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, 2002
( ) 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, 2002, there were 114,168,373 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, 2002 and December 31, 2001............................. 3
Condensed Consolidated Income Statements
Three months and six months ended June 30, 2002 and 2001........ 4
Condensed Consolidated Statements of Cash Flows
Six months ended June 30, 2002 and 2001......................... 5
Notes to Condensed Consolidated Financial Statements............. 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations........................ 10
Item 3. Quantitative and Qualitative Disclosures About Market Risk........ 17
PART II. OTHER INFORMATION
Item 1. Legal Proceedings................................................. 18
Item 4. Submission of Matters to a Vote of Security Holders............... 18
Item 5. Other Information................................................. 18
Item 6. Exhibits and Reports on Form 8-K.................................. 18
Signatures.................................................. 20
2
DOLLAR TREE STORES, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
(Unaudited)
June 30, December 31,
2002 2001
---- ----
ASSETS
Current assets:
Cash and cash equivalents.................................................... $ 159,075 $ 236,653
Short-term investments (Note 2).............................................. 16,500 --
Merchandise inventories (Note 5)............................................. 381,337 296,473
Deferred tax asset........................................................... 9,872 8,877
Refundable income taxes...................................................... 5,113 --
Prepaid expenses and other current assets.................................... 18,835 18,776
------- -------
Total current assets..................................................... 590,732 560,779
Property and equipment, net....................................................... 312,145 279,011
Deferred tax asset................................................................ 7,746 7,436
Goodwill (Note 5)................................................................. 38,358 38,358
Other assets (Note 5)............................................................. 17,513 16,464
------- -------
TOTAL ASSETS............................................................. $ 966,494 $ 902,048
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt............................................ $ 25,000 $ 25,000
Accounts payable............................................................. 95,044 68,653
Income taxes payable......................................................... -- 38,848
Other current liabilities.................................................... 47,639 63,656
Current installments of obligations under
capital leases............................................................. 3,964 3,865
------- -------
Total current liabilities................................................ 171,647 200,022
Long-term debt, excluding current portion......................................... 6,000 12,000
Obligations under capital leases, excluding current
installments.................................................................... 19,390 21,506
Other liabilities ................................................................ 22,871 16,784
------- -------
Total liabilities........................................................ 219,908 250,312
------- -------
Shareholders' equity (Note 6):
Common stock, par value $0.01. Authorized
300,000,000 shares, 114,063,053 shares
issued and outstanding at June 30, 2002
and 112,505,658 shares issued and
outstanding at December 31, 2001........................................... 1,141 1,125
Additional paid-in capital................................................... 214,639 167,151
Accumulated other comprehensive loss......................................... (679) (378)
Unearned compensation........................................................ (142) --
Retained earnings............................................................ 531,627 483,838
------- -------
Total shareholders' equity............................................... 746,586 651,736
Commitments (Note 3).............................................................. -- --
------- -------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY............................... $ 966,494 $ 902,048
======= =======
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,
------------------------ --------------------------
2002 2001 2002 2001
---- ---- ---- ----
Net sales ................................................ $ 498,578 $ 440,361 $ 988,203 $ 827,680
Cost of sales (Note 5)........................................ 318,387 283,274 634,847 539,132
------- ------- ------- -------
Gross profit......................................... 180,191 157,087 353,356 288,548
------- ------- ------- -------
Selling, general and administrative
expenses (Note 5)........................................... 138,062 121,842 275,113 235,364
------- ------- ------- -------
Operating income...................................... 42,129 35,245 78,243 53,184
------- ------- ------- -------
Other income (expense):
Interest income.......................................... 833 1,151 2,057 2,832
Interest expense......................................... (1,103) (1,355) (2,366) (2,649)
Changes in fair value of non-hedging
interest rate swaps.................................... (824) 197 (229) (595)
------- ------- ------- -------
Total other income (expense)......................... (1,094) (7) (538) (412)
------- ------- ------- -------
Income before income taxes........................... 41,035 35,238 77,705 52,772
Provision for income taxes.................................... 15,798 13,580 29,916 20,331
------- ------- ------- -------
Net income........................................... $ 25,237 $ 21,658 $ 47,789 $ 32,441
