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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, 1996
COMMISSION FILE NO.0-25464
DOLLAR TREE STORES, INC.
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(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
VIRGINIA 54-1387365
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(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
2555 ELLSMERE AVENUE, NORFOLK, VA 23513
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(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (757) 857-4600
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
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TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
NONE NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
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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 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
statements the best of Registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this form 10-K. (X)
The aggregate market value of Common Stock held by non-affiliates of the
Registrant on March 14, 1997 was $418,883,969 based on a $36 3/8 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.
The number of shares outstanding of the Registrant's Common Stock on March
14, 1997 was 25,952,206 shares.
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 June 4, 1997, which will be filed with the Securities and Exchange
Commission not later than 120 days after January 1, 1997.
DOLLAR TREE STORES, INC.
TABLE OF CONTENTS
PAGE
PART I
Item 1. BUSINESS........................................................... 3
Item 2. PROPERTIES......................................................... 11
Item 3. LEGAL PROCEEDINGS.................................................. 12
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS................ 14
PART II
Item 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS.............................................. 14
Item 6. SELECTED FINANCIAL DATA............................................ 14
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.............................. 17
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA........................ 24
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE.............................. 43
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT.................... 43
Item 11. EXECUTIVE COMPENSATION............................................ 43
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT.................................................. 43
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.................... 43
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS
ON FORM 8-K..................................................... 43
SIGNATURES........................................................ 45
FORWARD LOOKING STATEMENTS. The Company has made in this Report, and from time
to time may otherwise make, forward looking statements regarding the Company's
operations, economic performance, and financial condition. These statements are
recognizable by the incorporation of words such as "believe," "anticipate" and
"expect." Such forward looking statements are subject to various risks and
uncertainties, as discussed throughout this Report, and as summarized in
"Management's Discussion and Analysis of Financial Condition and Results of
Operation--Forward Looking Statements"
PART I
ITEM 1. BUSINESS
GENERAL: Dollar Tree Stores, Inc. ("Dollar Tree" or the "Company") is the
leading operator of discount variety stores offering merchandise at the $1.00
price point. As of December 31, 1996, the Company operated 737 stores in both
strip centers and malls in 26 states in the Southeastern, Midwestern, Mid-
Atlantic, Southcentral and Northeastern United States. The Company's stores,
which are designed to be the modern day equivalent of the traditional variety
store, offer a wide assortment of quality everyday general merchandise in many
traditional variety store categories, including housewares, seasonal goods,
food, toys, health and beauty aids, party goods, stationery, hardware, gifts,
books, and other consumer items. Virtually all items are sold for $1.00 or less,
with the exception of a small number of value items sold in a few select stores.
The Company was incorporated under the laws of Virginia in 1986 as Only One
Dollar, Inc. and changed its name to Dollar Tree Stores, Inc. in 1993. In 1991,
the executive officers of the Company effected a number of strategic changes,
including (i) shifting the Company's merchandising focus away from closeout
merchandise towards its current emphasis on providing selection and value in
traditional variety store categories, (ii) focusing its expansion strategy on
strip center locations, (iii) accelerating the Company's expansion program and
(iv) improving the depth of the management team and breadth of operational
controls. The Company began trading on the NASDAQ Stock Market under the symbol
DLTR in March 1995. In January 1996, the Company acquired all of the outstanding
common stock of Dollar Bills, Inc., which operated 136 discount variety stores
similar to Dollar Tree under the name of "Dollar Bill$", as well as a
distribution center and wholesale division in the Chicago, Illinois, area.
The Company's strategy is to continue to expand the existing store base by
concentrating on strip-center locations anchored by strong mass merchandisers
such as WalMart, Kmart and Target, and selected mall-based locations. In
addition, the Company will remain focused on the following key business
initiatives: (i) offering value to the customer at the $1.00 price point; (ii)
consistently changing the merchandise mix to offer new and exciting products;
(iii) emphasizing performance at the individual store level; (iv) continually
refining inventory and cost-control measures; (v) retaining a disciplined,
cost-sensitive approach to site selection for new stores; and (vi) capitalizing
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on Company management's retail experience.
THE DOLLAR BILLS ACQUISITION: The Company acquired all of the stock of Dollar
Bills, Inc. for approximately $52.6 million in cash and $2.0 million in
inventory in January 1996. This acquisition broadened the Company's base in
terms of geographic coverage, merchandise categories and market share while
taking advantage of Dollar Tree's existing infrastructure. The Company plans to
continue operating the acquired stores under the "Dollar Bill$" name. Most
Dollar Bills stores are located in different retail markets from existing Dollar
Tree stores, resulting in little competition for sales. The acquisition also
added a modern 250,000 square foot distribution center and a wholesale division
in the Chicago area, both of which the Company continues to operate.
Although the two chains are in the same core business of offering discount
merchandise primarily for $1.00, a number of operational differences do exist.
Dollar Bills stores (i) are typically larger and, accordingly, have higher
average sales per store, (ii) are more concentrated in urban areas than Dollar
Tree stores, (iii) carry a higher proportion of consumable merchandise, such as
food, health and beauty aids, and everyday household supplies, which typically
have lower merchandise margins and, therefore, carry a lower proportion of
leisure items, such as toys and gifts, which typically have higher merchandise
margins, (iv) carry less inventory per square foot because of different store
fixtures and (v) offer a limited number of multi-price point items, which the
Company now offers only at certain Dollar Bills locations and at prices not
exceeding $5.00. During 1996, the Company introduced into the Dollar Bills
stores more merchandise with higher merchandise margins, replaced certain store
fixtures to accommodate new merchandise and improve merchandise display, and
implemented Dollar Tree's operational procedures in the Dollar Bills stores. The
Company continues to evaluate these operational differences.
CURRENT DEVELOPMENTS: In January, 1997, Dollar Tree completed the purchase of
approximately 50 acres of land in Chesapeake, Virginia, approximately 10 miles
from its current Norfolk location, for the purpose of building a new Store
Support Center, made up of a headquarters building and a distribution center. In
addition to a 76,000 square foot headquarters, the facility will include a
distribution center of roughly 400,000 square feet. Management believes that
upon completion of this facility, the Company's capacity to service stores will
increase to approximately 1,600 units, up from its current capacity of
approximately 1,000 units. The new warehouse and distribution center will
replace the existing Norfolk facility and will contain advance materials
handling technologies, including a new automated conveyor and sortation system.
The Store Support Center project is expected to require an investment of
approximately $29 million. The Company believes that the facility will be
operational in early 1998, when it is needed to support continued growth. See
also "Business--Warehousing and Distribution," "Management's Discussion and
Analysis--Subsequent Event," "Management's Discussion and Analysis--Forward
Looking Statements," and Note 11 of the Notes to Consolidated Financial
Statements.
4
BUSINESS STRATEGY: The Company's goal is to continue its leadership position
in the $1.00 price point segment of the discount retail industry. Factors
contributing to the success of the Company's operations include:
VALUE OFFERING. Dollar Tree's management strives to exceed its customers'
expectations of the range and quality of products that can be purchased for
$1.00. Management believes that many of the items Dollar Tree sells for $1.00
are typically sold for higher prices elsewhere. The Company is able to offer
such value in part by purchasing a substantial portion of its products directly
from foreign manufacturers, allowing the Company to pass on savings to the
customer. In addition, direct relationships with both domestic and foreign
manufacturers permit broad product selection, customized packaging and
frequently the ability to obtain larger sizes and higher package quantities.
CHANGING MERCHANDISE MIX. The Company supplements its wide assortment of
quality everyday core merchandise with a changing mix of new and exciting
products, including seasonal goods, such as summer toys, back-to-school products
and Christmas wrapping paper and, to a limited extent, selected closeout
merchandise. Closeouts comprise no more than 20% of merchandise purchased at
cost. The Company also takes advantage of the availability of lower priced,
private label goods, which are comparable to national name brands.
STRONG AND CONSISTENT STORE LEVEL ECONOMICS. The Company believes that its
attractive store level economics and the flexibility of its real estate strategy
provide it with a wide range of real estate opportunities and will facilitate
its continued expansion. The Company's stores have historically been profitable
within the first full year of operations, with an average store level operating
income of approximately $162,000 (approximately 23% of net sales) for stores
whose first full year of operations was 1996. In addition, the operating
performance of the Company's stores has been very consistent, with over 90% of
the Company's stores opened for the entire year having store level operating
income margins in excess of 15% for calendar year 1996, and over 85% of the
Company's Dollar Bills stores having store level operating income margins in
excess of 15% for the eleven months ended December 31, 1996. Operating income
margins at certain Dollar Bills stores were comparatively lower due to a higher
proportion of consumable goods being offered at such stores.
COST CONTROL. Given the Company's pricing structure, Dollar Tree believes
that maintaining sufficient gross margins and tight control over store expenses,
corporate expenses and inventory costs are critical to its success. Dollar Tree
closely manages both retail inventory shrinkage and retail markdowns of
inventory, limiting each to an average of less than 2.5% of annual net sales
over the last five years. In the past five years, Dollar Tree has maintained
gross profit margins in the 36% to 37% range and increased its
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operating income margin from 8.6% to 12.2%. In 1996, as a result of the Dollar
Bills acquisition, gross profit margin was slightly impacted by a shift in
merchandise mix toward higher levels of domestic, consumable merchandise (for
instance, food and health and beauty aids), which generally carry a higher
merchandise cost. Management feels that adjustments to its merchandise mix are
complete.
EXPERIENCED RETAIL MANAGEMENT TEAM. The Company's three executive officers,
J. Douglas Perry, Macon F. Brock, Jr., and H. Ray Compton, each have between 18
and 28 years of experience in the retail industry and have worked together for
the past 18 years. Additionally, the Company's seven Vice Presidents each have
significant experience in their respective areas of operational expertise.
As part of the recapitalization of the Company in 1993, Messrs. Perry,
Brock and Compton were required to enter into employment and non-competition
agreements which have now expired. Messrs. Perry, Brock, and Compton intend to
continue with the Company as executive officers, but are not actively
negotiating new employment and non-competition agreements.
STORES: Dollar Tree has opened over 70 stores in each of the past five years.
During 1996, the Company opened 104 new stores and closed 3 stores, ending the
year with 737 stores in 26 states. The addition of the 136 Dollar Bills stores
expanded Dollar Tree's operations into three new states in 1996, Iowa,
Minnesota, and Wisconsin. Dollar Tree stores have been successful in major
metropolitan areas, mid-sized cities and small towns with populations under
25,000, and management believes that Dollar Tree stores can perform well in a
variety of locations.
The Company maintains a disciplined, cost sensitive approach to site
selection, favoring strip centers and selected enclosed malls. In the last five
years, Dollar Tree has opened primarily strip center based stores, which have
historically required lower initial capital investment and generated higher
operating margins than mall stores. The Company favors opening new stores in
strip center locations anchored by strong mass merchandisers such as Wal-Mart,
Kmart and Target, whose target customers management believes are similar to
those of Dollar Tree. The Company has also begun to open more stores in
neighborhood centers anchored by large groceries. Currently, management
anticipates expanding by approximately 145 to 150 stores in 1997, and 175 to 180
stores in 1998. The Company's expansion plans include increasing its presence in
its existing markets to take advantage of market opportunities and efficiencies
in distribution and field management, and selectively entering new markets.
Management believes that its stores have a relatively small shopping radius,
which permits the concentration of multiple stores in a single market. The
Company's ability to open new stores is contingent upon, among other factors,
locating suitable sites and negotiating favorable lease terms.
The typical Dollar Tree store has approximately 3,200 square feet, of which
approximately 85% to 90% represents selling space. Dollar Bills stores average
4,000 to 4,500 square feet. The prototype for future Dollar Tree stores is
6
between 3,500 and 4,000 square feet. Of this increased square footage, a portion
may be earmarked for larger aisles to allow for ease of shopping and the use of
shopping carts, which may tend to reduce the average sales per square foot.
However, management believes that it will encourage shoppers to increase their
average purchase.
Merchandise is displayed in densely stocked bins and shelves and organized
by category according to a standard store layout plan used throughout the chain.
The wide variety, value and freshness of merchandise at the $1.00 price point
and lively appearance of the store create excitement for customers that
management believes results in high store traffic, high sales volume and an
environment which encourages "impulse" purchases. In addition, the size of the
store, standard layout, merchandising by category, pricing structure and
convenient locations combine for a time-efficient shopping experience for the
customer.
Centralized check-out at the front of the store and the even-dollar pricing
policy ensure that customers are not kept waiting. The Company does not have and
does not currently anticipate adding a point-of-sale system, and credit cards
are not accepted.
