**Form10-Q**

** **

**SECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

**(Mark One)**

** **

**ý****  QUARTERLY REPORT PURSUANT TO SECTION 13 OR15(d) OF THE**

**SECURITIESEXCHANGE ACT OF 1934**

#### **For the quarterly period ended May 28, 2005**

** **

**OR**

** **

**o****  TRANSITION REPORT PURSUANT TO SECTION 13 OR15(d) OF THE**

**SECURITIESEXCHANGE ACT OF 1934**

** **

**Commission File Number 1-6807**

** **

**FAMILYDOLLAR STORES, INC.**

(Exact name of registrant as specified in its charter)

 
| **Delaware**                              |   | **56-0942963**      |
|-------------------------------------------|--------|---------------------|
| (State or other jurisdiction of           |   | (I.R.S.  Employer   |
| incorporation or organization)            |   | Identification No.) |
|                                      |   |                |
| **P. O. Box 1017, 10401 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 reports required to be filed by Section 13 or 15(d) of theSecurities Exchange Act of 1934 during the preceding 12 months (or for suchshorter 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  ý  No o

 

Indicate by check mark whether the registrantis an accelerated filer (as defined in Rule 12-b of the Exchange Act).   Yes ý No o

 

Indicate the number of shares outstanding ofeach of the issuer’s classes of common stock, as of the latest practicabledate.

 
| **Class**                    | ** ** | **Outstanding at June 28, 2005** |
|------------------------------|------------|----------------------------------|
| Common Stock, $.10 par value |       | 164,896,504 shares               |

 

 

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FAMILY DOLLAR STORES, INC., AND SUBSIDIARIES

 

INDEX

 
| Part I - Financial Information                                                                            |                                                                                                         |
|-----------------------------------------------------------------------------------------------------------|--------------------------------------------------------------------------------------------------------------|
|                                                                                                      |                                                                                                         |
| Item 1 -  Consolidated Condensed Financial Statements:                                                    |                                                                                                         |
|                                                                                                      |                                                                                                         |
|                                                                                                      | Consolidated Condensed Balance Sheets – May 28, 2005 and August 28, 2004                           |   |
|                                                                                                      |                                                                                                         |   |
|                                                                                                      | Consolidated Condensed Statements of Income  - Quarter Ended May 28, 2005 and May 29, 2004              |   |
|                                                                                                      |                                                                                                         |   |
|                                                                                                      | Consolidated Condensed Statements of Income  – Three Quarters Ended May 28, 2005 and May  29, 2004 |   |
|                                                                                                      |                                                                                                         |   |
|                                                                                                      | Consolidated Condensed Statements of Cash  Flows - Three Quarters Ended  May 28, 2005 and May 29, 2004  |   |
|                                                                                                      |                                                                                                         |   |
|                                                                                                      | 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 2 - Unregistered Sales of Equity  Securities and Use of Proceeds                                     |                                                                                                         |
|                                                                                                      |                                                                                                         |
| Item  6 - Exhibits                                                                                        |                                                                                                         |
|                                                                                                      |                                                                                                         |
| Signatures                                                                                                |                                                                                                         |

 

2

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FAMILY DOLLAR STORES, INC. ANDSUBSIDIARIES

CONSOLIDATED CONDENSED BALANCESHEETS

(Unaudited)

(In thousands, except per shareamounts)

 
| ** **                                                                                                                                                                                                                                    | ** ** | **May 28, 2005** | ** **    | **August 28, 2004** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------|---------------|---------------------|------------|
| **Assets**                                                                                                                                                                                                                                    |       |             |          |                |       |
| Current assets:                                                                                                                                                                                                                               |       |             |          |                |       |
| Cash and cash equivalents (Note 2)                                                                                                                                                                                                            |       | $                | 80,719        |                | $          | 87,023 |   |
| Investment securities (Note 2)                                                                                                                                                                                                                |       | 98,320           |          | 120,840             |       |
| Merchandise inventories                                                                                                                                                                                                                       |       | 990,828          |          | 980,124             |       |
| Deferred income taxes                                                                                                                                                                                                                         |       | 93,383           |          | 84,084              |       |
| Income tax refund receivable                                                                                                                                                                                                                  |       | —           |          | 1,304               |       |
| Prepayments and other current assets                                                                                                                                                                                                          |       | 48,470           |          | 16,937              |       |
| Total current assets                                                                                                                                                                                                                          |       | 1,311,720        |          | 1,290,312           |       |
|                                                                                                                                                                                                                                          |       |             |          |                |       |
| Property and equipment, net                                                                                                                                                                                                                   |       | 979,581          |          | 918,449             |       |
| Other assets                                                                                                                                                                                                                                  |       | 23,502           |          | 15,600              |       |
|                                                                                                                                                                                                                                          |       |             |          |                |       |
| ** **                                                                                                                                                                                                                                    | ** ** | **$**            | **2,314,803** | ** **          | **$**      | **2,224,361** | ** ** |
| **Liabilities and Shareholders’ Equity**                                                                                                                                                                                                 |       |             |          |                |       |
| Current liabilities:                                                                                                                                                                                                                          |       |             |          |                |       |
| Accounts payable and accrued liabilities                                                                                                                                                                                                      |       | $                | 807,513       |                | $          | 800,585 |   |
| Income taxes payable                                                                                                                                                                                                                          |       | 3,867            |          | —              |       |
| Total current liabilities                                                                                                                                                                                                                     |       | 811,380          |          | 800,585             |       |
|                                                                                                                                                                                                                                          |       |             |          |                |       |
| Deferred income taxes                                                                                                                                                                                                                         |       | 88,760           |          | 86,694              |       |
| Commitments and contingencies (Note 7)                                                                                                                                                                                                        |       |             |          |                |       |
|                                                                                                                                                                                                                                          |       |             |          |                |       |
| 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 188,301,129 shares at May 28, 2005, and  187,671,318 shares at August 28, 2004, and outstanding 165,138,304 shares at  May 28, 2005, and 167,396,998 shares at August 28, 2004 |       | 18,830           |          | 18,767              |       |
| Capital in excess of par                                                                                                                                                                                                                      |       | 122,445          |          | 106,853             |       |
| Retained earnings                                                                                                                                                                                                                             |       | 1,641,314        |          | 1,498,890           |       |
|                                                                                                                                                                                                                                          |       | 1,782,589        |          | 1,624,510           |       |
| Less: common stock held in treasury, at  cost (23,162,825 shares at May 28, 2005, and 20,274,320 shares at August 28,  2004) (Note 6)                                                                                                         |       | 367,926          |          | 287,428             |       |
| Total shareholders’ equity                                                                                                                                                                                                               |       | 1,414,663        |          | 1,337,082           |       |
|                                                                                                                                                                                                                                          |       |             |          |                |       |
| ** **                                                                                                                                                                                                                                    | ** ** | **$**            | **2,314,803** | ** **          | **$**      | **2,224,361** | ** ** |

## ** **

## **See notes to the consolidated condensed financialstatements.**

 

3

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FAMILY DOLLAR STORES, INC. ANDSUBSIDIARIES

CONSOLIDATED CONDENSED STATEMENTSOF INCOME

(Unaudited)

