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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, 1998
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 Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes (X) No ( )
Indicate by check mark 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 15, 1999 was $1,785,983,119 based on a $37.50 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.
On March 15, 1999, there were 61,169,679 shares of the Registrant's Common
Stock outstanding.
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 3, 1999, which will be filed with the Securities and
Exchange Commission not later than April 30, 1999.
DOLLAR TREE STORES, INC.
TABLE OF CONTENTS
Page
PART I
Item 1. BUSINESS.........................................................3
Item 2. PROPERTIES.......................................................9
Item 3. LEGAL PROCEEDINGS...............................................10
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.............11
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS...........................................11
Item 6. SELECTED FINANCIAL DATA.........................................11
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS...........................13
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK......21
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.....................22
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE...........................38
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT..............39
Item 11. EXECUTIVE COMPENSATION..........................................39
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT................................................39
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS..................39
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS
ON FORM 8-K...................................................39
SIGNATURES......................................................41
A WARNING ABOUT FORWARD LOOKING STATEMENTS: We have made "forward-looking
statements" in this document as that term is used in the Private Securities
Litigation Reform Act of 1995. Such statements are based on the beliefs and
assumptions of our management, and on information currently available to our
management. Our assumptions, beliefs and current information could be mistaken.
Forward-looking statements include any statements preceded by, followed by or
including words such as "believe," "anticipate," "expect," "intend," "plan,"
"view" or "estimate." Forward-looking statements also include, and are subject
to risks relating to, our future operations, performance, or financial condition
such as:
o comparable store net sales trends,
o expansion plans and store openings,
o dependence on imports and vulnerability to foreign economic and
political conditions as well as import restrictions, duties and
tariffs,
o increases in shipping costs, the minimum wage, and other costs,
o the integration of Step Ahead,
o the capacity and the performance of our distribution centers and
systems,
o our ability to sublease the Memphis facility, and
o Year 2000 compliance.
Any statements concerning our future operations, performance, or financial
condition could be inaccurate or incorrect. For additional discussion of the
factors that could affect our actual operations, performance or financial
condition, see "Business," and "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
Investors should also be aware that while we do, from time to time, communicate
with securities analysts, it is against company policy to disclose to them any
material non-public information or other confidential commercial information.
Accordingly, shareholders should not assume that we agree with any statement or
report issued by any analyst irrespective of the content of the statement or
report. We also have a company policy against issuing financial forecasts or
projections or confirming those issued by others. Thus, to the extent that
reports issued by securities analysts contain any projections, forecasts or
opinions, such reports are not our responsibility.
- --------------------------------------------------------------------------------
INTRODUCTORY NOTE: Unless otherwise stated, financial and other data
describe Dollar Tree and Step Ahead on a combined basis, and references to "we,"
"our" and the "company" refer to the combined company.
- --------------------------------------------------------------------------------
PART I
Item 1. BUSINESS
Dollar Tree Stores, Inc. was established in 1986 by J. Douglas Perry,
our Chairman, Macon F. Brock, Jr., our President and Chief Executive Officer,
and H. Ray Compton, our Executive Vice President. They have worked together for
20 years building first a chain of toy stores and then the discount variety
store chain that became Dollar Tree. After selling the toy stores in 1991, they
concentrated solely on developing and expanding Dollar Tree variety stores and
selling merchandise at the $1.00 price point.
We have opened over 100 new stores in each of the last three years.
Dollar Tree stores have been successful in major metropolitan areas, mid-sized
cities and small towns with populations under 25,000. Our stores perform well in
a variety of locations. They are typically between 4,500 to 5,000 square feet in
size and stock a wide assortment of products in traditional variety store
categories. Much of this merchandise is directly or indirectly imported from
vendors located abroad.
In December 1998, we merged Dollar Tree with Step Ahead Investments,
Inc., and obtained its sixty-six "98 Cent Clearance Center" stores located in
northern and central California and northwestern Nevada. These stores average
10,000 to 14,000 square feet and are more than twice as large as the typical
Dollar Tree store. They also stock more consumable merchandise and generally
3
target customers with lower incomes than those that Dollar Tree targets.
Although Step Ahead does not directly import merchandise, a portion of its goods
purchased from domestic vendors are manufactured abroad.
During 1999, we will make several changes to the 98 Cent Clearance
Centers so that they will more closely resemble our Dollar Tree stores. These
changes include:
o changing the name, layout and look of the stores,
o improving the quality and selection of merchandise,
o improving merchandise presentation, and
o converting the $0.98 price point to match our $1.00 price point.
Business Strategy
Our goal is to continue our leadership position in the $1.00 price
point segment of the discount retail industry. Factors contributing to the
success of our operations include:
Value Offering. We strive to exceed customers' expectations of the
range and quality of products that can be purchased for $1.00. Management
believes that many of the items we sell for $1.00 are typically sold for higher
prices elsewhere. We are able to offer such value in part by purchasing a
substantial portion of our products directly from foreign manufacturers,
allowing us to pass on additional value 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. In addition to our wide assortment of quality
everyday core merchandise, we have a constantly changing mix of new and exciting
products. These can include seasonal goods, such as Easter gifts, summer toys,
back-to-school products and Christmas wrapping paper, as well as closeout
merchandise. We also take advantage of the availability of lower priced, private
label goods, which are comparable to national name brands.
Strong and Consistent Store Level Economics. The early profitability of
our stores and the flexibility of our real estate strategy provide us with a
wide range of real estate opportunities. Dollar Tree and 98 Cent Clearance
Center stores have historically been profitable within the first full year of
operations. Dollar Tree stores have an average store level operating income of
approximately $185,000 (approximately 23% of net sales) for stores whose first
full year of operations was 1998. 98 Cent Clearance Centers have an average
store level operating income of approximately $252,000 (approximately 15% of net
sales) for stores whose first full year of operations was 1998. In addition, the
operating performance of both Dollar Tree and 98 Cent Clearance Center stores
has been very consistent. Over 90% of those stores open for the entire year have
store level operating income margins in excess of 15% for 1998. We expect most
future stores we open to resemble the Dollar Tree model.
Cost Control. Given our pricing structure, it is critical that we
monitor expenses, inventories and operating margins. We closely manage both
retail inventory shrinkage and retail markdowns of inventory, limiting each to
an average of not more than 2.5% of annual net sales over the last five years.
In the past five years, on a combined basis and excluding merger related costs,
we have kept our gross profit margins in the 35.7% to 37.9% range and increased
our operating income margin from 10.3% to 13.4%.
Growth Strategy
Historically, our net sales growth has come primarily from new store
openings, as well as comparable store net sales increases. For the five years
ended December 31, 1998, net sales increased at a compound annual growth rate of
35% and operating income, excluding merger related costs, increased at a
compound annual growth rate of 44%. Management anticipates that the primary
sources of future sales growth will be new store openings and, to a lesser
degree, sales increases from expanded and relocated stores and comparable store
net sales increases. We anticipate expanding by approximately 215 to 225 stores
in 1999, 24 of which have been added as of March 1, 1999. Our new store openings
in 1999 will continue to be concentrated within our existing eastern markets to
take advantage of market opportunities, distribution efficiencies and field
management efficiencies. In 1999, we expect to add approximately six to ten
stores in the western market. We also plan to selectively enter new markets.
4
Merchandising and Store Format
Our primary goal in merchandising is to offer a wide assortment of
products which exceed customer expectations of the value available for $1.00. We
seek to accomplish this goal by:
o offering a balanced mix of everyday core products and changing
selections in traditional variety store categories,
o maintaining a disciplined, global purchasing program, and
o emphasizing the effective presentation of merchandise in the
stores.
Merchandise Mix. Our merchandise mix distinguishes Dollar Tree from
other discount variety stores selling at the $1.00 price point. Our stores offer
a well stocked selection of core and changing products within traditional
variety store categories. These categories include housewares, seasonal goods,
candy and food, toys, health and beauty care, party goods, gifts, stationery,
personal accessories, books and other consumer items. The actual items and
brands offered at any one time will vary.
We use seasonal and, to a limited extent, selected closeout merchandise
to add to the variety and freshness of our stores' core products. Seasonal goods
include Easter gifts, summer toys, back-to-school products and Christmas
wrapping paper. We purchase closeout merchandise, which management believes can
be effective in generating recognized value and excitement, as opportunities
present themselves, but limit the percentage of total inventory represented by
closeout merchandise to less than 20%. The 98 Cent Clearance Centers have, in
the past, carried slightly more closeout merchandise and slightly less seasonal
goods than the traditional Dollar Tree stores.
The merchandise mix in the 98 Cent Clearance Center stores focuses
considerably more on consumable products. While we expect the historical balance
between consumable and "impulse" merchandise for the West Coast stores to remain
relatively the same in 1999, within this merchandise mix we will focus on faster
selling items and replace lower quality goods with the higher quality
merchandise already carried in our eastern stores. We also expect to broaden the
selection of items available within particular categories, such as gifts, party
goods, toys and seasonal goods.
