SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
( X ) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
COMMISSION FILE NO.0-25464
DOLLAR TREE STORES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
VIRGINIA 54-1387365
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
500 VOLVO PARKWAY, CHESAPEAKE, VA 23320
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (757) 321-5000
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
NONE NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
COMMON STOCK (PAR VALUE $.01 PER SHARE)
(TITLE OF CLASS)
Indicate by check mark whether Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes (X) No ( )
Indicate by check mark if disclosure of delinquent filers pursuant to item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
form 10-K. (X)
The aggregate market value of Common Stock held by non-affiliates of the
Registrant on March 24, 1998 was $1,544,759,624 based on a $50 27/32 average of
the high and low sales prices for the Common Stock on such date. For purposes of
this computation, all executive officers and directors have been deemed to be
affiliates. Such determination should not be deemed to be an admission that such
executive officers and directors are, in fact, affiliates of the Registrant.
The number of shares outstanding of the Registrant's Common Stock on March
24, 1998 was 39,214,709 shares.
DOCUMENTS INCORPORATED BY REFERENCE
The information called for in Part III is incorporated by reference to the
definitive Proxy Statement for the Annual Meeting of Stockholders of the Company
to be held June 4, 1998, which will be filed with the Securities and Exchange
Commission not later than 120 days after January 1, 1998.
DOLLAR TREE STORES, INC.
TABLE OF CONTENTS
PAGE
PART I
Item 1. BUSINESS....................................................... 3
Item 2. PROPERTIES..................................................... 8
Item 3. LEGAL PROCEEDINGS.............................................. 9
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS............ 10
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS.......................................... 10
Item 6. SELECTED FINANCIAL DATA........................................ 10
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.......................... 13
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK..... 18
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.................... 19
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE.......................... 34
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT............. 35
Item 11. EXECUTIVE COMPENSATION......................................... 35
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT............................................... 35
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS................. 35
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS
ON FORM 8-K.................................................. 35
SIGNATURES..................................................... 36
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
"Management's Discussion and Analysis of Financial Condition and Results of
Operation--Forward Looking Statements."
PART I
ITEM 1. BUSINESS
GENERAL: Dollar Tree Stores, Inc. ("Dollar Tree" or the "Company") is the
leading operator of discount variety stores offering merchandise at the $1.00
price point. The Company's stores, which are designed to be the modern day
equivalent of the traditional variety store, offer a wide assortment of quality
everyday general merchandise in many traditional variety store categories,
including housewares, seasonal goods, food, toys, health and beauty aids, gifts,
party goods, stationery, books, hardware, and other consumer items. Virtually
all items are sold for $1.00 or less, with the exception of a small number of
value items sold in a few select stores. As of December 31, 1997, the Company
operated 887 stores, principally in strip centers and malls, in 26 states in the
Southeastern, Midwestern, Mid-Atlantic, Southcentral and Northeastern United
States.
The Company was incorporated under the laws of Virginia in 1986 as Only One
Dollar, Inc. and changed its name to Dollar Tree Stores, Inc. in 1993. In 1991,
the executive officers of the Company effected a number of strategic changes,
including (i) shifting the Company's merchandising focus away from closeout
merchandise towards its current emphasis on providing selection and value in
traditional variety store categories, (ii) focusing its expansion strategy on
strip center locations, (iii) accelerating the Company's expansion program and
(iv) improving the depth of the management team and breadth of operational
controls. The Company began trading on the NASDAQ National Market under the
symbol DLTR in March 1995. In January 1996, the Company acquired all of the
outstanding common stock of Dollar Bills, Inc., which operated 136 discount
variety stores similar to Dollar Tree under the name of "Dollar Bill$", as well
as a distribution center and wholesale division in the Chicago, Illinois area.
During 1997, the Company built a new Store Support Center in Chesapeake,
Virginia, to increase its capacity to serve its stores.
The Company's strategy is to continue to expand the existing store base by
concentrating on strip-center locations anchored by strong mass merchandisers
such as Wal-Mart, Kmart and Target, and selected mall-based locations. In
addition, the Company will remain focused on the following key business
initiatives: (i) offering value to the customer at the $1.00 price point; (ii)
consistently changing the merchandise mix to offer new and exciting products;
(iii) emphasizing performance at the individual store level; (iv) continually
refining inventory and cost-control measures; (v) retaining a disciplined,
cost-sensitive approach to site selection for new stores; and (vi) capitalizing
on Company management's retail experience.
GREENBRIER STORE SUPPORT CENTER: The Company recently replaced its Norfolk
distribution facility and headquarters with a new Store Support Center, located
in Chesapeake, Virginia, consisting of a distribution center and headquarters
facility. The new distribution center contains advanced materials handling
technologies, including a new automated conveyor and sorting system,
radio-frequency inventory tracking equipment, improved racking and specialized
information systems designed to improve inventory movement and controls. The
distribution facility became operational in January 1998. The distribution
center is currently servicing 235 stores, and management anticipates it will
service more than 500 stores by the end of 1998, with an expected ultimate
capacity of 800 stores.
CURRENT DEVELOPMENTS: In March 1998, the Company purchased approximately 43
acres of land in Olive Branch, Mississippi, for the purpose of building a new
distribution center to replace the existing facility located in Memphis,
Tennessee. The new facility will be modeled after the recently completed
Chesapeake distribution center and will contain similar advanced materials
handling technologies. The Olive Branch facility will be approximately 425,000
square feet and is expected to require an investment of approximately $20
million. Management believes that, upon completion of this facility, the
Company's capacity to service stores will increase to approximately 2,000
stores. The Company believes that the facility will be operational in early
1999.
3
BUSINESS STRATEGY: The Company's goal is to continue its leadership position in
the $1.00 price point segment of the discount retail industry. Factors
contributing to the success of the Company's operations include:
VALUE OFFERING. Dollar Tree's management strives to exceed its customers'
expectations of the range and quality of products that can be purchased for
$1.00. Management believes that many of the items Dollar Tree sells for $1.00
are typically sold for higher prices elsewhere. The Company is able to offer
such value in part by purchasing a substantial portion of its products directly
from foreign manufacturers, allowing the Company to pass on savings to the
customer. In addition, direct relationships with both domestic and foreign
manufacturers permit broad product selection, customized packaging and
frequently the ability to obtain larger sizes and higher package quantities.
CHANGING MERCHANDISE MIX. The Company supplements its wide assortment of
quality everyday core merchandise with a changing mix of new and exciting
products, including seasonal goods, such as summer toys, back-to-school products
and Christmas wrapping paper and, to a limited extent, selected closeout
merchandise. Closeouts comprise no more than 15% of merchandise purchased at
cost. The Company also takes advantage of the availability of lower priced,
private label goods, which are comparable to national name brands.
STRONG AND CONSISTENT STORE LEVEL ECONOMICS. The Company believes that its
attractive store level economics and the flexibility of its real estate strategy
provide it with a wide range of real estate opportunities and will facilitate
its continued expansion. The Company's stores have historically been profitable
within the first full year of operations, with an average store level operating
income of approximately $163,000 (approximately 22% of net sales) for stores
whose first full year of operations was 1997. In addition, the operating
performance of the Company's stores has been very consistent, with over 90% of
the Company's stores opened for the entire year having store level operating
income margins in excess of 15% for 1997.
COST CONTROL. Given the Company's pricing structure, Dollar Tree believes
that maintaining sufficient margins and tight control over store expenses,
corporate expenses and inventories is critical to its success. Dollar Tree
closely manages both retail inventory shrinkage and retail markdowns of
inventory, limiting each to an average of less than 2.5% of annual net sales
over the last five years. In the past five years, Dollar Tree has maintained
gross profit margins in the 36.5% to 37.5% range and increased its operating
income margin from 11.2% (excluding recapitalization expenses) to 12.9%. In
1996, as a result of the Dollar Bills acquisition, gross profit margin was
slightly impacted by a shift in merchandise mix toward higher levels of
domestic, consumable merchandise (for instance, food and health and beauty
aids), which generally carry a higher merchandise cost. In 1997, gross profit
margin returned to levels experienced prior to the acquisition.
EXPERIENCED RETAIL MANAGEMENT TEAM. Each of the Company's three executive
officers, Macon F. Brock, Jr., J. Douglas Perry and H. Ray Compton, has between
19 and 29 years of experience in the retail industry, and they have worked
together for the past 19 years. Additionally, the Company's nine Vice Presidents
have significant experience in their areas of operational expertise.
SITE SELECTION AND STORE LOCATIONS: The Company maintains a disciplined, cost
sensitive approach to site selection, favoring strip centers and selected
enclosed malls. In the last five years, Dollar Tree has opened primarily strip
center based stores, which have historically required lower initial capital
investment and generated higher operating margins than mall stores. The Company
favors opening new stores in strip center locations anchored by strong mass
merchandisers such as Wal-Mart, Kmart and Target, whose target customers
management believes are similar to those of Dollar Tree. The Company has also
begun to open more stores in neighborhood centers anchored by large grocery
retailers. Dollar Tree stores have been successful in major metropolitan areas,
mid-sized cities and small towns with populations under 25,000, and management
believes that Dollar Tree stores can perform well in a variety of locations.
Management believes that its stores have a relatively small shopping radius,
which permits the concentration of multiple stores in a single market. The
Company's ability to open new stores is contingent upon, among other factors,
locating suitable sites and negotiating favorable lease terms.
The prototype for Dollar Tree stores is currently between 4,000 to 4,500
square feet per store, of which approximately 85% to 90% represents selling
space. This represents a substantial increase over the company-wide average of
approximately 3,500 square feet per store prior to the introduction of the
current prototype.
4
MERCHANDISING AND STORE FORMAT: Dollar Tree's primary goal in merchandising is
to offer a wide assortment of products in traditional variety store categories
which exceed customer expectations of the value available for $1.00. The Company
seeks to accomplish this goal by: (i) offering a balanced mix of everyday core
products and changing products in traditional variety store categories, (ii)
maintaining a disciplined, global purchasing program and (iii) emphasizing the
effective presentation of merchandise in the stores.
MERCHANDISE MIX. Management believes its merchandise mix differentiates
Dollar Tree from other discount variety stores selling at the $1.00 price point.
The Company's stores offer a well stocked selection of core and changing
products within the traditional variety store categories, although the actual
items and brands offered at any one time will vary. The traditional variety
store categories featured in Dollar Tree stores include housewares, seasonal
goods, food, toys, health and beauty aids, gifts, party goods, stationery,
books, hardware, and other consumer items.
Dollar Tree utilizes seasonal merchandise and, to a limited extent,
selected closeout merchandise to add to the variety and freshness in the stores'
merchandise. Seasonal goods include summer toys, back-to-school products and
Christmas wrapping paper. The Company purchases closeout merchandise, which
management believes can be effective in generating recognized value and
excitement, as opportunities present themselves, but limits the percentage of
total inventory represented by closeout merchandise to less than 15%.
When the opportunity presents itself, the Company purchases items which it
prices at two for $1.00. These items provide sufficient value to the customer
without compromising the Company's margin goals. These items are the only items
in the store on which a price tag is used, and customers may buy only one item
if desired.
During 1996, the merchandise mix at the Dollar Bills stores was adjusted to
more closely reflect the broad variety traditionally offered by Dollar Tree. In
turn, the merchandise mix at the Dollar Tree stores was supplemented with
increased domestic consumable products of the type normally carried at the
Dollar Bills stores.
PURCHASING. Management believes that its disciplined purchasing program,
its relationships with its suppliers and the exclusive focus of its buying power
at the $1.00 price point contribute to its successful purchasing strategy.
Dollar Tree believes that offering perceived as well as real value to its
customers while maintaining target merchandise margins in its purchasing program
is critical to its success.
The Company purchases merchandise from 650 to 750 vendors annually, buying
both directly from manufacturers and indirectly from trading companies and
brokers. No vendor accounted for 10% or more of total merchandise purchased in
any of the last five calendar years. New vendors are used frequently to offer
competitive, yet varied, product selection and to maintain high levels of value.
The Company deals with its suppliers principally on an order-by-order basis
and has no long-term purchase contracts or other contractual assurance of
continued supply or pricing. While there can be no assurance of a continuing and
increasing supply of quality merchandise suitable to be priced by the Company at
$1.00, management believes that such merchandise will be available in sufficient
quantities to meet the Company's plans for future growth.
IMPORTS. In 1996 and 1997, the Company imported approximately 32% and 34%,
respectively, of its merchandise based on cost and approximately 35% and 38%,
respectively, of its merchandise based on retail directly from vendors located
abroad, primarily in Hong Kong and Taiwan (through which the Company's Chinese
imports flow), Thailand, Italy, Mexico and Indonesia. The Company expects
imports to continue to account for approximately 35% to 40% of total purchases
at retail. In addition, the Company believes that a substantial portion of the
goods the Company purchases from domestic vendors is indirectly imported from
foreign countries.
China is the source for a substantial majority of the Company's direct
imports and, the Company believes, is also the largest source of its indirect
imports. The Company's imports from China are generally subject to favorable
United States import duties because China is currently afforded "most favored
nation" ("MFN") status by the United States. The MFN status of China is reviewed
annually by the United States government and is currently extended through July
3, 1998. As a result of outstanding trade and other issues between the United
States and China, there is
5
significant opposition in the U.S. Congress to the renewal of MFN status for
China. Loss of China's MFN status could impose significantly higher purchasing
costs on the Company because of increased tariffs on Chinese goods.
The countries of Southeast Asia are involved in an emerging economic crisis
characterized by currency devaluations, rising interest rates, deteriorating
economic growth and declining capital markets. An extended period of financial
pressure on overseas markets or fluctuations in the value of the Chinese or Hong
Kong currency may result in disruptions in the sourcing of goods, increases in
the cost of goods, reductions in the quality of goods, product shortages,
nonshipment of goods or strikes.
