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 June 30, 1999
( ) 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 August 6, 1999, there were 61,940,070 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
June 30, 1999 and December 31, 1998.............................. 3
Condensed Consolidated Income Statements
Three months and six months ended June 30, 1999 and 1998......... 4
Condensed Consolidated Statements of Cash Flows
Six months ended June 30, 1999 and 1998.......................... 5
Notes to Condensed Consolidated Financial Statements.............. 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.............................. 8
Item 3. Quantitative and Qualitative Disclosures About Market Risk......... 14
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.................................................. 15
Item 4. Submission of Matters to a Vote of Security Holders................ 15
Item 5. Other Information.................................................. 15
Item 6. Exhibits and Reports on Form 8-K................................... 16
Signatures....................................................... 17
2
DOLLAR TREE STORES, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
(Unaudited)
June 30, December 31,
1999 1998
--------- ------------
ASSETS
Current assets:
Cash and cash equivalents............................. $ 36,502 $ 74,644
Merchandise inventories............................... 187,247 142,706
Deferred tax asset.................................... 7,615 6,709
Prepaid expenses and other current assets............. 7,656 7,451
------- -------
Total current assets.............................. 239,020 231,510
------- -------
Net property and equipment................................. 134,195 122,503
Deferred tax asset......................................... 2,420 2,194
Goodwill, net of accumulated amortization.................. 41,587 42,551
Other assets ............................................. 5,849 6,429
------- -------
TOTAL ASSETS...................................... $423,071 $405,187
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt (note 4)............ $ 25,000 $ 16,500
Accounts payable...................................... 60,322 53,030
Income taxes payable.................................. 4,936 21,353
Other current liabilities............................. 18,124 26,445
------- -------
Total current liabilities......................... 108,382 117,328
------- -------
Long-term debt, excluding current portion.................. 24,000 30,000
Other liabilities.......................................... 8,405 9,043
------- -------
Total liabilities................................. 140,787 156,371
------- -------
Shareholders' equity (note 3):
Common stock, par value $0.01. Authorized
300,000,000 shares, 61,887,293 shares issued
and outstanding at June 30, 1999 and authorized
100,000,000 shares, 61,380,418 shares issued
and outstanding at December 31, 1998................ 619 614
Additional paid-in capital............................ 66,541 53,030
Retained earnings..................................... 215,124 195,172
------- -------
Total shareholders' equity........................ 282,284 248,816
------- -------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY........ $423,071 $405,187
======= =======
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 Six Months Ended
June 30, June 30,
------------------ -----------------
1999 1998 1999 1998
---- ---- ---- ----
Net sales ........................................ $253,216 $205,209 $480,259 $385,808
Cost of sales......................................... 159,525 131,130 305,703 247,740
Merger related costs (note 3)......................... 443 -- 443 --
------- ------- ------- -------
Gross profit................................. 93,248 74,079 174,113 138,068
------- ------- ------- -------
Selling, general and administrative expenses:
Operating expenses................................. 61,710 49,463 117,835 95,460
Merger related expenses (note 3)................... 607 -- 607 --
Depreciation and amortization...................... 6,881 4,889 13,101 9,303
------- ------- ------- -------
Total selling, general
and administrative expenses................ 69,198 54,352 131,543 104,763
------- ------- ------- -------
Operating income...................................... 24,050 19,727 42,570 33,305
Interest expense...................................... 670 1,051 1,152 1,759
------- ------- ------- -------
Income before income taxes............................ 23,380 18,676 41,418 31,546
Provision for income taxes............................ 8,876 6,870 15,587 11,760
------- ------- ------- -------
Net income................................... $ 14,504 $ 11,806 $ 25,831 $ 19,786
======= ======= ======= =======
Net income per share (note 2):
Basic net income per share............................ $ 0.23 $ 0.19 $ 0.42 $ 0.32
======= ======= ======= =======
Diluted net income per share ......................... $ 0.21 $ 0.17 $ 0.38 $ 0.29
======= ======= ======= =======
Pro forma income data (note 3):