MERCHANDISE: Dollar Tree's primary goal in merchandising is to offer a wide
assortment of products in traditional variety store categories which exceed
customer expectations of the value available for $1.00. The Company seeks to
accomplish this goal by: (i) offering a balanced mix of everyday core products
and changing products in traditional variety store categories, (ii) maintaining
a disciplined, global purchasing program and (iii) emphasizing the effective
presentation of merchandise in the stores.
Merchandise in the Dollar Bills stores is predominantly comprised of the
same categories as the Dollar Tree stores, although of a different mix, most
notably with a stronger emphasis on food and health and beauty aids. During
1996, the merchandise mix at the Dollar Bills stores was adjusted to more
closely reflect the broad variety traditionally offered by Dollar Tree. In turn,
the merchandise mix at the Dollar Tree stores was supplemented with increased
domestic consumable products of the type normally carried at the Dollar Bills
stores.
PURCHASING. Management believes that its disciplined purchasing program,
its relationships with its suppliers and the exclusive focus of its buying power
at the $1.00 price point contribute to its successful purchasing strategy.
Dollar Tree believes that offering perceived as well as real value to its
customers while maintaining target merchandise margins in its purchasing program
is critical to its success.
The Company purchases merchandise from 600 to 700 vendors annually, buying
both directly from vendors and indirectly from trading companies and brokers. No
vendor accounted for 10% or more of total merchandise purchased in any of the
last five calendar years. New vendors are used frequently to offer competitive,
yet varied, product selection and to maintain high levels of value.
7
The Company deals with its suppliers principally on an order-by-order basis
and has no long-term purchase contracts or other contractual assurance of
continued supply or pricing. While there can be no assurance of a continuing and
increasing supply of quality merchandise suitable to be priced by the Company at
$1.00, management believes that such merchandise will be available in sufficient
quantities to meet the Company's plans for future growth.
IMPORTS. In 1995 and 1996, the Company purchased approximately 34% and 32%,
respectively of its merchandise based on cost, and approximately 37% and 35%,
respectively, of its merchandise based on retail, directly from vendors located
abroad. The Company expects direct imports to continue to account for 35% to 40%
of its purchases at retail and believes that a substantial portion of its
domestic purchases are manufactured abroad. In addition, a substantial portion
of the Company's purchases are manufactured in China. These arrangements are
subject to the risks of relying on products manufactured abroad, including
import duties and quotas, loss of "most favored nation" ("MFN") trading status,
currency fluctuations, work stoppages, economic uncertainties including
inflation, foreign government regulations, political unrest and trade
restrictions, including U.S. retaliation against unfair foreign practices, which
could have a material adverse effect on the Company's business and results of
operations.
China is the source for a majority of the Company's direct imports and, the
Company believes, is also the largest source of its indirect imports. The MFN
status of China is reviewed annually by the United States government and,
accordingly, extension of such status is subject to political uncertainties. In
view of the frictions experienced in the past several years between the
governments of the United States and China, it is possible that there may be
significant future opposition to the extension of MFN status for China. Loss of
China's MFN status could impose significantly higher purchasing costs on the
Company, including increased tariffs on goods. The Company believes that it
could find alternative sources of supply in such an event and continues to
broaden its base of overseas vendors with the intention of lessening its
dependence on vendors in any one country. However, an interruption or delay in
supply from China or the Company's other foreign sources, or the imposition of
additional duties, taxes or other charges on these imports, could have a
material adverse effect on the Company's business and results of operations
unless and until such alternative supply arrangements are secured. Moreover,
products from alternative sources may be of lesser quality and/or more expensive
than those currently purchased by the Company.
WAREHOUSING AND DISTRIBUTION. Warehousing and distribution are managed centrally
by the Company from its corporate headquarters, which is located in the same
building as its Norfolk distribution center. The Company plans to replace the
Norfolk facility with a new Store Support Center, including a headquarters and a
distribution center, to be built in Chesapeake, Virginia in 1997. The new
warehouse and distribution center will contain advanced materials handling
technologies, including a new automated conveyor and sortation system,
radio-frequency inventory tracking equipment, improved racking, and specialized
information systems designed to improve inventory movement and controls. This
facility is expected to be operational in early 1998. See also "Business--
Subsequent Event" for additional references.
8
Substantially all of the Company's inventory is shipped directly from
suppliers to the Company's distribution centers. Dollar Tree's substantial
distribution center capacity allows the Company to receive manufacturers' early
shipment discounts and buy large quantities of goods at favorable prices. Since
the distribution centers maintain back-up inventory and provide weekly delivery
to each store, in-store inventory requirements are reduced and the Company is
able to operate with smaller stores than would otherwise be required. Since many
stores are limited in size, off-hours stocking, as well as off-site storage
space, is utilized to support the store's inventory turnover, particularly
during the busy fourth quarter.
Stores receive weekly shipments of merchandise from distribution centers
based on their anticipated inventory requirements for each week and
communication via telephone or electronic mail between store managers and the
distribution group. The Company has the ability to make two weekly deliveries to
high volume stores during the busy Christmas season. The majority of the
Company's inventory is delivered to the stores by contract carriers,
supplemented by the Company's distribution fleet, consisting of approximately 18
leased tractors and 61 owned or leased trailers.
The Company's success depends in large part on the orderly operation of its
receiving and distribution process, which depends, in turn, on adherence to
shipping schedules (especially those from the Far East) and effective management
of the distribution centers. Although management believes that its receiving and
distribution process is efficient and well positioned to support the Company's
expansion plans, there can be no assurance that the Company has anticipated, or
will anticipate all of the changing demands which its expanding operations will
impose on its receiving and distribution system or that events beyond the
control of the Company will not result in delays in the delivery of merchandise
to the stores.
TRADEMARKS. The Company is the owner 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," each of which expires in 2003 or later. A
small number of the Company's stores operate under the name "Only $1.00," for
which the Company has not obtained a service mark registration; if it were
required to change the name of these stores, the Company does not believe that
this would have a material adverse effect on its business. Additionally, with
the acquisition of Dollar Bills in January, 1996, the Company became the owner
of various Federal service mark registrations, including a concurrent use
registration for "Dollar Bill$" and the related logo. The Company also
occasionally uses various names under which it markets certain products.
Management believes that these "brand names" are not significant to the
Company's operations.
9
SEASONALITY. The Company has historically experienced and expects to continue
to experience seasonal fluctuations in its net sales, operating income and net
income. See "Management's Discussion and Analysis--Seasonal and Quarterly
Fluctuations."
COMPETITION. The retail industry is highly competitive. The Company's
competitors include mass merchandisers (such as Wal-Mart), discount stores (such
as Dollar General), variety stores (such as Woolworth), closeout stores (such as
Odd Lot and Big Lot) and other $1.00 price point stores. Certain of the
Company's competitors are units of national or regional chains that may
have substantially greater financial resources than the Company. Several of the
largest operators of discount stores at the $1.00 price point (or their parent
companies) have recently filed for or emerged from bankruptcy protection in U.S.
bankruptcy court and have closed a number of their stores, while others have
abandoned the $1.00 price point concept and/or reconfigured their stores. The
Company may face competition in the future which could have an adverse
effect on its financial results. Management believes that the Company remains
competitive by offering a wide variety of quality, value-priced merchandise in
attractive and convenient locations.
EMPLOYEES. As of December 31, 1996, Dollar Tree had approximately 11,000
employees. The Company employs approximately 7,600 employees based on a rolling
twelve month average; approximately 1,900 of these are full-time and 5,700
part-time. The number of part-time employees fluctuates depending on seasonal
needs. None of the Company's employees are currently represented by a labor
union. On March 20, 1996, the employees of the Company's Norfolk distribution
center voted against union representation in an election supervised by the
National Labor Relations Board. There can be no assurance that any of the
Company's employees will not in the future elect to be represented by a union.
The Company considers its relationship with employees to be good and has not
experienced significant interruptions of operations due to labor disagreements.
10
ITEM 2. PROPERTIES
As of December 31, 1996, Dollar Tree operated 737 stores in 26 states, 535
of which were located in strip centers and 202 of which were located in malls. A
summary of Dollar Tree's historical unit growth by state over the past three
years is presented below, as well as the number of Dollar Bills stores acquired
by state, all of which remain open at year-end (number represents stores open as
of the date indicated):
December 31, Dollar Bills Stores
1994 1995 1996 January 31, 1996
---- ---- ---- -------------------
SOUTHEAST:
Florida........................ 62 66 85 5
North Carolina................. 39 48 52 0
Georgia........................ 29 40 50 4
Tennessee...................... 23 31 37 1
Alabama........................ 23 26 33 3
South Carolina................. 18 23 27 0
Mississippi.................... 9 12 15 0
MIDWEST:
Michigan....................... 26 25 49 22
Illinois....................... 0 1 47 42
Ohio........................... 34 35 46 5
Indiana........................ 8 10 27 14
Kentucky....................... 11 14 15 1
Missouri....................... 0 3 13 6
Wisconsin...................... 0 0 7 7
Minnesota...................... 0 0 3 3
Iowa........................... 0 0 1 1
MID-ATLANTIC:
Virginia....................... 54 60 72 2
Pennsylvania................... 30 35 45 3
Maryland....................... 17 20 39 17
West Virginia.................. 7 8 9 0
Delaware....................... 2 2 2 0
SOUTHCENTRAL:
Texas.......................... 0 9 16 0
Louisiana...................... 5 9 12 0
Arkansas....................... 5 6 9 0
NORTHEAST:
New York....................... 5 10 16 0
New Jersey..................... 2 7 10 0
---- ---- ---- ----
Total............................ 409 500 737 136
==== ==== ==== ====
Of the 737 Dollar Tree and Dollar Bills stores open at December 31, 1996,
the majority are located in the Southeastern and Midwestern regions of the
United States. The acquisition of Dollar Bills increased the Company's presence
primarily in Illinois, Indiana, Maryland, and Michigan. Additionally, the
Company operates three distribution centers, one each in Norfolk, Virginia, in
the Memphis, Tennessee, area, and in the Chicago, Illinois, area.
The Company currently leases all of its existing store locations and
expects that its policy of leasing rather than owning stores will continue as
11
it expands. The Company's store leases typically provide for a short initial
lease term with options on the part of the Company to extend. Management
believes that this lease strategy enhances the Company's flexibility to pursue
various expansion and relocation opportunities resulting from changing market
conditions. The Company's ability to open new stores is contingent upon locating
satisfactory sites, negotiating favorable leases, obtaining necessary financing
and recruiting and training additional qualified management personnel.
As current leases expire, the Company believes that it 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, the
Company has not experienced difficulty in either renewing leases for existing
locations or securing leases for suitable locations for new stores. A
substantial majority of the Company's store leases contain certain provisions
related to changes in control of the Company. These provisions may be applicable
in a small number of leases as a result of the public offerings of the Company's
common stock. Based primarily on the Company's belief that it maintains good
relations with its landlords, that most of its leases are at market rents, and
that it has historically been able to secure leases for suitable locations,
management believes that these provisions will not have a material adverse
effect on the business or financial position of the Company.
The Norfolk distribution center consists of 186,000 square feet, while the
Memphis distribution center, opened in 1994, encompasses 244,000 square feet.
Including the 250,000 square foot Illinois facility, the Company's distribution
centers have the capacity to service an estimated 1,000 stores. The Company
plans to replace its Norfolk facility with an expanded Store Support Center
located in Chesapeake, Virginia. This facility will be owned by the Company,
rather than leased. See also "Business--Current Developments" for additional
references.
The Company currently leases its Norfolk distribution center complex. The
Norfolk facility is currently listed with a commercial real estate agent for
sub-lease. The lease expires in June 2004, and the Company will be responsible
for rent payments through this date if it is unable to find a suitable sub-
lessee. The distribution center in Memphis is also leased; this lease expires in
September, 2004, with four additional five year terms available. Additionally,
the Company assumed the lease on the Dollar Bills distribution center, located
outside of Chicago; this lease expires in June, 2005, with certain options to
renew.
ITEM 3. LEGAL PROCEEDINGS
On January 31, 1996, the Company bought all of the capital stock of Dollar
Bills, pursuant to a stock purchase agreement. In March and April, 1996, Michael
and Pamela Alper (the "Alpers"), former shareholders of Dollar Bills, together
with a corporation they control, filed lawsuits, in the state and federal courts
in Illinois, against the Company and one of its employees relating to the Dollar
Bills transaction. The lawsuits sought to recover
12
compensatory damages of not less than $10 million (which could be tripled under
the federal antitrust law claim described below), punitive damages, attorney's
fees, costs and injunctive and other relief.
