AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 7, 1996
REGISTRATION NO. 333-04391
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------------
AMENDMENT NO. 1
TO
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
-------------------
DOLLAR TREE STORES, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
VIRGINIA 54-1387365
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
</TABLE>
-------------------
<TABLE>
<S> <C>
2555 ELLSMERE AVENUE H. RAY COMPTON
NORFOLK COMMERCE PARK DOLLAR TREE STORES, INC.
NORFOLK, VIRGINIA 23513 2555 ELLSMERE AVENUE
(804) 857-4600 NORFOLK COMMERCE PARK
(Address and telephone number of NORFOLK, VIRGINIA 23513
registrant's principal executive offices) (804) 857-4600
(Name, address and telephone number
of agent for service)
</TABLE>
-------------------
COPIES TO:
<TABLE>
<S> <C> <C>
RICHARD D. TRUESDELL, JR. WILLIAM A. OLD, JR. PATRICK J. RONDEAU
DAVIS POLK & WARDWELL HOFHEIMER, NUSBAUM, MCPHAUL & BRENT B. SILER
450 LEXINGTON AVENUE SAMUELS, HALE AND DORR
NEW YORK, NEW YORK 10017 A PROFESSIONAL CORPORATION 60 STATE STREET
(212) 450-4000 1700 DOMINION TOWER BOSTON, MASSACHUSETTS 02109
NORFOLK, VIRGINIA (617) 526-6000
(804) 622-3366
</TABLE>
-------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
-------------------
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box: / /
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box: / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering: / / _______
If this Form is a post-effective amendment filed pursuant to Rule 426(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering: / / _______
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box: / /
-------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
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- --------------------------------------------------------------------------------
<PAGE>
SUBJECT TO COMPLETION, DATED JUNE 7, 1996
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 May 22, 1996, the last reported sale price of the Common Stock
on the Nasdaq National Market was $38.00 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.
<TABLE>
<CAPTION>
Price Underwriting Proceeds to Proceeds to Selling
to Public Discount (1) Company (2) Shareholders
<S> <C> <C> <C> <C>
Per Share.................. $ $ $ $
Total (3).................. $ $ $ $
</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 $ , the Underwriting Discount will
total $ and the Proceeds to Selling Shareholders will total
$ . 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 ,
1996.
-------------------
MONTGOMERY SECURITIES
GOLDMAN, SACHS & CO.
SMITH BARNEY INC.
, 1996
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any State in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such State.
<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.
2
<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 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. See "Business--Legal Proceedings" for a description
of certain litigation arising out of the 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>
BALANCE SHEET DATA:
Working capital............................................................................... $30,221 $30,221
Total assets.................................................................................. 173,570 173,570
Total debt.................................................................................... 86,208 59,633
Shareholders' equity.......................................................................... 41,258 67,833
</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 (assuming a public offering price of $38.00 per share,
the last sale price of the Common Stock on May 22, 1996) 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.
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
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. Two of the products on
the May 15 list, stainless steel cookingware and 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 $1.6 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.
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
11
<PAGE>
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 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."
12
<PAGE>
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 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."
13
<PAGE>
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 $26.6
million, assuming a public offering price of $38.00 per share, the last sale
price of the Common Stock on May 22, 1996, and after deducting the estimated
underwriting discount and 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
<CAPTION>
1996
- ----------------------------------------------------------------------------
<S> <C> <C>
First quarter............................................................... 30 7/8 16 3/8
Second quarter (through May 22, 1996)....................................... 40 1/2 29
</TABLE>
On May 22, 1996, the last reported sale price for the Company's Common Stock
on the Nasdaq National Market was $38.00 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,
assuming a public offering price of $38.00 per share, the last sale price of the
Common Stock on May 22, 1996, and after deducting the estimated underwriting
discount and 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
-----------------------
<S> <C> <C>
ACTUAL AS ADJUSTED
-------- -----------
<CAPTION>
(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 $ 40,055
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 40,840
-------- -----------
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 30,711
Retained earnings................................................... 36,864 36,864
-------- -----------
Total shareholders' equity.......................................... 41,258 67,833
-------- -----------
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>
<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>
SELECTED OPERATING DATA:
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(10)................ 2.7% 24.1% 6.9% 9.1% 7.3% 4.1 % 6.8% 11.8% 7.5%
Average net sales per
store(11)................... $ 414 $ 520 $ 555 $ 606 $ 649 $ 691 $ 117 $ 135 $ 141
Average net sales per square
foot(11):
Mall....................... $ 175 $ 214 $ 224 $ 241 $ 246 $ 241 $ 43 $ 49 $ 49
Strip center(9)............ $ 185 $ 201 $ 188 $ 197 $ 209 $ 200 $ 38 $ 43 $ 41
All stores................. $ 177 $ 210 $ 206 $ 214 $ 221 $ 210 $ 40 $ 45 $ 43
<CAPTION>
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.
(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) 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
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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.
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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.
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
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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.
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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.
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<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.
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
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<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
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.
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 indictment of members of a Chinese weapons - smuggling operation with
suspected ties to the Chinese Government; the
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<PAGE>
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. Two of the products on
the May 15 list, stainless steel cookingware and 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 $1.6 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.
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.
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
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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.
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.
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<PAGE>
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 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
34
<PAGE>
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 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:
<TABLE>
<CAPTION>
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
---------- ------- ---------- ---------- -------
<CAPTION>
<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...........................................
Goldman, Sachs & Co. ...........................................
Smith Barney Inc................................................
---------
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 $ per share; and the
Underwriters may allow, and such dealers may reallow, a concession of not more
than $ 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.
42
<PAGE>
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 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
43
<PAGE>
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 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.
44
<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 in this 3,250,000 SHARES
Prospectus, and, if given or made,
such information or representation
must not be relied upon as having
been authorized by the Company, any [LOGO]
Selling Shareholder or by the
Underwriters. Neither the delivery DOLLAR TREE STORES, INC.
of this Prospectus nor any sale
made hereunder shall under any
circumstances create any COMMON STOCK
implication that there has been no
change in the 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.
--------------------- --------------
TABLE OF CONTENTS PROSPECTUS
--------------------- --------------
Page
------
Prospectus Summary................ 3 MONTGOMERY SECURITIES
Risk Factors...................... 8
Use of Proceeds...................15 GOLDMAN, SACHS & CO.
Price Range of Common Stock.......15
Dividend Policy...................15 SMITH BARNEY INC.
Capitalization....................16
Selected Financial Data...........17
Management's Discussion and
Analysis of Financial
Condition and Results , 1996
of Operations...................19
Business..........................27
Management........................37
Principal and Selling
Shareholders....................40
Underwriting......................42
Legal Matters.....................43
Experts...........................43
Additional Information............43
Incorporation of Certain
Documents by Reference..........44
- ----------------------------------- -----------------------------------
- ----------------------------------- -----------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCES AND DISTRIBUTION
The following table sets forth the fees and expenses payable in connection
with the issuance and distribution of the securities other than underwriting
discount. All of such expenses except the Securities and Exchange Commission
registration fee and NASD filing fee are estimated:
<TABLE>
<S> <C>
Securities and Exchange Commission registration fee............. $ 45,753
Blue Sky fees and expenses...................................... 12,000
Printing expense................................................ 120,000
Accounting fees and expenses.................................... 50,000
Legal fees and expenses......................................... 210,000
NASD filing fee................................................. 13,769
Miscellaneous................................................... 48,478
--------
Total..................................................... $500,000
--------
--------
</TABLE>
The Company has agreed to pay the foregoing expenses.
- ------------
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
To the full extent permitted by the Virginia Stock Corporation Act, the
Articles of Incorporation require the Company to indemnify its officers and
directors. Article V of the Articles of Incorporation provides that any director
or officer who was or is a party to any proceeding shall be indemnified by the
Company against any liability incurred by him in connection with such proceeding
unless he engaged in willful misconduct or a knowing violation of the criminal
law. The Company is also required to promptly pay for or reimburse all
reasonable expenses, including attorneys' fees, incurred by a director or
officer in advance of final disposition of the proceeding if the director or
officer furnishes the Company with a written statement of his good faith belief
that he has met the standard of conduct that is a prerequisite to his
entitlement to indemnification and agrees to repay the advance if it is
ultimately determined that he did not meet such standard of conduct. The Company
is authorized to purchase and maintain insurance to insure the Company against
its indemnification obligation, or insure any person who is or was a director,
officer, employee, or agent of the Company against any liability asserted
against or incurred by him in any such capacity or arising from his status as
such, whether or not the Company has the power to indemnify him against such
liability. The Company has directors and officers liability insurance. The
Company is also empowered, by a majority vote of a quorum of disinterested
directors, to enter into a contract to indemnify any director or officer against
liability, whether occurring before or after the execution of the contract.
Except to the extent contrary to the Articles of Incorporation or Virginia Stock
Corporation Act, the Company is not prevented or restricted from making or
providing for indemnities in addition to those provided in the Articles of
Incorporation.
Section 11 of the Underwriting Agreement provides for indemnification by the
Underwriters of directors, officers and controlling persons of the Company
against certain liabilities, including liabilities under the Securities Act of
1933, as amended (the "Securities Act"), under certain circumstances.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULE
(a) Exhibits
II-1
<PAGE>
<TABLE>
<C> <S>
1.1 --Form of Underwriting Agreement
* 2.1 --Agreement for Purchase and Sale of Stock dated September 24, 1993 among J.
Douglas Perry, Patricia W. Perry, Macon F. Brock, Jr., Joan P. Brock, H. Ray
Compton and The SK Equity Fund, L.P.
** 2.2 --Amended and Restated Stockholders Agreement effective March 13, 1995 among the
Company, John F. Megrue, Thomas A. Saunders, III, and certain shareholders
* 2.3 --Securities Purchase Agreement dated September 30, 1993 among the Company, J.
Douglas Perry, Patricia W. Perry, Macon F. Brock, Jr., Joan P. Brock, H. Ray
Compton, John F. Megrue, Thomas A. Saunders, III, Allan W. Karp, Christopher K.
Reilly, and The SK Equity Fund, L.P., and the First Amendment thereto
*** 2.4 --Agreement for Purchase and Sale of Stock dated as of January 16, 1996 between
the Company and Michael N. Alper and Pamela J. Alper
** 4.1 --Amended and Restated Stockholders Agreement (See Exhibit 2.2)
* 4.2 --Third Restated Articles of Incorporation of the Company
* 4.3 --Second Restated Bylaws of the Company
* 4.4 --Form of Specimen Certificate representing the Company's Common Stock, $.01 par
value per share
**** 5.1 --Opinion of Hofheimer, Nusbaum, McPhaul & Samuels, a Professional Corporation,
regarding the legality of the securities being registered
****23.1 --Consent of Hofheimer, Nusbaum, McPhaul & Samuels, a Professional Corporation
(included in Exhibit 5.1 hereto)
23.2 --Consent of KPMG Peat Marwick LLP, independent accountants
23.3 --Consent of Arthur Andersen, LLP independent accountants
****24.1 --Power of Attorney (included in Part II of the Registration Statement)
</TABLE>
- ------------
* Incorporated by reference to the Company's Registration Statement on Form
S-1, No. 33-88502.
** Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the quarter ended March 31, 1995.
*** Incorporated by reference to the Company's Current Report on Form 8-K dated
February 14, 1996.
**** Previously filed in the Company's Registration Statement on Form
S-3, No. 333-04391.
ITEM 17. UNDERTAKINGS
The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act each filing of the
registrant's annual report pursuant to Section 13(a) or 15(d) of the Securities
Exchange Act of 1934 (and, where applicable, each filing of an employee benefit
plan's annual report pursuant to Section 15(d) of the Securities Exchange Act of
1934) that is incorporated by reference in this registration statement shall be
deemed to be a new registration statement relating to the securities offered
herein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
registrant pursuant to the provisions described in Item 15 above or otherwise,
the registrant has been advised that in the opinion of the Commission such
indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of expenses
incurred or paid by a director, officer or controlling person of the registrant
in the
II-2
<PAGE>
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
The undersigned registrant hereby undertakes:
For purposes of determining any liability under the Securities Act, the
information omitted from the form of prospectus filed as part of a registration
statement in reliance upon Rule 430A and contained in the form of prospectus
filed by the registrant pursuant to Rule 424(b)(1) or(4) or 497(h) under the
Securities Act shall be deemed to be part of this registration statement as of
the time it was declared effective.
For the purpose of determining any liability under the Securities Act, each
post-effective amendment that contains a form of prospectus shall be deemed to
be a new registration statement relating to the securities offered herein, and
the offering of such securities at that time shall be deemed to be the initial
bona fide offering thereof.
II-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-3 and has duly caused this Amendment No. 1 to
the Registration Statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of Norfolk, Commonwealth of Virginia,
on the 7th day of June, 1996.
DOLLAR TREE STORES, INC.
By /s/ MACON F. BROCK, JR.
...................................
Macon F. Brock, Jr.
President and Chief Executive
Officer
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS
REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE
CAPACITIES AND ON THE DATES INDICATED.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- -----
<S> <C> <C>
/s/ J. DOUGLAS PERRY Chairman of the Board; Director June 7, 1996
......................................
J. Douglas Perry
/s/ MACON F. BROCK, JR. President and Chief Executive June 7, 1996
...................................... Officer; Director (principal
Macon F. Brock, Jr. executive officer)
/s/ H. RAY COMPTON Executive Vice President and June 7, 1996
...................................... Chief Financial Officer;
H. Ray Compton Director (principal financial
and accounting officer)
* Vice Chairman; Director June 7, 1996
......................................
John F. Megrue
* Director June 7, 1996
......................................
Allan W. Karp
* Director June 7, 1996
......................................
Thomas A. Saunders, III
...................................... Director
Alan L. Wurtzel
...................................... Director
Frank Doczi
</TABLE>
*By /s/ MACON F. BROCK, JR.
-----------------------
Macon F. Brock, Jr.
Attorney-in-Fact
II-4
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION PAGE NO.
