Dollar Tree Stores, Inc. Form 10K Annual Report for Fiscal Year ended February
3, 2007
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES
EXCHANGE ACT OF 1934
For
the Fiscal Year Ended February 3, 2007
Commission
File No.0-25464
DOLLAR
TREE STORES, INC.
(Exact
name of registrant as specified in its charter)
Virginia
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54-1387365
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(State
or other jurisdiction of
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(I.R.S.
Employer
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incorporation
or organization)
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Identification
No.)
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500
Volvo Parkway, Chesapeake, VA 23320
(Address
of principal executive offices)
Registrant’s
telephone number, including area code: (757) 321-5000
Securities
Registered Pursuant to Section 12(b) of the
Act:
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Title
of Each Class
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Name
of Each Exchange on Which Registered
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None
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None
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Securities
Registered Pursuant to Section 12(g) of the Act:
Common
Stock (par value $.01 per share)
(Title
of Class)
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined
in
Rule 405 of the Securities Act.
Indicate
by check mark if the registrant is not required to file reports pursuant
to
Section 13 or Section 15(d) of the Exchange Act.
Indicate
by check mark whether 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.
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the
best
of Registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment
to this
Form 10-K. ( )
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of “accelerated
filer and large accelerated filer” in Rule 12b-2 of the Exchange
Act.
Large
accelerated filer (X)
|
Accelerated filer ( ) |
Non-accelerated filer (
) |
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
The
aggregate market value of Common Stock held by non-affiliates of the Registrant
on July 28, 2006, was $2,536,628,738 based on a $26.18 average of the high
and
low sales prices for the Common Stock on such date. For purposes of this
computation, all executive officers and directors have been deemed to be
affiliates. Such determination should not be deemed to be an admission that
such
executive officers and directors are, in fact, affiliates of the
Registrant.
On
March
30, 2007, there were 98,251,291 shares of the Registrant’s Common
Stock outstanding.
DOCUMENTS
INCORPORATED BY REFERENCE
The
information regarding securities authorized for issuance under equity
compensation plans called for in Item 5 of Part II and the information called
for in Items 10, 11, 12, 13 and 14 of Part III are incorporated by reference
to
the definitive Proxy Statement for the Annual Meeting of Stockholders of
the
Company to be held June 21, 2007, which will be filed with the Securities
and
Exchange Commission not later than June 1, 2007.
DOLLAR
TREE STORES, INC.
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Page
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PART
I
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6
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10
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12
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13
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14
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14
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PART
II
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15
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16
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18
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27
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29
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54
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55
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PART
III
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55
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56
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56
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56
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56
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PART
IV
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56
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57
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A
WARNING ABOUT FORWARD-LOOKING
STATEMENTS:
This
document contains "forward-looking statements" as that term is used in the
Private Securities Litigation Reform Act of 1995. Forward-looking statements
address future events, developments and results. They include statements
preceded by, followed by or including words such as "believe," "anticipate,"
"expect," "intend," "plan," "view," “target” or "estimate." For example, our
forward-looking statements include statements regarding:
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our
anticipated sales, including comparable store net sales, net sales
growth
and earnings growth;
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our
growth plans, including our plans to add, expand or relocate stores,
our
anticipated square footage increase, and our ability to renew leases
at
existing store locations;
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the
average size of our stores to be added in 2007 and
beyond;
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the
effect of a slight shift in merchandise mix to consumables and
the
increase of freezers and coolers on gross profit margin and
sales;
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the
effect that expanding tender types accepted by our stores will
have on
sales;
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the
net sales per square foot, net sales and operating income attributable
to
smaller and larger stores and store-level cash payback
metrics;
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the
possible effect of inflation and other economic changes on our
costs and
profitability, including the possible effect of future changes
in minimum
wage rates, shipping rates, domestic and foreign freight costs,
fuel costs
and wage and benefit costs;
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·
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our
cash needs, including our ability to fund our future capital expenditures
and working capital requirements;
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our
gross profit margin, earnings, inventory levels and ability to
leverage
selling, general and administrative and other fixed
costs;
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our
seasonal sales patterns including those relating to the length
of the
holiday selling seasons;
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the
capabilities of our inventory supply chain technology and other
new
systems;
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the
future reliability of, and cost associated with, our sources of
supply,
particularly imported goods such as those sourced from
China;
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the
capacity, performance and cost of our distribution centers, including
opening and expansion schedules;
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our
expectations regarding competition and growth in our retail
sector;
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costs
of pending and possible future legal claims;
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management's
estimates associated with our critical accounting policies, including
inventory valuation, accrued expenses, and income
taxes;
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the
possible effect on our financial results of changes in generally
accepted
accounting principles relating to accounting for income tax
uncertainties.
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You
should assume that the information appearing in this annual report is accurate
only as of the date it was issued. Our business, financial condition, results
of
operations and prospects may have changed since that date.
For
a
discussion of the risks, uncertainties and assumptions that could affect our
future events, developments or results, you should carefully review the risk
factors described in “Item 1A. Risk Factors” beginning on page 10, as well as
"Management’s Discussion and Analysis of Financial Condition and Results of
Operations" beginning on page 18.
Our
forward-looking statements could be wrong in light of these and other risks,
uncertainties and assumptions. The future events, developments or results
described in this report could turn out to be materially different. We have
no
obligation to publicly update or revise our forward-looking statements after
the
date of this annual report and you should not expect us to do so.
Investors
should also be aware that while we do, from time to time, communicate with
securities analysts and others, we do not, by policy, selectively disclose
to
them any material , nonpublic information or other confidential commercial
information. Accordingly, shareholders should not assume that we agree with
any
statement or report issued by any securities analyst regardless of the content
of the statement or report. We generally do not issue financial forecasts or
projections and we do not, by policy, confirm those issued by others. Thus,
to
the extent that reports issued by securities analysts contain any projections,
forecasts or opinions, such reports are not our responsibility.
INTRODUCTORY
NOTE: Unless otherwise stated, references to "we,"
"our" and "Dollar Tree" generally refer to Dollar Tree Stores, Inc.
and
its direct and indirect subsidiaries on a consolidated basis. Unless
specifically indicated otherwise, any references to “2007” or “fiscal
2007”, “2006” or “fiscal 2006,” “2005” or “fiscal 2005,” and "2004" or
"fiscal 2004," relate to as of or for the years ended February 2,
2008, February 3, 2007, January 28, 2006 and January 29, 2005,
respectively. |
AVAILABLE
INFORMATION
Our
annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports
on
Form 8-K and amendments to those reports filed or furnished pursuant to Section
13(a) or 15(d) of the Securities Exchange Act are available free of charge
on
our website at www.dollartree.com as soon as reasonably practicable after
electronic filing of such reports with the SEC.
PART
I
Overview
Since
our
founding in 1986, we have become the leading operator of discount variety stores
offering merchandise at the fixed price of $1.00. We believe the variety and
quality of products we sell for $1.00 sets us apart from our competitors. At
February 3, 2007, we operated 3,219 discount variety retail stores.
Approximately 3,100 of these stores sell substantially all items for $1.00
or
less. The remaining stores, operating as Deal$, which were acquired in March
2006, sell many items for $1.00 or less but also sell items at prices greater
than $1.00. Our stores operate under the names of Dollar Tree, Deal$, Dollar
Bills and Dollar Express.
In
the
past five years, we have modified our average store size to reflect what we
believe is our optimal store size of between 10,000 and 12,500 square feet.
At
February 3, 2007, approximately 17% of our stores are less than 6,000 square
feet, which is down from approximately 47% of our stores at December 31, 2002.
These smaller stores are comprised of mall and older strip shopping center
locations and are candidates for relocation as their leases expire. Our current
store size reflects our expanded merchandise offerings and improved service
to
our customers. As we have been expanding our merchandise offerings, we have
added freezers and coolers to approximately 700 stores during the past two
years
to increase traffic and transaction size. At December 31, 2002, we operated
2,263 stores in 40 states. At February 3, 2007, we operated 3,219 stores in
48
states. Our selling square footage increased from approximately 13.0 million
square feet in December 2002 to 26.3 million square feet in February 2007.
Our
store growth since 2002 has resulted from opening new stores and completing
mergers and acquisitions. We centrally manage our store and distribution
operations from our corporate headquarters in Chesapeake, Virginia.
Business
Strategy
Value
Merchandise Offering.
We
strive to exceed our customers' expectations of the variety and quality of
products that they can purchase for $1.00 by offering items that we believe
typically sell for higher prices elsewhere. We buy approximately 60% to 65%
of
our merchandise domestically and import the remaining 35% to 40%. Our domestic
purchases include closeouts. We believe our mix of imported and domestic
merchandise affords our buyers flexibility that allows them to consistently
exceed the customer's expectation. In addition, direct relationships with
manufacturers permit us to select from a broad range of products and customize
packaging, product sizes and package quantities that meet our customers'
needs.
Mix
of Basic Variety and Seasonal Merchandise.
We
maintain a balanced selection of products within traditional variety store
categories. We offer a wide selection of everyday basic products and we
supplement these basic, everyday items with seasonal and closeout merchandise.
We attempt to keep certain basic consumable merchandise in our stores
continuously to establish our stores as a destination and increased slightly
the
mix of consumable merchandise in order to increase the traffic in our stores.
Closeout merchandise is purchased opportunistically and represents less than
10%
of our purchases. National, regional and private-label brands have become a
bigger part of our merchandise mix.
Our
merchandise mix consists of:
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consumable
merchandise, which includes candy and food, basic health and beauty
care,
and household consumables such as paper, plastics and household chemicals
and in select stores, frozen and refrigerated food;
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variety
merchandise, which includes toys, durable housewares, gifts, fashion
health and beauty care, party goods, greeting cards, apparel, and
other
items; and
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seasonal
goods, which include Easter, Halloween and Christmas merchandise,
along
with summer toys and lawn and garden
merchandise.
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We
have
added freezers and coolers to certain stores which have increased the consumable
merchandise carried by our stores. We believe this initiative helps us drive
additional transactions and allows us to appeal to a broader demographic mix,
and these stores will carry more consumable merchandise than stores without
freezers. We have added freezers and coolers to approximately 400 more stores
in
2006. Therefore, as of February 3, 2007, we have freezers and coolers in
approximately 700 of our stores. We plan to add them to approximately 250 more
stores in 2007. As a result of the installation of freezers and coolers in
select stores, consumable merchandise has grown as a percentage of purchases
and
sales and we expect this trend to continue. The following table shows the
percentage of purchases of each major product group for the years ended February
3, 2007 and January 28, 2006:
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February
3,
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January
28,
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Merchandise
Type
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2007
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2006
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Variety
categories
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48.9%
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47.2%
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Consumable
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45.3%
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44.9%
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Seasonal
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5.8%
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7.9%
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Customer
Payment Methods. All
of
our stores accept cash and checks and approximately 700 stores accept Visa
and
MasterCard credit cards.
Prior
to
May 2005, approximately 900 of our stores accepted debit cards. By the end
of
2005, approximately 2,300 of our stores accepted debit cards and as of the
end
of 2006, all of our stores accept debit cards. Along with the shift to more
consumables, the rollout of freezers and coolers and the acceptance of pin-based
debit transactions, we increased the number of stores accepting Electronic
Benefits Transfer cards and food stamps at qualified stores in the current
year.
We believe that expanding our tender types has helped increase both the traffic
and the average size of transactions at our stores in the current year.
Convenient
Locations and Store Size. We
primarily focus on opening new stores in strip shopping centers anchored by
mass
merchandisers, whose target customers we believe to be similar to ours, and
in
neighborhood centers anchored by large grocery retailers. Our stores have proven
successful in metropolitan areas, mid-sized cities and small towns. The range
of
our store sizes allows us to target a particular location with a store that
best
suits that market and takes advantage of available real estate opportunities.
Our stores are attractively designed and create an inviting atmosphere for
shoppers by using bright lighting, vibrant colors, decorative signs and
background music. We enhance the store design with attractive merchandise
displays. We believe this design attracts new and repeat customers and enhances
our image as both a destination and impulse purchase store.
For
more
information on retail locations and retail store leases, see
"Properties."
Profitable
Stores with Strong Cash Flow.
We
maintain a disciplined, cost-sensitive approach to store site selection in
order
to minimize the initial capital investment required and maximize our potential
to generate high operating margins and strong cash flows. We believe that our
stores have a relatively small shopping radius, which allows us to profitably
concentrate multiple stores within a single market. Our ability to open new
stores is dependent upon, among other factors, locating suitable sites and
negotiating favorable lease terms.
Our
older, smaller stores continue to generate significant store-level operating
income and operating cash flows and have some of the highest operating margin
rates among our stores; however, the increased size of our newer stores allows
us to offer a wider selection of products, including more basic consumable
merchandise, thereby making them more attractive as a destination
store.
The
strong cash flows generated by our stores allow us to self-fund infrastructure
investment and new stores. Over the past five years, cash flows from operating
activities have exceeded capital expenditures.
For
more
information on our results of operations, see "Management's Discussion and
Analysis - Results of Operations." For more information on seasonality of sales,
see "Management's Discussion and Analysis - Seasonality and Quarterly
Fluctuations."
Cost
Control.
We
believe that substantial buying power at the $1.00 price point contributes
to
our successful purchasing strategy, which includes disciplined, targeted
merchandise margin goals by category. We believe our disciplined buying and
quality merchandise help to minimize markdowns. We buy products on an
order-by-order basis and have no material long-term purchase contracts or other
assurances of continued product supply or guaranteed product cost. No vendor
accounted for more than 10% of total merchandise purchased in any of the past
five years.
Our
supply chain systems continue to provide us with valuable sales information
to
assist our buyers and improve merchandise allocation to our stores. Controlling
our inventory levels has resulted in more efficient distribution and store
operations.
Information
Systems.
We
believe that investments in technology help us to increase sales and control
costs. Our inventory management system has allowed us to improve the efficiency
of our supply chain, improve merchandise flow and control distribution and
store
operating costs.
Our
automatic replenishment system automatically reorders key items, based on actual
store level sales and inventory. In 2005 and 2006, we rolled out this system
to
additional stores and merchandise categories. At the end of 2006, we had over
800 basic, everyday items on automatic replenishment. As we continue to utilize
this system, our store management has more time to focus on customer focused
activities.
Point-of-sale
data allows us to track sales by merchandise category at the store level and
assists us in planning for future purchases of inventory. We believe that this
information allows us to ship the appropriate product to stores at the
quantities commensurate with selling patterns. Using this point-of-sale data
for
planning purchases of inventory has helped us reduce our inventory per
store approximately
12% in 2005 as compared to 2004 and an additional 5% in 2006 compared to 2005.
Our inventory turns also increased 70 basis points in the current
year.
Corporate
Culture and Values.
We
believe that honesty and integrity, doing the right things for the right
reasons, and treating people fairly and with respect are core values within
our
corporate culture. We believe that running a business, and certainly a public
company, carries with it a responsibility to be above reproach when making
operational and financial decisions. Our management team visits and shops our
stores like every customer; we have an open door policy for all our associates;
and ideas and individual creativity are encouraged. We have standards for store
displays, merchandise presentation, and store operations. Our distribution
centers are operated based on objective measures of performance and virtually
everyone in our store support center is available to assist associates in the
stores and distribution centers.
Our
disclosure committee meets at least quarterly and monitors our internal controls
over financial reporting and ensures that our public filings contain discussions
about the risks our business faces. We believe that we have the controls in
place to be able to certify our financial statements. Additionally, we have
complied with the updated listing requirements for the Nasdaq Stock
Market.
Growth
Strategy
Store
Openings and Square Footage Growth.
The
primary factors contributing to our net sales growth have been new store
openings, an active store expansion and remodel program, and selective mergers
and acquisitions. From 2002 to 2006, net sales increased at a compound annual
growth rate of 14.3%. We expect that the substantial majority of our future
sales growth will come primarily from new store openings and from our store
expansion and relocation program.
The
following table shows the total selling square footage of our stores and the
selling square footage per new store opened over the last five years. Our growth
and productivity statistics are reported based on selling square footage because
our management believes the use of selling square footage yields a more accurate
measure of store productivity. The selling square footage statistics for 2002
through 2006 are estimates based on the relationship of selling to gross square
footage.
Year
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Number
of Stores
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Average
Selling Square Footage Per Store
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Average
Selling Square Footage Per New Store Opened
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2002
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2,263
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5,763
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7,783
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2003
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2,513
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6,716
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9,948
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2004
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2,735
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7,475
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10,947
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2005
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2,914
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7,900
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9,756
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2006
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3,219
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8,160
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8,780
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We
expect
to increase our selling square footage in the future by opening new stores
in
underserved markets and strategically increasing our presence in our existing
markets via new store openings and store expansions (expansions include store
relocations). In fiscal 2007 and beyond, we plan to predominantly open stores
that are approximately 9,000 selling square feet and we believe this size allows
us to achieve our objectives in the markets in which we plan to expand. At
February 3, 2007, 1,094 of our stores, totaling 50.5% of our selling square
footage, were 9,000 selling square feet or larger.
In
addition to new store openings, we plan to continue our store expansion program
to increase our net sales per store and take advantage of market opportunities.
We target stores for expansion based on the current sales per selling square
foot and changes in market opportunities. Stores targeted for expansion are
generally less than 6,000 selling square feet in size. Store expansions
generally increase the existing store size by approximately 6,000 selling square
feet.
Since
1995, we have added a total of 609 stores through four mergers and several
small
acquisitions. Our acquisition strategy has been to target companies with a
similar single price point concept that have shown success in operations or
provide a strategic advantage. We evaluate potential acquisition opportunities
in our retail sector as they become available.
On
March
25, 2006, we completed our acquisition of 138 Deal$ stores and paid $32.0
million for store-related and other assets and $22.1 million for inventory.
These stores are located primarily in the Midwest part of the United States
and
we have existing logistics capacity to service these stores. This acquisition
also included a few “combo” stores that offer an expanded assortment of
merchandise including items that sell for more than $1. Substantially all Deal$
stores acquired continue to operate under the Deal$ banner while providing
us an
opportunity to leverage our Dollar Tree infrastructure in the testing of new
merchandise concepts, including higher price points, without disrupting the
single-price point model in our Dollar Tree stores.
In
2006,
we also acquired the rights to 21 store leases through bankruptcy proceedings
of
certain discount retailers. We will take advantage of these opportunities as
they arise in the future.
Merchandising
and Distribution.
Expanding our customer base is important to our growth plans. We plan to
continue to stock our new stores with the ever-changing merchandise that our
current customers have come to appreciate. In addition, we are opening larger
stores that contain more basic consumable merchandise to attract new customers.
Consumable merchandise typically leads to more frequent return trips to our
stores resulting in increased sales. The presentation and display of merchandise
in our stores are critical to communicating value to our customers and creating
a more exciting shopping experience. We believe our approach to visual
merchandising results in higher store traffic, higher sales volume and an
environment that encourages impulse purchases.
A
strong
and efficient distribution network is critical to our ability to grow and to
maintain a low-cost operating structure. We expect to continue to add
distribution capacity to support our store opening plans, with the aim of
remaining approximately one year ahead of our distribution needs. In 2007,
we
are planning to add capacity to our Briar Creek distribution center which
services the northeast part of the country. We believe these distribution
centers, including the planned expansion of the Briar Creek distribution center,
in total are capable of supporting approximately $5.0 billion in annual sales.
Based on current plans, we will not need to add any additional distribution
capacity until at least 2008. New distribution sites are strategically located
to reduce stem miles, maintain flexibility and improve efficiency in our store
service areas.
Our
stores receive approximately 95% of their inventory from our distribution
centers via contract carriers. The remaining store inventory, primarily
perishable consumable items and other vendor-maintained display items, are
delivered directly to our stores from vendors. For more information on our
distribution center network, see “Properties.”
Competition
The
retail industry is highly competitive and we expect competition to increase
in
the future. Our value discount retail competitors include Family Dollar, Dollar
General and 99 Cents Only. Family Dollar and Dollar General sell items for
more
than $1 while 99 Cents only sells items at the $0.99 price point or below.
The
principal methods of competition include closeout merchandise, convenience
and
the quality of merchandise offered to the customer. Though we are predominantly
a fixed-price point retailer, we also compete with mass merchandisers, such
as
Wal-Mart and Target, and regional discount retailers. In addition, several
mass
merchandisers and grocery store chains carry "dollar store" or “dollar zone”
concepts in their stores, which increases competition. Our sales and profits
could be reduced by increases in competition, especially because there are
no
significant economic barriers for others to enter our retail
sector.
Trademarks
We
are
the owners of federal service mark registrations for "Dollar Tree," the "Dollar
Tree" logo, "1 Dollar Tree" together with the related design, and "One
Price...One Dollar." We also own a concurrent use registration for "Dollar
Bill$" and the related logo. During 1997, we acquired the rights to use trade
names previously owned by Everything's A Dollar, a former competitor in the
$1.00 price point industry. Several trade names were included in the purchase,
including the marks "Everything's $1.00 We Mean Everything," and "Everything's
$1.00," the registration of which is pending. With the acquisition of Dollar
Express, we became the owner of the service marks "Dollar Express" and "Dollar
Expres$." We
became
the owners of the "Greenbacks All A Dollar" and "All A Dollar" service marks,
with the acquisition of Greenbacks. We also became the owners of “Deal$” and
“Deal$ Nothing Over A Dollar” trademarks, with the acquisition of Deal$. We have
applied for federal trademark registrations for various private labels that
we
use to market some of our product lines.
Employees
We
employed approximately 12,700 full-time and 29,500 part-time associates on
February 3, 2007. The number of part-time associates fluctuates depending on
seasonal needs. We consider our relationship with our associates to be good,
and
we have not experienced significant interruptions of operations due to labor
disagreements. None of our employees are subject to collective bargaining
agreements.