Purchasing. Management believes that our disciplined purchasing
program, our relationships with our suppliers and the exclusive focus of our
buying power at the $1.00 price point contribute to our successful purchasing
strategy. We believe that offering perceived, as well as real, value to our
customers while maintaining target merchandise margins in our purchasing program
is critical to our success.
We purchase merchandise from 850 to 900 vendors annually, buying both
directly from manufacturers and indirectly from trading companies and brokers.
No vendor accounted for more than 10% 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.
We deal with our suppliers principally on an order-by-order basis. We
have no long-term purchase contracts or other contractual assurance of continued
supply or pricing. Management believes that a continuing and increasing supply
of quality merchandise suited to a $1.00 sales price will be available in
sufficient quantities to meet our plans for future growth.
Imports. A majority of the merchandise sold in Dollar Tree stores is
imported from foreign sources, particularly China. On a combined basis, in 1997,
we imported approximately 29% of our merchandise based on cost and approximately
33% based on retail, directly from vendors located abroad, primarily in Hong
Kong and Taiwan (through which our Chinese imports flow), Thailand, Mexico,
Indonesia, Italy and India. In 1998, we imported approximately 36% of our
merchandise based on cost and approximately 40% based on retail. In 1999, we
expect imports to account for approximately 40% of total purchases at retail.
Historically, Step Ahead did not purchase a significant amount of direct
imports. However, we believe that a portion of the non-consumable goods both
companies purchased from domestic vendors was indirectly imported from foreign
countries.
China is the source for a large majority of our direct imports. We
believe it is also the largest source of our indirect imports. Our imports from
China are generally subject to favorable United States import duties because
China is currently afforded "most favored nation" status by the United States.
This status for China is reviewed annually by the United States government and
is currently extended through July 2, 1999. As a result of unresolved trade and
other issues between the United States and China, there is significant
opposition in the U.S. Congress to the renewal of "most favored nation" status
for China. Loss of this status for China or the
5
imposition of trade restrictions such as punitive tariffs or duties could impose
significantly higher purchasing costs on us. Although no punitive import duties
are currently imposed, these duties could equal as much as 100% of the cost of
certain Chinese goods.
The countries of Southeast Asia have been involved in an economic
crisis characterized by currency devaluations, rising interest rates,
deteriorating economic growth and declining capital markets. In 1998, the
Southeast Asia crisis resulted in a shortage of shipping containers available
for shipments from Asia. Continued 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, and/or
strikes.
While we believe we 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, the
transition to alternative sources may not occur in time to meet our demands.
Also, products from alternative sources may be of lesser quality and/or more
expensive than those we currently purchase. The result could be a material
adverse effect on our business and results of operations.
Visual Merchandising. Management believes that the presentation of our
merchandise is critical to communicating value and excitement to our customers.
Our stores are attractively designed, using vibrant colors, uniform decorative
signs and accent lighting, and provide carpeting and background music to create
an inviting atmosphere for shoppers. We use a variety of merchandising fixtures,
including slat walls, bins and shelving, and adjustable gift displays. These
fixtures allow us the flexibility to rearrange merchandise to feature seasonal
products. Some of these fixtures have been specifically designed for us, such as
the customized shelf display designed to promote our polyresin and porcelain
gift products at the front of the stores. We maintain a field merchandising
group, including store display coordinators, who maintain a consistent visual
presentation in stores throughout the chain and expedite the store opening
process. We rely on attractive exterior signs and in-store merchandising as the
primary forms of advertising. We generally do not use other forms of
advertising, except when promoting the opening of a new store.
The wide variety, value and freshness of our merchandise together with
the 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. After-hours stocking and
"recovery" of the stores help maintain the stores' clean, neat appearance as
well as ensure that the maximum amount of merchandise is displayed. The size and
layout of the store, merchandising by category, our $1.00 price point and
convenient locations combine for a time-efficient shopping experience.
Centralized check-out at the front of the store and the even-dollar
pricing policy ensure that customers are not kept waiting. We do not have a
point-of-sale system. Credit and debit cards are accepted at a select number of
stores.
During 1999, the layout of the 98 Cent Clearance Center stores will be
changed to more closely resemble our eastern stores. We will install shelving
and display fixtures consistent with current Dollar Tree standards and update
the checkout area for better efficiency. We intend to update these stores to
create a more attractive, inviting atmosphere.
Site Selection and Store Locations
We maintain a disciplined, cost-sensitive approach to site selection,
favoring strip centers and selected enclosed malls. In the last five years, we
have opened primarily strip center based stores. These stores have historically
required lower initial capital investment and generated higher operating margins
than mall stores. We favor 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. We also open
stores in neighborhood centers anchored by large grocery retailers. Our stores
have been successful in major metropolitan areas, mid-sized cities and small
towns with populations under 25,000. Management believes that our stores can
perform well in a variety of locations. Management also believes that our stores
have a relatively small shopping radius, which allows the concentration of
multiple stores in a single market. Our ability to open new stores is contingent
upon, among other factors, locating suitable sites and negotiating favorable
lease terms.
Larger Store Format
The format of our Dollar Tree stores has evolved over time from a
predominantly mall-based store, averaging 2,500 to 3,000 square feet, in the
late 1980s to a preference for strip center locations of approximately 4,500 to
5,000 square feet in more recent years. Prior to our acquisition of the 98 Cent
Clearance Centers, we began testing a larger Dollar Tree store
6
format. These larger stores range from 7,500 to 14,000 square feet, and provide
a better opportunity to display our variety store merchandise. Although we
characterize a 10,000 square foot store as "larger," we believe that this is
still "small box" retailing within the discount retail industry. Our management
does not view these stores as a departure from our core business, but rather a
variation on our core philosophies of value, variety and convenience.
In these larger stores, a lower profile gondola fixture, wider aisles
and lower shelf display allow the customer to see virtually the whole store,
which creates a sense of openness and space. The merchandise mix displayed
within the larger Dollar Tree stores is largely identical to that in all of our
Dollar Tree stores, with our ongoing focus on offering a wide selection of
variety merchandise. Because of the added space in the larger stores, we are
able to display a larger selection of certain items, such as picture frames and
candles, and to create attractive displays, such as a gift wrap center.
During 1998, we opened four larger format stores and remodeled three of
our existing Dollar Tree stores to this format. Due to the short amount of time
that these stores have been open with this format, we do not have actual annual
operating results available. Our management believes that sales in the large
format Dollar Tree stores will range from $1.2 to $1.5 million, and will produce
store-level operating margins similar to margins historically seen at the Dollar
Tree stores. We expect to open 20 to 25 of these larger stores during 1999. We
will continue to locate these stores in markets that serve the middle income
customer looking for a convenient shopping experience. We expect future new
store square footage to range from approximately 4,500 to 10,000 square feet.
Our goal is to select the size which we believe can best serve our customer in
each location.
Warehousing And Distribution
Warehousing and distribution are managed centrally from our corporate
headquarters, located on the same site as our Chesapeake, Virginia distribution
center. We view maintaining strong warehousing and distribution support for our
stores as a critical element of our expansion strategy and our ability to
maintain a low cost operating structure. As we continue our expansion, we intend
to open new units in regions around our distribution centers.
Our financial results depend in large part on whether we get our
inventory from suppliers to stores in a timely and efficient manner.
Substantially all of our inventory is shipped or picked up directly from
suppliers and delivered to our distribution centers where the inventory is
processed and then distributed to stores.
We believe that our distribution centers currently allow us to service
over 2,000 stores. However, the California facility can only service 75 stores
and we currently have sixty-six 98 Cent Clearance Center stores. As a result, a
new leased distribution center will be built in 1999 in Stockton, California and
is expected to open in early 2000. For more information on this facility, see
"Properties" on page 10.
Our substantial distribution center capacity allows us to receive
manufacturers' early shipment discounts and buy large quantities of goods at
favorable prices. In addition, during the past several years we have used
off-site facilities to accommodate large shipments of seasonal merchandise.
Since the distribution centers maintain back-up inventory and provide weekly
delivery to each store, in-store inventory requirements are reduced and we are
able to operate with smaller stores than would otherwise be required. Off-hours
stocking, as well as off-site storage space, is used to support the stores'
inventory turnover.
Our merchandise replenishment software generates distribution models
that can be based on variables such as store volume and certain demographic and
physical characteristics of the stores. Each store has a weekly and monthly
budgeted inventory requirement based on our projected sales for the year and our
existing inventory levels. 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. We have the ability to make two weekly deliveries to
high volume stores during the busy Christmas season. The majority of our
inventory is delivered to the stores by contract carriers, supplemented by a
small internal fleet of less than 50 tractors.
The orderly operation of our receiving and distribution process depends
on effective management of our distribution centers and strict adherence to
shipping schedules (especially those from the Far East). We are continually
looking for opportunities to reduce our freight and distribution costs and
periodically evaluate various delivery options. We may not have anticipated all
of the changing demands our expanding operations will impose on our distribution
network. Events beyond our control, such as disruptions in operations due to
labor disagreements or shipping problems, may result in unexpected costs or
delays in the delivery of merchandise to stores.