The Company believes that it could find alternative sources of supply in
response to an increase in tariffs, duties or other import costs or to an
interruption or delay in the supply of goods from foreign sources. However, the
transition to alternative sources may not occur in time to meet Company demands
and products may be of lesser quality and/or more expensive than those currently
purchased by the Company, which could have a material adverse effect on the
Company's business and results of operations.
VISUAL MERCHANDISING. Management believes that the presentation of its
merchandise is critical to communicating value and excitement to its customers.
Stores are attractively designed with the use of vibrant colors, uniform
decorative signage and supportive accent lighting. The stores are bright and
carpeted and provide background music, helping to create an inviting atmosphere
for shoppers. Dollar Tree uses a variety of very adaptable merchandising
fixtures, including slat walls, bins and shelving, and adjustable gift displays
to allow flexibility and the shifting of the merchandise mix to feature seasonal
merchandise. Some of these fixtures have been specifically designed for Dollar
Tree, such as the customized shelf display designed to promote the store's
polyresin and porcelain gift products at the front of the stores. Dollar Tree
maintains a group of Field Merchandise Specialists and Store Display
Coordinators to coordinate visual presentation in stores throughout the chain
and expedite the store opening process. The Company relies on attractive
exterior signage and in-store merchandising as its primary form of advertising
and generally does not utilize other forms of advertising.
Merchandise is displayed in densely stocked bins and shelves and organized
by category according to a standard store layout plan used throughout the chain.
The wide variety, value and freshness of merchandise at the $1.00 price point
and lively appearance of the store create excitement for customers that
management believes results in high store traffic, high sales volume and an
environment which encourages "impulse" purchases. Night stocking and "recovery"
of the stores help maintain the stores' clean and neat appearance as well as
ensure that the maximum amount of merchandise is displayed, particularly in the
busy fourth quarter. The size of the store, standard layout, merchandising by
category, pricing structure and convenient locations combine for a time
efficient shopping experience for the customer.
Centralized check-out at the front of the store and the even-dollar pricing
policy ensure that customers are not kept waiting. The Company does not have a
point-of-sale system, and credit cards are not accepted.
WAREHOUSING AND DISTRIBUTION. Warehousing and distribution are managed centrally
by the Company from its corporate headquarters, which is located on the same
site as its Chesapeake distribution center, constructed in 1997. The new
distribution center contains advanced materials handling technologies, including
a new automated conveyor and sorting system, radio-frequency inventory tracking
equipment, improved racking, and specialized information systems designed to
improve inventory movement and controls. The distribution facility became
operational in January 1998. The distribution center is currently servicing 235
stores, and management anticipates it will service more than 500 stores by the
end of 1998, with an expected ultimate capacity of 800 stores. The Company is
also building a new distribution facility in Olive Branch, Mississippi. See also
"Business-Greenbrier Store Support Center" and "Business-Current Developments."
Substantially all of the Company's inventory is shipped directly from
suppliers to the Company's distribution centers. Dollar Tree's substantial
distribution center capacity allows the Company to receive manufacturers' early
shipment discounts and buy large quantities of goods at favorable prices. Since
the distribution centers maintain back-up inventory and provide weekly delivery
to each store, in-store inventory requirements are reduced and the Company is
able to operate with smaller stores than would otherwise be required. Since many
stores are limited in size, off-hours stocking, as well as off-site storage
space, is utilized to support the store's inventory turnover, particularly
during the busy fourth quarter.
6
Stores receive weekly shipments of merchandise from distribution centers
based on their anticipated inventory requirements for each week and
communication via telephone or electronic mail between store managers and the
distribution group. The Company has the ability to make two weekly deliveries to
high volume stores during the busy Christmas season. The majority of the
Company's inventory is delivered to the stores by contract carriers,
supplemented by the Company's distribution fleet, consisting of approximately 21
leased tractors and 60 owned or leased trailers.
The Company's success depends in large part on the orderly operation of its
receiving and distribution process, which depends, in turn, on adherence to
shipping schedules (especially those from the Far East) and effective management
of the distribution centers. Although management believes that its receiving and
distribution process is efficient and well positioned to support the Company's
expansion plans, there can be no assurance that the Company has anticipated, or
will anticipate all of the changing demands which its expanding operations will
impose on its receiving and distribution system. The delivery of merchandise to
the stores could be disrupted by delays in the opening of the proposed Olive
Branch distribution center, complications in the operations of the Olive Branch
or Chesapeake distribution centers, or in the transition from the Memphis
facility, or events which may be beyond the control of the Company.
TRADEMARKS. The Company is the owner of Federal service mark registrations for
"Dollar Tree," the "Dollar Tree" logo, "1 Dollar Tree" together with the related
design, and "One Price . . . One Dollar," each of which expires in 2003 or
later. A small number of the Company's stores operate under the name "Only
$1.00," for which the Company has not obtained a service mark registration; if
it were required to change the name of these stores, the Company does not
believe that this would have a material adverse effect on its business.
Additionally, with the acquisition of Dollar Bills in January 1996, the Company
became the owner of various Federal service mark registrations, including a
concurrent use registration for "Dollar Bill$" and the related logo which expire
in 2005. During 1997, the Company acquired the rights to use trade names
previously owned by Everything's A Dollar, a former competitor in the $1.00
price point industry. Several trade names were included in the purchase,
including the marks "Everything's $1.00," the registration of which is pending,
and "The Dollar Store," the registration of which expires in 2001. The Company
also occasionally uses various brand names under which it markets products,
although management believes that these brand names are not material to the
Company's operations.
SEASONALITY. The Company has historically experienced and expects to continue to
experience seasonal fluctuations in its net sales, operating income and net
income. See "Management's Discussion and Analysis--Seasonality and Quarterly
Fluctuations."
COMPETITION. The retail industry is highly competitive. The Company's
competitors include mass merchandisers (such as Wal-Mart), discount stores (such
as Dollar General), variety stores (such as Woolworth), closeout stores (such as
Odd Lots and Big Lots) and other $1.00 price point stores. In January 1996, the
Company acquired all of the stock of one of its competitors, Dollar Bills.
Several of the largest operators of discount stores at the $1.00 price point (or
their parent companies) have filed for or emerged from bankruptcy protection in
U.S. bankruptcy court and have closed a number of their stores, while others
have liquidated in bankruptcy, abandoned the $1.00 price point concept, and/or
reconfigured their stores. The Company expects to face increased competition in
the future which could have an adverse effect on its financial results.
EMPLOYEES. The Company employed approximately 13,000 employees at December 31,
1997, approximately 3,200 of whom were full-time and 9,800 part-time. The number
of part-time employees fluctuates depending on seasonal needs. None of the
Company's employees are currently represented by a labor union. On March 31,
1994 and March 20, 1996, the employees of the Company's Norfolk distribution
center voted against union representation by the International Brotherhood of
Teamsters in elections certified by the National Labor Relations Board. Within
the last several months, the Teamsters have actively attempted to organize the
Company's employees at its Chesapeake and Chicago distribution centers. There
can be no assurance that the Company's employees at any of its three
distribution centers will not in the future elect to be represented by a union.
The Company considers its relationship with employees to be good and has not
experienced significant interruptions of operations due to labor disagreements.
7
ITEM 2. PROPERTIES
As of December 31, 1997, Dollar Tree operated 887 stores in 26 states, 652
of which were located in strip centers and 235 of which were located in malls. A
summary of Dollar Tree's historical unit growth by state over the past three
years is presented below (number represents stores open as of the date
indicated):
December 31,
------------------------------
1995 1996 1997
---- ---- ----
SOUTHEAST:
Florida............................. 66 85 96
North Carolina...................... 48 52 61
Georgia............................. 40 50 60
Tennessee........................... 31 37 41
Alabama............................. 26 33 38
South Carolina...................... 23 27 35
Mississippi......................... 12 15 20
MIDWEST:
Michigan............................ 25 49 57
Illinois............................ 1 47 58
Ohio................................ 35 46 49
Indiana............................. 10 27 28
Kentucky............................ 14 15 19
Missouri............................ 3 13 22
Wisconsin........................... 0 7 15
Minnesota........................... 0 3 6
Iowa................................ 0 1 2
MID-ATLANTIC:
Virginia............................ 60 72 84
Pennsylvania........................ 35 45 51
Maryland............................ 20 39 47
West Virginia....................... 8 9 11
Delaware............................ 2 2 3
SOUTHCENTRAL:
Texas............................... 9 16 20
Louisiana........................... 9 12 15
Arkansas............................ 6 9 12
NORTHEAST:
New York............................ 10 16 23
New Jersey.......................... 7 10 14
---- ---- ----
Total................................. 500 737 887
==== ==== ====
Of the 887 Dollar Tree stores open at December 31, 1997, the majority are
located in the Southeastern and Midwestern regions of the United States. The
acquisition of Dollar Bills in 1996 increased the Company's presence primarily
in Illinois, Indiana, Maryland, and Michigan. Additionally, the Company operates
three distribution centers, one each in Chesapeake, Virginia, in Memphis,
Tennessee and in the Chicago, Illinois, area. The Company anticipates expanding
by approximately 200 to 205 stores in 1998.
The Company currently leases all of its existing store locations and
expects that its policy of leasing rather than owning stores will continue as it
expands. The Company's store leases typically provide for a short initial lease
term with options on the part of the Company to extend. Management believes that
this lease strategy enhances the Company's flexibility to pursue various
expansion and relocation opportunities resulting from changing market
conditions. The Company's ability to open new stores is contingent upon locating
satisfactory sites, negotiating favorable leases, obtaining necessary financing
and recruiting and training additional qualified management personnel.
As current leases expire, the Company believes that it will be able either
to obtain lease renewals if desired for present store locations, or to obtain
leases for equivalent or better locations in the same general area. To date, the
Company has not experienced difficulty in either renewing leases for existing
locations or securing leases for suitable locations for new stores. A
substantial majority of the Company's store leases contain certain provisions
related to changes in control of the Company. These provisions may be applicable
in a small number of leases as a result of the public offerings of the Company's
common stock. Based primarily on the
8
Company's belief that it maintains good relations with its landlords, that most
of its leases are at market rents, and that it has historically been able to
secure leases for suitable locations, management believes that these provisions
will not have a material adverse effect on the business or financial position of
the Company.
The Chesapeake distribution center consists of 400,000 square feet; the
Memphis distribution center encompasses 244,000 square feet; and the Chicago
distribution center comprises 250,000 square feet. The Company believes its
distribution centers have the capacity to service 1,600 stores. The Company owns
its Chesapeake Store Support Center, constructed in 1997, and continues to lease
its former Norfolk distribution center. The lease expires in June 2004. The
distribution center in Memphis is also leased; this lease expires in September
2005, with four additional five-year terms available. Additionally, the Company
leases the Chicago distribution center; this lease expires in June 2005, with
certain options to renew.
In March 1998, the Company purchased approximately 43 acres of land in
Olive Branch, Mississippi, for the purpose of building a new distribution center
to replace the existing facility located in Memphis, Tennessee. The new facility
will be modeled after the recently completed Chesapeake distribution center and
will contain similar advanced materials handling technologies. The Olive Branch
facility will be approximately 425,000 square feet and is expected to require an
investment of approximately $20 million. Management believes that, upon
completion of this facility, the Company's capacity to service stores will
increase to approximately 2,000 stores. The Company believes that the facility
will be operational in early 1999.
The Company is liable for rent and pass-through costs under the Norfolk
lease until June 2004. In March 1998, the Company subleased its Norfolk facility
through June 2004 for an annual amount that management expects will at least
equal the Company's annual obligation under the prime lease. In addition, the
Company is liable for rent and pass-through costs under the Memphis lease until
September 2005, at a current annual cost of approximately $702,000. Although the
Company expects to be able to sublease the Memphis facility, no assurance can be
given that an acceptable sublease will be secured.
ITEM 3. LEGAL PROCEEDINGS
On January 31, 1996, the Company bought all of the capital stock of Dollar
Bills, pursuant to a stock purchase agreement. In March and April 1996, Michael
and Pamela Alper (the "Alpers"), former shareholders of Dollar Bills, together
with a corporation they control, filed lawsuits in the state and federal courts
in Illinois, against the Company and one of its employees, relating to the
Dollar Bills transaction. The lawsuits sought to recover compensatory damages of
not less than $10.0 million, punitive damages, attorney's fees and other relief.
The plaintiffs claimed that the Company defrauded the Alpers into selling the
wholesale operations which were owned by Dollar Bills; improperly obtained and
misused confidential and proprietary information; breached the provisions of a
confidentiality agreement and stock purchase agreement relating to the
acquisition; intentionally or negligently misrepresented its intentions with
respect to the wholesale operations; conspired to violate antitrust law; and
violated securities laws.
The Company filed motions to dismiss the litigation in both state and
federal courts. On June 28, 1996, the state court denied the Company's motion to
dismiss. Plaintiffs subsequently dismissed their suit in state court
voluntarily. The Company then appealed the state court's denial of its motion to
dismiss. The Company's appeal was dismissed by the state appellate court on
December 15, 1997 for lack of jurisdiction.
On November 26, 1996, the federal court dismissed all counts of the
plaintiffs' lawsuit against the Company and the co-defendant. Plaintiffs'
federal securities and federal antitrust claims against the Company were
dismissed with prejudice and the state claims were dismissed without prejudice.
The plaintiffs did not appeal.
No litigation is currently pending in this matter. However, in light of the
history of this dispute, the Alpers may attempt to refile their state law claims
against the Company in the future.