An
investment in our common stock involves a high degree of risk. You should
carefully consider the specific risk factors listed below together with all
other information included or incorporated in this report. Any of the following
risks may materialize, and additional risks not known to us, or that we now
deem
immaterial, may arise. In such event, our business, financial condition, results
of operations or prospects could be materially adversely affected. If that
occurs, the market price of our common stock could fall, and you could lose
all
or part of your investment.
Our
profitability is especially vulnerable to cost
increases.
Future
increase in costs such as the cost of merchandise, wage levels, shipping rates,
freight costs, fuel costs and store occupancy costs may reduce our
profitability. As a fixed price retailer, we cannot raise the sales price of
our
merchandise to offset cost increases. Unlike multi-price retailers, we are
primarily dependent on our ability to operate more efficiently or increase
our
comparable store net sales in order to offset inflation. We expect comparable
store net sales will increase approximately 1% to 3% in 2007. We can give you
no
assurance that we will be able to operate more
efficiently or increase our comparable store net sales in the future. Please
see
Item 7, "Management's Discussion and Analysis of Financial Condition and Results
of Operations," of this Form 10-K for further discussion of the effect of
Inflation and Other Economic Factors on our operations.
Our
profitability is affected by the mix of products we
sell.
Our
gross
profit could decrease if we increase the proportion of higher cost goods we
sell
in the future. In recent years, the percentage of our sales from higher cost
consumable products has increased and is likely to increase in the first half
of
2007. Our gross profit will decrease, primarily in the first two quarters in
2007, unless we are able to increase the amount of our net sales sufficiently
to
offset any decrease in our product margin percentage. We can give you no
assurance that we will be able to do so.
We
may be unable to expand our square footage as profitably as
planned.
We
plan
to expand our selling square footage by approximately 10% in 2007 to increase
our sales and profits. Expanding our square footage profitably depends on a
number of uncertainties, including our ability to locate, lease, build out
and
open or expand stores in suitable locations on a timely basis under favorable
economic terms. We must also open or expand stores within our established
geographic markets, where new or expanded stores may draw sales away from our
existing stores. We may not manage our expansion effectively, and our failure
to
achieve our expansion plans could materially and adversely affect our business,
financial condition and results of operations.
A
downturn in economic conditions could adversely affect our sales.
Economic
conditions, such as those caused by recession, inflation, adverse weather
conditions, or terrorism, could reduce consumer spending or cause customers
to
shift their spending to products we either do not sell or do not sell as
profitably. Adverse economic conditions could disrupt consumer spending and
significantly reduce our sales.
Our
sales and profits rely on imported merchandise, which may increase in cost
or
become unavailable.
Merchandise
imported directly from overseas accounts for approximately 35% to 40% of our
total purchases at retail. In addition, we believe that a small portion of
our
goods purchased from domestic vendors is imported. China is the source of a
substantial majority of our imports. Imported goods are generally less expensive
than domestic goods and increase our profit margins. A disruption in the flow
of
our imported merchandise or an increase in the cost of those goods may
significantly decrease our profits. Risks associated with our reliance on
imported goods include:
§ |
disruptions
in the flow of imported goods because of factors such
as:
|
o |
raw
material shortages, work stoppages, strikes and political
unrest;
|
o |
problems
with oceanic shipping, including shipping container shortages;
and
|
o |
economic
crises and international disputes.
|
§ |
increases
in the cost of purchasing or shipping foreign merchandise, resulting
from:
|
o |
increases
in shipping rates imposed by the trans-Pacific ocean carriers;
|
o |
changes
in currency exchange rates and local economic conditions, including
inflation in the country of origin;
|
o |
failure
of the United States to maintain normal trade relations with China;
and
|
o |
import
duties, import quotas and other trade
sanctions.
|
We
could encounter disruptions or additional costs in receiving and distributing
merchandise.
Our
success depends on our ability to transport merchandise from our suppliers
to
our distribution centers and then ship it to our stores in a timely and
cost-effective manner. We may not anticipate, respond to or control all of
the
challenges of operating our receiving and distribution systems. Some of the
factors that could have an adverse effect on our shipping and receiving systems
or costs are:
§ |
Shipping.
Our
oceanic shipping schedules may be disrupted or delayed from time
to time.
We also have experienced shipping rate increases over the last several
years imposed by the trans-Pacific ocean
carriers.
|
§
|
Diesel
fuel costs. We have experienced increases in diesel fuel
costs over the past few years. |
§ |
Vulnerability
to natural or man-made disasters.
A
fire, explosion or natural disaster at any of our distribution
facilities
could result in a loss of merchandise and impair our ability to
adequately
stock our stores. Some of our facilities are especially vulnerable
to
earthquakes, hurricanes or
tornadoes.
|
§ |
Labor
disagreement.
Labor disagreements or disruptions may result in delays in the delivery
of
merchandise to our stores and increase
costs.
|
§ |
War,
terrorism and other events.
War and acts of terrorism in the United States, or in China or other
parts
of Asia where we buy a significant amount of our imported merchandise,
could disrupt our supply chain.
|
Sales
below our expectations during peak seasons may cause our operating results
to
suffer materially.
Our
highest sales periods are the Christmas and Easter seasons. We generally realize
a disproportionate amount of our net sales and a substantial majority of our
operating and net income during the fourth quarter. In anticipation, we stock
extra inventory and hire many temporary employees to supplement our stores.
An
economic downturn during these periods could adversely affect our operating
results, particularly operating and net income, to a greater extent than if
a
downturn occurred at other times of the year. Untimely merchandise delays due
to
receiving or distribution problems could have a similar effect. Sales during
the
Easter selling season are materially affected by the timing of the Easter
holiday. Easter in fiscal 2006 was on April 16th,
while
in fiscal 2007, it will be one week earlier on April 8th.
Pressure
from competitors may reduce our sales and profits.
The
retail industry is highly competitive. The marketplace is highly fragmented
as
many different retailers compete for market share by utilizing a variety of
store formats and merchandising strategies. We expect competition to increase
in
the future because there are no significant economic barriers for others to
enter our retail sector. Many of our current or potential competitors have
greater financial resources than we do. We cannot guarantee that we will
continue to be able to compete successfully against existing or future
competitors. Please see Item 1 “Business,” of this Form 10-K for further
discussion of the effect of competition on our operations.
The
resolution of certain legal matters could have a material adverse effect on
our
results of operations, accrued liabilities and cash.
For
a
discussion of current legal matters, please see Item 3. Legal Proceedings of
this Form 10-K. Resolution of certain matters described in that item, if decided
against the Company, could have a material adverse effect on our results of
operations, accrued liabilities or cash flows.
Certain
provisions in our articles of incorporation and bylaws could delay or discourage
a takeover attempt that may be in a shareholder's best
interest.
Our
articles of incorporation and bylaws contain provisions that may delay or
discourage a takeover attempt that a shareholder might consider in his best
interest. These provisions, among other things:
· |
classify
our board of directors into three classes, each of which serves for
different three-year periods;
|
· |
provide
that only the board of directors, chairman or president may call
special
meetings of the shareholders;
|
· |
establish
certain advance notice procedures for nominations of candidates for
election as directors and for shareholder proposals to be considered
at
shareholders' meetings;
|
· |
require
a vote of the holders of more than two-thirds of the shares entitled
to
vote in order to remove a director, change the number of directors,
or
amend the foregoing and certain other provisions of the articles
of
incorporation and bylaws; and
|
· |
permit
the board of directors, without further action of the shareholders,
to
issue and fix the terms of preferred stock, which may have rights
senior
to those of the common stock.
|
None.
Stores
As
of
February 3, 2007, we operated 3,219 stores in 48 states as detailed
below:
Alabama
|
81
|
|
Maine
|
16
|
|
Ohio
|
148
|
Arizona
|
50
|
|
Maryland
|
74
|
|
Oklahoma
|
50
|
Arkansas
|
48
|
|
Massachusetts
|
41
|
|
Oregon
|
65
|
California
|
222
|
|
Michigan
|
118
|
|
Pennsylvania
|
178
|
Colorado
|
37
|
|
Minnesota
|
39
|
|
Rhode
Island
|
11
|
Connecticut
|
25
|
|
Mississippi
|
49
|
|
South
Carolina
|
68
|
Delaware
|
16
|
|
Missouri
|
80
|
|
South
Dakota
|
4
|
Florida
|
200
|
|
Montana
|
8
|
|
Tennessee
|
83
|
Georgia
|
129
|
|
Nebraska
|
11
|
|
Texas
|
200
|
Idaho
|
20
|
|
Nevada
|
24
|
|
Utah
|
31
|
Illinois
|
134
|
|
New
Hampshire
|
13
|
|
Vermont
|
6
|
Indiana
|
94
|
|
New
Jersey
|
69
|
|
Virginia
|
125
|
Iowa
|
27
|
|
New
Mexico
|
22
|
|
Washington
|
58
|
Kansas
|
31
|
|
New
York
|
148
|
|
West
Virginia
|
32
|
Kentucky
|
68
|
|
North
Carolina
|
145
|
|
Wisconsin
|
59
|
Louisiana
|
55
|
|
North
Dakota
|
3
|
|
Wyoming
|
4
|
We
currently lease our stores and expect to continue to lease new stores as
we
expand. Our leases typically provide for a short initial lease term, generally
five years, with options to extend, however in some cases we have initial
lease
terms of seven to ten years. We believe this leasing strategy enhances our
flexibility to pursue various expansion opportunities resulting from changing
market conditions. As current leases expire, we believe that we will be able
to
obtain lease renewals, if desired, for present store locations, or to obtain
leases for equivalent or better locations in the same general area.
Distribution
Centers
The
following table includes information about the distribution centers that
we
currently operate. We plan to expand the Briar Creek distribution center
in
2007. This expansion will increase the square footage of the Briar Creek
distribution center to 1.0 million square feet. We believe our distribution
center network, including this planned expansion, is capable of supporting
approximately $5.0 billion in annual sales.
Location
|
Own/Lease
|
Lease
Expires
|
Size
in
Square
Feet
|
|
|
|
|
Chesapeake,
Virginia
|
Own
|
N/A
|
400,000
|
Olive
Branch, Mississippi
|
Own
|
N/A
|
425,000
|
Joliet,
Illinois
|
Own
|
N/A
|
1,200,000
|
Stockton,
California
|
Own
|
N/A
|
525,000
|
Briar
Creek, Pennsylvania
|
Own
|
N/A
|
603,000
|
Savannah,
Georgia
|
Own
|
N/A
|
603,000
|
Marietta,
Oklahoma
|
Own
|
N/A
|
603,000
|
Salt
Lake City, Utah
|
Lease
|
April
2010
|
252,000
|
Ridgefield,
Washington
|
Own
|
N/A
|
665,000
|
In
addition to our distribution centers noted above, during the past several
years,
we have used off-site facilities to accommodate limited quantities of seasonal
merchandise.
With
the
exception of our Salt Lake City and Ridgefield facilities, each of our
distribution centers contains advanced materials handling technologies,
including automated conveyor and sorting systems, radio-frequency inventory
tracking equipment and specialized information systems.
For
more
information on financing of our distribution centers, see "Management's
Discussion and Analysis - Funding Requirements."
From
time
to time, we are defendants in ordinary, routine litigation or proceedings
incidental to our business, including allegations regarding:
|
|
·
|
employment
related matters;
|
|
|
·
|
infringement
of intellectual property rights;
|
|
|
·
|
product
safety matters, which may include product recalls in cooperation
with the
Consumer Products Safety Commission;
|
|
|
·
|
personal
injury/wrongful death claims; and
|
|
|
·
|
real
estate matters related to store
leases.
|
In
2003,
we were served with a lawsuit in a California state court by a former employee
who alleged that employees did not properly receive sufficient meal breaks
and
paid rest periods, along with other alleged wage and hourly violations. The
suit
requested that the California state court certify the case as a class action.
This suit was dismissed with prejudice in May 2005, and the dismissal was
appealed. A California appeals court granted the appeal and our petition
for
review to the California Supreme Court was denied. The case has been remanded
to
the trial court where it will likely be consolidated with a companion suit
which
had been filed in the same court following the trial court’s earlier dismissal.
We anticipate that the plaintiff will seek class certification which we will
oppose.
In
2005,
we were served with a lawsuit by former employees in Oregon who allege that
they
did not properly receive sufficient meal breaks and paid rest periods. They
also
allege other wage and hour violations. The plaintiffs requested the Court
to
certify classes for their various claims and the presiding judge did so with
respect to two classes, one alleging that our Oregon employees, in violation
of
that state’s labor laws, were not paid for rest breaks and the other that upon
termination of employment, employees were not tendered their final pay in
a
timely manner. Other claims of the plaintiffs were dismissed by an earlier
Order
of the Court and are being appealed by the plaintiffs. Discovery will ensue
on
the certified class issues; no trial is anticipated before the end of
2007.
In
2006,
we were served with a lawsuit by a former employee in a California state
court
alleging that she was paid for wages with a check drawn on a bank which did
not
have any branches in the state, an alleged violation of the state's labor
code;
that she was paid less for her work than other similar employees with the
same
job title based on her gender; and that we did not pay her final wages in
a
timely manner, also an alleged violation of the labor code. The plaintiff
requested the court to certify the case as a class action. We have been
successful in removing the case from state to the federal court level.
The
parties have reached a settlement and executed an Agreement which will be
presented to the Court for its approval on April 24, 2007. The estimated
settlement amount has been accrued in the accompanying consolidated financial
statements as of February 3, 2007.
In
2006,
we were served with a lawsuit filed in federal court in the state of Alabama
by
a former store manager. She claims that she should have been classified as
a
non-exempt employee under the Fair Labor Standards Act and, therefore, should
have received overtime compensation and other benefits. She filed the case
as a
collective action on behalf of herself and all other employees (store managers)
similarly situated. Our motion requesting that the case be transferred from
Alabama to Virginia has been denied. The plaintiff now seeks entry of an
Order
allowing nationwide notice to be sent to all store managers employed by us
now
or within the past three years. We are contesting entry of such an
Order.
We
will
vigorously defend ourselves in these lawsuits. We do not believe that any
of
these matters will, individually or in the aggregate, have a material adverse
effect on our business or financial condition. We cannot give assurance,
however, that one or more of these lawsuits will not have a material adverse
effect on our results of operations for the period in which they are resolved.
No
matters were submitted to a vote of security holders during the fourth quarter
of our 2006 fiscal year.
PART
II
Our
common stock has been traded on The Nasdaq Stock Market® under the symbol "DLTR"
since our initial public offering on March 6, 1995. The following table gives
the high and low sales prices of our common stock as reported by Nasdaq for
the
periods indicated.
|
|
High
|
|
Low
|
|
Fiscal
year ended January 28, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
First
Quarter
|
|
$
|
29.04
|
|
$
|
23.95
|
|
Second
Quarter
|
|
|
26.01
|
|
|
22.77
|
|
Third
Quarter
|
|
|
25.65
|
|
|
20.56
|
|
Fourth
Quarter
|
|
|
25.48
|
|
|
20.66
|
|
|
|
|
|
|
|
|
|
Fiscal
year ended February 3, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First
Quarter
|
|
$
|
28.68
|
|
$
|
24.34
|
|
Second
Quarter
|
|
|
27.89
|
|
|
23.90
|
|
Third
Quarter
|
|
|
32.00
|
|
|
25.62
|
|
Fourth
Quarter
|
|
|
32.78
|
|
|
29.34
|
|
On
March
30, 2007, the last reported sale price for our common stock, as quoted by
Nasdaq, was $38.24 per share. As of March 30, 2007, we had
approximately 550
shareholders of record.
The
following table presents our share repurchase activity for the 14 weeks ended
February 3, 2007.
|
|
|
|
|
|
|
|
Approximate
|
|
|
|
|
|
|
|
|
|
dollar
value
|
|
|
|
|
|
|
|
Total
number
|
|
of
shares that
|
|
|
|
|
|
|
|
of
shares
|
|
may
yet be
|
|
|
|
|
|
|
|
purchased
as
|
|
purchased
under
|
|
|
|
Total
number
|
|
Average
|
|
part
of publicly
|
|
the
plans or
|
|
|
|
of
shares
|
|
price
paid
|
|
announced
plans
|
|
programs
|
|
Period
|
|
purchased
|
|
per
share
|
|
or
programs
|
|
(in
millions)
|
|
October
29, 2006 to November 25, 2006
|
|
|
-
|
|
$
|
-
|
|
|
-
|
|
$
|
26.7
|
|
November
26, 2006 to December 30, 2006
|
|
|
3,156,881
|
|
|
30.80
|
|
|
3,156,881
|
|
|
426.7
|
|
December
31, 2006 to February 3, 2007
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
426.7
|
|
Total
|
|
|
3,156,881
|
|
$
|
30.80
|
|
|
3,156,881
|
|
$
|
426.7
|
|
In
March
2005, our Board of Directors authorized the repurchase of up to $300.0 million
of our common stock through March 2008. During fiscal 2006, we repurchased
5,650,871 shares for approximately $148.2 million under the March 2005
authorization.
In
November 2006, our Board of Directors authorized the repurchase of up to
$500.0
million of our common stock. This amount was in addition to the $26.7 million
remaining on the March 2005 authorization. In December 2006, we entered into
two
agreements with a third party to repurchase approximately $100.0 million
of the
Company’s common shares under an Accelerated Share Repurchase Agreement (ASR).
The $100.0 million is reflected in the table above. As of February 3, 2007,
of
the $100.0 million that is recorded as a reduction to stockholders’ equity,
approximately $3.8 million is pending final settlement of the ASR. See
additional discussion of the ASR in the Liquidity and Capital Resource section
of, “Management’s Discussion and Analysis of Financial Condition and Results of
Operations,” found elsewhere in this report.
We
anticipate that substantially all of our cash flow from operations in the
foreseeable future will be retained for the development and expansion of
our
business, the repayment of indebtedness and, as authorized by our Board of
Directors, the repurchase of stock. Management does not anticipate paying
dividends on our common stock in the foreseeable future. In addition, our
credit
facilities contain financial covenants that restrict our ability to pay cash
dividends.
The
following table presents a summary of our selected financial data for the
fiscal
years ended February 3, 2007, January 28, 2006, January 29, 2005, and January
31, 2004 and the calendar year ended December 31, 2002. In January 2003,
we
changed our fiscal year end to a retail fiscal year ending on the Saturday
closest to January 31. Fiscal 2006 included 53 weeks, commensurate with the
retail calendar, while all other fiscal years reported in the table contain
52
weeks. The selected income statement and balance sheet data have been derived
from our consolidated financial statements that have been audited by our
independent registered public accounting firm. This information should be
read
in conjunction with the consolidated financial statements and related notes,
"Management’s Discussion and Analysis of Financial Condition and Results of
Operations" and our financial information found elsewhere in this report.
Comparable
store net sales compare net sales for stores open throughout each of the
two
periods being compared, including expanded stores. Net sales per store and
net
sales per selling square foot are calculated for stores open throughout the
period presented.