7
Competition
The retail industry is highly competitive. Our competitors include mass
merchandisers (such as Wal-Mart), discount stores (such as Dollar General),
closeout stores (such as Odd Lots and Big Lots) and other variety stores. In
past years, our principal competitors have not been other single price point
retailers. However, management expects that our expansion plans, as well as the
expansion plans of other single price point retailers, will bring us
increasingly into direct competition with other single price point retailers.
For example, we expect competition to increase with such companies as 99 Cents
Only in California and Dollar Express in the Northeast. Increased competition
could have a material adverse effect on business and financial results.
Trademarks
We are the owners 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 our stores operate under the name "Only $1.00," for which we
have not obtained a service mark registration; if we were required to change the
name of these stores, we do not believe that this would have a material adverse
effect on our business. We also own a concurrent use registration for "Dollar
Bill$" and the related logo which expire in 2005. During 1997, we 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 We Mean Everything,"
and "Everything's $1.00," the registration of which is pending, and "The Dollar
Store," the registration of which expires in 2001. In 1998, with the acquisition
of Step Ahead, we became the owner of additional Federal service mark
registrations which include "98 Cent Clearance Center" and "98 Cent Clearance
Centers" together with the related design. These marks expire in 2003.
We also occasionally use various brand names under which we market
products, although management believes that these brand names are not material
to our operations.
Seasonality
Dollar Tree 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."
Employees
We employed approximately 16,000 employees at December 31, 1998,
approximately 3,800 of whom were full-time and 12,200 part-time. The number of
part-time employees fluctuates depending on seasonal needs. None of our
employees are currently represented by a labor union. On March 31, 1994 and
March 20, 1996, the employees of our Virginia distribution center voted against
union representation by the International Brotherhood of Teamsters in elections
certified by the National Labor Relations Board. During 1998, the Teamsters
attempted to organize our employees at our Chesapeake and Chicago, Illinois area
distribution centers. In the future, our employees at any of our distribution
centers may elect to be represented by a union. We consider our relationship
with employees to be good, and we have not experienced significant interruptions
of operations due to labor disagreements.
8
Item 2. PROPERTIES
As of December 31, 1998, we operated 1,156 stores in 31 states. A
summary of our historical unit growth by state over the past three years is
presented below (number represents stores open as of the date indicated):
December 31,
---------------------------------------
1996 1997 1998
---- ---- ----
SOUTHEAST:
Florida.................... 85 96 117
North Carolina............. 52 61 72
Georgia.................... 50 60 71
Tennessee.................. 37 41 47
South Carolina............. 27 35 44
Alabama.................... 33 38 41
Mississippi................ 15 20 23
MIDWEST:
Michigan................... 49 57 69
Illinois................... 47 58 65
Ohio....................... 46 49 54
Wisconsin.................. 7 15 30
Indiana.................... 27 28 30
Missouri................... 13 22 25
Kentucky................... 15 19 24
Minnesota.................. 3 6 9
Iowa....................... 1 2 3
MID-ATLANTIC:
Virginia................... 72 84 99
Pennsylvania............... 45 51 57
Maryland................... 39 47 54
West Virginia.............. 9 11 17
Delaware................... 2 3 3
SOUTHCENTRAL:
Texas...................... 16 20 31
Arkansas................... 9 12 17
Louisiana.................. 12 15 16
Oklahoma................... 0 0 4
NORTHEAST:
New York................... 16 23 45
New Jersey................. 10 14 16
Connecticut................ 0 0 5
Massachusetts.............. 0 0 2
WEST
California................. 46 56 63
Nevada..................... 2 3 3
----------------------------------------
Total........................ 785 946 1,156
========================================
Of the 1,156 stores open at December 31, 1998, the majority are located
in the Southeastern and Midwestern regions of the United States. Additionally,
we operate four distribution centers, one each in Chesapeake, Virginia; Olive
Branch, Mississippi; the Chicago, Illinois area; and the Sacramento, California
area. We anticipate expanding by approximately 215 to 225 stores in 1999.
We currently lease all of our existing store locations and expect that
our policy of leasing rather than owning stores will continue as we expand. Our
leases typically provide for a short initial lease term and give us the option
to extend. Management believes that this lease strategy enhances our flexibility
to pursue various expansion and relocation opportunities resulting from changing
market conditions. Our ability to open new stores is contingent upon:
o locating satisfactory sites,
o negotiating favorable leases,
o obtaining necessary financing, and
o recruiting and training additional qualified management personnel.
As current leases expire, we believe that we 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, we
have not experienced difficulty in either renewing leases for existing locations
or securing leases for suitable locations for new stores. We may have violated
prohibitions against a change in control of Dollar Tree in a minority of our
leases. Many of our
9
leases contain provisions with which we do not comply, including provisions
requiring purchase of insurance upon leasehold improvements and/or property
located in the stores, requiring us to advertise or prohibiting us from
operating another store within a specified radius. Management believes that
these provisions will not have a material adverse effect on the business or
financial position of Dollar Tree based primarily on our belief that we maintain
good relations with the landlords, that most of our leases are at market rents,
and that we have historically been able to secure leases for suitable locations.
The following table includes information about the distribution centers
we currently have in use. It shows where those distribution centers are located;
whether we own the facility or lease it, and, if leased, when the lease expires;
the overall size in square feet of the facility; and the number of stores we
believe can be served from each distribution center.
Estimated
Location Own/Lease Lease Expires Square Feet Store Capacity
- ---------------------------- ----------- ---------------- ------------- --------------
Chesapeake, Virginia Own N/A 400,000 800
- ---------------------------- ----------- ---------------- ------------- --------------
Olive Branch, Mississippi Own N/A 425,000 800
- ---------------------------- ----------- ---------------- ------------- --------------
Chicago area, Illinois Lease June 2005, with 250,000 400
options to renew
- ---------------------------- ----------- ---------------- ------------- --------------
Sacramento area, California Lease June 2008 140,000 75
- ---------------------------- ----------- ---------------- ------------- --------------
Our Store Support Center in Chesapeake, Virginia, was built in 1997 to
replace our original location in Norfolk, Virginia. The lease on our former
Norfolk location expires in December 2009 and the facility has been subleased.
The distribution center in Olive Branch, Mississippi, became operational in
January 1999 and replaced a former location in Memphis, Tennessee. The lease on
our former Memphis distribution center expires in September 2005; we hope to
sublease this facility in the future (see "Management's Discussion and Analysis
of Financial Condition and Results of Operations").
The Chesapeake and Olive Branch distribution centers contain advanced
materials handling technologies, including an automated conveyor and sorting
system, radio-frequency inventory tracking equipment and specialized information
systems. The Chicago area and Sacramento area distribution centers are not
automated. The Sacramento area distribution center is also supported by three
satellite locations totaling approximately 220,000 square feet.
We expect to replace the distribution center in the Sacramento area
with a new leased facility in Stockton, California. Construction of this 317,000
square foot, non-automated facility is scheduled to begin in the second quarter
of 1999. Management anticipates operation of this distribution center to begin
in early 2000.
Item 3. LEGAL PROCEEDINGS
Alper Lawsuit. On January 31, 1996, we bought all of the capital stock
of Dollar Bills, Inc. pursuant to a stock purchase agreement. In March and April
1996, Michael and Pamela Alper, former shareholders of Dollar Bills, together
with a corporation they control, filed lawsuits in the state and federal courts
in Illinois, against our company and one of our 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 contract violations, fraud, misrepresentation, and other
violations in connection with our purchase of the wholesale operations which
were owned by Dollar Bills and continued by Dollar Tree. Plaintiffs subsequently
dismissed their suit in state court voluntarily. On November 26, 1996, the
federal court dismissed all counts of the plaintiffs' lawsuit against us and the
co-defendant. Plaintiffs' federal securities and federal antitrust claims
against us were dismissed with prejudice and the state claims were dismissed
without prejudice. No litigation is currently pending against us in this matter.
However, in light of the history of this dispute, the Alpers may attempt to
refile their state law claims in the future.
We believe that the ultimate outcome of this matter will not have a
material adverse effect on our financial condition or results of operations.
Nevertheless, there can be no assurance regarding the ultimate outcome of any
future litigation, and any such litigation may have a material adverse effect on
our financial condition or results of operations.
Consumer Products Liability. We recalled (in cooperation with the
Consumer Products Safety Commission) approximately 155,000 retractable dog
leashes which we sold between November 1997 and January 1998. We learned of
several minor injuries involving the leashes, and one leash allegedly caused a
serious personal injury in January 1998 which has resulted in a product
liability claim. The claimant has indicated she may seek punitive damages.
Management does not believe that potential claims arising from these injuries
will have a material adverse effect on our company. However, additional serious
injuries giving rise to potential claims could occur in the future.
