<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 4, 1998
REGISTRATION NO. 333-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------------
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
-----------------
DOLLAR TREE STORES, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
VIRGINIA 54-1387365
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
</TABLE>
------------------------
<TABLE>
<S> <C>
500 VOLVO PARKWAY H. RAY COMPTON
CHESAPEAKE, VIRGINIA 23320 DOLLAR TREE STORES, INC.
(757) 321-5000 500 VOLVO PARKWAY
(Address and telephone number of CHESAPEAKE, VIRGINIA 23320
registrant's principal executive offices) (757) 321-5000
(Name, address and telephone number
of agent for service)
</TABLE>
------------------------
copies to:
<TABLE>
<S> <C>
WILLIAM A. OLD, JR. PATRICK J. RONDEAU
HOFHEIMER NUSBAUM, P.C. BRENT B. SILER
999 WATERSIDE DRIVE, SUITE 1700 HALE AND DORR LLP
NORFOLK, VIRGINIA 23510 60 STATE STREET
(757) 622-3366 BOSTON, MASSACHUSETTS 02109
(617) 526-6000
</TABLE>
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
-------------------
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box: / /
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box: / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering: / / _______
If this Form is a post-effective amendment filed pursuant to Rule 426(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering: / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box: / /
------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
PROPOSED PROPOSED
NUMBER OF SHARES MAXIMUM OFFERING MAXIMUM
TITLE OF SHARES TO BE PRICE AGGREGATE OFFERING AMOUNT OF
TO BE REGISTERED REGISTERED(1) PER SHARE(2) PRICE(2) REGISTRATION FEE
<S> <C> <C> <C> <C>
Common Stock, $0.01 Par Value............. 5,175,000 $42.25 $218,643,750 $64,499.91
</TABLE>
(1) Includes 675,000 shares to cover Underwriters' over-allotment options.
(2) Estimated pursuant to paragraph (c) of Rule 457 solely for the purpose of
calculating the registration fee, based upon the average of the reported
high and low sales prices for a share of Common Stock on March 3, 1998, as
reported on the Nasdaq National Market.
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 THEREUNDER 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>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
<PAGE>
SUBJECT TO COMPLETION, DATED MARCH 4, 1998
4,500,000 SHARES
[LOGO] DOLLAR TREE STORES, INC.
COMMON STOCK
ALL OF THE 4,500,000 SHARES OF COMMON STOCK OFFERED HEREBY ARE BEING SOLD BY
THE SELLING SHAREHOLDERS. SEE "PRINCIPAL AND SELLING SHAREHOLDERS." THE COMPANY
WILL NOT RECEIVE ANY OF THE PROCEEDS FROM THE SALE OF SHARES BY THE SELLING
SHAREHOLDERS.
THE COMPANY'S COMMON STOCK IS TRADED ON THE NASDAQ NATIONAL MARKET UNDER THE
SYMBOL "DLTR." ON MARCH 3, 1998, THE LAST REPORTED SALE PRICE OF THE COMMON
STOCK ON THE NASDAQ NATIONAL MARKET WAS $42.25 PER SHARE. SEE "PRICE RANGE OF
COMMON STOCK."
SEE "RISK FACTORS" BEGINNING ON PAGE 6 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE COMMON STOCK OFFERED
HEREBY.
-----------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
<TABLE>
<CAPTION>
PRICE UNDERWRITING PROCEEDS TO SELLING
TO PUBLIC DISCOUNT (1) SHAREHOLDERS (2)
<S> <C> <C> <C>
PER SHARE.............................. $ $ $
TOTAL (3).............................. $ $ $
</TABLE>
(1) SEE "UNDERWRITING" FOR INFORMATION CONCERNING INDEMNIFICATION OF THE
UNDERWRITERS AND OTHER MATTERS.
(2) BEFORE DEDUCTING ESTIMATED OFFERING EXPENSES OF $600,000, WHICH WILL BE PAID
BY THE SELLING SHAREHOLDERS.
(3) THE SELLING SHAREHOLDERS HAVE GRANTED TO THE UNDERWRITERS A 30-DAY OPTION TO
PURCHASE UP TO 675,000 ADDITIONAL SHARES OF COMMON STOCK SOLELY TO COVER
OVER-ALLOTMENTS, IF ANY. IF THE UNDERWRITERS EXERCISE THIS OPTION IN FULL,
THE PRICE TO PUBLIC WILL TOTAL $ , THE UNDERWRITING DISCOUNT WILL
TOTAL $ AND THE PROCEEDS TO SELLING SHAREHOLDERS WILL TOTAL
$ . SEE "PRINCIPAL AND SELLING SHAREHOLDERS" AND "UNDERWRITING."
THE SHARES OF COMMON STOCK ARE OFFERED BY THE SEVERAL UNDERWRITERS NAMED
HEREIN WHEN, AS AND IF DELIVERED TO AND ACCEPTED BY THE UNDERWRITERS AND SUBJECT
TO THEIR RIGHT TO REJECT ANY ORDER IN WHOLE OR IN PART. IT IS EXPECTED THAT
DELIVERY OF THE CERTIFICATES REPRESENTING THE SHARES WILL BE MADE AGAINST
PAYMENT THEREFOR AT THE OFFICE OF NATIONSBANC MONTGOMERY SECURITIES LLC ON OR
ABOUT , 1998.
-------------------
NATIONSBANC MONTGOMERY SECURITIES LLC
BT ALEX. BROWN
<PAGE>
GOLDMAN, SACHS & CO.
SALOMON SMITH BARNEY
, 1998
<PAGE>
[Map of Store Locations]
[External Store Photo]
[Three Internal Store Photos]
Certain persons participating in this offering may engage in transactions
that stabilize, maintain or otherwise affect the price of the Common Stock. Such
transactions may include stabilizing transactions and the purchase of Common
Stock to cover syndicate short positions. For a description of these activities,
see "Underwriting."
2
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED
INFORMATION (INCLUDING THE FINANCIAL STATEMENTS AND THE NOTES THERETO) INCLUDED
ELSEWHERE IN THIS PROSPECTUS OR INCORPORATED BY REFERENCE HEREIN, WHICH SHOULD
BE READ IN ITS ENTIRETY. UNLESS OTHERWISE INDICATED, ALL INFORMATION IN THIS
PROSPECTUS ASSUMES NO EXERCISE OF THE UNDERWRITERS' OVER-ALLOTMENT OPTION. SEE
"UNDERWRITING."
THE COMPANY
Dollar Tree Stores, Inc. ("Dollar Tree" or the "Company") is the leading
operator of discount variety stores offering merchandise at the $1.00 price
point. The Company's stores, which are designed to be the modern day equivalent
of the traditional variety store, offer a wide assortment of quality everyday
general merchandise in many traditional variety store categories, including
housewares, seasonal goods, food, toys, health and beauty aids, gifts, party
goods, stationery, books, hardware and other consumer items. As of December 31,
1997, the Company operated 887 stores, principally in strip centers and malls,
in 26 states in the Southeastern, Midwestern, Mid-Atlantic, Southcentral and
Northeastern United States.
Dollar Tree has increased its net sales and operating income in each year
since its inception in 1986. During the past five years, the Company has grown
significantly, with the number of stores increasing from 256 at December 31,
1992 to 887 at December 31, 1997. The Company's net sales increased from $167.8
million in 1993 to $635.5 million in 1997, a compound annual growth rate of
39.5%. In addition, operating income increased from $18.8 million (excluding
recapitalization expenses) in 1993 to $81.8 million in 1997, a compound annual
growth rate of 44.4%.
Dollar Tree believes that its ability to operate successfully in major
metropolitan areas, mid-sized cities and small towns, in both strip center and
mall based locations, its ability to concentrate multiple stores in a single
market and its attractive store level economics provide it with a wide range of
real estate opportunities and will facilitate its continued expansion. The
Company's expansion plan is to increase its presence in its existing markets and
to selectively enter new markets. Dollar Tree opened 94 new stores in 1995, 104
new stores in 1996 and 151 new stores in 1997. In addition, the Company added
136 stores through its acquisition of Dollar Bills, Inc. ("Dollar Bills") in
January 1996. The Company anticipates expanding by approximately 200 to 205
stores in 1998. The Company is focusing its expansion strategy 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. In 1997, the average investment per new store, including capital
expenditures, initial inventory and pre-opening costs, was approximately
$168,000, while the average new store (i.e., a store for which 1997 was its
first full year of operations) had net sales of approximately $728,000. The
Company's Dollar Tree stores have historically been profitable within the first
full year of operation, with an average store level operating income of
approximately $163,000 (approximately 22% of sales) for stores whose first full
year of operation was 1997. The operating performance of the Company's stores
has been very consistent, with over 90% of its stores having store level
operating income margins in excess of 15% in 1997.
Dollar Tree's management strives to exceed its customers' expectations of
the range and quality of products that can be purchased for $1.00. Management
believes that many of the items Dollar Tree sells for $1.00 are typically sold
for higher prices elsewhere. The Company supplements its wide assortment of
quality everyday core merchandise with a changing mix of new and exciting
products, including seasonal goods (such as Christmas and Easter goods) and, to
a limited extent, selected closeout merchandise. The wide variety and freshness
of merchandise and the $1.00 price point create excitement for customers, which
management believes results in "impulse" purchases and encourages consumers to
make return visits to the store.
Each of Dollar Tree's three executive officers has between 19 and 29 years
of experience in the retail industry and they have worked together for the past
19 years. In addition to their experience with Dollar Tree, they helped to
manage the profitable growth of K&K Toys, Incorporated ("K&K Toys") from one toy
3
<PAGE>
store to a 136-store, mall-based toy retailer. K&K Toys was profitable in every
year of its operation from 1970 until its sale in 1991.
Dollar Tree believes that, given the Company's pricing structure,
maintaining sufficient margins and tight control over store expenses, corporate
expenses and inventories is critical to its success. Dollar Tree increased its
operating income margin from 11.2% (excluding recapitalization expenses) in 1993
to 12.9% in 1997. 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.
RECENT DEVELOPMENTS
The Company recently replaced its Norfolk 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 the Company's capacity to approximately 1,600 stores.
In February 1998, the Company contracted to purchase approximately 43 acres
of land in Olive Branch, Mississippi, for the purpose of building a new 425,000
square foot distribution center to replace the existing leased facility located
in Memphis, Tennessee. The Company expects that the new Olive Branch facility
will cost approximately $20 million and that, upon completion of the facility,
the Company's capacity to service stores will increase to approximately 2,000
stores. The Company anticipates that the facility will be operational in early
1999.
------------------------
The Company was incorporated under the laws of Virginia in 1986 as Only One
Dollar, Inc. and changed its name to Dollar Tree Stores, Inc. on December 14,
1993. The Company's principal executive and administrative offices are located
at 500 Volvo Parkway, Chesapeake, Virginia 23320, and the Company's telephone
number is (757) 321-5000. References to the Company and Dollar Tree include the
Company's wholly-owned subsidiaries.
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered by the Selling Shareholders......... 4,500,000 shares
Common Stock to be outstanding after the offering........ 39,153,617 shares(1)
Nasdaq National Market symbol............................ DLTR
</TABLE>
- ------------------------
(1) Based on shares outstanding at February 28, 1998. Does not include up to
5,107,129 shares of Common Stock issuable upon the exercise of (i) options
to purchase 1,383,863 shares of Common Stock and (ii) warrants to purchase
3,723,266 shares of Common Stock outstanding at such date.
4
<PAGE>
SUMMARY FINANCIAL INFORMATION AND CERTAIN OPERATING DATA
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA AND SALES PER SQUARE FOOT DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1995 1996 1997
--------- --------- ---------
<S> <C> <C> <C>
INCOME STATEMENT DATA:
Net sales...................................................................................... $ 300,229 $ 493,037 $ 635,473
Gross profit................................................................................... 112,677 182,137 238,357
Selling, general and administrative expenses:
Operating expenses........................................................................... 70,504 111,401 143,438
Depreciation and amortization................................................................ 5,468 10,527 13,125
--------- --------- ---------
Total.................................................................................... 75,972 121,928 156,563
Operating income............................................................................... 36,705 60,209 81,794
Net income..................................................................................... $ 20,963 $ 33,835 $ 48,574
--------- --------- ---------
--------- --------- ---------
Basic net income per share(1).................................................................. $ 0.56 $ 0.89 $ 1.24
--------- --------- ---------
--------- --------- ---------
Diluted net income per share(1)................................................................ $ 0.51 $ 0.80 $ 1.13
--------- --------- ---------
--------- --------- ---------
Weighted average number of common shares outstanding, in thousands(1).......................... 37,271 38,217 39,033
--------- --------- ---------
--------- --------- ---------
Weighted average number of common shares and common share equivalents outstanding, in
thousands(1)................................................................................. 41,026 42,171 43,106
--------- --------- ---------
--------- --------- ---------
SELECTED OPERATING DATA:
Number of stores open at end of period(2):
Mall......................................................................................... 173 202 235
Strip center................................................................................. 327 535 652
--------- --------- ---------
Total.................................................................................... 500 737 887
--------- --------- ---------
--------- --------- ---------
Net sales growth(2)............................................................................ 29.6% 64.2% 28.9%
Comparable store net sales increase(3)......................................................... 7.3% 6.2% 7.8%
Average net sales per store(4)................................................................. $ 649 $ 691 $ 767
Average net sales per square foot(4):
Mall......................................................................................... $ 246 $ 249 $ 239
Strip center................................................................................. $ 209 $ 220 $ 217
All stores................................................................................... $ 221 $ 229 $ 222
</TABLE>
<TABLE>
<CAPTION>
AS OF
DECEMBER 31,
1997
-------------
<S> <C>
BALANCE SHEET DATA:
Working capital................................................................................................. $ 60,213
Total assets.................................................................................................... 272,576
Total debt...................................................................................................... 31,121
Shareholders' equity............................................................................................ 154,926
</TABLE>
- ------------------------
(1) Basic net income per share has been computed by dividing net income by the
weighted average number of common shares outstanding. Diluted net income per
share has been computed by dividing net income by the weighted average
number of common shares and common share equivalents outstanding. Common
share equivalents include the weighted average number of shares subject to
stock options and warrants outstanding at the end of the period, after
applying the treasury stock method.
(2) The Company closed 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.
(3) Comparable store net sales increase compares net sales for stores open at
the beginning of the first of the two periods compared. The comparable store
net sales increase calculation for 1997 includes net sales of Dollar Bills
stores for the twelve months ended December 31, 1996 and December 31, 1997.
(4) For stores open the entire period presented. Dollar Bills stores are only
included in the calculation for 1997. The 1996 calculation does not include
the 28 stores expanded in 1996 due to remodeling and/or relocation, which
increased total square footage by approximately 29,900 square feet. The 1997
calculation does not include the 29 stores expanded in 1997 due to
remodeling and/or relocation, which increased total square footage by
approximately 46,000 square feet.
5
<PAGE>
RISK FACTORS
BEFORE PURCHASING THE SHARES OF COMMON STOCK OFFERED HEREBY, A PROSPECTIVE
INVESTOR SHOULD CONSIDER THE SPECIFIC FACTORS SET FORTH BELOW AS WELL AS THE
OTHER INFORMATION SET FORTH ELSEWHERE IN THIS PROSPECTUS AND INCORPORATED HEREIN
BY REFERENCE. SEE "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS" AND "BUSINESS" FOR A DESCRIPTION OF OTHER FACTORS
AFFECTING THE BUSINESS OF THE COMPANY GENERALLY.
RISKS ASSOCIATED WITH EXPANSION PLANS
The Company has grown from its initial five stores in 1986 to 887 stores at
December 31, 1997 and its net sales have grown significantly in the past several
years. The Company intends to continue to pursue an aggressive store opening
strategy. The continued growth of the Company is dependent, in large part, upon
the Company's ability to open new stores on a timely basis and to operate them
profitably. 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 square foot will occur as the average store size
increases. The Company expects to expand by approximately 200 to 205 stores in
1998. As of December 31, 1997, the Company had signed leases with respect to 78
new stores and had reached an agreement in principle with respect to an
additional 44 new stores to open in 1998. However, successful expansion is
subject to various contingencies, many of which are beyond the Company'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 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 the
Company's store leases contain provisions with which the Company does not
comply--see "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 the Company has no or
only limited store operations (see "Business--Growth Strategy"), (vii) the
ability to expand internal systems to accomodate the Company's growth and (viii)
the ability to manage the Company's increased distribution demands. As a result,
there can be no assurance that the Company will be able to achieve its targets
for opening new stores, that its new stores will be profitable or achieve net
sales and profitability comparable to the Company's existing stores or that
comparable store net sales increases will continue. Furthermore, there can be no
assurance that the Company will anticipate all of the changing demands which its
expanding operations will impose on its systems and personnel. Any failure of
the Company to successfully and profitably execute its expansion plans could
have a material adverse effect on the Company's business and results of
operations.
RISKS ASSOCIATED WITH IMPORTS
The Company is dependent on foreign imports, particularly its imports from
China. In 1996 and 1997, the Company 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 the Company's Chinese
imports flow), Thailand, Italy, Mexico and Indonesia. The Company expects
imports to continue to account for approximately 35% to 40% of total purchases
at retail. In addition, the Company believes that a substantial portion of the
goods the Company purchases from domestic vendors is indirectly imported from
foreign countries. China is the source for a substantial majority of the
Company's direct imports and, the Company believes, is also the largest source
of its indirect imports.
The Company'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; 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
6
<PAGE>
fluctuations; foreign government regulations; lack of compliance by foreign
manufacturers with U.S. consumer protection laws and intellectual property laws
(for which the Company may be responsible as the importer of record or seller);
and political unrest. While the Company believes that it could find alternative
sources of supply in response to an increase in tariffs, duties or other 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 the Company. Any of the
risks referred to in this paragraph could have a material adverse effect on the
Company's business and results of operations.
The Company'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 3, 1998. 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 and allegations regarding 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 the Company 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 the 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 the
possibility of punitive import duties, if such monitoring reveals inadequate
Chinese enforcement of the agreements. If the USTR decides that certain
categories of Chinese products that the Company imports should be targeted for
punitive import duties, the Company expects that it would substitute similar
goods from other countries or other categories of goods, which may be at higher
costs.
The Company purchases a significant amount of its direct Chinese imports
through trading companies located in Hong Kong, arrangements which involve
significant risk. In 1996, a Hong Kong trading company obtained payment on a
number of letters of credit issued on the Company's behalf by falsely claiming
that conforming goods had been shipped, when, in fact, the trading company had
either shipped non-conforming goods or empty containers. Sovereignty over Hong
Kong transferred to China on July 1, 1997. Although no significant problems were
experienced during the transfer, there can be no assurance as to the continued
stability of political, economic or commercial conditions in Hong Kong or in
China.
The countries of Southeast Asia are involved in an emerging economic crisis
characterized by currency devaluations, rising interest rates, deteriorating
economic growth and declining capital markets. This 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.
RISKS ASSOCIATED WITH NEW DISTRIBUTION CENTERS
In January 1998, the Company opened its Chesapeake distribution center to
replace its Norfolk distribution center. The center is currently servicing 235
stores, and management anticipates it will service more than 500 stores by the
end of 1998, with an expected ultimate capacity of 800 stores. There can be no
assurance that complications will not arise in the operation of the new
Chesapeake center, including its automated conveyor and sorting system. The
Company plans to build a new distribution center in Olive Branch, Mississippi to
replace its Memphis, Tennessee facility. The Company expects that the Olive
Branch
7
<PAGE>
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 overuns
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. Although
the Company expects to be able to sublease the Norfolk and Memphis facilities,
no assurance can be given that acceptable subleases will be secured. The Company
is liable for rent and pass-through costs under the Norfolk lease until June
2004, at a current annual cost of $744,000, and for rent and pass-through costs
under the Memphis lease until September 2005, at a current annual cost of
approximately $702,000. Any of the foregoing risks, including delays,
complications, cost overruns or difficulty in subleasing, could materially
adversely affect the Company's business and results of operation. See "Risk
Factors--Disruptions in Receiving and Distribution" and "Business--Warehousing
and Distribution."
DISRUPTIONS IN RECEIVING AND DISTRIBUTION
Substantially all of the Company's inventory is shipped directly from
suppliers to the Company's distribution centers in Chesapeake, Virginia,
Memphis, Tennessee, and Chicago, Illinois where the inventory is processed and
then distributed to stores. The Company'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 the Company's expansion plans, there can be no
assurance that the Company has anticipated, or will anticipate, all of the
changing demands which its expanding operations will impose on its receiving and
distribution system or that events beyond the control of the Company, such as
disruptions in operations due to labor disagreements or shipping problems, will
not result in delays in the delivery of merchandise to the stores. Within the
last several months, the International Brotherhood of Teamsters have actively
attempted to organize the Company's employees at its Chesapeake and Chicago
distribution centers. Unionization of a portion of the Company's distribution
center workforce could result in labor disagreements that could cause a delay in
the receipt or distribution of merchandise to the stores. Any delay could have a
material adverse effect on the Company's business and results of operations. See
"Risk Factors--Risks Associated with New Distribution Centers,"
"Business--Warehousing and Distribution" and "Business--Employees."
ADVERSE ECONOMIC FACTORS
The Company's ability to provide quality merchandise at the $1.00 price
point is subject to certain economic factors which are beyond the Company's
control, including inflation, 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. On February 12, 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. Management
expects that this plan, if it is passed into law, will have a significantly
greater impact on payroll costs than the increases in the minimum wage
implemented in 1996 and 1997. Additionally, in November 1997, an ocean-shipping
cartel indicated that it would try to force a 10% rate increase on U.S. imports
from Asia in the spring of 1998. In 1997, the Company's shipping costs from Asia
were approximately $7 million. 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
8
<PAGE>
confidence or general economic conditions, could have a material adverse effect
on the Company's business and results of operations, especially given the
constraints on the Company's ability to pass on any incremental costs through
price increases.
LEGAL CLAIMS
On January 31, 1996, the Company bought all of the capital stock of Dollar
Bills, pursuant to a stock purchase agreement. In March and April 1996, Michael
and Pamela Alper (the "Alpers"), former shareholders of Dollar Bills, together
with a corporation they control, filed lawsuits in the state and federal courts
in Illinois, against the Company 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, attorney's fees and other relief.
The plaintiffs claimed that the Company 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.
The Company filed motions to dismiss the litigation in both state and
federal courts. On June 28, 1996, the state court denied the Company's motion to
dismiss. Plaintiffs subsequently dismissed their suit in state court
voluntarily. The Company then appealed the state court's denial of its motion to
dismiss. The Company'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 the Company and the co-defendant. Plaintiffs'
federal securities and federal antitrust claims against the Company 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 the Company in the future.
Based on management's understanding of the facts (which facts are contested
by the plaintiffs), and the advice of its lead litigation counsel for this
matter in reliance on such facts, the Company believes it is unlikely that the
plaintiffs will ultimately prevail on the merits of this dispute. Accordingly,
the Company believes that the ultimate outcome of this matter will not have a
material adverse effect on the Company's results of operations or financial
condition. Nevertheless, particularly in light of the contested factual
assertions, there can be no assurance regarding the ultimate outcome of any
future litigation or that any such litigation will not have a material adverse
effect on the Company's results of operations or financial condition.
The Company is also in the process of recalling (in cooperation with the
Consumer Products Safety Commission) approximately 155,000 retractable dog
leashes sold by the Company. The Company has learned of several minor personal
injuries involving the leashes. More importantly, one of the leashes allegedly
caused a serious personal injury in January 1998 which may result in a product
liability claim. Management does not believe that these injuries will have a
material adverse effect on the Company. There can be no assurance, however, that
additional serious injuries will not occur in the future.
DEPENDENCE ON KEY PERSONNEL
The Company's success depends to a significant extent upon the leadership
and performance of its senior management team, particularly Macon F. Brock, Jr.,
the Company's President and Chief Executive Officer, J. Douglas Perry, Chairman
of the Company's Board of Directors, and H. Ray Compton, the Company's Executive
Vice President and Chief Financial Officer. While the Company believes that its
senior management team has significant depth, the loss of the services of any of
these individuals could have a material adverse impact on the Company and none
of these individuals is currently bound by any
9
<PAGE>
employment or non-competition agreement. See "Management." In addition, the
Company's revolving credit facility provides that it is an event of default for
Mr. Perry and his wife, Mr. Brock and his wife, Mr. Compton, and trusts for the
benefit of their family members to beneficially own collectively less than 10%
of the aggregate of all voting stock in the Company and other ownership rights
and interests to such voting stock. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital Resources."
COMPETITION
The retail industry is highly competitive. The Company's competitors include
mass merchandisers, discount stores, variety stores, closeout stores and other
$1.00 price point stores. 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 been liquidated in bankruptcy, abandoned the $1.00
price point concept and/or reconfigured their stores. The Company expects to
face increased competition in the future which could have an adverse effect on
its financial results. See "Business--Competition."