Based on management's understanding of the facts (which facts are contested
by the plaintiffs), and the advice of its lead litigation counsel for this
matter in reliance on such facts, the Company believes it is unlikely that the
plaintiffs will ultimately prevail on the merits of this dispute. Accordingly,
the Company believes that the ultimate outcome of this matter will not have a
material adverse effect on the Company's results of operations or financial
condition. Nevertheless, particularly in light of the contested factual
assertions,
9
there can be no assurance regarding the ultimate outcome of any future
litigation or that any such litigation will not have a material adverse effect
on the Company's results of operations or financial condition.
The Company is also in the process of recalling (in cooperation with the
Consumer Products Safety Commission) approximately 155,000 retractable dog
leashes sold by the Company. The Company has learned of several minor personal
injuries involving the leashes. More importantly, one of the leashes allegedly
caused a serious personal injury in January 1998 which may result in a product
liability claim. Management does not believe that these injuries will have a
material adverse effect on the Company. There can be no assurance, however, that
additional serious injuries will not occur in the future.
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 Consumer Product Safety Commission, none of
which is individually or in the aggregate material to the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of the Company's 1997 calendar year.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock has been traded on the NASDAQ National Market
under the symbol "DLTR" since the Company's initial public offering on March 6,
1995. The following table sets forth the high and low sales prices of the
Company's Common Stock as reported on the NASDAQ National Market for the periods
indicated, restated to reflect 3-for-2 stock splits effected as stock dividends
in April 1996 and July 1997.
1996: High Low
----- ---- ---
First Quarter.............................. $ 20 9/16 10 57/64
Second Quarter............................. 30 19 21/64
Third Quarter.............................. 28 15 21/64
Fourth Quarter............................. 28 43/64 20 11/64
1997:
-----
First Quarter.............................. $ 30 21/64 21 1/2
Second Quarter............................. 33 43/64 28 5/8
Third Quarter.............................. 47 3/8 31 53/64
Fourth Quarter............................. 44 7/8 34 1/2
On March 24, 1998, the last reported sale price for the Company's Common
Stock as quoted by NASDAQ was $50 5/8 per share. As of March 24, 1998, the
Company had approximately 364 shareholders of record.
The Company anticipates that all of its income in the foreseeable future
will be retained for the development and expansion of its business and the
repayment of indebtedness, and therefore does not anticipate paying dividends on
its Common Stock in the foreseeable future. The Company's credit facilities
contain financial covenants which restrict the Company's ability to pay
dividends.
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth for the periods indicated selected financial
data for the Company. The selected income statement and balance sheet items
which follow have been derived from the Company's consolidated financial
statements that have been audited by KPMG Peat Marwick LLP, independent
certified public accountants. This information should be read in conjunction
with the Consolidated Financial Statements and related notes, "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the other financial information included elsewhere in this Form 10-K. The pro
forma data have not been audited but, in the opinion of management, include all
adjustments necessary to present fairly the information set forth therein
including the matters referred to in footnotes 4 and 5 on page 12.
10
ITEM 6. SELECTED FINANCIAL DATA, CONTINUED
Year Ended December 31,
-----------------------------------------------------
1993 1994 1995 1996 1997
---- ---- ---- ---- ----
(Dollars in thousands, except per share data
and sales per square foot data)
INCOME STATEMENT DATA:
Net sales......................................................... $167,753 $231,601 $300,229 $493,037 $635,473
Cost of sales..................................................... 106,318 145,481 187,552 310,900 397,116
-------- -------- -------- -------- --------
Gross profit.................................................... 61,435 86,120 112,677 182,137 238,357
-------- -------- -------- -------- --------
Selling, general and administrative expenses:.....................
Operating expenses.............................................. 39,559 54,993 70,504 111,401 143,438
Depreciation and amortization................................... 3,054 4,186 5,468 10,527 13,125
Recapitalization expenses(1).................................... 4,387 --- --- --- ---
-------- -------- -------- -------- --------
Total......................................................... 47,000 59,179 75,972 121,928 156,563
-------- -------- -------- -------- --------
Operating income.................................................. 14,435 26,941 36,705 60,209 81,794
Interest expense.................................................. 1,837 4,028 2,617 5,193 2,812
-------- -------- -------- -------- --------
Income before income taxes and extraordinary loss................. 12,598 22,913 34,088 55,016 78,982
Provision for income taxes........................................ 3,152 9,546 13,125 21,181 30,408
-------- -------- -------- -------- --------
Income before extraordinary loss.................................. 9,446 13,367 20,963 33,835 48,574
Extraordinary loss, net of income tax(2).......................... --- 1,253 --- --- ---
-------- -------- -------- -------- --------
Net income........................................................ $ 9,446 $ 12,114 $ 20,963 $ 33,835 $ 48,574
======== ======== ======== ======== ========
Income Per Share Data(3):
Basic net income per share........................................ $ 0.33 $ 0.56 $ 0.89 $ 1.24
======== ======== ======== ========
Diluted net income per share...................................... $ 0.32 $ 0.51 $ 0.80 $ 1.13
======== ======== ======== ========
Pro Forma Data:
Net income........................................................ $ 9,446
Pro forma adjustment for C corporation income taxes(4)............ 1,838
--------
Pro forma net income(4)........................................... $ 7,608
========
Pro forma basic net income per share(5)........................... $ 0.20
========
Pro forma diluted net income per share(5)......................... $ 0.20
========
Weighted average number of common shares
outstanding, in thousands(3 and 5).............................. 37,233 37,233 37,271 38,217 39,033
======== ======== ======== ======== ========
Weighted average number of common shares and common
share equivalents outstanding, in thousands(3 and 5)............ 38,158 38,158 41,026 42,171 43,106
======== ======== ======== ======== ========
SELECTED OPERATING DATA:
Number of stores open at end of period(6):
Mall............................................................ 145 154 173 202 235
Strip center.................................................... 183 255 327 535 652
-------- -------- -------- -------- --------
Total......................................................... 328 409 500 737 887
======== ======== ======== ======== ========
Net sales growth(6)............................................... 39.2% 38.1% 29.6% 64.2% 28.9%
Comparable store net sales increase(7)............................ 6.9% 9.1% 7.3% 6.2% 7.8%
Average net sales per store(8).................................... $ 555 $ 606 $ 649 $ 691 $ 767
Average net sales per square foot(8):
Mall............................................................ $ 224 $ 241 $ 246 $ 249 $ 239
Strip Center.................................................... $ 188 $ 197 $ 209 $ 220 $ 217
All Stores...................................................... $ 206 $ 214 $ 221 $ 229 $ 222
As of December 31,
-----------------------------------------------------
1993 1994 1995 1996 1997
---- ---- ---- ---- ----
BALANCE SHEET DATA:
Working capital................................................... $ 7,742 $ 14,334 $ 29,133 $ 23,488 $ 60,213
Total assets...................................................... 42,188 60,688 91,621 171,099 272,576
Total debt........................................................ 17,768 14,205 14,518 4,353 31,121
Shareholders' equity.............................................. 3,660 17,274 39,087 101,590 154,926
11
(1) Represents recapitalization expenses of $4.4 million incurred in connection
with a 1993 recapitalization, comprised of $3.6 million of management incentive
expenses and $0.8 million of transaction expenses.
(2) Represents redemption premiums of approximately $1.3 million plus write off
of original issue discount financing costs of $0.9 million (net of income tax
benefit of approximately $0.9 million) on the early retirement of the Company's
12% Senior Subordinated Notes and 12% Junior Subordinated Notes.
(3) The extraordinary loss recognized in 1994 reduced basic and diluted net
income per share by $0.03, respectively. Basic and diluted income per share data
have been computed by dividing its components by the weighted average number of
common shares outstanding, and by the weighted average number of common shares
and common share equivalents outstanding, respectively. All warrants and options
outstanding at December 31, 1994 have been considered outstanding for the entire
year ended December 31, 1994 and are included in the calculation of the weighted
average number of common shares and common share equivalents outstanding for net
income per share computations in accordance with the rules of the Securities and
Exchange Commission. For all periods after December 31, 1994, common share
equivalents include the weighted average number of shares subject to stock
options and warrants outstanding at the end of the period, after applying the
treasury stock method.
(4) Prior to September 30, 1993, the Company was treated as a subchapter S
corporation for Federal and certain state income tax purposes. As such, income
of the Company for that period was taxable to the individual shareholders rather
than to the Company. Accordingly, the provision for income taxes for the nine
months ended September 29, 1993, represents corporate level state income taxes
on income earned in those states that do not recognize subchapter S corporation
status. On September 30, 1993, the Company converted to a subchapter C
corporation. Accordingly, income since September 30, 1993 was taxable to the
Company. Pro forma net income reflects a provision for income taxes as if the
Company were a C corporation for all of 1993 at an assumed effective tax rate of
approximately 40%.
(5) Pro forma basic net income per share has been computed by dividing pro forma
net income by the weighted average number of common shares outstanding. Pro
forma diluted net income per share has been computed by dividing pro forma net
income by the weighted average number of common shares and common share
equivalents outstanding. Common share equivalents include all outstanding stock
options and warrants after applying the treasury stock method. All warrants and
options outstanding at December 31, 1994 have been considered outstanding for
the year ended December 31, 1993, and are included in the calculation of the
weighted average number of common shares and common share equivalents
outstanding for the pro forma diluted net income per share computation in
accordance with the rules of the Securities and Exchange Commission.
(6) The Company closed two stores in 1993, one store in 1994, three stores in
1995, three stores in 1996 and one store in 1997. 1996 data reflects the
addition of 136 Dollar Bills stores on January 31, 1996.
(7) Comparable store net sales increase compares net sales for stores open at
the beginning of the first of the two periods compared. The comparable store net
sales increase calculation for the year ended December 31, 1997 includes net
sales of Dollar Bills stores for the twelve months ended December 31, 1996 and
December 31, 1997.
(8) For stores open the entire period presented. Dollar Bills stores are only
included in the calculation for 1997. The 1996 calculation does not include the
28 stores expanded in 1996 due to remodeling and/or relocation, which increased
total square footage by approximately 29,900 square feet. The calculation for
1997 does not include the 29 stores expanded in 1997 due to remodeling and/or
relocation, which increased total square footage by approximately 46,000 square
feet.
12
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the
consolidated financial statements and notes thereto appearing elsewhere in this
Form 10-K.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain selected
income statement data as a percentage of net sales:
Year Ended December 31,
----------------------------
1995 1996 1997
---- ---- ----
Net sales............................... 100.0% 100.0% 100.0%
Cost of sales........................... 62.5 63.1 62.5
----- ----- -----
Gross profit.......................... 37.5 36.9 37.5
Selling, general and
administrative expenses:
Operating expenses.................... 23.5 22.6 22.5
Depreciation and amortization......... 1.8 2.1 2.1
----- ----- -----
Total............................... 25.3 24.7 24.6
----- ----- -----
Operating income........................ 12.2 12.2 12.9
Interest expense........................ 0.9 1.1 0.5
----- ----- -----
Income before income taxes.............. 11.3 11.1 12.4
Provision for income taxes.............. 4.4 4.3 4.8
----- ----- -----
Net income.............................. 6.9% 6.8% 7.6%
===== ===== =====
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1997
Net sales increased $142.5 million, or 28.9%, to $635.5 million for 1997,
from $493.0 million for 1996. Of this increase, (i) approximately 71.0%, or
$101.2 million, was attributable to stores opened in 1996 and 1997, which are
not included in the Company's comparable store net sales calculation, and (ii)
approximately 29.0%, or $41.3 million, was attributable to comparable store net
sales growth, which represented a 7.8% increase over comparable store net sales
for 1996. The comparable store net sales increase includes sales at Dollar Bills
stores for the twelve month periods ended December 31, 1996 and December 31,
1997. 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 increases were driven primarily by a strong
in-stock position throughout the year, particularly in the first quarter of the
year; increased customer traffic in 1997, coupled with a slight increase in the
average purchase per customer; continued improvements in the quality and variety
of merchandise offered; and the improved performance in the Dollar Bills stores
resulting in part from their shift towards the Dollar Tree merchandise mix
throughout 1996. The Company opened 151 new stores and closed one store during
1997, compared to opening 104 new stores and closing three stores during 1996.
The Company also added 136 Dollar Bills stores on January 31, 1996.
Management anticipates that the primary source of future sales growth will
be new store openings and, to a lesser degree, comparable store net sales
increases. Management expects that any future increases in comparable store net
sales will be smaller than those experienced historically, and that decreases in
average net sales per square foot will occur as the average store size
increases. See "-- Seasonality and Quarterly Fluctuations."
Gross profit, which consists of net sales less cost of sales (including
distribution and certain occupancy costs), increased $56.2 million, or 30.9%. As
a percentage of net sales, gross profit increased to 37.5% from 36.9%, primarily
due to improved merchandise costs (including freight) and improved inventory
shrinkage costs as a percentage of net sales, partially offset by an increase in
distribution costs as a percentage of net sales. Throughout 1996, management
shifted the merchandise mix at Dollar Bills stores away from their historical
consumable product emphasis to more closely resemble the merchandise mix at
Dollar Tree stores. While this change in mix benefited merchandise costs,
management does not anticipate this level of improvement in the future.