(In thousands, except per shareamounts)

 
| ** **                                           | ** ** | **Quarter Ended** | ** ** |
|------------------------------------------------------|------------|-------------------|------------|
| ** **                                           | ** ** | **May 28, 2005**  | ** ** | **May 29, 2004** | ** ** |
| ** **                                           | ** ** | ** **        | ** ** | **(Restated – See  Note 9)** | ** ** |
| Net sales                                            |       | $                 | 1,427,966  |   | $ | 1,310,159 |   |
| Cost and expenses:                                   |       |              |       |   |   |
| Cost of sales                                        |       | 948,614           |       | 852,783 |   |
| Selling, general and administrative  expenses        |       | 394,400           |       | 343,395 |   |
|                                                 |       |              |       |   |   |
| Cost of sales and operating expenses                 |       | 1,343,014         |       | 1,196,178 |   |
|                                                 |       |              |       |   |   |
| Income before provision for taxes on income          |       | 84,952            |       | 113,981 |   |
|                                                 |       |              |       |   |   |
| Provision for taxes on income                        |       | 31,178            |       | 41,598 |   |
|                                                 |       |              |       |   |   |
| Net income                                           |       | $                 | 53,774     |   | $ | 72,383 |   |
|                                                 |       |              |       |   |   |
| Net income per common share – basic (Note  6)   |       | $                 | 0.32       |   | $ | 0.42 |   |
| Average shares – basic (Note 6)                 |       | 166,858           |       | 170,862 |   |
|                                                 |       |              |       |   |   |
| Net income per common share – diluted (Note  6) |       | $                 | 0.32       |   | $ | 0.42 |   |
| Average shares – diluted (Note 6)               |       | 167,160           |       | 171,571 |   |
|                                                 |       |              |       |   |   |
| Dividends per common share                           |       | $                 | 0.095      |   | $ | 0.085 |   |

 

See notes to the consolidated condensedfinancial statements.

 

4

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FAMILY DOLLAR STORES, INC. ANDSUBSIDIARIES

CONSOLIDATED CONDENSED STATEMENTSOF INCOME

(Unaudited)

(In thousands, except per shareamounts)

 
| ** **                                           | ** ** | **Three Quarters Ended** | ** ** |
|------------------------------------------------------|------------|--------------------------|------------|
| ** **                                           | ** ** | **May 28, 2005**         | ** ** | **May 29, 2004** | ** ** |
| ** **                                           | ** ** | ** **               | ** ** | **(Restated –  See Note 9)** | ** ** |
| Net sales                                            |       | $                        | 4,394,965  |   | $ | 3,957,640 |   |
| Cost and expenses:                                   |       |                     |       |   |   |
| Cost of sales                                        |       | 2,934,342                |       | 2,595,125 |   |
| Selling, general and administrative  expenses        |       | 1,164,009                |       | 1,021,978 |   |
|                                                 |       |                     |       |   |   |
| Cost of sales and operating expenses                 |       | 4,098,351                |       | 3,617,103 |   |
|                                                 |       |                     |       |   |   |
| Income before provision for taxes on income          |       | 296,614                  |       | 340,537 |   |
|                                                 |       |                     |       |   |   |
| Provision for taxes on income                        |       | 108,338                  |       | 124,285 |   |
|                                                 |       |                     |       |   |   |
| Net income                                           |       | $                        | 188,276    |   | $ | 216,252 |   |
|                                                 |       |                     |       |   |   |
| Net income per common share – basic (Note  6)   |       | $                        | 1.12       |   | $ | 1.26 |   |
| Average shares – basic (Note 6)                 |       | 167,400                  |       | 171,759 |   |
|                                                 |       |                     |       |   |   |
| Net income per common share – diluted (Note  6) |       | $                        | 1.12       |   | $ | 1.25 |   |
| Average shares – diluted (Note 6)               |       | 167,846                  |       | 172,736 |   |
|                                                 |       |                     |       |   |   |
| Dividends per common share                           |       | $                        | 0.275      |   | $ | 0.245 |   |

 

See notes to the consolidated condensedfinancial statements.

 

5

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FAMILY DOLLAR STORES, INC. ANDSUBSIDIARIES

CONSOLIDATED CONDENSED STATEMENTSOF CASH FLOWS

(Unaudited)

(In thousands)

 
| ** **                                                                         | ** ** | **Three Quarters Ended** | ** ** |
|------------------------------------------------------------------------------------|------------|--------------------------|------------|
| ** **                                                                         | ** ** | **May 28, 2005**         | ** ** | **May 29, 2004** | ** ** |
| ** **                                                                         | ** ** | ** **               | ** ** | **(Restated -  See Note 9)** | ** ** |
| Cash flows from operating activities:                                              |       |                     |       |   |   |
| Net income                                                                         |       | $                        | 188,276    |   | $ | 216,252 |   |
| Adjustments to reconcile net income to net  cash provided by operating activities: |       |                     |       |   |   |
| Depreciation and amortization                                                      |       | 83,187                   |       | 75,963 |   |
| Deferred income taxes                                                              |       | (7,233                   | )          | 321 |   |
| Tax benefit from stock option exercises                                            |       | 2,549                    |       | 3,733 |   |
| Loss on disposition of property and  equipment                                     |       | 1,415                    |       | 3,097 |   |
| Changes in operating assets and  liabilities:                                      |       |                     |       |   |   |
| Merchandise inventories                                                            |       | (10,704                  | )          | (58,140 | ) |
| Income tax refund receivable                                                       |       | 1,304                    |       | — |   |
| Prepayments and other current assets                                               |       | (31,533                  | )          | (630 | ) |
| Other assets                                                                       |       | (7,902                   | )          | 984 |   |
| Accounts payable and accrued liabilities                                           |       | (696                     | )          | 34,490 |   |
| Income taxes payable                                                               |       | 3,867                    |       | 3,198 |   |
|                                                                               |       | 222,530                  |       | 279,268 |   |
| Cash flows from investing activities:                                              |       |                     |       |   |   |
| Purchases of investment securities                                                 |       | (234,315                 | )          | (267,015 | ) |
| Sales of investment securities                                                     |       | 256,835                  |       | 288,894 |   |
| Capital expenditures                                                               |       | (147,662                 | )          | (131,416 | ) |
| Proceeds from dispositions of property and  equipment                              |       | 1,928                    |       | 619 |   |
|                                                                               |       | (123,214                 | )          | (108,918 | ) |
| Cash flows from financing activities:                                              |       |                     |       |   |   |
| Net purchases of stock for treasury                                                |       | (80,498                  | )          | (129,254 | ) |
| Changes in cash overdrafts                                                         |       | 6,181                    |       | (1,771 | ) |
| Exercise of employee stock options                                                 |       | 13,106                   |       | 10,955 |   |
| Payment of dividends                                                               |       | (44,409                  | )          | (40,451 | ) |
|                                                                               |       | (105,620                 | )          | (160,521 | ) |
|                                                                               |       |                     |       |   |   |
| Net change in cash and cash equivalents                                            |       | (6,304                   | )          | 9,829 |   |
| Cash and cash equivalents at beginning of  period                                  |       | 87,023                   |       | 80,994 |   |
| Cash and cash equivalents at end of period                                         |       | $                        | 80,719     |   | $ | 90,823 |   |
|                                                                               |       |                     |       |   |   |
| Supplemental disclosure of cash flow  information:                                 |       |                     |       |   |   |
| Cash paid during the period for:                                                   |       |                     |       |   |   |
| Interest                                                                           |       | $                        | —     |   | $ | — |   |
| Income taxes                                                                       |       | 107,850                  |       | 117,034 |   |

## ** **

## **See notes to the consolidated condensed financialstatements.**

 

6

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## **FAMILY DOLLAR STORES, INC., ANDSUBSIDIARIES**

## ** **

## **NOTESTO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS**

 

1.               Inthe opinion of the Company, the accompanying unauditedconsolidated condensed financial statements contain all adjustments (consistingof only normal recurring accruals) necessary to present fairly the financialposition as of May 28, 2005, and the results of operations for the quarter andthe three quarters ended May 28, 2005, and May 29, 2004, and the cash flows forthe three quarters ended May 28, 2005, and May 29, 2004.  For further information, refer to theconsolidated financial statements and footnotes included in the Company’sAnnual Report on Form 10-K/A for the year ended August 28, 2004, and Note 9below.

