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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, 2001
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 7, 2002, was $3,216,072,280 based on a $31.14 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 7, 2002, there were 112,749,328 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 30, 2002, which will be filed with the Securities and Exchange
Commission not later than April 30, 2002.
DOLLAR TREE STORES, INC.
TABLE OF CONTENTS
Page
PART I
Item 1. BUSINESS.................................................. 4
Item 2. PROPERTIES................................................ 7
Item 3. LEGAL PROCEEDINGS......................................... 8
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS....... 9
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS..................................... 9
Item 6. SELECTED FINANCIAL DATA................................... 9
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS..................... 11
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 20
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA............... 21
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE..................... 41
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT........ 41
Item 11. EXECUTIVE COMPENSATION.................................... 41
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT.......................................... 41
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS............ 41
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS
ON FORM 8-K............................................. 41
SIGNATURES................................................ 42
2
A WARNING ABOUT FORWARD LOOKING STATEMENTS: This document contains
"forward-looking statements" as that term is used in the Private Securities
Litigation Reform Act of 1995. Forward-looking statements address future events,
developments and results. They include statements preceded by, followed by or
including words such as "believe," "anticipate," "expect," "intend," "plan,"
"view" or "estimate." For example, our forward-looking statements include
statements regarding:
o our anticipated sales and comparable store net sales;
o our growth plans, including our plans to open, add, expand or
relocate stores, and our anticipated 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, 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 including our obligations
relating to the operating leases for several of our distribution
centers;
o our gross profit margin and ability to leverage selling, general and
administrative costs;
o our seasonal sales patterns including those relating to the length of
the holiday selling seasons and the shift of Easter from the second
quarter in 2001 to the first quarter in 2002;
o possible changes in our merchandise mix and its effect on gross profit
margin and sales;
o the capabilities of our inventory supply chain processes;
o the future reliability of, and cost associated with, our sources of
supply, particularly imported goods such as those sourced from China;
o the capacity, performance and cost of our existing and planned
distribution centers, including opening and expansion schedules;
o our expectations regarding competition;
o the possible effect of changes in generally accepted accounting
principles relating to the type of operating lease under which we lease
certain of our distribution centers; and
o the accuracy of management's estimates of our financial statement
reserves related to inventory and accrued expenses.
You should assume that the information appearing in this annual report is
accurate only as of the date it was issued. Our business, financial condition,
results of operations and prospects may have changed since that date.
For a discussion of the risks, uncertainties and assumptions that could
affect our future events, developments or results, you should carefully review
the risk factors described below, "Management's Discussion and Analysis of
Financial Condition and Results of Operations" beginning on page 11, as well as
the factors listed under "Risk Factors" in our most recent prospectus:
o Adverse economic conditions, such as reduced consumer confidence and
spending, or bad weather could significantly reduce our sales.
o We could fail to meet our goals for opening and expanding stores on a
timely basis, which would cause our sales to suffer. We may not
anticipate all the challenges that our expanding operations will impose
and, as a result, we may not meet our targets for opening new stores
and expanding profitably. In addition, new stores can cause sales at
our existing stores to suffer.
o We realize a disproportionately larger amount of our sales and net
income during the Christmas and Easter seasons. If for any reason our
sales were below expectations during the Christmas and Easter selling
seasons, our operating results could suffer materially.
o Our profitability is vulnerable to future increases in operating and
merchandise costs including shipping rates, freight costs, wage levels,
inflation, competition and other adverse economic factors.
3
o The performance of our distribution system is critical to our
operations. We must expand or replace existing distribution centers and
build new ones in a timely manner or we will not meet our growth plans.
Unforeseen disruptions or costs in operating and expanding our
receiving and distribution systems could harm our sales and
profitability.
o Our merchandise mix relies heavily on imported goods. An increase in
the cost or disruption of the flow of these goods may significantly
decrease our sales and profits because any transition to alternative
sources may not occur in time to meet our demands. In addition,
products from alternative sources may also be of lesser quality and
more expensive than those we currently import.
o Disruptions in the availability of quality, low-cost merchandise in
sufficient quantities to maintain our growth may reduce our sales and
profits.
o The retail industry is highly competitive and we expect competition to
increase in the future, possibly reducing our sales and profits.
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 and others, it is against our policy to
selectively 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
Since our founding in 1986, we have become 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 sets us apart from our
competitors.
Since 1986, Dollar Tree has evolved from opening primarily mall-based
stores ranging between 2,000 to 3,000 selling square feet to opening primarily
strip-shopping center based stores ranging between 7,000 to 10,000 selling
square feet. In the past five years, we gradually increased the size of stores
that we opened each year as we improved our merchandise offerings and service to
our customers. At December 31, 1997, we operated 1,059 stores in 28 states; at
December 31, 2001, we operated 1,975 stores in 37 states. Over the same time
period, our selling square footage increased from approximately 3.9 million
square feet in December 1997 to 10.1 million square feet in December 2001. Our
store growth since 1997 has resulted from opening new stores and completing
selective mergers and acquisitions from 1998 through 2000. We centrally manage
our store and distribution operations from our corporate headquarters in
Chesapeake, Virginia.
At December 31, 2001, we operated 1,963 single-price point stores that
operate under the names of Dollar Tree, Dollar Express, Dollar Bills, Only One
Dollar and Only $One. We also operate 12 multi-price point stores under the name
Spain's Cards and Gifts.
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 by offering
items that we believe typically sell for higher prices elsewhere. We buy
approximately 55% of our merchandise domestically and directly import the
remaining 45%. We believe our mix of imported and domestic merchandise affords
our buyers flexibility that allows them to consistently exceed the customer's
expectation. In addition, direct relationships with manufacturers permit us to
select from a broad range of products, and customize packaging, product sizes
and package quantities that meet our customers' needs.
4
Changing Merchandise Mix. We maintain a balanced selection of products
within traditional variety store categories; we offer a wide selection of
everyday basic products; and we supplement these basic, everyday items with
seasonal and closeout merchandise. We attempt to keep certain basic consumable
merchandise in our stores continuously to establish our stores as a destination
store for our customers. Closeout merchandise is purchased opportunistically and
represents less than 15% of our purchases. 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.
Our merchandise mix consists of: (1) consumable merchandise, which includes
candy and food, health and beauty care, and housewares such as paper and
plastics; (2) variety merchandise, which include toys, housewares, party goods,
gifts, stationery, and other items; and (3) seasonal goods such as Easter,
Halloween and Christmas merchandise. The following table shows the percentage of
purchases of each major product group for the years ended December 31, 2001 and
2000:
Merchandise Type 2001 2000
---------------- ---- ----
Variety categories 50.7% 51.4%
Consumable 38.2% 36.6%
Seasonal 11.1% 12.0%
Site Selection and Store Format. We primarily focus on opening new stores
in strip shopping centers anchored by mass merchandisers, whose target customers
we believe to be similar to ours, and in neighborhood centers anchored by large
grocery retailers. Our stores have proven successful in metropolitan areas,
mid-sized cities and small towns. The range of our store sizes allows us to
target a particular location with a store that best suits that market and take
advantage of real estate opportunities, when available. 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. We believe this design attracts new and repeat customers and
enhances our image as both a destination and impulse store.
For more information on retail locations and retail store leases, see
"Properties" on page 7.
Strong and Consistent Store Level Economics. We maintain a disciplined,
cost-sensitive approach to store site selection in order to minimize the initial
capital investment required and maximize our potential to generate high
operating margins. 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.
On a cash basis, our stores have historically experienced a payback period
of approximately 12 to 15 months and we expect this trend to continue. During
the past five years, we have maintained our store-level operating income margins
in the 21.0% to 23.1% range. Stores whose first full year of operations was 2001
had average store level operating income of approximately 21.0% as a percent of
sales.
Our older, smaller stores continue to generate a significant amount of
store-level operating income and operating cash flow and have some of the
highest operating margins among our stores. The increased size of our newer
stores allows us to offer a wider selection of products, including more basic
consumable merchandise, thereby making them more attractive as a destination
store.
In the past five years, we have maintained our gross profit margins in the
34.9% to 36.9% range and our operating income margins in the 10.3% to 13.0%
range. Historically, we have experienced seasonal fluctuation in our net sales,
operating income and net income because of our mix of seasonal merchandise.
For more information on our results of operations, see "Management's
Discussion and Analysis - Results of Operations" on page 11. For more
information on seasonality of sales, see "Management's Discussion and Analysis -
Seasonality and Quarterly Fluctuations" on page 18.
Cost Control. 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 believe our disciplined
buying and quality merchandise help to minimize markdowns. 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. No vendor
accounted for more than 10% of total merchandise purchased in any of the last
five years.
We are currently upgrading our supply chain technology to better manage our
inventories. The new systems implemented in this project will provide us with
valuable sales information to assist our buyers and improve merchandise
allocation to our stores. Controlling our inventory levels will result in more
efficient distribution and store operations.
5
Growth Strategy
Store Openings and Square Footage Growth. The primary factors contributing
to our net sales growth have been new store openings, an active store expansion
program and selective mergers and acquisitions. From 1997 to 2001, net sales
increased at a compound annual growth rate of 23.7% and operating income,
excluding merger-related items, increased at a compound annual growth rate of
22.4%. We expect that the substantial majority of our future sales growth will
come from new store openings.
The following table shows the total selling square footage of our stores
and the selling square footage per new store opened over the last five years. We
began opening larger stores after the acquisition of 98 Cents Clearance Center
in 1998. Our growth and productivity statistics will be reported based on
selling square footage prospectively because our management believes the use of
selling square footage yields a more accurate measure of store productivity. The
selling square footage statistics for 1997 through 2000 are estimates based on
the relationship of selling to gross square footage.
Average Selling
Average Selling Square Footage
Square Footage Per New Store
Year Number of Stores Per Store Opened
---- ---------------- --------- ------
1997 1,059 3,665 4,055
1998 1,285 3,790 3,840
1999 1,507 4,055 4,765
2000 1,729 4,520 6,240
2001 1,975 5,130 7,070
We expect to increase our selling square footage in the future by opening
new stores in underserved markets and strategically increasing our presence in
our existing markets via new store openings and store expansions (expansions
include store relocations). In 2002 and beyond, we plan to predominately open
stores that are approximately 7,000 to 10,000 selling square feet. We will also
continue to open stores ranging from 4,000 to 6,000 selling square feet as
opportunities arise. Stores of this size continue to offer strong store-level
economics and allow us to optimize our strategic approach for a particular
market.
In addition to new store openings, we plan to continue our store expansion
program to increase our net sales per store and take advantage of market
opportunities. We target stores for expansion based on the current sales per
square foot and changes in market opportunities. Stores targeted for expansion
are generally less than 3,500 selling square feet in size. Store expansions
generally increase the existing store size by approximately 3,000 to 4,000
selling square feet.
Since 1995, we have added a total of 371 stores through three 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. We evaluate potential acquisition
opportunities in our retail sector as they become available.
