Dollar General Corporation
DOLLAR GENERAL CORP (Form: 10-Q, Received: 12/04/2014 08:44:27)

 

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 October 31, 2014

 

Commission File Number: 001-11421

 

DOLLAR GENERAL CORPORATION

(Exact name of Registrant as specified in its charter)

 

TENNESSEE
(State or other jurisdiction of
incorporation or organization)

61-0502302
(I.R.S. Employer
Identification No.)

 

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

 

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

 

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 303,425,920 shares of common stock outstanding on November 28, 2014.

 



 

PART I—FINANCIAL INFORMATION

 

ITEM 1.         FINANCIAL STATEMENTS.

 

DOLLAR GENERAL CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands)

 

 

 

October 31,
2014

 

January 31,
2014

 

ASSETS

 

(Unaudited)

 

(see Note 1)

Current assets:

 

 

 

 

 

 

Cash and cash equivalents

 

  $

216,155

 

 

  $

505,566

 

Merchandise inventories

 

2,788,996

 

 

2,552,993

 

Prepaid expenses and other current assets

 

173,981

 

 

147,048

 

Total current assets

 

3,179,132

 

 

3,205,607

 

Net property and equipment

 

2,120,572

 

 

2,080,305

 

Goodwill

 

4,338,589

 

 

4,338,589

 

Other intangible assets, net

 

1,202,651

 

 

1,207,645

 

Other assets, net

 

36,428

 

 

35,378

 

Total assets

 

  $

10,877,372

 

 

  $

10,867,524

 

 

 

 

 

 

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

Current portion of long-term obligations

 

  $

101,041

 

 

  $

75,966

 

Accounts payable

 

1,394,873

 

 

1,286,484

 

Accrued expenses and other

 

442,859

 

 

368,578

 

Income taxes payable

 

33,215

 

 

59,148

 

Deferred income taxes

 

38,858

 

 

21,795

 

Total current liabilities

 

2,010,846

 

 

1,811,971

 

Long-term obligations

 

2,666,022

 

 

2,742,788

 

Deferred income taxes

 

569,055

 

 

614,026

 

Other liabilities

 

287,812

 

 

296,546

 

 

 

 

 

 

 

 

Commitments and contingencies

 

 

 

 

 

 

 

 

 

 

 

 

 

Shareholders’ equity:

 

 

 

 

 

 

Preferred stock

 

-

 

 

-

 

Common stock

 

265,495

 

 

277,424

 

Additional paid-in capital

 

3,038,621

 

 

3,009,226

 

Retained earnings

 

2,047,674

 

 

2,125,453

 

Accumulated other comprehensive loss

 

(8,153

)

 

(9,910

)

Total shareholders’ equity

 

5,343,637

 

 

5,402,193

 

Total liabilities and shareholders’ equity

 

  $

10,877,372

 

 

  $

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 39 weeks ended

 

 

 

October 31,
2014

 

November 1,
2013

 

October 31,
2014

 

November 1,
2013

 

Net sales

 

 $

4,724,409

 

$

4,381,838

 

$

13,970,529

 

$

13,010,222

 

Cost of goods sold

 

3,300,661

 

3,053,345

 

9,733,461

 

9,009,291

 

Gross profit

 

1,423,748

 

1,328,493

 

4,237,068

 

4,000,931

 

Selling, general and administrative expenses

 

1,029,605

 

938,252

 

3,034,691

 

2,802,868

 

Operating profit

 

394,143

 

390,241

 

1,202,377

 

1,198,063

 

Interest expense

 

21,835

 

21,524

 

66,700

 

66,671

 

Other (income) expense

 

-

 

-

 

-

 

18,871

 

Income before income taxes

 

372,308

 

368,717

 

1,135,677

 

1,112,521

 

Income tax expense

 

135,992

 

131,332

 

425,703

 

409,578

 

Net income

 

 $

236,316

 

$

237,385

 

$

709,974

 

$

702,943

 

 

 

 

 

 

 

 

 

 

 

Earnings per share:

 

 

 

 

 

 

 

 

 

Basic

 

 $

0.78

 

$

0.74

 

$

2.33

 

$

2.17

 

Diluted

 

 $

0.78

 

$

0.74

 

$

2.32

 

$

2.16

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares outstanding:

 

 

 

 

 

 

 

 

 

Basic

 

303,080

 

321,711

 

305,142

 

324,485

 

Diluted

 

304,108

 

322,543

 

306,097

 

325,438

 

 

 

 

 

 

 

 

 

 

 

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 39 weeks ended

 

 

October 31,
2014

 

November 1,
2013

 

October 31,
2014

 

November 1,
2013

 

Net income

 

 $

 236,316

 

 $

 237,385

 

 $

 709,974

 

 $

 702,943

 

Unrealized net gain (loss) on hedged transactions, net of related income tax expense (benefit) of $428, $100,  $1,146, and $(4,735), respectively

 

655

 

166

 

1,757

 

(7,393

)

Comprehensive income

 

 $

 236,971

 

 $

 237,551

 

 $

 711,731

 

 $

 695,550

 

 

 

 

 

 

 

 

 

 

 

See notes to condensed consolidated financial statements.

 

3



 

DOLLAR GENERAL CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(In thousands)

 

 

 

For the 39 weeks ended

 

 

October 31,
2014

 

November 1,
2013

 

 

 

 

 

 

 

Cash flows from operating activities:

 

 

 

 

 

 

Net income

 

$

709,974

 

 

$

702,943

 

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

 

 

 

 

 

 

Depreciation and amortization

 

255,759

 

 

247,672

 

Deferred income taxes

 

(35,944

)

 

6,483

 

Tax benefit of share-based awards

 

(11,659

)

 

(28,163

)

Loss on debt retirement, net

 

-

 

 

18,871

 

Noncash share-based compensation

 

27,698

 

 

16,372

 

Other noncash gains and losses

 

7,574

 

 

(3,552

)

Change in operating assets and liabilities:

 

 

 

 

 

 

Merchandise inventories

 

(239,302

)

 

(187,490

)

Prepaid expenses and other current assets

 

(29,479

)

 

5,269

 

Accounts payable

 

100,510

 

 

(3,106

)

Accrued expenses and other liabilities

 

71,035

 

 

63,547

 

Income taxes

 

(14,274

)

 

(76,371

)

Other

 

(1,345

)

 

(1,900

)

Net cash provided by (used in) operating activities

 

840,547

 

 

760,575

 

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

 

Purchases of property and equipment

 

(288,537

)

 

(443,978

)

Proceeds from sales of property and equipment

 

1,588

 

 

950

 

Net cash provided by (used in) investing activities

 

(286,949

)

 

(443,028

)

 

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

 

Issuance of long-term obligations

 

-

 

 

2,297,177

 

Repayments of long-term obligations

 

(51,914

)

 

(2,119,760

)

Borrowings under revolving credit facilities

 

1,023,000

 

 

1,170,900

 

Repayments of borrowings under revolving credit facilities

 

(1,023,000

)

 

(1,195,800

)

Debt issuance costs

 

-

 

 

(15,996

)

Payments for cash flow hedge related to debt issuance

 

-

 

 

(13,217

)

Repurchases of common stock

 

(800,095

)

 

(419,974

)

Other equity transactions, net of employee taxes paid

 

(2,659

)

 

(24,132

)

Tax benefit of share-based awards

 

11,659

 

 

28,163

 

Net cash provided by (used in) financing activities

 

(843,009

)

 

(292,639

)

 

 

 

 

 

 

 

Net increase (decrease) in cash and cash equivalents

 

(289,411

)

 

24,908

 

Cash and cash equivalents, beginning of period

 

505,566

 

 

140,809

 

Cash and cash equivalents, end of period

 

$

216,155

 

 

$

165,717

 

 

 

 

 

 

 

 

Supplemental schedule of non-cash investing and financing activities:

 

 

 

 

 

 

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

 

$

34,961

 

 

$

32,040

 

 

 

 

 

 

 

 

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 October 31, 2014 and results of operations for the 13-week and 39-week accounting periods ended October 31, 2014 and November 1, 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 $2.2 million and $(3.7) million in the respective 13-week periods, and $3.1 million and $(6.6) million in the respective 39-week periods, ended October 31, 2014 and November 1, 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

 

5



 

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

 

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 October 31, 2014

 

13 Weeks Ended November 1, 2013

 

 

Net
Income

 

Shares

 

Per Share
Amount

 

Net
Income

 

Shares

 

Per Share
Amount

Basic earnings per share

 

$

236,316

 

303,080

 

  $

0.78

 

  $

237,385

 

321,711

 

  $

0.74

 

Effect of dilutive share-based awards

 

 

 

1,028

 

 

 

 

 

832

 

 

 

Diluted earnings per share

 

$

236,316

 

304,108

 

  $

0.78

 

  $

237,385

 

322,543

 

  $

0.74

 

 

 

 

39 Weeks Ended October 31, 2014

 

39 Weeks Ended November 1, 2013

 

 

Net
Income

 

Shares

 

Per Share
Amount

 

Net
Income

 

Shares

 

Per Share
Amount

Basic earnings per share

 

$

709,974

 

305,142

 

  $

2.33

 

  $

702,943

 

324,485

 

  $

2.17

 

Effect of dilutive share-based awards

 

 

 

955

 

 

 

 

 

953

 

 

 

Diluted earnings per share

 

$

709,974

 

306,097

 

  $

2.32

 

  $

702,943

 

325,438

 

  $

2.16

 

 

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 1.0 million and 1.1 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 2009 and earlier federal income tax returns. As a result, the 2009 and earlier tax years are not open for further examination by the IRS. Due to the filing of an amended federal income tax return for the 2010 tax year, the IRS may, to a limited extent, examine the Company’s 2010 income tax filings. The IRS, at its discretion, may also choose to examine the Company’s 2011 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 October 31, 2014, the total reserves for uncertain tax benefits, interest expense related to income taxes and potential income tax penalties were $9.4 million, $0.8 million and $0.4 million, respectively, for a total of $10.6 million. Of this amount, $0.2 million and $10.4 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 $3.2 million in the coming twelve months principally as a result of the effective settlement of uncertain tax positions. As of October 31, 2014, approximately $9.4 million of the reserve for uncertain tax positions would impact the Company’s effective income tax rate if the Company were to recognize the tax benefit for these positions.

 

The effective income tax rates for the 13-week and 39-week periods ended October 31, 2014 were 36.5% and 37.5%, respectively, compared to effective income tax rates of 35.6% and 36.8%, respectively, for the 13-week and 39-week periods ended November 1, 2013.  The effective tax rate for both the 13-week and 39-week periods 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, as well as nondeductible expenses related to the Company’s proposal to acquire Family Dollar as discussed in Note 10.  Partially offsetting these increases were reductions in the reserve associated with uncertain state tax positions in the 2014 periods as compared to additions that occurred in the 2013 periods.  Both the 2014 and the 2013 periods benefited from reductions in federal uncertain tax positions (due to the favorable resolution of income tax examinations and the lapsing of the assessment period associated with previously filed income tax returns) of a similar amount.

 

7



 

4.                                     Current and long-term obligations

 

On April 11, 2013, the Company consummated a refinancing pursuant to which it terminated its then-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, which commenced 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 sheets. 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 39-week period ended November 1, 2013.

 

As of October 31, 2014, the balance of the Term Facility was $950.0 million, and under the Revolving Facility, the Company had no outstanding borrowings, outstanding letters of credit of $31.2 million, and borrowing availability of $818.8 million. In addition, the Company had letters of credit totaling $21.3 million as of October 31, 2014 which were not issued under the Revolving Facility.

 

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 sheets.

 

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).

 

8



 

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 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 October 31, 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 October 31, 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
October 31,
2014

Liabilities:

 

 

 

 

 

 

 

 

 

Long-term obligations (a)

 

  $

2,658,100

 

  $

19,422

 

  $

-

 

  $

2,677,522

 

Derivative financial instruments (b)

 

-

 

2,195

 

-

 

2,195

 

Deferred compensation (c)

 

23,332

 

-

 

-

 

23,332

 

 

 

 

 

 

 

 

 

 

 

(a)        Reflected at book value in the condensed consolidated balance sheet as Current portion of long-term obligations of $101,041 and Long-term obligations of $2,666,022.

(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 $2,038 and noncurrent Other liabilities of $21,294.

 

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

 

9



 

that are attributable to the hedged risk in a fair value hedge or the earnings effect of the hedged forecasted transactions in a cash flow hedge.

 

The Company may enter into derivative contracts that are intended to economically hedge a certain portion of its risk, even though hedge accounting does not apply or the Company elects not to apply the hedge accounting standards. 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 39-week periods ended October 31, 2014 and November 1, 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 October 31, 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

 

10



 

reclassified to interest expense as interest payments are made on the Company’s variable-rate debt.

 

During the 39-week period ended November 1, 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 October 31, 2014, the Company estimates that approximately $3.5 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 October 31, 2014 and January 31, 2014:

 

(in thousands)

 

October 31,
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

 

$

2,195

 

$

-

 

 

The table below presents the pretax effect of the Company’s derivative financial instruments as reflected in the condensed consolidated statements of comprehensive income for the 13-week and 39-week periods ended October 31, 2014 and November 1, 2013:

 

 

 

13 Weeks Ended

 

39 Weeks Ended

(in thousands)

 

October 31,
2014

 

November 1,
2013

 

October 31,
2014

 

November 1,
2013

Derivatives in Cash Flow Hedging Relationships

 

 

 

 

 

 

 

 

 

Loss related to effective portion of derivatives recognized in OCI

 

$

201

 

$

957

 

$

956

 

$

15,475

 

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

 

$

1,282

 

$

1,223

 

$

3,858

 

$

3,347

 

 

 

Credit-risk-related contingent features

 

The Company has agreements with all of its interest rate swap counterparties that provide 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.

