**Form 10-Q**

 

**SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549**

 

**(Mark One)**

 

| **ý**                                       |   | **QUARTERLY  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**  |
|--------------------------------------------------|--------|-----------------------------------------------------------------------------------------------|
| **For the quarterly period ended March 1, 2003** |
|                                             |
| **OR**                                           |
|                                             |
| **o**                                            |   | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |

 

**Commission File Number    1-6807**

 

| **FAMILY DOLLAR STORES, INC.**                                       |
|----------------------------------------------------------------------|
| (Exact name of registrant as specified in  its charter)              |
|                                                                 |   |   |
| **DELAWARE**                                                         |   | **56-0942963** |
| (State or other jurisdiction of  incorporation or organization)      |   | (I.R.S. Employer  Identification No.) |
|                                                                 |   |   |
| **P. O. Box 1017, 10401 Old Monroe Road  Charlotte, North Carolina** |   | **28201-1017** |
| (Address of principal executive offices)                             |   | (Zip Code) |

 

Registrant’s telephone number, including area code     **704-847-6961**

 

Indicate by check mark whether the registrant (1) has filed all reportsrequired to be filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject to suchfiling requirements for the past 90 days.

Yes ý No o

 

Indicate by check mark whether the registrant is an accelerated filer(as defined in Rule 12-b of the Exchange Act). Yes ýNo o

 

Indicate the number of shares outstanding of each of the issuer’sclasses of common stock, as of the latest practicable date.

 

| **Class**                    |   | **Outstanding at April 1, 2003** |
|------------------------------|--------|----------------------------------|
| Common Stock, $.10 par value |   | 172,027,160 shares               |

 

 

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FAMILY DOLLARSTORES, INC., AND SUBSIDIARIES

 

INDEX

 
| Part I - Financial Information |
|--------------------------------|
|                           |   |
| Item 1 -                       | Consolidated Condensed Financial Statements: |
|                           |   |
|                           | Consolidated Condensed Balance Sheets -  March 1, 2003 and August 31, 2002 |
|                           |   |
|                           | Consolidated Condensed Statements of Income -  Quarter Ended March 1, 2003 and March 2, 2002 |
|                           |   |
|                           | Consolidated Condensed Statements of Income -  First Half Ended March 1, 2003 and March 2, 2002 |
|                           |   |
|                           | Consolidated Condensed Statements of Cash Flows -  First Half Ended March 1, 2003 and March 2, 2002 |
|                           |   |
|                           | Notes to  Consolidated Condensed Financial Statements |
|                           |   |
| Item 2 -                       | Management’s  Discussion and Analysis of Financial Condition and Results of Operations |
|                           |   |
| Item 4 -                       | Controls and Procedures |
|                           |   |
| Part II -                      | Other Information and Signatures |
|                           |   |
| Item 1 -                       | Legal Proceedings |
|                           |   |
| Item 4 -                       | Submission of Matters to a Vote of Security  Holders |
|                           |   |
| Item 6 -                       | Exhibits and Reports on Form 8-K |
|                           |   |
| Signatures                     |
|                           |
| Certifications                 |

 

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FAMILYDOLLAR STORES, INC., AND SUBSIDIARIES

 

CONSOLIDATED CONDENSED BALANCE SHEETS

(Unaudited)

 
| **(In thousands, except share amounts)**                                                                                                       |   | **March 1,  2003** |      | **August 31,  2002** |   |
|------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------------------|-----------|----------------------|--------|
|                                                                                                                                           |   |               |      |                 |   |
| Assets                                                                                                                                         |   |               |      |                 |   |
| Current assets:                                                                                                                                |   |               |      |                 |   |
| Cash and cash  equivalents (Note 2)                                                                                                            |   | $                  | 266,844   |                 | $      | 220,265 |   |
| Merchandise  inventories                                                                                                                       |   | 728,016            |      | 766,631              |   |
| Deferred income  taxes                                                                                                                         |   | 57,234             |      | 49,941               |   |
| Income tax  refund receivable                                                                                                                  |   | —             |      | 6,469                |   |
| Prepayments and  other current assets                                                                                                          |   | 15,837             |      | 12,553               |   |
| Total current  assets                                                                                                                          |   | 1,067,931          |      | 1,055,859            |   |
|                                                                                                                                           |   |               |      |                 |   |
| Property and  equipment, net                                                                                                                   |   | 721,929            |      | 685,617              |   |
|                                                                                                                                           |   |               |      |                 |   |
| Other assets                                                                                                                                   |   | 14,204             |      | 13,143               |   |
|                                                                                                                                           |   |               |      |                 |   |
|                                                                                                                                           |   | $                  | 1,804,064 |                 | $      | 1,754,619 |   |
|                                                                                                                                           |   |               |      |                 |   |
| Liabilities and Shareholders’ Equity                                                                                                      |   |               |      |                 |   |
|                                                                                                                                           |   |               |      |                 |   |
| Current  liabilities:                                                                                                                          |   |               |      |                 |   |
| Accounts  payable and accrued liabilities                                                                                                      |   | $                  | 491,958   |                 | $      | 530,780 |   |
| Income taxes  payable                                                                                                                          |   | 20,145             |      | —               |   |
| Total current  liabilities                                                                                                                     |   | 512,103            |      | 530,780              |   |
|                                                                                                                                           |   |               |      |                 |   |
| Deferred income  taxes                                                                                                                         |   | 71,502             |      | 68,891               |   |
|                                                                                                                                           |   |               |      |                 |   |
| Shareholders’  equity (Notes 5 and 6):                                                                                                    |   |               |      |                 |   |
| Preferred  stock, $1 par; authorized and unissued 500,000 shares                                                                               |   |               |      |                 |   |
| Common stock,  $.10 par; authorized 600,000,000 shares; issued 186,394,448 shares at March  1, 2003, and 185,830,901 shares at August 31, 2002 |   | 18,639             |      | 18,583               |   |
| Capital in  excess of par                                                                                                                      |   | 75,288             |      | 63,294               |   |
| Retained  earnings                                                                                                                             |   | 1,224,120          |      | 1,118,015            |   |
|                                                                                                                                           |   | 1,318,047          |      | 1,199,892            |   |
| Less common  stock held in treasury, at cost (14,281,283 shares at March 1, 2003 and  12,501,666 at August 31, 2002)(Note 6)                   |   | 97,588             |      | 44,944               |   |
| Total  shareholders’ equity                                                                                                               |   | 1,220,459          |      | 1,154,948            |   |
|                                                                                                                                           |   |               |      |                 |   |
|                                                                                                                                           |   | $                  | 1,804,064 |                 | $      | 1,754,619 |   |