======= ======= ======= =======
Net income per share (Notes 4 and 5):
Basic ............................................... $ 0.22 $ 0.19 $ 0.42 $ 0.29
Diluted............................................... $ 0.22 $ 0.19 $ 0.42 $ 0.29
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,
------------------------
2002 2001
---- ----
Cash flows from operating activities:
Net income................................................................... $ 47,789 $ 32,441
Adjustments to reconcile net income to net cash
used in operating activities:
Depreciation and amortization............................................ 33,599 24,819
Loss on disposal of property and equipment............................... 910 862
Change in fair value of non-hedging interest
rate swaps............................................................. 229 595
Provision for deferred income taxes...................................... (1,106) (2,011)
Tax benefit of stock option exercises.................................... 10,333 575
Other non-cash adjustments to net income................................. 133 (261)
Changes in assets and liabilities increasing
(decreasing) cash and cash equivalents:
Merchandise inventories................................................ (84,864) (75,927)
Prepaid expenses and other current assets.............................. (34) 20
Refundable income taxes................................................ (5,113) --
Other assets........................................................... (558) (545)
Accounts payable....................................................... 26,391 19,288
Income taxes payable................................................... (38,848) (12,787)
Other current liabilities.............................................. (16,017) (12,012)
Other liabilities...................................................... 5,347 2,854
------- -------
Net cash used in operating activities............................... (21,809) (22,089)
------- -------
Cash flows from investing activities:
Capital expenditures......................................................... (67,693) (62,833)
Purchase of short-term investments........................................... (16,500) --
Acquisition of favorable lease rights........................................ (813) --
Proceeds from sale of property and equipment................................. 251 34
------- -------
Net cash used in investing activities............................... (84,755) (62,799)
------- -------
Cash flows from financing activities:
Repayment of long-term debt and facility fees................................ (6,025) (6,239)
Principal payments under capital lease obligations........................... (1,885) (1,755)
Settlement of merger-related contingencies................................... 6,654 --
Proceeds from stock issued pursuant to stock-based
compensation plans......................................................... 30,242 2,388
------- -------
Net cash provided by (used in) financing
activities........................................................ 28,986 (5,606)
------- -------
Net decrease in cash and cash equivalents......................................... (77,578) (90,494)
Cash and cash equivalents at beginning of period.................................. 236,653 181,166
------- -------
Cash and cash equivalents at end of period........................................ $ 159,075 $ 90,672
======= =======
Supplemental disclosure of cash flow information
Cash paid for:
Interest................................................................. $ 1,977 $ 2,723
Income taxes............................................................. 65,251 34,526
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, 2002, 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 December 31, 2001
balance sheet information was derived from the audited consolidated financial
statements for the year ended December 31, 2001.
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, 2001, contained in the
Company's Annual Report on Form 10-K filed March 14, 2002. The results of
operations for the three- and six-month periods ended June 30, 2002 are not
necessarily indicative of the results to be expected for the entire year ending
December 31, 2002.
Certain 2001 amounts have been reclassified for comparability with the 2002
financial statement presentation.
2. SHORT-TERM INVESTMENTS
The Company's short-term investments primarily consist of
government-sponsored commercial paper with remaining maturities of more than 90
days at the time of purchase. These investments are classified as
held-to-maturity and carried at amortized cost, which approximates fair value.
3. OPERATING LEASE AGREEMENT
The Company has a Lease Facility that 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 an annual administrative fee payable
quarterly. The Lease Facility, among other things, requires the maintenance of
certain specified financial ratios, restricts the payment of certain
distributions and prohibits the incurrence of certain new indebtedness.
Approximately $113.5 million is committed to the Savannah, Briar Creek and
Stockton distribution centers. This Lease Facility expires in March 2006.
Generally, under this type of agreement, an unrelated third party in the
form of a special purpose entity borrows funds under a construction agreement,
purchases the property, pays for the construction costs and subsequently leases
the facility to the Company. The lease requires the Company to provide 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.
These agreements are typically referred to as synthetic leases. Each reporting
period, the Company estimates its liability under the residual value guarantee
and, if necessary, records additional rent expense on a straight-line basis over
the remaining lease term. No liability was recorded as of June 30, 2002 and
December 31, 2001.
