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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, 2000
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. ( )
The aggregate market value of Common Stock held by non-affiliates of the
Registrant on March 23, 2001 was $1,671,936,316 based on a $17.22 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 23, 2001 there were 112,142,690 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 24, 2001, which will be filed with the Securities and Exchange
Commission not later than April 30, 2001.
DOLLAR TREE STORES, INC.
TABLE OF CONTENTS
Page
----
PART I
Item 1. BUSINESS........................................................... 4
Item 2. PROPERTIES......................................................... 8
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.............................................. 10
Item 6. SELECTED FINANCIAL DATA............................................ 11
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.............................. 13
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.............................. 44
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT................. 44
Item 11. EXECUTIVE COMPENSATION............................................. 44
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT................................................... 44
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS..................... 44
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS
ON FORM 8-K...................................................... 45
SIGNATURES......................................................... 46
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 sales and comparable store net sales;
o our growth plans, including our plans to open, add, expand or relocate
stores, and our anticipated gross square footage increase;
o the possible effect of inflation and other economic changes on our
costs and profitability, including the possible effect of future
changes in shipping rates, domestic and foreign freight costs, fuel
costs (including fuel surcharge for imports), minimum wage rates and
wage and benefit costs;
o our cash needs, including our ability to fund our future capital
expenditures and working capital requirements;
o our gross profit margin and ability to leverage selling, general and
administrative costs;
o seasonal sales patterns of both our traditional and larger stores;
o possible changes in our merchandise mix and its effect on gross profit
margin and sales;
o the capabilities of, and the cost of improving our inventory supply
chain processes;
o the future reliability of, and cost associated with, our sources of
supply, particularly China;
o the future availability of quality merchandise that can be profitably
sold for $1.00;
o the capacity, performance and cost of our existing and planned
distribution centers, including opening and expansion schedules; and
o our expectations regarding competition.
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 adverse weather and economic conditions, such as reduced consumer
confidence and spending;
o failure to meet our aggressive sales and other expansion goals or to
successfully manage our growth, including opening or expanding stores
on a timely basis;
o difficulties and uncertainties in adding and operating larger stores,
with which we have less experience;
o the seasonality of our sales and the importance of our fourth quarter
operating results;
o our profitability is especially vulnerable to future increases in
operating and merchandise costs, including shipping rates, freight
costs, fuel costs, wage and benefit levels, inflation, competition and
other adverse economic factors;
o the capacity and performance of our distribution system and our
ability to expand its capacity in time to support our sales growth;
o unforeseen disruptions or costs in operating and expanding our
receiving;
o possible delays, costs and other difficulties in integrating Dollar
Express with our business;
o increase in the cost or disruption of the flow of our imported goods;
3
o difficulties in obtaining sufficient quantities of low-cost
merchandise; and
o increased 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 generally do not issue financial forecasts or
projections and we have a policy against 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.
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
Macon Brock, our President and Chief Executive Officer, Doug Perry, our
Chairman and Ray Compton, our Executive Vice President started Dollar Tree in
1986. We are the leading operator of discount variety stores offering
merchandise at the fixed price of $1.00. We believe the variety and quality of
products we sell for $1.00 set us apart from our competitors. In each of the
last three years, we added over 220 stores. As of December 31, 2000, we operated
1,729 stores totaling 9.8 million gross square feet in 36 states:
o 1,327 are our traditional dollar stores, generally ranging from 3,500
to 6,000 gross square feet;
o 378 are larger dollar stores, generally ranging from 7,000 to 12,000
gross square feet; and
o 24 are multi-price point card and gift stores, generally ranging from
3,000 to 5,000 gross square feet.
During 2000, we merged with Dollar Express, Inc., which operated 132 stores
in the Mid-Atlantic area. Of the stores acquired, 107 were $1.00 single-price
point stores operated as "Dollar Express" and 25 were multi-price point stores
operated as "Spain's Cards & Gifts."
Our single-price point stores range from 2,000 to 23,000 total square feet
and operate under the names of Dollar Tree, Dollar Express, Dollar Bills, Only
One Dollar and Only $One. The single-price point stores are generally segregated
into two groups: stores less than 7,000 gross square feet, which we refer to as
our traditional stores and stores 7,000 gross square feet or greater, which we
refer to as our larger format stores. Our multi-price point stores operate under
the name Spain's Cards & Gifts and represent less than 1% of total net sales.
Business Strategy
Value Offering. We strive to exceed our customers' expectations of the
variety and quality of products that can be purchased for $1.00. We believe that
many of the items we sell for $1.00 are typically sold for higher prices
elsewhere. We purchase a 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.
4
Changing Merchandise Mix. We supplement our wide assortment of quality
everyday core merchandise and consumable products with a changing mix of new and
exciting products, including seasonal goods, such as Easter gifts, summer toys
and Halloween and Christmas decorations. We also take advantage of the
availability of lower-priced, private-label and regional brand goods, which we
believe are comparable to national name brands. We continually change the mix of
seasonal merchandise, non-seasonal merchandise and consumable products to add
variety and freshness to our merchandise offerings.
Convenient, Highly Visible Store Locations. We locate our stores in areas
convenient to customers. We prefer opening new stores in strip shopping centers
anchored by strong mass merchandisers such as Wal Mart, Kmart and Target, whose
target customers we believe to be similar to ours. We also open stores in
neighborhood centers anchored by large grocery retailers. We believe that our
stores' bright lighting and curb appeal attract new and repeat customers and
enhance our image as both a destination and impulse store.
Strong and Consistent Store Level Economics. Our stores have been
successful in major metropolitan areas, mid-sized cities and small towns. Since
1994, all stores opened under the Dollar Tree name have been profitable,
producing store-level operating income within the first full year of operation.
Cost Control. Given our fixed $1.00 price structure, we must control
expenses, inventory levels and operating margins to be successful. We closely
monitor both retail inventory shrinkage and retail markdowns of inventory.
Neither exceeded 2.5% of annual net sales in each year from 1996 through 1999,
excluding the Dollar Express operations. In 2000, inventory shrinkage slightly
exceeded 2.5% while markdowns of inventory remained below 2.5%. As part of our
effort to control expenses, we generally do not advertise and we accept credit
and debit cards in only 10% to 15% of our stores. In the past five calendar
years, excluding merger-related items, we have maintained our gross profit
margins in the 34.6% to 37.0% range and our operating income margins in the
10.4% to 13.1% range.
Growth Strategy
The primary factors contributing to our net sales growth have been new
store openings, comparable store net sales increases and mergers and
acquisitions. From 1996 to 2000, net sales increased at a compound annual growth
rate of 26.2% and operating income, excluding merger-related items, increased at
a compound annual growth rate of 31.7%. We expect that future sales growth will
come primarily from new store openings and, to a lesser degree, from comparable
store net sales increases, including those attributable to expanded and
relocated stores. We expect to open approximately 260 to 275 new stores and
close 10 to 15 stores in 2001 and we expect our total gross square footage to
increase 27% to 29%. We expect net sales to increase approximately 19% in 2001
as compared to 2000. Our expected net sales increase is less than our gross
square footage increase because net sales per gross square foot will decrease as
we open more of our larger format stores. Also, continued difficult economic and
consumer related conditions may likely reduce our net sales increases. Our store
openings will continue to be concentrated within our existing markets to take
advantage of market opportunities, distribution efficiencies and field
management efficiencies. In addition, we also plan to enter selected new
geographic markets.
We plan to continue our store expansion and relocation program to increase
net sales per store and take advantage of market opportunities. In 2000, we
added approximately 401,000 gross square feet by expanding or relocating 98
stores. In 2001, we plan to expand or relocate approximately 100 stores, adding
approximately 400,000 gross square feet. We target stores for expansion and
relocation based on the current sales per square foot and changes in market
opportunities. Stores targeted for relocation in 2001 are generally stores in
the 2,500 to 3,000 square foot range.
We have experienced significant sales growth over the last five years.
Managing our growth has become more complex because we are now operating over
1,700 stores in 36 states from coast to coast. We may not anticipate all the
challenges that our expanding operations will impose on our systems. Our sales
growth and profitability depends on our ability to increase our total store
square footage and the capacity of our store support systems in a profitable,
timely and efficient manner. To meet our aggressive growth plans, we must supply
an increasing number of stores with the proper mix and volume of merchandise;
successfully add and operate larger stores; hire, train and retain an increasing
number of qualified employees; open suitable store sites; and expand and upgrade
our distribution centers and internal store support systems on a tight time
schedule. We may not meet our targets for opening new stores and expanding
profitably.
5
In the past five years, we added a total of 371 stores through three large
mergers and several small acquisitions. Our acquisition strategy has been to
target companies with a similar single price point concept that have shown
success in operations or provide a strategic advantage. Although we do not have
any current plans regarding potential acquisitions, we may evaluate
opportunities in our retail sector as they become available.
Site Selection and Store Size
We maintain a disciplined, cost-sensitive approach to store site selection,
favoring strip shopping centers. Since 1995, we have opened stores primarily in
strip shopping centers. These stores typically require lower initial capital
investments and generate higher operating margins than mall stores. Our stores
have been successful in metropolitan areas, mid-sized cities and small towns. We
believe that our stores have a relatively small shopping radius, which allows us
to profitably concentrate multiple stores in a single market. Our ability to
open new stores is dependent upon, among other factors, locating suitable sites
and negotiating favorable lease terms.
We operate stores primarily ranging from 3,500 to 6,000 gross square feet.
In addition to opening our traditional stores, we continue to open more of our
larger stores, which generally range from 7,000 to 12,000 gross square feet.
Stores with at least 7,000 gross square feet account for approximately 22% of
our store base as of December 31, 2000. We expect to open 165 to 175 of these
larger stores during 2001. The range of our store sizes allows us to target a
particular location with a store that best suits that market. We view the
development of these larger stores as a continuation of our core business.
For more information on retail locations and retail store leases, see
"Properties" on page 8.
Merchandising and Store Format
Merchandise Mix. Our stores offer a wide selection of core and changing
products within traditional variety store categories, including candy and food,
housewares, 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 products that 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 a greater variety and
quantity of consumable products than our smaller stores, particularly food,
household chemicals and health and beauty care products.
We sell seasonal and impulse items and selected closeout merchandise to add
variety and freshness to our core products and create an exciting shopping
experience. Examples of seasonal goods include Easter gifts, summer toys and
Halloween and Christmas decorations. We also offer name-brand closeout
merchandise to supplement our merchandise mix. In 2000, closeout merchandise
represented less than 10% of our purchases and we would generally not expect it
to exceed 15%. We also sell private label and regional brand goods that we
believe are comparable in quality but priced lower than similar goods with
national name brands.
Purchasing. We believe that our substantial buying power at the $1.00 price
point contributes to our successful purchasing strategy, which includes
disciplined, targeted merchandise margin goals. We purchase merchandise from
manufacturers, trading companies and brokers. No vendor accounted for more than
10% of total merchandise purchased in any of the last five years. We frequently
use new vendors to offer competitive, yet varied, product selection and high
value. We buy products on an order-by-order basis and have no material long-term
purchase contracts or other assurances of continued product supply or guaranteed
product cost.
Our purchasing strategy balances imported merchandise and domestic
products. We believe imported merchandise and domestic products each currently
account for approximately one-half of our purchases. Our domestic products
include name-brand merchandise from manufacturers like Hershey's and Procter &
Gamble and a variety of consumable products, housewares and paper and plastic
goods. Our domestic purchasing program has evolved over the past few years to
include direct relationships with major manufacturers such as Colgate and
Unilever. Merchandise imported directly from overseas manufacturers and agents
accounts for approximately 40% to 45% of total purchases at retail. In addition,
we believe that a small portion of the goods we purchase from domestic vendors
is imported. While we do not expect to increase imports significantly as a
percentage of our merchandise, our future success depends on the continuing
availability of imported merchandise at favorable costs.
6
If Chinese or other imported merchandise becomes more expensive or
unavailable, the transition to alternative sources, which may be of lesser
quality and more expensive, may not occur in time to meet our demands. A
disruption in the flow of our imported merchandise or an increase in the cost of
this merchandise may significantly decrease our net sales and profits. On
October 10, 2000, the United States granted permanent normal trade relations to
China. Even with permanent normal trade relations, the United States could
impose punitive trade sanctions on Chinese goods for a variety of reasons.
Although no punitive import duties are currently imposed, in the past, the
United States Trade Representative has threatened retaliatory sanctions equaling
as much as 100% of the cost of some Chinese goods.
Visual Merchandising. The presentation and display of merchandise in our
stores is critical to communicating value to our customers and creating a more
exciting shopping experience. Our stores are attractively designed and 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 a 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 stores. We believe that our approach
to visual merchandising results in high store traffic, high sales volume and an
environment that encourages impulse purchases. We rely on attractive exterior
signs and in-store merchandising for our advertising. We generally do not use
other forms of advertising, except in limited cases when promoting the opening
of a new store.
During 1999, we converted our 98 Cent Clearance Center stores to more
closely resemble existing Dollar Tree stores, including changing all but one
store name to Dollar Tree. During 2000, we converted 20 of the 24 Only $One
stores added in 1999. These conversions included 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. During 2000, we added shelving and display fixtures and we improved
store layouts and merchandise displays in 11 of the Dollar Express stores.
During the first three quarters of 2001, we expect to upgrade 65 to 70 of the
Dollar Express stores by adding display fixtures, improving store layouts and
merchandise displays, installing new signs, installing new checkouts in some of
the stores and changing each store name to Dollar Tree.
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.
