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 September 30,
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 November 8, 2001, there were 112,269,889 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
September 30, 2001 and December 31, 2000........................... 3
Condensed Consolidated Income Statements
Three months and nine months ended September 30, 2001 and 2000..... 4
Condensed Consolidated Statements of Cash Flows
Nine months ended September 30, 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......... 17
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.................................................. 18
Item 6. Exhibits and Reports on Form 8-K................................... 19
Signatures..................................................... 20
2
DOLLAR TREE STORES, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
September 30, December 31,
2001 2000
---- ----
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents.................................................... $ 44,844 $181,166
Merchandise inventories...................................................... 438,383 258,687
Deferred tax asset........................................................... 11,298 8,291
Prepaid expenses and other current assets.................................... 21,227 29,370
------- -------
Total current assets..................................................... 515,752 477,514
------- -------
Property and equipment, net....................................................... 271,603 211,632
Deferred tax asset................................................................ 2,062 1,566
Goodwill, net .................................................................... 38,862 40,376
Other assets, net................................................................. 16,631 15,771
------- -------
TOTAL ASSETS............................................................. $844,910 $746,859
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable............................................................. $135,720 $ 75,404
Income taxes payable......................................................... 18,822 23,448
Other current liabilities.................................................... 39,509 46,906
Current portion of long-term debt............................................ 25,000 25,000
Current installments of obligations under
capital leases........................................................... 3,765 3,547
------- -------
Total current liabilities................................................ 222,816 174,305
------- -------
Long-term debt, excluding current portion......................................... 12,000 18,000
Obligations under capital leases, excluding current
installments................................................................. 22,387 25,183
Other liabilities (Notes 5 and 6)................................................. 19,791 10,713
------- -------
Total liabilities........................................................ 276,994 228,201
------- -------
Shareholders' equity (Note 8):
Common stock, par value $0.01. Authorized
300,000,000 shares, 112,188,913 shares
issued and outstanding at September 30, 2001
and 112,046,201 shares issued and
outstanding at December 31, 2000......................................... 1,122 1,121
Additional paid-in capital................................................... 160,186 156,780
Accumulated other comprehensive
income (loss) (Notes 5, 6 and 7)......................................... (1,142) --
Retained earnings............................................................ 407,750 360,757
------- -------
Total shareholders' equity............................................... 567,916 518,658
------- -------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY............................... $844,910 $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 Nine Months Ended
September 30, September 30,
-------------------------- --------------------------
2001 2000 2001 2000
---- ---- ---- ----
Net sales..................................................... $444,745 $377,318 $1,272,425 $1,088,932
Cost of sales ................................................ 290,450 238,328 829,582 698,324
Merger related costs.......................................... -- -- -- 1,100
------- ------- --------- ---------
Gross profit......................................... 154,295 138,990 442,843 389,508
------- ------- --------- ---------
Selling, general and administrative expenses:
Operating expenses....................................... 114,513 92,023 325,058 261,381
Merger related expenses.................................. -- -- -- 3,266
Depreciation and amortization............................ 13,962 10,638 38,781 28,887
------- ------- --------- ---------
Total selling, general
and administrative expenses........................ 128,475 102,661 363,839 293,534
------- ------- --------- ---------
Operating income..................................... 25,820 36,329 79,004 95,974
------- ------- --------- ---------
Other income (expense):
Interest income.......................................... 513 715 3,345 3,812
Interest expense......................................... (1,276) (1,514) (3,925) (5,729)
Other, net (Note 5)...................................... (1,379) -- (1,974) --
------- ------- --------- ---------
Other expense, net................................... (2,142) (799) (2,554) (1,917)
------- ------- --------- ---------
Income before income taxes........................... 23,678 35,530 76,450 94,057
Provision for income taxes.................................... 9,126 13,680 29,457 36,720
------- ------- --------- ---------
Income before extraordinary item..................... 14,552 21,850 46,993 57,337
Loss on debt extinguishment, net of
tax benefit of $242........................................ -- -- -- 387