Merchandising and Distribution. Expanding our customer base is important to
our growth plans. We will continue to stock our new stores with the
ever-changing merchandise that our current customers have come to appreciate. In
addition, we are opening larger stores that contain more basic consumable
merchandise to attract new customers. Consumable merchandise typically sells
faster than other merchandise, which results in increased sales. The
presentation and display of merchandise in our stores is critical to
communicating value to our customers and creating a more exciting shopping
experience. We believe our approach to visual merchandising results in high
store traffic, high sales volume and an environment that encourages impulse
purchases.
A strong and efficient distribution network is key to our ability to grow
and to maintain a low-cost operating structure. We currently operate six
distribution centers, which are capable of supporting approximately $3.0 billion
in annual sales. We will continue to add distribution capacity to support our
store opening plans, with the aim of remaining approximately one year ahead of
our distribution needs. New distribution sites are strategically located to
reduce stem miles, maintain flexibility and improve efficiency in our store
service areas.
Our stores receive approximately 97% of their inventory from our six
distribution centers via contract carriers. The remaining store inventory,
primarily perishable consumable items and other vendor-maintained display items,
are delivered directly to our stores from vendors. For more information on our
distribution center network, see "Properties" on page 7.
6
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.
At December 31, 2001, we operated point-of-sale systems (POS) in 167 stores
and we plan to install POS in all new and expanded stores and convert some of
our existing stores to POS in 2002. We expect to have POS installed in more
than 600 stores by the end of 2002. Point-of-sale data will allow us to track
sales by merchandise category and geographic region as well as assist in
planning for future purchases of inventory. In addition, we expect that
implementation of these initiatives will improve the efficiency of our supply
chain management, improve our merchandise flow and help control costs.
Competition
The retail industry is highly competitive and we expect competition to
increase in the future. Among fixed price point retailers, the principal methods
of competition include convenience and the quality of merchandise offered to the
customer. Our competitors include variety and discount stores, closeout stores,
mass merchandisers and, to a lesser extent, other fixed-price point retailers.
Our competitors include Family Dollar, Dollar General and 99 Cents Only.
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," and "Everything's $1.00," the
registration of which is pending. We also occasionally market products under
various private labels but these brand names are not material to our operations.
With the acquisition of Dollar Express, we became the owner of the service marks
"Dollar Express" and "Dollar Expres$."
Employees
We employed approximately 8,200 full-time and 14,500 part-time associates
on December 31, 2001. The number of part-time associates fluctuates depending on
seasonal needs. We consider our relationship with our associates to be good, and
we have not experienced significant interruptions of operations due to labor
disagreements. None of our employees are subject to collective bargaining
agreements.
Item 2. PROPERTIES
Stores
As of December 31, 2001, we operated 1,975 stores in 37 states as detailed
below:
Alabama..........53 Maryland............77 Oklahoma.............23
Arkansas.........27 Massachusetts.......19 Oregon...............24
California......121 Michigan............88 Pennsylvania........163
Connecticut......16 Minnesota...........12 Rhode Island..........6
Delaware.........12 Mississippi.........33 South Carolina.......60
Florida.........154 Missouri............43 Tennessee............66
Georgia.........105 Nevada..............11 Texas................87
Illinois.........86 New Hampshire........8 Vermont...............1
Indiana..........55 New Jersey..........56 Virginia............119
Iowa..............9 New York...........107 Washington............1
Kansas...........13 North Carolina.....106 West Virginia........23
Kentucky.........41 Ohio................79 Wisconsin............44
Louisiana........27
We currently lease our stores and expect to continue to lease new stores as
we expand. Our leases typically provide for a short initial lease term
(generally five years) with options to extend. We believe this leasing strategy
enhances our flexibility to pursue various expansion opportunities resulting
from changing market conditions.
7
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. From time to time we may
not comply with certain provisions of our store operating leases. We maintain
good relations with our landlords and believe that violation of these lease
provisions, if any, will not have a material effect on our operations.
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 $3.0 billion in annual 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
June 2005, with
Chicago, Illinois Lease options to renew 250,000
Stockton, California Lease March 2006 525,000
Briar Creek, Pennsylvania Lease March 2006 600,000
Savannah, Georgia Lease March 2006 600,000
We are planning to open a new distribution center in Oklahoma in early to
mid-2003. In addition to our distribution centers noted above, during the past
several years we have used off-site facilities to accommodate limited quantities
of seasonal merchandise.
Effective March 12, 2001, we entered into an operating lease facility for
$165 million, of which $113 million was committed to our existing Stockton,
Briar Creek and Savannah distribution centers. The termination date of this
operating lease facility is 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.
Except for our Chicago facility, each of our distribution centers contain
advanced materials handling technologies, including an automated conveyor and
sorting system, radio-frequency inventory tracking equipment and specialized
information systems. We completed the expansion and automation of our Stockton
distribution center in January 2002. This expansion increased the facility to a
total of 525,000 square feet. We have no plans to automate our existing Chicago
distribution center.
Since 1998, we have replaced four distribution centers for which we are
liable for future rents. The leases on these facilities expire at various dates
through December 2009. We make every effort to sublease these facilities and
have subleased certain of the vacated facilities under agreements expiring at
various dates through June 2008.
For more information on financing of our distribution centers, see
"Management's Discussion and Analysis - Funding Requirements" on page 15. 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 18.
Item 3. LEGAL PROCEEDINGS
From time to time, we are defendants in ordinary, routine litigation and
proceedings incidental to our business, including:
o employment related matters;
o product safety matters, including product recalls by the Consumer
Products Safety Commission and personal injury claims; and
o the infringement of the intellectual property rights of others.
We have been sued by three salaried California employees who allege that
they should have been classified as non-exempt employees and, therefore, should
have received overtime compensation. The suits also request that the California
state court certify the case as a class action on behalf of all store managers,
assistant managers and merchandise managers in our California stores. The
Company will vigorously defend itself in this matter.
We do not believe that any of these matters are individually or in the
aggregate material to us.
8
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 2001 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
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
2001:
First Quarter.............................. $ 32.25 $ 15.56
Second Quarter............................. 27.84 17.94
Third Quarter.............................. 34.96 16.36
Fourth Quarter............................. 31.87 18.22
On March 7, 2002, the last reported sale price for our common stock as
quoted by Nasdaq was $30.98 per share. As of March 7, 2002, we had approximately
550 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.
Item 6. SELECTED FINANCIAL DATA
(Amounts in thousands, except per share data, number of stores data
and net sales per selling 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, 2001, 2000, 1999 and 1998 have been
derived from our consolidated financial statements that have been audited by our
independent auditors. 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 auditors. 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 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, 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 net income available to common
shareholders and the related per share 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. Pro forma C corporation income taxes were $505 in 1999, $4,804 in
1998, and $2,279 in 1997.
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
9
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.
In 1999 and 1998, store contribution margin excludes stores acquired
through our merger in 2000. In 1997, store contribution margin excludes stores
acquired through mergers in 2000, 1999 and 1998. Store-level data for the
acquired stores was not available for the referenced periods that were excluded.
Comparable store net sales compare net sales for stores open throughout
each of the two periods being compared, including expanded stores. Net sales per
store and net sales per selling square foot are calculated for stores open
throughout the period presented.
Year Ended December 31,
------------------------------------------------------------------------
2001 2000 1999 1998 1997
---- ---- ---- ---- ----
Income Statement Data:
Net sales...................................... $1,987,321 $1,688,105 $1,351,820 $1,073,886 $ 847,830
Gross profit................................... 715,957 623,589 497,253 391,198 295,904
Selling, general and administrative
expenses.................................... 512,092 420,553 321,657 260,684 205,077
Operating income............................... 203,865 203,036 175,596 130,514 90,827
Net income..................................... 123,081 121,622 106,577 81,318 55,818
Pro forma net income available to
common shareholders......................... 123,081 120,209 99,550 76,514 53,539
Margin Analysis:
Gross profit................................... 36.0% 36.9% 36.8% 36.4% 34.9%
Selling, general and administrative
expenses.................................... 25.7% 24.9% 23.8% 24.3% 24.2%
Operating income............................... 10.3% 12.0% 13.0% 12.2% 10.7%
Net income..................................... 6.2% 7.2% 7.9% 7.6% 6.6%
Pro forma net income available to
common shareholders......................... 6.2% 7.1% 7.3% 7.1% 6.3%
Per Share Data:
Pro forma diluted net income per
common share................................ $ 1.09 $ 1.08 $ 0.92 $ 0.71 $ 0.50
Pro forma diluted net income per
common share annual growth.................. 0.9% 17.4% 29.6% 42.0% 35.1%
Selected Operating Data:
Number of stores open at
end of period............................... 1,975 1,729 1,507 1,285 1,059
Gross square footage........................... 12,791 9,832 7,638 6,051 4,793
Selling square footage......................... 10,129 7,818 6,113 4,867 3,878
Selling square footage annual growth........... 29.6% 27.9% 25.6% 25.5% 25.8%
Net sales annual growth........................ 17.7% 24.9% 25.9% 26.7% 27.3%
Comparable store net sales increase............ 0.1% 5.7% 5.0% 6.5% 6.9%
Net sales per selling square foot.............. $ 217 $ 238 $ 245 $ 249 $ 245
Net sales per store............................ $ 1,043 $ 1,014 $ 939 $ 902 $ 851
Selected Financial Ratios:
Return on assets............................... 14.9% 17.9% 20.3% 21.3% 17.0%
Return on equity............................... 21.0% 29.1% 36.8% 37.3% 38.5%
Store contribution margin...................... 21.0% 22.4% 22.7% 22.8% 23.1%
Store inventory turns.......................... 4.6 4.7 4.9 4.9 4.9
As of December 31,
------------------------------------------------------------------------
2001 2000 1999 1998 1997
---- ---- ---- ---- ----
Balance Sheet Data:
Cash ........................................ $ 236,653 $ 181,166 $ 181,587 $ 84,714 $ 48,912
Working capital.............................. 360,757 303,209 226,707 124,758 70,521
Total assets................................. 902,048 746,859 611,233 436,768 328,282
Total debt................................... 62,371 71,730 108,773 53,759 42,622
Mandatorily redeemable preferred
stock..................................... -- -- 35,171 -- --
Shareholders' equity......................... 651,736 518,658 316,238 262,575 173,290
10
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 January 2002, we completed the expansion and automation of our
California distribution center, which increased the size to 525,000
square feet.
o In August 2001, we opened a new 600,000 square foot automated
distribution center in Pennsylvania. This new facility replaced our
former distribution facilities in Philadelphia, Pennsylvania.
o In January 2001, we opened a new 600,000 square foot automated
distribution center in Georgia.
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 opened a new 317,000 square foot distribution
center in 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 Mississippi, which replaced our Memphis, Tennessee facility.
We accounted for the Dollar Express and Only $One mergers as poolings of
interest. As a result, all financial and operational data assume that Dollar
Express and Only $One had each been a part of Dollar Tree throughout all periods
presented. For each period presented, the outstanding Dollar Express and Only
$One 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 may vary at our
existing stores from one year to the next. We refer to this change 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 stores
in the calculation of comparable store net sales, which has the effect of
increasing our comparable store net sales. The term 'expanded' also includes
stores that are relocated.
Most retailers have the ability to 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. Our
plans for 2002 operations are based on comparable store net sales increases
between 0% and 2%, but we are unable to predict actual comparable store net
sales. In addition, we expect net sales to increase approximately 18% in 2002.
