dollargeneral10k2008.htm
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
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
(Exact
name of registrant as specified in its charter)
TENNESSEE
(State
or other jurisdiction of
incorporation
or organization)
|
61-0502302
(I.R.S.
Employer
Identification
No.)
|
|
100
MISSION RIDGE
GOODLETTSVILLE,
TN 37072
(Address
of principal executive offices, zip code)
|
|
Registrant’s
telephone number, including area code: (615)
855-4000
|
|
Securities
registered pursuant to Section 12(b) of the Act:
None
|
|
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
[ ] 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 [ ] 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 |
[ ] |
Accelerated
filer |
[ ] |
|
|
|
|
Non-accelerated Filer |
[X] |
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, 2007 was $663,400, all of which was owned
by employees of the registrant and not traded on a public market. For this
purpose, directors, executive officers and greater than 10% record shareholders
are considered the affiliates of the registrant.
The
registrant had 555,481,897 shares of common stock outstanding on March 17,
2008.
INTRODUCTION
General
This
report contains references to years 2008, 2007, 2006, 2005, 2004 and 2003, which
represent fiscal years ending or ended January 30, 2009, February 1, 2008,
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.
Forward
Looking Statements
“Forward-looking
statements” within the meaning of the federal securities laws are included
throughout this report, particularly under the headings “Business” and
“Management’s Discussion and Analysis of Financial Condition and Results of
Operation,” among others. You can identify these statements because they are not
solely statements of historical fact or they use words such as “may,” “will,”
“should,” “expect,” “believe,” “anticipate,” “project,” “plan,” “expect,”
“estimate,” “objective,” “forecast,” “goal,” “intend,” “will likely result,” or
“will continue” and similar expressions that concern our strategy, plans or
intentions. For example, all statements relating to our estimated and projected
earnings, costs, expenditures, cash flows and financial results, our plans and
objectives for future operations, growth or initiatives, or the expected outcome
or impact of pending or threatened litigation 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 impact 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 as 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.
The
important factors referenced above may not contain all of the material factors
that are important to you. In addition, we cannot assure you that we will
realize the results or developments we expect or 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.
PART
I
General
We are
the largest discount retailer in the United States by number of stores, with
8,222 stores located in 35 states, 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.
We offer
a compelling value proposition for our customers based on convenient store
locations, easy in and out shopping and quality name brand and private label
merchandise at highly competitive everyday low prices. We believe our
combination of value and convenience distinguishes us from other discount,
convenience and drugstore retailers, who typically focus on either value or
convenience. 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).
We were
founded 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. We changed our
name to Dollar General Corporation in 1968 and reincorporated as a Tennessee
corporation in 1998.
We have
expanded rapidly in recent years, increasing our total number of stores from
5,540 as of February 1, 2002, to 8,229 as of February 2, 2007, an 8.2%
compounded annual growth rate (“CAGR”). Over the same period, we grew
our net sales from $5.3 billion to $9.2 billion (11.5% CAGR), driven by growth
in number of stores as well as same store sales growth. In the fourth quarter of
fiscal 2006, we announced our plans to slow new store growth in 2007 and to
close approximately 400 stores in order to improve our profitability and to
enable us to focus on improving the performance of existing stores. In 2007, we
opened 365 new stores and closed 400 stores. We also relocated or remodeled 300
existing stores. We generated net sales in 2007 of $9.5 billion, an increase of
3.5% over 2006, including a same-store sales increase of 2.1%.
Merger
with KKR
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. In addition, fees and expenses related to the Merger
and the related financing transactions totaling $102.6 million, principally
consisting of investment banking fees, management fees, legal fees and stock
compensation expense ($39.4 million), are reflected in the 2007 results of
operations. As a result of the Merger, we are a subsidiary of Buck Holdings,
L.P. (“Parent”), a Delaware limited partnership controlled by investment funds
affiliated with Kohlberg Kravis Roberts & Co., L.P. (“KKR” or “Sponsor”).
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-investors (collectively, the “Investors”) indirectly own a
substantial portion of our capital stock through their investment in
Parent.
The
Merger consideration was funded through the use of our available cash, cash
equity contributions from the Investors, equity contributions of certain members
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.
We
entered into the following debt financings in conjunction with the
Merger:
·
|
We
entered into a credit agreement and related security and other agreements
consisting of a $2.3 billion senior secured term loan facility, which
matures on July 6, 2014 (the “Term Loan
Facility”).
|
·
|
We
entered into a credit agreement and related security and other agreements
consisting of a senior secured asset-based revolving credit facility of up
to $1.125 billion (of which $432.3 million was drawn at closing
and $132.3 million was paid down on the same day), subject to
borrowing base availability, which matures July 6, 2013 (the “ABL
Facility” and, with the Term Loan Facility, the “New Credit
Facilities”).
|
|
|
· |
We
issued $1.175 billion aggregate principal amount of 10.625% senior
notes due 2015, which mature on July 15, 2015, and $725 million
aggregate principal amount of 11.875%/12.625% senior subordinated toggle
notes due 2017, which mature on July 15, 2017. We repurchased $25
million of the 11.875%/12.625% senior subordinated toggle notes due 2017
in the fourth quarter of fiscal
2007. |
Overall
Business Strategy
Our
mission is “Serving Others.” To carry out this mission, we have developed a
business strategy of providing our customers with a focused assortment of
everyday low priced merchandise in a convenient, small-store
format.
Our
Customers. In general, we locate our stores and base our
merchandise selection on the needs of households seeking value and convenience,
with an emphasis on rural and small markets. However, much of our
merchandise, intended to serve the basic consumable, household, apparel and
seasonal needs of these targeted customers, also appeals to a much broader and
higher income customer base.
Our
Stores. The traditional Dollar General® store has, on average,
approximately 6,900 square feet of selling space and generally serves customers
who live within five miles of the store. Of our 8,222 stores
operating as of February 29, 2008, more than half serve communities
with populations of 20,000
or less. We believe that our target customers prefer the convenience
of a small, neighborhood store with a focused merchandise assortment at value
prices. Our Dollar General Market® stores are larger than the average Dollar
General store, having on average approximately 17,000 square feet of selling
space, and carry, among other items, an expanded assortment of grocery products
and perishable items. As of February 29, 2008, we operated 57 Dollar
General Market stores.
Our
Merchandise. Our merchandising strategy combines a low-cost
operating structure with a focused assortment of products, consisting of quality
basic consumable, household, apparel and seasonal merchandise at competitive
everyday low prices. Our strategic combination of name brands, quality private
label products and other great value brands allows us to offer our customers a
compelling value proposition. We believe our merchandising strategy and focused
assortment generate frequent repeat customer purchases and encourage customers
to shop at our stores for their everyday household needs.
Our
Prices. We distribute quality, consumable merchandise at
everyday low prices. Our strategy of a low-cost operating structure
and a focused assortment of merchandise allows us to offer quality merchandise
at competitive prices. As part of this strategy, we emphasize
even-dollar prices on many of our items. In the typical Dollar
General store, the majority of the products are priced at $10 or less, with
approximately 30% of the products priced at $1 or less.
Our
Cost Controls. We aggressively manage our overhead cost structure and
typically seek to locate stores in neighborhoods where rental and operating
costs are relatively low. Our stores typically have low fixed costs,
with lean staffing of usually two to three employees in the store at any
time. In 2005 and 2006, we implemented “EZstoreTM”,
our initiative designed to improve inventory flow from our distribution centers,
or DCs, to consumers. EZstore has allowed us to reallocate store labor hours to
more customer-focused activities, improving the work content in our
stores.
We also
attempt to control operating costs by implementing new technology when feasible,
including improvements in recent years to our store labor scheduling and store
replenishment systems in addition to other improvements to our supply chain and
warehousing systems.
Recent
Strategic Initiatives—Project
Alpha. In 2007, we executed strategic initiatives launched in
the fourth quarter of 2006 aimed at improving our merchandising and real estate
strategies, which we refer to collectively as “Project Alpha.” Project Alpha was
based upon a comprehensive analysis of the performance of each of our stores and
the impact of our inventory management model on our ability to effectively serve
our customers.
The
execution of this merchandising initiative has moved us away from our
traditional inventory packaway model, where unsold seasonal, apparel and home
products inventory items were stored on-site and returned to the sales floor to
be sold year after year, until the items were eventually sold, damaged or
discarded. Project Alpha is an attempt to better meet our customers’
needs and to ensure an appealing, fresh merchandise selection. In connection
with this initiative, in fiscal 2007 we began taking end-of-season markdowns on
current-year non-replenishable
merchandise. With limited
and planned exceptions, we eliminated, through end-of-season and other
markdowns, our seasonal, home products and basic clothing packaway merchandise
and out of season current year merchandise by the end of fiscal 2007. In
addition to allowing us to carry newer, fresher merchandise, particularly in our
seasonal, apparel and home categories, we believe this strategy change has
enhanced the appearance of our stores and will continue to positively impact
customer satisfaction as well as our store employees’ ability to manage
stores.
Project
Alpha also encompassed significant improvements to our real estate practices. We
are fully integrating the functions of site selection, lease renewals,
relocations, remodels and store closings and have defined and are implementing
rigorous analytical processes for decision-making in those areas. As a first
step in our initiative to revitalize our store base, we performed a
comprehensive real estate review resulting in the identification of
approximately 400 underperforming stores, all of which we closed by mid-2007.
These closings were in addition to stores that are typically closed in the
normal course of business, which over the last 10 years constituted
approximately 1% to 2% of our store base per year. We believe our rate of store
closings should return to historic levels in 2008 and future
years. While we believe we have significant opportunities for future
store growth, we have moderated our new store growth rate to enable us to focus
on improving the performance of existing stores. Those efforts include
increasing the number of store remodels and relocations in order to improve
productivity and enhance the shopping experience for our customers.
As a
result of opening new stores and remodeling existing stores, as of February 29,
2008, over 1,000 stores are operating in our racetrack format, which is
designed with improved merchandise adjacencies and wider, more open aisles to
enhance the overall guest shopping experience. We plan to continue to enhance
this new store layout to further drive sales growth and margin enhancements
through improved merchandising.
Our
Industry
We
compete in the deep discount segment of the U.S. retail industry. Our
competitors include traditional “dollar stores,” as well as other retailers
offering discounted convenience items. The “dollar store” sector differentiates
itself from other forms of retailing in the deep discount segment by offering
consistently low prices in a convenient, small-store format. Unlike other
formats that have suffered with the rise of Wal-Mart and other discount
supercenters, the “dollar store” sector has grown despite the presence of the
discount supercenters. We believe it is our
substantial convenience advantage, at prices comparable to those of
supercenters, that allows Dollar General to compete so effectively.
We
believe that there is considerable room for growth in the “dollar store” sector.
According to AC Nielsen, “dollar stores” have been able to increase their
penetration across all income brackets in the last 6 years. Though traditional
“dollar stores” have high customer penetration, according to Information
Resources, Inc. “IRI,” the sector as a whole accounts for only approximately
1.2% of total consumer product goods spending, which we believe leaves ample
room for growth. Our merchandising initiatives are aimed at increasing our
stores’ share of customer spending.
See “Our
Competitive Strengths” and “Competition” below for additional information
regarding our competitive situation.
Our
Competitive Strengths
Market
Leader in an Attractive Sector with a Growing Customer
Base. We are the largest discount retailer in the U.S. by
number of stores, with 8,222 stores in 35 states as of February 29,
2008. We are the largest player in the U.S. small box deep discount
segment, with sales in excess of 1.4 times that of our nearest competitor in
2007. We believe we are well positioned to further increase our
market share as we continue to execute our business strategy 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).
Consistent
Sales Growth and Strong Cash Flow Generation. For 18 consecutive years,
we have experienced positive annual same store sales
growth. Approximately two-thirds of our net sales come from the sale
of consumable products, which are less susceptible to economic pressures (such
as increased fuel costs and unemployment), with the remaining one-third
comprised mainly of seasonal, basic clothing and home products which are subject
to little trend or fashion risk. We have a low cost operating model
with attractive operating margins, low capital expenditures and low working
capital needs, resulting in generation of significant cash flow from operations
(before interest).
Differentiated
Value Proposition. Our ability to deliver highly competitive everyday low
prices in a convenient location and shopping format provides our customers with
a compelling shopping experience and distinguishes us from other discount
retailers, as well as convenience and drugstore retailers.
Compelling
Unit Economics. The traditional Dollar General store size,
design and location requires an initial investment of approximately $250,000
including inventory. The low initial investment and maintenance capital
expenditures, when combined with strong average unit volumes, provide for a
quick recovery of store start-up costs. The ability of our stores to
generate strong cash flows with minimal investment results in a short payback
period.
Efficient
Supply Chain. We believe our distribution network is an
integral component of our efforts to reduce transportation expenses and
effectively support our growth. In recent years, we have made
significant investments in technological improvements and upgrades which have
increased our efficiency and capacity to support our merchandising and
operations initiatives as well as future store growth.
Experienced
and Motivated Management Team. In January 2008, we hired
Richard Dreiling, who has 38 years of retail experience, to serve as our Chief
Executive Officer. Over the past two years we strengthened our
management team with the hiring of David Beré, our President and Chief Operating
Officer. We also replaced a majority of our senior merchandising and real estate
teams. In connection with the Merger, we entered into agreements with
certain
members of management
pursuant to which they elected to invest in Dollar General in an aggregate
amount of approximately $10.4 million.
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.
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 two most recent fiscal years. All of the
quarters reflected below are comprised of 13 weeks with the exception of the
fourth quarter of our fiscal year ended February 3, 2006, which was comprised 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 |
|
(a)
|
For
comparison purposes, the 2nd
quarter includes the results of operations for Buck Acquisition
Corp. for the period prior to the Merger from March 6, 2007 (its
formation) through July 7, 2007 (reflecting the change in fair value of
interest rate swaps), and the 2nd
quarter reflects the combination of pre-Merger and post-Merger
results of Dollar General Corporation for the period from May 5, 2007
through August 3, 2007. We believe this presentation provides a more
meaningful understanding of the underlying business.
|
(b)
|
Results
for the 3rd
and 4th
quarters of 2006 and all quarters of 2007 reflect the impact of Recent
Strategic Initiatives as discussed in further detail in “Management’s
Discussion
and
Analysis of Financial Condition and Results of
Operations.”
|
Merchandise
We
separate our merchandise into the following four categories for reporting
purposes: highly consumable, seasonal, home products, and basic clothing. Highly
consumable consists of packaged food, candy, snacks and refrigerated products,
health and beauty aids, home cleaning supplies and pet supplies; seasonal
consists of seasonal and other holiday-related items, toys, stationery and
hardware; and home products consists of housewares and domestics.
The percentage of net sales of each of our four categories of merchandise
for the period indicated below was as follows:
|
|
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 home
products and seasonal categories typically account for the highest gross profit
margin, and the highly consumable category typically accounts for the lowest
gross profit margin.
We
currently maintain approximately 5,400 core stock-keeping units, or SKUs, per
store and an additional 3,000 non-core SKUs that get rotated in and out of the
store over the course of a year. In 2007, we reduced the number of
non-core SKUs.
We
purchase our merchandise from a wide variety of suppliers. Approximately 12% of
our purchases in 2007 were from The Procter & Gamble Company. 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.
The
Dollar General Store
The
average Dollar General store has approximately 6,900 square feet of selling
space and is typically operated by a manager, an assistant manager and two or
more sales clerks. Approximately 47% of our stores are located in
strip shopping centers, 51% are in freestanding buildings and 2% are in downtown
buildings. We attempt to locate primarily in small towns or in neighborhoods of
more densely populated areas where occupancy expenses are relatively
low.
We
generally have not encountered difficulty locating suitable store sites in the
past, and management does not currently anticipate experiencing material
difficulty in finding future suitable locations.
Our recent store growth is summarized
in the following table:
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
|
(a) |
Includes 41 stores
closed as a result of hurricane damage. |
(b) |
Includes 128 stores
in 2006 and 275 stores in 2007 closed as a result of certain recent
strategic initiatives. |
Employees
As of
February 29, 2008, we employed approximately 71,500 full-time and part-time
employees, including divisional and regional managers, district managers, store
managers, and DC and administrative personnel. Management believes
our relationship with our employees is generally good, and we currently are not
a party to any collective bargaining agreements.
Competition
We
operate in the discount retail merchandise business, 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-Mart Walgreens, CVS, Rite
Aid, Target and Costco, among others. Certain of our competitors have greater
financial, distribution, marketing and other resources than we do.
The
dollar store category differentiates itself 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 and our focused
assortment of merchandise.
Trademarks
Through
our subsidiary, Dollar General Merchandising, Inc., we own marks that are
registered with the United States Patent and Trademark Office, including the
trademarks Dollar General®, Dollar General Market®, Clover Valley®, American
Value®, DG Guarantee® and the Dollar General price point designs, along with
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.
Available
Information
Our Web
site address is www.dollargeneral.com. We make available through this address,
without charge, our annual report on Form 10-K, quarterly reports on Form 10-Q,
current reports on Form 8-K and amendments to those reports filed or furnished
pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably
practicable after they are electronically filed or furnished to the
SEC.
Investing
in our securities involves a degree of risk. Persons buying our securities
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. In addition, the risks described
below are not the only risks facing us. Additional risks and uncertainties not
currently known to us or those 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
or we may not be able to make payments of principal and interest on our
outstanding notes, and you may lose all or part of your original
investment.
The
fact that we have substantial debt could adversely affect our ability to raise
additional capital to fund our operations, limit our ability to react to changes
in the economy or our industry, expose us to interest rate risk to the extent of
our variable rate debt and prevent us from meeting our obligations under our
outstanding debt securities.
We have
substantial debt which could have important consequences,
including:
·
|
making
it more difficult for us to make payments on our outstanding
debt;
|
·
|
increasing
our vulnerability to general economic and industry
conditions;
|
·
|
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;
|
·
|
exposing
us to the risk of interest rate fluctuations as certain of our borrowings
bear interest based on market interest
rates;
|
·
|
limiting
our ability to obtain additional financing for working capital, capital
expenditures, debt service requirements, acquisitions and general
corporate or other purposes; and
|
·
|
limiting
our ability to adjust to changing market conditions and placing us at a
competitive disadvantage compared to our competitors who are less highly
leveraged.
|
In
addition, the borrowings under our New Credit Facilities bear interest at
variable rates and 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 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. We and our subsidiaries may
be able to incur substantial additional indebtedness in the future, subject to
the restrictions contained in our New Credit Facilities and the indentures
governing our debt securities. If new indebtedness is added to our
current debt levels, the related risks that we now face could
intensify.
Our
debt agreements contain restrictions that limit our flexibility in operating our
business.
Our New
Credit Facilities and the indentures governing our debt securities contain
various covenants that limit our ability to engage in specified types of
transactions. These covenants limit our and our restricted
subsidiaries’ ability to, among other things:
·
|
incur
additional indebtedness, issue disqualified stock or issue certain
preferred stock;
|
·
|
pay
dividends and make certain distributions, investments and other restricted
payments;
|
·
|
create
certain liens or encumbrances;
|
·
|
enter
into transactions with our
affiliates;
|
·
|
limit
the ability of restricted subsidiaries to make payments to
us;
|
·
|
merge,
consolidate, sell or otherwise dispose of all or substantially all of our
assets; and
|
·
|
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 debt securities. We have
pledged a significant portion of our assets as collateral under our New Credit
Facilities. If we were unable to repay those amounts, the lenders
under our New Credit Facilities could proceed against the collateral granted to
them to secure that indebtedness. Additional borrowings under the ABL Facility
will, if excess availability under
that facility is less than
a certain amount, be subject to the satisfaction of a specified financial
ratio. 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
and other covenants.
General
economic factors may adversely affect our financial performance.
General
economic conditions in one or more of the markets we serve may adversely affect
our financial performance. A general slowdown in the economy, higher interest
rates, higher than expected fuel and other energy costs, inflation, higher
levels of unemployment, higher consumer debt levels, higher tax rates and other
changes in tax laws, tightening of the credit markets, and other economic
factors could adversely affect consumer demand for the products we sell, change
our sales mix of products to one with a lower average gross profit and result in
slower inventory turnover and greater markdowns on inventory. Higher interest
rates, higher commodities rates, higher fuel and other energy costs,
transportation costs, inflation, higher costs of labor, insurance and
healthcare, foreign exchange rate fluctuations, higher tax rates and other
changes in tax laws, changes in other laws and regulations and other economic
factors increase our cost of sales and selling, general and administrative
expenses, and otherwise adversely affect the operations and operating results of
our stores.
Our
plans depend significantly on initiatives designed to 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, store
operations and real estate) in various stages of testing, evaluation, and
implementation, upon which we expect to rely to improve our results of
operations and financial condition. 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.
Testing and general implementation also can be affected by other risk factors
described herein that reduce the results expected. 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.
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. A seasonal merchandise inventory imbalance could
result if for any reason our net sales during the Christmas selling season were
to fall below either seasonal norms or expectations. If for any reason our
fourth quarter 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.
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 discount retail
merchandise business, 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 operating in the discount retail merchandise sector
(due to customer demographics and other factors) may have limited ability to
increase prices in response to increased costs (including vendor price
increases). 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, grocery, drug, convenience, variety and other specialty
stores. Certain of our competitors have greater financial, distribution,
marketing and other resources than we do. These other competitors compete in a
variety of 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. 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” industry in a significant way. Generally, we expect an
increase in competition.
Natural
disasters, unusually adverse weather conditions, pandemic outbreaks, boycotts
and geo-political events could adversely affect our financial
performance.
The
occurrence of one or more natural disasters, such as hurricanes and earthquakes,
unusually adverse weather conditions, pandemic outbreaks, boycotts and
geo-political events, such as civil unrest in countries in which our suppliers
are located and acts of terrorism, or similar disruptions could adversely affect
our operations and financial performance. These events could result in physical
damage to one or more of our properties, increases in fuel (or other energy)
prices, the temporary or permanent closure of one or more 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
indirect consequences such
as increases in the costs of insurance following a destructive hurricane season.
These factors could otherwise disrupt and adversely affect our operations and
financial performance.
Risks
associated with 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% of our purchases in 2007 were from The
Procter & Gamble Company. Our next largest supplier accounted for
approximately 6% of our purchases in 2007. We directly imported approximately 9%
of our purchases at cost in 2007, but many of our domestic vendors directly
import their products or components of their products. 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, labor problems experienced by our suppliers, the availability 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. 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 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, 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 we increase our
imports of merchandise from foreign vendors, the risks associated with foreign
imports will increase.
We are
dependent on attracting and retaining qualified employees while also controlling
labor costs.
Our
future performance depends on our ability to attract, retain and motivate
qualified employees. Many of these employees are in entry-level or part-time
positions with historically high rates of turnover. Availability of personnel
varies widely from location to location. Our ability to meet our labor needs
generally, including our ability to find qualified personnel to fill positions
that become vacant at our existing stores and distribution centers, while
controlling our labor costs, is subject to numerous external factors, including
the level of competition for such personnel in a given market, the availability
of a sufficient number of qualified persons in the work force of the markets in
which we are located, unemployment levels within those markets, prevailing wage
rates and changes in minimum wage laws, changing demographics, health and other
insurance costs and changes in employment legislation. Increased turnover also
can have significant indirect costs, including more recruiting and training
needs, store disruptions due to management changeover and potential delays in
new store openings or adverse customer
reactions to inadequate
customer service levels due to personnel shortages. Competition for qualified
employees exerts upward pressure on wages paid to attract such personnel. In
addition, to the extent a significant portion of our employee base unionizes, or
attempts to unionize, our labor costs could increase. Our ability to pass along
those costs is constrained.
Also, our
stores are decentralized and are managed through a network of geographically
dispersed management personnel. Our inability to effectively and efficiently
operate our stores, including the ability to control losses resulting from
inventory and cash shrinkage, may negatively affect our sales and/or operating
margins.
Our
planned future growth will be impeded, which would adversely affect sales, if we
cannot open new stores on schedule or if we close a number of stores materially
in excess of anticipated levels.
Our
growth is dependent on both increases in sales in existing stores and the
ability to open new stores. Our ability to timely open new 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 favorable lease terms; the ability to hire and train new
personnel, especially store managers; the ability to identify customer demand in
different geographic areas; general economic conditions; and the availability of
sufficient funds for expansion. In addition, many of these factors affect our
ability to successfully relocate stores. Many of these factors are beyond our
control. In addition, our substantial debt, particularly combined with the
recent tightening of the credit markets, has made it more difficult for our real
estate developers to obtain loans for our build-to-suit stores and to locate
investors for those properties after they have been developed. If this trend
continues, it could materially adversely impact our ability to open
build-to-suit stores in desirable locations.
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
from existing stores, could materially adversely affect our growth. 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 or
expanding profitably.
Some of
our new stores may be located in areas where we have little or no meaningful
experience. Those markets may have different competitive conditions, market
conditions, consumer tastes and discretionary spending patterns than our
existing markets, which may cause our new stores to be less successful than
stores in our existing markets.
Some 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 cause us to over-saturate markets and temporarily or permanently
divert customers and sales from our existing stores, thereby adversely affecting
our overall financial performance.
We are
dependent upon the smooth functioning of our distribution network, the capacity
of our distribution centers, and the timely receipt of
inventory.
We rely
upon the ability to replenish depleted inventory through deliveries to our
distribution centers from vendors and from the distribution centers to our
stores by various means of transportation, including shipments by sea and truck.
Labor shortages in the transportation industry and/or labor inefficiencies
associated with certain “driver hours of service” regulations adopted by the
Federal Motor Carriers Safety Administration could negatively affect
transportation costs. In addition, long-term disruptions to the national and
international transportation infrastructure that lead to delays or interruptions
of service would adversely affect our business.
The
efficient operation of our business is heavily dependent upon our information
systems.
We depend
on a variety of information technology systems for the efficient functioning of
our business. We rely on certain software vendors to maintain and 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 or with maintenance or
adequate support of existing systems could also disrupt or reduce the efficiency
of our operations. We also rely heavily on our information technology staff. If
we cannot meet our staffing needs in this area, we may not be able to fulfill
our technology initiatives while continuing to provide maintenance on existing
systems.
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 regulations. Changes in
these regulations, particularly those governing the sale of products, may
require extensive system and operating changes that may be difficult to
implement and could increase our cost of doing business. 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.
Our
current insurance program may expose us to unexpected costs and negatively
affect our financial performance.
Historically, our
insurance coverage has reflected 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, 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
amounts of expense than expected under these programs, which could have a
material adverse effect on our financial condition and results of operations.
Although we continue to maintain property insurance for catastrophic events, we
are effectively self-insured for losses up to the amount of our deductibles. If
we experience a greater number of these losses than we anticipate, our financial
performance could be adversely affected.
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, shareholders, government agencies, or others through private actions,
class actions, administrative proceedings, regulatory actions or other
litigation. The outcome of litigation, particularly class action lawsuits and
regulatory actions, 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” for further details regarding certain of these pending
matters.
In
addition, from time to time, third parties may claim that our trademarks or
product offerings infringe upon their proprietary rights. Any such claim,
whether or not it has merit, could be time-consuming and distracting for
executive management, result in costly litigation, cause changes to our private
label offerings or delays in introducing new private label offerings, or require
us to enter into royalty or licensing agreements. As a result, any such claim
could have a material adverse effect on our business, results of operations and
financial condition.
The
Investors control us and may have conflicts of interest with us now or in the
future.
The
Investors indirectly own, through their investment in Parent, a substantial
portion of our common stock. 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 the approval of shareholders regardless
of whether others believe that any such transactions are in our own best
interests. For example, the Investors could cause us to make
acquisitions that increase the amount of indebtedness that is secured or that is
senior to our outstanding debt securities or
to sell assets, which may
impair our ability to make payments under our outstanding debt
securities.
Additionally, the
Investors are 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 be 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 the 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.
As of
February 29, 2008, we operated 8,222 retail stores located in 35 states as
follows:
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 leases 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 10 years
with multiple renewal options. In recent years, an increasing percentage of our
new stores have been subject to build-to-suit arrangements. In 2007,
approximately 70% of our new stores were build-to-suit
arrangements.
As of February 29, 2008, 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
|
|
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 lease additional temporary warehouse space as necessary to support our
distribution needs.
Our
executive offices are located in approximately 302,000 square feet of leased
space in Goodlettsville, Tennessee.
ITEM 3. |
LEGAL
PROCEEDINGS |
The
information contained in Note 7 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.
ITEM 4. |
SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS |
No
matters 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 is no established public trading market for our common
stock. There were approximately 145 shareholders of record of our common stock
as of March 17, 2008.
Our Board
of Directors declared a quarterly dividend in the amount of $0.05 per
share:
·
|
payable
on or before April 20, 2006 to common shareholders of record on April 6,
2006;
|
·
|
payable
on or before July 20, 2006 to common shareholders of record on July 6,
2006;
|
·
|
payable
on or before October 19, 2006 to common shareholders of record on October
5, 2006;
|
·
|
payable
on or before January 18, 2007 to common shareholders of record on January
4, 2007; and
|
·
|
payable
on or before April 19, 2007 to common shareholders of record on April 5,
2007.
|
Our Board
of Directors did not declare a dividend thereafter. See Item 7,
“Management’s Discussion and Analysis of Financial Condition and Results of
Operations—Liquidity and Capital Resources” for a description of the
restrictions on our ability to pay dividends.
Unregistered
Sales of Equity Securities. In connection with the Merger, our
officer-level employees were offered the opportunity to roll over portions of
their equity and/or stock options and to purchase additional equity of Dollar
General. In connection with such opportunity, on July 6, 2007 these
individuals purchased a total of 635,207 shares of common stock having an
aggregate value of approximately $3,176,035 and exchanged a total of 2,225,175
stock options outstanding prior to the Merger for 1,920,543 vested options to
purchase shares of common stock (the “Rollover Options”) in the surviving
company (the “Rollover”). 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.
We
subsequently offered certain other employees a similar investment opportunity to
participate in our common equity. As a result, on September 20, 2007
and October 5, 2007, we sold 15,000 shares and 558,000 shares, respectively, of
our common stock to those employees for a purchase price of $5 per
share.
In
connection with the investment discussed above and the Merger, our Board of
Directors adopted a new stock incentive plan pursuant to which certain of our
officer-level and other employees also were granted, on July 6, 2007, September
20, 2007 and October 5, 2007, respectively, new non-qualified stock options to
purchase 13,110,000 shares, 130,000 shares and 4,150,000 shares of our common
stock at a per share exercise price of $5, which represented the fair market
value of one share of our common stock on the grant date. Effective
January 21, 2008, our Board also granted to our CEO, Mr. Dreiling, non-qualified
stock options to purchase 2.5 million shares of our common stock pursuant to the
terms of the new stock incentive plan. All of these new options expire no later
than 10 years following the grant date. In addition, half of the
options will vest ratably on each of the five anniversaries of July 6, 2007
solely based upon continued employment over that time period, while the other
half of the options will vest based both upon continued employment and upon the
achievement of predetermined performance annual or cumulative financial-based
targets over time which coincide with our fiscal year. The options also have
certain accelerated vesting provisions upon a change in control or initial
public offering, as defined in the new incentive plan.
Effective
January 21, 2008, our Board also granted to Mr. Dreiling 890,000 shares of
restricted common stock pursuant to the terms of the new stock incentive plan.
The restricted stock will vest on the last day of our 2011 fiscal year if
Mr. Dreiling remains employed by us through that date. The restricted stock
also has certain accelerated vesting provisions upon a change in control,
initial public offering, termination without cause or due to death or
disability, or resignation for good reason, all as defined in
Mr. Dreiling’s employment agreement.
The share
issuances, the Rollover Options and the new option and restricted stock grants
described above were effected without registration in reliance on (1) the
exemptions afforded by Section 4(2) of the Securities Act of 1933, as
amended (the “Securities Act”), because the sales did not involve any public
offering, (2) Rule 701 promulgated under the Securities Act for shares that were
sold under a written compensatory benefit plan or contract for the participation
of our employees, directors, officers, consultants and advisors, and (3)
Regulation S promulgated under the Securities Act relating to offerings of
securities outside of the United States.
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, 2007 and February 3, 2006, and balance sheet data as of February 1,
2008 and February 2, 2007 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 ended January 28, 2005 and January 30, 2004 and
balance sheet data as of February 3, 2006, January 28, 2005, and January 30,
2004 presented in this table have been derived from audited consolidated
financial statements not included in this report.
As a
result of the Merger, purchase accounting, 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 from February 3, 2007 to
July 6, 2007 and 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’s results of operations for the period from March 6, 2007
to July 6, 2007 (prior to the Merger on July 6, 2007) are also included in the
consolidated financial statements for the periods described above, where
applicable, as a result of certain derivative financial instruments entered into
by Buck prior to the Merger as further described below. Other than
these financial instruments, Buck had no assets, liabilities, or operations
prior to the Merger. The fiscal years presented from 2003 to 2006 reflect the
Predecessor.
Due to
the significance of the Merger and related transactions that occurred in 2007,
the 2007 Successor financial information may not be comparable to that of
previous 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.
(Amounts
in millions, excluding number of stores and net sales per square
foot)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
July
7, 2007 through
February
1,
2008
(1)
|
|
|
February
3, 2007
through
July
6, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 Buck for the period prior to the Merger with and into
Dollar General Corporation from March 6, 2007 (its formation) through July
6, 2007 and the post-Merger results of Dollar General Corporation for the
period from July 7, 2007 through February 1,
2008.
|
(2)
|
Includes
the effects of certain strategic merchandising and real estate initiatives
as further described in “Management’s Discussion and Analysis of Financial
Condition and Results of
Operations.”
|
(3)
|
The
fiscal year ended February 3, 2006 was comprised of 53
weeks.
|
(4)
|
Penalty
expenses of $10 million in fiscal 2003 are included in
SG&A.
|
(5)
|
For
the fiscal year ended February 3, 2006, net sales per square foot was
calculated based on 52 weeks’
sales.
|
ITEM
7.
|
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
|
General
Accounting
Periods. The following text contains references to years 2008,
2007, 2006 and 2005, which represent fiscal years ending or ended January 30,
2009, February 1, 2008, February 2, 2007 and February 3, 2006, respectively. Our
fiscal year ends on the Friday closest to January 31. Each of fiscal years 2007
and 2006 were and fiscal year 2008 will be 52-week accounting periods, while
fiscal 2005 was a 53-week accounting period, which affects the comparability of
certain amounts in the Consolidated Financial Statements and financial ratios
between 2005 and the other fiscal years reflected herein. As
discussed below, we completed a merger transaction on July 6,
2007. The 2007 52-week period presented includes the 22-week
Predecessor period of Dollar General Corporation through July 6, 2007 reflecting
the historical basis of accounting, and a 30-week 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, 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
ended 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. 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 Forward-Looking Statements/Risk Factors
disclosures set forth in the Introduction and in Item 1A of this
report.
Purpose
of Discussion. We intend for this discussion to provide the reader with
information that will assist in understanding our company and the critical
economic factors that affect our company. In addition, we hope to help the
reader understand our financial statements, the changes in certain key items in
those financial statements from year to year, and the primary factors that
accounted for those changes, as well as how certain accounting principles affect
our financial statements.
Merger
with KKR
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. As a result of the Merger, we are a subsidiary of Buck
Holdings, L.P. (“Parent”), a Delaware limited partnership controlled by
investment funds affiliated with Kohlberg Kravis Roberts & Co., L.P. (“KKR”
or “Sponsor”). 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-investors (collectively, the “Investors”) indirectly own a substantial
portion of our capital stock through their investment in Parent.
The
Merger consideration was funded through the use of our available cash, cash
equity contributions from the Investors, equity contributions of certain members
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.
