Back to GetFilings.com
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
( X ) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 1999
Commission File No.0-25464
DOLLAR TREE STORES, INC.
(Exact name of registrant as specified in its charter)
Virginia 54-1387365
(State or other jurisdiction of (I.R.S. Employer
Incorporation or organization) Identification No.)
500 Volvo Parkway, Chesapeake, VA 23320
(Address of principal executive offices)
Registrant's telephone number, including area code: (757) 321-5000
Securities Registered Pursuant to Section 12(b) of the Act:
Title of Each Class Name of Each Exchange on Which Registered
None None
Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock (par value $.01 per share)
(Title of Class)
Indicate by check mark whether Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes (X) No ( )
Indicate by check mark if disclosure of delinquent filers pursuant to Item
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 information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. (X)
The aggregate market value of Common Stock held by non-affiliates of the
Registrant on March 10, 2000 was $2,009,327,616 based on a $40.844 average of
the high and low sales prices for the Common Stock on such date. For purposes of
this computation, all executive officers and directors have been deemed to be
affiliates. Such determination should not be deemed to be an admission that such
executive officers and directors are, in fact, affiliates of the Registrant.
On March 10, 2000 there were 62,248,562 shares of the Registrant's Common
Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
The information called for in Part III is incorporated by reference to the
definitive Proxy Statement for the Annual Meeting of Stockholders of the Company
to be held May 25, 2000, which will be filed with the Securities and Exchange
Commission not later than April 30, 2000.
DOLLAR TREE STORES, INC.
TABLE OF CONTENTS
Page
PART I
Item 1. BUSINESS.........................................................4
Item 2. PROPERTIES.......................................................9
Item 3. LEGAL PROCEEDINGS...............................................10
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.............10
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS...........................................11
Item 6. SELECTED FINANCIAL DATA.........................................11
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS...........................14
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK......21
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.....................23
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE...........................41
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT..............41
Item 11. EXECUTIVE COMPENSATION..........................................41
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT................................................41
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS..................41
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS
ON FORM 8-K...................................................41
SIGNATURES......................................................42
2
A WARNING ABOUT FORWARD LOOKING STATEMENTS: This document contains
"forward-looking statements" as that term is used in the Private Securities
Litigation Reform Act of 1995. Forward-looking statements address future events,
developments and results. They include statements preceded by, followed by or
including words such as "believe," "anticipate," "expect," "intend," "plan,"
"view" or "estimate." For example, our forward-looking statements include
statements regarding:
o our anticipated comparable store net sales and the impact of our
growth on total sales;
o our future operating costs such as wages and landlord costs (including
rents and our ability to sublease our former distribution centers);
o the availability and cost of merchandise, including shipping costs;
o the reliability and stability of our sources of supply, particularly
China;
o our growth strategy, including store openings and remodeling plans and
entering new markets;
o the planned opening and performance of distribution centers;
o the anticipated consequences of the Year 2000 issue; and
o our expectations regarding competition, the overall retail environment
and domestic and international economies.
These forward-looking statements are subject to numerous risks,
uncertainties and assumptions potentially affecting Dollar Tree, including the
factors described in this annual report under the headings "Business,"
"Properties" and "Management's Discussion and Analysis of Financial Condition
and Results of Operations" as well as the factors listed under "Risk Factors" in
our most recent prospectus. They include, among other things:
o possible difficulties in meeting our expansion goals on a profitable
basis, including anticipated store openings and expansions;
o adverse economic factors and increases in costs, including possible
increases in shipping rates, wage levels and inflation and interest
rates;
o risks relating to our dependence on imports and vulnerability to
import tariffs and restrictions, particularly those regarding China;
o potentially limited availability of low-cost, high-quality
merchandise;
o possible difficulties in achieving our sales goals due to the effect
of expansion, seasonal sales fluctuations, the development of our
larger format stores and changes in merchandise mix;
o the capacity and the performance of our distribution system and its
ability to cope with our expansion plans; and
o increasing competition in the discount retail market.
Our forward-looking statements could be wrong in light of these and other
risks, uncertainties and assumptions. The future events, developments or results
described in this report or our most recent prospectus could turn out to be
materially different. We have no obligation to publicly update or revise our
forward-looking statements after the date of this annual report and you should
not expect us to do so.
Investors should also be aware that while we do, from time to time,
communicate with securities analysts, it is against our policy to disclose to
them any material nonpublic information or other confidential commercial
information. Accordingly, shareholders should not assume that we agree with any
statement or report issued by any analyst regardless of the content of the
statement or report. We also have a policy against issuing financial forecasts
or projections or confirming those issued by others. Thus, to the extent that
reports issued by securities analysts contain any projections, forecasts or
opinions, such reports are not our responsibility.
3
INTRODUCTORY NOTE: Unless otherwise stated, references to "we," "our" and
"Dollar Tree" generally refer to Dollar Tree Stores, Inc. and its direct and
indirect subsidiaries on a consolidated basis.
PART I
Item 1. BUSINESS
Overview
Dollar Tree was started in 1986 by Macon Brock, our President and Chief
Executive Officer, Doug Perry, our Chairman, and Ray Compton, our Executive Vice
President. We are the leading operator of discount variety stores offering
merchandise at a fixed price point of $1.00 or less. We operate over 1,383
stores in 33 states and have added over 200 stores in each of the last two
years.
Our stores successfully operate in major metropolitan areas, mid-sized
cities and small towns with populations under 25,000 and perform well in a
variety of locations. We have traditionally opened stores generally between
3,500 and 6,000 total square feet in size, stocking a wide assortment of
products in many traditional variety store categories. During 1998, we began
testing larger stores in the 7,000 to 10,000 total square foot range, which
provides us the opportunity to target prime locations with the larger store
size. In 2000, we will open stores generally in the 5,000 to 12,000 total square
foot range.
In December 1998, we merged with 98 Cent Clearance Center, adding 66 stores
located in northern and central California and Nevada to our chain. In June
1999, we merged with Only $One, adding 24 stores to our chain in central and
upstate New York. These stores average 10,000 to 12,000 total square feet.
Business Strategy
We are the leader in the $1.00 price point segment of the discount retail
industry. Factors contributing to our success include:
Value Offering. We strive to exceed customers' expectations of the variety
and quality of products that can be purchased for $1.00. Many of the items we
sell for $1.00 are typically sold for higher prices elsewhere. We purchase a
substantial portion of our products directly from foreign manufacturers,
allowing us to pass on additional value to the customer. In addition, direct
relationships with both domestic and foreign manufacturers permit us to select a
broad product range, customize packaging and frequently obtain larger product
sizes and higher package quantities.
Convenient, Highly Visible Store Locations. We locate our stores close to
where we believe our core customer resides. Although our customer tends to be a
female with children in a middle income household, we attract customers from all
demographic ranges, including low and high income households. We believe that
bright lighting and the store's "curb appeal" attract new customers, as well as
our repeat customers, and enhance our image as both a destination and impulse,
treasure hunt store.
Strong and Consistent Store Level Economics. Since 1994, stores opened
under the Dollar Tree name have been profitable within the first full year of
operation. Our stores, whose first full year of operation was 1999, have an
average store level operating income of approximately $195,000 (approximately
22% of net sales).
Cost Control. Given our fixed $1.00 price structure, we must monitor
expenses, inventory levels and operating margins to be successful. We closely
manage both retail inventory shrinkage and retail markdowns of inventory,
limiting each to an average of not more than 2.5% of annual net sales over the
last five years. In the past five years, excluding merger related items, we have
kept our gross profit margins in the 35.9% to 37.7% range and increased our
operating income margin from 10.8% to 13.6%.
Growth Strategy
For the five years ended December 31, 1999, net sales increased at a
compound annual growth rate of 33.2% and operating income, excluding merger
related items, increased at a compound annual growth rate of 41.2%. Future sales
growth will come primarily from new store openings and, to a lesser degree,
sales increases from expanded and relocated stores and comparable store net
sales increases. We anticipate expanding by approximately 225 to 235 stores in
2000. While a portion of our store openings in 2000 are planned to occur in the
West, our
4
store openings continue to be concentrated within our existing eastern markets
to take advantage of market opportunities, distribution efficiencies and field
management efficiencies. We also plan to selectively enter new markets.
We plan to increase our store expansion and relocation program. In 1999, we
expanded or relocated 59 stores and, in 2000, we plan to expand or relocate
approximately 100 additional stores. We target existing stores for expansion
based on the current sales per square foot and changes in market opportunities.
Our growth strategy includes the opening of new distribution centers and
the expansion or replacement of existing distribution centers. We currently
operate four distribution centers. Two of these can be physically expanded--the
facilities in Olive Branch, Mississippi and Stockton, California. In addition,
the Stockton facility can be fully automated when the store demand requires. We
are currently constructing a new 600,000 square foot, leased, automated
distribution facility in Savannah, Georgia which we expect to begin operating
during the first quarter of 2001. See more information on distribution centers
in "Merchandise Receiving and Distribution" on page 7.
We have experienced significant sales growth over the last five years.
Managing our growth has become more complex because we are now operating in 33
states from coast to coast. Our sales growth depends on our ability to
aggressively and steadily add stores and store support systems in a profitable
and efficient manner. Management believes that we are well positioned to
accomplish these tasks, but we may not achieve our targets for opening new
stores, and we may not expand profitably and efficiently. As we expand, we will
face challenges that may be difficult to manage, and others that may be entirely
controlled by outside economic factors. We must supply an increasing number of
stores with the proper mix and amount of merchandise. This will require hiring
an increasing number of qualified employees, opening suitable store sites, and
expanding and upgrading our distribution centers and internal store support
systems. Failure to achieve these goals in a timely and economical manner could
have a material adverse effect on our business and results of operations.
In the past four years, we have made three large acquisitions and a number
of smaller acquisitions which added 239 stores. Our acquisition strategy has
been to target companies with a similar single price point concept that have
shown success in operations or provide some strategic advantage. We look for
opportunities to leverage our management expertise in merchandise procurement,
logistics, management information systems, and in managing growth thereby
significantly improving the acquired company. Reviewing the operating strategies
of the acquired companies has also enabled us to improve our operations.
Although we do not have any current plans regarding potential acquisitions, we
continuously evaluate opportunities in our retail sector.
Inherent in our growth strategy is the constant evaluation of our
infrastructure needs in people, processes and systems. Over the past three
years, we have:
o increased our efforts in recruiting and training;
o improved human resource and merchandising functions;
o added buying and real estate infrastructure; and
o increased our top management expertise.
During this period of growth, we feel we have made appropriate investments
while containing costs and improving operating margins. We will continue making
future investments to improve our supply chain and decision making processes in
order to achieve our target growth rate.
Site Selection and Store Locations
We maintain a disciplined, cost-sensitive approach to store site selection,
favoring strip centers and selected enclosed malls. In the last five years, we
have opened primarily strip center based stores. These stores have required
lower initial capital investment and generated higher operating margins than
mall stores. We prefer opening new stores in strip center locations anchored by
strong mass merchandisers such as Wal-Mart, Kmart and Target, whose target
customers are similar to ours. We also open stores in neighborhood centers
anchored by large grocery retailers. Our stores have been successful in major
metropolitan areas, mid-sized cities and small towns. We believe that our stores
have a relatively small shopping radius, which allows us to concentrate multiple
stores in a single market profitably. Our ability to open new stores is
dependent upon, among other factors, locating suitable sites and negotiating
favorable lease terms.
5
The size of our stores has evolved over time from a predominantly
mall-based store, averaging 2,500 to 3,000 total square feet, in the late
1980's, to a predominantly strip shopping center based store of approximately
4,500 to 5,000 total square feet in more recent years. In the past two years, we
have opened larger size stores, primarily in the 7,000 to 10,000 total square
foot range. The range of store sizes provides us with an important opportunity
to target a particular location with the appropriate store size. Although we
characterize a 7,000 square foot store as "larger," these stores are still
regarded as "small box" retailing within the discount retail industry. Our
management does not view these stores as a departure from our core business.
Including stores added by merger or acquisition, approximately 10% of our
store base at the end of 1999 is greater than 7,000 total square feet per store.
We expect to open 90 to 100 of these larger stores during 2000, primarily in the
8,000 to 12,000 total square foot range. For more information on retail
locations and retail store leases, see "Properties" on page 9.
Merchandising and Store Format
We offer a wide assortment of products which exceed customer expectations
of the value available for $1.00 by:
o providing a balanced mix of everyday core products and changing
selections in traditional variety store categories;
o maintaining a disciplined, global purchasing program; and
o emphasizing the effective display of merchandise in our stores.
Merchandise Mix. Our stores offer a well stocked selection of core and
changing products within traditional variety store categories. These categories
include housewares, candy and food, seasonal goods, health and beauty care,
toys, party goods, gifts, stationery and other consumer items. The actual items
and brands offered at any one time will vary. We have a core selection of
consumable products (such as household chemicals, paper and plastics, candy and
food, and health and beauty care) which we target to have in stock at our stores
continuously. These products are generally available year-round in our
distribution facilities for stores to reorder as needed. Our larger stores carry
more consumable products than our smaller stores, particularly food and health
and beauty care products. Because of the added space in the large stores, we can
also display a larger selection of certain items.
We sell seasonal and impulse items and, to a limited extent, selected
closeout merchandise to add variety and freshness to our core products. Seasonal
goods include Easter gifts, summer toys, back-to-school products and Christmas
wrapping paper. When the opportunity arises, we offer closeout merchandise,
whose value creates an exciting shopping experience for our customers. However,
in order to maintain our disciplined approach to merchandising, we limit
closeout merchandise to less than 20% of our purchases. We also sell lower
priced, private label goods, which are comparable to national name brands.
Purchasing. Our excellent supplier relationships, as well as our
substantial buying power at the $1.00 price point, contribute to our successful
purchasing strategy. We offer real product value to our customers that they
recognize and appreciate. At the same time, we establish disciplined, targeted
merchandise margin goals.
We purchase merchandise from a large number of vendors, including
manufacturers, trading companies and brokers. No vendor accounted for more than
10% of total merchandise purchased in any of the last five years. New vendors
are used frequently to offer competitive, yet varied, product selection and high
levels of value.
We buy product on an order-by-order basis and have no long-term purchase
contracts or other assurances of continued product supply or guaranteed product
cost. Management believes that an adequate supply of quality merchandise suited
to a $1.00 sales price will continue to be available.
Imports. Merchandise imported directly from overseas manufacturers and
agents accounts for approximately 40% to 45% of total purchases at retail. China
is the primary source for our import merchandise. In addition, our management
believes that a small portion of the non-consumable goods that we purchase from
domestic vendors is imported. While we do not expect to significantly increase
imports as a percentage of our merchandise, our future success depends on the
continuing availability of imported merchandise at favorable costs.
Chinese goods imported into the United States currently enjoy favorable
duties because the United States grants China normal trade relations, formerly
called "most favored nation" status. Under a 1974 law, China's favorable trade
status is reviewed on an annual basis and is
6
currently extended through July 2, 2000. In November 1999, the United States and
China finalized an agreement concerning China's future membership in the World
Trade Organization. President Clinton has asked Congress to remove normal trade
relations with China from annual review. However, there continues to be
significant political opposition to the permanent extension of normal trade
relations with China. The opposition stems from a variety of issues, including
China's trade surplus with the United States, its failure to open its markets
adequately to U.S. businesses, its relations with Taiwan, its human rights
record and its acquisition and sale of weapons and sensitive technology. Failure
to renew normal trade relations could have a material adverse effect on our
business and results of operations. For example, administration officials
testified in June 1999 that ending normal trade relations with China would raise
tariffs on Chinese products from their current overall trade-weighted average of
4% to an estimated 44%. Depending on the extent of tariffs and the nature of
goods affected, such an increase could impose significantly higher purchasing
costs on our company.