Net income......................................... $ 14,504 $ 11,806 $ 25,831 $ 19,786
Pro forma adjustment for C-corporation
income taxes..................................... 271 299 505 395
------- ------- ------- -------
Pro forma net income............................... $ 14,233 $ 11,507 $ 25,326 $ 19,391
======= ======= ======= =======
Pro forma basic net income per share............... $ 0.23 $ 0.19 $ 0.41 $ 0.32
======= ======= ======= =======
Pro forma diluted net income per share............. $ 0.21 $ 0.17 $ 0.37 $ 0.29
======= ======= ======= =======
Weighted average number of common
shares outstanding.................................. 61,815 61,182 61,679 61,051
======= ======= ======= =======
Weighted average number of common
shares and dilutive potential
common shares outstanding........................... 68,035 67,644 67,972 67,482
======= ======= ======= =======
See accompanying Notes to Condensed Consolidated Financial Statements
4
DOLLAR TREE STORES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Six Months Ended
June 30,
------------------
1999 1998
---- ----
Cash flows from operating activities:
Net income .................................................. $ 25,831 $ 19,786
------- -------
Adjustments to reconcile net income to net cash
used in operating activities:
Depreciation and amortization............................... 13,101 9,303
Loss (gain) on disposal of property and equipment........... (98) 402
Provision for deferred income taxes......................... (1,132) (999)
Changes in assets and liabilities increasing
(decreasing) cash and cash equivalents:
Merchandise inventories.................................. (44,541) (68,417)
Prepaid expenses and other current assets................ (205) 814
Other assets ............................................ 339 (115)
Accounts payable......................................... 7,565 (922)
Income taxes payable..................................... (12,175) (13,521)
Other current liabilities................................ (8,343) (1,517)
Other liabilities........................................ (288) 500
------- -------
Total adjustments....................................... (45,777) (74,472)
------- -------
Net cash used in operating activities .................. (19,946) (54,686)
------- -------
Cash flows from investing activities:
Capital expenditures .......................................... (23,952) (20,182)
Proceeds from sale of property and equipment................... 86 138
------- -------
Net cash used in investing activities................... (23,866) (20,044)
------- -------
Cash flows from financing activities:
Distributions paid (note 3).................................... (1,410) (1,025)
Proceeds from long-term debt................................... 2,500 89,200
Repayment of long-term debt and facility fees.................. -- (57,407)
Net change in notes payable to bank............................ -- 1,919
Principal payments under capital lease obligations............. (225) (183)
Proceeds from stock issued pursuant to
stock-based compensation plans................................ 4,805 3,520
------- -------
Net cash provided by financing activities............... 5,670 36,024
------- -------
Net decrease in cash and cash equivalents....................... (38,142) (38,706)
Cash and cash equivalents at beginning of period................ 74,644 47,638
------- -------
Cash and cash equivalents at end of period...................... $ 36,502 $ 8,932
======= =======
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 of Dollar Tree Stores, Inc.
and subsidiaries (the Company) at June 30, 1999, and for the three- and
six-month periods then ended, are unaudited and reflect all adjustments
(consisting only of normal recurring adjustments) which are, in the opinion of
management, necessary for a fair presentation of the financial position and
operating results for the interim periods. The condensed consolidated income
statements for the periods ended June 30, 1998 reflect the results of operations
for Dollar Tree Stores, Inc. and Tehan's Merchandising, Inc. (Only $One) for the
three- and six-month periods then ended combined with the Step Ahead
Investments, Inc. (Step Ahead) three- and six-month periods ended July 26, 1998.
The condensed consolidated statement of cash flows for the period ended June 30,
1998 reflects cash flows for Dollar Tree Stores, Inc. and Only $One for the
six-month period then ended combined with the Step Ahead six-month period ended
July 26, 1998. The condensed consolidated balance sheet as of June 30, 1998
reflects the financial position of Dollar Tree Stores, Inc. and Only $One on
that date combined with the financial position of Step Ahead as of July 26,
1998. 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, 1998, contained in the
Company's Annual Report on Form 10-K. The results of operations for the three-
and six-month periods ended June 30, 1999 are not necessarily indicative of the
results to be expected for the entire year ending December 31, 1999.
