<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 10, 1998
REGISTRATION NO. 333-61139
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 3
TO
FORM S-4
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
------------------------
DOLLAR TREE STORES, INC.
(Exact Name of Registrant as Specified in its Charter)
<TABLE>
<S> <C> <C>
VIRGINIA 5331 54-1387365
(State or Other Jurisdiction of (Primary Standard Industrial (I.R.S. Employer
Incorporation or Organization) Classification Code Number) Identification No.)
</TABLE>
500 VOLVO PARKWAY, CHESAPEAKE, VIRGINIA 23320, (757) 321-5000
(Address, Including Zip Code, and Telephone Number, Including Area Code, of
Registrant's Principal Executive Offices)
H. RAY COMPTON, EXECUTIVE VICE PRESIDENT
500 VOLVO PARKWAY, CHESAPEAKE, VIRGINIA 23320, (757) 321-5000
(Name, Address, Including Zip Code, and Telephone Number, Including Area Code,
of Agent for Service)
------------------------
COPIES TO:
<TABLE>
<S> <C>
WILLIAM A. OLD, JR., ESQ. TRACY K. EDMONSON, ESQ.
HOFHEIMER NUSBAUM, P.C. LATHAM & WATKINS
999 WATERSIDE DRIVE, SUITE 1700 505 MONTGOMERY STREET, SUITE 1900
NORFOLK, VIRGINIA 23510 SAN FRANCISCO, CA 94111-2562
TELEPHONE: (757) 629-0613 TELEPHONE:(415) 395-8010
FACSIMILE:(757) 629-0660 FACSIMILE:(415) 395-8095
</TABLE>
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: Upon
completion of the transaction described herein.
If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, 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.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
[LOGO]
November 10, 1998
Dear Shareholders:
I cordially invite you to attend a special meeting of our shareholders at
our headquarters, located at 3222 Winona Way, North Highlands, California, on
December 10, 1998 at 10:00 a.m., local time.
At the special meeting, you will vote on a proposal to approve the merger
agreement among Dollar Tree Stores, Inc., Dollar Tree West, Inc. (one of Dollar
Tree's wholly owned subsidiaries), and Step Ahead Investments, Inc. ("Step
Ahead"), which provides for the merger of Dollar Tree West with and into Step
Ahead. As a result of the merger, you will become shareholders of Dollar Tree
Stores, Inc. ("Dollar Tree").
In the merger, each outstanding share of Step Ahead common stock and each
outstanding share of Step Ahead preferred stock (other than shares as to which
dissenters' rights have been exercised under California law) will be converted
into shares of Dollar Tree common stock. The actual number of shares of Dollar
Tree common stock you will receive depends on the total number of shares of Step
Ahead stock outstanding or subject to options just prior to the special meeting
and on the average closing price of Dollar Tree common stock over the five
trading days ending on the sixth business day prior to the special meeting.
Please refer to the table located on page 55 of the Proxy Statement to determine
the number of shares of Dollar Tree common stock you would receive in the merger
based on various assumed average closing prices of Dollar Tree common stock and
on the total number of shares of Step Ahead stock outstanding or subject to
options as of September 30, 1998. In the event the average closing price is
below $34 11/32, the number of shares of Dollar Tree common stock you may
receive in the merger is subject to further negotiation between the boards of
Dollar Tree and Step Ahead. You will not know how many shares of Dollar Tree
common stock you will receive until the third business day before the special
meeting. On December 7, 1998, you can call 1-888-224-5256 toll-free to find out
exactly how many shares of Dollar Tree common stock you will receive for each
share of Step Ahead stock you own.
The terms of the merger agreement require that an aggregate of 10% of the
Dollar Tree shares to be issued in the merger be held back and placed in an
escrow account. These shares will be used to satisfy any claims Dollar Tree may
have with respect to breaches of representations, warranties and covenants in
the merger agreement and may also be claimed by Dollar Tree to the extent that
Step Ahead's adjusted net worth just prior to closing is less than a specified
amount.
After careful consideration, Step Ahead's board of directors has determined
that the merger agreement and the merger are in the best interests of Step Ahead
and its shareholders. Accordingly, the Board has unanimously approved the merger
agreement and the merger and recommends that you vote in favor of the merger
agreement and the merger at the special meeting. In making this recommendation,
the Board considered the opinion of Piper Jaffray Inc., our financial advisor,
stating that, as of the date of its opinion, the aggregate consideration to be
received by the shareholders of Step Ahead as a group in the merger was fair
from a financial point of view to such holders as a group.
Under California law, the affirmative vote of both the holders of a majority
of Step Ahead's common stock and the holders of a majority of Step Ahead's
preferred stock, each voting separately as a class, must
<PAGE>
approve the merger. Certain trusts benefiting my family members and I have
agreed to vote our shares in favor of the merger. We own, in the aggregate,
approximately 64% of Step Ahead's common stock.
PLEASE NOTE THAT WE STILL NEED YOUR VOTE. DOLLAR TREE CAN TERMINATE THE
MERGER AGREEMENT IF HOLDERS OF MORE THAN 9.98% OF STEP AHEAD'S COMMON AND
PREFERRED STOCK VOTE AGAINST THE MERGER OR ABSTAIN FROM VOTING. WHETHER OR NOT
YOU PLAN TO ATTEND THE MEETING IN PERSON, I URGE YOU TO COMPLETE, DATE, SIGN AND
PROMPTLY RETURN THE ENCLOSED PROXY CARD IN THE ENCLOSED PRE-PAID ENVELOPE TO
ENSURE THAT YOUR SHARES WILL BE REPRESENTED AT THE MEETING. YOU CAN REVOKE YOUR
PROXY AT ANY TIME PRIOR TO OR AT THE MEETING BY FOLLOWING THE PROCEDURES
EXPLAINED IN THE PROXY STATEMENT.
Thank you, and I look forward to seeing you at the special meeting.
Sincerely yours,
[LOGO]
Gary Cino
Chairman & Chief Executive Officer
<PAGE>
STEP AHEAD INVESTMENTS, INC.
3222 WINONA WAY
NORTH HIGHLANDS, CALIFORNIA 95660
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD
THURSDAY,
DECEMBER 10, 1998
10:00 A.M.
3222 WINONA WAY
NORTH HIGHLANDS, CALIFORNIA
The Board of Directors of Step Ahead asks you to attend this meeting to vote on
the following:
1. PROPOSED MERGER. To vote on the merger agreement among Dollar Tree
Stores, Inc., Dollar Tree West, Inc. (one of Dollar Tree's wholly owned
subsidiaries), and Step Ahead Investments, Inc., which provides for the
merger of Dollar Tree West with and into Step Ahead. In the merger, each
outstanding share of Step Ahead common stock and each outstanding share
of Step Ahead preferred stock (other than shares as to which dissenters'
rights have been exercised under California law) will be converted into
shares of Dollar Tree Stores, Inc. common stock. The actual number of
shares of Dollar Tree common stock you will receive depends on the
average closing price of Dollar Tree common stock over the five trading
days ending on the sixth business day prior to the special meeting. A
table located on page 55 of the Proxy Statement sets forth the number of
shares of Dollar Tree common stock which would be issued in the merger
based on various assumed average closing prices of Dollar Tree common
stock. However, if the average closing price is below $34 11/32, the
number of shares of Dollar Tree common stock which would be issued in the
merger is subject to further negotiation between the Boards of Dollar
Tree and Step Ahead.
2. SHAREHOLDER REPRESENTATIVE. To select Gary Cino as your representative
to act for and on your behalf with respect to all matters arising in
connection with shares of Dollar Tree common stock to be placed in
escrow. The terms of the merger agreement require that an aggregate of
10% of the Dollar Tree shares to be issued in the merger be held back and
placed in an escrow account. These shares will be used to satisfy any
claims Dollar Tree may have with respect to breaches of representations,
warranties and covenants in the merger agreement and may also be claimed
by Dollar Tree to the extent that Step Ahead's adjusted net worth just
prior to closing is less than a specified amount.
3. OTHER BUSINESS. To consider and vote on any other matters that properly
come before the meeting or any adjournments or postponements.
The Board of Directors has fixed the close of business on November 10, 1998 as
the record date for the determination of shareholders entitled to notice of and
to vote at the special meeting. Only shareholders of record on that date are
entitled to notice of and to vote at the special meeting and any adjournments or
postponements.
By Order of the Board of Directors,
[LOGO]
Janet S. Cino
Secretary
November 10, 1998
North Highlands, California
YOUR BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT YOU VOTE FOR THE MERGER.
UNDER CALIFORNIA LAW, THE AFFIRMATIVE VOTE OF BOTH THE HOLDERS OF A MAJORITY OF
STEP AHEAD'S COMMON STOCK AND THE HOLDERS OF A MAJORITY OF STEP AHEAD'S
PREFERRED STOCK, EACH VOTING SEPARATELY AS A CLASS, MUST APPROVE THE MERGER.
FAILURE TO RETURN A PROPERLY EXECUTED PROXY AND/OR VOTE AT THE SPECIAL
MEETING WILL HAVE THE SAME EFFECT AS A VOTE "AGAINST" THE MERGER.
TO VOTE YOUR SHARES, PLEASE, SIGN, DATE AND COMPLETE THE ENCLOSED PROXY AND
MAIL IT PROMPTLY IN THE ENCLOSED RETURN ENVELOPE. YOU MAY REVOKE YOUR PROXY AT
ANY TIME PRIOR TO OR AT THE MEETING BY FOLLOWING THE PROCEDURES EXPLAINED IN THE
PROXY STATEMENT.
DO NOT SEND ANY CERTIFICATES REPRESENTING STEP AHEAD COMMON OR PREFERRED
STOCK AT THIS TIME.
<PAGE>
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/PROXY STATEMENT 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>
SUBJECT TO COMPLETION, DATED NOVEMBER 10, 1998
PROSPECTUS/PROXY STATEMENT
------------------------
[LOGO]
[LOGO]
PROSPECTUS
DOLLAR TREE STORES, INC.
------------------------
PROXY STATEMENT
STEP AHEAD INVESTMENTS, INC.
SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON DECEMBER 10, 1998
------------------------
Dollar Tree Stores, Inc. has agreed to acquire Step Ahead Investments, Inc.
through a Merger. The consummation of the Merger is subject to a number of
conditions, including the approval of Step Ahead Shareholders at their Special
Meeting to be held on December 10, 1998. See "Voting and Proxies--Vote Required"
and "Terms of the Merger."
In the Merger, each outstanding share of Step Ahead Common Stock and Series
A Preferred Stock will be converted into the right to receive shares of Dollar
Tree Common Stock equal to an Exchange Ratio calculated in accordance with the
Merger Agreement signed by Dollar Tree and Step Ahead. Dollar Tree will also
assume all outstanding options to purchase shares of Step Ahead Common Stock.
A table located on page 55 illustrates how you can calculate the Exchange
Ratio. As an example, if the Average Closing Price (as defined on page 8) of
Dollar Tree Common Stock were $34 11/32 per share (and if the number of shares
of outstanding Step Ahead Stock and options doesn't change), the Exchange Ratio
would be 1.2106. That is, Dollar Tree would theoretically issue you 1.2106
shares of Dollar Tree Common Stock for each share of Step Ahead Stock you own.
However, 10% of such amount would be withheld and placed in an escrow for one
year, and you will only receive those shares if the conditions of escrow are
satisfied, which may not occur. Any fractional share amount would be paid to you
in cash. The actual number of shares of Dollar Tree Common Stock you receive in
the Merger may differ from this example because that number depends on factors
that may not be known until three business days before the Special Meeting. The
actual cash value of the shares you do receive will also fluctuate with the
market price of Dollar Tree Common Stock, and there is no limit on the minimum
or maximum value of the Dollar Tree Common Stock you may receive in the Merger.
Based on the example described in the paragraph above, at an Exchange Ratio
of 1.2106, Dollar Tree would issue and reserve for issuance approximately
2,144,000 shares of Dollar Tree Common Stock to Step Ahead Shareholders and
holders of Step Ahead Options, representing 3.5% of Dollar Tree's outstanding
Common Stock after the Merger. At an assumed value of $34 11/32 per share, such
shares would have an approximate aggregate value of $73.6 million. Of these
2,144,000 shares of Dollar Tree Common Stock, approximately 1,795,000 shares
would be issued to Step Ahead Shareholders and 349,000 shares would be reserved
for issuance to holders of Step Ahead Options. All of these figures are
approximate and will also vary depending on factors that may not be known until
three business days before the Special Meeting.
If the actual Average Closing Price of Dollar Tree Common Stock is less than
$34 11/32, the Dollar Tree Board may propose that the parties treat the Average
Closing Price, for purposes of calculating the Exchange Ratio, as a value
between the actual Average Closing Price and $34 11/32. This proposal would have
the effect of decreasing the Exchange Ratio (but not below 1.2106). If the Step
Ahead Board does not accept this proposal by 5:00 p.m. of the third business day
before the Special Meeting, the Merger Agreement will terminate. If Dollar Tree
makes such a proposal, the Step Ahead Board will use the time before the
deadline for termination of the Merger Agreement to decide whether to agree to
the Dollar Tree proposal. The Step Ahead Board will make its determination only
after careful consideration of Dollar Tree's financial condition, results of
operations and stock performance and other factors, including the interests of
the Step Ahead Shareholders, and only after receiving an updated opinion from
Piper Jaffray Inc., its financial advisor, as to whether the proposed merger
consideration is fair from a financial point of view to the Step Ahead
Shareholders as a group. After the Step Ahead Board makes its determination,
however, it does not intend to resolicit your proxy.
Dollar Tree Common Stock has traded at prices lower than $34 11/32 during
the past several weeks. As a result, the process described in the paragraph
above may be used to determine the actual Exchange Ratio.
YOU WILL NOT KNOW THE EXCHANGE RATIO UNTIL 5:00 P.M. ON DECEMBER 7, 1998, AT
WHICH TIME YOU CAN CALL 1-888-224-5256 TOLL-FREE TO OBTAIN THE ACTUAL EXCHANGE
RATIO. IF YOU HAVE ALREADY EXECUTED A PROXY IN CONNECTION WITH THE MERGER, YOU
CAN REVOKE YOUR PROXY OR CHANGE YOUR VOTE BY FOLLOWING THE PROCEDURES OUTLINED
ON PAGE 38.
Dollar Tree Common Stock is traded on The Nasdaq National Market under the
symbol "DLTR." On November 9, 1998, the last reported sale price of Dollar Tree
Common Stock was $42 5/8 per share. Step Ahead Shareholders are urged to obtain
current quotations of the price of Dollar Tree Common Stock.
--------------------------
THE MERGER INVOLVES CERTAIN RISKS TO STEP AHEAD SHAREHOLDERS. SEE "RISK FACTORS"
ON PAGES 26 TO 37 FOR A DESCRIPTION OF CERTAIN RISK FACTORS TO BE CONSIDERED BY
STEP AHEAD SHAREHOLDERS BEFORE VOTING ON THE MERGER AND THE MERGER AGREEMENT.
------------------------
THE SECURITIES OF DOLLAR TREE TO BE ISSUED IN THE MERGER 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/PROXY STATEMENT. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
------------------------
THIS PROSPECTUS/PROXY STATEMENT INCORPORATES DOCUMENTS BY REFERENCE RELATING TO
DOLLAR TREE WHICH ARE NOT PRESENTED HEREIN OR DELIVERED HEREWITH. THESE
DOCUMENTS ARE AVAILABLE UPON REQUEST AT NO CHARGE FROM DOLLAR TREE
STORES, INC., 500 VOLVO PARKWAY, CHESAPEAKE, VIRGINIA 23320,
ATTENTION: SHAREHOLDER SERVICES, TELEPHONE: (757) 321-5000. IN
ORDER TO ENSURE TIMELY DELIVERY OF THE DOCUMENTS, ANY SUCH
REQUEST SHOULD BE MADE BY DECEMBER 3, 1998.
------------------------
This Prospectus/Proxy Statement is dated November 10, 1998.
It is first being mailed to Step Ahead Shareholders on or about November 10,
1998.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
QUESTIONS AND ANSWERS ABOUT THE DOLLAR
TREE/STEP AHEAD MERGER.............. 3
SUMMARY............................... 6
The Companies....................... 6
Special Meeting of Shareholders of
Step Ahead........................ 6
The Merger.......................... 7
Selected Historical Financial Data
of Dollar Tree.................... 17
Selected Historical Financial Data
of Step Ahead..................... 19
Selected Unaudited Pro Forma
Combined Financial Data........... 21
Comparative Per Share Data.......... 24
Price Range of Common Stock......... 25
RISK FACTORS.......................... 26
Risks Related to the Merger......... 26
Risks Related to Dollar Tree........ 29
Risks Related to Step Ahead......... 35
VOTING AND PROXIES.................... 38
Date, Time and Place of Special
Meeting........................... 38
Record Date and Outstanding Shares
of Step Ahead..................... 38
Voting of Proxies................... 38
Vote Required....................... 39
Solicitation of Proxies and
Expenses.......................... 39
THE MERGER AND RELATED TRANSACTIONS... 40
Background of the Merger............ 40
Reasons for the Merger.............. 43
Opinion of Financial Advisor to Step
Ahead............................. 48
Certain Information Provided to
Piper Jaffray and Dollar Tree..... 52
Management After the Merger......... 53
Prior Relationship Between Dollar
Tree and Step Ahead............... 53
TERMS OF THE MERGER................... 54
Form of the Merger.................. 54
Manner and Basis of Converting
Shares of Step Ahead Stock........ 54
Escrow of Shares.................... 56
Post-Closing Adjustment............. 57
Representations and Warranties...... 57
Indemnification..................... 58
Shareholder Representative.......... 58
Assumption of Step Ahead Options.... 59
Exchange of Certificates; Letter of
Transmittal....................... 59
Interests of Certain Persons........ 60
Conduct of Business Prior to the
Merger............................ 61
No Solicitation..................... 61
Conditions Precedent to the
Merger............................ 62
Directors' and Officers'
Indemnification................... 63
Non-Competition Agreements; Option
Grants............................ 63
New Stock Option Grants............. 63
Material United States Federal
Income Tax Consequences........... 63
Accounting Treatment................ 64
Affiliates' Restrictions on Sale of
Step Ahead and Dollar Tree
Stock............................. 65
Governmental and Regulatory
Approvals......................... 65
Amendment; Termination.............. 66
Lock-Up Option...................... 67
Dissenters' Rights.................. 67
Fees and Expenses................... 69
Voting Agreement.................... 69
Articles of Incorporation and
Bylaws............................ 69
UNAUDITED PRO FORMA CONDENSED COMBINED
FINANCIAL STATEMENTS................ 70
SELECTED HISTORICAL FINANCIAL DATA OF
DOLLAR TREE......................... 78
DOLLAR TREE MANAGEMENT'S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS........... 80
Overview............................ 80
Results of Operations............... 81
Liquidity and Capital Resources..... 84
Recent Developments................. 86
Seasonality and Quarterly
Fluctuations...................... 87
Inflation and Other Economic
Factors........................... 88
Year 2000 Compliance................ 89
New Accounting Pronouncements....... 90
SELECTED HISTORICAL FINANCIAL DATA OF
STEP AHEAD.......................... 91
STEP AHEAD MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS............... 93
Results of Operations............... 93
Liquidity and Capital Resources..... 95
Seasonality and Quarterly
Fluctuations...................... 95
Inflation and Other Economic
Factors........................... 96
Year 2000 Compliance................ 96
New Accounting Pronouncements....... 97
</TABLE>
i
<PAGE>
<TABLE>
<S> <C>
INFORMATION CONCERNING DOLLAR TREE.... 98
Business............................ 98
Overview.......................... 98
Business Strategy................. 98
Growth Strategy................... 99
Merchandising and Store Format.... 100
Site Selection and Store
Locations......................... 101
Field Management and Personnel.... 102
Warehousing and Distribution...... 102
Management Information Systems.... 104
Competition....................... 104
Trademarks........................ 104
Employees......................... 104
Legal Proceedings................. 105
Management.......................... 106
Directors, Executive Officers and
Certain Key Personnel............. 106
Directors and Executive
Officers.......................... 106
Certain Key Personnel............. 108
INFORMATION CONCERNING STEP AHEAD..... 109
Business............................ 109
History........................... 109
Step Ahead's Competitive
Strengths......................... 109
Merchandising and Store Format.... 110
Site Selection and Store
Locations......................... 111
Warehousing and Distribution...... 112
Field Management and Personnel.... 112
Employees......................... 112
Management Information Systems.... 112
Competition....................... 113
Trademarks........................ 113
Environmental..................... 113
Litigation........................ 113
Management.......................... 114
Directors, Executive Officers and
Certain Key Personnel............. 114
Directors and Executive
Officers.......................... 114
Certain Key Personnel............. 115
Security Ownership of Principal
Shareholders and Management of
Step Ahead........................ 116
DESCRIPTION OF DOLLAR TREE CAPITAL
STOCK............................... 118
Dollar Tree Common Stock............ 118
Dollar Tree Preferred Stock......... 118
Anti-Takeover Effects of Certain
Provisions of Dollar Tree's
Articles of Incorporation and
Bylaws and Virginia Law........... 118
Elimination of Liability and
Indemnification of Officers and
Directors......................... 119
Registrar and Transfer Agent........ 119
DESCRIPTION OF STEP AHEAD CAPITAL
STOCK............................... 120
Step Ahead Common Stock............. 120
Step Ahead Preferred Stock.......... 120
COMPARISON OF SHAREHOLDERS' RIGHTS.... 122
Authorized Capital Stock; Blank
Stock Provisions.................. 122
Amendments to the Articles of
Incorporation..................... 122
Amendments to the Bylaws............ 123
Size and Classification of the Board
of Directors...................... 123
Vacancies on the Board of
Directors......................... 124
Removal of Directors................ 124
Indemnification of Directors,
Officers and Employees;
Limitations on Personal Liability
of Directors...................... 124
Loans to Directors and Officers..... 126
Special Meetings of Shareholders.... 126
Corporate Action Without a
Shareholder Meeting............... 126
Shareholder Approval of Certain
Significant Transactions.......... 127
Cumulative Voting................... 127
Payment of Dividends and Repurchase
of Shares......................... 127
Dissolution......................... 128
Inspection of Books and Records..... 128
Issuance of Rights and Options;
Preemptive Rights................. 129
Anti-Takeover Provisions............ 129
LEGAL MATTERS......................... 130
EXPERTS............................... 130
STEP AHEAD INVESTMENTS, INC. INDEX TO
FINANCIAL STATEMENTS................ F-1
APPENDICES:
A. Exchange Ratios.................. A-1
B. Merger Agreement................. B-1
C. Escrow Agreement................. C-1
D. Dissenting Step Ahead
Shareholders' Rights Under Chapter
13 of the General Corporation Law
of the California Corporations
Code.............................. D-1
E. Opinion of Financial Advisor to
Step Ahead........................ E-1
</TABLE>
ii
<PAGE>
AVAILABLE INFORMATION
Dollar Tree has filed with the U.S. Securities and Exchange Commission a
Registration Statement under the Securities Act on Form S-4 (together with all
amendments and exhibits thereto) with respect to the Dollar Tree Common Stock
offered hereby. This Prospectus/Proxy Statement does not contain all of the
information set forth in the Registration Statement and the exhibits and
schedules thereto, certain parts of which have been omitted in accordance with
the rules and regulations of the Commission. For such information, reference is
made to the Registration Statement and the exhibits and schedules thereto. In
addition, Dollar Tree is subject to the information requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in
accordance therewith is required to file periodic reports, proxy statements and
other information with the Commission. Copies of such materials may be obtained
from the Commission at prescribed rates by addressing written requests for such
copies to the Public Reference Section of the Commission, 450 Fifth Street,
N.W., Washington, D.C. 20549. The public may obtain information on the operation
of the Public Reference Section by calling the Commission at 1-800-SEC-0330. The
Registration Statement and such reports, proxy statements and other information
can also be inspected and copied at the Commission's public reference facilities
referred to above and at the Commission's Regional Offices at 7 World Trade
Center, Suite 1300, New York, New York 10048 and 500 West Madison Street,
Chicago, Illinois 60661. The Commission maintains a Web site that contains
reports, proxy and information statements and other materials that are filed
through the Commission's Electronic Data Gathering, Analysis, and Retrieval
system. This Web site can be accessed at http:// www.sec.gov. This material may
also be inspected at the offices of the National Association of Securities
Dealers, Inc., at 1735 K Street, N.W., Washington, D.C. 20006.
A WARNING ABOUT FORWARD-LOOKING STATEMENTS
Dollar Tree and Step Ahead have made forward-looking statements in this
document (and certain documents referred to in this document) within the meaning
of the Private Securities Litigation Reform Act of 1995. Such statements are
based on the beliefs and assumptions of the respective company's management, and
on information currently available to such management. THE ASSUMPTIONS, BELIEFS
AND CURRENT INFORMATION COULD BE WRONG. In particular, certain pro forma
financial data contained in this document (such as Selected Unaudited Pro Forma
Combined Financial Data, Comparative Per Share Data, Unaudited Pro Forma
Condensed Combined Financial Statements and other calculations projecting the
effect of the Merger on net income per share) may be inaccurate because they
depend in significant part on the number of shares of Dollar Tree Common Stock
issuable in the Merger which will not be known until just before the special
meeting of Step Ahead's shareholders.
Forward-looking statements include the information concerning the Merger as
well as Dollar Tree's and Step Ahead's operations, economic performance and
financial condition and also include any statements preceded by, followed by or
including words such as "believes," "anticipates," "expects," "intends," "plans"
or "estimates." Any statements concerning the anticipated effect of the Merger
or the anticipated performance of the combined company in future periods could
be inaccurate and are subject to risks relating to, among other things: the
difficulties and costs of integrating the two businesses' management, personnel
and operations; the volatility of the price of Dollar Tree Common Stock and its
effect on the Exchange Ratio and on the amount and value of such stock received
in the Merger; the dilutive or accretive effect of the Merger; the requirements
of pooling of interests accounting including the locking up of affiliates'
shares; the fact that Dollar Tree does not intend to pay cash dividends;
expansion plans and store openings; sales per selling square foot and comparable
store net sales trends; dependence on imports and vulnerability to import
restrictions, particularly nonrenewal of most favored nation trade status and
the imposition of punitive duties, the Asian financial crisis and factors
relating to China; the projected capacity and the performance of the Chesapeake
and the Olive Branch distribution centers; the opening date and cost of the
Olive Branch distribution center; the subleasing of the Memphis facility; labor
disagreements and union-organizing activities; increases in distribution costs
including increases attributable to a trans-Pacific shipping cartel; increases
in other costs, including the impact of increases in the minimum wage; the
Dollar Bills litigation; the potential products liability claims; adverse
economic factors;
1
<PAGE>
purchasing abilities; capital requirements; difficulties in expanding within the
California and Nevada markets; the limited capacity of the Step Ahead
distribution center; the vulnerability arising from Step Ahead's geographical
concentration and single distribution site; limited availability of low-cost,
high-quality closeout goods; the ownership of Step Ahead's distribution center
and certain store locations by affiliates; potential environmental liabilities;
Year 2000 compliance; and the projected performance of Step Ahead.
For additional discussion of the factors that could impact actual results,
performance or actions of Dollar Tree or Step Ahead, see "Risk Factors," "Dollar
Tree Management's Discussion and Analysis of Financial Condition and Results of
Operations," "Step Ahead Management's Discussion and Analysis of Financial
Condition and Results of Operations," "Information Concerning Dollar Tree" and
"Information Concerning Step Ahead" in this Prospectus/Proxy Statement.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following reports filed by Dollar Tree pursuant to Section 13 of the
Exchange Act shall be deemed to be incorporated by reference herein and to be a
part hereof:
1. Annual Report on Form 10-K for the year ended December 31, 1997, as
filed with the Commission on March 30, 1998.
2. Quarterly Reports on Form 10-Q for the quarters ended March 31 and
June 30, 1998, as filed with the Commission on May 13 and August 13, 1998.
3. Current Reports on Form 8-K, dated June 29, 1998, July 22, 1998,
October 5, 1998 and October 20, 1998 as filed with the Commission on July
16, 1998, July 30, 1998, October 8, 1998 and October 29, 1998, respectively.
In addition, all reports and other documents filed with the Commission by
Dollar Tree pursuant to Section 13(a), 13(c), 14 or 15(d) of the Exchange Act
subsequent to the date hereof and prior to the date of the Special Meeting shall
be deemed to be incorporated by reference herein and to be a part hereof from
the date any such report or document is filed. The information relating to
Dollar Tree contained in this Prospectus/Proxy Statement does not purport to be
comprehensive and should be read together with the information in the documents
incorporated by reference. Any statement contained in a document incorporated or
deemed to be incorporated by reference herein shall be deemed to be modified or
superseded for purposes hereof to the extent that a statement contained herein
(or in any other subsequently filed document that also is incorporated by
reference herein) modifies or supersedes such statement. Any statement in such a
document so modified or superseded shall not be deemed to constitute a part
hereof except as so modified or superseded. All information appearing in this
Prospectus/Proxy Statement is qualified in its entirety by the information and
consolidated financial statements (including notes thereto) appearing in the
documents incorporated herein by reference, except to the extent set forth in
the immediately preceding statement.
INFORMATION PROVIDED BY DOLLAR TREE AND STEP AHEAD
THE INFORMATION SET FORTH IN THIS PROSPECTUS/PROXY STATEMENT CONCERNING
DOLLAR TREE AND MERGER SUB HAS BEEN PROVIDED BY DOLLAR TREE AND THE INFORMATION
SET FORTH IN THIS PROSPECTUS/PROXY STATEMENT CONCERNING STEP AHEAD HAS BEEN
PROVIDED BY STEP AHEAD.
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION OTHER THAN AS CONTAINED IN THIS
PROSPECTUS/PROXY STATEMENT IN CONNECTION WITH THE OFFERING MADE HEREBY. IF GIVEN
OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING
BEEN AUTHORIZED BY DOLLAR TREE OR STEP AHEAD. THIS PROSPECTUS/PROXY STATEMENT
DOES NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, ANY
SECURITIES OTHER THAN THE COMMON STOCK OF DOLLAR TREE TO BE ISSUED IN THE
MERGER, OR AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, IN ANY
JURISDICTION WHERE, OR TO ANY PERSON TO WHOM, IT IS UNLAWFUL TO MAKE SUCH OFFER
OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS/ PROXY STATEMENT NOR
ANY DISTRIBUTION OF SECURITIES MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES,
CREATE AN IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY
TIME SUBSEQUENT TO THE DATE HEREOF.
2
<PAGE>
QUESTIONS AND ANSWERS
ABOUT THE DOLLAR TREE/STEP AHEAD MERGER
Q: WHY ARE THE TWO COMPANIES PROPOSING TO MERGE?
A: We believe that the merger will combine Step Ahead's expertise in operating a
larger store format and purchasing closeout merchandise with Dollar Tree's
strength in purchasing imported merchandise and displaying merchandise
effectively. The merger will create a combined company with stores on both
the East and West Coasts, providing a platform for future growth and
increasing leverage and visibility with suppliers, vendors, landlords and
customers.
Q: WHAT DO I NEED TO DO NOW?
A: Just mail in your signed and dated proxy card in the enclosed return envelope
as soon as possible, so that your shares may be represented at the special
meeting. The special meeting will take place on December 10, 1998. The Board
of Directors of Step Ahead recommends voting in favor of the proposed merger
and the selection of Gary Cino to represent the former shareholders of Step
Ahead in connection with an escrow of shares issued in the merger.
Q: CAN I CHANGE MY VOTE AFTER I HAVE MAILED MY SIGNED PROXY CARD?
A: Yes. You can change your vote at any time before your proxy is voted at the
special meeting. You can do this in one of three ways: First, you can send a
written notice stating that you would like to revoke your proxy. Second, you
can complete and submit a new proxy card. If you choose either of these two
methods, you must submit your notice of revocation or your new proxy card to
Step Ahead by mail or hand delivery at the address on page 5 or by fax at
(916) 349-7200, Attn: David Reed. Third, you can attend the special meeting
and vote in person. Simply attending the special meeting, however, will not
revoke your proxy.
Q: SHOULD I SEND IN MY STOCK CERTIFICATES NOW?
A: No. After the merger is completed, we will send you written instructions for
exchanging your stock certificates.
Q: WHAT WILL I RECEIVE IN THE MERGER?
A: Step Ahead shareholders will receive a number of shares of Dollar Tree common
stock which will depend on the amount of Step Ahead stock outstanding or
subject to options and the average closing price of Dollar Tree common stock
over the five trading days ending on the sixth business day prior to the
special meeting. If that average closing price were $34 11/32, you would
receive 1.2106 shares of Dollar Tree common stock for each share you own. You
would be entitled to 90% of those shares immediately, and the remaining 10%
of those shares would be placed into escrow for one year to secure Step
Ahead's obligations to Dollar Tree. You will only receive the shares placed
in escrow if the conditions of the escrow are satisfied, which may not occur.
The actual number of shares of Dollar Tree common stock you receive in the
Merger will likely differ from this example because that number depends on
factors that may not be known until three business days before the Special
Meeting. A table on page 55 sets forth the number of shares of Dollar Tree
common stock which would be issued in the merger based on various assumed
average closing prices of Dollar Tree common stock.
Because the merger agreement prevents Step Ahead from issuing any new capital
stock or from granting additional options, the only way the shares of Step
Ahead stock used to calculate the merger consideration will change is if
outstanding options to purchase shares of Step Ahead common stock lapse. Any
lapses of outstanding options will decrease the number of shares of Step
Ahead stock outstanding or subject to options and thus increase the number of
shares of Dollar Tree common stock you would receive in the merger.
Dollar Tree will not issue fractional shares. Step Ahead shareholders who
would otherwise be entitled to receive a fractional share instead will
receive cash based on the average closing price of the fractional share of
Dollar Tree common stock.
3
<PAGE>
Q: WHAT HAPPENS IF THE AVERAGE CLOSING PRICE IS BELOW $34 11/32?
A: If the actual average closing price of Dollar Tree common stock is less than
$34 11/32, the Dollar Tree Board may propose that the parties treat the
average closing price, for purposes of calculating the exchange ratio, as a
value between the actual average closing price and $34 11/32. This proposal
would have the effect of decreasing the exchange ratio (but not below
1.2106). If the Step Ahead Board does not accept this proposal by 5:00 p.m.
of the third business day before the special meeting, the merger agreement
will terminate. If Dollar Tree makes such a proposal, the Step Ahead Board
will use the time before the deadline for termination of the merger agreement
to decide whether to agree to the Dollar Tree proposal. The Step Ahead Board
will make its determination only after careful consideration of Dollar Tree's
financial condition, results of operations and stock performance and other
factors, including the interests of the Step Ahead shareholders, and only
after receiving an updated opinion from Piper Jaffray Inc., its financial
advisor, as to whether the proposed merger consideration is fair from a
financial point of view to the Step Ahead shareholders as a group. After the
Step Ahead Board makes its determination, however, it does not intend to
resolicit your proxy. We cannot assure you that the parties will agree to an
average closing price that reflects actual Dollar Tree market prices below
$34 11/32 or to an exchange ratio greater than 1.2106.
Q: HOW AND WHEN CAN I LEARN HOW MANY SHARES I WILL RECEIVE IN THE MERGER?
A: YOU WILL NOT KNOW THE EXCHANGE RATIO UNTIL 5:00 P.M. ON DECEMBER 7, 1998, AT
WHICH TIME YOU CAN CALL 1-888-224-5256 TOLL-FREE TO OBTAIN THE ACTUAL
EXCHANGE RATIO. STEP AHEAD AND DOLLAR TREE WILL ALSO ISSUE A PRESS RELEASE
CONTAINING THIS INFORMATION.
Q: CAN I REVOKE MY PROXY?
A: YES. IF YOU HAVE ALREADY EXECUTED A PROXY, YOU CAN REVOKE YOUR PROXY OR
CHANGE YOUR VOTE BY FOLLOWING THE PROCEDURES OUTLINED ON PAGE 38 OF THIS
PROSPECTUS/PROXY STATEMENT.
Q: WHAT IS THE ESCROW?
A: The terms of the merger agreement require that 10% of the Dollar Tree shares
issued in the merger be held back and placed in an escrow account. These
shares will be used to satisfy any claims Dollar Tree may have with respect
to breaches of representations, warranties and covenants in the merger
agreement and may also be claimed by Dollar Tree to the extent that Step
Ahead's adjusted net worth just prior to closing is less than a specified
amount. If any shares of Dollar Tree common stock remain in the escrow one
year after the merger is completed, they will be distributed to you on a pro
rata basis.
Q: CAN YOU GIVE ME AN EXAMPLE?
A: If you currently own 100 shares of Step Ahead common stock, and Dollar Tree's
average closing price is $34 11/32 (and if the amount of Step Ahead stock
outstanding or subject to options does not change), then, immediately after
the merger, you will be entitled to 121 shares of Dollar Tree common stock
and a check for $2.06, which is the value of the fractional share based on
the average closing price. However, 12 shares of your Dollar Tree common
stock will go into escrow for one year so that upon closing you will
initially receive only 109 shares. The number of these shares you ultimately
receive out of the escrow will depend on whether Dollar Tree makes any valid
claims against the escrow during that one-year period. Since Dollar Tree
could make substantial claims against the escrowed shares, we can't assure
you that you will receive any shares out of the escrow. The value of shares
of Dollar Tree common stock you receive in the merger or any you receive from
the escrow may decline before you can sell them.
Q: WHO WILL REPRESENT ME IN CONNECTION WITH MY ESCROWED SHARES?
A: You are also being asked to select Gary Cino as your representative to act
for and on your behalf with respect to all matters arising in connection with
shares of Dollar Tree common stock to be placed in escrow.
Q: WHEN DO YOU EXPECT THE MERGER TO BE COMPLETED?
A: We are working towards completing the merger as quickly as possible. In
addition to the shareholder approval, certain other conditions must be met.
We expect to complete the merger by the end of 1998.
4
<PAGE>
Q: WHAT ARE THE TAX CONSEQUENCES OF THE MERGER?
A: The merger will be tax-free to you for federal income tax purposes except to
the extent you receive cash in lieu of fractional shares, in which case you
will recognize gain or loss equal to the difference between your tax basis in
such fractional shares and the amount of cash received. To review the tax
consequences to shareholders in greater detail, please see page 63.
Q: OTHER THAN APPROVAL BY THE STEP AHEAD SHAREHOLDERS, WHAT ARE THE KEY
CONDITIONS TO THE MERGER?
A: The merger may not occur unless the following conditions are met or waived:
- Over 90.02% of Step Ahead's shareholders have voted in favor of the
merger.
- The representations and warranties of the parties are true as of closing
and each has performed certain required actions before closing.
- Accountants for the parties have concurred in treatment of the merger as a
"pooling of interests."
- Certain officers of Step Ahead, including Gary Cino, have signed
non-competition agreements.
- Step Ahead's comparable store net sales increase on a two-month rolling
basis is at least five percent.
Q: CAN DOLLAR TREE TERMINATE THE MERGER AGREEMENT?
A: Yes, under certain circumstances. Dollar Tree may unilaterally choose to
terminate the merger agreement, among other reasons, if:
- Events have occurred which have had or are likely to have a "material
adverse effect" on Step Ahead;
- The actual average closing price of Dollar Tree common stock is less than
$34 11/32 and the Dollar Tree Board proposes that the parties treat the
average closing price as $34 11/32 or a lesser value and the Step Ahead
Board does not accept the proposed value by 5:00 p.m. of the third
business day before the special meeting, or
- The merger has not occurred by January 1, 1999.
WHO CAN HELP ANSWER YOUR QUESTIONS
If you have more questions about the merger you should contact:
Step Ahead Investments, Inc.
3222 Winona Way
North Highlands, California 95660
Attention: Mr. David Reed--Special Meeting
Phone Number: (916) 348-9898
5
<PAGE>
SUMMARY
The following is a brief summary of certain information contained elsewhere
in this Prospectus/Proxy Statement. This summary is qualified in its entirety by
the more detailed information appearing elsewhere in this Prospectus/Proxy
Statement and in the Appendices hereto.
<TABLE>
<S> <C>
THE COMPANIES
Dollar Tree....................... Dollar Tree Stores, Inc., a Virginia corporation
("Dollar Tree"), is the nation's leading operator of
discount variety stores offering merchandise at the
$1.00 price point. As of September 30, 1998, Dollar Tree
operated 1,054 stores in 29 states. Dollar Tree's
principal executive offices are located at 500 Volvo
Parkway, Chesapeake, Virginia 23320, and its telephone
number at that address is (757) 321-5000. See
"Information Concerning Dollar Tree."
Step Ahead........................ Step Ahead Investments, Inc., a California corporation
("Step Ahead"), is a retailer offering products at a
fixed price of 98 CENTS or less. As of September 30,
1998, Step Ahead operated 60 stores in central and
northern California and three stores in northwestern
Nevada. Step Ahead's principal executive offices are
located at 3222 Winona Way, North Highlands, California
95660, and its telephone number at that address is (916)
348-9898. See "Information Concerning Step Ahead."
SPECIAL MEETING OF SHAREHOLDERS OF STEP AHEAD
Time, Date, Place and Purpose..... A special meeting of shareholders of Step Ahead (the
"Special Meeting") will be held on December 10, 1998 at
10:00 a.m., local time, at Step Ahead's principal
executive offices, located at 3222 Winona Way, North
Highlands, California 95660.
At the Special Meeting, shareholders of Step Ahead (the
"Step Ahead Shareholders") will be asked to consider and
vote upon a proposal to approve (i) the merger (the
"Merger") of Dollar Tree West, Inc., a California
corporation and wholly owned subsidiary of Dollar Tree
("Merger Sub"), with and into Step Ahead, and (ii) the
Merger Agreement dated as of July 22, 1998 by and among
Step Ahead, Dollar Tree and Merger Sub, as amended by
the Amendment to Merger Agreement dated October 20, 1998
(the "Merger Agreement") which sets forth the terms of
the Merger. (A copy of the Merger Agreement and the
Amendment are attached hereto as Appendix B). See
"Voting and Proxies." The Step Ahead Shareholders will
also be asked to approve the selection of Mr. Gary Cino
to represent them with respect to the escrow of certain
shares to be received in the Merger.
Record Date; Vote Required........ The record date for Step Ahead Shareholders entitled to
vote upon the Merger and the Merger Agreement at the
Special Meeting is November 10, 1998 (the "Record
Date"). Under applicable law, approval of the Merger
requires the affirmative vote of the holders of a
majority of the outstanding shares of
</TABLE>
6
<PAGE>
<TABLE>
<S> <C>
Step Ahead's Common Stock, no par value (the "Step Ahead
Common Stock") and a majority of the outstanding shares
of Step Ahead's Series A Preferred Stock (the "Step
Ahead Preferred Stock"), each voting separately as a
class. The presence, either in person or by a properly
executed proxy, at the Special Meeting of the holders of
a majority of the outstanding shares entitled to vote is
necessary to constitute a quorum at the Special Meeting.
Consummation of the Merger is also subject to a number
of other conditions, including the requirement that
holders of no more than 9.98% of Step Ahead Stock vote
against the Merger or abstain from voting. See "Terms of
the Merger--Conditions Precedent to the Merger." As of
November 6, 1998, 1,261,290 shares of Step Ahead Common
Stock and 221,700 shares of Step Ahead Preferred Stock
were outstanding and entitled to vote at the Special
Meeting. Each such share will be entitled to one vote at
the Special Meeting. Gary Cino, Chairman and Chief
Executive Officer and a director of Step Ahead, and
certain trusts benefiting Gary Cino's family members
("Principal Shareholders") have agreed to vote all
shares of Step Ahead capital stock held beneficially by
them as of the Record Date (consisting of 810,000 shares
of Step Ahead Common Stock, representing approximately
64% of the Step Ahead Common Stock outstanding as of
November 6, 1998) in favor of the Merger and the Merger
Agreement.
</TABLE>
THE MERGER
The Merger Agreement is attached as Appendix B to this Prospectus/Proxy
Statement. On October 20, 1998, Dollar Tree, Step Ahead and Merger Sub signed an
amendment to the Merger Agreement (which also appears in Appendix B, after the
Merger Agreement.) The terms of the Merger and the provisions of the Merger
Agreement described in this Prospectus/Proxy Statement give effect to the
amendment to the original Merger Agreement. We encourage you to read the Merger
Agreement as it is the legal document that governs the Merger.
<TABLE>
<S> <C>
Effect of the Merger.............. Step Ahead will become a wholly owned subsidiary of
Dollar Tree. All of the outstanding shares of Step Ahead
Common Stock and Step Ahead Preferred Stock ("Step Ahead
Stock") (other than shares, if any, as to which
dissenters' rights have been exercised pursuant to
California law) will be converted into shares of the
common stock of Dollar Tree, ("Dollar Tree Common
Stock"). After consummation of the Merger, the sur-
viving corporation will be merged with and into Dollar
Tree on or about January 1, 1999.
Effective Time of the Merger...... If approved by the Step Ahead Shareholders, as soon as
practicable following the Special Meeting, the Agreement
of Merger
is expected to be filed with the Secretary of State of
the State
of California (the "Effective Time"). The Merger is also
subject to the satisfaction or waiver of the conditions
precedent to the Merger set forth in the Merger
Agreement. See "Terms of the Merger--Conditions
Precedent to the Merger."
</TABLE>
7
<PAGE>
<TABLE>
<S> <C>
Terms of the Merger............... As a result of the Merger, each outstanding share of
Step Ahead Stock (other than shares, if any, as to which
dissenters' rights have been exercised pursuant to
California law) will be converted into the right to
receive shares of Dollar Tree Common Stock equal to an
exchange ratio (the "Exchange Ratio"), calculated as
described in the next paragraph. Dollar Tree will assume
all options to acquire shares of Step Ahead Common Stock
(the "Step Ahead Options") that are outstanding at the
Effective Time. After such assumption, Dollar Tree will
issue, upon exercise of each such option, in lieu of
shares of Step Ahead Common Stock, the number of shares
of Dollar Tree Common Stock equal to the Exchange Ratio
multiplied by the number of shares of Step Ahead Common
Stock purchasable under such option at an exercise price
equal to the former exercise price of the option divided
by the Exchange Ratio. See "Terms of the Merger-- Manner
and Basis of Converting Shares of Step Ahead Stock" and
"Terms of the Merger--Assumption of Step Ahead Options."
Exchange Ratio.................... The Exchange Ratio equals (i) the Merger Consideration
divided by (ii) the Fully Diluted Step Ahead Shares and
will be calculated just prior to the Special Meeting.
"Fully Diluted Step Ahead Shares" means the total number
of shares of Step Ahead Stock issued and outstanding
immediately prior to the Effective Time increased by the
total number of shares of Step Ahead Stock subject to
Step Ahead Options outstanding on the sixth business day
prior to the Special Meeting. "Merger Consideration" is
calculated according to a somewhat complex formula that
will vary based on the average closing prices of Dollar
Tree Common Stock, as reported on The Nasdaq National
Market for each of the five consecutive trading days
ending on the sixth business day prior to the date of
the Special Meeting ("Average Closing Price"), as
follows:
- If the Average Closing Price is between $36 3/8
and $44 7/16 per share, inclusive, then the Merger
Consideration will be 2,025,000 shares of Dollar
Tree Common Stock.
- If the Average Closing Price is above $44 7/16 per
share, then the Merger Consideration will be the
number of shares of Dollar Tree Common Stock equal
to the product of 2,025,000 multiplied by a
fraction, the numerator of which is 44 7/16 and
the denominator of which is the Average Closing
Price. In no case, however, will the Merger
Consideration be less than 1,936,547 shares of
Dollar Tree Common Stock.
- If the Average Closing Price is below $36 3/8 per
share, then the Merger Consideration will be the
number of shares of Dollar Tree Common Stock equal
to the product of 2,025,000 multiplied by a
fraction, the numerator
</TABLE>
8
<PAGE>
<TABLE>
<S> <C>
of which is $36 3/8 and the denominator of which
is the Average Closing Price. However, if the
Average Closing Price is below $34 11/32 per
share, Dollar Tree has the right to terminate the
Merger Agreement. See "--Conditions to the Merger;
Termination."
Based on the number of Fully Diluted Step Ahead Shares
as of November 6, 1998, the following table shows the
Exchange Ratios associated with various Average Closing
Prices and illustrates the approximate corresponding
number of shares of Dollar Tree Common Stock to be
received for each share of Step Ahead Stock:
</TABLE>
<TABLE>
<S> <C> <C> <C> <C>
Average Exchange Shares Received Escrow
Closing Price Ratio Net of Escrow(1) Shares(1)
------------- ------------- ---------------- -------------
46 15/32 or 1.0930 0.9837 0.1093
higher
46 1.1042 0.9938 0.1104
45 1.1288 1.0159 0.1129
44 7/16 - 1.1430 1.0287 0.1143
36 3/8
36 1.1549 1.0394 0.1155
35 1.1879 1.0691 0.1188
34 11/32 1.2106 1.0895 0.1211
</TABLE>
<TABLE>
<S> <C>
---------
(1) The number of shares received net of Escrow is
calculated by subtracting the number of Escrow Shares
from the Exchange Ratio. The number of Escrow Shares
is calculated by multiplying the respective Exchange
Ratio by 10%. BECAUSE A STEP AHEAD SHAREHOLDER'S
SHARES WILL BE AGGREGATED TO DETERMINE WHETHER OR
NOT A FRACTIONAL SHARE EXISTS AND TO DETERMINE THE
NUMBER OF SHARES TO BE CONTRIBUTED TO THE ESCROW,
THE CALCULATIONS ABOVE ARE ONLY AN APPROXIMATION AND
CANNOT BE USED TO DETERMINE EXACTLY WHAT A STEP
AHEAD SHAREHOLDER WILL RECEIVE IN THE MERGER. See
"--Escrow of Shares."
See the table on page 55 or Appendix A for the Exchange
Ratios associated with other Average Closing Prices. See
also "Terms of the Merger--Manner and Basis of
Converting Shares of Step Ahead Stock."
If the actual Average Closing Price of Dollar Tree
Common Stock is less than $34 11/32, the Dollar Tree
Board may propose that the parties treat the Average
Closing Price, for purposes of calculating the Exchange
Ratio, as a value between the actual Average Closing
Price and $34 11/32. This proposal would have the effect
of decreasing the Exchange Ratio (but not below 1.2106).
If the Step Ahead Board does not accept this proposal by
5:00 p.m. of the third business day before the Special
Meeting, the Merger Agreement will terminate. If Dollar
Tree makes such a proposal, the Step Ahead Board will
use the time before the deadline for termination of the
Merger Agreement to decide whether to agree to the
Dollar Tree proposal. The Step Ahead
</TABLE>
9
<PAGE>
<TABLE>
<S> <C>
Board will make its determination only after careful
consideration of Dollar Tree's financial condition,
results of operations and stock performance and other
factors, including the interests of the Step Ahead
Shareholders, and only after receiving an updated
opinion from Piper Jaffray Inc., its financial advisor
("Piper Jaffray"), as to whether the proposed merger
consideration is fair from a financial point of view to
the Step Ahead Shareholders as a group. After the Step
Ahead Board makes its determination, however, it does
not intend to resolicit proxies.
STEP AHEAD SHAREHOLDERS WILL NOT KNOW THE EXCHANGE RATIO
UNTIL 5:00 P.M. ON DECEMBER 7, 1998, AT WHICH TIME STEP
AHEAD SHAREHOLDERS CAN CALL 1-888-224-5256 TOLL FREE TO
OBTAIN THE ACTUAL EXCHANGE RATIO. IF A STEP AHEAD
SHAREHOLDER HAS ALREADY EXECUTED A PROXY, A STEP AHEAD
SHAREHOLDER CAN REVOKE HIS OR HER PROXY OR CHANGE HIS OR
HER VOTE BY FOLLOWING THE PROCEDURES OUTLINED ON PAGE 38
OF THIS PROSPECTUS/PROXY STATEMENT.
Because the Merger Agreement prevents Step Ahead from
issuing new capital stock or from granting additional
options, the only way the Fully Diluted Step Ahead
Shares will change is if outstanding options to purchase
shares of Step Ahead Common Stock lapse. Any lapses of
outstanding options will decrease the number of Fully
Diluted Step Ahead Shares and thus increase the number
of shares of Dollar Tree Common Stock to be issued to
any particular Step Ahead Shareholder in the Merger.
Escrow of Shares.................. Upon consummation of the Merger, ten percent (10%) of
the shares of Dollar Tree Common Stock otherwise
issuable in the Merger ("Escrow Shares") will be held
back and placed in escrow with State Street Bank and
Trust in Boston, Massachusetts (the "Escrow Agent"). For
one year following the Effective Time, Dollar Tree may
make claims against the Escrow Shares for losses and
other amounts described in the next paragraph. In each
case, a claim will be paid by deducting a number of
Escrow Shares having an aggregate value nearest to the
amount of such claim, with each share valued at the
Average Closing Price. Any such claims will be satisfied
solely out of the Escrow Shares. Amounts deducted from
the Escrow Shares will reduce the Dollar Tree Common
Stock to be received by the Step Ahead Shareholders on a
pro rata basis. If any Escrow Shares remain at the end
of one year after the Effective Time, they will be
released to the Step Ahead Shareholders, except that
Escrow Shares may be held in reserve pending resolution
of open claims. Since Dollar Tree could make substantial
claims against the Escrow Shares, there can be no
assurance that the Step Ahead Shareholders will receive
any shares out of escrow. See "Terms of the
Merger--Escrow of Shares."
Post-Closing Adjustment;
Indemnification................. Dollar Tree may make a claim against the Escrow Shares
under the following circumstances:
</TABLE>
10
<PAGE>
<TABLE>
<S> <C>
- Step Ahead's net worth, subject to certain
adjustments described in the Merger Agreement
("Closing Equity"), is less than $8,200,000 on
November 29, 1998. If the Merger closes on or
after December 27, 1998, the Closing Equity
requirement is $9,600,000. For example, if the
Merger closes on December 10, 1998 and Step
Ahead's Closing Equity on November 29, 1998 is
$7,600,000, Dollar Tree will receive shares valued
at $600,000 from the escrow and your Escrow Shares
will be reduced on a pro rata basis (see "Terms of
the Merger--Post-Closing Adjustment");
- Dollar Tree or its affiliates, or their officers,
directors and agents suffer damages or losses
because Step Ahead made inaccurate representations
or warranties or Step Ahead violated its
agreements, undertakings or covenants contained in
the Merger Agreement or certain related documents
(see "Terms of the Merger-- Representations and
Warranties" and "Terms of the
Merger--Indemnification"); or
- Step Ahead's expenses relating to the Merger
exceed $1.3 million (see "Terms of the Merger--Fees
and Expenses").
Dollar Tree may use the escrow to recover the amount of
losses described in the first item above on a dollar for
dollar basis. Dollar Tree may also recover losses under
the latter two items on a dollar for dollar basis if
such losses arise from inaccurate representations and
warranties about fundamental matters or if the breach
was willful. Otherwise, Dollar Tree may only recover
such losses to the extent they exceed, in the aggregate,
$600,000.
Shareholder Representative........ The Step Ahead Shareholders will select a shareholder
representative at the Special Meeting who will have full
authority to settle or defend all claims by Dollar Tree
against the Escrow Shares ("Shareholder
Representative"). In addition, the Shareholder
Representative may be reimbursed for certain costs and
expenses through the transfer of Escrow Shares remaining
after satisfaction of such Dollar Tree claims. The
Shareholder Representative is exonerated from any
liability for actions taken, or omissions to act, in
good faith as Shareholder Representative. See "Terms of
the Merger--Shareholder Representative."
Interests of Certain Persons in
the Merger and Voting
Agreement....................... The Principal Shareholders own beneficially a majority
of the outstanding Step Ahead Common Stock. See
"Information Concerning Step Ahead--Security Ownership
of Principal Shareholders and Management of Step Ahead."
Pursuant to the terms of the Merger Agreement, Mr. Cino
will enter into a consulting and non-competition
agreement as a consultant of Dollar Tree. Pursuant to
that agreement, Mr. Cino will agree not
</TABLE>
11
<PAGE>
<TABLE>
<S> <C>
to compete with Step Ahead or Dollar Tree for a ten-year
period beginning on the date of the agreement. In
consideration for entering into such consulting and
non-competition agreement, Mr. Cino shall receive a
ten-year option under a newly adopted plan to purchase
150,000 shares of Dollar Tree Common Stock at the fair
market value of such stock on the date of grant. The
option vests ratably over five years. This option will
lapse if Mr. Cino competes with the combined company.
Messrs. Eric Stauss, Eric Leon, Anthony Leon and William
Coyle, officers of Step Ahead, will also enter into non-
competition agreements. Pursuant to those agreements,
the officers will not compete with Step Ahead or Dollar
Tree for a five-year period beginning on the date of the
agreement. In consideration for entering into such
non-competition agreements, the officers will receive
options to purchase shares of Dollar Tree Common Stock
under a newly adopted stock option plan at the fair
market value of such stock on the date of grant. The
options vest ratably over five years. In addition, upon
consummation of the Merger, certain officers and
employees of Step Ahead that become employees of Dollar
Tree or its subsidiaries are expected to receive other
options to purchase Dollar Tree Common Stock under
Dollar Tree's existing employee stock option plan. See
"Terms of the Merger--Non-Competition Agreements; Option
Grants" and "Terms of the Merger--New Stock Option
Grants."
In addition, the Principal Shareholders have executed a
voting agreement, pursuant to which they have agreed to
vote all shares of capital stock of Step Ahead owned
beneficially or controlled by them in favor of the
Merger. See "Terms of the Merger-- Voting Agreement"
From and after the closing of the Merger, Dollar Tree is
required to indemnify Step Ahead's directors and
officers for acts or omissions occurring at or prior to
the Effective Time. See "Terms of the Merger--Directors'
and Officers' Indemnification."
Recommendation of the Board of
Directors of Step Ahead......... The Board of Directors of each company has unanimously
approved the Merger and the Merger Agreement and the
transactions contemplated thereby as being in the best
interests of such company and its shareholders. THE
BOARD OF DIRECTORS OF STEP AHEAD UNANIMOUSLY RECOMMENDS
THAT STEP AHEAD SHAREHOLDERS VOTE FOR APPROVAL OF THE
MERGER AND THE MERGER AGREEMENT. For a discussion of the
factors considered by each company's Board of Directors
in approving the Merger, see "The Merger and Related
Transactions--Reasons for the Merger."
Exchange of Shares................ At the Effective Time, each issued and outstanding share
of Step Ahead Stock (other than shares, if any, as to
which dissenters'
</TABLE>
12
<PAGE>
<TABLE>
<S> <C>
rights have been exercised pursuant to California law)
automatically will be converted into the right to
receive shares of Dollar Tree Common Stock equal to the
Exchange Ratio. Exchange of certificates evidencing
shares of Step Ahead Stock for certificates evidencing
shares of Dollar Tree Common Stock will be made upon
surrender of the former to Boston Equiserve Limited
Partnership. CERTIFICATES SHOULD NOT BE SURRENDERED FOR
EXCHANGE PRIOR TO THE APPROVAL OF THE MERGER BY STEP
AHEAD SHAREHOLDERS. Step Ahead Shareholders will be
provided with a letter of transmittal and related
materials needed to exchange their certificates after
such approval. Promptly after the Effective Time, Dollar
Tree will notify holders of Step Ahead Options of the
procedure to be followed in connection with Dollar
Tree's assumption of such options. See "Terms of the
Merger--Manner and Basis of Converting Shares of Step
Ahead Stock," "Terms of the Merger--Assumption of Step
Ahead Options" and "Terms of the Merger--Exchange of
Certificates; Letter of Transmittal."
Conditions to the Merger;
Termination..................... Notwithstanding approval of the Merger by Step Ahead
Shareholders, the consummation of the Merger is subject
to a number of conditions which, if not fulfilled or
waived, permit termination of the Merger Agreement. For
example, Dollar Tree may refuse to close the Merger if
more than 9.98% of the Step Ahead Shareholders have
voted against or abstained from approving the Merger or
if Dollar Tree does not receive letters from accountants
for Dollar Tree and Step Ahead concurring with pooling
of interests accounting treatment for the Merger. See
"--Accounting Treatment" below. The Merger Agreement may
also be terminated by mutual consent or, in certain
circumstances, by Dollar Tree alone or Step Ahead alone.
For example, the Dollar Tree Board may unilaterally
terminate the Merger Agreement if the actual Average
Closing Price of Dollar Tree Common Stock is less than
$34 11/32 (unless the Step Ahead Board agrees, by 5:00
p.m. of the third business day before the Special
Meeting, to treat the Average Closing Price as $34 11/32
or a lesser value proposed by Dollar Tree) or if events
have occurred that have had or are likely to have a
material adverse effect on Step Ahead. The Merger
Agreement may also be unilaterally terminated by either
party if the Merger has not closed by January 1, 1999.
See "Terms of the Merger-- Conditions Precedent to the
Merger" and "Terms of the Merger--Amendment;
Termination."
Governmental and Regulatory
Approvals....................... The Merger will need to satisfy the requirements of the
Federal securities laws and applicable securities and
"blue sky" laws of various states. See "Terms of the
Merger--Governmental and Regulatory Approvals."
</TABLE>
13
<PAGE>
<TABLE>
<S> <C>
Material United States Federal
Income Tax Consequences......... The Merger is intended to qualify as a reorganization
under Section 368(a) of the Internal Revenue Code of
1986, as amended (the "Code"). Step Ahead has received
an opinion from its tax counsel that, among other
things, the Merger, if consummated on the terms
described in this Prospectus/Proxy Statement and based
on certain representation certificates, will constitute
a reorganization under Section 368(a) of the Code. The
merger will be tax-free to Step Ahead Shareholders for
federal income tax purposes except to the extent Step
Ahead Shareholders receive cash in lieu of fractional
shares, in which case Step Ahead Shareholders will
recognize gain or loss equal to the difference between
their tax basis in such fractional shares and the amount
of cash received. However, all Step Ahead Shareholders
are urged to consult their own tax advisors. See "Terms
of the Merger--Material United States Federal Income Tax
Consequences."
Accounting Treatment.............. The Merger is intended to be treated as a pooling of
interests for accounting purposes. As a condition to the
consummation of the Merger, Dollar Tree is to receive
two letters, dated as of the effective date of the
Registration Statement of which this Prospectus/Proxy
Statement forms a part (the "Registration Statement"),
and as of the Effective Time, from KPMG Peat Marwick LLP
("KPMG") to the effect that, based upon discussions with
officials responsible for financial and accounting
matters, and information to be furnished to KPMG through
the date of the letters, KPMG will concur with Dollar
Tree management's conclusion that no conditions exist
which would preclude Dollar Tree from accounting for the
merger with Step Ahead as a pooling of interests. KPMG's
letters will be based upon letters from
PricewaterhouseCoopers LLP ("PwC") concluding that Step
Ahead qualifies for pooling of interests accounting
treatment. To ensure pooling of interests accounting
treatment, the affiliates of Step Ahead and Dollar Tree
will agree to certain restrictions on the sale of their
shares of capital stock of Step Ahead and Dollar Tree.
In addition, at least 90% of the Step Ahead Stock must
be exchanged for Dollar Tree Common Stock in the Merger.
See "Terms of the Merger-- Accounting Treatment" and
"Terms of the Merger--Affiliates' Restrictions on Sale
of Step Ahead and Dollar Tree Stock."
Dissenters' Rights................ Step Ahead Shareholders are entitled to certain rights
under California law to receive cash, in lieu of Dollar
Tree Common Stock, for their shares provided that they
follow certain prescribed statutory procedures. The
failure of a dissenting shareholder to follow the
appropriate procedure may result in the termination or
waiver of such rights. Dollar Tree has the right under
the Merger Agreement not to proceed with the Merger if
holders of more than 9.98% of Step Ahead Stock have a
right to exercise their dissenters' rights because they
voted against or abstained from approving the Merger.
See "Terms of
</TABLE>
14
<PAGE>
<TABLE>
<S> <C>
the Merger--Conditions Precedent to the Merger" and
"Terms of the Merger--Dissenters' Rights."
Certain Effects of the Merger on
the Rights of Step Ahead
Shareholders.................... The internal affairs of Step Ahead are currently
governed by Step Ahead's Articles of Incorporation and
Bylaws and the California Corporations Code ("CCC").
Upon consummation of the Merger, Step Ahead Shareholders
will become shareholders of Dollar Tree and their rights
will be governed by Dollar Tree's Articles of
Incorporation and Bylaws and the Virginia Stock
Corporation Act, which differ from Step Ahead's Articles
of Incorporation and Bylaws and the CCC. See
"Description of Dollar Tree Capital Stock" and
"Comparison of Shareholders' Rights."
Termination Fee; Lock-Up Option... Step Ahead has agreed to pay Dollar Tree a fee of $3.0
million if the Merger Agreement is terminated because
(i) Step Ahead fails to cure a breach of any of its
covenants or any of its representations and warranties
in the Merger Agreement such that Dollar Tree's
conditions to the closing would not be satisfied; (ii)
the requisite vote of the Step Ahead Shareholders in
favor of the Merger Agreement is not obtained at the
Special Meeting; (iii) the Step Ahead Board of Directors
resolves, publicly comments, or discloses its intentions
to withdraw or modify its recommendation of the Merger
or recommends any alternative transaction; or (iv) a
tender or exchange offer for Step Ahead Stock is
commenced and the Step Ahead Board of Directors either
fails to recommend against acceptance of such tender or
exchange offer by Step Ahead Shareholders or takes no
position with respect to such acceptance. Step Ahead has
also granted to Dollar Tree an option to purchase for
cash a number of shares of Step Ahead Common Stock equal
to 19.9% of the total number of shares of Step Ahead
Stock issued and outstanding as of July 22, 1998 (the
"Lock-Up Option") at a price per share equal to $45.97.
The Lock-Up Option may be exercised by Dollar Tree in
whole or in part, in one or more exercises, at any time
prior to the second anniversary of the termination of
the Merger Agreement in the events described in (i),
(ii), (iii) and (iv) above, or at any time prior to the
first anniversary in all other events. The Lock-Up
Option may not be exercised if Step Ahead terminates the
Merger Agreement because Dollar Tree breaches its
agreements or Dollar Tree's representations or
warranties are inaccurate or untrue or if Dollar Tree
terminates the Merger Agreement because the Average
Closing Price is less than $34 11/32. See "Terms of the
Merger--Amendment; Termination" and "Terms of the
Merger--Lock-Up Option."
Opinion of Financial Advisor to
Step Ahead...................... Piper Jaffray has rendered an opinion stating that, as
of November 5, 1998, and based on and subject to the
assumptions,
</TABLE>
15
<PAGE>
<TABLE>
<S> <C>
factors and limitations set forth in the opinion, the
aggregate consideration to be received by the Step Ahead
Shareholders as a group in the Merger was fair from a
financial point of view to such holders as a group.
Piper Jaffray has agreed to provide an updated opinion
as to whether the proposed merger consideration is fair
from a financial point of view to the Step Ahead
shareholders as a group if requested by the Step Ahead
Board in the event that the Average Closing Price is
less than $34 11/32, Dollar Tree has proposed that the
parties treat the Average Closing Price as a value
between the actual Average Closing Price and $34 11/32
and the Step Ahead Board is considering whether to agree
to the Dollar Tree proposal. Step Ahead will have paid
Piper Jaffray an aggregate fee of $1,025,000 upon the
consummation of the Merger, of which $930,000 was
contingent upon the consummation of the Merger. See "The
Merger and Related Transactions--Opinion of Financial
Advisor to Step Ahead."
</TABLE>
RISK FACTORS
In determining whether to exchange Step Ahead Stock for Dollar Tree Common
Stock, the Step Ahead Shareholders should consider carefully the information set
forth under the caption "Risk Factors" and all other information contained in
this Prospectus/Proxy Statement.
16
<PAGE>
SELECTED HISTORICAL FINANCIAL DATA OF DOLLAR TREE
The following table sets forth for the periods indicated selected financial
data for Dollar Tree. The selected income statement and balance sheet data
presented below for the years ended December 31, 1993, 1994, 1995, 1996, and
1997 have been derived from Dollar Tree Stores, Inc. and subsidiaries'
consolidated financial statements that have been audited by KPMG Peat Marwick
LLP, independent certified public accountants. The selected income statement and
balance sheet data presented below for the six months ended June 30, 1997 and
1998 have been derived from the unaudited condensed consolidated financial
statements of Dollar Tree Stores, Inc. and subsidiaries 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. All Dollar Tree share and per share data have been
adjusted to reflect 50% stock dividends effected as 3-for-2 stock splits in
April 1996, July 1997 and June 1998. The results of operations for the six
months ended June 30, 1998 are not necessarily indicative of the results to be
expected for the entire year ending December 31, 1998. This information should
be read in conjunction with the financial statements and the notes thereto
incorporated herein by reference and "Dollar Tree Management's Discussion and
Analysis of Financial Condition and Results of Operations" included in this
Prospectus/Proxy Statement.
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED JUNE 30,
----------------------------------------------------- --------------------
1993 1994 1995 1996 1997 1997 1998
--------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA
AND SALES PER SELLING SQUARE FOOT DATA)
INCOME STATEMENT DATA:
Net sales.......................................... $ 167,753 $ 231,601 $ 300,229 $ 493,037 $ 635,473 $ 247,078 $ 324,698
Cost of sales...................................... 106,318 145,481 187,552 310,900 397,116 159,623 205,012
--------- --------- --------- --------- --------- --------- ---------
Gross profit..................................... 61,435 86,120 112,677 182,137 238,357 87,455 119,686
--------- --------- --------- --------- --------- --------- ---------
Selling, general and administrative expenses:
Operating expenses............................... 39,559 54,993 70,504 111,401 143,438 64,529 81,231
Depreciation and amortization.................... 3,054 4,186 5,468 10,527 13,125 6,095 8,471
Recapitalization expenses(1)..................... 4,387 -- -- -- -- -- --
--------- --------- --------- --------- --------- --------- ---------
Total.......................................... 47,000 59,179 75,972 121,928 156,563 70,624 89,702
--------- --------- --------- --------- --------- --------- ---------
Operating income................................... 14,435 26,941 36,705 60,209 81,794 16,831 29,984
Interest expense, net.............................. 1,837 4,028 2,617 5,193 2,812 1,238 1,321
--------- --------- --------- --------- --------- --------- ---------
Income before income taxes and extraordinary
loss............................................. 12,598 22,913 34,088 55,016 78,982 15,593 28,663
Provision for income taxes......................... 3,152 9,546 13,125 21,181 30,408 6,003 11,035
--------- --------- --------- --------- --------- --------- ---------
Income before extraordinary loss................... 9,446 13,367 20,963 33,835 48,574 9,590 17,628
Extraordinary loss, net of income tax(2)........... -- 1,253 -- -- -- -- --
--------- --------- --------- --------- --------- --------- ---------
Net income......................................... $ 9,446 $ 12,114 $ 20,963 $ 33,835 $ 48,574 $ 9,590 $ 17,628
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
INCOME PER SHARE DATA(3):
Basic net income per share......................... $ 0.22 $ 0.37 $ 0.59 $ 0.83 $ 0.16 $ 0.30
--------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- ---------
Diluted net income per share....................... $ 0.20 $ 0.34 $ 0.53 $ 0.75 $ 0.15 $ 0.27
--------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- ---------
PRO FORMA INCOME STATEMENT DATA (UNAUDITED):
Net income......................................... $ 9,446
Pro forma adjustment for C corporation income
taxes(4)......................................... 1,838
---------
Pro forma net income(4)............................ $ 7,608
---------
---------
Pro forma basic net income per share(5)............ $ 0.14
---------
---------
Pro forma diluted net income per share(5).......... $ 0.13
---------
---------
Weighted average number of common shares
outstanding, in thousands(3 and 5)............... 55,849 55,849 55,905 57,325 58,534 58,431 58,886
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
Weighted average number of common shares and
dilutive potential common shares outstanding, in
thousands(3 and 5)............................... 56,416 60,603 61,539 63,256 64,645 64,438 65,123
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
</TABLE>
17
<PAGE>
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED JUNE 30,
----------------------------------------------------- --------------------
1993 1994 1995 1996 1997 1997 1998
--------- --------- --------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA
AND SALES PER SELLING SQUARE FOOT DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
SELECTED OPERATING DATA:
Number of stores open at end of period(6):
Mall............................................. 145 154 173 202 235 224 256
Strip center..................................... 183 255 327 535 652 588 724
--------- --------- --------- --------- --------- --------- ---------
Total.......................................... 328 409 500 737 887 812 980
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
Net sales growth(6)................................ 39.2% 38.1% 29.6% 64.2% 28.9% 31.7% 31.4%
Comparable store net sales increase(7)............. 6.9% 9.1% 7.3% 6.2% 7.8% 9.7% 8.8%
Average net sales per store(8 and 9)............... $ 555 $ 606 $ 649 $ 691 $ 767 $ 319 $ 348
Average net sales per selling square foot(9):
Mall............................................. $ 270 $ 289 $ 295 $ 299 $ 287 $ 113 $ 120
Strip center..................................... $ 226 $ 236 $ 251 $ 264 $ 260 $ 106 $ 113
All stores....................................... $ 247 $ 257 $ 265 $ 275 $ 266 $ 108 $ 115
<CAPTION>
AS OF DECEMBER 31, AS OF JUNE 30,
----------------------------------------------------- --------------------
1993 1994 1995 1996 1997 1997 1998
--------- --------- --------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital.................................... $ 7,742 $ 14,334 $ 29,133 $ 23,488 $ 60,213 $ 67,360 $ 98,163
Total assets....................................... 42,188 60,688 91,621 171,099 272,576 219,619 311,472
Total debt......................................... 17,768 14,205 14,518 4,353 31,121 54,202 62,938
Shareholders' equity............................... 3,660 17,274 39,087 101,590 154,926 114,113 179,856
</TABLE>
- ------------------------
(1) Represents recapitalization expenses of $4.4 million incurred in connection
with a 1993 recapitalization, comprised of $3.6 million of management
incentive expenses and $0.8 million of transaction expenses.
(2) 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 Dollar
Tree's 12% Senior Subordinated Notes and 12% Junior Subordinated Notes.
(3) The extraordinary loss recognized in 1994 reduced basic and diluted net
income per share by $0.02, respectively. Basic and diluted income per share
data have been computed by dividing its components by the weighted average
number of common shares outstanding, and by the weighted average number of
common shares and dilutive potential common shares outstanding,
respectively. Dilutive potential common shares include all outstanding stock
options and warrants after applying the treasury stock method.
(4) Prior to September 30, 1993, Dollar Tree was treated as a subchapter S
corporation for Federal and certain state income tax purposes. As such,
income of Dollar Tree for that period was taxable to the individual
shareholders rather than to Dollar Tree. Accordingly, the provision for
income taxes for 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, Dollar
Tree converted to a subchapter C corporation. Accordingly, income since
September 30, 1993 was taxable to Dollar Tree. Pro forma net income reflects
a provision for income taxes as if Dollar Tree were a C corporation for all
of 1993 at an assumed effective tax rate of approximately 40%.
(5) Pro forma basic net income per share has been computed by dividing pro forma
net income by the weighted average number of common shares outstanding. Pro
forma diluted net income per share has been computed by dividing pro forma
net income by the weighted average number of common shares and dilutive
potential common shares outstanding. Dilutive potential common shares
include all outstanding stock options and warrants after applying the
treasury stock method.
(6) Dollar Tree closed two stores in 1993, one store in 1994, three stores in
1995, three stores in 1996 and one store in 1997. 1996 data reflects the
addition of 136 Dollar Bills stores on January 31, 1996. Dollar Tree closed
three stores during the first six months of 1998; there were no closures in
the comparable period for 1997.
(7) Comparable store net sales increase compares net sales for stores open
during the entire two periods compared. The comparable store net sales
increase calculation for the periods ended December 31, 1997, June 30, 1997
and June 30, 1998 include net sales of Dollar Bills stores for the
comparable periods.
(8) For stores open the entire period presented. Dollar Bills stores are only
included in the calculation for 1997 and for the calculations for June 30,
1997 and 1998.
(9) For stores open the entire period presented. Dollar Bills stores are only
included in the calculation for 1997 and for the calculations for June 30,
1997 and 1998. Selling square footage is estimated to be 83% of gross square
feet per store. Results for the six months ended June 30, 1998 may not be
indicative of full year average net sales per store or average net sales per
selling square foot due to seasonal fluctuations in sales. See "Dollar Tree
Management's Discussion and Analysis of Financial Condition and Results of
Operations--Seasonality and Quarterly Fluctuations."
18
<PAGE>
SELECTED HISTORICAL FINANCIAL DATA OF STEP AHEAD
The following table sets forth for the periods indicated selected financial
data for Step Ahead. The selected income statement and balance sheet data
presented below for the fiscal years ended January 2, 1994, January 1, 1995,
January 28, 1996, January 26, 1997 and January 25, 1998 have been derived from
Step Ahead Investments, Inc. financial statements that have been audited by
PricewaterhouseCoopers LLP, independent certified public accountants. The
selected income statement and balance sheet data presented below for the fiscal
six months ended July 27, 1997 and July 26, 1998 have been derived from the
unaudited financial statements of Step Ahead Investments, Inc. 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 statement
of the financial data shown. The results of operations for the fiscal six months
ended July 26, 1998 are not necessarily indicative of the results to be expected
for the entire current fiscal year. This information should be read in
conjunction with the financial statements and notes thereto and "Step Ahead
Management's Discussion and Analysis of Financial Condition and Results of
Operations" included in this Prospectus/Proxy Statement.
<TABLE>
<CAPTION>
FISCAL SIX MONTHS ENDED
FISCAL YEAR ENDED
----------------------------------------------------------- ------------------------
JAN. 2, JAN. 1, JAN. 28, JAN. 26, JAN 25, JULY 27, JULY 26,
1994 1995(1) 1996(1) 1997 1998 1997 1998
--------- ----------- ----------- ----------- --------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA
AND SALES PER SELLING SQUARE FOOT DATA)
INCOME STATEMENT DATA:
Net sales.................................... $ 38,457 $ 47,051 $ 55,038 $ 71,263 $ 92,940 $ 41,244 $ 52,430
Cost of sales................................ 29,270 34,918 39,837 50,738 66,696 30,163 37,160
--------- ----------- ----------- ----------- --------- ----------- -----------
Gross profit............................... 9,187 12,133 15,201 20,525 26,244 11,081 15,270
--------- ----------- ----------- ----------- --------- ----------- -----------
Selling, general and administrative expenses:
Operating expenses......................... 10,032 10,173 12,782 16,595 22,006 9,918 12,132
Depreciation and amortization.............. 403 529 651 899 1,332 611 794
--------- ----------- ----------- ----------- --------- ----------- -----------
Total.................................... 10,435 10,702 13,433 17,494 23,338 10,529 12,926
--------- ----------- ----------- ----------- --------- ----------- -----------
Operating income (loss)...................... (1,248) 1,431 1,768 3,031 2,906 552 2,344
Interest expense, net........................ 245 380 358 450 665 299 487
--------- ----------- ----------- ----------- --------- ----------- -----------
Income (loss) before income taxes............ (1,493) 1,051 1,410 2,581 2,241 253 1,857
Provision for income taxes................... 1 48 267 1,068 887 109 725
--------- ----------- ----------- ----------- --------- ----------- -----------
Net income (loss)............................ $ (1,494) $ 1,003 $ 1,143 $ 1,513 $ 1,354 144 1,132
--------- ----------- ----------- ----------- --------- ----------- -----------
--------- ----------- ----------- ----------- --------- ----------- -----------
INCOME (LOSS) PER SHARE DATA(2):
Basic net income (loss) per share............ $ (1.25) $ 0.84 $ 0.95 $ 1.25 $ 1.08 $ 0.11 $ 0.90
--------- ----------- ----------- ----------- --------- ----------- -----------
--------- ----------- ----------- ----------- --------- ----------- -----------
Diluted net income (loss) per share.......... $ (1.25) $ 0.71 $ 0.80 $ 1.05 $ 0.86 $ 0.09 $ 0.69
--------- ----------- ----------- ----------- --------- ----------- -----------
--------- ----------- ----------- ----------- --------- ----------- -----------
Weighted average number of common shares
outstanding, in thousands(2)............... 1,200 1,200 1,201 1,210 1,258 1,253 1,261
--------- ----------- ----------- ----------- --------- ----------- -----------
--------- ----------- ----------- ----------- --------- ----------- -----------
Weighted average number of common shares and
dilutive potential common shares
outstanding,
in thousands(2)............................ 1,200 1,422 1,423 1,439 1,570 1,572 1,643
--------- ----------- ----------- ----------- --------- ----------- -----------
--------- ----------- ----------- ----------- --------- ----------- -----------
</TABLE>
19
<PAGE>
<TABLE>
<CAPTION>
FISCAL SIX MONTHS ENDED
FISCAL YEAR ENDED
----------------------------------------------------------- ------------------------
JAN. 2, JAN. 1, JAN. 28, JAN. 26, JAN 25, JULY 27, JULY 26,
1994 1995(1) 1996(1) 1997 1998 1997 1998
--------- ----------- ----------- ----------- --------- ----------- -----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA
AND SALES PER SELLING SQUARE FOOT DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
SELECTED OPERATING DATA:
Number of stores open at end of period(3).... 30 33 38 48 59 54 62
Net sales growth............................. 25.1% 22.3% 17.0% 29.5% 30.4% 35.9% 27.1%
Comparable store net sales increase
(decrease)(4).............................. (8.3)% 1.5% 3.3% 2.1% 5.9% 6.2% 12.3%
Average net sales per store(5)............... $ 1,280 $ 1,380 $ 1,482 $ 1,504 $ 1,599 $ 754 $ 813
Average net sales per selling square foot(3
and 5)..................................... $ 173 $ 164 $ 164 $ 161 $ 160 $ 76 $ 81
</TABLE>
<TABLE>
<CAPTION>
AS OF
--------------------------------------------------------------------------
JAN. 2 JAN. 1, JAN. 28, JAN. 26, JAN. 25, JULY 27,
1994 1995(1) 1996(1) 1997 1998 1997
--------- ----------- ----------- ----------- ----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital............................. $ 1,084 $ 1,515 $ 1,971 $ 1,323 $ 1,936 $ 1,167
Total assets................................ 10,879 12,113 16,013 24,537 30,012 28,201
Total debt.................................. 3,367 2,258 5,318 8,686 10,045 9,899
Shareholders' equity........................ 695 1,698 2,672 4,258 6,127 4,914
<CAPTION>
JULY 26,
1998
-----------
<S> <C>
BALANCE SHEET DATA:
Working capital............................. $ 1,946
Total assets................................ 31,926
Total debt.................................. 11,964
Shareholders' equity........................ 7,275
</TABLE>
- ------------------------
(1) Effective January 30, 1995, Step Ahead changed its fiscal year from a
52-week period ending on the Sunday nearest December 31 to the last Sunday
in January. For this reason, the results of operations for the four week
period ended January 29, 1995 are not included in the results of operations
for the fiscal year ended January 1, 1995 or for the fiscal year ended
January 28, 1996. The audited net loss for this four week period was $0.169
million.
(2) Basic and diluted income (loss) per share data have been computed by
dividing net income by the weighted average number of common shares
outstanding, and by the weighted average number of common shares and
dilutive potential common shares outstanding, respectively. Dilutive
potential common shares include all outstanding stock options after applying
the treasury stock method unless they would have an antidilutive effect on
net income per share.
(3) Step Ahead closed one store in fiscal 1996. All stores are located in strip
centers or are free standing.
(4) Comparable store net sales increase compares net sales for stores open
during the entire two periods compared.
(5) For stores open the entire period presented. Results for the fiscal six
months ended July 26, 1998 may not be indicative of full year average net
sales per store or average net sales per selling square foot due to seasonal
fluctuations in sales. See "Step Ahead Management's Discussion and Analysis
of Financial Condition and Results of Operations--Seasonality and Quarterly
Fluctuations."
20
<PAGE>
SELECTED UNAUDITED PRO FORMA COMBINED FINANCIAL DATA
The following selected unaudited pro forma combined financial data give
effect to the Merger, based on an assumed Exchange Ratio of 1.2106, the Exchange
Ratio corresponding to an Average Closing Price of $34 11/32 per share based on
Fully Diluted Step Ahead Shares as of November 6, 1998, using the pooling of
interests method of accounting and reflect the combination of the historical
consolidated balance sheets and related consolidated income statements of Dollar
Tree Stores, Inc. and subsidiaries with the balance sheets and statements of
income of Step Ahead Investments, Inc. All Dollar Tree share and per share data
have been adjusted to reflect 50% stock dividends effected as 3-for-2 stock
splits in April 1996, July 1997 and June 1998.
The unaudited pro forma combined operating results assume that the Merger
occurred at the beginning of each of the periods presented. To reflect the
pooling of interests, the operating results of Dollar Tree Stores, Inc. and
subsidiaries for each of the years ended December 31, 1993, 1994, 1995, 1996 and
1997 and for each of the six months ended June 30, 1997 and 1998 have been
combined with Step Ahead Investments, Inc.'s operating results for each of the
fiscal years ended January 2, 1994, January 1, 1995, January 28, 1996, January
26, 1997 and January 25, 1998 and for each of the fiscal six months ended July
27, 1997 and July 26, 1998, respectively.
The pro forma combined balance sheet data as of December 31, 1993, 1994,
1995, 1996 and 1997 and as of June 30, 1997 and 1998 assume that the Merger
occurred as of these dates, respectively, and reflect the combination of the
historical consolidated balance sheets of Dollar Tree Stores, Inc. and
subsidiaries as of these dates with the historical balance sheets of Step Ahead
Investments, Inc. as of January 2, 1994, January 1, 1995, January 28, 1996,
January 26, 1997 and January 25, 1998 and as of July 27, 1997 and July 26, 1998,
respectively.
The unaudited pro forma combined financial data has been prepared from and
should be read in conjunction with each of the historical financial statements
and notes thereto referred to above, and incorporated herein by reference or
appearing elsewhere in this Prospectus/Proxy Statement, and the pro forma
condensed combined financial statements appearing elsewhere herein. The
unaudited pro forma combined financial data are presented for comparative
purposes only and are not necessarily indicative of what the actual results of
operations or financial position would have been for the periods presented had
the transaction occurred on the dates indicated or of the results of future
operations.
21
<PAGE>
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED JUNE 30,
----------------------------------------------------- --------------------
1993 1994(1) 1995(1) 1996 1997 1997 1998
--------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA
AND SALES PER SELLING SQUARE FOOT DATA)
PRO FORMA INCOME STATEMENT DATA:
Net sales.......................................... $ 206,210 $ 278,652 $ 355,267 $ 564,300 $ 728,413 $ 288,322 $ 377,128
Cost of sales...................................... 135,588 180,399 227,389 361,638 463,812 189,786 242,172
--------- --------- --------- --------- --------- --------- ---------
Gross profit..................................... 70,622 98,253 127,878 202,662 264,601 98,536 134,956
--------- --------- --------- --------- --------- --------- ---------
Selling, general and administrative expenses:
Operating expenses............................... 49,591 65,166 83,286 127,996 165,444 74,447 93,363
Depreciation and amortization.................... 3,457 4,715 6,119 11,426 14,457 6,706 9,265
Recapitalization expenses(2)..................... 4,387 -- -- -- -- -- --
--------- --------- --------- --------- --------- --------- ---------
Total.......................................... 57,435 69,881 89,405 139,422 179,901 81,153 102,628
--------- --------- --------- --------- --------- --------- ---------
Operating income................................... 13,187 28,372 38,473 63,240 84,700 17,383 32,328
Interest expense................................... 2,082 4,408 2,975 5,643 3,477 1,537 1,808
--------- --------- --------- --------- --------- --------- ---------
Income before income taxes and extraordinary
loss............................................. 11,105 23,964 35,498 57,597 81,223 15,846 30,520
Provision for income taxes(3)...................... 4,991 9,594 13,392 22,249 31,295 6,112 11,760
--------- --------- --------- --------- --------- --------- ---------
Income before extraordinary loss(3)................ 6,114 14,370 22,106 35,348 49,928 9,734 18,760
Extraordinary loss, net of income tax(4)........... -- 1,253 -- -- -- -- --
--------- --------- --------- --------- --------- --------- ---------
Net income(3)...................................... $ 6,114 $ 13,117 $ 22,106 $ 35,348 $ 49,928 $ 9,734 $ 18,760
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
PRO FORMA INCOME PER SHARE DATA(5):
Basic net income per share......................... $ 0.11 $ 0.23 $ 0.39 $ 0.60 $ 0.83 $ 0.16 $ 0.31
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
Diluted net income per share....................... $ 0.11 $ 0.21 $ 0.35 $ 0.54 $ 0.75 $ 0.15 $ 0.28
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
Weighted average number of common shares
outstanding, in thousands(5)..................... 57,301 57,301 57,358 58,789 60,056 59,947 60,412
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
Weighted average number of common shares and
dilutive potential common shares outstanding, in
thousands(5)..................................... 58,137 62,324 63,261 64,998 66,545 66,341 67,112
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
PRO FORMA SELECTED OPERATING DATA:
Number of stores open at end of period(6):
Mall............................................. 145 154 173 202 235 224 256
Strip center..................................... 213 288 365 583 711 642 786
--------- --------- --------- --------- --------- --------- ---------
Total.......................................... 358 442 538 785 946 866 1,042
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
Net sales growth(6)................................ 36.3% 35.1% 27.5% 58.8% 29.1% 32.3% 30.8%
Comparable store net sales increase(7)............. 4.4% 8.0% 6.7% 5.6% 7.6% 9.3% 9.3%
Average net sales per store(8)..................... $ 615 $ 671 $ 712 $ 747 $ 818 $ 346 $ 377
Average net sales per selling square foot(9):
Mall............................................. $ 270 $ 289 $ 295 $ 299 $ 287 $ 113 $ 120
Strip center..................................... $ 204 $ 212 $ 220 $ 245 $ 238 $ 99 $ 106
All stores....................................... $ 231 $ 235 $ 241 $ 260 $ 247 $ 102 $ 109
</TABLE>
22
<PAGE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31, AS OF JUNE 30,
----------------------------------------------------- --------------------
1993 1994(1) 1995(1) 1996 1997 1997 1998
--------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
PRO FORMA BALANCE SHEET DATA:
Working capital.................................... $ 8,826 $ 15,849 $ 31,104 $ 24,811 $ 62,149 $ 68,527 $ 100,109
Total assets....................................... 53,067 72,801 107,634 195,636 302,588 247,820 343,398
Total debt......................................... 21,135 16,463 19,836 13,039 41,166 64,101 74,902
Shareholders' equity............................... 4,355 18,972 41,759 105,848 161,053 119,027 187,131
</TABLE>
- ------------------------
(1) Effective January 30, 1995, Step Ahead changed its fiscal year from a
52-week period ending on the Sunday nearest December 31 to the last Sunday
in January. For this reason, Step Ahead's results of operations for the
four-week period ended January 29, 1995 are not included in the results of
operations for the year ended December 31, 1994 or for the year ended
December 31, 1995. The audited net loss for this four-week period was $0.169
million.
(2) Represents recapitalization expenses of $4.4 million incurred in connection
with a 1993 recapitalization, comprised of $3.6 million of management
incentive expenses and $0.8 million of transaction expenses.
(3) Prior to September 30, 1993, Dollar Tree was treated as a subchapter S
corporation for Federal and certain state income tax purposes. As such,
income of Dollar Tree for that period was taxable to the individual
shareholders rather than to Dollar Tree. Accordingly, the provision for
income taxes for 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, Dollar
Tree converted to a subchapter C corporation. Accordingly, income since
September 30, 1993 was taxable to Dollar Tree. Net income for the year ended
December 31, 1993 reflects a provision for income taxes of $1.838 million as
if Dollar Tree were a C corporation for all of 1993 at an assumed effective
tax rate of approximately 40%.
(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 Dollar
Tree's 12% Senior Subordinated Notes and 12% Junior Subordinated Notes.
(5) The extraordinary loss recognized in 1994 reduced basic and diluted net
income per share by $0.02, respectively. Basic and diluted income per share
data have been computed by dividing its components by the weighted average
number of common shares outstanding, and by the weighted average number of
common shares and dilutive potential common shares outstanding,
respectively. Diluted potential common shares include all outstanding stock
options and warrants after applying the treasury stock method.
(6) Dollar Tree closed two stores in 1993, one store in 1994, three stores in
1995, three stores in 1996 and one store in 1997. 1996 data reflects the
addition of 136 Dollar Bills stores on January 31, 1996. Dollar Tree closed
three stores during the first six months of 1998; there were no closures in
the comparable period for 1997. Step Ahead closed one store in 1996.
(7) Comparable store net sales increase compares net sales for stores open
during the entire two periods compared. The comparable store net sales
increase calculation for the periods ended December 31, 1997, June 30, 1997
and June 30, 1998 includes net sales of Dollar Bills stores for the
comparable periods.