** **

**The results of operations for the current quarterand three quarters ended May 28, 2005, are not necessarily indicative of theresults to be expected for the full year.**

** **

**Certain reclassifications of the fiscal 2004 amountshave been made to conform to the fiscal 2005 presentation.  These include investments in auction ratesecurities and variable rate demand notes, which had a change in classificationfrom cash and cash equivalents to investment securities.  In addition, outstanding checks had a changein classification from cash and cash equivalents to accounts payable andaccrued liabilities.**

** **

**The Company manages its business on the basis of onereportable segment.**

 

2.               The Company considers all highly liquidinvestments with an original maturity of three months or less to be “cashequivalents.”  The carrying amount of theCompany’s cash equivalents approximates fair value due to the short maturitiesof these investments and consists primarily of money market funds and otherovernight investments.  The Companymaintains cash deposits with major banks, which from time to time may exceedfederally insured limits.  The Companyperiodically assesses the financial condition of the institutions and believesthat the risk of any loss is minimal.

 

The items classified as investment securitiesare principally auction rate securities and variable rate demand notes.  The Company classifies all investmentsecurities as available-for-sale. Securities accounted for as available-for-sale are required to bereported at fair value with unrealized gains and losses, net of taxes, excludedfrom net income and shown separately as a component of accumulated othercomprehensive income within shareholders’ equity.  The securities that the Company hasclassified as available-for-sale generally trade at par and as a resulttypically do not have any realized or unrealized gains or losses.

 

3.               The preparation of the Company’s consolidatedcondensed financial statements, in conformity with accounting principlesgenerally accepted in the United States of America, requires management to makeestimates and assumptions.  Theseestimates and assumptions affect the reported amounts of assets andliabilities, the disclosure of contingent assets and liabilities at the date ofthe financial statements, and the reported amounts of revenues and expensesduring the reporting period.  Actualresults could differ from these estimates.

 

4.               The Company has unsecured revolving creditfacilities with banks for short-term borrowings of up to $200 million.  On May 25, 2006, $100 million of thefacilities expires.  The remaining $100million expires on May 31, 2010.  Anyborrowings under these facilities are at a variable interest rate based on short-termmarket interest rates.  The Company hadno borrowings against these facilities during the first three quarters endedMay 28, 2005.

 

7

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5.               The Company’s non-qualified stock option planprovides for the granting of options to key employees to purchase shares ofcommon stock at prices not less than the fair market value on the date ofgrant.  Options expire five years fromthe date of grant and are exercisable to the extent of 40% after the secondanniversary of the grant and an additional 30% at each of the following twoanniversary dates on a cumulative basis.

 

**The Company accounts for stockoptions granted to employees using the intrinsic value method, under which nocompensation expense is recorded since the exercise price of the stock optionsis equal to the market price of the underlying stock on the date of thegrant.  Had compensation cost for thestock options issued been determined consistent with Statement of FinancialAccounting Standards No. 123, “Accounting for Stock-Based Compensation,” asamended by Statement of Financial Accounting Standards No. 148, “Accounting forStock Based Compensation – Transition and Disclosure,” net income and netincome per share would have been reduced to the following pro forma amounts (inthousands, except per share amounts):**

** **
| ** **                              | ** ** | **Quarter Ended** | ** ** | **Three Quarters Ended** | ** ** |
|-----------------------------------------|------------|-------------------|------------|--------------------------|------------|
| ** **                              | ** ** | **May 28, 2005**  | ** ** | **May 29, 2004(1)**      | ** ** | **May 28, 2005** | ** ** | **May 29, 2004(1)** | ** ** |
| Net income – as reported           |       | $                 | 53,774     |                     | $          | 72,383 |   | $ | 188,276 |   | $ | 216,252 |   |
| Pro forma stock-based compensation cost |       | (2,237            | )          | (2,139                   | )          | (6,506 | ) | (6,120 | ) |
| Net income – pro forma             |       | 51,537            |       | $                        | 70,244     |   | 181,770 |   | $ | 210,132 |   |
| Net income per share as reported:       |       |              |       |                     |       |   |   |   |   |
| Basic                                   |       | $                 | .32        |                     | $          | .42 |   | $ | 1.12 |   | $ | 1.26 |   |
| Diluted                                 |       | $                 | .32        |                     | $          | .42 |   | $ | 1.12 |   | $ | 1.25 |   |
| Net income per share – pro forma   |       |              |       |                     |       |   |   |   |   |
| Basic                                   |       | $                 | .31        |                     | $          | .41 |   | $ | 1.09 |   | $ | 1.22 |   |
| Diluted                                 |       | $                 | .31        |                     | $          | .41 |   | $ | 1.09 |   | $ | 1.22 |   |

 

----

(1)See Note 9

** **

**The assumptions used to calculate the fair value ofoptions granted are evaluated and revised, as necessary, to reflect marketconditions and experience.**

 

**The following is a summary oftransactions under the plan during the three quarters ended May 28, 2005, andMay 29, 2004, (in thousands, except per share amounts).**

** **
| ** **                   | ** ** | **Three Quarters Ended**           | ** ** |
|------------------------------|------------|------------------------------------|------------|
| ** **                   | ** ** | **May 28, 2005**                   | ** ** | **May 29, 2004** | ** ** |
| ** **                   | ** ** | **Number of shares  under option** | ** ** | **Option price  per share** | ** ** | **Number of shares  under option** | ** ** | **Option price per  share** | ** ** |
| Outstanding – beginning |       | 5,956                              |       | $14.75-$44.00 |   | 5,001 |   | $14.75-$39.00 |   |
| Granted                      |       | 1,950                              |       | $24.00-$33.25 |   | 1,937 |   | $27.50-$44.00 |   |
| Exercised                    |       | (630)                              |       | $14.75-$32.25 |   | (549) |   | $15.00-$31.25 |   |
| Cancelled                    |       | (253)                              |       |   |   | (242) |   |   |   |
| Outstanding – ending    |       | 7,023                              |       | $16.00-$44.00 |   | 6,147 |   | $14.75-$44.00 |   |
| Exercisable options          |       | 1,899                              |       | $16.00-$35.50 |   | 1,423 |   | $14.75-$35.50 |   |

 

8

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6.               Basic net income per common share is computedby dividing net income by the weighted average number of shares outstandingduring each period.  Diluted net incomeper common share gives effect to all securities representing potential commonshares that were dilutive and outstanding during the period.  The exercise prices for certain of theoutstanding stock options that the Company has awarded exceed the averagemarket price of the Company’s common stock. Such stock options are antidilutive (optionsfor 2.2 million and 2.1 million shares for the third quarter and the threequarters ended May 28, 2005, respectively) and were not included in thecomputation of diluted net income per share. In the calculation of diluted net income per common share, thedenominator includes the number of additional common shares that would havebeen outstanding if the Company’s outstanding stock options had been exercised.