2. NET INCOME PER SHARE
The following table sets forth the calculation of basic and diluted net
income per share:
Three months ended Six months ended
June 30, June 30,
----------------- -----------------
1999 1998 1999 1998
---- ---- ---- ----
(In thousands, except per share data)
Basic net income per share:
Net income................................ $14,504 $11,806 $25,831 $19,786
------ ------ ------ ------
Weighted average number of
common shares outstanding.............. 61,815 61,182 61,679 61,051
------ ------ ------ ------
Basic net income per share...... $ 0.23 $ 0.19 $ 0.42 $ 0.32
====== ====== ====== ======
Diluted net income per share:
Net income................................ $14,504 $11,806 $25,831 $19,786
------ ------ ------ ------
Weighted average number of
common shares outstanding.............. 61,815 61,182 61,679 61,051
Dilutive effect of stock options and
warrants (as determined by applying
the treasury stock method)............. 6,220 6,462 6,293 6,431
------ ------ ------ ------
Weighted average number of common
shares and dilutive potential
common shares outstanding.............. 68,035 67,644 67,972 67,482
------ ------ ------ ------
Diluted net income per share.... $ 0.21 $ 0.17 $ 0.38 $ 0.29
====== ====== ====== ======
6
3. ACQUISITION
On June 30, 1999, the Company completed a merger with privately-held, New
York-based Tehan's Merchandising, Inc. (Only $One) which operates 24 stores
under the name "Only $One". These stores offer variety merchandise at a fixed
price of $1.00 and are located in New York state. The merger qualified as a
tax-free exchange of stock and was accounted for as a pooling of interests. The
Company issued 501,600 shares of Common Stock for all of the Only $One
outstanding common stock. In connection with the merger, the Company incurred
approximately $1.0 million ($0.8 million after taxes or $0.01 diluted net income
per share) of merger related costs and expenses, consisting primarily of
writedowns of inventory and professional fees, which were charged to operations
during the quarter ended June 30, 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
condensed consolidated income statements represent the estimated taxes that
would have been recorded had Only $One been a C-corporation for the entire
periods presented. Distributions paid presented in the condensed consolidated
statements of cash flows represent distributions paid to the Only $One
shareholders.
4. INTEREST RATE SWAP AGREEMENT
On April 1, 1999, the Company entered into an interest rate swap agreement
related to the $19.0 million Loan Agreement with the Mississippi Business
Finance Corporation (Loan Agreement). This swap agreement converts the variable
rate to a fixed rate and reduces the Company's exposure to interest rate
fluctuations. Under this agreement, the Company pays interest to the bank which
provided the swap at a fixed rate of 5.5%. In addition, the bank pays the
Company at a variable interest rate, which approximates the rate on the Loan
Agreement, which was 5.2% at June 30, 1999. The swap, effective through April 1,
2009, is for the entire amount outstanding under the Loan Agreement. The bank
which provided the swap has the option to cancel it on April 1, 2006. The Loan
Agreement amount is included in the current portion of long-term debt.
5. LEASES
During June 1999, the Company entered into an $18.0 million operating lease
agreement for the purpose of financing construction costs to build a new
distribution center in Stockton, California, which will replace the existing
leased facilities located in the Sacramento, California area. Under this
agreement, the lessor purchases the property, pays for the construction costs
and subsequently leases the facility to 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 outstanding 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.
7
During April 1999, the Company entered into an agreement to sublease the
Memphis distribution facility through March 2000 with an option for the
sublessee to renew the lease through March 2001.
