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.
<PAGE>
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
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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
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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.
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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
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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
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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.
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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.
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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
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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.
<TABLE>
<CAPTION>
Estimated
Location Own/Lease Lease Expires Square Feet Store Capacity
- ---------------------------- ----------- ---------------- ------------- --------------
<S> <C> <C> <C> <C>
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
- ---------------------------- ----------- ---------------- ------------- --------------
</TABLE>
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
<PAGE>
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.
<TABLE>
<CAPTION>
1997: High Low
---- ---- ---
<S> <C> <C>
First Quarter................... $ 20.222 $ 14.333
Second Quarter.................. 22.444 15.750
Third Quarter................... 31.583 21.222
Fourth Quarter.................. 29.917 23.000
<CAPTION>
1998:
----
<S> <C> <C>
First Quarter................... $ 36.083 $ 23.000
Second Quarter.................. 41.917 33.417
Third Quarter................... 49.500 27.875
Fourth Quarter.................. 48.750 23.750
</TABLE>
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:
<TABLE>
<CAPTION>
Historical Fiscal Period Currently Reported
Dollar Tree Step Ahead Combined Period
----------- ---------- ---------------
<S> <C> <C>
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
</TABLE>
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
<PAGE>
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.
<TABLE>
<CAPTION>
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)
<S> <C> <C> <C> <C> <C>
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
<CAPTION>
Year Ended December 31,
---------------------------------------------------------
1994(1) 1995(1) 1996 1997 1998
------- ------- ---- ---- ----
<S> <C> <C> <C> <C> <C>
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
- ----------------
<FN>
(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
<PAGE>
(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.
</FN>
</TABLE>
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
<PAGE>
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:
<TABLE>
<CAPTION>
Historical Fiscal Period Currently Reported
Dollar Tree Step Ahead Combined Period
----------- ---------- ---------------
<S> <C> <C>
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
</TABLE>
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
<PAGE>
The following table expresses certain expenses as a percentage of net
sales:
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------
1996 1997 1998
---- ---- ----
<S> <C> <C> <C>
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%
===== ===== =====
</TABLE>
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
<PAGE>
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
<PAGE>
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:
<TABLE>
<CAPTION>
1996 1997 1998
---- ---- ----
(in millions)
Net cash provided by (used in):
<S> <C> <C> <C>
Operations.................... $40.4 $68.4 $68.7
Investing activities.......... (71.0) (59.9) (53.3)
Financing activities.......... 13.4 30.4 10.7
</TABLE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
<TABLE>
DOLLAR TREE STORES, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 1997 and 1998
<CAPTION>
1997 1998
---- ----
(In thousands,
ASSETS except share data)
<S> <C> <C>
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
======= =======
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY
<S> <C> <C>
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.
</TABLE>
24
<PAGE>
<TABLE>
DOLLAR TREE STORES, INC.
AND SUBSIDIARIES
CONSOLIDATED INCOME STATEMENTS
Years ended December 31, 1996, 1997 and 1998
<CAPTION>
1996 1997 1998
---- ---- ----
(In thousands, except
per share data)
<S> <C> <C> <C>
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.
</TABLE>
25
<PAGE>
<TABLE>
DOLLAR TREE STORES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Years ended December 31, 1996, 1997 and 1998
<CAPTION>
Common Additional
Stock Common Paid-in Retained Shareholders'
Shares Stock Capital Earnings Equity
------ ----- ------- -------- ------
(In thousands, except share data)
<S> <C> <C> <C> <C> <C>
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.
</TABLE>
26
<PAGE>
<TABLE>
DOLLAR TREE STORES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 1996, 1997 and 1998
<CAPTION>
1996 1997 1998
---- ---- ----
(In thousands)
<S> <C> <C> <C>
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 of Dollar Bills, Inc., net of
cash acquired of $414..................................... (52,216) - -
------- ------- -------
Net cash used in investing activities.......... (71,025) (59,890) (53,342)
------- ------- -------
Cash flows from financing activities:
Repayments of revolving credit facility...................... (148,643) (209,600) (185,800)
Proceeds from revolving credit facility...................... 151,643 206,600 185,800
Proceeds from development facility........................... 52,630 - -
Repayment of development facility............................ (52,630) - -
Repayments of subordinated notes............................. (14,000) - -
Net change in notes payable to bank.......................... (3,597) 1,359 (10,045)
Proceeds from senior notes and demand bonds.................. - 30,000 16,500
Payment of credit facility fees.............................. (445) (203) (230)
Principal payments under capital lease obligations........... (271) (305) (425)
Proceeds from stock issued pursuant to stock-based
compensation plans......................................... 3,335 2,510 4,927
Proceeds from public offering................................ 25,333 - -
------- ------- -------
Net cash provided by financing activities...... 13,355 30,361 10,727
------- ------- -------
Net increase (decrease) in cash and cash equivalents............ (17,291) 38,851 26,101
Cash and cash equivalents at beginning of year.................. 23,458 6,167 45,018
------- ------- -------
Cash and cash equivalents at end of year........................$ 6,167 $ 45,018 $ 71,119
======= ======= =======
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest, net of amount capitalized........................$ 4,728 $ 4,276 $ 4,389
======= ======= =======
Income taxes..............................................$ 16,696 $ 25,257 $ 39,154
======= ======= =======
See accompanying Notes to Consolidated Financial Statements.
</TABLE>
27
<PAGE>
DOLLAR TREE STORES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share data)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business
Dollar Tree Stores, Inc. (DTS or the Company) owns and operates, in one
business segment, discount variety retail stores which sell substantially all
items for $1.00; through a recent merger, the Company owns stores which sell
substantially all items for $0.98. The Company operates under the names of
Dollar Tree, Dollar Bills, Only One Dollar, and 98 Cent Clearance Center. The
Company's headquarters and one of its distribution centers are located in
Chesapeake, Virginia. The Company also operates distribution centers in Olive
Branch, Mississippi, in the Chicago, Illinois area and in the Sacramento,
California area. Most of the Company's stores are located in the eastern half of
the United States; the 98 Cent Clearance Center stores are located in northern
and central California and Nevada. The Company's merchandise includes
housewares, seasonal goods, candy and food, toys, health and beauty care, party
goods, gifts, stationery, personal accessories, books and other consumer items.
A substantial portion of the Company's merchandise is purchased directly or
indirectly from countries in the Far East, principally China. The Company is not
dependent on a few suppliers.
Principles of Consolidation
At December 31, 1998, DTS has three wholly owned subsidiaries, Dollar
Tree Management, Inc. (DTM), Dollar Tree Distribution, Inc. (DTD) and Dollar
Tree West, Inc. (DTW). DTM provides management, retail store leasing, accounting
and administrative services to DTS for a fee and DTD provides merchandise
procurement, purchasing, warehousing and distribution services to DTS for a fee.
DTW owns and operates discount variety retail stores under the name 98 Cent
Clearance Center and was merged with and into DTS on January 1, 1999. Effective
October 29, 1996, DTD established a wholly owned subsidiary, Dollar Tree
Properties, Inc. (DTP). DTP is organized as a real estate holding company and
owns certain undeveloped property. The consolidated group is referred to
throughout the notes as "the Company." The consolidated financial statements
include the financial statements of Dollar Tree Stores, Inc., and its wholly
owned subsidiaries. All significant intercompany balances and transactions have
been eliminated in consolidation.