(8) For stores open the entire period presented. Dollar Bills stores are only
included in the calculation for 1997 and for the calculations for June 30,
1997 and 1998.
(9) For stores open the entire period presented. Dollar Bills stores are only
included in the calculation for 1997 and for the calculations for June 30,
1997 and 1998. Dollar Tree's selling square footage is estimated to be 83%
of gross square feet per store.
23
<PAGE>
COMPARATIVE PER SHARE DATA
The following table reflects: (a) the historical net income per share of
Dollar Tree Common Stock in comparison with the pro forma net income per share
after giving effect to the Merger as a pooling of interests; and (b) the
historical net income per share of Dollar Tree Common Stock in comparison with
the pro forma net income attributable to the shares of Dollar Tree Common Stock
which will be received for each share of Step Ahead Stock, assuming an Exchange
Ratio of 1.2106, the Exchange Ratio corresponding to an Average Closing Price of
$34 11/32 per share. The information presented in this table should be read in
conjunction with the unaudited pro forma condensed combined financial data and
the separate audited financial statements of the respective companies and the
notes thereto incorporated herein by reference or appearing elsewhere herein.
All Dollar Tree share and per share data have been adjusted to reflect 50% stock
dividends effected as 3-for-2 stock splits in April 1996, July 1997 and June
1998. The unaudited pro forma condensed combined financial data are not
necessarily indicative of the operating results that would have been achieved
had the transaction been in effect as of the beginning of the periods presented
and should not be construed as representative of the results of future
operations.
<TABLE>
<CAPTION>
PER SHARE DATA (1)
-------------------------------------------
<S> <C> <C> <C>
BASIC DILUTED
NET INCOME NET INCOME BOOK VALUE
------------- ------------- -------------
Dollar Tree
Calendar year ended December 31, 1995.................................. $ 0.37 $ 0.34 $ 0.70
Calendar year ended December 31, 1996.................................. 0.59 0.53 1.74
Calendar year ended December 31, 1997.................................. 0.83 0.75 2.64
Six months ended June 30, 1998......................................... 0.30 0.27 3.04
Step Ahead
Fiscal year ended January 28, 1996..................................... $ 0.95 $ 0.80 $ 2.22
Fiscal year ended January 26, 1997..................................... 1.25 1.05 3.51
Fiscal year ended January 25, 1998..................................... 1.08 0.86 4.86
Fiscal six months ended July 26, 1998.................................. 0.90 0.69 5.77
Pro forma combined (per Dollar Tree share) (2)
Calendar year ended December 31, 1995.................................. $ 0.39 $ 0.35 $ 0.73
Calendar year ended December 31, 1996.................................. 0.60 0.54 1.77
Calendar year ended December 31, 1997.................................. 0.83 0.75 2.67
Six months ended June 30, 1998......................................... 0.31 0.28 3.09
Equivalent pro forma combined (per Step Ahead share) (3)
Calendar year ended December 31, 1995.................................. $ 0.47 $ 0.42 $ 0.88
Calendar year ended December 31, 1996.................................. 0.73 0.66 2.15
Calendar year ended December 31, 1997.................................. 1.01 0.91 3.24
Six months ended June 30, 1998......................................... 0.38 0.34 3.74
</TABLE>
- ------------------------
(1) All per share information is based upon the weighted average number of
common shares (and, in the case of diluted per share information, diluted
potential common shares, including, in the case of Step Ahead, preferred
shares) outstanding, for net income per share data, or the number of shares
outstanding at the end of the periods presented, for book value per share
data.
(2) Pro forma combined data (per Dollar Tree shares) is calculated by dividing
the combined net income or book value for the corresponding calendar and
fiscal years or years ends by the sum of (i) Dollar Tree shares oustanding
and (ii) the number of Step Ahead shares outstanding at the end of the
period shown multiplied by the Exchange Ratio, assumed to be 1.2106.
(3) Equivalent pro forma combined data (per Step Ahead shares) is calculated by
dividing the combined net income or book value for the corresponding
calendar and fiscal years or year ends by the sum of (i) Step Ahead shares
outstanding at the end of the period shown and (ii) Dollar Tree shares
oustanding divided by the Exchange Ratio, assumed to be 1.2106.
24
<PAGE>
PRICE RANGE OF COMMON STOCK
Dollar Tree's Common Stock has been traded on The Nasdaq National Market
under the symbol "DLTR" since Dollar Tree's initial public offering on March 6,
1995. The following table sets forth the high and low sales prices of Dollar
Tree's Common Stock as reported on The Nasdaq National Market for the periods
indicated, restated to reflect 50% stock dividends effected as 3-for-2 stock
splits in April 1996, July 1997 and June 1998.
<TABLE>
<CAPTION>
1996: HIGH LOW
- -------------------------------------------------------------------------- ------- -------
<S> <C> <C>
First Quarter............................................................. $13 45/64 7 17/64
Second Quarter............................................................ 20 12 57/64
Third Quarter............................................................. 18 43/64 10 7/32
Fourth Quarter............................................................ 19 7/64 13 29/64
1997:
- --------------------------------------------------------------------------
First Quarter............................................................. $20 7/32 14 21/64
Second Quarter............................................................ 22 29/64 15 3/4
Third Quarter............................................................. 31 37/64 21 7/32
Fourth Quarter............................................................ 29 59/64 23
1998:
- --------------------------------------------------------------------------
First Quarter............................................................. $36 5/64 23
Second Quarter............................................................ 41 59/64 33 27/64
Third Quarter............................................................. 49 1/2 27 7/8
Fourth Quarter (through November 9, 1998)................................. 43 1/2 23 3/4
</TABLE>
On July 22, 1998, the last trading day prior to the first public
announcement by Dollar Tree and Step Ahead concerning the Merger, the closing
price of Dollar Tree Common Stock reported on The Nasdaq National Market was
$46 5/8 per share. As of November 6, 1998, Dollar Tree had approximately 399
shareholders of record.
Following the Merger, Dollar Tree Common Stock will continue to be traded on
The Nasdaq National Market under the symbol "DLTR."
Dollar Tree 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 Dollar Tree Common Stock in the foreseeable future. Dollar Tree's
credit facilities contain financial covenants which restrict Dollar Tree's
ability to pay dividends.
There is no public market for either Step Ahead Common Stock or Step Ahead
Preferred Stock. Step Ahead has not paid cash dividends on Step Ahead Common
Stock or Step Ahead Preferred Stock during its last three fiscal years. As of
November 6, 1998, Step Ahead had 47 shareholders of record of Step Ahead Common
Stock and 31 shareholders of record of Step Ahead Preferred Stock.
25
<PAGE>
RISK FACTORS
BEFORE VOTING IN FAVOR OF THE MERGER, HOLDERS OF STEP AHEAD STOCK SHOULD
CONSIDER THE SPECIFIC FACTORS SET FORTH BELOW AS WELL AS THE OTHER INFORMATION
SET FORTH ELSEWHERE IN THIS PROSPECTUS/PROXY STATEMENT AND INCORPORATED HEREIN
BY REFERENCE. SEE "DOLLAR TREE MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS" AND "INFORMATION CONCERNING DOLLAR TREE"
FOR A DESCRIPTION OF OTHER FACTORS AFFECTING THE BUSINESS OF DOLLAR TREE
GENERALLY. SEE "STEP AHEAD MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS" AND "INFORMATION CONCERNING STEP AHEAD" FOR
A DESCRIPTION OF OTHER FACTORS AFFECTING THE BUSINESS OF STEP AHEAD GENERALLY.
RISKS RELATED TO THE MERGER
UNCERTAINTY AS TO EXCHANGE RATIO AND AMOUNT OF DOLLAR TREE COMMON STOCK ISSUABLE
IN THE MERGER
Upon consummation of the Merger, each outstanding share of Step Ahead Stock
will be converted into the right to receive a certain number of shares of Dollar
Tree Common Stock. The Merger Agreement provides that the number of shares of
Dollar Tree Common Stock to be issued to the Step Ahead Shareholders will be
determined by the Exchange Ratio, which is based in part upon an Average Closing
Price, reflecting the market price of Dollar Tree Common Stock shortly before
the Special Meeting. The market price of Dollar Tree Common Stock, however, has
historically been volatile. See "--Risks Related to the Merger--Volatility of
Stock Prices." Consequently, there can be no assurance as to the market value of
Dollar Tree Common Stock on the dates the Average Closing Price is determined.
Accordingly, the number of shares of Dollar Tree Common Stock that Step Ahead
Shareholders will receive in the Merger cannot be determined until three
business days before the Special Meeting. An increase in the aggregate number of
shares issued in the Merger will dilute the net income per share of Dollar Tree
after the Merger and increase the percentage of Dollar Tree Common Stock issued
to Step Ahead Shareholders in the Merger. See "--Risks Related to the
Merger--Dilution to Net Income Per Share." See the table on page 55 or Appendix
A for the Exchange Ratios associated with various Average Closing Prices.
If the actual Average Closing Price of Dollar Tree Common Stock is less than
$34 11/32, the Dollar Tree Board may propose that the parties treat the Average
Closing Price, for purposes of calculating the Exchange Ratio, as a value
between the actual Average Closing Price and $34 11/32. This proposal would have
the effect of decreasing the Exchange Ratio (but not below 1.2106). If the Step
Ahead Board does not accept this proposal by 5:00 p.m. of the third business day
before the Special Meeting, the Merger Agreement will terminate. If Dollar Tree
makes such a proposal, the Step Ahead Board will use the time before the
deadline for termination of the Merger Agreement to decide whether to agree to
the Dollar Tree proposal. The Step Ahead Board will make its determination only
after careful consideration of Dollar Tree's financial condition, results of
operations and stock performance and other factors, including the interests of
the Step Ahead Shareholders, and only after receiving an updated opinion from
Piper Jaffray as to whether the proposed merger consideration is fair from a
financial point of view to the Step Ahead Shareholders as a group. After the
Step Ahead Board makes its determination, however, it does not intend to
resolicit proxies. As a result, the Step Ahead Board's decision will be final
and will be available to Step Ahead Shareholders only once the final Exchange
Ratio is announced by press release at 5:00 p.m. on December 7, 1998, at which
time Step Ahead Shareholders may call 1-888-224-5256 toll-free to learn the
Exchange Ratio. If a Step Ahead Shareholder has already executed a proxy, a Step
Ahead Shareholder can revoke his or her proxy or change his or her vote by
following the procedures outlined on page 38 of this Prospectus/Proxy Statement.
VOLATILITY OF STOCK PRICES
Dollar Tree Common Stock has experienced substantial price volatility. In
addition, any shortfall or changes in financial results or expectations could
cause the price of Dollar Tree Common Stock to fluctuate significantly. Since
July 1, 1998 the price of Dollar Tree Common Stock has ranged from a high of
26
<PAGE>
$49 1/2 per share on July 30, 1998 to a low of $23 3/4 per share on October 8,
1998. On November 9, 1998, the closing price of Dollar Tree Common Stock on The
Nasdaq National Market was $42 5/8 per share. In recent weeks, the stock market
in general has experienced extreme price and volume fluctuations, which have
sometimes been unrelated to the operating performance of listed companies. These
broad market fluctuations may also adversely affect the market price of Dollar
Tree Common Stock. Changes in the market price of Dollar Tree Common Stock will
impact the Exchange Ratio and the number of shares of Dollar Tree Common Stock
issuable pursuant to the Merger as discussed in "--Risks Related to the
Merger--Uncertainty as to Exchange Ratio and Amount of Dollar Tree Common Stock
Issuable in the Merger." The market price of Dollar Tree Common Stock may
decline after the Exchange Ratio has been determined but before Step Ahead
Shareholders are permitted to sell the shares received in the Merger. See
"--Risks Related to the Merger--Risks Related to Escrow Shares" and"--Risks
Related to the Merger--Lock-up of Affiliates' Shares."
DIFFICULTIES AND COSTS OF INTEGRATION
Dollar Tree expects that the Merger will enable it to expand to the West
Coast utilizing Step Ahead's established management team, store and distribution
personnel and infrastructure; obtain expertise in operating a larger single
price point store format; secure the services of experienced buyers
knowledgeable in consumable and closeout merchandise; provide Dollar Tree with
the platform to expand using either the Dollar Tree or 98 CENTS Clearance Center
prototype store; and consolidate the buying power of both companies with a view
towards obtaining higher quality goods, greater volume discounts, and economies
of scale.
The anticipated benefits of the Merger will not be achieved unless Dollar
Tree and Step Ahead successfully combine in an efficient and effective manner.
That combination will require the integration of Dollar Tree's management staffs
and corporate culture with Step Ahead's management staffs and corporate culture;
the coordination of the companies' sales and marketing efforts; the integration
and coordination of the companies' purchasing departments; and the
identification and elimination of redundant overhead and under-performing retail
stores. Dollar Tree believes that the continued employment of certain members of
Step Ahead's management team is critical to the successful integration and
operation of Step Ahead following consummation of the Merger, particularly in
the areas of purchasing, merchandising, store operations and real estate. The
98 CENTS Clearance Center concept, with its larger store format, product mix
with a higher percentage of consumable goods, greater reliance on closeout
merchandise, and lower rent costs in stores located in less economically
advantaged areas, differs from Dollar Tree's concept. Although certain members
of Step Ahead management will sign non-competition agreements, the agreements do
not assure that the signatories will stay with the combined company and only
five members of management will have signed non-competition agreements.
Moreover, Gary Cino, Step Ahead's founder, Chairman, and Chief Executive
Officer, has announced his intention to retire after the closing of the Merger
and will be available to assist Dollar Tree for only a one-year period under a
consulting arrangement. There can be no assurance that Dollar Tree will be able
to retain Step Ahead's existing management team. Further, the acquisition of
Step Ahead expands Dollar Tree's operations into geographic locations outside
its present market area. There can be no assurance that the Dollar Tree store
concept will be successful in West Coast markets or that Dollar Tree can
successfully expand the 98 CENTS Clearance Center concept in any market. No
assurance can be given that the level of sales of Dollar Tree and Step Ahead
will not be adversely affected by the Merger, or that the integration of the
various organizations within the combined company will be completed in the
manner anticipated. The difficulties of integrating Dollar Tree and Step Ahead
may have a material adverse effect on the business and operating results of the
combined company.
Full integration of the purchasing effort, financial and information
systems, distribution and merchandising systems, management staffs and
organizational cultures of the two geographically separated organizations will
require considerable time and effort on the part of Dollar Tree's management,
buyers, accounting staff, operations personnel and other staff. There can be no
assurance that Dollar Tree will not
27
<PAGE>
experience problems associated with the integration or that the integration will
proceed efficiently or successfully. Furthermore, even if the operations of the
two companies are ultimately successfully integrated, it is anticipated that the
integration will be accomplished over time and, in the interim, the combination
may have an adverse effect on Dollar Tree's business and results of operations.
Step Ahead and Dollar Tree estimate that they will incur substantial direct
transaction costs and other charges associated with the Merger which management
estimates to be approximately $5.3 million and which will be charged to
operations during the course of the transaction. These costs and charges cannot
be determined accurately at this time and may well exceed the estimate. There
can be no assurance that Dollar Tree will not incur additional unanticipated
costs in the future associated with integrating the two companies or that these
costs will not have a material adverse effect on the operating results of the
combined company.
DILUTION TO NET INCOME PER SHARE
Dollar Tree and Step Ahead anticipate that the results of operations for
Dollar Tree in the quarter in which the Merger is completed will be adversely
affected by transaction costs and other charges associated with the Merger. See
"--Risks Related to the Merger--Difficulties and Costs of Integration." In
addition, the number of shares of Dollar Tree Common Stock issued in the Merger
will fluctuate based upon the market price of such stock, which has historically
been volatile. See "--Risks Related to the Merger-- Volatility of Stock Prices."
After consideration of expected costs and charges and estimates of the number of
shares of Dollar Tree Common Stock to be issued in the Merger, Dollar Tree
anticipates that the Merger will be dilutive for shareholders of the combined
company for the year ending December 31, 1998, but Dollar Tree management
believes that the Merger will not be dilutive for the year ending December 31,
1999. However, no assurances can be given that the Merger will not have a
dilutive effect on Dollar Tree's net income per share for any period, especially
if the anticipated benefits of the Merger are not achieved or the Merger is not
otherwise completed in the manner anticipated.
RISKS RELATED TO ESCROW SHARES
Upon consummation of the Merger, ten percent (10%) of the shares of Dollar
Tree Common Stock issuable to each Step Ahead Shareholder (other than shares, if
any, as to which dissenters' rights have been exercised pursuant to California
law) will be held back and placed in escrow with the Escrow Agent for one year
following the Effective Time. During the one-year period of the Escrow, Step
Ahead Shareholders will not be able to transfer their Escrow Shares except by
will or according to the laws of inheritance and will, therefore, bear the risk
of a decline in the price of Dollar Tree Common Stock. The market price of
Dollar Tree Common Stock has historically been volatile. See "--Risks Relating
to the Merger--Volatility of Stock Prices." Dollar Tree may make claims against
the Escrow Shares (i) if Step Ahead's Closing Equity is less than a target
amount; (ii) for damages or losses Dollar Tree incurs because Step Ahead made
inaccurate representations or warranties or because Step Ahead breaches its
covenants in the Merger Agreement; or (iii) if Step Ahead's expenses relating to
the Merger exceed $1.3 million. Dollar Tree may recover for losses under items
(ii) and (iii) above only to the extent such losses, in the aggregate, exceed
$600,000, or if such losses arise from inaccurate representations or warranties
about fundamental matters or if the breach of a covenant was willful. Any such
claims will be paid by deducting a number of Escrow Shares having an aggregate
value nearest to the amount of such claim, with each share valued at the Average
Closing Price. Any claims against the Escrow Shares will reduce the number of
shares of Dollar Tree Common Stock the Step Ahead Shareholders will receive in
the Merger. Accordingly, there can be no assurance that the Step Ahead
Shareholders will receive any of the Escrow Shares. See "Terms of the
Merger--Escrow of Shares," "Terms of the Merger--Post-Closing Adjustment,"
"Terms of the Merger-- Representations and Warranties" and "Terms of the
Merger--Indemnification."
28
<PAGE>
SHAREHOLDER REPRESENTATIVE; POTENTIAL CONFLICTS OF INTEREST
The Merger Agreement provides for selection of a Shareholder Representative
by the Step Ahead Shareholders. The Shareholder Representative will have full
authority to settle or defend all claims by Dollar Tree against the Escrow
Shares, and may also be reimbursed for certain costs and expenses out of the
Escrow Shares remaining after satisfaction of any Dollar Tree claims. The
Shareholder Representative will not be liable to the Step Ahead Shareholders for
any actions taken, or omissions to act, as Shareholder Representative in good
faith.
The Step Ahead Shareholders are being asked to approve the selection of Gary
Cino as Shareholder Representative at the Special Meeting. Mr. Cino and certain
trusts benefiting members of his family will beneficially own approximately 55%
of the Escrow Shares after the Merger. Certain decisions concerning the Escrow
Shares may present conflicts of interest between Mr. Cino and the other Step
Ahead Shareholders. For example, because of Mr. Cino's significant interest in
the Escrow Shares after the Merger, he may approve a resolution of a claim that,
in his good faith judgment, does not harm his interest in the Escrow Shares,
even though such a resolution might involve risks to the other Step Ahead
Shareholders. While Mr. Cino intends to act in good faith with respect to his
responsibilities as the Shareholder Representative, the other Step Ahead
Shareholders could be adversely affected by his decisions.
LOCK-UP OF AFFILIATES' SHARES
In order to qualify the Merger as a pooling of interests for accounting and
financial reporting purposes, affiliates of Step Ahead and Dollar Tree may not
sell any shares of stock of either Step Ahead or Dollar Tree during the period
beginning 30 days preceding the Effective Time and ending on the date that
Dollar Tree publishes financial results which reflect at least 30 days of
combined operations of Dollar Tree and Step Ahead. Assuming that the Merger is
completed and the Effective Time occurs on or about December 10, 1998, it is not
expected that such combined financial results would be published until after
February 12, 1999. The affiliates of Step Ahead and Dollar Tree will, therefore,
bear the risk of a decline in the price of Dollar Tree Common Stock until such
publication without being able to sell or otherwise reduce their economic
interest in their Dollar Tree Common Stock. The market price of Dollar Tree
Common Stock has historically been volatile. See "--Risks Related to the
Merger--Volatility of Stock Prices." As a condition to consummation of the
Merger, affiliates of Step Ahead must enter into agreements setting forth the
restrictions described above. See "Terms of the Merger--Affiliates' Restrictions
on Sale of Step Ahead and Dollar Tree Stock" and "Terms of the
Merger--Accounting Treatment."
RISKS RELATED TO DOLLAR TREE
RISKS ASSOCIATED WITH EXPANSION PLANS
Dollar Tree has grown from its initial five stores in 1986 to 1,054 stores
at September 30, 1998 and its net sales have grown significantly in the past
several years. Dollar Tree intends to continue to pursue an aggressive store
opening strategy. The continued growth of Dollar Tree is dependent, in large
part, upon Dollar Tree's ability to open new stores on a timely basis and to
operate them profitably. Management expects that any future increases in
comparable store net sales will be smaller than those experienced historically,
and that decreases in average net sales per selling square foot will occur as
the average store size increases. Dollar Tree expects to expand by approximately
200 to 205 stores in 1998, not including stores acquired in the Merger. As of
September 30, 1998, Dollar Tree had added 167 stores, had signed leases with
respect to 30 additional new stores and had reached an agreement in principle
with respect to an additional 8 new stores to open in 1998. However, successful
expansion is subject to various contingencies, many of which are beyond Dollar
Tree's control. These contingencies include, among others, (i) the 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
29
<PAGE>
financing, (iii) the ability to identify, secure and build-out suitable store
sites on a timely basis and on satisfactory terms, (iv) the ability to retain
its current store sites or substitute sites on satisfactory terms (especially
given that certain of Dollar Tree's store leases contain provisions with which
Dollar Tree does not comply--see "Information Concerning Dollar
Tree--Business--Site Selection and Store Locations"), (v) the ability to
successfully integrate new stores into existing operations, (vi) the ability to
successfully locate stores in geographic markets where Dollar Tree has no or
only limited store operations (see "Information Concerning Dollar
Tree--Business--Growth Strategy"), (vii) the ability to expand internal systems
to accommodate Dollar Tree's growth, and (viii) the ability to manage Dollar
Tree's increased distribution demands (see "Information Concerning Dollar
Tree--Business--Warehousing and Distribution"). As a result, there can be no
assurance that Dollar Tree 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 Dollar Tree's existing stores or that comparable
store net sales increases will continue. Furthermore, there can be no assurance
that Dollar Tree will anticipate all the changing demands that its expanding
operations will impose on its systems and personnel. Any failure of Dollar Tree
to successfully and profitably execute its expansion plans could have a material
adverse effect on Dollar Tree's business and results of operations.
RISKS ASSOCIATED WITH IMPORTS
Dollar Tree is dependent on foreign imports, particularly its imports from
China. In 1996 and 1997, Dollar Tree imported approximately 32% and 34%,
respectively, of its merchandise based on cost, and approximately 35% and 38%,
respectively, of its merchandise based on retail, directly from vendors located
abroad, primarily in Hong Kong and Taiwan (through which Dollar Tree's Chinese
imports flow), Thailand, Italy, Mexico and Indonesia. Dollar Tree expects
imports to continue to account for approximately 35% to 40% of total purchases
at retail. In addition, Dollar Tree believes that a substantial portion of the
goods Dollar Tree purchases from domestic vendors is indirectly imported from
foreign countries. China is the source of a substantial majority of Dollar
Tree's direct imports and, Dollar Tree believes, is also the largest source of
its indirect imports.
The countries of Southeast Asia are involved in an ongoing economic crisis
characterized by currency devaluations, rising interest rates, deteriorating
economic growth and declining capital markets. In particular, Indonesia has
suffered severe economic and political turmoil. This Southeast Asian crisis
could have serious adverse repercussions on the financial stability of all
countries in the region, including China. An extended period of financial
pressure on overseas markets or fluctuations in the value of the Chinese or Hong
Kong currency may result in disruptions in the sourcing of goods, increases in
the cost of goods, reductions in the quality of goods, product shortages,
nonshipment of goods or strikes. The economic crisis in Southeast Asia has
already resulted in a decrease in goods being shipped to Southeast Asia and,
consequently, a lack of containers in Southeast Asia for goods being shipped
back into the United States. Dollar Tree has compensated in part for the
container shortage by, among other things, accelerating its schedule for
receiving goods from Southeast Asia, which may cause bottlenecks in the receipt
of goods by Dollar Tree's distribution centers and adversely affect the orderly
distribution of goods to the stores. See "--Risks Related to Dollar
Tree--Disruptions in Receiving and Distribution" below. No assurances can be
given that the Southeast Asia crisis will not have a material adverse effect on
Dollar Tree's results of operations.
Dollar Tree's imports, particularly its imports from China, are subject to
certain risks, including import duties and quotas; loss of "most favored nation"
("MFN") trading status (also known as "normal trade relations"); trade
restrictions, including U.S. retaliation against unfair foreign practices and
punitive duties; product shortages; nonshipment of goods; work stoppages and
strikes; economic uncertainties, including inflation and currency fluctuations;
foreign government regulations; lack of compliance by foreign manufacturers with
U.S. consumer protection laws and intellectual property laws (for which Dollar
Tree may be responsible as the importer of record or seller); and political
unrest. While Dollar Tree believes that it could find alternative sources of
supply in response to an increase in tariffs, duties or other
30
<PAGE>
import costs or to an interruption or delay in the supply of goods from foreign
sources, the transition to alternative sources may not occur in time to meet
Company demands and products from alternative sources may be of lesser quality
and/or more expensive than those currently purchased by Dollar Tree. Any of the
risks referred to in this paragraph could have a material adverse effect on
Dollar Tree's business and results of operations.
Dollar Tree's imports from China are generally subject to favorable United
States import duties because China is currently afforded MFN status by the
United States. The MFN status of China is reviewed annually by the United States
government and is currently extended through July 2, 1999. As a result of
outstanding trade and other issues between the United States and China, there is
significant opposition in the U.S. Congress to the renewal of MFN status for
China. These issues include China's significant trade surplus with the United
States, its refusal to license foreign insurance companies, the banning of
certain imports and certain types of foreign investment and allegations
regarding the acquisition by China of sensitive military technology,
interference in U.S. national elections, human rights abuses, religious
persecution and the sale of weapons to Iran and Pakistan. Loss of China's MFN
status could impose significantly higher purchasing costs on Dollar Tree because
of increased tariffs on Chinese goods.
In 1995 and 1996, the United States objected to the lack of protection in
China of intellectual property rights. As a result, the U.S. Trade
Representative ("USTR") threatened the imposition of 100% punitive import duties
on selected Chinese goods. On April 30, 1997, the USTR, citing "significant
progress," removed the threat of immediate punitive action but signaled the need
for continued improvement and stronger enforcement of existing intellectual
property agreements. The USTR is now required to monitor Chinese compliance with
the agreements and authorized to move directly to trade sanctions, including
punitive import duties, if such monitoring reveals inadequate Chinese
enforcement of the agreements. If the USTR decides that certain categories of
Chinese products that Dollar Tree imports should be targeted for punitive import
duties, Dollar Tree expects that it would substitute similar goods from other
countries or other categories of goods, but there can be no assurance that such
action would not result in a material adverse effect on its business or results
of operations.
RISKS ASSOCIATED WITH NEW DISTRIBUTION CENTERS
In January 1998, Dollar Tree opened its Chesapeake, Virginia distribution
center to replace its Norfolk, Virginia distribution center. The center is
currently servicing approximately 525 stores, and management anticipates it will
service approximately 535 to 540 stores by the end of 1998, with an expected
ultimate capacity of 800 stores. Complications may arise in the operation of the
new Chesapeake center, including its automated conveyor and sorting system.
Dollar Tree is currently building a new distribution center in Olive Branch,
Mississippi to replace its Memphis, Tennessee facility. Dollar Tree expects that
the Olive Branch facility will cost approximately $20 million and will be open
in early 1999. There can be no assurance that delays will not be experienced in
the opening of the Olive Branch distribution center, that complications will not
occur in its operation or in the transition from the Memphis facility or that
cost overruns will not be experienced in building the facility. Any delays or
complications in connection with the operation of the Chesapeake or Olive Branch
facilities could interrupt the receipt and distribution of merchandise to the
stores. Dollar Tree has subleased the Norfolk facility. Although Dollar Tree
management expects to be able to sublease the Memphis facility, no assurance can
be given that an acceptable sublease will be secured. Dollar Tree is liable for
rent and pass-through costs under the Memphis lease until September 2005, at a
current annual cost of approximately $702,000. Dollar Tree management believes
that any sublease of the Memphis facility at prevailing market rates will not
fully cover such costs. Any of the foregoing risks, including delays,
complications, cost overruns or difficulty in subleasing, could materially
adversely affect Dollar Tree's business and results of operations. See "--Risks
Related to Dollar Tree--Disruptions in Receiving and Distribution" and
"Information Concerning Dollar Tree--Business-- Warehousing and Distribution."
31
<PAGE>
DISRUPTIONS IN RECEIVING AND DISTRIBUTION
Substantially all of Dollar Tree's inventory is shipped directly from
suppliers to Dollar Tree's distribution centers in Chesapeake, Virginia,
Memphis, Tennessee, and Chicago, Illinois where the inventory is processed and
then distributed to stores. Dollar Tree's financial results depend 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 Dollar Tree's expansion plans, there can be no
assurance that Dollar Tree has anticipated, or will anticipate, all the changing
demands its expanding operations will impose on its receiving and distribution
system or that events beyond the control of Dollar Tree, such as disruptions in
operations due to labor disagreements or shipping problems, will not result in
delays in the delivery of merchandise to stores. Recently, the Southeast Asian
crisis has caused a container shortage. Dollar Tree has compensated for the lack
of containers by accelerating its schedule for the shipment of goods to the
distribution centers, which may cause bottlenecks in the receipt of goods by the
distribution centers and adversely affect the orderly distribution of goods to
stores. During 1998, the International Brotherhood of Teamsters actively
attempted to organize Dollar Tree's employees at its Chesapeake and Chicago
distribution centers. Unionization of a portion of Dollar Tree's distribution
center workforce could result in labor disagreements that could cause a delay in
the receipt or distribution of merchandise to stores. Any delay could have a
material adverse effect on Dollar Tree's business and results of operations. In
addition, a fire, hurricane, flood or other disaster at any of Dollar Tree's
distribution facilities could materially and adversely affect its business and
results of operations. See "--Risks Related to Dollar Tree--Risks Associated
with Imports" and "--Risks Related to Dollar Tree--Risks Associated with New
Distribution Centers," "Information Concerning Dollar
Tree--Business--Warehousing and Distribution" and "Information Concerning Dollar
Tree--Business--Employees."
ADVERSE ECONOMIC FACTORS
Dollar Tree's ability to provide quality merchandise at the $1.00 price
point is subject to certain economic factors which are beyond Dollar Tree's
control, including inflation, minimum wage levels, operating costs, consumer
confidence and general economic conditions. There can be no assurance that such
factors will remain favorable and in particular that hourly minimum wage rates,
health care costs, shipping costs, or other costs will remain at current levels.
The federally mandated minimum wage increased by $0.50 per hour on October 1,
1996 and by an additional $0.40 per hour on September 1, 1997. These changes
increased payroll costs by approximately $2 million during 1997, and management
believes that the increase in 1998 payroll costs due to the minimum wage changes
will be greater than in 1997. In February 1998, President Clinton announced
support for a plan that would raise the minimum wage by an additional $0.50 per
hour in January 1999 and an additional $0.50 per hour in 2000. In March 1998,
Congressional Republicans announced their intention to block consideration of an
increase in the minimum wage in 1998. A proposal similar to President Clinton's
was defeated in the Senate in September 1998. Based on the proposals before
Congress, management believes that a proposed increase, if eventually passed
into law, may have a significantly greater impact on payroll costs than the
increases in the minimum wage implemented in 1996 and 1997. Additionally, in May
1998, a trans-Pacific ocean-shipping cartel imposed an increase of $300 per
container on U.S. imports from Asia. This increase took effect with shipments
beginning in mid-May 1998 and is expected to add approximately $600,000 to
$700,000 in freight expenses to Dollar Tree's cost of sales for the second half
of 1998. The cartel recently announced its intention to impose a further
increase of $900 per container for shipments from Asia to the West Coast of the
United States and $1,000 for shipments to the East Coast, with a $300 per
container surcharge during the peak shipping season from June 1 through November
30. Although it is uncertain whether the cartel will be successful in
implementing the increase at the announced rates, the target effective date for
the increase is May 1, 1999. Unless offsetting cost savings are realized (and no
assurance can be given that they will be), an increase in inflation, minimum
wage levels, shipping costs or other
32
<PAGE>
operating costs, or a decline in consumer confidence or general economic
conditions, could have a material adverse effect on Dollar Tree's business and
results of operations, especially given the constraints on Dollar Tree's ability
to pass on incremental costs through price increases.
SEASONALITY AND QUARTERLY FLUCTUATIONS
Dollar Tree 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 Dollar Tree are the Christmas and Easter
seasons. A disproportionate amount of Dollar Tree's net sales and a substantial
majority of Dollar Tree's operating income and net income are generally realized
during the fourth quarter. In anticipation of increased sales activity during
these months, Dollar Tree purchases substantial amounts of inventory and hires a
significant number of temporary employees to bolster its permanent store staff.
If for any reason Dollar Tree's net sales were below seasonal norms during the
fourth quarter or Easter season, including as a result of merchandise delivery
delays due to receiving or distribution problems, Dollar Tree's operating
results, particularly operating and net income, could be adversely affected. See
"--Risks Related to Dollar Tree--Disruptions in Receiving and Distribution."
Historically, net sales, operating income and net income have been weakest
during the first quarter, and Dollar Tree expects this trend to continue. Dollar
Tree'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 Dollar Tree has experienced significant
increases in comparable store net sales historically, management believes that
any increases in comparable store net sales in the future may be smaller than
those experienced historically. See "Dollar Tree Management's Discussion and
Analysis of Financial Condition and Results of Operations--Seasonality and
Quarterly Fluctuations."
LEGAL CLAIMS
On January 31, 1996, Dollar Tree bought all of the capital stock of Dollar
Bills, Inc. ("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 Illinois, against Dollar Tree and one of its
employees, relating to the Dollar Bills transaction. The lawsuits sought to
recover compensatory damages of not less than $10.0 million, punitive damages,
attorneys' fees and other relief. The plaintiffs claimed that Dollar Tree
defrauded the Alpers into selling the wholesale operations which were owned by
Dollar Bills; improperly obtained and misused confidential and proprietary
information; breached the provisions of a confidentiality agreement and stock
purchase agreement relating to the acquisition; intentionally or negligently
misrepresented its intentions with respect to the wholesale operations;
conspired to violate antitrust law; and violated securities laws.
Dollar Tree filed motions to dismiss the litigation in both state and
federal courts. On June 28, 1996, the state court denied Dollar Tree's motion to
dismiss. Plaintiffs subsequently dismissed their suit in state court
voluntarily. Dollar Tree then appealed the state court's denial of its motion to
dismiss. Dollar Tree's appeal was dismissed by the state appellate court on
December 15, 1997 for lack of jurisdiction. On November 26, 1996, the federal
court dismissed all counts of the plaintiffs' lawsuit against Dollar Tree and
the co-defendant. Plaintiffs' federal securities and federal antitrust claims
against Dollar Tree were dismissed with prejudice and the state claims were
dismissed without prejudice. The plaintiffs did not appeal. No litigation is
currently pending in this matter. However, in light of the history of this
dispute, the Alpers may attempt to refile their state law claims against Dollar
Tree in the future.
Dollar Tree believes that the ultimate outcome of this matter will not have
a material adverse effect on Dollar Tree's results of operations or financial
condition. Nevertheless, there can be no assurance regarding the ultimate
outcome of any future litigation or that any such litigation will not have a
material adverse effect on Dollar Tree's results of operations or financial
condition.
33
<PAGE>
Dollar Tree has recalled (in cooperation with the Consumer Products Safety
Commission) approximately 155,000 retractable dog leashes which it sold between
November 1997 and January 1998. Dollar Tree has learned of several minor
injuries involving the leashes, and one leash allegedly caused a serious
personal injury that occurred in January 1998 which has resulted in a product
liability claim. Counsel for the claimant has indicated they may seek punitive
damages. Management does not believe that potential claims arising from these
injuries will have a material adverse effect on Dollar Tree. There can be no
assurance, however, that additional serious injuries giving rise to potential
claims will not occur in the future.
DEPENDENCE ON KEY PERSONNEL
Dollar Tree's success depends to a significant extent upon the leadership
and performance of its senior management team, particularly Macon F. Brock, Jr.,
Dollar Tree's President and Chief Executive Officer and H. Ray Compton, Dollar
Tree's Executive Vice President. While Dollar Tree believes that its senior
management team has significant depth, the loss of the services of these
individuals could adversely impact Dollar Tree. None of Dollar Tree's senior
management is currently bound by any employment or non-competition agreement.
See "Information Concerning Dollar Tree--Management." J. Douglas Perry, Chairman
of Dollar Tree's Board of Directors and a key member of senior management,
reduced his responsibilities for day to day management when he elected to work
on a part-time basis beginning May 1, 1998.
COMPETITION
The retail industry is highly competitive. Dollar Tree's competitors include
mass merchandisers, discount stores, variety stores, closeout stores and other
stores with a price point around $1.00. In past years, several of the largest
operators of discount stores selling goods at or around the $1.00 price point
(or their parent companies) have closed their stores while others have been
liquidated in bankruptcy or abandoned the $1.00 price point concept. Dollar Tree
expects to face increased competition in the future, which could have an adverse
effect on its financial results. See "Information Concerning Dollar Tree--
Business--Competition."
LIMITED AVAILABILITY OF SUITABLE MERCHANDISE
Dollar Tree'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. Dollar Tree 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 Dollar Tree believes that
its management has long-standing and satisfactory relationships with its
suppliers, there can be no assurance that Dollar Tree 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
"Information Concerning Dollar Tree--Business--Merchandising and Store Format."
ANTI-TAKEOVER EFFECT OF CERTAIN PROVISIONS OF DOLLAR TREE'S ARTICLES OF
INCORPORATION AND BYLAWS
Certain provisions of Dollar Tree's Articles of Incorporation ("Dollar Tree
Articles of Incorporation") and Bylaws ("Dollar Tree Bylaws") 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 Dollar Tree's Board of Directors
into three classes, each of which serves for different three-year periods, (ii)
provide that only the Dollar Tree 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
34
<PAGE>
to vote in order to remove a director or amend the foregoing and certain other
provisions of the Dollar Tree Articles of Incorporation and Dollar Tree Bylaws.
In addition, the Dollar Tree 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 Dollar Tree Common Stock.
EFFECTIVE CONTROL OF DOLLAR TREE BY EXISTING SHAREHOLDERS
Based on shares of Dollar Tree Common Stock owned as of November 6, 1998,
and assuming that Dollar Tree issues the minimum number of shares of Dollar Tree
Common Stock possible in connection with the Merger, 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 29%
of outstanding Dollar Tree Common Stock. As a result, if such shareholders act
together, they would have significant influence over, and may be able to
effectively control, the election of the Directors of Dollar Tree, the outcome
of any other matter submitted to a vote of Dollar Tree's shareholders for
approval, including mergers, consolidations or the sale of all or substantially
all of Dollar Tree's assets, and a change in control of Dollar Tree. See "Dollar
Tree Management's Discussion and Analysis of Financial Condition and Results of
Operations--Overview."
NO DIVIDENDS
Dollar Tree 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 Dollar Tree Common Stock in the foreseeable future. Dollar Tree's
credit facilities contain financial covenants which restrict its ability to pay
dividends.
RISKS RELATED TO STEP AHEAD
RISKS ASSOCIATED WITH EXPANSION OF STEP AHEAD'S OPERATIONS
Step Ahead has grown from its initial store in 1985 to 63 stores as of
September 30, 1998 and its net sales have grown significantly in the past
several years. Continued growth of Step Ahead as a part of Dollar Tree is
dependent, in large part, upon the combined company's ability to open new stores
on a timely basis and to operate them profitably and also on the procurement of
additional distribution center capacity in the very near future to support
continued growth in the Step Ahead market areas. As of September 30, 1998, Step
Ahead had opened 4 net new stores in fiscal year 1998, and plans to open an
additional 3 stores by the end of the year. However, successful expansion is
subject to various contingencies, many of which are beyond the combined
company's control. These contingencies include, in addition to the factors
mentioned under the caption "--Risks Related to Dollar Tree--Risks Associated
with Expansion Plans," other factors which may have a greater impact on Step
Ahead than on Dollar Tree's existing expansion plans. These factors include (i)
the ability of the California and Nevada labor markets to support the combined
company's hiring needs, (ii) the availability of adequate high-quality, low-cost
closeout inventory, (iii) the ability of the combined company to identify,
secure and build-out suitable store sites in the West Coast region on a timely
basis and on satisfactory terms, and (iv) the ability to manage the combined
company's increased distribution demands given the limited capacity of Step
Ahead's existing distribution center. As a result, there can be no assurance
that the combined company will be able to achieve its targets for opening new
stores in the Step Ahead market area, that such new stores will be profitable or
achieve net sales and profitability comparable to Dollar Tree's existing stores
or that comparable store net sales increases among the Step Ahead stores will
continue.
RISKS ASSOCIATED WITH THE STEP AHEAD DISTRIBUTION CENTER
The Step Ahead distribution center in North Highlands, California is
currently servicing 63 stores, and Step Ahead management anticipates it will be
servicing 66 stores by the end of 1998. Step Ahead
35
<PAGE>
management believes the capacity of the distribution center is only 75 stores.
Although Step Ahead management has reviewed a number of alternative strategies
for expanding and/or replacing this facility, Step Ahead has not decided to
pursue any of these alternatives at this time. If the combined company decides
to replace the existing North Highlands distribution center, no assurance can be
given that an acceptable sublease will be secured. Step Ahead is liable for rent
and pass-through costs under the North Highlands lease until June 2008, at a
current annual cost of approximately $641,000. There can be no assurances that
delays will not be experienced in procuring additional distribution center
capacity, that complications will not occur in the operation of or transition to
the new or additional facility or in subleasing the existing facility, or that
the plan can be implemented in a time frame or at a cost that will not result in
a material adverse effect on the combined company. See "--Risks Related to Step
Ahead-- Disruptions in Receiving and Distribution" and "Information Concerning
Step Ahead--Business--Warehousing and Distribution."
DISRUPTIONS IN RECEIVING AND DISTRIBUTION
Most of Step Ahead's inventory is shipped or picked-up directly from
suppliers and delivered to Step Ahead's single warehouse and distribution
facility, where the inventory is processed and distributed. Step Ahead depends
on the orderly operation of this receiving and distribution process, which
depends, in turn, on adherence to shipping schedules and effective management of
the warehouse operations. There can be no assurance that the combined company
will anticipate all of the changing demands its expanding operations will impose
on this receiving and distribution system or that events beyond the control of
the combined company will not result in delays in the delivery of merchandise to
the warehouse or from the warehouse to the stores. In addition, because Step
Ahead's receiving and distribution operations are concentrated at a single
location, a fire, earthquake, flood or other disaster at its warehouse and
distribution facility could materially and adversely affect its business and
results of operations. In Step Ahead's case, such a disaster could be
particularly damaging because much of its inventory is purchased as closeouts
and special situations and could not be readily replaced for its carrying value,
if at all. Although Step Ahead maintains business interruption and standard
property and casualty insurance, Step Ahead does not maintain earthquake
insurance on its facilities and business. See "Information Concerning Step
Ahead--Business--Warehousing and Distribution."
RISKS ASSOCIATED WITH PURCHASING
Step Ahead historically has been able to locate and purchase quality
closeout merchandise at attractive prices in order to maintain a mix of
name-brand and other merchandise at the 98 CENTS price point. There can be no
assurance that such merchandise will continue to be available in the future.
Further, there can be no assurance that such merchandise will be available in
quantities necessary to accommodate the combined company's expansion strategy.
Step Ahead 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 wholesalers, discount chains, mass
merchandisers, food markets, drug chains, club stores, other retailers and
various small privately-held companies and individuals. Although Step Ahead is
not dependent on any single supplier or group of suppliers, Step Ahead's
business and results of operations could be adversely affected by a disruption
in the availability of merchandise. Step Ahead's suppliers sometimes restrict
the advertising, promotion and method of distribution of the merchandise sold to
Step Ahead. These restrictions may make it more difficult for Step Ahead or the
combined company to resell quickly items in its inventory that are subject to
such restrictions. See "Information Concerning Step
Ahead--Business--Merchandising and Store Format."
36
<PAGE>
ADVERSE ECONOMIC FACTORS
Step Ahead's ability to provide quality merchandise at its 98 CENTS price
point is subject to certain economic factors beyond Step Ahead's control,
including inflation, other operating costs (such as prevailing wage levels),
consumer confidence and general economic conditions. There can be no assurance
that such factors will remain favorable, in particular, that Step Ahead's wages
will remain at current levels. Proposals currently before the United States
Congress include measures that would raise the minimum wage significantly.
Inflation, an increase in the minimum wage, wages or other operating costs or a
declining consumer confidence or general economic conditions could have a
material adverse effect on Step Ahead's business and results of operations. See
"--Risks Related to Dollar Tree--Adverse Economic Factors."
CONCENTRATION OF OPERATIONS
All but three of Step Ahead's 98 CENTS Clearance Centers are currently
located in California. Consequently, Step Ahead's results of operations and
financial condition are dependent upon general trends in this regional economy.
In addition, California historically has been vulnerable to certain natural
disasters and other risks, such as earthquakes, fires, floods and civil
disturbance, which at times have disrupted the local economy. These events pose
physical risks to Step Ahead properties and could materially adversely affect
Step Ahead's business, results of operations and financial condition. See
"--Risks Related to Step Ahead--Disruptions in Receiving and Distribution."
37
<PAGE>
VOTING AND PROXIES
DATE, TIME AND PLACE OF SPECIAL MEETING
The Special Meeting will be held at Step Ahead's principal executive
offices, located at 3222 Winona Way, North Highlands, California 95660, on
December 10, 1998, at 10:00 a.m., local time.
RECORD DATE AND OUTSTANDING SHARES OF STEP AHEAD
Only shareholders of record of Step Ahead Common Stock and Step Ahead
Preferred Stock at the close of business on the Record Date are entitled to
notice of and to vote at the Special Meeting. As of November 6, 1998, Step Ahead
had 47 shareholders of record of Step Ahead Common Stock and 31 shareholders of
record of Step Ahead Preferred Stock. Also as of November 6, 1998, there were
1,261,290 shares of Step Ahead Common Stock and 221,700 shares of Step Ahead
Preferred Stock issued and outstanding. Except for the shareholders identified
under "Information Concerning Step Ahead-- Security Ownership of Principal
Shareholders and Management of Step Ahead," there were no persons known to the
management of Step Ahead to be the beneficial owners of more than 5% of the
outstanding Step Ahead Common Stock or more than 5% of the outstanding Step
Ahead Preferred Stock.
VOTING OF PROXIES
The proxy accompanying this Prospectus/Proxy Statement is solicited on
behalf of the Board of Directors of Step Ahead (the "Step Ahead Board") for use
at the Special Meeting. Step Ahead Shareholders are requested to complete, date
and sign the accompanying proxy and promptly return it in the accompanying
envelope or otherwise mail or deliver it to Step Ahead. All properly executed
proxies that are returned and are not revoked will be voted at the Special
Meeting in accordance with the instructions contained therein. Such proxies
containing no instructions regarding the proposal specified in the form of proxy
will be voted for approval of the Merger Agreement and the Merger in accordance
with the recommendation of the Step Ahead Board and for Gary Cino as Shareholder
Representative. The Step Ahead Board does not presently intend to bring any
business before the Special Meeting other than the proposals referred to in this
Prospectus/Proxy Statement and specified in the Notice of the Special Meeting.
If any other matters are properly brought before the Special Meeting and
submitted to a vote, all proxies will be voted in accordance with the judgment
of the persons voting the proxies. Any shareholder signing a proxy has the power
to revoke it prior to the Special Meeting or at the Special Meeting prior to the
vote pursuant to the proxy. A proxy may be revoked by (i) delivering to the
Secretary of Step Ahead (by any means, including by sending a facsimile to (916)
349-7200, Attn: David Reed) a written notice, bearing a date later than the
proxy, stating that the proxy is revoked, (ii) signing and so delivering a proxy
relating to the same shares and bearing a date later than the proxy, or (iii)
attending the Special Meeting and voting in person (although attendance at the
Special Meeting will not, by itself, revoke a proxy).
If the actual Average Closing Price of Dollar Tree Common Stock is less than
$34 11/32, the Dollar Tree Board may propose that the parties treat the Average
Closing Price, for purposes of calculating the Exchange Ratio, as a value
between the actual Average Closing Price and $34 11/32. This proposal would have
the effect of decreasing the Exchange Ratio (but not below 1.2106). If the Step
Ahead Board does not accept this proposal by 5:00 p.m. of the third business day
before the Special Meeting, the Merger Agreement will terminate. If Dollar Tree
makes such a proposal, the Step Ahead Board will use the time before the
deadline for termination of the Merger Agreement to decide whether to agree to
the Dollar Tree proposal. The Step Ahead Board will make its determination only
after careful consideration of Dollar Tree's financial condition, results of
operations and stock performance and other factors, including the interests of
the Step Ahead Shareholders, and only after receiving an updated opinion from
Piper Jaffray as to whether the proposed merger consideration is fair from a
financial point of view to the Step Ahead Shareholders as a group. After the
Step Ahead Board makes its determination, however, it does not intend to
resolicit proxies. As a result, the Step Ahead Board's decision will be final
and will be available to
38
<PAGE>
Step Ahead Shareholders only once the final Exchange Ratio is announced by press
release at 5:00 p.m. on December 7, 1998. Step Ahead Shareholders may call
1-888-224-5256 toll-free to determine the actual Exchange Ratio after that time.
If a Step Ahead Shareholder has already executed a proxy, a Step Ahead
Shareholder can revoke his or her proxy or change his or her vote by following
the procedures outlined above.
VOTE REQUIRED
Under California law, approval of the Merger requires the affirmative vote
of the holders of a majority of the outstanding shares of the Step Ahead Common
Stock and a majority of the outstanding shares of Step Ahead Preferred Stock
entitled to vote at the Special Meeting, each voting separately as a class. Each
share of Step Ahead Common Stock and Step Ahead Preferred Stock is entitled to
one vote at the Special Meeting. The presence, in person or by proxy, of the
holders of at least a majority of the outstanding shares of Step Ahead Common
Stock and Step Ahead Preferred Stock together entitled to vote, is necessary to
constitute a quorum at the Special Meeting. Proxies marked to abstain from
voting will have the same effect as votes against approval of the Merger
Agreement and the Merger.
The Principal Shareholders have agreed to vote all shares of Step Ahead
Stock owned beneficially or controlled by them as of the Record Date (consisting
of 810,000 shares of Step Ahead Common Stock, representing approximately 64% of
the Step Ahead Common Stock outstanding as of November 6, 1998) in favor of the
Merger Agreement and the Merger. Executive officers, directors and affiliates of
Step Ahead own beneficially 76% of the Step Ahead Common Stock and 4% of the
Step Ahead Preferred Stock and have advised Step Ahead that they intend to vote
such shares in favor of the Merger. The consummation of the Merger is also
conditioned upon a number of other conditions. See "Terms of the
Merger--Conditions Precedent to the Merger."
Under the terms of the Merger Agreement and assuming an Average Closing
Price of $34 11/32 per share, Dollar Tree will issue to the Step Ahead
Shareholders and reserve for issuance upon exercise of the Step Ahead Options
approximately 2,144,000 shares of previously authorized Dollar Tree Common Stock
which is approximately 3.6% of the outstanding number of shares of Dollar Tree
Common Stock on November 6, 1998 (or 3.2% if you include shares of Dollar Tree
Common Stock subject to options or warrants). Accordingly, approval by the
shareholders of Dollar Tree is not required to consummate the proposed Merger.
SOLICITATION OF PROXIES AND EXPENSES
Step Ahead will bear the cost of the solicitation of proxies from its
shareholders. In addition to solicitation by mail, the directors, officers and
employees of Step Ahead may solicit proxies from shareholders by telephone,
facsimile, telegram or letter, or in person.
39
<PAGE>
THE MERGER AND RELATED TRANSACTIONS
BACKGROUND OF THE MERGER
In mid-1996, the Board of Directors of Step Ahead (the "Step Ahead Board")
and senior management began reviewing a variety of strategies for realizing
shareholder value and liquidity. In this regard, Step Ahead periodically
explored these strategies with a number of potential financial and strategic
acquirors, but none of these discussions resulted in a definitive agreement.
In April 1997, after interviewing several investment banking firms to assist
Step Ahead in pursuing these strategies, Step Ahead engaged Piper Jaffray as its
financial advisor.
THE 1997 DISCUSSIONS. On July 8, 1997, while visiting a mutual vendor,
Macon Brock, the President and Chief Executive Officer of Dollar Tree,
encountered Gary Cino, the Chairman and Chief Executive Officer of Step Ahead.
On July 17, 1997, Mr. Brock called Mr. Cino to discuss a possible business
combination. Over the next two weeks, Mr. Brock and Mr. Cino continued these
discussions, focusing on the proper methodology for valuing Step Ahead, and Step
Ahead sent Dollar Tree a package of Step Ahead information, including background
data, financial statements and financial projections.
Discussions between Mr. Cino and Mr. Brock continued into August 1997. On
August 18, 1997, after visiting a number of Step Ahead stores on the previous
day, Mr. Brock, H. Ray Compton, Dollar Tree's Executive Vice President, and J.
Douglas Perry, the Chairman of the Board of Dollar Tree, met with Mr. Cino and
other members of Step Ahead senior management at Step Ahead's headquarters
outside of Sacramento, California. At this meeting, the parties discussed the
relative strengths and weaknesses of the operations of Step Ahead and Dollar
Tree, how the two companies might operate together, and the synergies that might
be achieved in a business combination. The parties recognized that Step Ahead's
bigger stores and product mix, which is weighted more heavily towards consumable
products, required different operational expertise, but Dollar Tree expressed an
interest in acquiring this expertise.
On September 4 and 5, 1997, Mr. Cino, Mr. Ken Miller, a Step Ahead director,
and other members of Step Ahead senior management, together with a
representative from Piper Jaffray, traveled to Norfolk, Virginia to observe
Dollar Tree's operations and to visit a number of Dollar Tree stores. During
this visit, Step Ahead senior management noted significant differences between
Step Ahead stores and Dollar Tree stores, including product mix, store size and
store layout and design. On September 9, 1997, John F. Megrue, Vice Chairman of
the Board of Directors of Dollar Tree, met with Mr. Cino and David Reed, Step
Ahead's Vice President and Chief Financial Officer, at Step Ahead's headquarters
to discuss Dollar Tree's financial performance and future plans. On September
22, 1997, Mr. Cino and Eric Stauss, Step Ahead's President and Chief Operating
Officer, met with Mr. Brock and Mr. Compton in San Francisco to discuss further
the possibility of a business combination of their two companies. Messrs. Cino
and Stauss were comfortable with the valuation proposed by Dollar Tree and
agreed to proceed to negotiate a letter of intent. Following the meeting, Step
Ahead and Dollar Tree management planned additional legal and business due
diligence.
On September 29, 1997 the Step Ahead Board met to discuss the terms of the
merger negotiated over the prior week by Step Ahead management. The Step Ahead
Board focused on the valuation proposed by Dollar Tree compared to alternative
transactions available to Step Ahead, including an initial public offering and a
combination with another publicly held company in the same industry. While the
Step Ahead Board believed than an initial public offering would yield a
valuation similar to that proposed by Dollar Tree, the additional infrastructure
and related costs necessary to support a public company made this a less
attractive alternative. The range of values that the Step Ahead Board believed
was realistic with respect to other public companies was substantially below
Dollar Tree's proposal. Prior to approving the execution of the letter of
intent, the Step Ahead Board also discussed the impact of the "no solicitation"
and "lock-up option" provisions of the letter of intent, and expressed a desire
to be able to continue to carry out its fiduciary duties to the Step Ahead
Shareholders. Also, the Step Ahead Board authorized
40
<PAGE>
senior management to engage Piper Jaffray to issue a fairness opinion on the
merger consideration to be received by Step Ahead Shareholders.
Following that meeting, on September 30, 1997, Step Ahead and Dollar Tree
executed a letter of intent pursuant to which they agreed to a stock-for-stock
merger valued at approximately $58 million. Legal counsel for the parties
proceeded toward negotiating a definitive agreement, while Dollar Tree conducted
legal and business due diligence. While conducting its due diligence, Dollar
Tree became concerned that a merger with Step Ahead would likely coincide with
Dollar Tree's transition from its Norfolk, Virginia corporate headquarters and
distribution center to the new Chesapeake Store Support Center. In addition, the
due diligence review highlighted operational issues related to Step Ahead's
store format and product mix, which differ from those of Dollar Tree. Dollar
Tree determined that these operational issues would require significant
management attention which would divert resources from the transition to the new
Store Support Center during the busy fourth quarter selling season. On October
13, 1997, prior to executing any definitive agreement, Mr. Brock called Mr. Cino
to tell him that Dollar Tree did not wish to proceed with the transaction based
on the foregoing considerations. Mr. Brock followed that conversation with a
letter dated October 15, 1997 expressing the same concerns and proposing to
terminate the letter of intent. Mr. Cino formally acknowledged termination of
the letter of intent on October 17, 1997.
Between October 1997 and March 1998, Step Ahead and Dollar Tree had
incidental contacts but did not communicate regarding any proposed business
combination. During this time, Step Ahead focused on improving operating
efficiencies and profitability and reorganized its management structure. With a
reorganized management structure and an improved merchandise mix, Step Ahead was
experiencing improved earnings and comparable store sales increases in the first
quarter of fiscal 1998. In light of these achievements, Step Ahead and Piper
Jaffray discussed the prospect of successfully completing an initial public
offering. Piper Jaffray advised Step Ahead that, assuming favorable market
conditions, Step Ahead might be able to complete an initial public offering in
early 1999 at a discount to the composite average earnings multiple for the
Extreme Value Retailing Segment. Two other parties separately contacted Step
Ahead in March 1998 and expressed an interest in pursuing a possible business
combination. Step Ahead provided financial and background information to one of
the parties and engaged in preliminary discussions with both parties, but these
discussions ended without advancing beyond the preliminary stage because (i) one
of these parties was trading at a discount to the earnings multiple Step Ahead
believed it could achieve in an initial public offering and that party was not
operating in the "dollar store" retailing segment, (ii) the other party was a
privately-held financial buyer interested in a cash transaction instead of a
tax-free stock exchange and (iii) Step Ahead did not believe the long-term
growth prospects for either of these parties was superior to Step Ahead's
prospects on an independent basis. Step Ahead did not contact other parties to
solicit interest in a possible business combination.
THE 1998 DISCUSSIONS. In November 1997, Dollar Tree relocated its corporate
headquarters to the Chesapeake Store Support Center and the distribution center
there became operational in January 1998. In addition, in early 1998, Dollar
Tree completed plans to reconfigure its largest store on an experimental basis
to a product mix more heavily weighted toward consumable goods in order to gain
operational experience with the different larger store format. With Dollar Tree
having completed the distribution center transition and having gained greater
familiarity with the larger store format, on March 23, 1998, Mr. Brock called
Mr. Cino and stated that Dollar Tree had an interest in reviving discussions
toward a business combination of the two companies and requested certain
financial information. Step Ahead prepared and furnished that financial
information on April 20, 1998, through Piper Jaffray.
Mr. Compton called Mr. Cino on May 13, 1998 to discuss new terms for a
potential transaction and Mr. Cino told Mr. Compton that Dollar Tree's new terms
should take into consideration Step Ahead's substantial operating improvements
since the 1997 discussions between the companies. After visiting a few of Step
Ahead's stores, Messrs. Compton and Megrue and Mr. K. Bryan Bagwell, Dollar
Tree's Vice President, Merchandise arrived at Step Ahead's headquarters on May
20, 1998. Messrs. Cino and Reed
41
<PAGE>
made a presentation at this meeting, highlighting Step Ahead's improvements in
same store sales, merchandise, inventory turnover, employee morale and
profitability. While the parties discussed the terms of a possible business
combination, the meeting ended without any agreement on terms.
On June 4, 1998, Step Ahead sent Dollar Tree updated projections prepared by
Step Ahead management and an accretion analysis prepared by Piper Jaffray. On
June 22, 1998, Step Ahead received a letter from Dollar Tree proposing a
stock-for-stock merger at a fixed consideration, based on certain assumptions,
of 1,300,000 shares of Dollar Tree Common Stock (1,950,000 shares after giving
effect to a 50% stock dividend effected as a 3-for-2 stock split of Dollar Tree
Common Stock which took effect after June 29, 1998).
Step Ahead responded to that letter on June 24, 1998 with a letter
indicating a willingness to accept Dollar Tree's offer if Dollar Tree agreed to
be responsible for Step Ahead's transaction costs and to grant options to Step
Ahead employees at a level commensurate with their role, if any, in the combined
company. The parties spent the next few weeks negotiating a new letter of
intent, which was based on the proposal described immediately above but which
provided for a variable exchange ratio with a "collar" mechanism that limits the
effect of changes in the price of Dollar Tree Common Stock on the value of the
consideration to be received by Step Ahead Shareholders. Each party also agreed
to pay the other $1 million (subject to a number of exceptions) if a definitive
agreement had not been signed by August 22, 1998.
On July 6, 1998, the Step Ahead Board met to discuss the new terms of the
merger. The Step Ahead Board focused on the increased valuation proposed by
Dollar Tree, the "collar" mechanism, the required escrow of shares and the
impact of the "no solicitation" and "lock-up option" provisions of the letter of
intent. Also, the Step Ahead Board consulted with representatives from Piper
Jaffray as to the fairness from a financial point of view of the aggregate
merger consideration to be received by Step Ahead Shareholders as a group. The
Step Ahead Board approved the execution of the letter of intent, and it was
executed on July 8, 1998.
Between July 8 and July 22, 1998, the parties negotiated a definitive merger
agreement, including a voting agreement by the principal shareholders of Step
Ahead and an escrow agreement to govern the release of Step Ahead shares held in
escrow. The definitive merger agreement reflected changes in the terms proposed
by the letter of intent, including an increase in the number of Dollar Tree
shares to be issued in the merger reflecting the present value of the aggregate
exercise price of outstanding Step Ahead Options, the application of a $600,000
threshold before Dollar Tree could make certain claims against escrowed shares,
and elimination of the payment of the $3.0 million termination fee upon certain
but not all of the proposed termination events. Also during that time, the
parties engaged in legal and business due diligence.
The parties also agreed to terms of non-competition agreements between
Dollar Tree and certain Step Ahead officers, including Mr. Cino, under which the
officers were to receive options to purchase shares of Dollar Tree Common Stock.
Mr. Cino also agreed to include a one-year consulting arrangement in the
non-competition agreement.
APPROVAL AND EXECUTION OF THE MERGER. On July 20, 1998, the Board of
Directors of Dollar Tree (the "Dollar Tree Board") met to discuss the terms of
the Merger as expressed in the definitive merger agreement and related documents
which had been negotiated by the companies. The Dollar Tree Board focused on a
number of factors which are described under the caption "--Reasons for the
Merger" below. The Dollar Tree Board also focused on the non-competition
agreements with the Step Ahead officers, and suggested that the options issuable
to the officers upon execution of the agreements should lapse if they competed
with the combined company. Counsel to the parties later discussed this change,
which was accepted. The Dollar Tree Board did not obtain an opinion as to the
fairness from a financial point of view of the Merger Consideration to be paid
by Dollar Tree because it believed the Dollar Tree Board and management
possessed the requisite financial expertise to make this determination.
42
<PAGE>
On July 21, 1998, at a special meeting, the Step Ahead Board met to discuss
the terms of the definitive merger agreement. At the meeting, Piper Jaffray
rendered an oral opinion to the effect that, as of such date, subject to certain
assumptions and other matters (including an assumed Average Closing Price of
$42.55), the aggregate consideration to be received by the Step Ahead
Shareholders as a group, as reflected in the proposed merger agreement, was fair
from a financial point of view to such shareholders as a group. In addition, Mr.
Cino stated that he and his wife and the trust in which a majority of his shares
are held, were in favor of the terms as reflected in the proposed merger
agreement. The Step Ahead Board approved the Merger and the Merger Agreement and
unanimously recommended that the shareholders of Step Ahead adopt and approve
the Merger and the Merger Agreement.
On July 22, 1998, the Merger Agreement was executed by the parties.
Following the execution of the Merger Agreement, the market price of Dollar Tree
Common Stock declined below $34 11/32, the Average Closing Price at which Dollar
Tree would have the right to terminate the Merger Agreement, unless Step Ahead
agreed to treat the Average Closing Price as $34 11/32 or such lesser value as
determined by Dollar Tree. Senior management of Dollar Tree and Step Ahead had a
number of telephone conferences to discuss amending the Merger Agreement because
the process for determining the Average Closing Price at prices below $34 11/32
did not allow enough time for the parties to make fully informed choices. As a
result of these conversations, the parties executed an Amendment to Merger
Agreement on October 20, 1998 which extended the time between the determination
of the Average Closing Price and the date of the Special Meeting to give Dollar
Tree and Step Ahead more time to consider whether to terminate the Merger
Agreement or accept a new value for the Average Closing Price, respectively.
REASONS FOR THE MERGER
The Boards of Directors of Dollar Tree and Step Ahead believe that the
combination of Dollar Tree and Step Ahead will bring together for the benefit of
their shareholders the complementary strengths of their organizations. The
factors considered by the Boards of Directors of each company are described in
greater detail below.
FACTORS CONSIDERED BY DOLLAR TREE. On July 20, 1998, a meeting of the
Dollar Tree Board was held at which it unanimously approved the Merger and the
Merger Agreement. In reaching its decision to approve the Merger, the Dollar
Tree Board considered a number of factors, including improvements in Step
Ahead's operations since discussions about a possible combination broke off in
October 1997 and factors described below. In light of the variety of factors
considered in its evaluation of the Merger, the Dollar Tree Board did not find
it practical to and did not quantify or otherwise attempt to assign relative
weights to the specific factors considered in reaching its determination. After
a presentation by management of Dollar Tree, the Dollar Tree Board determined
that the Merger is in the best interests of Dollar Tree and its shareholders and
authorized the Merger for the following reasons, among others:
- APPROPRIATE PLATFORM FOR EXPANSION TO THE WEST COAST. The Merger will
increase the number of stores owned by Dollar Tree and diversify Dollar
Tree's geographic presence into California and Nevada. Dollar Tree also
believes that the Merger will provide a base of operations for Dollar Tree
on the West Coast with an established management team, store and
distribution personnel and infrastructure, avoiding the costly process of
developing these assets internally. The Merger would then allow Dollar
Tree to expand further, using either its prototype store or the larger
Step Ahead prototype.
- LARGER STORE FORMAT. Dollar Tree believes that the Merger will allow it to
advance its knowledge about operating a larger 10,000-12,000 square foot
store format such as that used by Step Ahead by acquiring the purchasing
and operational expertise relating to the larger store format with a
product mix that carries a higher percentage of consumables and closeouts
than that currently carried by Dollar Tree.
- IMPROVED PURCHASING. Dollar Tree believes that, through the acquisition of
Step Ahead, it will gain greater access to and knowledge about buying
opportunities in the closeout and consumables
43
<PAGE>
product areas. In addition, Dollar Tree's buying expertise in variety
store product lines could reduce the cost and improve the quality of
certain of Step Ahead's purchases. The buying power of both companies
could be consolidated with a view toward obtaining higher-quality goods,
volume discounts and economies of scale.
- FINANCIAL POSITION AND OPERATING RESULTS OF STEP AHEAD. Dollar Tree was
impressed with the planning and execution that has permitted Step Ahead to
achieve growth in sales and net income.
- OPPORTUNITY FOR IMPROVED STORE LEVEL ECONOMICS. Dollar Tree believes that
further opportunities exist for improving Step Ahead's store level
economics. In addition, it is anticipated that the acquisition will
provide the combined business with opportunities to improve Step Ahead's
gross profit margins. However, management has not identified significant
efficiencies to be obtained in the area of selling, general and
administrative expenses.
At the July 20 meeting, the Dollar Tree Board also considered risks
associated with combining the two companies, including risks solely associated
with the business of Step Ahead and risks related to the combination of the
companies. In evaluating the risks associated with the business of Step Ahead
and the risks associated with combining two geographically separated business
operations, the Dollar Tree Board considered:
- Step Ahead's geographic location and concentration and related risks.
- The differences in the way Step Ahead operates its 98 CENTS Clearance
Centers compared with the way Dollar Tree operates its stores.
- The risk that Dollar Tree may not be able to retain key Step Ahead
personnel.
- The differences in the size, product mix, real estate strategy, and
customers of Step Ahead compared with those of Dollar Tree.
- The difficulties in integrating the two corporate cultures and operations.
- The risk that the Dollar Tree store concept may not operate or perform as
anticipated on the West Coast.
- The need to expand Step Ahead's distribution and warehouse systems to
accommodate further growth.
- The lack of an independent fairness opinion from a Dollar Tree financial
advisor.
- Other risks more fully described under the caption "Risk Factors" in this
Prospectus/Proxy Statement.
The Dollar Tree Board considered the above in light of its knowledge of the
business and operations of Dollar Tree, information presented by Dollar Tree
management, and its business judgment. While the Dollar Tree Board did not
assign a relative weight to any of the factors considered, it placed special
emphasis on its belief in the complementary business, financial and management
strengths of Dollar Tree and Step Ahead, its view that those complementary
strengths would enhance the value of the combined company in the eyes of its
customers and the investment community, and its view that the Merger is in the
best interests of Dollar Tree and its shareholders. The Dollar Tree Board
decided that the potential benefits of the Merger to Dollar Tree and its
shareholders outweighed these risks.
On October 20, 1998, the Dollar Tree Board, acting by unanimous consent in
writing, approved an amendment to the Merger Agreement, stating that it was
desirable to modify the Merger Agreement to extend the time between the
determination of the Average Closing Price and the Special Meeting to six
business days. The Dollar Tree Board noted that if the actual Average Closing
Price were below $34 11/32, the amendment provides the Board with additional
time to consider whether it should propose that the parties treat the Average
Closing Price as an amount greater than the actual Average Closing Price. This
44
<PAGE>
decision is important in that it would result in the termination of the Merger
Agreement if the value proposed by Dollar Tree is not accepted by the Step Ahead
Board.
FACTORS CONSIDERED BY STEP AHEAD - JULY 21 MEETING. On July 21, 1998, the
Step Ahead Board held a meeting at which it unanimously approved the Merger and
the Merger Agreement and recommended that the Step Ahead Shareholders vote FOR
approval of the Merger and the Merger Agreement. In reaching its decision to
authorize Step Ahead to enter into the Merger Agreement and to recommend
approval of the Merger and the Merger Agreement by the Step Ahead Shareholders,
the Step Ahead Board considered a number of factors, including the factors
described below. In light of the variety of factors considered in its evaluation
of the Merger, the Step Ahead Board did not find it practical to and did not
quantify or otherwise attempt to assign relative weights to the specific factors
considered in reaching its determination.
STEP AHEAD BUSINESS. The Step Ahead Board considered historical and
prospective information concerning the financial condition, results of
operations and business of Step Ahead. The Step Ahead Board considered the
current state (and its perception of the future state) of the retail discount
merchandise industry. The Step Ahead Board considered the strategic alternatives
available to Step Ahead in lieu of this transaction, including maintaining the
status quo, undertaking an initial public offering and seeking to grow through
alternative transactions. The Step Ahead Board discussed competitive conditions
in the industry that place a strain on smaller companies. Step Ahead's
management made presentations to the Step Ahead Board, providing it with
operational, financial and legal information. Management also stressed to the
Step Ahead Board that capital resources available to Step Ahead may not be
sufficient to fund planned growth.
DOLLAR TREE BUSINESS. The Step Ahead Board considered the operational,
financial and legal due diligence provided to it by Step Ahead management and
professional advisors. This due diligence included historical and prospective
information regarding the results of operations, financial condition and
business of Dollar Tree. In evaluating Dollar Tree, the Step Ahead Board
considered, among other things, (i) the operating performance of Dollar Tree's
stores, (ii) the perceived strength of Dollar Tree's management, (iii) Dollar
Tree's plans for future growth, (iv) the quality of the Dollar Tree brand name
and its reputation for excellent customer service and high quality merchandise,
(v) the result of Step Ahead's legal due diligence and (vi) Dollar Tree's
significant financial resources and access to capital. The Step Ahead Board also
reviewed recent trading prices for Dollar Tree Common Stock, which ranged from a
high of $44.88 to a low of $38.42 during the 30-day period preceding the
meeting.
PIPER JAFFRAY OPINION. The Step Ahead Board considered the presentation and
oral opinion delivered by Piper Jaffray on July 21, 1998, which concluded that
as of such date, the aggregate merger consideration to be received by Step Ahead
Shareholders as a group, calculated based upon an assumed Average Closing Price
of $42.55, was fair from a financial point of view, to such shareholders as a
group. Piper Jaffray's oral opinion was subsequently confirmed in writing. On
October 19, 1998, Step Ahead requested that Piper Jaffray render an updated
opinion to the Step Ahead Board concerning the fairness, from a financial point
of view, of the consideration to be paid in the proposed Merger in light of the
decrease in the price of Dollar Tree Common Stock between July 1998 and October
19, 1998. On November 5, 1998, Piper Jaffray rendered an updated opinion to the
Step Ahead Board. See "--Opinion of Financial Advisor to Step Ahead."
STRATEGIC BENEFITS. The Step Ahead Board considered the following potential
benefits offered by the Merger:
(i) The belief that Step Ahead Shareholders will have the opportunity to
participate in the growth of the combined company.
(ii) The opportunity for Step Ahead Shareholders to own publicly-traded
stock of a significantly larger business enterprise.
45
<PAGE>
(iii) The belief that the combined company would have greater leverage
and visibility with suppliers, vendors and landlords.
(iv) The opportunity to improve profitability of the combined company by
implementing the best practices of each company.
(v) The belief that the Merger would allow the combined company to
improve operating efficiencies, reduce costs, and achieve synergies,
particularly in the areas of purchasing, accounting, and payroll. While the
Step Ahead Board identified particular areas where it believed the combined
company could improve efficiencies, reduce costs and achieve synergies, it
did not quantify any of these savings.
(vi) The belief that the combined company's store base will benefit from
Step Ahead's purchasing practices and merchandise mix.
STRUCTURE OF TRANSACTION; TERMS OF THE MERGER AGREEMENT. The Step Ahead
Board considered the terms of the Merger Agreement and its legal and tax
implications. The Step Ahead Board considered in particular the "no
solicitation" provision of the Merger Agreement, the option granted to Dollar
Tree to purchase 19.9% of Step Ahead Stock at $45.97 per share should the
transaction terminate for certain reasons, the $3.0 million termination fee
payable to Dollar Tree in certain circumstances and the termination provisions
of the Merger Agreement. The Step Ahead Board also noted that the Merger is
expected to be accounted for as a pooling of interests and is generally not
expected to result in Federal income taxes. The Step Ahead Board also considered
the mechanism contained in the Merger Agreement that limits the effect of
changes in the price of Dollar Tree Common Stock on the value of the
consideration to be received by Step Ahead Shareholders in the Merger. While the
Exchange Ratio is not affected so long as the Average Closing Price is between
$36 3/8 and $44 7/16, the Exchange Ratio will be adjusted in the event the
Average Closing Price rises above $44 7/16 and in the event the Average Closing
Price declines below $36 3/8; provided, however, that the merger consideration
cannot be less than an aggregate of 1,936,547 shares of Dollar Tree Common
Stock. The Step Ahead Board recognized that this "collar" limits the ability of
Step Ahead shareholders to benefit from appreciation in Dollar Tree Common Stock
at prices between $44 7/16 and $46 15/32, but determined that this limitation
was offset by the protection afforded by the limitation on risk associated with
price declines.
NEGATIVE FACTORS. The Step Ahead Board also identified and considered a
variety of potentially negative factors in its deliberations concerning the
Merger, including but not limited to:
(i) the timing and risks associated with the integration by Dollar Tree
of Step Ahead and whether the potential benefits sought in the Merger might
not be fully realized;
(ii) the possibility that the Merger might not be consummated and the
effect of public announcement of the Merger on Step Ahead's sales and
operating results and Step Ahead's ability to attract and retain key
management and marketing personnel;
(iii) the substantial voting power dilution to the Step Ahead
Shareholders, resulting in Step Ahead Shareholders' ownership of less than
3% of the shares of the combined company after the consummation of the
Merger;
(iv) the possibility of management disruption associated with the Merger
and the risk that despite the efforts of Dollar Tree and Step Ahead, key
management personnel might not remain employed by Step Ahead;
(v) the estimated charges to be incurred in connection with the Merger,
including costs of integrating the businesses and transaction expenses
arising from the Merger;
(vi) the required escrow of shares which could result in Step Ahead
Shareholders receiving up to 10% fewer shares of Dollar Tree Common Stock as
merger consideration and
46
<PAGE>
(vii) the other risks described under "Risk Factors" herein.
The Step Ahead Board believed that these risks were outweighed by the
potential benefits of the Merger.
In addition, the Step Ahead Board reviewed the interests of certain persons
in the Merger, including Step Ahead management, discussed below in "Terms of the
Merger--Interests of Certain Persons." The Step Ahead Board was aware that such
arrangements would give certain individuals interests in the Merger that were in
addition to the interests of Step Ahead Shareholders generally.
FACTORS CONSIDERED BY STEP AHEAD-ACTIONS TAKEN ON OCTOBER 19. On October
19, 1998, the Step Ahead Board unanimously approved the amendment to the Merger
Agreement and confirmed its recommendation that the Step Ahead Shareholders vote
FOR approval of the Merger and the Merger Agreement. In reaching these
decisions, the Step Ahead Board considered the following:
- The Step Ahead Board confirmed its earlier conclusions with respect to the
fundamentals of the Step Ahead business and the Dollar Tree business, the
strategic benefits that the Board expects to realize from the Merger, and
the potentially negative factors concerning the Merger.
- In light of the significant price volatility of the Dollar Tree Common
Stock over the last 60 days, the Step Ahead Board reconsidered certain
terms of the Merger Agreement relating to the timing of the determination
of the Average Closing Price and the duties of the parties if the Average
Closing Price is less than $34 11/32. The Step Ahead Board determined that
the parties should have more flexibility in determining a mutually
acceptable price to treat as the Average Closing Price if the Average
Closing Price is less than $34 11/32 and that the parties' ultimate
decision on the Average Closing Price should be disclosed to Step Ahead
Shareholders at least three business days prior to the Special Meeting to
give the Step Ahead Shareholders adequate time to make an informed
decision. The Step Ahead Board determined that setting the date on which
the Average Closing Price is determined at least six business days before
the Special Meeting would provide the additional time necessary to meet
these goals.
- The Step Ahead Board also determined that the existing collar mechanism in
the Merger Agreement, which limits the effect of changes in the price of
Dollar Tree Common Stock on the value of the consideration to be received
by Step Ahead Shareholders in the Merger, should not be altered because of
the potential benefits to Step Ahead Shareholders at prices below $36 3/8.
The Step Ahead Board recognized, however, that these benefits will be
offset if the Average Closing Price is less than $34 11/32 and the parties
decide to treat the Average Closing Price as an amount greater than the
actual Average Closing Price.
- Finally, in light of the assumptions made in the first Piper Jaffray
opinion and the recent significant price volatility of the Dollar Tree
Common Stock, the Board requested that Piper Jaffray issue a new opinion
as to whether or not the Merger Consideration to be received by the Step
Ahead Shareholders as a group is fair from a financial point of view and
that this opinion be delivered to the Board just prior to the date of this
Prospectus/Proxy Statement. On November 5, 1998, Piper Jaffray issued its
updated opinion as to the fairness of the proposed Merger Consideration.
See
"--Opinion of Financial Advisor to Step Ahead." To assist the Step Ahead
Board in deciding to accept or reject any price that is less than the
actual Average Closing Price (if the Average Closing Price is less than
$34 11/32), the Board expects to request Piper Jaffray to issue another
updated opinion prior to the time the Board must accept or reject such a
price.
THE BOARD OF DIRECTORS OF EACH COMPANY BELIEVES THAT THE MERGER IS IN THE
BEST INTERESTS OF SUCH COMPANY AND ITS SHAREHOLDERS. STEP AHEAD'S BOARD OF
DIRECTORS THEREFORE UNANIMOUSLY RECOMMENDS THAT ITS SHAREHOLDERS VOTE FOR THE
APPROVAL OF THE MERGER AND THE MERGER AGREEMENT.
47
<PAGE>
OPINION OF FINANCIAL ADVISOR TO STEP AHEAD
Piper Jaffray was retained by Step Ahead on April 9, 1997 to act as Step
Ahead's exclusive advisor in negotiating with potential strategic partners of
Step Ahead. Subsequently, after Step Ahead and Dollar Tree signed a letter of
intent on July 8, 1998, Step Ahead requested that Piper Jaffray render an
opinion to the Step Ahead Board concerning the fairness, from a financial point
of view, of the consideration to be paid in the proposed Merger.
Piper Jaffray delivered to the Step Ahead Board on July 21, 1998, its
written opinion (the "Original Opinion"), to the effect that, as of the date of
the Original Opinion, based on and subject to the assumptions, factors and
limitations set forth in the Original Opinion and as described below, the
aggregate consideration proposed to be paid to the holders of Step Ahead Stock
as a group in the Merger, based upon an assumed Average Closing Price of $42.55
per share and a resulting assumed Exchange Ratio of approximately 1.1379 under
the Merger Agreement, was fair, from a financial point of view, to such
shareholders as a group.
Following execution of the Merger Agreement, the market price of Dollar Tree
Common Stock declined. On November 5, 1998, Piper Jaffray delivered to the Step
Ahead Board an updated written opinion (the "Updated Opinion", and, together
with the Original Opinion, the "Opinions") to the effect that, as of the date of
the Updated Opinion, based on and subject to the assumptions, factors and
limitations set forth in the Updated Opinion and as described below, the
aggregate consideration (the "Aggregate Merger Consideration") proposed to be
paid to the holders of Step Ahead Stock as a group in the Merger was fair, from
a financial point of view, to such shareholders as a group. Both Opinions assume
that Step Ahead Shareholders will receive all of the shares to be held in
escrow, even though the shareholders may actually receive none of these shares.
A copy of the Updated Opinion is attached as Appendix E to this Prospectus/Proxy
Statement and is incorporated herein by reference. Holders of Step Ahead Stock
are urged to read the attached Updated Opinion in its entirety.
Piper Jaffray was not requested and did not make any recommendation to the
Step Ahead Board as to the form or amount of the consideration to be received by
the holders of Step Ahead Stock in the Merger, which was determined through
negotiations between the parties to the Merger. The Opinions were rendered to
Step Ahead's Board and do not constitute a recommendation to any shareholder of
Step Ahead as to how such shareholder should vote at the Special Meeting. Piper
Jaffray was not requested to opine as to, and the Opinions do not address, (i)
Step Ahead's underlying business decision to proceed with or effect the Merger
or (ii) whether the consideration proposed to be paid to the holders of Step
Ahead Stock was fair from a financial point of view to any particular class of
capital stock of Step Ahead as compared to any other class of capital stock of
Step Ahead.
In arriving at the Opinions, Piper Jaffray reviewed, among other things, (i)
the draft of the Merger Agreement provided to it on July 20, 1998 (in the case
of the Original Opinion) and the Merger Agreement and the Amendment to Merger
Agreement (in the case of the Updated Opinion), (ii) certain publicly available
information relative to the business, financial condition and operations of
Dollar Tree, (iii) certain information relative to the business, financial
condition and operations of Step Ahead, (iv) certain financial planning
information of Step Ahead furnished by management of Step Ahead, (v) certain
financial and securities data of companies deemed similar to Step Ahead and
Dollar Tree or representative of the business sector in which Step Ahead and
Dollar Tree operate, (vi) to the extent publicly available, the financial terms
of certain merger and acquisition transactions deemed comparable to the Merger,
and (vii) certain publicly available securities data relative to Dollar Tree
Common Stock. In addition, Piper Jaffray engaged in discussions with members of
management of Dollar Tree and Step Ahead concerning the respective financial
conditions, current operating performance and balance sheet characteristics of
Dollar Tree and Step Ahead and the prospects for Dollar Tree and Step Ahead on a
combined basis (the "Combined Company") following the Merger.
48
<PAGE>
In delivering the Updated Opinion to the Step Ahead Board on November 5,
1998, Piper Jaffray prepared and delivered to the Board certain written
materials containing various analyses and other information material to the
Updated Opinion. The following is a summary of these materials.
IMPLIED EQUITY VALUE/IMPLIED COMPANY VALUE. Based on the five-day
average closing price of Dollar Tree Common Stock of $39.05 for the period
ended November 2, 1998 and a resulting assumed Exchange Ratio of 1.14
calculated pursuant to the Merger Agreement, Piper Jaffray calculated that
holders of Step Ahead Stock and holders of Step Ahead Options would receive
the equivalent of approximately 1.94 million shares of Dollar Tree Common
Stock in the Merger. Based on an assumed Average Closing Price of $39.05,
payment of 1.94 million shares of Dollar Tree Common Stock yielded an
implied equity value of Step Ahead of approximately $75.6 million and an
implied company value of Step Ahead of approximately $87.9 million.
MARKET ANALYSIS. Piper Jaffray reviewed selected market data relating to
the ownership, price, volume and analyst coverage of Dollar Tree Common
Stock. In addition, Piper Jaffray reviewed the relative stock performance of
Dollar Tree Common Stock in comparison to (i) the group of retail discount
store chains (other than Dollar Tree) referred to below in "COMPARABLE
COMPANY ANALYSIS", (ii) the NASDAQ Composite Index and (iii) the Standard &
Poor's 500 Stock Index, in each case for the period October 31, 1997 through
November 2, 1998.
COMPARABLE COMPANY ANALYSIS. Piper Jaffray compared certain financial
information and valuation ratios relating to Step Ahead to corresponding
data and ratios from six publicly traded companies deemed comparable to Step
Ahead (Consolidated Stores Corporation, Dollar General, Dollar Tree Stores,
Family Dollar Stores, Mazel Stores, Inc. and 99 Cents Only Stores). This
group was selected from those companies that are assigned the Standard
Industrial Classification ("SIC") code for variety stores, are publicly
traded retail discount store chains and have a market capitalization greater
than $100 million. For purposes of its analysis, Piper Jaffray utilized the
implied company value of Step Ahead of $87.9 million and used in its
calculations estimates of future financial results of Step Ahead and the
comparable companies provided by, respectively, management of Step Ahead and
research analysts covering the comparable companies. This analysis produced
multiples of selected valuation data as follows: price to latest twelve
months ("LTM") earnings for the comparable companies ranging from 11.9x to
47.7x, with a mean and median of 30.1x and 32.2x, respectively, and for Step
Ahead 25.9x; estimated price to earnings for the fiscal year ending December
31, 1998/January 31, 1999/February 28, 1999 for the comparable companies
ranging from 11.0x to 40.3x, with a mean and median of 26.4x and 29.3x,
respectively, and for Step Ahead 20.1x; estimated price to earnings for the
fiscal year ending December 31, 1999/January 31, 2000/February 28, 2000 for
the comparable companies ranging from 9.4x to 32.9x, with a mean and median
of 21.4x and 23.6x, respectively, and for Step Ahead 15.7x; company value to
LTM revenue for the comparable companies ranging from 0.5x to 3.4x, with a
mean and median of 1.8x and 1.5x, respectively, and for Step Ahead 0.8x;
company value to estimated revenue for the fiscal year ending December 31,
1998/January 31, 1999/February 28, 1999 for the comparable companies ranging
from 0.5x to 3.2x, with a mean and median of 1.6x and 1.5x, respectively,
and for Step Ahead 0.8x; company value to estimated revenue for the fiscal
year ending December 31, 1999/January 31, 2000/February 28, 2000 for the
comparable companies ranging from 0.4x to 2.6x, with a mean and median of
1.3x and 1.2x, respectively, and for Step Ahead 0.7x; company value to LTM
operating income for the comparable companies ranging from 7.5x to 25.4x,
with a mean and median of 17.5x and 19.3x, respectively, and for Step Ahead
15.1x; company value to estimated operating income for the fiscal year
ending December 31, 1998/January 31, 1999/February 28, 1999 for the
comparable companies ranging from 8.4x to 22.7x, with a mean and median of
16.2x and 18.2x, respectively, and for Step Ahead 11.8x; and company value
to estimated operating income for the fiscal year ending December 31,
1999/January 31, 2000/February 28, 2000 for the comparable companies ranging
from 6.3x to 17.8x, with a mean and median of 12.8x and 14.8x, respectively,
and for Step Ahead 9.5x.
49
<PAGE>
MERGER AND ACQUISITION MULTIPLE ANALYSIS. Piper Jaffray reviewed certain
merger and acquisition transactions which it deemed comparable to the
Merger. It selected these transactions by searching SEC filings, public
company disclosures, press releases, industry and popular press reports,
databases and other sources and applying the following criteria: target
companies with SIC codes for variety, general merchandise, drug and
proprietary, used merchandise, hobby, toys and games and retail stores,
transaction values of greater than $25 million and less than $400 million,
the absence of hostile intent by the acquiring company and transactions
involving acquisition of 50% or more of the target company. Specifically,
Piper Jaffray analyzed thirteen transactions which satisfied the foregoing
criteria and two other acquisitions of discount retailers outside of the
valuation range but deemed relevant nonetheless. The complete group of
fifteen transactions analyzed by Piper Jeffray consisted of: the acquisition
of Odd's-N-End's Inc. by 99 Cents Only Stores; the acquisition of Rockbottom
Stores by Duane Reade Inc.; the acquisition of Universal International by 99
Cents Only Stores; the acquisition of MacFrugal's Bargains by Consolidated
Stores Corp.; the acquisition of Tuesday Morning Corp. by Madison Dearborn
Partners; the acquisition of Penn-Daniels Inc. by ShopKo Stores Inc.; the
acquisition of Cosmetic Center Inc. by Prestige Fragrance & Cosmetics; the
acquisition of Pet Food Warehouse Inc. by Petco Animal Supplies Inc.; the
acquisition of Big B Inc. (Revco DS Inc.) by Revco DS Inc.; the acquisition
of Kash N' Karry Food Stores Inc. by Food Lion Inc.; the acquisition of
Fay's Inc. by Thrift Drug Inc. (JC Penney Co.); the acquisition of Kay-Bee
Toy & Hobby Shops Inc. by Consolidated Stores Corp.; the acquisition of
Dollar Bill$ by Dollar Tree; the acquisition of Super Rite Corp. by Richfood
Holdings Inc.; and the acquisition of Pet Food Giant Inc. by PetSmart Inc.
Piper Jaffray compared certain financial data of Step Ahead for the twelve
months ended June 28, 1998 to the corresponding data of the target companies
in the selected transactions for the most recent twelve-month period
preceding each transaction for which data were available. For purposes of
its analysis, Piper Jaffray utilized the implied company value of Step Ahead
of $87.9 million and the implied equity value of Step Ahead of $75.6
million. This analysis produced multiples of selected valuation data as
follows: company value to LTM revenue for the target companies in the
selected transactions ranging from 0.2x to 1.2x, with a mean and median of
0.5x and 0.5x, respectively, and for Step Ahead 0.8x; company value to LTM
earnings before interest, taxes, depreciation and amortization for the
target companies in the selected transactions ranging from 6.3x to 27.2x,
with a mean and median of 13.8x and 9.9x, respectively, and for Step Ahead
11.7x; company value to LTM operating income for the target companies in the
selected transactions ranging from 8.2x to 17.3x, with a mean and median of
12.7x and 11.6x, respectively, and for Step Ahead 15.1x; and equity value to
LTM net income for the target companies in the selected transactions ranging
from 18.2x to 33.3x, with a mean and median of 24.6x and 21.3x,
respectively, and for Step Ahead 25.9x. Piper Jaffray deemed certain data
from certain of the selected transactions not meaningful (for example, if
the target company had losses during the relevant twelve-month period) or
not available. Therefore, the data presented as to each multiple does not
include the target companies from all fifteen selected transactions.