------- ------- --------- ---------
Net income........................................... 14,552 21,850 46,993 56,950
Less: Preferred stock dividends and
accretion ................................................ -- -- -- 1,413
------- ------- --------- ---------
Net income available to
common shareholders................................ $ 14,552 $ 21,850 $ 46,993 $ 55,537
======= ======= ========= =========
Basic net income per common share (Note 4):
Income before extraordinary item......................... $ 0.13 $ 0.21 $ 0.42 $ 0.55
Net income............................................... 0.13 0.21 0.42 0.54
Diluted net income per common share (Note 4):
Income before extraordinary item......................... $ 0.13 $ 0.19 $ 0.42 $ 0.50
Net income............................................... 0.13 0.19 0.42 0.50
See accompanying Notes to Condensed Consolidated Financial Statements
4
DOLLAR TREE STORES, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Nine Months Ended
September 30,
-----------------------
2001 2000
---- ----
Cash flows from operating activities:
Net income................................................................... $ 46,993 $ 56,950
Adjustments to reconcile net income to net cash
used in operating activities:
Depreciation and amortization............................................ 38,781 28,887
Loss on disposal of property and equipment............................... 1,222 743
Extraordinary loss on early extinguishment of debt....................... -- 629
Provision for deferred income taxes...................................... (3,547) (3,206)
Tax benefit of stock option exercises.................................... 1,418 15,901
Change in fair value of non-hedging interest rate
swaps.................................................................. 1,974 --
Other non-cash adjustments to net income................................. 11 --
Changes in assets and liabilities increasing
(decreasing) cash and cash equivalents:
Merchandise inventories............................................. (179,696) (157,217)
Prepaid expenses and other current assets........................... 8,143 (10,818)
Other assets, net................................................... (2,205) (117)
Accounts payable.................................................... 60,316 15,585
Income taxes payable................................................ (4,626) (28,992)
Other current liabilities........................................... (7,397) (7,881)
Other liabilities................................................... 7,218 (247)
------- -------
Net cash used in operating activities.......................... (31,395) (89,783)
------- -------
Cash flows from investing activities:
Capital expenditures......................................................... (98,064) (71,618)
Proceeds from sale of property and equipment................................. 48 199
------- -------
Net cash used in investing activities.......................... (98,016) (71,419)
------- -------
Cash flows from financing activities:
Proceeds from revolving credit facilities.................................... -- 33,300
Repayment of long-term debt and facility fees................................ (6,239) (27,708)
Repayment of revolving credit facilities..................................... -- (22,900)
Principal payments under capital lease obligations........................... (2,661) (2,371)
Proceeds from stock issued pursuant to
stock-based compensation plans............................................. 5,761 23,248
Repurchase of common stock (Note 8).......................................... (3,772) --
------- -------
Net cash provided by (used in) financing activities............ (6,911) 3,569
------- -------
Net decrease in cash and cash equivalents......................................... (136,322) (157,633)
Cash and cash equivalents at beginning of period.................................. 181,166 181,587
------- -------
Cash and cash equivalents at end of period........................................ $ 44,844 $ 23,954
======= =======
Supplemental disclosure of cash flow information: Cash paid for:
Interest..................................................................... $ 3,513 $ 5,494
Income taxes................................................................. 36,216 52,826
Non-cash investing activity -
Purchase of equipment under capital lease obligations........................ $ 83 $ 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 September 30, 2001, and
for the three- and nine-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 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- and nine-month periods ended September 30, 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; (2) an annual facilities fee, calculated as a percentage,
as defined, of the amount available under the line of credit; and (3) an 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. At
September 30, 2001, no amount was outstanding under the Revolver Agreement.
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. At September
30, 2001, $52.0 million was committed to letters of credit.
The Company's $135.0 million revolving credit facility, which included
provisions for letters of credit, was terminated concurrently 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; (2) an annual facilities fee, calculated as a percentage of the
amount available under the facility; and (3) an annual administrative fee
payable quarterly. The Lease Facility, among other things, requires the
6
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 Stockton, Savannah and Briar
Creek distribution centers. In addition, approximately $20.0 million is
committed for expansion of the Stockton distribution center. This facility
replaced the operating lease facilities for the Stockton, Savannah and Briar
Creek distribution centers and expires in March 2006.
