** **

**UNITEDSTATESSECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C.  20549**

**FORM 10-K**

 
| **ý** | **Annual  Report Pursuant to Section 13 or 15(d) of  the Securities Exchange Act of 1934** |
|------------|-------------------------------------------------------------------------------------------------|

**For thefiscal year ended August 27, 2005**

**or**
| **o** | **Transition  Report Pursuant to Section 13 or 15(d) of  the Securities Exchange Act of 1934** |
|-------|-----------------------------------------------------------------------------------------------------|

**Commission File No. 1-6807**

**FAMILY DOLLAR STORES, INC.**

(Exact name of registrant asspecified in its charter)

| **Delaware**                                                     | **56-0942963**                       |
|------------------------------------------------------------------|--------------------------------------|
| (State or other jurisdiction of                                  | (I.R.S. Employer Identification No.) |
| incorporation or organization)                                   |                                 |
|                                                             |                                 |
| **10401 Monroe Road, Matthews, North Carolina**                  | **28105**                            |
| (Address of principal executive offices)                         | (Zip Code)                           |
|                                                             |                                 |
| **P. O. Box 1017, Charlotte, North Carolina  28201-1017**        |
| (Mailing address)                                                |
|                                                             |                                 |
| Registrant’s telephone number, including area code          | **(704)  847-6961**                  |
| ** **                                                       | ** **                           |
| Securities registered pursuant to Section 12(b) of the Act: |

 

| **Title of  each class**     | ** ** | **Name of  each exchange  on which registered** |
|------------------------------|------------|-------------------------------------------------|
| Common Stock, $.10 Par Value |       | New York Stock Exchange                         |

Securitiesregistered pursuant to Section 12(g) of the Act:  **None**

Indicate by check mark whether the registrant (1) has filed all reportsrequired to be filed by Section 13 or 15(d) of the Securities Exchange Actof 1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject to suchfiling requirements for the past 90 days.         Yes  ý       No  o

Indicate by check mark if disclosure of delinquent filers pursuant toItem 405 of Regulation S-K is not contained herein, and will not be contained,to the best of registrant’s knowledge, in definitive proxy or informationstatements incorporated by reference in Part III of this Form 10-K or anyamendment to this Form 10-K.           o

Indicate by check mark whether the registrant is an accelerated filer(as defined in Rule 12b-2 of the Act).         Yes  ý      No  o

Indicate by check mark whether the registrant is a shell company (asdefined in Rule 12b-2 of the Exchange Act).          Yes  o       No  ý

The aggregate market value of voting and non-voting common equity heldby non-affiliates of the registrant on February 26, 2005, based on the closingprice on February 25, 2005, was approximately $5.1 billion.

The number of shares of the registrant’s Common Stock outstanding as ofOctober 17, 2005, was 155,264,313.

DOCUMENTSINCORPORATED BY REFERENCE

The information required in Part III of thisForm 10-K is incorporated by reference to the registrant’s definitive proxystatement to be filed for the Annual Meeting of Stockholders to be held onJanuary 19, 2006.

 

 

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**PART I**

*This report contains “forward-lookingstatements” that are based on the current expectations of Family Dollar Stores,Inc.  Actual results in future periodsmay differ materially from those expressed or implied by those forward-lookingstatements because of a number of factors set forth in this Annual Report onForm 10-K (“Report”).  Statements thatare forward-looking may be identified by the use of the words “plan,” “estimate,”“expect,” “anticipate,” “probably,” “should,” “project,” “intend,” “continue,”and similar terms and expressions.  For adiscussion of the factors that may affect the Company’s future business andprospects, see Management’s Discussion and Analysis (“MD&A”) - CautionaryStatement Regarding Forward-Looking Statements.*

*Information is provided herein with respectto the Company’s operations related to the Company’s fiscal years ended onAugust 27, 2005 (“fiscal 2005”); on August 28, 2004 (“fiscal 2004”); onAugust 30, 2003 (“fiscal 2003”); on August 31, 2002 (“fiscal 2002”);and on September 1, 2001 (“fiscal 2001”); and the fiscal year ending onAugust 26, 2006 (“fiscal 2006”).*

**ITEM 1.  BUSINESS**

**General**

                FamilyDollar Stores, Inc., (together with its wholly-owned subsidiaries and entitiesreferred to herein as the “Company”) operates a chain of almost 6,000 retaildiscount stores in a 44-state area, providing primarily low to lower-middleincome consumers with a wide range of general merchandise at highly competitiveprices in convenient neighborhood stores. The goods offered by the Company generally have price points that rangefrom under one dollar to ten dollars and include apparel, food, cleaning andpaper products, home decor, beauty and health aids, toys, pet products,automotive products, domestics and seasonal goods.

The original predecessor of the Company wasorganized in 1959 to operate a self-service retail store in Charlotte, NorthCarolina.  In subsequent years,additional stores were opened, and separate corporations generally were organizedto operate these stores.  Family DollarStores, Inc., was incorporated in Delaware in 1969, and all then-existingcorporate entities became its wholly-owned subsidiaries.

**Overview of Business Operations**

The Company owns or leases and operates allof its retail discount stores located in 44 states of the United States.  The Company’s stores are operated on aself-service basis, and low overhead permits the sale of merchandise at arelatively moderate markup.  As discussedbelow, the Company’s merchandise consists of a variety of hardline and softlinemerchandise.  The Company’s stores arelocated in urban, suburban, small town and rural markets.  See Properties herein.  The Company’s relatively small store sizeallows the Company to select store locations that provide neighborhoodconvenience to its customers in each of these areas.  The Company generally prices merchandiseuniformly in all of its stores, but some merchandise may carry higher prices instores in less competitive markets where operating costs are higher.  Most items available for sale are pricedunder ten dollars.

The Company’s “everyday low price” strategyrelies on offering consistently low prices on its products and utilizinglimited advertising and promotional activity. The Company traditionally advertises through circulars available instores or, occasionally, circulars which are inserted in newspapers or maileddirectly to consumers’ residences.  Inthe years immediately prior to and during fiscal 2004, the Company distributedone circular in each December period to boost holiday sales.  In fiscal 2005, the Company distributedcirculars in November and December 2004; and, in April and August2005.  The Company continues to utilizecirculars that are passed out in stores monthly, and limited advertising isused to support the opening of new stores.

The Company accepts cash, checks and, in moststores, PIN-based debit cards but does not currently accept credit cards.  The Company is currently testing systems thatwill allow it to accept a broad range of electronic benefits, including foodstamps.

As discussed in MD&A elsewhere in thisReport, the Company focused on four primary initiatives during fiscal 2005: (i)the installation of refrigerated coolers; (ii) the “Treasure Hunt” merchandiseprogram; (iii) new store openings; and (iv) the Urban Initiative.

 

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No single store accounted for more thanone-quarter of one percent of sales during fiscal 2005.  The Company’s stores are open at least sixdays a week, with most open on Sundays.

**Merchandise**

The Company’s stores offer a variety ofhardline and softline merchandise. Hardline merchandise includes household chemical and paper products,candy, snacks and other food, health and beauty aids, electronics, housewaresand giftware, pet food and supplies, toys, stationery and school supplies,seasonal goods, hardware and automotive supplies.  Softline merchandise includes men’s, women’s,boys’, girls’ and infants’ clothing, shoes, and domestic items such asblankets, sheets and towels.  Duringfiscal 2005, hardline merchandise accounted for approximately 78.8% of theCompany’s sales.  Softline merchandiseaccounted for approximately 21.2% of sales.

During fiscal 2005, nationally advertised brandname merchandise accounted for approximately 37% of sales versus 36% in fiscal2004.  Family Dollar private labelmerchandise accounted for approximately 4% of sales, and merchandise sold underother labels, or which was unlabeled, accounted for the balance of sales.  During fiscal 2005, irregular merchandiseaccounted for less than one-half of 1% of sales, and closeout merchandiseaccounted for less than 2% of sales.

For a number of years, the Company has addedmore hardline consumable merchandise, including nationally recognized brandname merchandise, to its merchandise assortments while reducing the amount ofspace allocated to apparel and shoes. During fiscal 2005, the Company continued to adjust the merchandiseselection in stores, including the introduction of an expanded assortment ofhardline consumable merchandise, such as paper products, household chemicalsand food.  However, approximately thesame amount of space was allocated to hardline merchandise and softlinemerchandise as at the end of fiscal 2004, except in a limited number of storesin which all or most hanging apparel and shoes were removed from themerchandise assortment.

During fiscal 2005, the Company implementedadjustments to its merchandising strategy by increasing levels of opportunisticallypurchased goods supplementing the basic assortment of merchandise.  This “Treasure Hunt” merchandise is designedto create more excitement in stores and attract customers throughout the year,with particular emphasis on the holiday seasons.  In fiscal 2006, the Company expects tocontinue to develop this merchandising strategy.

During fiscal 2005, the Company expanded itsfood assortment to include perishable foods by installing refrigerated coolersin approximately 1,000 stores.  In fiscal2006, the Company plans to install coolers in approximately 2,500 additionalstores.

The Company purchases merchandise fromapproximately 1,500 suppliers and generally has not experienced difficulty inobtaining adequate quantities of merchandise. Approximately 60% of the merchandise is manufactured in the U.S., andsubstantially all such merchandise is purchased directly from themanufacturer.  Purchases of importedmerchandise are made directly from the manufacturer or from importers, and theCompany’s vendor arrangements provide for payment for such merchandise in U.S.Dollars.  No single supplier accountedfor more than 8% of the merchandise sold by the Company in fiscal 2005.

The Company maintains a substantial varietyand depth of basic and seasonal merchandise inventory in stock in its stores(and in its distribution centers for weekly store replenishment) to attractcustomers and meet their shopping needs. Vendors’ trade payment terms are negotiated to help finance the cost ofcarrying this inventory.  The Companymust balance the value of maintaining high inventory levels to meet customers’demands with the potential cost of having inventories at levels that exceedsuch demands and that may need to be marked down in price in order to sell.

**Distribution and Logistics**

During fiscal 2005, approximately 4.7% of themerchandise purchased by the Company was shipped directly to stores by themanufacturer or importer.  The balance ofthe merchandise was received at one of the Company’s eight distribution centersdescribed below.  Merchandise isdelivered to stores from the Company’s distribution centers by Company-ownedtrucks and by common and contract carriers. During fiscal 2005, approximately 85% of the merchandise delivered wasby common or contract carriers.  At theend of fiscal 2005, the average distance between the distribution centers andthe stores served by each facility was:

 

3

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| **Distribution Center** | ** ** | **Number of  Stores Served** | ** ** | **Average  Distance (Miles)** | ** ** |
|-------------------------|------------|------------------------------|------------|-------------------------------|------------|
| Matthews, NC            |       | 775                          |       |                          | 173        |   |   |
| West  Memphis, AR       |       | 704                          |       |                          | 260        |   |   |
| Front Royal,  VA        |       | 848                          |       |                          | 306        |   |   |
| Duncan, OK              |       | 772                          |       |                          | 306        |   |   |
| Morehead, KY            |       | 800                          |       |                          | 241        |   |   |
| Maquoketa,  IA          |       | 744                          |       |                          | 310        |   |   |
| Odessa, TX              |       | 657                          |       |                          | 566        |   |   |
| Marianna, FL            |       | 598                          |       |                          | 267        |   |   |
| Totals                  |       | 5,898                        |       |                          | 300        |   |   |

 

During fiscal 2005, the Company also acquireda 90-acre site in Rome, New York, on which the Company is currentlyconstructing its ninth distribution center, which is expected to be operationalduring the third quarter of fiscal 2006.

**Technology**

The Company has an integrated system toimprove inventory management through merchandise planning and inventory controldepartments.  The inventory managementsystem maintains by-item inventories at all stores and supports a demandforecasting system for replenishment of distribution centers.  The Company also utilizes software forautomatic store replenishment of basic merchandise and for forecasting-basedallocation of non-basic merchandise. These systems give the Company improved tools to facilitate optimummerchandise in-stock positions in stores, reduce markdowns and improveinventory turnover.

During fiscal 2003, the Company beganimplementation of a new transportation management system designed to improvevisibility and cost control for both import and domestic freight movement.  The import and domestic inbound portions ofthis project have been completed.

During fiscal 2004, as part of the Company’s “storeof the future” multi-year initiative, a new hiring system was designed toprovide consistent pre-employment assessments and interviews for prospectiveemployees and was tested in a major urban market.  Currently, the new hiring system is utilizedin approximately 1,200 stores.  TheCompany also has begun implementing plans to upgrade the stores’ communicationsinfrastructure to facilitate communications and provide more interactivetraining for store employees.

**Competition**

The business in which the Company is engagedis highly competitive.  The principalcompetitive factors include store locations, price and quality of merchandise,in-stock consistency, merchandise assortment and presentation, and customerservice.  The Company competes for salesand store locations in varying degrees with international, national, regionaland local retailing establishments, including discount stores, departmentstores, variety stores, dollar stores, discount clothing stores, drug stores,grocery stores, convenience stores, outlet stores, warehouse stores and otherstores.  Many of the nation’s other largeretailers have stores in areas in which the Company operates.  The relatively small size of the Company’sstores permits it to open new stores in rural areas, small towns and in largeurban markets, in locations convenient to the Company’s low and lower-middleincome customer base.  The Company’sstores offer customers a reasonable selection of competitively priced, basicmerchandise within a relatively narrow range of price points.

**Seasonality**

The Company’s sales are slightlyseasonal.  Historically, sales have beenhighest in the second fiscal quarter (December, January, and February),representing approximately 27% of total annual sales.

**Trademarks**

The Company has registered with the U.S.Patent and Trademark Office the name “Family Dollar Stores” as a service markand also has registered a number of other names as trademarks for certainmerchandise sold in stores.

 

4

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**Employees**

As of October 1, 2005, the Company hadapproximately 24,000 full-time employees and approximately 18,000 part-timeemployees.  None of the Company’semployees are covered by collective bargaining agreements.  The Company considers its employee relationsgenerally to be good.

**Available Information**

The mailing address of the Company’sExecutive Offices is P.O. Box 1017, Charlotte, North Carolina 28201-1017, andthe telephone number at that location is 704-847-6961.  The Company’s Internet Website iswww.familydollar.com.  Through a link onthe Investors section of the Website, the Company makes available thefollowing filings as soon as reasonably practicable after they areelectronically filed with or furnished to the Securities and ExchangeCommission:  Annual Reports on Form 10-K,Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and any amendmentsto these reports filed or furnished pursuant to Section 13(a) or 15(d) ofthe Securities Exchange Act of 1934. These reports and amendments also are available at the Website of theSecurities and Exchange Commission at www.sec.gov.  All such filings are available free ofcharge.

**ITEM 2.  PROPERTIES**

The Company operates a chain of self-serviceretail discount stores.  As of October 1,2005, there were 5,908 stores in 44 states and the District of Columbia asfollows:

 

| Texas                 | 739 |
|-----------------------|-----|
| Ohio                  | 371 |
| Florida               | 319 |
| North  Carolina       | 309 |
| Michigan              | 306 |
| Georgia               | 289 |
| New York              | 258 |
| Pennsylvania          | 227 |
| Louisiana             | 211 |
| Virginia              | 203 |
| Illinois              | 202 |
| Tennessee             | 192 |
| Kentucky              | 179 |
| South  Carolina       | 175 |
| Indiana               | 172 |
| Alabama               | 144 |
| Wisconsin             | 133 |
| Arizona               | 120 |
| Oklahoma              | 112 |
| West  Virginia        | 110 |
| Mississippi           | 109 |
| Arkansas              | 98  |
| Missouri              | 89  |
| Massachusetts         | 87  |
| New Mexico            | 86  |
| Maryland              | 86  |
| Colorado              | 82  |
| Minnesota             | 63  |
| New Jersey            | 61  |
| Utah                  | 52  |
| Connecticut           | 50  |
| Maine                 | 39  |
| Iowa                  | 36  |
| Kansas                | 34  |
| Nebraska              | 26  |
| Delaware              | 22  |
| Idaho                 | 22  |
| New  Hampshire        | 20  |
| Rhode Island          | 20  |
| Nevada                | 19  |
| Vermont               | 9   |
| Wyoming               | 9   |
| South Dakota          | 7   |
| North Dakota          | 6   |
| District of  Columbia | 5   |

 

                The storeslisted above include approximately 41 stores temporarily closed, includingstores closed due to Hurricane Katrina and Hurricane Rita, which struck theU.S. Gulf Coast in August 2005 and September 2005, respectively.  See MD&A and Note 13 to the ConsolidatedFinancial Statements included in this Report for more information about theimpact of these storms.

The number of stores operated by the Companyat the end of each of its last five fiscal years is as follows: 5,898 storesfor fiscal 2005; 5,466 stores for fiscal 2004; 5,027 stores for fiscal 2003;4,616 stores for fiscal 2002; and 4,141 stores for fiscal 2001.

 

5

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During fiscal 2005, 500 stores were opened, 68 stores were closed, 16stores were relocated within the same shopping center or market area, 33 storeswere expanded in size, and 105 stores were renovated.  During fiscal 2006, the Company plans to openapproximately 400 stores, close approximately 65 stores, and relocate, expandor renovate approximately 75 stores. Such plans are continually reviewed and subject to change.  From August 27, 2005, through October 1,2005, the Company opened 12 new stores, closed 2 stores, and relocated,expanded or renovated 6 stores.

As of October 1, 2005, the Company had in theaggregate approximately 49.9 million square feet of total store space(including receiving rooms and other non-selling areas) and approximately 41.4million square feet of selling space. The typical store has approximately 7,500 to 9,500 square feet of totalarea.

The Company’s stores are located in large urban, suburban and ruralareas, and they are typically freestanding or located in shopping centers withadequate parking available.  At the endof fiscal 2005, approximately 20% of the Company’s stores were located in largeurban markets (markets with populations above 200,000), and approximately 26%of the Company’s stores were located in small urban markets (markets withpopulations greater than 75,000 but less than 200,000) or suburban areas.  During fiscal 2005, approximately 35% of newstore locations were opened in large urban markets and 28% of new locationswere opened in small urban or suburban markets.

With the exception of 481 stores owned by theCompany, all of the Company’s stores are leased.  Most of the leases are for initial terms offive years and for fixed rentals.  Alarge majority of the leases contain provisions that may require additionalpayments based upon a percentage of sales, property taxes, insurance premiumsor common area maintenance charges.