On December 10, 1998, DTW completed a merger, which was accounted for
as a pooling of interests, with Step Ahead (the Step Ahead merger) in which Step
Ahead became a wholly owned subsidiary of DTS. Prior to the merger, Step Ahead's
fiscal year end was the 52-week period ending on the last Sunday in January. As
a result of the merger, the Company's consolidated financial statements have
been restated to retroactively combine Step Ahead's financial statements as if
the merger had occurred at the beginning of the earliest period presented.
The consolidated income statements, statements of shareholders' equity
and cash flows for the years ended December 31, 1996 and 1997 reflect the
results of operations and cash flows for Dollar Tree Stores, Inc. for the years
then ended combined with Step Ahead for the fiscal years ended January 26, 1997
and January 25, 1998. The consolidated income statement and statements of
shareholders' equity and cash flows for the year ended December 31, 1998 reflect
the results of operations and cash flows for Dollar Tree Stores, Inc. for the
year then ended combined with Step Ahead for the 11-month period ended December
31, 1998. The consolidated balance sheet as of December 31, 1997 reflects the
financial position of Dollar Tree Stores, Inc. on that date combined with the
financial position of Step Ahead as of January 25, 1998. The consolidated
balance sheet as of December 31, 1998 reflects the combined financial position
of Dollar Tree Stores, Inc. and Step Ahead on that date.
Cash and Cash Equivalents
Cash and cash equivalents at December 31, 1997 and 1998 includes
$39,400 and $64,200, respectively, of investments in money market securities and
bank participation agreements which are valued at cost, which approximates
market. The underlying assets of these short-term participation agreements are
primarily commercial notes. For purposes of the statements of cash flows, the
Company considers all highly liquid debt instruments with original maturities of
three months or less to be cash equivalents.
28
<PAGE>
Merchandise Inventories
Merchandise inventories are stated at the lower of cost or market. Cost
is assigned to store inventories using the retail inventory method, determined
on a first-in, first-out (FIFO) basis. Costs directly associated with
warehousing and distribution are capitalized as merchandise inventories. Total
warehousing and distribution costs capitalized into inventories amounted to
$5,731 and $7,790 at December 31, 1997 and 1998, respectively.
Property and Equipment
Property and equipment are stated at cost. Buildings are depreciated
using the straight-line method over 39 years, the estimated useful life of the
assets. Furniture and fixtures are depreciated using the straight-line method
over four to seven years, the estimated useful lives of the respective assets.
Transportation vehicles are depreciated using the straight-line method over four
to six years, the estimated useful lives of the respective assets. Improvements
and assets held under capital leases are amortized using the straight-line
method over three to ten years, the estimated useful lives of the respective
assets or terms of the related leases, whichever is less.
Interest is capitalized in connection with the construction of major
facilities. The capitalized interest is recorded as part of the asset to which
it relates and is amortized over the asset's estimated useful life. In 1997 and
1998, $916 and $402, respectively, of interest cost was capitalized. No interest
was capitalized in 1996.
Goodwill
Goodwill, which represents the excess purchase price over fair value of
net assets acquired, is amortized on a straight-line basis over 25 years. The
Company assesses the recoverability of this intangible asset by comparing the
carrying amount of the asset to expected future net cash flows of the acquired
organization. The recoverability of goodwill will be impacted if estimated
future net cash flows are not achieved.
Cost of Sales
The Company includes the cost of merchandise, warehousing and
distribution costs, and certain occupancy costs in cost of sales.
Store Opening Costs
The Company expenses store opening costs when the store opens.
Income Taxes
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between financial statement carrying
amounts of existing assets and liabilities and their respective tax bases.
Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in the tax rates is recognized in income in
the period that includes the enactment date of such change.
Stock-Based Compensation
The Company has elected to apply Accounting Principles Board Opinion
No. 25, Accounting for Stock Issued to Employees (APB No. 25), and related
Interpretations in accounting for certain stock-based compensation plans as
permitted by Statement of Financial Accounting Standards (SFAS) No. 123,
Accounting for Stock-Based Compensation (SFAS No. 123). The Company has adopted
the disclosure-only provisions of SFAS No. 123.
Net Income Per Share
Basic net income per share has been computed by dividing net income by
the weighted average number of common shares outstanding. Diluted net income per
share reflects the potential dilution that could occur assuming the inclusion of
dilutive potential common shares and has been computed by dividing net income by
the weighted average number of common shares and dilutive potential common
shares outstanding. Dilutive potential common shares include all outstanding
stock options and warrants after applying the treasury stock method. The market
price used in applying the treasury stock method was the closing market price of
the stock at the end of each day.
29
<PAGE>
In connection with stock dividends authorized by the Board of Directors
in 1996, 1997 and 1998, the Company issued one-half share for each outstanding
share of Common Stock, payable April 19, 1996 to shareholders of record as of
April 5, 1996, payable July 21, 1997 to shareholders of record as of July 14,
1997 and payable June 29, 1998 to shareholders of record as of June 22, 1998,
respectively. All share and per share data in these consolidated financial
statements and the accompanying notes have been retroactively adjusted to
reflect these dividends, each having the effect of a 3-for-2 stock split.
New Accounting Standards
The Financial Accounting Standards Board has issued Statement No. 133,
Accounting for Derivative Instruments and Hedging Activities. This statement
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts, and for
hedging activities. This standard is effective for all fiscal quarters of fiscal
years beginning after June 15, 1999. The impact of the implementation of this
standard is not expected to be material to the Company's financial position or
results of operation.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the reported
period. Actual results could differ from those estimates. In addition, the
Company has contingent liabilities related to legal proceedings and other
matters arising from the normal course of operations. Management does not expect
that amounts, if any, which may be required to satisfy such contingencies will
be material in relation to the accompanying consolidated financial statements.
Reclassifications
Certain 1996 and 1997 amounts have been reclassified for comparability
with the 1998 financial statement presentation.
NOTE 2 - ACQUISITIONS
On January 31, 1996, the Company acquired all of the outstanding
capital stock of Dollar Bills, Inc. (Dollar Bills), formerly known as Terrific
Promotions, Inc., which owned and operated 136 discount variety retail stores
under the name Dollar Bill$. The Company has assumed operations of a
distribution center and wholesale division in the Chicago area. The acquisition
was accounted for by the purchase method of accounting and these consolidated
financial statements include the operating results of Dollar Bills from the date
of acquisition through December 31, 1998. The acquisition cost for the purchase
was allocated on the basis of the estimated fair value of assets acquired and
liabilities assumed with the excess purchase price allocated to goodwill. Total
cash paid was $52,630 and goodwill of $48,170 was recorded on the date of
acquisition. Accumulated amortization relating to goodwill approximates $3,692
and $5,619 at December 31, 1997 and 1998, respectively.
On December 10, 1998, the Company completed the Step Ahead merger. The
merger qualified as a tax-free exchange and was accounted for as a pooling of
interests. DTS issued 1.1212 shares of the Company's common stock for each share
of Step Ahead outstanding common and preferred stock. A total of 1,662,740
shares (after adjustment for fractional shares) of the Company's common stock
was issued as a result of the merger and Step Ahead's outstanding stock options
were converted into options to purchase 323,207 common shares of the Company. In
addition, the Company issued options to certain former shareholders of Step
Ahead in exchange for non-competition agreements and a consulting agreement.