Under this agreement, the lessor purchases the property, pays for the
construction costs and subsequently leases the facility to the Company. The
lease provides for a residual value guarantee and includes a purchase option
based on the outstanding property costs plus any unpaid interest and rents under
the lease agreement. Each reporting period, the Company estimates its liability
under the residual value guarantee and, if necessary, records additional rent
expense on a straight-line basis over the remaining lease term.
4. NET INCOME PER COMMON SHARE
The following table sets forth the calculation of basic and diluted income
before extraordinary item per common share:
Three months ended Nine months ended
September 30, September 30,
-------------------------- ------------------------
2001 2000 2001 2000
---- ---- ---- ----
(In thousands, except per share data)
Basic income before extraordinary item per common share:
Income before extraordinary item......................... $ 14,552 $ 21,850 $ 46,993 $ 57,337
Less: Preferred stock dividends and
accretion ............................................ -- -- -- 1,413
------- ------- ------- -------
Income before extraordinary item
available to common shareholders...................... $ 14,552 $ 21,850 $ 46,993 $ 55,924
======= ======= ======= =======
Weighted average number of
common shares outstanding............................. 112,363 106,115 112,214 102,254
======= ======= ======= =======
Basic income before
extraordinary item per common
share.......................................... $ 0.13 $ 0.21 $ 0.42 $ 0.55
======= ======= ======= =======
Diluted income before extraordinary item per common share:
Income before extraordinary
item available to common
shareholders.......................................... $ 14,552 $ 21,850 $ 46,993 $ 55,924
======= ======= ======= =======
Weighted average number of
common shares outstanding............................. 112,363 106,115 112,214 102,254
Dilutive effect of stock options and
warrants (as determined by applying
the treasury stock method)............................ 874 7,384 737 9,044
------- ------- ------- -------
Weighted average number of common
shares and dilutive potential
common shares outstanding............................. 113,237 113,499 112,951 111,298
======= ======= ======= =======
Diluted income before
extraordinary item per common
share.......................................... $ 0.13 $ 0.19 $ 0.42 $ 0.50
======= ======= ======= =======
7
At September 30, 2001, 721,049 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 1,403,000 shares of the
Company's common stock.
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 in effect at January 1, 2001 did 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 7). The $2.0 million net decrease in their fair
values during the first nine months of 2001 is recorded currently in earnings as
a component of "other, net."
6. DERIVATIVE FINANCIAL INSTRUMENTS
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 are reported in the consolidated
balance sheets as a component of "accumulated other comprehensive income." These
amounts are 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
7. 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 Nine months ended
September 30, September 30,
------------------------ ------------------------
2001 2000 2001 2000
---- ---- ---- ----
(In thousands) (In thousands)
Net income........................................ $ 14,552 $ 21,850 $ 46,993 $ 56,950
Cumulative effect of change
in accounting for derivative
financial instruments(net of
$44 tax expense)............................... -- -- 70 --
Fair value adjustment - derivative
hedging instruments............................ (1,357) -- (1,223) --
Amortization of SFAS 133
cumulative effect.............................. 4 -- 11 --
------ ------ ------ ------
Total comprehensive income..................... $ 13,199 $ 21,850 $ 45,851 $ 56,950
====== ====== ====== ======
The cumulative effect recorded in accumulated other comprehensive income is
being amortized over the remaining lives of the related interest rate swaps.
8. SHARE REPURCHASE PROGRAM
In September 2001, the Company's Board of Directors authorized the
repurchase of up to $100 million of the Company's common stock in connection
with the Securities and Exchange Commission's (SEC) Emergency Relief Order. The
Company had previously been unable to enter into a formal repurchase program
because of its merger with Dollar Express, Inc. on May 5, 2000, which was
accounted for as a pooling of interests. Pursuant to this program, the Company
repurchased and retired 225,000 shares of common stock for approximately $3.8
million. The Company's limited share repurchase plan expired concurrently with
the expiration of the SEC's Exemptive Order on October 12, 2001.
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.
9
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 the sources of increases in net sales;
o comparable store net sales in future periods;
o our future merchandise mix and its effect on gross margins;
o our growth plans, including our plans to add, expand or relocate stores;
o the possible effect of inflation and other economic changes on our future
costs and profitability;
o our cash needs, including our ability to fund our future capital
expenditures and working capital requirements; and
o the effect of new accounting pronouncements on future net income.
