UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
( X ) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 2002
Commission File No.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, VA 23320
(Address of principal executive offices)
Registrant's telephone number, including area code: (757) 321-5000
Securities Registered Pursuant to Section 12(b) of the Act:
Title of Each Class Name of Each Exchange on Which Registered
None None
Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock (par value $.01 per share)
(Title of Class)
Indicate by check mark whether Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities 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 ( )
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. ( )
Indicate by check mark whether the Registrant is an accelerated filer
(as defined in Rule 12b-2 of the Act). Yes (X) No ( )
The aggregate market value of Common Stock held by non-affiliates of the
Registrant on March 20, 2003, was $2,160,704,822 based on a $20.56 average of
the high and low sales prices for the Common Stock on such date. For purposes of
this computation, all executive officers and directors have been deemed to be
affiliates. Such determination should not be deemed to be an admission that such
executive officers and directors are, in fact, affiliates of the Registrant.
On March 20, 2003, there were 114,234,847 shares of the Registrant's Common
Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
The information regarding securities authorized for issuance under equity
compensation plans called for in Item 5 of Part II and the information called
for in Items 10, 11, 12 and 13 of Part III are incorporated by reference to the
definitive Proxy Statement for the Annual Meeting of Stockholders of the Company
to be held June 19, 2003, which will be filed with the Securities and Exchange
Commission not later than April 30, 2003.
DOLLAR TREE STORES, INC.
TABLE OF CONTENTS
Page
PART I
Item 1. BUSINESS...................................................... 5
Item 2. PROPERTIES.................................................... 8
Item 3. LEGAL PROCEEDINGS............................................. 9
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS........... 10
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS......................................... 10
Item 6. SELECTED FINANCIAL DATA....................................... 10
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS......................... 12
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.... 21
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA................... 23
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE......................... 46
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT............ 46
Item 11. EXECUTIVE COMPENSATION........................................ 46
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.............. 47
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS................ 47
Item 14. CONTROLS AND PROCEDURES....................................... 47
PART IV
Item 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS
ON FORM 8-K................................................. 47
SIGNATURES.................................................... 48
2
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 and results. They include statements preceded by, followed by or
including words such as "believe," "anticipate," "expect," "intend," "plan,"
"view" or "estimate." For example, our forward-looking statements include
statements regarding:
o our anticipated sales, including comparable store net sales, net sales
growth and earnings growth;
o our growth plans, including our plans to add, expand or relocate
stores, and our anticipated square footage increase;
o the average size of our stores to be added in 2003;
o the net sales per square foot, net sales and operating income
attributable to smaller and larger stores;
o our future return on assets;
o the possible effect of inflation and other economic changes on our costs
and profitability, including the possible effect of future changes in
shipping rates, domestic and foreign freight costs, fuel costs, minimum
wage rates and wage and benefit costs;
o our cash needs, including our ability to fund our future capital
expenditures and working capital requirements;
o our gross profit margin, earnings, inventory levels and ability to
leverage selling, general and administrative costs;
o our seasonal sales patterns including those relating to the length of
the holiday selling seasons;
o possible changes in our merchandise mix and its effect on gross profit
margin and sales;
o the capabilities of our inventory supply chain and other new systems;
o the future reliability of, and cost associated with, our sources of
supply, particularly imported goods such as those sourced from China;
o the capacity, performance and cost of our existing and planned
distribution centers, including opening and expansion schedules;
o our expectations regarding competition;
o the adequacy of our internal financial reporting controls;
o the possible effect on our financial results of changes in generally
accepted accounting principles relating to accounting for stock-based
compensation;
o future costs attributable to the consolidation of the variable interest
entity; and
o the accuracy of management's estimates of our financial statement
reserves related to inventory and accrued expenses.
You should assume that the information appearing in this annual report is
accurate only as of the date it was issued. Our business, financial condition,
results of operations and prospects may have changed since that date.
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, as well as "Management's Discussion and
Analysis of Financial Condition and Results of Operations" beginning on page 12.
Our risk factors include:
o The outbreak of war and other national and international events, such
as terrorism, could lead to disruptions in the economy. Adverse
economic conditions, such as reduced consumer confidence and spending,
could significantly reduce our sales. Bad weather could also prevent us
from meeting our sales and operating forecasts.
o Our profitability is vulnerable to future increases in operating and
merchandise costs including shipping rates, freight costs, fuel costs,
wage levels, inflation, competition and other adverse economic factors
because we sell goods at the fixed $1.00 price point.
3
o We could fail to meet our goals for opening, expanding or relocating
stores on a timely basis, which would 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 profitably. In addition, new or expanded stores
will cause sales at nearby stores to suffer.
o We could fail to hire or retain key employees, which could cause our
sales and profitability to suffer.
o We realize a disproportionately larger amount of our sales and net
income during the Christmas and Easter seasons. If for any reason our
sales were below expectations during the Christmas and Easter selling
seasons, our operating results could suffer materially.
o Our sales and profits could be reduced by increases in competition,
especially because there are no significant economic barriers for
others to enter our retail segment.
o The performance of our distribution system is critical to our
operations. We must expand or replace existing distribution centers and
build new ones in a timely manner or we will not meet our growth plans.
Unforeseen disruptions or costs in operating and expanding our systems,
including 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 from 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 our sales and
profits.
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 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 annual 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.
- --------------------------------------------------------------------------------
INTRODUCTORY NOTE: Unless otherwise stated, references to "we," "our"
and "Dollar Tree" generally refer to Dollar Tree Stores, Inc. and its direct and
indirect subsidiaries on a consolidated basis. References to fiscal 2003 refer
to the period from February 2, 2003 to January 31, 2004.
- --------------------------------------------------------------------------------
AVAILABLE INFORMATION
Our annual reports on Form 10-K, quarterly reports on Form 10-Q, Current
reports on Form 8-K and amendments to those reports filed or furnished pursuant
to Section 13(a) or 15(d) of the Securities Exchange Act are available free of
charge on our web site at www.dollartree.com as soon as reasonably practicable
after electronically filing such reports with the SEC.
4
PART I
Item 1. BUSINESS
Overview
Since our founding in 1986, we have become the leading operator of discount
variety stores offering merchandise at the fixed price of $1.00. We believe the
variety and quality of products we sell for $1.00 sets us apart from our
competitors. At December 31, 2002, we operated 2,263 single-price point stores
under the names of Dollar Tree, Dollar Express, Dollar Bills, Only One Dollar
and Only $One.
Since 1986, we have evolved from opening primarily mall-based stores
ranging between 1,500 and 2,500 selling square feet to opening primarily strip
shopping center based stores averaging 8,000 to 10,000 selling square feet. In
the past five years, we gradually increased the size of stores that we opened
each year as we improved our merchandise offerings and service to our customers.
At December 31, 1998, we operated 1,285 stores in 31 states; at December 31,
2002, we operated 2,263 stores in 40 states. Over the same time period, our
selling square footage increased from approximately 4.9 million square feet in
December 1998 to 13.0 million square feet in December 2002. Our store growth
since 1998 has resulted from opening new stores and completing selective mergers
and acquisitions from 1998 through 2000. We centrally manage our store and
distribution operations from our corporate headquarters in Chesapeake, Virginia.
Business Strategy
Value Merchandise Offering. We strive to exceed our customers' expectations
of the variety and quality of products that they can purchase for $1.00 by
offering items that we believe typically sell for higher prices elsewhere. We
buy approximately 60% of our merchandise domestically and directly import the
remaining 40%. We believe our mix of imported and domestic merchandise affords
our buyers flexibility that allows them to consistently exceed the customer's
expectation. In addition, direct relationships with manufacturers permit us to
select from a broad range of products, and customize packaging, product sizes
and package quantities that meet our customers' needs.
Mix of Basic Variety and Seasonal Merchandise. We maintain a balanced
selection of products within traditional variety store categories. We offer a
wide selection of everyday basic product and we supplement these basic, everyday
items with seasonal and closeout merchandise. We attempt to keep certain basic
consumable merchandise in our stores continuously to establish our stores as a
destination. Closeout merchandise is purchased opportunistically and represents
less than 10% of our purchases. National, regional and private-label name brands
have become a bigger part of our merchandise mix.
Our merchandise mix consists of:
o consumable merchandise, which includes candy and food, health and
beauty care, and housewares such as paper, plastics and household
chemicals;
o variety merchandise, which includes toys, durable housewares, gifts,
hardware, and other items; and
o seasonal goods such as Easter, Halloween and Christmas merchandise.
Our larger stores, which appeal to a broader demographic mix, carry more
consumable merchandise than smaller, older stores. As a result, consumables have
grown as a percentage of purchases and sales. The following table shows the
percentage of purchases of each major product group for the years ended December
31, 2002 and 2001:
Merchandise Type 2002 2001
---------------- ---- ----
Variety categories 50.6% 50.7%
Consumable 40.5% 38.2%
Seasonal 8.9% 11.1%
Convenient Locations and Store Size. We primarily focus on opening new
stores in strip shopping centers anchored by mass merchandisers, whose target
customers we believe to be similar to ours, and in neighborhood centers anchored
by large grocery retailers. Our stores have proven successful in metropolitan
areas, mid-sized cities and small towns. The range of our store sizes allows us
to target a particular location with a store that best suits that market and
take advantage of available real estate opportunities. Our stores are
attractively designed and create an inviting atmosphere for shoppers by using
bright lighting, vibrant colors, uniform decorative signs and background music.
We enhance the store design with attractive merchandise displays. We believe
this design attracts new and repeat customers and enhances our image as both a
destination and impulse store.
For more information on retail locations and retail store leases, see
"Properties" on page 8.
5
Profitable Stores with Strong Cash Flow. We maintain a disciplined,
cost-sensitive approach to store site selection in order to minimize the initial
capital investment required and maximize our potential to generate high
operating margins and strong cash flows. We believe that our stores have a
relatively small shopping radius, which allows us to profitably concentrate
multiple stores in a single market. Our ability to open new stores is dependent
upon, among other factors, locating suitable sites and negotiating favorable
lease terms.
On a cash basis, our stores have historically experienced a payback period
of approximately 12 to 15 months and we expect this trend to continue. During
the past five years, we have maintained our store-level cash operating income
margins in the 22.4% to 24.2% range. Stores whose first full year of operations
was 2002 had average store level cash operating income of approximately 22.8% of
sales, which was better than the average for all stores with a full year's
operations in 2002.
Our older, smaller stores continue to generate significant store-level
operating income and operating cash flow and have some of the highest operating
margins among our stores. The increased size of our newer stores allows us to
offer a wider selection of products, including more basic consumable
merchandise, thereby making them more attractive as a destination store.
In the past five years, on an annual basis, we have maintained our gross
profit margins in the 36.0% to 36.9% range and our operating income margins in
the 10.3% to 13.0% range. Historically, we have experienced seasonal fluctuation
in our net sales, operating income and net income because of our mix of seasonal
merchandise.
For more information on our results of operations, see "Management's
Discussion and Analysis - Results of Operations" on page 13. For more
information on seasonality of sales, see "Management's Discussion and Analysis -
Seasonality and Quarterly Fluctuations" on page 19.
Cost Control. We believe that substantial buying power at the $1.00 price
point contributes to our successful purchasing strategy, which includes
disciplined, targeted merchandise margin goals by category. We believe our
disciplined buying and quality merchandise help to minimize markdowns. We buy
products on an order-by-order basis and have no material long-term purchase
contracts or other assurances of continued product supply or guaranteed product
cost. No vendor accounted for more than 10% of total merchandise purchased in
any of the past five years.
During 2002, we upgraded our supply chain systems and identified other
processes that could be improved using technology. The new systems that we
implemented provide us with valuable sales information to assist our buyers and
improve merchandise allocation to our stores. Controlling our inventory levels
will result in more efficient distribution and store operations.
Payroll and related costs are a significant component of our selling,
general and administrative costs. Accordingly, we believe that more efficient
use of labor hours in our stores could increase our profitability. In an effort
to optimize hours worked in our stores, we expect to implement a new labor
management and scheduling system during fiscal 2003.
Information Systems. We believe that investments in appropriate technology
help us to increase sales and control costs. As a result, we initiated a supply
chain management project that encompassed four major components:
o planning for our merchandise purchasing;
o purchasing merchandise and allocating that merchandise throughout our
distribution and retail network;
o obtaining current and detailed sales information from stores using a
point-of-sale system; and
o improving our ability to keep select merchandise in stock.
In April 2002, we implemented our new inventory management system. We
expect that the new system will enable us to improve the efficiency of our
supply chain, improve merchandise flow and control distribution and store
operation costs. We continue to evaluate our processes to identify those that
would be improved using technology.
At December 31, 2002, we operated point-of-sale systems in 851 stores and
we plan to install POS in all new and expanded stores and convert more of our
existing stores to POS in fiscal 2003. We expect to have POS installed in
approximately 1,800 stores by the end of fiscal 2003. Point-of-sale data allows
us to track sales by merchandise category and geographic region as well as
assists in planning for future purchases of inventory. We believe that this
information will allow us to ship the appropriate product to the correct store
at the proper time.
6
Corporate Culture and Values. We believe that honesty and integrity, doing
the right things for the right reasons, and treating people fairly and with
respect are core values within our strong corporate culture. We believe that
running a business, and certainly a public company, carries with it a
responsibility to be beyond reproach when making operational and financial
decisions. Our management team visits and shops our stores like every customer;
we have an open door policy to all our associates; and ideas and individuality
are encouraged. We have standards for store displays, merchandise presentation,
and store operations. Our distribution centers are run based on objective
measures of performance, and everyone in our store support center is here to
help associates in the stores and distribution centers get their jobs done.
A Board of Directors with an independent committee structure governs us.
Our Board consists of a majority of independent directors. All our committees -
audit, compensation and nominating - consist solely of independent directors and
our audit committee chair is an audit committee financial expert. We believe our
directors, working on behalf of our shareholders, are active in understanding
the financial aspects of the business, the compensation of our management team,
and the way in which we manage our business.
In 2002, we also established a disclosure committee to identify and monitor
internal financial reporting controls and to ensure that our public filings
contain discussions about the risks our business faces. We have engaged an
internal audit service provider that will assist us in preparing for the next
round of requirements under the Sarbanes-Oxley Act. We believe that we have the
controls in place to be able to certify our financial statements and have our
external auditors attest to our certifications. Additionally, we have complied
with the updated listing requirements for the Nasdaq Stock Market.
In the next year or so, public companies will face more requirements and
regulations. We expect to be ready to comply with all of them. In the meantime,
we will be reviewing all aspects of corporate governance to enhance the
transparency of our financial reporting, improve the policies and procedures
that affect the way we act, and increase the quality of our communications with
shareholders.
Growth Strategy
Store Openings and Square Footage Growth. The primary factors contributing
to our net sales growth have been new store openings, an active store expansion
and remodel program and selective mergers and acquisitions. From 1998 to 2002,
net sales increased at a compound annual growth rate of 21.4% and operating
income, excluding merger-related items, increased at a compound annual growth
rate of 16.9%. We expect that the substantial majority of our future sales
growth will come primarily from new store openings and secondarily from our
store expansion and remodeling program.
The following table shows the total selling square footage of our stores
and the selling square footage per new store opened over the last five years. We
began opening larger stores after the acquisition of 98 Cent Clearance Center in
1998. Our growth and productivity statistics will be reported based on selling
square footage prospectively because our management believes the use of selling
square footage yields a more accurate measure of store productivity. The selling
square footage statistics for 1998 through 2000 are estimates based on the
relationship of selling to gross square footage.
Average Selling
Average Selling Square Footage
Square Footage Per New Store
Year Number of Stores Per Store Opened
---- ---------------- --------- ------
1998 1,285 3,790 3,840
1999 1,507 4,055 4,765
2000 1,729 4,520 6,240
2001 1,975 5,130 7,070
2002 2,263 5,763 7,783
We expect to increase our selling square footage in the future by opening
new stores in underserved markets and strategically increasing our presence in
our existing markets via new store openings and store expansions (expansions
include store relocations). In fiscal 2003 and beyond, we plan to predominately
open stores that are approximately 8,000 to 10,000 selling square feet and we
believe this size range allows us to achieve our objectives in the markets in
which we plan to expand. At December 31, 2002, 468 of our stores, totaling 36.9%
of our selling square footage, were 8,000 selling square feet or larger.
In addition to new store openings, we plan to continue our store expansion
program to increase our net sales per store and take advantage of market
opportunities. We target stores for expansion based on the current sales per
square foot and changes in market opportunities. Stores targeted for expansion
are generally less than 3,500 selling square feet in size. Store expansions
generally increase the existing store size by approximately 4,500 to 6,500
selling square feet.
Since 1995, we have added a total of 371 stores through three mergers and
several small acquisitions. Our acquisition strategy has been to target
companies with a similar single price
7
point concept that have shown success in operations or provide a strategic
advantage. We evaluate potential acquisition opportunities in our retail sector
as they become available.
Merchandising and Distribution. Expanding our customer base is important to
our growth plans. We will continue to stock our new stores with the
ever-changing merchandise that our current customers have come to appreciate. In
addition, we are opening larger stores that contain more basic consumable
merchandise to attract new customers. Consumable merchandise typically leads to
more frequent return trips to our stores resulting in increased sales. The
presentation and display of merchandise in our stores are critical to
communicating value to our customers and creating a more exciting shopping
experience. We believe our approach to visual merchandising results in high
store traffic, high sales volume and an environment that encourages impulse
purchases.
A strong and efficient distribution network is key to our ability to grow
and to maintain a low-cost operating structure. We currently operate seven
distribution centers, which are capable of supporting approximately $3.1 billion
in annual sales. We will continue to add distribution capacity to support our
store opening plans, with the aim of remaining approximately one year ahead of
our distribution needs. New distribution sites are strategically located to
reduce stem miles, maintain flexibility and improve efficiency in our store
service areas.
Our stores receive approximately 97% of their inventory from our seven
distribution centers via contract carriers. The remaining store inventory,
primarily perishable consumable items and other vendor-maintained display items,
are delivered directly to our stores from vendors. For more information on our
distribution center network, see "Properties" below.
