FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
(Mark One)
(X) Quarterly report pursuant to Section 13 or 15 (d) of the
Securities Exchange Act of 1934
For the quarterly period ended June 30, 2000
( ) Transition report pursuant to Section 13 or 15 (d) of the Securities
Exchange Act of 1934
Commission File Number: 0-25464
DOLLAR TREE STORES, INC.
(Exact name of registrant as specified in its charter)
Virginia 54-1387365
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
500 Volvo Parkway
Chesapeake, Virginia 23320
(Address of principal executive offices)
Telephone Number (757) 321-5000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days:
Yes (X) No ( )
As of August 9, 2000, there were 107,399,880 shares of the Registrant's Common
Stock outstanding.
DOLLAR TREE STORES, INC.
AND SUBSIDIARIES
INDEX
PART I. FINANCIAL INFORMATION Page
----
Item 1. Condensed Consolidated Financial Statements:
Condensed Consolidated Balance Sheets
June 30, 2000 and December 31, 1999.......................... 3
Condensed Consolidated Income Statements
Three months and six months ended June 30, 2000 and 1999..... 4
Condensed Consolidated Statements of Cash Flows
Six months ended June 30, 2000 and 1999...................... 5
Notes to Condensed Consolidated Financial Statements.......... 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.......................... 8
Item 3. Quantitative and Qualitative Disclosures About Market Risk..... 14
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.............................................. 15
Item 2. Changes in Securities and Use of Proceeds...................... 15
Item 4. Submission of Matters to a Vote of Security Holders............ 15
Item 5. Other Information.............................................. 16
Item 6. Exhibits and Reports on Form 8-K............................... 16
Signatures..................................................... 17
2
DOLLAR TREE STORES, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
June 30, December 31,
2000 1999
-------- ------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents ...................................................... $ 55,417 $181,587
Merchandise inventories ........................................................ 284,517 192,838
Deferred tax asset ............................................................. 6,031 6,093
Prepaid expenses and other current assets ...................................... 15,176 14,588
------- -------
Total current assets ....................................................... 361,141 395,106
------- -------
Property and equipment, net ......................................................... 184,374 157,368
Deferred tax asset .................................................................. 818 470
Goodwill, net ....................................................................... 41,385 42,394
Other assets, net ................................................................... 15,061 15,895
------- -------
TOTAL ASSETS ............................................................... $602,779 $611,233
======= =======
LIABILITIES, MANDITORILY REDEEMABLE PREFERRED STOCK AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable ............................................................... $ 79,455 $ 73,878
Income taxes payable ........................................................... 4,768 29,193
Other current liabilities ...................................................... 24,276 34,942
Current portion of long-term debt (note 4) ..................................... 25,025 28,070
Current installments of obligations
under capital leases ....................................................... 3,333 3,190
------- -------
Total current liabilities .................................................. 136,857 169,273
------- -------
Long-term debt, excluding current portion (note 4) .................................. 18,000 49,138
Obligations under capital leases,
excluding current installments ................................................. 26,733 28,375
Common stock put warrants of Dollar Express (note 3) ................................ -- 4,394
Other liabilities ................................................................... 8,719 8,644
------- -------
Total liabilities .......................................................... 190,309 259,824
------- -------
Cumulative convertible manditorily redeemable
preferred stock of Dollar Express (note 3) ..................................... -- 35,171
Shareholders' equity (notes 3 and 5):
Common stock, par value $0.01. Authorized 450,000,000 shares, 102,979,895
shares issued and outstanding at June 30, 2000 and 98,842,201 shares
issued and outstanding at December 31, 1999 ................................ 1,030 659
Additional paid-in capital ..................................................... 137,205 75,031
Retained earnings .............................................................. 274,235 240,548
------- -------
Total shareholders' equity ................................................. 412,470 316,238
------- -------
TOTAL LIABILITIES, MANDITORILY REDEEMABLE
PREFERRED STOCK AND SHAREHOLDERS' EQUITY .............................. $602,779 $611,233
======= =======
See accompanying Notes to Condensed Consolidated Financial Statements
3
DOLLAR TREE STORES, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED INCOME STATEMENTS
(In thousands, except per share data)
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
-------------------- -------------------
2000 1999 2000 1999
------- ------- ------- -------
Net sales.............................................. $384,503 $288,148 $711,614 $546,239
Cost of sales ......................................... 246,458 184,389 459,996 352,780
Merger related costs (note 3).......................... 1,100 443 1,100 443
------- ------- ------- -------
Gross profit.................................. 136,945 103,316 250,518 193,016