 

11



 

As of October 31, 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 $2.2 million. If the Company had breached any of these provisions at October 31, 2014, it could have been required to post full collateral or settle its obligations under the agreements at an estimated termination value of $2.2 million. As of October 31, 2014, the Company had not breached any of these provisions or posted any collateral related to these agreements.

 

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 was formalized and submitted to the court for approval, to resolve the matter for up to $8.5 million. On November 24, 2014, the court entered an order approving the settlement and dismissing the action.  The Company has deemed the settlement probable and recorded such amount as the estimated expense in the second quarter of 2013.

 

12



 

On September 8, 2014, a lawsuit entitled Sally Ann Carpenter v. Dolgencorp, Inc. was filed in the United States District Court for the Southern District of West Virginia (Case No. 2:14-cv-25500) (“Carpenter”).  The Carpenter plaintiff seeks to proceed on a collective basis under the FLSA on behalf of herself and other former and current store managers in the state of West Virginia who were allegedly improperly classified as exempt executive employees under the FLSA.  The Carpenter plaintiff seeks to recover overtime pay, liquidated damages, and attorneys’ fees and costs.

 

The Company filed its answer to the complaint on September 30, 2014.  A scheduling conference is scheduled for December 22, 2014.

 

On October 31, 2014, a lawsuit entitled Ronda Hood v. Dollar General Corporation was filed in the United States District Court for the Eastern District of Louisiana (Case No. 2:14-cv-02512-JTM-DEK) (“Hood”).  The Hood plaintiff seeks to proceed on a nationwide collective basis under the FLSA on behalf of herself and other similarly situated store managers who were allegedly improperly classified as exempt executive employees under the FLSA.  The Hood plaintiff seeks to recover overtime pay, liquidated damages, and attorneys’ fees and costs.

 

The Company’s answer is due to be filed on or before January 16, 2015.

 

The Company believes that its store managers are and have been properly classified as exempt employees under the FLSA and that the Carpenter and Hood actions are 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, it is not possible to predict whether the Carpenter or Hood matter ultimately will be permitted to proceed collectively, and no assurances can be given that the Company will be successful in its defense of either 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 if either of these actions was to proceed.  For these reasons, the Company is unable to estimate any potential loss or range of loss in either matter; however, if the Company is not successful in its defense efforts, the resolution of Carpenter or Hood could have a material adverse effect on the Company’s consolidated financial statements as a whole.

 

13



 

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) (“Marcum”) 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.

 

On October 16, 2014, the court entered an order preliminarily approving the parties’ proposed settlement.  The final fairness hearing is scheduled for February 26, 2015.

 

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

 

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”).

 

14



 

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.  On September 3, 2014, the court modified the scheduling order and ordered the parties to complete fact discovery related to liability by May 15, 2015.  A status conference is scheduled for January 8, 2015.

 

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.

 

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

 

15



 

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 (discussed below), the Company filed a petition for coordination of the Main and Varela matters on April 28, 2014.

 

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.

 

As noted above, on April 28, 2014, the Company petitioned to consolidate the Main and Varela matters.  Following the Company’s consolidation petition, the Main plaintiff agreed to dismiss her complaint, and the parties agreed that the Varela plaintiff would file an amended complaint to include the allegations asserted in the Main complaint.  On November 4, 2014, the Varela plaintiff filed a stipulation with the court seeking an order to file an amended complaint.  The court has not entered an order granting the filing of the amended complaint.  The Company’s answer is due to be filed 35 days after the court enters the order granting the Varela plaintiff leave to file an amended complaint.

 

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.  The Company has not yet been served with this complaint, and there are no deadlines in this matter.

 

On November 26, 2014, a lawsuit entitled Kendra Pleasant v. Dollar General Corporation, Dolgencorp, LLC and Does 1 through 50 (Case No. CIVDS1417709 (“ Pleasant ”) was filed in the Superior Court of the State of California for the County of San Bernardino.  The Pleasant plaintiff alleges that she and other non-exempt employees were not paid for all time worked, reimbursed for necessary business related expenses, provided rest and meal breaks, and provided accurate wage statements in violation of California wage and hour laws.  The Pleasant plaintiff seeks to recover alleged unpaid wages, restitution, interest, statutory penalties, unspecified damages, and attorneys’ fees and costs.  The Pleasant plaintiff also asserts a claim for unfair business practices and seeks to proceed under the PAGA. The Company has not yet been served with this complaint, and there are no deadlines in this matter.

 

The Company believes that its policies and practices comply with California law and that the Varela, Main , Avila and Pleasant 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

 

16



 

predict whether the Varela, Main , Avila or Pleasant 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 , Avila and/or Pleasant 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 and filed a supplemental brief on June 20, 2014.  On July 25, 2014, the Company filed its response to plaintiff’s motion for conditional certification as well as a motion for summary judgment as to plaintiff’s individual claims.

 

On October 16, 2014, the court granted the Company’s motion for summary judgment and denied as moot the plaintiff’s motion for conditional class certification of her FLSA claims.  The parties subsequently agreed to resolve this matter for an amount not material to the Company’s consolidated financial statements as a whole.

 

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 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.

 

17



 

The plaintiffs subsequently petitioned the Sixth Circuit for a writ of mandamus and asked the district court to stay all deadlines in the underlying proceeding pending the Sixth Circuit’s ruling on the writ.  On October 23, 2014, the United States Court of Appeals for the Sixth Circuit denied plaintiff’s petition for writ of mandamus.  To date, the order entered by the district court to stay proceedings pending a decision by the appellate court regarding plaintiffs’ writ of mandamus has not been lifted.

 

Because of the stay, the Buttry plaintiffs were not required to file their motion for certification of their statewide claims by September 22, 2014, the original deadline for such motion.  At this time, the court has not set a new deadline for this motion, and this matter remains set 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 Company’s response is due to be filed on or before February 23, 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, Eighth 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.

 

On September 25, 2014, the court entered a scheduling order which requires plaintiff to file her motion for conditional class certification of her claims under the FLSA on or before February 23, 2015.  The Company’s response is due to be filed on or before April 9, 2015.

 

On September 8, 2014, a lawsuit entitled Joyce Riley v. Dolgencorp, LLC (Case No. 2:14-cv-25505) (“Riley”) was filed in the United States District Court for the Southern District of West Virginia.  The Riley plaintiff seeks to proceed on a collective basis under the FLSA on

 

18



 

behalf of all similarly situated non-exempt store employees in the state of West Virginia who allegedly were not paid for certain breaks.  The Riley plaintiff seeks back wages (including overtime), liquidated damages, and attorneys’ fees and costs.

 

The Company filed its answer to the complaint on September 30, 2014.  A scheduling conference is scheduled for December 22, 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 Buttry, Harsey , Vincino, and Riley 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 Buttry, Harsey , Vincino or Riley 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 Buttry , Harsey, Vincino, and/or Riley 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.  Subsequently, plaintiff filed a motion with the trial court on remand to dismiss stores not located in Florida from the case without prejudice, which the court denied on September 29, 2014.  Further, the parties have, as directed by the trial court,

 

19



 

submitted briefs in an effort to clarify the issues to be resolved on remand.  On November 19, 2014, the court issued an order (i) permitting the parties to conduct additional discovery regarding the scope of the restrictive covenants at issue in light of the Eleventh Circuit’s decision, and (ii) scheduling a bench trial to resolve any outstanding issues on the court’s April 20, 2015 docket.

 

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.

 

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 October 31, 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

 

39 Weeks Ended

(In thousands)

 

October 31,
2014

 

November 1,
2013

 

October 31,
2014

 

November 1,
2013

Classes of similar products:

 

 

 

 

 

 

 

 

Consumables

 

$

3,645,021

 

$

3,362,796

 

$

10,666,675

 

$

9,859,528

Seasonal

 

524,623

 

505,793

 

1,659,651

 

1,610,965

Home products

 

298,878

 

276,770

 

867,903

 

807,986

Apparel

 

255,887

 

236,479

 

776,300

 

731,743

Net sales

 

$

4,724,409

 

$

4,381,838

 

$

13,970,529

 

$

13,010,222

 

20



 

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 October 31, 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 the Company’s 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 39-week periods ended October 31, 2014, and November 1, 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 7.8 million shares at a total cost of $420.0 million, respectively.

 

10.                             Acquisition Proposal

 

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 and containing other terms. On August 21, 2014, Family Dollar announced that its Board of Directors had rejected this proposal. On September 2, 2014, the Company announced it had submitted a revised proposal to the Board of Directors of Family Dollar to acquire all of the outstanding shares of Family Dollar common stock for $80.00 per share in cash and a commitment to pay a $500 million reverse break-up fee to Family Dollar in the event that the transaction is not completed for antitrust reasons, along with certain other terms. On September 5, 2014, Family Dollar announced that its Board of Directors had rejected this revised proposal. On September 10, 2014, the Company commenced a tender offer to acquire all outstanding shares of common stock of Family Dollar at $80.00 per share in cash directly from the stockholders of Family Dollar subject to certain conditions. On September 17, 2014, the Board of Directors of Family Dollar recommended that its stockholders reject the tender offer and not tender their shares pursuant to the tender offer.  The Company has extended the expiration date of the tender offer to December 31, 2014. There can be no assurance that an acquisition transaction or the tender offer will be completed on the terms proposed or at all.

 

21



 

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 October 31, 2014, and the related condensed consolidated statements of income and comprehensive income for the thirteen and thirty-nine week periods ended October 31, 2014 and November 1, 2013, and the condensed consolidated statements of cash flows for the thirty-nine week periods ended October 31, 2014 and November 1, 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

 

 

December 4, 2014

Nashville, Tennessee

 

22



 

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.

 

Acquisition 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 and containing other terms. On August 21, 2014, Family Dollar announced that its Board of Directors had rejected this proposal. On September 2, 2014, we announced we had submitted a revised proposal to the Board of Directors of Family Dollar to acquire all of the outstanding shares of Family Dollar common stock for $80.00 per share in cash and a commitment to pay a $500 million reverse break-up fee to Family Dollar in the event that the transaction is not completed for antitrust reasons, along with certain other terms. On September 5, 2014, Family Dollar announced that its Board of Directors had rejected this revised proposal. On September 10, 2014, we commenced a tender offer to acquire all outstanding shares of common stock of Family Dollar at $80.00 per share in cash directly from the stockholders of Family Dollar subject to certain conditions. On September 17, 2014, the Board of Directors of Family Dollar recommended that its stockholders reject the tender offer and not tender their shares pursuant to the tender offer. We have extended the expiration date of the tender offer to December 31, 2014. There can be no assurance that an acquisition transaction or the tender offer 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 11,715 stores located in 40 states as of October 31, 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.

 

23



 

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 continues to be competitive.

 

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 617 new stores in the first three quarters 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 third 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 2014, we expect the growth rate of consumables to continue to outpace the growth rate of non-consumables throughout the remainder of the year. Commodities cost inflation has been minimal in 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

 

24



 

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.

 

We have continued our mission of serving others by striving to give our customers clean, well-stocked stores with quality products at low prices and our employees an environment that attracts and retains talented personnel and by supporting our store communities through our charitable and other efforts.

 

The following highlights the results of the third 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 7.8% to $4.72 billion. Sales in same-stores increased 2.8% driven by increases in customer traffic and average transaction amount. Average sales per square foot for all stores over the 52-week period ended October 31, 2014 were $220.

 

·                  Gross profit, as a percentage of sales, was 30.1% in the 2014 period compared to 30.3% in the 2013 period, a decline of 18 basis points. We experienced an increase in promotional and clearance 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 and an improved shrink rate.

 

·                  SG&A, as a percentage of sales, was 21.8% compared to 21.4% in the 2013 period, an increase of 38 basis points, which includes 17 basis points for costs related to the acquisition proposal referenced above. The increase in SG&A reflects increases in rent, utilities and incentive compensation expenses, partially offset by convenience fees for cash back from debit card transactions and store labor efficiencies.

 

·                  Interest expense was relatively constant, increasing by $0.3 million to $21.8 million in the 2014 period. Total outstanding debt (including the current portion of long-term obligations) as of October 31, 2014 was $2.77 billion.

 

·                  Net income was $236.3 million, or $0.78 per diluted share, compared to net income of $237.4 million, or $0.74 per diluted share, in the 2013 period. Diluted shares outstanding decreased by 18.4 million shares, reflecting the impact of share repurchases in earlier periods.

 

·                  Cash generated from operating activities was $840.5 million during the 39-week period ended October 31, 2014, compared to $760.6 million in the comparable prior year period. At October 31, 2014, we had a cash balance of $216.2 million.

 

25



 

·                  Inventory turnover was 4.8 times on a rolling four-quarter basis. Inventories increased 2% on a per store basis over the 2013 period.

 

·                  During the 39 weeks ended October 31, 2014, we opened 617 new stores, remodeled or relocated 874 stores and closed 34 stores, resulting in a store count of 11,715 as of October 31, 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.

 

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 and ended January 30, 2015 and January 31, 2014, respectively. References to the third quarter accounting periods for 2014 and 2013 contained herein refer to the 13-week accounting periods ended October 31, 2014 and November 1, 2013, respectively.

 

Seasonality. The nature of our business is moderately seasonal. 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.

