UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
(Mark One)
(X) Quarterly report pursuant to Section 13 or 15 (d) of the Securities
Exchange Act of 1934 For the quarterly period ended May 3, 2003
OR
( ) Transition report pursuant to Section 13 or 15 (d) of the Securities
Exchange Act of 1934
Commission File Number: 0-25464
DOLLAR TREE STORES, INC.
(Exact name of registrant as specified in its charter)
Virginia 54-1387365
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
500 Volvo Parkway
Chesapeake, Virginia 23320
(Address of principal executive offices)
Telephone Number (757) 321-5000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes (X) No ( )
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Exchange Act).
Yes (X) No ( )
As of June 4, 2003, there were 114,362,427 shares of the Registrant's Common
Stock outstanding.
DOLLAR TREE STORES, INC.
AND SUBSIDIARIES
INDEX
PART I-FINANCIAL INFORMATION
Page
----
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets as of
May 3, 2003, February 1, 2003 and December 31, 2002.............. 3
Condensed Consolidated Income Statements for the
Quarters ended May 3, 2003 and April 30, 2002.................... 4
Condensed Consolidated Statements of Cash Flows for the
Quarters ended May 3, 2003 and April 30, 2002.................... 5
Notes to Condensed Consolidated Financial Statements.............. 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations......................... 10
Item 3. Quantitative and Qualitative Disclosures About Market Risk......... 15
Item 4. Controls and Procedures............................................ 16
PART II-OTHER INFORMATION
Item 1. Legal Proceedings.................................................. 17
Item 6. Exhibits and Reports on Form 8-K................................... 17
Signatures................................................... 19
2
DOLLAR TREE STORES, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
(Unaudited)
May 3, February 1, December 31,
2003 2003 2002
---- ---- ----
ASSETS
Current assets:
Cash and cash equivalents......................................... $ 89,873 $ 237,302 $ 292,192
Short-term investments............................................ 87,185 63,525 43,780
Merchandise inventories........................................... 496,904 438,439 357,665
Deferred tax asset................................................ 14,271 14,333 10,409
Prepaid expenses and other current assets......................... 12,989 15,783 12,094
--------- --------- ---------
Total current assets.......................................... 701,222 769,382 716,140
Property and equipment, net (Note 3)................................... 520,204 477,947 344,322
Goodwill .............................................................. 38,358 38,358 38,358
Other assets, net...................................................... 18,759 18,552 17,557
--------- --------- ---------
TOTAL ASSETS.................................................. $ 1,278,543 $ 1,304,239 $ 1,116,377
========= ========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt................................. $ 25,000 $ 25,000 $ 25,000
Current installments of obligations under
capital leases................................................ 5,728 5,811 5,782
Accounts payable.................................................. 89,644 137,668 59,451
Other current liabilities......................................... 70,803 23,548 88,237
Income taxes payable.............................................. 14,049 75,033 28,041
--------- --------- ---------
Total current liabilities..................................... 205,224 267,060 206,511
Long-term debt, excluding current portion (Note 3)..................... 142,422 146,628 6,000
Obligations under capital leases, excluding
current installments................................................ 16,917 17,283 17,647
Deferred tax liability................................................. 15,641 11,685 9,899
Other liabilities...................................................... 18,027 15,764 20,916
--------- --------- ---------
Total liabilities............................................. 398,231 458,420 260,973
--------- --------- ---------
Shareholders' equity (Note 5):
Common stock, par value $0.01. 300,000,000
shares authorized, 114,337,934; 114,231,314;
and 114,186,569 shares issued and outstanding
at May 3, 2003, February 1, 2003, and
December 31, 2002, respectively................................. 1,143 1,142 1,142
Additional paid-in capital........................................ 219,848 218,106 217,267
Accumulated other comprehensive loss.............................. (1,335) (1,277) (1,373)
Unearned compensation............................................. (100) (112) (117)
Retained earnings................................................. 660,756 627,960 638,485
--------- --------- ---------
Total shareholders' equity.................................... 880,312 845,819 855,404
Commitments............................................................ -- -- --
--------- --------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY.................... $ 1,278,543 $ 1,304,239 $ 1,116,377
========= ========= =========
See accompanying Notes to Condensed Consolidated Financial Statements.
