FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
(Mark One)
(X) Quarterly report pursuant to Section 13 or 15 (d) of the Securities
Exchange Act of 1934
For the quarterly period ended September 30, 2000
( ) Transition report pursuant to Section 13 or 15 (d) of the Securities
Exchange Act of 1934
Commission File Number: 0-25464
DOLLAR TREE STORES, INC.
(Exact name of registrant as specified in its charter)
Virginia 54-1387365
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
500 Volvo Parkway
Chesapeake, Virginia 23320
(Address of principal executive offices)
Telephone Number (757) 321-5000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days:
Yes (X) No ( )
As of November 9, 2000, there were 107,919,754 shares of the Registrant's Common
Stock outstanding.
<PAGE>
DOLLAR TREE STORES, INC.
and SUBSIDIARIES
INDEX
PART I. FINANCIAL INFORMATION
Page
----
Item 1. Condensed Consolidated Financial Statements:
Condensed Consolidated Balance Sheets
September 30, 2000 and December 31, 1999............................ 3
Condensed Consolidated Income Statements
Three months and nine months ended September 30, 2000 and 1999...... 4
Condensed Consolidated Statements of Cash Flows
Nine months ended September 30, 2000 and 1999....................... 5
Notes to Condensed Consolidated Financial Statements................. 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations............................ 9
Item 3. Quantitative and Qualitative Disclosures About Market Risk...... 16
PART II. OTHER INFORMATION
Item 1. Legal Proceedings............................................... 16
Item 6. Exhibits and Reports on Form 8-K................................ 17
Signatures................................................ 18
2
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<TABLE>
<CAPTION>
DOLLAR TREE STORES, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
September 30, December 31,
2000 1999
---- ----
(Unaudited)
ASSETS
Current assets:
<S> <C> <C>
Cash and cash equivalents ..................................................... $ 23,954 $ 181,587
Merchandise inventories ....................................................... 350,055 192,838
Deferred tax asset ............................................................ 8,633 6,093
Prepaid expenses and other current assets ..................................... 25,049 14,588
------- -------
Total current assets ...................................................... 407,691 395,106
------- -------
Property and equipment, net ........................................................ 201,100 157,368
Deferred tax asset ................................................................. 1,136 470
Goodwill, net ...................................................................... 40,881 42,394
Other assets, net .................................................................. 15,378 15,895
------- -------
TOTAL ASSETS .............................................................. $ 666,186 $ 611,233
======= =======
LIABILITIES, PREFERRED STOCK AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable .............................................................. $ 89,463 $ 73,878
Income taxes payable .......................................................... 201 29,193
Other current liabilities ..................................................... 27,061 34,942
Current portion of long-term debt (notes 4 and 6) ............................. 41,900 28,070
Current installments of obligations
under capital leases ...................................................... 3,403 3,190
------- -------
Total current liabilities ................................................. 162,028 169,273
Long-term debt, excluding current portion (note 4) ................................. 18,000 49,138
Obligations under capital leases,
excluding current installments ................................................ 25,859 28,375
Common stock put warrants (note 3) ................................................. -- 4,394
Other liabilities .................................................................. 8,397 8,644
------- -------
Total liabilities ......................................................... 214,284 259,824
Cumulative convertible preferred stock (note 3) .................................... -- 35,171
Shareholders' equity (notes 3 and 5):
Common stock, par value $0.01. Authorized 450,000,000 shares,
107,896,833 shares issued and outstanding at September 30, 2000 and
98,842,201 shares issued and outstanding at December 31, 1999 .............. 1,079 659
Additional paid-in capital .................................................... 154,738 75,031
Retained earnings ............................................................. 296,085 240,548
------- -------
Total shareholders' equity ................................................ 451,902 316,238
------- -------
TOTAL LIABILITIES, PREFERRED STOCK AND
SHAREHOLDERS' EQUITY ................................................. $ 666,186 $ 611,233
======= =======
See accompanying Notes to Condensed Consolidated Financial Statements
</TABLE>
3
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<TABLE>
<CAPTION>
DOLLAR TREE STORES, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED INCOME STATEMENTS
(In thousands, except per share data)
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------- --------------------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales ........................................... $ 377,318 $ 298,868 $ 1,088,932 $ 845,107
Cost of sales ....................................... 238,328 191,546 698,324 544,326
Merger related costs (note 3) ....................... -- -- 1,100 443
------- ------- --------- -------
Gross profit ............................... 138,990 107,322 389,508 300,338
------- ------- --------- -------
Selling, general and administrative expenses:
Operating expenses ............................. 92,023 71,523 261,381 202,894
Merger related expenses (note 3) ............... -- -- 3,266 607