Of the Company’s 5,427 leased stores atOctober 1, 2005, all but 396 leases grant the Company options to renew foradditional terms; in most cases for a number of successive five-yearperiods.  The following table sets forthcertain data, as of October 1, 2005, concerning the expiration dates of allleases with renewal options:

 

| **Fiscal Years**     | ** ** | **Approximate Number of  Leases Expiring Assuming No  Exercise of Renewal Options** | ** ** | **Approximate Number of  Leases Expiring Assuming Full  Exercise of Renewal Options** | ** ** |
|----------------------|------------|-------------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------------|------------|
| 2006                 |       | 149                                                                                 |       |                                                                                  | 0          |   |   |
| 2007-2009            |       | 2,435                                                                               |       |                                                                                  | 10         |   |   |
| 2010-2012            |       | 1,756                                                                               |       |                                                                                  | 106        |   |   |
| 2013-2015            |       | 647                                                                                 |       |                                                                                  | 426        |   |   |
| 2016 and  thereafter |       | 44                                                                                  |       |                                                                                  | 4,489      |   |   |

 

Of the 481 Company-owned stores, 127 arelocated in Texas, with no more than 30 located in any other state.  In these owned stores, there areapproximately 4.0 million total square feet of space.

The Company also owns its corporateheadquarters and distribution center located on a 108-acre tract of land inMatthews, North Carolina, just outside of Charlotte, in two buildingscontaining approximately 1.13 million square feet.  Approximately 890,000 square feet are usedfor the distribution center which includes receiving, warehousing, shipping andstorage facilities.  Approximately240,000 square feet are used for the corporate headquarters.

The Company also owns seven additionalfull-service distribution centers described in the table below:

 

| ** **              | ** ** | **Facility Size** | ** ** | ** **                | ** ** |
|-------------------------|------------|-------------------|------------|---------------------------|------------|
| **Distribution Center** | ** ** | **Land**          | ** ** | **Building**              | ** ** | **Date Operational** | ** ** |
| West  Memphis, AR       |       | 75 acres     |       | 550,000 sq.  ft.          |       | April 1994 |   |
|                    |       |              |       | 300,000 sq.  ft. addition |       | August 1996 |   |
| Front Royal,  VA        |       | 75 acres     |       | 907,000 sq.  ft.          |       | January 1998 |   |
| Duncan, OK              |       | 85 acres     |       | 907,000 sq.  ft.          |       | July 1999 |   |
| Morehead, KY            |       | 94 acres     |       | 907,000 sq.  ft.          |       | June 2000 |   |
| Maquoketa,  IA          |       | 74 acres     |       | 907,000 sq.  ft.          |       | March 2002 |   |
| Odessa, TX              |       | 89 acres     |       | 907,000 sq.  ft.          |       | July 2003 |   |
| Marianna, FL            |       | 76 acres     |       | 907,000 sq.  ft           |       | January 2005 |   |

 

In the summer of 2005, the Company began construction of a ninthfull-service distribution center on a 90-acre tract of land owned by theCompany in Rome, New York.  The buildingwill contain approximately 907,000 square feet and is expected to beoperational during the third quarter of fiscal 2006.

 

6

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**ITEM 3.  LEGALPROCEEDINGS**

On January 30, 2001, Janice Morgan andBarbara Richardson, two individuals who have held the position of Store Managerfor subsidiaries of the Company, filed a Complaint against the Company in theUnited States District Court for the Northern District of Alabama.  Thereafter, pursuant to the Court’s ruling,notice of the pendency of the lawsuit was sent to approximately 13,000 currentand former Store Managers holding the position on or after July 1, 1999.  Approximately 2,550 of those receiving suchnotice filed consent forms and joined the lawsuit as plaintiffs, includingapproximately 2,300 former Store Managers and approximately 250 then currentemployees.  After rulings by the Court onmotions to dismiss certain plaintiffs filed by the Company and motions toreconsider filed by plaintiffs, 1,424 plaintiffs remained in the case at the commencementof trial.

The case has proceeded as a collective actionunder the Fair Labor Standards Act (“FLSA”). The Complaint alleges that the Company violated the FLSA by classifyingthe named plaintiffs and other similarly situated current and former StoreManagers as “exempt” employees who are not entitled to overtimecompensation.  Plaintiffs seek to recoverunpaid overtime compensation in an amount currently estimated to be up toapproximately $50 million, liquidated damages equal to the overtime award, ifany, plus an award of attorneys’ fees, costs and expenses, and such otherrelief as the Court may deem proper.

A jury trialin this case commenced on June 13, 2005, in Tuscaloosa, Alabama, and ended onJune 28, 2005, with the judge declaring a mistrial after the jury was unable toreach a unanimous decision in the matter. The case is scheduled to be retried commencing on February 21, 2006.

In general, the Company continues to believethat the Store Managers are “exempt” employees under the FLSA and have beenproperly compensated and that the Company has meritorious defenses that shouldenable it ultimately to prevail. However, the outcome of any litigation is inherently uncertain.  Resolution of this matter could have amaterial adverse effect on the Company’s financial position, liquidity orresults of operation.

The Company is involved in numerous otherlegal proceedings and claims incidental to its business, including litigationrelated to alleged failures to comply with various state and federal employmentlaws.  While the ultimate outcome cannotbe determined, the Company currently believes that these proceedings andclaims, both individually and in the aggregate, should not have a materialadverse effect on the Company’s financial position, liquidity or results ofoperations.  However, the outcome of anylitigation is inherently uncertain and, if decided adversely to the Company,the Company may be subject to liability that could have a material adverseeffect on the Company’s financial position, liquidity or results of operations.

**ITEM 4.  SUBMISSIONOF MATTERS TO A VOTE OF SECURITY HOLDERS**

There were no matters submitted to a vote ofsecurity holders through the solicitation of proxies or otherwise during thefourth quarter of fiscal 2005.

**ITEM 4A.               EXECUTIVEOFFICERS OF THE REGISTRANT**

The following information is furnished withrespect to each of the executive officers of the Company as of October 1, 2005:

 

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| **Name**                    | ** ** | **Position and Office**                                        | ** ** | **Age** | ** ** |
|-----------------------------|------------|----------------------------------------------------------------|------------|---------|------------|
| Howard R.  Levine (1)       |       | Chairman of the Board and  Chief Executive Officer             |       | 46      |       |
|                        |       |                                                           |       |    |       |
| R. James  Kelly (2)         |       | Vice Chairman and  Chief Financial and  Administrative Officer |       | 58      |       |
|                        |       |                                                           |       |    |       |
| Robert  George (3)          |       | Executive Vice President-  Merchandising                       |       | 43      |       |
|                        |       |                                                           |       |    |       |
| Charles S.  Gibson, Jr. (4) |       | Executive Vice President-  Supply Chain                        |       | 44      |       |
|                        |       |                                                           |       |    |       |
| Dorlisa K.  Flur (5)        |       | Senior Vice President-  Strategy and Business Development      |       | 40      |       |
|                        |       |                                                           |       |    |       |
| Janet G.  Kelley (6)        |       | Senior Vice President-  General Counsel and Secretary          |       | 52      |       |
|                        |       |                                                           |       |    |       |
| C. Martin  Sowers (7)       |       | Senior Vice President-  Finance                                |       | 47      |       |
|                        |       |                                                           |       |    |       |
| Barry  Sullivan (8)         |       | Senior Vice President-  Store Operations                       |       | 41      |       |

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| (1) |   | Mr. Howard R. Levine was employed by the Company in various  capacities in the Merchandising Department from 1981 to 1987, including  employment as Senior Vice President-Merchandising and Advertising. From 1988  to 1992, Mr. Levine was President of Best Price Clothing Stores, Inc., a  chain of ladies’ apparel stores. From 1992 to April 1996, he was  self-employed as an investment manager. He rejoined the Company in April  1996, and was elected Vice President-General Merchandise Manager: Softlines  in April 1996, Senior Vice President-Merchandising and Advertising in  September 1996, President and Chief Operating Officer in April 1997, Chief  Executive Officer in August 1998, and Chairman of the Board in January 2003.  He is the son of Leon Levine, the founder and Chairman Emeritus of the  Company. |
|-----|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (2) |   | Mr. R. James Kelly was employed by the Company as Vice Chairman-Chief  Financial and Administrative Officer in January 1997.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| (3) |   | Mr. Robert George was employed by the Company as Executive Vice  President-Merchandising in August 2005. Prior to his employment by the  Company, he was employed by Staples Corporation, an office supply retailer,  from 1986 to July 2005, where his last position was Senior Vice  President, General Merchandise Manager — Office Products.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| (4) |   | Mr. Charles S. Gibson, Jr., was employed by the Company as Vice  President-Logistics in September 1997 and was promoted to Senior Vice  President-Distribution and Logistics in October 1999 and to Executive  Vice President-Supply Chain in September 2003.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| (5) |   | Ms. Dorlisa K. Flur was employed by the Company as Senior Vice  President-Strategy and Business Development in June 2004. Prior to her  employment by the Company, she was employed by McKinsey & Company, a  global management consulting firm, from 1988 to May 2004, where her last  position was Principal with responsibility for McKinsey’s Retail Practice in  the Southeast.                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| (6) |   | Ms. Janet G. Kelley was employed by the Company as Senior Vice  President-Senior Counsel in January 2004 and promoted to Senior Vice  President-General Counsel in May 2005. Prior to her employment by the  Company, she was employed by Kmart Corporation, a chain of discount stores,  from April 2001 to January 2003, where her last position was  Executive Vice President and General Counsel. Kmart Corporation filed a  petition for reorganization under Chapter 11 of the Federal bankruptcy laws  in January 2002 and                                                                                                                                                                                                                                                                                         |

 

8

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|   |   | emerged from bankruptcy in May 2003. From June 1999 to  April 2001, she was employed by Limited Brands, Inc., a chain of  specialty apparel and personal beauty stores, as Vice President and Senior  Counsel.                                                                                                                                                       |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (7)    |   | Mr. C. Martin Sowers was employed by the Company as an accountant in  October 1984 and was promoted to Assistant Controller in  January 1985. He was elected Controller in January 1986, Vice  President-Controller in July 1989 and Senior Vice President-Finance in  December 1991.                                                                      |
| (8)    |   | Mr. Barry Sullivan was employed by the Company as Vice  President-Store Operations in September 2002 and was promoted to Senior  Vice President-Store Operations in May 2005. Prior to his employment with the  Company, he was employed by Eckerd Corporation, a regional drug store chain,  from 1986 to 2002, where his last position was Vice President-Store  Operations. |

 

All executive officers of the Company areelected annually by and serve at the pleasure of the Board of Directors untiltheir successors are duly elected.

**PART II**
| **ITEM 5.** | ** ** | **MARKET FOR REGISTRANT’S COMMON EQUITY AND  RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES** |   |   |
|-------------|------------|---------------------------------------------------------------------------------------------------------------------------|--------|--------|

 

The Company’s Common Stock is traded on the New York Stock Exchangeunder the ticker symbol FDO.  At October17, 2005, there were approximately 2,300 holders of record of the CommonStock.  The accompanying tables give thehigh and low sales prices of the Common Stock and the dividends declared pershare for each quarter of fiscal 2005 and 2004.

**Market Prices and Dividends**

 

| **2005**        | ** ** | **High** | ** ** | **Low** | ** ** | **Dividend** | ** ** |
|-----------------|------------|----------|------------|---------|------------|--------------|------------|
| First  Quarter  |       | $        | 32.30      |    | $          | 25.54        |       | $ | .08 1/2 |   |
| Second  Quarter |       | 35.25    |       | 28.25   |       | .09 1/2      |       |
| Third  Quarter  |       | 33.64    |       | 23.68   |       | .09 1/2      |       |
| Fourth  Quarter |       | 27.15    |       | 20.10   |       | .09 1/2      |       |
|            |       |     |       |    |       |         |       |
| **2004**        | ** ** | **High** | ** ** | **Low** | ** ** | **Dividend** | ** ** |
| First  Quarter  |       | $        | 44.13      |    | $          | 38.10        |       | $ | .07 1/2 |   |
| Second  Quarter |       | 39.66    |       | 32.00   |       | .08 1/2      |       |
| Third  Quarter  |       | 38.73    |       | 26.51   |       | .08 1/2      |       |
| Fourth  Quarter |       | 34.00    |       | 25.09   |       | .08 1/2      |       |

 

The following table sets forth information with respect to purchases ofshares of the Company’s Common Stock made during the quarter endedAugust 27, 2005, by or on behalf of the Company or any “affiliatedpurchaser” as defined by Rule 10b-18(a)(3) of the Securities Exchange Act of1934.

| **Period**              | ** ** | **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 or  Programs** | ** ** |
|-------------------------|------------|--------------------------------------|------------|----------------------------------|------------|---------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------------|------------|
| June(5/29/05-7/2/05)    |       | 446,400                              |       | $25.76                           |       | 446,400                                                                               |       | 3,883,200                                                                           |       |
| July  (7/3/05-7/30/05)  |       | —                               |       | —                           |       | —                                                                                |       | 3,883,200                                                                           |       |
| August(7/31/05-8/27/05) |       | —                               |       | —                           |       | —                                                                                |       | 18,705,334                                                                          | (1)        |
| Total                   |       | 446,400                              |       | $25.76                           |       | 446,400                                                                               |       | 18,705,334                                                                          |       |

----

| (1) | Includes $300 million of the Company’s Common Stock converted to  shares using the Company’s closing stock price of $20.24 as of August 26,  2005, which may be acquired pursuant to a repurchase program approved by the  Board of Directors on August 18, 2005. See below for additional information. |
|-----|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

9

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During fiscal 2004 and fiscal 2003, the Company purchased in the openmarket 5.6 million and 2.2 million shares of its Common Stock, respectively, ata cost of $176.7 million and $65.9 million, respectively.  On April 13, 2005, the Company announced thatthe Board of Directors authorized the purchase of up to an additional 5 millionshares of the Company’s Common Stock from time to time as market conditionswarrant.  On August 19, 2005, the Companyannounced that the Board of Directors authorized the purchase of an additional$300 million of the Company’s Common Stock from time to time as marketconditions warrant.  During fiscal 2005,the Company purchased in the open market 3.3 million shares of the Company’sCommon Stock at a cost of $92.0 million. As of the end of fiscal 2005, the Company had approximately 18.7 millionshares authorized to be purchased.  Thereis no expiration date governing the period during which the Company can makeshare repurchases pursuant to the above referenced authorizations.  There are no other repurchase programs underwhich the Company is authorized to repurchase outstanding shares.  Shares purchased prior to the end of fiscal2005 under the share repurchase authorization are held in treasury or have beenreissued under the Family Dollar 2000 Outside Directors Plan.

On September 27, 2005, the Company obtained $250 million in aggregateproceeds through a private placement under Section 4(2) of the Securities Actof 1933, as amended, of unsecured Senior Notes (the “Notes”) to a group ofinstitutional accredited investors.  OnOctober 4, 2005, the Company executed an overnight share repurchase transactionwith a bank for the acquisition of 10 million shares, or approximately 6%, ofthe Company’s outstanding Common Stock for an initial purchase price of $19.97per share pursuant to the $300 million repurchase authorization.  The transaction was financed with theproceeds of the Notes.  Shares that are repurchasedwith the proceeds of the Notes will be canceled and returned to the status ofauthorized but unissued shares.  See Note13 to the Consolidated Financial Statements included in this Report for moreinformation on the Notes and the overnight share repurchase transaction.

**ITEM 6.****                             SELECTEDFINANCIAL DATA**

**SUMMARY OF SELECTED FINANCIAL DATA**

 

| **Years Ended (in thousands, except per share amounts and store data)** | ** ** | **August 27,  2005** | ** ** | **August 28,  2004** | ** ** | **August 30,  2003** | ** ** | **August 31,  2002** | ** ** | **September 1,  2001** | ** ** |
|-------------------------------------------------------------------------|------------|----------------------|------------|----------------------|------------|----------------------|------------|----------------------|------------|------------------------|------------|
| ** **                                                              | ** ** | ** **           | ** ** | ** **           | ** ** | ** **           | ** ** | ** **           | ** ** | ** **             | ** ** |
| Net sales                                                               |       | $                    | 5,824,808  |                 | $          | 5,281,888            |       | $                    | 4,750,171  |                   | $          | 4,162,652 |   | $ | 3,665,362 |   |
| Cost of  sales and operating expenses                                   |       | 5,482,013            |       | 4,875,226            |       | 4,367,027            |       | 3,827,582            |       | 3,372,094              |       |
| Income  before income taxes                                             |       | 342,795              |       | 406,662              |       | 383,144              |       | 335,070              |       | 293,268                |       |
| Income taxes                                                            |       | 125,286              |       | 148,758              |       | 139,835              |       | 122,288              |       | 107,025                |       |
| Net income                                                              |       | 217,509              |       | 257,904              |       | 243,309              |       | 212,782              |       | 186,243                |       |
| Diluted  earnings per common share                                      |       | $                    | 1.30       |                 | $          | 1.50                 |       | $                    | 1.40       |                   | $          | 1.22 |   | $ | 1.08 |   |
|                                                                    |       |                 |       |                 |       |                 |       |                 |       |                   |       |
| Dividends  declared                                                     |       | $                    | 61,538     |                 | $          | 56,077               |       | $                    | 49,890     |                   | $          | 44,106 |   | $ | 40,352 |   |
| Dividends  declared per common share                                    |       | $                    | 0.37       |                 | $          | 0.33                 |       | $                    | 0.29       |                   | $          | .25 1/2 |   | $ | .23 1/2 |   |
|                                                                    |       |                 |       |                 |       |                 |       |                 |       |                   |       |
| Total assets                                                            |       | $                    | 2,409,501  |                 | $          | 2,224,361            |       | $                    | 2,065,392  |                   | $          | 1,818,541 |   | $ | 1,467,866 |   |
| Working  capital                                                        |       | $                    | 460,157    |                 | $          | 489,727              |       | $                    | 541,913    |                   | $          | 507,945 |   | $ | 404,087 |   |
| Shareholders’  equity                                              |       | $                    | 1,428,066  |                 | $          | 1,337,082            |       | $                    | 1,292,432  |                   | $          | 1,140,577 |   | $ | 948,791 |   |
|                                                                    |       |                 |       |                 |       |                 |       |                 |       |                   |       |
| Stores  opened                                                          |       | 500                  |       | 500                  |       | 475                  |       | 525                  |       | 502                    |       |
| Stores  closed                                                          |       | (68                  | )          | (61                  | )          | (64                  | )          | (50                  | )          | (50                    | )          |
| Number of  stores - end of year                                         |       | 5,898                |       | 5,466                |       | 5,027                |       | 4,616                |       | 4,141                  |       |

 

The Company did not have any long-term debtat the end of each of its last five fiscal years.  On September 27, 2005, the Company obtained$250 million in aggregate proceeds through the private placement of the Notesto a group of institutional accredited investors.  See Note 13 to the Consolidated FinancialStatements included in this Report for more information on the Notes.

