<PAGE>
Exhibit 99.1
<TABLE>
<CAPTION>
Index to Supplemental Consolidated Financial Statements Page
----
<S> <C>
Independent Auditors' Report.............................................. 2
Supplemental Consolidated Balance Sheets as of March 31, 2000
(unaudited) and December 31, 1999 and 1998....................... 3
Supplemental Consolidated Income Statements for the three months ended
March 31, 2000 and 1999 (unaudited) and the years ended
December 31, 1999, 1998 and 1997 ................................ 4
Supplemental Consolidated Statements of Shareholders' Equity
for the years ended December 31, 1999, 1998 and 1997............. 5
Supplemental Consolidated Statements of Cash Flows for the three months
ended March 31, 2000 and 1999 (unaudited) and the years ended
December 31, 1999, 1998 and 1997.................................. 6
Notes to Supplemental Consolidated Financial Statements................... 7
</TABLE>
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
Dollar Tree Stores, Inc.:
We have audited the accompanying supplemental consolidated balance sheets of
Dollar Tree Stores, Inc. and subsidiaries (the Company) as of December 31, 1999
and 1998, and the related supplemental consolidated income statements,
statements of shareholders' equity and cash flows for each of the years in the
three-year period ended December 31, 1999. These supplemental consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these supplemental 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.
The supplemental consolidated financial statements give retroactive effect to
the merger of Dollar Tree Stores, Inc. and Dollar Express, Inc. on May 5, 2000
which has been accounted for as a pooling of interests as described in note 1 to
the supplemental consolidated financial statements. Generally accepted
accounting principles proscribe giving effect to a consummated business
combination accounted for by the pooling-of-interests method in financial
statements that do not include the date of consummation. These financial
statements do not extend through the date of consummation. However, they will
become the historical consolidated financial statements of Dollar Tree Stores,
Inc. and subsidiaries after financial statements covering the date of
consummation of the business combination are issued.
In our opinion, the supplemental 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, 1999 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, 1999, in conformity with generally accepted
accounting principles applicable after financial statements are issued for a
period which includes the date of consummation of the business combination.
/s/ KPMG LLP
Norfolk, Virginia
May 25, 2000
2
<PAGE>
DOLLAR TREE STORES, INC.
AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATED BALANCE SHEETS (Note 2)
<TABLE>
<CAPTION>
December 31,
March 31, -------------------
2000 1999 1998
----------- ---- ----
(unaudited)
(In thousands, except share data)
ASSETS
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents $ 83,711 $ 181,587 $ 84,714
Merchandise inventories 276,811 192,838 154,719
Deferred tax asset (Note 3) 5,751 6,093 6,709
Prepaid expenses and other current assets 11,713 14,588 7,932
--------- --------- ---------
Total current assets 377,986 395,106 254,074
Property and equipment, net (Notes 4 and 5) 167,167 157,368 131,461
Deferred tax asset (Note 3) 642 470 2,194
Goodwill, net of accumulated amortization 41,890 42,394 42,551
Other assets, net (Note 4) 15,633 15,895 6,488
--------- --------- ---------
TOTAL ASSETS $ 603,318 $ 611,233 $ 436,768
========= ========= =========
LIABILITIES, MANDITORILY REDEEMABLE PREFERRED STOCK AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 73,631 $ 73,878 $ 59,882
Income taxes payable (Note 3) 10,502 29,193 21,353
Other current liabilities (Note 5) 23,262 34,942 30,934
Current portion of long-term debt (Note 6) 26,595 28,070 16,638
Current installments of obligations under capital leases (Note 4) 3,264 3,190 509
--------- --------- ---------
Total current liabilities 137,254 169,273 129,316
Long-term debt, excluding current portion (Note 6) 54,930 49,138 34,136
Obligations under capital leases, excluding
current installments (Note 4) 27,591 28,375 2,476
Common stock put warrants of Dollar Express (Note 8) 4,394 4,394 --
Other liabilities 7,272 8,644 8,265
--------- ------- -------
Total liabilities 231,441 259,824 174,193
Cumulative convertible manditorily redeemable preferred stock of
Dollar Express (Note 8) 36,247 35,171 --
Shareholders' equity (Notes 8 and 10):
Common stock, par value $0.01. 450,000,000 shares authorized,
99,239,404 issued and outstanding at March 31, 2000 and
98,842,201 shares issued and outstanding at December 31,
1999; and 150,000,000 shares authorized, 97,746,113
shares issued and outstanding at December 31, 1998 662 659 652
Additional paid-in capital 81,544 75,031 55,522
Retained earnings 253,424 240,548 206,401
--------- --------- ---------
Total shareholders' equity 335,630 316,238 262,575
Commitments, contingencies and subsequent
events (Notes 1, 4, 6, 7, 8, 10 and 11)
--------- --------- ---------
TOTAL LIABILITIES, MANDITORILY REDEEMABLE PREFERRED STOCK
AND SHAREHOLDERS' EQUITY $ 603,318 $ 611,233 $ 436,768
========= ========= =========
</TABLE>
See accompanying Notes to Supplemental Consolidated Financial Statements.
3
<PAGE>
DOLLAR TREE STORES, INC.
AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATED INCOME STATEMENTS (Note 2)
<TABLE>
<CAPTION>
Three Months
Ended Year Ended
March 31, December 31,
------------------- -----------------------------------------
2000 1999 1999 1998 1997
---- ---- ---- ---- ----
(unaudited)
(In thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Net sales ...................................................... $ 327,111 $ 258,091 $ 1,351,820 $ 1,073,886 $ 847,830
Cost of sales (Note 4) ......................................... 213,538 168,391 854,124 681,387 551,926
Merger related costs ........................................... -- -- 443 1,301 --
--------- --------- ----------- ----------- -----------
Gross profit .......................................... 113,573 89,700 497,253 391,198 295,904
--------- --------- ----------- ----------- -----------
Selling, general and administrative expenses (Notes 4, 7 and 9):
Operating expenses ...................................... 81,661 62,517 290,241 234,197 189,060
Merger related expenses ................................. -- -- 607 4,024 --
Depreciation and amortization ........................... 8,693 6,732 30,809 22,463 16,017
--------- --------- ----------- ----------- -----------
Total selling, general and administrative
expenses ............................................ 90,354 69,249 321,657 260,684 205,077
--------- --------- ----------- ----------- -----------
Operating income ...................................... 23,219 20,451 175,596 130,514 90,827
Interest income ................................................ 1,778 416 1,743 604 145
Interest expense (Note 6) ...................................... (2,278) (1,280) (7,429) (5,217) (3,831)
--------- --------- ----------- ----------- -----------
Income before income taxes ............................ 22,719 19,587 169,910 125,901 87,141
Provision for income taxes (Note 3) ............................ 8,767 5,241 63,333 44,583 31,323
--------- --------- ----------- ----------- -----------
Net income ............................................ 13,952 14,346 106,577 81,318 55,818
Less: Preferred stock dividends and accretion (Note 8) ......... 1,076 440 7,027 -- --
--------- --------- ----------- ----------- -----------
Net income available to common shareholders ........... $ 12,876 $ 13,906 $ 99,550 $ 81,318 $ 55,818
========= ========= =========== =========== ===========
Pro forma income data:
Net income available to common shareholders ............. $ 12,876 $ 13,906 $ 99,550 $ 81,318 $ 55,818
Pro forma adjustment for C-corporation income taxes ..... -- 234 505 4,804 2,279
--------- --------- ----------- ----------- -----------
Pro forma net income available to
common shareholders ................................... $ 12,876 $ 13,672 $ 99,045 $ 76,514 $ 53,539
========= ========= =========== =========== ===========
Pro forma basic net income per common share ............. $ 0.13 $ 0.14 $ 1.01 $ 0.79 $ 0.55
========= ========= =========== =========== ===========
Pro forma diluted net income per common share ........... $ 0.12 $ 0.13 $ 0.92 $ 0.71 $ 0.50
========= ========= =========== =========== ===========
Weighted average number of common shares outstanding ........... 99,032 97,989 98,435 97,454 96,747
========= ========= =========== =========== ===========
Weighted average number of common shares
and dilutive potential common shares outstanding ............. 108,647 107,622 107,960 107,115 106,149
========= ========= =========== =========== ===========
</TABLE>
See accompanying Notes to Supplemental Consolidated Financial Statements.