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. We also make deliveries to some of
our stores using our fleet of trucks. Most stores receive weekly shipments of
merchandise from distribution centers based on their anticipated inventory
requirements for that week. We also make more frequent deliveries to some
stores, including most Dollar Express stores. Many of our Dollar Tree stores
require more frequent deliveries during the busy Christmas season. For more
information on our distribution center network, see "Properties" on page 8.
Inventory Supply Chain
Beginning in 1999, we evaluated our inventory supply chain processes to
identify potential improvements. As a result, we initiated a supply chain
management project that encompasses four major components:
o planning for our merchandise purchasing;
o purchasing merchandise and allocating that merchandise throughout our
distribution and retail network;
o obtaining current and detailed sales information from a group of
representative stores using a point-of-sale system; and
o improving our ability to keep select merchandise in stock.
We believe the implementation of this project will improve the efficiency
of our supply chain management, improve our merchandise flow and help control
costs.
7
In the first half of 2001, we will begin to test our point-of-sale system
in approximately 10 stores. We then plan to install point-of-sale in up to 300
of our stores within approximately 12 months after we complete the test phase.
We expect that the point-of-sale data will allow us to track sales by
merchandise category and geographic region and assist our planning for future
purchases of inventory. Our supply chain management project is expected to cost
approximately $23.0 to $26.0 million in total, of which approximately $8.5
million was expended through December 31, 2000.
Competition
The retail industry is highly competitive and we expect competition to
increase in the future. Our competitors include variety and discount stores such
as Dollar General, closeout stores such as Odd Lots and Big Lots, mass
merchandisers such as Wal Mart, and, to a lesser extent, other fixed price
retailers. We expect that our expansion plans, as well as the expansion plans of
other fixed price retailers such as 99 Cents Only Stores based in Southern
California, will increasingly bring us into direct competition. Competition may
also increase because there are no significant economic barriers to other
companies becoming fixed price retailers.
Trademarks
We are the owners of federal service mark registrations for "Dollar Tree,"
the "Dollar Tree" logo, "1 Dollar Tree" together with the related design, and
"One Price...One Dollar." A small number of our stores operate under the name
"Only One Dollar," for which we have not obtained a service mark registration.
We also own a concurrent use registration for "Dollar Bill$" 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," "Everything's $1.00," the registration
of which is pending, and "The Dollar Store." With the acquisition of the Only
$One stores in 1999, we became the owner of additional federal service mark
registrations, including "Only One $1," and the stylized "Only $One," together
with the related design. We also occasionally market products under various
private labels but these brand names are not material to our operations. With
the acquisition of Dollar Express, we became the owner of the service marks
"Dollar Express" and "Dollar Expres$."
Seasonality
Historically we have experienced seasonal fluctuation in our net sales,
operating income and net income. We expect this trend to continue. See
"Management's Discussion and Analysis - Seasonality and Quarterly Fluctuations"
on page 20.
Employees
We employed approximately 6,700 full-time and 19,500 part-time associates
on December 31, 2000. The number of part-time associates fluctuates depending on
seasonal needs. Except the truck drivers for the Philadelphia distribution
center, none of our associates are represented by a labor union. The Teamsters
have attempted to organize our associates at our Chesapeake, Chicago and
Philadelphia distribution centers on several occasions, and we expect their
efforts to continue. We consider our relationship with our associates to be
good, and we have not experienced significant interruptions of operations due to
labor disagreements.
Item 2. PROPERTIES
Stores
As of December 31, 2000, we operated 1,729 stores in 36 states. The
following table presents a summary of our growth by region for the past three
years (number represents stores open as of the date indicated):
December 31,
------------
2000 1999 1998
---- ---- ----
Southeast.......................... 526 466 415
Midwest............................ 403 362 309
Mid-Atlantic....................... 387 353 313
Southcentral....................... 125 99 68
Northeast ......................... 180 150 114
West............................... 108 77 66
----- ----- -----
Total.......................... 1,729 1,507 1,285
===== ===== =====
8
Our stores in the West average approximately 12,400 gross square feet
compared to our other stores, which average approximately 5,200 gross square
feet.
We currently lease our existing stores and expect this policy to continue
as we expand. Our leases typically provide for a short initial lease term and
give us the option to extend. We believe this leasing strategy enhances our
flexibility to pursue various expansion and relocation opportunities resulting
from changing market conditions.
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. 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
generally maintain good relations with our landlords and are a valued tenant.
Distribution Centers
The following table includes information about the distribution centers
that we currently operate. We believe our operational distribution centers can
support a total of approximately $2.3 billion in annual retail sales.
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 March 2006 317,000
Philadelphia, Pennsylvania Lease December 2002 200,000
Savannah, Georgia Lease March 2006 600,000
In addition to our distribution centers noted above, during the past
several years we have used off-site facilities to accommodate large quantities
of seasonal merchandise.
We have leased a 600,000 square foot distribution center being constructed
in Briar Creek, Pennsylvania. We expect it to be operational in early 2002. We
believe that when this new facility is fully operational, our distribution
network will support annual sales up to $2.9 billion. The Briar Creek
distribution center will replace our Philadelphia distribution center and 83,000
square foot office and warehouse, the lease for which expires in April 2001.
When the lease expires, the office and warehouse facility will be leased on a
month-to-month basis until the Briar Creek distribution center is operational.
Effective March 12, 2001, we entered into an operating lease facility for
$165 million, of which $93 million was committed to our existing Stockton, Briar
Creek and Savannah distribution centers. Our existing distribution center
operating lease agreements for Stockton, Briar Creek and Savannah were replaced
with this facility. The termination date of this operating lease facility is
March 12, 2006. As a result, the lease expiration date for the Stockton, Briar
Creek and Savannah distribution centers is now March 12, 2006. The lease
facility, among other things, requires the maintenance of certain specified
financial ratios, restricts the payment of certain distributions and limits
certain types of debt we can incur.
The Chesapeake, Olive Branch and Savannah distribution centers contain, and
the Briar Creek distribution center will contain, advanced materials handling
technologies, including an automated conveyor and sorting system,
radio-frequency inventory tracking equipment and specialized information
systems. Beginning in March 2001, we plan to expand and automate the Stockton
distribution center. The automation and expansion is expected to be complete in
the first quarter of 2002 and will increase the facility to 525,000 square feet.
The Chicago and Philadelphia distribution centers are not automated and there
are no plans to automate these facilities.
9
Over the past several years, we have replaced certain distribution centers
for which we are liable for future rents as detailed in the table below:
Year
Location Facility Replaced Replaced Lease Expires Sublease Expires
-------- ----------------- -------- ------------- ----------------
Chesapeake, Virginia Norfolk, Virginia 1998 December 2009 February 2008
Olive Branch, Mississippi Memphis, Tennessee 1999 September 2005 March 2002
Stockton, California Sacramento, California 2000 June 2008 June 2008
For more information on our liability for future rents and related costs,
see "Management's Discussion and Analysis-Inflation and Other Economic Factors"
on page 20.
Item 3. LEGAL PROCEEDINGS
We are defendants in ordinary routine litigation and proceedings incidental
to our business. From time to time, the Consumer Products Safety Commission
requires us to recall products. We are currently in the process of recalling one
product. On several occasions, products we sold have been alleged to cause
injuries, but there are no pending or threatened injury claims. Some products we
sold have also been alleged to infringe the intellectual property rights of
others. We are currently defending claims by parties who have alleged that
products we sold violated their intellectual property rights. We do not believe
that any of these matters are individually or in the aggregate material to us.
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 2000 calendar year.
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our 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 the
Nasdaq for the periods indicated, restated to reflect a 3-for-2 stock split
effected as a stock dividend in June 2000.
High Low
---- ---
1999:
First Quarter........................ $ 32.83 $ 20.50
Second Quarter....................... 29.33 19.17
Third Quarter........................ 31.00 21.67
Fourth Quarter....................... 34.83 23.00
2000:
First Quarter........................ $ 36.33 $ 20.83
Second Quarter....................... 43.21 31.00
Third Quarter........................ 48.25 37.75
Fourth Quarter....................... 44.00 18.69
On March 23, 2001, the last reported sale price for our common stock as
quoted by Nasdaq was $17.56 per share. As of March 23, 2001, we had
approximately 500 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. In addition, our credit facilities contain
financial covenants that restrict our ability to pay cash dividends.
10
Item 6. SELECTED FINANCIAL DATA
(Dollars in thousands, except per share data and net sales
per gross square foot data)
The following table presents a summary of our selected financial data for
the last five calendar years. The selected income statement and balance sheet
data for the years ended December 31, 2000, 1999 and 1998 have been derived from
our consolidated financial statements that have been audited by our independent
certified public accountants. In addition, the selected income statement data
for the year ended 1997 has been derived from our consolidated income statement
that has 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 our financial information found
elsewhere in this report. The selected balance sheet data for the year ended
December 31, 1997 and the selected income statement and balance sheet data for
the year ended December 31, 1996 have been derived from our unaudited
consolidated financial statements, which have been prepared on the same basis as
the audited consolidated financial statements. As required by
pooling-of-interests accounting, the financial information and operating data of
Dollar Tree and our past merger partners, Dollar Express, Only $One and 98 Cent
Clearance Center, have been combined and restated as of the beginning of the
earliest period presented.
For 2000, the extraordinary loss represents the write-off of deferred
financing costs in connection with early retirement of the Dollar Express
outstanding debt.
For 2000, operating income was reduced by $4,366, and net income was
reduced by $3,134 for charges related to the Dollar Express merger. For 1999,
operating income was reduced by $1,050, and net income was reduced by $792, for
charges related to the Only $One merger. For 1998, operating income was reduced
by $5,325, and net income was reduced by $4,201, for charges related to the 98
Cent Clearance Center merger.
Dollar Express and Only $One were treated as S corporations for federal and
state income tax purposes through February 4, 1999 and June 29, 1999,
respectively. As a result, their income was taxable to their shareholders
through those dates. Accordingly, our pro forma income statement data reflects
the pro forma increase in our C corporation federal and state income tax
expense, which would have occurred had these companies been taxed as C
corporations for the entire periods presented.
In our merger with Dollar Express in May 2000, the outstanding preferred
stock of Dollar Express was converted to common stock. Pro forma diluted net
income per common share would have been $0.96 for the year ended December 31,
1999 if the conversion of preferred stock had taken place on February 5, 1999,
the date when the preferred stock was originally issued. This calculation gives
effect to an adjustment that increases net income available to common
shareholders by $7,409 to eliminate the charge for accrued preferred stock
dividends and accretion of preferred stock and warrants for the year ended
December 31, 1999. In addition, if the conversion had taken place on February 5,
1999, the weighted average number of common shares and potential dilutive common
shares outstanding would have increased by 2,795,000 shares for the year ended
December 31, 1999.
Comparable store net sales compare net sales for stores open throughout
each of the two periods being compared, including expanded and relocated stores.
Net sales per store and net sales per square foot are calculated for stores open
throughout the period presented.
11
Year Ended December 31,
--------------------------------------------------------------------
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
Income Statement Data:
Net sales...................................... $1,688,105 $1,351,820 $1,073,886 $847,830 $665,802
Cost of sales.................................. 1,063,416 854,124 681,387 551,926 435,446
Merger-related costs........................... 1,100 443 1,301 -- --
--------- --------- --------- ------- -------
Gross profit................................... 623,589 497,253 391,198 295,904 230,356
Selling, general and administrative
expenses:
Operating expenses.......................... 375,316 290,241 234,197 189,060 148,785
Merger-related expenses..................... 3,266 607 4,024 -- --
Depreciation and amortization............... 41,971 30,809 22,463 16,017 12,607
--------- --------- --------- ------- -------
Total................................... 420,553 321,657 260,684 205,077 161,392
--------- --------- --------- ------- -------
Operating income............................... 203,036 175,596 130,514 90,827 68,964
Interest income................................ 4,266 1,743 604 145 119
Interest expense............................... (7,817) (7,429) (5,217) (3,831) (5,868)
--------- --------- --------- ------- -------
Income before income taxes..................... 199,485 169,910 125,901 87,141 63,215
Provision for income taxes..................... 77,476 63,333 44,583 31,323 22,284
--------- --------- --------- ------- -------
Income before extraordinary item............... 122,009 106,577 81,318 55,818 40,931
Loss on debt extinguishment, net of
tax benefit of $242......................... 387 -- -- -- --
--------- --------- --------- ------- -------
Net income..................................... 121,622 106,577 81,318 55,818 40,931
Preferred stock dividends and
accretion................................... 1,413 7,027 -- -- --
--------- --------- --------- ------- -------
Net income available to common
shareholders................................ $ 120,209 $ 99,550 $ 81,318 $ 55,818 $ 40,931
========= ========= ========= ======= =======
Pro Forma Income Statement Data:
Net income available to common
shareholders................................ $ 120,209 $ 99,550 $ 81,318 $ 55,818 $ 40,931
Adjustment for C corporation income
taxes....................................... -- 505 4,804 2,279 2,163
--------- --------- --------- ------- -------
Pro forma net income available to
common shareholders......................... $ 120,209 $ 99,045 $ 76,514 $ 53,539 $ 38,768
========= ========= ========= ======= =======
Pro forma basic net income per common
share....................................... $ 1.16 $ 1.01 $ 0.79 $ 0.55 $ 0.41
Pro forma diluted net income per
common share................................ $ 1.08 $ 0.92 $ 0.71 $ 0.50 $ 0.37
Weighted average number of common
shares outstanding, in thousands............ 103,972 98,435 97,454 96,747 94,830
Weighted average number of common
shares and dilutive potential common
shares outstanding, in thousands............ 111,809 107,960 107,115 106,149 103,919
Selected Operating Data:
Number of stores open at
end of period............................... 1,729 1,507 1,285 1,059 888
Total gross square footage,
in thousands................................ 9,832 7,638 6,051 4,793 3,810
Net sales growth............................... 24.9% 25.9% 26.7% 27.3% 51.6%
Comparable store net sales increase............ 5.7% 5.0% 6.5% 6.9% 5.9%
Net sales per store............................ $ 1,014 $ 939 $ 902 $ 851 $ 784
Net sales per gross square foot................ $ 189 $ 196 $ 200 $ 198 $ 200
As of December 31,
--------------------------------------------------------------------
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
Balance Sheet Data:
Working capital.............................. $ 303,596 $ 226,707 $ 124,758 $ 70,521 $ 32,518
Total assets................................. 746,859 611,233 436,768 328,282 217,370
Total debt................................... 71,730 108,773 53,759 42,622 13,059
Manditorily redeemable preferred
stock..................................... -- 35,171 -- -- --
Shareholders' equity......................... 518,658 316,238 262,575 173,290 116,651
12
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Key Events and Recent Developments
Several key events have had or are expected to have a significant effect on
our results of operations. You should keep in mind that:
o In August 2000, we amended an existing distribution center operating
lease agreement to facilitate construction of a 600,000 square foot
distribution center in Briar Creek, Pennsylvania. We plan to begin
operating this facility in the first quarter of 2002.