6. STORE OPENING COSTS
In accordance with Statement of Position (SOP) 98-5, Reporting on the Costs
of Start-up Activities, effective January 1, 1999, the Company expenses store
opening costs as incurred. The impact of the implementation of this SOP was not
material to the Company's financial results.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
A WARNING ABOUT FORWARD-LOOKING STATEMENTS: We have made "forward-looking
statements" in this document as that term is used in the Private Securities
Litigation Reform Act of 1995. Such statements are based on the beliefs and
assumptions of our management, and on information currently available to our
management. Our assumptions, beliefs and current information could be mistaken.
Forward-looking statements include any statements preceded by, followed by or
including words such as "believe," "anticipate," "expect," "intend," "plan,"
"view" or "estimate." Forward-looking statements also include, and are subject
to risks relating to, our future operations, performance, or financial condition
such as:
- comparable store net sales trends,
- expansion plans and store openings,
- dependence on imports and vulnerability to foreign economic and political
conditions as well as import restrictions, duties and tariffs,
- increases in shipping costs, the minimum wage, and other costs,
- our ability to sublease the Memphis facility beyond March 2000, and
- Year 2000 compliance.
Any statements concerning our future operations, performance, or financial
condition could be inaccurate or incorrect.
Recent Development
On June 30, 1999, Dollar Tree merged with the operator of 24 Only $One
stores. The Only $One stores are located in central and upstate New York and
average approximately 10,000 square feet in size. We issued 501,600 shares of
our common stock in exchange for all the outstanding common stock of Only $One.
We accounted for the merger as a pooling of interests. Under this form of
accounting, we combined the condensed consolidated financial statements of
Dollar Tree with those of Only $One, not only since the date of the merger, but
also retroactively. As a result, we have adjusted our condensed consolidated
financial statements to reflect results of operations as if Only $One had been a
part of Dollar Tree throughout all the periods discussed. Quarterly combined
financial data, which combines Dollar Tree and Only $One, were filed on a Form
8-K on July 22, 1999.
8
The Three Months Ended June 30, 1999 Compared To The Three Months Ended June 30,
1998
Net Sales. Net sales increased 23.4% to $253.2 million for the three months
ended June 30, 1999 from $205.2 million for the three months ended June 30,
1998. We attribute this $48.0 million increase to sales at new stores opened in
1999 and 1998 which are not included in our comparable store net sales
calculation and a 1.8% increase in comparable store net sales in the second
quarter of 1999.
We opened 66 new stores and closed 2 stores during the second quarter of
1999, compared to 61 new stores opened and one store closed in the second
quarter of 1998. We plan to expand by 230 to 235 stores in 1999, including the
24 Only $One stores acquired in June 1999. Our management anticipates that
future net sales growth will come mostly from new store openings.
The comparable store net sales calculation includes sales at the 98 Cent
Clearance Center stores, acquired in December 1998, and sales at the Only $One
stores, acquired in June 1999. Both acquisitions were accounted for as poolings
of interests. The shift in timing of the Easter holiday caused a portion of the
Easter selling season to occur in the first quarter of 1999 which we believe
adversely affected our comparable store net sales.
Most retailers can increase the price of their merchandise as well as sell
more merchandise in order to increase their comparable store net sales. As a
fixed price point retailer, we do not have the ability to raise our prices, so
our comparable store net sales increase only when we sell more merchandise. We
believe that our future comparable store net sales increases, if any, will be
lower than those we have experienced in the past. Our internal business plan
continues to call for a two to three percent increase in comparable store net
sales for calendar year 1999.
Gross Profit. Gross profit increased $19.2 million, or 25.9%. Our gross
profit margin (gross profit expressed as a percentage of net sales) increased to
36.8% in the second quarter of 1999 from 36.1% in the same period in 1998. If
you exclude merger related costs otherwise included in cost of sales (primarily
related to merchandise markdowns), then the gross profit margin increased to
37.0%. This increase occurred mainly because certain costs declined as a
percentage of net sales:
- Our inventory shrinkage decreased, mainly because of lower shrinkage in
our distribution centers and improved inventory controls at our acquired
stores. This decrease may not continue in future periods.