** **

**During fiscal 2004, and the yearended August 30, 2003, the Company purchased in the open market 5.6 million and2.2 million shares, respectively, at a cost of $176.7 million and $65.9million, respectively.  On April 13,2005, the Company announced that the Board of Directors authorized the purchaseof up to an additional five million shares of its outstanding common stock fromtime to time as market conditions warrant. During the three quarters of 2005, the Company purchased in the openmarket 2.9 million shares at a cost of $80.6 million, leaving 4.3 million sharesauthorized to be purchased.**

** **

**Thefollowing table sets forth the computation of basic and diluted net income percommon share (in thousands, except per share amounts):**

** **
| ** **                                          | ** ** | **Quarter Ended** | ** ** |
|-----------------------------------------------------|------------|-------------------|------------|
| ** **                                          | ** ** | **May 28, 2005**  | ** ** | **May 29, 2004 (1)** | ** ** |
| Basic Net Income Per Share:                         |       |              |       |   |   |
| Net Income                                          |       | $                 | 53,774     |   | $ | 72,383 |   |
| Weighted Average Number of Shares  Outstanding      |       | 166,858           |       | 170,862 |   |
| Net Income Per Common Share – Basic            |       | $                 | .32        |   | $ | .42 |   |
|                                                |       |              |       |   |   |
| Diluted Net Income Per Share:                       |       |              |       |   |   |
| Net Income                                          |       | $                 | 53,774     |   | $ | 72,383 |   |
| Weighted Average Number of Shares  Outstanding      |       | 166,858           |       | 170,862 |   |
| Effect of Dilutive Securities – Stock  Options |       | 302               |       | 709 |   |
| Average Shares - Diluted                            |       | 167,160           |       | 171,571 |   |
| Net Income Per Common Share – Basic            |       | $                 | .32        |   | $ | .42 |   |

** **

** **
| ** **                                          | ** ** | **Three Quarters Ended** | ** ** |
|-----------------------------------------------------|------------|--------------------------|------------|
| ** **                                          | ** ** | **May 28, 2005**         | ** ** | **May 29, 2004 (1)** | ** ** |
| Basic Net Income Per Share:                         |       |                     |       |   |   |
| Net Income                                          |       | $                        | 188,276    |   | $ | 216,252 |   |
| Weighted Average Number of Shares  Outstanding      |       | 167,400                  |       | 171,759 |   |
| Net Income Per Common Share – Basic            |       | $                        | 1.12       |   | $ | 1.26 |   |
|                                                |       |                     |       |   |   |
| Diluted Net Income Per Share:                       |       |                     |       |   |   |
| Net Income                                          |       | $                        | 188,276    |   | $ | 216,252 |   |
| Weighted Average Number of Shares  Outstanding      |       | 167,400                  |       | 171,759 |   |
| Effect of Dilutive Securities – Stock  Options |       | 446                      |       | 977 |   |
| Average Shares - Diluted                            |       | 167,846                  |       | 172,736 |   |
| Net Income Per Common Share – Basic            |       | $                        | 1.12       |   | $ | 1.25 |   |

 

----

**(1) See Note 9**

** **

**7.**               On January 30, 2001, Janice Morgan and Barbara Richardson, twoindividuals who have held the position of Store Manager for subsidiaries of theCompany, filed a Complaint against the Company in the United States DistrictCourt for the Northern District of Alabama. Thereafter, pursuant to the 

** **

**9**

----

** **

**Court’s ruling, notice of the pendency of the lawsuit was sent to approximately 13,000current and former Store Managers holding the position on or after July 1,1999. Approximately 2,550 of those receiving such notice filed consent formsand joined the lawsuit as plaintiffs, including approximately 2,300 formerStore Managers and approximately 250 then current employees.  After rulings by the Court on motions todismiss certain plaintiffs filed by the Company and motions to reconsider filedby plaintiffs, 1,424 plaintiffs remained in the case at the commencement oftrial.**

** **

**The case has proceeded as acollective action under the Fair Labor Standards Act (“FLSA”).  The Complaint alleges that the Companyviolated the FLSA by classifying the named 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 in an amount currently estimated to be up to approximately $50million, liquidated damages equal to the overtime award, if any, plus an awardof attorneys’ fees, costs and expenses, and such other relief as the Court maydeem proper.**

** **

**A jury trial in this casecommenced on June 13, 2005, in Tuscaloosa, Alabama and ended on June 28, 2005,with the judge declaring a mistrial after the jury was unable to reach aunanimous decision in the matter.  Nodate for a new trial has been set.**

** **

**In general, the Company continuesto believe that the Store Managers are “exempt” employees under the FLSA and have been properly compensated and that theCompany has meritorious defenses that should enable it ultimately toprevail.  However, the outcome of anylitigation is inherently uncertain.  As aresult of the mistrial of this matter, the timing and process of future actionsin this case is currently unclear. Resolution of this matter could have a material adverse effect on theCompany’s financial position, liquidity or results of operation.**

** **

**The Company is involved innumerous other legal proceedings and claims incidental to its business,including litigation related to alleged failures to comply with various stateand federal employment laws.  While theultimate outcome cannot be determined, the Company currently believes thatthese proceedings and claims, both individually and in the aggregate, shouldnot have a material adverse effect on the Company’s financial position,liquidity or results of operations. However, the outcome of any litigation is inherently uncertain and, ifdecided adversely to the Company, the Company may be subject to liability thatcould have a material adverse effect on the Company’s financial position,liquidity or results of operations.**

** **

**8.**               In December 2004, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 123R, “Share-Based Payment,” which requires allcompanies to measure compensation cost for all share-based payments (includingemployee stock options) at fair value, effective for public companies forinterim or annual periods beginning after June 15, 2005.  The FASB concludedthat companies can adopt the new standard in one of two ways: the modifiedprospective transition method, in which a company would recognize share-basedemployee compensation cost from the beginning of the fiscal period in which therecognition provisions are first applied as if the fair-value-based accountingmethod had been used to account for all employee awards granted, modified, orsettled after the effective date and to any awards that were not fully vestedas of the effective date; or the modified retrospective transition method, inwhich a company would recognize employee compensation cost for periodspresented prior to the adoption of SFAS No. 123R inaccordance with the original provisions of SFAS No.123 “Accounting for Stock-Based Compensation,” pursuant to which a companywould recognize employee compensation cost in the amounts reported in the proforma disclosures provided in accordance with SFASNo. 123.  The Company will adopt SFAS No. 123R during the first quarter of fiscal 2006 andhas not made a determination as to the method of adoption or the effect ofadopting SFAS No. 123R.

 

10

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**9.**               On February 7, 2005, the Office of the Chief Accountant of the Securitiesand Exchange Commission (“SEC”) issued a letter to the American Institute ofCertified Public Accountants expressing its views regarding certain operatinglease accounting issues and their application under generally acceptedaccounting principles in the United States of America (“GAAP”).  In light of this letter, the Company’s managementinitiated a review of its lease-related accounting and determined that itsthen-current method of accounting for leasehold improvements funded by landlordincentives or allowances under operating leases (tenant improvementallowances), its then-current method of accounting for rent holidays and itsthen-current amortization of leasehold improvements were not in accordance withGAAP.  As aresult, the Company restated its consolidated condensed financial statementsfor the quarter ended November 27, 2004, in its previously filed Form 10-Q/A,and its consolidated financial statements for the fiscal years 2002 through2004 in its previously filed Form 10-K/A.

** **

**The Company previously amortizedleasehold improvements over their estimated useful economic life of up to tenyears.  In some cases this periodextended into an option period for the lease. The Company will now amortizeleasehold improvements over the shorter of the term of the related lease(generally five years) or the asset’s useful economic life.  Further, the Company had recognized rentexpense for leases beginning on the rent commencement date.  This had the effect of excluding thepre-opening period of its stores from the calculation of the period over whichit expensed rent.  The Company nowrecognizes straight-line rent expense (including any rent adjustment during thelease term) over a period that includes the pre-opening period.  For tenant improvement allowances and rentholidays, the Company now records a deferred rent liability and amortizes thedeferred rent over the terms of the leases as reductions to rent expense.  The restatement had no impact on historic orfuture cash flows or the timing of lease payments.**

** **

**The Company previously recordedauction rate securities and variable rate demand notes as cash and cashequivalents and has reclassified these investments to investmentsecurities.  Additionally, the Companyhas reclassified outstanding checks from cash and cash equivalents to accountspayable and accrued liabilities.  The cashflow reduction to cash and cash equivalents as of May 29, 2004, as a result ofthese reclassifications was approximately $20.1 million.**

 

The effect of the restatement described aboveas well as the change in classification of investment securities and outstandingchecks from cash and cash equivalents is as follows (in thousands except pershare amounts):

 

