Dollar General Corporation
DOLLAR GENERAL CORP (Form: 10-Q, Received: 08/28/2014 08:40:36)

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

 

FORM 10-Q

 

QUARTERLY REPORT

PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended August 1, 2014

 

Commission File Number: 001-11421

 

DOLLAR GENERAL CORPORATION

(Exact name of Registrant as specified in its charter)

 

TENNESSEE

61-0502302

(State or other jurisdiction of
incorporation or organization)

(I.R.S. Employer
Identification No.)

 

100 MISSION RIDGE
GOODLETTSVILLE, TN  37072
(Address of principal executive offices, zip code)

 

Registrant’s telephone number, including area code:  (615) 855-4000

 

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes [X]  No [  ]

 

Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the Registrant was required to submit and post such files).   Yes [X]  No [  ]

 

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer [X]

Accelerated filer [ ]

Non-accelerated filer [  ]

Smaller reporting company [  ]

 

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes [  ]  No [X]

 

The registrant had 303,397,106 shares of common stock outstanding on August 25, 2014.

 



 

PART I—FINANCIAL INFORMATION

 

ITEM 1.         FINANCIAL STATEMENTS.

 

DOLLAR GENERAL CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands)

 

 

 

August 1,
2014

 

 

 

January 31,
2014

 

ASSETS

 

(Unaudited)

 

 

 

(see Note 1)

 

Current assets:

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

172,474

 

 

 

$

505,566

 

Merchandise inventories

 

2,788,872

 

 

 

2,552,993

 

Income taxes receivable

 

4,237

 

 

 

-

 

Prepaid expenses and other current assets

 

175,048

 

 

 

147,048

 

Total current assets

 

3,140,631

 

 

 

3,205,607

 

Net property and equipment

 

2,106,963

 

 

 

2,080,305

 

Goodwill

 

4,338,589

 

 

 

4,338,589

 

Other intangible assets, net

 

1,203,904

 

 

 

1,207,645

 

Other assets, net

 

35,707

 

 

 

35,378

 

Total assets

 

$

10,825,794

 

 

 

$

10,867,524

 

 

 

 

 

 

 

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

Current portion of long-term obligations

 

$

101,013

 

 

 

$

75,966

 

Accounts payable

 

1,395,780

 

 

 

1,286,484

 

Accrued expenses and other

 

427,269

 

 

 

368,578

 

Income taxes payable

 

23,922

 

 

 

59,148

 

Deferred income taxes

 

21,434

 

 

 

21,795

 

Total current liabilities

 

1,969,418

 

 

 

1,811,971

 

Long-term obligations

 

2,881,217

 

 

 

2,742,788

 

Deferred income taxes

 

582,883

 

 

 

614,026

 

Other liabilities

 

296,283

 

 

 

296,546

 

 

 

 

 

 

 

 

 

Commitments and contingencies

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shareholders’ equity:

 

 

 

 

 

 

 

Preferred stock

 

-

 

 

 

-

 

Common stock

 

265,458

 

 

 

277,424

 

Additional paid-in capital

 

3,027,985

 

 

 

3,009,226

 

Retained earnings

 

1,811,358

 

 

 

2,125,453

 

Accumulated other comprehensive loss

 

(8,808

)

 

 

(9,910

)

Total shareholders’ equity

 

5,095,993

 

 

 

5,402,193

 

Total liabilities and shareholders’ equity

 

$

10,825,794

 

 

 

$

10,867,524

 

 

See notes to condensed consolidated financial statements.

 

1



 

DOLLAR GENERAL CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

(In thousands, except per share amounts)

 

 

For the 13 weeks ended

 

For the 26 weeks ended

 

 

August 1,
2014

 

 

 

August 2,
2013

 

 

 

August 1,
2014

 

 

 

August 2,
2013

 

Net sales

 

$

4,724,039

 

 

 

$

4,394,651

 

 

 

$

9,246,120

 

 

 

$

8,628,384

 

Cost of goods sold

 

3,268,465

 

 

 

3,017,361

 

 

 

6,432,800

 

 

 

5,955,946

 

Gross profit

 

1,455,574

 

 

 

1,377,290

 

 

 

2,813,320

 

 

 

2,672,438

 

Selling, general and administrative expenses

 

1,027,048

 

 

 

964,468

 

 

 

2,005,086

 

 

 

1,864,616

 

Operating profit

 

428,526

 

 

 

412,822

 

 

 

808,234

 

 

 

807,822

 

Interest expense

 

22,598

 

 

 

20,631

 

 

 

44,865

 

 

 

45,147

 

Other (income) expense

 

-

 

 

 

-

 

 

 

-

 

 

 

18,871

 

Income before income taxes

 

405,928

 

 

 

392,191

 

 

 

763,369

 

 

 

743,804

 

Income tax expense

 

154,668

 

 

 

146,716

 

 

 

289,711

 

 

 

278,246

 

Net income

 

$

251,260

 

 

 

$

245,475

 

 

 

$

473,658

 

 

 

$

465,558

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.83

 

 

 

$

0.76

 

 

 

$

1.55

 

 

 

$

1.43

 

Diluted

 

$

0.83

 

 

 

$

0.75

 

 

 

$

1.54

 

 

 

$

1.42

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

303,015

 

 

 

324,770

 

 

 

306,173

 

 

 

325,872

 

Diluted

 

303,888

 

 

 

325,639

 

 

 

307,091

 

 

 

326,886

 

 

See notes to condensed consolidated financial statements.

 

2



 

DOLLAR GENERAL CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

(In thousands)

 

 

For the 13 weeks ended

 

For the 26 weeks ended

 

 

August 1,
2014

 

 

 

August 2,
2013

 

 

 

August 1,
2014

 

 

 

August 2,
2013

 

Net income

 

$

251,260

 

 

 

$

245,475

 

 

 

$

473,658

 

 

 

$

465,558

 

Unrealized net gain (loss) on hedged transactions, net of related income tax expense (benefit) of $450, $793, $718, and $(4,835), respectively

 

704

 

 

 

1,209

 

 

 

1,102

 

 

 

(7,559

)

Comprehensive income

 

$

251,964

 

 

 

$

246,684

 

 

 

$

474,760

 

 

 

$

457,999

 

 

See notes to condensed consolidated financial statements.

 

3



 

DOLLAR GENERAL CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(In thousands)

 

 

 

For the 26 weeks ended

 

 

 

August 1,
2014

 

 

 

August 2,
2013

 

 

 

 

 

 

 

 

 

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net income

 

 

$

473,658

 

 

 

$

465,558

 

Adjustments to reconcile net income to net cash from operating activities:

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

169,498

 

 

 

163,237

 

Deferred income taxes

 

 

(38,880

)

 

 

5,163

 

Tax benefit of share-based awards

 

 

(10,994

)

 

 

(23,717

)

Loss on debt retirement, net

 

 

-

 

 

 

18,871

 

Noncash share-based compensation

 

 

18,320

 

 

 

10,843

 

Other noncash gains and losses

 

 

3,539

 

 

 

(176

)

Change in operating assets and liabilities:

 

 

 

 

 

 

 

 

Merchandise inventories

 

 

(235,890

)

 

 

(133,414

)

Prepaid expenses and other current assets

 

 

(29,055

)

 

 

(14,245

)

Accounts payable

 

 

104,382

 

 

 

(10,855

)

Accrued expenses and other liabilities

 

 

61,977

 

 

 

65,737

 

Income taxes

 

 

(28,469

)

 

 

(61,584

)

Other

 

 

(1,162

)

 

 

(1,303

)

Net cash provided by (used in) operating activities

 

 

486,924

 

 

 

484,115

 

 

 

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Purchases of property and equipment

 

 

(191,414

)

 

 

(308,526

)

Proceeds from sales of property and equipment

 

 

692

 

 

 

258

 

Net cash provided by (used in) investing activities

 

 

(190,722

)

 

 

(308,268

)

 

 

 

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Issuance of long-term obligations

 

 

-

 

 

 

2,297,177

 

Repayments of long-term obligations

 

 

(26,672

)

 

 

(2,119,536

)

Borrowings under revolving credit facilities

 

 

972,000

 

 

 

823,900

 

Repayments of borrowings under revolving credit facilities

 

 

(782,000

)

 

 

(902,800

)

Debt issuance costs

 

 

-

 

 

 

(15,996

)

Payments for cash flow hedge related to debt issuance

 

 

-

 

 

 

(13,217

)

Repurchases of common stock

 

 

(800,095

)

 

 

(219,981

)

Other equity transactions, net of employee taxes paid

 

 

(3,521

)

 

 

(20,700

)

Tax benefit of share-based awards

 

 

10,994

 

 

 

23,717

 

Net cash provided by (used in) financing activities

 

 

(629,294

)

 

 

(147,436

)

 

 

 

 

 

 

 

 

 

Net increase (decrease) in cash and cash equivalents

 

 

(333,092

)

 

 

28,411

 

Cash and cash equivalents, beginning of period

 

 

505,566

 

 

 

140,809

 

Cash and cash equivalents, end of period

 

 

$

172,474

 

 

 

$

169,220

 

 

 

 

 

 

 

 

 

 

Supplemental schedule of non-cash investing and financing activities:

 

 

 

 

 

 

 

 

Purchases of property and equipment awaiting processing for payment, included in Accounts payable

 

 

$

31,996

 

 

 

$

43,251

 

 

See notes to condensed consolidated financial statements.

 

4



 

DOLLAR GENERAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

1.         Basis of presentation

 

The accompanying unaudited condensed consolidated financial statements of Dollar General Corporation and its subsidiaries (the “Company”) have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information and are presented in accordance with the requirements of Form 10-Q and Rule 10-01 of Regulation S-X. Such financial statements consequently do not include all of the disclosures normally required by U.S. GAAP or those normally made in the Company’s Annual Report on Form 10-K, including the condensed consolidated balance sheet as of January 31, 2014 which has been derived from the audited consolidated financial statements at that date. Accordingly, readers of this Quarterly Report on Form 10-Q should refer to the Company’s Annual Report on Form 10-K for the fiscal year ended January 31, 2014 for additional information.

 

The Company’s fiscal year ends on the Friday closest to January 31. Unless the context requires otherwise, references to years contained herein pertain to the Company’s fiscal year. The Company’s 2014 fiscal year will be a 52-week accounting period ending on January 30, 2015, and the 2013 fiscal year was a 52-week accounting period that ended on January 31, 2014.

 

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with the Company’s customary accounting practices. In management’s opinion, all adjustments (which are of a normal recurring nature) necessary for a fair presentation of the consolidated financial position as of August 1, 2014 and results of operations for the 13-week and 26-week accounting periods ended August 1, 2014 and August 2, 2013 have been made.

 

The preparation of financial statements and related disclosures in conformity with U.S. GAAP 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 condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates.

 

The Company uses the last-in, first-out (LIFO) method of valuing inventory. An actual valuation of inventory under the LIFO method is made at the end of each year based on the inventory levels and costs at that time. Accordingly, interim LIFO calculations are based on management’s estimates of expected year-end inventory levels, sales for the year and the expected rate of inflation or deflation for the year. The interim LIFO calculations are subject to adjustment in the final year-end LIFO inventory valuation. The Company recorded a LIFO provision (benefit) of $0.8 million and $(2.4) million in the respective 13-week periods, and $0.9 million and $(2.8) million in the respective 26-week periods, ended August 1, 2014 and August 2, 2013. In addition, ongoing estimates of inventory shrinkage and initial markups and markdowns are included in the interim cost of goods sold calculation. Because the Company’s

 

5



 

business is moderately seasonal, the results for interim periods are not necessarily indicative of the results to be expected for the entire year.

 

In July 2013, the Financial Accounting Standards Board issued an accounting standards update which relates to the presentation of an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists. The Company’s adoption of this guidance in the first quarter of 2014 did not have a material effect on the Company’s condensed consolidated financial statements.

 

In May 2014, the Financial Accounting Standards Board issued comprehensive new accounting standards related to the recognition of revenue.  This guidance is effective for annual reporting periods beginning after December 15, 2016, and early adoption is not permitted. The new guidance allows for companies to use either a full retrospective or a modified retrospective approach in the adoption of this guidance, and the Company is evaluating these transition approaches. The Company will adopt this guidance in the first quarter of 2017 and is currently in the process of evaluating the effect of adoption on its consolidated financial statements.

 

Certain financial statement amounts relating to prior periods may have been reclassified to conform to the current period presentation where applicable.

 

2.         Earnings per share

 

Earnings per share is computed as follows (in thousands, except per share data):

 

 

 

13 Weeks Ended August 1, 2014

 

13 Weeks Ended August 2, 2013

 

 

Net
Income

 

Shares

 

Per Share
Amount

 

Net
Income

 

Shares

 

Per Share
Amount

 

Basic earnings per share

 

$

251,260

 

303,015

 

$

0.83

 

$

245,475

 

324,770

 

$

0.76

 

Effect of dilutive share-based awards

 

 

 

873

 

 

 

 

 

869

 

 

 

Diluted earnings per share

 

$

251,260

 

303,888

 

$

0.83

 

$

245,475

 

325,639

 

$

0.75

 

 

 

 

26 Weeks Ended August 1, 2014

 

26 Weeks Ended August 2, 2013

 

 

Net
Income

 

Shares

 

Per Share
Amount

 

Net
Income

 

Shares

 

Per Share
Amount

 

Basic earnings per share

 

$

473,658

 

306,173

 

$

1.55

 

$

465,558

 

325,872

 

$

1.43

 

Effect of dilutive share-based awards

 

 

 

918

 

 

 

 

 

1,014

 

 

 

Diluted earnings per share

 

$

473,658

 

307,091

 

$

1.54

 

$

465,558

 

326,886

 

$

1.42

 

 

Basic earnings per share is computed by dividing net income by the weighted average number of shares of common stock outstanding during the period. Diluted earnings per share is determined based on the dilutive effect of share-based awards using the treasury stock method.

 

Share-based awards that were outstanding at the end of the respective periods, but were not included in the computation of diluted earnings per share because the effect of exercising such awards would be antidilutive, were 1.7 million and 1.5 million in the 2014 and 2013 13-week periods, respectively.

 

6



 

3.         Income taxes

 

Under the accounting standards for income taxes, 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.

 

Income tax reserves are determined using the methodology established by accounting standards for income taxes which require companies to assess each income tax position taken using the following two-step approach. 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.