In the lawsuits, the plaintiffs claimed that the Company defrauded the
Alpers into selling the wholesale operations which were owned by Dollar Bills;
improperly obtained and misused confidential and proprietary information;
breached the provisions of a confidentiality agreement and stock purchase
agreement relating to the acquisition; intentionally or negligently mis-
represented its intentions with respect to the wholesale operations; conspired
to violate antitrust law by excluding the plaintiffs as competitors in the
wholesale business; and violated Section 10(b) of the Securities Exchange
Act of 1934 and Rule 10b-5 promulgated thereunder. The Company emphatically
denied the plaintiff's claims and vigorously defended itself in this matter.
The Company filed motions to dismiss the litigation in both the Circuit
Court of Cook County, Illinois (the "State Court") and in the U.S. District
Court for the Northern District of Illinois ("Federal Court"). On June 28, 1996,
the State Court denied the Company's motion to dismiss. Plaintiffs subsequently
dismissed their suit in State Court voluntarily. The Company then appealed the
State Court's denial of its motion to dismiss, and the appeal is currently
pending.
On November 26, 1996, the Federal Court dismissed all counts of the
plaintiff's lawsuit against the Company and the co-defendant, and plaintiffs did
not appeal. Plaintiffs are now precluded from refiling their federal securities
and federal antitrust claims against the Company in the future. The Federal
Court ruling does not, however, specifically preclude plaintiffs from refiling
their state law claims in State Court in the future.
Based on management's understanding of the facts (which facts are contested
by the plaintiffs), the current procedural posture of the dispute and the advice
of its lead litigation counsel for this matter in reliance on such facts, the
Company believes it is unlikely that the plaintiffs will ultimately prevail on
the merits of this dispute. Accordingly, the Company believes that the ultimate
outcome of this matter will not have a material adverse effect on the Company's
results of operations or financial condition. Nevertheless, particularly in
light of the contested factual assertions, there can be no assurances regarding
the ultimate outcome of any future litigation or that any such litigation will
not have a material adverse effect on the Company's results of operations or
financial condition.
Additionally, the Company is a party to ordinary routine litigation and
proceedings incidental to its business, including certain matters which may
occasionally be asserted by the Consumer Product Safety Commission, none of
which is individually or in the aggregate material to the Company.
13
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 the Company's 1996 calendar year.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
The Company's common stock is traded on the NASDAQ National Market (NASDAQ)
under the symbol DLTR. Trading of the Company's stock commenced on March 7,
1995. The following table sets forth, for the periods indicated, the high and
low sales prices of shares of the Common Stock as reported by NASDAQ, restated
to reflect a 3-for-2 stock split completed in April, 1996.
High Low
---- ---
Calendar 1995:
First Quarter (March 7 to March 31).......................$ 14 10 43/64
Second Quarter (April 1 to June 30)....................... 17 59/64 13 1/2
Third Quarter (July 1 to September 30).................... 24 11/64 17 27/64
Fourth Quarter (October 1 to December 31)................. 22 53/64 14 43/64
Calendar 1996:
First Quarter (January 1 to March 31).....................$ 30 53/64 16 21/64
Second Quarter............................................ 45 29
Third Quarter............................................. 42 23
Fourth Quarter............................................ 43 30 1/4
On March 14, 1997, the last reported sale price for the Company's Common
Stock as quoted by NASDAQ was $36 3/8 per share. As of March 14, 1997, the
Company had approximately 4,200 beneficial shareholders.
The Company anticipates that all of its income in the foreseeable future
will be retained for the development and expansion of its business and the
repayment of indebtedness, and therefore does not anticipate paying dividends on
its Common Stock in the foreseeable future. The Company's credit agreement
contains financial covenants which may have the effect of restricting the
Company's ability to pay dividends.
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth for the periods indicated selected financial
data for the Company. The selected income statement and balance sheet items
which follow have been derived from the Company's consolidated financial
statements that have been audited by KPMG Peat Marwick LLP, independent
accountants. This information should be read in conjunction with the
Consolidated Financial Statements and related notes, "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and the other
financial information included elsewhere in this Form 10-K.
14
ITEM 6. SELECTED FINANCIAL DATA, CONTINUED
Calendar Year Ended
December 31,
---------------------------------------------------
1992 1993 1994 1995 1996
---- ---- ---- ---- ----
(Dollars in thousands, except per share data
and sales per square foot data)
INCOME STATEMENT DATA:
Net sales......................................................... $120,542 $167,753 $231,601 $300,229 $493,037
Cost of sales..................................................... 76,434 106,318 145,481 187,552 310,900
-------- -------- -------- -------- --------
Gross profit.................................................... 44,108 61,435 86,120 112,677 182,137
-------- -------- -------- -------- --------
Selling, general and administrative expenses:
Operating expenses.............................................. 29,546 39,559 54,993 70,504 111,401
Depreciation and amortization................................... 2,075 3,054 4,186 5,468 10,527
Recapitalization expenses(1).................................... --- 4,387 --- --- ---
-------- -------- -------- -------- --------
Total......................................................... 31,621 47,000 59,179 75,972 121,928
-------- -------- -------- -------- --------
Operating income.................................................. 12,487 14,435 26,941 36,705 60,209
Interest expense.................................................. 1,138 1,837 4,028 2,617 5,193
-------- -------- -------- -------- --------
Income before income taxes and extraordinary loss................. 11,349 12,598 22,913 34,088 55,016
Provision for income taxes........................................ 503 3,152 9,546 13,125 21,181
-------- -------- -------- -------- --------
Income before extraordinary loss.................................. 10,846 9,446 13,367 20,963 33,835
Extraordinary loss, net of income tax(2).......................... --- --- 1,253 --- ---
-------- -------- -------- -------- --------
Net income........................................................ $ 10,846 $ 9,446 $ 12,114 $ 20,963 $ 33,835
======== ======== ======== ======== ========
Income Per Share Data(3):
Income before extraordinary loss per share........................ $ 0.49 $ 0.76 $ 1.19
Extraordinary loss per share...................................... 0.05 --- ---
--------- -------- --------
Net income per share.............................................. $ 0.44 $ 0.76 $ 1.19
========= ======== ========
Pro Forma Data:
Net income........................................................ $ 10,846 $ 9,446
Pro forma adjustment for C corporation income taxes(4)............ 3,992 1,838
-------- --------
Pro forma net income.............................................. $ 6,854 $ 7,608
======== ========
Pro forma net income per share(5)................................. $ 0.25 $ 0.28
======== ========
Weighted average number of common shares and common share
equivalents outstanding, in thousands(3 and 5).................. 27,262 27,262 27,262 27,589 28,327
======== ======== ======== ======== ========
SELECTED OPERATING DATA:
Number of stores open at end of period(6):
Mall............................................................ 145 145 154 173 202
Strip center.................................................... 111 183 255 327 535
-------- -------- -------- -------- --------
Total......................................................... 256 328 409 500 737
======== ======== ======== ======== ========
Net sales growth.................................................. 72.7% 39.2% 38.1% 29.6% 64.2%
Comparable store net sales increase(7)............................ 24.1% 6.9% 9.1% 7.3% 6.2%
Average net sales per store(8).................................... $ 520 $ 555 $ 606 $ 649 $ 691
Average net sales per square foot(8):
Mall............................................................ $ 214 $ 224 $ 241 $ 246 $ 249
Strip Center.................................................... $ 201 $ 188 $ 197 $ 209 $ 220
All Stores...................................................... $ 210 $ 206 $ 214 $ 221 $ 229
December 31,
---------------------------------------------------
1992 1993 1994 1995 1996
---- ---- ---- ---- ----
BALANCE SHEET DATA:
Working capital................................................... $ 10,457 $ 7,742 $ 14,334 $ 29,133 $ 23,488
Total assets...................................................... 32,077 42,188 60,688 91,621 171,099
Total debt........................................................ 3,316 17,768 14,205 14,518 4,353
Shareholders' equity.............................................. 17,499 3,660 17,274 39,087 101,590
15
(1) Represents recapitalization expenses of $4.4 million incurred in connection
with a recapitalization undertaken in 1993, comprised of $3.6 million of
management incentive expenses and $0.8 million of transaction expenses.
(2) Represents redemption premiums of approximately $1.3 million plus write off
of original issue discount and deferred financing costs of $0.9 million (net of
income tax benefit of approximately $0.9 million) on the early retirement of the
Company's 12% Subordinated Notes. See Note 5 of Notes to Consolidated Financial
Statements.
(3) Income per share data have been computed by dividing its components by the
weighted average number of common shares and common share equivalents
outstanding. All warrants and options outstanding at December 31, 1994 have been
considered outstanding for the entire year ended December 31, 1994 and are
included in the calculation of the weighted average number of common shares and
common share equivalents outstanding for net income per share computations in
accordance with the rules of the Securities and Exchange Commission. For the
year ended December 31, 1995 and 1996, common share equivalents include the
weighted average number of shares subject to stock options and warrants
outstanding at December 31 of the respective period, after applying the treasury
stock method. All share and per share data have been retroactively adjusted to
reflect a stock dividend, having the effect of a three-for-two stock split,
which was completed in April, 1996.
(4) Prior to September 30, 1993, the Company was treated as a subchapter S
corporation for Federal and certain state income tax purposes. As such, income
of the Company for that period was taxable to the individual shareholders rather
than to the Company. Accordingly, the provision for income taxes for the year
ended December 31, 1992 and the nine months ended September 29, 1993, represents
corporate level state income taxes on income earned in those states that do not
recognize subchapter S corporation status. On September 30, 1993, the Company
converted to a subchapter C corporation. Accordingly, income since September 30,
1993 was taxable to the Company. Pro forma net income reflects a provision for
income taxes as if the Company were a subchapter C corporation for all years
presented at an assumed effective tax rate of approximately 40%.
(5) Pro forma net income per share has been computed by dividing pro forma net
income by the weighted average number of common shares and common share
equivalents outstanding. Common share equivalents include all outstanding stock
options and warrants after applying the treasury stock method. All currently
outstanding warrants and options have been considered outstanding for the years
ended December 31, 1992 and 1993, and are included in the calculation of the
weighted average number of common shares and common share equivalents
outstanding for pro forma income per share computations in accordance with the
rules of the Securities and Exchange Commission.
(6) Includes 136 Dollar Bills stores, none which were closed in 1996 and which
contributed $104.7 million in net sales for the eleven month period ended
December 31, 1996. The Company closed three Dollar Tree stores in 1992, two
stores in 1993, one store in 1994, three stores in 1995, and three stores in
1996.
(7) Comparable store net sales increase compares net sales for stores open at
the beginning of the first of the two periods compared. Dollar Bills stores are
not included in the comparable store base.
(8) Average net sales per store are for stores open the entire period presented.
Average net sales per square foot are for stores open the entire period
presented, not including stores expanded in 1996. In 1996, 28 stores were
expanded due to remodeling and/or relocation, increasing total square footage by
approximately 29,900 square feet. Dollar Bills stores were included in the
Company's 1996 financial statements for eleven months of the period and are
therefore not included in these calculations.
16
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The acquisition of Dollar Bills has been accounted for by the purchase
method. Results of operations for 1996 discussed below include amounts relating
to Dollar Bills operations beginning February 1, 1996. For pro forma financial
statements related to the acquisition, see Note 3 of Notes to Consolidated
Financial Statements.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain selected
income statement data as a percentage of net sales:
Year Ended December 31,
1994 1995 1996
---- ---- ----
Net Sales .................................................. 100.0% 100.0% 100.0%
Cost of sales............................................... 62.8 62.5 63.1
----- ----- -----
Gross Profit....................................... 37.2 37.5 36.9
Selling, general and administrative expenses:
Operating expenses................................. 23.8 23.5 22.6
Depreciation and amortization...................... 1.8 1.8 2.1
----- ----- -----
Total.............................................. 25.6 25.3 24.7
----- ----- -----
Operating income............................................ 11.6 12.2 12.2
Interest expense............................................ 1.7 0.9 1.1
----- ----- -----
Income before income taxes and
extraordinary loss................................. 9.9 11.3 11.1
Provision for income taxes.................................. 4.1 4.4 4.3
----- ----- -----
Income before extraordinary loss............................ 5.8 6.9 6.8
Extraordinary loss, net of income tax....................... 0.6 --- ---
----- ----- -----
Net income.................................................. 5.2% 6.9% 6.8%
===== ===== =====
1995 COMPARED TO 1996
Net sales increased 64.2%, to $493.0 million for 1996, from $300.2 million
for 1995. Of this increase, (i) approximately 54.3%, or $104.7 million, was
attributable to the 136 Dollar Bills stores added as of February 1, 1996, (ii)
approximately 37.2%, or $71.8 million, to 198 stores opened in 1995 and 1996,
which are not included in the Company's comparable store net sales calculation,
and (iii) approximately 8.4%, or $16.3 million, was attributable to comparable
store net sales growth, which represented a 6.2% increase over comparable store
net sales for the prior period. Because substantially all the Company's products
sell for $1.00, the increase in comparable store net sales was a direct result
of increased unit volume. Management believes that this increase in volume
resulted from strong holiday selling seasons in 1996, increased inventory levels
compared to the preceding year, and continued improvements in the quality and
variety of merchandise offered. The Company opened 104 new stores and closed
three stores during 1996 compared to opening 94 new stores and closing three
stores during 1995.