------- ------- ------- -------
Selling, general and administrative expenses:
Operating expenses................................ 87,697 68,854 169,358 131,371
Merger related expenses (note 3).................. 3,266 607 3,266 607
Depreciation and amortization..................... 9,556 7,622 18,249 14,354
------- ------- ------- -------
Total selling, general
and administrative expenses................. 100,519 77,083 190,873 146,332
------- ------- ------- -------
Operating income.............................. 36,426 26,233 59,645 46,684
Interest income........................................ 1,319 258 3,097 674
Interest expense....................................... (1,937) (1,583) (4,215) (2,863)
------- ------- ------- -------
Income before income taxes.................... 35,808 24,908 58,527 44,495
Provision for income taxes............................. 14,273 9,540 23,040 14,781
------- ------- ------- -------
Income before extraordinary item.............. 21,535 15,368 35,487 29,714
Loss on debt extinguishment, net of
tax benefit of $242................................. 387 -- 387 --
------- ------- ------- -------
Net income.................................... 21,148 15,368 35,100 29,714
Preferred stock dividends and accretion................ 337 742 1,413 1,182
------- ------- ------- -------
Net income available to
common shareholders......................... $ 20,811 $ 14,626 $ 33,687 $ 28,532
======= ======= ======= =======
Pro forma income data (note 2):
Net income available to common
shareholders.................................... $ 20,811 $ 14,626 $ 33,687 $ 28,532
Pro forma adjustment for C-corporation
income taxes.................................... -- 271 -- 505
------- ------- ------- -------
Pro forma net income available to
common shareholders............................. $ 20,811 $ 14,355 $ 33,687 $ 28,027
======= ======= ======= =======
Basic pro forma net income per common share:
Pro forma income before extraordinary
item............................................ $ 0.21 $ 0.15 $ 0.34 $ 0.29
Pro forma net income.............................. 0.20 0.15 0.34 0.29
Diluted pro forma net income per common share:
Pro forma income before extraordinary
item............................................ $ 0.19 $ 0.13 $ 0.31 $ 0.26
Pro forma net income.............................. 0.19 0.13 0.31 0.26
See accompanying Notes to Condensed Consolidated Financial Statements
4
DOLLAR TREE STORES, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Six Months Ended
June 30,
-----------------------
2000 1999
------- -------
Cash flows from operating activities:
Net income .................................................... $ 35,100 $ 29,714
------- -------
Adjustments to reconcile net income to net cash
used in operating activities:
Depreciation and amortization ................................ 18,249 14,354
Loss on disposal of property and equipment ................... 467 241
Extraordinary loss on early extinguishment of debt ........... 629 --
Lease loss accrual ........................................... (283) (339)
Provision for deferred income taxes .......................... (286) (3,222)
Changes in assets and liabilities increasing
(decreasing) cash and cash equivalents:
Merchandise inventories ................................... (91,679) (50,785)
Prepaid expenses and other current assets ................. (1,217) (769)
Other assets, net ......................................... 579 404
Accounts payable .......................................... 5,577 7,699
Income taxes payable ...................................... (15,877) (12,691)
Other current liabilities ................................. (10,776) (7,910)
Other liabilities ......................................... 468 138
------- -------
Total adjustments ....................................... (94,149) (52,880)
------- -------
Net cash used in operating activities .............. (59,049) (23,166)
------- -------
Cash flows from investing activities:
Capital expenditures ............................................ (44,532) (26,797)
Proceeds from sale of property and equipment .................... 142 86
------- -------
Net cash used in investing activities .............. (44,390) (26,711)
------- -------
Cash flows from financing activities:
Distributions paid .............................................. -- (60,934)
Proceeds from long-term debt .................................... -- 22,500
Proceeds from revolving credit facilities ....................... 7,000 11,750
Repayment of long-term debt and facility fees ................... (27,683) (791)
Repayment of revolving credit facilities ........................ (13,500) (4,000)
Principal payments under capital lease obligations .............. (1,567) (251)
Proceeds from issuance of preferred stock and common
stock put warrants of Dollar Express ........................ -- 32,156
Proceeds from stock issued pursuant to
stock-based compensation plans .............................. 13,019 4,805
------- -------
Net cash provided by (used in) financing
activities ..................................... (22,731) 5,235
------- -------
Net decrease in cash and cash equivalents ........................ (126,170) (44,642)
Cash and cash equivalents at beginning of period ................. 181,587 84,714
------- -------
Cash and cash equivalents at end of period ....................... $ 55,417 $ 40,072
======= =======
See accompanying Notes to Condensed Consolidated Financial Statements
5
DOLLAR TREE STORES, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The condensed consolidated financial statements at June 30, 2000, and for
the three- and six-month periods then ended, are unaudited and reflect all
adjustments (consisting only of normal recurring adjustments) which are, in the
opinion of management, necessary for a fair presentation of the financial
position and operating results for the interim periods.