LIMITED AVAILABILITY OF SUITABLE MERCHANDISE
The Company's success depends in large part upon its ability to select and
purchase quality merchandise at attractive prices in order to maintain a balance
of regularly available core products and a changing mix of fresh merchandise at
the $1.00 price point. The Company has no continuing contracts for the purchase
of merchandise and must continuously seek out buying opportunities from both its
existing suppliers and new sources, for which it competes with other variety,
closeout and $1.00 price point merchandisers. Although the Company believes that
its management has long-standing and satisfactory relationships with its
suppliers, there can be no assurance that the Company will be successful in
maintaining a continuing and, in light of the anticipated addition of new
stores, an increasing supply of quality merchandise at attractive prices. See
"Business--Merchandising and Store Format."
SEASONALITY AND QUARTERLY FLUCTUATIONS
The Company has historically experienced and expects to continue to
experience seasonal fluctuations in its net sales, operating income and net
income. The highest sales periods for the Company are the Christmas and Easter
seasons. A disproportionate amount of the Company's net sales and a substantial
majority of the Company's operating income and net income are generally realized
during the fourth quarter. In anticipation of increased sales activity during
these months, the Company purchases substantial amounts of inventory and hires a
significant number of temporary employees to bolster its permanent store staff.
If for any reason the Company's net sales were below seasonal norms during the
fourth quarter or Easter season, including as a result of merchandise delivery
delays due to receiving or distribution problems, the Company'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 the Company expects this trend to continue. The
Company's quarterly results of operations may also fluctuate significantly as a
result of a variety of factors, including the timing of new store openings, the
net sales contributed by new stores, shifts in the timing of certain holidays
and the merchandise mix. In 1998, the Easter holiday will fall in the second
quarter instead of the first quarter, as it did in 1997. This change could have
an adverse impact on comparable store net sales in the first quarter of 1998
because the Company expects that most 1998 Easter sales will occur in the second
quarter. Although the Company has experienced significant increases in
comparable store net sales historically, management expects that any increases
in comparable store net sales in the future will be smaller than those
experienced historically. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Seasonality and Quarterly Fluctuations."
10
<PAGE>
ANTI-TAKEOVER EFFECT OF CERTAIN PROVISIONS OF THE COMPANY'S ARTICLES OF
INCORPORATION AND BY-LAWS
Certain provisions of the Company's Articles of Incorporation ("Articles of
Incorporation") and By-Laws ("By-Laws") may be deemed to have anti-takeover
effects and may discourage, delay or prevent a takeover attempt that a
shareholder might consider in its best interest. These provisions, among other
things, (i) classify the Company's Board of Directors into three classes, each
of which will serve for different three year periods, (ii) provide that only the
Board of Directors, chairman or president may call special meetings of the
shareholders, (iii) establish certain advance notice procedures for nominations
of candidates for election as directors and for shareholder proposals to be
considered at shareholders' meetings, and (iv) require a vote of the holders of
more than two-thirds of the shares entitled to vote in order to remove a
director or amend the foregoing and certain other provisions of the Articles of
Incorporation and By-Laws. In addition, the Board of Directors, without further
action of the shareholders, is permitted to issue and fix the terms of preferred
stock which may have rights senior to those of the Common Stock.
EFFECTIVE CONTROL OF THE COMPANY BY EXISTING SHAREHOLDERS
Based on shares owned as of February 28, 1998 and after giving effect to
this offering, Mr. Brock and his wife, Mr. Perry and his wife, Mr. Compton and
The SK Equity Fund, L.P. (the "Fund") and certain affiliates of the Fund will
own, or otherwise control, approximately 31% of the Company's outstanding 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 the Company, the outcome of any other matter submitted to a
vote of the Company's shareholders for approval, including mergers,
consolidations or the sale of all or substantially all of the Company's assets,
and a change in control of the Company. See "Principal and Selling
Shareholders."
POSSIBLE VOLATILITY OF STOCK PRICE
The market price of the Company's Common Stock, which is quoted on the
Nasdaq National Market, may be subject to significant fluctuations in response
to operating results, comparable store sales announcements, announcements by
competitors and other factors. In addition, the stock market in recent years has
experienced extreme price and volume fluctuations that often have been unrelated
or disproportionate to the operating performance of individual companies. These
market fluctuations, as well as general economic conditions, may adversely
affect the market price of the Common Stock.
FORWARD-LOOKING STATEMENTS
This Prospectus includes forward-looking statements within the meaning of
the Private Securities Litigation Reform Act of 1995 concerning the Company's
operations, economic performance and financial condition. Such statements may be
identified by the use of words such as "believe," "anticipate" and "expect." The
forward-looking statements concern, among other things, the Company's expansion
plans and store openings; sales per square foot and comparable store net sales
trends; dependence on imports and vulnerability to import restrictions,
particularly nonrenewal of MFN status and the imposition of punitive duties, the
Asian financial crisis and other factors relating to China; the projected
capacity and the performance of the Chesapeake and the proposed Olive Branch
distribution centers; the opening date and cost of the Olive Branch distribution
center; the subleasing of the Norfolk and Memphis facilities; labor
disagreements and union organizing activities; increases in shipping or
distribution costs; increases in costs including the impact of increases in the
minimum wage; the Dollar Bills litigation; the potential products liability
claims; adverse economic factors; purchasing abilities; and capital
requirements. Such forward-looking statements are subject to various known and
unknown risks and uncertainties. Actual results, performance or actions of the
Company could differ materially from those currently anticipated due to a number
of factors, including those discussed under the caption "Risk Factors,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business" in this Prospectus.
11
<PAGE>
USE OF PROCEEDS
The Company will not receive any of the proceeds from the sale of Common
Stock in this offering.
PRICE RANGE OF COMMON STOCK
The Company's Common Stock has been traded on the Nasdaq National Market
under the symbol "DLTR" since the Company's initial public offering on March 6,
1995. The following table sets forth the high and low sale prices of the
Company's Common Stock as reported on the Nasdaq National Market for the periods
indicated, restated to reflect 3-for-2 stock splits effected as stock dividends
in April 1996 and July 1997.
<TABLE>
<CAPTION>
1996: HIGH LOW
- ------------------------------------------------------------------------------------------- --------- ---------
<S> <C> <C>
First Quarter.............................................................................. $20 9/16 $10 57/64
Second Quarter............................................................................. 30 19 21/64
Third Quarter.............................................................................. 28 15 21/64
Fourth Quarter............................................................................. 28 43/64 20 11/64
<CAPTION>
1997:
- -------------------------------------------------------------------------------------------
<S> <C> <C>
First Quarter.............................................................................. 30 21/64 21 1/2
Second Quarter............................................................................. 33 43/64 28 5/8
Third Quarter.............................................................................. 47 3/8 31 53/64
Fourth Quarter............................................................................. 44 7/8 34 1/2
<CAPTION>
1998:
- -------------------------------------------------------------------------------------------
<S> <C> <C>
First Quarter (through March 3, 1998)...................................................... 46 5/8 34 1/2
</TABLE>
On March 3, 1998, the last reported sale price for the Company's Common
Stock on the Nasdaq National Market was $42.25 per share. As of February 28,
1998, the Company had 374 shareholders of record.
DIVIDEND POLICY
The Company anticipates that all of its income in the foreseeable future
will be retained for the development and expansion of its business and the
repayment of indebtedness, and therefore does not anticipate paying cash
dividends on its Common Stock in the foreseeable future. The Company's credit
facilities contain financial covenants which restrict the Company's ability to
pay dividends.
12
<PAGE>
SELECTED FINANCIAL DATA
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA AND SALES PER SQUARE FOOT DATA)
The following table sets forth for the periods indicated selected financial
data for the Company. The selected income statement and balance sheet data
presented below for the years ended December 31, 1993, 1994, 1995, 1996 and 1997
have been derived from the Company's financial statements that have been audited
by KPMG Peat Marwick LLP, independent certified public accountants. This
information should be read in conjunction with the financial statements and the
notes thereto incorporated herein by reference and "Management's Discussion and
Analysis of Financial Condition and Results of Operations" included in this
Prospectus. The pro forma data have not been audited but, in the opinion of
management, include all adjustments necessary to present fairly the information
set forth therein including the matters referred to in footnotes 4 and 5 below.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------
1993 1994 1995 1996 1997
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net sales............................................................... $167,753 $231,601 $300,229 $493,037 $635,473
Cost of sales........................................................... 106,318 145,481 187,552 310,900 397,116
-------- -------- -------- -------- --------
Gross profit............................................................ 61,435 86,120 112,677 182,137 238,357
-------- -------- -------- -------- --------
Selling, general and administrative expenses:
Operating expenses.................................................... 39,559 54,993 70,504 111,401 143,438
Depreciation and amortization......................................... 3,054 4,186 5,468 10,527 13,125
Recapitalization expenses(1).......................................... 4,387 -- -- -- --
-------- -------- -------- -------- --------
Total............................................................. 47,000 59,179 75,972 121,928 156,563
-------- -------- -------- -------- --------
Operating income........................................................ 14,435 26,941 36,705 60,209 81,794
Interest expense........................................................ 1,837 4,028 2,617 5,193 2,812
-------- -------- -------- -------- --------
Income before income taxes and extraordinary loss....................... 12,598 22,913 34,088 55,016 78,982
Provision for income taxes.............................................. 3,152 9,546 13,125 21,181 30,408
-------- -------- -------- -------- --------
Income before extraordinary loss........................................ 9,446 13,367 20,963 33,835 48,574
Extraordinary loss, net of income tax(2)................................ -- 1,253 -- -- --
-------- -------- -------- -------- --------
Net income.............................................................. $ 9,446 $ 12,114 $ 20,963 $ 33,835 $ 48,574
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
INCOME PER SHARE DATA(3):
Basic net income per share.............................................. $ 0.33 $ 0.56 $ 0.89 $ 1.24
-------- -------- -------- --------
-------- -------- -------- --------
Diluted net income per share............................................ $ 0.32 $ 0.51 $ 0.80 $ 1.13
-------- -------- -------- --------
-------- -------- -------- --------
PRO FORMA DATA:
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)................................. $ 0.20
--------
--------
Pro forma diluted net income per share(5)............................... $ 0.20
--------
--------
Weighted average number of common shares outstanding, in thousands(3 and
5).................................................................... 37,233 37,233 37,271 38,217 39,033
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
Weighted average number of common shares
and common share equivalents outstanding, in thousands(3 and 5)....... 38,158 38,158 41,026 42,171 43,106
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
SELECTED OPERATING DATA:
Number of stores open at end of period(6):
Mall.................................................................. 145 154 173 202 235
Strip center.......................................................... 183 255 327 535 652
-------- -------- -------- -------- --------
Total............................................................. 328 409 500 737 887
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
</TABLE>
13
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------
1993 1994 1995 1996 1997
------- ------- ------- -------- --------
<S> <C> <C> <C> <C> <C>
SELECTED OPERATING DATA:
Net sales growth(6)........................................................ 39.2% 38.1% 29.6% 64.2% 28.9%
Comparable store net sales increase(7)..................................... 6.9% 9.1% 7.3% 6.2% 7.8%
Average net sales per store(8)............................................. $ 555 $ 606 $ 649 $ 691 $ 767
Average net sales per square foot(8):
Mall..................................................................... $ 224 $ 241 $ 246 $ 249 $ 239
Strip center............................................................. $ 188 $ 197 $ 209 $ 220 $ 217
All stores............................................................... $ 206 $ 214 $ 221 $ 229 $ 222
<CAPTION>
AS OF DECEMBER 31,
---------------------------------------------
1993 1994 1995 1996 1997
------- ------- ------- -------- --------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital............................................................ $ 7,742 $14,334 $29,133 $ 23,488 $ 60,213
Total assets............................................................... 42,188 60,688 91,621 171,099 272,576
Total debt................................................................. 17,768 14,205 14,518 4,353 31,121
Shareholders' equity....................................................... 3,660 17,274 39,087 101,590 154,926
</TABLE>
- ------------------------------
(1) Represents recapitalization expenses of $4.4 million incurred in connection
with the 1993 Recapitalization, comprised of $3.6 million of management
incentive expenses and $0.8 million of transaction expenses. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Overview."
(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 the
Company'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 $0.03, 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 common share equivalents outstanding, respectively. All
warrants and options outstanding at December 31, 1994 have been considered
outstanding for the entire year ended December 31, 1994 and are included in
the calculation of the weighted average number of common shares and common
share equivalents outstanding for net income per share computations in
accordance with the rules of the Securities and Exchange Commission. For all
periods after December 31, 1994, common share equivalents include the
weighted average number of shares subject to stock options and warrants
outstanding at the end of the period, after applying the treasury stock
method.
(4) Prior to September 30, 1993, the Company was treated as a subchapter S
corporation for Federal and certain state income tax purposes. As such,
income of the Company for that period was taxable to the individual
shareholders rather than to the Company. Accordingly, the provision for
income taxes for the nine months ended September 29, 1993, represents
corporate level state income taxes on income earned in those states that do
not recognize subchapter S corporation status. On September 30, 1993, the
Company converted to a subchapter C corporation. Accordingly, income since
September 30, 1993 was taxable to the Company. Pro forma net income reflects
a provision for income taxes as if the Company were a C corporation for all
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 common share equivalents outstanding. Common share equivalents
include all outstanding stock options and warrants after applying the
treasury stock method. All warrants and options outstanding at December 31,
1994 have been considered outstanding for the year ended December 31, 1993,
and are included in the calculation of the weighted average number of common
shares and common share equivalents outstanding for the pro forma diluted
net income per share computation in accordance with the rules of the
Securities and Exchange Commission.
(6) The Company 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.
(7) Comparable store net sales increase compares net sales for stores open at
the beginning of the first of the two periods compared. The comparable store
net sales increase calculation for the year ended December 31, 1997 includes
net sales of Dollar Bills stores for the twelve months ended December 31,
1996 and December 31, 1997.
(8) For stores open the entire period presented. Dollar Bills stores are only
included in the calculation for 1997. The 1996 calculation does not include
the 28 stores expanded in 1996 due to remodeling and/or relocation, which
increased total square footage by approximately 29,900 square feet. The
calculation for 1997 does not include the 29 stores expanded in 1997 due to
remodeling and/or relocation, which increased total square footage by
approximately 46,000 square feet.
14
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the financial
statements and notes thereto incorporated by reference in this Prospectus.
OVERVIEW
Dollar Tree was established by J. Douglas Perry, the Company's Chairman,
Macon F. Brock, Jr., the Company's President and Chief Executive Officer, and H.
Ray Compton, the Company's Executive Vice President and Chief Financial Officer
(the "Founders"), in November 1986 with the opening of its first five stores in
Virginia, Georgia and Tennessee. From November 1986 through October 1991, the
Company's shareholders also owned a substantial portion of the outstanding stock
of K&K Toys, a 136-store, mall-based toy retailer managed by the Founders.
During this period, Dollar Tree grew to 171 stores and shared certain management
and distribution services and facilities with K&K Toys for which it paid a fee
to K&K Toys.
In October 1991, K&K Toys was acquired by a subsidiary of Melville
Corporation. Following the sale of K&K Toys, the Founders focused their
attention solely on Dollar Tree and effected a number of strategic changes,
including (i) shifting the Company's merchandising focus away from closeout
merchandise and towards its current emphasis on providing selection and value in
traditional variety store categories, (ii) focusing its expansion strategy on
strip center locations, (iii) accelerating its expansion program and (iv)
improving the depth of the management team and breadth of operational controls.
Since the sale of K&K Toys, Dollar Tree has grown from 171 stores to 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.
On September 30, 1993, the Company effected a recapitalization including a
stock split and reclassification (the "1993 Recapitalization"), pursuant to
which (i) J. Douglas Perry, Chairman of the Company's Board of Directors, his
wife, Patricia W. Perry, Macon F. Brock, Jr., the Company's President and Chief
Executive Officer, his wife, Joan P. Brock, and H. Ray Compton, the Company's
Executive Vice President and Chief Financial Officer (the "Original
Shareholders") sold to The SK Equity Fund, L.P. (the "Fund") and four
individuals affiliated with the Fund (collectively, the "Co-Investors") 50% of
the outstanding stock of the Company for an aggregate purchase price of $23.6
million, (ii) the Fund and the Co-Investors purchased from the Company $7.0
million face amount senior subordinated notes for $6.5 million (the "12% Senior
Subordinated Notes") and purchased for $500,000 warrants to purchase 1,861,633
shares of Common Stock and (iii) on February 22, 1994 pursuant to a commitment
entered into September 30, 1993, the Original Shareholders purchased from the
Company $7.0 million face amount junior subordinated notes for $6.5 million (the
"12% Junior Subordinated Notes") and purchased for $500,000 warrants to purchase
1,861,633 shares. On December 31, 1994, the Company redeemed and extinguished
the 12% Senior Subordinated Notes and the 12% Junior Subordinated Notes
(collectively, the "12% Notes"). As part of this transaction, the Company paid a
redemption premium of approximately $1.3 million and issued an aggregate of
$14.0 million principal amount of 9% Senior Subordinated Notes and 9% Junior
Subordinated Notes (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, the Company acquired all of the stock of Dollar Bills,
formerly known as Terrific Promotions, Inc., and subsequently merged Dollar
Bills into the Company. At the time of the acquisition, Dollar Bills owned and
operated 136 discount variety stores in 16 states, offering merchandise
primarily at the $1.00 price point under the name Dollar Bill$, a 250,000 square
foot distribution center in the Chicago area and a wholesale division, all of
which the Company currently operates. The Company paid approximately $52.6
million in cash and $2.0 million in merchandise inventory for 100% of the stock
of Dollar Bills
15
<PAGE>
and has accounted for the acquisition as a purchase. In connection with the
acquisition, the Company recognized goodwill of $48.2 million, which it is
amortizing over a 25 year period.
The Company recently replaced its Norfolk 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 the Company's capacity to approximately 1,600 stores.
In February 1998, the Company contracted to purchase approximately 43 acres
of land in Olive Branch, Mississippi, for the purpose of building a new 425,000
square foot distribution center to replace the existing leased facility located
in Memphis, Tennessee. The Company expects that the new Olive Branch facility
will cost approximately $20 million and that, upon completion of the facility,
the Company's capacity to service stores will increase to approximately 2,000
stores. The Company anticipates that the facility will be operational in early
1999.
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>
YEAR ENDED DECEMBER 31,
-------------------------------
<S> <C> <C> <C>
1995 1996 1997
--------- --------- ---------
<CAPTION>
<S> <C> <C> <C>
Net sales........................................................................... 100.0% 100.0% 100.0%
Cost of sales....................................................................... 62.5 63.1 62.5
--------- --------- ---------
Gross profit...................................................................... 37.5 36.9 37.5
Selling, general and administrative expenses:
Operating expenses................................................................ 23.5 22.6 22.5
Depreciation and amortization..................................................... 1.8 2.1 2.1
--------- --------- ---------
Total........................................................................... 25.3 24.7 24.6
--------- --------- ---------
Operating income.................................................................... 12.2 12.2 12.9
Interest expense.................................................................... 0.9 1.1 0.5
--------- --------- ---------
Income before income taxes.......................................................... 11.3 11.1 12.4
Provision for income taxes.......................................................... 4.4 4.3 4.8
--------- --------- ---------
Net income.......................................................................... 6.9% 6.8% 7.6%
--------- --------- ---------
--------- --------- ---------
</TABLE>
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 the Company'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 the Company's products sell for $1.00, the
increase in comparable store net sales was a direct result of increased unit
volume. Comparable store net sales 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
16
<PAGE>
merchandise mix throughout 1996. The Company opened 151 new stores and closed
one store during 1997, compared to opening 104 new stores and closing three
stores during 1996. The Company also added 136 Dollar Bills stores on January
31, 1996.
Management anticipates that the primary source of future sales growth will
be new store openings and, to a lesser degree, comparable store net sales
increases. 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 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 $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 the Company'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 Norfolk
and Memphis. The Company is liable for rent and pass-through costs under the
Norfolk lease until June 2004, at a current annual cost of approximately
$744,000, and for rent and pass-through costs under the Memphis lease until
September 2005, at a current annual cost of approximately $702,000. Management
also expects that shipping costs from Asia may increase in 1998 as a result of
the announcement by a trans-Pacific ocean-shipping cartel that it will try to
force a 10% rate increase in the spring of 1998. In 1997, the Company's shipping
costs from Asia were approximately $7 million, or 1.1% of net sales.
Selling, general and administrative expenses, which include operating
expenses and depreciation and amortization, 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 the Company had increased borrowings related
to the purchase of Dollar Bills. In 1997, the Company 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. The Company expects to capitalize the interest incurred in 1998
relating to the construction of the Olive Branch facility.
17
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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 as of
February 1, 1996, (ii) approximately 37.2%, or $71.8 million, was attributable
to 198 stores opened in 1995 and 1996, which are not included in the Company's
comparable store net sales calculation, 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 the Company'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. The Company 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 the Company
will continue to carry somewhat higher levels of domestic, consumable
merchandise than in prior years. However, the Company 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, the Company'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, the Company
redeemed and extinguished its 9% Subordinated Notes in June 1996.
LIQUIDITY AND CAPITAL RESOURCES
The Company's ongoing capital requirements result primarily from capital
expenditures related to new store openings and working capital requirements
related to new and existing stores. The Company's
18
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working capital requirements for existing stores are seasonal in nature and
typically reach their peak near the end of the third and beginning of the fourth
quarter of the year. Historically, the Company has met its seasonal working
capital requirements for existing stores and funded its store expansion program
from internally generated funds and borrowings under its credit facilities.
During 1995, 1996 and 1997, net cash provided by operations was $27.2
million, $39.2 million and $69.7 million, respectively. Net cash used in
investing activities during the same periods was $11.6 million, $68.7 million,
and $57.5 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 the Company'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. Net cash provided by financing activities during the same
periods was $0.8 million, $10.1 million and $28.5 million, respectively. In
1995, the funds provided were primarily a result of the exercise of stock
options granted under the Company's Stock Option Plan. In 1996, the funds
provided were primarily a result of the issuance of 1,125,000 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.
The Company expects to expand by approximately 200 to 205 stores during
1998. In 1997, the average investment per new store, including capital
expenditures, initial inventory and pre-opening costs, was approximately
$168,000 per store. The Company'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. The Company'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, the Company 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 the Company'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 the
Company, establishes minimum beneficial ownership requirements of the founding
shareholders 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, the Company 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 the Company to use that
credit facility to fund capital expenditures for the new Store Support Center.
The Company 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 have the right to require the Company
to prepay the Notes in full without premium upon a change of control or upon
certain asset dispositions or certain other transactions by the Company. The
Note agreements, among other things, prohibit certain mergers and
consolidations, require the maintenance of certain specified ratios, require
that the Notes rank pari passu with the Company's other debt and limit the
amount of Company debt. In the event of default or a prepayment at the option of
the Company, the Company is required to pay a prepayment penalty equal to a
make-whole amount.
19
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Except for the cost of the new Olive Branch facility, the Company believes
that it can adequately fund its planned capital expenditures and working capital
requirements for the next several years from net cash provided by operations and
availability under its credit facilities. The Company plans to borrow an
additional $20 million under a proposed loan facility to fund the cost of the
proposed Olive Branch distribution center. The Company believes that it will
obtain the required consent from its existing lenders for the proposed loan
facility.
SEASONALITY AND QUARTERLY FLUCTUATIONS
The Company has historically experienced and expects to continue to
experience seasonal fluctuations in its net sales, operating income and net
income. The highest sales periods for the Company are the Christmas and Easter
seasons. A disproportionate amount of the Company's net sales and a substantial
majority of the Company's operating and net income are generally realized during
the fourth quarter. In anticipation of increased sales activity during these
months, the Company purchases substantial amounts of inventory and hires a
significant number of temporary employees to bolster its permanent store staff.
If for any reason the Company's net sales were below seasonal norms during the
fourth quarter or Easter season, including as a result of merchandise delivery
delays due to receiving or distribution problems, the Company'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 the Company expects this trend to continue. The
Company's quarterly results of operations may also fluctuate significantly as a
result of a variety of factors, including the timing of new store openings, the
net sales contributed by new stores and the merchandise mix.
Shifts in the timing of certain holidays may also have an effect on
quarterly results. In 1998, the Easter holiday will fall in the second quarter
instead of the first quarter, as it did in 1997. This change could have an
adverse impact on comparable store net sales in the first quarter of 1998
because the Company expects that most 1998 Easter sales will occur in the second
quarter.
The following table sets forth certain unaudited results of operations for
each quarter of 1996 and 1997. The unaudited information has been prepared on
the same basis as the audited consolidated financial statements incorporated
herein by reference and includes all adjustments, consisting only of normal
recurring adjustments, which management considers necessary for a fair
presentation of the financial data shown. The operating results for any quarter
are not necessarily indicative of results for any future period. Although the
Company has experienced significant increases in comparable store net sales
increases historically, management expects that any increases in comparable net
sales in the future will be smaller than those experienced historically.