o In May 2000, we merged with Dollar Express and issued or reserved
9,000,000 shares of our common stock in exchange for Dollar Express's
outstanding stock and options. Dollar Express operated 132 stores
primarily in the Mid-Atlantic region.
o In January 2000, we entered into an operating lease for a new 600,000
square foot distribution center, which was constructed in Savannah,
Georgia. We began shipping from this facility in February 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 merged with Only $One, issuing 752,400 shares of our
common stock in exchange for Only $One's outstanding stock. 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 merged with 98 Cent Clearance Center. We reserved
or issued approximately 3,228,000 shares of our common stock in
exchange for 98 Cent Clearance Center's outstanding stock and options.
98 Cent Clearance Center operated 66 stores in northern and central
California and Nevada.
We accounted for the Dollar Express, Only $One and 98 Cent Clearance Center
mergers as poolings of interest. As a result, all financial and operational data
assume that Dollar Express, Only $One and 98 Cent Clearance Center had each been
a part of Dollar Tree throughout all periods presented. For each period
presented, the outstanding Dollar Express, Only $One and 98 Cent Clearance
Center shares of stock have been converted into Dollar Tree shares based on the
exchange ratios used in each merger.
Results of Operations
Our net sales derive 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 change at our
existing stores from one year to the next. We refer to this as a change in
comparable store net sales, because we compare only those stores that are open
throughout both of the periods being compared. We include expanded or relocated
stores in the calculation of comparable store net sales, which causes our
comparable store net sales increases or decreases to appear more favorable.
Most retailers can increase the price of their merchandise in order to
increase their comparable store net sales. As a fixed price retailer, we do not
have the ability to raise our prices. Generally, our comparable store net sales
will increase only if we sell more merchandise. In 1999, we increased the price
point in the sixty-six 98 Cent Clearance Center stores from $0.98 to $1.00. This
had only a minor impact on our comparable store net sales. We believe that
future comparable store net sales increases, if any, will be lower than those we
have experienced in the past.
We anticipate that our future net sales growth will come mostly from new
store openings. We added 222 stores in 2000 and plan to add 250 to 260 stores in
2001. We also expect our average store size to increase in 2001, which we
believe will result in a decrease in our net sales per gross square foot. Of our
expected gross square footage increase in 2001 of 27% to 29% (or 2.6 million to
2.8 million gross square feet), approximately 400,000 square feet will come from
expanded or relocated stores.
Increases in expenses could negatively impact our operating results because
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 our costs.
13
The following table expresses items from our income statement as a
percentage of net sales:
Year Ended December 31,
2000 1999 1998
---- ---- ----
Net sales............................................. 100.0% 100.0% 100.0%
Cost of sales......................................... 63.0 63.2 63.5
Merger-related costs.................................. 0.1 -- 0.1
----- ----- -----
Gross profit.......................................... 36.9 36.8 36.4
Selling, general and administrative expenses:
Operating expenses.................................. 22.2 21.5 21.8
Merger-related expenses............................. 0.2 -- 0.4
Depreciation and amortization....................... 2.5 2.3 2.0
----- ----- -----
Total....................................... 24.9 23.8 24.2
----- ----- -----
Operating income...................................... 12.0 13.0 12.2
Interest income....................................... 0.3 0.1 0.1
Interest expense...................................... (0.5) (0.5) (0.6)
----- ----- -----
Income before income taxes............................ 11.8 12.6 11.7
Provision for income taxes............................ 4.6 4.7 4.1
----- ----- -----
Net income............................................ 7.2% 7.9% 7.6%
===== ===== =====
2000 Compared to 1999
Net Sales. Net sales increased 24.9% to $1,688.1 million for 2000 from
$1,351.8 million for 1999. We attribute this $336.3 million increase in net
sales to two factors:
o Approximately 79% of the increase came from stores opened in 2000 and
1999, which are not included in our comparable store net sales
calculation.
o Approximately 21% of the increase came from comparable store net sales
increases. Comparable store net sales increased 5.7% during 2000.
We believe comparable store net sales increased because:
o We expanded and relocated stores.
o We improved the mix of our merchandise, offering more consumable
products as a component of our domestic merchandise.
o The Easter selling season was longer in 2000 compared to 1999.
o Customers purchased a higher average number of items per visit, and we
had more customer visits.
We opened 233 new stores and closed 11 stores during 2000, compared to 227
new stores opened and five stores closed the previous year. We added 28.7% to
our total store square footage in 2000 compared to 26.2% in 1999. Of the 2.2
million, or 28.7%, increase in gross square footage in 2000, approximately
400,000 gross square feet was added by expanding and relocating existing stores.
Gross Profit. Gross profit increased $126.3 million, or 25.4%, in 2000 as
compared to our gross profit in 1999. Our gross profit margin increased to 36.9%
in 2000 from 36.8% in 1999. Excluding merger-related costs, gross profit margin
increased to 37.0% in 2000 compared to 36.8% in 1999. Particular changes
affecting our gross profit margin in 2000 included:
o We believe our buying power with merchandise vendors increased because
of our increased sales, which in turn lowered our overall merchandise
costs expressed as a percentage of net sales.
o Our freight costs increased primarily as a result of our changing
merchandise mix and an increase in domestic fuel costs. The changing
merchandise mix, which included an increase in consumable merchandise
as a percentage of our domestic merchandise, required more shipments
to deliver the same amount of merchandise in 2000 as compared to 1999.
14
o In 2000, we purchased a slightly higher percentage of imports, which
generally cost less than domestic products, and sales of these goods
improved our gross profit margin for the year.
We will have difficulty maintaining our historical gross profit margins in
2001 and future years as we refine our merchandise mix to include a higher
proportion of consumable merchandise, which typically carry a lower gross profit
margin, open more of the larger stores and continue to absorb higher costs.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $98.9 million, or 30.7%, in 2000 compared to
1999. As a percentage of net sales, selling, general and administrative expenses
increased to 24.9% in 2000 compared to 23.8% in 1999. Excluding expenses related
to the Dollar Express merger in 2000, selling, general and administrative
expenses increased as a percentage of net sales to 24.7% compared to 23.8% in
1999. This increase is primarily the result of a loss of leverage during the
important fourth quarter selling season, non-recurring Dollar Express expenses
of approximately $3.3 million and an increase in our worker's compensation and
general liability accruals resulting from a change in our estimates. The $3.3
million in non-recurring Dollar Express expenses primarily includes:
o accrual of tax liabilities;
o training Dollar Express store personnel on new systems, policies and
procedures;
o conducting physical inventories of Dollar Express stores; and
o improving benefits and paying transitional salaries.
Expressed as a percentage of net sales, depreciation and amortization
increased to 2.5% in 2000 from 2.3% in 1999, a total increase of $11.2 million.
The increase as a percentage of net sales was primarily due to approximately
$1.4 million of accelerated depreciation related to Dollar Express's store
equipment and warehouse management system. We replaced the Dollar Express
warehouse management system in January 2001 with our own, which we believe will
increase the visibility of merchandise in our Philadelphia distribution center
and improve merchandise flow and our store ordering system.
We estimate that Dollar Express was approximately $0.04 dilutive to our
diluted earnings per share in 2000, excluding merger-related items.
Leveraging our selling, general and administrative expenses will become
increasingly difficult because we expect to incur difficulties in maintaining
our historical comparable store net sales increases, especially in the first
half of 2001.
Operating Income. Our operating income increased $27.4 million, or 15.6%,
in 2000 as compared to 1999. As a percentage of net sales, operating income
decreased to 12.0% in 2000 compared to 13.0% in 1999. Excluding merger-related
items, operating income increased to $207.4 million in 2000 from $176.6 million
in 1999 and decreased as a percentage of net sales to 12.3% from 13.1%. This
decrease was due to increased operating expenses, as a percentage of net sales,
partially offset by improved gross profit margin as discussed above.
Interest Income and Expense. Interest income increased $2.6 million to $4.3
million in 2000 from $1.7 million in 1999. The increase resulted from higher
levels of cash and cash equivalents in 2000 compared to 1999. Interest expense
increased $0.4 million to $7.8 million in 2000 from $7.4 million in 1999.
Interest expense increased because we incurred interest on the sale-leaseback
transaction for the entire year in 2000 compared to only three months in 1999.
This increase was partially offset by the decrease in interest on the revolving
credit facility and term loan paid off in May 2000.
Income Taxes. Our effective tax rate increased to 38.8% for the year ended
December 31, 2000 from 37.3% for the year ended December 31, 1999 because the
1999 rate included a benefit of approximately 1.3%, as a percentage of income
before taxes, related to Dollar Express's conversion from an S to C corporation
and 0.3% related to the non-taxable S corporation income of Only $One in the
first half of 1999.
1999 Compared to 1998
Net Sales. Net sales increased 25.9% to $1,351.8 million for 1999 from
$1,073.9 million for 1998. We attribute this $277.9 million increase in net
sales to two factors:
o Approximately 82% of the increase came from stores opened in 1999 and
1998, which are not included in our comparable store net sales
calculation.
o Approximately 18% of the increase came from comparable store net sales
growth. Comparable store net sales increased 5.0% during 1999.
15
We believe comparable store net sales increased because:
o We improved the mix of our 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 expanded and relocated stores.
o Customers purchased a higher average number of items per visit, and we
had more customer visits.
We opened 227 new stores and closed five stores during 1999, compared to
234 new stores opened and eight stores closed the previous year. The new 1999
stores include four that we acquired from a small dollar store operator. We
added 26.2% to our total square footage in each of 1999 and 1998.
Gross Profit. Gross profit increased $106.1 million, or 27.1%, in 1999 as
compared to our gross profit in 1998. Our gross profit margin increased to 36.8%
in 1999 from 36.4% in 1998. Particular changes affecting our gross profit margin
in 1999 included:
o We believe our buying power with merchandise vendors increased because
of our increased sales, which in turn lowered our overall merchandise
costs expressed as a percentage of net sales.
o Our distribution costs were lower as a percentage of net sales due to
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 that took effect in May 1999. Excluding
the effect on Dollar Express, we estimate that the impact of these
higher shipping rates on our business was approximately $5.0 million
in 1999.
o In 1999, we purchased a slightly higher percentage of imports, which
generally cost less than domestic products, and sales of these goods
improved our gross profit margin for the year.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $61.0 million, or 23.4%, in 1999 compared to
1998. As a percentage of net sales, selling, general and administrative expenses
decreased to 23.8% in 1999 compared to 24.2% in 1998. Excluding expenses related
to the 98 Cent Clearance Center merger in 1998, selling, general and
administrative expenses remained constant as a percentage of net sales at 23.8%
in both 1999 and 1998. Expressed as a percentage of net sales, depreciation and
amortization increased to 2.3% in 1999 from 2.0% in 1998, a total increase of
$8.3 million. This percentage increase resulted primarily from depreciation
related to the Olive Branch distribution facility.
During 1999, we recorded a $1.3 million charge in selling, general and
administrative expenses for remaining payments on our closed Sacramento
distribution facility. This lease loss accrual is adjusted quarterly based on
changes in market conditions.
Operating Income. Our operating income increased $45.1 million, or 34.5%,
in 1999 as compared to 1998. As a percentage of net sales, operating income
increased to 13.0% in 1999 compared to 12.2% in 1998. Excluding merger-related
items, operating income increased to $176.6 million in 1999 from $135.8 million
in 1998 and increased as a percentage of net sales to 13.0% from 12.7%. These
increases were attributable to our improved gross profit margin discussed above.
Interest Income and Expense. Interest income increased $1.1 million to $1.7
million in 1999 from $0.6 million in 1998. The increase resulted from higher
levels of cash and cash equivalents in 1999 compared to 1998. Interest expense
increased $2.2 million to $7.4 million in 1999 from $5.2 million in 1998. The
increase resulted from the term loan entered into by Dollar Express in February
1999 and accretion of the common stock put warrants of Dollar Express to
redemption value. The common stock put warrants were terminated in connection
with the consummation of the merger with Dollar Express.
16
Income Taxes. Our effective tax rate increased to 37.3% for the year ended
December 31, 1999 from 35.4% for the year ended December 31, 1998 because Dollar
Express was not subject to corporate-level income taxes before its conversion
from an S to C corporation on February 5, 1999. This increase was partially
offset by a $2.2 million deferred tax benefit recorded in connection with its
conversion from an S to C corporation for income tax purposes.