- Our distribution costs were lower because of efficiencies at our two
newest distribution centers. The Chesapeake, VA facility, which has been
in operation since early 1998, is more mature than a year ago, and the
Olive Branch, MS facility, opened in early 1999, was able to service more
stores than we forecast.
These decreased costs more than offset a slight increase in merchandise
costs for the quarter. Our merchandise costs, which include freight costs, were
higher this year compared to last because our merchandise mix included more
domestic merchandise than during the second quarter of 1998. Domestics generally
carry a higher cost than imported goods. We attribute the change in
9
our mix year over year to the receipt of a higher quantity of imports than usual
in 1998 as we sought to avoid last summer's shipping container shortage.
A recent increase in our transpacific shipping rates did not have a
noticeable impact on our results for the quarter. Our management believes that
the impact of these higher rates, which went into effect during the second
quarter of 1999, can be substantially offset by other cost savings.
SGA Expenses. Selling, general and administrative (SGA) expenses, not
including depreciation and amortization, increased $12.9 million, or 26.0%. If
you exclude merger related expenses, SGA expenses increased as a percentage of
net sales to 24.4% in the second quarter of 1999 from 24.1% in the second
quarter of 1998. This increase happened primarily because our comparable store
net sales did not allow us to leverage our fixed costs. Depreciation and
amortization increased $2.0 million, to 2.7% a a percentage of net sales in 1999
from 2.4% in 1998. This percentage increase is mainly the result of depreciation
related to the new distribution facility in Olive Branch, Mississippi.
Increases in expenses can have a negative impact on our operating results,
especially since we cannot pass on increased expenses to our customers by
increasing our merchandise prices. Consequently, our future success will depend
in large part on our ability to control costs.
Proposals now before the U.S. Congress call for increasing the federal
minimum wage by $1.00 an hour over two or three years. Our management believes
that an increase in the minimum wage, if eventually passed into law, could have
a significant impact on our payroll costs.
Operating Income. Our operating income increased $4.3 million or 21.9%. As
a percentage of net sales, operating income decreased to 9.5% in the second
quarter of 1999 from 9.6% in the same period in 1998. If you exclude merger
related costs and expenses, operating income increased to $25.1 million in 1999
from $19.7 million in 1998 and increased as a percentage of net sales to 9.9%
from 9.6%. These increases were attributable to the factors discussed above.
Interest Expense. Interest expense decreased to $0.7 million in the second
quarter of 1999 from $1.1 million in the second quarter of 1998. This decrease
was primarily a result of lower levels of debt in 1999 compared to 1998,
resulting from a higher cash position throughout the three months ended June 30,
1999.
The Six Months Ended June 30, 1999 Compared To The Six Months Ended June 30,
1998
Net Sales. Net sales increased 24.5% to $480.3 million for the six months
ended June 30, 1999 from $385.8 million for the six months ended June 30, 1998.
We attribute this $94.5 million increase to sales at new stores opened in 1999
and 1998 which are not included in our comparable store net sales calculation
and a 3.5% increase in comparable same store sales in the first six months of
1999.
10
We opened 115 new stores and closed three stores during the first half of
1999, compared to 102 new stores opened and five stores closed in the first half
of 1998.
Gross Profit. Gross profit increased $36.0 million, or 26.1%. Our gross
profit margin increased to 36.3% in the first six months of 1999 from 35.8% in
the same period in 1998. Merger related costs did not change the year-to-date
gross margin percentage. The year-to-date increase in gross margin was impacted
by the same factors as discussed above.
SGA Expenses. SGA, excluding depreciation and amortization, increased $23.0
million, or 24.1%, in the first half of 1999. As a percentage of net sales, SGA
expenses remained constant at 24.7%. If you exclude merger related expenses, SGA
expenses decreased to 24.5% for the first half of 1999 from 24.7% during the
same period in 1998. This decrease happened primarily because our year-to-date
comparable store sales allowed us to leverage our fixed costs. Depreciation and
amortization increased $3.8 million, to 2.7% as a percentage of net sales in
1999 from 2.4% in 1998. This percentage increase is mainly the result of
depreciation related to the new distribution facility in Olive Branch,
Mississippi.