Even if normal trade relations do become permanent, the United States could
also impose punitive trade sanctions on Chinese goods for a variety of reasons.
In 1995, the United States threatened to impose punitive trade tariffs on
certain categories of Chinese goods in response to China's failure to protect
the intellectual property of U.S. businesses. The November 1999 agreement
between the United States and China permits punitive tariffs and other tariffs
designed to reduce market disruptions because of a large increase in Chinese
imports. Although no punitive import duties are currently imposed, these duties
could equal as much as 100% of the cost of certain Chinese goods. Imposition of
trade restrictions, such as punitive tariffs or duties, could impose
significantly higher purchasing costs on us, depending on which goods might be
affected.
While imported goods are less expensive than domestic goods and have
contributed significantly to our historically favorable profit margins,
importing presents significant risks. For example, the flow of imported goods
could be interrupted, or the cost of purchasing or shipping foreign merchandise
could increase. In the event Chinese or other imported merchandise becomes more
expensive or unavailable, we believe we could find alternative sources of
supply. However, the transition to alternative sources may not occur in time to
meet our demands. Products from alternative sources could also be of lesser
quality and more expensive than those we currently import. As a result, a
disruption in the flow of imported merchandise or an increase in the cost of
those goods could have a material adverse effect on our business and results of
operations.
Visual Merchandising. The presentation and display of merchandise in our
stores is critical to communicating value and excitement to our customers. Our
stores are attractively designed. They create an inviting atmosphere for
shoppers by using bright lighting, vibrant colors, uniform decorative signs,
carpeting and background music. Our merchandise fixtures include gondola
shelving, slat walls, bins, and adjustable gift displays, allowing us the
flexibility to rearrange merchandise to feature seasonal products. Some of these
fixtures have been specifically designed for us, such as the customized shelf
display promoting our polyresin and porcelain gift products. Our field
merchandising group, including regional merchandise managers and store display
coordinators, maintains a consistent visual presentation of merchandise
throughout our chain of stores. We rely on attractive exterior signs and
in-store merchandising for our advertising. We generally do not use other forms
of advertising, except when promoting the opening of a new store.
The wide variety, value and freshness of our merchandise together with the
lively appearance of the store create an exciting shopping experience for our
customers. These unique features result in high store traffic, high sales volume
and an environment which encourages impulse purchases. Credit and debit cards
are accepted at a select number of stores and checks are accepted at all stores.
During 1999, we converted the 98 Cent Clearance Center stores to more
closely resemble existing Dollar Tree stores, including changing the store name
to Dollar Tree. During the first quarter of 2000, we will convert most of the 24
Only $One stores added in 1999. These conversions will include installing new
checkouts and display fixtures and improving store layouts and merchandise
displays at all Only $One stores and changing the name from Only $One to Dollar
Tree at select stores.
Merchandise Receiving And Distribution
Merchandise receiving and distribution are managed centrally from our
corporate headquarters, located on the same site as our Chesapeake, Virginia
distribution center. Maintaining a strong receiving and distribution system is
critical to our expansion and ability to maintain a low cost operating
structure.
7
Substantially all of our inventory is shipped or picked up directly from
suppliers and delivered to our distribution centers, where the inventory is
processed and then distributed to our stores. The majority of our inventory is
delivered to the stores by contract carriers. Stores receive weekly shipments of
merchandise from distribution centers based on their anticipated inventory
requirements for that week. We also make semi-weekly deliveries to certain high
volume stores and during the busy Christmas season.
Our distribution center capacity allows us to receive manufacturers' early
shipment discounts and buy large quantities of goods at favorable prices. In
addition, during the past several years we have used off-site facilities to
accommodate large receipts of seasonal merchandise. For more information on
distribution centers, see "Properties" on page 9.
Competition
The retail industry is highly competitive. Our competitors include mass
merchandisers (such as Wal-Mart), discount stores (such as Dollar General),
closeout stores (such as Odd Lots and Big Lots) and other variety stores. In
past years, other single price point retailers have not been significant
competitors. However, we expect that our expansion plans as well as the
expansion plans of other single price point retailers such as 99 Cents Only
Stores based in Southern California and Dollar Express based in Philadelphia,
Pennsylvania will bring us increasingly into direct competition. Increased
competition may have a material adverse effect on our business, comparable store
net sales and results of operations.
Trademarks
We are the owners of Federal service mark registrations for "Dollar Tree,"
the "Dollar Tree" logo, "1 Dollar Tree" together with the related design, and
"One Price . . . One Dollar." A small number of our stores operate under the
name "Only One Dollar," for which we have not obtained a service mark
registration; if we were required to change the name of these stores, we do not
believe that this would have a material adverse effect on our business. We also
own a concurrent use registration for "Dollar Bill$" and the related logo.
During 1997, we acquired the rights to use trade names previously owned by
Everything's A Dollar, a former competitor in the $1.00 price point industry.
Several trade names were included in the purchase, including the marks
"Everything's $1.00 We Mean Everything" and "Everything's $1.00," the
registration of which is pending, and "The Dollar Store." In 1998, with the
acquisition of 98 Cent Clearance Center, we became the owner of additional
Federal service mark registrations which include "98 Cent Clearance Centers" and
"98 Cent Clearance Centers" together with the related design. In 1999, with the
acquisition of the Only $One stores, we became the owner of additional Federal
service mark registrations which include Only One $1 stylized "Only $One"
together with the related design. We also occasionally use various private
labels under which we market products, although management believes that these
brand names are not material to our operations.
Seasonality
Dollar Tree has historically experienced and expects to continue to
experience seasonal fluctuations in its net sales, operating income and net
income. See "Management's Discussion and Analysis--Seasonality and Quarterly
Fluctuations" on page 20.
Employees
We employed approximately 5,000 full-time and 13,000 part-time associates
on December 31, 1999. The number of part-time associates fluctuates depending on
seasonal needs. None of our associates are currently represented by a labor
union. The Teamsters have attempted to organize our associates at our Chesapeake
and Chicago distribution centers on several occasions, and we expect them to do
so in the future. We consider our relationship with associates to be good, and
we have not experienced significant interruptions of operations due to labor
disagreements.
8
Item 2. PROPERTIES
As of December 31, 1999, we operated 1,383 stores in 33 states. The
following table presents a summary of our historical unit growth by region over
the past three years (number represents stores open as of the date indicated):
December 31,
---------------------------------------
1999 1998 1997
---- ---- ----
Southeast.................... 466 415 351
Midwest...................... 362 309 256
Mid-Atlantic................. 258 230 196
Southcentral................. 121 68 47
Northeast ................... 99 91 57
West......................... 77 66 59
----- ----- -----
Total....................... 1,383 1,179 966
===== ===== =====
Of the 1,383 stores open at December 31, 1999, the majority are located in
the Southeastern and Midwestern regions of the United States. We anticipate
expanding by approximately 225 to 235 stores in 2000.
We currently lease all of our existing store locations and expect that our
policy of leasing rather than owning stores will continue as we expand. Our
leases typically provide for a short initial lease term and give us the option
to extend. Management believes that this lease strategy enhances our flexibility
to pursue various expansion and relocation opportunities resulting from changing
market conditions. Our ability to open new stores is contingent upon:
o finding, signing leases for, building-out improvements for and opening
suitable store sites on a timely basis and on favorable economic
terms, including both in new geographic markets, where we have limited
or no experience, and in our established geographic markets, where new
stores may draw sales away from our existing stores; and
o hiring, training and retaining an increasing number of qualified
employees at affordable rates of compensation.
As current leases expire, we believe that we will be able either to obtain
lease renewals, if desired, for present store locations, or to obtain leases for
equivalent or better locations in the same general area. To date, we have not
experienced difficulty in either renewing leases for existing locations or
securing leases for suitable locations for new stores. We may have violated
prohibitions against a change in control of Dollar Tree in a minority of our
leases. Many of our leases contain provisions with which we do not comply,
including provisions requiring us to advertise or insure store property,
prohibiting us from operating another store within a specified radius and
restricting the sale of leasehold improvements. We believe that the violation of
these provisions will not have a material adverse effect on our business or
financial position because we maintain good relations with our landlords, and we
are a valued tenant. Most of our leases are at market rents, and we have
historically been able to secure leases for suitable locations.
The following table includes information about the distribution centers
that we currently operate. We believe our existing distribution centers can
support a total of approximately $1.7 billion in sales. The table shows the
location of those distribution centers; whether we own the facility or lease it,
and, if leased, when the lease expires; and the overall size in square feet of
the facility.
Size in
Location Own/Lease Lease Expires Square Feet
- -------- --------- ------------- -----------
Chesapeake, Virginia Own N/A 400,000
Olive Branch, Mississippi Own N/A 425,000
Chicago, Illinois area Lease June 2005, with 250,000
options to renew
Stockton, California Lease June 2004, with 317,000
options to renew
9
We have also signed a contract to lease a 600,000 square foot distribution
center being constructed in Savannah, Georgia. We believe this facility, along
with our existing distribution centers, will support sales of more than $2
billion. We expect this distribution center to be operational in the first
quarter of 2001 and its lease expires in January 2005 with options to renew.
The Chesapeake and Olive Branch distribution centers contain, and the
Savannah distribution center will contain, advanced materials handling
technologies, including an automated conveyor and sorting system,
radio-frequency inventory tracking equipment and specialized information
systems. The Chicago and Stockton distribution centers are not automated, but
the Stockton distribution center is designed to allow for future automation.
Our Store Support Center in Chesapeake was built in 1997 to replace our
original location in Norfolk, Virginia. The lease on our former Norfolk location
expires in December 2009 and the facility has been subleased through February
2008. The distribution center in Olive Branch became operational in January 1999
and replaced a former location in Memphis, Tennessee. The lease on our former
Memphis distribution center expires in September 2005; this facility is
currently subleased through December 2000. The distribution center in Stockton
became operational in January 2000 and replaced a former location in the
Sacramento, California area. The lease on our former Sacramento distribution
center expires in June 2008; we hope to sublease this facility in the future.
See "Management's Discussion and Analysis--Inflation and Other Economic Factors"
on page 20.
Item 3. LEGAL PROCEEDINGS
Alper Lawsuit. On January 31, 1996, we bought all of the capital stock of
Dollar Bills, Inc. pursuant to a stock purchase agreement. In March and April
1996, Michael and Pamela Alper, former shareholders of Dollar Bills, together
with a corporation they control, filed lawsuits in the state and federal courts
in Illinois against our company and one of our employees, relating to the Dollar
Bills transaction. The lawsuits sought to recover compensatory damages of not
less than $10.0 million, punitive damages, attorney's fees and other relief. The
plaintiffs claimed contract violations, fraud, misrepresentation and other
violations in connection with our purchase of the wholesale operations which
were owned by Dollar Bills and are currently operated by Dollar Tree. Plaintiffs
subsequently dismissed their suit in state court voluntarily. On November 26,
1996, the federal court dismissed all counts of the plaintiffs' lawsuit against
us and the co-defendant. Plaintiffs' federal securities and federal antitrust
claims against us were dismissed with prejudice and the state claims were
dismissed without prejudice. No litigation is currently pending against us in
this matter. However, in light of the history of this dispute, the Alpers may
attempt to refile their state law claims in the future. We believe that the
ultimate outcome of this matter will not have a material adverse effect on our
financial condition or results of operations. Nevertheless, there can be no
assurance regarding the ultimate outcome of any future litigation, and any such
litigation may have a material adverse effect on our financial condition or
results of operations.
Consumer Products Liability. We recalled (in cooperation with the Consumer
Products Safety Commission) approximately 155,000 retractable dog leashes which
we sold between November 1997 and January 1998. We learned of several minor
injuries involving the leashes, and one leash allegedly caused a serious
personal injury in January 1998. Our insurer settled with that individual in
1999 at no cost to Dollar Tree. Management does not believe that potential
claims arising from product injuries will have a material adverse effect on us.
However, we can give no assurance that additional serious injuries from products
we have sold will not occur in the future.
Additional Disputes. We are also defendants to ordinary routine litigation
and proceedings incidental to our business, including certain matters which may
occasionally be asserted by the Consumer Products Safety Commission. We are
currently in the process of recalling three products. We do not believe that any
of these additional matters are individually or in the aggregate material to the
Company.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of our 1999 calendar year.
10
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Dollar Tree's common stock has been traded on The Nasdaq Stock Market(R)
under the symbol "DLTR" since our initial public offering on March 6, 1995. The
following table gives the high and low sales prices of our common stock as
reported by Nasdaq for the periods indicated, restated to reflect a 3-for-2
stock split effected as a stock dividend in June 1998.
1999: High Low
----- ---- ---
First Quarter........................... $ 49.250 $ 30.750
Second Quarter.......................... 44.000 28.750
Third Quarter........................... 46.500 32.500
Fourth Quarter.......................... 52.250 34.500
1998:
-----
First Quarter........................... $ 36.083 $ 23.000
Second Quarter.......................... 41.917 33.417
Third Quarter........................... 49.500 27.875
Fourth Quarter.......................... 48.750 23.750
On March 10, 2000, the last reported sale price for our common stock as
quoted by Nasdaq was $40.063 per share. As of March 10, 2000, we had
approximately 460 shareholders of record.
We anticipate that all of our income in the foreseeable future will be
retained for the development and expansion of our business and the repayment of
indebtedness. Management does not anticipate paying dividends on our common
stock in the foreseeable future. Additionally, our credit facilities contain
financial covenants which restrict our ability to pay dividends.
Item 6. SELECTED FINANCIAL DATA
This section of our report presents our selected financial data for the
last five years. This information is different from the information reported in
the table in our 1998 Annual Report on Form 10-K because we merged with Only
$One during 1999. We accounted for the merger as a pooling of interests, which
required us to combine the financial statements of Dollar Tree with those of
Only $One, retroactively.
The selected income statement and balance sheet items for December 31,
1999, 1998 and 1997 come from our consolidated financial statements that have
been audited by our independent certified public accountants. This information
should be read in conjunction with the consolidated financial statements and
related notes, "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and other financial information found elsewhere in this
report.
