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 March 31, 2001
( ) 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 May 10, 2001, there were 112,177,944 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
March 31, 2001 and December 31, 2000.............................. 3
Condensed Consolidated Income Statements
Three months ended March 31, 2001 and 2000........................ 4
Condensed Consolidated Statements of Cash Flows
Three months ended March 31, 2001 and 2000........................ 5
Notes to Condensed Consolidated Financial Statements............... 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations................................ 9
Item 3. Quantitative and Qualitative Disclosures About Market Risk.......... 14
PART II. OTHER INFORMATION
Item 1. Legal Proceedings................................................... 15
Item 6. Exhibits and Reports on Form 8-K.................................... 15
Signatures.................................................... 16
2
DOLLAR TREE STORES, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
March 31, December 31,
2001 2000
---- ----
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents.................................................. $ 65,984 $ 181,166
Merchandise inventories.................................................... 354,911 258,687
Deferred tax asset......................................................... 7,733 8,291
Prepaid expenses and other current assets.................................. 28,096 29,370
------- -------
Total current assets................................................... 456,724 477,514
------- -------
Property and equipment, net..................................................... 226,371 211,632
Deferred tax asset.............................................................. 1,976 1,566
Goodwill, net................................................................... 39,872 40,376
Other assets, net............................................................... 16,118 15,771
------- -------
TOTAL ASSETS........................................................... $ 741,061 $ 746,859
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable........................................................... $ 81,936 $ 75,404
Income taxes payable....................................................... 12,426 23,448
Other current liabilities.................................................. 31,873 46,906
Current portion of long-term debt.......................................... 25,000 25,000
Current installments of obligations under capital
leases................................................................... 3,611 3,547
------- -------
Total current liabilities.............................................. 154,846 174,305
------- -------
Long-term debt, excluding current portion....................................... 18,000 18,000
Obligations under capital leases, excluding
current installments......................................................... 24,254 25,183
Other liabilities (Note 5)...................................................... 12,691 10,713
------- -------
Total liabilities...................................................... 209,791 228,201
------- -------
Shareholders' equity(Notes 5 and 6):
Common stock, par value $0.01. 300,000,000 shares authorized, 112,140,038
shares issued and outstanding March 31, 2001; and 112,046,201 shares
issued and outstanding at December 31, 2000.............................. 1,121 1,121
Additional paid-in capital................................................. 158,535 156,780
Accumulated other comprehensive income..................................... 74 --
Retained earnings.......................................................... 371,540 360,757
------- -------
Total shareholders' equity............................................. 531,270 518,658
------- -------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY............................. $ 741,061 $ 746,859
======= =======
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
March 31,
-----------------------
2001 2000
---- ----
Net sales.................................................................... $ 387,319 $ 327,111
Cost of sales ............................................................... 255,858 213,538
------- -------
Gross profit ....................................................... 131,461 113,573
------- -------
Selling, general and administrative expenses:
Operating expenses...................................................... 101,691 81,661
Depreciation and amortization........................................... 11,831 8,693
------- -------
Total selling, general and administrative expenses.................. 113,522 90,354
------- -------
Operating income.................................................... 17,939 23,219
Other income (expense):
Interest income......................................................... 1,681 1,778
Interest expense........................................................ (1,294) (2,278)
Other, net (Note 5)..................................................... (792) --
------- -------
Total other expense................................................. (405) (500)
------- -------
Income before income taxes.......................................... 17,534 22,719
Provision for income taxes................................................... 6,751 8,767
------- -------
Net income.......................................................... 10,783 13,952
Less: Preferred stock dividends and accretion................................ -- 1,076
------- -------
Net income available to common shareholders......................... $ 10,783 $ 12,876
======= =======
Net income per share (Note 4):
Basic................................................................... $ 0.10 $ 0.13
======= =======
Diluted................................................................. $ 0.10 $ 0.12
======= =======
See accompanying Notes to Condensed Consolidated Financial Statements.