- --------- ------------------------------------------------------------------------ --------
<C> <S> <C>
1.1 --Form of Underwriting Agreement
* 2.1 --Agreement for Purchase and Sale of Stock dated September 24, 1993
among J. Douglas Perry, Patricia W. Perry, Macon F. Brock, Jr., Joan
P. Brock, H. Ray Compton and The SK Equity Fund, L.P.
** 2.2 --Amended and Restated Stockholders Agreement effective March 13, 1995
among the Company, John F. Megrue, Thomas A. Saunders, III, and
certain shareholders
* 2.3 --Securities Purchase Agreement dated September 30, 1993 among the
Company, J. Douglas Perry, Patricia W. Perry, Macon F. Brock, Jr.,
Joan P. Brock, H. Ray Compton, John F. Megrue, Thomas A. Saunders,
III, Allan W. Karp, Christopher K. Reilly, and The SK Equity Fund,
L.P., and the First Amendment thereto
*** 2.4 --Agreement for Purchase and Sale of Stock dated as of January 16, 1996
between the Company and Michael N. Alper and Pamela J. Alper
** 4.1 --Amended and Restated Stockholders Agreement (See Exhibit 2.2)
* 4.2 --Third Restated Articles of Incorporation of the Company
* 4.3 --Second Restated Bylaws of the Company
* 4.4 --Form of Specimen Certificate representing the Company's Common Stock,
$.01 par value per share
**** 5.1 --Opinion of Hofheimer, Nusbaum, McPhaul & Samuels, a Professional
Corporation, regarding the legality of the securities being registered
****23.1 --Consent of Hofheimer, Nusbaum, McPhaul & Samuels, a Professional
Corporation (included in Exhibit 5.1 hereto)
23.2 --Consent of KPMG Peat Marwick LLP, independent accountants
23.3 --Consent of Arthur Andersen, LLP independent accountants
****24.1 --Power of Attorney (included in Part II of the Registration Statement)
</TABLE>
- ------------
* Incorporated by reference to the Company's Registration Statement on Form
S-1, No. 33-88502.
** Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the quarter ended March 31, 1995.
*** Incorporated by reference to the Company's Current Report on Form 8-K dated
February 14, 1996.
**** Previously filed in the Company's Registration Statement on Form S-3, No.
333-04391.
Exhibit 1.1
3,250,000 Shares
DOLLAR TREE STORES, INC.
Common Stock
UNDERWRITING AGREEMENT
----------------------
June __, 1996
MONTGOMERY SECURITIES
GOLDMAN, SACHS & CO.
SMITH BARNEY INC.
As Representatives of the several Underwriters
c/o MONTGOMERY SECURITIES
600 Montgomery Street
San Francisco, California 94111
Dear Sirs:
SECTION 1. Introductory. Dollar Tree Stores, Inc., a Virginia
------------
corporation (the "Company") proposes to issue and sell 750,000 shares of
its authorized but unissued Common Stock (the "Common Stock") and certain
shareholders of the Company named in Schedule B annexed hereto (the
"Selling Shareholders") propose to transfer and sell an aggregate of
2,500,000 shares of the outstanding Common Stock of the Company to the
several underwriters named in Schedule A annexed hereto (the
"Underwriters"), for whom you are acting as Representatives. Said
aggregate of 3,250,000 shares are herein called the "Firm Common Shares."
In addition, the Selling Shareholders propose to grant to the Underwriters
an option to purchase up to 487,500 additional shares of Common Stock (the
"Optional Common Shares"), as provided in Section 5 hereof. The Firm
Common Shares and, to the extent such option is exercised, the Optional
Common Shares are hereinafter collectively referred to as the "Common
Shares."
You have advised the Company and the Selling Shareholders that the
Underwriters propose to make a public offering of their respective portions
of the Common Shares on the effective date of the registration statement
hereinafter referred to, or as soon thereafter as in your judgment is
advisable.
The Company and each of the Selling Shareholders hereby confirm their
respective agreements with respect to the purchase of the Common Shares by
the Underwriters as follows:
-1-
<PAGE>
SECTION 2. Representations and Warranties of the Company. The
---------------------------------------------
Company hereby represents and warrants to the several Underwriters that:
(a) A registration statement on Form S-3 (File No. 333-_____) with
respect to the Common Shares has been prepared by the Company in conformity
with the requirements of the Securities Act of 1933, as amended (the
"Act"), and the rules and regulations (the "Rules and Regulations") of the
Securities and Exchange Commission (the "Commission") thereunder, and has
been filed with the Commission. The Company has prepared and has filed or
proposes to file prior to the effective date of such registration statement
an amendment or amendments to such registration statement, which amendment
or amendments have been or will be similarly prepared. There have been
delivered to you two signed copies of such registration statement and
amendments, together with two copies of each exhibit filed therewith.
Conformed copies of such registration statement and amendments (but without
exhibits) and of the related preliminary prospectus have been delivered to
you in such reasonable quantities as you have requested for each of the
Underwriters. The Company will next file with the Commission one of the
following: (i) prior to effectiveness of such registration statement, a
further amendment thereto, including the form of final prospectus, or
(ii) a final prospectus in accordance with Rules 430A and 424(b) of the
Rules and Regulations. As filed, such amendment and form of final
prospectus, or such final prospectus, shall include all Rule 430A
Information and, except to the extent that you shall agree in writing to a
modification, shall be in all substantive respects in the form furnished to
you prior to the date and time that this Agreement was executed and
delivered by the parties hereto, or, to the extent not completed at such
date and time, shall contain only such specific additional information and
other changes (beyond that contained in the latest Preliminary Prospectus)
as the Company shall have previously advised you in writing would be
included or made therein.
The term "Registration Statement" as used in this Agreement shall mean
such registration statement at the time such registration statement becomes
effective and, in the event any post-effective amendment thereto becomes
effective prior to the First Closing Date (as hereinafter defined), shall
also mean such registration statement as so amended; provided, however,
that such term shall also include (i) all Rule 430A Information deemed to
be included in such registration statement at the time such registration
statement becomes effective as provided by Rule 430A of the Rules and
Regulations and (ii) any registration statement filed pursuant to
Rule 462(b) of the Rules and Regulations relating to the Common Shares.
The term "Preliminary Prospectus"
-2-
<PAGE>
shall mean any preliminary prospectus referred to in the preceding
paragraph and any preliminary prospectus included in the Registration
Statement at the time it becomes effective that omits Rule 430A
Information. The term "Prospectus" as used in this Agreement shall mean
the prospectus relating to the Common Shares in the form in which it is
first filed with the Commission pursuant to Rule 424(b) of the Rules and
Regulations or, if no filing pursuant to Rule 424(b) of the Rules and
Regulations is required, shall mean the form of final prospectus included
in the Registration Statement at the time such registration statement
becomes effective. The term "Rule 430A Information" means information with
respect to the Common Shares and the offering thereof permitted to be
omitted from the Registration Statement when it becomes effective pursuant
to Rule 430A of the Rules and Regulations. Any reference herein to any
Preliminary Prospectus or the Prospectus shall be deemed to refer to and
include the documents incorporated by reference therein pursuant to Form
S-3 under the Act, as of the date of such Preliminary Prospectus or
Prospectus, as the case may be.
(b) The Commission has not issued any order preventing or suspending
the use of any Preliminary Prospectus, and each Preliminary Prospectus has
conformed in all material respects to the requirements of the Act and the
Rules and Regulations and, as of its date, has not included any untrue
statement of a material fact or omitted to state a material fact necessary
to make the statements therein, in the light of the circumstances under
which they were made, not misleading; and at the time the Registration
Statement becomes effective, and at all times subsequent thereto up to and
including the First Closing Date hereinafter mentioned, the Registration
Statement will contain all material statements and information required to
be included therein by the Act and the Rules and Regulations and will in
all material respects conform to the requirements of the Act and the Rules
and Regulations, and the Registration Statement will not include any untrue
statement of a material fact or omit to state a material fact required to
be stated therein or necessary to make the statements therein not
misleading; and the Prospectus, as amended and supplemented, as applicable,
at the time the Registration Statement becomes effective, and at all times
subsequent thereto up to and including the First Closing Date hereinafter
mentioned, will not include any untrue statement of a material fact or omit
to state a material fact necessary in order to make the statements, in the
light of the circumstances under which they were made, not misleading;
provided, however, no representation or warranty contained in this
subsection 2(b) shall be applicable to information contained in or omitted
from any Preliminary Prospectus, the Registration Statement, the Prospectus
or any such amendment or supplement in reliance upon and in conformity with
written information furnished
-3-
<PAGE>
to the Company by or on behalf of any Underwriter, directly or through the
Representatives, specifically for use in the preparation thereof. The
documents incorporated by reference in the Prospectus, when they were filed
with the Commission, conformed in all material respects to the requirements
of the Securities Exchange Act of 1934, as amended (the "Exchange Act"),
and the rules and regulations of the Commission thereunder, and none of
such documents contained an untrue statement of a material fact or omitted
to state a material fact required to be stated therein or necessary to make
the statements therein not misleading.
(c) The Company does not own or control, directly or indirectly, any
corporation, association or other entity other than Dollar Bills, Inc., an
Illinois corporation formerly known as Terrific Promotions, Inc. ("TPI"),
and the other subsidiaries listed in Exhibit 21 to the Company's Annual
Report on Form 10-K for the year ended December 31, 1995. The Company and
each of its subsidiaries have been duly incorporated and are validly
existing as corporations in good standing under the laws of their
respective jurisdictions of incorporation, with full power and authority
(corporate and other) to own and lease their properties and conduct their
respective businesses as described in the Prospectus, except where the
failure to be in good standing would not have a material adverse effect on
the Company and its subsidiaries, taken as a whole; the Company owns of
record and beneficially all of the outstanding capital stock of its
subsidiaries free and clear of all claims, liens, charges and encumbrances
(except as disclosed in the Prospectus); the Company and each of its
subsidiaries are in possession of and operating in compliance with all
authorizations, licenses, permits, consents, certificates and orders
material to the conduct of their respective businesses, all of which are
valid and in full force and effect; the Company and each of its
subsidiaries are duly qualified to do business and in good standing as
foreign corporations in each jurisdiction in which the ownership or leasing
of properties or the conduct of their respective businesses requires such
qualification, except for jurisdictions in which the failure to so qualify
would not have a material adverse effect upon the Company and its
subsidiaries, taken as a whole; and no proceeding has been instituted in
any such jurisdiction, revoking, limiting or curtailing, or seeking to
revoke, limit or curtail, such power and authority or qualification.
(d) The Company has authorized and outstanding capital stock as set
forth under the heading "Capitalization" in the Prospectus; the issued and
outstanding shares of Common Stock have been duly authorized and validly
issued, are fully paid and nonassessable,
-4-
<PAGE>
have been issued in compliance with all federal and state securities laws,
were not issued in violation of or subject to any preemptive rights or
other rights to subscribe for or purchase securities, and conform to the
description thereof contained in the Prospectus. All issued and
outstanding shares of capital stock of each subsidiary of the Company have
been duly authorized and validly issued and are fully paid and
nonassessable. Except as disclosed in or contemplated by the Prospectus
and the financial statements of the Company, and the related notes thereto,
included in the Prospectus, neither the Company nor any subsidiary has
outstanding any options to purchase, or any preemptive rights or other
rights to subscribe for or to purchase, any securities or obligations
convertible into, or any contracts or commitments to issue or sell, shares
of its capital stock or any such options, rights, convertible securities or
obligations, except that the Company has preemptive rights to shares of its
subsidiaries' stock. The description of the Company's stock option, stock
bonus and other stock plans or arrangements, and the options or other
rights granted and exercised thereunder, set forth in the Prospectus
accurately and fairly presents the information required to be shown with
respect to such plans, arrangements, options and rights.
(e) The Common Shares to be sold by the Company have been duly
authorized and, when issued, delivered and paid for in the manner set forth
in this Agreement, will be duly authorized, validly issued, fully paid and
nonassessable, and will conform to the description thereof contained in the
Prospectus. No preemptive rights or other rights to subscribe for or
purchase exist with respect to the issuance and sale of the Common Shares
by the Company pursuant to this Agreement. No shareholder of the Company
has any right which has not been waived to require the Company to register
the sale of any shares owned by such shareholder under the Act in the
public offering contemplated by this Agreement. No further approval or
authority of the shareholders or the Board of Directors of the Company will
be required for the transfer and sale of the Common Shares to be sold by
the Selling Shareholders or the issuance and sale of the Common shares to
be sold by the Company as contemplated herein.
(f) The Company has full legal right, power and authority to enter
into this Agreement and perform the transactions contemplated hereby. This
Agreement has been duly authorized, executed and delivered by the Company
and constitutes a valid and binding obligation of the Company in accordance
with its terms, except as rights to indemnity and contribution hereunder
may be limited by applicable law. Except as disclosed in the Prospectus,
the making and performance of this Agreement by the Company and the
consummation by the Company of the transactions herein
-5-
<PAGE>
contemplated will not violate any provisions of the certificate of
incorporation or bylaws, or other organizational documents, of the Company
or any of its subsidiaries, and will not conflict with, result in the
breach or violation of, or constitute, either by itself or upon notice or
the passage of time or both, a default under any agreement, mortgage, deed
of trust, lease, franchise, license, indenture, permit or other instrument
to which the Company or any of its subsidiaries is a party or by which the
Company or any of its subsidiaries or any of their respective properties,
except for any such conflicts, breaches or defaults which individually or
in the aggregate would not be material to the Company and its subsidiaries,
taken as a whole may be bound or affected, any statute or any
authorization, judgment, decree, order, rule or regulation of any court or
any regulatory body, administrative agency or other governmental body
applicable to the Company or any of its subsidiaries or any of their
respective properties, except for any such conflicts, breaches or defaults
which individually or in the aggregate would not be material to the Company
and its subsidiaries, taken as a whole. No consent, approval,
authorization or other order of any court, regulatory body, administrative
agency or other governmental body is required for the execution and
delivery of this Agreement or the consummation of the transactions
contemplated by this Agreement by the Company, except such consents,
approvals, authorizations or orders (i) as have been obtained under the
Act, (ii) as may be required under state securities or Blue Sky laws or
foreign securities laws in connection with the purchase and distribution of
the Shares by the Underwriters, (iii) as may be required by the National
Association of Securities Dealers, Inc. (the "NASD") and (iv) the absence
of which individually and in the aggregate are not material to the Company
and its subsidiaries, taken as a whole, or to the Underwriters.