Depreciation and amortization .................. 10,638 7,879 28,887 22,233
Total selling, general
and administrative expenses .............. 102,661 79,402 293,534 225,734
------- ------- --------- -------
Operating income ........................... 36,329 27,920 95,974 74,604
Interest income ..................................... 715 207 3,812 881
Interest expense .................................... (1,514) (1,974) (5,729) (4,837)
------- ------- --------- -------
Income before income taxes ................. 35,530 26,153 94,057 70,648
Provision for income taxes .......................... 13,680 10,168 36,720 24,949
------- ------- --------- -------
Income before extraordinary item ........... 21,850 15,985 57,337 45,699
Loss on debt extinguishment, net of
tax benefit of $242 (note 4) ..................... -- -- 387 --
------- ------- --------- -------
Net income ................................. 21,850 15,985 56,950 45,699
Preferred stock dividends and accretion.............. -- 3,902 1,413 5,084
------- ------- --------- -------
Net income available to
common shareholders ...................... $ 21,850 $ 12,083 $ 55,537 $ 40,615
======= ======= ========= =======
Pro forma income data (note 2):
Net income available to common
shareholders ................................. $ 21,850 $ 12,083 $ 55,537 $ 40,615
Pro forma adjustment for C-corporation
income taxes ................................. -- -- -- 505
------- ------- --------- -------
Pro forma net income available to
common shareholders .......................... $ 21,850 $ 12,083 $ 55,537 $ 40,110
======= ======= ========= =======
Basic pro forma net income per common share:
Pro forma income before extraordinary
item ......................................... $ 0.21 $ 0.12 $ 0.55 $ 0.41
Pro forma net income ........................... 0.21 0.12 0.54 0.41
Diluted pro forma net income per common share:
Pro forma income before extraordinary
item ......................................... $ 0.19 $ 0.11 $ 0.50 $ 0.37
Pro forma net income ........................... 0.19 0.11 0.50 0.37
See accompanying Notes to Condensed Consolidated Financial Statements
</TABLE>
4
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<TABLE>
<CAPTION>
DOLLAR TREE STORES, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Nine Months Ended
September 30,
-----------------------
2000 1999
---- ----
Cash flows from operating activities:
<S> <C> <C>
Net income $ 56,950 $ 45,699
-------- --------
Adjustments to reconcile net income to net cash
used in operating activities:
Depreciation and amortization .............................. 28,887 22,233
Loss on disposal of property and equipment ................. 743 483
Extraordinary loss on early extinguishment of debt ......... 629 --
Lease loss accrual ......................................... (340) (316)
Provision for deferred income taxes ........................ (3,206) 1,713
Accretion of common stock put warrants to
redemption value ......................................... -- 282
Tax benefit on exercise of stock options ................... 15,901 5,293
Changes in assets and liabilities increasing
(decreasing) cash and cash equivalents:
Merchandise inventories .................................. (157,217) (121,521)
Prepaid expenses and other current assets ................ (11,090) (1,317)
Other assets, net ........................................ 155 501
Accounts payable ......................................... 15,585 22,556
Income taxes payable ..................................... (28,992) (21,730)
Other current liabilities ................................ (7,980) (6,779)
Other liabilities ........................................ 192 (350)
-------- --------
Total adjustments ....................................... (146,733) (98,952)
-------- --------
Net cash used in operating activities .................. (89,783) (53,253)
-------- --------
Cash flows from investing activities:
Capital expenditures ........................................... (71,618) (41,148)
Proceeds from sale of property and equipment ................... 199 99
-------- --------
Net cash used in investing activities .................. (71,419) (41,049)
-------- --------
Cash flows from financing activities:
Distributions paid ............................................. -- (60,934)
Proceeds from long-term debt ................................... -- 39,400
Repayment of long-term debt and facility fees .................. (27,708) (18,511)
Proceeds from revolving credit facilities ...................... 33,300 47,350
Repayment of revolving credit facilities ....................... (22,900) (35,600)
Proceeds from sale-leaseback transaction ....................... -- 21,605
Principal payments under capital lease obligations ............. (2,371) (382)
Proceeds from issuance of preferred stock and common
stock put warrants ............................................ -- 32,156
Proceeds from stock issued pursuant to
stock-based compensation plans ................................ 23,248 6,584
-------- --------
Net cash provided by financing
activities ........................................... 3,569 31,668
-------- --------
Net decrease in cash and cash equivalents ....................... (157,633) (62,634)
Cash and cash equivalents at beginning of period ................ 181,587 84,714
-------- --------
Cash and cash equivalents at end of period ...................... $ 23,954 $ 22,080
======== ========
See accompanying Notes to Condensed Consolidated Financial Statements
</TABLE>
5
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DOLLAR TREE STORES, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The condensed consolidated financial statements at September 30, 2000, and
for the three- and nine-month periods then ended, are unaudited and reflect all
adjustments (consisting only of normal recurring adjustments) which are, in the
opinion of management, necessary for a fair presentation of the financial
position and operating results for the interim periods.