The condensed consolidated financial statements should be read in
conjunction with the supplemental consolidated financial statements and notes
thereto, for the year ended December 31, 1999 filed on Form 8-K on July 12,
2000. These supplemental consolidated financial statements should be read with
management's discussion and analysis of financial condition and results of
operations for the year ended December 31, 1999, contained in the Dollar Tree
Stores, Inc. (the Company) Prospectus dated August 2, 2000. These filings
restate the consolidated financial statements to give retroactive effect to the
pooling of interests with Dollar Express, Inc. The results of operations for the
three- and six-month periods ended June 30, 2000 are not necessarily indicative
of the results to be expected for the entire year ending December 31, 2000.
2. PRO FORMA NET INCOME PER COMMON SHARE
The following table sets forth the calculation of pro forma basic and pro
forma diluted income before extraordinary item per common share:
Three months ended Six months ended
June 30, June 30,
------------------ -------------------
2000 1999 2000 1999
------- ------ ------- ------
(In thousands, except per share data)
Pro forma basic income before
extraordinary item per common share:
Income before extraordinary item ........... $ 21,535 $15,368 $ 35,487 $29,714
Less: Preferred stock dividends and
accretion ................................ 337 742 1,413 1,182
------- ------ ------- ------
Income before extraordinary item
available to common shareholders ......... 21,198 14,626 34,074 28,532
Pro forma adjustment for C-corporation
income taxes ............................. -- 271 -- 505
------- ------ ------- ------
Pro forma income before extraordinary
item available to common
shareholders ............................. $ 21,198 $14,355 $ 34,074 $28,027
======= ====== ======= ======
Weighted average number of
common shares outstanding ................ 101,615 98,398 100,323 98,194
======= ====== ======= ======
Pro forma basic income before
extraordinary item per common
share ............................. $ 0.21 $ 0.15 $ 0.34 $ 0.29
======= ====== ======= ======
6
Three months ended Six months ended
June 30, June 30,
------------------ ---------------------
2000 1999 2000 1999
------- ------- ------- -------
(In thousands, except per share data)
Pro forma diluted income before
extraordinary item per common share:
Pro forma income before extraordinary
item available to common
shareholders ............................. $ 21,198 $ 14,355 $ 34,074 $ 28,027
======= ======= ======= =======
Weighted average number of
common shares outstanding ................ 101,615 98,398 100,323 98,194
Dilutive effect of stock options and
warrants (as determined by applying
the treasury stock method) ............... 10,133 9,405 9,874 9,519
------- ------- ------- -------
Weighted average number of common
shares and dilutive potential
common shares outstanding ................ 111,748 107,803 110,197 107,713
======= ======= ======= =======
Pro forma diluted income before
extraordinary item per common
share ............................. $ 0.19 $ 0.13 $ 0.31 $ 0.26
======= ======= ======= =======
3. DOLLAR EXPRESS ACQUISITION
On May 5, 2000, the Company completed its merger with privately-held,
Philadelphia-based Dollar Express, Inc. (Dollar Express), which operated 107
single-price point stores under the name "Dollar Express." These stores offer
variety merchandise at a fixed price of $1.00 and are located in six states in
the Mid-Atlantic region. Dollar Express also operated 25 multi-price point
stores under the name "Spain's Cards & Gifts" in the Philadelphia area. The
Company issued .8772 shares of its common stock for each share of Dollar
Express's outstanding common stock. The Company issued 8,771,928 shares of its
common stock for all of the outstanding shares of Dollar Express's common stock,
which included all of Dollar Express's preferred shares converted into common
shares on a one-for-one basis. Stock options to purchase 260,000 shares of
Dollar Express's common stock were converted into options to purchase 228,072
common shares of the Company. As a result of the merger, the Company's
consolidated financial statements have been restated to retroactively combine
Dollar Express's financial statements as if the merger had occurred at the
beginning of the earliest period presented.