4
DOLLAR TREE STORES, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Three Months Ended,
March 31,
--------------------
2001 2000
---- ----
Cash flows from operating activities:
Net income............................................................... $ 10,783 $ 13,952
------- -------
Adjustments to reconcile net income to net cash used in operating
activities:
Depreciation and amortization........................................ 11,831 8,693
Loss on disposal of property and equipment........................... 367 205
Change in lease loss................................................. (148) (283)
Change in fair value of interest rate swaps.......................... 792 --
Provision for deferred income taxes.................................. 104 170
Tax benefit of stock option exercises................................ 444 2,930
Other non-cash adjustments to net income............................. 4 --
Changes in assets and liabilities increasing
(decreasing) cash and cash equivalents:
Merchandise inventories......................................... (96,224) (83,973)
Prepaid expenses and other current assets....................... 1,274 2,875
Other assets.................................................... (229) 141
Accounts payable................................................ 6,532 (728)
Income taxes payable............................................ (11,022) (18,691)
Other current liabilities....................................... (15,062) (11,692)
Other liabilities............................................... 1,477 (596)
------- -------
Net cash used in operating activities........................... (89,077) (86,997)
------- -------
Cash flows from investing activities:
Capital expenditures..................................................... (26,325) (18,069)
Proceeds from sale of property and equipment............................. 13 65
------- -------
Net cash used in investing activities........................... (26,312) (18,004)
------- -------
Cash flows from financing activities:
Proceeds from revolving credit facilities................................ -- 6,000
Repayment of long-term debt and facility fees............................ (239) (1,683)
Principal payments under capital lease obligations....................... (865) (778)
Proceeds from stock issued pursuant to stock-based compensation plans ... 1,311 3,586
------- -------
Net cash provided by financing activities....................... 207 7,125
------- -------
Net decrease in cash and cash equivalents..................................... (115,182) (97,876)
Cash and cash equivalents at beginning of period.............................. 181,166 181,587
------- -------
Cash and cash equivalents at end of period.................................... $ 65,984 $ 83,711
======= =======
Supplemental disclosure of cash flow information:
Cash paid for:
Interest, net of amount capitalized.................................. 958 1,725
Income taxes......................................................... 17,225 24,534
Non-cash investing activities:
Purchase of equipment under capital lease obligation................. -- 68
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 March 31, 2001, and for
the three-month period 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 period.
The condensed consolidated financial statements should be read in
conjunction with the consolidated financial statements and notes thereto,
together with management's discussion and analysis of financial condition and
results of operations for the year ended December 31, 2000, contained in the
Company's Annual Report on Form 10-K filed March 30, 2001. The results of
operations for the three-month period ended March 31, 2001 are not necessarily
indicative of the results to be expected for the entire year ending December 31,
2001.
Certain 2000 amounts have been reclassified for comparability with the 2001
financial statement presentation.
2. REVOLVING CREDIT FACILITY AND LETTERS OF CREDIT
Effective March 12, 2001, the Company entered into a Revolving Credit
Facility with its banks (Revolver Agreement). The Revolver Agreement provides
for, among other things: (1) a $50.0 million revolving line of credit, bearing
interest at the agent bank's prime interest rate or LIBOR, plus a spread, at the
option of the Company; and (2) an annual facilities fee, calculated as a
percentage, as defined, of the amount available under the line of credit, and
annual administrative fee payable quarterly. The Revolver Agreement, among other
things, requires the maintenance of certain specified financial ratios,
restricts the payment of certain distributions and prohibits the incurrence of
certain new indebtedness. The Revolver Agreement matures on March 11, 2002.
Effective March 12, 2001, the Company entered into a Letter of Credit
Reimbursement and Security Agreement that terminates on March 11, 2002. The
agreement provides $125.0 million for letters of credit, which are generally
issued in relation to routine purchases of imported merchandise. The Company's
existing $135.0 million revolving credit facility, which included provisions for
letters of credit, was terminated concurrent with entering into the new
facilities discussed above.
3. OPERATING LEASE AGREEMENT
Effective March 12, 2001, the Company entered into an operating lease
facility (Lease Facility) with its banks. The Lease Facility provides for, among
other things: (1) a $165.0 million operating lease facility, bearing interest at
the agent bank's prime interest rate or LIBOR, plus a spread, at the option of
the Company; and (2) an annual facilities fee, calculated as a percentage of the
amount available under the facility and annual administrative fee payable
quarterly. The Lease Facility, among other things, requires the maintenance of
certain specified financial ratios, restricts the payment of certain
distributions and prohibits the incurrence of certain new indebtedness.