4
<PAGE>
DOLLAR TREE STORES, INC.
AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (Note 2)
Years ended December 31, 1999, 1998 and 1997
<TABLE>
<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, 1996 ................ 96,247,430 $ 306 $ 36,310 $ 80,035 $ 116,651
Transfer from additional paid-in
capital for Common Stock dividend ......... -- 135 (135) -- --
Net income for the year
ended December 31, 1997 ................... -- -- -- 55,818 55,818
Shareholder distributions ................... -- -- -- (4,456) (4,456)
Issuance of stock under Employee
Stock Purchase Plan and
other plans (Note 10) ..................... 29,508 -- 358 -- 358
Exercise of stock options, including
income tax benefit of $2,752 (Note 10) .... 709,961 2 4,917 -- 4,919
---------- ---------- ---------- ---------- ----------
Balance at December 31, 1997 ................ 96,986,899 443 41,450 131,397 173,290
Transfer from additional paid-in
capital for Common Stock dividend ......... -- 198 (198) -- --
Net income for the year
ended December 31, 1998 ................... -- -- -- 81,318 81,318
Shareholder distributions ................... -- -- -- (6,314) (6,314)
Issuance of stock under Employee
Stock Purchase Plan and
other plans (Note 10) ..................... 36,505 7 634 -- 641
Grant of stock options under the 1998
Special Stock Option Plan (Note 10) ...... -- -- 4,413 -- 4,413
Exercise of stock options, including
income tax benefit of $4,916 (Note 10) .... 722,709 4 9,223 -- 9,227
---------- ---------- ---------- ---------- ----------
Balance at December 31, 1998 ................ 97,746,113 652 55,522 206,401 262,575
Contribution of Only $One's undistributed
S-corporation earnings ................... -- -- 4,469 (4,469) --
Net income for the year
ended December 31, 1999 ................... -- -- -- 106,577 106,577
Shareholder distributions (Note 8) .......... -- -- -- (60,934) (60,934)
Issuance of stock under Employee Stock
Purchase Plan and other plans (Note 10) ... 45,656 -- 838 -- 838
Exercise of stock options, including
income tax benefit of $6,278 (Note 10) .... 1,050,432 7 14,202 -- 14,209
Accretion to redemption value, amortization
of discount and accrued dividends of
cumulative convertible redeemable
preferred stock of Dollar Express (Note 8) -- -- -- (7,027) (7,027)
---------- ---------- ---------- ---------- ----------
Balance at December 31, 1999 ................ 98,842,201 $ 659 $ 75,031 $ 240,548 $ 316,238
========== ========== ========== ========== ==========
</TABLE>
See accompanying Notes to Supplemental Consolidated Financial Statements.
5
<PAGE>
DOLLAR TREE STORES, INC.
AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF CASH FLOWS (Note 2)
<TABLE>
<CAPTION>
Three Months
Ended Year Ended
March 31, December 31,
------------------ -----------------------------------------
2000 1999 1999 1998 1997
---- ---- ---- ---- ----
(unaudited)
(In thousands)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income ............................................ $ 13,952 $ 14,346 $ 106,577 $ 81,318 $ 55,818
--------- --------- --------- --------- ---------
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization .................... 8,693 6,732 30,809 22,463 16,017
Loss on disposal of property and equipment ....... 205 60 692 1,664 290
Lease loss charge ................................ (283) (255) 529 1,125 --
Provision for deferred income taxes .............. 170 (2,577) 2,340 (1,207) (3,503)
Accretion of common stock put warrants of
Dollar Express to redemption value ............. -- -- 382 -- --
Changes in assets and liabilities increasing
(decreasing) cash and cash equivalents:
Merchandise inventories .................... (83,973) (39,621) (37,391) (31,666) (21,006)
Prepaid expenses and other current assets .. 2,875 1,094 (7,488) (292) 1,235
Other assets ............................... 141 311 449 265 (293)
Accounts payable ........................... (247) (7,818) 13,824 (1,794) 10,409
Income taxes payable ....................... (15,761) (11,698) 14,118 6,682 9,366
Other current liabilities .................. (11,790) (11,262) 4,008 7,197 6,386
Other liabilities .......................... (979) (206) (294) (230) 1,301
--------- --------- --------- --------- ---------
Total adjustments ....................... (100,949) (65,240) 21,978 4,207 20,202
--------- --------- --------- --------- ---------
Net cash provided (used in) by operating
activities (86,997) (50,894) 128,555 85,525 76,020
--------- --------- --------- --------- ---------
Cash flows from investing activities:
Acquisition, net of cash acquired ..................... -- -- (320) -- --
Capital expenditures .................................. (18,069) (11,317) (55,013) (57,212) (63,476)
Proceeds from sale of property and equipment .......... 65 27 172 174 159
--------- --------- --------- --------- ---------
Net cash used in investing activities ... (18,004) (11,290) (55,161) (57,038) (63,317)
--------- --------- --------- --------- ---------
Cash flows from financing activities:
Distributions paid .................................... -- (59,874) (60,934) (6,314) (4,456)
Proceeds from long-term debt .......................... -- 22,000 22,500 17,500 31,350
Proceeds from revolving credit facilities ............. 6,000 5,750 48,600 190,800 206,600
Net change in notes payable to bank ................... -- -- -- (10,045) 1,359
Repayment of long-term debt and facility fees ......... (1,683) (775) (1,966) (2,304) (225)
Repayment of revolving credit facilities .............. -- -- (46,100) (186,800) (209,600)
Proceeds from sale-leaseback transaction .............. -- -- 21,605 -- --
Principal payments under capital lease obligations .... (778) (123) (1,151) (474) (354)
Proceeds from issuance of preferred stock and
common stock put warrants of Dollar Express ........ -- 32,156 32,156 -- --
Proceeds from stock issued pursuant to stock-based
compensation plans ................................. 3,586 2,997 8,769 4,952 2,525
-------- --------- --------- --------- ---------
Net cash provided by financing activities 7,125 2,131 23,479 7,315 27,199
-------- --------- --------- --------- ---------
Net increase (decrease) in cash and cash equivalents ..... (97,876) (60,053) 96,873 35,802 39,902
Cash and cash equivalents at beginning of year ........... 181,587 84,714 84,714 48,912 9,010
-------- --------- --------- --------- ---------
Cash and cash equivalents at end of year ................. $ 83,711 $ 24,661 $ 181,587 $ 84,714 $ 48,912
======== ========= ========= ========= =========
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest, net of amount capitalized ................ $ 6,821 $ 4,680 $ 4,558
========= ========= =========
Income taxes ....................................... $ 46,640 $ 39,171 $ 25,321
========= ========= =========
</TABLE>
See accompanying Notes to Suplemental Consolidated Financial Statements.
