DOLLAR TREE STORES INC, 424B2, 1996-06-11

DOLLAR TREE STORES INC
424B2, 1996-06-11
VARIETY STORES

Previous: NEIMAN MARCUS FUNDING CORP, 8-K, 1996-06-11

Next: GRANDVIEW INVESTMENT TRUST, N-30D, 1996-06-11

Filed Pursuant To
Rule 424(b)(2)
Registration No. 333-04391

3,250,000 SHARES

[LOGO] DOLLAR TREE STORES, INC.

COMMON STOCK

Of the 3,250,000 shares of Common Stock offered hereby, 750,000 are being
sold by the Company and 2,500,000 are being sold by the Selling Shareholders.
See "Principal and Selling Shareholders." The Company will not receive any of
the proceeds from the sale of shares by the Selling Shareholders.

The Company's Common Stock is traded on the Nasdaq National Market under the
symbol "DLTR." On June 10, 1996, the last reported sale price of the Common
Stock on the Nasdaq National Market was $36 7/8 per share. See "Price Range of
Common Stock."

SEE "RISK FACTORS" BEGINNING ON PAGE 8 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE COMMON STOCK OFFERED
HEREBY.

-------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.

[CAPTION]
<TABLE>
Proceeds to
Price Underwriting Proceeds to Selling
to Public Discount (1) Company (2) Shareholders
<S> <C> <C> <C> <C>
Per Share............... $36.00 $1.575 $34.425 $34.425
Total (3)............... $117,000,000 $5,118,750 $25,818,750 $86,062,500
</TABLE>

(1) See "Underwriting" for information concerning indemnification of the
Underwriters and other matters.

(2) Before deducting estimated offering expenses of $500,000, which will be
payable by the Company.

(3) The Selling Shareholders have granted to the Underwriters a 30-day option to
purchase up to 487,500 additional shares of Common Stock solely to cover
over-allotments, if any. If the Underwriters exercise this option in full,
the Price to Public will total $134,550,000, the Underwriting Discount will
total $5,886,563 and the Proceeds to Selling Shareholders will total
$102,844,688. See "Principal and Selling Shareholders" and "Underwriting."

The shares of Common Stock are offered by the several Underwriters named
herein when, as and if delivered to and accepted by the Underwriters and subject
to their right to reject any order in whole or in part. It is expected that
delivery of the certificates representing the shares will be made against
payment therefor at the office of Montgomery Securities on or about June 14,
1996.

-------------------
MONTGOMERY SECURITIES
GOLDMAN, SACHS & CO.
SMITH BARNEY INC.

June 10, 1996
<PAGE>

[MAP OF DOLLAR TREE STORES, INC.,
DISTRIBUTION CENTERS AND AREA LOCATIONS]

[(AS OF MARCH 31, 1996)]

IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS AND SELLING GROUP MEMBERS
MAY ENGAGE IN PASSIVE MARKET MAKING TRANSACTIONS IN THE COMMON STOCK ON THE
NASDAQ NATIONAL MARKET IN ACCORDANCE WITH RULE 10B-6A UNDER THE EXCHANGE ACT.
SEE "UNDERWRITING."

IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK OF
THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH TRANSACTIONS MAY BE EFFECTED IN THE NASDAQ NATIONAL MARKET, IN THE
OVER-THE-COUNTER MARKET OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE
DISCONTINUED AT ANY TIME.

<PAGE>

[PHOTO OF A DOLLAR TREE STOREFRONT]

[PHOTO OF A DOLLAR BILL$ STOREFRONT]

<PAGE>

[PHOTO OF DOLLAR BILL$ STORE --
LAYOUT AND MERCHANDISE]

[PHOTO OF DOLLAR BILL$ STORE MERCHANDISE]

<PAGE>
PROSPECTUS SUMMARY

The following summary is qualified in its entirety by the more detailed
information (including the financial statements and the notes thereto) included
elsewhere in this Prospectus or incorporated by reference herein, which should
be read in its entirety. Unless otherwise indicated, all information in this
Prospectus (i) gives effect to a 3 for 2 split of the Company's Common Stock
effected by means of a 50% share dividend paid on April 19, 1996 to the
shareholders of record as of April 5, 1996 and (ii) assumes no exercise of the
Underwriters' over-allotment option. See "Underwriting." As used in this
Prospectus, references to a "fiscal" year refer to the Company's fiscal year
ended January 31 of the following year.

THE COMPANY

Dollar Tree Stores, Inc. ("Dollar Tree" or the "Company") is the leading
operator of discount variety stores offering merchandise at the $1.00 price
point. The Company's stores, which are designed to be the modern day equivalent
of the traditional variety store, offer a wide assortment of quality everyday
general merchandise in many traditional variety store categories, including
housewares, toys, seasonal goods, gifts, food, stationery, health and beauty
aids, books, party goods, hardware and other consumer items. As of March 31,
1996, the Company operated 660 stores principally in strip centers and malls in
26 states in the Southeastern, Mid-Atlantic, Midwestern, Southcentral and
Northeastern United States, including 136 Dollar Bills stores added in January
1996. See "--Dollar Bills Acquisition."

Dollar Tree has increased its net sales and operating income in each year
since its inception in 1986. During the past five years, the Company has grown
significantly, with the number of stores increasing from 141 at the close of
fiscal 1990 to 500 at December 31, 1995. The Company's net sales increased from
$71.1 million in fiscal 1991 to $300.2 million in calendar 1995, a compound
annual growth rate of 43.4%. In addition, operating income increased from $5.2
million in fiscal 1991 to $36.7 million in calendar 1995, a compound annual
growth rate of 62.9%. The Company's net sales increased 74.5% from $48.7 million
to $85.0 million, and operating income increased 197.1% from $0.9 million to
$2.6 million from the three months ended March 31, 1995 to the three months
ended March 31, 1996. The results of operations for the three months ended March
31, 1996 include two months of operations of 136 Dollar Bills stores added in
January 1996.

Dollar Tree believes that its ability to operate successfully in major
metropolitan areas, mid-sized cities and small towns, in both strip center and
mall based locations, its ability to concentrate multiple stores in a single
market and its attractive store level economics provide it with a wide range of
real estate opportunities and will facilitate its continued expansion. The
Company's expansion plan is to increase its presence in its existing markets and
to selectively enter new markets. Dollar Tree opened 74 new stores in 1993, 82
new stores in 1994 and 94 new stores in 1995. The Company anticipates expanding
by approximately 90 to 100 stores in 1996 (24 of which had been added as of
March 31, 1996), in addition to 136 Dollar Bills stores added in January 1996,
and by approximately 140 stores in 1997. The Company is focusing its expansion
strategy on strip center locations anchored by strong mass merchandisers such as
Wal-Mart, Target and Kmart, whose target customers management believes are
similar to those of Dollar Tree. In calendar 1995, the average investment per
new store, including capital expenditures, initial inventory and pre-opening
costs, was approximately $152,000, while the average new store (i.e., a store
for which 1995 was its first full year of operations) had net sales of
approximately $634,000. The Company's Dollar Tree stores have historically been
profitable within the first full year of operation, with an average store level
operating income of approximately $147,000 (approximately 23% of sales) for
stores whose first full year of operation was 1995. The operating performance of
the Company's Dollar Tree stores has been very consistent, with over 90% of its
stores having store level operating income margins in excess of 15% in calendar
1995.

3
<PAGE>
Dollar Tree's management strives to exceed its customers' expectations of
the range and quality of products that can be purchased for $1.00. Management
believes that many of the items Dollar Tree sells for $1.00 are typically sold
for higher prices elsewhere. The Company supplements its wide assortment of
quality everyday core merchandise with a changing mix of new and exciting
products, including seasonal goods (such as Christmas and Easter goods) and, to
a limited extent, selected closeout merchandise. The wide variety and freshness
of merchandise and the $1.00 price point create excitement for customers, which
management believes results in "impulse" purchases and encourages consumers to
make return visits to the store.

Dollar Tree's three executive officers each have between 17 and 27 years of
experience in the retail industry and have worked together for the past 17
years. In addition to their experience with Dollar Tree, they helped to manage
the profitable growth of K&K Toys, Incorporated ("K&K Toys") from one toy store
to a 136 store, mall based toy retailer. K&K Toys was profitable in every year
of operation from 1970 until its sale in 1991.

Dollar Tree believes that, given the Company's pricing structure,
maintaining sufficient gross margins and tight control over store expenses,
corporate expenses and inventories is critical to its success. From fiscal 1991
to calendar 1995, Dollar Tree increased its gross profit margin from 34.7% to
37.5% and increased its operating income margin from 7.3% to 12.2%. Dollar
Tree's gross profit margin increased from 33.8% to 34.2%, and its operating
income margin increased from 1.8% to 3.0%, from the three months ended March 31,
1995 to the three months ended March 31, 1996. Dollar Tree closely manages both
retail inventory shrinkage and retail markdowns of inventory, limiting each to
an average of less than 2.5% of annual net sales over the last five years.

DOLLAR BILLS ACQUISITION

On a pro forma basis after giving effect to the acquisition, the Company had
$404.1 million in net sales, $140.2 million in gross profit and $44.0 million in
operating income for the year ended December 31, 1995 and had $91.5 million in
net sales, $30.9 million in gross profit and $2.1 million in operating income
for the three months ended March 31, 1996. Pro forma results give effect to
certain adjustments, before any nonrecurring charges or credits, and do not
purport to be indicative of the results that would have occurred had the
transaction taken place at the beginning of the period or of future results.

Management believes that the Dollar Bills acquisition broadens the Company's
base in terms of geographic coverage, merchandise categories and market share,
while taking advantage of the Company's existing infrastructure. Most Dollar
Bills stores are located in different retail markets from existing Dollar Tree
stores, resulting in little competition for sales. The business combination also
adds a modern 250,000 square foot distribution center in the Chicago area, which
has been in operation for two years.

-------------------

The Company was incorporated under the laws of Virginia in 1986 as Only One
Dollar, Inc. and changed its name to Dollar Tree Stores, Inc. on December 14,
1993. The Company's principal executive and administrative offices are located
at 2555 Ellsmere Avenue, Norfolk Commerce Park, Norfolk, Virginia 23513, and the
Company's telephone number is (804) 857-4600. References to the Company and
Dollar Tree include the Company's wholly-owned subsidiaries.

4
<PAGE>
THE OFFERING

<TABLE>
<S> <C>
Common Stock offered by the Company...................... 750,000 shares

Common Stock offered by the Selling Shareholders......... 2,500,000 shares

Common Stock to be outstanding after the offering........ 25,806,346 shares(1)

Use of Proceeds.......................................... Repayment of indebtedness,
including notes payable to
affiliates.

Nasdaq National Market symbol............................ DLTR
</TABLE>

- ------------

(1) Based on shares outstanding at May 22, 1996. Does not include up to
3,366,654 shares of Common Stock issuable upon the exercise of (i) options
to purchase 884,476 shares of Common Stock and (ii) warrants to purchase
2,482,178 shares of Common Stock outstanding at such date.

5
<PAGE>
SUMMARY FINANCIAL INFORMATION AND CERTAIN OPERATING DATA
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA AND SALES PER SQUARE FOOT DATA)

<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
YEAR ENDED DECEMBER 31,
----------------------------------------------------- -----------------------------
FISCAL YEAR PRO FORMA PRO FORMA
1991(1) 1992(1) 1993 1994 1995 1995(2) 1995 1996 1996(2)
----------- -------- -------- -------- -------- --------- ------- ------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net sales.................. $71,068 $120,542 $167,753 $231,601 $300,229 $404,079 $48,733 $84,975 $91,457
Gross profit............... 24,655 44,108 61,435 86,120 112,677 140,176 16,458 29,070 30,873
Selling, general and
administrative expenses:
Operating expenses........ 18,114 29,546 39,559 54,993 70,504 87,529 14,418 24,288 26,268
Depreciation and
amortization............... 1,323 2,075 3,054 4,186 5,468 8,615 1,175 2,212 2,475
Recapitalization
expenses(3)................ -- -- 4,387 -- -- -- -- -- --
----------- -------- -------- -------- -------- --------- ------- ------- ---------
Total.................. 19,437 31,621 47,000 59,179 75,972 96,144 15,593 26,500 28,743
Operating income........... 5,218 12,487 14,435 26,941 36,705 44,032 865 2,570 2,130
Net income................. $ 12,114 $ 20,963 $ 22,791 $ 249 $ 923 $ 423
-------- -------- --------- ------- ------- ---------
-------- -------- --------- ------- ------- ---------
Net income per share(4).... $ 0.44 $ 0.76 $ 0.83 $ 0.01 $ 0.03 $ 0.02
-------- -------- --------- ------- ------- ---------
-------- -------- --------- ------- ------- ---------
Pro forma net income(5).... $ 2,337 $ 6,854 $ 7,608
----------- -------- --------
----------- -------- --------
Pro forma net income per
share(6)................... $ 0.09 $ 0.25 $ 0.28
----------- -------- --------
----------- -------- --------
Weighted average number of
common shares and common
share equivalents
outstanding, in thousands
(4 and 6).................. 27,262 27,262 27,262 27,262 27,589 27,589 27,306 27,795 27,795
----------- -------- -------- -------- -------- --------- ------- ------- ---------
----------- -------- -------- -------- -------- --------- ------- ------- ---------
SELECTED OPERATING DATA:
Number of stores open at
end of period(7):
Mall...................... 141 145 145 154 173 174 155 179 179
Strip center(8)........... 45 111 183 255 327 462 269 481 481
----------- -------- -------- -------- -------- --------- ------- ------- ---------
Total.................. 186 256 328 409 500 636 424 660 660
----------- -------- -------- -------- -------- --------- ------- ------- ---------
----------- -------- -------- -------- -------- --------- ------- ------- ---------
Net sales growth........... 36.1% 72.7% 39.2% 38.1% 29.6% 23.4 % 34.7% 74.5% 32.1%
Comparable store net sales
increase(9)................ 2.7% 24.1% 6.9% 9.1% 7.3% 4.1 % 6.8% 11.8% 7.5%
Average net sales per
store(10).................. $ 414 $ 520 $ 555 $ 606 $ 649 $ 691 $ 117 $ 135 $ 141
Average net sales per square foot(10):
Mall...................... $ 175 $ 214 $ 224 $ 241 $ 246 $ 241 $ 43 $ 49 $ 49
Strip center(8)........... $ 185 $ 201 $ 188 $ 197 $ 209 $ 200 $ 38 $ 43 $ 41
All stores................ $ 177 $ 210 $ 206 $ 214 $ 221 $ 210 $ 40 $ 45 $ 43
</TABLE>

<TABLE>
<CAPTION>
AS OF
MARCH 31, 1996
-------------------------
ACTUAL AS ADJUSTED(11)
------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital............................................................................... $30,221 $30,221
Total assets.................................................................................. 173,570 173,570
Total debt.................................................................................... 86,208 60,889
Shareholders' equity.......................................................................... 41,258 66,577
</TABLE>

6
<PAGE>
- ------------

(1) In September 1993, the Company changed its fiscal year end from January 31
to December 31. Accordingly, the results of operations for calendar 1992
and fiscal 1991 both include results of operations for the month of January
1992.

(2) The unaudited pro forma income statement data for the year ended December
31, 1995 and for the three months ended March 31, 1996 combine the
historical results of the Company with the historical results of Dollar
Bills as if the acquisition had taken place at the beginning of the
respective periods presented. The unaudited pro forma income statement data
for the year ended December 31, 1995 and the three months ended March 31,
1996 give effect to certain adjustments related to the elimination of
duplicative operating costs associated with Dollar Bills' corporate
headquarters and distribution facility ($4.0 million and $0.5 million,
respectively); amortization of goodwill recognized in connection with the
Dollar Bills acquisition, which is being amortized over a 25 year period
($2.0 million and $0.2 million, respectively); interest expense related to
borrowings under the Company's Development Facility used to finance the
acquisition ($3.9 million and $0.3 million, respectively); and income taxes
relating to the conversion of Dollar Bills to a C corporation at an assumed
effective rate of 38.5% ($1.0 million and $0.3 million, respectively). The
unaudited pro forma income statement data do not include nonrecurring
charges or credits, such as severance costs, one-time training costs, and
other nonrecurring operational costs of the transaction. The unaudited pro
forma income statement data do not purport to be indicative of the results
that would have occurred had the acquisition taken place at the beginning
of the respective periods or of future results. For unaudited pro forma
condensed consolidated income statements of the Company, reference is made
to the Company's Quarterly Report on Form 10-Q for the quarter ended March
31, 1996.

(3) Represents recapitalization expenses of $4.4 million incurred in connection
with the 1993 Recapitalization, comprised of $3.6 million of management
incentive expenses and $0.8 million of transaction expenses. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Overview."

(4) Net income per share has been computed by dividing net income by the
weighted average number of common shares and common share equivalents
outstanding. All warrants and options outstanding at December 31, 1994 have
been considered outstanding for the entire year ended December 31, 1994 and
are included in the calculation of the weighted average number of common
shares and common share equivalents outstanding for net income per share
computations in accordance with the rules of the Securities and Exchange
Commission. For all periods after December 31, 1994, common share
equivalents include the weighted average number of shares subject to stock
options and warrants outstanding at the end of the period, after applying
the treasury stock method.

