FORM 10-Q SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 (Mark One) / X / Quarterly report pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1996 / / 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.) 2555 ELLSMERE AVENUE NORFOLK COMMERCE PARK NORFOLK, VIRGINIA 23513 (Address of principal executives office) TELEPHONE NUMBER (757) 857-4600 (Registrants telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days: Yes /X/ No / / As of November 1, 1996, there were 25,877,265 shares of the Registrant's Common Stock outstanding. DOLLAR TREE STORES, INC. and subsidiaries INDEX PART I. FINANCIAL INFORMATION Page No. ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS: Condensed Consolidated Balance Sheets September 30, 1996 and December 31, 1995........................... 3 Condensed Consolidated Income Statements Three months and nine months ended September 30, 1996 and 1995..... 4 Condensed Consolidated Statements of Cash Flows Nine months ended September 30, 1996 and 1995...................... 5 Notes to Condensed Consolidated Financial Statements................ 6 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.................... 10 PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS............................................. 13 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.............................. 14 Signatures................................................... 15 DOLLAR TREE STORES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (In thousands, except share data) (Unaudited) September 30, December 31, 1996 1995 ------------ ------------ ASSETS Current assets: Cash and cash equivalents.................... $ 4,121 $ 22,415 Accounts receivable.......................... 2,364 380 Merchandise inventories ..................... 112,439 40,113 Deferred tax asset .......................... 853 720 Prepaid expenses and other current assets ... 4,104 2,392 ------- ------- Total current assets..................... 123,881 66,020 ------- ------- Property and equipment, net....................... 34,693 23,091 Deferred tax asset................................ 2,750 2,219 Goodwill, net (note 2) ........................... 46,985 -- Other assets, net................................. 730 291 ------- ------- TOTAL ASSETS............................. $209,039 $ 91,621 ======= ======= LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Notes payable to bank........................ $ 36,500 $ -- Accounts payable ............................ 38,369 19,603 Accrued liabilities ......................... 9,957 8,939 Income taxes payable......................... 832 8,244 Current installments of obligations under capital leases...................... 343 101 ------- ------- Total current liabilities................ 86,001 36,887 ------- ------- Notes payable to bank, long-term portion (notes 2 and 3).............. 40,000 -- Senior subordinated notes......................... -- 7,000 Junior subordinated notes......................... -- 7,000 Obligations under capital leases, excluding current installments................. 956 417 Other liabilities................................. 3,662 1,230 ------- ------- Total liabilities........................ 130,619 52,534 ------- ------- Shareholders' equity: Common stock, par value $0.01. Authorized 100,000,000 shares, 25,874,104 issued and outstanding at September 30, 1996 (note 8).. 259 166 Additional paid-in capital................... 31,608 2,980 Retained earnings............................ 46,553 35,941 ------- ------- Total shareholders' equity.................. 78,420 39,087 ------- ------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY.. $209,039 $ 91,621 ======= ======= See accompanying Notes to Condensed Consolidated Financial Statements 3 DOLLAR TREE STORES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED INCOME STATEMENTS (In thousands, except per share data) (Unaudited) Three Months Ended Nine Months Ended September 30, September 30, ------------------ ------------------- 1996 1995 1996 1995 -------- ------- -------- -------- Net sales ............... $110,588 $ 67,427 $298,252 $179,045 Cost of sales................ 68,698 41,359 191,633 114,179 ------- ------- ------- ------- Gross profit........ 41,890 26,068 106,619 64,866 ------- ------- ------- ------- Selling, general, and administrative expenses: Operating expenses........ 28,075 17,974 77,843 48,555 Depreciation and amortization............ 2,681 1,438 7,486 3,911 ------- ------- ------- ------- Total selling, general and administrative expenses................ 30,756 19,412 85,329 52,466 ------- ------- ------- ------- Operating income............. 11,134 6,656 21,290 12,400 Interest expense............. 1,408 791 4,032 1,937 ------- ------- ------- ------- Income before income taxes... 9,726 5,865 17,258 10,463 Provision for income taxes... 3,748 2,260 6,646 4,029 ------- ------- ------- ------- Net income.......... $ 5,978 $ 3,605 $ 10,612 $ 6,434 ======= ======= ======= ======= Net income per share ........ $ 0.21 $ 0.13 $ 0.38 $ 0.23 ======= ======= ======= ======= Weighted average number of common shares and common share equivalents outstanding (note 3): Primary ............ 28,664 27,674 28,191 27,536 Fully diluted....... 28,707 27,723 28,255 27,698 See accompanying Notes to Condensed Consolidated Financial Statements 4 DOLLAR TREE STORES, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) (Unaudited) Nine Months Ended September 30, ---------------------- 1996 1995 -------- --------- Cash flows from operating activities: Net income........................................ $ 10,612 $ 6,434 Adjustments to reconcile net income to net cash used in operating activities: Depreciation and amortization.................. 