These forward-looking statements are subject to numerous risks and
uncertainties that may affect us including:
o adverse weather and economic conditions, such as declining consumer
confidence, recession and unemployment in the wake of the incidents of
September 11, 2001;
o possible difficulties in meeting our sales, other expansion goals and
anticipated comparable store net sales results, which may result in
loss of leverage of increasing selling, general and administrative
expenses;
o the seasonality of our sales 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 competition and possible increases in merchandise costs, shipping rates,
freight costs, or other operating costs such as wage levels; and
o the capacity and performance of our distribution system and our ability
to expand its capacity in time to support our sales growth.
10
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 September 30, 2001 Compared To The Three Months
Ended September 30, 2000
Net Sales. Net sales increased 17.9% in the third quarter of 2001 compared
to the same period in 2000. The $67.4 million increase in net sales resulted
from sales at stores that are not included in our comparable store net sales
calculation partially offset by a 0.1% decrease in our comparable store net
sales. We believe our comparable store net sales decrease was due primarily to a
slight decrease in customer traffic throughout the quarter resulting from the
weak U.S. economy as compared to the third quarter of 2000. We include expanded
and relocated stores in the calculation of our comparable store net sales.
The following table summarizes our store openings and closings and our
relocations and expansions for the third quarters of 2001 and 2000:
Total Average Gross Relocations
Store Square Feet Per Store and
Period Openings New Store Closings Expansions
------ -------- --------- -------- ----------
Third
Quarter 2001 79 8,000 7 41
Third
Quarter 2000 49 8,200 6 31
At September 30, 2001, we operate 1,935 stores with 12.3 million total
gross square feet. At September 30, 2000, we operated 1,677 stores with 9.3
million total gross square feet.
We expect to increase our total store gross square footage by approximately
29% for the full year 2001. Our management anticipates that net sales growth
during the next twelve months will come mostly from square footage growth
related to new store openings and expansion of existing stores. The remaining
sales growth, if any, will come from comparable store net sales increases. For
the fourth quarter of 2001, we are planning inventory levels to support a
comparable store net sales increase of approximately 2%.
Gross Profit. Our gross profit as a percentage of sales is called our gross
profit margin. Our gross profit margin decreased to 34.7% in the third quarter
of 2001 compared to 36.8% in the same period in 2000. The decrease in gross
profit margin for the quarter is primarily due to:
o a change in merchandise mix to include a higher percentage of domestic
merchandise, including a larger percentage of consumables, which carry
a higher cost than our other items;
11
o loss of leverage on occupancy and distribution costs caused by the 0.1%
decrease in comparable store net sales; and
o inventory shrink primarily related to operating our Philadelphia
distribution network, which we replaced with our new Briar Creek
distribution center in August 2001.
The above decreases in gross profit margin were partially offset by improved
inbound freight costs.
As a result of the space afforded consumable merchandise in our larger
stores, we expect to sell more consumables as a percentage of domestic
merchandise as we continue to open larger stores. This trend will continue to
place pressure on our gross margins because consumable products generally carry
a higher cost than our other domestic items. While consumable merchandise places
pressure on our gross margins, it turns more quickly than our other merchandise,
resulting in increased sales.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses, excluding depreciation and amortization, increased
24.4% in the third quarter of 2001 compared to the same period in 2000. Selling,
general and administrative expenses, excluding depreciation and amortization,
increased as a percentage of net sales to 25.7% in the third quarter of 2001
compared to 24.4% in the third quarter of 2000. The increase in selling, general
and administrative expenses resulted from:
o loss of leverage caused by the 0.1% decrease in comparable store net
sales; and
o an increase in payroll-related costs, including workers' compensation.
In addition, we recorded a $1.7 million charge in connection with closing our
Philadelphia distribution facilities, which includes lease costs and an
impairment charge for property and equipment. We also increased our existing
liability for our former Memphis distribution center by approximately $0.7
million due to changes in market conditions. These additional costs compare to
approximately $1.7 million of additional expense incurred in the third quarter
of 2000 related to the integration of Dollar Express, Inc.