We
entered into the following debt financings in conjunction with the
Merger:
·
|
We
entered into a credit agreement and related security and other agreements
consisting of a $2.3 billion senior secured term loan facility, which
matures on July 6, 2014 (the “Term Loan
Facility”).
|
·
|
We
entered into a credit agreement and related security and other agreements
consisting of a senior secured asset-based revolving credit facility of up
to $1.125 billion (of which $432.3 million was drawn at closing
and $132.3 million was paid down on the same day), subject to
borrowing base availability, which matures July 6, 2013 (the “ABL
Facility” and, with the Term Loan Facility, the “New Credit
Facilities”).
|
·
|
We
issued $1.175 billion aggregate principal amount of 10.625% senior
notes due 2015, which mature on July 15, 2015, and $725 million
aggregate principal amount of 11.875%/12.625% senior subordinated toggle
notes due 2017, which mature on July 15, 2017. During the
fourth quarter of fiscal 2007, we repurchased $25 million of the
11.875%/12.625% senior subordinated toggle notes due
2017.
|
Executive
Overview
We are
the largest discount retailer in the United States by number of stores, with
approximately 8,200 stores located in 35 states, primarily in the southern,
southwestern, midwestern and eastern United States. 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. We seek to offer a compelling value proposition for
our customers based on convenient store locations, easy in and out shopping and
quality merchandise at highly competitive prices. We believe our combination of
value and convenience distinguishes us from other discount, convenience and
drugstore retailers, who typically focus on either value or
convenience.
The
nature of our business is seasonal to a certain extent. Primarily
because of sales of holiday-related merchandise, sales in the fourth quarter
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, 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.
In
November 2006, we completed a strategic review of our inventory and real estate
strategies and announced significant changes to existing company practices,
which we refer to as “Project Alpha.” At that time, we announced our decision to
close 403 stores which did not meet our recently developed store criteria, in
addition to stores closed in the ordinary course of business, and to slow our
new store growth rate. We made this decision to allow ourselves to focus on our
merchandising efforts and improvements to our execution in the stores. At that
time, we also announced the decision to eliminate, with limited exceptions, our
“packaway” inventory strategy, which was our historical practice of storing
unsold merchandise at the end of a season and carrying it over to the following
year. All of the 403 stores identified for closing were closed by the end of
July 2007, and all of our packaway inventory was eliminated by the end of the
2007 fiscal year. We believe that the elimination of packaway inventory, coupled
with the completion in 2006 of the implementation of our EZstoreTM
process (simplifying the way we stock new merchandise in our stores),
contributed to our ability to show significant improvements in the shopability
and manageability of our stores in 2007. We believe these initiatives
also led to our successful reduction of store employee turnover in 2007,
including significant improvement at the critical store manager and district
manager levels.
In
addition to the initiatives noted above, during 2007 we worked closely with KKR
to refine our strategic initiatives and set goals to improve our operational and
financial performance. During this transition, we slowed our store growth, as
planned, and we defined very specific operational and financial benchmarks to
monitor and measure our progress against our goals. Specifically, in 2007, we
focused on and made good progress on improving our merchandising and category
management processes, refining our real estate processes and improving our
distribution and transportation logistics. In addition, we accelerated our
efforts to refine our pricing strategy, increase direct foreign sourcing and
expand our private label offering. All of these initiatives are ongoing and we
continue to expect them to positively impact our gross profit, sales
productivity and capital efficiency in 2008 and beyond.
It is
important for you to read our more detailed discussion of financial and
operating results below under “Results of Operations.” Basis points or "bps"
amounts referred to below are equal to 0.01 percent as a percentage of
sales. Some of the more significant highlights of the 2007 fiscal year are
as follows:
·
|
Total
sales increased 3.5%, including a 2.1% increase in same-store sales
compared with the prior year. The remaining sales increase resulted from
new stores, partially offset by the impact of closed
stores.
|
·
|
Gross
profit, as a percentage of sales, increased to 27.8% compared to 25.8% in
2006. This increase was the result of improved purchase markups, decreased
markdowns, and leverage on distribution costs impacted by improved
logistics. The 2006 gross profit rate was significantly
impacted by merchandise markdowns as a result of our inventory liquidation
and store closing activities.
|
·
|
SG&A,
as a percentage of sales, increased to 24.1% compared to 23.1%. Several
items of significance affected this comparison, including: the addition of
leasehold intangibles amortization (non-cash) of 25 bps; an excess of
Project Alpha-related
|
|
SG&A
expenses in 2007 over 2006 of 21 bps; an excess of 2007 incentive
compensation resulting from meeting certain financial targets over 2006
discretionary bonuses of 18 bps; the impact of
hurricane-related insurance proceeds received in 2006 of 14 bps; an
accrued loss relating to the restructuring of certain distribution center
leases as a result of the Merger of 13 bps; and other SG&A relating to
or resulting from the Merger. |
|
|
·
|
Other
items affecting our 2007 results of operations, relating to or resulting
from the Merger, as more fully described below, include transaction and
related costs of $102.6 million and a significant increase in interest
expense.
|
·
|
As
a result, we incurred a net loss for the 2007 combined periods of $12.8
million compared to net income for 2006 of $137.9 million. Cash flow from
operating activities increased to $441.6 million in 2007 from $405.4
million in 2006.
|
·
|
We
opened 365 new stores, closed 400 stores (including 275 remaining from
Project Alpha) and relocated or remodeled 300 stores. As of February 1,
2008, we operated 8,194 stores.
|
·
|
We
also reduced total inventories by $143.7 million, or
10.0%.
|
We made
significant progress on our merchandising and operating initiatives in 2007,
including clearing our stores of packaway inventories and closing our
low-performing stores, giving us a strong foundation for further enhancements in
2008. These changes also contributed to a decrease in employee turnover and a
dramatic improvement in the overall appearance of our stores. We moved forward
with our pricing and private label initiatives and enhanced our merchandising
analysis tools giving us a better platform for decision-making. We accomplished
these goals while making a significant transition in the financial structure of
the Company.
2008
Priorities. In 2008, under the leadership of our new CEO, we plan to
continue to deliver value to our customers through our ability to deliver highly
competitive prices in a convenient shopping format. Our stores provide our
customers with a compelling shopping experience, low everyday prices on name
brand and other quality items in a convenient, easy-to-shop format. We plan to
continue to improve on this value/convenience model by implementing
merchandising and operational improvements.
We are
focused on further improving financial performance through:
·
|
Productive
sales growth, including emphasis on increasing shopper frequency, size of
basket and productivity per square
foot.
|
·
|
Improving
our gross margins through: decreasing inventory shrink, refining our
pricing strategy, optimizing our merchandise offering, expanding and
improving our private label offering and improving and expanding our
foreign sourcing;
|
·
|
Improving
our operational processes, for example, through information technology and
work management and leveraging those improvements to reduce
costs.
|
·
|
Strengthening
and expanding our culture of serving
others.
|
In
addition, we plan to open approximately 200 new stores and to remodel or
relocate approximately 400 stores.
Key
Financial Metrics. We have identified the following as our most critical
financial metrics for 2008:
·
|
Same-store
sales growth / sales per square
foot
|
·
|
Gross
profit, as a percentage of sales
|
·
|
Earnings
before interest, taxes and depreciation and amortization
(“EBITDA”)
|
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
The
following discussion of our financial performance is based on the Consolidated
Financial Statements set forth herein. The following table contains results of
operations data for the 2007, 2006 and 2005 fiscal years, and the dollar and
percentage variances among those years.
|
|
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|
|
|
|
|
|
|
|
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 |
)% |
(a)
|
The
amounts in the 2007 column represent the mathematical combination of the
Predecessor through July 6, 2007 and Successor from July 7, 2007 through
February 1, 2008 as included in the consolidated financial statements.
These results also include the operations of Buck for the period prior to
the Merger from March 6, 2007 (Buck’s date of formation) through July 6,
2007 (reflecting the change in fair value of interest rate swaps.) This
presentation does not comply with generally accepted accounting
principles, but we believe this combination provides a meaningful method
of comparison.
|
(b)
|
Includes
the impacts of certain strategic initiatives as more fully described in
the “Executive Overview” above.
|
(c)
|
The
fiscal year ended February 3, 2006 was comprised of 53
weeks.
|
Net
Sales. Net sales increased $325.4 million, or 3.5%, in 2007,
primarily representing a same-store sales increase of 2.1% for 2007 compared to
2006. Same-store sales include stores that have been open for 13
months and remain open at the end of the reporting period. The increase in
same-store sales accounted for $185.6 million of the increase in sales. Sales
resulting from new store growth, including 365 new stores in 2007, were
partially offset by the impact of store closings in 2007 and 2006. Increased
sales of highly consumables accounted for $294.8 million of our total sales
increase, resulting from successful changes over the past year to our
consumables merchandising mix. Sales of seasonal merchandise and apparel
increased slightly and were partially offset by a decrease in home products
sales. To some extent, sales in these more discretionary categories were
impacted by our efforts to eliminate our packaway strategy by the end of 2007
and to reduce overall inventory levels. In addition, we believe sales of
seasonal merchandise, apparel and home products were negatively affected by
continued economic pressures on our customers, particularly in the fourth
quarter. The increase in same-store sales represents an increase in average
customer purchase, offset by a slight decrease in customer traffic.
Increases
in 2006 net sales resulted primarily from opening additional stores, including
300 net new stores in 2006, and a same-store sales increase of 3.3% for 2006
compared to 2005. The increase in same-store sales accounted for $265.4 million
of the increase in sales, while new stores were the primary contributors to the
remaining $322.2 million sales increase during 2006. 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%. An increase in sales of seasonal 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 additions to our product offerings and
increased promotional activities, including the use of advertising circulars and
clearance activities.
As
discussed above, we monitor our sales internally by the following four major
categories: highly consumable, seasonal, home products and basic clothing. The
highly consumable category has a lower gross profit rate than the other three
categories and has grown significantly over 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. 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 rate increased by 201 basis points in
2007 as compared with 2006 due to a number of factors, including: an increase in
purchase markups, resulting primarily from a change in mix of items and higher
vendor rebates; lower markdowns, including markdowns from retail and below cost
markdowns (as discussed below, markdowns in 2006 included significant markdowns
and below cost adjustments relating to the initial launch of Project Alpha); and
improved leverage on distribution and transportation costs driven by
logistics
efficiencies. Offsetting the factors listed above was an increase in our
shrink rate in 2007 as compared to 2006.
The gross
profit rate decline in 2006 as compared with 2005 was due primarily to a
significant increase in markdown activity as a percentage of sales, including
below-cost markdowns, as a result of our inventory liquidation and store closing
initiatives. While we believe these initiatives had a positive impact on sales,
they had a negative impact on our gross profit rate in 2006. In total, our gross
profit rate declined by 289 basis points to 25.8% in 2006 compared to 28.7% in
2005. Significantly impacting our gross profit rate, as a result of the related
effect on cost of goods sold, were total markdowns of $279.1 million at cost
taken during 2006, compared with total markdowns 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. SG&A
expense increased $165.5 million, or 7.8%, in 2007 from the prior year, and
increased as a percentage of sales to 24.1% in 2007 from 23.1% in 2006. SG&A
in 2007 includes: $23.4 million related to amortization of leasehold intangibles
capitalized in connection with the revaluation of assets at the date of the Merger;
$27.2 million of accrued administrative employee incentive compensation expense
resulting from meeting certain financial targets (compared to $9.6 million of
discretionary bonuses in 2006); approximately $54 million of expenses relating
to the closing of stores and the elimination of our packaway inventory strategy
(compared to approximately $33 million in 2006) and an accrued loss of
approximately $12.0 million relating to the probable restructuring of certain
distribution center leases. In addition, SG&A in 2007 includes approximately
$4.8 million of KKR-related consulting and monitoring fees. SG&A expense in
2006 was partially offset by insurance proceeds of $13.0 million received during
the year related to losses incurred due to Hurricane
Katrina.
The
increase in SG&A expense as a percentage of sales in 2006 as compared with
2005 was due to a number of factors, including increases in the following
expense categories: impairment charges on leasehold improvements and
store fixtures totaling $9.4 million, including $8.0 million related to the
planned closings of approximately 400 underperforming stores, 128 of which
closed in 2006 and the remainder of which closed in 2007, lease contract
terminations totaling $5.7 million related to these stores; higher store
occupancy costs (increased 12.1%) due to higher average monthly rentals
associated with our leased store locations; higher debit and credit card fees
(increased 40.6%) due to the increased customer usage of debit cards and the
acceptance of VISA credit and check cards at all locations; higher
administrative labor costs (increased 29.9%) primarily related to additions to
our executive team, particularly in merchandising and real estate, and the
expensing of stock options; higher advertising costs (increased 198.3%) related
primarily to the distribution of several advertising circulars 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 Board of Directors for
the 2006 fiscal year. These
increases were partially
offset by insurance proceeds of $13.0 million received during the period related
to losses incurred due to Hurricane Katrina, and depreciation and amortization
expenses that remained relatively constant in fiscal 2006 as compared to fiscal
2005.
Transaction
and Related Costs. The $102.6 million of expenses recorded in 2007
reflect $63.2 million of expenses related to the Merger, such as investment
banking and legal fees as well as $39.4 million of compensation expense related
to stock options, restricted stock and restricted stock units which were fully
vested immediately prior to the Merger.
Interest
Income. Interest income in 2007 consists primarily of interest
on short-term investments. The increase in 2007 from 2006 resulted from higher
levels of cash and short term investments on hand, primarily in the first half
of the year. The decrease in 2006 compared to 2005 was due primarily to the
acquisition of the entity which held legal title to the South Boston
distribution center in June 2006 and the related elimination of the note
receivable which represented debt issued by this entity from which we formerly
leased the South Boston distribution center.
Interest
Expense. Interest expense increased by $228.3 million in 2007 as compared
to 2006 due to interest on long-term obligations incurred to finance the Merger.
See further discussion under “Liquidity and Capital Resources”
below. We had outstanding variable-rate debt of $787.0 million, after
taking into consideration the impact of interest rate swaps, as of
February 1, 2008. The remainder of our outstanding indebtedness at
February 1, 2008 was fixed rate debt.
The
increase in interest expense in 2006 was primarily attributable to increased
interest 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.
Loss
on Interest Rate Swaps. During 2007, we recorded an unrealized loss of
$4.1 million related to the change in the fair value of interest swaps prior to
the designation of such swaps as cash flow hedges in October 2007. This loss is
offset by earnings of $1.7 million under the contractual provisions of the swap
agreements.
Loss
on Debt Retirements, Net. During 2007, we recorded $6.2 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 million of our 11.875%/12.625%
Senior Subordinated Notes, due July 15, 2017.
Income
Taxes. The effective income tax rates for the Successor period
ended February 1, 2008, and the Predecessor periods ended July 6, 2007, 2006 and
2005 were a benefit of 26.9% and expense of 300.2%, 37.4% and 35.7%,
respectively.
The
income tax rate for the Successor period ended February 1, 2008 is a benefit of
26.9%. This benefit is less than the expected U.S. statutory rate of
35% 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.
The
income tax rate for the Predecessor period ended July 6, 2007 is an expense of
300.2%. This expense is higher than the expected U.S. statutory rate
of 35% due principally to the non-deductibility of certain acquisition related
expenses.
The
2006 income tax rate was higher than the 2005 rate by 1.7%. Factors
contributing to this increase include additional expense related to the adoption
of a new tax system in the State of Texas; a reduction 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.
Effects of
Inflation
We
believe that inflation and/or deflation had a minimal impact on our overall
operations during 2007, 2006 and 2005.
Liquidity
and Capital Resources
Current
Financial Condition / Recent Developments. During the past three years,
we have generated an aggregate of approximately $1.4 billion in cash flows from
operating activities. During that period, we expanded the number of stores we
operate by approximately 12% (874 stores) and incurred approximately $685
million in capital expenditures. As noted above, we made certain strategic
decisions which slowed our growth in 2007.
At
February 1, 2008, we had total outstanding debt (including the current portion
of long-term obligations) of $4.282 billion. We also had an
additional $769.2 million available for borrowing under our new senior secured
asset-based revolving credit facility at that date. Our liquidity
needs are significant, primarily due to our debt service and other
obligations.
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.
New
Credit Facilities
Overview.
On July 6, 2007, in connection with the Merger, we entered into 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.
The New
Credit Facilities provide financing of $3.425 billion, consisting
of:
·
|
$2.3
billion in a senior secured term loan facility;
and
|
·
|
a
senior secured asset-based revolving credit facility of up to $1.125
billion (of which up to $350.0 million is available for letters of
credit), subject to borrowing base
availability.
|
The term
loan credit facility consists of two tranches, one of which is a “first-loss”
tranche, which, in certain circumstances, is subordinated in right of payment to
the other tranche of the term loan credit facility.
We are the borrower under the term loan credit facility,
the primary borrower under the asset-based credit facility and, in addition,
certain subsidiaries of ours are designated as borrowers under this
facility. The asset-based credit facility includes borrowing capacity
available for letters of credit and for short-term borrowings referred to as
swingline loans.
The New
Credit Facilities provide that we have the right at any time to request up to
$325.0 million of incremental commitments under one or more incremental
term loan facilities and/or asset-based revolving credit facilities. The lenders
under these facilities are not under any obligation to provide any such
incremental commitments and any such addition of or increase in commitments will
be subject to our not exceeding certain senior secured leverage ratios and
certain other customary conditions precedent. Our ability to obtain
extensions of credit under these incremental commitments will also be subject to
the same conditions as extensions of credit under the New Credit
Facilities.
The
amount from time to time available under the senior secured asset-based credit
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 our eligible inventory and that of
each guarantor thereunder is made available to us in the form of a “last out”
tranche in respect of which we may borrow up to a maximum amount of $125.0
million. Borrowings under
the asset-based credit facility will be incurred first under the last out
tranche, and no borrowings will be permitted under any other tranche until the
last out tranche is fully utilized. Repayments of the senior secured asset-based
revolving credit facility will be applied to the last out tranche only after all
other tranches have been fully paid down.
Interest
Rate and Fees.
Borrowings under the New Credit Facilities bear interest at a rate equal to an
applicable margin plus, at our 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, 2.75% with respect to
LIBOR borrowings and 1.75% with respect to base-rate borrowings and (ii) as of
February 1, 2008 under the asset-based revolving credit facility (except in the
last out tranche described above), 1.50% with respect to LIBOR borrowings and
0.50% with respect to base-rate borrowings and for any last out borrowings,
2.25% with respect to LIBOR borrowings and 1.25% with respect to base-rate
borrowings. The applicable margins for borrowings under the
asset-based revolving credit 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.
In
addition to paying interest on outstanding principal under the New Credit
Facilities, we are required to pay a commitment fee to the lenders under the
asset-based revolving credit facility in respect of the unutilized commitments
thereunder. At February 1, 2008 the commitment fee rate was 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 facility are equal to or less than 50% of the
aggregate commitments under the asset-based revolving credit facility. We must
also pay customary letter of credit fees.
Prepayments. The
senior secured credit agreement for the term loan facility requires us to prepay
outstanding term loans, subject to certain exceptions, with:
·
|
50%
of our annual excess cash flow (as defined in the credit agreement)
commencing with the fiscal year ending on or about January 31, 2008 (which
percentage 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.
|
The
mandatory prepayments discussed above will be applied to the term loan facility
as directed by the senior secured credit agreement.
In
addition, the senior secured credit agreement for the asset-based revolving
credit facility requires us to prepay the asset-based revolving credit facility,
subject to certain exceptions, 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
asset-based revolving credit
facility).
|
We may
be obligated to pay a prepayment premium on the amount repaid 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.
Letters of
Credit. $350.0
million of our asset-based revolving credit facility is available for letters of
credit.
Amortization. Beginning
September 30, 2009, we are required to repay installments on the loans under the
term loan credit facility in equal quarterly principal amounts in an aggregate
amount per annum equal to 1% of the total funded principal amount at July 6,
2007, with the balance payable on July 6, 2014. There is no amortization under
the asset-based revolving credit facility. The entire principal amounts (if any)
outstanding under the asset-based revolving credit facility are due and payable
in full at maturity, on July 6, 2013, on which day the commitments thereunder
will terminate.
Guarantee
and Security. All
obligations under the New Credit Facilities are unconditionally guaranteed by
substantially all of our existing and future domestic subsidiaries (excluding
certain immaterial subsidiaries and certain subsidiaries designated by us under
our senior secured credit agreements as “unrestricted subsidiaries”), referred
to, collectively, as U.S. Guarantors.
All
obligations and related guarantees under the term loan credit 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 the 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 the Company, 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 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;
|
·
|
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; and
|
·
|
change
our lines of business.
|
The
senior secured credit agreements also contain certain customary affirmative
covenants and events of default.
At
February 1, 2008, we had $102.5 million of borrowings, $28.8 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
On July
6, 2007, we issued $1,175.0 million aggregate principal amount of 10.625% senior
notes due 2015 (the “senior notes”) 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”),
which mature on July 15, 2017, pursuant to an indenture, dated as of July 6,
2007 (the “senior subordinated indenture”). The senior notes and the senior
subordinated notes are collectively referred to herein as the “notes.” The
senior indenture and the senior subordinated indenture are collectively referred
to herein as the “indentures.”
Interest
on the notes is payable on January 15 and July 15 of each year, commencing
January 15, 2008. Interest on the senior notes will be payable in cash. Cash
interest on the senior subordinated notes will accrue 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
will be payable in cash. For any interest period thereafter through July 15,
2011, we may elect to pay interest on the senior subordinated notes (i) in cash,
(ii) by increasing the principal amount of the senior subordinated notes or
issuing new senior subordinated notes (“PIK interest”) or (iii) by paying
interest on half of the principal amount of the senior subordinated notes in
cash interest and half in PIK interest. After July 15, 2011, all interest on the
senior subordinated notes will be payable in cash.
The
notes 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 may
redeem some or all of the notes at any time at redemption prices described or
set forth in the indentures. We repurchased $25.0 million of the 11.875%/12.625%
senior subordinated toggle 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 the notes has the right to require us to
repurchase some or all of such holder’s notes at a purchase price in cash equal
to 101% of the principal amount thereof, plus accrued and unpaid interest, if
any, to the repurchase date.
Covenants. 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 on or make certain distributions and other restricted
payments;
|
·
|
create
certain liens or encumbrances;
|
·
|
enter
into transactions with affiliates;
|
·
|
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 the notes to become or to be declared due and payable.
Registration
Rights Agreement. On July 6, 2007, we entered into a registration rights
agreement with respect to the notes. In the registration rights
agreement, we agreed to use commercially reasonable efforts to register with the
SEC new senior notes having substantially identical terms as the senior notes
and new senior subordinated notes having substantially identical terms as the
senior subordinated notes. We filed this registration statement with
the SEC, and it was declared effective, in the fourth quarter of fiscal
2007. We subsequently commenced the offer to exchange the new senior
notes and the new senior subordinated notes for each of the outstanding senior
notes and the outstanding senior subordinated notes, respectively. The exchange
offer expired on March 17, 2008. All of the outstanding senior notes
and senior subordinated notes were tendered in the exchange offer.
Adjusted
EBITDA
Under the
New Credit Facilities and the indentures, certain limitations and restrictions
could occur 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, this ratio was
3.4 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, are not
measures of financial performance or condition, liquidity or profitability, and
should not be considered as an alternative to (1) net income, operating
income or any other performance measures determined in accordance with GAAP or
(2) operating cash flows determined in accordance with 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 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
other
companies. We believe that the presentation of EBITDA and Adjusted EBITDA is
appropriate to provide additional information about the calculation of this
financial ratio in the New Credit Facilities. Adjusted EBITDA is a material
component of this ratio. Specifically, non-compliance with the senior secured
indebtedness ratio contained in our New Credit Facilities could prohibit us from
being able to incur additional secured indebtedness, other than the additional
funding provided for under the senior secured credit agreement and pursuant to
specified exceptions, to make investments, to incur liens and to make certain
restricted payments.
The calculation of
Adjusted EBITDA under the New Credit Facilities is as
follows:
(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 |
|
Other
Considerations
Our
inventory balance represented approximately 44% of our total assets exclusive of
goodwill and other intangible assets as of February 1, 2008. 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 more efficient
inventory management a strategic priority, as more fully discussed in the
“Executive Overview” above.
During
2006 and 2005, the Predecessor’s Board of Directors authorized the repurchase of
up to $500 million and 10 million shares, respectively, of the Predecessor’s
outstanding common stock. These authorizations allowed purchases in the open
market or in privately negotiated transactions from time to time, subject to
market conditions. During 2006, we purchased approximately 4.5 million shares
pursuant to the 2005 authorization at a total cost of $79.9 million. During
2005, we purchased approximately 15.0 million shares pursuant to the 2005 and a
prior authorization at a total cost of $297.6 million.
We may
seek, from time to time, to retire the notes (as defined above) 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.
The
following table summarizes our significant contractual obligations and
commercial commitments as of February 1, 2008 (in thousands):
|
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
|
(a)
|
Represents
obligations for interest payments on long-term debt and capital lease
obligations, and includes projected interest on variable rate long-term
debt, based upon 2007 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 Merger date 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)
|
We
entered into a monitoring agreement, dated July 6, 2007, with affiliates
of certain of our Investors pursuant to which those entities will provide
management and advisory services. Such agreement has no
contractual term and for purposes of this schedule is presumed to be
outstanding for a period of five
years.
|
(e)
|
Commercial
commitments include information technology license and support agreements,
supplies, fixtures, letters of credit for import merchandise, and other
inventory purchase obligations.
|
(f)
|
Purchase
obligations include legally binding agreements for software licenses and
support, supplies, fixtures, and merchandise purchases excluding such
purchases subject to letters of
credit.
|
In 2007
and 2006, our South Carolina-based wholly owned captive insurance subsidiary,
Ashley River Insurance Company (“ARIC”), had cash and cash equivalents and
investments balances held pursuant to South Carolina regulatory requirements to
maintain a specified percentage of ARIC’s liability and equity balances
(primarily insurance liabilities) in the form of certain specified types of
assets and, as such, these investments are not available for general corporate
purposes. At February 1, 2008, these cash and cash equivalents balances and
investments balances were $11.9 million and $51.5 million,
respectively.
During 2005, we incurred
significant losses caused by Hurricane Katrina, primarily inventory and fixed
assets, in the form of store fixtures and leasehold improvements. We reached
final settlement of our related insurance claim in 2006 and received proceeds
totaling $21.0 million due to these losses, including $13.0 million in 2006 and
$8.0 million in 2005, and have utilized a portion of these proceeds to replace
lost assets. Insurance proceeds related to fixed assets are included in
cash flows from investing activities and proceeds related to inventory losses
and business interruption are included in cash flows from operating
activities.
Legal
actions, claims and tax contingencies. As described in Note 7 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 5 we also have
certain income tax-related contingencies as more fully described below under
“Critical Accounting Policies and Estimates.” Future negative developments could
have a material adverse effect on our liquidity.
Considerations
regarding distribution center leases. The Merger and certain of the
related financing transactions may be interpreted as giving rise to certain
trigger events (which may include events of default) under our three
distribution center leases. 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.
Credit
ratings. On June 12, 2007 Standard & Poor’s revised our
long-term debt rating to B, and left our long-term debt ratings on negative
watch. Moody’s revised our long-term debt rating to B3 with a stable
outlook. These current ratings are considered non-investment
grade. Our current credit ratings, as well as future rating agency
actions, could (1) negatively impact our ability to obtain financings to finance
our operations on satisfactory terms; (2) have the effect of increasing our
financing costs; and (3) have the effect of increasing our insurance premiums
and collateral requirements necessary for our self-insured
programs.
Cash
flows
The
discussion of the cash flows from operating, investing and financing activities
included below for 2007 is generally based on the combination of the Predecessor
and Successor for the 52-week period ended February 1, 2008, which we believe
provides a more meaningful understanding of our liquidity and capital resources
for the time period presented.
Cash
flows from operating activities. Cash flows from operating
activities for 2007 compared to 2006 increased by $36.2 million, notwithstanding
a decline in net income (loss) 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 change in cash flows from operating activities in 2007 as compared to
2006 were changes in inventory balances, which decreased by approximately 10%
during 2007 compared to a decrease of approximately 3% during 2006. Inventory
levels in the seasonal category declined by $84.5 million, or 24%, in 2007
compared to a $6.7 million, or 2%, increase in 2006. The highly consumable
category declined by $42.4 million, or 6%, in 2007 compared to a $63.2 million,
or 10%, increase in 2006. The home products category increased by $3.5 million,
or 2%, in 2007 as compared to a $52.5 million, or 25%, decline in 2006. The
basic clothing category decreased by $20.3 million, or 9%, in 2007 as compared
to a $59.5 million, or 21%, decrease in 2006. In addition to inventory changes
the decline in net income was a principal factor in the reduction in income
taxes paid in 2007 as compared to 2006. Also offsetting the decline in net
income were changes in accrued expenses in 2007 as compared to 2006, which
increased primarily due to income tax related reserves, accrued interest,
incentive compensation accrual, the accrued loss in connection with the ongoing
negotiations to restructure our distribution center leases, and accruals
for lease liabilities on closed stores.
Cash
flows from operating activities for 2006 compared to 2005 declined by $150.1
million. The most significant component of the decline in cash flows from
operating activities in 2006 as compared to 2005 was the reduction in net
income, as described in detail 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 $78.1 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 inventories at the end of 2006 were $1.43
billion compared to $1.47 billion at the end 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. The Merger, as discussed in more detail
above, required cash payments of approximately $6.7 billion, net of cash
acquired of $350 million. Significant components of property and equipment
purchases in 2007 included the following approximate amounts: $60 million for
improvements, upgrades, remodels and relocations of existing stores; $45 million
for new stores; and $30 million for distribution and transportation-related
capital expenditures. During 2007, we opened 365 new stores and remodeled or
relocated 300 stores.
During
2007 we purchased a secured promissory note for $37.0 million which represents
debt issued by a third-party entity from which we lease our distribution center
in Ardmore, Oklahoma. Purchases and
sales of short-term investments in 2007, which equaled net sales of $22.1
million, primarily reflect our investment activities in our captive insurance
subsidiary, and all purchases of long-term investments are related to the
captive insurance subsidiary.
Cash
flows used in investing activities totaling $282.0 million in 2006 were
primarily related to capital expenditures and, to a lesser degree, purchases of
long-term investments. Significant components of our property and equipment
purchases in 2006 included the following approximate amounts: $66 million for
distribution and transportation-related capital expenditures (including
approximately $30 million related to our distribution center in Marion, Indiana
which opened in 2006); $66 million for new 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 sales of short-term investments in 2006, which equaled net sales of $1.9
million, reflect our investment activities in tax-exempt auction rate securities
as well as investing activities of our captive insurance subsidiary. Purchases
of long-term investments are related to the captive insurance
subsidiary.
Significant components of
our purchases of property and equipment in 2005 included the following
approximate amounts: $102 million for distribution and transportation-related
capital expenditures; $96 million for new stores; $47 million related to the
EZstoreTM project;
$18 million for certain fixtures in existing stores; and $15 million for various
systems-related capital projects. During 2005, we opened 734 new stores and
relocated or remodeled 82 stores. Distribution and transportation expenditures
in 2005 included costs associated with the construction of our new distribution
centers in South Carolina and Indiana.
Net sales
of short-term investments in 2005 of $34.1 million primarily reflect our
investment activities in tax-exempt auction rate securities. Purchases of
long-term investments are related to our captive insurance
subsidiary.
Capital
expenditures during 2008 are projected to be approximately $200 to $220
million. We anticipate funding 2008 capital requirements with cash
flows from operations and our revolving credit facility, if necessary.
Significant components of the 2008 capital plan include growth initiatives as
well as continued investment in our existing store base, plans for
remodeling and relocating approximately 400 stores, additional
investments in our supply chain, and leasehold improvements and fixtures and
equipment for approximately 200 new stores. We plan to undertake these
expenditures in order to improve our infrastructure and enhance our cash
generated from operating activities.
Cash
flows from financing activities. To finance the Merger,
we issued long-term debt of approximately $4.2 billion and issued common stock
in the amount of approximately $2.8 billion. We incurred costs associated with
the issuance of Merger-related long-term debt of $87.4 million. As discussed
above, we completed a cash tender offer for our 2010 Notes. Approximately 99% of
the 2010 Notes were validly tendered resulting in repayments of long-term debt
and related consent fees in the amount of $215.6 million. Borrowings, net of
repayments, under our new asset-based revolving credit facility in 2007 totaled
$102.5 million.
Cash
flows used in financing activities during 2006 included the repurchase of
approximately 4.5 million shares of our common stock at a total cost of $79.9
million, 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.
During
2005, we repurchased approximately 15.0 million shares of our common stock at a
total cost of $297.6 million, paid cash dividends of $56.2 million, or $0.175
per share, on our outstanding common stock, and expended $14.3 million to reduce
our outstanding capital lease and financing obligations. Also in 2005, we
received proceeds of $14.5 million from the issuance of a tax increment
financing in conjunction with the construction of our new distribution center in
Indiana and proceeds from the exercise of stock options of $29.4
million.
The
borrowings and repayments under the revolving credit agreements in 2007, 2006
and 2005 were primarily a result of activity associated with periodic cash
needs.
Critical
Accounting Policies and Estimates
The
preparation of financial statements in accordance with 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 of sales. The RIM
is an averaging method that has been widely used in the retail industry due to
its practicality. Also, it is recognized that the use of the RIM will result in
valuing inventories at the lower of cost or market (“LCM”) if markdowns are
currently taken as a reduction of the retail value of
inventories.
Inherent
in the RIM calculation are certain significant management judgments and
estimates including, among others, initial markups, markdowns, and shrinkage,
which significantly impact the 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 the LIFO analysis whereby all SKUs are considered in the index formulation.
As part of this process we also perform an inventory-aging 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,
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 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.
Goodwill
and Indefinite-Lived Intangible Assets. Under SFAS 142, “Goodwill and
Other Intangible Assets”, we are required to test goodwill and intangible assets
with indefinite lives for impairment annually, or
more frequently if impairment indicators occur. Significant judgments required
in this testing process may include projecting future cash flows, determining
appropriate discount rates and other assumptions. Projections are based on
management’s best estimate given recent financial performance, market trends,
strategic plans and other available information. Changes in these estimates and
assumptions could materially affect the determination of fair value or
impairment. Future indicators of impairment could result in an asset impairment
charge.
Purchase
Accounting. The Merger was accounted for as a reverse acquisition in
accordance with the purchase accounting provisions of SFAS 141, “Business
Combinations,” under which our assets and liabilities have been accounted for at
their estimated fair values as of the date of the Merger. The aggregate purchase
price was allocated to the tangible and intangible assets acquired and
liabilities assumed, based upon an assessment 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.
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
the shorter of the applicable lease term or the estimated useful life of the
asset. Certain store and warehouse fixtures, when fully depreciated, are removed
from the cost and related accumulated depreciation and amortization accounts.
The valuation and classification of these assets and the assignment of useful
depreciable lives involves significant judgments and the use of
estimates.
Impairment
of Long-lived Assets. We review the carrying value of all long-lived
assets for impairment whenever events or changes in circumstances indicate that
the carrying value of an asset may not be recoverable. In accordance with
Statement of Financial Accounting Standards (“SFAS”) 144, “Accounting for the
Impairment or Disposal of Long-Lived Assets,” we review 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. Our 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 are 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 fair value. The fair value is estimated based primarily upon future cash
flows (discounted at our credit adjusted risk-free rate) or other reasonable
estimates of fair market value.