6
During the first quarter of 2002, the Company committed approximately $41.0
million to the Company's new Marietta, Oklahoma distribution center under its
existing Lease Facility. As a result, the total commitment under the Lease
Facility is approximately $154.5 million. The Marietta distribution center is
being constructed to the Company's specifications by an unrelated third party,
who is serving as the developer, subject to the terms and conditions of a
development agreement with the Company. The special purpose entity provided the
developer a $41.0 million construction loan, of which the Company guaranteed
approximately 89.9% of the amount outstanding under the loan as defined in the
development agreement. At June 30, 2002, the Company had guaranteed $2.0 million
under this agreement. The construction loan will be satisfied by the developer
no later than March 2003, at which time the Company has the option to lease the
distribution center under the Lease Facility or purchase the distribution center
outright.
4. NET INCOME PER COMMON SHARE
The following table sets forth the calculation of basic and diluted net
income per share:
Three months ended Six months ended
June 30, June 30,
-------------------------- ------------------------
2002 2001 2002 2001
---- ---- ---- ----
(In thousands, except per share data)
Basic net income per share:
Net income ............................................ $ 25,237 $ 21,658 $ 47,789 $ 32,441
======= ======= ======= =======
Weighted average number of
common shares outstanding............................. 113,552 112,182 113,135 112,140
======= ======= ======= =======
Basic net income per share.......................... $ 0.22 $ 0.19 $ 0.42 $ 0.29
======= ======= ======= =======
Diluted net income per share:
Net income ............................................ $ 25,237 $ 21,658 $ 47,789 $ 32,441
======= ======= ======= =======
Weighted average number of
common shares outstanding............................. 113,552 112,182 113,135 112,140
Dilutive effect of stock options and
restricted stock (as determined by
applying the treasury stock method)................... 1,352 670 1,267 668
------- ------ ------- -------
Weighted average number of common
shares and dilutive potential
common shares outstanding............................. 114,904 112,852 114,402 112,808
======= ======= ======= =======
Diluted net income per share....................... $ 0.22 $ 0.19 $ 0.42 $ 0.29
======= ======= ======= =======
At June 30, 2002 and 2001, 126,504 and 790,539, respectively, 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 11, 2002, the Board of Directors granted options to employees
under the Company's Stock Incentive Plan to purchase 1,613,300 shares of the
Company's common stock. In addition, on May 23, 2002, options to purchase 30,000
and 6,000 shares of common stock were granted to continuing non-employee
directors and the Chairman Emeritus, respectively.
7
5. ACCOUNTING CHANGES
Inventory
In April 2002, the Company changed its method of accounting for its
merchandise inventories from the first-in, first-out method to the
weighted-average cost method following the implementation of its new inventory
management system. The Company believes this change is preferable because it
more accurately measures the cost of the Company's merchandise inventories and
more accurately matches revenues and costs. In accordance with generally
accepted accounting principles, the Company implemented this change
retroactively to January 1, 2002. The cumulative effect of the accounting change
at January 1, 2002 was not material. In addition, there was no material impact
to the first or second quarter financial statements as a result of this change
in accounting principle and the Company does not expect this change in
accounting to have a material effect in future periods. Additional pro forma
disclosures of the impact of the change on prior periods as required under
Accounting Principles Board Opinion No. 20, "Accounting Changes" are not
provided since weighted-average cost information was not available from the
prior inventory management system; however, the Company does not believe the
effects would have been material.
Intangible Assets and Goodwill
Effective January 1, 2002, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 142, "Goodwill and Other Intangible Assets,"
which establishes accounting and reporting standards for intangible assets and
goodwill. SFAS No. 142 requires that goodwill and intangible assets with
indefinite useful lives no longer be amortized, but rather tested for impairment
at least annually. SFAS No. 142 also requires 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." The Company performed the required
transition impairment tests of goodwill and other intangibles as of January 1,
2002, and determined that no impairment existed.
Intangible Assets
At January 1, 2002, the Company's intangible assets consisted of
non-compete agreements with former shareholders of a company acquired by the
Company in 1998. These assets are being amortized over the legal terms of the
individual agreements, which is generally a ten-year period. At June 30, 2002
and December 31, 2001, the carrying value of these agreements was $2.7 million
and $3.0 million, respectively, which is net of $1.7 million and $1.4 million,
respectively, of accumulated amortization.
