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 SEPTEMBER 30, 1996
/ / 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.)
2555 ELLSMERE AVENUE
NORFOLK COMMERCE PARK
NORFOLK, VIRGINIA 23513
(Address of principal executives office)
TELEPHONE NUMBER (757) 857-4600
(Registrants 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 November 1, 1996, there were 25,877,265 shares of the Registrant's Common
Stock outstanding.
DOLLAR TREE STORES, INC.
and subsidiaries
INDEX
PART I. FINANCIAL INFORMATION Page No.
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS:
Condensed Consolidated Balance Sheets
September 30, 1996 and December 31, 1995........................... 3
Condensed Consolidated Income Statements
Three months and nine months ended September 30, 1996 and 1995..... 4
Condensed Consolidated Statements of Cash Flows
Nine months ended September 30, 1996 and 1995...................... 5
Notes to Condensed Consolidated Financial Statements................ 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.................... 10
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS............................................. 13
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.............................. 14
Signatures................................................... 15
DOLLAR TREE STORES, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
(Unaudited)
September 30, December 31,
1996 1995
------------ ------------
ASSETS
Current assets:
Cash and cash equivalents.................... $ 4,121 $ 22,415
Accounts receivable.......................... 2,364 380
Merchandise inventories ..................... 112,439 40,113
Deferred tax asset .......................... 853 720
Prepaid expenses and other current assets ... 4,104 2,392
------- -------
Total current assets..................... 123,881 66,020
------- -------
Property and equipment, net....................... 34,693 23,091
Deferred tax asset................................ 2,750 2,219
Goodwill, net (note 2) ........................... 46,985 --
Other assets, net................................. 730 291
------- -------
TOTAL ASSETS............................. $209,039 $ 91,621
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Notes payable to bank........................ $ 36,500 $ --
Accounts payable ............................ 38,369 19,603
Accrued liabilities ......................... 9,957 8,939
Income taxes payable......................... 832 8,244
Current installments of obligations
under capital leases...................... 343 101
------- -------
Total current liabilities................ 86,001 36,887
------- -------
Notes payable to bank,
long-term portion (notes 2 and 3).............. 40,000 --
Senior subordinated notes......................... -- 7,000
Junior subordinated notes......................... -- 7,000
Obligations under capital leases,
excluding current installments................. 956 417
Other liabilities................................. 3,662 1,230
------- -------
Total liabilities........................ 130,619 52,534
------- -------
Shareholders' equity:
Common stock, par value $0.01. Authorized
100,000,000 shares, 25,874,104 issued and
outstanding at September 30, 1996 (note 8).. 259 166
Additional paid-in capital................... 31,608 2,980
Retained earnings............................ 46,553 35,941
------- -------
Total shareholders' equity.................. 78,420 39,087
------- -------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY.. $209,039 $ 91,621
======= =======
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 Nine Months Ended
September 30, September 30,
------------------ -------------------
1996 1995 1996 1995
-------- ------- -------- --------
Net sales ............... $110,588 $ 67,427 $298,252 $179,045
Cost of sales................ 68,698 41,359 191,633 114,179
------- ------- ------- -------
Gross profit........ 41,890 26,068 106,619 64,866
------- ------- ------- -------
Selling, general, and
administrative expenses:
Operating expenses........ 28,075 17,974 77,843 48,555
Depreciation and
amortization............ 2,681 1,438 7,486 3,911
------- ------- ------- -------
Total selling, general
and administrative
expenses................ 30,756 19,412 85,329 52,466
------- ------- ------- -------
Operating income............. 11,134 6,656 21,290 12,400
Interest expense............. 1,408 791 4,032 1,937
------- ------- ------- -------
Income before income taxes... 9,726 5,865 17,258 10,463
Provision for income taxes... 3,748 2,260 6,646 4,029
------- ------- ------- -------
Net income.......... $ 5,978 $ 3,605 $ 10,612 $ 6,434
======= ======= ======= =======
Net income per share ........ $ 0.21 $ 0.13 $ 0.38 $ 0.23
======= ======= ======= =======
Weighted average number of
common shares and common
share equivalents