(5) Prior to September 30, 1993, the Company was treated as a subchapter S
corporation for Federal and certain state income tax purposes. As such,
income of the Company for that period was taxable to the individual
shareholders rather than to the Company. Accordingly, the provision for
income taxes for fiscal 1991, the year ended December 31, 1992 and the nine
months ended September 29, 1993, represents corporate level state income
taxes on income earned in those states that do not recognize subchapter S
corporation status. On September 30, 1993, the Company converted to a C
corporation. Accordingly, income since September 30, 1993 was taxable to
the Company. Pro forma net income reflects a provision for income taxes as
if the Company were a subchapter C corporation for all years presented at
an assumed effective tax rate of approximately 40%.

(6) Pro forma net income per share has been computed by dividing pro forma net
income by the weighted average number of common shares and common share
equivalents outstanding. Common share equivalents include all outstanding
stock options and warrants after applying the treasury stock method. All
warrants and options outstanding at December 31, 1994 have been considered
outstanding for fiscal 1991 and for the calendar years ended December 31,
1992 and 1993, and are included in the calculation of the weighted average
number of common shares and common share equivalents outstanding for pro
forma income per share computations in accordance with the rules of the
Securities and Exchange Commission.

(7) The Company closed three stores in calendar 1992, two stores in calendar
1993, one store in calendar 1994 and three stores in calendar 1995.

(8) Pro forma data for 1995 and actual and pro forma data for March 31, 1996
include approximately 10 non strip-center, urban based Dollar Bills stores.

(9) Comparable store net sales increase compares net sales for stores open at
the beginning of the first of the two periods compared. No Dollar Bills
stores are included in the calculation, except in pro forma data.

(10) For stores open the entire period presented. No Dollar Bills stores are
included in the calculation, except in pro forma data. Results for the
three months ended March 31, 1996 may not be indicative of full year
average net sales per store or average net sales per square foot due to
seasonal fluctuations in sales. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations--Seasonality and Quarterly
Fluctuations."

(11) Gives effect to the sale by the Company of 750,000 shares of Common Stock
to be sold by it in this offering and the application of the estimated net
proceeds therefrom (at a public offering price of $36.00 per share) to
repay certain indebtedness. See "Use of Proceeds."

7
<PAGE>
RISK FACTORS

Before purchasing the shares of Common Stock offered hereby, a prospective
investor should consider the specific factors set forth below as well as the
other information set forth elsewhere in this Prospectus and incorporated herein
by reference. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and "Business" for a description of other factors
affecting the business of the Company generally.

RISKS ASSOCIATED WITH EXPANSION PLANS

The Company has grown from its initial five stores in 1986 to 660 stores at
March 31, 1996 and its net sales have grown significantly in the past several
years. The Company intends to continue to pursue an aggressive store opening
strategy. The continued growth of the Company is dependent, in large part, upon
the Company's ability to open new stores on a timely basis and to operate them
profitably. The Company plans to expand by approximately 90 to 100 stores in
calendar 1996 (24 of which had been added as of March 31, 1996), in addition to
136 Dollar Bills stores added in January 1996, and by approximately 140 stores
in 1997. As of March 31, 1996, the Company had signed leases with respect to 29
new stores and had reached an agreement in principle with respect to an
additional 32 new stores to open in 1996 and had signed leases with respect to 5
new stores and had reached an agreement in principle with respect to 14 new
stores to open in 1997. However, successful expansion is subject to various
contingencies, many of which are beyond the Company's control. These
contingencies include, among others, (i) the Company's ability to hire, train
and retain qualified managers and other personnel, and to maintain good
relations with all of its employees, (ii) the availability of adequate
inventory, capital resources and external financing, (iii) the Company's ability
to identify and secure suitable store sites on a timely basis and on
satisfactory terms and to complete any necessary construction or refurbishment
of these sites, (iv) the Company's ability to retain its current store sites or
substitute sites on satisfactory terms given that a substantial number of the
Company's store leases contain provisions prohibiting a change in control of the
Company or permitting the landlord to terminate the lease or increase rent upon
a change in control of the Company, which provisions are arguably applicable in
a substantial number of the Company's leases as a result of the recapitalization
of the Company in 1993 and may be applicable in a small number of additional
leases as a result of the Company's prior public offerings and this offering,
and given that many of the Company's leases contain provisions with which the
Company does not comply, including provisions requiring certain insurance and
advertising and prohibiting competing Company stores within a specified radius,
and (v) the successful integration of new stores into existing operations. As a
result, there can be no assurance that the Company will be able to achieve its
targets for opening new stores, that its new stores will be profitable or
achieve net sales and profitability comparable to the Company's existing stores
or that comparable store net sales increases will continue. Furthermore, there
can be no assurance that the Company will anticipate all of the changing demands
which its expanding operations will impose on its systems and personnel. The
Company's failure to expand internal systems or to hire, train and retain
qualified personnel as required by its growth could adversely affect its future
operating results.

The Company expects in the remainder of calendar 1996 and 1997 to expand in
existing and selected new markets in the Southeastern, Mid-Atlantic, Midwestern,
Southcentral and Northeastern United States. In some cases, stores will be
located in markets where the Company has no or only limited store operations.
The success of the Company's expansion plan is dependent upon the Company's
ability to penetrate these markets successfully. There can be no assurance that
the Company will do so. See "Business--Growth Strategy."

RISKS ASSOCIATED WITH DOLLAR BILLS ACQUISITION

As a result of the Company's recent acquisition of Dollar Bills, the size of
the Company has been significantly expanded. While the Company's Dollar Tree and
Dollar Bills stores are in the same

8
<PAGE>
business, there are a number of significant operational differences between
them. Dollar Bills stores typically (i) are larger; (ii) are more concentrated
in urban areas than Dollar Tree stores; (iii) carry a higher proportion of
consumable merchandise, such as food, health and beauty aids and everyday
household supplies, which typically have lower merchandise margins, and a lower
proportion of leisure items, such as toys and gifts, which typically have higher
merchandise margins; (iv) carry less inventory per square foot because of
different store fixtures; and (v) offered a limited number of multi-price point
items, which the Company expects to continue to offer only at certain Dollar
Bills locations and at prices not exceeding $5.00. There can be no assurance
that the Company will be able to successfully implement its business strategy or
achieve profitability comparable to its historical operations in the Dollar
Bills stores. In addition, the Company has incurred significant costs and
expenses in consolidating the operations of the two companies and the ongoing
integration of the two companies has placed and will continue to place
significant demands on the Company's management resources and infrastructure.
The unaudited pro forma financial information incorporated herein by reference
are not necessarily indicative of what historical performance of the Company
would have been, or what the future financial performance of the Company will
be, as a combined company with Dollar Bills.

The parties from whom the Company acquired Dollar Bills, together with a
corporation they control, have filed suits against the Company in Illinois state
and federal court relating to the acquisition by the Company of the wholesale
division of Dollar Bills, and seek compensatory damages in an amount no less
than $10 million (which could be tripled under a federal anti-trust claim),
punitive damages, attorney's fees, costs and injunctive and other relief. This
litigation is in its preliminary stages and discovery has only recently
commenced; however, based on management's understanding of the facts (which
facts are contested by the plaintiffs) and the advice of its lead litigation
counsel for this matter in reliance on such facts, the Company believes it is
unlikely that the plaintiffs will ultimately prevail on the merits of the
litigation. Accordingly, the Company believes that the ultimate outcome of this
matter will not have a material adverse effect on the Company's results of
operations or financial condition. Nevertheless, particularly in light of the
contested factual assertions, there can be no assurances regarding the ultimate
outcome of this litigation or that this litigation will not have a material
adverse effect on the Company's results of operations or financial condition. In
any event, the litigation has diverted, and is expected to continue to divert,
the efforts and attention of the Company's management.

DEPENDENCE ON IMPORTS AND VULNERABILITY TO IMPORT RESTRICTIONS

In 1994 and 1995, the Company purchased approximately 39% and 34%,
respectively, of its merchandise based on cost directly from vendors located
abroad, primarily in Hong Kong and Taiwan (through which the Company's Chinese
imports flow), Thailand, Brazil, India and the Philippines. The Company expects
imports to continue to account for approximately 35% to 40% of total purchases
at cost. In addition, the Company believes that a substantial portion of the
goods the Company purchases from domestic vendors are manufactured abroad. These
arrangements are subject to the risks of relying on products manufactured
abroad, including import duties and quotas, loss of "most favored nation"
("MFN") trading status, currency fluctuations, work stoppages, economic
uncertainties including inflation, foreign government regulations, political
unrest and trade restrictions, including U.S. retaliation against unfair foreign
practices. While the Company believes that it could find alternative sources of
supply, an interruption or delay in supply from China or the Company's other
foreign sources, or the imposition of additional duties, taxes or other charges
on these imports, could have a material adverse effect on the Company's business
and results of operations unless and until alternative supply arrangements are
secured. Moreover, products from alternative sources may be of lesser quality
and/or more expensive than those currently purchased by the Company.

9
<PAGE>
China's efforts to disrupt Taiwan's elections by conducting military exercises
in the Taiwan Straits, China's alleged sales of nuclear weapons-making equipment
to Pakistan and the resulting temporary suspension of U.S. Export-Import Bank
financing for sales to China, China's failure adequately to implement and
enforce the terms of the intellectual property protection agreement reached with
the United States in 1995, China's human rights record, China's alleged sale of
missiles to Iran, the recent indictment of members of a Chinese
weapons-smuggling operation with suspected ties to the Chinese government, the
growing U.S. trade deficit with China and the ongoing negotiations concerning
China's accession to the World Trade Organization.

Under U.S. law, countries may be subject to retaliatory trade actions under
a number of trade statutes. One such statute is the "Special 301" provision,
which requires the U.S. Trade Representative ("USTR") to determine whether the
practices of foreign countries deny adequate and effective protection of
intellectual property rights or fair and equitable market access for U.S.
persons who rely on intellectual property protection. On April 30, 1996, the
USTR designated China as a "priority foreign country" under the Special 301
provision for its failure adequately to implement and enforce the bilateral 1995
intellectual property rights agreement with the United States, and on May 15,
1996 the USTR announced its intention to impose prohibitive import tariffs on
June 17, 1996 on certain categories of Chinese products, totaling approximately
$2 billion in U.S. imports, unless China takes satisfactory action to implement
the bilateral intellectual property agreement by that date. It is unclear
whether China will, or can, take the actions necessary to forestall the
imposition of sanctions between now and June 17. If punitive tariffs are
imposed, the categories of goods that will be subject to such sanctions will be
drawn from a larger list issued by the USTR on May 15. One of the products on
the May 15 list, certain types of paper bags, are products that the Company
imports in significant quantities directly or indirectly from China. The Company
has noncancellable orders to purchase products in these categories that will not
be received prior to June 17, 1996, the tariffs on which, if imposed, would be
approximately $1.9 million. In the event such tariffs were imposed, the Company
would use its relationships with the vendors involved to attempt to renegotiate
such noncancellable purchase orders, although there can be no assurances that
such efforts would be successful. If the USTR decides that those products, or
others that the Company imports, should be targeted for punitive import duties,
the Company expects that it would, except in the case of the non-cancellable
purchase orders referred to above, substitute similar goods from other countries
or other categories of goods, which, for the remainder of 1996 at least, would
likely be at higher cost. The imposition of punitive tariffs on such Chinese
products could have a material adverse effect on the Company's business and
results of operations unless and until alternative sources of supply were
secured.

China is currently accorded MFN status by the United States, and, as such,
products imported from China are generally subject to favorable United States
import duties. The MFN status of China is reviewed annually by the United States
government and, accordingly, extension of such status is subject to political
uncertainties. On May 31, 1996, President Clinton transmitted his formal
recommendation to the U.S. Congress that MFN status for China be renewed.
Senator Robert Dole, the presumptive Presidential nominee of the Republican
party, has also announced his support for MFN renewal. The Congress now has
until September 1, 1996 to decide whether to oppose that recommendation, which
it must do, if at all, by a joint resolution of both houses of Congress. As a
result of the number of outstanding issues that currently exist between the
United States and the Chinese government, it is possible that there may be
significant opposition to the extension of MFN status for China when the issue
comes before Congress. If a joint resolution were to be adopted, China's MFN
status would expire 61 days after the joint resolution became effective. Loss of
China's MFN status could impose significantly higher purchasing costs on the
Company, including increased tariffs on goods and could have a material adverse
effect on the Company's business and results of operations unless and until
alternative sources of supply were secured.

10
<PAGE>

DISPUTE WITH TRADING COMPANY

The Company recently terminated its relationship with a Hong Kong trading
company that accounted for approximately 6% of the Company's purchases in 1995.
The trading company had obtained payment on a number of letters of credit issued
on the Company's behalf by falsely claiming that conforming goods had been
shipped, when in fact the trading company had either shipped non-conforming
goods or empty containers. During the second quarter of 1996, the Company
intends to increase its previously established reserves by an additional
$300,000 to $400,000 for potential losses arising from the letters of credit
upon which the trading company has obtained payment. The Company has cancelled
all outstanding purchase orders with the trading company. In addition to the
payments already obtained by the trading company, there remains approximately
$2.7 million in undrawn irrevocable letters of credit issued to the trading
company with respect to the cancelled orders. The Company has taken extensive
measures, including legal action against the trading company, which it believes
have substantially limited its exposure with respect to the remaining undrawn
letters of credit. Although there can be no assurances in this regard, the
Company believes it is unlikely that its losses in connection with this matter
will significantly exceed its reserves. The Company has also expanded its
relationship with another trading company which it believes will be able to fill
most of the cancelled orders and fulfill the Company's future needs. There can
be no assurances, however, that this shift in suppliers will not result in a
temporary disruption or delay in the receipt of merchandise.

DISRUPTIONS IN RECEIVING AND DISTRIBUTION

Substantially all of the Company's inventory is shipped directly from
suppliers to the Company's distribution centers in Norfolk, Virginia, Memphis,
Tennessee, and Chicago, Illinois where the inventory is processed and then
distributed to stores. The Company's success depends in large part on the
orderly operation of this receiving and distribution process, which depends, in
turn, on adherence to shipping schedules (especially those from the Far East)
and effective management of the distribution centers. Although management
believes that its receiving and distribution process is efficient and well
positioned to support the Company's expansion plans, there can be no assurance
that the Company has anticipated, or will anticipate, all of the changing
demands which its expanding operations will impose on its receiving and
distribution system or that events beyond the control of the Company will not
result in delays in the delivery of merchandise to the stores. See
"Business--Warehousing and Distribution."

ADVERSE ECONOMIC FACTORS

The Company's ability to provide quality merchandise at the $1.00 price
point is subject to certain economic factors which are beyond the Company's
control, including inflation, other operating costs (such as employee health
care costs or minimum wage levels), consumer confidence and general economic
conditions. There can be no assurance that such factors will remain favorable
and in particular that health care costs or the minimum wage will remain at
current levels. Inflation, an increase in health care costs or other operating
costs or a decline in consumer confidence or general economic conditions could
have a material adverse effect on the Company's business and results of
operations, especially given constraints on the Company's ability to pass on any
incremental costs through price increases.

The United States House of Representatives has recently approved and it is
expected that the Senate will soon consider a proposal which would raise the
minimum wage from $4.25 to $5.15 per hour over a two-year period. While the
passage of such a proposal would significantly increase the Company's employment
costs, management does not believe that it would have a material adverse effect
on the Company's business and operations taken as a whole.

11
<PAGE>
DEPENDENCE ON KEY PERSONNEL

The Company's success depends to a significant extent upon the leadership
and performance of its senior management team, particularly J. Douglas Perry,
Chairman of the Company's Board of Directors, Macon F. Brock, Jr., the Company's
President and Chief Executive Officer, and H. Ray Compton, the Company's
Executive Vice President and Chief Financial Officer. While the Company believes
that its senior management team has significant depth, the loss of services of
any of the Company's executive officers could have a material adverse impact on
the Company. See "Management." In addition, the Company's credit agreement
provides that it is an event of default for Messrs. Perry, Brock and Compton to
own collectively less than 10% of the outstanding shares of the Company. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations-- Liquidity and Capital Resources."

COMPETITION

The retail industry is highly competitive. The Company's competitors include
mass merchandisers, discount stores, variety stores, closeout stores and other
$1.00 price point stores, many of which are units of national or regional chains
that have substantially greater financial resources than the Company. Several of
the largest operators of discount stores at the $1.00 price point (or their
parent companies) have recently filed for or emerged from bankruptcy protection
in U.S. bankruptcy court and have closed a number of their stores, while others
have abandoned the $1.00 price point concept and/or reconfigured their stores.
The Company may face intense competition in the future which could have an
adverse effect on its financial results. See "Business--Competition."

LIMITED AVAILABILITY OF SUITABLE MERCHANDISE

The Company's success depends in large part upon its ability to select and
purchase quality merchandise at attractive prices in order to maintain a balance
of regularly available core products and a changing mix of fresh merchandise at
the $1.00 price point. The Company has no continuing contracts for the purchase
of merchandise and must continuously seek out buying opportunities from both its
existing suppliers and new sources, for which it competes with other variety,
closeout and $1.00 price point merchandisers. Although the Company believes that
its management has long-standing and satisfactory relationships with its
suppliers, there can be no assurance that the Company will be successful in
maintaining a continuing and, in light of the anticipated addition of new
stores, an increasing supply of quality merchandise at attractive prices. See
"Business--Merchandising."