Approximately $93.0 million is committed to the Savannah, Briar Creek and
Stockton distribution centers. In addition, approximately $20.0 million is
committed for expansion of the Stockton distribution
6
center. This facility replaced the operating lease facilities for the Savannah,
Briar Creek and Stockton distribution centers and expires in March 2006.
Under this type of agreement, the lessor purchases the property, pays for
the construction costs and subsequently leases the facility to the Company. The
lease provides for a residual value guarantee and includes a purchase option
based on the outstanding property costs plus any unpaid interest and rents under
the lease agreement. Each reporting period, the Company estimates its liability
under the residual value guarantee and, if necessary, records additional rent
expense on a straight-line basis over the remaining lease term.
4. NET INCOME PER COMMON SHARE
The following table sets forth the calculation of basic and diluted net
income per common share:
Three months ended
March 31,
-------------------
2001 2000
---- ----
(In thousands, except
per share data)
Basic net income per common share:
Net income ................................... $ 10,783 $ 13,952
Less: Preferred stock dividends and
accretion ................................... -- 1,076
------- -------
Net income available to common
shareholders.................................. 10,783 12,876
======= =======
Weighted average number of
common shares outstanding..................... 112,097 99,032
======= =======
Basic net income per common share........... $ 0.10 $ 0.13
======= =======
Diluted net income per common share:
Net income available to common
shareholders.................................. $ 10,783 $ 12,876
======= =======
Weighted average number of
common shares outstanding..................... 112,097 99,032
Dilutive effect of stock options and
warrants (as determined by applying
the treasury stock method).................... 667 9,615
------- -------
Weighted average number of common
shares and dilutive potential
common shares outstanding..................... 112,764 108,647
======= =======
Diluted net income per common share......... $ 0.10 $ 0.12
======= =======
At March 31, 2001, 729,643 stock options are not included in the
calculation of the weighted average number of common shares and dilutive
potential common shares outstanding because their effect would be anti-dilutive.
On March 20, 2001, the Board of Directors granted options to employees
under the Company's Stock Incentive Plan to purchase 1,505,000 shares of the
Company's common stock.
7
5. ACCOUNTING CHANGE
Effective January 1, 2001, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 133, "Accounting for Derivative Instruments and
Hedging Activities." This statement, as amended by SFAS No. 138, establishes
accounting and reporting standards for derivative instruments, including
derivative instruments embedded in other contracts, and for hedging activities.
The Company's interest rate swaps at January 1, 2001 do not qualify for hedge
accounting pursuant to the provisions of SFAS No. 133. As a result, the interest
rate swaps were recorded at their fair values in the consolidated balance sheet
on January 1, 2001 as a component of "accumulated other comprehensive income"
(see Note 6). The changes in their fair values during the first quarter were
recorded currently in earnings as a component of "other, net."
6. COMPREHENSIVE INCOME
The Company's comprehensive income reflects the effect of recording
derivative financial instruments pursuant to SFAS No. 133. The following table
provides a reconciliation of net income to total comprehensive income:
Three months ended
March 31,
-------------------
2001 2000
---- ----
(In thousands)
Net income...................................... $ 10,783 $ 13,952
Cumulative effect of change in accounting
for derivative financial instruments
(net of $44 tax expense)...................... 70 --
Other comprehensive income...................... 4 --
------ ------
Total comprehensive income................... $ 10,857 $ 13,952
====== ======
The cumulative effect recorded in accumulated other comprehensive income is
being amortized over the remaining lives of the related interest rate swaps.
7. SUBSEQUENT EVENT
On April 12, 2001, the Company entered into a $25.0 million interest rate
swap agreement (swap) to manage the risk associated with interest rate
fluctuations on a portion of its $165.0 million operating lease facility. The
swap creates the economic equivalent of a fixed rate lease by converting the
variable interest rate to a fixed rate. Under this agreement, the Company pays
interest to a financial institution at a fixed rate of 5.43%. In exchange, the
financial institution pays the Company at a variable interest rate, which
approximates the floating rate on the lease agreement, excluding the credit
spread. The interest rate on the swap is subject to adjustment monthly
consistent with the interest rate adjustment on the operating lease facility.