<TABLE>
<CAPTION>
QUARTER ENDED
---------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30,
1996 1996 1996 1996 1997 1997 1997
----------- --------- ----------- --------- --------- --------- -----------
<CAPTION>
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Net sales.............................. $ 84,975 $ 102,689 $ 110,588 $ 194,785 $ 117,746 $ 129,332 $ 142,386
Gross profit........................... $ 29,070 $ 35,659 $ 41,890 $ 75,518 $ 41,291 $ 46,164 $ 53,836
Operating income....................... $ 2,570 $ 7,586 $ 11,134 $ 38,919 $ 6,243 $ 10,588 $ 15,065
Stores open at end of period........... 660 686 712 737 767 812 865
Comparable store net
sales increases...................... 11.8% 1.5% 4.3% 7.6% 10.9% 8.2% 7.4%
<CAPTION>
<S> <C>
DEC. 31,
1997
---------
<S> <C>
Net sales.............................. $ 246,009
Gross profit........................... $ 97,066
Operating income....................... $ 49,898
Stores open at end of period........... 887
Comparable store net
sales increases...................... 5.5%
</TABLE>
INFLATION
The Company's ability to provide quality merchandise at the $1.00 price
point is subject to certain economic factors which are beyond the Company's
control, including inflation. Significant and unexpected increases in inflation
could have a material adverse effect on the Company's business and results of
operations, especially given the constraints on the Company's ability to pass on
any incremental costs through price increases.
20
<PAGE>
YEAR 2000 COMPLIANCE
The Company 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 the Company'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.
The Company has conducted a preliminary assessment of its computer systems
and made inquiries regarding the computer systems of other entities with which
the Company does business, such as contractors, suppliers and creditors.
Management believes that the Company's internal systems, including computer
programs housed on its mainframe and those used to accumulate data from its
stores, are currently Year 2000 compliant. Given information known at this time
about the Company's systems, management does not expect Year 2000 compliance
costs to have a material adverse impact on the Company's business or results of
operations. No assurance can be given, however, that unanticipated or
undiscovered Year 2000 compliance problems will not have a material adverse
effect on the Company's business or results of operations. In addition, if the
Company's significant contractors, suppliers or creditors do not successfully
achieve Year 2000 compliance, the Company's business and operations could be
adversely affected.
NEW ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board has issued Statements No. 128,
EARNINGS PER SHARE (SFAS 128), No. 129, DISCLOSURE OF INFORMATION ABOUT CAPITAL
STRUCTURE (SFAS 129), No. 130, REPORTING COMPREHENSIVE INCOME (SFAS 130), and
No. 131, DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION
(SFAS 131). The Company adopted SFAS 128 for the year ended December 31, 1997
and recalculated its net income per share accordingly. SFAS 129 continues the
requirements to disclose certain information about an enterprise's capital
structure prescribed by previous accounting standards; the Company's current
disclosures are in compliance with the requirements of SFAS 129. SFAS 130 and
SFAS 131 are effective for the Company beginning January 1998 and for the year
ended December 31, 1998, respectively.
21
<PAGE>
BUSINESS
OVERVIEW
Dollar Tree was established by J. Douglas Perry, the Company's Chairman,
Macon F. Brock, Jr., the Company's President and Chief Executive Officer, and H.
Ray Compton, the Company's Executive Vice President and Chief Financial Officer
(the "Founders"). 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, the Company increased the number of stores to 171, while
continuing to develop the Dollar Tree concept. During this period, Dollar Tree
benefitted from the Founders' familiarity with variety store retailing and from
the existing infrastructure of K&K Toys, with whom Dollar Tree shared certain
operating functions and expenses.
Following the sale of K&K Toys in 1991, the Founders focused their attention
solely on Dollar Tree and effected a number of strategic changes, including (i)
shifting the Company's merchandising focus away from closeout merchandise
towards its current emphasis on providing selection and value in traditional
variety store categories, (ii) focusing its expansion strategy on strip center
locations, (iii) accelerating the Company's expansion program and (iv) improving
the depth of the management team and breadth of operational controls.
Dollar Tree has opened over 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. The Company
is focusing its expansion strategy on strip center locations anchored by strong
mass merchandisers such as Wal-Mart, whose target customers management believes
are similar to those of Dollar Tree.
BUSINESS STRATEGY
The Company'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 the Company'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. The Company
is able to offer such value in part by purchasing a substantial portion of
its products directly from foreign manufacturers, allowing the Company to
pass on savings to the customer. In addition, direct relationships with both
domestic and foreign manufacturers permit broad product selection,
customized packaging and frequently the ability to obtain larger sizes and
higher package quantities.
CHANGING MERCHANDISE MIX. The Company supplements its wide assortment
of quality everyday core merchandise with a changing mix of new and exciting
products, including seasonal goods, such as summer toys, back-to-school
products and Christmas wrapping paper and, to a limited extent, selected
closeout merchandise. Closeouts comprise no more than 15% of merchandise
purchased at cost. The Company also takes advantage of the availability of
lower priced, private label goods, which are comparable to national name
brands.
STRONG AND CONSISTENT STORE LEVEL ECONOMICS. The Company believes that
its attractive store level economics and the flexibility of its real estate
strategy provide it with a wide range of real estate opportunities and will
facilitate its continued expansion. The Company's stores have historically
been profitable within the first full year of operation, with an average
store level operating income of
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<PAGE>
approximately $163,000 (approximately 22% of net sales) for stores whose
first full year of operation was 1997. In addition, the operating
performance of the Company's stores has been very consistent, with over 90%
of the Company's stores opened for the entire year having store level
operating income margins in excess of 15% for 1997.
COST CONTROL. Given the Company'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 the Company's three
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, the
Company's nine 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. Currently, management
anticipates expanding by approximately 200 to 205 stores in 1998. The Company'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 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 square
foot will occur as the average store size increases.
Dollar Tree's real estate strategy allows the Company the flexibility of
opening stores in a variety of locations. Management believes that Dollar Tree
stores can perform well in strip center locations and selected mall locations.
The Company is currently concentrating on strip center locations anchored by
strong mass merchandisers such as Wal-Mart, Kmart and Target, whose target
customers management believes are similar to those of Dollar Tree. Although
strip center locations typically have lower sales per square foot, strip center
locations benefit from lower total investment requirements and lower occupancy
costs than mall based locations. Dollar Tree stores have been successful in
major metropolitan areas such as Washington/Baltimore, mid-sized cities such as
Norfolk, Virginia, and small towns with populations under 25,000. Management
also believes that its stores have a relatively small shopping radius, which
permits the concentration of multiple stores in a single market.
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. The Company seeks to accomplish
this goal by: (i) offering a balanced mix of everyday core products and changing
products in traditional variety store categories, (ii) maintaining a
disciplined, global purchasing program and (iii) emphasizing the effective
presentation of merchandise in the stores.
MERCHANDISE MIX. Management believes its merchandise mix differentiates
Dollar Tree from other discount variety stores selling at the $1.00 price point.
The Company's stores offer a well stocked selection of core and changing
products within the traditional variety store categories, although the actual
items and
23
<PAGE>
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. The Company purchases closeout merchandise, which
management believes can be effective in generating recognized value and
excitement, as opportunities present themselves, but limits the percentage of
total inventory represented by closeout merchandise to less than 15%.
When the opportunity presents itself, the Company purchases items which it
prices at two for $1.00. These items provide sufficient value to the customer
without compromising the Company's margin goals. These items are the only items
in the store on which a price tag is used, and customers may buy only one item
if desired.
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.
The Company 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.
The Company deals with its suppliers principally on an order-by-order basis
and has no long-term purchase contracts or other contractual assurance of
continued supply or pricing. While there can be no assurance of a continuing and
increasing supply of quality merchandise suitable to be priced by the Company at
$1.00, management believes that such merchandise will be available in sufficient
quantities to meet the Company's plans for future growth.
In 1996 and 1997, the Company 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 the Company's Chinese
imports flow), Thailand, Italy, Mexico and Indonesia. The Company expects
imports to continue to account for approximately 35% to 40% of total purchases
at retail. In addition, the Company believes that a substantial portion of the
goods the Company purchases from domestic vendors is indirectly imported from
foreign countries. China is the source for a substantial majority of the
Company's direct imports and, the Company believes, is also the largest source
of its indirect imports. See "Risk Factors-- 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. The Company
relies on attractive
24
<PAGE>
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. The Company does not have a
point-of-sale system, and credit cards are not accepted.
SITE SELECTION AND STORE LOCATIONS
The Company 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. The Company 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. The Company 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. The Company'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 to 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 December 31, 1997, Dollar Tree operated 887 stores in 26 states, 652
of which were located in strip centers (including certain non strip-center,
urban based Dollar Bills stores) and 235 of which were located in malls. Of the
strip center based stores, 256 were located in strips with Wal-Mart, 75 with
Kmart and 48 with Target.
The Company currently leases all of its existing store locations and expects
that its policy of leasing rather than owning will continue as it expands. The
Company's leases typically provide for a short initial lease term with options
on the part of the Company to extend. Management believes that this lease
strategy enhances the Company's flexibility to pursue various expansion and
relocation opportunities resulting from changing market conditions. The
Company's ability to open new stores is contingent upon locating satisfactory
sites, negotiating favorable leases, obtaining necessary financing and
recruiting and training additional qualified management personnel.
As current leases expire, the Company believes that it will be able either
to obtain lease renewals if desired for present store locations, or to obtain
leases for equivalent or better locations in the same general area. To date, the
Company has not experienced difficulty in either renewing leases for existing
locations or securing leases for suitable locations for new stores. A
substantial number of the Company's store leases contain certain provisions
related to changes in control of the Company. These provisions may arguably be
applicable in a substantial number of the Company's leases as a result of the
1993 Recapitalization, and may be applicable in a small number of additional
leases as a result of the prior public offerings of the Company's common stock
and this offering. Many of the Company's leases contain provisions with which
the Company does not comply, including provisions requiring purchase of
insurance upon leasehold
25
<PAGE>
improvements and/or property located in the stores, requiring the Company to
advertise or prohibiting the Company from operating another store within a
specified radius. Based primarily on the Company's belief that it maintains good
relations with its landlords, that most of its leases are at market rents, and
that it has historically been able to secure leases for suitable locations,
management believes that these provisions will not have a material adverse
effect on the business or financial position of the Company.
FIELD MANAGEMENT AND PERSONNEL
Management believes its philosophy of providing strong field and store
management is an integral element of delivering value to its customers. The
Company maintains a highly trained and well managed staff to ensure that all
stores are continuously well maintained and tightly controlled and to provide
the best possible customer service. The field organization is directed by the
Senior Vice President, Sales and Operations, assisted by two Directors of Sales
and Operations and eight Regional Managers, who in turn oversee numerous
District Managers. 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 the Company'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 are based on a variety of factors which vary between plans.
These factors include comparable store sales, overall sales performance,
inventory shrinkage levels, payroll and net income. Eligible employees may
participate in the Company's Employee Stock Purchase Plan and its 401(k) and
profit sharing plan. In addition, medical and dental insurance are available to
eligible employees.
WAREHOUSING AND DISTRIBUTION
Warehousing and distribution are managed centrally by the Company from its
corporate headquarters, which is located on the same site as its Chesapeake
distribution center. The Company views maintaining strong warehousing and
distribution support for its stores as a critical element of its expansion
strategy and its ability to maintain a low cost operating structure. As the
Company continues its expansion, it intends to open new units in regions around
its distribution centers.
The 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. The Company believes its
distribution centers have the capacity to service 1,600 stores. The Company owns
its Chesapeake Store Support Center, constructed in 1997, and continues to lease
its former Norfolk distribution center. The lease expires in June 2004. The
distribution center in Memphis is also leased; this lease expires in September
2004, with four additional five-year terms available. Additionally, the Company
leases the Chicago distribution center; this lease expires in June 2005, with
certain options to renew.
The Company 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 235
stores, and management anticipates it will service more than 500 stores by the
end of 1998, with an expected ultimate capacity of 800 stores.
In February 1998, the Company contracted to purchase approximately 43 acres
of land in Olive Branch, Mississippi, for the purpose of building a new
distribution center to replace the existing facility
26
<PAGE>
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, the Company's capacity to service stores will increase to
approximately 2,000 stores. The Company 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 the Company's business and results of operations.
See "Risk Factors--Risks Associated with New Distribution Centers," "Risk
Factors--Disruptions in Receiving and Distribution" and "Management's Discussion
and Analysis of Financial Condition and Results of Operations--Results of
Operations."
Substantially all of the Company's inventory is shipped directly from
suppliers to the Company's distribution centers. Dollar Tree's substantial
distribution center capacity allows the Company to receive manufacturers' early
shipment discounts and buy large quantities of goods at favorable prices. In
addition, during the past several years the Company has utilized offsite
facilities to accommodate large shipments of seasonal merchandise. Since the
distribution centers maintain back-up inventory and provide weekly delivery to
each store, in-store inventory requirements are reduced and the Company is able
to operate with smaller stores than would otherwise be required. Since many
stores are limited in size, off-hours stocking, as well as off-site storage
space, is utilized to support the store's inventory turnover, particularly
during the busy fourth quarter.
Distribution to the stores is centrally controlled by the Company's
distribution group. The Company's merchandise replenishment software generates
distribution models that can be based on variables such as store volume and
certain demographic and physical characteristics of the stores. Each store has a
weekly and monthly budgeted inventory requirement based on its projected sales
for the year and its existing inventory levels. Stores receive weekly shipments
of merchandise from distribution centers based on their anticipated inventory
requirements for each week and communication via telephone or electronic mail
between store managers and the distribution group. The Company has the ability
to make two weekly deliveries to high volume stores during the busy Christmas
season.
The Company's distribution fleet consists of 21 leased tractors and 60 owned
or leased trailers. The majority of the Company's inventory is delivered to the
stores by contract carriers. The Company fleet is used in freight lanes which
allow backhauls of merchandise from suppliers to its distribution centers and to
service stores located near distribution centers. The Company is continuously
looking for opportunities to reduce its freight and distribution costs and
periodically evaluates various delivery options.
MANAGEMENT INFORMATION SYSTEMS
The Company's management information systems allow it to monitor its
merchandising, inventory, distribution and operating expenses centrally at its
Chesapeake headquarters. These systems allow the Company to support its stores
efficiently, manage inventory turnover, and provide detailed financial reporting
to support management's operational decisions and cost control efforts. The
Company does not have a point-of-sale system. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Year 2000
Compliance."
COMPETITION
The retail industry is highly competitive. The Company's competitors include
mass merchandisers (such as Wal-Mart), discount stores (such as Dollar General),
variety stores (such as Woolworth), closeout stores (such as Odd Lots and Big
Lots) and other $1.00 price point stores. In January 1996, the Company 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. The Company
27
<PAGE>
expects to face increased competition in the future which could have an adverse
effect on its financial results.
TRADEMARKS
The Company is the owner of Federal service mark registrations for "Dollar
Tree," the "Dollar Tree" logo, "1 Dollar Tree" together with the related design,
and "One Price . . . One Dollar," each of which expires in 2003 or later. A
small number of the Company's stores operate under the name "Only $1.00," for
which the Company has not obtained a service mark registration; if it were
required to change the name of these stores, the Company does not believe that
this would have a material adverse effect on its business. Additionally, with
the acquisition of Dollar Bills in January 1996, the Company became the owner of
various Federal service mark registrations, including a concurrent use
registration for "Dollar Bill$" and the related logo which expire in 2005.
During 1997, the Company 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. The Company also occasionally
uses various brand names under which it markets products, although management
believes that these brand names are not material to the Company's operations.
EMPLOYEES
The Company employed approximately 13,000 employees at December 31, 1997,
approximately 3,200 of whom were full-time and 9,800 part-time. The number of
part-time employees fluctuates depending on seasonal needs. None of the
Company's employees are currently represented by a labor union. On March 31,
1994 and March 20, 1996, the employees of the Company's Norfolk distribution
center voted against union representation by the International Brotherhood of
Teamsters in elections certified by the National Labor Relations Board. Within
the last several months, the Teamsters have actively attempted to organize the
Company's employees at its Chesapeake and Chicago distribution centers. There
can be no assurance that the Company's employees at any of its three
distribution centers will not in the future elect to be represented by a union.
The Company considers its relationship with employees to be good and has not
experienced significant interruptions of operations due to labor disagreements.
LEGAL PROCEEDINGS
The Company is engaged in a dispute with the former owners of Dollar Bills
and is subject to potential product liability claims. See "Risk Factors--Legal
Proceedings." The Company 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 the Company.
28
<PAGE>
MANAGEMENT
DIRECTORS, EXECUTIVE OFFICERS AND CERTAIN KEY PERSONNEL
The following table sets forth certain information with respect to
directors, executive officers and certain key personnel of the Company:
<TABLE>
<CAPTION>
DIRECTORS AND EXECUTIVE OFFICERS AGE OFFICE
- ---------------------------------- --- --------------------------------------------------
<S> <C> <C>
Macon F. Brock, Jr. 55 President and Chief Executive Officer; Director
J. Douglas Perry 50 Chairman of the Board; Director
H. Ray Compton 55 Executive Vice President and Chief Financial
Officer; Director
John F. Megrue 39 Vice Chairman of the Board; Director
Allan W. Karp 43 Director
Thomas A. Saunders, III 61 Director
Alan L. Wurtzel 64 Director
Frank Doczi 60 Director
CERTAIN KEY PERSONNEL
Thomas J. Bowyer 38 Senior Vice President, Sales and Operations
Frederick C. Coble 36 Senior Vice President, Finance
K. Bryan Bagwell 38 Vice President, Merchandise
Robert G. Gurnee 38 Vice President, Real Estate
G. Zeb Holt 49 Vice President, Corporate Development
Charles S. Murray 49 Vice President, Human Resources
Darcel L. Stephan 40 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 the Company since
1993 and a Director and President of the Company since 1986 when he founded the
Company with Mr. Perry and Mr. Compton. 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 the Company 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 the
Company since 1986 when he founded the Company with Mr. Brock and Mr. Compton.
Mr. Perry intends to reduce his day to day responsibilities with the Company in
the near future. However, he will continue 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, Executive Vice President and Chief
Financial Officer of the Company since 1986 when he founded the Company with Mr.
Perry and Mr. Brock. He is responsible for finance, maintenance of credit
facilities, cash management, information systems and human resources. He also
serves on the Board of Directors of Hibbett Sporting Goods, Inc. From 1979 until
1991 Mr. Compton was employed in a similar role with K&K Toys. Prior to 1979, he
was associated for 15 years with a
29
<PAGE>
manufacturing company in various accounting and management positions. Mr.
Compton graduated from Phillips Business College.
JOHN F. MEGRUE has been a Director and Vice Chairman of the Board of the
Company 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.
ALLAN W. KARP has been a Director of the Company 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 the Company 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 the Company since April 1995. Mr.
Wurtzel serves as the Vice Chairman of the Board of Circuit City Stores, Inc.
("Circuit City"), a large consumer electronics retailing chain. From 1986 to
1994, he served as Chairman of the Board of Circuit City. Prior to 1986, he
served in several other capacities with Circuit City, including Chief Executive
Officer (1973 to 1986). From December 1986 to April 1988, he served as President
of Operation Independence, a non-profit organization. Mr. Wurtzel 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 the Company since May 1995. Mr. Doczi
currently serves as Special Advisor to the Chairman of Hechinger Company. Prior
to that appointment, he served as the President and Chief Executive Officer of
Home Quarters Warehouse, Inc. ("HQ"), a subsidiary of Hechinger Company, from
1988 until 1995. Mr. Doczi had been with HQ since its inception in 1984. He also
served as a member of the Management Committee for the Hechinger Company. Prior
to Mr. Doczi's association with HQ, he spent seven years with Moore's, a chain
of home centers operated by Evans Products Company, where he was the Senior Vice
President, General Merchandise Manager. Mr. Doczi attended Rutgers University.
Mr. Brock is married to Mr. Perry's sister. There are no additional family
relationships among the Directors and executive officers.
CERTAIN KEY PERSONNEL
THOMAS J. BOWYER became Senior Vice President, Sales and Operations, of the
Company in January 1995 and prior thereto served as Vice President, Sales and
Operations from July 1991. Prior thereto, he served as Director of Sales and
Operations of Dollar Tree from August 1989. His previous work experience
30
<PAGE>
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.
FREDERICK C. COBLE became Senior Vice President, Finance, of the Company in
January 1997 and prior thereto served as Vice President, Controller, of the
Company since December 1991. Mr. Coble also, prior to joining the Company 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.
K. BRYAN BAGWELL became Vice President, Merchandise, of the Company in
September 1993. Prior thereto, Mr. Bagwell served as Merchandise Manager for
Dollar Tree from March 1993 to September 1993 and as a buyer for the Company
from October 1991 to March 1993. Before joining the Company, Mr. Bagwell worked
for K&K Toys from 1977 to October 1991, starting as a distribution center
associate and leaving as a senior buyer.
ROBERT G. GURNEE became Vice President, Real Estate, of the Company 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 the Company, 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 the Company in February 1998 as Vice President, Corporate
Development. Before joining the Company, 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.
CHARLES S. MURRAY became Vice President, Human Resources, of the Company in
January 1998. Previously, he served as Director of Human Resources since May
1997. Before joining the Company, 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 the Company
in September 1989. Prior thereto, she served as Data Processing Director from
February 1987 to September 1989. Before joining the Company, Ms. Stephan worked
for K&K Toys as Data Processing Supervisor from December 1980 to February 1987.
Ms. Stephan previously worked as a programmer/analyst with Haynes Furniture, a
furniture retailer, and C. Lloyd Johnson, a distributor of manufactured goods.
STEPHEN W. WHITE became Vice President, Logistics in December 1995 after
having joined the Company in June 1994 as Director of Transportation and
Distribution. Prior to joining the Company, he served as Director of
Transportation and Distribution Planning for Ames Department Stores from July
1986 to June 1994. His previous work experience included various transportation
and supply positions with a number of companies, including Shell Oil Company and
Eastern Airlines. Mr. White graduated from Northeastern University in 1978.
31
<PAGE>
PRINCIPAL AND SELLING SHAREHOLDERS
The following table sets forth certain information regarding the beneficial
ownership as of February 28, 1998 of the Common Stock by (i) each of the
Directors, (ii) each of the executive officers, (iii) all current Directors and
executive officers as a group, (iv) each other person who has reported
beneficial ownership of more than 5% of the outstanding Common Stock and (v)
each other Selling Shareholder. The address of each Director and executive
officer of the Company is c/o Dollar Tree Stores, Inc., 500 Volvo Parkway,
Chesapeake, Virginia 23320.