Management anticipates that the primary sources of future sales growth will
be new store openings and, to a lesser degree, sales increases from expanded and
relocated stores and comparable store net sales increases. The Company has
experienced significant increases in comparable store net sales historically,
and management expects that any increases in comparable store net sales in the
future will be smaller than those experienced historically. See "Management's
Discussion and Analysis--Seasonality and Quarterly Fluctuations."
17
Gross profit, which consists of net sales less cost of sales (including
distribution and certain occupancy costs), increased $69.5 million, or 61.6%. As
a percentage of net sales, gross profit decreased to 36.9% from 37.5%,
reflecting, as a percentage of net sales, decreased merchandise margin (gross
profit before inventory shrinkage, markdowns, and distribution and occupancy
costs) and a slight increase in inventory shrinkage, partially offset by lower
inbound freight costs and lower store occupancy costs. The decrease in
merchandise margin as a percentage of net sales is a result of increased sales
of domestically purchased products which generally carry a lower gross margin
than imported merchandise. The increase in inventory shrinkage is due largely to
higher shrinkage experienced at the Dollar Bills stores. The decrease in inbound
freight arose primarily from more favorable terms negotiated with shippers and
consolidators. The decrease in store occupancy costs as a percentage of net
sales is a result of the comparable store net sales growth.
As a result of the Dollar Bills acquisition, in 1996, there was a shift in
overall merchandise mix toward higher levels of domestic, consumable merchandise
(for instance, food and health and beauty aids), which generally carry a higher
merchandise cost. Management believes that changes in the overall merchandise
mix arising from the acquisition are substantially complete and that the Company
will continue to carry somewhat higher levels of domestic, consumable
merchandise than in prior years. However, the Company expects imports to
continue to account for approximately 35% to 40% of total purchases at cost.
Selling, general and administrative expenses, which include operating
expenses and depreciation and amortization, increased $46.0 million, or 60.5%,
but decreased as a percentage of net sales to 24.7% from 25.3% during the same
period. The decrease is due primarily to strengthened cost controls relating to
hourly payroll at the store level. Management does not expect similar payroll
cost savings in the future due to the increase in minimum wage instituted in
October, 1996. During 1996, the Company's operating expenses incurred in
connection with the Dollar Bills acquisition and litigation amounted to
approximately $2.5 million.
Depreciation and amortization expense increased $5.0 million, increasing as
a percentage of net sales to 2.1% from 1.8% for 1995. Of this increase, $1.8
million related to the amortization of goodwill recognized in connection with
the acquisition of Dollar Bills.
Operating income increased $23.5 million, or 64.0%, to $60.2 million for
1996 from $36.7 million for 1995, remaining constant as a percentage of net
sales at 12.2%.
Interest expense increased $2.6 million to $5.2 million in 1996 compared to
$2.6 million in 1995. This increase is a result of increased borrowing incurred
in connection with Dollar Bills acquisition. The development facility used for
the acquisition was repaid prior to year end. In addition, the Company redeemed
and extinguished its 9% Subordinated Notes in June 1996.
18
1994 COMPARED TO 1995
Net sales increased 29.6%, to $300.2 million for 1995, from $231.6 million
for 1994. Of this increase, (i) approximately 79.0%, or $54.2 million, was
attributable to a net increase of 176 stores opened in 1994 and 1995, which are
not included in the Company's comparable store net sales calculation, and (ii)
approximately 21.0%, or $14.4 million, was attributable to comparable store net
sales growth, which represented a 7.3% increase over comparable store net sales
for the prior period. Because substantially all the Company's products sell for
$1.00, the increase in comparable store net sales was a direct result of
increased unit volume. This increase in volume resulted from strong holiday
selling seasons, increased inventory levels early in the year compared to the
preceding year, and new promotional efforts which grouped like items into theme
displays for more convenient shopping. The Company opened 94 new stores and
closed three stores during 1995 compared to opening 82 new stores and closing
one store during 1994.
Gross profit, which consists of net sales less cost of sales (including
distribution and certain occupancy costs), increased $26.5 million, or 30.8%. As
a percentage of net sales, gross profit increased to 37.5% from 37.2%,
reflecting, as a percentage of net sales, lower inbound freight costs, lower
store occupancy costs and distribution costs, and a slight decrease in
markdowns, partially offset by lower merchandise margins (gross profit before
inventory shrinkage, markdowns, and distribution and occupancy costs). The
decrease in store occupancy costs and distribution costs as a percentage of net
sales is a result of the comparable store net sales growth. The decrease in
merchandise margin as a percentage of net sales is a result of increased sales
of domestically purchased products which generally carry a lower gross margin
than imported merchandise. During the fourth quarter of 1995, the Company took
advantage of the opportunity to purchase domestic product under attractive
terms, while the receiving of some imported goods was delayed. This resulted in
a decrease in imports as a percentage of total purchases.
Selling, general and administrative expenses, which include operating
expenses and depreciation and amortization, increased $16.8 million, or 28.4%,
but decreased as a percentage of net sales to 25.3% from 25.6% during the same
period. The decrease is due primarily to the recognition in 1994 of $1.0 million
of costs associated with the grant of stock options and the comparable store net
sales growth. Excluding the stock option costs, selling, general and
administrative costs increased as a percentage of net sales to 25.3% from 25.1%
during the period. This increase is primarily due to a slight increase in store
payroll costs arising from efforts focused on strengthening store appearance and
merchandise presentation as well as increasing inventory levels, predominantly
in the third quarter of 1995. Depreciation and amortization expense increased
$1.3 million but remained constant as a percentage of net sales at 1.8% for 1995
and 1994.
Operating income increased $9.8 million, or 36.2%, to $36.7 million for
1995 from $26.9 million for 1994 and increased as a percentage of net sales to
12.2% from 11.6% during the same periods for the reasons noted above. Excluding
stock option costs incurred in 1994, operating income increased as a percentage
of net sales to 12.2% for 1995 from 12.1% for 1994.
Interest expense decreased $1.4 million to $2.6 million in 1995 compared to
1994. The Company was able to delay the use of its credit lines because of
19
increased cash flows and a higher cash balance at the beginning of the year. The
Company also redeemed and extinguished its 12% Notes and issued 9% Subordinated
Notes, and wrote off the related discount and deferred financing costs at the
end of 1994, resulting in no amortization expense in 1995.
SUBSEQUENT EVENTS
In January, 1997, the Company completed the purchase of approximately 50
acres of land in Chesapeake, Virginia, on which it will construct an expanded
headquarters and distribution center facility, to replace its current Norfolk
facility. The distribution center will contain advance materials handling
technologies, including a new automated conveyor and sortation system. Managment
believes that upon completion of this facility, the Company's capacity to serve
stores will increase to approximately 1,600 units, up from its current capacity
of approximately 1,000 units. This Store Support Center project is expected to
require an investment of approximately $29 million. The Company believes that
the facility will be operational in early 1998, when it is needed to support
continued growth. There can be no assurance, however, that no delays will be
experienced in opening the distribution center, or that there will be no
complications in the integration of the new automation system. Any such delays
or complications may result in significant interruption in the distribution of
merchandise and materially adversely affect the Company's business and results
of operations. See "Business--Subsequent Event," "Business--Warehousing and
Distribution," "Management's Discussion and Analysis--Forward Looking
Statements," and Note 11 of Notes to Consolidated Financial Statements.
On March 18, 1997, the Company granted to employees options to purchase
337,750 shares of the Company's Common Stock.
LIQUIDITY AND CAPITAL RESOURCES
The Company's capital requirements result primarily from capital
expenditures related to new store openings and working capital requirements
related to new and existing stores. The Company's working capital requirements
for existing stores are seasonal in nature and typically reach their peak near
the end of the third and beginning of the fourth quarter of the year.
Historically, the Company has met its seasonal working capital requirements for
existing stores and funded its store expansion program from internally generated
funds and borrowings under its credit facilities.
The Company ended 1996 with a high inventory position relative to prior
years. In part, this increased inventory is a result of the inventory needs
relating to the Dollar Bills stores and new stores opened in 1996. In addition,
the Company planned earlier receiving of shipments in anticipation of the early
Easter selling season and in preparation for new store openings early in the
first quarter.
During 1994, 1995 and 1996, net cash provided by operations was $17.5
million, $27.2 million and $39.2 million, respectively. During 1994, 1995, and
1996, net cash used in investing activities was $6.9 million, $11.6 million and
$68.7 million, respectively, consisting primarily of capital expenditures
relating to new store expansion and, in 1996, $52.2 million (net of cash
acquired) used for the purchase of Dollar Bills, Inc. Net cash used in (provided
by) financing activities was $5.5 million, ($0.8) million and ($10.1) in 1994,
1995 and 1996, respectively. In 1994, these funds were primarily used for
extinguishment of debt. In 1995, the funds provided were primarily a result of
the exercise of stock options granted under the employee stock compensation
plan. In 1996, the funds provided were primarily a result of the issuance of
750,000 shares of common stock in a public offering completed in June and the
exercise of stock options granted under the employee stock compensation plans,
reduced by the repayment of subordinated debt and notes payable to banks.
20
The Company expects to expand by approximately 145 to 150 stores during
1997. In 1996, the average investment per new store, including capital
expenditures, initial inventory and pre-opening costs, was approximately
$162,000 per store. Capital expenditures related to Dollar Bills stores during
1996 amounted to approximately $2.4 million and included the purchase and
installation of registers and back office personal computers, the purchase of
merchandise display units and modifications to checkout and back room areas in
the stores.
The Company's cash needs for opening new stores in 1997 are expected to
total approximately $25.0 million, $14.6 million of which is budgeted for
capital expenditures and $10.4 million of which is budgeted for initial
inventory and pre-opening costs. The Company's total planned capital
expenditures for 1997, including expenditures relating to the new headquarters
and distribution center facility, are approximately $54.0 million. This total
includes, among other things, planned expenditures for expanding and relocating
stores, purchasing additional equipment for the distribution centers and
computer system upgrades. In 1997, the Company expects to incur approximately
$29.0 million in expenditures relating to the new headquarters and distribution
center facility in Chesapeake, Virginia.
In September, 1996, the Company entered into a revolving credit agreement
which provides for, among other things, (i) a $135 million revolving line of
credit, bearing interest at the agent bank's prime rate or LIBOR, plus a spread,
at the option of the Company; (ii) an annual facilities fee and annual agent's
fee payable quarterly; and (iii) the reduction of amounts outstanding, declining
from $40 million to $10 million, under the facility for a period of 30
consecutive days between each December 1 and March 1, beginning in 1996 and
ending in 2000. The credit agreement requires the maintenance of certain
specified financial ratios, restricts the payment of dividends and levels of
capital expenditure, restricts the incurrence of debt and establishes certain
minimum beneficial ownership requirements of the founding shareholders. The
agreement matures on May 31, 2000, and is unsecured (pursuant to an amendment to
the agreement subsequent to year end). At December 31, 1996, the balance
outstanding under the agreement was $3.0 million. See Note 6 of Notes to
Consolidated Financial Statements.
In addition, subsequent to year end, the Company was in the process of
issuing approximately $30 million in senior unsecured debt. The proceeds from
the debt will be used to repay existing indebtedness and for general corporate
purposes, including the construction of the new headquarters and distribution
center facility in Chesapeake, Virginia. See Note 11 of Notes to Consolidated
Financial Statements.
The Company believes that it can adequately fund its planned capital
expenditures and working capital requirements for the next several years from
net cash provided by operations and availability under its credit facilities.
The use of a portion of the Company's debt capacity in the construction of its
new headquarters and distribution center facility is not expected to affect the
Company's ability to fund operations and expenditures. The Company expects to
capitalize a substantial portion of its construction interest and therefore does
not anticipate a significant increase in interest charges in 1997.
21
SEASONALITY AND QUARTERLY FLUCTUATIONS
The Company has historically experienced and expects to continue to
experience seasonal fluctuations in its net sales, operating income and net
income. The highest sales periods for the Company are the Christmas and Easter
seasons. A disproportionate amount of the Company's net sales and a substantial
majority of the Company's operating and net income are generally realized during
the fourth quarter. In anticipation of increased sales activity during these
months, the Company purchases substantial amounts of inventory and hires a
significant number of temporary employees to bolster its permanent store staff.