 

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| **ITEM 7.** |   | **MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND  RESULTS OF OPERATIONS** |   |   |
|-------------|--------|-------------------------------------------------------------------------------------------------|--------|--------|

 

This discussion summarizes the significantfactors affecting the consolidated results of operations and financialcondition of the Company for fiscal 2005, fiscal 2004 and fiscal 2003.  This discussion should be read in conjunctionwith, and is qualified by, the Consolidated Financial Statements and Notes toConsolidated Financial Statements included in this Report.

## **Fiscal 2005 Overview and Fiscal 2006 Outlook**

During fiscal 2005, the Company began the implementation of four keyinitiatives designed to increase sales and profitability: the installation ofrefrigerated coolers in selected stores; the introduction of a “Treasure Hunt”merchandise program; the continuation of an aggressive store opening program;and the Urban Initiative.  During fiscal2006, the Company will continue these initiatives as discussed below.

•              Coolers — Theinstallation of refrigerated coolers for the sale of perishable food began inthe second quarter of fiscal 2005.  Thecustomer traffic generated by coolers increased sales of food and othermerchandise throughout the store.  At theend of fiscal 2005, refrigerated coolers were installed in approximately 1,000stores.  The Company plans to haverefrigerated coolers installed in approximately 2,500 additional stores by theend of fiscal 2006.  In addition, theCompany is testing new point-of-sale software in a limited number of stores tofacilitate the acceptance of food stamps in stores with refrigerated coolers.

•              “Treasure Hunt”merchandise program — During fiscal 2005, the Company began supplementing itsbasic assortment of merchandise with additional opportunistically purchasedgoods designed to create more excitement in stores throughout the year, withparticular emphasis on holiday, spring and back-to-school seasons.  The Company will enhance this initiative infiscal 2006.

•              New Stores — Duringfiscal 2005, the Company opened 500 stores and closed 68 stores.  In order to build processes that will supporta more balanced distribution of store openings throughout the year, the Companyplans to open approximately 400 stores and close approximately 65 stores infiscal 2006.

•              Urban Initiative —The Urban Initiative is designed to improve the operating performance of high salesvolume stores in large metropolitan markets through investments in people,process changes and technology, including organizational changes to support amore mobile and flexible workforce. During fiscal 2005, the Urban Initiative was implemented inapproximately 1,200 stores.  While theUrban Initiative stores have experienced mid-single-digit sales growth andcontinue to be profitable, the Company’s profitability goals have not yet beenachieved.  For fiscal 2006, the Companywill continue its investments in the current “Urban Initiative markets”(approximately 1,300 stores) but does not expect to expand the initiative intonew markets until processes have been refined to generate improved results.

The Company currently expects net income per diluted share of CommonStock to be between $1.30 and $1.39 for fiscal 2006, compared to $1.30 infiscal 2005.  The net income per dilutedshare of Common Stock guidance for fiscal 2006 includes the impact of theexpensing of stock options as required by Statement of Financial AccountingStandards (“SFAS”) No. 123R, “Share-Based Payment,” and other new compensationprograms, and also includes the accretive benefit of the Company’s sharerepurchase program and related debt placement. See the Recent Accounting Pronouncements contained in this MD&A formore information on the impact of SFAS No. 123R and the Liquidity and CapitalResources section for more information on the Company’s share repurchaseprogram and issuance of the Notes.

Subsequent to the Company’s fiscal 2005 yearend, Hurricane Katrina and Hurricane Rita struck the U.S. Gulf Coast, impactingnumerous stores in the afflicted areas. The Company has property insurance that covers most of its propertydamage.  Since the Company’s stores arewidely dispersed, lost sales due to closed stores are generally limited and areoften offset by increased sales in other stores.  Therefore, these storms have not had amaterial impact in the aggregate on the Company’s financial position, liquidityor results of operations.  The long-termimpact of these storms is more difficult to forecast.  The potential increase in energy costs overthe long-term could negatively impact the Company and its customers.  However, the resources received by customersfrom government and private organizations and the funds contributed in therebuilding effort could positively impact sales.  Therefore, the Company has not included anyimpact from these storms in its fiscal 2006 outlook.

# **Net Sales**

Net sales increased approximately 10.3% ($542.9 million) in fiscal 2005compared with fiscal 2004, and approximately 11.2% ($531.7 million) in fiscal2004 compared with fiscal 2003.  Theincreases in fiscal 2005 and in fiscal 2004 were attributable, in part, toincreased sales in comparable stores (stores open more than 13 months) of 2.3%($117.1 million) and 1.9% ($86.3 million), respectively, with the balance ofthe increases primarily relating to sales from new stores 

 

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opened as partof the Company’s store growth program. The Urban Initiative, the installation of refrigerated coolers and the “TreasureHunt” merchandise program all had positive impacts on sales in fiscal2005.  Sales of lower-margin basicconsumables continued to be stronger than sales of higher-margin discretionarygoods during fiscal 2005, reflecting the difficult economic environment,including higher energy prices, faced by the Company’s low and lower-middleincome customer base.

The 2.3% increase in comparable store sales during fiscal 2005 includesan increase of approximately 3.7% in the sales of hardline merchandise and adecrease of approximately 2.6% in the sales of softline merchandise.  In fiscal 2005, the customer count, asmeasured by the number of register transactions in comparable stores, decreasedapproximately 0.7%, and the average transaction increased approximately 2.9% to$9.22.  Increased sales of hardlinemerchandise have been the primary contributor to the overall sales increases.  Hardline merchandise, as a percentage of netsales, increased to approximately 78.8% in fiscal 2005 compared toapproximately 77.7% in fiscal 2004. Softline merchandise, as a percentage of net sales, decreased toapproximately 21.2% in fiscal 2005 compared to approximately 22.3% in fiscal2004.  The Company distributed fouradvertising circulars in fiscal 2005 and one advertising circular in fiscal2004.  The circulars are designed tostimulate traffic and inform customers about the Company’s “Treasure Hunt”merchandise, seasonal values and competitive prices on core consumables.  During fiscal 2006, the Company expects todistribute four advertising circulars.

The 1.9% increase in comparable store salesduring fiscal 2004 as compared with fiscal 2003 includes an increase ofapproximately 3.2% in the sales of hardline merchandise and a decrease ofapproximately 2.5% in the sales of softline merchandise.  Sales of consumable merchandise were strongerthan sales of more discretionary merchandise. In fiscal 2004, the customer count increased approximately 0.7%, and theaverage transaction increased approximately 0.9% to $8.95.  The Company distributed one advertisingcircular in both fiscal 2004 and fiscal 2003.

Hardline merchandise includes household chemical and paper products,candy, snacks and other food, health and beauty aids, electronics, housewaresand giftware, pet food and supplies, toys, stationery and school supplies,seasonal goods, hardware and automotive supplies.  Softline merchandise includes men’s, women’s,boys’, girls’ and infants’ clothing, shoes, and domestic items such asblankets, sheets and towels.

During fiscal 2006, the Company expects comparable store sales toincrease 2% to 4% as a result of the ongoing rollout of refrigerated coolers,the impact from “Treasure Hunt” merchandise sales and the operationalimprovements resulting from the Urban Initiative program.

During fiscal 2005, the Company opened 500 stores and closed 68 storesfor a net addition of 432 stores, compared with the opening of 500 stores andclosing of 61 stores for a net addition of 439 stores during fiscal 2004.  The Company also expanded or relocated 49stores in fiscal 2005, compared with 79 stores that were expanded or relocatedin fiscal 2004.  In addition,approximately 105 stores in fiscal 2005 and 116 stores in fiscal 2004 wererenovated.  In order to build processesthat will support a more balanced distribution of store openings throughout theyear, the Company plans to open approximately 400 stores and closeapproximately 65 stores in fiscal 2006. The Company also plans to relocate, expand, or renovate approximately 75stores during fiscal 2006.  Storeopening, closing, expansion, relocation and renovation plans are continuouslyreviewed and are subject to change.

**Cost of Sales and Margin**

Cost of sales increased approximately 11.8%($412.3 million) in fiscal 2005 compared with fiscal 2004 and approximately11.1% ($350.5 million) in fiscal 2004 compared with fiscal 2003.  These increases primarily reflected theadditional sales volume in each of the years. Cost of sales, as a percentage of net sales, was 67.1% in fiscal 2005and 66.2% in both fiscal 2004 and fiscal 2003. The increase in cost of sales, as a percentage of net sales, duringfiscal 2005 was due primarily to the continuing shift in the merchandise mix ofsales to more lower-margin consumables and fewer higher-margin discretionarygoods, increased inventory shrinkage and increased freight costs due to higherfuel expense.  To address inventoryshrinkage, the Company is implementing new loss prevention reports that providemore visibility to transaction level issues and is adding personnel to its LossPrevention Department.  In addition, aspart of its Urban Initiative, the Company modified its field management structureto increase management presence and the frequency of inspections in urbanmarkets.  The opening of the Company’seighth distribution center in Marianna, Florida, in the second quarter offiscal 2005 positively impacted freight costs by lowering the average distanceto the stores from the distribution centers. Increases in productivity and efficiency, such as increased back haulsand optimization and consolidation of inbound routing have also offset some ofthe cost increases.  However, thesesavings did not fully offset the impact of higher year-over-year fuelcosts.  The Company expects that theopening of the ninth distribution center in Rome, New York, during the thirdquarter of fiscal 2006 will positively impact freight costs and continue tooffset higher fuel costs.

Cost of sales, as a percentage of net sales,in fiscal 2004 was unchanged from fiscal 2003. The percentage was 

 

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favorably impacted by a change in the treatment of certain vendorallowances in conformity with an accounting pronouncement, as well as fromlower merchandise markdowns.  However,the favorable impact of the change in the treatment of certain vendorallowances was offset by a shift in the merchandise mix to more lower-marginbasic consumables and relatively less sales of higher-margin discretionarymerchandise.  Cost of sales, as apercentage of net sales, in fiscal 2004 was also negatively impacted byincreased inventory shrinkage and increased freight costs due to higher fuelexpense.

During fiscal 2006, the Company expects thatcost of sales, as a percentage of net sales, will be flat or increase slightlyas compared to fiscal 2005 due to the continuing effect of the shift in themerchandise mix to more lower-margin basic consumables and rising fuel costs.  Lower markdowns and lower inventory shrinkageare expected to offset these increases.

**Selling, General and Administrative Expenses**

Selling, general and administrative (“SG&A”)expenses increased approximately 14.1% ($194.5 million) in fiscal 2005 comparedwith fiscal 2004, and approximately 12.9% ($157.7 million) in fiscal 2004compared with fiscal 2003.  The increasesin these expenses were attributable primarily to additional costs arising fromthe continued growth in the number of stores in operation and the continuedramp-up of the eighth distribution center. SG&A expenses, as a percentage of net sales, were 27.0% in fiscal2005, 26.1% in fiscal 2004 and 25.7% in fiscal 2003.  The increase in SG&A expenses, as apercentage of net sales, in fiscal 2005 was due primarily to planned payrollexpenses incurred in connection with the urban and cooler initiatives(approximately 0.4% of net sales); increased occupancy and store-related costs(approximately 0.4% of net sales); and increased legal-related costs (approximately0.1% of net sales).  Each of thesepercentages was negatively impacted by the lower than planned increase in salesin comparable stores.  A cumulativecharge to correct property tax accruals on leased properties and theincremental costs of three additional advertising circulars also impacted thispercentage (approximately 0.2% of net sales), but these amounts were offset bya reduction in bonus costs as the Company did not reach the earnings targetnecessary for payment of management bonuses. In addition, most other costs, as a percentage of net sales, werenegatively impacted by the lower than planned increase in sales in comparablestores.

The increase in SG&A expenses, as apercentage of net sales, in fiscal 2004 was due primarily to below plan saleswhich negatively impacted the Company’s ability to leverage its coststructure.  In addition, the effect ofthe change in treatment of certain vendor allowances negatively impactedexpense leverage.  Continued increases ininsurance costs, primarily workers’ compensation, and increased rent expensealso adversely impacted expense leverage. The increase in SG&A expense, as a percentage of net sales, forfiscal 2004 was offset slightly by a reduction in bonus costs as the Companydid not reach the earnings target necessary for payment of full bonuses.

During fiscal 2006, the Company expects SG&A expense, as apercentage of net sales, to increase as compared to fiscal 2005 due to theexpanded rollout of the cooler program and the continued investments in theexisting Urban Initiative markets.  Inaddition, the required expensing of stock options and other compensation planchanges will increase SG&A expenses, as a percentage of net sales.

**Income Taxes**

The effective tax rate was 36.5% in fiscal2005, 36.6% in fiscal 2004 and 36.5% in fiscal 2003.  For fiscal 2006, the Company’s plan is forthe effective tax rate to increase to 37.0% due to the effect of changes instate income taxes.

**Liquidity and Capital Resources**

The Company has consistently maintained astrong liquidity position.  Cash providedby operating activities during fiscal 2005 was $299.4 million as compared to$376.5 million in fiscal 2004 and $302.3 million in fiscal 2003.  These amounts have enabled the Company tofund its regular operating needs, capital expenditure program, cash dividendpayments and any repurchase of the Company’s Common Stock.  In addition, the Company has unsecuredrevolving credit facilities with banks for short-term borrowings of up to $200million.  On May 25, 2006, $100 millionof the facilities will expire, and the remaining $100 million will expire onMay 31, 2010.  The Company expects thatthe facilities expiring May 25, 2006, will be extended.  The Company had no borrowings against thesefacilities during fiscal 2005.

Merchandise inventories at the end of fiscal2005 were 11.3% higher than at the end of fiscal 2004.  This increase was due primarily to additionalinventory for 432 net new stores. Inventory on a per store basis at the end of fiscal 2005 was 1.8% higherthan at the end of fiscal 2004, excluding merchandise in transit to thedistribution centers.  All of thisincrease was in hardline merchandise, which increased approximately 4.3% perstore, reflecting the early receipt of holiday merchandise and new inventoryassociated with the cooler program. Average softline merchandise inventory per store, 

 

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excluding merchandise in transit to the distribution centers, decreasedapproximately 5.2% as the Company aggressively managed these items to preventan inventory buildup.

The increase in capital expenditures to$229.1 million in fiscal 2005 from $218.7 million in fiscal 2004 was dueprimarily to greater distribution center construction expenditures.  In addition, the Company installedrefrigerated coolers in approximately 1,000 stores.  Capital expenditures for fiscal 2006 areexpected to be between $210 and $225 million and relate primarily to new storeopenings; existing store expansions, relocations and renovations; constructionof distribution centers; expenditures related to store-focused technologyinfrastructure; and the continued implementation of a refrigerated coolerprogram for perishable goods in selected stores.  The new store expansion and new distributioncenters will require additional investment in merchandise inventories.

Capital spending plans, including storeopening plans, are continuously reviewed and are subject to change.  Cash flow from current operations is expectedto be sufficient to meet planned liquidity and operational capital resourceneeds, including store expansion and other capital spending programs.  In addition, the Company has availablerevolving credit facilities as previously discussed.

During fiscal 2004 and fiscal 2003, theCompany purchased in the open market 5.6 million and 2.2 million shares of itsCommon Stock, respectively, at a cost of $176.7 million and $65.9 million,respectively.  On April 13, 2005, theCompany announced that the Board of Directors authorized the purchase of up toan additional 5 million shares of the Company’s Common Stock from time to timeas market conditions warrant.  On August19, 2005, the Company announced that the Board of Directors authorized thepurchase of an additional $300 million of the Company’s Common Stock from timeto time as market conditions warrant. During fiscal 2005, the Company purchased in the open market 3.3 millionshares of the Company’s Common Stock at a cost of $92.0 million.  As of the end of fiscal 2005, the Company hadapproximately 18.7 million shares authorized to be purchased.

On September 27, 2005, the Company obtained$250 million in aggregate proceeds through a private placement under section4(2) of the Securities Act of 1933, as amended, of the Notes.  On October 4, 2005, the Company executed anovernight share repurchase transaction with a bank for the acquisition of 10million shares, or approximately 6%, of the Company’s outstanding Common Stock foran initial purchase price of $19.97 per share pursuant to the $300 millionrepurchase authorization.  The proceedsfrom the Notes were used to finance this transaction.  See Note 13 to the Consolidated FinancialStatements included in this Report for more information.

The following table shows the Company’s obligations and commitments tomake future payments under contractual obligations at the end of fiscal 2005(in thousands):

 
| ** **                    | ** ** | **Payments Due During One Year Fiscal Period Ending** | ** ** |
|-------------------------------|------------|-------------------------------------------------------|------------|
| **Contractual Obligations**   | ** ** | **Total**                                             | ** ** | **August 2006** | ** ** | **August 2007** | ** ** | **August 2008** | ** ** | **August 2009** | ** ** | **August 2010** | ** ** | **Thereafter** | ** ** |
| Merchandise letters of credit |       | $                                                     | 125,613    |   | $ | 125,613 |   | $ | — |   | $ | — |   | $ | — |   | $ | — |   | $ | — |   |
| Operating leases              |       | 1,135,810                                             |       | 252,588 |   | 225,649 |   | 188,636 |   | 150,096 |   | 107,522 |   | 211,319 |   |
| Construction obligations      |       | 58,992                                                |       | 58,992 |   | — |   | — |   | — |   | — |   | — |   |
| Total                         |       | $                                                     | 1,320,415  |   | $ | 437,193 |   | $ | 225,649 |   | $ | 188,636 |   | $ | 150,096 |   | $ | 107,522 |   | $ | 211,319 |   |

 

Most of the Company’s operating leasesprovide the Company with an option to extend the term of the lease atdesignated rates.  See Properties herein.

The following table shows the Company’s other commercial commitments atthe end of fiscal 2005 (in thousands):

 

| **Other Commercial Commitments** | ** ** | **Total Amounts Committed** | ** ** |
|----------------------------------|------------|-----------------------------|------------|
| Standby  letters of credit       |       | $                           | 114,979    |   |
| Surety bonds                     |       | 6,458                       |       |
| Total                            |       | $                           | 121,437    |   |

 

At the end of fiscal 2005, approximately$78.1 million of the merchandise letters of credit were included in accountspayable and accrued liabilities on the Company’s balance sheet.  A substantial portion of the outstandingamount of standby letters of credit and surety bonds (which are primarilyrenewed 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 

 

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for these future payment liabilities as described in the CriticalAccounting Policies section of this MD&A.