6
<PAGE>
DOLLAR TREE STORES, INC.
AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL 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. The Company operates under the names of Dollar Tree, Dollar
Express, Dollar Bills, Spain's Cards & Gifts, Only $One and Only One Dollar. 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, in Stockton, California and
in Philadelphia, Pennsylvania. Most of the Company's stores are located in the
eastern half of the United States and in northern and central California. The
Company's merchandise includes housewares, candy and food, seasonal goods,
health and beauty care, toys, party goods, gifts, stationery and other consumer
items. Approximately 40% to 45% of the Company's merchandise is directly
imported, primarily from China. The Company is not dependent on a few suppliers.
Recent Developments
On May 5, 2000, DT Keystone, Inc., a wholly owned subsidiary,
completed a merger, which was accounted for as a pooling of interests, with
privately-held Dollar Express, Inc. (Dollar Express), in which Dollar Express
became a wholly owned subsidiary of Dollar Tree Stores, Inc. Dollar Express
operated 132 stores primarily in the Mid-Atlantic area. Of the stores acquired,
107 are $1.00 single price point stores operated as "Dollar Express" and 25 are
multi-price point stores operated as "Spain's Cards & Gifts." Sales from the
multi-price point stores accounted for less than 2% of total net sales in 1999.
As a result of the merger, 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.
In addition, on May 25, 2000 the Board of Directors authorized a
stock dividend, in which the Company issued one-half share for each outstanding
share of Common Stock, payable June 19, 2000 to shareholders of record as of
June 12, 2000. As a result, all share and per share data in these supplemental
consolidated financial statements and the accompanying financial statements and
footnotes that follow have been adjusted to reflect this dividend, having the
effect of a 3-for-2 stock split.
Principles of Consolidation
At December 31, 1999, DTS has three wholly owned subsidiaries, Dollar Tree
Management, Inc. (DTM), Dollar Tree Distribution, Inc. (DTD) and Dollar Tree New
York, Inc. (DTN). DTM provides management, accounting and administrative
services to DTS for a fee and DTD provides merchandise procurement, purchasing,
warehousing and distribution services to DTS for a fee. DTN owns and operates
discount variety retail stores under the name Only $One and was merged with and
into DTS on January 1, 2000. 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
supplemental 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, Dollar Tree West, Inc. (DTW), a former wholly owned
subsidiary, completed a merger, which was accounted for as a pooling of
interests, with Step Ahead Investments, Inc. (98 Cent Clearance Center) in which
98 Cent Clearance Center became a wholly owned subsidiary of DTS. 98 Cent
Clearance Center operated 66 stores in northern and central California and
Nevada under the name "98 Cent Clearance Center". Prior to the merger, 98 Cent
Clearance Center'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 were restated to retroactively combine 98 Cent Clearance
Center's financial statements as if the merger had occurred at the beginning of
the earliest period presented.
7
<PAGE>
On June 30, 1999, DTN completed a merger, which was accounted for as a
pooling of interests, with privately-held Tehan's Merchandising, Inc. (Only
$One), in which Only $One became a wholly owned subsidiary of DTS. Only $One
operated 24 stores in central and upstate New York state under the name "Only
$One." As a result of the merger, the Company's consolidated financial
statements were restated to retroactively combine Only $One's financial
statements as if the merger had occurred at the beginning of the earliest period
presented.
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 98 Cent Clearance Center for the 11-month period ended December
31, 1998. The consolidated income statement, statements of shareholders' equity
and cash flows for the year ended December 31, 1997 reflect the results of
operations and cash flows for Dollar Tree Stores, Inc. for the year then ended
combined with 98 Cent Clearance Center for the fiscal year ended January 25,
1998.
Unaudited Quarterly Financial Statements
The supplemental consolidated financial statements at March 31, 2000
and for the three-month periods ended March 31, 2000 and 1999, 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
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.
Cash and Cash Equivalents
Cash and cash equivalents at December 31, 1999 and 1998 includes $162,755
and $71,700, 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.
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 amounts to $8,347 and $7,790 at
December 31, 1999 and 1998, respectively.
Property and Equipment
Property and equipment are stated at cost and depreciated using the
straight-line method over the estimated useful lives of the respective assets as
follows:
Buildings.......................................... 39 years
Furniture, fixtures and equipment.................. 3 to 7 years
Transportation vehicles............................ 4 to 6 years
Leasehold improvements and assets held under capital leases are
amortized over the estimated useful lives of the respective assets or terms of
the related leases, whichever is shorter.
Costs incurred related to software developed for internal use are
capitalized and amortized over three years. Costs capitalized include those
incurred in the application development stage.
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 1998 and
1997, $402 and $916, respectively, of interest cost was capitalized; no interest
was capitalized in 1999.
8
<PAGE>
Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of
The Company reviews its long-lived assets and certain identifiable
intangible assets for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable.
Recoverability of assets to be held and used is measured by comparing the
carrying amount of an asset to future net undiscounted cash flows expected to
be generated by the asset. If such assets are considered to be impaired, the
impairment to be recognized is measured by the amount by which the carrying
amount of the assets exceeds the fair value of the assets based on discounted
cash flows or other readily available evidence of fair value, if any. Assets
to be disposed of are reported at the lower of the carrying amount or fair
value less costs to sell.