Amounts
in the following tables are in millions, except per share data, number of
stores
data, net sales per selling square foot data and inventory turns.
|
|
Years
Ended
|
|
|
|
February
3,
|
|
January
28,
|
|
January
29,
|
|
January
31
|
|
December
31,
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
2004
|
|
2002
|
|
Income
Statement Data:
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$
|
3,969.4
|
|
$
|
3,393.9
|
|
$
|
3,126.0
|
|
$
|
2,799.9
|
|
$
|
2,329.2
|
|
Gross
profit
|
|
|
1,357.2
|
|
|
1,172.4
|
|
|
1,112.5
|
|
|
1,018.4
|
|
|
852.0
|
|
Selling,
general and administrative expenses
|
|
|
1,046.4
|
|
|
888.5
|
|
|
819.0
|
|
|
724.8
|
|
|
598.1
|
|
Operating
income
|
|
|
310.8
|
|
|
283.9
|
|
|
293.5
|
|
|
293.6
|
|
|
253.9
|
|
Net
income
|
|
|
192.0
|
|
|
173.9
|
|
|
180.3
|
|
|
177.6
|
|
|
154.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Margin
Data (as a percentage of net sales):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
profit
|
|
|
34.2
|
%
|
|
34.5
|
%
|
|
35.6
|
%
|
|
36.4
|
%
|
|
36.6
|
%
|
Selling,
general and administrative expenses
|
|
|
26.4
|
%
|
|
26.2
|
%
|
|
26.2
|
%
|
|
25.9
|
%
|
|
25.7
|
%
|
Operating
income
|
|
|
7.8
|
%
|
|
8.4
|
%
|
|
9.4
|
%
|
|
10.5
|
%
|
|
10.9
|
%
|
Net
income
|
|
|
4.8
|
%
|
|
5.1
|
%
|
|
5.8
|
%
|
|
6.3
|
%
|
|
6.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per
Share Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
net income per share
|
|
$
|
1.85
|
|
$
|
1.60
|
|
$
|
1.58
|
|
$
|
1.54
|
|
$
|
1.35
|
|
Diluted
net income per share increase
|
|
|
15.6
|
%
|
|
1.3
|
%
|
|
2.6
|
%
|
|
14.1
|
%
|
|
23.9
|
%
|
|
|
As
of
|
|
|
|
February
3,
|
|
January
28,
|
|
January
29,
|
|
January
31
|
|
December
31,
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
2004
|
|
2002
|
|
Balance
Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
|
|
|
|
|
|
|
|
|
|
and
short-term investments
|
|
$
|
306.8
|
|
$
|
339.8
|
|
$
|
317.8
|
|
$
|
168.7
|
|
$
|
336.0
|
|
Working
capital
|
|
|
575.7
|
|
|
648.2
|
|
|
675.5
|
|
|
450.3
|
|
|
509.6
|
|
Total
assets
|
|
|
1,873.3
|
|
|
1,798.4
|
|
|
1,792.7
|
|
|
1,501.5
|
|
|
1,116.4
|
|
Total
debt, including capital lease obligations
|
|
|
269.5
|
|
|
269.9
|
|
|
281.7
|
|
|
185.1
|
|
|
54.4
|
|
Shareholders'
equity
|
|
|
1,167.7
|
|
|
1,172.3
|
|
|
1,164.2
|
|
|
1,014.5
|
|
|
855.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years
Ended
|
|
|
|
|
|
|
|
January
28,
|
|
|
January
29,
|
|
|
January
31
|
|
|
December
31,
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2002
|
|
Selected
Operating Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number
of stores open at end of period
|
|
|
3,219
|
|
|
2,914
|
|
|
2,735
|
|
|
2,513
|
|
|
2,263
|
|
Gross
square footage at end of period
|
|
|
33.3
|
|
|
29.2
|
|
|
25.9
|
|
|
21.4
|
|
|
16.5
|
|
Selling
square footage at end of period
|
|
|
26.3
|
|
|
23.0
|
|
|
20.4
|
|
|
16.9
|
|
|
13.0
|
|
Selling
square footage annual growth
|
|
|
14.3
|
%
|
|
12.6
|
%
|
|
21.1
|
%
|
|
27.5
|
%
|
|
28.8
|
%
|
Net
sales annual growth
|
|
|
16.9
|
%
|
|
8.6
|
%
|
|
11.6
|
%
|
|
18.7
|
%
|
|
17.2
|
%
|
Comparable
store net sales increase (decrease)
|
|
|
4.6
|
%
|
|
(0.8
|
%)
|
|
0.5
|
%
|
|
2.9
|
%
|
|
1.0
|
%
|
Net
sales per selling square foot
|
|
$
|
161
|
|
$
|
156
|
|
$
|
168
|
|
$
|
187
|
|
$
|
201
|
|
Net
sales per store
|
|
$
|
1.3
|
|
$
|
1.2
|
|
$
|
1.2
|
|
$
|
1.2
|
|
$
|
1.1
|
|
Selected
Financial Ratios:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Return
on assets
|
|
|
10.2
|
%
|
|
9.7
|
%
|
|
10.9
|
%
|
|
13.7
|
%
|
|
15.3
|
%
|
Return
on equity
|
|
|
16.4
|
%
|
|
14.9
|
%
|
|
16.5
|
%
|
|
19.0
|
%
|
|
20.5
|
%
|
Inventory
turns
|
|
|
4.4
|
|
|
3.7
|
|
|
3.5
|
|
|
3.7
|
|
|
4.5
|
|
In
Management’s Discussion and Analysis, we explain the general financial condition
and the results of operations for our company, including:
|
|
·
|
what
factors affect our business;
|
|
|
·
|
what
our earnings, gross margins and costs were in 2006 and
2005;
|
|
|
·
|
why
those earnings, gross margins and costs were different from the
year
before;
|
|
|
·
|
how
all of this affects our overall financial condition;
|
|
|
·
|
what
our expenditures for capital projects were in 2006 and what we
expect them
to be in 2007; and
|
|
|
·
|
where
funds will come from to pay for future
expenditures.
|
As
you
read Management’s Discussion and Analysis, please refer to our consolidated
financial statements, included in Item 8 of this Form 10-K, which present
the
results of operations for the fiscal years ended February 3, 2007, January
28,
2006 and January 29, 2005. In Management’s Discussion and Analysis, we analyze
and explain the annual changes in some specific line items in the consolidated
financial statements for the fiscal year 2006 compared to the comparable
fiscal
year 2005 and the fiscal year 2005 compared to the comparable fiscal year
2004.
Key
Events and Recent Developments
Several
key events have had or are expected to have a significant effect on our
results
of operations. You should keep in mind that:
·
|
In
November 2006, our Board of Directors authorized the repurchase
of up to
$500 million of our common stock. This amount was in addition
to the $26.7
million remaining on the $300.0 million March 2005 authorization.
As of
February 3, 2007, we had approximately $427.0 million remaining
under this
authorization.
|
·
|
In
March 2006, we completed our acquisition of 138 Deal$ stores
and related
assets. We paid approximately $32.0 million for store related
assets and
$22.1 million for inventory.
|
·
|
On
December 15, 2005, the Compensation Committee of our Board of
Directors
approved the acceleration of the vesting date of all previously
issued,
outstanding and unvested options under all current stock option
plans,
effective as of December 15, 2005. This decision eliminated non-cash
compensation expense that would have been recorded in future
periods
following our adoption of Statement of Financial Accounting Standards
No.
123, Share-Based
Payment (revised 2004) (FAS
123R), on January 29, 2006. Compensation expense has been reduced
by
approximately $14.9 million over a period of four years during
which the
options would have vested, as a result of the option acceleration
program.
|
·
|
In
2004, we completed construction and began operations in two new
distribution centers. In June 2004, we began operations in our
new
distribution center in Joliet, Illinois. The Joliet distribution
center is
a 1.2 million square foot, fully automated facility. In February
2004, we
began operations in our Ridgefield, Washington distribution center.
The
Ridgefield distribution center is a 665,000 square foot facility
that can
be expanded to accommodate future growth needs. In 2007, we are
planning
to expand our Briar Creek distribution center by 400,000 square
feet. Upon
completion of this expansion, our nine distribution centers will
support
approximately $5.0 billion in sales annually.
|
·
|
In
March 2004, we entered into a five-year $450.0 million Unsecured
Revolving
Credit Facility (Facility). We used availability under this Facility
to
repay variable rate debt. This Facility also replaced our previous
$150.0
million revolving credit facility.
|
Overview
Our
net
sales are derived from the sale of merchandise. Two major factors tend
to affect
our net sales trends. First is our success at opening new stores or adding
new
stores through acquisitions. Second, sales vary at our existing stores
from one
year to the next. We refer to this change as a change in comparable store
net
sales, because we compare only those stores that are open throughout both
of the
periods being compared. We include sales from stores expanded during the
year in
the calculation of comparable store net sales, which has the effect of
increasing our comparable store net sales. The term 'expanded' also includes
stores that are relocated.
At
February 3, 2007, we operated 3,219 stores in 48 states, with 26.3 million
selling square feet compared to 2,914 stores with 23.0 million selling
square
feet at January 28, 2006. During fiscal 2006, we opened 211 stores, expanded
85
stores and closed 44 stores, compared to 232 new stores opened, 93 stores
expanded and 53 stores closed during fiscal 2005. In addition, we acquired
138
Deal$ stores on March 25, 2006. Including the Deal$ acquisition, we achieved
the
high end of our square footage growth target of 12%-14% for the fiscal
year. In
fiscal 2006, we increased our selling square footage by approximately 3.3
million square feet, or approximately 14%. Of the 3.3 million selling square
foot increase in 2006, approximately 1.2 million resulted from the acquisition
of the Deal$ stores and 0.4 million was added by expanding existing stores.
The
average size of our stores opened in 2006 was approximately 9,000 selling
square
feet (or about 11,000 gross square feet). The average new store size decreased
in 2006 from approximately 10,000 selling square feet (or about 12,400
gross
square feet) for new stores in 2005. For 2007, we continue to plan to open
stores around 9,000 selling square feet (or about 11,000 gross square feet).
We
believe that the 11,000-12,500 gross square foot store size is our optimal
size
operationally and that this size also gives the customer an improved shopping
environment that invites them to shop longer and buy more. We expect the
substantial majority of our future net sales growth to come from the square
footage growth resulting from new store openings and expansion of existing
stores.
Fiscal
2006 ended on February 3, 2007 and included 53 weeks, commensurate with
the
retail calendar. The 53rd
week in
2006 added approximately $70 million in sales. Fiscal 2005 ended on January
28,
2006 and included 52 weeks.
In
fiscal
2006, comparable store net sales increased by 4.6%. This increase was based
on
53 weeks for both periods. The comparable store net sales increase was
the
result of increases of 1.9% in the number of transactions and 2.7% in
transaction size, compared to fiscal 2005. We believe comparable store
net sales
were positively affected by the initiatives we began putting in place in
2005,
including expansion of forms of payment accepted by our stores and the
roll-out
of freezers and coolers to more of our stores. During 2006, we completed
the
roll-out of debit card acceptance to all of our stores, which has enabled
us to
accept Electronic Benefit Transfer cards and we now accept food stamps
in
approximately 600 qualified stores. We believe the expansion of forms of
payment
accepted by our stores has helped increase the average transaction size
in our
stores.
In
2006,
we continued to experience a slight shift in the mix of merchandise sold
to more
consumables, which we believe increases the traffic in our stores but have
lower
margin. The planned shift in mix to more consumables is the result of the
roll-out of freezers and coolers to more stores in 2005 and 2006. At February
3,
2007, we had freezers and coolers in approximately 700 stores, compared
to
approximately 250 stores at January 28, 2006. We plan to add freezers and
coolers to approximately 250 more stores in 2007, which we believe will
continue
to pressure margins, as a percentage of sales, in 2007. However, we believe
that
this will enable us to increase sales and earnings in the future by increasing
the number of shopping trips made by our customers.
Our
point-of-sale technology is now in all of our stores, and this technology
provides us with valuable sales and inventory information to assist our
buyers
and improve our merchandise allocation to our stores. We believe that this
has
enabled us to better control our inventory, resulting in more efficient
distribution and store operations and increased inventory turnover. Using
the
data captured at the point of sale has enabled us to better plan our inventory
purchases and helped us reduce our inventory investment per store by
approximately 5.0% at February 3, 2007 compared to January 28, 2006. In
addition, inventory turnover has increased 70 basis points in 2006 as compared
to 2005.
We
must
continue to control our merchandise costs, inventory levels and our general
and
administrative expenses. Increases in these expenses could negatively impact
our
operating results.
Our
plans
for fiscal 2007 anticipate comparable store net sales increases of approximately
1% to 3% yielding net sales in the $4.22 billion to $4.33 billion range
and
diluted earnings per share of $1.96 to $2.10. This guidance for 2007 is
predicated on selling square footage growth of approximately 10%.
On
March
25, 2006, we completed our acquisition of 138 Deal$ stores. These stores
are
located primarily in the Midwest part of the United States and we have
existing
logistics capacity to service these stores. This acquisition also included
a few
“combo” stores that offer an expanded assortment of merchandise including items
that sell for more than $1. Substantially all Deal$ stores acquired continue
to
operate under the Deal$ banner while providing us an opportunity to leverage
our
Dollar Tree infrastructure in the testing of new merchandise concepts,
including
higher price points, without disrupting the single-price point model in
our
Dollar Tree stores. At February 3, 2007, 121 of these stores were selling
items
priced at over $1.00.
We
paid
approximately $32.0 million for store-related and other assets and $22.1
million
for inventory. The results of Deal$ store operations are included in our
financial statements since the acquisition date and did not have a significant
impact on our operating results through February 3, 2007. This acquisition
is
immaterial to our operations as a whole and therefore no proforma disclosure
of
financial information has been presented.
Results
of Operations
The
following table expresses items from our consolidated statements of operations,
as a percentage of net sales:
|
|
Year
Ended
|
|
Year
Ended
|
|
Year
Ended
|
|
|
|
February
3,
|
|
January
28,
|
|
January
29,
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
|
100.0
|
%
|
|
100.0
|
%
|
|
100.0
|
%
|
Cost
of sales
|
|
|
65.8
|
%
|
|
65.5
|
%
|
|
64.4
|
%
|
Gross
profit
|
|
|
34.2
|
%
|
|
34.5
|
%
|
|
35.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
Selling,
general and administrative
|
|
|
|
|
|
|
|
|
|
|
expenses
|
|
|
26.4
|
%
|
|
26.2
|
%
|
|
26.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
Operating
income
|
|
|
7.8
|
%
|
|
8.3
|
%
|
|
9.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income
|
|
|
0.2
|
%
|
|
0.2
|
%
|
|
0.1
|
%
|
Interest
expense
|
|
|
(0.4
|
%)
|
|
(0.4
|
%)
|
|
(0.3
|
%)
|
|
|
|
|
|
|
|
|
|
|
|
Income
before income taxes
|
|
|
7.6
|
%
|
|
8.1
|
%
|
|
9.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
Provision
for income taxes
|
|
|
(2.8
|
%)
|
|
(3.0
|
%)
|
|
(3.4
|
%)
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
|
4.8
|
%
|
|
5.1
|
%
|
|
5.8
|
%
|
Fiscal
year ended February 3, 2007 compared to fiscal year ended January 28,
2006
Net
Sales.
Net
sales increased 16.9%, or $575.5 million, in 2006 compared to 2005, resulting
from sales in our new and expanded stores, including 138 Deal$ stores
acquired
in March 2006 and the 53 weeks of sales in 2006 versus 52 weeks in 2005,
which
accounted for approximately $70 million of the increase. Our sales increase
was
also impacted by a 4.6% increase in comparable store net sales for the
year.
This increase is based on a 53-week comparison for both periods. Comparable
store net sales are positively affected by our expanded and relocated
stores,
which we include in the calculation, and, to a lesser extent, are negatively
affected when we open new stores or expand stores near existing
ones.
The
following table summarizes the components of the changes in our store
count for
fiscal years ended February 3, 2007 and January 28, 2006.
|
|
February
3, 2007
|
|
January
28, 2006
|
|
|
|
|
|
|
|
New
stores
|
|
|
190
|
|
|
197
|
|
Deal$
acquisition
|
|
|
138
|
|
|
--
|
|
Acquired
leases
|
|
|
21
|
|
|
35
|
|
Expanded
or relocated stores
|
|
|
85
|
|
|
93
|
|
Closed
stores
|
|
|
(44)
|
|
|
(53)
|
|
Of the 3.3 million selling square foot increase in 2006, approximately
1.2
million resulted from the acquisition of the Deal$ stores and 0.4 million
was
added by expanding existing stores.
Gross
Profit.
Gross
profit margin decreased to 34.2% in 2006 compared to 34.5% in 2005. The
decrease
was primarily due to a 35 basis point increase in merchandise cost, including
inbound freight. This increase in merchandise cost was due to a slight
shift in
mix to more consumables, which have a lower margin, higher cost merchandise
at
our Deal$ stores and increased inbound domestic freight costs.
Selling,
General and Administrative Expenses.
Selling, general and administrative expenses, as a percentage of net
sales,
increased to 26.4% for 2006 as compared to 26.2% for 2005. The increase
is
primarily due to the following:
·
|
Payroll
and benefit related costs increased 35 basis points due to
increased
incentive compensation costs resulting from better overall
company
performance in the current year as compared to the prior year
and
increased stock compensation expense, partially offset by lower
workers'
compensation costs in the current year.
|
·
|
Operating
and corporate expenses decreased 10 basis points primarily
as the result
of payments received for early lease terminations in the current
year.
|
Operating
Income.
Due to
the reasons discussed above, operating income margin decreased to 7.8%
in 2006
compared to 8.4% in 2005.
Income
Taxes.
Our
effective tax rate was 36.6% in 2006 compared to 36.8% in 2005. The decreased
tax rate for 2006 was due primarily to increased tax-exempt interest
on certain
of our investments in the current year.
Fiscal
year ended January 28, 2006 compared to fiscal year ended January 29,
2005
Net
Sales.
Net
sales increased 8.6% in 2005 compared to 2004. We attribute this $267.9
million
increase in net sales primarily to new stores in 2005 and 2004 (which
are not
included in our comparable store net sales calculation) partially offset
by a
slight decrease in comparable store net sales of 0.8% in 2005. Our comparable
store net sales are positively affected by our expanded and relocated
stores,
which we include in the calculation, and, to a lesser extent, are negatively
affected when we open new stores or expand stores near existing stores.
The
following table summarizes the components of the changes in our store
count for
fiscal years ended January 28, 2006 and January 29, 2005.
|
|
January
28, 2006
|
|
January
29, 2005
|
|
|
|
|
|
|
|
New
stores
|
|
|
197
|
|
|
209
|
|
Acquired
leases
|
|
|
35
|
|
|
42
|
|
Expanded
or relocated stores
|
|
|
93
|
|
|
129
|
|
Closed
stores
|
|
|
(53)
|
|
|
(29)
|
|
Of
the
2.6 million selling square foot increase in 2005, approximately 0.5 million
in
selling square feet was added by expanding existing stores.
Gross
Profit.
Gross
profit margin decreased to 34.5% in 2005 compared to 35.6% in 2004. The
decrease
is primarily due to the following:
·
|
Merchandise
cost, including inbound freight, increased approximately 55
basis points,
due to a slight shift in mix to more consumables, which have
a lower
margin and increased inbound freight costs due to higher fuel
costs.
|
·
|
Occupancy
costs increased approximately 45 basis points due primarily
to
deleveraging associated with the negative comparable store
net sales for
the year.
|
Selling,
General and Administrative Expenses.
Selling, general and administrative expenses, as a percentage of net
sales, were
26.2% for 2005 and 2004. However, several components had increases or
decreases
as noted below:
·
|
Operating
and corporate expenses decreased approximately 25 basis points
primarily
due to decreased store supplies expense as a result of better
pricing,
decreased professional fees and the receipt of insurance proceeds
resulting from a fire at one of our locations, partially offset
by
increased interchange fees resulting from the rollout of debit
card
acceptance in 2005.
|
·
|
Payroll
related costs decreased approximately 10 basis points due to
a reduction
in incentive compensation accruals that are based on lower
than budgeted
2005 earnings and lower workers’ compensation and health care claims in
the current year.
|
·
|
These
decreases were partially offset by an approximate 25 basis
point increase
in store operating costs primarily due to higher utility costs
due to
higher rates and consumption in the current year.
|
·
|
Depreciation
expense for stores also increased 10 basis points primarily
due to the
deleveraging associated with negative comparable store net
sales for the
current year.
|
Operating
Income.
Due to
the reasons discussed above, operating income margin decreased to 8.3%
in 2005
compared to 9.4% for 2004.
Interest
Income. Interest
income increased $2.2 million in 2005 compared to 2004 because of higher
investment balances in the current year and increased interest
rates.
Interest
Expense.
Interest
expense increased $4.8 million in 2005 as compared to 2004. This increase
is
primarily due to increased rates on our revolver in the current year.
Income
Taxes.
Our
effective tax rate was 36.8% in 2005 compared to 37.5% in 2004. The decreased
tax rate for 2005 was due primarily to the resolution of tax uncertainties
in
the current year and increased tax-exempt interest on certain of our
investments.
Liquidity
and Capital Resources
Our
business requires capital to build and open new stores, expand our distribution
network and operate existing stores. Our working capital requirements
for
existing stores are seasonal and usually reach their peak in September
and
October. Historically, we have satisfied our seasonal working capital
requirements for existing stores and have funded our store opening and
distribution network expansion programs from internally generated funds
and
borrowings under our credit facilities.
The
following table compares cash-related information for the years ended
February
3, 2007, January 28, 2006, and January 29, 2005:
|
|
Year
Ended
|
|
Year
Ended
|
|
Year
Ended
|
|
|
|
February
3,
|
|
January
28,
|
|
January
29,
|
|
(in
millions)
|
|
2007
|
|
2006
|
|
2005
|
|
Net
cash provided by (used in):
|
|
|
|
|
|
|
|
Operating
activities
|
|
$
|
412.8
|
|
$
|
365.1
|
|
$
|
276.5
|
|
Investing
activities
|
|
|
(190.7
|
)
|
|
(235.5
|
)
|
|
(315.4
|
)
|
Financing
activities
|
|
|
(202.9
|
)
|
|
(170.3
|
)
|
|
61.2
|
|
The
$47.7
million increase in cash provided by operating activities in 2006 was
primarily
due to increased earnings before depreciation in the current year and
better
payables management in the current year, partially offset by approximately
$20.0
million of rent payments for February 2007 made prior to the end of fiscal
2006.
The
$44.8
million decrease in cash used in investing activities in 2006 compared
to 2005
was the result of a $114.9 million increase in net proceeds from short-term
investments which were used to help fund stock repurchases and the Deal$
acquisition in the current year. In the current year, we purchased an
additional
$9.3 million of investments in a restricted account to collateralize
certain
long-term insurance obligations. Additional uses of cash for investing
activities consisted of $54.1 million for the Deal$ acquisition in the
current
year and an increase of $36.1 million in capital expenditures due primarily
to
new store growth and the installation of freezers and coolers to certain
stores
in the current year.
The
$32.6
million increase in cash used in financing activities in 2006 compared
to 2005
primarily resulted from $248.2 million in stock repurchases in the current
year
compared to $180.4 million in the prior year. This increase was partially
offset
by increased proceeds from stock option exercises in the current year
resulting
from our higher stock prices in 2006 as compared to 2005.
The
$88.6
million increase in cash provided by operating activities in 2005 was
primarily
due to an approximate 12% decrease in inventory per store at January
28, 2006
compared to January 29, 2005. The inventory per store decrease is the
result of
an initiative to lower backroom inventory levels and increase inventory
turns
through a reduction in 2005 purchases. The aforementioned net cash provided
by
operating activities was partially offset by a decrease in deferred tax
liabilities chiefly as a result of the elimination of bonus
depreciation.
The
$79.9
million decrease in cash used in investing activities in 2005 compared
to 2004
was the result of a $34.2 million decrease in net purchases of investments
resulting from more cash used to repurchase stock in the current year.