3
DOLLAR TREE STORES, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED INCOME STATEMENTS
(In thousands, except per share data)
(Unaudited)
Quarter ended
-------------------------
May 3, April 30,
2003 2002
---- ----
Net sales.............................................................. $ 615,568 $ 509,668
Cost of sales ......................................................... 397,780 325,159
------- -------
Gross profit.................................................. 217,788 184,509
------- -------
Selling, general and administrative expenses........................... 163,297 138,793
------- -------
Operating income.............................................. 54,491 45,716
------- -------
Other income (expense):
Interest income................................................... 810 1,064
Interest expense.................................................. (2,058) (1,228)
Changes in fair value of non-hedging interest rate swaps.......... 83 110
------- -------
Total other expense, net...................................... (1,165) (54)
------- -------
Income before income taxes.................................... 53,326 45,662
Provision for income taxes............................................. 20,531 17,580
------- -------
Net income (Notes 3 and 5).................................... $ 32,795 $ 28,082
======= =======
Net income per share (Notes 2 and 3):
Basic............................................................. $ 0.29 $ 0.25
======= =======
Diluted........................................................... $ 0.29 $ 0.25
======= =======
See accompanying Notes to Condensed Consolidated Financial Statements.
4
DOLLAR TREE STORES, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Quarter ended
--------------------------
May 3, April 30,
2003 2002
---- ----
Cash flows from operating activities:
Net income................................................................. $ 32,795 $ 28,082
-------- --------
Adjustments to reconcile net income to net cash
used in operating activities:
Depreciation and amortization.......................................... 23,169 16,601
Loss on disposal of property and equipment............................. 1,004 1,008
Change in fair value of non-hedging interest rate swaps................ (83) (110)
Provision for deferred income taxes.................................... 4,057 (1,178)
Tax benefit of stock option exercises.................................. 249 5,155
Other non-cash adjustments to net income............................... 96 129
Changes in assets and liabilities increasing
(decreasing) cash and cash equivalents:
Merchandise inventories........................................... (58,465) (40,681)
Prepaid expenses and other current assets......................... 2,795 (8,808)
Other assets...................................................... (408) (386)
Accounts payable and other current liabilities.................... (52,255) (57,936)
Income taxes payable.............................................. (9,499) (6,097)
Other liabilities................................................. 2,246 3,779
-------- --------
Net cash used in operating activities......................... (54,299) (60,442)
-------- --------
Cash flows from investing activities:
Capital expenditures....................................................... (63,336) (29,762)
Purchase of short-term investments......................................... (28,360) --
Proceeds from maturities of short-term investments......................... 4,700 --
Acquisition of favorable lease rights...................................... -- (813)
Proceeds from sale of property and equipment............................... 29 252
Settlement of merger-related contingencies................................. -- 42
-------- --------
Net cash used in investing activities......................... (86,967) (30,281)
-------- --------
Cash flows from financing activities:
Repayment of long-term debt and facility fees.............................. (6,000) (6,025)
Principal payments under capital lease obligations......................... (1,657) (940)
Proceeds from stock issued pursuant to
stock-based compensation plans .......................................... 1,494 16,569
-------- --------
Net cash provided by (used in) financing activities........... (6,163) 9,604
-------- --------
Net decrease in cash and cash equivalents....................................... (147,429) (81,119)
Cash and cash equivalents at beginning of period................................ 237,302 218,077
-------- --------
Cash and cash equivalents at end of period...................................... $ 89,873 $ 136,958
======== ========
Supplemental disclosure of cash flow information
Cash paid for:
Interest, net of amount capitalized.................................... 1,980 1,314
Income taxes........................................................... 25,742 49,374
See accompanying Notes to Condensed Consolidated Financial Statements.