 

See notes to consolidated condensedfinancial statements

 

2

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FAMILYDOLLAR STORES, INC., AND SUBSIDIARIES

 

CONSOLIDATED CONDENSED STATEMENTS OF INCOME

(Unaudited)

 
|                                            |   | **Quarter Ended**  |      |
|-------------------------------------------------|--------|--------------------|-----------|
| **(In thousands, except  per share amounts)**   |   | **March 1,  2003** |      | **March 2,  2002** |   |
|                                            |   |               |      |   |   |
| Net sales                                       |   | $                  | 1,256,183 |   | $ | 1,105,165 |   |
|                                            |   |               |      |   |   |
| Cost and  expenses:                             |   |               |      |   |   |
| Cost of sales                                   |   | 838,662            |      | 740,420 |   |
| Selling,  general and administrative expenses   |   | 303,010            |      | 264,323 |   |
|                                            |   | 1,141,672          |      | 1,004,743 |   |
| Income before  provision for taxes on income    |   | 114,511            |      | 100,422 |   |
| Provision for  taxes on income                  |   | 41,796             |      | 36,654 |   |
|                                            |   |               |      |   |   |
| Net income                                      |   | $                  | 72,715    |   | $ | 63,768 |   |
|                                            |   |               |      |   |   |
| Net income per  common share - Basic (Note 6)   |   | $                  | 0.42      |   | $ | 0.37 |   |
|                                            |   |               |      |   |   |
| Average shares  - Basic (Note 6)                |   | 172,151            |      | 172,598 |   |
|                                            |   |               |      |   |   |
| Net income per  common share - Diluted (Note 6) |   | $                  | 0.42      |   | $ | 0.37 |   |
|                                            |   |               |      |   |   |
| Average shares  - Diluted (Note 6)              |   | 173,037            |      | 173,934 |   |
|                                            |   |               |      |   |   |
| Dividends per  common share                     |   | $                  | 0.075     |   | $ | 0.065 |   |

 

See notes to consolidated condensedfinancial statements.

 

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FAMILYDOLLAR STORES, INC., AND SUBSIDIARIES

 

CONSOLIDATED CONDENSED STATEMENTS OF INCOME

(Unaudited)

 
|                                            |   | **First Half Ended** |      |
|-------------------------------------------------|--------|----------------------|-----------|
| **(In thousands, except  per share amounts)**   |   | **March 1,  2003**   |      | **March 2,  2002** |   |
|                                            |   |                 |      |   |   |
| Net sales                                       |   | $                    | 2,364,820 |   | $ | 2,082,298 |   |
|                                            |   |                 |      |   |   |
| Cost and  expenses:                             |   |                 |      |   |   |
| Cost of sales                                   |   | 1,566,467            |      | 1,383,140 |   |
| Selling,  general and administrative expenses   |   | 593,325              |      | 519,670 |   |
|                                            |   | 2,159,792            |      | 1,902,810 |   |
| Income before  provision for taxes on income    |   | 205,028              |      | 179,488 |   |
| Provision for  taxes on income                  |   | 74,835               |      | 65,513 |   |
|                                            |   |                 |      |   |   |
| Net income                                      |   | $                    | 130,193   |   | $ | 113,975 |   |
|                                            |   |                 |      |   |   |
| Net income per  common share - Basic (Note 6)   |   | $                    | 0.75      |   | $ | 0.66 |   |
|                                            |   |                 |      |   |   |
| Average shares  - Basic (Note 6)                |   | 172,614              |      | 172,425 |   |
|                                            |   |                 |      |   |   |
| Net income per  common share - Diluted (Note 6) |   | $                    | 0.75      |   | $ | 0.66 |   |
|                                            |   |                 |      |   |   |
| Average shares  - Diluted (Note 6)              |   | 173,489              |      | 173,766 |   |
|                                            |   |                 |      |   |   |
| Dividends per  common share                     |   | $                    | 0.14      |   | $ | 0.125 |   |

 

See notes to consolidated condensedfinancial statements.

 

4

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FAMILYDOLLAR STORES, INC., AND SUBSIDIARIES

 

CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS

(Unaudited)

 
|                                                                               |   | **First Half Ended** |    |
|------------------------------------------------------------------------------------|--------|----------------------|---------|
| **(In thousands)**                                                                 |   | **March 1,  2003**   |    | **March 2,  2002** |   |
| Cash flows from  operating activities:                                             |   |                 |    |   |   |
| Net income                                                                         |   | $                    | 130,193 |   | $ | 113,975 |   |
| Adjustments to  reconcile net income to net cash provided by operating activities: |   |                 |    |   |   |
| Depreciation  and amortization                                                     |   | 43,132               |    | 37,176 |   |
| Deferred income  taxes                                                             |   | (4,682               | )       | (352 | ) |
| Loss on  disposition of property and equipment                                     |   | 1,773                |    | 1,565 |   |
| Changes in  operating assets and liabilities:                                      |   |                 |    |   |   |
| Merchandise  inventories                                                           |   | 38,615               |    | 64,880 |   |
| Income tax  refund receivable                                                      |   | 6,469                |    | 4,936 |   |
| Prepayments and  other current assets                                              |   | (3,284               | )       | 2,085 |   |
| Other assets                                                                       |   | (1,061               | )       | 756 |   |
| Accounts  payable and accrued liabilities                                          |   | (40,464              | )       | 6,545 |   |
| Income taxes  payable                                                              |   | 20,145               |    | 20,793 |   |
|                                                                               |   | 190,836              |    | 252,359 |   |
| Cash flows from  investing activities:                                             |   |                 |    |   |   |
| Capital  expenditures                                                              |   | (81,423              | )       | (88,466 | ) |
| Proceeds from  dispositions of property and equipment                              |   | 206                  |    | 1,253 |   |
|                                                                               |   | (81,217              | )       | (87,213 | ) |
| Cash flows from  financing activities:                                             |   |                 |    |   |   |
| Net purchases  of stock for treasury                                               |   | (52,644              | )       | 5 |   |
| Exercise of  employee stock options                                                |   | 12,050               |    | 13,610 |   |
| Payment of  dividends                                                              |   | (22,446              | )       | (20,666 | ) |
|                                                                               |   | (63,040              | )       | (7,051 | ) |
|                                                                               |   |                 |    |   |   |
| Net change in  cash and cash equivalents                                           |   | 46,579               |    | 158,095 |   |
|                                                                               |   |                 |    |   |   |
| Cash and cash  equivalents at beginning of period                                  |   | 220,265              |    | 21,753 |   |
|                                                                               |   |                 |    |   |   |
| Cash and cash  equivalents at end of period                                        |   | $                    | 266,844 |   | $ | 179,848 |   |
|                                                                               |   |                 |    |   |   |
| Supplemental  disclosure of cash flow information:                                 |   |                 |    |   |   |
| Cash paid  during the period for:                                                  |   |                 |    |   |   |
| Interest                                                                           |   | $                    | —  |   | $ | 158 |   |
| Income taxes                                                                       |   | 49,785               |    | 34,143 |   |