11

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Consolidated Condensed Statements of Income

 
| ** **                                    | ** ** | **As Previously  Presented  Quarter Ended  May 29, 2004** | ** ** | **As Restated  Quarter Ended  May 29, 2004** | ** ** |
|-----------------------------------------------|------------|-----------------------------------------------------------|------------|----------------------------------------------|------------|
|                                          |       |                                                      |       |                                         |       |
| Selling, general and administrative  expenses |       | $                                                         | 341,140    |                                         | $          | 343,395 |   |
| Income before provision for taxes on income   |       | 116,236                                                   |       | 113,981                                      |       |
| Provision for taxes on income                 |       | 42,426                                                    |       | 41,598                                       |       |
| Net income                                    |       | 73,810                                                    |       | 72,383                                       |       |
| Net income per common share - Basic           |       | 0.43                                                      |       | 0.42                                         |       |
| Net income per common share - Diluted         |       | 0.43                                                      |       | 0.42                                         |       |
|                                               |            |                                                           |            |                                              |            |  |  |

 
| ** **                                    | ** ** | **As Previously  Presented Three  Quarters Ended  May 29, 2004** | ** ** | **As Restated  Three Quarters Ended  May 29, 2004** | ** ** |
|-----------------------------------------------|------------|------------------------------------------------------------------|------------|-----------------------------------------------------|------------|
|                                          |       |                                                             |       |                                                |       |
| Selling, general and administrative  expenses |       | $                                                                | 1,016,526  |                                                | $          | 1,021,978 |   |
| Income before provision for taxes on income   |       | 345,989                                                          |       | 340,537                                             |       |
| Provision for taxes on income                 |       | 126,286                                                          |       | 124,285                                             |       |
| Net income                                    |       | 219,703                                                          |       | 216,252                                             |       |
| Net income per common share – Basic      |       | 1.28                                                             |       | 1.26                                                |       |
| Net income per common share - Diluted         |       | 1.27                                                             |       | 1.25                                                |       |
|                                               |            |                                                                  |            |                                                     |            |  |  |

 

Consolidated Condensed Statements of Cash Flows

 
| ** **                                        | ** ** | **As Previously  Presented Three  Quarters Ended  May 29, 2004** | ** ** | **As Restated  Three Quarters Ended  May 29, 2004** | ** ** |
|---------------------------------------------------|------------|------------------------------------------------------------------|------------|-----------------------------------------------------|------------|
|                                              |       |                                                             |       |                                                |       |
| Net income                                        |       | $                                                                | 219,703    |                                                | $          | 216,252 |   |
| Depreciation and amortization                     |       | 72,929                                                           |       | 75,963                                              |       |
| Deferred income taxes                             |       | 2,322                                                            |       | 321                                                 |       |
| Accounts payable and accrued liabilities          |       | 31,353                                                           |       | 34,490                                              |       |
| Cash flows from operating activities              |       | 274,816                                                          |       | 279,268                                             |       |
|                                              |       |                                                             |       |                                                |       |
| Purchases of investment securities                |       | —                                                           |       | (267,015                                            | )          |
| Sales of investment securities                    |       | —                                                           |       | 288,894                                             |       |
| Capital expenditures                              |       | (130,698                                                         | )          | (131,416                                            | )          |
| Cash flows from investing activities              |       | (130,079                                                         | )          | (108,918                                            | )          |
|                                              |       |                                                             |       |                                                |       |
| Change in cash overdrafts                         |       | —                                                           |       | (1,771                                              | )          |
| Cash flows from financing activities              |       | (155,017                                                         | )          | (160,521                                            | )          |
|                                              |       |                                                             |       |                                                |       |
| Net change in cash and cash equivalents           |       | (10,280                                                          | )          | 9,829                                               |       |
| Cash and cash equivalents at beginning of  period |       | 206,731                                                          |       | 80,994                                              |       |
| Cash and cash equivalents at end of period        |       | 196,451                                                          |       | 90,823                                              |       |
|                                                   |            |                                                                  |            |                                                     |            |  |  |

 

12

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**MANAGEMENT’S DISCUSSION ANDANALYSIS OF FINANCIAL CONDITION**

** AND RESULTS OF OPERATIONS**

** **

**This discussion summarizes the significant factorsaffecting the consolidated results of operations and financial condition of theCompany for the thirteen week periods ended May 28, 2005, and May 29, 2004,(the “2005 third quarter” and “2004 third quarter”, respectively) and thethirty-nine week periods ended on the same dates (the “three quarters of 2005”and “three quarters of 2004”, respectively). This discussion should be read in conjunction with, and is qualified by,the financial statements included in this quarterly report, the financialstatements for the year ended August 28, 2004, (“fiscal 2004”), and Management’sDiscussion and Analysis of Financial Condition and Results of Operations (“MD&A”), both contained in the Company’s Annual Reporton Form10-K/A for fiscal 2004.  This discussionreflects the Company’s correction of certain lease accounting practices and therestatement of its financial statements as described in Note 9 to theconsolidated condensed financial statements.**

** **

**This discussion containsforward-looking statements which are identified by such words as “expect,” “plan,”“anticipates” and similar phrases or words. All such forward-looking statements are subject to the Cautionary NoteRegarding Forward-Looking Statements set forth following this MD&A.**

** **

**Results of Operations**

** **

**Fiscal2005 Outlook**

** **

**Inthe fiscal year ending August 27, 2005, (“fiscal 2005”), the Company is implementingfour key initiatives designed to increase sales and earnings – the urbaninitiative; the introduction of additional “Treasure Hunt” merchandise; theinstallation of coolers in selected stores; and the continuation of anaggressive store opening program.**

** **

**•**                  UrbanInitiative – Investments are being made in people, process changes andtechnology, including organizational changes to support a more mobile andflexible workforce, to improve the operating performance of high volume storesin large metropolitan markets.  Duringthe three quarters of 2005, the urban initiative was initiated in approximately800 stores and is expected to expand to approximately 1,300 stores by Septemberof 2005.

**•**                  Treasure Hunt Merchandise – The Company’s basic assortment of merchandiseis being supplemented by additional opportunistically purchased goods which aredesigned to create more excitement in the stores throughout the year, withparticular emphasis on the holiday, spring and back-to-school seasons.

**•**                  Coolers– The installation of refrigerated coolers for the sale of perishable foodbegan in the 2005 second quarter.  At theend of the 2005 third quarter, refrigerated coolers were installed and fullystocked in approximately 650 stores.  TheCompany plans to have refrigerated coolers installed in approximately 1,000stores by the end of fiscal 2005.  Inaddition, the Company also plans to initiate a test of new point-of-salesoftware in a limited number of stores to facilitate the acceptance of foodstamps in stores with refrigerated coolers.

**•**                  NewStores – The Company’s current plan is to open approximately 500 stores and toclose 65 to 70 stores.  In the threequarters of 2005, the Company opened 278 stores and closed 63 stores.