Goodwill
Goodwill, which represents the excess of acquisition cost over the fair
value of net assets acquired, is amortized on a straight-line basis over the
expected periods to be benefited, generally 20 to 25 years. Accumulated
amortization relating to goodwill approximates $7,593 and $5,619 at December 31,
1999 and 1998, respectively.
Financial Instruments
The Company utilizes derivative financial instruments to reduce its
exposure to market risks from changes in interest rates. By entering into a
receive-variable, pay-fixed interest rate swap, the Company changed the variable
rate cash flow exposure on certain variable-rate debt to fixed rate cash flows.
The Company is exposed to credit related losses in the event of non-performance
by the counterparty to the interest rate swap; however, the counterparty is a
major financial institution, and the risk of loss due to non-performance is
considered remote. Interest rate differentials paid or received on the swap are
recognized as adjustments to interest expense in the period earned or incurred.
The Company does not speculate using derivative instruments in the form of
interest rate swaps; therefore, these swaps are not recorded in the Company's
balance sheet. The Company had no interest rate derivative instruments
outstanding at December 31, 1998.
The Company enters into foreign exchange forward contracts to hedge
off-balance sheet foreign currency denominated purchase commitments from
suppliers. The contracts are exclusively for Italian lire which account for
approximately 1% of the Company's purchases. The terms of these contracts are
generally less than three months. Gains and losses on these contracts are not
recognized until included in the measurement of the related foreign currency
transaction. At December 31, 1999, open foreign exchange contracts of
approximately $793 were recorded, based on current conversion rates, in
prepaid expenses and other current assets and accounts payable. There were no
open exchange contracts at December 31, 1998.
Cost of Sales
The Company includes the cost of merchandise, warehousing and distribution
costs, and certain occupancy costs in cost of sales.
Income Taxes
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between financial statement carrying
amounts of existing assets and liabilities and their respective tax bases.
Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in the tax rates is recognized in income in
the period that includes the enactment date of such change.
Stock-Based Compensation
The Company applies the intrinsic value-based method of accounting
prescribed by Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees" (APB No. 25), and related Interpretations in accounting for
its fixed stock option plans. As such, compensation expense would be recorded on
the date of grant only if the current market price of the underlying stock
exceeded the exercise price. Statement of Financial Accounting Standards No.
123, "Accounting for Stock-Based Compensation" (SFAS No. 123) established
accounting and disclosure requirements using a fair value-based method of
accounting for stock-based employee compensation plans. As allowed by SFAS No.
123, the Company has elected to continue to apply the
9
<PAGE>
intrinsic value-based method of accounting described above, and has adopted the
disclosure only requirements of SFAS No. 123.
Pro Forma Net Income Per Common Share
Pro forma basic net income per common share has been computed by dividing
pro forma net income available to common shareholders by the weighted average
number of common shares outstanding. Pro forma diluted net income per common
share reflects the potential dilution that could occur assuming the inclusion of
dilutive potential common shares and has been computed by dividing pro forma net
income available to common shareholders 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.
New Accounting Standards
The Financial Accounting Standards Board (FASB) has issued SFAS 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. In June 1999, the FASB issued SFAS No. 137, "Accounting for
Derivative Instruments and Hedging Activities - Deferral of the Effective Date
of SFAS No. 133, an Amendment of SFAS No. 133," which defers the effective date
of SFAS No. 133 to all fiscal quarters of fiscal years beginning after June 15,
2000. Management does not expect the implementation of these pronouncements to
have a material effect on the Company's financial condition or results of
operations.
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 supplemental consolidated financial
statements.
Reclassifications
Certain 1998 and 1997 amounts have been reclassified for comparability
with the 1999 financial statement presentation.
NOTE 2 - MERGERS AND ACQUISITIONS
Dollar Express Merger
On May 5, 2000, the Company completed its merger with Dollar Express.
The merger was accounted for as a pooling of interests. DTS issued .8772
shares of the Company's 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 all of Dollar Express's preferred shares converted into common
shares on a one-for-one basis as more fully discussed in Note 8. 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.
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 cumulative deferred tax benefit in the first
quarter of 1999. The pro forma provisions for income taxes presented in the
supplemental consolidated income statements represent an estimate of the
taxes that would have been recorded had Dollar Express been a C-corporation
and were computed at 38.5%. A portion of the distributions paid presented in
the supplemental consolidated statements of cash flows represents
distributions paid to the Dollar Express shareholders for payment of their
pass-through tax liabilities.
10
<PAGE>
The following table presents a reconciliation of net sales and net income
previously reported in the Company's 1999 Annual Report to those presented in
the accompanying supplemental consolidated financial statements.
For the year ended December 31,
1999 1998 1997
---- ---- ----
Net sales:
DTS............... $1,197,960 $ 944,122 $ 745,590
Dollar Express.... 153,860 129,764 102,240
---------- ---------- ---------
Combined.......... $1,351,820 $1,073,886 $ 847,830
========== ========== =========
Net income:
DTS............... $ 98,518 $ 71,553 $ 51,959
Dollar Express.... 8,059 9,765 3,859
---------- ---------- ---------
Combined.......... $ 106,577 $ 81,318 $ 55,818
========== ========== =========
98 Cent Clearance Center Merger
On December 10, 1998, the Company completed its merger with 98 Cent
Clearance Center. The merger was accounted for as a pooling of interests. DTS
issued 1.6818 shares of the Company's common stock for each share of 98 Cent
Clearance Center outstanding common and preferred stock. A total of 2,494,110
of the Company's common stock was issued as a result of the merger and 98
Cent Clearance Center's outstanding stock options were converted into options
to purchase 484,811 common shares of the Company. In addition, the Company
issued options to certain former shareholders of 98 Cent Clearance Center in
exchange for non-competition agreements and a consulting agreement. Included
in other assets at December 31, 1998 is the fair value of these agreements of
$4,413 which is being amortized, generally, over a ten-year period. At
December 31, 1999, the carrying value of these agreements is $3,930, net of
$483 of accumulated amortization. The recording of these non-competition
agreements did not involve the use of cash and, accordingly, has been
excluded from the accompanying supplemental consolidated statements of cash
flows. In connection with the merger, the Company incurred $5,325 ($4,201
after taxes or $0.04 pro forma diluted net income per common share) of merger
related costs and expenses, consisting primarily of professional fees and
writedowns of inventory and fixed assets, which were charged to operations
during the year ended December 31, 1998.
Only $One Merger
On June 30, 1999, the Company completed the merger with Only $One. The
merger was accounted for as a pooling of interests. The Company issued
752,400 shares of its common stock for all of the Only $One outstanding
common stock. In connection with the merger, the Company incurred
approximately $1,050 ($792 after taxes or $0.01 pro forma diluted net income
per common share) of merger related costs and expenses, consisting primarily
of professional fees and writedowns of inventory, which were charged to
operations during the year ended December 31, 1999.