(g) KPMG Peat Marwick and Arthur Andersen LLP, who have expressed
their opinion with respect to the financial statements and schedules of the
Company or TPI filed with the Commission as a part of the Registration
Statement and/or included or incorporated by reference in the Prospectus
and in the Registration Statement, are independent accountants as required
by the Act and the Rules and Regulations.
(h) The financial statements and schedules of the Company and TPI,
and the related notes thereto, included in the Registration Statement and
the Prospectus and/or incorporated by reference therein present fairly the
financial position of the Company and TPI as of the respective dates of
such financial statements and schedules, and the results of operations and
cash flows of the Company and TPI for the respective periods covered
thereby. Such statements, schedules and related notes have been
-6-
<PAGE>
prepared in accordance with generally accepted accounting principles
applied on a consistent basis as certified by KPMG Peat Marwick and Arthur
Andersen LLP, as the case may be. No other financial statements or
schedules are required to be included in the Registration Statement or in
the documents incorporated by reference therein. The selected financial
data set forth in the Prospectus under the captions "Capitalization" and
"Selected Financial Data" fairly present the information set forth therein
on the basis stated in the Registration Statement. The pro forma financial
statements and the related notes thereto included in the Registration
Statement and the Prospectus and/or incorporated by reference therein
present fairly the information shown therein, have been prepared in
accordance with the Rules and Regulations and have been properly compiled
on the bases described therein, and the assumptions used in the preparation
thereof are reasonable and the adjustments used therein are appropriate to
give effect to the transactions and circumstances referred to therein.
(i) Except as disclosed in the Prospectus, or as to violations,
defaults and breaches which individually or in the aggregate would not be
material to the Company and its subsidiaries, taken as a whole, neither the
Company nor any of its subsidiaries is in violation or default of any
provision of its Articles of Incorporation or Bylaws, or is in breach of or
default with respect to any provision of any agreement, judgment, decree,
order, mortgage, deed of trust, lease, franchise, license, indenture,
permit or other instrument to which it is a party or by which it or any of
its properties are bound; and, except as disclosed in the Prospectus, there
does not exist any state of facts which constitutes an event of default on
the part of the Company or any such subsidiary as defined in such documents
or which, with notice or lapse of time or both, would constitute such an
event of default.
(j) There are no contracts or other documents required to be
described in the Registration Statement or to be filed as exhibits to the
Registration Statement or to any documents incorporated by reference
therein by the Act, by the Exchange Act or by the rules and regulations
thereunder which have not been described or filed as required. Except as
disclosed in the Prospectus, the contracts so described in the Prospectus
are in full force and effect on the date hereof; and neither the Company
nor any of its subsidiaries, nor to the best of the Company's knowledge,
any other party is in breach of or default under any of such contracts.
(k) Except as disclosed in the Prospectus, there are no legal or
governmental actions, suits or proceedings pending or, to the best of the
Company's knowledge, threatened to which the Company or any of its
subsidiaries is or may be a party or of
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<PAGE>
which property owned or leased by the Company or any of its subsidiaries is
or may be the subject, or related to environmental or discrimination
matters, which actions, suits or proceedings might, individually or in the
aggregate, prevent or materially adversely affect the transactions
contemplated by this Agreement or result in a material adverse change in
the condition (financial or otherwise), properties, business, results of
operations or prospects of the Company and its subsidiaries; and, except as
disclosed in the Prospectus, no labor disturbance by the employees of the
Company or any of its subsidiaries exists or is imminent which might be
expected to materially adversely affect such condition, properties,
business, results of operations or prospects. Neither the Company nor any
of its subsidiaries is a party or subject to the provisions of any material
injunction, judgment, decree or order of any court, regulatory body,
administrative agency or other governmental body.
(l) The Company or the applicable subsidiary has good and marketable
title to all the properties and assets reflected as owned in the financial
statements hereinabove described (or elsewhere in the Prospectus), subject
to no lien, mortgage, pledge, charge or encumbrance of any kind except
(i) those, if any, reflected in such financial statements (or elsewhere in
the Prospectus), or (ii) those which are not material in amount and do not
adversely affect the use made and proposed to be made of such property by
the Company and its subsidiaries. The Company or the applicable subsidiary
holds its leased properties under valid and binding leases, with such
exceptions as are not significant in relation to the business of the
Company. Except as disclosed in the Prospectus, the Company owns or leases
all such properties as are necessary to its operations as now conducted.
(m) Since the respective dates as of which information is given in
the Registration Statement and Prospectus, and except as described in or
specifically contemplated by the Prospectus: (i) the Company and its
subsidiaries have not incurred any material liabilities or obligations,
indirect, direct or contingent, or entered into any material verbal or
written agreement or other transaction, other than in the ordinary course
of business; (ii) the Company and its subsidiaries have not sustained any
material loss or interference with their respective businesses or
properties from fire, flood, windstorm, accident or other calamity, whether
or not covered by insurance; (iii) the Company has not paid or declared any
dividends or other distributions with respect to its capital stock and the
Company and its subsidiaries are not in default in the payment of principal
or interest on any outstanding debt obligations; (iv) there has not been
any change in the capital stock or indebtedness material to the Company and
its subsidiaries (other
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<PAGE>
than in the ordinary course of business); and (v) there has not been any
material adverse change in the condition (financial or otherwise),
business, properties, results of operations or prospects of the Company and
its subsidiaries.
(n) Except as disclosed in or specifically contemplated by the
Prospectus, the Company and its subsidiaries have sufficient trademarks,
trade names, copyrights, licenses, approvals and governmental
authorizations to conduct their businesses as now conducted, with such
exceptions as would not have a material adverse effect on the condition
(financial or otherwise), business, properties, results of operations or
prospects of the Company and its subsidiaries, taken as a whole; the
expiration of any trademarks (other than "Dollar Tree"), trade names,
copyrights, licenses, approvals or governmental authorizations would not
have a material adverse effect on the condition (financial or otherwise),
business, properties, results of operations or prospects of the Company or
its subsidiaries, taken as a whole; and the Company has no knowledge of any
material infringement by it or its subsidiaries of trademark, trade name
rights, copyrights, licenses, trade secret or other similar rights of
others, and there is no claim being made against the Company or its
subsidiaries regarding trademark, trade name, copyright, license, trade
secret or other infringement which could have a material adverse effect on
the condition (financial or otherwise), business, properties, results of
operations or prospects of the Company and its subsidiaries, taken as a
whole.
(o) The Company has not been advised, and has no reason to believe,
that either it or any of its subsidiaries is not conducting business in
compliance with all applicable laws, rules and regulations of the
jurisdictions in which it is conducting business, including, without
limitation, all applicable local, state and federal environmental laws and
regulations, except where failure to be so in compliance would not
materially adversely affect the condition (financial or otherwise),
business, properties, results of operations or prospects of the Company and
its subsidiaries, taken as a whole.
(p) The Company and its subsidiaries have filed all necessary
federal, state and foreign income and franchise tax returns and have paid
all taxes shown as due thereon; and the Company has no knowledge of any tax
deficiency which has been or might be asserted or threatened against the
Company or its subsidiaries which could materially and adversely affect the
condition (financial or otherwise) business, properties, results of
operations or prospects of the Company and its subsidiaries, taken as a
whole.
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<PAGE>
(q) The Company is not an "investment company" within the meaning of
the Investment Company Act of 1940, as amended.
(r) The Company has not distributed and will not distribute prior to
the First Closing Date any offering material in connection with the
offering and sale of the Common Shares other than the Prospectus, the
Registration Statement and other materials permitted by the Act.
(s) Each of the Company and its subsidiaries maintains insurance of
the types and in the amounts generally deemed adequate for its business,
including, but not limited to, insurance covering real and personal
property (except for personal property in the stores, which is uninsured)
owned or leased by the Company and its subsidiaries against theft, damage,
destruction and acts of vandalism, all of which insurance is in full force
and effect.
(t) Neither the Company nor any of its subsidiaries has at any time
during the last five years (i) made any unlawful contribution to any
candidate for foreign office, or failed to disclose fully any contribution
in violation of law, or (ii) made any payment to any federal or state
governmental officer or official, or other person charged with similar
public or quasi-public duties, other than payments required or permitted by
the laws or the United States or any jurisdiction thereof.
(u) The Company has not taken and will not take, directly or
indirectly, any action designed to or that might be reasonably expected to
cause or result in stabilization or manipulation of the price of the Common
Stock to facilitate the sale or resale of the Common Shares.
(v) The Common Stock of the Company has been registered under Section
12(g) of the Exchange Act, and all of the outstanding shares of Common
Stock (including the Common Shares to be sold by the Selling Shareholders
hereunder) and the Common Shares to be issued by the Company hereunder have
been listed on the Nasdaq National Market.
(w) The Company has filed with the Commission, on a timely basis, all
documents required to have been filed by the Company pursuant to the
Exchange Act or the rules and regulations promulgated thereunder. Each
such document, when filed with the Commission, conformed in all material
respects to the requirements of the Exchange Act and the rules and
regulations promulgated thereunder, and did not contain an untrue statement
of a material fact or omit to state a material fact required to be stated
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<PAGE>
therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading.
SECTION 3. Representations, Warranties and Covenants of the Selling
--------------------------------------------------------
Shareholders.
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(a) Each of the Selling Shareholders severally represents and
warrants to, and agrees with, the several Underwriters that:
(i) Such Selling Shareholder has, and on the First Closing
Date and the Second Closing Date (if applicable) hereinafter
mentioned will have, good and valid title to the Common Shares
proposed to be sold by such Selling Shareholder hereunder on such
Closing Date and full right, power and authority to enter into
this Agreement and to sell, assign, transfer and deliver such
Common Shares hereunder, free and clear of all voting trust
arrangements, liens, encumbrances, equities, security interests,
restrictions and claims whatsoever; and upon delivery of and
payment for such Common Shares hereunder, assuming the
Underwriters acquire such Common Shares without notice of any
adverse claim, the Underwriters will acquire good and valid title
thereto, free and clear of all liens, encumbrances, equities,
claims, restrictions, security interests, voting trusts or other
defects of title whatsoever.
(ii) This Agreement has been duly authorized, executed
and delivered by such Selling Shareholder and constitutes the
valid and binding obligation and agreement of such Selling
Shareholder, enforceable against such Selling Shareholder in
accordance with its terms.
(iii) Such Selling Shareholder has executed and
delivered a Power of Attorney and caused to be executed and
delivered on his behalf a Custody Agreement (hereinafter
collectively referred to with respect to each Selling Shareholder
as the "Shareholders Agreement") and in connection herewith such
Selling Shareholder further represents, warrants and agrees that
such Selling Shareholder has deposited in custody, under the
Shareholders Agreement, with the agent named therein (the
"Agent") as custodian, certificates in negotiable form for the
Common Shares to be sold hereunder by such Selling Shareholder,
for the purpose of further delivery pursuant to this Agreement.
Such Selling Shareholder agrees that the Common Shares to be sold
by such Selling
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<PAGE>
Shareholder on deposit with the Agent are subject to the
interests of the Company and the Underwriters, that the
arrangements made for such custody are to that extent irrevocable
(except as otherwise provided in this Agreement or the
Shareholders Agreement), and that the obligations of such Selling
Shareholder hereunder shall not be terminated, except as provided
in this Agreement or in the Shareholders Agreement, by any act of
such Selling Shareholder, by operation of law, by the death or
incapacity of such Selling Shareholder or by the occurrence of
any other event. If the Selling Shareholder should die or become
incapacitated, or if any other event should occur, before the
delivery of the Common Shares hereunder, the documents evidencing
Common Shares then on deposit with the Agent shall be delivered
by the Agent in accordance with the terms and conditions of this
Agreement as if such death, incapacity or other event had not
occurred, regardless of whether or not the Agent shall have
received notice thereof. This Agreement and the Shareholders
Agreement have been duly executed and delivered by or on behalf
of such Selling Shareholder and the form of such Shareholders
Agreement has been delivered to you.
(iv) The performance of this Agreement and the
Shareholders Agreement by such Selling Shareholder and the
consummation of the transactions contemplated hereby and thereby
will not result in a breach or violation by such Selling
Shareholder of any of the terms or provisions of, or constitute a
default by such Selling Shareholder under, (A) any indenture,
mortgage, deed of trust, trust (constructive or other), loan
agreement, lease, franchise, license or other agreement, trust
instrument or instrument to which such Selling Shareholder is a
party or by which such Selling Shareholder or any of its
properties is bound, (B) if such Selling Shareholder is not a
natural person, the partnership agreement, trust instrument or
any other organizational documents of such Selling Shareholder,
or (C) any statute, judgment, decree, order, rule or regulation
of any court or governmental agency or body applicable to such
Selling Shareholder or any of its properties. No consent,
approval, authorization or other order of any court, regulatory
body, administrative agency or other governmental body is
required for the execution and delivery by such Selling
Shareholder of this Agreement and the Shareholders Agreement or
the consummation by such Selling Shareholder of the transactions
contemplated by this
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<PAGE>
Agreement and the Shareholders Agreement, except such consents,
approvals, authorizations or orders (i) as have been obtained
under the Act, (ii) as may be required under state securities or
Blue Sky laws or foreign securities laws in connection with the
purchase and distribution of the Shares by the Underwriters,
(iii) as may be required by the NASD and (iv) the absence of
which individually and in the aggregate are not material to the
Company and its subsidiaries, taken as a whole, or to the
Underwriters.
(v) Such Selling Shareholder has not taken and will not
take, directly or indirectly, any action designed to or which has
constituted or which might reasonably be expected to cause or
result in stabilization or manipulation of the price of any
security of the Company to facilitate the sale or resale of the
Common Shares.
(vi) Each Preliminary Prospectus and the Prospectus, insofar
as it has related to such Selling Shareholder, has not included
any untrue statement of a material fact or omitted to state a
material fact necessary to make the statements therein not
misleading in light of the circumstances under which they were
made; and neither the Registration Statement nor the Prospectus,
nor any amendment or supplement thereto, as it relates to such
Selling Shareholder, will include any untrue statement of a
material fact or omit to state any material fact required to be
stated therein or necessary to make the statements therein not
misleading.