 

The Internal Revenue Service (“IRS”) has previously examined the Company’s 2008 and earlier federal income tax returns. As a result, the 2008 and earlier tax years are not open for further examination by the IRS. The Company has filed an amended federal income tax return requesting a refund of approximately $5.1 million for its 2009 tax year.  This amended return is being examined by the IRS.  As the statute of limitations has otherwise closed for the 2009 tax year, the IRS’s ability to assess additional income tax for 2009 is limited to the refund requested on the amended income tax return. The IRS, at its discretion, may choose to examine the Company’s 2010 through 2013 fiscal year income tax filings. The Company has various state income tax examinations that are currently in progress. Generally, the Company’s 2010 and later tax years remain open for examination by the various state taxing authorities.

 

As of August 1, 2014, the total reserves for uncertain tax benefits, interest expense related to income taxes and potential income tax penalties were $17.2 million, $2.1 million and $0.4 million, respectively, for a total of $19.7 million. Of this amount, $0.5 million and $19.2 million are reflected in current liabilities as Accrued expenses and other and in noncurrent Other liabilities, respectively, in the condensed consolidated balance sheet.

 

The Company believes it is reasonably possible that the reserve for uncertain tax positions may be reduced by approximately $8.7 million in the coming twelve months principally as a result of the effective settlement of uncertain tax positions. As of August 1, 2014, approximately $17.2 million of the reserve for uncertain tax positions would impact the Company’s effective income tax rate if the Company were to recognize the tax benefit for these positions.

 

The effective income tax rates for the 13-week and 26-week periods ended August 1, 2014 were 38.1% and 38.0%, respectively, compared to a rate of 37.4% for both the 13-week and 26-week periods ended August 2, 2013.  Both the 13-week and 26-week effective income tax rate increased due to the expiration of various federal job credit programs (primarily the Work Opportunity Tax Credit) for eligible employees hired after December 31, 2013.  Partially offsetting this tax rate increase for the 26-week period were benefits recognized due to the favorable resolution of state tax examinations. A similar benefit was not recognized in the 13-week period.

 

7



 

4.         Current and long-term obligations

 

On April 11, 2013, the Company consummated a refinancing pursuant to which it terminated its existing senior secured credit agreements, entered into a new five-year unsecured credit agreement, and issued senior notes due in 2018 and 2023 as discussed in greater detail below. The Company’s senior unsecured credit facilities (the “Facilities”) consist of a senior unsecured term loan facility (the “Term Facility”), which had an initial balance of $1.0 billion, and an $850.0 million senior unsecured revolving credit facility (the “Revolving Facility”), which provides for the issuance of letters of credit up to $250.0 million. The Term Facility amortizes in quarterly installments of $25.0 million, and the first such payment was made on August 1, 2014. The final quarterly payment of the then-remaining balance will be due at maturity on April 11, 2018. The Company capitalized $5.9 million of debt issuance costs associated with the Facilities, the amortized balance of which is included in long-term Other assets, net in the condensed consolidated balance sheet.

 

As of August 1, 2014, the balance of the Term Facility was $975.0 million, and under the Revolving Facility, the Company had total outstanding borrowings of $190.0 million, outstanding letters of credit of $31.2 million, and borrowing availability of $628.8 million. Also as of August 1, 2014, the Company had letters of credit totaling $19.7 million which were not issued under the Revolving Facility.

 

The Company incurred a pretax loss of $18.9 million for the write off of debt issuance costs associated with the termination of its previous credit facilities, which is reflected in Other (income) expense in the condensed consolidated statement of income for the 26-week period ended August 2, 2013.

 

On April 11, 2013, the Company issued $400.0 million aggregate principal amount of 1.875% senior notes due 2018, net of discount of $0.5 million, which mature on April 15, 2018, and issued $900.0 million aggregate principal amount of 3.25% senior notes due 2023, net of discount of $2.4 million, which mature on April 15, 2023. The Company capitalized $10.1 million of debt issuance costs associated with these issuances of senior notes, the amortized balance of which is included in long-term Other assets, net in the condensed consolidated balance sheet.

 

5.         Assets and liabilities measured at fair value

 

Fair value is a market-based measurement, not an entity-specific measurement. Therefore, a fair value measurement should be determined based on the assumptions that market participants would use in pricing the asset or liability. As a basis for considering market participant assumptions in fair value measurements, fair value accounting standards establish a fair value hierarchy that distinguishes between market participant assumptions based on market data obtained from sources independent of the reporting entity (observable inputs that are classified within Levels 1 and 2 of the hierarchy) and the reporting entity’s own assumptions about market participant assumptions (unobservable inputs classified within Level 3 of the hierarchy).

 

In connection with accounting standards for fair value measurement, the Company has made an accounting policy election to measure the credit risk of its derivative financial

 

8



 

instruments that are subject to master netting agreements on a net basis by counterparty portfolio. The Company has determined that the majority of the inputs used to value its derivative financial instruments using the income approach fall within Level 2 of the fair value hierarchy. However, the credit valuation adjustments associated with the Company’s derivatives utilize Level 3 inputs, such as estimates of current credit spreads to evaluate the likelihood of default by the Company and its counterparties. As of August 1, 2014, the Company has assessed the significance of the impact of the credit valuation adjustments on the overall valuation of its derivative positions and has determined that such adjustments are not significant to the derivatives’ valuation. As a result, the Company has classified its derivative valuations, as discussed in detail in Note 6, in Level 2 of the fair value hierarchy. The Company’s long-term obligations that are classified in Level 2 of the fair value hierarchy are valued at cost. The Company does not have any fair value measurements categorized within Level 3 as of August 1, 2014.

 

 

(in thousands)

 

Quoted Prices in
Active Markets
for Identical
Assets and
Liabilities
(Level 1)

 

Significant
Other
Observable
Inputs
(Level 2)

 

Significant
Unobservable
Inputs
(Level 3)

 

Balance at
August 1,
2014

 

Liabilities:

 

 

 

 

 

 

 

 

 

Long-term obligations (a)

 

2,938,547

 

19,665

 

-

 

2,958,212

 

Derivative financial instruments (b)

 

-

 

2,947

 

-

 

2,947

 

Deferred compensation (c)

 

22,799

 

-

 

-

 

22,799

 

 

 

 

 

 

 

 

 

 

 

 

(a)         Reflected at book value in the condensed consolidated balance sheet as Current portion of long-term obligations of $101,013 and Long-term obligations of $2,881,217.

(b)         Reflected at fair value in the condensed consolidated balance sheet as Accrued expenses and other current liabilities.

(c)          Reflected at fair value in the condensed consolidated balance sheet as Accrued expenses and other current liabilities of $1,735 and noncurrent Other liabilities of $21,064.

 

6.          Derivatives and hedging activities

 

The Company records all derivatives on the balance sheet at fair value. The accounting for changes in the fair value of derivatives depends on the intended use of the derivative, whether the Company has elected to designate a derivative in a hedging relationship and apply hedge accounting and whether the hedging relationship has satisfied the criteria necessary to apply hedge accounting. Derivatives designated and qualifying as a hedge of the exposure to changes in the fair value of an asset, liability, or firm commitment attributable to a particular risk, such as interest rate risk, are considered fair value hedges. Derivatives designated and qualifying as a hedge of the exposure to variability in expected future cash flows, or other types of forecasted transactions, are considered cash flow hedges. Derivatives may also be designated as hedges of the foreign currency exposure of a net investment in a foreign operation. Hedge accounting generally provides for the matching of the timing of gain or loss recognition on the hedging instrument with the recognition of the changes in the fair value of the hedged asset or liability that are attributable to the hedged risk in a fair value hedge or the earnings effect of the hedged forecasted transactions in a cash flow hedge.

 

9



 

The Company may enter into derivative contracts that are intended to economically hedge a certain portion of its risk, even though hedge accounting does not apply or the Company elects not to apply the hedge accounting standards. Changes in the fair value of such derivatives are recorded directly in earnings.

 

Risk management objective of using derivatives

 

The Company is exposed to certain risks arising from both its business operations and economic conditions. The Company principally manages its exposures to a wide variety of business and operational risks through management of its core business activities. The Company manages economic risks, including interest rate, liquidity, and credit risk, primarily by managing the amount, sources, and duration of its debt funding and the use of derivative financial instruments. Specifically, the Company enters into derivative financial instruments to manage exposures that arise from business activities that result in the receipt or payment of future known and uncertain cash amounts, the value of which are determined primarily by interest rates. The Company’s derivative financial instruments are used to manage differences in the amount, timing, and duration of the Company’s known or expected cash receipts and its known or expected cash payments principally related to the Company’s borrowings.

 

In addition, the Company is exposed to certain risks arising from uncertainties of future market values caused by the fluctuation in the prices of commodities. From time to time the Company may enter into derivative financial instruments to protect against future price changes related to these commodity prices.

 

Cash flow hedges of interest rate risk

 

The Company’s objectives in using interest rate derivatives are to add stability to interest expense and to manage its exposure to interest rate changes. To accomplish this objective, the Company primarily uses interest rate swaps as part of its interest rate risk management strategy. Interest rate swaps designated as cash flow hedges involve the receipt of variable-rate amounts from a counterparty in exchange for the Company making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount.

 

The effective portion of changes in the fair value of interest rate swaps designated and that qualify as cash flow hedges is recorded in Accumulated other comprehensive income (loss) (also referred to as “OCI”) and is subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings.  During the 13-week and 26-week periods ended August 1, 2014 and August 2, 2013, such interest rate swaps were used to hedge the variable cash flows associated with variable-rate debt. The ineffective portion of the change in fair value of the interest rate swaps, if any, is recognized directly in earnings.

 

As of August 1, 2014, the Company had interest rate swaps with a combined notional value of $875.0 million that were designated as cash flow hedges of interest rate risk. Amounts reported in Accumulated other comprehensive income (loss) related to these derivatives will be reclassified to interest expense as interest payments are made on the Company’s variable-rate debt.

 

10



 

During the 26-week period ended August 2, 2013, the Company entered into U.S. Treasury locks related to its issuance of senior notes due April 15, 2023, as further discussed in Note 4. The settlement of the U.S. Treasury locks resulted in a loss which was deferred to OCI and is being amortized as an increase to interest expense over the period corresponding to the debt’s maturity as the Company accrues or pays interest on the hedged long-term debt.

 

During the 52-week period following August 1, 2014, the Company estimates that approximately $4.3 million will be reclassified as an increase to interest expense for its interest rate swaps and U.S. Treasury locks.

 

All of the amounts reflected in Accumulated other comprehensive income (loss) in the condensed consolidated balance sheets for the periods presented are related to cash flow hedges.

 

The table below presents the fair value of the Company’s derivative financial instruments as well as their classification in the condensed consolidated balance sheets as of August 1, 2014 and January 31, 2014:

 

(in thousands)

 

August 1,
2014

 

January 31,
2014

 

Derivatives Designated as Hedging Instruments

 

 

 

 

 

Interest rate swaps classified as noncurrent Other liabilities

 

$

-

 

$

4,109

 

Interest rate swaps classified as Accrued expenses and other current liabilities

 

$

2,947

 

$

-

 

 

The table below presents the pre-tax effect of the Company’s derivative financial instruments as reflected in the condensed consolidated statements of comprehensive income for the 13-week and 26-week periods ended August 1, 2014 and August 2, 2013:

 

 

 

13 Weeks Ended

 

26 Weeks Ended

(in thousands)

 

August 1,
2014

 

August 2,
2013

 

August 1,
2014

 

August 2,

2013

 

Derivatives in Cash Flow Hedging Relationships

 

 

 

 

 

 

 

 

 

(Gain) loss related to effective portion of derivatives recognized in OCI

 

$

139

 

$

(809

)

  $

755

 

$

14,518

 

Loss related to effective portion of derivatives reclassified from Accumulated OCI to Interest expense

 

$

1,294

 

$

1,193

 

  $

2,576

 

$

2,124

 

 

Credit-risk-related contingent features

 

The Company has agreements with all of its interest rate swap counterparties that contain a provision providing that the Company could be declared in default on its derivative obligations if repayment of the underlying indebtedness is accelerated by the lender due to the Company’s default on such indebtedness.

 

As of August 1, 2014, the fair value of interest rate swaps in a net liability position, which includes accrued interest but excludes any adjustment for nonperformance risk related to these agreements, was $3.0 million. If the Company had breached any of these provisions at August 1, 2014, it could have been required to post full collateral or settle its obligations under the agreements at an estimated termination value of $3.0 million. As of August 1, 2014, the Company had not breached any of these provisions or posted any collateral related to these agreements.

 

11



 

7.         Commitments and contingencies

 

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 Fair Labor Standards Act (“FLSA”) and seeks to recover overtime pay, liquidated damages, and attorneys’ fees and costs. On August 15, 2006, the Richter plaintiff filed a motion in which she asked the court to certify a nationwide 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. On December 2, 2009, notice was mailed to over 28,000 current or former Dollar General store managers. Approximately 3,950 individuals opted into the lawsuit, approximately 1,000 of whom have been dismissed for various reasons, including failure to cooperate in discovery.

 

On April 2, 2012, the Company moved to decertify the class.  The plaintiff’s response to that motion was filed on May 9, 2012.

 

On October 22, 2012, the court entered a memorandum opinion granting the Company’s decertification motion.  On December 19, 2012, the court entered an order decertifying the matter and stating that a separate order would be entered regarding the opt-in plaintiffs’ rights and plaintiff Cynthia Richter’s individual claims. To date, the court has not entered such an order.

 

The parties agreed to mediate the matter, and the court informally stayed the action pending the results of the mediation.  Mediations were conducted in January, April and August 2013.  On August 10, 2013, the parties reached a preliminary agreement, which has been formalized and submitted to the court for approval, to resolve the matter for up to $8.5 million.  The Company has deemed the settlement probable and recorded such amount as the estimated expense in the second quarter of 2013.

 

The Company believes that its store managers are and have been properly classified as exempt employees under the FLSA and that the Richter action is not appropriate for collective action treatment. The Company has obtained summary judgment in some, although not all, of its pending individual or single-plaintiff store manager exemption cases in which it has filed such a motion.

 

At this time, although probable, it is not certain that the court will approve the settlement.  If it does not, and the case proceeds, it is not possible to predict whether Richter ultimately will be permitted to proceed collectively, and no assurances can be given that the Company will be successful in its defense of the action on the merits or otherwise. Similarly, at this time the Company cannot estimate either the size of any potential class or the value of the claims asserted

 

12



 

if this action were to proceed. For these reasons, the Company is unable to estimate any potential loss or range of loss in such a scenario; however, if the Company is not successful in its defense efforts, the resolution of Richter could have a material adverse effect on the Company’s consolidated financial statements as a whole.