If for any reason the Company's net sales were below seasonal norms during the
fourth quarter, including as a result of merchandise delivery delays due to
receiving or distribution problems, the Company's annual operating results,
particularly operating and net income, could be adversely affected.
Historically, net sales, operating income and net income have been weakest
during the first quarter, and the Company expects this trend to continue. The
Company's quarterly results of operations may also fluctuate significantly as a
result of a variety of factors, including the timing of new store openings, the
net sales contributed by new stores and the merchandise mix.
Shifts in the timing of certain holidays may also have an effect on
quarterly results. The Company believes that the change in the timing of the
Easter holiday from April 16 in 1995 to April 7 in 1996 shifted a substantial
amount of Easter sales from the second quarter in 1995 to the first quarter in
1996. The Company anticipates that the change in the timing of the Easter
holiday from April 7 in 1996 to March 30 in 1997 will further shift Easter sales
from second quarter in 1996 to first quarter in 1997, potentially lowering
comparable store net sales results in the second quarter of 1997.
The following table sets forth certain unaudited results of operations for
each quarter of 1995 and 1996. The unaudited information has been prepared on
the same basis as the audited consolidated financial statements appearing
elsewhere in this Form 10-K and includes all adjustments, consisting only of
normal recurring adjustments, which management considers necessary for a fair
presentation of the financial data shown. The operating results for any quarter
are not necessarily indicative of results for any future period. The Company has
experienced significant comparable store net sales increases historically, and
management expects that any increases in comparable net sales in the future will
be smaller than those experienced historically.
Quarter Ended
---------------------------------------------------------------------------------------
Mar 31 June 30 Sept 30 Dec 31 Mar 31 June 30 Sept 30 Dec 31
1995 1995 1995 1995 1996 1996 1996 1996
---------------------------------------------------------------------------------------
(Dollars in thousands)
Net sales..................$ 48,733 $62,885 $67,427 $121,185 $84,975 $102,689 $110,588 $194,785
Gross profit............... 16,458 22,340 26,068 47,811 29,070 35,659 41,890 75,517
Operating income........... 865 4,879 6,656 24,305 2,570 7,586 11,134 38,919
Stores open at end
of period............. 424 452 478 500 660 686 712 737
Comparable store net
sales increases....... 6.8% 16.8% 2.8% 3.8% 11.7% 1.45% 4.3% 7.6%
22
INFLATION AND OTHER ECONOMIC FACTORS
The Company's ability to provide quality merchandise at the $1.00 price
point is subject to certain economic factors which are beyond the Company's
control, including inflation, factors impacting operating costs (such as changes
in employee health care or minimum wage levels), consumer confidence and general
economic conditions. There can be no assurances that such factors will remain
favorable and in particular that health care costs or the minimum wage will
remain at current levels. Significant and unexpected increases in inflation, an
increase in health care costs or other operating costs or a decline in consumer
confidence or general economic conditions could have a material adverse effect
on the Company's business and results of operations, especially given the
constraints on the Company's ability to pass on any increases in incremental
costs through price increases.
FORWARD LOOKING STATEMENTS
The Company has made in this report, and from time to time may otherwise
make, forward-looking statements concerning the Company's operations, economic
performance and financial condition. This report may include, in particular,
forward-looking statements regarding the Company's recent acquisition of Dollar
Bills, the integration of Dollar Bills into the Company's existing operations
and the Company's expectations of future performance of Dollar Bills on an
operating basis. In addition, the information contained herein includes certain
forward- looking statements regarding store openings, the new Store Support
Center opening, purchasing abilities, and capital requirements. Such forward
looking statements are subject to various risks and uncertainties. Actual
results could differ materially from those currently anticipated due to a number
of factors. Some of those factors include (i) the Company's ability to open new
stores on a timely basis and operate them profitably, (ii) the Company's ability
to open the new Store Support Center complex on time and on budget, to sublease
its existing Norfolk facility, and to successfully implement planned advanced
technologies in the new distribution center, (iii) the risks attendant to the
importing of merchandise, particularly from China, including the potentially
higher costs and lower quality of merchandise should the Company be forced to
buy large quantities of domestic goods, (iv) the orderly operation of the
Company's receiving and distribution process, (v) the successful integration of
Dollar Bills into the Company's existing operations, (vi) inflation, consumer
confidence and other general economic factors, (vii) the availability of
adequate inventory, capital resources and external financing, (viii) the risk of
a disruption in sales volume in the fourth quarter and other seasonal factors as
discussed in "Management's Discussion and Analysis and Results of
Operations--Seasonality and Quarterly Fluctuations," and (ix) dependence on key
personnel and control of the Company by existing shareholders. In addition, the
market price of the Company's Common Stock, which is quoted on the NASDAQ
National Market, may be subject to significant fluctuations in response to
operating results, comparable store sales announcements, announcements by
competitors, or in response to market fluctuations unrelated or disproportionate
to the operating performance of the Company.
23
ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Consolidated Financial Statements
PAGE
Independent Auditors' Report............................................... 25
Consolidated Balance Sheets as of December 31, 1995 and 1996............... 26
Consolidated Income Statements for the years ended
December 31, 1994, 1995 and 1996.................................. 27
Consolidated Statements of Shareholders' Equity
for the years ended December 31, 1994, 1995 and 1996.............. 28
Consolidated Statements of Cash Flows for the years ended
December 31, 1994, 1995 and 1996.................................. 29
Notes to Consolidated Financial Statements................................. 30
24
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, 1995 and 1996,
and the related consolidated income statements and statements of shareholders'
equity and cash flows for each of the years in the three-year period ended
December 31, 1996. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Dollar Tree
Stores, Inc. and subsidiaries as of December 31, 1995 and 1996, and the results
of their operations and their cash flows for each of the years in the three-year
period ended December 31, 1996, in conformity with generally accepted accounting
principles.
/s/ KPMG Peat Marwick LLP
Norfolk, Virginia
January 21, 1997
25
DOLLAR TREE STORES, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1995 AND 1996
1995 1996
---- ----
(IN THOUSANDS,
ASSETS EXCEPT SHARE DATA)
Current assets:
Cash and cash equivalents...................................................... $ 22,415 $ 2,987
Accounts receivable............................................................ 380 1,855
Merchandise inventories........................................................ 40,113 75,081
Deferred tax asset (Note 2).................................................... 720 2,002
Prepaid expenses and other current assets...................................... 2,392 4,028
------- -------
Total current assets.................................................. 66,020 85,953
------- -------
Property and equipment (Note 4):
Leasehold improvements......................................................... 16,591 23,376
Furniture and fixtures......................................................... 21,645 33,867
Transportation vehicles........................................................ 605 1,420
Construction in progress....................................................... 333 1,596
------- -------
Total property and equipment.......................................... 39,174 60,259
Less accumulated depreciation and amortization................................. 16,083 24,224
------- -------
Net property and equipment............................................ 23,091 36,035
------- -------
Deferred tax asset (Note 2)........................................................... 2,219 1,947
Goodwill, net of accumulated amortization (Note 3).................................... -- 46,405
Other assets ...................................................................... 291 759
------- -------
TOTAL ASSETS.......................................................... $ 91,621 $171,099
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable............................................................... $ 19,603 $ 35,296
Accrued liabilities (Note 5)................................................... 8,939 14,260
Income taxes payable (Note 2).................................................. 8,244 12,607
Current installments of obligations under capital leases (Note 4).............. 101 302
------- -------
Total current liabilities............................................. 36,887 62,465
Senior subordinated notes (Notes 6 and 8)............................................. 7,000 --
Junior subordinated notes (Notes 6 and 8)............................................. 7,000 --
Revolving credit facility (Note 6).................................................... -- 3,000
Obligations under capital leases, excluding current installments (Note 4) 417 1,051
Other liabilities..................................................................... 1,230 2,993
------- -------
Total liabilities..................................................... 52,534 69,509
------- -------
Commitments, contingencies and subsequent events (Notes 4, 7, 10 and 11)
Shareholders' equity (Notes 7, 8 and 10):
Common stock, par value $0.01. Authorized 100,000,000 shares,
24,910,629 shares and 25,898,172 shares issued and outstanding
at December 31, 1995 and 1996, respectively.................................. 166 259
Additional paid-in capital..................................................... 2,980 31,555
Retained earnings.............................................................. 35,941 69,776
------- -------
Total shareholders' equity............................................ 39,087 101,590
------- -------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY............................ $ 91,621 $ 171,099
======= =======
See accompanying Notes to Consolidated Financial Statements.
26
DOLLAR TREE STORES, INC.
AND SUBSIDIARIES
CONSOLIDATED INCOME STATEMENTS
YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
1994 1995 1996
---- ---- ----
(IN THOUSANDS, EXCEPT SHARE
AND PER SHARE DATA)
Net sales.................................................................. $ 231,601 $ 300,229 $ 493,037
Cost of sales.............................................................. 145,481 187,552 310,900
------- ------- -------
Gross profit...................................................... 86,120 112,677 182,137
------ ------- -------
Selling, general and administrative expenses (Notes 3,4,7,9 and 10):
Operating expenses................................................ 54,993 70,504 111,401
Depreciation and amortization..................................... 4,186 5,468 10,527
------- ------- -------
Total selling, general and administrative expenses.............. 59,179 75,972 121,928
------- ------- -------
Operating income........................................................... 26,941 36,705 60,209
Interest expense (Note 6).................................................. 4,028 2,617 5,193
------- ------- -------
Income before income taxes and extraordinary loss.......................... 22,913 34,088 55,016
Provision for income taxes (Note 2)........................................ 9,546 13,125 21,181
------- ------- -------
Income before extraordinary loss........................................... 13,367 20,963 33,835
Extraordinary loss--Loss on early retirement of debt, net of
applicable income tax benefit of $896 (Notes 2 and 6)................... 1,253 - -
------- ------- -------
Net income........................................................ $ 12,114 $ 20,963 $ 33,835
======= ======= =======
Net income per share:
Income before extraordinary loss........................................... $ 0.49
Extraordinary loss......................................................... (0.05)
-------
Net income per share.............................................. $ 0.44 $ 0.76 $ 1.19
======= ======= =======
Weighted average number of common shares and common share equivalents
outstanding:
Primary.................................................................. 27,262,000 27,589,000 28,327,000
========== ========== ==========
Fully diluted............................................................ 27,262,000 27,598,000 28,394,000
========== ========== ==========
See accompanying Notes to Consolidated Financial Statements.
27
DOLLAR TREE STORES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
SERIES A SERIES A
COMMON CLASS I CLASS II
STOCK STOCK STOCK
SHARES SHARES SHARES
------ ------ ------
Balance at December 31, 1993................ - 12,410,927 12,410,927
Net income for the year ended
December 31, 1994......................... - - -
Issuance of warrants (Note 8)............... - - -
Issuance of stock options (Note 10)......... - - -
---------- ---------- ----------
Balance at December 31, 1994................. - 12,410,927 12,410,927
Net income for the year ended
December 31, 1995.......................... - - -
Conversion of Series A Class I and II,
no par stock, into common stock,
$0.01 par value............................. 24,821,854 (12,410,927) (12,410,927)
Exercise of stock options.................... 88,775 - -
---------- ---------- ----------
Balance at December 31, 1995................. 24,910,629 - -
Transfer from additional paid-in capital
for three-for-two stock split (Note 8).... - - -
Net income for the year ended
December 31, 1996......................... - - -
Issuance of stock from Employee Stock
Purchase Plan (Note 10)................... 9,168 - -
Issuance of stock from public offering (Note 8) 750,000 - -
Exercise of stock options.................... 228,375 - -
---------- ---------- ----------
Balance at December 31, 1996................. 25,898,172 - -
========== ========== ==========
DOLLAR TREE STORES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
ADDITIONAL
COMMON PAID-IN RETAINED SHAREHOLDERS'
STOCK CAPITAL EARNINGS EQUITY
----- ------- -------- ------
(In Thousands)
Balance at December 31, 1993................ $ - $ 796 $ 2,864 $ 3,660
Net income for the year ended
December 31, 1994......................... - - 12,114 12,114
Issuance of warrants (Note 8)............... - 500 - 500
Issuance of stock options (Note 10)......... - 1,000 - 1,000
---------- ---------- -------- ---------
Balance at December 31, 1994................. - 2,296 14,978 17,274
Net income for the year ended
December 31, 1995.......................... - - 20,963 20,963
Conversion of Series A Class I and II,
no par stock, into common stock,
$0.01 par value............................. 165 (165) - -
Exercise of stock options, net of income
tax benefit of $592 (Note 10)............... 1 849 - 850
---------- ---------- -------- ---------
Balance at December 31, 1995................. 166 2,980 35,941 39,087
Transfer from additional paid-in capital
for three-for-two stock split (Note 8).... 83 (83) - -
Net income for the year ended
December 31, 1996......................... - - 33,835 33,835
Issuance of stock from Employee Stock
Purchase Plan (Note 10)................... - 180 - 180
Issuance of stock from public offering (Note 8) 8 25,325 - 25,333
Exercise of stock options, net of income
tax benefit of $2,266 (Note 10)........... 2 3,153 - 3,155
--------- --------- --------- ---------
Balance at December 31, 1996................. $ 259 $ 31,555 $ 69,776 $ 101,590
========= ======== ========= =========
See accompanying Notes to Consolidated Financial Statements.