Insurance
Liabilities. We retain a significant portion of the risk for our workers’
compensation, employee health insurance, general liability, property loss and
automobile coverage. These costs are significant primarily due to the large
employee base and number of stores. At the date of the Merger this liability was
discounted in accordance with purchase accounting standards. Subsequent to the
Merger, provisions are made to this insurance liability on an undiscounted basis
based on actual claim data and estimates of incurred but not reported claims
developed using actuarial methodologies based on historical claim trends. If
future claim trends deviate from recent
historical patterns, we may be required to record additional expenses or expense
reductions, which could be material to our future financial
results.
Contingent
Liabilities – Income Taxes Income tax reserves are determined using the
methodology established by the Financial Accounting Standards Board (“FASB”)
Interpretation 48, Accounting for Uncertainty in Income Taxes – An
Interpretation of FASB Statement 109 (“FIN 48”). FIN 48, which we
adopted on February 3, 2007, 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 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
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 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). See
Note 7 to the Consolidated Financial Statements.
Lease
Accounting and Excess Facilities. The majority of our stores are subject
to short-term leases (usually with initial or primary terms of 3 to 5 years)
with multiple renewal options
when available.
We also have stores subject to build-to-suit arrangements with landlords, which
typically carry a primary lease term of 10 years with multiple renewal
options. Approximately half of our stores have provisions for contingent rentals
based upon a percentage of defined sales volume. We recognize contingent rental
expense when the achievement of specified sales targets is considered probable.
We recognize rent expense over the term of the lease. We record minimum rental
expense on a straight-line basis over the base, non-cancelable lease term
commencing on the date that we take physical possession of the property from the
landlord, which normally includes a period prior to store opening to make
necessary leasehold improvements and install store fixtures. When a lease
contains a predetermined fixed escalation of the minimum rent, we recognize the
related rent expense on a straight-line basis and record the difference between
the recognized rental expense and the amounts payable under the lease as
deferred rent. We also receive tenant allowances, which we record as deferred
incentive rent and amortize as a reduction to
rent expense over the term of the lease. We reflect as a liability any
difference between the calculated expense and the amounts actually paid.
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.
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, “Accounting for Costs Associated with Exit or 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. 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. If actual timing
and potential termination costs or realization of sublease 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. 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 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. Other factors
involving judgments that affect the expensing of share-based payments include
estimated forfeiture rates of share-based awards. If our estimates differ
materially from actual experience, we may be required to record additional
expense or reductions of expense, which could be material to our future
financial results.
Adoption
of Accounting Standard
We
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 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.
Subsequent to the adoption
of FIN 48, we elected to record income tax related interest and penalties as a
component of the provision for income tax expense.
Accounting
Pronouncements
In March
2008, the FASB issued Statement of Financial Accounting Standards ("SFAS") No.
161, “Disclosures about Derivative Instruments and Hedging Activities”, an
amendment 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 42 of SFAS 133 and related
hedged items accounted for under SFAS 133. SFAS 161 requires entities to provide
greater transparency through additional disclosures about how and why an 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 is effective as of the
beginning of an entity’s first fiscal year that begins after November 15,
2008. We currently plan to adopt SFAS 161 during our 2009 fiscal
year. No determination has yet been made regarding the potential
impact of this standard on our financial statements.
In
December 2007, the FASB issued SFAS No. 141(R), “Business Combinations”.
The new standard establishes the requirements for how an acquirer recognizes and
measures in its financial statements the identifiable assets acquired, the
liabilities assumed, and any non-controlling interest (formerly minority
interest) in an acquiree; provides updated requirements for recognition and
measurement of goodwill acquired in the business combination or a gain from a
bargain purchase; and provides updated disclosure requirements to enable users
of financial statements to evaluate the nature and financial effects of the
business combination. This Statement applies prospectively to business
combinations for which the acquisition date is on or after the beginning of the
first annual reporting period beginning on or after December 15, 2008. Early
adoption is not allowed. This standard is not expected to impact our
financial statements unless a qualifying transaction is consummated subsequent
to the effective date.
In
February 2007 the FASB issued SFAS No. 159, “The Fair Value Option for Financial
Assets and Financial Liabilities-Including an amendment of FASB Statement No.
115” (SFAS 159). SFAS 159 permits entities to choose to measure many financial
instruments and certain other items at fair value. It provides entities with the
opportunity to mitigate volatility in reported earnings caused by measuring
related assets and liabilities differently without having to apply complex hedge
accounting provisions. SFAS 159 is effective as of the beginning of an entity’s
first fiscal year that begins after November 15, 2007. We currently plan to
adopt SFAS 159 during our 2008 fiscal year. We are in the process of
evaluating the potential impact of this standard on our consolidated financial
statements.
In
September 2006, the FASB issued SFAS 157, “Fair Value Measurements.” SFAS 157
provides guidance for using fair value to measure assets and liabilities. The
standard also requires expanded
information about the extent to which companies measure assets and liabilities
at fair value, the information used to measure fair value, and the effect of
fair value measurements on earnings. The standard applies whenever other
standards require (or permit) assets or liabilities to be measured at fair
value. The standard does not expand the 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.
ITEM
7A. |
QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK |
Financial
Risk Management
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 New Credit Facilities provide for variable rate
borrowings of up to $3,425.0 million including availability of
$1,125.0 million under our senior secured asset-based revolving credit
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 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, we swapped three month LIBOR rates
for fixed interest rates which will result in the payment of a fixed rate of
7.68% on a notional amount of $2,000.0 million which will amortize on a
quarterly basis until maturity at July 31, 2012. At February 1, 2008, the
notional amount was $1,630.0 million.
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 derivatives qualify for hedge accounting as cash flow
hedges. Therefore, changes in market fluctuations related to the
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 outstanding debt as of February 1,
2008 and
assuming that our mix of debt instruments, derivative instruments and other
variables remain the same, the annualized effect of a one percentage point
change in variable interest rates would have a pretax impact on our earnings and
cash flows of approximately $7.9 million.
The
interest rate swaps are accounted 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, we
are accounting for 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.
Subsequent to the 2007
fiscal year end, we entered into a $350.0 million step-down interest rate swap
which became effective February 28, 2008 in order to mitigate an additional
portion of the variable rate interest exposure under the New Credit
Facilities. We entered into the swap with Wachovia Capital Markets
and we swapped one month LIBOR rates for fixed interest rates, which will result
in the payment of a fixed rate of 5.58% on a notional amount of $350.0 million
for the first year and $150.0 million for the second year.
ITEM 8. |
FINANCIAL STATEMENTS AND SUPPLEMENTARY
DATA |
Report
of Independent Registered Public Accounting Firm
To 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) and February 2,
2007 (Predecessor), and the related consolidated statements of operations,
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, 2007 and February 3, 2006
(Predecessor). 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, assessing the accounting principles
used and significant estimates made by
management, and 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) and February 2,
2007 (Predecessor), 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, 2007 and February 3, 2006 (Predecessor), in conformity with U.S. generally
accepted accounting principles.
As
discussed 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 connection with the adoption of Statement of Financial
Accounting Standards No. 123(R), “Share-Based Payment”.
As
discussed in Notes 1 and 5 to the consolidated financial statements, effective
February 3, 2007, the Company changed its method of accounting for uncertain tax
positions in connection with the adoption of FASB Interpretation No. 48,
“Accounting for Uncertainty in Income Taxes”.
/s/ Ernst & Young
LLP
Nashville,
Tennessee
March 25,
2008
CONSOLIDATED
BALANCE SHEETS
(In
thousands except per share amounts)
|
|
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.
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
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 |
|
(a)
|
Includes
the results of operations of Buck Acquisition Corp. for the period prior
to its merger with and into Dollar General Corporation from March 6, 2007
(its formation) through July 6, 2007 (reflecting the change in fair value
of interest rate swaps), and the post-merger results of Dollar General
Corporation for the period from July 7, 2007 through February 1,
2008. See Notes 1 and 2.
|
The
accompanying notes are an integral part of the consolidated financial
statements.
CONSOLIDATED
STATEMENTS OF SHAREHOLDERS’ EQUITY
(In
thousands except per share amounts)
|
|
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.
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(In
thousands)
|
|
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 |
|
|
$ |
- |
|
(a)
|
Includes
the cash flows of Buck Acquisition Corp. for the period prior to its
merger with and into Dollar General Corporation from March 6, 2007 (its
formation) through July 6, 2007 (which were zero), and the post-merger
results of Dollar General Corporation for the period from July 7, 2007
through February 1, 2008. See Notes 1 and
2.
|
The
accompanying notes are an integral part of the consolidated financial
statements.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
1. |
Basis of presentation and accounting
policies |
Basis
of presentation
These
notes contain references to the years 2008, 2007, 2006, and 2005, which
represent fiscal years ending or ended January 30, 2009, February 1, 2008,
February 2, 2007, and February 3, 2006, respectively. Fiscal 2008 will be, and
each of fiscal years 2007 and 2006 were, a 52-week accounting period while
fiscal 2005 was a 53-week accounting period. 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 the
assets and revenues of which are not material. Intercompany
transactions have been eliminated.
Dollar
General Corporation (the “Company”) was acquired on July 6, 2007 through a
Merger (as defined and discussed in greater detail in Note 2 below) accounted
for as a reverse acquisition. Although the Company continued as the
same legal entity after the Merger, the accompanying consolidated financial
statements are presented for the “Predecessor” and “Successor” relating to the
periods preceding and succeeding the Merger, respectively. As a
result of the Company applying purchase accounting and a new basis of accounting
beginning on July 7, 2007, the financial reporting periods presented are as
follows:
·
|
The
2007 periods presented include the 22-week Predecessor period of the
Company from February 3, 2007 to July 6, 2007 and 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’s
results of operations for the period from March 6, 2007 to July 6, 2007
(prior to the Merger on July 6, 2007) are also included in the
consolidated financial statements for the Successor period described above
as a result of certain derivative financial instruments entered into by
Buck prior to the Merger, as further described below. Other
than these financial instruments, Buck had no assets, liabilities, or
operations prior to the Merger.
|
·
|
The
2006 and 2005 periods presented reflect the Predecessor. The
consolidated financial statements for the Predecessor periods have been
prepared using the Company’s historical basis of accounting. As
a result of purchase accounting, the pre-Merger and post-Merger
consolidated financial statements are not
comparable.
|
The
Company leases three of its distribution centers (“DCs”) from lessors, which
meet the definition of a Variable Interest Entity (“VIE”) as described by
Financial Accounting Standards Board (“FASB”) Interpretation 46, “Consolidation
of Variable Interest Entities” (“FIN 46”), as revised. One of these DCs has been
recorded as a financing obligation whereby the property and equipment, along
with the related lease obligations, are reflected in the consolidated balance
sheets. The land and buildings of the other two DCs have been
recorded as operating leases in accordance with Statement of Financial
Accounting Standards (“SFAS”) 13,
“Accounting for
Leases.” The Company is not the primary beneficiary of these VIEs
and, accordingly, has not included these entities in its consolidated financial
statements.
Business
description
The
Company sells general merchandise on a retail basis through 8,194 stores (as of
February 1, 2008) located primarily in the southern, southwestern, midwestern
and eastern United States. The Company has 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% of the Company’s purchases in 2007 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,
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 banks for third-party credit card, debit card and electronic benefit
transactions classified as cash and cash equivalents totaled approximately $13.9
million and $11.6 million at February 1, 2008 and February 2, 2007,
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 million and $122.3 million at February 1, 2008 and February 2, 2007,
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.
The
Company has certain cash and cash equivalents balances that, along with certain
other assets, are being held as required by certain insurance-related regulatory
requirements and are therefore not available for general corporate purposes, as
further described below under “Investments in debt and equity
securities.”
Investments
in debt and equity securities
The
Company accounts for its investment 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. Debt
securities categorized as
held-to-maturity are stated at amortized cost. Debt and equity
securities categorized as available-for-sale are stated at fair value, with any
unrealized gains and losses, net of deferred income taxes, reported as a
component of Accumulated other comprehensive loss. Trading securities
(primarily mutual funds held pursuant to deferred compensation and supplemental
retirement plans, as further discussed in Note 8) are stated at fair value, with
changes in fair value recorded in income as a component of Selling, general and
administrative (“SG&A”) expense.
In
general, the Company invests excess cash in shorter-dated, highly liquid
investments such as money market 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 as the Company’s intentions with respect
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.
In 2006
and prior years, the Company invested in tax-exempt auction rate securities,
which are debt instruments having longer-dated (in some cases, many years) legal
maturities, but with interest rates that are generally reset every 28-35 days
under an auction system. Because auction rate securities are
frequently re-priced, they trade in the market like short-term
investments. As available-for-sale securities, these investments are
carried at fair value, which approximates cost given that the average duration
of such securities held by the Company is less than 40 days. Despite
the liquid nature of these investments, the Company categorizes them as
short-term investments instead of cash and cash equivalents due to the
underlying legal maturities of such securities. However, they have
been classified as current assets as they are generally available to support the
Company’s current operations. There were no such investments outstanding as of
February 1, 2008 or February 2, 2007.
In 2007
and 2006, the Company’s South Carolina-based wholly owned captive insurance
subsidiary, Ashley River Insurance Company (“ARIC”), had investments in U.S.
Government securities, obligations of Government Sponsored Enterprises, short-
and long-term corporate obligations, and asset-backed obligations. These
investments are held pursuant to South Carolina regulatory requirements to
maintain certain asset balances in relation to ARIC’s liability and equity
balances and, as such, these investments are not available for general corporate
purposes. The composition of these required asset balances changes periodically.
At February 1, 2008, the total of these balances was $63.4 million and is
reflected in the Company’s consolidated balance sheet as follows: cash and cash
equivalents of $11.9 million, short-term investments of $19.6 million and
long-term investments included in other assets of $31.9 million.
Historical cost
information pertaining to investments in mutual funds by participants in the
Company’s supplemental retirement and compensation deferral plans classified as
trading securities is not readily available to the Company.
On
February 1, 2008 and February 2, 2007, held-to-maturity, available-for-sale and
trading securities consisted of the following (in thousands):
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
On
February 1, 2008 and February 2, 2007, these investments were included in the
following accounts in the consolidated balance sheets (in
thousands):
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
|
|
The
contractual maturities of held-to-maturity securities as of February 1,
2008 were as follows (in thousands):
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, 2007 and February 3, 2006, 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. 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. The excess of current cost over LIFO cost was
approximately $6.1 million at February 1, 2008 and $4.3 million at February 2,
2007. Current cost is determined using the retail first-in, first-out
method. The Company’s LIFO reserves were adjusted to zero at July 6,
2007 as a result 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 million in 2006 and 2005, respectively. Costs directly
associated with warehousing and distribution are capitalized into
inventory.
In 2005,
the Company expanded the number of inventory departments it utilizes for its
gross profit calculation from 10 to 23. The impact of this change in estimate on
the Company’s consolidated 2005 results of operations was an estimated reduction
of gross profit and a corresponding decrease to inventory, at cost, of $5.2
million.
Store
pre-opening costs
Pre-opening costs related
to new store openings and the construction periods are expensed as
incurred.
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 flows or the appraised values of the underlying
assets. In accordance with SFAS 144, “Accounting for the Impairment or Disposal
of 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 fair
value. The fair value is estimated based primarily upon 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 million in the 2007 Predecessor period, $9.4 million in 2006
and $0.6 million in 2005 to reduce the carrying value of certain of its stores’
assets as deemed necessary due to negative sales trends and cash flows at these
locations. The majority of the 2006 charges were recorded pursuant to certain
strategic initiatives discussed 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 based on undiscounted cash flows, and, if impaired, written down to
fair value based on either discounted cash flows or appraised values. Intangible
assets with indefinite lives are tested annually for impairment and written down
to fair value as required. No impairment of intangible assets has been
identified during any of the periods presented.
Other
assets
Other
assets consist primarily of long-term investments, qualifying prepaid expenses,
debt issuance costs which are amortized over the life of the related
obligations, 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.
Vendor
rebates
The
Company accounts for all cash consideration received from vendors in accordance
with the provisions of Emerging Issues Task Force Issue (“EITF”) 02-16,
“Accounting by a Customer (Including a Reseller) for Certain Consideration
Received from a Vendor.” 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 and recognized in the statement of operations at the
time the goods are sold. However, certain specific, incremental and otherwise
qualifying SG&A expenses related to the promotion or sale of vendor products
may be offset by cash consideration received from vendors, in accordance with
arrangements such as cooperative advertising, when earned for dollar amounts up
to but not exceeding actual incremental costs. The Company recognizes amounts
received for cooperative advertising on performance, “first showing” or
distribution, consistent with its policy for advertising expense in accordance
with the American Institute of Certified Public Accountants Statement of
Position 93-7, “Reporting on Advertising Costs.”
Rent
expense
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 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. The
Company also receives tenant allowances, which 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 in the
consolidated balance sheets, and totaled approximately $3.7 million (after
purchase accounting adjustment due to the Merger) and $30.4 million at February
1, 2008 and February 2, 2007, respectively.
The
Company recognizes contingent rental expense when the achievement of specified
sales targets are considered probable, in accordance with EITF Issue 98-9,
“Accounting for Contingent Rent.” The amount expensed but not paid as of
February 1, 2008 and February 2, 2007 was approximately $8.3 million and $8.6
million, respectively, and is included in Accrued expenses and other in the
consolidated balance sheets (See Note 7).
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 SFAS 146, “Accounting for Costs Associated
with Exit or Disposal Activities.” The estimated future liability associated
with the rental obligation for certain store closures associated with the Merger
were based on EITF 95-3, “Recognition of Liabilities in Connection with a
Purchase Business Combination.” 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. 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. 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 closed store
liability balance at February 1, 2008 and February 2, 2007 was $20.2 million and
$5.4 million, respectively.
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
|
Other
accrued expenses primarily include the current portion of liabilities for
deferred rent, freight expense, contingent rent expense, interest, electricity,
lease contract termination liabilities for closed stores, 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 has 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.” ARIC
currently insures no unrelated third-party risk.
As a
result of the Merger, the Company recorded its assumed self-insurance reserves
as of the Merger date at their present value in accordance with SFAS 141,
“Business Combinations”, using a discount rate of 5.4%. The balance of the
resulting discount was $18.7 million at February 1, 2008. Other than for
reserves assumed in a business combination, the Company’s policy is to record
self-insurance reserves on an undiscounted basis.
Other
liabilities
Other
non-current 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
|
Other
liabilities consist primarily of deferred rent, lease contract termination
liabilities for closed stores, leasehold interests liabilities, and redeemable
stock options.
Fair
value of financial instruments
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, the fair value 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.
The fair
value of the Company’s derivatives reflects the estimated amounts that the
Company would receive or pay to terminate these contracts at the reporting date
based upon pricing or valuation models applied to current market information.
Interest rate swaps are valued using the market standard methodology of netting
the discounted future fixed cash receipts (or payments) and the discounted
expected variable cash payments (or receipts). The variable cash payments (or
receipts) are based on an expectation of future interest rates derived from
observed market interest rate curves.
Derivative
financial instruments
The
Company accounts for derivative financial instruments in accordance with SFAS
No. 133 “Accounting 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. All financial instrument
positions taken by the Company are intended to be used to reduce risk by hedging
an underlying economic exposure.
The
Company’s derivative financial instruments, in the form of interest rate swaps,
are related to variable interest rate risk exposures associated with the
Company’s long-term debt and were entered into in an attempt 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. The Company does not offset fair value
amounts of derivatives and associated cash collateral.
In April
2007, Buck entered into interest rate swaps, contingent upon the completion of
the Merger, on a portion of the loans anticipated to result from the
Merger. The interest rate swaps result in the Company paying a fixed
rate of 7.683% on a notional amount of $2.0 billion as of July 31, 2007, with
the notional amount 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 $3.7 million for the Successor period has been recognized 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.
As of
February 1, 2008, the fair value of the interest rate swaps of ($82.3) million
was recorded in non-current Other liabilities on the consolidated balance sheet.
From the date the swaps were designated as hedges, the effective portion of the
change in fair value of the swaps of ($78.6) million was recorded in Other
comprehensive income, a separate component of equity, offset by related income
taxes of $29.5 million. The Company also recorded expense related to hedge
ineffectiveness of $0.4 million during the Successor period ended February 1,
2008.
Share-based
payments
Effective
February 4, 2006, the Company adopted SFAS 123 (Revised 2004) “Share Based
Payment” (“SFAS 123(R)”) and began recognizing compensation expense for
share-based compensation based on the fair value of the awards on the grant
date. SFAS 123(R) requires share-based compensation expense recognized since
February 4, 2006 to be based on: (a) grant date fair value estimated in
accordance with the original provisions of SFAS 123, “Accounting for Stock-Based
Compensation,” for unvested options granted prior to the adoption date and (b)
grant date fair value estimated in accordance with the provisions of SFAS 123(R)
for unvested options granted after the adoption date. The Company adopted SFAS
123(R) under the modified-prospective-transition method and, therefore, results
from prior periods have not been restated.
Prior to
February 4, 2006, the Company accounted for share-based payments using the
intrinsic-value-based recognition method prescribed by Accounting Principles
Board Opinion 25, “Accounting for Stock Issued to Employees” (“APB 25”), and
provided pro forma disclosures as permitted under SFAS 123. Because options were
granted at an exercise price equal to the market price of the underlying common
stock on the grant date, compensation cost related to stock options was
generally not required to be recorded as a reduction to net income prior to the
adoption of SFAS 123(R).
Under
SFAS 123(R), forfeitures are estimated at the time of valuation and reduce
expense ratably over the vesting period. This estimate is adjusted periodically
based on the extent to which actual forfeitures differ, or are expected to
differ, from the prior estimate. The forfeiture rate is the estimated percentage
of options granted that are expected to be forfeited or canceled before becoming
fully vested. The Company bases this estimate on historical experience or
estimates of future trends, as applicable. An increase in the forfeiture rate
will decrease compensation expense. Under SFAS 123, the Company elected to
account for forfeitures when awards were actually forfeited.
SFAS
123(R) also requires the benefits of tax deductions in excess of recognized
compensation cost to be reported as a financing cash flow, rather than as an
operating cash flow as required prior to the adoption of SFAS
123(R).
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 accounts for nonvested restricted stock 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.
The
Company has elected 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 Merger and the related application of purchase accounting, the excess tax
benefit pool has been reduced to zero.
Revenue
and gain recognition
The
Company recognizes 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 began gift card sales in the third quarter of 2005. The
Company recognizes gift card sales revenue at the time of
redemption. The liability for the gift cards is established for the
cash value at the time of purchase. The liability for outstanding gift cards was
approximately $1.2 million and $0.8 million at February 1, 2008 and February 2,
2007, respectively, and is recorded in Accrued expenses and other. Through
February 1, 2008, the Company has not recorded any breakage income related to
its gift card program. The Company will continue to evaluate its current
breakage policy as it continues to gain more sufficient company-specific
customer experience.
Advertising
costs
Advertising costs are
expensed upon performance, “first showing” or distribution, and are reflected
net of qualifying cooperative advertising funds provided by vendors in SG&A
expenses. Advertising costs were $23.6 million $17.3 million, $45.0 million and
$15.1 million in 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
Association 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.
Capitalized
interest
To assure
that interest costs properly reflect only that portion relating to current
operations, interest on borrowed funds during the construction of property and
equipment is capitalized. Interest costs capitalized were
approximately $2.9 million and $3.3 million in 2006 and 2005,
respectively.
Income
taxes
The
Company reports income taxes in accordance with SFAS No. 109, “Accounting for
Income Taxes” (“SFAS 109”). Under SFAS 109, the asset and liability
method is used for computing the future income tax consequences of events that
have been recognized in the Company’s consolidated financial statements or
income tax returns. Deferred income tax expense or benefit is
the net change during the year in the Company’s deferred income tax assets and
liabilities.
As
discussed in Note 5, effective February 3, 2007 the Predecessor modified its
method of accounting for income taxes in connection with the adoption of FASB
Interpretation 48, Accounting for Uncertainty in Income Taxes – An
Interpretation of FASB Statement 109 (“FIN 48”). 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.
Subsequent to the adoption
of FIN 48, the Company has elected to record income tax related interest and
penalties as a component of the provision for income tax expense.
Income
tax reserves are determined using the methodology established by FIN
48. FIN 48 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 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'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, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments
and Hedging Activities”, an amendment 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 42
of SFAS 133 and related hedged items accounted for under SFAS 133. SFAS 161
requires entities to provide greater transparency through additional disclosures
about how and why an 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 is effective as of the beginning of an entity’s first fiscal year that
begins after November 15, 2008. The Company currently plans to adopt
SFAS 161 during its 2009 fiscal year. No determination has yet been
made regarding the potential impact of this standard on the Company’s financial
statements.
In
December 2007, the FASB issued SFAS No. 141(R), “Business
Combinations”. The new standard establishes the requirements for how
an acquirer recognizes and measures in its financial statements the identifiable
assets acquired, the liabilities assumed, and any non-controlling interest
(formerly minority interest) in an acquiree; provides updated requirements for
recognition and measurement of goodwill acquired in a business combination or a
gain from a bargain purchase; and provides updated disclosure requirements to
enable users of financial statements to evaluate the nature and financial
effects of the business combination. This Statement applies
prospectively to business combinations for which the acquisition date is on or
after the beginning of the first annual reporting period beginning on or after
December 15, 2008. Early adoption is not allowed. This standard is
not expected to impact the Company’s financial statements unless a qualifying
transaction is consummated subsequent to the effective date.
In
February 2007, the FASB issued SFAS 159, “The Fair Value Option for Financial
Assets and Financial Liabilities – Including an amendment of FASB Statement No.
115” (“SFAS 159”). SFAS 159 permits entities to choose to measure
many financial instruments and certain other items at fair value. It
provides entities with the opportunity to mitigate volatility in reported
earnings caused by measuring related assets and liabilities differently without
having to apply complex hedge accounting provisions. SFAS 159 is
effective as of the beginning of an entity’s first fiscal year that begins after
November 15, 2007. The Company currently plans to adopt SFAS 159
during its 2008 fiscal year. The Company is in the process of
evaluating the potential impact of this standard on its financial
statements.
In
September 2006, the FASB issued SFAS 157, “Fair Value Measurements” (“SFAS
157”). SFAS 157 provides guidance for using fair value to measure
assets and liabilities. The standard also requires expanded
information about the extent to which companies measure assets and liabilities
at fair value, the information used to measure fair value, and the effect of
fair value measurements on earnings. The standard applies whenever
other standards require (or permit) assets or liabilities to be measured at fair
value. The standard does not expand the use of fair value in any new
circumstances for financial assets and liabilities. 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. The Company currently
plans to adopt SFAS 157 during its 2008 and 2009 fiscal years as appropriate.
The Company is in the process of evaluating the potential impact of this
standard on its financial statements.
Reclassifications
Certain
reclassifications of the 2006 amounts have been made to conform to the 2007
presentation.
On March
11, 2007, the Company entered into 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 (prior to the Merger) controlled by
investment funds affiliated with Kohlberg Kravis Roberts & Co., L.P.
(“KKR”). On July 6, 2007, the transaction was consummated through a
merger (the “Merger”) of Buck with and into the Company. The Company survived
the Merger as a subsidiary of Parent. The Company’s results of
operations after July 6, 2007 include the effects of the Merger.
The
aggregate purchase price was approximately $7.1 billion, including direct costs
of the Merger, and was funded primarily through debt financings as described
more fully below in Note 6 and cash equity contributions from 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-investors (collectively, the
“Investors”) of approximately $2.8 billion (553.4 million shares of new common
stock, $0.50 par value per share, valued at $5.00 per share). Also in
connection with the Merger, certain of the Company’s management employees
invested, and were issued new shares representing less than 1% of the
outstanding shares, in the Company. Pursuant to the terms of the
Merger Agreement, the former holders of the Company’s common stock, par value
$0.50 per share, received $22.00 per share, or approximately $6.9 billion, and
all such shares were acquired as a result of the Merger. As of February 1, 2008,
there were approximately 555,481,897 shares of Company common stock outstanding,
a portion of which is redeemable as further discussed below in Note
9.
As
discussed in Note 1, the Merger was accounted for as a reverse acquisition in
accordance with the purchase accounting provisions of SFAS 141, “Business
Combinations”. Because of this accounting treatment, the Company’s
assets and liabilities have 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
allocation of the purchase price is as follows (in thousands):
Cash
and cash equivalents
|
$
|
349,615
|
Short-term
investments
|
|
30,906
|
Merchandise
inventories
|
|
1,368,130
|
Income
taxes receivable
|
|
36,934
|
Deferred
income taxes
|
|
57,176
|
Prepaid
expenses and other current assets
|
|
63,204
|
Property
and equipment, net
|
|
1,301,119
|
Goodwill
|
|
4,344,930
|
Intangible
assets
|
|
1,396,612
|
Other
assets, net
|
|
66,537
|
Current
portion of long-term obligations
|
|
(7,088)
|
Accounts
payable
|
|
(585,518)
|
Accrued
expenses and other
|
|
(306,394)
|
Income
taxes payable
|
|
(84)
|
Long-term
obligations
|
|
(267,927)
|
Deferred
income taxes
|
|
(536,555)
|
Other
liabilities
|
|
(215,906)
|
Total
purchase price assigned
|
$
|
7,095,691
|
The
purchase price allocation as of February 1, 2008 included approximately $4.34
billion of goodwill, none of which is expected to be deductible for tax
purposes. 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 to the Merger. The February
1, 2008 purchase price allocation also included approximately $1.4 billion of
other intangible assets, as follows:
|
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, 2008 of $26.1 million
($23.7 million of which is included in rent expense). Amortizable
intangible assets will 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 million, 2012
- $17.1 million.
Fees and
expenses related to the Merger totaled $102.6 million, principally consisting of
investment banking fees, legal fees and stock compensation ($39.4 million as
further discussed in Note 9), and are reflected in 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.
The
following represents the unaudited pro forma results of our consolidated
operations as if the Merger had occurred on February 4, 2006, after giving
effect to certain adjustments, including the depreciation and amortization of
the assets acquired based on their estimated fair values and changes in interest
expense resulting from changes in consolidated debt (in thousands):
(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)
|
The pro
forma information does not purport to be indicative of what the Company's
results of operations would have been if the acquisition had in fact occurred at
the beginning of the periods presented, and is not intended to be a projection
of the Company's future results of operations.
Subsequent to the
announcement of the Merger Agreement, the Company and its directors, along with
other parties, were named in seven putative class actions filed in Tennessee
state courts alleging claims for breach of fiduciary duty arising out of the
proposed Merger, all as described more fully under “Legal Proceedings” in Note 7
below.
During
2006, the Company began implementing certain strategic initiatives related to
its historical inventory management and real estate strategies, as more fully
described below.
Inventory
management
In
November 2006, the Company undertook an initiative to discontinue its historical
inventory packaway model for virtually all merchandise by the end of fiscal
2007. Under the packaway model, unsold inventory items were stored on-site and
returned to the sales floor to be sold year after year, until the items were
eventually sold, damaged or discarded. Through end-of-season and other
markdowns, this initiative resulted in the elimination of seasonal, home
products and basic clothing packaway merchandise to allow for increased levels
of newer, current-season merchandise. In connection with this
strategic change, in the third quarter of 2006 the Company recorded a reserve
for lower of cost or market inventory impairment estimates of $63.5 million
and incurred higher markdowns and writedowns on inventory in the second
half of 2006 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.
Exit
and disposal activities
In
November 2006, the Company decided to close, in addition to those stores that
might be closed in the ordinary course of business, approximately 400 stores by
the end of fiscal 2007, all of which have been closed as of February 1,
2008. Additionally, in connection with the Merger, management
approved and completed a plan to close an additional 60 stores prior to February
1, 2008. The Company has recorded the following pre-tax costs
associated with the closing of these approximately 460 stores (in
millions):
|
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
|
|
$
|
-
|
|
(a)
|
Reflects
totals as of February 1, 2008, which, in total, are $1.5 million less than
estimates as of November 2, 2007.
|
(b)
|
These
amounts were recorded as assumed liabilities in connection with the
Merger.
|
(c)
|
Including
reversals of deferred rent accruals totaling $0.5 million, of which $0.1
million is reflected in 2006, and $0.4 million is reflected in
2007. Excludes accretion expense to be incurred in future
periods.
|
Other
associated store closing costs as listed in the table above primarily include
the removal of any usable assets as well as real estate consulting and other
services.
Liability
balances related to exit activities discussed above are as follows (in
millions):
|
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
|
|
(a)
|
2007
expenses associated with exit and disposal activities are included in
selling, general and administrative (“SG&A”) expenses in the
consolidated statement of
operations.
|
(b)
|
These
amounts were recorded as assumed liabilities in connection with the
Merger.
|
(c)
|
Primarily
represents store closing costs including removal of store
fixtures.
|
4.
|
Property
and equipment
|
Property
and equipment is recorded at cost and summarized as follows:
(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 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 2006 and $186.1 million for
2005. Amortization of capital lease assets is included in
depreciation expense.
The
provision (benefit) for income taxes consists of the following:
|
|
|
|
|
|
|
|
|
July
7, 2007
to
February
1, 2008
|
|
|
February
3, 2007
to
July
6, 2007
|
|
|
|
|
|
|
|
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 |
|
A
reconciliation between actual income taxes and amounts computed by applying the
federal statutory rate to income before income taxes is summarized as
follows:
|
|
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
income tax rate for the Successor period ended February 1, 2008 is a benefit of
26.9%. This benefit is less than the expected, U.S. statutory rate of
35% 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.
The
income tax rate for the Predecessor period ended July 6, 2007 is an expense of
300.2%. This expense is higher than the expected U.S. statutory rate
of 35% due principally to the non-deductibility of certain acquisition related
expenses.
The 2006
income tax rate was higher than the 2005 rate by 1.7%. Factors
contributing to this increase include additional expense related to the adoption
of a new tax system in the State of Texas; a reduction 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 the Company’s 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.
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)
|
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 |
) |
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 that total approximately $261.1
million and will expire beginning in 2012 through 2027 and state tax credit
carryforwards of approximately $13.4 million that will expire beginning in 2008
through 2027.
The
valuation allowance has been provided principally for state tax credit
carryforwards. The full amount of the change in the valuation
allowance for the 2007 Successor period, a decrease of $4.2 million, was
recorded as an adjustment to goodwill. The increase 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. 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
to realize the deferred
tax assets after giving consideration to the valuation allowance. After the
Merger, the full benefit of any reversal of the valuation allowance will reduce
goodwill and not income tax expense.
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.
Subsequent to the adoption
of FIN 48, the Company has elected to record income tax related interest and
penalties as a component of the provision for income tax expense.
In the
Predecessor period ended July 6, 2007, the Internal Revenue Service completed an
examination of the Company’s federal income tax returns through fiscal year 2003
resulting in a net income tax refund. There are no unresolved issues
related to this examination. None of the Company’s federal income tax
returns are currently under examination by the Internal Revenue Service;
however, fiscal years 2004 and later are still subject to possible examination
by the Internal Revenue Service. The Company has various state income
tax examinations that are currently in progress. The estimated
liability related to these state income tax examinations is included in the
Company’s reserve for uncertain tax positions. Generally, the
Company’s tax years ended in 2004 and forward remain open for examination by the
various state taxing authorities.
As of
February 1, 2008, the total reserves for uncertain tax benefits, interest
expense related to income taxes and potential income tax penalties were $96.6
million, $19.7 million and $1.5 million, respectively, for a total of $117.8
million. Of this amount, $23.2 million and $78.3 are reflected in
current liabilities as accrued expenses and other and in other noncurrent
liabilities, respectively, in the consolidated balance sheet with the remaining
$16.3 million reducing deferred tax assets related to net operating loss carry
forwards.