SEASONALITY AND QUARTERLY FLUCTUATIONS

The Company has historically experienced and expects to continue to
experience seasonal fluctuations in its net sales, operating income and net
income. The highest sales periods for the Company are the Christmas and Easter
seasons. A disproportionate amount of the Company's net sales and a substantial
majority of the Company's operating income and net income are generally realized
during the fourth quarter. In anticipation of increased sales activity during
these months, the Company purchases substantial amounts of inventory and hires a
significant number of temporary employees to bolster its permanent store staff.
If for any reason the Company's net sales were below seasonal norms during the
fourth quarter, including as a result of merchandise delivery delays due to
receiving or distribution problems, the Company's annual operating results,
particularly operating and net income, could be adversely affected.
Historically, net sales, operating income and net income have been weakest
during the first quarter, and the Company expects this trend to continue. The
Company's quarterly results of operations may also fluctuate significantly as a
result of a variety of factors, including the timing of new store openings, the
net sales contributed by new stores, shifts in the timing of certain holidays
and the merchandise mix. Although the Company has experienced significant
increases in comparable store net sales historically, management expects that
any increases in comparable store net

12
<PAGE>
sales in the future will be smaller than those experienced historically. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Seasonality and Quarterly Fluctuations."

ANTI-TAKEOVER EFFECT OF CERTAIN PROVISIONS OF THE COMPANY'S ARTICLES OF
INCORPORATION AND BY-LAWS

Certain provisions of the Company's Articles of Incorporation ("Articles of
Incorporation") and By-Laws ("By-Laws") may be deemed to have anti-takeover
effects and may discourage, delay or prevent a takeover attempt that a
shareholder might consider in its best interest. These provisions, among other
things, (i) classify the Company's Board of Directors into three classes, each
of which will serve for different three year periods, (ii) provide that only the
Board of Directors, chairman or president may call special meetings of the
shareholders, (iii) establish certain advance notice procedures for nominations
of candidates for election as directors and for shareholder proposals to be
considered at shareholders' meetings, and (iv) require a vote of the holders of
more than two-thirds of the shares entitled to vote in order to remove a
director or amend the foregoing and certain other provisions of the Articles of
Incorporation and By-Laws. In addition, the Board of Directors, without further
action of the shareholders, is permitted to issue and fix the terms of preferred
stock which may have rights senior to those of the Common Stock. Until July
1996, the Company may be subject to the affiliated transaction provisions of the
Virginia Stock Corporation Act which may be deemed to have anti-takeover effects
and may discourage, delay or prevent a takeover attempt that a shareholder might
consider in its best interest. The affiliated transaction provisions of the
Virginia Stock Corporation Act would, subject to certain exceptions, prohibit
the Company from engaging in an "affiliated transaction" with an "interested
shareholder" for a period of three years after the date of the transaction in
which the person became an interested shareholder, unless the affiliated
transaction is approved in a prescribed manner.

POTENTIAL ADVERSE MARKET PRICE EFFECTS OF SHARES ELIGIBLE FOR FUTURE SALE

Sales of substantial amounts of the Common Stock in the public market
following this offering could adversely affect the market price of the Common
Stock. Immediately following the completion of this offering there will be
11,277,499 shares eligible for resale in the public market. An additional
1,709,572 shares are currently eligible for resale in the public market, subject
to certain volume and other limitations. The remaining 12,819,275 shares, which
are owned by the Selling Shareholders, will be eligible for resale in the public
market beginning 90 days after the date of this Prospectus, unless released
earlier by Montgomery Securities, as representative of the Underwriters, subject
to certain volume and other limitations. Following the close of this offering,
certain of the Company's shareholders who will hold 14,528,847 shares of Common
Stock and warrants to purchase an additional 2,482,178 shares of Common Stock
will be entitled to certain rights with respect to the registration of all such
shares under the Securities Act. In addition, the Company has filed registration
statements covering the sale of 1,741,185 shares of Common Stock reserved for
issuance under The Dollar Tree Stores, Inc. Amended and Restated Stock Option
Plan, The Dollar Tree Stores, Inc. Stock Incentive Plan and The Dollar Tree
Stores, Inc. Employee Stock Purchase Plan.

CONTROL OF THE COMPANY BY EXISTING SHAREHOLDERS

Upon the closing of this offering, Mr. Brock and his wife, Mr. Perry and his
wife, Mr. Compton and The SK Equity Fund, L.P. (the "Fund") and certain
affiliates of the Fund will own, or otherwise control, approximately 60.1% of
the Company's outstanding Common Stock. Directors may be nominated by the Board
of Directors, by a committee of the Board of Directors, or, subject to advance
written notice and other procedural requirements, by a shareholder. Directors
are elected by a plurality of the votes cast by the holders of shares entitled
to vote and cumulative voting is not permitted. As a result, if such
shareholders act together, they could effectively control the Company, including
the power to elect all of the Directors of the Company and, in general, to
determine the outcome of any

13
<PAGE>
matter submitted to a vote of the Company's shareholders for approval, including
mergers, consolidations or the sale of all or substantially all of the Company's
assets, and to prevent or cause a change in control of the Company. See
"Principal and Selling Shareholders."

POSSIBLE VOLATILITY OF STOCK PRICE

The market price of the Company's Common Stock, which is quoted on the
Nasdaq National Market, may be subject to significant fluctuations in response
to operating results, comparable store sales announcements, announcements by
competitors and other factors. In addition, the stock market in recent years has
experienced extreme price and volume fluctuations that often have been unrelated
or disproportionate to the operating performance of individual companies. These
market fluctuations, as well as general economic conditions, may adversely
affect the market price of the Common Stock.

FORWARD-LOOKING STATEMENTS

This Prospectus includes forward-looking statements concerning the Company's
operations, economic performance and financial condition, in particular
forward-looking statements regarding the Company's recent acquisition of Dollar
Bills, the resolution of the pending litigation relating to the Dollar Bills
acquisition, the integration of Dollar Bills into the Company's existing
operations and the Company's expectations of future operating performance of
Dollar Bills stores. In addition, the information contained herein includes
certain forward-looking statements regarding its potential losses arising from
the dispute with a trading company, store openings, purchasing abilities, and
capital requirements. Such forward-looking statements are subject to various
risks and uncertainties. Actual results could differ materially from those
currently anticipated due to a number of factors, including those under the
caption "Risk Factors" in this Prospectus.

14
<PAGE>
USE OF PROCEEDS

The net proceeds to the Company from the sale of 750,000 shares of Common
Stock offered hereby by the Company are estimated to be approximately $25.3
million, at a public offering price of $36.00 per share, and after deducting the
underwriting discount and estimated offering expenses. The Company will not
receive any proceeds from the sale of Common Stock by the Selling Shareholders,
including upon the exercise of the underwriters' overallotment option.

The Company intends to use approximately $14.2 million of the estimated net
proceeds to repay its 9% Senior Subordinated Notes due 1997 and 9% Junior
Subordinated Notes due 1997, including $0.2 million of accrued interest thereon.
All of such notes are owned by the Original Shareholders (or immediate family
members), the Fund and the Co-Investors. All net proceeds in excess of the
amounts needed to repay those notes will be used to reduce the outstanding
balance under the Company's Development Facility loan, which as of May 23, 1996
had a balance of $52.6 million maturing in April 1997 and bears interest at
variable rates (6.74% at March 31, 1996). See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."

PRICE RANGE OF COMMON STOCK

The Company's Common Stock has been traded on the Nasdaq National Market
under the symbol "DLTR" since the Company's initial public offering on March 6,
1995. The following table sets forth the high and low sale prices of the
Company's Common Stock as reported on the Nasdaq National Market for the periods
indicated.
<TABLE>
<CAPTION>

1995 HIGH LOW
---- ------------- -------------
<S> <C> <C>
First quarter (from March 6, 1995).......................................... $ 14 $ 10 5/8
Second quarter.............................................................. 17 7/8 13 1/2
Third quarter............................................................... 24 1/8 17 3/8
Fourth quarter.............................................................. 22 7/8 14 5/8

1996
----
<S> <C> <C>
First quarter............................................................... 30 7/8 16 3/8
Second quarter (through June 10, 1996)...................................... 45 29
</TABLE>

On June 10, 1996, the last reported sale price for the Company's Common
Stock on the Nasdaq National Market was $36 7/8 per share. As of May 22, 1996,
the Company had 242 shareholders of record.

DIVIDEND POLICY

The Company anticipates that all of its income in the foreseeable future
will be retained for the development and expansion of its business and the
repayment of indebtedness, and therefore does not anticipate paying cash
dividends on its Common Stock in the foreseeable future. The Company's credit
agreement contains financial covenants which may have the effect of restricting
the Company's ability to pay dividends.

15
<PAGE>
CAPITALIZATION

The following table sets forth the short-term debt and total capitalization
of the Company as of March 31, 1996 on an actual basis and as adjusted to
reflect the sale by the Company of 750,000 shares of Common Stock pursuant to
this offering, the receipt by the Company of the estimated net proceeds thereof,
at a public offering price of $36.00 per share and after deducting the
underwriting discount and estimated offering expenses, and the application of
the net proceeds by the Company to repay certain indebtedness as described in
"Use of Proceeds."

<TABLE>
<CAPTION>
MARCH 31, 1996
-----------------------
ACTUAL AS ADJUSTED
-------- -----------
(IN THOUSANDS)
<S> <C> <C>
Short-term debt:
Notes payable to banks.............................................. $ 18,500 $ 18,500
Current installments of obligations under capital leases............ 293 293
-------- -----------
Total short-term debt............................................... $ 18,793 $ 18,793
-------- -----------
-------- -----------

Long-term debt:
Development facility................................................ $ 52,630 $ 41,311
9% Senior Subordinated Notes........................................ 7,000 --
9% Junior Subordinated Notes........................................ 7,000 --
Obligations under capital leases, excluding current installments.... 785 785
-------- -----------
Total long-term debt................................................ 67,415 42,096
-------- -----------

Shareholders' equity:
Common stock, $0.01 par value; 50,000,000 shares authorized;
25,017,300 shares issued and outstanding, actual, and 25,767,300
shares, issued and outstanding, as adjusted(1)........................ 250 258
Additional paid-in capital.......................................... 4,144 29,455
Retained earnings................................................... 36,864 36,864
-------- -----------
Total shareholders' equity.......................................... 41,258 66,577
-------- -----------
Total capitalization................................................ $108,673 $ 108,673
-------- -----------
-------- -----------
</TABLE>

- ------------

(1) The number of outstanding shares does not include up to 3,179,393 shares of
Common Stock issuable upon the exercise of (i) options to purchase 697,215
shares of Common Stock and (ii) warrants to purchase 2,482,178 shares of
Common Stock outstanding as of March 31, 1996. Options to purchase 231,500
additional shares were granted in April 1996. The number of authorized
shares does not reflect a proposed increase in the number of authorized
shares of Common Stock to 100,000,000, which management expects will be
submitted for shareholder approval at the annual meeting of shareholders in
July 1996.

16
<PAGE>
SELECTED FINANCIAL DATA

The following table sets forth for the periods indicated selected financial
data for the Company. The selected income statement and balance sheet data
presented below for the fiscal year ended January 31, 1992 and for the calendar
years ended December 31, 1992, 1993, 1994 and 1995 have been derived from the
Company's financial statements that have been audited by KPMG Peat Marwick LLP,
independent accountants. The selected income statement and balance sheet data
presented below for the three months ended March 31, 1995 and 1996 have been
derived from the unaudited financial statements of the Company which, in the
opinion of management, have been prepared on the same basis as the audited
financial statements and include all adjustments, consisting only of normal
recurring adjustments, which management considers necessary for a fair
presentation of the financial data shown. The results of operations for the
three months ended March 31, 1996 are not necessarily indicative of the results
to be expected for the entire year ending December 31, 1996. This information
should be read in conjunction with the financial statements and the notes
thereto incorporated herein by reference and "Management's Discussion and
Analysis of Financial Condition and Results of Operations" included in this
Prospectus. The pro forma data have not been audited but, in the opinion of
management, include all adjustments necessary to present fairly the information
set forth therein including the matters referred to in footnotes 2 and 7 below.
The pro forma financial data are provided for comparative purposes only and may
not be indicative of the results that would have occurred if the Dollar Bills
acquisition had occurred at the beginning of the respective periods for which
pro forma information is presented or the results to be expected in the future.

<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
YEAR ENDED DECEMBER 31,
----------------------------------------------------- -----------------------------
FISCAL YEAR PRO FORMA PRO FORMA
1991(1) 1992(1) 1993 1994 1995 1995(2) 1995 1996 1996(2)
----------- -------- -------- -------- -------- --------- ------- ------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net sales................... $71,068 $120,542 $167,753 $231,601 $300,229 $404,079 $48,733 $84,975 $91,457
Cost of sales............... 46,413 76,434 106,318 145,481 187,552 263,903 32,275 55,905 60,584
----------- -------- -------- -------- -------- --------- ------- ------- ---------
Gross profit................ 24,655 44,108 61,435 86,120 112,677 140,176 16,458 29,070 30,873
----------- -------- -------- -------- -------- --------- ------- ------- ---------
Selling, general and
administrative expenses:
Operating expenses......... 18,114 29,546 39,559 54,993 70,504 87,529 14,418 24,288 26,268
Depreciation and
amortization................ 1,323 2,075 3,054 4,186 5,468 8,615 1,175 2,212 2,475
Recapitalization
expenses(3)................. -- -- 4,387 -- -- -- -- -- --
----------- -------- -------- -------- -------- --------- ------- ------- ---------
Total................... 19,437 31,621 47,000 59,179 75,972 96,144 15,593 26,500 28,743
----------- -------- -------- -------- -------- --------- ------- ------- ---------
Operating income............ 5,218 12,487 14,435 26,941 36,705 44,032 865 2,570 2,130
Interest expense............ 1,403 1,138 1,837 4,028 2,617 6,973 460 1,069 1,433
----------- -------- -------- -------- -------- --------- ------- ------- ---------
Income before income taxes
and extraordinary loss..... 3,815 11,349 12,598 22,913 34,088 37,059 405 1,501 687
Provision for income
taxes....................... 138 503 3,152 9,546 13,125 14,268 156 578 264
----------- -------- -------- -------- -------- --------- ------- ------- ---------
Income before extraordinary
loss........................ 3,677 10,846 9,446 13,367 20,963 22,791 249 923 423
Extraordinary loss, net of
income tax(4).............. -- -- -- 1,253 -- -- -- -- --
----------- -------- -------- -------- -------- --------- ------- ------- ---------
Net income.................. $ 3,677 $ 10,846 $ 9,446 $ 12,114 $ 20,963 $ 22,791 $ 249 $ 923 $ 423
----------- -------- -------- -------- -------- --------- ------- ------- ---------
----------- -------- -------- -------- -------- --------- ------- ------- ---------
INCOME PER SHARE DATA(5):
Income before extraordinary
loss per share............. $ 0.49
Extraordinary loss per
share....................... 0.05
--------
Net income per share........ $ 0.44 $ 0.76 $ 0.83 $ 0.01 $ 0.03 $ 0.02
-------- -------- --------- ------- ------- ---------
-------- -------- --------- ------- ------- ---------
PRO FORMA DATA:
Net income.................. $ 3,677 $ 10,846 $ 9,446
Pro forma adjustment for C
corporation income
taxes(6).................... 1,340 3,992 1,838
----------- -------- --------
Pro forma net income(6)..... $ 2,337 $ 6,854 $ 7,608
----------- -------- --------
----------- -------- --------
Pro forma net income per
share(7).................... $ 0.09 $ 0.25 $ 0.28
----------- -------- --------
----------- -------- --------
Weighted average number of
common shares and common
share equivalents
outstanding, in thousands(5
and 7)...................... 27,262 27,262 27,262 27,262 27,589 27,589 27,306 27,795 27,795
----------- -------- -------- -------- -------- --------- ------- ------- ---------
----------- -------- -------- -------- -------- --------- ------- ------- ---------
SELECTED OPERATING DATA:
Number of stores open at end
of period(8):
Mall....................... 141 145 145 154 173 174 155 179 179
Strip center(9)............ 45 111 183 255 327 462 269 481 481
----------- -------- -------- -------- -------- --------- ------- ------- ---------
Total................... 186 256 328 409 500 636 424 660 660
----------- -------- -------- -------- -------- --------- ------- ------- ---------
----------- -------- -------- -------- -------- --------- ------- ------- ---------
</TABLE>

17
<PAGE>

AS OF AS OF
AS OF DECEMBER 31, MARCH
JANUARY 31, ----------------------------------------- 31,
1992 1992 1993 1994 1995 1996
----------- -------- -------- -------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital............. $ 5,737 $ 10,457 $ 7,742 $ 14,334 $ 29,133 $30,221
Total assets................ 25,295 32,077 42,188 60,688 91,621 173,570
Total debt.................. 8,964 3,316 17,768 14,205 14,518 86,208
Shareholders' equity........ 6,925 17,499 3,660 17,274 39,087 41,258
</TABLE>

- ------------
(1) In September 1993, the Company changed its fiscal year end from January 31
to December 31. Accordingly, the results of operations for calendar 1992
and fiscal 1991 both include results of operations for the month of January
1992.

(4) Represents redemption premiums of approximately $1.3 million plus write off
of original issue discount financing costs of $0.9 million (net of income
tax benefit of approximately $0.9 million) on the early retirement of the
Company's 12% Senior Subordinated Notes and 12% Junior Subordinated Notes.