<TABLE>
<CAPTION>
BENEFICIAL
BENEFICIAL OWNERSHIP OWNERSHIP
BEFORE OFFERING(1) AFTER OFFERING(1)
----------------------- -------------------
<S> <C> <C> <C> <C> <C>
SHARES
SHARES PERCENT OFFERED(2) SHARES PERCENT
------------- ------- ---------- ---------- -------
<CAPTION>
<S> <C> <C> <C> <C> <C>
DIRECTORS AND EXECUTIVE OFFICERS
J. Douglas Perry.................................... 3,074,749(3) 7.69% 156,000 2,429,742 6.08%
Macon F. Brock, Jr.................................. 3,348,988(4) 8.37% 100,000 2,947,650 7.37%
H. Ray Compton...................................... 574,648(5) 1.46% 80,000 374,648 *
John F. Megrue...................................... 8,176,690(6) 19.94% -- 5,389,076 13.14%
Allan W. Karp....................................... 8,176,692(7) 19.94% 4,565 5,389,077 13.14%
Thomas A. Saunders, III............................. 8,176,692(8) 19.94% -- 5,389,077 13.14%
Alan L. Wurtzel..................................... 43,500(9) * -- 43,500 *
Frank Doczi......................................... 34,875(10) * -- 34,875 *
All current Directors and executive
officers of the Company (8 persons)............... 15,280,230 35.58% 340,565 11,237,141 26.17%
OTHER 5% SHAREHOLDERS
The SK Equity Fund, L.P............................. 8,163,302(11) 19.91% 2,783,050 5,380,252 13.12%
Two Greenwich Plaza
Suite 100
Greenwich, Connecticut 06830
Putnam Investment, Inc.............................. 3,274,563(12) 8.36% -- 3,274,563 8.36%
One Post Office Square
Boston, Massachusetts 02109
Baron Capital Group, Inc............................ 2,705,825(13) 6.91% -- 2,705,825 6.91%
767 Fifth Avenue, 24th Floor
New York, New York 10153
Provident Investment Counsel, Inc................... 2,611,059(14) 6.67% -- 2,611,059 6.67%
300 N. Lake Avenue, Suite 1001
Pasadena, California 91101
Pilgrim, Baxter & Associates, Ltd................... 2,549,679(15) 6.51% -- 2,549,679 6.51%
825 Duportail Rd.
Wayne, Pennsylvania 19087
OTHER SELLING SHAREHOLDERS
Joan P. Brock....................................... 1,187,421(16) 3.03% 100,000 1,087,421 2.78%
Patricia W. Perry................................... 1,487,898(17) 3.80% 356,000 1,131,898 2.89%
Christopher K. Reilly............................... 2,672(18) * 911 1,761 *
Robert C. Miller and J. Douglas Perry, as Trustees
for Joseph C. Perry Descendants Trust............. 475,907(19) 1.21% 160,000 315,907 *
Robert C. Miller and J. Douglas Perry, as Trustees
for Brandon D. Perry Descendants Trust............ 475,907(19) 1.21% 160,000 315,907 *
Robert C. Miller and J. Douglas Perry, as Trustees
for Laura Page Perry Descendants Trust............ 475,905(20) 1.21% 160,000 315,905 *
Robert C. Miller and J. Douglas Perry, as Trustees
for the Joseph C. Perry Trust..................... 3,002 * 3,002 -- --
Robert C. Miller and J. Douglas Perry, as Trustees
for the Brandon D. Perry Trust.................... 3,002 * 3,002 -- --
Robert C. Miller and J. Douglas Perry, as Trustees
for the Laura Page Perry Trust.................... 3,003 * 3,003 -- --
</TABLE>
32
<PAGE>
<TABLE>
<CAPTION>
BENEFICIAL
BENEFICIAL OWNERSHIP OWNERSHIP
BEFORE OFFERING(1) AFTER OFFERING(1)
----------------------- -------------------
SHARES
SHARES PERCENT OFFERED(2) SHARES PERCENT
------------- ------- ---------- ---------- -------
<S> <C> <C> <C> <C> <C>
Robert C. Miller and Macon F. Brock, as Trustees for
the Kathryn P. Brock Descendants Trust............ 454,691(19) 1.15% 100,446 354,245 *
Robert C. Miller and Macon F. Brock, as Trustees for
the Macon F. Brock III Descendants Trust.......... 454,691(19) 1.15% 100,446 354,245 *
Robert C. Miller and Macon F. Brock, as Trustees for
the Christine B. McCammon Descendants Trust....... 454,690(20) 1.15% 100,446 354,244 *
James P. Compton, as Trustee of the Bryan Compton
Trust............................................. 30,784 * 10,000 20,784 *
James P. Compton, as Trustee of the Mark Compton
Trust............................................. 30,784 * 10,000 20,784 *
James P. Compton, Trustee of the Brymar Descendants
Trust............................................. 354,502(21) * 100,000 254,502 *
Melanie K. Berman, Custodian for Kyle Galbreath
Megrue............................................ 6,694(22) * 2,282 4,412 *
Melanie K. Berman, Custodian for Christopher
Galbreath Megrue.................................. 6,694(22) * 2,282 4,412 *
Thomas A. Saunders, III and Joanne S. Berkley, as
Trustees for the Saunders Dollar Tree Trust....... 13,390(23) * 4,565 8,825 *
</TABLE>
- ------------------------------
* less than 1%
33
<PAGE>
(1) As used in this table "beneficial ownership" means the sole or shared power
to vote or direct the voting or to dispose or direct the disposition of any
security. A person is deemed as of any date to have "beneficial ownership"
of any security that such person has a right to acquire within 60 days after
such date. Any security that any person named above has the right to acquire
within 60 days is deemed to be outstanding for purposes of calculating the
ownership percentage of such person, but is not deemed to be outstanding for
purposes of calculating the ownership percentage of any other person. The
Company has issued warrants to acquire 3,723,266 shares of Common Stock (the
"Warrant Shares"), all of which are currently exercisable.
(2) Certain shares being offered by The SK Equity Fund, L.P., may instead be
offered by affiliates of The SK Equity Fund, L.P., including Thomas A.
Saunders, III, Allan W. Karp and/or John F. Megrue, the general partners of
the general partner of The SK Equity Fund, L.P., and/or their trusts and/or
charitable donees. Such shares would be transferred from The SK Equity Fund,
L.P. to the ultimate selling shareholder prior to consummation of the
offering. This table assumes no exercise of the Underwriters' over-allotment
option to purchase up to 675,000 shares of Common Stock. If the Underwriters
exercise this option in whole, the Selling Shareholders will sell additional
shares in the following respective amounts: Allan W. Karp, 1,101 shares; The
SK Equity Fund, L.P., 671,476 shares; Christopher K. Reilly, 220 shares;
Melanie K. Berman, Custodian for Kyle Galbreath Megrue, 551 shares; Melanie
K. Berman, Custodian for Christopher Galbreath Megrue, 551 shares; Thomas A.
Saunders, III and Joanne S. Berkley, as Trustees for the Saunders Dollar
Tree Trust, 1,101 shares. A partial exercise of this option would reduce
these amounts pro rata.
(3) Includes 598,992 shares and 837,734 Warrant Shares owned by trusts for the
benefit of certain Perry family members, of which Mr. Perry is a trustee,
and 106,400 shares owned by a private foundation over which Mr. Perry and
his wife, Patricia W. Perry, exercise shared control, but excludes 1,381,498
shares owned by Patricia W. Perry.
(4) Includes 862,257 shares and 837,734 Warrant Shares owned by trusts for the
benefit of certain Brock family members, of which Mr. Brock is a trustee,
but excludes 1,187,421 shares owned by Mr. Brock's wife, Joan P. Brock.
(5) Includes 229,905 shares and 186,165 Warrant Shares owned by trusts for the
benefit of certain Compton family members, over which Mr. Compton may
indirectly exercise investment or voting power, but excludes 37,500 shares
owned by Mr. Compton's wife, Jean T. Compton.
(6) Represents 10,352 shares and 3,036 Warrant Shares owned by Mr. Megrue's
sister as Custodian for his children. Also includes 6,311,386 shares and
1,851,916 Warrant Shares owned by The SK Equity Fund, L.P. Mr. Megrue is a
general partner of the general partner of The SK Equity Fund, L.P.
(7) Includes 6,311,386 shares and 1,851,816 Warrant Shares owned by The SK
Equity Fund, L.P., and 3,037 Warrant Shares owned by Mr. Karp. Mr. Karp is a
general partner of the general partner of The SK Equity Fund, L.P.
(8) Represents 10,353 shares and 3,037 Warrant Shares owned by an irrevocable
trust for the benefit of certain Saunders family members, of which Mr.
Saunders is a trustee. Also includes 6,311,386 shares and 1,851,916 Warrant
Shares owned by The SK Equity Fund, L.P. Mr. Saunders is a general partner
of the general partner of The SK Equity Fund, L.P.
(9) Includes 8,625 shares held in a revocable trust of which Mr. Wurtzel is a
trustee and 34,875 shares issuable upon exercise of certain stock options
granted to Mr. Wurtzel pursuant to The Dollar Tree Stores, Inc. Stock
Incentive Plan.
(10) Includes 34,875 shares issuable upon exercise of certain stock options
granted to Mr. Doczi pursuant to The Dollar Tree Stores, Inc. Stock
Incentive Plan.
(11) Includes 1,851,916 Warrant Shares. Messrs. Megrue, Saunders and Karp, as
general partners of the general partner of The SK Equity Fund, L.P., may be
deemed to have beneficial ownership of shares held by The SK Equity Fund,
L.P. and the shares and Warrant Shares held by The SK Equity Fund, L.P. have
been attributed to them in the table above.
(12) Includes shares held or controlled by Putnam Investments, Inc. ("PI") and
its affiliates including Marsh & McLennan Companies, Inc., PI's parent
holding company, and Putnam Investment Management, Inc. and The Putnam
Advisory Company, Inc., investment advisors and subsidiaries of PI. Based on
Schedule 13G filed by PI on January 20, 1998.
(13) Includes shares held or controlled by Baron Capital Group, Inc., a parent
holding company ("BCG"), and its affiliates including BAMCO, Inc. and Baron
Capital Management, Inc., registered investment advisors, and Baron Asset
Fund, a registered investment company. Ronald Baron owns a controlling
interest in BCG. Based on Schedule 13G filed by BCG on February 18, 1998.
(14) Includes shares held or controlled by Provident Investment Counsel, Inc., a
registered investment advisor ("PIC"), and its affiliates including United
Asset Management Holdings, PIC's parent ("UAMH"), and UAMH's parent, United
Asset Management Corporation. Based on Schedule 13G/A filed by PIC on
February 10, 1998.
(15) Includes shares held or controlled by Pilgrim, Baxter & Associates, Ltd., a
registered investment advisor ("Pilgrim") and its affiliates. Based on
Schedule 13G/A filed by Pilgrim on February 12, 1998.
(16) Does not include 2,511,254 shares and 837,734 Warrant Shares beneficially
owned by Mrs. Brock's husband, Macon F. Brock, Jr.
(17) Includes 106,400 shares owned by a private foundation over which Mrs. Perry
and her husband, J. Douglas Perry, exercise shared control but does not
include 2,237,015 shares and 837,734 Warrant Shares beneficially owned by J.
Douglas Perry.
(18) Includes 607 Warrant Shares. Mr. Reilly is a general partner of Saunders
Karp & Megrue, an affiliate of The SK Equity Fund, L.P.
(19) Includes 279,245 Warrant Shares.
(20) Includes 279,244 Warrant Shares.
(21) Includes 186,165 Warrant Shares.
(22) Includes 1,518 Warrant Shares.
(23) Includes 3,037 Warrant Shares.
34
<PAGE>
UNDERWRITING
The Underwriters named below have severally agreed, subject to the terms and
conditions set forth in the Underwriting Agreement, to purchase from the Selling
Shareholders the number of shares of Common Stock indicated below opposite their
respective names at the public offering price less the underwriting discount set
forth on the cover page of this Prospectus. The Underwriting Agreement provides
that the obligations of the Underwriters are subject to certain conditions
precedent and that the Underwriters are committed to purchase all of the shares
if they purchase any.
<TABLE>
<CAPTION>
NUMBER
UNDERWRITERS OF SHARES
- --------------------------------------------------------------------------------- ----------
<S> <C>
NationsBanc Montgomery Securities LLC............................................
BT Alex. Brown Incorporated .....................................................
Goldman, Sachs & Co. ............................................................
Smith Barney Inc. ...............................................................
----------
Total........................................................................ 4,500,000
----------
----------
</TABLE>
The Underwriters have advised the Company and the Selling Shareholders that
the Underwriters propose initially to offer the Common Stock to the public on
the terms set forth on the cover page of this Prospectus. The Underwriters may
allow to selected dealers a concession of not more than $ per share; and the
Underwriters may allow, and such dealers may reallow, a concession of not more
than $
per share to certain other dealers. After the public offering, the offering
price and other selling terms may be changed by the Underwriters. The Common
Stock is offered subject to receipt and acceptance by the Underwriters, and to
certain other conditions, including the right to reject orders in whole or in
part.
The Selling Shareholders have granted an option to the Underwriters,
exercisable during the 30-day period after the date of this Prospectus, to
purchase up to a maximum of 675,000 additional shares of Common Stock to cover
over-allotments, if any, at the same price per share as the initial shares to be
purchased by the Underwriters. To the extent that the Underwriters exercise this
option, the Underwriters will be committed, subject to certain conditions, to
purchase such additional shares in approximately the same proportion as set
forth in the above table. The Underwriters may purchase such shares only to
cover over-allotments made in connection with this offering.
The Underwriting Agreement provides that the Company and the Selling
Shareholders will indemnify the Underwriters against certain liabilities,
including civil liabilities under the Securities Act, or will contribute to
payments the Underwriters may be required to make in respect thereof.
All of the Selling Shareholders have agreed, subject to certain limited
exceptions, not to offer, sell or otherwise dispose, directly or indirectly, of
any shares of Common Stock of the Company for a period of 90 days after the date
of this Prospectus, without the prior written consent of NationsBanc Montgomery
Securities LLC, as representative of the Underwriters. The Company has agreed
not to offer, sell or otherwise dispose of, directly or indirectly, any shares
of Common Stock of the Company for a period of 90 days after the date of this
Prospectus, without the prior written consent of NationsBanc Montgomery
Securities LLC, as representative of the Underwriters, except that the Company,
without such consent, may grant options or issue Common Stock upon exercise of
new or outstanding options pursuant to The Dollar Tree Stores, Inc. Amended and
Restated Stock Option Plan, The Dollar Tree Stores, Inc. Stock Incentive Plan
and The Dollar Tree Stores, Inc. Employee Stock Purchase Plan.
The Representatives are permitted to engage in certain transactions that
stabilize the price of the Common Stock. Such transactions consist of bids or
purchases for the purpose of pegging, fixing or maintaining the price of the
Common Stock. If the Underwriters create a short position in the Common Stock in
connection with the offering, i.e., if they sell more shares of Common Stock
than are set forth on the cover page of this Prospectus, the Representatives may
reduce that short position by purchasing
35
<PAGE>
Common Stock in the open market. The Representatives may also elect to reduce
any short position by exercising all or part of the over-allotment option
described above.
In general, purchases of Common Stock for the purpose of stabilization or to
reduce a short position could cause the price of the Common Stock to be higher
than it might be in the absence of such purchases. Neither the Company nor any
of the Underwriters makes any representation or predictions as to the direction
or magnitude of any effect that the transactions described above may have on the
price of the Common Stock. In addition, neither the Company nor any of the
Underwriters makes any representation that the Representatives will engage in
such transactions or that such transactions, once commenced, will not be
discontinued without notice.
LEGAL MATTERS
The validity of the Common Stock and certain other legal matters in
connection with this offering will be passed upon for the Company by Hofheimer
Nusbaum, P.C., Norfolk, Virginia. Certain legal matters in connection with the
Common Stock offered hereby will be passed upon for the Underwriters by Hale and
Dorr LLP, Boston, Massachusetts.
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 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.
ADDITIONAL INFORMATION
The Company has filed a Registration Statement on Form S-3 under the
Securities Act of 1933, as amended, with the Securities and Exchange Commission
(the "Commission") with respect to the shares offered by this Prospectus. This
Prospectus does not contain all of the information set forth in the Registration
Statement and the exhibits and schedules thereto. Statements contained herein
concerning the provisions of any documents are not necessarily complete and, in
each instance, reference is made to the copy of such documents filed as an
exhibit to the Registration Statement, and each such statement shall be deemed
qualified in its entirety by such reference.
The Company is subject to the informational requirements of the Exchange Act
and, in accordance therewith, files reports and other information with the
Commission. A copy of the reports and other information filed by the Company in
accordance with the Exchange Act may be inspected without charge at the offices
of the Commission at Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549,
and will also be available for inspection and copying at the regional offices of
the Commission located at 7 World Trade Center, Suite 1300, New York, New York
10048 and at Citicorp Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661-2511. Copies of such material may also be obtained from the
Public Reference Section of the Commission, Washington, D.C. 20549, upon payment
of the fees prescribed by the Commission. The Commission maintains a Web site
that contains reports, proxy and information statements and other information
regarding registrants that file electronically with the Commission with a Web
site address of http://www.sec.gov. Such reports, proxy statements and other
information concerning the Company are also available for inspection at the
offices of the Nasdaq National Market, Reports Section, 1735 K Street, N.W.,
Washington, D.C. 20006.
36
<PAGE>
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents filed by the Company with the Commission are
incorporated herein by reference: (i) the Company's Annual Report on Form 10-K
for the year ended December 31, 1996; (ii) the Company's Current Report on Form
8-K filed March 4, 1998; (iii) the Company's Quarterly Reports on Form 10-Q for
the quarters ended March 31, June 30, and September 30, 1997; and (iv) the
Company's Registration Statement on Form 8-A filed February 28, 1995,
registering the Company's Common Stock under Section 12(g) of the Exchange Act.
All documents filed by the Company with the Commission pursuant to Sections
13(a), 13(c), 14 and 15(d) of the Exchange Act subsequent to the date hereof and
prior to the termination of the offering of the Common Stock registered hereby
shall be deemed to be incorporated by reference into this Prospectus and to be a
part hereof from the date of filing such documents. Any statements contained in
a document incorporated or deemed to be incorporated by reference herein shall
be deemed to be modified or superseded for purposes of this Prospectus to the
extent that a statement contained herein or in any other subsequently filed
document which also is, or is deemed to be, incorporated by reference herein
modifies or supersedes such statement. Any statement so modified or superseded
shall not be deemed, except as so modified or superseded, to constitute a part
of this Prospectus. The Company will provide without charge to each person to
whom this Prospectus is delivered, upon a written request of such person, a copy
of any or all of the foregoing documents incorporated by reference into this
Prospectus (other than exhibits to such documents, unless such exhibits are
specifically incorporated by reference into such documents). Requests for such
copies should be delivered to H. Ray Compton, Executive Vice President and Chief
Financial Officer, 500 Volvo Parkway, Chesapeake, Virginia 23320.
37
<PAGE>
[Internal Store Photo]
<PAGE>
- -----------------------------------------------
-----------------------------------------------
- -----------------------------------------------
-----------------------------------------------
NO DEALER, SALES REPRESENTATIVE, OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO
GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED
IN THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION
MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY, BY ANY SELLING
SHAREHOLDER OR BY THE UNDERWRITERS. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR
ANY SALE MADE HEREUNDER SHALL UNDER ANY CIRCUMSTANCES CREATE ANY IMPLICATION
THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE
HEREOF. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION
OF AN OFFER TO BUY ANY SECURITIES OFFERED HEREBY BY ANYONE IN ANY JURISDICTION
IN WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED OR IN WHICH THE PERSON
MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO OR TO ANY PERSON TO
WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION.
---------------------
TABLE OF CONTENTS
---------------------
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
PROSPECTUS SUMMARY................................... 3
RISK FACTORS......................................... 6
USE OF PROCEEDS...................................... 12
PRICE RANGE OF COMMON STOCK.......................... 12
DIVIDEND POLICY...................................... 12
SELECTED FINANCIAL DATA.............................. 13
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS
OF OPERATIONS...................................... 15
BUSINESS............................................. 22
MANAGEMENT........................................... 29
PRINCIPAL AND SELLING SHAREHOLDERS................... 32
UNDERWRITING......................................... 35
LEGAL MATTERS........................................ 36
EXPERTS.............................................. 36
ADDITIONAL INFORMATION............................... 36
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE...... 37
</TABLE>
4,500,000 SHARES
[LOGO]
DOLLAR TREE STORES, INC.
COMMON STOCK
-----------
PROSPECTUS
----------------
NATIONSBANC MONTGOMERY
SECURITIES LLC
BT ALEX. BROWN
GOLDMAN, SACHS & CO.
SALOMON SMITH BARNEY
, 1998
- -----------------------------------------------
-----------------------------------------------
- -----------------------------------------------
-----------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCES AND DISTRIBUTION
The following table sets forth the fees and expenses payable in connection
with the issuance and distribution of the securities other than underwriting
discount. All of such expenses except the Securities and Exchange Commission
registration fee and NASD filing fee are estimated:
<TABLE>
<S> <C>
Securities and Exchange Commission registration fee............... $ 64,500
Blue Sky fees and expenses........................................ 12,000
Printing expense.................................................. 200,000
Accounting fees and expenses...................................... 40,000
Legal fees and expenses........................................... 150,000
NASD filing fee................................................... 22,364
Miscellaneous..................................................... 111,136
---------
Total....................................................... $ 600,000
---------
---------
The Selling Shareholders have agreed to pay the foregoing expenses.
</TABLE>
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
To the full extent permitted by the Virginia Stock Corporation Act, the
Articles of Incorporation require the Company to indemnify its officers and
directors. Article V of the Articles of Incorporation provides that any director
or officer who was or is a party to any proceeding shall be indemnified by the
Company against any liability incurred by him in connection with such proceeding
unless he engaged in willful misconduct or a knowing violation of the criminal
law. The Company is also required to promptly pay for or reimburse all
reasonable expenses, including attorneys' fees, incurred by a director or
officer in advance of final disposition of the proceeding if the director or
officer furnishes the Company with a written statement of his good faith belief
that he has met the standard of conduct that is a prerequisite to his
entitlement to indemnification and agrees to repay the advance if it is
ultimately determined that he did not meet such standard of conduct. The Company
is authorized to purchase and maintain insurance to insure the Company against
its indemnification obligation, or insure any person who is or was a director,
officer, employee, or agent of the Company against any liability asserted
against or incurred by him in any such capacity or arising from his status as
such, whether or not the Company has the power to indemnify him against such
liability. The Company has directors and officers liability insurance. The
Company is also empowered, by a majority vote of a quorum of disinterested
directors, to enter into a contract to indemnify any director or officer against
liability, whether occurring before or after the execution of the contract.
Except to the extent contrary to the Articles of Incorporation or Virginia Stock
Corporation Act, the Company is not prevented or restricted from making or
providing for indemnities in addition to those provided in the Articles of
Incorporation.
Section 11 of the Underwriting Agreement provides for indemnification by the
Underwriters of directors, officers and controlling persons of the Company
against certain liabilities, including liabilities under the Securities Act of
1933, as amended (the "Securities Act"), under certain circumstances.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULE
(a) Exhibits
<TABLE>
<S> <S>
1.1 --Form of Underwriting Agreement
</TABLE>
II-1
<PAGE>
<TABLE>
<S> <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 the
Company, John F. Megrue, Thomas A. Saunders, III, and certain shareholders
("Stockholders Agreement")
* 2.3 --Securities Purchase Agreement dated September 30, 1993 among the Company, J.
Douglas Perry, Patricia W. Perry, Macon F. Brock, Jr., Joan P. Brock, H. Ray
Compton, John F. Megrue, Thomas A. Saunders, III, Allan W. Karp, Christopher K.
Reilly, and The SK Equity Fund, L.P., and the First Amendment thereto
*** 2.4 --Agreement for Purchase and Sale of Stock dated as of January 16, 1996 between
the Company and Michael N. Alper and Pamela J. Alper
**** 2.5 --First Amendment to Stockholders Agreement effective March 13, 1995
** 4.1 --Amended and Restated Stockholders Agreement (See Exhibit 2.2)
* 4.2 --Third Restated Articles of Incorporation of the Company
* 4.3 --Second Restated Bylaws of the Company
* 4.4 --Form of Specimen Certificate representing the Company's Common Stock, $.01 par
value per share
5.1 --Opinion of Hofheimer Nusbaum, P.C., regarding the legality of the securities
being registered
23.1 --Consent of Hofheimer Nusbaum, P.C. (included in Exhibit 5.1 hereto)
23.2 --Consent of KPMG Peat Marwick LLP, independent certified public accountants
24.1 --Power of Attorney (included in Part II of the Registration Statement)
</TABLE>
- ------------------------
* Incorporated by reference to the Company's Registration Statement on Form
S-1, No. 33-88502.
** Incorporated by reference to the Company's Quarterly Report on Form 10-Q for
the quarter ended March 31, 1995.
*** Incorporated by reference to the Company's Current Report on Form 8-K dated
February 14, 1996.
****Incorporated by reference to the Company's Registration Statement on Form
S-3, No. 333-28599.
ITEM 17. UNDERTAKINGS
The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act each filing of the
registrant's annual report pursuant to Section 13(a) or 15(d) of the Securities
Exchange Act of 1934 (and, where applicable, each filing of an employee benefit
plan's annual report pursuant to Section 15(d) of the Securities Exchange Act of
1934) that is incorporated by reference in this registration statement shall be
deemed to be a new registration statement relating to the securities offered
herein, and the offering of such securities at that time shall be deemed to be
the initial BONA FIDE offering thereof.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
registrant pursuant to the provisions described in Item 15 above or otherwise,
the registrant has been advised that in the opinion of the Commission such
indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of expenses
incurred or paid by a director, officer or controlling person of the registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
II-2
<PAGE>
The undersigned registrant hereby undertakes:
For purposes of determining any liability under the Securities Act, the
information omitted from the form of prospectus filed as part of a registration
statement in reliance upon Rule 430A and contained in the form of prospectus
filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the
Securities Act shall be deemed to be part of this registration statement as of
the time it was declared effective.
For the purpose of determining any liability under the Securities Act, each
post-effective amendment that contains a form of prospectus shall be deemed to
be a new registration statement relating to the securities offered herein, and
the offering of such securities at that time shall be deemed to be the initial
bona fide offering thereof.
II-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-3 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Chesapeake, Commonwealth of Virginia, on the 4th day
of March, 1998.
DOLLAR TREE STORES, INC.
By /s/ MACON F. BROCK, JR.
------------------------------------
Macon F. Brock, Jr.