Distribution costs increased as a result of increased costs inherent in
transitioning operations to the new Chesapeake distribution center and in the
installation of the Company's new warehouse management system in all three
distribution centers early in 1997. In 1998, management expects its recently
elevated level of distribution costs, as a percentage of net sales, to continue
due to the construction of the new Olive Branch facility. Costs could further
increase
13
in the event of a failure to sublease the leased facilities in Memphis. The
Company is liable for rent and pass-through costs under the Memphis lease until
September 2005, at a current annual cost of approximately $702,000. Management
also expects that shipping costs from Asia may increase in 1998 as a result of
the announcement by a trans-Pacific ocean-shipping cartel that it will try to
force a 10% rate increase in the spring of 1998. In 1997, the Company's shipping
costs from Asia were approximately $7 million, or 1.1% of net sales.
Selling, general and administrative expenses, which include operating
expenses and depreciation and amortization, increased $34.6 million, or 28.4%,
but decreased slightly as a percentage of net sales to 24.6% from 24.7%. This
decrease, as a percentage of net sales, resulted primarily from approximately
$2.5 million in expense incurred in 1996 as a result of the Dollar Bills
acquisition and litigation. Amortization of goodwill relating to the Dollar
Bills acquisition amounted to $1.9 million for 1997. Excluding the expenses
incurred in 1996 related to the Dollar Bills acquisition, selling, general and
administrative expenses increased as a percentage of sales to 24.6% in 1997 from
24.2% in 1996 primarily due to an increase of approximately $2 million in
payroll costs resulting from the federally mandated increase in the hourly
minimum wage. Management believes that the increase in 1998 payroll costs due to
this minimum wage change will be greater than in 1997.
Operating income increased $21.6 million, or 35.9%, to $81.8 million for
1997 from $60.2 million for 1996, and increased as a percentage of net sales to
12.9% from 12.2% during the same period for the reasons noted above.
Interest expense decreased $2.4 million to $2.8 million in 1997 compared to
$5.2 million in 1996. This decrease was primarily a result of lower levels of
debt in 1997 compared to 1996, when the Company had increased borrowings related
to the purchase of Dollar Bills. In 1997, the Company capitalized $916,000 of
interest relating to the construction of the Chesapeake facility. Interest
charges on debt incurred to finance the construction of the Chesapeake Store
Support Center will not be capitalized in 1998 but will be charged to interest
expense. The Company expects to capitalize the interest incurred in 1998
relating to the construction of the Olive Branch facility.
YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1996
Net sales increased $192.8 million, or 64.2%, to $493.0 million for 1996,
from $300.2 million for 1995. Of this increase, (i) approximately 54.3%, or
$104.7 million, was attributable to the 136 Dollar Bills stores added on January
31, 1996, (ii) approximately 37.2%, or $71.8 million, was attributable to 198
stores opened in 1995 and 1996, which are not included in the Company's
comparable store net sales calculation, and (iii) approximately 8.5%, or $16.3
million, was attributable to comparable store net sales growth, which
represented a 6.2% increase over comparable store net sales for 1995. Dollar
Bills stores are not included in the comparable store net sales calculations for
1996. 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. Management believes that this increase in volume resulted from strong
holiday selling seasons in 1996, increased inventory levels compared to the
preceding year, and continued improvements in the quality and variety of
merchandise offered. The Company opened 104 new stores (in addition to the 136
Dollar Bills stores added on January 31, 1996), and closed three stores during
1996 compared to opening 94 new stores and closing three stores during 1995.
Gross profit increased $69.5 million, or 61.6%. As a percentage of net
sales, gross profit decreased to 36.9% from 37.5%, reflecting, as a percentage
of net sales, decreased merchandise margin (gross profit before inventory
shrinkage, markdowns, and distribution and occupancy costs) and a slight
increase in inventory shrinkage, partially offset by lower inbound freight costs
and lower store occupancy costs. The decrease in merchandise margin as a
percentage of net sales is a result of increased sales of domestically purchased
products which generally carry a lower gross margin than imported merchandise.
The increase in inventory shrinkage is due largely to higher shrinkage
experienced at the Dollar Bills stores. The decrease in inbound freight arose
primarily from more favorable terms negotiated with shippers and consolidators.
The decrease in store occupancy costs as a percentage of net sales is a result
of the comparable store net sales growth.
As a result of the Dollar Bills acquisition in 1996, there was a shift in
overall merchandise mix toward higher levels of domestic, consumable merchandise
(for instance, food and health and beauty aids), which generally carry a higher
merchandise cost. Management believes that changes in the overall merchandise
mix arising from the acquisition are substantially complete and that
14
the Company will continue to carry somewhat higher levels of domestic,
consumable merchandise than in prior years. However, the Company expects imports
to continue to account for approximately 35% to 40% of total purchases at
retail.
Selling, general and administrative expenses increased $46.0 million, or
60.5%, but decreased as a percentage of net sales to 24.7% from 25.3% during the
same period. The decrease is due primarily to strengthened cost controls
relating to hourly payroll at the store level. Management does not expect
similar payroll cost savings in the future due to federally mandated increases
in the minimum wage. During 1996, the Company's operating expenses incurred in
connection with the Dollar Bills acquisition and litigation amounted to
approximately $2.5 million. Depreciation and amortization expense increased $5.0
million, increasing as a percentage of net sales to 2.1% from 1.8% for 1995. Of
this increase, $1.8 million related to the amortization of goodwill recognized
in connection with the acquisition of Dollar Bills.
Operating income increased $23.5 million, or 64.0%, to $60.2 million for
1996 from $36.7 million for 1995 and remained constant as a percentage of net
sales at 12.2%.
Interest expense increased $2.6 million to $5.2 million in 1996 compared to
$2.6 million in 1995. This increase is a result of increased borrowing incurred
in connection with the Dollar Bills acquisition. The development facility used
for the acquisition was repaid prior to year end. In addition, the Company
redeemed and extinguished its 9% Subordinated Notes in June 1996.
SUBSEQUENT EVENTS
In March 1998, the Company entered into an agreement to sublease its
Norfolk facility through June 2004. See "Properties".
In March 1998, the Company purchased approximately 43 acres of land in Olive
Branch, Mississippi, for the purpose of building a new distribution center to
replace the existing facility located in Memphis, Tennessee. The new facility
will be modeled after the recently completed Chesapeake distribution center and
will contain similar advanced materials handling technologies. The Olive Branch
facility will be approximately 425,000 square feet and is expected to require an
investment of approximately $20 million. Management believes that, upon
completion of this facility, the Company's capacity to service stores will
increase to approximately 2,000 stores. The Company believes that the facility
will be operational in early 1999.
LIQUIDITY AND CAPITAL RESOURCES
The Company's ongoing 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 beginning of the fourth quarter of the year.
Historically, the Company has met its seasonal working capital requirements for
existing stores and funded its store expansion program from internally generated
funds and borrowings under its credit facilities.
During 1995, 1996 and 1997, net cash provided by operations was $27.2
million, $39.2 million and $69.7 million, respectively. Net cash used in
investing activities during the same periods was $11.6 million, $68.7 million,
and $57.5 million, respectively. During 1995, net cash used in investing
activities consisted primarily of capital expenditures relating to new store
expansion. During 1996, $52.2 million (net of cash acquired) was used for the
purchase of Dollar Bills, funded with borrowings under the Company's credit
facility, in addition to capital expenditures relating to new store expansion.
During 1997, net cash used in investing activities consisted primarily of
capital expenditures relating to the Chesapeake Store Support Center and new
store expansion. Net cash provided by financing activities during the same
periods was $0.8 million, $10.1 million and $28.5 million, respectively. In
1995, the funds provided were primarily a result of the exercise of stock
options granted under the Company's Stock Option Plan. In 1996, the funds
provided were primarily a result of the issuance of 1,125,000 shares of common
stock in a public offering completed in June and the exercise of stock options
granted under the employee stock compensation plans, reduced by the repayment of
subordinated debt and notes payable to banks. In 1997, net funds provided by
financing activities were primarily the result of the issuance of $30 million of
Senior Notes.
15
The Company expects to expand by approximately 200 to 205 stores during
1998. In 1997, the average investment per new store, including capital
expenditures, initial inventory and pre-opening costs, was approximately
$168,000 per store. The Company's cash needs for opening new stores in 1998 are
expected to total approximately $34.9 million, $19.5 million of which is
budgeted for capital expenditures and $15.4 million of which is budgeted for
initial inventory and pre-opening costs. The Company's total planned capital
expenditures for 1998 are approximately $50 million, including approximately $20
million relating to the Olive Branch distribution center and including planned
expenditures for expanded and relocated stores, additional equipment for the
distribution centers and computer system upgrades.
On September 27, 1996, the Company entered into an amended and restated
credit agreement with its banks which currently provides for a $135 million
unsecured 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. As of December 31, 1997, the
interest rate was approximately 6.5%. The credit agreement, among other things,
requires the maintenance of certain specified ratios, restricts the amount of
capital expenditures, restricts the payments of cash dividends and other
distributions, limits the amount of debt, prohibits a change in control of the
Company, establishes minimum beneficial ownership requirements of the founding
shareholders and requires that aggregate borrowings must be paid down to a
specified amount for at least 30 consecutive days at any time between December 1
and March 1 through March 1, 2000. The original maturity date of the facility
was May 31, 2000, which was extended to May 31, 2002 in 1997.
On April 30, 1997, the Company issued $30 million of 7.29% unsecured Senior
Notes. The proceeds from the issuance of the Notes were used to pay down a
portion of the revolving credit facility, which enabled the Company to use that
credit facility to fund capital expenditures for the new Store Support Center.
The Company pays interest on the Notes semi-annually on April 30 and October 30
each year and will pay principal in five equal annual installments of $6 million
beginning April 30, 2000. The Note holders have the right to require the Company
to prepay the Notes in full without premium upon a change of control or upon
certain asset dispositions or certain other transactions by the Company. The
Note agreements, among other things, prohibit certain mergers and
consolidations, require the maintenance of certain specified ratios, require
that the Notes rank pari passu with the Company's other debt and limit the
amount of Company debt. In the event of default or a prepayment at the option of
the Company, the Company is required to pay a prepayment penalty equal to a
make-whole amount.
Except for the cost of the new Olive Branch facility, the Company believes
that it can adequately fund its planned capital expenditures and working capital
requirements for the next several years from net cash provided by operations and
availability under its credit facilities. The Company plans to borrow an
additional $20 million under a proposed loan facility to fund the cost of the
proposed Olive Branch distribution center. The Company believes that it will
obtain the required consent from its existing lenders for the proposed loan
facility.
SEASONALITY AND QUARTERLY FLUCTUATIONS
The Company has historically experienced and expects to continue to
experience seasonal fluctuations in its net sales, operating income and net
income. The highest sales periods for the Company are the Christmas and Easter
seasons. A disproportionate amount of the Company's net sales and a substantial
majority of the Company's operating and net income are generally realized during
the fourth quarter. In anticipation of increased sales activity during these
months, the Company purchases substantial amounts of inventory and hires a
significant number of temporary employees to bolster its permanent store staff.
If for any reason the Company's net sales were below seasonal norms during the
fourth quarter or Easter season, including as a result of merchandise delivery
delays due to receiving or distribution problems, the Company's operating
results, particularly operating and net income, could be adversely affected.
Historically, net sales, operating income and net income have been weakest
during the first quarter, and the Company expects this trend to continue. The
Company's quarterly results of operations may also fluctuate significantly as a
result of a variety of factors, including the timing of new store openings, the
net sales contributed by new stores and the merchandise mix.
Shifts in the timing of certain holidays may also have an effect on
quarterly results. In 1998, the Easter holiday will fall in the second quarter
instead of the first quarter, as it did in 1997. This change could have an
adverse impact on comparable store net sales in the first quarter of 1998
because the Company expects that most 1998 Easter sales will occur in the second
quarter.
16
The following table sets forth certain unaudited results of operations for
each quarter of 1996 and 1997. The unaudited information has been prepared on
the same basis as the audited consolidated financial statements appearing
elsewhere in this Form 10-K and includes all adjustments, consisting only of
normal recurring adjustments, which management considers necessary for a fair
presentation of the financial data shown. The operating results for any quarter
are not necessarily indicative of results for any future period. Although the
Company has experienced significant increases in comparable store net sales
historically, management expects that any increases in comparable net sales in
the future will be smaller than those experienced historically.
Quarter Ended
----------------------------------------------------------------------------------------
Mar. 31, June 30, Sept. 30, Dec. 31, Mar. 31, June 30, Sept. 30, Dec. 31,
1996 1996 1996 1996 1997 1997 1997 1997
----------------------------------------------------------------------------------------
(Dollars in thousands)
Net sales............ $84,975 $102,689 $110,588 $194,785 $117,746 $129,332 $142,386 $246,009
Gross profit......... $29,070 $ 35,659 $ 41,890 $ 75,518 $ 41,291 $ 46,164 $ 53,836 $ 97,066
Operating income..... $ 2,570 $ 7,586 $ 11,134 $ 38,919 $ 6,243 $ 10,588 $ 15,065 $ 49,898
Stores open at end
of period.......... 660 686 712 737 767 812 865 887
Comparable store net
sales increases.... 11.8% 1.5% 4.3% 7.6% 10.9% 8.2% 7.4% 5.5%
INFLATION AND OTHER ECONOMIC FACTORS
The Company's ability to provide quality merchandise at the $1.00 price
point is subject to certain economic factors which are beyond the Company's
control, including inflation, minimum wage levels, operating costs, consumer
confidence and general economic conditions. There can be no assurance that such
factors will remain favorable and in particular that hourly minimum wage rates,
health care costs, shipping costs, or other costs will remain at current levels.