(vii) Such Selling Shareholder is not aware that the
Registration Statement or Prospectus includes any untrue
statement of a material fact or omits to state any material fact
required to be stated therein or necessary to make the statements
therein not misleading. It is agreed the aggregate liability of
a Selling Shareholder to the Underwriters (A) for a breach of
this representation and (B) under Section 11(a) hereof shall not
exceed the amount of the proceeds (net of the applicable
underwriting discount) received by such Selling Shareholder with
respect to the Shares purchased by the Underwriters from such
Selling Shareholder hereunder; and that no Selling Shareholder
shall be liable to an Underwriter for a breach of this
representation until the Underwriter shall have first made a
demand for payment on the Company with respect to any damages
alleged to result from the breach of this
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<PAGE>
representation and the Company shall have either rejected such
demand or failed to make such requested payment within 60 days
after receipt thereof.
(b) Each of the Selling Shareholders agree with the Company and
the Underwriters not to offer to sell, sell or contract to sell or
otherwise dispose of any shares of Common Stock or securities
convertible into or exchangeable for any shares of Common Stock, for a
period of 90 days after the date of the Prospectus, without the prior
written consent of Montgomery Securities, as a Representative of the
Underwriters, which consent may be withheld at the sole discretion of
Montgomery Securities.
SECTION 4. Representations and Warranties of the Underwriters. The
--------------------------------------------------
Representatives, on behalf of the several Underwriters, represent and
warrant to the Company and the Selling Shareholders that the information
set forth (i) in the first sentence of the last paragraph of text on the
cover page of the Prospectus, (ii) in the stabilization and passive market
making language on the inside front cover of the Prospectus and (iii) in
the second paragraph under "Underwriting" in the Prospectus concerning the
terms of the offering by the Underwriters and in the first sentence of the
sixth paragraph of text under "Underwriting" concerning passive market
making by the Underwriters, was furnished to the Company by and on behalf
of the Underwriters for use in connection with the preparation of the
Registration Statement and the Prospectus and is correct in all material
respects. The Representatives represent and warrant that they have been
authorized by each of the other Underwriters as the Representatives to
enter into this Agreement on its behalf and to act for it in the manner
herein provided.
SECTION 5. Purchase, Sale and Delivery of Common Shares. On the
--------------------------------------------
basis of the representations, warranties and agreements herein contained,
but subject to the terms and conditions herein set forth, (i) the Company
agrees to issue and sell to the Underwriters 750,000 of the Firm Common
Shares, and (ii) the Selling Shareholders agree, severally and not jointly,
to sell to the Underwriters in the respective amounts set forth in
Schedule B hereto, an aggregate of 2,500,000 Firm Common Shares. The
Underwriters agree, severally and not jointly, to purchase from the Company
and the Selling Shareholders, respectively, the number of Firm Common
Shares described below. The purchase price per share to be paid by the
several Underwriters to the Company and the Selling Shareholders shall be
$_____ per share.
The obligation of each Underwriter to the Company shall be to purchase
from the Company that number of full shares which (as
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<PAGE>
nearly as practicable, as determined by you) bears to 750,000 the same
proportion as the number of shares set forth opposite the name of such
Underwriter in Schedule A hereto bears to the total number of Firm Common
Shares. The obligation of each Underwriter to the Selling Shareholders
shall be to purchase from the Selling Shareholders that number of full
shares which (as nearly as practicable, as determined by you) bears to
2,500,000 the same proportion as the number of shares set forth opposite
the name of such Underwriter in Schedule A hereto bears to the total number
of Firm Common Shares.
Delivery of certificates for the Firm Common Shares to be purchased by
the Underwriters and payment therefor shall be made at the offices of
Montgomery Securities, 600 Montgomery Street, San Francisco, California (or
such other place as may be agreed upon by the Company and the
Representatives) at such time and date, not later than the third (or, if
the Firm Common Shares are priced, as contemplated by Rule 15c6-1(c) under
the Exchange Act, after 4:30 p.m. Washington D.C. time, the fourth) full
business day following the first date that any of the Common Shares are
released by you for sale to the public, as you shall designate by at least
48 hours prior notice to the Company (or at such other time and date, not
later than one week after such third or fourth, as the case may be, full
business day as may be agreed upon by the Company and the Representatives)
(the "First Closing Date"); provided, however, that if the Prospectus is at
any time prior to the First Closing Date recirculated to the public, the
First Closing Date shall occur upon the later of the third or fourth, as
the case may be, full business day following the first date that any of the
Common Shares are released by you for sale to the public or the date that
is 48 hours after the date that the Prospectus has been so recirculated.
Delivery of certificates for the Firm Common Shares shall be made by
or on behalf of the Company and the Selling Shareholders to you, for the
respective accounts of the Underwriters, against payment by you, for the
accounts of the several Underwriters, of the purchase price therefor by
wire transfer or by a certified or official bank check payable in same day
funds to the order of the Company and the Agent, in proportion to the
number of Common Shares to be sold by the Company and the Selling
Shareholders, respectively. The certificates for the Firm Common Shares
shall be registered in such names and denominations as you shall have
requested at least two full business days prior to the First Closing Date,
and shall be made available for checking and packaging on the business day
preceding the First Closing Date at a location in New York, New York, as
may be designated by you. Time shall be of the essence, and delivery at
the time and place
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<PAGE>
specified in this Agreement is a further condition to the obligations of
the Underwriters.
In addition, on the basis of the representations, warranties and
agreements herein contained, but subject to the terms and conditions herein
set forth, the Selling Shareholders hereby grant an option to the several
Underwriters to purchase, severally and not jointly, in the respective
amounts set forth in Schedule B hereto, up to an aggregate of 487,500
Optional Common Shares at the purchase price per share to be paid for the
Firm Common Shares, for use solely in covering any over-allotments made by
you for the account of the Underwriters in the sale and distribution of the
Firm Common Shares. The option granted hereunder may be exercised at any
time (but not more than once) within 30 days after the first date that any
of the Common Shares are released by you for sale to the public, upon
notice by you to the Company and the Agent setting forth the aggregate
number of Optional Common Shares as to which the Underwriters are
exercising the option, the names and denominations in which the
certificates for such shares are to be registered and the time and place at
which such certificates will be delivered. Such time of delivery (which
may not be earlier than the First Closing Date), being herein referred to
as the "Second Closing Date," shall be determined by you, but if at any
time other than the First Closing Date shall not be earlier than three nor
later than five full business days after delivery of such notice of
exercise. The number of Optional Common Shares to be purchased by each
Underwriter shall be determined by multiplying the number of Optional
Common Shares to be sold by the Selling Shareholders pursuant to such
notice of exercise by a fraction, the numerator of which is the number of
Firm Common Shares to be purchased by such Underwriter as set forth
opposite its name in Schedule A and the denominator of which is 3,250,000
(subject to such adjustments to eliminate any fractional share purchases as
you and the Selling Shareholders may mutually agree). If the option
granted hereunder is exercised in part, the number of Optional Common
Shares to be sold by each Selling Shareholder shall be determined by
multiplying the number of Optional Common Shares set forth opposite his or
its name in Schedule B by a fraction, the numerator of which is the number
of Optional Common Shares to be sold by the Selling Shareholders as
specified in such notice of exercise and the denominator of which is
487,500 (subject to such adjustments to eliminate any fractional share
purchases as you and the Selling Shareholders may mutually agree).
Certificates for the Optional Common Shares will be made available for
checking and packaging on the business day preceding the Second Closing
Date at a location in New York, New York, as may be designated by you. The
manner of payment for and delivery of the Optional Common Shares shall be
the same as for the Firm Common Shares purchased from the Company and the
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<PAGE>
Selling Shareholders as specified in the two preceding paragraphs. At any
time before lapse of the option, you may cancel such option by giving
written notice of such cancellation to the Company and the Agent.
You have advised the Company and the Selling Shareholders that each
Underwriter has authorized you to accept delivery of its Common Shares, to
make payment and to receipt therefor. You, individually and not as the
Representatives of the Underwriters, may (but shall not be obligated to)
make payment for any Common Shares to be purchased by any Underwriter whose
funds shall not have been received by you by the First Closing Date or the
Second Closing Date, as the case may be, for the account of such
Underwriter, but any such payment shall not relieve such Underwriter from
any of its obligations under this Agreement.
Subject to the terms and conditions hereof, the Underwriters propose
to make a public offering of their respective portions of the Common Shares
as soon after the effective date of the Registration Statement as in the
judgment of the Representatives is advisable and at the public offering
price set forth on the cover page of and on the terms set forth in the
Prospectus.
SECTION 6. Covenants of the Company. The Company covenants and
------------------------
agrees that:
(a) The Company will use its best efforts to cause the
Registration Statement and any amendment thereof, if not effective at
the time and date that this Agreement is executed and delivered by the
parties hereto, to become effective. If the Registration Statement
has become or becomes effective pursuant to Rule 430A of the Rules and
Regulations, or the filing of the Prospectus is otherwise required
under Rule 424(b) of the Rules and Regulations, the Company will file
the Prospectus, properly completed, pursuant to the applicable
paragraph of Rule 424(b) of the Rules and Regulations within the time
period prescribed and will provide evidence satisfactory to you of
such timely filing. The Company will promptly advise you in writing
(i) of the receipt of any comments of the Commission, (ii) of any
request of the Commission for amendment of or supplement to the
Registration Statement (either before or after it becomes effective),
any Preliminary Prospectus or the Prospectus or for additional
information, (iii) when the Registration Statement shall have become
effective and (iv) of the issuance by the Commission of any stop order
suspending the effectiveness of the Registration Statement or of the
institution of any proceedings for that purpose. If the Commission
shall enter any such stop order at any time,
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<PAGE>
the Company will use its best efforts to obtain the lifting of such
order at the earliest possible moment. The Company will not file any
amendment or supplement to the Registration Statement (either before
or after it becomes effective), any Preliminary Prospectus or the
Prospectus of which you have not been furnished with a copy a
reasonable time prior to such filing or to which you reasonably object
or which is not in compliance in all material respects with the Act
and the Rules and Regulations.
(b) The Company will fully and completely comply with the
provisions of Rule 430A of the Rules and Regulations with respect to
information omitted from the Registration Statement in reliance upon
such Rule.
(c) If during such period after the first date of the public
offering of the Shares as, in the opinion of your counsel, the
Prospectus is required by law to be delivered in connection with sales
by an Underwriter or dealer, any event occurs, as a result of which
the Prospectus, including any amendments or supplements, would include
an untrue statement of a material fact, or omit to state any material
fact required to be stated therein or necessary to make the statements
therein not misleading, or if it is necessary at any time to amend the
Prospectus, including any amendments or supplements, to comply with
the Act or the Rules and Regulations, the Company will promptly advise
you thereof and will promptly prepare and file with the Commission, at
its own expense, an amendment or supplement which will correct such
statement or omission or an amendment or supplement which will effect
such compliance and will use its best efforts to cause the same to
become effective (to the extent effectiveness is required under the
Act or the Rules and Regulations) as soon as possible; and, in case
any Underwriter is required to deliver a prospectus after such period,
the Company upon request, but at the expense of such Underwriter, will
promptly prepare such amendment or amendments to the Registration
Statement and such Prospectus or Prospectuses as may be necessary to
permit compliance with the requirements of Section 10(a)(3) of the
Act.
(d) As soon as practicable, but not later than 45 days after the
end of the first quarter ending after one year following the
"effective date of the Registration Statement" (as defined in Rule
158(c) of the Rules and Regulations), the Company will make generally
available to its security holders an earnings statement (which need
not be audited) covering a period of 12 consecutive months beginning
after the effective
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date of the Registration Statement which will satisfy the provisions
of the last paragraph of Section 11(a) of the Act.
(e) During such period as a prospectus is required by law to be
delivered in connection with sales by an Underwriter or dealer, the
Company, at its expense, but only for the nine-month period referred
to in Section 10(a)(3) of the Act, will furnish to you or mail to your
order copies of the Registration Statement, the Prospectus, the
Preliminary Prospectus and all amendments and supplements to any such
documents in each case as soon as available and in such quantities as
you may reasonably request, for the purposes contemplated by the Act.
(f) The Company shall cooperate with you and your counsel in
order to qualify or register the Common Shares for sale under (or
obtain exemptions from the application of) the Blue Sky laws of such
jurisdictions as you designate and Canadian securities laws, will
comply with such laws and will continue such qualifications,
registrations and exemptions in effect so long as reasonably required
for the distribution of the Common Shares. The Company shall not be
required to qualify as a foreign corporation or to file a general
consent to service of process in any such jurisdiction where it is not
presently qualified or where it would be subject to taxation as a
foreign corporation. The Company will advise you promptly of the
suspension of the qualification or registration of (or any such
exemption relating to) the Common Shares for offering, sale or trading
in any jurisdiction or any initiation or threat of any proceeding for
any such purpose, and in the event of the issuance of any order
suspending such qualification, registration or exemption, the Company,
with your cooperation, will use its best efforts to obtain the
withdrawal thereof.
(g) During the period of five years hereafter, the Company will
furnish to the Representatives: (i) as soon as practicable after the
end of each fiscal year, copies of the Annual Report of the Company
containing the balance sheet of the Company as of the close of such
fiscal year and statements of income, shareholders' equity and cash
flows for the year then ended and the opinion thereon of the Company's
independent public accountants; (ii) as soon as practicable after the
filing thereof, copies of each proxy statement, Annual Report on Form
10-K, Quarterly Report on Form 10-Q, Report on Form 8-K or other
report filed by the Company with the Commission, the NASD or any
securities exchange; and (iii) as soon as available, copies of any
report or
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<PAGE>
communication of the Company mailed generally to holders of its Common
Stock.
(h) During the period of 90 days after the first date that any
of the Common Shares are released by you for sale to the public,
without the prior written consent of Montgomery Securities, as a
Representative of the Underwriters, or each of the Representatives
(which consent may be withheld at the sole discretion of any of the
Representatives), the Company will not issue, offer, sell, grant
options to purchase or otherwise dispose of any of the Company's
equity securities or any other securities convertible into or
exchangeable with its Common Stock or other equity security; provided,
however, that the Company may (i) issue shares of Common Stock upon
the exercise of stock options and warrants outstanding on the date
hereof, as described in the Prospectus (it being agreed that the
Company shall not accelerate the exercisability of any such options or
grant any waiver or acceleration under the terms of the Stock
Restriction Agreement to be entered into by the optionee upon the
exercise of such options), and (ii) grant options and issue shares of
Common Stock in accordance with its Amended and Restated Stock Option
Plan, Stock Incentive Plan or Employee Stock Purchase Plan, as
described in the Prospectus or in materials incorporated by reference
in the Prospectus.