** **

**13**

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** **

**Based on the operating results for the threequarters of 2005, as discussed below, and the Company’s plans for the fourthquarter of 2005, the Company currently expects net income per diluted share ofCommon Stock to be between $1.33 and $1.36 for fiscal 2005, compared to $1.50in fiscal 2004.  These numbers reflect areduction of net income per diluted share of $0.03 in fiscal 2004 and a similarestimated impact in fiscal 2005 as a result of the correction of leaseaccounting practices as discussed in Note 9 to the consolidated condensedfinancial statements.**

 

**Netsales**

 

**Net sales increased 9.0% ($117.8million) in the 2005 third quarter, as compared with an increase of 11.3%($133.3 million) in the 2004 third quarter, and increased 11.1% ($437.3million) in the three quarters of 2005, as compared with an increase of 11.7%($415.9 million) in the three quarters of 2004. These increases were attributable to an increase in sales in comparablestores (stores open more than 13 months) of 1.3% ($16.1 million) and 2.8%($109.1 million) for the 2005 third quarter and three quarters of 2005,respectively, with the balance of the increases primarily relating to salesfrom new stores opened as part of the Company’s new store expansionprogram.  Sales of lower margin basicconsumables continued to be stronger than sales of higher margin discretionarygoods in both the 2005 third quarter and three quarters of 2005, reflecting theunseasonably cool weather in the 2005 third quarter, and the difficult economy,including higher energy prices, for the Company’s low and low-middle incomecustomer base.  However, sales of coreconsumables in the 2005 third quarter were not as strong as previous quarterspartially due to the disruption caused by an extensive schematic change in thehousehold chemical area in the majority of our stores.**

** **

**The 1.3% increase in comparablestore sales includes an increase of approximately 2.4% in the sales of hardline merchandise and a decrease of approximately 2.6%in sales of softline merchandise.  In the 2005 third quarter, the customercount, as measured by the number of register transactions in comparable stores,decreased approximately 1.5% and the average transaction increasedapproximately 2.6% to $9.10 over the 2004 third quarter.  Hardlinemerchandise, as a percentage of net sales, increased to approximately 78.1% inthe 2005 third quarter compared to approximately 77.3% in the 2004 thirdquarter.  Softlinemerchandise, as a percentage of net sales, decreased to 21.9% in the 2005 thirdquarter compared to approximately 22.7% in the 2004 third quarter.  The impact attributable to an advertisingcircular that was distributed in March 2005 was inconclusive due to the timingof Easter and unusually cool weather. The Company did not distribute an advertising circular in the thirdquarter of 2004.**

** **

**The comparable store sales of2.8% for the three quarters of 2005 included an increase of 4.3% in hardline merchandise and a decrease of approximately 2.2%in softline merchandise.  In the three quarters of 2005, the customercount decreased approximately 0.2% and the average transaction increasedapproximately 2.9% to $9.30 over the three quarters of 2004.  Hardlinemerchandise, as a percentage of net sales, increased to approximately 78.6% inthe three quarters of 2005 compared to approximately 77.5% in the threequarters of 2004.  Softlinemerchandise, as a percentage of net sales, decreased to 21.4% in the threequarters of 2005 compared to approximately 22.5% in the three quarters of 2004.**

** **

**Hardline** merchandise includes primarily household chemical and paper products,health and beauty aids, food, electronics, housewaresand giftware, toys, school supplies, hardware and automotive supplies.  Softlinemerchandise includes men’s, women’s, boys’, girls’ and infants’ clothing andaccessories, shoes, and domestic items such as blankets, sheets and towels.

** **

**Theaverage number of stores in operation during the three quarters of 2005 was8.3% more than stores in operation during the three quarters of 2004.  The Company had 5,681 stores in operation atthe end of the 2005 third quarter, compared with 5,269 stores in operation atthe end of the 2004 third quarter, representing an increase of approximately7.8%.**

 

14

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**Forthe 2005 fourth quarter, the Company’s plan is for a comparable store salesincrease of 2% to 4% as a result of the ongoing rollout of urban andrefrigerated cooler initiatives and the effect of an advertising circular to bedistributed in August.**

** **

## **Cost of Sales**

** **

**Cost of sales increased 11.2% inthe 2005 third quarter, compared with the 2004 third quarter, and increased13.1% in the three quarters of 2005, compared with the three quarters of2004.  These increases primarily reflectedthe additional sales volume between these periods.  Cost of sales, as a percentage of net sales,was 66.4% in the 2005 third quarter, compared with 65.1% in the 2004 thirdquarter, and was 66.8% in the three quarters of 2005 compared with 65.6% in thesame period in 2004.  These increases inthe cost of sales percentages for both the 2005 third quarter and threequarters of 2005 were due primarily to the continuing shift in the merchandisemix of sales to more lower margin basic consumables and less higher margindiscretionary goods, increased shrinkage and freight costs due to higher fuelexpense.  Markdowns in the 2005 thirdquarter contributed to the increase in the cost of sales percentage for thatquarter, as the Company aggressively marked down some seasonal goods to bettermanage end of season inventory levels. Shrinkage in the 2005 third quarter was also greater than the previousyear.  However, shrink results thisquarter reflected an improved trend over the first half of the year as theCompany continues implementing new loss prevention reports that provide morevisibility to store level issues and adding personnel to its Loss PreventionDepartment.  In addition, as part of itsurban initiative, the Company is modifying its field management structure to increasemanagement presence and the frequency of inspections in its urban markets.  Freight costs in the 2005 third quarter werepositively impacted by the opening of the Company’s eighth distribution centerin Marianna, Florida, which lowered the average distance to the stores from thedistribution centers.  However, thesesavings did not fully offset the impact of higher year over year fuel costs.**

** **

**For the 2005 fourth quarter, the Company’s plan isfor the cost of sales, as a percentage of net sales, to increase compared withfiscal 2004 due to the continuing effect of the factors discussed above, exceptfor markdowns which should be more consistent with the 2004 fourthquarter.  In addition, the shrinkinitiatives and new distribution center are expected to mitigate these impactssomewhat during the fourth quarter of fiscal 2005.**

** **

**Selling, general and administrative expenses**

 

**Selling,general and administrative expenses increased 14.9% in the 2005 third quarter,compared with the 2004 third quarter, and increased 13.9% in the three quartersof 2005, compared with the three quarters of 2004.  The increases in these expenses were dueprimarily to additional costs arising from the continued growth in the numberof stores in operation.  Selling, generaland administrative expenses, as a percentage of net sales, were 27.6% in the2005 third quarter, compared with 26.2% in the 2004 third quarter, and were26.5% in the three quarters of 2005, compared with 25.8% in the three quartersof 2004.  The increases in thepercentages for both the 2005 third quarter and three quarters were dueprimarily to planned payroll expenses incurred in connection with the urban andcooler initiatives (approximately 0.6% and 0.4% of net sales, respectively);increased occupancy costs (approximately 0.5% and 0.1% of net sales,respectively); and increased legal related costs (approximately 0.1% of netsales for both the 2005 third quarter and three quarters).  Each of these percentage increases wasimpacted by the deleverage of expenses resulting fromour lower than planned increase in sales in comparable stores.  The incremental costs to distribute anadvertising circular in March also impacted this percentage for the 2005 thirdquarter (approximately 0.1% of net sales) but was offset by a reduction inbonus costs as the Company is not likely to reach the earnings target necessaryfor payment of full bonuses.  In addition,as a result of the lower than planned increase in sales in comparable stores inthe 2005 third quarter, most other costs in such period were deleveraged. **

** **

**For the 2005 fourth quarter, the Company’s plan isfor the selling, general and administrative expense, as a percentage of netsales, to increase compared with the 2004 fourth quarter.  The Company expects**

 

15

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**the** funding of an accelerated urban initiative, an accelerated refrigeratedcooler initiative and the opening of more new stores than last year willnegatively impact its expense leverage. In addition, the distribution of an advertising circular in August 2005may contribute to the overall expense deleveraging asno advertising circular was distributed in the 2004 fourth quarter.

