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, 2002
( ) 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 9, 2002, there were 113,622,890 shares of the Registrant's Common
Stock outstanding.
DOLLAR TREE STORES, INC.
AND SUBSIDIARIES
INDEX
PART I. FINANCIAL INFORMATION
Page
Item 1. Condensed Consolidated Financial Statements:
Condensed Consolidated Balance Sheets
March 31, 2002 and December 31, 2001.............................. 3
Condensed Consolidated Income Statements
Three months ended March 31, 2002 and 2001........................ 4
Condensed Consolidated Statements of Cash Flows
Three months ended March 31, 2002 and 2001........................ 5
Notes to Condensed Consolidated Financial Statements............... 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations............................... 9
Item 3. Quantitative and Qualitative Disclosures About Market Risk.......... 14
PART II. OTHER INFORMATION
Item 1. Legal Proceedings................................................... 15
Item 6. Exhibits and Reports on Form 8-K.................................... 15
Signatures.................................................... 16
2
DOLLAR TREE STORES, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
March 31, December 31,
2002 2001
---- ----
ASSETS
Current assets:
Cash and cash equivalents.......................................................... $ 181,040 $ 236,653
Merchandise inventories............................................................ 371,841 296,473
Deferred tax asset................................................................. 10,138 8,877
Prepaid expenses and other current assets.......................................... 20,442 18,776
------- -------
Total current assets........................................................... 583,461 560,779
Property and equipment, net............................................................. 293,644 279,011
Deferred tax asset...................................................................... 7,745 7,436
Goodwill (Note 4)....................................................................... 38,358 38,358
Other assets, net (Note 4).............................................................. 17,485 16,464
------- -------
TOTAL ASSETS................................................................... $ 940,693 $ 902,048
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt.................................................. $ 25,000 $ 25,000
Accounts payable................................................................... 103,347 68,653
Income taxes payable............................................................... 19,209 38,848
Other current liabilities.......................................................... 45,970 63,656
Current installments of obligations under capital
leases........................................................................... 3,899 3,865
------- -------
Total current liabilities...................................................... 197,425 200,022
Long-term debt, excluding current portion............................................... 12,000 12,000
Obligations under capital leases, excluding
current installments................................................................... 20,403 21,506
Other liabilities....................................................................... 20,691 16,784
------- -------
Total liabilities.............................................................. 250,519 250,312
------- -------
Shareholders' equity (Note 5):
Common stock, par value $0.01. 300,000,000 shares authorized
112,843,492 shares issued and outstanding at March 31, 2002;
and 112,505,658 shares issued and outstanding at
December 31, 2001................................................................ 1,128 1,125
Additional paid-in capital......................................................... 182,853 167,151
Accumulated other comprehensive loss............................................... (197) (378)
Retained earnings.................................................................. 506,390 483,838
------- -------
Total shareholders' equity..................................................... 690,174 651,736
Commitments (Note 2).................................................................... -- --
------- -------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY..................................... $ 940,693 $ 902,048
======= =======
See accompanying Notes to Condensed Consolidated Financial Statements.
3
DOLLAR TREE STORES, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED INCOME STATEMENTS
(In thousands, except per share data)
(Unaudited)
Three Months Ended
March 31,
------------------------
2002 2001
---- ----
Net Sales................................................................... $ 489,625 $ 387,319
Cost of sales .............................................................. 316,460 255,858
------- -------
Gross profit....................................................... 173,165 131,461
------- -------
Selling, general and administrative expenses:
Operating expenses..................................................... 121,330 101,691
Depreciation and amortization (Note 4)................................. 15,721 11,831
------- -------
Total selling, general and administrative expenses................. 137,051 113,522
------- -------
Operating income................................................... 36,114 17,939
------- -------
Other income (expense):
Interest income........................................................ 1,224 1,681
Interest expense....................................................... (1,263) (1,294)
Changes in fair value of non-hedging interest rate swaps............... 595 (792)
------- -------
Total other income (expense)....................................... 556 (405)
------- -------
Income before income taxes......................................... 36,670 17,534
Provision for income taxes.................................................. 14,118 6,751
------- -------
Net income......................................................... $ 22,552 $ 10,783
======= =======
Net income per share (Notes 3 and 4):
Basic.................................................................. $ 0.20 $ 0.10
======= =======
Diluted................................................................ $ 0.20 $ 0.10
======= =======
See accompanying Notes to Condensed Consolidated Financial Statements.