(i) The Company will apply the net proceeds of the sale of the
Common Shares sold by it substantially in accordance with its
statements under the caption "Use of Proceeds" in the Prospectus.
(j) The Company will use its best efforts to qualify or register
its Common Stock for sale in non-issuer transactions under (or obtain
exemptions from the application of) the Blue Sky laws of the State of
California (and thereby permit market making transactions and
secondary trading in the Company's Common Stock in California), will
comply with such Blue Sky laws and will continue such qualifications,
registrations and exemptions in effect for a period of five years
after the date hereof.
You, on behalf of the Underwriters, may, in your sole discretion,
waive in writing the performance by the Company of any one or more of the
foregoing covenants or extend the time for their performance.
SECTION 7. Payment of Expenses. Whether or not the transactions
-------------------
contemplated hereunder are consummated or this Agreement becomes effective
or is terminated, the Company and the
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Selling Shareholders agree to pay, in such proportions as they may agree
upon among themselves, all costs, fees and expenses incurred in connection
with the performance of the obligations of the Company or the Selling
Shareholders hereunder, including without limiting the generality of the
foregoing, (i) all expenses incident to the issuance and delivery of the
Common Shares (including all printing, copying, and engraving costs),
(ii) all fees and expenses of the registrar and transfer agent of the
Common Stock, (iii) all necessary issue, transfer and other stamp taxes in
connection with the issuance, transfer and sale of the Common Shares to the
Underwriters, (iv) all fees and expenses of the Company's counsel and the
Company's independent accountants, (v) all costs and expenses incurred in
connection with the preparation, printing, copying, filing, shipping and
distribution of the Registration Statement, each Preliminary Prospectus and
the Prospectus (including all exhibits and financial statements) and all
amendments and supplements provided for herein, this Agreement, the
Agreement Among Underwriters, the Selected Dealers Agreement, the
Underwriters' Questionnaire and the Blue Sky memorandum, (vi) all filing
fees, attorneys' fees and expenses incurred by the Company or the
Underwriters in connection with qualifying or registering (or obtaining
exemptions from the qualification or registration of) all or any part of
the Common Shares for offer and sale under the Blue Sky laws and Canadian
securities laws (provided that such fees and expenses shall not exceed
$12,000), (vii) the filing fee of the NASD, and (viii) all other fees,
costs and expenses referred to in Item 14 of the Registration Statement.
Except as provided in this Section 7, Section 9 and Section 11 hereof, the
Underwriters shall pay all of their own expenses, including the fees and
disbursements of their counsel (excluding those relating to qualification,
registration or exemption under the Blue Sky laws and Canadian securities
laws and the Blue Sky memorandum referred to above). This Section 7 shall
not affect any agreements or understandings relating to the payment of
expenses between the Company and the Selling Shareholders.
SECTION 8. Conditions of the Obligations of the Underwriters. The
-------------------------------------------------
obligations of the several Underwriters to purchase and pay for the Firm
Common Shares on the First Closing Date and the Optional Common Shares on
the Second Closing Date shall be subject to the accuracy of the
representations and warranties on the part of the Company and the Selling
Shareholders herein set forth as of the date hereof and as of the First
Closing Date or the Second Closing Date, as the case may be, to the
accuracy of the statements of Company officers and the Selling Shareholders
made pursuant to the provisions hereof, to the performance by the Company
and the Selling Shareholders of their
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respective obligations hereunder, and to the following additional
conditions:
(a) The Registration Statement shall have become effective not
later than 5:00 P.M. (or, in the case of a registration statement
filed pursuant to Rule 462(b) of the Rules and Regulations relating to
the Common Shares, not later than 10:00 P.M.), Washington, D.C. Time,
on the date of this Agreement, or at such later time as shall have
been consented to by you; if the filing of the Prospectus, or any
supplement thereto, is required pursuant to Rule 424(b) of the Rules
and Regulations, the Prospectus shall have been filed in the manner
and within the time period required by Rule 424(b) of the Rules and
Regulations; and prior to such Closing Date, no stop order suspending
the effectiveness of the Registration Statement shall have been issued
and no proceedings for that purpose shall have been instituted or
shall be pending or, to the knowledge of the Company or you, shall be
contemplated by the Commission; and any request of the Commission for
inclusion of additional information in the Registration Statement, or
otherwise, shall have been complied with to your satisfaction.
(b) You shall be satisfied that since the respective dates as of
which information is given in the Registration Statement and
Prospectus, (i) there shall not have been any change in the capital
stock of the Company (other than as contemplated by Section 6(h)
above) or any of its subsidiaries or any material change in the
indebtedness (other than in the ordinary course of business) of the
Company or any of its subsidiaries, (ii) except as set forth in or
contemplated by the Registration Statement or the Prospectus, no
material verbal or written agreement or other transaction shall have
been entered into by the Company or any of its subsidiaries, which is
not in the ordinary course of business, (iii) no loss or damage
(whether or not insured) to the property of the Company or any of its
subsidiaries shall have been sustained which materially and adversely
affects the condition (financial or otherwise), business, results of
operations or prospects of the Company and its subsidiaries, taken as
a whole, (iv) no legal or governmental action, suit or proceeding
affecting the Company or any of its subsidiaries which is material to
the Company and its subsidiaries, taken as a whole, or which affects
or may affect the transactions contemplated by this Agreement shall
have been instituted or threatened and (v) there shall not have been
any material change in the condition (financial or otherwise),
business, management, results of operations or prospects of the
Company and its subsidiaries, taken as a
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<PAGE>
whole, which makes it impractical or inadvisable in the judgment of
the Representatives to proceed with the public offering or purchase
the Common Shares as contemplated hereby.
(c) There shall have been furnished to you, as Representatives
of the Underwriters, on each Closing Date, in form and substance
satisfactory to you, except as otherwise expressly provided below:
(i) An opinion of Hofheimer, Nusbaum, McPhaul & Samuels,
P.C., counsel for the Company and the Selling Shareholders
identified as the "Virginia Selling Shareholders" on Schedule B
hereto (the "Virginia Selling Shareholders"), addressed to the
Underwriters and dated the First Closing Date, or the Second
Closing Date, as the case may be, to the effect that:
(1) Each of the Company and its subsidiaries has been
duly incorporated and is validly existing as a corporation
in good standing under the laws of its jurisdiction of
incorporation, is duly qualified to do business as a foreign
corporation and is in good standing in each state in which
it owns or leases real property, and has full corporate
power and authority to own its properties and conduct its
business as described in the Registration Statement;
(2) The authorized, issued and outstanding capital
stock of the Company is as set forth under the caption
"Capitalization" in the Prospectus; all necessary and proper
corporate proceedings have been taken in order to validly
authorize such authorized capital stock; all outstanding
shares of capital stock (including the Firm Common Shares
and any Optional Common Shares) have been duly and validly
issued, are fully paid and nonassessable, were not issued in
violation of or subject to any preemptive rights or, to the
best of such counsel's knowledge, other rights to subscribe
for or purchase any securities and conform to the
description thereof contained in the Prospectus; all
outstanding shares of capital stock of the Company have been
issued in compliance with federal and state securities laws;
(3) All of the issued and outstanding shares of the
Company's subsidiaries have been duly and
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<PAGE>
validly authorized and issued, are fully paid and
nonassessable and are owned beneficially by the Company free
and clear of all liens, encumbrances, equities, claims,
security interests, voting trusts or other defects of title
whatsoever;
(4) The certificates evidencing the Common Shares to
be delivered hereunder are in due and proper form under
Virginia law, and when duly countersigned by the Company's
transfer agent and registrar, and delivered to you or upon
your order against payment of the agreed consideration
therefor in accordance with the provisions of this
Agreement, the Common Shares represented thereby will be
duly authorized and validly issued, fully paid and
nonassessable, will not have been issued in violation of or
subject to any preemptive rights or, to the best of such
counsel's knowledge, other rights to subscribe for or
purchase securities and will conform in all respects to the
description thereof contained in the Prospectus;
(5) Except as disclosed in or specifically
contemplated by the Prospectus, to the best of such
counsel's knowledge, there are no outstanding options,
warrants or other rights calling for the issuance of, and no
commitments, plans or arrangements to issue, any shares of
capital stock of the Company or any security convertible
into or exchangeable for capital stock of the Company;
6(a) To the best of such counsel's knowledge, there are
no franchises, leases, contracts, agreements or documents of
a character required to be disclosed in the Registration
Statement or Prospectus or to be filed as exhibits to the
Registration Statement or to any document incorporated by
reference therein which are not disclosed or filed, as
required; and
(b) To the best of such counsel's knowledge, there are
no legal or governmental actions, suits or proceedings
pending or threatened against the Company which are required
to be described in the Prospectus which are not described as
required.
(7) The Company has full right, power and authority to
enter into this Agreement and to sell and deliver the Common
Shares to be sold by it to
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<PAGE>
the several Underwriters hereunder; this Agreement has been
duly and validly authorized by all necessary corporate
action by the Company, has been duly and validly executed
and delivered by and on behalf of the Company, and is a
valid and binding agreement of the Company in accordance
with its terms, except as enforceability may be limited by
general equitable principles, bankruptcy, insolvency,
reorganization, moratorium or other laws affecting
creditors' rights generally and except as to those
provisions relating to indemnity or contribution for
liabilities, as to which no opinion need be expressed; and
no approval, authorization, order, consent, registration,
filing, qualification, license or permit of or with any
court, regulatory, administrative or other governmental body
is required for the execution and delivery of this Agreement
by the Company or the consummation of the transactions
contemplated by this Agreement; provided, however, no
opinion need be expressed as to the Act, the rules of the
NASD or applicable state securities or Blue Sky laws or
foreign securities laws in connection with the purchase and
distribution of the Common Shares;
(8) Except as disclosed in the Prospectus, the
execution and performance of this Agreement and the
consummation of the transactions herein contemplated will
not conflict with, result in the breach of, or constitute,
either by themselves or upon notice or the passage of time
or both, a default under, any agreement, mortgage, deed of
trust, lease, franchise, license, indenture, permit or other
instrument known to such counsel to which the Company or any
of its subsidiaries is a party or by which the Company or
any of its subsidiaries or any of its or their property may
be bound or affected which is material to the Company and
its subsidiaries, taken as a whole, or violate any of the
provisions of the certificate of incorporation or bylaws, or
other organizational documents, of the Company or any of its
subsidiaries or, so far as is known to such counsel, violate
any statute, judgment, decree, order, rule or regulation of
any court or governmental body having jurisdiction over the
Company or any of its subsidiaries or any of its or their
property;
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<PAGE>
(9) Except as disclosed in the Prospectus, neither the
Company nor any subsidiary is in violation of its Articles
of Incorporation or Bylaws, or other organizational
documents, or to the best of such counsel's knowledge, in
breach of or default with respect to any provision of any
agreement, mortgage, deed of trust, lease, franchise,
license, indenture, permit or other instrument known to such
counsel to which the Company or any such subsidiary is a
party or by which it or any of its properties may be bound
or affected, except where such breach or default would not
materially adversely affect the Company and its
subsidiaries, taken as a whole; and, to the best of such
counsel's knowledge, the Company and its subsidiaries are in
compliance with all laws, rules, regulations, judgments,
decrees, orders and statutes of any court or jurisdiction to
which they are subject, except where noncompliance would not
materially adversely affect the Company and its
subsidiaries, taken as a whole;
(10) To the best of such counsel's knowledge, no
holders of securities of the Company have rights which have
not been waived to the registration of shares of Common
Stock or other securities, because of the filing of the
Registration Statement by the Company or the offering
contemplated hereby;
(11) No transfer taxes are required to be paid in
connection with the sale and delivery of the Common Shares
to the Underwriters hereunder.