In March 2002, the Company acquired favorable lease rights for operating
leases for retail locations from a third party. The fair market value of the
lease rights was approximately $0.8 million and will be amortized on a
straight-line basis to rent expense over the remaining initial lease terms,
which expire at various dates through 2007.
These intangible assets are included in "other assets" in the accompanying
condensed consolidated balance sheets. Estimated annual amortization expense for
the next five years follows: 2002 - $0.7 million; 2003 - $0.7 million; 2004 -
$0.6 million; 2005 - $0.5 million; and 2006 - $0.5 million.
8
Goodwill
At June 30, 2002 and December 31, 2001, the carrying value of goodwill was
$38.4 million. In accordance with SFAS No. 142, goodwill is no longer being
amortized, but will be tested at least annually for impairment. In addition,
goodwill will be tested on an interim basis if an event or circumstance
indicates that it is more likely than not that an impairment loss has been
incurred.
The following table reconciles reported net income and net income per share
for the three- and six month periods ended June 30, 2002 and 2001 to net income
and net income per share that would have been recorded if SFAS No. 142 were
effective for each of the periods presented:
Three months ended Six months ended
June 30, June 30,
-------------------------- --------------------------
2002 2001 2002 2001
---- ---- ---- ----
(In thousands, except per share data)
Reconciliation of net income:
Net income...................................... $ 25,237 $ 21,658 $ 47,789 $ 32,441
Add back: Goodwill amortization
(net of tax)................................. -- 310 -- 621
------ ------ ------ ------
Adjusted net income............................. $ 25,237 $ 21,968 $ 47,789 $ 33,062
====== ====== ====== ======
Basic net income per share:
Net income...................................... $ 0.22 $ 0.19 $ 0.42 $ 0.29
Goodwill amortization........................... -- 0.01 -- 0.01
------ ------ ------ ------
Adjusted net income............................. $ 0.22 $ 0.20 $ 0.42 $ 0.30
====== ====== ====== ======
Diluted net income per share:
Net income...................................... $ 0.22 $ 0.19 $ 0.42 $ 0.29
Goodwill amortization........................... -- -- -- --
------ ------ ------ ------
Adjusted net income............................. $ 0.22 $ 0.19 $ 0.42 $ 0.29
====== ====== ====== ======
9
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 Six months ended
June 30, June 30,
-------------------------- ------------------------
2002 2001 2002 2001
---- ---- ---- ----
(In thousands) (In thousands)
Net income........................................ $ 25,237 $ 21,658 $ 47,789 $ 32,441
------ ------ ------ ------
Cumulative effect of change
in accounting for derivative
financial instruments(net of
$44 tax expense)............................... -- -- -- 70
Fair value adjustment-derivative
hedging instruments............................. (789) 133 (511) 133
Income tax benefit(expense)....................... 303 (51) 202 (51)
------ ------ ------ ------
Fair value adjustment, net of tax................. (486) 82 (309) 82
------ ------ ------ ------
Amortization of SFAS No. 133
cumulative effect.............................. 6 6 12 12
Income tax expense................................ (2) (2) (4) (4)
------ ------ ------ ------
Amortization of SFAS No. 133
cumulative effect, net of tax.................. 4 4 8 8
------ ------ ------ ------
Total comprehensive income..................... $ 24,755 $ 21,744 $ 47,488 $ 32,601
====== ====== ====== ======
The cumulative effect recorded in "accumulated other comprehensive income" is
being amortized over the remaining lives of the related interest rate swaps.
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 inventory levels and future net sales results;
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;
10
o our cash needs, including our ability to fund our future capital
expenditures and working capital requirements; and
o the possible effect of changes in generally accepted accounting
principles relating to special purpose entities.