Prior to February 5, 1999, Dollar Express was treated as an S-corporation
for federal and state income tax purposes. As such, income of Dollar Express for
periods prior to February 5, 1999 was taxable to the Dollar Express
shareholders, rather than to Dollar Express. Effective February 5, 1999, Dollar
Express converted from an S-corporation to a C-corporation and recorded the
related cumulative deferred tax benefit of $2.2 million in the first quarter of
1999.
In connection with the merger, the Company incurred approximately $4.4
million ($3.1 million after taxes, which decreased pro forma diluted net income
per common share $0.02 for the second quarter) of merger related costs and
expenses, consisting primarily of writedowns of inventory and professional fees.
These expenses were charged to operations during the quarter ended June 30,
2000.
With the consummation of the merger, the cumulative convertible manditorily
redeemable preferred stock of Dollar Express was converted to common shares of
Dollar Express and then into common shares of Dollar Tree. In addition, the
common stock put warrants of Dollar Express were terminated. The amounts for the
7
preferred stock and common stock put warrants were credited to additional
paid-in capital during the three months ended June 30, 2000.
4. LONG-TERM DEBT
In May 2000, the Company retired and terminated Dollar Express's $40.0
million term loan and revolving credit facility. This retirement resulted in an
after-tax extraordinary loss of $387,000 due to the write-off of the related
unamortized deferred financing fees.
5. STOCK DIVIDEND
On May 25, 2000, the Board of Directors authorized a stock dividend, in
which the Company issued one-half share for each outstanding share of common
stock, payable June 19, 2000 to shareholders of record as of June 12, 2000. As a
result, all share and per share data in these condensed consolidated financial
statements and accompanying notes have been retroactively adjusted to reflect
this dividend, having the effect of a 3-for-2 stock split.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
INTRODUCTORY NOTE: Unless otherwise stated, references to "we," "our" and "us"
generally refer to Dollar Tree Stores, Inc. and its direct and indirect
subsidiaries on a consolidated basis.
A WARNING ABOUT FORWARD-LOOKING STATEMENTS: This document contains
"forward-looking statements" as that term is used in the Private Securities
Litigation Reform Act of 1995. Forward-looking statements address future events,
developments or results and typically use words such as believe, anticipate,
expect, intend, plan or estimate. For example, our forward-looking statements
include statements regarding:
o our anticipated comparable store net sales and net sales per square
foot;
o our growth plans, including our plans to add, expand or relocate
stores;
o the integration of Dollar Express into our business;
o the possible effect of inflation and other economic changes on our
costs and profitability, including the possible effect of future
changes in oceanic shipping rates, freight costs, fuel costs, minimum
wage rates and wage costs;
o our cash needs, including our ability to fund our future capital
expenditures and working capital requirements;
o the capabilities of, and the cost of improving, our inventory supply
chain processes; and
o the future availability of quality merchandise that can be profitably
sold for $1.00.
8
These forward-looking statements are subject to numerous risks and
uncertainties which may affect us including:
o possible difficulties in meeting our expansion goals and anticipated
comparable store net sales;
o possible delays, costs and other difficulties in integrating Dollar
Express with our business;
o possible increases in merchandise costs, shipping rates, wage levels,
inflation, competition and other adverse economic factors;
o our vulnerability to changes in our foreign trade relations and import
tariffs and restrictions, particularly those affecting China; and
o the capacity and performance of our distribution system and our
ability to expand its capacity in time to support our net sales
growth.
For a discussion of the risks, uncertainties and assumptions that could
affect our future events, developments or results, you should carefully review
the "Risk Factors," "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and "Business" sections in our most recently filed
prospectus.
In light of these risks, uncertainties and assumptions, the future events,
developments or results described by our forward-looking statements in this
document could turn out to be materially different from those we discuss or
imply. We have no obligation to publicly update or revise our forward-looking
statements after the date of this quarterly report and you should not expect us
to do so.
Results of Operations
The Three Months Ended June 30, 2000 Compared To The Three Months Ended June 30,
1999
Net Sales. Net sales increased 33.5% to $384.5 million for the three months
ended June 30, 2000 from $288.1 million for the three months ended June 30,
1999. We attribute this $96.4 million increase in net sales to two factors:
o Approximately 61% of the increase came from stores opened in 2000 and
1999, which are not included in our comparable store net sales
calculation.
o Approximately 39% of the increase came from comparable store net sales
growth. Comparable store net sales increased 14.3% for the second
quarter of 2000.