28
DOLLAR TREE STORES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
1994 1995 1996
---- ---- ----
(In thousands)
Cash flows from operating activities:
Net income..................................................... $ 12,114 $ 20,963 $ 33,835
------- ------- -------
Adjustments to reconcile net income to net cash provided by operating
activities:
Extraordinary loss....................................... 1,253 - -
Depreciation and amortization............................ 4,186 5,467 10,527
Amortization of original issue discount.................. 506 - -
Loss on disposal of property and equipment............... 146 248 275
Provision for deferred income taxes...................... (2,008) 579 (1,010)
Increase in deferred compensation........................ 1,000 - -
Changes in assets and liabilities increasing
(decreasing) cash and cash equivalents:
Accounts receivable.................................. (233) 46 (1,026)
Merchandise inventories.............................. (8,239) (8,069) (18,673)
Prepaid expenses and other current assets............ (543) (810) (1,544)
Other assets......................................... (58) (47) 683
Accounts payable..................................... 2,212 6,441 9,879
Accrued liabilities.................................. 1,329 2,348 3,426
Income taxes payable................................. 5,708 1,558 2,833
Other liabilities.................................... 102 (1,531) 2
------- ------- -------
Total adjustments................................. 5,361 6,230 5,372
------- ------- -------
Net cash provided by operating activities......... 17,475 27,193 39,207
------- ------- -------
Cash flows from investing activities:
Capital expenditures........................................... (6,856) (11,614) (16,530)
Proceeds from sale of property and equipment................... 1 32 59
Purchase of Dollar Bills, Inc., net of
cash acquired of $414....................................... - - (52,216)
-------- -------- --------
Net cash used in investing activities............. (6,855) (11,582) (68,687)
-------- -------- --------
Cash flows from financing activities:
Proceeds from development facility............................. - - 52,630
Repayment of development facility.............................. - - (52,630)
Repayments of revolving credit facilities...................... (17,250) (9,550) (148,643)
Proceeds from revolving credit facilities...................... 6,150 9,550 151,643
Repayments of senior subordinated notes........................ - - (7,000)
Proceeds from junior subordinated notes........................ 6,500 - -
Repayments of junior subordinated notes........................ - - (7,000)
Redemption premiums paid....................................... (1,262) - -
Proceeds from sale of warrants................................. 500 - -
Principal payments on notes payable to bank.................... - - (6,900)
Payment of credit facility fees................................ - - (445)
Principal payments under capital lease obligations............. (107) (62) (271)
Proceeds from exercise of stock options........................ - 850 3,155
Proceeds from public offering.................................. - - 25,333
Proceeds from stock purchased under the
Employee Stock Purchase Plan................................ - - 180
------- ------- -------
Net cash provided by (used in) financing
activities...................................... (5,469) 788 10,052
------- ------- -------
Net increase (decrease) in cash and cash equivalents.............. 5,151 16,399 (19,428)
Cash and cash equivalents at beginning of year.................... 865 6,016 22,415
------- ------- -------
Cash and cash equivalents at end of year.......................... $ 6,016 $ 22,415 $ 2,987
======= ======= =======
Supplemental disclosure of cash flow information: Cash paid during the year for:
Interest.................................................... $ 3,316 $ 2,634 $ 4,042
======= ======= =======
Income taxes................................................ $ 5,846 $ 10,396 $ 15,656
======= ======= =======
See accompanying Notes to Consolidated Financial Statements.
29
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) owns and operates discount variety retail
stores which sell substantially all items for $1.00. The Company's headquarters
and one of its distribution centers are located in Norfolk, Virginia. The
Company also operates distribution centers in Memphis, Tennessee and Woodridge,
Illinois. Most of the Company's stores are located in the eastern half of the
United States. The Company's merchandise includes housewares, toys, seasonal
goods, gifts, food, stationery, health and beauty aids, books, party goods,
hardware and other consumer items. A substantial portion of the Company's
merchandise is purchased directly or indirectly from countries in the Far East,
principally China. The Company is not dependent on a few suppliers.
PRINCIPLES OF CONSOLIDATION
Effective January 1, 1995, DTS established two wholly owned subsidiaries,
Dollar Tree Management, Inc. (DTM) and Dollar Tree Distribution, Inc. (DTD), and
transferred assets to the new companies in exchange for stock. DTM provides
management, retail store leasing, accounting and administrative services to DTS
for a fee, and DTD provides merchandise procurement, purchasing, warehousing and
distribution services to DTS for a fee. Effective October 29, 1996, DTD
established a wholly owned subsidiary, Dollar Tree Properties, Inc. (DTP). DTP
is organized as a real estate holding company and will own certain undeveloped
property. The consolidated group is referred to throughout the notes as "the
Company". 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, 1995 includes approximately
$20,700 of overnight repurchase agreements and commercial notes which are valued
at cost, which approximates market. There were no such investments held at
December 31, 1996. 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 are stated at the lower of cost or market. Cost is
assigned to store inventories using the retail inventory method, determined on a
first-in, first-out (FIFO) basis. Costs directly associated with warehousing and
distribution are capitalized as merchandise inventories. Total warehousing and
distribution costs capitalized into inventories amounted to $2,592 and $4,660 at
December 31, 1995 and 1996, respectively.
30
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Furniture and fixtures are
depreciated using the straight-line method over four to seven years, the
estimated useful lives of the respective assets. Transportation vehicles are
depreciated using the straight-line method over four to six years, the estimated
useful lives of the respective assets. Leasehold improvements and assets held
under capital leases are amortized using the straight-line method over three to
ten years, the estimated useful lives of the respective assets or terms of the
related leases, whichever is less.
GOODWILL
Goodwill, which represents the excess purchase price over fair value of net
assets acquired, is amortized on a straight-line basis over 25 years. The
Company assesses the recoverability of this intangible asset by comparing the
carrying amount of the asset to expected future net cash flows of the acquired
organization. The assessment of the recoverability of goodwill will be impacted
if estimated future net cash flows are not achieved.
IMPAIRMENT OF LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE DISPOSED OF
The Company adopted the provisions of SFAS No. 121, ACCOUNTING FOR THE
IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF, on
January 1, 1996. Adoption of this Statement did not have an impact on the
Company's financial position or results of operations.
COST OF SALES
The Company includes the cost of merchandise, warehousing and distribution
costs, and certain occupancy costs in cost of sales.
STORE OPENING COSTS
The Company expenses store opening costs when the store opens.
INCOME TAXES
Income taxes are accounted for under the asset liability method. Deferred
tax assets and liabilities are recognized for the future tax consequences
attributable to differences between financial statement carrying amounts of
existing assets and liabilities and their respective tax bases. Deferred tax
assets and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are expected to
be recovered or settled. The effect on deferred tax assets and liabilities of a
change in the tax rates is recognized in income in the period that includes the
enactment date.
NET INCOME PER SHARE
Net income per share has been computed by dividing net income by the
weighted average number of common shares and common share equivalents
outstanding.
31
Common share equivalents include all outstanding stock options and warrants
after applying the treasury stock method. The market price used in applying the
treasury stock method was $10.00 per share for the periods prior to March 6,
1995 and the closing market price of the stock at the end of each week
thereafter. All warrants and options (collectively, "equity instruments")
outstanding through December 31, 1994 are included in the calculation of the
weighted average number of common shares and common share equivalents for net
income per share computations in accordance with the rules of the Securities and
Exchange Commission for the year ended December 31, 1994.
In connection with a stock dividend authorized by the Board of Directors,
the Company issued one-half share for each outstanding share of Common Stock,
payable April 19, 1996 to shareholders of record as of April 5, 1996. All share
and per share data in these consolidated financial statements and the
accompanying notes have been retroactively adjusted to reflect this dividend,
having the effect of a three-for-two stock split.
USE OF ESTIMATES
Management of the Company has made a number of estimates and assumptions
relating to the reporting of assets and liabilities and the disclosure of
contingent assets and liabilities to prepare these consolidated financial
statements in conformity with generally accepted accounting principles. Actual
results could differ from those estimates.
NOTE 2 - INCOME TAXES
The provision for income taxes attributable to income from continuing
operations for the years ended December 31, 1994, 1995 and 1996 consists of the
following:
1994 1995 1996
---- ---- ----
Federal--Current........... $ 8,810 $ 10,966 $ 19,160
Federal--Deferred.......... (1,005) 468 (877)
State--Current............. 1,848 1,580 3,031
State--Deferred............ (107) 111 (133)
------ ------ ------
$ 9,546 $ 13,125 $ 21,181
====== ====== ======
The provision for total income taxes for the year ended December 31, 1994
was allocated as follows:
Income from continuing operations.......................... $ 9,546
Extraordinary loss......................................... (896)
------
$ 8,650
======
32
A reconciliation of the statutory Federal income tax rate and the effective
rate for the years ended December 31, 1994, 1995 and 1996 follows:
1994 1995 1996
---- ---- ----
Statutory tax rate............................ 35.0% 35.0% 35.0%
Effect of:
State and local income taxes, net of
Federal income tax benefit.............. 5.1 3.3 3.4
Other, net................................. 1.6 0.2 0.1
---- ---- ----
Effective tax rate............................ 41.7% 38.5% 38.5%
==== ==== ====
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Deferred tax assets and
liabilities are classified on the balance sheet based on the classification of
the underlying asset or liability. Significant components of the Company's net
deferred tax assets as of December 31, 1995 and 1996 are as follows:
1995 1996
---- ----
Deferred tax assets:
Extraordinary loss, due to write off
of original issue discount and redemption
premiums for book purposes which were
capitalized for tax purposes....................$ 407 $ -
Deferred compensation, due to accrual for
financial reporting purposes.................... 353 247
Property and equipment, principally due to
differences in depreciation..................... 1,311 1,921
Accrued expenses, due to accrual for financial
reporting purposes.............................. 590 1,432
Inventories, due to differences in inventory
valuation for book and tax purposes............. 495 1,212
----- -----
Total deferred tax assets................... 3,156 4,812
----- -----
Deferred tax liabilities:
Supplies inventory, due to difference in
accounting for store supplies for book
and tax purposes................................ (217) (174)
Goodwill, due to differences in amortization......... - (689)
----- -----
Total deferred tax liabilities.............. (217) (863)
----- -----
Net deferred tax assets.....................$ 2,939 $ 3,949
===== =====
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 1994, 1995 and 1996 taxable income and management's
projections for future taxable income over the periods in which the deferred tax
assets are deductible, management believes the existing net deductible temporary
differences will reverse during periods in which carrybacks are available and/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 c
ontinuing income in future years.
33
NOTE 3 - ACQUISITION
On January 31, 1996, the Company acquired all of the outstanding capital
stock of Dollar Bills, Inc. ("Dollar Bills"), formerly known as Terrific
Promotions, Inc., which owned and operated 136 discount variety retail stores
under the name Dollar Bill$. The Company has assumed operations of a
distribution center and wholesale division in the Chicago area. The acquisition
was accounted for by the purchase method of accounting and these consolidated
financial statements include the operating results of Dollar Bills from the date
of acquisition through December 31, 1996. The acquisition cost for the purchase
was allocated on the basis of the estimated fair value of assets acquired and
liabilities assumed with the excess purchase price allocated to goodwill. Total
cash paid was $52,630 and goodwill of $48,170 was recorded on the date of
acquisition. Accumulated amortization relating to goodwill approximates $1,765
at December 31, 1996.
The following unaudited pro forma consolidated income statement information
combines the consolidated historical results of the Company with the historical
results of Dollar Bills for the years ended December 31, 1995 and 1996, after
giving effect to certain adjustments, as explained below, before any
nonrecurring charges or credits, such as severance costs, one-time training
costs, and other nonrecurring operational costs of the transaction.
These unaudited pro forma consolidated statements do not purport to be
indicative of the results that would have occurred had the transaction taken
place at the beginning of the periods presented or of future results.