The federally mandated minimum wage increased by $0.50 per hour on October 1,
1996 and by an additional $0.40 per hour on September 1, 1997. These changes
increased payroll costs by approximately $2 million during 1997, and management
believes that the increase in 1998 payroll costs due to the minimum wage changes
will be greater than in 1997. On February 12, 1998, President Clinton announced
support for a plan that would raise the minimum wage by an additional $0.50 per
hour in January 1999 and an additional $0.50 per hour in 2000. Management
expects that this plan, if it is passed into law, will have a significantly
greater impact on payroll costs than the increases in the minimum wage
implemented in 1996 and 1997. Additionally, in November 1997, an ocean-shipping
cartel indicated that it would try to force a 10% rate increase on U.S. imports
from Asia in the spring of 1998. In 1997, the Company's shipping costs from Asia
were approximately $7 million. Unless offsetting cost savings are realized (and
no assurance can be given that they will be), an increase in inflation, minimum
wage levels, shipping costs or other operating costs, or a decline in consumer
confidence or general economic conditions, could have a material adverse effect
on the Company's business and results of operations, especially given the
constraints on the Company's ability to pass on any incremental costs through
price increases.
YEAR 2000 COMPLIANCE
The Company utilizes a significant number of in-house and vendor-supplied
computer software programs across its entire organization, including
applications used in purchasing, distribution, retail store management,
financial business systems and various administrative functions. To the extent
that the Company's software applications contain source code that is unable to
appropriately interpret the upcoming calendar year "2000" and beyond, some level
of modification or replacement of such applications will be necessary.
The Company has conducted a preliminary assessment of its computer systems
and made inquiries regarding the computer systems of other entities with which
the Company does business, such as contractors, suppliers and creditors.
Management believes that the Company's internal systems, including computer
programs housed on its mainframe and those used to accumulate data from its
stores, are currently Year 2000 compliant. Given information known at this time
about the Company's systems, management does not expect Year 2000 compliance
costs to have a material adverse impact on the Company's business or results of
operations. No assurance can be given, however, that unanticipated or
undiscovered Year 2000 compliance problems will not have a
17
material adverse effect on the Company's business or results of operations. In
addition, if the Company's significant contractors, suppliers or creditors do
not successfully achieve Year 2000 compliance, the Company's business and
operations could be adversely affected.
NEW ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board has issued Statements No. 128,
EARNINGS PER SHARE (SFAS 128), No. 129, DISCLOSURE OF INFORMATION ABOUT CAPITAL
STRUCTURE (SFAS 129), No. 130, REPORTING COMPREHENSIVE INCOME (SFAS 130), and
No. 131, DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION
(SFAS 131). The Company adopted SFAS 128 for the year ended December 31, 1997
and recalculated its net income per share accordingly. SFAS 129 continues the
requirements to disclose certain information about an enterprise's capital
structure prescribed by previous accounting standards; the Company's current
disclosures are in compliance with the requirements of SFAS 129. SFAS 130 and
SFAS 131 are effective for the Company beginning January 1998 and for the year
ended December 31, 1998, respectively.
FORWARD LOOKING STATEMENTS
This report includes forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995 concerning the Company's
operations, economic performance and financial condition. Such statements may be
identified by the use of words such as "believe," "anticipate" and "expect." The
forward-looking statements concern, among other things, the Company's expansion
plans and store openings; sales per square foot and comparable store net sales
trends; dependence on imports and vulnerability to import restrictions,
particularly nonrenewal of MFN status and the imposition of punitive duties, the
Asian financial crisis and other factors relating to China; the projected
capacity and the performance of the Chesapeake and the proposed Olive Branch
distribution centers; the opening date and cost of the Olive Branch distribution
center; the subleasing of the Memphis facility; labor disagreements and union
organizing activities; increases in shipping or distribution costs; increases in
costs including the impact of increases in the minimum wage; the Dollar Bills
litigation; the potential products liability claims; adverse economic factors;
purchasing abilities; and capital requirements. Such forward-looking statements
are subject to various known and unknown risks and uncertainties. Actual
results, performance or actions of the Company could differ materially from
those currently anticipated due to a number of factors, including those
discussed here.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Independent Auditors' Report.............................................. 20
Consolidated Balance Sheets as of December 31, 1996 and 1997.............. 21
Consolidated Income Statements for the years ended December 31,
1995, 1996 and 1997.................................................. 22
Consolidated Statements of Shareholders' Equity for the years ended
December 31, 1995, 1996 and 1997..................................... 23
Consolidated Statements of Cash Flows for the years ended December 31,
1995, 1996 and 1997.................................................. 24
Notes to Consolidated Financial Statements................................ 25
19
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
Dollar Tree Stores, Inc.:
We have audited the accompanying consolidated balance sheets of Dollar
Tree Stores, Inc. and subsidiaries (the Company) as of December 31, 1996 and
1997, and the related consolidated income statements and statements of
shareholders' equity and cash flows for each of the years in the three-year
period ended December 31, 1997. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Dollar Tree
Stores, Inc. and subsidiaries as of December 31, 1996 and 1997, and the results
of their operations and their cash flows for each of the years in the three-year
period ended December 31, 1997, in conformity with generally accepted accounting
principles.
/s/ KPMG Peat Marwick LLP
Norfolk, Virginia
January 20, 1998
20
DOLLAR TREE STORES, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 1996 and 1997
1996 1997
---- ----
(In thousands, except
ASSETS share data)
Current assets:
Cash and cash equivalents......................................................... $ 2,987 $ 43,695
Accounts receivable............................................................... 1,855 1,406
Merchandise inventories........................................................... 75,081 89,066
Deferred tax asset (Note 2)....................................................... 2,002 5,093
Prepaid expenses and other current assets......................................... 4,028 3,762
--------- ---------
Total current assets........................................................ 85,953 143,022
--------- ---------
Property and equipment (Note 4):
Land.............................................................................. - 6,275
Buildings......................................................................... - 7,864
Leasehold improvements............................................................ 23,376 32,010
Furniture and fixtures............................................................ 33,867 46,841
Transportation vehicles........................................................... 1,420 1,463
Construction in progress.......................................................... 1,596 22,459
--------- ---------
Total property and equipment................................................ 60,259 116,912
Less accumulated depreciation and amortization.................................... 24,224 34,841
--------- ---------
Net property and equipment.................................................. 36,035 82,071
--------- ---------
Deferred tax asset (Note 2)........................................................... 1,947 2,029
Goodwill, net of accumulated amortization (Note 3).................................... 46,405 44,478
Other assets.......................................................................... 759 976
--------- ---------
TOTAL ASSETS................................................................ $ 171,099 $ 272,576
========== =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable.................................................................. $ 35,296 $ 44,058
Accrued liabilities (Note 5)...................................................... 14,260 19,526
Income taxes payable (Note 2)..................................................... 12,607 18,908
Current installments of obligations under capital leases (Note 4)................. 302 317
--------- ---------
Total current liabilities................................................... 62,465 82,809
Senior notes (Note 6)................................................................. - 30,000
Revolving credit facility (Note 6).................................................... 3,000 -
Obligations under capital leases, excluding current installments (Note 4)............. 1,051 804
Other liabilities..................................................................... 2,993 4,037
--------- ---------
Total liabilities........................................................... 69,509 117,650
--------- ---------
Commitments, contingencies and subsequent events (Notes 4, 6, 7, 8, 11 and 12)
Shareholders' equity (Notes 7, 8 and 11):
Common stock, par value $0.01. Authorized 100,000,000 shares,
38,847,258 shares and 39,139,965 shares issued and outstanding at December 31,
1996 and 1997, respectively..................................................... 259 391
Additional paid-in capital........................................................ 31,555 36,185
Retained earnings................................................................. 69,776 118,350
--------- ---------
Total shareholders' equity.................................................. 101,590 154,926
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY.................................. $ 171,099 $ 272,576
========= =========
See accompanying Notes to Consolidated Financial Statements.
21
DOLLAR TREE STORES, INC.
AND SUBSIDIARIES
CONSOLIDATED INCOME STATEMENTS
Years ended December 31, 1995, 1996 and 1997
1995 1996 1997
---- ---- ----
(In thousands, except per share data)
Net sales.................................................................. $ 300,229 $ 493,037 $ 635,473
Cost of sales ............................................................. 187,552 310,900 397,116
----------- ----------- -----------
Gross profit................................................. 112,677 182,137 238,357
----------- ----------- -----------
Selling, general and administrative expenses (Notes 3, 4, 7, 10 and 11):
Operating expenses.................................................. 70,504 111,401 143,438
Depreciation and amortization....................................... 5,468 10,527 13,125
----------- ----------- -----------
Total selling, general and administrative expenses........... 75,972 121,928 156,563
----------- ----------- -----------
Operating income........................................................... 36,705 60,209 81,794
Interest expense (Note 6).................................................. 2,617 5,193 2,812
----------- ----------- -----------
Income before income taxes................................................. 34,088 55,016 78,982
Provision for income taxes (Note 2)........................................ 13,125 21,181 30,408
----------- ----------- -----------
Net income................................................... $ 20,963 $ 33,835 $ 48,574
=========== =========== ===========
Net income per share (Note 9):
Basic net income per share............................................. $ 0.56 $ 0.89 $ 1.24
=========== =========== ===========
Weighted average number of common shares outstanding................... 37,271 38,217 39,033
=========== =========== ===========
Diluted net income per share........................................... $ 0.51 $ 0.80 $ 1.13
=========== =========== ===========
Weighted average number of common shares
and common share equivalents outstanding............................ 41,026 42,171 43,106
=========== =========== ===========
See accompanying Notes to Consolidated Financial Statements.
22
DOLLAR TREE STORES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Years ended December 31, 1995, 1996 and 1997
Series A Series A
Common Class I Class II
stock stock stock Common
shares shares shares Stock
------ ------ ------ -----
(In thousands, except share data)
Balance at December 31, 1994.......................... - 18,616,391 18,616,391 $ -
Net income for the year ended December 31, 1995....... - - - -
Conversion of Series A Class I and II, no par stock,
into Common Stock, $0.01 par value (Note 8)....... 37,232,782 (18,616,391) (18,616,391) 165
Exercise of stock options, including income
tax benefit of $592 (Note 11)..................... 133,162 - - 1
----------- ----------- ----------- -------
Balance at December 31, 1995.......................... 37,365,944 - - 166
Transfer from additional paid-in capital for Common
Stock dividend.................................... - - - 83
Net income for the year ended December 31, 1996....... - - - -
Issuance of stock under Employee Stock Purchase
Plan (Note 11).................................... 13,752 - - -
Issuance of stock in public offering (Note 8)......... 1,125,000 - - 8
Exercise of stock options, including income
tax benefit of $2,266 (Note 11)................... 342,562 - - 2
----------- ----------- ----------- -------
Balance at December 31, 1996.......................... 38,847,258 - - 259
Transfer from additional paid-in capital for Common
Stock dividend.................................... - - - 130
Net income for the year ended December 31, 1997....... - - - -
Issuance of stock under Employee Stock Purchase
Plan (Note 11).................................... 14,765 - - -
Exercise of stock options, including income
tax benefit of $2,752 (Note 11)................... 277,942 - - 2
----------- ----------- ----------- -------
Balance at December 31, 1997.......................... 39,139,965 - - $ 391
=========== =========== ========== ===========
Additional
paid-in Retained Shareholders'
capital earnings equity
------- -------- ------
(In thousands, except share data)
Balance at December 31, 1994.......................... $ 2,296 $ 14,978 $ 17,274
Net income for the year ended December 31, 1995....... - 20,963 20,963
Conversion of Series A Class I and II, no par stock,
into Common Stock, $0.01 par value (Note 8)....... (165) - -
Exercise of stock options, including income
tax benefit of $592 (Note 11)..................... 849 - 850
------- ------- --------
Balance at December 31, 1995.......................... 2,980 35,941 39,087
Transfer from additional paid-in capital for Common
Stock dividend.................................... (83) - -
Net income for the year ended December 31, 1996....... - 33,835 33,835
Issuance of stock under Employee Stock Purchase
Plan (Note 11).................................... 180 - 180
Issuance of stock in public offering (Note 8)......... 25,325 - 25,333
Exercise of stock options, including income
tax benefit of $2,266 (Note 11)................... 3,153 - 3,155
------- ------- --------
Balance at December 31, 1996.......................... 31,555 69,776 101,590
Transfer from additional paid-in capital for Common
Stock dividend.................................... (130) - -
Net income for the year ended December 31, 1997....... - 48,574 48,574
Issuance of stock under Employee Stock Purchase
Plan (Note 11).................................... 343 - 343
Exercise of stock options, including income
tax benefit of $2,752 (Note 11)................... 4,417 - 4,419
------- ------- --------
Balance at December 31, 1997.......................... $ 36,185 $ 118,350 $ 154,926
======= ======= ========
See accompanying Notes to Consolidated Financial Statements.
