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 March 31, 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 May 8, 2000 there were 68,484,937 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
March 31, 2000 and December 31, 1999........................... 3
Condensed Consolidated Income Statements
Three months ended March 31, 2000 and 1999..................... 4
Condensed Consolidated Statements of Cash Flows
Three months ended March 31, 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....................... 7
Item 3. Quantitative and Qualitative Disclosures About Market Risk....... 11
PART II. OTHER INFORMATION
Item 1. Legal Proceedings................................................ 11
Item 6. Exhibits and Reports on Form 8-K................................. 11
Signatures....................................................... 13
<PAGE>
<TABLE>
<CAPTION>
DOLLAR TREE STORES, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
(Unaudited)
March 31, December 31,
2000 1999
---------- ------------
ASSETS
Current assets:
<S> <C> <C>
Cash and cash equivalents........................... $ 81,166 $176,514
Merchandise inventories............................. 255,239 174,582
Deferred tax asset.................................. 5,056 5,398
Prepaid expenses and other current assets........... 11,233 13,001
------- -------
Total current assets............................ 352,694 369,495
------- -------
Property and equipment, net.............................. 152,867 144,023
Goodwill, net ........................................... 41,890 42,394
Other assets, net........................................ 14,984 15,216
------- -------
TOTAL ASSETS.................................... $562,435 $571,128
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable.................................... $ 63,880 $ 63,170
Income taxes payable................................ 12,058 28,063
Other current liabilities........................... 17,067 29,034
Current portion of long-term debt................... 25,025 26,500
Current installments of obligations
under capital leases............................. 3,264 3,183
------- -------
Total current liabilities....................... 121,294 149,950
------- -------
Long-term debt, excluding current portion................ 24,000 24,000
Obligations under capital leases,
excluding current installments........................ 27,591 28,375
Deferred tax liability................................... 1,010 1,182
Other liabilities........................................ 6,234 6,650
------- -------
Total liabilities............................... 180,129 210,157
------- -------
Shareholders' equity:
Common stock, par value $0.01. Authorized
300,000,000 shares, 62,375,945 shares
issued and outstanding at March 31, 2000
and 62,111,143 shares issued and
outstanding at December 31, 1999.................. 624 621
Additional paid-in capital.......................... 79,052 72,539
Retained earnings................................... 302,630 287,811
------- -------
Total shareholders' equity...................... 382,306 360,971
------- -------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY...... $562,435 $571,128
======= =======
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements.
3
<PAGE>
<TABLE>
<CAPTION>
DOLLAR TREE STORES, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED INCOME STATEMENTS
(In thousands, except per share data)
(Unaudited)
Three Months Ended
March 31,
2000 1999
---- ----
<S> <C> <C>
Net sales ...................................... $291,599 $227,044
Cost of sales ...................................... 187,657 146,179
------- -------
Gross profit............................... 103,942 80,865
------- -------
Selling, general and administrative expenses:
Operating expenses............................. 72,139 56,125
Depreciation and amortization.................. 7,862 6,220
------- -------
Total selling, general
and administrative expenses............... 80,001 62,345
------- -------
Operating income.................................... 23,941 18,520
Interest income..................................... 1,776 400
Interest expense.................................... (1,622) (882)
------- -------
Income before income taxes.......................... 24,095 18,038
Provision for income taxes.......................... 9,276 6,711
------- ------
Net income................................. $ 14,819 $ 11,327
======= =======
Net income per share (note 2):
Basic net income per share..................... $ 0.24 $ 0.18
======= =======
Diluted net income per share................... $ 0.22 $ 0.17
======= =======
Pro forma income data (note 2):
Net income..................................... $ 14,819 $ 11,327
Pro forma adjustment for
C-corporation income taxes................... - 234
------- -------
Pro forma net income........................... $ 14,819 $ 11,093
======= =======
Pro forma basic net income per share........... $ 0.24 $ 0.18
======= =======
Pro forma diluted net income per share......... $ 0.22 $ 0.16
======= =======
Weighted average number of common
shares outstanding................................ 62,237 61,543
======= =======
Weighted average number of common
shares and dilutive potential
common shares outstanding......................... 68,589 67,909
======= =======
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements.
