-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, EzLSW51tsWvZ3asZOfNcbN68cJdIctcah//mCqPATNi960Hn6FxIHWXsPW44RUwQ E1LnKpY/j9s0rGvPhA+uKQ== 0000950112-96-001916.txt : 19960612 0000950112-96-001916.hdr.sgml : 19960612 ACCESSION NUMBER: 0000950112-96-001916 CONFORMED SUBMISSION TYPE: S-3/A PUBLIC DOCUMENT COUNT: 4 FILED AS OF DATE: 19960607 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: DOLLAR TREE STORES INC CENTRAL INDEX KEY: 0000935703 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-VARIETY STORES [5331] IRS NUMBER: 541387365 STATE OF INCORPORATION: VA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-3/A SEC ACT: 1933 Act SEC FILE NUMBER: 333-04391 FILM NUMBER: 96578095 BUSINESS ADDRESS: STREET 1: 2555 ELLSMERE AVE STREET 2: NORFOLK COMMERCE PARK CITY: NORFOLK STATE: VA ZIP: 23513 BUSINESS PHONE: 8048574600 MAIL ADDRESS: STREET 1: P O BOX 2500 CITY: NORFOLK STATE: VA ZIP: 23501-2500 S-3/A 1 DOLLAR TREE STORES, INC. AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 7, 1996 REGISTRATION NO. 333-04391 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------- AMENDMENT NO. 1 TO FORM S-3 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ------------------- DOLLAR TREE STORES, INC. (Exact name of registrant as specified in its charter) VIRGINIA 54-1387365 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.)
------------------- 2555 ELLSMERE AVENUE H. RAY COMPTON NORFOLK COMMERCE PARK DOLLAR TREE STORES, INC. NORFOLK, VIRGINIA 23513 2555 ELLSMERE AVENUE (804) 857-4600 NORFOLK COMMERCE PARK (Address and telephone number of NORFOLK, VIRGINIA 23513 registrant's principal executive offices) (804) 857-4600 (Name, address and telephone number of agent for service)
------------------- COPIES TO: RICHARD D. TRUESDELL, JR. WILLIAM A. OLD, JR. PATRICK J. RONDEAU DAVIS POLK & WARDWELL HOFHEIMER, NUSBAUM, MCPHAUL & BRENT B. SILER 450 LEXINGTON AVENUE SAMUELS, HALE AND DORR NEW YORK, NEW YORK 10017 A PROFESSIONAL CORPORATION 60 STATE STREET (212) 450-4000 1700 DOMINION TOWER BOSTON, MASSACHUSETTS 02109 NORFOLK, VIRGINIA (617) 526-6000 (804) 622-3366
------------------- APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as practicable after this Registration Statement becomes effective. ------------------- If the only securities being registered on this Form are being offered pursuant to dividend or interest reinvestment plans, please check the following box: / / If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, other than securities offered only in connection with dividend or interest reinvestment plans, check the following box: / / If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering: / / _______ If this Form is a post-effective amendment filed pursuant to Rule 426(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering: / / _______ If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box: / / ------------------- THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SUBJECT TO COMPLETION, DATED JUNE 7, 1996 3,250,000 SHARES [LOGO] DOLLAR TREE STORES, INC. COMMON STOCK Of the 3,250,000 shares of Common Stock offered hereby, 750,000 are being sold by the Company and 2,500,000 are being sold by the Selling Shareholders. See "Principal and Selling Shareholders." The Company will not receive any of the proceeds from the sale of shares by the Selling Shareholders. The Company's Common Stock is traded on the Nasdaq National Market under the symbol "DLTR." On May 22, 1996, the last reported sale price of the Common Stock on the Nasdaq National Market was $38.00 per share. See "Price Range of Common Stock." SEE "RISK FACTORS" BEGINNING ON PAGE 8 FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE COMMON STOCK OFFERED HEREBY. ------------------- THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
Price Underwriting Proceeds to Proceeds to Selling to Public Discount (1) Company (2) Shareholders Per Share.................. $ $ $ $ Total (3).................. $ $ $ $
(1) See "Underwriting" for information concerning indemnification of the Underwriters and other matters. (2) Before deducting estimated offering expenses of $500,000, which will be payable by the Company. (3) The Selling Shareholders have granted to the Underwriters a 30-day option to purchase up to 487,500 additional shares of Common Stock solely to cover over-allotments, if any. If the Underwriters exercise this option in full, the Price to Public will total $ , the Underwriting Discount will total $ and the Proceeds to Selling Shareholders will total $ . See "Principal and Selling Shareholders" and "Underwriting." The shares of Common Stock are offered by the several Underwriters named herein when, as and if delivered to and accepted by the Underwriters and subject to their right to reject any order in whole or in part. It is expected that delivery of the certificates representing the shares will be made against payment therefor at the office of Montgomery Securities on or about , 1996. ------------------- MONTGOMERY SECURITIES GOLDMAN, SACHS & CO. SMITH BARNEY INC. , 1996 Information contained herein is subject to completion or amendment. A registration statement relating to these securities has been filed with the Securities and Exchange Commission. These securities may not be sold nor may offers to buy be accepted prior to the time the registration statement becomes effective. This prospectus shall not constitute an offer to sell or the solicitation of an offer to buy nor shall there be any sale of these securities in any State in which such offer, solicitation or sale would be unlawful prior to registration or qualification under the securities laws of any such State. [MAP OF DOLLAR TREE STORES, INC., DISTRIBUTION CENTERS AND AREA LOCATIONS] [(AS OF MARCH 31, 1996)] IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS AND SELLING GROUP MEMBERS MAY ENGAGE IN PASSIVE MARKET MAKING TRANSACTIONS IN THE COMMON STOCK ON THE NASDAQ NATIONAL MARKET IN ACCORDANCE WITH RULE 10B-6A UNDER THE EXCHANGE ACT. SEE "UNDERWRITING." IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK OF THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH TRANSACTIONS MAY BE EFFECTED IN THE NASDAQ NATIONAL MARKET, IN THE OVER-THE-COUNTER MARKET OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME. 2 PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information (including the financial statements and the notes thereto) included elsewhere in this Prospectus or incorporated by reference herein, which should be read in its entirety. Unless otherwise indicated, all information in this Prospectus (i) gives effect to a 3 for 2 split of the Company's Common Stock effected by means of a 50% share dividend paid on April 19, 1996 to the shareholders of record as of April 5, 1996 and (ii) assumes no exercise of the Underwriters' over-allotment option. See "Underwriting." As used in this Prospectus, references to a "fiscal" year refer to the Company's fiscal year ended January 31 of the following year. THE COMPANY Dollar Tree Stores, Inc. ("Dollar Tree" or the "Company") is the leading operator of discount variety stores offering merchandise at the $1.00 price point. The Company's stores, which are designed to be the modern day equivalent of the traditional variety store, offer a wide assortment of quality everyday general merchandise in many traditional variety store categories, including housewares, toys, seasonal goods, gifts, food, stationery, health and beauty aids, books, party goods, hardware and other consumer items. As of March 31, 1996, the Company operated 660 stores principally in strip centers and malls in 26 states in the Southeastern, Mid-Atlantic, Midwestern, Southcentral and Northeastern United States, including 136 Dollar Bills stores added in January 1996. See "--Dollar Bills Acquisition." Dollar Tree has increased its net sales and operating income in each year since its inception in 1986. During the past five years, the Company has grown significantly, with the number of stores increasing from 141 at the close of fiscal 1990 to 500 at December 31, 1995. The Company's net sales increased from $71.1 million in fiscal 1991 to $300.2 million in calendar 1995, a compound annual growth rate of 43.4%. In addition, operating income increased from $5.2 million in fiscal 1991 to $36.7 million in calendar 1995, a compound annual growth rate of 62.9%. The Company's net sales increased 74.5% from $48.7 million to $85.0 million, and operating income increased 197.1% from $0.9 million to $2.6 million from the three months ended March 31, 1995 to the three months ended March 31, 1996. The results of operations for the three months ended March 31, 1996 include two months of operations of 136 Dollar Bills stores added in January 1996. Dollar Tree believes that its ability to operate successfully in major metropolitan areas, mid-sized cities and small towns, in both strip center and mall based locations, its ability to concentrate multiple stores in a single market and its attractive store level economics provide it with a wide range of real estate opportunities and will facilitate its continued expansion. The Company's expansion plan is to increase its presence in its existing markets and to selectively enter new markets. Dollar Tree opened 74 new stores in 1993, 82 new stores in 1994 and 94 new stores in 1995. The Company anticipates expanding by approximately 90 to 100 stores in 1996 (24 of which had been added as of March 31, 1996), in addition to 136 Dollar Bills stores added in January 1996, and by approximately 140 stores in 1997. The Company is focusing its expansion strategy on strip center locations anchored by strong mass merchandisers such as Wal-Mart, Target and Kmart, whose target customers management believes are similar to those of Dollar Tree. In calendar 1995, the average investment per new store, including capital expenditures, initial inventory and pre-opening costs, was approximately $152,000, while the average new store (i.e., a store for which 1995 was its first full year of operations) had net sales of approximately $634,000. The Company's Dollar Tree stores have historically been profitable within the first full year of operation, with an average store level operating income of approximately $147,000 (approximately 23% of sales) for stores whose first full year of operation was 1995. The operating performance of the Company's Dollar Tree stores has been very consistent, with over 90% of its stores having store level operating income margins in excess of 15% in calendar 1995. 3 Dollar Tree's management strives to exceed its customers' expectations of the range and quality of products that can be purchased for $1.00. Management believes that many of the items Dollar Tree sells for $1.00 are typically sold for higher prices elsewhere. The Company supplements its wide assortment of quality everyday core merchandise with a changing mix of new and exciting products, including seasonal goods (such as Christmas and Easter goods) and, to a limited extent, selected closeout merchandise. The wide variety and freshness of merchandise and the $1.00 price point create excitement for customers, which management believes results in "impulse" purchases and encourages consumers to make return visits to the store. Dollar Tree's three executive officers each have between 17 and 27 years of experience in the retail industry and have worked together for the past 17 years. In addition to their experience with Dollar Tree, they helped to manage the profitable growth of K&K Toys, Incorporated ("K&K Toys") from one toy store to a 136 store, mall based toy retailer. K&K Toys was profitable in every year of operation from 1970 until its sale in 1991. Dollar Tree believes that, given the Company's pricing structure, maintaining sufficient gross margins and tight control over store expenses, corporate expenses and inventories is critical to its success. From fiscal 1991 to calendar 1995, Dollar Tree increased its gross profit margin from 34.7% to 37.5% and increased its operating income margin from 7.3% to 12.2%. Dollar Tree's gross profit margin increased from 33.8% to 34.2%, and its operating income margin increased from 1.8% to 3.0%, from the three months ended March 31, 1995 to the three months ended March 31, 1996. Dollar Tree closely manages both retail inventory shrinkage and retail markdowns of inventory, limiting each to an average of less than 2.5% of annual net sales over the last five years. DOLLAR BILLS ACQUISITION On January 31, 1996, the Company acquired all of the stock of Dollar Bills, Inc. ("Dollar Bills"). At the time of the acquisition, Dollar Bills owned and operated 136 discount variety stores in 16 states, offering merchandise primarily at the $1.00 price point under the name Dollar Bill$. In addition, Dollar Bills operated a distribution center in the Chicago area and a wholesale division. The Company plans to continue operating the Dollar Bills stores, distribution center and wholesale division. The Company paid approximately $54.6 million for 100% of the stock of Dollar Bills and has accounted for the acquisition as a purchase. See "Business--Legal Proceedings" for a description of certain litigation arising out of the Dollar Bills acquisition. On a pro forma basis after giving effect to the acquisition, the Company had $404.1 million in net sales, $140.2 million in gross profit and $44.0 million in operating income for the year ended December 31, 1995 and had $91.5 million in net sales, $30.9 million in gross profit and $2.1 million in operating income for the three months ended March 31, 1996. Pro forma results give effect to certain adjustments, before any nonrecurring charges or credits, and do not purport to be indicative of the results that would have occurred had the transaction taken place at the beginning of the period or of future results. Management believes that the Dollar Bills acquisition broadens the Company's base in terms of geographic coverage, merchandise categories and market share, while taking advantage of the Company's existing infrastructure. Most Dollar Bills stores are located in different retail markets from existing Dollar Tree stores, resulting in little competition for sales. The business combination also adds a modern 250,000 square foot distribution center in the Chicago area, which has been in operation for two years. ------------------- The Company was incorporated under the laws of Virginia in 1986 as Only One Dollar, Inc. and changed its name to Dollar Tree Stores, Inc. on December 14, 1993. The Company's principal executive and administrative offices are located at 2555 Ellsmere Avenue, Norfolk Commerce Park, Norfolk, Virginia 23513, and the Company's telephone number is (804) 857-4600. References to the Company and Dollar Tree include the Company's wholly-owned subsidiaries. 4 THE OFFERING Common Stock offered by the Company...................... 750,000 shares Common Stock offered by the Selling Shareholders......... 2,500,000 shares Common Stock to be outstanding after the offering........ 25,806,346 shares(1) Use of Proceeds.......................................... Repayment of indebtedness, including notes payable to affiliates. Nasdaq National Market symbol............................ DLTR
- ------------ (1) Based on shares outstanding at May 22, 1996. Does not include up to 3,366,654 shares of Common Stock issuable upon the exercise of (i) options to purchase 884,476 shares of Common Stock and (ii) warrants to purchase 2,482,178 shares of Common Stock outstanding at such date. 5 SUMMARY FINANCIAL INFORMATION AND CERTAIN OPERATING DATA (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA AND SALES PER SQUARE FOOT DATA)
THREE MONTHS ENDED MARCH 31, YEAR ENDED DECEMBER 31, ----------------------------------------------------- ----------------------------- FISCAL YEAR PRO FORMA PRO FORMA 1991(1) 1992(1) 1993 1994 1995 1995(2) 1995 1996 1996(2) ----------- -------- -------- -------- -------- --------- ------- ------- --------- INCOME STATEMENT DATA: Net sales.................. $71,068 $120,542 $167,753 $231,601 $300,229 $404,079 $48,733 $84,975 $91,457 Gross profit............... 24,655 44,108 61,435 86,120 112,677 140,176 16,458 29,070 30,873 Selling, general and administrative expenses: Operating expenses........ 18,114 29,546 39,559 54,993 70,504 87,529 14,418 24,288 26,268 Depreciation and amortization............... 1,323 2,075 3,054 4,186 5,468 8,615 1,175 2,212 2,475 Recapitalization expenses(3)................ -- -- 4,387 -- -- -- -- -- -- ----------- -------- -------- -------- -------- --------- ------- ------- --------- Total.................. 19,437 31,621 47,000 59,179 75,972 96,144 15,593 26,500 28,743 Operating income........... 5,218 12,487 14,435 26,941 36,705 44,032 865 2,570 2,130 Net income................. $ 12,114 $ 20,963 $ 22,791 $ 249 $ 923 $ 423 -------- -------- --------- ------- ------- --------- -------- -------- --------- ------- ------- --------- Net income per share(4).... $ 0.44 $ 0.76 $ 0.83 $ 0.01 $ 0.03 $ 0.02 -------- -------- --------- ------- ------- --------- -------- -------- --------- ------- ------- --------- Pro forma net income(5).... $ 2,337 $ 6,854 $ 7,608 ----------- -------- -------- ----------- -------- -------- Pro forma net income per share(6)................... $ 0.09 $ 0.25 $ 0.28 ----------- -------- -------- ----------- -------- -------- Weighted average number of common shares and common share equivalents outstanding, in thousands (4 and 6).................. 27,262 27,262 27,262 27,262 27,589 27,589 27,306 27,795 27,795 ----------- -------- -------- -------- -------- --------- ------- ------- --------- ----------- -------- -------- -------- -------- --------- ------- ------- --------- SELECTED OPERATING DATA: Number of stores open at end of period(7): Mall...................... 141 145 145 154 173 174 155 179 179 Strip center(8)........... 45 111 183 255 327 462 269 481 481 ----------- -------- -------- -------- -------- --------- ------- ------- --------- Total.................. 186 256 328 409 500 636 424 660 660 ----------- -------- -------- -------- -------- --------- ------- ------- --------- ----------- -------- -------- -------- -------- --------- ------- ------- --------- Net sales growth........... 36.1% 72.7% 39.2% 38.1% 29.6% 23.4 % 34.7% 74.5% 32.1% Comparable store net sales increase(9)................ 2.7% 24.1% 6.9% 9.1% 7.3% 4.1 % 6.8% 11.8% 7.5% Average net sales per store(10).................. $ 414 $ 520 $ 555 $ 606 $ 649 $ 691 $ 117 $ 135 $ 141 Average net sales per square foot(10): Mall...................... $ 175 $ 214 $ 224 $ 241 $ 246 $ 241 $ 43 $ 49 $ 49 Strip center(8)........... $ 185 $ 201 $ 188 $ 197 $ 209 $ 200 $ 38 $ 43 $ 41 All stores................ $ 177 $ 210 $ 206 $ 214 $ 221 $ 210 $ 40 $ 45 $ 43
AS OF MARCH 31, 1996 ------------------------- ACTUAL AS ADJUSTED(11) ------- --------------- BALANCE SHEET DATA: Working capital............................................................................... $30,221 $30,221 Total assets.................................................................................. 173,570 173,570 Total debt.................................................................................... 86,208 59,633 Shareholders' equity.......................................................................... 41,258 67,833
6 - ------------ (1) In September 1993, the Company changed its fiscal year end from January 31 to December 31. Accordingly, the results of operations for calendar 1992 and fiscal 1991 both include results of operations for the month of January 1992. (2) The unaudited pro forma income statement data for the year ended December 31, 1995 and for the three months ended March 31, 1996 combine the historical results of the Company with the historical results of Dollar Bills as if the acquisition had taken place at the beginning of the respective periods presented. The unaudited pro forma income statement data for the year ended December 31, 1995 and the three months ended March 31, 1996 give effect to certain adjustments related to the elimination of duplicative operating costs associated with Dollar Bills' corporate headquarters and distribution facility ($4.0 million and $0.5 million, respectively); amortization of goodwill recognized in connection with the Dollar Bills acquisition, which is being amortized over a 25 year period ($2.0 million and $0.2 million, respectively); interest expense related to borrowings under the Company's Development Facility used to finance the acquisition ($3.9 million and $0.3 million, respectively); and income taxes relating to the conversion of Dollar Bills to a C corporation at an assumed effective rate of 38.5% ($1.0 million and $0.3 million, respectively). The unaudited pro forma income statement data do not include nonrecurring charges or credits, such as severance costs, one-time training costs, and other nonrecurring operational costs of the transaction. The unaudited pro forma income statement data do not purport to be indicative of the results that would have occurred had the acquisition taken place at the beginning of the respective periods or of future results. For unaudited pro forma condensed consolidated income statements of the Company, reference is made to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1996. (3) Represents recapitalization expenses of $4.4 million incurred in connection with the 1993 Recapitalization, comprised of $3.6 million of management incentive expenses and $0.8 million of transaction expenses. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Overview." (4) Net income per share has been computed by dividing net income by the weighted average number of common shares and common share equivalents outstanding. All warrants and options outstanding at December 31, 1994 have been considered outstanding for the entire year ended December 31, 1994 and are included in the calculation of the weighted average number of common shares and common share equivalents outstanding for net income per share computations in accordance with the rules of the Securities and Exchange Commission. For all periods after December 31, 1994, common share equivalents include the weighted average number of shares subject to stock options and warrants outstanding at the end of the period, after applying the treasury stock method. (5) Prior to September 30, 1993, the Company was treated as a subchapter S corporation for Federal and certain state income tax purposes. As such, income of the Company for that period was taxable to the individual shareholders rather than to the Company. Accordingly, the provision for income taxes for fiscal 1991, the year ended December 31, 1992 and the nine months ended September 29, 1993, represents corporate level state income taxes on income earned in those states that do not recognize subchapter S corporation status. On September 30, 1993, the Company converted to a C corporation. Accordingly, income since September 30, 1993 was taxable to the Company. Pro forma net income reflects a provision for income taxes as if the Company were a subchapter C corporation for all years presented at an assumed effective tax rate of approximately 40%. (6) Pro forma net income per share has been computed by dividing pro forma net income by the weighted average number of common shares and common share equivalents outstanding. Common share equivalents include all outstanding stock options and warrants after applying the treasury stock method. All warrants and options outstanding at December 31, 1994 have been considered outstanding for fiscal 1991 and for the calendar years ended December 31, 1992 and 1993, and are included in the calculation of the weighted average number of common shares and common share equivalents outstanding for pro forma income per share computations in accordance with the rules of the Securities and Exchange Commission. (7) The Company closed three stores in calendar 1992, two stores in calendar 1993, one store in calendar 1994 and three stores in calendar 1995. (8) Pro forma data for 1995 and actual and pro forma data for March 31, 1996 include approximately 10 non strip-center, urban based Dollar Bills stores. (9) Comparable store net sales increase compares net sales for stores open at the beginning of the first of the two periods compared. No Dollar Bills stores are included in the calculation, except in pro forma data. (10) For stores open the entire period presented. No Dollar Bills stores are included in the calculation, except in pro forma data. Results for the three months ended March 31, 1996 may not be indicative of full year average net sales per store or average net sales per square foot due to seasonal fluctuations in sales. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Seasonality and Quarterly Fluctuations." (11) Gives effect to the sale by the Company of 750,000 shares of Common Stock to be sold by it in this offering and the application of the estimated net proceeds therefrom (assuming a public offering price of $38.00 per share, the last sale price of the Common Stock on May 22, 1996) to repay certain indebtedness. See "Use of Proceeds." 7 RISK FACTORS Before purchasing the shares of Common Stock offered hereby, a prospective investor should consider the specific factors set forth below as well as the other information set forth elsewhere in this Prospectus and incorporated herein by reference. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Business" for a description of other factors affecting the business of the Company generally. RISKS ASSOCIATED WITH EXPANSION PLANS The Company has grown from its initial five stores in 1986 to 660 stores at March 31, 1996 and its net sales have grown significantly in the past several years. The Company intends to continue to pursue an aggressive store opening strategy. The continued growth of the Company is dependent, in large part, upon the Company's ability to open new stores on a timely basis and to operate them profitably. The Company plans to expand by approximately 90 to 100 stores in calendar 1996 (24 of which had been added as of March 31, 1996), in addition to 136 Dollar Bills stores added in January 1996, and by approximately 140 stores in 1997. As of March 31, 1996, the Company had signed leases with respect to 29 new stores and had reached an agreement in principle with respect to an additional 32 new stores to open in 1996 and had signed leases with respect to 5 new stores and had reached an agreement in principle with respect to 14 new stores to open in 1997. However, successful expansion is subject to various contingencies, many of which are beyond the Company's control. These contingencies include, among others, (i) the Company's ability to hire, train and retain qualified managers and other personnel, and to maintain good relations with all of its employees, (ii) the availability of adequate inventory, capital resources and external financing, (iii) the Company's ability to identify and secure suitable store sites on a timely basis and on satisfactory terms and to complete any necessary construction or refurbishment of these sites, (iv) the Company's ability to retain its current store sites or substitute sites on satisfactory terms given that a substantial number of the Company's store leases contain provisions prohibiting a change in control of the Company or permitting the landlord to terminate the lease or increase rent upon a change in control of the Company, which provisions are arguably applicable in a substantial number of the Company's leases as a result of the recapitalization of the Company in 1993 and may be applicable in a small number of additional leases as a result of the Company's prior public offerings and this offering, and given that many of the Company's leases contain provisions with which the Company does not comply, including provisions requiring certain insurance and advertising and prohibiting competing Company stores within a specified radius, and (v) the successful integration of new stores into existing operations. As a result, there can be no assurance that the Company will be able to achieve its targets for opening new stores, that its new stores will be profitable or achieve net sales and profitability comparable to the Company's existing stores or that comparable store net sales increases will continue. Furthermore, there can be no assurance that the Company will anticipate all of the changing demands which its expanding operations will impose on its systems and personnel. The Company's failure to expand internal systems or to hire, train and retain qualified personnel as required by its growth could adversely affect its future operating results. The Company expects in the remainder of calendar 1996 and 1997 to expand in existing and selected new markets in the Southeastern, Mid-Atlantic, Midwestern, Southcentral and Northeastern United States. In some cases, stores will be located in markets where the Company has no or only limited store operations. The success of the Company's expansion plan is dependent upon the Company's ability to penetrate these markets successfully. There can be no assurance that the Company will do so. See "Business--Growth Strategy." RISKS ASSOCIATED WITH DOLLAR BILLS ACQUISITION As a result of the Company's recent acquisition of Dollar Bills, the size of the Company has been significantly expanded. While the Company's Dollar Tree and Dollar Bills stores are in the same 8 business, there are a number of significant operational differences between them. Dollar Bills stores typically (i) are larger; (ii) are more concentrated in urban areas than Dollar Tree stores; (iii) carry a higher proportion of consumable merchandise, such as food, health and beauty aids and everyday household supplies, which typically have lower merchandise margins, and a lower proportion of leisure items, such as toys and gifts, which typically have higher merchandise margins; (iv) carry less inventory per square foot because of different store fixtures; and (v) offered a limited number of multi-price point items, which the Company expects to continue to offer only at certain Dollar Bills locations and at prices not exceeding $5.00. There can be no assurance that the Company will be able to successfully implement its business strategy or achieve profitability comparable to its historical operations in the Dollar Bills stores. In addition, the Company has incurred significant costs and expenses in consolidating the operations of the two companies and the ongoing integration of the two companies has placed and will continue to place significant demands on the Company's management resources and infrastructure. The unaudited pro forma financial information incorporated herein by reference are not necessarily indicative of what historical performance of the Company would have been, or what the future financial performance of the Company will be, as a combined company with Dollar Bills. The parties from whom the Company acquired Dollar Bills, together with a corporation they control, have filed suits against the Company in Illinois state and federal court relating to the acquisition by the Company of the wholesale division of Dollar Bills, and seek compensatory damages in an amount no less than $10 million (which could be tripled under a federal anti-trust claim), punitive damages, attorney's fees, costs and injunctive and other relief. This litigation is in its preliminary stages and discovery has only recently commenced; however, based on management's understanding of the facts (which facts are contested by the plaintiffs) and the advice of its lead litigation counsel for this matter in reliance on such facts, the Company believes it is unlikely that the plaintiffs will ultimately prevail on the merits of the litigation. Accordingly, the Company believes that the ultimate outcome of this matter will not have a material adverse effect on the Company's results of operations or financial condition. Nevertheless, particularly in light of the contested factual assertions, there can be no assurances regarding the ultimate outcome of this litigation or that this litigation will not have a material adverse effect on the Company's results of operations or financial condition. In any event, the litigation has diverted, and is expected to continue to divert, the efforts and attention of the Company's management. DEPENDENCE ON IMPORTS AND VULNERABILITY TO IMPORT RESTRICTIONS In 1994 and 1995, the Company purchased approximately 39% and 34%, respectively, of its merchandise based on cost directly from vendors located abroad, primarily in Hong Kong and Taiwan (through which the Company's Chinese imports flow), Thailand, Brazil, India and the Philippines. The Company expects imports to continue to account for approximately 35% to 40% of total purchases at cost. In addition, the Company believes that a substantial portion of the goods the Company purchases from domestic vendors are manufactured abroad. These arrangements are subject to the risks of relying on products manufactured abroad, including import duties and quotas, loss of "most favored nation" ("MFN") trading status, currency fluctuations, work stoppages, economic uncertainties including inflation, foreign government regulations, political unrest and trade restrictions, including U.S. retaliation against unfair foreign practices. While the Company believes that it could find alternative sources of supply, an interruption or delay in supply from China or the Company's other foreign sources, or the imposition of additional duties, taxes or other charges on these imports, could have a material adverse effect on the Company's business and results of operations unless and until alternative supply arrangements are secured. Moreover, products from alternative sources may be of lesser quality and/or more expensive than those currently purchased by the Company. China is the source for a majority of the Company's direct imports and, the Company believes, is also the largest source of its indirect imports. Several trade-related and other issues have recently intensified tensions between the governments of the United States and China. These issues include 9 China's efforts to disrupt Taiwan's elections by conducting military exercises in the Taiwan Straits, China's alleged sales of nuclear weapons-making equipment to Pakistan and the resulting temporary suspension of U.S. Export-Import Bank financing for sales to China, China's failure adequately to implement and enforce the terms of the intellectual property protection agreement reached with the United States in 1995, China's human rights record, China's alleged sale of missiles to Iran, the recent indictment of members of a Chinese weapons smuggling operation with suspected ties to the Chinese government, the growing U.S. trade deficit with China and the ongoing negotiations concerning China's accession to the World Trade Organization. Under U.S. law, countries may be subject to retaliatory trade actions under a number of trade statutes. One such statute is the "Special 301" provision, which requires the U.S. Trade Representative ("USTR") to determine whether the practices of foreign countries deny adequate and effective protection of intellectual property rights or fair and equitable market access for U.S. persons who rely on intellectual property protection. On April 30, 1996, the USTR designated China as a "priority foreign country" under the Special 301 provision for its failure adequately to implement and enforce the bilateral 1995 intellectual property rights agreement with the United States, and on May 15, 1996 the USTR announced its intention to impose prohibitive import tariffs on June 17, 1996 on certain categories of Chinese products, totaling approximately $2 billion in U.S. imports, unless China takes satisfactory action to implement the bilateral intellectual property agreement by that date. It is unclear whether China will, or can, take the actions necessary to forestall the imposition of sanctions between now and June 17. If punitive tariffs are imposed, the categories of goods that will be subject to such sanctions will be drawn from a larger list issued by the USTR on May 15. Two of the products on the May 15 list, stainless steel cookingware and certain types of paper bags, are products that the Company imports in significant quantities directly or indirectly from China. The Company has noncancellable orders to purchase products in these categories that will not be received prior to June 17, 1996, the tariffs on which, if imposed, would be approximately $1.6 million. In the event such tariffs were imposed, the Company would use its relationships with the vendors involved to attempt to renegotiate such noncancellable purchase orders, although there can be no assurances that such efforts would be successful. If the USTR decides that those products, or others that the Company imports, should be targeted for punitive import duties, the Company expects that it would, except in the case of the non-cancellable purchase orders referred to above, substitute similar goods from other countries or other categories of goods, which, for the remainder of 1996 at least, would likely be at higher cost. The imposition of punitive tariffs on such Chinese products could have a material adverse effect on the Company's business and results of operations unless and until alternative sources of supply were secured. China is currently accorded MFN status by the United States, and, as such, products imported from China are generally subject to favorable United States import duties. The MFN status of China is reviewed annually by the United States government and, accordingly, extension of such status is subject to political uncertainties. On May 31, 1996, President Clinton transmitted his formal recommendation to the U.S. Congress that MFN status for China be renewed. Senator Robert Dole, the presumptive Presidential nominee of the Republican party, has also announced his support for MFN renewal. The Congress now has until September 1, 1996 to decide whether to oppose that recommendation, which it must do, if at all, by a joint resolution of both houses of Congress. As a result of the number of outstanding issues that currently exist between the United States and the Chinese government, it is possible that there may be significant opposition to the extension of MFN status for China when the issue comes before Congress. If a joint resolution were to be adopted, China's MFN status would expire 61 days after the joint resolution became effective. Loss of China's MFN status could impose significantly higher purchasing costs on the Company, including increased tariffs on goods and could have a material adverse effect on the Company's business and results of operations unless and until alternative sources of supply were secured. 