The
change, from the date of adoption, through the end of the Predecessor period
ended July 6, 2007 in the reserves for uncertain tax benefits, interest expense
related to income taxes and potential income tax penalties that impacted the
consolidated statement of operations was a net increase of $10.4 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
uncertain tax benefits and interest expense 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 million in the coming twelve
months 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. The reasonably possible
change of $64.8 million is included in both current liabilities ($21.2 million)
and other noncurrent liabilities ($43.6 million) in the consolidated balance
sheet as of February 1, 2008. Also, as of February 1, 2008 (after the merger and
the related application of purchase accounting), approximately $0.3 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.
A
reconciliation of the reserve associated with uncertain income tax positions
from February 3, 2007 (the date of adoption) through February 1, 2008 is as
follows:
(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
|
6. |
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 |
|
On July
6, 2007, the Company entered into two senior secured credit agreements (the “New
Credit Facilities”). The New Credit Facilities provide financing of
$3,425.0 million, consisting of $2,300.0 million in a senior secured term loan
facility which matures on July 6, 2014, and a senior secured asset-based
revolving credit facility of up to $1,125.0 million, subject to borrowing base
availability, which matures on July 6, 2013.
Under the
New Credit Facilities, the Company has the right at any time to request up to
$325.0 million of incremental commitments under one or more incremental term
loan facilities and/or asset-based revolving credit facilities, subject to
certain conditions and subject to the lender’s desire to extend the incremental
facilities.
The
amount from time to time available under the senior secured asset-based
revolving credit facility (including in respect of 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 facility
includes a $1.0 billion tranche and a $125.0 million (“last out”)
tranche. Repayments of the senior secured asset-based revolving
credit facility will be applied to the $125.0 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, 2.75% with respect to LIBOR borrowings and 1.75%
with respect to base-rate borrowings and (ii) as of February 1, 2008, under the
asset-based revolving credit facility (except in the last out tranche described
above), 1.50% with respect to LIBOR borrowings and 0.50% with respect to
base-rate borrowings and for any last out borrowings, 2.25% with respect to
LIBOR borrowings and 1.25% with respect to base-rate borrowings. The
applicable margins for borrowings under the asset-based revolving credit
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%. The interest rate for borrowings under the term loan facility
was 6.22% (without giving effect to the interest rate swap discussed in Note 1)
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 the unutilized
commitments thereunder. The commitment fee rate was 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 facility are equal to or less than 50%
of the aggregate commitments under the asset-based revolving credit
facility. The Company also must pay customary letter of credit
fees.
The
senior secured credit agreement for the term 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 facility requires the Company to prepay the
asset-based revolving credit 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. Beginning
September 30, 2009, the Company is required to repay installments on the loans
under the term loan credit
facility in equal
quarterly principal amounts in an aggregate amount per annum equal to 1% of the
total funded principal amount at July 6, 2007, with the balance payable on July
6, 2014.
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
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); and first-priority
pledge of the capital stock held by the Company. All obligations
under the asset-based revolving credit facility are secured by all existing and
after-acquire inventory and accounts receivable, subject to certain
exceptions.
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.
As of
February 1, 2008, the Company had $102.5 million in borrowings, $28.8 million of
commercial letters of credit, and $69.2 million of standby letters of credit
outstanding under the asset-based revolving credit facility, with excess
availability under that facility of $769.2 million. As of February 1,
2008, the Company had $2,300.0 million outstanding under the term loan
facility.
In
addition, on July 6, 2007, in conjunction with the Merger, the Company issued
$1,175.0 million aggregate principal amount of 10.625% senior notes due 2015
(the “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”), which mature on July 15, 2017, pursuant to an indenture,
dated as of July 6, 2007 (the “senior subordinated indenture”). The
senior notes and the senior subordinated notes are collectively referred to
herein as the “notes”. The senior indenture and the senior
subordinated indenture are collectively referred to herein as the
“indentures”.
Interest
on the notes is payable on January 15 and July 15 of each year, commencing on
January 15, 2008. Interest on the senior notes will be payable in
cash. Cash interested on the senior subordinated notes will accrue 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 may elect to pay interest on
the senior subordinated notes by increasing the principal amount of the senior
subordinated notes or issuing new senior subordinated notes (“PIK
interest”).
The notes
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 notes at any time at redemption prices
described or set forth in the indentures. During the fourth quarter of fiscal
2007, we repurchased $25.0 million of the 11.875%/12.625% senior subordinated
toggle notes due 2017, resulting in a pretax gain of $4.9 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 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; 2012
- $23,272; thereafter - $4,216,034.
On July
6, 2007, immediately after the completion of the Merger, the Company completed a
cash tender offer to purchase any and all of its $200 million principal amount
of 8 5/8% Notes due June 2010 (the “2010 Notes”). Approximately 99%
of the 2010 Notes were validly tendered and accepted for payment. The
tender offer included a consent payment equal to 3% of the par value of the 2010
Notes, and such payments along with associated settlement costs totaling $6.2
million were paid and reflected as a loss on debt retirement in the
2007 Successor period presented. Additionally, because the
Company received the requisite consents to the proposed amendments 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 all of the restrictive covenants contained in the
indenture, became operative upon the purchase of the tendered 2010
Notes.
7. |
Commitments and
contingencies |
Leases
As of
February 1, 2008, 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
majority 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 10
years with multiple renewal options. Approximately 44% of the stores have
provisions for contingent rentals based upon a percentage of defined sales
volume. Certain leases contain restrictive covenants. As
of February 1, 2008, 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.
The Merger and certain of
the related financing transactions may be interpreted as giving rise to certain
trigger events (which may include events of default) under the Company’s three
DC leases. In
such event, the Company’s net cost of acquiring the underlying assets could
approximate $112 million. At this time, the Company does not believe the
resolution of such issues would result in the purchase of these DCs; however,
the payments associated with such an outcome would have a negative impact on the
Company’s liquidity. To minimize the uncertainty associated with such possible
interpretations, the Company is negotiating the restructuring of these leases
and the related underlying debt. The Company has concluded that a probable loss
exists in connection with the restructurings and has recorded expenses totaling
$12.0 million in SG&A expenses in the Successor statement of operations
for the period ended February 1, 2008. The ultimate resolution of these
negotiations may result in changes in the amounts of such losses, and such
changes may be material.
In
January 1999 and April 1997, the Company sold its DCs located in Ardmore,
Oklahoma and South Boston, Virginia, respectively, for 100% cash
consideration. Concurrent with the sale transactions, the Company
leased the properties back for periods of 23 and 25 years,
respectively. The transactions were recorded as financing obligations
rather than sales as a result of, among other things, the lessor’s ability to
put the properties back to the Company under certain
circumstances. The property and equipment, along with the related
lease obligations, associated with these transactions were recorded in the
consolidated balance sheets.
In August
2007, the Company purchased a secured promissory note (the “Ardmore Note”) from
Principal Life Insurance Company, which had a face value of $34.3 million at the
date of purchase and approximated the remaining financing obligation. The
Ardmore Note represents debt issued by the third party entity from which the
Company leases the Ardmore DC. The Ardmore Note is being accounted for as a
“held to maturity” debt security in accordance with the provisions of SFAS 115,
“Accounting for Certain Investments in Debt and Equity Securities” (see Note 1).
However, by acquiring the Ardmore Note, the Company holds the debt
instrument pertaining to its lease financing obligation and, because a legal
right of offset exists, is accounting for the acquired Ardmore Note as a
reduction of its outstanding financing obligations in its consolidated balance
sheet as of February 1, 2008 in accordance with the provisions of FASB
Interpretation 39, “Offsetting of Amounts Related to Certain Contracts – An
Interpretation of APB Opinion 10 and FASB Statement 105.”
In May
2003, the Company purchased two secured promissory notes (the “South Boston
Notes”) from Principal Life Insurance Company totaling $49.6 million. The South
Boston Notes represented debt issued by the third party entity from which the
Company leased the South Boston DC. In June 2006, the Company acquired the third
party entity, which owned legal title to the South Boston DC assets and had
issued the related debt in connection with the original financing transaction.
There was no material gain or loss recognized as a result of this transaction.
Based on the Company’s ownership of the third party entity at February 1, 2008,
the financing obligation and South Boston Notes are eliminated in the
Company’s consolidated financial statements.
Future
minimum payments as of February 1, 2008 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 |
|
|
|
|
|
Capital
leases were discounted at an effective interest rate of approximately 5.43% at
February 1, 2008. The gross amount of property and equipment recorded
under capital leases and financing obligations at February 1, 2008 and February
2, 2007, was $33.5 million and $85.1 million,
respectively. Accumulated depreciation on property and equipment
under capital leases and financing obligations at February 1, 2008 and February
2, 2007, was $2.7 million and $41.0 million, respectively.
Rent
expense under all operating leases is as follows:
|
|
|
|
|
|
|
(In
thousands)
|
|
|
July
7, 2007 through
February
1, 2008
|
|
|
February
3, 2007 through
July
6, 2007
|
|
|
|
|
|
|
|
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 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
Excludes
net contract termination costs of $2.4 million, $19.1 million, and $5.7
million for the Successor period ended February 1, 2008 and the
Predecessor periods ended July 6, 2007 and February 2, 2007,
respectively. These expenses were recorded in association with
the closing of stores associated with strategic initiatives as further
discussed in Note 3. Also excludes amortization of leasehold interests of
$26.1 million included in rent expense for the Successor period ended
February 1, 2008. |
|
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 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
class of current and
former store managers. The Company opposed the plaintiff’s motion. On
March 23, 2007, the court conditionally certified a nationwide class of
individuals who worked for Dollar General as store managers since August 7,
2003. The number of persons who will be included in the class has not been
determined, and the court has not approved the Notice that will be sent to the
class.
On
May 30, 2007, the court stayed all proceedings in the case, including the
sending of the Notice, to evaluate, among other things, certain appeals
currently pending in the Eleventh Circuit involving claims similar to those
raised in this action. That stay has been extended through June 30, 2008. During
the stay, the statute of limitations will be tolled for potential class members.
At its conclusion, the court will determine whether to extend the stay or to
permit this action to proceed. If the court ultimately permits Notice to issue,
the Company will have an opportunity at the close of the discovery period to
seek decertification of the class, and the Company expects to file such a
motion.
The
Company believes that its store managers are and have been properly classified
as exempt employees under the FLSA and that this action is not appropriate for
collective action treatment. The Company intends to vigorously defend this
action. However, at this time, it is not possible to predict whether the court
ultimately will permit this action to proceed collectively, and no assurances
can be given that the Company will be successful in the defense on the merits or
otherwise. If the Company is not successful in its efforts to defend this
action, the resolution 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 whether the
court will permit this action to proceed collectively or as a class. However,
the Company believes that this action is not appropriate for either collective
or class treatment and that the Company’s wage and hour policies and practices
comply with both federal and state law. The Company plans 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’s 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
(“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 impacted
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’s 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. The Company will have an
opportunity at the close of the discovery period to seek decertification of the
Equal Pay Act class, and the Company expects to file such motion.
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, 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; however, no assurances can be given
that the Company will be successful in the defense on the merits or otherwise.
If the Company is not successful in defending the Calvert action, its resolution
could have a material adverse effect on the Company’s financial statements as a
whole.
On
November 9, 2007, the Company was served with an action entitled Sheneica
Nunn, et al. v. Dollar General Corporation, et al. (Circuit Court for
Dane County, Wisconsin, Case No. 07CV4178) in which the plaintiff, on
behalf of herself and a putative class of African-American applicants, alleges
that the Company’s criminal background check process disparately impacts
African-Americans in violation of Title VII of the Civil Rights Act of 1964, as
amended, and the Wisconsin Fair Employment Act. The Company has removed the case
to federal court, 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; 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’s financial
statements as a whole.
On
September 8, 2005, the Company received a request for information from the
Environmental Protection Agency (EPA) with respect to Krazy String, a product
that was offered for sale in the Company’s stores. The EPA asserted that Krazy
String contained an aerosol that included an ozone depleting substance in
violation of the Clean Air Act. On July 12, 2006, the Company agreed to an
Administrative Compliance Order requiring the destruction of the Krazy String
remaining in inventory. After advising the Company that it was considering
imposing a penalty in connection with Krazy String, on February 5, 2007 the
EPA proposed a penalty of approximately $800,000. The Company believed that
amount to be excessive under applicable EPA policies. After additional
discussions with the EPA, the Company and the EPA agreed on January 17,
2008 to resolve this matter through the Company’s payment of a $155,826
penalty.
The Company paid this
penalty in the fourth quarter of fiscal 2007 and has received full reimbursement
from the product vendor.
Subsequent to the
announcement of the agreement relating to the Merger, the Company and its
directors were named in seven putative class actions alleging claims for breach
of fiduciary duty arising out of the Company’s proposed sale to KKR. Each of the
complaints alleged, among other things, that the Company’s directors engaged in
“self-dealing” by agreeing to recommend the transaction to the Company’s
shareholders and that the consideration available to such shareholders in the
transaction is unfairly low. On motion of the plaintiffs, each of these cases
was transferred to the Sixth Circuit Court for Davidson County, Twentieth
Judicial District, at Nashville. By order dated April 26, 2007, the seven
lawsuits were consolidated in the court under the caption, “In re: Dollar
General,” Case No. 07MD-1. On June 13, 2007, the court denied the
Plaintiffs’ motion for a temporary injunction to block the shareholder vote that
was then held on June 21, 2007. On June 22, 2007, the Plaintiffs filed
their amended complaint making claims substantially similar to those outlined
above. The matter is currently in discovery. The Company believes that the
foregoing lawsuit is without merit and continues to defend the action
vigorously; however, if the Company is not successful in that defense, its
resolution could have 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 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 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.
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
annual eligible salary,
after an employee has been employed for one year and has completed a minimum of
1,000 hours of service.
A
participant’s right to claim a distribution of his or her account balance is
dependent on ERISA guidelines and Internal Revenue Service regulations. All
active employees are fully vested in all contributions to the 401(k) plan.
During the 2007 Successor and Predecessor periods, 2006 and 2005, the Company
expensed approximately $3.0 million, $4.3 million, $6.4 million, and $5.8
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 and compensation
deferral plan (called the Dollar General Corporation CDP/SERP Plan) for a select
group of management and highly compensated employees. The
supplemental retirement plan is a noncontributory defined contribution plan with
annual Company contributions ranging from 2% to 12% of base pay plus bonus
depending upon age plus years of service and job grade. Under the
compensation deferral plan, 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 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 plan accounts.
As a
result of the Merger which constituted a “change in control” under the CDP/SERP
Plan, all previously unvested amounts under the supplemental retirement plan
vested on July 6, 2007. For newly eligible SERP participants after
July 6, 2007, the supplemental retirement plan accounts vest at the earlier of
the participant’s attainment of age 50 or the participant’s being credited with
10 or more “years of service”, upon termination of employment due to death or
“total and permanent disability” or upon a “change in control”, all as defined
in the CDP/SERP Plan. The Company incurred compensation expense for
these plans of approximately $0.3 million in the 2007 Successor period, $0.5
million in the 2007 Predecessor period, $0.8 million in 2006 and $0.6 million in
2005.
The
supplemental retirement plan and compensation deferral plan assets are invested
at the option of the participant in an account that mirrors the performance of a
fund or funds selected by the Company’s Compensation Committee or its delegate
(the “Mutual Fund Options”) or, prior to the Merger, in an account that mirrored
the performance of the Company’s common stock (the “Common Stock
Option”). A participant’s compensation deferral 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) a combination of lump sum and installments. The
vested amount will be payable at the time designated by the plan upon the
participant’s termination of employment 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 deferral
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.
As a
result of the Merger, the CDP/SERP Plan liabilities were fully funded into an
irrevocable rabbi trust. All account balances deemed to be invested
in the Common Stock Option were liquidated at a value of $22.00 per share and
the proceeds were transferred to an existing Mutual Fund Option within the
Plan.
Asset
balances in the Mutual Funds Option are stated at fair market value, which is
based on quoted market prices. The current portion of these balances is included
in Prepaid expenses and other current assets and the long term portion is
included in Other assets, net in the consolidated balance sheets. In
accordance with EITF 97-14 “Accounting for Deferred Compensation Arrangements
Where Amounts Earned Are Held 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. The deferred compensation
liability related to the Mutual Funds Option 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.
The
Company sponsored through 2007 a supplemental executive retirement plan for the
Chief Executive Officer (called the Supplemental Executive Retirement Plan for
David A. Perdue) and accounted for the plan in accordance with SFAS
158. As a result of the Merger, which constituted a change in control
under the terms of this plan and the grantor trust agreement, and Mr. Perdue’s
subsequent resignation, Mr. Perdue became 100% vested. A deposit of
$6,208,966 was made to the trust representing Mr. Perdue’s lump sum vested
benefit and accumulated interest, which amount was paid to Mr. Perdue on January
7, 2008 effectively terminating the plan.
Prior to
the Merger, non-employee directors could defer all or a part of any fees
normally paid by the Company to a voluntary nonqualified compensation deferral
plan. The compensation eligible for deferral includes the annual
retainer, meeting and other fees, as well as any per diem compensation for
special assignments, earned by a director for his or her service to the
Company’s Board of Directors or one of its committees. The deferred
compensation was credited to a liability account, which was then invested at the
option of the director, in deemed investments which mirrored either the Mutual
Fund Options or the Common Stock Option and the deferred compensation was to be
paid in accordance with the director’s election. All deferred compensation was
immediately due and payable upon a “change in control” of the Company, as
defined by the Plan. As a result of the Merger, which constituted a change in
control under the Plan, all accounts held in the Deferred Compensation Plan for
Non-Employee Directors were distributed.
The
Company accounts for share-based payments in accordance with SFAS
123(R). Under SFAS 123(R), 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. The application of this valuation model involves assumptions
that are judgmental and highly sensitive in the determination of compensation
expense.
The
Successor statement of operations for the period from July 7, 2007 to February
1, 2008 reflect share-based compensation expense (a component of SG&A
expenses) under the fair value method of SFAS 123(R) for outstanding share-based
awards and a corresponding reduction of pre-tax income in the amount of $3.8
million ($2.4 million net of tax).
The
Company recognized $45.4 million of share-based compensation expense in the
Predecessor statements of operations in 2007 ($28.5 million net of tax),
including $6.0 million of compensation expense prior to the Merger
included in SG&A expenses comprised of $2.3 million and $3.7 million,
respectively, for stock options and restricted stock and restricted stock units.
The remaining $39.4 million of such expense related directly to the Merger is
reflected in Transaction and related costs in the consolidated statement of
operations for the Predecessor period ended July 6, 2007, consisting of $18.7
million and $20.7 million, respectively, for the accelerated vesting of stock
options and restricted stock and restricted stock units.
For the
year ended February 2, 2007, the fair value method of SFAS 123(R) resulted
in additional share-based compensation expense and a corresponding reduction in
net income before income taxes in the amount of $3.6 million ($2.2 million net
of tax).
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. Certain 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
February 3, 2006, the vesting of all outstanding options granted prior to August
2, 2005, other than options previously granted to the Company’s then CEO and
options granted in 2005 to the officers of the Company at the level of Executive
Vice President or above, accelerated
pursuant to a January 24,
2006 action of the Compensation Committee of the Company’s Board of Directors.
In addition, pursuant to that Compensation Committee action, the vesting of all
outstanding options granted on or after August 2, 2005 but prior to January 24,
2006, other than options granted during that time period to the officers of the
Company at the level of Executive Vice President or above, accelerated effective
as of the date that is six months after the applicable grant date. Certain
options granted on January 24, 2006 to certain newly hired officers below the
level of Executive Vice President were granted with a six-month vesting period.
The decision to accelerate the vesting of these stock options resulted in
compensation expense of $0.9 million, before income taxes, recognized during the
fourth quarter of 2005, and was made primarily to reduce non-cash compensation
expense to be recorded in future periods under the provisions of SFAS 123(R).
The future expense eliminated as a result of the decision to accelerate the
vesting of these options was approximately $28 million, or $17 million net of
income taxes, over the four-year period during which the stock options would
have vested, subject to the impact of additional adjustments related to certain
stock option forfeitures. The Company also believed this decision benefited
employees.
On July
6, 2007, the Company’s Board of Directors adopted the 2007 Stock Incentive Plan
for Key Employees (the “Plan”). 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. As of
February 1, 2008, 3,470,200 of such shares are available for future
grants.
During
the Successor period ended February 1, 2008, the Company granted options 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 the Company’s fiscal year
(“Performance Options”). According to the award terms, 20% of the
Time Options vest on each of the five successive anniversary dates of the merger
transaction, and 20% of the Performance Options vests at the end of each of the
successive five fiscal years in which the performance target is
achieved. In the event the performance target is not achieved in any
given year, such options for that year will subsequently vest upon the
achievement of a cumulative performance target. Vesting of the Time
Options and Performance Options is also subject to acceleration in the event of
an earlier change in control or public offering. 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 stock on the date
of grant.
Both the
Time Options and the Performance Options are subject to various provisions 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 stockholders 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
cases, because the
employee would not benefit in any share appreciation over the exercise price,
for accounting purposes, under SFAS 123(R) such options are not considered
vested until the expiration of the Company’s call option (July 6,
2012). Accordingly, all references to the vesting provisions or
vested status of the options discussed in this note give effect to the vesting
pursuant to the provisions of SFAS 123(R) and may differ from descriptions of
the vesting status of the Time Options and Performance Options located elsewhere
in the Company’s Annual Report on Form 10-K.
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 vested new options may require the Company to repurchase such instruments in
limited circumstances. Specifically, each such instrument is subject
to a repurchase right for a period of 365 days after termination due to the
death or disability of the holder of the instrument that occurs within five
years from the closing date of the Merger. 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 rollover 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 million and $3.2 million, respectively, have been
classified as Redeemable common stock in the accompanying consolidated balance
sheet at February 1, 2008. Because redemption of such shares is
uncertain, such shares are not subject to re-measurement until their redemption
becomes probable.
In
addition to the repurchase rights upon death or disability that are common to
all management held shares, Rollover Options, and vested new options, the
management stockholder’s agreement which the Company entered into
with certain executive officers provides 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 at a price 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, each of the shares, whether held by
general members of management or executive officers, has been classified within
Redeemable common stock on 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).
The
Company adopted SFAS 123(R) effective February 4, 2006 and began recognizing
compensation expense for stock options based on the fair value of the awards on
the grant date. The Company adopted SFAS 123(R) under the
modified-prospective-transition method and, therefore, results from prior
periods have not been restated. The following table illustrates the effect on
net income and earnings per share as if the Company had applied the fair
value
recognition provisions of
SFAS 123 to options granted under the Company’s stock plans 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 |
|
Under
SFAS 123(R), forfeitures are estimated at the time of valuation and reduce
expense ratably over the vesting period. Under SFAS 123, the Company elected to
account for forfeitures when awards were actually forfeited, at which time all
previous pro forma expense (which, after-tax, approximated $5.5 million in the
year ended February 3, 2006) was reversed to reduce pro forma expense for that
year.
SFAS
123(R) also requires the benefits of tax deductions in excess of recognized
compensation cost to be reported as a financing cash flow, rather than as an
operating cash flow as required prior to the adoption of SFAS 123(R). For the
Predecessor period ended July 6, 2007 and year ended February 2, 2007, the $3.9
million and $2.5 million excess tax benefits, respectively, classified as
financing cash inflows would have been classified as an operating cash inflow if
the Company had not adopted SFAS 123(R). The impact of the adoption of SFAS
123(R) on future results will depend on, among other things, levels of
share-based payments granted in the future, actual forfeiture rates and the
timing of option exercises.
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, 2007 and February 3, 2006, 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
|
|
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, the Company is
subject to limitations on the payment of dividends under its credit
facilities as further discussed in Note 6. 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
and implied volatility
based upon traded options, weighted equally, to calculate the volatility
assumption, as it was the Company’s belief that this methodology provided the
best indicator of future volatility. For historical volatility, the Company
calculated daily market price changes from the date of grant over a past period
representative of the expected life of the options to determine volatility.
Subsequent to the Merger the expected volatilities have been based upon the
historical volatilities of a peer group of four companies, as the Company’s
common stock is not publicly traded. An increase in the expected volatility will
increase compensation expense.
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 of 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.
All
nonvested restricted stock and restricted stock unit awards granted for the
Predecessor and Successor periods in the year ended February 1, 2008 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
originally 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.
In
accordance with the provisions of SFAS 123(R), unearned compensation is not
recorded within shareholders’ equity for nonvested restricted stock and
restricted stock unit awards. Accordingly, during the year ended February 2,
2007, the Company reversed its unearned compensation balance as of February 3,
2006 of approximately $5.2 million, with an offset to common stock and
additional paid-in capital.
The
Company issues new shares when options are exercised. A summary of stock option
activity during the Predecessor period ended July 6, 2007 is as
follows:
|
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
|
|
-
|
|
|
|
$
|
-
|
|
During
the Predecessor period from February 3, 2007 to July 6, 2007 and years ended
February 2, 2007 and February 3, 2006, the weighted average grant date fair
value of options granted was $5.37, $5.86 and $6.33, respectively; 4,213,373,
617,234 and 8,281,184 options vested, net of forfeitures, respectively; with a
total fair value of approximately $23.6 million, $2.5 million and $56.5 million,
respectively; and the total intrinsic value of stock options exercised was $10.8
million, $6.8 million and $16.7 million, respectively. The total intrinsic value
of stock options exercised during the Successor period from July 7, 2007 to
February 1, 2008 (all of which were Rollover Options) was $0.5
million.
At
February 1, 2008, 1,799,102 Rollover Options were outstanding, all of which were
exercisable. The aggregate intrinsic value of outstanding Rollover Options was
$6.7 million with a weighted average remaining contractual term of 7.36 years,
and a weighted average exercise price of $1.25.
All stock
options granted prior to the Merger in the period ended July 6, 2007 and the
year ended February 2, 2007 under the terms of the Company’s pre-merger stock
incentive plan were non-qualified stock options issued at a price equal to the
fair market value of the Company’s common stock on the date of grant, were
originally scheduled to vest ratably over a four-year period, and were to expire
10 years following the date of grant.
A summary
of activity related to nonvested restricted stock and restricted stock unit
awards during the Predecessor period ended July 6, 2007 is as
follows:
|
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
|
|
-
|
|
|
|
$
|
-
|
|
A summary
of Time Options activity during the Successor period ended February 1, 2008 is
as follows:
|
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
|
|
During
the Successor period from July 7, 2007 to February 1, 2008, the weighted average
grant date fair value of Time Options granted was $2.65; no options vested or
were exercised. At February 1, 2008, the aggregate intrinsic value of
outstanding 2007 Time Options was $0 with a weighted average remaining
contractual term of 9.6 years. None of the outstanding Time Options are
currently exercisable.
A summary
of Performance Options activity during the Successor period ended February 1,
2008 is as follows:
|
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
|
|
During
the Successor period from July 7, 2007 to February 1, 2008, the weighted average
grant date fair value of Performance Options granted was $2.65; 1,907,000
Performance Options vested and are exercisable, net of forfeitures, with a
total fair value of approximately $5.1 million, and none of those options were
exercised. At February 1, 2008, the aggregate intrinsic value of outstanding
2007 Performance Options was $0 with a weighted average remaining contractual
term of 9.6 years.
At
February 1, 2008, the total unrecognized compensation cost related to non-vested
stock options was $46.8 million with an expected weighted average expense
recognition period of 4.4 years.
The
Company currently believes that the performance targets related to the
Performance Options will be achieved. If such goals are not met, and
there is no change in control, no compensation cost relating to these
Performance Options will be recognized and any compensation cost recognized to
date will be reversed.
In
January 2008, the Company granted 890,000 nonvested restricted shares to its
CEO. These shares vest on the first to occur of (i) a change in control, (ii) an
initial public offering, (iii) termination without cause or due to death or
disability, or (iv) the last day of the Company’s 2011 fiscal year. These shares
represent the only outstanding restricted shares as of February 1, 2008. At
February 1, 2008, the total compensation cost related to nonvested restricted
stock awards not yet recognized was approximately $4.4
million.
10. |
Related party
transactions |
Affiliates of certain of
the Investors participated as (i) lenders in the Company’s New Credit Facilities
discussed in Note 6; (ii) initial purchasers of the Company’s notes discussed in
Note 6; (iii) counterparties to certain interest rate swaps discussed in Note 1
and (iv) as advisors in the Merger. Certain fees were paid upon closing of the
Merger to affiliates 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 during the Successor period ended February 1, 2008 totaled
$134.9 million, portions of which have been capitalized as debt financing costs
or as direct acquisition costs.
The
Company entered into a monitoring agreement, dated July 6, 2007, with affiliates
of certain of the Investors pursuant to which those entities will provide
management and advisory services to the Company. Under the terms of the
monitoring agreement, among other things, the Company is obliged to pay to those
entities an aggregate annual management fee of $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. After the completion of the Company’s
first fiscal year, the management fee will increase at a rate of 5% per year.
Those entities also are entitled to receive a fee equal to 1% of the gross
transaction value in connection with certain subsequent financing, acquisition,
disposition, and change in control transactions, as well as a termination fee in
the event of an initial public offering or under certain other circumstances. In
addition, on July 6, 2007, the Company also entered into a separate
indemnification agreement with the parties to the monitoring agreement, pursuant
to which the Company agreed to provide customary indemnification to such parties
and their affiliates.
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 serves on our
Board. 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 period ended February 1, 2008 totaled $1.9
million.
The
Company purchased a total of $25 million of the 11.857%/12.625% senior
subordinated notes held by Goldman Sachs & Co. as further discussed in Note
6 and paid a commission of less than $0.1 million in connection
therewith.
Prior to
the Merger, the Company had a Shareholder Rights Plan (the “Rights Plan”) under
which Series B Junior Participating Preferred Stock Purchase Rights (the
“Rights”) were issued for each outstanding share of common stock. The
Rights were attached to all common stock outstanding as of March 10, 2000. On
May 8, 2000, the Company effected a five for four stock split at which time,
pursuant to the adjustment provisions contained in the Rights
Agreement, each
outstanding share of the Company’s common stock evidenced the right to receive
eight-tenths of a Right. Such Rights attached to all additional
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 purchase from the Company one one-hundredth of a share (a “Unit”) 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 defined 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.
On
November 29, 2006, the Board of Directors authorized the Company to repurchase
up to $500 million of its outstanding common stock. On September 30,
2005, the Board of Directors authorized the Company to repurchase up to 10
million shares of its outstanding common stock. These authorizations allowed for
purchases in the open market or in privately negotiated transactions from time
to time, subject to market conditions. The objective of the Company’s share
repurchase initiative was to enhance shareholder value by purchasing shares at a
price that produced a return on investment that was greater than the Company’s
cost of capital. Additionally, share repurchases generally were undertaken only
if such purchases resulted in an accretive impact on the Company’s fully diluted
earnings per share calculation. As a result of the Merger, the 2006
authorization is no longer outstanding. No purchases were made pursuant to this
authorization. The 2005 authorization was completed prior to its expiration
date. During 2006, the Company purchased approximately 4.5 million shares
pursuant to the 2005 authorization at a total cost of $79.9 million. During
2005, the Company purchased approximately 5.5 million shares pursuant to the
2005 authorization at a total cost of $104.7 million and approximately 9.5
million shares pursuant to an earlier authorization at a total cost of $192.9
million.
During
2006 and 2005, the Company received proceeds of $13.0 million and $8.0 million,
respectively, representing insurance recoveries for destroyed and damaged
assets, costs incurred and business interruption coverage related to Hurricane
Katrina, which are reflected in results of operations for these years as a
reduction of SG&A expenses. The claim was settled in 2006. The business
interruption portion of the proceeds was approximately $5.8 million and was
received in 2006. Insurance recoveries related to fixed assets losses are
included in cash flows from investing activities and recoveries related to
inventory losses and business interruption are included in cash flows from
operating activities.
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, all of the Company’s operations
were located within the United States with the exception of an immaterial Hong
Kong subsidiary formed to assist in the process of importing certain merchandise
that began operations in 2004. The following net sales data is
presented in accordance with SFAS 131, “Disclosures about Segments of an
Enterprise and Related Information.”
|
|
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 |
|
Subsequent to the 2007 fiscal year end,
the Company entered into a $350.0 million step-down interest rate swap which
became effective February 28, 2008 in order to mitigate an additional portion of
the variable rate interest exposure under the New Credit Facilities discussed in
Note 6. The Company entered into the swap with Wachovia Capital
Markets and the terms result in the Company paying a fixed rate of 5.58% on a
notional amount of $350.0 million for the first year and $150.0 million for the
second year.
15. |
Quarterly financial data
(unaudited) |
The
following is selected unaudited quarterly financial data for the fiscal years
ended February 1, 2008 and February 2, 2007. Each quarter 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.
|
|
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 |
|
(a)
|
Includes
the results of operations of Buck Acquisition Corp. for the period prior
to its merger with and into Dollar General Corporation from March 6, 2007
(its formation) through July 6, 2007 (reflecting the change in fair value
of interest rate swaps), and the post-merger results of Dollar General
Corporation for the period from July 7, 2007 through February 1,
2008. See Notes 1 and 2.
|
As
discussed in Note 2, in the Predecessor period ended July 6, 2007, the Company
recorded transaction and other costs related to the Merger of $56.7 million and
share-based compensation expense related directly to the Merger of $39.4 million
as discussed in Note 9. As discussed in Note 2, in the Successor period ended
August 3, 2007, the Company recorded transaction and other costs related to the
Merger of $5.6 million, a loss on debt retirement related to the Merger of $6.2
million; a contingent loss related to certain DC leases of $8.6 million as
discussed in Note 7; and a gain on certain interest rate swaps discussed in Note
1 of $6.8 million.
In the
third quarter of 2007, the Company recorded an additional contingent loss
related to certain DC leases of $3.4 million as discussed in Note 7. As
discussed in Note 6, in the fourth quarter of 2007, the Company recorded a gain
on debt retirement 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 3, in the third quarter of 2006, the Company completed a
strategic review of its real estate portfolio and traditional inventory packaway
strategy. The review resulted in plans to close approximately 400
underperforming stores and to eliminate nearly all packaway merchandise by the
close of fiscal 2007. As a result, in the third quarter of 2006, the Company
recorded SG&A charges and a lower of cost or market inventory impairment,
which reduced the Company’s net income. Also, the change in merchandising
strategy resulted in substantially higher markdowns on inventory in the fourth
quarter of 2006 ($179.9 million at cost) negatively impacting gross profit and
net income.
16. |
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.
|
|
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 |
|
|
|
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 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 |
|
ITEM
9.
|
CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
|
Not
Applicable.
ITEM 9A(T). |
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 maintaining effective internal control
over financial reporting as defined in Rule 13a-15(f) or 15d-15(f) under the
Securities Exchange Act of 1934. Our internal control over financial reporting
is designed to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external
purposes in accordance with United States generally accepted accounting
principles.
To 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 its internal control over financial reporting. The
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’s internal control over financial
reporting is effective as of February 1, 2008.
This
annual report does not include an attestation report of Ernst & Young LLP
regarding internal control over financial reporting. Management’s report was not
subject to attestation by 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.
(c) Changes
in Internal Control Over Financial Reporting. There have been
no changes during the quarter ended February 1, 2008 in our internal control
over financial reporting (as defined in Exchange Act Rule 13a-15(f)) that have
materially affected, or are reasonably likely to materially affect, our internal
control over financial reporting.