11
Year Ended December 31,
--------------------------------------------------------------
1999 1998(1) 1997(1) 1996(1,2) 1995(1,3)
---- ------- ------- --------- ---------
(In thousands, except store, per share data
and sales per square foot)
Income Statement Data:
Net sales......................................... $1,197,960 $944,122 $745,590 $577,440 $366,842
Cost of sales..................................... 746,463 589,080 474,612 369,701 235,117
Merger related costs (4) ......................... 443 1,301 - - -
--------- -------- ------- ------- -------
Gross profit................................... 451,054 353,741 270,978 207,739 131,725
Selling, general and administrative expenses:
Operating expenses............................. 259,917 208,782 169,792 131,682 85,880
Merger related expenses (4) ................... 607 4,024 - - -
Depreciation and amortization.................. 28,117 20,518 14,523 11,497 6,164
--------- ------- ------- ------- -------
Total........................................ 288,641 233,324 184,315 143,179 92,044
--------- ------- ------- ------- -------
Operating income.................................. 162,413 120,417 86,663 64,560 39,681
Interest income................................... 1,717 596 145 108 60
Interest expense.................................. (4,522) (4,927) (3,554) (5,712) (3,029)
--------- ------- ------- ------- -------
Income before income taxes........................ 159,608 116,086 83,254 58,956 36,712
Provision for income taxes........................ 61,090 44,533 31,295 22,249 13,392
--------- ------- ------- ------- -------
Net income........................................ $ 98,518 $ 71,553 $ 51,959 $ 36,707 $ 23,320
========= ======= ======= ======= =======
Income Per Share Data (5):
Basic net income per share..................... $ 1.59 $ 1.17 $ 0.86 $ 0.62 $ 0.40
========= ======= ======= ======= =======
Diluted net income per share................... $ 1.45 $ 1.06 $ 0.78 $ 0.56 $ 0.37
========= ======= ======= ======= =======
Pro Forma Income Data (6):
Pro forma net income........................... $ 98,013 $ 70,528 $ 51,177 $ 36,184 $ 22,853
========= ======= ======= ======= =======
Pro forma basic income per share............... $ 1.58 $ 1.15 $ 0.84 $ 0.61 $ 0.39
========= ======= ======= ======= =======
Pro forma diluted income per share............. $ 1.44 $ 1.04 $ 0.76 $ 0.55 $ 0.36
========= ======= ======= ======= =======
Weighted average number of common shares
outstanding, in thousands ...................... 61,839 61,185 60,714 59,436 58,008
========= ======= ======= ======= =======
Weighted average number of common shares and
dilutive potential common shares outstanding,
in thousands .................................. 68,135 67,626 66,982 65,495 63,641
========= ======= ======= ======= =======
Selected Operating Data:
Number of stores open at end of period (7)........ 1,383 1,179 966 801 552
Total gross square footage (7).................... 6,675 5,376 4,218 3,319 2,063
Net sales growth.................................. 26.9% 26.6% 29.1% 57.4% 28.5%
Comparable store net sales increase (8) .......... 5.6% 6.8% 7.5% 5.6% 6.4%
Net sales per store (9) .......................... $ 920 $ 879 $ 826 $ 758 $ 721
Net sales per square foot (9)..................... $ 198 $ 200 $ 199 $ 201 $ 195
As of December 31,
-----------------------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
Balance Sheet Data:
Working capital................................... $ 219,545 $114,182 $ 65,313 $ 26,897 $ 33,025
Total assets...................................... 571,128 405,187 306,698 198,650 110,269
Total debt........................................ 82,058 49,426 41,166 13,039 19,836
Shareholders' equity.............................. 360,971 248,816 164,357 108,071 43,628
12
(1) We merged with 98 Cent Clearance Center during 1998 in a transaction
accounted for as a pooling of interests. The following table identifies the
reporting periods that have been combined:
Historical Fiscal Period Currently Reported
Dollar Tree 98 Cent Clearance Center Combined Period
----------- ------------------------ ---------------
Jan. 1, 1998-Dec. 31, 1998 Jan. 26, 1998-Dec. 31, 1998 Calendar Year 1998
Jan. 1, 1997-Dec. 31, 1997 Jan. 27, 1997-Jan. 25, 1998 Calendar Year 1997
Jan. 1, 1996-Dec. 31, 1996 Jan. 29, 1996-Jan. 26, 1997 Calendar Year 1996
Jan. 1, 1995-Dec. 31, 1995 Jan. 30, 1995-Jan. 28, 1996 Calendar Year 1995
Effective January 30, 1995 and prior to the merger with Dollar Tree in
1998, 98 Cent Clearance Center reported financial results based on a
52-week period that ended on the last Sunday in January. For this reason,
our combined calendar year 1998 financial statements include only an
11-month period for 98 Cent Clearance Center. Only $One's reported
financial results are based on a calendar year and are included in each
period presented.
(2) On January 31, 1996, we bought all of the stock of a corporation owning 136
Dollar Bills stores in an acquisition accounted for as a purchase. For this
reason, the operating results for the year ended December 31, 1996 only
include 11 months of results for Dollar Bills. The operating results for
the year ended December 31, 1995 do not include any Dollar Bills results.
(3) Effective January 30, 1995, 98 Cent Clearance Center changed its fiscal
year from a 52-week period ending on the Sunday nearest December 31 to the
last Sunday in January. For this reason, 98 Cent Clearance Center's results
of operations for the four-week period ended January 29, 1995 are not
included in the results of operations for the year ended December 31, 1995.
The net loss for this four-week period was $169.
(4) For 1999, represents expenses of $1,050 related to the June 1999 merger
with Only $One, primarily inventory writedowns and professional fees. For
1998, represents expenses of $5,325 related to the December 1998 merger
with 98 Cent Clearance Center, primarily professional fees and inventory
and fixed asset writedowns.
(5) Basic net income per share is computed by dividing net income by the
weighted average number of common shares outstanding. Diluted net income
per share is computed by dividing net income by the weighted average number
of common shares and dilutive potential common shares outstanding. Dilutive
potential common shares include all outstanding stock options and warrants
after applying the treasury stock method.
(6) Amounts include a pro forma adjustment for C-corporation income taxes
relating to Only $One of $505 in 1999, $1,025 in 1998, $782 in 1997, $523
in 1996, and $467 in 1995.
(7) We closed four stores in 1999, seven stores in 1998, one store in 1997, six
stores in 1996, and three stores in 1995.
(8) Comparable store net sales increase compares net sales for stores open
during the entire two periods compared. The comparable store net sales
increase calculation for the year ended December 31, 1998 includes net
sales for 98 Cent Clearance Center for the 11-month periods ended December
31, 1998 and 1997. The comparable store net sales increase calculation for
the year ended December 31, 1997 includes net sales of Dollar Bills stores
for the 12-month periods ended December 31, 1997 and 1996.
(9) For stores open the entire period presented. The net sales per store and
net sales per square foot calculations for 1998 include 98 Cent Clearance
Center's net sales for the 12-month period ended December 31, 1998. Dollar
Bills stores are included in the calculations beginning in 1997.
13
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Introduction
In Management's Discussion and Analysis, we explain our general financial
condition and results of operations, including:
o what factors affect our business;
o what our earnings and costs were for the years 1999, 1998, and 1997;
o why earnings and costs in 1999 and 1998 were different from the year
before;
o where our earnings come from;
o how all of this affects our overall financial condition;
o what our expenditures for capital projects were in 1999, 1998, and
1997 and what we expect them to be in 2000; and
o where funds will come from to pay for future expenditures.
We merged with 98 Cent Clearance Center in December 1998 and with Only $One
in June 1999. We accounted for each of these mergers as a "pooling of
interests." Under this form of accounting, we combined the financial statements
of Dollar Tree with those of 98 Cent Clearance Center and Only $One, not only
since the dates of the mergers, but also retroactively. As a result, all
financial data, information, and discussion assumes that 98 Cent Clearance
Center and Only $One had each been a part of Dollar Tree throughout all years
discussed. For each period presented, the outstanding 98 Cent Clearance Center
and Only $One shares have been converted into Dollar Tree shares based on the
exchange ratios used in each merger. This has the effect of changing our prior
net income per share calculations.
Key Events and Recent Developments
Several key events have had or are expected to have a significant effect on
our results of operations. When reading Management's Discussion and Analysis,
you should keep in mind that:
o In January 2000, we signed a contract to enter into an operating lease
for a new 600,000 square foot distribution center, which is being
constructed in Savannah, Georgia. We plan to have this facility in
operation in the first quarter of 2001.
o Also in January 2000, we opened a new 317,000 square foot distribution
center in Stockton, California, which replaced our Sacramento,
California facility.
o In June 1999, we completed our merger with Only $One. We issued
501,600 shares of our common stock to the former owners of Only $One.
Only $One operated 24 stores in central and upstate New York.
o In January 1999, we opened a new 425,000 square foot distribution
center in Olive Branch, Mississippi, which replaced our Memphis,
Tennessee facility.
o In December 1998, we completed our merger with 98 Cent Clearance
Center. We reserved or issued approximately 2,152,000 shares of our
common stock for 98 Cent Clearance Center's existing shareholders and
its option holders. 98 Cent Clearance Center operated 66 stores in
northern and central California and Nevada.
o In January 1996, we acquired a corporation owning 136 Dollar Bills
stores for $54.6 million in cash and inventory.
Results of Operations
In this section, we discuss our 1999 and 1998 operations and the factors
affecting them. Our net sales result from the sale of merchandise. Two major
factors tend to affect our net sales trends. First is our success at opening new
stores or adding new stores through mergers or acquisitions. Second, sales at
our existing stores change from one year to the next. We refer to this as a
change in "comparable store net sales," because we compare only those stores
which are open for the entire two years being compared.
14
Most retailers can increase the price of their merchandise as well as sell
more merchandise in order to increase their comparable store net sales. As a
fixed price point retailer, we do not have the ability to raise our prices. Our
comparable store net sales increase only if we sell more merchandise. In 1999,
however, we increased the price point in the sixty-six 98 Cent Clearance Centers
from $0.98 to $1.00, which had a minor impact on our comparable store net sales.
We believe that our future comparable store net sales increases, if any, will be
lower than those we have experienced in the past. Our internal business plan
continues to call for a 2% to 3% increase in comparable store net sales in 2000,
with some reduction in the first quarter of 2000 because the Easter holiday
shopping season shifts to the second quarter.
We anticipate that our future sales growth will come mostly from new store
openings. We plan to expand by 225 to 235 stores in 2000. We also expect our
average store size to increase in 2000, which we believe will result in a
decrease in our net sales per square foot.
Increases in expenses could impact our operating results negatively since
we cannot pass on increased expenses to our customers by increasing our
merchandise price. Consequently, our future success depends in large part on our
ability to control costs.
The following table expresses certain of our expenses as a percentage of
net sales:
Year Ended December 31,
-----------------------
1999 1998 1997
---- ---- ----
Net sales...................................... 100.0% 100.0% 100.0%
Cost of sales.................................. 62.3 62.4 63.7
Merger related costs .......................... - 0.1 -
----- ----- -----
Gross profit................................. 37.7 37.5 36.3
Selling, general and administrative expenses:
Operating expenses........................... 21.7 22.1 22.8
Merger related expenses...................... 0.1 0.4 -
Depreciation and amortization................ 2.3 2.2 1.9
----- ----- -----
Total...................................... 24.1 24.7 24.7
----- ----- -----
Operating income............................... 13.6 12.8 11.6
Interest income................................ 0.1 0.0 0.0
Interest expense............................... (0.4) (0.5) (0.5)
----- ----- -----
Income before income taxes..................... 13.3 12.3 11.1
Provision for income taxes..................... 5.1 4.7 4.2
----- ----- -----
Net income..................................... 8.2% 7.6% 6.9%
===== ===== =====
1999 Compared to 1998
Net Sales. Net sales increased 26.9% to $1,198.0 million for 1999 from
$944.1 million for 1998. We attribute this $253.9 million increase to two
factors:
o Approximately 81% of the increase came primarily from stores opened in
1999 and 1998, which are not included in our comparable store net
sales calculation.
o Approximately 19% of the increase came from comparable store net sales
growth. Comparable store net sales increased 5.6% during 1999.
Because our products sell for a fixed price, the increase in comparable
store net sales was entirely a result of an increase in the number of items sold
in the stores included in the calculation. We believe net sales increased in
comparable stores because:
o We improved the quality and mix of merchandise, with a slightly higher
emphasis on consumable products.
o Throughout 1999, we changed the merchandise mix at the 98 Cent
Clearance Center stores to more closely resemble the mix at our
existing Dollar Tree stores.
o We benefited from expanding and relocating existing stores, which are
included in the comparable store net sales calculation.
o Customers purchased a higher average number of items and more
customers visited our stores.
15
We opened 208 new stores and closed four stores during 1999, compared to
220 new stores opened and seven stores closed the previous year. The new 1999
stores include four that we acquired from a small dollar store operator. We
added 24.2% to our total square footage in 1999 compared to adding 27.5% in
1998.
Gross Profit. Gross profit increased $97.3 million, or 27.5% in 1999 as
compared to 1998. Our gross profit expressed as a percentage of net sales is
called our "gross profit margin." Our gross profit margin increased to 37.7% in
1999 from 37.5% in 1998. This increase occurred mainly because of a decline in
certain costs as a percentage of net sales offset by increases in certain costs
as a percentage of sales:
o Our increased sales volume provided greater buying power with
merchandise vendors. We also experienced lower overall merchandise
costs resulting from an increase in the percentage of import
merchandise.
o Our distribution costs were lower as a result of efficiencies at our
Chesapeake and Olive Branch distribution centers.
o We experienced higher freight costs because of the increase in the
trans-Pacific shipping rates. Management estimates that the impact of
these higher shipping rates was approximately $5.0 million in 1999.
See "Inflation and Other Economic Factors" on page 20.
In 1999, we purchased a slightly higher percentage of imports, which
generally cost less than domestic product, and these goods improved our gross
profit margin for the year. In 2000, we intend to buy more consumable products,
such as food and household chemicals, to meet customer demand and supply our
larger store format. Consumable products are generally domestically produced and
carry a higher cost than imports. Management expects the changing merchandise
mix will result in a slight reduction in gross profit margin in 2000.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $55.3 million, or 23.7%, in 1999 compared to
1998. As a percentage of net sales, selling, general and administrative expenses
decreased to 24.1% in 1999 compared to 24.7% in 1998. Excluding merger related
expenses, selling, general and administrative expenses decreased as a percentage
of net sales to 24.0% in 1999 from 24.3% in 1998. This decrease happened
primarily because our comparable store net sales allowed us to leverage our
fixed costs. Depreciation and amortization increased $7.6 million, to 2.3% as a
percentage of net sales in 1999 from 2.2% in 1998. This percentage increase is
mainly the result of depreciation related to the Olive Branch facility.
During 1999, we recorded a $1.3 million loss contingency in selling,
general and administrative expenses due to our uncertainty about being able to
sublease our Sacramento facility for an amount that would cover our remaining
payments. During 1998, we recorded a $1.1 million loss contingency in selling,
general and administrative expenses because we were not certain that we could
sublease our Memphis facility for an amount that would cover our remaining
payments. The Memphis facility experienced favorable developments in 1999, which
reduced the loss contingency approximately $0.7 million. See "Inflation and
Other Economic Factors" on page 20.
Operating Income. Our operating income increased $42.0 million, or 34.9%,
in 1999 as compared to 1998. As a percentage of net sales, operating income
increased to 13.6% in 1999 compared to 12.8% in 1998. Excluding merger related
items, operating income increased to $163.5 million in 1999 from $125.7 million
in 1998 and increased as a percentage of net sales to 13.6% from 13.3%. These
increases were attributable to our improved gross profit margin and the decrease
in our selling, general and administrative expenses as a percentage of net sales
discussed above.
Interest Income/Expense. Interest expense decreased $0.4 million to $4.5
million in 1999 from $4.9 million in 1998. Interest income increased $1.1
million to $1.7 million in 1999 from $0.6 million in 1998. The increase in
interest income and the decrease in interest expense each resulted from lower
levels of debt in 1999 compared to 1998, creating a higher cash position in 1999
compared to 1998.