 

26



 

The following table contains results of operations data for the 13-week and 39-week periods ended October 31, 2014 and November 1, 2013, and the dollar and percentage variances among those periods:

 

(amounts in millions,

 

13 Weeks Ended

 

2014 vs. 2013

 

39 Weeks Ended

 

2014 vs. 2013

 

except per share

 

Oct. 31,

 

Nov. 1,

 

Amount

 

%

 

Oct. 31,

 

Nov. 1,

 

Amount

 

%

 

amounts)

 

2014

 

2013

 

change

 

change

 

2014

 

2013

 

change

 

change

 

Net sales by category:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consumables

 

$

3,645.0

 

$

3,362.8

 

$

282.2

 

8.4

%

$

10,666.7

 

$

9,859.5

 

$

807.1

 

8.2

%

% of net sales

 

77.15%

 

76.74%

 

 

 

 

 

76.35%

 

75.78%

 

 

 

 

 

Seasonal

 

524.6

 

505.8

 

18.8

 

3.7

 

1,659.7

 

1,611.0

 

48.7

 

3.0

 

% of net sales

 

11.10%

 

11.54%

 

 

 

 

 

11.88%

 

12.38%

 

 

 

 

 

Home products

 

298.9

 

276.8

 

22.1

 

8.0

 

867.9

 

808.0

 

59.9

 

7.4

 

% of net sales

 

6.33%

 

6.32%

 

 

 

 

 

6.21%

 

6.21%

 

 

 

 

 

Apparel

 

255.9

 

236.5

 

19.4

 

8.2

 

776.3

 

731.7

 

44.6

 

6.1

 

% of net sales

 

5.42%

 

5.40%

 

 

 

 

 

5.56%

 

5.62%

 

 

 

 

 

Net sales

 

$

4,724.4

 

$

4,381.8

 

$

342.6

 

7.8

%

$

13,970.5

 

$

13,010.2

 

$

960.3

 

7.4

%

Cost of goods sold

 

3,300.7

 

3,053.3

 

247.3

 

8.1

 

9,733.5

 

9,009.3

 

724.2

 

8.0

 

% of net sales

 

69.86%

 

69.68%

 

 

 

 

 

69.67%

 

69.25%

 

 

 

 

 

Gross profit

 

1,423.7

 

1,328.5

 

95.3

 

7.2

 

4,237.1

 

4,000.9

 

236.1

 

5.9

 

% of net sales

 

30.14%

 

30.32%

 

 

 

 

 

30.33%

 

30.75%

 

 

 

 

 

Selling, general and administrative expenses

 

1,029.6

 

938.3

 

91.4

 

9.7

 

3,034.7

 

2,802.9

 

231.8

 

8.3

 

% of net sales

 

21.79%

 

21.41%

 

 

 

 

 

21.72%

 

21.54%

 

 

 

 

 

Operating profit

 

394.1

 

390.2

 

3.9

 

1.0

 

1,202.4

 

1,198.1

 

4.3

 

0.4

 

% of net sales

 

8.34%

 

8.91%

 

 

 

 

 

8.61%

 

9.21%

 

 

 

 

 

Interest expense

 

21.8

 

21.5

 

0.3

 

1.4

 

66.7

 

66.7

 

0.0

 

0.0

 

% of net sales

 

0.46%

 

0.49%

 

 

 

 

 

0.48%

 

0.51%

 

 

 

 

 

Other (income) expense

 

-

 

-

 

-

 

-

 

-

 

18.9

 

(18.9)

 

(100.0)

 

% of net sales

 

0.00%

 

0.00%

 

 

 

 

 

0.00%

 

0.15%

 

 

 

 

 

Income before income taxes

 

372.3

 

368.7

 

3.6

 

1.0

 

1,135.7

 

1,112.5

 

23.2

 

2.1

 

% of net sales

 

7.88%

 

8.41%

 

 

 

 

 

8.13%

 

8.55%

 

 

 

 

 

Income taxes

 

136.0

 

131.3

 

4.7

 

3.5

 

425.7

 

409.6

 

16.1

 

3.9

 

% of net sales

 

2.88%

 

3.00%

 

 

 

 

 

3.05%

 

3.15%

 

 

 

 

 

Net income

 

$

236.3

 

$

237.4

 

$

(1.1

)

(0.5)

%

$

710.0

 

$

702.9

 

$

7.0

 

1.0

%

% of net sales

 

5.00%

 

5.42%

 

 

 

 

 

5.08%

 

5.40%

 

 

 

 

 

Diluted earnings per share

 

$

0.78

 

$

0.74

 

$

0.04

 

5.4

%

$

2.32

 

$

2.16

 

$

0.16

 

7.4

%

 

13 WEEKS ENDED OCTOBER 31, 2014 AND NOVEMBER 1, 2013

 

Net Sales . The net sales increase in the 2014 third quarter reflects a same-store sales increase of 2.8% 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 10,888 same-stores which accounted for sales of $4.5 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.

 

27



 

Gross Profit. Gross profit increased by 7.2%, and as a percentage of sales, decreased by 18 basis points to 30.1% in the 2014 third quarter. Our product category with the lowest gross profit rate is consumables, and this category continues to comprise a larger portion of our net sales, primarily as a result of increased sales of lower margin tobacco and perishable products. The gross profit rate decrease in the 2014 period as compared to the 2013 period also reflects an increase in markdowns, primarily due to increased promotional and inventory clearance activity. These factors were partially offset by higher initial inventory markups and an improved rate of inventory shrinkage. We recorded a LIFO provision of $2.2 million in the 2014 period compared to a LIFO benefit of $3.7 million in the 2013 period.

 

SG&A. Selling, general and administrative expense was 21.8% as a percentage of sales in the 2014 period compared to 21.4% in the 2013 period, an increase of 38 basis points. The 2014 results reflect increases in rent, utilities and incentive compensation expenses, as well as expenses of $8.2 million, or 17 basis points as a percentage of sales, related to our ongoing efforts to acquire Family Dollar. Offsetting these items were convenience fees charged to customers for cash back on debit card transactions as well as retail labor expense, which increased at a rate lower than our increase in sales.

 

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

 

Income Taxes. The effective income tax rate for the 2014 period was 36.5% compared to a rate of 35.6% for the 2013 period which represents a net increase of 0.9 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. Nondeductible acquisition-related expenses incurred in connection with the pending Family Dollar acquisition proposal also increased the effective tax rate for the period.  These increases were partially offset by 2014 expense decreases associated with reductions in reserves for uncertain state tax positions as compared to additions that occurred in the 2013 period.  Both the 2014 and the 2013 periods benefited from reductions in federal uncertain tax positions (due to the favorable resolution of income tax examinations and the lapsing of the assessment period associated with previously filed income tax returns) of a similar amount.

 

39 WEEKS ENDED OCTOBER 31, 2014 AND NOVEMBER 1, 2013

 

Net Sales . The net sales increase in the 2014 period reflects a same-store sales increase of 2.1% compared to the 2013 period. In the 2014 period, our 10,888 same-stores accounted for sales of $13.1 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 5.9%, and as a percentage of sales, decreased by 42 basis points to 30.3%. 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

 

28



 

increased promotional and inventory clearance 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. We recorded a LIFO provision of $3.1 million in the 2014 period compared to a LIFO benefit of $6.6 million in the 2013 period.

 

SG&A. Selling, general and administrative expense was 21.7% as a percentage of sales in the 2014 period compared to 21.5% in the 2013 period, an increase of 18 basis points. The 2014 results reflect expenses of $8.2 million, or 6 basis points as a percentage of sales, related to our ongoing efforts to acquire Family Dollar, while the 2013 results include expenses of $8.5 million, or 7 basis points as a percentage of sales, for a legal settlement of a previously decertified collective action. Rent, utilities and incentive compensation expenses contributed to the increase in SG&A expense as a percentage of sales, while retail labor expense increased at a rate lower than our increase in sales. In addition, workers’ compensation and general liability expenses declined in the 2014 period compared to the 2013 period.

 

Interest Expense . Interest expense in the 2014 period was comparable to the amount in 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 37.5% compared to a rate of 36.8% 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.  Nondeductible acquisition-related expenses incurred in connection with the pending Family Dollar acquisition proposal also increased the effective tax rate for the period.  These increases were partially offset by 2014 expense decreases associated with reductions in reserves for uncertain state tax positions as compared to additions that occurred in the 2013 period.  Both the 2014 and the 2013 periods benefited from reductions in federal uncertain tax positions (due to the favorable resolution of income tax examinations and the lapsing of the assessment period associated with previously filed income tax returns) of a similar amount.

 

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”) consist of a senior unsecured term loan facility with an initial balance of $1.0 billion (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

 

29



 

$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 October 31, 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, which commenced 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 which require the maintenance of a minimum fixed charge coverage ratio and a maximum leverage ratio.  As of October 31, 2014, we were in compliance with all such covenants.  The Facilities also contain customary affirmative covenants and events of default.

 

As of October 31, 2014, we had total outstanding letters of credit of $52.5 million, $31.2 million of which were issued under the Revolving Facility, and borrowing availability under the Revolving Facility was $818.8 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. 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

 

30



 

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 October 31, 2014, we had total outstanding debt (including the current portion of long-term obligations) of approximately $2.77 billion. We had $818.8 million available for borrowing under our Revolving Facility at that date. We believe our cash flow from operations and existing 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 52% of our total assets exclusive of goodwill and other intangible assets as of October 31, 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 our proposal to acquire Family Dollar, Standard and Poor’s placed all of our credit ratings on watch with negative implications and Moody’s placed all of our credit ratings on review for downgrade. Our 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.

 

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In connection with the company’s proposal to acquire Family Dollar, we have received commitments from lenders to provide financing that may be required by such an acquisition. See “Acquisition Proposal” for information about our proposed acquisition of Family Dollar.

 

Cash flows from operating activities . Cash flows from operating activities were $840.5 million in the first three quarters of 2014, an increase of $80.0 million compared to the corresponding 2013 period. Merchandise inventories increased by a greater amount in the 2014 period compared to the 2013 period, which was offset by accounts payable, which increased by $100.5 million in the 2014 period but declined slightly in the 2013 period. The increase in accounts payable during the 2014 period was due primarily to increases in domestic merchandise receipts. 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 2014 period compared to an 8% increase in the corresponding 2013 period. 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 13% compared to a 16% increase; the seasonal category increased by 3% compared to a 1% increase; the home products category increased by 7% compared to a 10% increase; and apparel increased by 1% compared to a 14% decline.

 

Cash flows from investing activities . Significant components of property and equipment purchases in the 2014 period included the following approximate amounts: $104 million for improvements, upgrades, remodels and relocations of existing stores; $86 million related to new leased stores, primarily for leasehold improvements, fixtures and equipment; $36 million for distribution and transportation-related capital expenditures; $29 million for stores built by us; and $28 million for information systems upgrades and technology-related projects. The timing of new, remodeled and relocated store openings along with other factors may affect the relationship between such openings and the related property and equipment purchases in any given period. During the 2014 period, we opened 617 new stores and remodeled or relocated 874 stores, including the limited scope remodels discussed below.

 

Significant components of property and equipment purchases in the 2013 period included the following approximate amounts: $167 million for improvements, upgrades, remodels and relocations of existing stores; $103 million related to new leased stores, primarily for leasehold improvements, fixtures and equipment; $86 million for distribution and transportation-related capital expenditures; $65 million for stores purchased or built by us; and $17 million for information systems upgrades and technology-related projects. During the 2013 period, we opened 577 new stores and remodeled or relocated 534 stores.

 

Capital expenditures during 2014 are projected to be approximately $400 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 have also begun the implementation of 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

 

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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 . Borrowings and repayments under the Revolving Facility during the 2014 period were the same amount, netting to zero, compared to net repayments of $24.9 million during the 2013 period. During the 2014 and 2013 periods, we repurchased 14.1 million and 7.8 million outstanding shares of our common stock at a total cost of $800.1 million and $420.0 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 December 3, 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.

 

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 October 31, 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 October 31, 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)

($)

 

08/02/14-08/31/14

 

-

 

-

 

-

 

223,417,000

 

09/01/14-09/30/14

 

-

 

-

 

-

 

223,417,000

 

10/01/14-10/31/14

 

-

 

-

 

-

 

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;

 

35



 

·                  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.

 

36



 

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: December 4, 2014

By:

  /s/ David M. Tehle

 

 

  David M. Tehle

 

 

  Executive Vice President and Chief Financial Officer

 

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EXHIBIT INDEX

 

10.1

 

Summary of Non-Employee Director Compensation (effective January 31, 2015)

 

 

 

10.2

 

Form of Stock Option Award Agreement (approved August 26, 2014) for annual awards beginning March 2015 to certain employees of Dollar General Corporation pursuant to the Amended and Restated 2007 Stock Incentive Plan

 

 

 

10.3

 

Form of Stock Option Award Agreement (approved August 26, 2014) for awards beginning December 2014 to certain newly hired and promoted employees of Dollar General Corporation pursuant to the Amended and Restated 2007 Stock Incentive Plan

 

 

 

10.4

 

Form of Performance Share Unit Award Agreement (approved August 26, 2014) for annual awards beginning March 2015 to certain employees of Dollar General Corporation pursuant to the Amended and Restated 2007 Stock Incentive Plan

 

 

 

10.5

 

Form of Restricted Stock Unit Award Agreement (approved August 26, 2014) for annual awards beginning March 2015 to certain employees of Dollar General Corporation pursuant to the Amended and Restated 2007 Stock Incentive Plan

 

 

 

10.6

 

Dollar General Corporation Non-Employee Director Deferred Compensation Plan (approved December 3, 2014)

 

 

 

10.7

 

Form of Restricted Stock Unit Award Agreement (approved December 3, 2014) for awards beginning February 2015 to non-employee directors of Dollar General Corporation pursuant to the Amended and Restated 2007 Stock Incentive Plan

 

 

 

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

 

38


Exhibit 10.1

 

Summary of Non-Employee Director Compensation

(effective January 31, 2015)

 

We do not compensate for Board service any director who also serves as our employee. We will reimburse directors for certain fees and expenses incurred in connection with continuing education seminars and for travel and related expenses related to Dollar General business.

 

Each non-employee director will receive payment (prorated as applicable), in quarterly installments, of the following cash compensation, as applicable:

 

·                         $85,000 annual retainer for service as a Board member;

·                         $25,000 annual retainer for service as Lead Director;

·                         $22,500 annual retainer for service as chairman of the Audit Committee;

·                         $20,000 annual retainer for service as chairman of the Compensation Committee;

·                         $15,000 annual retainer for service as chairman of the Nominating & Governance Committee; and

·                         $1,500 for each Board or committee meeting in excess of an aggregate of 16 that a director attends, as a member, during each fiscal year.