Operating Income. Our operating income increased $9.3 million or 27.8%. As
a percentage of net sales, operating income increased to 8.9% in the first half
of 1999 from 8.6% in the same period in 1998. If you exclude merger related
costs and expenses, operating income increased to $43.6 million in 1999 from
$33.3 million in 1998 and increased as a percentage of net sales to 9.1% from
8.6%. These increases were attributable to the factors discussed above.
Interest Expense. Interest expense decreased to $1.2 million in the first
six months of 1999 from $1.8 million in the first six months of 1998. This
decrease was primarily a result of lower levels of debt in 1999 compared to
1998, resulting from a higher cash position throughout the six months ended June
30, 1999.
Liquidity and Capital Resources
Our business requires capital primarily to open new stores and operate
existing stores. Our working capital requirements for existing stores are
seasonal in nature and typically reach their peak in the months of September and
October. Historically, we have met our seasonal working capital requirements for
existing stores and funded our store expansion program from internally generated
funds and borrowings under our credit facilities.
The following table compares certain cash-related information for the first
two quarters of 1999 and 1998:
Six Months Ended June 30,
1999 1998
---- ----
(in millions)
Net cash provided by (used in):
Operations..................... $(19.9) $(54.7)
Investing activities........... (23.9) (20.0)
Financing activities........... 5.7 36.0
11
For both periods, we generally expended net cash used in operations to
build inventory levels, while net cash used in investing activities was used
primarily to open new stores. The decrease in 1999 net cash used in operations
reflects the lower amount of inventory compared to the same period in 1998, when
imported goods were received earlier to avoid a possible shipping container
shortage in Southeast Asia. Inventory quantities at comparable stores are
similar year over year; the decrease is primarily seen in inventory quantities
in the distribution centers.
Net cash provided by financing activities was obtained from:
- the exercise of stock options in both years,
- in 1998, borrowings under our bank facility used to fund our seasonal
working capital needs, and
- in 1999, from the issuance of an additional $2.5 million in callable
bonds related to the construction of the Olive Branch distribution
facility.
At June 30, 1999, our borrowings under our bank facility, senior notes and
bonds were $49.0 million and we had an additional $135.0 million available
through our bank facility. Of the amount available, approximately $42.3 million
was committed to letters of credit issued for the routine purchase of foreign
merchandise.
During June 1999, we entered into an $18.0 million operating lease
agreement to finance the construction of a new distribution center in Stockton,
California. This facility will replace the leased distribution center located in
the Sacramento, California area. Unlike the Chesapeake and Olive Branch
distribution centers, the new facility will not initially include an automated
conveyor and sorting system. We expect to expand and automate this facility as
we increase our selling capacity in the northern and central California and
Nevada regions. The new facility is scheduled to be operational in the first
quarter of 2000.
Year 2000 Compliance
We use a large number of computer software programs throughout our entire
organization, such as purchasing, distribution, retail store management,
financial business systems and various administrative functions. We developed
some of these programs in-house and bought others from vendors.
We have been evaluating and adjusting all known date-sensitive systems
and equipment for Year 2000 compliance. We define Year 2000 compliance to mean
that a given system continues to function appropriately after December 31, 1999,
with no significant business interruption. We divided our Year 2000 project into
four phases:
12
- inventory and initial assessment,
- remediation and testing,
- implementation and re-testing, and
- contingency planning.
The assessment and remediation and testing phases of the Year 2000 project
are complete and include both information technology systems, such as computer
equipment and software, as well as non-information technology equipment, such as
warehouse conveyor systems. We will continue to monitor and test our systems to
ensure ongoing compliance.
