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 MARCH 31, 1997
( ) 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 May 13, 1997, there were 26,011,182 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
March 31, 1997 and December 31, 1996.................... 3
Condensed Consolidated Income Statements
Three months ended March 31, 1997 and 1996.............. 4
Condensed Consolidated Statements of Cash Flows
Three months ended March 31, 1997 and 1996.............. 5
Notes to Condensed Consolidated Financial Statements..... 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS................ 7
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS......................................... 10
ITEM 5. OTHER INFORMATION......................................... 11
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.......................... 11
SIGNATURES.......................................... 12
DOLLAR TREE STORES, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
(Unaudited)
March 31, December 31,
1997 1996
------------ ------------
ASSETS
Current assets:
Cash................................................................ $ 4,354 $ 2,987
Accounts receivable................................................. 928 1,855
Merchandise inventories ............................................ 89,967 75,081
Deferred tax asset ................................................. 2,150 2,002
Prepaid expenses and other current assets .......................... 3,494 4,028
------- -------
Total current assets............................................ 100,893 85,953
------- -------
Property and equipment, net.............................................. 42,788 36,035
Deferred tax asset....................................................... 1,965 1,947
Goodwill, net ........................................................... 45,924 46,405
Other assets, net........................................................ 754 759
------- -------
TOTAL ASSETS.................................................... $192,324 $171,099
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current installments of
revolving credit facility...................................... $ 4,500 $ 0
Accounts payable ................................................... 32,813 35,296
Accrued liabilities ................................................ 12,236 14,260
Income taxes payable................................................ 1,502 12,607
Current installments of obligations
under capital leases............................................. 295 302
------- -------
Total current liabilities....................................... 51,346 62,465
------- -------
Revolving credit facility, excluding
current installments.................................................. 30,000 3,000
Obligations under capital leases,
excluding current installments........................................ 981 1,051
Other liabilities........................................................ 3,658 2,993
------- -------
Total liabilities............................................... 85,985 69,509
------- -------
Subsequent event (note 3)
Shareholders' equity:
Common stock, par value $0.01. Authorized
100,000,000 shares, 25,959,379 shares issued and
outstanding at March 31, 1997 and 25,898,172 shares
issued and oustanding at Dec. 31, 1996............................ 260 259
Additional paid-in capital.......................................... 32,740 31,555
Retained earnings................................................... 73,339 69,776
------- -------
Total shareholders' equity...................................... 106,339 101,590
------- -------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY...................... $192,324 $171,099
======= =======
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
March 31,
1997 1996
-------- ---------
Net sales ........................................................... $117,746 $ 84,975
Cost of sales............................................................ 76,455 55,905
------ ------
Gross profit.................................................... 41,291 29,070
------ ------
Selling, general and administrative expenses:
Operating expenses.................................................... 32,116 24,288
Depreciation and amortization......................................... 2,932 2,212
------ ------
Total selling, general
and administrative expenses................................ 35,048 26,500
------ ------
Operating income......................................................... 6,243 2,570
Interest expense......................................................... 450 1,069
------ ------
Income before income taxes............................................... 5,793 1,501
Provision for income taxes............................................... 2,230 578
------ ------
Net income...................................................... $ 3,563 $ 923
====== ======
Net income per share .................................................... $ 0.12 $ 0.03
====== ======
Weighted average number of common shares and common share equivalents
outstanding (note 2):
Primary ........................................................ 28,775 27,795
------ ------
Fully diluted................................................... 28,738 27,866
------ ------
See accompanying Notes to Condensed Consolidated Financial Statements
4
DOLLAR TREE STORES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Three Months Ended
March 31,
1997 1996
-------- --------
Cash flows from operating activities:
Net income.............................................................. $ 3,563 $ 923
-------- -------
Adjustments to reconcile net income to net cash
used in operating activities:
Depreciation and amortization........................................ 2,932 2,212