 

In addition, we grant annually to those non-employee directors who are elected or reelected at each applicable shareholders’ meeting an equity award under our Amended and Restated 2007 Stock Incentive Plan with an estimated value of $125,000 on the grant date. This entire value consists of restricted stock units payable in shares of our common stock (“RSUs”). The RSUs will vest as to 100% of the award on the first anniversary of the grant date. Directors may elect to defer receipt of shares underlying the RSUs. They may also elect to defer up to 100% of cash fees earned for Board service under the Non-Employee Director Deferred Compensation Plan filed separately as Exhibit 10.6 to the Company’s Quarterly Report on Form 10-Q for the fiscal quarter ended October 31, 2014. Any new director appointed after the annual shareholders’ meeting but before February 1 of a given year, will receive a full equity award no later than the first regularly scheduled Compensation Committee meeting following the date on which he or she is appointed. Any new director appointed on or after February 1 of a given year but before the next annual shareholders’ meeting shall be eligible to receive the next regularly scheduled annual award.

 


Exhibit 10.2

 

DOLLAR GENERAL CORPORATION

STOCK OPTION AWARD AGREEMENT

 

THIS AGREEMENT (the “ Agreement ”), dated as of the date indicated on Schedule A hereto (the “ Grant Date ”), is made by and between Dollar General Corporation, a Tennessee corporation (hereinafter referred to as the “ Company ”), and the individual whose name is set forth on the signature page hereof, who is an employee of the Company or a Subsidiary or Affiliate of the Company (hereinafter referred to as the “ Optionee ”).  Any capitalized terms herein not otherwise defined in this Agreement shall have the meaning set forth in the Amended and Restated 2007 Stock Incentive Plan for Key Employees of Dollar General Corporation and its Affiliates, as such Plan may be amended from time to time (the “ Plan ”).

 

WHEREAS, the Company wishes to carry out the Plan, the terms of which are hereby incorporated by reference and made a part of this Agreement; and

 

WHEREAS, the Compensation Committee (or a duly authorized subcommittee thereof) of the Board of the Company appointed to administer the Plan (the “ Committee ”) has determined that it would be to the advantage and best interest of the Company and its shareholders to grant the Option provided for herein to the Optionee, and has advised the Company thereof and instructed the undersigned officer to issue said Option.

 

NOW, THEREFORE, in consideration of the mutual covenants herein contained and other good and valuable consideration, receipt and sufficiency of which are hereby acknowledged, the parties hereto do hereby agree as follows:

 

ARTICLE I

DEFINITIONS

 

Whenever the following terms are used in this Agreement, they shall have the meaning specified below unless the context clearly indicates to the contrary.

 

Section 1.1.   Cause

 

“Cause” shall mean (A) “Cause” as such term may be defined in any employment agreement between the Optionee and the Company or any of its Subsidiaries or Affiliates that is in effect at the time of termination of employment; or (B) if there is no such employment agreement in effect, “Cause” as such term may be defined in any change-in-control agreement between the Optionee and the Company or any of its Subsidiaries or Affiliates that is in effect at the time of termination of employment; or (C) if there is no such employment or change-in-control agreement, with respect to an Optionee: (i) any act of the Optionee involving fraud or dishonesty, or any willful failure to perform reasonable duties assigned to the Optionee which failure is not cured within 10 business days after receipt from the Company of written notice of such failure; (ii) any material breach by the Optionee of any securities or other law or regulation or any Company policy governing trading or dealing with stock, securities, investments or the like, or any inappropriate disclosure or “tipping” relating to any stock, securities, investments or the like; (iii) other than as required by law, the carrying out by the Optionee of any activity, or the Optionee making any public statement, which prejudices or ridicules the good name and standing of the Company or its Affiliates or would bring such persons into public contempt or ridicule; (iv) attendance by the Optionee at work in a state of intoxication or the Optionee otherwise being found in possession at the Optionee’s place of work of

 

1



 

any prohibited drug or substance, possession of which would amount to a criminal offense; (v) any assault or other act of violence by the Optionee; or (vi) the Optionee being indicted for any crime constituting (x) any felony whatsoever or (y) any misdemeanor that would preclude employment under the Company’s hiring policy.

 

Section 1.2.   Disability

 

“Disability” shall mean (A) “Disability” as such term may be defined in any employment agreement between the Optionee and the Company or any of its Subsidiaries or Affiliates that is in effect at the time of termination of employment; or (B) if there is no such employment agreement in effect, “Disability” as such term may be defined in any change-in-control agreement between the Optionee and the Company or any of its Subsidiaries or Affiliates that is in effect at the time of termination of employment; or (C)  if there is no such employment or change-in-control agreement, “Disability” as defined in the Company’s long-term disability plan.

 

Section 1.3.   Option

 

“Option” shall mean the right and option to purchase, on the terms and conditions set forth herein, all or any part of an aggregate of the number of Shares of Common Stock set forth on Schedule A hereto.

 

Section 1.4.  Retirement

 

“Retirement” shall mean the voluntary termination of the Optionee’s employment with the Company or any of its Subsidiaries or Affiliates on or after (A) reaching the minimum age of sixty-two (62) and (B) achieving five (5) consecutive years of service; provided, however, that the sum of the Optionee’s age plus years of service (counting whole years only) must equal at least seventy (70) and provided further that there is no basis for the Company to terminate the Optionee for Cause at the time of Optionee’s voluntary termination.

 

Section 1.5.   Secretary

 

“Secretary” shall mean the Secretary of the Company.

 

ARTICLE II

GRANT OF OPTION

 

Section 2.1.    Grant of Option

 

For good and valuable consideration, on and as of the Grant Date the Company irrevocably grants to the Optionee the Option on the terms and conditions set forth in this Agreement.

 

Section 2.2.    Exercise Price

 

Subject to Section 2.4, the exercise price of the Shares of Common Stock covered by the Option (the “ Exercise Price ”) shall be as set forth on Schedule A hereto, which shall be the Fair Market Value on the Grant Date.

 

2



 

Section 2.3.   No Guarantee of Employment

 

Nothing in this Agreement or in the Plan shall confer upon the Optionee any right to continue in the employ of the Company or any Subsidiary or Affiliate or shall interfere with or restrict in any way the rights of the Company and its Subsidiaries or Affiliates, which are hereby expressly reserved, to terminate the employment of the Optionee at any time for any reason whatsoever, with or without cause, subject to the applicable provisions of, if any, the Optionee’s employment agreement with the Company or offer letter provided by the Company to the Optionee.

 

Section 2.4.    Adjustments to Option

 

The Option shall be subject to the adjustment provisions of Sections 8 and 9 of the Plan, provided , however , that in the event of the payment of an extraordinary dividend by the Company to its shareholders: the Exercise Price of the Option shall be reduced by the amount of the dividend paid, but only to the extent the Committee determines it to be permitted under applicable tax laws and to not have adverse tax consequences to the Optionee under Section 409A of the Code; and, if such reduction cannot be fully effected due to such tax laws and it will not have adverse tax consequences to the Optionee, then the Company shall pay to the Optionee a cash payment, on a per Share basis, equal to the balance of the amount of the dividend not permitted to be applied to reduce the Exercise Price of the applicable Option as follows: (a) for each Share subject to a vested Option, immediately upon the date of such dividend payment; and (b) for each Share subject to an unvested Option, on the date on which such Option becomes vested and exercisable with respect to such Share.

 

ARTICLE III

PERIOD OF EXERCISABILITY

 

Section 3.1.   Commencement of Exercisability

 

(a)        Except as otherwise provided in Section 3.1(b) or (c) below, so long as the Optionee continues to be employed by the Company or any other Service Recipient, the Option shall become vested and exercisable with respect to 25% of the Shares subject to such Option on each April 1 of the four (4) fiscal years following the fiscal year in which the Grant Date occurs, as set forth on Schedule A hereto (each such date, a “Vesting Date”).  To the extent this vesting schedule results in the vesting of fractional shares, the fractional shares shall be combined and be exercisable on the earliest Vesting Date.

 

(b)        Notwithstanding Section 3.1(a) above, upon the earliest occurrence of (i) a Change in Control, (ii) the Optionee’s death, or (iii) a termination of the Optionee’s employment by reason of the Optionee’s Disability, the Option shall become immediately vested and exercisable with respect to 100% of the Shares subject to such unvested Option immediately prior to such event (but only to the extent such Option has not otherwise terminated or become exercisable).

 

(c)        Notwithstanding Section 3.1(a) above, in the event of the Optionee’s Retirement, that portion of the Option that would have become vested and exercisable within the one (1) year period following the Optionee’s Retirement date if the Optionee had remained employed with the Company or the applicable Service Recipient shall remain outstanding for a period of one (1) year following the Optionee’s Retirement date and shall become vested and exercisable on the anniversary of the Grant Date that falls within the one (1) year period following the Optionee’s Retirement date (but

 

3



 

only to the extent such portion of the Option has not otherwise terminated or become exercisable); provided, however, that if during such one (1) year period there occurs a Change in Control or the Optionee dies or incurs a Disability, such portion of the Option shall instead become immediately vested and exercisable (but only to the extent such portion of the Option has not otherwise terminated).

 

(d)       No Option shall become vested or exercisable as to any additional Shares following the Optionee’s termination of employment for any reason, and any Option which is unexercisable as of the Optionee’s termination of employment shall immediately expire without payment therefor, in each case except as otherwise provided in Section 3.1(b) or (c) above.

 

Section 3.2.   Expiration of Option

 

The Optionee may not exercise the Option to any extent after the first to occur of the following events:

 

(a)        The tenth anniversary of the Grant Date;

 

(b)        The fifth anniversary of the date of the Optionee’s termination of employment with the Company and all Service Recipients if the Optionee’s employment is terminated by reason of Retirement;

 

(c)        The first anniversary of the date of the Optionee’s termination of employment with the Company and all Service Recipients if the Optionee’s employment is terminated by reason of death or Disability (unless earlier terminated as provided in Section 3.2(h) below);

 

(d)       The first anniversary of the date of the Optionee’s termination of employment with the Company and all Service Recipients if the Optionee’s employment terminates (1) within two (2) years following a Change in Control and (2) for any reason other than an involuntary termination with Cause or a Retirement (in the case of an involuntary termination with Cause or a Retirement, the provisions of Section 3.2 (g) and (b), as applicable, shall instead apply);

 

(e)        Ninety (90) days after the date of the Optionee’s involuntary termination of employment by the Company and all Service Recipients without Cause (for any reason other than as set forth in Section 3.2(c));

 

(f)        Ninety (90) days after the date of the Optionee’s voluntary termination of employment with the Company and all Service Recipients by the Optionee (for any reason other than as set forth in Section 3.2(b) or (c));

 

(g)        Immediately upon the date of the Optionee’s termination of employment by the Company and all Service Recipients for Cause;

 

(h)        At the discretion of the Company, if the Committee so determines pursuant to Section 9 of the Plan.

 

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ARTICLE IV

EXERCISE OF OPTION

 

Section 4.1.   Person Eligible to Exercise

 

During the lifetime of the Optionee, only the Optionee (or his or her duly authorized legal representative) may exercise the Option or any portion thereof.  After the death of the Optionee, any exercisable portion of the Option may, prior to the time when the Option becomes unexercisable under Section 3.2, be exercised by the Optionee’s personal representative or by any person empowered to do so under the Optionee’s will or under the then applicable laws of descent and distribution.

 

Section 4.2.   Partial Exercise

 

Any exercisable portion of the Option or the entire Option, if then wholly exercisable, may be exercised in whole or in part at any time prior to the time when the Option or portion thereof becomes unexercisable under Section 3.2; provided , however , that any partial exercise shall be for whole Shares of Common Stock only.

 

Section 4.3.   Manner of Exercise

 

The Option, or any exercisable portion thereof, may be exercised solely by delivering to the Secretary or his or her designee all of the following prior to the time when the Option or such portion becomes unexercisable under Section 3.2:

 

(a)        Notice in writing signed by the Optionee or the other person then entitled to exercise the Option or portion thereof, stating that the Option or portion thereof is thereby exercised, such notice complying with all applicable rules established by the Committee;

 

(b)        (i) Full payment (in cash or by check or by a combination thereof) for the Shares with respect to which such Option or portion thereof is exercised (provided, however, that full payment is deemed made if the Company receives cash in respect of the exercise price no later than the date on which the Company or its agent delivers or releases Shares to the Optionee or his or her agent, which date shall not be later than three (3) business days following the date on which the Option is exercised, in the event of a cashless exercise via a third party in a manner that is compliant with applicable law) or (ii) notice in writing that the Optionee elects to have the number of Shares that would otherwise be issued to the Optionee reduced by a number of Shares having an equivalent Fair Market Value to the payment that would otherwise be made by the Optionee to the Company pursuant to clause (i) of this subsection (b);

 

(c)        (i) Full payment (in cash or by check or by a combination thereof) to satisfy the minimum withholding tax obligation with respect to which such Option or portion thereof is exercised (provided, however, that full payment is deemed made if the Company receives such payment no later than the date on which the Company must remit such withholding to the Internal Revenue Service in the event of a cashless exercise via a third party in a manner that is compliant with applicable law); or (ii) notice in writing that the Optionee elects to have the number of Shares that would otherwise be issued to the Optionee reduced by a number of Shares having an equivalent Fair Market Value to the payment that would otherwise be made by the Optionee to the Company pursuant to clause (i) of this subsection (c);

 

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(d)      A bona fide written representation and agreement, in a form satisfactory to the Committee, signed by the Optionee or other person then entitled to exercise such Option or portion thereof, stating that the Shares of Common Stock are being acquired for his or her own account, for investment and without any present intention of distributing or reselling said Shares or any of them except as may be permitted under the Securities Act of 1933, as amended (the “ Act ”), and then applicable rules and regulations thereunder, and that the Optionee or other person then entitled to exercise such Option or portion thereof will indemnify the Company against and hold it free and harmless from any loss, damage, expense or liability resulting to the Company if any sale or distribution of the Shares by such person is contrary to the representation and agreement referred to above; provided , however , that the Committee may, in its reasonable discretion, take whatever additional actions it deems reasonably necessary to ensure the observance and performance of such representation and agreement and to effect compliance with the Act and any other federal or state securities laws or regulations; and

 

(e)        In the event the Option or portion thereof shall be exercised pursuant to Section 4.1 by any person or persons other than the Optionee, appropriate proof of the right of such person or persons to exercise the Option.