(5) Income per share data have been computed by dividing its components by the
weighted average number of common shares and common share equivalents
outstanding. All warrants and options outstanding at December 31, 1994 have
been considered outstanding for the entire year ended December 31, 1994 and
are included in the calculation of the weighted average number of common
shares and common share equivalents outstanding for net income per share
computations in accordance with the rules of the Securities and Exchange
Commission. For all periods after December 31, 1994, common share
equivalents include the weighted average number of shares subject to stock
options and warrants outstanding at the end of the period, after applying
the treasury stock method.

(6) Prior to September 30, 1993, the Company was treated as a subchapter S
corporation for Federal and certain state income tax purposes. As such,
income of the Company for that period was taxable to the individual
shareholders rather than to the Company. Accordingly, the provision for
income taxes for fiscal 1991, the year ended December 31, 1992 and the nine
months ended September 29, 1993, represents corporate level state income
taxes on income earned in those states that do not recognize subchapter S
corporation status. On September 30, 1993, the Company converted to a
subchapter C corporation. Accordingly, income since September 30, 1993 was
taxable to the Company. Pro forma net income reflects a provision for
income taxes as if the Company were a C corporation for all years presented
at an assumed effective tax rate of approximately 40%.

(7) Pro forma net income per share has been computed by dividing pro forma net
income by the weighted average number of common shares and common share
equivalents outstanding. Common share equivalents include all outstanding
stock options and warrants after applying the treasury stock method. All
warrants and options outstanding at December 31, 1994 have been considered
outstanding for fiscal 1991 and calendar years ended December 31, 1992 and
1993, and are included in the calculation of the weighted average number of
common shares and common share equivalents outstanding for pro forma income
per share computations in accordance with the rules of the Securities and
Exchange Commission.

(8) The Company closed three stores in calendar 1992, two stores in calendar
1993, one store in calendar 1994 and three stores in calendar 1995.

(9) Pro forma data for 1995 and actual and pro forma data for March 31, 1996
include approximately 10 non strip-center, urban based Dollar Bills stores.

(10) Comparable store net sales increase compares net sales for stores open at
the beginning of the first of the two periods compared. No Dollar Bills
stores are included in the calculation except in pro forma data.

(11) For stores open the entire period presented. No Dollar Bills stores are
included in the calculation except in pro forma data. Results for the three
months ended March 31, 1996 may not be indicative of full year average net
sales per store or average net sales per square foot due to seasonal
fluctuations in sales. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Seasonality and Quarterly
Fluctuations."

18
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion should be read in conjunction with the financial
statements and notes thereto incorporated by reference in this Prospectus.

OVERVIEW

Dollar Tree was established by J. Douglas Perry, the Company's Chairman,
Macon F. Brock, Jr., the Company's President and Chief Executive Officer, and H.
Ray Compton, the Company's Executive Vice President and Chief Financial Officer
(the "Founders"), in November 1986 with the opening of its first five stores in
Virginia, Georgia and Tennessee. From November 1986 through October 1991, the
Company's shareholders also owned a substantial portion of the outstanding stock
of K&K Toys, Incorporated ("K&K Toys"), a 136 store, mall based toy retailer
managed by the Founders. During this period, Dollar Tree grew to 171 stores and
shared certain management and distribution services and facilities with K&K Toys
for which it paid a fee to K&K Toys.

In October 1991, K&K Toys was acquired by a subsidiary of Melville
Corporation. Following the sale of K&K Toys, the Founders focused their
attention solely on Dollar Tree and effected a number of strategic changes,
including (i) shifting the Company's merchandising focus away from closeout
merchandise and towards its current emphasis on providing selection and value in
traditional variety store categories, (ii) focusing its expansion strategy on
strip center locations, (iii) accelerating its expansion program and (iv)
improving the depth of the management team and breadth of operational controls.
Since the sale of K&K Toys, Dollar Tree has grown from 171 stores to 500 stores
as of December 31, 1995, and net sales and operating income have increased from
$71.1 million and $5.2 million, respectively, in fiscal 1991 to $300.2 million
and $36.7 million, respectively, in calendar 1995. Since December 31, 1995,
Dollar Tree has grown from 500 stores to 660 stores as of March 31, 1996,
including 136 Dollar Bills stores added in January 1996. The Company's net sales
increased 74.5% from $48.7 million to $85.0 million, and operating income
increased 197.1% from $0.9 million to $2.6 million from the three months ended
March 31, 1995 to the three months ended March 31, 1996. The results of
operations for the three months ended March 31, 1996 include two months of
operations of 136 Dollar Bills stores added in January 1996.

On September 30, 1993, the Company effected a recapitalization including a
stock split and reclassification (the "1993 Recapitalization"), pursuant to
which (i) J. Douglas Perry, Chairman of the Company's Board of Directors, his
wife, Patricia W. Perry, Macon F. Brock, Jr., the Company's President and Chief
Executive Officer, his wife, Joan P. Brock, and H. Ray Compton, the Company's
Executive Vice President and Chief Financial Officer (the "Original
Shareholders") sold to The SK Equity Fund, L.P. (the "Fund") and four
individuals affiliated with the Fund (collectively, the "Co-Investors") 50% of
the outstanding stock of the Company for an aggregate purchase price of $23.6
million, (ii) the Fund and the Co-Investors purchased from the Company $7.0
million face amount senior subordinated notes for $6.5 million (the "12% Senior
Subordinated Notes") and purchased for $500,000 warrants to purchase 1,241,090
shares of Common Stock and (iii) on February 22, 1994 pursuant to a commitment
entered into September 30, 1993, the Original Shareholders purchased from the
Company $7.0 million face amount junior subordinated notes for $6.5 million (the
"12% Junior Subordinated Notes") and purchased for $500,000 warrants to purchase
1,241,088 shares. On December 31, 1994, the Company redeemed and extinguished
the 12% Senior Subordinated Notes and the 12% Junior Subordinated Notes
(collectively, the "12% Notes"). As part of this transaction, the Company paid a
redemption premium of approximately $1.3 million and issued an aggregate of
$14.0 million principal amount of 9% Senior Subordinated Notes and 9% Junior
Subordinated Notes to the previous holders of the 12% Notes.

19
<PAGE>
ACQUISITION OF DOLLAR BILLS

On January 31, 1996, the Company acquired all of the stock of Dollar Bills,
formerly known as Terrific Promotions, Inc. and subsequently merged Dollar Bills
into the Company. At the time of the acquisition, Dollar Bills owned and
operated 136 discount variety stores in 16 states, offering merchandise
primarily at the $1.00 price point under the name Dollar Bill$. In addition,
Dollar Bills operated a distribution center in the Chicago area and a wholesale
division. The Company plans to continue operating the Dollar Bills stores,
distribution center and wholesale division. The Company paid approximately $52.6
million in cash and $2.0 million in merchandise inventory for 100% of the stock
of Dollar Bills and has accounted for the acquisition as a purchase. The Company
funded the cash portion of the purchase price with borrowings under its
Development Facility, described below. In connection with the acquisition, the
Company recognized goodwill of $47.8 million, which it is amortizing over a 25
year period. Dollar Bills reported sales of $113.3 million ($102.0 million of
which were from retail operations and $11.3 million of which were from wholesale
operations) and operating income of $4.7 million for its fiscal year ended
September 30, 1995 compared to sales of $100.4 million and operating income of
$4.3 million for its fiscal year ended September 30, 1994. On a pro forma basis,
the Company had $404.1 million in net sales, $140.2 million in gross profit and
$44.0 million in operating income for the year ended December 31, 1995 and had
$91.5 million in net sales, $30.9 million in gross profit and $2.1 million in
operating income for the three months ended March 31, 1996. Pro forma results
give effect to certain adjustments, before any nonrecurring charges or credits,
and do not purport to be indicative of results that would have occurred had the
transactions taken place at the beginning of the period or future results.

While the Company's Dollar Tree and Dollar Bills stores are in the same
business, there are a number of significant operational differences between
them. Dollar Bills stores typically (i) are larger, and accordingly have higher
average sales per store; (ii) are more concentrated in urban areas than Dollar
Tree stores; (iii) carry a higher proportion of consumable merchandise, such as
food, health and beauty aids and everyday household supplies, which typically
have lower merchandise margins, and a lower proportion of leisure items, such as
toys and gifts, which typically have higher merchandise margins; (iv) carry less
inventory per square foot because of different store fixtures; and (v) offered a
limited number of multi-price point items, which the Company expects to continue
to offer only at certain Dollar Bills locations and at prices not exceeding
$5.00. All of these differences are being evaluated by management to determine
how certain characteristics in either or both types of stores can best be
combined to operate stores which reach the optimum level of sales in their
respective markets.

Management believes that the Dollar Bills acquisition broadens the Company's
base in terms of geographic coverage, merchandise categories, and market share,
while taking advantage of the Company's existing infrastructure. Most Dollar
Bills stores are located in different retail markets from existing Dollar Tree
stores, resulting in little competition for sales. The business combination also
adds a modern 250,000 square foot distribution center in the Chicago area, which
has been in operation for two years.

20
<PAGE>

RESULTS OF OPERATIONS

The following table sets forth, for the periods indicated, certain selected
income statement data as a percentage of net sales:

<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED ENDED
DECEMBER 31, MARCH 31,
------------------------- ---------------
1993 1994 1995 1995 1996
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Net sales......................................... 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales..................................... 63.4 62.8 62.5 66.2 65.8
----- ----- ----- ----- -----
Gross profit.................................... 36.6 37.2 37.5 33.8 34.2
Selling, general and administrative expenses:
Operating expenses.............................. 23.6 23.8 23.5 29.6 28.6
Depreciation and amortization................... 1.8 1.8 1.8 2.4 2.6
Recapitalization expenses....................... 2.6 -- -- -- --
----- ----- ----- ----- -----
Total......................................... 28.0 25.6 25.3 32.0 31.2
----- ----- ----- ----- -----
Operating income.................................. 8.6 11.6 12.2 1.8 3.0
Interest expense.................................. 1.1 1.7 0.9 0.9 1.2
----- ----- ----- ----- -----
Income before income taxes and extraordinary
loss.............................................. 7.5 9.9 11.3 0.9 1.8
Provision for income taxes........................ 4.1 4.4 0.4 0.7
----- ----- ----- -----
Income before extraordinary loss.................. 5.8 6.9 0.5 1.1
Extraordinary loss, net of income tax............. 0.6 -- -- --
----- ----- ----- -----
Net income........................................ 5.2% 6.9% 0.5% 1.1%
----- ----- ----- -----
----- ----- ----- -----
Pro forma provision for income taxes.............. 3.0
-----
Pro forma net income.............................. 4.5%
-----
-----
</TABLE>

Three Months Ended March 31, 1996 Compared to the Three Months Ended March 31,
1995

Net sales increased $36.3 million, or 74.5%, to $85.0 million for the three
months ended March 31, 1996, from $48.7 million for the three months ended March
31, 1995. Of this increase, (i) approximately 43.5%, or $15.8 million, was
attributable to the addition of 136 Dollar Bills stores in January 1996, (ii)
approximately 40.5%, or $14.7 million, was attributable to a net increase of 100
stores opened in 1995 and 1996 which are not included in the Company's
comparable store net sales calculation, and (iii) approximately 16.0%, or $5.8
million, was attributable to comparable store net sales growth, which
represented an 11.8% increase over comparable store net sales in the
corresponding quarter of the prior period. Dollar Bills stores are not included
in the comparable store net sales calculation. Because substantially all the
Company's products sell for $1.00, the increase in comparable store net sales
was a direct result of increased unit volume. Comparable store net sales were
driven primarily by an earlier Easter shopping season and a strong in-stock
position on seasonal and general merchandise throughout the quarter. The Company
opened 24 new stores during the first quarter of 1996 compared to opening 15 new
stores during the first quarter of 1995. The Company also added 136 Dollar Bills
stores in January 1996.

Management anticipates that the primary sources of future sales growth will
be new store openings and, to a lesser degree, sales increases from expanded and
relocated stores and comparable store net sales increases. Although the Company
has experienced significant increases in comparable store net sales
historically, management expects that any increases in comparable store net
sales in the future will be smaller than those experienced historically. See
"--Seasonality and Quarterly Fluctuations."

Gross profit, which consists of net sales less cost of sales (including
distribution and certain occupancy costs), increased $12.6 million, or 76.6%, to
$29.1 million in the first quarter of 1996 from

21
<PAGE>
$16.5 million in the first quarter of 1995. As a percentage of net sales, gross
profit increased to 34.2% from 33.8%, reflecting lower occupancy costs as a
percentage of net sales due primarily to the increase in comparable store sales,
partially offset by a slight increase in merchandise costs. Management expects
that merchandise costs as a percentage of net sales may continue to be higher
than they have been historically due to the addition of Dollar Bills stores,
which carry a higher proportion of consumable goods having a lower merchandise
margin.

Selling, general and administrative expenses, which include operating
expenses and depreciation and amortization, increased $10.9 million, or 69.9%,
to $26.5 million in the first quarter of 1996 from $15.6 million in the first
quarter of 1995, and decreased as a percentage of net sales to 31.2% from 32.0%
during the same period. This decrease resulted primarily from reduced payroll
costs due to the comparable store net sales increase and stronger controls over
hourly payroll at the stores. During the first quarter of 1996, the Company's
selling, general and administrative expenses increased by approximately $1.8
million due to transactional costs and expenses incurred in connection with the
Dollar Bills acquisition. Amortization of goodwill relating to the acquisition
amounted to $0.3 million during the first quarter of 1996.

Operating income increased $1.7 million, or 197.1%, to $2.6 million for the
first three months of 1996 from $0.9 million for the comparable period in 1995,
and increased as a percentage of net sales to 3.0% from 1.8% during the same
period for the reasons noted above.

Interest expense increased $0.6 million to $1.1 million in the first quarter
of 1996 from $0.5 million during the first quarter of 1995. This increase is a
result of borrowings under the Company's Development Facility in connection with
the acquisition of Dollar Bills and the amortization of deferred financing costs
relating thereto.

Year Ended December 31, 1994 Compared to Year Ended December 31, 1995

Net sales increased 29.6%, to $300.2 million for 1995, from $231.6 million
for 1994. Of this increase, (i) approximately 79.0%, or $54.2 million, was
attributable to a net increase of 176 stores opened in 1994 and 1995, which are
not included in the Company's comparable store net sales calculation, and (ii)
approximately 21.0%, or $14.4 million, was attributable to comparable store net
sales growth, which represented a 7.3% increase over comparable store net sales
for the prior period. Because substantially all the Company's products sell for
$1.00, the increase in comparable store net sales was a direct result of
increased unit volume. This increase in volume resulted from strong holiday
selling seasons, increased inventory levels early in the year compared to the
preceding year, and new promotional efforts which grouped like items into theme
displays for more convenient shopping. The Company opened 94 new stores and
closed three stores during 1995 compared to opening 82 new stores and closing
one store during 1994.

Gross profit increased $26.5 million, or 30.8%. As a percentage of net
sales, gross profit increased to 37.5% from 37.2%, reflecting, as a percentage
of net sales, lower inbound freight costs, lower store occupancy costs and
distribution costs, and a slight decrease in markdowns, partially offset by
lower merchandise margins (gross profit before inventory shrinkage, markdowns,
and distribution and occupancy costs). The decrease in store occupancy costs and
distribution costs as a percentage of net sales is a result of the comparable
store net sales growth. The decrease in merchandise margin as a percentage of
net sales is a result of increased sales of domestically purchased products
which generally carry a lower gross margin than imported merchandise. During the
fourth quarter of 1995, the Company took advantage of the opportunity to
purchase domestic product under attractive terms, while the receiving of some
imported goods was delayed. This resulted in a decrease in imports as a
percentage of total purchases. While fluctuations between imported and domestic
merchandise occur throughout the year, the Company does not foresee any
significant changes in the overall mix of imports and domestic purchases and
expects imports to continue to account for approximately 35% to 40% of total
purchases at cost.

22
<PAGE>
Selling, general and administrative expenses increased $16.8 million, or
28.4%, from 1994 to 1995, but decreased as a percentage of net sales to 25.3%
from 25.6%. The decrease is due primarily to the recognition in 1994 of $1.0
million of costs associated with the grant of stock options and the comparable
store net sales growth. Excluding the stock option costs, selling, general and
administrative costs increased as a percentage of net sales to 25.3% from 25.1%
during the period. This increase is primarily due to a slight increase in store
payroll costs arising from efforts focused on strengthening store appearance and
merchandise presentation as well as increasing inventory levels, predominantly
in the third quarter of 1995. Depreciation and amortization expense increased
$1.3 million but remained constant as a percentage of net sales at 1.8% for 1995
and 1994.

Operating income increased $9.8 million, or 36.2%, to $36.7 million for 1995
from $26.9 million for 1994 and increased as a percentage of net sales to 12.2%
from 11.6% for the reasons noted above. Excluding stock option costs incurred in
1994, operating income increased as a percentage of net sales to 12.2% for 1995
from 12.1% for 1994.

Interest expense decreased $1.4 million to $2.6 million in 1995 compared to
1994. The Company was able to delay the use of its credit lines because of
increased cash flows and a higher cash balance at the beginning of the year. The
Company also redeemed and extinguished its 12% Notes and issued 9% Subordinated
Notes, and wrote off the related discount and deferred financing costs at the
end of 1994, resulting in no amortization expense in 1995.