We expect the substantial majority of our future net sales growth to come
from square footage growth resulting from new store openings and expansion of
existing stores. In 2002, we plan to increase our selling square footage
approximately 25%, or approximately 2.3 million square feet, by adding 300 net
new stores and 0.4 million square feet by expanding approximately 100 stores. We
expect the average size of new stores opened in 2002 to average approximately
7,250 selling square feet per store. In 2002 and beyond, we plan to
predominately open stores that are approximately 7,000 to 10,000 selling square
feet. We will also continue to open stores ranging from 4,000 to 6,000 selling
square feet as opportunities arise. Stores of this size continue to offer strong
store-level economics and allow us to optimize our strategic approach for a
particular market. While our newer, larger stores have lower sales per square
foot than older, smaller stores, they generate higher sales and operating income
per store and create an improved shopping environment that invites customers to
shop longer and buy more.
We must control our merchandise costs, inventory levels and our general and
administrative expenses. Increases in expenses could negatively impact our
operating results because we cannot pass on increased expenses to our customers
by increasing our merchandise price above the $1.00 price point.
11
We will continue to experience pressure on our gross profit margins in
future years as we refine our merchandise mix to include a higher proportion of
consumable merchandise, which typically carries a lower gross profit margin,
open larger stores and continue to absorb higher costs. We do expect to
partially offset the effect of the above factors with improved domestic freight
costs created by the addition of our two new distribution centers in 2001. Even
with our changing merchandise mix, we expect our gross profit margin will range
between 36.0% and 37.0% in the foreseeable future because we can vary the mix
among our consumable products and variety categories to impact our gross margin.
In addition, consumable merchandise typically sells more quickly than our other
merchandise, resulting in increased sales.
Leveraging our selling, general and administrative expenses is difficult
because a substantial majority of our future sales growth is expected to come
primarily from new store openings, rather than comparable store net sales.
The following table expresses items from our income statement as a
percentage of net sales:
Year Ended December 31,
2001 2000 1999
---- ---- ----
Net sales.................................................. 100.0% 100.0% 100.0%
Cost of sales.............................................. 64.0 63.0 63.2
Merger-related costs....................................... -- 0.1 --
----- ----- -----
Gross profit............................................... 36.0 36.9 36.8
Selling, general and administrative expenses:
Operating expenses................................... 23.0 22.2 21.5
Merger-related expenses.............................. -- 0.2 --
Depreciation and amortization........................ 2.7 2.5 2.3
----- ----- -----
Total............................................ 25.7 24.9 23.8
----- ----- -----
Operating income........................................... 10.3 12.0 13.0
Interest income............................................ 0.2 0.3 0.1
Interest expense........................................... (0.3) (0.5) (0.5)
Other, net................................................. (0.1) -- --
----- ----- -----
Income before income taxes................................. 10.1 11.8 12.6
Provision for income taxes................................. 3.9 4.6 4.7
----- ----- -----
Net income................................................. 6.2% 7.2% 7.9%
===== ===== =====
2001 Compared to 2000
Net Sales. Net sales increased 17.7% in 2001 compared to 2000. We attribute
this $299.2 increase in net sales primarily to our new stores opened in 2001 and
2000, which are not included in our comparable store net sales results.
Comparable store net sales increased 0.1% in 2001.
We believe comparable store net sales remained relatively flat in 2001
because the retail environment in 2001 was unusually difficult in light of the
economic downturn and the events of September 11, 2001. In addition, our Easter
selling season was shorter in 2001 compared to 2000 because Easter was
approximately one week earlier in 2001 than 2000.
We opened 276 new stores and closed 30 stores during 2001, compared to 233
new stores opened and 11 stores closed in 2000. We added 29.6% to our selling
square footage in 2001 compared to 27.9% in 2000. Of the 2.3 million, or 29.6%,
increase in selling square footage in 2001, approximately 0.4 million selling
square feet was added by expanding 111 existing stores.
Gross Profit. Excluding $1.1 million of merger-related costs, gross profit
margin decreased to 36.0% in 2001 compared to 37.0% in 2000. This decrease in
gross profit margin in 2001 was primarily due to loss of leverage on occupancy
costs and increases in shrink in the now-closed Philadelphia distribution
facilities.
Selling, General and Administrative Expenses. Excluding $3.3 million of
merger-related expenses in 2000, selling, general and administrative expenses
increased as a percentage of net sales to 25.7% compared to 24.7% in 2000. This
increase is primarily the result of increases in payroll-related costs,
including insurance; certain store operating expenses; and charges recorded in
connection with our closed distribution facilities in Philadelphia. The increase
in payroll-related costs and store operating expenses was primarily due to the
loss of leverage.
Expressed as a percentage of net sales, depreciation and amortization
increased to 2.7% in 2001 from 2.5% in 2000, a total increase of $11.8 million.
The increase as a percent of net sales was due primarily to loss of leverage.
The $11.8 million increase is due primarily to new stores and expansions in 2001
and to stores opened in 2000 being opened a full year in 2001.
12
Operating Income. Due to the reasons discussed above, excluding $4.4
million of merger-related items in 2000, operating income decreased to $203.9
million in 2001 from $207.4 million in 2000 and decreased as a percentage of net
sales to 10.3% from 12.3%.
Interest Income and Expense. Interest income decreased $0.7 million in 2001
compared to 2000. The decrease resulted primarily because of decreased interest
rates throughout 2001. Interest expense decreased $2.4 million in 2001 compared
to 2000. This decrease was primarily due to the payoff of a revolving credit
facility and term loan in May 2000. We benefited slightly from the decrease in
variable interest rates in 2001 because of our variable-rate operating leases
and variable-rate debt. However, this benefit was partially offset as a result
of the interest rate swaps in effect during 2001.
Income Taxes. Our effective tax rate decreased to 38.5% for the year ended
December 31, 2001 from 38.8% for the year ended December 31, 2000 because 2000
included certain non-deductible merger-related expenses related to Dollar
Express.
2000 Compared to 1999
Net Sales. Net sales increased 24.9% in 2000 compared to 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 in 2000 because we improved our
merchandise mix to offer more consumable products as a component of our domestic
merchandise and the Easter selling season was longer in 2000 compared to 1999.
We opened 233 new stores and closed 11 stores during 2000, compared to 227
new stores opened and five stores closed in 1999. We added 27.9% to our selling
square footage in 2000 compared to 25.6% in 1999. Of the 1.7 million, or 27.9%,
increase in selling square footage in 2000, approximately 0.3 million selling
square feet was added by expanding 98 existing stores.
Gross Profit. Excluding $1.1 million of merger-related costs in 2000, gross
profit margin increased to 37.0% in 2000 compared to 36.8% in 1999. The increase
in gross margin in 2000 was primarily due to decreased merchandise costs
primarily as a result of our increased purchasing power and a slightly higher
percentage of import merchandise. These savings were partially offset by
increased freight costs caused by increased domestic fuel costs and the higher
mix of consumable products as a percentage of our domestic merchandise.
Selling, General and Administrative Expenses. Excluding $3.3 million of
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 workers'
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
increased the visibility of merchandise in our Philadelphia distribution center
and improved 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.
Operating Income. Due to the reasons discussed above, excluding $4.4
million of merger-related items in 2000, operating income decreased as a
percentage of net sales to 12.3% from 13.1%.
13
Interest Income and Expense. Interest income increased $2.6 million in 2000
compared to 1999. The increase resulted from higher levels of cash and cash
equivalents in 2000 compared to 1999. Interest expense increased $0.4 million in
2000 compared to 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.
Liquidity and Capital Resources
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 September and October. Historically, we have
satisfied our seasonal working capital requirements for existing stores and
funded our store opening 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, 2001, 2000 and 1999:
Year Ended December 31,
2001 2000 1999
---- ---- ----
(in millions)
Net cash provided by (used in):
Operating activities..................................... $ 178.7 $ 107.3 $ 128.6
Investing activities..................................... (121.5) (94.8) (55.2)
Financing activities..................................... (1.8) (12.9) 23.5
The $71.4 million increase in cash provided by operating activities in 2001
was caused primarily by an approximate $72.8 million increase in working
capital.
Cash used in investing activities is generally expended to open new stores.
The $26.7 million increase in 2001 compared to 2000 in investing activities was
primarily due to the following:
o We increased the number of new stores opened and the average size of
those stores in 2001.
o We expanded 111 stores in 2001 compared to 98 stores in 2000 while also
increasing the size of those expanded stores.
o We invested in technology to improve our supply chain processes.
The $11.1 million decrease in cash used in financing activities was
primarily the result of the following:
o We made a $6.0 million principal payment on the senior notes in
2001. In 2000, we made net repayments of approximately $34.2
million due to repayment of Dollar Express's term loan and
revolving credit facility and the first principal payment on the
senior notes.
o We received $12.8 million less cash pursuant to stock-based
compensation plans in 2001 compared to 2000 because of a decrease
in the amount of stock option exercises, which we believe resulted
from the decreased stock price throughout 2001.
o We paid $3.8 million in 2001 to repurchase shares in accordance
with the Securities and Exchange Commission's Emergency Relief
Order, which has since expired.
At December 31, 2001, our long-term borrowings were $37.0 million. We had
$50.0 million available through a revolving credit facility. We also have $125.0
million available under the Letter of Credit Reimbursement and Security
Agreement, of which approximately $68.1 million was committed to letters of
credit issued for routine purchases of imported merchandise.
14
Funding Requirements
Overview
We plan to add approximately 300 net new stores in 2002. In 2001, the
average investment per new store, including capital expenditures, initial
inventory and pre-opening costs, was approximately $360,000.
We expect our cash needs for opening new stores in 2002 to total
approximately $112.6 million, which includes approximately $67.6 million for
capital expenditures and $45.0 million for initial inventory and pre-opening
costs. In addition, we expect to spend approximately $25.1 million to expand 100
stores in 2002. Our total planned capital expenditures for 2002 are
approximately $135.0 to $140.0 million, including planned expenditures for new
and expanded stores, investments in our supply chain processes and additional
equipment for the distribution centers. 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 existing
credit facilities.
The following tables summarize our material contractual obligations,
including both on- and off-balance sheet arrangements, and our commitments (in
millions) at December 31, 2001:
Contractual Obligations Total 2002 2003 2004 2005 2006 Thereafter
----------------------- ----- ---- ---- ---- ---- ---- ----------
Lease Financing
Operating lease obligations $658.0 $126.2 $118.1 $104.0 $ 82.8 $141.1 $ 85.8
(including distribution center
operating lease facility)
Capital lease obligations 32.0 6.0 5.9 6.4 7.9 5.8 --
(including sale-leaseback)
Long-term Borrowings
Long-term debt 37.0 25.0 6.0 6.0 -- -- --
Total obligations $727.0 $157.2 $130.0 $116.4 $ 90.7 $146.9 $ 85.8
Expiring Expiring Expiring Expiring Expiring
Commitments Total in 2002 in 2003 in 2004 in 2005 in 2006 Thereafter
----------- ----- ------- ------- ------- ------- ------- ----------
Revolving credit facility $ -- $ -- $ -- $ -- $ -- $ -- $ --
Letters of credit 107.4 87.4 20.0 -- -- -- --
Other commitments 27.2 21.8 5.4 -- -- -- --
Total commitments $134.6 $109.2 $25.4 $ -- $ -- $ -- $ --
Commitments
Bank Credit Facilities. Effective March 12, 2001, we entered into a
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 was scheduled to terminate on March 11, 2002.