Prior to June 30, 1999, Only $One was treated as an S-corporation for
federal and state income tax purposes. As such, income of Only $One for periods
prior to June 30, 1999 was taxable to the Only $One shareholders, rather than to
Only $One. Effective with the Company's merger with Only $One, Only $One became
a C-corporation. The pro forma provisions for income taxes presented in the
supplemental consolidated income statements represent an estimate of the taxes
that would have been recorded had Only $One been a C-corporation and were
computed at 38.5%. A portion of the distributions paid presented in the
supplemental consolidated statements of cash flows represents distributions paid
to the Only $One shareholders for payment of their pass-through tax liabilities.
Other
On July 6, 1999, the Company acquired all of the assets and liabilities of
a small dollar store operator for approximately $2,600 in cash and forgiveness
of receivables. The acquisition was accounted for as a purchase. The purchase
price was allocated to the assets acquired based on their estimated fair market
values. The excess of the purchase price over the fair value of the net assets
acquired (goodwill) was approximately $1,800. The goodwill is being amortized
over 20 years. The operating results of the acquired company are included in the
Company's operating results beginning July 6, 1999. Pro forma financial
information to reflect the effect of the purchase on historical periods is not
presented because it is immaterial.
11
<PAGE>
NOTE 3 - INCOME TAXES
The provision for income taxes for the years ended December 31, 1999, 1998
and 1997 consists of the following:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Federal--Current ............................... $ 52,093 $ 39,348 $ 29,967
Federal--Deferred .............................. 3,856 (1,024) (3,067)
Federal--S-corporation to C-corporation
conversion ................................... (1,700) -- --
State--S-corporation to C-corporation conversion (524) -- --
State--Current ................................. 8,900 6,442 4,859
State--Deferred ................................ 708 (183) (436)
-------- -------- --------
$ 63,333 $ 44,583 $ 31,323
======== ======== ========
</TABLE>
A reconciliation of the statutory federal income tax rate and the
effective rate for the years ended December 31, 1999, 1998 and 1997 follows:
1999 1998 1997
---- ---- ----
Statutory tax rate ......................... 35.0% 35.0% 35.0%
Effect of:
State and local income taxes, net of
federal income tax benefit ............ 3.7 3.2 3.2
Other, net ............................... 0.2 0.6 0.1
Only $One and Dollar Express S-corporation
income ................................ (0.3) (3.4) (2.4)
Conversion of Dollar Express from S- to
C-corporation ......................... (1.3) -- --
---- ---- ----
Effective tax rate .................. 37.3% 35.4% 35.9%
==== ==== ====
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, 1999 and 1998 are as
follows:
1999 1998
---- ----
Deferred tax assets:
Property and equipment ................ $ 828 $ 2,359
Accrued expenses ...................... 6,008 5,487
Inventories ........................... 3,536 3,147
Other ................................. 1,248 361
-------- --------
Total deferred tax assets ......... 11,620 11,354
-------- --------
Deferred tax liabilities:
Intangible assets ..................... (2,553) (2,311)
Property and equipment ................ (657) --
Deferred compensation ................. (1,626) --
Other ................................. (221) (140)
-------- --------
Total deferred tax liabilities .... (5,057) (2,451)
-------- --------
Net deferred tax assets ........... $ 6,563 $ 8,903
======== ========
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 1999, 1998 and 1997 taxable income and
management's projections for future taxable income over the periods in which the
deferred tax assets are deductible, management believes it is more likely than
not the existing net deductible temporary differences will reverse during
periods in which carrybacks are available 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.
12
<PAGE>
NOTE 4 - COMMITMENTS
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, 1999 are as follows:
Capital Operating
Leases Leases
------ ------
Year ending December 31:
2000 ............................................ $ 5,880 $ 84,435
2001 ............................................ 5,859 77,377
2002 ............................................ 5,829 65,189
2003 ............................................ 5,792 50,495
2004 ............................................ 6,346 34,718
Thereafter....................................... 13,525 69,225
------- --------
Total minimum lease payments......................... 43,231 $381,439
========
Less amount representing interest
(at an average rate of approximately 9%)......... 11,666
-------
Present value of net minimum capital lease payments.. 31,565
Less current installments of obligations under
capital leases................................... 3,190
-------
Obligations under capital leases, excluding current
installments..................................... $28,375
=======
The above future minimum lease payments include amounts for leases that
were signed prior to December 31, 1999 for stores that were not open as of
December 31, 1999. 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 $7,284
under operating leases.
Included in property and equipment at December 31, 1999 and 1998 are
leased furniture and fixtures and transportation vehicles, excluding
sale-leaseback assets, with a cost of $3,514 and $3,621 and accumulated
amortization of $1,259 and $754 at December 31, 1999 and 1998, respectively.
Sale-Leaseback Transaction
On September 30, 1999, the Company sold certain retail store leasehold
improvements to an unrelated third party and leased them back for a period of
seven years. The Company has an option to purchase the leasehold improvements at
the end of the fifth and seventh years at amounts approximating their fair
market values at the time the option is exercised. This transaction is being
accounted for as a financing arrangement. The total amount of the lease
obligation is $29.0 million. The lease agreement includes financial covenants
that are not more restrictive than those of existing loan agreements. As part of
the transaction, the Company received proceeds of $20,880, net of financing
costs, and an $8,120 11% note receivable which matures September 2006 and is
included in "other assets, net." The future minimum lease payments related to
the capital lease obligation are included in the five-year schedule above.
Operating Leases
During June 1999, the Company entered into an $18,000 operating lease
agreement to finance the construction of the new unautomated distribution center
in Stockton. This distribution center replaced the Sacramento, California area
facility. Under this agreement, the lessor purchases the property, pays for the
construction costs and subsequently leases the facility to the Company. The
initial lease term is five years. The lease provides for a residual value
guarantee and includes a purchase option based on the initial cost of the
property. Each reporting period, the Company estimates its liability, if any,
under the residual value guarantee and, if necessary, records additional rent
expense on a straight-line basis over the remaining lease term. There was no
liability recorded as of December 31, 1999.
The Company is responsible for payments under leases for former
distribution centers located in Memphis, Tennessee and Sacramento and the
former corporate headquarters and distribution center in Norfolk, Virginia.
The leases for the facilities expire in September 2005, June 2008 and
December 2009, respectively. The future minimum lease payments for each
facility are included in the five-year schedule above. The Company receives
sublease income in connection with the Norfolk and Memphis facilities from
sublease agreements which expire in February 2008 and March 2002,
respectively. The sublease income on the Norfolk facility exceeds the annual
obligation of $656 under the lease. Due to the uncertainty regarding the
ultimate recovery of the
13
<PAGE>
future lease payments and the investment in the improvements in the buildings in
Memphis and Sacramento, the Company recorded a $1,300 charge related to
Sacramento in 1999 and a $1,125 charge related to Memphis in 1998. The charge
for Memphis was reduced $700 in 1999 due to leasing the facility earlier than
expected in 1999.