 

See notes to consolidated condensedfinancial statements.

 

5

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FAMILY DOLLAR STORES, INC., AND SUBSIDIARIES

 

NOTESTO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

 

1.                           In theopinion of the Company, the accompanying unaudited consolidated condensedfinancial statements contain all adjustments (consisting of only normalrecurring accruals) necessary to present fairly the financial position as ofMarch 1, 2003, and the results of operations for the quarter and first halfended March 1, 2003 and March 2, 2002, and the cash flows for the first halfended March 1, 2003, and March 2, 2002. For further information, refer to the consolidated financial statementsand footnotes included in the Company’s annual report on Form 10-k for the yearended August 31, 2002.

** **

**The results of operations forthe first half ended March 1, 2003, are not necessarily indicative of theresults to be expected for the full year.**

** **

**The Company manages itsbusiness on the basis of one reportable segment.**

** **

2.                           The Company considers allhighly liquid investments with an original maturity of three months or less tobe “cash equivalents.” The carrying amount of the Company’s cash equivalentsapproximates fair value due to the short maturities of these investments.  The Company maintains cash deposits withmajor banks which from time to time may exceed federally insured limits.  The Company periodically assesses thefinancial condition of the institutions and believes that the risk of any lossis minimal.

 

3.                           The preparation of theCompany’s consolidated condensed financial statements, in conformity withgenerally accepted accounting principles in the United States of America,requires management to make estimates and assumptions.  These estimates and assumptions affect thereported amounts of assets and liabilities, the disclosure of contingent assetsand liabilities at the date of the financial statements, and the reportedamounts of revenues and expenses during the reporting period.  Actual results could differ from theseestimates.

 

4.                            The Company has unsecuredrevolving credit facilities with banks for short-term borrowings of up to $200million.  One hundred million dollars ofthe facilities expires on May 29, 2003, and the remaining $100 million expireson May 31, 2004.  The Company expectsthat the facilities expiring on May 29, 2003, will be extended.  Borrowings under these facilities are at avariable interest rate based on short-term market interest rates.  The Company may convert up to $100 millionof the facilities expiring on May 31, 2004, into either a five or seven yearterm loan, at the bank’s variable prime rate.

 

6

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5.                                       TheCompany’s non-qualified stock option plan provides for the granting of optionsto key employees to purchase shares of common stock at prices not less than thefair market value on the date of grant. Options expire five years from the date of grant and are exercisable tothe extent of 40% after the second anniversary of the grant and an additional30% at each of the following two anniversary dates on a cumulative basis.

 

**Thefollowing is a summary of transactions under the plan during the first halfended March 1, 2003 and March 2, 2002 (In thousands, except per share amounts).**

 
|                  |   | **First Half Ended**                |   |
|-----------------------|--------|-------------------------------------|--------|
|                  |   | **March 1, 2003**                   |   | **March 2, 2002** |   |
|                  |   | **Number of  shares  under option** |   | **Option price  per share** |   | **Number of  shares  under option** |   | **Option price  per share** |   |
| Outstanding-beginning |   | 4,411                               |   | $11.38 - $35.50 |   | 4,386 |   | $5.58 - $30.25 |   |
| Granted               |   | 1,620                               |   | $24.75 - $31.75 |   | 1,364 |   | $24.25 - $32.50 |   |
| Exercised             |   | (564                                | )      | $11.38 - $23.75 |   | (807 | ) | $5.58 - $24.75 |   |
| Cancelled             |   | (51                                 | )      |   |   | (91 | ) |   |   |
| Outstanding-ending    |   | 5,416                               |   | $12.75 - $35.50 |   | 4,852 |   | $7.75 - $32.50 |   |
| Exercisable options   |   | 1,364                               |   | $12.75 - $25.50 |   | 1,459 |   | $7.75 - $24.75 |   |

 

6.                                       Basic net incomeper common share is computed by dividing net income by the weighted averagenumber of shares outstanding during each period.  Diluted net income per common share gives effect to allsecurities representing potential common shares that were dilutive andoutstanding during the period. In the calculation of diluted net income percommon share, the denominator includes the number of additional common sharesthat would have been outstanding if the Company’s outstanding stock options hadbeen exercised.

 

**On October 9, 2002,the Company announced that the Board of Directors authorized the purchase of upto 5 million shares of its outstanding common stock from time to time as marketconditions warrant.  As of March 1,2003, the Company had purchased in the open market, 1,782,200 shares at a costof $52.7 million.**

 

7

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The following table sets forth the computationof basic and diluted net income per common share (In thousands, except pershare amounts):

 
|                                           |   | **Quarter Ended**  |   |
|------------------------------------------------|--------|--------------------|--------|
|                                           |   | **March 1,  2003** |   | **March 2,  2002** |   |
| Basic Net  Income Per Share:                   |   |               |   |   |   |
|                                           |   |               |   |   |   |
| Net Income                                     |   | $                  | 72,715 |   | $ | 63,768 |   |
|                                           |   |               |   |   |   |
| Weighted Average  Number of Shares Outstanding |   | 172,151            |   | 172,598 |   |
|                                           |   |               |   |   |   |
| Net Income Per  Common Share - Basic           |   | $                  | 0.42   |   | $ | 0.37 |   |
|                                           |   |               |   |   |   |
| Diluted Net  Income Per Share:                 |   |               |   |   |   |
|                                           |   |               |   |   |   |
| Net Income                                     |   | $                  | 72,715 |   | $ | 63,768 |   |
|                                           |   |               |   |   |   |
| Weighted  Average Number of Shares Outstanding |   | 172,151            |   | 172,598 |   |
|                                           |   |               |   |   |   |
| Effect of  Dilutive Securities - Stock Options |   | 886                |   | 1,336 |   |
| Average Shares  - Diluted                      |   | 173,037            |   | 173,934 |   |
|                                           |   |               |   |   |   |
| Net Income Per  Common Share - Diluted         |   | $                  | 0.42   |   | $ | 0.37 |   |