For a discussion of the risks, uncertainties and assumptions that could
affect our future events, developments or results, you should carefully review
the risk factors described below, "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "Business" sections in our
Annual Report on Form 10-K filed March 14, 2002, and review "Risk Factors" in
our most recent prospectus:
o Adverse economic conditions, such as reduced consumer confidence
and spending, or bad weather could significantly reduce our sales.
o We could fail to meet our goals for opening or expanding stores on
a timely basis, which could cause our sales to suffer. We may not
anticipate all the challenges that our expanding operations will
impose and, as a result, we may not meet our targets for opening
new stores and expanding profitability. In addition, new stores
can cause sales at our existing stores to suffer.
o Our sales may be below expectations during the Christmas selling
season, particularly this year since there are six fewer selling
days between Thanksgiving and Christmas, which may cause our
operating results to suffer materially.
o Our profitability is vulnerable to future increases in operating
and merchandise costs including shipping rates, freight costs,
wage levels, inflation, competition and other adverse economic
factors.
o Our sales and profits could be reduced by increases in
competition, especially because there are no significant economic
barriers. For example, Wal-Mart is operating an in-store "dollar
store" concept in some of its stores.
o Unforeseen disruptions or costs in operating and expanding our
receiving and distribution systems could harm our sales and
profitability.
o Our merchandise mix relies heavily on imported goods. An increase
in the cost or disruption of the flow of these goods may
significantly decrease our sales and profits because any
transition to alternative sources may not occur in time to meet
our demands. In addition, products and alternative sources may
also be of lesser quality and more expensive than those we
currently import.
o Disruptions in the availability of quality, low-cost merchandise
in sufficient quantities to maintain our growth may reduce sales
and profits.
o Disruptions in receiving shipments at west coast ports due to a
threatened strike by the International Longshore and Warehouse
Union.
11
Our forward-looking statements could be wrong in light of these and other
risks, uncertainties and assumptions. The future events, developments or results
described in this report or our most recent prospectus could turn out to be
materially different. We have no obligation to publicly update or revise our
forward-looking statements after the date of this quarterly report and you
should not expect us to do so.
Investors should also be aware that while we do, from time to time,
communicate with securities analysts and others, we do not, by policy,
selectively disclose to them any material nonpublic information or other
confidential commercial information. Accordingly, shareholders should not assume
that we agree with any statement or report issued by any analyst regardless of
the content of the statement or report. We generally do not issue financial
forecasts or projections, and we do not, by policy, confirm those issued by
others. Thus, to the extent that reports issued by securities analysts contain
any projections, forecasts or opinions, such reports are not our responsibility.
Results of Operations
The Three Months Ended June 30, 2002 Compared To The Three Months Ended June 30,
2001
Net Sales. Net sales increased 13.2% in the second quarter of 2002 compared
to the same period in 2001. This $58.2 million increase in net sales resulted
from sales at new stores partially offset by a 2.5% decrease in comparable store
net sales. In computing our comparable store net sales, we include the positive
effect of our expanded and relocated stores. The decrease in our comparable
store net sales resulted primarily from the shift of the Easter holiday from the
second quarter in 2001 to the first quarter of 2002.
At June 30, 2002, we operated 2,105 stores with 11.4 million selling square
feet compared to 1,863 stores with 9.1 million selling square feet for the same
period in 2001. We opened 82 stores, expanded 22 stores and closed 8 stores in
the second quarter of 2002, compared to 89 stores opened, 22 stores expanded,
and 7 stores closed in the second quarter of 2001. In the second quarter of
2002, we added approximately 0.7 million selling square feet, of which
approximately 0.1 million selling square feet was added through expanding
existing stores.
Gross Profit. Our gross profit as a percentage of net sales is called our
gross profit margin. Gross profit margin increased to 36.1% in the second
quarter of 2002 compared to 35.7% in the second quarter of 2001. The increase in
gross profit margin is primarily due to the following:
o improved shrink in our stores, particularly in our Dollar Express
stores, and adjustments to distribution center shrink in
connection with our supply chain implementation;
o improved markdowns due to better inventory flow, good seasonal sell
through, and lower inventory levels on a per store basis.
These improvements were partially offset by an increase in occupancy costs, as a
percentage of net sales, due to a loss of leverage resulting from the 2.5%
decrease in comparable store net sales.