The Company also leases properties for thirteen of its stores, its former
corporate headquarters and distribution center in Norfolk and the Philadelphia
office and warehouse from partnerships owned by related parties. The total
rental payments related to these leases were $2,094, $1,990 and $1,554 for the
years ended December 31, 1999, 1998 and 1997, respectively. The future minimum
lease payments for each facility are included in the five-year schedule above.
Rental payments to related parties are included in the rental expense disclosure
below.
Rental expense for store, distribution center and former corporate
headquarters operating leases included in the accompanying supplemental
consolidated income statements for the years ended December 31, 1999, 1998 and
1997 are as follows:
1999 1998 1997
---- ---- ----
Minimum rentals ............. $78,780 $62,693 $51,843
Contingent rentals .......... 1,613 1,374 1,837
------- ------- -------
Total .............. $80,393 $64,067 $53,680
======= ======= =======
Purchase Contract
During 1996, the Company entered into a purchase agreement with a
vendor which commits the Company to purchase a minimum of $39,462 in vendor
products by April 2003, of which $9,600 has been purchased through December
31, 1999. If the Company does not meet the minimum purchase requirement by
the stated end of the contract term, the contract will extend in six-month
increments until the commitment has been met.
NOTE 5 - BALANCE SHEET COMPONENTS
Property and equipment, net as of December 31, 1999 and 1998 consists
of the following:
1999 1998
---- ----
Land ......................................... $ 8,051 $ 8,051
Buildings .................................... 28,468 17,714
Improvements ................................. 69,289 52,584
Furniture, fixtures and equipment ............ 130,747 95,996
Transportation vehicles ...................... 3,283 3,938
Construction in progress ..................... 7,576 20,918
-------- --------
Total property and equipment .......... 247,414 199,201
Less accumulated depreciation and amortization 90,046 67,740
-------- --------
Total ................................. $157,368 $131,461
======== ========
14
<PAGE>
Other current liabilities as of December 31, 1999 and 1998 consists of
the following:
1999 1998
---- ----
Compensation and benefits ................ $13,745 $16,332
Taxes (other than income taxes) .......... 18,298 11,383
Other .................................... 2,899 3,219
------- -------
Total ............................. $34,942 $30,934
======= =======
NOTE 6 - LONG-TERM DEBT
Long-term debt as of December 31, 1999 and 1998 consists of the
following:
1999 1998
---- ----
7.29% unsecured Senior Notes, interest payable
semiannually on April 30 and October 30,
principal payable $6,000 per year beginning
April 2000 and maturing April 2004 ................ $30,000 $30,000
Demand Revenue Bonds, interest payable monthly at a
variable rate which was 6.9% at December 31, 1999,
principal payable beginning June 2006, maturing
June 2018 ......................................... 19,000 16,500
Revolving credit facility, interest payable monthly
at a variable interest rate which was 9.5% at
December 31, 1999, paid in full in May 2000 ....... 6,500 4,000
Term loan, interest payable monthly at a variable rate
which was 8.63% at December 31, 1999, paid in
full in May 2000 .................................. 20,000 --
Other long-term debt ................................. 1,708 274
------- -------
Total long-term debt ................................. 77,208 50,774
Less current portion ................................. 28,070 16,638
------- -------
Long-term debt, excluding current portion ............ $49,138 $34,136
======= =======
Maturities of long-term debt are as follows: 2000 - $28,070; 2001 -
$10,638; 2002 - $12,000; 2003 - $20,500; 2004 - $6,000.
Senior Notes
The holders of the Senior Notes 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 Senior Notes rank pari passu
with the Company's other debt. The Note agreements, among other things,
prohibit certain mergers and consolidations and require the maintenance of
certain specified ratios. 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.
Demand Revenue Bonds
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. The Bonds do not contain a prepayment penalty as long
as the interest rate remains variable. The Bonds are secured 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.
On April 1, 1999, the Company entered into an interest rate swap agreement
(swap) related to the $19,000 Loan Agreement with the MBFC (Loan Agreement).
This swap converts the variable interest rate to a fixed rate and reduces the
Company's exposure to interest rate fluctuations. Under this agreement, as
amended, the Company pays interest to the bank which provided the swap at a
fixed rate of 4.99%. In exchange, the bank pays the Company at a variable
interest rate, which approximates the rate on the Loan Agreement. The variable
interest rate of the swap is adjusted monthly. For months in which the interest
rate as calculated under the agreement is
15
<PAGE>
greater than 8.28%, no payments are made by either party. The swap, effective
through April 1, 2009, is for the entire amount outstanding under the Loan
Agreement.
Revolving Credit Facility and Term Loan
In February 1999, Dollar Express entered into a credit facility for an
aggregate amount of $40,000, of which $20,000 is a term loan and $20,000 is a
revolving credit facility. At the option of Dollar Express, interest on the
facility is calculated at the lender's base rate plus a margin, or LIBOR plus
a margin based on a leverage ratio, as defined. Commitment fees on the unused
portion of the revolving credit facility are calculated based on the LIBOR
margin in effect during the period, as defined. The facility was secured by
substantially all of Dollar Express's assets, as well as all of Dollar
Express's outstanding common and preferred stock. The facility contains
customary operational and financial covenants, including covenants regarding
maintenance of specified financial ratio, restrictions on capital
expenditures, restrictions on payment of cash dividends and other
distributions, limits on incurrence of debt and prohibitions on changes of
control. As of December 31, 1999, Dollar Express was not in compliance with
one of its covenants but received a waiver from its lender. Amounts
outstanding on the revolving credit facility and term loan at December 31,
1999 were $6,500 and $20,000, respectively, all of which were paid in full in
May 2000. Of the $20.0 million available under the revolving credit facility,
$13.0 million is available at December 31, 1999 and $0.5 million is reserved
for a standby letter of credit.
Revolving Credit Facility
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, calculated
as a percentage, as defined, of the amount available under the line of credit,
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
December 1, 1999 and March 1, 2000 to $10,000. There are no additional reduction
requirements.
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. At December 31, 1999, the variable interest rate on the
facility was 7.0%. At December 31, 1999 and 1998, no amounts were outstanding
under the Agreement; however, approximately $42,387 of the $135,000 available
under the Agreement was committed to certain letters of credit issued in
relation to the routine purchase of imported merchandise at December 31, 1999.
Fair Value of Financial Instruments
The carrying values of cash and cash equivalents, other current assets,
other assets, accounts payable, other current liabilities and other
liabilities approximate fair value because of the short maturity of these
instruments.