23
DOLLAR TREE STORES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 1995, 1996 and 1997
1995 1996 1997
---- ---- ----
(In thousands)
Cash flows from operating activities:
Net income............................................................. $ 20,963 $ 33,835 $ 48,574
Adjustments to reconcile net income to net cash provided by operating --------- -------- --------
activities:
Depreciation and amortization.................................... 5,467 10,527 13,125
Loss on disposal of property and equipment....................... 248 275 290
Provision for deferred income taxes.............................. 579 (1,010) (3,173)
Changes in assets and liabilities increasing (decreasing) cash and
cash equivalents:
Accounts receivable......................................... 46 (1,026) 449
Merchandise inventories..................................... (8,069) (18,673) (13,985)
Prepaid expenses and other current assets................... (810) (1,544) 266
Other assets................................................ (47) 683 (14)
Accounts payable............................................ 6,441 9,879 8,762
Accrued liabilities......................................... 2,348 3,426 5,266
Income taxes payable........................................ 1,558 2,833 9,053
Other liabilities........................................... (1,531) 2 1,044
-------- ------ -------
Total adjustments...................................... 6,230 5,372 21,083
-------- ------ -------
Net cash provided by operating activities.............. 27,193 39,207 69,657
-------- ------ -------
Cash flows from investing activities:
Capital expenditures................................................... (11,614) (16,530) (57,501)
Proceeds from sale of property and equipment........................... 32 59 50
Purchase of Dollar Bills, Inc., net of cash acquired of $414........... - (52,216) -
-------- ------- -------
Net cash used in investing activities.................. (11,582) (68,687) (57,451)
-------- ------- -------
Cash flows from financing activities:
Repayments of revolving credit facilities.............................. (9,550) (148,643) (209,600)
Proceeds from revolving credit facilities.............................. 9,550 151,643 206,600
Proceeds from development facility..................................... - 52,630 -
Repayment of development facility...................................... - (52,630) -
Repayments of senior subordinated notes................................ - (7,000) -
Repayments of junior subordinated notes................................ - (7,000) -
Principal payments on notes payable to bank............................ - (6,900) -
Proceeds from senior notes............................................. - - 30,000
Payment of credit facility fees........................................ - (445) (203)
Principal payments under capital lease obligations..................... (62) (271) (305)
Proceeds from exercise of stock options................................ 850 3,155 1,667
Proceeds from public offering.......................................... - 25,333 -
Proceeds from stock purchased under the Employee Stock Purchase Plan... - 180 343
-------- ------ -------
Net cash provided by financing activities.............. 788 10,052 28,502
-------- ------ -------
Net increase (decrease) in cash and cash equivalents....................... 16,399 (19,428) 40,708
Cash and cash equivalents at beginning of year............................. 6,016 22,415 2,987
-------- ------ -------
Cash and cash equivalents at end of year................................... $ 22,415 $ 2,987 $ 43,695
======== ======= =======
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest, net of amount capitalized................................. $ 2,634 $ 4,042 $ 3,414
======== ======= =======
Income taxes........................................................ $ 10,396 $ 15,656 $ 24,288
======== ======= =======
See accompanying Notes to Consolidated Financial Statements.
24
DOLLAR TREE STORES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share data)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business
Dollar Tree Stores, Inc. (DTS) owns and operates discount variety
retail stores which sell substantially all items for $1.00. The Company's
headquarters and one of its distribution centers are located in Chesapeake,
Virginia. The Company also operates distribution centers in Memphis, Tennessee
and in the Chicago, Illinois area. Most of the Company's stores are located in
the eastern half of the United States. The Company's merchandise includes
housewares, seasonal goods, food, toys, health and beauty aids, gifts, party
goods, stationery, books, hardware and other consumer items. A substantial
portion of the Company's merchandise is purchased directly or indirectly from
countries in the Far East, principally China. The Company is not dependent on a
few suppliers.
Principles of Consolidation
DTS has two wholly owned subsidiaries, Dollar Tree Management, Inc.
(DTM) and Dollar Tree Distribution, Inc. (DTD). DTM provides management, retail
store leasing, accounting and administrative services to DTS for a fee, and DTD
provides merchandise procurement, purchasing, warehousing and distribution
services to DTS for a fee. Effective October 29, 1996, DTD established a wholly
owned subsidiary, Dollar Tree Properties, Inc. (DTP). DTP is organized as a real
estate holding company and owns certain undeveloped property. The consolidated
group is referred to throughout the notes as "the Company". The consolidated
financial statements include the financial statements of Dollar Tree Stores,
Inc. and its wholly owned subsidiaries. All significant intercompany balances
and transactions have been eliminated in consolidation.
Cash and Cash Equivalents
Cash and cash equivalents at December 31, 1997 includes $39,400 of
investments in money market securities and bank participation agreements which
are valued at cost, which approximates market. The underlying assets of these
short-term participation agreements are primarily commercial notes. There were
no such investments held at December 31, 1996. For purposes of the statements of
cash flows, the Company considers all highly liquid debt instruments with
original maturities of three months or less to be cash equivalents.
Merchandise Inventories
Merchandise inventories are stated at the lower of cost or market. Cost
is assigned to store inventories using the retail inventory method, determined
on a first-in, first-out (FIFO) basis. Costs directly associated with
warehousing and distribution are capitalized as merchandise inventories. Total
warehousing and distribution costs capitalized into inventories amounted to
$3,589 and $4,546 at December 31, 1996 and 1997, respectively.
Property and Equipment
Property and equipment are stated at cost. Buildings are depreciated
using the straight-line method over 39 years, the estimated useful life of the
assets. Furniture and fixtures are depreciated using the straight-line method
over four to seven years, the estimated useful lives of the respective assets.
Transportation vehicles are depreciated using the straight-line method over four
to six years, the estimated useful lives of the respective assets. Leasehold
improvements and assets held under capital leases are amortized using the
straight-line method over three to ten years, the estimated useful lives of the
respective assets or terms of the related leases, whichever is less.
Interest is capitalized in connection with the construction of major
facilities. The capitalized interest is recorded as part of the asset to which
it relates and is amortized over the asset's estimated useful life. In 1997,
$916 of interest cost was capitalized. No interest was capitalized in 1995 or
1996.
25
DOLLAR TREE STORES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(In thousands, except share and per share data)
Goodwill
Goodwill, which represents the excess 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 comparing the
carrying amount of the asset to expected future net cash flows of the acquired
organization. The recoverability of goodwill will be impacted if estimated
future net cash flows are not achieved.
Cost of Sales
The Company includes the cost of merchandise, warehousing and
distribution costs, and certain occupancy costs in cost of sales.
Store Opening Costs
The Company expenses store opening costs when the store opens.
Income Taxes
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between financial statement carrying
amounts of existing assets and liabilities and their respective tax bases.
Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in the tax rates is recognized in income in
the period that includes the enactment date of such change.
Stock-Based Compensation
The Company applies Accounting Principles Board Opinion No. 25,
ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES (APB No. 25), and related
Interpretations in accounting for its stock-based compensation plans. The
Company has adopted the disclosure-only provisions of Statement of Financial
Accounting Standards (SFAS) No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION
(SFAS No. 123).
Net Income Per Share
As required, the Company adopted the provisions of SFAS No. 128,
EARNINGS PER SHARE (SFAS No. 128), for the year ended December 31, 1997. Basic
net income per share as calculated in accordance with SFAS No. 128 has been
computed by dividing net income by the weighted average number of common shares
outstanding. Diluted net income per share reflects the potential dilution that
could occur assuming the inclusion of common share equivalents and has been
computed by dividing net income by the weighted average number of common shares
and common share equivalents outstanding. Common share equivalents include all
outstanding stock options and warrants after applying the treasury stock method.
The market price used in applying the treasury stock method was $6.67 per share
(the original public offering price) for the periods prior to March 6, 1995 and
the closing market price of the stock at the end of each day thereafter. All
share and per share data in these consolidated financial statements and the
accompanying notes have been retroactively adjusted to reflect the
implementation of SFAS No. 128.
In connection with stock dividends authorized by the Board of Directors
in 1996 and 1997, 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 and payable July 21, 1997 to shareholders of record as of July 14, 1997,
respectively. All share and per share data in these consolidated financial
statements and the accompanying notes have been retroactively adjusted to
reflect these dividends, each having the effect of a three-for-two stock split.
New Accounting Standards
In June 1997, the FASB issued SFAS No. 130, REPORTING COMPREHENSIVE
INCOME. This Statement establishes standards for the reporting and display of
comprehensive income; however, it does not affect the principles of measurement
of items that comprise comprehensive income. This Statement is effective for the
Company beginning January 1, 1998.
In June 1997, the FASB issued SFAS No. 131, DISCLOSURES ABOUT SEGMENTS
OF AN ENTERPRISE AND RELATED INFORMATION. This Statement requires publicly-held
entities to report financial and descriptive information about their reportable
operating segments. Reportable operating segments are components of an entity
about which separate financial information is available that is regularly
evaluated by the chief operating decision maker in deciding how to allocate
resources and in assessing performance. This Statement is effective for the
Company for the year ended December 31, 1998.
26
DOLLAR TREE STORES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(In thousands, except share and per share data)
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the reported
period. Actual results could differ from those estimates.
NOTE 2 - INCOME TAXES
The provision for income taxes for the years ended December 31, 1995,
1996 and 1997 consists of the following:
1995 1996 1997
---- ---- ----
Federal--Current..................................... $ 10,966 $ 19,160 $ 29,028
Federal--Deferred.................................... 468 (877) (2,787)
State--Current....................................... 1,580 3,031 4,553
State--Deferred...................................... 111 (133) (386)
---------- ---------- ----------
$ 13,125 $ 21,181 $ 30,408
========== ========== ==========
A reconciliation of the statutory Federal income tax rate and the
effective rate for the years ended December 31, 1995, 1996 and 1997 follows:
1995 1996 1997
---- ---- ----
Statutory tax rate.................................... 35.0% 35.0% 35.0%
Effect of:
State and local income taxes, net of
Federal income tax benefit...................... 3.3 3.4 3.4
Other, net......................................... 0.2 0.1 0.1
----- ----- ------
Effective tax rate.................................... 38.5% 38.5% 38.5%
==== ==== ======
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes. Deferred tax
assets and liabilities are classified on the balance sheet based on the
classification of the underlying asset or liability. Significant components of
the Company's net deferred tax assets as of December 31, 1996 and 1997 are as
follows:
1996 1997
---- ----
Deferred tax assets:
Deferred compensation, due to accrual for financial
reporting purposes............................................ $ 247 $ 186
Property and equipment, principally due to differences
in depreciation............................................... 1,921 2,450
Accrued expenses, due to accrual for financial
reporting purposes............................................ 1,432 4,116
Inventories, due to differences in inventory valuation
for book and tax purposes..................................... 1,212 2,363
------- -------
Total deferred tax assets................................. 4,812 9,115
------- -------
Deferred tax liabilities:
Supplies inventory, due to difference in accounting
for store supplies for book and tax purposes.................. (174) (131)
Goodwill, due to differences in amortization..................... (689) (1,862)
-------- --------
Total deferred tax liabilities............................ (863) (1,993)
------- --------
Net deferred tax assets................................... $ 3,949 $ 7,122
======= ========
In assessing the realizability of deferred tax assets, management
considers whether it is more likely than not that some portion or all of the
deferred taxes will not be realized. Based upon the availability of carrybacks
of future deductible amounts to 1995, 1996 and 1997 taxable income and
management's projections for future taxable income over the periods in which the
deferred tax assets are deductible, management believes the existing net
deductible temporary differences will reverse during periods in which carrybacks
are available and/or in which the Company generates net taxable income. However,
there can be no assurance that the Company will generate any income or any
specific level of continuing income in future years.
27
DOLLAR TREE STORES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(In thousands, except share and per share data)
NOTE 3 - ACQUISITION
On January 31, 1996, the Company acquired all of the outstanding
capital stock of Dollar Bills, Inc. (Dollar Bills), formerly known as Terrific
Promotions, Inc., which owned and operated 136 discount variety retail stores
under the name Dollar Bill$. The Company has assumed operations of a
distribution center and wholesale division in the Chicago area. The acquisition
was accounted for by the purchase method of accounting and these consolidated
financial statements include the operating results of Dollar Bills from the date
of acquisition through December 31, 1997. The acquisition cost for the purchase
was allocated on the basis of the estimated fair value of assets acquired and
liabilities assumed with the excess purchase price allocated to goodwill. Total
cash paid was $52,630 and goodwill of $48,170 was recorded on the date of
acquisition. Accumulated amortization relating to goodwill approximates $1,765
and $3,692 at December 31, 1996 and 1997, respectively.
The following unaudited pro forma consolidated income statement
information combines the consolidated historical results of the Company with the
historical results of Dollar Bills for the years ended December 31, 1995 and
1996, after giving effect to certain adjustments, as explained below, before any
nonrecurring charges or credits, such as severance costs, one-time training
costs, and other nonrecurring operational costs of the transaction.
These unaudited pro forma consolidated statements do not purport to be
indicative of the results that would have occurred had the transaction taken
place at the beginning of the periods presented or of future results.
Pro forma
income statement
(Unaudited)
------------------------
1995 1996
---- ----
Net sales............................................. $ 404,079 $ 499,519
-- ------- -----------
Gross profit.......................................... 140,176 183,940
Selling, general and administrative expenses.......... (96,144) (124,171)
----------- ------------
Operating income...................................... 44,032 59,769
Interest expense...................................... (6,973) (5,567)
----------- ------------
Income before income taxes............................ 37,059 54,202
Provision for income taxes............................ (14,268) (20,867)
----------- ------------
Net income........................................... $ 22,791 $ 33,335
=========== ============
Net income per share:
Basic.............................................. $ 0.61 $ 0.87
=========== ============
Diluted............................................ $ 0.56 $ 0.79
=========== ============
The pro forma 1995 income statement reflects adjustments related to the
elimination of duplicative operating costs associated with Dollar Bills'
corporate headquarters and distribution facility; amortization of goodwill over
a 25-year period; interest expense related to acquisition debt; and income taxes
relating to the conversion of Dollar Bills to a C corporation at an assumed
effective rate of 38.5%.
The pro forma 1996 income statement reflects adjustments related to the
January 1996 operating results of Dollar Bills; elimination of duplicative
operating costs associated with Dollar Bills' corporate headquarters and
distribution facility; amortization of goodwill; interest expense related to the
acquisition debt; and income taxes relating to the conversion of Dollar Bills to
a C corporation at an assumed effective rate of 38.5%.