 
|                                           |   | **First Half Ended** |    |
|------------------------------------------------|--------|----------------------|---------|
|                                           |   | **March 1,  2003**   |    | **March 2,  2002** |   |
| Basic Net  Income Per Share:                   |   |                 |    |   |   |
|                                           |   |                 |    |   |   |
| Net Income                                     |   | $                    | 130,193 |   | $ | 113,975 |   |
|                                           |   |                 |    |   |   |
| Weighted  Average Number of Shares Outstanding |   | 172,614              |    | 172,425 |   |
|                                           |   |                 |    |   |   |
| Net Income Per  Common Share - Basic           |   | $                    | 0.75    |   | $ | 0.66 |   |
|                                           |   |                 |    |   |   |
| Diluted Net  Income Per Share:                 |   |                 |    |   |   |
|                                           |   |                 |    |   |   |
| Net Income                                     |   | $                    | 130,193 |   | $ | 113,975 |   |
|                                           |   |                 |    |   |   |
| Weighted  Average Number of Shares Outstanding |   | 172,614              |    | 172,425 |   |
|                                           |   |                 |    |   |   |
| Effect of  Dilutive Securities - Stock Options |   | 875                  |    | 1,341 |   |
| Average Shares  - Diluted                      |   | 173,489              |    | 173,766 |   |
|                                           |   |                 |    |   |   |
| Net Income Per  Common Share - Diluted         |   | $                    | 0.75    |   | $ | 0.66 |   |

 

8

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**7.**                           On January 30, 2001,Janice Morgan and Barbara Richardson, two individuals who have held theposition of Store Manager for subsidiaries of the Company, filed a Complaintagainst the Company in the United States District Court for the NorthernDistrict of Alabama.  The Complaint wasthen amended to add as plaintiffs five more individuals who had held theposition of Store Manager for subsidiaries of the Company.  Thereafter, notice of the pendency of thelawsuit was sent to approximately 13,000 current and former Store Managersholding the position on or after July 1, 1999. Based on currently available information, approximately 2,500 of thosehave filed consent forms and joined the lawsuit as plaintiffs, includingapproximately 2,075 former Store Managers and approximately 425 current StoreManagers.  The opt-in period ended onFebruary 25, 2003, and the case is proceeding as a collective action under theFair Labor Standards Act (“FLSA”).  TheComplaint alleges that the Company violated the FLSA by classifying theplaintiffs and other similarly situated current and former Store Managers as“exempt” employees who are not entitled to overtime compensation.  Plaintiffs seek to recover unpaid overtimecompensation, prejudgment interest, liquidated damages, an award of attorneys’fees, costs and expenses, and such other relief as the Court may deemproper.  The lawsuit is currently in thediscovery phase.  The Company isvigorously defending this action.  Theoutcome of any litigation is inherently uncertain; moreover, as a collectiveaction the determination with respect to each individual plaintiff depends inpart on the facts and circumstances which relate solely to that plaintiff.  As a general matter, the Company believesthat the Store Managers are “exempt” employees under the FLSA and have beenproperly compensated and that the Company has meritorious defenses that should enableit to ultimately prevail.

** **

**9**

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** **

## **MANAGEMENT**’S DISCUSSION ANDANALYSISOF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

Thisdiscussion summarizes the significant factors affecting the consolidated resultsof operations and financial condition of the Company for periods ended March 1,2003 and March 2, 2002.  This discussionshould be read in conjunction with the Consolidated Condensed FinancialStatements and Notes to Consolidated Condensed Financial Statements included inthis quarterly report.  For furtherinformation, refer to the Consolidated Financial Statements and Notes toConsolidated Financial Statements included in the Company’s annual report onForm 10-K for the year ended August 31, 2002.

 

**Liquidity and CapitalResources**

 

At March 1,2003, the Company had working capital of $555.8 million with cash and cashequivalents of approximately $266.8 million and no outstanding borrowings.  Changes in working capital and cash and cashequivalents during the first half of fiscal 2003 and fiscal 2002 were primarilythe result of earnings, capital expenditures and, in fiscal 2003, repurchasesof the Company’s Common Stock.  With thecurrent economic uncertainties, the Company planned its sales of seasonal goodsconservatively; however, as an additional precautionary measure due togeopolitical concerns, the Company accelerated the receipt of springmerchandise.  In fiscal 2002, theCompany flowed spring seasonal and apparel merchandise later to better match receiptsand sales which contributed to increased operating cash flow during the firsthalf of fiscal 2002.  At the end of thefirst half of fiscal 2003 per store inventories were at approximately the samelevel as at the end of the first half of fiscal 2002 albeit that a higherportion of seasonal merchandise in fiscal 2003 was spring merchandise.  Cash and cash equivalents at the end of thefirst half of fiscal 2003 were also impacted by increased accounts payable leverage(accounts payable as a percentage of merchandise inventory) resulting fromimproved inventory turnover and higher levels of in-transit merchandisecompared to the end of the first half of fiscal 2002.