Included in other assets at December 31, 1998 is the present value of these
agreements of $4,413 which will be amortized, generally, over a ten-year period.
The recording of these non-competition agreements did not involve the use of
cash and, accordingly, has been excluded from the accompanying consolidated
statements of cash flows. In connection with the merger, the Company incurred
$5,325 ($4,201 after taxes or $0.06 diluted net income per share) of merger
related costs, consisting primarily of professional fees and writedowns of
inventory and fixed assets, which were charged to operations during the year
ended December 31, 1998.
30
<PAGE>
The following table presents a reconciliation of net sales and net
income previously reported by the Company to those presented in the accompanying
consolidated financial statements.
<TABLE>
<CAPTION>
For the year ended December 31,
1996 1997 1998
---- ---- ----
<S> <C> <C> <C>
Net sales:
DTS........................ $ 493,037 $ 635,473 $ 811,991
Step Ahead................. 65,804 87,729 106,816
------- ------- -------
Combined................... $ 558,841 $ 723,202 $ 918,807
======= ======= =======
Net income:
DTS........................ $ 33,835 $ 48,574 $ 67,428
Step Ahead................. 1,513 1,354 1,462
------- ------- -------
Combined................... $ 35,348 $ 49,928 $ 68,890
======= ======= =======
</TABLE>
NOTE 3 - INCOME TAXES
The provision for income taxes for the years ended December 31, 1996,
1997 and 1998 consists of the following:
<TABLE>
<CAPTION>
1996 1997 1998
---- ---- ----
<S> <C> <C> <C>
Federal--Current........... $ 20,049 $ 29,967 $ 39,348
Federal--Deferred.......... (938) (3,067) (1,024)
State--Current............. 3,287 4,831 6,392
State--Deferred............ (149) (436) (183)
------ ------ ------
$ 22,249 $ 31,295 $ 44,533
====== ====== ======
</TABLE>
A reconciliation of the statutory Federal income tax rate and the
effective rate for the years ended December 31, 1996, 1997 and 1998 follows:
<TABLE>
<CAPTION>
1996 1997 1998
---- ---- ----
<S> <C> <C> <C>
Statutory tax rate.......................... 35.0% 35.0% 35.0%
Effect of:
State and local income taxes, net of
Federal income tax benefit............ 3.4 3.4 3.6
Other, net............................... 0.2 0.1 0.7
---- ---- ----
Effective tax rate ......................... 38.6% 38.5% 39.3%
==== ==== ====
</TABLE>
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes. Deferred tax
assets and liabilities are classified on the balance sheet based on the
classification of the underlying asset or liability. Significant components of
the Company's net deferred tax assets as of December 31, 1997 and 1998 are as
follows:
<TABLE>
<CAPTION>
1997 1998
---- ----
<S> <C> <C>
Deferred tax assets:
Property and equipment, principally due to differences
in depreciation.................................... $ 2,075 $ 2,359
Accrued expenses, due to accrual for financial
reporting purposes................................. 5,001 5,487
Inventories, due to differences in inventory valuation
for book and tax purposes.......................... 2,363 3,147
Other ............................................... 455 361
----- ------
Total deferred tax assets...................... 9,894 11,354
----- ------
Deferred tax liabilities:
Goodwill, due to differences in amortization.......... (1,862) (2,311)
Other ............................................... (336) (140)
----- ------
Total deferred tax liabilities................. (2,198) (2,451)
----- ------
Net deferred tax assets........................ $ 7,696 $ 8,903
===== ======
</TABLE>
In assessing the realizability of deferred tax assets, management
considers whether it is more likely than not that some portion or all of the
deferred taxes will not be realized. Based upon the availability of carrybacks
of future deductible amounts to 1996, 1997 and 1998 taxable
31
<PAGE>
income and management's projections for future taxable income over the periods
in which the deferred tax assets are deductible, management believes the
existing net deductible temporary differences will reverse during periods in
which carrybacks are available and/or in which the Company generates net taxable
income. However, there can be no assurance that the Company will generate any
income or any specific level of continuing income in future years.
NOTE 4 - LEASES
Future minimum lease payments under noncancelable store, distribution
center and former corporate headquarters operating leases and the present value
of future minimum capital lease payments as of December 31, 1998 are as follows:
<TABLE>
<CAPTION>
Capital Operating
Leases Leases
------ ------
Year ending December 31:
<S> <C> <C>
1999 ............................................ $ 704 $ 57,790
2000 ............................................ 655 52,721
2001 ............................................ 621 43,727
2002 ............................................ 523 32,936
2003 ............................................ 479 21,655
Later years...................................... 596 38,931
----- -------
Total minimum lease payments......................... 3,578 $ 247,760
=======
Less amount representing interest
(at an average rate of approximately 8%)......... 652
-----
Present value of net minimum capital lease payments.. 2,926
Less current installments of obligations under
capital leases, included in other current
liabilities...................................... 457
-----
Obligations under capital leases, excluding current
installments, included in other liabilities...... $ 2,469
=====
</TABLE>
The above future minimum lease payments include amounts for leases that
were signed prior to December 31, 1998 for stores that were not open as of
December 31, 1998. Minimum rental payments for operating leases do not include
contingent rentals that may be paid under certain store leases based on a
percentage of sales in excess of stipulated amounts. Future minimum lease
payments have not been reduced by future minimum sublease rentals of $7,365
under operating leases.
The Company is a party to a lease agreement for the former corporate
headquarters and distribution center in Norfolk, Virginia, with a partnership
owned by certain Company shareholders. The lease includes land, a building and
certain equipment and expires in December 2009 with options to renew for three
five-year periods. The lease currently provides for an aggregate annual rental
payment of $656 which is included in the future minimum lease payments above;
the Company receives annual rental payments in excess of this obligation from a
sublease agreement which expires in February 2008. The Company also leases
properties for three of its stores from related partnerships. The total rental
payments related to the leases for the former corporate headquarters and
distribution center and these stores were $746, $789 and $790 for the years
ended December 31, 1996, 1997 and 1998, respectively. Rental payments for these
properties are included in the rental expense disclosure below.
During 1998, the Company built an automated distribution facility in
Olive Branch, Mississippi to replace its leased facility in Memphis, Tennessee.
In preparation for the move to this new facility, the Company listed its Memphis
facility with a commercial real estate agent for sublease. The Company is
responsible for payments under the terms of this lease through September 2005.
At December 31, 1998, the Company had not obtained a sublease and the real
estate market in Memphis did not indicate that a sublease with terms that would
cover the remaining lease payments would be obtainable. Due to the uncertainty
regarding the ultimate recovery of the future lease payments and the investment
in the improvements in the building, the Company recorded a $1,125 loss
contingency during 1998.
Included in property and equipment at December 31, 1997 and 1998 are
leased furniture and fixtures and transportation vehicles with a cost of $1,744
and $3,473 and accumulated amortization of $702 and $677 at December 31, 1997
and 1998, respectively.