10
Additionally, the company is a party to ordinary routine litigation and
proceedings incidental to our business, including certain matters which may
occasionally be asserted by the Consumer Products 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 our 1998 calendar year.
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Dollar Tree's common stock has been traded on The Nasdaq Stock
Market(R) under the symbol "DLTR" since our initial public offering on March 6,
1995. The following table gives the high and low sales prices of our common
stock as reported by Nasdaq for the periods indicated, restated to reflect
3-for-2 stock splits effected as stock dividends in July 1997 and June 1998.
1997: High Low
---- ---- ---
First Quarter................... $ 20.222 $ 14.333
Second Quarter.................. 22.444 15.750
Third Quarter................... 31.583 21.222
Fourth Quarter.................. 29.917 23.000
1998:
----
First Quarter................... $ 36.083 $ 23.000
Second Quarter.................. 41.917 33.417
Third Quarter................... 49.500 27.875
Fourth Quarter.................. 48.750 23.750
On March 15, 1999, the last reported sale price for our common stock as
quoted by Nasdaq was $37.25 per share. As of March 15, 1999, we had
approximately 450 shareholders of record.
We anticipate that all of our income in the foreseeable future will be
retained for the development and expansion of our business and the repayment of
indebtedness. Management does not anticipate paying dividends on our common
stock in the foreseeable future. Additionally, our credit facilities contain
financial covenants which restrict our ability to pay dividends.
Item 6. SELECTED FINANCIAL DATA
This section of our report presents our selected financial data for the
last five years. This information is different from the information reported in
last year's table because we merged with Step Ahead Investments, Inc. during
1998. We accounted for the merger as a pooling of interests, which required us
to combine the financial statements of Dollar Tree with those of Step Ahead,
retroactively. The following table identifies the reporting periods that have
been combined:
Historical Fiscal Period Currently Reported
Dollar Tree Step Ahead Combined Period
----------- ---------- ---------------
Jan. 1, 1994 - Dec. 31, 1994 Jan. 3, 1994 - Jan. 1, 1995 Calendar Year 1994
Jan. 1, 1995 - Dec. 31, 1995 Jan. 30, 1995 - Jan. 28, 1996 Calendar Year 1995
Jan. 1, 1996 - Dec. 31, 1996 Jan. 29, 1996 - Jan. 26, 1997 Calendar Year 1996
Jan. 1, 1997 - Dec. 31, 1997 Jan. 27, 1997 - Jan. 25, 1998 Calendar Year 1997
Jan. 1, 1998 - Dec. 31, 1998 Jan. 26, 1998 - Dec. 31, 1998 Calendar Year 1998
After January 1, 1995 and prior to the merger with Dollar Tree in 1998,
Step Ahead reported financial results based on a 52-week period that ended on
the last Sunday in January. For this reason, our combined calendar year 1998
financial statements include only an 11-month period for Step Ahead.
On January 31, 1996, we bought all of the stock of Dollar Bills, Inc.
in an acquisition accounted for as a purchase. For this reason, the operating
results for the year ended December
11
31, 1996 only include 11 months of results for Dollar Bills. The operating
results for the years ended December 31, 1994 and 1995 do not include any Dollar
Bills results.
The selected income statement and balance sheet items for December 31,
1996, 1997 and 1998 come from our consolidated financial statements that have
been audited by KPMG 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 other financial information found
elsewhere in this report.
Year Ended December 31,
---------------------------------------------------------
1994(1) 1995(1) 1996 1997 1998
------- ------- ---- ---- ----
(Dollars in thousands, except per share data
and sales per selling square foot data)
Income Statement Data:
- ---------------------
Net sales.......................................... $275,192 $351,432 $558,841 $723,202 $918,807
Cost of sales...................................... 176,939 223,554 356,179 458,601 571,012
Merger related costs (2)........................... - - - - 1,301
------- ------- ------- ------- -------
Gross profit.................................... 98,253 127,878 202,662 264,601 346,494
------- ------- ------- ------- -------
Selling, general and administrative expenses:
Operating expenses.............................. 65,166 83,286 127,996 165,444 204,160
Merger related expenses (2)..................... - - - - 4,024
Depreciation and amortization................... 4,715 6,119 11,426 14,457 20,452
------- ------- ------- ------- -------
Total......................................... 69,881 89,405 139,422 179,901 228,636
------- ------- ------- ------- -------
Operating income................................... 28,372 38,473 63,240 84,700 117,858
Interest expense................................... 4,408 2,975 5,643 3,477 4,435
------- ------- ------- ------- -------
Income before income taxes and extraordinary loss.. 23,964 35,498 57,597 81,223 113,423
Provision for income taxes......................... 9,594 13,392 22,249 31,295 44,533
------- ------- ------- ------- -------
Income before extraordinary loss................... 14,370 22,106 35,348 49,928 68,890
Extraordinary loss, net of income tax (3).......... 1,253 - - - -
------- ------- ------- ------- -------
Net income......................................... $ 13,117 $ 22,106 $ 35,348 $ 49,928 $ 68,890
======= ======= ======= ======= =======
Income Per Share Data (4):
- -------------------------
Basic net income per share......................... $ 0.23 $ 0.38 $ 0.60 $ 0.83 $ 1.14
======= ======= ======= ======= =======
Diluted net income per share....................... $ 0.22 $ 0.35 $ 0.54 $ 0.75 $ 1.03
======= ======= ======= ======= =======
Weighted average number of common shares
outstanding, in thousands (4).................... 57,443 57,506 58,934 60,212 60,683
======= ======= ======= ======= =======
Weighted average number of common shares and
dilutive potential common shares outstanding,
in thousands (4)................................ 58,831 63,139 64,993 66,480 67,124
======= ======= ======= ======= =======
Selected Operating Data:
- -----------------------
Number of stores open at end of period (5)......... 442 538 785 946 1,156
Net sales growth................................... 34.9% 27.7% 59.0% 29.4% 27.0%
Comparable store net sales increase (6)............ 8.0% 6.7% 5.6% 7.6% 6.8%
Average net sales per store (7).................... $ 671 $ 712 $ 747 $ 818 $ 872
Average net sales per selling square foot (8)...... $ 235 $ 241 $ 250 $ 242 $ 250
Year Ended December 31,
---------------------------------------------------------
1994(1) 1995(1) 1996 1997 1998
------- ------- ---- ---- ----
Balance Sheet Data:
- ------------------
Working capital.................................... $ 15,849 $ 31,326 $ 24,811 $ 62,149 $109,710
Total assets....................................... 72,801 107,563 195,636 302,588 399,621
Total debt......................................... 16,463 19,836 13,039 41,166 49,426
Shareholders' equity............................... 18,972 41,759 105,848 161,053 244,224
- ----------------
(1) Effective January 30, 1995, Step Ahead changed its fiscal year from a
52-week period ending on the Sunday nearest December 31 to the last Sunday in
January. For this reason, Step Ahead's results of operations for the four-week
period ended January 29, 1995 are not included in the results of operations for
the year ended December 31, 1994 or for the year ended December 31, 1995. The
net loss for this four-week period was $0.169 million.
(2) Represents merger related expenses of $5.3 million incurred in connection
with the 1998 merger with Step Ahead, primarily comprised of professional fees
and inventory and fixed asset writedowns.
12
(3) Represents redemption premiums of approximately $1.3 million plus write-off
of original issue discount and deferred financing costs of $0.9 million (net of
income tax benefit of approximately $0.9 million) on the early retirement of
subordinated notes in 1994.
(4) The extraordinary loss recognized in 1994 reduced basic and diluted net
income per share by $0.02, 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 dilutive potential common shares outstanding, respectively. Dilutive
potential common shares include all outstanding stock options and warrants after
applying the treasury stock method.
(5) We closed one store in 1994, three stores in 1995, six stores in 1996, one
store in 1997 and seven stores in 1998.
(6) Comparable store net sales increase compares net sales for stores open
during the entire 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 comparable period. The comparable store net sales increase
calculation for the year ended December 31, 1998 includes net sales for Step
Ahead for the 11-month periods ended December 31, 1997 and 1998.
(7) For stores open the entire period presented. Dollar Bills stores are
included in the calculations beginning in 1997. The average net sales per store
calculation for 1998 includes Step Ahead's net sales for the 12-month period
ended December 31, 1998.
(8) For stores open the entire period presented. Dollar Bills stores are
included in the calculations beginning in 1997. The average net sales per
selling square foot calculation for 1998 includes Step Ahead's net sales for the
12-month period ended December 31, 1998. Dollar Tree's selling square footage is
estimated to be 83% of gross square feet per store.
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Introduction
In Management's Discussion and Analysis, we explain the general
financial condition and the results of operations for our company, including:
o what factors affect our business,
o what our earnings and costs were in 1997 and 1998,
o why those earnings and costs were different from the year before,
o where our earnings come from,
o how all of this affects our overall financial condition,
o what our expenditures for capital projects were in 1996, 1997, and
1998 and what we expect them to be in 1999, and
o where funds will come from to pay for future expenditures.