Liquidity and Capital Resources
Overview
Our business requires capital to open new stores and operate existing
stores. Our working capital requirements for existing stores are seasonal and
usually 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 opening and relocation and expansion programs from
internally generated funds and borrowings under our credit facilities.
The following table compares cash-related information for the years ended
December 31, 2000, 1999 and 1998:
YEAR ENDED DECEMBER 31,
2000 1999 1998
---- ---- ----
(in millions)
Net cash provided by (used in):
Operating activities.................... $ 107.7 $ 128.6 $ 85.5
Investing activities.................... (94.8) (55.2) (57.0)
Financing activities.................... (12.9) 23.5 7.3
The $20.9 million decrease in cash provided by operating activities in 2000
was caused primarily by the decrease in fourth quarter operating results as
compared to 1999. This resulted in a carry over of approximately 5% more of our
fourth quarter seasonal merchandise as compared to 1999.
Cash used in investing activities is generally expended to open new stores.
The $39.6 million increase in investing activities was primarily due to an
increase in capital expenditures for the year 2000 compared to the same period
in 1999 as a result of the following:
o an increase in the number of new stores opened and the average size of
those stores in 2000;
o an increase in the number of relocations and expansions;
o the expansion of the Store Support Center;
o improvement in our supply chain processes; and
o installation of new registers and back-office equipment in the Dollar
Express stores.
The $36.4 million decrease in cash provided by (used in) financing
activities was primarily the result of the following:
o We did not receive any proceeds from the issuance of equity, excluding
stock-based compensation plans, in 2000 compared to the $32.2 million
received in 1999 related to the issuance of Dollar Express's preferred
stock and common stock put warrants.
o We made net repayments of approximately $34.2 million in 2000 due to
repayment of Dollar Express's term loan and revolving credit facility
and the first principal payment on the senior notes. In 1999, we had
net borrowings of approximately $23.0 million related primarily to
draw downs on Dollar Express's term loan and revolving credit
facility.
o We received $15.8 million more cash pursuant to stock-based
compensation plans in 2000 compared to 1999 because of increased stock
option exercises.
o We did not pay any distributions in 2000 compared to the $61.0 million
of distributions paid in the first nine months of 1999 to the former
shareholders of Dollar Express and Only $One.
o We received $21.6 million related to the sale-leaseback transaction in
1999.
17
At December 31, 2000, our borrowings under our bank facilities, senior
notes and bonds were $43.0 million and we had an additional $135.0 million
available under our bank facility. Of the amount available, approximately $71.0
million was committed to letters of credit issued for the routine purchase of
imported merchandise.
Funding Requirements
We expect to add approximately 250 to 260 stores in 2001. In 2000, the
average investment per new store, including capital expenditures, initial
inventory and pre-opening costs, was as follows:
Number of Average Investment
Store Type Stores Opened per Store
---------- ------------- ---------
Traditional stores 117 $ 211,000
Larger stores 116 333,000
All stores 233 272,000
We expect our cash needs for opening new stores in 2001, including approximately
165 to 175 of the larger format stores, to total approximately $89.7 million. We
have budgeted approximately $53.5 million for capital expenditures and $36.2
million for initial inventory and pre-opening costs. Our total planned capital
expenditures for 2001 are approximately $114.7 million, including planned
expenditures for new, expanded and relocated stores, investments in our supply
chain processes, additional equipment for the distribution centers and
remodeling and upgrading many of the Dollar Express stores. We believe that we
can adequately fund our planned capital expenditures and working capital
requirements for the next few years from net cash provided by operations and
borrowings under our credit facility.
Bank Credit Facilities. 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,
2000, the interest rate was approximately 7.1%. The credit agreement, among
other things, requires the maintenance of specified ratios, restricts the
payments of cash dividends and other distributions and limits the amount of debt
we can incur. The facility terminates on May 31, 2002. Dollar Express's former
credit facility was paid in full after the consummation of the merger on May 5,
2000.
Effective March 12, 2001, we entered into a new revolving credit facility
with our banks, which provides for a $50.0 million unsecured revolving credit
facility to be used for working capital bearing interest at the agent bank's
prime rate or LIBOR plus a spread, at our option. The credit agreement, among
other things, requires the maintenance of specified ratios, restricts the
payments of certain distributions and limits certain types of debt we can incur.
The facility terminates on March 11, 2002.
Also, effective March 12, 2001, we entered into a Letter of Credit
Reimbursement and Security Agreement, which provides $125.0 million for letters
of credit, which are generally issued in relation to the routine purchase of
imported merchandise.
Operating Lease Agreements. We have entered into operating leases for three
of our distribution centers. Under these agreements, the lessor is required to
purchase the property, pay for the construction costs and lease the facility to
us. The following table includes information related to these operating leases:
Operating Lease
Location Amount Lease Begins Lease Expires
-------- ------ ------------ -------------
Stockton, California and
Briar Creek, Pennsylvania $58.0 million June 1999 March 2006
Savannah, Georgia $35.0 million January 2000 March 2006
In August 2000, we amended our existing operating lease agreement related to our
Stockton distribution center. We increased the agreement to $58.0 million to
facilitate the construction of a new $40.0 million distribution center in Briar
Creek, Pennsylvania.
18
On September 8, 2000, we entered into a $10.0 million interest rate swap
agreement to manage the risk associated with interest rate fluctuations on a
portion of our Stockton distribution center lease. The swap creates the economic
equivalent of a fixed rate lease by converting the variable interest rate to a
fixed rate. Under this agreement, we pay interest to a financial institution at
a fixed rate of 6.45%. In exchange, the financial institution pays us at a
variable interest rate, which approximates the floating rate on the lease
agreement, excluding the credit spread. The interest rate on the swap is subject
to adjustment monthly. No payments are made by either party under the swap for
monthly periods with an established interest rate greater than 7.41%. The swap
is effective through June 2004, but it may be canceled by the bank or us and
settled for the fair value of the swap as determined by market rates. The fair
value of this swap at December 31, 2000 was approximately ($0.2) million.
On December 20, 2000, we entered into a $5.0 million interest rate swap
agreement to manage the risk associated with interest rate fluctuations on a
portion of our Stockton distribution center lease. Under this agreement, we pay
interest to a financial institution at a fixed rate of 5.83%. In exchange, the
financial institution pays us at a variable interest rate, which approximates
the floating rate on the lease agreement, excluding the credit spread. The
interest rate on the swap is subject to adjustment monthly. No payments are made
by either party under the swap for monthly periods with an established interest
rate greater than 7.41%. The swap is effective through June 2004, but it may be
canceled by the bank or us and settled for the fair value of the swap as
determined by market rates. The fair value of this swap at December 31, 2000 was
approximately ($15,000).
Effective March 12, 2001, we entered into an operating lease facility for
$165.0 million, of which approximately $93 million was committed to our existing
Stockton, Briar Creek and Savannah distribution centers. Our existing
distribution center operating lease agreements for Stockton, Briar Creek and
Savannah were replaced with this facility. The termination date of this
operating lease facility is March 2006. As a result, the lease expiration date
for the Stockton, Briar Creek and Savannah distribution centers is now March
2006. The lease facility, among other things, requires the maintenance of
certain specified financial ratios, restricts the payment of certain
distributions and limits certain types of debt we can incur.
Sale-Leaseback Transaction. In September 1999, we sold some 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. The transaction is treated as a
financing arrangement for financial accounting purposes. The total amount of the
lease obligation is $29.0 million. We are required to make monthly lease
payments of $438,000 in the first five years and $638,000 in the sixth and
seventh years. As a result of the transaction, we received net cash of $20.9
million and an $8.1 million 11.0% note receivable, which matures in September
2006.
Revenue and Bond Financing. In May 1998, we entered into an agreement with
the Mississippi Business Finance Corporation under which it issued $19.0 million
of variable rate demand revenue bonds. We borrowed 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, 2000, the balance outstanding on the bonds was
$19.0 million. We begin repayment of the principal amount of the bonds in June
2006, with a portion maturing each June 1 until the final portion matures in
June 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 7.3% at December 31, 2000.
The bonds are secured 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 require that we maintain specified
financial ratios and restrict our ability to pay cash dividends.
In April 1999, we entered into a $19.0 million interest rate swap agreement
to manage the risk associated with interest rate fluctuations on the demand
revenue bonds. Under this agreement, as amended, we pay interest to the bank
that provided the swap at a fixed rate of 4.88%. In exchange, the financial
institution pays us at a variable interest rate, which is similar to the rate on
the demand revenue bonds. The variable interest rate on the interest rate swap
is set monthly. No payments are made by either party under the swap for monthly
periods with an established interest rate greater than 7.75%. The swap is
effective through April 1, 2009, but it may be canceled by the bank or us and
settled for the fair value of the swap as determined by market rates. The fair
value of this swap at December 31, 2000 was approximately $0.3 million.
19
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 we pay principal in five equal annual installments of $6.0 million, which
began 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 specified
asset dispositions or other transactions we may make. The note agreements
prohibit specified mergers and consolidations in which our company is not the
surviving company, require that we maintain specified financial 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
penalty to the note holder.
Seasonality and Quarterly Fluctuations
We experience seasonal fluctuations in our net sales, comparable store net
sales, operating income and net income and expect 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 larger store format has a slightly different seasonal sales pattern
than our traditional stores. These larger stores realize a lower percentage of
their annual sales in the fourth quarter as compared to our traditional stores.
We believe this is a result of the larger format stores containing a higher
proportion of basic consumer products than our traditional stores.
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
May 24, 2000, which includes quarterly information for the combined companies.
Inflation and Other Economic Factors
Our ability to provide quality merchandise at a fixed price and on a
profitable basis is subject to economic factors that we cannot control,
including inflation in shipping rates, wage rates and other operating costs.
Shipping Costs. In May 1998, the trans-Pacific shipping cartel imposed a
freight increase of $300 per container on U.S. 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. The Trans-Pacific Stabilization Agreement (TSA),
which has essentially replaced the trans-Pacific shipping cartel, may call for
increased shipping rates and a peak season surcharge in 2001. As a result, our
trans-Pacific shipping rates may increase when we renegotiate our import
shipping rates effective May 2001.
During 2000, we experienced a $1.2 million increase in our domestic freight
costs because of increased domestic fuel costs. If fuel costs remain at current
levels, we believe our domestic freight expense in 2001 will increase by an
additional $0.5 to $0.7 million compared with 2000. In addition, higher fuel
costs are expected to increase our import freight costs in the form of a fuel
surcharge. We expect these costs will increase approximately $0.5 million in
2001.
20
Minimum Wage. Although our average hourly wage rate is significantly higher
than the federal minimum wage, an increase in the mandated minimum wage could
significantly increase our payroll costs. For example, the federal 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 $5.0 million in 1998, excluding the impact this increase had on
the 98 Cent Clearance Center, Only $One and Dollar Express stores. In February
2000, the U.S. Senate approved a proposal increasing the federal minimum wage by
$1.00 per hour over three years. In March 2000, the U.S. House of
Representatives approved a proposal increasing the federal minimum wage by $1.00
per hour over two years. No bill was passed into law and the status of this
issue in the 2001 Congress is uncertain given the new administration. If the
minimum wage were to increase by $1.00 per hour, we believe that our annual
payroll expenses would increase by approximately 2.0% to 2.5% of operating
expenses unless we realize offsetting cost reductions.
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, our former distribution center in Sacramento through
June 2008 and our current distribution center in Philadelphia through December
2002. Annual rent and pass-through costs are approximately $0.7 million for the
Memphis facility, $0.6 million for the Sacramento facility and $0.5 million for
the Philadelphia facility. We subleased the Memphis facility through March 2002
and the Sacramento facility through June 2008. We have recorded charges for the
Memphis and Sacramento leases considering current market conditions and probable
sublease income at each location.
Unless offsetting cost savings are realized, adverse economic factors,
including inflation in operating costs, could harm our financial condition and
results of operations.
New Accounting Pronouncements
Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for
Derivative Instruments and Hedging Activities," as amended by SFAS No. 138,
establishes accounting standards for derivative instruments and hedging
activities and requires the recognition of all derivatives as either assets or
liabilities in the statement of financial position at their fair value. We
adopted this statement effective January 1, 2001. We do not expect the
implementation of this pronouncement to materially affect our financial
condition or results of operations.
Pursuant to SFAS No. 133, our current interest rate swaps do not qualify
for cash flow hedge accounting. As a result, changes in the fair value of our
existing derivative instruments will be recorded currently in earnings. These
changes in fair value are not predictable.
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 may enter 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,
consisting of debt obligations issued at variable and fixed rates. Based on
amounts outstanding on our fixed rate debt obligations at December 31, 2000, we
do not consider our exposure to interest rate risk to be material.
We use variable-rate debt and operating leases to finance our operations
and capital improvements. These obligations expose 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 our interest
payments.
To meet this objective, we entered into derivative instruments in the form
of interest rate swaps to manage fluctuations in cash flows resulting from
changes in the variable interest rates on the obligations. The interest rate
swaps reduce the interest rate exposure on these variable-rate obligations.
Under the interest rate swap, we pay the bank at a fixed rate and receive
variable interest at a rate approximating the variable rate on the obligation,
thereby creating the economic equivalent of a fixed rate obligation. No payments
are made by either party under the swap for monthly periods in which the
variable interest rate is greater than the predetermined knockout rate.