5
DOLLAR TREE STORES, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The condensed consolidated financial statements at May 3, 2003 and for the
quarters ended May 3, 2003 and April 30, 2002 are unaudited and reflect all
adjustments (consisting only of normal recurring adjustments) which are, in the
opinion of management, necessary for a fair presentation of the financial
position at May 3, 2003 and operating results for the interim periods. The
February 1, 2003 and December 31, 2002 balance sheet information was derived
from the audited consolidated financial statements as of those dates.
The condensed consolidated financial statements should be read in
conjunction with the consolidated financial statements and notes thereto,
together with management's discussion and analysis of financial condition and
results of operations for the year ended December 31, 2002 contained in the
Company's Annual Report on Form 10-K filed March 28, 2003. The results of
operations for the quarter ended May 3, 2003 are not necessarily indicative of
the results to be expected for the entire fiscal year ending January 31, 2004.
Certain 2002 amounts have been reclassified for comparability with the 2003
financial statement presentation.
2. NET INCOME PER SHARE
The following table sets forth the calculation of basic and diluted net income per share:
Quarter ended
---------------------------
May 3, April 30,
2003 2002
---- ----
(In thousands, except
per share data)
Basic net income per share:
Net income .......................................... $ 32,795 $ 28,082
======= =======
Weighted average number of
common shares outstanding............................ 114,258 112,801
======= =======
Basic net income per share......................... $ 0.29 $ 0.25
======= =======
Diluted net income per share:
Net income .......................................... $ 32,795 $ 28,082
======= =======
Weighted average number of
common shares outstanding............................ 114,258 112,801
Dilutive effect of stock options and
warrants (as determined by applying
the treasury stock method)........................... 273 1,234
------- -------
Weighted average number of common
shares and dilutive potential
common shares outstanding............................ 114,531 114,035
======= =======
Diluted net income per share....................... $ 0.29 $ 0.25
======= =======
6
At May 3, 2003 and April 30, 2002, 5,514,622 and 146,308 stock options,
respectively, 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.
3. VARIABLE INTEREST ENTITY
Effective January 1, 2003, the Company implemented the Financial Accounting
Standards Board's 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 previous synthetic lease
facility was held, are required to be consolidated on the Company's financial
statements. As a result of the implementation, the assets of four distribution
centers and the debt formerly incurred by the variable interest entity to
purchase and construct the assets were included in the Company's balance sheets
for periods after January 1, 2003. These distribution centers were previously
accounted for as operating leases.
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:
Quarter ended
----------------------------
May 3, April 30,
2003 2002
---- ----
(In thousands,
except per share data)
Reconciliation of net income:
Net income, as reported ............................................ $ 32,795 $ 28,082
Less: Depreciation, amortization
and deferred rent effect (net of tax)............................ -- (1,030)
------ ------
Adjusted net income................................................. $ 32,795 $ 27,052
====== ======
Basic net income per share:
Net income per share, as reported................................... $ 0.29 $ 0.25
Less: Depreciation, amortization
and deferred rent effect (net of tax)............................ -- (0.01)
------ ------
Adjusted net income per share....................................... $ 0.29 $ 0.24
====== ======
Diluted net income per share:
Net income per share, as reported................................... $ 0.29 $ 0.25
Less: Depreciation, amortization
and deferred rent effect (net of tax)............................ -- (0.01)
------ ------
Adjusted net income per share....................................... $ 0.29 $ 0.24
====== ======
4. STOCK-BASED COMPENSATION
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 below.
7
The Company currently 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. 148.
If the accounting provisions of SFAS No. 123 had been adopted, the
Company's net income and net income per share would have been reduced to the pro
forma amounts indicated in the following table:
Quarter ended
-----------------------------
May 3, April 30,
2003 2002
---- ----
(In thousands,
except per share data)
Net income as reported.............................................. $ 32,795 $ 28,082
Deduct: Total stock-based employee
compensation determined under
fair value based method
net of related tax effects....................................... (3,187) (3,459)
------ ------
Net income for SFAS No. 123......................................... $ 29,608 $ 24,623
====== ======
Net income per share:
Basic, as reported.................................................. $ 0.29 $ 0.25
Basic, pro forma for SFAS No. 123................................... $ 0.26 $ 0.22
Diluted, as reported................................................ $ 0.29 $ 0.25
Diluted, pro forma for SFAS No. 123................................. $ 0.26 $ 0.22
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 periods.