**Recent Accounting Pronouncements**

In December 2004, the Financial AccountingStandards Board (“FASB”) issued SFAS No. 123R which requires all companies tomeasure compensation cost for all share-based payments (including employeestock options) at fair value, effective for public companies for interim orannual periods beginning after June 15, 2005. The FASB concluded that companies can adopt the new standard in one oftwo ways: the modified prospective transition method, in which the companywould recognize share-based employee compensation from the beginning of thefiscal period in which the recognition provisions are first applied as if thefair-value-based accounting method had been used to account for all employeeawards granted, modified, or settled after the effective date and to any awardsthat were not fully vested as of the effective date; or the modified retrospectivetransition method, in which a company would recognize employee compensationcost for periods presented prior to the adoption of SFAS No. 123R in accordancewith the original provisions of SFAS No. 123 “Accounting for Stock-BasedCompensation,” pursuant to which a company would recognize employeecompensation cost in the amounts reported in the pro forma disclosures providedin accordance with SFAS No. 123.  TheCompany will adopt SFAS No. 123R during the first quarter of fiscal 2006 andwill use the modified prospective transition method.  

On August 18, 2005, the CompensationCommittee of the Board of Directors of the Company approved the acceleration ofthe vesting date of certain previously issued and outstanding options under the1989 Non-Qualified Stock Option Plan, effective as of August 26, 2005.  The accelerated vesting program applies to:(i) all unvested options that currently have an exercise price in excess of$40.00/share, including options held by the five most highly compensatedexecutive officers of the Company, and (ii) all unvested options that are “underwater”(i.e. the options have an exercise price in excess of the market value of thestock, determined as of August 26, 2005) and are held by employees at the levelof manager or below.

The Company implemented the accelerationprogram to enhance retention incentives for current employees and to reduce thecompensation expense the Company would otherwise be required to recognize as aresult of the Company’s adoption, effective for fiscal 2006, of SFAS 123R.  See Note 1 to the Consolidated FinancialStatements included in this Report for information on the impact of the vestingacceleration on the fiscal 2005 pro forma stock-based compensation cost.

During fiscal 2006, the Company expects to incurincremental SG&A expense of approximately $6 million to $10 millionrelated to the 1989 Non-Qualified Stock Option Plan as a result of the adoptionof SFAS No. 123R.  In addition, theCompany expects to incur incremental SG&A expense of approximately $4 millionto $6 million during fiscal 2006 in connection with the expected implementationof new compensation programs, which are designed to improve the linkage betweenpay and performance.

**Critical Accounting Policies**

Management believes the following accounting principles are criticalbecause they involve significant judgments, assumptions and estimates used inthe preparation of the Company’s consolidated financial statements.

*Merchandise Inventories:*

Inventories are valued using the retailmethod, based on retail prices less markon percentages, which approximates thelower 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.

*Property and Equipment:*

Property and equipment is stated atcost.  Depreciation for financialreporting purposes is calculated using the straight-line method over theestimated useful lives of the related assets. For leasehold improvements, this depreciation is over the shorter of theterm of the related lease (generally five years) or the asset’s useful economiclife.  The valuation and classificationof these assets and the assignment of useful depreciable lives involvessignificant judgments and the use of estimates. The Company generally assigns no salvage value to property andequipment.  Property and equipment isreviewed 

 

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for impairment whenever events or changes in circumstances indicatethat the carrying amount of an asset may not be recoverable.  Historically, impairment losses on fixedassets have not been material to the Company’s financial position and resultsof operations.

*Insurance Liabilities:*

The Company is primarily self-insured forhealth care, property loss, workers’ compensation and general liabilitycosts.  These costs are significantprimarily due to the large number of the Company’s retail locations andemployees.  Because the nature of theseclaims is such that there can be a significant lag from the incurrence of theclaim (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 total estimated costs ofclaims filed and estimates of claims incurred but not reported, less amountspaid 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 not indicative of future trends,then the Company may be required to record additional expense or a reduction toexpense which could be material to the reported financial condition and resultsof operations.

*Lease Accounting:*

                The Companyleases substantially all of its store properties and accounts for store leasesin accordance with SFAS 13, “Accounting for Leases.”  For purposes of recognizing incentives,premiums and minimum rental expenses on a straight-line basis over terms of theleases, the Company uses the date of initial possession to begin amortization,which is generally when the Company enters the space and begins to makeimprovements in preparation of intended use. For tenant improvement allowances and rent holidays, the Company recordsa deferred rent liability at the inception of the lease term and amortizes thedeferred rent over the terms of the leases as reductions to rent expense on theConsolidated Statements of Income.

**Cautionary Statement RegardingForward-Looking Statements**

Certain statements contained in this Report,or in other public filings, press releases, or other written or oralcommunications made by the Company or our representatives, which are nothistorical facts are forward-looking statements made pursuant to the safeharbor provisions of the Private Securities Litigation Reform Act of 1995.  These forward-looking statements address theCompany’s plans, activities or events which the Company expects will or mayoccur in the future and may include express or implied projections of revenueor expenditures, statements of plans and objectives for future operations,growth or initiatives, statements of future economic performance, or statementsregarding the outcome or impact of pending or threatened litigation.  These forward-looking statements may beidentified by the use of the words “plan,” “estimate,” “expect,” “anticipate,” “probably,”“should,” “project,” “intend,” “continue,” and other similar terms andexpressions.  Various risks,uncertainties and other factors may cause the Company’s actual results todiffer materially from those expressed or implied in any forward-lookingstatements.  Factors, uncertainties andrisks that may result in actual results differing from such forward-lookinginformation include, but are not limited to those listed below, as well as otherfactors discussed throughout this Report, including without limitation thefactors described under “Critical Accounting Policies.”

*Success of merchandising and marketingprograms*

The Company undertakes new programs andrefines existing programs to increase net sales and its customer base.  The Company may be adversely impacted ifmerchandise and marketing programs fail to attract customers into its stores orif the merchandising programs implemented by the Company are not attractive toits customers.

*Unusual weather or natural disasters that mayimpact sales and or operations*

Extreme changes in weather patterns or othernatural disasters influence customer trends and purchases.  Likewise, weather patterns and naturaldisasters may negatively impact sales and/or operation of the Company.

*Competitive factors*

The Company is in a highly competitive sectorof the discount retail merchandise sector with numerous competitors, some ofwhom may have greater resources than the Company.  The Company competes for customers, merchandise,real 

 

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estate locations and employees. This competitive environment subjects the Company to various risks,including the ability to continue its store growth and provide attractivemerchandise to its customers at competitive prices that allow the Company tomaintain its profitability.

*Pricing pressures, including inflation andenergy prices*

Increases in the cost of goods and services,including changes resulting from inflationary pressures, may reduce the Company’sprofitability and/or sales.  The Company’sability to pass on incremental pricing changes may be limited due tooperational and/or competitive factors. Increases in prices, including changes in energy prices, may impact theCompany’s customer base by limiting the amount of discretionary spending of itscustomers and may impact the Company through increased costs of goods and/orincreased operating expenses.

*Changes in consumer demand and product mix;and changes in overall economic conditions*

A general slowdown in the U.S. economy mayadversely affect the spending of the Company’s customers, which may result inlower net sales than expected on a quarterly or annual basis.  In addition, changes in the types of productsmade available for sale and the selection of the products by customers affectsales, product mix and margins.  Futureeconomic conditions affecting disposable consumer income, such as employmentlevels, business conditions, fuel and energy costs, interest rates, and taxrates, could also adversely affect the Company’s business by reducing spendingor causing customers to shift their spending to other products.

*The impact of acts of war or terrorism andtransportation and distribution delays or interruptions*

Significant acts of terrorism, existing U.S.military efforts, as well as the involvement of the U.S. in other militaryengagements, could have an adverse impact on the Company by, among otherthings, disrupting its distribution or information systems, causing dramaticincreases in fuel prices which increase the cost of doing business, or impedingthe flow of imports or domestic products to the Company.  Delays or interruptions in the transportationand distribution of products could have an adverse impact on the Company.

*Merchandise supply and pricing and theinterruption of and dependence on imports*

The Company has generally been able to obtainsufficient quantities of attractive merchandise at prices that allow theCompany to profitably sell such merchandise. Any disruption in that supply and/or the pricing of such merchandisecould negatively impact the Company’s operations and results.  A significant amount of the goods sold by theCompany are imported, and changes to the flow of these goods for any reasoncould have an adverse impact on the Company.

*Delays associated with building and openingof distribution facilities and stores and costs of operating distributionfacilities and stores*

The Company maintains a network ofdistribution facilities in its geographic territory, and constructs new facilitiesto support its growth.  In addition, theCompany expands its network of stores through opening new stores and remodelingexisting stores each year.  Delays inopening distribution facilities or stores could adversely affect the Company’sfuture operations by slowing growth, which may in turn reduce revenuegrowth.  Adverse changes in the cost tooperate distribution facilities and stores, such as changes in labor, utility,and other operating costs, could have an adverse impact on the Company.  Adverse changes in inventory shrinkage at thestore-level or in distribution facilities could have a negative impact on theCompany.

*Operational difficulties*

The Company’s stores are decentralized andare managed through a network of geographically dispersed managementpersonnel.  Inability of the Company toeffectively and efficiently operate its stores, including the ability tocontrol losses resulting from inventory shrinkage, may negatively impact theCompany’s sales and/or margin.  Inaddition, the Company relies upon its distribution and logistics network toprovide goods to stores in a timely and cost-effective manner; any disruption,unanticipated expense or operational failure related to this process couldnegatively impact store operations. Finally, the Company’s operations are facilitated by the use of varioustechnologies, the disruption or failure of which could negatively impact theCompany’s operations.

 

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*Higher costs, potential problems andachievement of targeted results associated with the implementation of newprograms, systems and technology*

The Company is undertaking a variety ofoperating initiatives as well as infrastructure initiatives.  The failure to properly execute any of theseinitiatives could have an adverse impact on the future operating results of theCompany.

*Changes in state or federal legislation orregulations, including the effects of legislation and regulations on wagelevels and entitlement programs; changes in currency exchange rates, traderestrictions, tariffs, quotas and freight rates*

Unanticipated changes in federal or statewage requirements or other changes in workplace regulation could adverselyimpact the Company’s ability to achieve its financial targets.  Because a substantial amount of the Company’simported merchandise comes from China, a change in the Chinese currency policycould negatively impact the Company’s merchandise costs.  Changes in trade restrictions, new tariffsand quotas, and higher shipping costs for goods could also adversely impact theability of the Company to achieve anticipated operating results.

*Success of new store opening program*

The Company’s growth is dependent on bothincreases in sales in existing stores and the ability to open new stores.  Unavailability of store locations that theCompany deems attractive, delays in the acquisition or opening of new stores,difficulties in staffing and operating new store locations and lack of customeracceptance of stores in expanded market areas all may negatively impact theCompany’s new store growth, the costs associated with new stores and/or theprofitability of new stores.

*Changes in the Company’s ability to attractand retain employees, and changes in health care and other insurance costs*

The growth of the Company could be adverselyimpacted by its inability to attract and retain employees at the storeoperations level, in distribution facilities, and at the corporate level,including the Company’s senior management team. Adverse changes in health care costs could also adversely impact theCompany’s ability to achieve its operational and financial goals and to offerattractive benefit programs to its employees.

*Adverse impacts associated with legalproceedings and claims*

The Company is a party in a variety of legalproceedings and claims, including those described elsewhere in thisReport.  Operating results for theCompany could be adversely impacted if legal proceedings and claims against theCompany are made, requiring the payment of cash towards those proceedings orchanges to the operation of the business.

All of the forward-looking statements made bythe Company in this Report and other documents or statements are qualified bythese and other factors, risks and uncertainties.  Readers are cautioned not to place unduereliance on these forward-looking statements, which speak only as of the dateof this Report.  The Company does notundertake to publicly update or revise its forward-looking statements even ifexperience or future changes make it clear that projected results expressed orimplied in such statements will not be realized.

 

**ITEM 7A.****                    QUANTITATIVEAND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**

The Company is subject to market risk from exposure to changes ininterest rates based on its financing, investing and cash managementactivities.  The Company maintainsunsecured revolving credit facilities at variable interest rates to meet theshort-term needs of its expansion program and seasonal inventory increases.

 

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**ITEM 8.  FINANCIAL STATEMENTSAND SUPPLEMENTARY DATA**

**INDEX TO CONSOLIDATED FINANCIAL STATEMENTS**

**FAMILY DOLLAR STORES, INC.**

 
| Report of Independent Registered Public  Accounting Firm                                          |
|---------------------------------------------------------------------------------------------------|
| Consolidated Statements of Income for  fiscal 2005, fiscal 2004 and fiscal 2003                   |
| Consolidated Balance Sheets as of August  27, 2005, and August 28, 2004                           |
| Consolidated Statement of Shareholders’  Equity for fiscal 2005, fiscal 2004 and fiscal 2003 |
| Consolidated Statement of Cash Flows for  fiscal 2005, fiscal 2004 and fiscal 2003                |
| Notes to Consolidated Financial Statements                                                        |

 

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**Report of Independent Registered Public Accounting Firm**

To the Board of Directors and Shareholders of Family Dollar Stores,Inc:

We have completed an integrated audit of Family Dollar Stores, Inc.’sAugust 27, 2005 consolidated financial statements and of its internal controlover financial reporting as of August 27, 2005 and audits of its August 28,2004 and August 30, 2003 consolidated financial statements in accordance withthe standards of the Public Company Accounting Oversight Board (UnitedStates).  Our opinions, based on ouraudits, are presented below.

*Consolidated financial statements*

In our opinion, the consolidated financial statements listed in theindex appearing under Item 15(a)(1) present fairly, in all material respects,the financial position of Family Dollar Stores, Inc., and its subsidiaries atAugust 27, 2005 and August 28, 2004, and the results of their operations andtheir cash flows for each of the three years in the period ended August 27,2005 in conformity with accounting principles generally accepted in the UnitedStates of America.  These financialstatements are the responsibility of the Company’s management.  Our responsibility is to express an opinionon these financial statements based on our audits.  We conducted our audits of these statementsin accordance with the standards of the Public Company Accounting OversightBoard (United States).  Those standardsrequire that we plan and perform the audit to obtain reasonable assurance aboutwhether the financial statements are free of material misstatement.  An audit of financial statements includesexamining, on a test basis, evidence supporting the amounts and disclosures inthe financial statements, assessing the accounting principles used andsignificant estimates made by management, and evaluating the overall financialstatement presentation.  We believe thatour audits provide a reasonable basis for our opinion.

*Internal control over financial reporting*

Also, in our opinion, management’s assessment, included in Management’sReport on Internal Control Over Financial Reporting appearing under Item 9A,that the Company maintained effective internal control over financial reportingas of August 27, 2005 based on criteria established in *InternalControl - Integrated Framework* issued by the Committee of SponsoringOrganizations of the Treadway Commission (COSO), is fairly stated, in allmaterial respects, based on those criteria. Furthermore, in our opinion, the Company maintained, in all materialrespects, effective internal control over financial reporting as of August 27,2005, based on criteria established in *Internal Control -Integrated Framework* issued by the COSO.  The Company’s management is responsible formaintaining effective internal control over financial reporting and for itsassessment of the effectiveness of internal control over financialreporting.  Our responsibility is toexpress opinions on management’s assessment and on the effectiveness of theCompany’s internal control over financial reporting based on our audit.  We conducted our audit of internal controlover financial reporting in accordance with the standards of the Public CompanyAccounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtainreasonable assurance about whether effective internal control over financialreporting was maintained in all material respects.  An audit of internal control over financialreporting includes obtaining an understanding of internal control overfinancial reporting, evaluating management’s assessment, testing and evaluatingthe design and operating effectiveness of internal control, and performing suchother procedures as we consider necessary in the circumstances.  We believe that our audit provides areasonable basis for our opinions.

A company’s internal control over financial reporting is a processdesigned to provide reasonable assurance regarding the reliability of financialreporting and the preparation of financial statements for external purposes inaccordance with generally accepted accounting principles.  A company’s internal control over financialreporting includes those policies and procedures that (i) pertain to themaintenance of records that, in reasonable detail, accurately and fairlyreflect the transactions and dispositions of the assets of the company; (ii)provide reasonable assurance that transactions are recorded as necessary topermit preparation of financial statements in accordance with generallyaccepted accounting principles, and that receipts and expenditures of thecompany are being made only in accordance with authorizations of management anddirectors of the company; and (iii) provide reasonable assurance regarding preventionor timely detection of unauthorized acquisition, use, or disposition of thecompany’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financialreporting may not prevent or detect misstatements.  Also, projections of any evaluation ofeffectiveness to future periods are subject to the risk that controls maybecome inadequate because of changes in conditions, or that the degree of compliancewith the policies or procedures may deteriorate.

PricewaterhouseCoopers LLP

Charlotte, North Carolina

November 2, 2005

 

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**FAMILY DOLLAR STORES, INC., AND SUBSIDIARIESCONSOLIDATEDSTATEMENTS OF INCOME**

 
| ** **                                       | ** ** | **Years Ended**     | ** ** |
|--------------------------------------------------|------------|---------------------|------------|
| **(in thousands, except per share  amounts)**    | ** ** | **August 27, 2005** | ** ** | **August 28, 2004** | ** ** | **August 30, 2003** | ** ** |
|                                             |       |                |       |   |   |   |   |
| Net sales                                        |       | $                   | 5,824,808  |   | $ | 5,281,888 |   | $ | 4,750,171 |   |
|                                             |       |                |       |   |   |   |   |
| Costs and  expenses:                             |       |                |       |   |   |   |   |
| Cost of sales                                    |       | 3,908,569           |       | 3,496,278 |   | 3,145,788 |   |
| Selling, general and administrative              |       | 1,573,444           |       | 1,378,948 |   | 1,221,239 |   |
| Cost of  sales and operating expenses            |       | 5,482,013           |       | 4,875,226 |   | 4,367,027 |   |
|                                             |       |                |       |   |   |   |   |
| Income  before income taxes                      |       | 342,795             |       | 406,662 |   | 383,144 |   |
|                                             |       |                |       |   |   |   |   |
| Income taxes  (Note 6)                           |       | 125,286             |       | 148,758 |   | 139,835 |   |
|                                             |       |                |       |   |   |   |   |
| Net income                                       |       | $                   | 217,509    |   | $ | 257,904 |   | $ | 243,309 |   |
|                                             |       |                |       |   |   |   |   |
| Net income  per common share - basic (Note 10)   |       | $                   | 1.30       |   | $ | 1.51 |   | $ | 1.41 |   |
| Average shares - basic (Note 10)                 |       | 166,791             |       | 170,770 |   | 172,346 |   |
|                                             |       |                |       |   |   |   |   |
| Net income  per common share - diluted (Note 10) |       | $                   | 1.30       |   | $ | 1.50 |   | $ | 1.40 |   |
| Average shares - diluted (Note 10)               |       | 167,092             |       | 171,624 |   | 173,354 |   |

 

The accompanying notes are anintegral part of the consolidated financial statements.