Competition
The retail industry is highly competitive and we expect competition to
increase in the future. The value discount retail sector currently represents
approximately 10% of the $300 billion discount retail market and appears to be
the fastest growing. Our value discount retail competitors include Family
Dollar, Dollar General, 99 Cents Only and Big Lots. The principal methods of
competition include convenience and the quality of merchandise offered to the
customer. Though we are a fixed-price point retailer, we also compete, to a
lesser extent, with mass merchandisers, such as Wal-Mart and Target, and
regional discount retailers.
Trademarks
We are the owners of federal service mark registrations for "Dollar Tree,"
the "Dollar Tree" logo, "1 Dollar Tree" together with the related design, and
"One Price...One Dollar." A small number of our stores operate under the name
"Only One Dollar," for which we have not obtained a service mark registration.
We also own a concurrent use registration for "Dollar Bill$" and the related
logo. During 1997, we acquired the rights to use trade names previously owned by
Everything's A Dollar, a former competitor in the $1.00 price point industry.
Several trade names were included in the purchase, including the marks
"Everything's $1.00 We Mean Everything," and "Everything's $1.00," the
registration of which is pending. With the acquisition of Dollar Express, we
became the owner of the service marks "Dollar Express" and "Dollar Expres$." We
also occasionally market products under various private labels but these brand
names are not material to our operations.
Employees
We employed approximately 8,600 full-time and 18,800 part-time associates
on December 31, 2002. The number of part-time associates fluctuates depending on
seasonal needs. We consider our relationship with our associates to be good, and
we have not experienced significant interruptions of operations due to labor
disagreements. None of our employees is subject to collective bargaining
agreements.
Item 2. PROPERTIES
Stores
As of December 31, 2002, we operated 2,263 stores in 40 states as detailed
below:
Alabama.................61 Maryland................77 Oklahoma.................29
Arkansas................30 Massachusetts...........19 Oregon...................37
California.............145 Michigan................92 Pennsylvania............169
Connecticut.............17 Minnesota...............17 Rhode Island..............8
Delaware................15 Mississippi.............39 South Carolina...........61
Florida................179 Missouri................51 South Dakota..............1
Georgia................117 Nebraska.................6 Tennessee................74
Illinois................92 Nevada..................11 Texas...................118
Indiana.................63 New Hampshire...........10 Vermont...................4
Iowa....................13 New Jersey..............58 Virginia................125
Kansas..................20 New York...............111 Washington...............11
Kentucky................48 North Carolina.........127 West Virginia............25
Louisiana...............35 Ohio....................98 Wisconsin................49
Maine....................1
8
We currently lease our stores and expect to continue to lease new stores
as we expand. Our leases typically provide for a short initial lease term
(generally five years) with options to extend. We believe this leasing strategy
enhances our flexibility to pursue various expansion opportunities resulting
from changing market conditions.
As current leases expire, we believe that we will be able either to obtain
lease renewals, if desired, for present store locations, or to obtain leases for
equivalent or better locations in the same general area. To date, we have not
experienced difficulty in either renewing leases for existing locations or
securing leases for suitable locations for new stores. From time to time we may
not comply with certain provisions of our store operating leases. We maintain
good relations with our landlords and believe that violation of these lease
provisions, if any, will not have a material effect on our operations.
Distribution Centers
The following table includes information about the distribution centers
that we currently operate. We believe our operational distribution centers can
support a total of approximately $3.1 billion in annual sales.
Size in
Location Own/Lease Lease Expires Square Feet
-------- --------- ------------- -----------
Chesapeake, Virginia Own N/A 400,000
Olive Branch, Mississippi Own N/A 425,000
June 2005, with
Chicago, Illinois Lease options to renew 250,000
Stockton, California Own* N/A 525,000
Briar Creek, Pennsylvania Own* N/A 600,000
Savannah, Georgia Own* N/A 600,000
Marietta, Oklahoma Own* N/A 603,000
* These facilities are owned by a variable interest entity that we include
in our consolidated financial statements effective January 1, 2003.
We are planning to open a new distribution center in the Northwest in early
to mid-2004. We are also planning to relocate our Chicago distribution center
and expand it. This facility is expected to open during the third quarter of
2004. In addition to our distribution centers noted above, during the past
several years we have used off-site facilities to accommodate limited quantities
of seasonal merchandise.
Four of our distribution centers are financed through a variable interest
entity, which we include in our consolidated financial statements effective
January 1, 2003. The variable interest entity owns these distribution center
assets and carries the debt used to finance them. Terms of the debt, among other
things, require the maintenance of certain specified financial ratios, restrict
the payment of certain distributions and limit certain types of debt we can
incur.
With the exception of our current Chicago facility, each of our
distribution centers contain advanced materials handling technologies, including
an automated conveyor and sorting system, radio-frequency inventory tracking
equipment and specialized information systems. We completed the expansion and
automation of our Stockton distribution center in January 2002.
We currently have two former distribution centers for which we are liable
for future rents. The leases on these facilities expire at various dates through
June 2008. We make every effort to sublease these facilities and have subleased
certain of the vacated facilities under agreements expiring at various dates
through June 2008.
For more information on financing of our distribution centers, see
"Management's Discussion and Analysis - Funding Requirements" on page 16. For
more information on our liability for future rents and related costs, see
"Management's Discussion and Analysis - Inflation and Other Economic Factors" on
page 19.
Item 3. 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.
9
We have been sued in California by several employees and in Alabama by a
salaried store manager and a former store manager 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 and request
that the Alabama Federal Court certify the case as a collective action under the
Fair Labor Standards Act on behalf of all salaried managers in all of our
stores. We will vigorously defend ourselves in these matters.
We do not believe that any of these matters will individually, or in the
aggregate, have a material adverse effect on us.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of our 2002 calendar year.
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our common stock has been traded on The Nasdaq Stock Market(R) under the
symbol "DLTR" since our initial public offering on March 6, 1995. The following
table gives the high and low sales prices of our common stock as reported by
Nasdaq for the periods indicated.
High Low
---- ---
2001:
First Quarter............................... $ 32.25 $ 15.56
Second Quarter.............................. 27.84 17.94
Third Quarter............................... 34.96 16.36
Fourth Quarter.............................. 31.87 18.22
2002:
First Quarter............................... $ 35.15 $ 26.96
Second Quarter.............................. 41.00 30.66
Third Quarter............................... 39.84 21.13
Fourth Quarter.............................. 30.59 19.08
On March 20, 2003, the last reported sale price for our common stock as
quoted by Nasdaq was $20.65 per share. As of March 20, 2003, we had
approximately 565 shareholders of record.
We anticipate that all of our income in the foreseeable future will be
retained for the development and expansion of our business and the repayment of
indebtedness. Management does not anticipate paying dividends on our common
stock in the foreseeable future. In addition, our credit facilities contain
financial covenants that restrict our ability to pay cash dividends.
Item 6. SELECTED FINANCIAL DATA
(Amounts in thousands, except per share data, number of stores data and net
sales per selling square foot data)
The following table presents a summary of our selected financial data for
the last five calendar years. The selected income statement and balance sheet
data have been derived from our consolidated financial statements that have been
audited by our independent auditors. This information should be read in
conjunction with the consolidated financial statements and related notes,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and our financial information found elsewhere in this report. As
required by pooling-of-interests accounting, the financial information and
operating data of Dollar Tree and our past merger partners, Dollar Express, Only
$One and 98 Cent Clearance Center, have been combined and restated as of the
beginning of the earliest period presented.
For 2000, operating income was reduced by $4,366, and net income was
reduced by $3,134 for charges related to the Dollar Express merger. For 1999,
operating income was reduced by $1,050, and net income was reduced by $792, for
charges related to the Only $One merger. For 1998, operating income was reduced
by $5,325, and net income was reduced by $4,201, for charges related to the 98
Cent Clearance Center merger.
Dollar Express and Only $One were treated as S corporations for federal and
state income tax purposes through February 4, 1999 and June 29, 1999,
respectively. As a result, their income was taxable to their shareholders
through those dates. Accordingly, our pro forma net income available to common
shareholders and the related per share data reflects the pro forma increase in
our C corporation federal and state income tax expense, which would have
occurred had these companies been taxed as C corporations for the entire periods
presented. Pro forma C corporation income taxes were $505 in 1999 and $4,804 in
1998.
10
In our merger with Dollar Express in May 2000, the outstanding preferred
stock of Dollar Express was converted to common stock. Pro forma diluted net
income per common share would have been $0.96 for the year ended December 31,
1999 if the conversion of preferred stock had taken place on February 5, 1999,
the date when the preferred stock was originally issued. This calculation gives
effect to an adjustment that increases net income available to common
shareholders by $7,409 to eliminate the charge for accrued preferred stock
dividends and accretion of preferred stock and warrants for the year ended
December 31, 1999. In addition, if the conversion had taken place on February 5,
1999, the weighted average number of common shares and potential dilutive common
shares outstanding would have increased by 2,795,000 shares for the year ended
December 31, 1999.
In 1999 and 1998, store contribution margin excludes stores acquired
through our merger in 2000, because store-level data for the acquired stores was
not available.
Comparable store net sales compare net sales for stores open throughout
each of the two periods being compared, including expanded stores. Net sales per
store and net sales per selling square foot are calculated for stores open
throughout the period presented.
Year Ended December 31,
--------------------------------------------------------------------
2002 2001 2000 1999 1998
---- ---- ---- ---- ----
Income Statement Data:
Net sales...................................... $2,329,188 $1,987,271 $1,688,105 $1,351,820 $1,073,886
Gross profit................................... 847,956 715,957 623,589 497,253 391,198
Selling, general and administrative
expenses.................................... 594,035 512,092 420,553 321,657 260,684
Operating income............................... 253,921 203,865 203,036 175,596 130,514
Net income..................................... 154,647 123,081 121,622 106,577 81,318
Pro forma net income available to
common shareholders......................... 154,647 123,081 120,209 99,550 76,514
Margin Analysis:
Gross profit................................... 36.4% 36.0% 36.9% 36.8% 36.4%
Selling, general and administrative
expenses.................................... 25.5% 25.7% 24.9% 23.8% 24.3%
Operating income............................... 10.9% 10.3% 12.0% 13.0% 12.2%
Net income..................................... 6.6% 6.2% 7.2% 7.9% 7.6%
Pro forma net income available to
common shareholders......................... 6.6% 6.2% 7.1% 7.3% 7.1%
Per Share Data:
Pro forma diluted net income per
common share................................ $ 1.35 $ 1.09 $ 1.08 $ 0.92 $ 0.71
Pro forma diluted net income per
common share annual growth.................. 23.9% 0.9% 17.4% 29.6% 42.0%
Selected Operating Data:
Number of stores open at
end of period............................... 2,263 1,975 1,729 1,507 1,285
Gross square footage at end of period.......... 16,527 12,791 9,832 7,638 6,051
Selling square footage at end of period........ 13,042 10,129 7,818 6,113 4,867
Selling square footage annual growth........... 28.8% 29.6% 27.9% 25.6% 25.5%
Net sales annual growth........................ 17.2% 17.7% 24.9% 25.9% 26.7%
Comparable store net sales increase............ 1.0% 0.1% 5.7% 5.0% 6.5%
Net sales per selling square foot.............. $ 199 $ 217 $ 238 $ 245 $ 249
Net sales per store............................ $ 1,083 $ 1,043 $ 1,014 $ 939 $ 902
Selected Financial Ratios:
Return on assets............................... 15.3% 14.9% 17.9% 20.3% 21.3%
Return on equity............................... 20.5% 21.0% 29.1% 36.8% 37.3%
Store contribution margin...................... 20.2% 21.0% 22.4% 22.7% 22.8%
Store inventory turns.......................... 4.5 4.6 4.7 4.9 4.9
11
As of December 31,
--------------------------------------------------------------------
2002 2001 2000 1999 1998
---- ---- ---- ---- ----
Balance Sheet Data:
Cash and short-term investments.............. $ 335,972 $ 236,653 $ 181,166 $ 181,587 $ 84,714
Working capital.............................. 509,629 360,757 303,209 226,707 124,758
Total assets................................. 1,116,377 902,048 746,859 611,233 436,768
Total debt................................... 54,429 62,371 71,730 108,773 53,759
Mandatorily redeemable preferred
stock..................................... -- -- -- 35,171 --
Shareholders' equity......................... 855,404 651,736 518,658 316,238 262,575
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
In Management's Discussion and Analysis, we explain the general financial
condition and the results of operations for our company, including:
o what factors affect our business;
o what our earnings and costs were in 2002 and 2001;
o why those earnings and costs were different from the year before;
o how all of this affects our overall financial condition;
o what our expenditures for capital projects were in 2002 and what we
expect them to be in 2003; and
o where funds will come from to pay for future expenditures.
As you read Management's Discussion and Analysis, please refer to our
consolidated financial statements, included in Item 8 of this Form 10-K, which
present the results of operations for 2002, 2001 and 2000. In Management's
Discussion and Analysis, we analyze and explain the annual changes in some
specific line items in the consolidated financial statements.
Key Events and Recent Developments
Several key events have had or are expected to have a significant effect on
our results of operations. You should keep in mind that:
o In February 2003, we opened a new 603,000 square foot automated
distribution center in Marietta, Oklahoma.
o In January 2003, we changed our fiscal year from a calendar year to a
retail fiscal year ending on the Saturday closest to January 31. Our
first fiscal year reported will be fiscal 2003. Fiscal 2003 is the
period beginning February 2, 2003 and ending January 31, 2004.
o In April 2002, we implemented a new supply chain management system.
o In January 2002, we completed the expansion and automation of our
Stockton, California distribution center, which increased the size to
525,000 square feet. This distribution center opened in January 2000
and replaced the former 98 Cent Clearance Center facility in
Sacramento, California.
o In August 2001, we opened a new 600,000 square foot automated
distribution center in Briar Creek, Pennsylvania. This new facility
replaced the former Dollar Express distribution facilities in
Philadelphia, Pennsylvania.
o In January 2001, we opened a new 600,000 square foot automated
distribution center in Savannah, Georgia.
o In May 2000, we merged with Dollar Express and issued or reserved
9,000,000 shares of our common stock in exchange for Dollar Express'
outstanding stock and options. Dollar Express operated 132 stores
primarily in the Mid-Atlantic region.
We accounted for the Dollar Express merger as a pooling of interests. As a
result, all financial and operational data assume that Dollar Express had been a
part of Dollar Tree throughout all periods presented. For each period presented,
the outstanding Dollar Express shares of stock have been converted into Dollar
Tree shares based on the exchange ratio used in the merger.
12
Results of Operations
Our net sales derive from the sale of merchandise. Two major factors tend
to affect our net sales trends. First is our success at opening new stores or
adding new stores through mergers or acquisitions. Second, sales may vary at our
existing stores from one year to the next. We refer to this change as a change
in comparable store net sales, because we compare only those stores that are
open throughout both of the periods being compared. We include expanded stores
in the calculation of comparable store net sales, which has the effect of
increasing our comparable store net sales. The term 'expanded' also includes
stores that are relocated.
Most retailers have the ability to increase their merchandise prices or
alter the mix of their merchandise to favor higher-priced items in order to
increase their comparable store net sales. As a fixed-price retailer, we do not
have the ability to raise our prices. Generally, our comparable store net sales
will increase only if we sell more merchandise. Our plans for fiscal 2003
operations anticipate comparable store net sales increases of 0% to 1% and net
sales and earnings increases of at least 15% based on fiscal 2002 earnings of
$1.27 per share. We may be unable to predict our actual operating results
accurately.
We expect the substantial majority of our future net sales growth to come
from square footage growth resulting from new store openings and expansion of
existing stores. In fiscal 2003, we plan to increase our selling square footage
approximately 22%, or approximately 2.9 million square feet, 0.9 million of
which will come from expansions. We expect the average size of new stores opened
in fiscal 2003 to be approximately 9,000 selling square feet per store. In
fiscal 2003 and beyond, we plan to predominately open stores that are
approximately 8,000 to 10,000 selling square feet. We believe this size range
allows us to achieve our objectives in the markets in which we plan to expand.
Larger stores take longer to negotiate, build out and open and generally have
lower net sales per square foot than our smaller stores. While our newer, larger
stores have lower sales per square foot than older, smaller stores, they
generate higher sales and operating income per store and create an improved
shopping environment that invites customers to shop longer and buy more.
We must control our merchandise costs, inventory levels and our general and
administrative expenses. Increases in expenses could negatively impact our
operating results because we cannot pass on increased expenses to our customers
by increasing our merchandise price above the $1.00 price point.
We will continue to experience pressure on our gross profit margins in
future years as we refine our merchandise mix to include a higher proportion of
consumable merchandise, which typically carries a lower gross profit margin,
open larger stores and continue to absorb higher costs. We do expect to
partially offset the effect of the above factors with improved domestic freight
costs created by the addition of our new distribution center in 2003. Even with
our changing merchandise mix, we expect our gross profit margin will approximate
36% in the foreseeable future because we can vary the mix among our consumable
products and variety categories to impact our gross margin. In addition,
consumable merchandise typically leads to more frequent return trips to our
stores, resulting in increased sales.
Leveraging our selling, general and administrative expenses is difficult
because a substantial majority of our future sales growth is expected to come
primarily from new store openings, rather than from comparable store net sales.