PART
III
ITEM
10.
|
DIRECTORS,
EXECUTIVE OFFICERS AND CORPORATE
GOVERNANCE
|
(a) Information
Regarding Directors and Executive Officers. Information
regarding our current directors and executive officers as of March 17, 2008 is
set forth below. Each of our directors holds office for a term of 1 year or
until his or her successor is elected and qualified. Our executive officers
serve at the pleasure of the Board of Directors and are elected annually by the
Board to serve until their successors are duly elected. There are no familial
relationships between any of our directors or executive officers.
|
|
|
|
|
|
Michael
M. Calbert
|
45
|
Director
(Chairman of the Board)
|
Raj
Agrawal
|
34
|
Director
|
Adrian
Jones
|
43
|
Director
|
Dean
B. Nelson
|
49
|
Director
|
Richard
W. Dreiling
|
54
|
Director;
Chief Executive Officer
|
David
L. Beré
|
54
|
President
& Chief Operating Officer
|
David
M. Tehle
|
51
|
Executive
Vice President & Chief Financial Officer
|
Beryl
J. Buley
|
46
|
Division
President, Merchandising, Marketing & Supply Chain
|
Kathleen
R. Guion
|
56
|
Division
President, Store Operations & Store Development
|
Susan
S. Lanigan
|
45
|
Executive
Vice President & General Counsel
|
Challis
M. Lowe
|
62
|
Executive
Vice President, Human Resources
|
Anita
C. Elliott
|
43
|
Senior
Vice President & Controller
|
Wayne
Gibson
|
49
|
Senior
Vice President, Dollar General Markets &
Shrink
|
Mr. Calbert
has been with KKR for eight years and during that time has been directly
involved with several portfolio companies and participated in another four
investments. He heads the Retail industry team. Mr. Calbert is currently on
the board of directors of Toys “R” Us, Inc. and U.S. Foodservice.
Mr. Calbert joined Randall's Food Markets as the Chief Financial Officer in
1994, ultimately taking the company through a transaction with KKR in
June 1997. He left Randall’s Food Markets after the company was sold in
September 1999 and joined KKR. Mr. Calbert started his professional
career as a consultant with Arthur Andersen Worldwide, where his primary focus
was on the retail/consumer industry. He has been a member of our Board of
Directors since July 2007. KKR is an affiliate of Dollar General.
Mr. Agrawal
joined KKR in 2006 and is a member of the Retail and Energy industry
teams. Prior to joining KKR, he was a Vice President with Warburg Pincus, where
he was involved 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. KKR is an affiliate of Dollar General.
Mr. Jones
has been with Goldman, Sachs & Co. since 1994. He is a managing
director in Principal Investment Area (PIA) in New York where he focuses on
healthcare and consumer-related opportunities and sits on the Global Investment
Committee. Mr. Jones joined Goldman, Sachs & Co. as an associate
in the Investment Banking Division and, after two years in the Communications
and Media Department and mobility assignments in Equity Capital Markets and in
the Executive Office of Goldman Sachs International, he joined PIA in London in
1998. He returned to New York with PIA in 2002 and became a managing director
later that year. He became a partner in 2004. Goldman, Sachs & Co. is an
affiliate of Dollar General. Mr. Jones is currently on the board of
directors of Biomet, Inc., Burger King Holdings, Inc., Education Management
Corporation, HealthMarkets, Inc. and Signature Hospital, LLC. He has been a
member of our Board of Directors since July 2007.
Mr. Nelson
has been the Chairman of the Board (since April 2003) and was previously
President and Chief Executive Officer (since October 2005 –
September 2007) of PRIMEDIA Inc., a targeted media company. He has
served as the Chief Executive Officer of Capstone Consulting LLC, a strategic
consulting firm, since 2000. From August 1985 to February 2000,
Mr. Nelson was employed by Boston Consulting Group, Inc., a strategic
consulting firm, where he served as a Senior Vice President from
December 1998 to February 2000 and held various other positions from
August 1985 to November 1998. Mr. Nelson is a member of the Board
of Directors of Sealy Corporation and Toys “R” Us, Inc. He has been a member of
our Board of Directors since July 2007.
Mr. Dreiling
joined Dollar General in January 2008 as Chief Executive Officer and a
member of our Board of Directors. 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. Mr. Dreiling previously served as Executive Vice
President—Chief Operating Officer of Longs Drug Store Corporation, an operator
of a chain of retail drug stores on the West Coast and Hawaii, since
March 2005, 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. Beré
has served as our President and Chief Operating Officer since
December 2006. He also served as our Interim Chief Executive Officer from
July 6, 2007 to January 21, 2008. He served as a member of our Board
of Directors from 2002 until March 2008. He served from December 2003 until
June 2005 as Corporate Vice President of Ralcorp Holdings, Inc. and as
the President and Chief Executive Officer of Bakery Chef, Inc., a leading
manufacturer of frozen bakery products that was acquired by Ralcorp Holdings in
December 2003. From 1998 until the acquisition, Mr. Beré was the
President and Chief Executive Officer of Bakery Chef, Inc., and also served
on its Board of Directors. From 1996 to 1998, he served as President and Chief
Executive Officer of McCain Foods USA, a manufacturer and marketer of frozen
foods and a subsidiary of McCain Foods Limited. From 1978 to 1995, Mr. Beré
worked for The Quaker Oats
Company and served as
President of the Breakfast Division from 1992 to 1995 and President of the
Golden Grain Division from 1990 to 1992.
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 serves as a director of
Jack in the Box, Inc.
Mr. Buley
joined Dollar General in December 2005 as Division President,
Merchandising, Marketing and Supply Chain. Prior to joining Dollar General, he
served from April 2005 through November 2005 as Executive Vice
President, Retail Operations of Mervyn’s Department Store, a privately held
company operating 265 department stores, where he was responsible for store
operations, supply chain (including 4 distribution centers), real estate,
construction, visual merchandising and interior planning, and loss prevention.
From September 2003 to March 2005, Mr. Buley worked for Sears,
Roebuck and Company, a multi-line retailer offering a wide array of merchandise
and related services. As Sears’ Executive Vice President and General Manager of
Retail Store Operations, he was responsible for all store-based activities.
Prior to that, he had responsibility for 8 distinct businesses operating in over
2,200 locations as Sears’ Senior Vice President and General Merchandise Manager
of the Specialty Retail Group. Prior to joining Sears, Mr. Buley spent
15 years in various positions with Kohl’s Corporation, which operates a
chain of specialty department stores, including Executive Vice President of
Stores, responsible for store operations, and Senior Vice President of
Stores.
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 Division President, Store
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, a convenience store chain operator and
wholesale distributor of petroleum products. 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).
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.
Ms. Lowe
joined Dollar General as Executive Vice President of Human Resources in
September 2005. From 2000 to 2004, Ms. Lowe was Executive Vice
President of Human Resources, Corporate Communications, and Public Affairs for
Ryder System, Inc., a logistics and transportation services company. She
was Executive Vice President of Human Resources and Administration Services for
Beneficial Management Corporation, an international consumer finance company,
from 1997 to 1999, and Executive Vice President of Human Resources and
Communications for Heller International, a commercial finance company, from 1993
to 1997. She also served as Senior Vice President, Administrative Services, for
Sanwa Business Credit Corporation from 1985 to 1993. Prior to joining Sanwa, she
spent 13 years with Continental Illinois Leasing Corporation and
Continental Bank, where her last position was Vice President and Division Head.
Ms. Lowe serves as a director of The South Financial
Group, Inc.
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 with Ernst & Young
LLP.
Mr. Gibson
joined Dollar General as Senior Vice President of Dollar General Market in
November 2005. He was named Senior Vice President of Dollar General Markets
and Shrink in January 2008. Prior to joining Dollar General, he assembled and
led teams of investment bankers and private equity fund managers in several
mid-sized business acquisition efforts from 2004 to November 2005. He also
served as Senior Vice President of Global Logistics (2000-2003) and Vice
President of Imports and Logistics (1998-2000) for The Home Depot, Inc., a
home improvement retailer. He founded Gibson Associates, a management consulting
firm, in 1997 and served there until 1998. Prior to that, he served in various
positions at Rite Aid Corporation from 1994 to 1997, including Senior Vice
President of Logistics. He also served retailers as a management consulting
principal (1993-1994) and management consultant (1984-1993) at
Deloitte & Touche.
(b) Procedures
for Shareholders to Nominate Directors; Arrangements to Serve as
Directors. The procedures by which security holders may
recommend nominees to our Board of Directors that were contained in our Bylaws
prior to the Merger were eliminated as a result, and at the effective time, of
the Merger.
All of
our directors are managers of Buck Holdings, LLC. The Second Amended and
Restated Limited Liability Company Agreement of Buck Holdings, LLC generally
requires that the members of Buck Holdings, LLC take all necessary action to
ensure that the persons who
serve as managers of Buck
Holdings, LLC also serve on our Board. In addition, Mr. Dreiling’s
employment agreement provides that he will continue to serve as a member of our
Board as long as he remains our Chief Executive Officer.
Because
of these requirements, together with Buck Holdings’ controlling ownership of our
outstanding common stock, we do not currently have a policy or procedures with
respect to shareholder recommendations for nominees to our Board.
(c) Audit
Committee Financial Expert. Our Audit Committee is
composed of Messrs. Calbert and Agrawal. In light of our status as a closely
held company and the absence of a public trading market for our common stock,
our Board has not designated any member of the Audit Committee as an “audit
committee financial expert.” Though not formally considered by our Board given
that our securities are not registered or traded on any national securities
exchange, based upon the listing standards of the New York Stock Exchange (the
“NYSE”) upon which our common stock was listed prior to the Merger, we do not
believe that Messrs. Calbert or Agrawal would be considered independent
because of their relationships with KKR which indirectly owns, through its
interests in Parent, over 50% of our outstanding common stock, and certain other
relationships with us as more fully described under Item 13 below.
(d) Code
of Business Conduct and Ethics. We have adopted a 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 functions. We will either post this Code on our
Internet website at www.dollargeneral.com or, if not so posted, provide a copy
of the Code to any person without charge 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 any amendment to or waiver from the Code that applies to our
principal executive officer, principal financial officer, principal accounting
officer or controller, or persons performing similar functions, on
www.dollargeneral.com promptly following the amendment or waiver. We
may elect to disclose any such amendment or waiver in a report on Form 8-K filed
with the SEC either in addition to or in lieu of the website disclosure. The
information contained on or connected to our Internet website is not
incorporated by reference into this report and should not be considered part of
this or any other report that we file with or furnish to the SEC.
ITEM 11. |
EXECUTIVE
COMPENSATION |
(a) Executive
Compensation. We
refer 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 in 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.
Compensation Discussion and
Analysis
Executive
Compensation Philosophy and Objectives
We strive
to attract, retain and motivate persons with superior ability, to reward
outstanding performance, and to align our NEOs’ and shareholders’ long-term
interests. Our material compensation principles applicable to 2007 NEO
compensation included the following, all of which are discussed in more detail
in “Elements of 2007 NEO Compensation” below:
·
|
We
generally target total compensation at the benchmarked median of our
market comparator group, but we make adjustments based on circumstances,
such as unique job descriptions and our particular niche in the retail
sector, that are not reflected in the market data. For competitive
reasons, our levels of total compensation or for any component of
compensation may exceed median.
|
·
|
We
set base salaries to reflect the responsibilities, experience and
contributions of the NEOs and the salaries for comparable benchmarked
positions, subject to minimums set forth in employment
agreements.
|
·
|
We
emphasize pay for performance and reward NEOs who enhance our performance.
We accomplish this by linking cash incentives to the achievement of our
financial goals and through subjective evaluations of the NEOs’
contributions to the achievement of our business
goals.
|
·
|
We
promote ownership of our common stock to align the interests of our NEOs
with those of our shareholders.
|
Beginning
in 2004 (2003 with respect to Mr. David Perdue), the Compensation Committee
authorized employment agreements with NEOs which, among other things, set forth
minimum levels of certain compensation components because the Committee
believed, based on benchmarking data, that such arrangements were a common
protection offered to NEOs at comparable companies and because contracts were
needed to ensure continuity and to retain NEOs to execute changes necessary to
meet our strategic objectives. The Committee also wanted to give standard
protections to both the NEOs and to us upon the termination of any NEO’s
employment.
Compensation
Process
Oversight
of 2007 NEO Compensation. Prior to the Merger, the
Compensation Committee was responsible for recommending CEO compensation to the
independent directors of our Board and for approving compensation of other NEOs.
The independent directors of the Board retained sole authority to determine CEO
compensation. Prior to the Merger, the Committee members were Messrs. Dennis
Bottorff, Reginald Dickson and E. Gordon Gee. Subsequent to the Merger, our
Board made all executive compensation decisions until a new Compensation
Committee was established in March 2008.
Use of
Outside Advisors in Determining NEO Compensation. Prior to the
Merger, the Compensation Committee selected Hewitt Associates as its
compensation consultant. Hewitt also provides consulting services to our human
resources group, both with respect to management’s work in connection with NEO
compensation (as described below under “Management’s Role in Determining or
Recommending 2007 NEO Compensation”) and in connection with general employee
compensation and benefits matters.
Prior to
the Merger, the Committee approved a written agreement with Hewitt describing
the general terms of the working relationship. In particular, Hewitt may perform
compensation consulting services upon management or Committee request, which
services may include competitive market pay analyses, support regarding legal,
regulatory or accounting considerations impacting compensation programs,
redesign of those programs, assistance with market data, trends and competitive
practices, meeting preparation and attendance and other miscellaneous
work.
Management’s
Role in Determining or Recommending 2007 NEO Compensation. Prior to the
Merger, management assisted Hewitt in gathering and analyzing relevant
competitive data and identifying and evaluating various alternatives for 2007
compensation. Mr. Perdue (while he served as CEO) and Ms. Challis Lowe regularly
provided their recommendations in Compensation Committee meetings regarding NEO
compensation and assisted Hewitt in making presentations to the Committee. Mr.
Perdue participated fully with the Committee in assessing NEO performance and
made recommendations on the compensation level for each NEO pay component prior
to the Merger. No member of management attended the Committee’s own private
session.
In
connection with the Merger, NEOs were represented by legal counsel who
negotiated on their behalf with KKR and its legal counsel with respect to the
terms of the new long-term incentive plan. Such negotiations did not
address the amounts or value of the grants to be given under that plan upon the
closing of the Merger. Messrs. Richard Dreiling and David Beré also
were represented by legal counsel in negotiations with respect to the terms of
their employment agreements and compensation.
While the
Board and the Committee valued and welcomed the input of management, Board and
Committee members ultimately made all 2007 NEO compensation
decisions.
Use of
Market Benchmarking Data in Determining 2007 NEO
Compensation. To attract and retain NEOs who we believe will
enhance our long-term business results, we must pay compensation that is
competitive with the external market for executive talent. We believe that the
primary NEO talent market consists of retail companies with revenues and
business models similar to ours because those companies have executive positions
similar in breadth, complexity and scope of responsibility to our NEO positions.
For 2007, the Compensation Committee directed Hewitt to provide data on total
and individual compensation elements from its proprietary salary survey database
and from the proxy statements of selected retail companies that met these
criteria. We refer to this combined group as the market comparator group. In
2007, this group consisted of Advance Auto Parts, AutoZone, Family Dollar,
Kohl’s, Limited Brands, Long Drug Stores, Nordstrom, OfficeMax, Office Depot,
RadioShack, Staples, J.C. Penney, The
The
Committee believed that the median of the competitive market generally was the
appropriate target for an NEO’s total compensation, although the target for each
compensation component relative to the competitive market varied.
Elements
of 2007 NEO Compensation
We
provide compensation in the form of base salary, short-term incentives,
long-term incentives, benefits and perquisites. As discussed in more detail
below, the Compensation Committee believed that each of these elements was a
necessary component of an NEO’s compensation package and was consistent with
compensation programs at competing companies. Prior to the Merger, the Committee
reviewed base salary, short-term incentives, and long-term incentives at least
annually and other elements periodically when material changes were
considered.
Base
Salary. Base salary generally promotes the
recruiting and retention functions of our compensation principles by reflecting
the salaries for comparable positions in the competitive marketplace. The
Committee believed that we would be unable to attract or retain quality NEOs in
the absence of competitive base salary levels. For this reason, base salary
constitutes a significant portion of an NEO’s total compensation. Base salary
also furthers our pay for performance role of our philosophy because, as a
threshold matter, an NEO is not eligible for a salary increase unless he or she
achieves a satisfactory overall performance evaluation.
In
determining each NEO’s 2007 base salary, the Committee reviewed with Mr. Perdue
his evaluation of each NEO’s individual performance. The evaluations included a
review of performance versus goals established earlier in 2006, except for Mr.
Beré who did not have established goals because he was hired near the end of
fiscal 2006. Because the Committee agreed with Mr. Perdue’s
conclusion that each NEO performed satisfactorily overall in 2006, each NEO was
eligible as a threshold matter for a salary increase.
Subsequent to the fiscal
2007 year end but prior to the filing of this document, the new Compensation
Committee considered the 2008 base salary increases for each NEO. Mr.
Dreiling, with Mr. Beré’s input, reviewed the 2007 individual performance of
each NEO, including a review of performance versus goals established earlier in
2007. Because Mr. Dreiling determined that each NEO performed satisfactorily
overall in 2007, as a threshold matter each NEO was eligible for a salary
increase.
The
Committee reviewed benchmarking data provided by Hewitt of a market comparator
group substantially similar to the group used for purposes of 2007 compensation
decisions (with the addition of Payless Shoe Source, Retail Ventures and Big
Lots and the removal of Office Depot and RadioShack). This benchmarking data
showed that there was a significant movement in the market median for Ms.
Guion’s position and, as a result, the Committee adjusted her pay accordingly.
The Committee approved 3% base salary increases for all NEOs (other than Mr.
Dreiling, who did not receive a base salary increase since he was hired shortly
before the end of the 2007 fiscal year, and Ms. Guion, who received an
approximate 15.5% base salary increase for the reason discussed above) in order
to maintain base salaries at the median of the market comparator
group.
Short-Term
Incentive Plan. Our short-term incentive plan,
called Teamshare, serves to motivate NEOs to achieve certain objective financial
goals that are established early in the fiscal year. As is the case with base
salary, as a threshold matter an NEO may not receive a Teamshare payout unless
he or she receives a satisfactory overall performance evaluation, even if the
Teamshare financial goal is attained. Accordingly, Teamshare fulfills a part of
our pay for performance philosophy while aligning our NEOs’ and shareholders’
interests. Teamshare also helps us meet our recruiting and retention
objectives by providing compensation opportunities that are consistent with
those prevalent in our market comparator group.
(a) 2007
Teamshare Structure. Teamshare authorizes the payment of cash
bonuses, calculated as a percentage of base salary, based on our performance
measured against a financial performance measure established early in the fiscal
year. “Threshold,” “target” and “maximum” performance goals are set, along with
corresponding potential payout percentages. Payouts are prorated
between threshold and maximum levels in relation to actual performance
results.
In 2007,
the Compensation Committee had decided to re-evaluate its historical use of net
income as the Teamshare performance measure given changes in our business
strategy, but before that evaluation could occur we announced the proposed
Merger and agreed to consult with KKR on significant changes to certain of our
normal business practices. KKR requested, and the Committee agreed, to adopt a
metric based principally upon earnings before interest, taxes, depreciation and
amortization (EBITDA) as the sole 2007 Teamshare performance measure. After
discussions with KKR, the Committee set this performance target for 2007 at $570
million, which was equal to our annual financial objective. Consistent with
prior practice and after consultation with KKR, the Committee also set the
threshold and maximum levels at 90% and 110%, respectively, of the target level.
The Committee considered the Teamshare performance target to be challenging and
generally consistent with the level of difficulty of achievement associated with
our performance-based awards for prior years. We did not achieve the
threshold Teamshare performance level in fiscal years 2006 or 2005. We achieved
Teamshare performance levels between threshold and target in fiscal years 2004
and 2002 and at maximum in fiscal year 2003.
The
Committee directed that our Teamshare 2007 EBITDA performance measure be
computed using numbers from our issued financial statements, adjusted to
exclude:
·
|
consulting,
accounting, legal, valuation, banking, filing, disclosure and similar
costs, fees and expenses directly related to the consideration,
negotiation, approval and consummation of the Merger and related financing
and any related litigation or settlement of any related
litigation;
|
·
|
costs
and expenses constituting severance payments and benefits incurred during
the 12 month period following the date of shareholder approval of the
Merger; and
|
·
|
the
impact of any unplanned items of a non-recurring or extraordinary
nature.
|
The
Committee then set the potential Teamshare payout range for the NEOs, other than
Mr. Perdue and Mr. Dreiling (see “Compensation of Mr. Perdue” and
“Compensation of Mr. Dreiling” below) and Mr. Beré (see below), at the following
base salary percentages: 32.5% (threshold), 65% (target), and 130% (maximum). In
determining this range, the Committee reviewed Hewitt’s benchmarking information
regarding competitive target incentives for comparable positions in our market
comparator group. This analysis showed that our existing target salary payout
percentages generally exceeded the market median, but that our total direct
compensation would remain at or slightly above the market median because our
long-term incentive compensation remains significantly below the market median.
The Committee also continued to rely on Hewitt’s prior year benchmarking data
which indicated that the typical practice was to set the threshold payout
percentage at half of the target and the maximum payout percentage at twice the
target. Accordingly, the Committee made no changes to the potential payout range
for those NEOs from the prior year.
Mr. Beré
assumed the position of Interim CEO upon Mr. Perdue’s resignation on July 6,
2007. At that time, the Board set Mr. Beré’s potential Teamshare
payout percentages at 35% (threshold), 140% (target) and 280% (maximum) of base
salary upon achievement of EBITDA-based performance levels of $630 million
(threshold), $700 million (target), 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 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.
(b) 2007
Teamshare Results. Mr. Dreiling, with Mr. Beré’s input,
reviewed the 2007 individual performance of each NEO, including a review of
performance versus goals established earlier in 2007. Because Mr. Dreiling
determined that each NEO performed satisfactorily overall in 2007, as a
threshold matter each NEO was eligible to receive a 2007 Teamshare payout to the
extent we achieved the relevant EBITDA performance target. In March 2008, our
new Compensation Committee approved an EBITDA calculation for this purpose
between the “target” and “maximum” performance levels. Accordingly, each NEO
received a Teamshare payout in the amount reflected in the “Non-Equity Incentive
Plan Compensation” column of the Summary Compensation Table at the following
percentages of base salary: Mr. Dreiling, 127% (based on an
annualization of his partial fiscal 2007 salary); Mr. Beré, 140%; and
Mr. Tehle, Mr. Buley, Ms. Guion and Ms. Lowe,
82.6%.
Prior to
the Merger, the Committee typically made equity grant decisions when it reviewed
other compensation decisions and evaluated NEO performance, and it was our
practice to establish option exercise prices as the closing market price on the
grant date. We typically released our annual earnings and other financial
results shortly thereafter, but the grants were made regardless of whether
earnings were favorable or unfavorable. In accordance with our usual practice,
the Committee made pre-Merger 2007 annual equity grant decisions prior to the
annual earnings release but after the announcement of the proposed
Merger.
Because
Hewitt’s benchmarking data indicated that our target long-term incentive values
for NEOs (other than Mr. Perdue) were significantly below the median of our
market comparator group, the Committee decided in fiscal 2006 to increase that
value by approximately 20-25% for fiscal 2006 compensation. At the same time,
the Committee also decided to change the options/restricted stock units (“RSUs”)
allocation from the previous 80%/20% to 70%/30% for fiscal 2006 compensation,
which, according to Hewitt, more closely aligned with market practice. In 2007,
the Committee decided to further adjust the relationship of options and RSUs to
reflect a 50%/50% allocation of the economic value for 2007 long-term incentive
grants which Hewitt advised continued to further align with market
practice.
The
Committee’s decision regarding the 2007 equity grant mix also took into account
the limited availability of shares for use under the shareholder-approved option
program existing at that time. If the options/RSUs mix continued
unchanged from 2006, there likely would not have been enough shares for equity
grants through fiscal 2008, the year the plan was scheduled to terminate by its
terms. The Committee believed the best way to address that issue,
while also assisting with retention and motivation of NEOs and maintaining
alignment with shareholder interests, was to adjust the options/RSUs grant
mix.
In
connection with the Merger, all outstanding equity awards became fully vested
and were settled in cash, canceled or rolled over, as described below. Unless
they elected to roll over their existing options, each NEO received in exchange
for each option an amount in cash, without interest and less applicable
withholding taxes, equal to $22.00 less the exercise price of each option.
Additionally, each NEO received in exchange for each RSU or share of restricted
stock an amount in cash, without interest and less applicable withholding taxes,
equal to $22.00.
Certain NEOs elected to
roll over their existing options in connection with the Merger (the “Rollover
Options”). The exercise price of the Rollover Options and the number of shares
underlying the Rollover Options were adjusted as a result of the Merger to
provide their pre-Merger value equivalents. The Rollover Options otherwise
continue under the terms of the equity plan under which they were
issued.
On
July 6, 2007, our Board adopted the 2007 Stock Incentive Plan for Key
Employees (the “2007 Plan”). For certain designated employees,
including NEOs, the Board required a personal financial investment in Dollar
General in order for the employee to be eligible to receive an option grant
under the 2007 Plan. That investment could be made in the form of cash, rollover
of stock and/or rollover of in-the-money options issued prior to the Merger.
Each NEO (other than Mr. Perdue who resigned and Mr. Dreiling who is discussed
separately below) met the personal investment requirement and, accordingly,
received option grants under the 2007 Plan.
The
options granted under the 2007 Plan are divided so that half are time-vested and
half are performance-vested based on a comparison of an EBITDA-based performance
metric, as described below, against pre-set goals for that performance metric.
The combination of time and performance based vesting of these awards is
designed to compensate executives for long-term commitment to us, while
motivating sustained increases in our financial performance. The options have an
exercise price of $5 per share, which was the fair market value on the grant
date.
The
time-vested options vest and become exercisable ratably on each of the five
anniversary dates of July 6, 2007 solely based upon continued employment with us
over that time period. The performance-vested options are eligible to vest and
become exercisable ratably if the Board determines in good faith that we achieve
specified annual performance targets based on EBITDA and adjusted as described
below. For fiscal 2007 that target was $700 million, which was based on our
annual financial plan and anticipated permitted adjustments, primarily to
account for unique expenses related to the Merger and costs associated with
Project Alpha. If a performance target for a given fiscal year is not
met, the performance-based options may still vest and become exercisable on a
“catch up” basis if, at the end of a subsequent fiscal year through fiscal 2012,
a specified cumulative EBITDA-based performance target is achieved. Because the
performance targets are based on our long-term financial plan, we believe these
levels, while attainable, require strong performance and execution. We consider
these performance targets to be slightly more difficult to achieve than
financial performance targets associated with Teamshare compensation in prior
years.
For
purposes of calculating performance targets for our long-term incentive program,
“EBITDA” means earnings before interest, taxes, depreciation and amortization
plus transaction, management and/or similar fees paid to KKR and/or its
affiliates. In addition, the Board is required to fairly and appropriately
adjust the calculation of EBITDA to reflect, to the extent not contemplated in
our financial plan, the following: acquisitions, divestitures, any change
required by generally accepted accounting principles (“GAAP”) relating to
share-based compensation or for other changes in GAAP promulgated by accounting
standard setters that, in each case, the Board in good faith determines require
adjustment to the EBITDA performance metric we use for our long-term incentive
program. For 2007 performance targets, the Board also is required
to
make a good faith
determination of adjustments to EBITDA for Project Alpha costs and other
non-recurring expenses after consulting with the CEO and CFO. Adjustments to
EBITDA for purposes of calculating performance targets or our long-term
incentive program may not in all circumstances be identical to adjustments to
EBITDA for other purposes, including our Teamshare targets and the covenants
contained in our principal financial agreements. Accordingly, comparability of
such measures is limited.
In March
2008, the Compensation Committee determined that the specified adjusted EBITDA
performance target had been achieved for fiscal 2007 and, as a result,
acknowledged the vesting of 20% of the performance-based options.
Benefits
and Perquisites. We provide benefits and limited
perquisites to NEOs for retention and recruiting purposes, to promote tax
efficiency for the NEOs, and to replace benefit opportunities lost due to
regulatory limits. We also provide NEOs with benefits and perquisites as
additional forms of compensation that are believed to be consistent and
competitive with benefits and perquisites provided to similar positions in our
market comparator group and our industry. The Compensation Committee believed
these benefits and perquisites help to attract and retain NEOs. Along with
certain benefits offered to NEOs on the same terms that are offered to all of
our salaried employees (such as health and welfare benefits and matching
contributions under our 401(k) plan), we provide NEOs with certain additional
benefits and perquisites.
We allow
NEOs to participate in the Compensation Deferral Plan (the “CDP”) and the
defined contribution Supplemental Executive Retirement Plan (the “SERP”, and
together with the CDP, the “CDP/SERP Plan”). During his tenure with us,
Mr. Perdue was eligible to participate in the CDP but not the SERP due to
his participation in an individual defined benefit supplemental executive
retirement plan. Mr. Perdue’s defined benefit supplemental executive
retirement plan was provided as part of Mr. Perdue’s inducement package to
join Dollar General in 2003 and was one of the compensation components necessary
at that time to attract him to serve as our CEO. In addition, in
January 2006 our Board approved the establishment of a grantor trust to
hold certain assets in connection with Mr. Perdue’s supplemental executive
retirement plan in the event of a change in control.
We
provide each NEO a life insurance benefit equal to 2.5 times his or her base
salary to a maximum of $3 million. We pay the premiums and gross up the NEO’s
income to pay the tax cost of this benefit. We also provide each NEO a
disability insurance benefit that provides income replacement of 60% of base
salary up to a maximum monthly benefit of $20,000 ($25,000 for Mr. Perdue). We
pay the cost of this benefit and gross up the NEO’s income to pay the tax cost
of this benefit to the extent necessary to replace benefit level caps in the
group plan applicable to all salaried employees.
Each NEO
may choose either a leased automobile or a fixed monthly automobile allowance.
All NEOs except Mr. Beré and Ms. Lowe chose the automobile allowance option
in 2007. Mr. Beré and Ms. Lowe chose the lease option under which we
provide a company-leased automobile, pay for gasoline, repairs, service, and
insurance and provide a gross-up payment to pay the tax cost of the imputed
income.
We also
provide a relocation assistance program to NEOs similar to that offered to
certain other employees. In 2007, we incurred relocation expenses in accordance
with this policy for Mr. Buley and Mr. Dreiling (as discussed below in
“Compensation of Mr. Dreiling”). The significant differences of the
relocation assistance available to NEOs from the relocation assistance available
to other employees are as follows:
·
|
We
provide a pre-move allowance of 5% of the NEO’s annual base salary (we cap
this allowance at $5,000 for other
employees);
|
·
|
We
provide home sale assistance by offering to purchase the NEO’s prior home
at an independently determined appraised value in the event the prior home
is not sold to an outside buyer (we do not offer this service to other
employees);
|
·
|
We
reimburse NEOs for all reasonable and customary home purchase closing
costs (we limit our reimbursement to other employees to 2% of the purchase
price to a maximum of $2,500) except for loan origination fees which are
limited to 1%; and
|
·
|
We
provide 60 days of temporary living expenses (we limit temporary living
expenses to 30 days for all other
employees).
|
As an
exception to the NEO relocation policy, the Committee extended the temporary
housing benefit in 2007 to Mr. Beré beyond the 60 day limit due to uncertainties
arising from the Merger.
Compensation
of Mr. Perdue
While
Mr. Perdue’s compensation reflected an emphasis on achieving both short and
long-term performance results, more emphasis was placed on long-term performance
goals. This is generally typical for CEO compensation structures as
it aligns their compensation more directly with that of shareholders, i.e., the
creation of long-term economic value in the company. As a result of
the risk associated with the long-term component being such a large portion of
his total compensation and as a part of the decision to extend Mr. Perdue’s
employment contract with us, his compensation was benchmarked closer to the
75th
percentile of the market comparator group.
In 2007,
the Committee reviewed Mr. Perdue’s assessment of his overall performance
to determine as a threshold matter his eligibility for a base salary increase.
This review included Mr. Perdue’s performance versus his previously established
2006 goals, which included measures relating to the sell off of inventory and
the closing of stores as a part of Project Alpha; increasing the discipline in
the planning and buying process including private label development and SKU
rationalization; enhanced domestic sourcing and continued reduction of costs
through the supply chain; enhancing the customer experience in the store through
shrink reduction, reduced store manager turnover and the development of
measurements of store standards; and the development of a store strategic growth
plan. Because the Committee was satisfied with Mr. Perdue’s
overall performance, he was eligible for a 2007 salary increase.
The
Committee also reviewed Hewitt’s benchmarking data, as described above, and
considered certain provisions contained in the Merger Agreement limiting the
aggregate employee base salary increase pool to no more than 3%. Hewitt’s data
showed that Mr. Perdue’s existing base salary with a 3% increase would continue
to approximate market median, and the Committee determined that Mr. Perdue would
receive a 3% base salary increase for 2007.
The
process followed in determining Mr. Perdue’s 2007 Teamshare structure and 2007
long-term incentives was substantially similar to that described above regarding
other NEOs, except that the ultimate decisions were made by the independent
directors of the Board upon Committee recommendation. In addition, the Board and
the Committee were contractually bound by the target (100%) and maximum (200%)
Teamshare payout percentages contained in Mr. Perdue’s employment agreement
approved prior to 2007.
With
respect to Mr. Perdue’s long-term incentive compensation, the Committee chose to
use the same 50%/50% options/RSUs allocation of economic value as it used for
other NEOs in 2007. Hewitt’s benchmarking data indicated that the
amounts to be granted to Mr. Perdue would approximate the 75th
percentile of our market comparator group, keeping his total direct compensation
near the same percentile. In connection with the Merger, Mr. Perdue’s
outstanding equity awards became fully vested and were settled in cash in the
same manner described for the other NEOs.
Mr. Perdue resigned
from Dollar General effective July 6, 2007. We treated the resignation as
one for “good reason” after a change-in-control under his employment agreement.
He executed a release and became entitled to certain severance payments and
benefits which are triggered by such a resignation under his employment
agreement, subject to his continued compliance with certain terms (including
restrictive covenants) of the employment agreement. He was also entitled to
payments under his defined benefit supplemental executive retirement plan and
the CDP.
Compensation
of Mr. Dreiling
Mr.
Dreiling entered into a five-year employment agreement to become CEO and a
member of our Board effective January 21, 2008. Key compensatory
provisions of the agreement include:
·
|
Annual
base salary of $1,000,000.
|
·
|
Annual
bonus payout range of 50% (threshold), 100% (target) and 200% (maximum) of
base salary based upon EBITDA performance. Mr. Dreiling is
eligible to earn a prorated 2007 bonus for the number of days worked in
fiscal 2007. For 2008, Mr. Dreiling is guaranteed to earn at
least a threshold level bonus.
|
·
|
A
signing bonus of $2,000,000.
|
·
|
Equity
grants consisting of 890,000 shares of restricted stock and options to
purchase 2.5 million shares of Dollar General at $5 per share (the fair
market value on the grant date). The restricted stock is scheduled to vest
upon the earlier to occur of the last day of fiscal 2011, a change in
control, an initial public offering, termination without cause or due to
death or disability, or resignation with good reason. Half of the
|
|
options
are time-vested and the other half are performance-vested. These options
vest upon the same terms as the other options that have been granted under
the 2007 Plan. |
·
|
Payment
of the premiums on his personal long-term disability insurance
policy.
|
·
|
Use
of our plane for Mr. Dreiling and his spouse up to nine trips per year
between our headquarters and his permanent residence in
California.
|
·
|
Reimbursement
and gross-up for taxes of all closing costs and expenses, including
broker’s fees, loan origination and/or loan discount fees (not to exceed 2
points in total), and attorney fees incurred to purchase a residence in
the Nashville, Tennessee area and for up to 2 months’ lease cancellation
on his apartment in the New York metropolitan
area. Reimbursement and/or payment of and gross-up for taxes of
temporary living expenses for 120 days as well as 2 house hunting trips
not to exceed 7 nights/8 days. Relocation also includes the payment of
packing, loading, transporting, storing and delivering his household goods
including the movement of 1 car and a miscellaneous expense allowance
equal to $50,000 less applicable
taxes.
|
·
|
Reimbursement
of legal fees up to $35,000, grossed-up for taxes, incurred in negotiating
and preparing the employment agreement and documents associated with Mr.