On March 24, 2003, the Board of Directors granted options to employees
under the Company's Stock Incentive Plan to purchase 1,812,150 shares of the
Company's common stock at an exercise price of $20.02 per share. The exercise
price represents the fair market value of the Company's stock at the date of the
grant.
For pro forma disclosure purposes the fair value of the newly granted
options was calculated using the Black-Scholes option-pricing model with the
following assumptions: expected term in years of 6.4; expected volatility of
62.8%; annual dividend yield of zero; and risk-free interest rate of 3.3%. Using
these assumptions, the weighted average fair value of options granted in the
first quarter of 2003 was $12.39.
8
5. COMPREHENSIVE INCOME
The Company's comprehensive income reflects the effect of recording
derivative financial instruments pursuant to SFAS No. 133. The following table
provides a reconciliation of net income to total comprehensive income:
Quarter ended
-------------------------
May 3, April 30,
2003 2002
---- ----
(In thousands)
Net income ......................................................... $ 32,795 $ 28,082
------ ------
Fair value adjustment-derivative
cash flow hedging instruments.................................... (101) (109)
Income tax benefit.................................................. 39 47
------ ------
Fair value adjustment, net of tax................................... (62) (62)
------ ------
Amortization of SFAS No. 133
cumulative effect................................................ 6 6
Income tax benefit.................................................. (2) (2)
Amortization of SFAS No. 133
------ ------
Amortization of SFAS No. 133
cumulative effect, net of tax.................................... 4 4
------ ------
Total comprehensive income.......................................... $ 32,737 $ 28,024
====== ======
The cumulative effect recorded in "accumulated other comprehensive income" is
being amortized over the remaining lives of the related interest rate swaps.
6. SUBSEQUENT EVENTS
Greenbacks Binding Agreement
On May 15, 2003, Dollar Tree Stores, Inc. signed a binding agreement to
acquire Greenbacks, Inc., based in Salt Lake City, Utah, for approximately $100
million in cash. The Company expects to use existing cash or amounts available
under its Revolving Credit Facility to fund the purchase. The transaction will
be accounted for under the purchase method of accounting and is expected to be
consummated in late June 2003, subject to regulatory approval and satisfaction
of certain closing conditions. Greenbacks is a privately-held company operating
96 stores in 10 western states and one expandable 252,000 square foot
distribution center in Salt Lake City as of May 15, 2003.
Unsecured Revolving Credit Facility
Effective May 30, 2003, the Company entered into a Revolving Credit
Facility (the Revolver Agreement). The Revolver Agreement provides for, among
other things: (1) a $150.0 million revolving line of credit, bearing interest at
LIBOR, plus a spread; and (2) an annual facilities fee, calculated as a
percentage, as defined, of the amount available under the line of credit and an
annual administrative fee payable quarterly.
The Revolver Agreement, among other things, requires the maintenance of
certain specified financial ratios, restricts the payment of certain
distributions and prohibits the incurrence of certain new indebtedness. The
Revolver Agreement matures on May 29, 2004. The Company's existing $50.0 million
revolving credit facility was terminated concurrent with entering into the new
$150.0 million revolving credit facility.
9
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
INTRODUCTORY NOTE: Unless otherwise stated, references to "we," "our" and "us"
generally refer to Dollar Tree Stores, Inc. and its direct and indirect
subsidiaries on a consolidated basis.
A WARNING ABOUT FORWARD-LOOKING STATEMENTS: This document contains
"forward-looking statements" as that term is used in the Private Securities
Litigation Reform Act of 1995. Forward-looking statements address future events,
developments or results and typically use words such as "believe," "anticipate,"
"expect," "intend," "plan" or "estimate." For example, our forward-looking
statements include statements regarding:
o our anticipated inventory levels, future net sales results and
future gross profit margin;
o our growth plans, including our plans to add, expand or relocate
stores and distribution centers and our anticipated selling square
footage growth;
o the possible effect of inflation and other economic changes on
our future costs and profitability;
o the effect of increases in surcharges as a result of renegotiations
of shipping rates and the effect of the work stoppage affecting the
Evergreen ships;
o the expected closing date of the Greenbacks acquisition; and
o our cash needs, including our ability to fund our future capital
expenditures, working capital requirements, distribution network
expansion and Greenbacks acquisition.