Effective March 7, 2002, we extended the revolving credit facility to May 31,
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 for the routine purchase of imported
merchandise. Approximately $68.1 million was committed to letters of credit at
December 31, 2001.
Financial Guarantee. We have issued a guarantee for $20.0 million that is
used by one of our suppliers as collateral. The guarantee is secured by letters
of credit totaling $20.0 million that expire in 2003.
Freight Contracts. We have contracted outbound freight services from
various carriers with contracts expiring through August 2003. The total amount
of these commitments is approximately $12.6 million.
Surety Bonds. We have issued various surety bonds totaling approximately
$14.6 million that expire at various dates through 2003. The surety bonds
primarily serve as collateral on our large deductible insurance programs.
15
Lease Facilities
Distribution Center Operating Lease Facility. We have entered into
operating leases known as synthetic leases for three of our distribution
centers. Effective March 12, 2001, we entered into an operating lease facility
with a group of financial institutions for $165.0 million, of which
approximately $113.0 million is committed to our existing Stockton, Briar Creek
and Savannah distribution centers. The distribution centers are owned by a
special purpose entity. Under this type of agreement, an unrelated third party
borrows funds under a construction agreement, purchases the property, pays for
the construction costs and subsequently leases the facility to us. Because these
arrangements are accounted for as operating leases, the related fixed assets and
lease liabilities are not included on our balance sheet. The termination date of
this operating lease facility is March 2006. At termination, we must select from
one of the following alternatives:
o We may purchase any or all of the distribution centers for the sum of
the amounts due and outstanding under the lease and any costs and
expenses incurred to exercise the purchase option (approximately $113.0
million to purchase all distribution centers).
o We may sell any or all of the distribution centers to a third party,
subject to a guarantee that the lessor will receive no less than 83% of
the property cost plus any unpaid interest and rents under the lease
agreement. (This obligation, which could total as much as $92.8
million, is included in future operating lease commitments in 2006).
We have not yet determined what course of action we will take upon
termination of the existing facility; however, we believe it is unlikely that we
will vacate those distribution centers upon termination in 2006. We believe that
we will have sufficient cash or financing capabilities to execute one of the
available alternatives. In addition, we may be able to negotiate a new lease
term based on fair market values at the time of termination.
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.
Changes are currently being proposed to the current accounting for
synthetic leases, which may make them less desirable in the future. The proposed
changes in the required accounting for these transactions may adversely affect
our results of operations and our consolidated balance sheets.
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 in
September 2004 and September 2006 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 $23.4 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. The amount of the lease obligation will equal the amount outstanding under
the note receivable in September 2006.
Long-Term Borrowings
Revenue Bond Financing. In May 1998, we entered into an agreement with the
Mississippi Business Finance Corporation under which it issued $19.0 million of
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, 2001, 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 2.2% at December 31, 2001.
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.
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.
16
Derivative Financial Instruments
Derivative Financial Instruments. We are party to four interest rate swaps,
which allow us to manage the risk associated with interest rate fluctuations on
the demand revenue bonds and a portion of our variable-rate operating leases.
The swaps are based on notional amounts of $19.0 million, $10.0 million, $5.0
million and $25.0 million. Under the $19.0 million, $10.0 million and $5.0
million agreements, as amended, we pay interest to the banks that provided the
swaps at a fixed rate. In exchange, the financial institution pays us at
variable interest rates, which are similar to the rates on the demand revenue
bonds and our variable-rate operating leases. The variable interest rates on the
interest rate swaps are set monthly. No payments are made by either party under
the swaps for monthly periods with an established interest rate greater than a
predetermined rate (the knock-out rate). The swaps may be canceled by the bank
or us and settled for the fair value of the swap as determined by market rates.
The $25.0 million interest rate swap agreement is used to manage the risk
associated with interest rate fluctuations on a portion of our variable-rate
operating leases. Under this agreement, we pay interest to a financial
institution at a fixed rate of 5.43%. 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. The swap is effective through March 2006, but it
may be canceled by the bank or us and settled for the fair value of the swap as
determined by market rates.
Because of the knock-out provision in the $19.0 million, $10.0 million and
$5.0 million interest rate swaps, changes in the fair value of those swaps are
recorded currently in earnings. Changes in fair value on our $25.0 million
interest rate swap are recorded as a component of "accumulated other
comprehensive income" in the consolidated balance sheets because the swap
qualifies for hedge accounting treatment in accordance with Statement of
Financial Accounting Standards No. 133, as amended by Statement of Financial
Accounting Standards No. 138. The amounts recorded in accumulated other
comprehensive income are subsequently reclassified into earnings in the same
period in which the related interest affects earnings.
For more information on the interest rate swaps, see "Quantitative and
Qualitative Disclosures About Market Risk - Interest Rate Risk" on page 20.
Critical Accounting Policies
Inventory Valuation
As discussed in Note 1 to the Consolidated Financial Statements,
inventories at the distribution centers are stated at the lower of cost or
market with cost determined on a first-in, first-out (FIFO) basis. Cost is
assigned to store inventories using the retail inventory method on a FIFO basis.
Under the retail inventory method, the valuation of inventories at cost and the
resulting gross margins are computed by applying a calculated cost-to-retail
ratio to the retail value of inventories. The retail inventory method is an
averaging method that has been widely used in the retail industry and results in
valuing inventories at lower of cost or market when markdowns are taken as a
reduction of the retail value of inventories on a timely basis.
Inventory valuation methods require certain significant management
estimates and judgments. These include estimates of merchandise markdowns and
shrink, which significantly affect the ending inventory valuation at cost as
well as the resulting gross margins. The averaging required in applying the
retail inventory method and the estimates of shrink and markdowns may, under
certain circumstances, result in inaccurate cost figures. Inaccurate inventory
cost may be caused by applying the retail inventory method to a group of
products that have differing characteristics related to gross margin and
turnover.
We estimate our markdown reserve based on the consideration of a variety of
factors, including but not limited to quantities of slow moving or carryover
seasonal merchandise on hand, historical markdown statistics and future
merchandising plans. The accuracy of our estimates can be affected by many
factors, some of which are outside of our control, including changes in economic
conditions and consumer buying trends. Historically, we have not experienced
significant differences in our estimates of markdowns compared with actual
results.
Our accrual for shrink is based on the actual historical shrink results of
our most recent physical inventories adjusted, if necessary, for current
economic conditions. These estimates are compared to actual results as physical
inventory counts are taken and reconciled to the general ledger. The majority of
our counts are taken in the first and second quarters of each year; therefore,
the shrink accrual recorded at December 31, 2001 is based on estimated shrink
for most of 2001, including the fourth quarter. We have not experienced
significant fluctuations in historical shrink rates in our Dollar Tree stores.
However, we have sometimes experienced higher than typical shrink in acquired
stores in the year following an acquisition, as was experienced in the former
Dollar Express distribution facilities and stores in 2001. We periodically
adjust our shrink estimates to address these factors as they become apparent.
Our management believes that our application of the retail inventory method
results in an inventory valuation that reasonably approximates cost and results
in carrying inventory at the lower of cost or market.
17
Accrued Expenses
On a monthly basis, we estimate certain material expenses in an effort to
record those expenses in the period incurred. Our most material estimates relate
to domestic freight, insurance-related expenses and certain store level
operating expenses, such as property taxes and utilities. Our freight and
store-level operating expenses are estimated based on current activity and
historical results. Our workers' compensation and general liability insurance
accruals are recorded based on actuarial valuation methods performed by third-
party actuaries. These actuarial valuations are estimates based on historical
loss development factors. Differences in management's estimates and assumptions
could result in an accrual materially different from the calculated accrual.
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. Easter was
observed on April 15, 2001 and will be observed on March 31, 2002. In addition,
there will be six fewer selling days between Thanksgiving and Christmas in 2002
as compared to 2001. The decrease in the selling season results because of the
shift of Thanksgiving from November 22, 2001 to November 28, 2002. We generally
realize a disproportionate amount of our net sales and a substantial majority of
our operating and net income during the fourth quarter. In anticipation of
increased sales activity during these months, we purchase substantial amounts of
inventory and hire a significant number of temporary employees to supplement our
permanent store staff. Our operating results, particularly operating and net
income, could suffer if our net sales were below seasonal norms during the
fourth quarter or Easter season for any reason, including merchandise delivery
delays due to receiving or distribution problems. Historically, net sales,
operating income and net income have been weakest during the first quarter. We
expect this trend to continue.
Our unaudited results of operations for the eight most recent quarters are
shown in a table in Footnote 11 of the Consolidated Financial Statements in Item
8 of this Form 10-K.
Inflation and Other Economic Factors
Our ability to provide quality merchandise at a fixed price and on a
profitable basis may be subject to economic factors that we cannot control,
including inflation in shipping rates, wage rates and other operating costs.
Shipping Costs. In the past, we have experienced annual increases of as
much as 33% in our trans-Pacific shipping rates due primarily to rate increases
imposed by the trans-Pacific shipping cartel. Currently, trans-Pacific shipping
rates are negotiated with individual freight lines and are subject to
fluctuation based on supply and demand for containers. As a result, our
trans-Pacific shipping rates may increase when we renegotiate our import
shipping rates effective May 2002.
During 2000, we experienced a $1.2 million increase in our domestic freight
costs because of increased domestic fuel costs. During 2001, we experienced a
$0.4 million increase in freight costs compared to 2000 resulting from increased
domestic fuel costs. Given the stabilization of fuel costs throughout 2001, we
do not expect fuel surcharges to materially affect our domestic freight costs in
2002.
We may experience disruptions in receiving shipments at our West coast
ports because of the possibility of a strike by the International Longshore and
Warehouse Union beginning July 1, 2002, the date their current labor agreement
expires. We are formulating appropriate contingency plans to minimize the impact
that a strike could have on our receiving and distribution operations.
18
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. 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 2002 Congress is
uncertain. If the federal 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 now-closed distribution centers whose leases
expire at various dates through December 2009. Annual rent and pass-through
costs on these facilities are approximately $3.2 million in 2002, $2.2 million
in 2003 and 2004, $2.0 in 2005, $1.3 million in 2006 and 2007, $1.0 million in
2008 and $0.7 million in 2009. Certain of these distribution facilities have
been subleased under agreements expiring at various dates through June 2008. We
have recorded charges for these future obligations for certain of the facilities
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
Statements of Financial Accounting Standards No. 141 and 142
Statement of Financial Accounting Standards (SFAS) No. 141, "Business
Combinations," requires that the purchase method of accounting be used for all
business combinations initiated after June 30, 2001.