32
<PAGE>
Rental expense for store, distribution center and former corporate
headquarters operating leases included in the accompanying consolidated income
statements for the years ended December 31, 1996, 1997 and 1998 was as follows:
<TABLE>
<CAPTION>
1996 1997 1998
---- ---- ----
<S> <C> <C> <C>
Minimum rentals............... $ 30,726 $ 40,389 $ 49,494
Contingent rentals............ 1,297 1,837 1,374
------ ------ ------
Total................ $ 32,023 $ 42,226 $ 50,868
====== ====== ======
</TABLE>
NOTE 5 - BALANCE SHEET COMPONENTS
Net property and equipment as of December 31, 1997 and 1998 consisted
of the following:
<TABLE>
<CAPTION>
1997 1998
---- ----
<S> <C> <C>
Land ............................................ $ 6,275 $ 8,051
Buildings ....................................... 7,864 17,714
Improvements..................................... 32,814 47,497
Furniture and fixtures........................... 53,900 80,291
Transportation vehicles.......................... 2,055 3,903
Construction in progress......................... 22,459 20,918
------- -------
Total property and equipment........... 125,367 178,374
Less accumulated depreciation and amortization... 38,365 55,989
------- -------
Total.................................. $ 87,002 $ 122,385
======= =======
</TABLE>
Other current liabilities as of December 31, 1997 and 1998 consisted of
the following:
<TABLE>
<CAPTION>
1997 1998
---- ----
<S> <C> <C>
Compensation and benefits........................ $ 9,718 $ 13,455
Taxes (other than income taxes).................. 9,816 10,296
Other ....................................... 2,097 2,592
------ ------
Total.................................. $ 21,631 $ 26,343
====== ======
</TABLE>
NOTE 6 - LONG-TERM DEBT
On December 31, 1994, the Company issued $7,000 of noncallable 9%
Senior Subordinated Notes and $7,000 of noncallable 9% Junior Subordinated Notes
(collectively, 9% Subordinated Notes) to certain Company shareholders. The 9%
Subordinated Notes were paid in full during June 1996. Interest expense related
to this debt was $574 for the year ended December 31, 1996.
On September 27, 1996, the Company entered into an Amended and Restated
Revolving Credit Agreement with its banks (the Agreement). The Agreement
provides for, among other things: (1) a $135,000 revolving line of credit,
bearing interest at the agent bank's prime interest rate or LIBOR, plus a
spread, at the option of the Company; (2) an annual facilities fee and annual
agent's fee payable quarterly; and (3) the reduction of amounts outstanding
under the Agreement for a period of 30 consecutive days between each December 1
and March 1 to the following:
December 1, 1998 to March 1, 1999.............. $ 20,000
December 1, 1999 to March 1, 2000.............. $ 10,000
There are no reduction requirements beyond those indicated above.
The Agreement, among other things, requires the maintenance of certain
specified financial ratios, restricts the payment of certain distributions and
prohibits the incurrence of certain new indebtedness. During 1998, the Agreement
was amended to remove the restrictions on the amount of capital expenditures and
on the minimum beneficial ownership of the founding shareholders. The Agreement
matures on May 31, 2002. During 1997 and 1998, the weighted average interest
rate charged by the banks under the Company's credit agreements approximated
6.4% and 6.0%, respectively. At December 31, 1997 and 1998, no amounts were
outstanding under the Agreement; however, approximately $34,782 of the $135,000
available under the Agreement was committed to certain letters of credit issued
in relation to the routine purchase of foreign merchandise at December 31, 1998.
33
<PAGE>
On April 30, 1997, the Company issued $30,000 of 7.29% unsecured Senior
Notes (the Notes). The principal amount is payable in five equal annual
installments of $6,000 beginning April 30, 2000. Interest is payable
semiannually on April 30 and October 30 of each year. The Note holders have the
right to require the Company to prepay the Notes in full without premium upon a
change of control or upon certain other transactions by the Company. The Note
agreements, among other things, prohibit certain mergers and consolidations,
require the maintenance of certain specified ratios, require that the Notes rank
pari passu with the Company's other debt and limit the amount of Company debt.
In the event of default or a prepayment at the option of the Company, the
Company is required to pay a prepayment penalty equal to a make-whole amount.
Outstanding amounts of $30,000 are included in long-term debt at December 31,
1997 and 1998.
On May 20, 1998, the Company entered into a Loan Agreement with the
Mississippi Business Finance Corporation (MBFC) under which the MBFC issued
Taxable Variable Rate Demand Revenue Bonds (the Bonds) in an aggregate principal
amount of $19,000, to finance the acquisition, construction, and installation of
land, buildings, machinery and equipment for the Company's new distribution
facility in Olive Branch, Mississippi. The principal amount of the Bonds is
payable beginning on June 1, 2006, with a portion maturing each June 1 with the
final portion maturing on June 1, 2018; the Bonds do not contain a prepayment
penalty as long as the interest rate remains variable. Interest is payable
monthly based on a variable interest rate which was 5.4% at December 31, 1998.
The Bonds are supported by a $19,300 letter of credit issued by one of the
Company's existing lending banks. The letter of credit is renewable annually.
The Letter of Credit and Reimbursement Agreement requires, among other things,
the maintenance of certain specified ratios and restricts the payment of
dividends. The Bonds contain a demand provision and, therefore, outstanding
amounts are classified as current liabilities. At December 31, 1998 the balance
outstanding on the Bonds is $16,500.
At December 31, 1997, the Company also has a loan and security
agreement under which $9,241 of a revolving loan and $804 of a term loan were
outstanding. During December 1998, the Company repaid all amounts outstanding
under this agreement, the agreement was terminated and all security interests
held by the lender were released.
The carrying value of the Company's long-term debt approximates its
fair value. The fair value is estimated by discounting the future cash flows of
each instrument at rates offered for similar debt instruments of comparable
maturities.
NOTE 7 - MANAGEMENT ADVISORY SERVICES
The Company has a financial and management advisory service agreement
with one of its non-employee shareholders. The agreement initially provided for
the payment of $250 annually. During 1995, the shareholder agreed to reduce the
annual payment to $200 over the remaining term of the agreement. The agreement
is terminable by vote of the Company's Board of Directors. During each of the
years ended December 31, 1996, 1997 and 1998, the Company paid $200 under this
agreement.
NOTE 8 - SHAREHOLDERS' EQUITY
The Company issued unattached warrants to purchase 2,792,450 shares of
Common Stock on September 30, 1993 for $0.18 per warrant and unattached warrants
to purchase 2,792,450 shares of Common Stock on February 22, 1994 for $0.18 per
warrant. The warrants, which are held by certain Company shareholders, carry an
exercise price of $0.86 per share, have been exercisable since March 6, 1995
(the effective date of the Company's initial public offering), and expire on
December 31, 2003. All warrants were outstanding at December 31, 1998.
Effective February 1, 1995, the Articles of Incorporation were amended
to authorize 50,000,000 shares of Common Stock, $0.01 par value per share, and
10,000,000 shares of Preferred Stock, $0.01 par value per share. On July 23,
1996, the shareholders of the Company approved an increase in authorized shares
of Common Stock from 50,000,000 to 100,000,000 shares.
On June 10, 1996, the Company sold 1,687,500 shares of Common Stock,
$0.01 par value per share, pursuant to a registration statement filed on Form
S-3 under the Securities Act of 1933. In connection with this offering, the
Company received $25,333, net of offering expenses.