 

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**FAMILYDOLLAR STORES, INC., AND SUBSIDIARIESCONSOLIDATED BALANCESHEETS**

 
| **(in thousands, except per share and share amounts)**                                                                                                                                                                                              | ** ** | **August 27, 2005** | ** ** | **August 28, 2004** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------|------------|-------------------------------|------------|
| **ASSETS**                                                                                                                                                                                                                                          |       |                          |       |                          |       |
| Current  assets:                                                                                                                                                                                                                                    |       |                          |       |                          |       |
| Cash and cash equivalents                                                                                                                                                                                                                           |       | $                             | 105,175    |                          | $          | 87,023 |   |
| Investment securities (Note 2)                                                                                                                                                                                                                      |       | 33,530                        |       | 120,840                       |       |
| Merchandise inventories                                                                                                                                                                                                                             |       | 1,090,791                     |       | 980,124                       |       |
| Deferred income taxes (Note 6)                                                                                                                                                                                                                      |       | 100,493                       |       | 84,084                        |       |
| Income tax refund receivable                                                                                                                                                                                                                        |       | —                        |       | 1,304                         |       |
| Prepayments and other current assets                                                                                                                                                                                                                |       | 24,779                        |       | 16,937                        |       |
| Total current assets                                                                                                                                                                                                                                |       | 1,354,768                     |       | 1,290,312                     |       |
| Property and  equipment, net (Note 3)                                                                                                                                                                                                               |       | 1,027,475                     |       | 918,449                       |       |
| Other assets                                                                                                                                                                                                                                        |       | 27,258                        |       | 15,600                        |       |
|                                                                                                                                                                                                                                                |       | $                             | 2,409,501  |                          | $          | 2,224,361 |   |
|                                                                                                                                                                                                                                                |       |                          |       |                          |       |
| **LIABILITIES  AND SHAREHOLDERS’ EQUITY**                                                                                                                                                                                                      |       |                          |       |                          |       |
| Current  liabilities:                                                                                                                                                                                                                               |       |                          |       |                          |       |
| Accounts payable                                                                                                                                                                                                                                    |       | $                             | 574,831    |                          | $          | 534,405 |   |
| Accrued liabilities (Note 5)                                                                                                                                                                                                                        |       | 315,508                       |       | 266,180                       |       |
| Income taxes payable                                                                                                                                                                                                                                |       | 4,272                         |       | —                        |       |
| Total current liabilities                                                                                                                                                                                                                           |       | 894,611                       |       | 800,585                       |       |
|                                                                                                                                                                                                                                                |       |                          |       |                          |       |
| Deferred  income taxes (Note 6)                                                                                                                                                                                                                     |       | $                             | 86,824     |                          | $          | 86,694 |   |
| Commitments  and contingencies (Note 8)                                                                                                                                                                                                             |       |                          |       |                          |       |
|                                                                                                                                                                                                                                                |       |                          |       |                          |       |
| Shareholders’  Equity: (Notes 9 and 10)                                                                                                                                                                                                        |       |                          |       |                          |       |
| Preferred stock, $1 par; authorized and  unissued 500,000 shares                                                                                                                                                                                    |       |                          |       |                          |       |
| Common stock, $.10 par; authorized  600,000,000 shares; issued 188,871,738 shares at August 27, 2005, and  187,671,318 shares at August 28, 2004, and outstanding 165,262,513 shares at  August 27, 2005, and 167,396,998 shares at August 28, 2004 |       | 18,887                        |       | 18,767                        |       |
| Capital in excess of par                                                                                                                                                                                                                            |       | 133,743                       |       | 106,853                       |       |
| Retained earnings                                                                                                                                                                                                                                   |       | 1,654,861                     |       | 1,498,890                     |       |
|                                                                                                                                                                                                                                                |       | 1,807,491                     |       | 1,624,510                     |       |
| Less: common stock held in treasury, at  cost (23,609,225 shares at August 27, 2005, and 20,274,320 shares at August  28, 2004)                                                                                                                     |       | 379,425                       |       | 287,428                       |       |
|                                                                                                                                                                                                                                                |       | 1,428,066                     |       | 1,337,082                     |       |
|                                                                                                                                                                                                                                                |       | $                             | 2,409,501  |                          | $          | 2,224,361 |   |

The accompanying notes are anintegral part of the consolidated financial statements.

 

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**FAMILYDOLLAR STORES, INC., AND SUBSIDIARIESCONSOLIDATEDSTATEMENTS OF SHAREHOLDERS’ EQUITY**

**Years Ended August 27, 2005, August 28, 2004,and August 30, 2003**

 

| **(in thousands, except per share and share amounts)**                                                 | ** ** | **Common  stock** | ** ** | **Capital in  excess of par** | ** ** | **Retained  earnings** | ** ** | **Treasury  stock** | ** ** |
|--------------------------------------------------------------------------------------------------------|------------|-------------------|------------|-------------------------------|------------|------------------------|------------|---------------------|------------|
| **Balance, August 31, 2002**  (185,830,901 shares common stock; 12,501,666 shares treasury stock)      |       | $                 | 18,583     |                          | $          | 63,294                 |       | $                   | 1,103,644  |   | $ | 44,944 |   |
| Net income for the year                                                                                |       |              |       |                          |       | 243,309                |       |                |       |
| Issuance of 1,079,092 common shares under  employee stock option plan, including tax benefits (Note 9) |       | 108               |       | 24,098                        |       |                   |       |                |       |
| Purchase of 2,202,200 common shares for  treasury                                                      |       |              |       |                          |       |                   |       | 65,851              |       |
| Issuance of 2,583 shares of treasury stock  under the Family Dollar 2000 Outside Directors Plan        |       |              |       | 65                            |       |                   |       | (16                 | )          |
| Less dividends on common stock, $.29 per  share                                                        |       |              |       |                          |       | (49,890                | )          |                |       |
| **Balance, August 30, 2003**  (186,909,993 shares common stock; 14,701,283 shares treasury stock)      |       | 18,691            |       | 87,457                        |       | 1,297,063              |       | 110,779             |       |
| Net income for the year                                                                                |       |              |       |                          |       | 257,904                |       |                |       |
| Issuance of 761,325 common shares under  employee stock option plan, including tax benefits (Note 9)   |       | 76                |       | 19,318                        |       |                   |       |                |       |
| Purchase of 5,576,100 common shares for  treasury                                                      |       |              |       |                          |       |                   |       | 176,674             |       |
| Issuance of 3,063 shares of treasury stock  under the Family Dollar 2000 Outside Directors Plan        |       |              |       | 78                            |       |                   |       | (25                 | )          |
| Less dividends on common stock, $.33 per  share                                                        |       |              |       |                          |       | (56,077                | )          |                |       |
| **Balance, August 28, 2004**  (187,671,318 shares common stock; 20,274,320 shares treasury stock)      |       | 18,767            |       | 106,853                       |       | 1,498,890              |       | 287,428             |       |
| Net income for the year                                                                                |       |              |       |                          |       | 217,509                |       |                |       |
| Issuance of 1,200,420 common shares under  employee stock option plan, including tax benefits (Note 9) |       | 120               |       | 26,829                        |       |                   |       |                |       |
| Purchase of 3,338,500 common shares for  treasury                                                      |       |              |       |                          |       |                   |       | 92,049              |       |
| Issuance of 3,595 shares of treasury stock  under the Family Dollar 2000 Outside Directors Plan        |       |              |       | 61                            |       |                   |       | (52                 | )          |
| Less dividends on common stock, $.37 per  share                                                        |       |              |       |                          |       | (61,538                | )          |                |       |
| **Balance, August 27, 2005**(188,871,738 shares common stock; 23,609,225 shares  treasury stock)       |       | $                 | 18,887     |                          | $          | 133,743                |       | $                   | 1,654,861  |   | $ | 379,425 |   |

 

The accompanying notes are an integral part of the consolidatedfinancial statements.

 

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**FAMILYDOLLAR STORES, INC., AND SUBSIDIARIESCONSOLIDATEDSTATEMENTS OF CASH FLOWS**

 
| ** **                                                                                         | ** ** | **Years Ended**     | ** ** |
|----------------------------------------------------------------------------------------------------|------------|---------------------|------------|
| **(in thousands)**                                                                                 | ** ** | **August 27, 2005** | ** ** | **August 28, 2004** | ** ** | **August 30, 2003** | ** ** |
| Cash flows from operating activities:                                                              |       |                |       |   |   |   |   |
| Net income                                                                                         |       | $                   | 217,509    |   | $ | 257,904 |   | $ | 243,309 |   |
| Adjustments to reconcile net income to net  cash provided by operating activities:                 |       |                |       |   |   |   |   |
| Depreciation and amortization                                                                      |       | 114,733             |       | 102,010 |   | 92,360 |   |
| Deferred income taxes                                                                              |       | (16,279             | )          | (4,268 | ) | (3,740 | ) |
| Tax benefit from stock option exercises                                                            |       | 3,700               |       | 4,476 |   | 6,815 |   |
| Loss on disposition of property and  equipment                                                     |       | 3,306               |       | 4,311 |   | 3,905 |   |
| Changes in operating assets and  liabilities:                                                      |       |                |       |   |   |   |   |
| Merchandise inventories                                                                            |       | (110,667            | )          | (125,754 | ) | (87,739 | ) |
| Income tax refund receivable                                                                       |       | 1,304               |       | (1,304 | ) | 6,469 |   |
| Prepayments and other current assets                                                               |       | (7,842              | )          | 16,685 |   | (21,069 | ) |
| Other assets                                                                                       |       | (11,658             | )          | 1,480 |   | (3,937 | ) |
| Accounts payable and accrued liabilities                                                           |       | 100,974             |       | 121,608 |   | 65,277 |   |
| Income taxes payable                                                                               |       | 4,272               |       | (671 | ) | 671 |   |
|                                                                                               |       | 299,352             |       | 376,477 |   | 302,321 |   |
| Cash flows from investing activities:                                                              |       |                |       |   |   |   |   |
| Purchases of investment securities                                                                 |       | (280,100            | )          | (282,265 | ) | (281,859 | ) |
| Sales of investment securities                                                                     |       | 367,410             |       | 365,924 |   | 249,110 |   |
| Capital expenditures                                                                               |       | (229,065            | )          | (218,748 | ) | (220,285 | ) |
| Proceeds from dispositions of property and  equipment                                              |       | 2,000               |       | 1,550 |   | 1,051 |   |
|                                                                                               |       | (139,755            | )          | (133,539 | ) | (251,983 | ) |
| Cash flows from financing activities:                                                              |       |                |       |   |   |   |   |
| Purchases of stock for treasury                                                                    |       | (91,997             | )          | (176,649 | ) | (65,835 | ) |
| Change in cash overdrafts                                                                          |       | (12,675             | )          | (20,501 | ) | 18,381 |   |
| Proceeds from exercise of stock options                                                            |       | 23,310              |       | 14,996 |   | 17,456 |   |
| Payment of dividends                                                                               |       | (60,083             | )          | (54,755 | ) | (48,242 | ) |
|                                                                                               |       | (141,445            | )          | (236,909 | ) | (78,240 | ) |
|                                                                                               |       |                |       |   |   |   |   |
| Net increase (decrease) in cash and cash  equivalents                                              |       | 18,152              |       | 6,029 |   | (27,902 | ) |
| Cash and cash equivalents at beginning of  year                                                    |       | 87,023              |       | 80,994 |   | 108,896 |   |
| Cash and cash equivalents at end of year                                                           |       | $                   | 105,175    |   | $ | 87,023 |   | $ | 80,994 |   |
|                                                                                               |       |                |       |   |   |   |   |
| Supplemental disclosures of cash flow  information                                                 |       |                |       |   |   |   |   |
| Cash paid during the period for:                                                                   |       |                |       |   |   |   |   |
| Purchases of property and equipment  awaiting processing for payment, included in accounts payable |       | $                   | 12,239     |   | $ | 14,272 |   | $ | 15,077 |   |
| Interest                                                                                           |       | —              |       | — |   | — |   |
| Income taxes                                                                                       |       | 132,288             |       | 150,525 |   | 129,619 |   |

 

The accompanying notes are an integral part of the consolidatedfinancial statements.

 

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**NOTES TO CONSOLIDATED FINANCIAL STATEMENTSYears Ended August 27, 2005, August 28, 2004, and August 30, 2003**

**1.            ****Description of Business and Summary of Significant Accounting Policies:**

**Description of business:**The Company operates a chain of neighborhood retaildiscount stores in 44 contiguous states. The Company manages its business on the basis of one reportablesegment.  The Company’s products includehardline merchandise such as household products, health and beauty aids, andsnacks and other food, and softline merchandise such as clothing, shoes anddomestic items.

**Principles of consolidation:**The consolidated financial statements include theaccounts of the Company and its subsidiaries, all of which are whollyowned.  All significant intercompanybalances and transactions have been eliminated.

**Cash equivalents:**The Company considers all highly liquid investmentswith an original maturity of three months or less to be “cash equivalents.”  The carrying amount of the Company’s cashequivalents approximates fair value due to the short maturities of theseinvestments and consists primarily of money market funds and other overnightinvestments.  The Company maintains cashdeposits with major banks, which from time to time may exceed federally insuredlimits.  The Company periodicallyassesses the financial condition of the institutions and believes that the riskof any loss is minimal.

**Investment securities:**The items classified as investment securities areprincipally auction rate securities and variable rate demand notes.  The Company classifies all investmentsecurities as available-for-sale.  Securitiesaccounted for as available-for-sale are required to be reported at fair valuewith unrealized gains and losses, net of taxes, excluded from net income andshown separately as a component of accumulated other comprehensive incomewithin stockholders’ equity.  Thesecurities that the Company has classified as available-for sale generallytrade at par and as a result typically do not have any realized or unrealizedgains or losses.

**Merchandise inventories:**Inventories are valued using retail prices less markonpercentages and approximate the lower of first-in, first-out (FIFO) cost ormarket.

**Property and equipment:**Property and equipment is stated at cost.  Depreciation for financial reporting purposesis calculated using the straight-line method over the estimated useful lives ofthe related assets.  For leaseholdimprovements, this depreciation is over the shorter of the term of the relatedlease (generally five years) or the asset’s useful economic life.
| **Estimated useful lives are as follows:** | ** ** | ** **  | ** ** |
|--------------------------------------------|------------|-------------|------------|
| Buildings  and building improvements       |       | 10-40 years |       |
| Furniture,  fixtures and equipment         |       | 3-10 years  |       |
| Transportation  equipment                  |       | 3-10 years  |       |
| Leasehold  improvements                    |       | 5-10 years  |       |

The Companycapitalizes certain costs incurred in connection with developing, obtaining andimplementing software for internal use. Capitalized costs are amortized over the expected economic life of theassets, generally ranging from five to eight years.

Property andequipment is reviewed for impairment whenever events or changes in circumstancesindicate that the carrying amount of an asset may not be recoverable.

**Revenues:**The Company recognizes revenue, net of returns, at thetime the customer tenders payment for and takes possession of the merchandise.

**Insurance liabilities:**The Company is primarily self-insured for health care,property loss, workers’ compensation and general liability costs.  

 

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These liabilities are based on the total estimated costs of claimsfiled and estimates of claims incurred but not reported, less amounts paidagainst such claims, and are not discounted.

**Advertising costs:**Advertising costs, net of co-op recoveries fromvendors, are expensed on the commencement of the advertisement and amounted to$4.7 million and $2.0 million in fiscal 2005 and fiscal 2004 respectively.  Net advertising expense amounts were notmaterial in fiscal 2003.

**Vendor allowances:**Cash consideration received from a vendor is presumedto be a reduction of the purchase cost of merchandise and is reflected as areduction of cost of sales unless it can be demonstrated this offsets anincremental expense, in which case it can be netted against that expense.

**Store opening and closing costs:**The Company charges pre-opening costs against operatingresults when incurred.  For propertiesunder operating lease agreements, the present value of any remaining liabilityunder the lease, net of expected sublease and lease termination recoveries, isexpensed when the closing occurs.

**Selling, general and administrative expenses:**Buying, distribution center and occupancy costs,including depreciation, are included in selling, general and administrativeexpenses.

**Operating leases:**Except for its corporate headquarters and distributioncenters, the Company generally conducts its operations from leasedfacilities.  Generally, store real estateleases are for initial terms of from five to ten years with multiple renewaloptions for additional five-year periods. Certain leases provide for contingent rental payments based upon apercentage of store sales.

For purposesof recognizing incentives, premiums and minimum rental expenses on astraight-line basis over terms of the leases, the Company uses the date ofinitial possession to begin amortization, which is generally when the Companyenters the space and begins to make improvements in preparation of intendeduse.  For tenant improvement allowancesand rent holidays, the Company records a deferred rent liability at the inceptionof the lease term and amortizes the deferred rent over the terms of the leasesas reductions to rent expense on the Consolidated Statements of Income.  The Company also has long-term leases forequipment generally with lease terms of five years or less.

**Income taxes:**The Company records deferred income tax assets andliabilities for the expected future tax consequences of temporary differencesbetween the financial reporting bases and the income tax bases of its assetsand liabilities.

**Stock options:**The Company accounts for stock-based compensationusing the intrinsic value method prescribed in Accounting Principles BoardOpinion No. 25, “Accounting for Stock Issued to Employees” (“APB No. 25”), andrelated Interpretations.  The exerciseprice of options awarded under the Company’s 1989 Non-Qualified Stock OptionPlan has been equal to the fair market value of the underlying Common Stock onthe date of grant.  Accordingly, nocompensation expense has been recognized for options granted under theplan.  Income tax benefits attributableto stock options exercised are credited to capital in excess of par.