SFAS No. 142, "Goodwill and Other Intangible Assets," establishes
accounting standards for intangible assets and goodwill and is effective January
1, 2002. SFAS No. 142 requires that goodwill and intangible assets with
indefinite useful lives no longer be amortized, but rather tested for impairment
at least annually. SFAS No. 142 will also require that intangible assets with
definite useful lives be amortized over their respective estimated useful lives
and reviewed for impairment in accordance with SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." Application of the
non-amortization provisions of SFAS No. 142 is expected to result in a reduction
in amortization expense of approximately $2.0 million per year. We performed the
first of the required impairment tests of goodwill as of January 1, 2002, to
evaluate existing goodwill for impairment upon adoption of SFAS No. 142. Based
on the transition impairment tests performed on recorded goodwill and other
intangibles, we will not record a cumulative effect of a change in accounting
principle in connection with the adoption of the provisions of this standard.
Statement of Financial Accounting Standards No. 143
In June 2001, the Financial Accounting Standards Board issued SFAS No. 143,
"Accounting for Asset Retirement Obligations," which addresses financial
accounting and reporting for obligations associated with the retirement of
tangible long-lived assets and the associated asset retirement costs. The
standard applies to legal obligations associated with the retirement of
long-lived assets that result from the acquisition, construction, development
and/or normal use of the asset. SFAS No. 143 is effective for fiscal years
beginning after June 15, 2002. Our management does not believe the
implementation of this standard will have a material effect on our financial
condition or results of operations.
Statement of Financial Accounting Standards No. 144
In August 2001, the Financial Accounting Standards Board issued SFAS No.
144, "Accounting for the Impairment or Disposal of Long-Lived Assets," which
requires that long-lived assets be reviewed 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 a
comparison of the carrying amount of an asset to future net cash flows expected
to be generated by the asset. If the carrying amount of an asset exceeds its
estimated future cash flows, an impairment charge is recognized by the amount by
which the carrying amount of the asset exceeds the fair value of the asset. SFAS
No. 144 requires companies to separately report discontinued operations and
extends that reporting to a component of an entity that either has been disposed
of (by sale, abandonment, or in a distribution to owners) or is classified as
held for sale. Assets to be disposed of are reported at the lower of the
carrying amount or fair value less costs to sell. SFAS No. 144 supersedes SFAS
No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed of." SFAS No. 144 is effective beginning January 1, 2002.
Our management does not believe the implementation of this standard will have a
material effect on our financial condition or results of operations.
19
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 and
we do not hold derivative instruments for trading purposes.
Interest Rate Risk
We have financial instruments that are subject to interest rate risk,
consisting of debt and lease obligations issued at variable and fixed rates.
Based on amounts outstanding on our fixed rate debt obligations at December 31,
2001, we do not consider our exposure to interest rate risk to be material.
We use variable-rate debt and variable-rate operating leases to finance
certain of our operations and capital improvements. These obligations expose us
to variability in interest and rent payments due to changes in interest rates.
If interest rates increase, interest and/or rent expense increase. Conversely,
if interest rates decrease, interest and/or rent expense also decrease. We
believe it is beneficial to limit the variability of our interest and rent
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. Under the
$19.0 million, $10.0 million and $5.0 million interest rate swaps, no payments
are made by parties under the swaps for monthly periods in which the variable
interest rate is greater than the predetermined knock-out rate.
The following table summarizes the financial terms of our interest rate
swap agreements and the fair value of each interest rate swap at December 31,
2001:
Hedging Receive Pay Knockout Fair
Instrument Variable Fixed Rate Expiration Value
---------- -------- ----- ---- ---------- -----
$19.0 million LIBOR 4.88% 7.75% 4/1/09 ($0.7 million)
interest rate swap
$10.0 million LIBOR 6.45% 7.41% 6/2/04 ($0.7 million)
interest rate swap
$5.0 million LIBOR 5.83% 7.41% 6/2/04 ($0.3 million)
interest rate swap
$25.0 million LIBOR 5.43% N/A 3/12/06 ($0.7 million)
interest rate swap
Hypothetically, a 1% change in interest rates results in approximately a $0.6
million change in the amount paid or received under the terms of the interest
rate swap agreements on an annual basis. Due to many factors, management is not
able to predict the changes in fair value of our interest rate swaps. The fair
values are the estimated amounts we would pay or receive to terminate the
agreements as of the reporting date. These fair values are obtained from an
outside financial institution.
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 Euros (formerly 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, 2001, we had no contracts
outstanding. Less than 1% of our purchases are contracted in Euros, and the
market risk exposure relating to currency exchange rate fluctuations is not
material.
20
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Consolidated Financial Statements Page
Independent Auditors' Report........................................... 22
Consolidated Balance Sheets as of December 31, 2001 and 2000........... 23
Consolidated Income Statements for the years ended
December 31, 2001, 2000 and 1999.............................. 24
Consolidated Statements of Shareholders' Equity
for the years ended December 31, 2001, 2000 and 1999.......... 25
Consolidated Statements of Cash Flows for the years ended
December 31, 2001, 2000 and 1999.............................. 26
Notes to Consolidated Financial Statements............................. 27
21
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, 2001 and 2000,
and the related consolidated income statements and consolidated statements of
shareholders' equity and cash flows for each of the years in the three-year
period ended December 31, 2001. 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, 2001 and 2000, and the results
of their operations and their cash flows for each of the years in the three-year
period ended December 31, 2001, in conformity with accounting principles
generally accepted in the United States of America.
/s/ KPMG LLP
Norfolk, Virginia
January 24, 2002
22
DOLLAR TREE STORES, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31,
------------
2001 2000
---- ----
(In thousands, except
share data)
ASSETS
Current assets:
Cash and cash equivalents................................................ $ 236,653 $ 181,166
Merchandise inventories.................................................. 296,473 258,687
Deferred tax asset (Note 3).............................................. 8,877 8,291
Prepaid expenses and other current assets................................ 18,776 29,370
------- -------
Total current assets................................................. 560,779 477,514
Property and equipment, net (Notes 4 and 5)................................... 279,011 211,632
Deferred tax asset (Note 3)................................................... 7,436 1,566
Goodwill, net of accumulated amortization (Note 5)............................ 38,358 40,376
Other assets, net (Notes 4 and 5)............................................. 16,464 15,771
------- -------
TOTAL ASSETS......................................................... $ 902,048 $ 746,859
======= =======
LIABILITIES AND SHAREHOLDERS'EQUITY
Current liabilities:
Other current liabilities (Note 5)....................................... $ 63,656 $ 46,906
Current portion of long-term debt (Note 6)............................... 25,000 25,000
Current installments of obligations under capital
leases (Note 4)........................................................ 3,865 3,547
Accounts payable......................................................... 68,653 75,404
Income taxes payable..................................................... 38,848 23,448
------- -------
Total current liabilities............................................ 200,022 174,305
Long-term debt, excluding current portion (Note 6)............................ 12,000 18,000
Obligations under capital leases, excluding
current installments (Note 4).............................................. 21,506 25,183
Other liabilities (Notes 7 and 9)............................................. 16,784 10,713
------- -------
Total liabilities.................................................... 250,312 228,201
------- -------
Shareholders' equity (Notes 2, 7, 8 and 10):
Common stock, par value $0.01. 300,000,000 shares authorized,
112, 505,658 shares issued and outstanding at December 31, 2001;
and 112,046,201 shares issued and outstanding at December 31, 2000..... 1,125 1,121
Additional paid-in capital............................................... 167,151 156,780
Accumulated other comprehensive loss..................................... (378) --
Retained earnings........................................................ 483,838 360,757
------- -------
Total shareholders' equity........................................... 651,736 518,658
Commitments, contingencies and subsequent events
(Notes 4, 6, 9 and 10)................................................... -- --
------- -------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY........................... $ 902,048 $ 746,859
======= =======
See accompanying Notes to Consolidated Financial Statements.
23
DOLLAR TREE STORES, INC.
AND SUBSIDIARIES
CONSOLIDATED INCOME STATEMENTS
Year Ended December 31,
-----------------------
2001 2000 1999
---- ---- ----
(In thousands, except per share data)
Net sales....................................................... $ 1,987,271 $ 1,688,105 $ 1,351,820
Cost of sales (Note 4).......................................... 1,271,314 1,063,416 854,124
Merger-related costs (Note 2)................................... -- 1,100 443
--------- --------- ---------
Gross profit .......................................... 715,957 623,589 497,253
--------- --------- ---------
Selling, general and administrative expenses (Notes 4 and 9):
Operating expenses......................................... 458,329 375,316 290,241
Merger-related expenses (Note 2)........................... -- 3,266 607
Depreciation and amortization.............................. 53,763 41,971 30,809
--------- --------- ---------
Total selling, general and
administrative expenses.............................. 512,092 420,553 321,657
--------- --------- ---------
Operating income....................................... 203,865 203,036 175,596
Interest income................................................. 3,573 4,266 1,743
Interest expense (Note 6)....................................... (5,464) (7,817) (7,429)
Changes in fair value of non-hedging interest
rate swaps (Note 7)........................................... (1,723) -- --
--------- --------- ---------
Income before income taxes............................. 200,251 199,485 169,910
Provision for income taxes (Note 3)............................. 77,170 77,476 63,333
--------- --------- ---------
Income before extraordinary item....................... 123,081 122,009 106,577
Loss on debt extinguishment, net of
tax benefit of $242........................................... -- 387 --
--------- --------- ---------
Net income............................................. 123,081 121,622 106,577
Less: Preferred stock dividends and
accretion (Note 8)..................................... -- 1,413 7,027
--------- --------- ---------
Net income available to common shareholders............ $ 123,081 $ 120,209 $ 99,550
========= ========= =========
Pro forma income data (Notes 2 and 8):
Net income available to common shareholders................ $ 123,081 $ 120,209 $ 99,550
Pro forma adjustment for
C corporation income taxes............................... -- -- 505
--------- --------- --------
Pro forma net income available
to common shareholders................................... $ 123,081 $ 120,209 $ 99,045
========= ========= ========
Basic pro forma income per common share:
Pro forma income before extraordinary item................. $ 1.10 $ 1.16 $ 1.01
========= ========= ========
Pro forma net income....................................... $ 1.10 $ 1.16 $ 1.01
========= ========= ========
Diluted pro forma income per common share:
Pro forma income before extraordinary item................. $ 1.09 $ 1.08 $ 0.92
========= ========= ========
Pro forma net income....................................... $ 1.09 $ 1.08 $ 0.92
========= ========= ========
See accompanying Notes to Consolidated Financial Statements.