 

On April 9, 2012, the Company was served with a lawsuit filed in the United States District Court for the Eastern District of Virginia entitled Jonathan Marcum, et al. v. Dolgencorp. Inc. (Civil Action No. 3:12-cv-00108-JRS) in which the plaintiffs, one of whose conditional offer of employment was rescinded, allege that certain of the Company’s background check procedures violate the Fair Credit Reporting Act (“FCRA”).  Plaintiff Marcum also alleges defamation. According to the complaint and subsequently filed first and second amended complaints, the plaintiffs seek to represent a putative class of applicants in connection with their FCRA claims. The Company responded to the complaint and each of the amended complaints.  The plaintiffs’ certification motion was due to be filed on or before April 5, 2013; however, plaintiffs asked the court to stay all deadlines in light of the parties’ ongoing settlement discussions (as more fully described below).  On November 12, 2013, the court entered an order lifting the stay but has not issued a new scheduling order in light of the parties’ preliminary agreement to resolve the matter.

 

The parties have engaged in formal settlement discussions on three occasions, once in January 2013 with a private mediator, and again in March 2013 and July 2013 with a federal magistrate. On February 18, 2014, the parties reached a preliminary agreement to resolve the matter for up to $4.08 million, which must be submitted to and approved by the court.

 

The Company’s Employment Practices Liability Insurance (“EPLI”) carrier has been placed on notice of this matter and participated in both the formal and informal settlement discussions.  The EPLI policy covering this matter has a $2 million self-insured retention.  Because the Company believes that it is likely to expend the balance of its self-insured retention in settlement of this litigation or otherwise, it accrued $1.8 million in the fourth quarter of 2012, an amount that is immaterial to the Company’s consolidated financial statements as a whole.

 

At this time, although probable, it is not certain that the court will approve the settlement.   If the court does not approve the settlement and the case proceeds, it is not possible to predict whether Marcum ultimately will be permitted to proceed as a class action under the FCRA, and no assurances can be given that the Company will be successful in its defense on the merits or otherwise.  At this stage in the proceedings, the Company cannot estimate either the size of any potential class or the value of the claims asserted by the plaintiffs.

 

In September 2011, the Chicago Regional Office of the United States Equal Employment Opportunity Commission (“EEOC” or “Commission”) notified the Company of a cause finding related to the Company’s criminal background check policy.  The cause finding alleges that the Company’s criminal background check policy, which excludes from employment individuals with certain criminal convictions for specified periods, has a disparate impact on African-American candidates and employees in violation of Title VII of the Civil Rights Act of 1964, as amended (“Title VII”).

 

13



 

The Company and the EEOC engaged in the statutorily required conciliation process, and despite the Company’s good faith efforts to resolve the matter, the Commission notified the Company on July 26, 2012 of its view that conciliation had failed.

 

On June 11, 2013, the EEOC filed a lawsuit in the United States District Court for the Northern District of Illinois entitled Equal Opportunity Commission v. Dolgencorp, LLC d/b/a Dollar General (Case No. 1:13-cv-04307) in which the Commission alleges that the Company’s criminal background check policy has a disparate impact on “Black Applicants” in violation of Title VII and seeks to recover monetary damages and injunctive relief on behalf of a class of “Black Applicants.”  The Company filed its answer to the complaint on August 9, 2013.

 

On January 29, 2014, the court entered an order, which, among other things, bifurcates the issues of liability and damages during discovery and at trial.  Under this order, fact discovery relating to liability is to be completed by September 15, 2014.  However, on August 1, 2014, the court ordered the parties to submit a proposal for modification of the fact discovery deadline by August 29, 2014.  Additionally, the court scheduled a routine status conference for September 3, 2014.

 

On July 29, 2014, the court entered an order compelling the Company to produce certain documents, information, and electronic data for the period 2004 to present.

 

The Company believes that its criminal background check process is both lawful and necessary to a safe environment for its employees and customers and the protection of its assets and shareholders’ investments.  The Company also does not believe that this matter is amenable to class or similar treatment.  However, at this time, it is not possible to predict whether the action will ultimately be permitted to proceed as a class or in a similar fashion or the size of any putative class.  Likewise, at this time, it is not possible to estimate the value of the claims asserted, and, therefore, the Company cannot estimate the potential exposure or range of potential loss.  If the matter were to proceed successfully as a class or similar action or the Company is unsuccessful in its defense efforts as to the merits of the action, it could have a material adverse effect on the Company’s consolidated financial statements as a whole.

 

On May 23, 2013, a lawsuit entitled Juan Varela v. Dolgen California and Does 1 through 50 (Case No. RIC 1306158) (“Varela”) was filed in the Superior Court of the State of California for the County of Riverside in which the plaintiff alleges that he and other “key carriers” were not provided with meal and rest periods in violation of California law and seeks to recover alleged unpaid wages, injunctive relief, consequential damages, pre-judgment interest, statutory penalties and attorneys’ fees and costs.  The Varela plaintiff seeks to represent a putative class of California “key carriers” as to these claims.  The Varela plaintiff also asserts a claim for unfair business practices and seeks to proceed under California’s Private Attorney General Act (“PAGA”).

 

The Company removed the action to the United States District Court for the Central District of California (Case No. 5:13-cv-01172VAP-SP) on July 1, 2013, and filed its answer to the complaint on July 1, 2013.  On July 30, 2013, the plaintiff moved to remand the action to state court.

 

14



 

On September 13, 2013, notwithstanding the Company’s opposition, the court granted plaintiff’s motion and remanded the case. The Company filed a petition for permission to appeal to the United States Court of Appeals for the Ninth Circuit on September 23, 2013.  Although the petition for permission to appeal remains pending, based on the Ninth Circuit’s denial of a similar petition filed by the Company in the Main matter and as more fully discussed below, the Company has filed a petition for coordination of the Main and Varela matters. A status conference has been scheduled by the Superior Court for October 21, 2014.

 

Similarly, on June 6, 2013, a lawsuit entitled Victoria Lee Dinger Main v. Dolgen California, LLC and Does 1 through 100 (Case No. 34-2013-00146129) (“Main”) was filed in the Superior Court of the State of California for the County of Sacramento.  The Main plaintiff alleges that she and other “key holders” were not provided with meal and rest periods, accurate wage statements and appropriate pay upon termination in violation of California wage and hour laws and seeks to recover alleged unpaid wages, declaratory relief, restitution, statutory penalties and attorneys’ fees and costs.  The Main plaintiff seeks to represent a putative class of California “key holders” as to these claims.  The Main plaintiff also asserts a claim for unfair business practices and seeks to proceed under the PAGA.

 

The Company removed this action to the United States District Court for the Eastern District of California (Case No. 2:13-cv-01637-MCE-KJN) on August 7, 2013, and filed its answer to the complaint on August 6, 2013.  On August 29, 2013, the plaintiff moved to remand the action to state court.  The Company opposed the motion.  On October 28, 2013, the court granted plaintiff’s motion and remanded the case.  The Company filed a petition for permission to appeal to the United States Court of Appeals for the Ninth Circuit on November 7, 2013.  The plaintiff filed its opposition brief on November 15, 2013. The Ninth Circuit denied the petition for permission to appeal on April 10, 2014.

 

On February 6, 2014, the Superior Court referred the matter to the trial setting process and ordered the parties to confer and agree upon a date for trial and a mandatory settlement conference.  The parties are to advise the court of the date agreed upon for a trial and settlement conference no later than January 30, 2015.  If the parties are unable to agree upon a date by such time, the court will assign the next available dates.

 

On April 28, 2014, the Company filed a petition for coordination of the Main and Varela matters.  As no hearing date has been scheduled, no deadline currently exists for either plaintiff’s response to the petition for coordination.

 

On July 22, 2014, a lawsuit entitled Oscar Avila  v. Dolgen California, LLC and Does 1 through 50 (Case No. S-1500-CV-282549) (“Avila”) was filed in the Superior Court of the State of California for the County of Kern.  The Avila plaintiff alleges that he and other “key holders” were not provided with meal and rest periods, accurate wage statements and appropriate pay upon termination in violation of California wage and hour laws and seeks to recover alleged unpaid wages, declaratory relief, restitution, pre- and post- judgment interest, statutory penalties and attorneys’ fees and costs.  The Avila plaintiff seeks to represent a putative class of California “key holders” as to these claims.  The Avila plaintiff also asserts a claim for unfair business practices.

 

15



 

The Company believes that its policies and practices comply with California law and that the Varela, Main , and Avila actions are not appropriate for class or similar treatment.  The Company intends to vigorously defend these actions; however, at this time, it is not possible to predict whether the Varela, Main , or Avila action ultimately will be permitted to proceed as a class, and no assurances can be given that the Company will be successful in its defense of these actions on the merits or otherwise. Similarly, at this time the Company cannot estimate either the size of any potential class or the value of the claims asserted in the Varela , Main , and Avila actions. For these reasons, the Company is unable to estimate any potential loss or range of loss in these matters; however, if the Company is not successful in its defense efforts, the resolution of any of these actions could have a material adverse effect on the Company’s consolidated financial statements as a whole.

 

On May 31, 2013, a lawsuit entitled Judith Wass v. Dolgen Corp, LLC (Case No. 13PO-CC00039) (“Wass”) was filed in the Circuit Court of Polk County, Missouri.  The Wass plaintiff seeks to proceed collectively on behalf of a nationwide class of similarly situated non-exempt store employees who allegedly were not properly paid for certain breaks in violation of the FLSA.  The Wass plaintiff seeks back wages, injunctive and declaratory relief, liquidated damages, pre- and post-judgment interest, and attorneys’ fees and costs.

 

On July 11, 2013, the Company removed this action to the United States District Court for the Western District of Missouri (Case No. 6:113-cv-03267-JFM).  The Company filed its answer on July 18, 2013.

 

On March 28, 2014, the Wass plaintiff moved for conditional certification of her FLSA claims.  Shortly thereafter, on April 3, 2014, the plaintiff moved the court for permission to conduct additional limited discovery and to file a supplemental brief in support of her motion for conditional certification.  By agreement of the parties, the court permitted the limited discovery.  Plaintiff filed a supplemental brief in support of her motion for conditional certification on June 20, 2014, to which the Company filed its response on July 25, 2014. Plaintiff’s reply brief in further support of her motion for conditional certification is due to be filed on or before September 18, 2014.  The Company also filed a motion for summary judgment as to plaintiff’s individual claims on July 25, 2014.  Plaintiff’s response deadline to the Company’s motion for summary judgment currently is September 18, 2014.

 

Similarly, on July 2, 2013, a lawsuit entitled Rachel Buttry and Jennifer Peters v. Dollar General Corp. (Case No. 3:13-cv-00652) (“Buttry”) was filed in the United States District Court for the Middle District of Tennessee.  The Buttry plaintiffs seek to proceed on a nationwide collective basis under the FLSA and as a statewide class under Tennessee law on behalf of non-exempt store employees who allegedly were not properly paid for certain breaks.  The Buttry plaintiffs seek back wages (including overtime), injunctive and declaratory relief, liquidated damages, compensatory and economic damages, “consequential” and “incidental” damages, pre-judgment and post-judgment interest, and attorneys’ fees and costs.

 

The Company filed its answer on August 7, 2013.  The plaintiffs filed their motion for conditional certification of their FLSA claims on December 5, 2013, to which the Company responded on February 3, 2014.  On April 4, 2014, the court denied plaintiffs’ certification motion.  Plaintiffs filed a motion for reconsideration or in the alternative for permission to seek

 

16



 

interlocutory appeal in the United States Court of Appeals for the Sixth Circuit on April 18, 2014. The court denied the plaintiffs’ motion on April 24, 2014.

 

On July 11, 2014, the plaintiffs filed a petition for writ of mandamus with the United States Court of Appeals for the Sixth Circuit.  The Company is not required at this time to file a response to the petition for writ of mandamus.  On August 18, 2014, the district court entered an order staying the proceedings pending a decision by the appellate court regarding plaintiffs’ writ of mandamus.

 

The Buttry plaintiffs’ motion for certification of their statewide claims is due to be filed on or before September 22, 2014.  The court has set this matter for trial on February 17, 2015.

 

On March 19, 2014, a lawsuit entitled Danielle Harsey v. Dolgencorp, LLC (Case No. 5:14-cv-00168-WTH-PRL) (“Harsey”) was filed in the United States District Court for the Middle District of Florida.  The Harsey plaintiff seeks to proceed on a nationwide collective basis under the FLSA and as a statewide class under the Florida Minimum Wage Act on behalf of all similarly situated non-exempt store employees who allegedly were not paid for all hours worked.  The Harsey plaintiff seeks back wages (including overtime), liquidated damages, pre- and post-judgment interest, injunctive relief, and attorneys’ fees and costs. The Company filed its answer on May 7, 2014.

 

On August 19, 2014, the court entered a scheduling order, which among other things, requires plaintiff to file motions for class certification of her statewide claims and conditional certification of her claims under the FLSA on or before January 7, 2015.  The order further sets the matter for trial during the weeks of November 2, 9, or 16, 2015.

 

On July 14, 2014, a lawsuit entitled Leslie Vincino v. Dolgencorp, LLC (Case No. 2014-CA-517) (“Vincino”) was filed in the Circuit Court, Eight Judicial Circuit, for Levy County, Florida.   The Vincino plaintiff seeks to proceed on a nationwide collective basis under the FLSA on behalf of all similarly situated non-exempt store employees who allegedly were not paid for all hours worked.  The Vincino plaintiff seeks back wages (including overtime), liquidated damages, pre-judgment interest, and attorneys’ fees and costs.  The Vincino plaintiff also asserts individual claims for violation of the Florida Civil Rights Act for alleged discrimination based on alleged unidentified disabilities. For the claims asserted under the Florida Civil Rights Act, the Vincino plaintiff seeks compensatory damages, back wages, front pay, punitive damages, attorneys’ fees and costs.  On August 11, 2014, the Company removed this matter to the United States District Court for the Northern District of Florida (Case No. 1:14-cv-142-RS-GRJ).  The Company filed its answer on August 18, 2014.

 

The Company believes that its wage and hour policies and practices comply with both the FLSA and state law, including Tennessee and Florida law, and that the Wass, Buttry, Harsey , and Vincino actions are not appropriate for collective or class treatment.  The Company intends to vigorously defend these actions; however, at this time, it is not possible to predict whether the Wass, Buttry, Harsey , or Vincino action ultimately will be permitted to proceed collectively or as a class, and no assurances can be given that the Company will be successful in its defense of these actions on the merits or otherwise. Similarly, at this time the Company cannot estimate either the size of any potential class or the value of the claims asserted in the Wass, Buttry ,

 

17



 

Harsey and/or Vincino actions. For these reasons, the Company is unable to estimate any potential loss or range of loss in these matters; however, if the Company is not successful in its defense efforts, the resolution of any of these actions could have a material adverse effect on the Company’s consolidated financial statements as a whole.