ACCRETION/DILUTION ANALYSIS. Piper Jaffray examined the hypothetical pro
forma effect of the Merger on Dollar Tree's earnings per share for the
fiscal years ending December 31, 1998 through 2000, based on estimates by
management and research analysts of the projected financial results of
Dollar Tree and estimates by management of the projected financial results
of Step Ahead. Piper Jaffray performed two analyses, one assuming that
certain synergies from, among other things, estimated cost savings and
revenue enhancements would not be realized following the Merger and one
assuming that such synergies would be realized. Both analyses indicated that
the Merger is anticipated, without regard to costs of the Merger, to have no
significant effect on projected earnings per share of Dollar Tree in fiscal
year 1998 and to be slightly accretive to projected earnings per share of
Dollar Tree for each of the fiscal years 1999 and 2000. The actual operating
and financial results achieved by Dollar Tree may vary from projected
results and variations may be material as a result of business and market
risks, the timing and amount of synergies, the costs associated with
achieving such synergies and other factors.
50
<PAGE>
CONTRIBUTION ANALYSIS. Piper Jaffray analyzed the expected contributions
of each of Dollar Tree and Step Ahead to revenue, operating income and net
income of the Combined Company for the year ended December 31, 1997 and the
twelve months ended June 28, 1998 based on pro forma results and for the
years ending December 31, 1998, 1999 and 2000 based on Step Ahead's
financial planning data, Dollar Tree management projections for 1998 results
and analyst estimates of Dollar Tree's financial results for 1999 and 2000.
For purposes of its analysis, Piper Jaffray assumed that no synergies would
result from the Merger. The analysis indicated that during these periods
Step Ahead contributed or would contribute to the Combined Company revenue
ranging from 10.8% to 12.6%, operating income ranging from 4.2% to 6.0% and
net income ranging from 3.2% to 5.3%. Step Ahead will account for
approximately 2.9% of the equity ownership of the Combined Company following
the Merger based on Piper Jaffray's analysis as described above in "IMPLIED
EQUITY VALUE/IMPLIED COMPANY VALUE".
DISCOUNTED CASH FLOW ANALYSIS. Piper Jaffray estimated a range of
theoretical values for Step Ahead based on the present value of its
projected future cash flows and an estimate of its future value using
projections made by Step Ahead management for the years ending January 31,
1999 through 2003. Piper Jaffray applied a range of terminal value multiples
of forecasted 2003 operating income of 10.0x to 12.0x and a range of
discount rates of 18% to 22%. This analysis yielded a range of estimated
values of aggregate Step Ahead equity value based on Step Ahead's debt and
cash levels as of September 27, 1998 of approximately $62.8 million to $87.8
million, with a mid-point of approximately $74.6 million based on a terminal
value of 11.0x and a discount rate of 20%. Piper Jaffray compared these
estimated values to the implied equity value of Step Ahead of $75.6 million
calculated as described above in "IMPLIED EQUITY VALUE/IMPLIED COMPANY
VALUE".
In delivering the Original Opinion to the Step Ahead Board on July 21, 1998,
Piper Jaffray prepared and delivered to the Board certain written materials
containing analyses and information comparable to those presented to the Step
Ahead Board in connection with the Updated Opinion.
In reaching its conclusions as to the fairness of the Aggregate Merger
Consideration and in its presentations to Step Ahead's Board, Piper Jaffray did
not rely on any single analysis or factor described above, assign relative
weights to the analyses or factors considered by it, or make any conclusions as
to how the results of any given analysis, taken alone, supported its Opinions.
The preparation of a fairness opinion is a complex process and not necessarily
susceptible to partial analyses or summary description. Piper Jaffray believes
that its analyses must be considered as a whole and that selecting portions of
its analyses and of the factors considered by it, without considering all
factors and analyses, would create a misleading view of the processes underlying
the Opinions. The analyses of Piper Jaffray are not necessarily indicative of
actual values or future results, which may be significantly more or less
favorable than suggested by such analyses. Analyses relating to the value of
companies do not purport to be appraisals or valuations or necessarily reflect
the price at which companies may actually be sold. No company or transaction
used in any analysis for purposes of comparison is identical to Dollar Tree,
Step Ahead or the Merger. Accordingly, an analysis of the results of such
comparisons is not mathematical; rather, it involves complex considerations and
judgments concerning differences in the various characteristics of the companies
to which Dollar Tree and Step Ahead were compared and other factors that could
affect the public trading value of such companies.
For purposes of the Opinions, Piper Jaffray relied upon and assumed the
accuracy, completeness and fairness of the financial statements and other
information made available to it and did not assume responsibility independently
to verify such information. Piper Jaffray relied upon the assurances of the
respective managements of Dollar Tree and Step Ahead that the information
provided was prepared on a reasonable basis in accordance with industry practice
and, with respect to financial planning data, reflects the best currently
available estimates and good faith judgments of Dollar Tree's and Step Ahead's
managements as to the expected future financial performance of Dollar Tree and
Step Ahead, and that each such management team is not aware of any information
or facts that would make the information
51
<PAGE>
provided to Piper Jaffray incomplete or misleading. For purposes of the
Opinions, Piper Jaffray assumed that Step Ahead and Dollar Tree are not parties,
together or individually, to any pending transaction, other than the Merger or
in the ordinary course of business. Piper Jaffray also assumed that (i) the
Merger would be free of federal tax to Step Ahead, Dollar Tree and the Step
Ahead Shareholders (ii) the Merger would be accounted for as a pooling of
interests under generally accepted accounting principles, (iii) all the
necessary regulatory approvals and consents required for the Merger would be
obtained in a manner that would not change the purchase price for Step Ahead and
(iv) all shares of Dollar Tree Common Stock held in escrow pursuant to the
Merger Agreement would be issued and delivered to the holders of Step Ahead
Stock. See "--Terms of the Merger--Amendment; Termination--By Dollar Tree."
In arriving at the Opinions, Piper Jaffray was not engaged to perform any
appraisals or valuations of specific assets or liabilities (contingent or
otherwise) of Dollar Tree or Step Ahead and was not furnished with any such
appraisals or evaluations, made no physical inspection of the properties or
assets of Step Ahead and expressed no opinion regarding the liquidation value of
any entity. Piper Jaffray expressed no opinion as to the price at which shares
of Dollar Tree Common Stock have traded or at which such shares may trade at any
future time. The Opinions are based on information available to Piper Jaffray
and the facts and circumstances as they existed and were subject to evaluation
on the respective dates of the Opinions. Events occurring after such dates could
materially affect the assumptions used in preparing the Opinions.
With the Step Ahead Board's consent, Piper Jaffray made no analysis of, or
distinction between, any separate class of capital stock of Step Ahead and
assumed each share of outstanding Step Ahead Preferred Stock to be the economic
equivalent of an outstanding share of Step Ahead Common Stock. Accordingly, each
Opinion relates solely to the aggregate merger consideration that such Opinion
assumes the holders of Step Ahead Stock as a group would receive in the Merger.
Piper Jaffray, as a customary part of its investment banking business, is
engaged in the evaluation of businesses and their securities in connection with
mergers and acquisitions, underwritings and secondary distributions of
securities, private placements and valuations for estate, corporate and other
purposes. The Step Ahead Board selected Piper Jaffray because of its expertise,
reputation and familiarity with the retail discount store industry in general
and Step Ahead in particular. Piper Jaffray provides research coverage on Dollar
Tree and in the ordinary course of its business, Piper Jaffray and its
affiliates may actively trade securities of Dollar Tree for their own accounts
or the accounts of their customers and, accordingly, may at any time hold a long
or short position in such securities.
Step Ahead paid Piper Jaffray $20,000 upon its engagement and has agreed to
pay an additional $930,000 upon consummation of the Merger for financial
advisory services rendered in connection with the Merger. In addition, Step
Ahead paid Piper Jaffray $75,000 upon rendering its Original Opinion. The
contingent nature of a portion of these fees may have created a potential
conflict of interest in that Step Ahead would be unlikely to consummate the
Merger unless it had received the Opinions. Whether or not the Merger is
consummated, Step Ahead has agreed to pay the reasonable out-of-pocket expenses
of Piper Jaffray and to indemnify Piper Jaffray against certain liabilities
incurred (including liabilities under the federal securities laws) in connection
with the engagement of Piper Jaffray by Step Ahead.
CERTAIN INFORMATION PROVIDED TO PIPER JAFFRAY AND DOLLAR TREE
In connection with the preparation of Piper Jaffray's fairness opinions,
Step Ahead provided Piper Jaffray and Dollar Tree with certain business and
financial information which is not publicly available, including, among other
things, financial projections for fiscal 1998 (ending 1/31/99) through fiscal
2002 prepared by Step Ahead management (the "Projections"). The Projections do
not take into account any of the potential effects of the transactions
contemplated by the Merger.
52
<PAGE>
The Projections assumed:
- Six new store openings in 1998, seven in 1999 and 2000, eight in 2001 and
nine in 2002
- Average store sales growth of 8.0% in 1998, 1.4% in 1999, 1.6% in 2000,
1.9% in 2001 and 1.6% in 2002
The Projections included:
- Net sales of $115.0 million in 1998, $128.2 million in 1999, $142.9
million in 2000, $159.5 million in 2001 and $178.0 million in 2002
- Operating Income of $7.5 million in 1998, $9.2 million in 1999, $10.9
million in 2000, $12.6 million in 2001 and $14.5 million in 2002
- Net income of $3.8 million in 1998, $4.8 million in 1999, $5.8 million in
2000, $6.7 million in 2001 and $7.7 million in 2002
As a matter of course, Step Ahead does not disclose projections as to future
revenues, earnings or other financial information. In addition, the Projections
were not prepared with a view to public disclosure or compliance with the
published guidelines of the Commission regarding projections, nor were they
prepared in accordance with the guidelines established by the American Institute
of Certified Public Accountants for preparation and presentation of financial
projections. The Projections were based upon a variety of estimates and
assumptions which involve judgments with respect to, among other things, future
economic and competitive conditions, financial market conditions and future
business decisions, which, though considered reasonable by Step Ahead, may not
be realized, and are inherently subject to significant economic, competitive and
business uncertainties, all of which are difficult to predict and many of which
are beyond the control of Step Ahead. While Step Ahead believes that the
estimates and assumptions relating to the Projections are reasonable, there can
be no assurance that the Projections will be realized, and actual results may
vary materially from those indicated in the Projections. In light of the
uncertainties inherent in any projected data, Step Ahead Shareholders are
cautioned not to place undue reliance on the Projections. The Projections are
not being included herein to induce any Step Ahead Shareholder to vote in favor
of the Merger.
MANAGEMENT AFTER THE MERGER
The Dollar Tree Board currently consists of J. Douglas Perry, Macon F.
Brock, Jr., H. Ray Compton, Thomas A. Saunders, III, Allan W. Karp, John F.
Megrue, Alan L. Wurtzel, and Frank Doczi. The Dollar Tree Board and the
executive officers of Dollar Tree will not change as a result of the Merger.
At the Effective Time, present members of the Board of Directors of Step
Ahead will resign and the Board of Directors of the surviving corporation will
consist of Messrs. Perry, Brock, Compton and Megrue, all of whom are current
directors of Dollar Tree, and Mr. Frederick C. Coble, Dollar Tree's Senior Vice
President, Chief Financial Officer.
PRIOR RELATIONSHIP BETWEEN DOLLAR TREE AND STEP AHEAD
To the best of each company's knowledge, the companies have not had prior
commercial dealings with each other, other than purchases by Dollar Tree of
wholesale goods from Step Ahead in arm's-length transactions. In 1997, the value
of such purchases totalled $376,840 in the aggregate.
53
<PAGE>
TERMS OF THE MERGER
The detailed terms of, and conditions to, the Merger are contained in the
Merger Agreement and Escrow Agreement, copies of which are attached to this
Prospectus/Proxy Statement as Appendix B and Appendix C respectively, and
incorporated herein by reference. The statements made in this Prospectus/ Proxy
Statement with respect to the terms of the Merger and related transactions are
qualified in their entirety by the text of the Merger Agreement and the Escrow
Agreement.
FORM OF THE MERGER
The Merger Agreement provides for the merger of Merger Sub with and into
Step Ahead with Step Ahead remaining as the surviving corporation. Step Ahead's
name will become Dollar Tree West, Inc. at the time of the Merger. As a result
of the Merger, Dollar Tree West, Inc. will become a wholly owned subsidiary of
Dollar Tree, Merger Sub will cease to exist and each issued and outstanding
share of Step Ahead Stock will be converted into the right to receive shares of
Dollar Tree Common Stock equal to the Exchange Ratio (other than shares, if any,
as to which dissenters' rights have been exercised pursuant to California law).
The surviving corporation is then expected to be merged with and into Dollar
Tree on or prior to January 1, 1999.
It is anticipated that, if the Merger is approved at the Special Meeting and
all other conditions to the Merger have been fulfilled or waived, the Agreement
of Merger will be filed with the Secretary of State of the State of California
as soon as practicable following the Special Meeting or the latest adjournment
thereof. See "--Conditions Precedent to the Merger."
MANNER AND BASIS OF CONVERTING SHARES OF STEP AHEAD STOCK
As a result of the Merger, at the Effective Time each outstanding share of
Step Ahead Stock (other than shares, if any, as to which dissenters' rights have
been exercised pursuant to California law) will be converted into the right to
receive shares of Dollar Tree Common Stock equal to the Exchange Ratio. The
Exchange Ratio equals (i) the Merger Consideration divided by (ii) the Fully
Diluted Step Ahead Shares. The "Merger Consideration" will be calculated as
follows:
- If the Average Closing Price is between $36 3/8 and $44 7/16 per share,
inclusive, then the Merger Consideration will be 2,025,000 shares of
Dollar Tree Common Stock.
- If the Average Closing Price is above $44 7/16 per share, then the Merger
Consideration will be the number of shares of Dollar Tree Common Stock
equal to the product of 2,025,000 multiplied by a fraction, the numerator
of which is 44 7/16 and the denominator of which is the Average Closing
Price. In no case, however, will the Merger Consideration be less than
1,936,547 shares of Dollar Tree Common Stock.
- If the Average Closing Price is below $36 3/8 per share, then the Merger
Consideration will be the number of shares of Dollar Tree Common Stock
equal to the product of 2,025,000 multiplied by a fraction, the numerator
of which is $36 3/8 and the denominator of which is the Average Closing
Price. However, if the Average Closing Price is below $34 11/32 per share,
Dollar Tree has the right to terminate the Merger Agreement. See
"--Amendment; Termination."
"Average Closing Price" equals the average of the closing prices of Dollar
Tree Common Stock, as reported on The Nasdaq National Market for each of the
five consecutive trading days ending on the sixth business day prior to the date
of the Special Meeting (the "ACP Determination Date"). "Fully Diluted Step Ahead
Shares" equals the total number of shares of Step Ahead Stock issued and
outstanding as of the ACP Determination Date (including dissenting shares) plus
the total number of shares of Step Ahead Common Stock subject to Step Ahead
Options outstanding as of the ACP Determination Date.
54
<PAGE>
The following table sets forth the number of shares of Dollar Tree Common
Stock that holders of shares of Step Ahead Stock will receive upon consummation
of the Merger for each share of Step Ahead Stock together with the number of
shares that will be placed in escrow and the equivalent cash value of each based
on the Average Closing Prices set forth below:
<TABLE>
<CAPTION>
SHARES RECEIVED
NET OF ESCROW ESCROW SHARES
AVERAGE -------------------------- ----------------------------
CLOSING EXCHANGE EQUIVALENT EQUIVALENT CASH
PRICE RATIO SHARES(1) CASH VALUE(2) SHARES(3) VALUE(2)
------------ ----------- ----------- ------------- ----------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C>
$46 15/32(4) 1.0930 0.9837 $ 45.71 0.1093 $ 5.08
$46 1.1042 0.9938 45.71 0.1104 5.08
$44 7/16(5) 1.1430 1.0287 45.71 0.1143 5.08
$44 1.1430 1.0287 45.26 0.1143 5.03
$42 1.1430 1.0287 43.21 0.1143 4.80
$40 1.1430 1.0287 41.15 0.1143 4.57
$38 1.1430 1.0287 39.09 0.1143 4.34
$36 3/8(5) 1.1430 1.0287 37.42 0.1143 4.16
$36 1.1549 1.0394 37.42 0.1155 4.16
$34 11/32(6) 1.2106 1.0895 37.42 0.1211 4.16
</TABLE>
- ------------------------------
(1) The number of shares received net of Escrow is calculated by subtracting the
number of Escrow Shares from the Exchange Ratio.
(2) The equivalent cash value is calculated by multiplying the corresponding
amount of Dollar Tree Common Stock by the Average Closing Price. The actual
cash value of Dollar Tree Common Stock when shares are received in the
Merger may be less than this amount because of the volatility in the market
price of Dollar Tree Common Stock.
(3) The number of Escrow Shares is calculated by multiplying the respective
Exchange Ratio by 10%.
(4) Above $46 15/32 per share the Exchange Ratio is fixed at 1.0930.
(5) If the Average Closing Price is between $44 7/16 and $36 3/8 per share,
inclusive, the Exchange Ratio is fixed at 1.1430.
(6) If the actual Average Closing Price of Dollar Tree Common Stock is less than
$34 11/32, the Dollar Tree Board may propose that the parties treat the
Average Closing Price, for purposes of calculating the Exchange Ratio, as a
value between the actual Average Closing Price and $34 11/32. This proposal
would have the effect of decreasing the Exchange Ratio (but not below
1.2106). If the Step Ahead Board does not accept this proposal by 5:00 p.m.
of the third business day before the Special Meeting, the Merger Agreement
will terminate. If the Dollar Tree and Step Ahead Boards agree to treat the
Average Closing Price of Dollar Tree Common Stock at a value that is greater
than its actual value, the equivalent cash value of Dollar Tree Common Stock
received in the Merger net of escrow will be less than $37.42 and the
equivalent cash value of Escrow Shares will be less than $4.16.
This table illustrates the impact of the Exchange Ratio and the Escrow on
one share of Step Ahead Stock. Because a Step Ahead Shareholder's shares will be
aggregated to determine whether or not a fractional share exists and to
determine the number of shares to be contributed to the Escrow, the calculations
above are only an approximation and cannot be used to determine exactly what a
Step Ahead Shareholder will receive in the Merger.
This table assumes that the number of Fully Diluted Step Ahead Shares as of
November 6, 1998 does not change. The actual number of shares of Dollar Tree
Common Stock issued to holders of Step Ahead Stock at the Effective Time of the
Merger may differ from the amounts set forth in the above table, depending upon,
among other things, the Average Closing Price of Dollar Tree Common Stock, which
may differ from the representative examples used in the above table. See
Appendix A for the Exchange Ratios associated with other Average Closing Prices.
There has been significant volatility in the market prices of Dollar Tree Common
Stock over recent periods, with trading prices during the period from July 1,
1998 to November 9, 1998 ranging from a high of $49 1/2 per share on July 30,
1998 to a low of $23 3/4 per share on October 8, 1998. The prevailing trading
prices of Dollar Tree Common Stock may rise or fall after the date of this
Prospectus/Proxy Statement until the Average Closing Price is finally determined
just prior to the Special Meeting. No fractional shares will be issued, and,
depending on the extent of Dollar Tree's claims against the Escrow Shares, Step
Ahead Shareholders may receive no shares from Escrow.
55
<PAGE>
If the actual Average Closing Price of Dollar Tree Common Stock is less than
$34 11/32, the Dollar Tree Board may propose that the parties treat the Average
Closing Price, for purposes of calculating the Exchange Ratio, as a value
between the actual Average Closing Price and $34 11/32. This proposal would have
the effect of decreasing the Exchange Ratio (but not below 1.2106). If the Step
Ahead Board does not accept this proposal by 5:00 p.m. of the third business day
before the Special Meeting, the Merger Agreement will terminate. If Dollar Tree
makes such a proposal, the Step Ahead Board will use the time before the
deadline for termination of the Merger Agreement to decide whether to agree to
the Dollar Tree proposal. The Step Ahead Board will make its determination only
after careful consideration of Dollar Tree's financial condition, results of
operations and stock performance and other factors, including the interests of
the Step Ahead Shareholders, and only after receiving an updated opinion from
Piper Jaffray as to whether the proposed merger consideration is fair from a
financial point of view to the Step Ahead Shareholders as a group. After the
Step Ahead Board makes its determination, however, it does not intend to
resolicit proxies. As a result, the Step Ahead Board's decision will be final
and will be available to Step Ahead Shareholders only once the final Exchange
Ratio is announced three business days prior to the Special Meeting. If a Step
Ahead Shareholder has already executed a proxy, a Step Ahead Shareholder can
revoke his or her proxy or change his or her vote only by following the
procedures outlined on page 38 above.
AT 5:00 P.M. ON DECEMBER 7, 1998, THREE BUSINESS DAYS BEFORE THE SPECIAL
MEETING, STEP AHEAD SHAREHOLDERS CAN CALL 1-888-224-5256 TOLL FREE TO FIND OUT
EXACTLY HOW MANY SHARES OF DOLLAR TREE COMMON STOCK THEY WILL RECEIVE FOR EACH
SHARE OF STEP AHEAD STOCK THEY OWN.
Based upon the number of outstanding shares of Dollar Tree Common Stock,
Step Ahead Common Stock and Step Ahead Preferred Stock as of November 6, 1998,
and assuming that: (i) no Step Ahead Shareholders exercise dissenters' rights;
(ii) no outstanding Dollar Tree or Step Ahead Options are exercised prior to the
Effective Time; and (iii) the Exchange Ratio is 1.2106, approximately 60,954,000
shares of Dollar Tree Common Stock will be outstanding as of the Effective Time,
of which approximately 1,795,000 shares (approximately 3.0% of the total) will
be issued to the former holders of Step Ahead Stock. The Principal Shareholders
will receive 980,586 shares of Dollar Tree Common Stock, which will equal
approximately 1.6% of the outstanding shares, based on the foregoing
assumptions.
ESCROW OF SHARES
An aggregate of ten percent (10%) of the shares of Dollar Tree Common Stock
issuable to the Step Ahead Shareholders in the Merger (exclusive of any shares
as to which dissenters' rights have been exercised ("Dissenting Shares")) will
be withheld for one year after closing. This 10% escrow will apply pro rata to
all Step Ahead Shareholders. The Escrow Shares may be delivered to the Step
Ahead Shareholders at the end of one year from the Effective Time; however, the
Step Ahead Shareholders may receive less than the full ten percent withheld
(including possibly none of the Escrow Shares at all) if Dollar Tree makes a
claim for Escrow Shares because:
- Step Ahead's Closing Equity is below a target amount (see "--Post-Closing
Adjustment");
- Dollar Tree or related parties suffer losses or damages as a result of
breaches by Step Ahead of its representations, warranties, and covenants
in the Merger Agreement or related documents (see "-- Representations and
Warranties"); or
- Step Ahead's expenses relating to the Merger exceed $1.3 million (see
"--Fees and Expenses").
Dollar Tree may make claims against the Escrow Shares for losses and damages
described in the three items above for up to one year following the Effective
Time; provided, however, that no claim may be brought after the date of issuance
of the first independent audit report with respect to Dollar Tree's financial
statements after the Effective Time if such claim is of a type expected to be
encountered in the
56
<PAGE>
course of such audit. Dollar Tree's recovery under the latter two items above is
subject to a threshold in certain cases. (See "--Indemnification.") If there is
no dispute as to Dollar Tree's claim, Dollar Tree will be entitled to a number
of Escrow Shares having an aggregate value nearest to the dollar amount of the
claim, such value per share to be the Average Closing Price. If any such amounts
become due, they will be satisfied solely out of the Escrow Shares. Any amounts
deducted from the Escrow Shares will reduce the Dollar Tree Common Stock to be
received by the Step Ahead Shareholders on a pro rata basis.
Promptly after the Effective Time, Dollar Tree will transfer the Escrow
Shares to State Street Bank and Trust in Boston, Massachusetts (the "Escrow
Agent"). While the Escrow Agent will be the holder of record of the Escrow
Shares, the Step Ahead Shareholders will have the full right to vote such shares
in matters coming before the Dollar Tree shareholders. Step Ahead Shareholders
will not, however, be entitled to sell or transfer their interests in the Escrow
Shares except by will or the laws of inheritance.
If any Escrow Shares remain at the end of one year after the Effective Time,
they will be released to the Step Ahead Shareholders (or their transferees) on a
pro rata basis, except that Escrow Shares may be held in reserve pending
resolution of open claims. Because Dollar Tree may make claims for amounts equal
to or exceeding the value of the Escrow Shares, Step Ahead Shareholders may not
receive any of the Escrow Shares.
POST-CLOSING ADJUSTMENT
Shortly after the closing of the Merger, Step Ahead's Closing Equity will be
determined as of the end of the accounting period immediately preceding or
ending on the Effective Time. Closing Equity is defined as the book value of
Step Ahead's assets of Step Ahead reduced by its liabilities, without taking
into account certain kinds of adjustments that Dollar Tree's accountants may
make to Step Ahead's balance sheet after Closing and without including any
payments to Step Ahead for the exercise of Step Ahead Options. If Step Ahead's
Closing Equity is less than the target amount, then Dollar Tree is entitled to
make a claim against the Escrow Shares for the deficit amount. The target amount
is as follows:
- $8,200,000 for the accounting period ending November 29, 1998, and
- $9,600,000 for the accounting period ending December 27, 1998.
In the event there is a deficit amount, Dollar Tree will instruct the Escrow
Agent to surrender a number of Escrow Shares determined by dividing (i) the
dollar amount of the deficit amount by (ii) the Average Closing Price. The
deficit amount will be satisfied solely out of the Escrow Shares. See "--Escrow
of Shares."
REPRESENTATIONS AND WARRANTIES
Pursuant to the Merger Agreement, Step Ahead has made certain
representations and warranties to Dollar Tree and Merger Sub with respect to,
among other things, Step Ahead's organization, capitalization, authority to
perform under the Merger Agreement, consents required to perform under the
Merger Agreement, ownership of assets, contractual and other commitments, real
estate leases, inventory, liabilities, litigation, financial statements,
compliance with applicable laws, tax matters and other representations customary
in transactions of this type.
Pursuant to the Merger Agreement, Dollar Tree and Merger Sub have made
certain representations and warranties to Step Ahead with respect to, among
other things, their organization, capitalization, authority to perform under the
Merger Agreement, consents required to perform under the Merger Agreement,
financial statements, compliance with applicable filing and reporting
obligations as a public company, and other representations customary in
transactions of this type.
57
<PAGE>
If the representations and warranties made by Step Ahead in the Merger
Agreement contain matters that are untrue, or if Step Ahead failed to disclose
matters required by the Merger Agreement, then to the extent Dollar Tree suffers
losses or damages from such inaccuracies or failure to disclose Dollar Tree will
be entitled to make a claim against the Escrow Shares. See "--Indemnification"
and "--Escrow of Shares."
INDEMNIFICATION
Dollar Tree may make a claim against the Escrow Shares if Dollar Tree and
certain related parties suffer injuries or losses because:
- Step Ahead made inaccurate representations or warranties in the Merger
Agreement or related documents, including, among others, the
representations and warranties relating to general corporate matters and
to the conduct of Step Ahead's business;
- Step Ahead violates the agreements, undertakings, or covenants contained
in the Merger Agreement or related documents, including, among others, its
agreements relating to the conduct of Step Ahead's business prior to the
Effective Time; or
- Step Ahead's expenses relating to the Merger exceed $1.3 million.
Dollar Tree and its related parties may recover for their losses and damages
only to the extent such losses, in the aggregate, exceed a $600,000 threshold,
however, this threshold will not apply to (i) the post-closing adjustment
described above, (ii) injuries or losses arising from inaccurate representations
and warranties about fundamental matters or (iii) the wilful breach of
pre-closing covenants. See "--Escrow of Shares." The fundamental matters to
which the $600,000 threshold does not apply include representations and
warranties about:
- Corporate organization and authorizations;
- Certain violations by Step Ahead;
- Enforceability of the Merger documents;
- Capitalization of Step Ahead;
- Fines and penalties relating to employee benefit plans; and
- Tax matters.
SHAREHOLDER REPRESENTATIVE
The Merger Agreement provides for selection of a Shareholder Representative
by the Step Ahead Shareholders, who will have full authority to settle or defend
all claims by Dollar Tree against the Escrow Shares. In addition, the
Shareholder Representative may be reimbursed for certain costs and expenses
through the transfer of Escrow Shares remaining after satisfaction of such
Dollar Tree claims. The Shareholder Representative is exonerated from any
liability for actions taken, or omissions to act, as Shareholder Representative
in good faith. The Step Ahead Shareholders are being asked to approve the
selection of Gary Cino as Shareholder Representative at the Special Meeting.
58
<PAGE>
Certain decisions concerning the Escrow Shares may present conflicts of
interest between Mr. Cino and the other Step Ahead Shareholders. For example,
because of Mr. Cino's significant ownership of Escrow Shares after the Merger,
he may approve a resolution of a claim that, in his good faith judgment, does
not harm his interest in the Escrow Shares, even though such a resolution might
involve risks to the other Step Ahead Shareholders. While Mr. Cino intends to
act in good faith with respect to his responsibilities as the Shareholder
Representative, the other Step Ahead Shareholders could be adversely affected by
his decisions.
The Step Ahead Shareholders may remove and/or replace the Shareholder
Representative by delivering a writing executed by holders of a majority of the
Escrow Shares to the Escrow Agent.
ASSUMPTION OF STEP AHEAD OPTIONS
At the Effective Time, Dollar Tree will assume the Step Ahead Options and
will treat each Step Ahead Option, whether or not vested or exercisable, as an
option to purchase, on the same terms and conditions as were applicable under
such Step Ahead Option, that number of shares of Dollar Tree Common Stock
(rounded to the nearest whole number) determined by multiplying the Exchange
Ratio by the number of shares of Step Ahead Stock then subject to purchase
pursuant to such Step Ahead Option. The assumed option shall be exercisable at a
price per share equal to the quotient determined by dividing the exercise price
per share of Step Ahead Common Stock at which such option was exercisable
immediately prior to the Effective Time by the Exchange Ratio, rounded to the
nearest whole cent.
The Step Ahead Options that qualified as incentive stock options as defined
in Section 422 of the Code immediately prior to the Effective Time will continue
to so qualify upon being assumed by Dollar Tree. Therefore, the exercise price,
the number of shares of Dollar Tree Common Stock purchasable and the terms and
conditions applicable to any Step Ahead Options assumed by Dollar Tree may be
modified if required so as to comply with Sections 422 and 424 of the Code and
the regulations promulgated thereunder.
Under the existing provisions of the Step Ahead Long Term Incentive Plan,
the vesting schedule applicable to Step Ahead Options will be accelerated by the
occurrence of the Merger so that all such options shall become fully vested at
the Effective Time. Dollar Tree plans to register the shares of Dollar Tree
Common Stock issued or issuable under Step Ahead's Long Term Incentive Plan,
under which the outstanding Step Ahead Options were issued, under the Securities
Act of 1933, as amended (the "Securities Act") on a Registration Statement on
Form S-8 which will become effective at the Effective Time.
EXCHANGE OF CERTIFICATES; LETTER OF TRANSMITTAL
On or prior to the closing date of the Merger, Dollar Tree will cause to be
mailed or otherwise delivered to each Step Ahead Shareholder of record a letter
of transmittal with instructions to be used by such shareholder in surrendering
certificates that, immediately prior to the Merger, represented shares of Step
Ahead Stock (the "Step Ahead Stock Certificates"). In the letter of transmittal,
each Step Ahead Shareholder shall represent, among other things, that he or she
has good title to, and full power to transfer, the shares of Step Ahead Stock
represented by the Step Ahead Stock Certificate, which are free and clear of all
liens, emcumbrances or options or other rights. Each Step Ahead Shareholder
shall indemnify Dollar Tree for any losses incurred in connection with a breach
of such representations.
Upon surrender of a Step Ahead Stock Certificate to Dollar Tree or its
designated agent, together with a duly executed letter of transmittal, Dollar
Tree and Boston Equiserve Limited Partnership, Dollar Tree's transfer agent,
will arrange for the holder of such certificate to receive in exchange therefor
a certificate evidencing the number of shares of Dollar Tree Common Stock to
which such holder of Step Ahead Stock is entitled (less such shareholder's pro
rata portion of the Escrow Shares); plus cash for any
59
<PAGE>
fractional share. In the event there has been a transfer of ownership of shares
of Step Ahead Stock that is not reflected on the transfer records of Step Ahead,
Dollar Tree Common Stock may be delivered to a transferee if the certificate
representing such Step Ahead Stock is presented to Dollar Tree, together with
the related letter of transmittal, and accompanied by all documents required to
evidence and effect such transfer and to evidence that any applicable stock
transfer taxes have been paid.
Until a Step Ahead Stock Certificate has been surrendered to Dollar Tree,
each such certificate shall be deemed at any time after the Effective Time to
represent the right to receive, upon such surrender, certificates for such
number of shares of Dollar Tree Common Stock (and cash in lieu of fractional
shares) as the shareholder is entitled under the Merger Agreement. After the
Effective Time, there will be no further registration of transfers of Step Ahead
Stock.
Promptly after the Effective Time, Dollar Tree will also notify the holders
of outstanding Step Ahead Options of the procedures to be followed in connection
with Dollar Tree's assumption of such options, which may include delivery of
certain documentation to Dollar Tree.
STEP AHEAD SHAREHOLDERS SHOULD NOT SURRENDER THEIR CERTIFICATES FOR EXCHANGE
PRIOR TO APPROVAL OF THE MERGER BY THE STEP AHEAD SHAREHOLDERS AND RECEIPT OF
THE TRANSMITTAL LETTER FROM DOLLAR TREE.
INTERESTS OF CERTAIN PERSONS
Mr. Gary Cino and the other Principal Shareholders beneficially own a
majority of the outstanding shares of Step Ahead Common Stock. Pursuant to the
terms of the Merger Agreement, Mr. Cino will enter into a consulting and
non-competition agreement as a consultant of Dollar Tree commencing on the
Effective Time. Pursuant to that agreement, Mr. Cino will agree not to compete
with Step Ahead or Dollar Tree for a ten-year period beginning on the date of
the agreement and provide consulting services to Dollar Tree for a period of one
year. In consideration for entering into such consulting and non-competition
agreement, Mr. Cino will receive a ten-year option to purchase 150,000 shares of
Dollar Tree Common Stock at the fair market value of such stock on the date of
grant, which will lapse if Mr. Cino competes with Step Ahead or Dollar Tree or
solicits or hires their employees. The option vests ratably over five years. See
"--Non-Competition Agreements; Option Grants."
Messrs. Eric Stauss, Anthony Leon, Eric Leon and William Coyle, all of whom
are officers or employees of Step Ahead, will each enter into a non-competition
agreement commencing on the Effective Time. Pursuant to that agreement, these
individuals will agree not to compete with Step Ahead or Dollar Tree for a
five-year period beginning on the date of the agreement. In consideration for
entering into such non-competition agreement, these individuals will receive
options to purchase 5,000, 5,000, 3,000 and 2,000 shares of Dollar Tree Common
Stock, respectively, at the fair market value of such stock on the date of
grant. The options vest ratably over five years. See "--Non-Competition
Agreements; Option Grants." In addition, upon consummation of the Merger,
certain officers and employees of Step Ahead who will become employees of Dollar
Tree or its subsidiaries are expected to receive options to purchase Dollar Tree
Common Stock under Dollar Tree's existing employee stock option plan. See "--New
Stock Option Grants."
In addition, the Principal Shareholders have executed a voting agreement,
pursuant to which they have agreed to vote all shares of Step Ahead Stock owned
beneficially or controlled by them in favor of the Merger. See "--Voting
Agreement."
David Reed, Step Ahead's Vice President and Chief Financial Officer, has an
employment contract with Step Ahead that provides that if he is terminated
without cause at any time, he is entitled to receive compensation plus continued
insurance benefits for 6 months after termination. Step Ahead estimates the
costs of this benefit would be approximately $60,000.
60
<PAGE>
Step Ahead leases certain of its facilities from shareholders or their
affiliates. Step Ahead leases its corporate offices (which include a retail
store) and the adjoining distribution center from an affiliate of Merit Income
Properties, Inc. ("MIP"), which is a Step Ahead Shareholder. This lease provides
for annual rent of $574,000 per year, with annual increases equal to increases
in the cost of living; the lease expires in June 2008. In addition, Step Ahead
leases one of its retail stores from an affiliate of MIP at a current rent of
approximately $90,000 per year, which increases to $103,000 per year in 2004;
this lease expires in 2008. Finally, trusts established by Gary Cino, Eric
Stauss and William Coyle lease a retail store to Step Ahead for approximately
$139,950 per year, which increases to $161,400 per year in 2002 and to $185,200
per year in 2007.
From and after the closing of the Merger, Dollar Tree is required to
indemnify Step Ahead's directors and officers for acts or omissions occurring at
or prior to the Effective Time. See "--Directors' and Officers'
Indemnification."
CONDUCT OF BUSINESS PRIOR TO THE MERGER
Step Ahead has agreed, among other things, that it will carry on its
business in a manner consistent with prior practice and in the usual and
ordinary course, except for actions contemplated by the Merger Agreement. In
addition, Step Ahead will (i) maintain its leased properties and equipment and
fixtures; (ii) maintain all existing insurance policies; (iii) assist Dollar
Tree in retaining the continued services of Step Ahead's key employees; and (iv)
deliver to Dollar Tree interim monthly balance sheets and income statements of
Step Ahead.
Step Ahead has agreed not to take certain actions which are out of the
ordinary course of business, including (i) incuring certain liabilities or
borrowing funds; (ii) selling its assets; (iii) making unusual adjustments in
the salaries, wages, bonuses, or severance payments to any officer or employee;
(iv) declaring any dividend or other distribution on its capital stock; or (v)
redeeming, purchasing or issuing any shares of Step Ahead Stock.
Step Ahead has agreed to promptly advise Dollar Tree in writing of any and
all material events or developments concerning its financial position, assets,
liabilities, results of operations or business or any of the items or matters
covered by Step Ahead's representations and warranties contained in the Merger
Agreement.
The Merger Agreement contains a confidentiality agreement under which each
party has promised not to disclose data, information or documents it obtains
from the others. In the event the Merger Agreement is terminated, each party
agrees that neither it nor its representatives will use confidential information
of any other party for any purpose and all copies of such information will be
returned or destroyed. The confidentiality provisions do not apply to
information that is in the public domain, was known prior to its disclosure, or
becomes available to a party on a nonconfidential basis from a third party.
In addition, each company has agreed to afford the other reasonable access
to information and documents relating to the Merger Agreement and the Merger,
and provide reasonably requested financial, technical and operating data and
other information pertaining to its business.
NO SOLICITATION
Except under limited circumstances, Step Ahead and its officers, directors,
agents and affiliates may not (i) solicit, encourage, initiate or further the
submission of proposals or offers relating to any Alternative Transaction; (ii)
participate in any discussions or negotiations regarding, or furnish any
confidential information with respect to, Step Ahead, in connection with any
Alternative Transaction; (iii) except as provided in the next paragraph, agree
to approve, recommend, endorse, or enter into any agreement, plan or
understanding with respect to any Alternative Transaction; or (iv) otherwise
cooperate
61
<PAGE>
in any way with, or assist or participate in, facilitiate or encourage, or
publicly announce any effort or attempt by any person to undertake or seek to
undertake any Alternative Transaction. An "Alternative Transaction" is any
acquisition, purchase, lease, exchange, mortgage, pledge, transfer or other
disposition of all or any significant portion of the assets of Step Ahead, or 5%
or more of the equity securities of Step Ahead, or any merger, reorganization,
share exchange, recapitalization, liquidation, dissolution, consolidation,
business combination, or similar transaction with Step Ahead other than the
transactions contemplated by the Merger Agreement. Step Ahead has also agreed to
notify Dollar Tree of any offer or indication of interest relating to any
Alternative Transaction.
The Step Ahead Board is not prevented, however, from considering,
evaluating, negotiating, approving and recommending an Alternative Proposal if
the Step Ahead Board has (i) received advice of counsel to the effect that it
must do so in order to discharge its fiduciary duties and (ii) determined in
good faith that the Alternative Transaction would result in a transaction more
favorable to the Step Ahead Shareholders from a financial point of view than the
Merger. Under certain circumstances, the actions taken by the Step Ahead Board
with respect to an Alternative Transaction would permit Dollar Tree or Step
Ahead to terminate the Merger Agreement and require the payment of a termination
fee by Step Ahead. See "--Amendment; Termination" and "--Fees and Expenses."
CONDITIONS PRECEDENT TO THE MERGER
Both Dollar Tree and Step Ahead have set conditions to their obligations to
consummate the Merger. Even if one or more of those conditions are not met,
however, the affected party may choose to waive the failure and proceed with the
Merger. The significant conditions which each party has set before its
obligations take effect are described below.
Conditions to Dollar Tree's obligations include: (i) the representations and
warranties of Step Ahead in the Merger Agreement are accurate in all material
respects as of the closing of the Merger as if made on and as of such date; and
Step Ahead has complied in all material respects with or performed in all
material respects all agreements, covenants and conditions contained in the
Merger Agreement; (ii) no suit, action or other proceeding by any third party
shall be pending seeking to restrain or prohibit, or to obtain damages or other
relief in connection with, the Merger; (iii) certain consents have been obtained
or made; (iv) Step Ahead has delivered certain documents to Dollar Tree,
including but not limited to a closing certificate, an opinion of counsel as to
certain matters, and agreements by affiliates; (v) KPMG and PwC have delivered
to Dollar Tree letters relating to the treatment of the merger as a pooling of
interests for accounting purposes; (vi) execution of the Escrow Agreement by the
Shareholder Representative; (vii) execution of non-competition agreements by
Messrs. Stauss, A. Leon, E. Leon, and Coyle; (viii) execution of a
non-competition and consulting agreement by Mr. Cino; (ix) the comparable store
sales increase of Step Ahead, as determined on a rolling two-month period ending
on the day before the Special Meeting, shall be at least five percent; and (x)
holders of not more than 9.98% of the Step Ahead Stock shall have voted against
the Merger or abstained from voting.
Conditions to Step Ahead's obligations include: (i) the representations and
warranties of Dollar Tree and Merger Sub in the Merger Agreement are accurate in
all material respects as of Closing as if made on and as of such date and Dollar
Tree and Merger Sub have complied in all material respects with or performed in
all material respects all agreements, covenants and conditions contained in the
Merger Agreement; (ii) no suit, action or other proceeding by any third party
shall be pending seeking to restrain or prohibit, or to obtain damages or other
relief in connection with, the Merger; (iii) certain consents have been obtained
or made; (iv) Dollar Tree has delivered certain documents to Step Ahead,
including but not limited to a closing certificate and an opinion of counsel as
to certain matters; (vi) the Merger and Merger Agreement have been approved at
the Special Meeting in accordance with the California Corporations Code; and
(vii) Step Ahead has received an opinion from its counsel as to the Federal
income tax
62
<PAGE>
consequences of the Merger. The Step Ahead Board does not intend to resolicit
proxies from Step Ahead Shareholders if it decides to waive any condition
precedent to consummation of the Merger.
DIRECTORS' AND OFFICERS' INDEMNIFICATION
From and after the closing of the Merger, Dollar Tree will indemnify and
hold harmless from liabilities for acts and omissions occurring at or prior to
the Effective Time the Step Ahead directors and officers to the same extent
provided in the surviving corporation's articles of incorporation and bylaws.
The indemnification for Step Ahead's officers and directors will not be amended,
repealed or modified from the closing of the Merger in any manner that would
adversely affect the rights thereunder of such individuals.
In the event of any claim, actions, suit, proceeding or investigation to
restrain, enjoin, prevent, set aside, invalidate or seek damages with respect to
the Merger Agreement or the Merger or seek damages from or to impose obligations
upon Step Ahead or its directors or officers by reason of the Merger Agreement
or the Merger (a "Claim"), then, subject to certain conditions, Dollar Tree will
indemnify and hold harmless Step Ahead, its officers and directors from any
proceedings, investigations, demands, judgments, damages, expenses and costs
arising out of such Claim.
NON-COMPETITION AGREEMENTS; OPTION GRANTS
At the Effective Time, Dollar Tree will enter into a non-competition and
consulting agreement with Mr. Gary Cino, the Chairman and Chief Executive
Officer and a director of Step Ahead. Pursuant to the agreement, Mr. Cino will
act as a consultant to Dollar Tree for the one-year period following the Merger.
The agreement restricts Mr. Cino from competing with Dollar Tree or Step Ahead
and from soliciting or hiring the companies' employees for the ten-year period
following the Merger. As consideration for the agreement, Mr. Cino will receive
a grant under a newly established stock option plan of an option to purchase
150,000 shares of Dollar Tree Common Stock at the fair market value of such
stock on the date of grant. The option vests ratably over five years. The term
of the option is ten years, but the option will lapse immediately if Mr. Cino
competes with Dollar Tree or Step Ahead, or solicits or hires their employees.
Dollar Tree will also enter, as of the Effective Time, into non-competition
agreements with Eric Stauss, Anthony Leon, Eric Leon and William Coyle. They
serve as President, Executive Vice President, Vice President of Category
Management, and Vice President of Real Estate, respectively, of Step Ahead.
Pursuant to the agreements, these individuals are restricted from competing with
Dollar Tree or Step Ahead and from soliciting or hiring the companies' employees
for the five-year period following the Merger. As consideration for entering
into the agreements, Messrs. Stauss, A. Leon, E. Leon and Coyle will receive a
grant under the new stock option plan of options to purchase 5,000, 5,000, 3,000
and 2,000 shares, respectively, of Dollar Tree Common Stock at the fair market
value of such stock on the date of grant. The options vest ratably over five
years and have a term of ten years. As with Mr. Cino, these options lapse
immediately if the holder competes with Dollar Tree or Step Ahead or solicits or
hires their employees.
NEW STOCK OPTION GRANTS
Following the Effective Time, Dollar Tree expects to grant options to
purchase shares of Dollar Tree Common Stock under Dollar Tree's existing
employee stock option plans consistent with that company's past practice. These
options do not include options granted separately to Messrs. Cino, Stauss, A.
Leon, E. Leon and Coyle under their non-competition agreements with Dollar Tree.
MATERIAL UNITED STATES FEDERAL INCOME TAX CONSEQUENCES
The following discussion summarizes the material United States Federal
income tax consequences of the Merger to holders of Step Ahead Stock who hold
Step Ahead Stock as a capital asset (generally,
63
<PAGE>
property held for investment) within the meaning of Section 1221 of the Code.
This discussion does not address the individual tax consequences to any holder
of Step Ahead Stock in light of any person's individual circumstances, including
insurance companies, financial institutions, dealers in securities, holders that
are not citizens or residents of the United States, tax-exempt entities and
holders that acquired Step Ahead Stock upon the exercise of employee stock
options or otherwise as compensation. The discussion, moreover, does not address
any consequences arising under any state, local or foreign laws. Finally, the
tax consequences to holders of stock options or restricted stock are not
discussed. The following discussion is based on the Code, the Treasury
Regulations promulgated thereunder, and administrative rulings and court
decisions as of the date hereof. All of the foregoing are subject to change,
possibly with a retroactive effect, and any such change could affect the
accuracy of the following discussion. No ruling has been or will be sought from
the Internal Revenue Service concerning the tax consequences of the Merger.
Holders of Step Ahead Stock are urged to consult their tax advisors regarding
the tax consequences of the Merger to them, including the effects of United
States Federal, state, local, foreign and other tax laws.
GENERAL. Latham & Watkins, counsel to Step Ahead, has delivered to Step
Ahead an opinion, dated on or about the date hereof, to the effect that, for
United States Federal income tax purposes,
(i) the Merger will constitute a "reorganization" within the meaning of
Section 368(a) of the Code;
(ii) no gain or loss will be recognized by Step Ahead Shareholders upon the
exchange of their Step Ahead Stock solely for shares of Dollar Tree Common Stock
pursuant to the Merger, except with respect to cash, if any, received in lieu of
fractional shares of Dollar Tree Common Stock;
(iii) the aggregate tax basis of the Dollar Tree Common Stock received by
the Step Ahead Shareholders pursuant to the Merger (including fractional shares
of Dollar Tree Common Stock for which cash is received) will be the same as the
aggregate tax basis of the Step Ahead Stock exchanged therefor;
(iv) the holding period of the Dollar Tree Common Stock in the hands of the
Step Ahead Shareholders will include the holding period of such shareholders'
Step Ahead Stock exchanged therefor pursuant to the Merger; and
(v) a Step Ahead Shareholder who receives cash in lieu of a fractional share
of Dollar Tree Common Stock will recognize gain or loss equal to the difference,
if any, between such shareholder's tax basis in such fractional share (as
described in clause (iii) above) and the amount of cash received.
Such opinion assumes that the Merger will take place as described in the
Merger Agreement. In rendering such opinion, Latham & Watkins has relied upon
certain facts and customary representations contained in certificates by
officers of Step Ahead, Dollar Tree and Merger Sub. It is a condition to the
obligation of Step Ahead to effect the Merger that Step Ahead also receive such
opinion as of the Effective Time.
EXERCISE OF DISSENTERS' RIGHTS BY SHAREHOLDERS. A Step Ahead Shareholder
who exercises dissenters' rights should, in general, treat the difference
between the tax basis of the Step Ahead Stock held by such shareholder with
respect to which such rights are exercised and the amount received through
exercise of such rights as capital gain or loss for United States Federal income
tax purposes.
ACCOUNTING TREATMENT
The acquisition of Step Ahead by Dollar Tree through the Merger is intended
to be accounted for as a pooling of interests. Under this method of accounting,
the assets and liabilities of Step Ahead and Dollar Tree will be combined based
on the respective carrying values of the accounts in the historical financial
statements of each entity. Results of operations of Dollar Tree will include
income of Step Ahead and Dollar Tree for the entire fiscal period in which the
combination occurs and the historical results of
64
<PAGE>
operations of the separate companies for periods prior to the Merger will be
combined and reported as the results of operations of Dollar Tree.
To support the treatment of the Merger as a pooling of interests, the
affiliates of Step Ahead will enter into agreements imposing certain resale
limitations on their Step Ahead Stock prior to the consummation of the Merger
and their Dollar Tree Common Stock following consummation of the Merger. See
"--Affiliates' Restrictions on Sale of Step Ahead and Dollar Tree Stock."
Dollar Tree's obligation to consummate the Merger is conditioned upon the
receipt by Dollar Tree of letters from KPMG regarding the firm's concurrence
with Dollar Tree management's and Step Ahead management's conclusions,
respectively, as to the appropriateness of pooling of interests accounting for
the Merger under Accounting Principles Board Opinion No. 16 if closed and
consummated in accordance with the Merger Agreement, and the receipt by KPMG of
letters from PwC concluding that Step Ahead qualifies for pooling of interests
accounting treatment.
AFFILIATES' RESTRICTIONS ON SALE OF STEP AHEAD AND DOLLAR TREE STOCK
The shares of Dollar Tree Common Stock to be issued in the Merger have been
registered under the Securities Act by the Registration Statement, thereby
allowing such securities to be traded without restriction by any former holder
of Step Ahead Stock (i) who is not deemed to be an "affiliate" of Step Ahead
prior to the consummation of the Merger, as "affiliate" is defined for purposes
of Rule 145 under the Securities Act; and (ii) who does not become an
"affiliate" of Dollar Tree after the Merger. Step Ahead Shareholders who may be
deemed affiliates of Step Ahead will be so advised prior to the Merger.
Step Ahead will use its best efforts to cause each Step Ahead Shareholder
who is an affiliate to agree (i) not to make any public sale of any Dollar Tree
Common Stock received upon consummation of the Merger except in compliance with
Rule 145 under the Securities Act or otherwise in compliance with the Securities
Act, (ii) not to sell, transfer or dispose of, or reduce such person's risk of
ownership or investment in, any securities of Step Ahead owned by such affiliate
during the 30-day period prior to the Effective Time and (iii) not to sell,
transfer or dispose of, or reduce such person's risk of ownership or investment
in, any securities of Dollar Tree until a financial report including the
combined sales and net income of Dollar Tree and Step Ahead covering at least 30
days of combined operations after the Effective Time has been publicly released
by Dollar Tree. In general, Rule 145, as currently in effect, imposes
restrictions on the manner in which such affiliates may make resales of Dollar
Tree Common Stock and also on the quantity of resales that such shareholders,
and others with whom they may act in concert, may make within any three-month
period for a period of one year after consummation of the Merger (or longer for
a person if that person is an affiliate of Dollar Tree).
GOVERNMENTAL AND REGULATORY APPROVALS
Under the Hart-Scott-Rodino Act (the "HSR Act") and the rules promulgated
thereunder by the Federal Trade Commission ("FTC"), the Merger cannot be
consummated until notifications have been given and certain information has been
furnished to the FTC or the Antitrust Division of the Department of Justice (the
"Antitrust Division") and the specified waiting period has been satisfied.
Dollar Tree and Step Ahead furnished the notifications required under the HSR
Act to the FTC and the Antitrust Division on August 21, 1998. Notice of early
termination of the specified waiting period under the HSR Act was received on
August 31, 1998. At any time before or after consummation of the Merger, and
notwithstanding that the HSR Act waiting period has expired, the Antitrust
Division, the FTC or any state or foreign governmental authority could take such
action under the antitrust laws as it deems necessary or desirable in the public
interest. Such action could include seeking to enjoin the consummation of the
Merger or seeking divestiture by Dollar Tree of businesses of Step Ahead or
Dollar Tree. Private parties may also seek to take legal action under the
antitrust laws under certain circumstances.
65
<PAGE>
Based on information available to them, Dollar Tree and Step Ahead believe
that the Merger will be effected in compliance with Federal and state antitrust
laws. However, there can be no assurance that a challenge to the consummation of
the Merger on antitrust grounds will not be made or that, if such a challenge
were made, Dollar Tree and Step Ahead would prevail.
AMENDMENT; TERMINATION
The Merger Agreement may be amended by the parties thereto by or pursuant to
action taken by their respective Boards of Directors (acting by a majority of
their respective board members), at any time before or after approval of the
matters presented in connection with the Merger by the Step Ahead Shareholders,
but after any such approval, no amendment can be made which by law requires
further approval of the Step Ahead Shareholders without that approval. If the
Merger Agreement is amended after the date of this Prospectus/Proxy Statement,
Step Ahead will notify Step Ahead Shareholders of the terms of any such
amendment by issuing a press release and by distributing a supplement to this
Prospectus/Proxy Statement or disclosing those terms on a recorded message that
can be accessed by calling 1-888-224-5256 toll-free three business days prior to
the Special Meeting.
The Merger Agreement may be terminated at any time prior to the Effective
Time, before or after approval by the Step Ahead Shareholders, under the
following circumstances:
MUTUAL CONSENT. The Merger Agreement may be terminated by the mutual
written consent of Dollar Tree and Step Ahead.
UNILATERALLY BY EITHER PARTY. The Merger Agreement also may be terminated
by action of either Dollar Tree or Step Ahead (i) if the other party to the
Merger has breached or failed to perform any of its agreements or covenants
contained in the Merger Agreement or any of the representations and warranties
of such party are or become inaccurate or untrue and any such breach, failure,
inaccuracy, or untruth is not reasonably capable of cure by January 1, 1999;
(ii) if the Closing has not occurred by January 1, 1999, unless such party has
been the cause of the failure of the Merger to occur on or before such date; or
(iii) if there shall be any order which is final and nonappealable preventing
the consummation of the Merger unless the party relying on such order has not
complied with its material obligations under the Merger Agreement. If Dollar
Tree terminates the Merger Agreement pursuant to clause (i) above, Step Ahead
must pay a termination fee of $3.0 million.
BY DOLLAR TREE. The Dollar Tree Board may terminate the Merger Agreement
(i) if the requisite vote of the Step Ahead Shareholders in favor of the Merger
Agreement shall not have been obtained at the Special Meeting (including any
adjournment or postponement thereof); (ii) if the Step Ahead Board withdraws or
modifies its recommendation of the Merger or shall have resolved or publicly
announced or disclosed to any third party its intention to do any of the
foregoing or the Step Ahead Board shall have recommended to the Step Ahead
Shareholders any Alternative Transaction or resolved to do so; (iii) if Step
Ahead shall not convene a meeting of the Step Ahead Shareholders to approve the
Merger within a reasonable time; (iv) if there shall have occurred one or more
events which shall have caused or are reasonably likely to have a material
adverse effect on Step Ahead; or (v) upon written notice from Dollar Tree to
Step Ahead if the Average Closing Price is less than $34 11/32 unless, by 5:00
p.m. on the third business day prior to the Special Meeting, Step Ahead has
agreed in writing to treat the Average Closing Price as $34 11/32 or a lesser
value proposed by Dollar Tree. Step Ahead must pay a termination fee of $3.0
million if Dollar Tree terminates the Merger Agreement pursuant to clauses (i),
(ii) or (iii) above.
BY STEP AHEAD. The Step Ahead Board may terminate the Merger Agreement,
upon payment of a fee of $3.0 million to Dollar Tree, if (i) the requisite vote
of the Step Ahead Shareholders in favor of the Merger Agreement is not obtained
at the Special Meeting (including any adjournment or postponement thereof); (ii)
the Step Ahead Board withdraws or modifies its recommendation of the Merger or
has resolved or publicly announced or disclosed to any third party its intention
to do the foregoing or has
66
<PAGE>
determined to recommend an Alternative Transaction to the Step Ahead
Shareholders or a tender offer or exchange offer for Step Ahead Stock is
commenced or a registration statement with respect thereto shall have been filed
and the Step Ahead Board, within ten (10) business days after such tender offer
or exchange offer is so commenced, either fails to recommend against acceptance
of such tender or exchange offer by the Step Ahead Shareholders or takes no
position with respect to the acceptance of such tender or exchange offer by the
Step Ahead Shareholders. In addition, except where a tender or exchange offer is
commenced, termination under these provisions requires that the Step Ahead Board
have met the conditions for considering an Alternative Proposal. Step Ahead has
also agreed to use its best efforts to give Dollar Tree at least two business
days prior notice of its intention to effect termination pursuant to clause (ii)
above. See "--No Solicitation" and "--Fees and Expenses."
LOCK-UP OPTION
Step Ahead has granted Dollar Tree an irrevocable option to purchase from
Step Ahead for cash a number of shares of Step Ahead Common Stock equal to 19.9%
of the total number of shares of Step Ahead Stock issued and outstanding as of
July 22, 1998 (the "Lock-Up Option") at a price per share equal to $45.97. The
Lock-Up Option is vested immediately and may be exercised in whole or in part by
Dollar Tree unless the Merger Agreement is terminated (i) by Dollar Tree because
the Average Closing Price is less than $34 11/32 and Step Ahead does not agree
in writing to treat the Average Closing Price as $34 11/32 or (ii) by Step Ahead
because Dollar Tree has breached or failed to perform any of its agreements or
covenants contained in the Merger Agreement or any of the representations and
warranties of Dollar Tree are or become inaccurate or untrue and any such
breach, failure, inaccuracy, or untruth is not reasonably capable of cure by
January 1, 1999. The Lock-Up Option may be exercised:
(i) at any time prior to the SECOND ANNIVERSARY of the termination of
the Merger Agreement if it is terminated by Dollar Tree because (A) Step
Ahead has breached or failed to perform any of its agreements or covenants
contained in the Merger Agreement or any of the representations and
warranties of Step Ahead are or become inaccurate or untrue and any such
breach, failure, inaccuracy, or untruth is not reasonably capable of cure by
January 1, 1999, (B) the requisite vote of the Step Ahead Shareholders in
favor of the Merger Agreement is not obtained at the Special Meeting
(including any adjournment or postponement thereof) or (C) the Step Ahead
Board withdraws or modifies its recommendation of the Merger or has resolved
or publicly announced or disclosed to any third party its intention to do
the foregoing or has determined to recommend an Alternative Transaction to
the Step Ahead Shareholders or a tender offer or exchange offer for Step
Ahead Stock is commenced or a registration statement with respect thereto
shall have been filed and the Step Ahead Board, within ten (10) business
days after such tender offer or exchange offer is so commenced, either fails
to recommend against acceptance of such tender or exchange offer by the Step
Ahead Shareholders or takes no position with respect to the acceptance of
such tender or exchange offer by the Step Ahead Shareholders; or
(ii) at any time prior to the FIRST ANNIVERSARY of the termination of
this Agreement in all other events.
DISSENTERS' RIGHTS
THE FOLLOWING IS A SUMMARY OF THE PROVISIONS OF CHAPTER 13 OF THE GENERAL
CORPORATION LAW OF THE CALIFORNIA CORPORATIONS CODE (THE "CCC"), WHICH PROVIDES
SHAREHOLDERS OF STEP AHEAD WITH CERTAIN DISSENTERS' RIGHTS. ALL REFERENCES TO
AND SUMMARIES OF THE RIGHTS OF DISSENTING SHAREHOLDERS ARE QUALIFIED IN THEIR
ENTIRETY BY REFERENCE TO THE TEXT OF CHAPTER 13 OF THE CCC, WHICH IS ATTACHED TO
THIS PROSPECTUS/PROXY STATEMENT AS APPENDIX C.
Subject to certain conditions, Chapter 13 of the CCC grants shareholders of
Step Ahead who are entitled to vote, and who either abstain from voting or vote
some or all of their shares against the Merger, the right to require Step Ahead
to purchase for cash at fair market value the shares that qualify as
67
<PAGE>
"dissenting shares" within the meaning of Section 1300(b) of the CCC
("Dissenting Shares"). Shareholders who do not follow the statutory procedures
of Chapter 13 of the CCC, however, will lose their rights to dissent from the
Merger. Dissenting shareholders will have no interest in Step Ahead after they
surrender their certificates representing the Dissenting Shares and receive
payment therefor. Surrendered shares will resume the status of authorized but
unissued shares.
Any shareholder entitled to vote at the Special Meeting who desires to
exercise dissenters' rights must either abstain from voting or vote shares
against the adoption of the Merger Agreement and the approval of the Merger. In
addition, the shareholder must demand in writing that Step Ahead purchase such
shares and pay the shareholder the fair market value of such shares in cash. The
demand for payment must state the number and class of the shares held of record
by the shareholder that the shareholder wants Step Ahead to purchase, and must
also state what the shareholder claims to be the fair market value of the shares
as of the day before the announcement of the definitive terms of the Merger. The
statement of fair market value will constitute an offer by the shareholder to
sell such shares at such price. Such demand must be received by Step Ahead at
its principal executive offices at 3222 Winona Way, North Highlands, California
95660 not later than the date of the Special Meeting. A shareholder may not
withdraw a demand for payment unless Step Ahead consents thereto.
Within ten days after the date of the Special Meeting, Step Ahead must mail
to any shareholder who could qualify as possessing Dissenting Shares a notice of
the approval of the Merger by the requisite number of outstanding shares, along
with a statement of the price determined by Step Ahead to represent the fair
market value of Dissenting Shares and a brief description of the procedure to be
followed if the shareholder desires to exercise dissenters' rights (the "Notice
of Approval"). Step Ahead's statement of fair market value will constitute an
offer by Step Ahead to purchase the shareholder's shares at the price stated in
the Notice of Approval, provided that such shares qualify as Dissenting Shares
and do not lose their status as Dissenting Shares, as outlined below.
Within 30 days after the date the Notice of Approval is mailed, the
shareholder must submit to Step Ahead the certificates representing any shares
which the shareholder demands that Step Ahead purchase. Such shares will be
stamped or endorsed with a statement that the shares are Dissenting Shares or
will be exchanged for share certificates so stamped or endorsed.
If a dissenting shareholder and Step Ahead agree that the shares are
Dissenting Shares and agree upon the price of the shares, Step Ahead will pay
the dissenting shareholder the agreed-upon price with interest at the legal rate
on judgments from the date of such agreement, within 30 days after the date of
the agreement or within 30 days after any statutory or contractual conditions to
the Merger are satisfied, whichever is later. If Step Ahead denies that the
shares are Dissenting Shares, or Step Ahead and the shareholder fail to agree
upon the fair market value of the Dissenting Shares, then the shareholder or
Step Ahead may seek a court determination of whether the shares are Dissenting
Shares, the fair market value of the Dissenting Shares, or both. The shareholder
may intervene in any action pending on such a complaint. The shareholder or Step
Ahead must file a complaint or intervene in a pending action within six months
after the date on which the Notice of Approval was mailed. In determining the
fair market value of the Dissenting Shares, the court may, but is not required
to, appoint one or more appraisers. If the court appoints appraisers, it may
accept the appraisers' valuation or make its own determination of the fair
market value of the Dissenting Shares and enter judgment accordingly. Any party
may appeal from the judgment. The costs of the action, including reasonable
compensation for the appraisers, shall be assessed as the court considers
equitable, but if the judgment exceeds the amount offered by Step Ahead, Step
Ahead shall pay such costs (including, in the court's discretion, attorneys'
fees, fees of expert witnesses, and interest at the legal rate on judgments from
the date of the shareholder's compliance with the foregoing procedures for
demanding payment of Dissenting Shares if the value awarded by the court is more
than 125% of the amount Step Ahead states as the fair market value in the Notice
of Approval). The shareholder may recover the amount the court determines to be
the fair market value of each Dissenting Share multiplied by the number of
Dissenting Shares Step Ahead must purchase, with interest thereon at
68
<PAGE>
the legal rate from the date of judgment. The judgment is payable only upon
endorsement and delivery to Step Ahead of the certificates for the shares
described in the judgment.
Dissenting Shares may lose their status as Dissenting Shares and the
dissenting shareholder will cease to be entitled to require Step Ahead to
purchase such shares if (i) the parties abandon the Merger, (ii) the shareholder
transfers the shares before submitting them to Step Ahead, (iii) the shareholder
withdraws the demand that Step Ahead purchase the Dissenting Shares, or (iv)
Step Ahead and the shareholder do not agree on the status of the shares as
Dissenting Shares or upon the fair market value of such shares and neither files
a court petition as set forth above within six months after the mailing of the
Notice of Approval.
A vote in favor of the Merger constitutes a waiver of dissenters' rights
under Chapter 13 of the CCC. Furthermore, an abstention from voting or a vote
against approval of the Merger does not by itself satisfy the requirement of a
written demand for payment or the other actions required by Chapter 13 to
perfect dissenters' rights. Such written demand for payment must be in addition
to and separate from any proxy regarding the Merger. FAILURE TO FOLLOW THE
PROVISIONS OF CHAPTER 13 OF THE CCC WILL RESULT IN A LOSS OF ALL DISSENTERS'
RIGHTS.
The Merger Agreement is subject to the condition that holders of not more
than 9.98% of the Step Ahead Stock shall have voted against the Merger or
abstained from voting.
FEES AND EXPENSES
All fees and expenses incurred in connection with the Merger shall be paid
by the party incurring such expenses, whether or not the Merger is consummated.
Upon the closing of the Merger, Step Ahead will pay all out-of-pocket expenses
payable to Piper Jaffray and to Step Ahead's accountants, lawyers, and
consultants relating to the negotiation and execution of the Merger and the
other transactions contemplated hereby up to a maximum of $1.3 million. To the
extent that fees and expenses exceed $1.3 million and the excess, together with
all other claims of Dollar Tree described in the section entitled "--
Indemnification" above, exceeds the $600,000 threshold, then the excess fees and
expenses will be paid out of the Escrow Shares.
In addition to the initial engagement to explore Step Ahead's strategic
alternatives, Step Ahead retained Piper Jaffray to render an opinion as to the
fairness, from a financial point of view, of the aggregate consideration to be
received by Step Ahead Shareholders as a group in connection with the Merger.
Upon consummation of the Merger, Step Ahead will have paid Piper Jaffray an
aggregate cash fee of $1,025,000, of which $930,000 was contingent upon the
consummation of the Merger.
VOTING AGREEMENT
Mr. Cino and the other Principal Shareholders have executed a voting
agreement, pursuant to which they have agreed to vote all shares of Step Ahead
Stock owned beneficially or controlled by them as of the Record Date (consisting
of 810,000 shares of Step Ahead Common Stock, representing approximately 64% of
the Step Ahead Common Stock outstanding as of November 6, 1998) in favor of the
Merger and the Merger Agreement.
ARTICLES OF INCORPORATION AND BYLAWS
The Articles of Incorporation and Bylaws of Merger Sub, each as in effect
immediately prior to the Effective Time, will remain in effect as the Articles
of Incorporation and the Bylaws of the surviving corporation after the Merger.
Thereafter, the Articles of Incorporation and Bylaws may be amended in
accordance with their respective terms and applicable law and the name of the
surviving corporation will be Dollar Tree West, Inc.
69
<PAGE>
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
The following unaudited pro forma condensed combined financial data give
effect to the Merger, based on an assumed Exchange Ratio of 1.2106, the Exchange
Ratio corresponding to an Average Closing Price of $34 11/32 per share based on
Fully Diluted Step Ahead Shares as of November 6, 1998, using the pooling of
interests method of accounting and reflect the combination of the historical
consolidated balance sheets and related consolidated income statements of Dollar
Tree Stores, Inc. and subsidiaries with the balance sheets and statements of
income of Step Ahead Investments, Inc. All Dollar Tree share and per share data
have been adjusted to reflect 50% stock dividends effected by 3-for-2 stock
splits in April 1996, July 1997 and June 1998.
The unaudited pro forma condensed combined income statements assume that the
Merger occurred at the beginning of each of the periods presented. To reflect
the pooling of interests, the consolidated income statements of Dollar Tree
Stores, Inc. and subsidiaries for each of the years ended December 31, 1995,
1996 and 1997 and for each of the six months ended June 30, 1997 and 1998 have
been combined with Step Ahead Investments, Inc.'s statements of income for each
of the fiscal years ended January 28, 1996, January 26, 1997 and January 25,
1998 and for each of the fiscal six months ended July 27, 1997 and July 26,
1998, respectively.
The pro forma condensed combined balance sheet as of December 31, 1997 and
as of June 30, 1998 assume that the Merger occurred as of these dates,
respectively, and reflect the combination of the historical consolidated balance
sheets of Dollar Tree Stores, Inc. and subsidiaries as of these dates with the
historical balance sheets of Step Ahead Investments, Inc. as of January 25, 1998
and as of July 26, 1998, respectively.
The unaudited pro forma condensed combined financial statements have been
prepared from and should be read in conjunction with each of the historical
financial statements and notes thereto referred to above and incorporated herein
by reference or appearing elsewhere in this Prospectus/Proxy Statement. The
unaudited pro forma condensed combined financial statements are presented for
comparative purposes only and are not necessarily indicative of what the actual
results of operations or financial position would have been for the periods
presented had the transaction occurred on the dates indicated or of the results
of future operations.
70
<PAGE>
DOLLAR TREE STORES, INC. AND SUBSIDIARIES
STEP AHEAD INVESTMENTS, INC.
PRO FORMA CONDENSED COMBINED INCOME STATEMENT (UNAUDITED)
SIX MONTHS ENDED JUNE 30, 1998
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA(2)
DOLLAR TREE STEP AHEAD(1) ADJUSTMENTS COMBINED
----------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Net sales................................................ $ 324,698 $ 52,430 $ 377,128
Cost of sales............................................ 205,012 37,160 242,172
----------- ------------- -------------
Gross profit............................................. 119,686 15,270 134,956
Selling, general and administrative expenses:
Operating expenses................................... 81,231 12,132 93,363
Depreciation and amortization........................ 8,471 794 9,265
----------- ------------- -------------
Total.................................................. 89,702 12,926 102,628
----------- ------------- -------------
Operating income......................................... 29,984 2,344 32,328
Interest expense......................................... 1,321 487 1,808
----------- ------------- -------------
Income before income taxes............................... 28,663 1,857 30,520
Provision for income taxes............................... 11,035 725 11,760
----------- ------------- -------------
Net income............................................... $ 17,628 $ 1,132 $ 18,760
----------- ------------- -------------
----------- ------------- -------------
Net income per share:
Basic net income per share............................. $ 0.30 $ 0.31
----------- -------------
----------- -------------
Weighted average number of common shares
outstanding:......................................... 58,886 1,526(3) 60,412
----------- ----- -------------
----------- ----- -------------
Diluted net income per share........................... $ 0.27 $ 0.28
----------- -------------
----------- -------------
Weighted average number of common shares and dilutive
potential common shares outstanding.................. 65,123 1,989(4) 67,112
----------- ----- -------------
----------- ----- -------------
</TABLE>
- ------------------------
(1) Step Ahead's statement of income for the fiscal six months ended July 26,
1998.
(2) The pro forma condensed combined income statement was prepared by combining
the Dollar Tree condensed consolidated income statement for the six months
ended June 30, 1998 with the Step Ahead statement of income for the fiscal
six months ended July 26, 1998.
(3) Pro forma adjustment to weighted average common shares outstanding
represents the assumed issuance of Dollar Tree Common Stock for Step Ahead
Stock, based on an assumed Exchange Ratio of 1.2106.
(4) Pro forma adjustment to weighted average common shares and dilutive
potential common shares outstanding represents the assumed issuance of
Dollar Tree Common Stock for Step Ahead Stock and the assumption of the Step
Ahead Options, based on an assumed Exchange Ratio of 1.2106.
71
<PAGE>
DOLLAR TREE STORES, INC. AND SUBSIDIARIES
STEP AHEAD INVESTMENTS, INC.
PRO FORMA CONDENSED COMBINED INCOME STATEMENT (UNAUDITED)
SIX MONTHS ENDED JUNE 30, 1997
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA(2)
DOLLAR TREE STEP AHEAD(1) ADJUSTMENTS COMBINED
----------- -------------- ----------- -------------
<S> <C> <C> <C> <C>
Net sales............................................... $ 247,078 $ 41,244 $ 288,322
Cost of sales........................................... 159,623 30,163 189,786
----------- ------- -------------
Gross profit............................................ 87,455 11,081 98,536
Selling, general and administrative expenses:
Operating expenses.................................. 64,529 9,918 74,447
Depreciation and amortization....................... 6,095 611 6,706
----------- ------- -------------
Total................................................. 70,624 10,529 81,153
----------- ------- -------------
Operating income........................................ 16,831 552 17,383
Interest expense........................................ 1,238 299 1,537
----------- ------- -------------
Income before income taxes.............................. 15,593 253 15,846
Provision for income taxes.............................. 6,003 109 6,112
----------- ------- -------------
Net income.............................................. $ 9,590 $ 144 $ 9,734
----------- ------- -------------
----------- ------- -------------
Net income per share:
Basic net income per share............................ $ 0.16 $ 0.16
----------- -------------
----------- -------------
Weighted average number of common shares
outstanding:........................................ 58,431 1,516(3) 59,947
----------- ----------- -------------
----------- ----------- -------------
Diluted net income per share.......................... $ 0.15 $ 0.15
----------- -------------
----------- -------------
Weighted average number of common shares and dilutive
potential common shares outstanding................. 64,438 1,903(4) 66,341
----------- ----------- -------------
----------- ----------- -------------
</TABLE>
- ------------------------
(1) Step Ahead's statement of income for the fiscal six months ended July 27,
1997.
(2) The pro forma condensed combined income statement was prepared by combining
the Dollar Tree condensed consolidated income statement for the six months
ended June 30, 1997 with the Step Ahead statement of income for the fiscal
six months ended July 27, 1997.
(3) Pro forma adjustment to weighted average common shares outstanding
represents the assumed issuance of Dollar Tree Common Stock for Step Ahead
Stock, based on an assumed Exchange Ratio of 1.2106
(4) Pro forma adjustment to weighted average common shares and dilutive
potential common shares outstanding represents the assumed issuance of
Dollar Tree Common Stock for Step Ahead Stock and the assumption of the Step
Ahead Options, based on an assumed Exchange Ratio of 1.2106.
72
<PAGE>
DOLLAR TREE STORES, INC. AND SUBSIDIARIES
STEP AHEAD INVESTMENTS, INC.
PRO FORMA CONDENSED COMBINED INCOME STATEMENT (UNAUDITED)
YEAR ENDED DECEMBER 31, 1997
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
STEP PRO FORMA PRO FORMA(2)
DOLLAR TREE AHEAD(1) ADJUSTMENTS COMBINED
----------- ----------- ------------- -------------
<S> <C> <C> <C> <C>
Net sales................................................... $ 635,473 $ 92,940 $ 728,413
Cost of sales............................................... 397,116 66,696 463,812
----------- ----------- -------------
Gross profit................................................ 238,357 26,244 264,601
Selling, general and administrative expenses:
Operating expenses...................................... 143,438 22,006 165,444
Depreciation and amortization........................... 13,125 1,332 14,457
----------- ----------- -------------
Total..................................................... 156,563 23,338 179,901
----------- ----------- -------------
Operating income............................................ 81,794 2,906 84,700
Interest expense............................................ 2,812 665 3,477
----------- ----------- -------------
Income before income taxes.................................. 78,982 2,241 81,223
Provision for income taxes.................................. 30,408 887 31,295
----------- ----------- -------------
Net income.................................................. $ 48,574 $ 1,354 $ 49,928
----------- ----------- -------------
----------- ----------- -------------
Net income per share:
Basic net income per share................................ $ 0.83 $ 0.83
----------- -------------
----------- -------------
Weighted average number of common shares outstanding:..... 58,534 1,522(3) 60,056
----------- ----- -------------
----------- ----- -------------
Diluted net income per share.............................. $ 0.75 $ 0.75
----------- -------------
----------- -------------
Weighted average number of common shares and dilutive
potential common shares outstanding..................... 64,645 1,900(4) 66,545
----------- ----- -------------
----------- ----- -------------
</TABLE>
- ------------------------
(1) Step Ahead's statement of income for the fiscal year ended January 25, 1998.
(2) The pro forma condensed combined income statement was prepared by combining
the Dollar Tree condensed consolidated income statement for the year ended
December 31, 1997 with the Step Ahead statement of income for the fiscal
year ended January 25, 1998.
(3) Pro forma adjustment to weighted average common shares outstanding
represents the assumed issuance of Dollar Tree Common Stock for Step Ahead
Stock, based on an assumed Exchange Ratio of 1.2106
(4) Pro forma adjustment to weighted average common shares and dilutive
potential common shares outstanding represents the assumed issuance of
Dollar Tree Common Stock for Step Ahead Stock and the assumption of the Step
Ahead Options, based on an assumed Exchange Ratio of 1.2106.
73
<PAGE>
DOLLAR TREE STORES, INC. AND SUBSIDIARIES
STEP AHEAD INVESTMENTS, INC.
PRO FORMA CONDENSED COMBINED INCOME STATEMENT (UNAUDITED)
YEAR ENDED DECEMBER 31, 1996
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA(2)
DOLLAR TREE STEP AHEAD(1) ADJUSTMENTS COMBINED
----------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Net sales................................................ $ 493,037 $ 71,263 $ 564,300
Cost of sales............................................ 310,900 50,738 361,638
----------- ------------- -------------
Gross profit............................................. 182,137 20,525 202,662
Selling, general and administrative expenses:
Operating expenses................................... 111,401 16,595 127,996
Depreciation and amortization........................ 10,527 899 11,426
----------- ------------- -------------
Total.................................................. 121,928 17,494 139,422
----------- ------------- -------------
Operating income......................................... 60,209 3,031 63,240
Interest expense......................................... 5,193 450 5,643
----------- ------------- -------------
Income before income taxes............................... 55,016 2,581 57,597
Provision for income taxes............................... 21,181 1,068 22,249
----------- ------------- -------------
Net income............................................... $ 33,835 $ 1,513 $ 35,348
----------- ------------- -------------
----------- ------------- -------------
Net income per share:
Basic net income per share............................. $ 0.59 $ 0.60
----------- -------------
----------- -------------
Weighted average number of common shares
outstanding:......................................... 57,325 1,464(3) 58,789
----------- ----- -------------
----------- ----- -------------
Diluted net income per share........................... $ 0.53 $ 0.54
----------- -------------
----------- -------------
Weighted average number of common shares and dilutive
potential common shares outstanding.................. 63,256 1,742(4) 64,998
----------- ----- -------------
----------- ----- -------------
</TABLE>
- ------------------------
(1) Step Ahead's statement of income for the fiscal year ended January 26, 1997.
(2) The pro forma condensed combined income statement was prepared by combining
the Dollar Tree condensed consolidated income statement for the year ended
December 31, 1996 with the Step Ahead statement of income for the fiscal
year ended January 26, 1997.
(3) Pro forma adjustment to weighted average common shares outstanding
represents the assumed issuance of Dollar Tree Common Stock for Step Ahead
Stock, based on an assumed Exchange Ratio of 1.2106.
(4) Pro forma adjustment to weighted average common shares and dilutive
potential common shares outstanding represents the assumed issuance of
Dollar Tree Common Stock for Step Ahead Stock and the assumption of the Step
Ahead Options, based on an assumed Exchange Ratio of 1.2106.
74
<PAGE>
DOLLAR TREE STORES, INC. AND SUBSIDIARIES
STEP AHEAD INVESTMENTS, INC.
PRO FORMA CONDENSED COMBINED INCOME STATEMENT (UNAUDITED)
YEAR ENDED DECEMBER 31, 1995
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA(2)
DOLLAR TREE STEP AHEAD(1) ADJUSTMENTS COMBINED
----------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Net sales................................................ $ 300,229 $ 55,038 $ 355,267
Cost of sales............................................ 187,552 39,837 227,389
----------- ------------- -------------
Gross profit............................................. 112,677 15,201 127,878
Selling general, and administrative expenses:
Operating expenses................................... 70,504 12,782 83,286
Depreciation and amortization........................ 5,468 651 6,119
----------- ------------- -------------
Total.................................................. 75,972 13,433 89,405
----------- ------------- -------------
Operating income......................................... 36,705 1,768 38,473
Interest expense......................................... 2,617 358 2,975
----------- ------------- -------------
Income before income taxes............................... 34,088 1,410 35,498
Provision for income taxes............................... 13,125 267 13,392
----------- ------------- -------------
Net income............................................... $ 20,963 $ 1,143 $ 22,106
----------- ------------- -------------
----------- ------------- -------------
Net income per share:
Basic net income per share............................. $ 0.37 $ 0.39
----------- -------------
----------- -------------
Weighted average number of common shares
outstanding:......................................... 55,905 1,453(3) 57,358
----------- ----- -------------
----------- ----- -------------
Diluted net income per share........................... $ 0.34 $ 0.35
----------- -------------
----------- -------------
Weighted average number of common shares and dilutive
potential common shares outstanding.................. 61,539 1,722(4) 63,261
----------- ----- -------------
----------- ----- -------------
</TABLE>
- ------------------------
(1) Step Ahead's statement of income for the fiscal year ended January 28, 1996.
(2) The pro forma condensed combined income statement was prepared by combining
the Dollar Tree condensed consolidated income statement for the year ended
December 31, 1995 with the Step Ahead statement of income for the fiscal
year ended January 28, 1996.
(3) Pro forma adjustment to weighted average common shares outstanding
represents the assumed issuance of Dollar Tree Common Stock for Step Ahead
Stock, based on an assumed Exchange Ratio of 1.2106.
(4) Pro forma adjustment to weighted average common shares and dilutive
potential common shares outstanding represents the assumed issuance of
Dollar Tree Common Stock for Step Ahead Stock and the assumption of the Step
Ahead Options, based on an assumed Exchange Ratio of 1.2106.
75
<PAGE>
DOLLAR TREE STORES, INC. AND SUBSIDIARIES
STEP AHEAD INVESTMENTS, INC.
PRO FORMA CONDENSED COMBINED BALANCE SHEET (UNAUDITED)
JUNE 30, 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
PRO FORMA PROFORMA(2)
DOLLAR TREE STEP AHEAD(1) ADJUSTMENTS COMBINED
----------- ------------- ------------------- ------------
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................... $ 5,459 $ 1,710 $ 7,169
Accounts receivable..................................... 676 593 1,269
Merchandise inventories................................. 156,099 21,310 177,409
Deferred tax asset...................................... 5,744 494 6,238
Prepaid expenses and other current assets............... 3,776 870 4,646
-
----------- ------------- ------------
Total current assets.................................. 171,754 24,977 196,731
-
----------- ------------- ------------
Property and equipment, net............................... 92,917 5,424 98,341
Deferred tax asset........................................ 2,189 268 2,457
Goodwill, net............................................. 43,514 -- 43,514
Other assets, net......................................... 1,098 1,257 2,355
-
----------- ------------- ------------
TOTAL ASSETS.......................................... $ 311,472 $ 31,926 $ 343,398
-
-
----------- ------------- ------------
----------- ------------- ------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt....................... $ 9,000 $ 11,964 $ 20,964
Accounts payable........................................ 43,363 9,856 53,219
Accrued liabilities..................................... 18,674 1,211 19,885
Income taxes payable.................................... 2,284 -- 2,284
Current installments of obligations under capital
leases................................................ 270 -- 270
-
----------- ------------- ------------
Total current liabilities............................. 73,591 23,031 96,622
-
----------- ------------- ------------
Long-term debt............................................ 53,000 -- 53,000
Obligations under capital leases, excluding current
installments............................................ 668 -- 668
Other liabilities......................................... 4,357 1,620 5,977
-
----------- ------------- ------------
Total liabilities..................................... 131,616 24,651 156,267
-
----------- ------------- ------------
Shareholders' equity...................................... 179,856 7,275 187,131
-
----------- ------------- ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY............ $ 311,472 $ 31,926 $ 343,398
-
-
----------- ------------- ------------
----------- ------------- ------------
</TABLE>
- ------------------------
(1) Step Ahead's balance sheet as of July 26, 1998.
(2) The pro forma condensed combined balance sheet was prepared by combining the
Dollar Tree consolidated balance sheet as of June 30, 1998 with the Step
Ahead balance sheet as of July 26, 1998.
76
<PAGE>
DOLLAR TREE STORES, INC. AND SUBSIDIARIES
STEP AHEAD INVESTMENTS, INC.
PRO FORMA CONDENSED COMBINED BALANCE SHEET (UNAUDITED)
DECEMBER 31, 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA(2)
DOLLAR TREE STEP AHEAD(1) ADJUSTMENTS COMBINED
----------- ------------- ------------------- -------------
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.............................. $ 43,695 $ 1,323 $ 45,018
Accounts receivable.................................... 1,406 945 2,351
Merchandise inventories................................ 89,066 20,417 109,483
Deferred tax asset..................................... 5,093 375 5,468
Prepaid expenses and other current assets.............. 3,762 767 4,529
-
----------- ------------- -------------
Total current assets................................. 143,022 23,827 166,849
-
----------- ------------- -------------
Property and equipment, net.............................. 82,071 4,931 87,002
Deferred tax asset....................................... 2,029 199 2,228
Goodwill, net............................................ 44,478 -- 44,478
Other assets, net........................................ 976 1,055 2,031
-
----------- ------------- -------------
TOTAL ASSETS......................................... $ 272,576 $ 30,012 $ 302,588
-
-
----------- ------------- -------------
----------- ------------- -------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt...................... $ -- $ 9,491 $ 9,491
Accounts payable....................................... 44,058 9,933 53,991
Accrued liabilities.................................... 19,526 1,788 21,314
Income taxes payable................................... 18,908 679 19,587
Current installments of obligations under capital
leases............................................... 317 -- 317
-
----------- ------------- -------------
Total current liabilities............................ 82,809 21,891 104,700
-
----------- ------------- -------------
Long-term debt........................................... 30,000 554 30,554
Obligations under capital leases, excluding current
installments........................................... 804 -- 804
Other liabilities........................................ 4,037 1,440 5,477
-
----------- ------------- -------------
Total liabilities.................................... 117,650 23,885 141,535
-
----------- ------------- -------------
Shareholders' equity..................................... 154,926 6,127 161,053
-
----------- ------------- -------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY........... $ 272,576 $ 30,012 $ 302,588
-
-
----------- ------------- -------------
----------- ------------- -------------
</TABLE>
- ------------------------
(1) Step Ahead's balance sheet as of January 25, 1998.
(2) The pro forma condensed combined balance sheet was prepared by combining the
Dollar Tree consolidated balance sheet as of December 31, 1997 with the Step
Ahead balance sheet as of January 25, 1998.
77
<PAGE>
SELECTED HISTORICAL FINANCIAL DATA OF DOLLAR TREE
The following table sets forth for the periods indicated selected financial
data for Dollar Tree. The selected income statement and balance sheet data
presented below for the years ended December 31, 1993, 1994, 1995, 1996, and
1997 have been derived from Dollar Tree Stores, Inc. and subsidiaries'
consolidated financial statements that have been audited by KPMG Peat Marwick
LLP, independent certified public accountants. The selected income statement and
balance sheet data presented below for the six months ended June 30, 1997 and
1998 have been derived from the unaudited condensed consolidated financial
statements of Dollar Tree Stores, Inc. and subsidiaries 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. All Dollar Tree share and per share data have been
adjusted to reflect 50% stock dividends effected as 3-for-2 stock splits in
April 1996, July 1997 and June 1998. The results of operations for the six
months ended June 30, 1998 are not necessarily indicative of the results to be
expected for the entire year ending December 31, 1998. This information should
be read in conjunction with the financial statements and the notes thereto
incorporated herein by reference and "Dollar Tree Management's Discussion and
Analysis of Financial Condition and Results of Operations" included in this
Prospectus/Proxy Statement.
<TABLE>
<CAPTION>
SIX
MONTHS
ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
----------------------------------------------------- ---------
1993 1994 1995 1996 1997 1997
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA
AND SALES PER SELLING SQUARE FOOT DATA)
INCOME STATEMENT DATA:
Net sales...................................................... $ 167,753 $ 231,601 $ 300,229 $ 493,037 $ 635,473 $ 247,078
Cost of sales.................................................. 106,318 145,481 187,552 310,900 397,116 159,623
--------- --------- --------- --------- --------- ---------
Gross profit................................................. 61,435 86,120 112,677 182,137 238,357 87,455
--------- --------- --------- --------- --------- ---------
Selling, general and administrative expenses:
Operating expenses........................................... 39,559 54,993 70,504 111,401 143,438 64,529
Depreciation and amortization................................ 3,054 4,186 5,468 10,527 13,125 6,095
Recapitalization expenses(1)................................. 4,387 -- -- -- -- --
--------- --------- --------- --------- --------- ---------
Total...................................................... 47,000 59,179 75,972 121,928 156,563 70,624
--------- --------- --------- --------- --------- ---------
Operating income............................................... 14,435 26,941 36,705 60,209 81,794 16,831
Interest expense, net.......................................... 1,837 4,028 2,617 5,193 2,812 1,238
--------- --------- --------- --------- --------- ---------
Income before income taxes and extraordinary loss.............. 12,598 22,913 34,088 55,016 78,982 15,593
Provision for income taxes..................................... 3,152 9,546 13,125 21,181 30,408 6,003
--------- --------- --------- --------- --------- ---------
Income before extraordinary loss............................... 9,446 13,367 20,963 33,835 48,574 9,590
Extraordinary loss, net of income tax(2)....................... -- 1,253 -- -- -- --
--------- --------- --------- --------- --------- ---------
Net income..................................................... $ 9,446 $ 12,114 $ 20,963 $ 33,835 $ 48,574 $ 9,590
--------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- ---------
INCOME PER SHARE DATA(3):
Basic net income per share..................................... $ 0.22 $ 0.37 $ 0.59 $ 0.83 $ 0.16
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Diluted net income per share................................... $ 0.20 $ 0.34 $ 0.53 $ 0.75 $ 0.15
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
PRO FORMA INCOME STATEMENT DATA (UNAUDITED):
Net income..................................................... $ 9,446
Pro forma adjustment for C corporation income taxes(4)......... 1,838
---------
Pro forma net income(4)........................................ $ 7,608
---------
---------
Pro forma basic net income per share(5)........................ $ 0.14
---------
---------
Pro forma diluted net income per share(5)...................... $ 0.13
---------
---------
Weighted average number of common shares outstanding, in
thousands(3 and 5)........................................... 55,849 55,849 55,905 57,325 58,534 58,431
--------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- ---------
Weighted average number of common shares and dilutive potential
common shares outstanding, in thousands(3 and 5)............. 56,416 60,603 61,539 63,256 64,645 64,438
--------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- ---------
<CAPTION>
1998
---------
<S> <C>
INCOME STATEMENT DATA:
Net sales...................................................... $ 324,698
Cost of sales.................................................. 205,012
---------
Gross profit................................................. 119,686
---------
Selling, general and administrative expenses:
Operating expenses........................................... 81,231
Depreciation and amortization................................ 8,471
Recapitalization expenses(1)................................. --
---------
Total...................................................... 89,702
---------
Operating income............................................... 29,984
Interest expense, net.......................................... 1,321
---------
Income before income taxes and extraordinary loss.............. 28,663
Provision for income taxes..................................... 11,035
---------
Income before extraordinary loss............................... 17,628
Extraordinary loss, net of income tax(2)....................... --
---------
Net income..................................................... $ 17,628
---------
---------
INCOME PER SHARE DATA(3):
Basic net income per share..................................... $ 0.30
---------
---------
Diluted net income per share................................... $ 0.27
---------
---------
PRO FORMA INCOME STATEMENT DATA (UNAUDITED):
Net income.....................................................
Pro forma adjustment for C corporation income taxes(4).........
Pro forma net income(4)........................................
Pro forma basic net income per share(5)........................