24
DOLLAR TREE STORES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Years ended December 31, 2001, 2000 and 1999
Accumulated
Common Additional Other Share-
Stock Common Paid-in Comprehensive Retained holders'
Shares Stock Capital Loss Earnings Equity
------ ----- ------- ---- -------- ------
(In thousands)
Balance at December 31, 1998........................... 97,746 $ 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).............. 46 -- 838 -- -- 838
Exercise of stock options, including
income tax benefit of $6,278 (Note 10)............... 1,050 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........................... 98,842 659 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)............................. 3,097 31 40,945 -- -- 40,976
Issuance of stock under Employee Stock
Purchase Plan and other plans (Note 10).............. 41 -- 1,151 -- -- 1,151
Exercise of stock options, including
income tax benefit of $16,670 (Note 10).............. 1,752 18 37,629 -- -- 37,647
Exercise of common stock warrants (Note 8)............. 4,252 43 2,394 -- -- 2,437
Conversion of common stock warrants (Note 8)........... 4,062 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 1,121 156,780 -- 360,757 518,658
Net income for the year
ended December 31, 2001.............................. -- -- -- -- 123,081 123,081
Issuance of stock under Employee Stock
Purchase Plan and other plans (Note 10).............. 91 -- 1,555 -- -- 1,555
Exercise of stock options, including
income tax benefit of $2,345 (Note 10)............... 594 6 12,589 -- -- 12,595
Repurchase and retirement of common
shares (Note 8)...................................... (225) (2) (3,773) -- -- (3,775)
Other comprehensive loss (Note 8)...................... -- -- -- (378) -- (378)
------- ----- ------- ----- ------- -------
Balance at December 31, 2001........................... 112,506 $ 1,125 $ 167,151 $ (378) $ 483,838 $ 651,736
======= ===== ======= ===== ======= =======
See accompanying Notes to Consolidated Financial Statements.
25
DOLLAR TREE STORES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31,
-----------------------
2001 2000 1999
---- ---- ----
(In thousands)
Cash flows from operating activities:
Net income........................................................ $ 123,081 $ 121,622 $ 106,577
-------- ------- -------
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization................................. 53,763 41,971 30,809
Loss on disposal of property and equipment.................... 1,726 1,471 692
Change in fair value of non-hedging interest
rate swaps ................................................. 1,723 -- --
Extraordinary loss on early extinguishment of debt............ -- 629 --
Provision for deferred income taxes........................... (6,219) (3,294) 2,340
Tax benefit of stock option exercises........................ 2,345 16,670 6,278
Other non-cash adjustments to net income...................... 1,318 -- 382
Changes in assets and liabilities increasing
(decreasing) cash and cash equivalents:
Merchandise inventories.................................. (37,786) (65,849) (37,391)
Prepaid expenses and other current assets................ 10,594 (14,782) (7,488)
Other assets............................................. (936) (987) 449
Accounts payable......................................... (6,751) 3,654 13,754
Income taxes payable..................................... 15,400 (5,745) 7,840
Other current liabilities................................ 16,750 10,710 3,839
Other liabilities........................................ 3,718 1,195 474
-------- ------- -------
Net cash provided by operating activities............ 178,726 107,265 128,555
-------- ------- -------
Cash flows from investing activities:
Acquisition, net of cash acquired................................. -- -- (320)
Capital expenditures.............................................. (121,566) (95,038) (55,013)
Proceeds from sale of property and equipment...................... 98 271 172
-------- ------- -------
Net cash used in investing activities................ (121,468) (94,767) (55,161)
-------- ------- -------
Cash flows from financing activities:
Distributions paid................................................ -- -- (60,934)
Proceeds from long-term debt...................................... -- -- 22,500
Proceeds from revolving credit facilities......................... 82,000 74,700 48,600
Repayment of long-term debt and facility fees..................... (6,239) (27,708) (1,966)
Repayment of revolving credit facilities.......................... (82,000) (81,200) (46,100)
Proceeds from sale-leaseback transaction.......................... -- -- 21,605
Principal payments under capital lease obligations................ (3,562) (3,274) (1,151)
Proceeds from issuance of preferred stock and
common stock put warrants....................................... -- -- 32,156
Proceeds from stock issued pursuant to
stock-based compensation plans ................................. 11,805 24,563 8,769
Repurchase of common stock (Note 8)............................... (3,775) -- --
-------- ------- -------
Net cash provided by (used in)
financing activities............................... (1,771) (12,919) 23,479
-------- ------- -------
Net increase(decrease) in cash and cash equivalents.................... 55,487 (421) 96,873
Cash and cash equivalents at beginning of year......................... 181,166 181,587 84,714
-------- ------- -------
Cash and cash equivalents at end of year............................... $ 236,653 $ 181,166 $ 181,587
======== ======= =======
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest ...................................................... $ 5,144 $ 7,315 $ 6,821
======= ======= =======
Income taxes................................................... $ 65,688 $ 65,597 $ 46,640
======= ======= =======
See accompanying Notes to Consolidated Financial Statements.
26
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 1,963
discount variety retail stores that sell substantially all items for $1.00 or
less. The Company's stores operate under the names of Dollar Tree, Dollar
Express, Dollar Bills, Only One Dollar and Only $One. Our stores average
approximately 6,475 gross square feet. The Company also operates 12 multi-price
point stores that 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
California. The Company's merchandise includes housewares, candy and food,
seasonal goods, health and beauty care, toys, party goods, gifts, stationery and
other consumer items. Approximately 45% of the Company's merchandise is directly
imported, primarily from China.
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.
Cash and Cash Equivalents
Cash and cash equivalents at December 31, 2001 and 2000 includes $219,635
and $161,495, 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 amounted to $15,707 and $13,129 at December 31, 2001
and 2000, respectively.
Property and Equipment
Property and equipment are stated at cost and depreciated using the
straight-line method over the estimated useful lives of the respective assets as
follows:
Buildings.................................. 39 years
Furniture, fixtures and equipment.......... 3 to 7 years
Transportation vehicles.................... 4 to 6 years
Leasehold improvements and assets held under capital leases are amortized
over the estimated useful lives of the respective assets or terms of the related
leases, whichever is shorter. The amortization is included in "depreciation and
amortization" on the consolidated income statements.
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 as defined in Statement of
Position 98-1, "Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use."
Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed of
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
27
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. In 2001 and 1999, the Company recorded charges of $1,400 and
$151, respectively, to write-down certain assets. These charges are recorded as
a component of "operating expenses" in the consolidated income statements.
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. In accordance with
Statement of Financial Accounting Standards (SFAS) No. 142, the Company ceased
amortization of goodwill effective January 1, 2002.
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 limits its exposure
to changes in variable interest rates. 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
formally documents all hedging relationships, if applicable, and assesses hedge
effectiveness both at inception and on an ongoing basis.
Prior to the implementation of SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," the fair value of the interest rate swaps
was not recorded in the Company's balance sheet because they met the
requirements for hedge accounting treatment prior to the implementation of
SFAS No. 133.
Effective January 1, 2001, the Company adopted SFAS No. 133. This
statement, as amended by SFAS No. 138, establishes accounting and reporting
standards for derivative instruments, including derivative instruments embedded
in other contracts, and for hedging activities. The Company's three interest
rate swaps in effect at January 1, 2001 do not qualify for hedge accounting
treatment pursuant to the provisions of SFAS No. 133. As a result, the interest
rate swaps were recorded at their fair values in the consolidated balance sheet
on January 1, 2001 as a component of other liabilities (see Note 7). Subsequent
changes in the fair value of these non-hedging interest rate swaps are recorded
currently in earnings as a component of "other expense." Changes in the fair
value of the interest rate swaps are recorded as "change in the fair value of
non-hedging interest rate swaps" in the statements of cash flows. Upon
termination of these non-hedging interest rate swaps, the remaining asset or
liability, if any, will be removed from the consolidated balance sheet.
The Company is party to one interest rate swap that qualifies for hedge
accounting treatment pursuant to the provisions of SFAS No. 133. Accordingly,
changes in the fair value of the interest rate swap are reported in the
consolidated balance sheets as a component of "accumulated other comprehensive
income." These amounts are subsequently reclassified into earnings as a yield
adjustment in the period in which the related interest on the variable rate
obligations affects earnings. If the swap is terminated prior to its expiration
date, the amount recorded in accumulated other comprehensive income will be
recorded as a yield adjustment over the term of the forecasted transaction.
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 Euros (formerly 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, 2001 and 2000.
Cost of Sales
The Company includes the cost of merchandise, warehousing and distribution
costs, and certain occupancy costs in cost of sales.
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 tax rates is recognized in income in the
period that includes the enactment date of such change.
28
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," 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. SFAS No.123, "Accounting for Stock-Based
Compensation," 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.
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 reporting period. Actual results could differ from those
estimates.
Reclassifications
Certain 2000 and 1999 amounts have been reclassified for comparability with
the 2001 financial statement presentation.
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.
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.
29
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.
NOTE 3 - INCOME TAXES
Total income taxes for the years ended December 31, 2001, 2000 and 1999
were allocated as follows:
2001 2000 1999
---- ---- ----
Income from continuing operations................................. $ 77,170 $ 77,476 $ 63,333
Extraordinary item................................................ -- (242) --
Accumulated other comprehensive income, marking
derivative financial instruments to fair value.................. (237) -- --
Stockholders' equity, tax benefit on exercise of
stock options................................................... (2,345) (16,670) (6,278)
------ ------ ------
$ 74,588 $ 60,564 $ 57,055
====== ====== ======
The provision for income taxes from continuing operations for the years
ended December 31, 2001, 2000 and 1999 consists of the following:
2001 2000 1999
---- ---- ----
Federal - Current................................................. $ 71,504 $ 69,330 $ 52,093
Federal - Deferred................................................ (5,339) (2,827) 3,856
Federal - S corporation to C corporation conversion............... -- -- (1,700)
State - S corporation to C corporation conversion................. -- -- (524)
State - Current................................................... 11,885 11,440 8,900
State - Deferred.................................................. (880) (467) 708
------ ------ ------
$ 77,170 $ 77,476 $ 63,333
====== ====== ======
A reconciliation of the statutory federal income tax rate and the effective
rate for the years ended December 31, 2001, 2000 and 1999 follows:
2001 2000 1999
---- ---- ----
Statutory tax rate................................................ 35.0% 35.0% 35.0%
Effect of:
State and local income taxes, net of
federal income tax benefit.................................... 3.6 3.6 3.7
Other, net ..................................................... (0.1) 0.2 0.2
Only $One and Dollar Express S corporation income............... -- -- (0.3)
Conversion of Dollar Express from S corporation to
C corporation................................................. -- -- (1.3)
---- ---- ----
Effective tax rate........................................ 38.5% 38.8% 37.3%
==== ==== ====
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 consolidated 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, 2001 and 2000 are as
follows:
2001 2000
---- ----
Deferred tax assets:
Accrued expenses and other liabilities.......................... $ 15,899 $ 8,658
Inventories..................................................... 2,862 3,398
Property and equipment.......................................... 1,674 1,023
Other........................................................... 587 867
------ ------
Total deferred tax assets..................................... 21,022 13,946
====== ======
Deferred tax liabilities:
Intangible assets............................................... (3,049) (2,801)
Deferred compensation........................................... (1,300) (977)
Other........................................................... (360) (311)
------ ------
Total deferred tax liabilities................................ (4,709) (4,089)
------ ------
Net deferred tax asset........................................ $ 16,313 $ 9,857
====== ======
30
In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred
taxes will not be realized. Based upon the availability of carrybacks of future
deductible amounts to 2001, 2000 and 1999 taxable income and management's
projections for future taxable income over the periods in which the deferred tax
assets are deductible, management believes it is more likely than not the
existing net deductible temporary differences will reverse during periods in
which carrybacks are available or in which the Company generates net taxable
income. However, there can be no assurance that the Company will generate any
income or any specific level of continuing income in future years.