10 DISPUTE WITH TRADING COMPANY The Company recently terminated its relationship with a Hong Kong trading company that accounted for approximately 6% of the Company's purchases in 1995. The trading company had obtained payment on a number of letters of credit issued on the Company's behalf by falsely claiming that conforming goods had been shipped, when in fact the trading company had either shipped non-conforming goods or empty containers. During the second quarter of 1996, the Company intends to increase its previously established reserves by an additional $300,000 to $400,000 for potential losses arising from the letters of credit upon which the trading company has obtained payment. The Company has cancelled all outstanding purchase orders with the trading company. In addition to the payments already obtained by the trading company, there remains approximately $2.7 million in undrawn irrevocable letters of credit issued to the trading company with respect to the cancelled orders. The Company has taken extensive measures, including legal action against the trading company, which it believes have substantially limited its exposure with respect to the remaining undrawn letters of credit. Although there can be no assurances in this regard, the Company believes it is unlikely that its losses in connection with this matter will significantly exceed its reserves. The Company has also expanded its relationship with another trading company which it believes will be able to fill most of the cancelled orders and fulfill the Company's future needs. There can be no assurances, however, that this shift in suppliers will not result in a temporary disruption or delay in the receipt of merchandise. DISRUPTIONS IN RECEIVING AND DISTRIBUTION Substantially all of the Company's inventory is shipped directly from suppliers to the Company's distribution centers in Norfolk, Virginia, Memphis, Tennessee, and Chicago, Illinois where the inventory is processed and then distributed to stores. The Company's success depends in large part on the orderly operation of this receiving and distribution process, which depends, in turn, on adherence to shipping schedules (especially those from the Far East) and effective management of the distribution centers. Although management believes that its receiving and distribution process is efficient and well positioned to support the Company's expansion plans, there can be no assurance that the Company has anticipated, or will anticipate, all of the changing demands which its expanding operations will impose on its receiving and distribution system or that events beyond the control of the Company will not result in delays in the delivery of merchandise to the stores. See "Business--Warehousing and Distribution." ADVERSE ECONOMIC FACTORS The Company's ability to provide quality merchandise at the $1.00 price point is subject to certain economic factors which are beyond the Company's control, including inflation, other operating costs (such as employee health care costs or minimum wage levels), consumer confidence and general economic conditions. There can be no assurance that such factors will remain favorable and in particular that health care costs or the minimum wage will remain at current levels. Inflation, an increase in health care costs or other operating costs or a decline in consumer confidence or general economic conditions could have a material adverse effect on the Company's business and results of operations, especially given constraints on the Company's ability to pass on any incremental costs through price increases. The United States House of Representatives has recently approved and it is expected that the Senate will soon consider a proposal which would raise the minimum wage from $4.25 to $5.15 per hour over a two-year period. While the passage of such a proposal would significantly increase the Company's employment costs, management does not believe that it would have a material adverse effect on the Company's business and operations taken as a whole. DEPENDENCE ON KEY PERSONNEL The Company's success depends to a significant extent upon the leadership and performance of its senior management team, particularly J. Douglas Perry, Chairman of the Company's Board of 11 Directors, Macon F. Brock, Jr., the Company's President and Chief Executive Officer, and H. Ray Compton, the Company's Executive Vice President and Chief Financial Officer. While the Company believes that its senior management team has significant depth, the loss of services of any of the Company's executive officers could have a material adverse impact on the Company. See "Management." In addition, the Company's credit agreement provides that it is an event of default for Messrs. Perry, Brock and Compton to own collectively less than 10% of the outstanding shares of the Company. See "Management's Discussion and Analysis of Financial Condition and Results of Operations-- Liquidity and Capital Resources." COMPETITION The retail industry is highly competitive. The Company's competitors include mass merchandisers, discount stores, variety stores, closeout stores and other $1.00 price point stores, many of which are units of national or regional chains that have substantially greater financial resources than the Company. Several of the largest operators of discount stores at the $1.00 price point (or their parent companies) have recently filed for or emerged from bankruptcy protection in U.S. bankruptcy court and have closed a number of their stores, while others have abandoned the $1.00 price point concept and/or reconfigured their stores. The Company may face intense competition in the future which could have an adverse effect on its financial results. See "Business--Competition." LIMITED AVAILABILITY OF SUITABLE MERCHANDISE The Company's success depends in large part upon its ability to select and purchase quality merchandise at attractive prices in order to maintain a balance of regularly available core products and a changing mix of fresh merchandise at the $1.00 price point. The Company has no continuing contracts for the purchase of merchandise and must continuously seek out buying opportunities from both its existing suppliers and new sources, for which it competes with other variety, closeout and $1.00 price point merchandisers. Although the Company believes that its management has long-standing and satisfactory relationships with its suppliers, there can be no assurance that the Company will be successful in maintaining a continuing and, in light of the anticipated addition of new stores, an increasing supply of quality merchandise at attractive prices. See "Business--Merchandising." SEASONALITY AND QUARTERLY FLUCTUATIONS The Company has historically experienced and expects to continue to experience seasonal fluctuations in its net sales, operating income and net income. The highest sales periods for the Company are the Christmas and Easter seasons. A disproportionate amount of the Company's net sales and a substantial majority of the Company's operating income and net income are generally realized during the fourth quarter. In anticipation of increased sales activity during these months, the Company purchases substantial amounts of inventory and hires a significant number of temporary employees to bolster its permanent store staff. If for any reason the Company's net sales were below seasonal norms during the fourth quarter, including as a result of merchandise delivery delays due to receiving or distribution problems, the Company's annual operating results, particularly operating and net income, could be adversely affected. Historically, net sales, operating income and net income have been weakest during the first quarter, and the Company expects this trend to continue. The Company's quarterly results of operations may also fluctuate significantly as a result of a variety of factors, including the timing of new store openings, the net sales contributed by new stores, shifts in the timing of certain holidays and the merchandise mix. Although the Company has experienced significant increases in comparable store net sales historically, management expects that any increases in comparable store net sales in the future will be smaller than those experienced historically. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Seasonality and Quarterly Fluctuations." 12 ANTI-TAKEOVER EFFECT OF CERTAIN PROVISIONS OF THE COMPANY'S ARTICLES OF INCORPORATION AND BY-LAWS Certain provisions of the Company's Articles of Incorporation ("Articles of Incorporation") and By-Laws ("By-Laws") may be deemed to have anti-takeover effects and may discourage, delay or prevent a takeover attempt that a shareholder might consider in its best interest. These provisions, among other things, (i) classify the Company's Board of Directors into three classes, each of which will serve for different three year periods, (ii) provide that only the Board of Directors, chairman or president may call special meetings of the shareholders, (iii) establish certain advance notice procedures for nominations of candidates for election as directors and for shareholder proposals to be considered at shareholders' meetings, and (iv) require a vote of the holders of more than two-thirds of the shares entitled to vote in order to remove a director or amend the foregoing and certain other provisions of the Articles of Incorporation and By-Laws. In addition, the Board of Directors, without further action of the shareholders, is permitted to issue and fix the terms of preferred stock which may have rights senior to those of the Common Stock. Until July 1996, the Company may be subject to the affiliated transaction provisions of the Virginia Stock Corporation Act which may be deemed to have anti-takeover effects and may discourage, delay or prevent a takeover attempt that a shareholder might consider in its best interest. The affiliated transaction provisions of the Virginia Stock Corporation Act would, subject to certain exceptions, prohibit the Company from engaging in an "affiliated transaction" with an "interested shareholder" for a period of three years after the date of the transaction in which the person became an interested shareholder, unless the affiliated transaction is approved in a prescribed manner. POTENTIAL ADVERSE MARKET PRICE EFFECTS OF SHARES ELIGIBLE FOR FUTURE SALE Sales of substantial amounts of the Common Stock in the public market following this offering could adversely affect the market price of the Common Stock. Immediately following the completion of this offering there will be 11,277,499 shares eligible for resale in the public market. An additional 1,709,572 shares are currently eligible for resale in the public market, subject to certain volume and other limitations. The remaining 12,819,275 shares, which are owned by the Selling Shareholders, will be eligible for resale in the public market beginning 90 days after the date of this Prospectus, unless released earlier by Montgomery Securities, as representative of the Underwriters, subject to certain volume and other limitations. Following the close of this offering, certain of the Company's shareholders who will hold 14,528,847 shares of Common Stock and warrants to purchase an additional 2,482,178 shares of Common Stock will be entitled to certain rights with respect to the registration of all such shares under the Securities Act. In addition, the Company has filed registration statements covering the sale of 1,741,185 shares of Common Stock reserved for issuance under The Dollar Tree Stores, Inc. Amended and Restated Stock Option Plan, The Dollar Tree Stores, Inc. Stock Incentive Plan and The Dollar Tree Stores, Inc. Employee Stock Purchase Plan. CONTROL OF THE COMPANY BY EXISTING SHAREHOLDERS Upon the closing of this offering, Mr. Brock and his wife, Mr. Perry and his wife, Mr. Compton and The SK Equity Fund, L.P. (the "Fund") and certain affiliates of the Fund will own, or otherwise control, approximately 60.1% of the Company's outstanding Common Stock. Directors may be nominated by the Board of Directors, by a committee of the Board of Directors, or, subject to advance written notice and other procedural requirements, by a shareholder. Directors are elected by a plurality of the votes cast by the holders of shares entitled to vote and cumulative voting is not permitted. As a result, if such shareholders act together, they could effectively control the Company, including the power to elect all of the Directors of the Company and, in general, to determine the outcome of any matter submitted to a vote of the Company's shareholders for approval, including mergers, consolidations or the sale of all or substantially all of the Company's assets, and to prevent or cause a change in control of the Company. See "Principal and Selling Shareholders." 13 POSSIBLE VOLATILITY OF STOCK PRICE The market price of the Company's Common Stock, which is quoted on the Nasdaq National Market, may be subject to significant fluctuations in response to operating results, comparable store sales announcements, announcements by competitors and other factors. In addition, the stock market in recent years has experienced extreme price and volume fluctuations that often have been unrelated or disproportionate to the operating performance of individual companies. These market fluctuations, as well as general economic conditions, may adversely affect the market price of the Common Stock. FORWARD-LOOKING STATEMENTS This Prospectus includes forward-looking statements concerning the Company's operations, economic performance and financial condition, in particular forward-looking statements regarding the Company's recent acquisition of Dollar Bills, the resolution of the pending litigation relating to the Dollar Bills acquisition, the integration of Dollar Bills into the Company's existing operations and the Company's expectations of future operating performance of Dollar Bills stores. In addition, the information contained herein includes certain forward-looking statements regarding its potential losses arising from the dispute with a trading company, store openings, purchasing abilities, and capital requirements. Such forward-looking statements are subject to various risks and uncertainties. Actual results could differ materially from those currently anticipated due to a number of factors, including those under the caption "Risk Factors" in this Prospectus. 14 USE OF PROCEEDS The net proceeds to the Company from the sale of 750,000 shares of Common Stock offered hereby by the Company are estimated to be approximately $26.6 million, assuming a public offering price of $38.00 per share, the last sale price of the Common Stock on May 22, 1996, and after deducting the estimated underwriting discount and offering expenses. The Company will not receive any proceeds from the sale of Common Stock by the Selling Shareholders, including upon the exercise of the underwriters' overallotment option. The Company intends to use approximately $14.2 million of the estimated net proceeds to repay its 9% Senior Subordinated Notes due 1997 and 9% Junior Subordinated Notes due 1997, including $0.2 million of accrued interest thereon. All of such notes are owned by the Original Shareholders (or immediate family members), the Fund and the Co-Investors. All net proceeds in excess of the amounts needed to repay those notes will be used to reduce the outstanding balance under the Company's Development Facility loan, which as of May 23, 1996 had a balance of $52.6 million maturing in April 1997 and bears interest at variable rates (6.74% at March 31, 1996). See "Management's Discussion and Analysis of Financial Condition and Results of Operations." PRICE RANGE OF COMMON STOCK The Company's Common Stock has been traded on the Nasdaq National Market under the symbol "DLTR" since the Company's initial public offering on March 6, 1995. The following table sets forth the high and low sale prices of the Company's Common Stock as reported on the Nasdaq National Market for the periods indicated.
1995 HIGH LOW - ---------------------------------------------------------------------------- ------------- ------------- First quarter (from March 6, 1995).......................................... $ 14 $ 10 5/8 Second quarter.............................................................. 17 7/8 13 1/2 Third quarter............................................................... 24 1/8 17 3/8 Fourth quarter.............................................................. 22 7/8 14 5/8 1996 - ---------------------------------------------------------------------------- First quarter............................................................... 30 7/8 16 3/8 Second quarter (through May 22, 1996)....................................... 40 1/2 29
On May 22, 1996, the last reported sale price for the Company's Common Stock on the Nasdaq National Market was $38.00 per share. As of May 22, 1996, the Company had 242 shareholders of record. DIVIDEND POLICY The Company anticipates that all of its income in the foreseeable future will be retained for the development and expansion of its business and the repayment of indebtedness, and therefore does not anticipate paying cash dividends on its Common Stock in the foreseeable future. The Company's credit agreement contains financial covenants which may have the effect of restricting the Company's ability to pay dividends. 15 CAPITALIZATION The following table sets forth the short-term debt and total capitalization of the Company as of March 31, 1996 on an actual basis and as adjusted to reflect the sale by the Company of 750,000 shares of Common Stock pursuant to this offering, the receipt by the Company of the estimated net proceeds thereof, assuming a public offering price of $38.00 per share, the last sale price of the Common Stock on May 22, 1996, and after deducting the estimated underwriting discount and offering expenses, and the application of the net proceeds by the Company to repay certain indebtedness as described in "Use of Proceeds."
MARCH 31, 1996 ----------------------- ACTUAL AS ADJUSTED -------- ----------- (IN THOUSANDS) Short-term debt: Notes payable to banks.............................................. $ 18,500 $ 18,500 Current installments of obligations under capital leases............ 293 293 -------- ----------- Total short-term debt............................................... $ 18,793 $ 18,793 -------- ----------- -------- ----------- Long-term debt: Development facility................................................ $ 52,630 $ 40,055 9% Senior Subordinated Notes........................................ 7,000 -- 9% Junior Subordinated Notes........................................ 7,000 -- Obligations under capital leases, excluding current installments.... 785 785 -------- ----------- Total long-term debt................................................ 67,415 40,840 -------- ----------- Shareholders' equity: Common stock, $0.01 par value; 50,000,000 shares authorized; 25,017,300 shares issued and outstanding, actual, and 25,767,300 shares, issued and outstanding, as adjusted(1)........................ 250 258 Additional paid-in capital.......................................... 4,144 30,711 Retained earnings................................................... 36,864 36,864 -------- ----------- Total shareholders' equity.......................................... 41,258 67,833 -------- ----------- Total capitalization................................................ $108,673 $ 108,673 -------- ----------- -------- -----------
- ------------ (1) The number of outstanding shares does not include up to 3,179,393 shares of Common Stock issuable upon the exercise of (i) options to purchase 697,215 shares of Common Stock and (ii) warrants to purchase 2,482,178 shares of Common Stock outstanding as of March 31, 1996. Options to purchase 231,500 additional shares were granted in April 1996. The number of authorized shares does not reflect a proposed increase in the number of authorized shares of Common Stock to 100,000,000, which management expects will be submitted for shareholder approval at the annual meeting of shareholders in July 1996. 16 SELECTED FINANCIAL DATA The following table sets forth for the periods indicated selected financial data for the Company. The selected income statement and balance sheet data presented below for the fiscal year ended January 31, 1992 and for the calendar years ended December 31, 1992, 1993, 1994 and 1995 have been derived from the Company's financial statements that have been audited by KPMG Peat Marwick LLP, independent accountants. The selected income statement and balance sheet data presented below for the three months ended March 31, 1995 and 1996 have been derived from the unaudited financial statements of the Company which, in the opinion of management, have been prepared on the same basis as the audited financial statements and include all adjustments, consisting only of normal recurring adjustments, which management considers necessary for a fair presentation of the financial data shown. The results of operations for the three months ended March 31, 1996 are not necessarily indicative of the results to be expected for the entire year ending December 31, 1996. This information should be read in conjunction with the financial statements and the notes thereto incorporated herein by reference and "Management's Discussion and Analysis of Financial Condition and Results of Operations" included in this Prospectus. The pro forma data have not been audited but, in the opinion of management, include all adjustments necessary to present fairly the information set forth therein including the matters referred to in footnotes 2 and 7 below. The pro forma financial data are provided for comparative purposes only and may not be indicative of the results that would have occurred if the Dollar Bills acquisition had occurred at the beginning of the respective periods for which pro forma information is presented or the results to be expected in the future.
THREE MONTHS ENDED MARCH 31, YEAR ENDED DECEMBER 31, ----------------------------------------------------- ----------------------------- FISCAL YEAR PRO FORMA PRO FORMA 1991(1) 1992(1) 1993 1994 1995 1995(2) 1995 1996 1996(2) ----------- -------- -------- -------- -------- --------- ------- ------- --------- INCOME STATEMENT DATA: Net sales................... $71,068 $120,542 $167,753 $231,601 $300,229 $404,079 $48,733 $84,975 $91,457 Cost of sales............... 46,413 76,434 106,318 145,481 187,552 263,903 32,275 55,905 60,584 ----------- -------- -------- -------- -------- --------- ------- ------- --------- Gross profit................ 24,655 44,108 61,435 86,120 112,677 140,176 16,458 29,070 30,873 ----------- -------- -------- -------- -------- --------- ------- ------- --------- Selling, general and administrative expenses: Operating expenses......... 18,114 29,546 39,559 54,993 70,504 87,529 14,418 24,288 26,268 Depreciation and amortization................ 1,323 2,075 3,054 4,186 5,468 8,615 1,175 2,212 2,475 Recapitalization expenses(3)................. -- -- 4,387 -- -- -- -- -- -- ----------- -------- -------- -------- -------- --------- ------- ------- --------- Total................... 19,437 31,621 47,000 59,179 75,972 96,144 15,593 26,500 28,743 ----------- -------- -------- -------- -------- --------- ------- ------- --------- Operating income............ 5,218 12,487 14,435 26,941 36,705 44,032 865 2,570 2,130 Interest expense............ 1,403 1,138 1,837 4,028 2,617 6,973 460 1,069 1,433 ----------- -------- -------- -------- -------- --------- ------- ------- --------- Income before income taxes and extraordinary loss..... 3,815 11,349 12,598 22,913 34,088 37,059 405 1,501 687 Provision for income taxes....................... 138 503 3,152 9,546 13,125 14,268 156 578 264 ----------- -------- -------- -------- -------- --------- ------- ------- --------- Income before extraordinary loss........................ 3,677 10,846 9,446 13,367 20,963 22,791 249 923 423 Extraordinary loss, net of income tax(4).............. -- -- -- 1,253 -- -- -- -- -- ----------- -------- -------- -------- -------- --------- ------- ------- --------- Net income.................. $ 3,677 $ 10,846 $ 9,446 $ 12,114 $ 20,963 $ 22,791 $ 249 $ 923 $ 423 ----------- -------- -------- -------- -------- --------- ------- ------- --------- ----------- -------- -------- -------- -------- --------- ------- ------- --------- INCOME PER SHARE DATA(5): Income before extraordinary loss per share............. $ 0.49 Extraordinary loss per share....................... 0.05 -------- Net income per share........ $ 0.44 $ 0.76 $ 0.83 $ 0.01 $ 0.03 $ 0.02 -------- -------- --------- ------- ------- --------- -------- -------- --------- ------- ------- --------- PRO FORMA DATA: Net income.................. $ 3,677 $ 10,846 $ 9,446 Pro forma adjustment for C corporation income taxes(6).................... 1,340 3,992 1,838 ----------- -------- -------- Pro forma net income(6)..... $ 2,337 $ 6,854 $ 7,608 ----------- -------- -------- ----------- -------- -------- Pro forma net income per share(7).................... $ 0.09 $ 0.25 $ 0.28 ----------- -------- -------- ----------- -------- -------- Weighted average number of common shares and common share equivalents outstanding, in thousands(5 and 7)...................... 27,262 27,262 27,262 27,262 27,589 27,589 27,306 27,795 27,795 ----------- -------- -------- -------- -------- --------- ------- ------- --------- ----------- -------- -------- -------- -------- --------- ------- ------- --------- SELECTED OPERATING DATA: Number of stores open at end of period(8): Mall....................... 141 145 145 154 173 174 155 179 179 Strip center(9)............ 45 111 183 255 327 462 269 481 481 ----------- -------- -------- -------- -------- --------- ------- ------- --------- Total................... 186 256 328 409 500 636 424 660 660 ----------- -------- -------- -------- -------- --------- ------- ------- --------- ----------- -------- -------- -------- -------- --------- ------- ------- ---------
17
THREE MONTHS ENDED MARCH 31, YEAR ENDED DECEMBER 31, ----------------------------------------------------- ----------------------------- FISCAL YEAR PRO FORMA PRO FORMA 1991(1) 1992(1) 1993 1994 1995 1995(2) 1995 1996 1996(2) ----------- -------- -------- -------- -------- --------- ------- ------- --------- SELECTED OPERATING DATA: Net sales growth............ 36.1% 72.7% 39.2% 38.1% 29.6% 23.4 % 34.7% 74.5% 32.1% Comparable store net sales increase(10)................ 2.7% 24.1% 6.9% 9.1% 7.3% 4.1 % 6.8% 11.8% 7.5% Average net sales per store(11)................... $ 414 $ 520 $ 555 $ 606 $ 649 $ 691 $ 117 $ 135 $ 141 Average net sales per square foot(11): Mall....................... $ 175 $ 214 $ 224 $ 241 $ 246 $ 241 $ 43 $ 49 $ 49 Strip center(9)............ $ 185 $ 201 $ 188 $ 197 $ 209 $ 200 $ 38 $ 43 $ 41 All stores................. $ 177 $ 210 $ 206 $ 214 $ 221 $ 210 $ 40 $ 45 $ 43 AS OF AS OF AS OF DECEMBER 31, MARCH JANUARY 31, ----------------------------------------- 31, 1992 1992 1993 1994 1995 1996 ----------- -------- -------- -------- -------- ------- BALANCE SHEET DATA: Working capital............. $ 5,737 $ 10,457 $ 7,742 $ 14,334 $ 29,133 $30,221 Total assets................ 25,295 32,077 42,188 60,688 91,621 173,570 Total debt.................. 8,964 3,316 17,768 14,205 14,518 86,208 Shareholders' equity........ 6,925 17,499 3,660 17,274 39,087 41,258