We believe our comparable store net sales increased because:
o We benefited from Easter being observed on April 23, 2000 compared to
April 4, 1999. Operating results in the second quarter of 2000 reflect
the positive effects of selling the majority of our Easter merchandise
in the second quarter in 2000 compared to the first quarter in 1999.
9
o We improved the mix of our merchandise and offered more consumable
products.
o We expanded and relocated stores.
During the second quarter of 2000 we opened 73 new stores and closed four
stores, compared to 71 new stores opened and three stores closed in the second
quarter of 1999. We continue to open a number of larger stores in the 8,000 to
12,000 total square foot range and increase the number of store expansions.
During the second quarter of 2000, we added 8.7% to our total square footage,
compared to increasing total square footage by 6.6% in the same period last
year. We expect to increase our total square footage by 25% to 27% for calendar
year 2000 by adding 220 to 230 stores. Our management anticipates that future
net sales growth will come mostly from square footage growth related to new
store openings and expansion of existing stores. We expect that our future
comparable store net sales increases, if any, will be lower than those we have
experienced in the past.
Gross Profit. Gross profit increased $33.6 million in the second quarter of
2000 compared to the same period in 1999, an increase of 32.5%. Our gross profit
as a percentage of sales is called our gross profit margin. Our gross profit
margin decreased 0.3% to 35.6% in the second quarter of 2000 compared to the
second quarter of 1999. Excluding merger related costs, our gross profit margin
decreased 0.1% to 35.9% in the second quarter of 2000 compared to the same
period in 1999. Our merchandise costs, which include freight costs, as a
percentage of net sales, increased slightly in the second quarter of 2000
compared to the same period in 1999 because of higher trans-Pacific shipping
rates imposed in May 1999 and the increase in domestic fuel costs. We expect
freight costs expressed as a percentage of net sales to continue to increase
through the third quarter of 2000 as compared to corresponding periods in 1999.
The increase in freight costs was partially offset by a decrease in occupancy
costs expressed as a percentage of net sales. If fuel costs remain at current
levels, we believe that our domestic freight expense will increase by $1.0 to
$1.2 million in 2000 compared with 1999.
Consistent with the first half of 2000, we expect to continue to buy more
consumable products, such as food and household chemicals, to meet customer
demand and supply our larger stores. Consumable products are generally
domestically produced and carry a higher cost than our other domestic items.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses, excluding depreciation and amortization, increased by
$21.5 million in the second quarter of 2000 compared to the same period in 1999,
an increase of 30.9%. Expressed as a percentage of net sales, selling, general
and administrative expenses, excluding depreciation and amortization, was 23.7%
for the three months ended June 30, 2000 compared to 24.1% for the three months
ended June 30, 1999. Excluding merger related expenses, selling, general and
administrative expenses, excluding depreciation and amortization, decreased as a
percentage of net sales to 22.8% in the second quarter of 2000 compared to 23.9%
in the second quarter of 1999. The decrease was due to leverage resulting from
increased comparable store net sales. Depreciation and amortization increased by
$1.9 million but decreased to 2.5% as a percentage of net sales, for the three
months ended June 30, 2000 compared to 2.6% for the three months ended June 30,
1999 because of leverage resulting from the increased comparable store net
sales.
10
We expect to incur additional selling, general and administrative expenses
totaling approximately $1.6 million during the third quarter of 2000 to phase
out some of Dollar Express's computer systems and pay severance and bonuses to
some of Dollar Express's employees. In addition, if the minimum wage were to
increase by $1.00 per hour, we believe that our annual payroll expenses would
increase by approximately 2.0% to 2.5% of operating expenses unless we realize
offsetting cost reductions.
Increases in expenses, such as wages and rents, could negatively influence
our operating results because we cannot pass on increased expenses to our
customers by increasing our merchandise prices. Consequently, our future success
depends, in large part, on our ability to control our costs.
Operating Income. Our operating income increased by $10.2 million during
the second quarter of 2000 compared to the second quarter of 1999, an increase
of 38.9%. As a percentage of net sales, operating income increased to 9.5% in
the second quarter of 2000 compared to 9.1% in the same period of 1999.
Excluding merger related items, operating income increased to $40.8 million in
the second quarter of 2000 compared to $27.3 million in the second quarter of
1999 and as a percentage of net sales to 10.6% from 9.5%. This increase was
caused by the decrease in selling, general and administrative expenses partially
offset by the decrease in gross profit margin discussed above.