The following table expresses items from our income statement as a
percentage of net sales:
Year Ended December 31,
--------------------------------
2002 2001 2000
---- ---- ----
Net sales.................................................. 100.0% 100.0% 100.0%
Cost of sales.............................................. 63.6 64.0 63.0
Merger-related costs....................................... -- -- 0.1
----- ----- -----
Gross profit............................................... 36.4 36.0 36.9
Selling, general and administrative expenses:
Operating expenses................................... 25.5 25.7 24.7
Merger-related expenses.............................. -- -- 0.2
----- ----- -----
Total............................................ 25.5 25.7 24.9
----- ----- -----
Operating income........................................... 10.9 10.3 12.0
Interest income............................................ 0.2 0.2 0.3
Interest expense........................................... (0.2) (0.3) (0.5)
Changes in fair value of non-hedging
interest rate swaps..................................... (0.1) (0.1) --
----- ----- -----
Income before income taxes................................. 10.8 10.1 11.8
Provision for income taxes................................. 4.2 3.9 4.6
----- ----- -----
Net income................................................. 6.6% 6.2% 7.2%
===== ===== =====
13
2002 Compared to 2001
Net Sales. Net sales increased 17.2% in 2002 compared to 2001. We attribute
this $341.9 million increase in net sales primarily to our new stores opened in
2002 and 2001, which are not included in our comparable store net sales
increase, and to a comparable store net sales increase of 1.0% in 2002.
Comparable store net sales are positively affected by our expanded and relocated
stores, which we include in the calculation, and, to a lesser extent, are
negatively affected when we open new stores or expand stores near existing
stores.
We opened 318 new stores and closed 30 stores during 2002, compared to 276
new stores opened and 30 stores closed in 2001. During 2002, we opened larger
stores than originally planned, which required us to shift our store openings to
later in the third quarter and shift some store openings into the fourth
quarter. We added 28.8% to our selling square footage in 2002 compared to 29.6%
in 2001. Of the 2.9 million in selling square footage increase in 2002,
approximately 0.5 million selling square feet was added by expanding 111
existing stores. Our square footage growth in the future will come primarily
from larger stores.
Gross Profit. Gross profit margin increased to 36.4% in 2002 compared to
36.0% in 2001. This increase in gross profit margin in 2002 was primarily due to
improved inventory shrink. This improvement is primarily attributed to 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. In addition, merchandise costs
increased, but were partially offset by improvements in freight costs.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses decreased as a percentage of net sales to 25.5% compared
to 25.7% in 2001. This decrease is primarily the result of savings achieved from
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 expense
resulted primarily from depreciation costs associated with our new inventory
management system, our store relocation and expansion program, and the opening
of new larger stores. In addition, effective January 1, 2002, we ceased
amortization of goodwill in accordance with the provisions of SFAS No. 142. We
recorded approximately $2.0 million of goodwill amortization in 2001.
Operating Income. Due to the reasons discussed above, operating income
increased to $253.9 million in 2002 from $203.9 million in 2001 and increased as
a percentage of net sales to 10.9% from 10.3%.
Interest Income and Expense. Interest income in 2002 was consistent with
2001. Decreased interest rates throughout 2002 were offset by increased levels
of cash and cash equivalents. Interest expense decreased $0.9 million in 2002
compared to 2001 due to repayments of our long-term debt and a decrease in
interest on our capitalized leases. We benefited slightly from the decrease in
variable interest rates in 2002; however, this benefit was partially offset as a
result of the interest rate swaps in effect during 2002.
Income Taxes. Our effective tax rate was 38.5% in 2002 and 2001 and we
expect the rate to remain the same in fiscal 2003.
2001 Compared to 2000
Net Sales. Net sales increased 17.7% in 2001 compared to 2000. We attribute
this $299.2 increase in net sales primarily to our new stores opened in 2001 and
2000, which are not included in our comparable store net sales results.
Comparable store net sales increased 0.1% in 2001.
We believe comparable store net sales remained relatively flat in 2001
because the retail environment in 2001 was unusually difficult in light of the
economic downturn and the events of September 11, 2001. In addition, our Easter
selling season was shorter in 2001 compared to 2000 because Easter was
approximately one week earlier in 2001 than 2000.
We opened 276 new stores and closed 30 stores during 2001, compared to 233
new stores opened and 11 stores closed in 2000. We added 29.6% to our selling
square footage in 2001 compared to 27.9% in 2000. Of the 2.3 million selling
square footage increase in 2001, approximately 0.4 million selling square feet
was added by expanding 111 existing stores.
Gross Profit. Excluding $1.1 million of merger-related costs recorded in
2000, gross profit margin decreased to 36.0% in 2001 compared to 37.0% in 2000.
This decrease in gross profit margin in 2001 was primarily due to loss of
leverage on occupancy costs and increases in shrink in the now-closed
Philadelphia distribution facilities.
Selling, General and Administrative Expenses. Excluding $3.3 million of
merger-related expenses in 2000, selling, general and administrative expenses
increased as a percentage of net sales to 25.7% compared to 24.7% in 2000. This
increase is primarily the result of increases in payroll-related costs,
including insurance; certain store operating expenses; depreciation and
amortization expense; and charges recorded in connection with our closed
distribution facilities in Philadelphia. The increases in payroll-related costs,
store operating expenses and depreciation and amortization were primarily due to
loss of leverage.
14
Operating Income. Due to the reasons discussed above, excluding $4.4
million of merger-related items in 2000, operating income decreased to $203.9
million in 2001 from $207.4 million in 2000 and decreased as a percentage of net
sales to 10.3% from 12.3%.
Interest Income and Expense. Interest income decreased $0.7 million in 2001
compared to 2000. The decrease resulted primarily from decreased interest rates
throughout 2001. Interest expense decreased $2.4 million in 2001 compared to
2000. This decrease was primarily due to the repayment of a revolving credit
facility and term loan in May 2000. We benefited slightly from the decrease in
variable interest rates in 2001 because of our variable-rate operating leases
and variable-rate debt. However, this benefit was partially offset as a result
of the interest rate swaps in effect during 2001.
Income Taxes. Our effective tax rate decreased to 38.5% for the year ended
December 31, 2001 from 38.8% for the year ended December 31, 2000 because 2000
included certain non-deductible merger-related expenses related to Dollar
Express.
Liquidity and Capital Resources
Our business requires capital to open new stores, expand our distribution
network and operate existing stores. Our working capital requirements for
existing stores are seasonal and usually reach their peak in September and
October. Historically, we have satisfied our seasonal working capital
requirements for existing stores and have funded our store opening and expansion
programs from internally generated funds and seasonal borrowings under our
credit facilities.
The following table compares cash-related information for the years ended
December 31, 2002, 2001 and 2000:
Year Ended December 31,
--------------------------------
2002 2001 2000
---- ---- ----
(in millions)
Net cash provided by (used in):
Operating activities..................................... $ 206.9 $ 178.7 $ 107.3
Investing activities..................................... (173.8) (121.5) (94.8)
Financing activities..................................... 22.5 (1.8) (12.9)
The $28.2 million increase in cash provided by operating activities in
2002 was due primarily to net income before depreciation expense. This increase
was offset by an increase in cash paid for income taxes
due primarily to the timing of payments.
Cash used in investing activities is generally expended to open new stores.
The $52.3 million increase in 2002 compared to 2001 was primarily due to the
following:
o Our increased profitability in 2002 provided us with additional cash,
which we invested in short-term securities.
o We increased the number of new stores opened and the average size
of those stores in 2002. We also increased the size of our
expanded stores.
o We invested in technology to improve our supply chain processes.
The $24.3 million increase in cash provided by financing activities in 2002
compared with 2001 was primarily the result of the following:
o We received $20.7 million more cash pursuant to stock-based
compensation plans in 2002 compared to 2001 because of an increase
in the amount of stock option exercises, which we believe resulted
from the increased stock price in the first half of 2002.
o We paid $3.8 million in 2001 to repurchase shares in accordance
with the Securities and Exchange Commission's Emergency Relief
Order, which has since expired. We did not repurchase any common
stock in 2002.
o We made a $6.0 million principal payment on the senior notes in
2002 and 2001. In 2000, we made net repayments of approximately
$34.2 million due to repayment of Dollar Express' term loan and
revolving credit facility and the first principal payment on the
senior notes.
At December 31, 2002, our long-term borrowings were $31.0 million and our
capital lease commitments were $28.0 million. We had $50.0 million available
through a revolving credit facility. We also have $125.0 million available under
the Letter of Credit Reimbursement and Security Agreement, of which
approximately $73.0 million was committed to letters of credit issued for
routine purchases of imported merchandise.
15
We adopted the requirements of Financial Accounting Standards Board
Interpretation No. 46, "Consolidation of Variable Interest Entities" early,
effective January 1, 2003. As a result, we consolidated the variable interest
entity used to finance the construction of four of our distribution centers. Our
long-term borrowings, including debt related to the variable interest entity, at
February 1, 2003 were $171.6 million.
Funding Requirements
Overview
We plan to increase our selling square footage by approximately 22% in
fiscal 2003. In 2002, the average investment per new store, including capital
expenditures, initial inventory and pre-opening costs, was approximately
$351,000.
We expect our cash needs for opening new stores and expanding existing
stores in fiscal 2003 to total approximately $156.3 million, which includes
approximately $112.7 million for capital expenditures and $43.6 million for
initial inventory and pre-opening costs. Our total planned capital expenditures
for fiscal 2003 are approximately $275.5 million, including planned expenditures
for new and expanded stores, new and relocated distribution centers and
investments in technology. We believe that we can adequately fund our working
capital requirements and planned capital expenditures, except for the new and
relocated distribution centers, for the next few years from net cash provided by
operations and borrowings under our existing credit facilities. We believe that
we will be able to obtain adequate funding to construct our new distribution
centers.
The following tables summarize our material contractual obligations,
including both on- and off-balance sheet arrangements, and our commitments (in
millions) at December 31, 2002:
Contractual Obligations Total 2003 2004 2005 2006 2007 Thereafter
----------------------- ----- ---- ---- ---- ---- ---- ----------
Lease Financing
Operating lease obligations $648.3 $149.8 $138.8 $117.3 $87.8 $58.6 $96.0
(excluding distribution center
operating lease facility)
Capital lease obligations 28.0 7.6 6.5 8.0 5.9 -- --
(primarily sale-leaseback)
Variable interest entity
(long-term debt as of February 140.6 -- -- -- 140.6 -- --
1, 2003)
Long-term Borrowings
Long-term debt(including 31.0 25.0 6.0 -- -- -- --
current portion)
Total obligations $847.9 $182.4 $151.3 $125.3 $234.3 $58.6 $96.0
Expiring Expiring Expiring Expiring Expiring
Commitments Total in 2003 in 2004 in 2005 in 2006 in 2007 Thereafter
----------- ----- ------- ------- ------- ------- ------- ----------
Unsecured revolving credit $ -- $ -- $ -- $ -- $ -- $ -- $ --
facility
Letters of credit and surety 133.6 133.6 -- -- -- -- --
bonds
Freight contracts 35.0 24.9 8.2 1.9 -- -- --
Total commitments $168.6 $158.5 $ 8.2 $ 1.9 $ -- $ -- $ --
Lease Financing
Operating Lease Obligations. Our operating lease obligations are primarily
for payments under noncancelable store leases. The commitment includes amounts
for leases that were signed prior to December 31, 2002 for stores that were not
yet open on December 31, 2002.
Capital Lease Obligations (primarily sale-leaseback). In September 1999, we
sold certain retail store leasehold improvements to an unrelated third party and
leased them back for seven years. We have an option to repurchase the leasehold
improvements in September 2004 and September 2006 at amounts approximating their
fair market values at the time the option is exercised. The transaction is
treated as a financing arrangement for financial accounting purposes. The total
amount of the lease obligation is $23.4 million. We are required to make monthly
lease payments
16
of $438,000 in the first five years and $638,000 in the sixth and seventh years.
As a result of the transaction, we received net cash of $20.9 million and an
$8.1 million 11.0% note receivable, which matures in September 2006. The amount
of the lease obligation will equal the amount outstanding under the note
receivable in September 2006.
Variable Interest Entity. In March 2001, we entered into an operating lease
known as a synthetic lease to finance the construction of several of our
distribution centers. At December 31, 2002, approximately $154.5 million of the
$165.0 million facility was committed to the Stockton, Savannah, Briar Creek and
Marietta facilities. Because we accounted for this transaction as an operating
lease prior to January 1, 2003, the related fixed assets and lease liabilities
were not included in our balance sheets and payments under the lease were
included in rent expense.
In January 2003, the Financial Accounting Standards Board issued FASB
Interpretation No. 46. After evaluating this new standard, our Board of
Directors and management determined that we would maintain the existing terms
of the facility and include the variable interest entity in our consolidated
financial statements effective January 1, 2003. As a result of the
implementation, the distribution center assets, the financing-related costs and
the debt incurred by the variable interest entity to purchase and construct the
assets are included on our balance sheets for periods after January 1, 2003.
Interest is payable monthly and the principal amount is payable upon maturity of
the debt in March 2006. The debt, 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. Estimated payments
under this facility at February 1, 2003 are included in the table above. As a
result of consolidating the entity, we expect our non-cash annual costs to
increase $8.6 million ($5.3 million, net of tax). We also expect our return on
assets ratio to decrease because of the consolidation of the variable interest
entity.
For more information on the variable interest entity, see Footnote 5 of the
Consolidated Financial Statements in Item 8 of this Form 10-K.
Long-Term Borrowings
Revenue Bond Financing. In May 1998, we entered into an agreement with the
Mississippi Business Finance Corporation under which it issued $19.0 million of
variable-rate demand revenue bonds. We borrowed the proceeds from the bonds to
finance the acquisition, construction and installation of land, buildings,
machinery and equipment for our distribution facility in Olive Branch,
Mississippi. At December 31, 2002, the balance outstanding on the bonds was
$19.0 million. We begin repayment of the principal amount of the bonds in June
2006, with a portion maturing each June 1 until the final portion matures in
June 2018. The bonds do not have a prepayment penalty as long as the interest
rate remains variable. The bonds contain a demand provision and, therefore,
outstanding amounts are classified as current liabilities. We pay interest
monthly based on a variable interest rate, which was 1.5% at December 31, 2002.
The bonds are secured by a $19.3 million letter of credit issued by one of our
existing lending banks. The letter of credit is renewable annually. The letter
of credit and reimbursement agreement require that we maintain specified
financial ratios and it restricts our ability to pay cash dividends.
Debt Securities. In April 1997, we issued $30.0 million of 7.29% unsecured
senior notes, proceeds from which indirectly financed a portion of our
Chesapeake distribution center and corporate headquarters. We pay interest on
the notes semiannually on April 30 and October 30 each year and we pay principal
in five equal annual installments of $6.0 million, which began April 30, 2000.
The note holders have the right to require us to prepay the notes in full
without premium upon a change of control or upon specified asset dispositions or
other transactions we may make. The note agreements prohibit specified mergers
and consolidations in which our company is not the surviving company, require
that we maintain specified financial ratios, require that the notes rank on par
with other debt and limit the amount of debt we can incur. In the event of
default or a prepayment at our option, we must pay a penalty to the note holder.
Commitments
Unsecured Revolving Credit Facility. Effective March 12, 2001, we entered
into a revolving credit facility with our banks, which provides for a $50.0
million unsecured revolving credit facility to be used for working capital
bearing interest at the agent bank's prime rate or LIBOR plus a spread, at our
option. The credit agreement, 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 facility was originally scheduled to
terminate on March 11, 2002; however, we have extended it to May 30, 2003 and
expect to extend it on or prior to its expiration.
Letters of Credit. Effective March 12, 2001, we entered into a Letter of
Credit Reimbursement and Security Agreement, which provides $125.0 million for
letters of credit, which are generally issued for the routine purchase of
imported merchandise. Approximately $73.0 million was committed to letters of
credit at December 31, 2002. The facility expires on May 30, 2003; however, we
expect it to be extended. We also have letters of credit or surety bonds
outstanding for our revenue bond financing, our high-deductible insurance
program and utility
17
payments at our stores. In addition, we have issued a guarantee for $20.0
million that is used by one of our suppliers as collateral. The guarantee is
secured by letters of credit totaling $20.0 million that expire in 2003.
Freight Contracts. We have contracted outbound freight services from
various carriers with contracts expiring through August 2003. The total amount
of these commitments is approximately $35.0 million.
Derivative Financial Instruments
We are party to four interest rate swaps,
which allow us to manage the risk associated with interest rate fluctuations on
the demand revenue bonds and a portion of our variable-rate variable interest
entity debt. The swaps are based on notional amounts of $19.0 million, $10.0
million, $5.0 million and $25.0 million. Under the $19.0 million, $10.0 million
and $5.0 million agreements, as amended, we pay interest to the banks that
provided the swaps at a fixed rate. In exchange, the financial institution pays
us at variable interest rates, which are similar to the rates on the demand
revenue bonds and our variable-rate operating leases. The variable interest
rates on the interest rate swaps are set monthly. No payments are made by either
party under the swaps for monthly periods with an established interest rate
greater than a predetermined rate (the knock-out rate). The swaps may be
canceled by the bank or us and settled for the fair value of the swap as
determined by market rates.
The $25.0 million interest rate swap agreement is used to manage the risk
associated with interest rate fluctuations on a portion of our variable interest
entity debt. 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 debt,
excluding the credit spread. The interest rate on the swap is subject to
adjustment monthly. The swap is effective through March 2006, but it may be
canceled by the bank or us and settled for the fair value of the swap as
determined by market rates.
Because of the knock-out provision in the $19.0 million, $10.0 million and
$5.0 million interest rate swaps, changes in the fair value of those swaps are
recorded in earnings. Changes in fair value on our $25.0 million interest rate
swap are recorded as a component of "accumulated other comprehensive income" in
the consolidated balance sheets because the swap qualifies for hedge accounting
treatment in accordance with Statement of Financial Accounting Standards No.
133, as amended by Statement of Financial Accounting Standards No. 138. The
amounts recorded in accumulated other comprehensive income are subsequently
reclassified into earnings in the same period in which the related interest
affects earnings.
For more information on the interest rate swaps, see "Quantitative and
Qualitative Disclosures About Market Risk - Interest Rate Risk" on page 21.
Critical Accounting Policies
The preparation of financial statements requires the use of estimates.
Certain of our estimates require a high level of judgment and have the potential
to have a material effect on the financial statements if actual results vary
significantly from those estimates. Following is a discussion of the estimates
that we consider critical.