As you read Management's Discussion and Analysis, it may be helpful to
refer to our consolidated financial statements, included in Item 8 of this Form
10-K, which present the results of operations for 1996, 1997 and 1998. In
Management's Discussion and Analysis, we analyze and explain the annual changes
in some specific line items in the consolidated financial statements.
You may notice some changes in this year's discussion, compared to past
years. The Securities and Exchange Commission has recently required public
companies to write certain financial documents in plain English. As a result, we
have rewritten our entire Management's Discussion and Analysis section in
language that is more easily understood. In addition, we recently merged with
Step Ahead Investments, Inc., the operator of 98 Cent Clearance Centers. We
accounted for the merger as a "pooling of interests." Under this form of
accounting, we combine the financial statements of Dollar Tree with those of
Step Ahead, not only since the date of the merger, but also retroactively. As a
result, we have adjusted our consolidated financial statements to reflect
results of operations as if Step Ahead had been a part of Dollar Tree throughout
all of the years discussed. For each period presented, the outstanding Step
Ahead shares have been converted into Dollar Tree shares based on the exchange
ratio used in the merger. This has the effect of changing our prior net income
per share calculations. Our Management's Discussion and Analysis section
reflects the merger with Step Ahead under these "pooling-of-interests" rules.
13
Before the merger with Dollar Tree, Step Ahead reported financial
results based on a 52-week period that ended on the last Sunday in January.
Dollar Tree's fiscal year ends on December 31. In combining our financial
statements with those of Step Ahead, we used Step Ahead's historical reporting
periods most comparable to Dollar Tree's, as follows:
Historical Fiscal Period Currently Reported
Dollar Tree Step Ahead Combined Period
----------- ---------- ---------------
Jan. 1, 1996 - Dec. 31, 1996 Jan. 29, 1996 - Jan. 26, 1997 Calendar Year 1996
Jan. 1, 1997 - Dec. 31, 1997 Jan. 27, 1997 - Jan. 25, 1998 Calendar Year 1997
Jan. 1, 1998 - Dec. 31, 1998 Jan. 26, 1998 - Dec. 31, 1998 Calendar Year 1998
Our combined calendar year 1998 financial statements include only an 11- month
period for Step Ahead.
Key Events and Recent Developments
Since the beginning of 1997, several events occurred which had or are
expected to have a significant effect on our results of operations. When reading
Management's Discussion and Analysis, you should keep in mind these key events:
o In 1997, we built a new headquarters and distribution center
facility, known as our Store Support Center, in Chesapeake,
Virginia. The 400,000 square foot distribution center, which
replaced our original location in Norfolk, opened in January 1998.
o On December 10, 1998, we completed our merger with Step Ahead. We
reserved or issued approximately 2,152,000 shares of our common
stock for Step Ahead's existing shareholders and its option
holders. Step Ahead operated sixty-six stores in northern and
central California and Nevada under the name of "98 Cent Clearance
Center."
o In January 1999, we opened a new 425,000 square foot distribution
center in Olive Branch, Mississippi, which replaces our Memphis,
Tennessee facility.
o In March 1999, we were in the process of negotiating an operating
lease agreement for a new distribution center. This facility,
which is expected to be located in Stockton, California,
will replace the leased site located in the Sacramento, California
area which services the 98 Cent Clearance Center stores.
Results of Operations
In this section, we discuss in detail our 1997 and 1998 operations and
factors affecting them. Our net sales derive from the sale of merchandise in our
retail stores. Two major factors tend to affect our net sales trends. First is
our success at opening new stores or adding new stores through acquisitions.
Second, sales at our existing stores change from one year to the next. We refer
to this as a change in "comparable store net sales," because we compare only
those stores which are open for the entire two years being compared.
Most retailers can increase the price of their merchandise as well as
sell more merchandise in order to increase their "comparable store net sales."
As a fixed price point retailer, we do not have the ability to raise our prices,
so our comparable store net sales will only increase if we sell more
merchandise. In 1999, however, we expect to increase the price point in the
sixty-six 98 Cent Clearance Centers from $0.98 to $1.00, which we anticipate
will only have a minor impact on our comparable store net sales. We believe that
our future comparable store net sales increases, if any, will be lower than
those we have experienced in the past. Our internal business plan continues to
call for a two to three percent increase in comparable store net sales in 1999.
Our management anticipates that future net sales growth will come
mostly from new store openings. We plan to expand by 215 to 225 stores in 1999.
We also expect our average store size to increase in 1999, which we believe will
result in a decrease in our average net sales per selling square foot.
Increases in expenses have a negative impact on our operating results.
This is especially true since we cannot pass on increased expenses to our
customers by increasing our merchandise prices. Consequently, our future success
will depend in large part on our ability to control costs.
14
The following table expresses certain expenses as a percentage of net
sales:
Year Ended December 31,
-----------------------------
1996 1997 1998
---- ---- ----
Net sales.......................................... 100.0% 100.0% 100.0%
Cost of sales...................................... 63.7 63.4 62.2
Merger related costs .............................. - - 0.1
----- ----- -----
Gross profit..................................... 36.3 36.6 37.7
Selling, general and administrative expenses:
Operating expenses............................... 22.9 22.9 22.3
Merger related expenses.......................... - - 0.4
Depreciation and amortization.................... 2.1 2.0 2.2
----- ----- -----
Total.......................................... 25.0 24.9 24.9
----- ----- -----
Operating income................................... 11.3 11.7 12.8
Interest expense................................... 1.0 0.5 0.5
----- ----- -----
Income before income taxes......................... 10.3 11.2 12.3
Provision for income taxes......................... 4.0 4.3 4.8
----- ----- -----
Net income......................................... 6.3% 6.9% 7.5%
===== ===== =====
1997 Compared to 1998
Net Sales. Net sales increased 27.0% from $723.2 million for 1997 to
$918.8 million for 1998. We attribute this $195.6 million increase to two
factors:
o Approximately 80% of the increase came from stores opened in 1997
and 1998, which are not included in our comparable store net sales
calculation.
o Approximately 20% of the increase came from comparable store net
sales growth. Comparable store sales increased 6.8% during 1998.
This comparable store net sales calculation includes sales at 98
Cent Clearance Center stores for the 11-month periods ended
December 31, 1997 and December 31, 1998.
We believe net sales increased in comparable stores because:
o We stocked a more consistent quantity of basic consumable goods
during the first half of 1998.
o Customers purchased a higher average number of items, and more
customers visited our stores.
o The Easter selling season lengthened because Easter shifted from
March 31 in 1997 to April 12 in 1998.
o We continued to improve the quality and variety of merchandise
offered in our stores.
We opened 217 new stores and closed seven stores during 1998, compared to 162
new stores opened and one store closed the previous year. We acquired nine of
the new stores in 1998 from two small dollar store operators.
Gross Profit. Gross profit increased $81.9 million, or 30.9%. Our gross
profit expressed as a percentage of net sales is called our "gross profit
margin." Our gross profit margin increased from 36.6% in 1997 to 37.7% in 1998.
If you exclude merger related costs otherwise included in cost of sales (related
to merchandise markdowns), the gross profit margin increased to 37.9%.
This increase occurred mainly because certain costs declined as a percentage of
net sales:
o Our increased sales volume gave us greater buying power with
merchandise vendors, which in turn lowered our overall merchandise
costs expressed as a percentage of net sales. We believe that
favorable foreign currency rates had only a minor effect on the
lower cost of our imported goods.
o We imported a higher percentage of our goods.
o We experienced lower occupancy costs expressed as a percentage of
net sales because occupancy costs tend to be mostly fixed. The
ability to lower fixed costs as a percentage of net sales because
of a growth in sales is known in the industry as "leverage."
In 1998, we brought in an unusually large amount of imports, which
generally cost less than domestic product, and these goods improved our gross
profit margin for the year. Management expects the amount of imports in 1999 to
return to levels similar to 1997 and prior years. We
15
also intend in 1999 to buy more consumable items, such as food and household
chemicals, to meet customer demand. Consumables are generally domestically
produced and carry a higher cost than imports. Management expects the changing
merchandise mix will result in a reduction in gross profit margin in 1999.
In May 1998, certain ocean shippers increased freight charges by $300
per container. The higher charges, which apply only to imported goods, added
approximately $700,000 to our freight costs. More increases in shipping costs
have been proposed for 1999. For more discussion on this topic, please see the
section entitled "Inflation and Other Economic Factors" later in this analysis.
Our new distribution centers are designed to be more efficient and
improve our ability to service stores. However, since the distribution centers
are not yet operating at optimal capacity, we don't expect to see significant
cost savings due to efficiencies in 1999. Additionally, in 1999, we will be
preparing to move to a new leased distribution center in California. This will
keep our distribution center costs at a level similar to 1998.