- ------------ (1) In September 1993, the Company changed its fiscal year end from January 31 to December 31. Accordingly, the results of operations for calendar 1992 and fiscal 1991 both include results of operations for the month of January 1992. (2) The unaudited pro forma income statement data for the year ended December 31, 1995 and for the three months ended March 31, 1996 combine the historical results of the Company with the historical results of Dollar Bills as if the acquisition had taken place at the beginning of the respective periods presented. The unaudited pro forma income statement data for the year ended December 31, 1995 and the three months ended March 31, 1996 give effect to certain adjustments related to the elimination of duplicative operating costs associated with Dollar Bills' corporate headquarters and distribution facility ($4.0 million and $0.5 million, respectively); amortization of goodwill recognized in connection with the Dollar Bills acquisition, which is being amortized over a 25 year period ($2.0 million and $0.2 million, respectively); interest expense related to borrowings under the Company's Development Facility used to finance the acquisition ($3.9 million and $0.3 million, respectively); and income taxes relating to the conversion of Dollar Bills to a C corporation at an assumed effective rate of 38.5% ($1.0 million and $0.3 million, respectively). The unaudited pro forma income statement data do not include nonrecurring charges or credits, such as severance costs, one-time training costs, and other nonrecurring operational costs of the transaction. The unaudited pro forma income statement data do not purport to be indicative of the results that would have occurred had the acquisition taken place at the beginning of the respective periods or of future results. For unaudited pro forma condensed consolidated income statements of the Company, reference is made to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1996. (3) Represents recapitalization expenses of $4.4 million incurred in connection with the 1993 Recapitalization, comprised of $3.6 million of management incentive expenses and $0.8 million of transaction expenses. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Overview." (4) Represents redemption premiums of approximately $1.3 million plus write off of original issue discount financing costs of $0.9 million (net of income tax benefit of approximately $0.9 million) on the early retirement of the Company's 12% Senior Subordinated Notes and 12% Junior Subordinated Notes. (5) Income per share data have been computed by dividing its components by the weighted average number of common shares and common share equivalents outstanding. All warrants and options outstanding at December 31, 1994 have been considered outstanding for the entire year ended December 31, 1994 and are included in the calculation of the weighted average number of common shares and common share equivalents outstanding for net income per share computations in accordance with the rules of the Securities and Exchange Commission. For all periods after December 31, 1994, common share equivalents include the weighted average number of shares subject to stock options and warrants outstanding at the end of the period, after applying the treasury stock method. (6) Prior to September 30, 1993, the Company was treated as a subchapter S corporation for Federal and certain state income tax purposes. As such, income of the Company for that period was taxable to the individual shareholders rather than to the Company. Accordingly, the provision for income taxes for fiscal 1991, the year ended December 31, 1992 and the nine months ended September 29, 1993, represents corporate level state income taxes on income earned in those states that do not recognize subchapter S corporation status. On September 30, 1993, the Company converted to a subchapter C corporation. Accordingly, income since September 30, 1993 was taxable to the Company. Pro forma net income reflects a provision for income taxes as if the Company were a C corporation for all years presented at an assumed effective tax rate of approximately 40%. (7) Pro forma net income per share has been computed by dividing pro forma net income by the weighted average number of common shares and common share equivalents outstanding. Common share equivalents include all outstanding stock options and warrants after applying the treasury stock method. All warrants and options outstanding at December 31, 1994 have been considered outstanding for fiscal 1991 and calendar years ended December 31, 1992 and 1993, and are included in the calculation of the weighted average number of common shares and common share equivalents outstanding for pro forma income per share computations in accordance with the rules of the Securities and Exchange Commission. (8) The Company closed three stores in calendar 1992, two stores in calendar 1993, one store in calendar 1994 and three stores in calendar 1995. (9) Pro forma data for 1995 and actual and pro forma data for March 31, 1996 include approximately 10 non strip-center, urban based Dollar Bills stores. (10) Comparable store net sales increase compares net sales for stores open at the beginning of the first of the two periods compared. No Dollar Bills stores are included in the calculation except in pro forma data. (11) For stores open the entire period presented. No Dollar Bills stores are included in the calculation except in pro forma data. Results for the three months ended March 31, 1996 may not be indicative of full year average net sales per store or average net sales per square foot due to seasonal fluctuations in sales. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Seasonality and Quarterly Fluctuations." 18 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion should be read in conjunction with the financial statements and notes thereto incorporated by reference in this Prospectus. OVERVIEW Dollar Tree was established by J. Douglas Perry, the Company's Chairman, Macon F. Brock, Jr., the Company's President and Chief Executive Officer, and H. Ray Compton, the Company's Executive Vice President and Chief Financial Officer (the "Founders"), in November 1986 with the opening of its first five stores in Virginia, Georgia and Tennessee. From November 1986 through October 1991, the Company's shareholders also owned a substantial portion of the outstanding stock of K&K Toys, Incorporated ("K&K Toys"), a 136 store, mall based toy retailer managed by the Founders. During this period, Dollar Tree grew to 171 stores and shared certain management and distribution services and facilities with K&K Toys for which it paid a fee to K&K Toys. In October 1991, K&K Toys was acquired by a subsidiary of Melville Corporation. Following the sale of K&K Toys, the Founders focused their attention solely on Dollar Tree and effected a number of strategic changes, including (i) shifting the Company's merchandising focus away from closeout merchandise and towards its current emphasis on providing selection and value in traditional variety store categories, (ii) focusing its expansion strategy on strip center locations, (iii) accelerating its expansion program and (iv) improving the depth of the management team and breadth of operational controls. Since the sale of K&K Toys, Dollar Tree has grown from 171 stores to 500 stores as of December 31, 1995, and net sales and operating income have increased from $71.1 million and $5.2 million, respectively, in fiscal 1991 to $300.2 million and $36.7 million, respectively, in calendar 1995. Since December 31, 1995, Dollar Tree has grown from 500 stores to 660 stores as of March 31, 1996, including 136 Dollar Bills stores added in January 1996. The Company's net sales increased 74.5% from $48.7 million to $85.0 million, and operating income increased 197.1% from $0.9 million to $2.6 million from the three months ended March 31, 1995 to the three months ended March 31, 1996. The results of operations for the three months ended March 31, 1996 include two months of operations of 136 Dollar Bills stores added in January 1996. On September 30, 1993, the Company effected a recapitalization including a stock split and reclassification (the "1993 Recapitalization"), pursuant to which (i) J. Douglas Perry, Chairman of the Company's Board of Directors, his wife, Patricia W. Perry, Macon F. Brock, Jr., the Company's President and Chief Executive Officer, his wife, Joan P. Brock, and H. Ray Compton, the Company's Executive Vice President and Chief Financial Officer (the "Original Shareholders") sold to The SK Equity Fund, L.P. (the "Fund") and four individuals affiliated with the Fund (collectively, the "Co-Investors") 50% of the outstanding stock of the Company for an aggregate purchase price of $23.6 million, (ii) the Fund and the Co-Investors purchased from the Company $7.0 million face amount senior subordinated notes for $6.5 million (the "12% Senior Subordinated Notes") and purchased for $500,000 warrants to purchase 1,241,090 shares of Common Stock and (iii) on February 22, 1994 pursuant to a commitment entered into September 30, 1993, the Original Shareholders purchased from the Company $7.0 million face amount junior subordinated notes for $6.5 million (the "12% Junior Subordinated Notes") and purchased for $500,000 warrants to purchase 1,241,088 shares. On December 31, 1994, the Company redeemed and extinguished the 12% Senior Subordinated Notes and the 12% Junior Subordinated Notes (collectively, the "12% Notes"). As part of this transaction, the Company paid a redemption premium of approximately $1.3 million and issued an aggregate of $14.0 million principal amount of 9% Senior Subordinated Notes and 9% Junior Subordinated Notes to the previous holders of the 12% Notes. 19 ACQUISITION OF DOLLAR BILLS On January 31, 1996, the Company acquired all of the stock of Dollar Bills, formerly known as Terrific Promotions, Inc. and subsequently merged Dollar Bills into the Company. At the time of the acquisition, Dollar Bills owned and operated 136 discount variety stores in 16 states, offering merchandise primarily at the $1.00 price point under the name Dollar Bill$. In addition, Dollar Bills operated a distribution center in the Chicago area and a wholesale division. The Company plans to continue operating the Dollar Bills stores, distribution center and wholesale division. The Company paid approximately $52.6 million in cash and $2.0 million in merchandise inventory for 100% of the stock of Dollar Bills and has accounted for the acquisition as a purchase. The Company funded the cash portion of the purchase price with borrowings under its Development Facility, described below. In connection with the acquisition, the Company recognized goodwill of $47.8 million, which it is amortizing over a 25 year period. Dollar Bills reported sales of $113.3 million ($102.0 million of which were from retail operations and $11.3 million of which were from wholesale operations) and operating income of $4.7 million for its fiscal year ended September 30, 1995 compared to sales of $100.4 million and operating income of $4.3 million for its fiscal year ended September 30, 1994. On a pro forma basis, the Company had $404.1 million in net sales, $140.2 million in gross profit and $44.0 million in operating income for the year ended December 31, 1995 and had $91.5 million in net sales, $30.9 million in gross profit and $2.1 million in operating income for the three months ended March 31, 1996. Pro forma results give effect to certain adjustments, before any nonrecurring charges or credits, and do not purport to be indicative of results that would have occurred had the transactions taken place at the beginning of the period or future results. While the Company's Dollar Tree and Dollar Bills stores are in the same business, there are a number of significant operational differences between them. Dollar Bills stores typically (i) are larger, and accordingly have higher average sales per store; (ii) are more concentrated in urban areas than Dollar Tree stores; (iii) carry a higher proportion of consumable merchandise, such as food, health and beauty aids and everyday household supplies, which typically have lower merchandise margins, and a lower proportion of leisure items, such as toys and gifts, which typically have higher merchandise margins; (iv) carry less inventory per square foot because of different store fixtures; and (v) offered a limited number of multi-price point items, which the Company expects to continue to offer only at certain Dollar Bills locations and at prices not exceeding $5.00. All of these differences are being evaluated by management to determine how certain characteristics in either or both types of stores can best be combined to operate stores which reach the optimum level of sales in their respective markets. Management believes that the Dollar Bills acquisition broadens the Company's base in terms of geographic coverage, merchandise categories, and market share, while taking advantage of the Company's existing infrastructure. Most Dollar Bills stores are located in different retail markets from existing Dollar Tree stores, resulting in little competition for sales. The business combination also adds a modern 250,000 square foot distribution center in the Chicago area, which has been in operation for two years. 20 RESULTS OF OPERATIONS The following table sets forth, for the periods indicated, certain selected income statement data as a percentage of net sales:
THREE MONTHS YEAR ENDED ENDED DECEMBER 31, MARCH 31, ------------------------- --------------- 1993 1994 1995 1995 1996 ----- ----- ----- ----- ----- Net sales......................................... 100.0% 100.0% 100.0% 100.0% 100.0% Cost of sales..................................... 63.4 62.8 62.5 66.2 65.8 ----- ----- ----- ----- ----- Gross profit.................................... 36.6 37.2 37.5 33.8 34.2 Selling, general and administrative expenses: Operating expenses.............................. 23.6 23.8 23.5 29.6 28.6 Depreciation and amortization................... 1.8 1.8 1.8 2.4 2.6 Recapitalization expenses....................... 2.6 -- -- -- -- ----- ----- ----- ----- ----- Total......................................... 28.0 25.6 25.3 32.0 31.2 ----- ----- ----- ----- ----- Operating income.................................. 8.6 11.6 12.2 1.8 3.0 Interest expense.................................. 1.1 1.7 0.9 0.9 1.2 ----- ----- ----- ----- ----- Income before income taxes and extraordinary loss.............................................. 7.5 9.9 11.3 0.9 1.8 Provision for income taxes........................ 4.1 4.4 0.4 0.7 ----- ----- ----- ----- Income before extraordinary loss.................. 5.8 6.9 0.5 1.1 Extraordinary loss, net of income tax............. 0.6 -- -- -- ----- ----- ----- ----- Net income........................................ 5.2% 6.9% 0.5% 1.1% ----- ----- ----- ----- ----- ----- ----- ----- Pro forma provision for income taxes.............. 3.0 ----- Pro forma net income.............................. 4.5% ----- -----
Three Months Ended March 31, 1996 Compared to the Three Months Ended March 31, 1995 Net sales increased $36.3 million, or 74.5%, to $85.0 million for the three months ended March 31, 1996, from $48.7 million for the three months ended March 31, 1995. Of this increase, (i) approximately 43.5%, or $15.8 million, was attributable to the addition of 136 Dollar Bills stores in January 1996, (ii) approximately 40.5%, or $14.7 million, was attributable to a net increase of 100 stores opened in 1995 and 1996 which are not included in the Company's comparable store net sales calculation, and (iii) approximately 16.0%, or $5.8 million, was attributable to comparable store net sales growth, which represented an 11.8% increase over comparable store net sales in the corresponding quarter of the prior period. Dollar Bills stores are not included in the comparable store net sales calculation. Because substantially all the Company's products sell for $1.00, the increase in comparable store net sales was a direct result of increased unit volume. Comparable store net sales were driven primarily by an earlier Easter shopping season and a strong in-stock position on seasonal and general merchandise throughout the quarter. The Company opened 24 new stores during the first quarter of 1996 compared to opening 15 new stores during the first quarter of 1995. The Company also added 136 Dollar Bills stores in January 1996. Management anticipates that the primary sources of future sales growth will be new store openings and, to a lesser degree, sales increases from expanded and relocated stores and comparable store net sales increases. Although the Company has experienced significant increases in comparable store net sales historically, management expects that any increases in comparable store net sales in the future will be smaller than those experienced historically. See "--Seasonality and Quarterly Fluctuations." Gross profit, which consists of net sales less cost of sales (including distribution and certain occupancy costs), increased $12.6 million, or 76.6%, to $29.1 million in the first quarter of 1996 from 21 $16.5 million in the first quarter of 1995. As a percentage of net sales, gross profit increased to 34.2% from 33.8%, reflecting lower occupancy costs as a percentage of net sales due primarily to the increase in comparable store sales, partially offset by a slight increase in merchandise costs. Management expects that merchandise costs as a percentage of net sales may continue to be higher than they have been historically due to the addition of Dollar Bills stores, which carry a higher proportion of consumable goods having a lower merchandise margin. Selling, general and administrative expenses, which include operating expenses and depreciation and amortization, increased $10.9 million, or 69.9%, to $26.5 million in the first quarter of 1996 from $15.6 million in the first quarter of 1995, and decreased as a percentage of net sales to 31.2% from 32.0% during the same period. This decrease resulted primarily from reduced payroll costs due to the comparable store net sales increase and stronger controls over hourly payroll at the stores. During the first quarter of 1996, the Company's selling, general and administrative expenses increased by approximately $1.8 million due to transactional costs and expenses incurred in connection with the Dollar Bills acquisition. Amortization of goodwill relating to the acquisition amounted to $0.3 million during the first quarter of 1996. Operating income increased $1.7 million, or 197.1%, to $2.6 million for the first three months of 1996 from $0.9 million for the comparable period in 1995, and increased as a percentage of net sales to 3.0% from 1.8% during the same period for the reasons noted above. Interest expense increased $0.6 million to $1.1 million in the first quarter of 1996 from $0.5 million during the first quarter of 1995. This increase is a result of borrowings under the Company's Development Facility in connection with the acquisition of Dollar Bills and the amortization of deferred financing costs relating thereto. Year Ended December 31, 1994 Compared to Year Ended December 31, 1995 Net sales increased 29.6%, to $300.2 million for 1995, from $231.6 million for 1994. Of this increase, (i) approximately 79.0%, or $54.2 million, was attributable to a net increase of 176 stores opened in 1994 and 1995, which are not included in the Company's comparable store net sales calculation, and (ii) approximately 21.0%, or $14.4 million, was attributable to comparable store net sales growth, which represented a 7.3% increase over comparable store net sales for the prior period. Because substantially all the Company's products sell for $1.00, the increase in comparable store net sales was a direct result of increased unit volume. This increase in volume resulted from strong holiday selling seasons, increased inventory levels early in the year compared to the preceding year, and new promotional efforts which grouped like items into theme displays for more convenient shopping. The Company opened 94 new stores and closed three stores during 1995 compared to opening 82 new stores and closing one store during 1994. Gross profit increased $26.5 million, or 30.8%. As a percentage of net sales, gross profit increased to 37.5% from 37.2%, reflecting, as a percentage of net sales, lower inbound freight costs, lower store occupancy costs and distribution costs, and a slight decrease in markdowns, partially offset by lower merchandise margins (gross profit before inventory shrinkage, markdowns, and distribution and occupancy costs). The decrease in store occupancy costs and distribution costs as a percentage of net sales is a result of the comparable store net sales growth. The decrease in merchandise margin as a percentage of net sales is a result of increased sales of domestically purchased products which generally carry a lower gross margin than imported merchandise. During the fourth quarter of 1995, the Company took advantage of the opportunity to purchase domestic product under attractive terms, while the receiving of some imported goods was delayed. This resulted in a decrease in imports as a percentage of total purchases. While fluctuations between imported and domestic merchandise occur throughout the year, the Company does not foresee any significant changes in the overall mix of imports and domestic purchases and expects imports to continue to account for approximately 35% to 40% of total purchases at cost. 22 Selling, general and administrative expenses increased $16.8 million, or 28.4%, from 1994 to 1995, but decreased as a percentage of net sales to 25.3% from 25.6%. The decrease is due primarily to the recognition in 1994 of $1.0 million of costs associated with the grant of stock options and the comparable store net sales growth. Excluding the stock option costs, selling, general and administrative costs increased as a percentage of net sales to 25.3% from 25.1% during the period. This increase is primarily due to a slight increase in store payroll costs arising from efforts focused on strengthening store appearance and merchandise presentation as well as increasing inventory levels, predominantly in the third quarter of 1995. Depreciation and amortization expense increased $1.3 million but remained constant as a percentage of net sales at 1.8% for 1995 and 1994. Operating income increased $9.8 million, or 36.2%, to $36.7 million for 1995 from $26.9 million for 1994 and increased as a percentage of net sales to 12.2% from 11.6% for the reasons noted above. Excluding stock option costs incurred in 1994, operating income increased as a percentage of net sales to 12.2% for 1995 from 12.1% for 1994. Interest expense decreased $1.4 million to $2.6 million in 1995 compared to 1994. The Company was able to delay the use of its credit lines because of increased cash flows and a higher cash balance at the beginning of the year. The Company also redeemed and extinguished its 12% Notes and issued 9% Subordinated Notes, and wrote off the related discount and deferred financing costs at the end of 1994, resulting in no amortization expense in 1995. Year Ended December 31, 1993 Compared to Year Ended December 31, 1994 Net sales increased $63.8 million, or 38.1%, from $167.8 million in calendar 1993 to $231.6 million in calendar 1994. Of this increase, (i) approximately 79.9%, or $51.0 million, was attributable to a net increase of 156 stores opened in 1993 and 1994, which are not included in the Company's comparable store net sales calculation and (ii) 20.1%, or $12.8 million, was attributable to comparable store net sales growth, which represented a 9.1% increase over comparable store net sales in calendar 1993. Because substantially all the Company's products sell for $1.00, the increase in comparable store net sales was a direct result of increased unit volume. The Company opened 74 new stores in 1993 compared to 82 new stores opened in 1994. Gross profit increased $24.7 million, or 40.2%, from $61.4 million in calendar 1993 to $86.1 million in calendar 1994. As a percentage of net sales, gross profit increased from 36.6% to 37.2%, reflecting a general increase in merchandise margin and a decrease in store occupancy costs as a percentage of net sales, which was partially offset by an increase in distribution costs as a percentage of net sales and a slight increase in inventory shrinkage as a percentage of sales. The increase in merchandise margin as a percentage of net sales reflected the Company's increased purchases of foreign goods directly from manufacturers. The decrease in store occupancy costs as a percentage of net sales was due primarily to the comparable store net sales growth. The increase in distribution costs as a percentage of net sales was due primarily to the costs associated with the operation of the Memphis distribution center, which opened in January 1994. The Memphis distribution center reached full capacity for the first time during the third quarter of 1994. Selling, general and administrative expenses decreased as a percentage of net sales from 28.0% in calendar 1993 to 25.6% in calendar 1994. Costs associated with the 1993 Recapitalization represented 2.6% of net sales, or $4.4 million, in calendar 1993. Costs associated with the 1993 Recapitalization were $3.6 million of management incentive expenses and approximately $0.8 million of transaction expenses including approximately $0.4 million in consulting fees paid to Saunders Karp & Co., approximately $0.3 million in legal fees and approximately $0.1 million in accounting fees. On March 30, 1994 the Company granted options to purchase 310,511 shares of Common Stock at the exercise price of $2.90 per share. Costs associated with the March 30, 1994 grant of stock options were $1.0 million or 0.4% of net sales in calendar 1994. Excluding the recapitalization costs and stock option costs, selling, general and administrative costs decreased as a percentage of net sales from 25.4% in 23 calendar 1993 to 25.1% in calendar 1994. Excluding $1.0 million of compensation expense related to the grant of certain stock options in 1994, operating expenses increased from $39.6 million in calendar 1993 to $54.0 million in calendar 1994, but decreased as a percentage of net sales from 23.6% to 23.3% during the same period due primarily to the comparable store net sales growth. Depreciation and amortization expense increased from $3.1 million in calendar 1993 to $4.2 million in calendar 1994 primarily due to new store growth, but remained constant as a percentage of net sales at 1.8% for calendar 1993 and calendar 1994. Operating income increased from $14.4 million in calendar 1993 to $26.9 million in calendar 1994. Excluding the recapitalization costs incurred in 1993 and stock option costs incurred in 1994, operating income increased from $18.8 million in calendar 1993 to $27.9 million in calendar 1994, representing a 48.4% increase, and increased as a percentage of net sales from 11.2% to 12.1% during the same periods. Interest expense increased $2.2 million between calendar 1993 and calendar 1994, primarily due to the interest on the debt incurred in connection with the 1993 Recapitalization. The Company incurred an extraordinary loss of $1.3 million on early retirement of debt, which is net of $0.9 million of income tax benefit. LIQUIDITY AND CAPITAL RESOURCES The Company's capital requirements result primarily from capital expenditures related to new store openings and working capital requirements related to new and existing stores. The Company's working capital requirements for existing stores are seasonal in nature and typically reach their peak near the end of the third and beginning of the fourth quarter of the year. Historically, the Company has met its seasonal working capital requirements for existing stores and funded its store expansion program from internally generated funds and borrowings under its credit facilities. During calendar 1993, 1994 and 1995 and the first three months of 1996, net cash provided by (used in) operations was $15.5 million, $17.5 million, $27.2 million and ($17.2) million, respectively. The net cash used in operations during the first three months of 1996 was used primarily to build inventory levels. Net cash used in investing activities during the same periods was $6.6 million, $6.9 million, $11.6 million, and $56.6 million, respectively. During calendar 1993, 1994 and 1995, net cash used in investing activities consisted primarily of capital expenditures relating to new store expansion. During the first three months of 1996, net cash used in investing activities consisted primarily of the payment for the acquisition of Dollar Bills. Net cash provided by (used in) financing activities during the same periods was ($8.8) million, ($5.5) million, $0.8 million and $64.5 million, respectively. In 1993, these funds were primarily used for the extinguishment of debt, to make a subchapter S corporation distribution relating to shareholders' tax liability and to make a special shareholder distribution in August 1993. In 1994, these funds were primarily used for the extinguishment of debt. In 1995, the funds provided were primarily a result of the exercise of stock options granted under the Company's Stock Option Plan. During the first three months of 1996, net funds provided by financing activities were attributable to borrowings incurred to fund the acquisition of Dollar Bills. The Company ended the first quarter of 1996 with a high cash position due to the quarter ending on a weekend, resulting in three days of sales remaining in store accounts. Additionally, transitory funds remained in dormant Dollar Bills depositary accounts. These funds were transferred into the Company's main account in early April and were used to fund working capital requirements. The Company expects to expand by approximately 90 to 100 stores during 1996, in addition to the 136 stores added in the Dollar Bills stock purchase, and by approximately 140 stores during 1997. In 1995, the average investment per new store, including capital expenditures, initial inventory and pre-opening costs, was approximately $152,000 per store. The Company's cash needs for opening new stores in 1996 are expected to total approximately $15.9 million, $8.7 million of which is budgeted for capital 24 expenditures and $7.2 million of which is budgeted for initial inventory and pre-opening costs. The Company's total planned capital expenditures for 1996, including expected expenditures for Dollar Bills stores, are approximately $17.0 million. Total capital expenditures for 1996 include planned expenditures for expanding and relocating stores, purchasing additional equipment for the distribution centers and computer system upgrades. Expenditures related to Dollar Bills stores are expected to amount to approximately $3.8 million and include the purchase and installation of registers and back office personal computers, the purchase of merchandise display units and modifications to checkout and backroom areas in the stores. In January 1996, the Company entered into a new credit agreement which provides for (i) a $60 million development facility (the "Development Facility"), under which amounts outstanding bear interest at the lesser of the agent bank's prime rate or a rate equal to LIBOR plus a variable rate determined from certain financial ratios, and (ii) a $60 million working capital line, amounts outstanding under which bear interest at the lesser of the agent bank's prime rate or a rate equal to LIBOR plus a variable rate determined from certain financial ratios. Any amounts repaid under the Development Facility, including amounts paid by the Company with the net proceeds of the offering, will become available for subsequent borrowings. The credit agreement requires the maintenance of certain specified financial ratios, which may have the effect of restricting the Company's ability to pay dividends, and restricts levels of capital expenditures and the incurrence of debt. The Company's credit agreement also provides for a security interest in favor of the banks upon the Company's inventory and intercompany receivables. It further provides that an event of default occurs if the Founders collectively own less than 10% of the outstanding shares of the Company. The Development Facility is required to be repaid on April 9, 1997. The working capital line expires May 31, 1999. The working capital line must have a zero balance for 30 consecutive days from December 1 to January 31. At March 31, 1996, the Company's borrowings under its new bank facilities were $71.1 million, of which $52.6 million was under the Development Facility and $18.5 million was under the working capital line, leaving an additional $48.9 million available under the facilities provided by the credit agreement. The Company believes that it can adequately fund its planned capital expenditures and working capital requirements for the next several years from net cash provided by operations and availability under its new credit facilities. The use of a major portion of the development facility in the acquisition of stock of Dollar Bills is not expected to affect the Company's ability to fund operations and expenditures. The increased borrowings will, however, result in increased interest charges in 1996. SEASONALITY AND QUARTERLY FLUCTUATIONS The Company has historically experienced and expects to continue to experience seasonal fluctuations in its net sales, operating income and net income. The highest sales periods for the Company are the Christmas and Easter seasons. A disproportionate amount of the Company's net sales and a substantial majority of the Company's operating and net income are generally realized during the fourth quarter. In anticipation of increased sales activity during these months, the Company purchases substantial amounts of inventory and hires a significant number of temporary employees to bolster its permanent store staff. If for any reason the Company's net sales were below seasonal norms during the fourth quarter, including as a result of merchandise delivery delays due to receiving or distribution problems, the Company's annual operating results, particularly operating and net income, could be adversely affected. Historically, net sales, operating income and net income have been weakest during the first quarter, and the Company expects this trend to continue. The Company's quarterly results of operations may also fluctuate significantly as a result of a variety of factors, including the timing of new store openings, the net sales contributed by new stores and the merchandise mix. Shifts in the timing of certain holidays may also have an effect on quarterly results. The Company believes that the change in the timing of the Easter holiday from April 3 in 1994 to April 16 in 1995 shifted most Easter sales from the first quarter in 1994 to the second quarter in 1995 and that the change in the timing of the Easter holiday from April 16 in 1995 to April 7 in 1996 shifted a substantial 25 amount of Easter sales from the second quarter in 1995 to the first quarter in 1996. The Company anticipates that the change in the timing of the Easter holiday from April 7 in 1996 to March 30 in 1997 could shift a substantial additional amount of Easter sales from the second quarter in 1996 to the first quarter in 1997. The following table sets forth certain unaudited results of operations for each quarter of 1994 and 1995 and the first quarter of 1996. The unaudited information has been prepared on the same basis as the audited consolidated financial statements incorporated herein by reference and includes all adjustments, consisting only of normal recurring adjustments, which management considers necessary for a fair presentation of the financial data shown. The operating results for any quarter are not necessarily indicative of results for any future period. Although the Company has experienced significant increases in comparable store net sales increases historically, management expects that any increases in comparable net sales in the future will be smaller than those experienced historically.