 

Without limiting the generality of the foregoing, the Committee may require an opinion of counsel acceptable to it to the effect that any subsequent transfer of Shares acquired on exercise of the Option does not violate the Act, and may issue stop-transfer orders covering such Shares.  Share certificates evidencing stock issued on exercise of the Option may bear an appropriate legend referring to the provisions of subsection (d) above and the agreements herein. The written representation and agreement referred to in subsection (d) above shall, however, not be required if the Shares to be issued pursuant to such exercise have been registered under the Act, and such registration is then effective in respect of such Shares.

 

Section 4.4.   Conditions to Issuance of Stock Certificates

 

The Shares deliverable upon the exercise of the Option, or any portion thereof, may be either previously authorized but unissued Shares or issued Shares, which have then been reacquired by the Company.  Such Shares shall be fully paid and nonassessable.  The Company shall not be required to issue or deliver any certificate or certificates for Shares purchased (if certificated, or if not certificated, register the issuance of such Shares on its books and records) upon the exercise of the Option or portion thereof prior to fulfillment of all of the following conditions:

 

(a)        The obtaining of approval or other clearance from any state or federal governmental agency which the Committee shall, in its reasonable and good faith discretion, determine to be necessary or advisable; and

 

(b)        The lapse of such reasonable period of time following the exercise of the Option as the Committee may from time to time establish for reasons of administrative convenience or as may otherwise be required by applicable law.

 

Section 4.5.   Rights as Shareholder

 

Except as otherwise provided in Section 2.4 of this Agreement, the holder of an Option shall not be, nor have any of the rights or privileges of, a shareholder of the Company in respect of any Shares purchasable upon the exercise of the Option or any portion thereof unless and until certificates

 

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representing such Shares shall have been issued by the Company to such holder or the Shares have otherwise been recorded in the records of the Company as owned by such holder.

 

ARTICLE V

MISCELLANEOUS

 

Section 5.1.   Administration

 

The Committee shall have the power to interpret the Plan and this Agreement and to adopt such rules for the administration, interpretation and application of the Plan as are consistent therewith and to interpret or revoke any such rules.  All actions taken and all interpretations and determinations made by the Committee shall be final and binding upon the Optionee, the Company and all other interested persons.  No member of the Committee shall be personally liable for any action, determination or interpretation made in good faith with respect to the Plan or the Option.  In its absolute discretion, the Board may at any time and from time to time exercise any and all rights and duties of the Committee under the Plan and this Agreement.

 

Section 5.2.   Option Not Transferable

 

Neither the Option nor any interest or right therein or part thereof shall be liable for the debts, contracts or engagements of the Optionee or his or her successors in interest or shall be subject to disposition by transfer, alienation, anticipation, pledge, encumbrance, assignment or any other means whether such disposition be voluntary or involuntary or by operation of law by judgment, levy, attachment, garnishment or any other legal or equitable proceedings (including bankruptcy), and any attempted disposition thereof shall be null and void and of no effect; provided, however, that this Section 5.2 shall not prevent transfers by will or by the applicable laws of descent and distribution or other transfers authorized in limited circumstances by the Committee (or its designee).

 

Section 5.3.   Notices

 

Any notice to be given under the terms of this Agreement to the Company shall be addressed to the Company in care of its Secretary or his or her designee, and any notice to be given to the Optionee shall be addressed to him or her at the address given beneath his or her signature hereto.  By a notice given pursuant to this Section 5.3, either party may hereafter designate a different address for notices to be given to him or her.  Any notice, which is required to be given to the Optionee, shall, if the Optionee is then deceased, be given to the Optionee’s personal representative if such representative has previously informed the Company of his status and address by written notice under this Section 5.3. Any notice shall have been deemed duly given when (i) delivered in person; or, except for notice under Section 4.3 which must be received to be duly given, (ii) enclosed in a properly sealed envelope or wrapper addressed as aforesaid, deposited (with postage prepaid) in a post office or branch post office regularly maintained by the United States Postal Service, or (iii) enclosed in a properly sealed envelope or wrapper addressed as aforesaid, deposited (with fees prepaid) in an office regularly maintained by FedEx, UPS, or comparable non-public mail carrier.

 

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Section 5.4.   Titles; Pronouns

 

Titles are provided herein for convenience only and are not to serve as a basis for interpretation or construction of this Agreement.  The masculine pronoun shall include the feminine and neuter, and the singular the plural, where the context so indicates.

 

Section 5.5.   [ Applicability of Plan and Management Stockholder’s Agreement

 

The Option and the Shares of Common Stock issued to the Optionee upon exercise of the Option shall be subject to all of the terms and provisions of the Plan to the extent applicable to an Option and Shares.   In the event of any conflict between this Agreement and the Plan, the terms of the Plan shall control.  The Option and the Shares of Common Stock issued to the Optionee upon exercise of the Option shall not be subject to, and hereby are expressly exempted from, all of the terms and provisions of any Management Stockholder’s Agreement between the Optionee and the Company in existence on the Grant Date.]

 

Section 5.6.   Amendment

 

This Agreement may only be amended pursuant to Section 10 of the Plan.

 

Section 5.7.   Governing Law

 

The laws of the State of Delaware shall govern the interpretation, validity and performance of the terms of this Agreement regardless of the law that might be applied under principles of conflicts of laws.

 

Section 5.8.   Arbitration

 

In the event of any controversy among the parties hereto arising out of, or relating to, this Agreement which cannot be settled amicably by the parties, such controversy shall be finally, exclusively and conclusively settled by mandatory arbitration conducted expeditiously in accordance with the American Arbitration Association rules, by a single independent arbitrator.  Such arbitration process shall take place within the Nashville, Tennessee metropolitan area.  The decision of the arbitrator shall be final and binding upon all parties hereto and shall be rendered pursuant to a written decision, which contains a detailed recital of the arbitrator’s reasoning.  Judgment upon the award rendered may be entered in any court having jurisdiction thereof.  Each party shall bear its own legal fees and expenses, unless otherwise determined by the arbitrator.

 

Section 5.9.   Clawback

 

As a condition of receiving the Option, the Optionee acknowledges and agrees that the Optionee’s rights, payments, and benefits with respect to the Option shall be subject to any reduction, cancellation, forfeiture or recoupment, in whole or in part, upon the occurrence of certain specified events, as may be required by any rule or regulation of the Securities and Exchange Commission or by any applicable national exchange, or by any other applicable law, rule or regulation.

 

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Section 5.10  Signature in Counterparts

 

This Agreement may be signed in counterparts, each of which shall be an original, with the same effect as if the signatures thereto and hereto were upon the same instrument.

 

[ Signatures on next pages ]

 

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IN WITNESS WHEREOF, this Agreement has been executed and delivered by the parties hereto.

 

 

 DOLLAR GENERAL CORPORATION

 

 

 

 

 

 

 

By:

 

 

 

 

Name:

 

 

 

 

Title:

 

 

 

 

 

 

 

 

ADDRESS:

 

 

 

Dollar General Corporation

 

100 Mission Ridge

 

Goodlettsville, TN 37072

 

 

[Signature Page of Stock Option Award Agreement]

 

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OPTIONEE:

 

 

 

 

 

Signature:

 

 

 

Print Name:

 

 

 

Employee ID:

 

 

 

 

 

 HOME ADDRESS:

 

 

 

 

 

 

[Signature Page of Stock Option Award Agreement]

 

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Schedule A to Stock Option Award Agreement

 

 

Grant Date [     ]

 

 

 

Exercise Price (per Share) $[     ]

 

 

 

Option Grant :

 

Aggregate number of Shares of Common Stock for which the Option granted hereunder is exercisable: [     ]

 

 

Vesting Dates:

 

Percentage

 

 

Date

 

 

 

 

 

25%

 

April 1, [year]

 

 

 

 

25%

 

April 1, [year]

 

 

 

 

25%

 

April 1, [year]

 

 

 

 

25%

 

April 1, [year]

 

 

 

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Exhibit 10.3

 

DOLLAR GENERAL CORPORATION

STOCK OPTION AWARD AGREEMENT

 

THIS AGREEMENT (the “ Agreement ”), dated as of the date indicated on Schedule A hereto (the “ Grant Date ”), is made by and between Dollar General Corporation, a Tennessee corporation (hereinafter referred to as the “ Company ”), and the individual whose name is set forth on the signature page hereof, who is an employee of the Company or a Subsidiary or Affiliate of the Company (hereinafter referred to as the “ Optionee ”).  Any capitalized terms herein not otherwise defined in this Agreement shall have the meaning set forth in the Amended and Restated 2007 Stock Incentive Plan for Key Employees of Dollar General Corporation and its Affiliates, as such Plan may be amended from time to time (the “ Plan ”).

 

WHEREAS, the Company wishes to carry out the Plan, the terms of which are hereby incorporated by reference and made a part of this Agreement; and

 

WHEREAS, the Compensation Committee (or a duly authorized subcommittee thereof) of the Board of the Company appointed to administer the Plan (the “ Committee ”) has determined that it would be to the advantage and best interest of the Company and its shareholders to grant the Option provided for herein to the Optionee, and has advised the Company thereof and instructed the undersigned officer to issue said Option.

 

NOW, THEREFORE, in consideration of the mutual covenants herein contained and other good and valuable consideration, receipt and sufficiency of which are hereby acknowledged, the parties hereto do hereby agree as follows:

 

ARTICLE I

DEFINITIONS

 

Whenever the following terms are used in this Agreement, they shall have the meaning specified below unless the context clearly indicates to the contrary.

 

Section 1.1.   Cause

 

“Cause” shall mean (A) “Cause” as such term may be defined in any employment agreement between the Optionee and the Company or any of its Subsidiaries or Affiliates that is in effect at the time of termination of employment; or (B) if there is no such employment agreement in effect, “Cause” as such term may be defined in any change-in-control agreement between the Optionee and the Company or any of its Subsidiaries or Affiliates that is in effect at the time of termination of employment; or (C) if there is no such employment or change-in-control agreement, with respect to an Optionee: (i) any act of the Optionee involving fraud or dishonesty, or any willful failure to perform reasonable duties assigned to the Optionee which failure is not cured within 10 business days after receipt from the Company of written notice of such failure; (ii) any material breach by the Optionee of any securities or other law or regulation or any Company policy governing trading or dealing with stock, securities, investments or the like, or any inappropriate disclosure or “tipping” relating to any stock, securities, investments or the like; (iii) other than as required by law, the carrying out by the Optionee of any activity, or the Optionee making any public statement, which prejudices or ridicules the good name and standing of the Company or its Affiliates or would bring such persons into public contempt or ridicule; (iv) attendance by the Optionee at work in a state of intoxication or the Optionee otherwise being found in possession at the Optionee’s place of work of

 

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any prohibited drug or substance, possession of which would amount to a criminal offense; (v) any assault or other act of violence by the Optionee; or (vi) the Optionee being indicted for any crime constituting (x) any felony whatsoever or (y) any misdemeanor that would preclude employment under the Company’s hiring policy.

 

Section 1.2.   Disability

 

“Disability” shall mean (A) “Disability” as such term may be defined in any employment agreement between the Optionee and the Company or any of its Subsidiaries or Affiliates that is in effect at the time of termination of employment; or (B) if there is no such employment agreement in effect, “Disability” as such term may be defined in any change-in-control agreement between the Optionee and the Company or any of its Subsidiaries or Affiliates that is in effect at the time of termination of employment; or (C)  if there is no such employment or change-in-control agreement, “Disability” as defined in the Company’s long-term disability plan.

 

Section 1.3.   Option

 

“Option” shall mean the right and option to purchase, on the terms and conditions set forth herein, all or any part of an aggregate of the number of Shares of Common Stock set forth on Schedule A hereto.

 

Section 1.4.  Retirement

 

“Retirement” shall mean the voluntary termination of the Optionee’s employment with the Company or any of its Subsidiaries or Affiliates on or after (A) reaching the minimum age of sixty-two (62) and (B) achieving five (5) consecutive years of service; provided, however, that the sum of the Optionee’s age plus years of service (counting whole years only) must equal at least seventy (70) and provided further that there is no basis for the Company to terminate the Optionee for Cause at the time of Optionee’s voluntary termination.

 

Section 1.5.   Secretary

 

“Secretary” shall mean the Secretary of the Company.

 

ARTICLE II

GRANT OF OPTION

 

Section 2.1.    Grant of Option

 

For good and valuable consideration, on and as of the Grant Date the Company irrevocably grants to the Optionee the Option on the terms and conditions set forth in this Agreement.

 

Section 2.2.    Exercise Price

 

Subject to Section 2.4, the exercise price of the Shares of Common Stock covered by the Option (the “ Exercise Price ”) shall be as set forth on Schedule A hereto, which shall be the Fair Market Value on the Grant Date.

 

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Section 2.3.   No Guarantee of Employment

 

Nothing in this Agreement or in the Plan shall confer upon the Optionee any right to continue in the employ of the Company or any Subsidiary or Affiliate or shall interfere with or restrict in any way the rights of the Company and its Subsidiaries or Affiliates, which are hereby expressly reserved, to terminate the employment of the Optionee at any time for any reason whatsoever, with or without cause, subject to the applicable provisions of, if any, the Optionee’s employment agreement with the Company or offer letter provided by the Company to the Optionee.