Year Ended December 31, 1993 Compared to Year Ended December 31, 1994

Net sales increased $63.8 million, or 38.1%, from $167.8 million in calendar
1993 to $231.6 million in calendar 1994. Of this increase, (i) approximately
79.9%, or $51.0 million, was attributable to a net increase of 156 stores opened
in 1993 and 1994, which are not included in the Company's comparable store net
sales calculation and (ii) 20.1%, or $12.8 million, was attributable to
comparable store net sales growth, which represented a 9.1% increase over
comparable store net sales in calendar 1993. Because substantially all the
Company's products sell for $1.00, the increase in comparable store net sales
was a direct result of increased unit volume. The Company opened 74 new stores
in 1993 compared to 82 new stores opened in 1994.

Gross profit increased $24.7 million, or 40.2%, from $61.4 million in
calendar 1993 to $86.1 million in calendar 1994. As a percentage of net sales,
gross profit increased from 36.6% to 37.2%, reflecting a general increase in
merchandise margin and a decrease in store occupancy costs as a percentage of
net sales, which was partially offset by an increase in distribution costs as a
percentage of net sales and a slight increase in inventory shrinkage as a
percentage of sales. The increase in merchandise margin as a percentage of net
sales reflected the Company's increased purchases of foreign goods directly from
manufacturers. The decrease in store occupancy costs as a percentage of net
sales was due primarily to the comparable store net sales growth. The increase
in distribution costs as a percentage of net sales was due primarily to the
costs associated with the operation of the Memphis distribution center, which
opened in January 1994. The Memphis distribution center reached full capacity
for the first time during the third quarter of 1994.

Selling, general and administrative expenses decreased as a percentage of
net sales from 28.0% in calendar 1993 to 25.6% in calendar 1994. Costs
associated with the 1993 Recapitalization represented 2.6% of net sales, or $4.4
million, in calendar 1993. Costs associated with the 1993 Recapitalization were
$3.6 million of management incentive expenses and approximately $0.8 million of
transaction expenses including approximately $0.4 million in consulting fees
paid to Saunders Karp & Co., approximately $0.3 million in legal fees and
approximately $0.1 million in accounting fees. On March 30, 1994 the Company
granted options to purchase 310,511 shares of Common Stock at the exercise price
of $2.90 per share. Costs associated with the March 30, 1994 grant of stock
options were $1.0 million or 0.4% of net sales in calendar 1994. Excluding the
recapitalization costs and stock option costs, selling, general and
administrative costs decreased as a percentage of net sales from 25.4% in

23
<PAGE>
calendar 1993 to 25.1% in calendar 1994. Excluding $1.0 million of compensation
expense related to the grant of certain stock options in 1994, operating
expenses increased from $39.6 million in calendar 1993 to $54.0 million in
calendar 1994, but decreased as a percentage of net sales from 23.6% to 23.3%
during the same period due primarily to the comparable store net sales growth.
Depreciation and amortization expense increased from $3.1 million in calendar
1993 to $4.2 million in calendar 1994 primarily due to new store growth, but
remained constant as a percentage of net sales at 1.8% for calendar 1993 and
calendar 1994.

Operating income increased from $14.4 million in calendar 1993 to $26.9
million in calendar 1994. Excluding the recapitalization costs incurred in 1993
and stock option costs incurred in 1994, operating income increased from $18.8
million in calendar 1993 to $27.9 million in calendar 1994, representing a 48.4%
increase, and increased as a percentage of net sales from 11.2% to 12.1% during
the same periods.

Interest expense increased $2.2 million between calendar 1993 and calendar
1994, primarily due to the interest on the debt incurred in connection with the
1993 Recapitalization.

The Company incurred an extraordinary loss of $1.3 million on early
retirement of debt, which is net of $0.9 million of income tax benefit.

LIQUIDITY AND CAPITAL RESOURCES

The Company's capital requirements result primarily from capital
expenditures related to new store openings and working capital requirements
related to new and existing stores. The Company's working capital requirements
for existing stores are seasonal in nature and typically reach their peak near
the end of the third and beginning of the fourth quarter of the year.
Historically, the Company has met its seasonal working capital requirements for
existing stores and funded its store expansion program from internally generated
funds and borrowings under its credit facilities.

During calendar 1993, 1994 and 1995 and the first three months of 1996, net
cash provided by (used in) operations was $15.5 million, $17.5 million, $27.2
million and ($17.2) million, respectively. The net cash used in operations
during the first three months of 1996 was used primarily to build inventory
levels. Net cash used in investing activities during the same periods was $6.6
million, $6.9 million, $11.6 million, and $56.6 million, respectively. During
calendar 1993, 1994 and 1995, net cash used in investing activities consisted
primarily of capital expenditures relating to new store expansion. During the
first three months of 1996, net cash used in investing activities consisted
primarily of the payment for the acquisition of Dollar Bills. Net cash provided
by (used in) financing activities during the same periods was ($8.8) million,
($5.5) million, $0.8 million and $64.5 million, respectively. In 1993, these
funds were primarily used for the extinguishment of debt, to make a subchapter S
corporation distribution relating to shareholders' tax liability and to make a
special shareholder distribution in August 1993. In 1994, these funds were
primarily used for the extinguishment of debt. In 1995, the funds provided were
primarily a result of the exercise of stock options granted under the Company's
Stock Option Plan. During the first three months of 1996, net funds provided by
financing activities were attributable to borrowings incurred to fund the
acquisition of Dollar Bills.

The Company ended the first quarter of 1996 with a high cash position due to
the quarter ending on a weekend, resulting in three days of sales remaining in
store accounts. Additionally, transitory funds remained in dormant Dollar Bills
depositary accounts. These funds were transferred into the Company's main
account in early April and were used to fund working capital requirements.

The Company expects to expand by approximately 90 to 100 stores during 1996,
in addition to the 136 stores added in the Dollar Bills stock purchase, and by
approximately 140 stores during 1997. In 1995, the average investment per new
store, including capital expenditures, initial inventory and pre-opening costs,
was approximately $152,000 per store. The Company's cash needs for opening new
stores in 1996 are expected to total approximately $15.9 million, $8.7 million
of which is budgeted for capital

24
<PAGE>
expenditures and $7.2 million of which is budgeted for initial inventory and
pre-opening costs. The Company's total planned capital expenditures for 1996,
including expected expenditures for Dollar Bills stores, are approximately $17.0
million. Total capital expenditures for 1996 include planned expenditures for
expanding and relocating stores, purchasing additional equipment for the
distribution centers and computer system upgrades. Expenditures related to
Dollar Bills stores are expected to amount to approximately $3.8 million and
include the purchase and installation of registers and back office personal
computers, the purchase of merchandise display units and modifications to
checkout and backroom areas in the stores.

In January 1996, the Company entered into a new credit agreement which
provides for (i) a $60 million development facility (the "Development
Facility"), under which amounts outstanding bear interest at the lesser of the
agent bank's prime rate or a rate equal to LIBOR plus a variable rate determined
from certain financial ratios, and (ii) a $60 million working capital line,
amounts outstanding under which bear interest at the lesser of the agent bank's
prime rate or a rate equal to LIBOR plus a variable rate determined from certain
financial ratios. Any amounts repaid under the Development Facility, including
amounts paid by the Company with the net proceeds of the offering, will become
available for subsequent borrowings. The credit agreement requires the
maintenance of certain specified financial ratios, which may have the effect of
restricting the Company's ability to pay dividends, and restricts levels of
capital expenditures and the incurrence of debt. The Company's credit agreement
also provides for a security interest in favor of the banks upon the Company's
inventory and intercompany receivables. It further provides that an event of
default occurs if the Founders collectively own less than 10% of the outstanding
shares of the Company. The Development Facility is required to be repaid on
April 9, 1997. The working capital line expires May 31, 1999. The working
capital line must have a zero balance for 30 consecutive days from December 1 to
January 31. At March 31, 1996, the Company's borrowings under its new bank
facilities were $71.1 million, of which $52.6 million was under the Development
Facility and $18.5 million was under the working capital line, leaving an
additional $48.9 million available under the facilities provided by the credit
agreement.

The Company believes that it can adequately fund its planned capital
expenditures and working capital requirements for the next several years from
net cash provided by operations and availability under its new credit
facilities. The use of a major portion of the development facility in the
acquisition of stock of Dollar Bills is not expected to affect the Company's
ability to fund operations and expenditures. The increased borrowings will,
however, result in increased interest charges in 1996.

SEASONALITY AND QUARTERLY FLUCTUATIONS

The Company has historically experienced and expects to continue to
experience seasonal fluctuations in its net sales, operating income and net
income. The highest sales periods for the Company are the Christmas and Easter
seasons. A disproportionate amount of the Company's net sales and a substantial
majority of the Company's operating and net income are generally realized during
the fourth quarter. In anticipation of increased sales activity during these
months, the Company purchases substantial amounts of inventory and hires a
significant number of temporary employees to bolster its permanent store staff.
If for any reason the Company's net sales were below seasonal norms during the
fourth quarter, including as a result of merchandise delivery delays due to
receiving or distribution problems, the Company's annual operating results,
particularly operating and net income, could be adversely affected.
Historically, net sales, operating income and net income have been weakest
during the first quarter, and the Company expects this trend to continue. The
Company's quarterly results of operations may also fluctuate significantly as a
result of a variety of factors, including the timing of new store openings, the
net sales contributed by new stores and the merchandise mix.

Shifts in the timing of certain holidays may also have an effect on
quarterly results. The Company believes that the change in the timing of the
Easter holiday from April 3 in 1994 to April 16 in 1995 shifted most Easter
sales from the first quarter in 1994 to the second quarter in 1995 and that the
change in the timing of the Easter holiday from April 16 in 1995 to April 7 in
1996 shifted a substantial

25
<PAGE>
amount of Easter sales from the second quarter in 1995 to the first quarter in
1996. The Company anticipates that the change in the timing of the Easter
holiday from April 7 in 1996 to March 30 in 1997 could shift a substantial
additional amount of Easter sales from the second quarter in 1996 to the first
quarter in 1997.

The following table sets forth certain unaudited results of operations for
each quarter of 1994 and 1995 and the first quarter of 1996. The unaudited
information has been prepared on the same basis as the audited consolidated
financial statements incorporated herein by reference and includes all
adjustments, consisting only of normal recurring adjustments, which management
considers necessary for a fair presentation of the financial data shown. The
operating results for any quarter are not necessarily indicative of results for
any future period. Although the Company has experienced significant increases in
comparable store net sales increases historically, management expects that any
increases in comparable net sales in the future will be smaller than those
experienced historically.

<TABLE>
<CAPTION>
QUARTER ENDED
--------------------------------------------------------------------------------------------------
MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31,
1994 1994 1994 1994 1995 1995 1995 1995 1996
-------- -------- --------- -------- -------- -------- --------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales................... $ 36,169 45,046 53,883 96,503 48,733 62,885 67,427 121,185 84,975
Gross profit................ 11,893 15,522 20,322 38,383 16,458 22,340 26,068 47,811 29,070
Operating income (loss)..... (791) 2,364 5,688 19,680 865 4,879 6,656 24,305 2,570
Stores open at end of
period...................... 345 370 392 409 424 452 478 500 660
Comparable store net sales
increases................... 7.5% 4.7% 13.6% 8.4% 6.8% 16.8% 2.8% 3.8% 11.8%
</TABLE>

INFLATION

The Company's ability to provide quality merchandise at the $1.00 price
point is subject to certain economic factors which are beyond the Company's
control, including inflation. Significant and unexpected increases in inflation
could have a material adverse effect on the Company's business and results of
operations, especially given the constraints on the Company's ability to pass on
any incremental costs through price increases.

26
<PAGE>
BUSINESS

HISTORY

Dollar Tree was established by J. Douglas Perry, the Company's Chairman,
Macon F. Brock, Jr., the Company's President and Chief Executive Officer, and H.
Ray Compton, the Company's Executive Vice President and Chief Financial Officer
(the "Founders"). Messrs. Perry and Brock began their careers in the variety
store business in 1969, working in a "five and dime" variety store owned by Mr.
Perry's father. In 1970, they, along with Mr. Perry's father, founded K&K Toys,
Incorporated ("K&K Toys"). Under their management and that of Mr. Compton, who
joined K&K Toys in 1979, K&K Toys expanded to 136 stores and was one of the
largest mall based toy retailers in the United States, based on number of
stores, when it was sold in October 1991.

In the mid 1980s, the Founders saw the opportunity to expand the variety
store concept into a new type of store, the "dollar store". In the 1980s,
traditional discount variety stores (such as Woolworth) were encountering
increasing competition from new mass merchandisers (such as Wal-Mart) and
smaller format, low price variety stores (such as Dollar General), both formats
emphasizing selection and value. In November 1986, Dollar Tree Stores opened
five variety stores using the $1.00 price point. From November 1986 through
October 1991, the Company increased the number of stores to 171, while
continuing to develop the Dollar Tree concept. During this period, Dollar Tree
benefitted from the Founders' familiarity with variety store retailing and from
the existing infrastructure of K&K Toys, with whom Dollar Tree shared certain
operating functions and expenses.

Following the sale of K&K Toys in 1991, the Founders focused their attention
solely on Dollar Tree and effected a number of strategic changes, including (i)
shifting the Company's merchandising focus away from closeout merchandise
towards its current emphasis on providing selection and value in traditional
variety store categories, (ii) focusing its expansion strategy on strip center
locations, (iii) accelerating the Company's expansion program and (iv) improving
the depth of the management team and breadth of operational controls.

Dollar Tree has opened over 70 new stores in each of the last three years.
Dollar Tree stores have been successful in major metropolitan areas, mid-sized
cities and small towns with populations under 25,000, and management believes
that Dollar Tree stores can perform well in a variety of locations. The Company
is focusing its expansion strategy on strip center locations anchored by strong
mass merchandisers such as Wal-Mart, whose target customers management believes
are similar to those of Dollar Tree.

On January 31, 1996, the Company acquired all of the stock of Dollar Bills,
Inc. ("Dollar Bills"). At the time of the acquisition, Dollar Bills owned and
operated 136 discount variety stores in 16 states, offering merchandise
primarily at the $1.00 price point under the name Dollar Bill$. In addition,
Dollar Bills operated a distribution center in the Chicago area and a wholesale
division. The Company plans to continue operating the Dollar Bills stores,
distribution center and wholesale division. The Company paid approximately $54.6
million for 100% of the stock of Dollar Bills and has accounted for the
acquisition as a purchase. Dollar Bills reported sales of $113.3 million ($102.0
million of which were from retail operations and $11.3 million of which were
from wholesale operations) and operating income of $4.7 million for its fiscal
year ended September 30, 1995. On a pro forma basis after giving effect to the
acquisition, the Company had $404.1 million in net sales, $140.2 million in
gross profit and $44.0 million in operating income for the year ended December
31, 1995 and had $91.5 million in net sales, $30.9 million in gross profit and
$2.1 million in operating income for the three months ended March 31, 1996. Pro
forma results give effect to certain adjustments, before any nonrecurring
charges or credits, and do not purport to be indicative of the results that
would have occurred had the transaction taken place at the beginning of the
period or of future results.

27
<PAGE>
Dollar Tree stores; (iii) carry a higher proportion of consumable merchandise,
such as food, health and beauty aids and everday household supplies, which
typically have lower merchandise margins, and a lower proportion of leisure
items, such as toys and gifts, which typically have higher merchandise margins;
(iv) carry less inventory per square foot because of different store fixtures;
and (v) offered a limited number of multi-price point items, which the Company
expects to continue to offer only at certain Dollar Bills locations and at
prices not exceeding $5.00. All of these differences are being evaluated by
management to determine how certain characteristics in either or both types of
stores can best be combined to operate stores which reach the optimum level of
sales in their respective markets.

Management believes that the Dollar Bills acquisition broadens the Company's
base in terms of geographic coverage, merchandise categories, and market share,
while taking advantage of the Company's existing infrastructure. The Company
currently intends to continue to operate those stores under the Dollar Bill$
name. Most Dollar Bills stores are located in different retail markets from
existing Dollar Tree stores, resulting in little competition for sales. The
business combination also adds a modern 250,000 square foot distribution center
in the Chicago area, which has been in operation for two years.

In general, the Company expects to run the Dollar Bills stores in the same
manner as its Dollar Tree stores, except that the Company expects to continue to
offer some multi-price point items, sold at prices not exceeding $5.00, in a
small number of select Dollar Bills stores. In the discussions that follow,
historical information and results of operations relate solely to Dollar Tree,
while anticipated changes brought about by this acquisition are discussed where
they have been identified. Management continues to evaluate certain aspects of
the merger of the two companies. See also "--Legal Proceedings" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."

BUSINESS STRATEGY

The Company's goal is to continue its leadership position in the $1.00 price
point segment of the discount retail industry. The key elements of the Company's
business strategy include:

Value Offering. Dollar Tree's management strives to exceed its
customers' expectations of the range and quality of products that can be
purchased for $1.00. Management believes that many of the items Dollar Tree
sells for $1.00 are typically sold for higher prices elsewhere. The Company
is able to offer such value in part by purchasing a substantial portion of
its products directly from foreign manufacturers, allowing the Company to
pass on savings to the customer. In addition, direct relationships with both
domestic and foreign manufacturers permit broad product selection,
customized packaging and frequently the ability to obtain larger sizes and
higher package quantities.

Changing Merchandise Mix. The Company supplements its wide assortment of
quality everyday core merchandise with a changing mix of new and exciting
products, including seasonal goods, such as summer toys, back-to-school
products and Christmas wrapping paper and, to a limited extent, selected
closeout merchandise. The Company also takes advantage of the availability
of lower priced, private label goods, which are comparable to national name
brands.