Interest Income/Expense. Interest income increased to $1.3 million in the
second quarter of 2000 from $258,000 in the second quarter of 1999. This
increase resulted from higher levels of cash and cash equivalents throughout the
three months ended June 30, 2000 compared with the three months ended June 30,
1999. Interest expense increased to $1.9 million in the second quarter of 2000
from $1.6 million in the second quarter of 1999. This increase primarily related
to our capital lease obligations for the sale-leaseback transaction entered into
in the third quarter of 1999.
Income Taxes. Our effective tax rate increased to 39.8% for the second
quarter of 2000 from 38.3% for the second quarter of 1999. The rate increased
because of the higher amount of non-deductible merger related expenses in the
second quarter of 2000 compared with the second quarter of 1999.
The Six Months Ended June 30, 2000 Compared To The Six Months Ended June 30,
1999
Net Sales. Net sales increased 30.3% to $711.6 million for the six months
ended June 30, 2000 from $546.2 million for the six months ended June 30, 1999.
We attribute this $165.4 million increase in net sales to two factors:
o Approximately 73% of the increase came from stores opened in 2000 and
1999, which are not included in our comparable store net sales
calculation.
o Approximately 27% of the increase came from comparable store net sales
growth. Comparable store net sales increased 8.7% for the six months
ended June 30, 2000.
We believe comparable store net sales increased because we improved the mix of
our merchandise and offered more consumable products. In addition, we expanded
and relocated stores.
11
We opened 132 new stores and closed five stores during the first half of
2000, compared to 122 new stores opened and four stores closed in the first half
of 1999.
Gross Profit. Gross profit increased by $57.5 million in the first six
months of 2000 compared to the same period in 1999, an increase of 29.8%. Our
gross profit margin decreased 0.1% to 35.2% in the first six months of 2000
compared to the first six months of 1999. Excluding merger related costs, our
year-to-date gross profit margin remained constant at 35.4% in 2000 compared to
the same period in 1999. Our merchandise costs, which include freight costs, as
a percentage of net sales, increased slightly in the first half of 2000 compared
to the same period in 1999 because of higher trans-Pacific shipping rates
imposed in May 1999 and the increase in domestic fuel costs. This increase was
offset by a decrease in occupancy and markdowns expressed as a percentage of net
sales.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses, excluding depreciation and amortization, increased by
$40.6 million in the first half of 2000 compared to the same period in 1999, an
increase of 30.8%. Expressed as a percentage of net sales, selling, general and
administrative expenses, excluding depreciation and amortization, was 24.3% for
the six months ended June 30, 2000 compared to 24.2% for the six months ended
June 30, 1999. Excluding merger related expenses, selling, general and
administrative expenses, excluding depreciation and amortization, decreased as a
percentage of net sales to 23.8% in the first half of 2000 compared to 24.2% in
the first half of 1999. This decrease was primarily the result of leverage from
increased comparable store net sales. Depreciation and amortization increased by
$3.9 million, but remained constant as a percentage of net sales at 2.6%.
Operating Income. Our operating income increased by $12.9 million during
the first six months of 2000 compared to the same period in 1999, an increase of
27.6%. As a percentage of net sales, operating income decreased to 8.4% in the
first half of 2000 from 8.5% in the same period in 1999. If you exclude merger
related costs and expenses, operating income increased to $64.0 million in 2000
from $47.7 million in 1999 and increased as a percentage of net sales to 9.0%
from 8.7%. The increases were a result of the factors discussed above.
Interest Income/Expense. Interest income increased to $3.1 million in the
first six months of 2000 from $674,000 in the first six months of 1999. This
increase resulted from higher levels of cash and cash equivalents throughout the
six months ended June 30, 2000 compared with the six months ended June 30, 1999.
Interest expense increased to $4.2 million in the first half of 2000 from $2.9
million in the first half of 1999. This increase primarily related to our
capital lease obligations for the sale-leaseback transaction entered into in the
third quarter of 1999.
Income Taxes. Our effective tax rate increased to 39.4% for the six months
ended June 30, 2000 from 33.2% for the six months ended June 30, 1999. This rate
increased primarily because of the $2.2 million deferred tax benefit recorded in
connection with Dollar Express's conversion from an S- to C-corporation for
income tax purposes on February 5, 1999. In addition, the rate increased because
of the higher amount of non-deductible merger related expenses in the first half
of 2000 compared with the corresponding period in 1999.