 

Section 2.4.    Adjustments to Option

 

The Option shall be subject to the adjustment provisions of Sections 8 and 9 of the Plan, provided , however , that in the event of the payment of an extraordinary dividend by the Company to its shareholders: the Exercise Price of the Option shall be reduced by the amount of the dividend paid, but only to the extent the Committee determines it to be permitted under applicable tax laws and to not have adverse tax consequences to the Optionee under Section 409A of the Code; and, if such reduction cannot be fully effected due to such tax laws and it will not have adverse tax consequences to the Optionee, then the Company shall pay to the Optionee a cash payment, on a per Share basis, equal to the balance of the amount of the dividend not permitted to be applied to reduce the Exercise Price of the applicable Option as follows: (a) for each Share subject to a vested Option, immediately upon the date of such dividend payment; and (b) for each Share subject to an unvested Option, on the date on which such Option becomes vested and exercisable with respect to such Share.

 

ARTICLE III

PERIOD OF EXERCISABILITY

 

Section 3.1.   Commencement of Exercisability

 

(a)        Except as otherwise provided in Section 3.1(b) or (c) below, so long as the Optionee continues to be employed by the Company or any other Service Recipient, the Option shall become vested and exercisable with respect to 25% of the Shares subject to such Option on each of the first four (4) anniversaries of the Grant Date.  To the extent this vesting schedule results in the vesting of fractional shares, the fractional shares shall be combined and be exercisable on the first anniversary of the Grant Date.

 

(b)        Notwithstanding Section 3.1(a) above, upon the earliest occurrence of (i) a Change in Control, (ii) the Optionee’s death, or (iii) a termination of the Optionee’s employment by reason of the Optionee’s Disability, the Option shall become immediately vested and exercisable with respect to 100% of the Shares subject to such unvested Option immediately prior to such event (but only to the extent such Option has not otherwise terminated or become exercisable).

 

(c)        Notwithstanding Section 3.1(a) above, in the event of the Optionee’s Retirement, that portion of the Option that would have become vested and exercisable within the one (1) year period following the Optionee’s Retirement date if the Optionee had remained employed with the Company or the applicable Service Recipient shall remain outstanding for a period of one (1) year following the Optionee’s Retirement date and shall become vested and exercisable on the anniversary of the Grant Date that falls within the one (1) year period following the Optionee’s Retirement date (but only to the extent such portion of the Option has not otherwise terminated or become exercisable);

 

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provided, however, that if during such one (1) year period there occurs a Change in Control or the Optionee dies or incurs a Disability, such portion of the Option shall instead become immediately vested and exercisable (but only to the extent such portion of the Option has not otherwise terminated).

 

(d)       No Option shall become vested or exercisable as to any additional Shares following the Optionee’s termination of employment for any reason, and any Option which is unexercisable as of the Optionee’s termination of employment shall immediately expire without payment therefor, in each case except as otherwise provided in Section 3.1(b) or (c) above.

 

Section 3.2.   Expiration of Option

 

The Optionee may not exercise the Option to any extent after the first to occur of the following events:

 

(a)        The tenth anniversary of the Grant Date;

 

(b)        The fifth anniversary of the date of the Optionee’s termination of employment with the Company and all Service Recipients if the Optionee’s employment is terminated by reason of Retirement;

 

(c)        The first anniversary of the date of the Optionee’s termination of employment with the Company and all Service Recipients if the Optionee’s employment is terminated by reason of death or Disability (unless earlier terminated as provided in Section 3.2(h) below);

 

(d)       The first anniversary of the date of the Optionee’s termination of employment with the Company and all Service Recipients if the Optionee’s employment terminates (1) within two (2) years following a Change in Control and (2) for any reason other than an involuntary termination with Cause or a Retirement (in the case of an involuntary termination with Cause or a Retirement, the provisions of Section 3.2 (g) and (b), as applicable, shall instead apply);

 

(e)        Ninety (90) days after the date of the Optionee’s involuntary termination of employment by the Company and all Service Recipients without Cause (for any reason other than as set forth in Section 3.2(c));

 

(f)        Ninety (90) days after the date of the Optionee’s voluntary termination of employment with the Company and all Service Recipients by the Optionee (for any reason other than as set forth in Section 3.2(b) or (c));

 

(g)        Immediately upon the date of the Optionee’s termination of employment by the Company and all Service Recipients for Cause;

 

(h)        At the discretion of the Company, if the Committee so determines pursuant to Section 9 of the Plan.

 

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ARTICLE IV

EXERCISE OF OPTION

 

Section 4.1.   Person Eligible to Exercise

 

During the lifetime of the Optionee, only the Optionee (or his or her duly authorized legal representative) may exercise the Option or any portion thereof.  After the death of the Optionee, any exercisable portion of the Option may, prior to the time when the Option becomes unexercisable under Section 3.2, be exercised by the Optionee’s personal representative or by any person empowered to do so under the Optionee’s will or under the then applicable laws of descent and distribution.

 

Section 4.2.   Partial Exercise

 

Any exercisable portion of the Option or the entire Option, if then wholly exercisable, may be exercised in whole or in part at any time prior to the time when the Option or portion thereof becomes unexercisable under Section 3.2; provided , however , that any partial exercise shall be for whole Shares of Common Stock only.

 

Section 4.3.   Manner of Exercise

 

The Option, or any exercisable portion thereof, may be exercised solely by delivering to the Secretary or his or her designee all of the following prior to the time when the Option or such portion becomes unexercisable under Section 3.2:

 

(a)        Notice in writing signed by the Optionee or the other person then entitled to exercise the Option or portion thereof, stating that the Option or portion thereof is thereby exercised, such notice complying with all applicable rules established by the Committee;

 

(b)        (i) Full payment (in cash or by check or by a combination thereof) for the Shares with respect to which such Option or portion thereof is exercised (provided, however, that full payment is deemed made if the Company receives cash in respect of the exercise price no later than the date on which the Company or its agent delivers or releases Shares to the Optionee or his or her agent, which date shall not be later than three (3) business days following the date on which the Option is exercised, in the event of a cashless exercise via a third party in a manner that is compliant with applicable law) or (ii) notice in writing that the Optionee elects to have the number of Shares that would otherwise be issued to the Optionee reduced by a number of Shares having an equivalent Fair Market Value to the payment that would otherwise be made by the Optionee to the Company pursuant to clause (i) of this subsection (b);

 

(c)        (i) Full payment (in cash or by check or by a combination thereof) to satisfy the minimum withholding tax obligation with respect to which such Option or portion thereof is exercised (provided, however, that full payment is deemed made if the Company receives such payment no later than the date on which the Company must remit such withholding to the Internal Revenue Service in the event of a cashless exercise via a third party in a manner that is compliant with applicable law); or (ii) notice in writing that the Optionee elects to have the number of Shares that would otherwise be issued to the Optionee reduced by a number of Shares having an equivalent Fair Market Value to the payment that would otherwise be made by the Optionee to the Company pursuant to clause (i) of this subsection (c);

 

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(d)      A bona fide written representation and agreement, in a form satisfactory to the Committee, signed by the Optionee or other person then entitled to exercise such Option or portion thereof, stating that the Shares of Common Stock are being acquired for his or her own account, for investment and without any present intention of distributing or reselling said Shares or any of them except as may be permitted under the Securities Act of 1933, as amended (the “ Act ”), and then applicable rules and regulations thereunder, and that the Optionee or other person then entitled to exercise such Option or portion thereof will indemnify the Company against and hold it free and harmless from any loss, damage, expense or liability resulting to the Company if any sale or distribution of the Shares by such person is contrary to the representation and agreement referred to above; provided , however , that the Committee may, in its reasonable discretion, take whatever additional actions it deems reasonably necessary to ensure the observance and performance of such representation and agreement and to effect compliance with the Act and any other federal or state securities laws or regulations; and

 

(e)          In the event the Option or portion thereof shall be exercised pursuant to Section 4.1 by any person or persons other than the Optionee, appropriate proof of the right of such person or persons to exercise the Option.

 

Without limiting the generality of the foregoing, the Committee may require an opinion of counsel acceptable to it to the effect that any subsequent transfer of Shares acquired on exercise of the Option does not violate the Act, and may issue stop-transfer orders covering such Shares.  Share certificates evidencing stock issued on exercise of the Option may bear an appropriate legend referring to the provisions of subsection (d) above and the agreements herein. The written representation and agreement referred to in subsection (d) above shall, however, not be required if the Shares to be issued pursuant to such exercise have been registered under the Act, and such registration is then effective in respect of such Shares.

 

Section 4.4.   Conditions to Issuance of Stock Certificates

 

The Shares deliverable upon the exercise of the Option, or any portion thereof, may be either previously authorized but unissued Shares or issued Shares, which have then been reacquired by the Company.  Such Shares shall be fully paid and nonassessable.  The Company shall not be required to issue or deliver any certificate or certificates for Shares purchased (if certificated, or if not certificated, register the issuance of such Shares on its books and records) upon the exercise of the Option or portion thereof prior to fulfillment of all of the following conditions:

 

(a)        The obtaining of approval or other clearance from any state or federal governmental agency which the Committee shall, in its reasonable and good faith discretion, determine to be necessary or advisable; and

 

(b)        The lapse of such reasonable period of time following the exercise of the Option as the Committee may from time to time establish for reasons of administrative convenience or as may otherwise be required by applicable law.

 

Section 4.5.   Rights as Shareholder

 

Except as otherwise provided in Section 2.4 of this Agreement, the holder of an Option shall not be, nor have any of the rights or privileges of, a shareholder of the Company in respect of any Shares purchasable upon the exercise of the Option or any portion thereof unless and until certificates

 

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representing such Shares shall have been issued by the Company to such holder or the Shares have otherwise been recorded in the records of the Company as owned by such holder.

 

ARTICLE V

MISCELLANEOUS

 

Section 5.1.   Administration

 

The Committee shall have the power to interpret the Plan and this Agreement and to adopt such rules for the administration, interpretation and application of the Plan as are consistent therewith and to interpret or revoke any such rules.  All actions taken and all interpretations and determinations made by the Committee shall be final and binding upon the Optionee, the Company and all other interested persons.  No member of the Committee shall be personally liable for any action, determination or interpretation made in good faith with respect to the Plan or the Option.  In its absolute discretion, the Board may at any time and from time to time exercise any and all rights and duties of the Committee under the Plan and this Agreement.

 

Section 5.2.   Option Not Transferable

 

Neither the Option nor any interest or right therein or part thereof shall be liable for the debts, contracts or engagements of the Optionee or his or her successors in interest or shall be subject to disposition by transfer, alienation, anticipation, pledge, encumbrance, assignment or any other means whether such disposition be voluntary or involuntary or by operation of law by judgment, levy, attachment, garnishment or any other legal or equitable proceedings (including bankruptcy), and any attempted disposition thereof shall be null and void and of no effect; provided, however, that this Section 5.2 shall not prevent transfers by will or by the applicable laws of descent and distribution or other transfers authorized in limited circumstances by the Committee (or its designee).

 

Section 5.3.   Notices

 

Any notice to be given under the terms of this Agreement to the Company shall be addressed to the Company in care of its Secretary or his or her designee, and any notice to be given to the Optionee shall be addressed to him or her at the address given beneath his or her signature hereto.  By a notice given pursuant to this Section 5.3, either party may hereafter designate a different address for notices to be given to him or her.  Any notice, which is required to be given to the Optionee, shall, if the Optionee is then deceased, be given to the Optionee’s personal representative if such representative has previously informed the Company of his status and address by written notice under this Section 5.3. Any notice shall have been deemed duly given when (i) delivered in person; or, except for notice under Section 4.3 which must be received to be duly given, (ii) enclosed in a properly sealed envelope or wrapper addressed as aforesaid, deposited (with postage prepaid) in a post office or branch post office regularly maintained by the United States Postal Service, or (iii) enclosed in a properly sealed envelope or wrapper addressed as aforesaid, deposited (with fees prepaid) in an office regularly maintained by FedEx, UPS, or comparable non-public mail carrier.

 

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Section 5.4.   Titles; Pronouns

 

Titles are provided herein for convenience only and are not to serve as a basis for interpretation or construction of this Agreement.  The masculine pronoun shall include the feminine and neuter, and the singular the plural, where the context so indicates.

 

Section 5.5.   [ Applicability of Plan and Management Stockholder’s Agreement

 

The Option and the Shares of Common Stock issued to the Optionee upon exercise of the Option shall be subject to all of the terms and provisions of the Plan to the extent applicable to an Option and Shares.   In the event of any conflict between this Agreement and the Plan, the terms of the Plan shall control.  The Option and the Shares of Common Stock issued to the Optionee upon exercise of the Option shall not be subject to, and hereby are expressly exempted from, all of the terms and provisions of any Management Stockholder’s Agreement between the Optionee and the Company in existence on the Grant Date.]

 

Section 5.6.   Amendment

 

This Agreement may only be amended pursuant to Section 10 of the Plan.

 

Section 5.7.   Governing Law

 

The laws of the State of Delaware shall govern the interpretation, validity and performance of the terms of this Agreement regardless of the law that might be applied under principles of conflicts of laws.

 

Section 5.8.   Arbitration

 

In the event of any controversy among the parties hereto arising out of, or relating to, this Agreement which cannot be settled amicably by the parties, such controversy shall be finally, exclusively and conclusively settled by mandatory arbitration conducted expeditiously in accordance with the American Arbitration Association rules, by a single independent arbitrator.  Such arbitration process shall take place within the Nashville, Tennessee metropolitan area.  The decision of the arbitrator shall be final and binding upon all parties hereto and shall be rendered pursuant to a written decision, which contains a detailed recital of the arbitrator’s reasoning.  Judgment upon the award rendered may be entered in any court having jurisdiction thereof.  Each party shall bear its own legal fees and expenses, unless otherwise determined by the arbitrator.

 

Section 5.9.   Clawback

 

As a condition of receiving the Option, the Optionee acknowledges and agrees that the Optionee’s rights, payments, and benefits with respect to the Option shall be subject to any reduction, cancellation, forfeiture or recoupment, in whole or in part, upon the occurrence of certain specified events, as may be required by any rule or regulation of the Securities and Exchange Commission or by any applicable national exchange, or by any other applicable law, rule or regulation.