Loss on disposal of property and equipment .......................... 25 60
Provision for deferred income taxes.................................. (166) (58)
Changes in assets and liabilities increasing
(decreasing) cash and cash equivalents,
(1996 shown net of effects resulting from
purchase of Dollar Bills, Inc.):
Accounts receivable............................................... 927 293
Merchandise inventories........................................... (14,886) (15,891)
Prepaid expenses and other current assets......................... 534 (325)
Other assets ..................................................... 452 (221)
Accounts payable.................................................. (2,483) 5,312
Accrued liabilities............................................... (2,024) (1,597)
Income taxes payable.............................................. (10,246) (7,932)
Other liabilities................................................. 665 33
-------- -------
Total adjustments................................................ (24,270) (18,114)
-------- --------
Net cash used in operating activities ........................... (20,707) (17,191)
-------- --------
Cash flows from investing activities:
Capital expenditures ................................................... (9,229) (4,417)
Payment for purchase of Dollar Bills, Inc.,
net of cash acquired................................................... 0 (52,209)
-------- --------
Net cash used in investing activities............................ (9,229) (56,626)
-------- --------
Cash flows from financing activities:
Proceeds from development facility...................................... 0 52,630
Proceeds from revolving credit facility................................. 68,200 0
Repayment of revolving credit facility and facility fees................ (37,147) 0
Net change in notes payable to bank..................................... 0 11,600
Principal payments under capital lease obligations...................... (77) (138)
Proceeds from options exercised and purchase
of shares under ESPP................................................... 327 426
-------- -------
Net cash provided by financing activities........................ 31,303 64,518
-------- -------
Net increase (decrease) in cash
and cash equivalents.................................................... 1,367 (9,299)
Cash and cash equivalents at beginning of period......................... 2,987 22,415
-------- -------
Cash and cash equivalents at end of period............................... $ 4,354 $ 13,116
======== =======
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 March 31, 1997, and for the three-month
period 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, 1996, contained in the
Company's Annual Report on Form 10-K. The results of operations for the three-
month period ended March 31, 1997 are not necessarily indicative of the results
to be expected for the entire year ending December 31, 1997.
2. 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 original terms of the SIP, options for no more than 270,000 shares of common
stock may be granted in any calendar year. This restriction on the number of
shares granted in any one year was removed by the Board of Directors in a
unanimous consent signed March 18, 1997.
At March 31, 1997 and 1996, options for the following numbers of shares
were outstanding under each plan:
Options for Shares Outstanding at Exercise
PLAN March 31, 1997 March 31, 1996 Price/Range
---- -------------- -------------- -------------
SOP..... 273,445 432,328 $ 2.90
SIP..... 776,692 264,888 $10.00 - 40.50
The options above include options for 306,200 shares, net of lapses and
cancellations, granted during the first quarter of 1997 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 May 13, 1997, 14,292 shares have
6
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 will adopt Statement of Financial Accounting Standards No. 128,
"Earnings Per Share," for the year ended December 31, 1997. This accounting
pronouncement replaces the calculation and presentation of primary earnings per
share with basic earnings per share and of fully diluted earnings per share with
diluted earnings per share. Under SFAS No. 128, the pro forma basic earnings per
share would have been $0.14 for the three months ended March 31, 1997.
The Company believes that diluted earnings per share under SFAS No. 128 will
approximate the Company's fully diluted earnings per share as reported.
3. ISSUANCE OF DEBT
On April 30, 1997, the Company issued $30 million of Senior Unsecured Notes
(the "Notes") due April 30, 2004. The proceeds will be used to repay existing
indebtedness and for general corporate purposes, including capital expenditures.
The principal amount of the Notes is payable in five equal annual installments
of $6 million beginning May 2000. Interest is payable semi-annually at a fixed
rate of 7.29%. The Notes contain restrictive covenants which, among other
things, require the Company to maintain certain financial ratios. The Notes rank
pari passu with all other senior unsecured indebtedness.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
FORWARD LOOKING STATEMENTS. The Company has made in this Report, and from time
to time may otherwise make, forward looking statements regarding the Company's
operations, economic performance, and financial condition. These statements are
recognizable by the incorporation of words such as "believe," "anticipate" and
"expect." Such forward looking statements are subject to various risks and
uncertainties, as discussed throughout this Report, and as summarized in the
Company's 1996 Annual Report on Form 10-K under the caption "Management's
Discussion and Analysis of Financial Condition and Results of Operations-Forward
Looking Statements."