Pro forma
income statement
(Unaudited)
1995 1996
Net sales............................ $ 404,079 499,519
-------- --------
Gross profit......................... 140,176 183,940
Selling, general and
administrative expenses (96,144) (124,171)
-------- --------
Operating income..................... 44,032 59,769
Interest expense (6,973) (5,567)
-------- --------
Income before income taxes........... 37,059 54,202
Provision for income taxes (14,268) (20,867)
-------- --------
Net income........................... $ 22,791 33,335
======== ========
Net income per share:
Primary.......................... $ 0.83 1.18
======== ========
Fully diluted.................... $ 0.83 1.17
======== ========
The pro forma 1995 income statement reflects adjustments related to the
elimination of duplicative operating costs associated with Dollar Bills'
corporate headquarters and distribution facility; amortization of goodwill
34
over a 25 year period; interest expense related to acquisition debt; and income
taxes relating to the conversion of Dollar Bills to a C corporation at an
assumed effective rate of 38.5%.
The pro forma 1996 income statement reflects adjustments related to the
January 1996 operating results of Dollar Bills; elimination of duplicative
operating costs associated with Dollar Bills' corporate headquarters and
distribution facility; amortization of goodwill; interest expense related to the
acquisition debt; and income taxes relating to the conversion of Dollar Bills to
a C corporation at an assumed effective rate of 38.5%.
Pro forma income per common share is computed by dividing pro forma net
income by the weighted average number of common shares and common share
equivalents outstanding. Common share equivalents include all outstanding stock
options and warrants after applying the treasury stock method. The market price
used in applying the treasury stock method was $10.00 per share prior to March
6, 1995, and the closing market price of the stock at the end of each week
thereafter.
NOTE 4 - LEASES
Future minimum lease payments under noncancelable store and corporate
headquarters operating leases and the present value of future minimum capital
lease payments as of December 31, 1996 are as follows:
Capital Operating
leases leases
Year ending December 31: -------- ---------
1997................................ $ 400 $ 32,468
1998................................ 373 29,912
1999................................ 306 24,646
2000................................ 296 18,738
2001................................ 227 11,468
Later years......................... 6 19,357
------ -------
Total minimum lease payments............ 1,608 $ 136,589
=======
Less amount representing interest (at
average rate of approximately 8%)... 255
------
Present value of net minimum capital
lease payments...................... 1,353
Less current installments of
obligations under capital leases.... 302
------
Obligations under capital leases,
excluding current installments...... $ 1,051
======
The above payments include amounts for leases that were signed prior to
December 31, 1996 for stores that were not open as of December 31, 1996. Minimum
rental payments for operating leases do not include contingent rentals that may
be paid under certain store leases on a percentage of sales in excess of
stipulated amounts.
Included in property and equipment at December 31, 1995 and 1996 are leased
furniture and fixtures and transportation vehicles with a cost of $565 and
$1,671 and accumulated amortization of $58 and $373 at December 31, 1995 and
35
1996, respectively. The Company entered into capital lease agreements during
1996 for property and equipment with a net present value of approximately $931.
This transaction was a noncash transaction and, accordingly, has been excluded
from the accompanying statements of cash flows.
Rental expense for store and warehouse operating leases included in the
accompanying consolidated income statements for the years ended December 31,
1994, 1995 and 1996 was as follows:
1994 1995 1996
---- ---- ----
Minimum rentals............................ $ 13,198 $ 16,619 $ 27,685
Contingent rentals......................... 961 1,231 1,060
------ ------ ------
Total............................. $ 14,159 $ 17,850 $ 28,745
====== ====== ======
NOTE 5 - ACCRUED LIABILITIES
Accrued liabilities as of December 31, 1995 and 1996 consisted of the
following:
1995 1996
---- ----
Compensation and benefits............................ $ 4,282 $ 6,186
Taxes (other than income taxes)...................... 4,006 6,934
Other................................................ 651 1,140
------ ------
Total....................................... $ 8,939 $14,260
====== ======
NOTE 6 - LONG-TERM DEBT
Long-term debt as of December 31, 1995 and 1996 consisted of the following:
1995 1996
---- ----
9% Senior Subordinated Notes................... $ 7,000 $ -
9% Junior Subordinated Notes................... 7,000 -
Revolving Credit Facility...................... - 3,000
------ -----
Total................................ $ 14,000 $ 3,000
====== =====
On September 30, 1993, the Company executed a plan of recapitalization
which restructured its debt and equity. Pursuant to that plan, the Company
issued $7,000 of callable 12% Senior Subordinated Notes on September 30, 1993,
at a $500 discount, to the holders of Series A Class I stock and $7,000 of
callable 12% Junior Subordinated Notes on February 22, 1994, at a $500 discount,
to the holders of Series A Class II stock.
On December 31, 1994, the Company redeemed and extinguished its callable
12% Senior Subordinated Notes and 12% Junior Subordinated Notes. As part of this
transaction, the Company paid a redemption premium of approximately $1,300 and
issued $7,000 of noncallable 9% Senior Subordinated Notes to the previous
holders of the 12% Senior Subordinated Notes and $7,000 of noncallable 9% Junior
Subordinated Notes to the previous holders of the 12% Junior Subordinated Notes
(collectively, "9% Subordinated Notes"). The Company recorded an extraordinary
loss of approximately $1,300 (net of income tax benefit of $896) on the early
retirement of debt. The 9% Subordinated Notes were paid in full during June of
1996.
36
Interest expense on all related party debt was $1,771, $1,260 and $574 for
the years ended December 31, 1994, 1995 and 1996, respectively.
On January 11, 1996, the Company replaced its previous Credit Agreement,
with a new Credit Facility which provided for, among other things: (1) a $60,000
development facility, bearing interest at LIBOR, plus a spread, with an up-front
commitment fee of $198 and (2) a $60,000 working capital line and letter of
credit facility, bearing interest at LIBOR, plus a spread.
On September 27, 1996, the Company entered into an amended and restated
Revolving Credit Agreement with its banks (the Agreement). The Agreement
provides for, among other things: (1) a $135,000 revolving line of credit,
bearing interest at the agent bank's prime interest rate or LIBOR, plus a
spread, at the option of the Company; (2) an annual facilities fee and annual
agent's fee payable quarterly; and (3) the reduction of amounts outstanding
under the facility for a period of 30 consecutive days between each December 1
and March 1 to the following:
December 1, 1996 to March 1, 1997 $ 40,000
December 1, 1997 to March 1, 1998 30,000
December 1, 1998 to March 1, 1999 20,000
December 1, 1999 to March 1, 2000 10,000
The Agreement, among other things, requires the maintenance of certain
specified financial ratios, restricts the amount of capital expenditures and the
payment of certain distributions, prohibits the incurrence of certain new
indebtedness and establishes certain minimum beneficial ownership requirements
of the founding shareholders. The Agreement matures on May 31, 2000 and was
secured by substantially all of the Company's assets at December 31, 1996. As
discussed in Note 11, the Agreement was amended to remove collateral
requirements in January, 1997. The outstanding balance under the Agreement at
December 31, 1996 was $3,000. During 1996, the weighted average interest rate
charged by the banks under the Company's credit agreements approximated 6.5%.
The carrying value of the Company's long-term debt approximates the 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.
NOTE 7 - RELATED PARTY TRANSACTIONS
The Company is a party to a lease agreement for the corporate headquarters
and Norfolk distribution center with a partnership owned by certain Company
shareholders. The lease includes land, a building and certain equipment and has
a remaining term of eight years with options to renew for three five-year
periods. The lease currently provides for an aggregate annual rental payment of
$656 which is included in the future minimum lease payments in Note 4. The total
payments related to this lease were $762, $765 and $746 for the years ended
December 31, 1994, 1995 and 1996, respectively.
37
On September 30, 1993, the Company entered into a financial and management
advisory service agreement with one of its nonemployee shareholders. The
agreement initially provided for the payment of $250 annually. During 1995, the
shareholder agreed to reduce the annual payment to $200 over the remaining term
of the agreement. The agreement is terminable by vote of the Board of Directors.
During the years ended December 31, 1994, 1995 and 1996, the Company paid $250,
$210 and $200, respectively, under this agreement.
NOTE 8 - SHAREHOLDERS' EQUITY
As discussed in Note 6, on September 30, 1993, the Company executed a plan
of recapitalization which restructured its debt and equity.
Pursuant to that plan, the Company issued unattached warrants to purchase
1,241,091 shares of Series B Class I stock on September 30, 1993 for $0.40 per
warrant (the "September Warrants"). The September Warrants were issued together
with the $7,000 12% Senior Subordinated Notes pursuant to the terms of a Stock
Purchase Agreement entered into on September 30, 1993 (the "Stock Purchase
Agreement").
On February 22, 1994, the Company issued unattached warrants to purchase
1,241,091 shares of Series B Class II stock for $0.40 per warrant (the "February
Warrants"). The February Warrants contained substantially identical terms to the
September Warrants and were issued together with the $7,000 12% Junior
Subordinated Notes pursuant to the terms of the Stock Purchase Agreement. The
commitment to issue the February Warrants arose on September 30, 1993 when the
Stock Purchase Agreement was entered into; thus, the measurement date for
purposes of determining any compensation expense for the February Warrants was
September 30, 1993.
All warrants carry an exercise price of $1.93 per share, are exercisable
upon the occurrence of certain events, and expire on December 31, 2003. All
warrants were outstanding at December 31, 1996.
On January 13, 1995, the Company filed a Registration Statement on Form S-1
under the Securities Act of 1933 and, in connection with this filing, each share
of its Series A Class I and Class II stock and Series B Class I and Class II
stock was split 1.65479 for 1.
Effective February 1, 1995, the Articles of Incorporation were amended to
authorize 50,000,000 shares of Common Stock, $0.01 par value per share, and
10,000,000 shares of Preferred Stock, $0.01 par value per share. Upon the
closing of the initial public offering, each share of the Company's Series A
Class I and Class II Stock automatically converted into one share of the
Company's Common Stock. On July 23, 1996, the shareholders of the Company
approved an increase in authorized shares of Common Stock from 50,000,000 to
100,000,000 shares.
On June 10, 1996, the Company sold 750,000 shares of Common Stock, $0.01
par value per share, pursuant to the registration statement filed on Form S-3
under the Securities Act of 1933. In connection with this offering, the Company
received $25,333, net of offering expenses.
38
In connection with a stock dividend authorized by the Board of Directors,
the Company issued one-half share for each outstanding share of Common Stock,
payable April 19, 1996 to shareholders of record as of April 5, 1996. All share
and per share data in these consolidated financial statements and the
accompanying notes have been retroactively adjusted to reflect this dividend,
having the effect of a three-for-two stock split.
NOTE 9 - 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 matching
contributions at its discretion.
Contributions to and reimbursements by the Company of expenses of the plan
included in the accompanying consolidated income statements for the years ended
December 31 were as follows:
1994....................................... $ 886
1995....................................... 1,059
1996....................................... 1,949
NOTE 10 - STOCK COMPENSATION PLANS
At December 31, 1996, the Company has three stock-based compensation plans,
which are described below. The Company applies APB Opinion No. 25 and related
Interpretations in accounting for its plans. Accordingly, no compensation cost
has been recognized in the accompanying consolidated income statements for its
1995 Stock Incentive Plan and its Employee Stock Purchase Plan. The compensation
cost that has been charged against income for its Stock Option Plan was $1,000
in 1994.
The Company adopted the disclosure-only option under SFAS No. 123,
ACCOUNTING FOR STOCK-BASED COMPENSATION, (SFAS No. 123) as of January 1, 1996.
If the accounting provisions of the new Statement had been adopted as of the
beginning of 1995, the Company's net income and earnings per share would have
been reduced to the pro forma amounts indicated below:
1995 1996
---- ----
Net income:
As reported ................................. $20,963 $33,835
Pro forma ................................. $20,617 $32,289
Net income per share:
As reported ................................. $ 0.76 $ 1.19
Pro forma ................................. $ 0.75 $ 1.15
The full impact of calculating compensation cost for stock options under
SFAS No. 123 is not reflected in the pro forma net income and net income per
share amounts presented above because compensation cost is reflected over the
options vesting periods and compensation cost for options granted prior to
January 1, 1995 is not considered.
39
FIXED STOCK OPTIONS PLANS
The Company has two fixed option plans. Under the Non-Qualified Stock
Option Plan ("SOP"), the Company granted options to its employees for 310,294
shares of common stock in 1993 and 310,511 shares in 1994. Options granted under
the SOP have an exercise price of $2.90 and are fully vested at date of grant.
Compensation expense related to the 1994 grant of options, amounting to $1,000,
was recorded in operating expense in March 1994.