The condensed consolidated financial statements should be read in
conjunction with the consolidated financial statements and notes thereto, for
the year ended December 31, 1999 filed on Form 8-K on November 9, 2000. These
consolidated financial statements should be read with management's discussion
and analysis of financial condition and results of operations for the year ended
December 31, 1999, contained in the Dollar Tree Stores, Inc. (the Company)
Prospectus dated August 3, 2000. These filings restate the consolidated
financial statements to give retroactive effect to the pooling of interests with
Dollar Express, Inc. The results of operations for the three- and nine-month
periods ended September 30, 2000 are not necessarily indicative of the results
to be expected for the entire year ending December 31, 2000.
<TABLE>
<CAPTION>
2. PRO FORMA NET INCOME PER COMMON SHARE
The following table sets forth the calculation of pro forma basic and pro
forma diluted income before extraordinary item per common share:
Three months ended Nine months ended
September 30, September 30,
------------------ -----------------
2000 1999 2000 1999
---- ---- ---- ----
(In thousands, except per share data)
Pro forma basic income before extraordinary
item per common share:
<S> <C> <C> <C> <C>
Income before extraordinary item................. $ 21,850 $ 15,985 $ 57,337 $ 45,699
Less: Preferred stock dividends and
accretion .................................... - 3,902 1,413 5,084
------- ------- ------- -------
Income before extraordinary item
available to common shareholders.............. 21,850 12,083 55,924 40,615
Pro forma adjustment for C-corporation
income taxes.................................. - - - 505
------- ------- ------- -------
Pro forma income before extraordinary
item available to common
shareholders.................................. $ 21,850 $ 12,083 $ 55,924 $ 40,110
======= ======= ======= =======
Weighted average number of
common shares outstanding..................... 106,115 98,604 102,254 98,330
======= ======= ======= =======
Pro forma basic income before
extraordinary item per common
share............................... $ 0.21 $ 0.12 $ 0.55 $ 0.41
======= ======= ======= =======
6
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<CAPTION>
Three months ended Nine months ended
September 30, September 30,
------------------ -----------------
2000 1999 2000 1999
---- ---- ---- ----
(In thousands, except per share data)
Pro forma diluted income before extraordinary
item per common share:
Pro forma income before extraordinary
item available to common
<S> <C> <C> <C> <C>
shareholders.................................. $ 21,850 $ 12,083 $ 55,924 $ 40,110
======= ======= ======= =======
Weighted average number of
common shares outstanding..................... 106,115 98,604 102,254 98,330
Dilutive effect of stock options and
warrants (as determined by applying
the treasury stock method).................... 7,384 9,474 9,044 9,504
------- ------- ------- -------
Weighted average number of common
shares and dilutive potential
common shares outstanding..................... 113,499 108,078 111,298 107,834
======= ======= ======= =======
Pro forma diluted income before
extraordinary item per common
share............................... $ 0.19 $ 0.11 $ 0.50 $ 0.37
======= ======= ======= =======
</TABLE>
3. DOLLAR EXPRESS ACQUISITION
On May 5, 2000, the Company completed its merger with privately-held,
Philadelphia-based Dollar Express, Inc. (Dollar Express), which operated 107
single-price point stores under the name "Dollar Express." These stores offer
variety merchandise at a fixed price of $1.00 and are located in six states in
the Mid-Atlantic region. Dollar Express also operated 25 multi-price point
stores under the name "Spain's Cards & Gifts" in the Philadelphia area. The
Company issued 0.8772 shares of its common stock for each share of Dollar
Express's outstanding common stock. The Company issued 8,771,928 shares of its
common stock for all of the outstanding shares of Dollar Express's common stock,
which included converting all of Dollar Express's cumulative manditorily
redeemable preferred shares into common shares on a one-for-one basis. Stock
options to purchase 260,000 shares of Dollar Express's common stock were
converted into options to purchase 228,072 common shares of the Company. As a
result of the merger, which was accounted for as a pooling of interests, the
Company's consolidated financial statements have been restated to retroactively
combine Dollar Express's financial statements as if the merger had occurred at
the beginning of the earliest period presented.
Prior to February 5, 1999, Dollar Express was treated as an S-corporation
for federal and state income tax purposes. As such, income of Dollar Express for
periods prior to February 5, 1999 was taxable to the Dollar Express
shareholders, rather than to Dollar Express. Effective February 5, 1999, Dollar
Express converted from an S-corporation to a C-corporation and recorded the
related cumulative deferred tax benefit of $2.2 million in the first quarter of
1999.