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.
The fair value of the interest rate swap is the estimated amount the
Company would receive or pay to terminate the agreement as of the reporting
date. The fair value of the interest rate swap at December 31, 1999 is $867.
16
<PAGE>
NOTE 7 - MANAGEMENT ADVISORY SERVICES
The Company has a financial and management advisory service agreement with
one of its non-employee shareholders. The agreement provides for the payment of
$200 annually over the 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, 1999, 1998 and 1997, the Company paid $200 under this agreement.
NOTE 8 - SHAREHOLDERS' EQUITY
Unattached Warrants
The Company issued unattached warrants to purchase 4,188,675 shares of
Common Stock on September 30, 1993 for $0.12 per warrant and unattached warrants
to purchase 4,188,675 shares of Common Stock on February 22, 1994 for $0.12 per
warrant. The warrants, which are held by certain Company shareholders, carry an
exercise price of $0.57 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 are outstanding at December 31, 1999.
Preferred Stock
Effective February 1, 1995, the Articles of Incorporation were amended to
authorize 10,000,000 shares of Preferred Stock, $0.01 par value per share.
Stock Dividends
In connection with stock dividends authorized by the Board of
Directors in 1998 and 1997, the Company issued one-half share for each
outstanding share of Common Stock, payable June 29, 1998 to shareholders of
record as of June 22, 1998, and payable July 21, 1997 to shareholders of record
as of July 14, 1997, respectively. On May 25, 2000 the Board of Directors
authorized a stock dividend, in which the Company issued one-half share for
each outstanding share of Common Stock, payable June 19, 2000 to shareholders of
record as of June 12, 2000. All share and per share data in these supplemental
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.
Recapitalization of Dollar Express
On February 5, 1999, Dollar Express issued 3,530,000 shares of cumulative
convertible redeemable preferred stock for gross proceeds of $34,000, net of
offering costs of $2,844. The preferred shareholders were entitled, at any time,
to convert any or all shares, on a one-for-one basis, into shares of common
stock of Dollar Express. Upon conversion, the holders of the preferred shares
were also entitled to payment of all accrued but unpaid dividends, if any, as
long as a qualified public offering, merger or consolidation or any other
recapitalization or other business combination with an affiliated entity had not
occurred prior to August 2001. All outstanding preferred shares were converted
into common shares of Dollar Express, on a one-for-one basis, upon consummation
of the Dollar Express merger as more fully discussed in Note 2. Dividends for
1999 of $2,751 have been accrued and are unpaid at December 31, 1999. As of
result of the merger with Dollar Express, all accrued and unpaid preferred stock
dividends were forfeited and credited to additional paid-in capital in May 2000.
The accretion of preferred stock to redemption value represents the pro
rata portion of the change in redemption value of the preferred stock from its
initial value at the date of issuance to December 31, 1999. The costs of $2,844
associated with issuing the preferred stock and the discount of $3,013 related
to the value of the detachable common stock put warrants have been recorded as
discounts on the preferred stock. The redemption value adjustments were being
accreted and the discounts were being amortized over a five-year period from the
date of issuance.
Dollar Express issued 416,667 detachable common stock put warrants to
the holders of the cumulative convertible redeemable preferred stock to
purchase shares of Dollar Express's common stock. The detachable common stock
warrants were exercisable beginning August 3, 2001, and thereafter until
expiration. The warrants were terminated upon consummation of the merger with
Dollar Express.
In connection with the recapitalization, Dollar Express distributed
$59,524 to the former owners of Dollar Express.
17
<PAGE>
Pro Forma Net Income Per Common Share
The following table sets forth the calculation of pro forma basic and
diluted net income per common share:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
(In thousands, except per share data)
<S> <C> <C> <C>
Pro forma basic net income per common share:
Pro forma net income available to common
shareholders ............................. $ 99,045 $ 76,514 $ 53,539
-------- -------- --------
Weighted average number of common shares
outstanding .............................. 98,435 97,454 96,747
-------- -------- --------
Pro forma basic net income per common share . $ 1.01 $ 0.79 $ 0.55
======== ======== ========
Pro forma diluted net income per common share:
Pro forma net income available to common
shareholders ............................. $ 99,045 $ 76,514 $ 53,539
-------- -------- --------
Weighted average number of common shares
outstanding .............................. 98,435 97,454 96,747
Dilutive effect of stock options and warrants
(as determined by applying the treasury
stock method) ............................ 9,525 9,661 9,402
-------- -------- --------
Weighted average number of common shares and
dilutive potential common shares
outstanding .............................. 107,960 107,115 106,149
-------- -------- --------
Pro forma diluted net income
per common share ......................... $ 0.92 $ 0.71 $ 0.50
======== ======== ========
</TABLE>
Detachable common stock put warrants to purchase 416,667 shares of
common stock of Dollar Express and 3,530,000 shares of cumulative convertible
redeemable preferred stock, eligible for conversion into 3,530,000 shares of
common stock of Dollar Express, were outstanding from February 5, 1999 to
December 31, 1999. These common stock equivalents are not included in the
calculation of the weighted average number of common shares and dilutive
potential common shares outstanding because their effect would be
anti-dilutive.
NOTE 9 - 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:
1999........................................ $ 5,413
1998........................................ 4,059
1997........................................ 2,923
NOTE 10 - STOCK-BASED COMPENSATION PLANS
At December 31, 1999, the Company has five stock-based compensation plans,
which are described below.
18
<PAGE>
Accounting Method
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 pro forma net income available to
common shareholders and pro forma net income per common share would have been
reduced to the pro forma amounts indicated in the following table:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Pro forma net income available to common shareholders:
As reported ....................................... $ 99,045 $ 76,514 $ 53,539
========== ========== ==========
Pro forma for SFAS No. 123 ........................ $ 88,718 $ 69,774 $ 50,531
========== ========== ==========
Pro forma basic net income per common share:
As reported ....................................... $ 1.01 $ 0.79 $ 0.55
========== ========== ==========
Pro forma for SFAS No. 123 ........................ $ 0.90 $ 0.72 $ 0.52
========== ========== ==========
Pro forma diluted net income per common share:
As reported ....................................... $ 0.92 $ 0.71 $ 0.50
========== ========== ==========
Pro forma for SFAS No. 123 ........................ $ 0.82 $ 0.65 $ 0.48
========== ========== ==========
</TABLE>
The full impact of calculating compensation cost for stock options under
SFAS No. 123 is not reflected in the pro forma net income available to common
shareholders for SFAS No. 123 and pro forma net income per share for SFAS No.
123 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 for SFAS No. 123 may
not 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
1,047,264 shares of Common Stock in 1993 and 1,048,289 shares in 1994. Options
granted under the SOP have an exercise price of $0.86 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 8,100,000 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 generally vest
over a three-year period.