4
DOLLAR TREE STORES, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Three Months Ended,
March 31,
------------------------
2002 2001
---- ----
Cash flows from operating activities:
Net income......................................................................... $ 22,552 $ 10,783
------- -------
Adjustments to reconcile net income to net cash used in operating
activities:
Depreciation and amortization.................................................. 15,721 11,831
Loss on disposal of property and equipment..................................... 494 367
Change in fair value of non-hedging interest rate swaps........................ (595) 792
Provision for deferred income taxes............................................ (1,673) 104
Tax benefit of stock option exercises.......................................... 2,005 444
Other non-cash adjustments to net income....................................... 238 4
Changes in assets and liabilities increasing
(decreasing) cash and cash equivalents:
Merchandise inventories................................................... (75,368) (96,224)
Prepaid expenses and other current assets................................. (1,666) 1,274
Other assets.............................................................. (349) (229)
Accounts payable.......................................................... 34,694 6,532
Income taxes payable...................................................... (19,639) (11,022)
Other current liabilities................................................. (17,686) (15,033)
Other liabilities......................................................... 4,780 1,300
------- -------
Net cash used in operating activities................................. (36,492) (89,077)
------- -------
Cash flows from investing activities:
Capital expenditures............................................................... (31,280) (26,325)
Acquisition of favorable lease rights.............................................. (813) --
Proceeds from sale of property and equipment....................................... 334 13
------- -------
Net cash used in investing activities................................. (31,759) (26,312)
------- -------
Cash flows from financing activities:
Repayment of long-term debt and facility fees...................................... -- (239)
Principal payments under capital lease obligations................................. (937) (865)
Settlement of merger-related contingencies......................................... 6,654 --
Proceeds from stock issued pursuant to
stock-based compensation plans .................................................. 6,921 1,311
------- -------
Net cash provided by financing activities............................. 12,638 207
------- -------
Net decrease in cash and cash equivalents............................................... (55,613) (115,182)
Cash and cash equivalents at beginning of period........................................ 236,653 181,166
------- -------
Cash and cash equivalents at end of period.............................................. $ 181,040 $ 65,984
======= =======
Supplemental disclosure of cash flow information:
Cash paid for:
Interest, net of amount capitalized............................................... 673 958
Income taxes...................................................................... 33,833 17,225
See accompanying Notes to Condensed Consolidated Financial Statements.
5
DOLLAR TREE STORES, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The condensed consolidated financial statements at March 31, 2002, and for
the three-month periods ended March 31, 2002 and 2001, 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 at March 31, 2002 and operating results for the interim periods. The
December 31, 2001 balance sheet information was derived from the audited
consolidated financial statements for the year ended December 31, 2001.
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, 2001, contained in the
Company's Annual Report on Form 10-K filed March 14, 2002. The results of
operations for the three-month period ended March 31, 2002 are not necessarily
indicative of the results to be expected for the entire year ending December 31,
2002.
Certain 2001 amounts have been reclassified for comparability with the 2002
financial statement presentation.
2. OPERATING LEASE AGREEMENT
The Company has a Lease Facility that provides for, among other things: (1)
a $165.0 million operating lease facility, bearing interest at the agent bank's
prime interest rate or LIBOR, plus a spread, at the option of the Company; and
(2) an annual facilities fee, calculated as a percentage of the amount available
under the facility and an annual administrative fee payable quarterly. The Lease
Facility, 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. Approximately $113.0 million is
committed to the Savannah, Briar Creek and Stockton distribution centers. This
Lease Facility expires in March 2006.
Under this type of agreement, an unrelated third party in the form of a
special purpose entity borrows funds under a construction agreement, purchases
the property, pays for the construction costs and subsequently leases the
facility to the Company. The lease requires the Company to provide a residual
value guarantee and includes a purchase option based on the outstanding property
costs plus any unpaid interest and rents under the lease agreement. These
agreements are typically referred to as synthetic leases. Each reporting period,
we estimate our liability under the residual value guarantee and, if necessary,
record additional rent expense on a straight-line basis over the remaining lease
term. No liability was recorded as of March 31, 2002 and December 31, 2001.