12
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased 13.3% in the second quarter of 2002 compared
to the same period in 2001. Expressed as a percentage of net sales, selling,
general and administrative expenses remained unchanged at 27.7% for the second
quarter of 2002. Selling, general and administrative expenses for the second
quarter of 2002 reflect a reduction in payroll-related costs which was offset by
an increase in depreciation and amortization expense compared to the second
quarter of 2001. The reduction in payroll-related costs is due in part to the
results of various expense-management initiatives, which allowed us to minimize
the loss of leverage on our selling, general and administrative expenses during
the second quarter of 2002. The increase in depreciation and amortization
expense resulted primarily from the implementation of our supply chain systems
in April 2002, as well as accelerated depreciation of store registers being
replaced by our new point-of-sale systems. Our new and expanded stores also
contributed to the increase in depreciation expense. We have spent approximately
$27.0 million on our new supply chain systems, which are being depreciated
generally over a five-year period. In addition, effective January 1, 2002, we
ceased amortization of goodwill in accordance with the provisions of SFAS No.
142. We recorded approximately $0.5 million of goodwill amortization in the
second quarter of 2001.
Operating Income. Due to the reasons discussed above, operating income
increased as a percentage of net sales to 8.4% in the second quarter of 2002
compared to 8.0% in the same period of 2001.
Interest Income/Expense. Interest income decreased to $0.8 million in the
second quarter of 2002 from $1.2 million in the second quarter of 2001. This
decrease resulted from decreases in interest rates earned on our investments
partially offset by increased levels of cash and cash equivalents and short-term
investments for the second quarter of 2002. Interest expense decreased to $1.1
million for the second quarter of 2002 compared to $1.4 million for the same
period in 2001 due to repayments of long-term debt and a decrease in interest on
capitalized leases.
Changes in Fair Value of Non-hedging Interest Rate Swaps. The $0.8 million
expense is the result of reflecting our non-hedging interest rate swaps at their
fair values in accordance with SFAS No. 133. The decrease in their fair values
for the quarter is primarily the result of a downward adjustment to the forward
interest rate yield curve. Due to many variables, our management is not able to
predict changes in the fair values of our interest rate swaps.
The Six Months Ended June 30, 2002 Compared To The Six Months Ended June 30,
2001
Net Sales. Net sales increased 19.4% for the first six months of 2002
compared to the same period in 2001. We attribute this $160.5 million increase
in net sales to increased sales at our new and expanded stores in addition to a
2.0% increase in our comparable store net sales in the first half of 2002.
For the first six months of 2002, we opened 148 stores, expanded 51 stores
and closed 18 stores, compared to 149 stores opened, 53 stores expanded, and 15
stores closed in the first six months of 2001. In the first half of 2002, we
added approximately 1.3 million selling square feet, of which approximately 0.2
million selling square feet was added through expanding existing stores.
13
We anticipate net sales will increase approximately 18%-19% for the full
year 2002 based on an underlying comparable store net sales increase of
approximately 1%-2% for the remainder of 2002. Management continues to plan
inventory levels to support this growth in net sales. In addition, there are six
fewer selling days between Thanksgiving and Christmas this year, which could
have a significant impact on our fourth quarter net sales.
Gross Profit. Our year-to-date gross profit margin increased to 35.8% in
2002 compared to 34.9% in 2001. The increase in gross profit margin for the
first half of 2002 is primarily due to improved inventory shrink. This
improvement is the result of lower shrink in our Dollar Express stores and our
Philadelphia distribution network and adjustments to our distribution center
shrink in connection with our supply chain management system implementation.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased 16.9% in the first half of 2002 compared to
the same period in 2001. Expressed as a percentage of net sales, selling,
general and administrative expenses decreased to 27.8% for the first six months
of 2002 compared to 28.4% for the same period in 2001. The improvement in
selling, general and administrative expenses, as a percentage of net sales, is
primarily due to savings achieved as a result of our implementation of various
expense-management initiatives, particularly with regard to payroll-related
expenses, partially offset by an increase in depreciation and amortization
expense. The increase in depreciation and amortization expense, resulted
primarily from the implementation of our supply chain systems in April 2002, as
well as accelerated depreciation of store registers being replaced by our new
point-of-sale systems. Our new and expanded stores also contributed to the
increase in depreciation expense. In addition, effective January 1, 2002, we
ceased amortization of goodwill in accordance with the provisions of SFAS No.
142. We recorded approximately $1.0 million of goodwill amortization in the
first half of 2001.
We expect depreciation and amortization expense to be approximately $19.0
million in the third quarter and $20.0 million in the fourth quarter of 2002.