21
The following table summarizes the financial terms of our interest rate swap
agreements:
Hedging Receive Pay Knockout Fair
Instrument Variable Fixed Rate Expiration Value
---------- -------- ----- ---- ---------- -----
$19.0 million LIBOR 4.88% 7.75% 4/1/09 $337,000
interest rate swap
$10.0 million LIBOR 6.45% 7.41% 6/2/04 ($208,000)
interest rate swap
$5.0 million LIBOR 5.83% 7.41% 6/2/04 ($15,000)
interest rate swap
We do not believe our exposure to changes in the fair value of the interest rate
swaps is material.
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 suppliers
in Italian lire. When favorable exchange rates exist, we may hedge foreign
currency commitments of future payments by purchasing foreign currency forward
contracts. On December 31, 2000, we had no contracts outstanding. Less than 1%
of our purchases are contracted in Italian lire, and the market risk exposure
relating to currency exchange rate fluctuations 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, 2000 and 1999............ 25
Consolidated Income Statements for the years ended
December 31, 2000, 1999 and 1998................................... 26
Consolidated Statements of Shareholders' Equity
for the years ended December 31, 2000, 1999 and 1998............... 27
Consolidated Statements of Cash Flows for the years ended
December 31, 2000, 1999 and 1998................................... 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, 2000 and 1999,
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, 2000. 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 auditing standards generally
accepted in the United States of America. 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, 2000 and 1999, and the results
of their operations and their cash flows for each of the years in the three-year
period ended December 31, 2000, in conformity with accounting principles
generally accepted in the United States of America.
/s/ KPMG LLP
Norfolk, Virginia
January 23, 2001
24
DOLLAR TREE STORES, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31,
------------
2000 1999
---- ----
(In thousands, except
share data)
ASSETS
Current assets
Cash and cash equivalents................................................ $ 181,553 $ 181,587
Merchandise inventories.................................................. 258,687 192,838
Deferred tax asset (Note 3).............................................. 8,291 6,093
Prepaid expenses and other current assets................................ 29,370 14,588
------- -------
Total current assets................................................. 477,901 395,106
------- -------
Property and equipment, net (Notes 4 and 5)................................... 211,632 157,368
Deferred tax asset (Note 3)................................................... 1,566 470
Goodwill, net of accumulated amortization..................................... 40,376 42,394
Other assets, net (Notes 2 and 4)............................................. 15,384 15,895
------- -------
TOTAL ASSETS......................................................... $ 746,859 $ 611,233
======= =======
LIABILITIES, MANDITORILY REDEEMABLE PREFERRED
STOCK AND SHAREHOLDERS'EQUITY
Current liabilities
Accounts payable......................................................... $ 75,404 $ 71,750
Income taxes payable (Note 3)............................................ 23,448 29,193
Other current liabilities (Note 5)....................................... 46,906 36,196
Current portion of long-term debt (Note 6)............................... 25,000 28,070
Current installments of obligations under capital
leases (Note 4)........................................................ 3,547 3,190
------- -------
Total current liabilities............................................ 174,305 168,399
Long-term debt, excluding current portion (Note 6)............................ 18,000 49,138
Obligations under capital leases, excluding
current installments (Note 4)............................................... 25,183 28,375
Common stock put warrants (Note 8)............................................ -- 4,394
Other liabilities ........................................................... 10,713 9,518
------- -------
Total liabilities.................................................... 228,201 259,824
------- -------
Cumulative convertible manditorily redeemable preferred
stock (Note 8).............................................................. -- 35,171
------- -------
Shareholders' equity (Notes 2, 8 and 10):
Common stock, par value $0.01. 300,000,000 shares authorized, 112,046,201
shares issued and outstanding at December 31, 2000; and 98,842,201 shares
issued and outstanding at December 31, 1999............................ 1,121 659
Additional paid-in capital............................................... 156,780 75,031
Retained earnings........................................................ 360,757 240,548
------- -------
Total shareholders' equity........................................... 518,658 316,238
------- -------
Commitments, contingencies and subsequent events
(Notes 4, 6, 7, 8, 10 and 11)............................................ -- --
------- -------
TOTAL LIABILITIES, MANDITORILY REDEEMABLE PREFERRED STOCK
AND SHAREHOLDERS' EQUITY........................................... $ 746,859 $ 611,233
======= =======
See accompanying Notes to Consolidated Financial Statements.
25
DOLLAR TREE STORES, INC.
AND SUBSIDIARIES
CONSOLIDATED INCOME STATEMENTS
Year Ended December 31,
-----------------------
2000 1999 1998
---- ---- ----
(In thousands, except per share data)
Net sales ...................................................... $ 1,688,105 $ 1,351,820 $ 1,073,886
Cost of sales (Note 4) ......................................... 1,063,416 854,124 681,387
Merger-related costs (Note 2) .................................. 1,100 443 1,301
--------- --------- ---------
Gross profit .......................................... 623,589 497,253 391,198
--------- --------- ---------
Selling, general and administrative expenses (Notes 4, 7 and 9):
Operating expenses ........................................ 375,316 290,241 234,197
Merger-related expenses (Note 2) .......................... 3,266 607 4,024
Depreciation and amortization (Note 2) .................... 41,971 30,809 22,463
--------- --------- ---------
Total selling, general and
administrative expenses ............................. 420,553 321,657 260,684
--------- --------- ---------
Operating income ...................................... 203,036 175,596 130,514
Interest income ................................................ 4,266 1,743 604
Interest expense (Note 6) ...................................... (7,817) (7,429) (5,217)
--------- --------- ---------
Income before income taxes ............................ 199,485 169,910 125,901
Provision for income taxes (Note 3) ............................ 77,476 63,333 44,583
--------- --------- ---------
Income before extraordinary item ...................... 122,009 106,577 81,318
Loss on debt extinguishment, net of
tax benefit of $242 ......................................... 387 -- --
--------- --------- ---------
Net income ............................................ 121,622 106,577 81,318
Less: Preferred stock dividends and
accretion (Note 8) .......................................... 1,413 7,027 --
--------- --------- ---------
Net income available to common shareholders ........... $ 120,209 $ 99,550 $ 81,318
========= ========= =========
Pro forma income data (Note 2):
Net income available to common shareholders ............... $ 120,209 $ 99,550 $ 81,318
Pro forma adjustment for
C corporation income taxes .............................. -- 505 4,804
--------- --------- ---------
Pro forma net income available
to common shareholders .................................. $ 120,209 $ 99,045 $ 76,514
========= ========= =========
Basic pro forma income per common share:
Pro forma income before extraordinary item ................ $ 1.16 $ 1.01 $ 0.79
========= ========= =========
Pro forma net income ...................................... $ 1.16 $ 1.01 $ 0.79
========= ========= =========
Diluted pro forma income per common share:
Pro forma income before extraordinary item ................ $ 1.08 $ 0.92 $ 0.71
========= ========= =========
Pro forma net income ...................................... $ 1.08 $ 0.92 $ 0.71
========= ========= =========
See accompanying Notes to Consolidated Financial Statements.
26
DOLLAR TREE STORES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Years ended December 31, 2000, 1999, and 1998
Common Additional Share-
Stock Common Paid-in Retained holders'
Shares Stock Capital Earnings Equity
------ ----- ------- -------- ------
(In thousands, except share data)
Balance at December 31, 1997......................... 96,986,899 $ 443 $ 41,450 $ 131,397 $ 173,290
Transfer from additional paid-in
capital for Common Stock dividend.................. -- 198 (198) -- --
Net income for the year
ended December 31, 1998............................ -- -- -- 81,318 81,318
Shareholder distributions (Note 2)................... -- -- -- (6,314) (6,314)
Issuance of stock under Employee Stock
Purchase Plan and other plans (Note 10)............ 36,505 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)............. 722,709 4 9,223 -- 9,227
----------- ----- ------- ------- -------
Balance at December 31, 1998......................... 97,746,113 652 55,522 206,401 262,575
Contribution of Only $One's undistributed
S corporation earnings............................. -- -- 4,469 (4,469) --
Net income for the year
ended December 31, 1999............................ -- -- -- 106,577 106,577
Shareholder distributions (Notes 2 and 8)............ -- -- -- (60,934) (60,934)
Issuance of stock under Employee Stock
Purchase Plan and other plans (Note 10)............ 45,656 -- 838 -- 838
Exercise of stock options, including
income tax benefit of $6,278 (Note 10)............. 1,050,432 7 14,202 -- 14,209
Accretion to redemption value, amortization
of discount and accrued dividends of
cumulative convertible redeemable
preferred stock (Note 8) .......................... -- -- -- (7,027) (7,027)
----------- ----- ------- ------- -------
Balance at December 31, 1999......................... 98,842,201 659 75,031 240,548 316,238
Transfer from additional paid-in
capital for Common Stock dividend.................. -- 329 (329) -- --
Net income for the year
ended December 31, 2000............................ -- -- -- 121,622 121,622
Issuance of stock for Dollar Express
preferred stock (Note 8)........................... 3,096,516 31 40,945 -- 40,976
Issuance of stock under Employee Stock
Purchase Plan and other plans (Note 10)............ 40,896 -- 1,151 -- 1,151
Exercise of stock options, including
income tax benefit of $16,670 (Note 10)............ 1,751,957 18 37,629 -- 37,647
Exercise of common stock warrants (Note 8)........... 4,252,152 43 2,394 -- 2,437
Conversion of common stock warrants (Note 8)......... 4,062,479 41 (41) -- --
Accretion to redemption value, amortization
of discount and accrued dividends of
cumulative convertible redeemable
preferred stock (Note 8) .......................... -- -- -- (1,413) (1,413)
----------- ----- ------- ------- -------
Balance at December 31, 2000......................... 112,046,201 $ 1,121 $ 156,780 $ 360,757 $ 518,658
=========== ===== ======= ======= =======
See accompanying Notes to Consolidated Financial Statements.
27
DOLLAR TREE STORES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31,
-----------------------
2000 1999 1998
---- ---- ----
(In thousands)
Cash flows from operating activities:
Net income ....................................................... $ 121,622 $ 106,577 $ 81,318
------- ------- -------
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization ................................ 41,971 30,809 22,463
Loss on disposal of property and equipment ................... 1,471 692 1,664
Change in lease loss ......................................... (663) 529 1,125
Extraordinary loss on early extinguishment of debt ........... 629 -- --
Provision for deferred income taxes .......................... (3,294) 2,340 (1,207)
Accretion of common stock put warrants to
redemption value ........................................... -- 382 --
Changes in assets and liabilities increasing
(decreasing) cash and cash equivalents:
Merchandise inventories ...................................... (65,849) (37,391) (31,666)
Prepaid expenses and other current assets .................... (14,782) (7,488) (292)
Other assets ................................................. (600) 449 265
Accounts payable ............................................. 3,654 13,519 (1,794)
Income taxes payable ......................................... 10,925 14,118 6,682
Other current liabilities .................................... 10,663 4,218 7,197
Other liabilities ............................................ 1,905 (199) (230)
------- ------- -------
Total adjustments ....................................... (13,970) 21,978 4,207
------- ------- -------
Net cash provided by operating activities ............... 107,652 128,555 85,525
------- ------- -------
Cash flows from investing activities:
Acquisition, net of cash acquired ................................ -- (320) --
Capital expenditures ............................................. (95,038) (55,013) (57,212)
Proceeds from sale of property and equipment ..................... 271 172 174
------- ------- -------
Net cash used in investing activities ................... (94,767) (55,161) (57,038)
------- ------- -------
Cash flows from financing activities:
Distributions paid ............................................... -- (60,934) (6,314)
Proceeds from long-term debt ..................................... -- 22,500 17,500
Proceeds from revolving credit facilities ........................ 74,700 48,600 190,800
Net change in notes payable to bank .............................. -- -- (10,045)
Repayment of long-term debt and facility fees .................... (27,708) (1,966) (2,304)
Repayment of revolving credit facilities ......................... (81,200) (46,100) (186,800)
Proceeds from sale-leaseback transaction ......................... -- 21,605 --
Principal payments under capital lease obligations ............... (3,274) (1,151) (474)
Proceeds from issuance of preferred stock and
common stock put warrants ...................................... -- 32,156 --
Proceeds from stock issued pursuant to
stock-based compensation plans ................................. 24,563 8,769 4,952
------- ------- -------
Net cash provided by (used in)
financing activities .................................. (12,919) 23,479 7,315
------- ------- -------
Net increase(decrease) in cash and cash equivalents ................... (34) 96,873 35,802
Cash and cash equivalents at beginning of year ........................ 181,587 84,714 48,912
------- ------- -------
Cash and cash equivalents at end of year .............................. $ 181,553 $ 181,587 $ 84,714
======= ======= =======
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest, net of amount capitalized .......................... $ 7,315 $ 6,821 $ 4,680
======= ======= =======
Income taxes ................................................. $ 65,597 $ 46,640 $ 39,171
======= ======= =======
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 1,705
discount variety retail stores that sell substantially all items for $1.00 and
24 multi-price point card and gift stores. The single-price point stores range
from 2,000 to 23,000 total square feet and operate under the names of Dollar
Tree, Dollar Express, Dollar Bills, Only One Dollar and Only $One. The majority
of the stores range between 3,500 and 6,000 square feet. The single-price point
stores are generally segregated into two groups: stores less than 7,000 gross
square feet (traditional stores) and stores 7,000 gross square feet or greater
(larger format stores). The multi-price point stores operate under the name
Spain's Cards & Gifts and these stores represent less than 1% of total net
sales.