1998 Compared to 1997
Net Sales. Net sales increased 26.6% to $944.1 million for 1998 from $745.6
million for 1997. We attribute this $198.5 million increase to two factors:
o Approximately 80% of the increase came primarily from stores opened in
1998 and 1997, which are not included in our comparable store net
sales calculation.
16
o Approximately 20% of the increase came from comparable store net sales
growth. Comparable store net sales increased 6.8% during 1998. This
comparable store net sales calculation includes sales at 98 Cent
Clearance Center stores for the 11-month periods ended December 31,
1998 and December 31, 1997.
We believe net sales increased in comparable stores because:
o We stocked a more consistent quantity of consumable products during
the first half of 1998.
o Customers purchased a higher average number of items, and more
customers visited our stores.
o The number of days in the Easter selling season increased because
Easter shifted to April 12 in 1998 from March 30 in 1997.
o We continued to improve the quality and variety of merchandise offered
in our stores.
We opened 220 new stores and closed seven stores during 1998, compared to
166 new stores opened and one store closed the previous year. We acquired nine
of the new stores in 1998 from two small dollar store operators.
Gross Profit. Gross profit increased $82.8 million, or 30.5%, in 1998 as
compared to 1997. Our gross profit margin increased to 37.5% in 1998 from 36.3%
in 1997. If you exclude merger related costs otherwise included in cost of sales
(related to merchandise markdowns), the gross profit margin increased to 37.6%.
This increase occurred mainly because certain costs declined as a percentage of
net sales:
o Our increased sales volume gave us greater buying power with
merchandise vendors, which in turn lowered our overall merchandise
costs expressed as a percentage of net sales. We believe that
favorable foreign currency rates had only a minor effect on the lower
cost of our imported goods.
o We imported a higher percentage of our goods.
o We experienced lower occupancy costs expressed as a percentage of net
sales because occupancy costs tend to be mostly fixed. The ability to
lower fixed costs as a percentage of net sales because of a growth in
sales is known in the industry as "leverage."
In 1998, we brought in a larger than usual amount of imports compared to
1997, which generally cost less than domestic product, and these goods improved
our gross profit margin for the year. Consumable products are generally
domestically produced and carry a higher cost than imports.
In May 1998, certain ocean shippers increased freight charges by $300 per
container. The higher charges, which apply only to imported goods, added
approximately $700,000 to our freight costs in 1998.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $49.0 million, or 26.6%, in 1998 as compared
to 1997. As a percentage of net sales, selling, general and administrative
expenses remained constant at 24.7%. If you exclude merger related expenses,
selling, general and administrative expenses decreased as a percentage of net
sales to 24.2% in 1998 from 24.7% in 1997. This decline happened primarily
because we were able to leverage fixed costs across a higher sales volume
because of a high comparable store net sales increase. Depreciation and
amortization increased $6.0 million, to 2.2% as a percentage of net sales in
1998 from 1.9% in 1997. This percentage increase is mainly the result of
depreciation related to the Chesapeake Store Support Center.
Operating Income. Our operating income increased $33.8 million, or 38.9%,
in 1998 as compared to 1997. As a percentage of net sales, operating income
increased to 12.8% in 1998 from 11.6% in 1997. If you exclude merger related
items, operating income increased to $125.7 million in 1998 from $86.7 million
in 1997 and increased as a percentage of net sales to 13.3% from 11.6%. These
increases were attributable to our improved gross profit margin and the decrease
in our selling, general and administrative expenses as a percentage of net sales
discussed above.
Interest Income/Expense. Interest income increased $0.5 million to $0.6
million in 1998 from $0.1 million in 1997. This increase was primarily a result
of an increased net cash position in the fourth quarter of 1998 compared to
1997. Interest expense increased $1.3 million to $4.9 million in 1998 from $3.6
million in 1997. This increase was primarily a result of higher levels of debt
in 1998 compared to 1997 resulting from borrowings related to our two new
distribution centers. In 1998, we capitalized $402,000 of interest relating to
the construction of the Olive
17
Branch facility compared with $916,000 of interest capitalized in 1997 related
to the construction of the Chesapeake Store Support Center.
Liquidity and Capital Resources
Overview
Our business requires capital primarily to open new stores and operate
existing stores. Our working capital requirements for existing stores are
seasonal and typically reach their peak in the months of September and October.
Historically, we have satisfied our seasonal working capital requirements for
existing stores and funded our store expansion program from internally generated
funds and borrowings under our credit facilities.
The following table compares certain cash-related information for 1999,
1998, and 1997:
1999 1998 1997
---- ---- ----
(in millions)
Net cash provided by (used in):
Operating activities............ $120.7 $ 71.0 $ 70.5
Investing activities............ (48.1) (53.4) (60.0)
Financing activities............ 29.2 9.4 29.4
We generally expended net cash used in investing activities to open new
stores and to meet the following additional needs:
o $17.9 million for part of the construction of the Olive Branch
distribution center in 1998 and another $1.4 million on that project
in 1999; and
o $30.0 million for the construction of the Chesapeake Store Support
Center in 1997.
Net cash provided by financing activities reflects cash which came from
sources other than normal operations. We obtained cash from the exercise of
stock options and the following sources:
o $21.6 million from the sale and leaseback of some of our retail store
leasehold improvements in 1999;
o $2.5 million in 1999 and $16.5 million in 1998 from the issuance of
callable bonds related to the construction of the Olive Branch
facility; and
o $30.0 million from the issuance of senior notes in 1997.
Our borrowings under our bank facility, senior notes and bonds were $49.0
million at December 31, 1999 and $46.5 million at December 31, 1998. At December
31, 1999, we had an additional $135.0 million available through our bank
facility. Of this amount, approximately $42.4 million is committed to letters of
credit issued for the routine purchase of imported merchandise.
Funding Requirements
We expect to expand by approximately 225 to 235 stores during 2000. In
1999, the average investment per new store, including capital expenditures,
initial inventory and pre-opening costs, was approximately $211,000 per store.
Of our new Dollar Tree stores in 1999, 35 were a slightly larger format than our
traditional prototype. Average investment for these larger stores was
approximately $307,000. We expect our cash needs for opening new stores in 2000,
including approximately 90 to 100 of the larger format stores, to total
approximately $58.0 million and we have budgeted $36.5 million for capital
expenditures and $21.5 million for initial inventory and pre-opening costs. Our
total planned capital expenditures for 2000 are approximately $77.5 million,
including planned expenditures for expanded and relocated stores, additional
equipment for the distribution centers, computer system upgrades, expanding the
Store Support Center in Chesapeake and remodeling and upgrading the Only $One
stores.
We believe that we can adequately fund our planned capital expenditures and
working capital requirements for the next several years from net cash provided
by operations and borrowings under our credit facility.
18
Bank Credit Facility. During September 1996, we entered into an amended and
restated credit agreement with our banks which currently provides for a $135.0
million unsecured revolving credit facility to be used for working capital,
letters of credit and development needs, bearing interest at the agent bank's
prime rate or LIBOR plus a spread, at our option. As of December 31, 1999, the
interest rate was approximately 7.0%. The credit agreement, among other things,
requires the maintenance of certain specified ratios, restricts the payments of
cash dividends and other distributions, limits the amount of debt, and, through
March 1, 2000, requires that aggregate borrowings must be paid down to a
specified amount for at least 30 consecutive days at any time between December 1
and March 1. The facility matures May 31, 2002.
During 1998, our banks agreed to remove the requirement that our founding
shareholders maintain a minimum beneficial ownership in the company and to
eliminate requirements which restricted the amount of our capital expenditures.
Operating Lease Agreements. During June 1999, we entered into an $18.0
million operating lease agreement to finance the construction of a new
distribution center in Stockton, California. In January 2000, we entered into a
$35.0 million operating lease agreement to finance the construction of a new
distribution center in Savannah, Georgia. Under these agreements the lessor
purchases the property, pays for the construction costs and subsequently leases
the facility to us.
Sale-Leaseback Transaction. In September 1999, we sold some of our retail
store leasehold improvements to an unrelated third party and leased them back
for seven years. We have an option to repurchase the leasehold improvements at
the end of the fifth and seventh years at amounts approximating their fair
market values at the time the option is exercised. This transaction is treated
as a financing arrangement. The total amount of the lease obligation is $29.0
million. We are required to make monthly lease payments of $438,000 in years one
through five and $638,000 in years six and seven. As a result of the
transaction, we received net cash of $20.9 million and an $8.1 million 11% note
receivable which matures in September 2006 and is included in "other assets,
net."
Revenue Bond Financing. In May 1998, we entered into an agreement with the
Mississippi Business Finance Corporation under which it issued $19.0 million of
Taxable Variable Rate Demand Revenue Bonds. We used the proceeds from the bonds
to finance the acquisition, construction and installation of land, buildings,
machinery and equipment for our new distribution facility in Olive Branch,
Mississippi. At December 31, 1999, the balance outstanding on the bonds was
$19.0 million. We begin repayment of the principal amount of the bonds on June
1, 2006, with a portion maturing each June 1 until the final portion matures on
June 1, 2018. The bonds do not have a prepayment penalty as long as the interest
rate remains variable. The bonds contain a demand provision and, therefore,
outstanding amounts are classified as current liabilities. We pay interest
monthly based on a variable interest rate which was 6.9% at December 31, 1999.
The bonds are supported by a $19.3 million letter of credit issued by one of our
existing lending banks. The letter of credit is renewable annually. The letter
of credit and reimbursement agreement requires that we maintain certain
specified ratios and restricts our ability to pay dividends.
In April 1999, we entered into an interest rate swap agreement that
converts a portion of the Demand Revenue Bonds to a fixed rate and reduces our
exposure to changes in interest rates. Under this agreement, as amended, we pay
interest to the bank which provided the swap at a fixed rate of 4.99%. In
exchange, the bank pays us at a variable interest rate, which is similar to the
rate on the Demand Revenue Bonds and was 6.5% at December 31, 1999. A maximum
variable interest rate was set, such that no payments are made by either party
under the swap for monthly periods with an established interest rate greater
than 8.28%. The variable interest rate on the interest rate swap is set monthly.
The swap expires April 1, 2009; however, it may be canceled by us or the bank
and settled for the fair value of the swap as determined by market rates.
Debt Securities. In April 1997, we issued $30.0 million of 7.29% unsecured
senior notes. We used the proceeds to pay down a portion of the revolving credit
facility, which enabled us to use that credit facility to fund capital
expenditures for the Chesapeake corporate headquarters and distribution center.
We pay interest on the notes semiannually on April 30 and October 30 each year
and will pay principal in five equal installments of $6.0 million beginning
April 30, 2000. The note holders have the right to require us to prepay the
notes in full without premium upon a change of control or upon certain asset
dispositions or certain other transactions we may make. The note agreements
prohibit certain mergers and consolidations in which our company is not the
surviving company, require that we maintain certain specified ratios, require
that the notes rank on par with other debt and limit the amount of debt we can
incur. In the event of default or a prepayment at our option, we must pay a
prepayment penalty equal to a make-whole amount.
19
Seasonality and Quarterly Fluctuations
We experience seasonal fluctuations in our net sales growth, comparable
store net sales, operating income and net income. Management expects this trend
to continue. Our results of operations may also fluctuate significantly as a
result of a variety of factors, including:
o shifts in the timing of certain holidays, especially Easter, which may
fall in different quarters from year to year;
o the timing of new store openings;
o the net sales contributed by new stores;
o changes in our merchandise mix; and
o competition.
Our highest sales periods are the Christmas and Easter seasons. We
generally realize a disproportionate amount of our net sales and a substantial
majority of our operating and net income during the fourth quarter. In
anticipation of increased sales activity during these months, we purchase
substantial amounts of inventory and hire a significant number of temporary
employees to supplement our permanent store staff. Our operating results,
particularly operating and net income, could suffer if our net sales were below
seasonal norms during the fourth quarter or Easter season for any reason,
including merchandise delivery delays due to receiving or distribution problems.
Historically, net sales, operating income and net income have been weakest
during the first quarter. We expect this trend to continue.
Our unaudited results of operations for the eight most recent quarters are
shown in a table in Footnote 12 of the consolidated financial statements in Item
8 of this Form 10-K. To reconcile the combined company's quarterly information
with that previously reported by Dollar Tree, refer to our Form 8-K, filed on
July 22, 1999, which includes quarterly information for the combined companies.
Inflation and Other Economic Factors
Our ability to provide quality merchandise at a fixed price point is
subject to certain economic factors which are beyond our control, including
inflation, operating costs, consumer confidence and general economic conditions.
These factors may not remain favorable. In particular, ocean shipping costs,
hourly minimum wage rates, or other costs may not remain at current levels.
Ocean Shipping Costs. In May 1998, a trans-Pacific ocean-shipping cartel
imposed a freight increase of $300 per container on United States imports from
Asia. In May 1999, the cartel imposed a further increase of $900 per container
for shipments from Asia to the West Coast of the United States and $1,000 for
shipments to the East Coast, with a $300 per container surcharge during the peak
shipping season from June 1 through November 30. Management believes the higher
rates will increase our shipping costs by approximately $2.0 to $3.0 million
during the first three quarters of 2000 as compared to the first three quarters
of 1999. The shipping cartel could seek a further rate increase in the future.
Minimum Wage. The federally mandated minimum wage increased by $0.50 per
hour on October 1, 1996 and by an additional $0.40 per hour on September 1,
1997. These changes increased payroll costs by approximately $5 million in 1998.
In February 2000, the United States Senate approved a proposal increasing the
federal minimum wage by $1.00 an hour over three years. In March 2000, the House
of Representatives approved a proposal increasing the federal minimum wage by
$1.00 per hour over two years. Differences between the two bills need to be
settled before a final bill is sent to the President for approval. Although our
average hourly rate is significantly higher than the federal minimum wage, an
increase in the minimum wage, if eventually passed into law, could have a
significant impact on our payroll costs.
Leases for Replaced Distribution Centers. We are liable for rent and
pass-through costs under leases for our former distribution center in Memphis
through September 2005 and in Sacramento through June 2008. Annual rent and
pass-through costs are approximately $745,000 for the Memphis facility and
$585,000 for the Sacramento facility. We have recorded loss contingencies for
each of these leases considering current market conditions and probable sublease
income at each location. If an acceptable sublease is not obtained in
Sacramento, we could record up to $250,000 in selling, general and
administrative expenses in 2000. If an acceptable sublease is not obtained in
Memphis beyond December 2000, we could record up to $350,000 in selling, general
and administrative expenses in 2000.
Unless offsetting cost savings are realized (and we can give no assurance
that they will be), an increase in inflation, minimum wage levels, shipping
costs or other operating costs, or a
20
decline in consumer confidence or general economic conditions, could have a
material adverse effect on our financial condition and results of operations.
Year 2000 Compliance
We use a large number of computer software programs throughout our entire
organization, such as purchasing, distribution, retail store management,
financial business systems and various administrative functions. We developed
some of these programs in-house and bought others from vendors. At one time,
most computer programs were written to store only two digits of date-related
information in order to more efficiently handle and sort data. As a result,
these programs were unable to properly distinguish between dates occurring in
the year 1900 and dates occurring in the year 2000. This is referred to as the
"Year 2000 problem."
In preparation for Year 2000, we evaluated and adjusted all known
date-sensitive systems and equipment for Year 2000 compliance. We relied
primarily on internal resources to identify, correct or reprogram and test
systems for Year 2000 compliance. Through December 31, 1999, we spent less than
$150,000 in modifying our systems for the Year 2000, and we do not expect to
incur any additional costs.