Dreiling’s equity grants.
|
·
|
Payment
of monthly membership fees and costs related to his membership in
professional clubs selected by him, grossed-up for any
taxes.
|
Mr.
Dreiling was chosen for the CEO position after a lengthy and careful search. The
Board firmly believes he is the right leader for the Company as we move
forward. The terms of his employment agreement summarized above were
settled after negotiation with Mr. Dreiling, and the Board believes that they
are fair and appropriate given CEO compensation and benefits at comparable
companies and given Mr. Dreiling’s experience and leadership
ability. These arrangements were also necessary to entice Mr.
Dreiling to resign from his previous employer and to give him the opportunity to
offset the potential financial gain he would be foregoing by leaving that
employer.
Severance
and Change-in-Control Agreements
As noted
above, we have employment agreements with our NEOs that among other things
provide for each NEO’s rights upon a termination of employment. We believe that
reasonable severance and change-in-control benefits are appropriate to protect
the NEO against circumstances over which he or she does not have control and as
consideration for the promises of non-competition, non-solicitation and
non-interference that we require in our employment agreements. Furthermore, we
believe change-in-control severance payments align NEO and shareholder interests
by enabling NEOs to evaluate a transaction in the best interests of our
shareholders and our other constituents without undue concern over whether the
transaction may jeopardize the NEO’s own employment.
All of
our change-in-control provisions operate under a double trigger, requiring both
a change-in-control and a termination event, except for the provisions related
to long-term equity incentives under our 2007 Plan. Under the 2007
Plan, (1) all time-vested options will vest and become immediately
exercisable as to 100% of the shares of common stock subject to such options
immediately prior to a change-in-control and (2) all performance–vested
options will
vest and become
immediately exercisable as to 100% of the shares of common stock subject to such
options immediately prior to a change-in-control if, as a result of the
change–in-control, (x) investment funds affiliated with KKR realize a
specified internal rate of return on 100% of their aggregate investment,
directly or indirectly, in our equity securities (the “Sponsor Shares”) and
(y) the investment funds affiliated with KKR earn a specified cash return
on 100% of the Sponsor Shares; provided, however, that in the event that a
change-in-control occurs in which more than 50% but less than 100% of our common
stock or other voting securities or the common stock or other voting securities
of Buck Holdings, L.P. is sold or otherwise disposed of, then the
performance-vested options will become vested up to the same percentage of
Sponsor Shares on which investment funds affiliated with KKR achieve a specified
internal rate of return on their aggregate investment and earn a specified
return on their Sponsor Shares. The Merger constituted a change-in-control for
purposes of our pre-Merger plans and arrangements.
Deductibility
of NEO Compensation
Section 162(m) of the
Internal Revenue Code generally disallows a tax deduction to public companies
for compensation over $1 million paid in any fiscal year to an NEO that is
not performance-based compensation. We believe that compensation paid in 2007
associated with stock options under our 1998 Stock Incentive Plan would
generally be fully deductible for federal income tax purposes. However, in
certain situations (such as time-vested RSUs) the Compensation Committee
approved compensation that did not meet these requirements in order to ensure
competitive levels of total compensation for our NEOs. Because our common stock
is no longer publicly traded, the Board did not consider Section 162(m)
with respect to 2007 compensation paid after the Merger.
Compensation
Committee Report
Our
Compensation Committee has reviewed and discussed with management the
Compensation Discussion and Analysis required by Item 402(b) of Regulation
S-K and, based on such review and discussions, the Compensation Committee
recommended to the Board that the Compensation Discussion and Analysis be
included in this document.
This
report has been furnished by:
·
|
Michael
M. Calbert, Chairman
|
The
Compensation Committee Report is deemed furnished, not filed, in this document
and will not be deemed to be incorporated by reference into any filing under the
Securities Act or the Exchange Act as a result of furnishing the Compensation
Committee Report in this manner.
Summary
Compensation Table
The
following table summarizes compensation paid to or earned by our NEOs in each of
fiscal 2007 and 2006.
Name
and Principal Position
|
Year
|
|
Salary
($)(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 |
|
(1)
|
Mr.
Dreiling was hired on January 21, 2008. Mr. Perdue resigned effective July
6, 2007. Mr. Beré was hired as our President and Chief
Operating Officer in December 2006, was appointed interim Chief Executive
Officer upon Mr. Perdue’s resignation on July 6, 2007, and resumed his
position as President and Chief Operating Officer when Mr. Dreiling was
hired as our Chief Executive
Officer.
|
(2)
|
All
NEOs (excluding Mr. Dreiling) deferred a portion of their fiscal 2007
salaries under the CDP. The amounts of such deferrals are included in the
Nonqualified Deferred Compensation Table. Each NEO (excluding Mr.
Dreiling) also contributed a portion of his or her fiscal 2007 salary to
our 401(k) Plan. All NEOs for which fiscal 2006 salaries are reported in
this column deferred a portion of their fiscal 2006 salaries under the CDP
and contributed a portion of their salaries to our 401(k)
Plan.
|
(3)
|
The
amount for Mr. Dreiling represents the signing bonus paid pursuant to his
employment agreement. The 2006 amounts represent a one-time
discretionary bonus awarded to these NEOs for fiscal
2006.
|
(4)
|
Represents
the dollar amount recognized during the fiscal year for financial
statement reporting purposes in accordance with Statement of Financial
Accounting Standards 123R (“SFAS 123R”), but disregarding the estimate of
forfeitures related to service-based vesting conditions, for outstanding
awards of restricted stock and restricted stock units
(“RSUs”). Prior to the Merger, the expense was recorded on a
straight-line basis over the restriction period based on the market price
of the underlying stock on the grant date. There were no forfeitures of
restricted stock or RSUs held by the NEOs during fiscal 2007 or fiscal
2006. For more information regarding the assumptions used in the valuation
of these awards, see Note 9 of the annual consolidated financial
statements included in this document. As a result of the Merger, all
restricted stock and RSU awards outstanding immediately before the Merger
vested and, therefore, all remaining compensation expense associated with
those awards was recognized in fiscal 2007 in accordance with SFAS
123R.
|
(5)
|
Represents
the dollar amount recognized during the fiscal year for financial
statement reporting purposes in accordance with SFAS 123R, but
disregarding the estimate of forfeitures related to service-based vesting
conditions, for stock options. Option awards granted before February 4,
2006 were valued on the applicable grant date under the fair value method
of SFAS 123 and those granted on or after that date were valued under the
fair value method of SFAS 123R using the Black-Scholes option pricing
model with the following
assumptions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 |
|
|
For
more information regarding the assumptions used in the valuation of these
awards, see Note 9 of the annual consolidated financial statements
included in this document. As a result of the Merger, all
options outstanding immediately before the Merger vested and, therefore,
all compensation expense associated with those awards was recognized in
fiscal 2007 in accordance with SFAS 123R. Mr. Tehle and Ms.
Guion had 63,000 and 50,300 options, respectively, that were forfeited as
a result of the Merger. There were no forfeitures of options
held by NEOs in fiscal 2006. |
|
|
(6)
|
Represents
amounts earned pursuant to our Teamshare bonus program for fiscal
2007. See the discussion of the “Short-Term Incentive Plan”,
“Compensation of Mr. Dreiling” and “Compensation of Mr. Perdue” in
“Compensation Discussion and Analysis” above. Messrs. Beré and
Buley and Ms. Guion deferred 5%, 20% and 5%, respectively of their fiscal
2007 bonus payments under the CDP in fiscal 2008. No amounts were earned
under our Teamshare bonus program for fiscal 2006 because we did not meet
the financial performance level required for a
payout.
|
(7)
|
Represents
the incremental cost of providing certain perquisites, including $61,414
for amounts associated with relocation and $727 for an automobile
allowance. The aggregate incremental cost related to Mr.
Dreiling’s relocation amount was calculated as follows: $50,000 as a
miscellaneous cash allowance, $4,000 for the cost to transport a personal
vehicle from New Jersey to his home in California, $4,803 for temporary
living expenses, $1,129 for transportation costs incurred in connection
with house hunting trips and $1,482 for meal expenses incurred in
connection with temporary living.
|
(8)
|
The
2007 amount represents the aggregate change in the actuarial present value
of the accumulated benefit under Mr. Perdue's SERP from February 2, 2007
to February 1, 2008. Because Mr. Perdue resigned effective July
6, 2007, the fiscal 2007 year-end actuarial present value of the
accumulated benefit is equal to the benefit paid to him in fiscal 2007.
The 2006 amount represents the aggregate change in the actuarial present
value of the accumulated benefit under Mr. Perdue’s SERP from February 4,
2006 to February 2, 2007.
|
(9)
|
Includes
$6,798,000 for severance paid in connection with Mr. Perdue’s resignation
pursuant to his employment agreement, $2,681,201 for the reimbursement of
excise taxes related to the severance payment, $78,438 for unused vacation
at the time of Mr. Perdue’s resignation, $1,489,398 for the reimbursement
of excise taxes related to the payment made to Mr. Perdue for his defined
benefit SERP, $71,327 for the tax reimbursement of excise taxes related to
the payment of interest on Mr. Perdue’s defined benefit SERP, $24,892 for
a lump sum payment in lieu of COBRA payments on behalf of Mr. Perdue,
$9,818 for reimbursement of taxes related to the lump sum payment in lieu
of COBRA payments, $19,908 for the reimbursement of taxes related to the
COBRA gross up payment, $11,249 for premiums paid under our life and
disability insurance programs, $17,753 for our match contributions to the
CDP, $6,667 for our match contributions to the 401(k) Plan, $6,452 for tax
reimbursements related to life and disability insurance premiums, and
$23,426 which represents the incremental cost of providing certain
perquisites, including $11,280 for personal use of the company plane and
other amounts, which individually did not equal the greater of $25,000 or
10% of total perquisites, including an annual automobile allowance, a
medical physical examination and a Merger closing gift. We incurred no
incremental cost in connection with the occasional travel of Mr. Perdue’s
spouse on our plane while accompanying him on
travel.
|
(10)
|
Includes
$7,806 for premiums paid under our life and disability insurance programs,
$53,683 for our contributions to the SERP, $32,872 for our match
contributions to the CDP, $2,854 for our match contributions to the 401(k)
Plan, $4,477 for the reimbursement of taxes related to life and disability
insurance premiums, $21,336 for the reimbursement of taxes related to
relocation, $4,906 for reimbursement of taxes related to the personal use
of a company-leased automobile, and $59,112 which represents the
incremental cost of providing certain perquisites, including $37,200 for
temporary living expenses (calculated as rent and utility payments)
associated with relocation, $18,601 for personal use of a company-leased
vehicle, and other amounts which individually did not equal the greater of
$25,000 or 10% of total perquisites, including a medical physical
examination, expenses related to Mr. Beré’s and his spouse’s attendance at
sporting events, and a Merger closing gift. We incurred no incremental
cost in connection with the occasional travel of Mr. Beré’s family members
on our plane while accompanying him on business
travel.
|
(11)
|
Includes
$6,412 for premiums paid under our life and disability insurance programs,
$58,618 for our contributions to the SERP, $18,403 for our match
contributions to the CDP, $11,198 for our match contributions to the
401(k) Plan, $3,678 for tax reimbursements related to life and disability
insurance premiums, and $32,155 which represents the incremental cost of
providing certain perquisites, including $21,000 for an annual automobile
allowance and other amounts which individually did not equal the greater
of $25,000 or 10% of total perquisites, including a directed donation to a
charity, expenses incurred in connection with his personal use of our
plane, and expenses related to Mr. Tehle’s and his guests’ attendance at
sporting events.
|
(12)
|
Includes
$3,294 for premiums paid under our life and disability insurance programs,
$34,868 for our contributions to the SERP, $18,148 for our match
contributions to the CDP, $11,174 for our match contributions to the
401(k) Plan, $1,890 for the reimbursement of taxes related to life and
disability insurance premiums, $2,182 for the reimbursement of taxes
related to relocation, and $39,678 which represents the incremental
cost of providing certain perquisites, including $21,000 for an
annual automobile allowance, $6,069 for an expense related to selling his
prior home, $5,000 for a directed charitable donation and other amounts
which individually did not equal the greater of $25,000 or 10% of total
perquisites, including expenses relating to Mr. Buley’s and his guests’
attendance at sporting events, a fee to attend a Young Presidents’
Organization meeting and a medical physical examination. We incurred no
incremental cost in connection with the occasional travel of Mr. Buley’s
spouse on our plane while accompanying him on business
travel.
|
(13)
|
Includes
$9,447 for premiums paid under our life and disability insurance programs,
$50,533 for our contributions to the SERP, $14,314 for our match
contributions to the CDP, $10,789 for our match contributions to the
401(k) Plan, $3,397 for tax reimbursements related to life and disability
insurance premiums, and $26,531 which represents the incremental cost of
providing certain perquisites, including $21,000 for an annual automobile
allowance, a $5,000 directed charitable donation and other amounts which
individually did not equal the greater of $25,000 or 10% of total
perquisites, including expenses relating to Ms. Guion’s attendance at a
sporting event.
|
(14)
|
Includes
$11,754 for premiums paid under our life and disability insurance
programs, $41,437 for our contributions to the SERP, $9,712 for our match
contributions to the CDP, $11,213 for our match contributions to the
401(k) Plan, $4,227 for the reimbursement of taxes related to life and
disability insurance premiums, $8,429 for reimbursement of taxes related
to the personal use of a company-leased automobile, and $31,361 which
represents the incremental cost of providing certain perquisites,
including $22,887 for personal use of a company-leased vehicle, a $5,000
directed charitable donation, and other amounts which individually did not
equal the greater of $25,000 or 10% of total perquisites, including
expenses relating to Ms. Lowe’s and her guests’ attendance at sporting or
other entertainment events and minimal hotel incidental charges incurred
by her spouse while accompanying her on business travel. We
incurred no incremental cost in connection with the occasional travel of
Ms. Lowe’s spouse on our plane while accompanying her on business
travel.
|
Grants
of Plan-Based Awards During Fiscal 2007
The table
below sets forth information regarding grants of plan-based awards to our NEOs
in fiscal 2007. The grants include RSUs and options granted pursuant
to our 1998 Stock Incentive Plan in fiscal 2007 prior to the Merger, all of
which became fully vested and were:
·
|
settled
in cash, without interest and less applicable withholding taxes, equal to
$22 per share less, for options, the exercise price (the “Merger
Consideration”);
|
·
|
forfeited,
with respect to any options having an exercise price at or above
$22/share; or
|
·
|
exchanged
for Rollover Options as further described and defined in the “Long-Term
Incentives” portion of “Compensation Discussion and Analysis”
above.
|
The
Rollover Options are set forth in the table as separate grants. The amounts paid
as consideration for the Rollover Options as noted in the footnotes to the table
represent the value the NEO would have received in the Merger had the NEO
instead chosen to accept the Merger Consideration. While the exercise price and
the number of shares underlying the Rollover Options have been adjusted as a
result of the Merger and are fully vested, they are deemed to have been granted,
and otherwise continue, under the terms of our 1998 Stock Incentive Plan, which
is the plan under which the original options were issued.
The table
also includes options granted in 2007 on or after the Merger under our 2007
Stock Incentive Plan. We have omitted the columns for threshold and
maximum estimated future payouts under equity incentive plan awards because they
are inapplicable.
Each
NEO’s annual Teamshare bonus opportunity established for fiscal 2007 also is set
forth in the table below. Actual bonus amounts earned by each NEO for
fiscal 2007 as a result of our EBITDA performance are set forth in the Summary
Compensation Table above and represent prorated payment on a graduated scale
between the target and maximum EBITDA performance levels for each of the NEOs
other than Mr. Beré whose payment was not made on a graduated scale, but rather
represented payment at the target level. Mr. Perdue did not receive a
Teamshare payout for
fiscal 2007 due to his resignation on July 6, 2007. See “Short-Term
Incentives”, “Compensation of Mr. Dreiling” and “Compensation of Mr. Perdue” in
“Compensation Discussion and Analysis” above for further discussion of the
fiscal 2007 Teamshare program.
|
|
|
|
Estimated Possible Payouts Under
Non-
Equity Incentive Plan
Awards(2)
Threshold
Target
Maximum
($)
($)
($)
|
|
|
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) |
(1)
|
Our
Board of Directors authorized Mr. Dreiling’s equity grants on the same day
that it approved his employment and related agreements. Because
the 2007 Stock Incentive Plan does not allow us to make grants to
non-employees, the Board set the grant date effective as of Mr. Dreiling’s
hire date. Our Board of Directors authorized Mr. Perdue’s
equity grants, and our Compensation Committee authorized the equity grants
to Messrs. Beré, Tehle and Buley and Mss. Guion and Lowe, at the meetings
where other annual executive compensation matters were considered,
consistent with historical practice. Such grants, however, were
conditioned upon receipt of KKR’s approval per certain provisions in the
Merger Agreement. The date of KKR’s approval was considered the
grant date for those awards.
|
(2)
|
Represents
each NEO’s fiscal 2007 Teamshare bonus opportunity. Mr.
Dreiling’s payout levels are prorated for 12 days of service in fiscal
2007.
|
(3)
|
Represents
post-Merger grants of performance-based options under the 2007 Stock
Incentive Plan. Because there is no market for our common
stock, the per share exercise price is the fair market value of one share
of our common stock on the grant date as determined in good faith by our
Board of Directors. If we achieve specific EBITDA targets,
these options are eligible to become exercisable in installments of 20% on
February 1, 2008, January 30, 2009, January 29, 2010, January 28, 2011,
and February 3, 2012. If an EBITDA target for a given fiscal
year is not met, these options may still vest on a “catch up” basis if, at
the end of fiscal years 2008, 2009, 2010, 2011, or 2012, the applicable
cumulative EBITDA target is achieved. In addition, these
options are subject to certain accelerated vesting provisions as described
in “Potential Payments Upon Termination or Change-in-Control”
below.
|
(4)
|
Represents
post-Merger grants of time-vested restricted stock to Mr. Dreiling under
the 2007 Stock Incentive Plan and pre-Merger grants of time-vested RSUs to
all other NEOs under the 1998 Stock Incentive Plan. The
restricted shares granted to Mr. Dreiling are scheduled to vest upon the
earliest to occur of: a change in control of the company, an
initial public offering of the company, Mr. Dreiling’s termination without
cause or due to death or disability, Mr. Dreiling’s resignation for good
reason, or February 3, 2012. The pre-Merger RSU grants vested in
connection with the Merger.
|
(5)
|
Represents
post-Merger grants of time-vested, non-qualified stock options under the
2007 Stock Incentive Plan. Because there is no market for our
common stock, the per share exercise price is the fair market value of one
share of our common stock on the grant date as determined in good faith by
our Board of Directors. These options are scheduled to become
exercisable ratably in installments of 20% on July 6, 2008, July 6, 2009,
July 6, 2010, July 6, 2011 and July 6, 2012. In addition, these options
are subject to certain accelerated vesting provisions as described in
“Potential Payments upon Termination or Change-in-Control”
below.
|
(6)
|
Represents
pre-Merger grants of time-vested, non-qualified stock options under the
1998 Stock Incentive Plan which became fully vested in connection with the
Merger. The per share exercise price equals the closing market
price of our common stock on the grant
date.
|
(7)
|
Represents
Rollover Options which are governed by the terms of the 1998 Stock
Incentive Plan. The per share exercise price equals the
exercise price of the original surrendered option (which was the closing
market price of our common stock on the grant date) as adjusted to reflect
our capitalization immediately following the Merger. As
described in the narrative before this Grants of Plan-Based Awards Table,
the NEOs paid the following consideration for the Rollover Options: Mr.
Beré, $182,675; Mr. Tehle, $720,034; Mr. Buley, $754,868; Ms. Guion,
$497,956; and Ms. Lowe, $396,380. Because we will not recognize
any compensation expense in connection with the Rollover Options on a
going forward basis, we have not determined the grant date fair values of
those options in accordance with SFAS 123R, but rather have disclosed
their intrinsic values (equal to the difference between the fair market
value of the common stock and the per share exercise price of the Rollover
Options multiplied by the number of shares underlying such Rollover
Options) which we believe would not be materially different from the SFAS
123R grant date fair value.
|
Outstanding
Equity Awards at 2007 Fiscal Year-End
The table
below sets forth information regarding outstanding equity awards held by our
NEOs as of the end of fiscal 2007.
|
|
|
|
|
|
|
|
|
Number
of
Securities
Underlying
Unexercised
Options
(#)
Exercisable
|
|
|
Number
of
Securities
Underlying
Unexercised
Options
(#)
Unexercisable
|
|
|
Equity
Incentive
Plan
Awards: Number of Securities Underlying Unexercised Unearned
Options
(#)
|
|
|
Option
Exercise
Price
($)
|
|
|
|
|
|
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
|
|
|
|
-- |
|
|
|
-- |
|
(1)
|
Based
on a per share fair market value of $5.00. Our Board
of Directors determined in good faith that the per share market value of
our common stock on January 21, 2008 was
$5.00.
|
(2)
|
These
options are scheduled to become exercisable ratably in installments of 20%
on July 6, 2008, July 6, 2009, July 6, 2010, July 6, 2011 and July 6,
2012. In addition, these options are subject to certain accelerated
vesting provisions as described in “Potential Payments upon Termination or
Change-in-Control” below.
|
(3)
|
These
options vested as of February 1,
2008.
|
(4)
|
If
we achieve specific EBITDA targets, these options are eligible to become
exercisable in installments of 25% on January 30, 2009, January 29, 2010,
January 28, 2011, and February 3, 2012. If an EBITDA target for
a given fiscal year is not met, these options may still vest on a “catch
up” basis if, at the end of fiscal years 2008, 2009, 2010, 2011, or 2012,
the applicable cumulative EBITDA target is achieved. In
addition, these options are subject to certain accelerated vesting
provisions as described in “Potential Payments upon Termination or
Change-in-Control” below.
|
(5)
|
These
restricted shares are scheduled to vest upon the earliest to occur
of: a change in control of the company, an initial public
offering of the company, Mr. Dreiling’s termination without cause or due
to death or disability, Mr. Dreiling’s resignation for good reason, or
February 3, 2012.
|
(6)
|
The
options for which these Rollover Options were exchanged became exercisable
on August 12, 2003.
|
(7)
|
The
options for which these Rollover Options were exchanged became
exercisable on March 13, 2004.
|
(8)
|
The
options for which these Rollover Options were exchanged became
exercisable on July 6, 2007.
|
(9)
|
As
a result of the Merger on July 6, 2007, Mr. Tehle forfeited 63,000 options
having an exercise price higher than the Merger
Consideration.
|
(10)
|
The
options for which these Rollover Options were exchanged became
exercisable in installments of 25% on August 9, 2005 and 75% on
February 3, 2006.
|
(11)
|
The
options for which these Rollover Options were exchanged became
exercisable in installments of 25% on August 24, 2005 and 75% on
February 3, 2006.
|
(12)
|
The
options for which these Rollover Options were exchanged became
exercisable in installments of 25% on March 16, 2007 and 75% on July 6,
2007.
|
(13)
|
The
options for which these Rollover Options were exchanged became
exercisable in installments of 25% on January 24, 2007 and 75% on July 6,
2007.
|
(14)
|
As
a result of the Merger on July 6, 2007, Ms. Guion forfeited 50,300 options
having an exercise price higher than the Merger
Consideration.
|
(15)
|
The
options for which these Rollover Options were exchanged became
exercisable in installments of 25% on December 2, 2004 and December 2,
2005 and 50% on February 3, 2006.
|
(16)
|
The
options for which these Rollover Options were exchanged became exercisable
in installments of 25% on September 1, 2006 and 75% on July 6,
2007.
|
Option
Exercises and Stock Vested During Fiscal 2007
The table
below provides information regarding the value realized by our NEOs upon the
transfer for value of stock options and the vesting of stock awards during
fiscal 2007.
|
|
|
|
|
|
|
|
|
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 |
|
|
(1)
|
Represents
the transfer for value of options held by the NEOs in connection with the
Merger. All of the value realized by Messrs. Beré and Tehle and
by Mss. Guion and Lowe and $754,868 of the value realized by Mr. Buley was
rolled over into Rollover Options.
|
Pension
Benefits
Fiscal
2007
We
provided retirement benefits to Mr. Perdue under an unfunded, non-qualified
defined benefit pension plan, or SERP. As a result of the Merger, which
constituted a change-in-control under the terms of the SERP and the related
grantor trust agreement, and Mr. Perdue’s resignation effective July 6,
2007, Mr. Perdue became 100% vested in his SERP account and the actuarial
equivalent of the lump sum value of Mr. Perdue’s accrued benefit was funded
to the grantor trust. The material terms of Mr. Perdue’s SERP
are discussed following the table.
Name
|
|
Plan
Name
|
|
Number
of Years
Credited
Service
|
|
Present
Value
of
Accumulated
Benefit
|
|
Payments
During
Last
Fiscal Year
|
Mr.
Perdue
|
Supplemental
Executive
Retirement
Plan for
David
A. Perdue
|
N/A
|
0
|
6,208,966
|
(1)
|
On
January 7, 2008, distribution was made to Mr. Perdue of the entire benefit
obligation under the terms of his SERP consisting of $6,028,122 of vested
benefit and $180,844 in interest. The distribution to Mr.
Perdue was made six months following his termination date to comply with
Section 409A of the Internal Revenue Code (the
“Code”).
|
Mr. Perdue’s SERP
provided for an annual normal retirement benefit equal to 25% of “final average
compensation” upon retirement on or after his “normal retirement date”, payable
as a joint and 50% spouse annuity assuming his spouse to be the same age as
Mr. Perdue. Mr. Perdue could elect to receive his benefit as a lump
sum or any annuity form actuarially equivalent to the normal retirement
benefit. The SERP also provided for an early retirement benefit which
would reduce his benefit by 5% for each year or portion thereof that Mr. Perdue
retired prior to age 60.
For
the purpose of calculating Mr. Perdue’s accumulated benefit, “normal
retirement date” is the first of the month coincident with or next following the
later of the date Mr. Perdue attains age 60 or is credited with
15 years of credited service. Since Mr. Perdue was not age
60 on the date of his resignation, his benefit under the SERP was treated as an
early retirement and his benefit was reduced accordingly.
Mr.
Perdue’s benefit was based on a total of 14 out of a possible 15 years of
credited service under the SERP plan. This included 8 years of
credited service based on his actual service under the plan in which he received
2 years of credited service upon each anniversary of his date of hire and an
additional 6 years of credited service since his resignation was for good reason
within 2 years of a change-in-control.
“Final
average compensation” is calculated as Mr. Perdue’s base salary plus his
“applicable annual bonus” for the highest 3 consecutive fiscal years of credited
service. “Applicable annual bonus” is the greater of the actual bonus
paid for the immediately preceding fiscal year or the target annual bonus for
the current fiscal year. Mr. Perdue’s base salary and
“applicable annual bonus” were assumed to have been paid during the additional
years of credited service for the purpose of calculating his “final average
compensation”. For the purpose of his benefit calculation,
Mr. Perdue’s final average compensation was $2,266,000.
We had
established a grantor trust that provided for assets to fund Mr. Perdue’s
SERP to be placed in the trust upon a change-in-control (as defined in the
grantor trust) of Dollar General. The trust’s assets were subject to the claims
of our creditors. The trust also provided for a distribution to Mr. Perdue
to pay certain taxes in the event he was taxed in connection with the funding of
the trust and to apply interest at the rate of 6% per annum in the event payment
was delayed due to Section 409A of the Code. As a result of the Merger, and
since the payment was determined to be subject to Section 409A delay, a deposit
of $6,208,966 was made to the trust representing the lump sum and interest value
of Mr. Perdue’s benefit. This amount was paid to Mr. Perdue on
January 7, 2008.
Nonqualified
Deferred Compensation
Fiscal
2007
We offer
a CDP/SERP Plan to certain key employees, including the NEOs. Mr. Perdue
was not eligible to participate in the SERP portion of the CDP/SERP Plan due to
his participation in his individualized SERP discussed under “Pension Benefits”
above. Information regarding the NEOs’ participation in the CDP/SERP Plan is
included in the following table. The material terms of the CDP/SERP Plan are
described after the table. Please also see “Benefits and Perquisites”
in “Compensation Discussion and Analysis” above.
|
Executive
Contributions
in
Last
FY
($)(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)
|
(1) |
|
Reported
as "Salary" in the Summary Compensation
Table.
|
(2) |
|
Reported
as "All Other Compensation" in the Summary Compensation
Table.
|
(3) |
|
The
amounts shown in this column are not reported in the Summary Compensation
Table because they do not represent above-market or preferential
earnings.
|
(4) |
|
Includes
the following amounts reported in the Summary Compensation Table in the
proxy statements for the fiscal years indicated: $92,337 in 2006; $94,670
in 2005; and $84,253 in 2004.
|
(5) |
|
Includes
the following amounts reported in the Summary Compensation Table in the
proxy statements for the fiscal years indicated: $102,104 in 2006; $84,387
in 2005; and $3,333 in 2004.
|
(6) |
|
Includes
the following amounts reported in the Summary Compensation Table in the
proxy statements for the fiscal years indicated: $89,392 in 2006; and
$4,792 in 2005.
|
(7) |
|
Includes
the following amounts reported in the Summary Compensation Table in the
proxy statements for the fiscal years indicated: $61,503 in 2006; $43,168
in 2005; and $57,689 in 2004.
|
(8) |
|
Includes
$91,496 reported in the Summary Compensation Table in the proxy statement
for fiscal 2006.
|
Pursuant to the
CDP, NEOs may annually elect to defer up to 65% of base salary and up to 100% of
bonus pay. We currently match base pay deferrals at a rate of 100%, up to 5% of
annual salary, with annual salary offset by the amount of match-eligible salary
under the 401(k) plan. All NEOs are 100% vested in all compensation and matching
deferrals and earnings on those deferrals.
Pursuant
to the SERP, we make an annual contribution equal to a certain percentage of a
participant's annual salary and bonus to all participants who are actively
employed in an eligible job grade on January 1 and continue to be employed
as of December 31 of a given year. The contribution percentage is based on
age, years of service and job grade. The 2007 contribution percentage for each
eligible NEO was 7.5% for Mr. Beré, Mr. Tehle, Ms. Guion and Ms. Lowe and
4.5% for Mr. Buley.
As a
result of the Merger, which constituted a change-in-control under the CDP/SERP
Plan, all previously unvested SERP amounts vested on July 6, 2007. For
newly eligible SERP participants after July 6, 2007, SERP amounts vest at
the earlier of the participant's attainment of age 50 or the participant's being
credited with 10 or more "years of service", or upon termination of employment
due to death or "total and permanent disability" or upon a “change-in-control”,
all as defined in the CDP/SERP Plan.
The
amounts deferred or contributed to the CDP/SERP Plan are credited to a liability
account, which is then invested at the participant's option in either an account
that mirrors the performance of a fund or funds selected by the Compensation
Committee or its delegate (the "Mutual Fund Options") or, prior to the Merger,
in an account that mirrors the performance of our common stock (the "Common
Stock Option").
As a
result of the Merger, the CDP/SERP Plan liabilities were fully funded into an
irrevocable rabbi trust. All account balances deemed to be invested in the
Common Stock Option were liquidated at a value of $22.00 per share and the
proceeds were transferred to an existing investment option within the
Plan.
Potential
Payments upon Termination or Change-in-Control
The
tables below reflect potential payments to each of our NEOs in various
termination and change-in-control scenarios based on compensation, benefit, and
equity levels in effect on February 1, 2008. The amounts shown assume that
the termination or change-in-control event was effective as of February 1,
2008. For stock valuations, we have assumed that the price per share is the fair
market value of our stock on February 1, 2008 ($5.00). The amounts shown
are merely estimates. We cannot determine the actual amounts to be paid until
the time of a change-in-control or the NEO's termination of
employment.
Since Mr.
Perdue resigned effective July 6, 2007, he did not have a right to any payments
as of February 1, 2008. We agreed to treat this resignation as one
for "good reason" after a change-in control as defined in his employment
agreement. Therefore, the table below presents Mr. Perdue’s actual payments in
connection with his resignation. The other forms of termination do
not apply and are marked as “N/A”, or not applicable.
Payments
Regardless of Manner of Termination
Regardless of the
termination scenario, the NEOs (other than Mr. Perdue) will receive earned but
unpaid base salary through the employment termination date, along with any other
benefits owed under any of our plans or agreements covering the NEO as governed
by the terms of those plans or agreements. These benefits include vested amounts
in the CDP/SERP Plan discussed above after the Nonqualified Deferred
Compensation Table.
Upon
Mr. Perdue's resignation on July 6, 2007, he received payment equal to his
earned but unpaid base salary through his employment termination date, any
accrued expenses and vacation pay. This payment was made in accordance with our
normal payroll cycle and procedures. He also received timely payment or
provision for any other accrued amounts or benefits required to be paid for
which he was eligible under any of our plans, practices or agreements. These
benefits include amounts payable pursuant to his SERP described above after the
Pension Benefits Table and his CDP benefit discussed above in detail after the
Nonqualified Deferred Compensation Table.
The
tables below exclude any amounts payable to the NEO to the extent that they are
available generally to all salaried employees and do not discriminate in favor
of our executive officers.
Payments
Upon Termination Due to Retirement
Mr.
Perdue’s resignation on July 6, 2007 was treated under the terms of his SERP as
a change-in-control termination and an early
retirement. Mr. Perdue's SERP benefit and the enhancement of
that benefit as a result of his retirement are discussed above after the Pension
Benefits Table.
Except
for Mr. Perdue, retirement is not treated differently from any other voluntary
termination under any of our plans or agreements for NEOs, except that all
Rollover Options will remain exercisable for a period of 3 years following the
NEO’s retirement unless the options expire earlier. To be entitled to
the extended exercise period for the Rollover Options, the retirement must occur
on or after the NEO reaches the age of 65 or, with our express consent, prior to
age 65 in accordance with any applicable early retirement policy then in effect
or as may be approved by our Compensation Committee.
Payments
Upon Termination Due to Death or Disability
In the
event of death or disability, with respect to each NEO:
·
|
The
20% portion of the time-based options that would have become exercisable
on the next anniversary date of the Merger if the NEO had remained
employed with us through that date will become vested and
exercisable.
|
·
|
The
20% portion of the performance-based options that would have become
exercisable in respect of the fiscal year in which the NEO’s employment
terminates if the NEO had remained employed with us through that date,
will remain outstanding through the date we determine whether the
applicable performance targets are met for that fiscal year. If
the performance targets are met for that fiscal year, that 20% portion of
the performance-based options will become exercisable on such
performance-vesting determination date. Otherwise, that 20% portion will
be forfeited.
|
·
|
All
unvested options will be forfeited, and vested options generally may be
exercised (by the employee’s survivor in the case of death) for a period
of 1 year (3 years in the case of Rollover Options) from the service
termination date unless we purchase such vested options in total at the
fair market value less the exercise
price.
|
In the
event of Mr. Dreiling’s death or disability, his restricted stock will vest and,
in the event of disability, he will receive a prorated bonus payment based on
our performance for the fiscal year, paid at the time bonuses are normally paid
for that fiscal year.