Effective March 25, 2002, the Company committed approximately $41.0 million
to the Company's new Marietta, Oklahoma distribution center under its existing
Lease Facility bringing the total commitment under the lease facility to
approximately $154.0 million. The Marietta distribution center is being
constructed to the Company's specification by an unrelated third party, who is
serving as the developer, subject to the terms and conditions of a development
agreement with the Company. The special purpose entity provided the developer
a $41.0 million construction loan, of which the Company guaranteed approximately
89.9% of the amount
6
outstanding under the loan as defined in the agreements. The construction
loan will be satisfied by the developer no later than March 2003, at which time
the Company has the option to lease the distribution center under the Lease
Facility or purchase the distribution center outright.
3. NET INCOME PER SHARE
The following table sets forth the calculation of basic and diluted net
income per share:
Three months ended
March 31,
------------------
2002 2001
---- ----
(In thousands, except
per share data)
Basic net income per share:
Net income............................................. $ 22,552 $ 10,783
======= =======
Weighted average number of
common shares outstanding............................ 112,718 112,097
======= =======
Basic net income per share......................... $ 0.20 $ 0.10
======= =======
Diluted net income per share:
Net income............................................. $ 22,552 $ 10,783
======= =======
Weighted average number of
common shares outstanding............................ 112,718 112,097
Dilutive effect of stock options and
warrants (as determined by applying
the treasury stock method)........................... 1,182 667
------- -------
Weighted average number of common
shares and dilutive potential
common shares outstanding............................ 113,900 112,764
======= =======
Diluted net income per share....................... $ 0.20 $ 0.10
======= =======
At March 31, 2002 and 2001, 1,762,163 and 729,643, respectively, stock
options 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.
On March 11, 2002, the Board of Directors granted options to employees
under the Company's Stock Incentive Plan to purchase 1,613,300 shares of the
Company's common stock.
4. ACCOUNTING CHANGE
Effective January 1, 2002, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 142, "Goodwill and Other Intangible Assets,"
which establishes accounting and reporting standards for intangible assets and
goodwill. SFAS No. 142 requires that goodwill and intangible assets with
indefinite useful lives no longer be amortized, but rather tested for impairment
at least annually. SFAS No. 142 also requires that intangible assets with
definite useful lives be amortized over their respective estimated useful lives
and reviewed for impairment in accordance with SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." The Company performed the required
transition impairment tests of goodwill and other intangibles as of January 1,
2002, and determined that no impairment existed.
7
Intangible Assets
At January 1, 2002, the Company's intangible assets consisted of
non-compete agreements with former shareholders of 98 Cents Clearance Center, a
Company acquired in 1998. These assets are being amortized over the legal term
of the individual agreements, which is generally a ten-year period. At March 31,
2002 and December 31, 2001, the carrying value of these agreements was $2.8
million and $3.0 million, respectively, which is net of $1.6 million and $1.4
million, respectively, of accumulated amortization.
In March 2002, the Company acquired favorable lease rights for operating
leases for retail locations from a third party. The fair market value of the
lease rights was approximately $0.8 million and will be amortized on a
straight-line basis to rent expense (included in "operating expenses" in the
accompanying condensed consolidated income statements) over the remaining
initial lease terms, which expire at various dates through 2007.
These intangible assets are included in "other assets" in the accompanying
condensed consolidated balance sheets. Estimated annual amortization expense for
the next five years follows: 2002 - $0.7 million; 2003 - $0.7 million; 2004 -
$0.6 million; 2005 - $0.5 million; and 2006 - $0.5 million.
Goodwill
At March 31, 2002 and December 31, 2001, the carrying value of goodwill was
$38.4 million. In accordance with SFAS No. 142, goodwill is no longer being
amortized, but will be tested at least annually for impairment at the reporting
unit level. In addition, goodwill will be tested on an interim basis if an event
or circumstance indicates that it is more likely than not that an impairment
loss has been incurred.