President and Chief Executive
Officer
The registrant and each person whose signature appears below constitutes and
appoints Macon F. Brock, Jr. and J. Douglas Perry, and any agent for service
named in this registration statement and each of them, his, her or its true and
lawful attorneys-in-fact and agents, with full power of substitution and
resubstitution, for him, her or it and in his, her, or its name, place and
stead, in any and all capacities, to sign and file (i) any and all amendments
(including post-effective amendments) to this registration statement and (ii)
any registration statement relating to the offering covered by this registration
statement deemed effective upon filing pursuant to Rule 462(b) under the
Securities Act of 1933 and any and all amendments (including post-effective
amendments) thereto, with all exhibits thereto, and other documents in
connection therewith, with the Securities and Exchange Commission, granting unto
said attorneys-in-fact and agents, and each of them, full power and authority to
do and perform each and every act and thing requisite or necessary to be done in
and about the premises, as fully to all intents and purposes as he, she, or it
might or could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents or any of them, or their or his substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS
REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE
CAPACITIES AND ON THE DATES INDICATED:
SIGNATURE TITLE DATE
- ------------------------------ -------------------------- -------------------
/s/ J. DOUGLAS PERRY
- ------------------------------ Chairman of the Board; March 4, 1998
J. Douglas Perry Director
President and Chief
/s/ MACON F. BROCK, JR. Executive Officer;
- ------------------------------ Director (principal March 4, 1998
Macon F. Brock, Jr. executive officer)
Executive Vice President
/s/ H. RAY COMPTON and Chief Financial
- ------------------------------ Officer; Director March 4, 1998
H. Ray Compton (principal financial and
accounting officer)
/s/ JOHN F. MEGRUE
- ------------------------------ Vice Chairman; Director March 4, 1998
John F. Megrue
/s/ ALLAN W. KARP
- ------------------------------ Director March 4, 1998
Allan W. Karp
/s/ THOMAS A. SAUNDERS, III
- ------------------------------ Director March 4, 1998
Thomas A. Saunders, III
/s/ ALAN L. WURTZEL
- ------------------------------ Director March 4, 1998
Alan L. Wurtzel
/s/ FRANK DOCZI
- ------------------------------ Director March 4, 1998
Frank Doczi
II-4
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION PAGE NO.
- ---------- ------------------------------------------------------------------------------------------- ---------
<C> <S> <C>
1.1 --Form of Underwriting Agreement
* 2.1 --Agreement for Purchase and Sale of Stock dated September 24, 1993 among J. Douglas Perry,
Patricia W. Perry, Macon F. Brock, Jr., Joan P. Brock, H. Ray Compton and The SK Equity
Fund, L.P.
** 2.2 --Amended and Restated Stockholders Agreement effective March 13, 1995 among the Company,
John F. Megrue, Thomas A. Saunders, III, and certain shareholders ("Stockholders
Agreement")
* 2.3 --Securities Purchase Agreement dated September 30, 1993 among the Company, J. Douglas
Perry, Patricia W. Perry, Macon F. Brock, Jr., Joan P. Brock, H. Ray Compton, John F.
Megrue, Thomas A. Saunders, III, Allan W. Karp, Christopher K. Reilly, and The SK Equity
Fund, L.P., and the First Amendment thereto
*** 2.4 --Agreement for Purchase and Sale of Stock dated as of January 16, 1996 between the Company
and Michael N. Alper and Pamela J. Alper
**** 2.5 --First Amendment to Stockholders Agreement effective March 13, 1995
** 4.1 --Amended and Restated Stockholders Agreement (See Exhibit 2.2)
* 4.2 --Third Restated Articles of Incorporation of the Company
* 4.3 --Second Restated Bylaws of the Company
* 4.4 --Form of Specimen Certificate representing the Company's Common Stock, $.01 par value per
share
5.1 --Opinion of Hofheimer Nusbaum, P.C., regarding the legality of the securities being
registered
23.1 --Consent of Hofheimer Nusbaum, P.C. (included in Exhibit 5.1 hereto)
23.2 --Consent of KPMG Peat Marwick LLP, independent certified public accountants
24.1 --Power of Attorney (included in Part II of the Registration Statement)
</TABLE>
- ------------------------
* Incorporated by reference to the Company's Registration Statement on Form
S-1, No. 33-88502.
** Incorporated by reference to the Company's Quarterly Report on Form 10-Q for
the quarter ended March 31, 1995.
*** Incorporated by reference to the Company's Current Report on Form 8-K dated
February 14, 1996.
****Incorporated by reference to the Company's Registration Statement on Form
S-3, No. 333-28599.
<PAGE>
4,500,000 Shares
DOLLAR TREE STORES, INC.
Common Stock
UNDERWRITING AGREEMENT
March , 1998
NATIONSBANC MONTGOMERY SECURITIES LLC
BT ALEX. BROWN INCORPORATED
GOLDMAN, SACHS & CO.
SMITH BARNEY INC.
As Representatives of the several Underwriters
c/o NATIONSBANC MONTGOMERY SECURITIES LLC
600 Montgomery Street
San Francisco, California 94111
Dear Sirs:
SECTION 1. Introductory. Certain shareholders of Dollar Tree
Stores, Inc., a Virginia corporation (the "Company"), named in Schedule B
annexed hereto (the "Selling Shareholders") propose to transfer and sell an
aggregate of 4,500,000 shares of the outstanding Common Stock of the Company
(the "Common Stock") to the several underwriters named in Schedule A annexed
hereto (the "Underwriters"), for whom you are acting as Representatives. Said
aggregate of 4,500,000 shares are herein called the "Firm Common Shares." In
addition, the Selling Shareholders propose to grant to the Underwriters an
option to purchase up to 675,000 additional shares of Common Stock (the
"Optional Common Shares"), as provided in Section 5 hereof. The Firm Common
Shares and, to the extent such option is exercised, the Optional Common
Shares are hereinafter collectively referred to as the "Common Shares."
You have advised the Company and the Selling Shareholders that the
Underwriters propose to make a public offering of their respective portions
of the Common Shares on the effective date of the registration statement
hereinafter referred to, or as soon thereafter as in your judgment is
advisable.
The Company and each of the Selling Shareholders hereby confirm
their respective agreements with respect to the purchase of the Common Shares
by the Underwriters as follows:
SECTION 2. Representations and Warranties of the Company. The
Company hereby represents and warrants to the several Underwriters that:
(a) A registration statement on Form S-3 (File No. 333- ) with
respect to the Common Shares has been prepared by the Company in conformity
with the requirements of the Securities Act of 1933, as amended (the "Act"),
and the rules and regulations (the "Rules and Regulations") of the Securities
and Exchange
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Commission (the "Commission") thereunder, and has been filed with the
Commission. The Company has prepared and has filed or proposes to file prior
to the effective date of such registration statement an amendment or
amendments to such registration statement, which amendment or amendments have
been or will be similarly prepared. There shall be delivered to you, upon
your request, two photocopies of the signed version of such registration
statement and amendments, together with two copies of each exhibit filed
therewith. Conformed copies of such registration statement and amendments
(but without exhibits) and of the related preliminary prospectus have been
delivered to you in such reasonable quantities as you have requested for each
of the Underwriters. The Company will next file with the Commission one of
the following: (i) prior to effectiveness of such registration statement, a
further amendment thereto, including the form of final prospectus, or (ii) a
final prospectus in accordance with Rules 430A and 424(b) of the Rules and
Regulations. As filed, such amendment and form of final prospectus, or such
final prospectus, shall include all Rule 430A Information and, except to the
extent that you shall agree in writing to a modification, shall be in all
substantive respects in the form furnished to you prior to the date and time
that this Agreement was executed and delivered by the parties hereto, or, to
the extent not completed at such date and time, shall contain only such
specific additional information and other changes (beyond that contained in
the latest Preliminary Prospectus) as the Company shall have previously
advised you in writing would be included or made therein.
The term "Registration Statement" as used in this Agreement shall
mean such registration statement at the time such registration statement
becomes effective and, in the event any post-effective amendment thereto
becomes effective prior to the First Closing Date (as hereinafter defined),
shall also mean such registration statement as so amended; provided, however,
that such term shall also include (i) all Rule 430A Information deemed to be
included in such registration statement at the time such registration
statement becomes effective as provided by Rule 430A of the Rules and
Regulations and (ii) any registration statement filed pursuant to Rule 462(b)
of the Rules and Regulations relating to the Common Shares (the "Additional
Registration Statement"). The term "Preliminary Prospectus" shall mean any
preliminary prospectus referred to in the preceding paragraph and any
preliminary prospectus included in the Registration Statement at the time it
becomes effective that omits Rule 430A Information. The term "Prospectus" as
used in this Agreement shall mean the prospectus relating to the Common
Shares in the form in which it is first filed with the Commission pursuant to
Rule 424(b) of the Rules and Regulations or, if no filing pursuant to Rule
424(b) of the Rules and Regulations is required, shall mean the form of final
prospectus included in the Registration Statement at the time such
registration statement becomes effective. The term "Rule 430A Information"
means information with respect to the Common Shares and the offering thereof
permitted to be omitted from the Registration Statement when it becomes
effective pursuant to Rule 430A of the Rules and Regulations. Any reference
herein to any Preliminary Prospectus or the Prospectus shall be deemed to
refer to and include the documents incorporated by reference therein pursuant
to Form S-3 under the Act, as of the date of such Preliminary Prospectus or
Prospectus, as the case may be.
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(b) The Commission has not issued any order preventing or
suspending the use of any Preliminary Prospectus, and each Preliminary
Prospectus has conformed in all material respects to the requirements of the
Act and the Rules and Regulations and, as of its date, has not included any
untrue statement of a material fact or omitted to state a material fact
necessary to make the statements therein, in the light of the circumstances
under which they were made, not misleading; and at the time the Registration
Statement becomes effective, and at all times subsequent thereto up to and
including the First Closing Date hereinafter mentioned, the Registration
Statement will contain all material statements and information required to be
included therein by the Act and the Rules and Regulations and will in all
material respects conform to the requirements of the Act and the Rules and
Regulations, and the Registration Statement will not include any untrue
statement of a material fact or omit to state a material fact required to be
stated therein or necessary to make the statements therein not misleading;
and the Prospectus, as amended and supplemented, as applicable, at the time
the Registration Statement becomes effective, and at all times subsequent
thereto up to and including the First Closing Date hereinafter mentioned,
will not include any untrue statement of a material fact or omit to state a
material fact necessary in order to make the statements, in the light of the
circumstances under which they were made, not misleading; provided, however,
no representation or warranty contained in this subsection 2(b) shall be
applicable to information contained in or omitted from any Preliminary
Prospectus, the Registration Statement, the Prospectus or any such amendment
or supplement in reliance upon and in conformity with written information
furnished to the Company by or on behalf of any Underwriter, directly or
through the Representatives, specifically for use in the preparation thereof.
The documents incorporated by reference in the Prospectus, when they were
filed with the Commission, conformed in all material respects to the
requirements of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), and the rules and regulations of the Commission thereunder,
and none of such documents contained an untrue statement of a material fact
or omitted to state a material fact required to be stated therein or
necessary to make the statements therein not misleading.
(c) The Company does not own or control, directly or indirectly,
any corporation, association or other entity other than the subsidiaries
listed in Exhibit 21 to the Company's Annual Report on Form 10-K for the year
ended December 31, 1996. The Company and each of its subsidiaries have been
duly incorporated and are validly existing as corporations in good standing
under the laws of their respective jurisdictions of incorporation, with full
power and authority (corporate and other) to own and lease their properties
and conduct their respective businesses as described in the Prospectus,
except where the failure to be in good standing would not have a material
adverse effect on the Company and its subsidiaries, taken as a whole; the
Company owns of record and beneficially all of the outstanding capital stock
of its subsidiaries free and clear of all claims, liens, charges and
encumbrances (except as disclosed in the Prospectus); the Company and each of
its subsidiaries are in possession of and operating in compliance
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with all authorizations, licenses, permits, consents, certificates and orders
material to the conduct of their respective businesses, all of which are
valid and in full force and effect; the Company and each of its subsidiaries
are duly qualified to do business and in good standing as foreign
corporations in each jurisdiction in which the ownership or leasing of
properties or the conduct of their respective businesses requires such
qualification, except for jurisdictions in which the failure to so qualify
would not have a material adverse effect upon the Company and its
subsidiaries, taken as a whole; and no proceeding has been instituted in any
such jurisdiction, revoking, limiting or curtailing, or seeking to revoke,
limit or curtail, such power and authority or qualification.
(d) The Company has authorized and outstanding capital stock as set
forth under the heading "Capitalization" in the Prospectus; the issued and
outstanding shares of Common Stock have been duly authorized and validly
issued, are fully paid and nonassessable, have been issued in compliance with
all federal and state securities laws, were not issued in violation of or
subject to any preemptive rights or other rights to subscribe for or purchase
securities, and conform to the description thereof contained in the
Prospectus. All issued and outstanding shares of capital stock of each
subsidiary of the Company have been duly authorized and validly issued and
are fully paid and nonassessable. Except as disclosed in or contemplated by
the Prospectus and the financial statements of the Company, and the related
notes thereto, included in the Prospectus, neither the Company nor any
subsidiary has outstanding any options to purchase, or any preemptive rights
or other rights to subscribe for or to purchase, any securities or
obligations convertible into, or any contracts or commitments to issue or
sell, shares of its capital stock or any such options, rights, convertible
securities or obligations, except that the Company has preemptive rights to
acquire shares of its subsidiaries' stock. The description of the Company's
stock option, stock bonus and other stock plans or arrangements, and the
options or other rights granted and exercised thereunder, set forth in the
Prospectus accurately and fairly presents the information required to be
shown with respect to such plans, arrangements, options and rights.
(e) No shareholder of the Company has any right which has not been
waived or satisfied to require the Company to register the sale of any shares
owned by such shareholder under the Act in the public offering contemplated
by this Agreement. No further approval or authority of the shareholders or
the Board of Directors of the Company will be required for the transfer and
sale of the Common Shares to be sold by the Selling Shareholders.
(f) The Company has full legal right, power and authority to enter
into this Agreement and perform the transactions contem-plated hereby. This
Agreement has been duly authorized, executed and delivered by the Company and
constitutes a valid and binding obligation of the Company in accordance with
its terms, except as rights to indemnity and contribution hereunder may be
limited by
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applicable law. Except as disclosed in the Prospectus, the making and
performance of this Agreement by the Company and the consummation by the
Company of the transactions herein contemplated will not violate any
provisions of the certificate of incorporation or bylaws, or other
organizational documents, of the Company or any of its subsidiaries, and will
not conflict with, result in the breach or violation of, or constitute,
either by itself or upon notice or the passage of time or both, a default
under any agreement, mortgage, deed of trust, lease, franchise, license,
indenture, permit or other instrument to which the Company or any of its
subsidiaries is a party or by which the Company or any of its subsidiaries or
any of their respective properties, except for any such conflicts, breaches
or defaults which individually or in the aggregate would not be material to
the Company and its subsidiaries, taken as a whole may be bound or affected,
any statute or any authorization, judgment, decree, order, rule or regulation
of any court or any regulatory body, administrative agency or other
governmental body applicable to the Company or any of its subsidiaries or any
of their respective properties, except for any such conflicts, breaches or
defaults which individually or in the aggregate would not be material to the
Company and its subsidiaries, taken as a whole. No consent, approval,
authorization or other order of any court, regulatory body, administrative
agency or other governmental body is required for the execution and delivery
of this Agreement or the consummation of the transactions contem-plated by
this Agreement by the Company, except such consents, approvals,
authorizations or orders (i) as have been obtained under the Act, (ii) as may
be required under state securities or Blue Sky laws or foreign securities
laws in connection with the purchase and distribution of the Common Shares by
the Underwriters, (iii) as may be required by the National Association of
Securities Dealers, Inc. (the "NASD") and (iv) the absence of which
individually and in the aggregate are not material to the Company and its
subsidiaries, taken as a whole, or to the Underwriters.
(g) KPMG Peat Marwick LLP, who have expressed their opinion with
respect to the financial statements and schedules of the Company filed with
the Commission as a part of the Registration Statement and/or included or
incorporated by reference in the Prospectus and in the Registration
Statement, are independent accountants as required by the Act and the Rules
and Regulations.
(h) The financial statements and schedules of the Company, and the
related notes thereto, included in the Registration Statement and the
Prospectus and/or incorporated by reference therein present fairly the
financial position of the Company as of the respective dates of such
financial statements and schedules, and the results of operations and cash
flows of the Company for the respective periods covered thereby. Such
statements, schedules and related notes have been prepared in accordance with
generally accepted accounting principles applied on a consistent basis. No
other financial statements or schedules are required to be included in the
Registration Statement or in the documents incorporated by reference therein.
<PAGE>
The selected financial data set forth in the Prospectus under the captions
"Capitalization" and "Selected Financial Data" fairly present the information
set forth therein on the basis stated in the Registration Statement.
(i) Except as disclosed in the Prospectus, or as to violations,
defaults and breaches which individually or in the aggregate would not be
material to the Company and its subsidiaries, taken as a whole, neither the
Company nor any of its subsidiaries is in violation or default of any
provision of its Articles of Incorporation or Bylaws, or is in breach of or
default with respect to any provision of any agreement, judgment, decree,
order, mortgage, deed of trust, lease, franchise, license, indenture, permit
or other instrument to which it is a party or by which it or any of its
properties are bound; and, except as disclosed in the Prospectus, there does
not exist any state of facts which constitutes an event of default on the
part of the Company or any such subsidiary as defined in such documents or
which, with notice or lapse of time or both, would constitute such an event
of default.
(j) There are no contracts or other documents required to be
described in the Registration Statement or to be filed as exhibits to the
Registration Statement or to any documents incorporated by reference therein
by the Act, by the Exchange Act or by the rules and regulations thereunder
which have not been described or filed as required. Except as disclosed in
the Prospectus, the contracts so described in the Prospectus are in full
force and effect on the date hereof; and neither the Company nor any of its
subsidiaries, nor to the best of the Company's knowledge, any other party is
in breach of or default under any of such contracts.
(k) Except as disclosed in the Prospectus, there are no legal or
governmental actions, suits or proceedings pending or, to the best of the
Company's knowledge, threatened to which the Company or any of its
subsidiaries is or may be a party or of which property owned or leased by the
Company or any of its subsidiaries is or may be the subject, or related to
environmental or discrimination matters, which actions, suits or proceedings
might, individually or in the aggregate, prevent or materially adversely
affect the transactions contemplated by this Agreement or result in a
material adverse change in the condition (financial or otherwise),
properties, business, results of operations or prospects of the Company and
its subsidiaries; the descriptions in the Prospectus of the litigation
matters described therein are accurate and complete in all material respects;
and, except as disclosed in the Prospectus, no labor disturbance by the
employees of the Company or any of its subsidiaries exists or is imminent
which might be expected to materially adversely affect such condition,
properties, business, results of operations or prospects. Neither the
Company nor any of its subsidiaries is a party or subject to the provisions
of any material injunction, judgment, decree or order of any court,
regulatory body, administrative agency or other governmental body.
(l) The Company or the applicable subsidiary has
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good and marketable title to all the properties and assets reflected as owned
in the financial statements hereinabove described (or elsewhere in the
Prospectus), subject to no lien, mortgage, pledge, charge or encumbrance of
any kind except (i) those, if any, reflected in such financial statements (or
elsewhere in the Prospectus), or (ii) those which are not material in amount
and do not adversely affect the use made and proposed to be made of such
property by the Company and its subsidiaries. The Company or the applicable
subsidiary holds its leased properties under valid and binding leases, with
such exceptions as are not significant in relation to the business of the
Company. Except as disclosed in the Prospectus, the Company owns or leases
all such properties as are necessary to its operations as now conducted.
(m) Since the respective dates as of which information is given in
the Registration Statement and Prospectus, and except as described in or
specifically contemplated by the Prospectus: (i) the Company and its
subsidiaries have not incurred any material liabilities or obligations,
indirect, direct or contingent, or entered into any material verbal or
written agreement or other transaction, other than in the ordinary course of
business; (ii) the Company and its subsidiaries have not sustained any
material loss or interference with their respective businesses or properties
from fire, flood, windstorm, accident or other calamity, whether or not
covered by insurance; (iii) the Company has not paid or declared any
dividends or other distributions with respect to its capital stock and the
Company and its subsidiaries are not in default in the payment of principal
or interest on any outstanding debt obligations; (iv) there has not been any
change in the capital stock or indebtedness material to the Company and its
subsidiaries (other than in the ordinary course of business); and (v) there
has not been any material adverse change in the condition (financial or
otherwise), business, properties, results of operations or prospects of the
Company and its subsidiaries.
(n) Except as disclosed in or specifically contemplated by the
Prospectus, the Company and its subsidiaries have sufficient trademarks,
trade names, copyrights, licenses, approvals and governmental authorizations
to conduct their businesses as now conducted, with such exceptions as would
not have a material adverse effect on the condition (financial or otherwise),
business, properties, results of operations or prospects of the Company and
its subsidiaries, taken as a whole; the expiration of any trademarks (other
than "Dollar Tree" or "Dollar Bill$"), trade names, copyrights, licenses,
approvals or governmental authorizations would not have a material adverse
effect on the condition (financial or otherwise), business, properties,
results of operations or prospects of the Company or its subsidiaries, taken
as a whole; and the Company has no knowledge of any material infringement by
it or its subsidiaries of trademark, trade name rights, copyrights, licenses,
trade secret or other similar rights of others, and there is no claim being
made against the Company or its subsidiaries regarding trademark, trade name,
copyright, license, trade secret or other infringement which could have a
material adverse effect on the condition (financial or otherwise), business,
properties, results
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of operations or prospects of the Company and its subsidiaries, taken as a
whole.
(o) The Company has not been advised, and has no reason to believe,
that either it or any of its subsidiaries is not conducting business in
compliance with all applicable laws, rules and regulations of the
jurisdictions in which it is conducting business, including, without
limitation, all applicable local, state and federal environmental laws and
regulations, except where failure to be so in compliance would not materially
adversely affect the condition (financial or otherwise), business,
properties, results of operations or prospects of the Company and its
subsidiaries, taken as a whole.
(p) The Company and its subsidiaries have filed all necessary
federal, state and foreign income and franchise tax returns and have paid all
taxes shown as due thereon; and the Company has no knowledge of any tax
deficiency which has been or might be asserted or threatened against the
Company or its subsidiaries which could materially and adversely affect the
condition (financial or otherwise) business, properties, results of
operations or prospects of the Company and its subsidiaries, taken as a whole.
(q) The Company is not an "investment company" within the meaning
of the Investment Company Act of 1940, as amended.
(r) The Company has not distributed and will not distribute prior
to the First Closing Date any offering material in connection with the
offering and sale of the Common Shares other than the Prospectus, the
Registration Statement and other materials permitted by the Act.
(s) Each of the Company and its subsidiaries maintains insurance of
the types and in the amounts generally deemed adequate for its business,
including, but not limited to, insurance covering real and personal property
(except for personal property in the stores, which is uninsured) owned or
leased by the Company and its subsidiaries against theft, damage, destruction
and acts of vandalism, all of which insurance is in full force and effect.
(t) Neither the Company nor any of its subsidiaries has at any time
during the last five years (i) made any unlawful contribution to any
candidate for foreign office, or failed to disclose fully any contribution in
violation of law, or (ii) made any payment to any federal or state
governmental officer or official, or other person charged with similar public
or quasi-public duties, other than payments required or permitted by the laws
or the United States or any jurisdiction thereof.
(u) The Company has not taken and will not take, directly or
indirectly, any action designed to or that might be reasonably
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expected to cause or result in stabilization or manipulation of the price of
the Common Stock to facilitate the sale or resale of the Common Shares.
(v) The Common Stock of the Company has been registered under
Section 12(g) of the Exchange Act, and all of the outstanding shares of
Common Stock (including the Common Shares to be sold by the Selling
Shareholders hereunder) have been listed on the National Market of the Nasdaq
Stock Market.
(w) The Company has filed with the Commission, on a timely basis,
all documents required to have been filed by the Company pursuant to the
Exchange Act or the rules and regulations promulgated thereunder. Each such
document, when filed with the Commission, conformed in all material respects
to the requirements of the Exchange Act and the rules and regulations
promulgated thereunder, and did not contain an untrue statement of a material
fact or omit to state a material fact required to be stated therein or
necessary to make the statements therein, in light of the circumstances under
which they were made, not misleading.
SECTION 3. Representations, Warranties and Covenants of the
Selling Shareholders.
(a) Each of the Selling Shareholders severally
represents and warrants to, and agrees with, the several Underwriters
that:
(i) Such Selling Shareholder has, and on the First
Closing Date and the Second Closing Date (if applicable) hereinafter
mentioned will have, good and valid title to the Common Shares
proposed to be sold by such Selling Shareholder hereunder on such
Closing Date and full right, power and authority to enter into this
Agreement and to sell, assign, transfer and deliver such Common
Shares hereunder, free and clear of all voting trust arrangements,
liens, encumbrances, equities, security interests, restrictions and
claims whatsoever; and upon delivery of and payment for such Common
Shares hereunder, assuming the Underwriters acquire such Common
Shares without notice of any adverse claim, the Underwriters will
acquire good and valid title thereto, free and clear of all liens,
encumbrances, equities, claims, restrictions, security interests,
voting trusts or other defects of title whatsoever.
(ii) This Agreement has been duly authorized,
executed and delivered by such Selling Shareholder and constitutes
the valid and binding obligation and agreement of such Selling
Shareholder, enforceable against such Selling Shareholder in
accordance with its terms, except as rights to indemnity and
contribution hereunder may be limited by applicable law.