 

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Section 5.10  Signature in Counterparts

 

This Agreement may be signed in counterparts, each of which shall be an original, with the same effect as if the signatures thereto and hereto were upon the same instrument.

 

[ Signatures on next pages ]

 

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IN WITNESS WHEREOF, this Agreement has been executed and delivered by the parties hereto.

 

 

 DOLLAR GENERAL CORPORATION

 

 

 

 

 

 

 

By:

 

 

 

 

Name:

 

 

 

 

Title:

 

 

 

 

 

 

 

 

ADDRESS:

 

 

 

Dollar General Corporation

 

100 Mission Ridge

 

Goodlettsville, TN 37072

 

 

[Signature Page of Stock Option Award Agreement]

 

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OPTIONEE:

 

 

 

 

 

Signature:

 

 

 

Print Name:

 

 

 

Employee ID:

 

 

 

 

 

 HOME ADDRESS:

 

 

 

 

 

 

[Signature Page of Stock Option Award Agreement]

 

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Schedule A to Stock Option Award Agreement

 

 

Grant Date : [    ]

 

Exercise Price (per Share) : $[    ]

 

 

 

Option Grant :

 

Aggregate number of Shares of Common Stock for which the Option granted hereunder is exercisable: [    ]

 

 

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Exhibit 10.4

 

DOLLAR GENERAL CORPORATION
PERFORMANCE SHARE UNIT AWARD AGREEMENT

 

THIS AGREEMENT (the “ Agreement ”), dated as of the date indicated on Schedule A hereto (the “Grant Date”), is made between Dollar General Corporation, a Tennessee corporation (hereinafter, together with all Service Recipients unless the context indicates otherwise, called the “ Company ”), and the individual whose name is set forth on the signature page hereof, who is an employee of the Company (hereinafter referred to as the “ Grantee ”).  Capitalized terms not otherwise defined herein shall have the same meanings as in the Amended and Restated 2007 Stock Incentive Plan for Key Employees of Dollar General Corporation and its Affiliates, as amended from time to time (the “ Plan ”), the terms of which are hereby incorporated by reference and made a part of this Agreement.

 

WHEREAS, the Company desires to grant the Grantee a performance share unit award as provided for hereunder, ultimately payable in shares of Common Stock of the Company, par value $0.875 per Share (the “ Performance Share Unit Award ”), pursuant to the terms and conditions of this Agreement and the Plan; and

 

WHEREAS, the Compensation Committee (or a duly authorized subcommittee thereof) of the Company’s Board appointed to administer the Plan (the “ Committee ”) has determined that it would be to the advantage and in the best interest of the Company and its shareholders to grant the Performance Share Unit Award provided for herein to the Grantee, and has advised the Company thereof and instructed the undersigned officer to issue said Performance Share Unit Award;

 

NOW, THEREFORE, in consideration of the foregoing and other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties hereto do hereby agree as follows:

 

1.                                     Grant of Performance Share Unit Award .  Subject to the terms and conditions of the Plan and the additional terms and conditions set forth in this Agreement, the Company hereby grants to the Grantee a certain number of performance units (referred to as “ Performance Share Units ”) which the Grantee will have an opportunity to earn over a Performance Period of one year if certain performance goal measures are met in accordance with Section 4 and to receive if additional time-based vesting conditions are met in accordance with Section 5.  A Performance Share Unit represents the right to receive one Share of Common Stock upon satisfaction of the performance, vesting and other conditions set forth in Agreement.

 

2.                                     Target Number of Performance Share Units .  The target number of Performance Share Units awarded is set forth on Schedule A hereto.  At the end of the Performance Period, and subject to additional time-based vesting, the Grantee can earn up to [300%] of the target number of Performance Share Units or as little as no Performance Share Units, depending upon actual performance compared to the performance goal measures established by the Committee.

 

3.                                     Performance Period .  The period during which the performance goal measures apply (the “ Performance Period ”) begins and ends as set forth on Schedule A hereto.

 

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4.                                     Performance Goal Measures .

 

(a)    The performance goal measures and the levels of performance for each of the performance goal measures that is required to earn Performance Share Units were established by the Committee on the Grant Date.  Performance goals are based on Adjusted EBITDA (weighted [50%]) and ROIC (weighted [50%]), each as defined below and as established by the Committee, for the Performance Period, with the method for determining the number of Performance Share Units that can be earned (including the threshold, target and maximum number of Performance Share Units) set forth on Schedule A hereto, subject to the additional time-based vesting requirements that extend beyond the end of the Performance Period as provided in Section 5.  If the performance level for a performance goal measure is below the established threshold, no Performance Share Units shall be earned.  If the performance level for a performance goal measure is above the established maximum, no additional Performance Share Units shall be earned above the associated maximum payout level.  Within sixty (60) days following the end of the Performance Period, the Committee will determine the extent to which the performance goal measures have been met and the number of Performance Share Units earned (subject to the additional time-based vesting requirements that extend beyond the end of the Performance Period as provided in Section 5) and will interpolate on a straight-line basis all stated levels between the performance results and Performance Share Units to be earned and will round to the nearest whole Performance Share Unit.  The Performance Share Units are intended to be Performance-Based Awards under the Plan, and the provision of Section 6(c)(ii) of the Plan shall apply.  The Committee must certify the performance results for each of the performance goal measures following the end of the Performance Period.  The Committee may exercise its discretion to reduce the number of Performance Share Units earned in its assessment of performance in relation to the performance goal measures or in light of other considerations that the Committee deems relevant.  Except as provided in Section 5(h) in the event of a Change in Control during the Performance Period, any Performance Share Units that are not, based on the Committee’s determination, earned by performance during the Performance Period, including Performance Share Units that had been potentially earnable by performance in excess of the actual performance levels achieved, shall be cancelled and forfeited as of the last day of the Performance Period.  The number of Performance Share Units earned as determined by the Committee (but subject to the additional pro-ration provisions and vesting provisions set forth in Section 5) shall be divided into three equal and separate installments as provided in Section 5.  To the extent allocation of the Performance Share Units to the three installments results in fractional shares, the vesting of the fractional shares shall be combined and be a part of the first installment.

 

(b)    The following terms have the following meaning for purposes hereof:

 

(i)                                   Adjusted EBITDA ” shall be computed as income (loss) from continuing operations before cumulative effect of change in accounting principles plus interest and other financing costs, net, provision for income taxes, and depreciation and amortization, but (1) shall exclude the impact of (a) any costs, fees and expenses directly related to the consideration, negotiation, preparation, or consummation of any asset sale, merger or other transaction that results in a Change in Control (within the meaning of the Plan) of the Company or any offering of Company common stock or other security; (b) share-based compensation charges; (c) any gain or loss recognized as a result of derivative instrument transactions or other hedging activities; (d) any gains or losses associated with the early retirement of debt obligations; (e) charges resulting from significant natural disasters; and (f) any significant gains or losses associated with the Company’s LIFO computation; and (2) unless the Committee disallows any such item, shall also exclude (a) non-cash asset impairments; (b) any significant loss as a result of an individual litigation, judgment or

 

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lawsuit settlement (including a collective or class action lawsuit and security holder lawsuit, among others); (c) charges for business restructurings; (d) losses due to new or modified tax or other legislation or accounting changes enacted after the beginning of the Performance Period; (e) significant tax settlements; and (f) any significant unplanned items of a non-recurring or extraordinary nature.

 

(ii)                               ROIC ” shall mean (a) the result of (x) the sum of (i) the Company’s operating income, plus (ii) depreciation and amortization, plus (iii) minimum rentals, minus (y) taxes, divided by (b) the result of (x) the sum of the averages of: (i) total assets, plus (ii) accumulated depreciation and amortization, minus (y) (i) cash, minus (ii) goodwill, minus (iii) accounts payable, minus (iv) other payables, minus (v) accrued liabilities, plus (vi) 8x minimum rentals (with all of the foregoing terms as determined per the Company’s financial statements), but (1) shall exclude the impact of (a) any costs, fees and expenses directly related to the consideration, negotiation, preparation, or consummation of any asset sale, merger or other transaction that results in a Change in Control (within the meaning of the Plan) of the Company or any offering of Company common stock or other security; (b) any gain or loss recognized as a result of derivative instrument transactions or other hedging activities; (c) any gains or losses associated with the early retirement of debt obligations; (d) charges resulting from significant natural disasters; and (e) any significant gains or losses associated with the Company’s LIFO computation; and (2) unless the Committee disallows any such item, shall also exclude (a) non-cash asset impairments; (b) any significant loss as a result of an individual litigation, judgment or lawsuit settlement (including a collective or class action lawsuit and security holder lawsuit, among others); (c) charges for business restructurings; (d) losses due to new or modified tax or other legislation or accounting changes enacted after the beginning of the Performance Period; (e) significant tax settlements; and (f) any significant unplanned items of a non-recurring or extraordinary nature.

 

5.             Vesting and Payment .

 

(a)    Vesting and Payment of One-Third of Earned Performance Share Units .  One-third of the Performance Share Units earned based on the Committee’s determination of the level of achievement for each of the performance goal measures in accordance with Section 4 (such one-third installment being the “ Initial Earned Performance Share Units ”) shall become vested and nonforfeitable as of the last day of the Performance Period but only if the Grantee has remained continuously employed through such date and the Grantee is not terminated for Cause prior to the date of payment unless prohibited by law.  If the Grantee does not remain continuously employed through the last day of the Performance Period because of Grantee’s Retirement, death or Disability during the Performance Period, then a Pro-Rata Portion of the Initial Earned Performance Share Units (rounded to the nearest whole share) shall become vested and nonforfeitable as of the last day of the Performance Period and all remaining Initial Earned Performance Share Units shall be automatically forfeited to the Company and cancelled.  For purposes of this Section 5(a) only, a “Pro Rata Portion” is determined by a fraction (not to exceed one), the numerator of which is the number of months in the Performance Period during which the Grantee was continuously in the employment of the Company and the denominator of which is the number of months in the Performance Period.  Grantee will be deemed to be employed for a month if the Grantee’s Retirement, death or Disability occurs after the fifteenth (15 th ) day of a month.  If the Grantee does not remain continuously employed through the last day of the Performance Period for any other reason, then all Initial Earned Performance Share Units shall be automatically forfeited to the Company and cancelled on the date the Grantee’s employment terminates.  The Initial Earned Performance Share Units that become vested under this Section 5(a) shall be paid on April 1, [Grant Date year + 1 year].  Notwithstanding

 

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the above and except to the extent required by law, no Initial Earned Performance Share Units shall be paid if the Grantee is terminated for Cause prior to the date of payment.

 

(b)    Vesting and Payment of Additional One-Third of Earned Performance Share Units .  An additional one-third of the Performance Share Units earned based on the Committee’s determination of the level of achievement for each of the performance goal measures in accordance with Section 4 (such one-third installment being the “ Additional Earned Performance Share Units ”) shall become vested and nonforfeitable and shall be paid on April 1, [Grant Date year + 2 years] but only if the Grantee has remained continuously employed through such date.  If the Grantee does not remain continuously employed through April 1, [Grant Date year + 2 years] because of Grantee’s earlier Retirement, but only if Grantee remained continuously employed through April 2, [Grant Date year + 1 year], then the Additional Earned Performance Share Units shall become vested and nonforfeitable and shall be paid on the date of Grantee’s Retirement.  If the Grantee does not remain continuously employed through April 1, [Grant Date year + 2 years] because of Grantee’s death or Disability, but only if the Grantee does not die or become Disabled prior to April 2, [Grant Date year + 1 year], then the Additional Earned Performance Share Units shall become vested and nonforfeitable as of the date of Grantee’s death or Disability.  The Additional Earned Performance Share Units that become vested and nonforfeitable on the date of Grantee’s death or Disability as provided above shall be paid within thirty (30) days following such death or Disability but in all events no later than the Latest Payment Date, as defined in Section 5(j).  If the Grantee does not remain continuously employed through April 1, [Grant Date year + 2 years] under any other circumstances, then all Additional Earned Performance Share Units that are not vested as of the date of the Grantee’s termination of employment shall be automatically forfeited to the Company and cancelled on the date of the Grantee’s termination of employment.

 

(c)    Vesting and Payment of Remaining Earned Performance Share Units .  The remaining one-third Performance Share Units earned based on the Committee’s determination of the level of achievement for each of the performance goal measures in accordance with Section 4 (such one-third installment being the “ Remaining Earned Performance Share Units ”) shall become vested and nonforfeitable and shall be paid on April 1, [Grant Date year + 3 years] but only if the Grantee has remained continuously employed through such date.  If the Grantee does not remain continuously employed through April 1, [Grant Date year + 3 years] because of Grantee’s earlier Retirement, but the Grantee has remained continuously employed through April 2, [Grant Date year + 2 years], then the Remaining Earned Performance Share Units shall become vested and nonforfeitable and shall be paid on the date of Grantee’s Retirement.  If the Grantee does not remain continuously employed through April 1, [Grant Date year + 3 years] because of Grantee’s death or Disability, but only if the Grantee does not die or become Disabled prior to April 2, [Grant Date year + 1 year], then the Remaining Earned Performance Share Units shall become vested and nonforfeitable as of the date of Grantee’s death or Disability.  All Remaining Earned Performance Share Units that become vested and nonforfeitable on the date of Grantee’s death or Disability shall be paid within thirty (30) days following such death or Disability but in no event later than the Latest Payment Date, as defined in Section 5(j).  If the Grantee does not remain continuously employed through April 1, [Grant Date year + 3 years] under any other circumstances, then all Remaining Performance Share Units that are not vested as of the date of the Grantee’s termination of employment shall be automatically forfeited to the Company and cancelled on the date of the Grantee’s termination of employment.

 

(d)    Transfers and Reemployment .  For purposes of this Agreement, transfer of employment among the Company and another Service Recipient shall not be considered a termination or interruption of employment.  Upon reemployment following a termination of

 

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employment for any reason, the Grantee shall have no rights to any Performance Share Units previously forfeited and cancelled under this Agreement.