For a discussion of the risks, uncertainties and assumptions that could
affect our future events, developments or results, you should carefully review
the risk factors described below, "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "Business" sections in our
Annual Report on Form 10-K filed March 28, 2003, and review "Risk Factors" in
our most recent prospectus:
o Failure of the Greenbacks merger to be consummated or failure of
the companies to integrate successfully would cause us to not
meet our expectations.
o Adverse economic conditions, such as reduced consumer confidence
and spending, or bad weather could significantly reduce our sales.
o We could fail to meet our goals for opening or expanding stores on
a timely basis, which could cause our sales to suffer. We may not
anticipate all the challenges that our expanding operations will
impose and, as a result, we may not meet our targets for opening
new stores and
10
expanding profitably. In addition, when new stores or expanded
stores are located near existing stores, sales at our existing
stores can suffer.
o The outbreak of war and other national and international events,
such as terrorism, could lead to disruptions in the economy.
o Our sales may be below expectations during the Christmas selling
season, which may cause our operating results to suffer
materially.
o Our profitability is vulnerable to future increases in operating
and merchandise costs including shipping rates, freight costs,
wage levels, inflation, competition and other adverse economic
factors.
o Unforeseen disruptions or costs in operating and expanding our
receiving and distribution systems could harm our sales and
profitability.
o Our merchandise mix relies heavily on imported goods. An increase
in the cost of or disruption in the flow of these goods, including
disruptions that could arise if the Severe Acute Respiratory
Syndrome (SARS) epidemic in the Far East worsens, may
significantly decrease our sales and profits because any
transition to alternative sources may not occur in time to meet
our demands. In addition, products and alternative sources may
also be of lesser quality and more expensive than those we
currently import.
o Disruptions in the availability of quality, low-cost merchandise
in sufficient quantities to maintain our growth may reduce sales
and profits.
Our forward-looking statements could be wrong in light of these and other
risks, uncertainties and assumptions. The future events, developments or results
described in this report or our most recent prospectus could turn out to be
materially different. We have no obligation to publicly update or revise our
forward-looking statements after the date of this quarterly report and you
should not expect us to do so.
Investors should also be aware that while we do, from time to time,
communicate with securities analysts and others, it is against our policy to
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 have a policy against confirming 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.
11
Recent Developments
Several key events have had or are expected to have a significant effect on
our results of operations. You should keep the following in mind that:
o We changed our fiscal year from a calendar year to a retail fiscal
year ending on the Saturday closest to January 31. As a result, the
fiscal year 2003 represents the period beginning February 2, 2003
and ending January 31, 2004. The following table presents the dates
and the number of days in the respective quarters for fiscal year
2003 and fiscal year 2002:
First Quarter 2003 February 2, 2003-May 3, 2003 91
First Quarter 2002 February 1, 2002-April 30, 2002 89
Second Quarter 2003 May 4, 2003-August 2, 2003 91
Second Quarter 2002 May 1, 2002-July 31, 2002 92
Third Quarter 2003 August 3, 2003-November 1, 2003 91
Third Quarter 2002 August 1, 2002-October 31, 2002 92
Fourth Quarter 2003 November 2, 2003-January 31, 2004 91
Fourth Quarter 2002 November 1, 2002-February 1,2003 93
o On May 15, 2003, we signed a binding agreement to acquire
Greenbacks, Inc., based in Salt Lake City, Utah, for approximately
$100 million in cash. The transaction will be accounted for under
the purchase method of accounting and is expected to be consummated
in late June 2003, subject to regulatory approval and satisfaction
of certain closing conditions. Greenbacks is a privately-held
company operating 96 stores in 10 western states and one expandable
252,000 square foot distribution center in Salt Lake City as of May
15, 2003.
o In May 2003, we announced that we will build two new distribution
centers, one in Joliet, Illinois and the other in Ridgefield,
Washington. The Joliet distribution center will be a fully
automated 1.2 million square foot facility, and will replace our
existing Chicago distribution center. The Ridgefield distribution
center will be a 665,000 square foot facility that can be expanded
in the future to accommodate our growth needs. We anticipate both
facilities to be operational by the third quarter of 2004.