The Company's headquarters and one of its distribution centers are located
in Chesapeake, Virginia. The Company also operates distribution centers in
Mississippi, Illinois, California, Pennsylvania and Georgia. Most of the
Company's stores are located in the eastern half of the United States and in
northern and central California. The Company's merchandise includes candy and
food, housewares, seasonal goods, health and beauty care, toys, party goods,
gifts, stationery and other consumer items. Approximately 40% to 45% of the
Company's merchandise is directly imported, primarily from China. The Company is
not dependent on a few suppliers.
Principles of Consolidation
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 May 5, 2000, DT Keystone, Inc., a wholly owned subsidiary, completed a
merger, which was accounted for as a pooling of interests, with privately-held
Dollar Express, Inc. (Dollar Express). Dollar Express became a wholly owned
subsidiary of Dollar Tree Stores, Inc. Dollar Express operated 132 stores
primarily in the Mid-Atlantic area. Of the stores acquired, 107 were $1.00
single-price point stores operated as "Dollar Express" and 25 were multi-price
point stores operated as "Spain's Cards & Gifts." As a result of the merger, the
Company's consolidated financial statements have been restated to retroactively
combine Dollar Express's financial statements as if the merger had occurred at
the beginning of the earliest period presented.
On December 10, 1998, the Company completed its merger with Step Ahead
Investments, Inc. (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, 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.
Cash and Cash Equivalents
Cash and cash equivalents at December 31, 2000 and 1999 includes $161,882
and $162,755, 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.
Merchandise Inventories
Merchandise inventories at the distribution centers are stated at the lower
of cost or market, determined on a first-in, first-out (FIFO) basis. Cost is
assigned to store inventories using the retail inventory method, determined on a
FIFO basis. Costs directly associated with warehousing and distribution are
capitalized as merchandise inventories. Total warehousing and distribution costs
capitalized into inventory amounts to $13,129 and $8,347 at December 31, 2000
and 1999, respectively.
29
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 amortized 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. No interest
cost was capitalized in 2000 or 1999. In 1998, $402 of interest cost was
capitalized.
Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed
The Company reviews its long-lived assets and certain identifiable
intangible assets for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable.
Recoverability of assets to be held and used is measured by comparing the
carrying amount of an asset to future net undiscounted cash flows expected to be
generated by the asset. If such assets are considered to be impaired, the
impairment to be recognized is measured by the amount by which the carrying
amount of the assets exceeds the fair value of the assets based on discounted
cash flows or other readily available evidence of fair value, if any. Assets to
be disposed of are reported at the lower of the carrying amount or fair value
less costs to sell.
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. Accumulated
amortization relating to goodwill approximates $9,611 and $7,593 at December 31,
2000 and 1999, respectively.
Financial Instruments
The Company utilizes derivative financial instruments to reduce its
exposure to market risks from changes in interest rates. By entering into
receive-variable, pay-fixed interest rate swaps, 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 swaps; however, the
counterparties are major financial institutions, 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 or rent
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 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, which account for
less than 1% of the Company's purchases. 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. There were no open foreign exchange contracts at December 31, 2000.
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.
Cost of Sales
The Company includes the cost of merchandise, warehousing and distribution
costs, and certain occupancy costs in cost of sales.
30
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 applies the intrinsic value-based method of accounting
prescribed by Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees" (APB No. 25), and related Interpretations in accounting for
its fixed stock option plans. As such, compensation expense would be recorded on
the date of grant only if the current market price of the underlying stock
exceeded the exercise price. Statement of Financial Accounting Standards No.
123, "Accounting for Stock-Based Compensation" (SFAS No. 123) established
accounting and disclosure requirements using a fair value-based method of
accounting for stock-based employee compensation plans. As allowed by SFAS No.
123, the Company has elected to continue to apply the intrinsic value-based
method of accounting described above, and has adopted the disclosure only
requirements of SFAS No. 123.
Pro Forma Net Income Per Common Share
Pro forma basic net income per common share has been computed by dividing
pro forma net income available to common shareholders by the weighted average
number of common shares outstanding. Pro forma diluted net income per common
share reflects the potential dilution that could occur assuming the inclusion of
dilutive potential common shares and has been computed by dividing pro forma net
income available to common shareholders 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,
as amended by SFAS No. 138, 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.
The Company will adopt the provisions of SFAS No. 133 effective January 1,
2001. As a result, the Company will record each interest rate swap at its fair
value in the balance sheet. The transition adjustment in connection with
adopting SFAS No. 133 is not material. However, pursuant to the provisions of
SFAS No. 133, the interest rate swaps of the Company do not qualify for hedge
accounting. Accordingly, changes in the fair values of the derivative
instruments will be recorded currently in earnings on a quarterly basis.
Use of Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America 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 1999 and 1998 amounts have been reclassified for comparability with
the 2000 financial statement presentation.
31
NOTE 2 - MERGERS AND ACQUISITIONS
Dollar Express Merger
On May 5, 2000, the Company completed its merger with Dollar Express. The
merger was accounted for as a pooling of interests. DTS issued 0.8772 shares of
the Company's common stock for each share of Dollar Express's outstanding common
stock. The Company issued 8,771,928 shares of its common stock for all of the
outstanding shares of Dollar Express's common stock, which included converting
all of Dollar Express's preferred shares into common shares on a one-for-one
basis as more fully discussed in Note 8. Stock options to purchase 260,000
shares of Dollar Express's common stock were converted into options to purchase
228,072 common shares of the Company.
In connection with the merger, the Company incurred approximately $4,366
($3,134 after taxes or $0.02 pro forma diluted net income per common share in
2000) of merger-related costs and expenses, consisting primarily of write-downs
of inventory and professional fees.
Prior to February 5, 1999, Dollar Express was treated as an S corporation
for federal and state income tax purposes. As such, income of Dollar Express for
periods prior to February 5, 1999 was taxable to the Dollar Express shareholders
rather than to Dollar Express. Effective February 5, 1999, Dollar Express
converted from an S corporation to a C corporation and recorded the cumulative
deferred tax benefit of $2,200 in the first quarter of 1999. A portion of 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
Dollar Express been a C corporation and were computed at 38.5%. A portion of the
distributions paid presented in the consolidated statements of cash flows
represents distributions paid to the Dollar Express 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 1999 Annual Report to those presented in
the accompanying consolidated financial statements.
For the year ended December 31,
-------------------------------
1999 1998
---- ----
Net sales:
DTS.............................. $ 1,197,960 $ 944,122
Dollar Express................... 153,860 129,764
--------- ---------
Combined......................... $ 1,351,820 $ 1,073,886
========= =========
Net income:
DTS.............................. $ 98,518 $ 71,553
Dollar Express................... 8,059 9,765
--------- ---------
Combined......................... $ 106,577 $ 81,318
========= =========
Only $One Merger
On June 30, 1999, the Company completed a merger with privately-held
Tehan's Merchandising, Inc. (Only $One). Only $One operated 24 stores in central
and upstate New York under the name "Only $One." The Company issued 752,400
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 pro forma diluted net income per common share in 1999) of
merger-related costs and expenses, consisting primarily of professional fees and
write-downs of inventory. The merger was accounted for as a pooling of
interests. As a result, the Company's consolidated financial statements were
restated to retroactively combine Only $One's financial statements as if the
merger had occurred at the beginning of the earliest period presented.
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. A portion of 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 and were
computed at 38.5%. A portion of the distributions paid presented in the
consolidated statements of cash flows represents distributions paid to the Only
$One shareholders for payment of their pass-through tax liabilities.
32
98 Cent Clearance Center Merger
On December 10, 1998, the Company completed its merger with Step Ahead
Investments, Inc. (98 Cent Clearance Center). 98 Cent Clearance Center operated
66 stores in northern and central California and Nevada under the name "98 Cent
Clearance Center." DTS issued 1.6818 shares of the Company's common stock for
each share of 98 Cent Clearance Center outstanding common and preferred stock. A
total of 2,494,110 of the Company's common stock was issued as a result of the
merger and 98 Cent Clearance Center's outstanding stock options were converted
into options to purchase 484,811 common shares of the Company. The merger was
accounted for as a pooling of interests. As a result, 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.
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, 2000 and 1999, the carrying value of these agreements is
$3,448 and $3,930, respectively, which is net of $965 and $483, respectively, 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 $0.04 pro forma diluted net income per common share in 1998) of
merger-related costs and expenses, consisting primarily of professional fees and
write downs of inventory and fixed assets.
NOTE 3 - INCOME TAXES
The provision for income taxes for the years ended December 31, 2000, 1999
and 1998 consists of the following:
2000 1999 1998
---- ---- ----
Federal - Current ................................... $ 69,122 $ 52,093 $ 39,348
Federal - Deferred .................................. (2,827) 3,856 (1,024)
Federal - S corporation to C corporation conversion . -- (1,700) --
State - S corporation to C corporation conversion ... -- (524) --
State - Current ..................................... 11,406 8,900 6,442
State - Deferred .................................... (467) 708 (183)
------ ------ ------
$ 77,234 $ 63,333 $ 44,583
====== ====== ======
A reconciliation of the statutory federal income tax rate and the effective
rate for the years ended December 31, 2000, 1999 and 1998 follows:
2000 1999 1998
---- ---- ----
Statutory tax rate....................................... 35.0% 35.0% 35.0%
Effect of:
State and local income taxes, net of
federal income tax benefit........................... 3.6 3.7 3.2
Other, net ............................................ 0.2 0.2 0.6
Only $One and Dollar Express S corporation income...... -- (0.3) (3.4)
Conversion of Dollar Express from S to
C corporation........................................ -- (1.3) --
---- ---- ----
Effective tax rate................................. 38.8% 37.3% 35.4%
==== ==== ====
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, 2000 and 1999 are as follows:
33
2000 1999
---- ----
Deferred tax assets:
Accrued expenses........................ $ 8,658 $ 6,008
Inventories............................. 3,398 3,536
Property and equipment ................. 1,023 171
Other................................... 867 1,248
------ ------
Total deferred tax asset.............. 13,946 10,963
------ ------
Deferred tax liabilities:
Intangible assets....................... (2,801) (2,553)
Deferred compensation................... (977) (1,626)
Other................................... (311) (221)
------ ------
Total deferred tax liability ......... (4,089) (4,400)
------ ------
Net deferred tax asset................ $ 9,857 $ 6,563
====== ======
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 carry backs of future
deductible amounts to 2000, 1999 and 1998 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 carry backs 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 - COMMITMENTS
Lease Commitments
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, 2000 are as follows:
Capital Operating
Leases Leases
------ ------
Year ending December 31:
2001................................................ $ 5,984 $ 101,845
2002................................................ 5,954 93,429
2003................................................ 5,852 80,264
2004................................................ 6,397 64,197
2005................................................ 7,808 85,933
Thereafter.......................................... 5,740 68,313
------ -------
Total minimum lease payments............................ 37,735 $ 493,981
=======
Less amount representing interest
(at an average rate of approximately 9%).............. 9,005
------
Present value of net minimum capital lease payments..... 28,730
Less current installments of obligations under
capital leases........................................ 3,547
------
Obligations under capital leases, excluding current
installments.......................................... $ 25,183
======
The above future minimum lease payments include amounts for leases that
were signed prior to December 31, 2000 for stores that were not open as of
December 31, 2000. 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 $6,873
under operating leases.
Included in property and equipment at December 31, 2000 and 1999 are leased
furniture and fixtures and transportation vehicles, excluding sale-leaseback
assets, with a cost of $3,964 and $3,514 and accumulated depreciation of $1,818
and $1,259 at December 31, 2000 and 1999, respectively.
34
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 proceeds of $20,880, net of financing
costs, 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
Distribution Centers
During June 1999, the Company entered into a five year, $18,000 operating
lease agreement to facilitate the construction of the new unautomated
distribution center in Stockton, California. The lease term expires in June
2004. Under this agreement, the lessor purchases the property, pays for the
construction costs and subsequently leases the facility to the Company. The
lease provides for a residual value guarantee and includes a purchase option
based on the outstanding property costs plus any unpaid interest and rents under
the lease agreement. Each reporting period, the Company estimates its liability
under the residual value guarantee and, if necessary, records additional rent
expense on a straight-line basis over the remaining lease term. There was no
liability recorded at December 31, 2000.
On January 13, 2000, the Company entered into a five year, $35,000
operating lease agreement to facilitate the construction of a new automated
distribution center in Savannah, Georgia. The lease term expires in January
2005. On August 28, 2000, the Company amended its existing operating lease
agreement related to the Stockton distribution center for the purpose of
facilitating construction costs to build a new $40,000 distribution center in
Briar Creek, Pennsylvania. The Briar Creek facility will replace the existing
leased facilities located in Philadelphia, Pennsylvania. Under this type of
agreement the lessor purchases the property, pays for the construction costs and
subsequently leases the facility to the Company. Each lease provides for a
residual value guarantee and includes a purchase option based on the outstanding
property costs plus any unpaid interest and rents under the lease agreement.
When the assets are placed into service, the Company will estimate its liability
under the residual value guarantee and, if necessary, record additional rent
expense on a straight-line basis over the remaining lease term. There was no
liability recorded at December 31, 2000. The Savannah facility began operations
in January 2001 and the Briar Creek facility is expected to be open in early
2002.
On September 8, 2000, the Company entered into a $10,000 interest rate swap
agreement (swap) to manage the risk associated with interest rate fluctuations
on a portion of its Stockton distribution center lease. The swap creates the
economic equivalent of a fixed rate lease by converting the variable interest
rate to a fixed rate. Under this agreement, the Company pays interest to a
financial institution at a fixed rate of 6.45%. In exchange, the financial
institution pays the Company at a variable interest rate, which approximates the
floating rate on the lease agreement, excluding the credit spread. The interest
rate on the swap is subject to adjustment monthly. For months in which the
interest rate, as calculated under the agreement, is greater than 7.41% no
payments are made by either party. The swap is effective through June 2004.