** **

Capitalexpenditures for the first half ended March 1, 2003, were approximately $81.4 million,and are currently expected to be approximately $200 to $225 million for fiscal2003.  The majority of planned capitalexpenditures for fiscal 2003 is related to the Company’s new store expansion;existing store expansion, relocation and renovation; and to the completion ofconstruction of the seventh full-service distribution center.  The new store expansion and seventhdistribution center will require additional investment in merchandiseinventories. In fiscal 2003, the Company’s original plan was to openapproximately 575 stores and close approximately 50 stores for a net additionof approximately 525 stores, compared with the opening of 525 stores andclosing of 50 stores for a net addition of 475 stores in fiscal 2002.  The Company has revised its store expansionplans for the fiscal year ending August 30, 2003.  The current plan is to open 475 to 500 stores and closeapproximately 65 stores.  In the lasttwo years, the Company’s traditional opportunistic approach to locatingpotential new sites has become more strategic with the objective of improvingnew store performance.  The Company isrealizing this objective with the sales performance of new stores (stores openless than 13 months) equal to more than 90% of the chain average in the firsthalf of fiscal 2003.  With this approachand better site selection processes, approximately 60% of new stores aretargeted to open in urban markets in fiscal 2003.  In fiscal 2002, approximately 40% of new stores opened in urbanmarkets.  The time it is taking to opennew stores in urban markets, including time for the permitting process and the

 

10

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**completionof leasehold improvements and new construction, is substantially longer thanthe time for opening stores in non-urban markets.  With the large number of approved locations currently beingprocessed, by this summer the Company expects to be opening stores at a runrate that will again support its targeted 10% to 12 % net new storegrowth.  The Company also currentlyplans to expand or relocate approximately 100 stores and renovate approximately50 stores in fiscal 2003, compared with the expansion or relocation of 121stores and renovation of 42 stores in fiscal 2002.  In the first half of fiscal 2003, the Company opened 179 stores,closed 42 stores, expanded or relocated 49 stores and renovated 26 stores.  The Company occupies most of its storesunder operating leases.  Store opening,closing, expansion, relocation, and renovation plans, as well as overall capitalexpenditure plans, are continuously reviewed and are subject to change.  The Company has unsecured revolving creditfacilities with banks for short-term borrowings of up to $200 million.  One hundred million dollars of thefacilities expires on May 29, 2003, and the remaining $100 million expires onMay 31, 2004.  The Company expects thatthe facilities expiring on May 29, 2003, will be extended.  The Company has no borrowings against thesefacilities at March 1, 2003.  Cash flowfrom current operations is expected to be sufficient to meet planned liquidityand capital resource needs, including store expansion and other capitalspending programs and any repurchase of the Company’s Common Stock.  In addition, the Company has availablerevolving credit facilities as discussed above.**

** **

On October 9,2002, the Company announced that the Board of Directors authorized the purchaseof up to 5 million shares of its outstanding Common Stock from time to time asmarket conditions warrant.  As of March1, 2003, the Company had purchased in the open market, 1,782,200 shares at acost of $52.7 million.

 

The followingtable shows the Company’s obligations and commitments as of March 1, 2003 tomake future payments under contractual obligations (in thousands):

** **
|                               |   | **Payments  Due During One Year Fiscal Period Ending** |    |
|------------------------------------|--------|--------------------------------------------------------|---------|
| **Contractual Obligations**        |   | **Total**                                              |    | **February  2004** |   | **February  2005** |   | **February  2006** |   | **February  2007** |   | **February  2008** |   | **Thereafter** |   |
| Merchandise letters of credit      |   | $                                                      | 42,411  |   | $ | 42,411 |   | $ |   |   | $ |   |   | $ |   |   | $ |   |   | $ |   |   |
| Operating leases                   |   | 725,945                                                |    | 181,960 |   | 156,020 |   | 126,842 |   | 94,254 |   | 59,330 |   | 107,539 |   |
| Construction obligations           |   | 34,210                                                 |    | 34,210 |   |   |   |   |   |   |   |   |   |   |   |
| Total Contractual Cash Obligations |   | $                                                      | 802,566 |   | $ | 258,581 |   | $ | 156,020 |   | $ | 126,842 |   | $ | 94,254 |   | $ | 59,330 |   | $ | 107,539 |   |

 

The followingtable shows the Company’s other commercial commitments as of March 1, 2003 (inthousands):

 
| **Other  Commercial Commitments** |   | **Total  Amounts  Committed** |   |
|-----------------------------------|--------|-------------------------------|--------|
|                              |   |                          |   |
| Standby letters of credit         |   | $                             | 32,175 |   |
| Surety bonds                      |   | 5,969                         |   |
| Total Commercial Commitments      |   | $                             | 38,144 |   |

 

A substantialportion of the outstanding amount of standby letters of credit and surety bonds(which are primarily renewed on an annual basis) are used as surety for futurepremium and deductible payments to the Company’s workers compensation andgeneral liability insurance carrier. The Company accrues for these future payment liabilities as described inthe “Critical Accounting Policies” section of this discussion.

 

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## **Results of Operations**

## **Net sales**

 

Net salesincreased 13.7% in the quarter ended March 1, 2003, as compared with thequarter ended March 2, 2002, and increased 13.6% in the first half ended March1, 2003, as compared with the first half ended March 2, 2002.  The sales increases were attributable toincreased sales in existing stores and sales from new stores opened as part ofthe Company’s store expansion program. Sales were adversely impacted as a result of the elimination of an advertisingcircular that was distributed last fiscal year at the end of November and thebeginning of December.  With theelimination of this circular, the Company now distributes only one circular peryear.  The Company planned sales ofapparel merchandise conservatively for fiscal 2003, and as a result had lessend of season clearance sales.  Moresevere winter weather during December 2002 and February 2003, also  negatively impacted sales during the secondquarter of fiscal 2003.

 

Sales inexisting stores increased 2.9% in the quarter ended March 1, 2003, above thecomparable period in fiscal 2002, with sales of hardlines merchandiseincreasing approximately 3.5%, and sales of softlines merchandise increasingapproximately 0.8%.  In the secondquarter of fiscal 2003, the customer count, as measured by the number ofregister transactions in existing stores increased 0.2% and the averagetransaction increased approximately 2.6% to $9.42.  Sales in existing stores increased 3.0% in the first half endedMarch 1, 2003, above the comparable period in fiscal 2002, with sales ofhardlines merchandise increasing approximately 3.4% and sales of softlinesmerchandise increasing approximately 1.8%. The customer count increased approximately 0.2% and the averagetransaction increased approximately 2.6% to $9.07.  Hardlines as a percentage of total sales increased toapproximately 77.1% in the second quarter of fiscal 2003 compared toapproximately 76.6% in the second quarter of fiscal 2002, and increased toapproximately 77.1% in the first half of fiscal 2003 compared to approximately76.8% in the first half of fiscal 2002. Softlines as a percentage of salesdecreased to 22.9% in the second quarter of fiscal 2003 (with hanging appareland shoes representing 11.3%, basic apparel 4.8% and domestics 6.8%) compared to23.4% in the second quarter of fiscal 2002 (with hanging apparel and shoesrepresenting 11.1%, basic apparel 5.2% and domestics 7.1%).  Softlines as a percentage of sales decreasedto 22.9% in the first half of fiscal 2003 (with hanging apparel and shoes representing11.6%, basic apparel 4.6% and domestics 6.7%) compared to 23.2% in the firsthalf of fiscal 2002 (with hanging apparel and shoes representing 11.4%, basicapparel 4.8% and domestics 7.0%).  Bythe end of the second quarter of fiscal 2003, all stores had anniversaried lastyear’s program in which the Company eliminated approximately one-half of theshoe inventories.  Therefore, the salesof hardlines and softlines is now on a more comparative basis year overyear.  The Company’s current plan is forsales in existing stores in the second half of fiscal 2003 to increase in the3% to 5% range.