Strong and Consistent Store Level Economics. The Company believes that
its attractive store level economics and the flexibility of its real estate
strategy provide it with a wide range of real estate opportunities and will
facilitate its continued expansion. The Company's Dollar Tree stores have
historically been profitable within the first full year of operations, with
an average store level operating income of approximately $147,000
(approximately 23% of net sales) for stores whose first full year of
operations was 1995. In addition, the operating performance of the Company's
Dollar Tree stores has been very consistent, with over 90% of the Company's
stores having store level operating income margins in excess of 15% in 1995,
and over 80% of the Company's Dollar Bills stores having store level
operating income margins in excess of 15% in 1995. Operating income margins
at certain Dollar Bills stores were comparatively lower due to a higher
proportion of consumable goods that have a lower merchandise margin being
offered at such stores.

28
<PAGE>
Experienced Retail Management Team. The Company's three executive
officers, J. Douglas Perry, Macon F. Brock, Jr., and H. Ray Compton, each
have between 17 and 27 years of experience in the retail industry and have
worked together for the past 17 years. Additionally, the Company's eight
Vice Presidents each have significant experience in their respective areas
of operational expertise.

Cost Control. Given the Company's pricing structure, Dollar Tree
believes that maintaining sufficient gross margins and tight control over
store expenses, corporate expenses and inventories is critical to its
success. Dollar Tree closely manages both retail inventory shrinkage and
retail markdowns of inventory, limiting each to an average of less than 2.5%
of annual net sales over the last five years. While the acquisition of
Dollar Bills may cause a slight increase in both retail inventory shrinkage
and in retail markdowns as a percentage of net sales, the Company does not
believe it will have a material adverse effect. In the past five years,
Dollar Tree increased its gross profit margin from 34.7% to 37.5% and
increased its operating income margin from 7.3% to 12.2%. From the three
months ended March 31, 1995 to the three months ended March 31, 1996, gross
profit margin increased from 33.8% to 34.2% and operating income margin
increased from 1.8% to 3.0%.

Site Selection. The Company maintains a disciplined, cost sensitive
approach to site selection, favoring strip centers and selected enclosed
malls. In the last four years, Dollar Tree has opened primarily strip center
based stores, which have historically required lower initial capital
investment and generated higher operating margins than mall stores. The
Company favors opening new stores in strip center locations anchored by
strong mass merchandisers such as Wal-Mart, Target and Kmart, whose target
customers management believes are similar to those of Dollar Tree.

GROWTH STRATEGY

Prior to the acquisition of Dollar Bills, the primary factors contributing
to Dollar Tree's net sales growth were new store openings and comparable store
net sales increases. For the five years ended December 31, 1995, net sales
increased at a compound annual growth rate of 43.4% and operating income
increased at a compound annual growth rate of 62.9%. Management anticipates that
the primary sources of future sales growth will be new store openings and to a
lesser degree sales increases from expanded and relocated stores and comparable
store net sales increases. Currently, management anticipates expanding by
approximately 90 to 100 stores in 1996, in addition to 136 Dollar Bills stores
added in January 1996, and approximately 140 stores in 1997. It is currently
anticipated that all of such stores will be opened under the Dollar Tree name;
however, the Company continues to evaluate the effect of store name on sales in
certain markets. The Company's expansion plans include increasing its presence
in its existing markets to take advantage of market opportunities, efficiencies
in distribution and field management, and selectively entering new markets.
Although the Company has experienced significant increases in comparable store
net sales historically, management expects that any increases in comparable
store net sales in the future will be smaller.

Dollar Tree's real estate strategy allows the Company the flexibility of
opening stores in a variety of locations. Management believes that Dollar Tree
stores can perform well in strip center locations and selected mall locations.
The Company is currently concentrating on strip center locations anchored by
strong mass merchandisers such as Wal-Mart, Target and Kmart, whose target
customers management believes are similar to those of Dollar Tree. Although
strip center locations typically have lower sales per square foot, strip center
locations benefit from lower total investment requirements and lower occupancy
costs than mall based locations. Dollar Tree stores have been successful in
major metropolitan areas such as Washington/Baltimore, mid-sized cities such as
Norfolk, Virginia, and small towns with populations under 25,000. Management
also believes that its stores have a relatively small shopping radius, which
permits the concentration of multiple stores in a single market.

29
<PAGE>

MERCHANDISING

Dollar Tree's primary goal in merchandising is to offer a wide assortment of
products in traditional variety store categories which exceed customer
expectations of the value available for $1.00. The Company seeks to accomplish
this goal by: (i) offering a balanced mix of everyday core products and changing
products in traditional variety store categories, (ii) maintaining a
disciplined, global purchasing program and (iii) emphasizing the effective
presentation of merchandise in the stores.

Merchandise. Management believes its merchandise mix differentiates Dollar
Tree from other discount variety stores selling at the $1.00 price point. The
Company's stores offer a well stocked selection of core and changing products
within the traditional variety store categories, although the actual items and
brands offered at any one time will vary. The traditional variety store
categories featured in Dollar Tree stores include housewares, toys, seasonal
goods, gifts, food, stationery, health and beauty aids, books, party goods,
hardware, jewelry/sunglasses, hair goods and accessories, crafts, baby and
infant products, softlines, batteries and pet supplies. The wide variety and
freshness of merchandise and the $1.00 price point create excitement for
customers, which management believes results in "impulse" purchases and
encourages consumers to make return visits to the store.

Dollar Tree utilizes seasonal merchandise and, to a limited extent, selected
closeout merchandise to add to the variety and freshness in the stores'
merchandise. Seasonal goods include summer toys, back-to-school products and
Christmas wrapping paper. The Company purchases closeout merchandise, which
management believes can be effective in generating recognized value and
excitement, as opportunities present themselves, but limits the percentage of
total inventory represented by closeout merchandise to less than 20%.

When the opportunity presents itself, the Company purchases items which it
prices at two for $1.00. These items provide sufficient value to the customer
without compromising the Company's margin goals. These items are the only items
in the store on which a price tag is used, and customers may buy only one item
if desired.

Merchandise in the Dollar Bills stores is predominantly of the same
categories, although of a different mix, most notably with a stronger emphasis
on food and health and beauty aids. In the past, Dollar Bills stores had carried
some items priced above $1.00 which will be phased out with the exception of a
limited number of multi-price point items, which the Company expects to continue
to offer only at certain Dollar Bills locations and at prices not exceeding
$5.00.

Purchasing. Management believes that its disciplined purchasing program, its
relationships with its suppliers and the exclusive focus of its buying power at
the $1.00 price point contribute to its successful purchasing strategy. Dollar
Tree believes that offering perceived value to its customers while maintaining
target merchandise margins in its purchasing program is critical to its success.

The Company purchases merchandise from 400 to 500 vendors annually, buying
both directly from vendors and indirectly from trading companies and brokers. No
vendor accounted for 10% or more of total merchandise purchased in either of the
last two calendar years. New vendors are used frequently to offer competitive,
yet varied, product selection and to maintain high levels of value.

The Company deals with its suppliers principally on an order-by-order basis
and has no long-term purchase contracts or other contractual assurance of
continued supply or pricing. While there can be no assurance of a continuing and
increasing supply of quality merchandise suitable to be priced by the Company at
$1.00, management believes that such merchandise will be available in sufficient
quantities to meet the Company's plans for future growth.

30
<PAGE>
non-conforming goods or empty containers. During the second quarter of 1996, the
Company intends to increase its previously established reserves by an additional
$300,000 to $400,000 for potential losses arising from the letters of credit
upon which the trading company has obtained payment. The Company has cancelled
all outstanding purchase orders with the trading company. In addition to the
payments already obtained by the trading company, there remains approximately
$2.7 million in undrawn irrevocable letters of credit issued to the trading
company with respect to the cancelled orders. The Company has taken extensive
measures, including legal action against the trading company, which it believes
have substantially limited its exposure with respect to the remaining undrawn
letters of credit. Although there can be no assurances in this regard, the
Company believes it is unlikely that its losses in connection with this matter
will significantly exceed its reserves. The Company has also expanded its
relationship with another trading company which it believes will be able to fill
most of the cancelled orders and fulfill the Company's future needs. There can
be no assurances, however, that this shift in suppliers will not result in a
temporary disruption or delay in the receipt of merchandise.

Visual Merchandising. Management believes that the presentation of its
merchandise is critical to communicating value and excitement to its customers.
Stores are attractively designed with the use of vibrant colors, uniform
decorative signage and supportive accent lighting. The stores are bright,
carpeted and provide background music, helping to create an inviting atmosphere
for shoppers. Dollar Tree uses a variety of very adaptable merchandising
fixtures, including slat walls, bins and shelving, and adjustable gift displays
to allow flexibility and the shifting of the merchandise mix to feature seasonal
merchandise. Some of these fixtures have been specifically designed for Dollar
Tree, such as the customized shelf display designed to promote the store's
porcelain gift products at the front of the stores. Dollar Tree maintains a
Field Merchandising Group to coordinate visual presentation in stores throughout
the chain. In addition, six store openers help to expedite the store opening
process. The Company relies on attractive exterior signage and in-store
merchandising as its primary form of advertising and generally does not utilize
other forms of advertising.

IMPORTS

China is the source for a majority of the Company's direct imports and, the
Company believes, is also the largest source of its indirect imports. Several
trade-related and other issues have recently intensified tensions between the
governments of the United States and China. These issues include China's efforts
to disrupt Taiwan's elections by conducting military exercises in the Taiwan
Straits, China's alleged sales of nuclear weapons-making equipment to Pakistan
and the resulting temporary suspension of U.S. Export-Import Bank financing for
sales to China, China's failure adequately to implement and enforce the terms of
the intellectual property protection agreement reached with the United States in
1995, China's human rights record, China's alleged sale of missiles to Iran, the
recent

31
<PAGE>
indictment of members of a Chinese weapons-smuggling operation with suspected
ties to the Chinese government, the growing U.S. trade deficit with China and
the ongoing negotiations concerning China's accession to the World Trade
Organization.

Under U.S. law, countries may be subject to retaliatory trade actions under
a number of trade statutes. One such statute is the "Special 301" provision,
which requires the U.S. Trade Representative ("USTR") to determine whether the
practices of foreign countries deny adequate and effective protection of
intellectual property rights or fair and equitable market access for U.S.
persons who rely on intellectual property protection. On April 30, 1996, the
USTR designated China as a "priority foreign country" under the Special 301
provision for its failure adequately to implement and enforce the bilateral 1995
intellectual property rights agreement with the United States, and on May 15,
1996 the USTR announced its intention to impose prohibitive import tariffs on
June 17, 1996 on certain categories of Chinese products, totaling approximately
$2 billion in U.S. imports, unless China takes satisfactory action to implement
the bilateral intellectual property agreement by that date. It is unclear
whether China will, or can, take the actions necessary to forestall the
imposition of sanctions between now and June 17. If punitive tariffs are
imposed, the categories of goods that will be subject to such sanctions will be
drawn from a larger list issued by the USTR on May 15. One of the products on
the May 15 list, certain types of paper bags, are products that the Company
imports in significant quantities directly or indirectly from China. The Company
has noncancellable orders to purchase products in these categories that will not
be received prior to June 17, 1996, the tariffs on which, if imposed, would be
approximately $1.9 million. In the event such tariffs were imposed, the Company
would use its relationships with the vendors involved to attempt to renegotiate
such noncancellable purchase orders, although there can be no assurances that
such efforts would be successful. If the USTR decides that those products, or
others that the Company imports, should be targeted for punitive import duties,
the Company expects that it would, except in the case of the noncancellable
purchase orders referred to above, substitute similar goods from other countries
or other categories of goods, which, for the remainder of 1996 at least, would
likely be at higher cost. The imposition of punitive tariffs on such Chinese
products could have a material adverse effect on the Company's business and
results of operations unless and until alternative sources of supply were
secured.

COST CONTROL

Dollar Tree believes that, given the Company's pricing structure,
maintaining sufficient gross margins and tight control over store expenses,
corporate expenses and inventories is critical to its success. Accordingly, the
Company's store format and operations, field management structure, site
selection, warehousing and distribution strategy and management information
systems are all designed to implement the Company's business strategy within a
low cost operating structure.

32
<PAGE>
STORE FORMAT

The prototype for future Dollar Tree stores is between 3,500 to 4,000 square
feet per store, of which approximately 85% to 90% represents selling space. This
represents a modest increase over the historical average of approximately 3,000
square feet per store. Merchandise is densely stocked and organized by category
according to a standard store layout plan used throughout the chain. The wide
variety, value and freshness of merchandise at the $1.00 price point and lively
appearance of the store create excitement for customers that management believes
results in high store traffic, high sales volume and an environment which
encourages "impulse" purchases. Signs throughout the store such as "New Arrivals
Weekly" emphasize the arrival of new merchandise and, management believes,
encourage customers to purchase products while merchandise is available. Night
stocking and "recovery" of the stores help maintain the stores' clean and neat
appearance as well as ensure that the maximum amount of merchandise is
displayed, particularly in the busy fourth quarter. The size of the store,
standard layout, merchandising by category, pricing structure and convenient
locations combine for a time efficient shopping experience for the customer.

Dollar Bills stores tend to be somewhat larger, with an average of 4,000 to
4,500 square feet. The format in these stores will be coordinated with that of
Dollar Tree stores as management deems prudent.

STORE OPERATIONS

Each store typically employs a manager, two assistant managers and 4 to 20
sales associates, most of whom are part-time. Additional temporary personnel are
typically hired to assist the stores with increased store traffic and sales
volume in the fourth quarter. Store managers are responsible for the operations
of individual stores, including recruiting and hiring store personnel,
communicating financial results nightly and coordinating with the distribution
staff on ordering, receiving and displaying weekly shipments. Centralized
check-out at the front of the store and simple pricing ensure that customers are
not kept waiting. The Company does not accept credit cards.

FIELD MANAGEMENT AND PERSONNEL

Management believes its philosophy of providing strong field and store
management is an integral element of delivering value to its customers. The
Company maintains a highly trained and well managed staff to ensure that all
stores are continuously well maintained and tightly controlled and to provide
the best possible customer service. The field organization is directed by the
Senior Vice President, Sales and Operations, assisted by two Directors of Sales
and Operations and eight Regional Managers, who in turn oversee numerous
District Managers and Area Supervisors. The corporate office is home of "Dollar
Tree University," where all field and store managers receive extensive training.

Management believes its compensation and benefit programs are a key element
in attracting and retaining qualified field management and store personnel and
in obtaining a high degree of dedication from employees to their jobs. To
motivate the Company's field organization, Dollar Tree has in place bonus plans
for the certain groups, including Regional Managers, Regional Field
Merchandisers, District Managers, Store Managers and Associate Store Managers.
Compensation under the various bonus plans are based on a variety of factors
which vary between plans. These factors include comparable store sales, overall
sales performance, inventory shrinkage levels, payroll and net income. Eligible
employees may participate in the Company's Employee Stock Purchase Plan and its
401(k) and profit sharing plan. In addition, medical and dental insurance are
available to eligible employees.

STORE LOCATIONS

As of March 31, 1996, Dollar Tree operated 660 stores in 26 states, 481 of
which were located in strip centers (including certain non strip-center, urban
based Dollar Bills stores) and 179 of which were

33
<PAGE>
located in malls. Of the strip center based stores, 181 were located in strips
with Wal-Mart, 39 with Kmart and 24 with Target.

The Company currently leases all of its existing store locations and expects
that its policy of leasing rather than owning will continue as it expands. The
Company's leases typically provide for a short initial lease term with options
on the part of the Company to extend. Management believes that this lease
strategy enhances the Company's flexibility to pursue various expansion and
relocation opportunities resulting from changing market conditions. The
Company's ability to open new stores is contingent upon locating satisfactory
sites, negotiating favorable leases, obtaining necessary financing and
recruiting and training additional qualified management personnel.

As current leases expire, the Company believes that it will be able either
to obtain lease renewals if desired for present store locations, or to obtain
leases for equivalent or better locations in the same general area. To date, the
Company has not experienced difficulty in either renewing leases for existing
locations or securing leases for suitable locations for new stores. A
substantial number of the Company's store leases contain certain provisions
related to changes in control of the Company. These provisions may arguably be
applicable in a substantial number of the Company's leases as a result of the
1993 Recapitalization, and may be applicable in a small number of additional
leases as a result of the prior public offerings of the Company's common stock.
Many of the Company's leases contain provisions with which the Company does not
comply, including provisions requiring purchase of insurance upon leasehold
improvements and/or property located in the stores, requiring the Company to
advertise or prohibiting the Company from operating another store within a
specified radius. Based primarily on the Company's belief that it maintains good
relations with its landlords, that most of its leases are at market rents, and
that it has historically been able to secure leases for suitable locations,
management believes that these provisions will not have a material adverse
effect on the business or financial position of the Company.

WAREHOUSING AND DISTRIBUTION

Warehousing and distribution are managed centrally by the Company from its
corporate headquarters, which is located in the same building as its Norfolk
distribution center. The Company views maintaining strong warehousing and
distribution support for its stores as a critical element of its expansion
strategy and its ability to maintain a low cost operating structure. As the
Company continues its expansion, it intends to open new units in regions around
its distribution centers.