The net
purchases of investments in 2005 include $29.9 million of investments
that are
in a restricted account to collateralize certain long-term insurance
obligations. These investments replaced higher cost stand-by letters
of credit
and surety bonds. Capital
expenditures also decreased $42.5 million in 2005 after two distribution
center
projects and point-of-sale installations were completed in 2004.
The
$231.5 million change in cash used in financing activities in 2005 compared
to
2004 primarily resulted from $180.4 million in stock repurchases in 2005
compared to $48.6 million in 2004. Also in 2004, we entered into a five-year
$450.0 million Revolving Credit Facility, under which we received net
proceeds
of $248.9 million. We used a portion of these proceeds to repay $142.6
million
of variable rate debt for our distribution centers and invested the balance
in
short-term tax exempt municipal bonds.
At
February 3, 2007, our long-term borrowings were $268.8 million and our
capital
lease commitments were $0.7 million. We also have $125.0 million and
$50.0
million Letter of Credit Reimbursement and Security Agreements, under
which
approximately $84.8 million were committed to letters of credit issued
for
routine purchases of imported merchandise at February 3, 2007.
In
March
2005, our Board of Directors authorized the repurchase of up to $300.0
million
of our common stock through March 2008. During fiscal 2006, we repurchased
5,650,871 shares for approximately $148.2 million under the March 2005
authorization.
In
November 2006, our Board of Directors authorized the repurchase of up
to $500.0
million of our common stock. This amount was in addition to the $27.0
million
remaining on the March 2005 authorization. In December 2006, we entered
into two
agreements with a third party to repurchase approximately $100.0 million
of the
Company’s common shares under an Accelerated Share Repurchase Agreement
(ASR).
The
first
$50.0 million was executed in an “uncollared” agreement. In this transaction, we
initially received 1,656,178 shares based on the market price of our
stock of
$30.19 as of the trade date (December 8, 2006). A weighted average price
was
calculated using stock prices from December 16, 2006 - March 8, 2007.
This
represents the calculation period and based on the weighted average price
during
this period, a settlement took place in March 2007 resulting in
additional funding of $3.3 million.
The
remaining $50.0 million relates to a “collared” agreement in which we initially
received 1,500,703 shares representing the minimum number of shares under
the
agreement. The maximum number of shares that can be repurchased under
the
agreement is 1,693,101. The number of shares was determined based on the
weighted average market price of our common stock during the same calculation
period as defined in the “uncollared” agreement. The weighted average market
price as of February 3, 2007 as defined in the “collared” agreement was $30.80.
Therefore, as of February 3, 2007, we would receive an additional 122,742
shares
under the “collared” agreement. Based on the applicable accounting literature,
these additional shares were not included in the weighted average diluted
earnings per share calculation because their effect would be antidilutive.
The
weighted average stock price of our common stock as defined in the “collared”
agreement as of March 8, 2007 (termination date) was $31.97. We received
an
additional 63,325 shares on March 8, 2007 under this agreement.
On
March 29, 2007, we entered into an agreement with a
third party to repurchase approximately $150.0 million of our common
shares
under another ASR. The entire $150.0 million was executed under a
"collared" agreement. Within
two weeks of the March 29, 2007 execution date, we will receive the minimum
number of shares. Up to four months after the initial execution date,
we will
receive additional shares from the third party depending on the volume
weighted
average price of our common shares during that period, subject to the
maximum
share delivery provisions of the agreement.
Funding
Requirements
Overview
We
expect
our cash needs for opening new stores and expanding existing stores in
fiscal
2007 to total approximately $160.7 million,
which includes capital expenditures, initial inventory and pre-opening
costs.
Our estimated capital expenditures for fiscal 2007 are between $170.0
and $190.0
million, including planned expenditures for our new and expanded stores,
the
addition of freezers and coolers to approximately 250 stores, an expansion
of
the Briar Creek Distribution Center and an expansion to our home office
and data
center in Chesapeake, Va. We believe that we can adequately fund our
working
capital requirements and planned capital expenditures for the next few
years
from net cash provided by operations and potential borrowings under our
existing
credit facilities.
The
following tables summarize our material contractual obligations, including
both
on- and off-balance sheet arrangements, and our commitments, excluding
interest
on long-term borrowings (in millions):
Contractual
Obligations
|
|
Total
|
|
2007
|
|
2008
|
|
2009
|
|
2010
|
|
2011
|
|
Thereafter
|
|
Lease
Financing
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
lease obligations
|
|
$
|
1,177.0
|
|
$
|
284.2
|
|
$
|
246.0
|
|
$
|
207.2
|
|
$
|
161.5
|
|
$
|
110.6
|
|
$
|
167.5
|
|
Capital
lease obligations
|
|
|
0.8
|
|
|
0.4
|
|
|
0.3
|
|
|
0.1
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term
Borrowings
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revolving
credit facility
|
|
|
250.0
|
|
|
--
|
|
|
--
|
|
|
250.0
|
|
|
--
|
|
|
--
|
|
|
--
|
|
Revenue
bond financing
|
|
|
18.8
|
|
|
18.8
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
obligations
|
|
$
|
1,446.6
|
|
$
|
303.4
|
|
$
|
246.3
|
|
$
|
457.3
|
|
$
|
161.5
|
|
$
|
110.6
|
|
$
|
167.5
|
|
Commitments
|
|
Total
|
|
Expiring
in 2007
|
|
Expiring
in 2008
|
|
Expiring
in 2009
|
|
Expiring
in 2010
|
|
Expiring
in 2011
|
|
Thereafter
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Letters
of credit and surety bonds
|
|
$
|
116.3
|
|
$
|
115.6
|
|
$
|
0.7
|
|
$
|
--
|
|
$
|
--
|
|
$
|
--
|
|
$
|
--
|
|
Freight
contracts
|
|
|
57.1
|
|
|
38.6
|
|
|
9.9
|
|
|
8.6
|
|
|
--
|
|
|
--
|
|
|
--
|
|
Technology
assets
|
|
|
3.8
|
|
|
3.8
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
Total
commitments
|
|
$
|
177.2
|
|
$
|
158.0
|
|
$
|
10.6
|
|
$
|
8.6
|
|
$
|
--
|
|
$
|
--
|
|
$
|
--
|
|
Lease
Financing
Operating
Lease Obligations. Our
operating lease obligations are primarily for payments under noncancelable
store
leases. The commitment includes amounts for leases that were signed prior
to
February 3, 2007 for stores that were not yet open on February 3,
2007.
Capital
Lease Obligations.
Our
capital lease obligations are primarily for payments for distribution
center
equipment and computer equipment at the store support center.
Long-Term
Borrowings
Revolving
Credit Facility. In
March
2004, we entered into a five-year Revolving Credit Facility (the Facility).
The
Facility provides for a $450.0 million line of credit, including up to
$50.0
million in available letters of credit. Interest is assessed under the
line based on matrix pricing which currently approximates LIBOR, plus
0.475%.
The Facility, among other things, requires the maintenance of certain
specified
financial ratios, restricts the payment of certain distributions and
prohibits
the incurrence of certain new indebtedness. We used availability under
this
Facility to repay the $142.6 million of variable-rate debt and to purchase
short-term investments. As of February 3, 2007, we had $250.0 million
outstanding on this Facility.
Revenue
Bond Financing.
In May
1998, we entered into an agreement with the Mississippi Business Finance
Corporation under which it issued $19.0 million of variable-rate demand
revenue
bonds. We used the proceeds from the bonds to finance the acquisition,
construction and installation of land, buildings, machinery and equipment
for
our distribution facility in Olive Branch, Mississippi. At February 3,
2007, the
balance outstanding on the bonds was $18.8 million. These bonds are due
to be
fully repaid in June 2018. The bonds do not have a prepayment penalty
as long as
the interest rate remains variable. The bonds contain a demand provision
and,
therefore, outstanding amounts are classified as current liabilities.
We pay
interest monthly based on a variable interest rate, which was 5.4% at
February
3, 2007.
Commitments
Letters
of Credit and Surety Bonds.
In
March 2001, we entered into a Letter of Credit Reimbursement and Security
Agreement, which provides $125.0 million for letters of credit. In December
2004, we entered into an additional Letter of Credit Reimbursement and
Security
Agreement, which provides $50.0 million for letters of credit. Letters
of credit
are generally issued for the routine purchase of imported merchandise
and we had
approximately $84.8 million of purchases committed under these letters
of credit
at February 3, 2007. We also have approximately $31.5 million of letters
of
credit or surety bonds outstanding for our insurance programs and certain
utility payment obligations at some of our stores.
Freight
Contracts.
We have
contracted outbound freight services from various carriers with contracts
expiring through April 2009. The total amount of these commitments is
approximately $57.1 million.
Technology
Assets.
We have
commitments totaling approximately $3.8 million to primarily purchase
store
technology assets for our stores during 2007.
Derivative
Financial Instruments
We
are
party to one interest rate swap, which allows us to manage the risk associated
with interest rate fluctuations on the demand revenue bonds. The swap
is based
on a notional amount of $18.8 million. Under the $18.8 million agreement,
as
amended, we pay interest to the bank that provided the swap at a fixed
rate. In
exchange, the financial institution pays us at a variable-interest rate,
which
is similar to the rate on the demand revenue bonds. The variable-interest
rate
on the interest rate swap is set monthly. No payments are made by either
party
under the swap for monthly periods with an established interest rate
greater
than a predetermined rate (the knock-out rate). The swap may be canceled
by the
bank or us and settled for the fair value of the swap as determined by
market
rates and expires in 2009.
Because
of the knock-out provision in the $18.8 million swap, changes in the
fair value
of that swap are recorded in earnings. For more information on the interest
rate
swaps, see "Quantitative and Qualitative Disclosures About Market Risk
-
Interest Rate Risk."
Critical
Accounting Policies
The
preparation of financial statements requires the use of estimates. Certain
of
our estimates require a high level of judgment and have the potential
to have a
material effect on the financial statements if actual results vary
significantly from
those estimates. Following is a discussion of the estimates that we consider
critical.
Inventory
Valuation
As
discussed in Note 1 to the Consolidated Financial Statements, inventories
at the
distribution centers are stated at the lower of cost or market with cost
determined on a weighted-average basis. Cost is assigned to store inventories
using the retail inventory method on a weighted-average basis. Under
the retail
inventory method, the valuation of inventories at cost and the resulting
gross
margins are computed by applying a calculated cost-to-retail ratio to
the retail
value of inventories. The retail inventory method is an averaging method
that
has been widely used in the retail industry and results in valuing inventories
at lower of cost or market when markdowns are taken as a reduction of
the retail
value of inventories on a timely basis.
Inventory
valuation methods require certain significant management estimates and
judgments, including estimates of future merchandise markdowns and shrink,
which
significantly affect the ending inventory valuation at cost as well as
the
resulting gross margins. The averaging required in applying the retail
inventory
method and the estimates of shrink and markdowns could, under certain
circumstances, result in costs not being recorded in the proper
period.
We
estimate our markdown reserve based on the consideration of a variety
of
factors, including, but not limited to, quantities of slow moving or
seasonal,
carryover merchandise on hand, historical markdown statistics and future
merchandising plans. The accuracy of our estimates can be affected by
many
factors, some of which are outside of our control, including changes
in economic
conditions and consumer buying trends. Historically, we have not experienced
significant differences in our estimated reserve for markdowns compared
with
actual results.
Our
accrual for shrink is based on the actual, historical shrink results
of our most
recent physical inventories adjusted, if necessary, for current economic
conditions. These estimates are compared to actual results as physical
inventory
counts are taken and reconciled to the general ledger. Our physical inventory
counts are generally taken between January and September of each year;
therefore, the shrink accrual recorded at February 3, 2007 is based on
estimated
shrink for most of 2006, including the fourth quarter. We have not experienced
significant fluctuations in historical shrink rates beyond 10 to 15 basis
points
in our Dollar Tree stores for the last two years. However, we have sometimes
experienced higher than typical shrink in acquired stores in the year
following
an acquisition. We periodically adjust our shrink estimates to address
these
factors as they become apparent.
Our
management believes that our application of the retail inventory method
results
in an inventory valuation that reasonably approximates cost and results
in
carrying inventory at the lower of cost or market each year on a consistent
basis.
Accrued
Expenses
On
a
monthly basis, we estimate certain expenses in an effort to record those
expenses in the period incurred. Our most material estimates include
domestic
freight expenses, self-insurance programs, store-level operating expenses,
such
as property taxes and utilities, and certain other expenses. Our freight
and
store-level operating expenses are estimated based on current activity
and
historical trends and results. Our workers' compensation and general
liability
insurance accruals are recorded based on actuarial valuations which are
adjusted
annually based on a review performed by a third-party actuary. These
actuarial
valuations are estimates based on historical loss development factors.
Certain
other expenses are estimated and recorded in the periods that management
becomes
aware of them. The related accruals are adjusted as management’s estimates
change. Differences in management's estimates and assumptions could result
in an
accrual materially different from the calculated accrual. Our experience
has
been that some of our estimates are too high and others are too low.
Historically, the net total of these differences has not had a material
effect
on our financial condition or results of operations.
Income
Taxes
On
a
quarterly basis, we estimate our required income tax liability and assess
the
recoverability of our deferred tax assets. Our income taxes payable are
estimated based on enacted tax rates, including estimated tax rates in
states
where our store base is growing applied to the income expected to be
taxed
currently. The current tax liability also includes a liability for resolution
of
tax uncertainties. Management assesses the recoverability of deferred
tax assets
based on the availability of carrybacks of future deductible amounts
and
management’s projections for future taxable income. We cannot guarantee that we
will generate taxable income in future years. Historically, we have not
experienced significant differences in our estimates of our tax accrual.
In 2006
and 2005, we recognized approximately $0.7 million and $1.5 million,
respectively, of tax benefits related to the resolution of tax uncertainties
in
certain states.
Seasonality
and Quarterly Fluctuations
We
experience seasonal fluctuations in our net sales, comparable store
net sales,
operating income and net income and expect this trend to continue.
Our results
of operations may also fluctuate significantly as a result of a variety
of
factors, including:
|
|
·
|
shifts
in the timing of certain holidays, especially Easter;
|
|
|
·
|
the
timing of new store openings;
|
|
|
·
|
the
net sales contributed by new stores;
|
|
|
·
|
changes
in our merchandise mix; and
|
|
|
·
|
competition.
|
Our
highest sales periods are the Christmas and Easter seasons. Easter was
observed
on March 27, 2005, April 16, 2006 and will be observed on April 8, 2007.
We
generally realize a disproportionate amount of our net sales and of our
operating and net income during the fourth quarter. In anticipation of
increased
sales activity during these months, we purchase substantial amounts of
inventory
and hire a significant number of temporary employees to supplement our
continuing store staff. Our operating results, particularly operating
and net
income, could suffer if our net sales were below seasonal norms during
the
fourth quarter or during the Easter season for any reason, including
merchandise
delivery delays due to receiving or distribution problems or consumer
sentiment.
Fiscal 2006 consisted of 53 weeks, commensurate with the retail calendar.
This
extra week contributed approximately $70.0 million of sales in 2006.
Fiscal 2007
will consist of 52 weeks.
Our
unaudited results of operations for the eight most recent quarters are
shown in
a table in Footnote 12 of the Consolidated Financial Statements in Item
8 of
this Form 10-K.
Inflation
and Other Economic Factors
Our
ability to provide quality merchandise at a fixed price and on a profitable
basis may be subject to economic factors and influences that we cannot
control.
Consumer spending could decline because of economic pressures, including
rising
fuel prices. Reductions in consumer confidence and spending could have
an
adverse effect on our sales. National or international events, including
war or
terrorism, could lead to disruptions in economies in the United States
or in
foreign countries where we purchase some of our merchandise. These and
other
factors could increase our merchandise costs and other costs that are
critical
to our operations, such as shipping and wage rates.
Shipping
Costs.
Currently, trans-Pacific shipping rates are negotiated with individual
freight
lines and are subject to fluctuation based on supply and demand for containers
and current fuel costs. As a result, our trans-Pacific shipping costs in
fiscal 2007 may increase compared with fiscal 2006 when we renegotiate
our
import shipping rates effective May 2007. We can give no assurances as
to the
amount of the increase, as we are in the early stages of our negotiations.
Minimum
Wage. Although
our average hourly wage rate is significantly higher than the federal
minimum
wage, an increase in the mandated minimum wage could increase our payroll
costs. In early 2007, proposals increasing the federal minimum wage to
$7.25 per
hour over a three-year period have passed both houses of Congress. If
the
federal minimum wage were to increase over the next three years to $7.25
per
hour, we believe that it would not have a material effect on our annual
payroll
expenses.
New
Accounting Pronouncements
In
July
2006, the Financial Accounting Standards Board (FASB) issued FASB Interpretation
No. 48 ("FIN 48"), Accounting for Uncertainty in Income Taxes -- an
interpretation of FASB Statement No. 109. FIN 48 clarifies the accounting
for uncertainty in income taxes recognized in an enterprise's financial
statements in accordance with FASB Statement No. 109, Accounting for Income
Taxes. FIN 48 prescribes a recognition threshold and measurement attribute
for the financial statement recognition and measurement of a tax position
taken
or expected to be taken in a tax return. FIN 48 also provides guidance
on
derecognition, classification, interest and penalties, accounting in
interim
periods, disclosures, and transition. FIN 48 is effective for fiscal
years
beginning after December 15, 2006. We do not expect that the adoption
of FIN 48
will have a material impact on our consolidated financial position, results
of
operations or cash flows.
We
are
exposed to various types of market risk in the normal course of our business,
including the impact of interest rate changes and foreign currency rate
fluctuations. We may enter into interest rate swaps to manage exposure
to
interest rate changes, and we may employ other risk management strategies,
including the use of foreign currency forward contracts. We do not enter
into
derivative instruments for any purpose other than cash flow hedging purposes
and
we do not hold derivative instruments for trading purposes.
Interest
Rate Risk
We
use
variable-rate debt to finance certain of our operations and capital
improvements. These obligations expose us to variability in interest
payments
due to changes in interest rates. If interest rates increase, interest
expense
increases. Conversely, if interest rates decrease, interest expense also
decreases. We believe it is beneficial to limit the variability of our
interest
payments.
To
meet
this objective, we entered into a derivative instrument in the form
of an
interest rate swap to manage fluctuations in cash flows resulting from
changes
in the variable-interest rates on the Demand Revenue Bonds. The interest
rate
swap reduces the interest rate exposure on this variable-rate obligation.
Under
the interest rate swap, we pay the bank at a fixed-rate and receive
variable-interest at a rate approximating the variable-rate on the
obligation,
thereby creating the economic equivalent of a fixed-rate obligation.
Under the
swap, no payments are made by parties under the swap for monthly periods
in
which the variable-interest rate is greater than the predetermined
knock-out
rate.
The
following table summarizes the financial terms of our interest rate swap
agreement and the fair value of the interest rate swap at February 3,
2007:
Hedging
Instrument
|
Receive
Variable
|
Pay
Fixed
|
Knock-out
Rate
|
Expiration
|
Fair
Value
|
$18.8
million
interest
rate swap
|
LIBOR
|
4.88%
|
7.75%
|
4/1/09
|
--
|
At
February 3, 2007, the fair value of this interest rate swap is less than
$0.1
million. Hypothetically, a 1% change in interest rates results in approximately
a $0.2 million change in the amount paid or received under the terms
of the
interest rate swap agreement on an annual basis. Due to many factors,
management
is not able to predict the changes in fair value of our interest rate
swap. The
fair values are the estimated amounts we would pay or receive to terminate
the
agreement as of the reporting date. These fair values are obtained from
an
outside financial institution.
Table
of
Contents
Index
to Consolidated Financial Statements
|
Page
|
|
|
|
30
|
|
|
|
|
February
3, 2007, January 28, 2006 and January 29, 2005
|
31
|
|
|
|
|
January
28, 2006
|
32
|
|
|
|
|
for
the years ended February 3, 2007, January 28, 2006 and
|
|
January
29, 2005
|
33
|
|
|
|
|
February
3, 2007, January 28, 2006 and January 29, 2005
|
34
|
|
|
|
35
|
The
Board
of Directors and Stockholders
Dollar
Tree Stores, Inc.:
We
have
audited the accompanying consolidated balance sheets of Dollar Tree Stores,
Inc.
and subsidiaries (the Company) as of February 3, 2007 and January 28, 2006,
and
the related consolidated statements of operations, shareholders’ equity and
comprehensive income, and cash flows for each of the fiscal years in the
three-year period ended February 3, 2007. 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 the standards of the Public Company
Accounting Oversight Board (United States). 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 the Company as of February
3, 2007 and January 28, 2006, and the results of their operations and their
cash
flows for each of the fiscal years in the three-year period ended February
3,
2007, in conformity with U.S. generally accepted accounting
principles.
As
discussed in note 1 to the consolidated financial statements, effective January
29, 2006, the Company adopted Statement of Financial Accounting Standards
No.
123 (revised 2004), Share-Based
Payment.
We
also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the effectiveness of the Company’s internal
control over financial reporting as of February 3, 2007, based on the criteria
established in Internal
Control - Integrated Framework,
issued
by the Committee of Sponsoring Organizations of the Treadway Commission (COSO),
and our report dated April 2, 2007, expressed an unqualified opinion on
management’s assessment of, and the effective operation of, internal control
over financial reporting.
/s/
KPMG
LLP
Norfolk,
Virginia
April
2,
2007
DOLLAR
TREE STORES, INC.