We have not encountered any business interruptions due to Year 2000
problems. However, it is too early to conclude these interruptions will not
occur. We are unable to assess fully the potential effect of Year 2000 problems
on our international suppliers, particularly in China. We also cannot predict
the duration or severity of any disruptions which may occur in China or the home
countries of our other overseas suppliers. In the event we experience business
interruptions resulting from Year 2000 problems, we are prepared to enact
contingency plans developed during the Year 2000 project. This Year 2000
Compliance section is a Year 2000 readiness disclosure as defined under the Year
2000 Information and Readiness Disclosure Act of 1998.
New Accounting Pronouncements
Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and Hedging Activities," establishes standards for
derivative instruments and hedging activities and requires that companies
recognize all derivatives as either assets or liabilities in the statement of
financial position and measure those instruments at fair value. This statement
goes into effect on January 1, 2001. We do not expect that the implementation of
this pronouncement will have a material impact on our financial condition or
results of operations.
Recently Issued Securities
During the quarter ended June 30, 1999, we issued an aggregate of 501,600
shares of our common stock in connection with the purchase of the capital stock
of Tehan's Merchandising, Inc. The shares were issued pursuant to an exemption
by reason of Section 4(2) of the Securities Act of 1933. These sales were made
without general solicitation or advertising. Each purchaser was an accredited
investor or a sophisticated investor with access to all relevant information
necessary. We have filed a Registration Statement on Form S-3 covering the
resale of such securities.
During the quarter ended September 30, 1999, we granted an option to two
owners of a business we acquired to purchase 3,000 shares of our common stock at
an exercise price of $42.875 per share. The option was issued pursuant to an
exemption by reason of Section 4(2) of the Securities Act of 1933. The issuance
was made without general solicitation or advertising. The holders are accredited
investors or sophisticated investors with access to all relevant information
necessary.
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to various types of market risk in the normal course of our
business, including the impact of interest rate changes and foreign currency
rate fluctuations. We have the option of entering into interest rate swaps to
manage exposure to interest rate changes, and we may employ other risk
management strategies, including the use of foreign currency forward contracts.
We do not enter into derivative instruments for any purpose other than cash flow
hedging purposes. We do not hold derivatives for trading purposes.
Interest Rate Risk
We have financial instruments that are subject to interest rate risk,
comprised of debt obligations issued at variable and fixed rates. Based on
amounts outstanding on our fixed rate debt obligations at December 31, 1999, our
exposure to interest rate risk is not considered material.
21
We use variable-rate debt to finance our operations. In particular, we have
issued variable-rate long-term revenue bonds. This obligation exposes us to
variability in interest payments due to changes in interest rates. If interest
rates increase, interest expense increases. Conversely, if interest rates
decrease, interest expense also decreases. We believe it is beneficial to limit
the variability of a portion of our interest payments.
To meet this objective, we entered into a derivative instrument in the form
of an interest rate swap to manage fluctuations in cash flows resulting from
interest rate risk. The interest rate swap changes the variable rate cash flow
exposure on the variable-rate debt to fixed-rate cash flows by entering into a
receive-variable, pay-fixed interest swap. Under the interest rate swap, we
receive variable interest rate payments and make fixed interest rate payments,
thereby creating fixed rate bonds. Under the interest rate swap, we pay the bank
at a fixed rate of 4.99% and receive variable interest at a rate approximating
the variable rate on the hedged cash flows. No payments are made by either party
under the swap for monthly periods in which the variable interest rate is
greater than 8.28%. As a result, we will not experience a negative cash flow or
income statement impact unless the variable interest rate increases to greater
than 8.28%. The variable rate under the swap was 6.5% for the month of December
1999. We assess interest rate cash flow risk by continually identifying and
monitoring changes in interest rate exposures that may adversely impact expected
future cash flows.
Foreign Currency Risk
Although we purchase most of our imported goods with U.S. dollars, we are
subject to foreign currency exchange rate risk relating to payments to a
supplier in Italian lire. As a general policy, we substantially hedge foreign
currency commitments of future payments by purchasing foreign currency forward
contracts. On December 31, 1999, we had one contract outstanding for $793,000.
Less than one percent of our expenditures are contracted in Italian lire and the
market risk exposure relating to currency exchange is not material.
22
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Consolidated Financial Statements Page
Independent Auditors' Report........................................... 24
Consolidated Balance Sheets as of December 31, 1999 and 1998........... 25
Consolidated Income Statements for the years ended
December 31, 1999, 1998 and 1997.............................. 26
Consolidated Statements of Shareholders' Equity
for the years ended December 31, 1999, 1998 and 1997.......... 27
Consolidated Statements of Cash Flows for the years ended
December 31, 1999, 1998 and 1997.............................. 28
Notes to Consolidated Financial Statements............................. 29
23
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
Dollar Tree Stores, Inc.:
We have audited the accompanying consolidated balance sheets of Dollar Tree
Stores, Inc. and subsidiaries (the Company) as of December 31, 1999 and 1998,
and the related consolidated income statements and statements of shareholders'
equity and cash flows for each of the years in the three-year period ended
December 31, 1999. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Dollar Tree
Stores, Inc. and subsidiaries as of December 31, 1999 and 1998, and the results
of their operations and their cash flows for each of the years in the three-year
period ended December 31, 1999, in conformity with generally accepted accounting
principles.
Norfolk, Virginia
January 24, 2000
24
DOLLAR TREE STORES, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 1999 and 1998
1999 1998
---- ----
(In thousands,
ASSETS except share data)
Current assets:
Cash and cash equivalents................................................. $ 176,514 $ 74,644
Merchandise inventories................................................... 174,582 142,706
Deferred tax asset (Note 3)............................................... 5,398 6,709
Prepaid expenses and other current assets................................. 13,001 7,451
------- -------
Total current assets ............................................. 369,495 231,510
------- -------
Net property and equipment (Notes 4 and 5)..................................... 144,023 122,503
Deferred tax asset (Note 3).................................................... - 2,194
Goodwill, net of accumulated amortization (Note 2)............................. 42,394 42,551
Other assets, net (Note 2)..................................................... 15,216 6,429
------- -------
TOTAL ASSETS...................................................... $ 571,128 $ 405,187
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................................... $ 63,170 $ 53,030
Income taxes payable (Note 3)............................................. 28,063 21,353
Other current liabilities (Note 5)........................................ 29,034 25,988
Current portion of long-term debt (Note 6)................................ 26,500 16,500
Current installments of obligations under capital leases (Note 4)......... 3,183 457
------- -------
Total current liabilities......................................... 149,950 117,328
Long-term debt, excluding current portion (Note 6)............................. 24,000 30,000
Obligations under capital leases, excluding current installments (Note 4)...... 28,375 2,469
Deferred tax liability (Note 3)................................................ 1,182 -
Other liabilities.............................................................. 6,650 6,574
------- -------
Total liabilities................................................. 210,157 156,371
------- -------
Commitments, contingencies and subsequent
event (Notes 1, 4, 6, 8, 10 and 11)
Shareholders' equity (Notes 2, 7, 8 and 10):
Common stock, par value $0.01. Authorized 300,000,000 shares,
62,111,143 shares issued and outstanding at December 31, 1999;
and authorized 100,000,000 shares, 61,380,418 shares issued
and outstanding at December 31, 1998.............................. 621 614
Additional paid-in capital................................................ 72,539 53,030
Retained earnings......................................................... 287,811 195,172
------- -------
Total shareholders' equity........................................ 360,971 248,816
------- -------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY........................ $ 571,128 $ 405,187
======= =======
See accompanying Notes to Consolidated Financial Statements.
25
DOLLAR TREE STORES, INC.
AND SUBSIDIARIES
CONSOLIDATED INCOME STATEMENTS
Years ended December 31, 1999, 1998 and 1997
1999 1998 1997
---- ---- ----
(In thousands, except
per share data)
Net sales..................................................... $ 1,197,960 $ 944,122 $ 745,590
Cost of sales................................................. 746,463 589,080 474,612
Merger related costs (Note 2)................................. 443 1,301 -
--------- ------- -------
Gross profit......................................... 451,054 353,741 270,978
--------- ------- -------
Selling, general and administrative expenses
(Notes 4, 7, and 9):
Operating expenses................................... 259,917 208,782 169,792
Merger related expenses (Note 2)..................... 607 4,024 -
Depreciation and amortization (Note 2)............... 28,117 20,518 14,523
--------- ------- -------
Total selling, general and administrative
expenses......................................... 288,641 233,324 184,315
--------- ------- -------
Operating income.............................................. 162,413 120,417 86,663
Interest income............................................... 1,717 596 145
Interest expense (Note 6)..................................... (4,522) (4,927) (3,554)
--------- ------- -------
Income before income taxes.................................... 159,608 116,086 83,254
Provision for income taxes (Note 3)........................... 61,090 44,533 31,295
--------- ------- -------
Net income......................................... $ 98,518 $ 71,553 $ 51,959
========= ======= =======
Net income per share (Note 8):
Basic net income per share................................ $ 1.59 $ 1.17 $ 0.86
========= ======= =======
Diluted net income per share.............................. $ 1.45 $ 1.06 $ 0.78
========= ======= =======
Pro forma income data (Note 2):
Net income................................................ $ 98,518 $ 71,553 $ 51,959
Pro forma adjustment for C-corporation income taxes....... 505 1,025 782
--------- ------- -------
Pro forma net income...................................... $ 98,013 $ 70,528 $ 51,177
========= ======= =======
Pro forma basic net income per share...................... $ 1.58 $ 1.15 $ 0.84
========= ====== =======
Pro forma diluted net income per share.................... $ 1.44 $ 1.04 $ 0.76
========= ======= =======
Weighted average number of common shares outstanding.......... 61,839 61,185 60,714
========= ======= =======
Weighted average number of common shares
and dilutive potential common shares outstanding............ 68,135 67,626 66,982
========= ======= =======
See accompanying Notes to Consolidated Financial Statements.
26
DOLLAR TREE STORES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Years ended December 31, 1999, 1998 and 1997
Common Additional
Stock Common Paid-in Retained Shareholders'
Shares Stock Capital Earnings Equity
------ ----- ------- -------- ------
(In thousands, except share data)
Balance at December 31, 1996....................... 60,381,297 $ 268 $ 33,818 $ 73,985 $ 108,071
Transfer from additional paid-in
capital for Common Stock dividend................ - 135 (135) - -
Net income for the year
ended December 31, 1997.......................... - - - 51,959 51,959
Shareholder distributions (Note 2)................. - - - (950) (950)
Issuance of stock under Employee
Stock Purchase Plan and
other plans (Note 10)............................ 26,078 - 358 - 358
Exercise of stock options, including
income tax benefit of $2,752 (Note 10)........... 466,901 2 4,917 - 4,919
---------- --- ------ ------- -------
Balance at December 31, 1997....................... 60,874,276 405 38,958 124,994 164,357
Transfer from additional paid-in
capital for Common Stock dividend................ - 198 (198) - -
Net income for the year
ended December 31, 1998.......................... - - - 71,553 71,553
Shareholder distributions (Note 2)................. - - - (1,375) (1,375)
Issuance of stock under Employee
Stock Purchase Plan and
other plans (Note 10)............................ 24,235 7 634 - 641
Grant of stock options under the 1998
Special Stock Option Plan (Note 10)............. - - 4,413 - 4,413
Exercise of stock options, including
income tax benefit of $4,916 (Note 10)........... 481,907 4 9,223 - 9,227
---------- --- ------ ------- -------
Balance at December 31, 1998....................... 61,380,418 614 53,030 195,172 248,816
Termination of Only $One S-corporation
status.......................................... - - 4,469 (4,469) -
Net income for the year
ended December 31, 1999.......................... - - - 98,518 98,518
Shareholder distributions (Note 2)................. - - - (1,410) (1,410)
Issuance of stock under Employee
Stock Purchase Plan and
other plans (Note 10)............................ 30,437 - 838 - 838
Exercise of stock options, including
income tax benefit of $6,278 (Note 10)........... 700,288 7 14,202 - 14,209
---------- --- ------ ------- -------
Balance at December 31, 1999....................... 62,111,143 $ 621 $ 72,539 $ 287,811 $ 360,971
========== === ====== ======= =======
See accompanying Notes to Consolidated Financial Statements.
27
DOLLAR TREE STORES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 1999, 1998 and 1997
1999 1998 1997
---- ---- ----
(In thousands)
Cash flows from operating activities:
Net income ............................................... $ 98,518 $ 71,553 $ 51,959
------- ------- -------
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization........................... 28,117 20,518 14,523
Loss on disposal of property and equipment.............. 1,221 2,814 305
Provision for deferred income taxes..................... 4,687 (1,207) (3,503)
Changes in assets and liabilities increasing
(decreasing) cash and cash equivalents:
Merchandise inventories........................... (31,148) (31,886) (20,537)
Prepaid expenses and other current assets......... (6,382) (558) 1,691
Other assets...................................... 307 247 (351)
Accounts payable.................................. 9,968 (2,010) 10,303
Income taxes payable.............................. 12,988 6,682 9,366
Other current liabilities......................... 3,046 4,538 5,281
Other liabilities................................. (597) 351 1,437
------- ------- -------
Total adjustments.............................. 22,207 (511) 18,515
------- ------- -------
Net cash provided by operating activities...... 120,725 71,042 70,474
------- ------- -------
Cash flows from investing activities:
Acquisition, net of cash acquired............................ (320) - -
Capital expenditures......................................... (47,931) (53,562) (60,118)
Proceeds from sale of property and equipment................. 172 174 159
------- ------- -------
Net cash used in investing activities.......... (48,079) (53,388) (59,959)
------- ------- -------
Cash flows from financing activities:
Proceeds from sale-leaseback transaction..................... 21,605 - -
Proceeds from long-term debt................................. 19,400 202,300 236,600
Payment of long-term debt and facility fees.................. (18,041) (186,030) (209,803)
Net change in notes payable to bank.......................... - (10,045) 1,359
Principal payments under capital lease obligations........... (1,099) (425) (305)
Proceeds from stock issued pursuant to stock-based
compensation plans.......................................... 8,769 4,927 2,510
Distributions paid........................................... (1,410) (1,375) (950)
------- ------- -------
Net cash provided by financing activities...... 29,224 9,352 29,411
------- ------- -------
Net increase in cash and cash equivalents....................... 101,870 27,006 39,926
Cash and cash equivalents at beginning of year.................. 74,644 47,638 7,712
------- ------- -------
Cash and cash equivalents at end of year........................ $ 176,514 $ 74,644 $ 47,638
======= ======= =======
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest, net of amount capitalized....................... $ 4,729 $ 4,389 $ 4,276
======= ======= =======
Income taxes.............................................. $ 43,100 $ 39,154 $ 25,257
======= ======= =======
See accompanying Notes to Consolidated Financial Statements.
28
DOLLAR TREE STORES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share data)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business
Dollar Tree Stores, Inc. (DTS or the Company) owns and operates, in one
business segment, discount variety retail stores which sell substantially all
items for $1.00. The Company operates under the names of Dollar Tree, Dollar
Bills, Only $One and Only One Dollar. The Company's headquarters and one of its
distribution centers are located in Chesapeake, Virginia. The Company also
operates distribution centers in Olive Branch, Mississippi, in the Chicago,
Illinois area and in Stockton, California. Most of the Company's stores are
located in the eastern half of the United States and in northern and central
California and Nevada. The Company's merchandise includes housewares, candy and
food, seasonal goods, health and beauty care, toys, party goods, gifts,
stationery and other consumer items. A slight majority of the Company's
merchandise is imported, primarily from China. The Company is not dependent on a
few suppliers.