Results of Operations
The Quarter Ended May 3, 2003 Compared To The Quarter Ended April 30, 2002
Net sales. Net sales increased 20.8% in the first quarter of 2003 compared
to the prior year first quarter. This $105.9 million increase in net sales
resulted primarily from strong sales performance from our newer stores,
particularly those stores in the 10,000-15,000 square footage range and stronger
than expected sales during the Easter selling season. Our comparable store net
sales increased 2.2% quarter over quarter. 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 expect our second quarter net sales to be $575-$590 million. Our
expectations are based on flat underlying comparable store net sales and are
exclusive of any contribution the Greenbacks acquisition may provide. In
addition, we estimate our net
12
sales for the fiscal year 2003 will increase by at least 15% over last year's
fiscal year ended February 1, 2003, exclusive of the Greenbacks acquisition.
At May 3, 2003, we operated 2,319 stores with 13.9 million selling square
feet compared to 2,272 stores with 13.2 million selling square feet at February
1, 2003 and 2,048 stores with 10.9 million selling square feet at April 30,
2002. We opened 55 stores, expanded 30 stores and closed 8 stores in the first
quarter of 2003, compared to 64 stores opened, 26 stores expanded, and 10 stores
closed in the first quarter ended April 30, 2002. In the first quarter of 2003,
we added approximately 0.6 million selling square feet, of which approximately
0.2 million selling square feet was added through expanding existing stores.
We expect to achieve our plan of 22% selling square footage growth for the
fiscal year 2003, excluding the Greenbacks stores.
Gross Profit. Our gross profit as a percentage of net sales is called our
gross profit margin. Gross profit margin decreased to 35.4% in the quarter ended
May 3, 2003 compared to 36.2% in the quarter ended April 30, 2002. This decline
was primarily attributable to the following:
o a benefit to last year's first quarter gross margin due to shrink
adjustments made in connection with our supply-chain implementation;
o a shift towards more larger stores resulting in slightly higher
shrink levels; and
o approximately $1.0 million of additional non-cash expense in the
first quarter of 2003, associated with the adoption of FIN 46.
We have approximately 10,000 containers of merchandise remaining to be
imported this year. We have shipping rate commitments from our carriers for the
remainder of the year; however, they are asking us to renegotiate based on
current market conditions. Although we do not expect that these increases will
have a material adverse effect on our operations, we could experience surcharges
this year of $1.0 to $2.0 million or more. We can give no assurance as to the
amount of the increase, if any, as we are in the early stages of our
negotiations.
A work stoppage by the International Longshoremen's Association has
resulted in several Evergreen Marine Corporation ships bound for the East Coast
being stalled or diverted. As of June 6, 2003, fewer than 100 of our containers
are affected by this action. Because June is a relatively low shipment period,
we do not expect that these delays will have a material adverse effect on our
results of operations.
In general, we expect our annual gross profit margin to be in the range of
36%-37%. However, quarterly gross margin results are likely to fluctuate due to
factors such as seasonality and shipping and receiving patterns. For example,
generally, our first and second quarter gross profit margins are lower than
those in the third and fourth quarters.
Selling, General and Administrative Expenses. Selling, general, and
administrative expenses for the first quarter of 2003 decreased to 26.5%, as a
percentage of net sales, compared to 27.2% in last year's first quarter. This
improvement was primarily due to continued improvements in personnel costs and
increased leverage associated with the 2.2% increase in comparable store net
sales, partially offset by increased depreciation expense associated with our
supply-chain investments and technology improvements; our store relocation and
expansion program; and the opening of new larger stores.
13
Operating Income. Due to the reasons discussed above, operating income
decreased as a percentage of net sales to 8.9% in the first quarter of 2003
compared to 9.0% in the same period of 2002.