Inventory Valuation
As discussed in Note 1 to the Consolidated Financial Statements,
inventories at the distribution centers are stated at the lower of cost or
market with cost determined on a weighted-average basis. Cost is assigned to
store inventories using the retail inventory method on a weighted-average basis.
Under the retail inventory method, the valuation of inventories at cost and the
resulting gross margins are computed by applying a calculated cost-to-retail
ratio to the retail value of inventories. The retail inventory method is an
averaging method that has been widely used in the retail industry and results in
valuing inventories at lower of cost or market when markdowns are taken as a
reduction of the retail value of inventories on a timely basis.
Inventory valuation methods require certain significant management
estimates and judgments, including estimates of merchandise markdowns and
shrink, which significantly affect the ending inventory valuation at cost as
well as the resulting gross margins. The averaging required in applying the
retail inventory method and the estimates of shrink and markdowns could, under
certain circumstances, result in costs not being recorded in the proper period.
We estimate our markdown reserve based on the consideration of a variety of
factors, including but not limited to quantities of slow moving or carryover
seasonal merchandise on hand, historical markdown statistics and future
merchandising plans. The accuracy of our estimates can be affected by many
factors, some of which are outside of our control, including changes in economic
conditions and consumer buying trends. Historically, we have not experienced
significant differences in our estimates of markdowns compared with actual
results.
Our accrual for shrink is based on the actual historical shrink results of
our most recent physical inventories adjusted, if necessary, for current
economic conditions. These estimates are compared to actual results as physical
inventory counts are taken and reconciled to the general ledger. The majority of
our counts are taken between January and May of each year;
18
therefore, the shrink accrual recorded at December 31, 2002 is based on
estimated shrink for most of 2002, including the fourth quarter. We have not
experienced significant fluctuations in historical shrink rates in our Dollar
Tree stores. However, we have sometimes experienced higher than typical shrink
in acquired stores in the year following an acquisition, as was experienced in
the former Dollar Express distribution facilities and stores in 2001. We
periodically adjust our shrink estimates to address these factors as they become
apparent.
Our management believes that our application of the retail inventory method
results in an inventory valuation that reasonably approximates cost and results
in carrying inventory at the lower of cost or market.
Accrued Expenses
On a monthly basis, we estimate certain material expenses in an effort to
record those expenses in the period incurred. Our most material estimates relate
to domestic freight, insurance-related expenses, certain store level operating
expenses, such as property taxes and utilities, and other expenses. Our freight
and store-level operating expenses are estimated based on current activity and
historical results. Our workers' compensation and general liability insurance
accruals are recorded based on actuarial valuation methods performed by
third-party actuaries. These actuarial valuations are estimates based on
historical loss development factors. Other expenses are estimated and recorded
in the periods that management becomes aware of them. The related accruals are
adjusted as management's estimates change. Differences in management's estimates
and assumptions could result in an accrual materially different from the
calculated accrual. Our experience has been that some of our estimates are too
high and others are too low. Historically, the net total of these differences
has not had a material effect on our financial condition or results of
operations.
Income Taxes
On a monthly basis, we estimate our required tax liability and assess the
recoverability of our deferred tax assets. Our taxes payable are estimated based
on enacted tax rates, including estimated tax rates in states where our store
base is growing applied to the income expected to be taxed currently. Management
assesses the realizability of our deferred tax asset based on the availability
of carrybacks of future deductible amounts and management's projections for
future taxable income. We cannot guarantee that we will generate income in
future years. Historically we have not experienced significant differences in
our estimates of our tax accrual.
Seasonality and Quarterly Fluctuations
We experience seasonal fluctuations in our net sales, comparable store net
sales, operating income and net income and expect this trend to continue. Our
results of operations may also fluctuate significantly as a result of a variety
of factors, including:
o shifts in the timing of certain holidays, especially Easter;
o the timing of new store openings;
o the net sales contributed by new stores;
o changes in our merchandise mix; and
o competition.
Our highest sales periods are the Christmas and Easter seasons. Easter was
observed on March 31, 2002 and will be observed on April 20, 2003. In addition,
there were six fewer selling days between Thanksgiving and Christmas in 2002 as
compared to 2001. The decrease in the selling season resulted from the shift of
Thanksgiving from November 22, 2001 to November 28, 2002. We generally realize a
disproportionate amount of our net sales and a substantial majority of our
operating and net income during the fourth quarter. In anticipation of increased
sales activity during these months, we purchase substantial amounts of inventory
and hire a significant number of temporary employees to supplement our permanent
store staff. Our operating results, particularly operating and net income, could
suffer if our net sales were below seasonal norms during the fourth quarter or
during the Easter season for any reason, including merchandise delivery delays
due to receiving or distribution problems.
Our unaudited results of operations for the eight most recent quarters are
shown in a table in Footnote 12 of the Consolidated Financial Statements in Item
8 of this Form 10-K.
Inflation and Other Economic Factors
Our ability to provide quality merchandise at a fixed price and on a
profitable basis may be subject to economic factors and influences that we
cannot control. The outbreak of war or other national or international events,
including terrorism, could lead to disruptions in the economy that could result
in decreased consumer spending and increases in costs that are critical to our
operations, including inflation in shipping rates, wage rates and other
operating costs.
19
Shipping Costs. In the past, we have experienced annual increases of as
much as 33% in our trans-Pacific shipping rates due primarily to rate increases
imposed by the trans-Pacific shipping cartel. Currently, trans-Pacific shipping
rates are negotiated with individual freight lines and are subject to
fluctuation based on supply and demand for containers. As a result, our
trans-Pacific shipping rates may increase when we renegotiate our import
shipping rates effective May 2003.
During 2000, we experienced a $1.2 million increase in our domestic freight
costs because of increased domestic fuel costs. During 2001, we experienced a
$0.4 million increase in freight costs compared to 2000 resulting from increased
domestic fuel costs. Because of rising fuel costs in 2003, we expect to
experience larger increases in freight costs than in past years.
Minimum Wage. Although our average hourly wage rate is significantly higher
than the federal minimum wage, an increase in the mandated minimum wage could
significantly increase our payroll costs. In February 2000, the U.S. Senate
approved a proposal increasing the federal minimum wage by $1.00 per hour over
three years. In March 2000, the U.S. House of Representatives approved a
proposal increasing the federal minimum wage by $1.00 per hour over two years.
No bill was passed into law and the status of this issue in the 2003 Congress is
uncertain. If the federal minimum wage were to increase by $1.00 per hour, we
believe that our annual payroll expenses would increase by approximately 1.0% to
1.5% of operating expenses unless we realize offsetting cost reductions.
Leases for Replaced Distribution Centers. We are liable for rent and
pass-through costs under two leases for now-closed distribution centers whose
leases expire at various dates through June 2008. Annual rent and pass-through
costs on these facilities are approximately $1.5 million in fiscal 2003 and
2004, $1.2 million in fiscal 2005, $0.6 million in fiscal 2006 and 2007 and $0.3
million in fiscal 2008. Certain of these distribution facilities have been
subleased under agreements expiring at various dates through June 2008. We have
recorded charges for these future obligations for certain of the facilities
considering current market conditions and probable sublease income at each
location.
Unless offsetting cost savings are realized, adverse economic factors,
including inflation in operating costs, could harm our financial condition and
results of operations.
New Accounting Pronouncements
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.
Statements of Financial Accounting Standards No. 146
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.
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.
Statement of Financial Accounting Standards No. 148
In December 2002, the Financial Accounting Standards Board issued SFAS No.
148, "Accounting for Stock-Based Compensation - Transition and Disclosure, an
amendment of SFAS No. 123." This statement amends SFAS No. 123, "Accounting for
Stock-Based Compensation," to provide alternative methods of transition for a
voluntary change to the fair value method of accounting for stock-based employee
compensation. In addition, this statement amends the disclosure requirements of
SFAS No. 123 to require prominent disclosures in both annual and interim
financial statements. Certain of the disclosure modifications are required for
fiscal years ending after December 15, 2002 and are included in the notes to our
consolidated financial statements.
FASB Interpretation No. 45
In November 2002, the Financial Accounting Standards Board issued
Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness to Others, an
Interpretation of SFAS Nos. 5, 57 and 107 and a recission of FASB Interpretation
No. 34." FIN 45 elaborates on the disclosures to be made by a guarantor in its
interim and annual financial statements about its obligations under guarantees
issued. FIN 45 also clarifies that a guarantor is required to recognize, at
inception of a guarantee, a liability for the fair value of the obligation
undertaken. The initial recognition and
20
measurement provisions are applicable to guarantees issued or modified after
December 31, 2002 and are not expected to have a material effect on our
financial statements. The disclosure requirements are effective for periods
ending after December 15, 2002 and are included in the notes to our consolidated
financial statements.
FASB Interpretation No. 46
In January 2003, the Financial Accounting Standards Board issued FASB
Interpretation No. 46, "Consolidation of Variable Interest Entities." Under the
terms of this standard, certain variable interest entities, such as the entity
that holds our distribution center lease facility, are required to be
consolidated. We implemented this standard effective January 1, 2003 and, as a
result, the distribution center assets and the $140.6 million of debt incurred
by the variable interest entity to purchase and construct the assets are
included in balance sheets for periods after January 1, 2003.
EITF Issue 02-16
The FASB's EITF Issue 02-16, "Accounting By A Customer (Including A
Reseller) For Cash Consideration Received From A Vendor," addresses the
accounting treatment for vendor allowances. We have only insignificant allowance
agreements with our vendors; therefore, we do not expect the adoption of this
pronouncement to have a material impact on our financial condition or results of
operations.
Potential Future Accounting Pronouncements
During fiscal 2003, the Financial Accounting Standards Board is expected to
address accounting for stock-based compensation. Changes to the existing rules
could require companies to recognize compensation expense for stock option
grants. If new rules are enacted, our results of operations could be materially
adversely affected.
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to various types of market risk in the normal course of our
business, including the impact of interest rate changes and foreign currency
rate fluctuations. We may enter into interest rate swaps to manage exposure to
interest rate changes, and we may employ other risk management strategies,
including the use of foreign currency forward contracts. We do not enter into
derivative instruments for any purpose other than cash flow hedging purposes and
we do not hold derivative instruments for trading purposes.
Interest Rate Risk
We have financial instruments that are subject to interest rate risk,
consisting of debt and lease obligations issued at variable and fixed rates.
Based on amounts outstanding on our fixed rate debt obligations at December 31,
2002, we do not consider our exposure to interest rate risk to be material.
We use variable-rate debt to finance certain of our operations and capital
improvements. These obligations expose us to variability in interest payments
due to changes in interest rates. If interest rates increase, interest expense
increases. Conversely, if interest rates decrease, interest expense also
decreases. We believe it is beneficial to limit the variability of our interest
payments.
To meet this objective, we entered into derivative instruments in the form
of interest rate swaps to manage fluctuations in cash flows resulting from
changes in the variable interest rates on the obligations. The interest rate
swaps reduce the interest rate exposure on these variable-rate obligations.
Under the interest rate swap, we pay the bank at a fixed rate and receive
variable interest at a rate approximating the variable-rate on the obligation,
thereby creating the economic equivalent of a fixed rate obligation. Under the
$19.0 million, $10.0 million and $5.0 million interest rate swaps, no payments
are made by parties under the swaps for monthly periods in which the variable
interest rate is greater than the predetermined knock-out rate.
The following table summarizes the financial terms of our interest rate
swap agreements and the fair value of each interest rate swap at December 31,
2002:
Hedging Receive Pay Knock-out Expiration Fair
Instrument Variable Fixed Rate ---------- Value
---------- -------- ----- ---- -----
$19.0 million LIBOR 4.88% 7.75% 4/1/09 ($2.1 million)
interest rate swap
$10.0 million LIBOR 6.45% 7.41% 6/2/04 ($0.7 million)
interest rate swap
$5.0 million LIBOR 5.83% 7.41% 6/2/04 ($0.3 million)
interest rate swap
$25.0 million LIBOR 5.43% N/A 3/12/06 ($2.4 million)
interest rate swap
21
Hypothetically, a 1% change in interest rates results in approximately a $0.6
million change in the amount paid or received under the terms of the interest
rate swap agreements on an annual basis. Due to many factors, 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 or receive to terminate the
agreements as of the reporting date. These fair values are obtained from an
outside financial institution.
Foreign Currency Risk
Although we purchase most of our imported goods with U.S. dollars, we are
subject to foreign currency exchange rate risk relating to payments to suppliers
in Euros (formerly Italian lire). When favorable exchange rates exist, we may
hedge foreign currency commitments of future payments by purchasing foreign
currency forward contracts. On December 31, 2002, we had no contracts
outstanding. Less than 1% of our purchases are contracted in Euros, and the
market risk exposure relating to currency exchange rate fluctuations is not
material.
22
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Consolidated Financial Statements Page
----
Independent Auditors' Report............................................... 24
Consolidated Balance Sheets as of February 1, 2003, December 31, 2002
and December 31, 2001.................................................. 25
Consolidated Statements of Operations for the month ended February 1, 2003
and the years ended December 31, 2002, 2001 and 2000................... 26
Consolidated Statements of Shareholders' Equity and Comprehensive Income
(Loss) for the month ended February 1, 2003 and the years ended
December 31, 2002, 2001 and 2000....................................... 27
Consolidated Statements of Cash Flows for the month ended
February 1, 2003 and the years ended
December 31, 2002, 2001 and 2000....................................... 28
Notes to Consolidated Financial Statements................................. 30
23
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
Dollar Tree Stores, Inc.:
We have audited the accompanying consolidated balance sheets of Dollar Tree
Stores, Inc. and subsidiaries (the Company) as of February 1, 2003 and December
31, 2002 and 2001, and the related consolidated statements of operations,
shareholders' equity and comprehensive income (loss), and cash flows for the
one-month period ended February 1, 2003 and for each of the years in the
three-year period ended December 31, 2002. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Dollar Tree
Stores, Inc. and subsidiaries as of February 1, 2003 and December 31, 2002 and
2001, and the results of their operations and their cash flows for the one-month
period ended February 1, 2003 and for each of the years in the three-year period
ended December 31, 2002, in conformity with accounting principles generally
accepted in the United States of America.
Effective January 1, 2002, the Company implemented Statement of Financial
Accounting Standards No. 142, Goodwill and Other Intangible Assets, as
described in Note 1. Also as described in Note 1, the Company changed its
method of accounting for merchandise inventories from the first-in, first-out
method to average cost, also effective January 1, 2002.
Effective January 1, 2003, the Company implemented the provisions of Financial
Accounting Standards Board Interpretation No. 46, Consolidation of Variable
Interest Entities, as described in Note 5.
/s/ KPMG LLP
Norfolk, Virginia
March 18, 2003
24
DOLLAR TREE STORES, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
February 1, December 31,
----------- ------------
2003 2002 2001
---- ---- ----
(In thousands, except share data)
ASSETS
Current assets:
Cash and cash equivalents.................................... $ 237,302 $ 292,192 $ 236,653
Short-term investments....................................... 63,525 43,780 --
Merchandise inventories...................................... 438,439 357,665 296,473
Deferred tax asset (Note 3).................................. 14,333 10,409 8,877
Prepaid expenses and other current assets.................... 15,783 12,094 18,776
--------- --------- -------
Total current assets..................................... 769,382 716,140 560,779
Property and equipment, net (Notes 4, 5, 6 and 7)................. 477,947 344,322 279,011
Deferred tax asset (Note 3)....................................... -- -- 7,436
Goodwill, net of accumulated amortization (Note 6)................ 38,358 38,358 38,358
Other assets, net (Notes 5 and 6)................................. 18,552 17,557 16,464
--------- --------- -------
TOTAL ASSETS............................................. $1,304,239 $1,116,377 $ 902,048
========= ========= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt (Note 7)................... $ 25,000 $ 25,000 $ 25,000
Current installments of obligations under capital
leases (Note 6)............................................ 5,811 5,782 3,865
Accounts payable............................................. 137,668 59,451 58,090
Other current liabilities (Note 6)........................... 75,033 88,237 75,219
Income taxes payable......................................... 23,548 28,041 38,848
--------- --------- -------
Total current liabilities................................ 267,060 206,511 201,022
Long-term debt, excluding current portion (Note 7)................ 146,628 6,000 12,000
Obligations under capital leases, excluding
current installments (Note 6)................................... 17,283 17,647 21,506
Deferred tax liability (Note 3)................................... 11,685 9,899 --
Other liabilities (Notes 8 and 10)................................ 15,764 20,916 15,784
--------- --------- -------
Total liabilities........................................ 458,420 260,973 250,312
--------- --------- -------
Shareholders' equity (Notes 8, 9 and 11):
Common stock, par value $0.01. 300,000,000 shares
authorized, 114,231,314 shares issued and outstanding at
February 1,2003; 114,186,569 shares issued and outstanding
at December 31, 2002; and 112,505,658 shares issued and
outstanding at December 31, 2001........................... 1,142 1,142 1,125
Additional paid-in capital................................... 218,106 217,267 167,151
Accumulated other comprehensive loss......................... (1,277) (1,373) (378)
Unearned compensation........................................ (112) (117) --
Retained earnings............................................ 627,960 638,485 483,838
--------- --------- -------
Total shareholders' equity............................... 845,819 855,404 651,736
Commitments and contingencies
(Notes 4, 5, 7, 8, 10 and 11)................................
--------- --------- -------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY................... $1,304,239 $1,116,377 $ 902,048
========= ========= =======
See accompanying Notes to Consolidated Financial Statements.