Principles of Consolidation
At December 31, 1999, DTS has three wholly owned subsidiaries, Dollar Tree
Management, Inc. (DTM), Dollar Tree Distribution, Inc. (DTD) and Dollar Tree New
York, Inc. (DTN). DTM provides management, accounting and administrative
services to DTS for a fee and DTD provides merchandise procurement, purchasing,
warehousing and distribution services to DTS for a fee. DTN owns and operates
discount variety retail stores under the name Only $One and was merged with and
into DTS on January 1, 2000. Effective October 29, 1996, DTD established a
wholly owned subsidiary, Dollar Tree Properties, Inc. (DTP). DTP is organized as
a real estate holding company and owns certain undeveloped property. The
consolidated financial statements include the financial statements of Dollar
Tree Stores, Inc. and its wholly owned subsidiaries. All significant
intercompany balances and transactions have been eliminated in consolidation.
On December 10, 1998, Dollar Tree West, Inc. (DTW), a former wholly owned
subsidiary, completed a merger, which was accounted for as a pooling of
interests, with Step Ahead Investments, Inc. (98 Cent Clearance Center) in which
98 Cent Clearance Center became a wholly owned subsidiary of DTS. 98 Cent
Clearance Center operated 66 stores in northern and central California and
Nevada under the name "98 Cent Clearance Center." Prior to the merger, 98 Cent
Clearance Center's fiscal year end was the 52-week period ending on the last
Sunday in January. As a result of the merger, the Company's consolidated
financial statements were restated to retroactively combine 98 Cent Clearance
Center's financial statements as if the merger had occurred at the beginning of
the earliest period presented.
On June 30, 1999, DTN completed a merger, which was accounted for as a
pooling of interests, with privately-held Tehan's Merchandising, Inc. (Only
$One), in which Only $One became a wholly owned subsidiary of DTS. Only $One
operated 24 stores in New York state under the name "Only $One." As a result of
the merger, the Company's consolidated financial statements have been restated
to retroactively combine Only $One's financial statements as if the merger had
occurred at the beginning of the earliest period presented.
The consolidated income statement and statements of shareholders' equity
and cash flows for the year ended December 31, 1998 reflect the results of
operations and cash flows for Dollar Tree Stores, Inc. for the year then ended
combined with 98 Cent Clearance Center for the 11-month period ended December
31, 1998. The consolidated income statements, statements of shareholders' equity
and cash flows for the year ended December 31, 1997 reflect the results of
operations and cash flows for Dollar Tree Stores, Inc. for the year then ended
combined with 98 Cent Clearance Center for the fiscal year ended January 25,
1998.
Cash and Cash Equivalents
Cash and cash equivalents at December 31, 1999 and 1998 includes $162,755
and $64,200, respectively, of investments in money market securities and bank
participation agreements which are valued at cost, which approximates market.
The underlying assets of these short-term participation agreements are primarily
commercial notes. For purposes of the statements of cash flows, the Company
considers all highly liquid debt instruments with original maturities of three
months or less to be cash equivalents.
29
Merchandise Inventories
Merchandise inventories are stated at the lower of cost or market. Cost is
assigned to store inventories using the retail inventory method, determined on a
first-in, first-out (FIFO) basis. Costs directly associated with warehousing and
distribution are capitalized as merchandise inventories. Total warehousing and
distribution costs capitalized into inventories amounts to $8,347 and $7,790 at
December 31, 1999 and 1998, respectively.
Property and Equipment
Property and equipment are stated at cost and depreciated using the
straight-line method over the estimated useful lives of the respective assets as
follows:
Buildings........................................ 39 years
Furniture, fixtures and equipment................ 3 to 7 years
Transportation vehicles.......................... 4 to 6 years
Leasehold improvements and assets held under capital leases are amortized
over the estimated useful lives of the respective assets or terms of the related
leases, whichever is shorter.
Costs incurred related to software developed for internal use are
capitalized and depreciated over three years. Costs capitalized include those
incurred in the application development stage.
Interest is capitalized in connection with the construction of major
facilities. The capitalized interest is recorded as part of the asset to which
it relates and is amortized over the asset's estimated useful life. In 1998 and
1997, $402 and $916, respectively, of interest cost was capitalized; no interest
was capitalized in 1999.
Goodwill
Goodwill, which represents the excess of acquisition cost over the fair
value of net assets acquired, is amortized on a straight-line basis over the
expected periods to be benefited, generally 20 to 25 years. If events indicate
the carrying amount of goodwill will not be recoverable, the Company assesses
the recoverability by comparing the carrying amount of the asset to expected
future net undiscounted cash flows of the acquired organization. The
recoverability of goodwill will be impacted if estimated future net cash flows
are not achieved. The amount of goodwill impairment, if any, is measured based
on projected discounted future operating cash flows using a discount rate
reflecting the Company's average cost of capital. Accumulated amortization
relating to goodwill approximates $7,593 and $5,619 at December 31, 1999 and
1998, respectively.
Financial Instruments
The Company utilizes derivative financial instruments to reduce its
exposure to market risks from changes in interest rates. By entering into a
receive-variable, pay-fixed interest rate swap, the Company changed the variable
rate cash flow exposure on certain variable-rate debt to fixed rate cash flows.
The Company is exposed to credit related losses in the event of non-performance
by the counterparty to the interest rate swap; however, the counterparty is a
major financial institution, and the risk of loss due to non-performance is
considered remote. Interest rate differentials paid or received on the swap are
recognized as adjustments to interest expense in the period earned or incurred.
The Company does not speculate using derivative instruments in the form of
interest rate swaps; therefore, these swaps are not recorded in the Company's
balance sheet. The Company had no interest rate derivative instruments
outstanding at December 31, 1998.
The Company enters into foreign exchange forward contracts to hedge
off-balance sheet foreign currency denominated purchase commitments from
suppliers. The contracts are exclusively for Italian lire. The terms of these
contracts are generally less than three months. Gains and losses on these
contracts are not recognized until included in the measurement of the related
foreign currency transaction. At December 31, 1999, open foreign exchange
contracts of approximately $793 were recorded based on current conversion rates
in prepaid expenses and other current assets and accounts payable. There were no
open exchange contracts at December 31, 1998.
Cost of Sales
The Company includes the cost of merchandise, warehousing and distribution
costs, and certain occupancy costs in cost of sales.
30
Store Opening Costs
The Company expenses store opening costs as they are incurred.
Income Taxes
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between financial statement carrying
amounts of existing assets and liabilities and their respective tax bases.
Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in the tax rates is recognized in income in
the period that includes the enactment date of such change.
Stock-Based Compensation
The Company has elected to apply Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" (APB No. 25), and related
Interpretations in accounting for certain stock-based compensation plans as
permitted by Statement of Financial Accounting Standards (SFAS) No. 123,
"Accounting for Stock-Based Compensation" (SFAS No. 123). The Company has
adopted the disclosure-only provisions of SFAS No. 123.
Net Income Per Share
Basic net income per share has been computed by dividing net income by the
weighted average number of common shares outstanding. Diluted net income per
share reflects the potential dilution that could occur assuming the inclusion of
dilutive potential common shares and has been computed by dividing net income by
the weighted average number of common shares and dilutive potential common
shares outstanding. Dilutive potential common shares include all outstanding
stock options and warrants after applying the treasury stock method.
New Accounting Standards
The Financial Accounting Standards Board (FASB) has issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." This statement
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts, and for
hedging activities. In June 1999, the FASB issued SFAS No. 137, "Accounting for
Derivative Instruments and Hedging Activities - Deferral of the Effective Date
of SFAS No. 133," an Amendment of SFAS No. 133, which defers the effective date
of SFAS No. 133 to all fiscal quarters of fiscal years beginning after June 15,
2000. Management does not expect the implementation of these pronouncements to
have a material effect on the Company's financial condition and results of
operations.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the reported
period. Actual results could differ from those estimates. In addition, the
Company has contingent liabilities related to legal proceedings and other
matters arising from the normal course of operations. Management does not expect
that amounts, if any, which may be required to satisfy such contingencies will
be material in relation to the accompanying consolidated financial statements.
Reclassifications
Certain 1998 and 1997 amounts have been reclassified for comparability with
the 1999 financial statement presentation.
NOTE 2 - MERGERS AND ACQUISITIONS
98 Cent Clearance Center Merger
On December 10, 1998, the Company completed the merger with 98 Cent
Clearance Center. The merger qualified as a tax-free exchange and was accounted
for as a pooling of interests. DTS issued 1.1212 shares of the Company's common
stock for each share of 98 Cent Clearance Center outstanding common and
preferred stock. A total of 1,662,740 of the Company's common stock was issued
as a result of the merger and 98 Cent Clearance Center's outstanding stock
options were
31
converted into options to purchase 323,207 common shares of the Company. In
addition, the Company issued options to certain former shareholders of 98 Cent
Clearance Center in exchange for non-competition agreements and a consulting
agreement. Included in other assets at December 31, 1998 is the fair value of
these agreements of $4,413 which is being amortized, generally, over a ten-year
period. At December 31, 1999, the carrying value of these agreements is $3,930,
net of $483 of accumulated amortization. The recording of these non-competition
agreements did not involve the use of cash and, accordingly, has been excluded
from the accompanying consolidated statements of cash flows. In connection with
the merger, the Company incurred $5,325 ($4,201 after taxes or $0.06 diluted net
income per share) of merger related costs and expenses, consisting primarily of
professional fees and writedowns of inventory and fixed assets, which were
charged to operations during the year ended December 31, 1998.
Only $One Merger
On June 30, 1999, the Company completed the merger with Only $One. The
merger qualified as a tax-free exchange of stock and was accounted for as a
pooling of interests. The Company issued 501,600 shares of its common stock for
all of the Only $One outstanding common stock. In connection with the merger,
the Company incurred approximately $1,050 ($792 after taxes or $0.01 diluted net
income per share) of merger related costs and expenses, consisting primarily of
professional fees and writedowns of inventory, which were charged to operations
during the year ended December 31, 1999.
Prior to June 30, 1999, Only $One was treated as an S-corporation for
federal and state income tax purposes. As such, income of Only $One for periods
prior to June 30, 1999 was taxable to the Only $One shareholders, rather than to
Only $One. Effective with the Company's merger with Only $One, Only $One became
a C-corporation. The pro forma provisions for income taxes presented in the
consolidated income statements represent an estimate of the taxes that would
have been recorded had Only $One been a C-corporation prior to the merger on
June 30, 1999. Distributions paid presented in the consolidated statements of
cash flows represent distributions paid to the Only $One shareholders for
payment of their pass-through tax liabilities.
The following table presents a reconciliation of net sales and net income
previously reported in the Company's 1998 Annual Report to those presented in
the accompanying consolidated financial statements.
For the year ended December 31,
1998 1997
---- ----
Net sales:
DTS................................ $ 918,807 $ 723,202
Only $One ......................... 25,315 22,388
------- -------
Combined........................... $ 944,122 $ 745,590
======= =======
Net income:
DTS................................ $ 68,890 $ 49,928
Only $One.......................... 2,663 2,031
------- -------
Combined........................... $ 71,553 $ 51,959
======= =======
Other
On July 6, 1999, the Company acquired all of the assets and liabilities of
a small dollar store operator for approximately $2,600 in cash and forgiveness
of receivables. The acquisition was accounted for as a purchase. The purchase
price was allocated to the assets acquired based on their estimated fair market
values. The excess of the purchase price over the fair value of the net assets
acquired (goodwill) was approximately $1,800. The goodwill is being amortized
over 20 years. The operating results of the acquired company are included in the
Company's operating results beginning July 6, 1999. Pro forma financial
information is not presented because it is immaterial.
NOTE 3 - INCOME TAXES
The provision for income taxes for the years ended December 31, 1999, 1998
and 1997 consists of the following:
1999 1998 1997
---- ---- ----
Federal--Current................... $ 48,535 $ 39,348 $ 29,967
Federal--Deferred.................. 3,950 (1,024) (3,067)
State--Current..................... 7,868 6,392 4,831
State--Deferred.................... 737 (183) (436)
------ ------ ------
$ 61,090 $ 44,533 $ 31,295
====== ====== ======
32
A reconciliation of the statutory federal income tax rate and the effective
rate for the years ended December 31, 1999, 1998 and 1997 follows:
1999 1998 1997
---- ---- ----
Statutory tax rate............................ 35.0% 35.0% 35.0%
Effect of:
State and local income taxes, net of
federal income tax benefit........... 3.5 3.5 3.3
Only $One S-corporation income.............. (0.3) (0.8) (0.8)
Other, net.................................. 0.1 0.7 0.1
---- ---- ----
Effective tax rate............................ 38.3% 38.4% 37.6%
==== ==== ====
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Deferred tax assets and
liabilities are classified on the balance sheet based on the classification of
the underlying asset or liability. Significant components of the Company's net
deferred tax assets as of December 31, 1999 and 1998 are as follows:
1999 1998
---- ----
Deferred tax assets:
Property and equipment......................... $ - $ 2,359
Accrued expenses............................... 5,707 5,487
Inventories.................................... 3,142 3,147
Other.......................................... 424 361
----- ------
Total deferred tax assets.................. 9,273 11,354
----- ------
Deferred tax liabilities:
Intangible assets.............................. (2,553) (2,311)
Property and equipment......................... (657) -
Deferred compensation.......................... (1,626) -
Other.......................................... (221) (140)
------ ------
Total deferred tax liabilities............. (5,057) (2,451)
------ ------
Net deferred tax assets.................... $ 4,216 $ 8,903
====== ======
In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred
taxes will not be realized. Based upon the availability of carrybacks of future
deductible amounts to 1999, 1998 and 1997 taxable income and management's
projections for future taxable income over the periods in which the deferred tax
assets are deductible, management believes it is more likely than not the
existing net deductible temporary differences will reverse during periods in
which carrybacks are available or in which the Company generates net taxable
income. However, there can be no assurance that the Company will generate any
income or any specific level of continuing income in future years.
NOTE 4 - LEASES
Future minimum lease payments under noncancelable store, distribution
center and former corporate headquarters operating leases and the present value
of future minimum capital lease payments as of December 31, 1999 are as follows:
Capital Operating
Leases Leases
------ ------
Year ending December 31:
2000 ............................................. $ 5,873 $ 71,921
2001 ............................................. 5,859 65,016
2002 ............................................. 5,829 53,969
2003 ............................................. 5,792 41,629
2004 ............................................. 6,346 27,801
Thereafter........................................ 13,525 56,436
------ -------
Total minimum lease payments.......................... 43,224 $316,772
=======
Less amount representing interest
(at an average rate of approximately 9%).......... 11,666
------
Present value of net minimum capital lease payments... 31,558
Less current installments of obligations under
capital leases.................................... 3,183
------
Obligations under capital leases, excluding current
installments...................................... $ 28,375
======
33
The above future minimum lease payments include amounts for leases that
were signed prior to December 31, 1999 for stores that were not open as of
December 31, 1999. Minimum rental payments for operating leases do not include
contingent rentals that may be paid under certain store leases based on a
percentage of sales in excess of stipulated amounts. Future minimum lease
payments have not been reduced by future minimum sublease rentals of $7,284
under operating leases.