 

Hardlinesmerchandise includes primarily household chemical and paper products, healthand beauty aids, candy, snack and other food, electronics, housewares andgiftware, toys, school supplies, hardware and automotive supplies.  Softlines merchandise includes men’s,women’s, boy’s, girl’s and infant’s clothing and accessories, shoes, anddomestic items such as blankets, sheets and towels.

 

The averagenumber of stores open during the first half of fiscal 2003 was 10.7% more thanduring the first half of fiscal 2002. The Company had 4,753 stores in operation at March 1, 2003, as comparedwith 4,299 stores in operation at March 2, 2002, representing an increase ofapproximately 10.6%.

 

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Cost of Sales

 

Cost of salesincreased 13.3% in the quarter ended March 1, 2003, as compared with thequarter ended March 2, 2002, and increased 13.3% in the first half ended March1, 2003, as compared to the first half ended March 2, 2002.  These increases primarily reflected theadditional sales volume between years. Cost of sales, as a percentage of net sales, was 66.8% in the quarterended March 1, 2003, compared with 67.0% in the quarter ended March 2, 2002,and was 66.2% in the first half ended March 1, 2003 compared with 66.4% in thefirst half ended March 2, 2002. The decrease in the cost of sales percentagesfor the second quarter and first half of fiscal 2003 were due primarily to thefavorable impact of supply chain initiatives which yielded savings in shrinkageand freight. Such savings more than offset a flat initial markup and increasedmarkdowns required to liquidate certain seasonal items.  The greater than planned markdowns ofseasonal items were partially offset by reduced markdowns for apparel due tomore effective inventory management and continued sales improvement.  The Company’s plan is for the cost of salespercentage to decrease slightly for the second half of fiscal 2003 due to theexpected continued favorable impact of merchandising and supply chaininitiatives.

 

Selling,general and administrative expenes

 

Selling,general and administrative expenses increased 14.6% in the quarter ended March1, 2003, as compared with the quarter ended March 2, 2002, and increased 14.2%in the first half ended March 1, 2003, as compared with the first half endedMarch 2, 2002.  The increases in theseexpenses were due primarily to additional costs arising from the continued growthin the number of stores in operation. Selling, general and administrative expenses, as a percentage of netsales, were 24.1% in the quarter ended March 1, 2003, as compared with 23.9% inthe quarter ended March 2, 2002, and were 25.1% in the first half ended March1, 2003, as compared with 25.0% in the first half ended March 2, 2002.  The increase in the percentages for thequarter and first half ended March 1, 2003 were due primarily to rising energyand insurance costs, primarily health care and workers compensation costs,partially offset by the elimination of an advertising circular that wasdistributed last fiscal year at the end of November and the beginning ofDecember.  With the Company continuingto invest heavily in its business, the increases in existing store sales werenot sufficient to produce incremental leverage on expenses.  For the second half of fiscal year 2003, theCompany’s plan is for selling, general and administrative expenses as a percentageof sales to be at approximately the same level as for the second half of fiscalyear 2002.

 

Provision fortaxes on income

 

The effectivetax rate was 36.5% for the quarters and first halves ended March 1, 2003 andMarch 2, 2002.  For fiscal year 2003,the Company’s plan is for the effective tax rate to remain at approximately thesame level as the rate in fiscal 2002.

 

Critical Accounting Policies

 

Managementbelieves the following accounting principles are critical because they involvesignificant judgments, assumptions, and estimates used in the preparation ofthe Company’s consolidated financial statements.

 

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Merchandise Inventories:

 

Inventoriesare valued using the retail method, based on retail prices less markonpercentages, which approximates the lower of first-in, first-out (FIFO) cost ormarket.  The Company records adjustmentsto inventory through cost of goods sold when permanent retail price reductions,or markdowns, are reflected in its stores. In addition, management makes estimates and judgments regarding, amongother things, initial markups, markdowns, future demand for specific productcategories and market conditions, all of which can significantly impactinventory valuation.  If actual demandor market conditions are different than those projected by management,additional markdowns may be necessary. This risk is generally higher for seasonal merchandise than fornon-seasonal goods.  The Company alsoprovides for estimated inventory losses for damaged, lost or stolen inventoryfor the period from the physical inventory to the financial statementdate.  These estimates are based onhistorical experience and other factors.

 

Property and equipment:

 

Property andequipment is stated at cost. Depreciation for financial reporting purposes is being providedprincipally by the straight-line method over the estimated useful lives of therelated assets.  The valuation andclassification of these assets and the assignment of useful depreciable livesinvolves significant judgments and the use of estimates.  The Company generally assigns no salvagevalue to property and equipment. Property and equipment is reviewed for impairment whenever events orchanges in circumstances indicate that the carrying amount of an asset may notbe recoverable.  Historically,impairment losses on fixed assets have not been material to the Company’sfinancial position and results of operations. Because the Company leases substantially all of its stores underoperating leases, the risk of impairment of fixed assets relates principally tothe leasehold improvements and other store-level assets in the event ofclosure.

 

Insurance Liabilities:

 

The Company isprimarily self-insured for health care, property loss, workers’ compensationand general liability costs.  Thesecosts are significant primarily due to the large number of the Company’s retaillocations and employees.  The Company’sself-insurance liabilities are based on the total estimated costs of claimsfiled and estimates of claims incurred but not reported, less amounts paidagainst such claims, and are not discounted. Management reviews current and historical claims data in developing itsestimates.  The Company also usesinformation provided by outside actuaries with respect to workers’ compensationand general liability claims.  If theunderlying facts and circumstances of the claims change or the historical trendis not indicative of future trends, then the Company may be required to recordadditional expense or a reduction to expense which could be material to thereported financial condition and results of operation.