The swap is effective through March 2006. This interest rate swap qualifies for
hedge accounting treatment in accordance with SFAS No. 133. Accordingly, changes
in the fair value of the interest rate swap will be reported in the consolidated
balance sheets as a component of "accumulated other comprehensive income." These
amounts will be subsequently reclassified into rent expense as a yield
adjustment in the period in which the related interest on the variable rate
obligations affects earnings.
8
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;
o our growth plans, including our plans to add, expand or relocate
stores;
o the integration of Dollar Express into our business, including the
continued operation of the Philadelphia distribution center;
o a possible increase in shrink resulting from an increase in the
percentage of larger format stores that we operate;
o the possible effect of inflation and other economic changes on our
future costs and profitability; and
o our cash needs, including our ability to fund our future capital
expenditures and working capital requirements.
These forward-looking statements are subject to numerous risks and
uncertainties that may affect us including:
o adverse weather and economic conditions, such as consumer confidence;
o possible difficulties in meeting our sales and other expansion goals
and anticipated comparable store net sales results, which may result
in loss of leverage of selling, general and administrative expenses;
o the difficulties and uncertainties in adding and operating larger
stores, with which we have less experience;
o the seasonality of our sales, including the shift of Easter from April
23 in 2000 to April 15 in 2001, and the importance of our fourth
quarter operating results;
o increases in the cost of or disruption of the flow of our imported
goods, especially from China;
o the difficulties in managing our aggressive growth plans, including
opening stores on a timely basis;
o possible delays, costs and other difficulties in integrating Dollar
Express with our business;
9
o possible increases in merchandise costs, shipping rates, freight
costs, fuel costs, wage levels, inflation, competition and other
adverse economic factors; and
o the capacity and performance of our distribution system and our
ability to expand its capacity in time to support our 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 "Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business" sections in our Annual Report on Form 10-K filed
March 30, 2001. Also, carefully review "Risk Factors" in our most recent
prospectuses filed November 15, 2000 and August 3, 2000.
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 March 31, 2001 Compared To The Three Months Ended
March 31, 2000
Net Sales. Net sales increased 18.4% to $387.3 million for the three months
ended March 31, 2001 from $327.1 million for the three months ended March 31,
2000. This $60.2 million increase in net sales resulted from sales at stores
that are not included in our comparable store net sales calculation.
We include expanded and relocated stores in the calculation of our
comparable store net sales. Our flat comparable store net sales are primarily
attributable to the positive impact of relocated or expanded stores offset by a
decrease in traffic, which we believe was caused by declining consumer
confidence and store closings resulting from inclement weather.
The following table summarizes our store openings and closings and our
relocations and expansions for the first quarters of 2001 and 2000:
Larger
Traditional Format Total Relocations Square
Store Store Store Store and Footage
Period Openings Openings Openings Closings Expansions Increase
------ -------- -------- -------- -------- ---------- --------
First 16 44 60 8 31 6.9%
Quarter 2001
First 37 22 59 1 21 5.9%
Quarter 2000
We define our larger format stores as those with at least 7,000 gross
square feet. At March 31, 2001, we operate 1,781 stores with 10.5 million total
gross square feet. Approximately 444, or 25%, of our stores at March 31, 2001
are our larger format stores.
We believe that our comparable store net sales may decrease as much as 10%
in the second quarter of 2001, remain flat in the third quarter and increase
approximately 2% to 3% in the fourth quarter.
10
We expect to increase our total gross square footage approximately 27% to
29% in 2001. 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.
Gross Profit. Gross profit increased $17.9 million in the first quarter of
2001 compared to the same period in 2000, an increase of 15.8%. Our gross profit
as a percentage of net sales is called our gross profit margin. Our gross profit
margin decreased 0.8% to 33.9% in the first quarter of 2001 compared to the
first quarter of 2000. The decrease in gross profit margin is primarily due to
the following:
o inventory shrink, temporary workforce inefficiencies and continuing
challenges in operating our Philadelphia distribution center; and
o an increase in occupancy costs, as a percentage of net sales, primarily as
a result of flat comparable store net sales for the quarter.
The above decreases in gross margin were partially offset by improved
merchandise costs, which includes freight costs.