In connection with the merger, the Company incurred approximately $4.4
million ($3.1 million after taxes, which decreased year-to-date pro forma
diluted net income per common share by $0.03) of merger related costs and
expenses, consisting primarily of write downs of inventory and professional
fees. These expenses were charged to operations during the quarter ended June
30, 2000.
7
<PAGE>
With the consummation of the merger, Dollar Express's preferred stock was
converted to common shares of Dollar Express and then into Dollar Tree common
shares. In addition, Dollar Express's common stock put warrants were terminated.
The book value of the preferred stock and common stock put warrants were
credited to additional paid-in capital during the three months ended June 30,
2000.
4. LONG-TERM DEBT
In May 2000, the Company retired and terminated Dollar Express's $40.0
million term loan and revolving credit facility. This retirement resulted in an
after-tax extraordinary loss of $387,000 to write off the related unamortized
deferred financing fees.
5. STOCK DIVIDEND
On May 25, 2000, the Board of Directors authorized a stock dividend,
payable June 19, 2000 to shareholders of record as of June 12, 2000, whereby the
Company issued one-half share for each outstanding share of common stock. As a
result, all share and per share data in these condensed consolidated financial
statements and accompanying notes have been retroactively adjusted to reflect
this dividend, having the effect of a 3-for-2 stock split.
6. INTEREST RATE SWAP AGREEMENTS
On September 8, 2000, the Company entered into a $10.0 million interest
rate swap agreement (swap) to manage the risk associated with interest rate
fluctuations on a portion of its Stockton, California distribution center lease.
The swap creates the economic equivalent of a fixed rate lease by converting the
variable interest rate to a fixed rate. Under this agreement, the Company pays
interest to a financial institution at a fixed rate of 6.45%. In exchange, the
financial institution pays the Company at a variable interest rate, which
approximates the floating rate on the lease agreement, excluding the credit
spread. The interest rate on the swap is subject to adjustment monthly. For
months in which the interest rate, as calculated under the agreement, is greater
than 7.41% (the knockout rate), no payments are made by either party. The swap
is effective through June 2004.
In addition, effective September 1, 2000, the Company amended its existing
interest rate swap agreement related to its Taxable Variable Rate Demand Revenue
Bonds to reduce the fixed rate of interest under the swap from 4.99% to 4.88%.
The knockout rate provision of the swap was reduced from 8.28% to 7.75%.
7. LEASES
During August 2000, the Company amended its existing operating lease
agreement related to the Stockton distribution center for the purpose of
financing construction costs to build a new $40.0 million distribution center in
Briar Creek, Pennsylvania. The facility will replace the existing leased
facilities located in Philadelphia, Pennsylvania. Under this agreement, the
lessor purchases the property, pays for the construction costs and subsequently
leases the facility to the Company. The lease expires in June 2004. The lease
provides for a residual value guarantee and includes a purchase option based on
the outstanding cost of the property plus any unpaid interest and rent under the
lease agreement. When the assets are placed into service, the Company will
estimate its liability under the residual value guarantee and, if necessary,
record additional rent expense on a straight-line basis over the remaining lease
term.
8
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
INTRODUCTORY NOTE: Unless otherwise stated, references to "we," "our" and "us"
generally refer to Dollar Tree Stores, Inc. and its direct and indirect
subsidiaries on a consolidated basis.
A WARNING ABOUT FORWARD-LOOKING STATEMENTS: This document contains
"forward-looking statements" as that term is used in the Private Securities
Litigation Reform Act of 1995. Forward-looking statements address future events,
developments or results and typically use words such as believe, anticipate,
expect, intend, plan or estimate. For example, our forward-looking statements
include statements regarding:
o our anticipated comparable store net sales;
o our growth plans, including our plans to add, expand or relocate
stores;
o the integration of Dollar Express into our business;
o the possible effect of inflation and other economic changes on our
future costs and profitability, including the possible effect of
changes in shipping rates, freight costs, fuel costs, minimum wage
rates and wage related costs;
o our cash needs, including our ability to fund our future capital
expenditures and working capital requirements;
o the capabilities of, and the cost of improving, our distribution
systems and supply chain processes; and
o the future availability and cost of quality merchandise that can be
profitably sold for $1.00.
These forward-looking statements are subject to numerous risks and
uncertainties which may affect us including:
o possible difficulties in meeting our expansion goals and anticipated
comparable store net sales;
o possible delays, costs and other difficulties in integrating Dollar
Express with our business;
o possible increases in merchandise costs, shipping rates, freight
costs, wage levels, inflation, competition and other adverse economic
factors;
o our exposure to changes in our foreign trade relations and import
tariffs and restrictions, particularly those affecting China; and
o the capacity and performance of our distribution system and our
ability to expand its capacity in time to support our net sales
growth.