NOTE 4 - COMMITMENTS AND CONTINGENCIES
Lease Commitments
Future minimum lease payments under noncancelable store, distribution
center and former corporate headquarters operating leases (including leases with
related parties) and the present value of future minimum capital lease payments
as of December 31, 2001 are as follows:
Capital Operating
Leases Leases
------ ------
Year ending December 31:
2002................................................ $ 5,991 $ 126,206
2003................................................ 5,895 118,081
2004................................................ 6,440 103,971
2005................................................ 7,864 82,839
2006................................................ 5,769 141,050
Thereafter.......................................... 21 85,752
------ -------
Total minimum lease payments............................. 31,980 $ 657,899
------ =======
Less amount representing interest
(at an average rate of approximately 9%)............... 6,609
------
Present value of net minimum capital lease payments...... 25,371
Less current installments of obligations under
capital leases......................................... 3,865
------
Obligations under capital leases, excluding current
installments........................................... $ 21,506
======
The above future minimum lease payments include amounts for leases that
were signed prior to December 31, 2001 for stores that were not open as of
December 31, 2001. 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 $8,126
under operating leases.
Included in property and equipment at December 31, 2001 and 2000 are leased
furniture and fixtures and transportation vehicles, excluding sale-leaseback
assets, with a cost of $3,822 and $3,964 and accumulated depreciation of $2,074
and $1,818 at December 31, 2001 and 2000, respectively.
Sale-Leaseback Transaction
On September 30, 1999, the Company sold certain retail store leasehold
improvements to an unrelated third party and leased them back for a period of
seven years. The Company has an option to purchase the leasehold improvements at
the end of the fifth and seventh years at amounts approximating their fair
market values at the time the option is exercised. This transaction is being
accounted for as a financing arrangement. The total amount of the lease
obligation is $23.4 million at December 31, 2001. 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 in 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 Lease Agreements
Minimum and Contingent Rentals
Rental expense for store, distribution center and former corporate
headquarters operating leases (including payments to related parties) included
in the accompanying consolidated income statements for the years ended December
31, 2001, 2000 and 1999 are as follows:
2001 2000 1999
---- ---- ----
Minimum rentals.................. $ 121,645 $ 95,600 $ 78,780
Contingent rentals............... 1,067 1,876 1,613
------- ------ ------
Total.......................... $ 122,712 $ 97,476 $ 80,393
======= ====== ======
31
Distribution Centers
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 $113,000 is committed to the Savannah, Briar Creek and Stockton
distribution centers.
Under this type of agreement, an unrelated third party in the form of a
special purpose entity, borrows funds under a construction agreement, purchases
the property, pays for the construction costs and subsequently leases the
facility to the Company. These agreements are typically referred to as synthetic
leases. 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. No liability was recorded as of December 31, 2001 and 2000. The
total estimated residual value guarantee is included in the operating lease
commitments in 2006.
Non-operating Facilities
The Company is responsible for payments under leases for former
distribution centers. The leases for the facilities expire at various dates
through December 2009. The Company receives sublease income on certain of the
vacated facilities under agreements expiring through June 2008. The accruals
recorded in connection with the closed distribution centers are adjusted
quarterly for changes in market conditions. Due to the uncertainty regarding the
ultimate recovery of the future lease and related payments, the Company recorded
a $974 charge in 1999 and a $1,160 charge in 2001. The total accrual for these
vacated facilities was $2,557 and $990 at December 31, 2001 and 2000,
respectively.
Related Parties
The Company also leases properties for six 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 $1,782, $2,051, and $2,094 for the
years ended December 31, 2001, 2000 and 1999, respectively.
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, 2001, 2000 and 1999, the Company paid $200 under this agreement.
Purchase Contract
During 1996, the Company entered into a purchase agreement with a vendor,
which committed the Company to purchase a minimum of $39,462 in vendor products
by April 2003, of which $11,846 had been purchased through December 31, 2000. In
June 2001, the Company terminated the agreement and recognized a $1,600 gain
related to the unamortized portion of the payment received upon commencement of
the contract.
Freight Services
The Company has contracted outbound freight services from various contract
carriers with contracts expiring through August 2003. The total amount of these
commitments is approximately $12,600, of which approximately $11,100 is
committed in 2002 and $1,500 is committed in 2003.
Financial Guarantees
As of December 31, 2001, the Company has issued a guarantee for $20,000
that is used by one of the Company's suppliers as collateral. The guarantee is
secured by letters of credit totaling $20,000 that expire in 2003.
Surety Bonds
The Company has issued various surety bonds that primarily serve as
collateral for our high deductible insurance programs. The total amount of the
commitment is approximately $14,600, of which approximately $10,700 is committed
through various dates in 2002 and $3,900 is committed through various dates in
2003.
32
Contingencies
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.
NOTE 5 - BALANCE SHEET COMPONENTS
Goodwill and Intangible Assets
Non-compete Agreements
The Company issued options to certain former shareholders of an acquired
entity in exchange for non-competition agreements and a consulting agreement.
These assets are being amortized over the legal term of the individual
agreements, which is generally over a ten-year period. At December 31, 2001 and
2000, the carrying value of these agreements is $2,965 and $3,448, respectively,
which is net of $1,448 and $965, respectively, of accumulated amortization, and
is included in other assets in the consolidated balance sheets. These intangible
assets will continue to be amortized over their remaining legal term in
accordance with SFAS No. 142, which was adopted effective January 1, 2002.
Goodwill
Accumulated amortization relating to goodwill was approximately $11,629 and
$9,611 at December 31, 2001 and 2000, respectively.
Property and Equipment, Net
Property and equipment, net as of December 31, 2001 and 2000 consists of
the following:
2001 2000
---- ----
Land...................................................... $ 8,059 $ 8,051
Buildings................................................. 31,281 31,281
Improvements.............................................. 144,784 100,953
Furniture, fixtures and equipment......................... 229,669 174,498
Transportation vehicles................................... 4,134 4,296
Construction in progress.................................. 25,754 16,600
------- -------
Total property and equipment.......................... 443,681 335,679
Less accumulated depreciation and amortization............ 164,670 124,047
------- -------
Total................................................. $ 279,011 $ 211,632
======= =======
Other Current Liabilities
Other current liabilities as of December 31, 2001 and 2000 consists of the
following:
2001 2000
---- ----
Compensation and benefits................................. $ 20,398 $ 14,977
Taxes (other than income taxes)........................... 26,129 23,685
Insurance................................................. 14,354 6,606
Other..................................................... 2,775 1,648
------ ------
Total ............................................... $ 63,656 $ 46,906
====== ======
33
NOTE 6 - LONG-TERM DEBT
Long-term debt as of December 31, 2001 and 2000 consists of the following:
2001 2000
---- ----
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...................... $ 18,000 $ 24,000
Demand Revenue Bonds, interest payable monthly at a variable rate
which was 2.2% at December 31, 2001, principal payable on demand,
otherwise beginning June 2006 and maturing June 2018.............. 19,000 19,000
------ ------
Total long-term debt........................................... 37,000 43,000
Less current portion................................................ 25,000 25,000
------ ------
Long-term debt, excluding current portion...................... $ 12,000 $ 18,000
====== ======
Maturities of long-term debt are as follows: 2002 - $25,000; 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, are classified as current liabilities.
Revolving Credit Facility
In March 2001, the Company entered into a Revolving Credit Facility with
its banks (the Revolver Agreement). The Revolver 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. Effective March 2002, the Company extended
its existing Revolving Credit Facility through May 31, 2002.
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
Revolver Agreement matures on March 11, 2002.
Letters of Credit
In March 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 for the routine purchase of imported merchandise.
Fair Value of Financial Instruments
The carrying values of cash and cash equivalents, accounts receivable,
accounts payable, other current liabilities and other liabilities (excluding
derivative financial instruments disclosed below) approximate fair value because
of the short maturity of these instruments.
The carrying value of the Company's variable-rate and fixed-rate 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.
34
It is not practicable to estimate the fair value of our outstanding
commitments and guarantees without unreasonable cost.
The fair value of the interest rate swaps (see Note 7) 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, 2001
and 2000 are as follows:
2001 2000
Receive/(Pay) Receive/(Pay)
------------- -------------
$19,000 interest rate swap.............. $(682) $ 338
$10,000 interest rate swap.............. (663) (208)
$5,000 interest rate swap............... (263) (15)
$25,000 interest rate swap.............. (744) --
The fair values of the interest rate swaps are included in other liabilities in
the consolidated balance sheets.
NOTE 7 - Derivative Financial Instruments
The fair value of interest rate swaps is approximately $2,352 and is
recorded in "other liabilities" on the consolidated balance sheets.
Non-hedging Derivatives
The Company is party to three derivative instruments in the form of
interest rate swaps that do not qualify for hedge accounting treatment pursuant
to the provisions of SFAS No. 133. These interest rate swaps do not qualify for
hedge accounting because each instrument contains a knock-out provision. The
swaps create the economic equivalent of fixed rate obligations by converting the
variable interest rates to fixed rates. Under these interest rate swaps, the
Company pays interest to a financial institution at fixed rates as defined in
each agreement. In exchange, the financial institution pays the Company at
variable interest rates, which approximate the floating rates on the variable
rate obligations, excluding the credit spreads. The interest rates on the swap
are subject to adjustment monthly. No payments are made by either party for
months in which the variable interest rates, as calculated under the swap
agreements, are greater than the "knock-out rate." The following table
summarizes the terms of each interest rate swap:
Derivative Origination Expiration Pay Fixed Knockout
Instrument Date Date Rate Rate
---------- ---- ---- ---- ----
$19.0 million swap 4/1/99 4/1/09 4.88% 7.75%
$10.0 million swap 9/8/00 6/2/04 6.45% 7.41%
$5.0 million swap 12/20/00 6/2/04 5.83% 7.41%
The $19.0 million swap reduces the Company's exposure to the variable interest
rate related to the Demand Revenue Bonds (see Note 6). The $10.0 and $5.0
million swaps reduce the Company's exposure to interest rate fluctuations on a
portion of the Company's variable-rate operating leases (see Note 4).
Hedging Derivatives
The Company is party to one derivative instrument in the form of an
interest rate swap that qualifies for hedge accounting treatment pursuant to the
provisions of SFAS No. 133.
On April 12, 2001, the Company entered into a $25.0 million interest rate
swap agreement (swap) to manage the risk associated with interest rate
fluctuations on a portion of the Company's variable-rate operating leases. 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 5.43%. 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
consistent with the interest rate adjustment on the operating lease facility.
The swap is effective through March 2006.
NOTE 8 - SHAREHOLDERS' EQUITY
Unattached Warrants
The Company issued 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 to certain Company shareholders.
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, 2001
or 2000.
35
Preferred Stock
The Company is authorized to issue 10,000,000 shares of Preferred Stock,
$0.01 par value per share. No preferred shares are issued and outstanding at
December 31, 2001 and 2000.
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 this dividend,
which has the effect of a 3-for-2 stock split.