QUARTER ENDED -------------------------------------------------------------------------------------------------- MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, 1994 1994 1994 1994 1995 1995 1995 1995 1996 -------- -------- --------- -------- -------- -------- --------- -------- -------- (DOLLARS IN THOUSANDS) Net sales................... $ 36,169 45,046 53,883 96,503 48,733 62,885 67,427 121,185 84,975 Gross profit................ 11,893 15,522 20,322 38,383 16,458 22,340 26,068 47,811 29,070 Operating income (loss)..... (791) 2,364 5,688 19,680 865 4,879 6,656 24,305 2,570 Stores open at end of period...................... 345 370 392 409 424 452 478 500 660 Comparable store net sales increases................... 7.5% 4.7% 13.6% 8.4% 6.8% 16.8% 2.8% 3.8% 11.8%
INFLATION The Company's ability to provide quality merchandise at the $1.00 price point is subject to certain economic factors which are beyond the Company's control, including inflation. Significant and unexpected increases in inflation could have a material adverse effect on the Company's business and results of operations, especially given the constraints on the Company's ability to pass on any incremental costs through price increases. 26 BUSINESS HISTORY Dollar Tree was established by J. Douglas Perry, the Company's Chairman, Macon F. Brock, Jr., the Company's President and Chief Executive Officer, and H. Ray Compton, the Company's Executive Vice President and Chief Financial Officer (the "Founders"). Messrs. Perry and Brock began their careers in the variety store business in 1969, working in a "five and dime" variety store owned by Mr. Perry's father. In 1970, they, along with Mr. Perry's father, founded K&K Toys, Incorporated ("K&K Toys"). Under their management and that of Mr. Compton, who joined K&K Toys in 1979, K&K Toys expanded to 136 stores and was one of the largest mall based toy retailers in the United States, based on number of stores, when it was sold in October 1991. In the mid 1980s, the Founders saw the opportunity to expand the variety store concept into a new type of store, the "dollar store". In the 1980s, traditional discount variety stores (such as Woolworth) were encountering increasing competition from new mass merchandisers (such as Wal-Mart) and smaller format, low price variety stores (such as Dollar General), both formats emphasizing selection and value. In November 1986, Dollar Tree Stores opened five variety stores using the $1.00 price point. From November 1986 through October 1991, the Company increased the number of stores to 171, while continuing to develop the Dollar Tree concept. During this period, Dollar Tree benefitted from the Founders' familiarity with variety store retailing and from the existing infrastructure of K&K Toys, with whom Dollar Tree shared certain operating functions and expenses. Following the sale of K&K Toys in 1991, the Founders focused their attention solely on Dollar Tree and effected a number of strategic changes, including (i) shifting the Company's merchandising focus away from closeout merchandise towards its current emphasis on providing selection and value in traditional variety store categories, (ii) focusing its expansion strategy on strip center locations, (iii) accelerating the Company's expansion program and (iv) improving the depth of the management team and breadth of operational controls. Dollar Tree has opened over 70 new stores in each of the last three years. Dollar Tree stores have been successful in major metropolitan areas, mid-sized cities and small towns with populations under 25,000, and management believes that Dollar Tree stores can perform well in a variety of locations. The Company is focusing its expansion strategy on strip center locations anchored by strong mass merchandisers such as Wal-Mart, whose target customers management believes are similar to those of Dollar Tree. On January 31, 1996, the Company acquired all of the stock of Dollar Bills, Inc. ("Dollar Bills"). At the time of the acquisition, Dollar Bills owned and operated 136 discount variety stores in 16 states, offering merchandise primarily at the $1.00 price point under the name Dollar Bill$. In addition, Dollar Bills operated a distribution center in the Chicago area and a wholesale division. The Company plans to continue operating the Dollar Bills stores, distribution center and wholesale division. The Company paid approximately $54.6 million for 100% of the stock of Dollar Bills and has accounted for the acquisition as a purchase. Dollar Bills reported sales of $113.3 million ($102.0 million of which were from retail operations and $11.3 million of which were from wholesale operations) and operating income of $4.7 million for its fiscal year ended September 30, 1995. On a pro forma basis after giving effect to the acquisition, the Company had $404.1 million in net sales, $140.2 million in gross profit and $44.0 million in operating income for the year ended December 31, 1995 and had $91.5 million in net sales, $30.9 million in gross profit and $2.1 million in operating income for the three months ended March 31, 1996. Pro forma results give effect to certain adjustments, before any nonrecurring charges or credits, and do not purport to be indicative of the results that would have occurred had the transaction taken place at the beginning of the period or of future results. While the Company's Dollar Tree and Dollar Bills stores are in the same business, there are a number of significant operational differences between them. Dollar Bills stores typically (i) are larger, and accordingly have higher average sales per store; (ii) are more concentrated in urban areas than 27 Dollar Tree stores; (iii) carry a higher proportion of consumable merchandise, such as food, health and beauty aids and everday household supplies, which typically have lower merchandise margins, and a lower proportion of leisure items, such as toys and gifts, which typically have higher merchandise margins; (iv) carry less inventory per square foot because of different store fixtures; and (v) offered a limited number of multi-price point items, which the Company expects to continue to offer only at certain Dollar Bills locations and at prices not exceeding $5.00. All of these differences are being evaluated by management to determine how certain characteristics in either or both types of stores can best be combined to operate stores which reach the optimum level of sales in their respective markets. Management believes that the Dollar Bills acquisition broadens the Company's base in terms of geographic coverage, merchandise categories, and market share, while taking advantage of the Company's existing infrastructure. The Company currently intends to continue to operate those stores under the Dollar Bill$ name. Most Dollar Bills stores are located in different retail markets from existing Dollar Tree stores, resulting in little competition for sales. The business combination also adds a modern 250,000 square foot distribution center in the Chicago area, which has been in operation for two years. In general, the Company expects to run the Dollar Bills stores in the same manner as its Dollar Tree stores, except that the Company expects to continue to offer some multi-price point items, sold at prices not exceeding $5.00, in a small number of select Dollar Bills stores. In the discussions that follow, historical information and results of operations relate solely to Dollar Tree, while anticipated changes brought about by this acquisition are discussed where they have been identified. Management continues to evaluate certain aspects of the merger of the two companies. See also "--Legal Proceedings" and "Management's Discussion and Analysis of Financial Condition and Results of Operations." BUSINESS STRATEGY The Company's goal is to continue its leadership position in the $1.00 price point segment of the discount retail industry. The key elements of the Company's business strategy include: Value Offering. Dollar Tree's management strives to exceed its customers' expectations of the range and quality of products that can be purchased for $1.00. Management believes that many of the items Dollar Tree sells for $1.00 are typically sold for higher prices elsewhere. The Company is able to offer such value in part by purchasing a substantial portion of its products directly from foreign manufacturers, allowing the Company to pass on savings to the customer. In addition, direct relationships with both domestic and foreign manufacturers permit broad product selection, customized packaging and frequently the ability to obtain larger sizes and higher package quantities. Changing Merchandise Mix. The Company supplements its wide assortment of quality everyday core merchandise with a changing mix of new and exciting products, including seasonal goods, such as summer toys, back-to-school products and Christmas wrapping paper and, to a limited extent, selected closeout merchandise. The Company also takes advantage of the availability of lower priced, private label goods, which are comparable to national name brands. Strong and Consistent Store Level Economics. The Company believes that its attractive store level economics and the flexibility of its real estate strategy provide it with a wide range of real estate opportunities and will facilitate its continued expansion. The Company's Dollar Tree stores have historically been profitable within the first full year of operations, with an average store level operating income of approximately $147,000 (approximately 23% of net sales) for stores whose first full year of operations was 1995. In addition, the operating performance of the Company's Dollar Tree stores has been very consistent, with over 90% of the Company's stores having store level operating income margins in excess of 15% in 1995, and over 80% of the Company's Dollar Bills stores having store level operating income margins in excess of 15% in 1995. Operating income margins at certain Dollar Bills stores were comparatively lower due to a higher proportion of consumable goods that have a lower merchandise margin being offered at such stores. 28 Experienced Retail Management Team. The Company's three executive officers, J. Douglas Perry, Macon F. Brock, Jr., and H. Ray Compton, each have between 17 and 27 years of experience in the retail industry and have worked together for the past 17 years. Additionally, the Company's eight Vice Presidents each have significant experience in their respective areas of operational expertise. Cost Control. Given the Company's pricing structure, Dollar Tree believes that maintaining sufficient gross margins and tight control over store expenses, corporate expenses and inventories is critical to its success. Dollar Tree closely manages both retail inventory shrinkage and retail markdowns of inventory, limiting each to an average of less than 2.5% of annual net sales over the last five years. While the acquisition of Dollar Bills may cause a slight increase in both retail inventory shrinkage and in retail markdowns as a percentage of net sales, the Company does not believe it will have a material adverse effect. In the past five years, Dollar Tree increased its gross profit margin from 34.7% to 37.5% and increased its operating income margin from 7.3% to 12.2%. From the three months ended March 31, 1995 to the three months ended March 31, 1996, gross profit margin increased from 33.8% to 34.2% and operating income margin increased from 1.8% to 3.0%. Site Selection. The Company maintains a disciplined, cost sensitive approach to site selection, favoring strip centers and selected enclosed malls. In the last four years, Dollar Tree has opened primarily strip center based stores, which have historically required lower initial capital investment and generated higher operating margins than mall stores. The Company favors opening new stores in strip center locations anchored by strong mass merchandisers such as Wal-Mart, Target and Kmart, whose target customers management believes are similar to those of Dollar Tree. GROWTH STRATEGY Prior to the acquisition of Dollar Bills, the primary factors contributing to Dollar Tree's net sales growth were new store openings and comparable store net sales increases. For the five years ended December 31, 1995, net sales increased at a compound annual growth rate of 43.4% and operating income increased at a compound annual growth rate of 62.9%. Management anticipates that the primary sources of future sales growth will be new store openings and to a lesser degree sales increases from expanded and relocated stores and comparable store net sales increases. Currently, management anticipates expanding by approximately 90 to 100 stores in 1996, in addition to 136 Dollar Bills stores added in January 1996, and approximately 140 stores in 1997. It is currently anticipated that all of such stores will be opened under the Dollar Tree name; however, the Company continues to evaluate the effect of store name on sales in certain markets. The Company's expansion plans include increasing its presence in its existing markets to take advantage of market opportunities, efficiencies in distribution and field management, and selectively entering new markets. Although the Company has experienced significant increases in comparable store net sales historically, management expects that any increases in comparable store net sales in the future will be smaller. Dollar Tree's real estate strategy allows the Company the flexibility of opening stores in a variety of locations. Management believes that Dollar Tree stores can perform well in strip center locations and selected mall locations. The Company is currently concentrating on strip center locations anchored by strong mass merchandisers such as Wal-Mart, Target and Kmart, whose target customers management believes are similar to those of Dollar Tree. Although strip center locations typically have lower sales per square foot, strip center locations benefit from lower total investment requirements and lower occupancy costs than mall based locations. Dollar Tree stores have been successful in major metropolitan areas such as Washington/Baltimore, mid-sized cities such as Norfolk, Virginia, and small towns with populations under 25,000. Management also believes that its stores have a relatively small shopping radius, which permits the concentration of multiple stores in a single market. 29 MERCHANDISING Dollar Tree's primary goal in merchandising is to offer a wide assortment of products in traditional variety store categories which exceed customer expectations of the value available for $1.00. The Company seeks to accomplish this goal by: (i) offering a balanced mix of everyday core products and changing products in traditional variety store categories, (ii) maintaining a disciplined, global purchasing program and (iii) emphasizing the effective presentation of merchandise in the stores. Merchandise. Management believes its merchandise mix differentiates Dollar Tree from other discount variety stores selling at the $1.00 price point. The Company's stores offer a well stocked selection of core and changing products within the traditional variety store categories, although the actual items and brands offered at any one time will vary. The traditional variety store categories featured in Dollar Tree stores include housewares, toys, seasonal goods, gifts, food, stationery, health and beauty aids, books, party goods, hardware, jewelry/sunglasses, hair goods and accessories, crafts, baby and infant products, softlines, batteries and pet supplies. The wide variety and freshness of merchandise and the $1.00 price point create excitement for customers, which management believes results in "impulse" purchases and encourages consumers to make return visits to the store. Dollar Tree utilizes seasonal merchandise and, to a limited extent, selected closeout merchandise to add to the variety and freshness in the stores' merchandise. Seasonal goods include summer toys, back-to-school products and Christmas wrapping paper. The Company purchases closeout merchandise, which management believes can be effective in generating recognized value and excitement, as opportunities present themselves, but limits the percentage of total inventory represented by closeout merchandise to less than 20%. When the opportunity presents itself, the Company purchases items which it prices at two for $1.00. These items provide sufficient value to the customer without compromising the Company's margin goals. These items are the only items in the store on which a price tag is used, and customers may buy only one item if desired. Merchandise in the Dollar Bills stores is predominantly of the same categories, although of a different mix, most notably with a stronger emphasis on food and health and beauty aids. In the past, Dollar Bills stores had carried some items priced above $1.00 which will be phased out with the exception of a limited number of multi-price point items, which the Company expects to continue to offer only at certain Dollar Bills locations and at prices not exceeding $5.00. Purchasing. Management believes that its disciplined purchasing program, its relationships with its suppliers and the exclusive focus of its buying power at the $1.00 price point contribute to its successful purchasing strategy. Dollar Tree believes that offering perceived value to its customers while maintaining target merchandise margins in its purchasing program is critical to its success. The Company purchases merchandise from 400 to 500 vendors annually, buying both directly from vendors and indirectly from trading companies and brokers. No vendor accounted for 10% or more of total merchandise purchased in either of the last two calendar years. New vendors are used frequently to offer competitive, yet varied, product selection and to maintain high levels of value. The Company deals with its suppliers principally on an order-by-order basis and has no long-term purchase contracts or other contractual assurance of continued supply or pricing. While there can be no assurance of a continuing and increasing supply of quality merchandise suitable to be priced by the Company at $1.00, management believes that such merchandise will be available in sufficient quantities to meet the Company's plans for future growth. The Company recently terminated its relationship with a Hong Kong trading company that accounted for approximately 6% of the Company's purchases in 1995. The trading company had obtained payment on a number of letters of credit issued on the Company's behalf by falsely claiming that conforming goods had been shipped, when in fact the trading company had either shipped 30 non-conforming goods or empty containers. During the second quarter of 1996, the Company intends to increase its previously established reserves by an additional $300,000 to $400,000 for potential losses arising from the letters of credit upon which the trading company has obtained payment. The Company has cancelled all outstanding purchase orders with the trading company. In addition to the payments already obtained by the trading company, there remains approximately $2.7 million in undrawn irrevocable letters of credit issued to the trading company with respect to the cancelled orders. The Company has taken extensive measures, including legal action against the trading company, which it believes have substantially limited its exposure with respect to the remaining undrawn letters of credit. Although there can be no assurances in this regard, the Company believes it is unlikely that its losses in connection with this matter will significantly exceed its reserves. The Company has also expanded its relationship with another trading company which it believes will be able to fill most of the cancelled orders and fulfill the Company's future needs. There can be no assurances, however, that this shift in suppliers will not result in a temporary disruption or delay in the receipt of merchandise. Visual Merchandising. Management believes that the presentation of its merchandise is critical to communicating value and excitement to its customers. Stores are attractively designed with the use of vibrant colors, uniform decorative signage and supportive accent lighting. The stores are bright, carpeted and provide background music, helping to create an inviting atmosphere for shoppers. Dollar Tree uses a variety of very adaptable merchandising fixtures, including slat walls, bins and shelving, and adjustable gift displays to allow flexibility and the shifting of the merchandise mix to feature seasonal merchandise. Some of these fixtures have been specifically designed for Dollar Tree, such as the customized shelf display designed to promote the store's porcelain gift products at the front of the stores. Dollar Tree maintains a Field Merchandising Group to coordinate visual presentation in stores throughout the chain. In addition, six store openers help to expedite the store opening process. The Company relies on attractive exterior signage and in-store merchandising as its primary form of advertising and generally does not utilize other forms of advertising. IMPORTS In 1994 and 1995, the Company purchased approximately 39% and 34%, respectively, of its merchandise based on cost directly from vendors located abroad, primarily in Hong Kong and Taiwan (through which the Company's Chinese imports flow), Thailand, Brazil, India and the Philippines. The Company expects imports to continue to account for approximately 35% to 40% of total purchases at cost. In addition, the Company believes that a substantial portion of the goods the Company purchases from domestic vendors are manufactured abroad. These arrangements are subject to the risks of relying on products manufactured abroad, including import duties and quotas, loss of "most favored nation" ("MFN") trading status, currency fluctuations, work stoppages, economic uncertainties including inflation, foreign government regulations, political unrest and trade restrictions, including U.S. retaliation against unfair foreign practices. While the Company believes that it could find alternative sources of supply, an interruption or delay in supply from China or the Company's other foreign sources, or the imposition of additional duties, taxes or other charges on these imports, could have a material adverse effect on the Company's business and results of operations unless and until alternative supply arrangements are secured. Moreover, products from alternative sources may be of lesser quality and/or more expensive than those currently purchased by the Company. China is the source for a majority of the Company's direct imports and, the Company believes, is also the largest source of its indirect imports. Several trade-related and other issues have recently intensified tensions between the governments of the United States and China. These issues include China's efforts to disrupt Taiwan's elections by conducting military exercises in the Taiwan Straits, China's alleged sales of nuclear weapons-making equipment to Pakistan and the resulting temporary suspension of U.S. Export-Import Bank financing for sales to China, China's failure adequately to implement and enforce the terms of the intellectual property protection agreement reached with the United States in 1995, China's human rights record, China's alleged sale of missiles to Iran, the recent indictment of members of a Chinese weapons - smuggling operation with suspected ties to the Chinese Government; the 31 growing U.S. trade deficit with China and the ongoing negotiations concerning China's accession to the World Trade Organization. Under U.S. law, countries may be subject to retaliatory trade actions under a number of trade statutes. One such statute is the "Special 301" provision, which requires the U.S. Trade Representative ("USTR") to determine whether the practices of foreign countries deny adequate and effective protection of intellectual property rights or fair and equitable market access for U.S. persons who rely on intellectual property protection. On April 30, 1996, the USTR designated China as a "priority foreign country" under the Special 301 provision for its failure adequately to implement and enforce the bilateral 1995 intellectual property rights agreement with the United States, and on May 15, 1996 the USTR announced its intention to impose prohibitive import tariffs on June 17, 1996 on certain categories of Chinese products, totaling approximately $2 billion in U.S. imports, unless China takes satisfactory action to implement the bilateral intellectual property agreement by that date. It is unclear whether China will, or can, take the actions necessary to forestall the imposition of sanctions between now and June 17. If punitive tariffs are imposed, the categories of goods that will be subject to such sanctions will be drawn from a larger list issued by the USTR on May 15. Two of the products on the May 15 list, stainless steel cookingware and certain types of paper bags, are products that the Company imports in significant quantities directly or indirectly from China. The Company has noncancellable orders to purchase products in these categories that will not be received prior to June 17, 1996, the tariffs on which, if imposed, would be approximately $1.6 million. In the event such tariffs were imposed, the Company would use its relationships with the vendors involved to attempt to renegotiate such noncancellable purchase orders, although there can be no assurances that such efforts would be successful. If the USTR decides that those products, or others that the Company imports, should be targeted for punitive import duties, the Company expects that it would, except in the case of the noncancellable purchase orders referred to above, substitute similar goods from other countries or other categories of goods, which, for the remainder of 1996 at least, would likely be at higher cost. The imposition of punitive tariffs on such Chinese products could have a material adverse effect on the Company's business and results of operations unless and until alternative sources of supply were secured. China is currently accorded MFN status by the United States, and, as such, products imported from China are generally subject to favorable United States import duties. The MFN status of China is reviewed annually by the United States government and, accordingly, extension of such status is subject to political uncertainties. On May 31, 1996, President Clinton transmitted his formal recommendation to the U.S. Congress that MFN status for China be renewed. Senator Robert Dole, the presumptive Presidential nominee of the Republican party, has also announced his support for MFN renewal. The Congress now has until September 1, 1996 to decide whether to oppose that recommendation, which it must do, if at all, by a joint resolution of both houses of Congress. As a result of the number of outstanding issues that currently exist between the United States and the Chinese government, it is possible that there may be significant opposition to the extension of MFN status for China when the issue comes before Congress. If a joint resolution were to be adopted, China's MFN status would expire 61 days after the joint resolution became effective. Loss of China's MFN status could impose significantly higher purchasing costs on the Company, including increased tariffs on goods and could have a material adverse effect on the Company's business and results of operations unless and until alternative sources of supply were secured. COST CONTROL Dollar Tree believes that, given the Company's pricing structure, maintaining sufficient gross margins and tight control over store expenses, corporate expenses and inventories is critical to its success. Accordingly, the Company's store format and operations, field management structure, site 32 selection, warehousing and distribution strategy and management information systems are all designed to implement the Company's business strategy within a low cost operating structure. STORE FORMAT The prototype for future Dollar Tree stores is between 3,500 to 4,000 square feet per store, of which approximately 85% to 90% represents selling space. This represents a modest increase over the historical average of approximately 3,000 square feet per store. Merchandise is densely stocked and organized by category according to a standard store layout plan used throughout the chain. The wide variety, value and freshness of merchandise at the $1.00 price point and lively appearance of the store create excitement for customers that management believes results in high store traffic, high sales volume and an environment which encourages "impulse" purchases. Signs throughout the store such as "New Arrivals Weekly" emphasize the arrival of new merchandise and, management believes, encourage customers to purchase products while merchandise is available. Night stocking and "recovery" of the stores help maintain the stores' clean and neat appearance as well as ensure that the maximum amount of merchandise is displayed, particularly in the busy fourth quarter. The size of the store, standard layout, merchandising by category, pricing structure and convenient locations combine for a time efficient shopping experience for the customer. Dollar Bills stores tend to be somewhat larger, with an average of 4,000 to 4,500 square feet. The format in these stores will be coordinated with that of Dollar Tree stores as management deems prudent. STORE OPERATIONS Each store typically employs a manager, two assistant managers and 4 to 20 sales associates, most of whom are part-time. Additional temporary personnel are typically hired to assist the stores with increased store traffic and sales volume in the fourth quarter. Store managers are responsible for the operations of individual stores, including recruiting and hiring store personnel, communicating financial results nightly and coordinating with the distribution staff on ordering, receiving and displaying weekly shipments. Centralized check-out at the front of the store and simple pricing ensure that customers are not kept waiting. The Company does not accept credit cards. FIELD MANAGEMENT AND PERSONNEL Management believes its philosophy of providing strong field and store management is an integral element of delivering value to its customers. The Company maintains a highly trained and well managed staff to ensure that all stores are continuously well maintained and tightly controlled and to provide the best possible customer service. The field organization is directed by the Senior Vice President, Sales and Operations, assisted by two Directors of Sales and Operations and eight Regional Managers, who in turn oversee numerous District Managers and Area Supervisors. The corporate office is home of "Dollar Tree University," where all field and store managers receive extensive training. Management believes its compensation and benefit programs are a key element in attracting and retaining qualified field management and store personnel and in obtaining a high degree of dedication from employees to their jobs. To motivate the Company's field organization, Dollar Tree has in place bonus plans for the certain groups, including Regional Managers, Regional Field Merchandisers, District Managers, Store Managers and Associate Store Managers. Compensation under the various bonus plans are based on a variety of factors which vary between plans. These factors include comparable store sales, overall sales performance, inventory shrinkage levels, payroll and net income. Eligible employees may participate in the Company's Employee Stock Purchase Plan and its 401(k) and profit sharing plan. In addition, medical and dental insurance are available to eligible employees. 33 STORE LOCATIONS As of March 31, 1996, Dollar Tree operated 660 stores in 26 states, 481 of which were located in strip centers (including certain non strip-center, urban based Dollar Bills stores) and 179 of which were located in malls. Of the strip center based stores, 181 were located in strips with Wal-Mart, 39 with Kmart and 24 with Target. The Company currently leases all of its existing store locations and expects that its policy of leasing rather than owning will continue as it expands. The Company's leases typically provide for a short initial lease term with options on the part of the Company to extend. Management believes that this lease strategy enhances the Company's flexibility to pursue various expansion and relocation opportunities resulting from changing market conditions. The Company's ability to open new stores is contingent upon locating satisfactory sites, negotiating favorable leases, obtaining necessary financing and recruiting and training additional qualified management personnel. As current leases expire, the Company believes that it will be able either to obtain lease renewals if desired for present store locations, or to obtain leases for equivalent or better locations in the same general area. To date, the Company has not experienced difficulty in either renewing leases for existing locations or securing leases for suitable locations for new stores. A substantial number of the Company's store leases contain certain provisions related to changes in control of the Company. These provisions may arguably be applicable in a substantial number of the Company's leases as a result of the 1993 Recapitalization, and may be applicable in a small number of additional leases as a result of the prior public offerings of the Company's common stock. Many of the Company's leases contain provisions with which the Company does not comply, including provisions requiring purchase of insurance upon leasehold improvements and/or property located in the stores, requiring the Company to advertise or prohibiting the Company from operating another store within a specified radius. Based primarily on the Company's belief that it maintains good relations with its landlords, that most of its leases are at market rents, and that it has historically been able to secure leases for suitable locations, management believes that these provisions will not have a material adverse effect on the business or financial position of the Company. WAREHOUSING AND DISTRIBUTION Warehousing and distribution are managed centrally by the Company from its corporate headquarters, which is located in the same building as its Norfolk distribution center. The Company views maintaining strong warehousing and distribution support for its stores as a critical element of its expansion strategy and its ability to maintain a low cost operating structure. As the Company continues its expansion, it intends to open new units in regions around its distribution centers. The Norfolk distribution center consists of 186,000 square feet, while the Memphis distribution center, opened in 1994, encompasses 244,000 square feet. Including the newly acquired 250,000 square foot Chicago facility, the Company's distribution centers have the capacity to service an estimated 1,000 stores. The Company is currently evaluating the expansion and/or relocation of one or more of its distribution facilities to further increase capacity. The Company currently leases its corporate headquarters and Norfolk distribution center. The lease expires in December 2009, but may be extended by the Company for up to three additional five year periods. The distribution center in Memphis is also leased; this lease expires in September 2004, with four additional five year terms available. Additionally, the Company is taking over the lease on the Dollar Bills distribution center, located in the Chicago area; this lease expires in June 2005, with certain options to renew. Substantially all of the Company's inventory is shipped directly from suppliers to the Company's distribution centers. Dollar Tree's substantial distribution center capacity allows the Company to receive manufacturers' early shipment discounts and buy large quantities of goods at favorable prices. In addition, during the past several years the Company has utilized offsite facilities to accommodate large shipments of seasonal merchandise. Since the distribution centers maintain back-up inventory and 34 provide weekly delivery to each store, in-store inventory requirements are reduced and the Company is able to operate with smaller stores than would otherwise be required. Since many stores are limited in size, off-hours stocking, as well as off-site storage space, is utilized to support the store's inventory turnover, particularly during the busy fourth quarter. Distribution to the stores is centrally controlled by the Company's distribution group. The Company's merchandise replenishment software generates distribution models that can be based on variables such as store volume and certain demographic and physical characteristics of the stores. Each store has a weekly and monthly budgeted inventory requirement based on its projected sales for the year and its existing inventory levels. Stores receive weekly shipments of merchandise from distribution centers based on their anticipated inventory requirements for each week and communication via telephone or electronic mail between store managers and the distribution group. The Company has the ability to make two weekly deliveries to high volume stores during the busy Christmas season. The Company's distribution fleet consists of 18 leased tractors and 57 owned trailers. The majority of the Company's inventory is delivered to the stores by contract carriers. The Company fleet is used in freight lanes which allow backhauls of merchandise from suppliers to its distribution centers and to service stores located near distribution centers. The Company is continuously looking for opportunities to reduce its freight and distribution costs and periodically evaluates various delivery options. MANAGEMENT INFORMATION SYSTEMS The Company's management information systems allow it to monitor its merchandising, inventory, distribution and operating expenses centrally at its Norfolk headquarters. These systems allow the Company to support its stores efficiently, manage inventory turnover, and provide detailed financial reporting to support management's operational decisions and cost control efforts. The Company does not have and does not currently anticipate adding a point-of-sale system. The Company is in the process of integrating the Dollar Bills stores into the existing management information systems. COMPETITION The retail industry is highly competitive. The Company's competitors include mass merchandisers (such as Wal-Mart), discount stores (such as Dollar General), variety stores (such as Woolworth), closeout stores (such as Odd Lot and Big Lot) and other $1.00 price point stores (including All For One, a division of Consolidated Stores Corporation, All For A Dollar and Everything's a Dollar, a division of Value Merchants, Inc.). In January 1996, the Company acquired all of the stock of one of its competitors, Dollar Bills. Certain of the Company's competitors are units of national or regional chains that may have substantially greater financial resources than the Company. Several of the largest operators of discount stores at the $1.00 price point (or their parent companies) have recently filed for or emerged from bankruptcy protection in U.S. bankruptcy court and have closed a number of their stores, while others have abandoned the $1.00 price point concept and/or reconfigured their stores. The Company may face intense competition in the future which could have an adverse effect on its financial results. TRADEMARKS The Company is the owner of Federal service mark registrations for "Dollar Tree," the "Dollar Tree" logo, "1 Dollar Tree" together with the related design, and "One Price . . . One Dollar," each of which expires in 2003 or later. A small number of the Company's stores operate under the name "Only $1.00," for which the Company has not obtained a service mark registration; if it were required to change the name of these stores, the Company does not believe that this would have a material adverse effect on its business. Additionally, with the acquisition of Dollar Bills in January 1996, the Company became the owner of various Federal service mark registrations, including a concurrent use registration for "Dollar Bill$" and the related logo. 35 EMPLOYEES The Company employed approximately 6,965 employees at March 31, 1996, approximately 1,795 of whom were full-time and 5,170 part-time. The number of part-time employees fluctuates depending on seasonal needs. The Company considers its relationship with employees to be good and has not experienced significant interruptions of operations due to labor disagreements. None of the Company's employees are currently represented by a labor union. On March 20, 1996, the employees of the Company's Norfolk distribution center voted against union representation by the International Brotherhood of Teamsters in an election certified by the National Labor Relations Board. The International Brotherhood of Teamsters cannot conduct another election at the Norfolk distribution center until March 20, 1997. There can be no assurance that any of the Company's employees will not in the future elect to be represented by a union. LEGAL PROCEEDINGS On January 31, 1996, the Company bought all of the capital stock of Dollar Bills, pursuant to a stock purchase agreement. In March and April, 1996, Michael and Pamela Alper (the "Alpers"), former shareholders of Dollar Bills, together with a corporation they control, filed lawsuits in the state and federal courts in Cook County, Illinois, against the Company and one of its employees relating to the Dollar Bills transaction. The lawsuits seek to recover compensatory damages of not less than $10 million (which could be tripled under the federal antitrust law claim described below), punitive damages, attorney's fees, costs and injunctive and other relief. In the lawsuit, the plaintiffs claim that the Alpers were defrauded into selling the wholesale merchandising operations which were owned by Dollar Bills; that the Company improperly obtained and misused confidential and proprietary information related to those operations; that the Company breached the provisions of a confidentiality agreement which it had entered into with Dollar Bills when negotiations regarding the acquisition began; that the Company breached certain terms of the stock purchase agreement relating to the acquisition; that the Company intentionally or negligently misrepresented its intentions with respect to the wholesale merchandising operations; and that the Company and the co-defendant conspired to violate antitrust law by excluding the plaintiffs as competitors in the wholesale merchandising business. It is possible that, in the future, the plaintiffs could amend their complaint to request that the court set aside or rescind the entire Dollar Bills transaction. The Company emphatically denies the plaintiffs' claims and will vigorously defend itself in this matter. The litigation is in its preliminary stages and discovery has only recently commenced; however, based on management's understanding of the facts (which facts are contested by the plaintiffs) and the advice of its lead litigation counsel for this matter in reliance on such facts, the Company believes it is unlikely that the plaintiffs will ultimately prevail on the merits of this litigation. Accordingly, the Company believes that the ultimate outcome of this matter will not have a material adverse effect on the Company's results of operations or financial condition. Nevertheless, particularly in light of the contested factual assertions, there can be no assurances regarding the ultimate outcome of this litigation or that this litigation will not have a material adverse effect on the Company's results of operations or financial condition. In any event, the litigation has diverted, and is expected to continue to divert, the efforts and attention of the Company's management. On May 1, 1996, the Company determined that certain terra cotta potted candles, approximately 31,170 sets of which it sold in April 1996, might contain a defect which could create a substantial risk of injury. As required by the Consumer Product Safety Act, the Company filed an initial report of the potential danger with the Consumer Product Safety Commission ("CPSC") on May 3, 1996. The Company has voluntarily stopped distribution of the product and intends to issue a recall to customers. The Company is not aware of any serious injuries, either to person or property, as a result of the potential defect. Additionally, the Company is a party to ordinary routine litigation and proceedings incidental to its business, including certain matters which may occasionally be asserted by the CPSC, none of which is individually or in the aggregate material to the Company. 36 MANAGEMENT DIRECTORS, EXECUTIVE OFFICERS AND CERTAIN KEY PERSONNEL The following table sets forth certain information with respect to directors, executive officers and certain key personnel of the Company:
DIRECTORS AND EXECUTIVE OFFICERS AGE OFFICE - ---------------------------------- --- -------------------------------------------------- J. Douglas Perry 48 Chairman of the Board; Director Macon F. Brock, Jr. 54 President and Chief Executive Officer; Director H. Ray Compton 53 Executive Vice President and Chief Financial Officer; Director John F. Megrue 37 Vice Chairman of the Board; Director Allan W. Karp 41 Director Thomas A. Saunders, III 59 Director Alan L. Wurtzel 62 Director Frank Doczi 58 Director CERTAIN KEY PERSONNEL Thomas J. Bowyer 37 Senior Vice President, Sales and Operations Frederick C. Coble 35 Vice President, Controller K. Bryan Bagwell 36 Vice President, Merchandise Leonard Intrieri 56 Vice President, Human Resources Darcel L. Stephan 38 Vice President, Information Systems David W. Thomas 36 Vice President, Leasing Stephen W. White 41 Vice President, Logistics
DIRECTORS AND EXECUTIVE OFFICERS J. Douglas Perry has been a Director and Chairman of the Board of the Company since 1986 when he founded the Company with Mr. Brock and Mr. Compton. Mr. Perry is primarily responsible for directing the real estate, leasing and construction functions of the Company. Until 1991, he was an executive officer of K&K Toys which he, along with Mr. Brock, Mr. Compton and Mr. Perry's father, built from its original single store to 136 stores. Mr. Perry has 27 years of retail experience. Mr. Perry attended Old Dominion University. Macon F. Brock, Jr. has been Chief Executive Officer of the Company since 1993 and a Director and President of the Company since 1986 when he founded the Company with Mr. Perry and Mr. Compton. Mr. Brock directs the overall operations of the Company which primarily include purchasing, merchandising, logistics and distribution and store operations. Until 1991, he was employed in a similar role with K&K Toys. Mr. Brock has 27 years of retail experience. Mr. Brock graduated from Randolph Macon College, served in the U.S. Marine Corps as a Captain and was a special agent for U.S. Naval Intelligence. H. Ray Compton has been a Director, Executive Vice President and Chief Financial Officer of the Company since 1986 when he founded the Company with Mr. Perry and Mr. Brock. He is responsible for finance, maintenance of credit facilities, cash management, information systems and human resources. From 1979 until 1991 Mr. Compton was employed in a similar role with K&K Toys. Prior to 1979, he was associated for 15 years with a manufacturing company in various accounting and management positions. Mr. Compton graduated from Phillips Business College. 37 John F. Megrue has been a Director and Vice Chairman of the Board of the Company since September 1993. Mr. Megrue has been a partner of SK Partners, L.P., which serves as the general partner of Saunders Karp & Co. and the Fund, since 1992. From 1989 to 1992 Mr. Megrue served as a Vice President and Principal at Patricof & Co. and prior thereto he served as a Vice President at C.M. Diker Associates. Mr. Megrue received a B.S. in mechanical engineering from Cornell University and an M.B.A. from the Wharton School. Allan W. Karp has been a Director of the Company since September 1993. Mr. Karp has been a partner of SK Partners, L.P., which serves as the general partner of Saunders Karp & Co. and the Fund, since 1990. Before founding Saunders Karp & Co., Mr. Karp was a Principal in the Merchant Banking Department at Morgan Stanley & Co., where he began in the firm's Mergers and Acquisitions Department in 1983. Mr. Karp graduated from M.I.T.'s Sloan School of Management with a Masters of Science degree in Management. Thomas A. Saunders, III, has been a Director of the Company since September 1993. Mr. Saunders has been a partner of SK Partners, L.P., which serves as the general partner of Saunders Karp & Co. and the Fund, since 1990. Before founding Saunders Karp & Co., Mr. Saunders served as a Managing Director of Morgan Stanley & Co. from 1974 to 1989 and the Chairman of The Morgan Stanley Leveraged Equity Fund II, L.P., from 1987 to 1989. Mr. Saunders is a member of the Board of Visitors of the Virginia Military Institute and is the Chairman of the Board of Trustees of the University of Virginia's Darden Graduate School of Business Administration. Mr. Saunders is also a Trustee of the Cold Spring Harbor Laboratory. Mr. Saunders received a B.S. in electrical engineering from the Virginia Military Institute in 1958 and an M.B.A. from the University of Virginia's Darden Graduate School of Business in 1967. Alan L. Wurtzel has been a Director of the Company since April 1995. Mr. Wurtzel serves as the Vice Chairman of the Board of Circuit City Stores, Inc. ("Circuit City"), a large consumer electronics retailing chain. From 1986 to 1994, he served as Chairman of the Board of Circuit City. Prior to 1986, he served in several other capacities with Circuit City, including Chief Executive Officer (1973 to 1986). From December 1986 to April 1988, he served as President of Operation Independence, a non-profit organization. Mr. Wurtzel has been a director of Office Depot, Inc. since 1989. Mr. Wurtzel has 30 years of retail experience. He is a graduate of Oberlin College and Yale Law School. Frank Doczi has been a Director of the Company since May 1995. Mr. Doczi currently serves as Special Advisor to the Chairman of Hechinger Company. Prior to that appointment, he served as the President and Chief Executive Officer of Home Quarters Warehouse, Inc. ("HQ"), a subsidiary of Hechinger Company, from 1988 until 1995. Mr. Doczi had been with HQ since its inception in 1984. He also served as a member of the Management Committee for the Hechinger Company. Prior to Mr. Doczi's association with HQ, he spent seven years with Moore's, a chain of home centers operated by Evans Products Company, where he was the Senior Vice President, General Merchandise Manager. Mr. Doczi attended Rutgers University. Mr. Brock is married to Mr. Perry's sister. There are no additional family relationships among the Directors and executive officers. CERTAIN KEY PERSONNEL Thomas J. Bowyer became Senior Vice President, Sales and Operations, of the Company in January 1995 and prior thereto served as Vice President, Sales and Operations from July 1991. Prior thereto, he served as Director of Sales and Operations of Dollar Tree from August 1989. His previous work experience includes positions as a district manager with K&K Toys from 1988 and in the grocery business, and store management positions with Circus World and Kay-Bee Toy Stores. 38 Frederick C. Coble became Vice President, Controller, of the Company in December 1991 after having joined Dollar Tree in December 1989. Prior to joining the Company, he served as Internal Audit Manager with Royster Company, a manufacturing company, and as Audit Manager for KPMG Peat Marwick LLP. Mr. Coble graduated from the University of Virginia in 1982 and is a Certified Public Accountant. K. Bryan Bagwell became Vice President, Merchandise, of the Company in September 1993. Prior thereto, Mr. Bagwell served as Merchandise Manager for Dollar Tree from March 1993 to September 1993 and as a buyer for the Company from October 1991 to March 1993. Before joining the Company, Mr. Bagwell worked for K&K Toys from 1977 to October 1991, starting as a distribution center associate and leaving as a senior buyer. Leonard Intrieri became Vice President, Human Resources, of the Company in September 1989. Prior thereto, he served as Personnel Director from February 1987 to March 1989 and Director, Human Resources, from March 1989 to September 1989. Mr. Intrieri previously worked as Personnel Manager for K&K Toys (1984-1987), assistant personnel manager for Allied Marine Corporation (1982-1984), assistant personnel/employee relations manager for Colonial Stores/Big Star Supermarkets (1980-1982) and employment counselor for an independent employment agency (1979-1980). Darcel L. Stephan became Vice President, Information Systems, of the Company in September 1989. Prior thereto, she served as Data Processing Director from February 1987 to September 1989. Before joining the Company, Ms. Stephan worked for K&K Toys as Data Processing Supervisor from December 1980 to February 1987. Ms. Stephan previously worked as a programmer/analyst with Haynes Furniture, a furniture retailer, and C. Lloyd Johnson, a distributor of manufactured goods. David W. Thomas became Vice President, Leasing, of the Company in January 1995. Prior thereto, he served as Leasing Representative from July 1989 until February 1991 when he became Director of Real Estate. His previous work experience included positions as store manager for K&K Toys, account executive for a local radio station, sales associate at Circuit City Stores and a restaurant manager with the Marriott Corporation. Mr. Thomas attended Old Dominion University. Stephen W. White became Vice President, Logistics in December 1995 after having joined the Company in June 1994 as Director of Transportation and Distribution. Prior to joining the Company, he served as Director of Transportation and Distribution Planning for Ames Department Stores from July 1986 to June 1994. His previous work experience included various transportation and supply positions with a number of companies, including Shell Oil Company and Eastern Airlines. Mr. White graduated from Northeastern University in 1978. 39 PRINCIPAL AND SELLING SHAREHOLDERS The following table sets forth certain information regarding the beneficial ownership as of May 22, 1996 of the Common Stock by (i) each of the Directors, (ii) each of the executive officers, (iii) all current Directors and executive officers as a group, (iv) each other person who is the beneficial owner of more than 5% of the outstanding Common Stock and (v) each other Selling Shareholder. The address of each Director and executive officer of the Company is c/o Dollar Tree Stores, Inc., 2555 Ellsmere Ave., Norfolk Commerce Park, Norfolk, Virginia 23513.