AND
SUBSIDIARIES
|
|
Year
Ended
|
|
Year
Ended
|
|
Year
Ended
|
|
|
|
February
3,
|
|
January
28,
|
|
January
29,
|
|
(In
millions, except per share data)
|
|
2007
|
|
2006
|
|
2005
|
|
Net
sales
|
|
$
|
3,969.4
|
|
$
|
3,393.9
|
|
$
|
3,126.0
|
|
Cost
of sales (Note 4)
|
|
|
2,612.2
|
|
|
2,221.5
|
|
|
2,013.5
|
|
Gross
profit
|
|
|
1,357.2
|
|
|
1,172.4
|
|
|
1,112.5
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling,
general and administrative
|
|
|
|
|
|
|
|
|
|
|
expenses
(Notes 8 and 9)
|
|
|
1,046.4
|
|
|
888.5
|
|
|
819.0
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
income
|
|
|
310.8
|
|
|
283.9
|
|
|
293.5
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income
|
|
|
8.6
|
|
|
6.8
|
|
|
3.9
|
|
Interest
expense (Notes 5 and 6)
|
|
|
(16.5
|
)
|
|
(15.5
|
)
|
|
(9.2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Income
before income taxes
|
|
|
302.9
|
|
|
275.2
|
|
|
288.2
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision
for income taxes (Note 3)
|
|
|
110.9
|
|
|
101.3
|
|
|
107.9
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
192.0
|
|
$
|
173.9
|
|
$
|
180.3
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
net income per share (Note 7)
|
|
$
|
1.86
|
|
$
|
1.61
|
|
$
|
1.59
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
net income per share (Note 7)
|
|
$
|
1.85
|
|
$
|
1.60
|
|
$
|
1.58
|
|
See
accompanying Notes to Consolidated Financial Statements.
DOLLAR
TREE STORES, INC.
AND
SUBSIDIARIES
(In
millions, except share data)
|
|
February
3, 2007
|
|
January
28, 2006
|
|
ASSETS
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
85.0
|
|
$
|
65.8
|
|
Short-term
investments
|
|
|
221.8
|
|
|
274.0
|
|
Merchandise
inventories
|
|
|
605.0
|
|
|
576.6
|
|
Deferred
tax assets (Note 3)
|
|
|
10.7
|
|
|
10.8
|
|
Prepaid
expenses and other current assets
|
|
|
36.5
|
|
|
16.5
|
|
Total
current assets
|
|
|
959.0
|
|
|
943.7
|
|
|
|
|
|
|
|
|
|
Property,
plant and equipment, net (Note 2)
|
|
|
715.3
|
|
|
681.8
|
|
Intangibles,
net (Notes 2 and 10)
|
|
|
146.6
|
|
|
129.3
|
|
Other
assets, net (Notes 2, 8 and 11)
|
|
|
52.4
|
|
|
43.6
|
|
|
|
|
|
|
|
|
|
TOTAL
ASSETS
|
|
$
|
1,873.3
|
|
$
|
1,798.4
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND SHAREHOLDERS' EQUITY
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
Current
portion of long-term debt (Note 5)
|
|
$
|
18.8
|
|
$
|
19.0
|
|
Accounts
payable
|
|
|
189.2
|
|
|
135.6
|
|
Other
current liabilities (Note 2)
|
|
|
132.0
|
|
|
99.2
|
|
Income
taxes payable
|
|
|
43.3
|
|
|
41.7
|
|
Total
current liabilities
|
|
|
383.3
|
|
|
295.5
|
|
|
|
|
|
|
|
|
|
Long-term
debt, excluding current portion (Note 5)
|
|
|
250.0
|
|
|
250.0
|
|
Deferred
tax liabilities (Note 3)
|
|
|
1.5
|
|
|
23.5
|
|
Other
liabilities (Notes 6 and 8)
|
|
|
70.8
|
|
|
57.1
|
|
|
|
|
|
|
|
|
|
Total
liabilities
|
|
|
705.6
|
|
|
626.1
|
|
|
|
|
|
|
|
|
|
Shareholders'
equity (Notes 6, 7 and 9):
|
|
|
|
|
|
|
|
Common
stock, par value $0.01. 300,000,000 shares
|
|
|
|
|
|
|
|
authorized,
99,663,580 and 106,552,054 shares
|
|
|
|
|
|
|
|
issued
and outstanding at February 3, 2007
|
|
|
|
|
|
|
|
and
January 28, 2006, respectively
|
|
|
1.0
|
|
|
1.1
|
|
Additional
paid-in capital
|
|
|
-
|
|
|
11.4
|
|
Accumulated
other comprehensive income (loss)
|
|
|
0.1
|
|
|
0.1
|
|
Retained
earnings
|
|
|
1,166.6
|
|
|
1,159.7
|
|
Total
shareholders' equity
|
|
|
1,167.7
|
|
|
1,172.3
|
|
|
|
|
|
|
|
|
|
Commitments,
contingencies snd subsequent event (Notes 4 and 12)
|
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
|
TOTAL
LIABILITIES AND SHAREHOLDERS' EQUITY
|
|
$
|
1,873.3
|
|
$
|
1,798.4
|
|
See
accompanying Notes to Consolidated Financial Statements.
DOLLAR
TREE STORES, INC.
AND
SUBSIDIARIES
YEARS
ENDED FEBRUARY 3, 2007, JANUARY 28, 2006 AND JANUARY 29,
2005
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
Common
|
|
|
|
Additional
|
|
Other
|
|
|
|
|
|
Share-
|
|
|
|
Stock
|
|
Common
|
|
Paid-in
|
|
Comprehensive
|
|
Unearned
|
|
Retained
|
|
holders'
|
|
(in
millions)
|
|
Shares
|
|
Stock
|
|
Capital
|
|
Income
(Loss)
|
|
Compensation
|
|
Earnings
|
|
Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at January 31, 2004
|
|
|
114.1
|
|
$
|
1.1
|
|
$
|
208.9
|
|
$
|
(0.9
|
)
|
$
|
(0.1
|
)
|
$
|
805.5
|
|
$
|
1,014.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income for the year ended
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January
29, 2005
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
180.3
|
|
|
180.3
|
|
Other
comprehensive income (Note 7)
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
0.6
|
|
|
-
|
|
|
-
|
|
|
0.6
|
|
Total
comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
180.9
|
|
Issuance
of stock under Employee Stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase
Plan (Note 9)
|
|
|
0.1
|
|
|
-
|
|
|
3.3
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
3.3
|
|
Exercise
of stock options, including
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
income
tax benefit of $2.1 (Note 9)
|
|
|
0.6
|
|
|
-
|
|
|
14.0
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
14.0
|
|
Repurchase
and retirement of shares (Note 7)
|
|
|
(1.8
|
)
|
|
-
|
|
|
(48.6
|
)
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(48.6
|
)
|
Restricted
stock amortization (Note 9)
|
|
|
-
|
|
|
-
|
|
|
0.1
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
0.1
|
|
Balance
at January 29, 2005
|
|
|
113.0
|
|
|
1.1
|
|
|
177.7
|
|
|
(0.3
|
)
|
|
(0.1
|
)
|
|
985.8
|
|
|
1,164.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income for the year ended
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January
28, 2006
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
173.9
|
|
|
173.9
|
|
Other
comprehensive income (Note 7)
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
0.4
|
|
|
-
|
|
|
-
|
|
|
0.4
|
|
Total
comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
174.3
|
|
Issuance
of stock under Employee Stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase
Plan (Note 9)
|
|
|
0.1
|
|
|
-
|
|
|
3.0
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
3.0
|
|
Exercise
of stock options, including
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
income
tax benefit of $1.2 (Note 9)
|
|
|
0.4
|
|
|
-
|
|
|
8.8
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
8.8
|
|
Repurchase
and retirement of shares (Note 7)
|
|
|
(7.0
|
)
|
|
-
|
|
|
(180.3
|
)
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(180.3
|
)
|
Stock-based
compensation (Notes 1 and 9)
|
|
|
-
|
|
|
-
|
|
|
2.2
|
|
|
-
|
|
|
0.1
|
|
|
-
|
|
|
2.3
|
|
Balance
at January 28, 2006
|
|
|
106.5
|
|
|
1.1
|
|
|
11.4
|
|
|
0.1
|
|
|
-
|
|
|
1,159.7
|
|
|
1,172.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income for the year ended
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
February
3, 2007
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
192.0
|
|
|
192.0
|
|
Other
comprehensive income (Note 7)
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Total
comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
192.0
|
|
Issuance
of stock under Employee Stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase
Plan (Note 9)
|
|
|
0.1
|
|
|
-
|
|
|
2.8
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
2.8
|
|
Exercise
of stock options, including
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
income
tax benefit of $5.6 (Note 9)
|
|
|
1.7
|
|
|
-
|
|
|
43.1
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
43.1
|
|
Repurchase
and retirement of shares (Note 7)
|
|
|
(8.8
|
)
|
|
(0.1
|
)
|
|
(63.0
|
)
|
|
|
|
|
-
|
|
|
(185.1
|
)
|
|
(248.2
|
)
|
Stock-based
compensation, net (Notes 1 and 9)
|
|
|
0.1
|
|
|
-
|
|
|
5.7
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
5.7
|
|
Balance
at February 3, 2007 |
|
|
99.6
|
|
$
|
1.0
|
|
$
|
-
|
|
$
|
0.1
|
|
$
|
-
|
|
$
|
1,166.6
|
|
$
|
1,167.7
|
|
See
accompanying Notes to Consolidated Financial Statements.
DOLLAR
TREE STORES, INC.
AND
SUBSIDIARIES
|
|
Year
Ended
|
|
Year
Ended
|
|
Year
Ended
|
|
|
|
February
3,
|
|
January
28,
|
|
January
29,
|
|
(In
millions)
|
|
2007
|
|
2006
|
|
2005
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
192.0
|
|
$
|
173.9
|
|
$
|
180.3
|
|
Adjustments
to reconcile net income to net cash
|
|
|
|
|
|
|
|
|
|
|
provided
by operating activities:
|
|
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
159.0
|
|
|
140.7
|
|
|
129.3
|
|
Provision
for deferred income taxes
|
|
|
(21.9
|
)
|
|
(21.5
|
)
|
|
15.6
|
|
Tax
benefit of stock option exercises
|
|
|
-
|
|
|
1.2
|
|
|
2.1
|
|
Stock
based compensation expense
|
|
|
6.7
|
|
|
2.4
|
|
|
-
|
|
Other
non-cash adjustments to net income
|
|
|
5.1
|
|
|
5.6
|
|
|
3.9
|
|
Changes
in assets and liabilities increasing
|
|
|
|
|
|
|
|
|
|
|
(decreasing)
cash and cash equivalents:
|
|
|
|
|
|
|
|
|
|
|
Merchandise
inventories
|
|
|
(6.2
|
)
|
|
38.9
|
|
|
(89.8
|
)
|
Other
assets
|
|
|
(19.8
|
)
|
|
(5.5
|
)
|
|
0.5
|
|
Accounts
payable
|
|
|
53.7
|
|
|
11.4
|
|
|
9.2
|
|
Income
taxes payable
|
|
|
1.6
|
|
|
8.0
|
|
|
(3.4
|
)
|
Other
current liabilities
|
|
|
31.8
|
|
|
(6.4
|
)
|
|
15.3
|
|
Other
liabilities
|
|
|
10.8
|
|
|
16.4
|
|
|
13.5
|
|
Net
cash provided by operating activities
|
|
|
412.8
|
|
|
365.1
|
|
|
276.5
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
Capital
expenditures
|
|
|
(175.3
|
)
|
|
(139.2
|
)
|
|
(181.8
|
)
|
Purchase
of short-term investments
|
|
|
(1,044.4
|
)
|
|
(885.5
|
)
|
|
(465.8
|
)
|
Proceeds
from sales of short-term investments
|
|
|
1,096.6
|
|
|
822.8
|
|
|
339.0
|
|
Purchase
of Deal$ assets, net of cash acquired of $0.3
|
|
|
(54.1
|
)
|
|
-
|
|
|
-
|
|
Acquisition
of favorable lease rights
|
|
|
(4.2
|
)
|
|
(3.7
|
)
|
|
(6.8
|
)
|
Purchase
of restricted investments
|
|
|
(9.3
|
)
|
|
(29.9
|
)
|
|
-
|
|
Net
cash used in investing activities
|
|
|
(190.7
|
)
|
|
(235.5
|
)
|
|
(315.4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
Proceeds
from long-term debt, net of
|
|
|
|
|
|
|
|
|
|
|
facility
fees of $1.1
|
|
|
-
|
|
|
-
|
|
|
248.9
|
|
Principal
payments under long-term debt and capital lease
obligations
|
|
|
(0.6
|
)
|
|
(0.6
|
)
|
|
(154.2
|
)
|
Payments
for share repurchases
|
|
|
(248.2
|
)
|
|
(180.4
|
)
|
|
(48.6
|
)
|
Proceeds
from stock issued pursuant to stock-based
|
|
|
|
|
|
|
|
|
|
|
compensation
plans
|
|
|
40.3
|
|
|
10.7
|
|
|
15.1
|
|
Tax
benefit of stock options exercised
|
|
|
5.6
|
|
|
-
|
|
|
-
|
|
Net
cash provided by (used in) financing activities
|
|
|
(202.9
|
)
|
|
(170.3
|
)
|
|
61.2
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
increase (decrease) in cash and cash equivalents
|
|
|
19.2
|
|
|
(40.7
|
)
|
|
22.3
|
|
Cash
and cash equivalents at beginning of year
|
|
|
65.8
|
|
|
106.5
|
|
|
84.2
|
|
Cash
and cash equivalents at end of year
|
|
$
|
85.0
|
|
$
|
65.8
|
|
$
|
106.5
|
|
Supplemental
disclosure of cash flow information:
|
|
|
|
|
|
|
|
|
|
|
Cash
paid for:
|
|
|
|
|
|
|
|
|
|
|
Interest,
net of amount capitalized
|
|
$
|
14.9
|
|
$
|
11.8
|
|
$
|
8.1
|
|
Income
taxes
|
|
$
|
125.5
|
|
$
|
113.9
|
|
$
|
93.4
|
|
Supplemental
disclosure of non-cash investing and financing activities:
The
Company purchased equipment under capital lease obligations amounting
to $0.1
million, $0.4 million and $0.4 million in the years ended February 3,
2007,
January 28, 2006, and January 29, 2005, respectively.
See
accompanying Notes to Consolidated Financial Statements
DOLLAR
TREE STORES, INC.
AND
SUBSIDIARIES
NOTE
1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description
of Business
At
February 3, 2007, Dollar Tree Stores, Inc. (DTS or the Company) owned
and
operated 3,219 discount variety retail stores. Approximately 3,100 of
these
stores sell substantially all items for $1.00 or less. The remaining
stores were
acquired as apart of the Deal$ acquisition and these stores sell many
items for
$1.00 or less but also sell items at prices greater than $1.00. The
Company's stores operate under the names of Dollar Tree, Deal$, Dollar
Bills and
Dollar Express.
Our
stores average approximately 8,200 selling square feet.
The
Company's headquarters and one of its distribution centers are located
in
Chesapeake, Virginia. The Company also operates distribution centers
in
Mississippi, Illinois, California, Pennsylvania, Georgia, Oklahoma, Utah
and
Washington. The Company's stores are located in all 48 contiguous states.
The
Company's merchandise includes food, health and beauty care, party goods,
candy, toys, stationery, seasonal goods, gifts and other consumer items.
Approximately 35% to 40% of the Company's merchandise is imported, primarily
from China.
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.
Fiscal
Year
The
Company's fiscal year ends on the Saturday closest to January 31. Any
reference
herein to “2006” or “Fiscal 2006,” “2005” or “Fiscal 2005,” and “2004” or
“Fiscal 2004” relates to as of or for the years ended February 3, 2007, January
28, 2006, and January 29, 2005, respectively. Fiscal year 2006 consisted
of 53
weeks, while 2005 and 2004 both consisted of 52 weeks.
Use
of Estimates
The
preparation of financial statements in conformity with U.S. 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 consolidated financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Reclassifications
Certain
2005 and 2004 amounts have been reclassified for comparability with the
current
period presentation.
Cash
and Cash Equivalents
Cash
and
cash equivalents at February 3, 2007 and January 28, 2006 includes $40.3
million
and $31.4 million, 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 consolidated statements
of cash
flows, the Company considers all highly liquid debt instruments with
original
maturities of three months or less to be cash equivalents. The majority
of
payments due from financial institutions for the settlement of debit
card and
credit card transactions process within three business days, and therefore
are
classified as cash and cash equivalents.
Short-Term
Investments
The
Company’s short-term investments consist primarily of government-sponsored
municipal bonds and auction rate securities. These investments are classified
as
available for sale and are recorded at fair value, which approximates
cost. The
government-sponsored municipal bonds can be converted into cash depending
on
terms of the underlying agreement. The auction rate securities have stated
interest rates, which typically reset to prevailing market rates every
35 days
or less. The securities underlying both the government-sponsored municipal
bonds
and the auction rate securities have longer legal maturity dates.
Merchandise
Inventories
Merchandise
inventories at the distribution centers are stated at the lower of cost
or
market, determined on a weighted average cost basis. Cost is assigned
to store
inventories using the retail inventory method, determined on a weighted
average
cost basis.
Costs
directly associated with warehousing and distribution are capitalized
as
merchandise inventories. Total warehousing and distribution costs capitalized
into inventory amounted to $25.6 million and $25.3 million at February
3, 2007
and January 28, 2006, respectively.
Property,
Plant and Equipment
Property,
plant 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
|
40
years
|
Furniture,
fixtures and equipment
|
3
to 15 years
|
Transportation
vehicles
|
4
to 6 years
|
Leasehold
improvements and assets held under capital leases are amortized over
the
estimated useful lives of the respective assets or the committed terms
of the
related leases, whichever is shorter. Amortization is included in "selling,
general and administrative expenses" on the accompanying consolidated
statements
of operations.
In
the
fourth quarter of 2004, the Company revised its estimate of useful lives
on
certain store equipment and distribution center assets. This change increased
net income by approximately $4.0 million in the first three quarters
of 2005 as
compared to 2004.
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 as defined in Statement of Position 98-1,
Accounting
for the Costs of Computer Software Developed or Obtained for Internal
Use.
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, in accordance with
Statement
of Financial Accounting Standards (SFAS) No. 144, Accounting
for the Impairment or Disposal of Long-Lived Assets.
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 as 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. In fiscal 2006, 2005 and 2004, the Company recorded
charges
of $0.5 million, $0.2 million and $0.5 million, respectively, to write
down
certain assets. These charges are recorded as a component of "selling,
general
and administrative expenses" in the accompanying consolidated statements
of
operations.
Intangible
Assets
Goodwill
and intangible assets with indefinite useful lives are not amortized,
but rather
tested for impairment at least annually. Intangible assets with finite
useful
lives are amortized over their respective estimated useful lives and
reviewed
for impairment in accordance with SFAS No. 144. The Company performs
its annual
assessment of impairment following the finalization of each November’s financial
statements.
Financial
Instruments
The
Company utilizes derivative financial instruments to reduce its exposure
to
market risks from changes in interest rates. By entering into receive-variable,
pay-fixed interest rate swaps, the Company limits its exposure to changes
in
variable interest rates. The Company is exposed to credit-related losses
in the
event of non-performance by the counterparty to the interest rate swaps;
however, the counterparties are major financial institutions, and the
risk of
loss due to non-performance is considered remote. Interest rate differentials
paid or received on the swaps are recognized as adjustments to expense
in the
period earned or incurred. The Company formally documents all hedging
relationships, if applicable, and assesses hedge effectiveness both at
inception
and on an ongoing basis.
Certain
of the Company’s interest rate swaps have not qualified for hedge accounting
treatment pursuant to the provisions of SFAS No. 133, Accounting
for Derivative Instruments and Hedging Activities (SFAS 133).
These
interest rate swaps are recorded at fair value in the accompanying consolidated
balance sheets as a component of “other liabilities” (see Note 6). Changes in
the fair values of these interest rate swaps are recorded as "interest
expense”
and “change in the fair value of non-hedging interest rate swaps" in the
accompanying consolidated statements of operations and the consolidated
statements of cash flows, respectively.
Lease
Accounting
The
Company recognized a one-time non-cash, after-tax adjustment of $5.7
million, or
$0.05 per diluted share, in the fourth quarter of 2004 to reflect the
cumulative
impact of a correction of its accounting practices related to leased
properties.
Of the aforementioned amount, approximately $1.2 million, or $0.01 per
diluted
share, related to fiscal 2004. Consistent with industry practices, in
prior
periods, the Company had reported its straight line expenses for leases
beginning on the earlier of the store opening date or the commencement
date of
the lease. This had the effect of excluding the pre-opening or build-out
period
of its stores (generally 60 days) from the calculation of the period
over which
it expenses rent. In addition, amounts received as tenant allowances
were
reflected in the balance sheet as a reduction to store leasehold improvement
costs instead of being classified as deferred lease credits. The adjustment
made
to correct these practices does not affect historical or future net cash
flows
or the timing of payments under related leases. Rather, this change affected
the
classification of costs in the accompanying consolidated statement of
operations
and cash flows by increasing depreciation and decreasing rent expense,
which is
included in cost of sales. In addition, fixed assets and deferred liabilities
increased due to the net cumulative unamortized allowances and abatements.
Revenue
Recognition
The
Company recognizes sales revenue at the time a sale is made to its
customer.
Taxes
Collected
The
Company reports taxes assessed by a governmental authority that are directly
imposed on revenue-producing transactions (i.e., sales tax) on a net
(excluded
from revenues) basis.
Cost
of Sales
The
Company includes the cost of merchandise, warehousing and distribution
costs,
and certain occupancy costs in cost of sales.
Pre-Opening
Costs
The
Company expenses pre-opening costs for new, expanded and relocated stores,
as
incurred.