(12) This Agreement and the Shareholders Agreement have
been duly authorized, executed and delivered by or on behalf
of each Virginia Selling Shareholder; the Agent has been
duly and validly authorized to act as the custodian of the
Common Shares to be sold by each Virginia Selling
Shareholder; and the performance of this Agreement and the
Shareholders Agreement and the consummation of the
transactions contemplated herein and therein by each
Virginia Selling Shareholder will not result in a breach or
violation of, or constitute a default under, (A) any
indenture, mortgage, deed of trust, trust (constructive or
other), loan agreement, lease, franchise, license or other
agreement or instrument known to such counsel to which such
Virginia Selling Shareholder is a party
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<PAGE>
or by which it or any of its properties may be bound, (B)
any organizational documents of any Virginia Selling
Shareholder that is not a natural person, or (C) any
statute, or, to the best of such counsel's knowledge, any
judgment, decree, order, rule or regulation of any court or
governmental body having jurisdiction over such Virginia
Selling Shareholder or any of its properties; and no
approval, authorization, order or consent of any court,
regulatory body, administrative agency or other governmental
body is required for the execution and delivery by each
Virginia Selling Shareholder of this Agreement or the
Shareholders Agreement or the consummation by each Virginia
Selling Shareholder of the transactions contemplated by this
Agreement or the Shareholders Agreement, provided, however,
no opinion need be expressed as to the Act, the rules of the
NASD or applicable state securities or Blue Sky laws or
foreign securities laws in connection with the purchase and
distribution of the Common Shares; provided that the
opinions expressed in this clause 8(c)(i)(12) with respect
to the due and valid authorization of the Agent to act as
the custodian of the Common Shares to be sold by each such
Virginia Selling Shareholder need not cover the provisions
contained in the second and third sentences of
Section 3(a)(iii) hereof, the [second full paragraph on page
5] of the Selling Shareholders Power of Attorney or the
[seventh paragraph] of the Selling Shareholders Custody
Agreement;
(13) Each Virginia Selling Shareholder that is not an
individual has trust power and authority to enter into this
Agreement and the Shareholders Agreement and to sell,
transfer and deliver the Common Shares to be sold on such
Closing Date by such Virginia Selling Shareholders;
immediately prior to each Closing Date, each Virginia
Selling Shareholder was the sole registered owner of the
Shares to be sold by such Virginia Selling Shareholder on
such Closing Date; upon issuance of new certificates in the
names of the Underwriters representing such Shares, assuming
the Underwriters purchased the Shares in good faith and
without notice of any adverse claim within the meaning of
the Uniform Commercial Code, the Underwriters will have
acquired all rights of such Virginia Selling
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<PAGE>
Shareholder in the Shares free of any adverse claim, any
lien in favor of the Company, and any restrictions on
transfer imposed by the Company;
(14) This Agreement and the Shareholders Agreement are
valid and binding agreements of each Virginia Selling
Shareholder in accordance with their terms, except (i) as
enforceability may be limited by general equitable
principles, bankruptcy, insolvency, reorganization,
moratorium or other laws affecting creditors' rights
generally, (ii) with respect to those provisions relating to
indemnities or contributions for liabilities under the Act,
as to which no opinion need be expressed, and (iii) with
respect to the provisions contained in the second and third
sentences of Section 3(a)(iii) hereof, the [second full
paragraph on page 5] of the Selling Shareholders Power of
Attorney or the [seventh paragraph] of the Selling
Shareholders Custody Agreement, as to which no opinion need
be expressed;
In rendering such opinion, such counsel may rely, as to matters of
fact, on certificates of officers of the Company, of the Virginia
Selling Shareholders and of governmental officials, in which cases
their opinion is to state that they are so doing and that the
Underwriters are justified in relying on such certificates and copies
of such certificates are to be attached to the opinion. Such
counsel's opinion may assume the capacity of all natural persons and
may assume the conformity of all copies or facsimiles to the originals
thereof. Moreover, such counsel's opinion shall be made with respect
to federal and Virginia law only. Such counsel shall also include in
such opinion (or provide separately to you) a statement to the effect
that nothing has come to such counsel's attention that would lead such
counsel to believe that at its effective date the Registration
Statement contained any untrue statement of a material fact or omitted
to state a material fact required to be stated therein or necessary to
make the statements therein not misleading or that the Prospectus, as
amended or supplemented, if applicable, at the applicable Closing Date
includes an untrue statement of material fact or omits to state a
material fact necessary in order to make the statements, in the light
of the circumstances under which they were made, not misleading. Such
counsel shall also permit
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<PAGE>
Hale and Dorr, as counsel to the Underwriters, to rely on such opinion
(insofar as it relates to matters of Virginia law) in rendering their
opinion pursuant to Section 8(c)(iii) hereof;
(ii) An opinion of Davis, Polk & Wardwell, special counsel
for the Company and for the Selling Shareholders identified as
the "New York Selling Shareholders" on Schedule B hereto (the
"New York Selling Shareholders"), addressed to the Underwriters
and dated the First Closing Date, or the Second Closing Date, as
the case may be, to the effect that:
(1)(a) The Registration Statement has become effective
under the Act, and, to the best of such counsel's knowledge,
no stop order suspending the effectiveness of the
Registration Statement or preventing the use of the
Prospectus has been issued and no proceedings for that
purpose have been instituted or are pending or contemplated
by the Commission; any required filing of the Prospectus and
any supplement thereto pursuant to Rule 424(b) of the Rules
and Regulations has been made in the manner and within the
time period required by such Rule 424(b);
(b) The Registration Statement, the Prospectus and
each amendment or supplement thereto, if any (except for the
financial statements and schedules included therein as to
which such counsel need express no opinion), comply as to
form in all material respects with the requirements of the
Act and the Rules and Regulations; and the documents
incorporated by reference in the Prospectus (except for the
financial statements and schedules included therein as to
which such counsel need express no opinion) comply as to
form in all material respects with the requirements of the
Exchange Act and the rules and regulations of the Commission
thereunder.
(2) This Agreement and the Shareholders Agreement have
been duly authorized, executed and delivered by or on behalf
of each New York Selling Shareholder; the Agent has been
duly and validly authorized to act as the custodian of the
Common Shares to be sold by each such New York Selling
Shareholder; and the performance of this Agreement and the
Shareholders Agreement by each New York
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Selling Shareholder will not result in a breach or violation
of, or constitute a default under, (A) any indenture,
mortgage, deed of trust, trust (constructive or other), loan
agreement, lease, franchise, license or other agreement or
instrument known to such counsel to which such New York
Selling Shareholder is a party or by which it or any of its
properties may be bound, (B) if such Selling Shareholder is
not a natural person, any organizational documents of such
New York Selling Shareholder, or (C) any statute, or, to the
knowledge of such counsel, any judgment, decree, order, rule
or regulation of any court or governmental body having
jurisdiction over such New York Selling Shareholder or any
of its properties; and no approval, authorization, order or
consent of any court, regulatory body, administrative agency
or other governmental body is required for the execution and
delivery by each New York Selling Shareholder of this
Agreement or the Shareholders Agreement or the consummation
by each New York Selling Shareholder of the transactions
contemplated by this Agreement or the Shareholders
Agreement, except such consents, approvals, authorizations
or orders (i) as have been obtained under the Act, (ii) as
may be required under state securities or Blue Sky laws or
foreign securities laws in connection with the purchase and
distribution of the Shares by the Underwriters and (iii) as
may be required by the NASD; provided that the opinions
expressed in this clause 8(c)(ii)(2) with respect to the due
and valid authorization of the Agent to act as the custodian
of the Common Shares to be sold by each such New York
Selling Shareholder need not cover the provisions contained
in the second and third sentences of Section 3(a)(iii)
hereof, the [second full paragraph on page 5] of the Selling
Shareholders Power of Attorney or the [seventh paragraph] of
the Selling Shareholders Custody Agreement;
(3) Each New York Selling Shareholder that is not an
individual has, as applicable, corporate, partnership or
trust power and authority to enter into this Agreement and
the Shareholders Agreement and to sell, transfer and deliver
the Common Shares to be sold on such Closing Date by such
New York Selling Shareholder; immediately prior to each
Closing Date, each New York Selling Shareholder was
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the sole registered owner of the Shares to be sold by such
New York Selling Shareholder on such Closing Date; upon
registration of the Shares in the names of the Underwriters
in the stock records of the Company, and the issuance of new
certificates registered in the names of the Underwriters
representing such Shares, assuming the Underwriters
purchased the Shares in good faith and without notice of any
adverse claim within the meaning of the Uniform Commercial
Code, the Underwriters will have acquired all rights of such
New York Selling Shareholder in the Shares free of any
adverse claim, any lien in favor of the Company, and any
restrictions on transfer imposed by the Company; and the
owner of the Shares, if other than such New York Selling
Shareholder, is precluded from asserting against the
Underwriters the ineffectiveness of any unauthorized
endorsement;
(4) This Agreement and the Shareholders Agreement are
valid and binding agreements of each New York Selling
Shareholder in accordance with their terms, except (i) as
enforceability may be limited by general equitable
principles, bankruptcy, insolvency, reorganization,
moratorium or other laws affecting creditors' rights
generally, (ii) with respect to those provisions relating to
indemnities or contributions for liabilities under the Act,
as to which no opinion need be expressed, and (iii) with
respect to the provisions contained in the second and third
sentences of Section 3(a)(iii) hereof, the [second full
paragraph on page 5] of the Selling Shareholders Power of
Attorney or the [seventh paragraph] of the Selling
Shareholders Custody Agreement, as to which no opinion need
be expressed; and
5(a) To the best of such counsel's knowledge, there are
no franchises, leases, contracts, agreements or documents of
a character required to be disclosed in the Registration
Statement or Prospectus or to be filed as exhibits to the
Registration Statement or to any document incorporated by
reference therein which are not disclosed or filed, as
required; and
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(b) To the best of such counsel's knowledge, there are
no legal or governmental actions, suits or proceedings
pending or threatened against the Company which are required
to be described in the Prospectus which are not described as
required.
In rendering such opinion, such counsel may rely, as to
matters of fact, on certificates of officers of the Company, of
the New York Selling Shareholders and of governmental officials,
in which cases their opinion is to state that they are so doing
and copies of such certificates are to be attached to the
opinion. Such counsel may also state that they have made no
independent factual investigation and have assumed the capacity
of all natural persons. Such counsel shall also include a
statement to the effect that nothing has come to such counsel's
attention that would lead such counsel to believe that at its
effective date the Registration Statement contained any untrue
statement of a material fact or omitted to state a material fact
required to be stated therein or necessary to make the statements
therein not misleading or that the Prospectus, as amended or
supplemented, if applicable, at the applicable Closing Date
includes an untrue statement of material fact or omits to state a
material fact necessary in order to make the statements, in the
light of the circumstances under which they were made, not
misleading. Such counsel shall also permit Hale and Dorr, as
counsel to the Underwriters, to rely on the opinions set forth in
clauses (2), (3) and (4) above (insofar as they relate to matters
of New York law) in rendering their opinion pursuant to Section
8(c)(iii) hereof;
(iii) Such opinion or opinions of Hale and Dorr, counsel
for the Underwriters, dated the First Closing Date or the Second
Closing Date, as the case may be, with respect to the
incorporation of the Company, the sufficiency of all corporate
proceedings and other legal matters relating to this Agreement,
the validity of the Common Shares, the Registration Statement and
the Prospectus and other related matters as you may reasonably
require, and the Company and the Selling Shareholders shall have
furnished to such counsel such documents and shall have exhibited
to them such papers and records as they may reasonably request
for the purpose of enabling them to pass upon such matters. In
connection with such opinions, such counsel may rely on
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representations or certificates of officers of the Company and
governmental officials.
(iv) A certificate of the Company executed by the Chairman
of the Board or President and the chief financial or accounting
officer of the Company, dated the First Closing Date or the
Second Closing Date, as the case may be, to the effect that:
(1) The representations and warranties of the Company
set forth in Section 2 of this Agreement are true and
correct as of the date of this Agreement and as of the First
Closing Date or the Second Closing Date, as the case may be,
and the Company has complied with all the agreements and
satisfied all the conditions on its part to be performed or
satisfied on or prior to such Closing Date;
(2) The Commission has not issued any order preventing
or suspending the use of the Prospectus or any Preliminary
Prospectus filed as a part of the Registration Statement or
any amendment thereto; no stop order suspending the
effectiveness of the Registration Statement has been issued;
and to the best of the knowledge of the respective signers,
no proceedings for that purpose have been instituted or are
pending or contemplated under the Act;
(3) Each of the respective signers of the certificate
has carefully examined the Registration Statement and the
Prospectus on behalf of the Company; the Registration
Statement and the Prospectus and any amendments or
supplements thereto contain all statements required to be
stated therein regarding the Company and its subsidiaries;
and neither the Registration Statement nor the Prospectus
nor any amendment or supplement thereto includes any untrue
statement of a material fact or omits to state any material
fact required to be stated therein or necessary to make the
statements therein not misleading;
(4) Since the initial date on which the Registration
Statement was filed, no agreement, written or oral,
transaction or event has occurred which should have been set
forth in an amendment to the Registration Statement or in a
supplement to or
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amendment of any prospectus which has not been disclosed in
such a supplement or amendment;
(5) Since the respective dates as of which information
is given in the Registration Statement and the Prospectus,
and except as disclosed in or contemplated by the
Prospectus, there has not been any material adverse change
or a development involving a material adverse change in the
condition (financial or otherwise), business, properties,
results of operations, management or prospects of the
Company and its subsidiaries, taken as a whole; and no legal
or governmental action, suit or proceeding is pending or
threatened against the Company or any of its subsidiaries
which is material to the Company and its subsidiaries, taken
as a whole, whether or not arising from transactions in the
ordinary course of business, or which may adversely affect
the transactions contemplated by this Agreement; since such
dates and except as so disclosed, neither the Company nor
any of its subsidiaries has entered into any verbal or
written agreement or other transaction that is material to
the Company and its subsidiaries, taken as a whole, which is
not in the ordinary course of business or incurred any
material liability or obligation, direct, contingent or
indirect, made any change in its capital stock, made any
material change in its short-term debt or funded debt or
repurchased or otherwise acquired any of the Company's
capital stock; and the Company has not declared or paid any
dividend, or made any other distribution, upon its
outstanding capital stock payable to shareholders of record
on a date prior to the First Closing Date or Second Closing
Date, as the case may be; and
(6) Since the respective dates as of which information
is given in the Registration Statement and the Prospectus
and except as disclosed in or contemplated by the
Prospectus, the Company and its subsidiaries have not
sustained a material loss or damage by strike, fire, flood,
windstorm, accident or other calamity (whether or not
insured).
(v) On the First Closing Date or the Second Closing Date,
as the case may be, a certificate, dated such Closing Date and
addressed to you, signed by or on behalf of each of the Selling
Shareholders to the effect
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that the representations and warranties of such Selling
Shareholder in this Agreement are true and correct, as if made at
and as of the First Closing Date or the Second Closing Date, as
the case may be, and such Selling Shareholder has complied with
all the agreements and satisfied all the conditions on his part
to be performed or satisfied prior to the First Closing Date or
the Second Closing Date, as the case may be.
(vi) On the date this Agreement is executed and also on the
First Closing Date and the Second Closing Date, letters addressed
to you, as Representatives of the Underwriters, from KPMG Peat
Marwick and Arthur Andersen LLP, independent accountants, the
first of each to be dated the date of this Agreement, the second
of each to be dated the First Closing Date and the third of each
(in the event of a Second Closing) to be dated the Second Closing
Date, in form and substance satisfactory to you.
All such opinions, certificates, letters and documents shall be in
compliance with the provisions hereof only if they are satisfactory to you
and to Hale and Dorr, counsel for the Underwriters. The Company shall
furnish you with such manually signed or conformed copies of such opinions,
certificates, letters and documents as you request. Any certificate signed
by any officer of the Company and delivered to the Representatives or to
counsel for the Underwriters shall be deemed to be a representation and
warranty by the Company to the Underwriters as to the statements made
therein.
If any condition to the Underwriters' obligations hereunder to be
satisfied prior to or at the First Closing Date is not so satisfied, this
Agreement at your election will terminate upon notification by you as
Representatives to the Company and the Selling Shareholders without
liability on the part of any Underwriter or the Company except for the
expenses to be paid or reimbursed by the Company and the Selling
Shareholders pursuant to Sections 7 and 9 hereof and except to the extent
provided in Section 11 hereof.