In addition to the shrink experienced at our Philadelphia distribution
center, we experienced higher than normal shrink in our Philadelphia area
stores, our larger format stores and our stores in urban areas. We believe that
our overall shrink may increase as a percentage of net sales as larger format
stores become a larger percentage of our store base. We believe the increased
shrink in our larger format stores results from the increased visibility of the
store and from carrying a higher percentage of needs-based consumable
merchandise.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses, excluding depreciation and amortization, increased by
$20.0 million in the first quarter of 2001 compared to the same period in 2000,
an increase of 24.5%. Expressed as a percentage of net sales, selling, general
and administrative expenses, excluding depreciation and amortization, was 26.3%
for the three months ended March 31, 2001 compared to 25.0% for the three months
ended March 31, 2000. The increase in operating expenses is primarily due to
loss of leverage resulting from flat comparable store net sales. In addition,
certain expenses, including repairs and maintenance, store supplies (primarily
resulting from opening larger stores), and workers' compensation and health
insurance, increased disproportionately with our growth rate.
Depreciation and amortization increased by $3.1 million to 3.1% as a
percentage of net sales, for the three months ended March 31, 2001 compared to
2.7% for the three months ended March 31, 2000. The increase as a percentage of
net sales was primarily due to the following:
o loss of leverage resulting from flat comparable store net sales; and
o increased depreciation expense associated with relocated and expanded
stores.
11
Operating Income. Our operating income decreased by $5.3 million during the
first quarter of 2001 compared to the first quarter of 2000, a decrease of
22.7%. As a percentage of net sales, operating income decreased to 4.6% in the
first quarter of 2001 compared to 7.1% in the same period of 2000. This decrease
was caused by the decrease in gross profit margin and increase in selling,
general and administrative expenses discussed above.
Interest Income/Expense. Interest income decreased to $1.7 million in the
first quarter of 2001 from $1.8 million in the first quarter of 2000. This
decrease resulted from slightly lower levels of cash and cash equivalents
throughout the three months ended March 31, 2001 compared with the three months
ended March 31, 2000 and a decrease in the rate earned on those investments.
Interest expense decreased to $1.3 million in the first quarter of 2001 from
$2.3 million in the first quarter of 2000. This decrease resulted from the
repayment of approximately $28 million in debt during the second quarter of 2000
and a decrease in the amount outstanding on our revolving credit facilities in
the first quarter of 2001 compared to the first quarter of 2000.
Income Taxes. Our effective tax rate decreased to 38.5% for the first
quarter of 2001 from 38.6% for the first quarter of 2000. The rate decreased
because Dollar Express's effective rate in the first quarter of 2000 was higher
than Dollar Tree's.
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 opening and relocation and expansion
programs from internally generated funds and borrowings under our credit
facilities.
The following table compares cash-related information for the three months
ended March 31, 2001 and 2000:
Three months ended
March 31,
--------------------
2001 2000
---- ----
(in millions)
Net cash provided by (used in):
Operating activities......................... $(89.1) $(87.0)
Investing activities......................... (26.3) (18.0)
Financing activities......................... 0.2 7.1
The $2.1 million increase in cash used for operating activities was
primarily the result of an increase in expenditures for inventory. The increase
in inventory purchases compared to the prior year period is less than our square
footage growth primarily because:
o we are managing our inventory to appropriate levels given the sales
results during the fourth quarter of 2000 and first quarter of 2001;
and
o new square footage growth requires less inventory per square foot as
more of our new stores are our larger format stores.
12
Cash used in investing activities is generally expended to open new stores.
The $8.3 million increase in capital expenditures for the three months ended
March 31, 2001 compared to the same period in 2000 was primarily the result of
the following:
o an increase in the average size of new stores opened in 2001;
o an increase in the number of relocations and expansions;
o investments made to improve our supply chain processes; and
o the conversion of 20 Dollar Express stores.
The $6.9 million decrease in cash provided by financing activities was
primarily the result of the following:
o We did not draw on our line of credit during the first quarter of 2001
as we did in the first quarter of 2000. The $6.0 million drawn on the
line of credit in the prior year was used to support Dollar Express's
operations prior to the acquisition on May 5, 2000.
o We received $2.3 million less cash pursuant to stock-based
compensation plans in the first quarter of 2001 compared to the first
quarter of 2000 because of decreased stock option exercises, which
resulted from our decreased stock price as compared to the prior year
period.
o We paid $1.4 million less in debt repayments and facility fees
compared to the prior year first quarter.