Advertising
Costs
The
Company expenses advertising costs as they are incurred. Advertising
costs
approximated $10.6 million, $11.8 million and $11.0 million for the years
ended
February 3, 2007, January 28, 2006, and January 29, 2005,
respectively.
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 tax rates is recognized in income in the period that includes
the
enactment date of such change.
Stock-Based
Compensation
Effective,
January 29, 2006, the Company adopted Statement of Financial Accounting
Standards, No. 123(revised 2004), Share-Based Payment, (SFAS 123R).
This statement is a revision of SFAS 123 and supersedes Accounting Principle
Board Opinion No. 25, Accounting for Stock Issued to Employees, (APB
Opinion 25). SFAS 123R requires all share-based payments to employees,
including
grants of employee stock options, to be recognized in the financial statements
based on their fair values. The Company adopted SFAS 123R using the modified
prospective method, which requires application of the standard to all
awards
granted, modified, repurchased or cancelled on or after January 29, 2006,
and to
all awards granted to employees that were unvested as of January 29,
2006. In
accordance with the modified prospective method of implementation, prior
period
financial statements have not been restated to reflect the impact of
SFAS 123R.
During 2006, the Company recognized $1.8 million of stock-based compensation
expense as a result of the adoption of SFAS 123R. Total stock-based compensation
expense for 2006 and 2005 was $6.7 million and $2.4 million, respectively.
There
was no stock-based compensation expense for 2004. Through January 28,
2006, the
Company applied the intrinsic value recognition and measurement principles
of
APB Opinion 25 and related Interpretations in accounting for its stock-based
employee compensation plans. Prior to the adoption of SFAS 123R, the
Company
reported all tax benefits resulting from the exercise of stock options
as
operating cash flows in the Consolidated Statements of Cash Flows. SFAS
123R
requires cash flows resulting from the tax deductions in excess of the
tax
benefits of the related compensation cost recognized in the financial
statements
(excess tax benefits) to be classified as financing cash flows. Thus,
the
Company has classified the $5.6 million of excess tax benefits recognized
in
2006 as financing cash flows. Excess tax benefits of $1.2 million and
$2.1
million recognized in 2005 and 2004, respectively, prior to the adoption
of SFAS
123R, are classified as operating cash flows.
If
the accounting provisions of SFAS 123 had been applied to 2005 and 2004,
the Company's net income and net income per share would have been reduced
to the
pro forma amounts indicated in the following table:
|
|
Year
Ended
|
|
Year
Ended
|
|
|
|
January
28,
|
|
January
29,
|
|
(in
millions, except per share data)
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
Net
income as reported
|
|
$
|
173.9
|
|
$
|
180.3
|
|
Add:
Total stock-based employee
|
|
|
|
|
|
|
|
compensation
expense included in net
|
|
|
|
|
|
|
|
income,
net of related tax effects
|
|
|
1.5
|
|
|
-
|
|
Deduct:
Total stock-based employee
|
|
|
|
|
|
|
|
compensation
expense determined under
|
|
|
|
|
|
|
|
fair
value based method,
|
|
|
|
|
|
|
|
net
of related tax effects
|
|
|
(18.2
|
)
|
|
(13.0
|
)
|
|
|
|
|
|
|
|
|
|
|
$
|
157.2
|
|
$
|
167.3
|
|
|
|
|
|
|
|
|
|
Net
income per share:
|
|
|
|
|
|
|
|
Basic,
as reported
|
|
$
|
1.61
|
|
$
|
1.59
|
|
Basic,
pro forma under FAS 123
|
|
|
1.45
|
|
|
1.48
|
|
|
|
|
|
|
|
|
|
Diluted,
as reported
|
|
$
|
1.60
|
|
$
|
1.58
|
|
Diluted,
pro forma under FAS 123
|
|
|
1.44
|
|
|
1.47
|
|
On
December 15, 2005, the Compensation Committee of the Board of Directors
of the
Company approved the acceleration of the vesting date of all previously
issued,
outstanding and unvested options under all current stock option plans,
including
the 1995 Stock Incentive Plan, the 2003 Equity Incentive Plan and the
2004
Executive Officer Equity Incentive Plan (EOEP), effective as of December
15,
2005. At the effective date, almost all of these options had exercise
prices
higher than the actual stock price. The Company made the decision to
accelerate
vesting of these options to give employees increased performance incentives
and
to enhance current retention. This decision also eliminated non-cash
compensation expense that would have been recorded in future periods
following
the Company’s adoption of SFAS 123R on January 29, 2006. Compensation expense,
as determined at the time of the accelerated vesting, has been reduced
by $14.9
million, over a period of four years during which the options would
have vested,
as a result of the option acceleration program. This amount is net
of
compensation expense of $0.1 million recognized in fiscal 2005 for
estimated
forfeiture of certain (in the money) options.
The
Company recognizes expense related to the fair value of restricted
stock units
(RSUs) over the requisite service period. The fair value of the RSUs
is
determined using the closing price of the Company’s common stock on the date of
grant.
On
March
30, 2007, the Board of Directors granted approximately 0.3 million
restricted
stock units and options to purchase 0.4 million shares of the Company’s common
stock under the Company’s Equity Incentive Plan and the EOEP.
Net
Income Per Share
Basic
net
income per share has been computed by dividing net income by the weighted
average number of shares outstanding. Diluted net income per share
reflects the
potential dilution that could occur assuming the inclusion of dilutive
potential
shares and has been computed by dividing net income by the weighted
average
number of shares and dilutive potential shares outstanding. Dilutive
potential
shares include all outstanding stock options and unvested restricted
stock,
excluding certain performance based restricted stock grants, after
applying the
treasury stock method.
NOTE
2 - BALANCE SHEET COMPONENTS
Intangibles,
Net
Intangibles,
net, as of February 3, 2007 and January 28, 2006 consist of the
following:
|
|
February
3,
|
|
January
28,
|
|
(in
millions)
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
Non-competition
agreements
|
|
$
|
6.4
|
|
$
|
6.4
|
|
Accumulated
amortization
|
|
|
(5.1
|
)
|
|
(4.3
|
)
|
Non-competition
agreements, net
|
|
|
1.3
|
|
|
2.1
|
|
|
|
|
|
|
|
|
|
Favorable
lease rights
|
|
|
19.0
|
|
|
12.6
|
|
Accumulated
amortization
|
|
|
(7.0
|
)
|
|
(4.1
|
)
|
Favorable
lease rights, net
|
|
|
12.0
|
|
|
8.5
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
|
144.9
|
|
|
130.3
|
|
Accumulated
amortization
|
|
|
(11.6
|
)
|
|
(11.6
|
)
|
Goodwill,
net
|
|
|
133.3
|
|
|
118.7
|
|
|
|
|
|
|
|
|
|
Total
intangibles, net
|
|
$
|
146.6
|
|
$
|
129.3
|
|
Non-Competition
Agreements
The
Company has entered into non-competition agreements with certain former
executives of certain acquired entities. These assets are being amortized
over
the legal term of the individual agreements, ranging from five to ten
years.
Favorable
Lease Rights
In
2006
and 2005, the Company acquired favorable lease rights for operating leases
for
retail locations from third parties, including the acquired favorable
lease
rights in its acquisition of 138 Deal$ stores (see Note 10). The Company’s
favorable lease rights are amortized on a straight-line basis to rent
expense
over the remaining initial lease terms, which expire at various dates
through
2016. The weighted average life remaining on the favorable lease rights
at
February 3, 2007 is 54 months.
Amortization
expense related to the non-competition agreements and favorable lease
rights was
$4.4 million, $3.3 million and $1.6 million for the years ended February
3,
2007, January 28, 2006 and January 29, 2005, respectively. Estimated
annual
amortization expense for the next five years follows: 2007 - $4.8 million;
2008
- $3.4 million; 2009 - $1.8 million, 2010 - $1.2 million, and 2011 -
$0.7
million.
Goodwill
In
accordance with SFAS No. 142, goodwill is no longer being amortized,
but is
tested annually for impairment. In addition, goodwill will be tested
on an
interim basis if an event or circumstance indicates that it is more likely
than
not that an impairment loss has been incurred. The Company performed
its annual
impairment testing in November 2006 and determined that no impairment
loss
existed.
Property,
Plant and Equipment, Net
Property,
plant and equipment, net, as of February 3, 2007 and January 28, 2006
consists
of the following:
|
|
February
3,
|
|
January
28,
|
|
(in
millions)
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
Land
|
|
$
|
29.4
|
|
$
|
29.4
|
|
Buildings
|
|
|
154.7
|
|
|
154.7
|
|
Improvements
|
|
|
482.3
|
|
|
418.1
|
|
Furniture,
fixtures and equipment
|
|
|
708.6
|
|
|
608.4
|
|
Construction
in progress
|
|
|
38.3
|
|
|
29.3
|
|
|
|
|
|
|
|
|
|
Total
property, plant and equipment
|
|
|
1,413.3
|
|
|
1,239.9
|
|
|
|
|
|
|
|
|
|
Less:
accumulated depreciation and amortization
|
|
|
698.0
|
|
|
558.1
|
|
|
|
|
|
|
|
|
|
Total
property, plant and equipment, net
|
|
$
|
715.3
|
|
$
|
681.8
|
|
Other
Assets, Net
Other
assets, net includes $39.2 million of restricted investments. The Company
purchased these restricted investments to collateralize long-term insurance
obligations. These investments replaced higher cost stand by letters
of credit
and surety bonds. These investments consist primarily of government-sponsored
municipal bonds and auction rate securities, similar to our short-term
investments. These investments are classified as available for sale
and are
recorded at fair value, which approximates cost.
Other
Current Liabilities
Other
current liabilities as of February 3, 2007 and January 28, 2006 consist
of
accrued expenses for the following:
|
|
February
3,
|
|
January
28,
|
|
(in
millions)
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
Compensation
and benefits
|
|
$
|
43.5
|
|
$
|
22.2
|
|
Taxes
(other than income taxes)
|
|
|
19.5
|
|
|
15.8
|
|
Insurance
|
|
|
26.8
|
|
|
28.1
|
|
Other
|
|
|
42.2
|
|
|
33.1
|
|
|
|
|
|
|
|
|
|
Total
other current liabilities
|
|
$
|
132.0
|
|
$
|
99.2
|
|
Fair
Value of Financial Instruments
The
carrying values of cash and cash equivalents, other current assets, accounts
payable and other current liabilities approximate fair value because
of the
short maturity of these instruments. The carrying values of other long-term
financial assets and liabilities, excluding restricted investments, approximate
fair value because they are recorded using discounted future cash flows
or
quoted market rates. Short-term investments and restricted investments
are
carried at fair value, which approximates cost, in accordance with SFAS
No. 115,
Accounting
for Certain Investments in Debt and Equity Securities.
The
carrying value of the Company's long-term debt approximates its fair
value
because the debt’s interest rates vary with market interest rates.
It
is not
practicable to estimate the fair value of the Company’s outstanding commitments
for letters of credit and surety bonds without
unreasonable cost.
NOTE
3 - INCOME TAXES
Total
income taxes were allocated as follows:
|
|
Year
Ended
|
|
Year
Ended
|
|
Year
Ended
|
|
|
|
February
3,
|
|
January
28,
|
|
January
29,
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
|
|
Income
from continuing operations
|
|
$
|
110.9
|
|
$
|
101.3
|
|
$
|
107.9
|
|
Accumulated
other comprehensive income,
|
|
|
|
|
|
|
|
|
|
|
marking
derivative financial
|
|
|
|
|
|
|
|
|
|
|
instruments
to fair value
|
|
|
-
|
|
|
0.2
|
|
|
0.4
|
|
Stockholders'
equity, tax benefit on
|
|
|
|
|
|
|
|
|
|
|
exercise
of stock options
|
|
|
(5.6
|
)
|
|
(1.2
|
)
|
|
(2.1
|
)
|
|
|
$
|
105.3
|
|
$
|
100.3
|
|
$
|
106.2
|
|
The
provision for income taxes consists of the following:
|
|
Year
Ended
|
|
Year
Ended
|
|
Year
Ended
|
|
|
|
February
3,
|
|
January
28,
|
|
January
29,
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
|
|
Federal
- current
|
|
$
|
116.2
|
|
$
|
108.1
|
|
$
|
75.8
|
|
State
- current
|
|
|
16.6
|
|
|
14.7
|
|
|
16.5
|
|
Total
current
|
|
|
132.8
|
|
|
122.8
|
|
|
92.3
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
- deferred
|
|
|
(19.1
|
)
|
|
(20.6
|
)
|
|
15.9
|
|
State
- deferred
|
|
|
(2.8
|
)
|
|
(0.9
|
)
|
|
(0.3
|
)
|
Total
deferred
|
|
|
(21.9
|
)
|
|
(21.5
|
)
|
|
15.6
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision
for income taxes
|
|
$
|
110.9
|
|
$
|
101.3
|
|
$
|
107.9
|
|
A
reconciliation of the statutory federal income tax rate and the effective
rate
follows:
|
|
Year
Ended
|
|
Year
Ended
|
|
Year
Ended
|
|
|
|
February
3,
|
|
January
28,
|
|
January
29,
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
|
|
Statutory
tax rate
|
|
|
35.0
|
%
|
|
35.0
|
%
|
|
35.0
|
%
|
Effect
of:
|
|
|
|
|
|
|
|
|
|
|
State
and local income taxes,
|
|
|
|
|
|
|
|
|
|
|
net
of federal income tax
|
|
|
|
|
|
|
|
|
|
|
benefit
|
|
|
3.3
|
|
|
3.4
|
|
|
3.6
|
|
Other,
net
|
|
|
(1.7
|
)
|
|
(1.6
|
)
|
|
(1.1
|
)
|
Effective
tax rate
|
|
|
36.6
|
%
|
|
36.8
|
%
|
|
37.5
|
%
|
The
rate
reduction in “other, net” in the above table consists primarily of benefits from
the resolution of tax uncertainties, federal jobs credits and tax exempt
interest in 2006, 2005 and 2004.
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 accompanying consolidated balance sheets based
on the
classification of the underlying asset or liability. Significant components
of
the Company's net deferred tax assets (liabilities) follows:
|
|
February
3,
|
|
January
28,
|
|
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
Deferred
tax assets:
|
|
|
|
|
|
Accrued
expenses
|
|
$
|
33.5
|
|
$
|
30.6
|
|
State
tax net operating losses and credit
|
|
|
|
|
|
|
|
carryforwards,
net
of federal tax benefit
|
|
|
1.3
|
|
|
-
|
|
Accrued
compensation expense
|
|
|
9.3 |
|
|
1.0 |
|
Valuation
allowance
|
|
|
(1.3
|
) |
|
-
|
|
Total
deferred tax assets
|
|
|
42.8
|
|
|
31.6
|
|
|
|
|
|
|
|
|
|
Deferred
tax liabilities:
|
|
|
|
|
|
|
|
Intangible
assets
|
|
|
(9.2
|
)
|
|
(8.0
|
)
|
Property
and equipment
|
|
|
(14.3
|
)
|
|
(34.9
|
)
|
Prepaids
|
|
|
(9.0
|
)
|
|
(1.2
|
)
|
Other
|
|
|
(1.1
|
)
|
|
(0.2
|
)
|
Total
deferred tax liabilities
|
|
|
(33.6
|
)
|
|
(44.3
|
)
|
|
|
|
|
|
|
|
|
Net
deferred tax asset (liability)
|
|
$
|
9.2
|
|
$
|
(12.7
|
)
|
A
valuation allowance of $1.3 million, net of Federal tax benefits,
has been
provided principally for certain state net operating losses and credit
carryforwards. In assessing the realizability of deferred tax assets,
management considers whether it is more likely than not that some
portion or all
of the deferred taxes will not be realized. Based upon the availability
of
carrybacks of future deductible amounts to the past two years’ 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 remaining existing deductible temporary differences
will reverse
during periods in which carrybacks are available or in which the
Company
generates net taxable income.
During
2006, the Company concluded an examination with the Internal Revenue
Service
(IRS) for calendar year 1999 through fiscal year 2003. The results
of the
examination were immaterial to the financial statements. Fiscal year
2004 and
forward are open for examination by the IRS. In addition, several
years are open
to state income tax audits. Management believes that adequate provisions
have
been made for any additional taxes and interest thereon that might
arise as a
result of future IRS and state examinations related to these open
years.
NOTE
4 - COMMITMENTS AND CONTINGENCIES
Operating
Lease Commitments
Future
minimum lease payments under noncancelable stores and distribution
center
operating leases are as follows:
2007
|
|
$
|
284.2
|
|
2008
|
|
|
246.0
|
|
2009
|
|
|
207.2
|
|
2010
|
|
|
161.5
|
|
2011
|
|
|
110.6
|
|
Thereafter
|
|
|
167.5
|
|
|
|
|
|
|
Total
minimum lease payments
|
|
$
|
1,177.0
|
|
The above future minimum lease payments include amounts for leases
that were
signed prior to February 3, 2007 for stores that were not open
as of February 3,
2007.
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
expected future minimum sublease rentals of $2.3 million under
operating
leases.
Minimum
and Contingent Rentals
Rental
expense for store and distribution center operating leases (including
payments
to related parties) included in the accompanying consolidated statements
of
operations are as follows:
|
|
Year
Ended
|
|
Year
Ended
|
|
Year
Ended
|
|
|
|
February
3,
|
|
January
28,
|
|
January
29,
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
|
|
Minimum
rentals
|
|
$
|
261.8
|
|
$
|
225.8
|
|
$
|
200.7
|
|
Contingent
rentals
|
|
|
0.9
|
|
|
0.7
|
|
|
0.9
|
|
Non-Operating
Facilities
The
Company is responsible for payments under leases for certain
closed stores. The
Company was also responsible for payments under leases for two
former
distribution centers whose leases expired in June 2005 and September
2005. The
Company accounts for abandoned lease facilities in accordance
with SFAS No. 146,
Accounting
for Costs Associated with Exit or Disposal Activities.
A
facility is considered abandoned on the date that the Company
ceases to use it.
On this date, the Company records an expense for the present
value of the total
remaining costs for the abandoned facility reduced by any actual
or probable
sublease income. Due to the uncertainty regarding the ultimate
recovery of the
future lease and related payments, the Company recorded charges
of $0.1 million,
$0.3 million and $1.5 million in 2006, 2005 and 2004, respectively.
Related
Parties
The
Company also leases properties for six of its stores from partnerships
owned by
related parties. The total rental payments related to these leases
were $0.5
million for each of the years ended February 3, 2007, January
28, 2006, and
January 29, 2005, respectively. Total future commitments under
related party
leases are $1.4 million.
Freight
Services
The
Company has contracted outbound freight services from various
contract carriers
with contracts expiring through January 2010. The total amount
of these
commitments is approximately $57.1 million, of which approximately
$38.6 million
is committed in 2007, $9.9 million is committed in 2008 and $8.6
million is
committed in 2009.
Technology
Assets
The
Company has commitments totaling approximately $3.8 million to
purchase store
technology assets for its stores during 2007.
Letters
of Credit
In
March
2001, the Company entered into a Letter of Credit Reimbursement
and Security
Agreement. The agreement provides $125.0 million for letters
of credit. In
December 2004, the Company entered into an additional Letter
of Credit
Reimbursement and Security Agreement, which provides $50.0 million
for letters
of credit. Letters of credit under both of these agreements are
generally issued
for the routine purchase of imported merchandise and approximately
$84.8 million
was committed to these letters of credit at February 3, 2007.
The
Company also has approximately $29.4 million in stand-by letters
of credit that
serve as collateral for its high-deductible insurance programs
and expire in
fiscal 2007.
Surety
Bonds
The
Company has issued various surety bonds that primarily serve
as collateral for
utility payments at the Company’s stores. The total amount of the commitment is
approximately $2.1 million, which is committed through various
dates through
fiscal 2008.
Contingencies
In
2003,
the Company was served with a lawsuit in a California state court
by a former
employee who alleged that employees did not properly receive
sufficient meal
breaks and paid rest periods, along with other alleged wage and
hourly
violations. The suit requested that the California state court
certify the case
as a class action. This suit was dismissed with prejudice in
May 2005, and the
dismissal was appealed. A California appeals court granted the
appeal and the
Company's petition for review to the California Supreme Court
was denied. The
case has been remanded to the trial court's where it will likely
be consolidated
with a companion suit which had been filed in the same court
following the trial
courts earlier dismissal. It is anticipated that the plaintiff
will seek class
certification which the Company will oppose.
In
2005,
the Company was served with a lawsuit by former employees in
Oregon who allege
that they did not properly receive sufficient meal breaks and
paid rest periods.
They also allege other wage and hour violations. The plaintiffs
requested the
Court to certify classes for their various claims and the presiding
judge
recently did so with respect to two classes, one alleging that
our Oregon
employees, in violation of that state’s labor laws, were not paid for rest
breaks and the other that upon termination of employment, employees
were not
tendered their final pay in a timely manner. Other claims of
the plaintiffs were
dismissed by an earlier Order of the Court and are being appealed
by the
plaintiffs. Discovery will ensue on the certified class issues;
no trial is
anticipated before the end of 2007.
In
2006,
the Company was served with a lawsuit by a former employee in
a California state
court alleging that she was paid for wages with a check drawn
on a bank which
did not have any branches in the state, an alleged violation
of the state's
labor code; that she was paid less for her work than other similar
employees
with the same job title based on her gender; and that we did
not pay her final
wages in a timely manner, also an alleged violation of the labor
code. The
plaintiff requested the court to certify the case as a class
action. The Company
has been successful in removing the case from state to the federal
court
level. The
parties have reached a settlement and executed an Agreement which
will be
presented to the Court for its approval on April 24, 2007. The
estimated has
been accrued in the accompanying financial statements as of February
3, 2007.
