-----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, H2JpbP22Dh9f4BEiZfAYQCPKG9CphiukrtpghKjXBW7klUYGCn7h1ndR9DA5xgWy VdYfcvIvROY/OlYqbGlg2w== /in/edgar/work/20000801/0000912057-00-034072/0000912057-00-034072.txt : 20000921 0000912057-00-034072.hdr.sgml : 20000921 ACCESSION NUMBER: 0000912057-00-034072 CONFORMED SUBMISSION TYPE: S-3/A PUBLIC DOCUMENT COUNT: 4 FILED AS OF DATE: 20000801 FILER: COMPANY DATA: COMPANY CONFORMED NAME: DOLLAR TREE STORES INC CENTRAL INDEX KEY: 0000935703 STANDARD INDUSTRIAL CLASSIFICATION: [5331 ] IRS NUMBER: 541387365 STATE OF INCORPORATION: VA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-3/A SEC ACT: SEC FILE NUMBER: 333-41280 FILM NUMBER: 683461 BUSINESS ADDRESS: STREET 1: 500 VOLVO PARKWAY STREET 2: NORFOLK COMMERCE PARK CITY: CHESAPEAKE STATE: VA ZIP: 23320 BUSINESS PHONE: 7573215000 MAIL ADDRESS: STREET 1: P.O. BOX 2500 CITY: NORFOLK STATE: VA ZIP: 23501-2500 S-3/A 1 s-3a.txt S-3/A AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 1, 2000 REGISTRATION NO. 333-41280 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 -------------- AMENDMENT NO. 2 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 5331 54-1387365 (State or Other Jurisdiction of (Primary Standard Industrial (I.R.S. Employer Incorporation or Organization) Classification Code Number) Identification No.)
-------------- 500 Volvo Parkway FREDERICK C. COBLE Chesapeake, Virginia 23320 Dollar Tree Stores, Inc. (757) 321-5000 500 Volvo Parkway (Address and telephone number of Chesapeake, Virginia 23320 registrant's principal executive offices) (757) 321-5000 (Name, address and telephone number of agent for service)
------------------ copies to: WILLIAM A. OLD, JR. BRENT B. SILER JOHN S. MITCHELL, JR. SCOTT E. PUESCHEL Hofheimer Nusbaum, P.C. Hale and Dorr LLP 999 Waterside Drive, Suite 1700 1455 Pennsylvania Avenue, N.W. Norfolk, Virginia 23510 Washington, D.C. 20004 Phone: (757) 629-0613 Phone: (202) 942-8400 Fax: (757) 629-0660 Fax: (202) 942-8484
-------------- 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 462(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 THEREUNDER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SECTION 8(A), MAY DETERMINE. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SUBJECT TO COMPLETION. DATED AUGUST 1, 2000. THE INFORMATION IN THIS PRELIMINARY PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. THESE SECURITIES MAY NOT BE SOLD UNTIL THE REGISTRATION STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PRELIMINARY PROSPECTUS IS NOT AN OFFER TO SELL NOR DOES IT SEEK AN OFFER TO BUY THESE SECURITIES IN ANY JURISDICTION WHERE THE OFFER OR SALE IS NOT PERMITTED. 15,000,000 Shares DOLLAR TREE STORES, INC.
[LOGO] Common Stock ----------- All of the shares of common stock in the offering are being sold by the selling shareholders identified in this prospectus. Dollar Tree Stores will not receive any proceeds from the sale of the shares. Our common stock is quoted on the Nasdaq National Market under the symbol "DLTR". The last reported sale price of the common stock on July 19, 2000 was $45.94 per share. SEE "RISK FACTORS" BEGINNING ON PAGE 6 TO READ ABOUT FACTORS YOU SHOULD CONSIDER BEFORE BUYING SHARES OF OUR COMMON STOCK. -------------- NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY OTHER REGULATORY BODY HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. --------------
Per Share Total --------- ----- Initial price to public................................... $ $ Underwriting discount..................................... $ $ Proceeds, before expenses, to the selling shareholders.... $ $
To the extent that the underwriters sell more than 15,000,000 shares of common stock, the underwriters have the option to purchase up to an additional 2,250,000 shares from the selling shareholders at the initial price to the public less the underwriting discount. -------------- The underwriters expect to deliver the shares against payment in New York, New York on , 2000. GOLDMAN, SACHS & CO. BANC OF AMERICA SECURITIES LLC --------- SALOMON SMITH BARNEY DEUTSCHE BANC ALEX. BROWN FIRST UNION SECURITIES, INC. U.S. BANCORP PIPER JAFFRAY -------------- Prospectus dated , 2000. [INSIDE COVER PAGE 1] [Map of Store Locations] ------------------------ We were incorporated under the laws of the Commonwealth of Virginia in 1986 as Only One Dollar, Inc. and changed our name to Dollar Tree Stores, Inc. in 1993. Our principal executive and administrative offices are located at 500 Volvo Parkway, Chesapeake, Virginia 23320, and our telephone number is (757) 321-5000. References to "we," "our" and "us" generally refer to Dollar Tree Stores, Inc., a Virginia corporation, and its direct and indirect subsidiaries on a consolidated basis. Dollar Tree-Registered Trademark-, Only $One-Registered Trademark-, Dollar Bill$-Registered Trademark- and Dollar Express-Registered Trademark- and the related logos are our registered service marks. Other trademarks or service marks referred to in this prospectus are the property of their legal owners. [INSIDE COVER PAGE 2] [1 External and 1 Internal Store Photos] [INSIDE COVER PAGE 3] [2 Internal Store Photos] PROSPECTUS SUMMARY THIS SUMMARY HIGHLIGHTS INFORMATION CONTAINED ELSEWHERE IN THIS PROSPECTUS OR IN DOCUMENTS REFERRED TO IN THIS PROSPECTUS. YOU SHOULD READ THE ENTIRE PROSPECTUS CAREFULLY BEFORE INVESTING IN OUR COMMON STOCK, INCLUDING THE "RISK FACTORS," "BUSINESS" AND "SELECTED FINANCIAL DATA" SECTIONS. WE MERGED WITH DOLLAR EXPRESS IN MAY 2000, ONLY $ONE IN JUNE 1999 AND 98 CENT CLEARANCE CENTER IN DECEMBER 1998. WE ACCOUNTED FOR THESE MERGERS AS POOLINGS OF INTERESTS. ALL FINANCIAL AND OPERATIONAL DATA CONTAINED IN THIS PROSPECTUS ASSUME THAT DOLLAR EXPRESS, ONLY $ONE AND 98 CENT CLEARANCE CENTER WERE PART OF DOLLAR TREE THROUGHOUT ALL PERIODS WE DISCUSS, UNLESS OTHERWISE INDICATED. OUR COMPANY Dollar Tree Stores is the leading operator of discount stores offering merchandise at the fixed price of $1.00. Our stores are the modern-day version of neighborhood "five and dime" variety stores, offering a wide assortment of quality everyday general merchandise in many traditional product categories. These categories include housewares, candy and food, seasonal goods, health and beauty care, toys, party goods and gifts. As of June 30, 2000, we operated 1,634 stores in 35 states. Over 80% of our stores are less than 7,000 gross square feet, generally ranging from 3,500 to 6,000 gross square feet. However, we plan to open an increasing number of larger stores, primarily in the 7,000 to 12,000 gross square foot range. Our stores are predominantly located in strip shopping centers, although we also operate stores in shopping malls and other locations. We have added over 220 stores in each of 1999 and 1998. We expect to add 220 to 230 stores in 2000 and 260 to 280 stores in 2001. Our growth strategy also includes plans to expand or relocate approximately 100 stores during each of 2000 and 2001. We expect to increase the total gross square footage of our stores by approximately 25% to 27% in 2000 and approximately 23% to 25% in 2001. Our net sales increased from $439.1 million in 1995 to $1,351.8 million in 1999, a compound annual growth rate of 32.5%. During the same period, operating income excluding merger related items increased by a compound annual growth rate of 43.4%, from $41.8 million to $176.6 million. RECENT DEVELOPMENTS DOLLAR EXPRESS MERGER. On May 5, 2000, we completed a merger with Dollar Express, Inc., which operated 107 stores under the name Dollar Express and 25 stores under the name Spain's Cards & Gifts. The merger increases our presence in the Mid-Atlantic region, primarily Pennsylvania and New Jersey, and supports our ongoing growth strategy and the development of our larger store format. The Dollar Express stores sell variety merchandise at the fixed price of $1.00. Spain's Cards & Gifts are multi-price point stores located in the Philadelphia area. We issued or reserved 9,000,000 shares of our common stock for all of the outstanding stock and options of Dollar Express. FINANCIAL RESULTS FOR THE PERIOD ENDED JUNE 30, 2000. We recently reported net sales of $384.5 million for the quarter ended June 30, 2000. This amount represented an increase of $96.4 million, or 33.5%, over net sales of $288.1 million during the same quarter in 1999. For the second quarter of 2000, comparable store net sales increased 14.3% over the same quarter last year. Operating income for the quarter was $36.4 million, an increase of 38.9% over operating income of $26.2 million during the same quarter in 1999. Pro forma net income available to common shareholders for the quarter was $20.8 million, an increase of 44.4% over pro forma net income available to common shareholders of $14.4 million for the same quarter in 1999. 3 Sales increased 30.3%, from $546.2 million for the six months ended June 30, 1999, to $711.6 million for the six months ended June 30, 2000. Comparable store net sales increased 8.7% for the six-month period ended June 30, 2000 as compared to the six-month period ended June 30, 1999. Operating income for the first six months of 2000 was $59.6 million, an increase of 27.6% over operating income of $46.7 million during the same period in 1999. Pro forma net income available to common shareholders for the first half of 2000 was $33.7 million, an increase of 20.4% over pro forma net income available to common shareholders of $28.0 million for the same period in 1999. THE OFFERING The common stock offered in this offering consists of 10,747,848 shares being offered by the selling shareholders and 4,252,152 shares to be issued upon exercise of warrants now held by some of the selling shareholders. The underwriters will purchase the warrants from these shareholders, pay us the exercise price specified in the warrant to obtain these shares and sell the shares in this offering. The common stock to be outstanding after the offering is based on shares outstanding on July 10, 2000 and includes the shares to be issued upon the exercise of warrants. This number does not include 6,115,516 shares issuable upon the exercise of outstanding stock options, nor does it include 4,125,188 shares issuable upon the exercise of warrants that will not be sold in connection with this offering. The following information assumes that the underwriters do not exercise the over-allotment option granted by the selling shareholders to purchase up to 2,250,000 additional shares of common stock in the offering. Common stock offered................... 15,000,000 shares Common stock to be outstanding after this offering........................ 107,237,333 shares Nasdaq National Market symbol............................... DLTR
SUMMARY FINANCIAL INFORMATION AND OPERATING DATA (Dollars in thousands, except per share data and net sales per square foot data) The following table presents a summary of our financial information and operating data for the three-month periods ended March 31, 2000 and 1999 and the last three calendar years. As required by pooling-of-interests accounting, the summary financial information and operating data of Dollar Tree Stores and our past merger partners, Dollar Express, Only $One and 98 Cent Clearance Center, have been combined and restated as of the beginning of the earliest period presented. For 1999, operating income was reduced by $1,050, and net income was reduced by $792, for charges related to the Only $One merger. For 1998, operating income was reduced by $5,325 and net income was reduced by $4,201, for charges related to the 98 Cent Clearance Center merger. Dollar Express and Only $One were treated as S corporations for federal and state income tax purposes through February 4, 1999 and June 29, 1999, respectively. As a result, their income was taxable to their shareholders through those dates. Accordingly, our pro forma income statement data reflect the pro forma increase in our C-corporation federal and state income tax expense which would have occurred had these companies been taxed as C corporations for the entire periods presented. In our merger with Dollar Express in May 2000, the outstanding preferred stock of Dollar Express was converted to common stock. Pro forma diluted net income per common share would have been $0.96 for the year ended December 31, 1999 if the conversion of preferred stock had taken place on February 5, 1999, when the preferred stock was originally issued. This calculation 4 increases net income available to common shareholders by $7,409 to eliminate the charge for accrued preferred stock dividends and accretion of preferred stock and warrants for the year ended December 31, 1999. In addition, if the conversion had taken place on February 5, 1999, the weighted average number of common shares and potential dilutive common shares outstanding would have increased by 2,795,000 shares for the year ended December 31, 1999. Comparable store net sales compare net sales for stores open throughout each of the two periods being compared. Net sales per store and net sales per square foot are calculated for stores open throughout the entire period presented.