 

On May 20, 2011, a lawsuit entitled Winn-Dixie Stores, Inc., et al. v. Dolgencorp, LLC was filed in the United States District Court for the Southern District of Florida (Case No. 9:11-cv-80601-DMM) (“Winn-Dixie”) in which the plaintiffs allege that the sale of food and other items in approximately 55 of the Company’s stores, each of which allegedly is or was at some time co-located in a shopping center with one of plaintiffs’ stores, violates restrictive covenants that plaintiffs contend are binding on the occupants of the shopping centers.  Plaintiffs sought damages and an injunction limiting the sale of food and other items in those stores.  Although plaintiffs did not make a demand for any specific amount of damages, documents prepared and produced by plaintiffs during discovery suggested that plaintiffs would seek as much as $47 million although the court limited their ability to prove such damages. The case was consolidated with similar cases against Big Lots and Dollar Tree. The court issued an order on August 10, 2012 in which it (i) dismissed all claims for damages, (ii) dismissed claims for injunctive relief for all but four stores, and (iii) directed the Company to report to the court on its compliance with restrictive covenants at the four stores for which it did not dismiss the claims for injunctive relief. The Company believes that compliance with the August 2012 ruling will have no material adverse effect on the Company or its consolidated financial statements.

 

On August 28, 2012, the Winn-Dixie plaintiffs filed a notice of appeal with the United States Court of Appeals for the Eleventh Circuit (Docket No. 12-14527-B). Oral argument was conducted on January 16, 2014, and the appellate court rendered its decision on March 5, 2014, affirming in part and reversing in part the trial court’s decision.  Specifically, the appellate court affirmed the trial court’s dismissal of plaintiffs’ claim for monetary damages but reversed the trial court’s decision denying injunctive relief as to thirteen additional stores and remanded for further proceedings.  On March 26, 2014, the plaintiffs moved the appellate court for rehearing.  That motion was denied on May 2, 2014.  Currently, the parties are, as directed by the trial court, preparing briefs in an effort to clarify the issues to be resolved on remand.  Briefing is expected to be complete by the end of August 2014.  Additionally, plaintiff has filed a motion to dismiss stores not located in Florida from the case without prejudice.  Briefing regarding that motion was complete on August 14, 2014, and the court has not yet rendered a decision.

 

At this time, the Company is unable to predict whether the trial court will enter an injunction as to any of the additional stores at issue; however, the Company does not believe that such an injunction, even if entered as to each remaining additional store at issue, would have a material adverse effect on the Company or its consolidated financial statements as a whole.

 

The Company also is unable to predict whether the plaintiffs will seek further appellate review of the trial court’s dismissal of plaintiffs’ claim for damages.  If plaintiffs were to obtain further appellate review, and the Company were unsuccessful in its defense of such appeal, the outcome could have a material adverse effect on the Company’s consolidated financial statements as a whole.

 

18



 

From time to time, the Company is a party to various other legal actions involving claims incidental to the conduct of its business, including actions by employees, consumers, suppliers, government agencies, or others through private actions, class actions, administrative proceedings, regulatory actions or other litigation, including without limitation under federal and state employment laws and wage and hour laws. The Company believes, based upon information currently available, that such other litigation and claims, both individually and in the aggregate, will be resolved without a material adverse effect on the Company’s financial statements as a whole. However, litigation involves an element of uncertainty. Future developments could cause these actions or claims to have a material adverse effect on the Company’s results of operations, cash flows, or financial position. In addition, certain of these lawsuits, if decided adversely to the Company or settled by the Company, may result in liability material to the Company’s financial position or may negatively affect operating results if changes to the Company’s business operation are required.

 

8.         Segment reporting

 

The Company manages its business on the basis of one reportable segment. As of August 1, 2014, all of the Company’s operations were located within the United States with the exception of a Hong Kong subsidiary and a liaison office in India, the collective assets and revenues of which are not material. The following net sales data is presented in accordance with accounting standards related to disclosures about segments of an enterprise.

 

 

 

13 Weeks Ended

 

 

26 Weeks Ended

(In thousands)

 

August 1,
2014

 

August 2,
2013

 

 

August 1,
2014

 

August 2,
2013

Classes of similar products:

 

 

 

 

 

 

 

 

 

Consumables

 

$

3,576,189

 

$

3,301,826

 

 

$

7,021,654

 

$

6,496,732

Seasonal

 

593,596

 

575,891

 

 

1,135,028

 

1,105,172

Home products

 

285,428

 

265,405

 

 

569,025

 

531,216

Apparel

 

268,826

 

251,529

 

 

520,413

 

495,264

Net sales

 

$

4,724,039

 

$

4,394,651

 

 

$

9,246,120

 

$

8,628,384

 

9.         Common stock transactions

 

On August 29, 2012, the Company’s Board of Directors authorized a common stock repurchase program, which was increased on March 19, 2013 and again on December 4, 2013. As of August 1, 2014, a total of $2.0 billion had been authorized under the program and $223.4 million remained available for repurchase. The repurchase authorization has no expiration date and allows repurchases from time to time in the open market or in privately negotiated transactions. The timing and number of shares purchased depends on a variety of factors, such as price, market conditions, compliance with the covenants and restrictions under our debt agreements and other factors. Repurchases under the program may be funded from available cash or borrowings under the Company’s credit facilities discussed in further detail in Note 4.

 

Pursuant to its common stock repurchase program, during the 26-week periods ended August 1, 2014, and August 2, 2013, the Company repurchased in the open market approximately 14.1 million shares of its common stock at a total cost of $800.1 million, and approximately 4.3 million shares at a total cost of $220.0 million, respectively.

 

19



 

10.       Subsequent Event

 

On August 18, 2014, the Company announced it had submitted a proposal to the Board of Directors of Family Dollar Stores, Inc. (“Family Dollar”) to acquire all of the outstanding shares of Family Dollar common stock for $78.50 per share in cash. On August 21, 2014, this proposal was rejected by the Board of Directors of Family Dollar. There can be no assurance that a transaction will be completed on the terms proposed or at all.

 

20



 

Report of Independent Registered Public Accounting Firm

 

To the Board of Directors and Shareholders of

Dollar General Corporation:

 

We have reviewed the condensed consolidated balance sheet of Dollar General Corporation and subsidiaries (the Company) as of August 1, 2014, and the related condensed consolidated statements of income and comprehensive income for the thirteen and twenty-six week periods ended August 1, 2014 and August 2, 2013, and the condensed consolidated statements of cash flows for the twenty-six week periods ended August 1, 2014 and August 2, 2013. These financial statements are the responsibility of the Company’s management.

 

We conducted our review in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.

 

Based on our review, we are not aware of any material modifications that should be made to the condensed consolidated financial statements referred to above for them to be in conformity with U.S. generally accepted accounting principles.

 

We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of Dollar General Corporation and subsidiaries as of January 31, 2014 and the related consolidated statements of income, comprehensive income, shareholders’ equity, and cash flows for the fiscal year then ended (not presented herein) and in our report dated March 20, 2014, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of January 31, 2014, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.

 

 

/s/ Ernst & Young LLP

 

August 28, 2014

Nashville, Tennessee

 

21



 

ITEM 2.                                      MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

 

General

 

This discussion and analysis is based on, should be read with, and is qualified in its entirety by, the accompanying unaudited condensed consolidated financial statements and related notes, as well as our consolidated financial statements and the related Management’s Discussion and Analysis of Financial Condition and Results of Operations as contained in our Annual Report on Form 10-K for the year ended January 31, 2014. It also should be read in conjunction with the disclosure under “Cautionary Disclosure Regarding Forward-Looking Statements” in this report.

 

Merger Proposal

 

On August 18, 2014, we announced we had submitted a proposal to the Board of Directors of Family Dollar Stores, Inc. (“Family Dollar”) to acquire all of the outstanding shares of Family Dollar common stock for $78.50 per share in cash. On August 21, 2014, this proposal was rejected by the Board of Directors of Family Dollar. There can be no assurance that a transaction will be completed on the terms proposed or at all.

 

Executive Overview

 

We are the largest discount retailer in the United States by number of stores, with 11,535 stores located in 40 states as of August 1, 2014, primarily in the southern, southwestern, midwestern and eastern United States. We offer a broad selection of merchandise, including consumable products such as food, paper and cleaning products, health and beauty products, pet supplies and tobacco products, and non-consumable products such as seasonal merchandise, home decor and domestics, and basic apparel. Our merchandise includes high quality national brands from leading manufacturers, as well as comparable quality private brand selections with prices at substantial discounts to national brands. We offer our customers these national brand and private brand products at everyday low prices (typically $10 or less) in our convenient small-box (small store) locations.

 

The core customers we serve are value-conscious, many with low or fixed incomes, and we have always been intensely focused on helping them make the most of their spending dollars. Like other companies, we have been operating for several years in an environment with ongoing macroeconomic challenges and uncertainties, and the timetable and strength of economic recovery for our core customers remains uncertain. The longer our customers have to manage under such negative conditions, the more difficult it is for them to stretch their spending dollars, not only for discretionary purchases (as has been the case in recent years) but also for non-discretionary purchases. During this period of extended economic weakness, we have achieved significant success by responding to our customers’ needs for value and convenience, in part, by increasing our offerings of basic consumables. In recent years, other retailers, including many of those in the dollar, discount and drug sectors, have expanded their consumables offerings. In addition, these retailers, as well as others, such as those in the mass merchandising and grocery sectors, have increased their promotional activities. The promotional environment remained quite competitive early in our second quarter and has continued to be more challenging than in the relatively recent past, although we believe competitive promotional activities have moderated recently.

 

22



 

We remain focused on executing our four operating priorities, which are: 1) drive productive sales growth, 2) increase, or enhance, our gross profit margins, 3) leverage process improvements and information technology to reduce costs, and 4) strengthen and expand our culture of serving others.

 

We seek to drive productive sales growth through increasing customer traffic, unit sales and average transaction amount in our same-stores and by adding new stores, as well as remodeling and relocating stores. We opened 426 new stores in the first half of 2014 and plan to open 700 stores for the full year. In the first quarter of 2013, we made a strategic decision to add tobacco products in our stores with the primary goal of increasing customer traffic. The rollout of tobacco products was substantially executed between March and June of 2013. In addition, in the first half of 2013, we expanded the number of coolers for refrigerated and frozen foods and beverages in over 1,600 existing stores. Tobacco products and perishables were the most significant drivers of same-store sales growth in 2013 and continued to increase at a faster rate than overall same-store sales through the 2014 second quarter. As expected, the addition of tobacco products and the increased proportion of sales of perishables have posed challenges to our second priority of enhancing our gross profit rate because these products generally have lower profit margins.

 

Ongoing initiatives to enhance our gross profit rate include merchandise category management, utilization of private brands, inventory shrink reduction initiatives, efforts to improve distribution and transportation efficiencies, and strategic focus on pricing and markdowns, while remaining committed to our everyday low price strategy. We remain committed to our seasonal, home, and apparel categories, which generally have higher gross profit rates. While we are encouraged by improvement in our sales of home products and apparel in the first half of 2014, we expect the growth of consumables to continue to outpace the growth of non-consumables throughout the remainder of 2014. Commodities cost inflation was minimal in the first half of 2014 and throughout 2013 and, in some instances, we experienced a decrease in such costs. Accordingly, overall price increases passed through to our customers have been minimal.

 

We remain committed to reducing costs, particularly selling, general and administrative expenses (“SG&A”) that do not affect the customer experience.  In 2012 and 2013, we successfully reduced our retail labor costs as a percentage of sales, in part, by optimizing our workforce management system and simplifying or eliminating various tasks performed in the stores and we are continuing these efforts in 2014. In addition, we believe we have additional opportunities to reduce costs through our focused procurement efforts.  However, we expect overall SG&A to be a higher percentage of sales in 2014 than in 2013, due to several factors, including the year-over-year impact of a significant reduction in incentive compensation in 2013, and an increase in 2014 store occupancy costs resulting from a sale-leaseback transaction completed at the end of 2013.

 

During the first half of 2014, we continued our mission of serving others by striving to give our customers clean, well-stocked stores with quality products at low prices, our employees

 

23



 

an environment that attracts and retains talented personnel, and supporting our store communities through our charitable and other efforts.

 

The following highlights the results of the second quarter of 2014 over the comparable 2013 period in many of our key financial metrics. Basis points amounts referred to below are equal to 0.01% as a percentage of sales.

 

·                  Net sales increased 7.5% to $4.72 billion. Sales in same-stores increased 2.1% driven by increases in customer traffic and average transaction amount. Average sales per square foot for all stores over the 52-week period ended August 1, 2014 were $220.

 

·                  Gross profit, as a percentage of sales, was 30.8% in the 2014 period compared to 31.3% in the 2013 period, a decline of 53 basis points. We experienced an increase in promotional markdowns as well as an increase in the proportion of overall sales from lower margin consumables categories, including tobacco products and perishables, partially offset by higher initial inventory markups.

 

·                  SG&A, as a percentage of sales, was 21.7% compared to 21.9% in the 2013 period, a decrease of 21 basis points including a 19 basis point legal settlement in 2013. Changes in SG&A, as a percentage of sales, were also impacted by increases in rent and advertising expenses, partially offset by store labor efficiencies and a reduction in benefits costs.

 

·                  Interest expense increased by $2.0 million to $22.6 million in the 2014 period due in part to higher borrowings for share repurchases during the preceding 12 months. Total outstanding debt (including the current portion of long-term obligations) as of August 1, 2014 was $2.98 billion.

 

·                  Net income was $251.3 million, or $0.83 per diluted share, compared to net income of $245.5 million, or $0.75 per diluted share, in the 2013 period. Diluted shares outstanding decreased by 21.8 million shares, reflecting the impact of share repurchases.

 

·                  Cash generated from operating activities was $486.9 million on a year to date basis, compared to $484.1 million in the comparable prior year period. At August 1, 2014, we had a cash balance of $172.5 million.

 

·                  Inventory turnover was 4.8 times on a rolling four-quarter basis. Inventories increased 4% on a per store basis over the 2013 period.