Included in property and equipment at December 31, 1999 and 1998 are leased
furniture and fixtures and transportation vehicles, excluding sale-leaseback
assets, with a cost of $3,366 and $3,473 and accumulated amortization of $1,170
and $677 at December 31, 1999 and 1998, respectively.
Sale-Leaseback Transaction
On September 30, 1999, the Company sold certain retail store leasehold
improvements to an unrelated third party and leased them back for a period of
seven years. The Company has an option to purchase the leasehold improvements at
the end of the fifth and seventh years at amounts approximating their fair
market values at the time the option is exercised. This transaction is being
accounted for as a financing arrangement. The total amount of the lease
obligation is $29.0 million. The lease agreement includes financial covenants
that are not more restrictive than those of existing loan agreements. As part of
the transaction, the Company received net proceeds of $20,880 and an $8,120 11%
note receivable which matures September 2006 and is included in "other assets,
net." The future minimum lease payments related to the capital lease obligation
are included in the five year schedule above.
Operating Leases
During June 1999, the Company entered into an $18,000 operating lease
agreement to finance the construction of the new unautomated distribution center
in Stockton. This distribution center replaced the Sacramento, California area
facility. Under this agreement, the lessor purchases the property, pays for the
construction costs and subsequently leases the facility to the Company. The
initial lease term is five years. The lease provides for a residual value
guarantee and includes a purchase option based on the initial cost of the
property. The Company estimates its liability, if any, under the residual value
guarantee and records additional rent expense on a straight-line basis over the
remaining lease term. (See Note 11)
The Company is responsible for payments under leases for former
distribution centers located in Memphis, Tennessee and Sacramento and the former
corporate headquarters and distribution center in Norfolk, Virginia. The leases
for the facilities expire in September 2005, June 2008, and December 2009,
respectively. The lease for the Norfolk facility is from a partnership owned by
related parties. The future minimum lease payments for each facility are
included in the five-year schedule above. The Company receives sublease income
in connection with the Norfolk and Memphis facilities from sublease agreements
which expire in February 2008 and December 2000, respectively. The sublease
income on the Norfolk facility exceeds the annual obligation of $656 under the
lease. Due to the uncertainty regarding the ultimate recovery of the future
lease payments and the investment in the improvements in the building in Memphis
and Sacramento, the Company recorded a $1,300 loss contingency related to
Sacramento in 1999 and a $1,125 loss contingency related to Memphis in 1998. The
loss contingency for Memphis was reduced $700 in 1999 due to favorable
developments.
The Company also leases properties for three of its stores from
partnerships owned by related parties. The total rental payments related to the
leases for the former corporate headquarters and distribution center and these
stores were $794, $790 and $789 for the years ended December 31, 1999, 1998 and
1997, respectively. Rental expense for these properties is included in the
rental expense disclosure below.
Rental expense for store, distribution center and former corporate
headquarters operating leases included in the accompanying consolidated income
statements for the years ended December 31, 1999, 1998 and 1997 are as follows:
1999 1998 1997
---- ---- ----
Minimum rentals..................... $ 65,480 $ 51,693 $ 42,143
Contingent rentals.................. 1,613 1,374 1,837
------ ------ ------
Total........................ $ 67,093 $ 53,067 $ 43,980
====== ====== ======
34
NOTE 5 - BALANCE SHEET COMPONENTS
Net property and equipment as of December 31, 1999 and 1998 consists of the
following:
1999 1998
---- ----
Land ........................................... $ 8,051 $ 8,051
Buildings......................................... 28,468 17,714
Improvements...................................... 61,779 47,508
Furniture, fixtures and equipment................. 111,033 80,729
Transportation vehicles........................... 3,248 3,903
Construction in progress.......................... 7,576 20,918
------- -------
Total property and equipment................ 220,155 178,823
Less accumulated depreciation and amortization.... 76,132 56,320
------- -------
Total ...................................... $144,023 $122,503
======= =======
Other current liabilities as of December 31, 1999 and 1998 consists of the
following:
1999 1998
---- ----
Compensation and benefits......................... $ 12,132 $ 13,496
Taxes (other than income taxes)................... 13,963 10,355
Other............................................. 2,939 2,137
------ ------
Total ...................................... $ 29,034 $ 25,988
====== ======
NOTE 6 - LONG-TERM DEBT
Long-term debt as of December 31, 1999 and 1998 consists of the following:
1999 1998
---- ----
7.29% Senior Notes, interest payable semiannually
on April 30 and October 30, principal payable
$6,000 per year beginning April 30, 2000.......... $ 30,000 $ 30,000
Demand Revenue Bonds, interest payable monthly at a
variable rate which was 6.9% at December 31, 1999,
principal payable beginning June 2006, maturing
June 2018......................................... 19,000 16,500
Note payable, interest at 7.0%, paid in
January 2000...................................... 1,500 -
----- ------
Total long-term debt ............................. 50,500 46,500
Less current portion ............................. 26,500 16,500
------ ------
Long-term debt, excluding current portion ........ $ 24,000 $ 30,000
====== ======
Maturities of long-term debt are as follows: 2000 - $26,500; 2001 - $6,000;
2002 - $6,000; 2003 - $6,000; 2004 - $6,000.
Senior Notes
The holders of the Senior Notes have the right to require the Company to
prepay the Notes in full without premium upon a change of control or upon
certain other transactions by the Company. The Note agreements, among other
things, prohibit certain mergers and consolidations, require the maintenance of
certain specified ratios, require that the Notes rank pari passu with the
Company's other debt and limit the amount of Company debt. In the event of
default or a prepayment at the option of the Company, the Company is required to
pay a prepayment penalty equal to a make-whole amount.
Demand Revenue Bonds
On May 20, 1998, the Company entered into a Loan Agreement with the
Mississippi Business Finance Corporation (MBFC) under which the MBFC issued
Taxable Variable Rate Demand Revenue Bonds (the Bonds) in an aggregate principal
amount of $19,000 to finance the acquisition, construction, and installation of
land, buildings, machinery and equipment for the Company's new distribution
facility in Olive Branch. The Bonds do not contain a prepayment penalty as long
as the interest
35
rate remains variable. The Bonds are supported by a $19,300 letter of credit
issued by one of the Company's existing lending banks. The letter of credit is
renewable annually. The Letter of Credit and Reimbursement Agreement requires,
among other things, the maintenance of certain specified ratios and restricts
the payment of dividends. The Bonds contain a demand provision and, therefore,
outstanding amounts are classified as current liabilities.
On April 1, 1999, the Company entered into an interest rate swap agreement
(swap) related to the $19,000 Loan Agreement with the MBFC (Loan Agreement).
This swap converts the variable interest rate to a fixed rate and reduces the
Company's exposure to interest rate fluctuations. Under this agreement, as
amended, the Company pays interest to the bank which provided the swap at a
fixed rate of 4.99%. In exchange, the bank pays the Company at a variable
interest rate, which approximates the rate on the Loan Agreement. The variable
interest rate of the swap is adjusted monthly. For months in which the interest
rate as calculated under the agreement is greater than 8.28%, no payments are
made by either party. The swap, effective through April 1, 2009, is for the
entire amount outstanding under the Loan Agreement.
Note Payable
The Company issued a note in connection with the acquisition of four stores
from a small dollar store operator (see Note 2). The note bears interest at 7.0%
and the Company paid all except $24 of the principal and accrued interest in
January 2000. The remaining balance relates to certain contingent payments of
store deposits.
Revolving Credit Facility
On September 27, 1996, the Company entered into an Amended and Restated
Revolving Credit Agreement with its banks (the Agreement). The Agreement
provides for, among other things: (1) a $135,000 revolving line of credit,
bearing interest at the agent bank's prime interest rate or LIBOR, plus a
spread, at the option of the Company; (2) an annual facilities fee and annual
agent's fee payable quarterly; and (3) the reduction of amounts outstanding
under the Agreement for a period of 30 consecutive days between December 1, 1999
and March 1, 2000 to $10,000. There are no additional reduction requirements.
The Agreement, among other things, requires the maintenance of certain
specified financial ratios, restricts the payment of certain distributions and
prohibits the incurrence of certain new indebtedness. During 1998, the Agreement
was amended to remove the restrictions on the amount of capital expenditures and
on the minimum beneficial ownership of the founding shareholders. The Agreement
matures on May 31, 2002. At December 31, 1999, the variable interest rate on the
facility was 7.0%. At December 31, 1999 and 1998, no amounts were outstanding
under the Agreement; however, approximately $42,387 of the $135,000 available
under the Agreement was committed to certain letters of credit issued in
relation to the routine purchase of imported merchandise at December 31, 1999.
Fair Value of Financial Instruments
The carrying value of the Company's long-term debt approximates its fair
value. The fair value is estimated by discounting the future cash flows of each
instrument at rates offered for similar debt instruments of comparable
maturities.
The fair value of the interest rate swap is the estimated amount the
Company would receive or pay to terminate the agreement as of the reporting
date. The fair value of the interest rate swap at December 31, 1999 is $867.
NOTE 7 - MANAGEMENT ADVISORY SERVICES
The Company has a financial and management advisory service agreement with
one of its non-employee shareholders. The agreement provides for the payment of
$200 annually over the term of the agreement. The agreement is terminable by
vote of the Company's Board of Directors. During each of the years ended
December 31, 1999, 1998 and 1997, the Company paid $200 under this agreement.
NOTE 8 - SHAREHOLDERS' EQUITY
Unattached Warrants
The Company issued unattached warrants to purchase 2,792,450 shares of
Common Stock on September 30, 1993 for $0.18 per warrant and unattached warrants
to purchase 2,792,450 shares of Common Stock on February 22, 1994 for $0.18 per
warrant. The warrants, which are held by certain Company shareholders, carry an
exercise price of $0.86 per share, have been exercisable since
36
March 6, 1995 (the effective date of the Company's initial public offering), and
expire on December 31, 2003. All warrants are outstanding at December 31, 1999.
Preferred Stock
Effective February 1, 1995, the Articles of Incorporation were amended to
authorize 10,000,000 shares of Preferred Stock, $0.01 par value per share.
Stock Dividends
In connection with stock dividends authorized by the Board of Directors in
1998 and 1997, the Company issued one-half share for each outstanding share of
Common Stock, payable June 29, 1998 to shareholders of record as of June 22,
1998, and payable July 21, 1997 to shareholders of record as of July 14, 1997,
respectively. All share and per share data in these consolidated financial
statements and the accompanying notes have been retroactively adjusted to
reflect these dividends, each having the effect of a 3-for-2 stock split.
Net Income Per Share
The following table sets forth the calculation of basic and diluted net
income per share:
1999 1998 1997
---- ---- ----
(In thousands, except per share data)
Basic net income per share:
Net income .......................................... $ 98,518 $ 71,553 $ 51,959
------ ------ ------
Weighted average number of common shares
outstanding ....................................... 61,839 61,185 60,714
------ ------ ------
Basic net income per share .......................... $ 1.59 $ 1.17 $ 0.86
====== ====== ======
Diluted net income per share:
Net income .......................................... $ 98,518 $ 71,553 $ 51,959
------ ------ ------
Weighted average number of common shares
outstanding ....................................... 61,839 61,185 60,714
Dilutive effect of stock options and warrants
(as determined by applying the treasury
stock method) ..................................... 6,296 6,441 6,268
------ ------ ------
Weighted average number of common shares and
dilutive potential common shares
outstanding ....................................... 68,135 67,626 66,982
------ ------ ------
Diluted net income per share ........................ $ 1.45 $ 1.06 $ 0.78
====== ====== ======
NOTE 9 - PROFIT SHARING AND 401(K) RETIREMENT PLAN
The Company maintains defined contribution profit sharing and 401(k) plans
which are available to all employees over 21 years of age who have completed one
year of service in which they have worked, in general, at least 1,000 hours.
Eligible employees may make elective salary deferrals. The Company may make
contributions at its discretion.
Contributions to and reimbursements by the Company of expenses of the plans
included in the accompanying consolidated income statements for the years ended
December 31 were as follows:
1999................................. $ 5,344
1998................................. 4,017
1997................................. 2,923
NOTE 10 - STOCK-BASED COMPENSATION PLANS
At December 31, 1999, the Company has five stock-based compensation plans,
which are described below.
Accounting Method
The Company adopted the disclosure-only option under SFAS No. 123 as of
January 1, 1996. If the accounting provisions of SFAS No. 123 had been adopted
as of the beginning of 1996, the Company's net income and net income per share
would have been reduced to the pro forma amounts indicated in the following
table:
37
1999 1998 1997
---- ---- ----
Net income:
As reported......................... $ 98,518 $ 71,553 $ 51,959
====== ====== ======
Pro forma........................... $ 88,499 $ 64,813 $ 48,951
====== ====== ======
Basic net income per share:
As reported......................... $ 1.59 $ 1.17 $ 0.86
====== ====== ======
Pro forma........................... $ 1.43 $ 1.06 $ 0.81
====== ====== ======
Diluted net income per share:
As reported......................... $ 1.45 $ 1.06 $ 0.78
====== ====== ======
Pro forma........................... $ 1.30 $ 0.96 $ 0.73
====== ====== ======
The full impact of calculating compensation cost for stock options under
SFAS No. 123 is not reflected in the pro forma net income and net income per
share amounts presented above because compensation cost is reflected over the
options' vesting periods and compensation cost for options granted prior to
January 1, 1995 is not considered. These pro forma amounts may not be
representative of future disclosures because compensation cost is reflected over
the options' vesting periods and because additional options may be granted in
future years.
Fixed Stock Option Plans
The Company has four fixed stock option plans. Under the Non-Qualified
Stock Option Plan (SOP), the Company granted options to its employees for
698,176 shares of Common Stock in 1993 and 698,859 shares in 1994. Options
granted under the SOP have an exercise price of $1.29 and are fully vested at
the date of grant.
Under the 1995 Stock Incentive Plan (SIP), the Company may grant options to
its employees for up to 5,400,000 shares of Common Stock. The exercise price of
each option equals the market price of the Company's stock at the date of grant,
unless a higher price is established by the Board of Directors, and an option's
maximum term is ten years. Options granted under the SIP generally vest over a
three-year period.
The Step Ahead Investments, Inc. Long-Term Incentive Plan (SAI Plan)
provided for the issuance of stock options, stock appreciation rights (SARs),
phantom stock and restricted stock awards to officers and key employees.
Effective with the merger with 98 Cent Clearance Center and in accordance with
the terms of the SAI Plan, outstanding 98 Cent Clearance Center options were
assumed by the Company and converted, based on 1.1212 Company options for each
98 Cent Clearance Center option, to options to purchase the Company's common
stock. Options issued as a result of this conversion were fully vested as of the
date of the merger. At the date of the merger, the SAI Plan was authorized to
issue 400,000 shares subject to stock options, 40,000 phantom shares, 125,000
SARs, and 25,000 restricted stock awards. In 1996, 98 Cent Clearance Center
converted all of the outstanding SARs and phantom stock awards to stock options
and restricted stock awards, respectively.