BENEFICIAL OWNERSHIP BENEFICIAL OWNERSHIP BEFORE OFFERING(1) AFTER OFFERING(1) ------------------------ --------------------- SHARES SHARES PERCENT OFFERED(2) SHARES PERCENT ---------- ------- ---------- ---------- ------- DIRECTORS AND EXECUTIVE OFFICERS J. Douglas Perry........................ 3,513,150(3) 13.72% 162,533 3,025,650 11.48% Macon F. Brock, Jr...................... 2,878,620(4) 11.24% 240,778 2,579,842 9.79% H. Ray Compton.......................... 921,576(5) 3.66% 90,000 771,576 2.98% John F. Megrue.......................... 9,959,878(6) 37.88% -- 8,589,815 31.76% Alan W. Karp............................ 9,959,878(7) 37.88% 2,244 8,589,815 31.76% Thomas A. Saunders, III................. 9,959,878(8) 37.88% -- 8,589,815 31.76% Alan L. Wurtzel......................... 16,500(9) * -- 16,500 * Frank Doczi............................. 11,250(10) * -- 11,250 * All current Directors and executive officers of the Company (8 persons).... 17,333,598 62.89% 495,555 15,022,769 53.06% OTHER 5% SHAREHOLDERS The SK Equity Fund, L.P................. 9,943,566(11) 37.82% 1,367,819 8,575,747 31.71% Two Greenwich Plaza Suite 100 Greenwich, Connecticut 06830 Joan P. Brock........................... 1,443,973(12) 5.76% 188,722 1,255,251 4.86% Dollar Tree Stores, Inc. 2555 Ellsmere Ave. Norfolk Commerce Park Norfolk, Virginia 23513 OTHER SELLING SHAREHOLDERS Christopher K. Reilly................... 3,262(13) * 449 2,813 * Robert C. Miller and Macon F. Brock, Jr., as Trustees of the Joan P. Brock Grantor Retained Annuity Trust......... 59,559 * 28,000 31,559 * Robert C. Miller and Macon F. Brock, Jr., as Trustees for Kathryn P. Brock................................... 325,627(14) 1.29% 10,000 315,627 1.21% Robert C. Miller and Macon F. Brock, Jr., as Trustees for Macon F. Brock, III..................................... 325,627(14) 1.29% 10,000 315,627 1.21% Robert C. Miller and Macon F. Brock, Jr., as Trustees for Christine B. McCammon................................ 325,627(14) 1.29% 10,000 315,627 1.21% Robert C. Miller and J. Douglas Perry, Trustees of the Patricia W. Perry Grantor Retained Annuity Trust......... 494,029 1.97% 324,967 169,062 * James P. Compton and Jean T. Compton, Trustees of the H. Ray Compton Grantor Retained Annuity Trust.................. 205,891 * 60,000 145,891 * Melanie K. Berman, Custodian for Kyle Galbreath Megrue........................ 8,156(15) * 1,122 7,034 * Melanie K. Berman, Custodian for Christopher Galbreath Megrue........... 8,156(15) * 1,122 7,034 * Thomas A. Saunders, III and Joanne S. Berkley, as Trustees for the Ivor Family Trust........................... 16,312(16) * 2,244 14,068 *
(Footnotes on following page) 40 (Footnotes for preceding page) - ------------ * less than 1% (1) As used in this table "beneficial ownership" means the sole or shared power to vote or direct the voting or to dispose or direct the disposition of any security. A person is deemed as of any date to have "beneficial ownership" of any security that such person has a right to acquire within 60 days after such date. Any security that any person named above has the right to acquire within 60 days is deemed to be outstanding for purposes of calculating the ownership percentage of such person, but is not deemed to be outstanding for purposes of calculating the ownership percentage of any other person. The Company has issued warrants to acquire 2,482,178 shares of Common Stock (the "Warrant Shares") all of which are currently exercisable. (2) Assumes no exercise of the Underwriter's over-allotment option to purchase up to 487,500 shares of Common Stock. If the Underwriters exercise this option in whole or in part, the Selling Shareholders will sell additional shares generally in proportion to the respective amounts offered by them in the initial sale to the Underwriters. (3) Includes 1,211,853 shares and 558,489 Warrant Shares owned by trusts for the benefit of certain Perry family members, of which Mr. Perry is a trustee, but excludes 757,942 shares owned by Mr. Perry's wife, Patricia W. Perry. (4) Includes 477,951 shares and 558,489 Warrant Shares owned by trusts for the benefit of certain Brock family members, of which Mr. Brock is a trustee, but excludes 1,443,973 shares owned by Mr. Brock's wife, Joan P. Brock. (5) Includes 439,697 shares and 124,110 Warrant Shares owned by trusts for the benefit of certain Compton family members, over which Mr. Compton may indirectly exercise investment or voting power. (6) Represents 14,288 shares and 2,024 Warrant Shares owned by Mr. Megrue's sister as Custodian for his children. Also includes 8,708,955 shares and 1,234,611 Warrant Shares owned by The SK Equity Fund, L.P. Mr. Megrue is a general partner of the general partner of The SK Equity Fund, L.P. (7) Includes 8,708,955 shares and 1,234,611 Warrant Shares owned by The SK Equity Fund, L.P., and 2,025 Warrant Shares owned by Mr. Karp. Mr. Karp is a general partner of the general partner of The SK Equity Fund, L.P. (8) Represents 14,287 shares and 2,025 Warrant Shares owned by an irrevocable trust for the benefit of certain Saunders family members, of which Mr. Saunders is a trustee. Also includes 8,708,955 shares and 1,234,611 Warrant Shares owned by The SK Equity Fund, L.P. Mr. Saunders is a general partner of the general partner of The SK Equity Fund, L.P. (9) Includes 5,250 shares held in a revocable trust of which Mr. Wurtzel is a trustee and 11,250 shares issuable upon exercise of certain stock options granted to Mr. Wurtzel pursuant to The Dollar Tree Stores, Inc. Stock Incentive Plan. (10) Includes 11,250 shares issuable upon exercise of certain stock options granted to Mr. Doczi pursuant to The Dollar Tree Stores, Inc. Stock Incentive Plan. (11) Includes 1,234,611 Warrant Shares. Messrs. Megrue, Saunders and Karp, as general partners of the general partner of The SK Equity Fund, L.P. (the "Fund"), may be deemed to have beneficial ownership of shares held by the Fund, and the shares and warrant shares held by the Fund have been attributed to them in the table above. See Notes (6), (7) and (8) above. (12) Does not include 2,320,131 shares and 558,489 Warrant Shares beneficially owned by Mrs. Brock's husband, Macon F. Brock, Jr. (13) Includes 405 Warrant Shares. Mr. Reilly is a principal of Saunders Karp & Co., an affiliate of The SK Equity Fund, L.P. (14) Includes 186,163 Warrant Shares. (15) Includes 1,012 Warrant Shares. (16) Includes 2,025 Warrant Shares. 41 UNDERWRITING The Underwriters named below have severally agreed, subject to the terms and conditions set forth in the Underwriting Agreement, to purchase from the Company and the Selling Shareholders the number of shares of Common Stock indicated below opposite their respective names at the public offering price less the underwriting discount set forth on the cover page of this Prospectus. The Underwriting Agreement provides that the obligations of the Underwriters are subject to certain conditions precedent and that the Underwriters are committed to purchase all of the shares if they purchase any.
NUMBER UNDERWRITERS OF SHARES - ---------------------------------------------------------------- --------- Montgomery Securities........................................... Goldman, Sachs & Co. ........................................... Smith Barney Inc................................................ --------- Total....................................................... 3,250,000 --------- ---------
The Underwriters have advised the Company and the Selling Shareholders that the Underwriters propose initially to offer the Common Stock to the public on the terms set forth on the cover page of this Prospectus. The Underwriters may allow to selected dealers a concession of not more than $ per share; and the Underwriters may allow, and such dealers may reallow, a concession of not more than $ per share to certain other dealers. After the public offering, the offering price and other selling terms may be changed by the Underwriters. The Common Stock is offered subject to receipt and acceptance by the Underwriters, and to certain other conditions, including the right to reject orders in whole or in part. The Selling Shareholders have granted an option to the Underwriters, exercisable during the 30-day period after the date of this Prospectus, to purchase up to a maximum of 487,500 additional shares of Common Stock to cover over-allotments, if any, at the same price per share as the initial shares to be purchased by the Underwriters. To the extent that the Underwriters exercise this option, the Underwriters will be committed, subject to certain conditions, to purchase such additional shares in approximately the same proportion as set forth in the above table. The Underwriters may purchase such shares only to cover over-allotments made in connection with this offering. The Underwriting Agreement provides that the Company and the Selling Shareholders will indemnify the Underwriters against certain liabilities, including civil liabilities under the Securities Act, or will contribute to payments the Underwriters may be required to make in respect thereof. All of the Selling Shareholders have agreed, subject to certain limited exceptions, not to offer, sell or otherwise dispose, directly or indirectly, of any shares of Common Stock of the Company for a period of 90 days after the date of this Prospectus, without the prior written consent of Montgomery Securities, as representative of the Underwriters. The Company has agreed not to offer, sell or otherwise dispose of, directly or indirectly, any shares of Common Stock of the Company for a period of 90 days after the date of this Prospectus, without the prior written consent of Montgomery Securities, as representative of the Underwriters, except that the Company, without such consent, may grant options or issue Common Stock upon exercise of new or outstanding options pursuant to The Dollar Tree Stores, Inc. Amended and Restated Stock Option Plan, The Dollar Tree Stores, Inc. Stock Incentive Plan and The Dollar Tree Stores, Inc. Employee Stock Purchase Plan. 42 Certain of the Underwriters and selling group members (if any) that currently act as market makers for the Common Stock may engage in "passive market making" in the Common Stock on Nasdaq in accordance with Rule 10b-6A under the Securities Exchange Act of 1934 (the "Exchange Act"). Rule 10b-6A permits, upon the satisfaction of certain conditions, underwriters and selling group members participating in a distribution that are also Nasdaq market makers in the security being distributed to engage in limited market making transactions during the period when Rule 10b-6 under the Exchange Act would otherwise prohibit such activity. Rule 10b-6A prohibits underwriters and selling group members engaged in passive market making generally from entering a bid or effecting a purchase at a price that exceeds the highest bid for those securities displayed on Nasdaq by a market maker that is not participating in the distribution. Under Rule 10b-6A, each underwriter or selling group member engaged in passive market making is subject to a daily net purchase limitation equal to 30% of such entity's average daily trading volume during the two full consecutive calendar months immediately preceding the date of the filing of the registration statement under the Securities Act pertaining to the security to be distributed. Passive market making may stabilize the market price of the Common Stock at a level above that which might otherwise prevail and, if commenced, may be discontinued at any time. LEGAL MATTERS The validity of the Common Stock and certain other legal matters in connection with this offering will be passed upon for the Company and the Selling Shareholders by Davis Polk & Wardwell, New York, New York, and Hofheimer, Nusbaum, McPhaul & Samuels, a Professional Corporation, Norfolk, Virginia. Certain legal matters in connection with the Common Stock offered hereby will be passed upon for the Underwriters by Hale and Dorr, Boston, Massachusetts. EXPERTS The financial statements of Dollar Tree Stores, Inc. as of December 31, 1994 and 1995, and for each of the years in the three-year period ended December 31, 1995 have been incorporated by reference herein and in the Registration Statement in reliance upon the report of KPMG Peat Marwick LLP, independent certified public accountants, incorporated by reference herein, and upon the authority of said firm as experts in accounting and auditing. The financial statements of Dollar Bills, Inc. (formerly known as Terrific Promotions, Inc.) as of September 31, 1994 and 1995, and for the fiscal years ended September 30, 1994 and 1995 have been incorporated by reference herein and in the Registration Statement in reliance upon the report of Arthur Andersen LLP, independent certified public accountants, incorporated by reference herein, and upon the authority of said firm as experts in accounting and auditing. ADDITIONAL INFORMATION The Company has filed a Registration Statement on Form S-3 under the Securities Act of 1933, as amended, with the Securities and Exchange Commission (the "Commission") with respect to the shares offered by this Prospectus. This Prospectus does not contain all of the information set forth in the Registration Statement and the exhibits and schedules thereto. Statements contained herein concerning the provisions of any documents are not necessarily complete and, in each instance, reference is made to the copy of such documents filed as an exhibit to the Registration Statement, and each such statement shall be deemed qualified in its entirety by such reference. The Company is subject to the informational requirements of the Exchange Act and, in accordance therewith, files reports and other information with the Commission. A copy of the reports and other 43 information filed by the Company in accordance with the Exchange Act may be inspected without charge at the offices of the Commission at Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549, and will also be available for inspection and copying at the regional offices of the Commission located at 7 World Trade Center, Suite 1300, New York, New York 10048 and at Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661-2511. Copies of such material may also be obtained from the Public Reference Section of the Commission, Washington, D.C. 20549, upon payment of the fees prescribed by the Commission. Such reports, proxy statements and other information concerning the Company are also available for inspection at the offices of the Nasdaq National Market, Reports Section, 1735 K Street, Washington, D.C. 20006. INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE The following documents filed by the Company with the Commission are incorporated herein by reference: (1) the Company's Annual Report on Form 10-K for the year ended December 31, 1995; (2) the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1996; (3) the Company's Current Report on Form 8-K filed with the Commission on January 16, 1996, as amended by the Company's Current Report on Form 8-K/A filed with the Commission on April 12, 1996, and (4) the Company's Registration Statement on Form 8-A filed February 28, 1995, registering the Company's Common Stock under Section 12(g) of the Exchange Act. All documents filed by the Company with the Commission pursuant to Sections 13(a), 13(c), 14 and 15(d) of the Exchange Act subsequent to the date hereof and prior to the termination of the offering of the Common Stock registered hereby shall be deemed to be incorporated by reference into this Prospectus and to be a part hereof from the date of filing such documents. Any statements contained in a document incorporated or deemed to be incorporated by reference herein shall be deemed to be modified or superseded for purposes of this prospectus to the extent that a statement contained herein or in any other subsequently filed document which also is, or is deemed to be, incorporated by reference herein modifies or supersedes such statement. Any statement so modified or superseded shall not be deemed, except as so modified or superseded, to constitute a part of this Prospectus. The Company will provide without charge to each person to whom this Prospectus is delivered, upon a written request of such person, a copy of any or all of the foregoing documents incorporated by reference into this Prospectus (other than exhibits to such documents, unless such exhibits are specifically incorporated by reference into such documents). Requests for such copies should be delivered to H. Ray Compton, Executive Vice President and Chief Financial Officer, 2555 Ellsmere Avenue, Norfolk, VA 23513. 44 No dealer, sales representative, or any other person has been authorized to give any information or to make any representations other than those contained in this 3,250,000 SHARES Prospectus, and, if given or made, such information or representation must not be relied upon as having been authorized by the Company, any [LOGO] Selling Shareholder or by the Underwriters. Neither the delivery DOLLAR TREE STORES, INC. of this Prospectus nor any sale made hereunder shall under any circumstances create any COMMON STOCK implication that there has been no change in the affairs of the Company since the date hereof. This Prospectus does not constitute an offer to sell or a solicitation of an offer to buy any securities offered hereby by anyone in any jurisdiction in which such offer or solicitation is not authorized or in which the person making such offer or solicitation is not qualified to do so or to any person to whom it is unlawful to make such offer or solicitation. --------------------- -------------- TABLE OF CONTENTS PROSPECTUS --------------------- -------------- Page ------ Prospectus Summary................ 3 MONTGOMERY SECURITIES Risk Factors...................... 8 Use of Proceeds...................15 GOLDMAN, SACHS & CO. Price Range of Common Stock.......15 Dividend Policy...................15 SMITH BARNEY INC. Capitalization....................16 Selected Financial Data...........17 Management's Discussion and Analysis of Financial Condition and Results , 1996 of Operations...................19 Business..........................27 Management........................37 Principal and Selling Shareholders....................40 Underwriting......................42 Legal Matters.....................43 Experts...........................43 Additional Information............43 Incorporation of Certain Documents by Reference..........44 - ----------------------------------- ----------------------------------- - ----------------------------------- ----------------------------------- 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: Securities and Exchange Commission registration fee............. $ 45,753 Blue Sky fees and expenses...................................... 12,000 Printing expense................................................ 120,000 Accounting fees and expenses.................................... 50,000 Legal fees and expenses......................................... 210,000 NASD filing fee................................................. 13,769 Miscellaneous................................................... 48,478 -------- Total..................................................... $500,000 -------- --------
The Company has agreed to pay the foregoing expenses. - ------------ ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS. To the full extent permitted by the Virginia Stock Corporation Act, the Articles of Incorporation require the Company to indemnify its officers and directors. Article V of the Articles of Incorporation provides that any director or officer who was or is a party to any proceeding shall be indemnified by the Company against any liability incurred by him in connection with such proceeding unless he engaged in willful misconduct or a knowing violation of the criminal law. The Company is also required to promptly pay for or reimburse all reasonable expenses, including attorneys' fees, incurred by a director or officer in advance of final disposition of the proceeding if the director or officer furnishes the Company with a written statement of his good faith belief that he has met the standard of conduct that is a prerequisite to his entitlement to indemnification and agrees to repay the advance if it is ultimately determined that he did not meet such standard of conduct. The Company is authorized to purchase and maintain insurance to insure the Company against its indemnification obligation, or insure any person who is or was a director, officer, employee, or agent of the Company against any liability asserted against or incurred by him in any such capacity or arising from his status as such, whether or not the Company has the power to indemnify him against such liability. The Company has directors and officers liability insurance. The Company is also empowered, by a majority vote of a quorum of disinterested directors, to enter into a contract to indemnify any director or officer against liability, whether occurring before or after the execution of the contract. Except to the extent contrary to the Articles of Incorporation or Virginia Stock Corporation Act, the Company is not prevented or restricted from making or providing for indemnities in addition to those provided in the Articles of Incorporation. Section 11 of the Underwriting Agreement provides for indemnification by the Underwriters of directors, officers and controlling persons of the Company against certain liabilities, including liabilities under the Securities Act of 1933, as amended (the "Securities Act"), under certain circumstances. ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULE (a) Exhibits II-1 1.1 --Form of Underwriting Agreement * 2.1 --Agreement for Purchase and Sale of Stock dated September 24, 1993 among J. Douglas Perry, Patricia W. Perry, Macon F. Brock, Jr., Joan P. Brock, H. Ray Compton and The SK Equity Fund, L.P. ** 2.2 --Amended and Restated Stockholders Agreement effective March 13, 1995 among the Company, John F. Megrue, Thomas A. Saunders, III, and certain shareholders * 2.3 --Securities Purchase Agreement dated September 30, 1993 among the Company, J. Douglas Perry, Patricia W. Perry, Macon F. Brock, Jr., Joan P. Brock, H. Ray Compton, John F. Megrue, Thomas A. Saunders, III, Allan W. Karp, Christopher K. Reilly, and The SK Equity Fund, L.P., and the First Amendment thereto *** 2.4 --Agreement for Purchase and Sale of Stock dated as of January 16, 1996 between the Company and Michael N. Alper and Pamela J. Alper ** 4.1 --Amended and Restated Stockholders Agreement (See Exhibit 2.2) * 4.2 --Third Restated Articles of Incorporation of the Company * 4.3 --Second Restated Bylaws of the Company * 4.4 --Form of Specimen Certificate representing the Company's Common Stock, $.01 par value per share **** 5.1 --Opinion of Hofheimer, Nusbaum, McPhaul & Samuels, a Professional Corporation, regarding the legality of the securities being registered ****23.1 --Consent of Hofheimer, Nusbaum, McPhaul & Samuels, a Professional Corporation (included in Exhibit 5.1 hereto) 23.2 --Consent of KPMG Peat Marwick LLP, independent accountants 23.3 --Consent of Arthur Andersen, LLP independent accountants ****24.1 --Power of Attorney (included in Part II of the Registration Statement)
- ------------ * Incorporated by reference to the Company's Registration Statement on Form S-1, No. 33-88502. ** Incorporated by reference to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1995. *** Incorporated by reference to the Company's Current Report on Form 8-K dated February 14, 1996. **** Previously filed in the Company's Registration Statement on Form S-3, No. 333-04391. ITEM 17. UNDERTAKINGS The undersigned registrant hereby undertakes that, for purposes of determining any liability under the Securities Act each filing of the registrant's annual report pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (and, where applicable, each filing of an employee benefit plan's annual report pursuant to Section 15(d) of the Securities Exchange Act of 1934) that is incorporated by reference in this registration statement shall be deemed to be a new registration statement relating to the securities offered herein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the registrant pursuant to the provisions described in Item 15 above or otherwise, the registrant has been advised that in the opinion of the Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the II-2 successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. The undersigned registrant hereby undertakes: For purposes of determining any liability under the Securities Act, the information omitted from the form of prospectus filed as part of a registration statement in reliance upon Rule 430A and contained in the form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or(4) or 497(h) under the Securities Act shall be deemed to be part of this registration statement as of the time it was declared effective. For the purpose of determining any liability under the Securities Act, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered herein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. II-3 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the registrant certifies that it has reasonable grounds to believe that it meets all of the requirements for filing on Form S-3 and has duly caused this Amendment No. 1 to the Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Norfolk, Commonwealth of Virginia, on the 7th day of June, 1996. DOLLAR TREE STORES, INC. By /s/ MACON F. BROCK, JR. ................................... Macon F. Brock, Jr. President and Chief Executive Officer PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE CAPACITIES AND ON THE DATES INDICATED.