 

·                  During the first half of 2014, we opened 426 new stores, remodeled or relocated 585 stores and closed 23 stores, resulting in a store count of 11,535 as of August 1, 2014.

 

The above discussion is a summary only. Readers should refer to the detailed discussion of our operating results below for the full analysis of our financial performance in the current year period as compared with the prior year period.

 

24



 

Results of Operations

 

Accounting Periods . We utilize a 52-53 week fiscal year convention that ends on the Friday nearest to January 31. The following text contains references to years 2014 and 2013, which represent the 52-week fiscal years ending January 30, 2015 and January 31, 2014, respectively. References to the second quarter accounting periods for 2014 and 2013 contained herein refer to the 13-week accounting periods ended August 1, 2014 and August 2, 2013, respectively.

 

Seasonality. The nature of our business is seasonal to a certain extent. Primarily because of sales of holiday-related merchandise, sales in our fourth quarter (November, December and January) have historically been higher than sales achieved in each of the first three quarters of the fiscal year. Expenses, and to a greater extent operating profit, vary by quarter. Results of a period shorter than a full year may not be indicative of results expected for the entire year. Furthermore, the seasonal nature of our business may affect comparisons between periods.

 

25



 

The following table contains results of operations data for the most recent 13-week and 26-week periods of each of 2014 and 2013, and the dollar and percentage variances among those periods:

 

(dollars in millions,

 

13 Weeks Ended

 

2014 vs. 2013

 

26 Weeks Ended

 

2014 vs. 2013

 

except per share
amounts)

 

August 1,
2014

 

August 2,
2013

 

Amount
change

 

%
change

 

August 1,
2014

 

August 2,
2013

 

Amount
change

 

%
change

 

Net sales by category:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consumables

 

$

3,576.2

 

$

3,301.8

 

$

274.4

 

8.3

%

$

7,021.7

 

$

6,496.7

 

$

524.9

 

8.1

%

% of net sales

 

75.70%

 

75.13%

 

 

 

 

 

75.94%

 

75.29%

 

 

 

 

 

Seasonal

 

593.6

 

575.9

 

17.7

 

3.1

 

1,135.0

 

1,105.2

 

29.9

 

2.7

 

% of net sales

 

12.57%

 

13.10%

 

 

 

 

 

12.28%

 

12.81%

 

 

 

 

 

Home products

 

285.4

 

265.4

 

20.0

 

7.5

 

569.0

 

531.2

 

37.8

 

7.1

 

% of net sales

 

6.04%

 

6.04%

 

 

 

 

 

6.15%

 

6.16%

 

 

 

 

 

Apparel

 

268.8

 

251.5

 

17.3

 

6.9

 

520.4

 

495.3

 

25.1

 

5.1

 

% of net sales

 

5.69%

 

5.72%

 

 

 

 

 

5.63%

 

5.74%

 

 

 

 

 

Net sales

 

$

4,724.0

 

$

4,394.7

 

$

329.4

 

7.5

%

$

9,246.1

 

$

8,628.4

 

$

617.7

 

7.2

%

Cost of goods sold

 

3,268.5

 

3,017.4

 

251.1

 

8.3

 

6,432.8

 

5,955.9

 

476.9

 

8.0

 

% of net sales

 

69.19%

 

68.66%

 

 

 

 

 

69.57%

 

69.03%

 

 

 

 

 

Gross profit

 

1,455.6

 

1,377.3

 

78.3

 

5.7

 

2,813.3

 

2,672.4

 

140.9

 

5.3

 

% of net sales

 

30.81%

 

31.34%

 

 

 

 

 

30.43%

 

30.97%

 

 

 

 

 

Selling, general and administrative expenses

 

1,027.0

 

964.5

 

62.6

 

6.5

 

2,005.1

 

1,864.6

 

140.5

 

7.5

 

% of net sales

 

21.74%

 

21.95%

 

 

 

 

 

21.69%

 

21.61%

 

 

 

 

 

Operating profit

 

428.5

 

412.8

 

15.7

 

3.8

 

808.2

 

807.8

 

0.4

 

0.1

 

% of net sales

 

9.07%

 

9.39%

 

 

 

 

 

8.74%

 

9.36%

 

 

 

 

 

Interest expense

 

22.6

 

20.6

 

2.0

 

9.5

 

44.9

 

45.1

 

(0.3

)

(0.6

)

% of net sales

 

0.48%

 

0.47%

 

 

 

 

 

0.49%

 

0.52%

 

 

 

 

 

Other (income) expense

 

-

 

-

 

-

 

-

 

-

 

18.9

 

(18.9

)

(100.0

)

% of net sales

 

0.00%

 

0.00%

 

 

 

 

 

0.00%

 

0.22%

 

 

 

 

 

Income before income taxes

 

405.9

 

392.2

 

13.7

 

3.5

 

763.4

 

743.8

 

19.6

 

2.6

 

% of net sales

 

8.59%

 

8.92%

 

 

 

 

 

8.26%

 

8.62%

 

 

 

 

 

Income taxes

 

154.7

 

146.7

 

8.0

 

5.4

 

289.7

 

278.2

 

11.5

 

4.1

 

% of net sales

 

3.27%

 

3.34%

 

 

 

 

 

3.13%

 

3.22%

 

 

 

 

 

Net income

 

$

251.3

 

$

245.5

 

$

5.8

 

2.4

%

$

473.7

 

$

465.6

 

$

8.1

 

1.7

%

% of net sales

 

5.32%

 

5.59%

 

 

 

 

 

5.12%

 

5.40%

 

 

 

 

 

Diluted earnings per share

 

$

0.83

 

$

0.75

 

$

0.08

 

10.7

%

$

1.54

 

$

1.42

 

$

0.12

 

8.5

%

 

13 WEEKS ENDED AUGUST 1, 2014 AND AUGUST 2, 2013

 

Net Sales . The net sales increase in the 2014 second quarter reflects a same-store sales increase of 2.1% compared to the 2013 quarter. Same-stores include stores that have been open for at least 13 months and remain open at the end of the reporting period. For the 2014 quarter, there were 10,685 same-stores which accounted for sales of $4.4 billion. Increases in customer traffic and average transaction amount contributed to the increase in same-store sales. Consumables sales continued to increase at a higher rate than non-consumables in the 2014 quarter, with the most significant growth related to tobacco products and strong sales of perishables and candy and snacks. Same-store sales growth was solid in home products and apparel. The sales increase was also impacted by new stores, partially offset by sales from closed stores.

 

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Gross Profit. Gross profit increased by 5.7%, and as a percentage of sales, decreased by 53 basis points to 30.8% in the 2014 second quarter. The gross profit rate decrease in the 2014 period as compared to the 2013 period was driven by an increase in markdowns, primarily due to increased promotional activity. In addition, consumables comprised a larger portion of our net sales, primarily as a result of increased sales of lower margin consumables such as tobacco and perishable products. These factors were partially offset by higher initial markups on inventory purchases.

 

SG&A Expense. SG&A expense was 21.7% as a percentage of sales in the 2014 period compared to 21.9% in the 2013 period, an improvement of 21 basis points. The 2013 results include expenses of $8.5 million, or 19 basis points as a percentage of sales, for a legal settlement of a previously decertified collective action. Retail labor expense increased at a rate lower than our increase in sales and our benefits costs declined, offset by increases in rent and advertising expenses.

 

Interest Expense . The increase in interest expense in the 2014 period compared to the 2013 period is partially due to greater borrowings primarily resulting from our share repurchases during the last twelve months.

 

Income Taxes. The effective income tax rate for the 2014 period was 38.1% compared to a rate of 37.4% for the 2013 period which represents a net increase of 0.7 percentage points. The effective tax rate increase was due to the expiration of various federal job credit programs (primarily the Work Opportunity Tax Credit) for eligible employees hired after December 31, 2013.  When these credit programs have expired in the past, most recently impacting our 2012 fiscal year, Congress has re-instated them on a retroactive basis.  It is uncertain as to whether or when this will occur on this occasion.

 

26 WEEKS ENDED AUGUST 1, 2014 AND AUGUST 2, 2013

 

Net Sales . The net sales increase in the 2014 period reflects a same-store sales increase of 1.8% compared to the 2013 period. In the 2014 period, our 10,685 same-stores accounted for sales of $8.7 billion. Increases in customer traffic and average transaction amount contributed to the increase in same-store sales. The remainder of the sales increase was attributable to new stores, partially offset by sales from closed stores.

 

Gross Profit. For the 2014 period, gross profit increased by 5.3%, and as a percentage of sales, decreased by 54 basis points to 30.4%. The gross profit rate decrease in the 2014 period as compared to the 2013 period was impacted by an increase in markdowns, primarily due to increased promotional activity. In addition, consumables comprised a larger portion of our net sales, primarily as a result of increased sales of lower margin consumables such as tobacco and perishable products. These factors were partially offset by higher initial markups on inventory purchases.

 

SG&A Expense. SG&A expense was 21.7% as a percentage of sales in the 2014 period compared to 21.6% in the 2013 period, an increase of 8 basis points. The 2013 results include expenses of $8.5 million, or 10 basis points as a percentage of sales, for a legal settlement of a previously decertified collective action. Rent and utilities expenses contributed to the increase in

 

27



 

SG&A expense as a percentage of sales. Retail labor expense increased at a rate lower than our increase in sales, and workers’ compensation and general liability expenses declined in the 2014 period compared to the 2013 period.

 

Interest Expense . Interest expense in the 2014 period is comparable to the same period in 2013.

 

Other (Income) Expense. In the 2013 period, we recorded pretax losses of $18.9 million resulting from a refinancing and the related termination of senior secured credit facilities.

 

Income Taxes. The effective income tax rate for the 2014 period was 38.0% compared to a rate of 37.4% for the 2013 period which represents a net increase of 0.6 percentage points. The effective tax rate increase was due to the expiration of various federal job credit programs (primarily the Work Opportunity Tax Credit) for eligible employees hired after December 31, 2013.  When these credit programs have expired in the past, most recently impacting our 2012 fiscal year, Congress has re-instated them on a retroactive basis.  It is uncertain as to whether or when this will occur on this occasion.  Partially offsetting the tax rate increase associated with federal jobs credits were benefits recognized in the 2014 period due to the favorable resolution of state tax examinations.

 

Liquidity and Capital Resources

 

Facilities

 

In April 2013, we consummated a refinancing pursuant to which we terminated our existing senior secured credit agreements, entered into a five-year $1.85 billion unsecured credit agreement, and issued senior notes with a face value of $1.3 billion. Our senior unsecured credit facilities (the “Facilities”) consisted of an initial $1.0 billion senior unsecured term loan facility (the “Term Facility”) and an $850.0 million senior unsecured revolving credit facility (the “Revolving Facility”) which provides for the issuance of letters of credit up to $250.0 million. We may request, subject to agreement by one or more lenders, increased revolving commitments and/or incremental term loan facilities in an aggregate amount of up to $150.0 million.

 

Borrowings under the 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 as of August 1, 2014 was 1.275% for LIBOR borrowings and 0.275% for base-rate borrowings. We must also pay a facility fee on any used and unused amounts of the Facilities and letter of credit fees.  The applicable margins for borrowings, the facility fees and the letter of credit fees under the Facilities are subject to adjustment each quarter based on our long-term senior unsecured debt ratings.

 

The Term Facility amortizes in quarterly installments of $25.0 million, and the first such payment was made on August 1, 2014. The final quarterly payment of the then-remaining balance will be due at maturity on April 11, 2018. The Facilities can be prepaid in whole or in part at any time. The Facilities contain certain covenants which place limitations on the incurrence of liens; change of business; mergers or sales of all or substantially all assets; and subsidiary indebtedness, among other limitations. The Facilities also contain financial covenants

 

28



 

which require the maintenance of a minimum fixed charge coverage ratio and a maximum leverage ratio.  As of August 1, 2014, we were in compliance with all such covenants.  The Facilities also contain customary affirmative covenants and events of default.

 

As of August 1, 2014, we had total outstanding letters of credit of $50.9 million, $31.2 million of which were issued under the Revolving Facility, and borrowing availability under the Revolving Facility was $628.8 million.

 

For the remainder of fiscal 2014, we anticipate potential borrowings under the Revolving Facility up to a maximum of approximately $450.0 million outstanding at any one time, including any anticipated borrowings to fund repurchases of common stock.

 

Senior Notes

 

On April 11, 2013, as part of our refinancing, we issued $400.0 million aggregate principal amount of 1.875% senior notes due 2018 (the “2018 Senior Notes”), net of discount of $0.5 million, which mature on April 15, 2018, and issued $900.0 million aggregate principal amount of 3.25% senior notes due 2023 (the “2023 Senior Notes”), net of discount of $2.4 million, which mature on April 15, 2023. We also have outstanding $500.0 million aggregate principal amount of 4.125% senior notes due 2017 (the “2017 Senior Notes”) which mature on July 15, 2017. Collectively, the 2017 Senior Notes, the 2018 Senior Notes and the 2023 Senior Notes comprise the “Senior Notes”, each of which were issued pursuant to an indenture as modified by supplemental indentures relating to each series of Senior Notes (as so supplemented, the “Senior Indenture”).  Interest on the 2018 Senior Notes and the 2023 Senior Notes is payable in cash on April 15 and October 15 of each year beginning October 15, 2013. Interest on the 2017 Senior Notes is payable in cash on January 15 and July 15 of each year.

 

We may redeem some or all of the Senior Notes at any time at redemption prices set forth in the Senior Indenture. Upon the occurrence of a change of control triggering event, which is defined in the Senior Indenture, each holder of our Senior Notes has the right to require us to repurchase some or all of such holder’s Senior 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.

 

The Senior Indenture contains covenants limiting, among other things, our ability (subject to certain exceptions) to consolidate, merge, or sell or otherwise dispose of all or substantially all of our assets; and our ability and the ability of our subsidiaries to incur or guarantee indebtedness secured by liens on any shares of voting stock of significant subsidiaries.

 

The Senior Indenture also provides for events of default which, if any of them occurs, would permit or require the principal of and accrued interest on our Senior Notes to become or to be declared due and payable.

 

Current Financial Condition / Recent Developments

 

At August 1, 2014, we had total outstanding debt (including the current portion of long-term obligations) of approximately $2.98 billion. We had $628.8 million available for borrowing under our Revolving Facility at that date. We believe our cash flow from operations and existing

 

29



 

cash balances, combined with availability under the Facilities, 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 as well as the next several years.

