Exhibit 99.1
Index to Consolidated Financial Statements Page
----
Independent Auditors' Report........................................ 2
Consolidated Balance Sheets as of December 31, 1999 and 1998........ 3
Consolidated Income Statements for the years ended
December 31, 1999, 1998 and 1997............................. 4
Consolidated Statements of Shareholders' Equity
for the years ended December 31, 1999, 1998 and 1997......... 5
Consolidated Statements of Cash Flows for the years ended
December 31, 1999, 1998 and 1997............................. 6
Notes to Consolidated Financial Statements......................... 7
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
Dollar Tree Stores, Inc.:
We have audited the accompanying consolidated balance sheets of Dollar Tree
Stores, Inc. and subsidiaries (the Company) as of December 31, 1999 and 1998,
and the related 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 consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these 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.
In our opinion, the 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.
/s/ KPMG LLP
Norfolk, Virginia
November 6, 2000
2
DOLLAR TREE STORES, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (Note 2)
December 31,
1999 1998
---- ----
(In thousands, except share data)
ASSETS
Current assets
Cash and cash equivalents................................................ $ 181,587 $ 84,714
Merchandise inventories.................................................. 192,838 154,719
Deferred tax asset (Note 3).............................................. 6,093 6,709
Prepaid expenses and other current assets................................ 14,588 7,932
--------- ---------
Total current assets................................................. 395,106 254,074
Property and equipment, net (Notes 4 and 5)................................... 157,368 131,461
Deferred tax asset (Note 3)................................................... 470 2,194
Goodwill, net of accumulated amortization..................................... 42,394 42,551
Other assets, net (Note 4).................................................... 15,895 6,488
--------- ---------
Total Assets......................................................... $ 611,233 $ 436,768
========= =========
LIABILITIES, MANDITORILY REDEEMABLE PREFERRED STOCK AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable......................................................... $ 73,878 $ 59,882
Income taxes payable (Note 3)............................................ 29,193 21,353
Other current liabilities (Note 5)....................................... 34,942 30,934
Current portion of long-term debt (Note 6)............................... 28,070 16,638
Current installments of obligations under capital
leases (Note 4) ................................................... 3,190 509
--------- ---------
Total current liabilities............................................ 169,273 129,316
Long-term debt, excluding current portion (Note 6)............................ 49,138 34,136
Obligations under capital leases, excluding
current installments (Note 4)............................................... 28,375 2,476
Common stock put warrants (Note 8)............................................ 4,394 --
Other liabilities ........................................................... 8,644 8,265
--------- ---------
Total liabilities.................................................... 259,824 174,193
Cumulative convertible manditorily redeemable preferred
stock (Note 8).............................................................. 35,171 --
Shareholders' equity (Notes 8 and 10):
Common stock, par value $0.01. 450,000,000 shares authorized,
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.......................... 659 652
Additional paid-in capital............................................... 75,031 55,522
Retained earnings........................................................ 240,548 206,401
--------- ---------
Total shareholders' equity........................................... 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........................................... $ 611,233 $ 436,768
========= =========
See accompanying Notes to Consolidated Financial Statements.
3
DOLLAR TREE STORES, INC.
AND SUBSIDIARIES
CONSOLIDATED INCOME STATEMENTS (Note 2)
Year Ended December 31,
------------------------------------------
1999 1998 1997
---- ---- ----
(In thousands, except per share data)
Net sales......................................................... $ 1,351,820 $ 1,073,886 $ 847,830
Cost of sales (Note 4)............................................ 854,124 681,387 551,926
Merger related costs ............................................. 443 1,301 --
----------- ----------- ---------
Gross profit ............................................ 497,253 391,198 295,904
----------- ----------- ---------
Selling, general and administrative expenses
(Notes 4, 7 and 9):
Operating expenses............................................ 290,241 234,197 189,060
Merger related expenses....................................... 607 4,024 --
Depreciation and amortization................................. 30,809 22,463 16,017
----------- ----------- ---------
Total selling, general and
administrative expenses................................ 321,657 260,684 205,077
----------- ----------- ---------
Operating income......................................... 175,596 130,514 90,827
Interest income................................................... 1,743 604 145
Interest expense (Note 6)......................................... (7,429) (5,217) (3,831)
----------- ----------- ---------
Income before income taxes............................... 169,910 125,901 87,141
Provision for income taxes (Note 3)............................... 63,333 44,583 31,323
----------- ----------- ---------
Net income............................................... 106,577 81,318 55,818
Less: Preferred stock dividends and accretion (Note 8)............ 7,027 -- --
----------- ----------- ---------
Net income available to common shareholders ............. $ 99,550 $ 81,318 $ 55,818
=========== =========== =========
Pro forma income data:
Net income available to common shareholders.................. $ 99,550 $81,318 $ 55,818
Pro forma adjustment for
C-corporation income taxes................................. 505 4,804 2,279
----------- ----------- ---------
Pro forma net income available to common shareholders $ 99,045 $ 76,514 $ 53,539
=========== =========== =========
Pro forma basic net income per common share.................. $ 1.01 $ 0.79 $ 0.55
=========== =========== =========
Pro forma diluted net income per common share................ $ 0.92 $ 0.71 $ 0.50
=========== =========== =========
Weighted average number of common shares outstanding ............. 98,435 97,454 96,747
=========== =========== =========
Weighted average number of common shares and dilutive
potential common shares outstanding...................... 107,960 107,115 106,149
=========== =========== =========
See accompanying Notes to Consolidated Financial Statements.