The Norfolk distribution center consists of 186,000 square feet, while the
Memphis distribution center, opened in 1994, encompasses 244,000 square feet.
Including the newly acquired 250,000 square foot Chicago facility, the Company's
distribution centers have the capacity to service an estimated 1,000 stores. The
Company is currently evaluating the expansion and/or relocation of one or more
of its distribution facilities to further increase capacity. The Company
currently leases its corporate headquarters and Norfolk distribution center. The
lease expires in December 2009, but may be extended by the Company for up to
three additional five year periods. The distribution center in Memphis is also
leased; this lease expires in September 2004, with four additional five year
terms available. Additionally, the Company is taking over the lease on the
Dollar Bills distribution center, located in the Chicago area; this lease
expires in June 2005, with certain options to renew.

Substantially all of the Company's inventory is shipped directly from
suppliers to the Company's distribution centers. Dollar Tree's substantial
distribution center capacity allows the Company to receive manufacturers' early
shipment discounts and buy large quantities of goods at favorable prices. In
addition, during the past several years the Company has utilized offsite
facilities to accommodate large shipments of seasonal merchandise. Since the
distribution centers maintain back-up inventory and provide weekly delivery to
each store, in-store inventory requirements are reduced and the Company is able
to operate with smaller stores than would otherwise be required. Since many
stores are limited in

34
<PAGE>
size, off-hours stocking, as well as off-site storage space, is utilized to
support the store's inventory turnover, particularly during the busy fourth
quarter.

Distribution to the stores is centrally controlled by the Company's
distribution group. The Company's merchandise replenishment software generates
distribution models that can be based on variables such as store volume and
certain demographic and physical characteristics of the stores. Each store has a
weekly and monthly budgeted inventory requirement based on its projected sales
for the year and its existing inventory levels. Stores receive weekly shipments
of merchandise from distribution centers based on their anticipated inventory
requirements for each week and communication via telephone or electronic mail
between store managers and the distribution group. The Company has the ability
to make two weekly deliveries to high volume stores during the busy Christmas
season.

The Company's distribution fleet consists of 18 leased tractors and 57 owned
trailers. The majority of the Company's inventory is delivered to the stores by
contract carriers. The Company fleet is used in freight lanes which allow
backhauls of merchandise from suppliers to its distribution centers and to
service stores located near distribution centers. The Company is continuously
looking for opportunities to reduce its freight and distribution costs and
periodically evaluates various delivery options.

MANAGEMENT INFORMATION SYSTEMS

The Company's management information systems allow it to monitor its
merchandising, inventory, distribution and operating expenses centrally at its
Norfolk headquarters. These systems allow the Company to support its stores
efficiently, manage inventory turnover, and provide detailed financial reporting
to support management's operational decisions and cost control efforts. The
Company does not have and does not currently anticipate adding a point-of-sale
system. The Company is in the process of integrating the Dollar Bills stores
into the existing management information systems.

COMPETITION

The retail industry is highly competitive. The Company's competitors include
mass merchandisers (such as Wal-Mart), discount stores (such as Dollar General),
variety stores (such as Woolworth), closeout stores (such as Odd Lot and Big
Lot) and other $1.00 price point stores (including All For One, a division of
Consolidated Stores Corporation, All For A Dollar and Everything's a Dollar, a
division of Value Merchants, Inc.). In January 1996, the Company acquired all of
the stock of one of its competitors, Dollar Bills. Certain of the Company's
competitors are units of national or regional chains that may have substantially
greater financial resources than the Company. Several of the largest operators
of discount stores at the $1.00 price point (or their parent companies) have
recently filed for or emerged from bankruptcy protection in U.S. bankruptcy
court and have closed a number of their stores, while others have abandoned the
$1.00 price point concept and/or reconfigured their stores. The Company may face
intense competition in the future which could have an adverse effect on its
financial results.

TRADEMARKS

The Company is the owner 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," each of which expires in 2003 or later. A
small number of the Company's stores operate under the name "Only $1.00," for
which the Company has not obtained a service mark registration; if it were
required to change the name of these stores, the Company does not believe that
this would have a material adverse effect on its business. Additionally, with
the acquisition of Dollar Bills in January 1996, the Company became the owner of
various Federal service mark registrations, including a concurrent use
registration for "Dollar Bill$" and the related logo.

35
<PAGE>
EMPLOYEES

The Company employed approximately 6,965 employees at March 31, 1996,
approximately 1,795 of whom were full-time and 5,170 part-time. The number of
part-time employees fluctuates depending on seasonal needs. The Company
considers its relationship with employees to be good and has not experienced
significant interruptions of operations due to labor disagreements. None of the
Company's employees are currently represented by a labor union. On March 20,
1996, the employees of the Company's Norfolk distribution center voted against
union representation by the International Brotherhood of Teamsters in an
election certified by the National Labor Relations Board. The International
Brotherhood of Teamsters cannot conduct another election at the Norfolk
distribution center until March 20, 1997. There can be no assurance that any of
the Company's employees will not in the future elect to be represented by a
union.

LEGAL PROCEEDINGS

On January 31, 1996, the Company bought all of the capital stock of Dollar
Bills, pursuant to a stock purchase agreement. In March and April, 1996, Michael
and Pamela Alper (the "Alpers"), former shareholders of Dollar Bills, together
with a corporation they control, filed lawsuits in the state and federal courts
in Cook County, Illinois, against the Company and one of its employees relating
to the Dollar Bills transaction. The lawsuits seek to recover compensatory
damages of not less than $10 million (which could be tripled under the federal
antitrust law claim described below), punitive damages, attorney's fees, costs
and injunctive and other relief.

In the lawsuit, the plaintiffs claim that the Alpers were defrauded into
selling the wholesale merchandising operations which were owned by Dollar Bills;
that the Company improperly obtained and misused confidential and proprietary
information related to those operations; that the Company breached the
provisions of a confidentiality agreement which it had entered into with Dollar
Bills when negotiations regarding the acquisition began; that the Company
breached certain terms of the stock purchase agreement relating to the
acquisition; that the Company intentionally or negligently misrepresented its
intentions with respect to the wholesale merchandising operations; and that the
Company and the co-defendant conspired to violate antitrust law by excluding the
plaintiffs as competitors in the wholesale merchandising business. It is
possible that, in the future, the plaintiffs could amend their complaint to
request that the court set aside or rescind the entire Dollar Bills transaction.
The Company emphatically denies the plaintiffs' claims and will vigorously
defend itself in this matter.

The litigation is in its preliminary stages and discovery has only recently
commenced; however, based on management's understanding of the facts (which
facts are contested by the plaintiffs) and the advice of its lead litigation
counsel for this matter in reliance on such facts, the Company believes it is
unlikely that the plaintiffs will ultimately prevail on the merits of this
litigation. Accordingly, the Company believes that the ultimate outcome of this
matter will not have a material adverse effect on the Company's results of
operations or financial condition. Nevertheless, particularly in light of the
contested factual assertions, there can be no assurances regarding the ultimate
outcome of this litigation or that this litigation will not have a material
adverse effect on the Company's results of operations or financial condition. In
any event, the litigation has diverted, and is expected to continue to divert,
the efforts and attention of the Company's management.

On May 1, 1996, the Company determined that certain terra cotta potted
candles, approximately 31,170 sets of which it sold in April 1996, might contain
a defect which could create a substantial risk of injury. As required by the
Consumer Product Safety Act, the Company filed an initial report of the
potential danger with the Consumer Product Safety Commission ("CPSC") on May 3,
1996. The Company has voluntarily stopped distribution of the product and
intends to issue a recall to customers. The Company is not aware of any serious
injuries, either to person or property, as a result of the potential defect.

Additionally, the Company is a party to ordinary routine litigation and
proceedings incidental to its business, including certain matters which may
occasionally be asserted by the CPSC, none of which is individually or in the
aggregate material to the Company.

36
<PAGE>
MANAGEMENT

DIRECTORS, EXECUTIVE OFFICERS AND CERTAIN KEY PERSONNEL

The following table sets forth certain information with respect to
directors, executive officers and certain key personnel of the Company:

DIRECTORS AND EXECUTIVE OFFICERS AGE OFFICE
- ---------------------------------- --- ------

<S> <C> <C>
J. Douglas Perry 48 Chairman of the Board; Director
Macon F. Brock, Jr. 54 President and Chief Executive Officer; Director
H. Ray Compton 53 Executive Vice President and Chief Financial
Officer; Director
John F. Megrue 37 Vice Chairman of the Board; Director
Allan W. Karp 41 Director
Thomas A. Saunders, III 59 Director
Alan L. Wurtzel 62 Director
Frank Doczi 58 Director

CERTAIN KEY PERSONNEL

Thomas J. Bowyer 37 Senior Vice President, Sales and Operations
Frederick C. Coble 35 Vice President, Controller
K. Bryan Bagwell 36 Vice President, Merchandise
Leonard Intrieri 56 Vice President, Human Resources
Darcel L. Stephan 38 Vice President, Information Systems
David W. Thomas 36 Vice President, Leasing
Stephen W. White 41 Vice President, Logistics
</TABLE>

DIRECTORS AND EXECUTIVE OFFICERS

J. Douglas Perry has been a Director and Chairman of the Board of the
Company since 1986 when he founded the Company with Mr. Brock and Mr. Compton.
Mr. Perry is primarily responsible for directing the real estate, leasing and
construction functions of the Company. Until 1991, he was an executive officer
of K&K Toys which he, along with Mr. Brock, Mr. Compton and Mr. Perry's father,
built from its original single store to 136 stores. Mr. Perry has 27 years of
retail experience. Mr. Perry attended Old Dominion University.

Macon F. Brock, Jr. has been Chief Executive Officer of the Company since
1993 and a Director and President of the Company since 1986 when he founded the
Company with Mr. Perry and Mr. Compton. Mr. Brock directs the overall operations
of the Company which primarily include purchasing, merchandising, logistics and
distribution and store operations. Until 1991, he was employed in a similar role
with K&K Toys. Mr. Brock has 27 years of retail experience. Mr. Brock graduated
from Randolph Macon College, served in the U.S. Marine Corps as a Captain and
was a special agent for U.S. Naval Intelligence.

H. Ray Compton has been a Director, Executive Vice President and Chief
Financial Officer of the Company since 1986 when he founded the Company with Mr.
Perry and Mr. Brock. He is responsible for finance, maintenance of credit
facilities, cash management, information systems and human resources. From 1979
until 1991 Mr. Compton was employed in a similar role with K&K Toys. Prior to
1979, he was associated for 15 years with a manufacturing company in various
accounting and management positions. Mr. Compton graduated from Phillips
Business College.

37
<PAGE>
John F. Megrue has been a Director and Vice Chairman of the Board of the
Company since September 1993. Mr. Megrue has been a partner of SK Partners,
L.P., which serves as the general partner of Saunders Karp & Co. and the Fund,
since 1992. From 1989 to 1992 Mr. Megrue served as a Vice President and
Principal at Patricof & Co. and prior thereto he served as a Vice President at
C.M. Diker Associates. Mr. Megrue received a B.S. in mechanical engineering from
Cornell University and an M.B.A. from the Wharton School.

Allan W. Karp has been a Director of the Company since September 1993. Mr.
Karp has been a partner of SK Partners, L.P., which serves as the general
partner of Saunders Karp & Co. and the Fund, since 1990. Before founding
Saunders Karp & Co., Mr. Karp was a Principal in the Merchant Banking Department
at Morgan Stanley & Co., where he began in the firm's Mergers and Acquisitions
Department in 1983. Mr. Karp graduated from M.I.T.'s Sloan School of Management
with a Masters of Science degree in Management.

Thomas A. Saunders, III, has been a Director of the Company since September
1993. Mr. Saunders has been a partner of SK Partners, L.P., which serves as the
general partner of Saunders Karp & Co. and the Fund, since 1990. Before founding
Saunders Karp & Co., Mr. Saunders served as a Managing Director of Morgan
Stanley & Co. from 1974 to 1989 and the Chairman of The Morgan Stanley Leveraged
Equity Fund II, L.P., from 1987 to 1989. Mr. Saunders is a member of the Board
of Visitors of the Virginia Military Institute and is the Chairman of the Board
of Trustees of the University of Virginia's Darden Graduate School of Business
Administration. Mr. Saunders is also a Trustee of the Cold Spring Harbor
Laboratory. Mr. Saunders received a B.S. in electrical engineering from the
Virginia Military Institute in 1958 and an M.B.A. from the University of
Virginia's Darden Graduate School of Business in 1967.

Alan L. Wurtzel has been a Director of the Company since April 1995. Mr.
Wurtzel serves as the Vice Chairman of the Board of Circuit City Stores, Inc.
("Circuit City"), a large consumer electronics retailing chain. From 1986 to
1994, he served as Chairman of the Board of Circuit City. Prior to 1986, he
served in several other capacities with Circuit City, including Chief Executive
Officer (1973 to 1986). From December 1986 to April 1988, he served as President
of Operation Independence, a non-profit organization. Mr. Wurtzel has been a
director of Office Depot, Inc. since 1989. Mr. Wurtzel has 30 years of retail
experience. He is a graduate of Oberlin College and Yale Law School.

Frank Doczi has been a Director of the Company since May 1995. Mr. Doczi
currently serves as Special Advisor to the Chairman of Hechinger Company. Prior
to that appointment, he served as the President and Chief Executive Officer of
Home Quarters Warehouse, Inc. ("HQ"), a subsidiary of Hechinger Company, from
1988 until 1995. Mr. Doczi had been with HQ since its inception in 1984. He also
served as a member of the Management Committee for the Hechinger Company. Prior
to Mr. Doczi's association with HQ, he spent seven years with Moore's, a chain
of home centers operated by Evans Products Company, where he was the Senior Vice
President, General Merchandise Manager. Mr. Doczi attended Rutgers University.

Mr. Brock is married to Mr. Perry's sister. There are no additional family
relationships among the Directors and executive officers.

CERTAIN KEY PERSONNEL

Thomas J. Bowyer became Senior Vice President, Sales and Operations, of the
Company in January 1995 and prior thereto served as Vice President, Sales and
Operations from July 1991. Prior thereto, he served as Director of Sales and
Operations of Dollar Tree from August 1989. His previous work experience
includes positions as a district manager with K&K Toys from 1988 and in the
grocery business, and store management positions with Circus World and Kay-Bee
Toy Stores.

38
<PAGE>
Frederick C. Coble became Vice President, Controller, of the Company in
December 1991 after having joined Dollar Tree in December 1989. Prior to joining
the Company, he served as Internal Audit Manager with Royster Company, a
manufacturing company, and as Audit Manager for KPMG Peat Marwick LLP. Mr. Coble
graduated from the University of Virginia in 1982 and is a Certified Public
Accountant.

K. Bryan Bagwell became Vice President, Merchandise, of the Company in
September 1993. Prior thereto, Mr. Bagwell served as Merchandise Manager for
Dollar Tree from March 1993 to September 1993 and as a buyer for the Company
from October 1991 to March 1993. Before joining the Company, Mr. Bagwell worked
for K&K Toys from 1977 to October 1991, starting as a distribution center
associate and leaving as a senior buyer.

Leonard Intrieri became Vice President, Human Resources, of the Company in
September 1989. Prior thereto, he served as Personnel Director from February
1987 to March 1989 and Director, Human Resources, from March 1989 to September
1989. Mr. Intrieri previously worked as Personnel Manager for K&K Toys
(1984-1987), assistant personnel manager for Allied Marine Corporation
(1982-1984), assistant personnel/employee relations manager for Colonial
Stores/Big Star Supermarkets (1980-1982) and employment counselor for an
independent employment agency (1979-1980).

Darcel L. Stephan became Vice President, Information Systems, of the Company
in September 1989. Prior thereto, she served as Data Processing Director from
February 1987 to September 1989. Before joining the Company, Ms. Stephan worked
for K&K Toys as Data Processing Supervisor from December 1980 to February 1987.
Ms. Stephan previously worked as a programmer/analyst with Haynes Furniture, a
furniture retailer, and C. Lloyd Johnson, a distributor of manufactured goods.

David W. Thomas became Vice President, Leasing, of the Company in January
1995. Prior thereto, he served as Leasing Representative from July 1989 until
February 1991 when he became Director of Real Estate. His previous work
experience included positions as store manager for K&K Toys, account executive
for a local radio station, sales associate at Circuit City Stores and a
restaurant manager with the Marriott Corporation. Mr. Thomas attended Old
Dominion University.

Stephen W. White became Vice President, Logistics in December 1995 after
having joined the Company in June 1994 as Director of Transportation and
Distribution. Prior to joining the Company, he served as Director of
Transportation and Distribution Planning for Ames Department Stores from July
1986 to June 1994. His previous work experience included various transportation
and supply positions with a number of companies, including Shell Oil Company and
Eastern Airlines. Mr. White graduated from Northeastern University in 1978.

39
<PAGE>
PRINCIPAL AND SELLING SHAREHOLDERS

The following table sets forth certain information regarding the beneficial
ownership as of May 22, 1996 of the Common Stock by (i) each of the Directors,
(ii) each of the executive officers, (iii) all current Directors and executive
officers as a group, (iv) each other person who is the beneficial owner of more
than 5% of the outstanding Common Stock and (v) each other Selling Shareholder.
The address of each Director and executive officer of the Company is c/o Dollar
Tree Stores, Inc., 2555 Ellsmere Ave., Norfolk Commerce Park, Norfolk, Virginia
23513.