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(iii) Such Selling Shareholder has executed and
delivered a Power of Attorney and caused to be executed and
delivered on his behalf a Custody Agreement (hereinafter
collectively referred to with respect to each Selling Shareholder as
the "Shareholders Agreement") and in connection herewith such
Selling Shareholder further represents, warrants and agrees that
such Selling Shareholder has deposited in custody, under the
Shareholders Agreement, with the agent named therein (the "Agent")
as custodian, certificates in negotiable form for the Common Shares
to be sold hereunder by such Selling Shareholder, for the purpose of
further delivery pursuant to this Agreement. Such Selling
Shareholder agrees that the Common Shares to be sold by such Selling
Shareholder on deposit with the Agent are subject to the interests
of the Company and the Underwriters, that the arrangements made for
such custody are to that extent irrevocable (except as otherwise
provided in this Agreement or the Shareholders Agreement), and that
the obligations of such Selling Shareholder hereunder shall not be
terminated, except as provided in this Agreement or in the
Shareholders Agreement, by any act of such Selling Shareholder, by
operation of law, by the death or incapacity of such Selling
Shareholder or by the occurrence of any other event. If the Selling
Shareholder should die or become incapacitated, or if any other
event should occur, before the delivery of the Common Shares
hereunder, the documents evidencing Common Shares then on deposit
with the Agent shall be delivered by the Agent in accordance with
the terms and conditions of this Agreement as if such death,
incapacity or other event had not occurred, regardless of whether or
not the Agent shall have received notice thereof. This Agreement
and the Shareholders Agreement have been duly executed and delivered
by or on behalf of such Selling Shareholder and the form of such
Shareholders Agreement has been delivered to you.
(iv) The performance of this Agreement and the
Shareholders Agreement by such Selling Shareholder and the
consummation of the transactions contemplated hereby and thereby
will not result in a breach or violation by such Selling Shareholder
of any of the terms or provisions of, or constitute a default by
such Selling Shareholder under, (A) any indenture, mortgage, deed of
trust, trust (constructive or other), loan agreement, lease,
franchise, license or other agreement, trust instrument or
instrument to which such Selling Shareholder is a party or by which
such Selling Shareholder or any of its properties is bound, (B) if
such Selling Shareholder is not a natural person, the partnership
agreement, trust instrument or any other organizational documents of
such Selling Shareholder, or (C) any statute, judgment, decree,
order, rule or regulation of any court or governmental agency or
body applicable to such Selling Shareholder or any of its
properties. No consent, approval, authorization or other order of
any court, regulatory body, administrative agency or other
governmental body is
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required for the execution and delivery by such Selling Shareholder
of this Agreement and the Shareholders Agreement or the consummation
by such Selling Shareholder of the transactions contemplated by this
Agreement and the Shareholders Agreement, except such consents,
approvals, authorizations or orders (i) as have been obtained under
the Act, (ii) as may be required under state securities or Blue Sky
laws or foreign securities laws in connection with the purchase and
distribution of the Common Shares by the Underwriters, (iii) as may
be required by the NASD and (iv) the absence of which individually
and in the aggregate are not material to the Company and its
subsidiaries, taken as a whole, or to the Underwriters.
(v) Such Selling Shareholder has not taken and will
not take, directly or indirectly, any action designed to or which
has constituted or which might reasonably be expected to cause or
result in stabilization or manipulation of the price of any security
of the Company to facilitate the sale or resale of the Common Shares.
(vi) Each Preliminary Prospectus and the Prospectus,
insofar as it has related to such Selling Shareholder, has not
included any untrue statement of a material fact or omitted to state
a material fact necessary to make the statements therein not
misleading in light of the circumstances under which they were made;
and neither the Registration Statement nor the Prospectus, nor any
amendment or supplement thereto, as it relates to such Selling
Shareholder, will include any untrue statement of a material fact or
omit to state any material fact required to be stated therein or
necessary to make the statements therein not misleading.
(vii) Such Selling Shareholder is not aware that the
Registration Statement or Prospectus includes any untrue statement
of a material fact or omits to state any material fact required to
be stated therein or necessary to make the statements therein not
misleading. It is agreed the aggregate liability of a Selling
Shareholder to the Underwriters (A) for a breach of this
representation and (B) under Section 11(a) hereof shall not exceed
the amount of the After Tax Net Proceeds (as defined in Section
11(a)) received by such Selling Shareholder with respect to the
Common Shares purchased by the Underwriters from such Selling
Shareholder hereunder; and that no Selling Shareholder shall be
liable to any Underwriter for a breach of this representation unless
(1) the Representatives shall have first made demand for payment on
the Company with respect to any damages alleged to result from the
breach of this representation, (2) the Representatives shall
thereafter have used all reasonable efforts to obtain such payment
from the Company, including active pursuit in a court of law of any
rights to indemnity or contribution based on the facts
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giving rise to the alleged breach of this representation, and (3) the
Company shall have failed to make such payment within one year after
receipt of the notice described in clause (1).
(b) Each of the Selling Shareholders agree
with the Company and the Underwriters not to offer
to sell, sell or contract to sell or otherwise
dispose of any shares of Common Stock or
securities convertible into or exchangeable for
any shares of Common Stock, for a period of 90
days after the date of the Prospectus, without the
prior written consent of NationsBanc Montgomery
Securities LLC, as a Representative of the
Underwriters, which consent may be withheld at the
sole discretion of NationsBanc Montgomery
Securities LLC.
SECTION 4. Representations and Warranties of the Underwriters. The
Representatives, on behalf of the several Underwriters, represent and warrant
to the Company and the Selling Shareholders that the information set forth
(i) in the first sentence of the last paragraph of text on the cover page of
the Prospectus, (ii) in the stabilization language on the inside front cover
of the Prospectus and (iii) in the second paragraph under "Underwriting" in
the Prospectus concerning the terms of the offering by the Underwriters and
in the sixth paragraph of text under "Underwriting" was furnished to the
Company by and on behalf of the Underwriters for use in connection with the
preparation of the Registration Statement and the Prospectus and is correct
in all material respects. The Representatives represent and warrant that
they have been authorized by each of the other Underwriters as the
Representatives to enter into this Agreement on its behalf and to act for it
in the manner herein provided.
SECTION 5. Purchase, Sale and Delivery of Common Shares. On the
basis of the representations, warranties and agreements herein contained, but
subject to the terms and conditions herein set forth, the Selling
Shareholders agree, severally and not jointly, to sell to the Underwriters in
the respective amounts set forth in Schedule B hereto, an aggregate of
4,500,000 Firm Common Shares. The Underwriters agree, severally and not
jointly, to purchase from the Selling Shareholders the number of Firm Common
Shares described below. The purchase price per share to be paid by the
several Underwriters to the Selling Shareholders shall be $_____ per share.
The obligation of each Underwriter to the Selling Shareholders shall
be to purchase from the Selling Shareholders that number of full shares set
forth opposite the name of such Underwriter in Schedule A hereto.
Delivery of certificates for the Firm Common Shares to be purchased
by the Underwriters and payment therefor shall be made at the offices of
NationsBanc Montgomery Securities LLC, 600 Montgomery Street, San Francisco,
California (or such other place as may be agreed upon by the Company and the
Representatives) at such time and date, not later than the third (or, if the
Firm Common Shares are priced, as contemplated by Rule 15c6-1(c) under the
Exchange Act, after 4:30 p.m. Washington
<PAGE>
D.C. time, the fourth) full business day following the first date that any of
the Common Shares are released by you for sale to the public, as you shall
designate by at least 48 hours prior notice to the Company (or at such other
time and date, not later than one week after such third or fourth, as the
case may be, full business day as may be agreed upon by the Company and the
Representatives) (the "First Closing Date"); provided, however, that if the
Prospectus is at any time prior to the First Closing Date recirculated to the
public, the First Closing Date shall occur upon the later of the third or
fourth, as the case may be, full business day following the first date that
any of the Common Shares are released by you for sale to the public or the
date that is 48 hours after the date that the Prospectus has been so
recirculated.
Delivery of certificates for the Firm Common Shares shall be made by
or on behalf of the Selling Shareholders to you, for the respective accounts
of the Underwriters, against payment by you, for the accounts of the several
Underwriters, of the purchase price therefor by wire transfer of same day
funds to the order of the Agent. The certificates for the Firm Common Shares
shall be registered in such names and denominations as you shall have
requested at least two full business days prior to the First Closing Date,
and shall be made available for checking and packaging on the business day
preceding the First Closing Date at a location in New York, New York, as may
be designated by you. Time shall be of the essence, and delivery at the time
and place specified in this Agreement is a further condition to the
obligations of the Underwriters.
In addition, on the basis of the representations, warranties and
agreements herein contained, but subject to the terms and conditions herein
set forth, the Selling Shareholders hereby grant an option to the several
Underwriters to purchase, severally and not jointly, in the respective
amounts set forth in Schedule B hereto, up to an aggregate of 675,000
Optional Common Shares at the purchase price per share to be paid for the
Firm Common Shares, for use solely in covering any over-allotments made by
you for the account of the Underwriters in the sale and distribution of the
Firm Common Shares. The option granted hereunder may be exercised at any
time (but not more than once) within 30 days after the first date that any of
the Common Shares are released by you for sale to the public, upon notice by
you to the Company and the Agent setting forth the aggregate number of
Optional Common Shares as to which the Underwriters are exercising the
option, the names and denominations in which the certificates for such shares
are to be registered and the time and place at which such certificates will
be delivered. Such time of delivery (which may not be earlier than the First
Closing Date), being herein referred to as the "Second Closing Date," shall
be determined by you, but if at any time other than the First Closing Date
shall not be earlier than three nor later than five full business days after
delivery of such notice of exercise. The number of Optional Common Shares to
be purchased by each Underwriter shall be determined by multiplying the
number of Optional Common Shares to be sold by the Selling Shareholders
pursuant to such notice of exercise by a fraction, the numerator of which is
the number of Firm Common Shares to be purchased by such Underwriter as set
forth opposite its name in Schedule A and the denominator of which is
4,500,000 (subject to such adjustments to eliminate any fractional share
purchases as you
<PAGE>
and the Selling Shareholders may mutually agree). If the option granted
hereunder is exercised in part, the number of Optional Common Shares to be
sold by each Selling Shareholder shall be determined by multiplying the
number of Optional Common Shares set forth opposite his or its name in
Schedule B by a fraction, the numerator of which is the number of Optional
Common Shares to be sold by the Selling Shareholders as specified in such
notice of exercise and the denominator of which is 675,000 (subject to such
adjustments to eliminate any fractional share purchases as you and the
Selling Shareholders may mutually agree). Certificates for the Optional
Common Shares will be made available for checking and packaging on the
business day preceding the Second Closing Date at a location in New York, New
York, as may be designated by you. The manner of payment for and delivery of
the Optional Common Shares shall be the same as for the Firm Common Shares
purchased from the Selling Shareholders as specified in the two preceding
paragraphs. At any time before lapse of the option, you may cancel such
option by giving written notice of such cancellation to the Company and the
Agent.
You have advised the Company and the Selling Shareholders that each
Underwriter has authorized you to accept delivery of its Common Shares, to
make payment and to receipt therefor. You, individually and not as the
Representatives of the Underwriters, may (but shall not be obligated to) make
payment for any Common Shares to be purchased by any Underwriter whose funds
shall not have been received by you by the First Closing Date or the Second
Closing Date, as the case may be, for the account of such Underwriter, but
any such payment shall not relieve such Underwriter from any of its
obligations under this Agreement.
Subject to the terms and conditions hereof, the Underwriters propose
to make a public offering of their respective portions of the Common Shares
as soon after the effective date of the Registration Statement as in the
judgment of the Representatives is advisable and at the public offering price
set forth on the cover page of and on the terms set forth in the Prospectus.
SECTION 6. Covenants of the Company. The Company covenants and
agrees that:
(a) The Company will use its best efforts to cause the
Registration Statement and any amendment thereof, if not
effective at the time and date that this Agreement is
executed and delivered by the parties hereto, to become
effective. If the Registration Statement has become or
becomes effective pursuant to Rule 430A of the Rules and
Regulations, or the filing of the Prospectus is otherwise
required under Rule 424(b) of the Rules and Regulations, the
Company will file the Prospectus, properly completed,
pursuant to the applicable paragraph of Rule 424(b) of the
Rules and Regulations within the time period prescribed and
will provide evidence satisfactory to you of such timely
filing. The Company will promptly advise you in writing
(i) of the receipt of any comments of the Commission,
(ii) of any request of the Commission for amendment of or
supplement to the Registration Statement (either before or
after it becomes effective), any Preliminary Prospectus or
the Prospectus or for additional information, (iii) when the
Registration Statement shall have become effective and
<PAGE>
(iv) of the issuance by the Commission of any stop order
suspending the effectiveness of the Registration Statement
or of the institution of any proceedings for that purpose.
If the Commission shall enter any such stop order at any
time, the Company will use its best efforts to obtain the
lifting of such order at the earliest possible moment. The
Company will not file any amendment or supplement to the
Registration Statement (either before or after it becomes
effective), any Preliminary Prospectus or the Prospectus of
which you have not been furnished with a copy a reasonable
time prior to such filing or to which you reasonably object
(except to the extent any amendment or supplement to which
you object is necessary in the opinion of counsel to the
Company to ensure that the Prospectus does not include an
untrue statement of a material fact or omit to state a material
fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which
they were made, not misleading) or which is not in compliance
in all material respects with the Act and the Rules and
Regulations.
(b) The Company will fully and completely comply with
the provisions of Rule 430A of the Rules and Regulations
with respect to information omitted from the Registration
Statement in reliance upon such Rule.
(c) If during such period after the first date of the
public offering of the Common Shares as, in the opinion of
your counsel, the Prospectus is required by law to be
delivered in connection with sales by an Underwriter or
dealer, any event occurs, as a result of which the
Prospectus, including any amendments or supplements, would
include an untrue statement of a material fact, or omit to
state any material fact required to be stated therein or
necessary to make the statements therein not misleading, or
if it is necessary at any time to amend the Prospectus,
including any amendments or supplements, to comply with the
Act or the Rules and Regulations, the Company will promptly
advise you thereof and will promptly prepare and file with
the Commission, at its own expense, an amendment or
supplement which will correct such statement or omission or
an amendment or supplement which will effect such compliance
and will use its best efforts to cause the same to become
effective (to the extent effectiveness is required under the
Act or the Rules and Regulations) as soon as possible; and,
in case any Underwriter is required to deliver a prospectus
after such period, the Company upon request, but at the
expense of such Underwriter, will promptly prepare such
amendment or amendments to the Registration Statement and
such Prospectus or Prospectuses as may be necessary to
permit compliance with the requirements of Section 10(a)(3)
of the Act.
(d) As soon as practicable, but not later than 45 days
after the end of the first quarter ending after one year
following the "effective date of the Registration Statement"
(as defined in Rule 158(c) of the Rules and Regulations),
the Company will make generally available to its security
holders an earnings statement (which need not be audited)
covering a period of 12 consecutive months beginning after
<PAGE>
the effective date of the Registration Statement which will
satisfy the provisions of the last paragraph of
Section 11(a) of the Act.
(e) During such period as a prospectus is required by
law to be delivered in connection with sales by an
Underwriter or dealer, the Company, at its expense, but only
for the nine-month period referred to in Section 10(a)(3) of
the Act, will furnish to you or mail to your order copies of
the Registration Statement, the Prospectus, the Preliminary
Prospectus and all amendments and supplements to any such
documents (other than periodic filings under the Exchange
Act) in each case as soon as available and in such
quantities as you may reasonably request, for the purposes
contemplated by the Act.
(f) The Company shall cooperate with you and your
counsel in order to qualify or register the Common Shares
for sale under (or obtain exemptions from the application
of) the Blue Sky laws of such jurisdictions as you designate
and Canadian securities laws, will comply with such laws and
will continue such qualifications, registrations and
exemptions in effect so long as reasonably required for the
distribution of the Common Shares. The Company shall not be
required to qualify as a foreign corporation or to file a
general consent to service of process in any such
jurisdiction where it is not presently qualified or where it
would be subject to taxation as a foreign corporation. The
Company will advise you promptly of the suspension of the
qualification or registration of (or any such exemption
relating to) the Common Shares for offering, sale or trading
in any jurisdiction or any initiation or threat of any
proceeding for any such purpose, and in the event of the
issuance of any order suspending such qualification,
registration or exemption, the Company, with your
cooperation, will use its best efforts to obtain the
withdrawal thereof.
(g) During the period of five years hereafter, the
Company will furnish to the Representatives: (i) as soon as
practicable after the end of each fiscal year, copies of the
Annual Report of the Company containing the balance sheet of
the Company as of the close of such fiscal year and
statements of income, shareholders' equity and cash flows
for the year then ended and the opinion thereon of the
Company's independent public accountants; (ii) as soon as
practicable after the filing thereof, copies of each proxy
statement, Annual Report on Form 10-K, Quarterly Report on
Form 10-Q, Report on Form 8-K or other report filed by the
Company with the Commission, the NASD or any securities
exchange; and (iii) as soon as available, copies of any
report or communication of the Company mailed generally to
holders of its Common Stock.
(h) During the period of 90 days after the first date
that any of the Common Shares are released by you for sale
to the public, without the prior written consent of
NationsBanc Montgomery Securities LLC, as a Representative
of the Underwriters, or each of the Representatives (which
consent may be withheld at the sole discretion of any of the
Representatives), the Company will not issue, offer, sell,
<PAGE>
grant options to purchase or otherwise dispose of any of the
Company's equity securities or any other securities
convertible into or exchangeable with its Common Stock or
other equity security; provided, however, that the Company
may (i) issue shares of Common Stock upon the exercise of
stock options and warrants outstanding on the date hereof,
as described in the Prospectus (it being agreed that the
Company shall not accelerate the exercisability of any such
options or grant any waiver or acceleration under the terms
of the Stock Restriction Agreement to be entered into by the
optionee upon the exercise of such options), and (ii) grant
options and issue shares of Common Stock in accordance with
its Amended and Restated Stock Option Plan, Stock Incentive
Plan or Employee Stock Purchase Plan, as described in the
Prospectus or in materials incorporated by reference in the
Prospectus.
(i) The Company will use its best efforts to qualify
or register its Common Stock for sale in non-issuer
transactions under (or obtain exemptions from the
application of) the Blue Sky laws of the State of California
(and thereby permit market making transactions and secondary
trading in the Company's Common Stock in California), will
comply with such Blue Sky laws and will continue such
qualifications, registrations and exemptions in effect for a
period of five years after the date hereof.
(j) The Company will cause its counsel to promptly
prepare a reasonable number of copies of bound closing
volumes for the Representatives and their counsel.
You, on behalf of the Underwriters, may, in your sole discretion,
waive in writing the performance by the Company of any one or more of the
foregoing covenants or extend the time for their performance.
SECTION 7. Payment of Expenses. Whether or not the transactions
contemplated hereunder are consummated or this Agreement becomes effective or
is terminated, each Selling Shareholder agrees to pay its pro rata portion of
all costs, fees and expenses incurred in connection with the performance of
the obligations of the Company or the Selling Shareholders hereunder,
including without limiting the generality of the foregoing, (i) all expenses
incident to the delivery of the Common Shares (including all printing,
copying, and engraving costs), (ii) all fees and expenses of the registrar
and transfer agent of the Common Stock, (iii) all necessary transfer and
other stamp taxes in connection with the transfer and sale of the Common
Shares to the Underwriters, (iv) all fees and expenses of the Company's
counsel and the Company's independent accountants, (v) all costs and expenses
incurred in connection with the preparation, printing, copying, filing,
shipping and distribution of the Registration Statement, each Preliminary
Prospectus and the Prospectus (including all exhibits and financial
statements) and all amendments and supplements provided for herein, this
Agreement, the Agreement Among Underwriters, the Selected Dealers Agreement,
the Underwriters' Questionnaire and the Blue Sky memorandum, (vi) all filing
fees, attorneys' fees and expenses incurred by the Company or the
Underwriters in connection with qualifying or registering (or obtaining
exemptions from the qualification or registration of) all or any part of the
Common
<PAGE>
Shares for offer and sale under the Blue Sky laws and Canadian securities
laws (provided that such fees and expenses shall not exceed $12,000), (vii)
the filing fee of the NASD, and (viii) all other fees, costs and expenses
referred to in Item 14 of the Registration Statement. Except as provided in
this Section 7, Section 9 and Section 11 hereof, the Underwriters shall pay
all of their own expenses, including the fees and disbursements of their
counsel (excluding those relating to qualification, registration or exemption
under the Blue Sky laws and Canadian securities laws and the Blue Sky
memorandum referred to above). Each Selling Shareholder's pro rata portion of
the expenses described in this Section 7 shall be that amount which bears to
the total expenses the same proportion as the number of Firm Common Shares to
be sold by such Selling Shareholder bears to 4,500,000.
SECTION 8. Conditions of the Obligations of the Underwriters. The
obligations of the several Underwriters to purchase and pay for the Firm
Common Shares on the First Closing Date and the Optional Common Shares on the
Second Closing Date shall be subject to the accuracy of the representations
and warranties on the part of the Company and the Selling Shareholders herein
set forth as of the date hereof and as of the First Closing Date or the
Second Closing Date, as the case may be, to the accuracy of the statements of
Company officers and the Selling Shareholders made pursuant to the provisions
hereof, to the performance by the Company and the Selling Shareholders of
their respective obligations hereunder, and to the following additional
conditions:
(a) The Registration Statement shall have become
effective not later than 5:00 P.M. (or, in the case of a
registration statement filed pursuant to Rule 462(b) of the
Rules and Regulations relating to the Common Shares, not
later than 10:00 P.M.), Washington, D.C. Time, on the date
of this Agreement, or at such later time as shall have been
consented to by you; if the filing of the Prospectus, or any
supplement thereto, is required pursuant to Rule 424(b) of
the Rules and Regulations, the Prospectus shall have been
filed in the manner and within the time period required by
Rule 424(b) of the Rules and Regulations; and prior to such
Closing Date, no stop order suspending the effectiveness of
the Registration Statement shall have been issued and no
proceedings for that purpose shall have been instituted or
shall be pending or, to the knowledge of the Company or you,
shall be contemplated by the Commission; and any request of
the Commission for inclusion of additional information in
the Registration Statement, or otherwise, shall have been
complied with to your satisfaction.
(b) You shall be satisfied that since the respective
dates as of which information is given in the Registration
Statement and Prospectus, (i) there shall not have been any
change in the capital stock of the Company (other than as
contemplated by Section 6(h) above) or any of its
subsidiaries or any material change in the indebtedness
(other than in the ordinary course of business) of the
Company or any of its subsidiaries, (ii) except as set forth
in or contemplated by the Registration Statement or the
Prospectus, no material verbal or written agreement or other
transaction shall have been entered into by the Company or
<PAGE>
any of its subsidiaries, which is not in the ordinary course
of business, (iii) no loss or damage (whether or not
insured) to the property of the Company or any of its
subsidiaries shall have been sustained which materially and
adversely affects the condition (financial or otherwise),
business, results of operations or prospects of the Company
and its subsidiaries, taken as a whole, (iv) no legal or
governmental action, suit or proceeding affecting the
Company or any of its subsidiaries which is material to the
Company and its subsidiaries, taken as a whole, or which
affects or may affect the transactions contemplated by this
Agreement shall have been instituted or threatened and
(v) there shall not have been any material change in the
condition (financial or otherwise), business, management,
results of operations or prospects of the Company and its
subsidiaries, taken as a whole, which makes it impractical
or inadvisable in the judgment of the Representatives to
proceed with the public offering or purchase the Common
Shares as contemplated hereby.