Our plan provided for internal compliance of mission-critical systems by
mid-1999. While no one can offer a realistic guarantee that there won't be any
business disruptions, we believe that the majority of our internal systems,
including substantially all mission-critical systems, are currently Year 2000
compliant. Some programs and equipment were replaced beginning in late 1998 by
routine upgrades which provided numerous system enhancements. These replacement
programs and equipment are Year 2000 compliant. The upgrades were previously
planned and were not accelerated due to Year 2000 issues. We have not deferred
any information technology projects to address the Year 2000 issue.
We have relied primarily on internal resources to identify, correct or
reprogram and test systems for Year 2000 compliance. To date, we have spent less
than $150,000 in modifying our systems for the Year 2000; the total costs of
modifying our current systems are not expected to exceed $275,000. These costs
are not expected to have a material adverse effect on our financial condition
and results of operations in future periods.
Additionally, we are continuing to communicate with service providers and
domestic suppliers of merchandise to assess their Year 2000 readiness and the
extent to which we may be vulnerable to any third parties' failure to correct
their own Year 2000 issues. Many of these parties have stated that their ability
to supply us will not be affected by the Year 2000 issue. However, we cannot be
sure of their timely compliance and our operations could suffer due to the
failure of a significant third part to become Year 2000 compliant.
We feel we are unable to adequately assess the potential effect of Year
2000 problems on our international suppliers, particularly in China. Several
recent studies suggest that the preparedness of China and other Asian countries
is considerably less than that of the United States and Europe, particularly in
the fields of manufacturing and utilities. We cannot predict the duration or
severity of any disruptions which may occur in China or the home countries of
our other overseas suppliers. In addition, we have evaluated the preparedness of
third parties who handle our international merchandise shipping for China. We
believe these third parties are substantially Year 2000 compliant. A failure in
our normal merchandise supply chain from China or other overseas suppliers could
have a material adverse effect on our business.
Although we anticipate that minimal business disruption will occur as a
result of Year 2000 issues, possible consequences include, but are not limited
to, loss of communications links with store locations, customs delays, loss of
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electric power, and the inability to process transactions or engage in similar
normal business activities. In addition, the United States and other world
economies could witness unusual purchasing patterns or other disruptions if
large numbers of consumers believe interruptions in power, communications, water
or food supplies are likely, regardless of the actual risks. Any such
disruptions could affect our business operations. With the substantial
completion of the assessment, implementation and testing phases of our plan, we
are now in the process of analyzing reasonably likely worst-case scenarios in
order to establish appropriate contingency plans. We expect to establish any
needed contingency plans by early in the fourth quarter of 1999.
The cost of the conversions and the completion dates are based on
management's best estimates and may be updated as additional information becomes
available. The above section, even if incorporated into other documents or
disclosures, is a Year 2000 readiness disclosure as defined under the Year 2000
Information and Readiness Disclosure Act of 1998
New Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board (FASB) issued its
Statement of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" (SFAS No. 133). SFAS No. 133 establishes
standards for derivative instruments and hedging activities and requires that
companies recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair value.
SFAS No. 133 is effective for all fiscal quarters of fiscal years beginning
after June 15, 1999. However, in June 1999, the FASB issued its Statement of
Financial Accounting Standards 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 is
reviewing the impact of the implementation of this pronouncement on our
financial condition and results of operations.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
During April 1999, as a result of the favorable interest rate environment,
we entered into an interest rate swap agreement that converts a portion of our
variable rate debt to a fixed rate and reduces our exposure to interest rate
fluctuations. Under this agreement, we pay interest to the bank which provided
the swap at a fixed rate of 5.5%. In addition, the bank pays us at a variable
interest rate which is similar to the rate under the callable bonds and was 5.2%
at June 30, 1999. The swap is fo the entire amount outstanding under our
callable bonds, which was $19.0 million at June 30, 1999, and is effective
through April 1, 2009. The bank which provided the swap has the option to cancel
it on April 1, 2006.
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PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS.
We previously reported in our 1998 Annual Report on Form 10-K a dispute
involving Michael and Pamela Alper and a corporation they control. No litigation
is currently pending against us in this matter.