25
DOLLAR TREE STORES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Month Ended Year Ended December 31,
February 1, -----------------------------------
2003 2002 2001 2000
---- ---- ---- ----
(In thousands, except per share data)
Net sales............................................ $ 160,789 $ 2,329,188 $ 1,987,271 $ 1,688,105
Cost of sales (Note 4)............................... 113,980 1,481,232 1,271,314 1,063,416
Merger-related costs (Note 2)........................ -- -- -- 1,100
------- --------- --------- ---------
Gross profit ............................... 46,809 847,956 715,957 623,589
------- --------- --------- ---------
Selling, general and administrative
expenses (Notes 4 and 10):
Operating expenses............................... 55,237 594,035 512,092 417,287
Merger-related expenses (Note 2)................. -- -- -- 3,266
------- --------- --------- ---------
Total selling, general and
administrative expenses................... 55,237 594,035 512,092 420,553
------- --------- --------- ---------
Operating income (loss)..................... (8,428) 253,921 203,865 203,036
Interest income...................................... 389 3,526 3,573 4,266
Interest expense (Notes 5 and 7)..................... (719) (4,519) (5,464) (7,817)
Changes in fair value of non-hedging
interest rate swaps (Note 8)....................... 239 (1,469) (1,723) --
------- ---------- --------- ---------
Income (loss) before income taxes........... (8,519) 251,459 200,251 199,485
Provision for income taxes (Note 3).................. (3,279) 96,812 77,170 77,476
------- --------- --------- ---------
Income (loss) before extraordinary
item and cumulative effect of a
change in accounting principle............ (5,240) 154,647 123,081 122,009
Cumulative effect of a change in
accounting principle, net of tax
benefit of $3,309 (Note 5)......................... (5,285) -- -- --
Loss on debt extinguishment, net of
tax benefit of $242................................ -- -- -- 387
------- --------- --------- ---------
Net income (loss)........................... (10,525) 154,647 123,081 121,622
Less: Preferred stock dividends and
accretion (Note 9).......................... -- -- -- 1,413
------- --------- --------- ---------
Net income (loss) available to
common shareholders....................... $ (10,525) $ 154,647 $ 123,081 $ 120,209
======= ========= ========= =========
Basic net income (loss) per common share (Note 9):
Income (loss) before extraordinary
item and cumulative effect of a
change in accounting principle.................. $ (0.05) $ 1.36 $ 1.10 $ 1.16
Cumulative effect of a change in
accounting principle and extraordinary item...... (0.04) -- -- --
------- --------- --------- ---------
Net income (loss)........................... $ (0.09) $ 1.36 $ 1.10 $ 1.16
======= ========= ========= =========
Diluted net income (loss) per common share (Note 9):
Income (loss) before extraordinary
item and cumulative effect of a
change in accounting principle.................. $ (0.05) $ 1.35 $ 1.09 $ 1.08
Cumulative effect of a change in
accounting principle and
extraordinary item.............................. (0.04) -- -- --
------- --------- --------- ---------
Net income (loss)............................... $ (0.09) $ 1.35 $ 1.09 $ 1.08
======= ========= ========= =========
See accompanying Notes to Consolidated Financial Statements.
26
DOLLAR TREE STORES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY AND COMPREHENSIVE INCOME (LOSS)
Month Ended February 1, 2003 and
Years Ended December 31, 2002, 2001 and 2000
Accumulated
Common Additional Other Share-
Stock Common Paid-in Comprehensive Unearned Retained holders'
Shares Stock Capital Loss Compensation Earnings Equity
------ ----- ------- ---- ------------ -------- ------
(In thousands)
Balance at December 31, 1999......................... 98,842 $ 659 $ 75,031 $ -- $ -- $240,548 $316,238
Transfer from additional paid-in
capital for Common Stock dividend................. -- 329 (329) -- -- -- --
Net income for the year ended December 31, 2000...... -- -- -- -- -- 121,622 121,622
Issuance of stock for Dollar Express
preferred stock (Note 8).......................... 3,097 31 40,945 -- -- -- 40,976
Issuance of stock under Employee Stock
Purchase Plan and other plans (Note 11)........... 41 -- 1,151 -- -- -- 1,151
Exercise of stock options, including
income tax benefit of $16,670 (Note 11)........... 1,752 18 37,629 -- -- -- 37,647
Exercise of common stock warrants (Note 9)........... 4,252 43 2,394 -- -- -- 2,437
Conversion of common stock warrants (Note 9)......... 4,062 41 (41) -- -- -- --
Accretion to redemption value, amortization of
discount and accrued dividends of cumulative
convertible redeemable preferred stock (Note 9)... -- -- -- -- -- (1,413) (1,413)
------- ------ ------- ------ ------- ------- -------
Balance at December 31, 2000......................... 112,046 1,121 156,780 -- -- 360,757 518,658
------- ------ ------- ------ ------- ------- -------
Net income for the year ended December 31, 2001...... -- -- -- -- -- 123,081 123,081
Other comprehensive loss (Note 9).................... -- -- -- (378) -- -- (378)
-------
Total comprehensive income...................... 122,703
Issuance of stock under Employee Stock
Purchase Plan and other plans (Note 11)........... 91 -- 1,555 -- -- -- 1,555
Exercise of stock options, including
income tax benefit of $2,345 (Note 11)............ 594 6 12,589 -- -- -- 12,595
Repurchase and retirement of common shares (Note 9).. (225) (2) (3,773) -- -- -- (3,775)
------- ------ ------- ------ ------- ------- -------
Balance at December 31, 2001......................... 112,506 1,125 167,151 (378) -- 483,838 651,736
------- ------ ------- ------ ------- ------- -------
Net income for the year ended December 31, 2002...... -- -- -- -- -- 154,647 154,647
Other comprehensive loss (Note 9).................... -- -- -- (995) -- -- (995)
-------
Total comprehensive income...................... 153,652
Issuance of stock under Employee Stock
purchase plan and other plans (Note 11)........... 96 1 2,038 -- -- -- 2,039
Exercise of stock options, including
income tax benefit of $10,696 (Note 11)........... 1,633 16 41,117 -- -- -- 41,133
Restricted stock issuance and amortization (Note 9).. 9 -- 275 -- (117) -- 158
Settlement of merger-related contingencies........... (57) -- 6,686 -- -- -- 6,686
------- ------ ------- ------ ------- ------- -------
Balance at December 31, 2002......................... 114,187 1,142 217,267 (1,373) (117) 638,485 855,404
------- ------ ------- ------ ------- ------- -------
Net loss for the month ended February 1, 2003........ -- -- -- -- -- (10,525) (10,525)
Other comprehensive income (Note 9).................. -- -- -- 96 -- -- 96
-------
Total comprehensive loss (Note 9)............... (10,429)
Issuance of stock under Employee Stock
Purchase Plan and other plans (Note 11)........... 32 -- 614 -- -- -- 614
Exercise of stock options, including
income tax benefit of $65 (Note 11)............... 12 -- 225 -- -- -- 225
Restricted stock amortization (Note 9)............... -- -- -- -- 5 -- 5
------- ------ ------- ------ ------- ------- --------
Balance at February 1, 2003.......................... 114,231 $1,142 $218,106 $(1,277) $ (112) $627,960 $845,819
======= ====== ======= ====== ======= ======= ========
See accompanying Notes to Consolidated Financial Statements.
27
DOLLAR TREE STORES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Month Ended Year Ended December 31,
February 1, -----------------------
2003 2002 2001 2000
---- ---- ---- ----
(In thousands)
Cash flows from operating activities:
Net income (loss)................................................. $ (10,525) $ 154,647 $ 123,081 $ 121,622
------- ------- ------- -------
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization................................. 7,217 71,615 53,763 41,971
Loss on disposal of property and equipment.................... 107 1,599 1,726 1,471
Cumulative effect of change in accounting principle........... 5,285 -- -- --
Change in fair value of non-hedging interest rate swaps...... (239) 1,469 1,723 --
Extraordinary loss on early extinguishment of debt............ -- -- -- 629
Provision for deferred income taxes........................... 1,111 16,439 (6,219) (3,294)
Tax benefit of stock option exercises........................ 65 10,696 2,345 16,670
Other non-cash adjustments to net income...................... 58 313 1,318 --
Changes in assets and liabilities increasing
(decreasing) cash and cash equivalents:
Merchandise inventories.................................. (80,774) (61,192) (37,786) (65,849)
Prepaid expenses and other current assets................ (3,689) 6,707 10,594 (14,782)
Other assets............................................. (679) (999) (936) (987)
Accounts payable......................................... 78,217 1,361 (17,314) 3,654
Income taxes payable..................................... (4,493) (10,807) 15,400 (5,745)
Other current liabilities................................ (12,505) 13,018 28,313 10,710
Other liabilities........................................ (3,185) 2,011 2,718 1,195
------- ------- ------- -------
Net cash provided by (used in) operating
activities....................................... (24,029) 206,877 178,726 107,265
------- ------- ------- -------
Cash flows from investing activities:
Acquisition of favorable lease rights............................. -- (813) -- --
Capital expenditures.............................................. (11,555) (136,127) (121,566) (95,038)
Proceeds from sale of property and equipment...................... -- 216 98 271
Purchase of short-term investments................................ (21,745) (60,280) -- --
Proceeds from maturities of short-term
investments..................................................... 2,000 16,500 -- --
Settlement of merger-related contingencies........................ -- 6,686 -- --
------- ------- ------- -------
Net cash used in investing activities.............. (31,300) (173,818) (121,468) (94,767)
------- ------- ------- -------
Cash flows from financing activities:
Proceeds from revolving credit facilities......................... -- -- 82,000 74,700
Repayment of long-term debt and facility fees..................... -- (6,025) (6,239) (27,708)
Repayment of revolving credit facilities.......................... -- -- (82,000) (81,200)
Principal payments under capital lease obligations................ (335) (3,971) (3,562) (3,274)
Proceeds from stock issued pursuant to
stock-based compensation plans ................................. 774 32,476 11,805 24,563
Repurchase of common stock (Note 9)............................... -- -- (3,775) --
------- ------- ------- -------
Net cash provided by (used in)
financing activities............................. 439 22,480 (1,771) (12,919)
------- ------- ------- -------
Net increase (decrease)in cash and cash equivalents.................... (54,890) 55,539 55,487 (421)
Cash and cash equivalents at beginning of year......................... 292,192 236,653 181,166 181,587
------- ------- ------- -------
Cash and cash equivalents at end of year............................... $ 237,302 $ 292,192 $ 236,653 $ 181,166
======= ======= ======= =======
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest...................................................... $ 195 $ 3,685 $ 5,144 $ 7,315
======= ======= ======== =======
Income taxes.................................................. $ 110 $ 82,420 $ 65,688 $ 65,597
======= ======= ======== =======
(continued on following page)
28
DOLLAR TREE STORES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(continued from previous page)
Supplemental disclosure of non-cash investing and financing activities:
The Company purchased equipment under capital lease obligations amounting
to $2,177, $222 and $439 in the years ended December 31, 2002, 2001 and 2000,
respectively.
As described in Note 5, the Company consolidated its variable interest
entity effective January 1, 2003. As a result, the Company recorded the
following on January 1, 2003: an increase of $128,791 in property and equipment;
an increase of $970 for deferred financing costs in other assets and an increase
of $140,628 in long-term debt. In addition, the cumulative effect of a change in
accounting principle represents, net of the tax effect of $3,309, the catch-up
of depreciation related to the distribution center assets and the catch-up of
the amortization of the deferred financing costs offset by the write-off of the
straight-lined rent liability.
See accompanying Notes to Consolidated Financial Statements.
29
DOLLAR TREE STORES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share data)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business
At February 1, 2003, Dollar Tree Stores, Inc. (DTS or the Company) owns and
operates 2,272 discount variety retail stores that sell substantially all items
for $1.00 or less. The Company's stores operate under the names of Dollar Tree,
Dollar Express, Dollar Bills, Only One Dollar and Only $One. Our stores average
approximately 5,900 selling square feet.
The Company's headquarters and one of its distribution centers are located
in Chesapeake, Virginia. The Company also operates distribution centers in
Mississippi, Illinois, California, Pennsylvania and Georgia. In February 2003,
the Company commenced operations of a distribution center in Oklahoma. Most of
the Company's stores are located in the eastern half of the United States and
California. The Company's merchandise includes candy and food, housewares,
health and beauty care, seasonal goods, party goods, toys, stationery, gifts and
other consumer items. Approximately 40% of the Company's merchandise is directly
imported, primarily from China.
Principles of Consolidation
The consolidated financial statements include the financial statements of
Dollar Tree Stores, Inc., and its wholly owned subsidiaries. Effective January
1, 2003, the consolidated financial statements also include the financial
statements of a variable interest entity that owns three of the Company's
distribution centers and the assets to a fourth distribution center that opened
in February 2003 (see Note 5). All significant intercompany balances and
transactions have been eliminated in consolidation.
Fiscal Year
The Company's fiscal years were calendar years in 2002, 2001 and 2000. The
Company changed its fiscal year end from December 31 to the Saturday closest to
January 31st, effective for the fiscal year beginning February 2, 2003.
Accordingly, the Company is presenting financial information and accompanying
notes, where applicable, for the month ended February 1, 2003 (the transition
period) in this year-end report on Form 10-K. The new fiscal year allows the
Company to align its reporting periods with its new inventory management system.
Use of Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosures of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
Reclassifications
Certain 2001 and 2000 amounts have been reclassified for comparability with
the current period presentation.
Cash and Cash Equivalents
Cash and cash equivalents at February 1, 2003, December 31, 2002 and
December 31, 2001 includes $211,525, $277,170 and $219,635, respectively, of
investments in money market securities and bank participation agreements which
are valued at cost, which approximates market. The underlying assets of these
short-term participation agreements are primarily commercial notes. For purposes
of the statements of cash flows, the Company considers all highly liquid debt
instruments with original maturities of three months or less to be cash
equivalents.
Short-Term Investments
The Company's short-term investments consist primarily 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.
Merchandise Inventories
In 2001, merchandise inventories at the distribution centers are stated at
the lower of cost or market, determined on a first-in, first-out (FIFO) basis.
Cost is assigned to store inventories using the retail inventory method,
determined on a FIFO basis. During the second quarter of 2002, the Company
changed its method of accounting for its merchandise inventories from the FIFO
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 and second quarter 2002 financial statements as a result of this
change in accounting principle. Additional pro
30
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
effect would have been material.
Costs directly associated with warehousing and distribution are capitalized
as merchandise inventories. Total warehousing and distribution costs capitalized
into inventory amounted to $19,990, $16,674, and $15,707 at February 1, 2003,
December 31, 2002 and December 31, 2001, respectively.
Property and Equipment
Property and equipment are stated at cost and depreciated using the
straight-line method over the estimated useful lives of the respective assets as
follows:
Buildings.................................. 39 years
Furniture, fixtures and equipment.......... 3 to 10 years
Transportation vehicles.................... 4 to 6 years
Leasehold improvements and assets held under capital leases are amortized
over the estimated useful lives of the respective assets or terms of the related
leases, whichever is shorter. If title to the related asset passes to the
Company at the end of the lease term, the asset is amortized over its estimated
useful life, even if the lease term is shorter. The amortization is included in
"selling, general and administrative expenses" on the consolidated statements of
operations.
Costs incurred related to software developed for internal use are
capitalized and amortized over three years. Costs capitalized include those
incurred in the application development stage as defined in Statement of
Position 98-1, "Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use."
Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of
Effective January 1, 2002, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 144, "Accounting for the Impairment or Disposal
of Long-Lived Assets," which requires that long-lived assets be reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. SFAS No. 144 also changes
the criteria for classifying an asset as held for sale and broadens the scope of
businesses to be disposed of that qualify for reporting as discontinued
operations and changes the timing of recognizing losses on such operations. The
adoption of SFAS No. 144 did not have a material effect on the Company's
financial statements.
The Company reviews its long-lived assets and certain identifiable
intangible assets for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable.
Recoverability of assets to be held and used is measured by comparing the
carrying amount of an asset to future net undiscounted cash flows expected to be
generated by the asset. If such assets are considered to be impaired, the
impairment to be recognized is measured by the amount by which the carrying
amount of the assets exceeds the fair value of the assets based on discounted
cash flows or other readily available evidence of fair value, if any. Assets to
be disposed of are reported at the lower of the carrying amount or fair value
less costs to sell. In 2001, the Company recorded charges of $1,400 to
write-down certain assets. No charges were recorded in the month ended February
1, 2003, the year ended December 31, 2002 or the year ended December 31, 2000.
These charges are recorded as a component of "operating expenses" in the
consolidated statements of operations.
Prior to the adoption of SFAS No. 144, the Company accounted for long-lived
assets in accordance with SFAS No. 121, "Accounting for Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of."
Intangible Assets and Goodwill
Effective January 1, 2002, the Company adopted 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. The Company performed the required transition impairment tests of goodwill
and other intangibles as of January 1, 2002, and determined that no impairment
existed. In addition, the Company performs its annual assessment of impairment
each November.
Prior to January 1, 2002, goodwill was amortized on a straight-line basis
over the expected periods to be benefited, generally 20 to 25 years.
31
Financial Instruments
The Company utilizes derivative financial instruments to reduce its
exposure to market risks from changes in interest rates. By entering into
receive-variable, pay-fixed interest rate swaps, the Company limits its exposure
to changes in variable interest rates. The Company is exposed to credit related
losses in the event of non-performance by the counterparty to the interest rate
swaps; however, the counterparties are major financial institutions, and the
risk of loss due to non-performance is considered remote. Interest rate
differentials paid or received on the swap are recognized as adjustments to
expense in the period earned or incurred. The Company formally documents all
hedging relationships, if applicable, and assesses hedge effectiveness both at
inception and on an ongoing basis.
Prior to the implementation of SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," the fair value of the interest rate swaps
was not recorded in the Company's balance sheet because they met the
requirements for hedge accounting treatment prior to the implementation of SFAS
No. 133.
Effective January 1, 2001, the Company adopted SFAS No. 133. 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 three interest
rate swaps in effect at January 1, 2001 do not qualify for hedge accounting
treatment 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 "other liabilities" (see Note 8). Changes
in the fair value of the interest rate swaps are recorded as "change in the fair
value of non-hedging interest rate swaps" in the statements of cash flows and
the consolidated statements of operations. Upon termination of these non-hedging
interest rate swaps, the remaining asset or liability, if any, will be removed
from the consolidated balance sheet.