9
<PAGE>
For a discussion of the risks, uncertainties and assumptions that could
affect our future events, developments or results, you should carefully review
the "Risk Factors," "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and "Business" sections in our prospectus filed
August 3, 2000 and our Annual Report on Form 10-K filed March 17, 2000. Also,
carefully review "Risk Factors" in our most recent prospectus filed November 9,
2000.
In light of these risks, uncertainties and assumptions, the future events,
developments or results described by our forward-looking statements in this
document could turn out to be materially different from those we discuss or
imply. We have no obligation to publicly update or revise our forward-looking
statements after the date of this quarterly report and you should not expect us
to do so.
Results of Operations
The Three Months Ended September 30, 2000 Compared To The Three Months Ended
September 30, 1999
Net Sales. Net sales increased 26.2% to $377.3 million for the three months
ended September 30, 2000 from $298.9 million for the three months ended
September 30, 1999. We attribute this $78.4 million increase in net sales to two
factors:
o Approximately 77% of the increase came from stores opened in 2000 and
1999, which are not included in our comparable store net sales
calculation.
o Approximately 23% of the increase came from comparable store net sales
growth. Comparable store net sales increased 5.3% for the third
quarter of 2000.
We believe our comparable store net sales increased because we expanded and
relocated stores, improved the variety and selection of our merchandise and
offered more consumable products as a component of our domestic merchandise. We
include expanded and relocated stores in the calculation of our comparable store
net sales.
During the third quarter of 2000 we opened 49 new stores and closed six
stores, compared to 59 new stores opened and one store closed in the third
quarter of 1999. We expanded and relocated 31 stores during third quarter 2000
compared to 29 stores in the same period in 1999. We continue to open a number
of larger stores in the 8,000 to 12,000 total square foot range and increase the
number of store relocations and expansions. During the third quarter of 2000, we
added 5.6% to our total square footage, compared to increasing total square
footage by 7.5% in the same period last year. We expect to increase our total
square footage by 28% for calendar year 2000 and will add 50 to 52 stores in the
fourth quarter. Our management anticipates that future net sales growth will
come mostly from square footage growth related to new store openings and
expansion of existing stores. We expect that our future comparable store net
sales increases, if any, will be lower than those we have experienced in the
past.
Gross Profit. Gross profit increased $31.7 million in the third quarter of
2000 compared to the same period in 1999, an increase of 29.5%. Our gross profit
as a percentage of net sales is called our gross profit margin. Our gross profit
margin increased 0.9% to 36.8% in the third quarter of 2000 compared to the
third quarter of 1999. We believe this improvement resulted from improved
pricing from vendors and a larger mix of import merchandise in third quarter
10
<PAGE>
2000. This improvement was partially offset by an increase in freight costs
caused primarily by our changing merchandise mix, higher trans-Pacific shipping
rates imposed in May 1999 and an increase in domestic fuel costs. The changing
merchandise mix, which included an increase in consumable merchandise, required
more shipments to deliver the same amount of merchandise in 2000 as compared to
1999. Gross margin was also affected by a slight increase in shrink. These
increases were partially offset by leverage of occupancy and distribution costs
resulting from increased comparable store net sales.
We do not expect increased trans-Pacific shipping costs resulting from the
May 1999 rate increase to have a material effect on our fourth quarter 2000
results. We do, however, expect domestic freight costs to continue to increase
partially as a result of current domestic fuel rates. If fuel costs remain at
current levels, we believe that our domestic freight expense will increase by
approximately $0.6 million in the fourth quarter 2000 compared to the same
period in 1999.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses, excluding depreciation and amortization, increased by
$20.5 million in the third quarter of 2000 compared to the same period in 1999,
an increase of 28.7%. Expressed as a percentage of net sales, selling, general
and administrative expenses, excluding depreciation and amortization, was 24.4%
for the three months ended September 30, 2000 compared to 23.9% for the three
months ended September 30, 1999. The increase was due to slight increases in
store and corporate operating expenses primarily related to the integration of
Dollar Express. We incurred approximately $1.7 million of integration expenses
to:
o train store personnel on new systems, policies, and procedures;
o prepare the stores for the fourth quarter selling season;
o improve benefits;
o conduct physical inventories; and
o pay severance.
Depreciation and amortization increased by $2.8 million to 2.8% as a percentage
of net sales, for the three months ended September 30, 2000 compared to 2.6% for
the three months ended September 30, 1999. The increase as a percentage of net
sales was caused by $0.6 million of accelerated depreciation expense to phase
out some of Dollar Express's computer systems and store registers. We expect to
record an additional $0.6 million during the fourth quarter because we plan to
replace Dollar Express's warehouse management system with our own in January
2001.