The Companyutilizes the disclosure-only provisions of Statement of Financial AccountingStandards No. 148, “Accounting for Stock-Based Compensation-Transition andDisclosure.”  If compensation cost forthe Company’s stock-based compensation plan had been determined based on fairvalue at the grant date for awards under this plan consistent with themethodology prescribed under this statement, net income and net income pershare would have been reduced to the pro forma amounts indicated in the tablebelow (in thousands, except per share amounts):

 

26

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| ** **                               | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
|------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Net income —  as reported           |       | $        | 217,509    |     | $          | 257,904  |       | $ | 243,309 |   |
| Pro forma  stock-based compensation cost |       | (15,374  | )          | (8,062   | )          | (5,988   | )          |
| Net income —  pro forma             |       | $        | 202,135    |     | $          | 249,842  |       | $ | 237,321 |   |
|                                     |       |     |       |     |       |     |       |
| Net income  per share — as reported |       |     |       |     |       |     |       |
| basic                                    |       | $        | 1.30       |     | $          | 1.51     |       | $ | 1.41 |   |
| diluted                                  |       | $        | 1.30       |     | $          | 1.50     |       | $ | 1.40 |   |
| Net income per share — pro forma    |       |     |       |     |       |     |       |
| basic                                    |       | $        | 1.21       |     | $          | 1.46     |       | $ | 1.38 |   |
| diluted                                  |       | $        | 1.21       |     | $          | 1.46     |       | $ | 1.37 |   |

 

The increasein pro forma stock-based compensation cost in fiscal 2005 was a result of theacceleration of certain “underwater” (i.e. the options have an exercise pricein excess of the market value of the stock, determined as of August 26,2005) options.  On August 18, 2005,the Compensation Committee of the Board of Directors of the Company approved theacceleration of the vesting date of certain previously issued and outstandingoptions under the 1989 Non-Qualified Stock Option Plan, effective as ofAugust 26, 2005.  The accelerated vesting program applies to:(i) all unvested options that currently have an exercise price in excessof $40.00/share, including options held by the five most highly compensatedexecutive officers of the Company and (ii) all unvested options that areunderwater and are held by employees at the level of manager or below.

The Companyimplemented the acceleration program to enhance retention incentives forcurrent employees and to reduce the compensation expense the Company wouldotherwise be required to recognize as a result of the Company’s adoption,effective for fiscal 2006, of SFAS 123R. The future expense eliminated as a result of the option accelerationprogram was approximately $12.9 million, or $8.2 million net of taxes over aperiod of four years during which the options would have vested.  

**New accounting pronouncement**In December 2004, the Financial Accounting StandardsBoard (“FASB”) issued SFAS No. 123R which requires all companies to measurecompensation cost for all share-based payments (including employee stockoptions) at fair value, effective for public companies for interim or annualperiods beginning after June 15, 2005. The FASB concluded that companies can adopt the new standard in one oftwo ways: the modified prospective transition method, in which the companywould recognize share-based employee compensation from the beginning of thefiscal period in which the recognition provisions are first applied as if thefair-value-based accounting method had been used to account for all employeeawards granted, modified, or settled after the effective date and to any awardsthat were not fully vested as of the effective date; or the modifiedretrospective transition method, in which a company would recognize employeecompensation cost for periods presented prior to the adoption of SFAS No. 123Rin accordance with the original provisions of SFAS No. 123 “Accounting forStock-Based Compensation,” pursuant to which a company would recognize employeecompensation cost in the amounts reported in the pro forma disclosures providedin accordance with SFAS No. 123.  TheCompany will adopt SFAS No. 123R during the first quarter of fiscal 2006 andwill use the modified prospective transition method.  During fiscal 2006, the Company expects toincur incremental SG&A expense of approximately $6 million to $10 millionrelated to the 1989 Non-Qualified Stock Option Plan as a result of the adoptionof SFAS No. 123R.

**Fiscal year:**The Company’s fiscal year generally ends on theSaturday closest to August 31.

**Use of estimates:**The preparation of the Company’s consolidatedfinancial statements, in conformity with accounting principles generallyaccepted in the United States of America, requires management to make estimatesand assumptions.  These estimates andassumptions affect the reported amounts of assets and liabilities, thedisclosure of contingent assets and liabilities at the date of the financialstatements, and the reported amounts of revenues and expenses during thereporting period.  Actual results coulddiffer from these estimates.

**Reclassifications and other:**Certain reclassifications of the fiscal 2003 andfiscal 2004 amounts have been made to conform to the fiscal 2005 

 

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presentation.  The fourth quarterof fiscal 2005 included an $8.4 million cumulative pre-tax charge to correctproperty tax accruals on leased properties.

**2.             InvestmentSecurities**

The Company’sinvestments consist of the following short-term available-for-sale securities(in thousands):

 

| **Auction Rate Securities And Variable Rate Demand Notes** | ** ** | **Amortized Cost** | ** ** | **Gross Unrealized Holding Gains** | ** ** | **Gross Unrealized Holding Losses** | ** ** | **Fair Value** | ** ** |
|------------------------------------------------------------|------------|--------------------|------------|------------------------------------|------------|-------------------------------------|------------|----------------|------------|
| August 27,  2005                                           |       | $                  | 33,530     |                               | —     |                                | —     |           | $          | 33,530 |   |
| August 28,  2004                                           |       | $                  | 120,840    |                               | —     |                                | —     |           | $          | 120,840 |   |

 

Proceeds fromsales of short-term investment securities available-for-sale during fiscal2005, fiscal 2004 and fiscal 2003 were $367,410, $365,924, and $249,110,respectively.  No gains or losses wererealized on those sales for fiscal 2005, fiscal 2004 and fiscal 2003.

**3.             Propertyand Equipment:**

| **(in thousands)**                              | ** ** | **August 27,  2005** | ** ** | **August 28,  2004** | ** ** |
|-------------------------------------------------|------------|----------------------|------------|----------------------|------------|
| Buildings  and building improvements            |       | $                    | 445,826    |                 | $          | 390,363 |   |
| Furniture,  fixtures and equipment              |       | 779,895              |       | 669,011              |       |
| Transportation  equipment                       |       | 68,173               |       | 60,289               |       |
| Leasehold  improvements                         |       | 270,156              |       | 212,968              |       |
| Construction  in progress                       |       | 38,871               |       | 59,453               |       |
|                                            |       | 1,602,921            |       | 1,392,084            |       |
| Less  accumulated depreciation and amortization |       | 642,190              |       | 535,765              |       |
|                                            |       | 960,731              |       | 856,319              |       |
| Land                                            |       | 66,744               |       | 62,130               |       |
|                                            |       | $                    | 1,027,475  |                 | $          | 918,449 |   |

 

**4.             RevolvingCredit Facilities and Short-Term Borrowings:**

The Companyhas unsecured revolving credit facilities with banks for short-term borrowingsof up to $200 million.  On May 25, 2006,$100 million of the facilities will expire, and the remaining $100 million willexpire on May 31, 2010.  The Companyexpects that the facilities expiring on May 25, 2006, will be extended.  Any borrowings under these facilities are ata variable interest rate based on short-term market interest rates.  The Company had no borrowings against thesefacilities during fiscal 2005, fiscal 2004 or fiscal 2003.

**5.             AccruedLiabilities:**

| **(in thousands)**             | ** ** | **August 27,  2005** | ** ** | **August 28,  2004** | ** ** |
|--------------------------------|------------|----------------------|------------|----------------------|------------|
| Compensation                   |       | $                    | 44,397     |                 | $          | 46,066 |   |
| Self-insurance  liabilities    |       | 157,134              |       | 124,343              |       |
| Taxes other  than income taxes |       | 43,217               |       | 36,436               |       |
| Deferred  rent                 |       | 42,728               |       | 28,773               |       |
| Other                          |       | 28,032               |       | 30,562               |       |
|                           |       | $                    | 315,508    |                 | $          | 266,180 |   |

**6.             IncomeTaxes:**

The taxeffects of temporary differences that give rise to significant portions of thedeferred tax assets and deferred tax liabilities as of the end of fiscal 2005and the end of fiscal 2004, were as follows (in thousands):

 

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| ** **                                               | ** ** | **August 27,  2005** | ** ** | **August 28,  2004** | ** ** |
|----------------------------------------------------------|------------|----------------------|------------|----------------------|------------|
| Deferred income tax liabilities:                         |       |                 |       |                 |       |
| Excess of book over tax basis of property  and equipment |       | $                    | 86,824     |                 | $          | 86,694 |   |
|                                                     |       |                 |       |                 |       |
| Deferred income tax assets:                              |       |                 |       |                 |       |
| Excess of tax over book basis of  inventories            |       | $                    | 14,901     |                 | $          | 17,019 |   |
| Currently nondeductible accruals for:                    |       |                 |       |                 |       |
| Self-insurance                                           |       | 60,308               |       | 47,723               |       |
| Compensation                                             |       | 8,980                |       | 7,137                |       |
| Deferred rent                                            |       | 12,227               |       | 6,743                |       |
| Other                                                    |       | 4,077                |       | 5,462                |       |
| Total deferred income tax assets                         |       | $                    | 100,493    |                 | $          | 84,084 |   |

The provisionsfor income taxes in fiscal 2005, fiscal 2004 and fiscal 2003 were as follows(in thousands):

 

| ** ** | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
|------------|------------|----------|------------|----------|------------|----------|------------|
| Current:   |       |     |       |     |       |     |       |
| Federal    |       | $        | 126,497    |     | $          | 138,508  |       | $ | 130,923 |   |
| State      |       | 15,068   |       | 14,518   |       | 12,652   |       |
|       |       | 141,565  |       | 153,026  |       | 143,575  |       |
|       |       |     |       |     |       |     |       |
| Deferred:  |       |     |       |     |       |     |       |
| Federal    |       | (14,463  | )          | (3,782   | )          | (3,773   | )          |
| State      |       | (1,816   | )          | (486     | )          | 33       |       |
|       |       | (16,279  | )          | (4,268   | )          | (3,740   | )          |
| Total      |       | $        | 125,286    |     | $          | 148,758  |       | $ | 139,835 |   |

 

The following table summarizesthe components of income tax expense in fiscal 2005, fiscal 2004 and fiscal2003 (in thousands):

 
| ** **                                             | ** ** | **2005**               | ** ** | **2004**                | ** ** | **2003**               | ** ** |
|--------------------------------------------------------|------------|------------------------|------------|-------------------------|------------|------------------------|------------|
| ** **                                             | ** ** | **Income tax expense** | ** ** | **% of pre-tax income** | ** ** | **Income tax expense** | ** ** | **% of pre-tax income** | ** ** | **Income tax expense** | ** ** | **% of pre-tax income** | ** ** |
| Computed “expected” federal income tax       |       | $                      | 119,978    |                    | 35.0       |                   | $          | 142,331 |   | 35.0 |   | $ | 134,100 |   | 35.0 |   |
| State income taxes, net of federal income  tax benefit |       | 8,632                  |       | 2.5                     |       | 9,391                  |       | 2.3 |   | 8,179 |   | 2.1 |   |
| Other                                                  |       | (3,324                 | )          | (1.0                    | )          | (2,964                 | )          | (0.7 | ) | (2,444 | ) | (0.6 | ) |
| Actual income tax expense                              |       | $                      | 125,286    |                    | 36.5       |                   | $          | 148,758 |   | 36.6 |   | $ | 139,835 |   | 36.5 |   |

 

The InternalRevenue Service is currently examining the Company’s consolidated federalincome tax returns for fiscal 2004 and fiscal 2003.  Although the ultimate outcome of theexamination cannot be presently determined, the Company believes that it hasmade adequate provision for federal income taxes with respect to all openyears.

 **7.            EmployeeBenefit Plans:**

**Incentive compensation plan:**

The Companyhas an incentive profit-sharing plan which provides that, at the discretion ofthe Board of Directors, the Company may pay certain employees and officers anaggregate amount not to exceed 5% of the Company’s consolidated income beforeincome taxes.  There were no expenses under the profit-sharing plan in fiscal2005.  Expenses under the profit-sharing 

 

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plan were $5.5million in fiscal 2004 and $7.3 million in fiscal 2003.

**Compensation deferral plans:**The Company has a voluntary compensation deferralplan, under Section 401(k) of the Internal Revenue Code, available to eligibleemployees.  At the discretion of theBoard of Directors, the Company makes contributions to the plan which areallocated to participants, and in which they become vested, in accordance withformulas and schedules defined by the plan. Company expenses for contributions to the plan were $3.0 million infiscal 2005, $2.7 million in fiscal 2004 and $2.3 million in fiscal 2003.

In fiscal2003, the Company adopted a deferred compensation plan to provide certain keymanagement employees the ability to defer a portion of their base compensationand bonuses.  The plan is an unfundednonqualified plan.  The deferred amountsand earnings thereon are payable to participants, or designated beneficiaries,at specified future dates, upon retirement or death.  The Company does not make contributions tothis plan or guarantee earnings.

**8.             Commitmentsand Contingencies:**

**Operating leases:**Rental expenses on all operating leases, bothcancelable and non-cancelable, for fiscal 2005, fiscal 2004 and fiscal 2003were as follows (in thousands):

 

| ** **                                      | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
|-------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Minimum  rentals, net of minor sublease rentals |       | $        | 274,562    |     | $          | 238,188  |       | $ | 210,268 |   |
| Contingent  rentals                             |       | 4,670    |       | 4,722    |       | 5,134    |       |
|                                            |       | $        | 279,232    |     | $          | 242,910  |       | $ | 215,402 |   |

 

The following table shows theCompany’s obligations and commitments to make future payments under contractualobligations, including future minimum rental payments required under operatingleases that have initial or remaining non-cancelable lease terms in excess ofone year at the end of fiscal 2005 (in thousands):

 
| ** **                    | ** ** | **Payments Due During One Year Fiscal Period Ending** | ** ** |
|-------------------------------|------------|-------------------------------------------------------|------------|
| **Contractual Obligations**   | ** ** | **Total**                                             | ** ** | **August 2006** | ** ** | **August 2007** | ** ** | **August 2008** | ** ** | **August 2009** | ** ** | **August 2010** | ** ** | **Thereafter** | ** ** |
| Merchandise letters of credit |       | $                                                     | 125,613    |   | $ | 125,613 |   | $ | — |   | $ | — |   | $ | — |   | $ | — |   | $ | — |   |
| Operating leases              |       | 1,135,810                                             |       | 252,588 |   | 225,649 |   | 188,636 |   | 150,096 |   | 107,522 |   | 211,319 |   |
| Construction obligations      |       | 58,992                                                |       | 58,992 |   | — |   | — |   | — |   | — |   | — |   |
| Total                         |       | $                                                     | 1,320,415  |   | $ | 437,193 |   | $ | 225,649 |   | $ | 188,636 |   | $ | 150,096 |   | $ | 107,522 |   | $ | 211,319 |   |

Most of theCompany’s operating leases provide the Company with an option to extend theterm of the lease at designated rates.

The followingtable shows the Company’s other commercial commitments at the end of fiscal2005 (in thousands):

 

| **Other Commercial Commitments** | ** ** | **Total  Amounts  Committed** | ** ** |
|----------------------------------|------------|-------------------------------|------------|
| Standby  letters of credit       |       | $                             | 114,979    |   |
| Surety bonds                     |       | 6,458                         |       |
| Total                            |       | $                             | 121,437    |   |

At the end offiscal 2005, approximately $78.1 million of the merchandise letters of creditare included in accounts payable on the Company’s consolidated balancesheet.  A substantial portion of the outstanding amount of standby lettersof credit and surety bonds (which are primarily renewed on an annual basis) areused as surety for future premium and deductible payments to the Company’sworkers’ compensation and general liability insurance carrier.  TheCompany accrues for these liabilities based on the total estimated costs ofclaims filed and claims incurred but not reported, and are not discounted.

 

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**Litigation:**On January 30, 2001, Janice Morgan and BarbaraRichardson, two individuals who have held the position of Store Manager forsubsidiaries of the Company, filed a Complaint against the Company in theUnited States District Court for the Northern District of Alabama.  Thereafter, pursuant to the Court’s ruling,notice of the pendency of the lawsuit was sent to approximately 13,000 currentand former Store Managers holding the position on or after July 1, 1999.  Approximately 2,550 of those receiving suchnotice filed consent forms and joined the lawsuit as plaintiffs, includingapproximately 2,300 former Store Managers and approximately 250 then currentemployees.  After rulings by the Court onmotions to dismiss certain plaintiffs filed by the Company and motions toreconsider filed by plaintiffs, 1,424 plaintiffs remained in the case at thecommencement of trial.

The case hasproceeded as a collective action under the Fair Labor Standards Act (“FLSA”).  The Complaint alleges that the Companyviolated the FLSA by classifying the named plaintiffs and other similarlysituated current and former Store Managers as “exempt” employees who are notentitled to overtime compensation. Plaintiffs seek to recover unpaid overtime compensation in an amountcurrently estimated to be up to approximately $50 million, liquidated damagesequal to the overtime award, if any, plus an award of attorneys’ fees, costsand expenses, and such other relief as the Court may deem proper.

A jury trialin this case commenced on June 13, 2005, in Tuscaloosa, Alabama, and ended onJune 28, 2005, with the judge declaring a mistrial after the jury was unable toreach a unanimous decision in the matter. The case is scheduled to be retried commencing on February 21, 2006.

In general,the Company continues to believe that the Store Managers are “exempt” employeesunder the FLSA and have been properly compensated and that the Company hasmeritorious defenses that should enable it ultimately to prevail.  However, the outcome of any litigation isinherently uncertain.  Resolution of thismatter could have a material adverse effect on the Company’s financialposition, liquidity or results of operation.

The Company isinvolved in numerous other legal proceedings and claims incidental to itsbusiness, including litigation related to alleged failures to comply withvarious state and federal employment laws. While the ultimate outcome cannot be determined, the Company currentlybelieves that these proceedings and claims, both individually and in theaggregate, should not have a material adverse effect on the Company’s financialposition, 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.

**9.             EmployeeStock Option Plan:**

The Company’s1989 Non-Qualified Stock Option Plan provides for the granting of options tokey employees to purchase shares of Common Stock at prices not less than fairmarket value on the date of the grant.  Options expire five years from thedate 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.

If theprovisions of SFAS No. 123 expensing had been applied, the Company’s net incomeand net income per common share would have been impacted as summarized in thediscussion of the Company’s stock option accounting policy in Note 1.

The averagefair value of options granted during fiscal 2005, fiscal 2004 and fiscal 2003is $6.85, $11.47 and $9.14 per share, respectively.

The fair valueof each option grant is estimated on the date of grant using the Black-Scholesoption-pricing model with the following assumptions:

 
| ** **                                | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
|-------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Expected  dividend yield                  |       | 1.25     | %          |     | 0.75       | %        |       | 0.89 | % |   |
| Expected  stock price volatility          |       | 31.82    | %          |     | 36.49      | %        |       | 41.54 | % |   |
| Weighted  average risk-free interest rate |       | 3.52     | %          |     | 3.06       | %        |       | 2.74 | % |   |
| Expected  life of options (years)         |       | 3.5      |       |     | 3.5        |     |       | 3.5 |   |   |

 

Theseassumptions are evaluated and revised, as necessary, to reflect marketconditions and experience.