The Company is party to one interest rate swap that qualifies for hedge
accounting treatment pursuant to the provisions of 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
loss." These amounts are subsequently reclassified into earnings as a yield
adjustment in the period in which the related interest on the variable-rate
obligations affects earnings. If the swap is terminated prior to its expiration
date, the amount recorded in accumulated other comprehensive income will be
recorded as a yield adjustment over the term of the forecasted transaction.
The Company enters into foreign exchange forward contracts to hedge
off-balance sheet foreign currency denominated purchase commitments from
suppliers. The contracts are exclusively for Euros (formerly Italian lire),
which account for less than 1% of the Company's purchases. The terms of these
contracts are generally less than three months. Gains and losses on these
contracts are not recognized until included in the measurement of the related
foreign currency transaction. There were no open foreign exchange contracts at
February 1, 2003, December 31, 2002 or December 31, 2001.
Cost of Sales
The Company includes the cost of merchandise, warehousing and distribution
costs, and certain occupancy costs in cost of sales.
Income Taxes
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between financial statement carrying
amounts of existing assets and liabilities and their respective tax bases.
Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date of such change.
Stock-Based Compensation
The Company applies the intrinsic value-based method of accounting
prescribed by Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees," and related Interpretations in accounting for its fixed
stock option plans. As such, compensation expense would be recorded on the date
of grant only if the current market price of the underlying stock exceeded the
exercise price. SFAS No. 123, "Accounting for Stock-Based Compensation,"
established accounting and disclosure requirements using a fair value-based
method of accounting for stock-based employee compensation plans. As allowed by
SFAS No. 123, the Company has elected to continue to apply the intrinsic
value-based method of accounting described above, and has adopted the disclosure
only requirements of SFAS No. 123.
32
If the accounting provisions of SFAS No. 123 had been adopted, the Company's
net income (loss) available to common shareholders and net income (loss) per
common share would have been reduced to the pro forma amounts indicated in the
following table:
Month Ended Year Ended December 31,
February 1, ------------------------------
2003 2002 2001 2000
---- ---- ---- ----
Net income (loss) available to common shareholders:
As reported........................................... $ (10,525) $ 154,647 $ 123,081 $ 120,209
Deduct: Total stock-based employee
compensation expense determined under
fair value based method
net of related tax effects.............................. $ 1,108 $ 12,625 $ 11,417 $ 13,837
------- ------- ------- -------
Net income (loss) available to
common shareholders for SFAS No. 123............... $ (11,633) $ 142,022 $ 111,664 $ 106,372
======= ======= ======= =======
Net income (loss) per common share:
Basic, as reported.................................... $ (0.09) $ 1.36 $ 1.10 $ 1.16
Basic, pro forma for SFAS No. 123..................... $ (0.10) $ 1.25 $ 0.99 $ 1.02
Diluted, as reported.................................. $ (0.09) $ 1.35 $ 1.09 $ 1.08
Diluted, pro forma for SFAS No. 123................... $ (0.10) $ 1.24 $ 0.99 $ 0.94
These pro forma amounts for SFAS No. 123 may not be representative of
future disclosures because compensation cost is reflected over the options'
vesting periods and because additional options may be granted in future years.
In December 2002, the Financial Accounting Standards Board issued SFAS No.
148, "Accounting for Stock-Based Compensation - Transition and Disclosure, an
amendment of SFAS No. 123." This statement amends SFAS No. 123, to provide
alternative methods of transition for a voluntary change to the fair value
method of accounting for stock-based employee compensation. In addition, this
statement amends the disclosure requirements of SFAS No. 123 to require
prominent disclosures in both annual and interim financial statements. Certain
of the disclosure modifications are required for fiscal years ending after
December 15, 2002 and are included in the table above.
Net Income Per Common Share
Basic net income per common share has been computed by dividing net income
available to common shareholders by the weighted average number of common shares
outstanding. Diluted net income per common share reflects the potential dilution
that could occur assuming the inclusion of dilutive potential common shares and
has been computed by dividing net income available to common shareholders by the
weighted average number of common shares and dilutive potential common shares
outstanding. Dilutive potential common shares include all outstanding stock
options and warrants after applying the treasury stock method.
Advertising Costs
The Company expenses advertising costs as they are incurred. Advertising
costs approximated $789 in the month ended February 1, 2003. The Company did not
incur significant advertising costs in the years ended December 31, 2002, 2001
and 2000.
NOTE 2 - MERGERS AND ACQUISITIONS
On May 5, 2000, the Company completed its merger with Dollar Express. The
merger was accounted for as a pooling of interests. DTS issued 0.8772 shares of
the Company's common stock for each share of Dollar Express outstanding common
stock. The Company issued 8,771,928 shares of its common stock for all of the
outstanding shares of Dollar Express common stock, which included converting all
of Dollar Express preferred shares into common shares on a one-for-one basis as
more fully discussed in Note 9. Stock options to purchase 260,000 shares of
Dollar Express common stock were converted into options to purchase 228,072
common shares of the Company.
In connection with the merger, the Company incurred approximately $4,366
($3,134 after taxes or $0.02 diluted net income per common share in 2000) of
merger-related costs and expenses, consisting primarily of write-downs of
inventory and professional fees.
33
NOTE 3 - INCOME TAXES
Total income taxes were allocated as follows:
Month Ended Year Ended December 31,
February 1, --------------------------
2003 2002 2001 2000
---- ---- ---- ----
Income (loss) from continuing operations....................... $ (3,279) $96,812 $77,170 $77,476
Extraordinary item............................................. -- -- -- (242)
Cumulative effect of a change in accounting
principle.................................................... (3,309) -- -- --
Accumulated other comprehensive (income) loss, marking
derivative financial instruments to fair value............... 61 (633) (237) --
Stockholders' equity, tax benefit on exercise of
stock options................................................ (65) (10,696) (2,345) (16,670)
------ ------ ------ ------
$ (6,592) $85,483 $74,588 $60,564
====== ====== ====== ======
The provision for income taxes from continuing operations consists of the
following:
Month Ended
February 1, Year Ended December 31,
2003 2002 2001 2000
---- ---- ----- -----
Federal - Current.............................................. $ (3,778) $69,003 $71,504 $69,330
Federal - Deferred............................................. 956 14,141 (5,339) (2,827)
State - Current................................................ (611) 11,373 11,885 11,440
State - Deferred............................................... 154 2,295 (880) (467)
------ ------ ------ ------
$ (3,279) $96,812 $77,170 $77,476
====== ====== ====== ======
A reconciliation of the statutory federal income tax rate and the effective
rate follows:
Month Ended
February 1, Year Ended December 31,
2003 2002 2001 2000
---- ---- ---- ----
Statutory tax rate........................................... (35.0%) 35.0% 35.0% 35.0%
Effect of:
State and local income taxes, net of
federal income tax benefit............................... (3.5) 3.5 3.6 3.6
Other, net................................................. -- -- (0.1) 0.2
------ ------ ------ ------
Effective tax rate..................................... (38.5%) 38.5% 38.5% 38.8%
====== ====== ====== ======
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Deferred tax assets and
liabilities are classified on the consolidated balance sheet based on the
classification of the underlying asset or liability. Significant components of
the Company's net deferred tax assets follows:
February 1, December 31,
2003 2002 2001
---- ---- ----
Deferred tax assets:
Accrued expenses and other liabilities principally
due to differences in the timing of deductions
for reserves............................................... $ 18,383 $18,952 $15,899
Inventories due to additional amounts inventoried
for tax purposes........................................... 2,314 2,474 2,862
Property and equipment due to differences in
depreciation............................................... -- -- 1,674
Other........................................................ 1,294 1,344 587
------ ------ ------
Total deferred tax assets.................................. 21,991 22,770 21,022
------ ------ ------
Deferred tax liabilities:
Intangible assets due to differences in
amortization............................................... (4,159) (4,073) (3,049)
Deferred compensation primarily due to
contributions to the profit sharing plan................... (1,402) (1,443) (1,300)
Property and equipment due to difference in
depreciation............................................... (13,472) (16,434) --
Other....................................................... (310) (310) (360)
------ ------ ------
Total deferred tax liabilities............................. (19,343) (22,260) (4,709)
------ ------ ------
Net deferred tax asset..................................... $ 2,648 $ 510 $16,313
====== ====== ======
34
In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred
taxes will not be realized. Based upon the availability of carrybacks of future
deductible amounts to the past five years' taxable income and management's
projections for future taxable income over the periods in which the deferred tax
assets are deductible, management believes it is more likely than not the
existing net deductible temporary differences will reverse during periods in
which carrybacks are available or in which the Company generates net taxable
income. However, there can be no assurance that the Company will generate any
income or any specific level of continuing income in future years.
NOTE 4 - COMMITMENTS AND CONTINGENCIES
Operating Lease Commitments
Future minimum lease payments under noncancelable store, distribution
center and former corporate headquarters operating leases (including leases with
related parties) as of December 31, 2002 are as follows:
Operating
Leases
------
Calendar year:
2003......................................... $ 149,799
2004......................................... 138,822
2005......................................... 117,247
2006......................................... 87,826
2007......................................... 58,604
Thereafter................................... 95,994
=======
$ 648,292
The above future minimum lease payments include amounts for leases that
were signed prior to December 31, 2002 for stores that were not open as of
December 31, 2002. In addition, the Company executed leases in the amount of
$9,872 during the month ended February 1, 2003 for stores that were not open as
of February 1, 2003. The above amounts exclude the future minimum lease payments
associated with the lease of four distribution centers from a variable interest
entity. As discussed in Note 5, the variable interest entity was consolidated in
the financial statements effective January 1, 2003.
Minimum rental payments for operating leases do not include contingent
rentals that may be paid under certain store leases based on a percentage of
sales in excess of stipulated amounts. Future minimum lease payments have not
been reduced by expected future minimum sublease rentals of $2,877 under
operating leases.
Minimum and Contingent Rentals
Rental expense for store, distribution center and former corporate
headquarters operating leases (including payments to related parties) included
in the accompanying consolidated statements of operations are as follows:
Month Ended Year Ended December 31,
February 1, -----------------------
2003 2002 2001 2000
---- ---- ---- ----
Minimum rentals.............................. $ 12,818 $ 142,674 $ 121,645 $ 95,600
Contingent rentals 1 1,277 1,067 1,876
------ ----- ------- ------
Total...................................... $ 12,819 $ 143,951 $ 122,712 $ 97,476
====== ======= ======= ======
Non-Operating Facilities
The Company is responsible for payments under leases for former
distribution centers and certain closed stores. The leases for the facilities
expire at various dates through June 2008. The Company receives sublease income
on certain of the vacated facilities under agreements expiring through June
2008. The accruals recorded in connection with the closed distribution centers
are adjusted quarterly for changes in market conditions. Remaining lease terms
on closed stores are generally short-term and not subleased during the remaining
lease term. Due to the uncertainty regarding the ultimate recovery of the future
lease and related payments, the Company recorded a $364 charge in 2002 and a
$1,160 charge in 2001. The total accrual for these vacated facilities was
$2,102, $2,180 and $3,100 at February 1, 2003, December 31, 2002 and December
31, 2001, respectively.
Related Parties
The Company also leases properties for six of its stores from partnerships
owned by related parties. The total rental payments related to these leases were
$25, $1,039, $1,782, and $2,051, for the month ended February 1, 2003 and the
years ended December 31, 2002, 2001 and 2000, respectively.
35
Management Advisory Services
During each of the years ended December 31, 2001 and 2000, the Company
paid $200 under a financial and management advisory service agreement with one
of its non-employee shareholders. No payments were made under this agreement
during the month ended February 1, 2003 and the year ended December 31, 2002.
Purchase Contract
During 1996, the Company entered into a purchase agreement with a vendor,
which committed the Company to purchase a minimum of $39,462 in vendor products
by April 2003, of which $11,846 had been purchased through December 31, 2000. In
June 2001, the Company terminated the agreement and recognized a $1,600 gain
related to the unamortized portion of the payment received upon commencement of
the contract.
Freight Services
The Company has contracted outbound freight services from various contract
carriers with contracts expiring through April 2005. The total amount of these
commitments is approximately $35,014, of which approximately $24,927 is
committed in 2003, $8,216 is committed in 2004, and $1,871 is committed in 2005.
Financial Guarantees
In November 2002, the Financial Accounting Standards Board issued
Interpretation No. 45 (FIN 45), "Guarantor's Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness to
Others, an Interpretation of SFAS Nos. 5, 57 and 107 and a recission of FASB
Interpretation No. 34." FIN 45 elaborates on the disclosures to be made by a
guarantor in its interim and annual financial statements about its obligations
under guarantees issued. FIN 45 also clarifies that a guarantor is required to
recognize, at inception of a guarantee, a liability for the fair value of the
obligation undertaken. The initial recognition and measurement provisions are
applicable to guarantees issued or modified after December 31, 2002 and are not
expected to have a material effect on the Company's financial statements. The
disclosure requirements are effective for periods ending after December 15,
2002.
As of February 1, 2003, the Company has issued a guarantee for $20,000 that
is used by one of the Company's suppliers as collateral to obtain merchandise
for the Company. The guarantee is secured by letters of credit totaling $20,000
that expire in 2003. If the supplier defaults on a payment to his supplier, the
Company would have to perform under the guarantee. Because this guarantee was
issued prior to December 31, 2002, no amounts related to it are recorded in the
consolidated balance sheets.
Letters of Credit
In March 2001, the Company entered into a Letter of Credit Reimbursement
and Security Agreement. The agreement provides $125,000 for letters of credit,
which are generally issued for the routine purchase of imported merchandise.
Approximately $84,200 was committed to letters of credit at February 1, 2003.
The Company also has approximately $20,600 in letters of credit that serve as
collateral for its high-deductible insurance programs and expire in fiscal 2003.
Surety Bonds
The Company has issued various surety bonds that primarily serve as
collateral for utility payments at the Company's stores. The total amount of the
commitment is approximately $732, of which $700 is committed through fiscal 2003
and $32 is committed through fiscal 2004.
Contingencies
The Company has contingent liabilities related to legal proceedings and
other matters arising from the normal course of operations. Management does not
expect that amounts, if any, which may be required to satisfy such contingencies
will be material in relation to the accompanying consolidated financial
statements.
NOTE 5 - CONSOLIDATION OF VARIABLE INTEREST ENTITY
In March 2001, we entered into an operating lease arrangement, known as a
synthetic lease, with a variable interest entity to finance the construction of
several of our distribution centers. At December 31, 2002, approximately
$154,500 of the $165,000 facility was committed to the Stockton, Savannah,
Briar Creek and Marietta facilities. Because the Company accounted for this
transaction as an operating lease, the related fixed assets and lease
liabilities were not included in the consolidated balance sheets.
In January 2003, the Financial Accounting Standards Board issued FASB
Interpretation No. 46, "Consolidation of Variable Interest Entities" (FIN 46).
Under the terms of this standard, certain variable interest entities, such as
the entity in which the Company's lease facility is held, are required to be
consolidated. The Company implemented this standard effective January 1, 2003
and, as a result, the distribution center assets and the debt incurred by the
variable interest entity to purchase and construct the assets are included in
balance sheets for periods after January 1, 2003. The cumulative effect of a
change in accounting principle represents, net of the tax effect, the catch-up
of depreciation related to the distribution center assets, the catch-up of the
amortization of the deferred financing costs and the write-off of a deferred
rent liability related to the lease.
36
At February 1, 2003, amounts included in the balance sheet related to the
variable interest entity are as follows:
Property and equipment, net........................ $ 128,296
Long-term debt, excluding current portion.......... 140,628
Other assets, net.................................. 945
Interest is payable monthly and the principal amount is payable upon
maturity of the debt in March 2006. The debt, among other things, requires the
maintenance of certain specified financial ratios, restricts the payment of
certain distributions and limits certain types of debt the Company can incur.
The following table reconciles reported net income and net income per share
to net income and net income per share that would have been recorded if FIN 46
were effective for each of the periods presented:
Year Ended December 31,
-----------------------
2002 2001
---- ----
(In thousands, except per share data)
Reconciliation of net income available to
common shareholders:
Net income available to common shareholders........... $ 154,647 $ 123,081
Less: Depreciation, amortization
and deferred rent effect (net of tax)............... 4,121 1,164
------- -------
Adjusted net income available to common
shareholders........................................ $ 150,526 $ 121,917
======= =======
Basic net income per common share:
Net income available to common shareholders........... $ 1.36 $ 1.10
Depreciation, amortization
and deferred rent effect (net of tax).............. (0.04) (0.01)
------- -------
Adjusted net income available to common
shareholders........................................ $ 1.32 $ 1.09
======= =======
Diluted net income per common share:
Net income available to common shareholders........... $ 1.35 $ 1.09
Depreciation, amortization
and deferred rent effect (net of tax).............. (0.04) (0.01)
------- -------
Adjusted net income available to common
shareholders........................................ $ 1.31 $ 1.08
======= =======
Basic...................................................... 113,637 112,238
Diluted.................................................... 114,547 112,990
NOTE 6 - BALANCE SHEET COMPONENTS
Intangible Assets and Goodwill
Intangible Assets
The Company issued options to certain former shareholders of an acquired
entity in exchange for non-competition agreements and a consulting agreement.
These assets are being amortized over the legal term of the individual
agreements, which is generally over a ten-year period. At Feb 1, 2003, December
31, 2002 and 2001, the carrying value of these agreements is $2,442, $2,483 and
$2,965, respectively, which is net of $1,971, $1,930 and $1,448, respectively,
of accumulated amortization. These intangible assets will continue to be
amortized over their remaining legal term in accordance with SFAS No. 142, which
was adopted effective January 1, 2002.
These intangible assets are included in "other assets" in the accompanying
consolidated balance sheets. Amortization expense related to the non-competition
agreements was $40 in the month ended February 1, 2003, and $483 in each of the
years ended December 31, 2002, 2001 and 2000, respectively. Estimated annual
amortization expense for the next five years follows: 2003 - $483; 2004 - $400;
2005 - $400; 2006 - $400; and 2007 - $400.