The following table reconciles reported net income and net income per share
for the three-month periods ended March 31, 2002 and 2001 to net income and net
income per share that would have been recorded if SFAS No. 142 were effective
for each of the periods presented:
Three months ended
March 31,
------------------
2002 2001
---- ----
(In thousands)
Reconciliation of net income:
Net income.......................................................... $ 22,552 $ 10,783
Add back: Goodwill amortization (net of tax)........................ -- 311
------ ------
Adjusted net income................................................. $ 22,552 $ 11,094
====== ======
Basic net income per share:
Net income.......................................................... $ 0.20 $ 0.10
Goodwill amortization............................................... -- --
------ ------
Adjusted net income................................................. $ 0.20 $ 0.10
====== ======
Diluted net income per share:
Net income.......................................................... $ 0.20 $ 0.10
Goodwill amortization............................................... -- --
------ ------
Adjusted net income................................................. $ 0.20 $ 0.10
====== ======
8
5. COMPREHENSIVE INCOME
The Company's comprehensive income reflects the effect of recording
derivative financial instruments pursuant to SFAS No. 133. The following table
provides a reconciliation of net income to total comprehensive income:
Three months ended
March 31,
------------------
2002 2001
---- ----
(In thousands)
Net income.......................................................... $ 22,552 $ 10,783
Cumulative effect of change in accounting
for derivative financial instruments
(net of $44 tax expense).......................................... -- 70
Fair value adjustment - derivative hedging
instrument (net of $101 tax expense).............................. 177 --
Amortization of SFAS No. 133 cumulative
effect (net of $2 tax expense).................................... 4 4
------ ------
Total comprehensive income.................................... $ 22,733 $ 10,857
====== ======
The cumulative effect recorded in "accumulated other comprehensive income" is
being amortized over the remaining lives of the related interest rate swaps.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
INTRODUCTORY NOTE: Unless otherwise stated, references to "we," "our" and "us"
generally refer to Dollar Tree Stores, Inc. and its direct and indirect
subsidiaries on a consolidated basis.
A WARNING ABOUT FORWARD-LOOKING STATEMENTS: This document contains
"forward-looking statements" as that term is used in the Private Securities
Litigation Reform Act of 1995. Forward-looking statements address future events,
developments or results and typically use words such as "believe," "anticipate,"
"expect," "intend," "plan" or "estimate." For example, our forward-looking
statements include statements regarding:
o our anticipated inventory levels and future net sales results;
o our growth plans, including our plans to add, expand or relocate stores;
o the possible effect of inflation and other economic changes on our
future costs and profitability
o our cash needs, including our ability to fund our future capital
expenditures and working capital requirements; and
o the possible effect of changes in generally accepted accounting
principles relating to the type of operating lease under which we
lease certain of our distribution centers.
For a discussion of the risks, uncertainties and assumptions that could
affect our future events, developments or results, you should carefully review
the risk factors described below, "Management's Discussion and Analysis of
9
Financial Condition and Results of Operations" and "Business" sections in our
Annual Report on Form 10-K filed March 14, 2002, and review "Risk Factors" in
our most recent prospectus:
o Adverse economic conditions, such as reduced consumer confidence
and spending, or bad weather could significantly reduce our sales.
o We could fail to meet our goals for opening or expanding stores on
a timely basis, which could cause our sales to suffer. We may not
anticipate all the challenges that our expanding operations will
impose and, as a result, we may not meet our targets for opening
new stores and expanding profitability. In addition, new stores
can cause sales at our existing stores to suffer.
o Our sales may be below expectations during the Christmas selling
season, which may cause our operating results to suffer
materially.
o Our profitability is vulnerable to future increases in operating
and merchandise costs including shipping rates, freight costs,
wage levels, inflation, competition and other adverse economic factors.
o Unforeseen disruptions or costs in operating and expanding our
receiving and distribution systems could harm our sales and
profitability.
o Our merchandise mix relies heavily on imported goods. An increase
in the cost or disruption of the flow of these goods may
significantly decrease our sales and profits because any transition
to alternative sources may not occur in time to meet our demands.