SIGNATURE TITLE DATE --------- ----- ----- /s/ J. DOUGLAS PERRY Chairman of the Board; Director June 7, 1996 ...................................... J. Douglas Perry /s/ MACON F. BROCK, JR. President and Chief Executive June 7, 1996 ...................................... Officer; Director (principal Macon F. Brock, Jr. executive officer) /s/ H. RAY COMPTON Executive Vice President and June 7, 1996 ...................................... Chief Financial Officer; H. Ray Compton Director (principal financial and accounting officer) * Vice Chairman; Director June 7, 1996 ...................................... John F. Megrue * Director June 7, 1996 ...................................... Allan W. Karp * Director June 7, 1996 ...................................... Thomas A. Saunders, III ...................................... Director Alan L. Wurtzel ...................................... Director Frank Doczi
*By /s/ MACON F. BROCK, JR. ----------------------- Macon F. Brock, Jr. Attorney-in-Fact II-4 EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION PAGE NO. - --------- ------------------------------------------------------------------------ -------- 1.1 --Form of Underwriting Agreement * 2.1 --Agreement for Purchase and Sale of Stock dated September 24, 1993 among J. Douglas Perry, Patricia W. Perry, Macon F. Brock, Jr., Joan P. Brock, H. Ray Compton and The SK Equity Fund, L.P. ** 2.2 --Amended and Restated Stockholders Agreement effective March 13, 1995 among the Company, John F. Megrue, Thomas A. Saunders, III, and certain shareholders * 2.3 --Securities Purchase Agreement dated September 30, 1993 among the Company, J. Douglas Perry, Patricia W. Perry, Macon F. Brock, Jr., Joan P. Brock, H. Ray Compton, John F. Megrue, Thomas A. Saunders, III, Allan W. Karp, Christopher K. Reilly, and The SK Equity Fund, L.P., and the First Amendment thereto *** 2.4 --Agreement for Purchase and Sale of Stock dated as of January 16, 1996 between the Company and Michael N. Alper and Pamela J. Alper ** 4.1 --Amended and Restated Stockholders Agreement (See Exhibit 2.2) * 4.2 --Third Restated Articles of Incorporation of the Company * 4.3 --Second Restated Bylaws of the Company * 4.4 --Form of Specimen Certificate representing the Company's Common Stock, $.01 par value per share **** 5.1 --Opinion of Hofheimer, Nusbaum, McPhaul & Samuels, a Professional Corporation, regarding the legality of the securities being registered ****23.1 --Consent of Hofheimer, Nusbaum, McPhaul & Samuels, a Professional Corporation (included in Exhibit 5.1 hereto) 23.2 --Consent of KPMG Peat Marwick LLP, independent accountants 23.3 --Consent of Arthur Andersen, LLP independent accountants ****24.1 --Power of Attorney (included in Part II of the Registration Statement)
- ------------ * Incorporated by reference to the Company's Registration Statement on Form S-1, No. 33-88502. ** Incorporated by reference to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1995. *** Incorporated by reference to the Company's Current Report on Form 8-K dated February 14, 1996. **** Previously filed in the Company's Registration Statement on Form S-3, No. 333-04391. EX-1.1 2 Exhibit 1.1 3,250,000 Shares DOLLAR TREE STORES, INC. Common Stock UNDERWRITING AGREEMENT ---------------------- June __, 1996 MONTGOMERY SECURITIES GOLDMAN, SACHS & CO. SMITH BARNEY INC. As Representatives of the several Underwriters c/o MONTGOMERY SECURITIES 600 Montgomery Street San Francisco, California 94111 Dear Sirs: SECTION 1. Introductory. Dollar Tree Stores, Inc., a Virginia ------------ corporation (the "Company") proposes to issue and sell 750,000 shares of its authorized but unissued Common Stock (the "Common Stock") and certain shareholders of the Company named in Schedule B annexed hereto (the "Selling Shareholders") propose to transfer and sell an aggregate of 2,500,000 shares of the outstanding Common Stock of the Company to the several underwriters named in Schedule A annexed hereto (the "Underwriters"), for whom you are acting as Representatives. Said aggregate of 3,250,000 shares are herein called the "Firm Common Shares." In addition, the Selling Shareholders propose to grant to the Underwriters an option to purchase up to 487,500 additional shares of Common Stock (the "Optional Common Shares"), as provided in Section 5 hereof. The Firm Common Shares and, to the extent such option is exercised, the Optional Common Shares are hereinafter collectively referred to as the "Common Shares." You have advised the Company and the Selling Shareholders that the Underwriters propose to make a public offering of their respective portions of the Common Shares on the effective date of the registration statement hereinafter referred to, or as soon thereafter as in your judgment is advisable. The Company and each of the Selling Shareholders hereby confirm their respective agreements with respect to the purchase of the Common Shares by the Underwriters as follows: -1- SECTION 2. Representations and Warranties of the Company. The --------------------------------------------- Company hereby represents and warrants to the several Underwriters that: (a) A registration statement on Form S-3 (File No. 333-_____) with respect to the Common Shares has been prepared by the Company in conformity with the requirements of the Securities Act of 1933, as amended (the "Act"), and the rules and regulations (the "Rules and Regulations") of the Securities and Exchange Commission (the "Commission") thereunder, and has been filed with the Commission. The Company has prepared and has filed or proposes to file prior to the effective date of such registration statement an amendment or amendments to such registration statement, which amendment or amendments have been or will be similarly prepared. There have been delivered to you two signed copies of such registration statement and amendments, together with two copies of each exhibit filed therewith. Conformed copies of such registration statement and amendments (but without exhibits) and of the related preliminary prospectus have been delivered to you in such reasonable quantities as you have requested for each of the Underwriters. The Company will next file with the Commission one of the following: (i) prior to effectiveness of such registration statement, a further amendment thereto, including the form of final prospectus, or (ii) a final prospectus in accordance with Rules 430A and 424(b) of the Rules and Regulations. As filed, such amendment and form of final prospectus, or such final prospectus, shall include all Rule 430A Information and, except to the extent that you shall agree in writing to a modification, shall be in all substantive respects in the form furnished to you prior to the date and time that this Agreement was executed and delivered by the parties hereto, or, to the extent not completed at such date and time, shall contain only such specific additional information and other changes (beyond that contained in the latest Preliminary Prospectus) as the Company shall have previously advised you in writing would be included or made therein. The term "Registration Statement" as used in this Agreement shall mean such registration statement at the time such registration statement becomes effective and, in the event any post-effective amendment thereto becomes effective prior to the First Closing Date (as hereinafter defined), shall also mean such registration statement as so amended; provided, however, that such term shall also include (i) all Rule 430A Information deemed to be included in such registration statement at the time such registration statement becomes effective as provided by Rule 430A of the Rules and Regulations and (ii) any registration statement filed pursuant to Rule 462(b) of the Rules and Regulations relating to the Common Shares. The term "Preliminary Prospectus" -2- shall mean any preliminary prospectus referred to in the preceding paragraph and any preliminary prospectus included in the Registration Statement at the time it becomes effective that omits Rule 430A Information. The term "Prospectus" as used in this Agreement shall mean the prospectus relating to the Common Shares in the form in which it is first filed with the Commission pursuant to Rule 424(b) of the Rules and Regulations or, if no filing pursuant to Rule 424(b) of the Rules and Regulations is required, shall mean the form of final prospectus included in the Registration Statement at the time such registration statement becomes effective. The term "Rule 430A Information" means information with respect to the Common Shares and the offering thereof permitted to be omitted from the Registration Statement when it becomes effective pursuant to Rule 430A of the Rules and Regulations. Any reference herein to any Preliminary Prospectus or the Prospectus shall be deemed to refer to and include the documents incorporated by reference therein pursuant to Form S-3 under the Act, as of the date of such Preliminary Prospectus or Prospectus, as the case may be. (b) The Commission has not issued any order preventing or suspending the use of any Preliminary Prospectus, and each Preliminary Prospectus has conformed in all material respects to the requirements of the Act and the Rules and Regulations and, as of its date, has not included any untrue statement of a material fact or omitted to state a material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading; and at the time the Registration Statement becomes effective, and at all times subsequent thereto up to and including the First Closing Date hereinafter mentioned, the Registration Statement will contain all material statements and information required to be included therein by the Act and the Rules and Regulations and will in all material respects conform to the requirements of the Act and the Rules and Regulations, and the Registration Statement will not include any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading; and the Prospectus, as amended and supplemented, as applicable, at the time the Registration Statement becomes effective, and at all times subsequent thereto up to and including the First Closing Date hereinafter mentioned, will not include any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements, in the light of the circumstances under which they were made, not misleading; provided, however, no representation or warranty contained in this subsection 2(b) shall be applicable to information contained in or omitted from any Preliminary Prospectus, the Registration Statement, the Prospectus or any such amendment or supplement in reliance upon and in conformity with written information furnished -3- to the Company by or on behalf of any Underwriter, directly or through the Representatives, specifically for use in the preparation thereof. The documents incorporated by reference in the Prospectus, when they were filed with the Commission, conformed in all material respects to the requirements of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and the rules and regulations of the Commission thereunder, and none of such documents contained an untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading. (c) The Company does not own or control, directly or indirectly, any corporation, association or other entity other than Dollar Bills, Inc., an Illinois corporation formerly known as Terrific Promotions, Inc. ("TPI"), and the other subsidiaries listed in Exhibit 21 to the Company's Annual Report on Form 10-K for the year ended December 31, 1995. The Company and each of its subsidiaries have been duly incorporated and are validly existing as corporations in good standing under the laws of their respective jurisdictions of incorporation, with full power and authority (corporate and other) to own and lease their properties and conduct their respective businesses as described in the Prospectus, except where the failure to be in good standing would not have a material adverse effect on the Company and its subsidiaries, taken as a whole; the Company owns of record and beneficially all of the outstanding capital stock of its subsidiaries free and clear of all claims, liens, charges and encumbrances (except as disclosed in the Prospectus); the Company and each of its subsidiaries are in possession of and operating in compliance with all authorizations, licenses, permits, consents, certificates and orders material to the conduct of their respective businesses, all of which are valid and in full force and effect; the Company and each of its subsidiaries are duly qualified to do business and in good standing as foreign corporations in each jurisdiction in which the ownership or leasing of properties or the conduct of their respective businesses requires such qualification, except for jurisdictions in which the failure to so qualify would not have a material adverse effect upon the Company and its subsidiaries, taken as a whole; and no proceeding has been instituted in any such jurisdiction, revoking, limiting or curtailing, or seeking to revoke, limit or curtail, such power and authority or qualification. (d) The Company has authorized and outstanding capital stock as set forth under the heading "Capitalization" in the Prospectus; the issued and outstanding shares of Common Stock have been duly authorized and validly issued, are fully paid and nonassessable, -4- have been issued in compliance with all federal and state securities laws, were not issued in violation of or subject to any preemptive rights or other rights to subscribe for or purchase securities, and conform to the description thereof contained in the Prospectus. All issued and outstanding shares of capital stock of each subsidiary of the Company have been duly authorized and validly issued and are fully paid and nonassessable. Except as disclosed in or contemplated by the Prospectus and the financial statements of the Company, and the related notes thereto, included in the Prospectus, neither the Company nor any subsidiary has outstanding any options to purchase, or any preemptive rights or other rights to subscribe for or to purchase, any securities or obligations convertible into, or any contracts or commitments to issue or sell, shares of its capital stock or any such options, rights, convertible securities or obligations, except that the Company has preemptive rights to shares of its subsidiaries' stock. The description of the Company's stock option, stock bonus and other stock plans or arrangements, and the options or other rights granted and exercised thereunder, set forth in the Prospectus accurately and fairly presents the information required to be shown with respect to such plans, arrangements, options and rights. (e) The Common Shares to be sold by the Company have been duly authorized and, when issued, delivered and paid for in the manner set forth in this Agreement, will be duly authorized, validly issued, fully paid and nonassessable, and will conform to the description thereof contained in the Prospectus. No preemptive rights or other rights to subscribe for or purchase exist with respect to the issuance and sale of the Common Shares by the Company pursuant to this Agreement. No shareholder of the Company has any right which has not been waived to require the Company to register the sale of any shares owned by such shareholder under the Act in the public offering contemplated by this Agreement. No further approval or authority of the shareholders or the Board of Directors of the Company will be required for the transfer and sale of the Common Shares to be sold by the Selling Shareholders or the issuance and sale of the Common shares to be sold by the Company as contemplated herein. (f) The Company has full legal right, power and authority to enter into this Agreement and perform the transactions contemplated hereby. This Agreement has been duly authorized, executed and delivered by the Company and constitutes a valid and binding obligation of the Company in accordance with its terms, except as rights to indemnity and contribution hereunder may be limited by applicable law. Except as disclosed in the Prospectus, the making and performance of this Agreement by the Company and the consummation by the Company of the transactions herein -5- contemplated will not violate any provisions of the certificate of incorporation or bylaws, or other organizational documents, of the Company or any of its subsidiaries, and will not conflict with, result in the breach or violation of, or constitute, either by itself or upon notice or the passage of time or both, a default under any agreement, mortgage, deed of trust, lease, franchise, license, indenture, permit or other instrument to which the Company or any of its subsidiaries is a party or by which the Company or any of its subsidiaries or any of their respective properties, except for any such conflicts, breaches or defaults which individually or in the aggregate would not be material to the Company and its subsidiaries, taken as a whole may be bound or affected, any statute or any authorization, judgment, decree, order, rule or regulation of any court or any regulatory body, administrative agency or other governmental body applicable to the Company or any of its subsidiaries or any of their respective properties, except for any such conflicts, breaches or defaults which individually or in the aggregate would not be material to the Company and its subsidiaries, taken as a whole. No consent, approval, authorization or other order of any court, regulatory body, administrative agency or other governmental body is required for the execution and delivery of this Agreement or the consummation of the transactions contemplated by this Agreement by the Company, except such consents, approvals, authorizations or orders (i) as have been obtained under the Act, (ii) as may be required under state securities or Blue Sky laws or foreign securities laws in connection with the purchase and distribution of the Shares by the Underwriters, (iii) as may be required by the National Association of Securities Dealers, Inc. (the "NASD") and (iv) the absence of which individually and in the aggregate are not material to the Company and its subsidiaries, taken as a whole, or to the Underwriters. (g) KPMG Peat Marwick and Arthur Andersen LLP, who have expressed their opinion with respect to the financial statements and schedules of the Company or TPI filed with the Commission as a part of the Registration Statement and/or included or incorporated by reference in the Prospectus and in the Registration Statement, are independent accountants as required by the Act and the Rules and Regulations. (h) The financial statements and schedules of the Company and TPI, and the related notes thereto, included in the Registration Statement and the Prospectus and/or incorporated by reference therein present fairly the financial position of the Company and TPI as of the respective dates of such financial statements and schedules, and the results of operations and cash flows of the Company and TPI for the respective periods covered thereby. Such statements, schedules and related notes have been -6- prepared in accordance with generally accepted accounting principles applied on a consistent basis as certified by KPMG Peat Marwick and Arthur Andersen LLP, as the case may be. No other financial statements or schedules are required to be included in the Registration Statement or in the documents incorporated by reference therein. The selected financial data set forth in the Prospectus under the captions "Capitalization" and "Selected Financial Data" fairly present the information set forth therein on the basis stated in the Registration Statement. The pro forma financial statements and the related notes thereto included in the Registration Statement and the Prospectus and/or incorporated by reference therein present fairly the information shown therein, have been prepared in accordance with the Rules and Regulations and have been properly compiled on the bases described therein, and the assumptions used in the preparation thereof are reasonable and the adjustments used therein are appropriate to give effect to the transactions and circumstances referred to therein. (i) Except as disclosed in the Prospectus, or as to violations, defaults and breaches which individually or in the aggregate would not be material to the Company and its subsidiaries, taken as a whole, neither the Company nor any of its subsidiaries is in violation or default of any provision of its Articles of Incorporation or Bylaws, or is in breach of or default with respect to any provision of any agreement, judgment, decree, order, mortgage, deed of trust, lease, franchise, license, indenture, permit or other instrument to which it is a party or by which it or any of its properties are bound; and, except as disclosed in the Prospectus, there does not exist any state of facts which constitutes an event of default on the part of the Company or any such subsidiary as defined in such documents or which, with notice or lapse of time or both, would constitute such an event of default. (j) There are no contracts or other documents required to be described in the Registration Statement or to be filed as exhibits to the Registration Statement or to any documents incorporated by reference therein by the Act, by the Exchange Act or by the rules and regulations thereunder which have not been described or filed as required. Except as disclosed in the Prospectus, the contracts so described in the Prospectus are in full force and effect on the date hereof; and neither the Company nor any of its subsidiaries, nor to the best of the Company's knowledge, any other party is in breach of or default under any of such contracts. (k) Except as disclosed in the Prospectus, there are no legal or governmental actions, suits or proceedings pending or, to the best of the Company's knowledge, threatened to which the Company or any of its subsidiaries is or may be a party or of -7- which property owned or leased by the Company or any of its subsidiaries is or may be the subject, or related to environmental or discrimination matters, which actions, suits or proceedings might, individually or in the aggregate, prevent or materially adversely affect the transactions contemplated by this Agreement or result in a material adverse change in the condition (financial or otherwise), properties, business, results of operations or prospects of the Company and its subsidiaries; and, except as disclosed in the Prospectus, no labor disturbance by the employees of the Company or any of its subsidiaries exists or is imminent which might be expected to materially adversely affect such condition, properties, business, results of operations or prospects. Neither the Company nor any of its subsidiaries is a party or subject to the provisions of any material injunction, judgment, decree or order of any court, regulatory body, administrative agency or other governmental body. (l) The Company or the applicable subsidiary has good and marketable title to all the properties and assets reflected as owned in the financial statements hereinabove described (or elsewhere in the Prospectus), subject to no lien, mortgage, pledge, charge or encumbrance of any kind except (i) those, if any, reflected in such financial statements (or elsewhere in the Prospectus), or (ii) those which are not material in amount and do not adversely affect the use made and proposed to be made of such property by the Company and its subsidiaries. The Company or the applicable subsidiary holds its leased properties under valid and binding leases, with such exceptions as are not significant in relation to the business of the Company. Except as disclosed in the Prospectus, the Company owns or leases all such properties as are necessary to its operations as now conducted. (m) Since the respective dates as of which information is given in the Registration Statement and Prospectus, and except as described in or specifically contemplated by the Prospectus: (i) the Company and its subsidiaries have not incurred any material liabilities or obligations, indirect, direct or contingent, or entered into any material verbal or written agreement or other transaction, other than in the ordinary course of business; (ii) the Company and its subsidiaries have not sustained any material loss or interference with their respective businesses or properties from fire, flood, windstorm, accident or other calamity, whether or not covered by insurance; (iii) the Company has not paid or declared any dividends or other distributions with respect to its capital stock and the Company and its subsidiaries are not in default in the payment of principal or interest on any outstanding debt obligations; (iv) there has not been any change in the capital stock or indebtedness material to the Company and its subsidiaries (other -8- than in the ordinary course of business); and (v) there has not been any material adverse change in the condition (financial or otherwise), business, properties, results of operations or prospects of the Company and its subsidiaries. (n) Except as disclosed in or specifically contemplated by the Prospectus, the Company and its subsidiaries have sufficient trademarks, trade names, copyrights, licenses, approvals and governmental authorizations to conduct their businesses as now conducted, with such exceptions as would not have a material adverse effect on the condition (financial or otherwise), business, properties, results of operations or prospects of the Company and its subsidiaries, taken as a whole; the expiration of any trademarks (other than "Dollar Tree"), trade names, copyrights, licenses, approvals or governmental authorizations would not have a material adverse effect on the condition (financial or otherwise), business, properties, results of operations or prospects of the Company or its subsidiaries, taken as a whole; and the Company has no knowledge of any material infringement by it or its subsidiaries of trademark, trade name rights, copyrights, licenses, trade secret or other similar rights of others, and there is no claim being made against the Company or its subsidiaries regarding trademark, trade name, copyright, license, trade secret or other infringement which could have a material adverse effect on the condition (financial or otherwise), business, properties, results of operations or prospects of the Company and its subsidiaries, taken as a whole. (o) The Company has not been advised, and has no reason to believe, that either it or any of its subsidiaries is not conducting business in compliance with all applicable laws, rules and regulations of the jurisdictions in which it is conducting business, including, without limitation, all applicable local, state and federal environmental laws and regulations, except where failure to be so in compliance would not materially adversely affect the condition (financial or otherwise), business, properties, results of operations or prospects of the Company and its subsidiaries, taken as a whole. (p) The Company and its subsidiaries have filed all necessary federal, state and foreign income and franchise tax returns and have paid all taxes shown as due thereon; and the Company has no knowledge of any tax deficiency which has been or might be asserted or threatened against the Company or its subsidiaries which could materially and adversely affect the condition (financial or otherwise) business, properties, results of operations or prospects of the Company and its subsidiaries, taken as a whole. -9- (q) The Company is not an "investment company" within the meaning of the Investment Company Act of 1940, as amended. (r) The Company has not distributed and will not distribute prior to the First Closing Date any offering material in connection with the offering and sale of the Common Shares other than the Prospectus, the Registration Statement and other materials permitted by the Act. (s) Each of the Company and its subsidiaries maintains insurance of the types and in the amounts generally deemed adequate for its business, including, but not limited to, insurance covering real and personal property (except for personal property in the stores, which is uninsured) owned or leased by the Company and its subsidiaries against theft, damage, destruction and acts of vandalism, all of which insurance is in full force and effect. (t) Neither the Company nor any of its subsidiaries has at any time during the last five years (i) made any unlawful contribution to any candidate for foreign office, or failed to disclose fully any contribution in violation of law, or (ii) made any payment to any federal or state governmental officer or official, or other person charged with similar public or quasi-public duties, other than payments required or permitted by the laws or the United States or any jurisdiction thereof. (u) The Company has not taken and will not take, directly or indirectly, any action designed to or that might be reasonably expected to cause or result in stabilization or manipulation of the price of the Common Stock to facilitate the sale or resale of the Common Shares. (v) The Common Stock of the Company has been registered under Section 12(g) of the Exchange Act, and all of the outstanding shares of Common Stock (including the Common Shares to be sold by the Selling Shareholders hereunder) and the Common Shares to be issued by the Company hereunder have been listed on the Nasdaq National Market. (w) The Company has filed with the Commission, on a timely basis, all documents required to have been filed by the Company pursuant to the Exchange Act or the rules and regulations promulgated thereunder. Each such document, when filed with the Commission, conformed in all material respects to the requirements of the Exchange Act and the rules and regulations promulgated thereunder, and did not contain an untrue statement of a material fact or omit to state a material fact required to be stated -10- 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. (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 -11- Shareholder on deposit with the Agent are subject to the interests of the Company and the Underwriters, that the arrangements made for such custody are to that extent irrevocable (except as otherwise provided in this Agreement or the Shareholders Agreement), and that the obligations of such Selling Shareholder hereunder shall not be terminated, except as provided in this Agreement or in the Shareholders Agreement, by any act of such Selling Shareholder, by operation of law, by the death or incapacity of such Selling Shareholder or by the occurrence of any other event. If the Selling Shareholder should die or become incapacitated, or if any other event should occur, before the delivery of the Common Shares hereunder, the documents evidencing Common Shares then on deposit with the Agent shall be delivered by the Agent in accordance with the terms and conditions of this Agreement as if such death, incapacity or other event had not occurred, regardless of whether or not the Agent shall have received notice thereof. This Agreement and the Shareholders Agreement have been duly executed and delivered by or on behalf of such Selling Shareholder and the form of such Shareholders Agreement has been delivered to you. (iv) The performance of this Agreement and the Shareholders Agreement by such Selling Shareholder and the consummation of the transactions contemplated hereby and thereby will not result in a breach or violation by such Selling Shareholder of any of the terms or provisions of, or constitute a default by such Selling Shareholder under, (A) any indenture, mortgage, deed of trust, trust (constructive or other), loan agreement, lease, franchise, license or other agreement, trust instrument or instrument to which such Selling Shareholder is a party or by which such Selling Shareholder or any of its properties is bound, (B) if such Selling Shareholder is not a natural person, the partnership agreement, trust instrument or any other organizational documents of such Selling Shareholder, or (C) any statute, judgment, decree, order, rule or regulation of any court or governmental agency or body applicable to such Selling Shareholder or any of its properties. No consent, approval, authorization or other order of any court, regulatory body, administrative agency or other governmental body is required for the execution and delivery by such Selling Shareholder of this Agreement and the Shareholders Agreement or the consummation by such Selling Shareholder of the transactions contemplated by this -12- Agreement and the Shareholders Agreement, except such consents, approvals, authorizations or orders (i) as have been obtained under the Act, (ii) as may be required under state securities or Blue Sky laws or foreign securities laws in connection with the purchase and distribution of the Shares by the Underwriters, (iii) as may be required by the NASD and (iv) the absence of which individually and in the aggregate are not material to the Company and its subsidiaries, taken as a whole, or to the Underwriters. (v) Such Selling Shareholder has not taken and will not take, directly or indirectly, any action designed to or which has constituted or which might reasonably be expected to cause or result in stabilization or manipulation of the price of any security of the Company to facilitate the sale or resale of the Common Shares. (vi) Each Preliminary Prospectus and the Prospectus, insofar as it has related to such Selling Shareholder, has not included any untrue statement of a material fact or omitted to state a material fact necessary to make the statements therein not misleading in light of the circumstances under which they were made; and neither the Registration Statement nor the Prospectus, nor any amendment or supplement thereto, as it relates to such Selling Shareholder, will include any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein not misleading. (vii) Such Selling Shareholder is not aware that the Registration Statement or Prospectus includes any untrue statement of a material fact or omits to state any material fact required to be stated therein or necessary to make the statements therein not misleading. It is agreed the aggregate liability of a Selling Shareholder to the Underwriters (A) for a breach of this representation and (B) under Section 11(a) hereof shall not exceed the amount of the proceeds (net of the applicable underwriting discount) received by such Selling Shareholder with respect to the Shares purchased by the Underwriters from such Selling Shareholder hereunder; and that no Selling Shareholder shall be liable to an Underwriter for a breach of this representation until the Underwriter shall have first made a demand for payment on the Company with respect to any damages alleged to result from the breach of this -13- representation and the Company shall have either rejected such demand or failed to make such requested payment within 60 days after receipt thereof. (b) Each of the Selling Shareholders agree with the Company and the Underwriters not to offer to sell, sell or contract to sell or otherwise dispose of any shares of Common Stock or securities convertible into or exchangeable for any shares of Common Stock, for a period of 90 days after the date of the Prospectus, without the prior written consent of Montgomery Securities, as a Representative of the Underwriters, which consent may be withheld at the sole discretion of Montgomery Securities. SECTION 4. Representations and Warranties of the Underwriters. The -------------------------------------------------- Representatives, on behalf of the several Underwriters, represent and warrant to the Company and the Selling Shareholders that the information set forth (i) in the first sentence of the last paragraph of text on the cover page of the Prospectus, (ii) in the stabilization and passive market making language on the inside front cover of the Prospectus and (iii) in the second paragraph under "Underwriting" in the Prospectus concerning the terms of the offering by the Underwriters and in the first sentence of the sixth paragraph of text under "Underwriting" concerning passive market making by the Underwriters, was furnished to the Company by and on behalf of the Underwriters for use in connection with the preparation of the Registration Statement and the Prospectus and is correct in all material respects. The Representatives represent and warrant that they have been authorized by each of the other Underwriters as the Representatives to enter into this Agreement on its behalf and to act for it in the manner herein provided. SECTION 5. Purchase, Sale and Delivery of Common Shares. On the -------------------------------------------- basis of the representations, warranties and agreements herein contained, but subject to the terms and conditions herein set forth, (i) the Company agrees to issue and sell to the Underwriters 750,000 of the Firm Common Shares, and (ii) the Selling Shareholders agree, severally and not jointly, to sell to the Underwriters in the respective amounts set forth in Schedule B hereto, an aggregate of 2,500,000 Firm Common Shares. The Underwriters agree, severally and not jointly, to purchase from the Company and the Selling Shareholders, respectively, the number of Firm Common Shares described below. The purchase price per share to be paid by the several Underwriters to the Company and the Selling Shareholders shall be $_____ per share. The obligation of each Underwriter to the Company shall be to purchase from the Company that number of full shares which (as -14- nearly as practicable, as determined by you) bears to 750,000 the same proportion as the number of shares set forth opposite the name of such Underwriter in Schedule A hereto bears to the total number of Firm Common Shares. The obligation of each Underwriter to the Selling Shareholders shall be to purchase from the Selling Shareholders that number of full shares which (as nearly as practicable, as determined by you) bears to 2,500,000 the same proportion as the number of shares set forth opposite the name of such Underwriter in Schedule A hereto bears to the total number of Firm Common Shares. Delivery of certificates for the Firm Common Shares to be purchased by the Underwriters and payment therefor shall be made at the offices of Montgomery Securities, 600 Montgomery Street, San Francisco, California (or such other place as may be agreed upon by the Company and the Representatives) at such time and date, not later than the third (or, if the Firm Common Shares are priced, as contemplated by Rule 15c6-1(c) under the Exchange Act, after 4:30 p.m. Washington D.C. time, the fourth) full business day following the first date that any of the Common Shares are released by you for sale to the public, as you shall designate by at least 48 hours prior notice to the Company (or at such other time and date, not later than one week after such third or fourth, as the case may be, full business day as may be agreed upon by the Company and the Representatives) (the "First Closing Date"); provided, however, that if the Prospectus is at any time prior to the First Closing Date recirculated to the public, the First Closing Date shall occur upon the later of the third or fourth, as the case may be, full business day following the first date that any of the Common Shares are released by you for sale to