In
2006,
the Company was served with a lawsuit filed in federal court
in the state of
Alabama by a former store manager. She claims that she should
have been
classified as a non-exempt employee under the Fair Labor Standards
Act and,
therefore, should have received overtime compensation and other
benefits. She
filed the case as a collective action on behalf of herself and
all other
employees (store managers) similarly situated. The Company’s motion requesting
that the case be transferred from Alabama to Virginia was denied. The
plaintiff now seeks entry of an Order allowing nationwide notice
be sent to all
store managers employed by the Company now or within the past
three years. The
Company is contesting entry of such an Order.
The
Company will vigorously defend itself in these lawsuits. The
Company does not
believe that any of these matters will, individually or in the
aggregate, have a
material adverse effect on its business or financial condition.
The Company
cannot give assurance, however, that one or more of these lawsuits
will not have
a material adverse effect on its results of operations for the
period in which
they are resolved.
NOTE
5 - LONG-TERM DEBT
Long-term
debt at February 3, 2007 and January 28, 2006 consists of the
following:
|
|
February
3,
|
|
January
28,
|
|
(in
millions)
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
$450.0
million Unsecured Revolving Credit Facility,
|
|
|
|
|
|
interest
payable monthly at LIBOR,
|
|
|
|
|
|
plus
0.475%, which was 5.8% at
|
|
|
|
|
|
February
3, 2007, principal payable upon
|
|
|
|
|
|
expiration
of the facility in March 2009
|
|
$
|
250.0
|
|
$
|
250.0
|
|
|
|
|
|
|
|
|
|
Demand
Revenue Bonds, interest payable monthly
|
|
|
|
|
|
|
|
at
a variable rate which was 5.4% at
|
|
|
|
|
|
|
|
February
3, 2007, principal payable on
|
|
|
|
|
|
|
|
demand,
maturing June 2018
|
|
|
18.8
|
|
|
19.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
long-term debt
|
|
|
268.8
|
|
|
269.0
|
|
|
|
|
|
|
|
|
|
Less
current portion
|
|
|
18.8
|
|
|
19.0
|
|
|
|
|
|
|
|
|
|
Long-term
debt, excluding current portion
|
|
$
|
250.0
|
|
$
|
250.0
|
|
Maturities
of long-term debt are as follows: 2007 - $18.8 million and 2009
- $250.0
million.
Unsecured
Revolving Credit Facility
In
March
2004, the Company entered into a five-year Unsecured Revolving
Credit Facility
(the Facility). The Facility provides for a $450.0 million revolving
line of
credit, including up to $50.0 million in available letters of
credit, bearing
interest at LIBOR, plus 0.475%. The Facility also bears an annual
facilities
fee, calculated as a percentage, as defined, of the amount available
under the
line of credit and an annual administrative fee payable quarterly.
The Facility,
among other things, requires the maintenance of certain specified
financial
ratios, restricts the payment of certain distributions and prohibits
the
incurrence of certain new indebtedness. The Company used availability
under the
Facility to repay $142.3 million of variable-rate debt and to
purchase
short-term, state and local government-sponsored municipal bonds.
The Company’s
$150.0 million revolving credit facility (Old Facility) was terminated
concurrent with entering into the Facility. The net debt issuance
costs related
to the Old Facility and the variable-rate debt totaling $0.7
million, were
charged to interest expense in 2004.
Demand
Revenue Bonds
On
May
20, 1998, the Company entered into an unsecured 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 $19.0 million to finance the acquisition, construction,
and
installation of land, buildings, machinery and equipment for
the Company's
distribution facility in Olive Branch, Mississippi. The Bonds
do not contain a
prepayment penalty as long as the interest rate remains variable.
The Bonds
contain a demand provision and, therefore, are classified as
current
liabilities.
NOTE
6 - DERIVATIVE
FINANCIAL INSTRUMENTS
Non-Hedging
Derivatives
At
February 3, 2007, the Company was party to a derivative instrument
in the form
of an interest rate swap that does not qualify for hedge accounting
treatment
pursuant to the provisions of SFAS No. 133 because it contains
a knock-out
provision. The swap creates the economic equivalent of a fixed
rate obligation
by converting the variable-interest rate to a fixed rate. Under
this interest
rate swap, the Company pays interest to a financial institution
at a fixed rate,
as defined in the agreement. In exchange, the financial institution
pays the
Company at a variable interest rate, which approximates the floating
rate on the
variable-rate obligation, excluding the credit spread. The interest
rate on the
swap is subject to adjustment monthly. No payments are made by
either party for
months in which the variable-interest rate, as calculated under
the swap
agreement, is greater than the "knock-out rate." The following
table summarizes
the terms of the interest rate swap:
Derivative
|
Origination
|
Expiration
|
Pay
Fixed
|
Knock-out
|
Instrument
|
Date
|
Date
|
Rate
|
Rate
|
$18.8
million swap
|
4/1/99
|
4/1/09
|
4.88%
|
7.75%
|
This
swap
reduces the Company's exposure to the variable interest rate related
to the
Demand Revenue Bonds (see Note 5).
Hedging
Derivative
The
Company was party to one derivative instrument in the form of an
interest rate
swap that qualified for hedge accounting treatment pursuant to the
provisions of
SFAS No. 133.
In
2001,
the Company entered into a $25.0 million interest rate swap agreement
(swap) to
manage the risk associated with interest rate fluctuations on a portion
of the
Company's variable interest entity debt. In March 2004, the Company
repaid all
of the variable interest entity debt with borrowings from the Facility
(see Note
5). The Company redesignated this swap to borrowings under the Facility.
This
redesignation does not affect the accounting treatment used for this
interest
rate swap. The swap created the economic equivalent of fixed-rate
debt by
converting the variable-interest rate to a fixed-rate. Under this
agreement, the
Company paid interest to a financial institution at a fixed-rate
of 5.43%. In
exchange, the financial institution paid the Company at a variable-interest
rate, which approximated the floating rate on the debt, excluding
the credit
spread. The interest rate on the swap was subject to adjustment monthly
consistent with the interest rate adjustment on the debt. The swap
expired in
March 2006.
NOTE
7 - SHAREHOLDERS' EQUITY
Preferred
Stock
The
Company is authorized to issue 10,000,000 shares of Preferred Stock,
$0.01 par
value per share. No preferred shares are issued and outstanding at
February 3,
2007 and January 28, 2006.
Net
Income Per Share
The
following table sets forth the calculation of basic and diluted net
income per
share:
|
|
Year
Ended
|
|
Year
Ended
|
|
Year
Ended
|
|
|
|
February
3,
|
|
January
28,
|
|
January
29,
|
|
(in
million, except per share data)
|
|
2007
|
|
2006
|
|
2005
|
|
Basic
net income per share:
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
192.0
|
|
$
|
173.9
|
|
$
|
180.3
|
|
Weighted
average number of shares
|
|
|
|
|
|
|
|
|
|
|
outstanding
|
|
|
103.2
|
|
|
108.3
|
|
|
113.3
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
net income per share
|
|
$
|
1.86
|
|
$
|
1.61
|
|
$
|
1.59
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
net income per share:
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
192.0
|
|
$
|
173.9
|
|
$
|
180.3
|
|
Weighted
average number of shares
|
|
|
|
|
|
|
|
|
|
|
outstanding
|
|
|
103.2
|
|
|
108.3
|
|
|
113.3
|
|
Dilutive
effect of stock options and
|
|
|
|
|
|
|
|
|
|
|
restricted
stock (as determined by
|
|
|
|
|
|
|
|
|
|
|
applying
the treasury stock method)
|
|
|
0.6
|
|
|
0.4
|
|
|
0.7
|
|
Weighted
average number of shares and
|
|
|
|
|
|
|
|
|
|
|
dilutive
potential shares outstanding
|
|
|
103.8
|
|
|
108.7
|
|
|
114.0
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
net income per share
|
|
$
|
1.85
|
|
$
|
1.60
|
|
$
|
1.58
|
|
At
February 3, 2007, January 28, 2006 and January 29, 2005, respectively,
1.5
million, 3.4 million, and 1.5 million stock options are not included
in the
calculation of the weighted average number of shares and dilutive
potential
shares outstanding because their effect would be anti-dilutive.
Comprehensive
Income
The
Company's comprehensive income reflects the effect of recording derivative
financial instruments pursuant to SFAS No. 133. The following table
provides a
reconciliation of net income to total comprehensive income:
|
|
Year
Ended
|
|
Year
Ended
|
|
Year
Ended
|
|
|
|
February
3,
|
|
January
28,
|
|
January
29,
|
|
(in
millions)
|
|
2007
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
192.0
|
|
$
|
173.9
|
|
$
|
180.3
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair
value adjustment-derivative
|
|
|
|
|
|
|
|
|
|
|
cash
flow hedging instrument
|
|
|
-
|
|
|
0.6
|
|
|
1.0
|
|
Income
tax expense
|
|
|
-
|
|
|
0.2
|
|
|
0.4
|
|
Fair
value adjustment, net of tax
|
|
|
-
|
|
|
0.4
|
|
|
0.6
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization
of SFAS No. 133
|
|
|
|
|
|
|
|
|
|
|
cumulative
effect
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Income
tax benefit
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Amortization
of SFAS No. 133
|
|
|
|
|
|
|
|
|
|
|
cumulative
effect, net of tax
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
comprehensive income
|
|
$
|
192.0
|
|
$
|
174.3
|
|
$
|
180.9
|
|
The
cumulative effect recorded in "accumulated other comprehensive income
(loss)" is
being amortized over the remaining lives of the related interest
rate swaps.
Share
Repurchase Programs
In
March
2005, the Company’s Board of Directors authorized the repurchase of up to $300.0
million of the Company’s common stock through March 2008. During fiscal 2006,
the Company repurchased 5,650,871 shares for approximately $148.2
million under
the March 2005 authorization.
In
November 2006, the Company’s Board of Directors authorized the repurchase of up
to $500.0 million of the Company’s common stock. This amount was in addition to
the $27.0 million remaining on the March 2005 authorization. In December
2006,
the Company entered into two agreements with a third party to repurchase
approximately $100.0 million of the Company’s common shares under an Accelerated
Share Repurchase Agreement (ASR).
The
first
$50.0 million was executed in an “uncollared” agreement. In this transaction the
Company initially received 1,656,178 shares based on the market price
of the
Company’s stock of $30.19 as of the trade date (December 8, 2006). A weighted
average price is calculated using stock prices from December 16,
2006 - March 8,
2007. This represents the calculation period for the weighted average
price. If
the
weighted average market price, as defined in the agreement, during
the
calculation period is greater than the $30.19 price per share, the
Company will
deliver to the third party cash or shares of Common Stock (at the
Company’s
option) equal to the price difference. If the weighted average market
price is
less than $30.19 then the third party will deliver to Dollar Tree
cash equal to
the price difference. The weighted average market price of the Company’s common
stock through February 3, 2007 was $31.00. Therefore, if the transaction
had
settled on February 3, 2007, the Company would have had to return
43,207 shares
to the third party which were included in the Company’s weighted average
dilutive potential common shares outstanding calculation. The weighted
average
stock price of the Company’s common stock as defined in the “uncollared”
agreement as of March 8, 2007 (termination date) was $32.17. The
Company paid
the third party an additional $3.3 million on March 8, 2007 for the
1,656,178
shares delivered under this agreement
The
remaining $50.0 million relates to a “collared” agreement in which the Company
initially received 1,500,703 shares on December 8, 2006, representing
the
minimum number of shares under the agreement. The maximum number
of shares that
can be received under the agreement is 1,693,101. The number of shares
is
determined based on the weighted average market price of the Company’s common
stock during the same calculation period as defined in the “uncollared”
agreement. The weighted average market price through February 3,
2007 as defined
in the “collared” agreement was $30.80. Therefore, if the transaction had
settled on February 3, 2007, the Company would have received an additional
122,742 shares under the “collared” agreement. Based on the applicable
accounting literature, these additional shares were not included
in the weighted
average diluted earnings per share calculation because their effect
would be
antidilutive.
Based on the weighted average price as of February 3, 2007 of $30.80,
there is
approximately $3.8 million of the $50.0 million related to the “collared”
agreement that is recorded as a reduction to stockholders’ equity pending final
settlement of the agreement. The weighted average stock price of
the Company’s
common stock as defined in the “collared” agreement as of March 8, 2007
(termination date) was $31.97. The Company received an additional
63,525 shares
on March 8, 2007 under this agreement.
NOTE
8 - EMPLOYEE BENEFIT PLANS
Profit
Sharing and 401(k) Retirement Plan
The
Company maintains a defined contribution profit sharing and 401(k)
plan which is
available to all employees over 21 years of age who have completed
one year of
service in which they have worked 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 plan included
in the
accompanying consolidated statements of operations were as follows:
Year
Ended February 3, 2007
|
|
$
|
16.8
million
|
|
Year
Ended January 28, 2006
|
|
|
6.9
million
|
|
Year
Ended January 29, 2005
|
|
|
8.5
million
|
|
Eligible
employees hired prior to January 1, 2007 are immediately vested in
the Company's
profit sharing contributions. Eligible employees hired subsequent to
January 1, 2007 vest in the Company's profit sharing contributions
based on the
following schedule:
· |
25%
after three years of service |
· |
50%
after four years of service |
· |
100%
after five years of service |
All
eligible employees are immediately vested in any Company match contributions
under the 401(k) portion of the plan.
Deferred
Compensation Plan
The
Company has a deferred compensation plan which provides certain officers
and
executives the ability to defer a portion of their base compensation
and bonuses
and invest their deferred amounts. The plan is a nonqualified plan
and the Company may make discretionary contributions. The deferred amounts
and earnings thereon are payable to participants, or designated beneficiaries,
at specified future dates, or upon retirement or death. Total cumulative
participant deferrals were approximately $2.3 million and $2.0 million,
respectively, at February 3, 2007 and January 28, 2006 and are included
in
"other liabilities" on the accompanying consolidated balance sheets.
The related
assets are included in "other assets, net" on the accompanying consolidated
balance sheets. The Company made no discretionary contributions in
the years
ended February 3, 2007, January 28, 2006, and January 29, 2005.
NOTE
9 - STOCK-BASED
COMPENSATION PLANS
At
February 3, 2007, the Company has eight stock-based compensation
plans. Each
plan and the accounting method are described below.
Fixed
Stock Option Compensation 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 granted options to its
employees
for the purchase of up to 12.6 million shares of Common Stock. The
exercise
price of each option equaled the market price of the Company's stock
at the date
of grant, unless a higher price was established by the Board of Directors,
and
an option's maximum term is 10 years. Options granted under the SIP
generally
vested over a three-year period. This plan was terminated on July
1, 2003 and
replaced with the Company’s 2003 Equity Incentive Plan, discussed
below.
The
Step
Ahead Investments, Inc. Long-Term Incentive Plan (SAI Plan) provided
for the
issuance of stock options, stock appreciation rights, phantom stock
and
restricted stock awards to officers and key employees. Effective
with the merger
with 98 Cent Clearance Center in December 1998 and in accordance
with the terms
of the SAI Plan, outstanding 98 Cent Clearance Center options were
assumed by
the Company and converted, based on 1.6818 Company options for each
98 Cent
Clearance Center option, to options to purchase the Company's common
stock.
Options issued as a result of this conversion were fully vested as
of the date
of the merger.
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
the options'
maximum term is 10 years. Options granted under the Special Plan
vested over a
five-year period. As of February 3, 2007, 240,000 of these options
are still
outstanding.
The
2003
Equity Incentive Plan (EIP) replaces the Company's SIP discussed
above. Under
the EIP, the Company may grant up to 6.0 million shares of its Common
Stock,
plus any shares available for future awards under the SIP, to the
Company’s
employees, including executive officers and independent contractors.
The EIP permits the Company to grant equity awards in the form of
stock options,
stock appreciation rights and restricted stock. The exercise price
of each stock
option granted equals the market price of the Company’s stock at the date of
grant. The options generally vest over a three-year period and have
a maximum
term of 10 years.
The
2004
Executive Officer Equity Plan (EOEP) is available only to the Chief
Executive
Officer and certain other executive officers. These officers no longer
receive
awards under the EIP. The EOEP allows the Company to grant the same
type of
equity awards as does the EIP. These awards generally vest over a
three-year
period, with a maximum term of 10 years.
Stock
appreciation rights may be awarded alone or in tandem with stock
options. When
the stock appreciation rights are exercisable, the holder may surrender
all or a
portion of the unexercised stock appreciation right and receive in
exchange an
amount equal to the excess of the fair market value at the date of
exercise over
the fair market value at the date of the grant. No stock appreciation
rights
have been granted to date.
Any
restricted stock or RSUs awarded are subject to certain general restrictions.
The restricted stock shares or units may not be sold, transferred,
pledged or
disposed of until the restrictions on the shares or units have lapsed
or have
been removed under the provisions of the plan. In addition, if a
holder of
restricted shares or units ceases to be employed by the Company,
any shares or
units in which the restrictions have not lapsed will be forfeited.
The
2003
Non-Employee Director Stock Option Plan (NEDP) provides non-qualified
stock
options to non-employee members of the Company's Board of Directors.
The stock
options are functionally equivalent to such options issued under
the EIP
discussed above. The exercise price of each stock option granted
equals the
market price of the Company’s stock at the date of grant. The options generally
vest immediately.
The
2003
Director Deferred Compensation Plan permits any of the Company's
directors who
receive a retainer or other fees for Board or Board committee service
to defer
all or a portion of such fees until a future date, at which time
they may be
paid in cash or shares of the Company's common stock, or to receive
all or a
portion of such fees in non-statutory stock options. Deferred fees
that are paid
out in cash will earn interest at the 30-year Treasury Bond Rate.
If a director
elects to be paid in common stock, the number of shares will be determined
by
dividing the deferred fee amount by the current market price of a
share of the
Company's common stock. The number of options issued to a director
will equal
the deferred fee amount divided by 33% of the price of a share of
the Company's
common stock. The exercise price will equal the fair market value
of the
Company's common stock at the date the option is issued. The options
are fully
vested when issued and have a term of 10 years.
Stock
Options
In
2006,
the Company granted a total of 342,216 stock options from the EIP,
EOEP and the
NEDP. For these options, the fair value of each option grant was
estimated on
the date of grant using the Black-Scholes option-pricing model and
the fair
value of these options of $3.4 million, net of expected forfeitures,
is being
recognized over the 3-year vesting period of these options, or a
shorter period
based on the retirement eligibility of the grantee. All options granted
to
directors vest immediately and are expenses on the grant date. During
2006, the Company recognized $1.3 million of expense related to the
2006 option
grants. As of February 3, 2007, there was approximately $2.1 million
of total
unrecognized compensation expense related to these stock options
which is
expected to be recognized over a weighted average period of 26 months.
The
expected term of the awards granted was calculated using the “simplified method”
in accordance with Staff Accounting Bulletin No. 107. Expected volatility
is
derived from an analysis of the historical and implied volatility
of the
Company’s publicly traded stock. The risk free rate is based on the U.S.
Treasury rates on the grant date with maturity dates approximating
the expected
life of the option on the grant date. For proforma disclosures required
under
FAS 123, the fair value of option awards in 2005 and 2004 was also
calculated
using the Black-Scholes option-pricing model. The weighted average
assumptions
used in the Black-Scholes option pricing model for grants in 2006,
2005 and 2004
are as follows:
|
|
Fiscal
2006
|
|
Fiscal
2005
|
|
Fiscal
2004
|
|
Expected
term in years
|
|
6.0
|
|
4.7
|
|
5.3
|
|
Expected
volatility
|
|
|
30.2
|
%
|
|
48.7
|
%
|
|
59.8
|
%
|
Annual
dividend yield
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Risk
free interest rate
|
|
|
4.8
|
%
|
|
3.7
|
%
|
|
3.7
|
%
|
Weighted
average fair value of options
|
|
|
|
|
|
|
|
|
|
|
granted
during the period
|
|
$
|
10.93
|
|
$
|
11.27
|
|
$
|
14.27
|
|
Options
granted
|
|
|
342,216
|
|
|
320,220
|
|
|
1,682,572
|
|
The
following tables summarize the Company's various option plans and
information
about options outstanding at February 3, 2007 and changes during
the 53 weeks
then ended.