34
<PAGE>
NOTE 9 - NET INCOME PER SHARE
The following table sets forth the calculation of basic and diluted net
income per share:
<TABLE>
<CAPTION>
1996 1997 1998
---- ---- ----
(In thousands, except per share data)
<S> <C> <C> <C>
Basic net income per share:
Net income ................................... $ 35,348 $ 49,928 $ 68,890
------ ------ ------
Weighted average number of common shares
outstanding................................... 58,934 60,212 60,683
------ ------ ------
Basic net income per share......... $ 0.60 $ 0.83 $ 1.14
====== ====== ======
Diluted net income per share:
Net income ................................... $ 35,348 $ 49,928 $ 68,890
------ ------ ------
Weighted average number of common shares
outstanding................................... 58,934 60,212 60,683
Dilutive effect of stock options and warrants
(as determined by applying
the treasury stock method)................... 6,059 6,268 6,441
------ ------ ------
Weighted average number of common shares and
dilutive potential common shares outstanding.. 64,993 66,480 67,124
------ ------ ------
Diluted net income per share....... $ 0.54 $ 0.75 $ 1.03
====== ====== ======
</TABLE>
NOTE 10 - PROFIT SHARING AND 401(K) RETIREMENT PLAN
The Company maintains defined contribution profit sharing and 401(k)
plans which are available to all employees over 21 years of age who have
completed one year of service in which they have worked, in general, at least
1,000 hours. Eligible employees may make elective salary deferrals. The Company
may make contributions at its discretion.
Contributions to and reimbursements by the Company of expenses of the
plans included in the accompanying consolidated income statements for the years
ended December 31 were as follows:
1996....................... $ 2,012
1997....................... $ 2,923
1998....................... $ 4,017
NOTE 11 - STOCK-BASED COMPENSATION PLANS
At December 31, 1998, the Company has five stock-based compensation
plans, which are described below. Effective with the Step Ahead merger and in
accordance with the terms of the Step Ahead Investments, Inc. Long-Term
Incentive Plan (SAI Plan), outstanding Step Ahead options were assumed by the
Company and converted, based on 1.1212 Company options for each Step Ahead
option, to options to purchase the Company's common stock. Options issued as a
result of this conversion were fully vested as of the date of the merger.
The Company adopted the disclosure-only option under SFAS No. 123 as of
January 1, 1996. If the accounting provisions of SFAS No. 123 had been adopted
as of the beginning of 1996, the Company's net income and net income per share
would have been reduced to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
1996 1997 1998
---- ---- ----
<S> <C> <C> <C>
Net income:
As reported.................. $ 35,348 $ 49,928 $ 68,890
====== ====== ======
Pro forma.................... $ 33,742 $ 46,920 $ 62,150
====== ====== ======
Basic net income per share:
As reported.................. $ 0.60 $ 0.83 $ 1.14
====== ====== ======
Pro forma.................... $ 0.57 $ 0.78 $ 1.02
====== ====== ======
Diluted net income per share:
As reported.................. $ 0.54 $ 0.75 $ 1.03
====== ====== ======
Pro forma.................... $ 0.52 $ 0.71 $ 0.93
====== ====== ======
</TABLE>
The full impact of calculating compensation cost for stock options
under SFAS No. 123 is not reflected in the pro forma net income and net income
per share amounts presented above because compensation cost is reflected over
the options' vesting periods and compensation cost for options granted prior to
January 1, 1995 is not considered. These pro forma amounts may not
35
<PAGE>
be representative of future disclosures because compensation cost is reflected
over the options' vesting periods and because additional options may be granted
in future years.
Fixed Stock Option Plans
The Company has four fixed stock option plans. Under the Non-Qualified
Stock Option Plan (SOP), the Company granted options to its employees for
698,176 shares of Common Stock in 1993 and 698,859 shares in 1994. Options
granted under the SOP have an exercise price of $1.29 and are fully vested at
the date of grant.
Under the 1995 Stock Incentive Plan (SIP), the Company may grant
options to its employees for up to 5,400,000 shares of Common Stock. The
exercise price of each option equals the market price of the Company's stock at
the date of grant, unless a higher price is established by the Board of
Directors, and an option's maximum term is ten years. Options granted under the
SIP vest over a three-year period.
The SAI Plan provided for the issuance of stock options, stock
appreciation rights (SARs), phantom stock and restricted stock awards to
officers and key employees. At the date of the merger, the SAI Plan was
authorized to issue 400,000 shares subject to stock options, 40,000 phantom
shares, 125,000 SARs, and 25,000 restricted stock awards. In 1996, Step Ahead
converted all of the outstanding SARs and phantom stock awards to stock options
and restricted stock awards, respectively.
Under the 1998 Special Stock Option Plan (Special Plan), options to
purchase 165,000 shares were granted to five former officers of Step Ahead who
are serving as employees or consultants of the Company. The options were granted
as consideration for entering into non-competition agreements and a consulting
agreement. The exercise price of each option equals the market price of the
Company's stock at the date of grant, and an option's maximum term is ten years.
Options granted under the Special Plan vest over a five-year period.
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option-pricing model with the following weighted average
assumptions:
<TABLE>
<CAPTION>
1996 1997 1998
---- ---- ----
<S> <C> <C> <C>
Expected term in years....... 10 10 8
Expected volatility.......... 49% 47.7% 50.4%
Annual dividend yield........ - - -
Risk-free interest rate...... 6.7% 5.8% 4.9%
</TABLE>
The following tables summarize the Company's various option plans,
including the SAI Plan for the period prior to the Step Ahead merger, as of
December 31, 1996, 1997 and 1998, and changes during the years then ended and
information about fixed options outstanding at December 31, 1998.
<TABLE>
Stock Option Activity
<CAPTION>
1996 1997 1998
------------------------- -------------------------- --------------------------
Weighted Weighted Weighted
Average Average Average
Per Share Per Share Per Share
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
Outstanding at
beginning of year.... 1,839,758 $ 2.99 2,183,246 $ 7.07 2,404,642 $ 10.16
Granted................. 934,948 12.40 798,338 15.64 1,413,073 36.30
Exercised............... (514,047) 1.73 (473,307) 4.59 (481,806) 8.91
Forfeited............... (77,413) 10.06 (103,635) 12.60 (84,999) 18.19
--------- --------- ---------
Outstanding at
end of year.......... 2,183,246 7.07 2,404,642 10.16 3,250,910 21.50
========= ========= =========
Options exercisable
at end of year....... 1,108,187 3.57 1,087,587 6.04 1,344,067 8.98
========= ========= =========
Weighted average fair
value of options
granted during the year................ $ 8.31 $ 10.39 $ 22.53
</TABLE>
36
<PAGE>
<TABLE>
Stock Options Outstanding and Exercisable
<CAPTION>
Options Outstanding Options Exercisable
---------------------------------------------- -----------------------------
Weighted
Number Average Weighted Number Weighted
Range of Outstanding Remaining Average Exercisable Average
Exercise at December 31, Contractual Exercise at December 31, Exercise
Prices 1998 Life Price 1998 Price
------ ---- ---- ----- ---- -----
<S> <C> <C> <C> <C> <C>
$1.29............... 310,798 (a) $ 1.29 310,798 $ 1.29
$4.44 to $8.92...... 599,658 5.4 years 7.30 599,658 7.30
$10.15 to $14.72.... 352,218 7.0 years 14.33 208,846 14.12
$14.89 to $25.00.... 621,321 8.0 years 16.08 197,690 17.35
$26.67 to $34.50.... 862,660 9.3 years 34.36 27,075 33.50
$38.56 to $45.38.... 504,255 10.0 years 40.55 - -
--------- ---------
$1.29 to $45.38..... 3,250,910 7.3 years $ 21.50 1,344,067 $ 8.98
========= =========
<FN>
(a) Options granted under the SOP in 1993 and 1994 have no expiration date. They
are therefore not included in the total weighted average remaining life.