12
Liquidity and Capital Resources
Our business requires capital to open new stores and operate existing
stores. Our working capital requirements for existing stores are seasonal in
nature and typically reach their peak in the months of September and October.
Historically, we have satisfied our seasonal working capital requirements for
existing stores and funded our store expansion program from internally generated
funds and borrowings under our credit facilities.
The following table compares cash-related information for the six months
ended June 30, 2000 and 1999:
Six Months Ended June 30,
2000 1999
---- ----
(in millions)
Net cash provided by (used in):
Operating activities $(59.0) $(23.2)
Investing activities (44.4) (26.7)
Financing activities (22.7) 5.2
The $35.8 million increase in cash used for operating activities was
primarily the result of an increase in expenditures for inventory. The
significant increase in inventory levels during the first half of 2000 reflects
the purchase of inventory necessary to support new stores and increased sales at
existing stores compared to 1999.
Cash used in investing activities is generally expended to open new stores.
The $17.7 million increase in capital expenditures for the six months ended June
30, 2000 compared to the same period in 1999 was primarily the result of the
following:
o an increase in the number of stores opened and an increase in the
average size of those stores;
o the expansion of the Store Support Center; and
o an increase in the number of relocations and expansions.
The $27.9 million increase in cash used in financing activities was
primarily the result of the following:
o We did not receive any proceeds from the issuance of equity in 2000
compared to the $32.2 million received in the first half of 1999
related to the issuance of Dollar Express's preferred stock and common
stock put warrants.
o We made net repayments of approximately $34.2 million in the first
half of 2000 due to repayment of Dollar Express's term loan and
revolving credit facility and the first principal payment on the
senior notes compared to net borrowings of approximately $29.5 million
in the first half of 1999 related primarily to draw downs on Dollar
Express's term loan and revolving credit facility.
o We received $8.2 million more cash pursuant to stock-based
compensation plans in the first half of 2000 compared to the first
half of 1999 because of increased stock option exercises.
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o We did not pay any distributions in 2000 compared to the $61.0 million
of distributions paid in the first half of 1999 to the former
shareholders of Dollar Express and Only $One.
At June 30, 2000, our borrowings under our senior notes and bonds were
$43.0 million and we had $135.0 million available through our bank facility. Of
the amount available, approximately $68.8 million was committed to letters of
credit issued for the routine purchase of imported merchandise.
Funding Requirements
Planned Capital Expenditures
Including the Dollar Express acquisition, our total planned capital
expenditures for 2000 are approximately $89.6 million. During 2000 and through
the second quarter of 2001, we expect to upgrade some of the Dollar Express
stores by installing new checkouts, adding display fixtures and improving store
layouts and merchandise displays. We believe that we can adequately fund our
planned capital expenditures and working capital requirements for the next few
years from cash provided by operations and borrowings under our credit facility.
Operating Leases
During the third quarter, we plan to enter into an operating lease
agreement of approximately $40.0 million for a new distribution center in the
Northeast. Under the agreement, the lessor is required to purchase the property,
pay the construction costs and lease the facility to us. This facility will
replace our current Philadelphia distribution center. Under the lease agreement
for the Philadelphia distribution center, we are liable for annual rent and
pass-through costs of approximately $525,000 through December 2002. As a result,
we may record a charge to cover our remaining liability under the lease if we
are unable obtain an acceptable sublease when we relocate the distribution
center.
Inventory Supply Chain
Within the next year, we expect to implement new supply chain systems and
test our new point-of-sale equipment in approximately ten stores. In 2001, we
expect to begin installing point-of-sale registers in up to 500 of our stores.
We expect that the point-of-sale data will allow us to track sales by
merchandise category and geographic region and assist our planning for future
purchases of inventory. Our supply chain management project is expected to cost
approximately $23.0 million to $26.0 million over the next two years.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
We are exposed to various types of market risk in the normal course of our
business, including the impact of interest rate changes and foreign currency
rate fluctuations. We may enter into interest rate swaps to manage exposure to
interest rate changes, and we may employ other risk management strategies,
including the use of foreign currency forward contracts. We do not enter into
derivative instruments for any purpose other than cash flow hedging purposes. We
do not hold derivatives for trading purposes.
There have been no material changes in our market risk exposures during the
six months ended June 30, 2000.
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PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS.