THREE MONTHS ENDED MARCH 31, YEAR ENDED DECEMBER 31, ---------------------- ----------------------------------- 2000 1999 1999 1998 1997 ---------- --------- ---------- ---------- --------- INCOME STATEMENT DATA: Net sales......................... $327,111 $258,091 $1,351,820 $1,073,886 $847,830 Gross profit...................... 113,573 89,700 497,253 391,198 295,904 Selling, general and administrative expenses......... 90,354 69,249 321,657 260,684 205,077 Operating income.................. 23,219 20,451 175,596 130,514 90,827 Net income........................ 13,952 14,346 106,577 81,318 55,818 Net income available to common shareholders.................... 12,876 13,906 99,550 81,318 55,818 PRO FORMA INCOME STATEMENT DATA: Pro forma net income available to common shareholders............. $ 12,876 $ 13,672 $ 99,045 $ 76,514 $ 53,539 Pro forma basic net income per common share.................... $ 0.13 $ 0.14 $ 1.01 $ 0.79 $ 0.55 Pro forma diluted net income per common share.................... $ 0.12 $ 0.13 $ 0.92 $ 0.71 $ 0.50 Weighted average number of common shares outstanding, in thousands....................... 99,032 97,989 98,435 97,454 96,747 Weighted average number of common shares and dilutive potential common shares outstanding, in thousands....................... 108,647 107,622 107,960 107,115 106,149 SELECTED OPERATING DATA: Number of stores open at end of period.......................... 1,565 1,335 1,507 1,285 1,059 Total gross square footage, in thousands....................... 8,097 6,349 7,638 6,051 4,793 Net sales growth.................. 26.7% 25.5% 25.9% 26.7% 27.3% Comparable store net sales increase........................ 3.0% 4.6% 5.0% 6.5% 6.9% Net sales per store............... $ 212 $ 204 $ 939 $ 902 $ 851 Net sales per square foot......... $ 42 $ 42 $ 196 $ 200 $ 198
AS OF MARCH 31, 2000 ---------------------- BALANCE SHEET DATA: Working capital................... $240,732 Total assets...................... 603,318 Total debt........................ 112,380 Shareholders' equity.............. 335,630
5 RISK FACTORS AN INVESTMENT IN OUR COMMON STOCK INVOLVES A HIGH DEGREE OF RISK. YOU SHOULD CAREFULLY CONSIDER THE SPECIFIC RISK FACTORS LISTED BELOW TOGETHER WITH ALL OTHER INFORMATION INCLUDED OR INCORPORATED IN THIS PROSPECTUS BEFORE YOU DECIDE TO INVEST IN OUR COMMON STOCK. IF ANY OF THE FOLLOWING RISKS MATERIALIZE, THEN OUR BUSINESS, FINANCIAL CONDITION, RESULTS OF OPERATIONS OR PROSPECTS COULD BE ADVERSELY AFFECTED. IF THAT OCCURS, THE MARKET PRICE OF OUR COMMON STOCK COULD FALL, AND YOU COULD LOSE ALL OR PART OF YOUR INVESTMENT. FAILURE TO MEET OUR AGGRESSIVE EXPANSION GOALS OR SUCCESSFULLY MANAGE OUR GROWTH MAY HARM OUR NET SALES GROWTH AND PROFITABILITY If we do not significantly increase the number of our stores and the capacity of our store support systems in a profitable, timely and efficient manner, our net sales growth and profitability may be harmed. As a single price point retailer, we cannot increase our sales prices. Therefore, we rely heavily on new and larger stores to increase sales and profitability. We expect to add 220 to 230 stores during 2000 and 260 to 280 stores during 2001. Managing our growth has become more complex because we are now operating over 1,630 stores in 35 states from coast to coast. We may not anticipate all the challenges that our expanding operations will impose on our systems and personnel. We may not meet our targets for opening new stores and expanding profitably. Our continued growth will depend on whether we can: - supply an increasing number of stores with the proper mix and volume of merchandise; - successfully add and operate larger stores, with which we have less experience; - hire, train and retain an increasing number of qualified employees, including associates, managers and executives, at affordable rates of compensation; - locate, lease, build out and open stores in suitable locations on a timely basis and on favorable economic terms; - expand into new geographic markets, where we have limited or no experience; - expand within our established geographic markets, where new stores may draw sales away from our existing stores; and - build, expand and upgrade distribution centers and internal store support systems in an efficient, timely and economical manner. OUR PROFITABILITY IS ESPECIALLY VULNERABLE TO FUTURE INCREASES IN OPERATING AND MERCHANDISE COSTS Future increases in labor, shipping, merchandise and other operating costs may reduce our profitability. As a fixed price retailer, we cannot raise the price of our merchandise to offset cost increases. Instead, we attempt to offset a cost increase in one area by finding cost savings or operating efficiencies in another. Inflation and adverse economic changes in the United States, where we both buy and sell merchandise, and in China and other parts of Asia, where we buy a large portion of our merchandise, may reduce our profitability. Past increases in the minimum wage, trans-Pacific shipping rates and fuel costs have materially increased our expenses. In 2000, we believe that oceanic shipping rate increases will add $2.0 to $3.0 million to our shipping costs and that fuel cost increases will add another $1.0 to $1.2 million to our domestic freight expense. In 1998, the $0.90 per hour increase in the minimum wage implemented in 1996 and 1997 added approximately $5.0 million to our payroll cost, excluding the effect of the increase on the operations of Dollar Express, Only $One and 98 Cent Clearance 6 Center. The U.S. Senate and House of Representatives recently passed two versions of a minimum wage bill that increase the hourly wage by $1.00. If the minimum wage were to increase by $1.00, we believe that, unless we realize offsetting cost reductions, our annual payroll expenses would increase by approximately 2.0% to 2.5% of operating expenses. WE EXPECT THAT THE DOLLAR EXPRESS MERGER WILL REDUCE OUR NET INCOME PER COMMON SHARE IN 2000 We expect that the Dollar Express merger will reduce our net income per common share in 2000. In addition to merger related costs of approximately $4.4 million, we expensed approximately $629,000 for the early repayment of Dollar Express's debt in the second quarter of 2000. We expect to incur additional selling, general and administrative expenses totalling approximately $1.0 million over the second and third quarters of 2000 to phase out some of Dollar Express's computer systems and pay severance and bonuses to some of Dollar Express's employees. Moreover, we may experience delays, unexpected costs and other difficulties integrating with Dollar Express. The Dollar Express merger requires the integration of Dollar Express's purchasing department, store operations, shipping and receiving operations and real estate leasing functions with those of Dollar Tree. Full integration of the two organizations will require considerable time and effort on the part of Dollar Tree's management, reducing the time they can devote to our other operations. To realize the economic benefits we hope to achieve from the merger, we must decrease the cost of Dollar Express's merchandise, identify and eliminate redundant operating costs and increase its net sales. We may experience delays in, or be unable to achieve, our expected cost reductions and net sales increases, which could result in the merger further diluting our net income per common share in 2000. UNFORESEEN DISRUPTIONS OR COSTS IN OPERATING AND EXPANDING OUR RECEIVING AND DISTRIBUTION SYSTEMS MAY HARM OUR SALES AND PROFITABILITY Our future success will depend on our ability to obtain merchandise from suppliers and ship it to our stores in a timely and cost-effective manner. We may not anticipate, respond to or control all the challenges of operating and expanding our receiving and distribution systems. Some of the factors that could have an adverse effect on our shipping and receiving systems or costs are: - EXPANSION, REPLACEMENT AND ADDITION OF DISTRIBUTION CENTERS. There is little excess capacity in our current distribution system. Our rapid growth, including the recent Dollar Express merger, places significant pressure on this critical function. We estimate that our distribution system currently has the capacity to support net sales of $1.8 billion per year, and our net sales during the twelve-month period ending June 30, 2000 were $1.5 billion. We currently operate distribution centers in Chesapeake, Virginia; Olive Branch, Mississippi; Chicago, Illinois; Stockton, California; and Philadelphia, Pennsylvania. We plan to open a distribution center in Savannah, Georgia in the first quarter of 2001 and a new distribution center in the Northeast in early 2002. We must expand or replace existing distribution centers and build new ones on a tight time schedule or we will not meet our aggressive growth plans. - CONTINUING COSTS ASSOCIATED WITH REPLACED DISTRIBUTION CENTERS. In 1998, we replaced our Memphis, Tennessee distribution center with our fully automated distribution center located in Mississippi. In January 2000, we replaced our Sacramento, California distribution center with our new facility located in Stockton. We will remain liable for rent and pass-through costs under the Memphis lease until September 2005 and the Sacramento lease until June 2008. We have subleased the Memphis center through March 2002. The annual rent and pass-through costs are $745,000 for the Memphis facility and $585,000 for the Sacramento facility. We have accrued net selling, general and administrative expenses of $1.4 million for the remaining rent and pass-through costs related to the closed Memphis and Sacramento 7 facilities and may have to accrue further charges for these facilities in the future if we are unable to obtain new or extended subleases. The lease for our existing distribution center in Philadelphia does not expire until December 31, 2002, and we anticipate replacing this facility with a new facility in the Northeast in early 2002. We are responsible for annual rent and pass-through costs of $525,000 for the Philadelphia facility. - SHIPPING. Our oceanic shipping schedules may be disrupted or delayed from time to time. We have experienced shipping rate increases over the last several years imposed by the trans-Pacific shipping cartel. - VULNERABILITY TO NATURAL OR MAN-MADE DISASTERS. A fire, explosion, hurricane, tornado, flood, earthquake or other disaster at any of our distribution facilities could significantly disrupt our distribution system, particularly because there is little excess capacity in our existing system. The facilities in California and Mississippi are especially vulnerable to earthquakes. The facilities in Mississippi, Virginia and Georgia are especially vulnerable to hurricanes. - LABOR DISAGREEMENT. Labor disagreements or disruptions may result in delays in the delivery of merchandise to our stores and increased costs. AN INCREASE IN THE COST OR A DISRUPTION IN THE FLOW OF OUR IMPORTED GOODS MAY SIGNIFICANTLY DECREASE OUR SALES AND PROFITS We rely heavily on imported goods to sell in our stores. Merchandise imported directly from overseas manufacturers and agents accounts for approximately 40% to 45% of our total purchases at retail. In addition, we believe that a small portion of our goods purchased from domestic vendors is imported. China is the source of a substantial majority of our imports. Imported goods are generally less expensive than domestic goods and contribute significantly to our favorable profit margins. A disruption in the flow of our imported merchandise or an increase in the cost of those goods may significantly decrease our sales and profits. If Chinese or other imported merchandise becomes more expensive or unavailable, the transition to alternative sources may not occur in time to meet our demands. Products from alternative sources may also be of lesser quality and more expensive than those we currently import. Risks associated with our reliance on imported goods include: - disruptions in the flow of imported goods because of factors such as: - raw material shortages, work stoppages, strikes and political unrest; - problems with oceanic shipping, including shipping container shortages; - economic crises and international disputes, such as China's claims to sovereignty over Taiwan; and - increases in the cost of purchasing or shipping foreign merchandise resulting from: - failure of the United States to maintain normal trade relations with China; - import duties, import quotas and other trade sanctions; and - increases in shipping rates imposed by the trans-Pacific shipping cartel. Chinese goods imported into the United States currently enjoy favorable duties because the United States grants China normal trade relations. China's favorable trade status is reviewed on an annual basis and is currently extended through July 2, 2001. Although the U.S. House of Representatives approved a bill on May 24, 2000 extending normal trade relations to China on a permanent basis, there continues to be significant political opposition to this proposal, and we 8 cannot be sure of its passage. A deterioration in trade relations with China could significantly increase the cost of our goods. For example, administration officials testified in June 1999 that ending normal trade relations with China would raise tariffs on Chinese products from their current overall trade-weighted average of 4% to an estimated 44%. Even if normal trade relations with China become permanent, the United States could impose punitive trade sanctions on Chinese goods for a variety of reasons. Although no punitive import duties are currently imposed, the United States Trade Representative has in the past threatened retaliatory sanctions equaling as much as 100% of the cost of some Chinese goods. DIFFICULTIES EXPERIENCED IN OBTAINING SUFFICIENT QUANTITIES OF LOW-COST MERCHANDISE MAY CAUSE OUR SALES AND PROFITS TO SUFFER Our future success depends on our ability to buy larger quantities of quality merchandise at low prices. Because we sell our merchandise at a fixed price, it would be difficult to maintain our gross profit margins if the cost of our merchandise increases. Disruptions in the availability of quality, low-cost merchandise in sufficient quantities to maintain our growth may reduce our sales and profits. Quality, low-cost merchandise may not be available in the future, or it may not be available in the quantities necessary for our expansion. We do not have significant long-term or continuing contracts for the purchase of merchandise, and we compete with other retailers and wholesalers for new buying opportunities from both our existing suppliers and new sources. We sometimes buy merchandise from manufacturers having standard sales policies that a dollar retailer cannot satisfy. For example, a policy may require us to sell a product at a retail price above $1.00, advertise or comply with some other restriction that is inconsistent with our method of operation. As a result, we could have difficulty obtaining low-cost merchandise and could incur some additional expenses. OUR OPERATING RESULTS COULD FLUCTUATE SIGNIFICANTLY AND CAUSE OUR STOCK PRICE TO FALL We expect to experience fluctuations in our quarterly and annual operating results, which may cause the price of our stock to fall. We realize a disproportionately large amount of our net sales and net income during the Christmas and Easter seasons. In anticipation of these holidays, we purchase substantial amounts of seasonal inventory and hire many temporary employees. If for any reason our net sales were below seasonal norms, our operating results would suffer. We continually change our mix of seasonal merchandise, non-seasonal merchandise and consumable products. As a result, our comparable store net sales and gross profit margins fluctuate from quarter to quarter. Our quarterly and annual results of operations, including comparable store net sales and income, also fluctuate for a variety of other reasons, including: - changes in the date on which Easter is observed each year and the length of the Easter and Christmas selling seasons; - the timing of new store openings; - the net sales contributed by new and expanded stores; - difficulties in obtaining sufficient quantities of merchandise from our suppliers; - disruptions in or adjustments to our shipping and receiving schedules; - competition; and - economic and weather conditions. 9 We believe that future comparable store net sales increases, if any, will be lower than those experienced in the past. In any quarter, comparable store net sales may be lower than our annual average. INCREASED COMPETITION IN THE FUTURE MAY REDUCE OUR SALES AND PROFITS The retail industry is highly competitive and we expect competition to increase in the future. Increased competition may reduce our sales and profits. Our competitors include variety and discount stores such as Dollar General, closeout stores such as Odd Lots and Big Lots, mass merchandisers such as Wal-Mart, and, to a lesser extent, other fixed price retailers. We expect that our expansion plans, as well as the expansion plans of other fixed price retailers such as 99 Cents Only Stores based in Southern California, will increasingly bring us into direct competition. Competition may also increase because there are no significant economic barriers to other companies becoming fixed price retailers. THE SUBSTANTIAL NUMBER OF SHARES OF OUR COMMON STOCK THAT ARE ELIGIBLE FOR PUBLIC SALE MAY CAUSE OUR STOCK PRICE TO FALL There are relatively few restrictions on the resale of our common stock, and a large number of shares of common stock are eligible for public sale. Sales of substantial amounts of these shares in the public market, or the perception that such sales could occur, could cause the market price for our common stock to fall. Significant sources of future public sales of our common stock, in addition to shares held by the general public, include: - OPTION SHARES. As of July 10, 2000, there were outstanding options under our stock option plans for the purchase of up to approximately 6.1 million shares. About 2.5 million of these option shares have vested and could be purchased. Substantially all of the shares issuable under our stock options have been registered under the Securities Act, and the vast majority of these shares are freely tradable without restriction. - PRIVATELY ISSUED SHARES. As of July 10, 2000, approximately 28 million shares of our common stock were held by persons who acquired them through private transactions that were not registered under the Securities Act. Approximately 2.7 million shares issued in our May 2000 merger with Dollar Express have been registered for ongoing resale. In addition, some of our shareholders own warrants to purchase approximately 8.4 million shares of our common stock. This offering includes approximately 4.3 million shares to be issued upon exercise of some of these warrants. Any remaining warrants can be exercised at any time for shares that could be resold into the public market. The holders of a substantial majority of our privately issued shares, including our warrant holders, can generally require that we register their shares for resale, subject to specified limitations. Even when shares are not registered for resale, the rules of the Securities and Exchange Commission permit a holder who has held shares for one year to sell the stock into the public market subject in some cases to volume and other limitations. A person who has held shares for two years can generally sell without limitation. VOLATILITY IN OUR STOCK PRICE COULD RESULT IN SUBSTANTIAL LOSSES TO INVESTORS The trading price of our common stock has been and is likely to continue to be highly volatile and subject to wide fluctuations in response to a variety of internal and external factors. These factors include: - the state of U.S. trade and political relations with China; 10 - the inflation rate, interest rates, shipping rates, increases in the minimum wage and general economic conditions; - quarterly variations in our operating results; - adverse events or announcements relating to our business; - sale of our option shares and restricted shares into the public market; - announcements by competitors; and - changes in financial estimates by securities analysts. Shareholders may not be able to resell their common stock at or above the public offering price as a result of a possible decline in price after this offering. Moreover, the stock market has experienced significant price and volume fluctuations over the past several years that have often been unrelated or disproportionate to the operating performance of particular companies. The trading prices of many companies' stocks, including ours, are at or near historical highs. This increases the risk that the trading prices of our stock may not be sustained. OUR ARTICLES OF INCORPORATION AND BYLAWS COULD DELAY OR DISCOURAGE A TAKEOVER ATTEMPT THAT MAY BE IN A SHAREHOLDER'S BEST INTEREST Our articles of incorporation and bylaws contain provisions that may delay or discourage a takeover attempt that a shareholder might consider in his best interest, including takeover attempts that might result in a premium being paid on shares of our common stock. These provisions, among other things: - classify our board of directors into three classes, each of which serves for different three-year periods; - provide that only the board of directors, chairman or president may call special meetings of the shareholders; - establish certain advance notice procedures for nominations of candidates for election as directors and for shareholder proposals to be considered at shareholders' meetings; - 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 bylaws; and - permit the board of directors, without further action of the shareholders, to issue and fix the terms of preferred stock, which may have rights senior to those of the common stock. 11 WARNING ABOUT FORWARD-LOOKING STATEMENTS This prospectus and the documents referred to in this prospectus contain "forward-looking statements" as that term is used in the Private Securities Litigation Reform Act of 1995. Forward-looking statements address future events, developments or results and typically use words such as believe, anticipate, expect, intend, plan or estimate. For example, our forward-looking statements include statements regarding: - our anticipated comparable store net sales and net sales per square foot; - our growth plans, including our plans to open, add, expand or relocate stores; - the integration of Dollar Express into our business, the effect of Dollar Express on our operating results and expenses related to the Dollar Express merger; - the possible effect of inflation and other economic changes on our costs and profitability, including the possible effect of future changes in oceanic shipping rates, freight costs, fuel costs, minimum wage rates and wage costs; - our cash needs, including our ability to fund our future capital expenditures and working capital requirements; - the capabilities of, and the cost of improving, our inventory supply chain processes; - the future reliability of, and cost associated with, our sources of supply, particularly China; - the future availability of quality merchandise that can be profitably sold for $1.00; - the capacity, performance and cost of our existing and planned distribution centers, including opening and expansion schedules; and - our expectations regarding competition. For a discussion of the risks, uncertainties, and assumptions that could affect our future events, developments or results, you should carefully review the "Risk Factors" beginning on page 6 of this prospectus, "Management's Discussion and Analysis of Financial Condition and Results of Operations" starting on page 16 and "Business" beginning on page 27. In light of these risks, uncertainties and assumptions, the future events, developments or results described by our forward-looking statements in this prospectus or in the documents referred to in this prospectus could turn out to be materially different from those we discuss or imply. We have no obligation to publicly update or revise our forward-looking statements after the date on the front cover of this prospectus and you should not expect us to do so. 12 USE OF PROCEEDS We will not receive any of the proceeds from the sale of common stock by the selling shareholders in this offering. We will receive approximately $2.4 million when the underwriters exercise the warrants they purchase from some of the selling shareholders. PRICE RANGE OF COMMON STOCK Our common stock has been traded on the Nasdaq National Market under the symbol "DLTR" since our initial public offering on March 6, 1995. The following table gives the high and low sales prices of our common stock as reported by the Nasdaq National Market for the periods indicated, restated to reflect 3-for-2 stock splits effected as stock dividends in June 1998 and June 2000.