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THE THREE MONTHS ENDED MARCH 31, 1997 AND 1996
RESULTS OF OPERATIONS AND GENERAL COMMENTS
Net sales increased $32.8 million, or 38.6%, to $117.7 million for the
three months ended March 31, 1997, from $85.0 million for the three months ended
March 31, 1996. Of this increase, (i) approximately 50.3%, or $16.5 million, was
attributable to stores opened in 1996 and 1997 which are not included in the
Company's comparable store net sales calculation, (ii) approximately 29.6%, or
$9.7 million, was attributable to the acquisition of 136 Dollar Bills stores on
January 31, 1996, and (iii) approximately 20.1%, or $6.6 million, was
attributable to comparable store net sales growth, which represented a 10.9%
increase over comparable store net sales in the corresponding quarter of the
prior period. Dollar Bills stores are included in the comparable store net sales
percentage calculation for the full three-month period, beginning January 1,
of each respective year. Because substantially all the Company's products
sell for $1.00, the increase in comparable store net sales was a direct
result of increased unit volume. Comparable store net sales were driven
primarily by an earlier Easter shopping season and a strong in-stock
position on seasonal and general merchandise at year-end and throughout the
quarter. The Company opened 30 new stores during the first quarter of 1997,
compared to 24 new stores opened during the first quarter of 1996 (excluding the
addition of 136 Dollar Bills stores in January, 1996).
Management anticipates that the primary source of future sales growth will
be new store openings and, to a lesser degree, sales increases from expanded and
relocated stores and comparable store net sales increases. Although the Company
has experienced significant increases in comparable store net sales
historically, management expects that any increases in comparable store net
sales in the future will be smaller than those experienced historically.
Gross profit, which consists of net sales less cost of sales (including
distribution and certain occupancy costs), increased $12.2 million, or 42.0%, to
$41.3 million in the first quarter of 1997 from $29.1 million in the first
quarter of 1996. As a percentage of net sales, gross profit increased to 35.1%
from 34.2%, primarily due to improved merchandise costs (including freight) and
improved occupancy and markdown costs as a percentage of net sales, offset by an
increase in distribution costs as a percentage of net sales. Merchandise costs
improved in part due to the change in merchandise mix, year over year, in the
Dollar Bills stores, which were still operating with a heavier consumable
product emphasis in the first quarter of 1996. Throughout 1996, the merchandise
mix at Dollar Bills stores was changed to more closely resemble the mix at
Dollar Tree stores, therefore management does not anticipate this level of
improvement in merchandise costs in the future. Distribution costs increased as
a result of start-up costs inherent in the installation of the Company's new
Warehouse Management System. This new materials handling technology was
installed in all three distribution centers during the first quarter, causing
some slight disruption in merchandise flow. Management expects some minor
disruption to continue into the second quarter, but believes it will not
8
materially affect the Company's results of operations.
Selling, general and administrative expenses ("SGA"), which include
operating expenses and depreciation and amortization, increased $8.5 million, or
32.3%, to $35.0 million in the first quarter of 1997 from $26.5 million in the
first quarter of 1996, and decreased as a percentage of net sales to 29.8% from
31.2% during the same period. This decrease resulted primarily from reduced
payroll costs as a percentage of net sales due to the strong comparable store
net sales increase. In addition, the decrease in SGA is partially due to the
non-recurring expenses last year related to the acquisition of Dollar Bills,
Inc., when the Company's operating expenses, not including amortization,
increased by approximately $1.3 million due to the acquisition. Amortization of
goodwill relating to the acquisition amounted to $0.5 million for the first
quarter of 1997.
Operating income increased $3.7 million, or 142.9%, to $6.2 million for the
first quarter of 1997 from $2.6 million for the comparable period in 1996, and
increased as a percentage of net sales to 5.3% from 3.0% during the same period
for the reasons noted above.
INTEREST EXPENSE
Interest expense decreased $0.6 million in the first quarter of 1997
compared to the first quarter of 1996 to $0.5 million from $1.1 million during
the same period. This decrease is primarily a result of lower levels of debt in
the current year compared to early 1996, when the Company had increased
borrowings related to the purchase of Dollar Bills, Inc.
LIQUIDITY AND CAPITAL RESOURCES
The Company's capital requirements result primarily from capital
expenditures related to new store openings and working capital requirements
related to new and existing stores. The Company's working capital requirements
for existing stores are seasonal in nature and typically reach their peak near
the end of the third and the beginning of the fourth quarter of the year.
Historically, the Company has met its seasonal working capital requirements for
its existing stores and funded its store expansion program from internally
generated funds and borrowings under its credit facilities.
In January, 1997, the Company completed the purchase of approximately 50
acres of land in Chesapeake, Virginia, on which it is constructing an expanded
headquarters and distribution center facility, to replace its current Norfolk
facility. The distribution center will have advanced materials handling
technologies, including a new automated conveyor and sortation system.