(c) There shall have been furnished to you, as
Representatives of the Underwriters, on each Closing Date,
in form and substance satisfactory to you, except as
otherwise expressly provided below:
(i) An opinion of Hofheimer Nusbaum, P.C.,
counsel for the Company and the Selling Shareholders
identified as the "Virginia Selling Shareholders" on
Schedule B hereto (the "Virginia Selling Shareholders"),
addressed to the Underwriters and dated the First Closing
Date, or the Second Closing Date, as the case may be, to
the effect that:
(1) Each of the Company and its subsidiaries
has been duly incorporated and is validly existing
as a corporation in good standing under the laws
of its jurisdiction of incorporation, is duly
qualified to do business as a foreign corporation
and is in good standing in each state in which it
owns or leases real property, and has full
corporate power and authority to own its
properties and conduct its business as described
in the Registration Statement;
(2) The authorized, issued and outstanding
capital stock of the Company is as set forth under
the caption "Capitalization" in the Prospectus;
all necessary and proper corporate proceedings
have been taken in order to validly authorize such
authorized capital stock; all outstanding shares
of capital stock (including the Firm Common Shares
and any Optional Common Shares) have been duly and
validly issued, are fully paid and nonassessable,
were not issued in violation of or subject to any
preemptive rights or, to the best of such
counsel's knowledge, other rights to subscribe for
or purchase any securities and conform to the
description thereof incorporated by reference in the
Prospectus; all outstanding shares of capital stock of
the Company have been issued in compliance with
federal and state securities laws;
<PAGE>
(3) All of the issued and outstanding shares
of the Company's subsidiaries have been duly and
validly authorized and issued, are fully paid and
nonassessable and are owned beneficially by the
Company free and clear of all liens, encumbrances,
equities, claims, security interests, voting
trusts or other defects of title whatsoever;
(4) The certificates evidencing the Common
Shares to be delivered hereunder are in due and
proper form under Virginia law, and when duly
countersigned by the Company's transfer agent and
registrar, and delivered to you or upon your order
against payment of the agreed consideration there-
for in accordance with the provisions of this
Agreement, the Common Shares represented thereby
will be duly authorized and validly issued, fully
paid and nonassessable, will not have been issued
in violation of or subject to any preemptive
rights or, to the best of such counsel's
knowledge, other rights to subscribe for or
purchase securities and will conform in all
respects to the description thereof contained in
the Prospectus;
(5) Except as disclosed in or specifically
contemplated by the Prospectus, to the best of
such counsel's knowledge, there are no outstanding
options, warrants or other rights calling for the
issuance of, and no commitments, plans or
arrangements to issue, any shares of capital stock
of the Company or any security convertible into or
exchangeable for capital stock of the Company;
6(a) To the best of such counsel's knowledge,
there are no franchises, leases, contracts,
agreements or documents of a character required to
be disclosed in the Registration Statement or
Prospectus or to be filed as exhibits to the
Registration Statement or to any document
incorporated by reference therein which are not
disclosed or filed, as required; and
(b) To the best of such counsel's knowledge,
there are no legal or governmental actions, suits
or proceedings pending or threatened against the
Company which are required to be described in the
Prospectus which are not described as required.
(7) The Company has full right, power and
authority to enter into this Agreement; this
Agreement has been duly and validly authorized by
all necessary corporate action by the Company, has
been duly and validly executed and delivered by
and on behalf of the Company, and is a valid and
binding agreement of the Company in accordance
with its terms, except as enforceability may be
limited by general equitable principles,
bankruptcy, insolvency, reorganization, moratorium
<PAGE>
or other laws affecting creditors' rights
generally and except as to those provisions
relating to indemnity or contribution for
liabilities, as to which no opinion need be
expressed; and no approval, authorization, order,
consent, registration, filing, qualification,
license or permit of or with any court, regulatory,
administrative or other governmental body is
required for the execution and delivery of this
Agreement by the Company or the consummation of
the transactions contemplated by this Agreement;
provided, however, no opinion need be expressed as
to the Act, the rules of the NASD or applicable
state securities or Blue Sky laws or foreign
securities laws in connection with the purchase
and distribution of the Common Shares;
(8) Except as disclosed in the Prospectus,
the execution and performance of this Agreement
and the consummation of the transactions herein
contemplated will not conflict with, result in the
breach of, or constitute, either by themselves or
upon notice or the passage of time or both, a
default under, any agreement, mortgage, deed of
trust, lease, franchise, license, indenture,
permit or other instrument known to such counsel
to which the Company or any of its subsidiaries is
a party or by which the Company or any of its
subsidiaries or any of its or their property may
be bound or affected which is material to the
Company and its subsidiaries, taken as a whole, or
violate any of the provisions of the certificate
of incorporation or bylaws, or other
organizational documents, of the Company or any of
its subsidiaries or, so far as is known to such
counsel, violate any statute, judgment, decree,
order, rule or regulation of any court or
governmental body having jurisdiction over the
Company or any of its subsidiaries or any of its
or their property;
(9) Except as disclosed in the
Prospectus, neither the Company nor any
subsidiary is in violation of its Articles of
Incorporation or Bylaws, or other
organizational documents, or to the best of
such counsel's knowledge, in breach of or
default with respect to any provision of any
agreement, mortgage, deed of trust, lease,
franchise, license, indenture, permit or other
instrument known to such counsel to which the
Company or any such subsidiary is a party or
by which it or any of its properties may be
bound or affected, except where such breach or
default would not materially adversely affect
the Company and its subsidiaries, taken as a
whole; and, to the best of such counsel's
knowledge, the Company and its subsidiaries
are in compliance with all laws, rules,
regulations, judgments, decrees, orders and
<PAGE>
statutes of any court or jurisdiction to which
they are subject, except where noncompliance
would not materially adversely affect the
Company and its subsidiaries, taken as a
whole;
(10) To the best of such counsel's knowledge,
no holders of securities of the Company have
rights which have not been waived to the
registration of shares of Common Stock or other
securities, because of the filing of the
Registration Statement by the Company or the
offering contemplated hereby;
(11) No transfer taxes are required to be
paid in connection with the sale and delivery of
the Common Shares to the Underwriters hereunder.
(12) This Agreement and the Shareholders
Agreement have been duly authorized, executed and
delivered by or on behalf of each Virginia Selling
Shareholder; the Agent has been duly and validly
authorized to act as the custodian of the Common
Shares to be sold by each Virginia Selling
Shareholder; and the performance of this Agreement
and the Shareholders Agreement and the
consummation of the transactions contemplated
herein and therein by each Virginia Selling
Shareholder will not result in a breach or
violation of, or constitute a default under, (A)
any indenture, mortgage, deed of trust, trust
(constructive or other), loan agreement, lease,
franchise, license or other agreement or
instrument known to such counsel to which such
Virginia Selling Shareholder is a party or by
which it or any of its properties may be bound,
(B) any organizational documents of any Virginia
Selling Shareholder that is not a natural person,
or (C) any statute, or, to the best of such
counsel's knowledge, any judgment, decree, order,
rule or regulation of any court or governmental
body having jurisdiction over such Virginia
Selling Shareholder or any of its properties; and
no approval, authorization, order or consent of
any court, regulatory body, administrative agency
or other governmental body is required for the
execution and delivery by each Virginia Selling
Shareholder of this Agreement or the Shareholders
Agreement or the consummation by each Virginia
Selling Shareholder of the transactions
contemplated by this Agreement or the Shareholders
Agreement, provided, however, no opinion need be
expressed as to the Act, the rules of the NASD or
applicable state securities or Blue Sky laws or
foreign securities laws in connection with the
purchase and distribution of the Common Shares;
provided that the opinions expressed in this
clause 8(c)(i)(12) with respect to the due and
valid authorization of the Agent to act as the
custodian of the Common Shares to be sold by each
such Virginia Selling Shareholder need not cover
<PAGE>
the provisions contained in the second and third
sentences of Section 3(a)(iii) hereof, the third
paragraph on page 5 of the Selling Shareholders
Power of Attorney or the seventh paragraph of the
Selling Shareholders Custody Agreement;
(13) Each Virginia Selling Shareholder that
is not an individual has trust power and authority
to enter into this Agreement and the Shareholders
Agreement and to sell, transfer and deliver the
Common Shares to be sold on such Closing Date by
such Virginia Selling Shareholders; immediately
prior to each Closing Date, each Virginia Selling
Shareholder was the sole registered owner of the
Common Shares to be sold by such Virginia Selling
Shareholder on such Closing Date; upon issuance of
new certificates in the names of the Underwriters
representing such Common Shares, assuming the
Underwriters purchased the Common Shares in good
faith and without notice of any adverse claim
within the meaning of the Uniform Commercial Code,
the Underwriters will have acquired all rights of
such Virginia Selling Shareholder in the Common
Shares free of any adverse claim, any lien in
favor of the Company, and any restrictions on
transfer imposed by the Company;
(14) This Agreement and the Shareholders
Agreement are valid and binding agreements of each
Virginia Selling Shareholder in accordance with
their terms, except (i) as enforceability may be
limited by general equitable principles,
bankruptcy, insolvency, reorganization, moratorium
or other laws affecting creditors' rights
generally, (ii) with respect to those provisions
relating to indemnities or contributions for
liabilities under the Act, as to which no opinion
need be expressed, and (iii) with respect to the
provisions contained in the second and third
sentences of Section 3(a)(iii) hereof, the third
paragraph on page 5 of the Selling Shareholders
Power of Attorney or the seventh paragraph of the
Selling Shareholders Custody Agreement, as to
which no opinion need be expressed;
(15) The documents incorporated by reference
in the Prospectus (except for the financial
statements and schedules included in such
documents as to which such counsel need express no
opinion) comply as to form in all material
respects with the requirements of the Exchange Act
and the rules and regulations of the Commission
thereunder.
(16)(a) The Registration Statement (assuming
compliance with clause (2) of Rule 462(b) in the
case of any Additional Registration Statement) has
become effective under the Act, and, to the best
of such counsel's knowledge, no stop order
suspending the effectiveness of the Registration
Statement or preventing the use of the Prospectus
<PAGE>
has been issued and no proceedings for that
purpose have been instituted or are pending or
contemplated by the Commission; any required
filing of the Prospectus and any supplement
thereto pursuant to Rule 424(b) of the Rules and
Regulations has been made in the manner and within
the time period required by such Rule 424(b);
(b) The Registration Statement, the
Prospectus and each amendment or supplement
thereto, if any (except for the financial
statements and schedules included therein as to
which such counsel need express no opinion),
comply as to form in all material respects with
the requirements of the Act and the Rules and
Regulations.
In rendering such opinion, such counsel may rely, as to matters of fact, on
certificates of officers of the Company, of the Virginia Selling Shareholders
and of governmental officials, in which cases their opinion is to state that
they are so doing and that the Underwriters are justified in relying on such
certificates and copies of such certificates are to be attached to the
opinion. Such counsel's opinion may state that they have made no independent
factual investigation as to such matters of fact, that they assume the
capacity of all natural persons and that they assume the conformity of all
copies or facsimiles to the originals thereof. Moreover, such counsel's
opinion shall be made with respect to federal and Virginia law only. Such
counsel shall also include in such opinion (or provide separately to you) a
statement to the effect that nothing has come to such counsel's attention
that would lead such counsel to believe that at its effective date the
Registration Statement contained any untrue statement of a material fact or
omitted to state a material fact required to be stated therein or necessary
to make the statements therein not misleading or that the Prospectus, as
amended or supplemented, if applicable, at the applicable Closing Date
includes an untrue statement of material fact or omits to state a material
fact necessary in order to make the statements, in the light of the
circumstances under which they were made, not misleading. Such counsel may
also state that they have assumed the conformity of the documents filed as
exhibits to the Registration Statement with the Commission via the Electronic
<PAGE>
Data Gathering, Analysis and Retrieval System ("EDGAR"), except for required
EDGAR formatting changes, to the physical copies of the documents submitted
for their examination. Such counsel shall also permit Hale and Dorr LLP, as
counsel to the Underwriters, to rely on such opinion (insofar as it relates
to matters of Virginia law) in rendering their opinion pursuant to Section
8(c)(iii) hereof;
(ii) An opinion of Jones, Day, Reavis &
Pogue, special counsel for the Selling Shareholders
identified as the "New York Selling Shareholders" on
Schedule B hereto (the "New York Selling Shareholders"),
addressed to the Underwriters and dated the First
Closing Date, or the Second Closing Date, as the case
may be, to the effect that:
(1) This Agreement and the Shareholders
Agreement have been duly authorized, executed and
delivered by or on behalf of each New York Selling
Shareholder; the Agent has been duly and validly
authorized to act as the custodian of the Common
Shares to be sold by each such New York Selling
Shareholder; and the performance of this Agreement
and the Shareholders Agreement by each New York
Selling Shareholder will not result in a breach or
violation of, or constitute a default under, (A)
any indenture, mortgage, deed of trust, trust
(constructive or other), loan agreement, lease,
franchise, license or other agreement or
instrument known to such counsel to which such New
York Selling Shareholder is a party or by which it
or any of its properties may be bound, (B) if such
Selling Shareholder is not a natural person, any
organizational documents of such New York Selling
Shareholder, or (C) any statute, or, to the
knowledge of such counsel, any judgment, decree,
order, rule or regulation of any court or
governmental body having jurisdiction over such
New York Selling Shareholder or any of its
properties; and no approval, authorization, order
or consent of any court, regulatory body,
administrative agency or other governmental body
is required for the execution and delivery by each
New York Selling Shareholder of this Agreement or
the Shareholders Agreement or the consummation by
each New York Selling Shareholder of the
transactions contemplated by this Agreement or the
Shareholders Agreement, except such consents,
approvals, authorizations or orders (i) as have been
obtained under the Act, (ii) as may be required
under state securities or Blue Sky laws or foreign
securities laws in connection with the purchase
and distribution of the Common Shares by the
Underwriters and (iii) as may be required by the
NASD; provided that the opinions expressed in this
<PAGE>
clause 8(c)(ii)(1) with respect to the due and
valid authorization of the Agent to act as the
custodian of the Common Shares to be sold by each
such New York Selling Shareholder need not cover
the provisions contained in the second and third
sentences of Section 3(a)(iii) hereof, the third
paragraph on page 5 of the Selling Shareholders
Power of Attorney or the seventh paragraph of the
Selling Shareholders Custody Agreement;
(2) Each New York Selling Shareholder that
is not an individual has, as applicable,
corporate, partnership or trust power and
authority to enter into this Agreement and the
Shareholders Agreement and to sell, transfer and
deliver the Common Shares to be sold on such
Closing Date by such New York Selling Shareholder;
as of such Closing Date, each New York Selling
Shareholder was the sole registered owner of the
Common Shares to be sold by such New York Selling
Shareholder on such Closing Date; upon
registration of the Common Shares in the names of
the Underwriters in the stock records of the
Company, and the issuance of new certificates
registered in the names of the Underwriters
representing such Common Shares, assuming the
Underwriters purchased the Common Shares in good
faith and without notice of any adverse claim
within the meaning of the Uniform Commercial Code,
the Underwriters will have acquired all rights of
such New York Selling Shareholder in the Common
Shares free of any adverse claim, any lien in
favor of the Company, and any restrictions on
transfer imposed by the Company, and the owner of
the Common Shares, if other than such New York
Selling Shareholder, is precluded from asserting
against the Underwriters the ineffectiveness of
any unauthorized endorsement;
(3) This Agreement and the Shareholders
Agreement are valid and binding agreements of each
New York Selling Shareholder in accordance with
their terms, except (i) as enforceability may be
limited by general equitable principles,
bankruptcy, insolvency, reorganization, moratorium
or other laws affecting creditors' rights
generally, (ii) with respect to those provisions
relating to indemnities or contributions for
liabilities under the Act, as to which no opinion
need be expressed, and (iii) with respect to the
provisions contained in the second and third
sentences of Section 3(a)(iii) hereof, the third
paragraph on page 5 of the Selling Shareholders
Power of Attorney or the seventh paragraph of the
Selling Shareholders Custody Agreement, as to
which no opinion need be expressed; and
In rendering such opinion, such
counsel may rely, as to matters of fact,
on certificates of the New York Selling
Shareholders and of governmental
<PAGE>
officials, in which cases their opinion
is to state that they are so doing and
copies of such certificates are to be
attached to the opinion. Such counsel
may also state that they have made no
independent factual investigation and
have assumed the capacity of all natural
persons. Such counsel shall also permit
Hale and Dorr LLP, as counsel to the
Underwriters, to rely on the opinions
set forth above (insofar as they relate
to matters of New York law) in rendering
their opinion pursuant to Section
8(c)(iii) hereof;
(iii) Such opinion or opinions of Hale and
Dorr LLP, counsel for the Underwriters, dated the First
Closing Date or the Second Closing Date, as the case
may be, with respect to the incorporation of the
Company, the sufficiency of all corporate proceedings
and other legal matters relating to this Agreement, the
validity of the Common Shares, the Registration
Statement and the Prospectus and other related matters
as you may reasonably require, and the Company and the
Selling Shareholders shall have furnished to such
counsel such documents and shall have exhibited to them
such papers and records as they may reasonably request
for the purpose of enabling them to pass upon such
matters. In connection with such opinions, such
counsel may rely on representations or certificates of
officers of the Company and governmental officials.
(iv) A certificate of the Company executed
by the Chairman of the Board or President and the chief
financial or accounting officer of the Company, dated
the First Closing Date or the Second Closing Date, as
the case may be, to the effect that:
(1) The representations and warranties of
the Company set forth in Section 2 of this
Agreement are true and correct as of the date of
this Agreement and as of the First Closing Date or
the Second Closing Date, as the case may be, and
the Company has complied with all the agreements
and satisfied all the conditions on its part to be
performed or satisfied on or prior to such Closing
Date;
(2) The Commission has not issued any order
preventing or suspending the use of the Prospectus
or any Preliminary Prospectus filed as a part of
the Registration Statement or any amendment
thereto; no stop order suspending the
effectiveness of the Registration Statement has
been issued; and to the best of the knowledge of
the respective signers, no proceedings for that
purpose have been instituted or are pending or
contemplated under the Act;
(3) Each of the respective signers of the
certificate has carefully examined the
<PAGE>
Registration Statement and the Prospectus on
behalf of the Company; the Registration Statement
and the Prospectus and any amendments or
supplements thereto contain all statements
required to be stated therein regarding the
Company and its subsidiaries; and neither the
Registration Statement nor the Prospectus nor any
amendment or supplement thereto includes any
untrue statement of a material fact or omits to
state any material fact required to be stated
therein or necessary to make the statements
therein not misleading;
(4) Since the initial date on which the
Registration Statement was filed, no agreement,
written or oral, transaction or event has occurred
which should have been set forth in an amendment
to the Registration Statement or in a supplement
to or amendment of any prospectus which has not
been disclosed in such a supplement or amendment;
(5) Since the respective dates as of which
information is given in the Registration Statement
and the Prospectus, and except as disclosed in or
contemplated by the Prospectus, there has not been
any material adverse change or a development
involving a material adverse change in the
condition (financial or otherwise), business,
properties, results of operations, management or
prospects of the Company and its subsidiaries,
taken as a whole; and no legal or governmental
action, suit or proceeding is pending or
threatened against the Company or any of its
subsidiaries which is material to the Company and
its subsidiaries, taken as a whole, whether or not
arising from transactions in the ordinary course
of business, or which may adversely affect the
transactions contemplated by this Agreement; since
such dates and except as so disclosed, neither the
Company nor any of its subsidiaries has entered
into any verbal or written agreement or other
transaction that is material to the Company and
its subsidiaries, taken as a whole, which is not
in the ordinary course of business or incurred any
material liability or obligation, direct,
contingent or indirect, made any change in its
capital stock, made any material change in its
short-term debt or funded debt or repurchased or
otherwise acquired any of the Company's capital
stock; and the Company has not declared or paid
any dividend, or made any other distribution, upon
its outstanding capital stock payable to
shareholders of record on a date prior to the
First Closing Date or Second Closing Date, as the
case may be; and
(6) Since the respective dates as of which
information is given in the Registration Statement
and the Prospectus and except as disclosed in or
contemplated by the Prospectus, the Company and
its subsidiaries have not sustained a material
<PAGE>
loss or damage by strike, fire, flood, windstorm,
accident or other calamity (whether or not
insured).
(v) On the First Closing Date or the
Second Closing Date, as the case may be, a certificate,
dated such Closing Date and addressed to you, signed by or
on behalf of each of the Selling Shareholders to the
effect that the representations and warranties of such
Selling Shareholder in this Agreement are true and
correct, as if made at and as of the First Closing Date or
the Second Closing Date, as the case may be, and such
Selling Shareholder has complied with all the agreements
and satisfied all the conditions on his part to be
performed or satisfied prior to the First Closing Date or
the Second Closing Date, as the case may be.
(vi) On the date this Agreement is executed
and also on the First Closing Date and the Second Closing
Date, letters addressed to you, as Representatives of the
Underwriters, from KPMG Peat Marwick LLP, independent
accountants, the first of each to be dated the date of
this Agreement, the second of each to be dated the First
Closing Date and the third of each (in the event of a
Second Closing) to be dated the Second Closing Date, in
form and substance satisfactory to you.
(vii) An opinion of Goldberg, Kohn, Bell,
Black, Rosenbloom & Moritz, Ltd., special litigation
counsel for the Company, addressed to the Underwriters and
dated the First Closing Date, or the Second Closing Date,
as the case may be, to the effect that the section of the
Prospectus entitled "Risk Factors --Legal Proceedings"
(except for the first sentence of the first paragraph,
the last two sentences of the next to last paragraph and
the last paragraph thereof) contains a fair and accurate
summary of the litigation described therein, and that
nothing has come to their attention that would lead them
to believe that either at the effective date of the
Registration Statement or the applicable Closing Date,
the above-listed sections of the Prospectus contain any
untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary
to make the statements therein regarding the litigation
described therein not misleading.
All such opinions, certificates, letters and
documents shall be in compliance with the provisions
hereof only if they are satisfactory to you and to Hale
and Dorr LLP, counsel for the Underwriters. The
Company shall furnish you with such manually signed or
conformed copies of such opinions, certificates,
letters and documents as you request. Any certificate
signed by any officer of the Company and delivered to
the Representatives or to counsel for the Underwriters
shall be deemed to be a representation and warranty by
the Company to the Underwriters as to the statements
made therein.
<PAGE>
If any condition to the Underwriters' obligations hereunder to be
satisfied prior to or at the First Closing Date is not so satisfied, this
Agreement at your election will terminate upon notification by you as
Representatives to the Company and the Selling Shareholders without liability
on the part of any Underwriter or the Company except for the expenses to be
paid or reimbursed by the Company and the Selling Shareholders pursuant to
Sections 7 and 9 hereof and except to the extent provided in Section 11
hereof.
SECTION 9. Reimbursement of Underwriters' Expenses. Notwithstanding
any other provisions hereof, if the sale to the Underwriters of the Common
Shares at the First Closing is not consummated because of any refusal,
inability or failure on the part of the Company or any Selling Shareholder to
perform any agreement herein or to comply with any provision hereof, the
Company agrees to reimburse you and the other Underwriters upon demand for
all out-of-pocket expenses that shall have been reasonably incurred by you
and them in connection with the proposed purchase and the sale of the Common
Shares, including but not limited to fees and disbursements of counsel,
printing expenses, travel expenses, postage, telegraph charges and telephone
charges relating directly to the offering contemplated by the Prospectus.
Any such termination shall be without liability of any party to any other
party except that the provisions of this Section, Section 7 and Section 11
shall at all times be effective and shall apply.
SECTION 10. Effectiveness of Registration Statement. You, the
Company and the Selling Shareholders will use your and its best efforts to
cause the Registration Statement to become effective, to prevent the issuance
of any stop order suspending the effectiveness of the Registration Statement
and, if such stop order be issued, to obtain as soon as possible the lifting
thereof.