4
DOLLAR TREE STORES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (Note 2)
Years ended December 31, 1999, 1998 and 1997
Common Additional Share-
Stock Common Paid-in Retained holders'
Shares Stock Capital Earnings Equity
------ ----- ------- -------- ------
(In thousands, except share data)
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 (Note 8) ....................... -- -- -- (7,027) (7,027)
---------- ----- -------- -------- ---------
Balance at December 31, 1999...................... 98,842,201 $ 659 $ 75,031 $240,548 $ 316,238
========== ===== ======== ======== =========
See accompanying Notes to Consolidated Financial Statements.
5
DOLLAR TREE STORES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Note 2)
Year Ended December 31,
---------------------------------------------
1999 1998 1997
---- ---- ----
(In thousands)
Cash flows from operating activities:
Net income................................................... $ 106,577 $ 81,318 $ 55,818
--------- --------- ---------
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization............................ 30,809 22,463 16,017
Loss on disposal of property and equipment............... 692 1,664 290
Lease loss charge........................................ 529 1,125 --
Provision for deferred income taxes...................... 2,340 (1,207) (3,503)
Accretion of common stock put warrants to
redemption value....................................... 382 -- --
Changes in assets and liabilities increasing
(decreasing) cash and cash equivalents:
Merchandise inventories.................................. (37,391) (31,666) (21,006)
Prepaid expenses and other current assets................ (7,488) (292) 1,235
Other assets ............................................ 449 265 (293)
Accounts payable......................................... 13,824 (1,794) 10,409
Income taxes payable..................................... 14,118 6,682 9,366
Other current liabilities................................ 4,008 7,197 6,386
Other liabilities........................................ (294) (230) 1,301
--------- --------- ---------
Total adjustments................................... 21,978 4,207 20,202
--------- --------- ---------
Net cash provided by operating activities........... 128,555 85,525 76,020
--------- --------- ---------
Cash flows from investing activities:
Acquisition, net of cash acquired............................ (320) -- --
Capital expenditures......................................... (55,013) (57,212) (63,476)
Proceeds from sale of property and equipment................. 172 174 159
--------- --------- ---------
Net cash used in investing activities .............. (55,161) (57,038) (63,317)
--------- --------- ---------
Cash flows from financing activities:
Distributions paid........................................... (60,934) (6,314) (4,456)
Proceeds from long-term debt................................. 22,500 17,500 31,350
Proceeds from revolving credit facilities.................... 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................ (1,966) (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........... (1,151) (474) (354)
Proceeds from issuance of preferred stock and
common stock put warrants.................................. 32,156 -- --
Proceeds from stock issued pursuant to
stock-based compensation plans ............................ 8,769 4,952 2,525
--------- --------- ---------
Net cash provided by financing activities........... 23,479 7,315 27,199
--------- --------- ---------
Net increase in cash and cash equivalents......................... 96,873 35,802 39,902
Cash and cash equivalents at beginning of year ................... 84,714 48,912 9,010
--------- --------- ---------
Cash and cash equivalents at end of year.......................... $ 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
========= ========= ========
See accompanying Notes to Consolidated Financial Statements.
6
DOLLAR TREE STORES, INC. AND SUBSIDIARIES
NOTES TO 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 house wares, 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.
On May 25, 2000 the Board of Directors authorized a stock dividend, payable
June 19, 2000 to shareholders of record as of June 12, 2000, whereby the Company
issued one-half share for each outstanding share of Common Stock. As a result,
all share and per share data in these 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
The 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. 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.
7
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.
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.
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
8
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.
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 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.
9
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 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,
as amended by SFAS No. 138, 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.
10
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 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 0.8772 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 converting
all of Dollar Express's preferred shares 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 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 consolidated statements of cash flows
represents distributions paid to the Dollar Express shareholders for payment of
their pass-through tax liabilities.