Pro forma basic net income per share is computed by dividing pro forma
net income by the weighted average number of common shares outstanding. Pro
forma diluted net income per share is computed by dividing pro forma net income
by the weighted average number of common shares and common share equivalents
outstanding. Common share equivalents include all outstanding stock options and
warrants after applying the treasury stock method. The market price used in
applying the treasury stock method was $6.67 (the original public offering
price) per share for the periods prior to March 6, 1995 and the closing market
price of the stock at the end of each day thereafter.
28
DOLLAR TREE STORES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(In thousands, except share and per share data)
NOTE 4 - LEASES
Future minimum lease payments under noncancelable store, distribution
center and former corporate headquarters operating leases and the present value
of future minimum capital lease payments as of December 31, 1997 are as follows:
Capital Operating
leases leases
------- ---------
Year ending December 31:
1998 ........................................................... $ 396 $ 40,195
1999 ........................................................... 323 38,223
2000 ........................................................... 314 32,001
2001 ........................................................... 244 23,140
2002 ........................................................... 21 13,830
Later years....................................................... - 23,261
------- --------
Total minimum lease payments......................................... 1,298 $ 170,650
========
Less amount representing interest (at an average rate of
approximately 8%)................................................. 177
-------
Present value of net minimum capital lease payments.................. 1,121
Less current installments of obligations under
capital leases.................................................... 317
-------
Obligations under capital leases, excluding current
installments...................................................... $ 804
=======
The above payments include amounts for leases that were signed prior to
December 31, 1997 for stores that were not open as of December 31, 1997. Minimum
rental payments for operating leases do not include contingent rentals that may
be paid under certain store leases based on a percentage of sales in excess of
stipulated amounts.
The Company is a party to a lease agreement for the former corporate
headquarters and distribution center in Norfolk, Virginia, with a partnership
owned by certain Company shareholders. The lease includes land, a building and
certain equipment and expires in June 2004 with options to renew for three
five-year periods. The lease currently provides for an aggregate annual rental
payment of $656 which is included in the future minimum lease payments above.
The Company also leases properties for three of its stores from related
partnerships. The total rental payments related to the leases for the former
corporate headquarters and distribution center and these stores were $765, $746
and $789 for the years ended December 31, 1995, 1996 and 1997, respectively.
Rental payments for these properties are included in the rental expense
disclosure below.
Included in property and equipment at December 31, 1996 and 1997 are
leased furniture and fixtures and transportation vehicles with a cost of $1,671
and $1,744 and accumulated amortization of $373 and $702 at December 31, 1996
and 1997, respectively.
Rental expense for store, distribution center and former corporate
headquarters operating leases included in the accompanying consolidated income
statements for the years ended December 31, 1995, 1996 and 1997 was as follows:
1995 1996 1997
---- ---- ----
Minimum rentals..................................... $ 16,619 $ 27,685 $ 35,441
Contingent rentals.................................. 1,231 1,060 1,490
--------- --------- ---------
Total..................................... $ 17,850 $ 28,745 $ 36,931
========= ========= =========
NOTE 5 - ACCRUED LIABILITIES
Accrued liabilities as of December 31, 1996 and 1997 consisted of the
following:
1996 1997
---- ----
Compensation and benefits............................................ $ 6,186 $ 9,283
Taxes (other than income taxes)...................................... 6,934 8,664
Other ............................................................... 1,140 1,579
------- --------
Total...................................................... $ 14,260 $ 19,526
======= ========
29
DOLLAR TREE STORES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(In thousands, except share and per share data)
NOTE 6 - LONG-TERM DEBT
On December 31, 1994, the Company issued $7,000 of noncallable 9%
Senior Subordinated Notes and $7,000 of noncallable 9% Junior Subordinated Notes
(collectively, 9% Subordinated Notes) to certain Company shareholders. The 9%
Subordinated Notes were paid in full during June 1996.
Interest expense related to this debt was $1,260 and $574 for the
years ended December 31, 1995 and 1996, respectively.
On January 11, 1996, the Company replaced its previous credit
agreement with a new credit facility which provided for, among other things:
(1) a $60,000 development facility, bearing interest at LIBOR, plus a spread
and (2) a $60,000 working capital line and letter of credit facility, bearing
interest at LIBOR, plus a spread.
On September 27, 1996, the Company entered into an Amended and Restated
Revolving Credit Agreement with its banks (the Agreement). The Agreement
provides for, among other things: (1) a $135,000 revolving line of credit,
bearing interest at the agent bank's prime interest rate or LIBOR, plus a
spread, at the option of the Company; (2) an annual facilities fee and annual
agent's fee payable quarterly; and (3) the reduction of amounts outstanding
under the Agreement for a period of 30 consecutive days between each December 1
and March 1 to the following:
December 1, 1997 to March 1, 1998...................... $30,000
December 1, 1998 to March 1, 1999...................... 20,000
December 1, 1999 to March 1, 2000...................... 10,000
There are no reduction requirements beyond those indicated above.
The Agreement, among other things, requires the maintenance of certain
specified financial ratios, restricts the amount of capital expenditures and the
payment of certain distributions, prohibits the incurrence of certain new
indebtedness and establishes certain minimum beneficial ownership requirements
of the founding shareholders. The Agreement was amended to remove collateral
requirements in January 1997. Also during 1997, the Agreement was amended to
extend its term for two additional years. The Agreement matures on May 31, 2002.
During 1996 and 1997, the weighted average interest rate charged by the banks
under the Company's credit agreements approximated 6.5% and 6.4%, respectively.
At December 31, 1997, approximately $28,500 of the $135,000 available under the
Agreement was committed to certain letters of credit issued in relation to the
routine purchase of foreign merchandise.
On April 30, 1997, the Company issued $30,000 of 7.29% unsecured
Senior Notes (Notes). The principal amount is payable in five equal annual
installments of $6,000 beginning April 30, 2000. Interest is payable
semi-annually on April 30 and October 30 of each year. The Note holders have
the right to require the Company to prepay the Notes in full without premium
upon a change of control or upon certain other transactions by the Company.
The Note agreements, among other things, prohibit certain mergers and
consolidations, require the maintenance of certain specified ratios, require
that the Notes rank pari passu with the Company's other debt and limit the
amount of Company debt. In the event of default or a prepayment at the option
of the Company, the Company is required to pay a prepayment penalty equal to
a make-whole amount.
The carrying value of the Company's long-term debt approximates its
fair value. The fair value is estimated by discounting the future cash flows of
each instrument at rates offered for similar debt instruments of comparable
maturities.
NOTE 7 - MANAGEMENT ADVISORY SERVICES
The Company has a financial and management advisory service
agreement with one of its nonemployee shareholders. The agreement initially
provided for the payment of $250 annually. During 1995, the shareholder
agreed to reduce the annual payment to $200 over the remaining term of the
agreement. The agreement is terminable by vote of the Company's Board of
Directors. During the years ended December 31, 1995, 1996 and 1997, the
Company paid $210, $200 and $200, respectively, under this agreement.
30
DOLLAR TREE STORES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(In thousands, except share and per share data)
NOTE 8 - SHAREHOLDERS' EQUITY
The Company issued unattached warrants to purchase 1,861,633 shares of
Common Stock on September 30, 1993 for $0.27 per warrant and unattached warrants
to purchase 1,861,633 shares of Common Stock on February 22, 1994 for $0.27 per
warrant. The warrants, which are held by certain Company shareholders, carry an
exercise price of $1.29 per share, have been exercisable since March 6, 1995
(the effective date of the Company's initial public offering), and expire on
December 31, 2003. All warrants were outstanding at December 31, 1997.
Effective February 1, 1995, the Articles of Incorporation were amended
to authorize 50,000,000 shares of Common Stock, $0.01 par value per share, and
10,000,000 shares of Preferred Stock, $0.01 par value per share. Upon the
closing of the initial public offering, each share of the Company's Series A
Class I and Class II Stock automatically converted into one share of the
Company's Common Stock. On July 23, 1996, the shareholders of the Company
approved an increase in authorized shares of Common Stock from 50,000,000 to
100,000,000 shares.
On June 10, 1996, the Company sold 1,125,000 shares of Common Stock,
$0.01 par value per share, pursuant to a registration statement filed on Form
S-3 under the Securities Act of 1933. In connection with this offering, the
Company received $25,333, net of offering expenses.
NOTE 9 - NET INCOME PER SHARE
The following table sets forth the calculation of basic and diluted net
income per share:
1995 1996 1997
---- ---- ----
(In thousands, except per share data)
Basic net income per share:
Net income.............................................. $20,963 $33,835 $48,574
------- ------- -------
Weighted average number of common shares
outstanding........................................ 37,271 38,217 39,033
------ ------ ------
Basic net income per share..................... $0.56 $0.89 $1.24
===== ===== =====
Diluted net income per share:
Net income.............................................. $20,963 $33,835 $48,574
------- ------- -------
Weighted average number of common shares
outstanding........................................ 37,271 38,217 39,033
Dilutive effect of stock options and warrants (as deter-
mined by applying the treasury stock method)....... 3,755 3,954 4,073
----- ----- -----
Weighted average number of common shares and
common share equivalents outstanding............... 41,026 42,171 43,106
------ ------ ------
Diluted net income per share................... $0.51 $0.80 $1.13
===== ===== =====
NOTE 10 - PROFIT SHARING AND 401(K) RETIREMENT PLAN
The Company maintains a defined contribution profit sharing and 401(k)
plan which is available to all employees over 21 years of age who have completed
one year of service in which they have worked at least 1,000 hours. Eligible
employees may make elective salary deferrals. The Company may make contributions
at its discretion.
Contributions to and reimbursements by the Company of expenses of the
plan included in the accompanying consolidated income statements for the years
ended December 31 were as follows:
1995....................................... $ 1,059
1996....................................... 1,949
1997....................................... 2,827
31
DOLLAR TREE STORES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(In thousands, except share and per share data)
NOTE 11 - STOCK COMPENSATION PLANS
At December 31, 1997, the Company has three stock-based compensation
plans, which are described below. The Company applies APB No. 25 and related
Interpretations in accounting for its plans. No compensation cost has been
recognized in the accompanying consolidated income statements for the
stock-based compensation plans under APB No. 25.
The Company adopted the disclosure-only option under SFAS No. 123 as
of January 1, 1996. If the accounting provisions of SFAS No. 123 had been
adopted as of the beginning of 1995, the Company's net income and net income
per share would have been reduced to the pro forma amounts indicated below:
1995 1996 1997
---- ---- ----
Net income:
As reported.................................... $20,963 $33,835 $48,574
======= ======= =======
Pro forma...................................... $20,617 $32,506 $45,873
======= ======= =======
Basic net income per share:
As reported.................................... $0.56 $0.89 $1.24
===== ===== =====
Pro forma...................................... $0.55 $0.85 $1.18
===== ===== =====
Diluted net income per share:
As reported.................................... $0.51 $0.80 $1.13
===== ===== =====
Pro forma...................................... $0.50 $0.77 $1.06
===== ===== =====
The full impact of calculating compensation cost for stock options
under SFAS No. 123 is not reflected in the pro forma net income and net income
per share amounts presented above because compensation cost is reflected over
the options' vesting periods and compensation cost for options granted prior to
January 1, 1995 is not considered. These pro forma amounts may not be
representative of future disclosures because compensation cost is reflected over
the options' vesting periods and because additional options may be granted in
future years.
Fixed Stock Option Plans
The Company has two fixed stock option plans. Under the
Non-Qualified Stock Option Plan (SOP), the Company granted options to its
employees for 465,447 shares of Common Stock in 1993 and 465,864 shares in
1994. Options granted under the SOP have an exercise price of $1.93 and are
fully vested at the date of grant.
On June 4, 1997, the Company's shareholders approved an increase in
the total number of shares issuable under the 1995 Stock Incentive Plan (SIP)
from 1,350,000 to 3,600,000. Under the original terms of the SIP, options for
no more than 405,000 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 1997. Under the SIP, the exercise price
of each option equals the market price of the Company's stock at the date of
grant, unless a higher price is established by the Board of Directors and an
option's maximum term is ten years. Options granted under the SIP vest over a
three-year period.
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants in 1995, 1996 and 1997:
Expected term.................................. 8-10 years
Expected volatility............................ 49%
Annual dividend yield.......................... 0%
Risk-free interest rate........................ 5.83-6.74%
32
DOLLAR TREE STORES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(In thousands, except share and per share data)
Stock Option Activity
1995 1996 1997
----------------------- ------------------------ ------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------- ------- -------- -------- -------- --------
Outstanding at beginning
of year.............. 925,012 $ 1.93 1,189,054 $ 4.20 1,205,776 $ 10.00
Granted................ 405,091 8.63 390,949 21.64 503,141 23.42
Exercised.............. (133,162) 1.93 (342,562) 2.60 (277,942) 6.01
Forfeited.............. (7,887) 3.39 (31,665) 16.17 (47,057) 20.93
--------- --------- ---------
Outstanding at end
of year.............. 1,189,054 4.20 1,205,776 10.00 1,383,918 15.31
========= ========= =========
Options exercisable
at end of year....... 820,147 2.25 624,595 3.88 596,484 8.08
========= ========= =========
Weighted average fair
value of options
granted during the year........... $ 5.82 $ 15.15 $ 15.79
Stock Options Outstanding and Exercisable
Options Outstanding Options Exercisable
------------------------------------------ ------------------------------
Weighted
Number Average Weighted Number Weighted
Range of Outstanding Remaining Average Exercisable Average
Exercise at December 31, Contractual Exercise at December 31, Exercise
Prices 1997 Life Price 1997 Price
------ ---- ---- ----- ---- -----
$1.93................. 305,375 (a) $ 1.93 305,375 $ 1.93
$6.67 to $11.83....... 291,676 7.4 years 9.05 180,604 9.31
$15.22 to $22.32...... 302,040 8.3 years 21.81 91,740 21.43
$22.33 to $37.50...... 484,827 9.2 years 23.46 18,765 30.97
---------- ---------
$1.93 to $37.50....... 1,383,918 8.5 years $ 15.31 596,484 $ 8.08
========== =========
(a) Options granted under the SOP in 1993 and 1994 have no expiration date. They
are therefore not included in the total weighted-average remaining life.