Increases in expenses, such as wages and rents, could negatively influence
our operating results, because we cannot pass on increased expenses to our
customers by increasing our merchandise prices. For example, if the minimum wage
were to increase by $1.00 per hour, we believe that our annual payroll expenses
would increase by approximately 2.0% to 2.5% of operating expenses unless we
realize offsetting cost reductions. Consequently, our future success depends, in
large part, on our ability to control our costs.
11
<PAGE>
Operating Income. Our operating income increased by $8.4 million during the
third quarter of 2000 compared to the third quarter of 1999, an increase of
30.1%. As a percentage of net sales, operating income increased to 9.6% in the
third quarter of 2000 compared to 9.3% in the same period of 1999. This increase
was caused by the increase in gross profit partially offset by increases in
selling, general and administrative expenses.
Interest Income/Expense. Interest income increased to $0.7 million in the
third quarter of 2000 from $0.2 million in the third quarter of 1999. This
increase resulted from higher levels of cash and cash equivalents throughout the
three months ended September 30, 2000 compared with the three months ended
September 30, 1999. Interest expense decreased to $1.5 million in the third
quarter of 2000 from $2.0 million in the third quarter of 1999. This decrease
resulted from the payoff of Dollar Express's debt during the second quarter of
2000 partially offset by increased interest expense related to our capital lease
obligation for the sale-leaseback transaction entered into in the third quarter
of 1999.
Income Taxes. Our effective tax rate decreased to 38.5% for the third
quarter of 2000 from 38.9% for the third quarter of 1999. The rate decreased
because Dollar Express's effective rate in 1999 was higher than Dollar Tree's.
The Nine Months Ended September 30, 2000 Compared To The Nine Months Ended
September 30, 1999
Net Sales. Net sales increased 28.9% to $1,088.9 million for the nine
months ended September 30, 2000 from $845.1 million for the nine months ended
September 30, 1999. We attribute this $243.8 million increase in net sales to
two factors:
o Approximately 75% of the increase came from stores opened in 2000 and
1999, which are not included in our comparable store net sales
calculation.
o Approximately 25% of the increase came from comparable store net sales
growth. Comparable store net sales increased 7.7% for the nine months
ended September 30, 2000.
We believe comparable store net sales increased because we expanded and
relocated stores, improved the variety and selection of our merchandise and
offered more consumable products as a component of our domestic merchandise.
We opened 181 new stores and closed eleven stores during the first nine
months of 2000, compared to 181 new stores opened and five stores closed in the
first nine months of 1999. In addition, we expanded and relocated 83 stores in
the first nine months of 2000 compared to 59 stores in 1999. Our net new stores
and expanded and relocated stores added approximately 1.7 million gross square
feet in 2000.
Gross Profit. Gross profit increased by $89.2 million in the first nine
months of 2000 compared to the same period in 1999, an increase of 29.7%. Our
gross profit margin increased 0.3% to 35.8% in the first nine months of 2000
compared to the first nine months of 1999. Excluding merger related costs, our
year-to-date gross profit margin increased 0.3% to 35.9% in 2000 compared to the
same period in 1999. We believe this improvement resulted from improved pricing
from vendors and a larger mix of import merchandise in 2000. This improvement
was partially offset by an increase in freight costs caused primarily by our
changing merchandise mix, higher trans-Pacific shipping rates imposed in May
1999 and an increase in domestic fuel costs. The changing merchandise mix,
12
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which included an increase in consumable merchandise, required more shipments to
deliver the same amount of merchandise in 2000 as compared to 1999. Gross margin
was also affected by a slight increase in shrink. These increases were partially
offset by leverage of occupancy costs resulting from increased comparable store
net sales.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses, excluding depreciation and amortization, increased by
$61.1 million in the first nine months of 2000 compared to the same period in
1999, an increase of 30.0%. Expressed as a percentage of net sales, selling,
general and administrative expenses, excluding depreciation and amortization,
was 24.3% for the nine months ended September 30, 2000 compared to 24.1% for the
nine months ended September 30, 1999. Excluding merger related expenses,
selling, general and administrative expenses, excluding depreciation and
amortization, remained constant at 24.0% as a percentage of net sales in the
first nine months of 2000 compared to the same period in the prior year. This
was the result of slight increases in store and corporate operating expenses
offset by leverage of payroll expenses. The increase in store and corporate
operating expenses related primarily to the integration of Dollar Express, as
discussed above. Depreciation and amortization increased by $6.7 million, and
increased 0.1% as a percentage of net sales to 2.7%. This increase primarily
resulted from the accelerated depreciation in connection with the phase out of
some of Dollar Express's computer systems and store registers.