HIGH LOW -------- -------- 1998: First Quarter.............................................. $24.06 $15.33 Second Quarter............................................. 27.94 22.28 Third Quarter.............................................. 33.00 18.58 Fourth Quarter............................................. 32.50 15.83 1999: First Quarter.............................................. $32.83 $20.50 Second Quarter............................................. 29.33 19.17 Third Quarter.............................................. 31.00 21.67 Fourth Quarter............................................. 34.83 23.00 2000: First Quarter.............................................. $36.33 $20.83 Second Quarter............................................. 43.21 31.00 Third Quarter (through July 19, 2000)...................... 48.25 38.56
On July 19, 2000, the last reported sale price for our common stock on the Nasdaq National Market was $45.94 per share. As of July 10, 2000, we had approximately 471 shareholders of record. DIVIDEND POLICY We anticipate that all of our income in the foreseeable future will be retained for the development and expansion of our business and the repayment of indebtedness. We do not anticipate paying cash dividends on our common stock in the foreseeable future. In addition, our credit facilities contain financial covenants that restrict our ability to pay cash dividends. 13 SELECTED FINANCIAL DATA (Dollars in thousands, except per share data and net sales per square foot data) The following table presents a summary of our selected financial data for the three-month periods ended March 31, 2000 and 1999 and the last five calendar years. The selected income statement and balance sheet data for the years ended December 31, 1999, 1998 and 1997 have been derived from our supplemental consolidated financial statements that have been audited by KPMG LLP, independent certified public accountants, incorporated in this prospectus by reference to our Form 8-K filed on July 12, 2000. The selected income statement and balance sheet data for the three-month periods ended March 31, 2000 and 1999 and the years ended December 31, 1996 and 1995 have been derived from our unaudited consolidated financial statements which have been prepared on the same basis as the audited consolidated financial statements. The interim financial statements include all adjustments, consisting only of normal recurring adjustments, which we consider necessary for a fair presentation of the financial data shown. The results of operations for the three-month period ended March 31, 2000 are not necessarily indicative of the results to be expected for the entire year ending December 31, 2000. As required by pooling-of-interests accounting, the financial information and operating data of Dollar Tree Stores and our past merger partners, Dollar Express, Only $One and 98 Cent Clearance Center, have been combined and restated as of the beginning of the earliest period presented. For 1999, operating income was reduced by $1,050, and net income was reduced by $792, for charges related to the Only $One merger. For 1998, operating income was reduced by $5,325, and net income was reduced by $4,201, for charges related to the 98 Cent Clearance Center merger. Dollar Express and Only $One were treated as S corporations for federal and state income tax purposes through February 4, 1999 and June 29, 1999, respectively. As a result, their income was taxable to their shareholders through those dates. Accordingly, our pro forma income statement data reflect the pro forma increase in our C-corporation federal and state income tax expense which would have occurred had these companies been taxed as C corporations for the entire periods presented. In our merger with Dollar Express in May 2000, the outstanding preferred stock of Dollar Express was converted to common stock. Pro forma diluted net income per common share would have been $0.96 for the year ended December 31, 1999 if the conversion of preferred stock had taken place on February 5, 1999, the date when the preferred stock was originally issued. This calculation gives effect to an adjustment that increases net income available to common shareholders by $7,409 to eliminate the charge for accrued preferred stock dividends and accretion of preferred stock and warrants for the year ended December 31, 1999. In addition, if the conversion had taken place on February 5, 1999, the weighted average number of common shares and potential dilutive common shares outstanding would have increased by 2,795,000 shares for the year ended December 31, 1999. On January 31, 1996, we bought all the outstanding stock of a corporation owning 136 Dollar Bills stores in an acquisition accounted for as a purchase. As a result, the financial data presented below include the financial data of Dollar Bills since the date of acquisition. Comparable store net sales compare net sales for stores open throughout each of the two periods being compared. Net sales per store and net sales per square foot are calculated for stores open throughout the period presented. 14
THREE MONTHS ENDED MARCH 31, YEAR ENDED DECEMBER 31, --------------------- ----------------------------------------------------------- 2000 1999 1999 1998 1997 1996 1995 --------- --------- ---------- ---------- --------- --------- --------- INCOME STATEMENT DATA: Net sales............................. $327,111 $258,091 $1,351,820 $1,073,886 $847,830 $665,802 $439,090 Cost of sales......................... 213,538 168,391 854,124 681,387 551,926 435,446 289,951 Merger related costs.................. -- -- 443 1,301 -- -- -- -------- -------- ---------- ---------- -------- -------- -------- Gross profit.......................... 113,573 89,700 497,253 391,198 295,904 230,356 149,139 Selling, general and administrative expenses: Operating expenses.................. 81,661 62,517 290,241 234,197 189,060 148,785 100,197 Merger related expenses............. -- -- 607 4,024 -- -- -- Depreciation and amortization....... 8,693 6,732 30,809 22,463 16,017 12,607 7,173 -------- -------- ---------- ---------- -------- -------- -------- Total........................... 90,354 69,249 321,657 260,684 205,077 161,392 107,370 -------- -------- ---------- ---------- -------- -------- -------- Operating income...................... 23,219 20,451 175,596 130,514 90,827 68,964 41,769 Interest income....................... 1,778 416 1,743 604 145 119 67 Interest expense...................... (2,278) (1,280) (7,429) (5,217) (3,831) (5,868) (3,220) -------- -------- ---------- ---------- -------- -------- -------- Income before income taxes............ 22,719 19,587 169,910 125,901 87,141 63,215 38,616 Provision for income taxes............ 8,767 5,241 63,333 44,583 31,323 22,284 13,400 -------- -------- ---------- ---------- -------- -------- -------- Net income............................ 13,952 14,346 106,577 81,318 55,818 40,931 25,216 Preferred stock dividends and accretion........................... 1,076 440 7,027 -- -- -- -- -------- -------- ---------- ---------- -------- -------- -------- Net income available to common shareholders........................ $ 12,876 $ 13,906 $ 99,550 $ 81,318 $ 55,818 $ 40,931 $ 25,216 ======== ======== ========== ========== ======== ======== ======== PRO FORMA INCOME STATEMENT DATA: Net income available to common shareholders........................ $ 12,876 $ 13,906 $ 99,550 $ 81,318 $ 55,818 $ 40,931 $ 25,216 Adjustment for C-corporation income taxes............................... -- 234 505 4,804 2,279 2,163 1,200 -------- -------- ---------- ---------- -------- -------- -------- Pro forma net income available to common shareholders................. $ 12,876 $ 13,672 $ 99,045 $ 76,514 $ 53,539 $ 38,768 $ 24,016 ======== ======== ========== ========== ======== ======== ======== Pro forma basic net income per common share............................... $ 0.13 $ 0.14 $ 1.01 $ 0.79 $ 0.55 $ 0.41 $ 0.26 Pro forma diluted net income per common share........................ $ 0.12 $ 0.13 $ 0.92 $ 0.71 $ 0.50 $ 0.37 $ 0.24 Weighted average number of common shares outstanding, in thousands.... 99,032 97,989 98,435 97,454 96,747 94,830 92,688 Weighted average number of common shares and dilutive potential common shares outstanding, in thousands.... 108,647 107,622 107,960 107,115 106,149 103,919 101,138 SELECTED OPERATING DATA: Number of stores open at end of period....................... 1,565 1,335 1,507 1,285 1,059 888 632 Total gross square footage, in thousands........................ 8,097 6,349 7,638 6,051 4,793 3,810 2,480 Net sales growth...................... 26.7% 25.5% 25.9% 26.7% 27.3% 51.6% 26.9% Comparable store net sales increase... 3.0% 4.6% 5.0% 6.5% 6.9% 5.9% 6.2% Net sales per store................... $ 212 $ 204 $ 939 $ 902 $ 851 $ 784 $ 734 Net sales per square foot............. $ 42 $ 42 $ 196 $ 200 $ 198 $ 200 $ 192
AS OF DECEMBER 31, AS OF MARCH 31, ----------------------------------------------------------- 2000 1999 1998 1997 1996 1995 --------------------- ---------- ---------- --------- --------- --------- BALANCE SHEET DATA: Working capital....................... $ 240,732 $ 225,833 $ 124,758 $ 70,521 $ 32,518 $ 37,010 Total assets.......................... 603,318 611,233 436,768 328,282 217,370 124,764 Total debt............................ 112,380 108,773 53,759 42,622 13,059 19,866 Mandatorily redeemable preferred stock............................... 36,247 35,171 -- -- -- -- Shareholders' equity.................. 335,630 316,238 262,575 173,290 116,651 51,579
15 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS KEY EVENTS Several key events have had or are expected to have a significant effect on our results of operations. You should keep in mind that: - In May 2000, we merged with Dollar Express and issued or reserved 9,000,000 shares of our common stock in exchange for Dollar Express's outstanding stock and options. Dollar Express operated 132 stores primarily in the Mid-Atlantic region. - In January 2000, we signed a contract to enter into an operating lease for a new 600,000 square foot distribution center, which is being constructed in Savannah, Georgia. We plan to be operating this facility by the end of the first quarter of 2001. - Also in January 2000, we opened a new 317,000 square foot distribution center in Stockton, California, which replaced our Sacramento, California facility. - In June 1999, we merged with Only $One, issuing 752,400 shares of our common stock in exchange for Only $One's outstanding stock. Only $One operated 24 stores in central and upstate New York. - In January 1999, we opened a new 425,000 square foot distribution center in Olive Branch, Mississippi, which replaced our Memphis, Tennessee facility. - In December 1998, we merged with 98 Cent Clearance Center. We reserved or issued approximately 3,228,000 shares of our common stock in exchange for 98 Cent Clearance Center's outstanding stock and options. 98 Cent Clearance Center operated 66 stores in northern and central California and Nevada. - In January 1996, we purchased a corporation owning 136 Dollar Bills stores for $54.6 million in cash and inventory. We accounted for the Dollar Express, Only $One and 98 Cent Clearance Center mergers as poolings of interests. As a result, all financial and operational data in this prospectus assume that Dollar Express, Only $One and 98 Cent Clearance Center had each been a part of Dollar Tree throughout all periods discussed. For each period presented, the outstanding Dollar Express, Only $One and 98 Cent Clearance Center shares of stock have been converted into Dollar Tree shares based on the exchange ratios used in each merger. RESULTS OF OPERATIONS Our net sales derive from the sale of merchandise. Two major factors tend to affect our net sales trends. First is our success at opening new stores or adding new stores through mergers or acquisitions. Second, sales at our existing stores change from one year to the next. We refer to this as a change in comparable store net sales, because we compare only those stores which are open throughout both of the periods being compared. We include expanded or relocated stores in the calculation of comparable store net sales. Most retailers can increase the price of their merchandise in order to increase their comparable store net sales. As a fixed price retailer, we do not have the ability to raise our prices. Generally, our comparable store net sales will increase only if we sell more merchandise. In 1999, we increased the price point in the sixty-six 98 Cent Clearance Center stores from $0.98 to $1.00. This had only a minor impact on our comparable store net sales. We believe that future comparable store net sales increases, if any, will be lower than those we have experienced in the past. We anticipate that our future sales growth will come mostly from new store openings. We plan to expand by 220 to 230 stores in 2000 and 260 to 280 stores in 2001. We also expect our average 16 store size to increase in 2000 and 2001, which we believe will result in a decrease in our net sales per square foot. Increases in expenses could negatively impact our operating results because we cannot pass on increased expenses to our customers by increasing our merchandise price. Consequently, our future success depends in large part on our ability to control our costs. The following table expresses items from our income statement as a percentage of net sales:
THREE MONTHS ENDED MARCH 31, YEAR ENDED DECEMBER 31, --------------------- --------------------------------- 2000 1999 1999 1998 1997 --------- --------- --------- --------- --------- Net sales.............................. 100.0% 100.0% 100.0% 100.0% 100.0% Cost of sales.......................... 65.3 65.2 63.2 63.5 65.1 Merger related costs................... -- -- 0.0 0.1 -- ----- ----- ----- ----- ----- Gross profit........................... 34.7 34.8 36.8 36.4 34.9 Selling, general and administrative expenses: Operating expenses................. 25.0 24.2 21.5 21.8 22.3 Merger related expenses............ -- -- 0.0 0.4 -- Depreciation and amortization...... 2.6 2.6 2.3 2.0 1.9 ----- ----- ----- ----- ----- Total............................ 27.6 26.8 23.8 24.2 24.2 ----- ----- ----- ----- ----- Operating income....................... 7.1 8.0 13.0 12.2 10.7 Interest income........................ 0.5 0.1 0.1 0.1 -- Interest expense....................... (0.7) (0.5) (0.5) (0.6) (0.4) ----- ----- ----- ----- ----- Income before income taxes............. 6.9 7.6 12.6 11.7 10.3 Provision for income taxes............. 2.6 2.0 4.7 4.1 3.7 ----- ----- ----- ----- ----- Net income............................. 4.3% 5.6% 7.9% 7.6% 6.6% ===== ===== ===== ===== =====
THE THREE MONTHS ENDED MARCH 31, 2000 COMPARED TO THE THREE MONTHS ENDED MARCH 31, 1999 NET SALES. Net sales increased 26.7% to $327.1 million for the first quarter of 2000 from $258.1 million for the first quarter of 1999. We attribute this $69.0 million increase in net sales to two factors: - Approximately 89% of the increase came from stores opened in 1999 and the first quarter of 2000, which are not included in our comparable stores net sales calculation. - Approximately 11% of the increase came from comparable store net sales growth. Comparable store net sales increased 3.0% for the first quarter of 2000. We believe comparable store net sales increased because: - We expanded and relocated stores. - We improved the mix of our merchandise and offered a wider variety of consumable products. These factors were partially offset by the observation of Easter on April 23 in 2000 as compared to April 4 in 1999. Unlike 2000, operating results in the first quarter of 1999 reflect the positive effects of almost the entire Easter selling season. During the first quarter of 2000, we added 59 new stores and closed one store, compared to 51 new stores opened and one store closed in the first quarter of 1999. Consistent with 1999, we 17 continue to open a number of larger stores ranging from approximately 7,000 to 12,000 gross square feet and increase the number of store expansions. During the first quarter of 2000, we added 6.0% to our total gross square footage, compared to an increase in total gross square footage of 4.9% for the same period last year. We expect to increase our total gross square footage by approximately 25% to 27% in 2000 and approximately 23% to 25% in 2001. We anticipate that future net sales growth will come mostly from square footage growth related to new store openings and expansion of existing stores. GROSS PROFIT. Gross profit increased by $23.9 million in the first quarter of 2000 compared to the same period in 1999, an increase of 26.6%. Our gross profit expressed as a percentage of net sales is called our gross profit margin. Our gross profit margin decreased 0.1% to 34.7% in the first quarter of 2000 compared to the first quarter of 1999. Our merchandise costs expressed as a percentage of net sales increased slightly in the first quarter of 2000 compared to the same period in 1999 because of higher freight costs attributable to the increase in trans-Pacific shipping rates imposed in May 1999 and the increase in domestic fuel costs. We expect freight costs expressed as a percentage of net sales to continue to increase through the third quarter of 2000 as compared to corresponding periods in 1999. The increase in freight costs was partially offset by a decrease in occupancy costs and markdowns expressed as a percentage of net sales. In 2000, we intend to buy more consumable products, such as food and household chemicals, to meet customer demand and supply our larger store format. Consumable products are generally domestically produced and carry a higher cost than imports. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and administrative expenses, excluding depreciation and amortization, increased by $19.1 million in the first quarter of 2000 compared to the same period of 1999, an increase of 30.6%. Expressed as a percentage of net sales, selling, general and administrative expenses, excluding depreciation and amortization, was 25.0% for the three months ended March 31, 2000 compared to 24.2% for the three months ended March 31, 1999. The increase was primarily due to an increase in payroll costs as a percentage of sales in the Dollar Express stores. We also expect to incur additional selling, general and administrative expenses totalling approximately $1.0 million over the second and third quarters of 2000 to phase out some of Dollar Express's computer systems and pay severance and bonuses to some of Dollar Express's employees. These additional costs will be recorded in selling, general and administrative expenses as incurred. Depreciation and amortization increased by $2.0 million, but remained constant as a percentage of net sales at 2.6%, for the three months ended March 31, 2000 compared to the three months ended March 31, 1999. OPERATING INCOME. Our operating income increased by $2.8 million during the first quarter of 2000 compared to the first quarter of 1999, an increase of 13.5%. As a percentage of net sales, operating income decreased to 7.1% in the first quarter of 2000 compared to 8.0% during the same period of 1999. This decrease was caused by the increase in selling, general and administrative expenses and the decrease in gross profit margin discussed above. INTEREST INCOME AND EXPENSE. Interest income increased to $1.8 million in the first quarter of 2000 from $416,000 in the first quarter of 1999. This increase resulted from higher levels of cash and cash equivalents throughout the three months ended March 31, 2000 compared with the three months ended March 31, 1999. Interest expense increased to $2.3 million in the first quarter of 2000 from $1.3 million in the first quarter of 1999. This increase primarily related to our capital lease obligations for the sale-leaseback transaction entered into in the third quarter of 1999. INCOME TAXES. Our effective tax rate increased to 38.6% for the first quarter of 2000 from 26.8% for the first quarter of 1999. This rate increased because of the $2.2 million deferred tax benefit recorded in connection with Dollar Express's conversion from an S- to C-corporation for income tax purposes on February 5, 1999. 