 

Our inventory balance represented approximately 53% of our total assets exclusive of goodwill and other intangible assets as of August 1, 2014. Our ability to effectively manage our inventory balances can have a significant impact on our cash flows from operations during a given fiscal year. Inventory purchases are often somewhat seasonal in nature, such as the purchase of warm-weather or Christmas-related merchandise. Efficient management of our inventory has been and continues to be an area of focus for us.

 

As described in Note 7 to the unaudited condensed 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. We also have certain income tax-related contingencies as disclosed in Note 3 to the unaudited condensed consolidated financial statements. Future negative developments could have a material adverse effect on our liquidity.

 

On August 18, 2014, as a result of the Company’s proposal to acquire Family Dollar Stores, Inc., Standard and Poor’s placed all of the Company’s credit ratings on watch with negative implications and Moody’s placed all of the Company’s credit ratings on review for downgrade. The Company’s current credit ratings are BBB- from Standard and Poor’s and Baa3 from Moody’s. Our current credit ratings, as well as future rating agency actions, could (i) impact our ability to finance our operations on satisfactory terms; (ii) affect our financing costs; and (iii) affect our insurance premiums and collateral requirements necessary for our self-insured programs. There can be no assurance that we will be able to maintain or improve our current credit ratings.

 

Cash flows from operating activities . Cash flows from operating activities were $486.9 million in the 2014 period, an increase of $2.8 million compared to the 2013 period. Changes in merchandise inventories and accounts payable generally had an offsetting impact on overall changes in working capital. The increase in accounts payable during the 2014 period was due primarily to increases in domestic merchandise receipts. Inventory balances increased by a greater amount in the 2014 period than in the 2013 period. On an ongoing basis, we closely monitor and manage our inventory balances, and they may fluctuate from period to period based on new store openings, the timing of purchases, and other factors. Merchandise inventories rose 9% during the first half of 2014 compared to a 6% increase in the first half of 2013. In the 2014 period compared to the respective 2013 period, changes in inventory balances in our four inventory categories were as follows: the consumables category increased 11% in both periods; the seasonal category increased by 4% compared to a 2% increase; the home products category increased by 10% compared to a 6% increase; and apparel increased by 6% compared to a 13% decline.

 

Cash flows from investing activities . Significant components of property and equipment purchases in the 2014 period included the following approximate amounts: $66 million for improvements, upgrades, remodels and relocations of existing stores; $58 million related to new leased stores, primarily for leasehold improvements, fixtures and equipment; $27 million for distribution and transportation-related capital expenditures; $21 million for information systems upgrades and technology-related projects; and $16 million for stores built by us. The timing of new, remodeled and relocated store openings along with other factors may affect the relationship

 

30



 

between such openings and the related property and equipment purchases in any given period. During the 2014 period, we opened 426 new stores and remodeled or relocated 585 stores, including the limited scope remodels discussed below.

 

Significant components of property and equipment purchases in the 2013 period included the following approximate amounts: $127 million for improvements, upgrades, remodels and relocations of existing stores; $66 million related to new leased stores, primarily for leasehold improvements, fixtures and equipment; $52 million for stores purchased or built by us; $49 million for distribution and transportation-related capital expenditures; and $12 million for information systems upgrades and technology-related projects. During the 2013 period, we opened 375 new stores and remodeled or relocated 377 stores.

 

Capital expenditures during 2014 are projected to be in the range of $450 million to $500 million. We anticipate funding 2014 capital requirements with existing cash balances, cash flows from operations, and if necessary, our Revolving Facility. We plan to continue to invest in store growth and development with approximately 700 new stores and approximately 500 stores to be relocated or remodeled in our traditional manner. We are also testing a limited-scope remodeling program to refresh some of our older, smaller stores with the goal of increasing sales by making them more appealing to our customers. We currently plan to have completed 400 of these limited-scope remodels by the end of 2014. Capital expenditures for the remainder of 2014 are anticipated to support our store growth as well as our remodel and relocation initiatives, including capital outlays for leasehold improvements, fixtures and equipment; the construction of new stores; costs to support and enhance our supply chain and technology initiatives; and routine and ongoing capital requirements.

 

Cash flows from financing activities . Net borrowings under the Revolving Facility were $190.0 million during the 2014 period compared to net repayments of $78.9 million during the 2013 period. During the 2014 and 2013 periods, we repurchased 14.1 million and 4.3 million outstanding shares of our common stock at a total cost of $800.1 million and $220.0 million, respectively. Proceeds from the issuance of long-term obligations in the 2013 period include the $1.0 billion unsecured Term Facility and the issuance of the Senior Notes totaling approximately $1.3 billion, the proceeds from which were used to extinguish our previous secured term loan and revolving credit facilities. We also paid debt issuance costs and hedging fees totaling $29.2 million in the 2013 period related to our refinancing.

 

Share Repurchase Program

 

We have an existing common stock repurchase program with a total remaining authorization of approximately $223.4 million at August 27, 2014. Under the authorization, purchases may be made in the open market or in privately negotiated transactions from time to time subject to market and other conditions, and the authorization has no expiration date.

 

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ITEM 3.                                      QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

 

There have been no material changes to the disclosures relating to this item from those set forth in our Annual Report on Form 10-K for the fiscal year ended January 31, 2014.

 

ITEM 4.                                      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) promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as of the end of the period covered by this report. 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)        Changes in Internal Control Over Financial Reporting .  There have been no changes in our internal control over financial reporting (as defined in Exchange Act Rule 13a-15(f)) during the quarter ended August 1, 2014 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

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PART II—OTHER INFORMATION

 

ITEM 1.         LEGAL PROCEEDINGS.

 

The information contained in Note 7 to the unaudited condensed consolidated financial statements under the heading “Legal proceedings” contained in Part I, Item 1 of this report is incorporated herein by this reference.

 

ITEM 1A.      RISK FACTORS.

 

There have been no material changes to the disclosures relating to this item from those set forth in our Annual Report on Form 10-K for the fiscal year ended January 31, 2014.

 

ITEM 2.                                      UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.

 

The following table contains information regarding purchases of our common stock made during the quarter ended August 1, 2014 by or on behalf of Dollar General or any “affiliated purchaser,” as defined by Rule 10b-18(a)(3) of the Exchange Act:

 

Issuer Purchases of Equity Securities

 

Period

 

Total Number
of Shares
Purchased

 

Average
Price Paid
per Share

($)

 

Total Number
of Shares Purchased
as Part of Publicly
Announced Plans or
Programs(a)

 

Approximate 
Dollar Value
of Shares that May
Yet Be Purchased
Under the Plans
or Programs(a)

($)

 

05/03/14-05/31/14

 

-

 

-

 

-

 

223,417,000

 

06/01/14-06/30/14

 

-

 

-

 

-

 

223,417,000

 

07/01/14-08/01/14

 

-

 

-

 

-

 

223,417,000

 

Total

 

-

 

-

 

-

 

223,417,000

 

 

(a ) A $500 million share repurchase program was publicly announced on September 5, 2012, and increases in the authorization under such program were announced on March 25, 2013 ($500 million increase) and December 4, 2013 ($1.0 billion increase). Under the authorization, purchases may be made in the open market or in privately negotiated transactions from time to time subject to market and other conditions. This repurchase authorization has no expiration date.

 

 

ITEM 6.                                      EXHIBITS.

 

See the Exhibit Index immediately following the signature page hereto, which Exhibit Index is incorporated by reference as if fully set forth herein.

 

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CAUTIONARY DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS

 

We include “forward-looking statements” within the meaning of the federal securities laws throughout this report, particularly under “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in Part I, Item 2, and “Note 7. Commitments and Contingencies” included in Part I, Item 1. You can identify these statements because they are not limited to historical fact or they use words such as “may,” “will,” “should,” “expect,” “ believe,” “anticipate,” “project,” “plan,” “estimate,” “objective,” “intend,” or “could,” and similar expressions that concern our strategy, plans, intentions or beliefs about future occurrences or results. For example, statements relating to estimated and projected expenditures, cash flows, results of operations, financial condition and liquidity; plans and objectives for, and expectations regarding, future operations, growth or initiatives, including the number of planned store openings, remodels and relocations, trends in sales of consumable products, and the levels of future costs and expenses; expectations regarding the Company’s proposal to acquire Family Dollar, the financing of a potential transaction, and the anticipated results of a potential transaction; anticipated borrowing under certain of our credit facilities; and the expected outcome or effect of pending or threatened litigation or audits are forward-looking statements.

 

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 effect 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 include, without limitation:

 

·                  economic conditions, including their effect on employment levels, consumer demand, disposable income, credit availability and spending patterns, inflation, commodity prices, fuel prices, interest rates, exchange rate fluctuations and the cost of goods;

 

·                  failure to successfully execute our strategies and initiatives, including those relating to merchandising, sourcing, inventory shrinkage, private brand, distribution and transportation, store operations, expense reduction and real estate;

 

·                  failure to open, relocate and remodel stores profitably and on schedule, as well as failure of our new store base to achieve sales and operating levels consistent with our expectations;

 

·                  levels of inventory shrinkage;

 

·                  effective response to competitive pressures and changes in our competitive environment and the markets where we operate;

 

·                  our level of success in gaining and maintaining broad market acceptance of our private brands;

 

·                  disruptions, unanticipated expenses or operational failures in our supply chain including, without limitation, a decrease in transportation capacity for overseas shipments, increases in transportation costs, work stoppages or other labor disruptions that could impede the receipt of merchandise, or delays in constructing or opening new distribution centers;

 

34



 

·                  risks and challenges associated with sourcing merchandise from suppliers, as well as trade restrictions;

 

·                  unfavorable publicity or consumer perception of our products, including, without limitation, related product liability and food safety claims;

 

·                  the impact of changes in or noncompliance with governmental laws and regulations (including, without limitation, product safety, healthcare, and labor and employment laws, as well as tax laws, the interpretation of existing laws, or our failure to sustain our reporting positions negatively affecting our tax rate) and developments in or outcomes of legal proceedings, investigations or audits;

 

·                  natural disasters, unusual weather conditions, pandemic outbreaks, terrorist acts and geo-political events;

 

·                  damage or interruption to our information systems;

 

·                  ability to attract and retain qualified employees, while controlling labor costs (including healthcare costs) and other labor issues;

 

·                  our loss of key personnel or our inability to hire additional qualified personnel;

 

·                  failure to successfully manage inventory balances;

 

·                  seasonality of our business;

 

·                  incurrence of material uninsured losses, excessive insurance costs or accident costs;

 

·                  a data security breach;

 

·                  deterioration in market conditions, including interest rate fluctuations, or a lowering of our credit ratings;

 

·                  our debt levels and restrictions in our debt agreements;

 

·                  new accounting guidance, or changes in the interpretation or application of existing guidance, such as changes to lease accounting guidance or a requirement to convert to international financial reporting standards;

 

·                  factors disclosed under “Risk Factors” in Part I, Item 1A of our Form 10-K for the fiscal year ended January 31, 2014; and

 

·                  factors disclosed elsewhere in this document (including, without limitation, in conjunction with the forward-looking statements themselves) and other factors.

 

All forward-looking statements are qualified in their entirety by these and other cautionary statements that we make from time to time in our other Securities and Exchange Commission (“SEC”) filings and public communications. You should evaluate forward-looking statements in the context of these risks and uncertainties. These factors may not contain all of the material factors that are important to you. We cannot assure you that we will realize the results or developments we 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 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.

 

35



 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized, both on behalf of the Registrant and in his capacity as principal financial and accounting officer of the Registrant.

 

 

DOLLAR GENERAL CORPORATION

 

 

 

 

 

 

Date: August 28, 2014

By:

 /s/ David M. Tehle

 

 

 David M. Tehle

 

 

 Executive Vice President and Chief Financial Officer

 

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EXHIBIT INDEX

 

10.1

Dollar General Corporation Executive Relocation Policy, as amended (effective July 16, 2014)

 

 

10.2

Form of Restricted Stock Unit Award Agreement (approved May 28, 2014) for awards to non-employee directors of Dollar General Corporation pursuant to the Amended and Restated 2007 Stock Incentive Plan (incorporated by reference to Exhibit 10.4 to Dollar General Corporation’s Quarterly Report on Form 10-Q for the fiscal quarter ended May 2, 2014, filed with the SEC on June 3, 2014 (file no. 001-11421))

 

 

15

Letter re unaudited interim financial information

 

 

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

 

 

101.INS

XBRL Instance Document

 

 

101.SCH

XBRL Taxonomy Extension Schema Document

 

 

101.CAL

XBRL Taxonomy Extension Calculation Linkbase Document

 

 

101.LAB

XBRL Taxonomy Extension Labels Linkbase Document

 

 

101.PRE

XBRL Taxonomy Extension Presentation Linkbase Document

 

 

101.DEF

XBRL Taxonomy Extension Definition Linkbase Document

 

37


Exhibit 10.1

 

 



 

Congratulations on your new assignment!

 

In addition to the challenges your new position brings, you and your family will encounter many changes as you leave familiar surroundings, find a new place to live and settle into your new location.

 

The relocation of employees contributes to the Company’s ability to stay flexible and competitive. For that reason, we have partnered with Global Mobility Solutions (GMS), as well as a number of other top rate service providers, to provide you with a program of relocation support to reduce normal move disruptions, and enable you to get settled in your new home and job as quickly as possible.

 

This Relocation Guide outlines the services made available to you to help facilitate your move, including selling your current residence and finding a new community and home.

 

Please take the time to read through this guide and familiarize yourself with the policy and GMS relocation services before you begin planning your relocation. Recognizing that relocating can be a disruptive time, the Company, through your dedicated Relocation Coach will assist you and your family throughout your move.

 

Our best wishes for success in your new location!

 

 

 

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Contents

 

 

 

Benefits at a Glance

3

 

 

Introduction

4

 

 

Relocation Administration

5

 

 

Forms to Complete

5

 

 

Expense Reimbursement

6

 

 

Relocation and Transition Expenses

6

 

 

Miscellaneous Expense Allowance

6

 

 

House Hunting

7

 

 

Home Sale Assistance program

8

 

 

Renters’ Assistance

16

 

 

Destination Location

17

 

 

Home Purchase Closing Cost Assistance

18

 

 

Shipment of Household Goods

19

 

 

Tax Assistance

21

 

 

Tax Treatment Table

23

 

 

 

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BENEFITS AT A GLANCE

 

 

 

 

 

Policy Component

 

 

Description

 

 

 

 

 

 

Eligibility

 

 

·   You are eligible for coverage under the relocation program described in this guide if you are classified as an active full-time current or newly-hired, salaried executive level employees and senior officers; homeowner or renter. It is your responsibility to work with the Sr. Manager Human Resources to monitor your eligibility for benefits and to ensure your status is accurately reflected in the payroll system.