We are defendants in ordinary routine litigation and proceedings incidental
to our business. From time to time, the Consumer Products Safety Commission
requires us to recall products. We are currently in the process of recalling one
product. On several occasions, products we sold have been alleged to cause
injuries, but there are no pending or threatened injury claims. Some products we
sold have also been alleged to infringe the intellectual property rights of
others. We are currently defending a claim by a party who has alleged that
products we sold violated its intellectual property rights. We do not believe
that any of these matters are individually or in the aggregate material to us.
Item 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
During the quarter ended June 30, 2000, we issued an aggregate of 8,771,928
shares of our common stock in connection with our merger with Dollar Express.
The shares were issued to the existing shareholders of Dollar Express pursuant
to an exemption by reason of Section 4(2) of the Securities Act of 1933. These
sales were made without general solicitation or advertising. Each purchaser was
an accredited investor or a sophisticated investor with access to all relevant
information necessary. We have filed two Registration Statements on Form S-3
covering the resale of the shares issued to Dollar Express shareholders.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
At our Annual Meeting of Shareholders held on May 25, 2000, the following
people were re-elected to the Board of Directors:
Votes For Votes Withheld
--------- --------------
J. Douglas Perry 55,423,272 885,098
Thomas A. Saunders, III 55,423,259 885,111
Frank Doczi 55,470,229 838,141
As Class II directors, Mr. Perry, Mr. Saunders and Mr. Doczi will serve
until the Annual Meeting of Shareholders in 2003, or such time as successors are
elected and qualified. Macon F. Brock, Jr., Richard G. Lesser, John F. Megrue,
H. Ray Compton, and Alan L. Wurtzel continued as directors after the meeting and
no elections were held with respect to their offices.
At the same meeting, an amendment to the Dollar Tree Stores, Inc. Stock
Incentive Plan was adopted, increasing the shares that may be issued under the
plan by an additional 4.5 million shares, to a maximum of 12.6 million shares.
The amendment also increased the maximum annual grant per individual to 90,000
option shares, provided for gifts and certain other transfers of non-qualified
options and provided that stock splits or share dividends will not increase the
number of option shares granted to outside directors.
For 44,063,400
Against 12,192,386
Abstain 52,584
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Item 5. OTHER INFORMATION.
Grant of Options to Directors
On May 25, 2000, options to purchase 11,250 shares of common stock each
were granted to Mssrs. Doczi, Wurtzel and Lesser as continuing outside
directors, under the terms of the Stock Incentive Plan. In addition, the
Compensation Committee of the Board of Directors awarded Mr. Perry 11,250 option
shares in his capacity as Chairman of the Board. These options are immediately
exercisable and have an exercise price of $37.21 per share.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
None
(b) Reports on Form 8-K.
The following reports on Forms 8-K were filed during the second quarter
of 2000:
1. Report on Form 8-K, filed April 11, 2000, included a press
release regarding sales for the quarter ended March 31, 2000 and
the signing of a definitive merger agreement with Dollar Express.
2. Report on Form 8-K, filed April 27, 2000, included a press
release regarding earnings for the quarter ended March 31, 2000.
3. Report on Form 8-K, filed May 18, 2000, regarding independent
auditors' consent.
4. Report on Form 8-K, filed May 24, 2000, regarding the completion
of the merger with Dollar Express and the restatement of prior
period financial data as a result of the pooling-of-interests
merger.
5. Report on Form 8-K, filed June 20, 2000, included a press release
announcing that Dollar Tree's Board of Directors approved a 50%
stock dividend, having the effect of a 3-for-2 stock split.
Also, in July 2000, we filed two Forms 8-K:
1. Report on Form 8-K, filed July 12, 2000, included Supplemental
Consolidated Financial Statements of Dollar Tree Stores, Inc. and
subsidiaries as of December 31, 1999 and 1998 and for the years
ended December 31, 1999, 1998 and 1997 and the Supplemental
Condensed Consolidated Financial Statements as of March 31, 2000
and for the three months ended March 31, 2000 and 1999.
2. Report on Form 8-K, filed July 20, 2000, included a press release
regarding earnings for the quarter ended June 30, 2000. In
addition, the report included the reporting of 30-day post-merger
financial results.
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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.
DATE: August 11, 2000
DOLLAR TREE STORES, INC.
By: /s/ Frederick C. Coble
----------------------
Frederick C. Coble
Senior Vice President,
Chief Financial Officer
(principal financial and accounting officer)
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