On December 20, 2000, the Company entered into a $5,000 interest rate swap
agreement to manage the risk associated with interest rate fluctuations on a
portion of its Stockton distribution center lease. Under this agreement, the
Company pays interest to a financial institution at a fixed rate of 5.83%. In
exchange, the financial institution pays the Company at a variable interest
rate, which approximates the floating rate on the lease agreement, excluding the
credit spread. The interest rate on the swap is subject to adjustment monthly.
For months in which the interest rate, as calculated under the agreement, is
greater than 7.41% no payments are made by either party. The swap is effective
through June 2004.
Non-operating Facilities
The Company is responsible for payments under leases for former
distribution centers located in Memphis, Tennessee and Sacramento, California
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 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 that expire in February 2008 and March 2002, respectively. The
sublease income on the Norfolk facility exceeds the annual obligation of $656
under the lease. The Sacramento facility was subleased in March 2001 under an
35
agreement that expires in June 2008. Due to the uncertainty regarding the
ultimate recovery of the future lease payments and the investment in the
improvements in the buildings in Memphis and Sacramento, the Company recorded a
$1,300 charge related to Sacramento in 1999 and a $1,125 charge related to
Memphis in 1998. The accruals related to the Sacramento and Memphis distribution
centers are adjusted for changes in market conditions.
Related Parties
The Company also leases properties for fourteen of its stores, its former
corporate headquarters and distribution center in Norfolk and the Philadelphia
office and warehouse from partnerships owned by related parties. The total
rental payments related to these leases were $2,051, $2,094 and $1,990 for the
years ended December 31, 2000, 1999 and 1998, respectively. The future minimum
lease payments for each facility are included in the five-year schedule above.
Rental payments to related parties are 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, 2000, 1999 and 1998 are as follows:
2000 1999 1998
---- ---- ----
Minimum rentals................... $ 95,600 $ 78,780 $ 62,693
Contingent rentals................ 1,876 1,613 1,374
------ ------ ------
Total........................... $ 97,476 $ 80,393 $ 64,067
====== ====== ======
Purchase Contract
During 1996, the Company entered into a purchase agreement with a vendor,
which commits the Company to purchase a minimum of $39,462 in vendor products by
April 2003, of which $11,846 has been purchased through December 31, 2000. If
the Company does not meet the minimum purchase requirement by the stated end of
the contract term, the contract will extend in six-month increments until the
commitment has been met.
Freight Services
The Company has contracted outbound freight services from various contract
carriers with contracts expiring through February 2003. The total amount of this
commitment is approximately $20,200. The contracts provide for termination in
the event of non-performance.
NOTE 5 - BALANCE SHEET COMPONENTS
Property and equipment, net as of December 31, 2000 and 1999 consists of
the following:
2000 1999
---- ----
Land............................................. $ 8,051 $ 8,051
Buildings........................................ 31,281 28,468
Improvements..................................... 100,953 69,289
Furniture, fixtures and equipment................ 174,498 130,747
Transportation vehicles.......................... 4,296 3,283
Construction in progress......................... 16,600 7,576
------- -------
Total property and equipment................. 335,679 247,414
Less accumulated depreciation and amortization... 124,047 90,046
------- -------
Total........................................ $ 211,632 $ 157,368
======= =======
Other current liabilities as of December 31, 2000 and 1999 consists of the
following:
2000 1999
---- ----
Compensation and benefits........................ $ 14,977 $ 13,745
Taxes (other than income taxes).................. 23,685 18,298
Other............................................ 8,244 4,153
------ ------
Total ...................................... $ 46,906 $ 36,196
====== ======
36
NOTE 6 - LONG-TERM DEBT
Long-term debt as of December 31, 2000 and 1999 consists of the following:
2000 1999
---- ----
7.29% unsecured Senior Notes, interest payable
semiannually on April 30 and October 30,
principal payable $6,000 per year beginning
April 2000 and maturing April 2004................ $ 24,000 $ 30,000
Demand Revenue Bonds, interest payable monthly at
a variable rate which was 7.3% at December 31,
2000, principal payable beginning June 2006,
maturing June 2018................................ 19,000 19,000
Revolving credit facility, paid in full in May 2000.. -- 6,500
Term loan, paid in full in May 2000.................. -- 20,000
Other long-term debt................................. -- 1,708
------ ------
Total long-term debt.............................. 43,000 77,208
Less current portion................................. 25,000 28,070
------ ------
Long-term debt, excluding current portion......... $ 18,000 $ 49,138
====== ======
Maturities of long-term debt are as follows: 2001 - $25,000; 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 Senior Notes rank pari passu with
the Company's other debt. The Note agreements, among other things, prohibit
certain mergers and consolidations and require the maintenance of certain
specified ratios. 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 distribution facility
in Olive Branch, Mississippi. The Bonds do not contain a prepayment penalty as
long as the interest rate remains variable. The Bonds are secured 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 financial institution that provided
the swap at a fixed rate of 4.88%. In exchange, the financial institution pays
the Company at a variable interest rate, which approximates the rate on the Loan
Agreement. The variable interest rate of the swap is subject to adjustment
monthly. For months in which the interest rate as calculated under the agreement
is greater than 7.75%, no payments are made by either party. The swap, effective
through April 1, 2009, is for the entire amount outstanding under the Loan
Agreement.
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, calculated
as a percentage, as defined, of the amount available under the line of credit,
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, 2000 and March 1, 2001 to $0.
37
The Agreement, as amended, 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. The
Agreement matures on May 31, 2002. At December 31, 2000, the variable interest
rate on the facility was 7.1%. At December 31, 2000 and 1999, no amounts were
outstanding under the Agreement; however, approximately $70,952 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,
2000.
Revolving Credit Facility and Term Loan
In February 1999, Dollar Express entered into a credit facility for an
aggregate amount of $40,000, of which $20,000 was a term loan and $20,000 was a
revolving credit facility. At the option of Dollar Express, interest on the
facility was calculated at the lender's base rate plus a margin, or LIBOR plus a
margin, based on a leverage ratio, as defined. Commitment fees on the unused
portion of the revolving credit facility are calculated based on the LIBOR
margin in effect during the period, as defined. The facility was secured by
substantially all of Dollar Express's assets, as well as all of Dollar Express's
outstanding common and preferred stock. Amounts outstanding on the revolving
credit facility and term loan at December 31, 1999 were $6,500 and $20,000,
respectively, all of which were paid in full in May 2000.
Fair Value of Financial Instruments
The carrying values of cash and cash equivalents, other current assets,
other assets, accounts payable, other current liabilities and other liabilities
approximate fair value because of the short maturity of these 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 swaps are the estimated amounts the
Company would receive or pay to terminate the agreements as of the reporting
date. The fair values of the interest rate swaps at December 31, 2000 are as
follows:
Receive/(Pay)
$19,000 MBFC interest rate swap............... $ 337
$10,000 Stockton interest rate swap........... (208)
$5,000 Stockton interest rate swap............ (15)
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, 2000, 1999 and 1998, the Company paid $200 under this agreement.
NOTE 8 - SHAREHOLDERS' EQUITY
Unattached Warrants
The Company issued, to certain Company shareholders, unattached warrants to
purchase 4,188,675 shares of Common Stock on September 30, 1993 for $0.12 per
warrant and unattached warrants to purchase 4,188,675 shares of Common Stock on
February 22, 1994 for $0.12 per warrant.
On August 2, 2000, certain Company shareholders exercised 4,252,152
warrants at an exercise price of $0.57 per share. Effective December 4, 2000,
the Company effected a Recapitalization wherein the remaining 4,125,198 warrants
were canceled and the warrant holders were issued 4,062,479 shares of common
stock. As a result, the Company has no outstanding warrants at December 31,
2000.
Preferred Stock
The Company is authorized to issue 10,000,000 shares of Preferred Stock,
$0.01 par value per share.
38
Stock Dividends
On May 25, 2000 the Board of Directors authorized a stock dividend, payable
June 19, 2000 to shareholders of record as of June 12, 2000, whereby the Company
issued one-half share for each outstanding share of Common Stock. 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. In connection with the stock dividend
authorized by the Board of Directors in 1998, 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.
Recapitalization of Dollar Express
On February 5, 1999, Dollar Express issued 3,530,000 shares of cumulative
convertible redeemable preferred stock for gross proceeds of $34,000, net of
offering costs of $2,844. The preferred shareholders were entitled, at any time,
to convert any or all shares, on a one-for-one basis, into shares of Dollar
Express common stock. Upon conversion, the holders of the preferred shares were
also entitled to payment of all accrued but unpaid dividends, if any, as long as
a qualified public offering, merger or consolidation or any other
recapitalization or other business combination with an affiliated entity had not
occurred prior to August 2001. All outstanding preferred shares were converted
into Dollar Express common shares, on a one-for-one basis, upon consummation of
the Dollar Express merger as more fully discussed in Note 2. As a result of the
merger with Dollar Express, all accrued and unpaid preferred stock dividends
were forfeited and credited to additional paid-in capital in the second quarter
of 2000.
The accretion of preferred stock to redemption value represents the pro
rata portion of the change in redemption value of the preferred stock from its
initial value at the date of issuance to May 5, 2000. The costs of $2,844
associated with issuing the preferred stock and the discount of $3,013 related
to the value of the detachable common stock put warrants have been recorded as
discounts on the preferred stock. The redemption value adjustments were being
accreted and the discounts were being amortized over a five-year period from the
date of issuance. As a result of the merger with Dollar Express, the book value
of the preferred stock and common stock put warrants were credited to additional
paid-in capital during the second quarter of 2000.
Dollar Express issued 416,667 detachable common stock put warrants to the
holders of the cumulative convertible redeemable preferred stock to purchase
shares of Dollar Express's common stock. The warrants were terminated upon
consummation of the merger.
In connection with the recapitalization, Dollar Express distributed $59,524
to the former owners of Dollar Express.
Pro Forma Net Income Per Common Share
The following table sets forth the calculation of pro forma basic and
diluted net income per common share:
2000 1999 1998
---- ---- ----
Pro forma basic income before extraordinary
item per common share:
Income before extraordinary item ......................... $ 122,009 $ 106,577 $ 81,318
Less: Preferred stock dividends and accretion ............ 1,413 7,027 --
------- ------- ------
Income before extraordinary item available
to common shareholders ................................. 120,596 99,550 81,318
Pro forma adjustment for C corporation
income taxes ........................................... -- 505 4,804
------- ------- ------
Pro forma income before extraordinary item
available to common shareholders ....................... 120,596 99,045 76,514
======= ======= ======
Weighted average number of common shares
outstanding ............................................ 103,972 98,435 97,454
======= ======= ======
Pro forma basic income before extraordinary
item per common share .................................. $ 1.16 $ 1.01 $ 0.79
======= ======= ======
39
2000 1999 1998
---- ---- ----
Pro forma diluted income before extraordinary
item per common share:
Pro forma income before extraordinary item
available to common shareholders...................... $ 120,596 $ 99,045 $ 76,514
======= ======= =======
Weighted average number of common shares
outstanding ........................................ 103,972 98,435 97,454
Dilutive effect of stock options and warrants
(as determined by applying the treasury
stock method)......................................... 7,837 9,525 9,661
------- ------- -------
Weighted average number of common shares and
dilutive potential common shares outstanding.......... 111,809 107,960 107,115
======= ======= =======
Pro forma diluted income before extraordinary
item per common share................................. $ 1.08 $ 0.92 $ 0.71
======= ======= =======
Detachable common stock put warrants to purchase 416,667 shares of common
stock of Dollar Express and 3,530,000 shares of cumulative convertible
redeemable preferred stock, eligible for conversion into 3,530,000 shares of
common stock of Dollar Express, were outstanding from February 5, 1999 to May 5,
2000. These common stock equivalents are not included in the calculation of the
weighted average number of common shares and dilutive potential common shares
outstanding because their effect would be anti-dilutive.
At December 31, 2000, 164,411 stock options are not included in the
calculation of the weighted average number of common shares and dilutive
potential common shares outstanding because their effect would be anti-dilutive.
NOTE 9 - EMPLOYEE BENEFIT PLANS
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:
2000................................ $ 7,041
1999................................ 5,413
1998................................ 4,059
Deferred Compensation Plan
The Company has a deferred compensation plan providing certain highly
compensated employees and executives the ability to defer a portion of their
base compensation and bonuses and earn interest on their deferred amounts. The
plan is an unfunded nonqualified plan; however, the Company may make
discretionary contributions. The deferred amounts and earnings thereon are
payable to participants, or designated beneficiaries, at specified future dates,
upon retirement or death. Total participant deferrals were approximately $390 at
December 31, 2000 and are included in other long-term liabilities in the balance
sheet. The Company made no discretionary contributions in 2000.
NOTE 10 - STOCK-BASED COMPENSATION PLANS
At December 31, 2000, the Company has five stock-based compensation plans.
The accounting method and the plans 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 pro forma net income available to
common shareholders and pro forma net income per common share would have been
reduced to the pro forma amounts indicated in the following table:
40
2000 1999 1998
---- ---- ----
Pro forma net income available to common shareholders:
As reported.............................................. $ 120,209 $ 99,045 $ 76,514
======= ====== ======
Pro forma for SFAS No. 123............................... $ 106,372 $ 88,718 $ 69,774
======= ====== ======
Pro forma basic net income per common share:
As reported.............................................. $ 1.16 $ 1.01 $ 0.79
======= ====== ======
Pro forma for SFAS No. 123............................... $ 1.02 $ 0.90 $ 0.72
======= ====== ======
Pro forma diluted net income per common share:
As reported.............................................. $ 1.08 $ 0.92 $ 0.71
======= ====== ======
Pro forma for SFAS No. 123............................... $ 0.94 $ 0.82 $ 0.65
======= ====== ======
The full impact of calculating compensation cost for stock options under
SFAS No. 123 is not reflected in the pro forma net income available to common
shareholders for SFAS No. 123 and pro forma net income per share for SFAS No.