We recalled approximately 155,000 retractable dog leashes which allegedly
caused several personal injuries, as previously reported in our 1998 Annual
Report on Form 10-K. There have been no other material developments regarding
this matter in 1999.
Additionally, the company is a party to ordinary routine litigation and
proceedings incidental to its business, including certain matters which may
occasionally be asserted by the U.S. Consumer Product Safety Commission, none of
which is individually or in the aggregate material to the company.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
At our Annual Meeting of Shareholders held on June 3, 1999, the following
people were elected to the Board of Directors:
Votes For Votes Withheld
--------- --------------
Macon F. Brock, Jr. 57,239,178 256,636
Richard G. Lesser 57,245,626 250,188
As Class I directors, Mr. Brock and Mr. Lesser will serve until the Annual
Meeting of Shareholders in 2002, or such time as successors are elected and
qualified.
J. Douglas Perry, John F. Megrue, H. Ray Compton, Thomas A. Saunders, III,
Alan L. Wurtzel and Frank Doczi continue as directors after the meeting and no
elections were held with respect to their offices. Allan W. Karp has retired his
directorship.
At the same meeting, an amendment to the Articles of Incorporation was
adopted, increasing our authorized common stock to 300,000,000 shares from
100,000,000 shares.
For 51,269,401
Against 6,199,543
Abstain 26,870
Item 5. OTHER INFORMATION.
Grant of Options to Directors
On June 2, 1999, options to purchase 13,500 shares of Common Stock each
were granted to Frank Doczi and Alan Wurtzel as continuing directors, under the
terms of the Stock Incentive Plan. Also on this date, an option to purchase
25,313 shares of Common Stock was granted to Richard Lesser as a new director,
under the terms of the Stock Incentive Plan. These options are immediately
exercisable and have an exercise price of $34.3125 per share.
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Item 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
The following documents are filed herewith:
3.1 Third Restated Articles of Incorporation of Dollar Tree Stores, Inc.,
as amended
10.1 Merger Agreement by and among Dollar Tree Stores, Inc., Dollar Tree
New York, Inc., Tehan's Merchandising, Inc. and The Shareholders of
Tehan's Merchandising, Inc., dated June 15, 1999
10.2 Credit Agreement among First Security Bank, National Association and
First Union National Bank, dated June 2, 1999
10.3 Agency Agreement between Dollar Tree Distribution, Inc. and First
Security Bank, National Association, dated June 2, 1999
10.4 Trust Agreement between First Union National Bank and First Security
Bank, National Association, dated June 2, 1999
10.5 Security Agreement between First Security Bank, National Association
and First Union National Bank and accepted and agreed to by Dollar
Tree Distribution, Inc., dated June 2, 1999
10.6 Lease Agreement between First Security Bank, National Association and
Dollar Tree Distribution, Inc., dated June 2, 1999
10.7 Participation Agreement among Dollar Tree Distribution, Inc., First
Security Bank, National Association and First Union National Bank,
dated June 2, 1999
(b) Reports on Form 8-K.
The following reports on Form 8-K were filed during the second quarter of
1999:
1. Report on Form 8-K, filed April 27, 1999, included a press release
regarding earnings for the quarter ended March 31, 1999.
2. Report on Form 8-K, filed June 10, 1999, included a press release
regarding the Annual Meeting of Shareholders held on June 3, 1999.
Also, in July 1999, we filed one Form 8-K.
Report on Form 8-K, filed July 22, 1999, included a press release regarding
earnings for the quarter ended June 30, 1999. It also included quarterly
financial data for the years 1998 and 1999 which has been restated on a combined
basis to account for the pooling of interests between Dollar Tree Stores, Inc.
and the operator of 24 Only $One stores.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
DATE: August 10, 1999
DOLLAR TREE STORES, INC.
By: /s/ Frederick C. Coble
--------------------------
Frederick C. Coble
Senior Vice President,
Chief Financial Officer
(principal financial and
accounting officer)
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