Interest Income/Expense. Interest income decreased to $0.8 million in the
first quarter of 2003 from $1.1 million in the first quarter of 2002. This
decrease resulted from decreases in interest rates earned on our investments
partially offset by increased levels of cash and cash equivalents and short-term
investments for the first quarter of 2003. Interest expense increased to $2.1
million in the first quarter of 2003 compared $1.2 million for the first quarter
of 2002. This increase was primarily due to approximately $1.0 million of
additional interest expense associated with the implementation of FIN 46.
Changes in fair value of non-hedging interest rate swaps. The $0.1 million
in income for the first quarters of 2003 and 2002 is the result of reflecting
our non-hedging interest rate swaps at their fair values in accordance with SFAS
No. 133. The change in the fair values for each quarter is primarily the result
of increasing interest rates. Due to the many variables involved in determining
the fair value, our management is not able to predict changes in the fair values
of our interest rate swaps.
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 in nature and typically reach their peak in the
months of September and October. Historically, we have satisfied our seasonal
working capital requirements for existing stores and funded our store opening
and expansion programs from internally generated funds and borrowings under our
credit facilities.
The following table compares cash-related information for the three months
ended May 3, 2003 and April 30, 2002:
Quarter ended
----------------------------
May 3, April 30,
2003 2002
---- ----
(In millions)
Net cash provided by (used in):
Operating activities................................ $(54.3) $(60.4)
Investing activities................................ (87.0) (30.3)
Financing activities................................ (6.2) 9.6
The $6.1 million decrease in cash used in operating activities was
primarily the result of the following:
o increased net income net of non-cash expense adjustments;
o timing of payments associated with prepaid expenses and other
current assets;
o partially offset by increased cash expenditures for inventory
associated with our square footage growth since the first quarter
of 2002.
The $56.7 million increase in cash used in investing activities was
primarily the result of the following:
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o increased capital expenditures associated with our new and expanded
stores and new distribution centers and
o purchases of short-term government-sponsored municipal bonds.
The $15.8 million decrease in cash provided by financing activities was
primarily attributed to $15.1 million less cash received pursuant to stock-based
compensation plans in the first quarter of 2003 compared to the first quarter of
2002 because of decreased stock option exercises. We believe the decrease in
stock option exercises was primarily due to a decreased stock price in the first
quarter of 2003 compared to the prior year period.
At May 3, 2003, our long-term borrowings were $167.4 million. We had $50.0
million available through our bank facility. We also have $125.0 million
available under the Letter of Credit Reimbursement and Security Agreement, of
which approximately $74.1 million was committed to letters of credit issued for
routine purchases of imported merchandise.
Effective May 30, 2003, we entered into an unsecured revolving credit
facility. The facility provides for, among other things: (1) a $150.0 million
revolving line of credit, bearing interest at LIBOR, plus a spread; and (2) an
annual facilities fee, calculated as a percentage, as defined, of the amount
available under the line of credit and an annual administrative fee payable
quarterly.
The facility, among other things, requires the maintenance of certain
specified financial ratios, restricts the payment of certain distributions and
prohibits the incurrence of certain new indebtedness. The facility matures on
May 29, 2004. Our existing $50.0 million revolving credit facility was
terminated concurrent with entering into the new $150.0 million revolving
credit facility.
We expect to fund the Greenbacks acquisition and the new distribution
center facilities using existing cash or borrowings under our revolving credit
facility.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
We are exposed to various types of market risk in the normal course of our
business, including the impact of interest rate changes and foreign currency
rate fluctuations. We may enter into interest rate swaps to manage our exposure
to interest rate changes, and we may employ other risk management strategies,
including the use of foreign currency forward contracts. We do not enter into
derivative instruments for any purpose other than cash flow hedging purposes.
Certain of our interest rate swaps do not qualify for hedge accounting treatment
under SFAS No. 133, as amended by SFAS No. 138, because they contain provisions
that "knockout" the swap when the variable interest rate exceeds a predetermined
rate.