In March and September 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 $1,000 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.
Goodwill
At February 1, 2003 and December 31, 2002 and 2001, the carrying value of
goodwill was $38,400. In accordance with SFAS No. 142, goodwill is no
longer being amortized, but is 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.
37
The following table reconciles reported net income and net income per share
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:
Year Ended December 31,
-----------------------
2001 2000
---- ----
(In thousands, except per share data)
Reconciliation of net income available to
common shareholders:
Net income available to common shareholders........... $ 123,081 $ 120,209
Add back: Goodwill amortization
(net of tax)......................................... 1,241 1,241
------- -------
Adjusted net income available to common
shareholders ....................................... $ 124,322 $ 121,450
======= =======
Basic net income per common share:
Net income available to common
shareholders........................................ $ 1.10 $ 1.16
Goodwill amortization................................. 0.01 .01
------- -------
Adjusted net income available to common
shareholders........................................ $ 1.11 $ 1.17
======= =======
Diluted net income per share:
Net income available to common
shareholders......................................... $ 1.09 $ 1.08
Goodwill amortization.................................. 0.01 0.01
------- -------
Adjusted net income available to common
shareholders......................................... $ 1.10 1.09
======= =======
Basic....................................................... 112,238 103,972
Diluted..................................................... 112,990 111,809
Accumulated amortization relating to goodwill was approximately $11,629 at
February 1, 2003, December 31, 2002 and December 31, 2001.
Property and Equipment, Net
Property and equipment, net, as of February 1, 2003, December 31, 2002 and
December 31, 2001 consists of the following:
December 31,
February 1, -----------------
2003 2002 2001
---- ---- ----
Land............................................... $ 15,936 $ 8,059 $ 8,059
Buildings.......................................... 88,627 31,281 31,281
Improvements....................................... 204,712 185,301 144,784
Furniture, fixtures and equipment.................. 358,744 319,811 229,669
Transportation vehicles............................ 3,504 3,504 4,134
Construction in progress........................... 45,720 19,936 25,754
------- ------- -------
Total property and equipment................... 717,243 567,892 443,681
Less: accumulated depreciation and
amortization..................................... 239,296 223,570 164,670
------- ------- -------
Total.......................................... $ 477,947 $ 344,322 $ 279,011
======= ======= =======
Other Current Liabilities
Other current liabilities as of February 1, 2003, December 31, 2002 and
December 31, 2001 consists of accrued expenses for the following:
December 31,
February 1, ----------------
2003 2002 2001
---- ---- ----
Compensation and benefits................................. $ 22,243 $ 24,573 $ 20,791
Taxes (other than income taxes)........................... 12,808 24,364 25,737
Insurance................................................. 22,057 18,064 14,354
Other..................................................... 17,925 21,236 14,337
------ ------- -------
Total ............................................... $ 75,033 $ 88,237 $ 75,219
======= ======= =======
38
Capital Leases
The present value of future minimum capital lease payments as of February
1, 2003 is as follows:
2003................................................. $ 7,579
2004................................................. 6,718
2005................................................. 7,940
2006................................................. 5,218
2007................................................. 36
Thereafter........................................... --
Total minimum lease payments............................. 27,491
Less amount representing interest
(at an average rate of approximately 9%)............... 4,397
------
Present value of net minimum capital lease payments...... 23,094
Less current installments of obligations under
capital leases......................................... 5,811
------
Obligations under capital leases, excluding current
installments........................................... $ 17,283
======
Included in property and equipment at February 1, 2003, December 31, 2002
and December 31, 2001 are leased furniture and fixtures and transportation
vehicles, excluding sale-leaseback assets, with a cost of $5,424, $5,424 and
$3,822. Accumulated depreciation on these assets totaled $2,346, $2,295 and
$2,074 at February 1, 2003, December 31, 2002 and December 31, 2001,
respectively.
Sale-Leaseback Transaction
On September 30, 1999, the Company sold certain retail store leasehold
improvements to an unrelated third party and leased them back for a period of
seven years. The Company has an option to purchase the leasehold improvements at
the end of the fifth and seventh years at amounts approximating their fair
market values at the time the option is exercised. This transaction is being
accounted for as a financing arrangement. The total amount of the lease
obligation is $19,900 at February 1, 2003. The lease agreement includes
financial covenants that are not more restrictive than those of existing loan
agreements. As part of the transaction, the Company received proceeds of
$20,880, net of financing costs, and an $8,120 11% note receivable, which
matures in September 2006 and is included in "other assets, net." The future
minimum lease payments related to the capital lease obligation are included in
the schedule above.
Fair Value of Financial Instruments
The carrying values of cash and cash equivalents, accounts receivable,
accounts payable, other current liabilities approximate fair value because of
the short maturity of these instruments. The carrying values of other
liabilities approximate fair value because they are recorded using discounted
future cash flow or quoted market rates.
The carrying value of the Company's variable-rate and fixed-rate long-term
debt approximates its fair value. The fair value is estimated by discounting the
future cash flows of each instrument at rates offered for similar debt
instruments of comparable maturities.
It is not practicable to estimate the fair value of our outstanding
commitments for letters of credit, surety bonds and guarantees without
unreasonable cost.
The fair value of the interest rate swaps (see Note 8) are the estimated
amounts the Company would receive or pay to terminate the agreements as of the
reporting date. The fair values of the interest rate swaps are as follows:
December 31,
February 1, -------------------------------
2003 2002 2001
Receive/(Pay) Receive/(Pay) Receive/(Pay)
------------- ------------- -------------
$19,000 interest rate swap.................... $(1,892) $(2,072) $(682)
$10,000 interest rate swap.................... (659) (700) (663)
$5,000 interest rate swap..................... (288) (306) (263)
$25,000 interest rate swap.................... (2,241) (2,396) (744)
The fair values of the interest rate swaps are included in other liabilities in
the consolidated balance sheets.
39
NOTE 7 - LONG-TERM DEBT
Long-term debt consists of the following: December 31,
February 1, ---------------
2003 2002 2001
---- ---- ----
7.29% unsecured Senior Notes, interest payable semiannually
on April 30 and October 30, principal payable $6,000 per
year beginning April 2000 and maturing April 2004.............. $ 12,000 $ 12,000 $ 18,000
Variable-rate debt, interest payable monthly at
LIBOR, principal payable upon maturity in
March 2006 (Note 5)............................................ 140,628 -- --
Demand Revenue Bonds, interest payable monthly at a
variable rate which was 1.4% at February 1,
2003, principal payable on demand, otherwise
beginning June 2006 and maturing June 2018..................... 19,000 19,000 19,000
------- ------ ------
Total long-term debt........................................ 171,628 31,000 37,000
Less: current portion............................................ 25,000 25,000 25,000
------- ------ ------
Long-term debt, excluding current portion................... $ 146,628 $ 6,000 $ 12,000
======= ====== ======
Maturities of long-term debt are as follows: 2003 - $25,000; 2004 - $6,000; and 2006 - $140,628.
Senior Notes
The holders of the Senior Notes (the Notes) have the right to require the
Company to prepay the Notes in full without premium upon a change of control or
upon certain other transactions by the Company. The Notes rank pari passu with
the Company's other debt. The Note agreements, among other things, prohibit
certain mergers and consolidations and require the maintenance of certain
specified ratios. In the event of default or a prepayment at the option of the
Company, the Company is required to pay a prepayment penalty equal to a
make-whole amount.
Variable-Rate Debt
As indicated in Note 5, in March 2001, the Company entered into an
operating lease facility with a variable interest entity. Effective with the
implementation of FIN 46, the Company consolidated the variable interest entity.
As a result, the balance sheet at February 1, 2003 includes the debt incurred by
the variable interest entity to construct the Company's distribution center
assets. The debt, 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. The debt is secured by the related
distribution center assets.
Demand Revenue Bonds
On May 20, 1998, the Company entered into a Loan Agreement with the
Mississippi Business Finance Corporation (MBFC) under which the MBFC issued
Taxable Variable Rate Demand Revenue Bonds (the Bonds) in an aggregate principal
amount of $19,000 to finance the acquisition, construction, and installation of
land, buildings, machinery and equipment for the Company's distribution facility
in Olive Branch, Mississippi. The Bonds do not contain a prepayment penalty as
long as the interest rate remains variable. The Bonds are secured by a $19,300
letter of credit issued by one of the Company's existing lending banks. The
letter of credit is renewable annually. The Letter of Credit and Reimbursement
Agreement requires, among other things, the maintenance of certain specified
ratios and restricts the payment of dividends. The Bonds contain a demand
provision and, therefore, are classified as current liabilities.
Unsecured Revolving Credit Facility
In March 2001, the Company entered into a Revolving Credit Facility with
its banks (the Revolver Agreement). Terms of the Revolver Agreement include,
among other things: (1) a $50,000 revolving line of credit, bearing interest at
the agent bank's prime interest rate or LIBOR, plus a spread, at the option of
the Company; and (2) an annual facilities fee, calculated as a percentage, as
defined, of the amount available under the line of credit, and annual
administrative fee payable quarterly.
The Revolver Agreement, among other things, requires the maintenance of
certain specified financial ratios, restricts the payment of certain
distributions and prohibits the incurrence of certain new indebtedness. The
Revolver Agreement expires on May 30, 2003.
NOTE 8 - Derivative Financial Instruments
The fair value of interest rate swaps at February 1, 2003 and December 31,
2002 is approximately $5,081 and $5,474, respectively, and is recorded in
"other liabilities" on the consolidated balance sheets.
Non-Hedging Derivatives
The Company is party to three derivative instruments in the form of
interest rate swaps that do not qualify for hedge accounting treatment pursuant
to the provisions of SFAS No. 133. These interest rate swaps do not qualify for
hedge accounting because each instrument contains a knock-out provision. The
swaps create the economic equivalent of fixed rate obligations by converting
40
the variable interest rates to fixed rates. Under these interest rate swaps, the
Company pays interest to a financial institution at fixed rates as defined in
each agreement. In exchange, the financial institution pays the Company at
variable interest rates, which approximate the floating rates on the
variable-rate obligations, excluding the credit spreads. The interest rates on
the swap are subject to adjustment monthly. No payments are made by either party
for months in which the variable interest rates, as calculated under the swap
agreements, are greater than the "knock-out rate." The following table
summarizes the terms of each interest rate swap:
Derivative Origination Expiration Pay Fixed Knock-out
Instrument Date Date Rate Rate
---------- ---- ---- ---- ----
$19,000 swap 4/1/99 4/1/09 4.88% 7.75%
$10,000 swap 9/8/00 6/2/04 6.45% 7.41%
$5,000 swap 12/20/00 6/2/04 5.83% 7.41%
The $19,000 swap reduces the Company's exposure to the variable interest
rate related to the Demand Revenue Bonds (see Note 7). The $10,000 and $5,000
swaps reduce the Company's exposure to interest rate fluctuations on a
portion of the Company's variable interest entity debt (see Note 5).
Hedging Derivatives
The Company is party to one derivative instrument in the form of an
interest rate swap that qualifies for hedge accounting treatment pursuant to the
provisions of SFAS No. 133.
On April 12, 2001, the Company entered into a $25,000 interest rate
swap agreement (swap) to manage the risk associated with interest rate
fluctuations on a portion of the Company's variable interest entity debt. The
swap creates the economic equivalent of fixed-rate debt 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 debt, excluding the credit spread. The
interest rate on the swap is subject to adjustment monthly consistent with the
interest rate adjustment on the debt. The swap is effective through March 2006.
NOTE 9 - SHAREHOLDERS' EQUITY
Unattached Warrants
The Company issued unattached warrants to purchase 4,188,675 shares of
Common Stock on September 30, 1993 for $0.12 per warrant and unattached warrants
to purchase 4,188,675 shares of Common Stock on February 22, 1994 for $0.12 per
warrant to certain Company shareholders.
On August 2, 2000, certain Company shareholders exercised 4,252,152
warrants at an exercise price of $0.57 per share. Effective December 4, 2000,
the Company effected a recapitalization wherein the remaining 4,125,198 warrants
were canceled and the warrant holders were issued 4,062,479 shares of common
stock. As a result, the Company has no outstanding warrants at February 1, 2003,
December 31, 2002 or December 31, 2001.
Preferred Stock
The Company is authorized to issue 10,000,000 shares of Preferred Stock,
$0.01 par value per share. No preferred shares are issued and outstanding at
February 1, 2003, December 31, 2002 and December 31, 2001.
Stock Dividends
On May 25, 2000, the Board of Directors authorized a stock dividend,
payable June 19, 2000 to shareholders of record as of June 12, 2000, whereby the
Company issued one-half share for each outstanding share of Common Stock. All
share and per share data in these consolidated financial statements and the
accompanying notes have been retroactively adjusted to reflect this dividend,
which has the effect of a 3-for-2 stock split.
Recapitalization of Dollar Express
On February 5, 1999, Dollar Express issued 3,530,000 shares of cumulative
convertible redeemable preferred stock for gross proceeds of $34,000, net of
offering costs of $2,844. The preferred shareholders were entitled, at any time,
to convert any or all shares, on a one-for-one basis, into shares of Dollar
Express common stock. Upon conversion, the holders of the preferred shares were
also entitled to payment of all accrued but unpaid dividends, if any, as long as
a qualified public offering, merger or consolidation or any other
recapitalization or other business combination with an affiliated entity had not
occurred prior to August 2001. All outstanding preferred shares were converted
into Dollar Express common shares, on a one-for-one basis, upon consummation of
the Dollar Express merger as more fully discussed in Note 2. As a result of the
merger with Dollar Express, all accrued and unpaid preferred stock dividends
were forfeited and credited to additional paid-in capital in the second quarter
of 2000.
41
The accretion of preferred stock to redemption value represented the pro
rata portion of the change in redemption value of the preferred stock from its
initial value at the date of issuance to May 5, 2000. The costs of $2,844
associated with issuing the preferred stock and the discount of $3,013 related
to the value of the detachable common stock put warrants were recorded as
discounts on the preferred stock. The redemption value adjustments were being
accreted and the discounts were being amortized over a five-year period from the
date of issuance. As a result of the merger with Dollar Express, the book value
of the preferred stock and common stock put warrants were credited to additional
paid-in capital during the second quarter of 2000.
Net Income (Loss) Per Common Share
The following table sets forth the calculation of basic and diluted net
income (loss) per common share:
Month Ended Year Ended December 31,
February 1, -----------------------------
2003 2002 2001 2000
---- ---- ---- ----
Basic income (loss) before extraordinary
item and accounting change per common share:
Income (loss) before extraordinary item
and accounting change.............................. $ (5,240) $ 154,647 $ 123,081 $ 122,009
Less: Preferred stock dividends and
accretion.......................................... -- -- -- 1,413
------- ------- ------- -------
Income (loss) before extraordinary item and
accounting change available to common
shareholders........................................ $ (5,240) $ 154,647 $ 123,081 $ 120,596
======= ======= ======= =======
Weighted average number of common
shares outstanding................................. 114,224 113,637 112,238 103,972
======= ======= ======= =======
Basic income (loss) before extraordinary
item per common share.............................. $ (0.05) $ 1.36 $ 1.10 $ 1.16
======= ======= ======= =======
Month Ended Year Ended December 31,
February 1, ------------------------------
2003 2002 2001 2000
---- ---- ---- ----
Diluted income (loss) before extraordinary
item and accounting change per common share:
Income (loss) before extraordinary item
available to common shareholders................... $ (5,240) $ 154,647 $ 123,081 $ 120,596
======= ======= ======= =======
Weighted average number of common shares
outstanding........................................ 114,224 113,637 112,238 103,972
Dilutive effect of stock options and warrants
(as determined by applying the treasury
stock method)...................................... 437 910 752 7,837
------- ------- ------- -------
Weighted average number of common shares and
dilutive potential common shares
outstanding........................................ 114,661 114,547 112,990 111,809
======= ======= ======= =======
Diluted income (loss) before extraordinary
item and accounting change per
common share....................................... $ (.05) $ 1.35 $ 1.09 $ 1.08
======= ======= ======= =======
Detachable common stock put warrants to purchase 416,667 shares of common
stock of Dollar Express and 3,530,000 shares of cumulative convertible
redeemable preferred stock, eligible for conversion into 3,530,000 shares of
common stock of Dollar Express, were outstanding through May 5, 2000. These
common stock equivalents 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.
At February 1, 2003, December 31, 2002, December 31, 2001 and December 31,
2000, respectively, 2,171,350, 1,704,153, 731,304 and 164,411 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.
42
Comprehensive Income (Loss)
The Company's comprehensive income (loss) reflects the effect of recording
derivative financial instruments pursuant to SFAS No. 133. The following table
provides a reconciliation of net income (loss) to total comprehensive income
(loss):
Month Ended Year Ended December 31,
February 1, ----------------------------
2003 2002 2001 2000
---- ---- ---- ----
Net income (loss)...................................... $ (10,525) $ 154,647 $ 123,081 $ 121,622
Cumulative effect of change
in accounting for derivative
financial instruments (net of
$44 tax expense)..................................... -- -- 70 --
Fair value adjustment - derivative
cash flow hedging instruments ....................... 155 (1,652) (744) --
Income tax benefit (expense)........................... (60) 642 287 --
------- ------- ------- -------
Fair value adjustment, net of tax...................... 95 (1,010) (457) --
------- ------- ------- -------
Amortization of SFAS No. 133
cumulative effect.................................... 2 24 15 --
-------
Income tax expense..................................... (1) (9) (6) --
------- ------- ------- -------
Amortization of SFAS No. 133
cumulative effect, net of tax........................ 1 15 9 --
------- ------- ------- -------
Total comprehensive income (loss)...................... $ (10,429) $ 153,652 $ 122,703 $ 121,622
======= ======= ======= =======
The cumulative effect recorded in "accumulated other comprehensive loss" is
being amortized over the remaining lives of the related interest rate swaps.