18 1999 COMPARED TO 1998 NET SALES. Net sales increased 25.9% to $1,351.8 million for 1999 from $1,073.9 million for 1998. We attribute this $277.9 million increase in net sales to two factors: - Approximately 82% of the increase came from stores opened in 1999 and 1998, which are not included in our comparable store net sales calculation. - Approximately 18% of the increase came from comparable store net sales growth. Comparable store net sales increased 5.0% during 1999. We believe comparable store net sales increased because: - We improved the mix of our merchandise, with a slightly higher emphasis on consumable products. - Throughout 1999, we changed the merchandise mix at the 98 Cent Clearance Center stores to more closely resemble the mix at our existing Dollar Tree stores. - We expanded and relocated stores. - Customers purchased a higher average number of items per visit, and we had more customer visits. We opened 227 new stores and closed five stores during 1999, compared to 234 new stores opened and eight stores closed the previous year. The new 1999 stores include four that we acquired from a small dollar store operator. We added 26.2% to our total square footage in each of 1999 and 1998. GROSS PROFIT. Gross profit increased $106.1 million or 27.1% in 1999 as compared to our gross profit in 1998. Our gross profit margin increased to 36.8% in 1999 from 36.4% in 1998. Particular changes affecting our gross profit margin in 1999 included: - We believe our buying power with merchandise vendors increased because of our increased sales, which in turn lowered our overall merchandise costs expressed as a percentage of net sales. - Our distribution costs were lower as a percentage of net sales due to efficiencies at our Chesapeake and Olive Branch distribution centers. - We experienced higher freight costs because of the increase in the trans-Pacific shipping rates which took effect in May 1999. Excluding the effect on Dollar Express, we estimate that the impact of these higher shipping rates on our business was approximately $5.0 million in 1999. - In 1999, we purchased a slightly higher percentage of imports, which generally cost less than domestic products, and these goods improved our gross profit margin for the year. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and administrative expenses increased $61.0 million, or 23.4%, in 1999 compared to 1998. As a percentage of net sales, selling, general and administrative expenses decreased to 23.8% in 1999 compared to 24.2% in 1998. Excluding expenses related to the 98 Cent Clearance Center merger in 1998, selling, general and administrative expenses remained constant as a percentage of net sales at 23.8% in both 1999 and 1998. Expressed as a percentage of net sales, depreciation and amortization increased to 2.3% in 1999 from 2.0% in 1998, a total increase of $8.3 million. This percentage increase mainly resulted from depreciation related to the Olive Branch distribution facility. During 1999, we recorded a $1.3 million charge in selling, general and administrative expenses for remaining payments on our closed Sacramento distribution facility. During 1998, we recorded a $1.1 million charge in selling, general and administrative expenses for remaining lease and other payments on our closed Memphis distribution facility. When we were able to sublease the Memphis 19 facility in April 1999 for a portion of the remaining lease term, we reduced the accrual by approximately $700,000. OPERATING INCOME. Our operating income increased $45.1 million, or 34.5%, in 1999 as compared to 1998. As a percentage of net sales, operating income increased to 13.0% in 1999 compared to 12.2% in 1998. Excluding merger related items, operating income increased to $176.6 million in 1999 from $135.8 million in 1998 and increased as a percentage of net sales to 13.0% from 12.7%. These increases were attributable to our improved gross profit margin discussed above. INTEREST INCOME AND EXPENSE. Interest income increased $1.1 million to $1.7 million in 1999 from $600,000 in 1998. The increase resulted from higher levels of cash and cash equivalents in 1999 compared to 1998. Interest expense increased $2.2 million to $7.4 million in 1999 from $5.2 million in 1998. The increase resulted from the term loan entered into by Dollar Express in February 1999 and accretion of the common stock put warrants of Dollar Express to redemption value. The common stock put warrants were terminated in connection with the consummation of the merger with Dollar Express. INCOME TAXES. Our effective tax rate increased to 37.3% for the year ended December 31, 1999 from 35.4% for the year ended December 31, 1998 because Dollar Express was not subject to corporate-level income taxes before its conversion from an S- to C-corporation on February 5, 1999. This increase was partially offset by the $2.2 million deferred tax benefit recorded in connection with its conversion from an S- to C-corporation for income tax purposes. 1998 COMPARED TO 1997 NET SALES. Net sales increased 26.7% to $1,073.9 million for 1998 from $847.8 million for 1997. We attribute this $226.1 million increase in net sales to two factors: - Approximately 79% of the increase came from stores opened in 1998 and 1997, which are not included in our comparable store net sales calculation. - Approximately 21% of the increase came from comparable store net sales growth. Comparable store net sales increased 6.5% during 1998. This comparable store net sales calculation includes sales at 98 Cent Clearance Center stores for the 11-month periods ended December 31, 1998 and December 31, 1997. We believe comparable store net sales increased because: - During 1998, we stocked consumable products more consistently. - Customers purchased a higher average number of items per visit, and we had more customer visits. - The number of days in the Easter selling season increased because Easter was observed on April 12 in 1998 as compared to March 30 in 1997. - We continued to improve the quality and variety of merchandise offered in our stores. We opened 234 new stores and closed eight stores during 1998, compared to 176 new stores opened and five stores closed the previous year. We acquired nine of the new stores in 1998 from two dollar store operators. GROSS PROFIT. Gross profit increased $95.3 million, or 32.2%, in 1998 as compared to 1997. Our gross profit margin increased to 36.4% in 1998 from 34.9% in 1997. Excluding merger related costs otherwise included in cost of sales, primarily related to merchandise markdowns, the gross profit margin increased to 36.5%. This increase occurred mainly because: - We believe our buying power with merchandise vendors increased because of our increased sales, which in turn lowered our overall merchandise costs expressed as a percentage of net 20 sales. Favorable foreign currency rates had a minor effect on the lower cost of our imported goods. - We imported a higher percentage of goods. Imported goods generally cost less than domestic products, and these goods improved our gross profit margin for the year. - We experienced lower occupancy costs expressed as a percentage of net sales because occupancy costs tend to be mostly fixed. In May 1998, trans-Pacific freight charges increased by $300 per container. Excluding the effects on Dollar Express, the higher charges, which applied only to imported goods, added approximately $700,000 to our freight costs in 1998. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and administrative expenses increased 27.1% in 1998 as compared to 1997, a total increase of $55.6 million. As a percentage of net sales, selling, general and administrative expenses remained constant at 24.2%. Excluding expenses relating to the 98 Cent Clearance Center merger, selling, general and administrative expenses decreased as a percentage of net sales to 23.8% in 1998 from 24.2% in 1997. This decrease was attributable to spreading these generally fixed costs across our increased comparable store net sales. Depreciation and amortization increased $6.4 million to 2.0% as a percentage of net sales in 1998, as compared to 1.9% in 1997. This percentage increase was primarily attributable to the depreciation of our Chesapeake Store Support Center. OPERATING INCOME. Our operating income increased $39.7 million in 1998 as compared to 1997, an increase of 43.7%. As a percentage of net sales, operating income increased to 12.2% in 1998 from 10.7% in 1997. Excluding merger related items, operating income increased to $135.8 million in 1998 from $90.8 million in 1997 and increased as a percentage of net sales to 12.7% from 10.7%. These increases were attributable to our improved gross profit margin and the decrease in our selling, general and administrative expenses as a percentage of net sales discussed above. INTEREST INCOME AND EXPENSE. Interest income increased to $600,000 in 1998 from $100,000 in 1997. This increase was primarily a result of higher levels of cash and cash equivalents in the fourth quarter of 1998 compared to 1997. Interest expense increased to $5.2 million in 1998 from $3.8 million in 1997. This increase was primarily a result of higher levels of debt incurred to finance two new facilities. LIQUIDITY AND CAPITAL RESOURCES OVERVIEW Our business requires capital to open new stores and operate existing stores. Our working capital requirements for existing stores are seasonal and usually reach their peak in the months of September and October. Historically, we have satisfied our seasonal working capital requirements for existing stores and funded our store expansion program from internally generated funds and borrowings under our credit facilities. 21 The following table compares cash-related information for the three months ended March 31, 2000 and 1999 and for the years ended December 31, 1999, 1998 and 1997:
THREE MONTHS YEAR ENDED ENDED MARCH 31, DECEMBER 31, --------------------- ------------------------------ 2000 1999 1999 1998 1997 --------- --------- -------- -------- -------- (IN MILLIONS) Net cash provided by (used in): Operating activities........................ ($87.0) ($50.9) $128.6 $ 85.5 $ 76.0 Investing activities........................ (18.0) (11.3) (55.2) (57.0) (63.3) Financing activities........................ 7.1 2.1 23.5 7.3 27.2
In addition to opening, expanding and relocating stores, which generally accounted for the majority of our cash used in investing activities, we also used cash to meet the following needs: - $17.6 million for the construction of the Olive Branch distribution center in 1998 and another $1.4 million for the construction of that project in 1999; and - $30.5 million for the construction of the Chesapeake Store Support Center in 1997. Net cash provided by financing activities reflects cash which came from sources other than normal operations. During 1999, we made $60.9 million of S-corporation distributions to the former owners of Dollar Express and Only $One. In each period presented, we obtained cash from the exercise of stock options and the following sources: - $32.2 million from Dollar Express's issuance of preferred stock, net of offering expenses, in February 1999; - $20.0 million from the issuance of long-term debt in 1999; - $21.6 million from the sale and leaseback of some of our retail store leasehold improvements in 1999; - $2.5 million in 1999 and $16.5 million in 1998 from the issuance of callable bonds related to the construction of the Olive Branch facility; and - $30.0 million from the issuance of senior notes in 1997. At March 31, 2000, our borrowings under our bank facilities, senior notes and bonds were $81.5 million and we had an additional $142.5 million available under our two bank facilities. Of the amount available, approximately $35.8 million was committed to letters of credit issued for the routine purchase of imported merchandise. FUNDING REQUIREMENTS We expect to expand by approximately 220 to 230 stores during 2000 and 260 to 280 stores in 2001. In 1999, the average investment per new store, including capital expenditures, initial inventory and pre-opening costs, was approximately $221,000. Of our new stores in 1999, 54 were larger than 7,000 gross square feet. Average investment for these larger stores was approximately $320,000 per store. We expect our cash needs for opening new stores in 2000, including approximately 105 to 115 of the larger format stores, to total approximately $58.0 million. We have budgeted $36.5 million for capital expenditures and $21.5 million for initial inventory and pre-opening costs. Our total planned capital expenditures for 2000 are approximately $89.6 million, including planned expenditures for expanded and relocated stores, additional equipment for the distribution centers, computer system upgrades, expanding the Store Support Center in Chesapeake and remodeling and upgrading the Only $One stores. We believe that we can adequately fund our planned capital expenditures and working capital requirements for the next few years from net cash provided by operations and borrowings under our credit facility. 22 BANK CREDIT FACILITIES. During September 1996, we entered into an amended and restated credit agreement with our banks, which currently provides for a $135.0 million unsecured revolving credit facility to be used for working capital, letters of credit and development needs, bearing interest at the agent bank's prime rate or LIBOR plus a spread, at our option. As of March 31, 2000, the interest rate was approximately 6.6%. The credit agreement, among other things, requires the maintenance of specified ratios, restricts the payments of cash dividends and other distributions, and limits the amount of debt we can incur. The facility terminates on May 31, 2002. Dollar Express's former credit facility was paid in full after the consummation of the merger on May 5, 2000. OPERATING LEASE AGREEMENTS. During the third quarter of 2000, we plan to enter into an operating lease agreement of approximately $40 million for a new distribution center in the Northeast. In January 2000, we entered into a $35.0 million operating lease agreement to finance the construction of a new distribution center in Savannah, Georgia. In June 1999, we entered into an $18.0 million operating lease agreement for a new distribution center in Stockton, California. Under these agreements, the lessor is required to purchase the property, pay for the construction costs and lease the facility to us. SALE-LEASEBACK TRANSACTION. In September 1999, we sold some retail store leasehold improvements to an unrelated third party and leased them back for seven years. We have an option to repurchase the leasehold improvements at the end of the fifth and seventh years at amounts approximating their fair market values at the time the option is exercised. The transaction is treated as a financing arrangement for financial accounting purposes. The total amount of the lease obligation is $29.0 million. We are required to make monthly lease payments of $438,000 in the first five years and $638,000 in the sixth and seventh years. As a result of the transaction, we received net cash of $20.9 million and an $8.1 million 11.0% note receivable which matures in September 2006. REVENUE BOND FINANCING. In May 1998, we entered into an agreement with the Mississippi Business Finance Corporation under which it issued $19.0 million of variable rate demand revenue bonds. We borrowed the proceeds from the bonds to finance the acquisition, construction and installation of land, buildings, machinery and equipment for our new distribution facility in Olive Branch, Mississippi. At March 31, 2000, the balance outstanding on the bonds was $19.0 million. We begin repayment of the principal amount of the bonds in June 2006, with a portion maturing each June 1 until the final portion matures in June 2018. The bonds do not have a prepayment penalty as long as the interest rate remains variable. The bonds contain a demand provision and, therefore, outstanding amounts are classified as current liabilities. We pay interest monthly based on a variable interest rate which was 6.4% at March 31, 2000. The bonds are secured by a $19.3 million letter of credit issued by one of our existing lending banks. The letter of credit is renewable annually. The letter of credit and reimbursement agreement require that we maintain specified financial ratios and restrict our ability to pay cash dividends. In April 1999, we entered into an interest rate swap agreement that converts the demand revenue bonds to a fixed rate and reduces our exposure to changes in interest rates. Under this agreement, as amended, we pay interest to the bank which provided the swap at a fixed rate of 4.99%. In exchange, the bank pays us at a variable interest rate, which is similar to the rate on the demand revenue bonds and was 5.9% at March 31, 2000. No payments are made by either party under the swap for monthly periods with an established interest rate greater than 8.28%. The variable interest rate on the interest rate swap is set monthly. The swap expires April 1, 2009, but it may be canceled by us or the bank and settled for the fair value of the swap as determined by market rates. DEBT SECURITIES. In April 1997, we issued $30.0 million of 7.29% unsecured senior notes. We used the proceeds to pay down a portion of the revolving credit facility, which enabled us to use 23 that credit facility to fund capital expenditures for the Chesapeake corporate headquarters and distribution center. We pay interest on the notes semiannually on April 30 and October 30 each year and will pay principal in five equal annual installments of $6.0 million, which began April 30, 2000. The note holders have the right to require us to prepay the notes in full without premium upon a change of control or upon specified asset dispositions or other transactions we may make. The note agreements prohibit specified mergers and consolidations in which our company is not the surviving company, require that we maintain specified financial ratios, require that the notes rank on par with other debt and limit the amount of debt we can incur. In the event of default or a prepayment at our option, we must pay a penalty to the note holder. SEASONALITY AND QUARTERLY FLUCTUATIONS We experience seasonal fluctuations in our net sales, comparable store net sales, operating income and net income and expect this trend to continue. The following table sets forth some items from our unaudited income statements for the quarter ended March 31, 2000 and each quarter of 1999 and 1998. The unaudited information has been prepared on the same basis as the audited consolidated financial statements incorporated herein by reference and includes all adjustments, consisting only of normal recurring adjustments, which we consider 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 we have historically experienced significant increases in comparable store net sales, we expect that any future increases will be smaller than those experienced historically. For the quarter ended June 30, 1999, due to the Only $One merger, gross profit was reduced by $443,000 of merger related costs, and operating income was reduced by these costs and $607,000 of merger related expenses. These items reduced net income by $792,000. For the quarter ended December 31, 1998, due to the 98 Cent Clearance Center merger, gross profit was reduced by $1.3 million of merger related costs, and operating income was reduced by these costs and $4.0 million of merger related expenses. These items reduced net income by $4.2 million. Easter will be observed on April 15, 2001 and was observed on April 23, 2000, April 4, 1999, April 12, 1998 and March 30, 1997.