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 consolidated financial statements.
11
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 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 write downs 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 write
downs 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
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 consolidated
statements of cash flows represents distributions paid to the Only $One
shareholders for payment of their pass-through tax liabilities.
12
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.
NOTE 3 - INCOME TAXES
The provision for income taxes for the years ended December 31, 1999, 1998
and 1997 consists of the following:
1999 1998 1997
---- ---- ----
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
======== ======== ========
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:
13
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 carry backs 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 carry backs 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.
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
=======
14
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 a five year, $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
lease provides for a residual value guarantee and includes a purchase option
based on the initial cost of the property plus any unpaid interest and rents
under the lease agreement. Each reporting period, the Company estimates its
liability 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 at 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 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.
15
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 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
======== ========
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
======= =======
16
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.
17
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 financial institution which provided
the swap at a fixed rate of 4.99%. In exchange, the financial institution pays
the Company at a variable interest rate, which approximates the rate on the Loan
Agreement. The variable interest rate of the swap is subject to adjustment
monthly. For months in which the interest rate as calculated under the agreement
is greater than 8.28% (the knockout rate), no payments are made by either party.
The swap, effective through April 1, 2009, is for the entire amount outstanding
under the Loan Agreement.
Effective September 1, 2000, the Company amended its existing interest rate
swap agreement to reduce the fixed rate of interest under the swap from 4.99% to
4.88%. The knockout rate provision of the swap was reduced from 8.28% to 7.75%.
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 and between December 1, 2000 and
March 1, 2001 to $0.
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
18
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.
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 (see note
11).
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, payable June 19, 2000 to shareholders of record as of June 12, 2000,
whereby the Company issued one-half share for each outstanding share of Common
Stock. All share and per share data in these 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.
19
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 Dollar
Express common stock. 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 Dollar Express common shares, 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 a result of
the merger with Dollar Express, all accrued and unpaid preferred stock dividends
were forfeited and credited to additional paid-in capital in the second quarter
of 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. As a result of the merger with Dollar Express, the book value
of the preferred stock and common stock put warrants were credited to additional
paid-in capital during the second quarter of 2000.
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.
20
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:
1999 1998 1997
---- ---- ----
(In thousands, except per share data)
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
======== ======== ========
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.
21
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:
1999 1998 1997
---- ----- ----
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
======== ======== ========
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
22
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.
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.
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
------ ----- ------ ----- ------ -----
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
23
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
- ------ ---- ---- ----- ---- -----
$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
========= ==========
<FN>
(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.
</FN>
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 five year, $35,000
operating lease agreement to finance the construction of a new automated
distribution center in Savannah, Georgia. On August 28, 2000, the Company
amended its existing operating lease agreement related to the Stockton
distribution center for the purpose of financing construction costs to build a
new $40.0 million distribution center in Briar Creek, Pennsylvania. The Briar
Creek facility will replace the existing leased facilities located in
Philadelphia, Pennsylvania. The lease term expires in June 2004. Under this type
of agreement the lessor purchases the property, pays for the construction costs
24
and subsequently leases the facility to the Company. Each lease provides for a
residual value guarantee and includes a purchase option based on the initial
cost of the property plus any unpaid interest and rents under the lease
agreement. When the assets are placed into service, the Company will estimate
its liability under the residual value guarantee and, if necessary, record
additional rent expense on a straight-line basis over the remaining lease term.
The Savannah facility is expected to be operational in early 2001 and the Briar
Creek facility is expected to be open in early 2002.
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.
On August 2, 2000, certain Company shareholders exercised 4,252,152
warrants at an exercise price of $0.57 per share.
On September 8, 2000, the Company entered into a $10.0 million interest
rate swap agreement (swap) to manage the risk associated with interest rate
fluctuations on a portion of its Stockton, California distribution center lease.
The swap creates the economic equivalent of a fixed rate lease by converting the
variable interest rate to a fixed rate. Under this agreement, the Company pays
interest to a financial institution at a fixed rate of 6.45%. In exchange, the
financial institution pays the Company at a variable interest rate, which
approximates the floating rate on the lease agreement, excluding the credit
spread. The interest rate on the swap is subject to adjustment monthly. For
months in which the interest rate, as calculated under the agreement, is greater
than 7.41% (the knockout rate), no payments are made by either party. The swap
is effective through June 2004.
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 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.
First Second Third Fourth
Quarter Quarter(1) Quarter Quarter(2)
------- ---------- ------- ----------
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%
25
First Second Third Fourth
Quarter Quarter(1) Quarter Quarter(2)
------- ---------- ------- ----------
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%
<FN>
(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.
26
</FN>