Operating Income. Our operating income increased by $21.4 million during
the first nine months of 2000 compared to the same period in 1999, an increase
of 28.6%. As a percentage of net sales, operating income remained constant at
8.8% in the first nine months of 2000 compared to the same period in 1999. If
you exclude merger related costs and expenses, operating income increased to
$100.3 million in 2000 from $75.7 million in 1999 and increased as a percentage
of net sales to 9.2% from 9.0%. The increase was a result of the factors
discussed above.
Interest Income/Expense. Interest income increased to $3.8 million in the
first nine months of 2000 from $0.9 million in the first nine months of 1999.
This increase resulted from higher levels of cash and cash equivalents
throughout the nine months ended September 30, 2000 compared with the nine
months ended September 30, 1999. Interest expense increased to $5.7 million in
the first nine months of 2000 from $4.8 million in the first nine months of
1999. This increase primarily related to our capital lease obligation for the
sale-leaseback transaction entered into in the third quarter of 1999 partially
offset by a decrease in interest related to the Dollar Express line of credit
and term loan that we repaid in May 2000.
Income Taxes. Our effective tax rate increased to 39.0% for the nine months
ended September 30, 2000 from 35.3% for the nine months ended September 30,
1999. This rate increased primarily because of the $2.2 million deferred tax
benefit recorded in connection with Dollar Express's conversion from an S- to
C-corporation for income tax purposes on February 5, 1999. In addition, the rate
increased because of the higher amount of non-deductible merger related expenses
in the first nine months of 2000 compared with the corresponding period in 1999.
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Liquidity and Capital Resources
Our business requires capital 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 satisfied 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 cash-related information for the nine months
ended September 30, 2000 and 1999:
Nine months ended September 30,
-------------------------------
2000 1999
---- ----
(in millions)
Net cash provided by (used in):
Operating activities $(89.8) $(53.3)
Investing activities (71.4) (41.0)
Financing activities 3.6 31.7
The $36.5 million increase in cash used for operating activities was
primarily the result of an increase in expenditures for inventory. The
significant increase in inventory levels during the first nine months of 2000
reflects the purchase of inventory necessary to support new stores and increased
sales at existing stores compared to 1999.
Cash used in investing activities is generally expended to open new stores.
The $30.4 million increase in capital expenditures for the nine months ended
September 30, 2000 compared to the same period in 1999 was primarily the result
of the following:
o an increase in the average size of new stores opened in 2000;
o an increase in the number of relocations and expansions;
o the expansion of the Store Support Center;
o improvement in our supply chain processes; and
o installation of new registers and back-office equipment in the Dollar
Express stores.
The $28.1 million decrease in cash provided by financing activities was
primarily the result of the following:
o We did not receive any proceeds from the issuance of equity, excluding
stock-based compensation plans, in 2000 compared to the $32.2 million
received in the first half of 1999 related to the issuance of Dollar
Express's preferred stock and common stock put warrants.
o We made net repayments of approximately $17.3 million in the first
nine months of 2000 due to repayment of Dollar Express's term loan and
revolving credit facility and the first principal payment on the
senior notes compared to net borrowings of approximately $32.6 million
in the first nine months of 1999 related primarily to draw downs on
Dollar Express's term loan and revolving credit facility.
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o We received $16.7 million more cash pursuant to stock-based
compensation plans in the first nine months of 2000 compared to the
first nine months of 1999 because of increased stock option exercises.
o We did not pay any distributions in 2000 compared to the $61.0 million
of distributions paid in the first nine months of 1999 to the former
shareholders of Dollar Express and Only $One, the company we acquired
in June 1999.
o We received $21.6 million related to the sale-leaseback transaction in
September of 1999.
At September 30, 2000, our borrowings under our senior notes and bonds were
$43.0 million and we had $118.1 million available through our bank facility. Of
the amount available, approximately $35.7 million was committed to letters of
credit issued for the routine purchase of imported merchandise.
Funding Requirements
Planned Capital Expenditures and Working Capital Requirements
Including the Dollar Express acquisition, our total planned capital
expenditures for 2000 are approximately $90.0 million. During 2000 and through
the second quarter of 2001, we expect to upgrade some of the Dollar Express
stores by installing new checkouts, adding display fixtures and improving store
layouts and merchandise displays. We believe that we can adequately fund our
planned capital expenditures and working capital requirements for the next few
years from cash provided by operations and seasonal borrowings under our credit
facility.