QUARTER ENDED --------------------------------------------- MAR. 31, DEC. 31, SEPT. 30, JUNE 30, 2000 1999 1999 1999 --------- --------- --------- --------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) Net sales.................. $327,111 $506,713 $298,868 $288,148 Gross profit............... 113,573 196,915 107,322 103,316 Operating income........... 23,219 100,992 27,920 26,233 Pro forma net income available to common shareholders............. 12,876 58,935 12,083 14,355 Pro forma diluted net income per common share.................... $ 0.12 $ 0.54 $ 0.11 $ 0.13 Stores open at end of period................... 1,565 1,507 1,461 1,403 Comparable store net sales increases................ 3.0% 7.5% 4.9% 1.7% QUARTER ENDED --------------------------------------------------------- MAR. 31, DEC. 31, SEPT. 30, JUNE 30, MAR. 31, 1999 1998 1998 1998 1998 --------- --------- --------- --------- --------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) Net sales.................. $258,091 $392,465 $237,852 $237,928 $205,641 Gross profit............... 89,700 151,730 85,944 81,652 71,872 Operating income........... 20,451 70,885 23,019 22,146 14,464 Pro forma net income available to common shareholders............. 13,672 41,991 13,190 12,937 8,396 Pro forma diluted net income per common share.................... $ 0.13 $ 0.39 $ 0.12 $ 0.12 $ 0.08 Stores open at end of period................... 1,335 1,285 1,241 1,163 1,100 Comparable store net sales increases................ 4.6% 5.2% 5.3% 12.3% 4.6%
INFLATION AND OTHER ECONOMIC FACTORS Our ability to provide quality merchandise at a fixed price and on a profitable basis is subject to economic factors that we cannot control, including inflation in shipping rates, wage rates and other operating costs. 24 SHIPPING COSTS. In May 1998, the trans-Pacific shipping cartel imposed a freight increase of $300 per container on U.S. imports from Asia. In May 1999, the cartel imposed a further increase of $900 per container for shipments from Asia to the West Coast of the United States and $1,000 for shipments to the East Coast, with a $300 per container surcharge during the peak shipping season from June 1 through November 30. We believe the higher rates will increase our shipping costs by approximately $2.0 to $3.0 million in 2000, primarily in the first three quarters. Increased fuel costs in 2000 also increased the cost of domestic freight. In addition, if fuel costs remain at current levels, we believe our domestic freight expense will increase by $1.0 to $1.2 million in 2000. MINIMUM WAGE. Although our average hourly wage rate is significantly higher than the federal minimum wage, an increase in the mandated minimum wage could significantly increase our payroll costs. For example, the federal minimum wage increased by $0.50 per hour on October 1, 1996 and by an additional $0.40 per hour on September 1, 1997. These changes increased payroll costs by approximately $5.0 million in 1998, excluding the impact this increase had on the 98 Cent Clearance Center, Only $One and Dollar Express stores. In February 2000, the U.S. Senate approved a proposal increasing the federal minimum wage by $1.00 per hour over three years. In March 2000, the U.S. House of Representatives approved a proposal increasing the federal minimum wage by $1.00 per hour over two years. Differences between the two bills must be settled before a final bill is sent to the President for his approval. If the minimum wage were to increase by $1.00 per hour, we believe that our annual payroll expenses would increase by approximately 2.0% to 2.5% of operating expenses unless we realize offsetting cost reductions. LEASES FOR REPLACED DISTRIBUTION CENTERS. We are liable for rent and pass-through costs under leases for our former distribution center in Memphis through September 2005, our former distribution center in Sacramento through June 2008 and our current distribution center in Philadelphia through December 2002. Annual rent and pass-through costs are approximately $745,000 for the Memphis facility, $585,000 for the Sacramento facility and $525,000 for the Philadelphia facility. We subleased the Memphis facility through March 2002, but the Sacramento facility has not been subleased. We have recorded charges for the Memphis and Sacramento leases considering current market conditions and probable sublease income at each location. Unless offsetting cost savings are realized, adverse economic factors, including inflation in operating costs, could harm our financial condition and results of operations. 25 NEW ACCOUNTING PRONOUNCEMENTS Statement of Financial Accounting Standards No. 133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES, as amended by Statement of Financial Accounting Standards No. 138, establishes accounting standards for derivative instruments and hedging activities and requires the recognition of all derivatives as either assets or liabilities in the statement of financial position at their fair value. This statement goes into effect on January 1, 2001. We do not expect that the implementation of this pronouncement will materially affect our financial condition or results of operations. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK We are exposed to various types of market risk in the normal course of our business, including the impact of interest rate changes and foreign currency rate fluctuations. We may enter into interest rate swaps to manage exposure to interest rate changes, and we may employ other risk management strategies, including the use of foreign currency forward contracts. We do not enter into derivative instruments for any purpose other than cash flow hedging purposes. We do not hold derivatives for trading purposes. INTEREST RATE RISK. We have financial instruments that are subject to interest rate risk, consisting of debt obligations issued at variable and fixed rates. Based on amounts outstanding on our fixed rate debt obligations at March 31, 2000, we do not consider our exposure to interest rate risk to be material. We use variable rate debt to finance our operations and capital improvements. In particular, we have issued variable rate long-term revenue bonds. This obligation exposes us to variability in interest payments due to changes in interest rates. If interest rates increase, interest expense increases. Conversely, if interest rates decrease, interest expense also decreases. We believe it is beneficial to limit the variability of our interest payments. To meet this objective, we entered into a derivative instrument in the form of an interest rate swap to manage fluctuations in cash flows resulting from changes in the interest rates on the variable rate bonds. The interest rate swap reduces the interest rate exposure on this variable rate debt. Under the interest rate swap, we pay the bank at a fixed rate of 4.99% and receive variable interest at a rate approximating the variable rate on the bonds, thereby creating the economic equivalent of fixed rate bonds. No payments are made by either party under the swap for monthly periods in which the variable interest rate is greater than 8.28%. As a result, we will not experience a negative cash flow or income statement impact on the bonds unless the variable interest rate increases to greater than 8.28%. The variable rate under the swap was 5.9% for the month of March 2000. FOREIGN CURRENCY RISK. Although we purchase most of our imported goods with U.S. dollars, we are subject to foreign currency exchange rate risk relating to payments to suppliers in Italian lire. When favorable exchange rates exist, we may hedge foreign currency commitments of future payments by purchasing foreign currency forward contracts. On March 31, 2000, we had no contracts outstanding. Approximately 1% of our purchases are contracted in Italian lire, and the market risk exposure relating to currency exchange rate fluctuations is not material. 26 BUSINESS Dollar Tree Stores was started in 1986 by Macon Brock, our President and Chief Executive Officer, Doug Perry, our Chairman, and Ray Compton, our Executive Vice President. We are the leading operator of discount variety stores offering merchandise at the fixed price of $1.00. We believe the variety and quality of products we sell for $1.00 set us apart from our competitors. In each of the last two years, we added over 220 stores. As of June 30, 2000, we operated 1,634 stores in 35 states: - 1,316 are our traditional dollar stores, generally ranging from 3,500 to 6,000 gross square feet; - 293 are larger dollar stores, generally ranging from 7,000 to 12,000 gross square feet; and - 25 are multi-price point card and gift stores, generally ranging from 3,000 to 5,000 gross square feet. BUSINESS STRATEGY VALUE OFFERING. We strive to exceed our customers' expectations of the variety and quality of products that can be purchased for $1.00. We believe that many of the items we sell for $1.00 are typically sold for higher prices elsewhere. We purchase a portion of our products directly from foreign manufacturers, allowing us to pass on additional value to the customer. In addition, direct relationships with both domestic and foreign manufacturers permit us to select a broad product range, customize packaging and frequently obtain larger product sizes and higher package quantities. CHANGING MERCHANDISE MIX. We supplement our wide assortment of quality everyday core merchandise and consumable products with a changing mix of new and exciting products, including seasonal goods, such as Easter gifts, summer toys and Halloween and Christmas decorations. We also take advantage of the availability of lower-priced, private-label and regional brand goods, which we believe are comparable to national name brands. We continually change the mix of seasonal merchandise, non-seasonal merchandise, and consumable products to add variety and freshness to our merchandise offerings. CONVENIENT, HIGHLY VISIBLE STORE LOCATIONS. We locate our stores to be convenient to customers. We prefer opening new stores in strip shopping centers anchored by strong mass merchandisers such as Wal-Mart, Kmart and Target, whose target customers we believe to be similar to ours. We also open stores in neighborhood centers anchored by large grocery retailers. We believe that our stores' bright lighting and curb appeal attract new and repeat customers and enhance our image as both a destination and impulse store. STRONG AND CONSISTENT STORE-LEVEL ECONOMICS. Our stores have been successful in major metropolitan areas, mid-sized cities and small towns. Since 1994, all stores opened under the Dollar Tree name have been profitable, producing store-level operating income within the first full year of operation. Approximately 90% of our stores open throughout 1999 had store level operating margins exceeding 15%. Stores whose first full year of operation was 1999 had an average store-level operating income of approximately $198,000, or approximately 22% of their net sales. COST CONTROL. Given our fixed $1.00 price structure, we must control expenses, inventory levels and operating margins to be successful. We closely manage both retail inventory shrinkage and retail markdowns of inventory. Neither exceeded 2.5% of annual net sales in each year from 1995 through 1999, excluding the Dollar Express operations. As part of our effort to control expenses, we generally do not advertise or accept credit and debit cards. In the past five calendar 27 years, excluding merger related items, we have maintained our gross profit margins in the 34.0% to 36.8% range and increased our operating income margin from 9.5% in 1995 to 13.0% in 1999. GROWTH STRATEGY The primary factors contributing to our net sales growth have been new store openings, comparable store net sales increases and mergers and acquisitions. From 1995 to 1999, net sales increased at a compound annual growth rate of 32.5% and operating income, excluding merger related items, increased at a compound annual growth rate of 43.4%. We expect that future sales growth will come primarily from new store openings and, to a lesser degree, from comparable store net sales increases, including those attributable to expanded and relocated stores. We anticipate expanding by approximately 220 to 230 stores in 2000 and 260 to 280 in 2001. Our store openings will continue to be concentrated within our existing eastern markets to take advantage of market opportunities, distribution efficiencies and field management efficiencies in that geographic area. A portion of our store openings in 2000 and 2001 are expected to occur in the western United States and we also plan to enter selected new geographic markets. We plan to increase our store expansion and relocation program to increase sales per store and take advantage of market opportunities. In 1999, we expanded or relocated 63 stores. In each of 2000 and 2001, we plan to expand or relocate approximately 100 stores. We target stores for expansion and relocation based on the current sales per square foot and changes in market opportunities. In the past five years, we have completed three large mergers, one large acquisition and a number of smaller acquisitions, adding a total of 371 stores. Our acquisition strategy has been to target companies with a similar single price point concept that have shown success in operations or provide a strategic advantage. We look for opportunities to improve the acquired company by using our expertise in merchandise procurement, logistics, management information systems and growth management. Reviewing the operating strategies of acquired companies has also enabled us to improve our own operations. Although we do not have any current plans regarding potential acquisitions, we will continue to evaluate opportunities in our retail sector as they become available. During the past five years, we believe we have made appropriate investments while containing costs and improving operating margins. We will make future investments to improve our supply chain and decision making processes in an effort to improve our performance. SITE SELECTION AND STORE SIZE We maintain a disciplined, cost-sensitive approach to store site selection, favoring strip shopping centers and selected enclosed malls. Since 1995, we have opened stores primarily in strip shopping centers. These stores typically require lower initial capital investments and generate higher operating margins than mall stores. Our stores have been successful in metropolitan areas, mid-sized cities and small towns. We believe that our stores have a relatively small shopping radius, which allows us to concentrate multiple stores in a single market profitably. Our ability to open new stores is dependent upon, among other factors, locating suitable sites and negotiating favorable lease terms. We operate stores primarily ranging from 3,500 to 6,000 gross square feet. We are concentrating on opening larger stores, generally ranging from 7,000 to 12,000 gross square feet. Approximately 18% of our store base as of June 30, 2000, is greater than 7,000 gross square feet per store. We expect to open 105 to 115 of these larger stores during 2000 and 170 to 180 of these larger stores during 2001. The range of our store size allows us to target a particular location with the store size that best suits that market. We view the development of these larger stores as a continuation of our core business. 28 We currently lease our existing stores and expect this policy to continue as we expand. Our leases typically provide for a short initial lease term and give us the option to extend. We believe that this leasing strategy enhances our flexibility to pursue various expansion and relocation opportunities resulting from changing market conditions. As current leases expire, we believe that we 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, we have not experienced difficulty in either renewing leases for existing locations or securing leases for suitable locations for new stores. Many of our leases contain provisions with which we do not comply, including provisions requiring us to advertise or insure store property, prohibiting us from operating another store within a specified radius and restricting the sale of leasehold improvements. We believe that the violation of these provisions will not have a material adverse effect on our business or financial position because we generally maintain good relations with our landlords and are a valued tenant. Most of our leases are at market rents, and we have historically been able to secure leases for suitable locations. MERCHANDISING AND STORE FORMAT MERCHANDISE MIX. Our stores offer a wide selection of core and changing products within traditional variety store categories, including housewares, candy and food, seasonal goods, health and beauty care, toys, party goods, gifts, stationery and other consumer items. The actual items and brands offered at any one time will vary. We have a core selection of consumable products such as household chemicals, paper and plastics, candy and food, and health and beauty care products which we target to have in stock at our stores continuously. These products are generally available year-round in our distribution facilities for stores to reorder as needed. Our larger stores carry a greater variety and quantity of consumable products than our smaller stores, particularly food, household chemicals and health and beauty care products. We sell seasonal and impulse items and selected closeout merchandise to add variety and freshness to our core products and create an exciting shopping experience. Examples of seasonal goods include Easter gifts, summer toys and Halloween and Christmas decorations. We also offer name-brand closeout merchandise to supplement our merchandise mix. In 1999, closeout merchandise represented less than 15% of our purchases. We also sell private label and regional brand goods which we believe are comparable in quality but priced lower than similar goods with national name brands. Almost all of our goods are sold at retail, although a very small portion is sold to wholesalers. PURCHASING. We believe that our substantial buying power at the $1.00 price point contributes to our successful purchasing strategy. At the same time, we establish disciplined, targeted merchandise margin goals. We purchase merchandise from manufacturers, trading companies and brokers. No vendor accounted for more than 10% of total merchandise purchased in any of the last five years or the three months ending March 31, 2000. We frequently use new vendors to offer competitive, yet varied, product selection and high value. We buy products on an order-by-order basis and have no long-term purchase contracts or other assurances of continued product supply or guaranteed product cost. Our purchasing strategy balances imported merchandise and domestic products. We believe imported merchandise and domestic products each currently account for approximately one-half of our purchases. Our domestic products include name-brand merchandise from manufacturers like Hershey's and Procter & Gamble and a variety of consumable products, housewares and paper and plastic goods. Our domestic purchasing program has evolved over the past few years to include direct relationships with major manufacturers such as Colgate and Unilever. Merchandise imported directly from overseas manufacturers and agents accounts for approximately 40% to 45% 29 of total purchases at retail. In addition, we believe that a small portion of the goods we purchase from domestic vendors is imported. While we do not expect to increase imports significantly as a percentage of our merchandise, our future success depends on the continuing availability of imported merchandise at favorable costs. VISUAL MERCHANDISING. The presentation and display of merchandise in our stores is critical to communicating value to our customers and creating a more exciting shopping experience. Our stores are attractively designed and create an inviting atmosphere for shoppers by using bright lighting, vibrant colors, uniform decorative signs, carpeting and background music. Our merchandise fixtures include gondola shelving, slat walls, bins and adjustable gift displays, allowing us the flexibility to rearrange merchandise to feature seasonal products. Some of these fixtures have been specifically designed for us, such as a customized shelf display promoting our polyresin and porcelain gift products. Our field merchandising group, including regional merchandise managers and store display coordinators, maintains a consistent visual presentation of merchandise throughout our stores. We believe that our approach to visual merchandising results in high store traffic, high sales volume and an environment which encourages impulse purchases. We rely on attractive exterior signs and in-store merchandising for our advertising. We generally do not use other forms of advertising, except when promoting the opening of a new store. During 1999, we converted our 98 Cent Clearance Center stores to more closely resemble existing Dollar Tree stores, including changing each store name to Dollar Tree. During the first quarter of 2000, we converted most of the 24 Only $One stores added in 1999. These conversions included installing new checkouts and display fixtures and improving store layouts and merchandise displays at all Only $One stores and changing the name from Only $One to Dollar Tree at select stores. During 2000 and through the second quarter of 2001, we expect to upgrade some of the Dollar Express stores by installing new checkouts, adding display fixtures and improving store layouts and merchandise displays. We currently plan to continue to operate these stores under the Dollar Express name. MERCHANDISE RECEIVING AND DISTRIBUTION Merchandise receiving and distribution are managed centrally from our corporate headquarters, located on the same site as our Chesapeake, Virginia distribution center. Maintaining a strong receiving and distribution system is critical to our expansion and ability to maintain a low cost operating structure. Substantially all of our inventory is shipped or picked up directly from suppliers and delivered to our distribution centers, where the inventory is processed and then distributed to our stores. The majority of our inventory is delivered to the stores by contract carriers. We also make deliveries to some of our stores using our fleet of trucks. Most stores receive weekly shipments of merchandise from distribution centers based on their anticipated inventory requirements for that week. We also make more frequent deliveries to some stores, including most Dollar Express stores. Many of our Dollar Tree stores require more frequent deliveries during the busy Christmas season. 30 The following table includes information about the distribution centers that we currently operate. We believe our operational distribution centers can support a total of approximately $1.8 billion in annual retail sales.