Pro forma diluted net income per share(5)......................
Weighted average number of common shares outstanding, in
thousands(3 and 5)........................................... 58,886
---------
---------
Weighted average number of common shares and dilutive potential
common shares outstanding, in thousands(3 and 5)............. 65,123
---------
---------
</TABLE>
78
<PAGE>
<TABLE>
<CAPTION>
SIX
MONTHS
ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
----------------------------------------------------- ---------
1993 1994 1995 1996 1997 1997
--------- --------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA
AND SALES PER SELLING SQUARE FOOT DATA)
<S> <C> <C> <C> <C> <C> <C>
SELECTED OPERATING DATA:
Number of stores open at end of period(6):
Mall......................................................... 145 154 173 202 235 224
Strip center................................................. 183 255 327 535 652 588
--------- --------- --------- --------- --------- ---------
Total...................................................... 328 409 500 737 887 812
--------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- ---------
Net sales growth(6)............................................ 39.2% 38.1% 29.6% 64.2% 28.9% 31.7%
Comparable store net sales increase(7)......................... 6.9% 9.1% 7.3% 6.2% 7.8% 9.7%
Average net sales per store(8 and 9)........................... $ 555 $ 606 $ 649 $ 691 $ 767 $ 319
Average net sales per selling square foot(9):
Mall......................................................... $ 270 $ 289 $ 295 $ 299 $ 287 $ 113
Strip center................................................. $ 226 $ 236 $ 251 $ 264 $ 260 $ 106
All stores................................................... $ 247 $ 257 $ 265 $ 275 $ 266 $ 108
<CAPTION>
AS OF
AS OF DECEMBER 31, JUNE 30,
----------------------------------------------------- ---------
1993 1994 1995 1996 1997 1997
--------- --------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital................................................ $ 7,742 $ 14,334 $ 29,133 $ 23,488 $ 60,213 $ 67,360
Total assets................................................... 42,188 60,688 91,621 171,099 272,576 219,619
Total debt..................................................... 17,768 14,205 14,518 4,353 31,121 54,202
Shareholders' equity........................................... 3,660 17,274 39,087 101,590 154,926 114,113
<CAPTION>
1998
---------
<S> <C>
SELECTED OPERATING DATA:
Number of stores open at end of period(6):
Mall......................................................... 256
Strip center................................................. 724
---------
Total...................................................... 980
---------
---------
Net sales growth(6)............................................ 31.4%
Comparable store net sales increase(7)......................... 8.8%
Average net sales per store(8 and 9)........................... $ 348
Average net sales per selling square foot(9):
Mall......................................................... $ 120
Strip center................................................. $ 113
All stores................................................... $ 115
1998
---------
<S> <C>
BALANCE SHEET DATA:
Working capital................................................ $ 98,163
Total assets................................................... 311,472
Total debt..................................................... 62,938
Shareholders' equity........................................... 179,856
</TABLE>
- ------------------------
(1) Represents recapitalization expenses of $4.4 million incurred in connection
with a 1993 recapitalization, comprised of $3.6 million of management
incentive expenses and $0.8 million of transaction expenses.
(2) 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 Dollar
Tree's 12% Senior Subordinated Notes and 12% Junior Subordinated Notes.
(3) The extraordinary loss recognized in 1994 reduced basic and diluted net
income per share by $0.02, respectively. Basic and diluted income per share
data have been computed by dividing its components by the weighted average
number of common shares outstanding, and by the weighted average number of
common shares and dilutive potential common shares outstanding,
respectively. Dilutive potential common shares include all outstanding stock
options and warrants after applying the treasury stock method.
(4) Prior to September 30, 1993, Dollar Tree was treated as a subchapter S
corporation for Federal and certain state income tax purposes. As such,
income of Dollar Tree for that period was taxable to the individual
shareholders rather than to Dollar Tree. Accordingly, the provision for
income taxes for 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, Dollar
Tree converted to a subchapter C corporation. Accordingly, income since
September 30, 1993 was taxable to Dollar Tree. Pro forma net income reflects
a provision for income taxes as if Dollar Tree were a C corporation for all
of 1993 at an assumed effective tax rate of approximately 40%.
(5) Pro forma basic net income per share has been computed by dividing pro forma
net income by the weighted average number of common shares outstanding. Pro
forma diluted net income per share has been computed by dividing pro forma
net income by the weighted average number of common shares and dilutive
potential common shares outstanding. Dilutive potential common shares
include all outstanding stock options and warrants after applying the
treasury stock method.
(6) Dollar Tree closed two stores in 1993, one store in 1994, three stores in
1995, three stores in 1996 and one store in 1997. 1996 data reflects the
addition of 136 Dollar Bills stores on January 31, 1996. Dollar Tree closed
three stores during the first six months of 1998; there were no closures in
the comparable period for 1997.
(7) Comparable store net sales increase compares net sales for stores open
during the entire two periods compared. The comparable store net sales
increase calculation for the periods ended December 31, 1997, June 30, 1997
and June 30, 1998 include net sales of Dollar Bills stores for the
comparable periods.
(8) For stores open the entire period presented. Dollar Bills stores are only
included in the calculation for 1997 and for the calculations for June 30,
1997 and 1998.
(9) For stores open the entire period presented. Dollar Bills stores are only
included in the calculation for 1997 and for the calculations for June 30,
1997 and 1998. Selling square footage is estimated to be 83% of gross square
feet per store. Results for the six months ended June 30, 1998 may not be
indicative of full year average net sales per store or average net sales per
selling square foot due to seasonal fluctuations in sales. See "Dollar Tree
Management's Discussion and Analysis of Financial Condition and Results of
Operations--Seasonality and Quarterly Fluctuations."
79
<PAGE>
DOLLAR TREE MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with Dollar Tree's
consolidated financial statements and notes thereto incorporated by reference in
this Prospectus/Proxy Statement.
OVERVIEW
Dollar Tree was established by J. Douglas Perry, Dollar Tree's Chairman,
Macon F. Brock, Jr., Dollar Tree's President and Chief Executive Officer, and H.
Ray Compton, Dollar Tree's Executive Vice President (the "Founders"), in
November 1986 with the opening of its first five stores in Virginia, Georgia and
Tennessee. From November 1986 through October 1991, Dollar Tree's shareholders
also owned a substantial portion of the outstanding stock of 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 Dollar Tree'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 887 stores
as of December 31, 1997, and net sales and operating income have increased from
$71.1 million and $5.2 million, respectively, for the twelve months ended
January 31, 1992 to $635.5 million and $81.8 million, respectively, in 1997.
Dollar Tree has grown to 980 stores as of June 30, 1998. Dollar Tree's net sales
increased 31.4% from $247.1 million to $324.7 million, and operating income
increased 78.1% from $16.8 million to $30.0 million from the six months ended
June 30, 1997 to the six months ended June 30, 1998.
On September 30, 1993, Dollar Tree effected a recapitalization including a
stock split and reclassification (the "1993 Recapitalization"), pursuant to
which (i) J. Douglas Perry, Chairman of Dollar Tree's Board of Directors, his
wife, Patricia W. Perry, Macon F. Brock, Jr., Dollar Tree's President and Chief
Executive Officer, his wife, Joan P. Brock, and H. Ray Compton, Dollar Tree's
Executive Vice President (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 Dollar Tree
for an aggregate purchase price of $23.6 million, (ii) the Fund and the
Co-Investors purchased from Dollar Tree $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 2,792,451 shares of Common Stock and
(iii) on February 22, 1994 pursuant to a commitment entered into September 30,
1993, the Original Shareholders purchased from Dollar Tree $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 2,792,448 shares. On
December 31, 1994, Dollar Tree redeemed and extinguished the 12% Senior
Subordinated Notes and the 12% Junior Subordinated Notes (collectively, the "12%
Notes"). As part of this transaction, Dollar Tree 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
(collectively, the "9% Notes") to the previous holders of the 12% Notes. The 9%
Notes were paid in full in June 1996.
On January 31, 1996, Dollar Tree acquired all of the stock of Dollar Bills,
formerly known as Terrific Promotions, Inc., and subsequently merged Dollar
Bills into Dollar Tree. At the time of the acquisition, Dollar Bills owned and
operated 136 discount variety stores in 16 states, offering merchandise
primarily at the $1.00 price point under the name Dollar Bill$, a 250,000 square
foot distribution center in the Chicago area and a wholesale division, all of
which Dollar Tree currently operates. Dollar Tree paid approximately $52.6
million in cash and $2.0 million in merchandise inventory for 100% of the stock
of Dollar Bills and
80
<PAGE>
has accounted for the acquisition as a purchase. In connection with the
acquisition, Dollar Tree recognized goodwill of $48.2 million, which it is
amortizing over a 25-year period.
Dollar Tree recently replaced its Norfolk, Virginia distribution facility
and headquarters with a new $34 million Store Support Center, located in
Chesapeake, Virginia, consisting of an approximately 400,000 square foot
distribution center and an approximately 76,000 square foot headquarters
facility. The headquarters facility became operational in November 1997 and the
distribution center in January 1998. Management believes that the new Store
Support Center has increased Dollar Tree's capacity to service stores to
approximately 1,600 stores.
In March 1998, Dollar Tree purchased approximately 43 acres of land in Olive
Branch, Mississippi, for the purpose of building a new distribution center to
replace the existing facility located in Memphis, Tennessee. The new facility
will be modeled after the recently completed Chesapeake distribution center and
will contain similar advanced materials handling technologies. The Olive Branch
facility will be approximately 425,000 square feet and is expected to require an
investment of approximately $20 million. Management believes that, upon
completion of this facility, Dollar Tree's capacity to service stores will
increase to approximately 2,000 stores. Dollar Tree believes that the facility
will be operational in early 1999. There can be no assurance that delays will
not be experienced in the opening of the Olive Branch distribution center, that
complications will not occur in its operation or in the transition from the
Memphis facility or that cost overruns will not be experienced in building the
facility. Any such delays or complications could interrupt the receipt and
distribution of merchandise to the stores, which could in turn materially
adversely affect Dollar Tree's business and results of operations.
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>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------------- --------------------
<S> <C> <C> <C> <C> <C>
1995 1996 1997 1997 1998
--------- --------- --------- --------- ---------
Net sales.............................................................. 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales.......................................................... 62.5 63.1 62.5 64.6 63.1
--------- --------- --------- --------- ---------
Gross profit......................................................... 37.5 36.9 37.5 35.4 36.9
Selling, general and administrative expenses:
Operating expenses................................................... 23.5 22.6 22.5 26.1 25.0
Depreciation and amortization........................................ 1.8 2.1 2.1 2.5 2.6
--------- --------- --------- --------- ---------
Total.............................................................. 25.3 24.7 24.6 28.6 27.6
--------- --------- --------- --------- ---------
Operating income....................................................... 12.2 12.2 12.9 6.8 9.3
Interest expense....................................................... 0.9 1.1 0.5 0.5 0.4
--------- --------- --------- --------- ---------
Income before income taxes............................................. 11.3 11.1 12.4 6.3 8.9
Provision for income taxes............................................. 4.4 4.3 4.8 2.4 3.4
--------- --------- --------- --------- ---------
Net income............................................................. 6.9% 6.8% 7.6% 3.9% 5.5%
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
SIX MONTHS ENDED JUNE 30, 1997 COMPARED TO THE SIX MONTHS ENDED JUNE 30, 1998
Net sales increased $77.6 million, or 31.4%, to $324.7 million for the six
months ended June 30, 1998, from $247.1 million for the six months ended June
30, 1997. Of this increase, (i) approximately 73%, or $56.8 million, was
attributable to stores opened in 1997 and 1998 which are not included in Dollar
Tree's comparable store net sales calculation, and (ii) approximately 27%, or
$20.8 million, was attributable to
81
<PAGE>
comparable store net sales growth, which represented an 8.8% increase over
comparable store net sales in the corresponding half of the prior year. Because
substantially all Dollar Tree's products sell for $1.00, the increase in
comparable store net sales was a direct result of increased unit volume.
Management believes that a consistent in-stock inventory position in basic
consumable goods early in the year and an extended Easter selling season
contributed to the comparable store net sales increase. Dollar Tree opened 96
new stores and closed three stores during the first half of 1998, compared to
opening 75 new stores and closing no stores during the first half of 1997.
Management anticipates that the primary source of future net 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
Dollar Tree has experienced significant increases in comparable store net sales
historically, management believes that any increases in comparable store net
sales in the future may be smaller than those experienced historically, and that
decreases in average net sales per selling square foot will occur as the average
store size increases. See "--Seasonality and Quarterly Fluctuations."
Gross profit, which consists of net sales less cost of sales (including
distribution and certain occupancy costs), increased $32.2 million, or 36.9%, to
$119.7 million in the first half of 1998 from $87.5 million in the first half of
1997. As a percentage of net sales, gross profit increased to 36.9% from 35.4%,
primarily due to improved merchandise costs (including freight) and improved
occupancy costs as a percentage of net sales. The improvement in occupancy costs
resulted primarily from the leveraging of fixed costs, due to the strong
comparable store sales increases. The improvement in merchandise costs is
primarily due to favorable pricing and the earlier receipt of higher margin
items. Because of the earlier receipt of selected items, management does not
expect this rate of improvement to continue for the balance of the year. In
addition, in May 1998, a trans-Pacific ocean-shipping cartel imposed an increase
of $300 per container on all U.S. imports from Asia, which took effect with
shipments beginning in mid-May 1998. This rate increase is expected to add
approximately $600,000 to $700,000 in freight expenses to Dollar Tree's cost of
sales for the second half of 1998, and approximately $1.5 million to $2.0
million for 1999. The cartel recently announced its intention to impose a
further increase of $900 per container for shipments from Asia to the West Coast
of the United States and $1,000 for shipments to the East Coast, with a $300 per
container surcharge during the peak shipping season from June 1 through November
30. Although it is uncertain whether the cartel will be successful in
implementing the increase at the announced rates, the target effective date for
the increase is May 1, 1999.
Selling, general and administrative expenses ("SGA"), which include
operating expenses and depreciation and amortization, increased $19.1 million,
or 27.0%, to $89.7 million in the first half of 1998 from $70.6 million in the
first half of 1997, and decreased as a percentage of net sales to 27.6% from
28.6% during the same period. This decrease in SGA expense, as a percentage of
net sales, resulted primarily from the leveraging of fixed costs, due to the
strong comparable store sales increases, and from on-going cost control
initiatives.
Operating income increased $13.2 million, or 78.1%, to $30.0 million for the
first half of 1998 from $16.8 million for the comparable period in 1997, and
increased as a percentage of net sales to 9.2% from 6.8% during the same period
for the reasons noted above.
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1997
Net sales increased $142.5 million, or 28.9%, to $635.5 million for 1997,
from $493.0 million for 1996. Of this increase, (i) approximately 71.0%, or
$101.2 million, was attributable to stores opened in 1996 and 1997, which are
not included in Dollar Tree's comparable store net sales calculation, and (ii)
approximately 29.0%, or $41.3 million, was attributable to comparable store net
sales growth, which represented a 7.8% increase over comparable store net sales
for 1996. The comparable store net sales increase includes sales at Dollar Bills
stores for the twelve month periods ended December 31, 1996 and December 31,
1997. Because substantially all Dollar Tree's products sell for $1.00, the
increase in comparable store net sales
82
<PAGE>
was a direct result of increased unit volume. Comparable store net sales
increases were driven primarily by a strong in-stock position throughout the
year, particularly in the first quarter of the year; increased customer traffic
in 1997, coupled with a slight increase in the average purchase per customer;
continued improvements in the quality and variety of merchandise offered; and
the improved performance in the Dollar Bills stores resulting in part from their
shift towards the Dollar Tree merchandise mix throughout 1996. Dollar Tree
opened 151 new stores and closed one store during 1997, compared to opening 104
new stores and closing three stores during 1996. Dollar Tree also added 136
Dollar Bills stores on January 31, 1996.
Gross profit increased $56.2 million, or 30.9%. As a percentage of net
sales, gross profit increased to 37.5% from 36.9%, primarily due to improved
merchandise costs (including freight) and improved inventory shrinkage costs as
a percentage of net sales, partially offset by an increase in distribution costs
as a percentage of net sales. Throughout 1996, management shifted the
merchandise mix at Dollar Bills stores away from their historical consumable
product emphasis to more closely resemble the merchandise mix at Dollar Tree
stores. While this change in mix benefited merchandise costs, management does
not anticipate this level of improvement in the future. Distribution costs
increased as a result of increased costs inherent in transitioning operations to
the new Chesapeake distribution center and in the installation of Dollar Tree's
new warehouse management system in all three distribution centers early in 1997.
In 1998, management expects its recently elevated level of distribution costs,
as a percentage of net sales, to continue due to the construction of the new
Olive Branch facility. Costs could further increase in the event of a failure to
sublease the leased facilities in Memphis. Dollar Tree is liable for rent and
pass-through costs under the Memphis lease until September 2005, at a current
annual cost of approximately $702,000. Dollar Tree management believes that any
sublease of the Memphis facility at prevailing market rates will not fully cover
such costs.
Selling, general and administrative expenses, increased $34.6 million, or
28.4%, but decreased slightly as a percentage of net sales to 24.6% from 24.7%.
This decrease, as a percentage of net sales, resulted primarily from
approximately $2.5 million in expense incurred in 1996 as a result of the Dollar
Bills acquisition and litigation. Amortization of goodwill relating to the
Dollar Bills acquisition amounted to $1.9 million for 1997. Excluding the
expenses incurred in 1996 related to the Dollar Bills acquisition, selling,
general and administrative expenses increased as a percentage of sales to 24.6%
in 1997 from 24.2% in 1996 primarily due to an increase of approximately $2
million in payroll costs resulting from the federally mandated increase in the
hourly minimum wage. Management believes that the increase in 1998 payroll costs
due to this minimum wage change will be greater than in 1997.
Operating income increased $21.6 million, or 35.9%, to $81.8 million for
1997 from $60.2 million for 1996, and increased as a percentage of net sales to
12.9% from 12.2% during the same period for the reasons noted above.
Interest expense decreased $2.4 million to $2.8 million in 1997 compared to
$5.2 million in 1996. This decrease was primarily a result of lower levels of
debt in 1997 compared to 1996, when Dollar Tree had increased borrowings related
to the purchase of Dollar Bills. In 1997, Dollar Tree capitalized $916,000 of
interest relating to the construction of the Chesapeake facility. Interest
charges on debt incurred to finance the construction of the Chesapeake Store
Support Center will not be capitalized in 1998 but will be charged to interest
expense. Dollar Tree expects to capitalize the interest incurred in 1998
relating to the construction of the Olive Branch facility.
YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1996
Net sales increased $192.8 million, or 64.2%, to $493.0 million for 1996,
from $300.2 million for 1995. Of this increase, (i) approximately 54.3%, or
$104.7 million, was attributable to the 136 Dollar Bills stores added on January
31, 1996, (ii) approximately 37.2%, or $71.8 million, was attributable to 198
stores opened in 1995 and 1996, which are not included in Dollar Tree's
comparable store net sales calculation,
83
<PAGE>
and (iii) approximately 8.5%, or $16.3 million, was attributable to comparable
store net sales growth, which represented a 6.2% increase over comparable store
net sales for 1995. Dollar Bills stores are not included in the comparable store
net sales calculations for 1996. Because substantially all Dollar Tree's
products sell for $1.00, the increase in comparable store net sales was a direct
result of increased unit volume. Management believes that this increase in
volume resulted from strong holiday selling seasons in 1996, increased inventory
levels compared to the preceding year, and continued improvements in the quality
and variety of merchandise offered. Dollar Tree opened 104 new stores (in
addition to the 136 Dollar Bills stores added on January 31, 1996), and closed
three stores during 1996 compared to opening 94 new stores and closing three
stores during 1995.
Gross profit increased $69.5 million, or 61.6%. As a percentage of net
sales, gross profit decreased to 36.9% from 37.5%, reflecting, as a percentage
of net sales, decreased merchandise margin (gross profit before inventory
shrinkage, markdowns, and distribution and occupancy costs) and a slight
increase in inventory shrinkage, partially offset by lower inbound freight costs
and lower store occupancy costs. 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.
The increase in inventory shrinkage is due largely to higher shrinkage
experienced at the Dollar Bills stores. The decrease in inbound freight arose
primarily from more favorable terms negotiated with shippers and consolidators.
The decrease in store occupancy costs as a percentage of net sales is a result
of the comparable store net sales growth.
As a result of the Dollar Bills acquisition in 1996, there was a shift in
overall merchandise mix toward higher levels of domestic, consumable merchandise
(for instance, food and health and beauty aids), which generally carry a higher
merchandise cost. Management believes that changes in the overall merchandise
mix arising from the acquisition are substantially complete and that Dollar Tree
will continue to carry somewhat higher levels of domestic, consumable
merchandise than in prior years. However, Dollar Tree expects imports to
continue to account for approximately 35% to 40% of total purchases at retail.
Selling, general and administrative expenses increased $46.0 million, or
60.5%, but decreased as a percentage of net sales to 24.7% from 25.3% during the
same period. The decrease is due primarily to strengthened cost controls
relating to hourly payroll at the store level. Management does not expect
similar payroll cost savings in the future due to federally mandated increases
in the minimum wage. During 1996, Dollar Tree's operating expenses incurred in
connection with the Dollar Bills acquisition and litigation amounted to
approximately $2.5 million. Depreciation and amortization expense increased $5.0
million, increasing as a percentage of net sales to 2.1% from 1.8% for 1995. Of
this increase, $1.8 million related to the amortization of goodwill recognized
in connection with the acquisition of Dollar Bills.
Operating income increased $23.5 million, or 64.0%, to $60.2 million for
1996 from $36.7 million for 1995 and remained constant as a percentage of net
sales at 12.2%.
Interest expense increased $2.6 million to $5.2 million in 1996 compared to
$2.6 million in 1995. This increase is a result of increased borrowing incurred
in connection with the Dollar Bills acquisition. The development facility used
for the acquisition was repaid prior to year end. In addition, Dollar Tree
redeemed and extinguished its 9% Subordinated Notes in June 1996.
LIQUIDITY AND CAPITAL RESOURCES
Dollar Tree's ongoing capital requirements result primarily from capital
expenditures related to new store openings and working capital requirements
related to new and existing stores. Dollar Tree'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, Dollar Tree 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.
84
<PAGE>
During 1995, 1996, 1997 and the first six months of 1998, net cash provided
by (used in) operations was $27.2 million, $39.2 million, $69.7 million and
($54.6) million, respectively. The net cash used in operations during the first
six months of 1998 was used primarily to build inventory levels and compares to
net cash used in operations of ($23.5) million during the comparable period of
1997. Net cash used in investing activities during the same periods was $11.6
million, $68.7 million, $57.5 million and $18.7 million, respectively. During
1995, net cash used in investing activities consisted primarily of capital
expenditures relating to new store expansion. During 1996, $52.2 million (net of
cash acquired) was used for the purchase of Dollar Bills, funded with borrowings
under Dollar Tree's credit facility, in addition to capital expenditures
relating to new store expansion. During 1997, net cash used in investing
activities consisted primarily of capital expenditures relating to the
Chesapeake Store Support Center and new store expansion. During the first six
months of 1998, net cash used in investing activities consisted primarily of
capital expenditures relating to new store expansion. Net cash provided by
financing activities during the same periods was $0.8 million, $10.1 million,
$28.5 million and $35.1 million, respectively. In 1995, the funds provided were
primarily a result of the exercise of stock options granted under Dollar Tree's
Stock Option Plan. In 1996, the funds provided were primarily a result of the
issuance of 1,687,500 shares of common stock in a public offering completed in
June and the exercise of stock options granted under the employee stock
compensation plans, reduced by the repayment of subordinated debt and notes
payable to banks. In 1997, net funds provided by financing activities were
primarily the result of the issuance of $30 million of Senior Notes. During the
first six months of 1998, net funds provided by financing activities were
primarily used to fund seasonal working capital needs.
Dollar Tree's borrowings under its bank facilities, senior notes and bonds
were $62.0 million at June 30, 1998, and $53.0 million at June 30, 1997.
Borrowings at December 31, 1997, amounted to $30.0 million. Under Dollar Tree's
bank facilities, an additional $106.0 million is available at June 30, 1998,
approximately $34.1 million of which is committed to certain letters of credit
issued in relation to the routine purchase of foreign merchandise.
Dollar Tree expects to expand by approximately 200 to 205 stores during 1998
and by approximately 215 to 220 stores during 1999, not including stores
acquired in the Merger. In 1997, the average investment per new store, including
capital expenditures, initial inventory and pre-opening costs, was approximately
$168,000 per store. Dollar Tree's cash needs for opening new stores in 1998 are
expected to total approximately $34.9 million, $19.5 million of which is
budgeted for capital expenditures and $15.4 million of which is budgeted for
initial inventory and pre-opening costs. Dollar Tree's total planned capital
expenditures for 1998 are approximately $50 million, including approximately $20
million relating to the Olive Branch distribution center and including planned
expenditures for expanded and relocated stores, additional equipment for the
distribution centers and computer system upgrades.
On September 27, 1996, Dollar Tree entered into an amended and restated
credit agreement with its banks which currently provides for a $135 million
unsecured revolving credit facility to be used for working capital, letters of
credit and development needs, bearing interest at the agent bank's prime rate or
LIBOR plus a spread, at Dollar Tree's option. As of December 31, 1997, the
interest rate was approximately 6.5%. The credit agreement, among other things,
requires the maintenance of certain specified ratios, restricts the amount of
capital expenditures, restricts the payments of cash dividends and other
distributions, limits the amount of debt, prohibits a change in control of
Dollar Tree and requires that aggregate borrowings must be paid down to a
specified amount for at least 30 consecutive days at any time between December 1
and March 1 through March 1, 2000. The original maturity date of the facility
was May 31, 2000, which was extended to May 31, 2002 in 1997.
On April 30, 1997, Dollar Tree issued $30 million of 7.29% unsecured Senior
Notes. The proceeds from the issuance of the Notes were used to pay down a
portion of the revolving credit facility, which enabled Dollar Tree to use that
credit facility to fund capital expenditures for the new Store Support Center.
Dollar Tree pays interest on the Notes semi-annually on April 30 and October 30
each year and will pay principal in five equal annual installments of $6 million
beginning April 30, 2000. The Note holders
85
<PAGE>
have the right to require Dollar Tree to prepay the Notes in full without
premium upon a change of control or upon certain asset dispositions or certain
other transactions by Dollar Tree. The Note agreements, among other things,
prohibit certain mergers and consolidations in which Dollar Tree is not the
surviving company, require the maintenance of certain specified ratios, require
that the Notes rank PARI PASSU with Dollar Tree's other debt and limit the
amount of Company debt. In the event of default or a prepayment at the option of
Dollar Tree, Dollar Tree is required to pay a prepayment penalty equal to a
make-whole amount.
RECENT DEVELOPMENTS
On May 20, 1998, Dollar Tree entered into a Loan Agreement with the
Mississippi Business Finance Corporation ("MBFC") under which the MBFC issued
Taxable Variable Rate Demand Revenue Bonds (the "Bonds") in an aggregate
principal amount of $19.0 million, to finance the acquisition, construction, and
installation of land, buildings, machinery, and equipment for Dollar Tree's new
distribution facility in Olive Branch, Mississippi. At June 30, the balance
outstanding on the Bonds is $3.0 million. The Company begins repayment of the
principal amount of the Bonds beginning on June 1, 2006, with a portion maturing
each June 1 until the final portion matures on June 1, 2018. The Bonds contain a
demand provision and, therefore, outstanding amounts are classified as current
liabilities. Interest is payable monthly based on a variable interest rate which
was 5.65% at June 30, 1998.
The Bonds are supported by a $19.3 million Letter of Credit issued by one of
Dollar Tree's existing lending banks. The Letter of Credit is renewable
annually. The Letter of Credit and Reimbursement Agreement requires, among other
things, the maintenance of certain specified ratios and restricts the amount of
capital expenditures and the payment of dividends.
Except for the cost of the new Olive Branch facility, Dollar Tree 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 credit facilities.
On October 21, 1998, Dollar Tree issued a press release containing financial
information for the period ended September 30, 1998. Dollar Tree reported net
earnings for the quarter ended September 30, 1998, of $11.5 million on sales of
$176.1 million, compared to net earnings of $8.7 million on sales of $142.4
million in the third quarter of 1997. Earnings per share increased to $0.18 in
the third quarter of 1998 from $0.13 in the same period last year.
Sales for the third quarter of 1998 increased $33.7 million over sales for
the third quarter of 1997, and sales in comparable stores increased by 2.9%.
Year to date through September 30, 1998, sales increased $111.3 million over
sales for the same period last year, and sales in comparable stores increased by
6.8%.
Gross margin for the quarter increased to 38.7% of sales compared to 37.8%
for the same quarter last year. This increase was due primarily to improved
merchandise costs (including freight) and a reduction in shrink and markdown
costs. The improvement in merchandise costs was primarily due to favorable
pricing and the earlier receipt of import merchandise.
Operating expenses increased to 27.3% of net sales for the third quarter of
1998, compared to 27.2% for the third quarter of 1997. This increase resulted
from increased payroll, primarily due to the minimum wage increase in 1997, and
depreciation, offset by a general reduction in operating expenses resulting from
cost controls.
Year to date, net sales, earnings, and earnings per share in 1998 were
$500.8 million, $29.1 million and $0.45 per share, respectively, compared to net
sales, earnings, and earnings per share through the third quarter of 1997 of
$389.5 million, $18.3 million, and $0.28 per share, respectively.
86
<PAGE>
The following tables set forth, for the periods indicated, selected
financial data for Dollar Tree:
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
-------------------- --------------------
<S> <C> <C> <C> <C>
INCOME STATEMENT DATA: 1997 1998 1997 1998
--------- --------- --------- ---------
<CAPTION>
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE
DATA)
(UNAUDITED)
<S> <C> <C> <C> <C>
Net sales............................................................ $ 142,386 $ 176,071 $ 389,464 $ 500,769
Cost of sales........................................................ 88,550 107,915 248,173 312,927
--------- --------- --------- ---------
Gross profit....................................................... 53,836 68,156 141,291 187,842
--------- --------- --------- ---------
Selling, general and administrative expenses:
Operating expenses................................................. 35,444 43,384 99,973 124,615
Depreciation and amortization...................................... 3,327 4,736 9,422 13,207
--------- --------- --------- ---------
Total............................................................ 38,771 48,120 109,395 137,822
--------- --------- --------- ---------
Operating income..................................................... 15,065 20,036 31,896 50,020
Interest expense, net................................................ 971 1,313 2,209 2,634
--------- --------- --------- ---------
Income before income taxes........................................... 14,094 18,723 29,687 47,386
Provision for income taxes........................................... 5,425 7,208 11,428 18,243
--------- --------- --------- ---------
Net income........................................................... $ 8,669 $ 11,515 $ 18,259 $ 29,143
--------- --------- --------- ---------
--------- --------- --------- ---------
INCOME PER SHARE DATA:
Basic net income per share......................................... $ 0.15 $ 0.19 $ 0.31 $ 0.49
--------- --------- --------- ---------
--------- --------- --------- ---------
Diluted net income per share....................................... $ 0.13 $ 0.18 $ 0.28 $ 0.45
--------- --------- --------- ---------
--------- --------- --------- ---------
Weighted average number of common shares outstanding, in
thousands........................................................ 58,616 59,132 58,492 58,968
--------- --------- --------- ---------
--------- --------- --------- ---------
Weighted average number of common shares and dilutive potential
common shares outstanding, in thousands........................ 64,831 65,391 64,569 65,213
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30,
--------------------
<S> <C> <C>
BALANCE SHEET DATA: 1997 1998
--------- ---------
<CAPTION>
(IN THOUSANDS)
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.................................................................. $ 4,638 $ 5,325
Merchandise inventories.................................................................... 133,150 184,511
Other current assets....................................................................... 7,815 13,782
--------- ---------
Total current assets..................................................................... 145,603 203,618
--------- ---------
Property and equipment, net.................................................................. 70,581 108,364
Goodwill, net................................................................................ 44,960 43,033
Other assets, net............................................................................ 3,255 3,443
--------- ---------
Total assets............................................................................. $ 264,399 $ 358,458
--------- ---------
--------- ---------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt.......................................................... $ 12,500 $ 40,000
Accounts payable and accrued expenses...................................................... 61,104 69,598
Income taxes payable....................................................................... 1,742 0
Current installments of obligations under capital leases................................... 309 392
--------- ---------
Total current liabilities................................................................ 75,655 109,990
--------- ---------
Long-term debt............................................................................... 60,000 50,000
Obligations under capital leases, excluding current installments............................. 817 2,188
Other liabilities............................................................................ 3,798 4,072
--------- ---------
Total liabilities........................................................................ 140,270 166,250
--------- ---------
Shareholders' equity......................................................................... 124,129 192,208
--------- ---------
Total liabilities and shareholders' equity............................................... $ 264,399 $ 358,458
--------- ---------
--------- ---------
</TABLE>
SEASONALITY AND QUARTERLY FLUCTUATIONS
Dollar Tree 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 Dollar Tree are the Christmas
87
<PAGE>
and Easter seasons. A disproportionate amount of Dollar Tree's net sales and a
substantial majority of Dollar Tree's operating and net income are generally
realized during the fourth quarter. In anticipation of increased sales activity
during these months, Dollar Tree purchases substantial amounts of inventory and
hires a significant number of temporary employees to bolster its permanent store
staff. If for any reason Dollar Tree's net sales were below seasonal norms
during the fourth quarter or Easter season, including as a result of merchandise
delivery delays due to receiving or distribution problems, Dollar Tree's
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 Dollar Tree expects this trend to
continue. Dollar Tree's quarterly results of operations may also fluctuate
significantly as a result of a variety of factors, including the timing of
certain holidays (including Easter), the timing of new store openings, the net
sales contributed by new stores and the merchandise mix.
The following table sets forth certain unaudited results of operations for
the last three quarters of 1996, each quarter of 1997 and the first two quarters
of 1998. 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 Dollar Tree has experienced significant
increases in comparable store net sales historically, management believes that
any increases in comparable net sales in the future may be smaller than those
experienced historically.
<TABLE>
<CAPTION>
QUARTER ENDED
----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30,
1996 1996 1996 1997 1997 1997 1997 1998 1998
---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
<CAPTION>
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales............. $ 102,689 $ 110,588 $ 194,785 $ 117,746 $ 129,332 $ 142,386 $ 246,009 $ 150,834 $ 173,864
Gross profit.......... $ 35,659 $ 41,890 $ 75,518 $ 41,291 $ 46,164 $ 53,836 $ 97,066 $ 54,968 $ 64,718
Operating income...... $ 7,586 $ 11,134 $ 38,919 $ 6,243 $ 10,588 $ 15,065 $ 49,898 $ 11,828 $ 18,156
Stores open at end of
period.............. 686 712 737 767 812 865 887 924 980
Comparable store net
sales increases..... 1.5% 4.3% 7.6% 10.9% 8.2% 7.4% 5.5% 5.4% 12.0%
</TABLE>
INFLATION AND OTHER ECONOMIC FACTORS
Dollar Tree's ability to provide quality merchandise at the $1.00 price
point is subject to certain economic factors which are beyond Dollar Tree's
control, including inflation, minimum wage levels, operating costs, consumer
confidence and general economic conditions. There can be no assurance that such
factors will remain favorable and in particular that hourly minimum wage rates,
health care costs, or other costs will remain at current levels. The federally
mandated minimum wage increased by $0.50 per hour on October 1, 1996 and by an
additional $0.40 per hour on September 1, 1997. These changes increased payroll
costs by approximately $2 million during 1997, and management believes that the
increase in 1998 payroll costs due to the minimum wage changes will be greater
than in 1997. In February 1998, President Clinton announced support for a plan
that would raise the minimum wage by an additional $0.50 per hour in January
1999 and an additional $0.50 per hour in 2000. In March 1998, Congressional
Republicans announced their intention to block consideration of an increase in
the minimum wage in 1998. A proposal similar to President Clinton's was defeated
in the Senate in September 1998. Based on the proposals before the Congress,
management believes that a proposed increase, if eventually passed into law, may
have a significantly greater impact on payroll costs than the increases in the
minimum wage implemented in 1996 and 1997. Additionally, in May 1998, a
trans-Pacific ocean-shipping cartel imposed an increase of $300 per container on
U.S. imports from Asia. This increase took effect with shipments
88
<PAGE>
beginning in mid-May 1998 and is expected to add approximately $600,000 to
$700,000 in freight expenses to Dollar Tree's cost of sales for the second half
of 1998. The cartel recently announced its intention to impose a further
increase of $900 per container for shipments from Asia to the West Coast of the
United States and $1,000 for shipments to the East Coast, with a $300 per
container surcharge during the peak shipping season from June 1 through November
30. Although it is uncertain whether the cartel will be successful in
implementing the increase at the announced rates, the target effective date for
the increase is May 1, 1999. Unless offsetting cost savings are realized (and no
assurance can be given that they will be), an increase in inflation, minimum
wage levels, shipping costs or other operating costs, or a decline in consumer
confidence or general economic conditions, could have a material adverse effect
on Dollar Tree's business and results of operations, especially given the
constraints on Dollar Tree's ability to pass on incremental costs through price
increases.
YEAR 2000 COMPLIANCE
Dollar Tree utilizes a significant number of in-house and vendor-supplied
computer software programs across its entire organization, including
applications used in purchasing, distribution, retail store management,
financial business systems and various administrative functions. To the extent
that Dollar Tree's software applications contain source code that is unable to
appropriately interpret the upcoming calendar year "2000" and beyond, some level
of modification or replacement of such applications will be necessary.
Dollar Tree has been evaluating and adjusting all known date-sensitive
systems and equipment for Year 2000 compliance. The Year 2000 project has been
divided into four phases: (1) inventory and initial assessment, (2) remediation
& testing, (3) implementation and (4) contingency planning. The assessment phase
of the Year 2000 project is substantially complete and included both information
technology, such as computer equipment and software, as well as non-information
technology equipment, such as warehouse conveyor systems.
Dollar Tree's plan provides for internal compliance of all mission-critical
systems by mid-1999. Dollar Tree believes that the majority of its internal
systems are currently Year 2000 compliant. Some programs and equipment will be
replaced beginning in late 1998 by routine upgrades which will provide numerous
system enhancements and will be Year 2000 compliant. These upgrades were
previously planned and were not accelerated due to Year 2000 issues. Dollar Tree
has not deferred any information technology projects to address the Year 2000
issue.
Dollar Tree plans to continue to rely primarily on internal resources in
order to identify, correct or reprogram and test systems for Year 2000
compliance. The total costs of modifying Dollar Tree's current systems are not
expected to exceed $500,000. These costs are not expected to have a material
adverse impact on Dollar Tree's financial position, results of operations or
cash flows in future periods.
Additionally, Dollar Tree is in the process of communicating with service
providers and suppliers of merchandise in order to assess their Year 2000
readiness and the extent to which Dollar Tree may be vulnerable to any third
parties' failure to remediate their own Year 2000 issues. Many of these parties
have stated their ability to supply Dollar Tree will not be affected by the Year
2000 issue. However, Dollar Tree cannot assure timely compliance of third
parties and may be adversely affected by failure of a significant third party to
become Year 2000 compliant.
Although Dollar Tree anticipates minimal business disruption will occur as a
result of Year 2000 issues, possible consequences include, but are not limited
to, loss of communications links with store locations, customs delays, loss of
electric power, inability to process transactions, or engage in similar normal
business activities.
89
<PAGE>
To date, Dollar Tree has not established a contingency plan for possible
Year 2000 issues. Where needed, Dollar Tree will establish contingency plans
based on Dollar Tree's actual testing experience and assessment of outside
risks.
The cost of the conversions and the completion dates are based on
management's best estimates and may be updated as additional information becomes
available.
NEW ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board has issued Statements No. 130,
REPORTING COMPREHENSIVE INCOME (SFAS 130), No. 131, DISCLOSURES ABOUT SEGMENTS
OF AN ENTERPRISE AND RELATED INFORMATION (SFAS 131) and No. 133, ACCOUNTING FOR
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES (SFAS 133). SFAS 130 and SFAS 131
are effective for Dollar Tree beginning January 1998 and for the year ended
December 31, 1998, respectively. SFAS 130 is currently not applicable for Dollar
Tree. SFAS 133 is effective for all fiscal quarters of fiscal years beginning
after June 15, 1999. The impact of SFAS 133 is being reviewed by Dollar Tree.
The Accounting Standards Executive Committee of the American Institute of
Certified Public Accountants issued Statement of Position (SOP) 98-5, REPORTING
ON THE COSTS OF START-UP ACTIVITIES, on April 3, 1998. It requires pre-opening
costs to be expensed as incurred for fiscal years beginning after December 15,
1998 and the impact of the implementation of this SOP is not expected to be
material to Dollar Tree's financial results.
90
<PAGE>
SELECTED HISTORICAL FINANCIAL DATA OF STEP AHEAD
The following table sets forth for the periods indicated selected financial
data for Step Ahead. The selected income statement and balance sheet data
presented below for the fiscal years ended January 2, 1994, January 1, 1995,
January 28, 1996, January 26, 1997 and January 25, 1998 have been derived from
Step Ahead Investments, Inc. financial statements that have been audited by
PricewaterhouseCoopers LLP, independent certified public accountants. The
selected income statement and balance sheet data presented below for the fiscal
six months ended July 27, 1997 and July 26, 1998 have been derived from the
unaudited financial statements of Step Ahead Investments, Inc. 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 statement
of the financial data shown. The results of operations for the fiscal six months
ended July 26, 1998 are not necessarily indicative of the results to be expected
for the entire current fiscal year. This information should be read in
conjunction with the financial statements and notes thereto and "Step Ahead
Management's Discussion and Analysis of Financial Condition and Results of
Operations" included in this Prospectus/Proxy Statement.
<TABLE>
<CAPTION>
FISCAL SIX MONTHS ENDED
FISCAL YEAR ENDED
----------------------------------------------------------- ------------------------
JAN. 2, JAN. 1, JAN. 28, JAN. 26, JAN 25, JULY 27, JULY 26,
1994 1995(1) 1996(1) 1997 1998 1997 1998
--------- ----------- ----------- ----------- --------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA
AND SALES PER SELLING SQUARE FOOT DATA)
INCOME STATEMENT DATA:
Net sales.................................... $ 38,457 $ 47,051 $ 55,038 $ 71,263 $ 92,940 $ 41,244 $ 52,430
Cost of sales................................ 29,270 34,918 39,837 50,738 66,696 30,163 37,160
--------- ----------- ----------- ----------- --------- ----------- -----------
Gross profit............................... 9,187 12,133 15,201 20,525 26,244 11,081 15,270
--------- ----------- ----------- ----------- --------- ----------- -----------
Selling, general and administrative expenses:
Operating expenses......................... 10,032 10,173 12,782 16,595 22,006 9,918 12,132
Depreciation and amortization.............. 403 529 651 899 1,332 611 794
--------- ----------- ----------- ----------- --------- ----------- -----------
Total.................................... 10,435 10,702 13,433 17,494 23,338 10,529 12,926
--------- ----------- ----------- ----------- --------- ----------- -----------
Operating income (loss)...................... (1,248) 1,431 1,768 3,031 2,906 552 2,344
Interest expense, net........................ 245 380 358 450 665 299 487
--------- ----------- ----------- ----------- --------- ----------- -----------
Income (loss) before income taxes............ (1,493) 1,051 1,410 2,581 2,241 253 1,857
Provision for income taxes................... 1 48 267 1,068 887 109 725
--------- ----------- ----------- ----------- --------- ----------- -----------
Net income (loss)............................ $ (1,494) $ 1,003 $ 1,143 $ 1,513 $ 1,354 $ 144 $ 1,132
--------- ----------- ----------- ----------- --------- ----------- -----------
--------- ----------- ----------- ----------- --------- ----------- -----------
INCOME (LOSS) PER SHARE DATA(2):
Basic net income (loss) per share............ $ (1.25) $ 0.84 $ 0.95 $ 1.25 $ 1.08 $ 0.11 $ 0.90
--------- ----------- ----------- ----------- --------- ----------- -----------
--------- ----------- ----------- ----------- --------- ----------- -----------
Diluted net income (loss) per share.......... $ (1.25) $ 0.71 $ 0.80 $ 1.05 $ 0.86 $ 0.09 $ 0.69
--------- ----------- ----------- ----------- --------- ----------- -----------
--------- ----------- ----------- ----------- --------- ----------- -----------
Weighted average number of common shares
outstanding, in thousands(2)............... 1,200 1,200 1,201 1,210 1,258 1,253 1,261
--------- ----------- ----------- ----------- --------- ----------- -----------
--------- ----------- ----------- ----------- --------- ----------- -----------
Weighted average number of common shares and
dilutive potential common shares
outstanding,
in thousands(2)............................ 1,200 1,422 1,423 1,439 1,570 1,572 1,643
--------- ----------- ----------- ----------- --------- ----------- -----------
--------- ----------- ----------- ----------- --------- ----------- -----------
</TABLE>
91
<PAGE>
<TABLE>
<CAPTION>
FISCAL SIX MONTHS ENDED
FISCAL YEAR ENDED
----------------------------------------------------------- ------------------------
JAN. 2, JAN. 1, JAN. 28, JAN. 26, JAN 25, JULY 27, JULY 26,
1994 1995(1) 1996(1) 1997 1998 1997 1998
--------- ----------- ----------- ----------- --------- ----------- -----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA
AND SALES PER SELLING SQUARE FOOT DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
SELECTED OPERATING DATA:
Number of stores open at end of period(3).... 30 33 38 48 59 54 62
Net sales growth............................. 25.1% 22.3% 17.0% 29.5% 30.4% 35.9% 27.1%
Comparable store net sales increase
(decrease)(4).............................. (8.3)% 1.5% 3.3% 2.1% 5.9% 6.2% 12.3%
Average net sales per store(5)............... $ 1,280 $ 1,380 $ 1,482 $ 1,504 $ 1,599 $ 754 $ 813
Average net sales per selling square foot(3
and 5)..................................... $ 173 $ 164 $ 164 $ 161 $ 160 $ 76 $ 81
</TABLE>
<TABLE>
<CAPTION>
AS OF
--------------------------------------------------------------------------
JAN. 2 JAN. 1, JAN. 28, JAN. 26, JAN. 25, JULY 27,
1994 1995(1) 1996(1) 1997 1998 1997
--------- ----------- ----------- ----------- ----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital............................... $ 1,084 $ 1,515 $ 1,971 $ 1,323 $ 1,936 $ 1,167
Total assets.................................. 10,879 12,113 16,013 24,537 30,012 28,201
Total debt.................................... 3,367 2,258 5,318 8,686 10,045 9,899
Shareholders' equity.......................... 695 1,698 2,672 4,258 6,127 4,914
<CAPTION>
JULY 26,
1998
-----------
<S> <C>
BALANCE SHEET DATA:
Working capital............................... $ 1,946
Total assets.................................. 31,926
Total debt.................................... 11,964
Shareholders' equity.......................... 7,275
</TABLE>
- ------------------------
(1) Effective January 30, 1995, Step Ahead changed its fiscal year from a
52-week period ending on the Sunday nearest December 31 to the last Sunday
in January. For this reason, the results of operations for the four-week
period ended January 29, 1995 are not included in the results of operations
for the fiscal year ended January 1, 1995 or for the fiscal year ended
January 28, 1996. The audited net loss for this four-week period was $0.169
million.
(2) Basic and diluted income (loss) per share data have been computed by
dividing net income by the weighted average number of common shares
outstanding, and by the weighted average number of common shares and
dilutive potential common shares outstanding, respectively. Dilutive
potential common shares include all outstanding stock options after applying
the treasury stock method unless they would have an antidilutive effect on
net income per share.
(3) Step Ahead closed one store in fiscal 1996. All stores are located in strip
centers or are free standing.
(4) Comparable store net sales increase compares net sales for stores during the
entire two periods compared.
(5) For stores open the entire period presented. Results for the fiscal six
months ended July 26, 1998 may not be indicative of full year average net
sales per store or average net sales per selling square foot due to seasonal
fluctuations in sales. See "Step Ahead Management's Discussion and Analysis
of Financial Condition and Results of Operations--Seasonality and Quarterly
Fluctuations."
92
<PAGE>
STEP AHEAD MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with Step Ahead's
financial statements and notes thereto and the other financial data included
elsewhere in this Prospectus/Proxy Statement.
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>
FISCAL SIX MONTHS
FISCAL YEAR ENDED ENDED
------------------------------------- ------------------------
<S> <C> <C> <C> <C> <C>
JAN. 28, JAN. 26, JAN. 25, JULY 27, JULY 26,
1996 1997 1998 1997 1998
----------- ----------- ----------- ----------- -----------
Net sales............................................... 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales........................................... 72.4 71.2 71.8 73.2 70.9
----- ----- ----- ----- -----
Gross profit.......................................... 27.6 28.8 28.2 26.8 29.1
Selling, general and administrative expenses:
Operating expenses.................................... 23.2 23.3 23.7 24.0 23.1
Depreciation and amortization......................... 1.2 1.3 1.4 1.5 1.5
----- ----- ----- ----- -----
Total............................................... 24.4 24.6 25.1 25.5 24.6
----- ----- ----- ----- -----
Operating income........................................ 3.2 4.2 3.1 1.3 4.5
Interest expense........................................ 0.7 0.6 0.7 0.7 0.9
----- ----- ----- ----- -----
Income before income taxes.............................. 2.5 3.6 2.4 0.6 3.6
Provision for income taxes.............................. 0.4 1.5 0.9 0.3 1.4
----- ----- ----- ----- -----
Net income.............................................. 2.1% 2.1% 1.5% 0.3% 2.2%
----- ----- ----- ----- -----
----- ----- ----- ----- -----
</TABLE>
FISCAL SIX MONTHS ENDED JULY 27, 1997 COMPARED TO THE FISCAL SIX MONTHS ENDED
JULY 26, 1998
Net sales increased $11.2 million, or 27.1%, to $52.4 million for the fiscal
six months ended July 26, 1998, from $41.2 million for the fiscal six months
ended July 27, 1997. Of this increase, (i) approximately 61.6%, or $6.9 million,
was attributable to stores opened in 1997 and 1998 which are not included in
Step Ahead's comparable store net sales calculation, and (ii) approximately
38.4%, or $4.3 million, was attributable to comparable store net sales growth,
which represented a 12.3% increase over comparable store net sales in the
corresponding period of the prior year. Because substantially all Step Ahead's
products sell for 98 CENTS, the increase in comparable store net sales was a
direct result of increased unit volume. Management believes that comparable
store net sales increases were driven primarily by a strong in-stock position,
the impact of a reorganized retail management structure, an improved merchandise
mix, and better merchandising. Step Ahead opened three net new stores during the
fiscal six months ended July 26, 1998, compared to opening six net new stores
during the fiscal six months ended July 27, 1997.
Gross profit, which consists of net sales less cost of sales, increased $4.2
million, or 37.8% to $15.3 million in the fiscal six months ended July 26, 1998
from $11.1 million in the fiscal six months ended July 27, 1997. As a percentage
of net sales, gross profit increased to 29.1% from 26.8%, primarily due to
reduced merchandise costs and a reduction in inventory shrinkage as a percentage
of net sales.
Selling, general and administrative expenses ("SGA"), which include
operating expenses and depreciation and amortization, increased $2.4 million, or
22.8%, to $12.9 million, in the fiscal six months ended July 26, 1998 from $10.5
million in the fiscal six months ended July 27, 1997, and decreased as a
percentage of net sales to 24.6% from 25.5% during the same period in 1997. This
decrease in SGA expense, as a
93
<PAGE>
percentage of net sales, resulted primarily from the expense leverage gained
through increases in
comparable store net sales.
Operating income increased $1.8 million, or 324.6%, to $2.3 million for the
fiscal six months ended July 26, 1998 from $0.6 million for the comparable
period in 1997, and increased as a percentage of net sales to 4.5% from 1.3%
during the same period in 1997 for the reasons noted above.
FISCAL YEAR ENDED JANUARY 26, 1997 COMPARED TO FISCAL YEAR ENDED JANUARY 25,
1998
Net sales increased $21.6 million, or 30.4%, to $92.9 million for fiscal
1997, from $71.3 million for fiscal 1996. Of this increase, (i) approximately
85.9%, or $18.5 million, was attributable to stores opened in fiscal years 1996
and 1997, which are not included in Step Ahead's comparable store net sales
calculation, and (ii) approximately 14.1%, or $3.1 million, was attributable to
comparable store net sales growth, which represented a 5.9% increase over
comparable store net sales for fiscal 1996. Because substantially all of Step
Ahead's products sell for 98 CENTS, the increase in comparable store net sales
was a direct result of increased unit volume. Management believes that
comparable store net sales increases were driven primarily by bolstering
in-stock position. Step Ahead opened 11 net new stores during fiscal 1997,
compared to 10 net new stores opened during fiscal 1996.
Gross profit increased $5.7 million, or 27.9%. As a percentage of net sales,
gross profit decreased to 28.2% from 28.8%, primarily due to an increase in
inventory shrinkage and freight and distribution costs, partially offset by
reduced merchandise costs.
SGA increased $5.8 million, or 33.4%. As a percentage of net sales, SGA
increased to 25.1% from 24.5%, primarily due to reserves established for
wholesale accounts receivable and certain professional fees related to corporate
financing activities.
Operating income decreased $0.1 million, or 4.1%, to $2.9 million for fiscal
1997 from $3.0 million for fiscal 1996, and decreased as a percentage of net
sales to 3.1% from 4.3% during the same period for the reasons noted above.
Interest expense, net increased $0.2 million to $0.7 million in fiscal 1997
compared to $0.5 million in fiscal 1996. This increase was primarily a result of
additional borrowings under Step Ahead's line of credit facility to finance
working capital requirements.
FISCAL YEAR ENDED JANUARY 28, 1996 COMPARED TO FISCAL YEAR ENDED JANUARY 26,
1997
Net sales increased $16.2 million, or 29.5%, to $71.3 million for fiscal
1996, from $55.0 million for fiscal 1995. Of this increase, (i) approximately
94.2%, or $15.3 million, was attributable to stores opened in fiscal years 1995
and 1996, which are not included in Step Ahead's comparable store net sales
calculation, and (ii) approximately 5.8%, or $0.9 million, was attributable to
comparable store net sales growth, which represented a 2.1% increase over
comparable store net sales for fiscal 1995. Because substantially all of Step
Ahead's products sell for 98 CENTS, the increase in comparable store net sales
was a direct result of increased unit volume. Management believes comparable
store net sales increases were driven primarily by a strong in-stock position.
Step Ahead opened 10 net new stores during fiscal 1996, compared to 5 net new
stores opened during fiscal 1995.
Gross profit increased $5.3 million, or 35.0%. As a percentage of net sales,
gross profit increased to 28.8% from 27.6% in 1995 primarily due to reduced
merchandise costs and reduced inventory shrinkage.
SGA increased $4.1 million, or 30.2%. As a percentage of net sales, SGA
remained unchanged at approximately 24.5%.
Operating income increased $1.2 million, or 71.4%, to $3.0 million for
fiscal 1996 from $1.8 million for fiscal 1995, and increased as a percentage of
net sales to 4.3% from 3.2% during the same period for the reasons noted above.
94
<PAGE>
Interest expense, net increased $0.1 million to $0.5 million in fiscal 1996
compared to $0.4 million in fiscal 1995. This increase was primarily a result of
additional borrowings under Step Ahead's line of credit facility to finance
working capital requirements partially offset by lower interest rates in 1996.
LIQUIDITY AND CAPITAL RESOURCES
Step Ahead's ongoing capital requirements result primarily from capital
expenditures related to new store openings and working capital requirements
related to new and existing stores. Step Ahead'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, Step Ahead 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 fiscal years 1995, 1996, 1997 and the fiscal six months ended July
26, 1998, net cash provided by (used in) operations was ($1.9) million, ($1.6)
million, $0.4 million and ($0.6) million, respectively. The net cash used in
operations during fiscal years 1995 and 1996 was used primarily to build
inventory levels for new stores opened. Net cash provided by operating
activities for fiscal 1997 was primarily due to a decrease in the restricted
cash balance, related to the timing of line of credit draw downs, partially
offset by cash used in building inventory levels for new stores opened. Net cash
used in operating activities in the fiscal six months ended July 26, 1998 was
primarily attributable to a reduction in trade accounts payable due to shorter
negotiated terms and generally faster payments to vendors. Net cash used in
investing activities during the same periods was $0.8 million, $2.3 million,
$2.4 million and $1.2 million, respectively. Net cash used in investing
activities consisted primarily of capital expenditures relating to new store
expansion and systems development and hardware costs. Net cash provided by
financing activities during the same periods was $3.2 million, $3.3 million,
$1.9 million and $1.9 million, resulting primarily from changes in Step Ahead's
line of credit used to fund seasonal working capital needs.
In 1997, the average net cash investment per new store, including capital
expenditures, initial inventory and pre-opening costs, was approximately
$277,000 per store. Step Ahead's cash needs for opening new stores in 1998 are
expected to total approximately $1.9 million, $0.9 million of which is budgeted
for capital expenditures and $1.1 million of which is budgeted for initial
inventory and pre-opening costs.
Step Ahead's borrowings under its line of credit facility were $11.3 million
at July 26, 1998, and $9.0 million at July 27, 1997. Under Step Ahead's line of
credit facility, an additional $3.7 million was available at July 26, 1998
subject to borrowing base limitations.
SEASONALITY AND QUARTERLY FLUCTUATIONS
Step Ahead 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 Step Ahead are the Christmas, Halloween
and Easter seasons. A disproportionate amount of Step Ahead's net sales and a
substantial majority of Step Ahead's operating and net income are generally
realized during the fourth quarter. In anticipation of increased sales activity
during these months, Step Ahead purchases substantial amounts of inventory and
hires a significant number of temporary employees to bolster its permanent store
staff. Historically, net sales, operating income and net income have been
weakest during the second and third quarters, and Step Ahead expects this trend
to continue. Step Ahead's quarterly results of operations may also fluctuate
significantly as a result of a variety of factors, including the timing of
certain holidays (including Easter and Halloween) with respect to Step Ahead's
fiscal quarters, the timing of new store openings, the net sales contributed by
new stores and the merchandise mix.
The following table sets forth certain unaudited results of operations for
the last three fiscal quarters of 1996, each fiscal quarter of 1997 and the
first two fiscal quarters of 1998. The unaudited information has been prepared
on the same basis as Step Ahead's audited financial statements included
elsewhere herein
95
<PAGE>
and includes all adjustments, consisting only of normal recurring adjustments,
which management considers necessary for a fair statement of the financial data
shown. The operating results for any quarter are not necessarily indicative of
results for any future period.
<TABLE>
<CAPTION>
FISCAL QUARTER ENDED
------------------------------------------------------------------------------------------------------
JULY 28, OCT. 27, JAN. 26, APR. 27, JULY 27, OCT. 26, JAN. 25, APR. 26,
1996 1996 1997 1997 1997 1997 1998 1998
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
Net sales................. $ 15,758 $ 17,203 $ 23,715 $ 20,402 $ 20,842 $ 22,799 $ 28,897 $ 25,862
Gross profit.............. 4,491 4,801 7,014 5,434 5,646 6,235 8,929 7,696
Operating income.......... 384 349 1,867 347 202 383 1,974 1,528
Stores open at end of
period.................. 42 45 48 52 54 58 59 59
Comparable store net sales
increases............... 3.0% 3.0% 6.4% 4.6% 7.7% 3.2% 6.8% 12.1%
<CAPTION>
JULY 26,
1998
-----------
<S> <C>
Net sales................. $ 26,568
Gross profit.............. 7,574
Operating income.......... 816
Stores open at end of
period.................. 62
Comparable store net sales
increases............... 12.5%
</TABLE>
INFLATION AND OTHER ECONOMIC FACTORS
Step Ahead's ability to provide quality merchandise at the 98 CENTS price
point is subject to certain economic factors which are beyond Step Ahead's
control, including inflation, minimum wage levels, operating costs, consumer
confidence and general economic conditions. There can be no assurance that such
factors will remain favorable and in particular that either hourly minimum wage
rates or other costs will remain at current levels. See "Risk Factors--Risks
Related to Step Ahead--Adverse Economic Factors."
YEAR 2000 COMPLIANCE
Step Ahead utilizes a number of in-house and vendor-supplied computer
software programs across its organization, including applications used in
managing, purchasing, distribution, retail store operations and financial
reporting. To the extent that Step Ahead's software applications contain source
code that is unable to appropriately interpret the upcoming calendar year "2000"
and beyond, some level of modification or replacement of such applications will
be necessary.
Step Ahead's Year 2000 Compliance Project is being managed on a discrete
project basis as opposed to project phases. Step Ahead is performing assessment,
remediation, testing, implementation and contingency planning simultaneously for
each individual system component. Step Ahead has received confirmations of Year
2000 compliance for most vendor-supplied software applications and Step Ahead's
custom developed software applications are Year 2000 compliant. Management
estimates that its Year 2000 Compliance Project is 80% complete and expects to
finish it by the fall of 1999. The primary tasks open for completion include
expanding certain reports, training employees on date sorting issues, and
testing and upgrading certain personal computers. Step Ahead has spent less that
$20,000 addressing Year 2000 issues through September 1998.
Step Ahead will continue to rely on internal and external resources in order
to identify, correct or reprogram and test systems for Year 2000 compliance
consistent with its past systems development efforts. The total costs of this
review and related remediation are not expected to exceed $100,000.
Step Ahead is in the process of contacting its key vendors to determine if
those vendors are Year 2000 compliant. It expects to complete its evaluation by
mid-1999.
Although Step Ahead anticipates minimal business disruption will occur as a
result of Year 2000 issues, possible consequences include, but are not limited
to, loss of communications links with store locations, loss of electric power,
inability to process transactions or inability to engage in normal store
operations. If Step Ahead fails to correct Year 2000 issues in its
mission-critical systems, it would be required to process inventory and certain
other transactions manually until the systems were remediated. Undetected issues
could be severe enough to warrant the installation of new Year 2000 compliant
vendor-supplied applications which could disrupt the flow of merchandise to
stores and negatively impact sales.
96
<PAGE>
Step Ahead estimates that it could cost up to $1 million to purchase and install
the appropriate software and hardware.
To date, Step Ahead has not established a contingency plan for possible Year
2000 issues. Where needed, Step Ahead will establish contingency plans based on
Step Ahead's actual testing experiences and assessment of outside risks.
The cost of testing, remediation and replacement and the completion dates
are based on management's best estimates and may be updated as additional
information becomes available.
NEW ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board has issued Statements No. 130,
REPORTING COMPREHENSIVE INCOME (SFAS 130), No. 131, DISCLOSURES ABOUT SEGMENTS
OF AN ENTERPRISE AND RELATED INFORMATION (SFAS 131) and No. 133, ACCOUNTING FOR
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES (SFAS 133). SFAS 130 and SFAS 131
are effective for Step Ahead beginning in fiscal 1998. SFAS 130 is currently not
applicable for Step Ahead. SFAS 133 is effective for fiscal quarters of fiscal
years beginning after June 15, 1999. The impact of SFAS 133 is being reviewed by
Step Ahead.
The Accounting Standards Executive Committee of the American Institute of
Certified Public Accountants issued Statement of Position (SOP) 98-5, REPORTING
ON THE COSTS OF START-UP ACTIVITIES, on April 3, 1998. It requires pre-opening
costs to be expensed as incurred for fiscal years beginning after December 15,
1998.
97
<PAGE>
INFORMATION CONCERNING DOLLAR TREE
BUSINESS
OVERVIEW
Dollar Tree was established in 1986 by J. Douglas Perry, Dollar Tree's
Chairman, Macon F. Brock, Jr., Dollar Tree's President and Chief Executive
Officer, and H. Ray Compton, Dollar Tree's Executive Vice President (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.
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, Dollar Tree 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 Dollar Tree'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 Dollar Tree's expansion program and (iv) improving
the depth of the management team and breadth of operational controls.
Dollar Tree has opened over 90 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. Dollar Tree
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.
BUSINESS STRATEGY
Dollar Tree's goal is to continue its leadership position in the $1.00 price
point segment of the discount retail industry. Factors contributing to the
success of Dollar Tree's operations 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. Dollar Tree is able to offer
such value in part by purchasing a substantial portion of its products directly
from foreign manufacturers, allowing Dollar Tree 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. Dollar Tree 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. Closeouts comprise no more than 15% of merchandise purchased at
cost. Dollar Tree also
98
<PAGE>
takes advantage of the availability of lower priced, private label goods, which
are comparable to national name brands.
STRONG AND CONSISTENT STORE LEVEL ECONOMICS. Dollar Tree 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. Dollar Tree's stores have historically been profitable
within the first full year of operation, with an average store level operating
income of approximately $163,000 (approximately 22% of net sales) for stores
whose first full year of operation was 1997. In addition, the operating
performance of Dollar Tree's stores has been very consistent, with over 90% of
Dollar Tree's stores opened for the entire year having store level operating
income margins in excess of 15% for 1997.
COST CONTROL. Given Dollar Tree's pricing structure, Dollar Tree believes
that maintaining sufficient 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. In the past five years, Dollar Tree has maintained
gross profit margins in the 36.5% to 37.5% range and increased its operating
income margin from 11.2% (excluding recapitalization expenses) to 12.9%. In
1996, as a result of the Dollar Bills acquisition, gross profit margin was
slightly impacted by a shift in merchandise mix toward higher levels of
domestic, consumable merchandise (for instance, food and health and beauty
aids), which generally carry a higher merchandise cost. In 1997, gross profit
margin returned to levels experienced prior to the acquisition.
EXPERIENCED RETAIL MANAGEMENT TEAM. Each of Dollar Tree's three senior
executive officers, Macon F. Brock, Jr., J. Douglas Perry and H. Ray Compton,
has between 19 and 29 years of experience in the retail industry, and they have
worked together for the past 19 years. Additionally, Dollar Tree's ten Vice
Presidents have significant experience in their areas of operational expertise.
GROWTH STRATEGY
The primary factors contributing to Dollar Tree's net sales growth have been
new store openings and comparable store net sales increases, as well as the
January 1996 acquisition of Dollar Bills. For the five years ended December 31,
1997, net sales increased at a compound annual growth rate of 39.5% and
operating income increased at a compound annual growth rate of 44.4%. 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. Management anticipates
expanding by approximately 200 to 205 stores in 1998, 167 of which have been
added as of September 30, 1998. Dollar Tree's expansion plans include increasing
its presence in its existing markets to take advantage of market opportunities
and efficiencies in distribution and field management and selectively entering
new markets. Management believes that any future increases in comparable store
net sales may be smaller than those experienced historically, and that decreases
in average net sales per selling square foot will occur as the average store
size increases.
Dollar Tree's real estate strategy allows Dollar Tree 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.
Dollar Tree is currently concentrating on strip center locations anchored by
strong mass merchandisers such as Wal-Mart, Kmart and Target, whose target
customers management believes are similar to those of Dollar Tree. Although
strip center locations typically have lower sales per selling 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.
99
<PAGE>
MERCHANDISING AND STORE FORMAT
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. Dollar Tree 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 MIX. Management believes its merchandise mix differentiates
Dollar Tree from other discount variety stores selling at the $1.00 price point.
Dollar Tree'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, seasonal
goods, food, toys, health and beauty aids, gifts, party goods, stationery,
books, hardware and other consumer items.
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. Dollar Tree 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 15%.
When the opportunity presents itself, Dollar Tree purchases items which it
prices at two for $1.00. These items provide sufficient value to the customer
without compromising Dollar Tree'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.
During 1996, the merchandise mix at the Dollar Bills stores was adjusted to
more closely reflect the broad variety traditionally offered by Dollar Tree. In
turn, the merchandise mix at the Dollar Tree stores was supplemented with
increased domestic consumable products of the type normally carried at the
Dollar Bills stores.
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 as well as real value to its
customers while maintaining target merchandise margins in its purchasing program
is critical to its success.
Dollar Tree purchases merchandise from 650 to 750 vendors annually, buying
both directly from manufacturers and indirectly from trading companies and
brokers. No vendor accounted for 10% or more of total merchandise purchased in
any of the last five calendar years. New vendors are used frequently to offer
competitive, yet varied, product selection and to maintain high levels of value.
Dollar Tree 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 Dollar Tree at
$1.00, management believes that such merchandise will be available in sufficient
quantities to meet Dollar Tree's plans for future growth.
In 1996 and 1997, Dollar Tree imported approximately 32% and 34%,
respectively, of its merchandise based on cost and approximately 35% and 38%,
respectively, of its merchandise based on retail, directly from vendors located
abroad, primarily in Hong Kong and Taiwan (through which Dollar Tree's Chinese
imports flow), Thailand, Italy, Mexico and Indonesia. Dollar Tree expects
imports to continue to account for approximately 35% to 40% of total purchases
at retail. In addition, Dollar Tree believes that a substantial portion of the
goods Dollar Tree purchases from domestic vendors is indirectly imported from
foreign countries. China is the source for a substantial majority of Dollar
Tree's direct imports and, Dollar
100
<PAGE>
Tree believes, is also the largest source of its indirect imports. See "Risk
Factors--Risks Related to Dollar Tree--Risks Associated with Imports."
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 and
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 and Store Opener Group to coordinate visual presentation in
stores throughout the chain and expedite the store opening process. Dollar Tree
relies on attractive exterior signage and in-store merchandising as its primary
form of advertising and generally does not utilize other forms of advertising.
Merchandise is displayed in densely stocked bins and shelves 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. 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.
Centralized check-out at the front of the store and the even-dollar pricing
policy ensure that customers are not kept waiting. Dollar Tree does not have a
point-of-sale system, and credit cards are not accepted.
SITE SELECTION AND STORE LOCATIONS
Dollar Tree maintains a disciplined, cost-sensitive approach to site
selection, favoring strip centers and selected enclosed malls. In the last five
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. Dollar Tree favors opening new stores in
strip center locations anchored by strong mass merchandisers such as Wal-Mart,
Kmart and Target, whose target customers management believes are similar to
those of Dollar Tree. Dollar Tree has also begun to open more stores in
neighborhood centers anchored by large grocery retailers. 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. Management believes that its
stores have a relatively small shopping radius, which permits the concentration
of multiple stores in a single market. Dollar Tree's ability to open new stores
is contingent upon, among other factors, locating suitable sites and negotiating
favorable lease terms.
The prototype for Dollar Tree stores is currently between 4,000 and 4,500
square feet per store, of which approximately 85% to 90% represents selling
space. This represents a substantial increase over the company-wide average of
approximately 3,500 square feet per store prior to the introduction of the
current prototype.
As of September 30, 1998, Dollar Tree operated 1,054 stores in 29 states,
789 of which were located in strip centers (including certain non strip center,
urban based Dollar Bills stores) and 265 of which were located in malls. Of the
strip center based stores, 376 were located in strips with Wal-Mart, 114 with
Kmart and 74 with Target.
101
<PAGE>
Dollar Tree currently leases all of its existing store locations and expects
that its policy of leasing rather than owning will continue as it expands.
Dollar Tree's leases typically provide for a short initial lease term with
options on the part of Dollar Tree to extend. Management believes that this
lease strategy enhances Dollar Tree's flexibility to pursue various expansion
and relocation opportunities resulting from changing market conditions. Dollar
Tree'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, Dollar Tree 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,
Dollar Tree has not experienced difficulty in either renewing leases for
existing locations or securing leases for suitable locations for new stores. A
substantial number of Dollar Tree's store leases contain certain provisions
related to changes in control of Dollar Tree. These provisions may arguably be
applicable in a substantial number of Dollar Tree'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 Dollar Tree Common Stock and
this Merger. Many of Dollar Tree's leases contain provisions with which Dollar
Tree does not comply, including provisions requiring purchase of insurance upon
leasehold improvements and/ or property located in the stores, requiring Dollar
Tree to advertise or prohibiting Dollar Tree from operating another store within
a specified radius. Based primarily on Dollar Tree'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 Dollar Tree's failure to comply with these provisions
will not have a material adverse effect on the business or financial position of
Dollar Tree.
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. Dollar
Tree 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. The corporate office is home of "Dollar Tree University," where field
and store managers receive extensive training.
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.
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 Dollar Tree's field organization, Dollar Tree has in place bonus plans
for certain groups, including Regional Managers, Field Merchandisers, District
Managers, Store Managers and Associate Store Managers. Compensation under the
various bonus plans is 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 Dollar Tree's Employee Stock Purchase Plan and its 401(k) and
profit sharing plan. In addition, medical and dental insurance are available to
eligible employees.
WAREHOUSING AND DISTRIBUTION
Warehousing and distribution are managed centrally by Dollar Tree from its
corporate headquarters, which are located on the same site as its Chesapeake
distribution center. Dollar Tree views maintaining
102
<PAGE>
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 Dollar Tree continues its expansion, it intends to open new units
in regions around its distribution centers.
The Chesapeake distribution center consists of 400,000 square feet; the
Memphis distribution center encompasses 244,000 square feet; and the Chicago
distribution center comprises 250,000 square feet. Dollar Tree believes its
distribution centers have the capacity to service 1,600 stores. Dollar Tree owns
its Chesapeake Store Support Center, constructed in 1997, and continues to lease
its former Norfolk distribution center. The lease expires in December 2009 and
the facility has been subleased. The distribution center in Memphis is also
leased; this lease expires in September 2005, with four additional five-year
terms available. Additionally, Dollar Tree leases the Chicago distribution
center; this lease expires in June 2005, with certain options to renew.
Dollar Tree recently replaced its Norfolk distribution facility and
headquarters with a new Store Support Center, located in Chesapeake, Virginia,
consisting of a distribution center and headquarters facility. The new
distribution center contains advanced materials handling technologies, including
a new automated conveyor and sorting system, radio-frequency inventory tracking
equipment, improved racking and specialized information systems designed to
improve inventory movement and controls. The distribution facility became
operational in January 1998. The distribution center is currently servicing
approximately 525 stores, and management anticipates it will service
approximately 535 to 540 stores by the end of 1998, with an expected ultimate
capacity of 800 stores.
In March 1998, Dollar Tree purchased approximately 43 acres of land in Olive
Branch, Mississippi, for the purpose of building a new distribution center to
replace the existing facility located in Memphis, Tennessee. The new facility
will be modeled after the recently completed Chesapeake distribution center and
will contain similar advanced materials handling technologies. The Olive Branch
facility will be approximately 425,000 square feet and is expected to require an
investment of approximately $20 million. Management believes that, upon
completion of this facility, Dollar Tree's capacity to service stores will
increase to approximately 2,000 stores. Dollar Tree believes that the facility
will be operational in early 1999. There can be no assurance, however, that
delays will not be experienced in opening the distribution center, or that
complications will not be experienced in its operation, including the
integration of the new automated conveyor and sorting system. Any such delays or
complications may result in significant interruption in the distribution of
merchandise and materially adversely affect Dollar Tree's business and results
of operations. See "Risk Factors--Risks Related to Dollar Tree--Risks Associated
with New Distribution Centers," "Risk Factors--Risks Related to Dollar
Tree--Disruptions in Receiving and Distribution" and "Dollar Tree Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Results of Operations."
Substantially all of Dollar Tree's inventory is shipped directly from
suppliers to Dollar Tree's distribution centers. Dollar Tree's substantial
distribution center capacity allows Dollar Tree to receive manufacturers' early
shipment discounts and buy large quantities of goods at favorable prices. In
addition, during the past several years Dollar Tree has utilized offsite
facilities to accommodate large shipments of seasonal merchandise. Since the
distribution centers maintain back-up inventory and provide weekly delivery to
each store, in-store inventory requirements are reduced and Dollar Tree 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 Dollar Tree's
distribution group. Dollar Tree'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
103
<PAGE>
anticipated inventory requirements for each week and communication via telephone
or electronic mail between store managers and the distribution group. Dollar
Tree has the ability to make two weekly deliveries to high volume stores during
the busy Christmas season.
Dollar Tree's distribution fleet consists of 31 leased tractors and 62 owned
or leased trailers. The majority of Dollar Tree's inventory is delivered to the
stores by contract carriers. Dollar Tree's 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. Dollar Tree is continuously
looking for opportunities to reduce its freight and distribution costs and
periodically evaluates various delivery options.
MANAGEMENT INFORMATION SYSTEMS
Dollar Tree's management information systems allow it to monitor its
merchandising, inventory, distribution and operating expenses centrally at its
Chesapeake Store Support Center. These systems allow Dollar Tree to support its
stores efficiently, manage inventory turnover, and provide detailed financial
reporting to support management's operational decisions and cost control
efforts. Dollar Tree does not have a point-of-sale system. See "Dollar Tree
Management's Discussion and Analysis of Financial Condition and Results of
Operations--Year 2000 Compliance."
COMPETITION
The retail industry is highly competitive. Dollar Tree'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 Lots and Big
Lots) and other $1.00 price point stores. In January 1996, Dollar Tree acquired
all of the stock of one of its competitors, Dollar Bills. Several of the largest
operators of discount stores at the $1.00 price point (or their parent
companies) have filed for or emerged from bankruptcy protection in U.S.
bankruptcy court and have closed a number of their stores, while others have
liquidated in bankruptcy, abandoned the $1.00 price point concept, and/or
reconfigured their stores. Dollar Tree expects to face increased competition in
the future which could have an adverse effect on its financial results.
TRADEMARKS
Dollar Tree 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 Dollar Tree's stores operate under the name "Only $1.00," for
which Dollar Tree has not obtained a service mark registration; if it were
required to change the name of these stores, Dollar Tree does not believe that
this would have a material adverse effect on its business. Additionally, with
the acquisition of Dollar Bills in January 1996, Dollar Tree became the owner of
various Federal service mark registrations, including a concurrent use
registration for "Dollar Bill$" and the related logo which expire in 2005.
During 1997, Dollar Tree acquired the rights to use trade names previously owned
by Everything's A Dollar, a former competitor in the $1.00 price point industry.
Several trade names were included in the purchase, including the marks
"Everything's $1.00," the registration of which is pending, and "The Dollar
Store," the registration of which expires in 2001. Dollar Tree also occasionally
uses various brand names under which it markets products, although management
believes that these brand names are not material to Dollar Tree's operations.
EMPLOYEES
Dollar Tree employed approximately 12,000 employees at September 30, 1998,
approximately 3,600 of whom were full-time and 8,400 part-time. The number of
part-time employees fluctuates depending on seasonal needs. None of Dollar
Tree's employees is currently represented by a labor union. On March 31, 1994
and March 20, 1996, the employees of Dollar Tree's Norfolk distribution center
voted against union representation by the International Brotherhood of Teamsters
in elections certified by the National Labor
104
<PAGE>
Relations Board. Within the last several months, the Teamsters have actively
attempted to organize Dollar Tree's employees at its Chesapeake and Chicago
distribution centers. There can be no assurance that Dollar Tree's employees at
any of its three distribution centers will not in the future elect to be
represented by a union. Dollar Tree considers its relationship with employees to
be good and has not experienced significant interruptions of operations due to
labor disagreements.
LEGAL PROCEEDINGS
Dollar Tree is engaged in a dispute with the former owners of Dollar Bills
and is subject to potential product liability claims. See "Risk Factors--Risks
Related to Dollar Tree--Legal Claims." Dollar Tree is also a party to ordinary
routine litigation and proceedings incidental to its business, including certain
matters which may occasionally be asserted by the Consumer Product Safety
Commission, none of which is individually or in the aggregate material to Dollar
Tree.
105
<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 Dollar Tree:
<TABLE>
<CAPTION>
DIRECTORS AND EXECUTIVE
OFFICERS AGE OFFICE
- ---------------------------- ----- --------------------------------------------------------
<S> <C> <C>
Macon F. Brock, Jr. ........ 56 President and Chief Executive Officer; Director
J. Douglas Perry............ 51 Chairman of the Board; Director
H. Ray Compton.............. 55 Executive Vice President; Director
John F. Megrue.............. 40 Vice Chairman of the Board; Director
Frederick C. Coble.......... 37 Senior Vice President, Chief Financial Officer
Allan W. Karp............... 43 Director
Thomas A. Saunders, III..... 62 Director
Alan L. Wurtzel............. 65 Director
Frank Doczi................. 61 Director
CERTAIN KEY PERSONNEL
- ----------------------------
Thomas J. Bowyer............ 39 Senior Vice President, Sales and Operations
K. Bryan Bagwell............ 39 Vice President, Merchandise
Robert G. Gurnee............ 38 Vice President, Real Estate
G. Zeb Holt................. 49 Vice President, Corporate Development
Stephen M. Miller........... 41 Vice President, Allocation and Replenishment
Charles S. Murray........... 49 Vice President, Human Resources
Darcel L. Stephan........... 41 Vice President, Information Systems
Stephen W. White............ 43 Vice President, Logistics
</TABLE>
DIRECTORS AND EXECUTIVE OFFICERS
MACON F. BROCK, JR. has been Chief Executive Officer of Dollar Tree since
1993 and a Director and President of Dollar Tree since 1986 when he founded
Dollar Tree with Mr. Perry and Mr. Compton. He also serves on the Board of
Directors for First Union National Bank of Virginia/Maryland/Washington, D.C.
Mr. Brock directs the overall operations of Dollar Tree which 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 29
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.
J. DOUGLAS PERRY has been a Director and Chairman of the Board of Dollar
Tree since 1986 when he founded Dollar Tree with Mr. Brock and Mr. Compton. Mr.
Perry reduced his responsibilities for day to day management when he elected to
work on a part-time basis beginning May 1, 1998. However, he continues his
active role as Chairman and Director. He also serves on the Board of Directors
of Old Dominion Trust 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 29 years of retail
experience. Mr. Perry attended Old Dominion University.
H. RAY COMPTON has been a Director and Executive Vice President of Dollar
Tree since 1986 when he founded Dollar Tree with Mr. Perry and Mr. Brock. From
1986 until April 1998, he served as Dollar Tree's Chief Financial Officer. From
1979 until 1991 Mr. Compton was employed in a similar role with K&K Toys. He
also serves on the Board of Directors of Hibbett Sporting Goods, Inc. 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.
106
<PAGE>
JOHN F. MEGRUE has been a Director and Vice Chairman of the Board of Dollar
Tree since September 1993. He also serves as Chairman of the Board and a
director of Hibbett Sporting Goods, Inc. and a director of The Children's Place
Retail Stores, Inc. Mr. Megrue has been a partner of SKM Partners, L.P., which
serves as the general partner of Saunders Karp & Megrue 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.
FREDERICK C. COBLE became Senior Vice President, Chief Financial Officer of
Dollar Tree in April 1998. Prior thereto he served as Senior Vice President,
Finance from January 1997 and as Vice President, Controller from December 1991.
Mr. Coble also, prior to joining Dollar Tree in December 1989, 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.
ALLAN W. KARP has been a Director of Dollar Tree since September 1993. Mr.
Karp has been a partner of SKM Partners, L.P., which serves as the general
partner of Saunders Karp & Megrue and the Fund, since 1990. Before founding
Saunders Karp & Megrue, 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 Dollar Tree since September
1993. He also serves on the Board of Directors of Hibbett Sporting Goods, Inc.
Mr. Saunders has been a partner of SKM Partners, L.P., which serves as the
general partner of Saunders Karp & Megrue and the Fund, since 1990. Before
founding Saunders Karp & Megrue, Mr. Saunders served as a Managing Director of
Morgan Stanley & Co. from 1974 to 1989. Mr. Saunders is the Vice President of
the Board of Visitors of the Virginia Military Institute. He is also a Trustee
of the University of Virginia's Darden Graduate School of Business
Administration. Mr. Saunders is a Trustee of The Thomas Jefferson Memorial
Foundation (Monticello) and Vice Chairman and 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 Dollar Tree 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 was a director
of Office Depot, Inc. from 1989 to 1996. Mr. Wurtzel has 31 years of retail
experience. He is a graduate of Oberlin College and Yale Law School.
FRANK DOCZI has been a Director of Dollar Tree 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.
107
<PAGE>
CERTAIN KEY PERSONNEL
THOMAS J. BOWYER became Senior Vice President, Sales and Operations of
Dollar Tree 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.
K. BRYAN BAGWELL became Vice President, Merchandise of Dollar Tree 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 Dollar Tree
from October 1991 to March 1993. Before joining Dollar Tree, Mr. Bagwell worked
for K&K Toys from 1977 to October 1991, starting as a distribution center
associate and leaving as a senior buyer.
ROBERT G. GURNEE became Vice President, Real Estate of Dollar Tree in
November 1997. Previously, he served as Director of Real Estate from July 1995
to November 1997 and as Director of Budgeting and Analysis from January 1994 to
July 1995. Before joining Dollar Tree, Mr. Gurnee was employed as Project
Development Manager and as Controller for Armada/Hoffler Enterprises and
Goodman, Segar, Hogan, Hoffler from 1986 to 1993. From 1982 to 1986, Mr. Gurnee
was employed as Tax Supervisor for KPMG Peat Marwick LLP. Mr. Gurnee is a
graduate of the University of Virginia and is a Certified Public Accountant.
G. ZEB HOLT joined Dollar Tree in February 1998 as Vice President, Corporate
Development. Before joining Dollar Tree, he was an Executive Vice President with
Signet Banking Corporation where he served on the executive steering committee
and was responsible for managing general bank operations, retail delivery and
corporate cash management services. During his 18 years at Signet, he managed
commercial and consumer lending and credit risk services and served as Regional
Executive for the Hampton Roads region from 1987 to 1991. Mr. Holt graduated
from Randolph Macon College in 1971 and received his M.B.A. from Virginia
Polytechnical Institute in 1978.
STEPHEN M. MILLER became Vice President, Allocation and Replenishment of
Dollar Tree in September 1998. Previously, he served as Director of Merchandise
Administration from December 1993, having joined Dollar Tree as a Store Manager
in 1987. Prior thereto, Mr. Miller held store management positions with F. W.
Woolworth and Gray Drug Fair. Mr. Miller obtained an Associate of Science degree
from Ohio University in 1987.
CHARLES S. MURRAY became Vice President, Human Resources of Dollar Tree in
January 1998. Previously, he served as Director of Human Resources from May
1997. Before joining Dollar Tree, Mr. Murray worked as Vice President, Human
Resources, for McCrory Corporation from 1996 to 1997. Prior work experience also
includes Director, Human Resources, for Woolworth Corporation, and Vice
President for Afterthoughts, a retail company. Mr. Murray graduated from the
University of Dayton in 1971.
DARCEL L. STEPHAN became Vice President, Information Systems of Dollar Tree
in September 1989. Prior thereto, she served as Data Processing Director from
February 1987 to September 1989. Before joining Dollar Tree, 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.
STEPHEN W. WHITE became Vice President, Logistics in December 1995 after
having joined Dollar Tree in June 1994 as Director of Transportation and
Distribution. Prior to joining Dollar Tree, he served as Director of
Transportation and Distribution Planning for Ames Department Stores from July
1986 to June 1994. His previous work experience includes 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.
108
<PAGE>
INFORMATION CONCERNING STEP AHEAD
BUSINESS
HISTORY
Gary and Janet Cino founded Step Ahead in 1983 to operate a closeout and
liquidation merchandise business in Sacramento, California. In 1985, after
observing the success of 99 Cents Only Stores in southern California, Mr. Cino
changed the focus of Step Ahead when he opened Step Ahead's first 98 CENTS
Clearance Center retail store in Sacramento. By the end of 1987, Step Ahead had
opened four stores in the Sacramento area. In November 1992, Step Ahead
completed the private placement of 221,700 shares of Step Ahead Preferred Stock
at a price of $10 per share. These shares were issued to retire trade and notes
payable, as partial consideration to purchase Step Ahead's office and warehouse
facility, and for working capital. By the end of fiscal 1993, Step Ahead
expanded to 30 stores and the working capital and infrastructure necessary to
support this rapid growth resulted in a fiscal 1993 net loss of $1.5 million.
From fiscal 1994 through fiscal 1997, Step Ahead opened 29 net new stores and
earned a profit in every year.
Step Ahead's net sales and net income have grown from $55.0 million and $1.1
million, respectively, in fiscal year 1995 to $71.3 million and $1.5 million,
respectively, in fiscal year 1996, and to $92.9 million and $1.4 million,
respectively, in fiscal year 1997. Step Ahead has opened 26 net new stores over
its last three fiscal years. On September 30, 1998, it operated 63 98 CENTS
Clearance Center stores and plans to open an additional 3 stores by the end of
1998. 98 CENTS Clearance Center stores can be found in major metropolitan areas,
mid-size cities and small towns. In locating its stores, Step Ahead has
historically focused on strip centers and, to a lesser extent, free-standing
locations next to or in close proximity with high volume grocery stores,
warehouse food clubs, drug stores, or discount variety stores whose target
customers are similar to those of Step Ahead.
STEP AHEAD'S COMPETITIVE STRENGTHS
Step Ahead's strategy has been to position itself as a destination store
with an attractive selection of merchandise in a relatively large store format,
emphasizing consumable necessities in the pre-packaged food and beverage, health
and beauty aid and household product categories as well as traditional variety
store product categories. Step Ahead's management believes its competitive
strengths include:
VALUE OFFERING. Step Ahead offers customers a wide range of quality
products for 98 CENTS or less. Management believes that Step Ahead offers value
to its customers through its closeout purchases, which management estimates at
approximately 25% of its product mix. Step Ahead's buyers and vendors work
together closely to specify, design and produce special product packaging and
sizing, identify products that customers need and desire, and negotiate a price
that results in value for the customer.
MERCHANDISE MIX. Step Ahead offers consumable as well as variety store
products with a constantly changing array of impulse items, all at a price of
98 CENTS or less. Approximately 43% of Step Ahead's products are consumables,
with a significant portion of the food and beverage as well as health and beauty
aid categories consisting of national brand name products. Step Ahead
supplements its core of consumable products with a changing mix of variety store
products, including seasonal goods such as summer toys, back to school products
and holiday merchandise.
STORE ECONOMICS. Historically, 98 CENTS Clearance Center stores have earned
a profit within the first full year of operation. Stores open more than one year
had an average store level operating income of approximately $269,000 or 16.8%
of net sales in fiscal 1997. Over 76% of stores open for the entire 1997 fiscal
year had store level operating income margins greater than 14%, with the median
store operating income margin at 17.7%.
COST CONTROL. Given Step Ahead's pricing structure, management maintains
tight control over store expenses, corporate expenses and inventories. Step
Ahead closely manages both inventory shrinkage and
109
<PAGE>
markdowns of inventory, which in total have averaged less than 2% of annual net
sales over the last five years. Over the past five years, Step Ahead has
maintained gross profit margins in the 23.9% to 28.8% range and increased its
operating income margin from (3.2%) to 3.1%.
WHOLESALE OPERATIONS. Step Ahead sells approximately 1% of the products it
purchases on a wholesale basis, which allows its buyers to take advantage of
large volume buying opportunities. Step Ahead also sells an additional 4% of the
products it purchases to stores owned by two other retailers that purchase a
substantial majority of their merchandise from Step Ahead under wholesale supply
agreements.
SALES GROWTH. The primary factors contributing to Step Ahead's net sales
growth have been new store openings and comparable store net sales increases.
For the five years ended January 25, 1998, net sales increased at a compound
annual growth rate of 24.8%.
MERCHANDISING AND STORE FORMAT
Step Ahead believes it exceeds customers' expectations as to the value of
products available for 98 CENTS or less by offering a wide assortment of
consumable products as well as changing products in traditional variety store
categories. In addition to its consumable products, Step Ahead believes that it
inspires customer loyalty by emphasizing effective presentation of merchandise
and offering extra value closeout merchandise.
MERCHANDISE MIX. Step Ahead offers products in the following categories:
prepackaged foods (including snacks and candy), beverages (primarily soft
drinks, but including beer, wine coolers and wine at some locations), health and
beauty aids, seasonal products, household cleaning products, housewares, toys,
books, hardware, stationary, novelties, and gifts. The average 98 CENTS
Clearance Center store stocks 3,500 to 4,000 SKUs. Approximately 43% of Step
Ahead's product mix consists of consumables, with over 60% of its consumables
consisting of food and beverage items. Many of Step Ahead's products boast
national brand names such as Pepsi-Registered Trademark-, General
Mills-Registered Trademark-, Maxell-Registered Trademark-,
M&M/Mars-Registered Trademark-, Eveready-Registered Trademark-, Proctor &
Gamble-Registered Trademark-, and New York Times Bestseller books. Although Step
Ahead stocks consumable product categories on a continuous basis, the number of
national brand names offered within a category vary depending on the particular
closeout purchase opportunities existing at that time. Step Ahead also believes
that many of its customers who seek bargain purchases will purchase a type of
product rather than a particular brand name and, as a result, Step Ahead offers
a variety of lower priced, private label goods.