In addition, products and alternative sources may also be of lesser
quality and more expensive than those we currently import.
o Disruptions in the availability of quality, low-cost merchandise
in sufficient quantities to maintain our growth may reduce sales
and profits.
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.
Investors should also be aware that while we do, from time to time,
communicate with securities analysts and others, it is against our policy to
selectively disclose to them any material nonpublic information or other
confidential commercial information. Accordingly, shareholders should not assume
that we agree with any statement or report issued by any analyst regardless of
the content of the statement or report. We generally do not issue financial
forecasts or projections and we have a policy against confirming those issued by
others. Thus, to the extent that reports issued by securities analysts contain
any projections, forecasts or opinions, such reports are not our responsibility.
10
Results of Operations
The Three Months Ended March 31, 2002 Compared To The Three Months Ended
March 31, 2001
Net sales. Net sales increased 26.4% in the first quarter of 2002 compared
to the same period in 2001. This $102.3 million increase in net sales resulted
primarily from sales at new stores. In addition, our comparable store net sales,
which include the effect of our expanded stores, increased 6.5% for the quarter
primarily as a result of the shift of the Easter holiday from April 15 in 2001
to March 31 in 2002. This move in the Easter holiday shifted all of our Easter
sales into the first quarter of 2002. We estimate that our second quarter net
sales will be approximately $500.0 million.
At March 31, 2002, we operated 2,031 stores with 10.7 million selling
square feet compared to 1,781 stores with 8.3 million selling square feet for
the same period in 2001. We opened 66 stores, expanded 29 stores and closed 10
stores in the first quarter of 2002, compared to 49 stores opened, 31 stores
expanded, and 6 stores closed in the first quarter of 2001. In 2002, we added
approximately 0.6 million selling square feet, of which approximately 0.1
million selling square feet was added through expanding existing stores.
Our management anticipates that net sales growth during 2002 will come
mostly from selling square footage growth related to new store openings and
expansion of existing stores. The remaining net sales growth, if any, will come
from comparable store net sales increases. We are continuing to plan inventory
levels to support a total net sales increase of approximately 18% for the
remainder of 2002.
Gross Profit. Our gross profit as a percentage of net sales is called our
gross profit margin. Gross profit margin increased to 35.4% in the first quarter
of 2002 compared to 33.9% in the first quarter of 2001. The increase in gross
profit margin is primarily due to the following:
o improved inventory shrink, as a percentage of net sales, due to
unusually high shrink in the first quarter of 2001 resulting from
challenges in operating our Philadelphia distribution network; and
o improved occupancy and distribution costs, as a percentage of net sales,
due to leverage resulting from the 6.5% increase in comparable store
net sales.
Selling, General and Administrative Expenses. Operating expenses increased
19.3% in the first quarter of 2002 compared to the same period in 2001.
Expressed as a percentage of net sales, operating expenses decreased to 24.8%
for the first quarter of 2002 compared to 26.3% for first quarter of 2001. The
improvement in operating expenses, as a percentage of net sales, is primarily
due to savings achieved in payroll and related costs. These savings are the
result of various expense-management initiatives. In addition, the increase in
comparable store net sales enabled us to leverage our operating expenses. These
decreases in operating expenses, as a percentage of net sales, were partially
offset by increased legal-related expenses for the quarter.
11
Depreciation and amortization increased $3.9 million, or 32.9%. As a
percentage of net sales, depreciation and amortization increased to 3.2% for the
first quarter of 2002 compared to 3.1% for the same period in 2001. Effective
January 1, 2002, we ceased amortization of goodwill in accordance with the
provisions of Statement of Financial Accounting Standards No. 142. Excluding
approximately $0.5 million of goodwill amortization recorded in the first
quarter of 2001, depreciation and amortization was approximately 2.9%, as a
percentage of net sales. The increase in depreciation and amortization expense,
as a percentage of net sales, is primarily due to increased depreciation expense
associated with expanded stores. In April 2002, we implemented the last major
system of our new supply chain technology improvements. We spent approximately
$27.0 million in connection with our new supply chain systems, which is being
depreciated generally over a five-year period.