</FN>
</TABLE>
Employee Stock Purchase Plan
Under the Dollar Tree Stores, Inc. Employee Stock Purchase Plan (ESPP),
the Company is authorized to issue up to 506,250 shares of Common Stock to
eligible employees. Under the terms of the ESPP, employees can choose to have up
to 10% of their annual base earnings withheld to purchase the Company's Common
Stock. The purchase price of the stock is 85% of the lower of the price at the
beginning or the price at the end of the quarterly offering period. Under the
ESPP, the Company has sold 67,012 shares as of December 31, 1998.
Under SFAS No. 123, compensation cost is recognized for the fair value
of the employees' purchase rights, which was estimated using the Black-Scholes
model with the following assumptions:
Expected term.......................... 3 months
Expected volatility.................... 21% to 30%
Annual dividend yield.................. -
Risk-free interest rate................ 5.32%-5.88% (annualized)
The weighted average fair value of those purchase rights granted in
1996, 1997 and 1998 was $2.34, $3.97, and $6.28, respectively.
37
<PAGE>
NOTE 12 - QUARTERLY FINANCIAL INFORMATION (Unaudited)
The following table sets forth certain unaudited results of operations
for each quarter of 1997 and 1998. The unaudited information has been prepared
on the same basis as the audited consolidated financial statements appearing
elsewhere in this report and includes all adjustments, consisting only of normal
recurring adjustments, which management considers necessary for a fair
presentation of the financial data shown. The operating results for any quarter
are not necessarily indicative of results for any future period.
<TABLE>
<CAPTION>
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
(In thousands, except per share data)
1997:
<S> <C> <C> <C> <C>
Net sales.............................. $136,867 $149,242 $163,577 $273,516
Gross profit........................... $ 46,725 $ 51,811 $ 60,070 $105,995
Operating income....................... $ 6,590 $ 10,793 $ 15,447 $ 51,870
Net income............................. $ 3,694 $ 6,040 $ 8,796 $ 31,398
Diluted net income per share........... $ 0.06 $ 0.09 $ 0.13 $ 0.47
Stores open at end of quarter.......... 819 866 923 946
Comparable store net sales increase.... 10.1% 8.0% 6.8% 5.4%
<CAPTION>
1998:
<S> <C> <C> <C> <C>
Net sales.............................. $175,531 $199,255 $203,998 $340,023
Gross profit........................... $ 62,664 $ 72,292 $ 76,571 $134,967 (1)
Operating income....................... $ 13,356 $ 18,972 $ 21,241 $ 64,289 (1)
Net income............................. $ 7,731 $ 11,029 $ 12,133 $ 37,997 (1)
Diluted net income per share........... $ 0.12 $ 0.16 $ 0.18 $ 0.56 (1)
Stores open at end of quarter.......... 983 1,042 1,118 1,156
Comparable store net sales increase.... 6.3% 12.0% 5.0% 5.2%
<FN>
(1) Included in gross profit is $1,301 of merger related costs. Included in
operating income is $1,301 of merger related costs and $4,024 of merger related
expenses. Excluding the effects of these merger related costs and merger related
expenses, for the fourth quarter of 1998, gross profit would have been $136,268,
operating income would have been $69,614, net income would have been $42,198 and
diluted net income per share would have been $0.63.
</FN>
</TABLE>
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
38
<PAGE>
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information concerning our Directors and Executive Officers
required by this Item is incorporated by reference to Dollar Tree Stores, Inc.'s
Proxy Statement relating to our Annual Meeting of Shareholders to be held on
June 3, 1999 (the Proxy Statement), under the caption "Election of Directors."
Information set forth in the Proxy Statement under the caption
"Compliance with Section 16(a) of the Securities and Exchange Act of 1934," with
respect to director and executive officer compliance with Section 16(a), is
incorporated herein by reference.
Item 11. EXECUTIVE COMPENSATION
Information set forth in the Proxy Statement under the caption
"Compensation of Executive Officers," with respect to executive compensation, is
incorporated herein by reference.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information set forth in the Proxy Statement under the caption
"Ownership of the Common Stock of the Company," with respect to security
ownership of certain beneficial owners and management, is incorporated herein by
reference.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information set forth in the Proxy Statement under the caption "Certain
Relationships and Related Transactions" is incorporated herein by reference.
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Documents filed as part of this report:
1. Financial Statements. Reference is made to the Index to the
Consolidated Financial Statements set forth under Part II, Item 8, on
page 22 of this Form 10-K.
2. Financial Statement Schedules. All schedules for which provision is
made in the applicable accounting regulations of the Securities and
Exchange Commission are not required under the related instructions,
are not applicable, or the information is included in the Consolidated
Financial Statements, and therefore have been omitted.
3. Exhibits. The exhibits listed on the accompanying Index to Exhibits, on
page 42 of this Form 10-K, are filed as part of, or incorporated by
reference into, this report.
(b) The following reports on Form 8-K were filed during the last quarter of
1998.
1. Report on Form 8-K, filed October 8, 1998, included a press release
regarding net sales for the quarter ended September 30, 1998.
2. Report on Form 8-K, filed October 29, 1998, included the Amendment to
the Merger Agreement dated October 20, 1998 among Dollar Tree Stores,
Inc., Dollar Tree West, Inc. and Step Ahead Investments, Inc. It also
included our press release regarding net earnings for the quarter ended
September 30, 1998.
3. Report on Form 8-K, filed December 7, 1998, included our press release
regarding the announcement of the exchange ratio for the merger of
Dollar Tree Stores, Inc. and Step Ahead Investments, Inc.
4. Report on Form 8-K, filed December 23, 1998, announced the consummation
of the merger between Dollar Tree Stores, Inc. and Step Ahead
Investments, Inc.
Also, in February 1999, we filed two Forms 8-K.
1. Report on Form 8-K, filed February 5, 1999, included financial data for
the years 1997 and 1998 which has been restated on a combined basis to
account for the pooling-of-interests between Dollar Tree Stores, Inc.
and Step Ahead Investments, Inc.
39
<PAGE>
2. Report on Form 8-K, filed February 18, 1999, includes 30 days of
post-merger combined financial results, reflecting the merger between
Dollar Tree Stores, Inc. and Step Ahead Investments, Inc.
40
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
DOLLAR TREE STORES, INC.
DATE: March 25, 1999 By: /s/ Macon F. Brock, Jr.
----------------------------
Macon F. Brock, Jr.
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ J. Douglas Perry
- ---------------------------
J. Douglas Perry Chairman of the Board; Director March 25, 1999
/s/ Macon F. Brock, Jr.