outstanding (note 3):
Primary ............ 28,664 27,674 28,191 27,536
Fully diluted....... 28,707 27,723 28,255 27,698
See accompanying Notes to Condensed Consolidated Financial Statements
4
DOLLAR TREE STORES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Nine Months Ended
September 30,
----------------------
1996 1995
-------- ---------
Cash flows from operating activities:
Net income........................................ $ 10,612 $ 6,434
Adjustments to reconcile net income to net cash
used in operating activities:
Depreciation and amortization.................. 7,485 3,911
Loss on disposal of property and equipment .... 258 208
Provision for deferred income taxes............ (664) (403)
Changes in assets and liabilities increasing
(decreasing) cash and cash equivalents,
net of effects resulting from purchase
of Dollar Bills, Inc.:
Accounts receivable......................... (411) 67
Merchandise inventories..................... (56,291) (33,727)
Prepaid expenses and other current assets... (1,527) (545)
Other assets ............................... 267 (39)
Accounts payable............................ 10,971 7,454
Accrued liabilities......................... (1,105) (192)
Income taxes payable........................ (7,412) (5,701)
Other liabilities........................... 57 (463)
-------- --------
Total adjustments.......................... (48,372) (29,046)
-------- --------
Net cash used in operating activities ..... (37,760) (22,612)
-------- --------
Cash flows from investing activities:
Capital expenditures ............................. (12,495) (8,987)
Proceeds from sale of property and equipment...... 23 32
Payment for purchase of Dollar Bills, Inc.,
net of cash acquired............................. (52,209) --
-------- --------
Net cash used in investing activities...... (64,681) (8,955)
-------- --------
Cash flows from financing activities:
Net proceeds from notes payable to bank........... 29,600 28,600
Principal payments under capital
lease obligations................................ (174) (52)
Proceeds from options exercised and purchase
of shares under ESPP............................. 2,902 238
Proceeds from public offering..................... 25,819 --
Proceeds from long-term debt...................... 92,630 --
Repayment of long-term debt....................... (52,630) --
Repayment of senior and junior
subordinated notes............................... (14,000) --
-------- --------
Net cash provided by financing activities.. 84,147 28,786
-------- --------
Net decrease in cash
and cash equivalents.............................. (18,294) (2,781)
Cash and cash equivalents at beginning of period... 22,415 6,016
-------- --------
Cash and cash equivalents at end of period......... $ 4,121 $ 3,235
======== ========
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 September 30, 1996, and for the three- and
nine-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 period. 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,
1995, contained in the Company's Annual Report on Form 10- K. The results of
operations for the three- and nine-month periods ended September 30, 1996 are
not necessarily indicative of the results to be expected for the entire year
ending December 31, 1996.
2. ACQUISITION OF DOLLAR BILLS, INC.
On January 31, 1996, the Company acquired all of the outstanding stock of
Dollar Bills, Inc. ("Dollar Bills" ), formerly known as Terrific Promotions,
Inc., which owned and operated 136 discount variety stores under the name Dollar
Bill$, a distribution center in the Chicago area and a wholesale division. The
acquisition is accounted for by the purchase method of accounting. Amounts shown
in these financial statements include the aggregate purchase price and the
relative fair values of the assets and liabilities of Dollar Bills. The Company
financed the acquisition through borrowings under a development facility with
its commercial lenders, which, together with its working capital facility, was
refinanced into a $135 million revolving credit facility on September 27, 1996
(see note 3).
Goodwill, which represents the excess of purchase price over fair value of
net assets acquired, is amortized on a straight line basis over 25 years. The
Company assesses the recoverability of this intangible asset by determining
whether the amortization of the goodwill balance over its remaining life can be
recovered through undiscounted future operating cash flows of the acquired
organization.
3. LONG-TERM DEBT
On September 27, 1996, the Company entered into a credit agreement with its
banks which provides for a $135 million revolving credit facility to be used for
working capital, letters of credit, and development needs, bearing interest at
the agent bank's prime rate or LIBOR plus a spread, at the Company's option.