 

Forward-Looking Statements

 

Certain statements containedherein and elsewhere in this Form 10-Q which are not historical facts areforward-looking statements made pursuant to the safe harbor provisions of thePrivate Securities Litigation Reform Act of 1995. These forward-lookingstatements address the Company’s plans and activities or events which theCompany expects will or may occur in the future such as future capital

 

14

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expenditures, store openings,closings, renovations, expansions and relocations, additional distributionfacilities, sales, cost of sales, expenses, the outcome of legal proceedingsand other aspects of the Company’s business and operations.  A number of important factors could causeactual results to differ materially from those expressed in any forward-lookingstatements, whether written or oral, made by or on behalf of the Company.  Such factors include, but are not limitedto, competitive factors and pricing pressures, general economic conditions, theimpact of acts of war or terrorism, changes in consumer demand and product mix,unusual weather that may temporarily impact sales, inflation, merchandisesupply constraints, general transportation delays or interruptions, dependenceon imports, changes in currency exchange rates, tariffs, quotas, and freightrates, availability of real estate, costs and delays associated with building,opening and operating new distribution facilities and stores, costs andpotential problems associated with the implementation of new systems andtechnology, including supply chain systems and electronic commerce, changes inenergy prices and the impact on consumer spending and the Company’s costs,legal proceedings and claims, changes in health care and other insurance costsand the effects of legislation on wage levels and entitlement programs.  Consequently, all of the forward-lookingstatements made are qualified by these and other factors, risks anduncertainties.  Readers are cautionednot to place undue reliance on these forward-looking statements, which speakonly as of the date of this Form 10-Q. The Company does not undertake topublicly update or revise its forward-looking statements even if experience orfuture changes make it clear that projected results expressed or implied insuch statements will not be realized.

 

Item 4.**                                    **Controls and Procedures

 

The Company’s Chief ExecutiveOfficer and Chief Financial Officer (its principal executive officer andprincipal financial officer, respectively) have concluded, based on theirevaluation as of a date within 90 days prior to the filing date of this report,that the Company’s disclosure controls and procedures are effective to ensure thatinformation required to be disclosed by the Company in the reports filed orsubmitted by it under the Securities Exchange Act of 1934, as amended, isrecorded, processed, summarized and reported within the time periods specifiedin the Securities and Exchange Commission’s rules and forms, and includecontrols and procedures designed to ensure that information required to bedisclosed by the Company in such reports is accumulated and communicated to theCompany’s management, including the Chief Executive Officer and Chief FinancialOfficer, as appropriate to allow timely decisions regarding requireddisclosure.

 

There were no significantchanges in the Company’s internal controls or in other factors that couldsignificantly affect these controls subsequent to the date of such evaluation,including any corrective actions with regard to significant deficiencies andmaterial weaknesses.

 

PART II - OTHER INFORMATION

 

Item 1.                                     Legal Proceedings

** **

**OnJanuary 30, 2001, Janice Morgan and Barbara Richardson, two individuals whohave held the position of Store Manager for subsidiaries of the Company, fileda Complaint against the Company in the United States District Court for theNorthern District of Alabama.**

 

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**The Complaintwas then amended to add as plaintiffs five more individuals who had held theposition of Store Manager for subsidiaries of the Company.  Thereafter, notice of the pendency of thelawsuit was sent to approximately 13,000 current and former Store Managersholding the position on or after July 1, 1999. Based on currently available information, approximately 2,500 of thosehave filed consent forms and joined the lawsuit as plaintiffs, includingapproximately 2,075 former Store Managers and approximately 425 current StoreManagers.  The opt-in period ended onFebruary 25, 2003, and the case is proceeding as a collective action under theFair Labor Standards Act (“FLSA”).  TheComplaint alleges that the Company violated the FLSA by classifying the plaintiffsand other similarly situated current and former Store Managers as “exempt”employees who are not entitled to overtime compensation.  Plaintiffs seek to recover unpaid overtimecompensation, prejudgment interest, liquidated damages, an award of attorneys’fees, costs and expenses, and such other relief as the Court may deemproper.  The lawsuit is currently in thediscovery phase.  The Company isvigorously defending this action.  Theoutcome of any litigation is inherently uncertain; moreover, as a collectiveaction the determination with respect to each individual plaintiff depends inpart on the facts and circumstances which relate solely to that plaintiff.  As a general matter, the Company believesthat the Store Managers are “exempt” employees under the FLSA and have beenproperly compensated and that the Company has meritorious defenses that shouldenable it to ultimately prevail.**

 

Item 4.                                   Submission of Matters to a Vote ofSecurity Holders

 

**At the Annual Meeting ofStockholders of the Company held January 16, 2003, stockholders voted to:**

** **

**(a)**                                  Elect to the Board ofDirectors of the Company the six nominees named in the Proxy Statement for theAnnual Meeting as follows:

** **
| **Nominee**            |   | **Shares  Voting For** |   | **Shares  Withholding  Authority to Vote** |   |
|------------------------|--------|------------------------|--------|--------------------------------------------|--------|
| Howard R. Levine       |   | 152,836,025            |   | 3,340,170                                  |   |
| George R. Mahoney, Jr. |   | 153,806,972            |   | 2,369,223                                  |   |
| Mark R. Bernstein      |   | 151,938,611            |   | 4,237,584                                  |   |
| Sharon Allred Decker   |   | 150,233,750            |   | 5,942,445                                  |   |
| Glenn A. Eisenberg     |   | 148,642,186            |   | 7,534,009                                  |   |
| James G. Martin        |   | 150,230,490            |   | 5,945,705                                  |   |

** **

**(b)**                                 Approve the proposalto amend the Company’s 1989 Non-Qualified Stock Option Plan to increase by6,000,000 the number of shares of Common Stock available for issuancethereunder, with 151,020,779 shares voted for, 3,877,339 shares against and1,278,077 shares abstaining.

** **

**16**

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** **

**(c)**                                  Ratify the action ofthe Board of Directors in selecting PricewaterhouseCoopers LLP as independentaccountants to audit the consolidated financial statements of the Company andits subsidiaries for the year ending August 30, 2003, with 146,903,977 sharesvoted for, 8,233,132 shares against and 1,039,086 shares abstaining.