Restricted Stock
In 2002, the Company adopted a restricted stock plan, under which a maximum
of 4,500 shares of common stock may be awarded to certain employees with no cash
payments required by the recipient. Under this plan, the Company awarded 4,500
shares of common stock to an employee during 2002, which vest ratably over a
three-year period. The $150 market value of the shares awarded was recorded as
unearned compensation and is shown as a separate component of shareholders'
equity. The unearned compensation will be amortized to compensation expense over
the three-year vesting period. Total amortization for the year ended 2002 and
the one-month period ended February 1, 2003 was approximately $33 and $4,
respectively.
In 2002, the Company issued 4,000 shares of restricted stock to
non-employees in recognition of past services provided to the Company. The
shares vested immediately upon issuance. The market value of the shares awarded
was approximately $125 and was recorded as a component of operating expenses
during 2002.
Share Repurchase Programs
The Company's Board of Directors authorized the repurchase of up to
$100,000 of the Company's common stock in connection with the Securities and
Exchange Commission's (SEC) Emergency Relief Order issued immediately following
the terrorist attacks on September 11, 2001. Pursuant to this program, the
Company repurchased and retired 225,000 shares of common stock for approximately
$3,800. The Company's limited share repurchase plan expired concurrently with
the expiration of the SEC's Exemptive Order on October 12, 2001. 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.
In November 2002, the Company's Board of Directors authorized the
repurchase of up to $200,000 of the Company's common stock. Stock repurchases
may be made until November 2005 and may be made either in the open market or
through privately negotiated transactions. No repurchase had been made under
this program as of February 1, 2003.
Shares retired are the result of the shares repurchased under the SEC's
Emergency Relief Order and shares received in the settlement of merger-related
contingencies. Shares retired totaled 281,708 at February 1, 2003 and December
31, 2002 and 225,000 at December 31, 2001.
43
NOTE 10 - EMPLOYEE BENEFIT PLANS
Profit Sharing and 401(k) Retirement Plan
The Company maintains a defined contribution profit sharing and 401(k) plan
which is available to all employees over 21 years of age who have completed one
year of service in which they have worked at least 1,000 hours. Eligible
employees may make elective salary deferrals. The Company may make contributions
at its discretion.
Contributions to and reimbursements by the Company of expenses of the plans
included in the accompanying consolidated statements of income were as follows:
Month Ended February 1, 2003..................... $ 755
Year Ended December 31, 2002..................... 9,728
Year Ended December 31, 2001..................... 8,914
Year Ended December 31, 2000..................... 7,041
Deferred Compensation Plan
The Company adopted a deferred compensation plan in 2000 providing certain
highly compensated employees and executives the ability to defer a portion of
their base compensation and bonuses and earn interest on their deferred amounts.
The plan is an unfunded nonqualified plan; however, the Company may make
discretionary contributions. The deferred amounts and earnings thereon are
payable to participants, or designated beneficiaries, at specified future dates,
upon retirement or death. Total cumulative participant deferrals were
approximately $871, $848 and $557, respectively, at February 1, 2003, December
31, 2002 and December 31, 2001 and are included in "other liabilities" in the
consolidated balance sheet. The Company made no discretionary contributions in
the month ended February 1, 2003 or in the years ended December 31, 2002, 2001
and 2000.
NOTE 11 - STOCK-BASED COMPENSATION PLANS
At February 1, 2003, the Company has five stock-based compensation plans.
Each plan and the accounting method are described below.
Fixed Stock Option Plans
The Company has four fixed stock option plans. Under the Non-Qualified
Stock Option Plan (SOP), the Company granted options to its employees for
1,047,264 shares of Common Stock in 1993 and 1,048,289 shares in 1994. Options
granted under the SOP have an exercise price of $0.86 and are fully vested at
the date of grant.
Under the 1995 Stock Incentive Plan (SIP), the Company may grant options to
its employees for up to 12,600,000 shares of Common Stock. The exercise price of
each option equals the market price of the Company's stock at the date of grant,
unless a higher price is established by the Board of Directors, and an option's
maximum term is ten years. Options granted under the SIP generally vest over a
three-year period. In exchange for their options to purchase Dollar Express
Common Stock, certain employees of Dollar Express were granted 228,072 options
to purchase the Company's common stock based on an exchange ratio of 0.8772.
Options issued in connection with the merger were fully vested as of the date of
the merger.
The Step Ahead Investments, Inc. Long-Term Incentive Plan (SAI Plan)
provided for the issuance of stock options, stock appreciation rights, phantom
stock and restricted stock awards to officers and key employees. Effective with
the merger with 98 Cent Clearance Center and in accordance with the terms of the
SAI Plan, outstanding 98 Cent Clearance Center options were assumed by the
Company and converted, based on 1.6818 Company options for each 98 Cent
Clearance Center option, to options to purchase the Company's common stock.
Options issued as a result of this conversion were fully vested as of the date
of the merger.
Under the 1998 Special Stock Option Plan (Special Plan), options to
purchase 247,500 shares were granted to five former officers of 98 Cent
Clearance Center who were serving as employees or consultants of the Company
following the merger. The options were granted as consideration for entering
into non-competition agreements and a consulting agreement. The exercise price
of each option equals the market price of the Company's stock at the date of
grant, and the options' maximum term is ten years. Options granted under the
Special Plan vest over a five-year period.
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted average
assumptions:
2002 2001 2000
---- ---- ----
Expected term in years.................. 5.7 6.0 6.0
Expected volatility..................... 63.8% 63.0% 61.6%
Annual dividend yield................... -- -- --
Risk-free interest rate................. 3.0% 4.9% 5.2%
The fair value of the one option grant during the month ended February 1,
2003 was computed using the same terms that were used for the 2002 option
grants.
44
The following tables summarize the Company's various option plans as of
February 1, 2003, December 31, 2002, December 31, 2001 and December 31, 2000,
and for the month ended February 1, 2003, and the years ended December 31, 2002,
2001, and 2000 and information about fixed options outstanding at February 1,
2003:
Stock Option Activity
------------------------------------------------------------------------------------------------- ---
February 1, 2003 2002 2001 2000
---------------------------- ---------------- --------------------- --------------------
Weighted Weighted Weighted Weighted
Average Average Average Average
Per Share Per Share Per Share Per Share
Exercise Exercise Exercise Exercise
Shares Price Shares Price Shares Price Shares Price
------ ----- ------ ----- ------ ----- ------ -----
Outstanding at
beginning of period.... 5,440,547 $ 24.17 5,683,827 $ 20.39 5,091,120 $ 21.02 5,288,463 $ 16.86
Granted................... 6,000 25.26 1,723,000 31.54 1,527,250 17.67 1,935,973 24.87
Exercised................. (12,402) 12.93 (1,632,942) 18.64 (593,597) 17.33 (1,751,957) 12.00
Forfeited ................ (20,122) 25.89 (333,338) 25.02 (340,946) 22.66 (381,359) 23.56
--------- --------- --------- ---------
Outstanding at
end of period.......... 5,414,023 $ 24.19 5,440,547 $ 24.17 5,683,827 $ 20.39 5,091,120 $ 21.02
========= ========= ========= =========
Options exercisable
at end of period....... 2,340,921 $ 21.84 2,343,879 $ 21.77 2,713,081 $ 20.04 1,904,127 $ 17.07
========= ========= ========= =========
Weighted average fair
value of options
ranted during the
period................. $ 15.24 $ 18.66 $ 11.00 $ 15.37
Stock Options Outstanding and Exercisable
-----------------------------------------
Options Outstanding Options Exercisable
------------------- -------------------
Weighted
Number Average Weighted Number Weighted
Range of Outstanding Remaining Average Exercisable Average
Exercise at February 1, Contractual Exercise at February 1, Exercise
Prices 2003 Life Price 2003 Price
- ------ ---- ---- ----- ---- -----
$0.86...................... 26,033 (1) $ 0.86 26,033 $ 0.86
$2.95 to $8.51............. 58,913 2.0 years 5.71 58,913 5.71
$8.52 to $21.28............ 1,586,407 7.1 years 16.77 718,799 16.31
$21.29 to $29.79........... 2,015,869 6.5 years 23.93 1,377,923 24.02
$29.80 to $42.56........... 1,726,801 8.9 years 32.30 159,253 37.34
--------- ---------
$0.86 to $42.56............ 5,414,023 2,340,921
========= =========
(1) Represent options granted under the SOP in 1993 and 1994. These options have
no expiration date.
Employee Stock Purchase Plan
Under the Dollar Tree Stores, Inc. Employee Stock Purchase Plan (ESPP), the
Company is authorized to issue up to 759,375 shares of Common Stock to eligible
employees. Under the terms of the ESPP, employees can choose to have up to 10%
of their annual base earnings withheld to purchase the Company's common stock.
The purchase price of the stock is 85% of the lower of the price at the
beginning or the end of the quarterly offering period. Under the ESPP, the
Company has sold 406,384 shares as of February 1, 2003.
The fair value of the employees' purchase rights is estimated on the date
of grant using the Black-Scholes option-pricing model with the following
weighted average assumptions:
Expected term ............................ 3 months
Expected volatility....................... 18% to 72%
Annual dividend yield..................... --
Risk-free interest rate................... 1.52% to 6.20% (annualized)
The weighted average per share fair value of those purchase rights granted
in 2002, 2001 and 2000 was $5.02, $3.98, and $7.00, respectively. No purchase
rights were granted in the month ended February 1, 2003.
45
NOTE 12 - QUARTERLY FINANCIAL INFORMATION AND MONTH ENDED JANUARY 31, 2002
FINANCIAL INFORMATION (Unaudited)
The following table sets forth certain items from the Company's unaudited
income statements for each quarter of 2002 and 2001 and for the month ended
January 31, 2002. The unaudited information has been prepared on the same basis
as the audited consolidated financial statements appearing elsewhere in this
report and includes all adjustments, consisting only of normal recurring
adjustments, which management considers necessary for a fair presentation of the
financial data shown. The operating results for any quarter or month are not
necessarily indicative of results for a full year or for any future period.
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- -------- -------
(In thousands, except store and per share data)
2002:
Net sales.......................................... $ 489,625 $ 498,578 $ 513,504 $ 827,481
Gross profit....................................... 173,165 180,191 182,583 312,017
Operating income................................... 36,114 42,129 34,096 141,582
Net income available to
common shareholders.............................. 22,552 25,237 19,878 86,980
Diluted net income per
common share..................................... 0.20 0.22 0.17 0.76
Stores open at end of quarter...................... 2,031 2,105 2,179 2,263
Comparable store net sales increase (1)............ 6.5% (2.5)% 0.2% (0.3)%
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
(In thousands, except store and per share data)
2001:
Net sales.......................................... $ 387,319 $ 440,361 $ 444,745 $ 714,846
Gross profit....................................... 131,461 157,087 154,295 273,114
Operating income................................... 17,939 35,245 25,820 124,861
Net income......................................... 10,783 21,658 14,552 76,088
Diluted net income per
common share..................................... 0.10 0.19 0.13 0.67
Stores open at end of quarter...................... 1,781 1,863 1,935 1,975
Comparable store net sales increase (1)............ -- (2.7%) (0.1%) 1.5%
(1) Easter was observed on March 31, 2002, April 15, 2001 and April 23, 2000.
Month Ended January 31, 2002:
Net sales.......................................... $ 132,140
Gross profit....................................... 40,541
Operating loss..................................... (1,895)
Net loss........................................... (1,097)
Diluted net loss per
common share..................................... $(0.01)
Stores open at end of period....................... 1,994
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information concerning our Directors and Executive Officers required by
this Item is incorporated by reference to Dollar Tree Stores, Inc.'s Proxy
Statement relating to our Annual Meeting of Shareholders to be held on June 19,
2003, under the caption "Election of Directors."
Information set forth in the Proxy Statement under the caption "Compliance
with Section 16(a) of the Securities and Exchange Act of 1934," with respect to
director and executive officer compliance with Section 16(a), is incorporated
herein by reference.
Item 11. EXECUTIVE COMPENSATION
Information set forth in the Proxy Statement under the caption
"Compensation of Executive Officers," with respect to executive compensation, is
incorporated herein by reference.
46
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
Information set forth in the Proxy Statement under the caption "Ownership
of Common Stock," with respect to security ownership of certain beneficial
owners and management, is incorporated herein by reference.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information set forth in the Proxy Statement under the caption "Certain
Relationships and Related Transactions," is incorporated herein by reference.
Item 14. CONTROLS AND PROCEDURES
(a) Evaluation of disclosure controls and procedures
During the third and fourth quarters of 2002, we appointed a disclosure
committee, which evaluated and documented our disclosure controls, formalized
certain disclosure control procedures, and reported to our chief executive
officer and chief financial officer. Within 90 days prior to the date of this
report, we carried out an evaluation, under the supervision and with the
participation of our management, including our chief executive officer and our
chief financial officer, of the effectiveness of the design and operation of our
disclosure controls and procedures pursuant to Rule 13a-14 of the Securities and
Exchange Act of 1934 (the "Exchange Act"). Based upon that evaluation, our chief
executive officer and our chief financial officer concluded that as of the date
of our evaluation, the Company's disclosure controls and procedures (as defined
in Rule 13a-14(c) under the Exchange Act) are effective to ensure that
information required to be disclosed by us in reports that we file or submit
under the Exchange Act is recorded, processed, summarized and reported within
the time periods specified in Securities and Exchange Commission rules and
forms.
(b) Changes in internal controls
There were no significant changes in our internal controls or in other
factors that could significantly affect these controls subsequent to the date of
our most recent evaluation.
PART IV
Item 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Documents filed as part of this report:
1. Financial Statements. Reference is made to the Index to the
Consolidated Financial Statements set forth under Part II, Item 8, on
page 23 of this Form 10-K.
2. Financial Statement Schedules. All schedules for which provision is
made in the applicable accounting regulations of the Securities and
Exchange Commission are not required under the related instructions,
are not applicable, or the information is included in the Consolidated
Financial Statements, and therefore have been omitted.
3. Exhibits. The exhibits listed on the accompanying Index to Exhibits, on
page 51 of this Form 10-K, are filed as part of, or incorporated by
reference into, this report.
(b) The following reports on Form 8-K were filed since September 30, 2002:
1. Report on Form 8-K, filed March 18, 2003 included the announcement of
Dollar Tree's consolidation of its synthetic lease, its participation
in the Merrill Lynch conference and historical financial data for the
fourth quarter and fiscal 2002 presented on the new fiscal year basis.
2. Report on Form 8-K, filed January 28, 2003, included the earnings
results for the quarter and year ended December 31, 2002.
3. Report on Form 8-K, filed January 7, 2003, included information
regarding a change in our fiscal year, historical financial data for
the first three quarters of 2002 presented on the new fiscal year
basis, the announcement of the appointment of a new Director, sales
results for the quarter and year ended December 31, 2002 and 2003
growth plans.
4. Report on Form 8-K, filed October 25, 2002, included a press release
regarding earnings for the third quarter ended September 30, 2002.
47
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
DOLLAR TREE STORES, INC.
DATE: March 27, 2003 By: /s/ Macon F. Brock Jr.
-----------------------
Macon F. Brock, Jr.
Chairman of the Board, Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Signature Title Date
/s/ Macon F. Brock, Jr
- ---------------------------
Macon F. Brock, Jr. Chairman and Chief Executive March 27, 2003
Officer; Director (principal
executive officer)
/s/ John F. Megrue
- ---------------------------
John F. Megrue Vice Chairman; Director March 27, 2003
/s/ J. Douglas Perry
- ---------------------------
J. Douglas Perry Chairman Emeritus; Director March 27, 2003
/s/ H. Ray Compton
- ---------------------------
H. Ray Compton Director March 27, 2003
/s/ Frederick C. Coble
- ---------------------------
Frederick C. Coble Chief Financial Officer March 27, 2003
(principal financial and
accounting officer)
/s/ Frank Doczi
- ---------------------------
Frank Doczi Director March 27, 2003
/s/ Richard G. Lesser
- ---------------------------
Richard G. Lesser Director March 27, 2003
/s/ Thomas A. Saunders, III
- ---------------------------
Thomas A. Saunders, III Director March 27, 2003
/s/ Eileen R. Scott
- ---------------------------
Eileen R. Scott Director March 27, 2003
/s/ Alan L. Wurtzel
- ---------------------------
Alan L. Wurtzel Director March 27, 2003
48
CERTIFICATIONS
Chief Executive Officer Certification
- -------------------------------------
I, Macon F. Brock, Jr., certify that:
1. I have reviewed this annual report on Form 10-K of Dollar Tree Stores, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this annual
report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent
functions):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated in this annual
report whether or not there were significant changes in internal controls or in
other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: March 27, 2003
/s/ Macon F. Brock, Jr.
-----------------------
Macon F. Brock, Jr.
Chairman and Chief Executive Officer
49
Chief Financial Officer Certification
- -------------------------------------
I, Frederick C. Coble, certify that:
1. I have reviewed this annual report on Form 10-K of Dollar Tree Stores, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this annual
report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent
functions):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated in this annual
report whether or not there were significant changes in internal controls or in
other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: March 27, 2003
/s/ Frederick C. Coble
----------------------
Frederick C. Coble
Chief Financial Officer
50
Index to Exhibits
3. Articles and Bylaws
3.1 Third Restated Articles of Incorporation of Dollar Tree Stores, Inc.
(the Company), as amended (Exhibit 3.1 to the Company's Quarterly
Report on Form 10-Q for the fiscal quarter ended September 30,
1996 incorporated herein by this reference)
3.2 Second Restated Bylaws of the Company (Exhibit 3.2 to the Company's
Registration Statement on Form S-1, No. 33-88502, incorporated
herein by this reference)
21. Subsidiaries of the Registrant
21.1 Subsidiaries
23. Consents of Experts and Counsel
23.1 Independent Auditors' Consent
99. Statements under Section 906 of the Sarbanes-Oxley Act
99.1 Statement under Section 906 of the Sarbanes-Oxley Act of Chief
Executive Officer
99.2 Statement under Section 906 of the Sarbanes-Oxley Act of Chief
Financial Officer
51