DISTRIBUTION CENTERS -------------------- SIZE IN LOCATION OWN/LEASE LEASE EXPIRES SQUARE FEET - -------- ----------- ------------- ------------ Chesapeake, Virginia........................ Own N/A 400,000 Olive Branch, Mississippi................... Own N/A 425,000 Chicago, Illinois area...................... Lease June 2005, with options 250,000 to renew Stockton, California........................ Lease June 2004 317,000 Philadelphia, Pennsylvania.................. Lease December 2002 200,000
In addition, during the past several years we have used off-site facilities to accommodate large quantities of seasonal merchandise. The Philadelphia distribution center is situated near our 83,000 square foot office and warehouse facility, the lease for which expires in April 2001. We have leased a 600,000 square foot distribution center being constructed in Savannah, Georgia and expect to lease a 600,000 square foot distribution center to be constructed in the Northeast. We believe that when these new facilities are fully operational, our distribution centers will support annual sales up to $2.9 billion. We expect the Savannah distribution center to be operational in the first quarter of 2001, and its lease expires in January 2005 with options to renew. We expect the Northeast distribution center to be operational in early 2002. The Chesapeake and Olive Branch distribution centers contain, and the Savannah and Northeast distribution centers will contain, advanced materials handling technologies, including an automated conveyor and sorting system, radio-frequency inventory tracking equipment and specialized information systems. The Chicago, Stockton and Philadelphia distribution centers are not automated, but the Stockton distribution center is designed to allow for future automation. INVENTORY SUPPLY CHAIN To support our business goals, we evaluated our inventory supply chain processes to identify potential improvements. As a result, we initiated a supply chain management project that encompasses four major components: - planning for our merchandise purchasing; - purchasing core merchandise and allocating the shipment of that merchandise throughout our distribution and retail network; - obtaining current and detailed sales information from a group of representative stores using a point-of-sale system; and - improving our ability to keep select merchandise in stock. We believe the implementation of this project will improve the efficiency of our supply chain management, improve our merchandise flow and help control costs. Within the next year, we expect to implement new supply chain systems and test our new point-of-sale equipment in approximately ten stores. In 2001, we expect to begin installing 31 point-of-sale registers in up to 500 of our stores. We expect that the point-of-sale data will allow us to track sales by merchandise category and geographic region and assist our planning for future purchases of inventory. Our supply chain management project is expected to cost approximately $23.0 to $26.0 million over the next two years. TRADEMARKS We are the owners of federal service mark registrations for "Dollar Tree," the "Dollar Tree" logo, "1 Dollar Tree" together with the related design, and "One Price...One Dollar." A small number of our stores operate under the name "Only One Dollar," for which we have not obtained a service mark registration. We also own a concurrent use registration for "Dollar Bill$" and the related logo. During 1997, we acquired the rights to use trade names previously owned by Everything's A Dollar, a former competitor in the $1.00 price point industry. Several trade names were included in the purchase, including the marks "Everything's $1.00 We Mean Everything," "Everything's $1.00," the registration of which is pending, and "The Dollar Store." With the acquisition of the Only $One stores in 1999, we became the owner of additional federal service mark registrations, including "Only One $1," and the stylized "Only $One," together with the related design. We also occasionally market products under various private labels but these brand names are not material to our operations. With the acquisition of Dollar Express, we became the owner of the service marks "Dollar Express" and "Dollar Expres$." EMPLOYEES We employed approximately 6,000 full-time and 11,000 part-time associates on June 30, 2000. The number of part-time associates fluctuates depending on seasonal needs. None of our associates are represented by a labor union except the truck drivers for the Philadelphia distribution center. The Teamsters have attempted to organize our associates at our Chesapeake, Chicago and Philadelphia distribution centers on several occasions, and we expect their efforts to continue. We consider our relationship with our associates to be good, and we have not experienced significant interruptions of operations due to labor disagreements. LEGAL PROCEEDINGS We are defendants in ordinary routine litigation and proceedings incidental to our business. From time to time, the Consumer Products Safety Commission requires us to recall products. We are currently in the process of recalling one product. On several occasions, products we sold have been alleged to cause injuries, but there are no pending or threatened injury claims. Some products we sold have also been alleged to infringe the intellectual property rights of others. We are currently defending a claim by a party who has alleged that products we sold violated its intellectual property rights. We do not believe that any of these matters are individually or in the aggregate material to us. 32 MANAGEMENT DIRECTORS, EXECUTIVE OFFICERS AND CERTAIN KEY PERSONNEL The following table sets forth certain information with respect to our directors, executive officers and certain key personnel:
DIRECTORS AND EXECUTIVE OFFICERS AGE OFFICE - -------------------------------- -------- ------ Macon F. Brock, Jr....................... 58 President and Chief Executive Officer; Director J. Douglas Perry......................... 52 Chairman of the Board; Director H. Ray Compton........................... 57 Executive Vice President; Director John F. Megrue........................... 42 Vice Chairman of the Board; Director Frederick C. Coble....................... 39 Senior Vice President, Chief Financial Officer Bob Sasser............................... 48 Chief Operating Officer Frank Doczi.............................. 62 Director Richard G. Lesser........................ 65 Director Thomas A. Saunders, III.................. 64 Director Alan L. Wurtzel.......................... 66 Director CERTAIN KEY PERSONNEL K. Bryan Bagwell......................... 40 Senior Vice President, Merchandise Thomas J. Bowyer......................... 41 Senior Vice President, Sales and Operations G. Zeb Holt.............................. 51 Senior Vice President, Administration Stephen W. White......................... 45 Senior Vice President, Logistics James E. Fothergill...................... 48 Vice President, Human Resources Robert G. Gurnee......................... 40 Vice President, Real Estate Darcel L. Stephan........................ 43 Vice President, Information Systems
DIRECTORS AND EXECUTIVE OFFICERS MACON F. BROCK, JR. has been our Chief Executive Officer since 1993 and a Director and President since 1986 when he founded Dollar Tree with Mr. Perry and Mr. Compton. He also serves on the Board of Directors for First Union National Bank of Virginia / Maryland / Washington, D.C. Mr. Brock directs the overall operations of Dollar Tree, which include purchasing, merchandising, logistics, distribution and store operations. J. DOUGLAS PERRY has been a Director and Chairman of the Board since 1986 when he founded Dollar Tree with Mr. Brock and Mr. Compton. Mr. Perry retired as an employee and officer of the company as of March 1, 1999. However, he continues his active role as Chairman and Director. He also serves on the Board of Directors of Old Dominion Trust Company. H. RAY COMPTON has been a Director and Executive Vice President since 1986 when he founded Dollar Tree with Mr. Perry and Mr. Brock. From 1986 until April 1998, he served as Chief Financial Officer. In 1999, Mr. Compton reduced his work hours and direct supervisory responsibilities, although he is still very involved in important decisions and special projects. He also serves on the Board of Directors of Hibbett Sporting Goods, Inc. JOHN F. MEGRUE has been a Director and Vice Chairman of the Board since September 1993. He also serves as Chairman of the Board and a director of Hibbett Sporting Goods, Inc. and a director of The Children's Place Retail Stores, Inc. Mr. Megrue has been a partner of SKM Partners, L.P. from 1992 to 1998 and a partner of the general partner of SKM Partners, L.P. since 1998. SKM Partners, L.P. serves as the general partner of Saunders Karp & Megrue and The SK Equity Fund. 33 FREDERICK C. COBLE became Senior Vice President, Chief Financial Officer in April 1998. He served as Senior Vice President, Finance from January 1997 to March 1998 and as Vice President, Controller from December 1991 through December 1996. From December 1989 through November 1991, Mr. Coble served as Controller. Before joining Dollar Tree in December 1989, Mr. Coble served as Internal Audit Manager with Royster Company, a manufacturing company, and as Audit Manager for KPMG LLP. BOB SASSER became Chief Operating Officer in April 1999. From December 1996 to April 1999, Mr. Sasser served as Senior Vice President, Merchandise and Marketing of Roses Stores, Inc. From March 1994 through November 1996, he was Vice President, General Merchandise Manager for Michael's Stores, Inc. FRANK DOCZI has been a Director since May 1995. He served as the President and Chief Executive Officer of Home Quarters Warehouse, Inc., a subsidiary of Hechinger Company, from 1988 until 1995. He also served as a member of the Management Committee for the Hechinger Company. RICHARD G. LESSER has been a Director since June 1999. Mr. Lesser has been President of The Marmaxx Group, which operates the T.J. Maxx and Marshalls discount retail chains, since 1995, Chief Operating Officer of the TJX Companies, Inc. since 1994 and Executive Vice President of The TJX Companies, Inc. since 1991. He serves on the Boards of Directors for The TJX Companies, Inc., Reebok International Ltd. and A.C. Moore Arts & Crafts, Inc. THOMAS A. SAUNDERS, III, has been a Director since September 1993. He also serves on the Board of Directors of Hibbett Sporting Goods, Inc. Mr. Saunders has been a partner of SKM Partners, L.P. from 1992 to 1998 and a partner of the general partner of SKM Partners, L.P. since 1998. SKM Partners, L.P. serves as the general partner of Saunders Karp & Megrue and The SK Equity Fund. Mr. Saunders is a Vice President of the Board of Visitors of the Virginia Military Institute. He also served as the Chairman of the Board of Trustees of the University of Virginia's Darden Graduate School of Business Administration. Mr. Saunders is Vice Chairman and a Trustee of The Thomas Jefferson Memorial Foundation (Monticello). ALAN L. WURTZEL has been a Director since April 1995. Mr. Wurtzel has served as the Vice Chairman of the Board of Circuit City Stores, Inc. since 1994. From 1986 to 1994, he served as Chairman of the Board of Circuit City and was also its Chief Executive Officer from 1973 to 1986. From December 1986 to April 1988, he served as President of Operation Independence, a nonprofit organization. Mr. Wurtzel was a director of Office Depot, Inc. from 1989 to 1996. Mr. Brock is married to Mr. Perry's sister. There are no additional family relationships among the Directors and executive officers. OTHER KEY PERSONNEL K. BRYAN BAGWELL became Senior Vice President, Merchandise in November 1998. Mr. Bagwell served as Vice President, Merchandise from September 1993 to November 1998, Merchandise Manager from March 1993 to September 1993 and as a buyer from October 1991 to March 1993. THOMAS J. BOWYER became Senior Vice President, Sales and Operations in January 1995. He served as Vice President, Sales and Operations from July 1991 to January 1995 and as Director of Sales and Operations from August 1989 to July 1991. G. ZEB HOLT became Senior Vice President, Administration in April 1999. He served as Vice President, Corporate Development from February 1998 to April 1999. From 1979 until joining Dollar Tree, he was with Signet Banking Corporation and served as Executive Vice President from 1989 to 1997. 34 STEPHEN W. WHITE became Senior Vice President, Logistics in August 1999. He served as Vice President, Logistics from December 1995 to August 1999 and as Director of Transportation and Distribution from June 1994 to December 1995. From July 1986 until joining Dollar Tree, he served as Director of Transportation and Distribution Planning for Ames Department Stores. JAMES E. FOTHERGILL became Vice President, Human Resources upon joining Dollar Tree in March 2000. Before that he served as Senior Vice President of Human Resources for Grey Advertising from March 1999 to March 2000. From February 1986 to March 1999, he served in various capacities at Caldor Corporation, including Senior Vice President of Human Resources. ROBERT G. GURNEE became Vice President, Real Estate in November 1997. He served as Director of Real Estate from July 1995 to November 1997 and as Director of Budgeting and Analysis from January 1994 to July 1995. DARCEL L. STEPHAN became Vice President, Information Systems in September 1989. She served as Data Processing Director from February 1987 to September 1989. 35 PRINCIPAL AND SELLING SHAREHOLDERS The following table shows the beneficial ownership of our common stock as of July 10, 2000, both before and after giving effect to this offering, together with shares to be sold in the offering by: - each of our executive officers and directors, individually and as a group; - each other person known to us to own beneficially more than 5% of our outstanding shares; and - each other selling shareholder. Percentage ownership in the table is based on 102,985,181 shares of common stock outstanding as of July 10, 2000 and gives effect to the exercise of warrants for the purchase of 4,252,152 of the shares of common stock included in this offering. The underwriters will purchase the warrants from some of the selling shareholders, exercise the warrants and sell the shares obtained upon exercise in this offering. Beneficial ownership is determined in accordance with the rules of the Securities and Exchange Commission. Shares of common stock subject to options or warrants that are presently exercisable or exercisable within 60 days of July 10, 2000 are deemed outstanding for the purpose of computing the percentage ownership of the person or entity holding the options or warrants, but are not treated as outstanding for the purpose of computing the percentage ownership of any other person or entity. The address of each of our directors and executive officers is c/o Dollar Tree Stores, Inc., 500 Volvo Parkway, Chesapeake, Virginia 23320.
BENEFICIAL OWNERSHIP BENEFICIAL OWNERSHIP BEFORE OFFERING(1) AFTER OFFERING(1) ----------------------------------- SHARES ----------------------------------- SHARES PERCENT OFFERED(2) SHARES PERCENT ------------------- ------------- ------------------ ------------------- ------------- DIRECTORS AND EXECUTIVE OFFICERS J. Douglas Perry................. 6,108,154(3) 5.8% 382,630 3,991,558 3.6% Macon F. Brock, Jr............... 5,824,639(4) 5.6 -- 5,259,799 4.8% H. Ray Compton................... 90,310(5) * 30,311 59,999 * John F. Megrue................... 10,465,867(6) 9.8 -- 5,719,066 5.3 Thomas A. Saunders, III.......... 10,612,122(7) 9.9 -- 5,872,151 5.5 Alan L. Wurtzel.................. 105,469(8) * -- 105,469 * Frank Doczi...................... 118,969(9) * -- 118,969 * Richard G. Lesser................ 37,969(10) * -- 37,969 * Frederick C. Coble............... 228,076(11) * -- 228,076 * Bob Sasser....................... 120,000(12) * -- 120,000 * All current Directors and Named Officers (10 persons).......... 23,287,549 20.9 412,941 15,829,001 14.2 OTHER 5% SHAREHOLDERS Putnam Investments, Inc.......... 12,399,308(13) 12.0 -- 12,399,308 11.5 One Post Office Square Boston, MA 02109 Baron Capital Group, Inc......... 6,387,336(14) 6.2 -- 6,387,336 5.9 767 Fifth Avenue, 24th Floor New York, NY 10153 The SK Equity Fund, L.P.......... 10,448,495(15) 9.8 4,739,971 5,708,524 5.3 262 Harbor Drive Stamford, CT 06902
36
BENEFICIAL OWNERSHIP BENEFICIAL OWNERSHIP BEFORE OFFERING(1) AFTER OFFERING(1) ----------------------------------- SHARES ----------------------------------- SHARES PERCENT OFFERED(2) SHARES PERCENT ------------------- ------------- ------------------ ------------------- ------------- OTHER SELLING SHAREHOLDERS Joan P. Brock.................... 2,633,889(16) 2.6% 840,992 1,698,729 1.6% Patricia W. Perry................ 564,304(17) * 383,404 155,900 * Jean T. Compton.................. 168,022(18) * 114,686 53,336 * Macon F. Brock & Robert C. 564,840 * 564,840 -- -- Miller,........................ Trustees of the Brock 1997 Grantor Retained Annuity Trust Joan P. Brock & Robert C. 106,525 * 94,168 12,357 * Miller,........................ Trustees of the Brock 1999 Grantor Retained Annuity Trust J. Douglas Perry & Robert C. 1,683,966 1.6 1,683,966 -- -- Miller,........................ Trustees of the Patricia W. Perry Grantor Retained Annuity Trust James P. Compton,................ 418,872(19) * 70,314 348,558 * Trustee of the Brymar Descendants Trust James P. Compton,................ 30,000 * 30,000 -- -- Trustee of the Bryan Compton Trust James P. Compton,................ 30,000 * 30,000 -- -- Trustee of the Mark Alan Compton Trust Allan W. Karp.................... 10,465,872(20) 9.8 6,832 5,719,069 5.3 Christopher K. Reilly............ 10,451,961(21) 9.8 1,365 5,710,625 5.3 Melanie K. Berman,............... 8,686(22) * 3,415 5,271 * Custodian for Kyle Galbreath Megrue Melanie K. Berman,............... 8,686(23) * 3,415 5,271 * Custodian for Christopher Galbreath Megrue Bernard Spain.................... 2,512,558(24) 2.4 1,413,841 1,098,980 1.0 Murray Spain..................... 2,823,805(25) 2.7 1,404,681 1,232,948 1.1 Bernard Spain Family Limited 330,826(26) * 186,159 144,404 * Partnership.................... Murray Spain Family Limited 346,646(27) * 195,319 151,081 * Partnership.................... Global Private Equity III Limited 2,495,770(28) 2.4 2,256,805 238,965 * Partnership.................... Advent PGGM Global Limited 382,446(29) * 345,828 36,618 * Partnership.................... Advent Partners GPE III Limited 37,683(30) * 34,075 3,608 * Partnership.................... Advent Partners Limited 16,380(31) * 14,812 1,568 * Partnership.................... Advent Partners (NA) GPE III 11,146(32) * 10,079 1,067 * Limited Partnership............ Guayacan Private Equity Fund 88,466(33) * 79,996 8,470 * Limited Partnership............ Dollar Express Investment LLC.... 64,591(34) * 58,407 6,184 * The Patricia & Douglas Perry 180,900(35) * 50,000 130,900 * Foundation.....................