 

(e)    Retirement .  For purposes of this Agreement, Retirement shall mean the voluntary termination of Grantee’s employment with the Company on or after (i) reaching the minimum age of sixty-two (62) and (ii) achieving five (5) consecutive years of service; provided, however, that the sum of the Grantee’s age plus years of service (counting whole years only) must equal at least seventy (70) and provided further that there is no basis for the Company to terminate the Grantee for Cause at the time of Grantee’s voluntary termination.

 

(f)    Disability .  For the purposes of this Agreement, Disability shall mean the Grantee’s termination of employment by the Company due to Grantee’s “Disability” (i) as defined in any employment agreement between the Grantee and the Company that is in effect at the time of termination of employment; or (ii) if there is no such employment agreement in effect or no definition therein, as defined in any change-in-control agreement between the Grantee and the Company that is in effect at the time of termination of employment; or (iii)  if there is no such employment or change-in-control agreement or definitions therein, as defined in the Company’s long-term disability plan.

 

(g)    Cause .  For the purposes of this Agreement, Cause shall mean (i) “Cause” as such term may be defined in any employment agreement between the Grantee and the Company that is in effect at the time of termination of employment; or (ii) if there is no such employment agreement in effect, “Cause” as such term may be defined in any change-in-control agreement between the Grantee and the Company that is in effect at the time of termination of employment; or (iii) if there is no such employment or change-in-control agreement, with respect to a Grantee: (A) any act of the Grantee involving fraud or dishonesty, or any willful failure to perform reasonable duties assigned to the Grantee which failure is not cured within 10 business days after receipt from the Company of written notice of such failure; (B) any material breach by the Grantee of any securities or other law or regulation or any Company policy governing trading or dealing with stock, securities, investments or the like, or any inappropriate disclosure or “tipping” relating to any stock, securities, investments or the like; (C) other than as required by law, the carrying out by the Grantee of any activity, or the Grantee making any public statement, which prejudices or ridicules the good name and standing of the Company or its Affiliates or would bring such persons into public contempt or ridicule; (D) attendance by the Grantee at work in a state of intoxication or the Grantee otherwise being found in possession at the Grantee’s place of work of any prohibited drug or substance, possession of which would amount to a criminal offense; (E) any assault or other act of violence by the Grantee; or (F) the Grantee being indicted for any crime constituting (I) any felony whatsoever or (II) any misdemeanor that would preclude employment under the Company’s hiring policy.

 

(h)  Change in Control . Notwithstanding any other provision of this Section 5 (other than Section 5(i)), in the event of a Change in Control, vesting and payment of the Performance Share Units that have not previously become vested and nonforfeitable, or have not previously been forfeited, under Section 4, 5(a), 5(b), or 5(c) shall be determined under this Section 5(h).  If a Change in Control occurs on or before the end of the Performance Period and provided the Grantee is continuously employed until the Change in Control, the target number of the Performance Share Units shall be deemed earned and shall become vested and nonforfeitable and shall be paid upon the Change in Control.  In the event a Change in Control occurs following the end of the Performance Period and provided the Grantee is continuously employed until the Change in Control, all of the Performance Share Units previously earned based on the Committee’s determination of

 

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performance in accordance with Section 4 shall become vested and nonforfeitable and shall be paid upon the Change in Control.

 

(i)   [Reserved]

 

(j)    Delivery of Shares .  Shares of Common Stock corresponding to the number of Performance Share Units that have been earned and become vested and nonforfeitable (“ Performance Shares ”) shall be paid to the Grantee, or, if deceased, to the Grantee’s estate, in settlement of the Performance Share Units at the times provided in Sections 5(a), 5(b), 5(c), and 5(h), although no interest shall be payable in the event there is a delay in the time of payment for any reason.  However, notwithstanding any other payment timing provision, in all events, payment and delivery of the Performance Shares shall be made no later than the later of the 15 th  day of the third month following the end of the Grantee’s first taxable year (usually the calendar year) in which the right to the payment is no longer subject to a substantial risk of forfeiture (upon the fixed payment date, death, Disability, or a Change in Control or when the Grantee who is eligible for Retirement has met all service requirements for vesting) or the 15 th  day of the third month following the end of the Company’s first taxable year (usually the fiscal year) in which the right to the payment is no longer subject to such substantial risk of forfeiture (the latest such date, the “ Latest Payment Date ”).  Such payment shall be accomplished either by delivering a share certificate or by providing evidence of electronic delivery, and the Performance Shares shall be registered in the name of the Grantee or, if deceased, Grantee’s estate. The Performance Shares may be either previously authorized but unissued Shares or issued Shares, which have then been reacquired by the Company. Such Shares shall be fully paid and nonassessable.  In determining the number of Performance Shares to be withheld for taxes as provided in Section 10, the value of the Performance Shares shall be based upon the Fair Market Value of the Shares on the date of payment.  If a designated date of payment falls on a weekend, holiday or other non-trading day, the value of any Performance Shares payable on such designated date of payment shall be determined based on the Fair Market Value of the Shares on the most recent prior trading date.

 

6.                                     No Dividend Equivalents .  The Grantee shall have no right to dividend equivalents or dividends on the Performance Share Units.

 

7.                                     Transferability .  Neither the Performance Shares prior to delivery pursuant to Section 5 nor any interest or right therein or part thereof shall be liable for the debts, contracts or engagements of the Grantee or his or her successors in interest or shall be subject to disposition by transfer, alienation, anticipation, pledge, encumbrance, assignment or any other means whether such disposition be voluntary or involuntary or by operation of law by judgment, levy, attachment, garnishment or any other legal or equitable proceedings (including bankruptcy), and any attempted disposition thereof shall be null and void and of no effect; provided, however, that this Section 7 shall not prevent transfers by will or by the applicable laws of descent and distribution.

 

8.                                     No Guarantee of Employment .  Nothing in this Agreement or in the Plan shall confer upon the Grantee any right to continue in the employ of the Company or shall interfere with or restrict in any way the rights of the Company, which are hereby expressly reserved, to terminate the employment of the Grantee at any time for any reason whatsoever, with or without cause, subject to the applicable provisions of, if any, the Grantee’s employment agreement with the Company or offer letter provided by the Company to the Grantee.

 

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9.                                     Change in Capitalization; Change in Control .  If any event described in Section 8 or 9 of the Plan occurs, this Agreement and the Performance Shares shall be adjusted to the extent required or permitted, as applicable, pursuant to Sections 8 and 9 of the Plan.

 

10.                             Taxes .  The Grantee shall have full responsibility, and the Company shall have no responsibility (except as to applicable tax withholdings), for satisfying any liability for any federal, state or local income or other taxes required by law to be paid with respect to the Performance Shares. The Grantee is hereby advised to seek his or her own tax counsel regarding the taxation of the Performance Shares hereunder.  Unless otherwise determined by the Committee, at the time of vesting the Company shall withhold from any Performance Shares deliverable in payment of the Performance Share Units the number of shares of Performance Shares having a value equal to the minimum amount of income and employment taxes required to be withheld under applicable laws and regulations, and pay the amount of such withholding taxes in cash to the appropriate taxing authorities.  Any fractional shares resulting from the payment of the withholding amounts shall be liquidated and paid in cash to the U.S. Treasury as additional federal income tax withholding for the Grantee.  Grantee shall be responsible for any withholding taxes not satisfied by means of such mandatory withholding and for all taxes in excess of such withholding taxes that may be due upon vesting of the Performance Share Units.

 

11.                             Limitation on Obligations .  This Performance Share Unit Award shall not be secured by any specific assets of the Company, nor shall any assets of the Company be designated as attributable or allocated to the satisfaction of the Company’s obligations under this Agreement.  In addition, the Company shall not be liable to the Grantee for damages relating to any delays in issuing the share certificates or electronic delivery thereof to him (or his designated entities), any loss of the certificates, or any mistakes or errors in the issuance or registration of the certificates or in the certificates themselves.

 

12.                             Securities Laws .  The Company may require the Grantee to make or enter into such written representations, warranties and agreements as the Committee may reasonably request in order to comply with applicable securities laws.  The Performance Share Units and Performance Shares shall be subject to all applicable laws, rules and regulations and to such approvals of any governmental agencies as may be required.

 

13.                             Notices .  Any notice to be given under the terms of this Agreement to the Company shall be addressed to the Company in care of its Secretary or his or her designee, and any notice to be given to the Grantee shall be addressed to him at the address given beneath his signature hereto.  By a notice given pursuant to this Section 13, either party may hereafter designate a different address for notices to be given to him.  Any notice that is required to be given to the Grantee shall, if the Grantee is then deceased, be given to the Grantee’s personal representative if such representative has previously informed the Company of his status and address by written notice under this Section 13.  Any notice shall have been deemed duly given when delivered by hand or courier or when enclosed in a properly sealed envelope or wrapper addressed as aforesaid, deposited (with postage prepaid) in a post office or branch post office regularly maintained by the United States Postal Service.

 

14.                             Governing Law .  The laws of the State of Delaware shall govern the interpretation, validity and performance of the terms of this Agreement regardless of the law that might be applied under principles of conflicts of laws.

 

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15.                             Section 409A of the Code .  This Agreement is intended to be exempt from Section 409A of the Code as a short-term deferral.  Each installment payment under this Agreement will be treated as a separate payment.  Notwithstanding the foregoing, the Company shall not be liable to the Grantee in the event this Agreement fails to be exempt from, or comply with, Section 409A of the Code.

 

16.                             Arbitration .  In the event of any controversy among the parties hereto arising out of, or relating to, this Agreement which cannot be settled amicably by the parties, such controversy shall be finally, exclusively and conclusively settled by mandatory arbitration conducted expeditiously in accordance with the American Arbitration Association rules, by a single independent arbitrator.  Such arbitration process shall take place within the Nashville, Tennessee metropolitan area.  The decision of the arbitrator shall be final and binding upon all parties hereto and shall be rendered pursuant to a written decision, which contains a detailed recital of the arbitrator’s reasoning.  Judgment upon the award rendered may be entered in any court having jurisdiction thereof.  Each party shall bear its own legal fees and expenses, unless otherwise determined by the arbitrator.

 

17.                             Clawback .  As a condition of receiving the Performance Share Units, the Grantee acknowledges and agrees that the Grantee’s rights, payments, and benefits with respect to the Performance Share Units shall be subject to any reduction, cancellation, forfeiture or recoupment, in whole or in part, upon the occurrence of certain specified events, as may be required by any rule or regulation of the Securities and Exchange Commission or by any applicable national exchange, or by any other applicable law, rule or regulation.

 

18.                             [ Applicability of Plan and Management Stockholder’s Agreement .  The Performance Share Units and the Performance Shares issued to the Grantee upon payment of the Performance Share Units shall be subject to all terms and provisions of the Plan to the extent applicable to performance share units and Shares. In the event of any conflict between this Agreement and the Plan, the terms of the Plan shall control.  The Performance Share Units and the Performance Shares issued to the Grantee shall not be subject to, and hereby are expressly exempted from, all of the terms and provisions of any Management Stockholder’s Agreement between the Grantee and the Company in existence on the Grant Date.]

 

19.                             Amendment and Termination .  This Agreement may be modified in any manner consistent with Section 10 of the Plan.

 

20.                             Administration . The Committee shall have the power to interpret the Plan and this Agreement and to adopt such rules for the administration, interpretation and application of the Plan as are consistent therewith and to interpret or revoke any such rules.  All actions taken and all interpretations and determinations made by the Committee shall be final and binding upon the Grantee, the Company and all other interested persons.  No member of the Committee shall be personally liable for any action, determination or interpretation made in good faith with respect to the Plan or the Performance Share Unit Award.  In its absolute discretion, the Board may at any time and from time to time exercise any and all rights and duties of the Committee under the Plan and this Agreement.

 

21.                             Rights as Shareholder .  The holder of a Performance Share Unit Award shall not be, nor have any of the rights or privileges of, a shareholder of the Company in respect of any Performance Shares issuable upon the payment of a vested Performance Share Unit unless and

 

8



 

until a certificate or certificates representing such Performance Shares shall have been issued by the Company to such holder or, if the Common Stock is listed on a national securities exchange, a book entry representing such Performance Shares has been made by the registrar of the Company.

 

22.                             Signature in Counterparts .  This Agreement may be signed in counterparts, each of which shall be an original, with the same effect as if the signatures thereto and hereto were upon the same instrument.

 

9



 

IN WITNESS WHEREOF, this Agreement has been executed and delivered by the parties hereto.

 

 

 

DOLLAR GENERAL CORPORATION

 

 

 

 

 

By:

 

 

 

 

Name:

 

 

 

 

Title:

 

 

 

 

 

 

 

 

GRANTEE

 

 

 

 

 

 

 

[name]

 

 

 

 

 

ADDRESS:

 

 

 

 

 

 

 

10



 

Schedule A to Performance Share Unit Award Agreement

 

Grant Date :

 

[     ]

 

 

 

Target Number of Performance Share Units Awarded :

 

[     ]

 

 

 

Performance Period :

 

Begins on [1 st  day of applicable fiscal year] and ends on [last day of applicable fiscal year]

Threshold, Target and Maximum Calculation Chart:

 

See attached Exhibit 1

 

11



 

Exhibit 1 to Schedule A to Performance Share Unit Award Agreement

 

 

[    ] Performance Share Matrix

 

 

 

 

 

EBITDA Based Shares Earned ([50%] Weighting)

 

ROIC Based Shares Earned ([50%] Weighting)

 

Performance Level

 

EBITDA
Result Vs.
Target

 

EBITDA
Based
Shares

 

EBITDA
Weight

 

Shares
Earned

 

ROIC
Result
Vs.
Target

 

ROIC
Shares

 

ROIC
Weight

 

Shares
Earned

 

Total
Shares
Earned

 

Threshold

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Target

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Maximum