SECTION 9. Reimbursement of Underwriters' Expenses. Notwithstanding
---------------------------------------
any other provisions hereof, if the sale to the Underwriters of the Common
Shares at the First Closing is not consummated because of any refusal,
inability or failure on the part of the Company or any Selling Shareholder
to perform any agreement herein or to comply with any provision hereof, the
Company agrees to reimburse you and the other Underwriters upon demand for
all out-of-pocket expenses that shall have been
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reasonably incurred by you and them in connection with the proposed
purchase and the sale of the Common Shares, including but not limited to
fees and disbursements of counsel, printing expenses, travel expenses,
postage, telegraph charges and telephone charges relating directly to the
offering contemplated by the Prospectus. Any such termination shall be
without liability of any party to any other party except that the
provisions of this Section, Section 7 and Section 11 shall at all times be
effective and shall apply.
SECTION 10. Effectiveness of Registration Statement. You, the
---------------------------------------
Company and the Selling Shareholders will use your and its best efforts to
cause the Registration Statement to become effective, to prevent the
issuance of any stop order suspending the effectiveness of the Registration
Statement and, if such stop order be issued, to obtain as soon as possible
the lifting thereof.
SECTION 11. Indemnification. (a) The Company and each of the Selling
---------------
Shareholders, jointly and severally, agree to indemnify and hold harmless
each Underwriter and each person, if any, who controls any Underwriter
within the meaning of the Act against any losses, claims, damages,
liabilities or expenses, joint or several, to which such Underwriter or
such controlling person may become subject, under the Act, the Exchange
Act, or other federal or state statutory law or regulation, or at common
law or otherwise (including in settlement of any litigation, if such
settlement is effected with the written consent of the Company), insofar as
such losses, claims, damages, liabilities or expenses (or actions in
respect thereof as contemplated below) arise out of or are based upon any
untrue statement or alleged untrue statement of any material fact contained
in the Registration Statement, any Preliminary Prospectus, the Prospectus,
or any amendment or supplement thereto, or arise out of or are based upon
the omission or alleged omission to state in any of them a material fact
required to be stated therein or necessary to make the statements in any of
them not misleading; and will reimburse each Underwriter and each such
controlling person for any legal and other expenses as such expenses are
reasonably incurred by such Underwriter or such controlling person in
connection with investigating, defending, settling, compromising or paying
any such loss, claim, damage, liability, expense or action; provided, that
--------
neither the Company nor any Selling Shareholder shall be liable in any such
case to the extent that any such loss, claim, damage, liability or expense
arises out of or is based upon an untrue statement or alleged untrue
statement or omission or alleged omission made in the Registration
Statement, any Preliminary Prospectus, the Prospectus or any amendment or
supplement thereto (i) in reliance upon and in
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conformity with the information furnished to the Company pursuant to Section
4 hereof or (ii) in reliance upon and in conformity with information furnished
to the Company by a Selling Shareholder with respect to such Selling Shareholder
(except that the Selling Shareholder furnishing such information shall not
be so relieved of liability); provided further, that no Selling Shareholder
-------- -------
shall be liable under this Section 11(a) for an amount in excess of the
proceeds (net of the applicable underwriting discount) received by such
Selling Shareholder with respect to the Shares purchased by the
Underwriters from such Selling Shareholder hereunder; provided further that
-------- -------
no Selling Shareholder shall be required to provide indemnification
hereunder until the Underwriter or controlling person seeking
indemnification shall have first made a demand for payment on the Company
with respect to any such loss, claim, damage, liability or expense and the
Company shall have either rejected such demand or failed to make such
requested payment within one year after receipt thereof; and provided
--------
further that the foregoing indemnity agreement with respect to any
- -------
preliminary prospectus shall not inure to the benefit of any Underwriter
from whom the person asserting any such loss, claim, damage, liability or
expenses purchased Shares, or any person controlling such Underwriter, if a
copy of the Prospectus (as then amended or supplemented if the Company
shall have furnished any amendments or supplements thereto) was not sent or
given by or on behalf of such Underwriter to such person, if required by
law so to have been delivered, at or prior to the written confirmation of
the sale of the Shares to such person, and if the Prospectus (as so amended
or supplemented) would have cured the defect giving rise to such loss,
claim, damage, liability or expense. The Company and the Selling
Shareholders may agree, as among themselves and without limiting the rights
of the Underwriters under this Agreement, as to their respective amounts of
such liability for which they each shall be responsible. In addition to
their other obligations under this Section 11(a), the Company and the
Selling Shareholders agree that, as an interim measure during the pendency
of any claim, action, investigation, inquiry or other proceeding arising
out of or based upon any statement or omission, or any alleged statement or
omission, all as described in this Section 11(a), they will reimburse each
Underwriter on a quarterly basis for all reasonable legal or other expenses
incurred in connection with investigating or defending any such claim,
action, investigation, inquiry or other proceeding. To the extent that any
such interim reimbursement payment is so held to have been improper, each
Underwriter shall promptly return it to the Company or the Selling
Shareholders, as applicable, together with interest, compounded daily,
determined on the basis of the prime rate (or other commercial lending rate
for borrowers of the highest credit standing) announced from time to time
by Bank of America NT&SA, San Francisco, California (the "Prime Rate").
Any such interim
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reimbursement payments which are not made to an Underwriter within 30 days
of a request for reimbursement shall bear interest at the Prime Rate from
the date of such request. This indemnity agreement will be in addition to
any liability which the Company or the Selling Shareholders may otherwise
have.
(b) Each Underwriter will severally indemnify and hold harmless the
Company, each of its directors, each of its officers who signed the
Registration Statement, each Selling Shareholder and each person, if any,
who controls the Company or any Selling Shareholder within the meaning of
the Act, against any losses, claims, damages, liabilities or expenses to
which the Company, or any such director, officer or controlling person may
become subject, under the Act, the Exchange Act, or other federal or state
statutory law or regulation, or at common law or otherwise (including in
settlement of any litigation, if such settlement is effected with the
written consent of such Underwriter), insofar as such losses, claims,
damages, liabilities or expenses (or actions in respect thereof as
contemplated below) arise out of or are based upon any untrue or alleged
untrue statement of any material fact contained in the Registration
Statement, any Preliminary Prospectus, the Prospectus, or any amendment or
supplement thereto, or arise out of or are based upon the omission or
alleged omission to state therein a material fact required to be stated
therein or necessary to make the statements therein not misleading, in each
case to the extent, but only to the extent, that such untrue statement or
alleged untrue statement or omission or alleged omission was made in the
Registration Statement, any Preliminary Prospectus, the Prospectus, or any
amendment or supplement thereto, in reliance upon and in conformity with
the information furnished to the Company pursuant to Section 4 hereof; and
will reimburse the Company, or any such director, officer, Selling
Shareholder or controlling person for any legal and other expense
reasonably incurred by the Company, or any such director, officer, Selling
Shareholder or controlling person in connection with investigating,
defending, settling, compromising or paying any such loss, claim, damage,
liability, expense or action. In addition to its other obligations under
this Section 11(b), each Underwriter severally agrees that, as an interim
measure during the pendency of any claim, action, investigation, inquiry or
other proceeding arising out of or based upon any statement or omission, or
any alleged statement or omission, described in this Section 11(b) which
relates to information furnished to the Company pursuant to Section 4
hereof, it will reimburse the Company (and, to the extent applicable, each
officer, director, Selling Shareholder or controlling person) on a
quarterly basis for all reasonable legal or other expenses incurred in
connection with investigating or defending any such claim, action,
investigation, inquiry or other proceeding, notwithstanding the
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absence of a judicial determination as to the propriety and enforceability
of the Underwriters' obligation to reimburse the Company (and, to the
extent applicable, each officer, director, Selling Shareholder or
controlling person) for such expenses and the possibility that such
payments might later be held to have been improper by a court of competent
jurisdiction. To the extent that any such interim reimbursement payment is
so held to have been improper, the Company (and, to the extent applicable,
each officer, director, Selling Shareholder or controlling person) shall
promptly return it to the Underwriters together with interest, compounded
daily, determined on the basis of the Prime Rate. Any such interim
reimbursement payments which are not made to the Company within 30 days of
a request for reimbursement, shall bear interest at the Prime Rate from the
date of such request. This indemnity agreement will be in addition to any
liability which such Underwriter may otherwise have.
(c) Promptly after receipt by an indemnified party under this Section
of notice of the commencement of any action, such indemnified party will,
if a claim in respect thereof is to be made against an indemnifying party
under this Section, notify the indemnifying party in writing of the
commencement thereof; but the omission so to notify the indemnifying party
will not relieve it from any liability which it may have to any indemnified
party for contribution or otherwise than under the indemnity agreement
contained in this Section or to the extent it is not prejudiced as a
proximate result of such failure. In case any such action is brought
against any indemnified party and such indemnified party seeks or intends
to seek indemnity from an indemnifying party, the indemnifying party will
be entitled to participate in, and, to the extent that it may wish, jointly
with all other indemnifying parties similarly notified, to assume the
defense thereof with counsel reasonably satisfactory to such indemnified
party; provided, however, if the defendants in any such action include both
the indemnified party and the indemnifying party and the indemnified party
shall have reasonably concluded that there may be a conflict between the
positions of the indemnifying party and the indemnified party in conducting
the defense of any such action or that there may be legal defenses
available to it and/or other indemnified parties which are different from
or additional to those available to the indemnifying party, the indemnified
party or parties shall have the right to select separate counsel to assume
such legal defenses and to otherwise participate in the defense of such
action on behalf of such indemnified party or parties. Upon receipt of
notice from the indemnifying party to such indemnified party of its
election so to assume the defense of such action and approval by the
indemnified party of counsel, the indemnifying party will not be liable to
such indemnified party under this Section for any legal or other expenses
subsequently
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<PAGE>
incurred by such indemnified party in connection with the defense thereof
unless (i) the indemnified party shall have employed such counsel in
connection with the assumption of legal defenses in accordance with the
proviso to the next preceding sentence (it being understood, however, that
the indemnifying party shall not be liable for the expenses of more than
one separate counsel, approved by the Representatives in the case of
paragraph (a), representing the indemnified parties who are parties to such
action) or (ii) the indemnifying party shall not have employed counsel
reasonably satisfactory to the indemnified party to represent the
indemnified party within a reasonable time after notice of commencement of
the action, in each of which cases the fees and expenses of counsel shall
be at the expense of the indemnifying party. The indemnifying party shall
not be liable for any settlement of such action effected without its
written consent, which shall not be unreasonably withheld or delayed, but
if settled with such consent, the indemnifying party agrees to indemnify
the indemnified party from and against any loss or liability by reason of
such settlement.
(d) If the indemnification provided for in this Section 11 is
required by its terms but is for any reason held to be unavailable to or
otherwise insufficient to hold harmless an indemnified party under
paragraphs (a), (b) or (c) in respect of any losses, claims, damages,
liabilities or expenses referred to herein, then each applicable
indemnifying party (subject to the limits set forth in subparagraph (a) of
this Section 11) shall contribute to the amount paid or payable by such
indemnified party as a result of any losses, claims, damages, liabilities
or expenses referred to herein (i) in such proportion as is appropriate to
reflect the relative benefits received by the Company, the Selling
Shareholders and the Underwriters from the offering of the Common Shares or
(ii) if the allocation provided by clause (i) above is not permitted by
applicable law, in such proportion as is appropriate to reflect not only
the relative benefits referred to in clause (i) above but also the relative
fault of the Company, the Selling Shareholders and the Underwriters in
connection with the statements or omissions or inaccuracies in the
representations and warranties herein which resulted in such losses,
claims, damages, liabilities or expenses, as well as any other relevant
equitable considerations. The respective relative benefits received by the
Company, the Selling Shareholders and the Underwriters shall be deemed to
be in the same proportion, in the case of the Company and the Selling
Shareholders on the one hand, as the total price paid to the Selling
Shareholders for the Common Shares sold by them to the Underwriters (net of
underwriting commissions but before deducting expenses), and in the case of
the Underwriters, on the other hand, as the underwriting commissions
received by them bears to the
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total of such amounts paid to the Selling Shareholders and received by the
Underwriters as underwriting commissions. The relative fault of the
Company, the Selling Shareholders and the Underwriters shall be determined
by reference to, among other things, whether the untrue or alleged untrue
statement of a material fact or the omission or alleged omission to state a
material fact relates to information supplied by the Company, the Selling
Shareholders or the Underwriters and the parties' relative intent,
knowledge, access to information and opportunity to correct or prevent such
statement or omission. The amount paid or payable by a party as a result
of the losses, claims, damages, liabilities and expenses referred to above
shall be deemed to include, subject to the limitations set forth in
subparagraph (c) of this Section 11, any legal or other fees or expenses
reasonably incurred by such party in connection with investigating or
defending any action or claim. The provisions set forth in subparagraph
(c) of this Section 11 with respect to notice of commencement of any action
shall apply if a claim for contribution is to be made under this
subparagraph (d); provided, however, that no additional notice shall be
required with respect to any action for which notice has been given under
subparagraph (c) for purposes of indemnification. The Company, the Selling
Shareholders and the Underwriters agree that it would not be just and
equitable if contribution pursuant to this Section 11 were determined
solely by pro rata allocation (even if the Underwriters were treated as one
entity for such purpose) or by any other method of allocation which does
not take account of the equitable considerations referred to in this
paragraph. Notwithstanding the provisions of this Section 11, no
Underwriter shall be required to contribute any amount in excess of the
amount of the total underwriting commissions received by such Underwriter
in connection with the Common Shares underwritten by it and distributed to
the public. No person guilty of fraudulent misrepresentation (within the
meaning of Section 11(f) of the Act) shall be entitled to contribution from
any person who was not guilty of such fraudulent misrepresentation. The
Underwriters' obligations to contribute pursuant to this Section 11 are
several in proportion to their respective underwriting commitments and not
joint.
(e) It is agreed that any controversy arising out of the operation of
the interim reimbursement arrangements set forth in Sections 11(a) and
11(b) hereof, including the amounts of any requested reimbursement payments
and the method of determining such amounts, shall be settled by arbitration
conducted under the provisions of the Constitution and Rules of the Board
of Governors of the New York Stock Exchange, Inc. or pursuant to the Code
of Arbitration Procedure of the NASD. Any such arbitration must be
commenced by service of a written demand for arbitration or
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written notice of intention to arbitrate, therein electing the arbitration
tribunal. In the event the party demanding arbitration does not make such
designation of an arbitration tribunal in such demand or notice, then the
party responding to said demand or notice is authorized to do so.