Currently, the interest rate is approximately 6.6%. The credit facility is
secured by the Company's assets. The agreement, among
6
other things, requires the maintenance of certain specified ratios, restricts
the amount of capital expenditures, restricts the payments of cash dividends and
other distributions, prohibits the incurrence of certain new indebtedness,
prohibits a change in control, and establishes certain minimum beneficial
ownership requirements of the founding shareholders. The maturity date of the
facility is May 31, 2000. The facility must be paid down to a specified amount
for at least 30 consecutive days at any time between December 1 and March 1 of
each year. For 30 days during the period from December 1, 1996 to March 1, 1997,
the facility must be paid down to $40 million.
4. STOCK SPLIT AND NET INCOME PER SHARE
In connection with a stock dividend authorized by the Board of Directors,
the Company issued one-half share for each outstanding share of Common Stock,
payable April 19, 1996 to shareholders of record as of April 5, 1996. All share
and per share data in these financial statements and accompanying notes have
been retroactively adjusted to reflect this dividend, having the effect of a
three-for-two stock split.
Primary net income per share has been computed by dividing net income by
the weighted average number of common shares and common share equivalents
outstanding. Common share equivalents include the weighted average number of
outstanding stock options and warrants after applying the treasury method. The
market price used in applying the treasury method was $15.00 per share, restated
to $10.00 per share due to the stock split, through March 6, 1995 and the
closing market price of the stock at the end of each week thereafter.
The fully diluted computation was based on the greater of the average
market price of the stock at the end of each week in the period or the market
price at the end of the period. Net income per share was the same using either
primary or fully diluted shares and share equivalents. All amounts have been
adjusted to reflect the stock split.
5. STOCK OPTION PLAN, STOCK INCENTIVE PLAN, EMPLOYEE STOCK PURCHASE PLAN AND
UNATTACHED WARRANTS
The Company maintains a stock option plan ("SOP") which was established on
December 16, 1993 and a stock incentive plan ("SIP") which was established on
January 1, 1995. No additional shares may be granted under the SOP and, under
the terms of the SIP, options for no more than 270,000 shares of common stock
may be granted in any calendar year.
At September 30, 1996 and 1995, options for the following numbers of shares
(restated for the stock split) were outstanding under each plan:
Options for Shares Outstanding at Exercise
PLAN September 30, 1996 September 30, 1995 Price/Range
---- ------------------ ------------------ -------------
SOP........ 342,456 613,254 $ 2.90
SIP........ 480,091 178,950 $10.00 - 33.50
The options above include options for 227,735 shares, net of lapses and
cancellations, granted during the second quarter of 1996 and 9,500 shares
7
granted during the third quarter of 1996 which are not included in the earnings
per share calculation.
On January 1, 1995, the Company also established The Dollar Tree Stores,
Inc. Employee Stock Purchase Plan (the "ESPP"). The Company reserved 225,000
shares of common stock for future issuance under the ESPP. The ESPP enables
eligible employees, as defined in the ESPP, to buy shares of common stock for
85% of fair market value on the first day or the last day of the applicable
offering period, whichever is lower. As of November 8, 1996, 9,168 shares
(post-split) have been purchased under the ESPP.
Additionally, in 1993 and 1994, the Company issued unattached warrants to
purchase a total of 2,482,178 shares of Common Stock to certain shareholders.
These warrants carry an exercise price of $1.93 and may be exercised upon the
occurrence of certain events.
The Company adopted the provisions of SFAS No. 123, Accounting for Stock-
Based Compensation, as of January 1, 1996.
6. REGISTRATION STATEMENT FILED ON FORM S-3
The Company sold 750,000 shares of Common Stock on June 10, 1996, pursuant
to a registration statement filed on Form S-3 under the Securities Act of 1933.
In connection with this offering, the Company received approximately $25.3
million, net of offering expenses. The Company used the proceeds of the offering
to repay its 9% Senior and Junior Subordinated Notes and pay down its
development facility.