 

·   Note: Active Full-time (AF) means not L, LP, or T status.

 

 

 

 

 

 

Miscellaneous Allowance

 

 

·   You will receive an Allowance of $10,000 to cover expenses not provided elsewhere in the policy

 

·   Such payment will not be grossed-up

 

 

 

 

 

 

Home Finding Trip

 

 

·   Professional assistance will be provided by GMS

 

·   The Company will provide you with two home finding trips for up to seven days/six nights, for you, your spouse or one additional family member and for your children.

 

·   Reimbursable expenses include reasonable costs associated with:

 

o Airfare or Mileage

 

 

o Lodging

 

o Meals ($25/day/adult & $15/day/child)

 

·   Rental car (if airfare)

 

 

 

 

 

 

Temporary Housing

 

 

·   Professional assistance will be provided by GMS

 

·   The Company will provide you with temporary housing accommodations for up to 90 days

 

·   Up to 14 days rental car if automobile is being shipped

 

 

 

 

 

 

Home Sale Assistance:

 

GPO/Amended Value Sale

 

 

·   Marketing Assistance

 

·   Appraised Value Offer

 

·   Amended Value Sale

 

·   Independent Sale

 

 

 

 

 

 

Renter Services

 

 

·   Lease Cancellation:

 

o Up to two months’ rent if required to cover lease cancellation or lease break fees

 

 

 

 

 

 

New Home Purchase Assistance

 

 

·   If you decide to purchase a home in the new location, you will be reimbursed for normal and customary new home purchase closing costs

 

·   Reimbursement includes a 1% loan origination fee

 

 

 

 

 

 

Movement of Household Goods

 

 

·   A professional van line will be selected and coordinated by GMS

 

·   Van line will pack, load, transport, unload goods, and unpack, including normal appliance servicing

 

·   The Company will provide:

 

o Debris pick up

 

o Storage for up to 90 days

 

o Up to $125,000 of valuation coverage

 

o Shipment for up to two automobiles if the distance to the new location is over 300 miles

 

 

 

 

 

 

Final Trip to the Destination Location

 

 

·   You and your family will be reimbursed for en route expenses from the departure location to the destination location. Reimbursable expenses include reasonable costs associated with:

 

o Airfare if vehicle(s) is/are shipped

 

o Lodging – 1 night in origin, en route

 

o Mileage – 1 vehicle if 1 is shipped or 2 vehicles if none are shipped

 

o Meals($25/day/adult & $15/day/child)

 

·   You must travel a minimum of 300 miles per day by the most direct route

 

 

 

 

 

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INTRODUCTION

 

On the Move…

 

This handbook has been designed to help you understand Dollar General’s relocation program and to assist you and your family in relocating as quickly as possible with minimal inconvenience.  You are encouraged to carefully read this handbook in its entirety.  Recognizing that relocating can be a disruptive process, the Company and GMS will assist you and your family throughout your move.

 

Eligibility

 

The relocation program was developed to facilitate the movement of active, full-time newly-hired and current, salaried, executive-level employees or senior officers who are requested to relocate by the Company and designated by the Company to receive the benefits described in this handbook.

 

In order to be eligible for relocation as described in this handbook, your relocation must meet the IRS 50-mile distance test.  The distance between your former residence and your new job site must be at least 50 miles greater than the distance between your former residence and your former job site.

 

Family

 

Your family members eligible for assistance under this policy include your spouse and your dependent household members.  In the event an additional member of your household is asked to relocate by the Company, you are eligible to receive only one set of benefits.

 

Time Limit

 

You are eligible for the benefits extended in this handbook for up to 12 months following your effective date of transfer. All expense reports related to your relocation are required to be submitted within 90 days of the date incurred within this 12-month period.

 

Disclaimer

 

The Company has the sole right at any time to revise, amend or discontinue this policy.  This policy shall not be considered or construed as an employment contract and does not constitute a guarantee of employment for any minimum or specified period of time.

 

Policy Exceptions

 

If you feel an exception is needed, please submit your request in writing to your GMS dedicated Relocation Coach.  They will review and forward your request to the Relocation Department at Dollar General for consideration.  Upon initial receipt, the Relocation Department will present a recommendation along with facts to the appropriate senior level officer for final approval by the Board’s Compensation Committee.  Your dedicated Relocation Coach will communicate the decision to you.

 

 

 

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RELOCATION ADMINISTRATION

 

Upon notification of your relocation, your dedicated Relocation Coach will contact you and be your main point of contact throughout your move.  Your dedicated Relocation Coach will guide you through each step of the relocation process, answer your questions, and help coordinate all aspects of your move.  Listed below are highlights of the services your dedicated Relocation Coach will provide to you:

 

à          general information,

 

à          expense report reimbursements,

 

à          disposition of your present home,

 

à          assistance in finding a new residence,

 

à          moving your household goods,

 

à          moving you and your family to the new location, and

 

We encourage you to become fully involved in your move and work closely with the professionals who have been made available to assist you throughout the relocation process.  By working closely with your dedicated Relocation Coach, you will be able to effectively manage your move.

 

Forms to Complete

 

Our goal is to have a relocation process that is as simple and easy to use as possible.  Therefore, there are only two steps that you must complete before receiving your relocation benefits.

 

Step 1.   Complete and return the Relocation Initiation Form

 

The Relocation Initiation Form provides us with important information to pass on to the moving company and for relocation check/reimbursement requests.

 

Step 2.   Complete and return the Employee Reimbursement Form.

 

The Employee Reimbursement Form states that you have read Dollar General’s Relocation policy and understand that you are responsible for any expenses not covered under the policy.  This form may also have a reimbursement schedule you would follow to pay back a pro-rated share of your relocation benefits should you leave the company within a year of the date of your last relocation reimbursement or last relocation expense incurred by Dollar General..

 

Both of these forms can be mailed or faxed to the following:

 

Dollar General Human Resources Relocation

 

100 Mission Ridge

 

Goodlettsville, TN  37072

 

Fax (615) 855-5872

 

 

 

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EXPENSE REIMBURSEMENT

 

Most ordinary expenses involved in moving from one location to another are covered under this policy.  Any questions of interpretation should be discussed with your dedicated Relocation Coach before you take action.

 

All relocation expenses must be submitted on the Relocation Expense Report Form (will be provided to you by GMS) and must not be combined with regular business expenses.  In order to determine the federal and state tax liability for reimbursed expenses, all relocation expenses must be reported accurately.

 

Where relocation-related expenses are specifically reimbursable, consistent guidelines apply.

 

à            All reimbursable expenses must be reasonable and appropriate.

 

à            All relocation benefits are reflected in U.S. dollars.

 

à    All reimbursable moving expenses must be incurred within 12 months from the effective date of employment or transfer and submitted for payment within 90 days from the date the expense is incurred.

 

à            Only expenses specifically outlined in the policy will be reimbursed.

 

à            You must submit original receipts for reimbursement.  Your completed expense reports together with your original receipts should be forwarded directly to your dedicated Relocation Coach.

 

à            It is important not to include any business expenses on relocation expense forms.

 

RELOCATION AND TRANSITION EXPENSES

 

Miscellaneous Expense Allowance

 

The Company will provide you with an allowance equal to $10,000, to cover many of the incidental expenses not specifically reimbursed under this policy, which may occur as a direct result of your transfer. Some of these expenses may include:

 

à            driver’s licenses and automobile registrations in the new location,

 

à            meals during temporary living,

 

à            duplicate mortgage,

 

à            utility deposits,

 

à            shipment of pets,

 

à            cleaning or maid service (new or old location),

 

à            non-refundable tuition, memberships, club dues or subscriptions,

 

à            piano tuning,

 

à            tips to movers,

 

à            drapery and carpet installation or alterations,

 

à            television or cable installation or adjustments,

 

à            overnight mail charges,

 

à            tax consulting,

 

à            items unique to your personal move not covered by this policy,

 

à            disassemble/reassemble playground, gym equipment, swimming pools, and similar items.

 

 

 

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For newly hired employees, a check will be processed and deposited into your account within 2 weeks after your start date.

 

Tax Assistance

 

Gross-up will not be provided for the Miscellaneous Expense Allowance.

 

House Hunting

 

Dollar General will provide you and your spouse or one additional household member and your children with two (2) house hunting/apartment hunting trips for a total of seven (7) days.  The House Hunting Trip will include the following:

 

Ø             Hotel accommodations for a maximum six (6) nights.

 

Ø             Airfare or mileage reimbursement at current Company rate if personal vehicle is driven.

 

Ø             Reimbursement for rental car for maximum of seven (7) days.

 

Ø             Reimbursable meal expenses not to exceed $25.00/day per adult, $15.00/day per child (original receipts must be submitted).

 

Tax Assistance

 

Gross-up will be provided for residence hunting expenses.

 

Temporary Living

 

Temporary Living Assistance is intended only for short-term living arrangements at the new location.  Dollar General will reimburse you for up to 90 days of temporary living expenses.  Temporary living assistance includes the following:

 

à          One bedroom fully furnished corporate apartment for employee only.

 

à          If trailing family, a two bedroom fully furnished corporate apartment may be requested in lieu of a one bedroom.

 

à          Reimbursement for full size rental car for a maximum of two (2) weeks

 

 

If you require temporary living assistance please contact your dedicated Relocation Coach at least two weeks in advance.  He or she will be happy to help you make arrangements and answer any questions you may have.

 

Return Trip

 

If you are required to report to work in your new location prior to your family’s final move, you shall receive coverage of travel expenses for one (1) return trip home per month up to a total of 3 round trips during the temporary living period. One family member may visit you in the new location in lieu of a return trip.

 

Tax Assistance

 

Gross-up will be provided for temporary living and return trip expenses.

 

 

 

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HOME SALE ASSISTANCE PROGRAM

 

Your dedicated Relocation Coach will provide you with the necessary expertise to facilitate the sale of your home through the services described below.

 

Home Eligibility

 

A home eligible for home sale assistance is any completed single-family or two-family residence, including a condominium that is used as your principal residence and that is owned by you, your spouse, any of your dependents residing in the same household, or any combination of those persons at the time you are asked to relocate.  This also includes land customarily considered part of a residential lot and all personal property normally sold with a residence according to local custom.  If your home does not meet these eligibility guidelines, you may qualify for reimbursement of certain home sale closing costs and commission expenses if you sell your primary residence on your own.

 

Homes considered ineligible for home sale assistance (Guaranteed Buyout Offer/Buyer Value Option) include, but are not limited to, the following:

 

        cooperative apartments,

        mobile homes,

        vacation/secondary homes,

        investment properties,

        homes with excessive acreage (+5 acres),

        homes that are partially completed or under substantial renovation,

        homes ineligible for conventional financing,

        houseboats,

        homes deemed ineligible through building inspections, and

        vacant lots appraised as contributory value only.

 

If you have any questions regarding your home’s eligibility, please contact your dedicated Relocation Coach prior to beginning the relocation process.

 

Overview

 

Marketing Your Home

 

 

 

You are required to speak with your dedicated Relocation Coach prior to taking any steps to list or market your home. You are required to market your home for a minimum of 90 days from the date your home is listed with an approved real estate agent.

 

 

The home sale process will begin with the appraisal and listing your home.  Your dedicated Relocation Coach will help you select a qualified real estate agent and together they will determine selling strategies targeted to help you receive the best

 

 

 

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possible offer for your home. The advantage to successfully marketing your home and selling to an outside buyer is that you may receive a greater cash return than the Appraised Value Offer.

 

Appraised Value Offer

 

Two independent appraisers will appraise your home to determine the Appraised Value Offer.  Your relocation coach will provide a list of ERC endorsed appraisers in your area to choose from.  This offer will be your “safety net” providing you with a guaranteed price, should your home not sell on the open market.  Your Appraised Value Offer will be available to you for 90 days.

 

Amended Value Sale

 

If you receive a qualified offer on your home from an outside buyer you have an opportunity to “amend” the Appraised Value Offer from GMS to reflect your buyer’s offer.

 

Marketing Assistance

 

As soon as the Company authorizes your relocation, your dedicated Relocation Coach will contact you to explain the first step—the listing, marketing and appraisal of your home.  Placing your home on the market as advantageously as possible is a critical element in successfully marketing your home.  Throughout the home sale process, your dedicated Relocation Coach will continuously track your agent’s efforts to market your home.  The goal of these efforts is to help you obtain the best offer for your home within a reasonable time frame.

 

Your dedicated Relocation Coach’s objectives are to:

 

        help you identify a qualified and active broker to assist you in marketing and listing your home in a highly effective manner;

 

        work with your real estate agent to develop a strategic marketing plan to sell your home at the best possible market value;

 

        in conjunction with your real estate agent, suggest any minor repairs and/or improvements that will increase the marketability of your home; and

 

        work with you throughout the process of you selling your home.

 

How the Marketing Process Works…

 

The following is a step-by-step process of marketing assistance services provided by your dedication Relocation Coach.

 

Agent Selection

 

Your dedicated Relocation Coach will place a referral with two (2) area real estate agents who will visit your home and prepare a complete Employee Relocation Council (ERC) Market Analysis.  If you would like to designate a particular real estate agent that has not been recommended, please notify your dedicated Relocation Coach.  As long as the real estate agent agrees to the program’s requirements, he or she will be able to work with you as one of your two selected agents.  You may not utilize or ask to have qualified any real estate agent that is a family member; i.e., spouse, child, mother, father, brother, sister or in-laws.  If you have no preference or are not familiar with local brokers, your dedicated Relocation Coach will assist you in the selection.

 

 

 

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Listing Your Home

 

Your dedicated Relocation Coach will ask you to select one real estate agent from the two you have interviewed.  He or she will then work with you and your selected agent to develop a marketing strategy and establish a list price that is both attractive and realistic in the local market.

 

 

You a re required to list your home within 110% Appraised Value. You are required to list your home for a minimum of 90 days from the initial list date before you are eligible to accept the Appraised Value Offer.

 

 

Listing Exclusion Clause

 

When you speak with your dedicated Relocation Coach, he or she will discuss the necessity of including the following language in the listing agreement with your broker. The reason for this clause is to allow for cancellation of the listing agreement if necessary for GMS to close with the buyer.  This clause is considered “standard operating procedure” among agents who work with corporate transferees.  The following Exclusion Clause should be attached as an addendum to the Listing Agreement.

 

“In the event of any conflict or inconsistency between this Addendum and the Listing Agreement, the terms of this Addendum shall control.