SECTION 12. Default of Underwriters. It shall be a condition to this
-----------------------
Agreement and the obligation of the Selling Shareholders to sell and
deliver the Common Shares hereunder, and of each Underwriter to purchase
the Common Shares in the manner as described herein, that, except as
hereinafter in this paragraph provided, each of the Underwriters shall
purchase and pay for all the Common Shares agreed to be purchased by such
Underwriter hereunder upon tender to the Representatives of all such shares
in accordance with the terms hereof. If any Underwriter or Underwriters
default in their obligations to purchase Common Shares hereunder on either
the First or Second Closing Date and the aggregate number of Common Shares
which such defaulting Underwriter or Underwriters agreed but failed to
purchase on such Closing Date does not exceed 10% of the total number of
Common Shares which the Underwriters are obligated to purchase on such
Closing Date, the non-defaulting Underwriters shall be obligated severally,
in proportion to their respective commitments hereunder, to purchase the
Common Shares which such defaulting Underwriters agreed but failed to
purchase on such Closing Date. If any Underwriter or Underwriters so
default and the aggregate number of Common Shares with respect to which
such default occurs is more than the above percentage and arrangements
satisfactory to the Representatives and the Company for the purchase of
such Common Shares by other persons are not made within 36 hours after such
default, this Agreement will terminate without liability on the part of any
non-defaulting Underwriter, the Company or the Selling Shareholders except
for the expenses to be paid by the Company pursuant to Section 7 hereof and
except to the extent provided in Section 11 hereof.
In the event that Common Shares to which a default relates are to be
purchased by the non-defaulting Underwriters or by another party or
parties, the Representatives or the Company shall have the right to
postpone the First or Second Closing Date, as the case may be, for not more
than five business days in order that the necessary changes in the
Registration Statement, Prospectus and any other documents, as well as any
other arrangements, may be effected. As used in this Agreement, the term
"Underwriter" includes any person substituted for an Underwriter under this
Section. Nothing herein will relieve a defaulting Underwriter from
liability for its default.
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SECTION 13. Effective Date. This Agreement shall become effective
--------------
immediately as to Sections 7, 9, 11, 14 and 15 and, as to all other
provisions, (i) if at the time of execution of this Agreement the
Registration Statement has not become effective, at 2:00 P.M., California
time, on the first full business day following the effectiveness of the
Registration Statement, or (ii) if at the time of execution of this
Agreement the Registration Statement has been declared effective, at 2:00
P.M., California time, on the first full business day following the date of
execution of this Agreement; but this Agreement shall nevertheless become
effective at such earlier time after the Registration Statement becomes
effective as you may determine on and by notice to the Company or by
release of any of the Common Shares for sale to the public. For the
purposes of this Section 13, the Common Shares shall be deemed to have been
so released upon the release for publication of any newspaper advertisement
relating to the Common Shares or upon the release by you of telegrams
(i) advising Underwriters that the Common Shares are released for public
offering, or (ii) offering the Common Shares for sale to securities
dealers, whichever may occur first.
SECTION 14. Termination. Without limiting the right to terminate
-----------
this Agreement pursuant to any other provision hereof:
(a) This Agreement may be terminated by the Company by notice to
you and the Selling Shareholders or by you by notice to the Company
and the Selling Shareholders at any time prior to the time this
Agreement shall become effective as to all its provisions, and any
such termination shall be without liability on the part of the Company
or any Selling Shareholder to any Underwriter (except for the expenses
to be paid or reimbursed by the Company pursuant to Sections 7 and 9
hereof and except to the extent provided in Section 11 hereof) or of
any Underwriter to the Company or any Selling Shareholder (except to
the extent provided in Section 11 hereof).
(b) This Agreement may also be terminated by you prior to the
First Closing Date by notice to the Company and the Selling
Shareholders (i) if additional material governmental restrictions, not
in force and effect on the date hereof, shall have been imposed upon
trading in securities generally or minimum or maximum prices shall
have been generally established on the New York Stock Exchange or on
the American Stock Exchange or in the over the counter market by the
NASD, or trading in securities generally shall have been suspended on
either such Exchange or in the over the counter market by the NASD, or
a general banking moratorium shall have been established by federal,
New York or California authorities,
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(ii) if an outbreak of major hostilities or other national or
international calamity or any substantial change in political,
financial or economic conditions shall have occurred or shall have
accelerated or escalated to such an extent, as, in the judgment of the
Representatives, to affect adversely the marketability of the Common
Shares, (iii) if any adverse event shall have occurred or shall exist
which makes untrue or incorrect in any material respect any statement
or information contained in the Registration Statement or Prospectus
or which is not reflected in the Registration Statement or Prospectus
but should be reflected therein in order to make the statements or
information contained therein not misleading in any material respect,
or (iv) if there shall be any action, suit or proceeding pending or
threatened, or there shall have been any development or prospective
development involving particularly the business or properties or
securities of the Company or any of its subsidiaries or the
transactions contemplated by this Agreement, which, in the reasonable
judgment of the Representatives, may materially and adversely affect
the Company's business or earnings and makes it impracticable or
inadvisable to offer or sell the Common Shares. Any termination
pursuant to this subparagraph (b) shall be without liability on the
part of any Underwriter to the Company or any Selling Shareholder or
on the part of the Company or any Selling Shareholder to any
Underwriter (except for expenses to be paid or reimbursed by the
Company pursuant to Sections 7 hereof and except to the extent
provided in Section 11 hereof.
SECTION 15. Representations and Indemnities to Survive Delivery. The
---------------------------------------------------
respective indemnities, agreements, representations, warranties and other
statements of the Company, of its officers, of the Selling Shareholders and
of the several Underwriters set forth in or made pursuant to this Agreement
will remain in full force and effect, regardless of any investigation made
by or on behalf of any Underwriter, the Company or any Selling Shareholder
or any of its or their partners, officers or directors or any controlling
person, as the case may be, and will survive delivery of and payment for
the Common Shares sold hereunder and any termination of this Agreement.
SECTION 16. Notices. All communications hereunder shall be in
-------
writing and, if sent to the Representatives shall be mailed, delivered or
telecopied to you at 600 Montgomery Street, San Francisco, California
94111, Attention: John A. Berg, with a copy to Hale and Dorr, 60 State
Street, Boston, Massachusetts 02109, Attention: Patrick J. Rondeau, Esq.;
if sent to the Company, shall be mailed, delivered or telecopied to the
Company, at 2555
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Ellsmere Avenue, Norfolk Commerce Park, Norfolk, Virginia 23501-2500 with
a copy to Davis Polk & Wardwell, 450 Lexington Avenue, New York, New York
10017, Attention: Richard D. Truesdell, Jr. and Hofheimer, Nusbaum,
McPhaul & Samuels, 1700 Dominion Tower, 999 Waterside Drive, Norfolk,
Virginia 23510, Attention: William A. Old, Esq.; if sent to any Virginia
Selling Shareholder, shall be mailed, delivered or telecopied to the
Selling Shareholder c/o the Company at 2555 Ellsmere Avenue, Norfolk
Commerce Park, Norfolk, Virginia 23501-2500 with a copy to Hofheimer,
Nussbaum, McPhaul & Samuels, 1700 Dominion Tower, 99 Waterside Drive,
Norfolk, Virginia 23510, Attention: William A. Old, Esq.; and if sent to
any of the New York Selling Shareholders, to the New York Selling
Shareholder c/o Saunders, Karp & Co., 667 Madison Avenue, 21st Floor, New
York, New York 10021 with a copy to Davis, Polk & Wardwell, 450 Lexington
Avenue, New York, New York 10017, Attention: Richard Truesdell, Esq. The
Company, the Selling Shareholders or you may change the address for receipt
of communications hereunder by giving notice to the others.
SECTION 17. Successors. This Agreement will inure to the benefit of
----------
and be binding upon the parties hereto, including any substitute
Underwriters pursuant to Section 12 hereof, and to the benefit of the
officers and directors and controlling persons referred to in Section 11,
and in each case their respective successors, personal representatives and
assigns, and no other person will have any right or obligation hereunder.
No such assignment shall relieve any party of its obligations hereunder.
The term "successors" shall not include any purchaser of the Common Shares
as such from any of the Underwriters merely by reason of such purchase.
SECTION 18. Representation of Underwriters. You will act as
------------------------------
Representatives for the several Underwriters in connection with all
dealings hereunder, and any action under or in respect of this Agreement
taken by you jointly or by Montgomery Securities, as Representatives, will
be binding upon all the Underwriters.
SECTION 19. Partial Unenforceability. The invalidity or
------------------------
unenforceability of any Section, paragraph or provision of this Agreement
shall not affect the validity or enforceability of any other Section,
paragraph or provision hereof. If any Section, paragraph or provision of
this Agreement is for any reason determined to be invalid or unenforceable,
there shall be deemed to be made such minor changes (and only such minor
changes) as are necessary to make it valid and enforceable.
SECTION 20. Applicable Law. This Agreement shall be governed by and
--------------
construed in accordance with the internal laws
-45-
<PAGE>
(and not the laws pertaining to conflicts of laws) of the State of
California.
SECTION 21. General. This Agreement constitutes the entire agreement
-------
of the parties to this Agreement and supersedes all prior written or oral
and all contemporaneous oral agreements, understandings and negotiations
with respect to the subject matter hereof. This Agreement may be executed
in several counterparts, each one of which shall be an original, and all of
which shall constitute one and the same document.
In this Agreement, the masculine, feminine and neuter genders and the
singular and the plural include one another. The section headings in this
Agreement are for the convenience of the parties only and will not affect
the construction or interpretation of this Agreement. This Agreement may
be amended or modified, and the observance of any term of this Agreement
may be waived, only by a writing signed by the Company, the Selling
Shareholders (to the extent such amendment affects them) and you.
-46-
<PAGE>
If the foregoing is in accordance with your understanding of our
agreement, kindly sign and return to us the enclosed copies hereof,
whereupon it will become a binding agreement among the Company, the Selling
Shareholders and the several Underwriters including you, all in accordance
with its terms.
Very truly yours,
DOLLAR TREE STORES, INC.
By:______________________________
Name:
Title:
THE SELLING SHAREHOLDERS IDENTIFIED
ON SCHEDULE B
By:______________________________
Name:
By:______________________________
Name:
Each as Attorney-in-Fact acting
on behalf of each such Selling
Shareholder
The foregoing Underwriting Agreement
is hereby confirmed and accepted by
us in San Francisco, California as of
the date first above written.
MONTGOMERY SECURITIES
GOLDMAN, SACHS & CO.
SMITH BARNEY INC.
Acting as Representatives of the
several Underwriters named in
the attached Schedule A.
By MONTGOMERY SECURITIES
By:______________________________
Partner
-47-
<PAGE>
SCHEDULE A
Number of Firm
Common Shares
Name of Underwriter to be Purchased
- ------------------- ---------------
Montgomery Securities . . . . . . . . .
Goldman, Sachs & Co. . . . . . . . . .
Smith Barney Inc. . . . . . . . . . . .
TOTAL . . . . . . . . . . . . . 3,250,000
=========
A-1
<PAGE>
SCHEDULE B
<TABLE>
<CAPTION>
Number of Firm Number of Optional
Common Shares Common Shares
Name of Selling Shareholder to be Sold to be Sold
- --------------------------- -------------- ------------------
<S> <C> <C>
The Virginia Selling Shareholders:
J. Douglas Perry . . . . . . . . . . . 162,533 31,694
Macon F. Brock, Jr. . . . . . . . . . 240,778 46,952
H. Ray Compton . . . . . . . . . . . . 90,000 17,550
Joan P. Brock . . . . . . . . . . . . 188,722 36,801
Robert C. Miller and
J. Douglas Perry,
Trustees of the Patricia W.
Perry Grantor Retained
Annuity Trust . . . . . . . . . . . 324,967 63,368
Robert C. Miller and
Macon F. Brock, Jr., as
Trustees for Kathryn P.
Brock . . . . . . . . . . . . . . . 10,000 1,950
Robert C. Miller and
Macon F. Brock, Jr., as
Trustees for Macon F.
Brock, III . . . . . . . . . . . . 10,000 1,950
Robert C. Miller and
Macon F. Brock, Jr., as
Trustees for Christine
B. McAmmon . . . . . . . . . . . . 10,000 1,950
Robert C. Miller and
Macon F. Brock, Jr., as
Trustees of the Joan P.
Brock Grantor Retained
Annuity Trust . . . . . . . . . . . 28,000 5,460
James P. Compton and Jean T.
Compton, as Trustees of
the H. Ray Compton Grantor
Retained Annuity Trust . . . . . . 60,000 11,700
</TABLE>
B-1
<PAGE>
<TABLE>
<CAPTION>
Number of Firm Number of Optional
Common Shares Common Shares
Name of Selling Shareholder to be Sold to be Sold
- --------------------------- -------------- ------------------
<S> <C> <C>
The New York Selling Shareholders:
SK Equity Fund, L.P. . . . . . . . . . 1,367,819 266,725
Allan W. Karp . . . . . . . . . . . . 2,244 437
Christopher K. Reilly . . . . . . . . 449 87
Melanie K. Berman, Custodian
for Kyle Galbreath
Megrue . . . . . . . . . . . . . . 1,122 219
Melanie K. Berman, Custodian
for Christopher Galbreath
Megrue . . . . . . . . . . . . . . 1,122 219
Thomas A. Saunders, III and
Joanne S. Berkley, as
Trustees for the
Ivor Family Trust . . . . . . . . . 2,244 438
--------- -------
TOTAL . . . . . . . . . . . . 2,500,000 487,500
========= =======
</TABLE>
B-2
EXHIBIT 23.2
INDEPENDENT AUDITORS' CONSENT
The Board of Directors
Dollar Tree Stores, Inc.:
We consent to the use of our report incorporated herein by reference and to the
references to our firm under the headings "Selected Financial Data" and
"Experts" in the prospectus.
/s/ KPMG PEAT MARWICK LLP
Norfolk Virginia
June 6, 1996
Exhibit 23.3
Consent of Independent Public Accountants
-----------------------------------------
As independent public accountants, we hereby consent to the use of our reports
made a part of this registration statement.
/s/ Arthur Andersen LLP
Chicago, Illinois,
June 6, 1996