SECTION 11. Indemnification. (a) The Company (in furtherance of
its agreement set forth in Section 22) and each of the Selling Shareholders,
jointly and severally, agree to indemnify and hold harmless each Underwriter
and each person, if any, who controls any Underwriter within the meaning of
the Act against any losses, claims, damages, liabilities or expenses, joint
or several, to which such Underwriter or such controlling person may become
subject, under the Act, the Exchange Act, or other federal or state statutory
law or regulation, or at common law or otherwise (including in settlement of
any litigation, if such settlement is effected with the written consent of
the Company), insofar as such losses, claims, damages, liabilities or
expenses (or actions in respect thereof as contemplated below) arise out of
or are based upon any untrue statement or alleged untrue statement of any
material fact contained in the Registration Statement, any Preliminary
Prospectus, the Prospectus, or any amendment or supplement thereto, or arise
out of or are based upon the omission or alleged omission to state in any of
them a material fact required to be stated therein or necessary to make the
statements in any of them not misleading; and will reimburse each Underwriter
and each such controlling person for any legal and other expenses as such
expenses are reasonably incurred by such Underwriter or such controlling
person in connection with investigating, defending, settling,
<PAGE>
compromising or paying any such loss, claim, damage, liability, expense or
action; provided, that neither the Company nor any Selling Shareholder shall
be liable in any such case to the extent that any such loss, claim, damage,
liability or expense arises out of or is based upon an untrue statement or
alleged untrue statement or omission or alleged omission made in the
Registration Statement, any Preliminary Prospectus, the Prospectus or any
amendment or supplement thereto (i) in reliance upon and in conformity with
the information furnished to the Company pursuant to Section 4 hereof or (ii)
in reliance upon and in conformity with information furnished to the Company
by a Selling Shareholder with respect to such Selling Shareholder (except
that the Selling Shareholder furnishing such information shall not be so
relieved of liability); provided further, that no Selling Shareholder shall
be liable under this Section 11(a) for an amount in excess of the After Tax
Net Proceeds (as defined below) received by such Selling Shareholder with
respect to the Common Shares purchased by the Underwriters from such Selling
Shareholder hereunder; provided further that no Selling Shareholder shall be
required to provide indemnification hereunder unless (1) the Representatives
shall have first made demand for payment on the Company with respect to any
such loss, claim, damage, liability or expense, (2) the Representatives shall
thereafter have used all reasonable efforts to obtain such payment from the
Company, including active pursuit in a court of law of any rights hereunder
to indemnity or contribution for such loss, claim, damage, liability or
expense, and (3) the Company shall have failed to make such payment within
one year after receipt of the notice described in clause (1); and
providedfurther that the foregoing indemnity agreement with respect to any
preliminary prospectus shall not inure to the benefit of any Underwriter from
whom the person asserting any such loss, claim, damage, liability or expenses
purchased Common Shares, or any person controlling such Underwriter, if a
copy of the Prospectus (as then amended or supplemented if the Company shall
have furnished any amendments or supplements thereto) was not sent or given
by or on behalf of such Underwriter to such person, if required by law so to
have been delivered, at or prior to the written confirmation of the sale of
the Common Shares to such person, and if the Prospectus (as so amended or
supplemented) would have cured the defect giving rise to such loss, claim,
damage, liability or expense. The Company and the Selling Shareholders may
agree, as among themselves and without limiting the rights of the
Underwriters under this Agreement, as to their respective amounts of such
liability for which they each shall be responsible. In addition to their
other obligations under this Section 11(a), the Company and the Selling
Shareholders agree that, as an interim measure during the pendency of any
claim, action, investigation, inquiry or other proceeding arising out of or
based upon any statement or omission, or any alleged statement or omission,
all as described in this Section 11(a), they will reimburse each Underwriter
on a quarterly basis for all reasonable legal or other expenses incurred in
connection with investigating or defending any such claim, action,
investigation, inquiry or other proceeding. To the extent that any such
interim reimbursement payment is so held to have been improper, each
Underwriter shall promptly return it to the Company or the Selling
Shareholders, as applicable, together with interest, compounded daily,
determined on the basis of the prime rate (or other commercial lending rate
for borrowers of the highest credit standing) announced from time to time by
Bank of America NT&SA,
<PAGE>
San Francisco, California (the "Prime Rate"). Any such interim reimbursement
payments which are not made to an Underwriter within 30 days of a request for
reimbursement shall bear interest at the Prime Rate from the date of such
request. This indemnity agreement will be in addition to any liability which
the Company or the Selling Shareholders may otherwise have. The "After Tax
Net Proceeds" received by a Selling Shareholder with respect to Common Shares
sold by it hereunder shall mean the proceeds (net of the applicable
underwriting discount) received by such Selling Shareholder with respect to
such Common Shares, as adjusted to reflect both (i) the amount of any taxes
paid or payable by such Selling Shareholder by virtue of the sale of such
Common Shares and (ii) the value of any tax benefit realized or realizable
(taking into account the probability that any such tax benefit will be
realized) by such Selling Shareholder by virtue of the payment of amounts
under this Section 11 or the payment of amounts in regard to a breach of a
representation of such Selling Shareholder set forth in Section 3(a).
(b) Each Underwriter will severally indemnify and hold harmless the
Company, each of its directors, each of its officers who signed the
Registration Statement, each Selling Shareholder and each person, if any, who
controls the Company or any Selling Shareholder within the meaning of the
Act, against any losses, claims, damages, liabilities or expenses to which
the Company, or any such director, officer or controlling person may become
subject, under the Act, the Exchange Act, or other federal or state statutory
law or regulation, or at common law or otherwise (including in settlement of
any litigation, if such settlement is effected with the written consent of
such Underwriter), insofar as such losses, claims, damages, liabilities or
expenses (or actions in respect thereof as contemplated below) arise out of
or are based upon any untrue or alleged untrue statement of any material fact
contained in the Registration Statement, any Preliminary Prospectus, the
Prospectus, or any amendment or supplement thereto, or arise out of or are
based upon the omission or alleged omission to state therein a material fact
required to be stated therein or necessary to make the statements therein not
misleading, in each case to the extent, but only to the extent, that such
untrue statement or alleged untrue statement or omission or alleged omission
was made in the Registration Statement, any Preliminary Prospectus, the
Prospectus, or any amendment or supplement thereto, in reliance upon and in
conformity with the information furnished to the Company pursuant to Section
4 hereof; and will reimburse the Company, or any such director, officer,
Selling Shareholder or controlling person for any legal and other expense
reasonably incurred by the Company, or any such director, officer, Selling
Shareholder or controlling person in connection with investigating,
defending, settling, compromising or paying any such loss, claim, damage,
liability, expense or action. In addition to its other obligations under
this Section 11(b), each Underwriter severally agrees that, as an interim
measure during the pendency of any claim, action, investigation, inquiry or
other proceeding arising out of or based upon any statement or omission, or
any alleged statement or omission, described in this Section 11(b) which
relates to information furnished to the Company pursuant to Section 4 hereof,
it will reimburse the Company (and, to the extent applicable, each officer,
director, Selling Shareholder or controlling person) on a quarterly basis
<PAGE>
for all reasonable legal or other expenses incurred in connection with
investigating or defending any such claim, action, investigation, inquiry or
other proceeding, notwithstanding the absence of a judicial determination as
to the propriety and enforceability of the Underwriters' obligation to
reimburse the Company (and, to the extent applicable, each officer, director,
Selling Shareholder or controlling person) for such expenses and the
possibility that such payments might later be held to have been improper by a
court of competent jurisdiction. To the extent that any such interim
reimbursement payment is so held to have been improper, the Company (and, to
the extent applicable, each officer, director, Selling Shareholder or
controlling person) shall promptly return it to the Underwriters together
with interest, compounded daily, determined on the basis of the Prime Rate.
Any such interim reimbursement payments which are not made to the Company
within 30 days of a request for reimbursement, shall bear interest at the
Prime Rate from the date of such request. This indemnity agreement will be
in addition to any liability which such Underwriter may otherwise have.
(c) Promptly after receipt by an indemnified party under this
Section of notice of the commencement of any action, such indemnified party
will, if a claim in respect thereof is to be made against an indemnifying
party under this Section, notify the indemnifying party in writing of the
commencement thereof; but the omission so to notify the indemnifying party
will not relieve it from any liability which it may have to any indemnified
party for contribution or otherwise than under the indemnity agreement
contained in this Section or to the extent it is not prejudiced as a
proximate result of such failure. In case any such action is brought against
any indemnified party and such indemnified party seeks or intends to seek
indemnity from an indemnifying party, the indemnifying party will be entitled
to participate in, and, to the extent that it may wish, jointly with all
other indemnifying parties similarly notified, to assume the defense thereof
with counsel reasonably satisfactory to such indemnified party; provided,
however, if the defendants in any such action include both the indemnified
party and the indemnifying party and the indemnified party shall have
reasonably concluded that there may be a conflict between the positions of
the indemnifying party and the indemnified party in conducting the defense of
any such action or that there may be legal defenses available to it and/or
other indemnified parties which are different from or additional to those
available to the indemnifying party, the indemnified party or parties shall
have the right to select separate counsel to assume such legal defenses and
to otherwise participate in the defense of such action on behalf of such
indemnified party or parties. Upon receipt of notice from the indemnifying
party to such indemnified party of its election so to assume the defense of
such action and approval by the indemnified party of counsel, the
indemnifying party will not be liable to such indemnified party under this
Section for any legal or other expenses subsequently incurred by such
indemnified party in connection with the defense thereof unless (i) the
indemnified party shall have employed such counsel in connection with the
assumption of legal defenses in accordance with the proviso to the next
preceding sentence (it being understood, however, that the indemnifying party
shall not be liable for the expenses of more than one separate counsel,
approved by the Representatives in the case of paragraph (a), representing
the indemnified parties who
<PAGE>
are parties to such action) or (ii) the indemnifying party shall not have
employed counsel reasonably satisfactory to the indemnified party to
represent the indemnified party within a reasonable time after notice of
commencement of the action, in each of which cases the fees and expenses of
counsel shall be at the expense of the indemnifying party. The indemnifying
party shall not be liable for any settlement of such action effected without
its written consent, which shall not be unreasonably withheld or delayed, but
if settled with such consent, the indemnifying party agrees to indemnify the
indemnified party from and against any loss or liability by reason of such
settlement.
(d) If the indemnification provided for in this Section 11 is
required by its terms but is for any reason held to be unavailable to or
otherwise insufficient to hold harmless an indemnified party under paragraphs
(a), (b) or (c) in respect of any losses, claims, damages, liabilities or
expenses referred to herein, then each applicable indemnifying party (subject
to the limits set forth in subparagraph (a) of this Section 11) shall
contribute to the amount paid or payable by such indemnified party as a
result of any losses, claims, damages, liabilities or expenses referred to
herein (i) in such proportion as is appropriate to reflect the relative
benefits received by the Company, the Selling Shareholders and the
Underwriters from the offering of the Common Shares or (ii) if the allocation
provided by clause (i) above is not permitted by applicable law, in such
proportion as is appropriate to reflect not only the relative benefits
referred to in clause (i) above but also the relative fault of the Company,
the Selling Shareholders and the Underwriters in connection with the
statements or omissions or inaccuracies in the representations and warranties
herein which resulted in such losses, claims, damages, liabilities or
expenses, as well as any other relevant equitable considerations. The
respective relative benefits received by the Company, the Selling
Shareholders and the Underwriters shall be deemed to be in the same
proportion, in the case of the Company and the Selling Shareholders on the
one hand, as the total price paid to the Selling Shareholders for the Common
Shares sold by them to the Underwriters (net of underwriting commissions but
before deducting expenses), and in the case of the Underwriters, on the other
hand, as the underwriting commissions received by them bears to the total of
such amounts paid to the Selling Shareholders and received by the
Underwriters as underwriting commissions. The relative fault of the Company,
the Selling Shareholders and the Underwriters shall be determined by
reference to, among other things, whether the untrue or alleged untrue
statement of a material fact or the omission or alleged omission to state a
material fact relates to information supplied by the Company, the Selling
Shareholders or the Underwriters and the parties' relative intent, knowledge,
access to information and opportunity to correct or prevent such statement or
omission. The amount paid or payable by a party as a result of the losses,
claims, damages, liabilities and expenses referred to above shall be deemed
to include, subject to the limitations set forth in subparagraph (c) of this
Section 11, any legal or other fees or expenses reasonably incurred by such
party in connection with investigating or defending any action or claim. The
provisions set forth in subparagraph (c) of this Section 11 with respect to
notice of commencement of any action shall apply if a claim for
<PAGE>
contribution is to be made under this subparagraph (d); provided, however,
that no additional notice shall be required with respect to any action for
which notice has been given under subparagraph (c) for purposes of
indemnification. The Company, the Selling Shareholders and the Underwriters
agree that it would not be just and equitable if contribution pursuant to
this Section 11 were determined solely by pro rata allocation (even if the
Underwriters were treated as one entity for such purpose) or by any other
method of allocation which does not take account of the equitable
considerations referred to in this paragraph. Notwithstanding the provisions
of this Section 11, no Underwriter shall be required to contribute any amount
in excess of the amount of the total underwriting commissions received by
such Underwriter in connection with the Common Shares underwritten by it and
distributed to the public. No person guilty of fraudulent misrepresentation
(within the meaning of Section 11(f) of the Act) shall be entitled to
contribution from any person who was not guilty of such fraudulent
misrepresentation. The Underwriters' obligations to contribute pursuant to
this Section 11 are several in proportion to their respective underwriting
commitments and not joint.
(e) It is agreed that any controversy arising out of the operation
of the interim reimbursement arrangements set forth in Sections 11(a) and
11(b) hereof, including the amounts of any requested reimbursement payments
and the method of determining such amounts, shall be settled by arbitration
conducted under the provisions of the Constitution and Rules of the Board of
Governors of the New York Stock Exchange, Inc. or pursuant to the Code of
Arbitration Procedure of the NASD. Any such arbitration must be commenced by
service of a written demand for arbitration or written notice of intention to
arbitrate, therein electing the arbitration tribunal. In the event the party
demanding arbitration does not make such designation of an arbitration
tribunal in such demand or notice, then the party responding to said demand
or notice is authorized to do so.
SECTION 12. Default of Underwriters. It shall be a condition to
this Agreement and the obligation of the Selling Shareholders to sell and
deliver the Common Shares hereunder, and of each Underwriter to purchase the
Common Shares in the manner as described herein, that, except as hereinafter
in this paragraph provided, each of the Underwriters shall purchase and pay
for all the Common Shares agreed to be purchased by such Underwriter
hereunder upon tender to the Representatives of all such shares in accordance
with the terms hereof. If any Underwriter or Underwriters default in their
obligations to purchase Common Shares hereunder on either the First or Second
Closing Date and the aggregate number of Common Shares which such defaulting
Underwriter or Underwriters agreed but failed to purchase on such Closing
Date does not exceed 10% of the total number of Common Shares which the
Underwriters are obligated to purchase on such Closing Date, the
non-defaulting Underwriters shall be obligated severally, in proportion to
their respective commitments hereunder, to purchase the Common Shares which
such defaulting Underwriters agreed but failed to purchase on such Closing
Date. If any Underwriter or Underwriters so default and the aggregate number
of Common Shares with respect to which such default occurs is more than the
above percentage and arrangements satisfactory to the Representatives and the
Company for the purchase of such Common Shares by other persons are not made
<PAGE>
within 36 hours after such default, this Agreement will terminate without
liability on the part of any non-defaulting Underwriter, the Company or the
Selling Shareholders except for the expenses to be paid by the Selling
Shareholders pursuant to Section 7 hereof and except to the extent provided
in Section 11 hereof.
In the event that Common Shares to which a default relates are to be
purchased by the non-defaulting Underwriters or by another party or parties,
the Representatives or the Company shall have the right to postpone the First
or Second Closing Date, as the case may be, for not more than five business
days in order that the necessary changes in the Registration Statement,
Prospectus and any other documents, as well as any other arrangements, may be
effected. As used in this Agreement, the term "Underwriter" includes any
person substituted for an Underwriter under this Section. Nothing herein
will relieve a defaulting Underwriter from liability for its default.
SECTION 13. Effective Date. This Agreement shall become effective
immediately as to Sections 7, 9, 11, 14 and 15 and, as to all other
provisions, (i) if at the time of execution of this Agreement the
Registration Statement has not become effective, at 2:00 P.M., California
time, on the first full business day following the effectiveness of the
Registration Statement, or (ii) if at the time of execution of this Agreement
the Registration Statement has been declared effective, at 2:00 P.M.,
California time, on the first full business day following the date of
execution of this Agreement; but this Agreement shall nevertheless become
effective at such earlier time after the Registration Statement becomes
effective as you may determine on and by notice to the Company or by release
of any of the Common Shares for sale to the public. For the purposes of this
Section 13, the Common Shares shall be deemed to have been so released upon
the release for publication of any newspaper advertisement relating to the
Common Shares or upon the release by you of telegrams (i) advising
Underwriters that the Common Shares are released for public offering, or (ii)
offering the Common Shares for sale to securities dealers, whichever may
occur first.
SECTION 14. Termination. Without limiting the right to terminate
this Agreement pursuant to any other provision hereof:
(a) This Agreement may be terminated by the Company by
notice to you and the Selling Shareholders or by you by
notice to the Company and the Selling Shareholders at any
time prior to the time this Agreement shall become effective
as to all its provisions, and any such termination shall be
without liability on the part of the Company or any Selling
Shareholder to any Underwriter (except for the expenses to
be paid or reimbursed by the Company and the Selling
Shareholders pursuant to Sections 7 and 9 hereof and except
to the extent provided in Section 11 hereof) or of any
Underwriter to the Company or any Selling Shareholder
(except to the extent provided in Section 11 hereof).
(b) This Agreement may also be terminated by you prior
to the First Closing Date by notice to the Company and the
Selling Shareholders (i) if additional material governmental
restrictions, not in force and effect on the date hereof,
shall have been imposed upon trading in securities generally
or minimum or maximum prices shall have been generally
<PAGE>
established on the New York Stock Exchange or on the
American Stock Exchange or in the over the counter market by
the NASD, or trading in securities generally shall have been
suspended on either such Exchange or in the over the counter
market by the NASD, or a general banking moratorium shall
have been established by federal, New York or California
authorities, (ii) if an outbreak of major hostilities or
other national or international calamity or any substantial
change in political, financial or economic conditions shall
have occurred or shall have accelerated or escalated to such
an extent, as, in the judgment of the Representatives, to
affect adversely the marketability of the Common Shares,
(iii) if any adverse event shall have occurred or shall
exist which makes untrue or incorrect in any material
respect any statement or information contained in the
Registration Statement or Prospectus or which is not
reflected in the Registration Statement or Prospectus but
should be reflected therein in order to make the statements
or information contained therein not misleading in any
material respect, or (iv) if there shall be any action, suit
or proceeding pending or threatened, or there shall have
been any development or prospective development involving
particularly the business or properties or securities of the
Company or any of its subsidiaries or the transactions
contemplated by this Agreement, which, in the reasonable
judgment of the Representatives, may materially and
adversely affect the Company's business or earnings and
makes it impracticable or inadvisable to offer or sell the
Common Shares. Any termination pursuant to this
subparagraph (b) shall be without liability on the part of
any Underwriter to the Company or any Selling Shareholder or
on the part of the Company or any Selling Shareholder to any
Underwriter (except for expenses to be paid or reimbursed by
the Selling Shareholders pursuant to Section 7 hereof and
except to the extent provided in Section 11 hereof.
SECTION 15. Representations and Indemnities to Survive Delivery.
The respective indemnities, agreements, representations, warranties and other
statements of the Company, of its officers, of the Selling Shareholders and
of the several Underwriters set forth in or made pursuant to this Agreement
will remain in full force and effect, regardless of any investigation made by
or on behalf of any Underwriter, the Company or any Selling Shareholder or
any of its or their partners, officers or directors or any controlling
person, as the case may be, and will survive delivery of and payment for the
Common Shares sold hereunder and any termination of this Agreement.
SECTION 16. Notices. All communications hereunder shall be in
writing and, if sent to the Representatives shall be mailed, delivered or
telecopied to you at 600 Montgomery Street, San Francisco, California 94111,
Attention: John A. Berg, with a copy to Hale and Dorr LLP, 60 State Street,
Boston, Massachusetts 02109, Attention: Patrick J. Rondeau, Esq.; if sent to
the Company, shall be mailed, delivered or telecopied to the Company, at 500
Volvo Parkway, Chesapeake, Virginia 23330 with a copy to Hofheimer Nusbaum,
P.C., 1700 Dominion Tower, 999 Waterside Drive, Norfolk, Virginia 23510,
Attention: William A. Old, Esq.; if sent to any Virginia Selling
Shareholder, shall be mailed, delivered or telecopied to the Selling
Shareholder c/o
<PAGE>
the Company at 500 Volvo Parkway, Chesapeake, Virginia 23330 with a copy to
Hofheimer Nussbaum, P.C., 1700 Dominion Tower, 99 Waterside Drive, Norfolk,
Virginia 23510, Attention: William A. Old, Esq.; and if sent to any of the
New York Selling Shareholders, to the New York Selling Shareholder c/o
Saunders, Karp & Co., 667 Madison Avenue, 21st Floor, New York, New York
10021 with a copy to Jones, Day, Reavis & Pogue, 599 Lexington Avenue, New
York, New York 10022, Attention: Robert A. Profusek, Esq. The Company, the
Selling Shareholders or you may change the address for receipt of
communications hereunder by giving notice to the others.
SECTION 17. Successors. This Agreement will inure to the benefit
of and be binding upon the parties hereto, including any substitute
Underwriters pursuant to Section 12 hereof, and to the benefit of the
officers and directors and controlling persons referred to in Section 11, and
in each case their respective successors, personal representatives and
assigns, and no other person will have any right or obligation hereunder. No
such assignment shall relieve any party of its obligations hereunder. The
term "successors" shall not include any purchaser of the Common Shares as
such from any of the Underwriters merely by reason of such purchase.
SECTION 18. Representation of Underwriters. You will act as
Representatives for the several Underwriters in connection with all dealings
hereunder, and any action under or in respect of this Agreement taken by you
jointly or by NationsBanc Montgomery Securities LLC, as Representatives, will
be binding upon all the Underwriters.
SECTION 19. Partial Unenforceability. The invalidity or
unenforceability of any Section, paragraph or provision of this Agreement
shall not affect the validity or enforceability of any other Section,
paragraph or provision hereof. If any Section, paragraph or provision of
this Agreement is for any reason determined to be invalid or unenforceable,
there shall be deemed to be made such minor changes (and only such minor
changes) as are necessary to make it valid and enforceable.
SECTION 20. Applicable Law. This Agreement shall be governed by
and construed in accordance with the internal laws (and not the laws
pertaining to conflicts of laws) of the State of California.
SECTION 21. General. This Agreement constitutes the entire
agreement of the parties to this Agreement and supersedes all prior written
or oral and all contemporaneous oral agreements, understandings and
negotiations with respect to the subject matter hereof. This Agreement may
be executed in several counterparts, each one of which shall be an original,
and all of which shall constitute one and the same document.
SECTION 22. Certain Agreements of the Company. The Selling
Shareholders have caused the Company to file the Registration Statement
pursuant to Section 3.1 of a certain Amended and Restated Stockholders
Agreement (the "Stockholders Agreement") by and among the Company and certain
of its current or former shareholders. Section 3.5 of the Stockholders
Agreement obligates the Company to pay certain expenses relating to an offering
of shares conducted pursuant to Section 3.1.
<PAGE>
However, by a letter agreement dated March __, 1998, the parties to the
Stockholders Agreement agreed that, notwithstanding Section 3.5 of the
Stockholders Agreement, the Selling Shareholders would pay the expenses
relating to the registration and offering of Common Shares contemplated by
this Agreement, with each Selling Shareholder bearing his, her or its pro
rata share of such expenses. The Stockholders Agreement also contemplates in
Section 3.6 that the Company shall indemnify and hold harmless the Selling
Stockholders under certain circumstances and subject to certain conditions.
In consideration of the agreement by the Selling Shareholders to relieve the
Company of its obligation to pay expenses of the registration and offering of
the Common Shares contemplated by this Agreement, the Company agrees (i) to
indemnify and hold harmless the Underwriters, and contribute to losses of the
Underwriters, under certain circumstances and subject to certain conditions
as contemplated in Section 11 of this Agreement and (ii) to make similar
indemnification and contribution agreements in favor of the underwriters for
any future offering of shares pursuant to Section 3.1 or Section 3.2 of the
Stockholders Agreement.
In this Agreement, the masculine, feminine and neuter genders and
the singular and the plural include one another. The section headings in
this Agreement are for the convenience of the parties only and will not
affect the construction or interpretation of this Agreement. This Agreement
may be amended or modified, and the observance of any term of this Agreement
may be waived, only by a writing signed by the Company, the Selling
Shareholders (to the extent such amendment affects them) and you.
If the foregoing is in accordance with your understanding of our
agreement, kindly sign and return to us the enclosed copies hereof, whereupon
it will become a binding agreement among the Company, the Selling
Shareholders and the several Underwriters including you, all in accordance
with its terms.
Very truly yours,
DOLLAR TREE STORES, INC.
By:
--------------------------------
Name:
Title:
THE SELLING SHAREHOLDERS IDENTIFIED
ON SCHEDULE B
By:
--------------------------------
Name:
By:
--------------------------------
Name:
Each as Attorney-in-Fact acting
on behalf of each such Selling
Shareholder
<PAGE>
The foregoing Underwriting Agreement is hereby confirmed and accepted by us
in San Francisco, California as of the date first above written.
NATIONSBANC MONTGOMERY SECURITIES LLC
BT ALEX. BROWN INCORPORATED
GOLDMAN, SACHS & CO.
SMITH BARNEY INC.
Acting as Representatives of the several Underwriters named in the attached
Schedule A.
By NATIONSBANC MONTGOMERY SECURITIES LLC
By:
-----------------------------
Partner
SCHEDULE A
<TABLE>
<CAPTION>
Number of Firm
Common Shares
Name of Underwriter to be Purchased
<S> <C>
NationsBanc Montgomery Securities LLC . . . . . .
BT Alex. Brown Incorporated . . . . . . . . . . .
Goldman, Sachs & Co. . . . . . . . . . . . . . . .
Smith Barney Inc. . . . . . . . . . . . . . . . .
TOTAL . . . . . . . . . . . . . . . . . . 4,500,000
</TABLE>
<PAGE>
EXHIBIT 5.1
March 4, 1998
Dollar Tree Stores, Inc.
500 Volvo Parkway
Chesapeake, Virginia 23320
Re: Public Offering
Ladies and Gentlemen:
We have acted as counsel to you in connection with the filing of a
Registration Statement on Form S-3 on March 4, 1998 (the "Registration
Statement"), under the Securities Act of 1933, as amended (the "Act"), with
respect to the registration of 5,175,000 shares of Common Stock of Dollar
Tree Stores, Inc., a Virginia corporation (the "Shares"). 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
Shares are duly and validly authorized, issued, fully paid, and nonassessable.
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 23.2
INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS CONSENT
The Board of Directors
Dollar Tree Stores, Inc.:
We consent to the use of our report incorporated herein by reference and to the
references to our firm under the headings "Selected Financial Data" and
"Experts" in the prospectus.
/s/ KPMG Peat Marwick LLP
Norfolk, Virginia
March 4, 1998