Operating Leases
In August 2000, we amended our existing operating lease agreement related
to our Stockton distribution center to finance the construction of a new $40.0
million distribution center in Briar Creek, Pennsylvania. Under the agreement,
the lessor is required to purchase the property, pay the construction costs and
lease the facility to us. This fully automated facility will replace our current
Philadelphia distribution center and we expect it to be operational in the first
quarter of 2002. Under the lease agreement for the Philadelphia distribution
center, we are liable for annual rent and pass-through costs of approximately
$525,000 through December 2002. As a result, we may record a charge to cover our
remaining liability under the lease if we are unable to obtain an acceptable
sublease when we relocate the distribution center.
Supply Chain Improvements
Within the next year, we expect to implement new supply chain systems and
test our new point-of-sale equipment in approximately ten stores. During the
third quarter of 2001 and throughout 2002, we expect to install point-of-sale
registers in up to 500 of our stores. We expect that the point-of-sale data will
allow us to track sales by merchandise category and geographic region and assist
in planning for future purchases and allocation of inventory. In addition,
through 2001 we will be installing new systems to assist in purchasing,
distribution center replenishment and inventory planning and allocation. Our
supply chain management project is expected to cost approximately $23.0 million
to $26.0 million over the next two years.
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Item 3. 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 may enter into interest rate swaps to manage our exposure
to interest rate changes, and we may employ other risk management strategies,
including the use of foreign currency forward contracts. We do not enter into
derivative instruments for any purpose other than cash flow hedging purposes. We
do not hold derivatives for trading purposes.
Interest Rate Risk
Effective September 1, 2000, we amended our existing interest rate swap
agreement related to our Taxable Variable Rate Demand Revenue Bonds. As amended,
we pay the financial institution at a fixed rate of 4.88% and receive variable
interest at a rate approximating the variable rate on the bonds, thereby
creating the economic equivalent of fixed rate bonds. No payments are made by
either party under the swap for monthly periods in which the variable interest
rate is greater than 7.75%. As a result, we will not experience a negative cash
flow or income statement impact under the swap unless the variable interest rate
decreases to less than 4.88%.
On September 8, 2000, we entered into a derivative instrument in the form
of a $10.0 million interest rate swap to manage the risk associated with
fluctuations in cash flows resulting from changes in the interest rates on the
Stockton lease. The interest rate swap reduces the interest rate exposure on
this variable-rate lease. Under the terms of the swap, we pay the bank at a
fixed rate of 6.45% and receive variable interest at a rate approximating the
floating rate of the lease, thereby creating the economic equivalent of fixed
rate lease payments. No payments are made by either party under the swap for
monthly periods in which the variable interest rate is greater than 7.41%. As a
result, we will not experience a negative cash flow or income statement impact
under the swap unless the variable interest rate decreases to less than 6.45%.
Foreign Currency Risk
There have been no material changes to our market risk exposures resulting
from foreign currency transactions during the nine months ended September 30,
2000.
PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS.
We are defendants in ordinary routine litigation and proceedings incidental
to our business. From time to time, the Consumer Products Safety Commission
requires us to recall products. We are currently in the process of recalling one
product. On occasion, products we sell may be alleged to cause injuries, but
there are no pending or threatened injury claims. Some products we sell may also
be alleged to infringe the intellectual property rights of others. We are
currently defending claims by parties who have alleged that products we sold
violated their intellectual property rights. We do not believe that any of these
matters are individually or in the aggregate material to us.
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Item 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
10.1 Amendment No. 1 to Certain Operative Agreements, dated August 28,2000.
27.1 Financial Data Schedule.
(b) Reports on Form 8-K:
The following reports on Form 8-K were filed during the third quarter of
2000:
1. Report on Form 8-K filed July 12, 2000, included Supplemental
Consolidated Financial Statements of Dollar Tree Stores, Inc. and
subsidiaries as of December 31, 1999 and 1998 and for the years ended
December 31, 1999, 1998 and 1997 and the Supplemental Condensed
Consolidated Financial Statements as of March 31, 2000 and for the
three months ended March 31, 2000 and 1999.
2. Report on Form 8-K, filed July 20, 2000, included a press release
regarding earnings for the quarter ended June 30, 2000. In addition,
the report included the reporting of 30-day post-merger financial
results.
Also, in the fourth quarter of 2000, we filed two reports on Form 8-K:
1. Report on Form 8-K, filed October 25, 2000, included a press release
regarding earnings for the quarter ended September 30, 2000.
2. Report on Form 8-K, filed November 9, 2000, included the Consolidated
Financial Statements of Dollar Tree Stores, Inc. and subsidiaries as
of December 31, 1999 and 1998 and for the years ended December 31,
1999, 1998 and 1997.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
DATE: November 13, 2000
DOLLAR TREE STORES, INC.
By: /s/ Frederick C. Coble
------------------------
Frederick C. Coble
Senior Vice President,
Chief Financial Officer
(principal financial and accounting officer)
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