Employee Stock Purchase Plan
Under the Dollar Tree Stores, Inc. Employee Stock Purchase Plan (ESPP),
the Company is authorized to issue up to 337,500 shares of Common Stock to
eligible employees. Under the terms of the ESPP, employees can choose to have up
to 10 percent of their annual base earnings withheld to purchase the Company's
Common Stock. The purchase price of the stock is 85 percent of the lower of the
price at the beginning or the price at the end of the quarterly offering period.
Under the ESPP, the Company has sold 28,517 shares as of December 31, 1997.
Under SFAS No. 123, compensation cost is recognized for the fair
value of the employees' purchase rights, which was estimated using the
Black-Scholes model with the following assumptions:
Expected term.................................... 3 months
Expected volatility.............................. 21% to 30%
Annual dividend yield............................ 0%
Risk-free interest rate.......................... 5.32%-5.88% (annualized)
The weighted-average fair value of those purchase rights granted in
1995, 1996 and 1997 was $3.05, $3.52, and $5.95, respectively.
33
DOLLAR TREE STORES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(In thousands, except share and per share data)
NOTE 12 - SUBSEQUENT EVENTS (Unaudited)
In preparation for moving to the Chesapeake corporate headquarters and
distribution center, the Company listed its Norfolk facility with a commercial
real estate agent for sublease. Subsequent to year end, the Company was in the
process of negotiating a sublease agreement for this facility.
During February 1998, the Company entered into a contract to purchase
approximately 43 acres of land for approximately $1,685 in Olive Branch,
Mississippi, for the purpose of building a new distribution center to replace
the existing facility located in Memphis, Tennessee. The new facility will be
designed after the new Chesapeake distribution center and will include an
automated conveyor and sorting system. The Company has also entered into a
contract to equip the new facility. The total commitment under this contract
approximates $3,700. The new facility is scheduled to be operational in early
1999. The Company intends to secure new financing for construction of this
facility.
In preparation for moving to the Olive Branch facility, the Company has
listed its Memphis distribution center with a commercial real estate agent for
sublease. The Company's current lease on its Memphis facility expires in
September 2005, and the Company will be responsible for rent payments through
this date if a suitable sublease cannot be secured.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
None.
34
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information concerning the Company's Directors and Executive Officers
required by this Item is incorporated by reference to Dollar Tree Stores, Inc.'s
Proxy Statement relating to the Company's Annual Meeting of Shareholders to be
held on June 4, 1998 (the "Proxy Statement"), under the caption "Election of
Directors".
Information set forth in the Proxy Statement under the caption "Compliance
with Section 16(a) of the Securities and Exchange Act of 1934", with respect to
director and executive officer compliance with Section 16(a), is incorporated
herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
Information set forth in the Proxy Statement under the caption
"Compensation of Executive Officers", with respect to executive compensation, is
incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information set forth in the Proxy Statement under the caption "Ownership
of the Common Stock of the Company", with respect to security ownership of
certain beneficial owners and management, is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information set forth in the Proxy Statement under the caption "Certain
Relationships and Related Transactions" is incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Documents filed as part of this report:
1. Financial Statements. Reference is made to the Index to the
Consolidated Financial Statements set forth under Part II, Item 8, on
page 19 of this Form 10-K.
2. Financial Statement Schedules. All schedules for which provision is
made in the applicable accounting regulations of the Securities and
Exchange Commission are not required under the related instructions,
are not applicable, or the information is included in the Consolidated
Financial Statements, and therefore have been omitted.
3. Exhibits. The exhibits listed on the accompanying Index to Exhibits are
filed as part of, or incorporated by reference into, this report.
(b) No report on Form 8-K was filed by the Company during the last quarter of
1997.
The Company filed two Forms 8-K on March 4, 1998, one of which included the
Company's audited consolidated financial statements for the years ended December
31, 1995, 1996 and 1997. The second Form 8-K filed on March 4, 1998 included the
Company's press release regarding the filing of a Form S-3 the same day.
35
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
DOLLAR TREE STORES, INC.
DATE: March 30, 1998 By: /s/ Macon F. Brock, Jr.
---------------------------
Macon F. Brock, Jr
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Signature Title Date
/s/ J. Douglas Perry Chairman of the Board; March 30, 1998
---------------------- Director
J. Douglas Perry
/s/ Macon F. Brock, Jr. President and Chief Executive March 30, 1998
----------------------- Officer; Director (principal
Macon F. Brock, Jr. executive officer)
/s/ H. Ray Compton Executive Vice President and March 30, 1998
------------------------ Chief Financial Officer; Director
H. Ray Compton (principal financial and
accounting officer)
/s/ John F. Megrue Vice Chairman; Director March 30, 1998
-----------------------
John F. Megrue
/s/ Allan W. Karp Director March 30, 1998
-----------------------
Allan W. Karp
/s/ Thomas A. Saunders, III Director March 30, 1998
---------------------------
Thomas A. Saunders, III
/s/ Alan L. Wurtzel Director March 30, 1998
-----------------------
Alan L. Wurtzel
Director
- ----------------------- --------------
Frank Doczi Date
36
Index to Exhibits
3. Articles and Bylaws
3.1 Third Restated Articles of Incorporation of Dollar Tree Stores,
Inc. (the "Company"), as amended (Exhibit 3.1 to the Company's
Quarterly Report on Form 10-Q for the fiscal quarter ended
September 30, 1996 incorporated herein by this reference).
3.2 Second Restated Bylaws of the Company (Exhibit 3.2 to the
Company's Registration Statement on Form S-1, No. 33-88502,
incorporated herein by this reference).
10. Material Contracts
(a) The following documents are filed herewith:
10.1 Lease dated March 27, 1998 by and between the Company and
Raytheon Service Company.
10.2 Lease Guarantee dated March 27, 1998 by and between the Company
and Raytheon Company.
(b) The following document, filed as Exhibit 10.1 to the Company's Current
Report on Form 8-K on March 4, 1998 is incorporated herein by this
reference:
10.3 Fourth Amendment to Amended and Restated Revolving Credit
Agreement (the "Amended Credit Agreement") among The First
National Bank of Boston, NationsBank, N.A., Signet Bank, Crestar
Bank, First Union National Bank of Virginia, Amsouth Bank of
Alabama, and Union Bank of California, N.A., the Company, Dollar
Tree Distribution, Inc., and Dollar Tree Management, Inc.
(c) The following document, filed as Exhibit 10.6 to the Company's Quarterly
Report on Form 10-Q for the fiscal quarter ended September 30, 1997 is
incorporated herein by this reference:
10.4 Third Amendment to the Amended Credit Agreement.
(d) The following documents, filed as Exhibits 10.1 and 10.2 to the Company's
Form S-3 filed on June 6, 1997, are incorporated herein:
10.5 Second Amendment to Dollar Tree Stores, Inc. Stock Incentive Plan
("Stock Incentive Plan").
10.6 Standard Form of Agreement between Owner (Dollar Tree Stores,
Inc.) and Contractor (Clancy & Theys Construction Company).
(e) The following documents, filed as Exhibits 10.4, 10.5 and 10.6 to the
Company's Quarterly Report on Form 10-Q for the fiscal quarter ended March
31, 1997 is incorporated herein by this reference:
10.7 $30 million, 7.29% Senior Guaranteed Notes, due April 30, 2004
(the "Notes").
10.8 Composite Conformed Copy of Note Agreements by Dollar Tree
Distribution, Inc. and the Company, regarding the Notes.
10.9 Guaranty Agreement by Dollar Tree Management, Inc. regarding the
Notes.
(f) 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:
10.10 Purchase and Sale Agreement by and among Volvo Cars of North
America, Inc. the Company, Dollar Tree Properties, Inc. and
Dollar Tree Distribution, Inc.
10.11 First Amendment to Amended and Restated Revolving Credit Agreement
by and among the Company, Dollar Tree Distribution, Inc., Dollar
Tree Management, Inc. and the Banks and The First National Bank of
Boston as Agent for the Banks.
10.12 First Amendment to the Company's Stock Incentive Plan.
37
(g) The following document filed as Exhibit 10.1 to the Company's Quarterly
Report on Form 10-Q for the fiscal quarter ended September 30, 1996 is
incorporated herein by this reference:
10.13 Amended and Restated Revolving Credit Agreement (the "Amended
Credit Agreement") among the Company, Dollar Tree Distribution,
Inc., Dollar Tree Management, Inc., and The First National Bank of
Boston, NationsBank, N.A., Signet Bank, Crestar Bank, First Union
National Bank of Virginia, Amsouth Bank of Alabama, and Union Bank
of California, N.A. (collectively, the "Banks").
(h) The following documents filed as Exhibit 10.19 - Exhibit 10.21 to the
Company's Quarterly Report on Form 10-Q for the fiscal quarter ended March
31, 1996 are incorporated herein by this reference:
10.14 Fourth Amendment to Dollar Tree Stores, Inc. Amended and Restated
Stock Option Plan (the "Stock Option Plan") (with forms of Second
Amendment to 1993 Stock Option Agreement and Second Amendment to
1994 Stock Option Agreement).
10.15 Technical Clarification to Dollar Tree Stores, Inc. Employee Stock
Purchase Plan (the "Stock Purchase Plan").
10.16 Second Amendment to the Amended and Restated Dollar Tree Stores,
Inc. Deferred Compensation Plan (the "Deferred Compensation Plan")
(i) The following document filed as Exhibit 10.14 to the Company's Annual
Report on Form 10-K for the fiscal year 1995 is incorporated herein by
this reference:
10.17 Non-Competition Agreements--Michael Alper and Pamela Alper.
(j) The following document filed as Exhibit 2 to the Company's Current Report
on Form 8-K dated February 14, 1996 for the fiscal year 1995 are
incorporated herein by this reference:
10.18 Agreement for Sale and Purchase of Stock.
(k) The following document filed as Exhibit 10.1 to the Company's Quarterly
Report on Form 10-Q for the fiscal quarter ended June 30, 1995 is
incorporated herein by this reference:
10.19 Third Amendment to the Stock Option Plan.
(l) The following documents filed as Exhibit 2.1, Exhibit 10.3, and Exhibit
10.13 - Exhibit 10.19 to the Company's Quarterly Report on Form 10-Q for
the fiscal quarter ended March 31, 1995 are incorporated herein by this
reference:
10.20 Amended and Restated Stockholders Agreement effective March 13,
1995 among the Company, John F. Megrue, Thomas A. Saunders, III,
and certain shareholders.
10.21 Form of First Amendment to the Warrant for the Purchase of Shares
of Common Stock of the Company.
10.22 Second Amendment to the Stock Option Plan.
10.23 First Amendment to the Deferred Compensation Plan.
10.24 Stock Incentive Plan.
10.25 Dollar Tree Stores, Inc. Employee Stock Purchase Plan.
10.26 First Amendment to the Advisory Agreement (annual fee) between the
Company and Saunders, Karp & Company, L.P. (The "Advisory
Agreement").
10.27 Assignment of the Industrial Lease Agreement between Industrial
Developments International, Inc. and the Company dated August 9,
1993 (the "Industrial Lease Agreement").
38
(m) The following documents filed as Exhibit 2.1, Exhibit 2.3, Exhibit 10.8,
Exhibit 10.19, Exhibit 10.20, Exhibit 10.27, and Exhibit 10.31 - Exhibit
10.33 to the Company's Registration Statement on Form S-1, No. 33-88502,
are incorporated herein by this reference:
10.28 Agreement for the Purchase and Sale of Stock dated September 24,
1993 among J. Douglas Perry, Patricia W. Perry, Macon F. Brock,
Jr., Joan P. Brock, H. Ray Compton and The SK Equity Fund, L.P.
10.29 Securities Purchase Agreement dated September 30, 1993 among the
Company, J. Douglas Perry, Patricia W. Perry, Macon F. Brock, Jr,
Joan P. Brock, H. Ray Compton, John F. Megrue, Thomas A. Saunders,
III, Allan W. Karp, Christopher K. Reilly, and the SK Equity Fund,
L.P. and the First Amendment thereto.
10.30 Form of Warrant for the Purchase of Shares of Common Stock of the
Company.
10.31 Stock Option Plan with exhibits thereto (including the Restrictive
Stock Agreement) and First Amendment thereto.
10.32 Deferred Compensation Plan.
10.33 Advisory Agreement.
10.34 Industrial Lease Agreement and First Amendment thereto.
10.35 Lease dated October 1, 1991 by and between DMK Associates and the
Company (Parcel 29), Amendment and Assignment.
10.36 Lease dated October 1, 1991 by and between DMK Associates and the
Company (Parcel 31), Amendment and Assignment.
21. Subsidiaries of the Registrant
21.1 Subsidiaries
23. Consents of Experts and Counsel
23.1 Consent of Independent Auditors
27. Financial Data Schedule
27.1 Financial Data Schedule for year ended December 31, 1997
27.2 Financial Data Schedule for year ended December 31, 1996 (restated
to reflect the implementation of SFAS No. 128)
27.3 Financial Data Schedule for year ended December 31, 1995 (restated
to reflect the implementation of SFAS No. 128)
39