Operating Income. Due to the reasons discussed above, operating income
increased as a percentage of net sales to 7.9% for the first six months of 2002
from 6.4% for the same period in 2001.
We expect modest operating income margin improvement based on an underlying
comparable store net sales increase of approximately 1%-2% over the third and
fourth quarters of 2002 as we continue to implement store-level expense
management initiatives.
Interest Income/Expense. Interest income decreased $0.8 million in the
first six months of 2002 compared to the first six months of 2001. This decrease
resulted from decreases in interest rates earned on our investments partially
offset by increased levels of cash and cash equivalents for the first half of
2002. Interest expense decreased to $2.4 million in the first half of 2002 from
$2.6 million in the first half of 2001 due to repayments of long-term debt and a
decrease in interest on capitalized leases.
Liquidity and Capital Resources
Our business requires capital to open new stores and operate existing
stores. Our working capital requirements for existing stores consist primarily
of inventory purchases, which are seasonal in nature and typically reach their
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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 expansion programs from internally generated funds and borrowings
under our credit facilities.
The following table compares cash-related information for the six months
ended June 30, 2002 and 2001:
Six months ended
June 30,
-----------------------------
2002 2001
---- ----
(In millions)
Net cash provided by (used in):
Operating activities................................ $(21.8) $(22.1)
Investing activities................................ (84.8) (62.8)
Financing activities................................ 29.0 (5.6)
The $22.0 million increase in cash used in investing activities was
primarily the result of short-term investment purchases and increased capital
expenditures associated with new and expanded stores in 2002. The purchased
short-term investments primarily consist of fixed-rate commercial paper.
The $34.6 million increase in cash provided by financing activities was
primarily the result of the following:
o We received $27.9 million more cash pursuant to stock-based
compensation plans in 2002 compared to 2001 because of increased
stock option exercises, which we believe resulted from our
increased stock price as compared to the prior year.
o We received cash from the settlement of merger-related
contingencies related to the Dollar Express merger. We also
received approximately 56,400 shares of common stock in settlement
of these contingencies.
At June 30, 2002, our long-term borrowings were $31.0 million and our
capitalized lease obligations were $23.4 million. We had $50.0 million available
through our bank facility. We also have $125.0 million available under our
Letter of Credit Reimbursement and Security Agreement, of which approximately
$86.3 million was committed to letters of credit issued for routine purchases of
imported merchandise.
Operating Leases
We have entered into operating leases known as synthetic leases for four of
our distribution centers. Effective March 12, 2001, we entered into an operating
lease facility for $165.0 million, of which approximately $113.5 million is
committed to the Stockton, Briar Creek and Savannah distribution centers as of
June 30, 2002. Under this type of agreement, an unrelated third party, in the
form of a special purpose entity, borrows funds under a construction agreement,
purchases the property, pays for the construction costs and subsequently leases
the facility to us. Because these arrangements are accounted for as operating
leases, the related fixed assets and lease liabilities are not included in our
balance sheets. The termination date of this operating lease facility is March
2006.
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We committed $41.0 million during the first quarter of 2002 for our new
Marietta distribution center that is scheduled to open in early 2003. As a
result, our total commitment under the lease facility is $154.5 million. The
Marietta distribution center is being constructed to our specifications by an
unrelated third party, who is serving as the developer, subject to the terms and
conditions of a development agreement between the developer and us. The special
purpose entity provided the developer a $41.0 million construction loan. We
guaranteed approximately 89.9% of the amount outstanding under the loan as
defined in the development agreement. At June 30, 2002, we had guaranteed $2.0
million under this agreement. The developer will satisfy the construction loan
no later than March 2003, at which time we have the option to lease the
distribution center under the lease facility or purchase the distribution center
outright.
The lease facility, among other things, requires the maintenance of certain
specified financial ratios, restricts the payment of certain distributions and
limits certain types of debt we can incur.
Changes have been proposed to the current accounting standards for special
purpose entities. If these changes are adopted as proposed, we would have three
options regarding the accounting treatment for our special purpose entity and
the associated synthetic leases:
o We could maintain the leases and consolidate the special purpose
entity which would result in recording the distribution center
assets and the related capital lease on our balance sheet in
addition to our recognizing depreciation and interest expense
rather than rent expense.
o We could buy out the leases with existing cash and record the
distribution center assets.
o We expect that we would be able to restructure the leases and
maintain the synthetic lease treatment, which would require
initial costs to change the structure of the facility and
possibly, higher borrowing costs.