7. DOLLAR TREE STORES, INC. AND SUBSIDIARIES AND DOLLAR BILLS INC. UNAUDITED
CONDENSED CONSOLIDATED PROFORMA INCOME STATEMENT
The following unaudited pro forma financial information of the Company is
based on the historical Consolidated Financial Statements of the Company for the
year ended December 31, 1995 and for the nine months ended September 30, 1996
adjusted to give effect to the Company's acquisition of Dollar Bills on January
31, 1996. The unaudited pro forma condensed consolidated income statements for
the year ended December 31, 1995 and the nine months ended September 30, 1996
give effect to the transactions described as if they had occurred on January 1,
1995 and January 1, 1996, respectively. The pro forma adjustments are based upon
currently available information and upon certain assumptions that management of
the Company believes are reasonable. Final purchase adjustments may differ from
the pro forma adjustments herein. The pro forma financial information is
presented for informational purposes and does not purport to represent what the
Company's actual results of operations would have been if the transaction
described had been consummated on January 1, 1995 (for the year ended December
31, 1995) or on January 1, 1996 (for the nine months ended September 30, 1996).
The pro forma financial information should be read in conjunction with the
related Notes, "Management's Discussion and Analysis of Financial Condition and
Results of Operations," and the Consolidated Financial Statements of the Company
and the Notes thereto and the Financial Statements of Dollar Bills and
8
the Notes thereto incorporated by reference.
The acquisition of Dollar Bills has been accounted for by the purchase
method of accounting. Accordingly, the Company established new accounting basis
for the assets and liabilities of Dollar Bills based upon the relative fair
values thereof and the aggregate purchase price paid by the Company. These
values are reflected in the Company's September 30, 1996 condensed consolidated
balance sheet.
The unaudited pro forma condensed consolidated income statements do not
purport to be indicative of the results that would have occurred had the
transaction taken place at the beginning of the period presented or of future
results.
Unaudited Pro Forma Condensed Consolidated Income Statements
(In thousands except per share data)
For the Year Ended December 31, 1995 For the Nine Months Ended September 30, 1996
----------------------------------------------- -----------------------------------------------------
Pro Forma Pro Forma
The Company Dollar Bills Adjustments Pro Forma The Company Dollar Bills(1) Adjustments Pro Forma
----------- ------------ ----------- --------- ----------- -------------- ----------- ---------
Net sales.......... $300,229 $103,850 $404,079 $298,252 $ 6,482 $304,734
Gross profit....... 112,679 27,497 140,176 106,619 1,803 108,422
Selling, general &
administrative
expenses......... 75,967 22,201 (4,004)(2) 96,144 85,329 2,613 (529)(2) 87,572
1,980 (3) 159 (3)
Operating income
(loss)........... 36,712 5,296 44,032 21,290 (810) 20,850
Interest expense... 2,618 505 3,850 (4) 6,973 4,032 50 324 (4) 4,406
Income (loss) before
income taxes..... 34,094 4,791 37,059 17,258 (860) 16,444
Provision for
income taxes..... 13,127 178 963 (5) 14,268 6,646 (26) (288)(5) 6,332
Net income (loss).. $ 20,967 $ 4,613 $ 22,791 $10,612 $ (834) $10,112
======== ======== ======== ======== ======== ========
Net income
per share(6)..... $ 0.76 $ 0.83 $ 0.38 $ 0.36
======== ======== ======== ========
Weighted average
number of common
shares and common
share equivalents
outstanding:..... 27,589 27,589 28,191 28,191
======== ======== ======== ========
(1) Represents January 1996 results of Dollars Bills. The Company acquired
Dollars Bills on January 31, 1996 and accordingly the Company's income statement
for the nine months ended September 30, 1996 includes the results of the
acquired business beginning February 1, 1996.
(2) Represents the elimination of duplicative operating costs associated
9
with Dollar Bills corporate headquarters and distribution facility.
(3) Represents amortization of goodwill recognized in connection with the
acquisition of Dollar Bills which is being amortized by the Company over a 25
year period.
(4) Represents interest expense related to the borrowings under the
Company's development facility used to fund the acquisition.
(5) Represents income taxes related to the conversion of Dollars Bills to a
C Corporation at an assumed effective tax rate of 38.5%.