Operating Income. Due to the reasons discussed above, operating income
increased as a percentage of net sales to 7.4% in the first quarter of 2002
compared to 4.6% in the same period of 2001.
Interest Income/Expense. Interest income decreased to $1.2 million in the
first quarter of 2002 from $1.7 million in the first quarter of 2001. This
decrease resulted from decreases in interest rates earned on our investments
partially offset by increased levels of cash and cash equivalents for the first
quarter of 2002. Interest expense remained relatively flat for the first quarter
of 2002 compared to the first quarter of 2001.
Changes in fair value of non-hedging interest rate swaps. The $0.6 million
income is the result of reflecting our non-hedging interest rate swaps at their
fair values in accordance with SFAS No. 133. The increase in their fair values
for the quarter is primarily the result of increasing interest rates. Due to
many variables, our management is not able to predict changes in the fair values
of our interest rate swaps.
Liquidity and Capital Resources
Our business requires capital to open new stores and operate existing
stores. Our working capital requirements for existing stores are seasonal in
nature and typically reach their peak in the months of September and October.
Historically, we have satisfied our seasonal working capital requirements for
existing stores and funded our store opening and expansion programs from
internally generated funds and borrowings under our credit facilities.
The following table compares cash-related information for the three months
ended March 31, 2002 and 2001:
Three months ended
March 31,
------------------
2002 2001
---- ----
(In millions)
Net cash provided by (used in):
Operating activities................................ $(36.5) $(89.1)
Investing activities................................ (31.8) (26.3)
Financing activities................................ 12.6 0.2
The $52.6 million decrease in cash used for operating activities was
primarily the result of a decrease in cash expended for inventory and timing of
payments. The decrease in cash used for inventory was the result of the Easter
holiday shift, a concerted effort to reduce inventory levels and improved
inventory flow to our stores.
12
Cash used in investing activities is generally expended to open new stores.
The $5.0 million increase in capital expenditures for the three months ended
March 31, 2002 compared to the same period in 2001 was primarily the result of
an increase in the number of stores opened in 2002 and the size of those stores.
The $12.4 million increase in cash provided by financing activities was
primarily the result of the following:
o We received $5.6 million more cash pursuant to stock-based
compensation plans in the first quarter of 2002 compared to the
first quarter of 2001 because of increased stock option exercises,
which resulted from our increased stock price as compared to the
prior year period.
o We received cash from the settlement of merger-related
contingencies related to the Dollar Express merger. We also
received approximately 56,400 shares in settlement of these
contingencies.
At March 31, 2002, our long-term borrowings were $37.0 million. We had
$50.0 million available through our bank facility. We also have $125.0 million
available under the Letter of Credit Reimbursement and Security Agreement, of
which approximately $55.5 million was committed to letters of credit issued for
routine purchases of imported merchandise.
Operating Leases
We have entered into operating leases known as synthetic leases for four of
our distribution centers. Effective March 12, 2001, we entered into an operating
lease facility for $165.0 million, of which approximately $113.0 million is
committed to the Stockton, Briar Creek and Savannah distribution centers as of
March 31, 2002. Under this type of agreement, an unrelated third party, in the
form of a special purpose entity, borrows funds under a construction agreement,
purchases the property, pays for the construction costs and subsequently leases
the facility to us. Because these arrangements are accounted for as operating
leases, the related fixed assets and lease liabilities are not included in our
balance sheet. The termination date of this operating lease facility is March
2006.
We committed $41.0 million during the first quarter of 2002 for our new
Marietta distribution center that is scheduled to open in early 2003 bringing
our total committment under the lease facility to $154.0 million. The Marietta
distribution center is being constructed to our specifications by an unrelated
third party, who is serving as the developer, subject to the terms and
conditions of a development agreement between the developer and us. The special
purpose entity provided the developer a $41.0 million construction loan, of
which the Company guaranteed approximately 89.9% of the amount outstanding under
the loan as defined in the agreements. The developer will satisfy the
construction loan no later than March 2003, at which time we have the option to
lease the distribution center under the lease facility or purchase the
distribution center outright.