Once the proposed changes are finalized, we will decide which option to
implement. As a result, our future results of operations and financial condition
could be adversely affected.
New Accounting Pronouncements
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.
In July 2002, the Financial Accounting Standards Board issued SFAS No. 146,
"Accounting for Costs Associated with Exit or Disposal Activities," which
addresses the financial accounting and reporting of costs associated with an
exit activity (including restructuring) or with a disposal of long-lived assets.
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The standard requires an entity to record a liability for costs associated with
an exit or disposal activity when that liability is incurred and can be measured
at fair value, and to subsequently adjust the recorded liability for changes in
estimated cash flows. SFAS No. 146 is effective prospectively after December 31,
2002. 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 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. 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
The following table summarizes the financial terms and fair values of each
of our interest rate swap agreements at June 30, 2002:
Hedging Receive Pay Knockout
Instrument Variable Fixed Rate Expiration Fair Value
- ------------------------ ------------------ -------------- ------------------- -------------------- ---------------------
$19.0 million LIBOR 4.88% 7.75% 4/1/09 ($ 920,000)
interest rate swap
$10.0 million LIBOR 6.45% 7.41% 6/2/04 ($ 651,000)
interest rate swap
$5.0 million LIBOR 5.83% 7.41% 6/2/04 ($ 268,000)
interest rate swap
$25.0 million LIBOR 5.43% N/A 3/12/06 ($1,255,000)
interest rate swap
Due to many variables, management is not able to predict the changes in fair
value of our interest rate swaps. The fair values are the estimated amounts we
would pay to terminate the agreements as of the reporting date. These fair
values are obtained from an outside financial institution.
There have been no material changes in our interest rate risk exposure
during the first six months of 2002.
Foreign Currency Risk
There have been no material changes to our market risk exposures resulting
from foreign currency transactions during the six months ended June 30, 2002.
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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 and lease related matters;
o product safety matters, including product recalls by the Consumer
Product Safety Commission;
o personal injury claims; and
o the infringement of the intellectual property rights of others.
We have been sued by several 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. We will
vigorously defend ourselves in this matter.
We do not believe that any of these matters will individually, or in the
aggregate, have a material adverse effect on our financial position or results
of operations.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
At our Annual Meeting of Shareholders held on May 30, 2002, the following
people were re-elected to the Board of Directors:
Votes For Votes Withheld
Macon F. Brock, Jr. 82,529,475 24,338,737
Richard G. Lesser 104,992,384 1,875,828
Item 5. OTHER INFORMATION
Grant of Options to Directors
On May 29, 2002, we granted options to purchase 6,000 shares of common
stock each to Messrs. Doczi, Lesser, Megrue, Saunders, and Wurtzel, as
continuing non-employee directors. In addition, the Compensation Committee of
the Board of Directors awarded Mr. Perry 6,000 options shares in his capacity as
Chairman Emeritus. All of these options were granted under the Stock Incentive
Plan and are immediately exercisable at an exercise price of $37.28 per share.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
18. Independent Auditors' Preferability Letter
99.1 Chief Executive Officer Certification
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99.2 Chief Financial Officer Certification
(b) Reports on Form 8-K:
The following reports on Form 8-K were filed during the second quarter of
2002:
1. Report on Form 8-K, filed April 26, 2002, included the earnings
results for the quarter ended March 31, 2002 and an outlook for the
remainder of 2002.
2. Report on Form 8-K, filed May 31, 2002, included announcement of
participation in the U.S. Bancorp Piper Jaffray Conference and the
results of the Annual Meeting of Shareholders.
Also, in the third quarter of 2002, we filed one report on Form 8-K:
1. Report on Form 8-K, filed July 30, 2002, included the earnings results
for the quarter ended June 30, 2002 and an outlook for the remainder
of 2002.
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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 14, 2002
DOLLAR TREE STORES, INC.
By: /s/ Frederick C. Coble
--------------------------
Frederick C. Coble
Chief Financial Officer
(principal financial and accounting officer)
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