7,485 3,911 Loss on disposal of property and equipment .... 258 208 Provision for deferred income taxes............ (664) (403) Changes in assets and liabilities increasing (decreasing) cash and cash equivalents, net of effects resulting from purchase of Dollar Bills, Inc.: Accounts receivable......................... (411) 67 Merchandise inventories..................... (56,291) (33,727) Prepaid expenses and other current assets... (1,527) (545) Other assets ............................... 267 (39) Accounts payable............................ 10,971 7,454 Accrued liabilities......................... (1,105) (192) Income taxes payable........................ (7,412) (5,701) Other liabilities........................... 57 (463) -------- -------- Total adjustments.......................... (48,372) (29,046) -------- -------- Net cash used in operating activities ..... (37,760) (22,612) -------- -------- Cash flows from investing activities: Capital expenditures ............................. (12,495) (8,987) Proceeds from sale of property and equipment...... 23 32 Payment for purchase of Dollar Bills, Inc., net of cash acquired............................. (52,209) -- -------- -------- Net cash used in investing activities...... (64,681) (8,955) -------- -------- Cash flows from financing activities: Net proceeds from notes payable to bank........... 29,600 28,600 Principal payments under capital lease obligations................................ (174) (52) Proceeds from options exercised and purchase of shares under ESPP............................. 2,902 238 Proceeds from public offering..................... 25,819 -- Proceeds from long-term debt...................... 92,630 -- Repayment of long-term debt....................... (52,630) -- Repayment of senior and junior subordinated notes............................... (14,000) -- -------- -------- Net cash provided by financing activities.. 84,147 28,786 -------- -------- Net decrease in cash and cash equivalents.............................. (18,294) (2,781) Cash and cash equivalents at beginning of period... 22,415 6,016 -------- -------- Cash and cash equivalents at end of period......... $ 4,121 $ 3,235 ======== ======== 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 of Dollar Tree Stores, Inc. and subsidiaries (the "Company") at September 30, 1996, and for the three- and nine-month periods then ended, are unaudited and reflect all adjustments (consisting only of normal recurring adjustments) which are, in the opinion of management, necessary for a fair presentation of the financial position and operating results for the interim period. The condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto, together with management's discussion and analysis of financial condition and results of operations for the year ended December 31, 1995, contained in the Company's Annual Report on Form 10- K. The results of operations for the three- and nine-month periods ended September 30, 1996 are not necessarily indicative of the results to be expected for the entire year ending December 31, 1996. 2. ACQUISITION OF DOLLAR BILLS, INC. On January 31, 1996, the Company acquired all of the outstanding stock of Dollar Bills, Inc. ("Dollar Bills" ), formerly known as Terrific Promotions, Inc., which owned and operated 136 discount variety stores under the name Dollar Bill$, a distribution center in the Chicago area and a wholesale division. The acquisition is accounted for by the purchase method of accounting. Amounts shown in these financial statements include the aggregate purchase price and the relative fair values of the assets and liabilities of Dollar Bills. The Company financed the acquisition through borrowings under a development facility with its commercial lenders, which, together with its working capital facility, was refinanced into a $135 million revolving credit facility on September 27, 1996 (see note 3). Goodwill, which represents the excess of purchase price over fair value of net assets acquired, is amortized on a straight line basis over 25 years. The Company assesses the recoverability of this intangible asset by determining whether the amortization of the goodwill balance over its remaining life can be recovered through undiscounted future operating cash flows of the acquired organization. 3. LONG-TERM DEBT On September 27, 1996, the Company entered into a credit agreement with its banks which provides for a $135 million revolving credit facility to be used for working capital, letters of credit, and development needs, bearing interest at the agent bank's prime rate or LIBOR plus a spread, at the Company's option. Currently, the interest rate is approximately 6.6%. The credit facility is secured by the Company's assets. The agreement, among 6 other things, requires the maintenance of certain specified ratios, restricts the amount of capital expenditures, restricts the payments of cash dividends and other distributions, prohibits the incurrence of certain new indebtedness, prohibits a change in control, and establishes certain minimum beneficial ownership requirements of the founding shareholders. The maturity date of the facility is May 31, 2000. The facility must be paid down to a specified amount for at least 30 consecutive days at any time between December 1 and March 1 of each year. For 30 days during the period from December 1, 1996 to March 1, 1997, the facility must be paid down to $40 million. 