SGA Expenses. Selling, general and administrative (SGA) expenses
increased $48.7 million or 27.1%. As a percentage of net sales, SGA expenses
remained constant at 24.9%. If you exclude merger related expenses, SGA expenses
decreased as a percentage of net sales from 24.9% in 1997 to 24.5% in 1998. This
decline happened primarily because we were able to leverage fixed costs across a
higher sales volume because of a high comparable store sales increase.
Depreciation and amortization increased $6.0 million, from 2.0% as a percentage
of net sales in 1997 to 2.2% in 1998. This percentage increase is mainly the
result of depreciation related to the new Store Support Center in Chesapeake.
During 1998, we recorded a $1.125 million loss contingency in SGA
expenses due to our uncertainty about being able to sublease our Memphis
facility for an amount that would cover our remaining payments. We are
responsible for rent and pass-through costs under the Memphis lease until
September 2005, at a current annual cost of approximately $745,000. We could
record up to $400,000 in SGA expenses in 1999 if a sublease is not obtained.
Operating Income. Our operating income increased $33.2 million or
39.1%. As a percentage of net sales, operating income increased from 11.7% in
1997 to 12.8% in 1998. If you exclude merger related costs and expenses,
operating income increased from $84.7 million in 1997 to $123.2 million in 1998
and increased as a percentage of net sales from 11.7% to 13.4%. These increases
were attributable to our improved gross profit margin and the decrease in our
SGA expenses discussed above.
Interest Expense. Interest expense increased $0.9 million from $3.5
million in 1997 to $4.4 million in 1998. This increase was primarily a result of
higher levels of debt in 1998 compared to 1997 resulting from borrowings related
to our two new distribution centers. In 1998, we capitalized $402,000 of
interest relating to the construction of the Olive Branch facility.
1996 Compared to 1997
Net Sales. Net sales increased 29.4% from $558.8 million for 1996 to
$723.2 million for 1997. We attribute this $164.4 million increase to two major
factors:
o Approximately 77% came from stores opened in 1996 and 1997, which
are not included in our comparable store net sales calculation.
o Approximately 23% came from comparable store net sales growth.
Comparable store sales increased 7.6% for the year. This
comparable store net sales calculation includes sales at Dollar
Bills stores for the 12-month periods ended December 31, 1996 and
1997.
Because our products sell for a fixed price, the increase in comparable store
net sales was a direct result of more items sold. We believe net sales increased
in comparable stores because:
o We carried more consistent levels of inventory throughout the
year, particularly in the first quarter.
o More customers shopped in our stores compared to 1996, combined
with a slight increase in the average number of items purchased
per customer.
o We continued to improve the quality and variety of merchandise
offered.
o We saw improved sales in the Dollar Bills stores, partly because
we changed their merchandise throughout 1996 to include more of
the items regularly carried by Dollar Tree.
16
We opened 162 new stores and closed one store during 1997, compared to opening
117 new stores and closing six stores during 1996. We also added 136 Dollar
Bills stores on January 31, 1996.
Gross Profit. Gross profit increased $61.9 million, or 30.6%. As a
percentage of net sales, gross profit increased from 36.3% to 36.6%, primarily
due to improved merchandise costs (including freight) which was 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 traditional Dollar Tree stores; this change in mix benefited
merchandise costs in 1997. Distribution costs increased as a result of costs
inherent in transitioning operations to the new Chesapeake distribution center
and in the installation of our new warehouse management system in all three
distribution centers early in 1997.
SGA Expenses. SGA expenses increased $40.5 million, or 29.0%, but
decreased slightly as a percentage of net sales from 25.0% in 1996 to 24.9% in
1997. This decrease, as a percentage of net sales, is primarily the result of
additional expenses in 1996 of approximately $2.5 million 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. If you exclude
the expenses incurred in 1996 related to the Dollar Bills acquisition, SGA
expenses increased as a percentage of sales from 24.5% in 1996 to 24.9% in 1997.
This increase was primarily due to an increase of approximately $2 million in
payroll costs resulting from the federally mandated increase in the hourly
minimum wage.
Operating Income. Operating income increased $21.5 million, or 33.9%,
from $63.2 million for 1996 to $84.7 million for 1997. As a percentage of net
sales, operating income rose from 11.3% to 11.7% during the same period for the
reasons noted above.
Interest Expense. Interest expense decreased $2.2 million from $5.6
million in 1996 to $3.5 million in 1997. This decline was primarily a result of
lower levels of debt in 1997 compared to 1996, when we had increased borrowings
related to the purchase of Dollar Bills. In 1997, we capitalized $916,000 of
interest relating to the construction of the Chesapeake facility.
Liquidity and Capital Resources
Overview
Our business requires capital primarily to open new stores and operate
existing stores. Our working capital requirements for existing stores are
seasonal in nature and typically reach their peak in the months of September and
October. Historically, we have met our seasonal working capital requirements for
existing stores and funded our store expansion program from internally generated
funds and borrowings under our credit facilities.
The following table compares certain cash-related information for 1996,
1997 and 1998:
1996 1997 1998
---- ---- ----
(in millions)
Net cash provided by (used in):
Operations.................... $40.4 $68.4 $68.7
Investing activities.......... (71.0) (59.9) (53.3)
Financing activities.......... 13.4 30.4 10.7
We generally expended net cash used in investing activities to open new stores
and to meet the following additional needs:
o $52.2 million (net of cash acquired) for the purchase of Dollar
Bills in 1996,
o $30.0 million for the construction of the Chesapeake Store Support
Center in 1997, and
o $17.9 million for part of the construction of the Olive Branch
distribution center in 1998. We expect to spend another $1 to
$2 million on that project in 1999.
Net funds provided by financing activities reflects funds which came from
sources other than normal operations. We obtained funds from the exercise of
stock options and the following sources:
o In 1996, we received $25.3 million from public offering proceeds.
The proceeds were reduced by the repayment of subordinated debt
and notes payable to banks.
17
o In 1997, we received $30.0 million from the issuance of senior
notes.
o In 1998, we received $16.5 million from the issuance of callable
bonds related to the construction of the Olive Branch distribution
facility. These funds were reduced by the repayment of notes
payable to banks.
Our borrowings under our bank facility, senior notes and bonds were
$46.5 million at December 31, 1998. Borrowings at December 31, 1997, amounted to
$40.0 million. At December 31, 1998, we had an additional $135.0 million
available through our bank facility. Of this amount, approximately $34.8 million
is committed to letters of credit issued for the routine purchase of foreign
merchandise.
Funding Requirements
We expect to expand by approximately 215 to 225 stores during 1999 and
by approximately 250 stores during 2000. In 1998, the average investment per new
store, including capital expenditures, initial inventory and pre-opening costs,
was approximately $186,500 per store. Of our new Dollar Tree stores in 1998,
four were a slightly larger format than our traditional prototype. Average
investment for these larger stores was approximately $315,000. We expect our
cash needs for opening new stores in 1999, including approximately 20 to 25 of
the larger format stores, to total approximately $45 million and have budgeted
$25 million for capital expenditures and $20 million for initial inventory and
pre-opening costs. Our total planned capital expenditures for 1999 are
approximately $50 million, including planned expenditures for expanded and
relocated stores, additional equipment for the distribution centers, computer
system upgrades and remodeling and upgrading the 98 Cent Clearance Center
stores.
We believe that we can adequately fund our planned capital expenditures
and working capital requirements for the next several years from net cash
provided by operations and availability under our credit facility.
Bank Credit Facility. On September 27, 1996, we entered into an amended
and restated credit agreement with our 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 our option. As of December 31, 1998, the
interest rate was approximately 6.1%. The credit agreement, among other things,
requires the maintenance of certain specified ratios, restricts the payments of
cash dividends and other distributions, limits the amount of debt, and, through
March 1, 2000, 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. The facility matures May 31, 2002.
During 1998, our banks agreed to remove the requirement that our
founding shareholders maintain a minimum beneficial ownership in the company and
to eliminate requirements which restricted the amount of our capital
expenditures.
Debt Securities. On April 30, 1997, we issued $30 million of 7.29%
unsecured senior notes. We used the proceeds to pay down a portion of the
revolving credit facility, which enabled us to use that credit facility to fund
capital expenditures for the new Store Support Center. We pay interest on the
notes semiannually 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 us to prepay the notes in full without
premium upon a change of control or upon certain asset dispositions or certain
other transactions we may make. The note agreements prohibit certain mergers and
consolidations in which our company is not the surviving company, require that
we maintain certain specified ratios, require that the notes rank on a par with
our other debt and limit the amount of debt we can incur. In the event of
default or a prepayment at our option, we must pay a prepayment penalty equal to
a make-whole amount.