** **

**Provision for taxes on income**

** **

**The effective tax rate was 36.7% for the 2005 thirdquarter, as compared with 36.5% for the 2004 third quarter, and was 36.5% forthe three quarters of 2005 and three quarters of 2004.  For the 2005 fourth quarter, the Company’splan is for the effective tax rate to remain at approximately 36.7%.**

** **

**Liquidity and Capital Resources**

** **

**Atthe end of the 2005 third quarter, the Company had working capital of $500.3million and no outstanding borrowings. Changes in working capital during the three quarters of each of fiscal2005 and fiscal 2004 were primarily the result of earnings, capitalexpenditures and repurchases of the Company’s Common Stock.  The Company’s inventories at the end of the2005 third quarter were approximately 1.5% lower on a per store basis than atthe end of the 2004 third quarter, excluding merchandise in transit to thedistribution centers.  The majority ofthis decrease was in softline merchandise which isapproximately 5% lower than a year ago. The Company expects that inventory on a per store basis will continue tobe gradually reduced due to programs focusing on improving inventoryproductivity.**

** **

**Capitalexpenditures for the three quarters of 2005, wereapproximately $147.7 million and are currently expected to be approximately$220 to $240 million for fiscal 2005. The majority of planned capital expenditures for fiscal 2005 is relatedto the Company’s new store expansion; existing store expansions, relocationsand renovations; the construction of new distribution centers; expendituresrelated to store-focused technology infrastructure; and the continuedimplementation of a refrigerated cooler program for perishable goods inselected stores.  The new store expansionand new distribution centers require additional investment in merchandiseinventories.**

** **

**In the three quarters of 2005,the Company opened 278 stores, closed 63 stores, expanded or relocated 43stores and renovated 108 stores.  TheCompany currently plans to open approximately 500 stores and to close 65 to 70stores in fiscal 2005.  The Company alsocurrently plans to expand or relocate approximately 49 stores and renovateapproximately 114 stores in fiscal 2005. In fiscal 2004, the Company opened 500 stores and closed 61 stores,expanded or relocated 79 stores and renovated 116 stores.  The Company occupies most of its stores underoperating leases.  Store opening,closing, expansion, relocation, and renovation plans, as well as overallcapital expenditure plans, are continuously reviewed and are subject to change.**

** **

**The Company has unsecuredrevolving credit facilities with banks for short-term borrowings of up to $200million.  On May 25, 2006, $100 millionof the facilities expires.  The remaining$100 million expires on May 31, 2010. The Company had no borrowings against these facilities during the threequarters of 2005.  Cash flow from currentoperations and available revolving credit facilities, as discussed above, areexpected to be sufficient to meet planned liquidity and capital resource needs,including store expansion and other capital spending programs and any repurchaseof the Company’s Common Stock.**

 

During fiscal 2004 andthe year ended August 30, 2003, the Company purchased in the open market 5.6million and 2.2 million shares, respectively, at a cost of $176.7 million and$65.9 million, respectively.  On April13, 2005, the Company announced that the Board of Directors authorized thepurchase of up to an additional 5 million shares of its outstanding commonstock from time to time as market conditions

 

16

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warrant.  During the three quarters of 2005, theCompany purchased in the open market 2.9 million shares of the Company’s CommonStock at a cost of $80.6 million, leaving 4.3 million shares authorized to bepurchased.

 

The following table showsthe Company’s obligations and commitments as of the end of the 2005 thirdquarter to make future payments under contractual obligations (in thousands):

 
| ** **                         | ** ** | **Payments Due During One Year Fiscal Period Ending** | ** ** |
|------------------------------------|------------|-------------------------------------------------------|------------|
| **Contractual Obligations**        | ** ** | **Total**                                             | ** ** | **May  2006** | ** ** | **May   2007** | ** ** | **May   2008** | ** ** | **May   2009** | ** ** | **May   2010** | ** ** | **Thereafter** | ** ** |
| Merchandise letters of credit      |       | $                                                     | 133,755    |   | $ | 133,755 |   | $ | — |   | $ | — |   | $ | — |   | $ | — |   | $ | — |   |
| Operating leases                   |       | 1,035,197                                             |       | 238,136 |   | 211,351 |   | 173,781 |   | 136,321 |   | 94,720 |   | 180,888 |   |
| Construction obligations           |       | 70,891                                                |       | 70,891 |   | — |   | — |   | — |   | — |   | — |   |
| Total Contractual Cash Obligations |       | $                                                     | 1,239,843  |   | $ | 442,782 |   | $ | 211,351 |   | $ | 173,781 |   | $ | 136,321 |   | $ | 94,720 |   | $ | 180,888 |   |

 

Most of the Company’soperating leases provide the Company with an option to extend the term of thelease at designated rates.

 

The following table showsthe Company’s other commercial commitments as of the end of the 2005 thirdquarter (in thousands):

** **

| **Other Commercial Commitments** | ** ** | **Total Amounts Committed** | ** ** |
|----------------------------------|------------|-----------------------------|------------|
| Standby letters of credit        |       | $                           | 103,734    |   |
| Surety bonds                     |       | 6,452                       |       |
| Total Commercial Commitments     |       | $                           | 110,186    |   |

### ** **

**At the end of the 2005 thirdquarter, approximately $15.6 million of the merchandise letters of credit areincluded in accounts payable and accrued liabilities on the Company’s balancesheet.  A substantial portion of theoutstanding amount of standby letters of credit and surety bonds (which areprimarily renewed on an annual basis) are used as surety for future premium anddeductible payments to the Company’s workers’ compensation and generalliability insurance carrier.  The Companyaccrues for these future payment liabilities as described in the “CriticalAccounting Policies” section of this discussion.**

 

17

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**Critical Accounting Policies**

** **

**Management believes the following accountingprinciples are critical because they involve significant judgments,assumptions, and estimates used in the preparation of the Company’sconsolidated financial statements.**

** **

**Merchandise Inventories:**

** **

**Inventories are valued using the retail method,based on retail prices less markon percentages, whichapproximates the lower of first-in, first-out (FIFO) cost or market.  The Company records adjustments to inventorythrough cost of goods sold when retail price reductions, or markdowns, aretaken against on-hand inventory.  Inaddition, management makes estimates and judgments regarding, among otherthings, initial markups, markdowns, future demand for specific productcategories and market conditions, all of which can significantly impactinventory valuation.  If actual demand ormarket conditions are different than those projected by management, additionalmarkdowns may be necessary.  This risk isgenerally higher for seasonal merchandise than for non-seasonal goods.  The Company also provides for estimatedinventory losses for damaged, lost or stolen inventory for the period from thephysical inventory to the financial statement date.  These estimates are based on historicalexperience and other factors.**

** **

**Propertyand Equipment:**

** **

**Property and equipment is statedat cost.  Depreciation for financialreporting purposes is being provided principally by the straight-line methodover the estimated useful lives of the related assets.  For leasehold improvements, this depreciationis over the shorter of the term of the related lease (generally five years) orthe asset’s useful economic life.  Thevaluation and classification of these assets and the assignment of usefuldepreciable lives involves 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, impairmentlosses on fixed assets have not been material to the Company’s financialposition and results of operations.**

** **

**InsuranceLiabilities:**

** **

**The Company is primarilyself-insured for health care, property loss, workers’ compensation and generalliability costs.  These costs aresignificant primarily due to the large number of the Company’s retail locationsand employees.  Because the nature ofthese claims is such that there can be a significant lag from the incurrence ofthe claim (which is when the expense is accrued) until payment is made, thepercentage increase in the accrual can be much more pronounced than thepercentage increase in the expense.  TheCompany’s self-insurance liabilities are based on the totalestimated costs of claims filed and estimates of claims incurred but notreported, less amounts paid against such claims, and are not discounted.  Management reviews current and historicalclaims data in developing its estimates. The Company also uses information provided by outside actuaries withrespect to workers’ compensation and general liability claims.  If the underlying facts and circumstances ofthe claims change or the historical trend is notindicative 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 operations.**

 

18

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## ** **

## **CautionaryNote Regarding Forward-Looking Statements**

 

**Certain statements contained inthis Form 10-Q, or in other public filings, press releases, or other written ororal communications made by the Company or the Company’s representatives, whichare not historical facts are forward-looking statements made pursuant to thesafe harbor provisions of the Private Securities Litigation Reform Act of1995.  These forward-looking statementsaddress the Company’s plans, activities or events which the Company expectswill or may occur in the future such as, without limitation, future capitalexpenditures, store openings, closings, renovations, expansions andrelocations, additional distribution facilities, sales, cost of sales,expenses, the outcome of legal proceedings and other aspects of the Company’sbusiness and operations. These forward-looking statements may be identified bythe use of the words “plan,” “estimate,” “expect,” “anticipate,” “probably,” “should,”“project,” “intend,” “continue,” and similar terms and expressions.  Various risks, uncertainties and otherfactors may cause actual results to differ materially from those expressed insuch forward-looking statements. Such risks, uncertainties and other factorsinclude, but are not limited to:**