The summary ofthe status of the Company’s stock-based compensation plan as of the end offiscal 2005, fiscal 2004 and 

 

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fiscal 2003,and changes during the years then ended were as follows (in thousands, exceptper share amounts):

 

| ** **                | ** ** | **Options  Outstanding** | ** ** | **Range of Option Prices  Per Share** | ** ** | **Weighted Average Exercise Price** | ** ** |
|---------------------------|------------|--------------------------|------------|---------------------------------------|------------|-------------------------------------|------------|
| Balance,  August 31, 2002 |       | 4,411                    |       | $                                     | 11.38      |                                | to         |   | $ | 35.50 |   | $ | 20.05 |   |
| Granted                   |       | 1,793                    |       | 24.75                                 |       | to                                  |       | 39.00 |   | 28.99 |   |
| Exercised                 |       | (1,079                   | )          | 11.38                                 |       | to                                  |       | 27.75 |   | 16.11 |   |
| Canceled                  |       | (124                     | )          | 15.00                                 |       | to                                  |       | 37.50 |   | 24.95 |   |
| Balance,  August 30, 2003 |       | 5,001                    |       | $                                     | 14.75      |                                | to         |   | $ | 39.00 |   | $ | 23.99 |   |
| Granted                   |       | 2,036                    |       | 26.00                                 |       | to                                  |       | 44.00 |   | 39.56 |   |
| Exercised                 |       | (761                     | )          | 14.75                                 |       | to                                  |       | 31.25 |   | 19.60 |   |
| Canceled                  |       | (320                     | )          | 16.00                                 |       | to                                  |       | 42.25 |   | 30.55 |   |
| Balance,  August 28, 2004 |       | 5,956                    |       | $                                     | 14.75      |                                | to         |   | $ | 44.00 |   | $ | 29.52 |   |
| Granted                   |       | 2,113                    |       | 20.75                                 |       | to                                  |       | 33.25 |   | 26.99 |   |
| Exercised                 |       | (1,200                   | )          | 14.75                                 |       | to                                  |       | 32.25 |   | 18.71 |   |
| Canceled                  |       | (807                     | )          | 16.00                                 |       | to                                  |       | 44.00 |   | 32.05 |   |
| Balance,  August 27, 2005 |       | 6,062                    |       | $                                     | 17.75      |                                | to         |   | $ | 44.00 |   | $ | 30.44 |   |

 

At the end offiscal 2005, fiscal 2004 and fiscal 2003, options for 3.6 million, 1.2 million,and 1.0 million shares were exercisable, respectively.

The followingtable summarizes information about stock options outstanding at the end offiscal 2005 (in thousands, except per share amounts):

 

| ** **                   | ** ** | ** **                                     | ** **         | ** **                                      | ** ** | **Options Outstanding**             | ** **                                                       | **Options Exercisable**                        | ** ** |
|------------------------------|------------|------------------------------------------------|--------------------|-------------------------------------------------|------------|-------------------------------------|------------------------------------------------------------------|------------------------------------------------|------------|
| **Range of Exercise Prices** | ** ** | **Number Outstanding at August 27, 2005** | ** **         | **Weighted Average Remaining Contractual Life** | ** ** | **Weighted Average Exercise Price** | ** **                                                       | **Number Exercisable at August 27, 2005** | ** ** | **Weighted Average Exercise Price** | ** ** |
| $                            | 17.75      | to                                             | $ 26.99       |                                            | 1,251      |                                | 1.81 years                                                  |                                           | $          | 24.19 |   | 852 |   | $ | 24.28 |   |
|                         | 27.00      | to                                             |    34.75 |                                            | 3,276      |                                | 3.22           |                                           | 28.14      |   | 1,274 |   | 28.39 |   |
|                         | 34.76      | to                                             |    44.00 |                                            | 1,535      |                                | 3.07           |                                           | 40.46      |   | 1,462 |   | 40.62 |   |
| $                            | 17.75      | to                                             | $ 44.00       |                                            | 6,062      |                                | 2.89 years                                                  |                                           | $          | 30.44 |   | 3,588 |   | $ | 32.40 |   |
|                              |            |                                                |                    |                                                 |            |                                     |                                                                  |                                                |            |  |  |  |  |  |  |  |  |  |  |  |

At the end offiscal 2005, fiscal 2004 and fiscal 2003, shares available for granting ofstock options under the Company’s stock option plan were 4.2 million, 5.5million and 7.2 million shares, respectively.

**10.          CommonStock:**

Basic netincome per common share is computed by dividing net income by the weightedaverage number of shares outstanding during each period.  Diluted net income per common share giveseffect to all securities representing potential common shares that weredilutive and outstanding during the period. The exercise prices for certain of the outstanding stock options that theCompany has awarded exceed the average market price of the Company’s CommonStock.  Such stock options areantidilutive (options for 3.4 million, 2.0 million and 0.5 million at the endof fiscal 2005, fiscal 2004 and fiscal 2003, respectively) and were notincluded in the computation of diluted net income per common share.  In the calculation of diluted net income percommon share, the denominator includes the number of additional common sharesthat would have been outstanding if the Company’s outstanding dilutive stockoptions had been exercised.

During fiscal 2004 and fiscal 2003, the Company purchased in the openmarket 5.6 million and 2.2 million shares of its Common Stock, respectively, ata cost of $176.7 million and $65.9 million, respectively.  On April 13, 2005, the Company announced thatthe Board of Directors authorized the purchase of up to an additional 5 millionshares of the Company’s Common Stock from time to time as market conditionswarrant.  On August 19, 2005, the Companyannounced that the Board of Directors authorized the purchase of an additional$300 million of the Company’s Common Stock from time to time as marketconditions warrant.  During fiscal 2005,the Company purchased in the open market 3.3 million shares of the Company’s CommonStock at a cost of $92.0 million.  As ofthe end of fiscal 2005, the Company had approximately 18.7 

 

32

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million shares authorized to be purchased.

The followingtable sets forth the computation of basic and diluted net income per commonshare (in thousands, except per share amounts):

 
| ** **                                          | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
|-----------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| **Basic  net income per share:**                    |       |     |       |     |       |     |       |
| Net income                                          |       | $        | 217,509    |     | $          | 257,904  |       | $ | 243,309 |   |
| Weighted  average number of shares outstanding      |       | 166,791  |       | 170,770  |       | 172,346  |       |
| Net income  per common share — basic           |       | $        | 1.30       |     | $          | 1.51     |       | $ | 1.41 |   |
|                                                |       |     |       |     |       |     |       |
| **Diluted  net income per share:**                  |       |     |       |     |       |     |       |
| Net income                                          |       | $        | 217,509    |     | $          | 257,904  |       | $ | 243,309 |   |
| Weighted  average number of shares outstanding      |       | 166,791  |       | 170,770  |       | 172,346  |       |
| Effect of  dilutive securities — stock options |       | 301      |       | 854      |       | 1,008    |       |
| Average  shares — diluted                      |       | 167,092  |       | 171,624  |       | 173,354  |       |
| Net income  per common share — diluted         |       | $        | 1.30       |     | $          | 1.50     |       | $ | 1.40 |   |

 

**11.          Unaudited Summaries of QuarterlyResults:**

** **

| **(in thousands, except per share amounts)** | ** ** | **First Quarter** | ** ** | **Second Quarter** | ** ** | **Third Quarter** | ** ** | **Fourth Quarter** | ** ** |
|----------------------------------------------|------------|-------------------|------------|--------------------|------------|-------------------|------------|--------------------|------------|
| **2005**                                     |       |              |       |               |       |              |       |               |       |
| Net sales                                    |       | $                 | 1,380,245  |               | $          | 1,586,754         |       | $                  | 1,427,966  |   | $ | 1,429,843 |   |
| Gross margin                                 |       | 460,352           |       | 520,919            |       | 479,352           |       | 455,616            |       |
| Net income                                   |       | 54,429            |       | 80,073             |       | 53,774            |       | 29,233             | (1)        |
| Net income  per common share(2)              |       | $                 | 0.32       |               | $          | 0.48              |       | $                  | 0.32       |   | $ | 0.18 | (1) |
|                                         |       |              |       |               |       |              |       |               |       |
| **2004**                                     |       |              |       |               |       |              |       |               |       |
| Net sales                                    |       | $                 | 1,244,683  |               | $          | 1,402,798         |       | $                  | 1,310,159  |   | $ | 1,324,248 |   |
| Gross margin                                 |       | 431,325           |       | 473,814            |       | 457,376           |       | 423,095            |       |
| Net income                                   |       | 63,437            |       | 80,432             |       | 72,383            |       | 41,652             |       |
| Net income  per common share(2)              |       | $                 | 0.37       |               | $          | 0.46              |       | $                  | 0.42       |   | $ | 0.25 |   |

----

(1) Includes an $8.4 millioncumulative pre-tax charge to correct property tax accruals on leasedproperties.

(2) Figures represent dilutedearnings per share.

**12.          RelatedParty Transactions:**

The Companypurchased a variety of merchandise in the ordinary course of business fromentities owned or represented by non-employee family members of the Company’sformer Chairman of the Board and the current Chairman of the Board and ChiefExecutive Officer.  These transactions totaled approximately $1.2 million,$1.2 million, and $17.8 million in fiscal 2005, fiscal 2004 and fiscal 2003,respectively.

**13.          Subsequent Events**

On September27, 2005, the Company obtained $250 million in aggregate proceeds through aprivate placement under Section 4(2) of the Securities Act of 1933, as amended,of unsecured Senior Notes (the “Notes”) to a group of institutional accreditedinvestors.  The Notes were issued in twotranches at par, and rank *pari passu*inright of payment with the Company’s other unsecured senior indebtedness.  The first tranche has an aggregate principalamount of $169 million, is payable in a single installment on September 27,2015, and bears interest at a rate of 5.41% per annum from the date ofissuance.  The second tranche has anaggregate principal amount of $81 million, matures on September 27, 2015, withamortization commencing in the sixth year, and bears interest at a rate of5.24% per annum from the date of issuance. The second tranche has a required principal repayment of $16.2 millionon September 27, 2011, and on each September 27 thereafter to and includingSeptember 27, 2015.  Interest on theNotes will be payable semi-annually in arrears on the 27thday 

 

33

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of March andSeptember of each year commencing on March 27, 2006.  The sale of the Notes was effected intransactions not requiring registration under the Securities Act of 1933, as amended.

On October 4,2005, the Company executed an overnight share repurchase transaction with abank for the acquisition of 10 million shares, or approximately 6%, of theCompany’s outstanding Common Stock for an initial purchase price of $19.97 pershare.  The transaction was financed withthe proceeds of the Company’s issuance of $250 million aggregate principalamount of the Notes.  Pursuant to theagreement with the bank, the bank will purchase ten million shares in the openmarket over the next 3-5 months.  At theend of the purchase period, the Company will either receive from or pay to thebank a price adjustment based on the volume weighted average purchase price ofthe shares acquired compared to the initial purchase price to the bank.  Such price adjustment can be either in cashor stock at the discretion of the Company. The Company has limited its potential financial exposure in the event ofan increase in its share price above a cap during the purchase period withrespect to five million of the repurchased shares.

Subsequent tothe Company’s fiscal 2005 year end, Hurricane Katrina and Hurricane Rita struckthe U.S. Gulf Coast, impacting numerous stores in the afflicted areas.  The Company has property insurance thatcovers most of its property damage. Since the Company’s stores are widely dispersed, lost sales due toclosed stores are generally limited and are often offset by increased sales inother stores.  Therefore, these stormshave not had a material impact in the aggregate on the Company’s financialposition, liquidity or results of operations. The long-term impact of these storms is more difficult to forecast.  The potential increase in energy costs overthe long-term could negatively impact the Company and its customers.  However, the resources received by customersfrom government and private organizations and the funds contributed in therebuilding effort, could positively impact sales.

 

**ITEM 9.****                  CHANGESIN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE**

None.

**ITEM 9A.****              CONTROLSAND PROCEDURES**

**Disclosure Controls and Procedures**

Based on an evaluation by management of the Company (with theparticipation of the Company’s Chief Executive Officer and Chief FinancialOfficer), as of the end of the period covered by this report, the Company’sChief Executive Officer and Chief Financial Officer concluded that the Company’sdisclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e)under the Securities Exchange Act of 1934, as amended, (the “Exchange Act”))were effective to provide reasonable assurance that information required to bedisclosed by the Company in reports that the Company files or submits under theExchange Act is recorded, processed, summarized and reported within the timeperiods specified in Securities and Exchange Commission (“SEC”) rules and formsand that such information is accumulated and communicated to the Company’smanagement, including the Chief Executive Officer and Chief Financial Officer,to allow timely decisions regarding required disclosures.  Consistent with the suggestion of the SEC,the Company has formed a Disclosure Committee consisting of key Companypersonnel designed to review the accuracy and completeness of all disclosuresmade by the Company.

# **Management’s Report on Internal Control Over Financial Reporting**

Management is responsible for establishingand maintaining adequate internal control over financial reporting for FamilyDollar Stores.  Internal control overfinancial reporting is a process designed to provide reasonable assuranceregarding the reliability of financial reporting and the preparation offinancial statements for external purposes in accordance with generallyaccepted accounting principles.  Internalcontrol over financial reporting includes those policies and procedures that:(i) pertain to the maintenance of records that in reasonable detail accuratelyand fairly reflect the transactions and dispositions of the assets of thecompany; (ii) provide reasonable assurance that transactions are recorded asnecessary to permit preparation of financial statements in accordance withgenerally accepted accounting principles, and that receipts and expenditures ofthe company are being made only in accordance with authorizations of managementand directors of the company; and (iii) provide reasonable assurance regardingprevention or timely detection of unauthorized acquisition, use, or dispositionof the company’s assets that could have a material effect on the financialstatements.

Because of its inherent limitations, internalcontrol over financial reporting may not prevent or detect misstatements.  

 

34

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Also, projections of any evaluation of effectiveness to future periodsare subject to the risk that controls may become inadequate because of changesin conditions, or that the degree of compliance with the policies or proceduresmay deteriorate.

Management (with the participation of theprincipal executive officer and principal financial officer) conducted anevaluation of the effectiveness of the Company’s internal control overfinancial reporting based on the framework in *InternalControl — Integrated Framework* issued by the Committee of SponsoringOrganizations of the Treadway Commission (COSO).  Based on this evaluation, managementconcluded that the Company’s internal control over financial reporting waseffective as of August 27, 2005.

Management’s assessment of the effectivenessof the Company’s internal control over financial reporting as of August 27,2005, has been audited by PricewaterhouseCoopers LLP, an independent registeredpublic accounting firm, as stated in their attestation report which is includedunder Item 8.

**Attestation Report of the Registered PublicAccounting Firm**

Included in Item 8.

**Changes in Internal Control over Financial Reporting**

There were no changes in the Company’s internal control over financialreporting during the Company’s fourth fiscal quarter that have materiallyaffected, or are reasonably likely to materially affect, the Company’s internalcontrol over financial reporting.

**ITEM 9B.****               OTHER INFORMATION**

None

 

**PART III**

**ITEM 10.****               DIRECTORS AND EXECUTIVEOFFICERS OF THE REGISTRANT**

The information required by this item as to the Company’s directors,director nominees, audit committee financial expert, audit committee, andprocedures for stockholders to recommend director nominees will be included inthe Company’s proxy statement to be filed for the Annual Meeting ofStockholders to be held on January 19, 2006, under the captions “Election ofDirectors” and “Corporate Governance Matters and Committees of the Board ofDirectors” and is incorporated by reference herein.   The information required by this item as tocompliance by the Company’s directors, executive officers and certain beneficialowners of the Company’s Common Stock with Section 16(a) of the SecuritiesExchange Act of 1934 also will be included in said proxy statement under thecaption “Section 16(a) Beneficial Ownership Reporting Compliance” and also isincorporated herein by reference.  Theinformation required by this item as to executive officers is included in PartI, Item 1 of this Report and also is incorporated herein by reference.

The Company has adopted: (i) a Code of Ethics that applies to the ChiefExecutive Officer and senior financial officers, including the Chief FinancialOfficer, the principal accounting officer and the controller; (ii) a Code ofBusiness Conduct that governs the actions of all Company employees, includingofficers; and (iii) a Board of Directors Code of Business Conduct applicable toall directors (collectively the “Codes of Conduct”).  The Codes of Conduct are posted within theInvestors section of the Company’s Internet Website at www.familydollar.com.  The Company will provide a copy of the Codesof Conduct to any stockholder upon request. Any amendments to and/or any waiver from a provision of any of the Codesof Conduct granted to any director, executive officer or any senior financialofficer, must be approved by the Board of Directors and will be disclosed onthe Company’s Internet Website within three business days following theamendment or waiver.  The informationcontained on or connected to the Company’s Internet Website is not incorporatedby reference into this Form 10-K and should not be considered part of this orany other report that the Company files with or furnishes to the Securities andExchange Commission.

 

35

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**ITEM 11.****               EXECUTIVE COMPENSATION**

The information required by this item will be included in the Company’sproxy statement to be filed for the Annual Meeting of Stockholders to be heldon January 19, 2006, under the captions “Executive Compensation” and “Compensationof Directors” and is incorporated herein by reference.
| **ITEM 12.** | ** ** | **SECURITY OWNERSHIP OF CERTAIN BENEFICIAL  OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS** |   |   |
|--------------|------------|-----------------------------------------------------------------------------------------------------|--------|--------|

The information required by this item as to security ownership bycertain beneficial owners and management will be included in the Company’sproxy statement to be filed for the Annual Meeting of Stockholders to be heldon January 19, 2006, under the caption “Ownership of the Company’s Securities”and is incorporated herein by reference. The information required by this item as to securities authorized forissuance under equity compensation plans also will be included in said proxystatement under the caption “Equity Compensation Plan Information” and also isincorporated herein by reference.

**ITEM 13.****               CERTAIN RELATIONSHIPSAND RELATED TRANSACTIONS**

The information required by this item will be included in the Company’sproxy statement to be filed for the Annual Meeting of Stockholders to be heldon January 19, 2006, under the caption “Related Transactions” and isincorporated herein by reference.

**ITEM 14.****               PRINCIPAL ACCOUNTANTFEES AND SERVICES**

The information required by this item will be included in the Company’sproxy statement to be filed for the Annual Meeting of Stockholders to be heldon January 19, 2006, under the caption “Independent Registered PublicAccounting Firm’s Fees and Services” and is incorporated herein by reference.

**PART IV**

**ITEM 15.****                                              EXHIBITS,FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 10-K**

(a)             Documentsfiled as part of this report:

1.                                       ConsolidatedFinancial Statements (See Item 8):

2.                                       Allschedules for which provision is made in the applicable accounting regulationsof the Securities and Exchange Commission are not required under the relatedinstructions, are inapplicable or the information is included in theConsolidated Financial Statements, and therefore, have been omitted.