** **

**Item6.**               Exhibits and Reports on Form 8-K

 

 

**(a)**                                  Exhibits filedherewith:

 

***10 Family Dollar CompensationDeferral Plan**

 

**11 Statements Re:  Computations of Per Share Earnings**

 

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***Exhibitrepresents a compensatory plan**

 

**(b)**                                 Reports on Form 8-K:

 

**1.**                  Form 8-K dated January 16,2003, with (i) news release dated January 16, 2003, reporting senior managementchanges and other actions at the Company’s Annual Meetings of Stockholders andthe Board of Directors, and (ii) Amendments to Employment Agreements of HowardR. Levine and R. David Alexander, Jr., and Family Dollar 2000 Outside DirectorsPlan as amended as of January 16, 2003, as Exhibits.

 

**2.**                  Form 8-K dated March19, 2003 with news release dated March 19, 2003, reporting sales and earningsfor the second quarter ended March 1, 2003, and other matters relating to theCompany’s operations and financial condition.

 

**17**

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**PART II - OTHER INFORMATION**

 

 

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 theundersigned thereunto duly authorized.

 

 
|   | FAMILY DOLLAR STORES, INC. |                            |
|--------|----------------------------|---------------------------------|
|   | (Registrant)               |                            |
|   |                       |                            |
|   |                       |                            |
| Date:  | April 10, 2003             |                            |   | /s/ R. James Kelly |   |
|   |                       | R. JAMES KELLY                  |
|   |                       | Vice Chairman                   |
|   |                       |                            |
|   |                       |                            |
| Date:  | April 10, 2003             |                            |   | /s/ C. Martin Sowers |   |
|   |                       | C. MARTIN SOWERS                |
|   |                       | Senior Vice President - Finance |
|        |                            |                                 |  |  |  |  |

 

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CERTIFICATION

 

**I, Howard R. Levine, certify that:**

 

**1.**                            I have reviewed this quarterly report on Form 10-Q of Family DollarStores, Inc. (the “registrant”);

 

**2.**                            Based on my knowledge, this quarterly report does not contain anyuntrue statement of a material fact or omit to state a material fact necessaryto make the statements made, in light of the circumstances under which suchstatements were made, not misleading with respect to the period covered by thisquarterly report;

 

**3.**                            Based on my knowledge, the financial statements, and other financialinformation included in this quarterly report, fairly present in all materialrespects the financial condition, results of operations and cash flows of theregistrant as of, and for, the periods presented in this quarterly report;

 

**4.**                            The registrant’s other certifying officers and I are responsible forestablishing and maintaining disclosure controls and procedures (as defined inExchange Act Rules 13a-14 and 15d-14) for the registrant and have:

 

**a)**                           designed such disclosure controls and procedures to ensure thatmaterial information relating to the registrant, including its consolidatedsubsidiaries, is made known to us by others within those entities, particularlyduring the period in which this quarterly report is being prepared;

 

**b)**                          evaluated the effectiveness of the registrant’s disclosure controls andprocedures as of a date within 90 days prior to the filing date of thisquarterly report (the “Evaluation Date”); and

 

**c)**                           presented in this quarterly report our conclusions about theeffectiveness of the disclosure controls and procedures based on our evaluationas of the Evaluation Date;

 

**5.**                            The registrant’s other certifying officers and I have disclosed, basedon our most recent evaluation, to the registrant’s auditors and the auditcommittee of registrant’s board of directors (or persons performing theequivalent functions):

 

**a)**                           all significant deficiencies in the design or operation of internalcontrols which could adversely affect the registrant’s ability to record,process, summarize and report financial data and have identified for theregistrant’s auditors any material weaknesses in internal controls; and

 

**b)**                          any fraud, whether or not material, that involves management or otheremployees who have a significant role in the registrant’s internal controls;and

 

**6.**                            The registrant’s other certifying officers and I have indicated in thisquarterly report whether there were significant changes in internal controls orin other factors that could significantly affect internal controls subsequentto the date of our most recent evaluation, including any corrective actionswith regard to significant deficiencies and material weaknesses.

 

 

**Date:  April 10, 2003**

 

 
| **/s/ Howard R. Levine**                  |   |
|-------------------------------------------|--------|
| **Howard R. Levine**                      |
| **Chairman and Chief  Executive Officer** |

 

**19**

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CERTIFICATION

 

**I, R. James Kelly, certify that:**

 

1.         I have reviewed thisquarterly report on Form 10-Q of Family Dollar Stores, Inc. (the “registrant”);

 

2.                            Based on my knowledge, thisquarterly report does not contain any untrue statement of a material fact oromit to state a material fact necessary to make the statements made, in lightof the circumstances under which such statements were made, not misleading withrespect to the period covered by this quarterly report;

 

3.                            Based on my knowledge, the financialstatements, and other financial information included in this quarterly report,fairly present in all material respects the financial condition, results ofoperations and cash flows of the registrant as of, and for, the periodspresented in this quarterly report;

 

4.                            The registrant’s other certifyingofficers and I are responsible for establishing and maintaining disclosurecontrols and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14)for the registrant and have:

 

a)                           designed such disclosure controlsand procedures to ensure that material information relating to the registrant,including its consolidated subsidiaries, is made known to us by others withinthose entities, particularly during the period in which this quarterly reportis being prepared;

 

b)                          evaluated the effectiveness of theregistrant’s disclosure controls and procedures as of a date within 90 daysprior to the filing date of this quarterly report (the “Evaluation Date”); and

 

c)                           presented in this quarterly reportour conclusions about the effectiveness of the disclosure controls andprocedures based on our evaluation as of the Evaluation Date;

 

5.                            The registrant’s other certifyingofficers and I have disclosed, based on our most recent evaluation, to theregistrant’s auditors and the audit committee of registrant’s board ofdirectors (or persons performing the equivalent functions):

 

a)                           all significant deficiencies in thedesign or operation of internal controls which could adversely affect theregistrant’s ability to record, process, summarize and report financial dataand have identified for the registrant’s auditors any material weaknesses ininternal controls; and

 

b)                          any fraud, whether or not material,that involves management or other employees who have a significant role in theregistrant’s internal controls; and

 

6.                            The registrant’s other certifyingofficers and I have indicated in this quarterly report whether there weresignificant changes in internal controls or in other factors that couldsignificantly affect internal controls subsequent to the date of our mostrecent evaluation, including any corrective actions with regard to significantdeficiencies and material weaknesses.

 

Date: April 10, 2003

 

 
| /s/ R. James Kelly                             |   |
|------------------------------------------------|--------|
| R. James Kelly                                 |
| **Vice Chairman and Chief  Financial Officer** |

# ** **

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