** **

**•**                  Competitivefactors and pricing pressures

**•**                  Changesin economic conditions

**•**                  Theimpact of acts of war or terrorism

**•**                  Changesin consumer demand and product mix

**•**                  Unusualweather that may impact sales

**•**                  Theimpact of inflation

**•**                  Merchandisesupply and pricing constraints

**•**                  Successof merchandising and marketing programs

**•**                  Generaltransportation or distribution delays or interruptions

**•**                  Dependenceon imports, changes in currency exchange rates, trade restrictions, tariffs,quotas and freight rates

**•**                  Availabilityof real estate, and costs and delays associated with building, opening andoperating new distribution facilities and stores

**•**                  Costs,potential problems and achievement of results associated with theimplementation of new programs, systems and technology, including supply chainsystems, store technology, cooler installations and urban initiative programs

**•**                  Changesin food and energy prices and the impact on consumer spending and the Company’scosts

**•**                  Changesin shrinkage

**•**                  Adverseimpacts associated with legal proceedings and claims

**•**                  Changesin health care and other insurance costs

**•**                  Changesin the Company’s ability to attract and retain employees

**•**                  Changesin state or federal legislation or regulations, including the effects oflegislation and regulations on wage levels and entitlement programs

** **

**Consequently, all of theforward-looking statements made by the Company in this and other documents orstatements are qualified by these and other factors, risks anduncertainties.  Readers are cautioned notto place undue reliance on these forward-looking statements, which speak onlyas of the date of this Form 10-Q.  Exceptas required by applicable securities laws, 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.**

 

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Item 4.    Controlsand Procedures

 

Based on an evaluation by management of theCompany (with the participation of the Company’s Chief Executive Officer andChief Financial Officer), as of the end of the period covered by this report,the Company’s Chief Executive Officer and Chief Financial Officer concludedthat the Company’s disclosure controls and procedures (as defined in Rules13a-15 (e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended(the “Exchange Act”)) were effective to provide reasonable assurance thatinformation required to be disclosed by the Company in reports that the Companyfiles or submits under the Exchange Act is recorded, processed, summarized andreported within the time periods specified in Securities and ExchangeCommission (“SEC”) rules and forms and that such information is accumulated andcommunicated to our management, including the Chief Executive Officer and ChiefFinancial Officer, to allow timely decisions regarding requireddisclosures.  Consistent with thesuggestion of the SEC, the Company has formed a Disclosure Committee consistingof key Company personnel designed to review the accuracy and completeness ofall disclosures made by the Company.

 

The Company effected a change in its internalcontrol over financial reporting (as defined in Rule 13a-15(f) under theExchange Act) during the fiscal quarter to which this report relates toremediate internal control deficiencies related to the application of our leaseaccounting policies and practices that led to the restatement as furtherdiscussed in Note 9 to the consolidated condensed financial statements.  The Company has corrected its leaseaccounting practices to amortize leasehold improvements over the shorter of theterm of the related lease (generally five years) or the asset’s useful economiclife.  For tenant improvement allowancesand rent holidays, the Company now records a deferred rent liability andamortizes the deferred rent over the terms of the leases as reductions to rentexpense.  In addition, the Company nowrecognizes straight-line rent expense (including any rent adjustment during thelease term) over a period that includes the pre-opening period.  The Company has implemented additional reviewprocess over its leasing arrangements to ensure the collection andcommunication of information necessary for the proper accounting for each leasein accordance with generally accepted accounting principles.

 

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PART II - OTHER INFORMATION

** **

**Item 1.**LegalProceedings 

** **

**Theinformation in Note 7 to the Consolidated Condensed Financial Statementscontained in Part I, Item 1 of the Form 10-Q isincorporated herein by this reference.**

** **

**Item 2.**UnregisteredSales of Equity Securities and Use of Proceeds

 

Shares of Common Stockrepurchased by the Company during the quarter ended May 28, 2005, were asfollows:

 
| ** **                | ** ** | **Total Number of  Shares  Purchased** | ** ** | **Average Price  Paid Per Share** | ** ** | **Total Number  of Shares  Purchased as  Part of Publicly  Announced  Plans or  Programs** | ** ** | **Maximum  Number of  Shares that May  Yet Be  Purchased Under  the Plans of  Programs** | ** ** |
|---------------------------|------------|----------------------------------------|------------|-----------------------------------|------------|--------------------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------------------|------------|
| March 2/27/05–4/2/05 |       | 102,300                                |       | $                                 | 30.25      |                                                                                       | 102,300    |                                                                                     | 1,540,600  |   |
| April 4/3/05–4/30/05 |       | 721,000                                |       | $                                 | 28.33      |                                                                                       | 721,000    |                                                                                     | 5,819,600  |   |
| May 5/1/05–5/28/05   |       | 1,490,000                              |       | $                                 | 25.40      |                                                                                       | 1,490,000  |                                                                                     | 4,329,600  |   |
| Total                     |       | 2,313,300                              |       | $                                 | 26.53      |                                                                                       | 2,313,300  |                                                                                     | 4,329,600  |   |

 

During the years endedAugust 28, 2004, and August 30, 2003, the Company purchased in the open market5.6 million and 2.2 million shares, respectively, at a cost of $176.7 millionand $65.9 million, respectively.  OnApril 13, 2005, the Company announced that the Board of Directors authorizedthe purchase of up to an additional five million shares of its outstandingcommon stock from time to time as market conditions warrant.  During the three quarters ended May 28, 2005,the Company purchased in the open market 2.9 million shares of the Company’sCommon Stock at a cost of $80.6 million, leaving 4.3 million shares authorizedto be purchased.  Shares purchased underthe share repurchase authorization are held in treasury and currently a portionof such shares are reissued under the Family Dollar 2000 Outside DirectorsPlan.  There is no expiration dategoverning the period during which the Company can make share repurchases.  There are no other repurchase programs underwhich the Company is authorized to repurchase outstanding shares.

** **

**Item 6.**Exhibits

** **

**(a)    Exhibits filed herewith:**

** **

**31.1**                                       Certification of Principal Executive Officer Pursuant to Rules 13a-14(a)and 15d-14(a) under the Securities Exchange Act of 1934, as adopted pursuant toSection 302 of the Sarbanes-Oxley Act of 2002

** **

**31.2**                                       Certification of Principal Financial Officer Pursuant to Rules 13a-14(a)and 15d-14(a) under the Securities Exchange Act of 1934, as adopted pursuant toSection 302 of the Sarbanes-Oxley Act of 2002

 

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**32.1**                                       Certification of Principal Executive Officer Pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 ofthe Sarbanes-Oxley Act of 2002

** **

**32.2**                                       Certification of Principal Financial Officer Pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 ofthe Sarbanes-Oxley Act of 2002

** **

**PART II - OTHER INFORMATION**

 

SIGNATURES

 

Pursuant to the requirements of theSecurities Exchange Act of 1934, the registrant has duly caused this report tobe signed on its behalf by the undersigned thereunto duly authorized.

 

 
|               | FAMILY DOLLAR STORES, INC.             |
|--------------------|----------------------------------------|
|               | (Registrant)                           |
|               |                                   |
|               |                                   |
| Date: July 1, 2005 |                                   | /s/ R. James Kelly |   |
|               | R. JAMES KELLY                         |
|               | Vice Chairman-Chief Financial  Officer |
|               |                                   |
|               |                                   |
| Date: July 1, 2005 |                                   | /s/ C. Martin Sowers |   |
|               | C. MARTIN SOWERS                       |
|               | Senior Vice President-Finance          |
|                    |                                        |  |  |  |

 

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