In the
event of death, the NEO's beneficiary will receive payments under our group life
insurance program in an amount, up to a maximum of $3 million, equal to 2.5
times the NEO's annual base salary. We have excluded from the tables below
amounts that the NEO would receive under our disability insurance program since
the same benefit level is provided to all of our salaried employees. The NEO's
CDP/SERP Plan benefit also becomes fully vested and is payable in a lump sum
within 60 days after the end of the calendar quarter in which the NEO's
death occurs.
In the
event of disability, the NEO’s CDP/SERP Plan benefit becomes fully vested and is
payable in a lump sum within 60 days after the end of the calendar quarter
in which we receive notification of the determination of the NEO's disability by
the Social Security Administration.
For
purposes of the NEOs' employment agreements, "disability" means the that
employee must be disabled for purposes of our long-term disability insurance
plan. For purposes of the CDP/SERP Plan, “disability” means total and permanent
disability for purposes of entitlement to Social Security disability
benefits.
Payments
Upon Voluntary Termination
The
payments to be made to an NEO upon voluntary termination vary depending upon
whether the NEO resigns with or without "good reason" or after our failure to
offer to renew, extend or replace the NEO's employment agreement under certain
circumstances. For purposes of each NEO, "good reason" generally means (as more
fully described in the applicable employment agreement):
·
|
a
reduction in base salary or target bonus
level;
|
·
|
our
material breach of the employment
agreement;
|
·
|
the failure of any successor to all or
substantially all of our business and/or assets to assume and agree to
perform the employment agreement;
|
·
|
our
failure to continue any significant compensation plan or benefit without
replacing it with a similar plan or a compensation equivalent (except for
across-the-board changes or terminations similarly affecting at least 95%
of all of our executives);
|
·
|
relocation
of our principal executive offices outside of the middle-Tennessee area or
basing the officer anywhere other than our principal executive offices;
or
|
·
|
assignment
of duties inconsistent, or the significant reduction of the title, powers
and functions associated, with the NEO's position unless it results from
our restructuring or realignment of duties and responsibilities for
business reasons that leaves the NEO at the same compensation and officer
level and with similar responsibility levels or results from the NEO's
failure to meet performance criteria, all without the NEO's written
consent.
|
No event
will constitute "good reason" if we cure the claimed event within 30 days
after receiving notice from the NEO.
Voluntary
Termination with Good Reason or After Failure to Renew the Employment
Agreement. If the NEO (1) resigns with good
reason, or (2) in the case of NEOs other than Mr. Dreiling, within 60 days
of our failure to offer to renew, extend or replace the NEO's employment
agreement before, at or within 60 days after the end of the agreement's
term (unless we enter into a mutually acceptable severance arrangement or the
resignation is a result of the NEO's voluntary retirement or termination), or
(3) in the case of Mr. Dreiling, in the event we elect not to extend the term of
his employment by providing 60 days prior written notice before the applicable
extension date:
·
|
With
respect to each NEO, all unvested option grants will be
forfeited. Unless we purchase the vested options in total at a
per share price equal to the fair market value less the exercise price or
they expire earlier, the NEO generally may exercise vested options for a
period of 180 days (90 days in the case of Rollover Options) from the
termination date. This extended exercisability period and purchase
provision for options that are not Rollover Options applies only if the
NEO resigns with good reason or is terminated without cause (as discussed
below); otherwise, the NEO will forfeit those
options.
|
·
|
Mr.
Dreiling’s restricted stock will vest if he resigns with good reason or is
terminated without cause (as discussed below) or upon a change-in-control
(as discussed below); otherwise, he will forfeit the restricted
stock.
|
·
|
The
NEO will receive, subject to any 6-month delay in payment required for tax
law compliance, the following upon the execution of a release of certain
claims against us and our affiliates in the form attached to the NEO’s
employment agreement:
|
√
|
Continuation
of base salary for 24 months payable in accordance with our normal
payroll cycle and procedures.
|
√
|
A
lump sum payment equal to 2 times the NEO's target incentive bonus (in the
case of Mr. Dreiling, target incentive bonus payable over 24 months) and 2
times our annual contribution for the NEO's participation in our medical,
dental and vision benefits program (in the case of Mr. Dreiling, the
medical, dental and vision benefit instead will be in the form of a
continuation of these benefits).
|
√
|
Mr.
Dreiling will receive a prorated bonus payment based on our performance
for the fiscal year, paid at the time bonuses are normally paid for that
fiscal year.
|
√
|
If
Mr. Beré’s termination occurred prior to the payment of our fiscal 2007
bonus, he would receive a lump sum payment of his fiscal 2007 bonus,
determined as if he had remained employed through the date necessary to
receive the payment of the fiscal 2007
bonus.
|
√
|
Outplacement
services, at our expense, for 1 year or, if earlier, until other
employment is secured.
|
Subject
to any applicable prohibition on acceleration of payment under Section 409A
of the Internal Revenue Code, we may, at any time and in our sole discretion,
elect to make a lump-sum payment of all these amounts (other than Mr. Dreiling’s
medical, dental and vision benefit continuation), or all remaining amounts, due
as a result of this type of termination.
The NEO
will forfeit any unpaid severance amounts upon a material breach of any
continuing obligation under the employment agreement or the release, which
include:
·
|
The
NEO must maintain the confidentiality of, and refrain from disclosing or
using, our (a) trade secrets for any period of time as the information
remains a trade secret under applicable law and (b) confidential
information for a period of 2 years following the employment termination
date.
|
·
|
For
2 years after the employment termination date, the NEO may not accept or
work in a “competitive position” within any state in which we maintain
stores at the time of his termination date or any state in which we have
specific plans to open stores within 6 months of that date. For
this purpose, “competitive position” means any employment, consulting,
advisory, directorship, agency, promotional or independent contractor
arrangement between the NEO and any person engaged wholly or in material
part in the business in which we are engaged, including but not limited to
Wal-Mart, K-Mart, Walgreen’s, Family Dollar Stores, Fred’s, the 99 Cents
Stores and Dollar Tree Stores (and, with respect to Mr. Dreiling, Costco,
BJ’s Wholesale Club, Casey’s General Stores, and The Pantry, Inc.), or any
person then planning to enter
|
|
the
deep discount consumable basics retail business, if the NEO is required to
perform services for that person which are substantially similar to those
he or she provided or directed at any time while employed by
us. |
·
|
For
2 years after the employment termination date, the NEO may not
actively recruit or induce any of our exempt employees to cease employment
with us.
|
·
|
For 2 years after the employment termination
date, the NEO may not solicit or communicate with any person who has a
business relationship with us and with whom the NEO had contact while
employed by us, if that contact would likely interfere with our business
relationships or result in an unfair competitive advantage over us.
|
·
|
The
NEO may not engage in any communications to persons outside Dollar General
which disparages Dollar General or interferes with our existing or
prospective business relationships.
|
Voluntary
Termination without Good Reason. If the NEO
resigns without good reason, he or she will forfeit all unvested equity grants
and all vested options granted in connection with the
Merger. Rollover Options generally may be exercised for 3 months from
the termination date unless they expire earlier or unless we repurchase them at
a per share price equal to the lesser of (x) fair market value minus the
exercise price and (y) the sum of base price and applicable percentage minus the
exercise price.
Payments
Upon Involuntary Termination
The
payments to be made to an NEO upon involuntary termination vary depending upon
whether termination is for or without "cause". For purposes of each NEO, "cause"
generally means (as more fully described in the applicable employment
agreement):
·
|
Attendance
at work in a state of intoxication or in possession of any prohibited drug
or substance which would amount to a criminal
offense;
|
·
|
Assault
or other act of violence;
|
·
|
Any
act involving fraud or dishonesty;
|
·
|
Any
material breach of any SEC or other law or regulation or any Dollar
General policy governing securities trading or inappropriate disclosure or
"tipping";
|
·
|
Any
activity or public statement, other than as required by law, that
prejudices Dollar General or reduces our good name and standing or would
bring Dollar General into public contempt or ridicule;
or
|
·
|
Conviction
of, or plea of guilty or nolo
contendre to, any felony whatsoever or any misdemeanor that would
preclude employment under our hiring
policy
|
For
purposes of determining treatment of an NEO’s Rollover Options, “cause” means,
to the extent that our Compensation Committee determines that it is directly and
materially harmful to our business or reputation:
·
|
A
felony conviction or the failure to contest prosecution of a felony;
or
|
·
|
Willful
misconduct or dishonesty.
|
Involuntary
Termination without Cause. If the NEO is
involuntarily terminated without cause, the NEO's equity grants will be treated
as described under "Voluntary Termination with Good Reason or After Failure to
Renew the Employment Agreement" above. In addition, each NEO will receive the
applicable payments and benefits listed under "Voluntary Termination with Good
Reason or After Failure to Renew the Employment Agreement" above.
Payments
After a Change-in-Control
Upon a
change-in-control, regardless of whether the NEO’s employment
terminates:
·
|
All
unvested time-based options will become fully vested and exercisable, and
all unvested performance-based options will become fully vested and
exercisable subject to KKR’s achievement of certain return-based
performance targets.
|
·
|
All
CDP/SERP Plan benefits will become fully
vested.
|
If the
NEO, other than Messrs. Perdue, Dreiling or Beré, is involuntarily terminated
without cause or resigns for good reason within 2 years of a
change-in-control, he or she will receive, upon execution of a release of
certain claims against us and our affiliates in the form attached to the NEO's
employment agreement, a lump sum payment equal to 2 times the NEO's annual base
salary plus 2 times the NEO's target incentive bonus, each as in effect
immediately prior to the change-in-control, plus 2 times our annual contribution
for the NEO's participation in our medical, dental and vision benefits program.
The NEO also will receive outplacement services, at our expense, for 1 year
or, if earlier, until other employment is secured.
For
Messrs. Dreiling and Beré, an involuntary termination following a
change-in-control event will be treated in the same manner as a “Voluntary
Termination with Good Reason or After Failure to Renew the Employment Agreement”
as described above.
If any
payments or benefits in connection with a change-in-control would be subject to
the excise tax under federal income tax rules, we will pay an additional amount
to the NEO to cover the excise tax and any resulting taxes. However, if after
receiving this payment the NEO's
after-tax benefit is not
at least $25,000 more than it would be without this payment, then it will not be
made and the severance and other benefits due will be reduced so that an excise
tax is not incurred.
For
purposes of the CDP/SERP Plan and the employment agreements of Mr. Tehle, Mr.
Buley, Ms. Guion and Ms. Lowe, a change-in-control generally is deemed to occur
(as more fully described in those documents):
·
|
if
any person (other than Dollar General or any of our employee benefit
plans) acquires 35% or more of our voting securities (other than as a
result of our issuance of securities in the ordinary course of
business);
|
·
|
for
purposes of our CDP/SERP Plan, if a majority of our Board members at the
beginning of any consecutive 2-year period are replaced within that period
without the approval of at least 2/3 of our Board members who served as
directors at the beginning of the
period;
|
·
|
for
purposes of the specified employment agreements, if a majority of our
Board members as of the effective date of the applicable NEO’s employment
agreement are replaced without the approval of at least 75% of our Board
members who served as directors on that effective date or are replaced,
even with this 75% approval, by persons who initially assumed office as a
result of an actual or threatened election contest or other actual or
threatened proxy solicitation other than by our Board;
or
|
·
|
upon
the consummation of a merger, other business combination or sale of assets
of, or cash tender or exchange offer or contested election with respect
to, Dollar General if less than 65% (less than a majority, for purposes of
our CDP/SERP Plan) of our voting securities are held after the transaction
in the aggregate by holders of our securities immediately prior to the
transaction.
|
For
purposes of the treatment of equity discussed above, a change-in-control
generally means (as more fully described in the Management Stockholder’s
Agreement between us and the NEOs), in one or a series of related
transactions:
·
|
the
sale of all or substantially all of the assets of Buck Holdings, L.P. or
us and our subsidiaries to any person (or group of persons
acting in concert), other than to (x) investment funds affiliated with KKR
or its affiliates or (y) any employee benefit plan (or trust forming a
part thereof) maintained by us, KKR or our respective affiliates or other
person of which a majority of its voting power or other equity securities
is owned, directly or indirectly, by us, KKR or our respective affiliates;
or
|
·
|
a
merger, recapitalization or other sale by us, KKR (indirectly) or any of
our respective affiliates, to a person (or group of persons acting in
concert) of our common stock or our other voting securities that results
in more than 50% of our common stock or our other voting securities (or
any resulting company after a merger) being held, directly or indirectly,
by a person (or group of persons acting in
|
|
concert)
that is not controlled by (x) KKR or its affiliates or (y) an employee
benefit plan (or trust forming a part thereof) maintained us, KKR or our
respective affiliates or other person of which a majority of its voting
power or other equity securities is owned, directly or indirectly, by us,
KKR or our respective affiliates; in any event, which results in us, KKR
and its affiliates or such employee benefit plan ceasing to hold the
ability to elect (or cause to be elected) a majority of the members of our
board of directors. |
Because
Mr. Perdue’s resignation occurred within 2 years of the Merger (which
constituted a change-in-control under his employment agreement and the plan
under which his equity awards were granted), he received the following benefits
under his employment agreement and other plans in which he
participated:
·
|
A
lump sum payment equal to 3 times the sum of his annual base salary in
effect on his employment termination date and his target annual incentive
bonus for fiscal 2007 and reimbursement of excise taxes related to this
payment.
|
·
|
A
lump sum payment equal to 36 months of the cost of COBRA benefits which
was grossed-up to the extent taxable to
him.
|
·
|
A
lump sum payment for unused vacation in fiscal
2007.
|
·
|
We
credited Mr. Perdue with 6 additional years of credited service under his
SERP. In determining his base salary and bonus for these
additional years for purposes of calculating his final average
compensation, we used his base salary on his termination date and his
target annual bonus for fiscal 2007. We also credited interest
to his SERP benefit for the period of time payment was delayed to him due
to Section 409A of the Code. We reimbursed Mr. Perdue for
excise taxes related to the SERP
payments.
|
·
|
All
unvested equity grants automatically vested without regard to Mr. Perdue’s
employment termination, and all CDP/SERP Plan benefits became fully
vested.
|
Mr. Perdue is subject
to the following business protection provisions:
·
|
He
must maintain the confidentiality of our (a) trade secrets as long as
the information remains a trade secret and (b) confidential
information for 2 years after his service termination
date.
|
·
|
For
2 years after his service termination date, Mr. Perdue may not
actively recruit or induce certain of our employees to cease employment
with us or engage that person's services in any business substantially
similar to or competitive with that in which we were engaged during
Mr. Perdue's employment.
|
·
|
For
2 years after his service termination date, Mr. Perdue may not
accept or work in a "competitive position" within any state in which we
maintain stores at the time of his
|
|
termination
date or any state in which we have specific plans to open stores within
6 months of that date. For this purpose, "competitive position" means
any employment, consulting, advisory, directorship, agency, promotional or
independent contractor arrangement between Mr. Perdue and any person
engaged wholly or in material part in the business in which we are
engaged, including but not limited to Wal-Mart, Target, K-Mart,
Walgreen's, Rite-Aid, CVS, Family Dollar Stores, Fred's, the 99 Cents
Stores and Dollar Tree Stores, or any person then planning to enter the
deep discount consumable basics retail business, if Mr. Perdue is
required to perform services for that person which are substantially
similar to those he provided or directed at any time while employed by
us. |
·
|
Mr. Perdue may not engage in any
communications which disparage Dollar General or interfere with our
existing or prospective business relationships.
|
Potential
Payments to Named Executive Officers Upon Occurrence of Various Termination
Events
As of
February 1, 2008
|
Voluntary
Without
Good
Reason
|
Involuntary
Without
Cause
or
Voluntary
With
Good
Reason
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
Voluntary
Without
Good
Reason
|
Involuntary
Without
Cause
or
Voluntary
With
Good
Reason
|
|
|
|
|
|
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
|
|
Voluntary
Without
Good
Reason
|
Involuntary
Without
Cause
or
Voluntary
With
Good
Reason
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
Voluntary
Without
Good
Reason
|
Involuntary
Without
Cause
or
Voluntary
With
Good
Reason
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
$1,991,335
|
|
(1)
|
All
payments in this column require termination to be paid except options
(prior to and due to the event) and restricted stock and
RSUs.
|
Compensation
Committee Interlocks and Insider Participation
Each of
Dennis Bottorff, Reginald Dickson and Gordon Gee was a member of our
Compensation Committee during fiscal 2007 prior to the Merger. We did not have a
Compensation Committee or another Board committee that performed equivalent
functions for the remaining portion of fiscal 2007. None of these persons was at
any time during fiscal 2007 an officer or employee of Dollar General or any of
our subsidiaries, or an officer of Dollar General or any of our subsidiaries at
any time prior to fiscal 2007. None of these persons had any
relationship with Dollar General or any of our subsidiaries requiring disclosure
under any paragraph of Item 404 of Regulation S-K during the period
that these persons served on the Committee. As a Board member, David L. Beré was
entitled to participate in Board deliberations regarding executive
compensation (other than his own) that occurred during the portion of fiscal
2007 after the Merger. None of our executive officers served as a
member of a compensation committee or as a director of any entity of which any
of our directors served as an executive officer during fiscal 2007.
(b) Director
Compensation. The following tables and text discuss the compensation of
persons who served as a member of our Board of Directors during all or part of
fiscal 2007 other than Richard W. Dreiling, David L. Beré, and David A. Perdue,
each of whose compensation is discussed under “Executive Compensation” above and
who was not separately compensated for Board service.
Fiscal
2007 Director Compensation
|
Fees
Earned
or
Paid
in
Cash
($)(2)
|
Stock
Awards
($)(3)(4)(5)
|
|
Non-Equity
Incentive
Plan Compensation
($)
|
Change
in
Pension
Value
and
Nonqualified
Deferred
Compensation
Earnings
($)
|
All
Other
Compensation
($)(7)
|
|
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
|
(1)
|
Pursuant
to the terms of the Merger Agreement, on July 6, 2007 each of Messrs.
Agrawal, Calbert, Jones and Rajpal joined our Board and each of Messrs.
Bottorff, Dickson, Gee, Purcell, Robbins, Thornburgh and Wilds and Mss.
Bowles and Knuckles ceased to serve on our Board. Mr. Rajpal
resigned from our Board effective September 19, 2007 and received no
compensation for his Board service. Mr. Nelson was appointed to our Board
on July 20, 2007.
|
(2)
|
Each
of Messrs. Purcell and Thornburgh deferred payments of all his fiscal
2007 director fees pursuant to the terms of our Deferred Compensation Plan
for Non-Employee Directors.
|
(3)
|
These
amounts represent restricted stock units (“RSUs”) granted during fiscal
2007 and prior fiscal years under the 1998 Stock Incentive Plan. The
amounts equal the compensation cost recognized during fiscal 2007 for
financial statement purposes in accordance with Statement of Financial
Accounting Standards 123R (“SFAS 123R”), except forfeitures related
to service-based vesting conditions were disregarded. Additional
information related to the calculation of the compensation cost is set
forth in Note 9 of the annual consolidated financial statements
included in this report. As a result of the Merger, all outstanding RSU
awards vested and, therefore, all compensation expense associated with
such awards was recognized in fiscal 2007 in accordance with
SFAS 123(R).
|
(4)
|
Each
person who served as a non-employee director on June 5, 2007 received
4,600 RSUs during fiscal 2007 under the automatic grant provisions of the
1998 Stock Incentive Plan. The grant date fair value computed in
accordance with SFAS 123R for those RSUs was
$99,360.
|
(5)
|
No
director listed in this table had stock awards or option awards
outstanding at February 1, 2008. As a result of the Merger,
each director who held RSUs received $22.00 in cash, without interest and
less applicable withholding taxes, and each director listed in this table
who held options 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. No director forfeited any RSUs or
options during fiscal 2007.
|
(6)
|
No
compensation expense was recorded in fiscal 2007 for options held by
directors because no options were granted to these directors during fiscal
2007 and all options awarded in prior years had previously
vested.
|
(7)
|
Perquisites
and personal benefits, if any, totaled less than $10,000 per
director.
|
Narrative
to Fiscal 2007 Director Compensation Table
The
following discussion of fiscal 2007 director compensation encompasses
compensation of the director group who served before the Merger, as well as the
director group who served after the Merger. Each group can be
identified by reference to the 1st
footnote to the Director Compensation Table above.
Prior to
the Merger, we used a combination of cash and stock-based incentive compensation
to attract and retain qualified Board candidates. Subsequent to the Merger, our
compensation structure includes only cash. For both periods, we did not
compensate for Board service any director who was also a Dollar General
employee.
Cash
Compensation. Prior to the Merger, we paid
non-employee directors two quarterly installments of the annual cash retainer
and the per meeting attendance fees set forth below. We also paid two quarterly
installments of the following additional annual retainers to each committee
chairman and to the Presiding Director.
|
|
In-Person
Meeting Attendance Fees
|
Telephonic
Meeting
Attendance
Fee
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$35,000
|
$20,000
|
$10,000
|
$15,000
|
$1,250
|
$1,500
|
$1,250
|
$625
|
To assist
in understanding the fees actually earned by each non-employee director prior to
the Merger, the following chart shows information regarding committee service
and meeting attendance of each pre-Merger director.
|
|
|
In-Person
Meetings Attended
|
Telephonic
Meetings
Attended
(Board/Committee)
|
|
|
|
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
|
We
reimbursed directors for certain fees and expenses incurred in connection with
continuing education seminars and travel expenses related to Dollar General
meeting attendance or requested appearances. We allowed directors (and spouses
for no additional incremental cost) to travel on the Dollar General airplane for
those purposes.
Subsequent to the Merger,
cash fees payable to our non-employee directors consist solely of a $40,000
annual retainer fee, payable in quarterly installments. Directors
also are entitled to receive the expense reimbursements discussed above. Because
the post-Merger directors served on our Board for only a portion of fiscal 2007,
those directors received one-third of the second quarter retainer fee along with
two full quarterly installments of the retainer fee.
Equity
Compensation. Each non-employee director who
served on our Board prior to the Merger received 4,600 RSUs in fiscal 2007
pursuant to the automatic grant provisions of our 1998 Stock Incentive Plan.
Each RSU represented the right to receive one share of Dollar General common
stock.
In
accordance with the terms of our 1998 Stock Incentive Plan, we credited dividend
equivalents to the director’s RSU account as additional RSUs whenever we
declared a cash dividend on our common stock. Directors did not have voting
rights with respect to RSUs until the underlying shares of common stock were
issued. RSUs generally vested one year after the grant date if the director was
still serving on our Board. We did not, however, make payment on vested RSUs
until the director ceased to be a member of our Board. Under the terms of the
1998 Stock Incentive Plan, vesting of the RSUs accelerated upon termination of a
director’s Board service due to a variety of reasons, including upon a
change-in-control of Dollar General. Because the Merger constituted a
change-in-control under our 1998 Stock Incentive Plan, all outstanding RSUs
vested and were settled in cash in the Merger.
Prior to
June 2, 2003, we also annually granted non-qualified stock options to our
non-employee directors under certain stock incentive plans. All of those options
have since fully vested and, pursuant to the Merger, were settled in cash (if
in-the-money) or cancelled.
Immediately following the
Merger, we ceased making equity grants to our non-employee directors as part of
director compensation.
Stock
Ownership Guidelines. In fiscal 2007, as a
publicly held company, we required each non-employee director to own at least
13,000 shares of our common stock within three years of joining our Board. RSUs
and stock options counted towards that requirement. Because we are now a
privately held company, we no longer maintain those stock ownership
guidelines.
All
deferred compensation pursuant to the Deferred Compensation Plan for
Non-Employee Directors was immediately due and payable as a result of the
Merger, which constituted a change-in-control of Dollar General under the terms
of that Plan.
Our Board
elected to terminate the Deferred Compensation Plan for Non-Employee Directors
effective as of December 31, 2007.
ITEM
12.
|
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS
|
(a) Equity
Compensation Plan Information. The following table sets forth
information about securities authorized for issuance under our equity
compensation plans (including individual compensation arrangements) as of
February 1, 2008:
|
|
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 |
|
(1) |
Column
(a) consists of shares issuable upon exercise of outstanding options under
the 2007 Stock Incentive Plan and the 1998 Stock Incentive Plan. Column
(c) consists of shares reserved for issuance pursuant to the 2007 Stock
Incentive Plan, whether in the form of stock or restricted stock or upon
the exercise of an option or
right. |
(b)
Security Ownership of Certain Beneficial Owners and
Management. The following table shows the amount of our common
stock beneficially owned, as of March 17, 2008, by those who were known by us to
beneficially own more than 5% of our common stock, by our directors and named
executive officers individually and 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, to
our knowledge, have sole voting 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 |
% |
*
|
Denotes
less than 1% of class.
|
(1)
|
Includes
the following number of shares held by the following entities: KKR 2006
Fund L.P. (203,464,902.69); KKR PEI Investments, L.P. (49,999,976.09); KKR
Partners III, L.P. (4,724,997.74) and Buck Holdings Co-Invest, LP
(30,210,020). Buck Holdings Co-Invest GP, LLC, which is controlled by KKR
2006 GP LLC, is the general partner of Buck Holdings Co-Invest, LP, and
has the right to manage the affairs of such entity, and thus is deemed to
be the beneficial owner of the securities owned by such entity. However,
it does not have any economic or other dispositive rights with respect to
such securities and thus disclaims beneficial ownership with respect
thereto. The address of KKR is c/o Kohlberg Kravis Roberts &
Co. L.P., 2800 Sand Hill Road, Suite 200, Menlo Park,
CA 94025.
|
(2)
|
Indirectly
held through Buck Holdings, L.P.
|
(3)
|
Includes
the following number of shares held by the following entities: GS Capital
Partners VI Parallel, L.P. (12,194,145.412); GS Capital Partners VI
GmbH & Co. KG (1,576,025.208); GS Capital Partners VI
Fund, L.P. (44,345,094.704); GS Capital Partners VI Offshore
Fund, L.P. (36,884,689.242); Goldman Sachs DGC Investors, L.P.
(6,692,778.104) and Goldman Sachs DGC Investors Offshore Holdings, L.P.
(13,307,212.332) (collectively, the "GS Funds"); and GSUIG, L.L.C.
(4,999,997.608). Affiliates of The Goldman Sachs Group, Inc.
are the general partner, managing general partner or
|
|
investment
manager of each of the GS Funds, and each of the GS Funds shares voting
and investment power with certain of its respective affiliates. Each of
the GS Funds is affiliated with or managed by Goldman, Sachs &
Co., a wholly owned subsidiary of The Goldman Sachs Group, Inc. Each
of The Goldman Sachs Group, Inc. and Goldman, Sachs & Co.
disclaims beneficial ownership of the shares owned by each of the GS
Funds, except to the extent of their pecuniary interest therein, if any.
The address of each of the GS Funds and GSUIG, L.L.C. is c/o Goldman,
Sachs & Co., 85 Broad Street 10th floor, New York, New York
10004. |
(4)
|
Includes
the following number of shares held by the following entities: Citigroup
Capital Partners II Employee Master Fund, L.P. (8,598,705.956); Citigroup
Capital Partners II 2007 Citigroup Investment, L.P. (7,655,121.066);
Citigroup Capital Partners II Onshore, L.P. (3,881,957.266); Citigroup
Capital Partners II Cayman Holdings, L.P. (4,864,203.756) and CPE
Co-Investment (Dollar General) LLC (14,999,992.826). The address of
Citigroup Capital Partners is c/o Citigroup Inc., 388 Greenwich
Street, 32nd Floor, New York, New York
10013.
|
(5)
|
The
Address of CPP Investment Board (USRE II) Inc. is c/o Canada Pension Plan
Investment Board, One Queen Street East, Suite 2600, Toronto, ON M5C 2W5,
Canada.
|
(6)
|
Includes
the following number of shares held by the following entities: Buck
Co-Investor I, LLC (17,933,540); Buck Co-Investor II, LLC (827,780); Buck
Co-Investor III, LLC (7,365,100); Buck Co-Investor IV, LLC (5,822,740);
Buck Co-Investor V, LLC (2,201,580); Buck Co-Investor VI, LLC (499,900),
Buck Co-Investor VII, LLC (2,252,700), Buck Co-Investor VIII, LLC
(445,820), Buck Co-Investor IX, LLC (281,560), Buck Co-Investor X, LLC
(609,280), Buck Co-Investor XI, LLC (1,160,000), Buck Co-Investor
XII, LLC (476,000), and Buck Co-Investor XIII, LLC (124,000). The
address of Wellington Management Company, LLP is 75 State Street, Boston,
Massachusetts 02109.
|
(7)
|
Messrs.
Calbert and Agrawal are our directors and are executives of KKR, and as
such may be deemed to share beneficial ownership of any shares
beneficially owned by KKR, but disclaim such beneficial ownership except
to the extent of their pecuniary interest in those
shares.
|
(8)
|
Mr.
Jones is our director and an executive of GS Capital Partners, but
disclaims any beneficial ownership except to the extent of his pecuniary
interest in those shares.
|
(9)
|
Represents
shares of restricted common stock that were unvested as of March 17, 2008
over which the named holder does not have investment power until the
vesting of those shares.
|
(10)
|
Includes
the following number of shares subject to options either currently
exercisable or exercisable within 60 days of March 17, 2008 over which the
person will not have voting or investment power until the options are
exercised: Mr. Dreiling (250,000); Mr. Beré (273,712); Mr. Tehle
(302,007); Mr. Buley (288,797); Ms. Guion (220,286); Ms. Lowe
(173,200); and all current directors and executive officers as a group
(1,930,628). The shares described in this note are considered outstanding
for the purpose of computing the percentage of outstanding stock owned by
each named person and by the group, but not for the purpose of computing
the percentage ownership of any other
person.
|
ITEM
13.
|
CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
|
(a) Director
Independence (post-Merger). The members of our Board of
Directors are Michael M. Calbert, Raj Agrawal, Adrian Jones, Dean B. Nelson and
Richard W. Dreiling. Messrs. Calbert and Agrawal serve on our Audit Committee
and Messrs. Calbert, Agrawal and Jones serve on our Compensation
Committee. Sumit Rajpal served as a member of our Board for a brief
period following the Merger and David Beré served on our Board until March 2008.
Though not formally considered by our Board given that our securities are not
registered or traded on any national securities exchange, based upon the listing
standards of the NYSE on which our common stock was listed prior to the Merger,
we do not believe that any of our current Board members or Messrs. Rajpal or
Beré would be considered independent either because they serve as members of our
management team or because of their relationships with certain affiliates of the
funds and other entities that hold significant interests in Parent, and other
relationships with us as more fully described under “Related Party Transactions”
below.
Accordingly, we do not
believe that any of our Audit Committee members would meet the independence
requirements of Rule 10A-1 of the Exchange Act or the NYSE’s audit
committee independence requirements, or that any of our Compensation Committee
members would meet the NYSE’s independence requirements. We do not have a
nominating/corporate governance committee, or a committee that serves a similar
purpose.
(b) Director
Independence (pre-Merger). Until the Merger on July 6, 2007, our Board of
Directors at least annually considered each director’s independence in
accordance with guidelines it had adopted, which included all elements of
independence set forth in the NYSE listing standards as well as certain
Board-adopted categorical independence standards. These guidelines were
contained in our Corporate Governance Principles or, with respect to interests
of less than 1% of a publicly held vendor, in our Code of Business Conduct and
Ethics, and were last described in our Form 10-K for the fiscal year ended
February 2, 2007.
During
fiscal 2007 but prior to the Merger, our Board of Directors consisted of David
Perdue, David Beré, Dennis Bottorff, Barbara Bowles, Reginald Dickson, Gordon
Gee, Barbara Knuckles, Neal Purcell, James Robbins, Richard Thornburgh and David
Wilds. Also during that time period, our Audit Committee consisted of
Mr. Robbins, Mr. Bottorff, Ms. Bowles and Mr. Purcell; our Compensation
Committee consisted of Mr. Bottorff, Mr. Dickson and Mr. Gee; and our Nominating
and Corporate Governance Committee consisted of Mr. Wilds, Mr. Gee and Ms.
Knuckles. Our Board of Directors had affirmatively determined on March 20, 2007
that Directors Bottorff, Bowles, Dickson, Gee, Knuckles, Purcell, Robbins,
Thornburgh and Wilds, but not Directors Perdue or Beré (each of whom was a
member of management), were independent from our management under both the
NYSE’s listing standards and our additional categorical independence standards
based on information known at that time. Any relationship between an independent
director and Dollar General or our management were either encompassed by the
Board-adopted categorical standards mentioned above or, in the case of Mr.
Wilds’ relationship with a vendor, deemed to be immaterial. A table setting
forth the transactions or relationships with our former directors that fell
within a Board-adopted categorical standard, as well as a description of
Mr. Wilds’ relationships with a vendor, was set forth in our Form 10-K for the
fiscal year ended February 2, 2007. Because of the Merger, our Board has not
made any additional independence determinations with respect to those former
Board members.
(c) Related
Party Transactions. We describe below the transactions that
have occurred since the beginning of fiscal 2007, and any currently proposed
transactions, that involve Dollar General and exceed $120,000, and in which a
related party had or has a direct or indirect material interest.
(1) Relationships
with Management:
Management
Stockholder’s Agreement. Simultaneously with the closing of the Merger
and, thereafter, in connection with our offering equity awards to certain
members of our management and other employees (the “Management Participants”)
under our stock incentive plan (including the equity grants to Mr. Dreiling
in connection with his offer of employment), we, Parent and each of the
Management Participants who held shares of our capital stock (including through
option exercises), or who were granted new options to acquire our stock (or,
in the case of
Mr. Dreiling, who was granted shares of restricted common stock), entered
into a stockholder’s agreement. The Management Stockholder’s Agreement imposes
significant transfer restrictions on shares of our common stock. Generally,
shares will be nontransferable by any means at any time prior to July 6, 2012,
except (i) sales pursuant to an effective registration statement filed by
us under the Securities Act in accordance with the Management Stockholder’s
Agreement, (ii) a sale pursuant to the Sale Participation Agreement
(described below), (iii) a sale to certain permitted transferees, or
(iv) as otherwise permitted by our Board of Directors or pursuant to a
waiver given by the Sponsor; provided, that, in the event the Sponsor or its
affiliates transfer limited partnership units owned by them to a third party,
such transfer restrictions shall lapse with respect to the same proportion of
shares of common stock owned by a management stockholder as the proportion of
limited partnership units transferred by the Sponsor and such affiliates
relative to the aggregate number of limited partnership units owned by them
prior to that transfer.
In the
event that a management stockholder wishes to sell his or her stock at any time
after July 6, 2012 but before the earlier of a “Change in Control” (as defined
in the Management Stockholder’s Agreement) or the consummation of a “Qualified
Public Offering” (as defined in the Management Stockholder’s Agreement), the
Management Stockholder’s Agreement provides us with a right of first refusal on
those shares on the same terms and conditions that the management stockholder
proposes to sell them to a third party. In the event that a registration
statement is filed with respect to our common stock in the future, the
Management Stockholder’s Agreement prohibits management stockholders from
selling shares not included in the registration statement from the time of
receipt of notice that we have filed or intend to file such registration
statement until 180 days (in the case of an initial public offering) or
90 days (in the case of any other public offering) of the effective date of
the registration statement. The Management Stockholder’s Agreement also provides
for the management stockholder’s ability to cause us to repurchase his
outstanding stock and vested options (and vested restricted stock, with respect
to Mr. Dreiling) in the event of the management stockholder’s death or
disability, and for our ability to cause the management stockholder to sell his
stock or options back to us upon certain termination events. Mr. Dreiling
also has the ability to cause us to repurchase his vested restricted stock, if
any, if he resigns for any reason within six months after January 21, 2008.