4. STOCK SPLIT AND NET INCOME PER SHARE In connection with a stock dividend authorized by the Board of Directors, the Company issued one-half share for each outstanding share of Common Stock, payable April 19, 1996 to shareholders of record as of April 5, 1996. All share and per share data in these financial statements and accompanying notes have been retroactively adjusted to reflect this dividend, having the effect of a three-for-two stock split. Primary net income per share has been computed by dividing net income by the weighted average number of common shares and common share equivalents outstanding. Common share equivalents include the weighted average number of outstanding stock options and warrants after applying the treasury method. The market price used in applying the treasury method was $15.00 per share, restated to $10.00 per share due to the stock split, through March 6, 1995 and the closing market price of the stock at the end of each week thereafter. The fully diluted computation was based on the greater of the average market price of the stock at the end of each week in the period or the market price at the end of the period. Net income per share was the same using either primary or fully diluted shares and share equivalents. All amounts have been adjusted to reflect the stock split. 5. STOCK OPTION PLAN, STOCK INCENTIVE PLAN, EMPLOYEE STOCK PURCHASE PLAN AND UNATTACHED WARRANTS The Company maintains a stock option plan ("SOP") which was established on December 16, 1993 and a stock incentive plan ("SIP") which was established on January 1, 1995. No additional shares may be granted under the SOP and, under the terms of the SIP, options for no more than 270,000 shares of common stock may be granted in any calendar year. At September 30, 1996 and 1995, options for the following numbers of shares (restated for the stock split) were outstanding under each plan: Options for Shares Outstanding at Exercise PLAN September 30, 1996 September 30, 1995 Price/Range ---- ------------------ ------------------ ------------- SOP........ 342,456 613,254 $ 2.90 SIP........ 480,091 178,950 $10.00 - 33.50 The options above include options for 227,735 shares, net of lapses and cancellations, granted during the second quarter of 1996 and 9,500 shares 7 granted during the third quarter of 1996 which are not included in the earnings per share calculation. On January 1, 1995, the Company also established The Dollar Tree Stores, Inc. Employee Stock Purchase Plan (the "ESPP"). The Company reserved 225,000 shares of common stock for future issuance under the ESPP. The ESPP enables eligible employees, as defined in the ESPP, to buy shares of common stock for 85% of fair market value on the first day or the last day of the applicable offering period, whichever is lower. As of November 8, 1996, 9,168 shares (post-split) have been purchased under the ESPP. Additionally, in 1993 and 1994, the Company issued unattached warrants to purchase a total of 2,482,178 shares of Common Stock to certain shareholders. These warrants carry an exercise price of $1.93 and may be exercised upon the occurrence of certain events. The Company adopted the provisions of SFAS No. 123, Accounting for Stock- Based Compensation, as of January 1, 1996. 6. REGISTRATION STATEMENT FILED ON FORM S-3 The Company sold 750,000 shares of Common Stock on June 10, 1996, pursuant to a registration statement filed on Form S-3 under the Securities Act of 1933. In connection with this offering, the Company received approximately $25.3 million, net of offering expenses. The Company used the proceeds of the offering to repay its 9% Senior and Junior Subordinated Notes and pay down its development facility. 7. DOLLAR TREE STORES, INC. AND SUBSIDIARIES AND DOLLAR BILLS INC. UNAUDITED CONDENSED CONSOLIDATED PROFORMA INCOME STATEMENT The following unaudited pro forma financial information of the Company is based on the historical Consolidated Financial Statements of the Company for the year ended December 31, 1995 and for the nine months ended September 30, 1996 adjusted to give effect to the Company's acquisition of Dollar Bills on January 31, 1996. The unaudited pro forma condensed consolidated income statements for the year ended December 31, 1995 and the nine months ended September 30, 1996 give effect to the transactions described as if they had occurred on January 1, 1995 and January 1, 1996, respectively. The pro forma adjustments are based upon currently available information and upon certain assumptions that management of the Company believes are reasonable. Final purchase adjustments may differ from the pro forma adjustments herein. The pro forma financial information is presented for informational purposes and does not purport to represent what the Company's actual results of operations would have been if the transaction described had been consummated on January 1, 1995 (for the year ended December 31, 1995) or on January 1, 1996 (for the nine months ended September 30, 1996). The pro forma financial information should be read in conjunction with the related Notes, "Management's Discussion and Analysis of Financial Condition and Results of Operations," and the Consolidated Financial Statements of the Company and the Notes thereto and the Financial Statements of Dollar Bills and 8 the Notes thereto incorporated by reference. The acquisition of Dollar Bills has been accounted for by the purchase method of accounting. Accordingly, the Company established new accounting basis for the assets and liabilities of Dollar Bills based upon the relative fair values thereof and the aggregate purchase price paid by the Company. These values are reflected in the Company's September 30, 1996 condensed consolidated balance sheet. The unaudited pro forma condensed consolidated income statements do not purport to be indicative of the results that would have occurred had the transaction taken place at the beginning of the period presented or of future results.