4
<PAGE>
<TABLE>
<CAPTION>
DOLLAR TREE STORES, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Three Months Ended
March 31,
2000 1999
---- ----
Cash flows from operating activities:
<S> <C> <C>
Net income ............................................ $ 14,819 $ 11,327
------- -------
Adjustments to reconcile net income to net cash
used in operating activities:
Depreciation and amortization......................... 7,862 6,220
Loss on disposal of property and equipment............ 205 60
Lease loss accrual.................................... (283) (255)
Provision for deferred income taxes................... 170 (487)
Changes in assets and liabilities increasing
(decreasing) cash and cash equivalents:
Merchandise inventories............................ (80,657) (33,909)
Prepaid expenses and other current assets.......... 1,768 826
Other assets....................................... 111 271
Accounts payable................................... 710 (10,219)
Income taxes payable............................... (12,077) (12,018)
Other current liabilities.......................... (13,075) (9,849)
Other liabilities.................................. (23) (365)
------- -------
Total adjustments................................ (95,289) (59,725)
------- -------
Net cash used in operating activities............ (80,470) (48,398)
------- -------
Cash flows from investing activities:
Capital expenditures..................................... (16,283) (9,813)
Proceeds from sale of property and equipment............. 65 27
------- -------
Net cash used in investing activities............. (16,218) (9,786)
------- -------
Cash flows from financing activities:
Proceeds from long-term debt............................. - 2,000
Payment of long-term debt................................ (1,475) -
Principal payments under capital lease obligations....... (771) (110)
Proceeds from stock issued pursuant to stock-based
compensation plans...................................... 3,586 2,997
Distributions paid (note 2).............................. - (350)
------- -------
Net cash provided by financing activities............ 1,340 4,537
------- -------
Net decrease in cash and cash equivalents................. (95,348) (53,647)
Cash and cash equivalents at beginning of period.......... 176,514 74,644
------- -------
Cash and cash equivalents at end of period................ $ 81,166 $ 20,997
======= =======
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements.
5
<PAGE>
DOLLAR TREE STORES, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The condensed consolidated financial statements at March 31, 2000, and
for the three-month period 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,
together with management's discussion and analysis of financial condition and
results of operations for the year ended December 31, 1999, contained in the
Company's Annual Report on Form 10-K filed March 17, 2000. The results of
operations for the three-month period ended March 31, 2000 are not necessarily
indicative of the results to be expected for the entire year ending December 31,
2000.
2. NET INCOME PER SHARE
The following table sets forth the calculation of basic and diluted net
income per share:
<TABLE>
<CAPTION>
Three months ended
March 31,
2000 1999
---- ----
(In thousands,
except per share data)
Basic net income per share:
<S> <C> <C>
Net income.................................. $14,819 $11,327
------ ------
Weighted average number of
common shares outstanding................ 62,237 61,543
------ ------
Basic net income per share............. $ 0.24 $ 0.18
====== ======
Diluted net income per share:
Net income.................................. $14,819 $11,327
------ ------
Weighted average number of
common shares outstanding................. 62,237 61,543
Dilutive effect of stock options and
warrants (as determined by applying
the treasury stock method)............... 6,352 6,366
------ -----
Weighted average number of
common shares and dilutive potential
common shares outstanding................. 68,589 67,909
------ ------
Diluted net income per share...... $ 0.22 $ 0.17
====== ======
</TABLE>
The pro forma provision for income taxes presented in the condensed
consolidated income statements represents an estimate of the taxes that would
have been recorded had Only $One been a C-corporation prior to the merger on
June 30, 1999. Distributions paid presented in the condensed consolidated
statements of cash flows represents distributions paid to the Only $One
shareholders for payment of their pass-through tax liabilities.
6
<PAGE>
On March 7, 2000, the Board of Directors granted options to employees
under the Company's Stock Incentive Plan to purchase 1,139,350 shares of the
Company's common stock.
3. Subsequent Event
On May 5, 2000, the Company completed a merger with privately-held,
Philadelphia-based Dollar Express, Inc. (Dollar Express), which operated 107
single-price point stores under the name "Dollar Expres$." 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 Card and Gifts" in the Philadelphia area. The
merger will be accounted for as a pooling-of-interests and, accordingly, the
Company's historical consolidated financial statements presented in future
reports will be restated to include the accounts and results of operations of
Dollar Express. The Company issued or reserved 6,000,000 shares of its common
stock for all of the Dollar Express outstanding common stock and options.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
INTRODUCTORY NOTE: Unless otherwise stated, references to "we," "our" and
"Dollar Tree" 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--which typically use
words such as believe, anticipate, expect, intend, plan, or estimate--address
future events, developments or results. For example, our forward-looking
statements include statements regarding:
o our anticipated comparable store net sales and growth plans;
o the stability of our sources of supply in the future,
particularly China; and
o our future operating costs, such as merchandise and shipping
costs, wages and rents.
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, wage
levels, inflation, competition and other adverse economic
factors;
o our vulnerability to changes in our foreign trade relations and
import tariffs and restrictions, particularly those affecting
China; and
7
<PAGE>
o the capacity and performance of our distribution system and our
ability to expand its capacity in time to support our net sales
growth.
For additional discussion of the factors that could affect our actual
results, performance or actions, see "Business" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations" in our 1999 Annual
Report on Form 10-K.