At March 31, 2001, our borrowings under our senior notes and bonds were
$43.0 million and we had $50.0 million available through our bank facility. Of
the $125.0 million available under the Letter of Credit Reimbursement and
Security Agreement, approximately $47.3 million was committed for routine
purchases of imported merchandise.
Revolving Credit Facility and Letters of Credit
Effective March 12, 2001, we entered into a new revolving credit facility
with our banks, which provides for a $50.0 million unsecured revolving credit
facility to be used for working capital requirements. The facility bears
interest at the agent bank's prime interest rate or LIBOR plus a spread, at our
option. The facility, among other things, requires the maintenance of specified
ratios, restricts the payments of certain distributions and limits certain types
of debt we can incur. It terminates on March 11, 2002.
Also, effective March 12, 2001, we entered into a Letter of Credit
Reimbursement and Security Agreement that provides $125.0 million for letters of
credit, which are generally issued in relation to routine purchases of imported
merchandise. The agreement terminates on March 11, 2002.
Operating Leases
Effective March 12, 2001, we entered into an operating lease facility for
$165.0 million, of which approximately $93.0 million was committed to the
Stockton, Briar Creek and Savannah distribution centers. This facility replaced
13
the operating lease agreements for our Stockton, Briar Creek and Savannah
distribution centers. The termination date of this operating lease facility is
March 2006. As a result, the lease expiration date for the Stockton, Briar Creek
and Savannah distribution centers is now March 2006. The lease facility, among
other things, requires the maintenance of certain specified financial ratios,
restricts the payment of certain distributions and limits certain types of debt
we can incur.
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 our 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.
However, certain of our interest rate swaps do not qualify for hedge accounting
treatment under SFAS No. 133, as amended by SFAS No. 138, because they contain
provisions that "knockout" the swap when the variable interest rate exceeds a
predetermined rate.
Interest Rate Risk
On April 12, 2001, we entered into a $25.0 million interest rate swap
agreement to manage the risk associated with interest rate fluctuations on a
portion of our $165.0 million operating lease facility. The swap creates the
economic equivalent of a fixed rate lease by converting the variable interest
rate to a fixed rate. Under this agreement, we pay interest to a financial
institution at a fixed rate of 5.43%. In exchange, the financial institution
pays us at a variable interest rate, which approximates the floating rate on the
lease agreement, excluding the credit spread. The interest rate on the swap is
subject to adjustment monthly consistent with the interest rate adjustment on
the operating lease facility. The swap is effective through March 2006.
The following table summarizes the financial terms of our interest rate
swap agreements and their fair values at March 31, 2001:
Hedging Receive Pay Knockout
Instrument Variable Fixed Rate Expiration Fair Value
---------- -------- ----- ---- ---------- ----------
$19.0 million LIBOR 4.88% 7.75% 4/1/09 ($46,000)
interest rate swap
$10.0 million LIBOR 6.45% 7.41% 6/2/04 ($479,000)
interest rate swap
$5.0 million LIBOR 5.83% 7.41% 6/2/04 ($153,000)
interest rate swap
$25.0 million LIBOR 5.43% N/A 3/12/06 N/A
interest rate swap
Management cannot predict the changes in fair value of our interest rate swaps.
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Foreign Currency Risk
There have been no material changes to our market risk exposures resulting
from foreign currency transactions during the three months ended March 31, 2001.
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 claims by parties who have alleged that
products we sold violated their intellectual property rights. We do not believe
that any of these matters are individually or in the aggregate material to us.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
None.
(b) Reports on Form 8-K:
The following reports on Form 8-K were filed during the first quarter of
2001:
1. Report on Form 8-K filed January 12, 2001, included the sales results
for the quarter and year ended December 31, 2000
2. Report on Form 8-K, filed January 26, 2001, included the earnings
results for the quarter and year ended December 31, 2000
3. Report on Form 8-K filed March 16, 2001, included a first quarter 2001
outlook
Also, in the second quarter of 2001, we filed one report on Form 8-K:
1. Report on Form 8-K, filed April 26, 2001, included the earnings
results for the quarter ended March 31, 2001 and an outlook for the
remainder of 2001
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SIGNATURES
Pursuant to the requirements 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: May 11, 2001
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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