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 represented 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 were 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:
2001 2000 1999
---- ---- ----
Pro forma basic income before extraordinary item per common share:
Income before extraordinary item........................ $ 123,081 $ 122,009 $ 106,577
Less: Preferred stock dividends and accretion........... -- 1,413 7,027
------- ------- -------
Income before extraordinary item available
to common shareholders................................ 123,081 120,596 99,550
Pro forma adjustment for C corporation
income taxes.......................................... -- -- 505
------- ------- -------
Pro forma income before extraordinary item
available to common shareholders...................... $ 123,081 $ 120,596 $ 99,045
======= ======= =======
Weighted average number of common shares
outstanding........................................... 112,238 103,972 98,435
======= ======= =======
Pro forma basic income before extraordinary
item per common share................................. $ 1.10 $ 1.16 $ 1.01
======= ======= =======
36
2001 2000 1999
---- ---- ----
Pro forma diluted income before extraordinary item per common share:
Pro forma income before extraordinary item
available to common shareholders...................... $ 123,081 $ 120,596 $ 99,045
======= ======= =======
Weighted average number of common shares
outstanding........................................... 112,238 103,972 98,435
Dilutive effect of stock options and warrants
(as determined by applying the treasury
stock method)......................................... 752 7,837 9,525
------- ------- -------
Weighted average number of common shares and
dilutive potential common shares
outstanding........................................... 112,990 111,809 107,960
======= ======= =======
Pro forma diluted income before extraordinary
item per common share................................. $ 1.09 $ 1.08 $ 0.92
======= ======= =======
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, 2001 and 2000, respectively, 731,304 and 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.
Comprehensive Income
The Company's comprehensive income reflects the effect of recording
derivative financial instruments pursuant to SFAS No. 133. The following table
provides a reconciliation of net income to total comprehensive income:
Year ended December 31,
-----------------------
2001 2000 1999
---- ---- ----
Net income........................................ $ 123,081 $ 121,622 $ 106,577
Cumulative effect of change
in accounting for derivative
financial instruments (net of
$44 tax expense)................................ 70 -- --
Fair value adjustment - derivative
hedging instruments (net of tax
benefit of $287)................................ (457) -- --
Amortization of SFAS No. 133
cumulative effect (net of $6 tax
expense)........................................ 9 -- --
------- ------- -------
Total comprehensive income.................... $ 122,703 $ 121,622 $ 106,577
======= ======= =======
The cumulative effect recorded in "accumulated other comprehensive loss" is
being amortized over the remaining lives of the related interest rate swaps.
Share Repurchase Program
The Company's Board of Directors authorized the repurchase of up to
$100,000 of the Company's common stock in connection with the Securities and
Exchange Commission's (SEC) Emergency Relief Order issued immediately following
the terrorist attacks on September 11, 2001. Pursuant to this program, the
Company repurchased and retired 225,000 shares of common stock for approximately
$3,800. The Company's limited share repurchase plan expired concurrently with
the expiration of the SEC's Exemptive Order on October 12, 2001. The Company had
previously been unable to enter into a formal repurchase program because of its
merger with Dollar Express, Inc. on May 5, 2000, which was accounted for as a
pooling of interests.
NOTE 9 - EMPLOYEE BENEFIT PLANS
Profit Sharing and 401(k) Retirement Plan
The Company maintains a defined contribution profit sharing and 401(k) plan
which is available to all employees over 21 years of age who have completed one
year of service in which they have worked at least 1,000 hours. Eligible
employees may make elective salary deferrals. The Company may make contributions
at its discretion.
37
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:
2001................................ $ 8,914
2000................................ 7,041
1999................................ 5,413
Deferred Compensation Plan
The Company adopted a deferred compensation plan in 2000 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 $557
and $390, respectively, at December 31, 2001 and 2000, and are included in
"other liabilities" in the consolidated balance sheet. The Company made no
discretionary contributions in 2001 or 2000.
NOTE 10 - STOCK-BASED COMPENSATION PLANS
At December 31, 2001, the Company has five stock-based compensation plans.
Each plan and the accounting method are described below.
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 the options' 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:
2001 2000 1999
---- ---- ----
Expected term in years................. 6 6 8
Expected volatility.................... 63.0% 61.6% 52.7%
Annual dividend yield.................. -- -- --
Risk-free interest rate................ 4.9% 5.2% 6.6%
38
The following tables summarize the Company's various option plans as of
December 31, 2001, 2000 and 1999, and for the years then ended and information
about fixed options outstanding at December 31, 2001:
Stock Option Activity
------------------------------------------------------------------------------------
2001 2000 1999
----------------------- ------------------------ -----------------------
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............. 5,091,120 $ 21.02 5,288,463 $ 16.86 4,876,365 $ 14.33
Granted.......................... 1,527,250 17.67 1,935,973 24.87 1,697,847 19.05
Exercised........................ (593,597) 17.33 (1,751,957) 12.00 (1,050,432) 7.55
Forfeited ....................... (340,946) 22.66 (381,359) 23.56 (235,317) 21.05
--------- --------- ---------
Outstanding at
end of year................... 5,683,827 20.39 5,091,120 21.02 5,288,463 16.86
========= ========= =========
Options exercisable
at end of year................ 2,713,081 20.04 1,904,127 17.07 2,212,093 12.07
========= ========= =========
Weighted average fair
value of options
granted during the
year.......................... $ 11.00 $ 15.37 $ 12.56
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 2001 Life Price 2001 Price
- ------ ---- ---- ----- ---- -----
$0.86...................... 50,516 (1) $ 0.86 50,516 $ 0.86
$2.96 to $5.96............. 124,883 3.4 years 4.29 124,883 4.29
$6.76 to $9.94............. 373,922 4.9 years 9.80 373,922 9.80
$10.80 to $19.50........... 2,146,648 8.4 years 17.69 505,114 18.29
$20.66 to $24.75........... 2,256,554 7.6 years 23.13 1,216,168 23.07
$25.53 to $42.57........... 731,304 7.6 years 29.41 442,478 29.01
--------- ---------
$0.86 to $42.57............ 5,683,827 2,713,081
========= =========
(1) Represent options granted under the SOP in 1993 and 1994. These options
have no expiration date.
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 end of the quarterly offering period. Under the ESPP, the
Company has sold 277,929 shares as of December 31, 2001.
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.................... 23% to 72%
Annual dividend yield.................. --
Risk-free interest rate................ 2.44% to 6.20% (annualized)
The weighted average per share fair value of those purchase rights granted
in 2001, 2000 and 1999 was $3.98, $7.00 and $4.59, respectively.
39
Accounting Method
If the accounting provisions of SFAS No. 123 had been adopted, 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:
2001 2000 1999
---- ---- ----
Pro forma net income available to common shareholders:
As reported.............................................. $ 123,081 $ 120,209 $ 99,045
======= ======= =======
Pro forma for SFAS No. 123............................... $ 111,664 $ 106,372 $ 106,372
======= ======= =======
Pro forma basic net income per common share:
As reported.............................................. $ 1.10 $ 1.16 $ 1.01
======= ======= =======
Pro forma for SFAS No. 123............................... $ 0.99 $ 1.02 $ 0.90
======= ======= =======
Pro forma diluted net income per common share:
As reported.............................................. $ 1.09 $ 1.08 $ 0.92
======= ======= =======
Pro forma for SFAS No. 123............................... $ 0.99 $ 0.94 $ 0.82
======= ======= =======
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.
NOTE 11 - QUARTERLY FINANCIAL INFORMATION (Unaudited)
The following table sets forth certain items from the Company's unaudited
income statements for each quarter of 2001 and 2000. 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 a full
year or for any future period.
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
(In thousands, except store and per share data)
2001:
Net sales.......................................... $ 387,319 $ 440,361 $ 444,745 $ 714,846
Gross profit....................................... 131,461 157,087 154,295 273,114
Operating income................................... 17,939 35,245 25,820 124,861
Net income......................................... 10,783 21,658 14,552 76,088
Diluted net income per
common share..................................... 0.10 0.19 0.13 0.67
Stores open at end of quarter...................... 1,781 1,863 1,935 1,975
Comparable store net sales increase (2)............ -- (2.7%) (0.1%) 1.5%
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
Net income available to
common shareholders.............................. 12,876 20,811 21,850 64,672
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 (2)............ 3.0% 14.3% 5.3% 2.0%
(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) Easter was observed on April 15, 2001; April 23, 2000; and April 4, 1999.
<
40
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information concerning our Directors and Executive Officers required by
this Item is incorporated by reference to Dollar Tree Stores, Inc.'s Proxy
Statement relating to our Annual Meeting of Shareholders to be held on May 30,
2002, 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.
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 21 of this Form 10-K.
2. Financial Statement Schedules. All schedules for which provision is
made in the applicable accounting regulations of the Securities and
Exchange Commission are not required under the related instructions,
are not applicable, or the information is included in the Consolidated
Financial Statements, and therefore have been omitted.
3. Exhibits. The exhibits listed on the accompanying Index to Exhibits,
on page 43 of this Form 10-K, are filed as part of, or incorporated by
reference into, this report.
(b) The following reports on Form 8-K were filed since September 30, 2001:
1. Report on Form 8-K, filed January 25, 2002, included the earnings
results for the quarter and year ended December 31, 2001.
2. Report on Form 8-K, filed October 26, 2001, included a press release
regarding earnings for the third quarter ended September 30, 2001.
41
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
DOLLAR TREE STORES, INC.
DATE: March 12, 2002 By: /s/ Macon F. Brock, Jr.
-------------------------------------
Macon F. Brock, Jr.
Chairman of the Board, 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/ Macon F. Brock, Jr.
- ---------------------------
Macon F. Brock, Jr. Chairman and Chief Executive March 12, 2002
Officer; Director (principal
executive officer)
/s/ John F. Megrue
- ---------------------------
John F. Megrue Vice Chairman; Director March 12, 2002
/s/ J. Douglas Perry
- ---------------------------
J. Douglas Perry Chairman Emeritus; Director March 12, 2002
/s/ H. Ray Compton
- ---------------------------
H. Ray Compton Executive Vice President; Dire March 12, 2002
/s/ Frederick C. Coble
- ---------------------------
Frederick C. Coble Chief Financial Officer March 12, 2002
(principal financial and
accounting officer)
/s/ Frank Doczi
- ---------------------------
Frank Doczi Director March 12, 2002
/s/ Richard G. Lesser
- ---------------------------
Richard G. Lesser Director March 12, 2002
/s/ Thomas A. Saunders, III
- ---------------------------
Thomas A. Saunders, III Director March 12, 2002
/s/ Alan L. Wurtzel
- ---------------------------
Alan L. Wurtzel Director March 12, 2002
42
Index to Exhibits
3. Articles and Bylaws
-------------------
3.1 Third Restated Articles of Incorporation of Dollar Tree Stores,
Inc.(the Company), as amended (Exhibit 3.1 to the Company's
Quarterly Report on Form 10-Q for the fiscal quarter ended
September 30, 1996 incorporated herein by this reference)
3.2 Second Restated Bylaws of the Company (Exhibit 3.2 to the
Company's Registration Statement on Form S-1, No. 33-88502,
incorporated herein by this reference)
21. Subsidiaries of the Registrant
------------------------------
21.1 Subsidiaries
23. Consents of Experts and Counsel
-------------------------------
23.1 Independent Auditors' Consent
43