Management believes that upon completion of this facility, the Company's
capacity to serve stores will increase to approximately 1,600 units, up from its
current capacity of approximately 1,000 units. This Store Support Center project
and related costs are expected to require an investment of approximately $34
million. The Company believes that the facility will be operational in early
9
1998, when it is needed to support continued growth. There can be no assurance,
however, that no delays will be experienced in opening the distribution
center, or that there will be no complications in the integration
of the new automation system. Any such delays or complications may result in
significant interruption in the distribution of merchandise and materially
adversely affect the Company's business and results of operations.
During the first three months of 1997 and 1996, net cash used in operations
was $20.7 million and $17.2 million, respectively, primarily used to build
inventory levels. During the first three months of 1997 and 1996, net cash used
in investing activities was $9.2 million and $56.6 million, respectively, the
decrease primarily due to payment for the acquisition of Dollar Bills in 1996.
In 1997, net cash used in investing activities was in payment of capital
expenditures. Net cash provided by financing activities was $31.3 million and
$64.5 million during the first three months of 1997 and 1996, the decrease
primarily attributable to borrowings incurred in 1996 to fund the acquisition of
Dollar Bills. In 1997, net cash provided by financing activities was primarily
used to fund seasonal working capital needs.
On April 30, 1997, the Company issued $30 million of Senior Unsecured Notes
(the "Notes") due April 30, 2004. The proceeds will be used to repay existing
indebtedness and for general corporate purposes, including capital expenditures.
The principal amount of the Notes is payable in five equal annual installments
of $6 million beginning May 2000. Interest is payable semi-annually at a fixed
rate of 7.29%. The Notes contain restrictive covenants which, among other
things, require the Company to maintain certain financial ratios. The Notes rank
pari passu with all other senior unsecured indebtedness.
NEW ACCOUNTING PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board issued SFAS No.
128, EARNINGS PER SHARE. SFAS 128 establishes standards for computing and
presenting earnings per share and is effective for financial statements issued
for periods ending after December 15, 1997. It replaces the calculation and
presentation of primary earnings per share with basic earnings per share and the
calculation and presentation of fully diluted earnings per share with diluted
earnings per share. The pro forma basic earnings per share calculation under
SFAS No. 128 would have been $0.14 for the three months ended March 31, 1997.
The calculation and presentation of diluted earnings per share under SFAS No.
128 is not expected to differ materially from the Company's reported fully
diluted earnings per share amounts.
10
PART II . OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
The Company has previously reported in its 1996 Annual Report on Form 10-K
litigation in the state and federal courts of Illinois involving Michael and
Pamela Alper and a corporation they control. There have been no material
developments regarding this matter in 1997.
Additionally, the Company is a party to ordinary routine litigation and
proceedings incidental to its business, including certain matters which may
occasionally be asserted by the U.S. Consumer Product Safety Commission, none of
which is individually or in the aggregate material to the Company.
ITEM 5. OTHER INFORMATION.
On March 18, 1997, the Board of Directors amended the Company's Stock
Incentive Plan to remove the annual limitations on the number of options
issuable by the Company. On the same date, the Company granted to employees
options to purchase 303,700 shares of the Company's Common Stock.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
The following documents, filed as exhibits 10.1, 10.2 and 10.3 to the
Company's Annual Report on Form 10-K for the fiscal year ended December 31,
1996, are incorporated herein by reference.
10.1 Purchase and Sale Agreement by and among Volvo Cars of North America,
Inc., the Company, Dollar Tree Properties, Inc. and Dollar Tree Distribution,
Inc.
10.2 First Amendment to Amended and Restated Revolving Credit Agreement by
and among the Company, Dollar Tree Distribution, Inc., Dollar Tree Management,
Inc. and certain Banks and the First National Bank of Boston as Agent for such
Banks.
10.3 First Amendment to the Company's Stock Incentive Plan.
The following documents are filed herewith:
10.4 $30 million, 7.29% Senior Guaranteed Notes, due April 30, 2004 (the
"Notes").
10.5 Composite Conformed Copy of Note Agreements by Dollar Tree Distribution,
Inc. and the Company, regarding the Notes.
10.6 Guaranty Agreement by Dollar Tree Management, Inc. regarding the Notes.
(b) Reports on Form 8-K.
The Company did not file any reports on Form 8-K during the quarter.
11
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: May 13, 1997
DOLLAR TREE STORES, INC.
By: /s/ H. Ray Compton
H. Ray Compton
Executive Vice President and
Chief Financial Officer
(principal financial and accounting officer)
12