PURCHASING. Management believes that its relationships with its suppliers
and the exclusive focus of its buying power at the 98 CENTS price point allow
Step Ahead to negotiate competitive pricing terms for the merchandise it
purchases. Step Ahead's purchasing department consists of five buyers, managed
by the Executive Vice President of Merchandising, Anthony Leon. Gary Cino has
also contributed significantly towards Step Ahead's purchasing activities. Step
Ahead purchases merchandise from 500 to 600 vendors annually, buying directly
from the manufacturers, wholesalers, manufacturers' representatives, importers,
barter companies, auctions, professional finders and other retailers, and
develops new sources of merchandise by attending industry trade shows and
referrals. Step Ahead has no continuing contracts for the purchase of
merchandise and must continually seek out buying opportunities from both
existing suppliers and new sources. No vendor accounted for more than 4% of
total merchandise purchased in any of the last two fiscal years.
Management estimates that approximately 25% of Step Ahead's products
represent closeout merchandise. Closeouts become available for a variety of
reasons, including a manufacturer's overproduction, discontinuance of
merchandise due to a change in style, color, size, formulation or packaging,
inability to move merchandise effectively through regular channels, reduction in
excess seasonal inventory, discontinuance of test-marketed items and financial
need. Although only approximately 3% of Step Ahead's merchandise is purchased
directly from foreign sources, management believes that overseas manufacturers
produce a significant portion of the variety products that Step Ahead purchases
from domestic vendors.
110
<PAGE>
There can be no assurance as to the availability of a continuing and increasing
supply of quality merchandise at a margin to allow for retail pricing at
98 CENTS.
MERCHANDISING. Step Ahead's management believes that merchandise
presentation must communicate both value and excitement to Step Ahead's
customers. 98 CENTS Clearance Center stores are attractively designed with
uniform decorative signage and accent lighting. The stores are open and tiled
and provide background music, helping to create an inviting atmosphere for
shoppers. Step Ahead uses a variety of adaptable merchandising fixtures,
including steel gondola shelving and feature display tables. Merchandise is
organized by category according to a standard layout plan which is used as a
guide throughout the chain. Household products and health and beauty items line
the side walls to create a colorful display. Step Ahead displays toys on the
back walls to draw parents and children to the back of the store. The middle
aisles contain groupings of housewares, prepackaged foods, gifts, and seasonal
items. Unlike many other single price point chains, Step Ahead accepts credit
cards, debit cards, and food stamps. Step Ahead currently leases space for fully
enclosed check-cashing kiosks located inside two of its stores, and this concept
could be used in additional stores.
Step Ahead relies on bold exterior signage above its storefronts, and often
uses large street-front signage to attract attention from motorists. Step Ahead
allocates 1% to 2% of sales to advertising and promotions, including radio and
television advertisements and special promotions such as sidewalk sales, grand
opening celebrations, discounts and participation in charitable events.
SITE SELECTION AND STORE LOCATIONS
Step Ahead's disciplined, cost sensitive approach to site selection has
historically favored strip centers, although its concept has also been
successful in free-standing locations. Unlike the majority of other dollar store
chains, Step Ahead has not opened locations in regional or enclosed malls,
favoring less expensive rental rates in locations that serve customers in all
social and economic categories. It avoids mall locations where stores must
adhere to mall hours, traffic depends upon the strength of anchor tenants, and
restrictions are imposed on signage as well as advertising and promotions. Step
Ahead has focused on sites next to or in close proximity with high volume
grocery stores, warehouse food clubs, drug stores, or discount variety stores
which target customers similar to those of Step Ahead. 98 CENTS Clearance Center
stores have succeeded in a wide variety of locations, including industrial
warehouse sites, locations next to large anchor stores, as well as in
neighborhood centers.
Step Ahead operates a wide range of store sizes. On September 30, 1998, Step
Ahead operated 63 98 CENTS Clearance Center stores and plans to open an
additional 3 stores by the end of 1998. Step Ahead's existing stores range from
3,400 to 17,000 square feet of selling space, with five stores containing less
than 6,000 square feet, 23 stores from 6,000 to 10,000 square feet, 25 from
10,000 to 15,000 square feet and nine over 15,000 square feet. On average,
selling space represents approximately 76% of total square footage. Step Ahead's
stores are concentrated in northern and central California, and it has three
stores in northwestern Nevada. 38 of Step Ahead's existing stores are located in
centers with major grocery stores and 10 are in centers with major discount
stores.
Step Ahead has opened 4 net new stores in fiscal year 1998, and anticipates
opening 3 additional stores by the end of 1998. Although Step Ahead has not
signed any leases for new stores to open in 1999, management is currently
evaluating several locations. Until a new distribution center can be opened,
Step Ahead's future growth will be limited by the number of stores its current
distribution facility can service. See "--Business--Warehousing and
Distribution."
Step Ahead leases all of its existing store locations. Step Ahead's leases
typically provide for an initial lease term of either five or ten years with
options on the part of Step Ahead to extend. As current leases expire, Step
Ahead believes that it will either obtain lease renewals if desired for present
store locations, or obtain leases for equivalent or better locations in the same
general area. To date, Step Ahead has not experienced difficulty in renewing
leases for existing locations or securing leases in suitable locations for
111
<PAGE>
new stores. In connection with the Merger, 24 of Step Ahead's store leases
contain provisions requiring landlord consent to the Merger. Step Ahead plans to
obtain landlord consent from all of these landlords before closing of the Merger
but offers no assurance that it will obtain all required consents before closing
of the Merger or at all. Based primarily on its belief that it maintains good
relations with its landlords and that most of these leases reflect market rents,
Step Ahead believes that the provisions requiring consents will not have a
material adverse affect on the business or financial position of Step Ahead.
WAREHOUSING AND DISTRIBUTION
Step Ahead distributes inventory to all its stores from its facility near
Sacramento, which contains 140,000 square feet of warehouse space, 32,000 square
feet of office space, and a retail store of 19,000 square feet. Step Ahead
leases the facility at a current rent of about $574,000 annually through the
year 2008, and subleases about 9,650 square feet. Step Ahead estimates this
facility can service adequately only 75 stores. Although Step Ahead management
has reviewed a number of alternative strategies for expanding and/or replacing
this facility, Step Ahead has not decided to pursue any of these alternatives at
this time. Step Ahead also leases a maintenance shop of about 9,000 square feet
and two satellite warehouses containing an aggregate of 162,000 square feet to
house seasonal merchandise and closeout purchases. Rent for the maintenance
department and two auxiliary warehouses totals approximately $415,000 annually.
See "Risk Factors--Risks Related to Step Ahead--Risks Associated with the Step
Ahead Distribution Center" and "Risk Factors--Risks Related to Step
Ahead--Disruptions in Receiving and Distribution."
Using a fleet of twelve leased trucks, Step Ahead distributes inventory to
its stores, typically two to three times per week and more frequently in
November and December. Step Ahead's relatively high percentage of consumables
results in a higher burden on its distribution center. Stores receive only about
7% of goods by direct shipment from suppliers. Of merchandise shipped from the
distribution center, store managers order approximately 60%, while approximately
40% is shipped to the stores based on decisions by management at corporate
headquarters.
FIELD MANAGEMENT AND PERSONNEL
Step Ahead's philosophy of providing strong field and store management
provides an integral element in delivering value to its customers. Scott Lucas,
Vice President of Retail Operations, assisted by nine district managers, directs
the field organization. Each store typically employs a manager, two or three
assistant managers, and 15 sales associates. Stores hire additional temporary
personnel to assist with increased store traffic and store volume in the fourth
quarter. Store managers remain responsible for the operations of individual
stores, including recruiting and hiring the store personnel, communicating
financial results daily, and coordinating with the distribution staff on
ordering, receiving and displaying shipments.
EMPLOYEES
Step Ahead employed approximately 1,325 employees as of September 30, 1998,
approximately 370 of whom work full time. The number of part-time employees
fluctuates depending on seasonal needs. None of Step Ahead's employees is a
party to a collective bargaining agreement. Step Ahead believes it enjoys a good
relationship with its employees.
MANAGEMENT INFORMATION SYSTEMS
Step Ahead's management information systems allow it to monitor its
merchandising, inventory, distribution and operating expenses centrally at its
headquarters outside Sacramento. These systems allow Step Ahead to support its
stores, manage inventory turnover, and provide financial reporting to support
management's operational decisions and cost control efforts. Step Ahead does not
have a point-of-sale
112
<PAGE>
system. See "Step Ahead Management's Discussion and Analysis of Financial
Condition and Results of Operations--Year 2000 Compliance."
COMPETITION
Step Ahead operates in highly competitive markets. Step Ahead sells product
lines similar to those of deep discount stores, discount merchandisers, closeout
stores, food markets, drug stores and other retailers. Except for a number of
small privately held companies, Step Ahead has no single price point competitors
in the markets in which it operates. However, 99 Cents Only Stores are located
in southern California and could expand north, and other deep discount retailers
offer increasing competition. Step Ahead may face increased competition in the
future, which could have an adverse effect on its business and financial
results. See "Risk Factors--Risks Related to Step Ahead--Competition."
TRADEMARKS
Step Ahead owns Federal service mark registrations for "98 CENTS Clearance
Center," "98 CENTS" and "98 CENTS CLEARANCE CENTERS" together with the related
design, each of which expires in 2003. Step Ahead has an application pending for
Federal registration of the service mark "Everything 98 CENTS . . . or Less"
which it uses in advertising and store signage. Step Ahead also owns California
service marks for "98 CENTS Clearance Center--Nothing Over 98 CENTS" and
"98 CENTS CLEARANCE CENTERS" together with the related design, both of which
expire in 2002. Step Ahead also occasionally uses various brand names under
which it markets products, but management believes these brand names are not
material to its operations.
ENVIRONMENTAL
Under various federal, state and local environmental laws and regulations, a
current or previous owner or occupant of real property may become liable for the
costs of removal or remediation of hazardous substances at such real property.
These laws and regulations often impose liability without regard to fault. Step
Ahead leases all of its stores, as well as its distribution center and two
satellite warehouses. Step Ahead could be held liable for the costs of remedial
actions with respect to hazardous substances on such properties under the terms
of the governing lease and/or governing law. Asbestos has been detected in the
floor tile at eight of Step Ahead's stores. Step Ahead follows OSHA guidelines
for notifying and educating employees in facilities containing asbestos. Step
Ahead does not believe that it will be necessary to remediate this asbestos but
if required, does not believe that the cost of any such remediation would be
material.
In the ordinary course of business, Step Ahead from time to time handles or
disposes of ordinary household products that are classified as hazardous
materials under various federal, state and local environmental laws and
regulations. Step Ahead has adopted policies regarding the handling and disposal
of these products, and has implemented a training program for employees on
hazardous material handling and disposal.
LITIGATION
Step Ahead is a party to litigation and proceedings incidental to its
business, none of which is individually or in the aggregate material to Step
Ahead.
113
<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 Step Ahead:
<TABLE>
<CAPTION>
DIRECTORS AND EXECUTIVE OFFICERS AGE OFFICE
- ------------------------------------------ --------- ------------------------------------------
<S> <C> <C>
Gary L. Cino.............................. 43 Chief Executive Officer and Chairman of
the Board; Director
Janet S. Cino............................. 42 Secretary; Director
Eric R. Stauss............................ 44 Chief Operating Officer and President;
Director
David J. Reed............................. 35 Chief Financial Officer and Vice
President; Director
Anthony D. Leon........................... 36 Executive Vice President; Director
Ken Miller................................ 53 Director
CERTAIN KEY PERSONNEL
William D. Coyle.......................... 38 Vice President of Real Estate
Scott Lucas............................... 33 Vice President of Retail Operations
Paul Hill................................. 37 Vice President of Distribution
</TABLE>
DIRECTORS AND EXECUTIVE OFFICERS
GARY L. CINO is a co-founder of Step Ahead and has been Chief Executive
Officer and a director of Step Ahead since its incorporation in 1987. In 1983,
Mr. Cino began the business as a wholesale distributor of closeout and promotion
merchandise, and in 1985 opened his first retail store.
JANET S. CINO is co-founder of Step Ahead and has served as Secretary and a
director since 1987. She served as treasurer of Step Ahead from 1987 to 1989.
Prior to Step Ahead's formation, Ms. Cino spent over eight years as the
Assistant Operations Officer at Hacienda/Mitsubishi Bank.
ERIC R. STAUSS has been President and Chief Operating Officer and a director
of Step Ahead since July 1995. Mr. Stauss was the Senior Vice President and
Institutional Services Managing Officer for CB Commercial from 1990 to 1995.
DAVID J. REED has been Chief Financial Officer and Vice President and a
director of Step Ahead since 1995. Mr. Reed held various positions including
Manager at Price Waterhouse, LLP (now PricewaterhouseCoopers LLP) from 1989 to
1995.
ANTHONY D. LEON has been Executive Vice President of Step Ahead since July
1995 and a director since January 1992. From January 1992 to 1995, Mr. Leon was
Vice President, Chief Operating Officer of Step Ahead. From 1991 to January
1992, Mr. Leon served as Step Ahead's Director of Retail Operations. From 1989
to 1990, Mr. Leon was the Director of Advertising and Purchasing. From 1987 to
1988, Mr. Leon served as a District Manager. In 1986, Mr. Leon held the position
of Retail Merchandising Manager. In 1985, a Mr. Leon was in charge of Step
Ahead's southern California wholesale operations.
KEN MILLER has been a director of Step Ahead since 1996 and has worked with
Step Ahead in a consulting capacity since 1997. Mr. Miller's business career
includes twelve years with Mosler Inc. (formerly a division of American
Standard) where he was Vice President/General Manager of their Electronic
Systems Division and five years with DeLaRue P.L.C. (a London based "FTSE100"
company) where he held the positions of Senior Vice President of Marketing and
Executive Vice President.
114
<PAGE>
CERTAIN KEY PERSONNEL
WILLIAM D. COYLE has been Vice President of Real Estate since 1994. As Vice
President of Real Estate, Mr. Coyle is responsible for site selection and lease
negotiation for all of Step Ahead's locations. From September 1992 to 1994, he
was Director of Real Estate. Prior to joining Step Ahead, Mr. Coyle worked for
CB Commercial, where he helped retailers, including Step Ahead, identify and
occupy new locations in the northern California area.
SCOTT LUCAS has been Vice President of Retail Operations since November
1997. From 1996 to 1997 he was Vice President of Sales and Merchandising, and he
served in various other positions with Step Ahead from 1991 to 1996. Prior to
joining Step Ahead, Mr. Lucas worked for Payless Drug Stores for seven years
where he held several different management positions.
PAUL HILL has been Vice President of Distribution since December 1997. As
Vice President of Distribution, Mr. Hill is responsible for managing Step
Ahead's warehouse operations and the delivery of goods to the stores. From
October 1996 to December 1997, he was Director of Distribution. From September
1995 to October 1996, he had a consulting relationship with Step Ahead, during
which he redesigned Step Ahead's warehouse operations and warehouse computer
systems. Prior to joining Step Ahead, Mr. Hill worked as a corporate industrial
engineer.
115
<PAGE>
SECURITY OWNERSHIP OF PRINCIPAL SHAREHOLDERS
AND MANAGEMENT OF STEP AHEAD
The following table sets forth certain information regarding the beneficial
ownership of outstanding Step Ahead Common Stock and Step Ahead Preferred Stock
as of November 6, 1998 by (i) each of Step Ahead's directors and executive
officers who is a shareholder, (ii) all directors and executive officers of Step
Ahead as a group, and (iii) each person believed by Step Ahead to own
beneficially more than five percent (5%) of the outstanding shares of either
Step Ahead Common Stock or Step Ahead Preferred Stock. Except as indicated by
the notes to the following table, the holders listed below have sole voting
power and investment power over the shares beneficially held by them. The
address of the Step Ahead directors and officers is in care of Step Ahead
Investments, Inc., 3222 Winona Way, North Highlands, California 95660.
<TABLE>
<CAPTION>
SHARES OF STEP AHEAD STOCK
BENEFICIALLY OWNED
(BEFORE THE MERGER)(1)
-------------------------------------------------
NUMBER PERCENT NUMBER PERCENT
NAME OF BENEFICIAL OWNER COMMON COMMON PREFERRED PREFERRED
---------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Gary L. and Janet S. Cino(2)........................................ 810,000 64.2% -- --
Eric R. Stauss(3)................................................... 70,016 5.3% -- --
David J. Reed(4).................................................... 30,028 2.3% -- --
Anthony D. Leon..................................................... 53,500 4.2% -- --
Kenneth L. Miller(5)................................................ 57,000 4.5% -- --
The Cino Children's Trust(2)........................................ 810,000 64.2% -- --
Greg Leon(6)........................................................ 48,000 3.8% 50,000 22.6%
Keith V. and Elizabeth E. Anderson(7)............................... -- -- 50,000 22.6%
Richard M. & Judy G. Pollock........................................ -- -- 19,000 8.6%
Frank and Barbara Van Heule(8)...................................... 60,000 4.8% 5,000 2.3%
All Directors & Executive Officers, as a group(9)................... 1,020,544 75.0% -- --
</TABLE>
Following the Merger, based on the number of shares of Dollar Tree Common
Stock outstanding as of November 6, 1998, each of the Step Ahead Shareholders
listed above will hold less than one percent (1%) of Dollar Tree Common Stock
except that the Principal Shareholders will beneficially own approximately 1.6%
of Dollar Tree Common Stock.
- ------------------------
(1) For purposes of this table, a person or a group of persons is deemed to have
"beneficial ownership" as of a given date of any shares which such person
has the right to acquire within 60 days after such date. For purpose of
computing the percentage of outstanding shares held by each person or group
of persons named above on a given date, any shares which such person or
persons has the right to acquire within 60 days after such date are deemed
to be outstanding, but are not deemed to be outstanding for the purpose of
computing the percentage ownership of any other person. The percentages of
common stock are based on the 1,261,290 shares of Step Ahead Common Stock
outstanding as of November 6, 1998. The percentages of preferred stock are
based on the 221,700 shares of Step Ahead Preferred Stock outstanding as of
November 6, 1998.
(2) Includes 732,667 and 77,333 common shares owned of record by the Gary and
Janet Cino Trust and the Cino Children's Trust respectively. Mr. and Mrs.
Cino are co-trustees of the Gary and Janet Cino Trust and share the
authority to vote and to dispose of such shares. Mrs. Cino's brother is sole
trustee of the Cino Children's Trust which was established for the benefit
of Mr. and Mrs. Cino's children, but he has no economic interest in such
shares. The trustees of the trusts have signed the Voting Agreement,
pursuant to which they have agreed to vote their shares in favor of the
Merger Agreement and the Merger. As a result, these parties may be deemed to
have formed a "group" for purposes of beneficial ownership under Rule 13d-5
of the Exchange Act.
(3) Includes 10,000 shares owned of record by the Stauss Family Trust and
options to purchase 60,016 shares.
(4) Includes options to purchase 30,028 shares.
(5) Includes options to purchase 10,000 shares.
(6) Includes 25,000 and 10,000 common shares owned of record by 3222 Winona Way,
L.P. and Merit Income Properties, Inc. ("MIP"), respectively, and 50,000
preferred shares owned of record by M.I.P./SAI, L.P. Greg Leon controls MIP,
which is the general partner
116
<PAGE>
of 3222 Winona Way, L.P. and M.I.P./SAI, L.P. As a result, Mr. Leon may be
deemed to beneficially own such shares. Mr. Leon is Anthony Leon's brother.
(7) Includes 30,000 and 20,000 preferred shares owned of record by the Anderson
Living Family Trust and the Five A Family Trust, respectively. Mr. and Mrs.
Anderson are the co-trustees to the Anderson Living Family Trust and share
the authority to vote and dispose of such shares. Mr. Anderson's brother is
the trustee of the Five A Family Trust, but he has no economic interest in
those shares.
(8) Includes 20,000 common shares owned of record by the Van Heule Family Trust
and 40,000 common shares owned of record by the Sales Max, Inc. Money
Purchase & Profit Sharing Plan. Mr. and Mrs. Van Heule are co-trustees of
the Van Heule Family Trust and share the authority to vote and to dispose of
shares held by the trust. Mr. and Mrs. Van Heule are also co-trustees of the
Sales Max, Inc. Money Purchase and Profit Sharing Plan and share the
authority to vote and to dispose of shares held by the plan.
(9) Includes shares issuable upon exercise of stock options as follows: Mr.
Stauss, 60,016; Mr. Reed, 30,028 and Mr. Miller 10,000.
117
<PAGE>
DESCRIPTION OF DOLLAR TREE CAPITAL STOCK
The authorized capital stock of Dollar Tree consists of 100,000,000 shares
of Dollar Tree Common Stock, $0.0l par value per share, and 10,000,000 shares of
Dollar Tree Preferred Stock, $0.01 par value per share. As of November 6, 1998,
there were 59,158,498 shares of Dollar Tree Common Stock outstanding, which were
held of record by 399 shareholders.
DOLLAR TREE COMMON STOCK
Holders of Dollar Tree Common Stock are entitled to receive ratably such
dividends, if any, as may be declared by the Board of Directors out of funds
legally available therefor, subject to any preferential dividend rights of
outstanding Dollar Tree Preferred Stock. Upon the liquidation, dissolution or
winding up of Dollar Tree, the holders of Dollar Tree Common Stock are entitled
to receive ratably the net assets of Dollar Tree available after the payment of
all debts and other liabilities, subject to the prior rights of any outstanding
Dollar Tree Preferred Stock. Holders of Dollar Tree Common Stock have no
preemptive, subscription, redemption or conversion rights. The outstanding
shares of Dollar Tree Common Stock are, and the shares offered by Dollar Tree in
this offering will be, when issued and paid for, fully paid and non-assessable.
The rights, preferences and privileges of holders of Dollar Tree Common Stock
are subject to, and may be adversely affected by, the rights of the holders of
shares of any series of Dollar Tree Preferred Stock which Dollar Tree may
designate and issue in the future. The holders of Dollar Tree Common Stock are
entitled to one vote for each share held on all matters submitted to a vote of
shareholders and do not have cumulative voting rights. See "--Anti-Takeover
Effects of Certain Provisions of Dollar Tree's Articles of Incorporation and
Bylaws and Virginia Law" below for a description of the votes required to elect
and remove directors.
DOLLAR TREE PREFERRED STOCK
Dollar Tree's Board of Directors has the authority, without further action
of the shareholders of Dollar Tree, to issue up to an aggregate of 10,000,000
shares of Dollar Tree Preferred Stock in one or more series and to fix or
determine the designations, preferences, rights and any qualifications,
limitations or restrictions of the shares of each such series thereof, including
the dividend rights, dividend rates, conversion rights, voting rights, terms of
redemption (including sinking fund provisions), redemption price or prices,
liquidation preferences and the number of shares constituting any series or the
designation of such series.
Dollar Tree's Board of Directors, without shareholder approval, can issue
Dollar Tree Preferred Stock with voting and conversion rights that could
adversely affect the voting power of holders of Dollar Tree Common Stock. The
issuance of Dollar Tree Preferred Stock, while providing desirable flexibility
in connection with possible acquisitions and other corporate purposes, may have
the effect of discouraging, delaying, or preventing a change in control of
Dollar Tree. There are currently no issued or outstanding shares of Dollar Tree
Preferred Stock and Dollar Tree has no present plans to issue any shares of
Dollar Tree Preferred Stock.
ANTI-TAKEOVER EFFECTS OF CERTAIN PROVISIONS OF DOLLAR TREE'S ARTICLES OF
INCORPORATION AND BYLAWS AND VIRGINIA LAW
The Articles of Incorporation provide that the directors of Dollar Tree
shall be classified into three classes as nearly equal in size as possible, with
staggered three-year terms. The Dollar Tree Bylaws provide that shareholder
nominations of persons for elections to the Board of Directors may be made only
upon advance written notice to the Board of Directors in accordance with certain
procedural requirements. Directors are elected by a plurality of the votes cast
by the holders of the shares entitled to vote in the election at a meeting in
which a quorum is present and cumulative voting is not permitted. A quorum
consists of a majority of the shares entitled to vote, represented in person or
by proxy. The Dollar Tree Articles of Incorporation provide that a director may
be removed only by a vote of the holders of more than two-thirds of the shares
entitled to vote. The staggered terms of the Board of Directors, the provision
118
<PAGE>
requiring advance notice for shareholder nominations and the removal provision
could have the effect of making it more difficult for a third party to acquire,
or of discouraging a third party from acquiring, control of Dollar Tree.
The Dollar Tree Bylaws provide that special meetings of shareholders may be
called only by the chairman of the Board of Directors, the president, or the
Board of Directors of Dollar Tree and that no business shall be transacted and
no corporate action may be taken at a special meeting of shareholders other than
that stated in the notice of the meeting. The Dollar Tree Bylaws also provide
that the only business that may be brought before an annual meeting of
shareholders is limited to matters (i) brought before the meeting at the
direction of the Board of Directors or (ii) specified in a written notice given
by or on behalf of a shareholder of Dollar Tree in accordance with certain
procedural requirements specified in the Dollar Tree Bylaws. These provisions
could have the effect of delaying shareholder actions which are favored by the
holders of a majority of the outstanding voting securities of Dollar Tree. These
provisions may also discourage another person or entity from making a tender
offer for Dollar Tree's Common Stock, because such person or entity, even if it
acquired a majority of the outstanding voting securities of Dollar Tree, would
be unable to call a special meeting of shareholders to take action as a
shareholder (such as electing new directors or approving a merger).
The Dollar Tree Articles of Incorporation require the affirmative vote of
the holders of more than two-thirds of each voting group entitled to vote
thereon to amend or repeal certain provisions of the Dollar Tree Articles of
Incorporation and Dollar Tree Bylaws, primarily the above mentioned
anti-takeover provisions. This supermajority requirement for amendments has the
effect of making it more difficult for a third party attempting to gain control
of Dollar Tree to remove these anti-takeover provisions.
ELIMINATION OF LIABILITY AND INDEMNIFICATION OF OFFICERS AND DIRECTORS
Except in the event of willful misconduct or a knowing violation of the
criminal law or of any Federal or state securities law, the Dollar Tree Articles
of Incorporation eliminate the liability of a Director or officer of Dollar Tree
to Dollar Tree or its shareholders for monetary damages. Except in the event of
willful misconduct or a knowing violation of the criminal law, the Dollar Tree
Articles of Incorporation require Dollar Tree to indemnify its Directors and
officers, and permit Dollar Tree to indemnify its agents and employees. Dollar
Tree believes that these provisions will assist Dollar Tree in attracting and
retaining qualified individuals to serve as Directors and officers.
REGISTRAR AND TRANSFER AGENT
The registrar and transfer agent for Dollar Tree Common Stock is Boston
Equiserve Limited Partnership, an affiliate of BankBoston, N.A.
119
<PAGE>
DESCRIPTION OF STEP AHEAD CAPITAL STOCK
The authorized capital stock of Step Ahead consists of 5,000,000 shares of
common stock and 1,000,000 shares of preferred stock, in each case without par
value. As of November 6, 1998, there were 1,261,290 outstanding shares of Step
Ahead Common Stock held of record by 47 shareholders, 221,700 outstanding shares
of Step Ahead Preferred Stock held of record by 31 shareholders and outstanding
options to purchase 288,592 shares of Step Ahead Common Stock.
STEP AHEAD COMMON STOCK
Each shareholder is entitled to one vote on all matters for each share of
Step Ahead Common Stock held. Each holder of Step Ahead Common Stock is entitled
under California law to cumulate such holder's votes at any election of
directors and give one candidate a number of votes equal to the number of
directors to be elected multiplied by the number of votes to which such holder's
shares are normally entitled, or distribute the holder's votes on the same
principle among as many candidates as such holder thinks fit. The holders of
Step Ahead Common Stock have no preemptive or other rights to subscribe for
additional shares. Holders of Step Ahead Common Stock are entitled to such
dividends as may be declared by the Step Ahead Board out of funds legally
available therefor and any such dividend is allocated ratably among the
outstanding shares of both Step Ahead Common Stock and Step Ahead Preferred
Stock. Upon liquidation, dissolution or winding up of Step Ahead, the assets
legally available for distribution to shareholders are distributable ratably
among the holders of the Step Ahead Common Stock at that time outstanding,
subject to prior distribution rights of creditors of Step Ahead and to the
preferential rights of any shares of Step Ahead Preferred Stock then
outstanding.
STEP AHEAD PREFERRED STOCK
The Step Ahead Board is authorized to issue shares of preferred stock from
time to time in one or more series and is also authorized to determine or alter
the rights, preferences, privileges and restrictions granted or imposed upon any
wholly unissued series of preferred stock and to increase or decrease (but not
below the number of shares of such series then outstanding) the number of shares
of any such series subsequent to the issue of shares of that series. The Step
Ahead Board has authorized one series of preferred stock, the Series A Preferred
Stock. There are 221,700 outstanding shares of such Series A Preferred Stock
(the "Step Ahead Preferred Stock").
Each preferred shareholder is entitled to one vote on all matters for each
whole share of Step Ahead Common Stock into which the shares of Step Ahead
Preferred Stock held by such shareholder could be converted. Unless otherwise
required by California law, the holders of Step Ahead Preferred Stock vote
together with the holders of Step Ahead Common Stock on all matters submitted to
a vote of shareholders, and not as separate classes or series. As of the Record
Date, each share of Step Ahead Preferred Stock was convertible into one (1)
share of Step Ahead Common Stock. Each holder of Step Ahead Preferred Stock is
entitled under California law to cumulate such holder's votes at any election of
directors and give one candidate a number of votes equal to the number of
directors to be elected multiplied by the number of votes to which such holder's
shares are normally entitled, or distribute the holder's votes on the same
principle among as many candidates as such holder thinks fit. The holders of
Step Ahead Preferred Stock have no preemptive or other rights to subscribe for
additional shares.
Holders of Step Ahead Preferred Stock are entitled to participate, out of
any funds legally available therefor, in any dividends when and as declared by
the Step Ahead Board. The Step Ahead Preferred Stock has no preference to any
such dividend, which shall be allocated ratably among all Step Ahead
Shareholders, regardless of whether they hold Step Ahead Common Stock or Step
Ahead Preferred Stock. The right to such dividends on the Step Ahead Preferred
Stock is not cumulative. As of the date of this Prospectus/Proxy Statement, Step
Ahead has no declared and unpaid dividends outstanding on any of its Step Ahead
Common Stock or Step Ahead Preferred Stock.
120
<PAGE>
In the event of any liquidation, dissolution or winding up of Step Ahead,
the holders of Step Ahead Preferred Stock are entitled to receive, prior and in
preference to any distribution of any of the assets or surplus funds of Step
Ahead to holders of Step Ahead Common Stock, an amount of $10.00 per share for
each share of Step Ahead Preferred Stock then held. If upon occurrence of such
event the assets and funds thus distributed among the holders of the Step Ahead
Preferred Stock are insufficient to permit the payment of such holders of the
full preferential amount, then the entire assets and funds of Step Ahead legally
available for distribution will be distributed ratably among the holders of the
Step Ahead Preferred Stock in proportion to the preferential amounts fixed
therefor upon a liquidation, dissolution or winding up of Step Ahead. After
payment has been made to the holders of the Step Ahead Preferred Stock of the
full amounts to which they are entitled, the holders of Step Ahead Common Stock
are entitled to receive all remaining assets of Step Ahead.
Step Ahead may at any time it may lawfully do so, at the option of the Step
Ahead Board, redeem in whole or in part the Step Ahead Preferred Stock by paying
in cash for each such share to be redeemed the price of ten dollars ($10.00) per
share (as appropriately adjusted for any stock dividends, stock splits,
recapitalization or consolidation of Step Ahead Preferred Stock), together with
interest in the amount of 12% per year. At least thirty (30) days prior to the
date fixed for any redemption of Step Ahead Preferred Stock, written notice
thereof must be mailed to each holder of record of Step Ahead Preferred Stock to
be redeemed. Each holder of Step Ahead Preferred Stock has fifteen (15) days
after the redemption notice to convert its shares of Step Ahead Preferred Stock
into Step Ahead Common Stock. All Step Ahead Preferred Stock not converted
within this 15 day period is subject to redemption at the redemption price.
121
<PAGE>
COMPARISON OF SHAREHOLDERS' RIGHTS
After consummation of the Merger, Step Ahead Shareholders will become Dollar
Tree Shareholders. Step Ahead is incorporated under the laws of the State of
California, whereas Dollar Tree is incorporated under the laws of the
Commonwealth of Virginia. The rights of Step Ahead Shareholders currently are
governed by the California Corporations Code (the "CCC"), the Step Ahead
Articles of Incorporation and the Step Ahead Bylaws. After consummation of the
Merger, the rights of the former Step Ahead Shareholders will be governed by the
Virginia Stock Corporation Act (the "VSCA"), the Dollar Tree Articles of
Incorporation and the Dollar Tree Bylaws. The following is a summary of certain
similarities and all material differences between the rights of holders of Step
Ahead Common Stock and the rights of holders of Dollar Tree Common Stock.
The following is a summary discussion and does not purport to be a complete
statement of the rights of Step Ahead Shareholders or Dollar Tree Shareholders
and is qualified in its entirety by reference to the full text of the Step Ahead
Articles of Incorporation and Step Ahead Bylaws and the Dollar Tree Articles of
Incorporation and Dollar Tree Bylaws.
AUTHORIZED CAPITAL STOCK; BLANK STOCK PROVISIONS
The Step Ahead Articles of Incorporation authorize 5,000,000 shares of
Common Stock, no par value, of which 1,261,290 shares are issued and outstanding
as of November 6, 1998, and 1,000,000 shares of Preferred Stock, no par value,
of which 221,700 shares are issued and outstanding as of November 6, 1998. The
Board of Directors of Step Ahead is authorized to issue shares of Preferred
Stock from time to time in one or more series, and is also authorized to
determine or alter the rights, preferences, privileges and restrictions granted
or imposed upon any wholly unissued series of Preferred Stock and to increase or
decrease (but not below the number of shares of such series then outstanding)
the number of shares of any such series subsequent to the issue of shares of
that series.
The Dollar Tree Articles of Incorporation authorize 100,000,000 shares of
common stock, $0.01 par value per share, of which approximately 59,158,498
shares were issued and outstanding as of November 6, 1998; and 10,000,000 shares
of preferred stock, $0.01 par value per share, of which no shares are issued and
outstanding. The holders of Dollar Tree Common Stock have one vote per share on
all matters on which holders of Dollar Tree Common Stock are entitled to vote.
The Dollar Tree Board of Directors is authorized to issue shares of Preferred
Stock from time to time in one or more series. The Dollar Tree Board of
Directors may also state and determine the number of shares of each such series
of Preferred Stock authorized to be issued and the preferences and relative,
participating, optional and other rights pertaining to each such series, and the
qualifications, limitations or restrictions thereof.
The VSCA provides that a corporation's articles of incorporation may permit
its board of directors to fix in whole or in part the preferences, limitations
and relative rights of any class of shares before the issuance of any shares of
that class or one or more series within a class before the issuance of any
shares of that series.
AMENDMENTS TO THE ARTICLES OF INCORPORATION
Under the CCC, unless otherwise specified in a corporation's articles of
incorporation, an amendment to the articles of incorporation may be adopted if
approved by the board and approved by the affirmative vote of holders of the
shares of stock entitled to vote thereon, unless a class vote is required. The
Step Ahead Articles of Incorporation do not contain any super-majority or other
restrictions on amendment to the Step Ahead Articles of Incorporation.
Under the VSCA, a corporation may amend its articles of incorporation at any
time to add or change a provision that is required or permitted in the articles
or to delete a provision not required in the articles. Except for certain types
of amendments that may be adopted by the Board of Directors without
122
<PAGE>
shareholder approval, amendments to a corporation's articles of incorporation
generally require the vote of at least two-thirds of each class outstanding and
entitled to vote thereon or, if the articles of incorporation so provide, a
greater or lesser proportion, but not less than a majority. Dollar Tree's
Articles of Incorporation specify that an amendment to either Article IV
("Directors") or Article VI ("Amendments") requires approval by more than
two-thirds of all the votes entitled to be cast by each voting group entitled to
vote thereon. Adoption of all other amendments requires approval of the
amendment by a majority of a quorum of the voting group for each voting group
entitled to vote thereon.
AMENDMENTS TO THE BYLAWS
The CCC provides that bylaws may be adopted, amended or repealed either by
affirmative vote of the outstanding shares entitled to vote thereon or by
approval of the board, except for bylaws specifying or changing the number of
directors or the maximum or minimum number of directors or changing from a fixed
to variable board or vice versa, which may only be adopted, amended or repealed
by the shareholders. Moreover, a corporation's articles of incorporation or
bylaws may restrict or eliminate the power of the board to adopt, amend or
repeal any or all bylaws. The Step Ahead Bylaws provide that bylaws may be
adopted, amended or repealed either by the vote of holders of a majority of the
outstanding shares entitled to vote or by the Step Ahead Board of Directors.
However, a bylaw changing the number of directors must be approved by the Step
Ahead Shareholders.
The VSCA provides generally that a Virginia corporation's board of directors
may amend or repeal the corporation's bylaws except (i) to the extent such power
is reserved to the shareholders by the articles of incorporation or the VSCA,
(ii) if the shareholders in adopting or amending a particular bylaw provided
expressly that the board of directors could not amend or repeal such bylaw, and
(iii) the corporation's shareholders may amend or repeal bylaws even though the
bylaws may be amended or repealed by the board of directors. The Dollar Tree
Articles of Incorporation provide that certain provisions of the Dollar Tree
Bylaws may be amended only by the affirmative vote, for each voting group
entitled to vote thereon, of more than two-thirds of the votes entitled to be
cast by such group. The power to alter, amend or repeal all other provisions of
the Dollar Tree Bylaws is initially vested in the Dollar Tree Board of
Directors, but bylaws made by the Dollar Tree Board with respect to any of these
provisions may be repealed or changed by Dollar Tree Shareholders. In addition,
the Dollar Tree Bylaws provide that Dollar Tree shareholders may adopt new
bylaws which specifically provide that such bylaws may not be altered, amended
or repealed by the Dollar Tree Board.
SIZE AND CLASSIFICATION OF THE BOARD OF DIRECTORS
The Step Ahead Bylaws provide that the Step Ahead Board shall be comprised
of between six and ten members. The Step Ahead Board currently is comprised of
six members. Directors of Step Ahead are elected annually for one-year terms.
The number of directors may be changed only by an amendment to the Step Ahead
Articles of Incorporation or by a bylaw adopted by Step Ahead Shareholders.
The VSCA provides that the board of directors of a Virginia corporation
shall consist of one or more directors as fixed by its articles of incorporation
or bylaws. The Dollar Tree Bylaws provide that the Dollar Tree Board shall be
comprised of between six and nine members, which number may be increased or
decreased within such range by the Dollar Tree Board or the Dollar Tree
shareholders. The Dollar Tree Board currently is comprised of eight members. As
permitted by the VSCA, the Dollar Tree Board of Directors is classified into
three classes that are approximately equal in number. Directors of each class
serve for a term of three years, and elections are staggered such that
approximately one-third of the Dollar Tree Board is elected each year.
123
<PAGE>
VACANCIES ON THE BOARD OF DIRECTORS
The Step Ahead Bylaws provide that vacancies on the Step Ahead Board may be
filled by the vote of a majority of the remaining Step Ahead directors. In
addition, Step Ahead Shareholders may elect a director at any time to fill a
vacancy not filled by the Step Ahead directors.
The Dollar Tree Bylaws provide that vacancies on the Dollar Tree Board
resulting from an increase in the number of directors may be filled by a
majority vote of the Dollar Tree directors between annual meetings of Dollar
Tree shareholders. The term of a director elected by the Dollar Tree Board to
fill a vacancy expires at the next shareholders' meeting, at which time
directors are elected by Dollar Tree shareholders.
REMOVAL OF DIRECTORS
The CCC provides that any or all directors may be removed without cause by
the vote of a majority of the outstanding shares entitled to vote; however, no
individual director may be removed (unless the entire board is removed) if the
number of votes cast against removal, or not consenting in writing to the
removal, would be sufficient to elect the director if voted cumulatively at an
election at which the same number of votes were cast and the entire number of
directors authorized at the time of the director's most recent election were
then being elected. Step Ahead's Bylaws expressly provide that directors may be
removed without cause if such removal is approved by a majority of all
outstanding shares entitled to vote.
The VSCA permits shareholders to remove directors with or without cause
unless the articles of incorporation provide that directors may only be removed
with cause. If a director is elected by a voting group of shareholders, only the
shareholders of that group may participate in the vote to remove the director. A
director may be removed by the shareholders only at a meeting called for that
purpose. Dollar Tree's Restated Articles of Incorporation provide that Dollar
Tree's directors may be removed only by the affirmative vote of more than
two-thirds of the shares entitled to vote in an election of directors.
INDEMNIFICATION OF DIRECTORS, OFFICERS AND EMPLOYEES; LIMITATIONS ON PERSONAL
LIABILITY OF DIRECTORS
The CCC authorizes a corporation to indemnify any person who was or is a
party or is threatened to be made a party to any proceeding (other than an
action by or in the right of the corporation to procure a judgment in its favor)
by reason of the fact that the person is or was an agent (including any person
who is or was a director, officer, employee or other agent) of the corporation,
against expenses, judgments, fines, settlements, and other amounts actually and
reasonably incurred in connection with the proceeding if that person acted in
good faith and in a manner the person reasonably believed to be in the best
interests of the corporation and, in the case of a criminal proceeding, had no
reasonable cause to believe the conduct of the person was unlawful. The
termination of any proceeding by judgment, order, settlement, conviction, or
upon a plea of nolo contendere or its equivalent does not, of itself, create a
presumption that the person did not act in good faith and in a manner which the
person reasonably believed to be in the best interests of the corporation or
that the person had reasonable cause to believe that the person's conduct was
unlawful. In addition, the CCC authorizes a corporation to indemnify any person
who was or is a party or is threatened to be made a party to any threatened,
pending, or completed action by or in the right of the corporation to procure a
judgment in its favor by reason of the fact that the person is or was an agent
of the corporation, against expenses actually and reasonably incurred by that
person in connection with the defense or settlement of the action if the person
acted in good faith, in a manner the person believed to be in the best interests
of the corporation and its shareholders. The Step Ahead Articles of
Incorporation do not contain such a provision.
The CCC also provides that a corporation's articles of incorporation may set
forth a provision eliminating or limiting the personal liability of a director
for monetary damages in an action brought by or in the right of the corporation
for breach of a director's duties to the corporation and its shareholders,
provided, however, that (A) such a provision may not eliminate or limit the
liability of directors (i) for acts
124
<PAGE>
or omissions that involve intentional misconduct or a knowing and culpable
violation of law, (ii) for acts or omissions that a director believes to be
contrary to the best interests of the corporation or its shareholders or that
involve the absence of good faith on the part of the director, (iii) for any
transaction from which a director derived an improper personal benefit, (iv) for
acts or omissions that show a reckless disregard for the director's duty to the
corporation or its shareholders in circumstances in which the director was
aware, or should have been aware, in the ordinary course of performing a
director's duties, of a risk of serious injury to the corporation or its
shareholders, (v) for acts or omissions that constitute an unexcused pattern of
inattention that amounts to an abdication of the director's duty to the
corporation or its shareholders, (vi) under Section 310 of the CCC, or (vii)
under Section 316 of the CCC, (B) no such provision shall eliminate or limit the
liability of a director for any act or omission occurring prior to the date when
the provision becomes effective, and (C) no such provision shall eliminate or
limit the liability of an officer for any act or omission as an officer,
notwithstanding that the officer is also a director or that his or her actions,
if negligent or improper, have been ratified by the directors. The Step Ahead
Articles of Incorporation do not contain such a provision.
The VSCA generally permits indemnification by a corporation of an individual
made a party to a proceeding because he is or was a director or officer of such
corporation against liability incurred in the proceeding, if the director or
officer has acted in good faith and he believed in the case of conduct in his
official capacity with the corporation, with the belief that his conduct was in
the best interest of the corporation; in all other cases, that his conduct was
at least not opposed to its best interest; and in the case of any criminal
proceeding, he had no reasonable cause to believe his conduct was unlawful. The
VSCA prohibits a corporation from indemnifying a director or officer in
connection with a proceeding by or in the right of a corporation in which the
director or officer was adjudged liable to the corporation. In addition, the
VSCA prohibits indemnification in connection with a proceeding charging improper
personal benefit to the director, whether or not in his official capacity, in
which he was adjudged liable on the basis that personal benefit was improperly
received by him. The Dollar Tree Articles of Incorporation provide, to the
fullest extent permitted by Virginia law, for the indemnification of Dollar
Tree's directors and officers against any obligation to pay a judgment,
settlement, penalty, fine or other liability and reasonable expenses, including
attorney's fees incurred by such director or officer in connection with or
resulting from any action, suit, or proceeding to which such director or officer
is or may be made a party by reason of being or having been a director or
officer of Dollar Tree, except such liabilities and expenses as are incurred
because of such director's or officer's willful misconduct or knowing violation
of the criminal law.
The VSCA also provides that a corporation may purchase and maintain
insurance on behalf of an individual who is or was a director, officer,
employee, or agent of the corporation against liability asserted against or
incurred by him in that capacity or arising from his status as a director,
officer, employee, or agent, whether or not the corporation is authorized under
the VSCA to indemnify such party. The Dollar Tree Articles of Incorporation
expressly authorize Dollar Tree to purchase and maintain such insurance.
The Dollar Tree Articles of Incorporation further qualifies the Board of
Directors, by a majority vote of a quorum of disinterested directors, to enter
into a contract to indemnify any director or officer against liability and/or to
advance or reimburse his expenses in respect to any proceedings arising from any
act or omission, whether occurring before or after the execution of such
contract.
Under the VSCA, the liability of an officer or director for a single
transaction in a proceeding brought by or in the right of a corporation or on
behalf of shareholders is limited to damages not exceeding the lesser of (i) the
monetary amount, including the elimination of liability, specified in the
articles of incorporation or, if approved by the shareholders, in the bylaws as
a limitation on or elimination of the liability of the officer or director; or
(ii) the greater of $100,000 or the amount of cash compensation received by the
officer or director from the corporation during the 12 months immediately
preceding the act or omission for which liability was imposed. The liability of
an officer or director may not be so limited if the officer or director engaged
in willful misconduct or a knowing violation of the criminal law or of any
federal or state securities law, including, without limitation, any claim of
unlawful insider trading or
125
<PAGE>
manipulation of the market for any security. The Dollar Tree Articles of
Incorporation include a provision eliminating, to the fullest extent permitted
by law, the personal liability of directors.
LOANS TO DIRECTORS AND OFFICERS
The CCC does not permit loans to be made to a director or officer unless
such loan is (i) for expenses reasonably anticipated to be incurred in the
performance of the duties of the director or officer for which the director or
officer would be entitled to reimbursement from the corporation in absence of
the advance, (ii) approved by a majority of the shareholders entitled to vote
thereon, or (iii) approved by the board of directors alone, if the corporation
has outstanding shares held of record by more than 100 persons on the date of
approval by the board and has a bylaw approved by the outstanding shares
authorizing the board of directors alone to approve the loan. Step Ahead
Shareholders have not approved any loans to directors or officers.
The VSCA does not contain an equivalent restriction on loans to directors or
officers. However, under the VSCA, a transaction with a corporation in which a
director has a direct or indirect personal interest is voidable by the
corporation unless (i) the material facts of the transaction and the director's
interest were disclosed or known to the board of directors (or a committee
thereof) and a majority of the disinterested members of the board or committee
authorized, approved or ratified the transaction; (ii) the material facts of the
transaction and the director's interest were disclosed to the shareholders
entitled to vote and a majority of the shares (excluding shares owned or
controlled by the director) approved or ratified the transaction; or (iii) the
transaction was fair to the corporation. A majority of the shares, whether or
not present, which are entitled to be counted in a vote on the transaction
constitutes a quorum for the purposes of taking action.
SPECIAL MEETINGS OF SHAREHOLDERS
The CCC provides that special meetings of the shareholders for the purpose
of taking any action which the shareholders are permitted to take under the CCC
may be called at any time by the Step Ahead Board of Directors, the Chairman of
the Board, the President, or by shareholders entitled to cast not less than 10
percent of the votes of the meeting. The Step Ahead Bylaws provide that in
addition to these parties, the Vice President and the Secretary may also call
special meetings of the shareholders.
The VSCA provides that a special meeting of the shareholders may be called
by the chairman of the board of directors, the president, the board of directors
or the person or persons authorized by the articles of incorporation or bylaws.
The Dollar Tree Bylaws provide that special meetings of shareholders may be
called by the Dollar Tree Board of Directors, the Chairman of the Board or the
President. Under the VSCA, if an annual shareholders' meeting is not held within
15 months after the last annual shareholders' meeting, a special meeting may be
called by the holders of 20% or more of the corporation's voting shares. Any
shareholder entitled to participate in an annual meeting may petition the
circuit court where the Virginia corporation's principal office or registered
office is located to order a meeting. Dollar Tree's principal office is in
Chesapeake, Virginia.
CORPORATE ACTION WITHOUT A SHAREHOLDER MEETING
The CCC states that unless otherwise provided in the articles of
incorporation, any action which may be taken at any annual or special meeting of
shareholders may be taken without a meeting and without prior notice, if a
consent in writing, setting forth the action so taken, is signed by the holders
of outstanding shares having not less than the minimum number of votes that
would be necessary to authorize or take such action at a meeting at which all
shares entitled to vote thereon were present and voted. The Step Ahead Articles
of Incorporation do not contain a provision preventing Step Ahead Shareholders
from acting by written consent in lieu of a meeting.
126
<PAGE>
Action may be taken without a shareholder meeting and without action by the
Board of Directors under the VSCA if the action is taken by all the shareholders
entitled to vote on the action. The action must be evidenced by one or more
written consents describing the action taken, signed by all the shareholders
entitled to vote on the action, and delivered to the secretary of the
corporation. A shareholder may withdraw consent only by delivering a written
notice of withdrawal to the corporation prior to the time that all consents are
in the possession of the corporation. If notice of the proposed action is
requried to be given to non-voting shareholders, and the action is to be taken
by unanimous consent of the voting shareholders, the corporation must give its
non-voting shareholders written notice of the proposed action at least 10 days
before the action is taken.
SHAREHOLDER APPROVAL OF CERTAIN SIGNIFICANT TRANSACTIONS
Under the CCC, the terms of a reorganization do not require shareholder
approval if the corporation, or its shareholders immediately before the
reorganization, or both, own equity securities, other than any warrant or right
to subscribe to or purchase such equity securities, of the surviving or
acquiring corporation possessing more than five-sixths of the voting power of
the surviving or acquiring corporation or parent party. Step Ahead's Articles of
Incorporation do not alter the shareholder vote requirement relating to such
transactions.
Under the VSCA, a sale, lease, exchange or other disposal of all or
substantially all of the property of a corporation other than in the usual or
regular course of business requires the adoption by the board of directors and
the approval by the holders of more than two-thirds of all the votes entitled to
be cast on the transaction (unless the board of directors requires a higher vote
or the articles of incorporation provide for a greater or lesser vote so long as
the vote provided for is not less than a majority of all the votes cast on the
transaction by each voting group entitled to vote on the transaction at a
meeting at which a quorum exists). Also under the VSCA, a plan of merger or
share exchange generally must be approved by each voting group entitled to vote
on the plan by more than two-thirds of all the votes entitled to be cast by that
voting group (unless the board of directors requires a higher vote or the
articles of incorporation provide for a greater or lesser vote so long as the
vote provided for is not less than a majority of all the votes cast on the plan
by each voting group entitled to vote on the transaction at a meeting at which a
quorum of the voting group exists). The Dollar Tree Articles of Incorporation do
not alter the shareholder vote requirement relating to such transactions.
CUMULATIVE VOTING
Under the CCC, cumulative voting is allowed in any election of directors
unless the corporation, after it becomes listed, amends its articles of
incorporation to eliminate cumulative voting. Such an amendment may only be
adopted by the approval of the board of directors and the outstanding shares,
voting as a single class. Step Ahead's Articles of Incorporation have not been
amended to eliminate cumulative voting.
As is permitted by the VSCA, the Dollar Tree Articles of Incorporation
expressly deny Dollar Tree shareholders the right to cumulate their votes in the
election of directors.
PAYMENT OF DIVIDENDS AND REPURCHASE OF SHARES
Under the CCC, a corporation may not make any distribution (including
dividends, whether in cash or other property, and repurchase of its shares)
unless either the corporation's retained earnings immediately prior to the
proposed distribution equal or exceed the amount of the proposed distribution
or, immediately after giving effect to such distribution, the corporation's
assets (exclusive of goodwill, capitalized research and development expenses and
deferred charges) would be at least equal to 1 1/4 times its liabilities (not
including deferred taxes, deferred income and other deferred credits), and the
corporation's current assets would be at least equal to its current liabilities
or, if the average earnings of the corporation before taxes on income and
interest expense for the two preceding fiscal years was less than the average of
the interest
127
<PAGE>
expense of the corporation for those fiscal years, at least equal to 1 1/4 times
its current liabilities; provided, however, that in determining the amount of
the assets of the corporation profits derived from an exchange of assets shall
not be included unless the assets received are currently realizable in cash; and
provided, further, that for the purpose of this rule "current assets" may
include net amounts which the board has determined in good faith may reasonably
be expected to be received from customers during the 12-month period used in
calculating current liabilities pursuant to existing contractual relationships
obligating those customers to make fixed or periodic payments during the term of
the contract.
With respect to the repurchase of shares, under the CCC, all of the above
requirements must be satisfied. In addition, before making the above
calculations, all amounts that had been previously deducted from retained
earnings with respect to obligations incurred in connection with the
corporation's repurchase of its shares and reflected on its balance sheet are
added to retained earnings. Furthermore, before making the above calculations,
all amounts that had been previously deducted from retained earnings with
respect to obligations incurred in connection with the corporation's repurchase
of its shares and reflected on its balance sheet are deducted from liabilities.
Under the VSCA, the payment of dividends is generally permissible, subject
to restriction by the articles of incorporation, except if, after giving effect
to such payment, the corporation would not be able to pay its debts as they
become due in the usual course of its business or the corporation's total assets
would be less than the sum of its total liabilities plus (unless the articles of
incorporation permit otherwise) the amount that would be needed, if the
corporation were dissolved, to satisfy the preferential rights of holders of
securities with rights superior to those receiving the distribution. The Dollar
Tree Articles of Incorporation do not alter the dividend provisions set forth in
the VSCA. The directors of a Virginia corporation may be personally liable to
the corporation and its creditors to the extent that a dividend authorized by
the directors exceeds such permissible amounts and is not repaid to the
corporation, but may seek contribution from other directors voting in favor of
the distribution and from the shareholders receiving the distribution.
Under the VSCA, the repurchase of a corporation's stock is generally
permissible, except if, after giving effect to such payment, the corporation
would not be able to pay its debts as they become due in the usual course of its
business or the corporation's total assets would be less than the sum of its
total liabilities plus the amount that would be needed, if the corporation were
dissolved, to satisfy the preferential rights of holders of securities with
rights superior to the corporation's common stock.
DISSOLUTION
Under the CCC, shareholders holding 50 percent or more of the total voting
power may authorize a corporation's dissolution. Approval of the board of
directors is not required.
Under the VSCA, shareholders owning more than two-thirds of all votes
certified to be cast may approve dissolution of a corporation, but only if
dissolution has been proposed by the board of directors. The articles of
incorporation may provide for a greater or lesser vote but not less than a
majority of outstanding shares of each voting group. The Dollar Tree Articles of
Incorporation do not modify the statutory default vote.
INSPECTION OF BOOKS AND RECORDS
Under the CCC, a shareholder or shareholders holding at least five percent
in the aggregate of the outstanding voting shares of a corporation or who hold
at least one percent of those voting shares and have filed a Schedule 14A with
the Commission have an absolute right to do either or both of the following: (1)
inspect and copy the record of shareholders' names and addresses and
shareholdings during usual business hours upon five business days' prior written
demand upon the corporation, or (2) obtain from the transfer agent for the
corporation, upon written demand and upon the tender of usual charges for such a
list, a list of the shareholders' names and addresses who are entitled to vote
for the election of directors,
128
<PAGE>
and their shareholdings, as of the most recent record date for which it has been
compiled or as of a date specified by the shareholder subsequent to the date of
demand.
Under the VSCA, any person who has been a shareholder of record of a
corporation for at least six months immediately preceding his demand, or is the
holder of record of at least five percent of all outstanding shares of the
corporation, is entitled to inspect and copy, during regular business hours at
the corporation's principal office, certain records maintained by the
corporation, including the minutes of all shareholders' meetings and the record
of shareholders, if he gives the corporation written notice of his demand at
least five business days before the date on which he wishes to inspect and copy.
Any such demand must be made in good faith and for a proper purpose and must
describe with reasonable particularity the shareholder's purpose and records he
wishes to inspect. The shareholder may only inspect such records during normal
business hours and at a reasonable location specified by the corporation.
ISSUANCE OF RIGHTS AND OPTIONS; PREEMPTIVE RIGHTS
Under the CCC, shareholders only have preemptive rights to subscribe for
issues of shares or other securities if such rights are expressly granted in the
articles of incorporation. Step Ahead's Articles of Incorporation do not grant
preemptive rights to Step Ahead Shareholders.
Under the VSCA, unless reserved to the shareholders in the articles of
incorporation and subject to the preemptive rights of shareholders, a
corporation may create or issue rights, options or warrants for the purchase of
shares of the corporation upon such terms and conditions and for such
consideration, if any, and such purposes as may be approved by the board of
directors. Unless limited or denied in the articles of incorporation,
shareholders of a Virginia corporation have a preemptive right to acquire
proportional amounts of the corporation's unissued shares upon the decision of
the board of directors to issue them. The Dollar Tree Articles of Incorporation
deny preemptive rights to Dollar Tree shareholders and do not reserve to Dollar
Tree shareholders the right to create or issue rights, options or warrants for
the purchase of Dollar Tree Stock.
Under the VSCA, the shareholders of a publicly-traded Virginia corporation
or a corporation whose shares are held by at least 2,000 record shareholders do
not enjoy dissenters' rights where: (i) the articles of incorporation issuing
such shares say otherwise; (ii) in a transaction of merger or share exchange,
the holders of the class or series are required under the transaction to accept
any consideration other than (a) cash, (b) shares or membership interests of the
surviving corporation, (c) any other corporation's shares that are either held
by at least 2,000 record shareholders or is a publicly-traded corporation whose
shares are listed on a national securities exchange; or (d) a combination of
cash and shares or membership interests as set forth in (a) and either (b) or
(c) above; (iii) the transaction to be voted on is an "affiliate transaction"
and is not approved by a majority of "disinterested directors" as such terms are
defined in the VSCA; and (iv) such rights have been terminated when (a) the
proposed corporate action is rescinded or abandoned, (b) a court enjoins the
action permanently or sets it aside; or (c) his demand for payment is withdrawn
with the written consent of the corporation. The Dollar Tree Articles of
Incorporation and the Dollar Tree Bylaws do not contain any provisions granting
Dollar Tree shareholders dissenters' rights.
ANTI-TAKEOVER PROVISIONS
Under the CCC, if a tender offer or a written proposal for approval of a
reorganization or for certain sales of assets is made to some or all of a
corporation's shareholders by an interested party (as defined in the CCC)
(herein referred to as an "Interested Party Proposal"), an affirmative opinion
in writing as to the fairness of the consideration to the shareholders of the
corporation must be delivered to the shareholders (or, in the event shareholder
approval is not required, to the corporation's board of directors). In addition,
the shareholders must be (i) informed of certain later tender offers or written
proposals and provided with any written materials relating thereto, and (ii)
afforded a reasonable opportunity to withdraw any vote, consent or proxy
previously given before the vote or written consent on the Interested Party
Proposal
129
<PAGE>
becomes effective, or a reasonable time to withdraw any tendered shares before
the purchase of the shares pursuant to the Interested Party Proposal.
In addition, the CCC generally requires that in connection with any merger
transaction, unless all shareholders of a class or series consent otherwise,
each share of such class or series must be treated equally with respect to any
distribution of cash, property, rights or securities. The CCC also provides
generally that if a corporation that is party to a merger, or its parent, owns
more than 50% but less than 90% of the voting power of the other corporation
that is party to such merger, the nonredeemable shares of common stock of the
controlled corporation may only be converted into nonredeemable shares of the
surviving corporation or a parent party unless all shareholders of the class
consent.
Under the Virginia Control Share Acquisition statute, a person (the
"acquiror") who makes a bona fide offer to acquire, or acquires, shares of stock
of a Virginia corporation that when combined with shares already owned, would
increase the acquiror's ownership to at least 20%, 33 1/3%, or a majority of the
voting stock of the corporation, must obtain the approval of a majority in
interest of the shares held by all shareholders, except the acquiror and the
officers and inside directors of the corporation, in order to vote the shares
acquired. The statute does not apply to mergers pursuant to a merger or plan of
share exchange effected in compliance with the relevant provisions of the VSCA.
The Virginia Control Share Acquisition statute permits a Virginia corporation to
elect not to be governed by these provisions by including such an election in
its articles of incorporation or bylaws, and does not apply to companies with
less than 300 shareholders. Dollar Tree has elected not to be governed by the
Virginia Control Share Acquisition statute in its Articles of Incorporation.
Virginia's Affiliated Transactions statute provides that if a person
acquires 10% or more of the stock of a Virginia corporation without the approval
of its board of directors (an "interested shareholder"), such person may not
engage in certain transactions with the corporation (including a merger and
purchase or sale of greater than five percent of the corporation's assets or
voting stock) for a period of three years, and then only with the specified
supermajority shareholder vote, disinterested director approval or fair price
and procedural protections. Virginia's Affiliated Transactions statute includes
certain exceptions to this prohibition; for example, if a majority of
disinterested directors approves the acquisition of stock or the transaction
prior to the time that the person became an interested shareholder, or if the
transaction is approved by the board of directors and by the affirmative vote of
two-thirds of the outstanding voting stock which is not owned by the interested
shareholder, the prohibition does not apply. Dollar Tree has elected not to be
governed by Virginia's Affiliated Transactions statute in its Articles of
Incorporation.
The VSCA contains provisions explicitly permitting a corporation to take the
steps necessary to implement a shareholder rights plan "poison pill" where all
shareholders, except for the acquiror, have certain economically powerful rights
that are activated upon an acquiror obtaining a 20% (or other percentage) stock
ownership position. Dollar Tree has not implemented a "poison pill." However,
the Dollar Tree Articles of Incorporation do authorize preferred stock as to
which the Dollar Tree Board of Directors has authority to determine the terms,
which is generally a prerequisite to implementing a "poison pill."
LEGAL MATTERS
The validity of the Dollar Tree Common Stock issuable pursuant to the Merger
and certain other legal matters relating thereto will be passed upon for Dollar
Tree by Hofheimer Nusbaum, P.C., Norfolk, Virginia. Latham & Watkins is acting
as counsel for Step Ahead in connection with certain legal matters relating to
the Merger and the transactions contemplated thereby.
EXPERTS
The consolidated financial statements of Dollar Tree Stores, Inc. and
subsidiaries as of December 31, 1996 and 1997, and for each of the years in the
three-year period ended December 31, 1997, have been
130
<PAGE>
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 Step Ahead Investments, Inc., as of January 26,
1997 and January 25, 1998 and for the years ended January 28, 1996, January 26,
1997 and January 25, 1998 appearing in this Prospectus/Proxy Statement have been
audited by PricewaterhouseCoopers LLP, independent accountants, as set forth in
their report thereon appearing elsewhere herein, and are included in reliance
upon said report given upon the authority of such firm as experts in auditing
and accounting.
131
<PAGE>
STEP AHEAD INVESTMENTS, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of Independent Accountants..................................................... F-2
Balance Sheets as of January 26, 1997, January 25, 1998 and July 26, 1998............. F-3
Statements of Income for the fiscal years ended January 28, 1996, January 26, 1997 and
January 25, 1998 and the fiscal six months ended July 27, 1997 and July 26, 1998.... F-4
Statements of Shareholders' Equity for the fiscal years ended January 28, 1996,
January 26, 1997 and January 25, 1998 and the fiscal six months ended July 26,
1998................................................................................ F-5
Statements of Cash Flows for the fiscal years ended January 28, 1996, January 26, 1997
and January 25, 1998 and the fiscal six months ended July 27, 1997 and July 26,
1998................................................................................ F-6
Notes to Financial Statements......................................................... F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Shareholders of Step Ahead Investments, Inc.
In our opinion, the accompanying balance sheets and the related statements of
income, of shareholders' equity and of cash flows present fairly, in all
material respects, the financial position of Step Ahead Investments, Inc. at
January 26, 1997 and January 25, 1998, and the results of its operations and its
cash flows for the fiscal years ended January 28, 1996, January 26, 1997 and
January 25, 1998 in conformity with generally accepted accounting principles.
These financial statements are the responsibility of Step Ahead's management;
our responsibility is to express an opinion on these financial statements based
on our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
PRICEWATERHOUSECOOPERS LLP
Sacramento, California
August 8, 1998
F-2
<PAGE>
STEP AHEAD INVESTMENTS, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
(UNAUDITED)
JAN. 26, JAN. 25, JULY 26,
1997 1998 1998
--------- --------- -----------
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash......................................................................... $ 454 $ 294 $ 438
Restricted cash.............................................................. 2,726 1,029 1,272
Trade accounts receivable, net............................................... 1,635 945 593
Merchandise inventories...................................................... 14,103 20,417 21,310
Other current assets......................................................... 833 1,142 1,364
--------- --------- -----------
Total current assets....................................................... 19,751 23,827 24,977
--------- --------- -----------
Property and equipment, net.................................................... 3,824 4,931 5,424
Notes receivable, net.......................................................... 619 986 1,199
Other assets................................................................... 343 268 326
--------- --------- -----------
TOTAL ASSETS............................................................... $ 24,537 $ 30,012 $ 31,926
--------- --------- -----------
--------- --------- -----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Line of credit............................................................... $ 7,582 $ 9,241 $ 11,280
Accounts payable and accrued expenses........................................ 10,546 12,400 11,067
Current portion of long-term debt............................................ 300 250 684
--------- --------- -----------
Total current liabilities.................................................. 18,428 21,891 23,031
--------- --------- -----------
Long-term debt................................................................. 804 554 --
Deferred rent and other liabilities............................................ 1,047 1,440 1,620
--------- --------- -----------
Total liabilities.......................................................... 20,279 23,885 24,651
--------- --------- -----------
Commitments and contingent liabilities
Shareholders' equity:
Series A preferred stock, no par value. Authorized 1,000,000 shares, 221,700
shares issued and outstanding, $2,217,000 liquidation preference........... 2,149 2,149 2,149
Common stock, no par value. Authorized 5,000,000 shares, 1,213,200, 1,261,300
and 1,261,300 shares issued and outstanding................................ 157 631 638
Unearned compensation........................................................ (59) (18) (9)
Retained earnings............................................................ 2,011 3,365 4,497
--------- --------- -----------
Total shareholders' equity................................................. 4,258 6,127 7,275
--------- --------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY................................. $ 24,537 $ 30,012 $ 31,926
--------- --------- -----------
--------- --------- -----------
</TABLE>
See accompanying Notes to Financial Statements.
F-3
<PAGE>
STEP AHEAD INVESTMENTS, INC.
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
(UNAUDITED)
FISCAL SIX MONTHS
FISCAL YEARS ENDED ENDED
------------------------------- --------------------
<S> <C> <C> <C> <C> <C>
JAN. 28, JAN. 26, JAN. 25, JULY 27, JULY 26,
1996 1997 1998 1997 1998
--------- --------- --------- --------- ---------
<CAPTION>
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
Net sales................................................ $ 55,038 $ 71,263 $ 92,940 $ 41,244 $ 52,430
Cost of sales............................................ 39,837 50,738 66,696 30,163 37,160
--------- --------- --------- --------- ---------
Gross profit......................................... 15,201 20,525 26,244 11,081 15,270
--------- --------- --------- --------- ---------
Selling, general and administrative expenses:
Operating expenses..................................... 12,782 16,595 22,006 9,918 12,132
Depreciation and amortization.......................... 651 899 1,332 611 794
--------- --------- --------- --------- ---------
Total selling, general and administrative expenses... 13,433 17,494 23,338 10,529 12,926
--------- --------- --------- --------- ---------
Operating income......................................... 1,768 3,031 2,906 552 2,344
Interest expense, net.................................... 358 450 665 299 487
--------- --------- --------- --------- ---------
Income before provision for income taxes................. 1,410 2,581 2,241 253 1,857
Provision for income taxes............................... 267 1,068 887 109 725
--------- --------- --------- --------- ---------
Net income........................................... $ 1,143 $ 1,513 $ 1,354 $ 144 $ 1,132
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Net income per share:
Basic net income per share............................. $ .95 $ 1.25 $ 1.08 $ .11 $ .90
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Weighted average number of common shares outstanding... 1,201 1,210 1,258 1,253 1,261
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Diluted net income per share........................... $ .80 $ 1.05 $ .86 $ .09 $ .69
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Weighted average number of common shares and dilutive
potential common shares outstanding.................. 1,423 1,439 1,570 1,572 1,643
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
See accompanying Notes to Financial Statements.
F-4
<PAGE>
STEP AHEAD INVESTMENTS, INC.
STATEMENTS OF SHAREHOLDERS' EQUITY
FISCAL YEARS ENDED JANUARY 28, 1996, JANUARY 26, 1997 AND JANUARY 25, 1998
AND FISCAL SIX MONTHS ENDED JULY 26, 1998
<TABLE>
<CAPTION>
RETAINED
PREFERRED PREFERRED COMMON COMMON UNEARNED EARNINGS
STOCK STOCK STOCK STOCK COMPENSATION (DEFICIT)
AMOUNT SHARES AMOUNT SHARES AMOUNT AMOUNT
----------- ----------- ----------- ---------- --------------- -----------
<S> <C> <C> <C> <C> <C> <C>
(IN THOUSANDS, EXCEPT SHARE DATA)
Balance at January 29, 1995................ $ 2,149 221,700 $ 25 1,200,000 $ -- $ (645)
Net income................................. -- -- -- -- -- 1,143
Restricted stock issued net of
forfeitures.............................. -- -- 54 5,400 (54) --
----------- ----------- ----- ---------- --- -----------
Balance at January 28, 1996................ 2,149 221,700 79 1,205,400 (54) 498
Net income................................. -- -- -- -- -- 1,513
Restricted stock issued net of
forfeitures.............................. -- -- 78 7,800 (78) --
Amortization of unearned compensation...... -- -- -- -- 73 --
----------- ----------- ----- ---------- --- -----------
Balance at January 26, 1997................ 2,149 221,700 157 1,213,200 (59) 2,011
Net income................................. -- -- -- -- -- 1,354
Common stock issued........................ -- -- 500 50,000 -- --
Restricted stock issued net of
forfeitures.............................. -- -- (26) (1,900) 26 --
Amortization of unearned compensation...... -- -- -- -- 15 --
----------- ----------- ----- ---------- --- -----------
Balance at January 25, 1998................ 2,149 221,700 631 1,261,300 (18) 3,365
Net income (unaudited)..................... -- -- -- -- -- 1,132
Restricted stock issued net of forfeitures
(unaudited).............................. -- -- 7 -- (7) --
Amortization of unearned compensation
(unaudited).............................. -- -- -- -- 16 --
----------- ----------- ----- ---------- --- -----------
Balance at July 26, 1998 (unaudited)....... $ 2,149 221,700 $ 638 1,261,300 $ (9) $ 4,497
----------- ----------- ----- ---------- --- -----------
----------- ----------- ----- ---------- --- -----------
<CAPTION>
TOTAL
EQUITY
---------
<S> <C>
Balance at January 29, 1995................ $ 1,529
Net income................................. 1,143
Restricted stock issued net of
forfeitures.............................. --
---------
Balance at January 28, 1996................ 2,672
Net income................................. 1,513
Restricted stock issued net of
forfeitures.............................. --
Amortization of unearned compensation...... 73
---------
Balance at January 26, 1997................ 4,258
Net income................................. 1,354
Common stock issued........................ 500
Restricted stock issued net of
forfeitures.............................. --
Amortization of unearned compensation...... 15
---------
Balance at January 25, 1998................ 6,127
Net income (unaudited)..................... 1,132
Restricted stock issued net of forfeitures
(unaudited).............................. --
Amortization of unearned compensation
(unaudited).............................. 16
---------
Balance at July 26, 1998 (unaudited)....... $ 7,275
---------
---------
</TABLE>
See accompanying Notes to Financial Statements.
F-5
<PAGE>
STEP AHEAD INVESTMENTS, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
(UNAUDITED)
FISCAL SIX MONTHS
FISCAL YEARS ENDED ENDED
------------------------------- ----------------------
JAN. 28, JAN. 26, JAN. 25, JULY 27, JULY 26,
1996 1997 1998 1997 1998
--------- --------- --------- --------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income............................................................... $ 1,143 $ 1,513 $ 1,354 $ 144 $ 1,132
Adjustments to reconcile net income to net cash flows from operating
activities:
Depreciation and amortization.......................................... 651 899 1,332 611 794
Amortization of unearned compensation.................................. -- 73 15 14 16
Changes in operating assets and liabilities:
Restricted cash...................................................... -- (2,726) 1,697 1,698 (243)
Trade accounts receivable............................................ (577) (317) 690 308 6
Merchandise inventories.............................................. (4,075) (3,689) (6,314) (4,441) (893)
Other assets......................................................... 131 (878) (601) (600) (280)
Accounts payable and accrued expenses................................ 707 3,232 1,854 1,602 (1,333)
Deferred rent and other liabilities.................................. 131 338 393 193 180
--------- --------- --------- --------- -----------
Net cash from operating activities................................. (1,889) (1,555) 420 (471) (621)
--------- --------- --------- --------- -----------
Cash flows from investing activities:
Purchases of property and equipment.................................... (776) (2,338) (2,548) (1,482) (1,287)
Proceeds from the sale of equipment.................................... -- -- 109 109 --
Payments received on notes receivable.................................. -- -- -- -- 135
--------- --------- --------- --------- -----------
Net cash used in investing activities.............................. (776) (2,338) (2,439) (1,373) (1,152)
--------- --------- --------- --------- -----------
Cash flows from financing activities:
Change in line of credit, net.......................................... 3,373 3,759 1,659 1,371 2,039
Principal payments on notes payable to shareholders, net............... (1) (124) -- -- --
Principal payments on long-term debt................................... (192) (332) (300) (160) (122)
Proceeds from issuance of common stock................................. -- -- 500 500 --
--------- --------- --------- --------- -----------
Net cash provided by financing activities.......................... 3,180 3,303 1,859 1,711 1,917
--------- --------- --------- --------- -----------
Net change in cash....................................................... 515 (590) (160) (133) 144
Cash, beginning of period................................................ 529 1,044 454 454 294
--------- --------- --------- --------- -----------
Cash, end of period...................................................... $ 1,044 $ 454 $ 294 $ 321 $ 438
--------- --------- --------- --------- -----------
--------- --------- --------- --------- -----------
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest paid........................................................ $ 550 $ 686 $ 862 $ 359 $ 567
--------- --------- --------- --------- -----------
--------- --------- --------- --------- -----------
Income taxes paid.................................................... $ 156 $ 1,040 $ 969 685 1,822
--------- --------- --------- --------- -----------
--------- --------- --------- --------- -----------
Supplemental disclosure of non-cash investing and financing activities:
Long-term debt issued to purchase property and equipment............... $ 164 $ 65 $ -- $ -- $ --
--------- --------- --------- --------- -----------
--------- --------- --------- --------- -----------
Long-term debt issued to refinance note payable to shareholder......... $ -- $ 1,000 $ -- $ -- $ --
--------- --------- --------- --------- -----------
--------- --------- --------- --------- -----------
</TABLE>
See accompanying Notes to Financial Statements.
F-6
<PAGE>
STEP AHEAD INVESTMENTS, INC.
NOTES TO FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS
Step Ahead Investments, Inc. (Step Ahead) owns and operates discount variety
retail stores which sell EVERYTHING FOR 98 CENTS ... OR LESS. At January 25,
1998, Step Ahead owned and operated 59 stores operating under the name 98 CENTS
CLEARANCE CENTERS. Step Ahead's headquarters and distribution facility is
located outside Sacramento, California; its stores are located in Northern and
Central California and Nevada. Merchandise carried by Step Ahead includes books,
beverages, food, health and beauty aids, hardware, housewares, party supplies,
seasonal goods, and stationery. None of Step Ahead's suppliers represented more
than 3% of total purchases in fiscal 1997. Step Ahead also sells merchandise to
wholesale customers.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
FINANCIAL STATEMENT PRESENTATION
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
FISCAL YEAR
Step Ahead's fiscal year is the 52-week period ending on the last Sunday in
January. All references herein to fiscal years 1995, 1996, and 1997 represent
the 52-week fiscal years ended January 28, 1996, January 26, 1997, and January
25, 1998, respectively.
RESTRICTED CASH
Restricted cash includes amounts subject to a blocked account agreement with
the finance company funding Step Ahead's line of credit. Under the terms of this
agreement all retail and wholesale cash receipts are deposited to this account
and are automatically transferred daily to pay down the line of credit.
MERCHANDISE INVENTORIES
Merchandise inventories are stated at the lower of cost or market. Cost is
determined using the first-in, first-out method for distribution center
inventories and using the retail inventory method for store inventories. Costs
directly associated with purchasing and distribution and certain occupancy costs
are included in cost of sales. Purchasing and distribution costs capitalized
into inventories totaled $781,000 at January 26, 1997 and $1,185,000 at January
25, 1998.
RETAIL STORE PRE-OPENING COSTS
Costs incurred to prepare retail stores for opening, primarily labor, are
deferred and amortized on a straight-line basis over twelve months. Unamortized
pre-opening costs of $440,000 at January 26, 1997 and $265,000 at January 25,
1998 are included in other current assets.
The Accounting Standards Executive Committee of the American Institute of
Certified Public Accountants issued Statement of Position (SOP) 98-5, REPORTING
ON THE COSTS OF START-UP ACTIVITIES, on April 3, 1998. It requires pre-opening
costs to be expensed as incurred for fiscal years beginning after December 15,
1998. Step Ahead intends to adopt this SOP in the first quarter of fiscal 1999.
Any
F-7
<PAGE>
STEP AHEAD INVESTMENTS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
unamortized pre-opening costs will be expensed and reported as the cumulative
effect of a change in accounting principle.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost. At the date of sale or
retirement, the related cost and accumulated depreciation or amortization are
removed from the accounts and the resulting gain or loss is included in income
from current operations. Maintenance and repair costs are expensed as incurred,
while renewals and betterments are capitalized and depreciated over their useful
lives. Depreciation and amortization are computed using the straight-line method
over the estimated lives of the assets which average five years.
DEFERRED RENT
The minimum rental payments on noncancelable operating leases are recognized
as expense on a straight-line basis over the lives of leases irrespective of the
timing of rental payments or rent-free periods. Unamortized rent of $968,000 at
January 26, 1997 and $1,387,000 at January 25, 1998 are included in deferred
rent and other liabilities.
REVENUE RECOGNITION
Revenue is recognized at the point of sale for retail sales and generally at
the time of shipment for wholesale sales, subject to an assessment of ultimate
realization.
ADVERTISING
Advertising costs, including radio, television, and newspaper, are
recognized as expense the first time the advertising takes place.
INCOME TAXES
Income taxes are recorded using the liability approach; a current or
deferred income tax liability or asset is recognized for the current or deferred
income tax consequences of all events that have been recognized in the financial
statements. A valuation allowance is recognized for a deferred tax asset if,
based on the weight of available evidence, it is more likely than not that some
or all of it will not be realized.
NET INCOME PER SHARE
Basic net income per share is computed by dividing net income by the
weighted-average number of common shares outstanding during the period. Diluted
net income per share is computed by dividing net income by the weighted-average
number of common and preferred shares outstanding plus the dilutive effect of
outstanding stock options calculated using the treasury stock method. The
weighted-average number of preferred shares outstanding was 221,700 for all
periods presented. The dilutive effect of outstanding stock options was 7,806
and 91,126 for the years ended January 26, 1997 and January 25, 1998,
respectively. The dilutive effect of outstanding stock options was 96,625 and
159,895 for the fiscal six months ended July 27, 1997 and July 26, 1998,
respectively.
F-8
<PAGE>
STEP AHEAD INVESTMENTS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
FINANCIAL INSTRUMENTS AND CONCENTRATION OF CREDIT RISK
The estimated fair value of Step Ahead's line of credit and long-term debt
approximate carrying value based on market interest rates available to Step
Ahead for similar financial instruments.
Trade accounts receivable, net includes amounts due from two customers
totaling $992,000 at January 26, 1997 and $741,000 at January 25, 1998. The
notes receivable are also due from these two customers and bear interest at 18%.
Payments required on the notes receivable total $20,246 per month (including
principal and interest) with the balances due in August, 2001 and January, 2003.
The estimated fair value of the notes receivable approximate carrying value
based on market interest rates for similar financial instruments. Reserves
related to these receivables totaled $51,000 and $513,000 at January 26, 1997
and January 25, 1998, respectively. Step Ahead holds a security interest in the
inventory and equipment owned by both customers.
UNAUDITED INTERIM FINANCIAL DATA
The interim financial data for the fiscal six months ended July 27, 1997 and
July 26, 1998 is unaudited, however, in the opinion of management, the interim
data includes all adjustments, consisting only of normal recurring adjustments,
necessary for a fair statement of the results for the interim periods.
RECLASSIFICATIONS
Certain reclassifications have been made in the financial statements and
notes to conform to the current presentation.
3. BALANCE SHEET COMPONENTS
Property and equipment, net, consists of the following:
<TABLE>
<CAPTION>
JANUARY 26, JANUARY 25,
1997 1998
----------- -----------
<S> <C> <C>
(IN THOUSANDS)
Furniture and fixtures.............................................. $ 3,204 $ 4,514
Equipment........................................................... 2,028 2,545
Automobiles and trucks.............................................. 420 592
Leasehold improvements.............................................. 453 804
----------- -----------
6,105 8,455
Less accumulated depreciation and amortization...................... (2,281) (3,524)
----------- -----------
$ 3,824 $ 4,931
----------- -----------
----------- -----------
</TABLE>
F-9
<PAGE>
STEP AHEAD INVESTMENTS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
3. BALANCE SHEET COMPONENTS (CONTINUED)
Accounts payable and accrued expenses consists of the following:
<TABLE>
<CAPTION>
JANUARY 26, JANUARY 25,
1997 1998
----------- -----------
<S> <C> <C>
(IN THOUSANDS)
Trade accounts payable.............................................. $ 5,880 $ 5,864
Book overdraft...................................................... 1,858 3,254
Accrued sales tax................................................... 928 1,110
Other accrued expenses.............................................. 1,880 2,172
----------- -----------
$ 10,546 $ 12,400
----------- -----------
----------- -----------
</TABLE>
4. LINE OF CREDIT
At January 25, 1998, Step Ahead had a $10 million revolving line of credit
agreement with a finance company bearing interest at prime plus 0.75% (9.25% at
January 25, 1998) which expires in May, 1999. The line of credit is secured by
essentially all of Step Ahead's assets and is subject to certain borrowing base
limitations. The agreement provides for an unused line fee of 0.25% per annum
(0.375% if the average balance is less than $5 million) and a loan origination
fee of 0.5%. The agreement also requires compliance with certain covenants
related to dividends, tangible net worth, capital expenditures, fixed charge
coverage, new store openings, and the maintenance of a restricted deposit
account the proceeds of which are automatically transferred daily to pay down
the line of credit. In May, 1998, the line of credit was increased to $15
million.
5. LONG-TERM DEBT
Step Ahead had a term loan with balances of $950,000 at January 26, 1997 and
$750,000 at January 25, 1998 and bearing interest at prime plus .75% (9.25% at
January 25, 1998). The loan is secured by essentially all of Step Ahead's assets
and is payable in quarterly principal installments of $50,000 with the balance
due in May, 1999. The agreement also requires compliance with certain covenants
related to dividends, tangible net worth, capital expenditures, fixed charge
coverage, and new store openings.
Long-term debt also includes installment notes and contracts payable which
are secured by vehicles and equipment and bear interest at rates averaging
12.75%.
Future principal payments at January 25, 1998 are scheduled as follows:
<TABLE>
<CAPTION>
FISCAL YEAR
- --------------------------------------------------------------------------------------
<S> <C>
1998............................................................................... $ 250,000
1999............................................................................... 554,000
----------
$ 804,000
----------
----------
</TABLE>
F-10
<PAGE>
STEP AHEAD INVESTMENTS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
6. INCOME TAXES
The provision for federal and state income taxes consists of the following:
<TABLE>
<CAPTION>
FISCAL YEARS ENDED
-----------------------------------------
<S> <C> <C> <C>
JANUARY 28, JANUARY 26, JANUARY 25,
1996 1997 1998
------------- ----------- -------------
<CAPTION>
(IN THOUSANDS)
<S> <C> <C> <C>
Federal:
Current.............................................. $ 313 $ 856 $ 902
Deferred............................................. (133) (28) (243)
----- ----------- -----
180 828 659
----- ----------- -----
State:
Current.............................................. 109 256 278
Deferred............................................. (22) (16) (50)
----- ----------- -----
87 240 228
----- ----------- -----
$ 267 $ 1,068 $ 887
----- ----------- -----
----- ----------- -----
</TABLE>
The provision for income taxes differs from the amount of income as
determined by applying the applicable federal tax rate to pretax income from
operations as a result of the following differences:
<TABLE>
<CAPTION>
FISCAL YEARS ENDED
---------------------------------------
<S> <C> <C> <C>
JANUARY 28, JANUARY 26, JANUARY 25,
1996 1997 1998
----------- ----------- -------------
<CAPTION>
(IN THOUSANDS)
<S> <C> <C> <C>
Income taxes at statutory federal rate................. $ 479 $ 877 $ 762
State income tax net of federal tax benefit............ 84 161 143
Change in valuation allowance.......................... (267) -- --
Other, net............................................. (29) 30 (18)
----------- ----------- -----
$ 267 $ 1,068 $ 887
----------- ----------- -----
----------- ----------- -----
</TABLE>
F-11
<PAGE>
STEP AHEAD INVESTMENTS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
6. INCOME TAXES (CONTINUED)
The net deferred tax assets balances are included in other assets. Deferred
tax assets (liabilities) consist of the following:
<TABLE>
<CAPTION>
JANUARY 26, JANUARY 25,
1997 1998
------------- -------------
<S> <C> <C>
(IN THOUSANDS)
Deferred tax assets:
Deferred rent..................................................... $ 386 $ 553
Accrued compensation.............................................. 89 96
Allowances and reserves........................................... 101 332
Other............................................................. 184 173
----- -----
760 1,154
----- -----
Deferred tax liabilities:
Depreciation...................................................... (285) (375)
Retail store pre-opening costs.................................... (175) (105)
Other............................................................. (20) (100)
----- -----
(480) (580)
----- -----
$ 280 $ 574
----- -----
----- -----
</TABLE>
7. RELATED PARTY TRANSACTIONS
Step Ahead purchases merchandise for resale from certain shareholders with a
2.8% ownership interest (in aggregate) at January 25, 1998. Purchases from these
related parties totaled $3,873,000, $3,131,000, and $2,698,000 for fiscal years
1995, 1996, and 1997, respectively. Trade accounts payable to these related
parties totaled $225,000 and $272,000 at January 26, 1997 and January 25, 1998,
respectively.
Step Ahead also leases its distribution facility from a shareholder with a
1.7% ownership interest, leases one store facility from shareholders with a
57.3% aggregate ownership interest, and is represented by an advertising agency
whose principals held a 0.3% ownership interest, at January 25, 1998. Amounts
paid for services rendered by these related parties totaled $1,317,000 and
$1,736,000 in fiscal years 1996 and 1997, respectively.
Management believes that goods or services received from these related
parties were purchased at fair market value.
Interest on notes payable to shareholders totaled $240,000, $59,000 and
$33,000 for fiscal years 1995, 1996 and 1997, respectively. Short-term loans
from shareholders which were received and repaid during fiscal years 1995 and
1997 totaled $1,900,000 and $1,410,000, respectively.
8. SERIES A PREFERRED SHARES
The Series A preferred shares are convertible into one share of common
stock, have a liquidation preference over the common stock of $10 per share, and
have voting rights of one vote per share. Step Ahead may redeem the shares at a
price of $10 per share plus 12% per year outstanding since issuance in 1992.
F-12
<PAGE>
STEP AHEAD INVESTMENTS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
9. STOCK OPTION AND RESTRICTED STOCK AWARDS
Step Ahead sponsors a Long-Term Incentive Plan (the Plan) which provides for
the issuance of stock options, stock appreciation rights (SARs), phantom stock
and restricted stock awards to officers and key employees. At January 25, 1998,
Step Ahead had authorized 400,000 shares subject to stock options, 40,000
phantom shares, 125,000 SARs, and 25,000 shares for restricted stock awards. In
fiscal 1996, Step Ahead converted all of the outstanding SARs and phantom stock
awards to stock options and restricted stock awards, respectively.
Step Ahead applies Accounting Principles Board Opinion 25 and related
Interpretations in accounting for awards issued under the Plan. The compensation
cost that has been charged against income for these awards totaled $2,000,
$1,000, and $35,000 for fiscal years 1997, 1996, and 1995, respectively. Had
compensation cost for the stock options been determined based on the fair value
of the stock options at the grant dates consistent with Financial Accounting
Standards Board Statement 123, for fiscal 1995, 1996 and 1997, Step Ahead's pro
forma net income would have been $1,143,000, $1,275,000 and $1,276,000,
respectively; pro forma basic net income per share would have been $0.95, $1.05,
and $1.01, respectively; and pro forma diluted net income per share would have
been $0.80, $0.89 and $0.85, respectively.
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants in fiscal 1996 and 1997, respectively: dividend
yield of 0% for both years, expected volatility of 0% for both years, risk-free
interest rates of 6.3% and 5.9%, and expected lives of 6.6 and 4.9 years. The
weighted-average grant date fair value of the options issued was $3.30 and $4.40
in fiscal years 1996 and 1997, respectively.
The following table summarizes information about the stock options granted,
exercised, and forfeited in fiscal years 1995, 1996 and 1997 (including options
granted to non-employees):
<TABLE>
<CAPTION>
WEIGHTED-AVERAGE EXERCISE PRICE
SHARES OF STOCK
------------------------------- -------------------------------
FIXED OPTIONS 1995 1996 1997 1995 1996 1997
- ----------------------------------------------------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Outstanding, beginning............................... -- 50,000 333,917 $ -- $ 10.00 $ 10.08
Granted.............................................. 50,000 310,742 38,800 10.00 10.09 18.09
Exercised............................................ -- -- (50,000) -- -- 10.00
Forfeited............................................ -- (26,825) (30,225) -- 10.00 11.01
--------- --------- --------- --------- --------- ---------
Outstanding, ending.................................. 50,000 333,917 292,492 $ 10.00 $ 10.08 $ 11.06
--------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- ---------
Exercisable, year end................................ 50,000 152,725 171,911
--------- --------- ---------
--------- --------- ---------
</TABLE>
The following table summarizes information about the stock options
outstanding at January 25, 1998:
<TABLE>
<CAPTION>
EXERCISE SHARES SHARES WEIGHTED-AVERAGE
PRICE EXERCISABLE OUTSTANDING REMAINING LIFE
- ------------- ----------- ----------- ----------------
<C> <C> <C> <S>
$ 10.00 159,011 246,592 4.6 years
12.00 12,900 12,900 1.9
15.00 -- 17,000 4.6
22.50 -- 16,000 4.7
- ------------- ----------- ----------- --------
$ 11.06 171,911 292,492 4.5
- ------------- ----------- ----------- --------
- ------------- ----------- ----------- --------
</TABLE>
F-13
<PAGE>
STEP AHEAD INVESTMENTS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
9. STOCK OPTION AND RESTRICTED STOCK AWARDS (CONTINUED)
At January 25, 1998, there were 11,343 shares of restricted stock awards
outstanding of which 2,475 shares were vested. The remaining shares vest as
follows: 8,107 shares in fiscal 1998 and 761 shares in fiscal 1999.
10. DEFINED CONTRIBUTION PENSION PLAN
Step Ahead sponsors a 401(k) Profit Sharing Plan which is subject to the
provisions of ERISA. Full-time employees are generally eligible to participate
in the plan after completing at least one year of service. Participants may
elect to contribute a percentage of their compensation subject to statutory
limitations. Step Ahead provides a matching contribution of 50% of the
participant's contributions up to 6% of each participant's compensation
contributed and discretionary contributions as determined by Step Ahead each
year. Participants are immediately vested in their contributions and earnings
thereon, and vest in employer contributions and earnings thereon 50% after three
years of service and 25% per year thereafter. Forfeitures of employer
contributions are applied to reduce future employer matching contributions or to
offset Plan expenses. Total expense recognized under the defined contribution
pension plan totaled $77,000, $63,000 and $96,000 for fiscal years 1995, 1996,
and 1997, respectively.