Depreciation and amortization increased to 3.1% as a percentage of net
sales for the three months ended September 30, 2001 compared to 2.8% in the same
period in 2000. The increase as a percentage of net sales is primarily due to
loss of leverage and increased depreciation expense associated with expanded and
relocated stores.
Operating Income. Due to the reasons discussed above, our operating income
decreased as a percentage of net sales to 5.8% in the third quarter of 2001 from
9.6% in the same period in 2000.
Interest Income/Expense. Interest income decreased $0.2 million in the
third quarter of 2001 compared to the third quarter of 2000. This decrease
resulted from the significantly lower interest rates for the three months ended
September 30, 2001 compared with the three months ended September 30, 2000.
Interest expense decreased to $1.3 million in the third quarter of 2001 from
12
$1.5 million in the third quarter of 2000. This decrease resulted primarily from
the $6.0 million repayment on our Senior Notes in April 2001 and a decrease in
our capital lease obligations.
Other, net. The $1.4 million other expense is the result of reflecting our
non-hedging interest rate swaps at fair value in accordance with SFAS No. 133.
The decrease in their fair values is primarily the result of decreasing interest
rates. Due to many factors, our management is not able to predict changes in the
fair values of our interest rate swaps.
The Nine Months Ended September 30, 2001 Compared To The Nine Months Ended
September 30, 2000
Net Sales. Net sales increased 16.9% for the first nine months of 2001
compared to the same period in 2000. We attribute this $183.5 million increase
in net sales to sales at stores that are not included in our comparable store
net sales calculation partially offset by a 0.7% decrease in our comparable
store net sales in the first nine months of 2001.
We believe our comparable store net sales decreased during the first nine
months of 2001 because of:
o decreased customer traffic patterns throughout 2001 as compared to 2000
as a result of the weaker U.S. economy during the first nine months of
2001; and
o the shift in the Easter holiday to one week earlier in April 2001, which
resulted in a shorter Easter selling season.
The following table summarizes our store openings and closings and our
relocations and expansions for the nine-month periods ended September 30, 2001
and 2000:
Average Square
Total Gross Square Relocations Footage
Store Feet Per New Store and Increase
Period Openings Store Closings Expansions Since 12/31
------ -------- ----- -------- ---------- -----------
Year-to-Date
2001 228 9,000 22 94 24.9%
Year-to-Date
2000 181 7,800 11 83 21.8%
Gross Profit. Excluding merger related costs in 2000, our year-to-date
gross profit margin decreased to 34.8% in 2001 compared to 35.9% in 2000. The
decrease in gross profit margin year-to-date is primarily due to:
o loss of leverage on occupancy and distribution costs; and
o inventory shrink and temporary workforce inefficiencies caused by
challenges operating our now closed Philadelphia distribution facilities.
The above decreases in gross profit margin were partially offset by improved
inbound freight costs.
13
Selling, General and Administrative Expenses. Excluding merger related
expenses in 2000, selling, general and administrative expenses, excluding
depreciation and amortization, increased as a percentage of net sales to 25.5%
in the first three quarters of 2001 compared to 24.0% in the first three
quarters of 2000. The increase in selling, general and administrative expenses
resulted from:
o loss of leverage caused by the 0.7% decrease in comparable store net
sales; and
o an increase in payroll-related costs, including workers' compensation
expense.
Depreciation and amortization increased to 3.0% as a percentage of net
sales in 2001 compared to 2.7% in 2000. The increase as a percentage of net
sales is primarily due to loss of leverage and increased depreciation expense
associated with expanded and relocated stores.
Operating Income. Due to the reasons discussed above, excluding merger
related items in 2000, operating income decreased as a percentage of net sales
to 6.2% for the first nine months of 2001 from 9.2% for the same period in 2000.
Interest Income/Expense. Interest income decreased $0.5 million in the
first three quarters of 2001 compared to the first three quarters of 2000. This
decrease resulted from lower interest rates throughout the nine months ended
September 30, 2001 compared with the same period in 2000. Interest expense
decreased to $3.9 million in the first three quarters of 2001 from $5.7 million
in the first three quarters of 2000. This decrease resulted primarily from the
repayment of approximately $34.5 million of debt during the second quarter of
2000, including the amounts outstanding on our revolving credit facilities.
