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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.
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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