- ---------------------------
Macon F. Brock, Jr. President and Chief Executive March 25, 1999
Officer; Director (principal
executive officer)
/s/ H. Ray Compton
- ---------------------------
H. Ray Compton Executive Vice President; Director March 25, 1999
/s/ Frederick C. Coble
- ---------------------------
Frederick C. Coble Senior Vice President and Chief March 25, 1999
Financial Officer (principal
financial and accounting officer)
/s/ John F. Megrue
- ---------------------------
John F. Megrue Vice Chairman; Director March 25, 1999
/s/ Allan W. Karp
- ---------------------------
Allan W. Karp Director March 25, 1999
/s/ Thomas A. Saunders, III
- ---------------------------
Thomas A. Saunders, III Director March 25, 1999
/s/ Alan L. Wurtzel
- ---------------------------
Alan L. Wurtzel Director March 25, 1999
/s/ Frank Doczi
- ---------------------------
Frank Doczi Director March 25, 1999
</TABLE>
41
<PAGE>
Index to Exhibits
-----------------
3. Articles and Bylaws
3.1 Third Restated Articles of Incorporation of Dollar Tree Stores,
Inc. (the Company), as amended (Exhibit 3.1 to the Company's
Quarterly Report on Form 10-Q for the fiscal quarter ended
September 30, 1996 incorporated herein by this reference).
3.2 Second Restated Bylaws of the Company (Exhibit 3.2 to the
Company's Registration Statement on Form S-1, No. 33-88502,
incorporated herein by this reference).
10. Material Contracts
(a) The following document is filed herewith:
10.1 Sixth Amendment to Amended and Restated Credit Agreement (Amended
and Restated Credit Agreement) dated December 31, 1998 by and
among Dollar Tree Stores, Inc., Dollar Tree Distribution, Inc.,
Dollar Tree Management, Inc., The First National Bank of Boston,
NationsBank, N.A., Signet Bank, Crestar Bank, First Union National
Bank of Virginia, Amsouth Bank of Alabama, and Union Bank of
California, N.A.
(b) The following document, filed as Exhibit 10.1 to the Company's Current
Report on Form 8-K on March 4, 1998 is incorporated herein by this
reference:
10.2 Fourth Amendment to Amended and Restated Revolving Credit
Agreement.
(c) The following documents, filed as Exhibits 10.1 and 10.2 to the Company's
Annual Report on Form 10-K for the fiscal year ended December 31, 1997,
are incorporated herein by this reference:
10.3 Lease dated March 27, 1998 by and between the Company and Raytheon
Service Company.
10.4 Lease Guarantee dated March 27, 1998 by and between the Company
and Raytheon Company.
(d) The following documents, filed as Exhibits 10.1, 10.2, 10.3, 10.4, 10.5
and 10.6 to the Company's Quarterly Report on Form 10-Q for the fiscal
quarter ended June 30, 1998 are incorporated herein by this reference:
10.5 Loan Agreement between Dollar Tree Distribution, Inc. and
Mississippi Business Finance Corporation, dated May 1, 1998.
10.6 Placement Letter Agreement by First Union National Bank, dated
May 1, 1998.
10.7 Tender Agency Agreement between Dollar Tree Distribution, Inc. and
Amsouth Bank, dated May 1, 1998.
10.8 Remarketing Agreement between Dollar Tree Distribution, Inc. and
First Union National Bank, dated May 1, 1998.
10.9 Guaranty Agreement by Dollar Tree Distribution, Inc., dated May 1,
1998.
10.10 Letter of Credit and Reimbursement Agreement between Dollar Tree
Distribution, Inc. and First Union National Bank, dated May 1,
1998.
(e) The following documents, filed as Exhibits 2.1 and 4.1 to the Company's
Form 8-K on July 30, 1998 are incorporated herein by this reference:
10.11 Merger Agreement dated July 22, 1998 by and among Dollar Tree
Stores, Inc., Dollar Tree West, Inc., and Step Ahead Investments,
Inc.
10.12 Voting Agreement dated July 22, 1998 by and among Dollar Tree
Stores, Inc., Gary L. Cino, Janet Cino, Gary L. Nett, Trustee for
The Cino Children's Trust dated March 18, 1997, and Gary and Janet
Cino, Trustees of the Gary and Janet Cino Trust dated May 1, 1991.
42
<PAGE>
(f) The following document, filed as Exhibits 10.4 to the Company's Form S-4
as Amended on October 21, 1998 is incorporated herein by this reference:
10.13 Agreement of Lease by and between Step Ahead and 3222 Winona Way,
L.P. dated February 17, 1993.
(g) The following document, filed as Exhibit 2.1 to the Company's Form 8-K on
October 29, 1998 is incorporated herein by this reference:
10.14 Amendment to the Merger Agreement dated October 20, 1998 by and
among Dollar Tree Stores, Inc., Dollar Tree West, Inc., and Step
Ahead Investments, Inc.
(h) The following document, filed as Exhibit 10.1 to the Company's Report on
Form 10-Q on November 13, 1998 is incorporated herein by this reference:
10.15 Fifth Amendment to Amended and Restated Revolving Credit
Agreement.
(i) The following documents, filed as Exhibits 4.1, 4.2, 4.3, 4.4, 4.5 and 4.6
to the Company's Post-Effective Amendment on Form S-8 dated December 10,
1998 to its registration statement on Form S-4, are incorporated herein by
this reference:
10.16 Step Ahead Investments, Inc. Long Term Incentive Plan, as Amended.
10.17 Form of Step Ahead Investments, Inc. Incentive Stock Option
Agreement.
10.18 Form of Step Ahead Investments, Inc. Non-statutory Stock Option
Agreement.
10.19 Dollar Tree Stores, Inc. 1998 Special Stock Option Plan.
10.20 Dollar Tree Stores, Inc. Non-qualified Stock Option Agreement with
Gary Cino.
10.21 Form of Dollar Tree Stores, Inc. Non-qualified Stock Option
Agreement with William Coyle, Eric Stauss, Eric Leon and Anthony
Leon.
21. Subsidiaries of the Registrant
21.1 Subsidiaries.
23. Consents of Experts and Counsel
23.1 Consent of Independent Auditors.
27. Financial Data Schedule
27.1 Financial Data Schedule as of and for the years ended December 31,
1996, December 31, 1997 and December 31, 1998. Years 1996 and 1997
have been restated to give effect to the pooling-of-interests
merger with Step Ahead Investments, Inc.
218048.1
SIXTH AMENDMENT TO AMENDED AND
RESTATED REVOLVING CREDIT AGREEMENT
This Sixth Amendment to Amended and Restated Revolving Credit Agreement
(the "Sixth Amendment") is made as of the 31st day of December, 1998 by and
among
Dollar Tree Distribution, Inc. (the "Borrower"), a Virginia
corporation having its chief executive office at 500 Volvo Parkway,
Chesapeake, Virginia 23320;
Dollar Tree Stores, Inc. ("DTS"), a Virginia corporation having its
chief executive office at 500 Volvo Parkway, Chesapeake, Virginia
23320;
Dollar Tree Management, Inc. ("DTM"), a Virginia corporation having
its chief executive office at 500 Volvo Parkway, Chesapeake, Virginia
23320;
BankBoston, N.A. (f/k/a The First National Bank of Boston),
NationsBank, N.A., Crestar Bank, First Union National Bank (f/k/a
First Union National Bank of Virginia), Amsouth Bank of Alabama, Union
Bank of California, N.A. and all other financial institutions which
are now or may hereafter become parties to such Amended and Restated
Revolving Credit Agreement (individually, a "Lender" and collectively,
the "Lenders"); and
BankBoston, N.A. (f/k/a The First National Bank of Boston), a national
banking association having its head office at 100 Federal Street,
Boston, Massachusetts, as Agent for the Lenders (in such capacity, the
"Agent").
in consideration of the mutual covenants herein contained and benefits to be
derived herefrom,
<PAGE>
W I T N E S S E T H:
WHEREAS, the Borrower, DTS, DTM, the Agent and the Lenders entered into
an Amended and Restated Revolving Credit Agreement dated as of September 27,
1996, as amended by a First Amendment to Amended and Restated Revolving Credit
Agreement dated January 25, 1997, as further amended by a Second Amendment to
Amended and Restated Revolving Credit dated as of May 8, 1997, as further
amended by a Third Amendment to Amended and Restated Revolving Credit dated as
of September 2, 1997, as further amended by a Fourth Amendment to Amended and
Restated Revolving Credit dated as of November 7, 1997, as further amended by a
Fifth Amendment to Amended and Restated Revolving Credit Agreement dated as of
September 30, 1998 and as further amended by a Sixth Amendment to Amended and
Restated Revolving Credit Agreement dated as of December 31, 1998 (collectively,
the "Agreement"); and
WHEREAS, the Borrower, DTS, DTM, the Agent, and the Lenders desire to
further modify and amend the Agreement, as provided herein.