Revenue Bond Financing. On May 20, 1998, we entered into an agreement
with the Mississippi Business Finance Corporation (MBFC) under which the MBFC
issued $19.0 million of Taxable Variable Rate Demand Revenue Bonds. We used the
proceeds from the bonds to finance the acquisition, construction, and
installation of land, buildings, machinery, and equipment for our new
distribution facility in Olive Branch, Mississippi. At December 31, 1998, the
balance outstanding on the bonds was $16.5 million. We begin repayment of the
principal amount of the bonds on June 1, 2006, with a portion maturing each June
1 until the final portion matures on June 1, 2018. The bonds do not have a
prepayment penalty as long as the interest rate remains variable. The bonds
contain a demand provision and, therefore, outstanding amounts are classified as
current liabilities. We pay interest monthly based on a variable interest rate
which was 5.4% at December 31, 1998. The bonds are supported by a $19.3 million
letter of credit issued by one of our existing lending banks. The letter of
credit is renewable annually. The letter of credit and reimbursement agreement
requires that we maintain certain specified ratios and restricts our ability to
pay dividends.
18
Operating Lease Agreement. During March 1999, we were in the process of
negotiating an operating lease agreement to finance construction costs to build
a new distribution center in Stockton, California. This distribution center will
replace the existing facilities located in the Sacramento, California area.
Under this agreement, the lessor purchases the property, pays for the
construction costs and subsequently leases the facility to us. Unlike the
Chesapeake and Olive Branch distribution centers, the new facility will not
initially include an automated conveyor and sorting system. The new facility is
expected to be operational in early 2000.
Seasonality and Quarterly Fluctuations
We experience seasonal fluctuations in our net sales, operating income
and net income, and management expects this trend to continue. Our quarterly
results of operations may also fluctuate significantly as a result of a variety
of factors, including:
o the timing of certain holidays (such as Easter) which may fall in
different quarters from year to year,
o the timing of new store openings,
o the net sales contributed by new stores, and
o seasonal and other changes in the merchandise mix and in operating
expenses.
Our highest sales periods are the Christmas and Easter seasons. We
generally realize a disproportionate amount of our net sales and a substantial
majority of our operating and net income during the fourth quarter. In
anticipation of increased sales activity during these months, we purchase
substantial amounts of inventory and hire a significant number of temporary
employees to supplement our permanent store staff. Our operating results,
particularly operating and net income, could suffer if our net sales were below
seasonal norms during the fourth quarter or Easter season for any reason,
including merchandise delivery delays due to receiving or distribution problems.
Historically, net sales, operating income and net income have been weakest
during the first quarter. We expect this trend to continue.
Our unaudited results of operations for the eight most recent quarters
are shown in a table in Footnote 12 of the consolidated financial statements in
Item 8 of this Form 10-K. To reconcile the combined company's quarterly
information with that previously reported by Dollar Tree, refer to our Form 8-K,
filed on February 5, 1999, which included quarterly information for the
separate, as well as combined, companies.
Inflation and Other Economic Factors
Our ability to provide quality merchandise at a fixed price point is
subject to certain economic factors which are beyond our control, including
inflation, minimum wage levels, operating costs, consumer confidence and general
economic conditions. These factors may not remain favorable. In particular,
ocean shipping costs, hourly minimum wage rates, or other costs may not remain
at current levels.
Ocean Shipping Costs. In May 1998, a trans-Pacific ocean-shipping
cartel imposed a freight increase of $300 per container on U.S. imports from
Asia. This increase took effect with shipments beginning in mid-May 1998 and
added approximately $700,000 in freight expenses to our cost of sales for the
second half of 1998. The cartel recently announced its intention to impose a
further increase of up to $900 per container for shipments from Asia to the West
Coast of the United States and $1,000 for shipments to the East Coast, with a
$300 per container surcharge during the peak shipping season from June 1 through
November 30. Although we are uncertain whether the cartel will be successful in
implementing the increase at the announced rates, the target effective date for
the increase is May 1, 1999.
Minimum Wage. 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 by approximately $5 million during 1998. In his 1999 State of the Union
Address, President Clinton announced support for a plan that would raise the
minimum wage by an additional $0.50 per hour in each of 1999 and 2000.
Congressional Republicans have generally opposed any increase in the minimum
wage. Based on the proposals before the Congress, management believes that a
proposed increase, if eventually passed into law, may have a significantly
greater impact on payroll costs than the increases in the minimum wage
implemented in 1996 and 1997.
Unless offsetting cost savings are realized (and we can't be sure 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 our financial condition and
results of operations.
19
Year 2000 Compliance
We use a large number of computer software programs throughout our
entire organization, such as purchasing, distribution, retail store management,
financial business systems and various administrative functions. We developed
some of these programs in-house and bought others from vendors. If our software
applications are unable to appropriately interpret the upcoming calendar year
2000 and beyond, then we will likely need to modify or replace such applications
in order to ensure "Year 2000 compliance."
We have been evaluating and adjusting all known date-sensitive systems
and equipment for Year 2000 compliance. We divided our Year 2000 project into
four phases:
o inventory and initial assessment,
o remediation and testing,
o implementation and re-testing, and
o contingency planning.
The assessment and remediation and testing phases of the Year 2000
project are complete and include both information technology systems, such as
computer equipment and software, as well as non-information technology
equipment, such as warehouse conveyor systems. We are in the process of
re-testing our systems after the implementation of certain modifications.
Our plan provides for internal compliance of all mission-critical
systems by mid-1999. We believe that the majority of our internal systems are
currently Year 2000 compliant. Some programs and equipment were replaced
beginning in late 1998 by routine upgrades which provided numerous system
enhancements. These replacement programs and equipment are Year 2000 compliant.
The upgrades were previously planned and were not accelerated due to Year 2000
issues. We have not deferred any information technology projects to address the
Year 2000 issue.
We plan to continue to rely primarily on internal resources to
identify, correct or reprogram and test systems for Year 2000 compliance. To
date, we have spent less than $150,000 in modifying our systems for the Year
2000; the total costs of modifying our current systems are not expected to
exceed $500,000. These costs are not expected to have a material adverse effect
on our financial condition and results of operations in future periods.
Additionally, we are in the process of communicating with service
providers and domestic suppliers of merchandise to assess their Year 2000
readiness and the extent to which we may be vulnerable to any third parties'
failure to correct their own Year 2000 issues. Many of these parties have stated
that their ability to supply us will not be affected by the Year 2000 issue.
However, we cannot be sure of their timely compliance and our operations could
suffer due to the failure of a significant third party to become Year 2000
compliant.
We feel we are unable to adequately assess the potential effect of Year
2000 problems on our international suppliers, particularly in China. Several
recent studies suggest that the preparedness of China and other Asian countries
is considerably less than that of the United States and Europe, particularly in
the fields of manufacturing and utilities. We cannot predict the duration or
severity of any disruptions which may occur in China or the home countries of
our other overseas suppliers. In addition, we are currently evaluating the
preparedness of third parties who handle our international merchandise shipping.
A failure in our normal merchandise supply chain from China or other overseas
suppliers could have a material adverse effect on our business.
Although we anticipate that minimal business disruption will occur as a
result of Year 2000 issues, possible consequences include, but are not limited
to, loss of communications links with store locations, customs delays, loss of
electric power, inability to process transactions, or engage in similar normal
business activities. In addition, the United States and other world economies
could witness unusual purchasing patterns or other disruptions if large numbers
of consumers believe interruptions in power, communications, water or food
supplies are likely, regardless of the actual risks. Any such disruptions could
affect our business operations. We also feel we are currently unable to estimate
reasonably likely worst-case effects of the arrival of the Year 2000 and do not
currently have a contingency plan in place for such occurrence. We intend to
analyze reasonably likely worst-case scenarios and the need for such contingency
planning once the upgrade and testing of internal systems and review of
third party preparedness described above have been completed.
20
The cost of the conversions and the completion dates are based on
management's best estimates and may be updated as additional information becomes
available. The above section, even if incorporated into other documents or
disclosures, is a Year 2000 readiness disclosure as defined under the Year 2000
Information and Readiness Disclosure Act of 1998.
New Accounting Pronouncements
Groups responsible for financial accounting standards have recently
issued two statements which are relevant to our company:
o In June 1998, the Financial Accounting Standards Board issued its
Statement of Financial Accounting Standards No. 133, "Accounting
for Derivative Instruments and Hedging Activities" (SFAS No. 133).
SFAS No. 133 establishes standards for derivative instruments and
hedging activities and requires that companies recognize all
derivatives as either assets or liabilities in the statement of
financial position and measure those instruments at fair value.
SFAS No. 133 is effective for all fiscal quarters of fiscal years
beginning after June 15, 1999.
o The Accounting Standards Executive Committee of the American
Institute of Certified Public Accountants issued Statement of
Position (SOP) 98-5, "Reporting on the Costs of Start-up
Activities," on April 3, 1998. It requires pre-opening costs to be
expensed as incurred for fiscal years beginning after December 15,
1998.
Management does not expect the implementation of these pronouncements to have a
material effect on our financial condition or results of operation.
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to various types of market risk in the normal course of
our business, including the impact of interest rate changes and foreign currency
rate fluctuations. We have the option of entering into interest rate swaps to
manage exposure to interest rate changes, and we may employ other risk
management strategies, including the use of foreign currency forward contracts.