11. COMMITMENTS AND CONTINGENT LIABILITIES
Step Ahead leases its corporate office and distribution facilities, retail
stores and certain equipment under noncancelable operating leases. In addition
to the minimum payments, Step Ahead is responsible for percentage rent based on
gross sales on certain store leases, and property taxes, insurance, and common
area maintenance charges allocated to the square footage for most properties.
Step Ahead also subleases a portion of its corporate office building. At January
25, 1998, the future minimum rental payments and receipts under these leases are
as follows:
<TABLE>
<CAPTION>
MINIMUM SUBLEASE
FISCAL YEAR PAYMENTS INCOME
- ------------------------------------------------------------------- ------------- ----------
<S> <C> <C>
1998............................................................... $ 5,181,000 $ 102,000
1999............................................................... 5,010,000 105,000
2000............................................................... 4,687,000 72,000
2001............................................................... 4,463,000 --
2002............................................................... 3,693,000 --
Thereafter......................................................... 13,755,000 --
------------- ----------
$ 36,789,000 $ 279,000
------------- ----------
------------- ----------
</TABLE>
Step Ahead is a defendant in certain legal actions. While management and
legal counsel are presently unable to predict the outcome or to estimate the
amount of any liability Step Ahead may have with respect to these lawsuits, it
is not expected that these matters will have a material adverse effect on Step
Ahead's financial position, results of operations, or cash flows.
12. SUBSEQUENT EVENT
On July 22, 1998, Step Ahead signed an agreement to merge with Dollar Tree
Stores, Inc. in a stock-for-stock transaction to be accounted for as a pooling
of interests. The merger is subject to the approval of the Step Ahead
Shareholders and other customary conditions.
F-14
<PAGE>
APPENDIX A
EXCHANGE RATIOS
The following table indicates the Exchange Ratios associated with various
Average Closing Prices for Dollar Tree Common Stock. It assumes that the number
of shares of Step Ahead Common Stock outstanding or subject to Step Ahead
Options plus the number of shares of Step Ahead Preferred Stock outstanding
equals 1,771,582.
The Exchange Ratio is equal to the total amount of Dollar Tree Common Stock
you might possibly receive in the Merger for each share of Step Ahead Stock. The
Exchange Ratio does not, however, reflect the holdback of Escrow Shares to cover
claims by Dollar Tree. To assist you in assessing the Merger, the table also
shows, for each share of Step Ahead Stock you own, the amount of Dollar Tree
Common Stock you would receive in the Merger, net of Escrow Shares, and the
amount of Dollar Tree Common Stock to be placed in escrow, with the equivalent
cash value of each based on the Average Closing Price. (Depending on the extent
of Dollar Tree claims against the Escrow Shares, you may not receive any of
these shares.) THESE NUMBERS ARE APPROXIMATE AND SHOULD BE USED ONLY TO MAKE A
ROUGH CALCULATION OF THE SHARES YOU WOULD RECEIVE IMMEDIATELY AND THE SHARES
PLACED IN ESCROW ON YOUR BEHALF AND THEIR RESPECTIVE CASH VALUES. NO FRACTIONAL
SHARES WILL BE ISSUED IN THE MERGER.
<TABLE>
<CAPTION>
SHARES RECEIVED,
NET OF ESCROW SHARES ESCROW SHARES
AVERAGE -------------------------- ----------------------------
CLOSING EQUIVALENT EQUIVALENT
PRICE EXCHANGE RATIO SHARES(1) CASH VALUE(2) SHARES(3) CASH VALUE(2)
- ------------ --------------- ----------- ------------- ----------- ---------------
<S> <C> <C> <C> <C> <C>
$46 15/32(4) 1.0930 0.9837 $ 45.71 0.1093 $ 5.08
46 3/8 1.0952 0.9857 45.71 0.1095 5.08
46 1/4 1.0982 0.9884 45.71 0.1098 5.08
46 1/8 1.1012 0.9911 45.71 0.1101 5.08
46 1.1042 0.9938 45.71 0.1104 5.08
45 7/8 1.1072 0.9965 45.71 0.1107 5.08
45 3/4 1.1102 0.9992 45.71 0.1110 5.08
45 5/8 1.1133 1.0020 45.71 0.1113 5.08
45 1/2 1.1163 1.0047 45.71 0.1116 5.08
45 3/8 1.1194 1.0075 45.71 0.1119 5.08
45 1/4 1.1225 1.0103 45.71 0.1123 5.08
45 1/8 1.1256 1.0130 45.71 0.1126 5.08
45 1.1288 1.0159 45.71 0.1129 5.08
44 7/8 1.1319 1.0187 45.71 0.1132 5.08
44 3/4 1.1350 1.0215 45.71 0.1135 5.08
44 5/8 1.1382 1.0244 45.71 0.1138 5.08
44 1/2 1.1414 1.0273 45.71 0.1141 5.08
44 7/16(5) 1.1430 1.0287 45.71 0.1143 5.08
44 3/8 1.1430 1.0287 45.65 0.1143 5.07
44 1/4 1.1430 1.0287 45.52 0.1143 5.06
44 1/8 1.1430 1.0287 45.39 0.1143 5.04
44 1.1430 1.0287 45.26 0.1143 5.03
43 7/8 1.1430 1.0287 45.13 0.1143 5.01
43 3/4 1.1430 1.0287 45.01 0.1143 5.00
43 5/8 1.1430 1.0287 44.88 0.1143 4.99
43 1/2 1.1430 1.0287 44.75 0.1143 4.97
43 3/8 1.1430 1.0287 44.62 0.1143 4.96
43 1/4 1.1430 1.0287 44.49 0.1143 4.94
43 1/8 1.1430 1.0287 44.36 0.1143 4.93
43 1.1430 1.0287 44.23 0.1143 4.91
42 7/8 1.1430 1.0287 44.11 0.1143 4.90
42 3/4 1.1430 1.0287 43.98 0.1143 4.89
</TABLE>
A-1
<PAGE>
<TABLE>
<CAPTION>
SHARES RECEIVED,
NET OF ESCROW SHARES ESCROW SHARES
AVERAGE -------------------------- ----------------------------
CLOSING EQUIVALENT EQUIVALENT
PRICE EXCHANGE RATIO SHARES(1) CASH VALUE(2) SHARES(3) CASH VALUE(2)
- ------------ --------------- ----------- ------------- ----------- ---------------
<S> <C> <C> <C> <C> <C>
$42 5/8 1.1430 1.0287 $ 43.85 0.1143 $ 4.87
42 1/2 1.1430 1.0287 43.72 0.1143 4.86
42 3/8 1.1430 1.0287 43.59 0.1143 4.84
42 1/4 1.1430 1.0287 43.46 0.1143 4.83
42 1/8 1.1430 1.0287 43.33 0.1143 4.81
42 1.1430 1.0287 43.21 0.1143 4.80
41 7/8 1.1430 1.0287 43.08 0.1143 4.79
41 3/4 1.1430 1.0287 42.95 0.1143 4.77
41 5/8 1.1430 1.0287 42.82 0.1143 4.76
41 1/2 1.1430 1.0287 42.69 0.1143 4.74
41 3/8 1.1430 1.0287 42.56 0.1143 4.73
41 1/4 1.1430 1.0287 42.43 0.1143 4.71
41 1/8 1.1430 1.0287 42.31 0.1143 4.70
41 1.1430 1.0287 42.18 0.1143 4.69
40 7/8 1.1430 1.0287 42.05 0.1143 4.67
40 3/4 1.1430 1.0287 41.92 0.1143 4.66
40 5/8 1.1430 1.0287 41.79 0.1143 4.64
40 1/2 1.1430 1.0287 41.66 0.1143 4.63
40 3/8 1.1430 1.0287 41.53 0.1143 4.61
40 1/4 1.1430 1.0287 41.41 0.1143 4.60
40 1/8 1.1430 1.0287 41.28 0.1143 4.59
40 1.1430 1.0287 41.15 0.1143 4.57
39 7/8 1.1430 1.0287 41.02 0.1143 4.56
39 3/4 1.1430 1.0287 40.89 0.1143 4.54
39 5/8 1.1430 1.0287 40.76 0.1143 4.53
39 1/2 1.1430 1.0287 40.63 0.1143 4.51
39 3/8 1.1430 1.0287 40.51 0.1143 4.50
39 1/4 1.1430 1.0287 40.38 0.1143 4.49
39 1/8 1.1430 1.0287 40.25 0.1143 4.47
39 1.1430 1.0287 40.12 0.1143 4.46
38 7/8 1.1430 1.0287 39.99 0.1143 4.44
38 3/4 1.1430 1.0287 39.86 0.1143 4.43
38 5/8 1.1430 1.0287 39.73 0.1143 4.41
38 1/2 1.1430 1.0287 39.60 0.1143 4.40
38 3/8 1.1430 1.0287 39.48 0.1143 4.39
38 1/4 1.1430 1.0287 39.35 0.1143 4.37
38 1/8 1.1430 1.0287 39.22 0.1143 4.36
38 1.1430 1.0287 39.09 0.1143 4.34
37 7/8 1.1430 1.0287 38.96 0.1143 4.33
37 3/4 1.1430 1.0287 38.83 0.1143 4.31
37 5/8 1.1430 1.0287 38.70 0.1143 4.30
37 1/2 1.1430 1.0287 38.58 0.1143 4.29
37 3/8 1.1430 1.0287 38.45 0.1143 4.27
37 1/4 1.1430 1.0287 38.32 0.1143 4.26
37 1/8 1.1430 1.0287 38.19 0.1143 4.24
37 1.1430 1.0287 38.06 0.1143 4.23
36 7/8 1.1430 1.0287 37.93 0.1143 4.21
36 3/4 1.1430 1.0287 37.80 0.1143 4.20
36 5/8 1.1430 1.0287 37.68 0.1143 4.19
36 1/2 1.1430 1.0287 37.55 0.1143 4.17
36 3/8(5) 1.1430 1.0287 37.42 0.1143 4.16
36 1/4 1.1469 1.0322 37.42 0.1147 4.16
</TABLE>
A-2
<PAGE>
<TABLE>
<CAPTION>
SHARES RECEIVED,
NET OF ESCROW SHARES ESCROW SHARES
AVERAGE -------------------------- ----------------------------
CLOSING EQUIVALENT EQUIVALENT
PRICE EXCHANGE RATIO SHARES(1) CASH VALUE(2) SHARES(3) CASH VALUE(2)
- ------------ --------------- ----------- ------------- ----------- ---------------
<S> <C> <C> <C> <C> <C>
36 1/8 1.1509 1.0358 $ 37.42 0.1151 $ 4.16
36 1.1549 1.0394 37.42 0.1155 4.16
35 7/8 1.1589 1.0430 37.42 0.1159 4.16
35 3/4 1.1630 1.0467 37.42 0.1163 4.16
35 5/8 1.1671 1.0504 37.42 0.1167 4.16
35 1/2 1.1712 1.0541 37.42 0.1171 4.16
35 3/8 1.1753 1.0578 37.42 0.1175 4.16
35 1/4 1.1795 1.0616 37.42 0.1180 4.16
35 1/8 1.1837 1.0653 37.42 0.1184 4.16
35 1.1879 1.0691 37.42 0.1188 4.16
34 7/8 1.1922 1.0730 37.42 0.1192 4.16
34 3/4 1.1964 1.0768 37.42 0.1196 4.16
34 5/8 1.2008 1.0807 37.42 0.1201 4.16
34 1/2 1.2051 1.0846 37.42 0.1205 4.16
34 3/8 1.2095 1.0886 37.42 0.1210 4.16
34 11/32(6) 1.2106 1.0895 37.42 0.1211 4.16
</TABLE>
- ------------------------
(1) The number of shares received net of Escrow Shares is calculated by
subtracting the number of Escrow Shares from the Exchange Ratio.
(2) The equivalent cash value is calculated by multiplying the corresponding
amount of Dollar Tree Common Stock by the Average Closing Price. Actual
market prices of Dollar Tree Common Stock fluctuate considerably and you are
urged to obtain current quotations. The actual cash value of Dollar Tree
Common Stock when shares are received in the Merger may be less than this
amount because of the volatility in the market price of Dollar Tree Common
Stock.
(3) The number of Escrow Shares is calculated by multiplying the respective
Exchange Ratio by 10%.
(4) Above $46 15/32 per share the Exchange Ratio is fixed at 1.0930.
(5) If the Average Closing Price is between $44 7/16 and $36 3/8 per share,
inclusive, the Exchange Ratio is fixed at 1.1430.
(6) If the actual Average Closing Price of Dollar Tree Common Stock is less than
$34 11/32, the Dollar Tree Board may propose that the parties treat the
Average Closing Price, for purposes of calculating the Exchange Ratio, as a
value between the actual Average Closing Price and $34 11/32. This proposal
would have the effect of decreasing the Exchange Ratio (but not below
1.2106). If the Step Ahead Board does not accept this proposal by 5:00 p.m.
of the third business day before the Special Meeting, the Merger Agreement
will terminate. If the Dollar Tree and Step Ahead Boards agree to treat the
Average Closing Price of Dollar Tree Common Stock at a value that is greater
than its actual value, the equivalent cash value of Dollar Tree Common Stock
received in the Merger net of Escrow will be less than $37.42, and the
equivalent cash value of Escrow Shares will be less than $4.16. See the
examples below.
Under the terms of the Merger Agreement, if the actual Average Closing Price
calculated over the five trading days ending on the sixth business day prior to
the Special Meeting is less than $34 11/32, the Dollar Tree Board may propose
that the parties treat the Average Closing Price, for purposes of calculating
the Exchange Ratio, as a value between the actual Average Closing Price and
$34 11/32. The Merger Agreement will terminate unless the Step Ahead Board
accepts this proposal by 5:00 p.m. of the third business day before the Special
Meeting. If the parties do agree to treat the Average Closing Price as $34 11/32
or some other value proposed by Dollar Tree, the effect will be to decrease the
Exchange Ratio below the value that would otherwise be obtained based on the
actual Average Closing Price. The following two examples illustrate how this
procedure affects what you receive in the Merger:
EXAMPLE 1. THE ACTUAL AVERAGE CLOSING PRICE DETERMINED ON DECEMBER 2, 1998
IS $32. SINCE THIS PRICE IS BELOW $34 11/32, THE DOLLAR TREE BOARD DELIBERATES
AND DECIDES, IN ITS DISCRETION, TO SEND A NOTICE TO STEP AHEAD STATING THAT
DOLLAR TREE HAS EXERCISED ITS RIGHT TO TERMINATE THE MERGER AGREEMENT UNLESS
STEP AHEAD AGREES TO TREAT THE AVERAGE CLOSING PRICE AS $33. THIS PROPOSAL WOULD
HAVE THE EFFECT OF LOWERING THE EXCHANGE RATIO FROM 1.2993 (CORRESPONDING TO THE
ACTUAL AVERAGE CLOSING PRICE OF $32) TO 1.2599 (CORRESPONDING TO THE AGREED TO
AVERAGE CLOSING PRICE OF $33). ASSUMING THE STEP AHEAD BOARD AGREES TO THE
DOLLAR TREE PROPOSAL, A STEP AHEAD SHAREHOLDER WOULD RECEIVE, FOR EACH SHARE OF
STEP AHEAD STOCK OWNED, APPROXIMATELY 1.1339 SHARES OF
A-3
<PAGE>
DOLLAR TREE COMMON STOCK NET OF THE ESCROW. APPROXIMATELY 0.1260 SHARES WOULD BE
PLACED IN ESCROW FOR A YEAR, TO BE RECEIVED IF THE CONDITIONS OF THE ESCROW ARE
MET. ASSUMING THAT THE MARKET VALUE OF THE DOLLAR TREE COMMON STOCK IS $32 PER
SHARE, THE SHARES RECEIVED NET OF ESCROW ABOVE WOULD HAVE AN EQUIVALENT CASH
VALUE OF $36.28 AND THE ESCROW SHARES WOULD HAVE AN EQUIVALENT CASH VALUE OF
$4.03.
EXAMPLE 2. THE ACTUAL AVERAGE CLOSING PRICE IS $32, AS IN EXAMPLE 1. IN
THIS SCENARIO, HOWEVER, THE DOLLAR TREE BOARD DECIDES, AGAIN IN ITS DISCRETION,
TO SEND A NOTICE TO STEP AHEAD STATING THAT DOLLAR TREE HAS EXERCISED ITS RIGHT
TO TERMINATE THE MERGER AGREEMENT UNLESS STEP AHEAD AGREES TO TREAT THE AVERAGE
CLOSING PRICE AS $34 11/32. THIS PROPOSAL WOULD HAVE THE EFFECT OF LOWERING THE
EXCHANGE RATIO FROM 1.2993 (CORRESPONDING TO THE ACTUAL AVERAGE CLOSING PRICE OF
$32) TO 1.2106 (CORRESPONDING TO THE AGREED TO AVERAGE CLOSING PRICE OF
$34 11/32). ASSUMING THE STEP AHEAD BOARD AGREES TO THIS DOLLAR TREE PROPOSAL, A
STEP AHEAD SHAREHOLDER WOULD RECEIVE, FOR EACH SHARE OF STEP AHEAD STOCK OWNED,
APPROXIMATELY 1.0895 SHARES OF DOLLAR TREE COMMON STOCK NET OF THE ESCROW.
APPROXIMATELY 0.1211 SHARES WOULD BE PLACED IN ESCROW FOR A YEAR, TO BE RECEIVED
IF THE CONDITIONS OF THE ESCROW ARE MET. ASSUMING THAT THE MARKET VALUE OF THE
DOLLAR TREE COMMON STOCK IS $32 PER SHARE, THE SHARES RECEIVED NET OF ESCROW
ABOVE WOULD HAVE AN EQUIVALENT CASH VALUE OF $34.86 AND THE ESCROW SHARES WOULD
HAVE AN EQUIVALENT CASH VALUE OF $3.88.
(In both the table and these examples, because a Step Ahead Shareholder's
shares will be aggregated to determine whether a fractional share exists and to
determine the number of shares to be contributed to the Escrow, the calculations
above are only an approximation).
As these examples show, if the parties agree to treat the Average Closing
Price at a value that is greater than its actual value, then Step Ahead
Shareholders will receive fewer shares of Dollar Tree Common Stock with a lower
equivalent cash value than if the actual Average Closing Price were used. THE
ILLUSTRATIONS ABOVE ARE PROVIDED AS EXAMPLES ONLY. YOU ARE STRONGLY ADVISED TO
CALL 1-888-224-5256 TOLL-FREE BEGINNING AT 5:00 P.M. ON DECEMBER 7, 1998 TO
LEARN OF ANY AGREED TO AVERAGE CLOSING PRICE AND EXCHANGE RATIO.
The Step Ahead Board will decide whether to accept any alternative Average
Closing Price proposed by Dollar Tree only after careful consideration of Dollar
Tree's financial condition, results of operations and stock performance and
other factors, including the interests of Step Ahead Shareholders, and only
after receiving an updated opinion from Piper Jaffray, its financial advisor, as
to whether the proposed merger consideration is fair from a financial point of
view to the Step Ahead Shareholders as a group. After the Step Ahead Board makes
its determination, however, it does not intend to resolicit your proxy. If you
have already executed a proxy, you can revoke your proxy and change your vote by
following the procedures outlined on page 38 of this Prospectus/Proxy Statement.
A-4
<PAGE>
APPENDIX B
MERGER AGREEMENT
by and among
DOLLAR TREE STORES, INC.
DOLLAR TREE WEST, INC.
and
STEP AHEAD INVESTMENTS, INC.
As of July 22, 1998
AMENDMENT TO MERGER AGREEMENT
DATED OCTOBER 20, 1998
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C> <C>
ARTICLE 1
THE MERGER
....................................................................... B-1
1.1 SURVIVING CORPORATION.................................................. B-1
1.2 ARTICLES OF INCORPORATION.............................................. B-1
1.3 BYLAWS................................................................. B-1
1.4 DIRECTORS AND OFFICERS................................................. B-1
1.5 EFFECTIVE TIME......................................................... B-1
1.6 OTHER EFFECTS OF THE MERGER............................................ B-2
1.7 TAX-FREE REORGANIZATION................................................ B-2
1.8 REGISTRATION STATEMENT................................................. B-2
ARTICLE 2
CONVERSION OF SHARES............................................................. B-3
2.1 CONVERSION OR CANCELLATION OF SHARES; ESCROW........................... B-3
(a) EXCHANGE RATIO..................................................... B-3
(b) ESCROWS OF SHARES.................................................. B-3
(c) STOCK SPLITS, ETC.................................................. B-4
(d) STOCK OF SUB....................................................... B-4
(e) COMPANY STOCK OPTIONS.............................................. B-4
2.2 FRACTIONAL SHARES...................................................... B-5
2.3 PROCEDURES RELATING TO COMPANY SHARES.................................. B-5
(a) EXCHANGE OF CERTIFICATES........................................... B-5
(b) CASH PAYMENTS...................................................... B-6
(c) LOST, MISLAID, STOLEN OR DESTROYED CERTIFICATES.................... B-6
(d) NO STOCK TRANSFERS................................................. B-6
(e) UNCLAIMED MERGER CONSIDERATION..................................... B-6
(f) DISSENTING SHARES.................................................. B-6
2.4 POST-CLOSING ADJUSTMENT................................................ B-7
ARTICLE 3
CLOSING.......................................................................... B-7
3.1 THE CLOSING............................................................ B-7
ARTICLE 4
COMPANY REPRESENTATIONS AND WARRANTIES........................................... B-7
4.1 CORPORATE ORGANIZATION; AUTHORIZATION.................................. B-8
4.2 NO VIOLATION........................................................... B-8
4.3 ENFORCEABILITY......................................................... B-8
4.4 CAPITALIZATION......................................................... B-8
4.5 SUBSIDIARIES; AFFILIATES; CONFLICT OF INTEREST......................... B-9
4.6 INVESTMENTS IN OTHERS.................................................. B-10
4.7 FINANCIAL STATEMENTS................................................... B-10
4.8 UNREPORTED AND CONTINGENT LIABILITIES.................................. B-10
4.9 ABSENCE OF CERTAIN CHANGES............................................. B-10
4.10 CERTAIN SALES.......................................................... B-11
4.11 LICENSES AND PERMITS................................................... B-11
4.12 LITIGATION............................................................. B-11
4.13 INVENTORY.............................................................. B-11
4.14 REAL PROPERTY.......................................................... B-12
</TABLE>
B-ii
<PAGE>
<TABLE>
<S> <C> <C>
4.15 ENVIRONMENTAL MATTERS.................................................. B-13
4.16 COMPLIANCE WITH LAWS GENERALLY......................................... B-13
4.17 EMPLOYEE BENEFIT PLANS................................................. B-13
4.18 INTELLECTUAL PROPERTY.................................................. B-15
4.19 TAX MATTERS............................................................ B-16
4.20 NO BROKER INVOLVED; DEAL EXPENSES...................................... B-16
4.21 CONTRACTS.............................................................. B-17
4.22 OFFICERS AND EMPLOYEES................................................. B-18
4.23 LABOR RELATIONS........................................................ B-18
4.24 INSURANCE.............................................................. B-19
4.25 TITLE TO PROPERTY AND RELATED MATTERS.................................. B-19
4.26 ACCOUNTS AND NOTES RECEIVABLE.......................................... B-19
4.27 NONDISCLOSED PAYMENTS.................................................. B-19
4.28 [NOT USED]............................................................. B-19
4.29 BUSINESS PRACTICES..................................................... B-20
4.30 [NOT USED]............................................................. B-20
4.31 SECURITIES MATTERS..................................................... B-20
4.32 POOLING................................................................ B-20
4.33 REORGANIZATION UNDER SECTION 368 OF THE CODE........................... B-20
4.34 FULL DISCLOSURE........................................................ B-20
ARTICLE 5
REPRESENTATIONS AND WARRANTIES OF PARENT AND SUB................................. B-21
5.1 CORPORATE ORGANIZATION................................................. B-21
5.2 AUTHORIZATION AND APPROVAL OF AGREEMENT................................ B-21
5.3 ABILITY TO CARRY OUT AGREEMENT......................................... B-21
5.4 CAPITAL STOCK.......................................................... B-21
5.5 OPERATIONS OF SUBSIDIARIES............................................. B-22
5.6 INVESTMENT REPRESENTATION.............................................. B-22
5.7 NO BROKER INVOLVED..................................................... B-22
5.8 PARENT COMMON STOCK.................................................... B-22
5.9 PARENT SEC REPORTS..................................................... B-22
5.10 ABSENCE OF CERTAIN CHANGES OR EVENTS................................... B-22
5.11 MATERIAL MISSTATEMENTS OR OMISSIONS.................................... B-22
5.12 WARN ACT............................................................... B-23
5.13 FULL DISCLOSURE........................................................ B-23
5.14 BENEFIT PLANS; TAX OBLIGATIONS......................................... B-23
ARTICLE 6
PRE-CLOSING COVENANTS............................................................ B-23
6.1 CONDUCT OF BUSINESS.................................................... B-23
6.2 PUBLIC ANNOUNCEMENTS................................................... B-25
6.3 SUPPLEMENTS TO SCHEDULES............................................... B-25
6.4 POOLING OF INTERESTS ACCOUNTING........................................ B-25
6.5 THE NASDAQ ADDITIONAL SHARES LISTING APPLICATION....................... B-25
6.6 ANTITRUST FILING....................................................... B-25
6.7 NO SOLICITATION OF TRANSACTIONS........................................ B-26
6.8 SHAREHOLDER APPROVAL................................................... B-27
6.9 DISSENTERS' RIGHTS NOTICES............................................. B-27
6.10 SHAREHOLDER REPRESENTATIVE............................................. B-27
6.11 AGREEMENTS WITH RESPECT TO AFFILIATES.................................. B-28
6.12 ACCESS TO INFORMATION; CONFIDENTIALITY................................. B-28
</TABLE>
B-iii
<PAGE>
<TABLE>
<S> <C> <C>
6.13 LEGAL REQUIREMENTS..................................................... B-28
6.14 THIRD PARTY CONSENTS................................................... B-29
6.15 [NOT USED]............................................................. B-29
6.16 INDEMNIFICATION OF DIRECTORS AND OFFICERS OF THE COMPANY............... B-29
6.17 NOTIFICATION OF CERTAIN MATTERS........................................ B-29
6.18 LETTERS OF COMPANY'S ACCOUNTANTS....................................... B-29
6.19 BEST EFFORTS AND FURTHER ASSURANCES.................................... B-29
6.20 TAX TREATMENT.......................................................... B-30
6.21 CURRENT REPORT......................................................... B-30
ARTICLE 7
POST-CLOSING COVENANTS........................................................... B-30
7.1 POST-CLOSING AUDIT..................................................... B-30
ARTICLE 8
SURVIVAL AND INDEMNIFICATION..................................................... B-31
8.1 INDEMNIFICATION OBLIGATIONS OF THE SHAREHOLDERS........................ B-31
8.2 INDEMNIFICATION OBLIGATIONS OF PARENT.................................. B-31
8.3 LIMITATIONS ON INDEMNIFICATION......................................... B-32
8.4 INDEMNIFICATION PROCEDURE.............................................. B-32
8.5 SURVIVAL; CLAIMS PERIOD................................................ B-32
8.6 RECOVERY............................................................... B-33
8.7 EXCLUSIVE REMEDY....................................................... B-33
ARTICLE 9
CONDITIONS PRECEDENT TO OBLIGATIONS OF PARENT AND SUB............................ B-33
9.1 CONDITIONS PRECEDENT................................................... B-33
(a) REPRESENTATIONS, WARRANTIES AND COVENANTS.......................... B-33
(b) LEGAL ACTIONS...................................................... B-33
(c) CONSENTS........................................................... B-33
(d) DELIVERIES......................................................... B-34
(e) ANTITRUST FILING................................................... B-34
(f) POOLING LETTERS.................................................... B-34
(g) POOLING LETTERS.................................................... B-34
(h) LISTING OF PARENT COMMON STOCK..................................... B-34
(i) ESCROW AGREEMENT................................................... B-34
(j) NON-COMPETITION AGREEMENTS......................................... B-34
(k) COMPARABLE STORE SALES............................................. B-35
(l) RELATED PARTY DEBT................................................. B-35
(m) DISSENTING SHARES.................................................. B-35
(n) SHAREHOLDER APPROVAL............................................... B-35
(o) CORPORATE DOCUMENTS................................................ B-35
(p) REGISTRATION STATEMENT............................................. B-35
9.2 WAIVER................................................................. B-35
ARTICLE 10
CONDITIONS PRECEDENT TO OBLIGATIONS OF THE COMPANY............................... B-35
10.1 CONDITIONS PRECEDENT................................................... B-35
(a) REPRESENTATIONS, WARRANTIES AND COVENANTS.......................... B-35
(b) LEGAL ACTIONS...................................................... B-35
(c) DELIVERIES......................................................... B-36
(d) ANTITRUST FILING................................................... B-36
(e) LISTING OF PARENT COMMON STOCK..................................... B-36
</TABLE>
B-iv
<PAGE>
<TABLE>
<S> <C> <C>
(f) REGISTRATION STATEMENT............................................. B-36
(g) SHAREHOLDER APPROVAL............................................... B-36
(h) CORPORATE DOCUMENTS................................................ B-36
(i) TAX OPINION........................................................ B-36
10.2 WAIVER................................................................. B-36
ARTICLE 11
TERMINATION...................................................................... B-36
11.1 TERMINATION............................................................ B-36
11.2 SPECIFIC PERFORMANCE AND OTHER REMEDIES................................ B-38
11.3 EFFECT OF TERMINATION.................................................. B-38
11.4 TERMINATION FEE; LOCK-UP OPTION........................................ B-38
ARTICLE 12
EXPENSES......................................................................... B-39
12.1 DEAL EXPENSES.......................................................... B-39
12.2 PAYMENT ON CLOSING..................................................... B-39
ARTICLE 13
MISCELLANEOUS.................................................................... B-39
13.1 COOPERATION FOLLOWING THE CLOSING...................................... B-39
13.2 BENEFITS AND BURDENS: ASSIGNMENT....................................... B-39
13.3 AMENDMENT.............................................................. B-39
13.4 NOTICES................................................................ B-40
13.5 ENTIRE AGREEMENT....................................................... B-40
13.6 HEADINGS............................................................... B-41
13.7 CONSTRUCTION........................................................... B-41
13.8 INCORPORATION OF EXHIBITS AND SCHEDULES................................ B-41
13.9 COUNTERPARTS........................................................... B-41
13.10 GOVERNING LAW.......................................................... B-41
13.11 ENFORCEMENT; JURISDICTION; WAIVER OF JURY TRIAL........................ B-41
13.12 SEVERABILITY........................................................... B-41
13.13 TIME................................................................... B-41
13.14 KNOWLEDGE.............................................................. B-42
13.15 STATUTES............................................................... B-42
AMENDMENT TO MERGER AGREEMENT........................................................ B-43
</TABLE>
B-v
<PAGE>
DEFINED TERMS
The following is a list of the defined terms used in this Agreement:
<TABLE>
<CAPTION>
TERMS SECTION
- ------------------------------------------------------------------------------------------ ----------------------
<S> <C>
1995 Financial Statements................................................................. Section 4.7(a)
1996 Financial Statements................................................................. Section 4.7(a)
1997 Financial Statements................................................................. Section 4.7(a)
98 CENTS Clearance Centers................................................................ Section 4.18(a)
Affiliate................................................................................. Section 4.5
Affiliate Agreement....................................................................... Section 6.11
Agreement................................................................................. Recitals
Agreement of Merger....................................................................... Section 1.5
Alternative Transaction................................................................... Section 6.7(a)(i)
Antitrust Filing.......................................................................... Section 6.6
Assumed Option............................................................................ Section 2.1(e)(i)
Average Closing Price..................................................................... Section 2.2(b)
Benefit Plans............................................................................. Section 4.17(a)
California Code........................................................................... Recitals
CERCLA.................................................................................... Section 4.15(b)
Certificate/s............................................................................. Section 2.3(a)
Claims Period............................................................................. Section 8.5
Closing................................................................................... Section 3.1
Closing Balance Sheet..................................................................... Section 7.1(a)
Closing Date.............................................................................. Section 3.1
Closing Equity............................................................................ Section 7.1(b)
COBRA..................................................................................... Section 4.17(d)
Code...................................................................................... Recitals
Company................................................................................... Recitals
Company Ancillary Agreements.............................................................. Section 4.1(a)
Company Common Stock...................................................................... Section 2.1
Company Contracts......................................................................... Section 4.21
Company Preferred Stock................................................................... Section 2.1
Company Shareholders Meeting.............................................................. Section 6.8(a)
Company Shares............................................................................ Section 2.1
Confidentiality Agreement................................................................. Section 6.12(b)
Confidential Information.................................................................. Section 6.12(b)
control................................................................................... Section 4.5
Debtors' Rights........................................................................... Section 4.3
Deal Expenses............................................................................. Section 12.1
Deficit Amount............................................................................ Section 2.4
Determination Date........................................................................ Section 7.1(a)
Disclosure Schedule....................................................................... Article 4
Dissenting Shares......................................................................... Section 2.3(f)
Dividend Account.......................................................................... Section 8.3(a)
Effective Time............................................................................ Section 1.5
Employees................................................................................. Section 4.17(b)
Environmental Laws........................................................................ Section 4.15(a)
ERISA..................................................................................... Section 4.17(a)
Escrow Agent.............................................................................. Section 9.1(i)
Escrow Agreement.......................................................................... Section 9.1(i)
</TABLE>
B-vi
<PAGE>
<TABLE>
<CAPTION>
TERMS SECTION
- ------------------------------------------------------------------------------------------ ----------------------
<S> <C>
Escrow Shares............................................................................. Section 2.1(b)
Exchange Act.............................................................................. Section 5.3
Exchange Ratio............................................................................ Section 2.1(a)
Exercise Price............................................................................ Section 11.4(b)
Financial Statements...................................................................... Section 4.7(a)
Financial Statement Date.................................................................. Section 4.7(a)
Fully Diluted Company Shares.............................................................. Section 2.1(a)
GAAP...................................................................................... Section 4.7(a)
GAAS...................................................................................... Section 7.1(b)
HSR Act................................................................................... Section 5.3
Indemnified Party......................................................................... Section 8.4(b)
Intellectual Property..................................................................... Section 4.18(a)
Interim Balance Sheet..................................................................... Section 4.7(b)
Interim Financial Statements.............................................................. Section 4.7(b)
Inventory................................................................................. Section 4.13
KPMG...................................................................................... Section 2.1(b)
Laws...................................................................................... Section 4.16
Leased Real Property...................................................................... Section 4.14(a)
Letter of Transmittal..................................................................... Section 2.3(a)
Lock-Up Option............................................................................ Section 11.4(b)
material adverse change................................................................... Section 4.l(b)
material adverse effect................................................................... Section 4.1(b)
Merger.................................................................................... Recitals
Merger Consideration...................................................................... Section 2.1(a)
Merger Transactions....................................................................... Section 6.8(a)
Multiemployer Plan........................................................................ Section 4.17(h)
Nasdaq.................................................................................... Section 2.2(b)
NLRB...................................................................................... Section 4.23(a)
Non-Competition Agreements................................................................ Section 9.1(j)
OSHA...................................................................................... Section 4.23(b)
Option.................................................................................... Section 2.1(e)(i)
Parent.................................................................................... Recitals
Parent Ancillary Agreements............................................................... Section 5.2
Parent Basket Amount...................................................................... Section 8.3(b)
Parent Common Stock....................................................................... Section 1.8
Parent Indemnified Parties................................................................ Section 8.1
Parent Losses............................................................................. Section 8.1
Parent Maximum Indemnity.................................................................. Section 8.3(b)
Parent SEC Reports........................................................................ Section 5.9
Permitted Encumbrances.................................................................... Section 4.14
Pooling Affiliate......................................................................... Section 6.11
pooling of interests...................................................................... Section 4.32
Price..................................................................................... Section 2.1(b)
Principal Shareholder..................................................................... Section 4.5
Proceeding................................................................................ Section 4.12
Product Safety Laws....................................................................... Section 4.13
Proxy Statement........................................................................... Section 1.8
Qualified Retirement Plan................................................................. Section 4.17(j)
Registration Statement.................................................................... Section 1.8
Related Party Obligations................................................................. Section 4.5
</TABLE>
B-vii
<PAGE>
<TABLE>
<CAPTION>
TERMS SECTION
- ------------------------------------------------------------------------------------------ ----------------------
<S> <C>
Representatives........................................................................... Section 6.12(a)
Restricted Stock.......................................................................... Section 4.4(a)
SEC....................................................................................... Section 1.8
Securities Act............................................................................ Section 1.8
Shareholder Basket Amount................................................................. Section 8.3(a)
Shareholder Indemnification Parties....................................................... Section 8.2
Shareholder Losses........................................................................ Section 8.2
Shareholder Maximum Indemnity............................................................. Section 8.3(a)
Shareholder Representative................................................................ Section 6.10(a)
Shareholders.............................................................................. Recitals
Special Escrow Shares..................................................................... Section 2.1(b)
Statement of Closing Equity............................................................... Section 7.1(b)
Stock Option Plan......................................................................... Section 2.1(e)
Sub....................................................................................... Recitals
Surviving Corporation..................................................................... Section 1.1
Target Amount............................................................................. Section 2.4
Tax....................................................................................... Section 4.19(a)
Tax Certificates.......................................................................... Section 6.20
Tax Return................................................................................ Section 4.19(b)
Termination Date.......................................................................... Section 11.1
Termination Fee........................................................................... Section 11.4(a)
Third Party............................................................................... Section 6.7(d)
Third Party Complainant................................................................... Section 8.4(a)
WARN Act.................................................................................. Section 5.12
</TABLE>
B-viii
<PAGE>
MERGER AGREEMENT
THIS MERGER AGREEMENT, dated as of July 22, 1998 ("Agreement"), by and among
DOLLAR TREE STORES, INC., a Virginia corporation ("Parent"), DOLLAR TREE WEST ,
INC., a California corporation and a wholly owned subsidiary of Parent ("Sub"),
and STEP AHEAD INVESTMENTS, INC., a California corporation ("Company").
W I T N E S S E T H:
WHEREAS, the respective Boards of Directors of Parent, Sub and the Company
parties have each determined that it is in the best interests of their
respective shareholders for the Sub to merge with and into Company upon the
terms and subject to the conditions set forth herein ("Merger");
WHEREAS, the parties intend for the Merger to be accounted for under the
pooling-of-interests method and qualify as a "reorganization" within the meaning
of Section 368 of the Internal Revenue Code of 1986, as amended ("Code");
WHEREAS, the parties have determined that the Merger and the other
transactions contemplated hereby are consistent with, and in furtherance of,
their respective business strategies and goals;
WHEREAS, the Board of Directors of Sub and Parent has approved this
Agreement, the Merger, and the transactions contemplated hereby in accordance
with applicable law and the Articles of Incorporation and By-laws of Parent and
Sub; and
WHEREAS, the Board of Directors of the Company has (i) approved this
Agreement, the Merger, and the transactions contemplated hereby in accordance
with the requirements of the General Corporation Law of California (the
"California Code") and the Articles of Incorporation and the By-laws of the
Company, (ii) found this Agreement, the Merger, and the transactions
contemplated hereby to be fair to the Company's shareholders ("Shareholders"),
and (iii) directed this Agreement and the Merger to be submitted to, and
recommended approval by, the Shareholders.
NOW, THEREFORE, in consideration of the premises and of the mutual covenants
and agreements set forth herein, the parties hereto agree as follows:
ARTICLE 1
THE MERGER
1.1 SURVIVING CORPORATION. Subject to the provisions of this Agreement and
applicable law, at the Effective Time (as hereinafter defined), Sub shall be
merged with and into the Company, and the separate corporate existence of Sub
shall cease. The Company shall be the surviving corporation in the Merger
(hereinafter sometimes called the "Surviving Corporation") and shall continue
its corporate existence under the laws of the State of California.
1.2 ARTICLES OF INCORPORATION. The Articles of Incorporation and name of
Sub shall be the Articles of Incorporation and name of the Surviving
Corporation.
1.3 BYLAWS. The Bylaws of Sub shall be the Bylaws of the Surviving
Corporation.
1.4 DIRECTORS AND OFFICERS. The directors and officers of the Surviving
Corporation shall be the directors and officers of Sub.
1.5 EFFECTIVE TIME. Upon satisfaction or waiver of the conditions set
forth in Articles 9 and 10 hereof, and if this Agreement shall not have been
terminated in accordance with Article 11 hereof, the parties hereto shall cause
the Agreement of Merger substantially in the form attached as Exhibit A
("Agreement of Merger") to be properly executed and filed on the Closing Date
(as hereinafter defined) with the Secretary of State of California. The Merger
shall become effective as of the time of filing of a properly executed Agreement
of Merger or at such later date and time as is specified in the Agreement of
Merger. The date and time when the Merger becomes effective is herein referred
to as the "Effective Time."
<PAGE>
1.6 OTHER EFFECTS OF THE MERGER. The Merger shall have all further effects
as specified in the applicable provisions of the California Code.
1.7 TAX-FREE REORGANIZATION. The Merger is intended to constitute a
reorganization within the meaning of Section 368(a) of the Code, and this
Agreement is intended to constitute a plan of reorganization within the meaning
of the regulations promulgated under Section 368(a) of the Code.
1.8 REGISTRATION STATEMENT. The shares of voting common stock, par value
$.01 per share, of Parent ("Parent Common Stock") to be issued in the Merger
pursuant to Article 2 will be registered under the Securities Act of 1933 (the
"Securities Act") pursuant to a registration statement of the Parent on Form S-4
(the "Registration Statement"). Company and Parent shall, as promptly as
commercially reasonable after the execution of the Agreement, prepare a
definitive proxy statement for the Company (the "Proxy Statement") and Parent
shall prepare and file with the Securities and Exchange Commission ("SEC") the
Registration Statement, in which the Proxy Statement will be included as a
prospectus. Each of Parent and the Company shall use its commercially reasonable
efforts to respond to the comments of the SEC and to cause the Registration
Statement to be declared effective. Company shall cause the Proxy Statement to
be mailed to its Shareholders as promptly as practicable after the Registration
Statement is declared effective under the Securities Act. Parent shall also take
any action (other than qualifying to do business in any jurisdiction in which it
is not now so qualified or to file a general consent to service of process)
required to be taken under any applicable state securities laws in connection
with the issuance of Parent Common Stock in the Merger, and Company shall
furnish all information concerning Company and the Shareholders as may be
reasonably requested in connection with any such action. Parent and the Company
shall each provide the other parties to this Agreement any information for
inclusion in the Registration Statement or Proxy Statement which may be required
under applicable law or which is reasonably requested by such other party and
shall each cause the Registration Statement to comply in all material respects
with the Securities Act and the regulations thereunder. The Company shall
deliver to its officers, directors and the beneficial owners of 5% or more of
its capital stock questionnaires prepared by Parent relating to the Registration
Statement and Proxy Statement furnished by Parent and shall use its best efforts
to have such questionnaires completed, executed by such persons and returned to
Parent. Parent and the Company shall promptly notify the other of the receipt of
the comments of the SEC and of any request from the SEC for amendments or
supplements to the Registration Statement or for additional information, and
will promptly supply the other with copies of all correspondence between it or
its representatives, on the one hand, and the SEC or members of its staff, on
the other hand, with respect to the Registration Statement. If at any time prior
to the Effective Time any event should occur which is required by applicable law
to be set forth in an amendment of, or a supplement to, the Registration
Statement, the party with knowledge of such event will promptly inform the other
parties to this Agreement. In such case, Parent and the Company will, upon
learning of such event, promptly prepare such amendment or supplement and shall
file such amendment or supplement with the SEC. If at any time prior to the
Effective Time any information relating to Company or Parent, or any of their
respective affiliates, officers or directors, should be discovered by Company or
Parent which should be set forth in an amendment or supplement to any of the
Registration Statement or the Proxy Statement, so that any of such documents
would not include any misstatement of a material fact or omit to state any
material fact necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading, the party which
discovers such information shall promptly notify the other party hereto and an
appropriate amendment or supplement describing such information shall, to the
extent required by law, be promptly filed with the SEC and/or be disseminated to
the Shareholders. The Company will notify Parent at least 24 hours prior to the
mailing of the Proxy Statement, or any amendment or supplement thereto, to the
Shareholders.
B-2
<PAGE>
ARTICLE 2
CONVERSION OF SHARES
2.1 CONVERSION OR CANCELLATION OF SHARES; ESCROW.
Subject to the provisions of this Article 2, at the Effective Time, by
virtue of the Merger and without any further action by the holders thereof, the
shares of capital stock of the Company outstanding immediately prior to the
Effective Time ("Company Shares," which term shall refer to the Company's common
stock ("Company Common Stock") and the Company's preferred stock ("Company
Preferred Stock") without distinction) shall be canceled and extinguished and
automatically converted into shares of Parent Common Stock, as follows:
(a) EXCHANGE RATIO. Other than Dissenting Shares (as defined in Section
2.3(f)), each Company Share issued and outstanding immediately prior to the
Effective Time shall be converted, subject to Sections 2.1(c) and 2.2, into that
number of shares of Parent Common Stock as is determined by multiplying such
Company Share by a ratio equal to (i) Merger Consideration divided by (ii) the
Fully Diluted Company Shares (such ratio shall be referred to herein as the
"Exchange Ratio"). The "Merger Consideration" shall be calculated as follows:
(x) If the Average Closing Price (as defined in Section 2.2(b)) is
between $36 3/8ths and $44 7/16ths per share, inclusive, then the Merger
Consideration will be 2,025,000 shares of Parent Common Stock.
(y) If the Average Closing Price is above $44 7/16ths per share, then
the Merger Consideration will be the number of shares of Parent Common Stock
equal to the product of 2,025,000 multiplied by a fraction, the numerator of
which is 44 7/16ths and the denominator of which is the Average Closing
Price; provided, however, the Merger Consideration shall not be less than
1,936,547 shares of Parent Common Stock.
(z) If the Average Closing Price is below $36 3/8ths per share, then the
Merger Consideration will be the number of shares of Parent Common Stock
equal to the product of 2,025,000 multiplied by a fraction, the numerator of
which is $36 3/8ths and the denominator of which is the Average Closing
Price; provided, however, if the Average Closing Price is below $34 11/32,
Parent shall have an option to terminate this Agreement and the terms of
Section 11.1(k) shall apply.
"Fully Diluted Company Shares" shall be calculated by adding (i) the total
number of shares of Company Common Stock issued and outstanding immediately
prior to the Effective Time (including Dissenting Shares) plus (ii) the total
number of shares of Company Preferred Stock issued and outstanding immediately
prior to the Effective Time (including Dissenting Shares) plus (iii) the total
number of shares of Company Common or Preferred Stock subject to Options (as
defined in paragraph (e) below) outstanding immediately prior to the Effective
Time.
(b) ESCROWS OF SHARES. An aggregate of ten percent (10%) of the shares of
Parent Common Stock issuable with respect to Company Shares (exclusive of
Dissenting Shares) in the Merger (together with any dividends or distributions
accrued or made with respect to such shares of Parent Common Stock after the
Effective Time and any other securities or property which may be issued after
the Effective Time in exchange for such shares of Parent Common Stock in any
merger or recapitalization or similar transaction involving Parent, the "Escrow
Shares") shall be transferred and pledged when and as issued on a pro rata basis
to the Escrow Agent (as defined in "Escrow Agreement" attached as Exhibit F) to
secure the payment of any Deficit Amount pursuant to Section 2.4 hereof and the
indemnification obligations of the Shareholders pursuant to this Agreement, the
Escrow Agreement and the Letter of Transmittal (as defined in Section 2.3(a)) to
be delivered by each Shareholder in connection with the Merger.
ANYTHING IN THIS AGREEMENT OR THE ESCROW AGREEMENT TO THE CONTRARY
NOTWITHSTANDING, THE NUMBER OF ESCROW SHARES TRANSFERRABLE TO THE ESCROW
SHALL BE REDUCED, AND THE TIMING AND AMOUNT OF THE
B-3
<PAGE>
DISTRIBUTION OF THE ESCROW SHARES FROM THE ESCROW SHALL BE ALLOCATED AND/OR
INCREASED, AS THE CASE MAY BE, TO THE EXTENT REQUIRED BY KPMG PEAT MARWICK
L.L.P. ("KPMG") AND PRICE WATERHOUSE COOPERS ("PRICE") TO DELIVER THE
POOLING LETTERS REFERRED TO IN SECTION 6.18.
(c) STOCK SPLITS, ETC. If after the date of the signing of this Agreement
but prior to the Effective Time, Parent should split or combine the Parent
Common Stock, or pay a stock dividend or other stock distribution in Parent
Common Stock, or otherwise change the Parent Common Stock into any other
securities, or make any other dividend or distribution on the Parent Common
Stock, then the Exchange Ratio and the number of shares of Parent Common Stock
constituting the aggregate consideration issuable in the Merger in respect of
Company Shares shall be appropriately adjusted to reflect such change.
(d) STOCK OF SUB. Each share of common stock, no par value, of Sub issued
and outstanding immediately prior to the Effective Time shall remain as one
issued and outstanding share of common stock, no par value, of the Surviving
Corporation as of and after the Effective Time.
(e) COMPANY STOCK OPTIONS. At the Effective Time, regardless of whether a
"change of control" shall have occurred as that term is defined in the Step
Ahead Investment, Inc. Long-Term Incentive Plan, as amended (the "Stock Option
Plan"):
(i) Each outstanding option to purchase Company Common Stock (each, an
"Option") issued pursuant to the Stock Option Plan whether vested or
unvested, shall not terminate or lapse on account of the Merger but instead
shall be assumed by Parent and shall constitute an option (an "Assumed
Option") (A) to acquire, on the same terms and conditions as were applicable
under such Option prior to the Effective Time, a number of shares of Parent
Common Stock (rounded to the nearest whole number) determined by multiplying
the Exchange Ratio by the number of Company Shares then subject to purchase
pursuant to such Option; and (B) at a per share exercise price for the
shares of Parent Common Stock issuable upon exercise of such Assumed Option
equal to the quotient determined by dividing the exercise price per share of
Company Common Stock at which such Option was exercisable immediately prior
to the Effective Time by the Exchange Ratio, rounded up or down to the
nearest whole cent.
(ii) It is the intention of the parties that the Assumed Options that
qualified as incentive stock options as defined in Section 422 of the Code
immediately prior to the Effective Time would continue to so qualify on and
after the Effective Time; and that notwithstanding anything contained in any
provision of this Agreement, the exercise price, the number of shares of
Parent Common Stock purchasable and the terms and conditions applicable to
any Assumed Options shall be determined so as to comply with Sections 422
and 424 of the Code and the regulations promulgated thereunder.
(iii) At or prior to the Effective Time, Company shall amend its Stock
Option Plan to provide that a "change-of-control" of Company will not cause
its unexercised Options to terminate, but no other amendments shall be made
except as provided herein.
(iv) any references in each such Assumed Option to the Company shall be
deemed to refer to Parent, where appropriate; and
(v) Parent shall file and maintain the effectiveness of a registration
statement or registration statements with respect to the shares of Parent
Common Stock subject to such Assumed Options for so long as such Assumed
Options remain outstanding. Parent and Company shall use reasonable efforts
to take such actions as are necessary for the conversion of the Assumed
Options pursuant to this Section 2.1(e), including the reservation, issuance
and listing of shares of Parent Common Stock as is necessary to effectuate
the transactions contemplated by this Section 2.1(e). At the Effective Time,
Parent will prepare and distribute to holders of Assumed Options a notice
explaining the effect of the conversion of such holder's Options into
Assumed Options.
B-4
<PAGE>
2.2 FRACTIONAL SHARES.
(a) No scrip or fractional shares of Parent Common Stock shall be issued in
the Merger. For purposes of determining the number of shares of Parent Common
Stock to be issued to each Shareholder in the Merger, all the Company Shares
owned by such Shareholder shall be aggregated prior to applying the Exchange
Ratio. If, after such aggregation, any Shareholder is to receive a fractional
share, such Shareholder shall be entitled, after the later of (a) the Effective
Time or (b) the surrender of such Shareholder's Certificate(s) (as defined
below) that represent such Company Shares, to receive from Parent an amount in
cash in lieu of such fractional share, based on the Average Closing Price (as
defined below).
(b) For the purposes of this calculation, each share of Parent Common Stock
shall be valued at the arithmetic average of the closing price per share of
Parent Common Stock, as reported on the Nasdaq National Market System (the
"Nasdaq") for each of the five (5) consecutive trading days ending with the
trading day which occurs immediately prior to the date of the Company
Shareholders Meeting (as defined in Section 6.8) (the "Average Closing Price").
If Parent effects any stock split, stock combination, stock dividend or similar
transaction with respect to the outstanding shares of Parent Common Stock during
the five consecutive trading days during which the Average Closing Price is
determined, the dollar amounts in the preceding sentence shall be appropriately
adjusted to reflect such change.
2.3 PROCEDURES RELATING TO COMPANY SHARES.
(a) EXCHANGE OF CERTIFICATES. On or prior to the Closing Date, Parent shall
make available to each record holder who, as of the Effective Time, was a holder
of an outstanding certificate or certificates which immediately prior to the
Effective Time represented Company Shares (the "Certificate" or "Certificates"),
a letter of transmittal and instructions in a form reasonably acceptable to
Parent and Company ("Letter of Transmittal") for use in effecting the surrender
of the Certificates for payment therefor and conversion thereof. Delivery shall
be effected, and risk of loss and title to the Certificates shall pass, only
upon proper delivery of the Certificates to Parent and the form of Letter of
Transmittal shall so reflect. Upon surrender to Parent of a Certificate,
together with such Letter of Transmittal duly executed, the holder of such
Certificate shall be entitled to receive in exchange therefor (i) one or more
certificates as requested by the holder (properly issued, executed and
countersigned, as appropriate) representing that number of whole shares of fully
paid and nonassessable shares of Parent Common Stock to which such holder of
Company Shares shall have become entitled pursuant to the provisions of Section
2.1 hereof, (ii) as to any fractional share of Parent Common Stock, a check
representing the cash consideration to which such holder shall have become
entitled pursuant to Section 2.2 hereof, and (iii) any dividend or other
distribution to which such holder is entitled pursuant to Section 2.3(b) hereof,
and the Certificate so surrendered shall forthwith be canceled. No interest will
be paid or accrued on the cash payable upon the surrender of the Certificates.
If any portion of the consideration to be received pursuant to Sections 2.1, 2.2
and 2.3(b) upon exchange of a Certificate (whether a certificate representing
shares of Parent Common Stock or by check representing cash for a fractional
share) is to be issued or paid to a person other than the person in whose name
the Certificate surrendered in exchange therefor is registered, it shall be a
condition of such issuance and payment that the Certificate so surrendered shall
be properly endorsed or otherwise in proper form for transfer and that the
person requesting such exchange shall pay in advance any transfer or other taxes
required by reason of the issuance of a Certificate or a check representing cash
for a fractional share to such other person, or established to the satisfaction
of Parent that such tax has been paid or that such tax is not applicable. From
the Effective Time until surrender in accordance with the provisions of this
Section 2.3, each Certificate shall represent for all purposes only the right to
receive the consideration provided in Sections 2.1, 2.2 and 2.3(b). All payments
of respective shares of Parent Common Stock that are made upon surrender of
Certificates in accordance with the terms hereof shall be deemed to have been
made in full satisfaction of rights pertaining to the Company Shares evidenced
by such Certificates.
B-5
<PAGE>
(b) CASH PAYMENTS. No dividends or other distributions with respect to
Parent Common Stock with a record date after the Effective Time shall be paid to
the holder of any unsurrendered Certificate with respect to the shares of Parent
Common Stock, and no cash payment in lieu of fractional shares shall be paid to
any such holder pursuant to Section 2.2, in each case until the surrender of
such Certificate in accordance with this Article 2. Following surrender of any
such Certificate, there shall be paid to the holder of the certificate
representing whole shares of Parent Common Stock issued in exchange therefor,
without interest, (i) at the time of such surrender, the amount of any cash
payable in lieu of a fractional share of Parent Common Stock to which such
holder is entitled pursuant to Section 2.2 and the amount of dividends or other
distributions with a record date after the Effective Time theretofore paid with
respect to such whole shares of Parent Common Stock and (ii) at the appropriate
payment date, the amount of dividends or other distributions with a record date
after the Effective Time but prior to such surrender and with a payment date
subsequent to such surrender payable with respect to such whole shares of Parent
Common Stock.
(c) LOST, MISLAID, STOLEN OR DESTROYED CERTIFICATES. In the case of any
lost, mislaid, stolen or destroyed Certificate, the holder thereof may be
required, as a condition precedent to delivery to such holder of the
consideration described in Sections 2.1, 2.2 and 2.3(b) hereof, to deliver to
Parent a bond in such reasonable sum or a reasonably satisfactory indemnity
agreement as Parent may direct as indemnity against any claim that may be made
against Parent or the Surviving Corporation with respect to the Certificate
alleged to have been lost, mislaid, stolen or destroyed.
(d) NO STOCK TRANSFERS. After the Effective Time, there shall be no
transfers on the stock transfer books of the Surviving Corporation of the
Company Shares that were outstanding immediately prior to the Effective Time.
If, after the Effective Time, Certificates are presented to the Surviving
Corporation for transfer, they shall be canceled and exchanged for the
consideration described in Sections 2.1, 2.2 and 2.3(b) hereof.
(e) UNCLAIMED MERGER CONSIDERATION. Any shares of Parent Common Stock or
cash due former shareholders of the Company pursuant to Sections 2.1, 2.2 and
2.3(b) hereof that remain unclaimed by such former shareholders for six (6)
months after the Effective Time shall be held by Parent, and any former holder
of Company Shares who has not theretofore complied with Section 2.3(a) shall
thereafter look only to Parent for issuance of the number of shares of Parent
Common Stock and other consideration to which such holder has become entitled
pursuant to the provisions of Sections 2.1, 2.2 and 2.3(b) hereof; provided,
however, that neither Parent nor any party hereto shall be liable to a former
holder of Company Shares for any amount required to be paid to a public official
pursuant to any applicable abandoned property, escheat or similar law.
(f) DISSENTING SHARES. To the extent that the availability of appraisal
rights are mandated under the California Code, Company Shares that have not been
voted for adoption of the Merger and with respect to which appraisal rights have
been properly demanded in accordance with the California Code ("Dissenting
Shares") shall not be converted pursuant to this Article 2 or transferred to the
Escrow Agent at or after the Effective Time unless and until the holder of such
shares becomes ineligible for such appraisal rights. If a holder of Dissenting
Shares becomes ineligible for appraisal, then, as of the Effective Time or the
occurrence of such event, whichever later occurs, such holder's Dissenting
Shares shall cease to be Dissenting Shares and shall be converted pursuant to
this Article 2 (subject to all of the rights and obligations of the Shareholders
hereunder). If any Shareholder asserts the right to be paid for the fair value
of such Company Shares as described above, the Company shall immediately give
Parent notice of such assertion and Parent shall have the right to participate
in all negotiations and proceedings with respect to any such demands. The
Company shall not, except with the prior written consent of Parent, voluntarily
make any payment with respect to, or settle or offer to settle, any such demand
for payment. Holders of Dissenting Shares shall have those rights, but only
those rights, of holders of "dissenting shares" under Sections 1300 et seq. of
the California Code, and payment for Dissenting Shares shall only be made as
required by the California Code.
B-6
<PAGE>
2.4 POST-CLOSING ADJUSTMENT. If the Closing Equity as determined in
accordance with Section 7.1 is less than the Target Amount (as defined below),
then the excess of the Target Amount over the Closing Equity as defined in
Section 7.1(b) shall be referred to as the "Deficit Amount" and, within five (5)
business days of the date on which the final Statement of Closing Equity (as
defined in Section 7.1) is determined (or on such earlier date as may be set
forth in the Escrow Agreement), the Escrow Agent shall surrender to Parent, out
of the Escrow Shares, a number of shares of Parent Common Stock for cancellation
without consideration determined by dividing (i) the Deficit Amount by (ii) the
Average Closing Price. The "Target Amount" means (A) $7,500,000 if the
Determination Date (as defined in Section 7.1) is August 30, 1998, (B)
$7,500,000 if the Determination Date is September 27, 1998, (C) $7,700,000 if
the Determination Date is October 25, 1998, (D) $8,200,000 if the Determination
Date is November 29, 1998, or $9,600,000 if the Determination Date is December
27, 1998. The Deficit Amount shall be satisfied solely out of the Escrow Shares,
even if such Escrow Shares are insufficient to pay the Deficit Amount.
ARTICLE 3
CLOSING
3.1 THE CLOSING. The closing ("Closing") will take place at 10:00 a.m.
California time on a date to be specified by the parties, at a mutually agreed
location, no later than the second business day after fulfillment of all the
conditions set forth in Article 9 which have not been waived by Parent, and all
the conditions set forth in Article 10 which have not been waived by the
Company. The date on which the Closing is held is referred to as the "Closing
Date".
ARTICLE 4
COMPANY REPRESENTATIONS AND WARRANTIES
The Company represents and warrants to Parent that as of the date of this
Agreement and as of the Closing Date and subject to the exceptions noted in this
Article and contained in the disclosure schedule delivered by the Company to
Parent concurrently, identified as the "Disclosure Schedule," and forming part
of this Agreement:
4.1 CORPORATE ORGANIZATION; AUTHORIZATION.
(a) As of the Closing Date, the Company will have all requisite power and
authority to execute and deliver this Agreement and all agreements, documents
and instruments executed and delivered by the Company in connection with the
transactions contemplated by this Agreement (the "Company Ancillary Agreements")
and to fully perform its obligations hereunder and thereunder, and the execution
and delivery of this Agreement and the Company Ancillary Agreements by the
Company and the Company's performance of the transactions contemplated herein
and therein will have been duly authorized by all requisite corporate and
shareholder action. As of the date of this Agreement, (i) the Company has the
corporate power and authority to execute and deliver this Agreement and the
Company Ancillary Agreements contemplated to be executed on the date of this
Agreement, and (ii) subject only to those obligations and transactions
contemplated hereby and thereby which require shareholder approval, the
obligations and transactions contemplated hereby and thereby have been
authorized by all requisite corporate action. The Board of Directors of Company
has, as of the date of this Agreement, determined unanimously that this
Agreement and the Merger is fair to, and in the best interests of, the Company
and its Shareholders, and has resolved to recommend that the Shareholders of the
Company approve this Agreement. Company has received an opinion from Piper
Jaffray Inc. to the effect that as of the date hereof, the consideration to be
received by Company shareholders in the Merger is fair from a financial point of
view and will deliver to Parent a copy of such written opinion.
(b) The Company is a corporation validly existing and in good standing under
the laws of the State of California and has all requisite corporate power and
authority to own, operate and lease its property and
B-7
<PAGE>
to carry on its business as now being conducted. The Company is qualified to
conduct business as a foreign corporation in each jurisdiction in which the
ownership or leasing of its properties or the conduct of its business requires
such qualification except where the failure to be so qualified would not have a
material adverse effect. A "material adverse change" or "material adverse
effect" means, when used in connection with Parent or Company, any change,
effect, event, occurrence or state of facts that is, or would reasonably be
expected to be, individually or in the aggregate, materially adverse to the
business, operations (including sales, comparable store sales, gross profit
margin, or material classification of expenses), facilities (including retail
stores or distribution facilities), assets, condition (financial or otherwise),
properties, or prospects of such party and its subsidiaries taken as a whole.
(c) The Company has previously delivered to Parent a true, correct, and
complete copy of its Articles of Incorporation, By-laws and all amendments to
the foregoing. The minute books of Company made available to counsel for Parent
are the only minute books of Company and contain a reasonably accurate summary
of all material actions and decisions occurring during all meetings of directors
(or committees thereof) and the shareholders or actions by written consent since
the time of incorporation of Company.
4.2 NO VIOLATION. Except as described in Section 4.2 of the Disclosure
Schedule, neither the execution and delivery of this Agreement or any of the
Company Ancillary Agreements by the Company nor the consummation of the
transactions contemplated hereby or thereby by the Company shall (i) violate any
provision of the Company's Articles of Incorporation or By-laws, (ii) violate
any order, arbitration award, judgment, or decree to which the Company is a
party or is bound or to which any property of the Company is subject or is bound
other than an order, award, judgment or decree the violation of which would not
cause a material adverse effect, (iii) violate or result in a breach of or
constitute a default (or would result in or constitute such a breach or default
with notice or lapse of time or both) under any provision of any Company
Contract (as defined in Section 4.21), (iv) require the consent of any other
party to any of the items described in this subsection or (v) require the
consent or approval of any governmental body, agency or authority, other than
(A) the Antitrust Filing (as defined in Section 6.6), (B) the filing with the
SEC of the Registration Statement including the Proxy Statement by Parent and
such reports under Section 13 of the Exchange Act and such reports, consents and
filings under state securities laws as may be required in connection with this
Agreement and the transactions contemplated hereby, (C) the filing of the
Agreement of Merger with the California Secretary of State and appropriate
documents with the relevant authorities of other states in which the Company is
qualified to do business and (D) such other consents or approvals which, if not
granted or obtained, would not cause a material adverse effect.
4.3 ENFORCEABILITY. As of the Closing Date, the Company will have duly
executed and delivered this Agreement and all Company Ancillary Agreements. As
of the date of this Agreement, the Company has duly executed and delivered this
Agreement and each of the Company Ancillary Agreements contemplated to be
executed on the date of this Agreement, and, assuming the due authorization,
execution and delivery of this Agreement and such Company Ancillary Agreements
by the parties thereto other than the Company, this Agreement and each of such
Company Ancillary Agreements constitutes a valid and binding agreement,
enforceable against the Company in accordance with its terms, except as
enforceability may be limited by laws of general application relating to
bankruptcy, reorganization, moratorium, insolvency and debtors' relief and
similar laws effecting the enforcement of creditors' rights, and by general
principles of equity ("Debtors' Rights").
4.4 CAPITALIZATION.
(a) The authorized capital stock of the Company and the issued and
outstanding shares of capital stock are set forth in Section 4.4(a) of the
Disclosure Schedule. The Company has outstanding 1,261,290 shares of Company
Common Stock (11,290 of which are Restricted Stock) and 221,700 shares of
Company Preferred Stock. Each share of the Company Preferred Stock is
convertible into one share of Company Common Stock. Section 4.4(a) of the
Disclosure Schedule also sets forth a true and complete list of all of the
shareholders of the Company as of the date of this Agreement (including the
holders of Restricted
B-8
<PAGE>
Stock), the number of shares of capital stock (including Restricted Stock)
(listed separately for each class) owned by each of them, the date such shares
were transferred to the shareholders, and each such shareholder's state of
residence. Section 4.4(a) also sets forth a description of all shares of
outstanding capital stock of the Company which are governed by vesting
arrangements or other restrictions as to ownership and/or transfer (other than
pursuant to the Securities Act or the blue sky laws of any jurisdiction)
("Restricted Stock"), the extent to which such Restricted Stock has vested, and
the terms of vesting of any unvested shares of Restricted Stock. Except as
described in Section 4.4(a) of the Disclosure Schedule, all of the Company's
issued and outstanding shares of capital stock have been duly authorized and
validly issued, are fully paid and nonassessable, are not subject to preemptive
rights, and have been issued in compliance with all applicable federal and state
securities laws.
(b) The Company has granted as of the date of this Agreement outstanding
options to purchase 296,592 shares of capital stock, all of which options have
been granted pursuant to the Stock Option Plan. Section 4.4 (b) of the
Disclosure Schedule lists each outstanding option to acquire shares of Company
capital stock granted by the Company or by a Principal Shareholder (specifying
whether they were issued by the Company or a Principal Shareholder), the name of
the holder of such option, the date on which such options were granted, the
state of residence of the optionee, the number of shares as to which such option
will have vested on the date hereof, the exercise price of such option and the
expiration date of such option. Except as described in Section 4.4(b) of the
Disclosure Schedule, all Options have been issued in accordance with the Stock
Option Plan and all applicable securities laws, including pursuant to valid
permits thereunder or exemptions therefrom. The Company Stock Option Plan and
all amendments thereto have been approved by all requisite Company shareholder
action. No stock appreciation rights or other derivative stock rights of the
Company are currently outstanding.
(c) Except as set forth in Section 4.4(a) and (b) of the Disclosure
Schedule, there are no warrants, options, agreements, calls, rights (including
preemptive rights), convertible or exchangeable securities or other commitments
pursuant to which the Company or any Principal Shareholder is or may become
obligated to grant, issue, extend, accelerate vesting, sell, purchase, retire or
redeem any options or shares of its capital stock. There is no right of first
refusal, co-sale right, right of participation, right of first offer demand,
registration rights, option (other than as described in Section 4.4(b)),
restriction on transfer (other than with respect to the Restricted Stock and
pursuant to applicable securities laws), phantom stock, stock appreciation right
or other agreement or understanding applicable to the Company or its capital
stock. Neither the Company nor any Affiliate is a party or subject to any
agreement or understanding, and to the Company's knowledge, there is no
agreement or understanding between or among any persons that affects or relates
to the voting or giving of written consent with respect to any outstanding
security of the Company, other than the transactions contemplated by this
Agreement.
4.5 SUBSIDIARIES; AFFILIATES; CONFLICT OF INTEREST. The Company has no
subsidiaries. The term "Affiliate" with respect to any person means any person
or entity which controls such person, which that person controls, or which is
under common control with that person. In addition, with respect to the Company,
the term "Affiliate" also includes the Principal Shareholders and the spouse of
a Principal Shareholder, siblings and lineal descendants or ancestors of
Principal Shareholders, a trust for the benefit of any of the foregoing, and any
corporation, partnership, joint venture or other entity which any of the
Principal Shareholders, any spouse, sibling or lineal descendant or ancestor of
a Principal Shareholder, or a trust for the benefit of any of them, controls.
For purposes of the preceding sentences, the term "control" means the power,
direct or indirect, to direct or cause the direction of the management and
policies of a person or entity through voting securities, contract or otherwise.
The term "Principal Shareholder" means Gary and Janet Cino and any trusts for
the benefit of them or their family members. Except as set forth in Section 4.5
of the Disclosure Schedule, no Affiliate of the Company has any direct or
indirect interest in: (i) any contract, arrangement or understanding with, or
relating to, the business or operations of the Company; (ii) any loan,
arrangement, understanding, agreement or contract for or relating to
indebtedness of the Company; (iii) any property (real, personal or mixed),
tangible or intangible, used or currently intended to
B-9
<PAGE>
be used in, the business or operations of the Company, or (iv) any creditor,
competitor, supplier, customer, or lessor of the Company. Following the Closing,
the Company will not have any obligations of any kind to any Shareholder or any
Affiliate of a Shareholder except for (i) accrued salary for the pay period
commencing immediately prior to the Closing Date and (ii) the obligations set
forth at Section 4.5 of the Disclosure Schedule and obligations under this
Agreement (collectively, the "Related Party Obligations").
4.6 INVESTMENTS IN OTHERS. The Company does not have any investment in or
advance or loan to or guarantee of, or any commitment to make any investment in,
advance or loan to or guarantee of, any person, except as set forth in the
Interim Balance Sheet (as defined below).
4.7 FINANCIAL STATEMENTS.
(a) The Company's audited balance sheets as of January 25, 1998 and January
26, 1997, and the related audited statements of income, shareholders' equity and
cash flow for the periods ending January 25, 1998 (the "Financial Statement
Date"), January 26, 1997, and January 28, 1996 are provided in Section 4.7(a) of
the Disclosure Schedule and are referred to collectively as the "Financial
Statements" and individually as the "1997 Financial Statements," "1996 Financial
Statements" and "1995 Financial Statements," respectively. The Financial
Statements (i) present fairly, in all material respects, the financial position,
results of operations and cash flows, as the case may be, of the Company as of
the dates and periods thereof, (ii) were prepared in accordance with generally
accepted accounting principles ("GAAP"), and (iii) reflect the consistent
application of such accounting principles throughout the periods and as of the
dates involved except as disclosed in the notes to the Financial Statements.
(b) The unaudited balance sheet of the Company as of June 28, 1998, (the
"Interim Balance Sheet"), and the related statements of income for the period
from January 26, 1998 through June 28, 1998 provided in Section 4.7(b) of the
Disclosure Schedule, are referred to herein as the "Interim Financial
Statements." The Interim Financial Statements (i) present fairly, in all
material respects, the financial position, and results of operations and cash
flows, as the case may be, of the Company, and (ii) were prepared in conformity
with GAAP and reflect the consistent application of such accounting principles
throughout the periods and dates involved, subject to normal and customary
year-end closing adjustments, the lack of footnotes and other presentation
items.
(c) Section 4.7(c) of the Disclosure Schedule presents a schedule of all
valuation accounts reflected in the 1997 Financial Statements and Interim
Balance Sheet, including any accounts for markdowns, shrink, currency exchange,
bad debts, general inventory reserves, allowance for accounts receivable,
allowance for notes receivable, income tax reserves and depreciation reserves.
4.8 UNREPORTED AND CONTINGENT LIABILITIES. Except (i) as set forth or
disclosed in the 1997 Financial Statements and the Interim Financial Statements,
or (ii) liabilities incurred in the ordinary course of business consistent with
past practice, or (iii) liabilities fully insured against (subject to reasonable
deductibles) by third party insurance, the Company has no liabilities or
obligations, whether accrued, absolute, fixed, contingent or otherwise.
4.9 ABSENCE OF CERTAIN CHANGES. Since January 28, 1998, the business of
the Company has been conducted only in the ordinary course consistent with past
practices, and except as set forth at Section 4.9 of the Disclosure Schedule,
there has not been (a) a material adverse change with respect to the Company;
(b) any damage, destruction, casualty or other similar occurrence or event
(whether or not insured against), which either individually or in the aggregate
has had or would reasonably be expected to have a material adverse effect on the
Company; (c) any mortgage or pledge of or encumbrance attached to any of the
properties or assets of the Company not in the ordinary course of business; (d)
any incurrence or creation of any liability, commitment, guarantee or obligation
in excess of $75,000 by the Company, except in the ordinary course of business,
and capital expenditures or contracts and commitments for capital expenditures
made or entered into in the ordinary course of business; (e) any sale, transfer
or other disposition by the Company of any of its assets in excess of $150,000
in the aggregate, except for inventory
B-10
<PAGE>
sold by the Company in the ordinary course of business; (f) [NOT USED]; (g) any
labor trouble or claim of wrongful discharge (except for such claims as would
not be expected to result in a material adverse effect on the Company) or other
unlawful labor practice or action; (h) any change in accounting methods or
practices (including any change in depreciation or amortization policies or
rates) by Company; (i) any material revaluation by Company of any of its assets;
(j) any declaration, setting aside or payment of a dividend or other
distribution with respect to the capital stock of Company, or direct or indirect
redemption, purchase or other acquisition by Company of any of its capital
stock; (k) any increase in the salary or other compensation payable or to become
payable to any of its officers, directors, employees or advisors, or the
declaration, payment or commitment or obligation of any kind for the payment of
a bonus or other additional salary or compensation to any such person except for
increases, payments or commitments in the ordinary course of business and
consistent with past practices; (l) any amendment or termination of any material
contract, agreement or license to which Company is a party or by which it is
bound; (m) any loan by Company to any person or entity, except for advances to
employees for travel and business expenses in the ordinary course of business,
consistent with past practices; (n) any waiver or release of any material right
or claim of Company, including any write-off or other compromise of any account
receivable of Company other than in the ordinary course of business and
consistent with past practices; (o) [NOT USED]; or (p) any issuance or sale by
Company or any of its Affiliates of any of the shares of capital stock of the
Company, or securities exchangeable, convertible or exercisable therefor except
for option grants disclosed in Section 4.4(b) of the Disclosure Statement and
issuances of capital stock upon exercises of options granted prior to the date
hereof.
4.10 CERTAIN SALES. The Company's sales and comparable store sales for the
period of June 29, 1998, to a date five days before the date hereof are set
forth in Section 4.10 of the Disclosure Schedule.
4.11 LICENSES AND PERMITS. The Company possesses all material licenses or
permits necessary to conduct its business as now operated. Such licenses and
permits are valid and in full force and effect. No action or claim is pending,
or, to the knowledge of the Company, threatened, to revoke or terminate any such
licenses or permits or declare any of them invalid in any respect and the
transactions contemplated by this Agreement will not result in the revocation or
termination of any such licenses or permits.
4.12 LITIGATION. Except as set forth at Section 4.12 of the Disclosure
Schedule, there is not pending against the Company, or to the knowledge of the
Company, threatened against the Company, any claim, action, suit, arbitration
proceeding, governmental proceeding or investigation ("Proceeding") (a)
demanding money damages in excess of $10,000 from the Company, or (b) demanding
a temporary restraining order, preliminary injunction or a permanent injunction
or order of specific performance against the Company. All pending Proceedings
relating to or involving the Company (or any of its officers or directors as
such) are adequately provided for in the Interim Balance Sheet in accordance
with GAAP. The Company is not subject to any judgment, decree, injunction, rule
or order of any court, and the Company is not subject to any governmental
restriction which may be reasonably likely (i) to have a material adverse effect
on the Company or (ii) to cause a material limitation on Parent's ability to
operate the business of the Company after the Closing. There are no Proceedings
pending under or pursuant to any warranty, whether expressed or implied, on
products sold by the Company. Except for the two suits involving Paul Nguyen and
California Compensation Insurance Company, the Company believes that the
Proceedings set forth on Schedule 4.12 are fully covered by insurance subject to
standard deductibles. Anything herein to the contrary notwithstanding, Company
agrees that any uninsured losses under these two Proceedings in excess of any
existing reserve for these two Proceedings shall be treated as a breach of this
Section 4.12 subject to indemnity under Section 8.1(a).
4.13 INVENTORY. All of the Company's Inventory (defined below) reflected
on the Interim Balance Sheet was purchased in the ordinary course of business
and is owned by the Company free and clear of all liens, security interests and
encumbrances, other than security interests securing debt to unaffiliated third
parties pursuant to existing credit agreements reflected on the Interim Balance
Sheet. The Inventory is maintained on the financial records of the Company
(including the Interim Financial Statements) using
B-11
<PAGE>
historical valuation methods and practices consistent with those used in
preparing the 1997 and 1996 Financial Statements. All items of Inventory are of
good and merchantable quality for sale in the ordinary course of business except
to the extent of adequate reserves reflected in the Interim Financial
Statements. The Company has no knowledge that such Inventory is not in
conformity with all applicable government requirements, (including the Consumer
Product Safety Act, Federal Hazardous Substances Act, Flammable Fabrics Act,
Poison Prevention Packaging Act, the laws administered by the Federal Food and
Drug Administration and other federal and state product safety and labeling
laws, and the regulations promulgated in connection therewith ("Product Safety
Laws")). "Inventory" shall mean all of the Company's inventory and merchandise
whether located in the stores, in a warehouse, or in transit to the stores,
together with the Company's packaging Inventory and displays. Since January 1,
1997, the Company has not received written notice that any item of Inventory
violates any Product Safety Laws or infringes on the Intellectual Property (as
defined in Section 4.18) rights of any third party, or requesting a recall of
any item of Inventory.
4.14 REAL PROPERTY. The Company does not own any real property. Section
4.14 of the Disclosure Schedule sets forth a true and correct list of all real
property currently leased by the Company (which together with all fixtures and
improvements thereon shall be referred to as the "Leased Real Property"),
categorized separately as follows: (i) all leases for retail stores of the
Company open on the date hereof; (ii) all leases for retail stores of the
Company that are not open as of the date hereof; (iii) a list of all leases for
retail stores of the Company under negotiation; and (iv) all other real property
leases of the Company, including the warehouse and office leases. The Company
has previously delivered to Parent correct and complete copies of all of the
leases and related amendments, modifications, subleases, and store, warehouse or
headquarters lease agreements, including all such documents related to the
Leased Real Property. The Company has a valid leasehold interest in the Leased
Real Property, free and clear of any mortgages, pledges, liens, security
interests or other encumbrances of any nature except for Permitted Encumbrances
as defined herein. The leases of the Leased Real Property are in full force and
effect. The Company has neither sent nor received written notice of any uncured
default under the leases of the Leased Real Property, and the Company is not in
breach of any material covenant, agreement or condition contained in any lease
of the Leased Real Property, nor has there occurred any event which with the
passage of time or the giving of notice or both would constitute such a breach
by the Company. The Company has paid in full or accrued all amounts due and
owing, and has satisfied in full or accrued all of its liabilities and
obligations, under the leases. The Company has not received any notice of any
pending claim by any landlord or other third party adverse to the possessory
rights of the Company under any leases. The Company has the right to use such
Leased Real Estate for the operations presently conducted. The Company is the
tenant under all of the leases except for the subleases to Food Express,
Grossmans, Thomas Nix Distributors (related to a check cashing booth located in
two stores) and certain subleases related to vending machines. No portion of the
Leased Real Property, or any of the buildings and improvements located thereon,
violates in any material respect any law, rule, regulation, ordinance, or
statute, including those relating to zoning, building, land use, environmental,
health and safety, fire, air, sanitation and noise control. To the knowledge of
the Company, no pending or threatened condemnation or similar proceeding exists
with respect to the Leased Real Property. To the knowledge of the Company, the
improvements and fixtures located on the Leased Real Property are in good
condition and working order, subject to ordinary wear and tear. The Company is
in possession of all of the Leased Real Property and all improvements and
fixtures located thereon, and the Company has adequate rights of ingress and
egress with respect to such Leased Real Property and the improvements and
fixtures located thereon. As used in this Agreement, "Permitted Encumbrances"
shall mean:
(a) encumbrances on properties consisting of easements, rights of way,
zoning restrictions, restrictions on the use of real property and defects
and irregularities in the title thereto, landlord's or lessor's liens under
leases to which the Company is a party, and other minor liens or
encumbrances none of which interferes materially with the use of the
property affected in the ordinary conduct of the business of the Company;
B-12
<PAGE>
(b) liens on properties to secure taxes, assessments and other
governmental charges or claims for labor, material or supplies in respect of
obligations not overdue;
(c) deposits or pledges made in connection with, or to secure payment
of, workmen's compensation, unemployment insurance, old age pensions or
other social security obligations;
(d) liens of carriers, warehousemen, mechanics and materialmen, and
other like liens on properties in respect of obligations not overdue.
4.15 ENVIRONMENTAL MATTERS. Except as set forth at Section 4.15 of the
Disclosure Schedule:
(a) Since January 1, 1993, the Company has not been the subject of any
federal, state or local investigation, and since such time the Company has
not received any notice or claim, or entered into any negotiations or
agreements with any third party, relating to any liability or remedial
action or potential liability or remedial action under any Environmental
Laws (as defined below). There are no pending or, to the knowledge of the
Company, threatened actions, suits, claims or proceedings against or
affecting the Company or any of its properties, assets or operations in
connection with any such Environmental Laws. The Company and its properties,
assets and operations are in compliance in all material respects with all
applicable federal, state, local and foreign laws, rules and regulations,
orders, decrees, judgments, permits and licenses relating to public and
worker health and safety and to the protection and clean-up of natural
environmental and activities or conditions relating thereto, including,
without limitation, those relating to the generation, handling, disposal,
transportation or release of hazardous materials (collectively,
"Environmental Laws");
(b) the Company has heretofore provided Parent with true, correct and
complete copies of all files of the Company relating to environmental
matters (or an opportunity to review such files).
(c) neither the Leased Real Property nor improvements or equipment
included within the Leased Real Property contains any asbestos, PCBs or
underground storage tanks.
4.16 COMPLIANCE WITH LAWS GENERALLY. Except as set forth in Section 4.16
of the Disclosure Schedule, (i) the Company is, and at all times since January
28, 1998 has been, in compliance in all material respects with all laws, rules,
regulations and ordinances to which it is subject or by which it is bound
("Laws") including the Product Safety Laws, (ii) no action, suit, proceeding,
hearing, investigation, charge, complaint, claim, demand, or notice has been
filed, commenced, or, to the Company's knowledge, threatened against the Company
alleging any uncured failure to comply with any Laws. This Section 4.16 shall
not apply to Environmental Laws (including rules and regulations issued
thereunder), all of which are subject to Section 4.15.
4.17 EMPLOYEE BENEFIT PLANS.
(a) Section 4.17(a) of the Disclosure Schedule contains a true and complete
list of all the following agreements or plans ("Benefit Plans") which are
presently in effect or which have previously been in effect and which cover or
covered any current or former employees, officers, directors or independent
contractors of the Company ("Employees"):
(i) any employee benefit plan as defined in Section 3(3) of Title I of
the Employee Retirement Income Security Act of 1974, as amended ("ERISA"),
under which the Company has any outstanding, present, or future obligation
or liability, or under which any Employee has any present or future right to
benefits which are covered by ERISA; or
(ii) any other pension, profit sharing, retirement, deferred
compensation, stock purchase, stock option, incentive, bonus, vacation,
severance, disability, hospitalization, medical, life insurance, or other
employee benefit plan, program, policy, or arrangement, written or oral,
which the Company maintains or to or under which the Company has any
outstanding, present, or future obligations to contribute or make payments,
whether voluntary, contingent or otherwise.
B-13
<PAGE>
(b) The Company has made available to Parent true, correct and complete
copies of all documents relating to the Benefit Plans that are currently in
effect, including but not limited to: (i) all plan documents and other related
material agreements; (ii) all related insurance and annuity contracts; and (iii)
the most recently available Form 5500 annual reports, certified financial
statements, actuarial reports, summary plan descriptions and favorable
determination letters for the Benefit Plans.
(c) All of the Benefit Plans and the related trusts subject to ERISA comply
and have been administered in compliance in all material respects with (i) the
provisions of ERISA, (ii) all provisions of the Code applicable to secure the
intended tax consequences, (iii) all applicable state and federal securities
laws and (iv) all other applicable laws, rules, regulations and collective
bargaining agreements, except where the failure to so comply or to be so
administered would not result in any monetary penalty against the Company.
(d) The Company has materially complied with the continuation coverage
requirements of Section 1001 of the Consolidated Omnibus Budget Reconciliation
Act of 1985, as amended, and ERISA Sections 601 through 608 ("COBRA").
(e) Neither the Company, its ERISA Affiliates (that is, any entity which,
together with the company, will be treated as a single employer within the
meaning of Code Section 414(b), (c), (m) or (o)), nor any administrator or
fiduciary of any Benefit Plan (or agent or delegate of any of the foregoing) has
engaged in any transaction or acted or failed to act in any manner that could
subject the Company to any direct or indirect liability (by indemnity or
otherwise) for a breach of any fiduciary or co-fiduciary duty under ERISA. The
Company has not engaged in any prohibited transaction (within the meaning of
ERISA Section 406 or Code Section 4975).
(f) No Benefit Plan is subject to Title IV of ERISA, and neither the Company
nor any of its ERISA Affiliates have incurred any liability under Title IV of
ERISA arising in connection with the termination of any plan covered or
previously covered by Title IV of ERISA that could become, after the Closing
Date, an obligation of Sub or any of its ERISA Affiliates.
(g) Neither the Company nor any of its ERISA Affiliates currently is or has
been a party to any pension or welfare plan that is a multiemployer plan within
the meaning of ERISA Section 4001(a)(3).
(h) None of the Benefit Plans provides welfare benefits, including, without
limitation, death or medical benefits (whether or not insured), with respect to
current or former Employees beyond their retirement or other termination of
service (other than coverage required by COBRA or any similar state law).
(i) The Company does not maintain, and has not maintained, a defined benefit
pension plan.
(j) For each Benefit Plan which is intended to be qualified under Code
Section 401(a) ("Qualified Retirement Plan"), the Company has received from the
Internal Revenue Service a favorable determination letter to the effect that the
plan in form satisfies the requirements for qualification under Code Section
401(a) (taking into account the provisions of the Tax Reform Act of 1986 and all
subsequent legislation). No amendments have been made to any Qualified
Retirement Plan since the application for such determination letter which would
cause disqualification of such plan. To Company's knowledge, any noncompliance
or failure prior to the Closing Date properly to maintain, operate, or
administer any Qualified Retirement Plan has not rendered and will not render:
(i) such plan or its related trust or Sub or its ERISA Affiliates subject to, or
liable (directly or indirectly) for, any taxes, penalties, or liabilities to any
person or governmental agency; (ii) such plan subject to disqualification; or
(iii) the trust under such plan subject to any liability for taxes. No request
has been submitted to the Internal Revenue Service and no request is being
contemplated under any program described in Rev. Proc. 98-22, Rev. Proc. 94-62,
or Rev. Proc. 94-16.
B-14
<PAGE>
(k) All contributions (including all employer contributions and employee
salary reduction contributions) which are due or withheld have been paid to each
employee pension benefit plan as defined in ERISA Section 3(2) and all
contributions for any period ending on or before the Closing Date which are not
yet due have been paid to each such employee pension benefit plan or accrued in
accordance with the past custom and practice of the Company. All premiums or
other payments for all periods ending on or before the Closing Date have been
paid with respect to each employee welfare benefit plan as defined in ERISA
Section 3(1).
(l) The Company's records accurately reflect its Employees' years of vesting
and eligibility service for purposes of the Benefit Plans.
(m) There is no pending or, to Company's knowledge, any threatened
complaint, claim (other than a routine claim for benefits), proceeding, audit,
or investigation of any kind in or before any court, tribunal, or governmental
agency with respect to any Benefit Plan.
(n) All Forms 5500 Annual Reports and Summary Annual Reports have been filed
or distributed appropriately with respect to each Employee Benefit Plan.
4.18 INTELLECTUAL PROPERTY.
(a) "Intellectual Property" means (i) all inventions, patents and patent
applications, (ii) all trademarks, service marks, trade dress, logos, trade
names and corporate names, together with all translations, adaptations,
derivations, and combinations thereof, and all applications, registrations and
renewals thereof, including any such Intellectual Property associated with the
name "98-TM- Clearance Centers" or other store or trade name used by the
Company, (iii) all copyrights, and all applications, registrations, and renewals
thereof, (iv) all trade secrets and confidential business information (including
ideas, research, and development, know-how, formulas, compositions,
manufacturing and production processes and techniques, technical data, designs,
drawings, specifications, customer and supplier lists, pricing and cost
information, and business and marketing plans and proposals), (v) all other
proprietary rights, and (vi) all copies and tangible embodiments thereof (in
whatever medium).
(b) The Company owns (or has adequate rights to use pursuant to license,
sublicense, agreement, or permission) all Intellectual Property necessary and
used for the operation of its business activities as presently conducted, free
and clear of all liens and encumbrances except liens arising pursuant to that
certain Loan and Security Agreement dated as of May 16, 1996, between the
Company and Heller Financial, Inc., as amended from time to time, through and
including a Ninth Amendment dated as of June 1, 1998. Each item of Intellectual
Property owned or available for use prior to the Closing hereunder will be owned
or available for the royalty-free use by the Company immediately subsequent to
the Closing. The Company has taken all necessary action to protect each item of
Intellectual Property that it owns or uses. The Company has not interfered with,
infringed upon, misappropriated, or otherwise come into conflict with, in each
case in any material respect, any Intellectual Property rights of third parties,
and neither the Company nor any officers, directors, or employees of the Company
has ever received any charge, complaint, claim, demand, or notice alleging such
interference, infringement, misappropriation, or violation (including any claim
that Company must license or refrain from using any Intellectual Property rights
of any third party). To the knowledge of the Company, no third party has
interfered with, infringed upon, misappropriated, or otherwise come into
conflict with any Intellectual Property rights of the Company. (c) Section
4.18(c) of the Disclosure Schedule identifies (i) each Intellectual Property
registration which has been issued to the Company and each pending Intellectual
Property application which has been made by the Company, (ii) each license,
agreement, or other permission which the Company has granted to any third party
with respect to any of its Intellectual Property, and (iii) each license,
agreement, or other permission which has been granted to the Company by any
third party with respect to any Intellectual Property used in the operation of
the Company's business.
B-15
<PAGE>
4.19 TAX MATTERS.
(a) "Tax" means any federal, state, local, or foreign income, gross
receipts, license, payroll, employment, excise, severance, stamp, occupation,
premium, windfall profits, environmental (including taxes under Code Section 59
A), customs duties, capital stock, franchise, profits, withholding, social
security (or similar), unemployment, disability, real property, personal
property, sales, use, transfer, registration, value added, alternative or add-on
minimum, estimated, or other tax of any kind whatsoever, including any interest,
penalty, or addition thereto, whether disputed or not.
(b) "Tax Return" means any return, declaration, report, claim for refund, or
information return or statement relating to Taxes, including any schedule or
attachment thereto, and including any amendment thereof.
(c) The Company has timely filed all Tax Returns that it was required to
file, including applicable extensions except where failure to file such Tax
Returns would not have a material adverse effect. All such Tax Returns were
correct and complete in all material respects. All Taxes owed by the Company
shown on such Tax Returns have been paid.
(d) The Company has withheld and paid all Taxes required to have been
withheld and paid in connection with amounts paid or owing to any employee,
independent contractor, creditor, stockholder, or other third party.