NOW, THEREFORE, it is hereby agreed as follows:
0. Definitions. All capitalized terms used herein and not otherwise
defined shall have the same meaning herein as in the Agreement.
0. Amendments to Section 9. The provisions ofss.ss.9.4 and 9.6 of the
Agreement are hereby deleted in their entirety.
0. Ratification of Loan Documents. Except as provided herein, all
terms and conditions of the Agreement and the other Loan Documents
remain in full force and effect. The Obligors each hereby ratify,
confirm, and reaffirm all representations, warranties, and
covenants contained therein and acknowledge and agree that none of
them have any offsets, defenses, or counterclaims against the Agent
or any Lender thereunder, and to the extent that any such offsets,
defenses, or counterclaims may exist, each of the Obligors hereby
waive and release the Agent and Lenders therefrom.
0. Miscellaneous.
(a) This Sixth Amendment may be executed in several counterparts and
by each party on a separate counterpart, each of which when so
executed and delivered shall be an original, and all of which
together shall constitute one instrument.
(a) This Sixth Amendment expresses the entire understanding of the
parties with respect to the transactions contemplated hereby. No
prior negotiations or discussions shall limit, modify, or
otherwise affect the provisions hereof.
<PAGE>
IN WITNESS WHEREOF, the undersigned have hereunto executed this Sixth
Amendment as a sealed instrument as of the date first above written.
DOLLAR TREE DISTRIBUTION, INC.
By: /s/ Frederick c. Coble
-----------------------------
Name: Frederick C. Coble
Title: Senior Vice President
Chief Financial Officer
DOLLAR TREE STORES, INC.
By: /s/ Frederick C. Coble
-------------------------------
Name: Frederick C. Coble
Title: Senior Vice President
Chief Financial Officer
DOLLAR TREE MANAGEMENT, INC.
By: /s/ Frederick C. Coble
--------------------------------
Name: Frederick C. Coble
Title: Senior Vice President
Chief Financial Officer
BANKBOSTON, N.A. (f/k/a THE FIRST
NATIONAL BANK OF BOSTON), individually
and as Agent
By: /s/ Judith C.E. Kelly
-------------------------------
Name: Judith C.E. Kelly
Title: Vice President
CRESTAR BANK
By /s/ Bruce W. Nave
--------------------------------
Name: Bruce W. Nave
Title: Senior Vice President
FIRST UNION NATIONAL BANK f/k/a FIRST
UNION NATIONAL BANK OF VIRGINIA
By: /s/ Sally H. Bryson
--------------------------------
Name: Sally H. Bryson
Title: Vice President
NATIONSBANK, N.A.
By: /s/ Eileen M. Mayette
-------------------------------
Name: Eileen M. Mayette
Title: Commercial Bank Officer
UNION BANK OF CALIFORNIA, N.A.
By: /s/ J. William Bloore
--------------------------------
Name: J. William Bloore
Title: Vice President
AMSOUTH BANK OF ALABAMA
By: /s/ Mary Anna Raburn
--------------------------------
Name: Mary Anna Raburn
Title: Vice President
SUBSIDIARIES OF THE REGISTRANT
The registrant is the parent company of Dollar Tree Distribution, Inc., a
distribution, warehousing and wholesale company, and Dollar Tree Management,
Inc., a management services company, both of which are Virginia companies.
Dollar Tree Distribution, Inc., is the parent of another Virginia company,
Dollar Tree Properties, Inc., a real estate holding company.
INDEPENDENT AUDITORS' CONSENT
The Board of Directors
Dollar Tree Stores, Inc.:
We consent to incorporation by reference in the registration statements on Form
S-8 (Nos. 33-92812, 33-92814, 33-92816 and 333-38735) and in the post-effective
amendment of Form S-8 to the registration statement on Form S-4 (No. 333-61139)
of Dollar Tree Stores, Inc. of our report dated January 20, 1999 relating to the
consolidated balance sheets of Dollar Tree Stores, Inc. and subsidiaries 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 which report appears herein.
/s/ KPMG LLP
Norfolk, Virginia
March 25, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information from the Company's
Consolidated Financial Statements filed on Form 10-K for the periods ended
December 31, 1996, December 31, 1997 and December 31, 1998, and is qualified in
its entirety by reference to such financial statements. The Financial Data
Schedules for 1996 and 1997 are restated to give effect to the
pooling-of-interests merger with Step Ahead Investments, Inc.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C> <C>
<PERIOD-TYPE> 12-MOS 12-MOS 12-MOS
<FISCAL-YEAR-END> Dec-31-1996 Dec-31-1997 Dec-31-1998
<PERIOD-END> Dec-31-1996 Dec-31-1997 Dec-31-1998
<CASH> 6,167 45,018 71,119
<SECURITIES> 0 0 0
<RECEIVABLES> 3,490 2,351 1,811
<ALLOWANCES> 0 0 0
<INVENTORY> 89,184 109,483 140,949
<CURRENT-ASSETS> 105,704 166,849 226,064
<PP&E> 66,364 125,367 178,374
<DEPRECIATION> 26,505 38,365 55,989
<TOTAL-ASSETS> 195,636 302,588 399,621
<CURRENT-LIABILITIES> 80,893 104,700 116,354
<BONDS> 0 0 0
0 0 0
0 0 0
<COMMON> 266 402 609
<OTHER-SE> 105,582 160,651 243,615
<TOTAL-LIABILITY-AND-EQUITY> 195,636 302,588 399,621
<SALES> 558,841 723,202 918,807
<TOTAL-REVENUES> 558,841 723,202 918,807
<CGS> 356,179 458,601 572,313
<TOTAL-COSTS> 356,179 458,601 572,313
<OTHER-EXPENSES> 139,422 179,901 228,636
<LOSS-PROVISION> 0 0 0
<INTEREST-EXPENSE> 5,643 3,477 4,435
<INCOME-PRETAX> 57,597 81,223 113,423
<INCOME-TAX> 22,249 31,295 44,533
<INCOME-CONTINUING> 35,348 49,928 68,890
<DISCONTINUED> 0 0 0
<EXTRAORDINARY> 0 0 0
<CHANGES> 0 0 0
<NET-INCOME> 35,348 49,928 68,890
<EPS-PRIMARY> 0.60 0.83 1.14
<EPS-DILUTED> 0.54 0.75 1.03
</TABLE>