We do not hold derivatives for trading purposes.
We have financial instruments that are subject to interest rate risk,
comprised of debt obligations issued at variable and fixed rates. Historically,
we have not experienced material gains or losses due to interest rate changes.
Based on amounts outstanding on our variable rate debt obligations at December
31, 1998, our exposure to interest rate risk is not considered material. We are
considering an interest rate swap to fix a portion of our variable rate debt
obligations due to the current favorable interest rate environment. Our fixed
rate debt obligation is not callable until maturity.
We are subject to foreign currency exchange rate risk relating to
payments to a supplier in Italian lire. As a general policy, we substantially
hedge foreign currency commitments of future payments by purchasing foreign
currency forward contracts. As of December 31, 1998, we did not have any forward
contracts outstanding. Less than one percent of our expenditures are contracted
in Italian lire and the market risk exposure relating to currency exchange is
not material.
21
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Consolidated Financial Statements Page
Independent Auditors' Report............................................ 23
Consolidated Balance Sheets as of December 31, 1997 and 1998............ 24
Consolidated Income Statements for the years ended
December 31, 1996, 1997 and 1998............................... 25
Consolidated Statements of Shareholders' Equity
for the years ended December 31, 1996, 1997 and 1998........... 26
Consolidated Statements of Cash Flows for the years ended
December 31, 1996, 1997 and 1998............................... 27
Notes to Consolidated Financial Statements.............................. 28
22
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, 1997 and
1998, 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, 1998. 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, 1997 and 1998, and the results
of their operations and their cash flows for each of the years in the three-year
period ended December 31, 1998, in conformity with generally accepted accounting
principles.
/s/ KPMG LLP
Norfolk, Virginia
January 20, 1999
23
DOLLAR TREE STORES, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 1997 and 1998
1997 1998
---- ----
(In thousands,
ASSETS except share data)
Current assets:
Cash and cash equivalents............................................ $ 45,018 $ 71,119
Merchandise inventories.............................................. 109,483 140,949
Deferred tax asset (Note 3).......................................... 5,468 6,709
Prepaid expenses and other current assets............................ 6,880 7,287
------- -------
Total current assets ....................................... 166,849 226,064
------- -------
Net property and equipment (Notes 4 and 5).................................. 87,002 122,385
Deferred tax asset (Note 3)................................................. 2,228 2,194
Goodwill, net of accumulated amortization (Note 2).......................... 44,478 42,551
Other assets (Note 2)....................................................... 2,031 6,427
------- -------
TOTAL ASSETS................................................ $302,588 $399,621
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt (Note 6)........................... $ 9,491 $ 16,500
Accounts payable..................................................... 53,991 52,158
Income taxes payable (Note 3)........................................ 19,587 21,353
Other current liabilities (Notes 4 and 5)............................ 21,631 26,343
------- -------
Total current liabilities................................... 104,700 116,354
Long-term debt (Note 6)..................................................... 30,554 30,000
Other liabilities (Note 4).................................................. 6,281 9,043
------- -------
Total liabilities........................................... 141,535 155,397
------- -------
Commitments and contingencies
(Notes 1, 4, 6, 8 and 11)
Shareholders' equity (Notes 2, 7, 8 and 11):
Common stock, par value $0.01. Authorized 100,000,000 shares,
60,372,676 shares and 60,878,818 shares issued and outstanding
at December 31, 1997 and 1998, respectively....................... 402 609
Additional paid-in capital........................................... 38,936 53,010
Retained earnings.................................................... 121,715 190,605
------- -------
Total shareholders' equity.................................. 161,053 244,224
------- -------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY.................. $302,588 $399,621
======= =======
See accompanying Notes to Consolidated Financial Statements.
24
DOLLAR TREE STORES, INC.
AND SUBSIDIARIES
CONSOLIDATED INCOME STATEMENTS
Years ended December 31, 1996, 1997 and 1998
1996 1997 1998
---- ---- ----
(In thousands, except
per share data)
Net sales.................................................... $ 558,841 $ 723,202 $ 918,807
Cost of sales................................................ 356,179 458,601 571,012
Merger related costs (Note 2)................................ - - 1,301
------- ------- -------
Gross profit........................................ 202,662 264,601 346,494
------- ------- -------
Selling, general and administrative expenses
(Notes 2, 4, 7, 10 and 11):
Operating expenses.................................. 127,996 165,444 204,160
Merger related expenses (Note 2).................... - - 4,024
Depreciation and amortization....................... 11,426 14,457 20,452
------- ------- -------
Total selling, general and administrative
expenses........................................ 139,422 179,901 228,636
------- ------- -------
Operating income............................................. 63,240 84,700 117,858
Interest expense (Note 6).................................... 5,643 3,477 4,435
------- ------- -------
Income before income taxes................................... 57,597 81,223 113,423
Provision for income taxes (Note 3).......................... 22,249 31,295 44,533
------- ------- -------
Net income........................................ $ 35,348 $ 49,928 $ 68,890
======= ======= =======
Net income per share (Note 9):
Basic net income per share............................... $ 0.60 $ 0.83 $ 1.14
======= ======= =======
Weighted average number of common shares outstanding..... 58,934 60,212 60,683
======= ======= =======
Diluted net income per share............................. $ 0.54 $ 0.75 $ 1.03
======= ======= =======
Weighted average number of common shares
and dilutive potential common shares outstanding....... 64,993 66,480 67,124
======= ======= =======
See accompanying Notes to Consolidated Financial Statements.
25
DOLLAR TREE STORES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Years ended December 31, 1996, 1997 and 1998
Common Additional
Stock Common Paid-in Retained Shareholders'
Shares Stock Capital Earnings Equity
------ ----- ------- -------- ------
(In thousands, except share data)
Balance at December 31, 1995.................. 57,648,981 $ 171 $ 5,149 $ 36,439 $ 41,759
Transfer from additional paid-in
capital for Common Stock dividend........... - 85 (85) - -
Net income for the year
ended December 31, 1996..................... - - - 35,348 35,348
Issuance of stock under Employee
Stock Purchase Plan (Note 11) and
other plans................................. 29,373 - 253 - 253
Issuance of stock in public
offering (Note 8)........................... 1,687,500 8 25,325 - 25,333
Exercise of stock options, including
income tax benefit of $2,266 (Note 11)...... 513,843 2 3,153 - 3,155
---------- --- ------ ------- -------
Balance at December 31, 1996.................. 59,879,697 266 33,795 71,787 105,848
Transfer from additional paid-in
capital for Common Stock dividend........... - 134 (134) - -
Net income for the year
ended December 31, 1997..................... - - - 49,928 49,928
Issuance of stock under Employee
Stock Purchase Plan (Note 11) and
other plans................................. 26,078 - 358 - 358
Exercise of stock options, including
income tax benefit of $2,752 (Note 11)...... 466,901 2 4,917 - 4,919
---------- --- ------ ------- -------
Balance at December 31, 1997.................. 60,372,676 402 38,936 121,715 161,053
Transfer from additional paid-in
capital for Common Stock dividend........... - 196 (196) - -
Net income for the year
ended December 31, 1998..................... - - - 68,890 68,890
Issuance of stock under Employee
Stock Purchase Plan (Note 11) and
other plans................................. 24,235 7 634 - 641
Grant of stock options under the 1998
Special Stock Option Plan (Note 11)........ - - 4,413 - 4,413
Exercise of stock options, including
income tax benefit of $4,916 (Note 11)...... 481,907 4 9,223 - 9,227
---------- --- ------ ------- -------
Balance at December 31, 1998.................. 60,878,818 $ 609 $ 53,010 $ 190,605 $ 244,224
========== === ====== ======= =======
See accompanying Notes to Consolidated Financial Statements.
26
DOLLAR TREE STORES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 1996, 1997 and 1998
1996 1997 1998
---- ---- ----
(In thousands)
Cash flows from operating activities:
Net income ...............................................$ 35,348 $ 49,928 $ 68,890
------- ------- -------
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization........................... 11,426 14,457 20,452
Loss on disposal of property and equipment.............. 348 305 2,814
Provision for deferred income taxes..................... (1,087) (3,503) (1,207)
Changes in assets and liabilities increasing
(decreasing) cash and cash equivalents:
Merchandise inventories........................... (22,362) (20,299) (31,466)
Prepaid expenses and other current assets......... (3,124) 1,471 (407)
Other assets...................................... 49 (351) 247
Accounts payable.................................. 12,786 10,154 (2,212)
Income taxes payable.............................. 3,466 9,366 6,682
Other current liabilities......................... 3,190 5,415 4,572
Other liabilities................................. 339 1,437 351
------- ------- -------
Total adjustments.............................. 5,031 18,452 (174)
------- ------- -------
Net cash provided by operating activities...... 40,379 68,380 68,716
------- ------- -------
Cash flows from investing activities:
Capital expenditures......................................... (18,868) (60,049) (53,516)
Proceeds from sale of property and equipment................. 59 159 174
Purchase o