123 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 for SFAS No. 123 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
1,047,264 shares of Common Stock in 1993 and 1,048,289 shares in 1994. Options
granted under the SOP have an exercise price of $0.86 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 12,600,000 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. In exchange for their options to purchase Dollar Express
Common Stock, certain employees of Dollar Express were granted 228,072 options
to purchase the Company's common stock based on an exchange ratio of 0.8772.
Options issued in connection with the merger were fully vested as of the date of
the merger.
The Step Ahead Investments, Inc. Long-Term Incentive Plan (SAI Plan)
provided for the issuance of stock options, stock appreciation rights, 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 1.6818 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.
Under the 1998 Special Stock Option Plan (Special Plan), options to
purchase 247,500 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:
2000 1999 1998
---- ---- ----
Expected term in years........... 6 8 8
Expected volatility.............. 61.6% 52.7% 50.4%
Annual dividend yield............ -- -- --
Risk-free interest rate.......... 5.2% 6.6% 4.9%
41
The following tables summarize the Company's various option plans as of
December 31, 2000, 1999 and 1998, and for the years then ended and information
about fixed options outstanding at December 31, 2000.
Stock Option Activity
2000 1999 1998
----------------------- ------------------------- ------------------------
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............. 5,288,463 $ 16.86 4,876,365 $ 14.33 3,606,963 $ 6.77
Granted.......................... 1,935,973 24.87 1,697,847 19.05 2,119,610 24.20
Exercised........................ (1,751,957) 12.00 (1,050,432) 7.55 (722,709) 5.94
Forfeited ....................... (381,359) 23.56 (235,317) 21.05 (127,499) 12.13
--------- --------- ---------
Outstanding at
end of year................... 5,091,120 21.02 5,288,463 16.86 4,876,365 14.33
========= ========= =========
Options exercisable
at end of year................ 1,904,127 17.07 2,212,093 12.07 2,016,101 5.99
========= ========= =========
Weighted average fair
value of options
granted during the
year.......................... $ 15.37 $ 12.56 $ 15.02
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 2000 Life Price 2000 Price
- ------ ---- ---- ----- ---- -----
$0.86...................... 54,323 (1) $ 0.86 54,323 $ 0.86
$2.96 to $5.96............. 177,276 4.6 years 4.60 177,276 4.60
$6.76 to $9.94............. 494,322 5.9 years 9.76 494,322 9.76
$10.80 to $19.50........... 1,055,079 8.1 years 18.80 306,014 17.08
$20.66 to $24.75........... 2,588,027 8.5 years 23.11 585,422 22.92
$25.53 to $42.57........... 722,093 8.4 years 30.00 286,770 28.48
--------- ---------
$0.86 to $42.57............ 5,091,120 1,904,127
========= =========
(1) 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 759,375 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 187,069 shares as of December 31, 2000.
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 72%
Annual dividend yield................ --
Risk-free interest rate.............. 5.16% to 6.20% (annualized)
The weighted average per share fair value of those purchase rights granted
in 2000, 1999 and 1998 was $7.00, $4.59, and $3.91, respectively.
42
NOTE 11 - SUBSEQUENT EVENTS (Unaudited)
Revolving Credit Facility
Effective March 12, 2001, the Company entered into a Revolving Credit
Facility with its banks (the Revolver Agreement). The Agreement provides for,
among other things: (1) a $50,000 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; and (2) an annual facilities fee, calculated as a percentage, as
defined, of the amount available under the line of credit, and annual
administrative fee payable quarterly.
The Revolver 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. The
Agreement matures on March 11, 2002. The Company's existing $135,000 revolving
credit facility was terminated concurrent with entering into the new $50,000
revolving credit facility.
Letters of Credit
Effective March 12, 2001, the Company entered into a Letter of Credit
Reimbursement and Security Agreement. The agreement provides $125,000 for
letters of credit, which are generally issued in relation to the routine
purchase of imported merchandise.
Operating Lease Agreement
Effective March 12, 2001, the Company entered into an operating lease
facility (the Lease Facility) with its banks. The Lease Facility provides for,
among other things: (1) a $165,000 operating lease facility, bearing interest at
the agent bank's prime interest rate or LIBOR, plus a spread, at the option of
the Company; and (2) an annual facilities fee, calculated as a percentage of the
amount available under the facility and annual administrative fee payable
quarterly. The Lease Facility, 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.
Approximately $93,000 is committed to the Savannah, Briar Creek and Stockton
distribution centers. This facility replaces the existing operating lease
facilities for the Savannah, Briar Creek and Stockton distribution centers. In
addition, approximately $20,000 is committed for expansion of the Stockton
distribution center.
Under this type of agreement, the lessor purchases the property, pays for
the construction costs and subsequently leases the facility to the Company. The
lease provides for a residual value guarantee and includes a purchase option
based on the outstanding property costs plus any unpaid interest and rents under
the lease agreement. Each reporting period, the Company estimates its liability
under the residual value guarantee and, if necessary, records additional rent
expense on a straight-line basis over the remaining lease term.
NOTE 12 - QUARTERLY FINANCIAL INFORMATION (Unaudited)
The following table sets forth some items from the Company's unaudited
income statements for each quarter of 2000 and 1999. 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
------- --------- ------- -------
(In thousands, except store and per share data)
2000:
Net sales........................................ $ 327,111 $ 384,503 $ 377,318 $ 599,173
Gross profit..................................... 113,573 136,945 138,990 234,081
Operating income................................. 23,219 36,426 36,329 107,062
Pro forma net income available to
common shareholders (3)........................ 12,876 20,811 21,850 64,672
Pro forma diluted net income per
common share................................... 0.12 0.19 0.19 0.57
Stores open at end of quarter.................... 1,565 1,634 1,677 1,729
Comparable store net sales increase (4).......... 3.0% 14.3% 5.3% 2.0%
43
First Second Third Fourth
Quarter Quarter(2) Quarter Quarter
------- --------- ------- -------
(In thousands, except store and per share data)
1999:
Net sales........................................ $ 258,091 $ 288,148 $ 298,868 $ 506,713
Gross profit..................................... 89,700 103,316 107,322 196,915
Operating income................................. 20,451 26,233 27,920 100,992
Pro forma net income available to
common shareholders (3)........................ 13,672 14,355 12,083 58,935
Pro forma diluted net income per
common share................................... 0.13 0.13 0.11 0.54
Stores open at end of quarter.................... 1,335 1,403 1,461 1,507
Comparable store net sales increase (4).......... 4.6% 1.7% 4.9% 7.5%
(1) Included in gross profit is $1,100 of merger-related costs. Included in
operating income is $1,100 of merger-related costs and $3,266 of
merger-related expenses.
(2) Included in gross profit is $443 of merger-related costs. Included in
operating income is $443 of merger-related costs and $607 of merger-related
expenses.
(3) Amounts include a pro forma adjustment for C corporation income taxes
relating to Dollar Express and Only $One of $271 for the second quarter of
1999 and $234 for the first quarter of 1999.
(4) Easter was observed on April 23, 2000, April 4, 1999, and April 12, 1998.
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 24,
2001, 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 Common Stock," 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.
44
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 47 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, 2000:
1. Report on Form 8-K, filed March 16, 2001, included a first quarter
2001 outlook
2. Report on Form 8-K, filed January 26, 2001, included the earnings
results for the quarter and year ended December 31, 2000
3. Report on Form 8-K, filed January 12, 2001, included the sales results
for the quarter and year ended December 31, 2000
4. Report on Form 8-K, filed December 22, 2000, included a fourth quarter
and full year 2000 outlook
5. Report on Form 8-K, filed November 9, 2000, included restated
consolidated financial statements as of December 31, 1999 and 1998 and
for the three year period ended December 31, 1999, and to
retroactively combine Dollar Tree's and Dollar Express's financial
statements
6. Report on Form 8-K, filed October 25, 2000, included a press release
regarding earnings for the third quarter ended September 30, 2000
45
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: March 28, 2001 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; March 28, 2001
Director
/s/ Macon F. Brock, Jr.
- ---------------------------
Macon F. Brock, Jr. President and Chief Executive March 28, 2001
Officer; Director (principal
executive officer)
/s/ H. Ray Compton
- ---------------------------
H. Ray Compton Executive Vice President; March 28, 2001
Director
/s/ John F. Megrue
- ---------------------------
John F. Megrue Vice Chairman; Director March 28, 2001
/s/ Frederick C. Coble
- ---------------------------
Frederick C. Coble Senior Vice President and Chief March 28, 2001
Financial Officer(principal
financial and accounting officer)
/s/ Frank Doczi
- ---------------------------
Frank Doczi Director March 28, 2001
/s/ Richard G. Lesser
- ---------------------------
Richard G. Lesser Director March 28, 2001
/s/ Thomas A. Saunders, III
- ---------------------------
Thomas A. Saunders, III Director March 28, 2001
/s/ Alan L. Wurtzel
- ---------------------------
Alan L. Wurtzel Director March 28, 2001
46
Index to Exhibits
2. Plan of Acquisition, Reorganization, Arrangements, Liquidation or
Succession
(a) The following document(s) is/are filed herewith:
2.1 Recapitalization Agreement and Plan of Reorganization dated December
4, 2000 by and among Dollar Tree Stores, Inc. and Warrantholders of
the Company
(b) The following documents, filed as Exhibits 2.4, 2.5 and 2.6 to the
Company's Form S-3/A filed August 1, 2000, are incorporated herein by this
reference:
2.2 Merger Agreement by and among the Company, DT Keystone, Inc., Dollar
Express, Inc. and Bernard Spain, Murray Spain, Bernard Spain Family
Limited Partnership, Murray Spain Family Limited Partnership, Global
Private Equity III Limited Partnership, Advent Partners GPE III
Limited Partnership, Advent Partners (NA) GPE Limited Partnership,
Advent Partners Limited Partnership, Guayacan Private Equity Fund
Limited Partnership, and Dollar Express Investment, LLC Limited
Partnership (collectively, the "Dollar Express Shareholders") dated
April 5, 2000 (incorporated by reference from our Current Report on
Form 8-K, filed April 11, 2000)
2.3 Registration Rights Agreement dated April 5, 2000 by and among the
Company and the Dollar Express Shareholders (incorporated by reference
from our Current Report on Form 8-K dated April 11, 2000)
2.4 Escrow Agreement dated May 5, 2000 by and among Dollar Tree Stores,
Inc., State Street Bank & Trust, Bernard Spain, David Mussafer, and
the Holders (incorporated by reference from our Current Report on Form
8-K, filed July 12, 2000)
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)
4. Instruments Defining the Rights of Holders Including Indentures
(a) The following document, filed as Exhibit 4.7 to the Company's Form S-8
filed July 12, 2000 is incorporated herein by this reference:
4.1 Third amendment to the Plan (see the Appendix to the Company's Proxy
Statement filed with the Commission in connection with the Company's
annual meeting of shareholders held on May 25, 2000, incorporated
herein by this reference
10. Material Contracts
(a) The following document(s) is/are filed herewith:
10.1 Credit Agreement among Dollar Tree Distribution, Inc., as Borrower,
Certain of the Domestic Affiliates of the Borrower from Time to Time
Parties Hereto, as Guarantors; the Lender Parties Hereto, Fleet
National Bank, as Syndication Agent, SunTrust Bank, as Documentation
Agent, and First Union National Bank, as Administrative Agent, dated
as of March 12, 2001
10.2 Credit Agreement among First Security Bank, National Association, as
Owner Trustee under the DTSD Realty Trust 1999-1, as the Borrower, The
Several Lenders from Time to Time Parties Hereto, and First Union
National Bank, as the Agent, dated as of March 12, 2001
47
10.3 Lease Agreement between First Security Bank, National Association, as
Owner Trustee under the DTSD Realty Trust 1999-1, as Lessor and
Respective each particular Property, the Lessee referenced on the
signature pages hereto which has executed a Lease Supplement with
respect to such Property or such other Credit Party designated as
Lessee in any Lease Supplement respecting such Property, dated as of
March 12, 2001
(b) The following documents, filed as Exhibits 10.1, 10.2 and 10.3 to the
Company's Quarterly Report on Form 10-Q for the fiscal quarter ended March
31, 2000 are incorporated herein by this reference:
10.4 Merger Agreement, dated April 5, 2000, by and among Dollar Tree
Stores, Inc., DT Keystone, Inc., Dollar Express, Inc., and the
shareholders of Dollar Express, Inc.
10.5 Registration Rights Agreement, dated April 5, 2000
10.6 Form of Escrow Agreement by and among Dollar Tree Stores, Inc., State
Street Bank & Trust, Bernard Spain, William Woo and the shareholders
(c) The following document, filed as Exhibit 10.1 to the Company's Quarterly
Report on Form 10-Q for the fiscal quarter ended September 30, 2000 is
incorporated herein by this reference:
10.7 Amendment No. 1 to Certain Operative Agreements, dated August 28, 2000
21. Subsidiaries of the Registrant
21.1 Subsidiaries
23. Consents of Experts and Counsel
23.1 Independent Auditors' Consent
48