The lease facility, among other things, requires the maintenance of certain
specified financial ratios, restricts the payment of certain distributions and
limits certain types of debt we can incur.
Changes are currently being proposed to the current accounting for
synthetic leases, which may make them less desirable in the future. The proposed
13
changes in the required accounting for these transactions may adversely affect
our results of operations and our consolidated balance sheets.
New Accounting Pronouncements
Statement of Financial Accounting Standards No. 143
In June 2001, the Financial Accounting Standards Board issued SFAS No. 143,
"Accounting for Asset Retirement Obligations," which addresses financial
accounting and reporting for obligations associated with the retirement of
tangible long-lived assets and the associated asset retirement costs. The
standard applies to legal obligations associated with the retirement of
long-lived assets that result from the acquisition, construction, development
and/or normal use of the asset. SFAS No. 143 is effective for fiscal years
beginning after June 15, 2002. Our management does not believe the
implementation of this standard will have a material effect on our financial
condition or results of operations.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
We are exposed to various types of market risk in the normal course of our
business, including the impact of interest rate changes and foreign currency
rate fluctuations. We may enter into interest rate swaps to manage our exposure
to interest rate changes, and we may employ other risk management strategies,
including the use of foreign currency forward contracts. We do not enter into
derivative instruments for any purpose other than cash flow hedging purposes.
Certain of our interest rate swaps do not qualify for hedge accounting treatment
under SFAS No. 133, as amended by SFAS No. 138, because they contain provisions
that "knockout" the swap when the variable interest rate exceeds a predetermined
rate.
Interest Rate Risk
The following table summarizes the financial terms and fair values of each
of our interest rate swap agreements at March 31, 2002:
Hedging Receive Pay Knockout
Instrument Variable Fixed Rate Expiration Fair Value
---------- -------- ----- ---- ---------- ----------
$19.0 million LIBOR 4.88% 7.75% 4/1/09 ($297,000)
interest rate swap
$10.0 million LIBOR 6.45% 7.41% 6/2/04 ($520,000)
interest rate swap
$5.0 million LIBOR 5.83% 7.41% 6/2/04 ($198,000)
interest rate swap
$25.0 million LIBOR 5.43% N/A 3/12/06 ($466,000)
interest rate swap
Due to many variables, management is not able to predict the changes in fair
value of our interest rate swaps. The fair values are the estimated amounts we
would pay or receive to terminate the agreements as of the reporting date. These
fair values are obtained from an outside financial institution.
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There have been no material changes in our interest rate risk exposure
during the first quarter of 2002.
Foreign Currency Risk
There have been no material changes to our market risk exposures resulting
from foreign currency transactions during the three months ended March 31, 2002.
PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS.
From time to time we are defendants in ordinary, routine litigation and
proceedings incidental to our business, including:
o employment-related matters;
o product safety matters, including product recalls by the Consumer
Products Safety Commission and personal injury claims; and
o the infringement of the intellectual property rights of others.
We have been sued by several salaried California employees who allege that
they should have been classified as non-exempt employees and, therefore, should
have received overtime compensation. The suits also request that the California
state court certify the case as a class action on behalf of all store managers,
assistant managers and merchandise managers in our California stores. We will
vigorously defend ourselves in this matter.
We do not believe that any of these matters will individually, or in the
aggregate, have a material adverse effect on our financial position or results
of operations.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
4.1 Second Amendment to the Dollar Tree Stores, Inc. Employee Stock
Purchase Plan dated November 20, 2001.
(b) Reports on Form 8-K:
The following reports on Form 8-K were filed during the first quarter of
2002:
1. Report on Form 8-K filed January 25, 2002, included the sales
results for the quarter and year ended December 31, 2001 and an
outlook for 2002.
Also, in the second quarter of 2002, we filed one report on Form 8-K:
1. Report on Form 8-K, filed April 26, 2002, included the earnings
results for the quarter ended March 31, 2002 and an outlook for
the remainder of 2002
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SIGNATURES
Pursuant to the requirements 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 13, 2002
DOLLAR TREE STORES, INC.
By: /s/ Frederick C. Coble
---------------------------------
Frederick C. Coble
Chief Financial Officer
(principal financial and accounting officer)
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