In addition, under the terms of the Management Stockholder’s Agreement, each
Senior Management Stockholder (as defined below) has the ability to cause us to
repurchase, prior to the later of (x) July 6, 2008 and (y) the last
day of the six-month period after Mr. Dreiling was hired, all of the shares of
common stock and all of the options they rolled over in connection with the
Merger that such Management Stockholder then holds if such Management
Stockholder resigns or is terminated within such time frame.
Following
the initial public offering of our common stock, certain members of senior
management, including the executive officers (the “Senior Management
Stockholders”), will have limited “piggyback” registration rights with respect
to their shares in the event that certain of the Investors are selling, or
causing to be sold, shares of common stock in such offering.
sale, if Parent elects, in
the event that Parent or its affiliates are proposing to sell at least 50% of
the outstanding shares of common stock held by it (the “Drag-Along Right”). The
number of shares a management stockholder would be permitted or required, as
applicable, to sell pursuant to the exercise of the Tag-Along Right or the
Drag-Along Right is equal to the number of shares then owned by the management
stockholder and his or her affiliates plus all shares that person is entitled to
acquire under unexercised options (to the extent exercisable at that time or as
a result of the consummation of the proposed sale and also, with respect to
Drag-Along Rights pertaining to Mr. Dreiling, unvested shares of restricted
stock that would vest upon consummation of the transaction), multiplied by a
fraction (x) the numerator of which is the aggregate number of shares
Parent proposes to transfer in the proposed sale and (y) the denominator of
which is the total number of shares Parent directly or indirectly owns.
Management stockholders will bear the pro rata share of any fees, commissions,
adjustments to purchase price, expenses or indemnities in connection with any
sale under the Sale Participation Agreement.
Equity
Investment by Senior Management Participants. In connection
with the Merger, certain members of our management (the “Senior Management
Participants”) were offered the opportunity to roll over portions of their
equity and/or options and to purchase additional equity of Dollar General. In
connection with such investment and the Merger, we adopted a new stock incentive
plan pursuant to which these individuals were granted new options with respect
to additional shares of our common stock. Messrs. Beré, Tehle, Buley and
Gibson and Mss. Guion, Lanigan, Lowe and Elliott each invested a total of
$2,249,995.00, $799,996.25, $754,863.75, $348,703.75, $650,007.50, $516,026.25,
$526,650.00 and $249,997.50, respectively. Any shares purchased or otherwise
acquired by these Senior Management Participants as described above (including
any shares subject to roll over options or acquired upon exercise thereof) are
subject to certain transfer limitations and repurchase rights by Dollar General.
We also offered other employees a similar investment opportunity to participate
in our common equity.
Pre-Merger
Equity. Prior to the Merger, we maintained various
share-based compensation programs which included options, restricted stock and
restricted stock units (“RSUs”). In connection with the Merger, the outstanding
stock options, restricted stock and RSUs became fully vested and were settled in
cash, canceled or, in limited circumstances, exchanged for new options to
purchase our common stock, 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 per share (the “Merger
Consideration”), less the exercise price of each option. Additionally, each
restricted stock and RSU holder received the Merger Consideration in cash,
without interest and less applicable withholding taxes. Certain members of our
management exchanged existing stock options for new options to purchase our
common stock. The exercise price of, and the number of shares underlying, the
roll over options were adjusted as a result of the Merger. The roll over options
otherwise continue under the terms of the equity plans under which they were
issued.
be funded in the grantor
trust within 30 days of a change in control of Dollar General, payable in
accordance with the terms of the CDP and trust. The Merger was a change in
control for this purpose. Messrs. Beré, Tehle, Buley and Gibson and Mss.
Guion, Lanigan, Lowe and Elliott had benefits under the CDP having approximate
values as of July 6, 2007 of $37,297.42, $143,419.06, $100,425.31,
$58,071.55, $140,542.64, $45,312.57, $73,370.05 and $173,186.85,
respectively.
The SERP,
in which the executive officers participate, provides that benefits will become
immediately vested upon a change in control of Dollar General. The associated
grantor trust agreement requires the full amount of the benefits due under the
SERP to be funded in the grantor trust within 30 days of a change in
control, payable in accordance with the terms of the SERP and the trust. The
Merger was a change in control for this purpose. Mr. Tehle and
Mss. Guion and Lowe were already vested in benefits under the SERP having
approximate values as determined on July 6, 2007 of $105,332.01, $83,706.80
and $41,776.60, respectively. As of the Merger, Messrs. Buley and Gibson
and Mss. Lanigan and Elliott became vested in benefits under the SERP having an
approximate value of $39,125.13, $20,035.14, $109,199.14 and $17,471.36,
respectively, as determined on July 6, 2007. Messrs. Dreiling and Beré
had no balances in the SERP as of that time.
New
Stock Incentive Plan. On July 6, 2007, our Board of
Directors adopted the 2007 Stock Incentive Plan for Key Employees (the “Plan”).
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 us,
our subsidiaries and certain of our affiliates. The number of shares of our
common stock authorized for grant under the Plan is 24,000,000.
On
July 6, 2007, we granted to the Senior Management Participants
non-qualified stock options to purchase 13,110,000 shares of our common stock
pursuant to the terms of the Plan. We later granted non-qualified stock options
to certain other employees pursuant to the terms of the Plan. Effective
January 21, 2008, our Board also granted to Mr. Dreiling non-qualified
stock options to purchase 2.5 million shares of our common stock and
890,000 shares of restricted common stock pursuant to the terms of the Plan.
SFAS 123R grant date fair values of the post-merger option grants to
Messrs. Dreiling, Beré, Tehle, Buley and Gibson and Mss. Guion, Lanigan,
Lowe and Elliott are $6,241,750, $6,084,450, $2,974,620, $2,366,175, $1,081,680,
$2,366,175, $1,825,335, $1,825,335 and $1,081,680, respectively. Half of these
options will vest ratably on each of the five anniversary dates of July 6, 2007
solely based upon continued employment over that time period, while the other
half of these options will vest based both upon continued employment and upon
the achievement of predetermined annual or cumulative financial-based targets
over time which coincide with our fiscal year. The options also have certain
accelerated vesting provisions upon a change in control or initial public
offering, as defined in the Plan. The options have a 10-year maximum expiration
date and an exercise price of $5.00 per share, which represented the fair market
value on the grant date. The SFAS 123R grant date fair value of the
post-merger restricted stock grant to Mr. Dreiling is $4,450,000. The
restricted stock will vest on the last day of our 2011 fiscal year if
Mr. Dreiling remains employed by us through that date. The restricted stock
also has certain accelerated vesting provisions upon a change in control,
initial public offering, termination without cause or due to death
or
disability, or resignation
for good reason, all as defined in Mr. Dreiling’s employment agreement. We
believe that the Plan has been designed to effectively align the interests of
our employees and shareholders.
Operating
Agreements. In connection with the Merger, the Investors (or
funds affiliated with the Investors) directly or indirectly acquired limited
partnership interests in Parent and certain of such Investors also acquired
membership interests in Parent’s general partner, Buck Holdings, LLC. These
entities entered into a limited partnership agreement with respect to their
investment in Parent and an operating agreement with respect to their investment
in Parent’s general partner and a registration rights agreement relating to such
investment. These agreements contain agreements among the parties with respect
to, among other things, restrictions on the issuance or transfer of interests,
other special corporate governance provisions (including the right to approve
various corporate actions), the election of managers of Parent’s general
partner, the election of our Board members, and registration rights (including
customary indemnification provisions).
Monitoring
Agreement and Indemnity Agreement. In
connection with the Merger, we and Parent entered into a monitoring agreement,
dated July 6, 2007, with an affiliate of KKR and Goldman, Sachs &
Co. pursuant to which such parties have provided and will continue to provide
management and advisory services to us and our affiliates. Under the terms of
the monitoring agreement, among other things, we are obligated to pay an
aggregate annual management fee of $5.0 million, which amount will increase
by 5.0% annually, payable quarterly in arrears at the end of each calendar
quarter. The initial annual fee was prorated for our fiscal 2007. Those entities
also are entitled to receive a fee equal to 1% of the gross transaction value in
connection with certain subsequent financing, acquisition or disposition of
assets or equity interests, recapitalization and other similar transactions, as
well as a termination fee in the event of an initial public offering or under
certain other circumstances. All such fees are to be split based upon an agreed
upon formula, which results in an initial split of
78.38% of this fee payable to the KKR affiliate and 21.62% payable to Goldman,
Sachs & Co. Under this agreement, we also are obligated to reimburse
all reasonable out-of-pocket expenses incurred by such entities and their
respective affiliates in connection with rendering covered services. Pursuant to
this agreement, we also paid aggregate fees of approximately $75 million in
connection with services provided in connection with the Merger and related
transactions, $58.8 million of which was paid to the KKR affiliate and
$16.2 million of which was paid to Goldman, Sachs &
Co.
In
connection with entering into the monitoring agreement, on July 6, 2007 we
and Parent also entered into a separate indemnification agreement with the
parties to the monitoring agreement, pursuant to which we agreed to provide
customary indemnification to such parties and their affiliates.
Messrs.
Calbert and Agrawal, two of our Board members, serve as a Member and a Director
of KKR, respectively. Mr. Jones, one of our Board members, serves as a Managing
Director of Goldman, Sachs & Co.
Other
Relationships. In connection with the Merger,
Goldman, Sachs & Co. and Citigroup Global Markets Inc. and their affiliates
participated in several related transactions with us. Specifically, Goldman
Sachs Credit Partners L.P. and Citigroup Global Markets Inc., along with other
institutions, served as joint lead arranger and joint bookrunner with respect to
the credit agreements and related security and other agreements consisting of
(i) a $2.3 billion senior secured term loan facility (affiliates of
KKR and Wellington Management Company, LLP are also lenders under this facility)
and (ii) a senior secured asset-based revolving credit facility of up to
$1.125 billion. Goldman Sachs Credit Partners L.P. also served as
syndication agent for each of the new facilities. Citicorp North America, Inc.
served as administrative agent, collateral agent for the senior secured term
loan facility. Goldman, Sachs & Co. also is a counterparty to certain
interest rate swaps entered into in connection with these facilities. Pursuant
to the swaps, which became effective on July 31, 2007, we swapped three
month LIBOR rates for fixed interest rates receiving an all-in fixed rate of
7.683% which includes a 2.75% spread on a notional amount of
$2,000.0 million which will amortize on a quarterly basis until maturity at
July 31, 2012. Also in connection with the Merger, Goldman, Sachs & Co.
and Citigroup Global Markets Inc., along with other institutions, (i) acted
as initial purchasers for our issuance of $1,175.0 million aggregate
principal amount of 10.625% senior notes due 2015 and $725 million
aggregate principal amount of 11.875%/12.625% senior subordinated notes due 2017
and (ii) provided financial advisory services to, and received financial
advisory fees from us, the Investors and their affiliates. Finally, in
connection with the Merger, we completed a cash tender offer to purchase any and
all of our $200 million principal amount of 8-5/8%
Notes due June 2010. Goldman, Sachs & Co. acted as dealer manager and
consent solicitation agent for that tender offer. In the aggregate,
approximately $32.0 million in fees were paid to Goldman, Sachs &
Co. and its affiliates and approximately $26.2 million in fees were paid to
Citigroup Global Markets Inc. and its affiliates in connection with the
foregoing transactions relating to the Merger, portions of which have been
capitalized as debt financing costs or as direct acquisition costs. In addition,
under the registration rights agreement, we agreed to file a “market-making”
prospectus in order to enable Goldman, Sachs & Co. to engage in
market-making activities for the notes.
In
addition, in the fourth quarter of fiscal 2007, we purchased a total of $25
million of the 11.857%/12.625% senior subordinated notes held by Goldman Sachs
& Co. or its affiliates for a purchase price of $20 million, and paid a
commission of $62,500 in connection therewith.
Goldman
Sachs Credit Partners L.P. and Goldman, Sachs & Co. are affiliates of
GS Capital Partners VI Fund, L.P. and affiliated funds. In addition, Mr. Jones,
who serves on our Board, and Sumit Rajpal, who served on our Board for a brief
period following the Merger, each serve as Managing Directors of Goldman,
Sachs & Co. GS Capital Partners VI Fund, L.P. and affiliated
funds indirectly own approximately 22% of our common stock on a fully diluted
basis. Citigroup Global Markets Inc. and Citicorp North America Inc.
are affiliates of Citigroup Private Equity LP. Funds managed by
Citigroup Private Equity LP indirectly own approximately 7.2% of our common
stock on a fully diluted basis.
We use
Capstone Consulting, LLC, a team of executives who work exclusively with KKR
portfolio companies as an integral part of the value-creation process, for
certain consulting
services. We pay Capstone
a monthly fee, currently $210,000, plus expense reimbursements. During
fiscal 2007, we incurred aggregate fees and expense reimbursements paid or owing
to Capstone for such services of approximately $1.9 million. We also paid
approximately $78,750 of fees to Capstone for services provided in connection
with the Merger and related transactions. Dean Nelson, who serves on our Board,
is the Chief Executive Officer of Capstone. 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.
(d) Related
Party Transaction Approval Policy. Prior to the Merger, as a
public company, we had policies and procedures in place regarding the review,
approval and ratification of “related party” transactions. Those policies and
procedures are described below. None of the Merger-related transactions or the
transactions with the Investors discussed above were considered under the
pre-existing policies and procedures.
On an
annual basis, both before and after the Merger, each director and executive
officer is asked to disclose, among other things, any relationship or
transaction with us in which the director or executive officer, or any member of
his or her immediate family (“related parties”), have a direct or indirect
material interest. Our Legal Department determines which of those disclosed
transactions or relationships fall below the related-party transaction
disclosure threshold in, or are otherwise exempt from disclosure under,
Item 404 of Regulation S-K of the Exchange Act or, prior to the
Merger, which fell within a Board-adopted categorical director independence
standard. Prior to the Merger, our Legal Department ensured that any identified
relationship or transaction that was not exempt from disclosure under
Item 404 or that did not fall within a categorical director independence
standard was submitted to the Board of Directors or an appropriate Board
committee for consideration under our conflict of interest or other policy as
further described below.
Pursuant
to our Code of Business Conduct and Ethics and prior to the Merger, the
Nominating and Corporate Governance Committee of our Board reviewed and resolved
any conflict of interest involving directors or executive officers. In addition,
if a director’s relationship or transaction fell within any of the Board-adopted
categorical standards for director independence, then the director’s interest in
the relationship or transaction was deemed immaterial in the absence of other
factors for purposes of both independence and related-party transaction
disclosure. Finally, prior to the Merger our Compensation Committee reviewed and
approved and/or ratified all material components of executive officer
compensation as further discussed in “Compensation Discussion and Analysis”
above.
ITEM 14. |
PRINCIPAL ACCOUNTING FEES AND
SERVICES |
The table
below shows the aggregate fees Ernst & Young LLP billed to us in connection
with various audit and other services provided throughout fiscal 2007 and fiscal
2006:
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
|
|
6,000
|
6,000
|
|
|
|
(1)
|
2007
fees include audit services, as well as services relating to the debt
offering memorandum associated with the Merger and the subsequent exchange
offer Registration Statement on Form S-4 filed with the SEC. 2006 fees
include audit services. Such amounts include fees and expenses
related to the fiscal year and interim reviews, notwithstanding when the
fees and expenses were billed or when the services were
rendered. |
(2)
|
2007 fees include
services relating to the employee benefit plan audit, as well as
accounting consultation services relating to the Merger. 2006
fees include services relating to accounting consultations regarding
Financial Accounting Standards Board Interpretation 48, “Accounting for
Uncertainty in Income Taxes,” and a sale-leaseback transaction for one of
our distribution centers. Such amounts include fees and services
rendered during the respective fiscal year, notwithstanding when the fees
and expenses were billed. |
(3)
|
Both 2007 and 2006
fees include services relating to a LIFO tax calculation and tax advisory
services related to inventory, as well as international, federal, state
and local tax advice. Such amounts include fees and services
rendered during the respective fiscal year, notwithstanding when the fees
and expenses were billed. |
(4)
|
Both
2007 and 2006 fees include a subscription fee to an on-line accounting
research tool. Such amounts include fees and services rendered
during the respective fiscal year, notwithstanding when the fees and
expenses were billed. |
The Audit
Committee Charter requires committee pre-approval for all audit and permissible
non-audit services provided by our independent auditors. Where feasible, the
committee considers and, when appropriate, pre-approves services at regularly
scheduled meetings after disclosure by management and the auditors of the nature
of the proposed services, the estimated fees (when available), and their
opinions that the services will not impair the auditors’ independence. The
committee also may consider and pre-approve any such services in between
meetings.
PART
IV
ITEM 15. |
EXHIBITS AND FINANCIAL STATEMENT
SCHEDULES |
(a)
|
Report
of Independent Registered Public Accounting Firm
Consolidated
Balance Sheets
Consolidated
Statements of Operations
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.
|
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
28, 2008 |
|
By:
|
|
|
|
Richard
W. Dreiling, Chief Executive
Officer
|
We, the
undersigned directors and officers of the 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
|
|
Chief
Executive Officer
(Principal
Executive Officer)
|
|
March
27, 2008 |
|
RICHARD
W. DREILING
|
|
|
|
|
|
|
|
|
/s/
David M. Tehle
|
|
Executive
Vice President and Chief Financial Officer (Principal Financial and
Accounting Officer)
|
|
March
27, 2008 |
|
DAVID
M. TEHLE
|
|
|
|
|
|
|
|
|
/s/
Michael M. Calbert
|
|
Director
(Chairman of the Board)
|
|
March
25, 2008 |
|
MICHAEL
M . CALBERT
|
|
|
|
|
|
|
|
|
/s/
Raj Agrawal
|
|
Director
|
|
March
26, 2008 |
|
RAJ
AGRAWAL
|
|
|
|
|
|
|
|
|
/s/
Adrian Jones
|
|
Director
|
|
March
25, 2008 |
|
ADRIAN
JONES
|
|
|
|
|
|
|
|
|
/s/
Dean B. Nelson
|
|
Director
|
|
March
26, 2008 |
|
DEAN
B. NELSON
|
|
|
|
Supplemental
Information to be Furnished With Reports Filed Pursuant to Section
15(d)
of the
Act by Registrants Which Have Not Registered Securities Pursuant to Section 12
of the Act
The
Registrant has not sent to its security holders an annual report covering its
last fiscal year. In addition, the Registrant has not sent to security holders
any proxy statement, form of proxy or other proxy soliciting material since such
time as the registration of Registrant’s securities under Section 12 of the Act
was terminated.
EXHIBIT
INDEX
2.1
|
Agreement
and Plan of Merger, dated as of March 11, 2007, by and among Buck
Holdings, L.P., Buck Acquisition Corp., and Dollar General
Corporation (incorporated by reference to Exhibit 2.1 to Dollar
General Corporation’s Current Report on Form 8-K dated March 11,
2007, filed with the SEC on March 12, 2007 (file number
001-11421))
|
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 July 6, 2007, filed with the SEC on
July 12, 2007 (file number
001-11421))
|
3.2
|
Amended
and Restated Bylaws of Dollar General Corporation (adopted on
September 20, 2007) (incorporated by reference to Exhibit 3.2 to
Dollar General Corporation’s Registration Statement on Form S-4, filed
with the SEC on December 21, 2007 (file number
333-148320))
|
4.1
|
Sections
7 and 8 of Dollar General Corporation’s Amended and Restated Charter
(included in Exhibit 3.1)
|
4.2
|
Indenture,
dated as of June 21, 2000, by and among Dollar General Corporation, the
guarantors named therein, as guarantors, and Wachovia Bank, National
Association (formerly known as First Union National Bank), as trustee
(incorporated by reference to Exhibit 4.1 to Dollar General
Corporation’s Registration Statement on Form S-4 filed with the SEC
on August 1, 2000 (file
number 333-42704))
|
4.3
|
First
Supplemental Indenture, dated as of July 28, 2000, by and among
Dollar General Corporation, the guarantors named therein, as guarantors,
and Wachovia Bank, National Association (formerly known as First Union
National Bank), as trustee (incorporated by reference to Exhibit 4.4
to Dollar General Corporation’s Annual Report on Form 10-K for the
fiscal year ended January 31, 2003, filed with the SEC on
March 19, 2003 (file
number 001-11421))
|
4.4
|
Second
Supplemental Indenture, dated as of June 18, 2001, by and among
Dollar General Corporation, the guarantors named therein, as guarantors,
and Wachovia Bank, National Association (formerly known as First Union
National Bank), as trustee (incorporated by reference to Exhibit 4.5
to Dollar General Corporation’s Annual Report on Form 10-K for the
fiscal year ended January 31, 2003, filed with the SEC on
March 19, 2003 (file
number 001-11421))
|
4.5
|
Third
Supplemental Indenture, dated as of June 20, 2002, by and among
Dollar General Corporation, the guarantors named therein, as guarantors,
and Wachovia Bank,
National
Association (formerly known as First Union National Bank), as trustee
(incorporated by reference to Exhibit 4.6 to Dollar General
Corporation’s Annual Report on Form 10-K for the fiscal year ended
January 31, 2003, filed with the SEC on March 19, 2003 (file
number 001-11421))
|
4.6
|
Fourth
Supplemental Indenture, dated as of December 11, 2002, by and among
Dollar General Corporation, the guarantors named therein, as guarantors,
and Wachovia Bank, National Association (formerly known as First Union
National Bank), as trustee (incorporated by reference to Exhibit 4.7
to Dollar General Corporation’s Annual Report on Form 10-K for the fiscal
year ended January 31, 2003, filed with the SEC on March 19,
2003 (file number 001-11421))
|
4.7
|
Fifth
Supplemental Indenture, dated as of May 23, 2003, by and among Dollar
General Corporation, the guarantors named therein, as guarantors, and
Wachovia Bank, National Association (formerly known as First Union
National Bank), as trustee (incorporated by reference to Exhibit 4.1
to Dollar General Corporation’s Quarterly Report on Form 10-Q for the
quarter ended August 1, 2003, filed with the SEC on August 29,
2003 (file number 001-11421))
|
4.8
|
Sixth
Supplemental Indenture, dated as of July 15, 2003, by and among
Dollar General Corporation, the guarantors named therein, as guarantors,
and Wachovia Bank, National Association (formerly known as First Union
National Bank), as trustee (incorporated by reference to Exhibit 4.2
to Dollar General Corporation’s Quarterly Report on Form 10-Q for the
quarter ended August 1, 2003, filed with the SEC on August 29,
2003 (file number 001-11421))
|
4.9
|
Seventh
Supplemental Indenture, dated as of May 23, 2005, by and among Dollar
General Corporation, the guarantors named therein, as guarantors, and
Wachovia Bank, National Association (formerly known as First Union
National Bank), as trustee (incorporated by reference to Exhibit 4.1
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 number 001-11421))
|
4.10
|
Eighth
Supplemental Indenture, dated as of July 27, 2005, by and among
Dollar General Corporation, the guarantors named therein, as guarantors,
and Wachovia Bank, National Association (formerly known as First Union
National Bank), as trustee (incorporated by reference to Exhibit 4.2
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 number 001-11421))
|
4.11
|
Ninth
Supplemental Indenture, dated as of August 30, 2006, by and among
Dollar General Corporation, the guarantors named therein, as guarantors,
and U.S. Bank National Association (successor to Wachovia Bank, National
Association), as trustee (incorporated by reference to Exhibit 4.2 to
Dollar General Corporation’s Quarterly Report on Form 10-Q for the
quarter ended November 3, 2006, filed with the SEC on
December 12, 2006 (file
number 001-11421))
|
4.12
|
Tenth
Supplemental Indenture, dated as of July 6, 2007, by and among Dollar
General Corporation, the guarantors named therein, as guarantors, and
U.S. Bank National Association (successor to Wachovia Bank, National
Association), as trustee (incorporated
|
|
by
reference to Exhibit 4.1 to Dollar General Corporation’s Current
Report on Form 8-K dated July 6, 2007, filed with the SEC on
July 12, 2007 (file number 001-11421)) |
|
|
4.13
|
Senior
Indenture, dated July 6, 2007, among Buck Acquisition Corp., Dollar
General Corporation, the guarantors named therein and Wells Fargo Bank,
National Association, 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 number 001-11421))
|
4.14
|
Form
of 10.625% Senior Notes due 2015 (included in
Exhibit 4.13)
|
4.15
|
First
Supplemental Indenture to the Senior Indenture, dated as of
September 25, 2007, between DC Financial, LLC, the Guaranteeing
Subsidiary, and Wells Fargo Bank,
National
Association, as trustee (incorporated by reference to Exhibit 4.14 to
Dollar General Corporation’s Registration Statement on Form S-4, filed
with the SEC on December 21, 2007 (file number
333-148320))
|
4.16
|
Second
Supplemental Indenture to the Senior Indenture, dated as of
December 31, 2007, between Retail Risk Solutions, LLC, the
Guaranteeing Subsidiary, and Wells Fargo Bank, National Association, as
trustee (incorporated by reference to Exhibit 4.32 to Dollar General
Corporation’s Amendment No. 1 to Registration Statement on Form S-4, filed
with the SEC on January 25, 2008 (file number
333-148320))
|
4.17
|
Senior
Subordinated Indenture, dated July 6, 2007, among Buck Acquisition
Corp., Dollar General Corporation, the guarantors named therein and Wells
Fargo Bank, National Association, 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 number 001-11421))
|
4.18
|
Form
of 11.875% / 12.625% Senior Subordinated Toggle Notes due 2017 (included
in Exhibit 4.17)
|
4.19
|
First
Supplemental Indenture to the Senior Subordinated Indenture, dated as of
September 25, 2007, between DC Financial, LLC, the Guaranteeing
Subsidiary, and Wells Fargo Bank, National Association, as trustee
(incorporated by reference to Exhibit 4.16 to Dollar General Corporation’s
Registration Statement on Form S-4, filed with the SEC on December 21,
2007 (file number 333-148320))
|
4.20
|
Second
Supplemental Indenture to the Senior Subordinated Indenture, dated as of
December 31, 2007, between Retail Risk Solutions, LLC, the
Guaranteeing Subsidiary, and Wells Fargo Bank, National Association, as
trustee (incorporated by reference to Exhibit 4.33 to Dollar General
Corporation’s Amendment No. 1 to Registration Statement on Form S-4, filed
with the SEC on January 25, 2008 (file number
333-148320))
|
4.21
|
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
number 001-11421))
|
4.22
|
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, filed with the SEC on December 21,
2007 (file number 333-148320))
|
4.23
|
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
number 001-11421))
|
4.24
|
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
number 001-11421))
|
4.25
|
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, filed with the
SEC on December 21, 2007 (file number
333-148320))
|
4.26
|
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 4.32 to Dollar General Corporation’s
Amendment No. 1 to Registration Statement on Form S-4, filed with the SEC
on January 25, 2008 (file number
333-148320))
|
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
number 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, filed with the SEC on December 21, 2007 (file
number 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 4.32 to Dollar General Corporation’s Amendment No. 1 to
Registration Statement on Form S-4, filed with the SEC on January 25, 2008
(file number 333-148320))
|
4.30
|
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
number 001-11421))
|
4.31
|
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,
filed with the SEC on December 21, 2007 (file number
333-148320))
|
4.32
|
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 4.32 to Dollar General Corporation’s Amendment No. 1
to Registration Statement on Form S-4, filed with the SEC on January 25,
2008 (file number 333-148320))
|
4.33
|
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 number 001-11421))
|
4.34
|
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, filed with the
SEC on December 21, 2007 (file number
333-148320))
|
4.35
|
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 Group/Business Credit Inc., as ABL Collateral
Agent (incorporated by reference to Exhibit 4.32 to Dollar General
Corporation’s Amendment No. 1 to Registration Statement on Form S-4, filed
with the SEC on January 25, 2008 (file number
333-148320))
|
4.36
|
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
number 001-11421))
|
4.37
|
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,
filed with the SEC on December 21, 2007 (file number
333-148320))
|
4.38
|
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 4.32 to Dollar General Corporation’s
Amendment No. 1 to Registration Statement on Form S-4, filed with the SEC
on January 25, 2008 (file number
333-148320))
|
10.1
|
2007
Stock Incentive Plan for Key Employees of Dollar General Corporation and
its Affiliates (incorporated by reference to Exhibit 10.1 to Dollar
General Corporation’s Registration Statement on Form S-4, filed with the
SEC on December 21, 2007 (file number
333-148320))*
|
10.2
|
Form
of Stock Option Agreement between Dollar General Corporation and 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, filed with the
SEC on December 21, 2007 (file number
333-148320))*
|
10.3
|
Form
of Option Rollover Agreement between Dollar General Corporation and
officers of Dollar General Corporation (incorporated by reference to
Exhibit 10.3 to Dollar General Corporation’s Registration Statement on
Form S-4, filed with the SEC on December 21, 2007 (file number
333-148320))*
|
10.4
|
Form
of Management Stockholder’s Agreement among Dollar General Corporation,
Buck Holdings, L.P. and officers of Dollar General Corporation
(incorporated by reference to Exhibit 10.4 to Dollar General Corporation’s
Registration Statement on Form S-4, filed with the SEC on December 21,
2007 (file number 333-148320))*
|
10.5
|
Form
of Sale Participation Agreement between Buck Holdings, L.P. and certain
officer-level employees, dated July 6, 2007 (incorporated by
reference to Exhibit 10.5 to Dollar General Corporation’s Registration
Statement on Form S-4, filed with the SEC on December 21, 2007 (file
number 333-148320))*
|
10.6
|
Agreement
among Challis Lowe, Buck Holdings, L.P. and Dollar General Corporation,
dated July 5, 2007, regarding call right and termination without good
reason provision in Management Stockholder’s Agreement (incorporated by
reference to Exhibit 10.6 to Dollar General Corporation’s Registration
Statement on Form S-4, filed with the SEC on December 21, 2007 (file
number 333-148320))*
|
10.7
|
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
number 001-11421))*
|
10.8
|
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 number 001-11421))*
|
10.9
|
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 number 001-11421))*
|
10.10
|
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, filed
with the SEC on December 21, 2007 (file number
333-148320))*
|
10.11
|
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, filed with the SEC on December 21, 2007 (file number
333-148320))*
|
10.12
|
Dollar
General Corporation Annual Incentive Plan (effective March 16, 2005,
as approved by shareholders on May 24, 2005) (incorporated by
reference to Exhibit 10.6 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
number 001-11421))*
|
10.13
|
Dollar
General Corporation 2007 Teamshare Bonus Program for Named Executive
Officers (incorporated by reference to Exhibit 10.3 Dollar General
Corporation’s Quarterly Report on Form 10-Q for the quarter ended
May 4, 2007, filed with the SEC on June 7, 2007) (file
number 001-11421))*
|
10.14
|
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
number 001-11421))*
|
10.15
|
Dollar
General Corporation Domestic Relocation Policy for Officers (incorporated
by reference to Exhibit 10.20 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
number 001-11421))*
|
10.16
|
Summary
of Director Compensation (incorporated by reference to Exhibit 10.19 to
Dollar General Corporation’s Registration Statement on Form S-4, filed
with the SEC on December 21, 2007 (file number
333-148320))
|
10.17
|
Employment
Agreement, effective as of January 11, 2008, between Dollar General
Corporation and Richard Dreiling (incorporated by reference to Exhibit
10.28 to Dollar General Corporation’s Amendment No. 1 to Registration
Statement on Form S-4, filed with the SEC on January 25, 2008 (file number
333-148320))*
|
10.18
|
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 Amendment No. 1 to
Registration Statement on Form S-4, filed with the SEC on January 25, 2008
(file number 333-148320))*
|
10.19
|
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 Amendment No. 1 to
Registration Statement on Form S-4, filed with the SEC on January 25, 2008
(file number 333-148320))*
|
10.20
|
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 Amendment No. 1 to Registration Statement on Form S-4, filed
with the SEC on January 25, 2008 (file number
333-148320))*
|
10.21
|
Sale
Participation Agreement, dated January 21, 2008, between Buck
Holdings, L.P. and Richard Dreiling (incorporated by reference to
Exhibit 10.31 to Dollar General Corporation’s Amendment No. 1 to
Registration Statement on Form S-4, filed with the SEC on January 25, 2008
(file number 333-148320))*
|
10.22
|
Employment
Agreement, dated July 6, 2007, by and between Dollar General
Corporation and David L. Beré (incorporated by reference to
Exhibit 10.1 to Dollar General Corporation’s Current Report on
Form 8-K dated July 6, 2007, filed with the SEC on July 12,
2007 (file number 001-11421))*
|
10.23
|
Extension
of Initial Term of Employment Agreement, dated December 27, 2007,
between Dollar General Corporation and David Beré (incorporated by
reference to Exhibit 10.33 to Dollar General Corporation’s Amendment No. 1
to Registration Statement on Form S-4, filed with the SEC on January 25,
2008 (file number 333-148320))*
|
10.24
|
Notice
of Initiation of Transition Period under Employment Agreement, dated
January 8, 2008, by Dollar General Corporation to David Beré
(incorporated by reference to Exhibit 10.34 to Dollar General
Corporation’s Amendment No. 1 to Registration Statement on Form S-4, filed
with the SEC on January 25, 2008 (file number
333-148320))*
|
10.25
|
Employment
Agreement with David M. Tehle effective April 1, 2006
(incorporated by reference to Exhibit 99.1 to Dollar General
Corporation’s Current Report on Form 8-K dated March 30, 2006,
filed with the SEC on April 5, 2006) (file
number 001-11421))*
|
10.26
|
Employment
Agreement with Beryl J. Buley effective April 1, 2006
(incorporated by reference to Exhibit 99 to Dollar General
Corporation’s Current Report on Form 8-K dated April 6, 2006,
filed with the SEC on April 12, 2006) (file
number 001-11421))*
|
10.27
|
Employment
Agreement with Kathleen R. Guion effective April 1, 2006
(incorporated by reference to Exhibit 99.2 to Dollar General
Corporation’s Current Report on Form 8-K dated March 30, 2006,
filed with the SEC on April 5, 2006) (file
number 001-11421))*
|
10.28
|
Employment
Agreement with Challis M. Lowe effective April 1, 2006
(incorporated by reference to Exhibit 10.31 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
number 001-11421))*
|
10.29
|
Monitoring
Fee Letter 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 10.25 to
Dollar General Corporation’s Registration Statement on Form S-4, filed
with the SEC on December 21, 2007 (file number
333-148320))
|
10.30
|
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, filed with the
SEC on December 21, 2007 (file number
333-148320))
|
10.31
|
Purchase
Letter Agreement, dated August 15, 2007, between Principal Life
Insurance Company and DC Financial, LLC (incorporated by reference to
Exhibit 10.27 to Dollar General Corporation’s Registration Statement on
Form S-4, filed with the SEC on December 21, 2007 (file number
333-148320))
|
10.32
|
Supplemental
Release Agreement between Dollar General Corporation and David Perdue
dated December 28, 2007 (incorporated by reference to Exhibit 10.35
to Dollar General Corporation’s Amendment No. 1 to Registration Statement
on Form S-4, filed with the SEC on January 25, 2008 (file number
333-148320))*
|
21
|
List
of Subsidiaries of Dollar General
Corporation
|
24 |
Powers of
Attorney (included as part of the signature pages
hereto) |
|
|
31 |
Certifications of CEO and CFO under Exchange Act Rule
13a-14(a). |
|
|
32 |
Certifications of CEO and CFO under 18 U.S.C.
1350. |
|
|
* |
Management
Contract or Compensatory
Plan |
179