- ------------------------------ * Less than 1%. (footnotes on following page) 37 (1) Includes an aggregate of 8,377,340 shares issuable upon the exercise of outstanding warrants, referred to as warrant shares, and an aggregate of 438,597 shares subject to the escrow described in note (2), referred to as escrow shares. (2) Includes 4,252,152 warrant shares included in this offering. This table assumes no exercise of the underwriters' over-allotment option to purchase up to 2,250,000 shares of common stock. If the underwriters exercise this option in whole, the selling shareholders will sell additional shares in the following respective amounts: Macon F. Brock, 525,000; Allan W. Karp, 1,185; Melanie K. Berman, Custodian for Kyle Galbreath Megrue, 593; Melanie K. Berman, Custodian for Christopher Galbreath Megrue, 593; Christopher K. Reilly, 236; The SK Equity Fund, L.P., 822,395; Bernard Spain, 266,650; Bernard Spain Family Limited Partnership, 35,109; Murray Spain, 264,922; Murray Spain Family Limited Partnership, 36,837; Global Private Equity III Limited Partnership, 238,965; Advent PGGM Global Limited Partnership, 36,618; Advent Partners GPE III Limited Partnership, 3,608; Advent Partners Limited Partnership, 1,568; Advent Partners (NA) GPE III Limited Partnership, 1,067; Guayacan Private Equity Fund Limited Partnership, 8,470; Dollar Express Investment LLC, 6,184. Of these, 438,597 shares are held of record by State Street Bank & Trust Company. Other shareholders have the ability to vote and direct the disposition of the escrow shares, and State Street Bank & Trust Company disclaims beneficial ownership of such shares. If the underwriters exercise their entire over-allotment option, State Street Bank & Trust Company will transfer for sale up to an aggregate of 438,597 shares, allocated in the following amounts to the respective shareholders: Bernard Spain, 125,427; Bernard Spain Family Limited Partnership, 16,542; Murray Spain, 124,472; Murray Spain Family Limited Partnership, 17,332; Global Private Equity III Limited Partnership, 124,788; Advent PGGM Global Limited Partnership, 19,122; Advent Partners GPE III Limited Partnership, 1,884; Advent Partners Limited Partnership, 819; Advent Partners (NA) GPE III Limited Partnership, 558; Guayacan Private Equity Fund Limited Partnership, 4,424; Dollar Express Investment LLC, 3,229. A partial exercise of the over-allotment option would reduce these amounts proportionally. However, the proceeds from the sale of these shares will remain in escrow until the escrow terminates pursuant to the terms of the escrow agreement with Dollar Tree Stores. See notes (24)-(34). A partial exercise of the over-allotment option would reduce these amounts proportionally. (3) Includes 1,683,966 shares and 1,884,889 warrant shares owned by trusts for the benefit of Perry family members, of which Mr. Perry is a trustee, and 180,900 shares owned by a private foundation over which Mr. Perry and his wife, Patricia W. Perry, exercise shared control, but excludes 383,404 shares owned by Patricia W. Perry. (4) Includes 949,475 shares and 1,884,889 warrant shares owned by trusts for the benefit of Brock family members, of which Mr. Brock is a trustee, and 184,775 shares owned by a private foundation over which Macon and Joan Brock exercise shared control, but excludes 2,449,114 shares beneficially owned by Mr. Brock's wife, Joan P. Brock. (5) Includes 83,647 shares owned as a joint tenant with Mr. Compton's wife, Jean T. Compton, but excludes 60,000 shares and 418,872 warrant shares owned by a trust for the benefit of Compton family members, of which Mr. Compton's brother is a trustee and also excludes 84,375 shares owned by Mrs. Compton. (6) Represents 10,542 shares and 6,830 warrant shares owned by Mr. Megrue's sister as custodian for his children. Also includes 6,281,684 shares and 4,166,811 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) Represents 10,545 shares and 6,832 warrant shares owned by an irrevocable trust for the benefit of Saunders family members, of which Mr. Saunders is a trustee. Also includes 6,281,684 shares and 4,166,811 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. (8) Includes 24,469 shares held in a revocable trust of which Mr. Wurtzel is a trustee and 81,000 shares issuable upon exercise of stock options granted to Mr. Wurtzel pursuant to the Dollar Tree Stores, Inc. Stock Incentive Plan. (9) Includes 118,969 shares issuable upon exercise of stock options granted to Mr. Doczi pursuant to the Dollar Tree Stores, Inc. Stock Incentive Plan. (10) Includes 37,969 shares issuable upon exercise of stock options granted to Mr. Lesser pursuant to the Dollar Tree Stores, Inc. Stock Incentive Plan. (11) Includes 165,782 shares issuable upon exercise of stock options granted to Mr. Coble pursuant to the Dollar Tree Stores, Inc. Stock Incentive Plan. (12) Represents 120,000 shares issuable upon exercise of stock options granted to Mr. Sasser pursuant to the Dollar Tree Stores, Inc. Stock Incentive Plan. (13) Includes shares held or controlled by Putnam Investments, Inc. and its affiliates including Marsh & McLennan Companies, Inc., Putnam Investments parent holding company, and Putnam Investment Management, Inc. and The Putnam Advisory Company, Inc., investment advisors and subsidiaries of Putnam Investments, Inc. Derived from a Schedule 13G/A filed by Putnam Investments on February 9, 1999. (14) Includes shares held or controlled by Baron Capital Group, Inc., a parent holding company, and its affiliates including BAMCO, Inc. and Baron Capital Management, Inc., registered investment advisors, and Baron Asset Fund, a registered investment company. Ronald Baron owns a controlling interest in Baron Capital Management, Inc. Derived from a Schedule 13G/A filed by Baron Capital Management on February 14, 2000. (15) Includes 4,166,811 warrant shares. Messrs. Megrue, Saunders, Karp and Reilly as general partners of the general partner of The SK Equity Fund, L.P., may be deemed to have beneficial ownership of shares held by The SK Equity Fund, L.P. and the shares and warrant shares held by The SK Equity Fund, L.P. have been attributed to them in this table. 38 (16) Includes 184,775 shares owned by a private foundation over which Macon and Joan Brock exercise shared control, but does not include 949,475 shares and 1,884,899 warrant shares beneficially owned by Mrs. Brock's husband, Macon F. Brock, Jr. (17) Includes 180,900 shares owned by a private foundation over which Mrs. Perry and her husband, J. Douglas Perry, exercise shared control but does not include 1,864,866 shares and 1,884,899 warrant shares beneficially owned by J. Douglas Perry. (18) Includes 83,647 shares owned as a joint tenant with Mrs. Compton's husband, H. Ray Compton, but does not include 6,663 shares owned by H. Ray Compton nor 60,000 shares and 418,872 warrant shares beneficially owned by Mr. Compton's brother. (19) Includes 418,872 warrant shares. (20) Includes 6,281,684 shares and 4,166,811 warrant shares owned by The SK Equity Fund, L.P., and 6,832 warrant shares owned by Mr. Karp. Mr. Karp is a general partner of the general partner of The SK Equity Fund, L.P. (21) Includes 6,281,684 shares and 4,166,811 warrant shares owned by The SK Equity Fund, L.P., and 1,365 warrant shares owned by Mr. Reilly. Mr. Reilly is a general partner of the general partner of The SK Equity Fund, L.P. (22) Includes 3,415 warrant shares. (23) Includes 3,415 warrant shares. (24) Includes 125,427 shares, referred to as escrow shares, contributed on behalf of Mr. Spain to State Street Bank & Trust Company as escrow agent under an escrow agreement with Dollar Tree Stores. See note (35). (25) Includes 124,472 escrow shares. See note (35). Also includes 330,826 shares beneficially owned by Bernard Spain Family Limited Partnership of which Mr. Murray Spain is a general partner and of which Mr. Spain disclaims beneficial ownership. (26) Includes 16,542 escrow shares. See note (35). This shareholder is a family limited partnership of which Mr. Murray Spain is a general partner. Mr. Spain disclaims beneficial ownership of any shares held by this shareholder. (27) Includes 17,332 escrow shares. See note (35). This shareholder is a family limited partnership of which Mr. Stephen Greenfield is a general partner. Mr. Greenfield disclaims beneficial ownership of any shares held by this shareholder. (28) Includes 124,788 escrow shares. See note (35). This shareholder is a limited partnership the general partner of which is Advent International Corporation, which may be deemed to beneficially own the shares held of record by this shareholder. (29) Includes 19,122 escrow shares. See note (35). This shareholder is a limited partnership the general partner of which is Advent International Corporation, which may be deemed to beneficially own the shares held of record by this shareholder. (30) Includes 1,884 escrow shares. See note (35). This shareholder is a limited partnership the general partner of which is Advent International Corporation, which may be deemed to beneficially own the shares held of record by this shareholder. (31) Includes 819 escrow shares. See note (35). This shareholder is a limited partnership the general partner of which is Advent International Corporation, which may be deemed to beneficially own the shares held of record by this shareholder. (32) Includes 558 escrow shares. See note (35). This shareholder is a limited partnership the general partner of which is Advent International Corporation, which may be deemed to beneficially own the shares held of record by this shareholder. (33) Includes 4,424 escrow shares. See note (35). This shareholder is a limited partnership the general partner of which is Advent-Morro Equity Partners, which may be deemed to beneficially own the shares held of record by this shareholder. (34) Includes 3,229 escrow shares. See note (35). (35) J. Douglas Perry and Patricia W. Perry, together with other members of their family, jointly control this foundation. The Perrys disclaim beneficial ownership of these shares. 39 UNDERWRITING We, the selling shareholders and the underwriters for the offering named below have entered into an underwriting agreement with respect to the shares being offered. Subject to certain conditions, each underwriter has severally agreed to purchase the shares together with warrants to purchase shares in the respective amounts indicated in the following table. Goldman, Sachs & Co., Banc of America Securities LLC, Salomon Smith Barney Inc., Deutsche Bank Securities Inc., First Union Securities, Inc. and U.S. Bancorp Piper Jaffray Inc. are the representatives of the underwriters.
UNDERWRITERS NUMBER OF SHARES - ------------ ------------------ Goldman, Sachs & Co. ....................................... Banc of America Securities LLC.............................. Salomon Smith Barney Inc. .................................. Deutsche Bank Securities Inc................................ First Union Securities, Inc................................. U.S. Bancorp Piper Jaffray Inc.............................. ---------- Total....................................................... 15,000,000 ==========
The underwriting agreement provides that the underwriters will purchase warrants for 4,252,152 shares, now held by some of the selling shareholders. All of these warrants will be purchased by the underwriters for a price per share equal to the total price to public shown on the cover page of this prospectus, less the total underwriting discounts and commissions per share shown on the cover page of this prospectus, less the exercise price per share of the warrants. The underwriters will exercise the warrants immediately upon the purchase of the warrants and pay us the exercise price in cash. The shares received by the underwriters upon exercise of the warrants will be sold in this offering. If the underwriters sell more shares than the total number set forth in the table above, the underwriters have an option to buy up to an additional 2,250,000 shares from the selling shareholders to cover such sales. They may exercise that option for 30 days. If any shares are purchased pursuant to this option, the underwriters will severally purchase shares in approximately the same proportion as set forth in the table above. The following table shows the per share and total underwriting discounts and commissions to be paid to the underwriters by the selling shareholders. Such amounts are shown assuming both no exercise and full exercise of the underwriters' over-allotment option.