The FinancialStatements of Family Dollar Stores, Inc., (Parent Company) are omitted becausethe registrant is primarily a holding company and all subsidiaries included inthe consolidated financial statements being filed, in the aggregate, do nothave minority equity and/or indebtedness to any person other than theregistrant or its consolidated subsidiaries in amounts which together exceed 5percent of the total assets as shown by the most recent year-end consolidatedbalance sheet.

3.                                       TheExhibits listed below in item (b).

(b)             The accompanying Index to Exhibitsis incorporated herein by reference.

 

36

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**SIGNATURES**

Pursuant tothe requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934,the registrant has duly caused this report to be signed on its behalf by theundersigned, thereunto duly authorized.

 
|   |              | FAMILY  DOLLAR STORES, INC. |
|--------|-------------------|-----------------------------|
|   |              | (Registrant)                |
|   |              |                        |   |
|   |              |                        |   |
| Date   | November 2,  2005 | By                          | /s/ | Howard R.  Levine |
|   |              |                        |   | Howard R.  Levine |
|   |              |                        |   | Chairman of  the Board |
|   |              |                        |   | (Chief  Executive Officer) |

 

Pursuant to the requirements ofthe Securities Exchange Act of 1934, this report has been signed by thefollowing persons on behalf of the registrant and in the capacities and on thedate indicated.

 
| **Signature**              | ** ** | **Title**                                                                 | ** ** | **Date**          |
|----------------------------|------------|---------------------------------------------------------------------------|------------|-------------------|
| ** **                 | ** ** | ** **                                                                | ** ** | ** **        |
| /s/ Howard R. Levine       |       | Chairman of  the Board, Chief Executive Officer and Director              |       | November 2,  2005 |
| Howard R. Levine           |       |                                                                      |       |
|                       |       | (Principal  Executive Officer)                                            |       |              |
|                       |       |                                                                      |       |              |
| /s/ R. James Kelly         |       | Vice Chairman  and Chief Financial Officer  (Principal Financial Officer) |       | November 2,  2005 |
| R. James Kelly             |       |                                                                      |       |
|                       |       |                                                                      |       |              |
| /s/ C. Martin Sowers       |       | Senior Vice  President-Finance                                            |       | November 2,  2005 |
| C. Martin Sowers           |       | (Principal Accounting  Officer)                                           |       |              |
|                       |       |                                                                      |       |              |
| /s/ Mark R. Bernstein      |       | Director                                                                  |       | November 2,  2005 |
| Mark R. Bernstein          |       |                                                                      |       |              |
|                       |       |                                                                      |       |              |
| /s/ Sharon Allred Decker   |       | Director                                                                  |       | November 2,  2005 |
| Sharon Allred Decker       |       |                                                                      |       |              |
|                       |       |                                                                      |       |              |
| /s/ Edward C. Dolby        |       | Director                                                                  |       | November 2,  2005 |
| Edward C. Dolby            |       |                                                                      |       |              |
|                       |       |                                                                      |       |              |
| /s/ Glenn A. Eisenberg     |       | Director                                                                  |       | November 2,  2005 |
| Glenn A. Eisenberg         |       |                                                                      |       |              |
|                       |       |                                                                      |       |              |
| /s/ George R. Mahoney, Jr. |       | Director                                                                  |       | November 2,  2005 |
| George R. Mahoney, Jr.     |       |                                                                      |       |              |
|                       |       |                                                                      |       |              |
| /s/ James G. Martin        |       | Director                                                                  |       | November 2,  2005 |
| James G. Martin            |       |                                                                      |       |              |

 

37

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**EXHIBIT INDEX**

 
|   |   | Exhibits incorporated by reference: |
|--------|--------|-------------------------------------|
|   |   |                                |   |   |
|   |   | 3.1.1                               |   | Certificate of Incorporation, dated November 24, 1969, (filed as  Exhibit 3(a) to the Company’s Registration Statement on  Form S-1, No. 2-35468) |
|   |   |                                |   |   |
|   |   | 3.1.2                               |   | Certificate of Amendment, dated February 2, 1972, of Certificate  of Incorporation (filed as Exhibit 3(a)(ii) to the Company’s  Form 10-K for the year ended August 31, 1980) |
|   |   |                                |   |   |
|   |   | 3.1.3                               |   | Certificate of Amendment, dated January 23, 1979, of Certificate  of Incorporation (filed as Exhibit 2 to the Company’s Form 10-Q for  the quarter ended February 28, 1979) |
|   |   |                                |   |   |
|   |   | 3.1.4                               |   | Certificate of Amendment, dated January 20, 1983, of Certificate  of Incorporation (filed as Exhibit 4(iv) to the Company’s  Registration Statement on Form S-3, No. 2-85343) |
|   |   |                                |   |   |
|   |   | 3.1.5                               |   | Certificate of Amendment, dated January 16, 1986, of Certificate  of Incorporation (filed as Exhibit 3(a)(v) to the Company’s  Form 10-K for the year ended August 31, 1986) |
|   |   |                                |   |   |
|   |   | 3.1.6                               |   | Certificate of Amendment, dated January 15, 1987, of Certificate  of Incorporation (filed as Exhibit 3(a)(vi) to the Company’s  Form 10-K for the year ended August 31, 1987) |
|   |   |                                |   |   |
|   |   | 3.1.7                               |   | Certificate of Amendment, dated January 15, 1998, of Certificate  of Incorporation (filed as Exhibit 3.1 to the Company’s Registration  Statement on Form S-8, No. 333-48751) |
|   |   |                                |   |   |
|   |   | 3.1.8                               |   | Certificate of Amendment, dated January 17, 2002, of Certificate  of Incorporation filed as Exhibit 3(i) to the Company’s  Form 10-Q for the quarter ended March 2, 2002) |
|   |   |                                |   |   |
|   |   | 3.2                                 |   | Bylaws, as amended on August 17, 2004 (filed as  Exhibit 3(ii) to the Company Form 10-K filing for the fiscal  year ended August 28, 2004) |
|   |   |                                |   |   |
|   |   | 4.1                                 |   | Sections FOURTH, SIXTH and SEVENTH of the Company’s Certificate of  Incorporation and all Amendments thereto (included as Exhibits 3.1.1 – 3.1.8)  and Articles II, VII, VIII, XII and XIV of the Company’s Bylaws (included as  Exhibit 3.2) |
|   |   |                                |   |   |
| *      |   | 10.1                                |   | Family Dollar Employee Savings and Retirement Plan and Trust, amended  and restated as of January 1, 2002 (filed as Exhibit 10  (iii) to the Company’s Form 10-Q for the quarter ended  March 2, 2002) |
|   |   |                                |   |   |
|   |   | 10.2                                |   | Amended and Restated Credit Agreement, dated as of May 31, 2001,  between the Company and Family Dollar, Inc., as Borrower, and Bank of  America, N.A. (filed as Exhibit 10 to the Company’s Form 10-Q for  the quarter ended June 2, 2001) |
|   |   |                                |   |   |
|   |   | 10.3                                |   | Amendment dated as of May 29, 2003, between the Company and  Family Dollar, Inc., as Borrower, and Bank of America, N.A., amending  the Amended and Restated Credit Agreement dated as of May 31, 2001  (filed as Exhibit 10(i) to the Company’s Form 10-Q for the  quarter ended May 31, 2003) |
|   |   |                                |   |   |
|   |   | 10.4                                |   | Second Amendment dated as of May 27, 2004, between the Company  and Family Dollar, Inc., as Borrower, and Bank of America, N.A.,  amending the Amended and Restated Credit Agreement dated as of May 31,  2001 (filed as Exhibit 10(a) to the Company’s Report on  Form 8-K filed May 27, 2004) |
|   |   |                                |   |   |
|   |   | 10.5                                |   | Credit Agreement, dated as of August 7, 2001, between the  Company and Family Dollar, Inc., as Borrower, and First Union National  Bank (filed as Exhibit 10(i) to the Company’s Form 10-K for  the year ended September 1, 2001) |
|   |   |                                |   |   |
|   |   | 10.6                                |   | First Amendment dated as of May 29, 2003, between the Company  and Family Dollar, Inc., as Borrower, and Wachovia Bank, N.A., amending  the Credit Agreement dated as of August 7, 2001 (filed as  Exhibit 10(ii) to the Company’s Form 10-Q for the quarter  ended May 31, 2003) |

 

38

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|   |   | 10.7   |   | Second Amendment dated as of May 27, 2004, between the Company  and Family Dollar, Inc., as Borrower, and Wachovia Bank, N.A., amending  the Credit Agreement dated as of August 7, 2001 (filed as  Exhibit 10(b) to the Company’s Report on Form 8-K filed  May 27, 2004.) |
|--------|--------|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |   |   |                                                                                                                                                                                                                                                                                                                |
|   |   | 10.8   |   | Third Amendment to Amended and Restated Credit Agreement between the  Company and Family Dollar, Inc., as Borrower, and Bank of America, N.A.,  dated as of May 16, 2005 (filed as Exhibit 10(a) to the  Company’s Report on Form 8-K filed May 17, 2005)                        |
|   |   |   |   |                                                                                                                                                                                                                                                                                                                |
|   |   | 10.9   |   | Third Amendment to Credit Agreement between the Company and Family  Dollar, Inc., as Borrower, and Wachovia Bank, National Association,  dated as of May 16, 2005 (filed as Exhibit 10(b) to the  Company’s Report on Form 8-K filed May 17, 2005)                               |
|   |   |   |   |                                                                                                                                                                                                                                                                                                                |
| *      |   | 10.10  |   | Amendment dated August 29, 2004, to the Employment Agreement  dated August 25, 2000, as amended, between the Company and R. David  Alexander, Jr. (filed as Exhibit 10(iv) to the Company’s  Form 10-K for the year ended August 28, 2004)                                  |
|   |   |   |   |                                                                                                                                                                                                                                                                                                                |
| *      |   | 10.11  |   | Retirement Agreement dated September 30, 2002, between the  Company and Leon Levine (filed as Exhibit 10 to the Company’s Report on  Form 8-K filed October 2, 2002)                                                                                                                       |
|   |   |   |   |                                                                                                                                                                                                                                                                                                                |
| *      |   | 10.12  |   | Family Dollar 2000 Outside Directors Plan, as amended as of November 5,  2003 (filed as Exhibit 10(iv) to the Company’s Form 10-K for  the year ended August 30, 2003)                                                                                                                |
|   |   |   |   |                                                                                                                                                                                                                                                                                                                |
|   |   | 10.13  |   | Enhanced Overnight Share Repurchase Agreement dated October 3,  2005, between Family Dollar Stores, Inc., and Bank of America, N.A.  (filed as Exhibit 10 to the Company’s Report on Form 8-K filed  October 4, 2005)                                                                 |
|   |   |   |   |                                                                                                                                                                                                                                                                                                                |
| *      |   | 10.14  |   | Employment Agreement dated August 18, 2005, between the Company  and Howard R. Levine (filed as Exhibit 10.2 to the Company’s Report on  Form 8-K filed August 24, 2005)                                                                                                                   |
|   |   |   |   |                                                                                                                                                                                                                                                                                                                |
| *      |   | 10.15  |   | Employment Agreement dated August 18, 2005, between the Company  and R. James Kelly (filed as Exhibit 10.3 to the Company’s Report on  Form 8-K filed August 24, 2005)                                                                                                                     |
|   |   |   |   |                                                                                                                                                                                                                                                                                                                |
| *      |   | 10.16  |   | Incentive Profit Sharing Plan, amended as of January 17, 2002  (filed as Exhibit 10(i) to the Company’s Form 10-K for the  year ended August 28, 2004)                                                                                                                                |
|   |   |   |   |                                                                                                                                                                                                                                                                                                                |
| *      |   | 10.17  |   | Medical Expense Reimbursement Plan amended as of November 2,  2004 (filed as Exhibit 10(v) to the Company’s Form 10-K for  the year ended August 28, 2004)                                                                                                                            |
|   |   |   |   |                                                                                                                                                                                                                                                                                                                |
| *      |   | 10.18  |   | Family Dollar Stores, Inc., 1989 Non-Qualified Stock Option  Plan, amended as of August 17, 2004 (filed as Exhibit 10(i) to  the Company’s Report on Form 8-K filed January 21, 2005)                                                                                            |
|   |   |   |   |                                                                                                                                                                                                                                                                                                                |
| *      |   | 10.19  |   | Resolution of the Board of Directors of Family Dollar  Stores, Inc., adopted January 20, 2005 regarding compensation of  the Directors (filed as Exhibit 10.2 to the Company’s Report on  Form 8-K filed January 21, 2005)                                                            |
|   |   |   |   |                                                                                                                                                                                                                                                                                                                |
| *      |   | 10.20  |   | Resolution of the Board of Directors of Family Dollar Stores, Inc.,  adopted August 18, 2005 regarding compensation of the Company’s Lead  Director (filed as Exhibit 10.1 to the Company’s Report on Form 8-K  filed August 24, 2005)                                           |
|   |   |   |   |                                                                                                                                                                                                                                                                                                                |
| *      |   | 10.21  |   | 2006 Incentive Plan Guidelines for Long Term Incentive Performance Share  Rights Awards (filed as Exhibit 10.1 to the Company’s Report on  Form 8-K filed September 29, 2005)                                                                                                                   |
|   |   |   |   |                                                                                                                                                                                                                                                                                                                |
| *      |   | 10.22  |   | Form of Performance Share Rights Award Certificate Awards (filed  as Exhibit 10.2 to the Company’s Report on Form 8-K filed  September 29, 2005)                                                                                                                                           |
|   |   |   |   |                                                                                                                                                                                                                                                                                                                |
| *      |   | 10.23  |   | Letter Agreement dated August 2, 2005 by and between Family  Dollar Stores, Inc., and R. David Alexander, Jr. (filed as  Exhibit 10 to the Company’s Report on Form 8-K filed August 5,  2005                                                                                    |

 

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|       |                     | 14         |       | Code of Ethics for Chief Executive and Senior Financial Officers  (filed as Exhibit 14 to the Company’s Form 10-K for the year ended  August 30, 2003)                                                                                                                                                                                                               |
|------------|--------------------------|------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|       |                     |       |       |                                                                                                                                                                                                                                                                                                                                                                                     |
|       | Exhibits filed herewith: |
|       |                     |       |       |                                                                                                                                                                                                                                                                                                                                                                                     |
| ** ** | ** **               | **4.2**    | ** ** | **Form of  certificate representing shares of the Company’s Common Stock**                                                                                                                                                                                                                                                                                                     |
| ** ** | ** **               | ** ** | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                               |
| ** ** | ** **               | **10.24**  | ** ** | **Note  Purchase Agreement dated as of September 27, 2005 between Family Dollar  Stores, Inc., Family Dollar, Inc., and the various purchasers named  therein, relating to $169,000,000 5.41% Series 2005-A Senior Notes, Tranche  A, due September 27, 2015; and, $81,000,000 5.24% Series 2005-A  Senior Notes, Tranche B, due September 27, 2015** |
| ** ** | ** **               | ** ** | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                               |
| *****      | ** **               | **10.25**  | ** ** | **Summary  of Family Dollar Stores, Inc., Executive Supplemental Disability Income  Plan**                                                                                                                                                                                                                                                                                          |
| ** ** | ** **               | ** ** | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                               |
| *****      | ** **               | **10.26**  | ** ** | **Family  Dollar Stores, Inc., Executive Life Plan**                                                                                                                                                                                                                                                                                                                                |
| ** ** | ** **               | ** ** | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                               |
| *****      | ** **               | **10.27**  | ** ** | **Relocation  Policy applicable to executive officers of the Company**                                                                                                                                                                                                                                                                                                                   |
| ** ** | ** **               | ** ** | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                               |
| *****      | ** **               | **10.28**  | ** ** | **Letter  agreement between the Company and Irving Neger dated July 21, 2000**                                                                                                                                                                                                                                                                                                      |
| ** ** | ** **               | ** ** | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                               |
| *****      | ** **               | **10.29**  | ** ** | **Separation  agreement between the Company and Irving Neger dated November 1, 2005**                                                                                                                                                                                                                                                                                                    |
| ** ** | ** **               | ** ** | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                               |
| *****      | ** **               | **10.30**  | ** ** | **Summary  of compensation arrangements of the Company’s named executive officers**                                                                                                                                                                                                                                                                                                 |
| ** ** | ** **               | ** ** | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                               |
| *****      | ** **               | **10.31**  | ** ** | **Letter  agreement between the Company and Robert A. George dated July 19, 2005**                                                                                                                                                                                                                                                                                                  |
| ** ** | ** **               | ** ** | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                               |
| *****      | ** **               | **10.32**  | ** ** | **Employment  Agreement dated November 4, 2005 between the Company and Charles S.  Gibson, Jr.**                                                                                                                                                                                                                                                                                    |
| ** ** | ** **               | ** ** | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                               |
| *****      | ** **               | **10.33**  | ** ** | **Amended  and Restated Family Dollar Compensation Deferral Plan**                                                                                                                                                                                                                                                                                                                       |
| ** ** | ** **               | ** ** | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                               |
|       |                     | 21         |       | Subsidiaries of the Company                                                                                                                                                                                                                                                                                                                                                              |
|       |                     |       |       |                                                                                                                                                                                                                                                                                                                                                                                     |
|       |                     | 23         |       | Consent dated November 7, 2005, of PricewaterhouseCoopers LLP,  independent registered public accounting firm                                                                                                                                                                                                                                                                       |
|       |                     |       |       |                                                                                                                                                                                                                                                                                                                                                                                     |
|       |                     | 31.1       |       | Certification pursuant to Section 302 of the Sarbanes-Oxley Act  of Chief Executive Officer                                                                                                                                                                                                                                                                                         |
|       |                     |       |       |                                                                                                                                                                                                                                                                                                                                                                                     |
|       |                     | 31.2       |       | Certification pursuant to Section 302 of the Sarbanes-Oxley Act  of Chief Financial Officer                                                                                                                                                                                                                                                                                         |
|       |                     |       |       |                                                                                                                                                                                                                                                                                                                                                                                     |
|       |                     | 32.1       |       | Certification pursuant to Section 906 of the Sarbanes-Oxley Act  of 2002 of Chief Executive Officer                                                                                                                                                                                                                                                                                 |
|       |                     |       |       |                                                                                                                                                                                                                                                                                                                                                                                     |
|       |                     | 32.2       |       | Certification pursuant to Section 906 of the Sarbanes-Oxley Act  of 2002 of Chief Financial Officer                                                                                                                                                                                                                                                                                 |

 

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*       Exhibit representsa management contract or compensatory plan

 

40

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