(6) Net income per common share and pro forma income per common share is
computed by dividing net income and pro forma net income by the weighted average
number of common shares and common share equivalents outstanding. Common share
equivalents include all outstanding stock options and warrants after applying
the treasury stock method.
NOTE 8. INCREASE IN AUTHORIZED SHARES OF COMMON STOCK
On July 23, 1996, the shareholders of the Company approved an increase in
authorized shares of Common Stock from 50,000,000 to 100,000,000 shares.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
THE THREE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
RESULTS OF OPERATIONS AND GENERAL COMMENTS
Net sales increased $43.2 million, or 64.0%, to $110.6 million for the
three months ended September 30, 1996, from $67.4 million for the three months
ended September 30, 1995. Of this increase, (i) approximately 59.6%, or $25.7
million, was attributable to the acquisition of 136 Dollar Bill$ stores on
January 31, 1996, (ii) approximately 34.1%, or $14.8 million, was attributable
to stores opened in 1995 and 1996 which are not included in the Company's
comparable store net sales calculation, and (iii) approximately 6.3%, or $2.7
million, was attributable to comparable store net sales growth, which
represented a 4.3% increase over comparable store net sales in the corresponding
quarter of the prior period. Dollar Bill$ stores are not included in the
comparable store net sales calculation. Because substantially all the Company's
products sell for $1.00, the increase in comparable store net sales was a direct
result of increased unit volume. The Company opened 26 new stores during the
third quarter of 1996; the same number of stores (26) was opened during the
third quarter of 1995.
Management anticipates that the primary source of future sales growth will
be new store openings and, to a lesser degree, sales increases from expanded and
relocated stores and comparable store net sales increases. Although the Company
has experienced significant increases in comparable store net sales
historically, management expects that any increases in comparable store net
10
sales in the future will be smaller than those experienced historically.
Gross profit, which consists of net sales less cost of sales (including
distribution and certain occupancy costs), increased $15.8 million, or 60.7%, to
$41.9 million in the third quarter of 1996 from $26.1 million in the third
quarter of 1995. As a percentage of net sales, gross profit decreased to 37.9%
from 38.7%, primarily due to increases in merchandise costs (including freight),
inventory shrinkage and markdowns, offset by slight decreases in occupancy and
distribution costs as a percentage of net sales. Higher inventory shrinkage
resulted from physical inventories completed at approximately half of the 136
Dollar Bill$ stores, which experience greater shrinkage than seen in the Dollar
Tree stores. Increased markdowns during the third quarter of 1996 compared to
the third quarter of 1995 are due to a difference in timing of markdowns and
continued merchandise clearance in the Dollar Bill$ stores. Year-to-date,
inventory shrinkage and markdowns as a percentage of sales are consistent with
last year.
Selling, general and administrative expenses, which include operating
expenses and depreciation and amortization, increased $11.3 million, or 58.4%,
to $30.8 million in the third quarter of 1996 from $19.4 million in the third
quarter of 1995, and decreased as a percentage of net sales to 27.8% from 28.8%
during the same period. This decrease resulted primarily from hourly payroll
costs savings due to controls instituted during the first quarter. In the fourth
quarter, management expects, but there can be no assurances, that any payroll
savings will be sufficient to offset the minimum wage increase which became
effective October 1, 1996. During the third quarter of 1996, the Company's
operating expenses increased by approximately $0.3 million due to costs and
expenses incurred in connection with the Dollar Bills litigation and
integration. Amortization of goodwill relating to the acquisition amounted to
$0.5 million for the third quarter of 1996.
Operating income increased $4.5 million, or 67.3%, to $11.1 million for the
third quarter of 1996 from $6.7 million for the comparable period in 1995, and
increased as a percentage of net sales to 10.1% from 9.9% during the same period
for the reasons noted above.
INTEREST EXPENSE
Interest expense increased $0.6 million in the third quarter of 1996
compared to the third quarter of 1995 to $1.4 million from $0.8 million during
the same period. This increase is primarily a result of borrowings under the
Company's development facility in connection with the Dollar Bills acquisition,
and the amortization of deferred financing costs relating thereto.