Under the 1998 Special Stock Option Plan (Special Plan), options to
purchase 165,000 shares were granted to five former officers of 98 Cent
Clearance Center who were serving as employees or consultants of the Company
following the merger. The options were granted as consideration for entering
into non-competition agreements and a consulting agreement. The exercise price
of each option equals the market price of the Company's stock at the date of
grant, and an option's maximum term is ten years. Options granted under the
Special Plan vest over a five-year period.
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted average
assumptions:
1999 1998 1997
---- ---- ----
Expected term in years................ 8 8 10
Expected volatility................... 52.7% 50.4% 47.7%
Annual dividend yield................. - - -
Risk-free interest rate............... 6.6% 4.9% 5.8%
The following tables summarize the Company's various option plans,
including the SAI Plan for the period prior to the merger with 98 Cent Clearance
Center, as of December 31, 1999, 1998 and 1997, and changes during the years
then ended and information about fixed options outstanding at December 31, 1999.
38
Stock Option Activity
1999 1998 1997
-------------------------- -------------------------- --------------------------
Weighted Weighted Weighted
Average Average Average
Per Share Per Share Per Share
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------ ----- ------ ----- ------ -----
Outstanding at
beginning of year....... 3,250,910 $ 21.50 2,404,642 $ 10.16 2,183,246 $ 7.07
Granted.................... 979,850 30.45 1,413,073 36.30 798,338 15.64
Exercised.................. (700,288) 11.33 (481,806) 8.91 (473,307) 4.59
Forfeited.................. (156,878) 31.58 (84,999) 18.19 (103,635) 12.60
--------- --------- ---------
Outstanding at
end of year............. 3,373,594 25.68 3,250,910 21.50 2,404,642 10.16
========= ========= =========
Options exercisable
at end of year.......... 1,474,729 18.10 1,344,067 8.98 1,087,587 6.04
========= ========= =========
Weighted average fair
value of options
granted during the
year.................... $ 20.08 $ 22.53 $ 10.39
Stock Options Outstanding and Exercisable
Options Outstanding Options Exercisable
------------------------------------------------- -----------------------------
Weighted
Number Average Weighted Number Weighted
Range of Outstanding Remaining Average Exercisable Average
Exercise at December 31, Contractual Exercise at December 31, Exercise
Prices 1999 Life Price 1999 Price
------ ---- ---- ----- ---- -----
$1.29...................... 152,053 (a) $ 1.29 152,053 $ 1.29
$4.44 to $8.92............. 370,060 5.7 years 6.69 370,060 6.69
$10.15 to $14.89........... 625,032 6.9 years 14.73 447,303 14.66
$16.22 to $29.25........... 870,376 9.1 years 28.70 57,301 22.31
$31.00 to $36.13........... 831,950 8.4 years 34.44 312,285 34.37
$38.44 to $49.81........... 524,123 9.0 years 40.72 135,727 40.48
--------- ---------
$1.29 to $49.81............ 3,373,594 8.1 years $ 25.68 1,474,729 $ 18.10
========= =========
(a) Options granted under the SOP in 1993 and 1994 have no expiration date. They
are therefore not included in the total weighted average remaining life.
Employee Stock Purchase Plan
Under the Dollar Tree Stores, Inc. Employee Stock Purchase Plan (ESPP), the
Company is authorized to issue up to 506,250 shares of Common Stock to eligible
employees. Under the terms of the ESPP, employees can choose to have up to 10%
of their annual base earnings withheld to purchase the Company's common stock.
The purchase price of the stock is 85% of the lower of the price at the
beginning or the price at the end of the quarterly offering period. Under the
ESPP, the Company has sold 97,449 shares as of December 31, 1999.
The fair value of the employees' purchase rights is estimated on the date
of grant using the Black-Scholes option-pricing model with the following
weighted average assumptions:
Expected term............................. 3 months
Expected volatility....................... 21% to 34%
Annual dividend yield..................... -
Risk-free interest rate................... 5.16% to 5.88% (annualized)
The weighted average per share fair value of those purchase rights granted
in 1999, 1998 and 1997 was $6.10, $6.28, and $3.97, respectively.
39
NOTE 11 - SUBSEQUENT EVENT (Unaudited)
On January 13, 2000, the Company entered into a $35,000 operating lease
agreement to finance the construction of a new automated distribution center in
Savannah, Georgia. Under this agreement the lessor purchases the property, pays
for the construction costs and subsequently leases the facility to the Company.
The initial lease term is five years with renewal options for two additional
five-year periods. The lease provides for a residual value guarantee and
includes a purchase option based on the initial cost of the property. When the
assets are placed into service, the Company will estimate its liability, if any,
under the residual value guarantee and record additional rent expense on a
straight-line basis over the remaining lease term. The new facility is expected
to be operational in early 2001.
NOTE 12 - QUARTERLY FINANCIAL INFORMATION (Unaudited)
The following table sets forth certain unaudited results of operations for
each quarter of 1999 and 1998. The unaudited information has been prepared on
the same basis as the audited consolidated financial statements appearing
elsewhere in this report and includes all adjustments, consisting only of normal
recurring adjustments, which management considers necessary for a fair
presentation of the financial data shown. The operating results for any quarter
are not necessarily indicative of results for any future period.
First Second Third Fourth
Quarter Quarter(1) Quarter Quarter(2)
------- ---------- ------- ----------
(In thousands, except store and per share data)
1999:
Net sales............................... $227,044 $253,216 $265,372 $452,329
Gross profit............................ $ 80,865 $ 93,248 $ 98,047 $178,894
Operating income........................ $ 18,520 $ 24,050 $ 26,969 $ 92,874
Net income.............................. $ 11,327 $ 14,504 $ 16,102 $ 56,585
Pro forma net income (3)................ $ 11,093 $ 14,233 $ 16,102 $ 56,585
Diluted net income per share............ $ 0.17 $ 0.21 $ 0.24 $ 0.83
Pro forma diluted net income per share.. $ 0.16 $ 0.21 $ 0.24 $ 0.83
Stores open at end of quarter........... 1,227 1,291 1,344 1,383
Comparable store net sales increase(4).. 5.2% 1.8% 5.6% 8.3%
1998:
Net sales............................... $180,599 $205,209 $210,008 $348,307
Gross profit............................ $ 63,989 $ 74,079 $ 77,994 $137,679
Operating income........................ $ 13,578 $ 19,727 $ 21,508 $ 65,604
Net income.............................. $ 7,980 $ 11,806 $ 12,422 $ 39,345
Pro forma net income (3)................ $ 7,884 $ 11,507 $ 12,311 $ 38,826
Diluted net income per share............ $ 0.12 $ 0.17 $ 0.18 $ 0.58
Pro forma diluted net income per share.. $ 0.12 $ 0.17 $ 0.18 $ 0.57
Stores open at end of quarter........... 1,003 1,063 1,139 1,179
Comparable store net sales increase(4).. 6.4% 11.9% 5.5% 5.2%
(1) Included in gross profit in 1999 is $443 of merger related costs. Included
in 1999 operating income is $443 of merger related costs and $607 of merger
related expenses. Excluding the effects of these merger related items, for
the second quarter 1999, gross profit would have been $93,691, operating
income would have been $25,100, net income would have been $15,296, diluted
net income per share would have been $0.22, pro forma net income would have
been $15,025, and pro forma diluted net income per share would have been
$0.22.
(2) Included in gross profit in 1998 is $1,301 of merger related costs.
Included in 1998 operating income is $1,301 of merger related costs and
$4,024 of merger related expenses. Excluding the effects of these merger
related costs and expenses, for the fourth quarter 1998, gross profit would
have been $138,980, operating income would have been $70,929, net income
would have been $43,546, diluted net income per share would have been
$0.64, pro forma net income would have been $43,027, and pro forma diluted
net income per share would have been $0.63.
(3) Amounts include a pro forma adjustment for C-corporation income taxes
relating to Only $One of $271 for the second quarter 1999, $234 for the
first quarter 1999, $519 for the fourth quarter 1998, $111 for the third
quarter 1998, $299 for the second quarter 1998, and $96 for the first
quarter 1998.
(4) Easter will be observed on April 23, 2000 and was observed on April 4,
1999, April 12, 1998, and March 30, 1997.
40
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information concerning our Directors and Executive Officers required by
this Item is incorporated by reference to Dollar Tree Stores, Inc.'s Proxy
Statement relating to our Annual Meeting of Shareholders to be held on May 25,
2000, under the caption "Election of Directors."
Information set forth in the Proxy Statement under the caption "Compliance
with Section 16(a) of the Securities and Exchange Act of 1934," with respect to
director and executive officer compliance with Section 16(a), is incorporated
herein by reference.
Item 11. EXECUTIVE COMPENSATION
Information set forth in the Proxy Statement under the caption
"Compensation of Executive Officers," with respect to executive compensation, is
incorporated herein by reference.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information set forth in the Proxy Statement under the caption "Ownership
of the Common Stock of the Company," with respect to security ownership of
certain beneficial owners and management, is incorporated herein by reference.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information set forth in the Proxy Statement under the caption "Certain
Relationships and Related Transactions" is incorporated herein by reference.
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Documents filed as part of this report:
1. Financial Statements. Reference is made to the Index to the
Consolidated Financial Statements set forth under Part II, Item 8, on
page 23 of this Form 10-K.
2. Financial Statement Schedules. All schedules for which provision is
made in the applicable accounting regulations of the Securities and
Exchange Commission are not required under the related instructions,
are not applicable, or the information is included in the Consolidated
Financial Statements, and therefore have been omitted.
3. Exhibits. The exhibits listed on the accompanying Index to Exhibits, on
page 43 of this Form 10-K, are filed as part of, or incorporated by
reference into, this report.
(b) The following reports on Form 8-K were filed since September 30, 1999.
1. Report on Form 8-K, filed January 26, 2000, included a press release
regarding earnings for the quarter and year ended December 31, 1999.
41
SIGNATURES
Pursuant to the 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 the undersigned, thereunto duly authorized.
DOLLAR TREE STORES, INC.
DATE: February 29, 2000 By: /s/ Macon F. Brock, Jr.
------------------------------------
Macon F. Brock, Jr.
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ J. Douglas Perry
- --------------------
J. Douglas Perry Chairman of the Board; February 29, 2000
Director
/s/ Macon F. Brock, Jr.
- -----------------------
Macon F. Brock, Jr. President and Chief Executive February 29, 2000
Officer; Director (principal
executive officer)
/s/ H. Ray Compton
- ------------------
H. Ray Compton Executive Vice President; February 29, 2000
Director
/s/ John F. Megrue
- ------------------
John F. Megrue Vice Chairman; Director February 29, 2000
/s/ Frederick C. Coble
- ----------------------
Frederick C. Coble Senior Vice President and February 29, 2000
Chief Financial Officer
(principal financial and
accounting officer)
/s/ Richard G. Lesser
- ---------------------
Richard G. Lesser Director February 29, 2000
/s/ Thomas A. Saunders, III
- ---------------------------
Thomas A. Saunders, III Director February 29, 2000
/s/ Alan L. Wurtzel
- -------------------
Alan L. Wurtzel Director February 29, 2000
/s/ Frank Doczi
- ---------------
Frank Doczi Director February 29, 2000
42
Index to Exhibits
3. Articles and Bylaws
3.1 Third Restated Articles of Incorporation of Dollar Tree Stores, Inc.
(the Company), as amended (Exhibit 3.1 to the Company's Quarterly
Report on Form 10-Q for the fiscal quarter ended September 30, 1996
incorporated herein by this reference)
3.2 Second Restated Bylaws of the Company (Exhibit 3.2 to the Company's
Registration Statement on Form S-1, No. 33-88502, incorporated
herein by this reference)
10. Material Contracts
(a) The following document(s) is/are filed herewith:
10.1 Seventh Amendment to Amended and Restated Revolving Credit Agreement
(Amended and Restated Credit Agreement) dated September 15, 1999 by
and among Dollar Tree Stores, Inc., Dollar Tree Distribution, Inc.,
Dollar Tree Management, Inc., BankBoston, N.A., Bank of America,
N.A., Crestar Bank, First Union National Bank, Amsouth Bank of
Alabama, Union Bank of California, N.A.
10.2 Master Lease Agreement between Atlantic Financial Group, LTD., as
Lessor, and Dollar Tree Distribution, Inc. and Certain Other
Subsidiaries of Dollar Tree Stores, Inc., as Lessee dated January
13, 2000
10.3 Appendix A to Master Agreement, Lease, Loan Agreement and
Construction Agency Agreement
10.4 Master Agreement among Dollar Tree Stores, Inc., as a Guarantor,
Dollar Tree Distribution, Inc. and Certain Other Subsidiaries
of Dollar Tree Stores, Inc. That May Hereafter Become Party Hereto,
as Lessees, Atlantic Financial Group, LTD., as Lessor, Certain
Financial Institutions Parties Hereto, as Lenders and Crestar Bank,
as Agent, dated January 13, 2000
10.5 Dollar Tree Stores, Inc. Supplemental Deferred Compensation Plan
dated February 24, 2000.
(b) The following documents, filed as Exhibits 10.1, 10.2, 10.3, 10.4, 10.5,
10.6, and 10.7 to the Company's Quarterly Report on Form 10-Q for the
fiscal quarter ended June 30, 1999 are incorporated herein by this
reference:
10.6 Merger Agreement by and among Dollar Tree Stores, Inc., Dollar Tree
New York, Inc., Tehan's Merchandising, Inc., dated June 15, 1999
10.7 Credit Agreement among First Security Bank, National Association and
First Union National Bank, dated June 2, 1999
10.8 Agency Agreement between Dollar Tree Distribution, Inc. and First
Security Bank, National Association, dated June 2, 1999
10.9 Trust Agreement between First Union National Bank and First Security
Bank, National Association, dated June 2, 1999
10.10 Security Agreement between First Security Bank, National Association
and First Union National Bank and accepted and agreed to by Dollar
Tree Distribution, Inc., dated June 2, 1999
10.11 Lease Agreement between First Security Bank, National Association,
and Dollar Tree Distribution, Inc., dated June 2, 1999
10.12 Participation Agreement among Dollar Tree Distribution, Inc. First
Security Bank, National Association and First Union National Bank,
dated June 2, 1999
43
(c) The following document, filed as Exhibit 2.2 to the Company's Form S-3 on
August 18, 1999 is incorporated herein by this reference:
10.13 Amendment to Merger Agreement dated June 22, 1999 by and among
Dollar Tree Stores, Inc., Dollar Tree New York, Inc., Tehan's and
the Shareholders
(d) The following documents, filed as Exhibits 10.1 and 10.2 to the Company's
Quarterly Report on Form 10-Q for the fiscal quarter ended September 30,
1999 are incorporated herein by this reference:
10.14 Master Lease Agreement between DTS Properties, Inc. and Dollar Tree
Stores, Inc., dated September 30, 1999 (Confidential material
omitted and filed separately with the Securities and Exchange
Commission pursuant to a request for confidential treatment)
10.15 Purchase and Sale Agreement by and between Dollar Tree Stores, Inc.
and DTS Properties, Inc., dated September 30, 1999
21. Subsidiaries of the Registrant
21.1 Subsidiaries
23. Consents of Experts and Counsel
23.1 Consent of Independent Auditors
27. Financial Data Schedule
27.1 Financial Data Schedule as of and for the years ended December 31,
1999, December 31, 1998 and December 31, 1997. Years 1998 and 1997
have been restated to give effect to the pooling-of-interests merger
with Only $One
44