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Interest Rate Risk
The following table summarizes the financial terms and fair values of each
of our interest rate swap agreements at May 3, 2003:
Hedging Receive Pay Knockout
Instrument Variable Fixed Rate Expiration Fair Value
- ------------------------ ------------------ -------------- ------------------- -------------------- ---------------------
$19.0 million LIBOR 4.88% 7.75% 4/1/09 ($1,939,000)
interest rate swap
$10.0 million LIBOR 6.45% 7.41% 6/2/04 ($567,000)
interest rate swap
$5.0 million LIBOR 5.83% 7.41% 6/2/04 ($250,000)
interest rate swap
$25.0 million LIBOR 5.43% N/A 3/12/06 ($2,342,000)
interest rate swap
Due to the many variables involved in determining the fair value, 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.
There have been no material changes in our interest rate risk exposure
during the first quarter of 2003.
Foreign Currency Risk
There have been no material changes to our market risk exposures resulting
from foreign currency transactions during the quarter ended May 3, 2003.
Item 4. CONTROLS AND PROCEDURES.
(a) Evaluation of disclosure controls and procedures
Within 90 days prior to the date of this report, our disclosure committee
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.
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(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 II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS.
From time to time we are defendants in ordinary, routine litigation and
proceedings incidental to our business, including:
o employment-related matters;
o product safety matters, including product recalls by the Consumer
Products Safety Commission;
o personal injury claims; and
o the infringement of the intellectual property rights of others.
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 affect on us.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
10. Material Contracts
10.1 Credit Agreement among Dollar Tree Distribution, Inc., as
Borrower, Certain of the Domestic Affiliates of the
Borrower from Time to Time Parties Hereto, as Guarantors;
the Lender Parties Hereto, Fleet National Bank, as
Syndication Agent, SunTrust Bank, as Documentation Agent,
and Wachovia Bank, National Association, as
Administrative Agent, dated as of May 30, 2003
99. Additional Exhibits
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
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(b) Reports on Form 8-K:
The following reports on Form 8-K were filed during the first quarter of
2003:
1. Report on Form 8-K, filed March 18, 2003, included the financial
statements reflecting the results for the fiscal quarter and year
ended February 1, 2003.
2. Report on Form 8-K, filed April 7, 2003, included a text of the
business update for the first quarter of fiscal 2003.
Also, in the second quarter of 2003, we filed the following reports on Form
8-K:
1. Report on Form 8-K, filed May 8, 2003, included a press release
regarding the sales results for the first quarter ended May 3, 2003.
2. Report on Form 8-K, filed May 20, 2003, included a press release
announcing the signing of a binding agreement to acquire
Greenbacks, Inc.
3. Report on Form 8-K, filed May 29, 2003, included a press release
regarding the earnings results for the first quarter ended May 3,
2003.
4. Report on Form 8-K, filed June 2, 2003, included a summary of
information discussed in the first quarter of 2003 earnings
conference call.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
DATE: June 10, 2003
DOLLAR TREE STORES, INC.
By: /s/ Frederick C. Coble
---------------------------------
Frederick C. Coble
Chief Financial Officer
(principal financial and accounting officer)
CERTIFICATIONS
Chief Executive Officer Certification
I, Macon F. Brock, Jr., certify that:
1. I have reviewed this quarterly report on Form 10-Q of Dollar Tree Stores,
Inc.;
2. Based on my knowledge, this quarterly 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 quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly 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 quarterly 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 quarterly 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
quarterly report (the "Evaluation Date"); and
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c) presented in this quarterly 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 function):
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
quarterly 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: June 10, 2003
/s/ Macon F. Brock, Jr.
--------------------------------
Macon F. Brock, Jr.
Chairman and Chief Executive Officer
Chief Financial Officer Certification
I, Frederick C. Coble, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Dollar Tree Stores,
Inc.;
2. Based on my knowledge, this quarterly 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 quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly 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 quarterly 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 quarterly report is being prepared;
20
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
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly 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 function):
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
quarterly 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: June 10, 2003
/s/ Frederick C. Coble
-----------------------------
Frederick C. Coble
Chief Financial Officer
21