Other, net. The $2.0 million other expense is the result of reflecting our
non-hedging interest rate swaps at fair value in accordance with SFAS No. 133.
The decrease in their fair values is primarily the result of decreasing interest
rates.
Income Taxes. Our effective tax rate decreased to 38.5% for the nine months
ended September 30, 2001 from 39.0% for the nine months ended June 30, 2000. Our
tax rate was higher in 2000 because of the non-deductible merger related
expenses incurred in the second quarter of 2000.
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
program from internally generated funds and borrowings under our credit
facilities.
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The following table compares cash-related information for the nine months
ended September 30, 2001 and 2000:
Nine Months Ended September 30,
-------------------------------
2001 2000
---- ----
(in millions)
Net cash provided by (used in):
Operating activities............. $(31.4) $(89.8)
Investing activities............. (98.0) (71.4)
Financing activities............. (6.9) 3.6
The $58.4 million decrease in cash used in operating activities was
primarily due to the following:
o a $44.7 million decrease in cash used for accounts payable resulting
from the timing of payments for merchandise and other operating
expenses; and
o a $24.4 million decrease in cash used for income taxes primarily due to
a change in the timing of the estimated payments due to the
extension of the filing deadline to October 1, 2001. In addition,
we had a decrease in estimated tax payments in 2001 compared to 2000
because of the decrease in current year income before income taxes.
The above decreases in cash used in operating activities was partially offset by
a $22.5 million increase in cash expended for inventory due primarily to the
increase in gross retail square footage during 2001. Our inventory balance
increased at a lower rate in 2001 compared to 2000 as a result of the generally
weak sales results compared to the prior year and the carry over of inventory
from the fourth quarter of 2000.
Cash used in investing activities is generally expended to open new and
expand existing stores. The $26.6 million increase in capital expenditures for
the nine months ended September 30, 2001 compared to the same period in 2000 was
primarily the result of:
o an increase in the number of stores opened, relocated or expanded and an
increase in the average size of those stores;
o investments made to improve our supply chain processes; and
o conversion of Dollar Express, Inc stores to the Dollar Tree format.
The $10.5 million increase in cash used in financing activities was
primarily the result of the following:
o an approximate $17.5 million decrease in cash received pursuant to
stock-based compensation plans, which resulted from our decreased stock
price in the first three quarters of 2001 compared to the first three
quarters of 2000; and
o repayments of approximately $6.2 million on long-term debt in the first
three quarters of 2001 compared to $17.3 million of net repayments in
the first three quarters of 2000 related to Dollar Express, Inc's term
loan, revolving credit facilities and the principal payment on the
senior notes.
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At September 30, 2001, our borrowings under our senior notes and bonds were
$37.0 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 $52.0 million was committed to letters of
credit issued 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 payment of certain distributions and limits certain types
of debt we can incur. The agreement 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 is committed to the
Stockton, Savannah and Briar Creek distribution centers. In addition,
approximately $20.0 million is committed for expansion of the Stockton
distribution center. This facility replaced the operating lease agreements for
our Stockton, Savannah and Briar Creek distribution centers. The termination
date of this operating lease facility is March 2006. As a result, the lease
expiration date for the Stockton, Savannah and Briar Creek 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.
New Accounting Pronouncements
Statements of Financial Accounting Standards No. 141 and 142
SFAS No. 141, "Business Combinations," requires that the purchase method of
accounting be used for all business combinations initiated after June 30, 2001.
SFAS No. 142, "Goodwill and Other Intangible Assets," establishes
accounting standards for intangible assets and goodwill and is effective January
1, 2002. SFAS No. 142 requires that goodwill and intangible assets with
indefinite useful lives no longer be amortized, but rather tested for impairment
at least annually in accordance with SFAS No. 142. SFAS No. 142 will also
require that intangible assets with definite useful lives be amortized over
their respective estimated useful lives and reviewed for impairment in
accordance with SFAS No. 144, "Accounting for the Impairment or Disposal of
Long-lived Assets." Application of the non-amortization provisions of SFAS No.