the public or the date that is 48 hours after the date that the Prospectus has been so recirculated. Delivery of certificates for the Firm Common Shares shall be made by or on behalf of the Company and the Selling Shareholders to you, for the respective accounts of the Underwriters, against payment by you, for the accounts of the several Underwriters, of the purchase price therefor by wire transfer or by a certified or official bank check payable in same day funds to the order of the Company and the Agent, in proportion to the number of Common Shares to be sold by the Company and the Selling Shareholders, respectively. The certificates for the Firm Common Shares shall be registered in such names and denominations as you shall have requested at least two full business days prior to the First Closing Date, and shall be made available for checking and packaging on the business day preceding the First Closing Date at a location in New York, New York, as may be designated by you. Time shall be of the essence, and delivery at the time and place -15- specified in this Agreement is a further condition to the obligations of the Underwriters. In addition, on the basis of the representations, warranties and agreements herein contained, but subject to the terms and conditions herein set forth, the Selling Shareholders hereby grant an option to the several Underwriters to purchase, severally and not jointly, in the respective amounts set forth in Schedule B hereto, up to an aggregate of 487,500 Optional Common Shares at the purchase price per share to be paid for the Firm Common Shares, for use solely in covering any over-allotments made by you for the account of the Underwriters in the sale and distribution of the Firm Common Shares. The option granted hereunder may be exercised at any time (but not more than once) within 30 days after the first date that any of the Common Shares are released by you for sale to the public, upon notice by you to the Company and the Agent setting forth the aggregate number of Optional Common Shares as to which the Underwriters are exercising the option, the names and denominations in which the certificates for such shares are to be registered and the time and place at which such certificates will be delivered. Such time of delivery (which may not be earlier than the First Closing Date), being herein referred to as the "Second Closing Date," shall be determined by you, but if at any time other than the First Closing Date shall not be earlier than three nor later than five full business days after delivery of such notice of exercise. The number of Optional Common Shares to be purchased by each Underwriter shall be determined by multiplying the number of Optional Common Shares to be sold by the Selling Shareholders pursuant to such notice of exercise by a fraction, the numerator of which is the number of Firm Common Shares to be purchased by such Underwriter as set forth opposite its name in Schedule A and the denominator of which is 3,250,000 (subject to such adjustments to eliminate any fractional share purchases as you and the Selling Shareholders may mutually agree). If the option granted hereunder is exercised in part, the number of Optional Common Shares to be sold by each Selling Shareholder shall be determined by multiplying the number of Optional Common Shares set forth opposite his or its name in Schedule B by a fraction, the numerator of which is the number of Optional Common Shares to be sold by the Selling Shareholders as specified in such notice of exercise and the denominator of which is 487,500 (subject to such adjustments to eliminate any fractional share purchases as you and the Selling Shareholders may mutually agree). Certificates for the Optional Common Shares will be made available for checking and packaging on the business day preceding the Second Closing Date at a location in New York, New York, as may be designated by you. The manner of payment for and delivery of the Optional Common Shares shall be the same as for the Firm Common Shares purchased from the Company and the -16- Selling Shareholders as specified in the two preceding paragraphs. At any time before lapse of the option, you may cancel such option by giving written notice of such cancellation to the Company and the Agent. You have advised the Company and the Selling Shareholders that each Underwriter has authorized you to accept delivery of its Common Shares, to make payment and to receipt therefor. You, individually and not as the Representatives of the Underwriters, may (but shall not be obligated to) make payment for any Common Shares to be purchased by any Underwriter whose funds shall not have been received by you by the First Closing Date or the Second Closing Date, as the case may be, for the account of such Underwriter, but any such payment shall not relieve such Underwriter from any of its obligations under this Agreement. Subject to the terms and conditions hereof, the Underwriters propose to make a public offering of their respective portions of the Common Shares as soon after the effective date of the Registration Statement as in the judgment of the Representatives is advisable and at the public offering price set forth on the cover page of and on the terms set forth in the Prospectus. SECTION 6. Covenants of the Company. The Company covenants and ------------------------ agrees that: (a) The Company will use its best efforts to cause the Registration Statement and any amendment thereof, if not effective at the time and date that this Agreement is executed and delivered by the parties hereto, to become effective. If the Registration Statement has become or becomes effective pursuant to Rule 430A of the Rules and Regulations, or the filing of the Prospectus is otherwise required under Rule 424(b) of the Rules and Regulations, the Company will file the Prospectus, properly completed, pursuant to the applicable paragraph of Rule 424(b) of the Rules and Regulations within the time period prescribed and will provide evidence satisfactory to you of such timely filing. The Company will promptly advise you in writing (i) of the receipt of any comments of the Commission, (ii) of any request of the Commission for amendment of or supplement to the Registration Statement (either before or after it becomes effective), any Preliminary Prospectus or the Prospectus or for additional information, (iii) when the Registration Statement shall have become effective and (iv) of the issuance by the Commission of any stop order suspending the effectiveness of the Registration Statement or of the institution of any proceedings for that purpose. If the Commission shall enter any such stop order at any time, -17- the Company will use its best efforts to obtain the lifting of such order at the earliest possible moment. The Company will not file any amendment or supplement to the Registration Statement (either before or after it becomes effective), any Preliminary Prospectus or the Prospectus of which you have not been furnished with a copy a reasonable time prior to such filing or to which you reasonably object or which is not in compliance in all material respects with the Act and the Rules and Regulations. (b) The Company will fully and completely comply with the provisions of Rule 430A of the Rules and Regulations with respect to information omitted from the Registration Statement in reliance upon such Rule. (c) If during such period after the first date of the public offering of the Shares as, in the opinion of your counsel, the Prospectus is required by law to be delivered in connection with sales by an Underwriter or dealer, any event occurs, as a result of which the Prospectus, including any amendments or supplements, would include an untrue statement of a material fact, or omit to state any material fact required to be stated therein or necessary to make the statements therein not misleading, or if it is necessary at any time to amend the Prospectus, including any amendments or supplements, to comply with the Act or the Rules and Regulations, the Company will promptly advise you thereof and will promptly prepare and file with the Commission, at its own expense, an amendment or supplement which will correct such statement or omission or an amendment or supplement which will effect such compliance and will use its best efforts to cause the same to become effective (to the extent effectiveness is required under the Act or the Rules and Regulations) as soon as possible; and, in case any Underwriter is required to deliver a prospectus after such period, the Company upon request, but at the expense of such Underwriter, will promptly prepare such amendment or amendments to the Registration Statement and such Prospectus or Prospectuses as may be necessary to permit compliance with the requirements of Section 10(a)(3) of the Act. (d) As soon as practicable, but not later than 45 days after the end of the first quarter ending after one year following the "effective date of the Registration Statement" (as defined in Rule 158(c) of the Rules and Regulations), the Company will make generally available to its security holders an earnings statement (which need not be audited) covering a period of 12 consecutive months beginning after the effective -18- date of the Registration Statement which will satisfy the provisions of the last paragraph of Section 11(a) of the Act. (e) During such period as a prospectus is required by law to be delivered in connection with sales by an Underwriter or dealer, the Company, at its expense, but only for the nine-month period referred to in Section 10(a)(3) of the Act, will furnish to you or mail to your order copies of the Registration Statement, the Prospectus, the Preliminary Prospectus and all amendments and supplements to any such documents in each case as soon as available and in such quantities as you may reasonably request, for the purposes contemplated by the Act. (f) The Company shall cooperate with you and your counsel in order to qualify or register the Common Shares for sale under (or obtain exemptions from the application of) the Blue Sky laws of such jurisdictions as you designate and Canadian securities laws, will comply with such laws and will continue such qualifications, registrations and exemptions in effect so long as reasonably required for the distribution of the Common Shares. The Company shall not be required to qualify as a foreign corporation or to file a general consent to service of process in any such jurisdiction where it is not presently qualified or where it would be subject to taxation as a foreign corporation. The Company will advise you promptly of the suspension of the qualification or registration of (or any such exemption relating to) the Common Shares for offering, sale or trading in any jurisdiction or any initiation or threat of any proceeding for any such purpose, and in the event of the issuance of any order suspending such qualification, registration or exemption, the Company, with your cooperation, will use its best efforts to obtain the withdrawal thereof. (g) During the period of five years hereafter, the Company will furnish to the Representatives: (i) as soon as practicable after the end of each fiscal year, copies of the Annual Report of the Company containing the balance sheet of the Company as of the close of such fiscal year and statements of income, shareholders' equity and cash flows for the year then ended and the opinion thereon of the Company's independent public accountants; (ii) as soon as practicable after the filing thereof, copies of each proxy statement, Annual Report on Form 10-K, Quarterly Report on Form 10-Q, Report on Form 8-K or other report filed by the Company with the Commission, the NASD or any securities exchange; and (iii) as soon as available, copies of any report or -19- communication of the Company mailed generally to holders of its Common Stock. (h) During the period of 90 days after the first date that any of the Common Shares are released by you for sale to the public, without the prior written consent of Montgomery Securities, as a Representative of the Underwriters, or each of the Representatives (which consent may be withheld at the sole discretion of any of the Representatives), the Company will not issue, offer, sell, grant options to purchase or otherwise dispose of any of the Company's equity securities or any other securities convertible into or exchangeable with its Common Stock or other equity security; provided, however, that the Company may (i) issue shares of Common Stock upon the exercise of stock options and warrants outstanding on the date hereof, as described in the Prospectus (it being agreed that the Company shall not accelerate the exercisability of any such options or grant any waiver or acceleration under the terms of the Stock Restriction Agreement to be entered into by the optionee upon the exercise of such options), and (ii) grant options and issue shares of Common Stock in accordance with its Amended and Restated Stock Option Plan, Stock Incentive Plan or Employee Stock Purchase Plan, as described in the Prospectus or in materials incorporated by reference in the Prospectus. (i) The Company will apply the net proceeds of the sale of the Common Shares sold by it substantially in accordance with its statements under the caption "Use of Proceeds" in the Prospectus. (j) The Company will use its best efforts to qualify or register its Common Stock for sale in non-issuer transactions under (or obtain exemptions from the application of) the Blue Sky laws of the State of California (and thereby permit market making transactions and secondary trading in the Company's Common Stock in California), will comply with such Blue Sky laws and will continue such qualifications, registrations and exemptions in effect for a period of five years after the date hereof. You, on behalf of the Underwriters, may, in your sole discretion, waive in writing the performance by the Company of any one or more of the foregoing covenants or extend the time for their performance. SECTION 7. Payment of Expenses. Whether or not the transactions ------------------- contemplated hereunder are consummated or this Agreement becomes effective or is terminated, the Company and the -20- Selling Shareholders agree to pay, in such proportions as they may agree upon among themselves, all costs, fees and expenses incurred in connection with the performance of the obligations of the Company or the Selling Shareholders hereunder, including without limiting the generality of the foregoing, (i) all expenses incident to the issuance and delivery of the Common Shares (including all printing, copying, and engraving costs), (ii) all fees and expenses of the registrar and transfer agent of the Common Stock, (iii) all necessary issue, transfer and other stamp taxes in connection with the issuance, transfer and sale of the Common Shares to the Underwriters, (iv) all fees and expenses of the Company's counsel and the Company's independent accountants, (v) all costs and expenses incurred in connection with the preparation, printing, copying, filing, shipping and distribution of the Registration Statement, each Preliminary Prospectus and the Prospectus (including all exhibits and financial statements) and all amendments and supplements provided for herein, this Agreement, the Agreement Among Underwriters, the Selected Dealers Agreement, the Underwriters' Questionnaire and the Blue Sky memorandum, (vi) all filing fees, attorneys' fees and expenses incurred by the Company or the Underwriters in connection with qualifying or registering (or obtaining exemptions from the qualification or registration of) all or any part of the Common Shares for offer and sale under the Blue Sky laws and Canadian securities laws (provided that such fees and expenses shall not exceed $12,000), (vii) the filing fee of the NASD, and (viii) all other fees, costs and expenses referred to in Item 14 of the Registration Statement. Except as provided in this Section 7, Section 9 and Section 11 hereof, the Underwriters shall pay all of their own expenses, including the fees and disbursements of their counsel (excluding those relating to qualification, registration or exemption under the Blue Sky laws and Canadian securities laws and the Blue Sky memorandum referred to above). This Section 7 shall not affect any agreements or understandings relating to the payment of expenses between the Company and the Selling Shareholders. SECTION 8. Conditions of the Obligations of the Underwriters. The ------------------------------------------------- obligations of the several Underwriters to purchase and pay for the Firm Common Shares on the First Closing Date and the Optional Common Shares on the Second Closing Date shall be subject to the accuracy of the representations and warranties on the part of the Company and the Selling Shareholders herein set forth as of the date hereof and as of the First Closing Date or the Second Closing Date, as the case may be, to the accuracy of the statements of Company officers and the Selling Shareholders made pursuant to the provisions hereof, to the performance by the Company and the Selling Shareholders of their -21- respective obligations hereunder, and to the following additional conditions: (a) The Registration Statement shall have become effective not later than 5:00 P.M. (or, in the case of a registration statement filed pursuant to Rule 462(b) of the Rules and Regulations relating to the Common Shares, not later than 10:00 P.M.), Washington, D.C. Time, on the date of this Agreement, or at such later time as shall have been consented to by you; if the filing of the Prospectus, or any supplement thereto, is required pursuant to Rule 424(b) of the Rules and Regulations, the Prospectus shall have been filed in the manner and within the time period required by Rule 424(b) of the Rules and Regulations; and prior to such Closing Date, no stop order suspending the effectiveness of the Registration Statement shall have been issued and no proceedings for that purpose shall have been instituted or shall be pending or, to the knowledge of the Company or you, shall be contemplated by the Commission; and any request of the Commission for inclusion of additional information in the Registration Statement, or otherwise, shall have been complied with to your satisfaction. (b) You shall be satisfied that since the respective dates as of which information is given in the Registration Statement and Prospectus, (i) there shall not have been any change in the capital stock of the Company (other than as contemplated by Section 6(h) above) or any of its subsidiaries or any material change in the indebtedness (other than in the ordinary course of business) of the Company or any of its subsidiaries, (ii) except as set forth in or contemplated by the Registration Statement or the Prospectus, no material verbal or written agreement or other transaction shall have been entered into by the Company or any of its subsidiaries, which is not in the ordinary course of business, (iii) no loss or damage (whether or not insured) to the property of the Company or any of its subsidiaries shall have been sustained which materially and adversely affects the condition (financial or otherwise), business, results of operations or prospects of the Company and its subsidiaries, taken as a whole, (iv) no legal or governmental action, suit or proceeding affecting the Company or any of its subsidiaries which is material to the Company and its subsidiaries, taken as a whole, or which affects or may affect the transactions contemplated by this Agreement shall have been instituted or threatened and (v) there shall not have been any material change in the condition (financial or otherwise), business, management, results of operations or prospects of the Company and its subsidiaries, taken as a -22- whole, which makes it impractical or inadvisable in the judgment of the Representatives to proceed with the public offering or purchase the Common Shares as contemplated hereby. (c) There shall have been furnished to you, as Representatives of the Underwriters, on each Closing Date, in form and substance satisfactory to you, except as otherwise expressly provided below: (i) An opinion of Hofheimer, Nusbaum, McPhaul & Samuels, P.C., counsel for the Company and the Selling Shareholders identified as the "Virginia Selling Shareholders" on Schedule B hereto (the "Virginia Selling Shareholders"), addressed to the Underwriters and dated the First Closing Date, or the Second Closing Date, as the case may be, to the effect that: (1) Each of the Company and its subsidiaries has been duly incorporated and is validly existing as a corporation in good standing under the laws of its jurisdiction of incorporation, is duly qualified to do business as a foreign corporation and is in good standing in each state in which it owns or leases real property, and has full corporate power and authority to own its properties and conduct its business as described in the Registration Statement; (2) The authorized, issued and outstanding capital stock of the Company is as set forth under the caption "Capitalization" in the Prospectus; all necessary and proper corporate proceedings have been taken in order to validly authorize such authorized capital stock; all outstanding shares of capital stock (including the Firm Common Shares and any Optional Common Shares) have been duly and validly issued, are fully paid and nonassessable, were not issued in violation of or subject to any preemptive rights or, to the best of such counsel's knowledge, other rights to subscribe for or purchase any securities and conform to the description thereof contained in the Prospectus; all outstanding shares of capital stock of the Company have been issued in compliance with federal and state securities laws; (3) All of the issued and outstanding shares of the Company's subsidiaries have been duly and -23- validly authorized and issued, are fully paid and nonassessable and are owned beneficially by the Company free and clear of all liens, encumbrances, equities, claims, security interests, voting trusts or other defects of title whatsoever; (4) The certificates evidencing the Common Shares to be delivered hereunder are in due and proper form under Virginia law, and when duly countersigned by the Company's transfer agent and registrar, and delivered to you or upon your order against payment of the agreed consideration therefor in accordance with the provisions of this Agreement, the Common Shares represented thereby will be duly authorized and validly issued, fully paid and nonassessable, will not have been issued in violation of or subject to any preemptive rights or, to the best of such counsel's knowledge, other rights to subscribe for or purchase securities and will conform in all respects to the description thereof contained in the Prospectus; (5) Except as disclosed in or specifically contemplated by the Prospectus, to the best of such counsel's knowledge, there are no outstanding options, warrants or other rights calling for the issuance of, and no commitments, plans or arrangements to issue, any shares of capital stock of the Company or any security convertible into or exchangeable for capital stock of the Company; 6(a) To the best of such counsel's knowledge, there are no franchises, leases, contracts, agreements or documents of a character required to be disclosed in the Registration Statement or Prospectus or to be filed as exhibits to the Registration Statement or to any document incorporated by reference therein which are not disclosed or filed, as required; and (b) To the best of such counsel's knowledge, there are no legal or governmental actions, suits or proceedings pending or threatened against the Company which are required to be described in the Prospectus which are not described as required. (7) The Company has full right, power and authority to enter into this Agreement and to sell and deliver the Common Shares to be sold by it to -24- the several Underwriters hereunder; this Agreement has been duly and validly authorized by all necessary corporate action by the Company, has been duly and validly executed and delivered by and on behalf of the Company, and is a valid and binding agreement of the Company in accordance with its terms, except as enforceability may be limited by general equitable principles, bankruptcy, insolvency, reorganization, moratorium or other laws affecting creditors' rights generally and except as to those provisions relating to indemnity or contribution for liabilities, as to which no opinion need be expressed; and no approval, authorization, order, consent, registration, filing, qualification, license or permit of or with any court, regulatory, administrative or other governmental body is required for the execution and delivery of this Agreement by the Company or the consummation of the transactions contemplated by this Agreement; provided, however, no opinion need be expressed as to the Act, the rules of the NASD or applicable state securities or Blue Sky laws or foreign securities laws in connection with the purchase and distribution of the Common Shares; (8) Except as disclosed in the Prospectus, the execution and performance of this Agreement and the consummation of the transactions herein contemplated will not conflict with, result in the breach of, or constitute, either by themselves or upon notice or the passage of time or both, a default under, any agreement, mortgage, deed of trust, lease, franchise, license, indenture, permit or other instrument known to such counsel to which the Company or any of its subsidiaries is a party or by which the Company or any of its subsidiaries or any of its or their property may be bound or affected which is material to the Company and its subsidiaries, taken as a whole, or violate any of the provisions of the certificate of incorporation or bylaws, or other organizational documents, of the Company or any of its subsidiaries or, so far as is known to such counsel, violate any statute, judgment, decree, order, rule or regulation of any court or governmental body having jurisdiction over the Company or any of its subsidiaries or any of its or their property; -25- (9) Except as disclosed in the Prospectus, neither the Company nor any subsidiary is in violation of its Articles of Incorporation or Bylaws, or other organizational documents, or to the best of such counsel's knowledge, in breach of or default with respect to any provision of any agreement, mortgage, deed of trust, lease, franchise, license, indenture, permit or other instrument known to such counsel to which the Company or any such subsidiary is a party or by which it or any of its properties may be bound or affected, except where such breach or default would not materially adversely affect the Company and its subsidiaries, taken as a whole; and, to the best of such counsel's knowledge, the Company and its subsidiaries are in compliance with all laws, rules, regulations, judgments, decrees, orders and statutes of any court or jurisdiction to which they are subject, except where noncompliance would not materially adversely affect the Company and its subsidiaries, taken as a whole; (10) To the best of such counsel's knowledge, no holders of securities of the Company have rights which have not been waived to the registration of shares of Common Stock or other securities, because of the filing of the Registration Statement by the Company or the offering contemplated hereby; (11) No transfer taxes are required to be paid in connection with the sale and delivery of the Common Shares to the Underwriters hereunder. (12) This Agreement and the Shareholders Agreement have been duly authorized, executed and delivered by or on behalf of each Virginia Selling Shareholder; the Agent has been duly and validly authorized to act as the custodian of the Common Shares to be sold by each Virginia Selling Shareholder; and the performance of this Agreement and the Shareholders Agreement and the consummation of the transactions contemplated herein and therein by each Virginia Selling Shareholder will not result in a breach or violation of, or constitute a default under, (A) any indenture, mortgage, deed of trust, trust (constructive or other), loan agreement, lease, franchise, license or other agreement or instrument known to such counsel to which such Virginia Selling Shareholder is a party -26- or by which it or any of its properties may be bound, (B) any organizational documents of any Virginia Selling Shareholder that is not a natural person, or (C) any statute, or, to the best of such counsel's knowledge, any judgment, decree, order, rule or regulation of any court or governmental body having jurisdiction over such Virginia Selling Shareholder or any of its properties; and no approval, authorization, order or consent of any court, regulatory body, administrative agency or other governmental body is required for the execution and delivery by each Virginia Selling Shareholder of this Agreement or the Shareholders Agreement or the consummation by each Virginia Selling Shareholder of the transactions contemplated by this Agreement or the Shareholders Agreement, provided, however, no opinion need be expressed as to the Act, the rules of the NASD or applicable state securities or Blue Sky laws or foreign securities laws in connection with the purchase and distribution of the Common Shares; provided that the opinions expressed in this clause 8(c)(i)(12) with respect to the due and valid authorization of the Agent to act as the custodian of the Common Shares to be sold by each such Virginia Selling Shareholder need not cover the provisions contained in the second and third sentences of Section 3(a)(iii) hereof, the [second full paragraph on page 5] of the Selling Shareholders Power of Attorney or the [seventh paragraph] of the Selling Shareholders Custody Agreement; (13) Each Virginia Selling Shareholder that is not an individual has trust power and authority to enter into this Agreement and the Shareholders Agreement and to sell, transfer and deliver the Common Shares to be sold on such Closing Date by such Virginia Selling Shareholders; immediately prior to each Closing Date, each Virginia Selling Shareholder was the sole registered owner of the Shares to be sold by such Virginia Selling Shareholder on such Closing Date; upon issuance of new certificates in the names of the Underwriters representing such Shares, assuming the Underwriters purchased the Shares in good faith and without notice of any adverse claim within the meaning of the Uniform Commercial Code, the Underwriters will have acquired all rights of such Virginia Selling -27- Shareholder in the Shares free of any adverse claim, any lien in favor of the Company, and any restrictions on transfer imposed by the Company; (14) This Agreement and the Shareholders Agreement are valid and binding agreements of each Virginia Selling Shareholder in accordance with their terms, except (i) as enforceability may be limited by general equitable principles, bankruptcy, insolvency, reorganization, moratorium or other laws affecting creditors' rights generally, (ii) with respect to those provisions relating to indemnities or contributions for liabilities under the Act, as to which no opinion need be expressed, and (iii) with respect to the provisions contained in the second and third sentences of Section 3(a)(iii) hereof, the [second full paragraph on page 5] of the Selling Shareholders Power of Attorney or the [seventh paragraph] of the Selling Shareholders Custody Agreement, as to which no opinion need be expressed; In rendering such opinion, such counsel may rely, as to matters of fact, on certificates of officers of the Company, of the Virginia Selling Shareholders and of governmental officials, in which cases their opinion is to state that they are so doing and that the Underwriters are justified in relying on such certificates and copies of such certificates are to be attached to the opinion. Such counsel's opinion may assume the capacity of all natural persons and may assume the conformity of all copies or facsimiles to the originals thereof. Moreover, such counsel's opinion shall be made with respect to federal and Virginia law only. Such counsel shall also include in such opinion (or provide separately to you) a statement to the effect that nothing has come to such counsel's attention that would lead such counsel to believe that at its effective date the Registration Statement contained any untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading or that the Prospectus, as amended or supplemented, if applicable, at the applicable Closing Date includes an untrue statement of material fact or omits to state a material fact necessary in order to make the statements, in the light of the circumstances under which they were made, not misleading. Such counsel shall also permit -28- Hale and Dorr, as counsel to the Underwriters, to rely on such opinion (insofar as it relates to matters of Virginia law) in rendering their opinion pursuant to Section 8(c)(iii) hereof; (ii) An opinion of Davis, Polk & Wardwell, special counsel for the Company and for the Selling Shareholders identified as the "New York Selling Shareholders" on Schedule B hereto (the "New York Selling Shareholders"), addressed to the Underwriters and dated the First Closing Date, or the Second Closing Date, as the case may be, to the effect that: (1)(a) The Registration Statement has become effective under the Act, and, to the best of such counsel's knowledge, no stop order suspending the effectiveness of the Registration Statement or preventing the use of the Prospectus has been issued and no proceedings for that purpose have been instituted or are pending or contemplated by the Commission; any required filing of the Prospectus and any supplement thereto pursuant to Rule 424(b) of the Rules and Regulations has been made in the manner and within the time period required by such Rule 424(b); (b) The Registration Statement, the Prospectus and each amendment or supplement thereto, if any (except for the financial statements and schedules included therein as to which such counsel need express no opinion), comply as to form in all material respects with the requirements of the Act and the Rules and Regulations; and the documents incorporated by reference in the Prospectus (except for the financial statements and schedules included therein as to which such counsel need express no opinion) comply as to form in all material respects with the requirements of the Exchange Act and the rules and regulations of the Commission thereunder. (2) This Agreement and the Shareholders Agreement have been duly authorized, executed and delivered by or on behalf of each New York Selling Shareholder; the Agent has been duly and validly authorized to act as the custodian of the Common Shares to be sold by each such New York Selling Shareholder; and the performance of this Agreement and the Shareholders Agreement by each New York -29- Selling Shareholder will not result in a breach or violation of, or constitute a default under, (A) any indenture, mortgage, deed of trust, trust (constructive or other), loan agreement, lease, franchise, license or other agreement or instrument known to such counsel to which such New York Selling Shareholder is a party or by which it or any of its properties may be bound, (B) if such Selling Shareholder is not a natural person, any organizational documents of such New York Selling Shareholder, or (C) any statute, or, to the knowledge of such counsel, any judgment, decree, order, rule or regulation of any court or governmental body having jurisdiction over such New York Selling Shareholder or any of its properties; and no approval, authorization, order or consent of any court, regulatory body, administrative agency or other governmental body is required for the execution and delivery by each New York Selling Shareholder of this Agreement or the Shareholders Agreement or the consummation by each New York Selling Shareholder of the transactions contemplated by this Agreement or the Shareholders Agreement, except such consents, approvals, authorizations or orders (i) as have been obtained under the Act, (ii) as may be required under state securities or Blue Sky laws or foreign securities laws in connection with the purchase and distribution of the Shares by the Underwriters and (iii) as may be required by the NASD; provided that the opinions expressed in this clause 8(c)(ii)(2) with respect to the due and valid authorization of the Agent to act as the custodian of the Common Shares to be sold by each such New York Selling Shareholder need not cover the provisions contained in the second and third sentences of Section 3(a)(iii) hereof, the [second full paragraph on page 5] of the Selling Shareholders Power of Attorney or the [seventh paragraph] of the Selling Shareholders Custody Agreement; (3) Each New York Selling Shareholder that is not an individual has, as applicable, corporate, partnership or trust power and authority to enter into this Agreement and the Shareholders Agreement and to sell, transfer and deliver the Common Shares to be sold on such Closing Date by such New York Selling Shareholder; immediately prior to each Closing Date, each New York Selling Shareholder was -30- the sole registered owner of the Shares to be sold by such New York Selling Shareholder on such Closing Date; upon registration of the Shares in the names of the Underwriters in the stock records of the Company, and the issuance of new certificates registered in the names of the Underwriters representing such Shares, assuming the Underwriters purchased the Shares in good faith and without notice of any adverse claim within the meaning of the Uniform Commercial Code, the Underwriters will have acquired all rights of such New York Selling Shareholder in the Shares free of any adverse claim, any lien in favor of the Company, and any restrictions on transfer imposed by the Company; and the owner of the Shares, if other than such New York Selling Shareholder, is precluded from asserting against the Underwriters the ineffectiveness of any unauthorized endorsement; (4) This Agreement and the Shareholders Agreement are valid and binding agreements of each New York Selling Shareholder in accordance with their terms, except (i) as enforceability may be limited by general equitable principles, bankruptcy, insolvency, reorganization, moratorium or other laws affecting creditors' rights generally, (ii) with respect to those provisions relating to indemnities or contributions for liabilities under the Act, as to which no opinion need be expressed, and (iii) with respect to the provisions contained in the second and third sentences of Section 3(a)(iii) hereof, the [second full paragraph on page 5] of the Selling Shareholders Power of Attorney or the [seventh paragraph] of the Selling Shareholders Custody Agreement, as to which no opinion need be expressed; and 5(a) To the best of such counsel's knowledge, there are no franchises, leases, contracts, agreements or documents of a character required to be disclosed in the Registration Statement or Prospectus or to be filed as exhibits to the Registration Statement or to any document incorporated by reference therein which are not disclosed or filed, as required; and -31- (b) To the best of such counsel's knowledge, there are no legal