(e) There is no dispute or claim concerning any Tax Liability of the Company
either (i) claimed or raised by any authority in writing, or (ii) as to which
any of the directors and officers (and employees responsible for Tax matters) of
the Company has knowledge based upon personal contact with any agent of such
authority. The Company has delivered to Parent correct and complete copies of
all federal income Tax Returns, examination reports, and statements of
deficiencies assessed against or agreed to by the Company for taxable years
ending on or after December 31, 1995.
(f) The Company has not waived any statute of limitations in respect of
Taxes or agreed to any extension of time with respect to a Tax assessment or
deficiency.
(g) The Company has not filed a consent under Code Section 341(f) concerning
collapsible corporations. The Company has not made any payments, is obligated to
make any payments, or is a party to any agreement that under certain
circumstances could obligate it to make any payments that will not be deductible
under Code Section 280G. The Company has not been a United States real property
holding corporation within the meaning of Code Section 897(c)(2) during the
applicable period specified in Code Section 897(c)(1)(A)(ii). The Company is not
a party to any Tax allocation or sharing agreement. The Company (i) has not been
a member of an affiliated group filing a consolidated federal income Tax Return
(other than a group the common parent of which was the Target), or (ii) has any
Liability for the Taxes of any Person (other than any of the Target and its
Subsidiaries) under Reg. Section 1.1502-6 (or any similar provision of state,
local, or foreign law), as a transferee or successor, by contract, or otherwise.
(h) The Company has no deferred gain or loss allocable to the Company
arising out of any deferred intercompany transaction as defined in the U.S.
Treasury Department's consolidated income tax regulations.
(i) The unpaid Taxes of the Company (i) did not, as of June 28, 1998, exceed
the reserve for tax liability (rather than any reserve for deferred Taxes
established to reflect timing differences between book and Tax income) set forth
on the face of the Interim Balance Sheet (rather than in any notes thereto) and
(ii) do not exceed that reserve as adjusted for the passage of time through the
date hereof, and will not exceed such reserve of the Closing Date, in accordance
with the past custom and practice of the Company in filing its Tax Returns.
4.20 NO BROKER INVOLVED; DEAL EXPENSES. Except for Piper Jaffray Inc., the
Company has not engaged any broker, finder or agent with respect to the
transactions contemplated by this Agreement or
B-16
<PAGE>
with respect to the Company's sale or merger or any other transaction relating
to the disposition of all or substantially all of the Company's assets.
4.21 CONTRACTS. Section 4.21 of the Disclosure Schedule contains a true
and complete list of (or cross-references to another portion of the Disclosure
Schedule listing) the following Company contracts ("Company Contracts") as of
the date hereof:
(a) all unpaid bonds, debentures, notes, mortgages, indentures, indemnities
or guarantees in excess of $50,000 to which the Company is a party or by which
any of its properties or assets (real, personal or mixed, tangible or
intangible) is bound;
(b) all leases to which the Company is a party or by which any of its
properties or assets (real, personal or mixed, tangible or intangible) is bound
involving an annual rental payment in excess of $50,000 individually;
(c) all loans and credit commitments to the Company which are outstanding
and pursuant to which any indebtedness of the Company in the aggregate principal
amount in excess of $50,000 is outstanding, together with a brief description of
such commitments and the name of each financial institution granting the same;
(d) all contracts or agreements which limit or restrict in any respect the
Company from engaging in any business in any jurisdiction;
(e) all agreements or arrangements that contain any severance pay or post-
employment liabilities or obligations (or a cross-reference to another section
of the Disclosure Schedule in which any such agreements or arrangements have
been listed);
(f) all bonus, deferred compensation, incentive compensation plans, or any
other employee benefit plans or arrangements (or a cross-reference to another
section of the Disclosure Schedule in which any such plans or arrangements have
been listed);
(g) all employment or consulting agreements, contracts or commitments with
any employee, not terminable by Company on thirty days notice without liability;
(h) all agreements or plans, including, without limitation, any stock option
plans, stock appreciation right plans or stock purchase plans, any of the
benefits of which will be increased, or the vesting of benefits of which will be
accelerated, by the occurrence of any of the transactions contemplated by this
Agreement or the value of any of the benefits of which will be calculated on the
basis of any of the transactions contemplated by this Agreement (or a
cross-reference to another section of the Disclosure Schedule in which any such
plans or arrangements have been listed);
(i) [NOT USED];
(j) all agreements, contracts or commitments containing any covenant
limiting the freedom of Company to engage in any line of business or compete
with any person;
(k) all agreements, contracts or commitments for capital expenditures for
future obligations in excess of $25,000 and not cancelable without penalty;
(l) all agreements, contracts or commitments currently in force relating to
the disposition or acquisition of assets not in the ordinary course of business
or any ownership interest in any corporation, partnership, joint venture or
other business enterprise;
(m) all material joint marketing, development, supply, franchise or
distribution agreements;
(n) all material sales and purchase commitments, maintenance agreements, ADP
agreements, inventory and accounting agreements, and other service outsourcing
agreements; and
B-17
<PAGE>
(o) all existing agreements, contracts and commitments, written or oral
(other than those described in the foregoing provisions of this Section 4.21) to
which the Company is a party or by which the Company or any of their respective
properties or assets may be bound (i) involving an annual commitment or annual
payment by any party thereto of more than $50,000 individually, (ii) which
cannot be terminated by the Company without penalty or further obligations on
not more than 90 days' notice or (iii) which is otherwise material to the
Company.
True and complete copies of all Company Contracts, including all amendments
thereto, have been made available to Parent. The Company Contracts are valid and
enforceable in accordance with their respective terms with respect to the
Company (as applicable) and valid and enforceable in accordance with their
respective terms with respect to any other party thereto, except as the
enforceability may be limited by Debtors' Rights. There is not under any of the
Company Contracts any existing material breach, default or event of default by
the Company or event that with notice or lapse of time or both would constitute
a material breach, default or event of default by the Company, nor does the
Company know of, and nor has the Company received notice of, or made a claim
with respect to, any material breach or default by any other party thereto. To
the knowledge of the Company, no customer or supplier which paid the Company or
was paid by the Company more than $50,000 during calendar year 1997 intends to
terminate or materially alter its level of business with the Company as a result
of the transactions contemplated by this Agreement.
4.22 OFFICERS AND EMPLOYEES. Section 4.22 of the Disclosure Schedule
contains a true and complete list of all of the officers and key employees of
the Company and all other persons with whom the Company has a written employment
agreement or to whom the Company has made verbal commitments which are binding
on the Company under applicable laws, specifying their title, annual rate of
compensation, bonus eligibility and the terms of such agreement or commitment as
of the date hereof. To Company's knowledge, no such employee of Company (i) is
in violation of any term of any employment contract, non-competition agreement,
or any restrictive covenant to a former employer relating to the right of any
such employee to be employed by Company because of the nature of the business
conducted or presently proposed to be conducted by Company or to the use of
trade secrets or proprietary information of others, and (ii) has given notice to
Company, nor is Company otherwise aware, that any such employee intends to
terminate his or her employment with Company except for terminations of a nature
and number that are consistent with Company's prior experience.
4.23 LABOR RELATIONS.
(a) The Company is not and since January 1, 1996 has not been a party to any
collective bargaining or other labor union contracts applicable to any person
employed by the Company. There is no pending or, to the knowledge of the
Company, threatened material labor dispute, strike or work stoppage against the
Company. Neither the Company nor its representatives or employees has committed
any material unfair labor practices in connection with the operation of the
business of the Company, and there is no pending or, to the knowledge of the
Company, threatened charge or complaint against the Company by the National
Labor Relations Board or any comparable state agency. No hand billing involving
the employees of the Company is in progress, and no denial of fair
representation claim is pending against the Company.
(b) Except as disclosed in Section 4.12 to the Disclosure Schedule, (i) no
claim for unpaid wages or overtime or for child labor or record keeping
violations is pending under the Fair Labor Standards Act, Davis-Bacon Act,
Walsh-Healey Act, Service Contract Act, or any other Federal, state, local or
foreign law, regulation, or ordinance, (ii) no discrimination and/or retaliation
claim is pending against the Company under the 1866 or 1964 Civil Rights Acts,
as amended, the Equal Pay Act, the Age Discrimination in Employment Act, the
Americans with Disabilities Act, the Family and Medical Leave Act, the Fair
Labor Standards Act, ERISA or any other Federal law or any comparable state fair
employment practices act or foreign law regulating discrimination in the
workplace (including the California Fair Employment and Housing Act), (iii) the
Company is under no obligation to develop or maintain an affirmative action plan
B-18
<PAGE>
and has not entered into any conciliation or settlement agreement with any
Federal agency or comparable state or foreign agency or court and no onsite
review or audit is in progress, (iv) no citation has been issued by Occupational
Safety and Health Administration ("OSHA") against the Company for any repeated
or willful violation and no notice of contest or OSHA administrative enforcement
proceeding involving the Company is pending, and (v) no citation of the Company
has occurred for any repeated or willful violation and no enforcement proceeding
has been initiated or is pending under Federal or foreign immigration law, in
each case except for such claims, citations, notices, and proceedings which, if
adversely determined, would not have a material adverse effect on the Company.
(c) Before the date of this Agreement the Company has not taken any action
which would constitute a "mass layoff" or "plant closing" within the meaning of
the Worker Adjustment and Retraining Notification Act or otherwise trigger
notice requirements or liability under any local or state plant closing notice
law.
(d) No employee of the Company is indebted to the Company except in the
ordinary course of business consistent with past practices.
(e) Except as disclosed on Section 4.23(e) of the Disclosure Schedule, the
Company has not entered into any written employment, covenant-not-to-compete,
confidentiality, proprietary rights, restrictive covenant, severance, or golden
parachute agreement with any present or former employee, consultant, or
Affiliate which is currently in effect, and the Company has not entered into any
agreement, oral or written, with any present or former employee that by its
terms obligates (either on an absolute or contingent basis) the Company or
Parent to make any payment on, after, or in connection with the Closing to any
present or former employee following his or her termination of employment.
(f) None of the officers of the Company has, to Company's knowledge,
expressed an intention to resign or retire as a result of the transaction
contemplated by this Agreement or for any other reason except for Gary Cino.
4.24 INSURANCE. Section 4.24 of the Disclosure Schedule sets forth a true
and complete list of the current insurance coverages for the Company, including
names of carriers, amounts of coverage and premiums therefor. The Company has
made available to the Parent true and complete copies of all such insurance
policies.
4.25 TITLE TO PROPERTY AND RELATED MATTERS. The Company has good and valid
title to or valid leasehold interest in its personal property, as reflected in
the Interim Balance Sheet (other than property sold, leased or otherwise
disposed of in the ordinary course of business since such date), and all of such
properties are held free and clear of all title defects, liens, encumbrances,
security interests and restrictions whatsoever, except, with respect to all such
properties, (a) liens securing debt reflected as liabilities on the Interim
Balance Sheet, and (b) Permitted Encumbrances.
4.26 ACCOUNTS AND NOTES RECEIVABLE. The accounts and notes receivable of
the Company reflected on the Interim Balance Sheet and the related reserves
arose from bona fide transactions in the ordinary course of business, have been
extended on terms consistent with the past practice of the Company, are not
subject to any counterclaims or setoffs other than in the ordinary course
(except for the amount of any applicable existing reserves for counterclaims or
setoffs), have been recorded in the Company's books in accordance with GAAP
consistently applied.
4.27 NONDISCLOSED PAYMENTS. Neither the Company nor any of the Company's
officers or directors, nor, to the Company's knowledge, anyone acting on behalf
of any of them, has made or received any material payments not correctly
categorized and fully disclosed in the Company's books and records in connection
with or in any way relating to or affecting the Company.
4.28 [Not Used]
B-19
<PAGE>
4.29 BUSINESS PRACTICES. Neither the Company nor any director or officer,
or, to the Company's knowledge, any employee, agent or other Person acting on
behalf of the Company (i) has used any Company funds for improper or unlawful
contributions, payments, gifts or entertainment, or made any improper or
unlawful expenditures relating to political activity to domestic or foreign
governmental officials or others, or (ii) has accepted or received any improper
or unlawful contributions, payments, gifts or expenditures. The Company has at
all times complied, and is in compliance, in all material respects, with the
Foreign Corrupt Practices Act, as amended, and all foreign laws and regulations
relating to prevention of corrupt practices and similar matters. There is no
agreement (noncompete or otherwise), commitment, judgment, injunction, order or
decree to which Company is a party or, to the knowledge of Company, is otherwise
binding upon Company, which has or reasonably could be expected to have the
effect of prohibiting or impairing any material business practice of Company, or
the conduct of business by Company. Without limiting the foregoing, Company has
not entered into any agreement under which Company is restricted, in any
material respect, from selling, licensing or otherwise distributing any of its
products to any class of customers, in any geographic area, during any period of
time or in any segment of the market.
4.30 [Not Used]
4.31 SECURITIES MATTERS.
(a) None of the information supplied by or on behalf of the Company or its
officers, directors, or shareholders to be included in the Proxy Statement will,
on the date the Proxy Statement is first mailed to the Shareholders and on the
date of the Shareholders' meeting referred to in Section 6.8, contain any untrue
statement of a material fact, or omit to state any material fact required to be
stated therein or necessary in order to make the statements therein, in light of
the circumstances under which they are made, not misleading. No representation
is made with respect to information supplied by or on behalf of Parent or Sub or
their respective directors, officers or shareholders specifically for inclusion
or incorporation in the Proxy Statement.
(b) None of the information supplied by or on behalf of the Company or its
officers, directors, or shareholders to be included or incorporated in the
Registration Statement will, at the time it becomes effective, contain any
untrue statement of a material fact, or omit to state any material fact required
to be stated therein or necessary in order to make the statements therein, in
light of the circumstances under which they are made, not misleading. No
representation is made with respect to information supplied by or on behalf of
Parent or Sub or their respective directors, officers or shareholders
specifically for inclusion or incorporation in the Registration Statement.
4.32 POOLING. Company has taken no actions that would prevent the
accounting of the business combination to be effected by the Merger as a pooling
of interests under Opinion 16 of the Accounting Principles Board and applicable
SEC rules and regulations ("pooling of interests"). In addition, the shares of
Parent Common Stock issued in the Merger will be shared ratably by the
Shareholders based on their respective percentage ownership of the Company
capital stock, and there is no agreement among the Shareholders providing for
any reallocation of such Parent Common Stock among the Shareholders. Company has
disclosed to its independent public accountants all actions taken by it that
would impact the accounting of the business combination to be effected by the
Merger as a pooling of interests. As of the date hereof, Company, based on
advice from its independent public accountants, believes that the Merger will
qualify for pooling of interests accounting.
4.33 REORGANIZATION UNDER SECTION 368 OF THE CODE. The Company will have
taken no action reasonably likely to prevent the Merger from qualifying as a
reorganization within the meaning of Section 368(a) of the Code.
4.34 FULL DISCLOSURE. The representations and warranties of the Company
contained in this Agreement (including all information in the Disclosure
Schedule and the Escrow Agreement hereto and the
B-20
<PAGE>
certificate to be furnished by the Company pursuant to Section 9.1(d)(i)) do not
contain any untrue statement of a material fact or omit to state a material fact
necessary in order to make the statements so made or information so delivered
not misleading.
ARTICLE 5
REPRESENTATIONS AND WARRANTIES OF PARENT AND SUB
Parent and Sub jointly and severally represent and warrant to the Company
that, as of the date of this Agreement and on the Closing Date:
5.1 CORPORATE ORGANIZATION. Parent is a corporation validly existing and
in good standing under the laws of the Commonwealth of Virginia and has all
requisite corporate power and authority to own, operate and lease its property
and to carry on its business as now being conducted. The Sub is a corporation
validly existing and in good standing under the laws of the State of California
and has all requisite corporate power and authority to own, operate and lease
its property and to carry on its business as now being conducted. The Sub was
formed for the purpose of consummating the transactions contemplated hereby and
has not previously conducted any other activities. Parent and Sub are each
qualified to conduct business as a foreign corporation in each jurisdiction in
which the ownership or leasing of its properties or the conduct of its business
requires such qualification except where the failure to be so qualified would
not individually or in the aggregate have a material adverse effect on the
Parent and its subsidiaries, taken as a whole.
5.2 AUTHORIZATION AND APPROVAL OF AGREEMENT. Parent and Sub have all
requisite corporate power and authority to execute and deliver this Agreement
and the other agreements, documents and instruments executed and delivered by
Parent or Sub in connection with the transactions contemplated by this Agreement
(the "Parent Ancillary Agreements"), and to fully perform the obligations
required to be performed by them hereunder and thereunder. All corporate
proceedings required by Parent's and Sub's respective charter documents or
otherwise required by law for the execution and delivery of this Agreement and
the Parent Ancillary Agreements and for the consummation of the transactions
provided for herein and therein have been duly taken, and no approval by
Parent's shareholders is required to authorize this Agreement or the Parent
Ancillary Agreements. This Agreement and each of the Parent Ancillary Agreements
has been duly and validly executed and delivered by Parent and Sub and is
enforceable against Parent and Sub in accordance with its terms, except as the
enforceability may be limited by Debtors' Rights.
5.3 ABILITY TO CARRY OUT AGREEMENT. The execution and delivery of this
Agreement and the Parent Ancillary Agreements by Parent and Sub and the
performance by Parent and Sub of their obligations hereunder and thereunder will
not conflict with, violate or result in any breach of or constitute a default
under any provisions of Parent's and Sub's Articles of Incorporation or By-laws
or, except for the Parent's credit facilities and private placement notes, of
any of the provisions of any indenture, mortgage, lease, agreement, license,
permit, instrument, order, arbitration award, judgment, decree, law, ordinance,
regulation or any other restriction of any kind or character to which Parent or
Sub is a party or by which either of them is bound. Except for compliance with
the applicable requirements of the Hart-Scott-Rodino Antitrust Improvements Act
of 1976 (the "HSR Act") and the Securities Act, the Securities Exchange Act of
1934 (the "Exchange Act"), applicable state securities laws, the bylaws of the
National Association of Securities Dealers, any listing agreement with respect
to the Parent Common Stock, and the filing of the Agreement of Merger with the
State of California, no consent of any governmental authority or other third
party is required to be obtained on the part of Parent in connection with
Parent's execution, delivery or performance of this Agreement or the Parent
Ancillary Agreements.
5.4 CAPITAL STOCK. The authorized capital stock of Parent consists of (i)
100,000,000 common shares $.01 par value per share, and (ii) 10,000,000
preferred shares. All the outstanding common shares are duly authorized, validly
issued, fully paid and nonassessable, and no class of capital stock of Parent is
entitled to
B-21
<PAGE>
preemptive rights or cumulative voting rights. As of the close of business on
June 30, 1998, 59,107,262 common shares and no shares of preferred stock were
issued and outstanding, and since that date there have been no further issuances
of common shares, except in connection with the exercise of options issued
pursuant to the Parent's various stock option and stock purchase plans. All
outstanding shares of capital stock of the subsidiaries of Parent are owned by
Parent or a direct or indirect wholly-owned subsidiary of Parent. As of June 30,
1998, there were no outstanding options, warrants or other rights to acquire
capital stock from Parent or any of its subsidiaries, or any securities
outstanding which were directly or indirectly convertible into or exchangeable
for shares of capital stock of Parent or any of its subsidiaries, except for
options and rights to purchase common shares granted pursuant to the Parent's
various stock option and stock purchase plans and 5,584,900 warrants. As of the
close of business on June 30, 1998, there were 2,706,128 common shares available
for issuance upon exercise of stock options not yet granted, 2,554,170 common
shares reserved for issuance upon exercise of stock options outstanding as of
such date, and 445,944 common shares reserved for issuance under the stock
purchase plan.
5.5 OPERATIONS OF SUBSIDIARIES. Each subsidiary of Parent (i) is a
corporation duly organized, validly existing and in good standing under the laws
of the jurisdiction of its organization and has the full power and authority to
own its properties and conduct its business and operations as currently
conducted, (ii) is duly qualified and in good standing in each jurisdiction in
which the property is owned, leased or operated by it or the nature of the
business conducted by it makes such qualification necessary, except where the
failure to be so qualified would not individually or in the aggregate have a
material adverse effect.
5.6 INVESTMENT REPRESENTATION. Parent and Sub are acquiring the Company
Shares for investment and not with a view to, or for resale in connection with,
any distribution of the Company Shares.
5.7 NO BROKER INVOLVED. Parent and Sub have not expressly or impliedly
engaged any broker, finder or agent with respect to the transactions
contemplated by this Agreement.
5.8 PARENT COMMON STOCK. The shares of Parent Common Stock to be issued in
the Merger will be validly issued, fully paid, nonassessable and free of
pre-emptive rights.
5.9 PARENT SEC REPORTS. Each registration statement, report and proxy or
information statement filed by Parent with the SEC since January 1, 1997, are
collectively referred to as the "Parent SEC Reports," all of which, as of their
respective filing dates (or if amended or superseded by a filing prior to the
date of this Agreement, then on the date of such filing), complied in all
material respects with all applicable requirements of the Securities Act and the
Exchange Act, and the rules and regulations promulgated thereunder. None of such
Parent SEC Reports, as of the respective dates they were filed, contained any
untrue statement of a material fact or omitted to state a material fact required
to be stated therein or necessary in order to make the statements therein, in
light of the circumstances under which they were made, not misleading. Each of
the consolidated financial statements of Parent (including any related notes and
schedules) included (or incorporated by reference) in the Parent SEC Reports
have been prepared in conformity with GAAP applied on a consistent basis
(except, with respect to all financial statements, as may be indicated in the
notes thereto and, with respect to unaudited financial statements, as permitted
by Form 10-Q of the SEC), the consolidated financial position of Parent and its
subsidiaries as of the date thereof and the consolidated results of their
operations and their cash flows for the periods then ended.
5.10 ABSENCE OF CERTAIN CHANGES OR EVENTS. Since December 31, 1997, and
except as disclosed in the Parent SEC Reports, the business of Parent has been
conducted only in the ordinary course consistent with past practice and there
has not been any event which either individually or in the aggregate has had or
may reasonably be expected to have a material adverse effect on Parent or its
subsidiaries (taken as a whole).
5.11 MATERIAL MISSTATEMENTS OR OMISSIONS.
(a) None of the information with respect to Parent or Sub to be included (or
incorporated by reference) in the Proxy Statement will, on the date the Proxy
Statement is first mailed to the Shareholders,
B-22
<PAGE>
and on the date of the Shareholders' meeting referred to Section 6.8, contain
any untrue statement of a material fact, or omit to state any material fact
required to be stated therein or necessary in order to make the statements
therein, in light of the circumstances under which they are made, not
misleading. The Proxy Statement will comply as to form in all material respects
with the provisions of the Securities Act, except that no representation is made
with respect to information supplied in writing by or on behalf of the Company
or its officers, directors, or shareholders for inclusion in the Proxy
Statement.
(b) None of the information with respect to Parent or Sub to be included (or
incorporated by reference) in the Registration Statement will, at the time it
becomes effective, contain any untrue statement of a material fact or omit to
state any material fact required to be stated therein or necessary in order to
make the statements therein, in light of the circumstances under which they are
made, not misleading. The Registration Statement will comply as to form in all
material respects with the provisions of the Securities Act, except that no
representation is made with respect to information supplied by or on behalf of
the Company or its officers, directors, or shareholders specifically for
inclusion or incorporation in the Registration Statement.
5.12 WARN ACT. Parent has no present plans or intention to carry out,
after the Closing, any plant closing or mass layoff which would violate the
federal Worker Adjustment and Retraining Notification Act (the "WARN Act") at
any facility of the Company.
5.13 FULL DISCLOSURE. The representations and warranties and other
agreements of the Parent and of the Sub contained in this Agreement (including
all information in the Schedules and Exhibits hereto and the certificate to be
furnished by Parent pursuant to Section 10.1(c)(i)) do not contain any untrue
statement of a material fact or omit to state a material fact necessary in order
to make the statements so made or information so delivered not misleading. 5.14
Reorganization under Section 368 of the Code. Parent and Sub will have taken no
action that will prevent the Merger from qualifying as a reorganization within
the meaning of Section 368(a) of the Code.
5.14 BENEFIT PLANS; TAX OBLIGATIONS. The material Benefit Plans of Parent
are as described in the Parent SEC Reports. Parent has no material delinquent
Tax obligations.
ARTICLE 6
PRE-CLOSING COVENANTS
6.1 CONDUCT OF BUSINESS. The Company covenants and agrees that from the
date of this Agreement to the Closing Date, the Company shall (except as
otherwise consented to in writing by Parent):
(a) carry on its business in a manner consistent with prior practice and
only in the usual and ordinary course, and use reasonable efforts to preserve
its business organization intact and conserve the good will and relationships of
its customers, suppliers and others having business relations with it;
(b) maintain its existence and good standing in its jurisdiction of
organization plus in each jurisdiction in which the ownership or leasing of its
property or the conduct of its business requires such qualification;
(c) duly and timely file or cause to be filed all reports and returns
required to be filed with any governmental body, agency or authority and
promptly pay or cause to be paid when due all taxes, assessments and
governmental charges, including interest and penalties levied or assessed,
unless diligently contested in good faith by appropriate proceedings;
(d) maintain in existing condition and repair, consistent with past
practice, all buildings, offices, shops and other structures located on the
Leased Real Property [see 4.15(g)], and all equipment, fixtures and other
tangible personal property located on the Leased Real Property;
(e) give Parent and Parent's employees, counsel, accountants and advisors,
full access upon reasonable notice during normal business hours to all of the
properties, personnel, financial and operating data,
B-23
<PAGE>
books, tax returns, contracts, commitments, and records of the Company in
connection with reviewing the Company and its respective properties and
operations;
(f) maintain in full force and effect all existing policies of insurance
except for replacements or renewals in the ordinary course of business;
(g) use its reasonable best efforts to permit the Company to retain the
material benefits provided by all existing contracts and licenses to which the
Company is a party under arrangements similar to those in effect prior to the
Closing Date;
(h) use its reasonable best efforts to assist Parent and Sub in retaining
the continued services of the Company's key employees.
(i) not amend its charter documents or by-laws;
(j) not authorize for issuance, issue or deliver any additional shares of
its capital stock or securities convertible into or exchangeable for shares of
its capital stock, or issue or grant any right, option or other commitment for
the issuance of shares of its capital stock or of such securities, or split,
combine or reclassify any shares of its capital stock except for issuances of
capital stock upon the exercise of options granted before the date hereof;
(k) not incur any liability, commitment or obligation, except unsecured
current and trade liabilities and other unsecured liabilities incurred in the
ordinary course of business;
(l) not borrow, or agree to borrow, any funds other than pursuant to its
existing loan agreements or otherwise in the ordinary course of business;
(m) not sell, transfer or otherwise dispose of assets, except for the sale
or disposition of obsolete or damaged tangible personal property and except for
the sale of inventory and other assets in the ordinary course of business;
(n) except for amounts committed for emergency repairs, not make any
material capital commitments;
(o) not mortgage, pledge or encumber any of its assets or guaranty the
obligations of any party except in the ordinary course of business;
(p) not make any adjustments in the salary or wage rate of, or make or
authorize any bonus, severance, or termination payments to or consulting
arrangements with, any officer or employee or amend or adopt any employee
benefit plan, without Parent's prior written consent, other than bonuses for the
1997 and 1998 years and salary increases for the 1998 year which shall be made
in amounts consistent with past practices;
(q) take any action with the intention of causing any of the representations
and warranties made herein to be inaccurate on the Closing Date;
(r) not dispose of or permit to lapse any rights to the use of any patent,
trademark, trade name, license or copyright, or dispose of or disclose to any
person, any trade secret, formula, process, technology or know-how not
heretofore a matter of public knowledge;
(s) not declare, pay or set aside for payment any dividend or other
distribution in respect of the capital stock or other equity securities or
equity interests of the Company and not redeem, purchase or issue any shares of
the capital stock or other securities or equity interests of the Company or
rights or obligations convertible into or exchangeable for any shares of the
capital stock or other securities or equity interests of the Company or
obligations convertible into such, or any options, warrants or other rights to
purchase or subscribe to any of the foregoing except for issuances of capital
stock upon exercise of options granted before the date hereof;
B-24
<PAGE>
(t) deliver to Parent on or prior to the twentieth (20th) business day of
each month a balance sheet of the Company in the form of the Interim Balance
Sheet as of the end of the prior monthly accounting period and an income
statement for such period in each case accompanied by a certificate executed by
the chief financial officer on behalf of the Company that such statements have
been prepared in accordance with the standards set forth in Section 4.7(b); and
(u) not take any action outside the ordinary course of business consistent
with past practice (unless contemplated by this Agreement).
6.2 PUBLIC ANNOUNCEMENTS. Parent and Company shall have the right to issue
a joint press release relating to the subject matter of this Agreement and the
transactions contemplated thereby, provided however that the timing and content
of such press release shall be consistent with the requirements of law, any
applicable bylaw of the National Association of Securities Dealers, and/or any
listing agreement relating to the Parent Common Stock. Until Closing, the timing
and content of all other announcements regarding any aspect of this Agreement or
the Merger to the financial community, government agencies, employees or the
general public shall be mutually agreed upon by Parent and the Company in
advance (unless Parent or the Company is advised by counsel in writing that any
such announcement or other disclosure not mutually agreed upon in advance is
required to be made by law or SEC policy, any applicable bylaw of the National
Association of Securities Dealers or any listing agreement relating to the
Parent Common Stock, and then only after consulting the other party and making
reasonable efforts to comply with the provisions of this Section).
6.3 SUPPLEMENTS TO SCHEDULES. On the Closing Date, each of the Company and
Parent shall supplement or amend the respective disclosure schedules which they
have delivered pursuant to this Agreement with respect to any matter hereafter
arising which, if existing or occurring at or prior to the date of this
Agreement, would have been required to be set forth or described in the
disclosure schedule or which is necessary to correct any information in any such
disclosure schedule which has been rendered inaccurate thereby. Before the
Closing Date, each of the Company and Parent shall give prompt notice to the
other if it comes to the attention of such party that an event, condition or
state of facts exists which has resulted or is reasonably likely to result in a
material adverse effect on the Company or Parent, respectively. No supplement or
amendment to any such disclosure schedule shall have any effect for the purpose
of determining satisfaction of the conditions set forth in Sections 9.1(a) or
10.1(a) of this Agreement.
6.4 POOLING OF INTERESTS ACCOUNTING. From and after the date hereof and
until the Closing Date, neither Parent nor the Company, nor any of their
respective subsidiaries or other Affiliates, shall take, and the Company shall
use its best efforts to ensure that the Company's officers, directors and
holders of ten percent (10%) or more of the Company Shares shall not take, any
action that might jeopardize the characterization of the Merger as a pooling of
interests for accounting purposes, except as expressly authorized by this
Agreement. Each of Parent and Company shall use their respective best efforts to
cause the transactions contemplated by this Agreement, including the Merger, to
be accounted for as a pooling of interests, and such accounting treatment to be
accepted by each of Parent's and Company's independent certified public
accountants, respectively, and to be accepted by the SEC.
6.5 THE NASDAQ ADDITIONAL SHARES LISTING APPLICATION. Parent will file an
additional shares listing application with the Nasdaq to approve for a listing,
subject to official notice of its issuance, the shares of Parent Common Stock to
be issued in the Merger and upon exercise of the Assumed Options. Parent shall
use its best efforts to cause its shares of Parent Common Stock to be issued in
the Merger and upon exercise of the Assumed Options to be approved for listing
on the Nasdaq, subject to official notice of issuance, prior to the Closing
Date.
6.6 ANTITRUST FILING. As soon as practicable following the execution of
this Agreement, both Parent and Company shall file an Antitrust Improvements Act
Notification and Report Form under the HSR Act (the "Antitrust Filing") relating
to the transactions contemplated by this Agreement with the Federal Trade
B-25
<PAGE>
Commission and the Department of Justice. Parent shall pay all filing fees
required in connection therewith, and Parent and Company shall use their
respective commercially reasonable efforts to take all action necessary, proper
and advisable under applicable laws and regulations to cause the expiration or
termination of the waiting periods under the HSR Act as soon as practicable.
6.7 NO SOLICITATION OF TRANSACTIONS.
(a) Until the earlier of (i) the Closing, or (ii) the termination of this
Agreement pursuant to Article 11, the Company agrees that neither it nor its
officers, directors, employees, agents, representatives (including, without
limitation, investment bankers, attorneys, accountants, financial advisors and
consultants), or Affiliates of the Company shall directly or indirectly:
(i) solicit, encourage, initiate or further (including by way of
furnishing information) the submission of proposals or offers relating to
any Alternative Transaction. An "Alternative Transaction" is any
acquisition, purchase, lease, exchange, mortgage, pledge, transfer or other
disposition of all or any significant portion of the assets of, or 5% or
more of the equity securities (excluding the exercise of outstanding stock
options under the Company Stock Option Plan) of, the Company or any merger,
reorganization, share exchange, recapitalization, liquidation, dissolution,
consolidation, business combination, or similar transaction with the
Company, other than the transactions contemplated by this Agreement;
(ii) participate in any discussions or negotiations regarding, or
furnish any confidential information with respect to the Company, in
connection with any Alternative Transaction;
(iii) except as otherwise provided in Section 6.7(d), agree to approve,
recommend, endorse, or enter into any agreement, plan or understanding with
respect to any Alternative Transaction; or
(iv) otherwise cooperate in any way with, or assist or participate in,
facilitate or encourage, or publicly announce any effort or attempt by any
Person to undertake or seek to undertake any Alternative Transaction.
(b) In the event the Company receives any offer or indication of interest
relating to any Alternative Transaction, the Company shall promptly (and in no
event later than 24 hours) notify Parent in writing of the details of the offer
or indication of interest, except that the identity of the interested Person is
not required to be disclosed.
(c) The Company shall immediately cease and cause to be terminated any
existing activities, discussions or negotiations relating to any Alternative
Transaction, whether conducted prior to the date of this Agreement or
thereafter. The Company agrees not to release any party from any confidentiality
or standstill agreement to which the Company is a party.
(d) Notwithstanding this Section 6.7 or any other provision of this
Agreement, the Board of Directors of the Company may provide information in
response to, evaluate, or consider, approve, recommend, endorse or enter into an
unsolicited bona fide Alternative Transaction made by a Third Party (as defined
below), provided that the following conditions are satisfied: (i) such action is
required for the Board of Directors to carry out its fiduciary duties under
applicable law and the Board of Directors has received advice of counsel to that
effect, and (ii) the Board of Directors in its good faith reasonable judgment
determines, after consultation with its independent financial advisors, that the
Alternative Transaction would result in a transaction more favorable to the
stockholders of Company from a financial point of view than the Merger. In
addition, notwithstanding the provisions of this paragraph (d), Company shall,
upon the direction of Parent, refer any Third Party to this Section 6.7. A
"Third Party" is any individual, firm, corporation, partnership, association,
group (as defined in Section 13(d)(3) of the Exchange Act) or person or entity,
individually or collectively (including, without limitation, any managers or
other employees of the Company or any affiliates) other than Parent or Sub.
(e) The Company shall ensure that the officers, directors, key employees,
agents, representatives and Affiliates of the Company are aware of the
restrictions described in this Section 6.7.
B-26
<PAGE>
6.8 SHAREHOLDER APPROVAL.
(a) The Company will take all action necessary to carry out the purposes of
this Agreement. The Company shall, in accordance with the California Code and
other applicable law and its Articles of Incorporation and By-laws, convene a
meeting of its shareholders (the "Company Shareholders Meeting") as promptly as
practicable to consider and vote upon the Merger. Except to the extent permitted
under Section 6.7(d), the Board of Directors of the Company shall recommend and
declare advisable the approval of this Agreement, the Agreement of Merger, the
Merger and the other transactions contemplated hereby ("Merger Transactions"),
and the Company shall as promptly as possible following dissemination of the
Proxy Statement take all lawful action to solicit, and use all reasonable
efforts to obtain, such approval. Pursuant to the terms of the Voting Agreement
attached hereto as Exhibit C which shall be executed simultaneously with the
execution of this Agreement, certain Shareholders of the Company each have
agreed to vote all Company Shares owned by them or over which they have voting
control, or to execute or cause to be executed written shareholder consents, to
grant their approval of the Merger, this Agreement, and the Agreement of Merger.
(b) Parent, as the sole shareholder of Sub, will act by written consent to
approve the Merger and the adoption of this Agreement by Sub.
6.9 DISSENTERS' RIGHTS NOTICES. The Company, before the Effective Time,
and Parent, after the Effective Time, shall timely provide all notices and other
communications as are required under the California Code in connection with such
Shareholders' statutory dissenters' rights, to the extent applicable to the
Merger. Without reducing the generality of the foregoing sentence, the Company
or Parent, as applicable, shall send the notice required by Section 1301 of the
Corporation Code to the persons specified therein no later than one (1) business
day following the approval of this Agreement at a meeting of its Shareholders
convened pursuant to Section 6.8(a).
6.10 SHAREHOLDER REPRESENTATIVE.
(a) Prior to the Closing Date, the Shareholders shall select a Person (the
"Shareholder Representative") to act for and on behalf of all such Shareholders
with respect to all matters arising in connection with Article 8 and the Escrow
Agreement as defined in Section 9.1(i), including, without limitation, the power
and authority, in his or her sole discretion, to:
(i) negotiate, determine, defend and settle any dispute which may arise
under Article 8 or the Escrow Agreement; and
(ii) make, execute, acknowledge and deliver any releases, assurances,
receipts, requests, instructions, notices, agreements, certificates and any
other instruments, and to generally do any and all things and to take any
and all actions which may be requisite, proper or advisable in connection
with Article 8 or under the Escrow Agreement.
(b) The Shareholders may replace the Shareholder Representative at any time
with a substitute Shareholder Representative who shall have all the powers and
responsibilities of the Shareholder Representative set forth in this Section
6.10.
(c) Neither the Shareholder Representative, nor any substitute Shareholder
Representative, shall be liable to any Person for any action taken or any
omission to act, in good faith, in connection with the Shareholder
Representative's responsibilities as Shareholder Representative.
(d) Promptly following his or her selection, the Shareholder Representative,
or any substitute Shareholder Representative, shall provide Parent with a
written certification of his or her selection and of the address for notices to
such Shareholder Representative. Parent may thereafter deal exclusively with the
Shareholder Representative in connection with the claims procedure in reliance
on such certification. Whenever in connection with the provisions of this
Agreement or the Escrow Agreement, Parent shall receive any certificate or other
written correspondence from the Shareholder Representative, such
B-27
<PAGE>
certificate or other written correspondence shall be full authorization to
Parent for any action taken or suffered in good faith by it under the provisions
of this Agreement or the Escrow Agreement in reliance thereon.
6.11 AGREEMENTS WITH RESPECT TO AFFILIATES. Not less than 45 days prior to
the Effective Time, Company shall deliver to Parent a list of names and
addresses of each person who, in Company's reasonable judgment is an affiliate
within the meaning of Rule 145 of the rules and regulations promulgated under
the Securities Act or otherwise applicable SEC accounting releases with respect
to pooling of interests accounting treatment (each such person, a "Pooling
Affiliate") of Company. Company shall provide Parent such information and
documents as Parent shall reasonably request for purposes of reviewing such
list. The Company shall deliver or cause to be delivered to Parent at Closing an
affiliate's agreement in the form attached hereto as Exhibit D ("Affiliate's
Agreement"), executed by each Pooling Affiliate of Company identified in the
foregoing list.
6.12 ACCESS TO INFORMATION; CONFIDENTIALITY.
(a) Each party will afford the other party and its officers, employees,
agents, accountants, counsel, financial advisors, lenders, and underwriters
("Representatives") reasonable access during normal business hours to the
properties, books, records and personnel of the other party during the
period prior to the Effective Time to obtain all information concerning the
business, including the status of merchandising efforts, leasing activities,
distribution center relocation efforts, properties, results of operations
and personnel of such party, as the other party may reasonably request . No
information or knowledge obtained in any investigation will affect or be
deemed to modify any representation or warranty contained herein or the
conditions to the obligations of the other party.
(b) The Confidentiality Agreement dated May 12, 1998 between Parent and
the Company ("Confidentiality Agreement") shall, upon execution of this
Agreement, be deemed terminated. All information furnished to the parties
hereto or to their respective Representatives pursuant to Section 6.12, the
Confidentiality Agreement or the August 7, 1997 agreement between Parent and
Company and all analyses, compilations, studies or other documents prepared
by either party hereto or by their respective Representatives containing, or
based in whole or part on, any such information, are herein collectively
referred to as the "Confidential Information." In the event this Agreement
is terminated, each party agrees that after the date of termination neither
it nor its Representatives shall use the Confidential Information of any
other party for any purpose and all copies of the Confidential Information
will be returned or destroyed upon written request of the furnishing party,
provided however that any Confidential Information consisting of documents
prepared by a party or its Representatives based on data contained in the
Confidential Information need only be destroyed and not returned, and such
party shall certify to the other party that it has done so. The term
Confidential Information shall not include such portions of the Confidential
Information which (i) are or become generally available to the public other
than as a result of a disclosure by a party hereto or its Representatives in
breach of its obligations hereunder or under the Confidentiality Agreement
before the date hereof, (ii) are or become available to a party or its
Representatives on a nonconfidential basis from a source other than the
other party or its Representatives, or (iii) were known to a party or its
Representatives prior to disclosure by the other party or its
Representatives.
6.13 LEGAL REQUIREMENTS. Each of Parent, Sub and Company will take all
reasonable actions necessary or desirable to comply promptly with all legal
requirements which may be imposed on them with respect to the consummation of
the transactions contemplated by this Agreement (including furnishing all
information required in connection with approvals of or filings with any
governmental entity, and prompt resolution of any litigation prompted hereby)
and will promptly cooperate with and furnish information to any party hereto
necessary in connection with any such requirements imposed upon any of them in
connection with the consummation of the transactions contemplated by this
Agreement.
B-28
<PAGE>
6.14 THIRD PARTY CONSENTS. As soon as practicable following the date
hereof, each of Parent and Company will use its commercially reasonable efforts
to obtain all material consents, waivers and approvals under any of its
agreements, contracts, licenses or leases required to be obtained in connection
with the consummation of the transactions contemplated hereby. On or before
Closing, Company will provide Parent with consents to the Merger and waivers of
any default that may occur, or any penalty that may be due, as described in
Section 4.2 of the Disclosure Statement.
6.15 [Not Used].
6.16 INDEMNIFICATION OF DIRECTORS AND OFFICERS OF THE COMPANY. Parent
shall, and agrees to cause Sub to indemnify and hold harmless from liabilities
for acts or omissions occurring at or prior to the Effective Time the Company's
directors and officers to the same extent provided in the indemnification
provisions contained in the Sub's Articles of Incorporation or By-laws. In
addition, from and after the Effective Time, any directors and officers of
Company will be entitled to indemnification under Sub's Articles of
Incorporation and By-laws, and to all other indemnity rights and protections as
are afforded to other directors and officers of Sub, and Sub shall not amend,
repeal or modify any such provision to reduce or adversely affect the rights of
such persons thereunder in respect of actions or omissions by them occurring at
or prior to the Effective Time. In the event that Sub or any of its successors
or assigns (i) consolidates with or merges into any other person and is not the
continuing or surviving corporation or entity of such consolidation or merger or
(ii) transfers or conveys all or substantially all of its properties and assets
to any person, then, and in each such case, proper provision will be made so
that the successors and assigns of Sub assume the obligations set forth in this
Section 6.16. The provisions of this Section 6.16 are intended to be for the
benefit of, and will be enforceable by, each indemnified party, his or her heirs
and his or her representatives.
6.17 NOTIFICATION OF CERTAIN MATTERS. Parent will give prompt notice to
Company, and Company will give prompt notice to Parent, of the occurrence, or
failure to occur, of any event, which occurrence or failure to occur would be
reasonably likely to cause (a) any representation or warranty contained in this
Agreement to be untrue or inaccurate in any material respect at any time from
the date of this Agreement to the Effective Time, or (b) any material failure of
Parent and Sub or Company, as the case may be, or of any officer, director,
employee or agent thereof, to comply with or satisfy any covenant, condition or
agreement to be complied with or satisfied by it under this Agreement.
Notwithstanding the above, the delivery of any notice pursuant to this section
will not limit or otherwise affect the remedies available hereunder to the party
receiving such notice; provided that the failure to give such notice on a timely
basis shall not be treated as a breach of covenant for purpose of Section 9.1(a)
or 10.1(a) unless such failure prejudices the other party in any material
manner.
6.18 LETTERS OF COMPANY'S ACCOUNTANTS. Company shall cause to be delivered
to Parent two letters from Price as the Company's independent accountant, one
dated as of the date on which the Registration Statement shall become effective
and one dated as of the Closing Date, each addressed to Parent, in form and
substance reasonably satisfactory to Parent and customary in scope and substance
for comfort letters delivered by independent public accountants in connection
with registration statements similar to the Registration Statement. Company
shall cause to be delivered to Parent and KPMG two letters from Price addressed
to Parent and Company, one dated as of the date the Registration Statement is
effective and one dated as of the Closing Date, stating that the accounting for
the Merger as a pooling of interests under Opinion 16 of the Accounting
Principles Board and applicable SEC rules and regulations is appropriate if the
Merger is closed and consummated in accordance with the terms of this Agreement.
6.19 BEST EFFORTS AND FURTHER ASSURANCES. Subject to the respective rights
and obligations of Parent and Company under this Agreement, each of the parties
to this Agreement will use its best efforts to effectuate the Merger and the
other transactions contemplated hereby and to fulfill and cause to be fulfilled
the conditions to closing under this Agreement. Each party hereto, at the
reasonable request of another party hereto, will execute and deliver such other
instruments and do and perform such other acts
B-29
<PAGE>
and things as may be reasonably necessary or desirable for effecting completely
the consummation of the transactions contemplated hereby.
6.20 TAX TREATMENT. Company shall use its best efforts to obtain an
opinion of Latham & Watkins, counsel to Company, dated as of the Closing Date,
substantially to the effect that the Merger will be treated for federal income
tax purposes as a reorganization within the meaning of Section 368(a) of the
Code. In connection therewith, each of Company and Parent shall deliver to
Latham & Watkins customary representation letters in form and substance
reasonably satisfactory to such counsel and Company shall obtain any
representation letters from appropriate Shareholders and shall deliver any such
letters obtained to Latham & Watkins (the representation letters referred to in
this sentence are collectively referred to as the "Tax Certificates"). Each of
Company and Parent shall use best efforts to cause the Merger to qualify as a
reorganization under the provisions of Section 368(a) of the Code and to obtain
the opinion of counsel referred to in Section 9.1, including, without
limitation, forebearing from taking any action that would cause the Merger not
to qualify as a reorganization under the provisions of Section 368(a) of the
Code.
6.21 CURRENT REPORT. Company shall assist Parent in the preparation and
filing, on the earliest practicable date after the date of this Agreement, of a
Current Report on Form 8-K for Company containing the historical financial
statements of Company required by Rule 3-05 of Regulation S-X of the SEC and the
pro forma financial information with respect to the business combination
contemplated by this Agreement required by Article 11 of Regulation S-X of the
SEC.
ARTICLE 7
POST-CLOSING COVENANTS
7.1 POST-CLOSING AUDIT.
(a) Parent shall cause Company to prepare a balance sheet of the Company
("Closing Balance Sheet") as of the end of the accounting period (as
described in the last sentence to Section 2.4) immediately preceding the
Effective Time, or as of the date of the Effective Time if such date is as
of the end of the accounting period ("Determination Date"). Such Closing
Balance Sheet shall be derived from and in accordance with the books and
records of the Company and determined in accordance with GAAP applied on a
basis consistent with the principles used in the preparation of the 1997
Financial Statements (as defined in Section 4.7(b)). Such Closing Balance
Sheet shall be audited by KPMG and accompanied by KPMG's opinion that such
Closing Balance Sheet presents fairly in all material respects the financial
position of the Company, except that it will substantially omit financial
statement disclosures required under GAAP.
(b) Parent shall also cause Company to prepare a statement of closing
equity ("Statement of Closing Equity") which shall calculate Closing Equity,
and KPMG will opine that the Statement of Closing Equity was prepared in
accordance with the requirements of this Section 7.1. For purposes of this
Agreement, "Closing Equity" shall be defined as the assets of the Company
reduced by its liabilities as shown in the Closing Balance Sheet with the
following clarifications, adjustments, and exceptions (regardless of whether
such clarifications, adjustments, and exceptions are in accordance with
GAAP, generally accepted auditing standards ("GAAS"), or the Company's past
practices):
(i) Closing Equity shall not exclude or be decreased by (A) any
reserves for accounts or notes receivable recorded since June 28, 1998,
including any retroactive adjustments proposed by KPMG during their
review of the Company's financial statements; (B) any expenses recorded
as a result of, or in connection with, this Merger Agreement, the
Exhibits hereto, or the Merger or the transactions contemplated hereby;
(C) any expenses recorded as a result of a change in accounting policies
(choice of GAAP) made by KPMG to conform the Company's financial
statements with those of Parent; or (D) any retroactive adjustments for
any period prior to June 28, 1998 proposed by KPMG for any reserves for
inventory; and
B-30
<PAGE>
(ii) Closing Equity shall not include or be increased by any payments
to the Company for options exercised between the date hereof and the
Determination Date.
(c) Company shall have the right to observe all steps (including any
physical inventory) taken by Parent in connection with the preparation of
the Closing Balance Sheet and to review all work papers and procedures
relating thereto.
ARTICLE 8
SURVIVAL AND INDEMNIFICATION
8.1 INDEMNIFICATION OBLIGATIONS OF THE SHAREHOLDERS. From and after the
Closing Date, and to the extent provided in this Article 8, all Shareholders
(other than holders of Dissenting Shares) hereby jointly and severally
indemnify, defend and hold harmless Parent and its subsidiaries and Affiliates
(including Sub, the Company and the Surviving Corporation), each of their
respective officers, directors, employees, agents and representatives and each
of the heirs, executors, successors and assigns of any of the foregoing
(collectively, the "Parent Indemnified Parties") from, against and in respect of
any and all claims, liabilities, obligations, losses, costs, expenses,
penalties, fines and judgments (at equity or at law) and damages whenever
arising or incurred (including, without limitation, amounts paid in settlement,
costs of investigation and reasonable attorneys' fees and expenses) arising out
of or relating to:
(a) any breach or inaccuracy of any representation or warranty made by
the Company in this Agreement, the Escrow Agreement, the Disclosure Schedule
or certificate delivered pursuant to Section 9.1(d)(i) contemplated hereby;
(b) any breach by Company of any covenant, agreement or undertaking made
in this Agreement, the Escrow Agreement, or the Disclosure Schedule
contemplated hereby or any failure by the Shareholders of Company to pay all
Deal Expenses in excess of $1,300,000.00.
The claims, liabilities, obligations, losses, costs, expenses, penalties,
fines, judgments and damages of the Parent Indemnified Parties arising under
this Section 8.1 as to which the Parent Indemnified Parties are entitled to
indemnification are hereinafter collectively referred to as "Parent Losses." As
a condition of the Merger and upon the Closing Date, this Article 8 shall be
binding on, and enforceable against, each Shareholder, even though such
Shareholder has not executed this Agreement and may not vote in favor of this
Agreement or the Merger, solely by virtue of the approval of this Agreement and
the transactions contemplated hereby by the requisite holders of Company Shares.
The indemnification obligations of the Shareholders pursuant to Section 8.1
shall be satisfied through a reduction of the Merger Consideration effected by
cancellation or other disposition of Escrow Shares pursuant to the terms of the
Escrow Agreement.
8.2 INDEMNIFICATION OBLIGATIONS OF PARENT. From and after the Closing
Date, Parent and Sub shall jointly and severally indemnify and hold harmless the
Shareholders and each of the affiliates, heirs, executors, successors and
assigns of such Shareholders (collectively, the "Shareholder Indemnification
Parties") from, against and in respect of any and all claims, liabilities,
obligations, losses, costs, expenses, penalties, fines and judgments (at equity
or at law) and damages whenever arising or incurred (including, without
limitation, amounts paid in settlement, costs of investigation and reasonable
attorneys' fees and expenses) arising out of or relating to:
(a) any breach or inaccuracy of any representation or warranty made by
Parent or Sub in this Agreement or any certificate, exhibit, or schedule
contemplated hereby; or
(b) any breach of any covenant, agreement or undertaking made by Parent
or Sub in this Agreement or any certificate, exhibit, or schedule
contemplated hereby.
B-31
<PAGE>
The claims, liabilities, obligations, losses, costs, expenses, penalties,
fines and damages of the Shareholder Indemnification Parties arising under this
Section 8.2 as to which the Shareholder Indemnification Parties are entitled to
indemnification are hereinafter collectively referred to as "Shareholder
Losses."
8.3 LIMITATIONS ON INDEMNIFICATION.
(a) Except for the specific exceptions contained in this Section 8.3(a),
the Parent Indemnified Parties will not be entitled to seek indemnification
under Section 8.1 unless and until the aggregate of all Parent Losses
incurred by the Parent Indemnified Parties exceeds $600,000 (the
"Shareholder Basket Amount"). In the event that the aggregate of all Parent
Losses exceeds the Shareholder Basket Amount, the Parent Indemnified Parties
will only be entitled to seek indemnification in respect of Parent Losses in
excess of the Shareholder Basket Amount, but in no event will the
Shareholder's obligations for Parent Losses pursuant to Section 8.1 be
greater than the Escrow Shares and Dividend Account (as defined in the
Escrow Agreement) held pursuant to the Escrow (the "Shareholder Maximum
Indemnity"); provided, however, that the Shareholder Basket Amount shall not
apply with respect to Parent Losses arising under: (i) Section 8.1(a) with
respect to any breach or inaccuracy of any representation or warranty made
by the Company in Sections 4.1(a), 4.2, 4.3, 4.4, 4.15, fines and penalties
under Section 4.17, 4.19 or 4.20; or (ii) Section 8.1(b), with respect to a
willful breach by the Company of the covenants contained in Article 6.
(b) The Shareholder Indemnification Parties will not be entitled to seek
indemnification under Section 8.2 for Shareholder Losses unless and until
the aggregate amount of all Shareholder Losses incurred by the Shareholder
Indemnification Parties exceeds $600,000 (the "Parent Basket Amount"). In
the event that the aggregate of all Shareholder Losses exceeds the Parent
Basket Amount, the Shareholder Indemnification Parties will only be entitled
to seek indemnification in respect of Shareholder Losses in excess of the
Parent Basket Amount, but in no event will Parent's obligation for
Shareholder Losses be greater than the product of the number of Escrow
Shares transferred to the Escrow multiplied by the Average Closing Price
(the "Parent Maximum Indemnity"); provided, however, that the Parent Basket
Amount shall not apply with respect to Shareholder Losses arising under (i)
Section 8.2(a) with respect to any breach or inaccuracy or any
representation or warranty made by Parent in Sections 5.1, 5.2, 5.3 or 5.7
or (ii) Section 8.2(b), with respect to willful breach by the Parent of the
covenants contained in Article 6.
8.4 INDEMNIFICATION PROCEDURE.
(a) [Not Used].
(b) Claims Against Indemnifying Party by Indemnified Party. In the event
a Parent Indemnified Party or a Shareholder Indemnified Party (hereinafter
collectively referred to as an "Indemnified Party") shall claim a right to
payment (or, a credit towards the Shareholders Basket Amount or Parent
Basket Amount) pursuant to this Article 8, the Shareholder Representative on
behalf of the Shareholder Indemnified Parties shall send written notice of
such claim to Escrow Agent and Parent, or Parent on behalf of Parent
Indemnified Parties shall send notice to the Shareholder Representative and
Escrow Agent, as the case may be. Such notice shall specify the basis for
such claim. As promptly as possible after the Indemnified Party has given
such notice, such Indemnified Party and Parent or Shareholder
Representative, as the case may be, shall establish the merits and amount of
such claim (by mutual agreement, litigation, arbitration or otherwise) in
accordance with the provisions of the Escrow Agreement.
8.5 SURVIVAL; CLAIMS PERIOD. All representations and warranties contained
in this Agreement shall survive the Effective Time for the applicable Claims
Period specified in this Section 8.5, and shall not be deemed waived or
otherwise affected by any investigation made or any knowledge acquired with
respect thereto. For purposes of this Agreement, a "Claims Period" shall be the
only period during which a claim for indemnification may be asserted under this
Agreement by a Parent or Shareholder Indemnified Party.
B-32
<PAGE>
The Claims Periods under this Agreement shall commence on the date of this
Agreement and shall terminate one (1) year following the Effective Time;
provided, however, no claim may be brought after the date of issuance of the
first independent audit report with respect to the financial statements of
Parent after the Effective Time if such claim is of a type expected to be
encountered in the course of such audit performed in accordance with generally
accepted auditing standards. Notwithstanding the foregoing, if, prior to the
close of business on the last day of the applicable Claims Period, an
Indemnifying Party shall have been properly notified as provided hereunder of a
claim for indemnity hereunder and such claim shall not have been finally
resolved or disposed of at such date, such claim shall continue to survive and
shall remain a basis for indemnity hereunder until such claim is finally
resolved or disposed of in accordance with the terms hereof.
8.6 RECOVERY. Parent may recover Parent Losses pursuant to Section 8.1
only in accordance with the provisions of the Escrow Agreement (as defined in
Section 9.1(i)).
8.7 EXCLUSIVE REMEDY. The indemnity of this Article 8 shall be the
exclusive remedy of the Shareholder Indemnified Parties against Parent or Sub
for a breach, misrepresentation, nonfulfillment, or default by Parent or Sub in
the performance of the representations, warranties, covenants, or agreements of
this Agreement or any certificate, exhibit, or schedule contemplated hereby,
except in the event of actual fraud or fraud in the inducement. The indemnity of
this Article 8 shall be the exclusive remedy of Parent and Sub against the
Shareholders for a breach, misrepresentation, nonfulfillment, or default by
Company in the performance of the representations, warranties, covenants, or
agreements of this Agreement or any certificate, exhibit, or schedule
contemplated hereby, except in the event of actual fraud or fraud in the
inducement; provided, however, nothing in this Agreement shall limit the
remedies of Parent Indemnified Parties against a Shareholder for a breach by
such Shareholder of any document (e.g., the Letter of Transmittal, Voting
Agreement, Affiliate Agreement, or Non-Competition Agreement) signed by such
Shareholder in a capacity other than as a director or officer of the Company.
ARTICLE 9
CONDITIONS PRECEDENT TO OBLIGATIONS OF PARENT AND SUB
9.1 CONDITIONS PRECEDENT. Parent's and Sub's obligation to consummate the
Merger and the transactions contemplated by this Agreement is subject to the
fulfillment or waiver, on or before the Closing Date, of each of the following
conditions:
(a) Representations, Warranties and Covenants. The representations and
warranties of the Company set forth herein shall be accurate in all material
respects on and as of the Closing Date as if made on and as of such date;
provided, however, that any representation or warranty that by its terms is
qualified by materiality shall be true and correct in all respects as of the
Closing Date as though made on that date. The Company shall have complied in
all material respects with or performed in all material respects all
agreements, covenants and conditions on their part to be performed or
complied with on or prior to the Closing Date.
(b) Legal Actions. No suit, action or other proceeding by any third
party shall be pending before any court or governmental agency seeking to
restrain or prohibit, or to obtain damages or other relief in connection
with, this Agreement or the consummation of the transactions contemplated
hereby.
(c) Consents. All consents and waivers to be obtained by Company that
are referred to in Section 6.14, all consents and waivers from Parent's
Lenders, and all consents, authorizations, orders and approvals of (or
filings or registrations with) any governmental commission, board or other
regulatory body required in connection with the execution, delivery and
performance of this Agreement by the Company shall have been obtained or
made, except for filing of the Agreement of Merger and any other documents
required to be filed after the Effective Time and except where the failure
to have obtained or made any such consent, authorization, order approval,
filing or registration would not have a material adverse effect on Parent or
the Company following the Effective Time.
B-33
<PAGE>
(d) Deliveries. The Company shall have delivered to Parent:
(i) a certificate executed by the President or any Vice President of
the Company certifying to the fulfillment on the Closing Date of the
conditions set forth in Sections 9.1(a), (b), and (c).
(ii) a certificate by the Secretary of the Company as to the Board of
Directors and Shareholders of the Company having taken all actions
necessary to authorize the execution, delivery and performance of this
Agreement by the Company and the consummation of the transactions
contemplated thereby;
(iii) the minute books, stock transfer books (containing canceled
stock certificates representing all transfers of its capital stock prior
to the Closing Date) and corporate seal of the Company which are in the
Company's possession;
(iv) the opinion of Latham & Watkins, counsel for the Company and the
Shareholders and the local counsel to Company, dated as of the Closing
Date, opining as to the matters described on Exhibit E hereto;
(v) an Affiliate Agreement in the form of Exhibit D hereto executed
by each Pooling Affiliate; and
(vi) such other documents and items as are contemplated by this
Agreement or as Parent may reasonably request, including a good standing
certificate from the State of California and a certificate of
qualification to do business for each other state in which one is
required.
(e) ANTITRUST FILING. The waiting period required in connection with the
Antitrust Filing, if any, shall have expired or been terminated.
(f) POOLING LETTERS. KPMG shall have delivered to Parent two letters,
one dated as of the date on which the Registration Statement shall become
effective and one dated as of the Closing Date to the effect that, based
upon discussions with officials responsible for financial and accounting
matters, and information to be furnished to KPMG through each such date,
KPMG concurs with management's conclusion that, as of each such date, no
conditions exist which would preclude Parent from accounting for the merger
with the Company as a pooling of interests under Opinion 16 of the
Accounting Principles Board and applicable SEC rules and regulations. In
addition, Company shall have caused to be delivered to KPMG the two letters
of Price referred to in the second sentence of Section 6.18.
(g) COMFORT LETTERS. Company shall have caused to be delivered to Parent
and KPMG the two letters referred to in the first sentence of Section 6.18.
(h) LISTING OF PARENT COMMON STOCK. The Parent Common Stock to be issued
pursuant to the Merger and to be issued pursuant to the Assumed Options
shall have been approved for listing on the Nasdaq, subject only to official
notice of issuance by Parent.
(i) ESCROW AGREEMENT. The Shareholder Representative shall have executed
and delivered the Escrow Agreement, substantially in the form attached
hereto as Exhibit F (the "Escrow Agreement") with such changes as may be
required by the escrow agent thereunder, pursuant to which there shall be
deposited with the escrow agent named therein on the Closing Date (the
"Escrow Agent") the Escrow Shares to secure their obligations under this
Agreement.
(j) NON-COMPETITION AGREEMENTS. Eric Stauss, Anthony Leon, Eric Leon,
and William Coyle shall have executed and delivered to Parent the
Non-Competition Agreements, and Gary Cino shall have executed and delivered
to Parent the Non-Competition and Consulting Agreement, substantially in the
forms attached hereto as Exhibit G (collectively these five agreements are
referred to as the "Non-Competition Agreements"); which is a material
inducement of the Parent entering into this Agreement. Company agrees to use
its best efforts to have the signatories execute the Non-Competition
Agreements at Closing.
B-34
<PAGE>
(k) COMPARABLE STORE SALES. The comparable store sales results of
Company, as determined on a rolling two-month period ending on the day
before the Company Shareholders Meeting, shall be at least five percent.
(l) RELATED PARTY DEBT. Each Shareholder or its Affiliate shall have
paid in full all amounts of any kind owed by such Shareholder or its
Affiliate to the Company, or such amount shall have been offset on a
dollar-for-dollar basis against any indebtedness for borrowed money owed by
the Company to such Shareholder or its Affiliate.
(m) DISSENTING SHARES. Holders of not more than 9-98/100% of the Company
Shares shall have the right to elect to exercise dissenters' rights pursuant
to the California Code; PROVIDED, HOWEVER, THAT SUCH PERCENTAGE SHALL BE
REDUCED TO THE EXTENT REQUIRED BY PRICE AND KPMG TO DELIVER THE POOLING
LETTERS REFERRED TO IN SECTION 6.18.
(n) SHAREHOLDER APPROVAL. This Agreement, the Agreement of Merger, and
the Merger shall have been duly approved by the shareholders of the Company
in accordance with all applicable laws, the Articles of Incorporation and
By-laws of the Company and otherwise.
(o) CORPORATE DOCUMENTS. The Agreement of Merger relating to the Merger
and the related officers' certificates required by the California Code shall
have been executed by the Company and delivered to Parent for filing.
(p) REGISTRATION STATEMENT. The Registration Statement shall be
effective under the Securities Act and no stop order suspending the
effectiveness of the Registration Statement shall be in effect and no
proceedings for such purpose, or under the proxy rules of the SEC pursuant
to the Exchange Act and with respect to the transactions contemplated by
this Agreement, shall be pending before or threatened by the SEC. All
applicable state securities laws shall have been complied with in connection
with the issuance of Parent Common Stock to be issued pursuant to the
Merger, and no stop order suspending the effectiveness of any qualification
or registration of such Parent Common Stock under such state securities laws
shall have been issued and pending or threatened by the authorities of any
such state.
9.2 WAIVER. The Parent and the Sub shall have the right to waive the
foregoing conditions, or any of them, wholly or in part; provided, however, that
no such waiver shall be deemed to have occurred unless the same is set out in
writing and executed by the Parent and the Sub.
ARTICLE 10
CONDITIONS PRECEDENT TO OBLIGATIONS OF THE COMPANY
10.1 CONDITIONS PRECEDENT. The obligation of the Company to consummate the
Merger and the transactions contemplated by this Agreement is subject to the
fulfillment or waiver, on or before the Closing Date, of each of the following
conditions:
(a) REPRESENTATIONS, WARRANTIES AND COVENANTS. The representations and
warranties made by Parent and Sub herein shall be accurate in all material
respects on and as of the Closing Date to the same extent as if made on and
as of such date; provided, however, that any representation or warranty that
by its terms is qualified by materiality shall be true and correct in all
respects as of the Closing Date as though made on that date. Parent and Sub
shall have complied in all material respects with or performed in all
material respects all agreements, covenants and conditions on their part to
be performed or complied with on or prior to the Closing Date.
(b) LEGAL ACTIONS. No suit, action or other proceeding by any third
party shall be pending before any court or governmental agency seeking to
restrain or prohibit, or to obtain damages or other relief in connection
with, this Agreement or the consummation of the transactions contemplated
hereby.
B-35
<PAGE>
(c) DELIVERIES. Parent shall have delivered to the Company:
(i) a certificate executed by the President or any Vice-President of
Parent and Sub certifying to the fulfillment on the Closing Date of the
conditions set forth in Sections 10.1(a), (b), and (c).
(ii) a certificate by the Secretary or any Assistant Secretary of
Parent and Sub as to the due adoption by the Board of Directors of Parent
and the Board of Directors and shareholders of Sub of the required
corporate resolutions authorizing the execution, delivery and performance
of this Agreement by Parent and Sub and the consummation of the
transactions contemplated thereby;
(iii) the opinion of Hofheimer Nusbaum, P.C., as counsel for Parent
and Sub, opining as to the matters described on Exhibit H hereto; and
(iv) such other documents and items as are contemplated by this
Agreement or as the Company may reasonably request.
(d) ANTITRUST FILING. The waiting period required in connection with the
Antitrust Filing, if any, shall have expired or been terminated.
(e) LISTING OF PARENT COMMON STOCK. The Parent Common Stock to be issued
pursuant to the Merger and pursuant to the Assumed Options shall have been
approved for listing on the Nasdaq, subject only to official notice of
issuance by Parent.
(f) REGISTRATION STATEMENT. The Registration Statement shall be
effective under the Securities Act and no stop order suspending the
effectiveness of the Registration Statement shall be in effect and no
proceedings for such purpose shall be pending before or threatened by the
SEC. All applicable state securities laws shall have been complied with in
connection with the issuance of Parent Common Stock to be issued pursuant to
the Merger, and no stop order suspending the effectiveness of any
qualification or registration of such Parent Common Stock under such state
securities laws shall have been issued and pending or threatened by the
authorities of any such state.
(g) SHAREHOLDER APPROVAL. The Merger, this Agreement and the
transactions contemplated hereby shall have been approved at the
Shareholders meeting in accordance with all applicable laws and the Articles
of Incorporation and By-laws of the Company.
(h) CORPORATE DOCUMENTS. The Agreement of Merger relating to the Merger
and the related officers' certificates required by the California Code shall
have been executed by the Company and delivered to Parent for filing.
(i) TAX OPINION. The Company shall have received the opinion of Latham &
Watkins described in Section 6.20.
10.2 WAIVER. The Company shall have the right to waive the foregoing
conditions, or any of them, wholly or in part; provided, however, that no such
waiver shall be deemed to have occurred unless the same is set out in writing
and executed by the Company. Any waiver made by the Company hereunder shall also
constitute a waiver with respect to any rights or remedies that the Company may
otherwise have against Parent in respect of or relating to the specific
conditions waived.
ARTICLE 11
TERMINATION
11.1 TERMINATION. This Agreement may be terminated at any time at or prior
to the Closing (the "Termination Date"), whether before or after approval of
this Agreement and the Merger by the Shareholders of Company:
(a) in writing by mutual consent of Parent and Company;
B-36
<PAGE>
(b) by written notice from the Company to Parent if Parent or Sub shall
breach or fail to perform any of its agreements or covenants contained
herein required to be performed by it on or prior to the Closing Date, or
any of the representations and warranties of Parent and Sub contained herein
shall be or become inaccurate or untrue in either case such that the
condition set forth in Section 10.1(a) would not be satisfied; provided that
if any such breach, failure, inaccuracy, or untruth is reasonably capable of
cure by January 1, 1999 and Parent is using its good faith efforts to effect
such cure at the earliest practicable time, the Company shall not be
permitted to terminate this Agreement pursuant to this subparagraph (b);
(c) by written notice from Parent to the Company, if the Company shall
breach or fail to perform any of its agreements or covenants contained
herein or any of its representations and warranties contained herein shall
be or become inaccurate or untrue in either case such that the conditions
set forth in Section 9.1(a) would not be satisfied; provided that if any
such breach, failure, inaccuracy, or untruth is reasonably capable of cure
by January 1, 1999 and Company is using its good faith efforts to effect
such cure at the earliest practicable time, Parent shall not be permitted to
terminate this Agreement pursuant to this subparagraph (c);
(d) by written notice by either Parent or Company, if the Closing has
not occurred by January 1, 1999; provided, however, that the right to
terminate this Agreement under this subsection 11.1(d) shall not be
available to any party whose failure to fulfill any obligation under this
Agreement has been the cause of the failure of the Merger to occur on or
before such date;
(e) by either Company or the Parent, if there shall be any order which
is final and nonappealable preventing the consummation of the Merger, unless
the party relying on such order has not complied with its material
obligations under this Agreement;
(f) by Parent or, upon payment of the fee required pursuant to Section
11.4(a) of this Agreement, Company, if the requisite vote of the
stockholders of Company in favor of this Agreement shall not have been
obtained at the Company Shareholders Meeting (including any adjournment or
postponement thereof);
(g) by Parent if (i) the Board of Directors of the Company withdraws or
modifies its recommendation of the Merger or shall have resolved or publicly
announced or disclosed to any third party its intention to do any of the
foregoing or the Board of Directors of the Company shall have recommended to
the Shareholders of the Company any Alternative Transaction or resolved to
do so; or (ii) the Company shall not convene a meeting of its Company
Shareholders Meeting to approve the Merger within a reasonable time;
(h) by the Company, if all of the following conditions are satisfied:
(i) the Board of Directors of Company withdraws or modifies its
recommendation of the Merger or has resolved or publicly announced or
disclosed to any third party its intention to do any of the foregoing or has
determined to recommend an Alternative Transaction to its Shareholders or a
tender offer or exchange offer for Company Shares is commenced or a
registration statement with respect thereto shall have been filed and the
Board of Directors of the Company, within ten (10) Business Days after such
tender offer or exchange offer is so commenced, either fails to recommend
against acceptance of such tender or exchange offer by its Shareholders or
takes no position with respect to the acceptance of such tender or exchange
offer by its Shareholders; (ii) except where a tender or exchange offer is
commenced, all of the provisions set forth in Section 6.7(d) are satisfied;
and (iii) Company makes the payment required pursuant to Section 11.4(a) of
this Agreement. The Company shall use its best efforts to give Parent at
least two Business Days prior notice of its intention to effect such
termination pursuant to this Section 11.1(h);
(i) [Not Used].
B-37
<PAGE>
(j) by the Parent, if there shall have occurred one or more events which
shall have caused or are reasonably likely to have a material adverse effect
on the Company; or
(k) by written notice by Parent to the Company, if the Average Closing
Price is less than $34 11/32 unless the Company agrees in writing to treat
the Average Closing Price as $34 11/32 within forty-eight hours of Company's
receipt of Parent's election to terminate, pursuant to this Section 11.1(k).
The right of any party hereto to terminate this Agreement pursuant to this
Section 11.1 shall remain operative and in full force and effect regardless of
nay investigation made by or on behalf of any party hereto, any person
controlling any such party or any of their respective officers, directors,
representatives, or agents, whether prior to or after the execution of this
Agreement.
11.2 SPECIFIC PERFORMANCE AND OTHER REMEDIES. The parties hereto each
acknowledge that the rights of each party to consummate the transactions
contemplated hereby are special, unique and of extraordinary character, and
that, in the event that any party violates or fails or refuses to perform any
covenant or agreement prior to the Closing Date made by it herein, the
non-breaching party may be without an adequate remedy at law. The parties each
agree, therefore, that in the event that either party violates or fails or
refuses to perform any covenant or agreement made by such party herein, the
non-breaching party or parties may, subject to the terms of this Agreement and
in addition to any remedies at law for damages or other relief, institute and
prosecute an action in any court of competent jurisdiction to enforce specific
performance of such covenant or agreement or seek any other equitable relief.
Subject to Section 8.7, any and all remedies herein expressly conferred upon a
party will be deemed cumulative with and not exclusive of any other remedy
conferred hereby, or by law or equity upon such party, and the exercise by a
party of any one remedy will not preclude the exercise of any other remedy.
11.3 EFFECT OF TERMINATION. In the event of termination of this Agreement
pursuant to this Article 11, this Agreement shall thereafter become void and
there shall be no liability on the part of any party or its respective officers,
directors or stockholders for acts or omissions occurring after the Termination
Date, except for obligations under Section 6.2, Section 11.4, Article 12 and
this Section 11.3, all of which shall survive the Termination Date.
Notwithstanding the foregoing, nothing contained herein shall relieve any party
from liability for any willful breach of its representations, warranties,
covenants, or agreements contained in this Agreement occurring on or before the
Termination Date.
11.4 TERMINATION FEE; LOCK-UP OPTION. As a condition and inducement to
Parent's willingness to enter into this Agreement, Company agrees as follows:
(a) If this Agreement is terminated consistent with the provisions of
11.1(c), (f), (g) or (h), the Company shall pay to Parent within two (2)
business days following such termination (by wire transfer of immediately
available funds to an account designated by Parent) the amount of THREE
MILLION DOLLARS ($3,000,000.00) (the "Termination Fee"). If such Termination
Fee is not paid when due, the Termination Fee shall accrue simple interest
on a daily basis at a rate equal to the lesser of (i) 8% per annum or (ii)
the greatest rate permitted by California law from the due date until paid
in full.
(b) Without the necessity of further action by either party, the Company
hereby irrevocably grants to Parent an option to purchase from the Company
for cash a number of shares of Company Common Stock equal to 19.9% of the
total number of Company Common and Preferred Stock issued and outstanding as
of the date of this Agreement (the "Lock-Up Option") at a price per share
(the "Exercise Price") equal to $45.97. The Lock-Up Option shall be vested
immediately and unless this Agreement is terminated by Company pursuant to
Section 11.1(b) or 11.1(k), may be exercised by Parent in whole or in part,
in one or more exercise, at any time prior to:
(i) the second anniversary of the termination of this Agreement if
the Agreement is terminated consistent with the provisions of Section
11.1(c), (f), (g) or (h); and
B-38
<PAGE>
(ii) the first anniversary of the termination of this Agreement in
all other events.
In the event of any merger, consolidation, recapitalization, combination,
stock split, stock dividend, or other change involving the Company's Common or
Preferred Stock, this Lock-Up Option shall survive and the number of shares
subject to the Lock-Up Option and Exercise Price shall be appropriately adjusted
to reflect such change.
ARTICLE 12
EXPENSES
Except as set forth in this Article 12 or as otherwise provided herein, all
fees and expenses incurred in connection with this Agreement and the
transactions contemplated hereby shall be paid by the party incurring such
expenses, whether or not the Merger is consummated.
12.1 DEAL EXPENSES. "Deal Expenses" shall mean all out-of-pocket expenses
of the Company payable to Piper Jaffray Inc., accountants, lawyers, and
consultants relating to the negotiation and execution of this Agreement and the
performance of the obligations and the carrying out of the Merger and the other
transactions contemplated hereby.
12.2 PAYMENT ON CLOSING. In the event of Closing, Company shall pay all
Deal Expenses up to a maximum of $1,300,000.00. The parties hereto contemplate
that the failure of the Shareholders of Company to pay all Deal Expenses in
excess of $1,300,000.00 shall give rise to a claim by Parent for indemnification
in accordance with the provisions of Article 8.
ARTICLE 13
MISCELLANEOUS
13.1 COOPERATION FOLLOWING THE CLOSING. Following the Closing, Parent and
the Shareholders each shall deliver to the other such further information and
documents and shall execute and deliver to the other such further information
and documents and shall execute and deliver such further instruments and
agreements as the other shall reasonably request in order to consummate or
confirm the transactions provided for herein, to accomplish the purpose of this
Agreement or to assure to the other the benefits of this Agreement.
13.2 BENEFITS AND BURDENS: ASSIGNMENT.
(a) Upon the execution of this Agreement by Parent, Sub, and the Company,
this Agreement shall become a binding and enforceable agreement with respect to
Parent, Sub and the Company.
(b) This Agreement shall inure to the benefit of and shall be binding upon
the Company, Sub and Parent, and each of their respective successors and
permitted assigns. No party to this Agreement may assign its rights or
obligations hereunder without the prior written consent of each of the other
parties hereto; provided, however, that this Agreement may be assigned by Parent
to a corporation, all of whose issued and outstanding capital stock is owned
directly or indirectly by Parent, but in such event Parent shall not be released
from its obligations hereunder.
(c) Except for Section 6.16, nothing contained in this Agreement or in any
instrument or document executed by any party in connection with the transactions
contemplated hereby shall create any rights in, or be deemed to have been
executed for the benefit of, any person or entity that is not a party hereto, a
successor or permitted assign of such a party or a person or entity expressly
entitled to indemnification hereunder.
13.3 AMENDMENT. This Agreement may be amended by the parties hereto, by or
pursuant to action taken by their respective Boards of Directors, at any time
before or after approval of the matters presented in connection with the Merger
by the Shareholders of the Company, but, after any such approval, no
B-39
<PAGE>
amendment shall be made which by law requires further approval by such
Shareholders without such further approval. This Agreement may not be amended
except by an instrument in writing signed on behalf of each of the parties
hereto.
13.4 NOTICES. All notices, communications and deliveries hereunder shall
be made in writing signed by or on behalf of the party making the same, shall
specify the Section hereunder pursuant to which it is given or being made, and
shall be delivered personally or by telecopy transmission or sent by registered
or certified mail (return receipt requested) or by any national overnight
courier service (with postage and other fees prepaid) as follows:
If to Parent or, after the Closing, the Company:
Dollar Tree Stores, Inc.
500 Volvo Parkway
Chesapeake, Virginia 23320
Attention: Mr. H. Ray Compton
With a required copy to:
Hofheimer Nusbaum, P.C.
999 Waterside Drive, Suite 1700
P. O. Box 3460
Norfolk, Virginia 23514
Attention: William A. Old, Jr., Esquire
Telecopier: (757) 629-0660
If, prior to Closing, to the Company:
Step Ahead Investments, Inc.
3222 Winona Way
North Highland, California 95660
Attention: David Reed
Telecopier: (916) 418-1266
With a required copy to:
Latham & Watkins
505 Montgomery Street, Suite 1900
San Francisco, California 94111
Attention: Tracy Edmonson, Esquire
Telecopier: (415) 395-8095
or to such other address or to such other person or persons designated in
writing by such party or counsel, as the case may be. Any such notice,
communication or delivery shall be deemed given or made (a) on the date of
delivery if delivered in person, (b) on the date after delivery to a national
overnight courier service, (c) upon transmission by facsimile if receipt is
confirmed by telephone or (d) on the fifth (5th) business day after it is mailed
by registered or certified mail.
13.5 ENTIRE AGREEMENT. The letter dated July 8, 1998 from Parent and
agreed to by Company is hereby terminated and rendered null and void AB INITIO.
This Agreement embodies the entire agreement and understanding of the parties
hereto in respect of the subject matter contained herein. There are no
restrictions, promises, representations, warranties, covenants or undertakings
other than those expressly set forth or referred to herein. This Agreement
supersedes all prior agreements and understandings between the parties. The
parties make no representations or warranties to each other, except as contained
in this Agreement, and any and all prior representations, warranties, assurances
and promises made by any
B-40
<PAGE>
party or its representatives, whether verbally or in writing, are deemed to have
been merged into this Agreement, it being intended that no such prior
representations, warranties, assurances and promises shall survive the execution
and delivery of this Agreement.
13.6 HEADINGS. The section headings in this Agreement are intended solely
for convenience and shall be given no effect in the construction and
interpretation hereof.
13.7 CONSTRUCTION. The parties hereto have participated jointly in the
negotiation and drafting of this Agreement. In the event an ambiguity or
question of intent or interpretation arises, this Agreement shall be construed
as if drafted jointly by the parties and no presumption or burden of proof shall
arise favoring or disfavoring any party by virtue of the authorship of any of
the provisions of this Agreement. Where the context requires, any reference to
Parent may be deemed to include a reference to Parent, Dollar Tree Management,
Inc. and/or Dollar Tree Distribution, Inc., which are wholly owned subsidiaries
of Parent, as the case may be. Any reference to any federal, state, local, or
foreign statute or law shall be deemed also to refer to all rules and
regulations promulgated thereunder, unless the context requires otherwise. The
word "including" shall mean including without limitation. The parties intend
that each representation, warranty, and covenant contained herein shall have
independent significance. The table of contents, headings and definitional
cross-reference contained in this Agreement are for reference purposes only and
shall not affect in any way the meaning or interpretation of this Agreement. If
any party has breached any representation, warranty, or covenant contained
herein in any respect, the fact that there exists another representation,
warranty, or covenant relating to the same subject matter (regardless of the
relative levels of specificity) which the party has not breached shall not
detract from or mitigate the fact that the party is in breach of the first
representation, warranty, or covenant.
13.8 INCORPORATION OF EXHIBITS AND SCHEDULES. The exhibits and schedules
identified in this Agreement, including the Disclosure Schedule are incorporated
herein by reference and made a part hereof. The term "Agreement" shall include
all such exhibits and schedules. The inclusion of any item in the Disclosure
Schedule is not evidence of the materiality or immateriality of such item for
the purposes of this Agreement.
13.9 COUNTERPARTS. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original and all of which
together shall constitute one and the same instrument, and, when signed by all
of the parties hereto, shall become legally binding on such parties effective as
of the date set forth at the beginning of this Agreement.
13.10 GOVERNING LAW. This Agreement shall be governed by and interpreted
under the laws of the Commonwealth of Virginia applicable to contracts made and
to be performed entirely within such Commonwealth and without giving effect to
the choice of law principles of such Commonwealth; provided, however, that the
Agreement of Merger and the provisions of this Agreement relating solely to the
operation of the Merger for purposes of corporate law shall be governed by the
applicable provisions of the California Code.
13.11 ENFORCEMENT; WAIVER OF JURY TRIAL. The parties hereto agree that
irreparable damage would occur in the event that any of the provisions of this
Agreement were not performed in accordance with their specific terms or were
otherwise breached. It is accordingly agreed that the parties shall be entitled
to an injunction or injunctions to prevent breaches of this Agreement and to
enforce specifically the terms and provisions hereof in any court of the United
States or any state having jurisdiction, such remedy being in addition to any
other remedy to which any party is entitled at law or in equity. Parent and the
Company hereby waive any right to a trial by jury in connection with any such
action, suit or proceeding.
13.12 SEVERABILITY. The invalidity or unenforceability of any provision of
this Agreement shall not affect the validity or enforceability of any other
provision of this Agreement.
13.13 TIME. Time is of the essence under this Agreement.
B-41
<PAGE>
13.14 KNOWLEDGE. The phrase "to the knowledge of the Company" or its
equivalent as used herein shall mean to the knowledge of the Company and its
directors and officers after appropriate inquiry.
13.15 STATUTES. Any reference herein to any federal, state or local
statute shall include all amendments to such statute through the date of this
Agreement or the Effective Time, as applicable.
IN WITNESS WHEREOF, the parties have executed or caused to be executed this
Agreement effective as of the day and year first above written.
<TABLE>
<S> <C> <C>
STEP AHEAD INVESTMENTS, INC.
By: /s/ GARY CINO
-----------------------------------------
Gary Cino
Chief Executive Officer
DOLLAR TREE STORES, INC.
By: /s/ H. RAY COMPTON
-----------------------------------------
H. Ray Compton
Executive Vice President
DOLLAR TREE WEST, INC.
By: /s/ H. RAY COMPTON
-----------------------------------------
H. Ray Compton
Executive Vice President
</TABLE>
B-42
<PAGE>
AMENDMENT TO MERGER AGREEMENT
THIS AMENDMENT TO MERGER AGREEMENT ("Amendment") dated October 20, 1998, by
and among DOLLAR TREE STORES, INC., a Virginia corporation ("Parent"), DOLLAR
TREE WEST, INC., a California corporation and a wholly owned subsidiary of
Parent ("Sub"), and STEP AHEAD INVESTMENTS, INC., a California corporation
("Company"). The capitalized terms used herein shall have the meanings given
such terms in the Merger Agreement dated July 22, 1998 by and among the parties
hereto ("Agreement").
W I T N E S S E T H:
WHEREAS, pursuant to the Agreement, if the Average Closing Price of Parent's
stock is less than $34 11/32 per share, Parent can terminate the Agreement
unless Company elects to treat the Average Closing Price as $34 11/32; and
WHEREAS, the parties desire to modify the Agreement to extend the time
between the determination of the Average Closing Price and the date of the
Company Shareholders Meeting to give the parties additional time to consider the
decisions described above; and
WHEREAS, the parties also desire to make certain other amendments described
below; and
WHEREAS, the Boards of Directors of Parent and Sub have approved this
Amendment in accordance with Section 13.3 of the Merger Agreement, applicable
law and the Articles of Incorporation and By-laws of Parent and Sub; and
WHEREAS, the Board of Directors of the Company has (i) approved this
Amendment in accordance with the requirements of Section 13.3 of the Merger
Agreement, the California Code and the Articles of Incorporation and the By-laws
of the Company, (ii) directed the Agreement, as modified by the Amendment, and
the Merger to be submitted to, and recommended approval by, the Shareholders.
NOW, THEREFORE, in consideration of the premises and of the mutual covenants
and agreements set forth herein, the parties hereby amend the Agreement and
agree as follows:
1. AVERAGE CLOSING PRICE. The definition of "Average Closing Price" shall
be amended by restating the first sentence of Section 2.2(b) to read as follows:
For the purposes of this calculation, each share of Parent Common Stock
shall be valued at the arithmetic average ("Average Closing Price") of
the closing price per share of Parent Common Stock, as reported on the
Nasdaq National Market System ("Nasdaq") for each of the five (5)
consecutive trading days ending with the sixth (6th) business day prior
to the Date of the Company Shareholders Meeting ("ACP Determination
Date"). The "Date of the Company Shareholders Meeting" shall be the date
for the Shareholders Meeting specified in the Company's definitive Proxy
Statement when first delivered to the Shareholders.
2. FULLY DILUTED COMPANY SHARES. The definition of "Fully Diluted Company
Shares" shall be amended by restating the last sentence of Section 2.1(a) to
read as follows:
"Fully Diluted Company Shares" shall be calculated by adding (i) the
total number of shares of Company Common Stock issued and outstanding as
of the ACP Determination Date (including Dissenting Shares) plus (ii)
the total number of shares of Company Preferred Stock issued and
outstanding as of the ACP Determination Date (including Dissenting
Shares) plus (iii) the total number of shares of Company Common or
Preferred Stock subject to Options (as defined in paragraph (e) below)
outstanding as of the ACP Determination Date (as defined in Section
2.2(b)).
3. TERMINATION OF AGREEMENT. Section 11.1(k) shall be restated in its
entirety as follows:
B-43
<PAGE>
(k) if the Average Closing Price is less than $34 11/32, Parent may
terminate the Agreement in accordance with the procedures set forth below:
(i) No later than 5:00 p.m. Sacramento time on the third calendar day
following the ACP Determination Date, Parent may send a notice to Company
electing to change the Average Closing Price to a final price of
$34 11/32 or less (as determined by Parent in its sole discretion) for
all purposes of this Agreement (including the determination of the
Exchange Ratio). If this notice is not sent, the Average Closing Price
shall be determined by Section 2.2(b), this Agreement shall not be deemed
terminated pursuant to this Section 11.1(k), and the following provisions
of this Section 11.1(k) shall not apply.
(ii) If Parent sends the notice described in Section 11.1(k)(i)
above, Company shall send a reply notice to Parent either accepting or
rejecting Parent's election to change the Average Closing Price no later
than 5:00 p.m. Sacramento time on the third business day preceding the
Date of the Company Shareholders Meeting. If Company rejects Parent's
election (or a reply notice is not sent), this Agreement shall be deemed
terminated by Parent pursuant to this Section 11.1(k). If Company accepts
Parent's election, the Average Closing Price shall be the price specified
by Parent in the notice described in Section 11.1(k)(i) above, and this
Agreement shall not be deemed terminated by Parent pursuant to this
Section 11.1(k).
4. INDEMNIFICATION OF DIRECTORS AND OFFICERS OF THE COMPANY. All
references to "Sub" in Section 6.16 shall be replaced with the phrase "Surviving
Corporation."
5. MISCELLANEOUS. The original Agreement, as amended hereby, shall remain
in full force and effect and embody the entire agreement and understanding of
the parties hereto in respect of the subject matter contained herein and therein
in conformity with Section 13.5 of the Agreement. This Amendment may be executed
in two or more counterparts, each of which shall be deemed an original and all
of which together shall constitute one and the same instrument, and, when signed
by all of the parties hereto, shall become legally binding on such parties
effective as of the date set forth at the beginning of this Amendment.
B-44
<PAGE>
IN WITNESS WHEREOF, the parties have executed or caused to be executed this
Agreement effective as of the day and year first above written.
<TABLE>
<S> <C> <C>
STEP AHEAD INVESTMENTS, INC.
By: /s/ GARY CINO
-----------------------------------------
Gary Cino
Chief Executive Officer
DOLLAR TREE STORES, INC.
By: /s/ H. RAY COMPTON
-----------------------------------------
H. Ray Compton
Executive Vice President
DOLLAR TREE WEST, INC.
By: /s/ H. RAY COMPTON
-----------------------------------------
H. Ray Compton
Executive Vice President
</TABLE>
B-45
<PAGE>
APPENDIX C
ESCROW AGREEMENT
<PAGE>
FORM OF ESCROW AGREEMENT
THIS ESCROW AGREEMENT, dated as of , 1998 (the "Escrow Agreement"),
by and among DOLLAR TREE STORES, INC., a Virginia corporation ("Parent"),
[ ] (the "Shareholder Representative"), in his/her individual
capacity and as representative of all the shareholders whose names, addresses,
and percentage interests of holdings of the Escrow Shares (defined below) are
set forth on Schedule A attached hereto and incorporated herein by reference as
such schedule may be amended from time to time (the "Shareholders") of STEP
AHEAD INVESTMENTS, INC., a California corporation (the "Company"), and STATE
STREET BANK AND TRUST COMPANY, a Massachusetts banking corporation acting solely
as escrow agent hereunder and not in its individual capacity ("Escrow Agent").
The Parent, the Shareholder Representative and the Company sometimes are
referred to herein as the "Interested Parties." Capitalized terms used but not
otherwise defined herein shall have the meanings ascribed to such terms in the
Merger Agreement (as hereinafter defined).