THE NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
RESULTS OF OPERATIONS AND GENERAL COMMENTS
Net sales increased $119.2 million, or 66.6%, to $298.3 million for the
nine months ended September 30, 1996, from $179.0 million for the nine months
ended September 30, 1995. Of this increase, (i) approximately 55.1%, or $65.7
11
million, was attributable to the acquisition of 136 Dollar Bill$ stores on
January 31, 1996, (ii) approximately 37.4%, or $44.6 million, was attributable
to stores opened in 1995 and 1996 which are not included in the Company's
comparable store net sales calculation, and (iii) approximately 7.5%, or $8.9
million, was attributable to comparable store net sales growth, which
represented a 5.4% increase over comparable store net sales in the corresponding
quarter of the prior period. Dollar Bill$ stores are not included in the
comparable store net sales calculation. Because substantially all the Company's
products sell for $1.00, the increase in comparable store net sales was a direct
result of increased unit volume. The Company opened 79 new stores and closed
three stores during the first nine months of 1996 compared to opening 71 new
stores and closing two stores during the first nine months of 1995.
Gross profit, which consists of net sales less cost of sales (including
distribution and certain occupancy costs), increased $41.8 million, or 64.4%, to
$106.6 million in the first nine months of 1996 from $64.9 million in the first
nine months of 1995. As a percentage of net sales, gross profit decreased to
35.7% from 36.2%, primarily due to increased sales of domestic and consumable
products, which generally carry a lower merchandise margin, partially offset by
a decrease in freight costs, as domestic freight is less costly than foreign
freight, and slight decreases in occupancy and distribution costs as a
percentage of net sales. Management expects that the Company's product mix will
continue to contain a higher proportion of domestic products, due to the
addition of Dollar Bill$ stores and the introduction of more domestic goods in
existing stores.
Selling, general and administrative expenses, which include operating
expenses and depreciation and amortization, increased $32.9 million, or 62.6%,
to $85.3 million in the first nine months of 1996 from $52.5 million in the
first nine months of 1995, and decreased as a percentage of net sales to 28.6%
from 29.3% during the same period. This decrease resulted primarily from hourly
payroll costs savings, partially offset by transactional costs and expenses,
including the amortization of goodwill, incurred with the purchase of Dollar
Bills. During the first nine months of 1996, the Company's operating expenses,
excluding amortization, increased by approximately $2.4 million due to costs and
expenses incurred in connection with the Dollar Bills acquisition and
litigation. Amortization of goodwill relating to the acquisition amounted to
$1.3 million for the first nine months of 1996.
Operating income increased $8.9 million, or 71.7%, to $21.3 million for the
first nine months of 1996 from $12.4 million for the comparable period in 1995,
and increased as a percentage of net sales to 7.1% from 6.9% during the same
period for the reasons noted above.
INTEREST EXPENSE
Interest expense increased $2.1 million in the first nine months of 1996
compared to the first nine months of 1995 to $4.0 million from $1.9 million
during the same period. This increase is primarily a result of borrowings under
the Company's development facility in connection with the Dollar Bills
acquisition, and the amortization of deferred financing costs relating
12
thereto.
LIQUIDITY AND CAPITAL RESOURCES
The Company's capital requirements result primarily from capital
expenditures related to new store openings and working capital requirements
related to new and existing stores. The Company's working capital requirements
for existing stores are seasonal in nature and typically reach their peak near
the end of the third and the beginning of the fourth quarter of the year.
Historically, the Company has met its seasonal working capital requirements for
its existing stores and funded its store expansion program from internally
generated funds and borrowings under its credit facilities.
During the first nine months of 1996 and 1995, net cash used in operations was
$37.8 million and $22.6 million, respectively, primarily used to build inventory
levels. During the first nine months of 1996 and 1995, net cash used in
investing activities was $64.7 million and $9.0 million, respectively, the
increase consisting primarily of payment for the acquisition of Dollar Bills in
1996 and payment for capital expenditures in both years. Net cash provided by
financing activities was $84.1 million and $28.8 million during the first nine
months of 1996 and 1995, the increase primarily attributable to borrowings
incurred to fund the acquisition of Dollar Bills in January 1996 and to capital
raised during a public offering completed in June, 1996.