or governmental actions, suits or proceedings pending or threatened against the Company which are required to be described in the Prospectus which are not described as required. In rendering such opinion, such counsel may rely, as to matters of fact, on certificates of officers of the Company, of the New York Selling Shareholders and of governmental officials, in which cases their opinion is to state that they are so doing and copies of such certificates are to be attached to the opinion. Such counsel may also state that they have made no independent factual investigation and have assumed the capacity of all natural persons. Such counsel shall also include a statement to the effect that nothing has come to such counsel's attention that would lead such counsel to believe that at its effective date the Registration Statement contained any untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading or that the Prospectus, as amended or supplemented, if applicable, at the applicable Closing Date includes an untrue statement of material fact or omits to state a material fact necessary in order to make the statements, in the light of the circumstances under which they were made, not misleading. Such counsel shall also permit Hale and Dorr, as counsel to the Underwriters, to rely on the opinions set forth in clauses (2), (3) and (4) above (insofar as they relate to matters of New York law) in rendering their opinion pursuant to Section 8(c)(iii) hereof; (iii) Such opinion or opinions of Hale and Dorr, counsel for the Underwriters, dated the First Closing Date or the Second Closing Date, as the case may be, with respect to the incorporation of the Company, the sufficiency of all corporate proceedings and other legal matters relating to this Agreement, the validity of the Common Shares, the Registration Statement and the Prospectus and other related matters as you may reasonably require, and the Company and the Selling Shareholders shall have furnished to such counsel such documents and shall have exhibited to them such papers and records as they may reasonably request for the purpose of enabling them to pass upon such matters. In connection with such opinions, such counsel may rely on -32- representations or certificates of officers of the Company and governmental officials. (iv) A certificate of the Company executed by the Chairman of the Board or President and the chief financial or accounting officer of the Company, dated the First Closing Date or the Second Closing Date, as the case may be, to the effect that: (1) The representations and warranties of the Company set forth in Section 2 of this Agreement are true and correct as of the date of this Agreement and as of the First Closing Date or the Second Closing Date, as the case may be, and the Company has complied with all the agreements and satisfied all the conditions on its part to be performed or satisfied on or prior to such Closing Date; (2) The Commission has not issued any order preventing or suspending the use of the Prospectus or any Preliminary Prospectus filed as a part of the Registration Statement or any amendment thereto; no stop order suspending the effectiveness of the Registration Statement has been issued; and to the best of the knowledge of the respective signers, no proceedings for that purpose have been instituted or are pending or contemplated under the Act; (3) Each of the respective signers of the certificate has carefully examined the Registration Statement and the Prospectus on behalf of the Company; the Registration Statement and the Prospectus and any amendments or supplements thereto contain all statements required to be stated therein regarding the Company and its subsidiaries; and neither the Registration Statement nor the Prospectus nor any amendment or supplement thereto includes any untrue statement of a material fact or omits to state any material fact required to be stated therein or necessary to make the statements therein not misleading; (4) Since the initial date on which the Registration Statement was filed, no agreement, written or oral, transaction or event has occurred which should have been set forth in an amendment to the Registration Statement or in a supplement to or -33- amendment of any prospectus which has not been disclosed in such a supplement or amendment; (5) Since the respective dates as of which information is given in the Registration Statement and the Prospectus, and except as disclosed in or contemplated by the Prospectus, there has not been any material adverse change or a development involving a material adverse change in the condition (financial or otherwise), business, properties, results of operations, management or prospects of the Company and its subsidiaries, taken as a whole; and no legal or governmental action, suit or proceeding is pending or threatened against the Company or any of its subsidiaries which is material to the Company and its subsidiaries, taken as a whole, whether or not arising from transactions in the ordinary course of business, or which may adversely affect the transactions contemplated by this Agreement; since such dates and except as so disclosed, neither the Company nor any of its subsidiaries has entered into any verbal or written agreement or other transaction that is material to the Company and its subsidiaries, taken as a whole, which is not in the ordinary course of business or incurred any material liability or obligation, direct, contingent or indirect, made any change in its capital stock, made any material change in its short-term debt or funded debt or repurchased or otherwise acquired any of the Company's capital stock; and the Company has not declared or paid any dividend, or made any other distribution, upon its outstanding capital stock payable to shareholders of record on a date prior to the First Closing Date or Second Closing Date, as the case may be; and (6) Since the respective dates as of which information is given in the Registration Statement and the Prospectus and except as disclosed in or contemplated by the Prospectus, the Company and its subsidiaries have not sustained a material loss or damage by strike, fire, flood, windstorm, accident or other calamity (whether or not insured). (v) On the First Closing Date or the Second Closing Date, as the case may be, a certificate, dated such Closing Date and addressed to you, signed by or on behalf of each of the Selling Shareholders to the effect -34- that the representations and warranties of such Selling Shareholder in this Agreement are true and correct, as if made at and as of the First Closing Date or the Second Closing Date, as the case may be, and such Selling Shareholder has complied with all the agreements and satisfied all the conditions on his part to be performed or satisfied prior to the First Closing Date or the Second Closing Date, as the case may be. (vi) On the date this Agreement is executed and also on the First Closing Date and the Second Closing Date, letters addressed to you, as Representatives of the Underwriters, from KPMG Peat Marwick and Arthur Andersen LLP, independent accountants, the first of each to be dated the date of this Agreement, the second of each to be dated the First Closing Date and the third of each (in the event of a Second Closing) to be dated the Second Closing Date, in form and substance satisfactory to you. All such opinions, certificates, letters and documents shall be in compliance with the provisions hereof only if they are satisfactory to you and to Hale and Dorr, counsel for the Underwriters. The Company shall furnish you with such manually signed or conformed copies of such opinions, certificates, letters and documents as you request. Any certificate signed by any officer of the Company and delivered to the Representatives or to counsel for the Underwriters shall be deemed to be a representation and warranty by the Company to the Underwriters as to the statements made therein. If any condition to the Underwriters' obligations hereunder to be satisfied prior to or at the First Closing Date is not so satisfied, this Agreement at your election will terminate upon notification by you as Representatives to the Company and the Selling Shareholders without liability on the part of any Underwriter or the Company except for the expenses to be paid or reimbursed by the Company and the Selling Shareholders pursuant to Sections 7 and 9 hereof and except to the extent provided in Section 11 hereof. SECTION 9. Reimbursement of Underwriters' Expenses. Notwithstanding --------------------------------------- any other provisions hereof, if the sale to the Underwriters of the Common Shares at the First Closing is not consummated because of any refusal, inability or failure on the part of the Company or any Selling Shareholder to perform any agreement herein or to comply with any provision hereof, the Company agrees to reimburse you and the other Underwriters upon demand for all out-of-pocket expenses that shall have been -35- reasonably incurred by you and them in connection with the proposed purchase and the sale of the Common Shares, including but not limited to fees and disbursements of counsel, printing expenses, travel expenses, postage, telegraph charges and telephone charges relating directly to the offering contemplated by the Prospectus. Any such termination shall be without liability of any party to any other party except that the provisions of this Section, Section 7 and Section 11 shall at all times be effective and shall apply. SECTION 10. Effectiveness of Registration Statement. You, the --------------------------------------- Company and the Selling Shareholders will use your and its best efforts to cause the Registration Statement to become effective, to prevent the issuance of any stop order suspending the effectiveness of the Registration Statement and, if such stop order be issued, to obtain as soon as possible the lifting thereof. SECTION 11. Indemnification. (a) The Company and each of the Selling --------------- Shareholders, jointly and severally, agree to indemnify and hold harmless each Underwriter and each person, if any, who controls any Underwriter within the meaning of the Act against any losses, claims, damages, liabilities or expenses, joint or several, to which such Underwriter or such controlling person may become subject, under the Act, the Exchange Act, or other federal or state statutory law or regulation, or at common law or otherwise (including in settlement of any litigation, if such settlement is effected with the written consent of the Company), insofar as such losses, claims, damages, liabilities or expenses (or actions in respect thereof as contemplated below) arise out of or are based upon any untrue statement or alleged untrue statement of any material fact contained in the Registration Statement, any Preliminary Prospectus, the Prospectus, or any amendment or supplement thereto, or arise out of or are based upon the omission or alleged omission to state in any of them a material fact required to be stated therein or necessary to make the statements in any of them not misleading; and will reimburse each Underwriter and each such controlling person for any legal and other expenses as such expenses are reasonably incurred by such Underwriter or such controlling person in connection with investigating, defending, settling, compromising or paying any such loss, claim, damage, liability, expense or action; provided, that -------- neither the Company nor any Selling Shareholder shall be liable in any such case to the extent that any such loss, claim, damage, liability or expense arises out of or is based upon an untrue statement or alleged untrue statement or omission or alleged omission made in the Registration Statement, any Preliminary Prospectus, the Prospectus or any amendment or supplement thereto (i) in reliance upon and in -36- conformity with the information furnished to the Company pursuant to Section 4 hereof or (ii) in reliance upon and in conformity with information furnished to the Company by a Selling Shareholder with respect to such Selling Shareholder (except that the Selling Shareholder furnishing such information shall not be so relieved of liability); provided further, that no Selling Shareholder -------- ------- shall be liable under this Section 11(a) for an amount in excess of the proceeds (net of the applicable underwriting discount) received by such Selling Shareholder with respect to the Shares purchased by the Underwriters from such Selling Shareholder hereunder; provided further that -------- ------- no Selling Shareholder shall be required to provide indemnification hereunder until the Underwriter or controlling person seeking indemnification shall have first made a demand for payment on the Company with respect to any such loss, claim, damage, liability or expense and the Company shall have either rejected such demand or failed to make such requested payment within one year after receipt thereof; and provided -------- further that the foregoing indemnity agreement with respect to any - ------- preliminary prospectus shall not inure to the benefit of any Underwriter from whom the person asserting any such loss, claim, damage, liability or expenses purchased Shares, or any person controlling such Underwriter, if a copy of the Prospectus (as then amended or supplemented if the Company shall have furnished any amendments or supplements thereto) was not sent or given by or on behalf of such Underwriter to such person, if required by law so to have been delivered, at or prior to the written confirmation of the sale of the Shares to such person, and if the Prospectus (as so amended or supplemented) would have cured the defect giving rise to such loss, claim, damage, liability or expense. The Company and the Selling Shareholders may agree, as among themselves and without limiting the rights of the Underwriters under this Agreement, as to their respective amounts of such liability for which they each shall be responsible. In addition to their other obligations under this Section 11(a), the Company and the Selling Shareholders agree that, as an interim measure during the pendency of any claim, action, investigation, inquiry or other proceeding arising out of or based upon any statement or omission, or any alleged statement or omission, all as described in this Section 11(a), they will reimburse each Underwriter on a quarterly basis for all reasonable legal or other expenses incurred in connection with investigating or defending any such claim, action, investigation, inquiry or other proceeding. To the extent that any such interim reimbursement payment is so held to have been improper, each Underwriter shall promptly return it to the Company or the Selling Shareholders, as applicable, together with interest, compounded daily, determined on the basis of the prime rate (or other commercial lending rate for borrowers of the highest credit standing) announced from time to time by Bank of America NT&SA, San Francisco, California (the "Prime Rate"). Any such interim -37- reimbursement payments which are not made to an Underwriter within 30 days of a request for reimbursement shall bear interest at the Prime Rate from the date of such request. This indemnity agreement will be in addition to any liability which the Company or the Selling Shareholders may otherwise have. (b) Each Underwriter will severally indemnify and hold harmless the Company, each of its directors, each of its officers who signed the Registration Statement, each Selling Shareholder and each person, if any, who controls the Company or any Selling Shareholder within the meaning of the Act, against any losses, claims, damages, liabilities or expenses to which the Company, or any such director, officer or controlling person may become subject, under the Act, the Exchange Act, or other federal or state statutory law or regulation, or at common law or otherwise (including in settlement of any litigation, if such settlement is effected with the written consent of such Underwriter), insofar as such losses, claims, damages, liabilities or expenses (or actions in respect thereof as contemplated below) arise out of or are based upon any untrue or alleged untrue statement of any material fact contained in the Registration Statement, any Preliminary Prospectus, the Prospectus, or any amendment or supplement thereto, or arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, in each case to the extent, but only to the extent, that such untrue statement or alleged untrue statement or omission or alleged omission was made in the Registration Statement, any Preliminary Prospectus, the Prospectus, or any amendment or supplement thereto, in reliance upon and in conformity with the information furnished to the Company pursuant to Section 4 hereof; and will reimburse the Company, or any such director, officer, Selling Shareholder or controlling person for any legal and other expense reasonably incurred by the Company, or any such director, officer, Selling Shareholder or controlling person in connection with investigating, defending, settling, compromising or paying any such loss, claim, damage, liability, expense or action. In addition to its other obligations under this Section 11(b), each Underwriter severally agrees that, as an interim measure during the pendency of any claim, action, investigation, inquiry or other proceeding arising out of or based upon any statement or omission, or any alleged statement or omission, described in this Section 11(b) which relates to information furnished to the Company pursuant to Section 4 hereof, it will reimburse the Company (and, to the extent applicable, each officer, director, Selling Shareholder or controlling person) on a quarterly basis for all reasonable legal or other expenses incurred in connection with investigating or defending any such claim, action, investigation, inquiry or other proceeding, notwithstanding the -38- 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 -39- incurred by such indemnified party in connection with the defense thereof unless (i) the indemnified party shall have employed such counsel in connection with the assumption of legal defenses in accordance with the proviso to the next preceding sentence (it being understood, however, that the indemnifying party shall not be liable for the expenses of more than one separate counsel, approved by the Representatives in the case of paragraph (a), representing the indemnified parties who are parties to such action) or (ii) the indemnifying party shall not have employed counsel reasonably satisfactory to the indemnified party to represent the indemnified party within a reasonable time after notice of commencement of the action, in each of which cases the fees and expenses of counsel shall be at the expense of the indemnifying party. The indemnifying party shall not be liable for any settlement of such action effected without its written consent, which shall not be unreasonably withheld or delayed, but if settled with such consent, the indemnifying party agrees to indemnify the indemnified party from and against any loss or liability by reason of such settlement. (d) If the indemnification provided for in this Section 11 is required by its terms but is for any reason held to be unavailable to or otherwise insufficient to hold harmless an indemnified party under paragraphs (a), (b) or (c) in respect of any losses, claims, damages, liabilities or expenses referred to herein, then each applicable indemnifying party (subject to the limits set forth in subparagraph (a) of this Section 11) shall contribute to the amount paid or payable by such indemnified party as a result of any losses, claims, damages, liabilities or expenses referred to herein (i) in such proportion as is appropriate to reflect the relative benefits received by the Company, the Selling Shareholders and the Underwriters from the offering of the Common Shares or (ii) if the allocation provided by clause (i) above is not permitted by applicable law, in such proportion as is appropriate to reflect not only the relative benefits referred to in clause (i) above but also the relative fault of the Company, the Selling Shareholders and the Underwriters in connection with the statements or omissions or inaccuracies in the representations and warranties herein which resulted in such losses, claims, damages, liabilities or expenses, as well as any other relevant equitable considerations. The respective relative benefits received by the Company, the Selling Shareholders and the Underwriters shall be deemed to be in the same proportion, in the case of the Company and the Selling Shareholders on the one hand, as the total price paid to the Selling Shareholders for the Common Shares sold by them to the Underwriters (net of underwriting commissions but before deducting expenses), and in the case of the Underwriters, on the other hand, as the underwriting commissions received by them bears to the -40- total of such amounts paid to the Selling Shareholders and received by the Underwriters as underwriting commissions. The relative fault of the Company, the Selling Shareholders and the Underwriters shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the Company, the Selling Shareholders or the Underwriters and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. The amount paid or payable by a party as a result of the losses, claims, damages, liabilities and expenses referred to above shall be deemed to include, subject to the limitations set forth in subparagraph (c) of this Section 11, any legal or other fees or expenses reasonably incurred by such party in connection with investigating or defending any action or claim. The provisions set forth in subparagraph (c) of this Section 11 with respect to notice of commencement of any action shall apply if a claim for contribution is to be made under this subparagraph (d); provided, however, that no additional notice shall be required with respect to any action for which notice has been given under subparagraph (c) for purposes of indemnification. The Company, the Selling Shareholders and the Underwriters agree that it would not be just and equitable if contribution pursuant to this Section 11 were determined solely by pro rata allocation (even if the Underwriters were treated as one entity for such purpose) or by any other method of allocation which does not take account of the equitable considerations referred to in this paragraph. Notwithstanding the provisions of this Section 11, no Underwriter shall be required to contribute any amount in excess of the amount of the total underwriting commissions received by such Underwriter in connection with the Common Shares underwritten by it and distributed to the public. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. The Underwriters' obligations to contribute pursuant to this Section 11 are several in proportion to their respective underwriting commitments and not joint. (e) It is agreed that any controversy arising out of the operation of the interim reimbursement arrangements set forth in Sections 11(a) and 11(b) hereof, including the amounts of any requested reimbursement payments and the method of determining such amounts, shall be settled by arbitration conducted under the provisions of the Constitution and Rules of the Board of Governors of the New York Stock Exchange, Inc. or pursuant to the Code of Arbitration Procedure of the NASD. Any such arbitration must be commenced by service of a written demand for arbitration or -41- written notice of intention to arbitrate, therein electing the arbitration tribunal. In the event the party demanding arbitration does not make such designation of an arbitration tribunal in such demand or notice, then the party responding to said demand or notice is authorized to do so. SECTION 12. Default of Underwriters. It shall be a condition to this ----------------------- Agreement and the obligation of the Selling Shareholders to sell and deliver the Common Shares hereunder, and of each Underwriter to purchase the Common Shares in the manner as described herein, that, except as hereinafter in this paragraph provided, each of the Underwriters shall purchase and pay for all the Common Shares agreed to be purchased by such Underwriter hereunder upon tender to the Representatives of all such shares in accordance with the terms hereof. If any Underwriter or Underwriters default in their obligations to purchase Common Shares hereunder on either the First or Second Closing Date and the aggregate number of Common Shares which such defaulting Underwriter or Underwriters agreed but failed to purchase on such Closing Date does not exceed 10% of the total number of Common Shares which the Underwriters are obligated to purchase on such Closing Date, the non-defaulting Underwriters shall be obligated severally, in proportion to their respective commitments hereunder, to purchase the Common Shares which such defaulting Underwriters agreed but failed to purchase on such Closing Date. If any Underwriter or Underwriters so default and the aggregate number of Common Shares with respect to which such default occurs is more than the above percentage and arrangements satisfactory to the Representatives and the Company for the purchase of such Common Shares by other persons are not made within 36 hours after such default, this Agreement will terminate without liability on the part of any non-defaulting Underwriter, the Company or the Selling Shareholders except for the expenses to be paid by the Company pursuant to Section 7 hereof and except to the extent provided in Section 11 hereof. In the event that Common Shares to which a default relates are to be purchased by the non-defaulting Underwriters or by another party or parties, the Representatives or the Company shall have the right to postpone the First or Second Closing Date, as the case may be, for not more than five business days in order that the necessary changes in the Registration Statement, Prospectus and any other documents, as well as any other arrangements, may be effected. As used in this Agreement, the term "Underwriter" includes any person substituted for an Underwriter under this Section. Nothing herein will relieve a defaulting Underwriter from liability for its default. -42- SECTION 13. Effective Date. This Agreement shall become effective -------------- immediately as to Sections 7, 9, 11, 14 and 15 and, as to all other provisions, (i) if at the time of execution of this Agreement the Registration Statement has not become effective, at 2:00 P.M., California time, on the first full business day following the effectiveness of the Registration Statement, or (ii) if at the time of execution of this Agreement the Registration Statement has been declared effective, at 2:00 P.M., California time, on the first full business day following the date of execution of this Agreement; but this Agreement shall nevertheless become effective at such earlier time after the Registration Statement becomes effective as you may determine on and by notice to the Company or by release of any of the Common Shares for sale to the public. For the purposes of this Section 13, the Common Shares shall be deemed to have been so released upon the release for publication of any newspaper advertisement relating to the Common Shares or upon the release by you of telegrams (i) advising Underwriters that the Common Shares are released for public offering, or (ii) offering the Common Shares for sale to securities dealers, whichever may occur first. SECTION 14. Termination. Without limiting the right to terminate ----------- this Agreement pursuant to any other provision hereof: (a) This Agreement may be terminated by the Company by notice to you and the Selling Shareholders or by you by notice to the Company and the Selling Shareholders at any time prior to the time this Agreement shall become effective as to all its provisions, and any such termination shall be without liability on the part of the Company or any Selling Shareholder to any Underwriter (except for the expenses to be paid or reimbursed by the Company pursuant to Sections 7 and 9 hereof and except to the extent provided in Section 11 hereof) or of any Underwriter to the Company or any Selling Shareholder (except to the extent provided in Section 11 hereof). (b) This Agreement may also be terminated by you prior to the First Closing Date by notice to the Company and the Selling Shareholders (i) if additional material governmental restrictions, not in force and effect on the date hereof, shall have been imposed upon trading in securities generally or minimum or maximum prices shall have been generally established on the New York Stock Exchange or on the American Stock Exchange or in the over the counter market by the NASD, or trading in securities generally shall have been suspended on either such Exchange or in the over the counter market by the NASD, or a general banking moratorium shall have been established by federal, New York or California authorities, -43- (ii) if an outbreak of major hostilities or other national or international calamity or any substantial change in political, financial or economic conditions shall have occurred or shall have accelerated or escalated to such an extent, as, in the judgment of the Representatives, to affect adversely the marketability of the Common Shares, (iii) if any adverse event shall have occurred or shall exist which makes untrue or incorrect in any material respect any statement or information contained in the Registration Statement or Prospectus or which is not reflected in the Registration Statement or Prospectus but should be reflected therein in order to make the statements or information contained therein not misleading in any material respect, or (iv) if there shall be any action, suit or proceeding pending or threatened, or there shall have been any development or prospective development involving particularly the business or properties or securities of the Company or any of its subsidiaries or the transactions contemplated by this Agreement, which, in the reasonable judgment of the Representatives, may materially and adversely affect the Company's business or earnings and makes it impracticable or inadvisable to offer or sell the Common Shares. Any termination pursuant to this subparagraph (b) shall be without liability on the part of any Underwriter to the Company or any Selling Shareholder or on the part of the Company or any Selling Shareholder to any Underwriter (except for expenses to be paid or reimbursed by the Company pursuant to Sections 7 hereof and except to the extent provided in Section 11 hereof. SECTION 15. Representations and Indemnities to Survive Delivery. The --------------------------------------------------- respective indemnities, agreements, representations, warranties and other statements of the Company, of its officers, of the Selling Shareholders and of the several Underwriters set forth in or made pursuant to this Agreement will remain in full force and effect, regardless of any investigation made by or on behalf of any Underwriter, the Company or any Selling Shareholder or any of its or their partners, officers or directors or any controlling person, as the case may be, and will survive delivery of and payment for the Common Shares sold hereunder and any termination of this Agreement. SECTION 16. Notices. All communications hereunder shall be in ------- writing and, if sent to the Representatives shall be mailed, delivered or telecopied to you at 600 Montgomery Street, San Francisco, California 94111, Attention: John A. Berg, with a copy to Hale and Dorr, 60 State Street, Boston, Massachusetts 02109, Attention: Patrick J. Rondeau, Esq.; if sent to the Company, shall be mailed, delivered or telecopied to the Company, at 2555 -44- Ellsmere Avenue, Norfolk Commerce Park, Norfolk, Virginia 23501-2500 with a copy to Davis Polk & Wardwell, 450 Lexington Avenue, New York, New York 10017, Attention: Richard D. Truesdell, Jr. and Hofheimer, Nusbaum, McPhaul & Samuels, 1700 Dominion Tower, 999 Waterside Drive, Norfolk, Virginia 23510, Attention: William A. Old, Esq.; if sent to any Virginia Selling Shareholder, shall be mailed, delivered or telecopied to the Selling Shareholder c/o the Company at 2555 Ellsmere Avenue, Norfolk Commerce Park, Norfolk, Virginia 23501-2500 with a copy to Hofheimer, Nussbaum, McPhaul & Samuels, 1700 Dominion Tower, 99 Waterside Drive, Norfolk, Virginia 23510, Attention: William A. Old, Esq.; and if sent to any of the New York Selling Shareholders, to the New York Selling Shareholder c/o Saunders, Karp & Co., 667 Madison Avenue, 21st Floor, New York, New York 10021 with a copy to Davis, Polk & Wardwell, 450 Lexington Avenue, New York, New York 10017, Attention: Richard Truesdell, Esq. The Company, the Selling Shareholders or you may change the address for receipt of communications hereunder by giving notice to the others. SECTION 17. Successors. This Agreement will inure to the benefit of ---------- and be binding upon the parties hereto, including any substitute Underwriters pursuant to Section 12 hereof, and to the benefit of the officers and directors and controlling persons referred to in Section 11, and in each case their respective successors, personal representatives and assigns, and no other person will have any right or obligation hereunder. No such assignment shall relieve any party of its obligations hereunder. The term "successors" shall not include any purchaser of the Common Shares as such from any of the Underwriters merely by reason of such purchase. SECTION 18. Representation of Underwriters. You will act as ------------------------------ Representatives for the several Underwriters in connection with all dealings hereunder, and any action under or in respect of this Agreement taken by you jointly or by Montgomery Securities, as Representatives, will be binding upon all the Underwriters. SECTION 19. Partial Unenforceability. The invalidity or ------------------------ unenforceability of any Section, paragraph or provision of this Agreement shall not affect the validity or enforceability of any other Section, paragraph or provision hereof. If any Section, paragraph or provision of this Agreement is for any reason determined to be invalid or unenforceable, there shall be deemed to be made such minor changes (and only such minor changes) as are necessary to make it valid and enforceable. SECTION 20. Applicable Law. This Agreement shall be governed by and -------------- construed in accordance with the internal laws -45- (and not the laws pertaining to conflicts of laws) of the State of California. SECTION 21. General. This Agreement constitutes the entire agreement ------- of the parties to this Agreement and supersedes all prior written or oral and all contemporaneous oral agreements, understandings and negotiations with respect to the subject matter hereof. This Agreement may be executed in several counterparts, each one of which shall be an original, and all of which shall constitute one and the same document. In this Agreement, the masculine, feminine and neuter genders and the singular and the plural include one another. The section headings in this Agreement are for the convenience of the parties only and will not affect the construction or interpretation of this Agreement. This Agreement may be amended or modified, and the observance of any term of this Agreement may be waived, only by a writing signed by the Company, the Selling Shareholders (to the extent such amendment affects them) and you. -46- If the foregoing is in accordance with your understanding of our agreement, kindly sign and return to us the enclosed copies hereof, whereupon it will become a binding agreement among the Company, the Selling Shareholders and the several Underwriters including you, all in accordance with its terms. Very truly yours, DOLLAR TREE STORES, INC. By:______________________________ Name: Title: THE SELLING SHAREHOLDERS IDENTIFIED ON SCHEDULE B By:______________________________ Name: By:______________________________ Name: Each as Attorney-in-Fact acting on behalf of each such Selling Shareholder The foregoing Underwriting Agreement is hereby confirmed and accepted by us in San Francisco, California as of the date first above written. MONTGOMERY SECURITIES GOLDMAN, SACHS & CO. SMITH BARNEY INC. Acting as Representatives of the several Underwriters named in the attached Schedule A. By MONTGOMERY SECURITIES By:______________________________ Partner -47- SCHEDULE A Number of Firm Common Shares Name of Underwriter to be Purchased - ------------------- --------------- Montgomery Securities . . . . . . . . . Goldman, Sachs & Co. . . . . . . . . . Smith Barney Inc. . . . . . . . . . . . TOTAL . . . . . . . . . . . . . 3,250,000 ========= A-1 SCHEDULE B
Number of Firm Number of Optional Common Shares Common Shares Name of Selling Shareholder to be Sold to be Sold - --------------------------- -------------- ------------------ The Virginia Selling Shareholders: J. Douglas Perry . . . . . . . . . . . 162,533 31,694 Macon F. Brock, Jr. . . . . . . . . . 240,778 46,952 H. Ray Compton . . . . . . . . . . . . 90,000 17,550 Joan P. Brock . . . . . . . . . . . . 188,722 36,801 Robert C. Miller and J. Douglas Perry, Trustees of the Patricia W. Perry Grantor Retained Annuity Trust . . . . . . . . . . . 324,967 63,368 Robert C. Miller and Macon F. Brock, Jr., as Trustees for Kathryn P. Brock . . . . . . . . . . . . . . . 10,000 1,950 Robert C. Miller and Macon F. Brock, Jr., as Trustees for Macon F. Brock, III . . . . . . . . . . . . 10,000 1,950 Robert C. Miller and Macon F. Brock, Jr., as Trustees for Christine B. McAmmon . . . . . . . . . . . . 10,000 1,950 Robert C. Miller and Macon F. Brock, Jr., as Trustees of the Joan P. Brock Grantor Retained Annuity Trust . . . . . . . . . . . 28,000 5,460 James P. Compton and Jean T. Compton, as Trustees of the H. Ray Compton Grantor Retained Annuity Trust . . . . . . 60,000 11,700
B-1
Number of Firm Number of Optional Common Shares Common Shares Name of Selling Shareholder to be Sold to be Sold - --------------------------- -------------- ------------------ The New York Selling Shareholders: SK Equity Fund, L.P. . . . . . . . . . 1,367,819 266,725 Allan W. Karp . . . . . . . . . . . . 2,244 437 Christopher K. Reilly . . . . . . . . 449 87 Melanie K. Berman, Custodian for Kyle Galbreath Megrue . . . . . . . . . . . . . . 1,122 219 Melanie K. Berman, Custodian for Christopher Galbreath Megrue . . . . . . . . . . . . . . 1,122 219 Thomas A. Saunders, III and Joanne S. Berkley, as Trustees for the Ivor Family Trust . . . . . . . . . 2,244 438 --------- ------- TOTAL . . . . . . . . . . . . 2,500,000 487,500 ========= =======
B-2 EX-23.2 3 EXHIBIT 23.2 INDEPENDENT AUDITORS' CONSENT The Board of Directors Dollar Tree Stores, Inc.: We consent to the use of our report incorporated herein by reference and to the references to our firm under the headings "Selected Financial Data" and "Experts" in the prospectus. /s/ KPMG PEAT MARWICK LLP Norfolk Virginia June 6, 1996 EX-23.3 4 Exhibit 23.3 Consent of Independent Public Accountants ----------------------------------------- As independent public accountants, we hereby consent to the use of our reports made a part of this registration statement. /s/ Arthur Andersen LLP Chicago, Illinois, June 6, 1996 -----END PRIVACY-ENHANCED MESSAGE-----