<TABLE>
<CAPTION>
BENEFICIAL OWNERSHIP BENEFICIAL OWNERSHIP
BEFORE OFFERING(1) AFTER OFFERING(1)
------------------------ ---------------------
SHARES
SHARES PERCENT OFFERED(2) SHARES PERCENT
---------- ------- ---------- ---------- -------
<S> <C> <C> <C> <C> <C>
DIRECTORS AND EXECUTIVE OFFICERS
J. Douglas Perry........................ 3,513,150(3) 13.72% 162,533 3,025,650 11.48%
Macon F. Brock, Jr...................... 2,878,620(4) 11.24% 240,778 2,579,842 9.79%
H. Ray Compton.......................... 921,576(5) 3.66% 90,000 771,576 2.98%
John F. Megrue.......................... 9,959,878(6) 37.88% -- 8,589,815 31.76%
Alan W. Karp............................ 9,959,878(7) 37.88% 2,244 8,589,815 31.76%
Thomas A. Saunders, III................. 9,959,878(8) 37.88% -- 8,589,815 31.76%
Alan L. Wurtzel......................... 16,500(9) * -- 16,500 *
Frank Doczi............................. 11,250(10) * -- 11,250 *

All current Directors and executive
officers of the Company (8 persons).... 17,333,598 62.89% 495,555 15,022,769 53.06%

OTHER 5% SHAREHOLDERS
The SK Equity Fund, L.P................. 9,943,566(11) 37.82% 1,367,819 8,575,747 31.71%
Two Greenwich Plaza
Suite 100
Greenwich, Connecticut 06830
Joan P. Brock........................... 1,443,973(12) 5.76% 188,722 1,255,251 4.86%
Dollar Tree Stores, Inc.
2555 Ellsmere Ave.
Norfolk Commerce Park
Norfolk, Virginia 23513

OTHER SELLING SHAREHOLDERS
Christopher K. Reilly................... 3,262(13) * 449 2,813 *
Robert C. Miller and Macon F. Brock,
Jr., as Trustees of the Joan P. Brock
Grantor Retained Annuity Trust......... 59,559 * 28,000 31,559 *
Robert C. Miller and Macon F. Brock,
Jr., as Trustees for Kathryn P.
Brock................................... 325,627(14) 1.29% 10,000 315,627 1.21%
Robert C. Miller and Macon F. Brock,
Jr., as Trustees for Macon F. Brock,
III..................................... 325,627(14) 1.29% 10,000 315,627 1.21%
Robert C. Miller and Macon F. Brock,
Jr., as Trustees for Christine B.
McCammon................................ 325,627(14) 1.29% 10,000 315,627 1.21%
Robert C. Miller and J. Douglas Perry,
Trustees of the Patricia W. Perry
Grantor Retained Annuity Trust......... 494,029 1.97% 324,967 169,062 *
James P. Compton and Jean T. Compton,
Trustees of the H. Ray Compton Grantor
Retained Annuity Trust.................. 205,891 * 60,000 145,891 *
Melanie K. Berman, Custodian for Kyle
Galbreath Megrue........................ 8,156(15) * 1,122 7,034 *
Melanie K. Berman, Custodian for
Christopher Galbreath Megrue........... 8,156(15) * 1,122 7,034 *
Thomas A. Saunders, III and Joanne S.
Berkley, as Trustees for the Ivor
Family Trust........................... 16,312(16) * 2,244 14,068 *
</TABLE>

(Footnotes on following page)

40
<PAGE>
(Footnotes for preceding page)
- ------------
* less than 1%

(1) As used in this table "beneficial ownership" means the sole or shared power
to vote or direct the voting or to dispose or direct the disposition of any
security. A person is deemed as of any date to have "beneficial ownership"
of any security that such person has a right to acquire within 60 days
after such date. Any security that any person named above has the right to
acquire within 60 days is deemed to be outstanding for purposes of
calculating the ownership percentage of such person, but is not deemed to
be outstanding for purposes of calculating the ownership percentage of any
other person. The Company has issued warrants to acquire 2,482,178 shares
of Common Stock (the "Warrant Shares") all of which are currently
exercisable.

(2) Assumes no exercise of the Underwriter's over-allotment option to purchase
up to 487,500 shares of Common Stock. If the Underwriters exercise this
option in whole or in part, the Selling Shareholders will sell additional
shares generally in proportion to the respective amounts offered by them in
the initial sale to the Underwriters.

(3) Includes 1,211,853 shares and 558,489 Warrant Shares owned by trusts for
the benefit of certain Perry family members, of which Mr. Perry is a
trustee, but excludes 757,942 shares owned by Mr. Perry's wife, Patricia W.
Perry.

(4) Includes 477,951 shares and 558,489 Warrant Shares owned by trusts for the
benefit of certain Brock family members, of which Mr. Brock is a trustee,
but excludes 1,443,973 shares owned by Mr. Brock's wife, Joan P. Brock.

(5) Includes 439,697 shares and 124,110 Warrant Shares owned by trusts for the
benefit of certain Compton family members, over which Mr. Compton may
indirectly exercise investment or voting power.

(6) Represents 14,288 shares and 2,024 Warrant Shares owned by Mr. Megrue's
sister as Custodian for his children. Also includes 8,708,955 shares and
1,234,611 Warrant Shares owned by The SK Equity Fund, L.P. Mr. Megrue is a
general partner of the general partner of The SK Equity Fund, L.P.

(7) Includes 8,708,955 shares and 1,234,611 Warrant Shares owned by The SK
Equity Fund, L.P., and 2,025 Warrant Shares owned by Mr. Karp. Mr. Karp is
a general partner of the general partner of The SK Equity Fund, L.P.

(8) Represents 14,287 shares and 2,025 Warrant Shares owned by an irrevocable
trust for the benefit of certain Saunders family members, of which Mr.
Saunders is a trustee. Also includes 8,708,955 shares and 1,234,611 Warrant
Shares owned by The SK Equity Fund, L.P. Mr. Saunders is a general partner
of the general partner of The SK Equity Fund, L.P.

(9) Includes 5,250 shares held in a revocable trust of which Mr. Wurtzel is a
trustee and 11,250 shares issuable upon exercise of certain stock options
granted to Mr. Wurtzel pursuant to The Dollar Tree Stores, Inc. Stock
Incentive Plan.

(10) Includes 11,250 shares issuable upon exercise of certain stock options
granted to Mr. Doczi pursuant to The Dollar Tree Stores, Inc. Stock
Incentive Plan.

(11) Includes 1,234,611 Warrant Shares. Messrs. Megrue, Saunders and Karp, as
general partners of the general partner of The SK Equity Fund, L.P. (the
"Fund"), may be deemed to have beneficial ownership of shares held by the
Fund, and the shares and warrant shares held by the Fund have been
attributed to them in the table above. See Notes (6), (7) and (8) above.

(12) Does not include 2,320,131 shares and 558,489 Warrant Shares beneficially
owned by Mrs. Brock's husband, Macon F. Brock, Jr.

(13) Includes 405 Warrant Shares. Mr. Reilly is a principal of Saunders Karp &
Co., an affiliate of The SK Equity Fund, L.P.

(14) Includes 186,163 Warrant Shares.

(15) Includes 1,012 Warrant Shares.

(16) Includes 2,025 Warrant Shares.

41
<PAGE>
UNDERWRITING

The Underwriters named below have severally agreed, subject to the terms and
conditions set forth in the Underwriting Agreement, to purchase from the Company
and the Selling Shareholders the number of shares of Common Stock indicated
below opposite their respective names at the public offering price less the
underwriting discount set forth on the cover page of this Prospectus. The
Underwriting Agreement provides that the obligations of the Underwriters are
subject to certain conditions precedent and that the Underwriters are committed
to purchase all of the shares if they purchase any.

<TABLE>
<CAPTION>
NUMBER
UNDERWRITERS OF SHARES
- ------------ ---------
<S> <C>
Montgomery Securities........................................... 1,083,334
Goldman, Sachs & Co. ........................................... 1,083,333
Smith Barney Inc................................................ 1,083,333
---------
Total....................................................... 3,250,000
---------
---------
</TABLE>

The Underwriters have advised the Company and the Selling Shareholders that
the Underwriters propose initially to offer the Common Stock to the public on
the terms set forth on the cover page of this Prospectus. The Underwriters may
allow to selected dealers a concession of not more than $0.92 per share; and the
Underwriters may allow, and such dealers may reallow, a concession of not more
than $0.10 per share to certain other dealers. After the public offering, the
offering price and other selling terms may be changed by the Underwriters. The
Common Stock is offered subject to receipt and acceptance by the Underwriters,
and to certain other conditions, including the right to reject orders in whole
or in part.

The Selling Shareholders have granted an option to the Underwriters,
exercisable during the 30-day period after the date of this Prospectus, to
purchase up to a maximum of 487,500 additional shares of Common Stock to cover
over-allotments, if any, at the same price per share as the initial shares to be
purchased by the Underwriters. To the extent that the Underwriters exercise this
option, the Underwriters will be committed, subject to certain conditions, to
purchase such additional shares in approximately the same proportion as set
forth in the above table. The Underwriters may purchase such shares only to
cover over-allotments made in connection with this offering.

The Underwriting Agreement provides that the Company and the Selling
Shareholders will indemnify the Underwriters against certain liabilities,
including civil liabilities under the Securities Act, or will contribute to
payments the Underwriters may be required to make in respect thereof.

All of the Selling Shareholders have agreed, subject to certain limited
exceptions, not to offer, sell or otherwise dispose, directly or indirectly, of
any shares of Common Stock of the Company for a period of 90 days after the date
of this Prospectus, without the prior written consent of Montgomery Securities,
as representative of the Underwriters. The Company has agreed not to offer, sell
or otherwise dispose of, directly or indirectly, any shares of Common Stock of
the Company for a period of 90 days after the date of this Prospectus, without
the prior written consent of Montgomery Securities, as representative of the
Underwriters, except that the Company, without such consent, may grant options
or issue Common Stock upon exercise of new or outstanding options pursuant to
The Dollar Tree Stores, Inc. Amended and Restated Stock Option Plan, The Dollar
Tree Stores, Inc. Stock Incentive Plan and The Dollar Tree Stores, Inc. Employee
Stock Purchase Plan.

Certain of the Underwriters and selling group members (if any) that
currently act as market makers for the Common Stock may engage in "passive
market making" in the Common Stock on Nasdaq in accordance with Rule 10b-6A
under the Securities Exchange Act of 1934 (the "Exchange Act"). Rule 10b-6A
permits, upon the satisfaction of certain conditions, underwriters and selling
group

42
<PAGE>
members participating in a distribution that are also Nasdaq market makers in
the security being distributed to engage in limited market making transactions
during the period when Rule 10b-6 under the Exchange Act would otherwise
prohibit such activity. Rule 10b-6A prohibits underwriters and selling group
members engaged in passive market making generally from entering a bid or
effecting a purchase at a price that exceeds the highest bid for those
securities displayed on Nasdaq by a market maker that is not participating in
the distribution. Under Rule 10b-6A, each underwriter or selling group member
engaged in passive market making is subject to a daily net purchase limitation
equal to 30% of such entity's average daily trading volume during the two full
consecutive calendar months immediately preceding the date of the filing of the
registration statement under the Securities Act pertaining to the security to be
distributed. Passive market making may stabilize the market price of the Common
Stock at a level above that which might otherwise prevail and, if commenced, may
be discontinued at any time.

LEGAL MATTERS

The validity of the Common Stock and certain other legal matters in
connection with this offering will be passed upon for the Company and the
Selling Shareholders by Davis Polk & Wardwell, New York, New York, and
Hofheimer, Nusbaum, McPhaul & Samuels, a Professional Corporation, Norfolk,
Virginia. Certain legal matters in connection with the Common Stock offered
hereby will be passed upon for the Underwriters by Hale and Dorr, Boston,
Massachusetts.

EXPERTS

The financial statements of Dollar Tree Stores, Inc. as of December 31, 1994
and 1995, and for each of the years in the three-year period ended December 31,
1995 have been incorporated by reference herein and in the Registration
Statement in reliance upon the report of KPMG Peat Marwick LLP, independent
certified public accountants, incorporated by reference herein, and upon the
authority of said firm as experts in accounting and auditing.

The financial statements of Dollar Bills, Inc. (formerly known as Terrific
Promotions, Inc.) as of September 31, 1994 and 1995, and for the fiscal years
ended September 30, 1994 and 1995 have been incorporated by reference herein and
in the Registration Statement in reliance upon the report of Arthur Andersen
LLP, independent certified public accountants, incorporated by reference herein,
and upon the authority of said firm as experts in accounting and auditing.

ADDITIONAL INFORMATION

The Company has filed a Registration Statement on Form S-3 under the
Securities Act of 1933, as amended, with the Securities and Exchange Commission
(the "Commission") with respect to the shares offered by this Prospectus. This
Prospectus does not contain all of the information set forth in the Registration
Statement and the exhibits and schedules thereto. Statements contained herein
concerning the provisions of any documents are not necessarily complete and, in
each instance, reference is made to the copy of such documents filed as an
exhibit to the Registration Statement, and each such statement shall be deemed
qualified in its entirety by such reference.

The Company is subject to the informational requirements of the Exchange Act
and, in accordance therewith, files reports and other information with the
Commission. A copy of the reports and other information filed by the Company in
accordance with the Exchange Act may be inspected without charge at the offices
of the Commission at Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549,
and will also be available for inspection and copying at the regional offices of
the Commission located at 7 World Trade Center, Suite 1300, New York, New York
10048 and at Citicorp Center, 500

43
<PAGE>
West Madison Street, Suite 1400, Chicago, Illinois 60661-2511. Copies of such
material may also be obtained from the Public Reference Section of the
Commission, Washington, D.C. 20549, upon payment of the fees prescribed by the
Commission. Such reports, proxy statements and other information concerning the
Company are also available for inspection at the offices of the Nasdaq National
Market, Reports Section, 1735 K Street, Washington, D.C. 20006.

INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE

The following documents filed by the Company with the Commission are
incorporated herein by reference: (1) the Company's Annual Report on Form 10-K
for the year ended December 31, 1995; (2) the Company's Quarterly Report on Form
10-Q for the quarter ended March 31, 1996; (3) the Company's Current Report on
Form 8-K filed with the Commission on January 16, 1996, as amended by the
Company's Current Report on Form 8-K/A filed with the Commission on April 12,
1996, and (4) the Company's Registration Statement on Form 8-A filed February
28, 1995, registering the Company's Common Stock under Section 12(g) of the
Exchange Act. All documents filed by the Company with the Commission pursuant to
Sections 13(a), 13(c), 14 and 15(d) of the Exchange Act subsequent to the date
hereof and prior to the termination of the offering of the Common Stock
registered hereby shall be deemed to be incorporated by reference into this
Prospectus and to be a part hereof from the date of filing such documents. Any
statements contained in a document incorporated or deemed to be incorporated by
reference herein shall be deemed to be modified or superseded for purposes of
this prospectus to the extent that a statement contained herein or in any other
subsequently filed document which also is, or is deemed to be, incorporated by
reference herein modifies or supersedes such statement. Any statement so
modified or superseded shall not be deemed, except as so modified or superseded,
to constitute a part of this Prospectus. The Company will provide without charge
to each person to whom this Prospectus is delivered, upon a written request of
such person, a copy of any or all of the foregoing documents incorporated by
reference into this Prospectus (other than exhibits to such documents, unless
such exhibits are specifically incorporated by reference into such documents).
Requests for such copies should be delivered to H. Ray Compton, Executive Vice
President and Chief Financial Officer, 2555 Ellsmere Avenue, Norfolk, VA 23513.

<PAGE>

[PHOTO OF DOLLAR BILL$ STORE MERCHANDISE]

<PAGE>

- ------------------------------------------ ---------------------------------
- ------------------------------------------ ---------------------------------

No dealer, sales representative, or any
other person has been authorized to give
any information or to make any
representations other than those contained 3,250,000 SHARES
in this Prospectus, and, if given or made,
such information or representation must
not be relied upon as having been
authorized by the Company, any Selling
Shareholder or by the Underwriters.
Neither the delivery of this Prospectus [LOGO(SM)]
nor any sale made hereunder shall under
any circumstances create any implication
that there has been no change in the DOLLAR TREE STORES, INC.
affairs of the Company since the date
hereof. This Prospectus does not
constitute an offer to sell or a
solicitation of an offer to buy any
securities offered hereby by anyone in any
jurisdiction in which such offer or
solicitation is not authorized or in which
the person making such offer or
solicitation is not qualified to do so or
to any person to whom it is unlawful
to make such offer or solicitation.

COMMON STOCK

---------------------
TABLE OF CONTENTS
---------------------

----------------
Page
---- PROSPECTUS
Prospectus Summary.................... 3
Risk Factors.......................... 8 ----------------
Use of Proceeds....................... 15
Price Range of Common Stock........... 15
Dividend Policy....................... 15
Capitalization........................ 16
Selected Financial Data............... 17
Management's Discussion and Analysis of MONTGOMERY SECURITIES
Financial Condition and Results
of Operations....................... 19 GOLDMAN, SACHS & CO.
Business.............................. 27
Management............................ 37 SMITH BARNEY INC.
Principal and Selling Shareholders.... 40
Underwriting.......................... 42
Legal Matters......................... 43
Experts............................... 43
Additional Information................ 43 June 10, 1996
Incorporation of Certain Documents by
Reference............................. 44

- ------------------------------------------ ---------------------------------
- ------------------------------------------ ---------------------------------