The Step Ahead Investments, Inc. Long-Term Incentive Plan (SAI Plan)
provided for the issuance of stock options, stock appreciation rights (SARs),
phantom stock and restricted stock awards to officers and key employees.
Effective with the merger with 98 Cent Clearance Center and in accordance with
the terms of the SAI Plan, outstanding 98 Cent Clearance Center options were
assumed by the Company and converted, based on 1.6818 Company options for each
98 Cent Clearance Center 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. 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, 98 Cent Clearance Center
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 247,500 shares were granted to five former officers of 98 Cent
Clearance Center who were serving as employees or consultants of the Company
following the merger. 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.
19
<PAGE>
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:
1999 1998 1997
---- ---- ----
Expected term in years ............ 8 8 10
Expected volatility ............... 52.7% 50.4% 47.7%
Annual dividend yield ............. -- -- --
Risk-free interest rate ........... 6.6% 4.9% 5.8%
The following tables summarize the Company's various option plans,
including the SAI Plan for the period prior to the merger with 98 Cent Clearance
Center and the Dollar Express plan for the period prior to the merger with
Dollar Express, as of December 31, 1999, 1998 and 1997, and for the years then
ended and information about fixed options outstanding at December 31, 1999.
<TABLE>
<CAPTION>
Stock Option Activity
1999 1998 1997
----------------------- ----------------------- -----------------------
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....... 4,876,365 $ 14.33 3,606,963 $ 6.77 3,274,869 $ 4.71
Granted.................... 1,697,847 19.05 2,119,610 24.20 1,197,508 10.43
Exercised.................. (1,050,432) 7.55 (722,709) 5.94 (709,961) 3.06
Forfeited.................. (235,317) 21.05 (127,499) 12.13 (155,453) 8.40
---------- --------- ---------
Outstanding at
end of year............. 5,288,463 16.86 4,876,365 14.33 3,606,963 6.77
========== ========= =========
Options exercisable
at end of year.......... 2,212,093 12.07 2,016,101 5.99 1,631,381 4.03
========== ========= =========
Weighted average fair
value of options
granted during the
year.................... $ 12.56 $ 15.02 $ 6.93
</TABLE>
<TABLE>
<CAPTION>
Stock Options Outstanding and Exercisable
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 1999 Life Price 1999 Price
------ ---- ---- ----- ---- -----
<S> <C> <C> <C> <C> <C>
$0.86...................... 228,079 (a) $ 0.86 228,079 $ 0.86
$2.96 to $5.95............. 555,090 5.7 years 4.46 555,090 4.46
$6.77 to $9.93............. 937,548 6.9 years 9.82 670,955 9.77
$10.81 to $19.50........... 1,533,636 9.1 years 17.92 85,952 14.87
$20.67 to $24.09........... 1,247,925 8.4 years 22.96 468,427 22.91
$25.63 to $33.21........... 786,185 9.0 years 27.15 203,590 26.99
--------- ---------
$0.86 to $33.21............ 5,288,463 2,212,093
========= =========
</TABLE>
(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.
20
<PAGE>
Employee Stock Purchase Plan
Under the Dollar Tree Stores, Inc. Employee Stock Purchase Plan (ESPP),
the Company is authorized to issue up to 759,375 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 146,174 shares as of December 31, 1999.
The fair value of the employees' purchase rights is estimated on the date
of grant using the Black-Scholes option-pricing model with the following
weighted average assumptions:
Expected term................................3 months
Expected volatility..........................21% to 34%
Annual dividend yield....................... --
Risk-free interest rate......................5.16% to 5.88% (annualized)
The weighted average per share fair value of those purchase rights granted
in 1999, 1998 and 1997 was $4.06, $4.19, and $2.65, respectively.
NOTE 11 - SUBSEQUENT EVENTS
On January 13, 2000, the Company entered into a $35,000 operating lease
agreement to finance the construction of a new automated distribution center in
Savannah, Georgia. Under this agreement the lessor purchases the property, pays
for the construction costs and subsequently leases the facility to the Company.
The initial lease term is five years with renewal options for two additional
five-year periods. The lease provides for a residual value guarantee and
includes a purchase option based on the initial cost of the property. When the
assets are placed into service, the Company will estimate its liability, if any,
under the residual value guarantee and record additional rent expense on a
straight-line basis over the remaining lease term. The new facility is expected
to be operational in early 2001.
On May 25, 2000, the Company's shareholders approved an amendment to
the SIP to increase the authorized number of option shares available for grant
under the plan to 12,600,000.
NOTE 12 - QUARTERLY FINANCIAL INFORMATION (Unaudited)
The following table sets forth certain unaudited results of operations for
each quarter of 1999 and 1998. The unaudited information has been prepared on
the same basis as the audited supplemental 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(1) Quarter Quarter(2)
------- ---------- ------- ----------
(In thousands, except store and per share data)
<S> <C> <C> <C> <C>
1999:
Net sales ............................. $258,091 $288,148 $298,868 $506,713
Gross profit .......................... 89,700 103,316 107,322 196,915
Operating income ...................... 20,451 26,233 27,920 100,992
Net income available to common
shareholders ........................ 13,906 14,626 12,083 58,935
Pro forma net income available to
common shareholders (3) .............. 13,672 14,355 12,083 58,935
Pro forma diluted net income per common
share ............................... 0.13 0.13 0.11 0.54
Stores open at end of quarter ......... 1,335 1,403 1,461 1,507
Comparable store net sales increase(4) 4.6% 1.7% 4.9% 7.5%
1998:
Net sales ............................. $205,641 $237,928 $237,852 $392,465
Gross profit .......................... 71,872 81,652 85,944 151,730
Operating income ...................... 14,464 22,146 23,019 70,885
Net income available to common
shareholders ........................ 8,818 14,139 13,854 44,507
Pro forma net income available to
common shareholders (3) ............. 8,396 12,937 13,190 41,991
Pro forma diluted net income per common
share ............................... 0.08 0.12 0.12 0.39
Stores open at end of quarter ......... 1,100 1,163 1,241 1,285
Comparable store net sales increase(4) 4.6% 12.3% 5.3% 5.2%
</TABLE>
(1) Included in gross profit is $443 of merger related costs. Included in
operating income is $443 of merger related costs and $607 of merger
related expenses.
(2) 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.
(3) Amounts include a pro forma adjustment for C-corporation income taxes
relating to Dollar Express and Only $One of $271 for the quarter ended
June 30, 1999, $234 for the quarter ended March 31, 1999, $2,516 for the
quarter ended December 31, 1998, $664 for the quarter ended September 30,
1998, $1,202 for the quarter ended June 30, 1998, and $422 for the quarter
ended March 31, 1998.
(4) Easter was observed on April 4, 1999, April 12, 1998 and March 30, 1997.