142 is expected to result in a reduction in amortization expense of
approximately $2.0 million per year. We will perform the first of the required
impairment tests of goodwill as of January 1, 2002, to evaluate existing
goodwill for impairment upon adoption of SFAS No. 142 and will record any
transition impairment as a cumulative effect of a change in accounting principle
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in the consolidated income statements. Because of the extensive effort needed to
comply with adopting SFAS No. 142, it is not possible to reasonably estimate the
impact of adopting this Statement on our financial statements at the date of
this report, including whether any transitional impairment losses will be
required to be recognized.
Statement of Financial Accounting Standards No. 143
In June 2001, the Financial Accounting Standards Board issued SFAS No. 143,
"Accounting for Asset Retirement Obligations," which addresses financial
accounting and reporting for obligations associated with the retirement of
tangible long-lived assets and the associated asset retirement costs. The
standard applies to legal obligations associated with the retirement of
long-lived assets that result from the acquisition, construction, development
and/or normal use of the asset. SFAS No. 143 is effective for fiscal years
beginning after June 15, 2002. Our management does not believe the
implementation of this standard will have a material effect on our financial
condition or results of operations.
Statement of Financial Accounting Standards No. 144
In October 2001, the Financial Accounting Standards Board issued SFAS No.
144, "Accounting for the Impairment or Disposal of Long-lived Assets," which
addresses financial accounting and reporting for the impairment or disposal of
long-lived assets and supersedes SFAS No. 121. It also supersedes the accounting
and reporting provisions of Accounting Principles Board Opinion No. 30 for the
disposal of a segment of a business. However, SFAS No. 144 retains the
requirement in Opinion No. 30 to report discontinued operations separately and
extends that reporting to include a "component of an entity" that either has
been disposed of or is classified as for sale. SFAS No. 144 is effective for
financial statements issued for fiscal years beginning after December 15, 2001.
Our management does not believe the implementation of this standard will have a
material effect on our financial condition or results of operations.
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 more 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.
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The following table summarizes the financial terms of our interest rate
swap agreements and their fair values at September 30, 2001:
Derivative Receive Pay Knockout
Instrument Variable Fixed Rate Expiration Fair Value
---------- -------- ----- ---- ---------- ----------
$19.0 million
non-hedging LIBOR 4.88% 7.75% 4/1/09 $ (818,000)
interest rate swap
$10.0 million
non-hedging LIBOR 6.45% 7.41% 6/2/04 $ (296,000)
interest rate swap
$5.0 million
non-hedging LIBOR 5.83% 7.41% 6/2/04 $ (747,000)
interest rate swap
$25.0 million
hedging LIBOR 5.43% N/A 3/12/06 $(1,223,000)
interest rate swap
Due to many factors, management is not able to predict the changes in fair value
of our interest rate swaps.
Foreign Currency Risk
There have been no material changes to our market risk exposures resulting
from foreign currency transactions during the nine months ended September 30,
2001.
PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS.
From time to time, we are defendants in ordinary, routine litigation and
proceedings incidental to our business, including:
o employment related matters;
o product safety matters, including product recalls by the Consumer
Products Safety Commission and personal injury claims; and
o the infringement of the intellectual property rights of others.
We do not believe that any of these matters are individually or in the aggregate
material to us.
We have been sued by three salaried California employees who allege that
they should have been classified as non-exempt employees and, therefore, should
have received overtime compensation. The suits also request that the California
state court certify the case as a class action on behalf of all store managers,
assistant managers and merchandise managers in our California stores. The
Company will vigorously defend itself in this matter. At this stage of the
litigation, it is too early for our management to predict our ultimate liability
related to these allegations.
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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 third quarter of
2001:
1. Report on Form 8-K, filed July 26, 2001, included the earnings
results for the three months and six months ended June 30, 2001
and an outlook for the remainder of 2001.
2. Report on Form 8-K, filed September 18, 2001, included a press
release regarding the Board of Director's approval to repurchase
up to $100 million of Company common stock under a limited share
repurchase program.
Also, in October 2001, we filed one Form 8-K.
1. Report on Form 8-K, filed October 25, 2001, included the earnings
results for the three months and nine months ended September 30,
2001 and an outlook for the remainder of 2001.
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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: November 13, 2001
DOLLAR TREE STORES, INC.
By: /s/ Frederick C. Coble
----------------------
Frederick C. Coble
Chief Financial Officer
(principal financial and accounting officer)
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