Our forward-looking statements could be wrong in light of these and
other risks, uncertainties, and assumptions. The future events, developments or
results described in this report or our most recent prospectus could turn out to
be materially different. 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 March 31, 2000 Compared to the Three Months Ended March
31, 1999
Net Sales. Net sales increased $64.6 million, or 28.4%, to $291.6
million for the three months ended March 31, 2000, from $227.0 million for the
three months ended March 31, 1999. We attribute this increase to the following:
o sales at new stores opened in 2000 and 1999, which are not
included in our comparable store net sales calculation; and
o a 4.6% increase in comparable store net sales in the first
quarter of 2000.
The increase in comparable store net sales resulted from our
continually improving merchandise and a wider variety of consumable product
offerings. Our results in the first quarter were significantly affected by the
move of Easter from April 4 in 1999 to April 23 in 2000. Generally, first
quarter 1999 results reflect the positive effects of the entire Easter selling
season.
During the first quarter of 2000, we added 52 new stores and closed one
store, compared to 49 new stores opened and one store closed in the first
quarter of 1999. Consistent with 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 expansions. During the first quarter 2000, we added 5.7% to our total
square footage, compared to increasing total square footage by 4.8% for the same
period last year. Not including our merger with Dollar Express in May 2000, we
expect to increase our total square footage by 23% to 25% for calendar year
2000. 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.
Gross Profit. Gross profit increased $23.1 million, or 28.5%. Our gross
profit expressed as a percentage of sales is called our "gross profit margin."
Our gross profit margin remained consistent at 35.6% in the first quarter of
2000 compared to the first quarter of 1999. Merchandise costs, which include
8
<PAGE>
freight costs, as a percentage of net sales, increased slightly compared to the
first quarter of 1999 because of the increase in the trans-Pacific shipping
rates in May 1999 and slightly higher domestic freight costs resulting from
increased fuel costs. We expect increased freight costs to continue through the
third quarter of 2000 because we were not significantly impacted by the
increased trans-Pacific shipping rates until the fourth quarter of 1999.
The above increase was partially offset by the decrease in certain
costs as a percentage of sales:
o Occupancy costs decreased as a result of increased comparable
store net sales.
o Markdowns decreased because of our continually improving product
offerings as evidenced by the increase in comparable store net
sales.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses, excluding depreciation and amortization, increased
$16.0 million, or 28.5%. Selling, general and administrative expenses, excluding
depreciation and amortization, was 24.7%, as a percentage of net sales, for the
three months ended March 31, 2000 and March 31, 1999. Depreciation and
amortization increased $1.6 million, but remained at 2.7%, as a percentage of
net sales, for the three months ended March 31, 2000 and March 31, 1999.
Increases in expenses can have a negative impact on our operating
results, especially since we cannot pass on increased expenses to our customers
by increasing our merchandise prices. Consequently, our future success depends,
in large part, on our ability to control costs.
Operating Income. Our operating income increased $5.4 million or 29.3%.
As a percentage of net sales, operating income remained consistent at 8.2% in
the first quarter of 2000 compared to the first quarter of 1999.
Interest Income/Expense. Interest income increased to $1.8 million in
the first quarter of 2000 from $0.4 million in the first quarter of 1999. This
increase in interest income resulted from a higher cash position throughout the
three months ended March 31, 2000 compared with the three months ended March 31,
1999. Interest expense increased to $1.6 million in the first quarter of 2000
from $0.9 million in the first quarter of 1999. This increase is primarily the
result of interest expense related to capital lease obligations, which resulted
from the sale-leaseback transaction entered into in the third quarter of 1999.
Liquidity and Capital Resources
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.
9
<PAGE>
The following table compares certain cash-related information for the
three months ended March 31, 2000 and 1999:
<TABLE>
<CAPTION>
Three Months Ended March 31,
2000 1999
---- ----
(in millions)
Net cash provided by (used in):
<S> <C> <C>
Operating activities.............. $(80.5) $(48.4)
Investing activities.............. (16.2) (9.8)
Financing activities.............. 1.3 4.5
</TABLE>
Cash used in operating activities is generally expended to build
inventory levels. The significant increase in inventory levels during the first
quarter of 2000 reflects the build-up of inventory for the Easter selling
season.
Cash used in investing activities was used primarily to open new
stores.
Cash provided by financing activities was obtained from the following:
o in 2000 and 1999, the exercise of stock options; and
o in 1999, the issuance of an additional $2.0 million in callable
bonds related to the construction of the Olive Branch
distribution facility.
At March 31, 2000, our borrowings under our bank facility, senior notes
and bonds were $49.0 million and we had an additional $135.0 million available
through our bank facility. Of the amount available, approximately $35.8 million
was committed to letters of credit issued for the routine purchase of imported
merchandise.