 

 

It is understood and agreed that regardless of whether or not an offer is presented by a ready, willing and able buyer:

 

 

1. No commission or compensation shall be earned by, or be due and payable to, broker until the sale of the property has been consummated between seller and buyer, the deed delivered to the buyer and the purchase price delivered to the seller; and

 

 

2. The seller reserves the right to sell the property to GMS or to: ____________ (individually and collectively a “Named Prospective Purchaser”) at any time. Upon the execution by a Named Prospective Purchaser and me (us) of an Agreement of Sale with respect to the property, this listing agreement shall immediately terminate without obligation of my (our) part or on the part of any Named Prospective Purchaser to either pay a commission or to continue this listing.”

 

 

 

 

 

 

 

 

 

 

 

 

 

Real Estate Agent

 

Date

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Seller

 

Date

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Seller

 

Date

 

 

 

 

 

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Monitoring the Marketing Process

 

Your dedicated Relocation Coach will work with you and your real estate agent throughout the marketing process to ensure maximum exposure for your home, provide feedback on the marketing process, and recommend strategy modifications, if needed.

 

Negotiating a Sale

 

 

When you have an interested buyer and receive an offer, your dedicated Relocation Coach will be a valuable resource as you negotiate a price and an Offer Letter.  You must submit ALL offers received to your dedicated Relocation Coach for review and consideration. DO NOT SIGN a contract (or any other document) with the buyers or take any money as a deposit from the real estate agent or prospective buyer.

 

Finalizing a Sale

 

Your dedicated Relocation Coach will handle the details of the real estate transaction once the terms of the sales agreement have been finalized.

 

APPRAISED VALUE OFFER

 

Your decision to relocate should not be hampered by concerns about selling your home.  GMS will assist you by making an offer to purchase your home at a value established by independent fee appraisers.  The appraisal process will begin immediately after entering the relocation program

 

Appraiser Selection

 

Once you have notified your dedicated Relocation Coach of your choice of appraiser’s, your dedicated Relocation Coach will notify the approved appraisers to contact you in order schedule a convenient time to survey your home.

 

Relocation Appraisal

 

A relocation appraisal is an estimate of the anticipated sales price of your home over a reasonable selling period.  Relocation Appraisers estimate value primarily by comparing your home to the sales of similar properties making detailed adjustments for the differences between those properties and your home.  The appraisers consider location, size, age, condition, and marketability.

 

When the appraisers arrive to inspect your home, you should be prepared to discuss any facts that may be important in determining the value of your home:

 

        any improvements you have made to the home that may or may not be visible to the appraisers; and

 

        any information on similar homes that have recently sold in your area.

 

Your home will be appraised in “as is” condition, so it is important your home shows favorably to maximize the appraised value and resale efforts. Your dedicated

 

 

 

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Relocation Coach and your real estate agent will assist in suggesting specific fix-up items to help maximize your marketing efforts.

 

The appraisers may also ask for a copy of the land survey and a copy of the title policy that you received when you closed on your home.  They will need these items to obtain the correct legal description.

 

Determining the Appraised Value Offer

Your Appraised Value Offer will be equal to the average of two independent relocation appraisals.  However, if the variance between the two appraisals is greater than 5% of the higher amount, a third relocation appraisal will be ordered.  In this case, your offer will be determined by averaging the two closest appraisals. Normal and customary home inspections will be ordered at the time of the appraisals.

 

Your dedicated Relocation Coach will present you with your Appraised Value Offer once the inspection and appraisal reports have been received and reviewed.  Your home will have to pass all inspections and/or you must satisfactorily remedy any deficiencies before your offer is finalized.  The entire process should be completed within 30 days from the date of the last inspection.

 

 

 

 

You are required to list your home at no more than 110% of the Appraised Value Offer. This may require you to make an adjustment to your most current list price.

 

 

 

Title Search

In addition to arranging for the appraisals and inspections, a title search will be initiated in order to prepare for closing.  You may need to be involved in clearing any title issues should they appear on the title report.  Please inform your real estate agent that GMS is bringing the title up-to-date.  This can avoid a duplicate title search.  Often an agent will arrange for a title search upon notification from a lender of a buyer’s loan approval.

 

Offer Period

Your dedicated Relocation Coach will call you with your Appraised Value Offer and outline the timing and process of the home sale program. The Appraised Value Offer has a 90-day acceptance period—90 days to continue marketing your home knowing you have a set “safety net”.  Your 90-day acceptance period begins the day your Offer Letter is postmarked.  You may accept the appraised value offer at any time after marketing your home for 90 days.

 

 

 

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You are required to market your home for 90 days from the list date before you are able to accept the Appraised Value Offer.

 

 

Accepting the Appraised Value Offer

If you are unable to sell your home during the 90-day offer period and accept the Appraised Value Offer, you and your spouse should sign the GMS Offer Letter and return both copies to your dedicated Relocation Coach along with the other supporting documents.  Your execution of the Offer Letter is a legal transaction.  You will need to sign and notarize the Offer Letter and other related documents.

 

The signed GMS Offer Letter and related documents must be received by your dedicated Relocation Coach on or prior to the expiration date of your offer.  The contract will be dated on the day all necessary documents are completed and signed by you and your dedicated Relocation Coach.

 

Vacating the Home

You have 60 days from the date you sign the GMS Offer Letter in which to vacate the property provided a resale closing does not occur sooner.  If you cannot move within 60 days, please let your dedicated Relocation Coach know and you may be granted additional time to vacate, if circumstances warrant.

 

After you and GMS have signed the Offer Letter, you will continue to be responsible for the costs of maintenance, repairs, utilities, insurance, etc., until you actually vacate.  Prior to vacating, you will be expected to cooperate fully with all attempts by GMS to market the home by allowing prospective purchasers to view the premises by appointment during reasonable hours.

 

From the date you vacate, GMS will make all future mortgage, tax, and other carrying payments on your home.  It will also assume payment of maintenance and utility costs.  Your equity statement will reflect mortgage interest through your executed GMS contract or vacate date, whichever comes last.

 

 

 

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Utilities

Since sudden cold weather can cause damage due to freezing, do not turn off any utilities when you vacate the home.  The utilities must be left in your name until you contract with GMS or vacate the home, whichever is later.  At that time, you should request final readings from the utility companies serving your home.  Your dedicated Relocation Coach will instruct your real estate agent to transfer the utilities into the real estate company’s name until the home closes with new buyers. The day you vacate is customarily the date utilities are transferred to the real estate company.  If you receive a utility bill covering a period of time when payment was not your responsibility, please submit the invoice to your dedicated Relocation Coach for payment.

 

Insurance

You will need to cancel your homeowner’s insurance policy effective when GMS signs the Offer Letter or you vacate, whichever is later.  Any refund due to you from the insurance company will be paid directly to you.  Make note to discuss this with your insurance agent and follow-up if necessary.

 

 

 

If you are vacating your home prior to contracting with GMS, contact your insurance agent to arrange coverage during any periods the home will be unoccupied. Most homeowner’s insurance policies state coverage is void if the dwelling is unoccupied for a specific period of time.

 

AMENDED VALUE SALE

Achieving an Amended Value Sale is of benefit to you and the Company.  The Company avoids the significant expense of purchasing, maintaining, and reselling your home through GMS and you receive the highest possible price for your home.

 

 

If at any time during your marketing period, you receive an offer through the efforts of your real estate agent, you must submit the offer to your dedicated Relocation Coach. DO NOT SIGN a contract (or any other document) with the buyers or take any money as a deposit from the real estate agent or prospective buyer.

 

 

Advantages of an Amended Value Sale

 

You may receive a greater cash net return than the Appraised Value Offer.

 

 

You will be relieved of the responsibilities of property ownership upon vacate or contract date with GMS, whichever is later.

 

 

You will be relieved of the necessity of closing with the buyer.

 

 

After contracting with GMS, you will be assured of receiving the net proceeds based upon the Amended Value Sale even if the original sale falls through and does not close.

 

 

 

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Analyzing the Offer

Your dedicated Relocation Coach will review the terms of the offer in an effort to determine whether the offer is bona fide (made in good faith), and to confirm that it is not subject to the sale of the buyer’s property, does not contain any unusual or unreasonable terms, and is not subject to interim financing.

 

Amending the Offer Letter

Once the final offer has been approved, your dedicated Relocation Coach will ask you to “amend” the amount in your GMS Offer Letter to reflect the buyer’s offer and to sign and return the Offer Letter.

 

Buyer’s Offer Less Than Appraised Value Offer

At its discretion, the Company may also accept offers which are lower than your Appraised Value Offer.  You will remain eligible to receive your equity calculation based on the Appraised Value Offer.

 

Closing an Amended Value Sale

GMS will acquire your home, according to the terms of the amended GMS Offer Letter with you.  GMS will also fully honor the terms of the Purchase Agreement with the buyers.

 

GMS will make every effort to close the transaction with the buyer.  However, since GMS has already purchased your home, you will not be impacted if the sale to the buyer is not eventually consummated.  Your equity payment will be based upon the Amended Value Sale Price.

 

Responsibility for your property remains with you until you contract with GMS or vacate, whichever is later.  This includes maintenance of your home, payments for utilities, mortgage, taxes, and premiums for insurance.

 

Equity

Your equity is calculated as of the GMS contract date or your scheduled vacate date, whichever is later, and is based upon the Amended Value sale price or guaranteed offer price, whichever is greater.  You will need to coordinate the timing of your equity check with your dedicated Relocation Coach. You may be eligible to receive an equity advance once you have signed the GMS Offer Letter and when there is a specific need for funds to close on a new home in the destination area.

 

 

 

It is important to note that certain items are not covered under the policy and will be deducted from your final equity, if you have agreed to any of these additional seller’s expenses:

 

repairs and improvements requested by the buyer;

 

 

buyer’s closing costs;

 

 

homeowner warranties;

 

 

buyer’s incentives;

 

 

 

 

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real estate commission above the standard rate for your area;

 

 

closing dates beyond 60 days of vacating or contracting with GMS.

 

 

INDEPENDENT SALE

If your home is considered ineligible for the Company’s Home Sale Assistance Program (Buyer Value Option or Amended Value Offer) or you elect to sell your home independently prior to initiation into GMS’ Home Sale Assistance Program, you may be eligible to receive direct reimbursement of normal and customary home sale closing costs and commission when you sell your home on your own. Contact your dedicated Relocation Coach to determine if your home qualifies for this home sale option.

 

 

If your home is eligible for GMS’ home sale assistance (Buyer Value Option or Amended Value Offer) and you sell your home on your own, the Company will not provide tax assistance for your home sale commission and closing cost expenses.

 

 

Reimbursement of Expenses

Normal and customary home sale closing costs and real estate commission at the prevailing rate in your current location (maximum of 6%) will be reimbursed if you sell your home independently within twelve (12) months of your effective date of transfer.

 

Discount points incurred through negotiation with FHA, VA and conventional financing are not reimbursable.

 

Tax Assistance

 

You will receive tax assistance for normal and customary home sale closing costs and eligible commission expenses only if your home is ineligible for the Home Sale Assistance Program (Buyer Value Option or Amended Value Offer).  If you choose to sell your home on your own, no tax assistance will be provided to you.

 

RENTERS’ ASSISTANCE

Lease Cancellation

If you are presently renting your home or apartment at the origination location, you should immediately notify your landlord or lease holder of your move to avoid or minimize penalty charges.  You should attempt to obtain a written waiver of any provisions of the lease requiring fees or penalties due to your transfer.  The Company asks that you make every effort to minimize the penalties by making the best possible arrangements with your landlord.

 

Should you be required to pay a penalty, the Company reimburses up to a maximum of two (2) months’ rent for any combination of lease termination penalty charges, forfeiture of lease deposit, and/or duplicate rent on your former home or apartment.  If necessary, your dedicated Relocation Coach can assist you with lease cancellation arrangements.

 

 

 

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New Lease Agreement

 

 

Should you decided to rent a home or apartment in the destination location your new lease should be examined carefully before it is signed.  You should negotiate a cancellation clause that would give you the right to cancel the lease without penalty after giving 30 days’ notice, in the event of a company-initiated transfer.

 

Sample Clause:

 

If tenant’s employer relocates tenant to a location more than fifty (50) miles from the premises that are the subject of this lease, this lease will be automatically terminated without further liability at any time.  Tenant agrees to give landlord at least 30 days’ notice of his/her intention to terminate this lease along with proof of such transfer of employment.

 

Tax Assistance

Gross-up will be provided for renters’ assistance reimbursements.

 

DESTINATION LOCATION

Planning Your House Hunting Trip

Whether you are a homeowner or a renter, selecting a new community and home is one of the most important decisions you will make as a result of your job transfer.  The Company’s relocation program offers you professional home finding counseling through GMS.  The Company encourages you to take advantage of this valuable service.

 

Your dedicated Relocation Coach will discuss your family’s specific needs, preferences, and lifestyle.  After review of your requirements, your dedicated Relocation Coach will select a local real estate professional who is experienced in the areas of interest to you.

 

 

 

 

Remember to contact your dedicated Relocation Coach prior to contacting any real estate agent in the new location.

 

 

 

Your dedicated Relocation Coach and real estate agent will work together to organize your house hunting trip so it is productive.  By planning in advance, the agent will be prepared to take you on area tours and discuss items of interest to you and your family.  Preparation gives you a better chance of quickly finding a residence to fit your needs at a price you can afford.

 

Once your real estate agent is contacted, he or she will provide the following information:

 

schools, churches, etc.,

 

 

commuting times,

 

 

child and elder care services, and

 

 

pre-selected homes for viewing

 

 

 

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If you are a current homeowner, you should delay house hunting in the new location until you have an estimated value on your present home and you have been pre-qualified by a mortgage lender.  Home purchase decisions made with unrealistic expectations of current equity may result in over-commitment at the new location.

 

Internet Home Search

Although the Internet can be a useful tool to gain information on housing in the new area, keep in mind you need to use the approved real estate agent assigned to you to obtain information or to view any home you find on the Internet.  This will avoid confusion as to which agent you are working with and any possible real estate commission disputes.

 

HOME PURCHASE CLOSING COST ASSISTANCE

If you are purchasing a residence in the new location, you will be reimbursed for reasonable and actual home purchase closing costs provided you sign a contract to purchase a home in the new area and close within one year of your employment effective date or effective date of transfer.

 

One time closing costs for permanent financing will be reimbursed including:

 

normal attorney’s fees,

appraisal fees,

tax service fees,

title insurance (lender’s coverage, only),

recording fees (including tax stamps),

credit reports,