On September 27, 1996, the Company replaced its existing working capital and
development facilities with a new $135.0 million revolving credit facility. The
Company's borrowings under its bank facilities were $76.5 million at September
30, 1996, and $28.6 million at September 30, 1995. There were no amounts
outstanding at December 31, 1995. Under the Company's new bank facilities, an
additional $58.5 million is available at September 30, 1996 (see note 3).
PART II . OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
On August 30, 1996, the Company filed a motion to dismiss the lawsuit
previously filed against the Company in the United States District Court for the
Northern District of Illinois, Eastern Division by the former owners of Dollar
Bill$ and a corporation they control; the lawsuit was previously reported in the
Company's Forms 10-Q for the periods ended March 31 and June 30, 1996. The
Company emphatically denies the Plaintiffs' claims and will continue to defend
itself vigorously in this matter.
This litigation is in its early stages and discovery is not yet completed;
however, based on management's understanding of the facts as developed in
discovery (which facts are contested by the Plaintiffs) and the advice of its
litigation counsel for this matter in reliance on such facts, the Company
believes that it is unlikely that the Plaintiffs will ultimately prevail on the
merits of this litigation. Accordingly, the Company believes that the
13
ultimate outcome of this matter will not have a material adverse effect on the
Company's results of operations or financial condition. Nevertheless,
particularly in light of the contested factual circumstances, there can be no
assurances regarding the ultimate outcome of this litigation or that this
litigation will not have a material adverse effect on the Company's results of
operations or financial condition. In any event, the litigation has diverted,
and is expected to continue to divert, the efforts and attention of the
Company's management.
As reported in the 10-Q for the second quarter of 1996, the Company
terminated its relationship with a Hong Kong trading company that had obtained
payment on a number of letters of credit issued on the Company's behalf by
falsely claiming that conforming goods had been shipped, when in fact the
trading company had either shipped non-conforming goods or empty containers. All
undrawn irrevocable letters of credit issued to that trading company have now
reached their expiry date. Although there can be no assurances in this regard,
the Company believes it is unlikely that its losses in connection with this
matter will exceed its previously established reserves.
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 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
10.1 Amended and Restated Revolving Credit Agreement (the "Credit
Agreement") among the Company, Dollar Tree Distribution, Inc.,
Dollar Tree Management, Inc., and The First National Bank of
Boston, NationsBank, N.A., Signet Bank, Crestar Bank, First Union
National Bank of Virginia, Amsouth Bank of Alabama, and Union Bank
of California, N.A. (collectively, the "Banks").
10.2 Schedule 1 to Credit Agreement.
10.3 Form of Revolving Credit Note between Dollar Tree Distribution, Inc.
as maker and the Banks.
10.4 Amendment and Ratification of Security Agreement by and between
the Company and The First National Bank of Boston as agent for the
Banks.
10.5 Amendment and Ratification of Security Agreement by and between
Dollar Tree Distribution, Inc. and The First National Bank of Boston
as agent for the Banks.
10.6 Amendment and Ratification of Security Agreement by and between
Dollar Tree Management and The First National Bank of Boston as agent
for the Banks.
10.7 Unlimited Guaranty by the Company.
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10.8 Unlimited Guaranty by Dollar Tree Management, Inc.
10.9 Amendment and Ratification of Negative Pledge Agreement by and
between the Company and The First National Bank of Boston as agent
for the Banks.
10.10 Amendment and Ratification of Negative Pledge Agreement by and
between certain shareholders of the Company and The First National
Bank of Boston as agent for the Banks.
(b) Reports on Form 8-K.
The Company did not file any reports on Form 8-K during the quarter.
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: November 11, 1996
DOLLAR TREE STORES, INC.
By: /s/ H. Ray Compton
-----------------------
H. Ray Compton
Executive Vice President and
Chief Financial Officer
(principal financial and accounting officer)
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