Recent Developments
On May 5, 2000, we completed a merger with privately-held,
Philadelphia-based Dollar Express, Inc., which operated 107 single-price point
stores under the name "Dollar Expres$." 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 Card and Gifts" in the Philadelphia area. The merger will be accounted
for as a pooling-of-interests. We issued or reserved 6,000,000 shares of our
common stock for all of Dollar Express's outstanding common stock and options.
We expect to incur approximately $6.0 to $7.0 million in merger related
expenses, consisting primarily of professional fees, the write-off of Dollar
Express's initial public offering costs and inventory write-downs, which will be
charged to operations during the second quarter of 2000.
10
<PAGE>
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 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 enter into derivative instruments for any purpose other than cash flow
hedging purposes. We do not hold derivatives for trading purposes.
There have been no material changes in our market risk exposures during the
three months ended March 31, 2000.
PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS.
Alper Lawsuit. We previously reported in our 1999 Annual Report on Form
10-K a dispute involving Michael and Pamela Alper and a corporation they
control. No litigation is currently pending against us in this matter.
Consumer Products Liability. We recalled (in cooperation with the
Consumer Products Safety Commission) approximately 155,000 retractable dog
leashes which allegedly caused several personal injuries, as previously reported
in our 1999 Annual Report on Form 10-K. There have been no material developments
regarding this matter in 2000.
Additional Disputes. We are also defendants to ordinary routine
litigation and proceedings incidental to our business, including certain matters
which may occasionally be asserted by the Consumer Products Safety Commission.
We are currently in the process of recalling three products. We do not believe
that any of these additional matters are individually or in the aggregate
material to the Company.
We believe that the ultimate outcome of the above matters 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.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
The following documents, filed as Exhibits 2.1 and 4.1 to the Company's
Form 8-K on April 11, 2000 are incorporated herein by this reference:
10.1 Merger Agreement dated April 5, 2000 by and among Dollar Tree
Stores, Inc., DT Keystone, Inc., Dollar Express, Inc. and The
Shareholders of Dollar Express, Inc.
10.2 Registration Rights Agreement dated April 5, 2000.
11
<PAGE>
The following document, filed as Exhibit 10.1 to the Company's Form S-3
on April 28, 2000 is incorporated herein by this reference:
10.3 Form of Escrow Agreement by and among Dollar Tree Stores, Inc.,
State Street Bank & Trust, Bernard Spain, William Woo and the
Shareholders.
(b) Reports on Form 8-K.
The following report on Form 8-K was filed during the first quarter of
2000:
1. Report on Form 8-K, filed January 26, 2000, included a press
release regarding earnings for the quarter and year ended December
31, 1999.
Also, in April 2000, we filed the following reports on Form 8-K:
1. Report on Form 8-K filed April 11, 2000, included a press release
regarding the signing of a definitive merger agreement with Dollar
Express, Inc. and first quarter sales.
2. Report on Form 8-K, filed April 27, 2000, included a press release
regarding earnings for the quarter ended March 31, 2000.
12
<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.
DATE: May 10, 2000
DOLLAR TREE STORES, INC.
By: /s/ Frederick C. Coble
----------------------
Frederick C. Coble
Senior Vice President,
Chief Financial Officer
(principal financial and
accounting officer)
13
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION FROM THE COMPANY'S
FORM 10-Q FOR THE PERIOD ENDED MARCH 31, 2000 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. THE FINANCIAL DATA
SCHEDULE FOR MARCH 31, 1999 IS RESTATED TO GIVE EFFECT TO THE POOLING-OF-
INTEREST MERGER WITH TEHAN'S MERCHANDISING, INC.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 3-MOS
<FISCAL-YEAR-END> DEC-31-2000 DEC-31-1999
<PERIOD-END> MAR-31-2000 MAR-31-1999
<CASH> 81,166 20,997
<SECURITIES> 0 0
<RECEIVABLES> 0 0
<ALLOWANCES> 0 0
<INVENTORY> 255,239 176,615
<CURRENT-ASSETS> 352,694 211,336
<PP&E> 235,185 188,090
<DEPRECIATION> 82,318 61,539
<TOTAL-ASSETS> 562,435 388,284
<CURRENT-LIABILITIES> 121,294 83,579
<BONDS> 79,880 51,255
0 0
0 0
<COMMON> 624 618
<OTHER-SE> 381,682 265,571
<TOTAL-LIABILITY-AND-EQUITY> 562,435 388,284
<SALES> 291,599 227,044
<TOTAL-REVENUES> 291,599 227,044
<CGS> 187,657 146,179
<TOTAL-COSTS> 187,657 146,179
<OTHER-EXPENSES> 80,001 62,345
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 1,622 882
<INCOME-PRETAX> 24,095 18,038
<INCOME-TAX> 9,276 6,711
<INCOME-CONTINUING> 0 0
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 14,819 11,327
<EPS-BASIC> 0.24 0.18
<EPS-DILUTED> 0.22 0.16
</TABLE>