Stock
Option Activity
|
|
|
|
|
|
|
|
|
|
|
|
|
February
3, 2007
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
Average
|
|
Weighted
|
|
Aggregate
|
|
|
|
|
|
Per
Share
|
|
Average
|
|
Intrinsic
|
|
|
|
|
|
Exercise
|
|
Remaining
|
|
Value
(in
|
|
|
|
Shares
|
|
Price
|
|
Term
|
|
millions)
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding,
beginning of period
|
|
|
5,990,757
|
|
$
|
5.60
|
|
|
|
|
|
|
|
Granted
|
|
|
342,216
|
|
|
27.67
|
|
|
|
|
|
|
|
Exercised
|
|
|
(1,725,593
|
)
|
|
21.70
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(141,339
|
)
|
|
29.23
|
|
|
|
|
|
|
|
Outstanding,
end of period
|
|
|
4,466,041
|
|
$
|
25.96
|
|
|
5.6
|
|
$
|
25.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
vested and expected to vest
|
|
|
|
|
|
|
|
|
|
|
|
|
|
at
February 3, 2007
|
|
|
4,431,978
|
|
$
|
25.95
|
|
|
5.6
|
|
$
|
25.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
exercisable at end of period
|
|
|
4,126,874
|
|
$
|
25.83
|
|
|
5.3
|
|
$
|
24.4
|
|
|
|
|
|
Options
Outstanding
|
|
Options
Exercisable
|
|
|
|
Options
|
|
|
|
|
|
Options
|
|
|
|
Range
of
|
|
Outstanding
|
|
Weighted
Avg.
|
|
Weighted
Avg.
|
|
Exercisable
|
|
Weighted
Avg.
|
|
Exercise
|
|
at
February 3,
|
|
Remaining
|
|
Exercise
|
|
at
February 3,
|
|
Exercise
|
|
Prices
|
|
2007
|
|
Contractual
Life
|
|
Price
|
|
2007
|
|
Price
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$0.86
|
|
|
7,264
|
|
|
N/A
|
|
|
0.86
|
|
|
7,264
|
|
|
0.86
|
|
$2.95
to $10.98
|
|
|
7,174
|
|
|
0.1
|
|
|
9.93
|
|
|
7,174
|
|
|
9.93
|
|
$10.99
to $21.28
|
|
|
777,807
|
|
|
5.1
|
|
|
19.18
|
|
|
777,807
|
|
|
19.18
|
|
$21.29
to $29.79
|
|
|
2,511,244
|
|
|
5.8
|
|
|
25.26
|
|
|
2,172,077
|
|
|
24.90
|
|
$29.80
to $42.56
|
|
|
1,162,552
|
|
|
5.0
|
|
|
32.26
|
|
|
1,162,552
|
|
|
32.26
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$0.86
to $42.56
|
|
|
4,466,041
|
|
|
|
|
|
|
|
|
4,126,874
|
|
|
|
|
The
intrinsic value of options exercised during 2006, 2005 and 2004 was
approximately $13.1 million, $2.8 million and $5.7 million,
respectively.
Restricted
Stock
The
Company granted 277,347 and 252,936 RSUs, net of forfeitures in 2006
and 2005,
respectively, from the EIP and the EOEP to the Company’s employees and officers.
The fair value of all of these RSUs of $13.9 million is being expensed
ratably
over the three-year vesting periods, or a shorter period based on
the retirement
eligibility of the grantee. The fair value was determined using the
Company’s
closing stock price on the date of grant. The Company recognized
$4.5 million of
expense related to the RSUs during 2006. As of February 3, 2007,
there was
approximately $7.8 million of total unrecognized compensation expense
related to
these RSUs which is expected to be recognized over a weighted average
period of
24 months. In 2005, the Company recognized approximately $1.6 million of
expense for the RSUs granted in 2005.
In
2005,
the Company granted 40,000 RSUs from the EOEP to certain officers
of the
Company, contingent on the Company meeting certain performance targets
in 2005
and future service of these officers through various points through
July 2007.
The Company met these performance targets in fiscal 2005; therefore,
the fair
value of these RSUs of $1.0 million is being expensed over the service
period.
The fair value of these RSUs was determined using the Company’s closing stock
price January 28, 2006 (the last day of
fiscal
2005), when the performance targets were satisfied. The Company recognized
$0.3
million of expense related to these RSUs in 2006. The remaining $0.1
million
will be recognized over the vesting periods through July 2007. In
2005, the
Company recognized $0.7 million of expense for these RSUs.
In
2006,
the Company granted 6,000 RSUs from the EOEP and the EIP to certain
officers of
the Company, contingent on the Company meeting certain performance
targets in
2006 and future service of the these officers through fiscal 2006.
The Company
met these performance targets in fiscal 2006; therefore, the Company
recognized
the fair value of these RSUs of $0.2 million during fiscal 2006.
The fair value
of these RSUS was determined using the Company’s closing stock price on the
grant date in accordance with SFAS 123R.
The
following table summarizes the status of RSUs as of February 3, 2007,
and
changes during the 53 weeks then ended:
|
|
|
|
Weighted
|
|
|
|
|
|
Average
|
|
|
|
|
|
Grant
|
|
|
|
|
|
Date
Fair
|
|
|
|
Shares
|
|
Value
|
|
|
|
|
|
|
|
Nonvested
at January 28, 2006
|
|
|
295,507
|
|
$
|
25.00
|
|
Granted
|
|
|
292,697
|
|
|
27.69
|
|
Vested
|
|
|
(107,097
|
)
|
|
25.02
|
|
Forfeited
|
|
|
(24,330
|
)
|
|
26.63
|
|
Nonvested
at February 3, 2007
|
|
|
456,777
|
|
$
|
26.57
|
|
In
connection with the vesting of RSUs in 2006, certain employees elected
to
receive shares net of minimum statutory tax withholding amounts
which totaled $1.0 million.
Employee
Stock Purchase Plan
Under
the
Dollar Tree Stores, Inc. Employee Stock Purchase Plan (ESPP), the
Company is
authorized to issue up to 1,040,780 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 end of the quarterly offering period.
Under
the ESPP, the Company has sold 917,883 shares as of February 3,
2007.
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:
|
|
Fiscal
2006
|
|
Fiscal
2005
|
|
Fiscal
2004
|
|
|
|
|
|
|
|
|
|
Expected
term
|
|
3
months
|
|
3
months
|
|
3
months
|
|
Expected
volatility
|
|
|
13.1
|
%
|
|
12.0
|
%
|
|
15.6
|
%
|
Annual
dividend yield
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Risk
free interest rate
|
|
|
4.8
|
%
|
|
3.9
|
%
|
|
2.1
|
%
|
The
weighted average per share fair value of those purchase rights granted
in 2006,
2005 and 2004 was $4.59, $4.11 and $4.93, respectively.
NOTE
10 - ACQUISITION
On
March
25, 2006, the Company completed its acquisition of 138 Deal$ stores.
These
stores are located primarily in the Midwest part of the United States
and the
Company has existing logistics capacity to service these stores.
This
acquisition also includes a few “combo” stores that offer an expanded assortment
of merchandise including items that sell for more than $1. Substantially
all
Deal$ stores acquired will continue to operate under the Deal$ banner
while
providing the Company an opportunity to leverage its Dollar Tree
infrastructure
in the testing of new merchandise concepts, including higher price
points,
without disrupting the single-price point model in its Dollar Tree
stores.
The
Company paid approximately $32.0 million for store-related and other
assets and
$22.1 million for inventory. This amount includes approximately $0.6
million of direct costs associated with the acquisition. The results
of Deal$
store operations are included in the Company’s financial statements since the
acquisition date and did not have a significant impact on the Company’s
operating results in 2006. This acquisition is immaterial to the
Company’s
operations as a whole and therefore no proforma disclosure of financial
information has been presented. The following table summarizes the
allocation of
the purchase price to the fair value of the assets acquired.
(In
millions)
|
|
|
|
Inventory
|
|
$
|
22.1
|
|
Other
current assets
|
|
|
0.1
|
|
Property
and equipment
|
|
|
15.1
|
|
Goodwill
|
|
|
14.6
|
|
Other
intangibles
|
|
|
2.2
|
|
|
|
$
|
54.1
|
|
The
goodwill resulting from this acquisition will not be amortized but
will be
tested annually for impairment. Included in other intangibles is
approximately
$2.1 million related to net favorable lease rights for operating
leases for
retail locations. This amount is being amortized on a straight-line
basis to
rent expense over 35 months, the weighted average remaining initial
lease term
of the locations purchased.
NOTE
11 - INVESTMENT
In
2003,
the Company paid $4.0 million to acquire a 10.5% fully diluted interest
in
Ollie's Holdings, Inc. (Ollie's), a multi-price point discount retailer
located
in the mid-Atlantic region. In addition, the SKM Equity Fund III,
L.P. (SKM
Equity) and SKM Investment Fund (SKM Investment) acquired a combined
fully
diluted interest in Ollie's of 53.1%. Two of the Company's directors,
Thomas
Saunders and John Megrue, are principal members of SKM Partners,
L.L.C., which
serves as the general partner of SKM Equity. John Megrue is also
a principal
member of Apax Partners, L.P., which serves as the general partner
for SKM
Investment. The $4.0 million investment in Ollie's is accounted for
under the
cost method of accounting and is included in "other assets" in the
accompanying
consolidated balance sheets.
NOTE
12 - SUBSEQUENT EVENT
On
March
29, 2007, the Company entered into an agreement with a third party
to repurchase
approximately $150.0 million of the Company’s common shares under an Accelerated
Share Repurchase Agreement. The entire $150.0 million was executed
under a
“collared” agreement. Within two weeks of the March 29, 2007 execution date,
the
Company will receive the minimum number of shares. Up to four months after
the initial execution date, the Company will receive additional
shares from the
third party depending on the volume weighted average price of the
Company’s
common shares during that period, subject to the maximum share
delivery
provisions of the agreement.
NOTE
13 - QUARTERLY FINANCIAL INFORMATION (Unaudited)
The
following table sets forth certain items from the Company's unaudited
consolidated statements of operations for each quarter of fiscal
year 2006 and
2005. 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 a full year or for any future period.
|
|
First
|
|
Second
|
|
Third
|
|
Fourth
|
|
|
|
Quarter
(1)
|
|
Quarter
|
|
Quarter
|
|
Quarter
(2)
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal
2006:
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$
|
856.5
|
|
$
|
883.6
|
|
$
|
910.4
|
|
$
|
1,318.9
|
|
Gross
profit
|
|
|
286.1
|
|
|
293.3
|
|
|
307.5
|
|
|
470.3
|
|
Operating
income
|
|
|
53.5
|
|
|
48.2
|
|
|
53.5
|
|
|
155.6
|
|
Net
income
|
|
|
32.9
|
|
|
29.0
|
|
|
32.5
|
|
|
97.6
|
|
Diluted
net income per share
|
|
|
0.31
|
|
|
0.28
|
|
|
0.32
|
|
|
0.96
|
|
Stores
open at end of quarter
|
|
|
3,119
|
|
|
3,156
|
|
|
3,192
|
|
|
3,219
|
|
Comparable
store net sales change
|
|
|
4.0
|
%
|
|
4.2
|
%
|
|
4.0
|
%
|
|
5.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal
2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$
|
749.1
|
|
$
|
769.0
|
|
$
|
796.8
|
|
$
|
1,079.0
|
|
Gross
profit
|
|
|
254.2
|
|
|
261.5
|
|
|
276.3
|
|
|
380.4
|
|
Operating
income
|
|
|
48.2
|
|
|
46.8
|
|
|
52.3
|
|
|
136.6
|
|
Net
income
|
|
|
29.0
|
|
|
27.3
|
|
|
31.1
|
|
|
86.5
|
|
Diluted
net income per share
|
|
|
0.26
|
|
|
0.25
|
|
|
0.29
|
|
|
0.81
|
|
Stores
open at end of quarter
|
|
|
2,791
|
|
|
2,856
|
|
|
2,899
|
|
|
2,914
|
|
Comparable
store net sales change
|
|
|
(3.7
|
%)
|
|
(1.5
|
%)
|
|
(1.0
|
%)
|
|
1.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
Easter was observed on April 16, 2006 and March 27, 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2)
Fiscal 2006 contains 14 weeks ended February 3, 2007 while
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal
2005 contains 13 weeks ended January 28, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
None.
Evaluation
of disclosure controls and procedures
We
maintain disclosure controls and procedures that are designed to ensure
that
information required to be disclosed in our reports under the Securities
Exchange Act of 1934 (Exchange Act) is recorded, processed, summarized
and
reported within the time periods specified in the rules and forms of the
Securities and Exchange Commission, and that such information is accumulated
and
communicated to our management, including our Chief Executive Officer and
Chief
Financial Officer, as appropriate, to allow timely decisions regarding
required
disclosure. In designing and evaluating the disclosure controls and procedures,
we recognize that any controls and procedures, no matter how well designed
and
operated, can provide only reasonable assurance of achieving the desired
control
objectives, and management necessarily is required to apply our judgment
in
evaluating the cost-benefit relationship of possible controls and
procedures.
Our
management has carried out, with the participation of the Company’s Chief
Executive Officer and Chief Financial Officer, an evaluation of the
effectiveness of the Company’s disclosure controls and procedures, as defined in
Rule 13a-15(e) under the Exchange Act. Based upon this evaluation, our
chief
executive officer and our chief financial officer concluded that, as of
February
3, 2007, the Company’s disclosure controls and procedures are effective to
provide reasonable assurance that material information required to be disclosed
by us in reports that we file or submit under the Exchange Act is recorded,
processed, summarized and reported within the time periods specified in
Securities and Exchange Commission rules and forms.
Management’s
Report on Internal Control over Financial Reporting
The
Company’s management is responsible for establishing and maintaining adequate
internal control over financial reporting, as defined in Exchange Act Rule
13a-15(f). The Company’s management conducted an assessment of the Company’s
internal control over financial reporting based on the framework established
by
the Committee of Sponsoring Organizations of the Treadway Commission in
Internal
Control-Integrated Framework.
Based
on this assessment, the Company’s management has concluded that, as of February
3, 2007, the Company’s internal control over financial reporting is effective.
The Company’s independent registered public accounting firm, KPMG LLP, has
audited the Company’s consolidated financial statements and has issued an
attestation report on management’s assessment of the Company’s internal control
over financial reporting. Their report appears below.
Changes
in internal controls
There
were no significant changes in our internal controls over financial reporting
that occurred during our most recently completed fiscal quarter that materially
affected, or are reasonably likely to materially affect, our internal control
over financial reporting.
Report
of Independent Registered Public Accounting Firm
The
Board
of Directors and Stockholders
Dollar
Tree Stores, Inc.:
We
have
audited management's assessment, included in the accompanying Management’s
Report on Internal Control over Financial Reporting, that Dollar Tree Stores,
Inc. (the Company) maintained effective internal control over financial
reporting as of February 3, 2007, based on criteria established in Internal
Control-Integrated Framework,
issued
by the Committee of Sponsoring Organizations of the Treadway Commission
(COSO).
The
Company's management is responsible for maintaining effective internal
control
over financial reporting and for its assessment of the effectiveness of
internal
control over financial reporting. Our responsibility is to express an opinion
on
management's assessment and an opinion on the effectiveness of the Company’s
internal control over financial reporting based on our audit.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that
we plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control
over
financial reporting, evaluating management's assessment, testing and evaluating
the design and operating effectiveness of internal control, and performing
such
other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.
A
company's internal control over financial reporting is a process designed
to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with U.S. generally accepted accounting principles. A company's internal
control
over financial reporting includes those policies and procedures that (1)
pertain
to the maintenance of records that, in reasonable detail, accurately and
fairly
reflect the transactions and dispositions of the assets of the company;
(2)
provide reasonable assurance that transactions are recorded as necessary
to
permit preparation of financial statements in accordance with U.S. generally
accepted accounting principles, and that receipts and expenditures of the
company are being made only in accordance with authorizations of management
and
directors of the company; and (3) provide reasonable assurance regarding
prevention or timely detection of unauthorized acquisition, use, or disposition
of the company’s assets that could have a material effect on the financial
statements.
Because
of its inherent limitations, internal control over financial reporting
may not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may
become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
In
our
opinion, management's assessment that the Company maintained effective
internal
control over financial reporting as of February 3, 2007 is fairly stated,
in all
material respects, based on criteria established in Internal
Control—Integrated Framework,
issued
by the Committee of Sponsoring Organizations of the Treadway Commission
(COSO).
Also, in
our opinion, the Company maintained, in all material respects, effective
internal control over financial reporting as of February 3, 2007, based
on
criteria
established in Internal
Control—Integrated Framework,
issued
by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO).
We
also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated balance sheets of Dollar
Tree
Stores, Inc. and subsidiaries as of February 3, 2007 and January 28, 2006,
and
the related consolidated statements of operations, shareholders’ equity and
comprehensive income, and cash flows for each of the fiscal years in the
three-year period ended February 3, 2007, and our report dated April 2,
2007
expressed an unqualified opinion on those consolidated financial
statements.
/s/
KPMG
LLP
Norfolk,
Virginia
April
2,
2007
On
March 29,
2007, the Company entered into an Amended and Restated Severance Agreement
(filed as Exhibit 10.6 to this Annual Report on Form 10-K) with Robert
H.
Rudman, the Company’s Chief Merchandising Officer. This agreement provides for a
salary continuation for one year as severance should the Company terminate
Mr.
Rudman’s employment for any reason other than “cause” (as defined in the
Agreement), death, permanent disability or retirement. This Agreement
is no
longer effective if his employment terminates on or after May 26, 2008.
As
previously disclosed in our Current Report on Form 8-K filed on March
20, 2007,
Mr. Rudman is also a party to a Change in Control Retention Agreement
in the
form filed as Exhibit 10.1 to the Form 8-K report.
PART
III
The
information concerning our Directors and Executive Officers required by
this
Item is incorporated by reference in Dollar Tree Stores, Inc.'s Proxy Statement
relating to our Annual Meeting of Shareholders to be held on June 21, 2007,
under the caption "Election of Directors."
Information
set forth in the Proxy Statement under the caption "Compliance with Section
16(a) of the Securities and Exchange Act of 1934," with respect to director
and
executive officer compliance with Section 16(a), is incorporated herein
by
reference.
The
information concerning our code of ethics required by this Item is incorporated
by reference to Dollar Tree Stores, Inc.'s Proxy Statement relating to
our
Annual Meeting of Shareholders to be held on June 21, 2007, under the caption
"Code of Business Conduct (Code of Ethics)."
Information
set forth in the Proxy Statement under the caption "Compensation of Executive
Officers," with respect to executive compensation, is incorporated herein
by
reference.
Information
set forth in the Proxy Statement under the caption "Ownership of Common
Stock,"
with respect to security ownership of certain beneficial owners and management,
is incorporated herein by reference.
Information
set forth in the Proxy Statement under the caption "Certain
Relationships, Related Transactions and Director Independence," is
incorporated herein by reference.
Information
set forth in the Proxy Statement under the caption "Principal Accounting
Fees
and Services," is incorporated herein by reference.
PART
IV
Documents
filed as part of this report:
1.
|
Financial
Statements. Reference is made to the Index to the Consolidated
Financial
Statements set forth under Part II, Item 8, on Page 29 of this
Form
10-K.
|
|
|
2.
|
Financial
Statement Schedules. All schedules for which provision is made
in the
applicable accounting regulations of the Securities and Exchange
Commission are not required under the related instructions, are
not
applicable, or the information is included in the Consolidated
Financial
Statements, and therefore have been omitted.
|
|
|
3.
|
Exhibits.
The exhibits listed on the accompanying Index to Exhibits, on
page 58 of
this Form 10-K, are filed as part of, or incorporated by reference
into,
this report.
|
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.
|
DOLLAR
TREE STORES, INC.
|
|
|
DATE:
April 4, 2007
|
By: /s/
Bob Sasser
|
|
Bob
Sasser
|
|
President, Chief Executive Officer
|
Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has
been
signed below by the following persons on behalf of the Registrant and in the
capacities and on the dates indicated.
Signature
|
Title
|
Date
|
|
|
|
/s/
Macon F. Brock, Jr.
|
|
|
Macon
F. Brock, Jr.
|
Chairman;
Director
|
April
4, 2007
|
|
|
|
/s/
Bob Sasser
|
|
|
Bob
Sasser
|
Director,
President and
|
April
4, 2007
|
|
Chief
Executive Officer
|
|
|
(principal
executive officer)
|
|
|
|
|
/s/
J. Douglas Perry
|
|
|
J.
Douglas Perry
|
Chairman
Emeritus; Director
|
April
4, 2007
|
|
|
|
/s/
Mary Anne Citrino
|
|
|
Mary
Anne Citrino
|
Director
|
April
4, 2007
|
|
|
|
/s/
H. Ray Compton
|
|
|
H.
Ray Compton
|
Director
|
April
4, 2007
|
|
|
|
/s/
Kent A. Kleeberger
|
|
|
Kent
A. Kleeberger
|
Chief
Financial Officer
|
April
4, 2007
|
|
(principal
financial and
|
|
|
accounting
officer)
|
|
|
|
|
/s/
Richard G. Lesser
|
|
|
Richard
G. Lesser
|
Director
|
April
4, 2007
|
|
|
|
/s/
John F. Megrue
|
|
|
John
F. Megrue
|
Director
|
April
4, 2007
|
|
|
|
/s/
Thomas A. Saunders, III
|
|
|
Thomas
A. Saunders, III
|
Director
|
April
4, 2007
|
|
|
|
/s/
Eileen R. Scott
|
|
|
Eileen
R. Scott
|
Director
|
April
4, 2007
|
|
|
|
/s/
Thomas E. Whiddon
|
|
|
Thomas
E. Whiddon
|
Director
|
April
4, 2007
|
|
|
|
/s/
Alan L. Wurtzel
|
|
|
Alan
L. Wurtzel
|
Director
|
April
4, 2007
|
Index
to Exhibits
3. Articles
and Bylaws
3.1
|
Third
Restated Articles of Incorporation of Dollar Tree Stores, Inc.
(the
Company), as amended (Exhibit 3.1 to the Company’s Quarterly Report on
Form 10-Q for the fiscal quarter ended September 30, 1996, incorporated
herein by this reference)
|
|
|
3.2
|
Third
Restated Bylaws of the Company (Exhibit 99.1 to the Company’s December 15,
2005 Current Report on Form 8-K, incorporated herein by this
reference)
|
|
|
10.
Material
Contracts
|
|
|
|
10.2 |
|
|
|
|
|
|
|
|
|
|
|
|
Salary
and bonus arrangements for the Company’s executive officers for fiscal
2006 (as described in Item 1.01 of the Company’s March 21, 2006 Current
Report on Form
8-K, incorporated herein by this reference)
|
|
|
|
|
21. Subsidiaries
of the Registrant
23. Consents
of Experts and Counsel
31. Certifications
required under Section 302 of the Sarbanes-Oxley Act
32. Statements
under Section 906 of the Sarbanes-Oxley Act