W I T N E S S E T H:
WHEREAS, pursuant to a certain Merger Agreement (the "Merger Agreement"),
dated as of July 22, 1998, by and among Parent, Dollar Tree West, Inc., a
California corporation and wholly-owned subsidiary of Parent ("Sub") and the
Company, the capital stock of the Company owned by the Shareholders has been
(simultaneously with the execution hereof) converted into the right to receive
shares of Parent Common Stock;
WHEREAS, pursuant to Article 8 of the Merger Agreement, the Shareholders
have agreed to indemnify Parent and its subsidiaries and Affiliates (including
Dollar Tree West, Inc., Step Ahead Investments, Inc., and the surviving
corporation in the Merger), each of their respective officers, directors,
employees, agents and representatives and each of the heirs, executors,
successors and assigns of any of the foregoing (collectively, the "Parent
Indemnified Parties") for Parent Losses;
WHEREAS, the Merger Agreement also contemplates a surrender of Escrow Shares
(as defined below) to the extent there may be a Deficit Amount under Section 2.4
of the Merger Agreement;
WHEREAS, claims with respect to the Parent Losses and the Deficit Amount are
to be satisfied pursuant to the Merger Agreement and this Escrow Agreement;
WHEREAS, pursuant to Section 6.10(a) of the Merger Agreement, the
Shareholders have elected the Shareholder Representative;
WHEREAS, pursuant to Section 2.3(a) of the Merger Agreement, Shareholders
are required to execute and deliver to Parent a Letter of Transmittal together
with the Certificates representing their shares of capital stock in the Company,
which Letter of Transmittal, among other things, appoints the Shareholder
Representative as attorney-in-fact for the Shareholders to act on their behalf
with respect to the execution and delivery of this Escrow Agreement and the
performance on behalf of such Shareholder under the terms and provisions of this
Escrow Agreement; and
WHEREAS, Escrow Agent is willing to act as escrow agent hereunder.
NOW, THEREFORE, in consideration of the premises and the mutual promises,
covenants and agreements contained herein, the parties hereto, intending to be
legally bound, hereby agree as follows:
1. DELIVERY OF ESCROW SHARES.
1.1. Subject and pursuant to the Merger Agreement, Escrow Shares shall be
delivered to the Escrow Agent. The Escrow Shares shall be represented by a stock
certificate in the name of State Street Bank and Trust Company, as Escrow Agent
under the Escrow Agreement, dated , 1998. Notwithstanding the foregoing,
during the term of this Escrow Agreement, title to the Escrow Shares will be in
the name of the Escrow Agent for record holder purposes only. The parties
acknowledge that the Shareholders are the beneficial owners of the Escrow
Shares, subject to the terms and conditions of the Merger Agreement and this
Escrow Agreement, and each Shareholder shall retain all rights to vote the
shares of Parent Common
<PAGE>
Stock delivered on behalf of such Shareholder to the Escrow Agent that are not
transferred to Parent pursuant to Section 2 hereof.
1.2. The Escrow Shares shall be contributed into escrow hereunder on behalf
of the Shareholders in the same proportion to the Parent Common Stock to be
received by each Shareholder pursuant to Article 2 of the Merger Agreement.
Escrow Agent agrees to submit said shares for transfer into its name as Escrow
Agent hereunder or, in its discretion, into the name of its nominee, and agrees
to hold and administer said shares subject to the terms of this Escrow
Agreement. Except as set forth in this Agreement, the Escrow Agent shall be
under no obligation to preserve, protect or exercise rights in the Escrow
Shares, and shall be responsible only for reasonable measures to maintain the
physical safekeeping thereof, and otherwise to perform and observe such duties
on its part as are expressly set forth in this Escrow Agreement. The Escrow
Agent shall have no responsibility for the genuineness, validity, market value,
title or sufficiency for any intended purpose of the Escrow Shares.
2. THE ESCROW FUND. All cash dividends on the Escrow Shares shall be
deposited directly into an escrow account created by the Escrow Agent
specifically for the purpose of holding such cash dividends (the "Dividend
Account"), without any tax or other withholding or deduction, subject to the
terms of the Escrow Agreement. Shares resulting from stock dividends, stock
splits and other shares or securities issued in respect of the Escrow Shares
shall be issued in the name of the Escrow Agent, and shall be held by the Escrow
Agent subject to the provisions of this Agreement, and upon issuance shall
become part of the Escrow Shares. The Escrow Agent shall invest the Dividend
Account at, and pursuant to, the written direction of the Shareholder
Representative in Eligible Investments and shall not be responsible or liable
for any loss accruing from any investment made in accordance herewith except for
losses due to the gross negligence or wilful misconduct of the Escrow Agent.
"Eligible Investments" shall mean (i) obligations issued or guaranteed by the
United States of America or any agency or instrumentality thereof (provided that
the full faith and credit of the United States is pledged in support thereof);
(ii) obligations (including certificates of deposit and banker's acceptances) of
any domestic commercial bank having capital and surplus in excess of
$500,000,000; (iii) repurchase obligations for underlying securities of the type
described in clause (i); (iv) shares of money market funds at least 95% of the
assets of which constitute obligations of the type described in clause (i)
above. No investment shall have a term of more than ninety (90) days. If
otherwise qualified, obligations of the Escrow Agent shall qualify as Eligible
Investments. Absent its timely receipt of such specific written investment
instruction from the Shareholder Representative, the Escrow Agent shall have no
obligation or duty to invest (or otherwise pay interest on) the Dividend
Account. All earnings received from the investment of the Dividend Account shall
be credited to, and shall become a part of, the Dividend Account (and any losses
on such investments shall be debited to the Dividend Account). The Escrow Agent
shall have no liability for any investment losses, including any losses on any
investment required to be liquidated prior to maturity in order to make a
payment required hereunder except for losses due to the gross negligence or
wilful misconduct of the Escrow Agent.
3. VOTING OF ESCROW SHARES. The Escrow Shares shall be voted on all
matters submitted to the shareholders of Parent as each Shareholder shall direct
with respect to the number of Escrow Shares allocated to such Shareholder.
During the period the Escrow Shares are held hereunder, Parent shall cause all
proxy solicitation materials, including forms of proxy, to be sent to the
Shareholders as and when sent to the shareholders of Parent. The Escrow Agent
shall not be responsible for forwarding to any party, notifying any party with
respect to, or taking any action with respect to, any notice, solicitation or
other document or information, written or otherwise, received from an issuer or
other person with respect to the Escrow Shares, including but not limited to,
proxy material, tenders, options, the pendency of calls and maturities and
expiration of rights.
C-2
<PAGE>
4. APPLICATION OF ESCROW SHARES TO CLAIMS OF PARENT INDEMNIFIED PARTIES AND
DEFICIT AMOUNT.
4.1. In the event a Parent Indemnified Party claims that it is entitled to
indemnification pursuant to the Merger Agreement, such Parent Indemnified Party
shall give written notice of such claim to the Shareholder Representative and
the Escrow Agent. The amount of such claim shall be paid to the Parent
Indemnified Party out of the Escrow Shares as provided in Section 4.3 (plus any
payments due from the Dividend Account) or as otherwise provided in Section 4.3,
unless the Shareholder Representative shall contest the right of such Parent
Indemnified Party to such payment by delivering to such Parent Indemnified Party
and the Escrow Agent notice of such contest within 15 days after such Parent
Indemnified Party shall have delivered notice to the Shareholder Representative
and the Escrow Agent of the claim.
4.2. If within the 15 day period specified in Section 4.1 above, the
Shareholder Representative shall deliver to the Parent Indemnified Party and the
Escrow Agent the notice of contest referred to in Section 4.1 above, the Parent
Indemnified Party and the Shareholder Representative shall use their reasonable
efforts to resolve the dispute by mutual agreement within ninety (90) days from
the receipt of such notice of contest. If at the end of such ninety-day period,
the Parent Indemnified Party and Shareholder Representative have not reached an
agreement with respect to such dispute, then such parties shall use their good
faith efforts to submit such dispute promptly to binding arbitration or, if such
parties cannot agree to the terms of such arbitration, to a court of competent
jurisdiction. The Escrow Agent shall make no payment hereunder with respect to a
claim with respect to which a notice of contest has been duly delivered to it
until the dispute has been finally settled by written agreement of such Parent
Indemnified Party and the Shareholder Representative, a copy of which is
delivered to Escrow Agent, or, in the absence of such an agreement, by a binding
and final arbitration award if such Parent Indemnified Party and the Shareholder
Representative have agreed to such arbitration, or otherwise by a binding and
final judgment, order or decree of a court of competent jurisdiction, a copy of
which is delivered to Escrow Agent.
4.3. Payments to a Parent Indemnified Party shall be made by cancellation
of the number of whole shares of the Escrow Shares, allocated pro rata among the
Shareholders in accordance with Schedule A hereto, having an aggregate value
nearest to the amount payable to the Parent Indemnified Party, such value per
share to be the [Average Closing Price], subject to appropriate adjustment to
take into account any stock split, stock dividend or recapitalization subsequent
to the Effective Time and not reflected in such [Average Closing Price] (the
"Share Value"). In addition, upon the cancellation of such Escrow Shares, a
proportionate distribution of any cash dividends in the Dividend Account (the
"Dividend Account Amount") shall be made to such Parent Indemnified Party.
4.4. In the event Parent has a claim for (i) a Deficit Amount under Section
2.4 of the Merger Agreement, (ii) indemnification for Shareholders' obligations
under Section 8.2 hereof or (iii) fees and costs payable by Shareholders under
Section 8.5 hereof, Parent shall give written notice thereof to the Shareholder
Representative and Escrow Agent and the amount of such claim shall be paid to
Parent out of the Escrow Shares in the same manner as payment with respect to
claims for indemnification is made to Parent Indemnified Parties under Section
4.3 hereof.
5. FINAL DISTRIBUTION. On the first anniversary of the date hereof (the
"Anniversary"), except as otherwise provided in this Section, the Escrow Shares
and cash dividends in the Dividend Account then remaining in escrow shall be
distributed to the Shareholders pro rata in accordance with Schedule A hereto.
If any claim theretofore asserted by a Parent Indemnified Party pursuant to
Section 4 hereof shall not have been paid or finally determined to be without
merit or the amount of such claim shall not have been finally determined, the
number of whole shares of the Escrow Shares having an aggregate value
(determined as provided in Section 4.3 above) nearest to the amount of such
claim on the Anniversary (the "Retained Escrow Shares"), plus proportionate
amount of any cash dividends in the Dividend Account, shall be retained in
escrow until such claim(s) shall have been paid or finally determined to be
without merit pursuant to Section 4 hereof, whereupon such Retained Escrow
Shares and cash dividends in the
C-3
<PAGE>
Dividend Account shall be distributed to the Shareholders pro rata in accordance
with Schedule A hereto, subject to the remaining provisions of this Section. Any
distribution pursuant hereto shall be net of any required tax or other
withholding or deduction. The parties will make all reasonable efforts to
resolve any claims hereunder as quickly as possible.
6. FRACTIONAL SHARES; DISTRIBUTIONS. In the event any calculations required
under this Escrow Agreement result in the allocation of a fractional share
amount to a Shareholder, the fraction shall be rounded to the nearest whole
number, and any remainder shares shall be canceled. All deliveries under this
Escrow Agreement shall be made by and to the parties hereto (or their lawfully
appointed attorneys-in-fact) in the United States.
7. SHAREHOLDER REPRESENTATIVE; NOTICES AND WRITTEN DIRECTIONS. Each
Shareholder is required, prior to delivery of the Escrow Shares on behalf of
such Shareholder to Escrow Agent, to have executed a Letter of Transmittal
appointing the Shareholder Representative to be his, her or its true and lawful
attorney for all matters in connection with this Escrow Agreement, the Escrow
Shares and any cash dividends in the Dividend Account, including without
limitation the acceptance of any claim by a Parent Indemnified Party, and the
compromise of any disputes relating to the Escrow Shares, cash dividends or
other matter under this Escrow Agreement. Notwithstanding the foregoing, the
Shareholder Representative will not act on behalf of the Shareholders with
respect to distributions, voting or tax withholdings. The Shareholder
Representative hereby agrees to accept such appointment. The Shareholder
Representative represents and warrants to the Escrow Agent that prior to the
delivery of the Escrow Shares on behalf of a Shareholder to the Escrow Agent,
the Shareholder Representative will have the right, power and authority, and by
delivery of such shares to the Escrow Agent thereby does, exercise such
authority (i) to enter into and perform this Escrow Agreement and to bind such
Shareholder to its terms, (ii) to give and receive directions and notices
hereunder; and (iii) to make all determinations that may be required or that he
deems appropriate under this Escrow Agreement. Until notified in writing by the
Shareholder Representative that he has resigned or by holders of a majority of
the Escrow Shares that he has been removed, the Escrow Agent may act upon the
directions, instructions and notices of the Shareholder Representative named
above and, thereafter, upon the directions, instructions and notices of any
successor named in a writing executed by holders of a majority of the Escrow
Shares delivered to the Escrow Agent.
8. ESCROW AGENT.
8.1. DUTIES.
(a) Each Interested Party acknowledges and agrees that the Escrow Agent
(i) shall not be responsible for any of the agreements referred to or
described herein (including without limitation the Merger Agreement), or for
determining or compelling compliance therewith, and shall not otherwise be
bound thereby, (ii) shall be obligated only for the performance of such
duties as are expressly and specifically set forth in this Escrow Agreement
on its part to be performed, each of which are ministerial (and shall not be
construed to be fiduciary) in nature, and no implied duties or obligations
of any kind shall be read into this Escrow Agreement against or on the part
of the Escrow Agent, (iii) shall not be obligated to take any legal or other
action hereunder which might in its judgment involve or cause it to incur
any expense or liability unless it shall have been furnished with acceptable
indemnification, (iv) may rely on and shall be protected in acting or
refraining from acting upon any written notice, instruction (including,
without limitation, wire transfer instructions, whether incorporated herein
or provided in a separate written instruction), instrument, statement,
certificate, request or other document furnished to it hereunder and
reasonably believed by it to be genuine and to have been signed or presented
by the proper person, and shall have no responsibility for determining the
accuracy thereof, and (v) may consult counsel satisfactory to it, including
in-house counsel, and the opinion or advice of such counsel in any instance
shall be full and complete authorization and protection in respect of any
action taken, suffered or omitted by it hereunder in good faith and in
accordance with the opinion or advice of such counsel.
C-4
<PAGE>
(b) The Escrow Agent shall not be liable to anyone for any action taken
or omitted to be taken by it hereunder except in the case of the Escrow
Agent's gross negligence or wilful misconduct in breach of the terms of this
Escrow Agreement. In no event shall the Escrow Agent be liable for punitive,
special or consequential damage or loss (including but not limited to lost
profits) whatsoever, even if the Escrow Agent has been informed of the
likelihood of such loss or damage and regardless of the form of action.
8.2. INDEMNIFICATION. Except in instances of Escrow Agent's own gross
negligence or willful misconduct, Parent and the Shareholders shall indemnify,
defend, and hold harmless Escrow Agent (and its directors, officers and
employees) against any and all costs, losses, claims, damages, liabilities,
expenses, including reasonable costs of investigation, court costs, and
attorneys' fees, and disbursements, which may be imposed upon Escrow Agent (and
its directors, officers and employees) in connection with its acceptance of
appointment as Escrow Agent and the exercise or failure to exercise its
discretion hereunder, including any litigation arising from this Escrow
Agreement involving the subject matter hereof, and all such costs, expenses and
disbursement shall be for the account of and shall be borne and paid by Parent
and the Shareholders as a condition to termination of this Escrow Agreement;
provided however that the parties agree that the Shareholders shall not have
personal liability for their indemnification obligations pursuant to this
Section 8.2 but that their share of the indemnification obligations under this
Section 8.2 shall be treated as a claim payable to Parent by Escrow Agent
pursuant to Section 4 hereof. The foregoing indemnification and agreement to
hold harmless shall survive the termination of the Escrow Agreement.
8.3. DISPUTES. In the event of a dispute between the parties, in the
discretion of Escrow Agent, Escrow Agent shall be entitled to tender into the
registry or custody of any court of competent jurisdiction all money or property
in its hands under this Escrow Agreement, together with such legal pleadings as
it deems appropriate, and thereupon shall be discharged from all further duties
and liabilities under this Escrow Agreement. Any such legal action may be
brought in such court as Escrow Agent shall determine to have jurisdiction
thereof. The filing of any such legal proceedings shall not deprive Escrow Agent
of its compensation earned prior to such filing, or of the benefits of Section
8.2 hereof.
8.4. RECEIPT. Escrow Agent shall provide written acknowledgment to the
Parent of receipt of the Escrow Shares from Parent on behalf of the
Shareholders.
8.5. FEES. Escrow Agent's fees hereunder shall be as set forth on the fee
schedule attached hereto as Schedule B and incorporated herein by reference. All
fees, expenses and reimbursements shall be paid by Parent. As between Parent and
Shareholders, all fees, expenses and reimbursements other than the annual fees
set forth on Schedule B and out of pocket expenses shall be paid fifty percent
(50%) by Parent and fifty percent (50%) by the Shareholders; provided however
that the parties agree that the Shareholders shall not have personal liability
for their indemnification obligations pursuant to this Section 8.5 but that
their share of the indemnification obligations under this Section 8.5 shall be
treated as a claim payable to Parent by Escrow Agent pursuant to Section 4
hereof.
9. TRANSFER OF INTERESTS.
The interests of the Shareholders in the Escrow Shares and the rights and
obligations of the Shareholders hereunder may not be transferred except by will,
the laws of descent and distribution or by other operation of law.
10. MISCELLANEOUS.
10.1. BENEFITS AND BURDENS; ASSIGNMENT. This Escrow Agreement shall inure
to the benefit of and shall be binding upon Parent and the Shareholders and
Escrow Agent and their respective heirs, representatives, successors and
assigns. No party to this Escrow Agreement may assign its rights or obligations
hereunder without the prior written consent of each of the other parties hereto,
provided however, that this Escrow Agreement may only be assigned by Parent to a
corporation, all of whose issued
C-5
<PAGE>
and outstanding capital stock is owned directly or indirectly by Parent, and in
such event Parent shall not be released from its obligations hereunder.
10.2. GOVERNING LAW. This Escrow Agreement shall be governed by the
internal laws (ignoring principles of conflicts of laws) of the Commonwealth of
Massachusetts. All deliveries under this Escrow Agreement shall be made by and
to the parties hereto (or their lawfully appointed attorneys-in-fact) in the
United States.
10.3. HEADINGS. The section and paragraph headings contained in this
Escrow Agreement are for reference purposes only and shall not affect in any way
the meaning or interpretation of this Escrow Agreement.
10.4. (a) NOTICES. Any transmittals, notice or other communications
required or permitted hereunder shall be sufficiently given if sent by
registered or certified mail, postage prepaid, by national overnight courier
service or, in the case of any communication not involving a transmittal of
original documents, by telecopy, addressed as follows:
If to Parent or, after the Closing, the Company:
Dollar Tree Stores, Inc.
500 Volvo Parkway
Chesapeake, Virginia 23320
Attention: Mr. H. Ray Compton
Telecopier: (757) 321-5111
With a copy to:
Hofheimer Nusbaum, P.C.
999 Waterside Drive, Suite 1700
P. O. Box 3460
Norfolk, Virginia 23514
Attention: William A. Old, Jr., Esquire
Telecopier: (757) 629-0660
If to the Shareholder Representative or, prior to Closing, the Company:
Step Ahead Investments, Inc.
3222 Winona Way
North Highland, California 95660
Attention: David Reed
Telecopier: (916) 348-0380
With a copy to:
Latham & Watkins
505 Montgomery Street, Suite 1900
San Francisco, California 94111
Attention: Tracy Edmonson, Esquire
Telecopier: (415) 395-8095
C-6
<PAGE>
If to Shareholders:
To the addresses stated on Schedule A
With copies to:
Step Ahead Investments, Inc.
3222 Winona Way
North Highland, California 95660
Attention: David Reed
Telecopier: (916) 348-0380
and
Latham & Watkins
505 Montgomery Street, Suite 1900
San Francisco, California 94111
Attention: Tracy Edmonson, Esquire
Telecopier: (415) 395-8095
If to Escrow Agent:
State Street Bank and Trust Company
Two International Place, Fourth Floor
Boston, Massachusetts 02110
Attention: Corporate Trust Department
Attention: Dollar Tree/Step Ahead Escrow
Fax: 617-664-5365
With a copy to:
Donald E. Vaughan, Esq.
Peabody & Arnold LLP
50 Rowes Wharf
Boston, Massachusetts 02110-3342
or such other addresses as shall be furnished in writing by any of the parties,
and any such notice or communication shall be deemed to have been given as of
the next business day, if delivered by overnight courier service or upon receipt
(as evidenced by proof of transmission), if telecopied and three days after the
date so mailed (if mailed).
(b) Wiring Instructions. Any funds to be paid to or by the Escrow Agent
hereunder shall be sent by wire transfer or certified or cashier's check
pursuant to the following instructions (or by such method of payment and
pursuant to such instruction as may have been given in advance and in writing to
or by the Escrow Agent, as the case may be, in accordance with Section 10.4(a)
above):
If to Parent:
Bank: First Union National Bank, N.A.
ABA #: 0514 0054 9
A/C #:
Attn: Theresa Boneske (757) 628-0438
Ref: Dollar Tree/Step Ahead Escrow
If to Shareholders:
By certified or cashier's check sent via
registered or certified mail, postage prepaid,
or by national overnight courier service to
the addresses stated on Schedule A.
C-7
<PAGE>
If to the Escrow Agent:
Bank: State Street Bank and Trust Company
ABA #: 0110 0002 8
A/C #: 9903-9901
Attn: Corporate Trust Department
Ref: Dollar Tree/Step Ahead Escrow
10.5. COUNTERPARTS. This Escrow Agreement may be executed in two or more
counterparts, each of which shall be deemed to be an original but all of which
together shall constitute one and the same instrument.
10.6. MODIFICATION. This Escrow Agreement may be modified only by a
written instrument signed by each of the parties hereto, provided however that
Schedule A hereto may be modified to reflect valid transfers of the
Shareholders' interests in the Escrow Shares by a writing signed by Parent and
the Shareholder Representative, upon which Escrow Agent shall be entitled to
rely without further investigation.
10.7. COOPERATION. Shareholders, Parent and the Escrow Agent shall deliver
to each other such information and documents and shall execute and deliver to
each other such further information and documents and shall execute and deliver
such further instruments and agreements as the others may reasonably request in
order to accomplish the purpose of this Escrow Agreement or to assure to the
others the benefits of this Escrow Agreement.
10.8. ENTIRE UNDERSTANDING. This Escrow Agreement and the schedules
referred to herein represent the entire understanding of the parties with
respect to the subject matter hereof and supersede all correspondence,
memoranda, conversations or other communications with respect thereto.
10.9. SEVERABILITY. The invalidity or unenforceability of any provision of
this Escrow Agreement shall not affect the validity or enforceability of any
other provision of this Escrow Agreement.
10.10. TIME. Time is of the essence under this Escrow Agreement.
10.11. STATUTES. Any reference herein to any federal, state or local
statute shall include all amendments to such statute through the date of this
Escrow Agreement.
10.12. INTERPRETATION. It is the intention of the parties hereto and the
Shareholders and Company that the Merger qualify as a "reorganization" under the
provisions of Section 368 of the Code, and be accounted for as a "pooling of
interests," and this Escrow Agreement shall be interpreted and applied in a
manner consistent with, and shall be subject to amendment to conform to, the
requirements for such treatment.
10.13. TAX-RELATED TERMS.
(a) Tax Reporting. The Interested Parties agree that, for tax reporting
purposes, all interest or other income earned from the investment of the
Dividend Account in any tax year shall (i) to the extent such interest or
other income is distributed by the Escrow Agent to any person or entity
pursuant to the terms of this Escrow Agreement during such tax year, be
allocated to such person or entity, and (ii) otherwise shall be allocated to
the Shareholders in proportion to their holdings as set forth on Schedule A.
(b) Certification of Tax Identification Number. If requested by the
Escrow Agent, the Shareholder Representative agrees to obtain the certified
tax identification number for each Shareholder on a Form W-9 (or Form W-8,
in case of non-U.S. persons) and deliver the same to the Escrow Agent prior
to the date on which any income earned on the investment of the Dividend
Account is credited to the Dividend Account. In the event that any tax
identification number is not certified to the Escrow
C-8
<PAGE>
Agent, the Internal Revenue Code, as amended from time to time, may require
withholding of a portion of any interest or other income earned on the
investment of the Dividend Account.
(c) Tax Indemnification. The Shareholder Representative will instruct
the Escrow Agent in writing with respect to the Escrow Agent's
responsibility for withholding and other taxes, assessments or other
governmental charges, and will instruct the Escrow Agent with respect to any
certifications and governmental reporting that may be required under any
laws or regulations that may be applicable in connection with its acting as
Escrow Agent under this Escrow Agreement. The Shareholders will indemnify
and hold the Escrow Agent harmless from any liability or obligation on
account of taxes, assessments, additions for late payment, interest,
penalties, expenses and other governmental charges that may be assessed or
asserted against the Escrow Agent in connection with or relating to any
payment made or other activities performed under the terms of this Escrow
Agreement, including without limitation any liability for the withholding or
deduction of (or the failure to withhold or deduct) the same, and any
liability for failure to obtain proper certifications or to report properly
to governmental authorities in connection with this Escrow Agreement,
including costs and expenses (including reasonable legal fees and expenses),
interest and penalties. The foregoing indemnification and agreement to hold
harmless shall survive the termination of this Escrow Agreement.
10.14. RESIGNATION. The Escrow Agent may at any time resign as Escrow
Agent hereunder by giving thirty (30) days' prior written notice of resignation
to the Parent and the Shareholder Representative. Prior to the effective date of
the resignation as specified in such notice, the Parent will issue to the Escrow
Agent a written instruction authorizing redelivery of the Escrow Shares and
Dividend Account to a bank or trust company that it selects as successor to the
Escrow Agent hereunder, subject to the consent of the Shareholder Representative
(which consent shall not be unreasonably withheld). If, however, the Parent
shall fail to name such a successor escrow agent within twenty (20) days after
the notice of resignation from the Escrow Agent, the Shareholder Representative
shall be entitled to name such successor escrow agent. If no successor escrow
agent is named by the Parent or the Shareholder Representative, the Escrow Agent
may apply to a court of competent jurisdiction for appointment of a successor
escrow agent.
10.15. FORCE MAJEURE. The Escrow Agent shall not be responsible for delays
or failures in performance resulting from acts beyond its control. Such acts
shall include but not be limited to acts of God, strikes, lockouts, riots, acts
of war, epidemics, governmental regulations superimposed after the fact, fire,
external power or communications line failures, earthquakes or other natural
disasters.
10.16. REPRODUCTION OF DOCUMENTS. This Escrow Agreement and all documents
relating thereto, including, without limitation, (a) consents, waivers and
modifications which may hereafter be executed, and (b) certificates and other
information previously or hereafter furnished, may be reproduced by any
photographic, photostatic, microfilm, optical disk, micro-card, miniature
photographic or other similar process. The parties agree that any such
reproduction shall be admissible in evidence as the original itself in any
judicial or administrative proceeding, whether or not the original is in
existence and whether or not such reproduction was made by a party in the
regular course of business, and that any enlargement, facsimile or further
reproduction of such reproduction shall likewise be admissible in evidence.
IN WITNESS WHEREOF, the parties hereto have executed this Escrow Agreement
as of the date first written above.
STEP AHEAD INVESTMENTS, INC.
By ___________________________________
[Name]
[Title]
C-9
<PAGE>
DOLLAR TREE STORES, INC.
By ___________________________________
[Name]
[Title]
______________________________________
Shareholder Representative
STATE STREET BANK AND TRUST COMPANY
(Acting solely as Escrow Agent herein
and not in its individual capacity)
By ___________________________________
[Name]
[Title]
C-10
<PAGE>
APPENDIX D
DISSENTING STEP AHEAD SHAREHOLDERS' RIGHTS UNDER
CHAPTER 13 OF THE GENERAL CORPORATION LAW
OF THE CALIFORNIA CORPORATIONS CODE
<PAGE>
DISSENTING STEP AHEAD SHAREHOLDERS' RIGHTS UNDER
CHAPTER 13 OF THE GENERAL CORPORATION LAW
OF THE CALIFORNIA CORPORATIONS CODE
SECTION 1300. REORGANIZATION OR SHORT-FORM MERGER; DISSENTING SHARES; CORPORATE
PURCHASE AT FAIR MARKET VALUE; DEFINITIONS.
(a) If the approval of the outstanding shares (Section 152) of a corporation
is required for a reorganization under subdivisions (a) and (b) or subdivision
(e) or (f) of Section 1201, each shareholder of the corporation entitled to vote
on the transaction and each shareholder of a subsidiary corporation in a
short-form merger may, by complying with this chapter, require the corporation
in which the shareholder holds shares to purchase for cash at their fair market
value the shares owned by the shareholder which are dissenting shares as defined
in subdivision (b). The fair market value shall be determined as of the day
before the first announcement of the terms of the proposed reorganization or
short-form merger, excluding any appreciation or depreciation in consequence of
the proposed action, but adjusted for any stock split, reverse stock split, or
share dividend which becomes effective thereafter.
(b) As used in this chapter, "dissenting shares" means shares which come
within all of the following descriptions:
(1) Which were not immediately prior to the reorganization or short-form
merger either (A) listed on any national securities exchange certified by
the Commissioner of Corporations under subdivision (o) of Section 25100 or
(B) listed on the list of OTC margin stocks issued by the Board of Governors
of the Federal Reserve System, and the notice of meeting of shareholders to
act upon the reorganization summarizes this section and Sections 1301, 1302,
1303 and 1304; provided, however, that this provision does not apply to any
shares with respect to which there exists any restriction on transfer
imposed by the corporation or by any law or regulation; and provided,
further, that this provision does not apply to any class of shares described
in subparagraph (A) or (B) if demands for payment are filed with respect to
5 percent or more of the outstanding shares of that class.
(2) Which were outstanding on the date for the determination of
shareholders entitled to vote on the reorganization and (A) were not voted
in favor of the reorganization or, (B) if described in subparagraph (A) or
(B) of paragraph (1) (without regard to the provisos in that paragraph),
were voted against the reorganization, or which were held of record on the
effective date of a short-form merger; provided, however, that subparagraph
(A) rather than subparagraph (B) of this paragraph applies in any case where
the approval required by Section 1201 is sought by written consent rather
than at a meeting.
(3) Which the dissenting shareholder has demanded that the corporation
purchase at their fair market value, in accordance with Section 1301.
(4) Which the dissenting shareholder has submitted for endorsement, in
accordance with Section 1302.
(c) As used in this chapter, "dissenting shareholder" means the recordholder
of dissenting shares and includes a transferee of record.
SECTION 1301. NOTICE TO HOLDERS OF DISSENTING SHARES IN REORGANIZATIONS; DEMAND
FOR PURCHASE; TIME; CONTENTS.
(a) If, in case of a reorganization, any shareholders of a corporation have
a right under Section 1300, subject to compliance with paragraphs (3) and (4) of
subdivision (b) thereof, to require the corporation to purchase their shares for
cash, such corporation shall mail to each such shareholder a notice of the
approval of the reorganization by its outstanding shares (Section 152) within 10
days after the date of such approval, accompanied by a copy of Sections 1300,
1302, 1303, 1304 and this section, a statement of the price determined by the
corporation to represent the fair market value of the dissenting shares, and a
brief
D-1
<PAGE>
description of the procedure to be followed if the shareholder desires to
exercise the shareholder's right under such sections. The statement of price
constitutes an offer by the corporation to purchase at the price stated any
dissenting shares as defined in subdivision (b) of Section 1300, unless they
lose their status as dissenting shares under Section 1309.
(b) Any shareholder who has a right to require the corporation to purchase
the shareholder's shares for cash under Section 1300, subject to compliance with
paragraphs (3) and (4) of subdivision (b) thereof, and who desires the
corporation to purchase such shares shall make written demand upon the
corporation for the purchase of such shares and payment to the shareholder in
cash of their fair market value. The demand is not effective for any purpose
unless it is received by the corporation or any transfer agent thereof (1) in
the case of shares described in clause (i) or (ii) of paragraph (1) of
subdivision (b) of Section 1300 (without regard to the provisos in that
paragraph), not later than the date of the shareholders' meeting to vote upon
the reorganization, or (2) in any other case within 30 days after the date on
which the notice of the approval by the outstanding shares pursuant to
subdivision (a) or the notice pursuant to subdivision (i) of Section 1110 was
mailed to the shareholder.
(c) The demand shall state the number and class of the shares held of record
by the shareholder which the shareholder demands that the corporation purchase
and shall contain a statement of what such shareholder claims to be the fair
market value of those shares as of the day before the announcement of the
proposed reorganization or short-form merger. The statement of fair market value
constitutes an offer by the shareholder to sell the shares at such price.
SECTION 1302. SUBMISSION OF SHARE CERTIFICATES FOR ENDORSEMENT; UNCERTIFICATED
SECURITIES.
Within 30 days after the date on which notice of the approval by the
outstanding shares or the notice pursuant to subdivision (i) of Section 1110 was
mailed to the shareholder, the shareholder shall submit to the corporation at
its principal office or at the office of any transfer agent thereof, (a) if the
shares are certificated securities, the shareholder's certificate representing
any shares which the shareholder demands that the corporation purchase, to be
stamped or endorsed with a statement that the shares are dissenting shares or to
be exchanged for certificates of appropriate denomination so stamped or endorsed
or (b) if the shares are uncertificated securities, written notice of the number
of shares which the shareholder demands that the corporation purchase. Upon
subsequent transfers of the dissenting shares on the books of the corporation,
the new certificates, initial transaction statement, and other written
statements issued therefor shall bear a like statement, together with the name
of the original dissenting holder of the shares.
SECTION 1303. PAYMENT OF AGREED PRICE WITH INTEREST; AGREEMENT FIXING FAIR
MARKET VALUE; FILING; TIME OF PAYMENT.
(a) If the corporation and the shareholder agree that the shares are
dissenting shares and agree upon the price of the shares, the dissenting
shareholder is entitled to the agreed price with interest thereon at the legal
rate on judgments from the date of the agreement. Any agreements fixing the fair
market value of any dissenting shares as between the corporation and the holders
thereof shall be filled with the secretary of the corporation.
(b) Subject to the provisions of Section 1306, payment of the fair market
value of dissenting shares shall be made within 30 days after the amount thereof
has been agreed or within 30 days after any statutory or contractual conditions
to the reorganization are satisfied, whichever is later, and in the case of
certificated securities, subject to surrender of the certificates therefor,
unless provided otherwise by agreement.
D-2
<PAGE>
SECTION 1304. ACTION TO DETERMINE WHETHER SHARES ARE DISSENTING SHARES OR FAIR
MARKET VALUE; LIMITATION; JOINDER; CONSOLIDATION; DETERMINATION OF
ISSUES; APPOINTMENT OF APPRAISERS.
(a) If the corporation denies that the shares are dissenting shares, or the
corporation and the shareholder fail to agree upon the fair market value of the
shares, then the shareholder demanding purchase of such shares as dissenting
shares or any interested corporation, within six months after the date on which
notice of the approval by the outstanding shares (Section 152) or notice
pursuant to subdivision (i) of Section 1110 was mailed to the shareholder, but
not thereafter, may file a complaint in the superior court of the proper county
praying the court to determine whether the shares are dissenting shares or the
fair market value of the dissenting shares or both or may intervene in any
action pending on such a complaint.
(b) Two or more dissenting shareholders may join as plaintiffs or be joined
as defendants in any such action and two or more such actions may be
consolidated.
(c) On the trial of the action, the court shall determine the issues. If the
status of the shares as dissenting shares is in issue, the court shall first
determine that issue. If the fair market value of the dissenting shares is in
issue, the court shall determine, or shall appoint one or more impartial
appraisers to determine, the fair market value of the shares.
SECTION 1305. REPORT OF APPRAISERS; CONFIRMATION; DETERMINATION BY COURT;
JUDGMENT; PAYMENT; APPEAL; COSTS.
(a) If the court appoints an appraiser or appraisers, they shall proceed
forthwith to determine the fair market value per share. Within the time fixed by
the court, the appraisers, or a majority of them, shall make and file a report
in the office of the clerk of the court. Thereupon, on the motion of any party,
the report shall be submitted to the court and considered on such evidence as
the court considers relevant. If the court finds the report reasonable, the
court may confirm it.
(b) If a majority of the appraisers appointed fail to make and file a report
within 10 days from the date of their appointment or within such further time as
may be allowed by the court or the report is not confirmed by the court, the
court shall determine the fair market value of the dissenting shares.
(c) Subject to the provisions of Section 1306, judgment shall be rendered
against the corporation for payment of an amount equal to the fair market value
of each dissenting share multiplied by the number of dissenting shares which any
dissenting shareholder who is a party, or who has intervened, is entitled to
require the corporation to purchase, with interest thereon at the legal rate
from the date on which judgment was entered.
(d) Any such judgment shall be payable forthwith with respect to
uncertificated securities and, with respect to certificated securities, only
upon the endorsement and delivery to the corporation of the certificates for the
shares described in the judgment. Any party may appeal from the judgment.
(e) The costs of the action, including reasonable compensation to the
appraisers to be fixed by the court, shall be assessed or apportioned as the
court considers equitable, but, if the appraisal exceeds the price offered by
the corporation, the corporation shall pay the costs (including in the
discretion of the court attorneys' fees, fees of expert witnesses and interest
at the legal rate on judgments from the date of compliance with Sections 1300,
1301 and 1302 if the value awarded by the court for the shares is more than 125
percent of the price offered by the corporation under subdivision (a) of Section
1301).
SECTION 1306. PREVENTION OF IMMEDIATE PAYMENT; STATUS AS CREDITORS; INTEREST.
To the extent that the provisions of Chapter 5 prevent the payment to any
holders of dissenting shares of their fair market value, they shall become
creditors of the corporation for the amount thereof together with interest at
the legal rate on judgments until the date of payment, but subordinate to all
other creditors in any liquidation proceeding, such debt to be payable when
permissible under the provisions of Chapter 5.
D-3
<PAGE>
SECTION 1307. DIVIDENDS ON DISSENTING SHARES.
Cash dividends declared and paid by the corporation upon the dissenting
shares after the date of approval of the reorganization by the outstanding
shares (Section 152) and prior to payment for the shares by the corporation
shall be credited against the total amount to be paid by the corporation
therefor.
SECTION 1308. RIGHTS OF DISSENTING SHAREHOLDERS PENDING VALUATION; WITHDRAWAL OF
DEMAND FOR PAYMENT.
Except as expressly limited in this chapter, holders of dissenting shares
continue to have all the rights and privileges incident to their shares, until
the fair market value of their shares is agreed upon or determined. A dissenting
shareholder may not withdraw a demand for payment unless the corporation
consents thereto.
SECTION 1309. TERMINATION OF DISSENTING SHARE AND SHAREHOLDER STATUS.
Dissenting shares lose their status as dissenting shares and the holders
thereof cease to be dissenting shareholders and cease to be entitled to require
the corporation to purchase their shares upon the happening of any of the
following:
(a) The corporation abandons the reorganization. Upon abandonment of the
reorganization, the corporation shall pay on demand to any dissenting
shareholder who has initiated proceedings in good faith under this chapter all
necessary expenses incurred in such proceedings and reasonable attorneys' fees.
(b) The shares are transferred prior to their submission for endorsement in
accordance with Section 1302 or are surrendered for conversion into shares of
another class in accordance with the articles.
(c) The dissenting shareholder and the corporation do not agree upon the
status of the shares as dissenting shares or upon the purchase price of the
shares, and neither files a complaint or intervenes in a pending action as
provided in Section 1304, within six months after the date on which notice of
the approval by the outstanding shares or notice pursuant to subdivision (i) of
Section 1110 was mailed to the shareholder.
(d) The dissenting shareholder, with the consent of the corporation,
withdraws the shareholder's demand for purchase of the dissenting shares.
SECTION 1310. SUSPENSION OF RIGHT TO COMPENSATION OR VALUATION PROCEEDINGS;
LITIGATION OF SHAREHOLDERS' APPROVAL.
If litigation is instituted to test the sufficiency or regularity of the
votes of the shareholders in authorizing a reorganization, any proceedings under
Sections 1304 and 1305 shall be suspended until final determination of such
litigation.
SECTION 1311. EXEMPT SHARES.
This chapter, except Section 1312, does not apply to classes of shares whose
terms and provisions specifically set forth the amount to be paid in respect to
such shares in the event of a reorganization or merger.
SECTION 1312. RIGHT OF DISSENTING SHAREHOLDER TO ATTACK, SET ASIDE OR RESCIND
MERGER OR REORGANIZATION; RESTRAINING ORDER OR INJUNCTION;
CONDITIONS.
(a) No shareholder of a corporation who has a right under this chapter to
demand payment of cash for the shares held by the shareholder shall have any
right at law or in equity to attack the validity of the reorganization or
short-form merger, or to have the reorganization or short-form merger set aside
or rescinded, except in an action to test whether the number of shares required
to authorize or approve the reorganization have been legally voted in favor
thereof; but any holder of shares of a class whose terms and
D-4
<PAGE>
provisions specifically set forth the amount to be paid in respect to them in
the event of a reorganization or short-form merger is entitled to payment in
accordance with those terms and provisions or, if the principal terms of the
reorganization are approved pursuant to subdivision (b) of Section 1202, is
entitled to payment in accordance with the terms and provisions of the approved
reorganization.
(b) If one of the parties to a reorganization or short-form merger is
directly or indirectly controlled by, or under common control with, another
party to the reorganization or short-form merger, subdivision (a) shall not
apply to any shareholder of such party who has not demanded payment of cash for
such shareholder's shares pursuant to this chapter; but if the shareholder
institutes any action to attack the validity of the reorganization or short-form
merger or to have the reorganization or short-form merger set aside or
rescinded, the shareholder shall not thereafter have any right to demand payment
of cash for the shareholder's shares pursuant to this chapter. The court in any
action attacking the validity of the reorganization or short-form merger or to
have the reorganization or short-form merger set aside or rescinded shall not
restrain or enjoin the consummation of the transaction except upon 10 days'
prior notice to the corporation and upon a determination by the court that
clearly no other remedy will adequately protect the complaining shareholder or
the class of shareholders of which such shareholder is a member.
(c) If one of the parties to a reorganization or short-form merger is
directly or indirectly controlled by, or under common control with, another
party to the reorganization or short-form merger, in any action to attack the
validity of the reorganization or short-form merger or to have the
reorganization or short-form merger set aside or rescinded, (1) a party to a
reorganization or short-form merger which controls another party to the
reorganization or short-form merger shall have the burden of proving that the
transaction is just and reasonable as to the shareholders of the controlled
party, and (2) a person who controls two or more parties to a reorganization
shall have the burden of proving that the transaction is just and reasonable as
to the shareholders of any party so controlled.
D-5
<PAGE>
APPENDIX E
OPINION OF FINANCIAL ADVISOR TO STEP AHEAD
<PAGE>
APPENDIX E
OPINION OF FINANCIAL ADVISOR TO STEP AHEAD
November 5, 1998
Board of Directors
Step Ahead Investments, Inc.
3222 Winona Way
North Highlands, California 95660
Members of the Board:
We understand that Step Ahead Investments, Inc. ("Step Ahead" or the
"Company"), Dollar Tree Stores, Inc. ("Dollar Tree") and Dollar Tree West, Inc.,
a wholly-owned subsidiary of Dollar Tree ("Merger Sub"), have entered into a
Merger Agreement as of July 22, 1998 and amended as of October 20, 1998 (the
"Merger Agreement") pursuant to which Step Ahead will be acquired through the
merger of Merger Sub with and into Step Ahead (the "Transaction"). Pursuant to
the Merger Agreement, and subject to certain exceptions specified therein, at
the effective time of the Transaction, each outstanding share of the Company's
common and preferred stock (collectively, the "Company Shares") will be
converted into that number of shares of Dollar Tree's common stock based on the
"Exchange Ratio," as that term is defined in the Merger Agreement. The Exchange
Ratio is subject to adjustment as provided in the Merger Agreement. You have
requested our opinion as to whether the aggregate merger consideration (the
"Aggregate Merger Consideration") proposed to be received by the holders of the
Company Shares as a group is fair, from a financial point of view, to the
holders of the Company Shares as a group.
Piper Jaffray Inc. ("Piper Jaffray"), as a customary part of its investment
banking business, is engaged in the valuation of businesses and their securities
in connection with mergers and acquisitions, underwritings and secondary
distributions of securities, private placements, and valuations for estate,
corporate and other purposes. For our services in rendering this opinion, Step
Ahead will pay us a fee and indemnify us against certain liabilities. Piper
Jaffray is also entitled to additional fees which are contingent on consummation
of the Transaction. Piper Jaffray provides research coverage on Dollar Tree and
in the ordinary course of its business, we and our affiliates may actively trade
securities of Dollar Tree for our own account or the accounts of our customers
and, accordingly, may at any time hold a long or short position in such
securities.
In arriving at our opinion, we have undertaken such reviews, analyses and
inquiries as we deemed necessary and appropriate under the circumstances. Among
other things, we have:
1. Reviewed the Merger Agreement.
2. Reviewed the Reports on Form 10-K for Dollar Tree for the four years
ended December 31, 1997.
3. Reviewed the Report on Form 10-Q for Dollar Tree for the quarter ended
June 30, 1998.
4. Reviewed the audited financial statements for Step Ahead for the four
fiscal years ended January 25, 1998.
5. Reviewed financial forecasts for Step Ahead prepared by Company
management for the years ending January 31, 1999 through January 26, 2003
("Financial Forecast").
6. Visited the headquarters of Step Ahead and conducted discussions with
members of senior management of Step Ahead, including Gary Cino, Chief Executive
Officer and David Reed, Chief Financial Officer. Topics discussed included, but
were not limited to, the background and rationale of the proposed Transaction,
the financial condition, operating performance and the balance sheet
characteristics of Step Ahead and the prospects for the Company and Dollar Tree
on a combined basis.
E-1
<PAGE>
Board of Directors
Step Ahead Investments, Inc.
November 5, 1998
Page 2
7. Conducted discussions with members of senior management of Dollar Tree,
including Ray Compton, Executive Vice President, John Megrue, Vice Chairman of
the Board of Directors, Eric Coble, Chief Financial Officer, Bryan Bagwell, Vice
President , Merchandise and Erica Robb, Director of Shareholder Services. Topics
discussed included, but were not limited to, the background and rationale of the
proposed Transaction, the financial condition, operating performance and the
balance sheet characteristics of Dollar Tree and the prospects for Dollar Tree
and the Company on a combined basis.
8. Reviewed the historical prices and trading activity for Dollar Tree
common stock.
9. Reviewed the financial terms, to the extent publicly available, of
certain comparable merger and acquisition transactions which we deemed relevant.
10. Performed discounted cash flow analysis on the Financial Forecasts.
11. Performed pro forma analyses, including a contribution analysis and an
accretion/dilution analysis for the two fiscal years ending January 30, 2000 and
December 31, 1999 for Step Ahead and Dollar Tree, respectively, on a combined
basis.
12. Compared certain financial data of Step Ahead and Dollar Tree with
certain financial and securities data of companies deemed similar to Step Ahead
and Dollar Tree or representative of the business sector in which both companies
operate.
13. Reviewed such other financial data, performed such other analyses and
considered such other information as we deemed appropriate under the
circumstances.
We have relied upon and assumed the accuracy and completeness of the
financial statements and other information provided by Step Ahead and Dollar
Tree or otherwise made available to us and have not assumed responsibility
independently to verify such information. We have further relied upon the
assurances of Step Ahead's and Dollar Tree's managements that the information
provided has been prepared on a reasonable basis in accordance with industry
practice and, with respect to financial planning data, reflects the best
currently available estimates and good faith judgements of Step Ahead's and
Dollar Tree's management's as to the expected future financial performance of
Step Ahead and Dollar Tree, and that each such management team is not aware of
any information or facts that would make the information provided to us
incomplete or misleading. Without limiting the generality of the foregoing, for
the purpose of this opinion, we have assumed that Step Ahead and Dollar Tree are
not parties, together or individually, to any pending transaction, including
external financing, recapitalizations, acquisitions or merger discussions, other
than the Transaction or in the ordinary course of business. We have also assumed
that the Transaction will be free of Federal tax to Step Ahead, Dollar Tree and
the holders of Company Shares and that the Transaction will be accounted for as
a pooling of interests under generally accepted accounting principles. In
arriving at our opinion, we have assumed that all the necessary regulatory
approvals and consents required for the Transaction will be obtained in a manner
that will not change the purchase price for the Company. Notwithstanding the
provision in the Merger Agreement for escrow of shares of Dollar Tree common
stock, we have, with your consent, assumed that all shares held in escrow will
be issued and delivered to holders of Company Shares.
In arriving at our opinion, we have not been engaged to perform any
appraisals or valuations of specific assets or liabilities of Step Ahead or
Dollar Tree and have not been furnished with any such appraisals or valuations,
have made no physical inspection of the properties or assets of the Company and
express no opinion regarding the liquidation value of Step Ahead and Dollar
Tree. Without limiting the
E-2
<PAGE>
Board of Directors
Step Ahead Investments, Inc.
November 5, 1998
Page 3
generality of the foregoing, we have undertaken no independent analysis of any
pending or threatened litigation, possible unasserted claims or other contingent
liabilities, to which either Step Ahead or Dollar Tree or its affiliates is a
party or may be subject and at Step Ahead's direction and with its consent, our
opinion makes no assumption concerning and therefore does not consider, the
possible assertion of claims, outcomes or damages arising out of any such
matters.
We have, with your consent, made no analysis of, or distinction between, any
separate class of capital stock of Step Ahead and assumed each share of
outstanding preferred stock of the Company to be the economic equivalent of an
outstanding share of common stock of the Company. Accordingly, our opinion
relates solely to the consideration to be paid to the holders of Company Shares
as a group.
Our opinion is necessarily based upon information available to us, facts and
circumstances and economic, market ant other conditions as they exist and are
subject to evaluation on the date hereof; events occurring after the date hereof
could materially affect the assumptions used in preparing this opinion. We have
not undertaken to reaffirm or revise this opinion or otherwise comment upon any
events occurring after the date hereof and do not have any obligation to update,
revise or reaffirm this opinion, except that we have agreed with the Company,
subject to certain conditions, to update this opinion if requested by the Step
Ahead Board in the event that the Average Closing Price (as that term is defined
in the Merger Agreement) is less than $34 11/32, and Dollar Tree has proposed
that the parties to the Transaction treat the Average Closing Price as a value
between the actual Average Closing Price and $34 11/32 and the Step Ahead Board
is considering whether to agree to the Dollar Tree proposal. We are not
expressing any opinion herein as to the prices at which shares of Dollar Tree
common stock have traded or at which such shares may trade at any future time.
In addition, we were not requested to opine as to, and this opinion does not
address in any manner, Step Ahead's underlying decision to proceed with the
Transaction or structure thereof.
This opinion is for the benefit of the Board of Directors of Step Ahead in
evaluating the Transaction and shall not be published or otherwise used by any
other persons for any other purposes nor shall any public references to Piper
Jaffray be made without our prior written consent, except that this opinion may
be appended to the prospectus/proxy statement relating to the Transaction. This
opinion is not intended to be and does not constitute a recommendation to any
shareholder as to how such shareholder should vote in the Transaction.
Based upon and subject to the foregoing and based upon such other factors as
we consider relevant, it is our opinion that, as of the date hereof, the
Aggregate Merger Consideration is fair, from a financial point of view, to the
holders of Company Shares as a group.
Sincerely,
PIPER JAFFRAY INC.
E-3
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
To the full extent permitted by the Virginia Stock Corporation Act, the
Articles of Incorporation require Dollar Tree 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
Dollar Tree 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. Dollar Tree 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 Dollar Tree 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. Dollar Tree
is authorized to purchase and maintain insurance to insure Dollar Tree against
its indemnification obligation, or insure any person who is or was a director,
officer, employee, or agent of Dollar Tree against any liability asserted
against or incurred by him in any such capacity or arising from his status as
such, whether or not Dollar Tree has the power to indemnify him against such
liability. Dollar Tree has directors and officers liability insurance. Dollar
Tree 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, Dollar Tree is not prevented or restricted from making or
providing for indemnities in addition to those provided in the Articles of
Incorporation.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ----------- ---------------------------------------------------------------------------------------------------
<C> <S>
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 Dollar Tree, John F.
Megrue, Thomas A. Saunders, III, and certain shareholders ("Stockholders Agreement")
2.3** Securities Purchase Agreement dated September 30, 1993 among Dollar Tree, 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 Dollar Tree and
Michael N. Alper and Pamela J. Alper
2.5+ First Amendment to Stockholders Agreement effective March 13, 1995
2.6 Merger Agreement by and among Dollar Tree, Dollar Tree West, Inc. and Step Ahead, dated July 22,
1998 as amended by the Amendment to Merger Agreement dated October 20, 1998 (filed as Appendix B to
the Prospectus/Proxy Statement included in the Registration Statement)
2.7* Form of Agreement of Merger to be entered into by and between Dollar Tree West, Inc. and Step Ahead
</TABLE>
II-1
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ----------- ---------------------------------------------------------------------------------------------------
2.8 Form of Escrow Agreement to be entered into by and among Dollar Tree, the Shareholder
Representative, Step Ahead, and Escrow Agent (filed as Appendix C to the Prospectus/Proxy Statement
included in the Registration Statement)
<C> <S>
3.1++ Third Restated Articles of Incorporation of Dollar Tree, as amended
3.2** Second Restated Bylaws of Dollar Tree
4.1*** Amended and Restated Stockholders Agreement, as amended (See Exhibits 2.2 and 2.5 hereto)
4.2++ Third Restated Articles of Incorporation of Dollar Tree, as amended
4.3** Second Restated Bylaws of Dollar Tree
4.4** Form of specimen certificate representing Dollar Tree's Common Stock
4.5+++ Voting Agreement by and among Dollar Tree, Gary L. Cino, Janet Cino, Gary L. Nett, Trustee, and
Gary and Janet Cino, Trustees
5.1 Opinion of Hofheimer Nusbaum P.C., regarding the legality of the securities being registered
8.1 Tax Opinion of Latham & Watkins
10.1* Form of Non-Competition and Consulting Agreement to be entered into by and among Gary Cino, Dollar
Tree and Dollar Tree West, Inc.
10.2* Form of Non-Competition Agreements to be entered into by and among Dollar Tree, Dollar Tree West,
Inc., and Eric Stauss, Eric Leon, Anthony Leon and William Coyle, respectively
10.3* Form of Affiliate's Agreement
10.4* Agreement of Lease by and between Step Ahead and 3222 Winona Way, L.P. dated February 17, 1993
10.5* Step Ahead Investments, Inc. Long-Term Incentive Plan, as amended
10.6 Form of Option Agreements to be entered into by and between Dollar Tree and Gary Cino, Eric Stauss,
Eric Leon, Anthony Leon and William Coyle, respectively
21.1* Subsidiaries of Dollar Tree
23.1 Consent of Hofheimer Nusbaum, P.C. (included in Exhibit 5.1 hereto)
23.2 Consent of KPMG Peat Marwick LLP
23.3 Consent of PricewaterhouseCoopers LLP
23.4 Consent of Piper Jaffray Inc.
23.5 Consent of Latham & Watkins (included in Exhibit 8.1 hereto)
24.1* Power of Attorney (included in Part II of this Registration Statement)
99.1 Form of Proxy
</TABLE>
- ------------------------
* Previously filed.
** Incorporated by reference to Dollar Tree's Registration Statement on Form
S-1, No. 33-88502.
*** Incorporated by reference to Dollar Tree's Quarterly Report on Form 10-Q
for the quarter ended March 31, 1995.
**** Incorporated by reference to Dollar Tree's Current Report on Form 8-K
dated February 14, 1996.
+ Incorporated by reference to Dollar Tree's Registration Statement on Form
S-3, No. 333-28599.
++ Incorporated by reference to Dollar Tree's Quarterly Report on Form 10-Q
for the quarter ended June 30, 1996.
+++ Incorporated by reference to Dollar Tree's current report on Form 8-K
dated July 22, 1998.
II-2
<PAGE>
(b) Schedule
STEP AHEAD INVESTMENTS, INC.
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
CHARGED TO CHARGED
BEGINNING COSTS AND TO OTHER ENDING
DESCRIPTION BALANCE EXPENSES ACCOUNTS DEDUCTIONS BALANCE
- ---------------------------------------------------- ---------- ----------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C>
Allowance for Doubtful Accounts
Fiscal year ended January 28, 1996................ $ 38,000 $ 12,000 $ -- $ -- $ 50,000
Fiscal year ended January 26, 1997................ 50,000 1,000 -- -- 51,000
Fiscal year ended January 25, 1998................ 51,000 462,000 -- -- 513,000
Fiscal six months ended July 26, 1998............. 513,000 124,000 -- -- 637,000
</TABLE>
ITEM 22. UNDERTAKINGS.
(1) The undersigned registrant hereby undertakes:
(a) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth in
the registration statement. Notwithstanding the foregoing, any increase
or decrease in volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered) and any
deviation from the low or high end of the estimated maximum offering
range may be reflected in the form of prospectus filed with the
Commission pursuant to Rule 424(b) if, in the aggregate, the changes in
volume and price represent no more than a 20 percent change in the
maximum aggregate offering price set forth in the "Calculation of
Registration Fee" table in the effective registration statement;
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or
any material change to such information in the registration statement.
(b) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to
be the initial bona fide offering thereof.
(c) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
(2) The undersigned registrant hereby undertakes to respond to requests for
information that are incorporated by reference into the prospectus pursuant to
Item 4, 10(b), 11 or 13 of this Form S-4, within one business day of receipt of
such request, and to send the incorporated documents by first-class mail or
other equally prompt means. This includes information contained in documents
filed subsequent to the effective date of the registration statement through the
date of responding to the request.
II-3
<PAGE>
(3) The undersigned registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
(4) The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, 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 the registration statement shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial BONA FIDE offering thereof.
(5) The registrant hereby undertakes as follows:
(a) that prior to any public reoffering of the securities registered
hereunder through use of a prospectus that is a part of this registration
statement, by any person or party who is deemed to be an underwriter within
the meaning of Rule 145(c), the issuer undertakes that such reoffering
prospectus will contain the information called for by the applicable
registration form with respect to reofferings by persons who may be deemed
underwriters, in addition to the information called for by the other items
of the applicable form.
(b) that every prospectus (i) that is filed pursuant to paragraph (a)
immediately preceding, or (ii) that purports to meet the requirements of
section 10(a)(3) of the Act and is used in connection with an offering of
securities subject to Rule 415, will be filed as a part of an amendment to
the registration statement and will not be used until such amendment is
effective, and that, for purposes of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to
be the initial BONA FIDE offering thereof.
(6) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the registrant pursuant to the foregoing provisions, or otherwise, the
registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the 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 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 Act and will be governed by the financial
adjudication of such issue.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused amendment no. 3 to this registration statement to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of
Chesapeake, Commonwealth of Virginia, on the 9th day of November, 1998.
<TABLE>
<S> <C> <C>
DOLLAR TREE STORES, INC.
By: /s/ MACON F. BROCK, JR.
-----------------------------------------
Macon F. Brock, Jr.
PRESIDENT AND CHIEF EXECUTIVE OFFICER
</TABLE>
Pursuant to the requirements of the Securities Act of 1933, amendment no. 3
to this registration statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
NAME TITLE DATE
- ------------------------------ -------------------------- -------------------
<C> <S> <C>
*
- ------------------------------ Chairman of the Board; November 9, 1998
J. Douglas Perry Director
President and Chief
/s/ MACON F. BROCK, JR. Executive Officer;
- ------------------------------ Director (principal November 9, 1998
Macon F. Brock, Jr. executive officer)
* Executive Vice President,
- ------------------------------ Secretary, Treasurer and November 9, 1998
H. Ray Compton Director
Senior Vice President and
* Chief Financial Officer;
- ------------------------------ (principal financial and November 9, 1998
Frederick C. Coble accounting officer)
*
- ------------------------------ Vice Chairman; Director November 9, 1998
John F. Megrue
*
- ------------------------------ Director November 9, 1998
Allan W. Karp
*
- ------------------------------ Director November 9, 1998
Thomas A. Saunders, III
</TABLE>
II-5
<PAGE>
<TABLE>
<CAPTION>
NAME TITLE DATE
- ------------------------------ -------------------------- -------------------
<C> <S> <C>
*
- ------------------------------ Director November 9, 1998
Alan L. Wurtzel
*
- ------------------------------ Director November 9, 1998
Frank Doczi
</TABLE>
<TABLE>
<S> <C> <C> <C>
*By: /s/ MACON F. BROCK, JR.
-------------------------
Macon F. Brock, Jr.
ATTORNEY-IN-FACT
</TABLE>
II-6
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ----------- -----------------------------------------------------------------------------------------------------
<C> <S>
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 Dollar Tree, John F.
Megrue, Thomas A. Saunders, III, and certain shareholders ("Stockholders Agreement")
2.3** Securities Purchase Agreement dated September 30, 1993 among Dollar Tree, 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 Dollar Tree and Michael
N. Alper and Pamela J. Alper
2.5+ First Amendment to Stockholders Agreement effective March 13, 1995
2.6 Merger Agreement by and among Dollar Tree, Dollar Tree West, Inc. and Step Ahead, dated July 22, 1998
as amended by the Amendment to Merger Agreement dated October 20, 1998 (filed as Appendix B to the
Prospectus/Proxy Statement included in the Registration Statement)
2.7* Form of Agreement of Merger to be entered into by and between Dollar Tree West, Inc. and Step Ahead
2.8 Form of Escrow Agreement to be entered into by and among Dollar Tree, the Shareholder Representative,
Step Ahead, and Escrow Agent (filed as Appendix C to the Prospectus/ Proxy Statement included in the
Registration Statement)
3.1++ Third Restated Articles of Incorporation of Dollar Tree, as amended
3.2** Second Restated Bylaws of Dollar Tree
4.1*** Amended and Restated Stockholders Agreement, as amended (See Exhibits 2.2 and 2.5 hereto)
4.2++ Third Restated Articles of Incorporation of Dollar Tree, as amended
4.3** Second Restated Bylaws of Dollar Tree
4.4** Form of specimen certificate representing Dollar Tree's Common Stock
4.5+++ Voting Agreement by and among Dollar Tree, Gary L. Cino, Janet Cino, Gary L. Nett, Trustee, and Gary
and Janet Cino, Trustees
5.1 Opinion of Hofheimer Nusbaum, P.C., regarding the legality of the securities being registered
8.1 Tax Opinion of Latham & Watkins
10.1* Form of Non-Competition and Consulting Agreement to be entered into by and among Gary Cino, Dollar
Tree and Dollar Tree West, Inc.
10.2* Form of Non-Competition Agreements to be entered into by and among Dollar Tree, Dollar Tree West,
Inc., and Eric Stauss, Eric Leon, Anthony Leon and William Coyle, respectively
</TABLE>
<PAGE>
<TABLE>
<C> <S>
10.3* Form of Affiliate's Agreement
10.4* Agreement of Lease by and between Step Ahead and 3222 Winona Way, L.P. dated February 17, 1993
10.5* Step Ahead Investments, Inc. Long-Term Incentive Plan, as amended
10.6 Forms of Option Agreements to be entered into by and between Dollar Tree and Gary Cino, Eric Stauss,
Eric Leon, Anthony Leon and William Coyle, respectively
21.1* Subsidiaries of Dollar Tree
23.1 Consent of Hofheimer Nusbaum, P.C. (included in Exhibit 5.1 hereto)
23.2 Consent of KPMG Peat Marwick LLP
23.3 Consent of PricewaterhouseCoopers LLP
23.4 Consent of Piper Jaffray Inc.
23.5 Consent of Latham & Watkins (included in Exhibit 8.1 hereto)
24.1* Power of Attorney (included in Part II of this Registration Statement)
99.1 Form of Proxy
</TABLE>
- ------------------------
* Previously filed.
** Incorporated by reference to Dollar Tree's Registration Statement on Form
S-1, No. 33-88502.
*** Incorporated by reference to Dollar Tree's Quarterly Report on Form 10-Q for
the quarter ended March 31, 1995.
****Incorporated by reference to Dollar Tree's Current Report on Form 8-K dated
February 14, 1996.
+ Incorporated by reference to Dollar Tree's Registration Statement on Form
S-3, No. 333-28599.
++ Incorporated by reference to Dollar Tree's Quarterly Report on Form 10-Q for
the quarter ended June 30, 1996.
+++ Incorporated by reference to Dollar Tree's current report on Form 8-K dated
July 22, 1998.
<PAGE>
Exhibit 5.1
[Letterhead of Hofheimer Nusbaum, P.C.]
November 10, 1998
Dollar Tree Stores, Inc.
500 Volvo Parkway
Chesapeake, Virginia 23320
Re: Registration Statement of Form S-4 of Dollar Tree Stores, Inc.
("Dollar Tree")
Ladies and Gentlemen:
We have acted as counsel to Dollar Tree in connection with the filing of a
Registration Statement on Form S-4 on August 10, 1998 (the "Registration
Statement"), under the Securities Act of 1933, as amended (the "Act"), with
respect to the registration of up to 2,350,000 shares of Common Stock of Dollar
Tree ("Merger Shares") to be issued pursuant to and in the event the Merger
Agreement among Dollar Tree, Step Ahead Investments, Inc. and Dollar Tree West,
Inc. is approved and the transactions contemplated therein are consummated, as
further described in the Registration Statement.
We have examined such documents, records, and matters of law as we have
deemed necessary for purposes of this opinion and, based thereon, we are of the
opinion that the Merger Shares, when converted in the manner described in the
Registration Statement (including all exhibits thereto) and in compliance with
the Act and applicable state Blue Sky laws, will be duly and validly authorized,
issued, fully paid and non-assessable.
We consent to the use of this opinion as an exhibit to the Registration
Statement and to the reference to our name under the heading "Legal Matters" in
the Prospectus. In giving such consent, we do not hereby admit that we come
within the category of persons whose consent is required under Section 7 of the
Act or the Rules and Regulations of the Securities and Exchange Commission
promulgated under the Act.
Very truly yours,
/s/ Hofheimer Nusbaum, P.C.
<PAGE>
Exhibit 8.1
[Letterhead of Latham & Watkins]
November 10, 1998
Step Ahead Investments, Inc.
3222 Winona Way
North Highland, California 95660
RE: MERGER AGREEMENT DATED AS OF JULY 22, 1998, BY AND AMONG DOLLAR
TREE STORES, INC., DOLLAR TREE WEST, INC. AND STEP AHEAD
INVESTMENTS, INC.
Ladies and Gentlemen:
We have acted as counsel for Step Ahead Investments, Inc., a
California corporation ("Company"), in connection with the proposed merger (the
"Merger") of Dollar Tree West, Inc., a California corporation ("Sub") and a
wholly owned subsidiary of Dollar Tree Stores, Inc., a Virginia corporation
("Parent"), with and into the Company, pursuant to a Merger Agreement dated as
of July 22, 1998 (the "Merger Agreement"), by and among Parent, Sub and Company
under which each of the issued and outstanding shares of common stock of the
Company ("Company Shares") will be converted into the right to receive common
stock of Parent ("Parent Common Stock").
In that connection, pursuant to Section 6.20 of the Merger Agreement,
you have requested our opinion regarding certain United States federal income
tax consequences of the Merger. In providing our opinion, we have examined and
are relying upon (without any independent investigation or review thereof) the
truth and accuracy, at all relevant times, of the statements, covenants,
representations and warranties contained in (i) the Merger Agreement, (ii)
<PAGE>
LATHAM & WATKINS
Step Ahead Investments, Inc.
November 10, 1998
Page 2
the registration statement on Form S-4 which includes the Proxy
Statement/Prospectus (the "Registration Statement") filed by Parent with the
Securities and Exchange Commission (the "SEC"), (iii) the representations
made to us by Company, Parent and Sub each dated the date hereof (the
"Representation Letters"), and (iv) such other documents and corporate
records as we have deemed necessary or appropriate for purposes of our
opinion.
In addition, we have assumed that:
1. Original documents (including signatures) are authentic,
documents submitted to us as copies conform to the original documents, and
there has been due execution and delivery of all documents where due
execution and delivery are prerequisites to the effectiveness thereof;
2. The Merger will be consummated in the manner contemplated by
the Registration Statement and in accordance with the provisions of the
Merger Agreement, and will be effective under the laws of the State of
California;
3. All statements, descriptions and representations contained
in any of the documents referred to herein or otherwise made to us are true
and correct in all material respects and no actions have been taken or
will be taken which are inconsistent with such statements, descriptions or
representations or which make any such statements, descriptions or
representations untrue or incorrect in any material respect; and
4. Any statements made in any of the documents referred to
herein "to the knowledge of" or similarly qualified are correct and will
continue to be true, correct and complete at all times up to and including
the Closing Date, in each case without such qualification.
If any of the above-described assumptions is untrue for any reason or
if the Merger is consummated in a manner that is inconsistent with the manner in
which it is described in the Merger Agreement and Registration Statement, our
opinion as expressed below may be adversely affected and may not be relied upon.
Based upon the foregoing, and subject to the qualifications and
limitations stated herein, we are of the opinion that:
1. The Merger will constitute a "reorganization" for United
States federal income tax purposes within the meaning of Section 368(a)
of the Code;
2. No gain or loss will be recognized by Step Ahead
Shareholders ("Company Shareholders") upon the exchange of their
Company Shares solely for shares
<PAGE>
LATHAM & WATKINS
Step Ahead Investments, Inc.
November 10, 1998
Page 3
of Parent Common Stock pursuant to the Merger, except with respect to
cash, if any, received in lieu of fractional shares of Parent Common
Stock;
3. The aggregate tax basis of the Parent Common Stock received
by the Company Shareholders pursuant to the Merger (including fractional
shares of Parent Common Stock for which cash is received) will be the
same as the aggregate tax basis of the Company Shares exchanged therefor;
4. The holding period of the Parent Common Stock in the hands
of the Company Shareholders will include the holding period of such
shareholders' Company Shares exchange therefor pursuant to the Merger; and
5. A Company Shareholder who receives cash in lieu of a
fractional share of Parent Common Stock will recognize gain or loss equal
to the difference, if any, between such shareholder's tax basis in such
fractional share (as described in clause 3 above) and the amount of cash
received.
In addition to the matters set forth above, this opinion is subject to
the exceptions, limitations and qualifications set forth below.
1. This opinion represents and is based upon our best judgment
regarding the application of United States federal income tax laws arising
under the Internal Revenue Code of 1986, as amended, existing judicial
decisions, administrative regulations and published rulings and procedures.
Our opinion is not binding upon the Internal Revenue Service or the courts,
and there is no assurance that the Internal Revenue Service will not assert
a contrary position. Furthermore, no assurance can be given that future
legislative, judicial or administrative changes, on either a prospective or
retroactive basis, would not adversely affect the accuracy of the
conclusions stated herein. Nevertheless, we undertake no responsibility to
advise you of any new developments in the application or interpretation of
the United States federal income tax laws.
2. This opinion addresses only the matters set forth above and,
except as stated above, does not address any other United States federal,
state, local or foreign tax consequences that may result from the Merger or
any other transaction. In addition, we express no opinion regarding the
tax consequences of the Merger as applied to specific holders of shares, or
of options to purchase shares, of stock of Company, including, but not
limited to, dealers in securities, foreign persons and holders of shares
acquired upon exercise of stock options or in any other compensatory
transactions.
3. This opinion has been delivered to you for your use in
connection with the filing of the Registration Statement with the SEC and
for the purpose of satisfying the requirement set forth in Section 6.20 of
the Merger Agreement. It is not to be used, circulated,
<PAGE>
LATHAM & WATKINS
Step Ahead Investments, Inc.
November 10, 1998
Page 4
quoted or otherwise referred to for any other purpose without our express
written permission. We consent to the filing of this opinion as an
exhibit to the Registration Statement and to the references to our firm
name therein. In giving this consent, we do not admit that we are within
the category of persons whose consent is required under Section 7 of the
Securities Act of 1933, as amended, or the rules or regulations of the
SEC promulgated thereunder.
Very truly yours,
/s/ Latham & Watkins
<PAGE>
Exhibit 10.6
DOLLAR TREE STORES, INC.
NONQUALIFIED STOCK OPTION AGREEMENT
THIS NONQUALIFIED STOCK OPTION AGREEMENT ("Agreement"), is effective as of
5:00 p.m., Eastern Standard Time, on the ___ day of ________, 1998, by and among
_____________ (the "Holder") and Dollar Tree Stores, Inc., a Virginia
corporation ("Dollar Tree").
W I TN E S S E T H:
WHEREAS, in connection with the merger of Dollar Tree West, Inc., a
California corporation and wholly owned subsidiary of Dollar Tree ("Merger
Sub"), with and into Step Ahead Investments, Inc., a California corporation
("SAI"), the Holder, Merger Sub and Dollar Tree have entered into a
Non-Competition and Consulting Agreement dated ______ ___, 1998
("Non-Competition Agreement"); and
WHEREAS, the parties to the Non-Competition Agreement agreed that the
Holder and certain affiliates as described therein shall not compete with
Dollar Tree and its wholly owned subsidiaries ("Company") because such
competition may cause irreparable damage to Company; and
WHEREAS, the parties to the Non-Competition Agreement agreed that Dollar
Tree would grant the Holder an option to purchase shares of common stock of
Dollar Tree as consideration for entering into the Non-Competition Agreement.
NOW, THEREFORE, in consideration of good and valuable consideration
described above and the covenants hereinafter set forth, the receipt and
sufficiency of which is hereby acknowledged by the Holder, it is agreed as
follows:
1 GRANT OF OPTION.
Subject to the terms and conditions set forth below, Dollar Tree hereby
grants to the Holder, a nonqualified stock option (meaning not qualified to be
treated as an incentive stock option under Section 422 of the Internal Revenue
Code of 1986, as amended) (the "Option") to purchase an aggregate of one hundred
fifty thousand (150,000) shares of Dollar Tree's common stock, par value, $.01
per share ("Common Stock") for the purchase price of __________ dollars ($_____)
per share (the "Exercise Price").
2 MANNER OF EXERCISE.
The Holder may exercise the Option, to the extent vested and before lapse
(as described in Sections 3, 4 and 5 below), in whole or in part during the term
hereof by providing written notice to Dollar Tree which states the number of
shares of Common Stock with respect to which the Option is being exercised.
Such notice shall be delivered in person or through certified or registered mail
to Chief Financial Officer of Dollar Tree, 500 Volvo Parkway, Chesapeake,
Virginia 23320. The
<PAGE>
exercise of the Option, or any part thereof, shall be deemed effective upon
receipt of notice and payment complying with the conditions set forth herein.
The Option shall only be exercisable with respect to whole shares.
Notice of exercise shall be accompanied by full payment of the aggregate
Exercise Price of the shares of Common Stock being purchased. Payment may be
made by either (i) delivering cash, check, bank draft, or money order made
payable to Dollar Tree in the amount equal to such aggregate Exercise Price,
(ii) surrendering to the Company shares of Common Stock already owned by the
Holder with an aggregate Fair Market Value (as defined in Section 9) equal to
such aggregate Exercise Price or (iii) electing to have the Company retain
shares of Common Stock subject to the portion of the Option being exercised with
an aggregate Fair Market Value equal to such aggregate Exercise Price
Promptly after Dollar Tree receives the notice of exercise and payment, it
shall deliver to the Holder a certificate evidencing the shares so purchased,
registered in the Holder's name.
3 VESTING OF OPTION.
3.1 VESTING SCHEDULE. The Holder may exercise the Option granted
hereby only during the term hereof and only to the extent the Holder is vested
in such Option. The Holder shall vest in the Option based upon the following
schedule:
NUMBER OF YEARS FROM DATE OF GRANT CUMULATIVE PERCENTAGE VESTED
One Year - ______________ __, 1999 20%
Two Years - _____________ __, 2000 40%
Three Years - ___________ __, 2001 60%
Four Years - ____________ __, 2002 80%
Five Years - ____________ __, 2003 100%
3.2 ACCELERATION. Anything in Section 3.1 to the contrary
notwithstanding, the Option shall become fully vested immediately upon the
consummation of any merger of Dollar Tree into or with, or sale of all or
substantially all of Dollar Tree's assets to, another person or entity, but only
if the beneficial owners of Dollar Tree immediately prior to the consummation of
such transaction do not constitute, directly or indirectly, a majority of the
beneficial owners of the successor entity.
- --------------------------------------------------------------------------------
Nonqualified Stock Option Agreement -- Page 2
<PAGE>
4 TERM OF OPTION.
Subject to the provisions of this Agreement, the Option granted hereunder
shall automatically lapse if not vested and exercised as permitted hereby on or
before the earliest of (i) the occurrence of any event of lapse described in
Section 5 of this Agreement, (ii) one year after the Holder's death, or (iii)
____________ ___, 2008.
5 LAPSE OF OPTION DUE TO COMPETITION, SOLICITATION OF
EMPLOYEES OR DISCLOSURE OF CONFIDENTIAL INFORMATION
5.1 EVENTS OF LAPSE. The Holder acknowledges that Holder (i) as a
founder, director, officer and principal shareholder of SAI, has been
instrumental in the Business (as that term is defined in the Non-Competition
Agreement) of SAI and its success, (ii) has been privy to and had access to the
offices, personnel, technology, confidential and proprietary information of SAI
and (iii) as a consultant to the Company will be privy and have access to
offices, personnel, technology, confidential and proprietary information of the
Company. If Holder conducts or engages in any activities listed below [for five
(5) years following the Effective Time (as defined below) / during the term of
this Option], then the entire Option, whether vested or nonvested, shall
immediately lapse:
(a) engaging in Restricted Activities within the Restricted Area
(as defined below); or
(b) operating or promoting within the Restricted Area a store
using (or at least a 500 square foot area within a store dedicated to) a single
price point retail concept selling goods at a single price point at or below
$2.00;
(c) operating any variety, clearance, or close-out retail store
in the same shopping center as any retail location of SAI existing as of the
Effective Time (as defined below) or, in the case of an existing store of SAI
not in a shopping center, within one-quarter mile of such retail location.
(d) operating any business (i) under the names or names similar
to "98CENTS Clearance Center," "Clearance 98CENTS Centers," "Everything 98CENTS
... or less," or "Step Ahead Investments"; (ii) advertising or promoting
outside or within a store using the terms, or terms similar to "Everything
98CENTS," 98CENTS Clearance Centers," and "Clearance 98CENTS Centers"; or (iii)
under any name containing the words "98CENTS," "Tree," or "Super Dollar,"
including their plurals.
(e) directly or indirectly, hiring or attempting to hire any
employee of Company or SAI, or soliciting, inducing, or attempting to solicit or
induce (other than through newspaper classified advertisements) any employee of
Company or SAI to leave his or her job for any reason whatsoever without the
written consent of Dollar Tree. For purposes of this paragraph,
- --------------------------------------------------------------------------------
Nonqualified Stock Option Agreement -- Page 3
<PAGE>
an "employee" shall mean, as of any given date, anyone who has been an employee
of Company or SAI or any affiliate at any time during the four (4) month period
prior to such date.
(f) intentionally copying, reproducing, disclosing or divulging
to any third party or using or permitting others to use any material
confidential information of SAI or the Company (including financial information,
sources of supplies and materials, prospective and existing expansion programs,
joint ventures and affiliate agreements, business systems, marketing methods,
business affairs, trade secrets, details of supplier contracts, operational
methods and marketing plans or strategies). Notwithstanding the foregoing, use
by the Holder of the confidential information described in this Section 5.1(f)
in the operation of or in the leasing of any real property or in connection with
a business not coming within the definition of Restricted Activities or for
other personal use (provided such personal use does not conflict with any
provision of this Agreement or the Non-Competition Agreement) shall not be
deemed an event of lapse. This Section 5.1(f) shall not apply if (a) such
information was already known to others not bound by a duty of confidentiality
or such information is or becomes publicly available through no fault of Holder
or Holder's affiliates, (b) the use of such information is necessary or
appropriate in making any filing or obtaining any consent or approval required
for the consummation of the closing under the Merger Agreement, or (c) the
furnishing or use of such information is required by legal proceedings.
5.2 As used in this Agreement, the following terms have the following
meanings:
(a) "Restricted Area" shall mean each state in which either
Dollar Tree or SAI, as of the Effective Time, has a store or otherwise carries
on the Business.
(b) "Restricted Activities" means the operation of (i) a
wholesale merchandise business that supplies stores of the type described in
clause (ii) hereof, or (ii) any store engaged in the retail sale of goods (e.g.,
toys, health and beauty aids, food, books, party goods, stationery, hardware,
housewares, jewelry, hair products, crafts, pet supplies, etc.) where at least
eighty percent (80%) of such goods are sold at or below $2.00.
(c) A "shopping center" means a group of at least six (6) retail
shops organized in a strip or mall configuration (but not necessarily in
attached or adjacent buildings) sharing common parking areas and having the same
landlord or leasing agent.
(d) "Effective Time" shall have the same definition as contained
in the Merger Agreement dated July 22, 1998 among Dollar Tree, Merger Sub and
SAI, as amended.
6 CERTAIN ADJUSTMENTS.
If the outstanding shares of Common Stock of Dollar Tree hereafter are
increased or decreased or changed into or exchanged for a different number or
kind of shares or other securities of Dollar Tree by reason of a
recapitalization, reincorporation, reclassification, stock split-up, reverse
- --------------------------------------------------------------------------------
Nonqualified Stock Option Agreement -- Page 4
<PAGE>
stock split, combination of shares, other dividend or other distribution payable
in capital stock or other similar corporation transaction, then the Board shall
make an appropriate adjustment in the number and kind of shares which are
purchasable pursuant to the Option. Any adjustment in the Option shall be made
without change in the total price applicable to the unexercised portion of the
Option, but with a corresponding adjustment in the purchase price per share. In
the event of any merger of Dollar Tree into or with, or sale of all or
substantially all of Dollar Tree's assets to, another person or entity, the
Option shall continue in full force and effect (subject to Section 3.2 hereof)
and shall thereafter represent the right to receive the kind and amount of
shares of stock and other securities and property (including cash) receivable in
connection with such transaction by a holder of the number of shares of Dollar
Tree Common Stock issuable upon exercise of this Option immediately prior to
such transaction.
7 COMPLIANCE WITH SECURITIES LAWS.
7.1 REPRESENTATIONS AND WARRANTIES. Holder represents and warrants
as follows:
(a) Holder is experienced in investment and business matters and
understands fully the nature of the risks involved in his investment in the
Option.
(b) Holder is acquiring the Option and upon exercise thereof
will acquire the shares of Common Stock for his own account for investment and
not for distribution or resale to others.
(c) Holder is an "accredited investor" under the Act. Holder is
a natural person whose individual net worth, or joint net worth with Holder's
spouse, exceeds $1,000,000, Holder's individual income was in excess of $200,000
(or jointly with Holder's spouse was in excess of $300,000) in each of the two
most recent years. Holder reasonably expects an income in excess of such amount
in the current year.
7.2 INDEMNIFICATION. Holder agrees to indemnify the Company and its
agents for any and all losses (including attorneys' fees) incurred by any of
them as a result of their reliance on representations and warranties contained
herein or on information contained in Section 7.1 hereof, including, but not
limited to, claims arising under federal and state securities laws, as well as
common law claims.
8 LIMITATIONS ON TRANSFER OF OPTION.
The Holder may not transfer or assign the Option granted under this
Agreement except by will or the laws of descent and distribution. Transfer to
the parties identified in the preceding sentence may only be effected upon
written notice to Dollar Tree. The Holder may not pledge or hypothecate the
Option in any way, and such Option shall not be subject to execution,
attachment, or similar process. After the death of Holder, any exercisable
portion of the Option may, prior to
- --------------------------------------------------------------------------------
Nonqualified Stock Option Agreement -- Page 5
<PAGE>
the time when the Option lapses under Section 4, be exercised by a Permitted
Transferee, by the Holder's personal representative or by any person empowered
to do so under the Holder's will or the applicable laws of descent and
distribution. Notwithstanding any transfer permitted by this Section 8, the
Option shall be exercisable only during the term stated in Section 4 hereof.
9 FAIR MARKET VALUE. The phrase "Fair Market Value" means, with respect
to the Common Stock, the following:
9.1 if the Common Stock is listed or admitted to unlisted trading
privileges on any national securities exchange or is not so listed or admitted
but transactions in the Common Stock are reported on The Nasdaq National Market,
the last sale price of the Common Stock on such exchange or reported by The
Nasdaq National Market as of such date (or if no shares were traded on such day,
as of the next preceding day on which there was such a trade);
9.2 if the Common Stock is not so limited or admitted to unlisted
trading privileges or reported on The Nasdaq National Market, and bid/asked
prices therefor in the over-the-counter market are reported on the Nasdaq
Small-Cap Market or by the National Quotation Bureau, Inc. (or any comparable
reporting service), the average of the closing bid and asked prices as of such
date, as so reported on The Nasdaq Small-Cap Market or, if not so reported
thereon, as reported by the National Quotation Bureau, Inc. (or such comparable
reporting service); or
9.3 if the Common Stock is not so listed or admitted to unlisted
trading privileges or reported on The Nasdaq National Market, and such bid and
asked prices are not so reported, such price as the Company's Board of Directors
determines in good faith in the exercise of its reasonable discretion.
10 RIGHT TO WITHHOLD.
The Company is entitled to (a) withhold and deduct from any amounts which
may be due and owing to the Holder from the Company or make other arrangements
for the collection of all legally required amounts necessary to satisfy any and
all federal, state and local withholding and employment-related tax requirements
attributable to the grant or exercise of the Option or otherwise incurred with
respect to the Option, or (b) require the Holder promptly to remit the amount of
such withholding liability to the Company before taking any action with respect
to the exercise of the Option or issuance of any stock certificate either to the
Holder or any transferee. The Board, in its sole discretion, may permit a
Holder to pay all or any portion of such withholding liability either (i) by
surrendering to the Company shares of Common Stock already owned by the Holder
or (ii) by electing to have the Company retain shares of Common Stock subject to
the portion of the Option being exercised. In either case, the shares of Common
Stock surrendered or retained shall have an aggregate Fair Market Value that is
no less than the amount of such required withholding.
- --------------------------------------------------------------------------------
Nonqualified Stock Option Agreement -- Page 6
<PAGE>
11 RIGHTS AS A SHAREHOLDER. The Holder shall have no rights as a
shareholder with respect to any shares of Common Stock covered by the Option
until such person shall have become the holder of record of such shares, and no
adjustments shall be made for dividends or other distributions or other rights
as to which there is a record date preceding the date the such person becomes
the holder of record of such shares, except as the Company may determine
pursuant to Section 6 hereof.
12 MISCELLANEOUS. This Agreement shall be governed by the internal laws
of the Commonwealth of Virginia. The Circuit Court of the City of Norfolk and
the United States District Court, Eastern District of Virginia, Norfolk Division
shall be the exclusive courts of jurisdiction and venue for any litigation,
special proceeding or other proceeding as between the parties that may be
brought, or arise out of, in connection with, or by reason of this Agreement.
The parties hereby consent to the jurisdiction of such courts. This Agreement
shall be binding upon and inure to the benefit of each party hereto, its
successors and permitted assigns.
[Remainder of page left intentionally blank.]
IN WITNESS WHEREOF, the undersigned have hereunto affixed their signatures.
DOLLAR TREE STORES, INC.
By:
--------------------------------------
Its: Executive Vice President
HOLDER:
------------------------------------------
[Name]
- --------------------------------------------------------------------------------
Nonqualified Stock Option Agreement -- Page 7
<PAGE>
EXHIBIT 23.2
INDEPENDENT AUDITORS' CONSENT
The Board of Directors and Shareholders
Dollar Tree Stores, Inc.:
We consent to the incorporation by reference in this Registration Statement
Amendment No. 3 on Form S-4 (333-61139) of our report dated January 20, 1998,
with respect to the consolidated balance sheets of Dollar Tree Stores, Inc. and
subsidiaries as of December 31, 1996 and 1997 and the related consolidated
income statements and statements of shareholders' equity and cash flows for each
of the years in the three-year period ended December 31, 1997, which report
appears in the Annual Report on Form 10-K for the year ended December 31, 1997,
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
November 9, 1998
<PAGE>
EXHIBIT 23.3
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Prospectus/Proxy Statement constituting
part of this Registration Statement on Form S-4 of Dollar Tree Stores, Inc. of
our report dated August 8, 1998 relating to the financial statements of Step
Ahead Investments, Inc., which appears in such Prospectus/Proxy Statement. We
also consent to the application of such report to the Financial Statement
Schedule for each of the three fiscal years in the period ended January 25, 1998
listed under Item 21(b) of this Registration Statement when such schedule is
read in conjunction with the financial statements referred to in our report. The
audits referred to in such report also included the schedule. We also consent to
the references to us under the headings "Experts" and "Selected Historical
Financial Data of Step Ahead" in such Prospectus/Proxy Statement. However, it
should be noted that PricewaterhouseCoopers LLP has not prepared or certified
such "Selected Historical Financial Data of Step Ahead."
/s/ PRICEWATERHOUSECOOPERS LLP
Sacramento, California
November 9, 1998
<PAGE>
EXHIBIT 23.4
CONSENT OF PIPER JAFFRAY INC.
We hereby consent to the inclusion in the Registration Statement of Dollar Tree
Stores, Inc. ("Dollar Tree") relating to the proposed merger of a wholly owned
subsidiary of Dollar Tree with and into Step Ahead Investments, Inc., of our
opinion letter appearing as Appendix E to the Prospectus/Proxy Statement which
is a part of the Registration Statement, and to the references of our firm name
therein. In giving such consent, we do not thereby admit that we come within the
category of person whose consent is required under Section 7 or Section 11 of
the Securities Act of 1933, as amended, or the rules and regulations adopted by
the Securities and Exchange Commission thereunder nor do we admit that we are
experts with respect to any part of such Registration Statement within the
meaning of the term "experts" as used in the Securities Act of 1933, as amended,
or the rules and regulations of the Securities and Exchange Commission
thereunder.
Very truly yours,
<TABLE>
<S> <C> <C> <C>
By: /s/ PIPER JAFFRAY INC.
-------------------------
Piper Jaffray Inc.
</TABLE>
Minneapolis, Minnesota
November 9, 1998
<PAGE>
STEP AHEAD INVESTMENTS, INC.
PROXY FOR SPECIAL MEETING OF SHAREHOLDERS
DECEMBER 10, 1998
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS OF STEP AHEAD
INVESTMENTS, INC.
The undersigned hereby appoints Gary Cino and David Reed, or either of them,
as proxies, each with full power of substitution, and hereby authorizes them to
represent and to vote, as designated below, all shares of Common Stock, no par
value, and Preferred Stock, no par value, of Step Ahead Investments, Inc. ("Step
Ahead"), held of record by the undersigned on November 10, 1998 at the Special
Meeting of Shareholders of Step Ahead to be held at the executive offices of
Step Ahead, located at 3222 Winona Way, North Highlands, California 95660 on
December 10, 1998, at 10:00 a.m., local time, and at any adjournments or
postponements thereof.
1. Approval of the Merger Agreement and the Merger, as described in the
accompanying Prospectus/Proxy Statement.
/ / FOR / / AGAINST / / ABSTAIN
2. Selection of Gary Cino as your representative to act for and on your behalf
with respect to all matters arising in connection with shares of Dollar Tree
common stock to be placed in escrow.
/ / FOR / / AGAINST / / ABSTAIN
3. The transaction of such other business as may properly come before the
Special Meeting or any adjournments or postponements of the Special Meeting.
The Board of Directors recommends that you vote FOR the proposals.
THIS PROXY WILL BE VOTED AS DIRECTED ABOVE. WHEN NO CHOICE IS INDICATED,
THIS PROXY WILL BE VOTED FOR THE PROPOSALS. IN THEIR DISCRETION, THE PROXY
HOLDERS ARE AUTHORIZED TO VOTE, IN ACCORDANCE WITH THEIR DISCRETION, UPON SUCH
OTHER BUSINESS AS MAY PROPERLY COME BEFORE THE SPECIAL MEETING OR ANY
ADJOURNMENTS OR POSTPONEMENTS THEREOF.
(Continued and to be signed on reverse side)
<PAGE>
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS OF STEP AHEAD
INVESTMENTS, INC.
__________________________________________
Print Shareholder(s) name
__________________________________________
Signatures of Shareholder(s) or
Authorized Signatory(ies)
__________________________________________
Dated: ______________________________,1998
Please sign exactly as your name appears
on your stock certificate. If shares of
stock stand of record in the names of two
or more persons or in the name of husband
and wife, whether as joint tenants or
otherwise, both or all of such persons
should sign the proxy. If shares of stock
are held of record by a corporation, the
proxy should be executed by the president
or vice president and the secretary or
assistant secretary. Executors,
administrators or other fiduciaries who
execute the above proxy for a deceased
shareholder should give their full title.
Please date the proxy.
WHETHER OR NOT YOU EXPECT TO ATTEND THE SPECIAL MEETING, PLEASE
COMPLETE, DATE, SIGN AND PROMPTLY RETURN THE PROXY IN THE
ENCLOSED POSTAGE PAID ENVELOPE SO THAT YOUR SHARES MAY BE
REPRESENTED AT THE SPECIAL MEETING