Under the 1995 Stock Incentive Plan ("SIP"), the Company may grant options
to its employees for up to 900,000 shares of common stock. Under the terms of
the SIP, options for no more than 270,000 shares of common stock may be granted
in any calendar year. 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 vest over a three-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 used for grants in 1995 and 1996:
Expected term 8-10 years
Expected volatility 49%
Annual dividend yield 0%
Risk-free interest rate 6.59-6.74%
40
STOCK OPTION ACTIVITY
1994 1995 1996
----------------------- ------------------------- -------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
-------- ---------- -------- --------- -------- ----------
Outstanding at
beginning
of year 310,294 $2.90 616,926 $2.90 793,515 $6.31
Granted 310,511 2.90 270,048 12.94 256,575 32.53
Exercised - - (88,775) 2.90 (228,375) 3.90
Forfeited (3,879) 2.90 (4,684) 4.89 (20,740) 23.76
Outstanding at
end of year 616,926 2.90 793,515 6.31 800,975 14.94
Options exercisable
at year end 616,926 2.90 524,781 2.90 412,335 5.56
Weighted average fair
value of options
granted during
the year $6.12* $8.72 $22.77
* Fair value of 1994 options determined by the Board of Directors in 1994.
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 1996 Life Price 1996 Price
------ ---- ---- ----- ---- -----
$ 2.90 324,651 (a) $2.90 324,651 $ 2.90
$10.00 to $17.75 235,804 8.4 years 13.30 79,684 14.13
$22.83 to $33.50 240,520 9.3 years 32.81 8,000 28.25
------- -------
$ 2.90 to $33.50 800,975 8.9 years $14.94 412,335 $ 5.56
======= =======
(a) Options granted under the SOP in 1993 and 1994 have no expiration date. They
are therefore not included in the total weighted average remaining life.
EMPLOYEE STOCK PURCHASE PLAN
Under the Dollar Tree Stores, Inc. Employee Stock Purchase Plan ("ESPP"),
the Company is authorized to issue up to 225,000 shares of common stock to
eligible employees. Under the terms of the ESPP, employees can choose to have
up to 10
41
percent of their annual base earnings withheld to purchase the Company's common
stock. The purchase price of the stock is 85 percent of the lower of the price
at the beginning or the price at the end of the quarterly offering period. Under
the ESPP, the Company has sold 9,168 shares as of December 31, 1996. At December
31, 1996, the Company was obligated to issue 1,887 shares under the plans. These
shares were issued subsequent to year end.
Under SFAS No. 123, compensation cost is recognized for the fair value of
the employees' purchase rights, which was estimated using the Black-Scholes
model with the following assumptions:
Expected term 3 months
Expected volatility 22% to 30%
Annual dividend yield 0%
Risk-free interest rate 5.32%-5.68% (annualized)
The weighted average fair value of those purchase rights granted in 1995
and 1996 was $4.58 and $5.29, respectively.
NOTE 11 - SUBSEQUENT EVENTS
During January of 1997, the Company purchased approximately 49 acres of
land in Chesapeake, Virginia, approximately 10 miles from its Norfolk location
for approximately $3,300. The Company plans to replace its Norfolk facility with
a new office building and distribution center which will include a new automated
conveyor and sortation system. The Company has also entered into contracts to
construct and equip the new facility. Total commitments under these contracts
approximate $25,700. The new facility is scheduled to begin operations during
1998.
In preparation for moving to the Chesapeake facility, the Company has
listed its Norfolk headquarters and distribution center facility with a
commercial real estate agent for sublease. The Company's current lease on its
Norfolk facility expires in June, 2004, and the Company will be responsible for
rent payments through this date if a suitable sublessee is not found.
On January 25, 1997, the Company amended its revolving credit agreement to
remove collateral security and modify certain financial ratio requirements.
Subsequent to year end, the Company was in the process of issuing $30,000
in senior unsecured debt. The proceeds from the debt, which will be issued by
Dollar Tree Distribution, Inc. and guaranteed by Dollar Tree Stores, Inc. and
Dollar Tree Management, Inc., will be used to repay existing indebtedness and
for general corporate purposes. The debt will provide for principal payments of
$6,000 payable at the end of years three through seven, with the final payment
due at maturity in May 2004. The debt will bear interest at a fixed per annum
rate equal to the yield on the 5-year U.S. Treasury security plus a spread,
which was undetermined as of the date of the financial statements. Interest is
payable semi-annually over the life of the debt. The terms of the debt require,
among other things, the maintenance of certain specified ratios.
On March 18, 1997, the Company granted to employees options to purchase
337,750 shares of the Company's Common Stock.
42
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 the Company's Directors and Executive Officers
required by this Item is incorporated by reference to Dollar Tree Stores, Inc.'s
Proxy Statement relating to the Company's Annual Meeting of Shareholders to be
held on June 4, 1997 (the "Proxy Statement"), under the caption "Election of
Directors".
Information set forth in the Proxy Statement under the caption "Compliance
with Section 16(a) of the Securities and Exchange Act of 1934", with respect to
director and executive officer compliance with Section 16(a), is incorporated
herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
Information set forth in the Proxy Statement under the caption
"Compensation of Executive Officers", with respect to executive compensation, is
incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information set forth in the Proxy Statement under the caption "Ownership
of the Common Stock of the Company", with respect to security ownership of
certain beneficial owners and management, is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information set forth in the Proxy Statement under the caption "Certain
Relationships and Related Transactions" is incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Documents filed as part of this report:
1. Financial Statements. Reference is made to the Index to the
Consolidated Financial Statements set forth under Part II, Item 8,
on page 24 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
are filed as part of, or incorporated by reference into, this report.
(b) No report on Form 8-K was filed by the Company during the last quarter
of 1996.
44
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
DOLLAR TREE STORES, INC.
DATE: March 28, 1997 By: /s/ Macon F. Brock, Jr.
---------------------------
Macon F. Brock, Jr
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Signature Title Date
/s/ J. Douglas Perry Chairman of the Board; March 28, 1997
---------------------- Director
J. Douglas Perry
/s/ Macon F. Brock, Jr. President and Chief Executive March 28, 1997
----------------------- Officer; Director (principal
Macon F. Brock, Jr. executive officer)
/s/ H. Ray Compton Executive Vice President and March 28, 1997
------------------------ Chief Financial Officer; Director
H. Ray Compton (principal financial and
accounting officer)
/s/ John F. Megrue Vice Chairman; Director March 28, 1997
-----------------------
John F. Megrue
/s/ Allan W. Karp Director March 28, 1997
-----------------------
Allan W. Karp
/s/ Thomas A. Saunders Director March 28, 1997
-----------------------
Thomas A. Saunders
/s/ Alan L. Wurtzel Director March 28, 1997
-----------------------
Alan L. Wurtzel
Director
- ----------------------- --------------
Frank Doczi Date
45
Index to Exhibits
3 Articles and Bylaws
3.1 Third Restated Articles of Incorporation of Dollar Tree Stores, Inc.
(the "Company"), as amended (Exhibit 3.1 to the Company's Quarterly
Report on Form 10-Q for the fiscal quarter ended September 30,
1996 incorporated herein by this reference).
3.2 Second Restated Bylaws of the Company (Exhibit 3.2 to the Company's
Registration Statement on Form S-1, No. 33-88502, incorporated herein
by this reference).
10 Material Contracts
(a) The following documents are filed herewith:
10.1 Purchase and Sale Agreement by and among Volvo Cars of North America,
Inc. the Company, Dollar Tree Properties, Inc. and Dollar Tree
Distribution, Inc.
10.2 First Amendment to Amended and Restated Revolving Credit Agreement by
and among the Company, Dollar Tree Distribution, Inc., Dollar Tree
Management, Inc. And the Banks and The First National Bank of Boston
as Agent for the Banks.
10.3 First Amendment to the Company's Stock Incentove Plan.
(b) The following document filed as Exhibit 10.1 to the Company's
Quarterly Report on Form 10-Q for the fiscal quarter ended
September 30, 1996 is incorporated herein by this reference:
10.4 Amended and Restated Revolving Credit Agreement (the "Amended
Credit Agreement") among the Company, Dollar Tree Distribution,
Inc., Dollar Tree Management, Inc., and The First National Bank of
Boston, NationsBank, N.A., Signet Bank, Crestar Bank, First Union
National Bank of Virginia, Amsouth Bank of Alabama, and Union Bank
of California, N.A. (collectively, the "Banks").
(c) The following documents filed as Exhibit 10.19 - Exhibit 10.21 to
the Company's Quarterly Report on Form 10-Q for the fiscal quarter
ended March 31, 1996 are incorporated herein by this reference:
10.5 Fourth Amendment to Dollar Tree Stores, Inc. Amended and Restated
Stock Option Plan (the "Stock Option Plan") (with forms of Second
Amendment to 1993 Stock Option Agreement and Second Amendment to 1994
Stock Option Agreement).
10.6 Technical Clarification to Dollar Tree Stores, Inc. Employee Stock
Purchase Plan (the "Stock Purchase Plan").
10.7 Second Amendment to the Amended and Restated Dollar Tree Stores, Inc.
Deferred Compensation Plan (the "Deferred Compensation Plan).
(d) The following document filed as Exhibit 10.14 to the Company's Annual
Report on Form 10-K for the fiscal year 1995 is incorporated herein
by this reference:
10.8 Non-Competition Agreements--Michael Alper and Pamela Alper.
(e) The following document filed as Exhibit 2 to the Company's Current
Report on Form 8-K dated February 14, 1996 for the fiscal year
1995 are incorporated herein by this reference:
10.9 Agreement for Sale and Purchase of Stock.
(f) The following document filed as Exhibit 10.1 to the Company's
Quarterly Report on Form 10-Q for the fiscal quarter ended June
30, 1995 is incorporated herein by this reference:
10.10 Third Amendment to the Stock Option Plan.
(g) The following documents filed as Exhibit 2.1, Exhibit 10.3, and
Exhibit 10.13 - Exhibit 10.19 to the Company's Quarterly Report on
Form 10-Q for the fiscal quarter ended March 31, 1995 are
incorporated herein by this reference:
10.11 Amended and Restated Stockholders Agreement effective March 13, 1995
among the Company, John F. Megrue, Thomas A. Saunders, III, and
certain shareholders.
10.12 Form of First Amendment to the Warrant for the Purchase of Shares
of Common Stock of the Company.
10.13 Second Amendment to the Stock Option Plan.
10.14 First Amendment to the Deferred Compensation Plan.
10.15 Dollar Tree Stores, Inc. Stock Incentive Plan (the "Stock Incentive
Plan").
10.16 Dollar Tree Stores, Inc. Employee Stock Purchase Plan
10.17 First Amendment to the Advisory Agreement between the Company and
Saunders, Karp & Company, L.P. (The "Advisory Agreement").
10.18 Assignment of the Industrial Lease Agreement between Industrial
Developments International, Inc. And the Company dated August 9, 1993
(the "Industrial Lease Agreement").
(h) The following document filed as Exhibit 2.1, Exhibit 2.3, Exhibit
10.8, Exhibit 10.19, Exhibit 10.20, Exhibit 10.27, Exhibit 10.31
Exhibit 10.33 to the Company's Registration Statement on Form S-1,
No. 33-88502, incorporated herein by this reference:
10.19 Agreement for the Purchase and Sale of Stock dated September 24, 1993
among J. Douglas Perry, Patricia W. Perry, Macon F. Brock, Jr., Joan
P. Brock, H. Ray Compton and The SK Equity Fund, L.P.
10.20 Securities Purchase Agreement dated September 30, 1993 among the
Company, J. Douglas Perry, Patricia W. Perry, Macon F. Brock, Jr,
Joan P. Brock, H. Ray Compton, John F. Megrue, Thomas A. Saunders,
III, Allan W. Karp, Christopher K. Reilly, and the SK Equity Fund,
L.P. and the First Amendment thereto.
10.21 Form of Warrant for the Purchase of Shares of Common Stock of the
Company.
10.22 Stock Option Plan with exhibits thereto (including the Restrictive
Stock Agreement) and First Amendment thereto.
10.23 Deferred Compensation Plan.
10.24 Advisory Agreement (annual fee) between the Company and Saunders,
Karp & Co., L.P. (The "Advisory Agreement").
10.25 Industrial Lease Agreement and First Amendment thereto.
10.26 Lease dated October 1, 1991 by and between DMK Associates and the
Company (Parcel 29), Amendment and Assignment.
10.27 Lease dated October 1, 1991 by and between DMK Associates and the
Company (Parcel 31), Amendment and Assignment.
21 Subsidiaries of the Registrant
21.1 Subsidiaries
23 Consents of Experts and Counsel
23.1 Consent of Independent Auditors
27 Financial Data Schedule
27.1 Financial Data Schedule