PAID BY THE SELLING SHAREHOLDERS NO EXERCISE FULL EXERCISE - -------------------------------- ------------ ------------- Per Share................................................... $ $ Total....................................................... $ $
Shares sold by the underwriters to the public will initially be offered at the initial price to public set forth on the cover of this prospectus. Any shares sold by the underwriters to securities dealers may be sold at a discount of up to $ per share from the initial price to public. Any such securities dealers may resell any shares purchased from the underwriters to certain other brokers or dealers at a discount of up to $ per share from the initial price to public. If all the shares are not sold at the initial price to public, the representatives may change the offering price and the other selling terms. We and the selling shareholders have agreed with the underwriters not to dispose of or hedge any of our common stock or securities convertible into or exchangeable for shares of common 40 stock during the period from the date of this prospectus continuing through the date 90 days after the date of this prospectus, except with the prior written consent of Goldman, Sachs & Co. This agreement does not apply to any securities issued under any existing employee benefit plans. In connection with the offering, the underwriters may purchase and sell shares of common stock in the open market. These transactions may include short sales, stabilizing transactions and purchases to cover positions created by short sales. Short sales involve the sale by the underwriters of a greater number of shares than they are required to purchase in the offering. Covered short sales are sales made in an amount not greater than the underwriters' option to purchase additional shares from the selling shareholders in the offering. The underwriters may close out any covered short position by either exercising their option to purchase additional shares or purchasing shares in the open market. Naked short sales are any sales in excess of their option. The underwriters must close out any naked short position by purchasing shares in the open market. A naked short position is more likely to be created if the underwriters are concerned that there may be a downward pressure on the price of the common stock in the open market after pricing that could adversely affect investors who purchase in the offering. Stabilizing transactions consist of various bids for or purchases of common stock made by the underwriters in the open market prior to the completion of the offering. The underwriters may also impose a penalty bid. This occurs when a particular underwriter repays to the underwriters a portion of the underwriting discount received by it because the representatives have repurchased shares sold by or for the account of such underwriter in stabilizing or short covering transactions. Purchases to cover a short position and stabilizing transactions may have the effect of preventing or slowing a decline in the market price of our stock, and together with the imposition of the penalty bid, may stabilize, maintain or otherwise affect the market price of the common stock. As a result, the price of the common stock may be higher than the price that otherwise might exist in the open market. If these activities are commenced, they may be discontinued at any time. These transactions may be effected on the Nasdaq National Market, in the over-the-counter market or otherwise. We and the selling shareholders have agreed to indemnify the several underwriters against specified liabilities, including liabilities under the Securities Act of 1933. Certain of the underwriters and their affiliates have in the past provided, and may in the future from time to time provide, commercial or investment banking services to us, for which they have in the past received, and may in the future receive, customary fees. 41 LEGAL MATTERS The validity of the common stock offered by the selling shareholders and other legal matters in connection with this offering will be passed upon for us by Hofheimer Nusbaum, P.C., Norfolk, Virginia. Hale and Dorr LLP, Washington, D.C., is serving as counsel to the underwriters in connection with this offering. EXPERTS The consolidated financial statements and supplemental consolidated financial statements of Dollar Tree Stores, Inc. and subsidiaries as of December 31, 1999 and 1998 and for each of the years in the three-year period ended December 31, 1999 have been incorporated by reference in this prospectus and in the registration statement in reliance upon the reports of KPMG LLP, independent certified public accountants, incorporated by reference in this prospectus and upon the authority of said firm as experts in accounting and auditing. WHERE YOU CAN FIND MORE INFORMATION We file annual, quarterly and special reports, proxy statements and other information with the Securities and Exchange Commission. You may read and copy any document we file at the SEC's public reference rooms in Washington, D.C., New York, New York and Chicago, Illinois. Please call the SEC at 1-800-SEC-0330 for further information on the public reference rooms. Our SEC filings are also available to the public from our web site at http://www.dollartree.com or at the SEC's web site at http://www.sec.gov. Except for the SEC filings described below, the information contained on our website and in our promotional material is not incorporated into this prospectus, and you should not rely on that information. We have filed a registration statement and related exhibits with the SEC under the Securities Act. The registration statement contains additional information about us and our common stock. You may inspect the registration statement and exhibits without charge at the office of the SEC at 450 Fifth Street, N.W., Washington, D.C. 20549, and you may obtain copies from the SEC at prescribed rates. The SEC allows us to incorporate by reference the information we file with them, which means that we can disclose important information to you by referring you to those documents. The information incorporated by reference is considered to be part of this prospectus, and later information filed with the SEC will update and supersede this information. We incorporate by reference the documents listed below and any future filings made with the SEC under Section 13(a), 13(c), 14, or 15(d) of the Securities Exchange Act of 1934 until our offering is completed. - Our Annual Report on Form 10-K for the year ended December 31, 1999, filed March 17, 2000; - Our Quarterly Report on Form 10-Q for the quarter ended March 31, 2000, filed May 10, 2000; - Our Current Reports on Form 8-K filed on January 26, April 11, April 27, May 18, May 24, June 20, July 12 and July 20, 2000; and - The description of our common stock contained in its registration statement on Form 8-A filed February 28, 1995, including any amendments or reports filed for the purpose of updating such descriptions. You may request a copy of these filings, at no cost, by writing or telephoning us at the following address: Dollar Tree Stores, Inc. Shareholder Services 500 Volvo Parkway Chesapeake, Virginia 23320 (757) 321-5000 42 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- No dealer, salesperson or other person is authorized to give any information or to represent anything not contained in this prospectus. You must not rely on any unauthorized information or representations. This prospectus is an offer to sell only the shares offered hereby, but only under circumstances and in jurisdictions where it is lawful to do so. The information contained in this prospectus is current only as of its date. -------------- TABLE OF CONTENTS
Page -------- Prospectus Summary......................... 3 Risk Factors............................... 6 Warning about Forward-Looking Statements... 12 Use of Proceeds............................ 13 Price Range of Common Stock................ 13 Dividend Policy............................ 13 Selected Financial Data.................... 14 Management's Discussion and Analysis of Financial Condition and Results of Operations............................... 16 Business................................... 27 Management................................. 33 Principal and Selling Shareholders......... 36 Underwriting............................... 40 Legal Matters.............................. 42 Experts.................................... 42 Where You Can Find More Information........ 42
15,000,000 Shares DOLLAR TREE STORES, INC. Common Stock [LOGO] GOLDMAN, SACHS & CO. BANC OF AMERICA SECURITIES LLC ---------- SALOMON SMITH BARNEY DEUTSCHE BANC ALEX. BROWN FIRST UNION SECURITIES, INC. U.S. BANCORP PIPER JAFFRAY Representatives of the Underwriters , 2000 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 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......... $178,318 Printing expense............................................ 250,000 Accounting fees and expenses................................ 125,000 Legal fees and expenses..................................... 200,000 NASD filing fee............................................. 30,500 Miscellaneous............................................... 91,182 -------- Total..................................................... $875,000 ========
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS. To the full extent permitted by the Virginia Stock Corporation Act, the Articles of Incorporation require us to indemnify our 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 us 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. We are 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 us 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. We are authorized to purchase and maintain insurance against our indemnification obligation, or insure any person who is or was our director, officer, employee, or agent against any liability asserted against or incurred by him in any such capacity or arising from his status as such, whether or not we have the power to indemnify him against such liability. We have directors and officers liability insurance. We are 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, we are 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 our directors, officers and controlling persons against certain liabilities, including liabilities under the Securities Act of 1933, as amended (the Securities Act), under certain circumstances. II-1 ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULE (a) Exhibits 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. (incorporated by reference from our Registration Statement on Form S-1, No. 33-88502) 2.2 -- Amended and Restated Stockholders Agreement effective March 13, 1995 among the Company, John F. Megrue, Thomas A. Saunders, III, and certain shareholders and First Amendment thereto (incorporated by reference to our Quarterly Report on Form 10-Q for the quarter ended March 31, 1995) 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 (incorporated by reference(a) from our Registration Statement on Form S-1, No. 33-88502 and (b) from our Registration Statement on Form S-3, No. 333-28599) 2.4 -- Merger Agreement by and among the Company, DT Keystone, Inc., Dollar Express, Inc. and Bernard Spain, Murray Spain, Bernard Spain Family Limited Partnership, Murray Spain Family Limited Partnership, Global Private Equity III Limited Partnership, Advent PGGM Global Limited Partnership, Advent Partners GPE III Limited Partnership, Advent Partners (NA) GPE III Limited Partnership, Advent Partners Limited Partnership, Guayacan Private Equity Fund Limited Partnership, and Dollar Express Investment, LLC Limited Partnership (collectively, the "Dollar Express Shareholders") dated April 5, 2000 (incorporated by reference from our Current Report on Form 8-K, filed April 11, 2000) 2.5 -- Registration Rights Agreement dated April 5, 2000 by and among the Company and the Dollar Express Shareholders (incorporated by reference from our Current Report on Form 8-K dated April 11, 2000) 2.6 -- Escrow Agreement dated May 5, 2000 by and among Dollar Tree Stores, Inc., State Street Bank & Trust, Bernard Spain, David Mussafer, and the holders named therein (incorporated by reference from our Current Report on Form 8-K, filed July 12, 2000) 4.1 -- Amended and Restated Stockholders Agreement (see Exhibit 2.2) 4.2 -- Third Restated Articles of Incorporation, as amended (incorporated by reference from our Quarterly Report on Form 10-Q for the fiscal quarter ended September 30, 1996) 4.3 -- Second Restated Bylaws (incorporated by reference from our Registration Statement on Form S-1, No. 33-88502) 4.4 -- Form of Specimen Certificate representing our common stock (incorporated by reference from our Registration Statement on Form S-1, No. 33-88502) 5.1 -- Opinion of Hofheimer Nusbaum, P.C., regarding the legality of the securities being registered *23.1 -- Consent of Hofheimer Nusbaum, P.C. 23.2 -- Consent of KPMG LLP, independent certified public accountants *24.1 -- Power of Attorney (included in Part II of the Registration Statement)
- ------------------------ * Previously filed. II-2 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 that is incorporated by reference in this registration statement shall be deemed to be a new registration statement relating to the securities offered herein, and the offering of such securities at that time shall be deemed to be the initial BONA FIDE offering thereof. Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the registrant pursuant to the provisions described in Item 15 above or otherwise, the registrant has been advised that in the opinion of the Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of our 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. 2 to the Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Chesapeake, Commonwealth of Virginia, on the 1st day of August, 2000. 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, AMENDMENT NO. 2 TO THIS REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE CAPACITIES AND ON THE DATES INDICATED. SIGNATURE TITLE DATE --------- ----- ---- * Chairman of the Board; - ------------------------------ Director August 1, 2000 J. Douglas Perry President and Chief /s/ MACON F. BROCK, JR. Executive Officer; - ------------------------------ Director (principal August 1, 2000 Macon F. Brock, Jr. executive officer) * Executive Vice President; - ------------------------------ Director August 1, 2000 H. Ray Compton Senior Vice * President--Chief - ------------------------------ Financial Officer August 1, 2000 Frederick C. Coble (principal financial and accounting officer) * Vice Chairman; Director - ------------------------------ August 1, 2000 John F. Megrue * Director - ------------------------------ August 1, 2000 Richard G. Lesser II-4 SIGNATURE TITLE DATE --------- ----- ---- * Director - ------------------------------ August 1, 2000 Thomas A. Saunders, III * Director - ------------------------------ August 1, 2000 Alan L. Wurtzel * Director - ------------------------------ August 1, 2000 Frank Doczi *By: /s/ MACON F. BROCK, JR. ------------------------------ Macon F. Brock, Jr. Attorney-In-Fact II-5 EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION - --------------------- ------------------------------------------------------------ 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. (incorporated by reference from our Registration Statement on Form S-1, No. 33-88502) 2.2 Amended and Restated Stockholders Agreement effective March 13, 1995 among the Company, John F. Megrue, Thomas A. Saunders, III, and certain shareholders and First Amendment thereto (incorporated by reference to our Quarterly Report on Form 10-Q for the quarter ended March 31, 1995) 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 (incorporated by reference(a) from our Registration Statement on Form S-1, No. 33-88502 and (b) from our Registration Statement on Form S-3, No. 333-28599) 2.4 Merger Agreement by and among the Company, DT Keystone, Inc., Dollar Express, Inc. and Bernard Spain, Murray Spain, Bernard Spain Family Limited Partnership, Murray Spain Family Limited Partnership, Global Private Equity III Limited Partnership, Advent PGGM Global Limited Partnership, Advent Partners GPE III Limited Partnership, Advent Partners (NA) GPE III Limited Partnership, Advent Partners Limited Partnership, Guayacan Private Equity Fund Limited Partnership, and Dollar Express Investment, LLC Limited Partnership (collectively, the "Dollar Express Shareholders") dated April 5, 2000 (incorporated by reference from our Current Report on Form 8-K, filed April 11, 2000) 2.5 Registration Rights Agreement dated April 5, 2000 by and among the Company and the Dollar Express Shareholders (incorporated by reference from our Current Report on Form 8-K dated April 11, 2000) 2.6 Escrow Agreement dated May 5, 2000 by and among Dollar Tree Stores, Inc., State Street Bank & Trust, Bernard Spain, David Mussafer, and the Holders (incorporated by reference from our Current Report on Form 8-K, filed July 12, 2000) 4.1 Amended and Restated Stockholders Agreement (see Exhibit 2.2) 4.2 Third Restated Articles of Incorporation, as amended (incorporated by reference from our Quarterly Report on Form 10-Q for the fiscal quarter ended September 30, 1996) 4.3 Second Restated Bylaws (incorporated by reference from our Registration Statement on Form S-1, No. 33-88502) 4.4 Form of Specimen Certificate representing our common stock (incorporated by reference from our Registration Statement on Form S-1, No. 33-88502) 5.1 Opinion of Hofheimer Nusbaum, P.C., regarding the legality of the securities being registered *23.1 Consent of Hofheimer Nusbaum, P.C. 23.2 Consent of KPMG LLP, independent certified public accountants *24.1 Power of Attorney (included in Part II of the Registration Statement)
- ------------------------ * Previously Filed. EX-1.1 2 ex-1_1.txt EXHIBIT 1.1 15,000,000 Shares DOLLAR TREE STORES, INC. Common Stock UNDERWRITING AGREEMENT August __, 2000 GOLDMAN, SACHS & CO. BANC OF AMERICA SECURITIES LLC DEUTSCHE BANK SECURITIES, INC. FIRST UNION SECURITIES, INC. SALOMON SMITH BARNEY INC. U.S. BANCORP PIPER JAFFRAY As Representatives of the several Underwriters c/o Goldman, Sachs & Co. 85 Broad Street New York, New York 10004 Dear Sirs: SECTION 1. INTRODUCTORY. Certain shareholders of Dollar Tree Stores, Inc., a Virginia corporation (the "Company"), named in Schedule B annexed hereto (the "Selling Shareholders") propose to transfer and sell an aggregate of (a) 10,747,848 shares of the outstanding Common Stock, $.01 par value per share, of the Company (the "Common Stock") and (b) warrants to purchase 4,252,152 shares of Common Stock, to the several underwriters named in Schedule A annexed hereto (the "Underwriters"), for whom you are acting as Representatives. Said aggregate of 10,747,848 shares of Common Stock are herein called the "Firm Common Shares", and said Warrants to purchase 4,252,152 shares of Common Stock are herein called the "Warrants". In addition, the Selling Shareholders propose to grant to the Underwriters an option to purchase up to 2,250,000 additional shares of Common Stock (the "Optional Common Shares"), as provided in Section 5 hereof. The Firm Common Shares and, to the extent the option described in Section 5 hereof is exercised, the Optional Common Shares, are hereinafter collectively referred to as the "Common Shares." The Common Shares and the shares of Common Stock issuable upon exercise of the Warrants are hereinafter collectively referred to as the "Shares". You have advised the Company and the Selling Shareholders that the Underwriters propose to make a public offering of the 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 and Warrants by the Underwriters as follows: SECTION 2. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company hereby represents and warrants to the several Underwriters that: (a) A registration statement on Form S-3 (File No. 333- 41280) with respect to the 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 shall be delivered to you, upon your request, two photocopies of the signed version of such registration statement and amendments, together with two copies of each exhibit filed therewith. Conformed copies of such registration statement and amendments (but without exhibits) and of the related preliminary prospectus have been delivered to you in such reasonable quantities as you have requested for each of the Underwriters. The Company will next file with the Commission one of the following: (i) prior to effectiveness of such registration statement, a further amendment thereto, including the form of final prospectus, or (ii) a final prospectus in accordance with Rules 430A and 424(b) of the Rules and Regulations. As filed, such amendment and form of final prospectus, or such final prospectus, shall include all Rule 430A Information and, except to the extent that you shall agree in writing to a modification, shall be in all substantive respects in the form furnished to you prior to the date and time that this Agreement was executed and delivered by the parties hereto, or, to the extent not completed at such date and time, shall contain only such specific additional information and other changes (beyond that contained in the latest Preliminary Prospectus) as the Company shall have previously advised you in writing would be included or made therein. The term "Registration Statement" as used in this Agreement shall mean such registration statement at the time such registration statement becomes effective and, in the event any post-effective amendment thereto becomes effective prior to the First Closing Date (as hereinafter defined), shall also mean such registration statement as so amended; PROVIDED, HOWEVER, that such term shall also include (i) all Rule 430A Information deemed to be included in such registration statement at the time such registration statement becomes effective as provided by Rule 430A of the Rules and Regulations and (ii) any registration statement filed pursuant to Rule 462(b) of the Rules and Regulations relating to the Shares (the "Additional Registration Statement"). The term "Preliminary Prospectus" shall mean any preliminary prospectus referred to in the preceding paragraph and any preliminary prospectus included in the Registration Statement at the time it becomes effective that omits Rule 430A Information. The term "Prospectus" as used in this Agreement shall mean the prospectus relating to the 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 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. -2- (b) The Commission has not issued any order preventing or suspending the use of any Preliminary Prospectus, and each Preliminary Prospectus has conformed in all material respects to the requirements of the Act and the Rules and Regulations and, as of its date, has not included any untrue statement of a material fact or omitted to state a material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading; and at the time the Registration Statement becomes effective, and at all times subsequent thereto up to and including the First Closing Date hereinafter mentioned, the Registration Statement will contain all material statements and information required to be included therein by the Act and the Rules and Regulations and will in all material respects conform to the requirements of the Act and the Rules and Regulations, and the Registration Statement will not include any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading; and the Prospectus, as amended and supplemented, as applicable, at the time the Registration Statement becomes effective, and at all times subsequent thereto up to and including the First Closing Date hereinafter mentioned, will not include any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements, in the light of the circumstances under which they were made, not misleading; provided, however, no representation or warranty contained in this subsection 2(b) shall be applicable to information contained in or omitted from any Preliminary Prospectus, the Registration Statement, the Prospectus or any such amendment or supplement in reliance upon and in conformity with written information furnished to the Company by or on behalf of any Underwriter, directly or through the Representatives, specifically for use in the preparation thereof. The documents incorporated by reference in the Prospectus, when they were filed with the Commission, conformed in all material respects to the requirements of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and the rules and regulations of the Commission thereunder, and none of such documents contained an untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading. (c) The Company does not own or control, directly or indirectly, any corporation, association or other entity other than the subsidiaries listed in Exhibit 21 to the Company's Annual Report on Form 10-K for the year ended December 31, 1999, and other than DT Keystone Distribution, Inc., DE&S Finance Company, Dollar Express, Inc., Dollar Express Stores, Inc., Dollar Express Royalties, Inc. and Dollar Express Management, Inc.. 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 -3- 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 capital stock as set forth in the financial statements included in the Company's Current Report on Form 8-K dated July 12, 2000 (the "Current Report"), and as of July 26, 2000, the Company had 103,044,657 issued and outstanding shares of Common Stock and no outstanding shares of any other class or series of capital stock; the issued and outstanding shares of Common Stock have been duly authorized and validly issued, are fully paid and nonassessable, have been issued in compliance with all federal and state securities laws, were not issued in violation of or subject to any preemptive rights or other rights to subscribe for or purchase securities, and conform to the description thereof contained in the Prospectus. All issued and outstanding shares of capital stock of each subsidiary of the Company have been duly authorized and validly issued and are fully paid and nonassessable. The Warrants have been duly authorized, executed and delivered by the Company and constitute valid, binding and enforceable obligations of the Company. The shares of Common Stock issuable upon exercise of the Warrants have been duly authorized and reserved for issuance upon such exercise, and, when issued and delivered upon exercise of the Warrants in accordance with the terms thereof, such shares of Common Stock will be validly issued, fully paid and non-assessable, free from any restrictions on transfer (after giving effect to the registration of such shares under the Act), and will not be subject to any preemptive or similar rights. The Warrants, when purchased by the Underwriters as contemplated herein, will be exercisable in full by the Underwriters in accordance with the terms thereof. Except as disclosed in or contemplated by the Prospectus and the financial statements of the Company, and the related notes thereto, included in the Prospectus, neither the Company nor any subsidiary has outstanding any options to purchase, or any preemptive rights or other rights to subscribe for or to purchase, any securities or obligations convertible into, or any contracts or commitments to issue or sell, shares of its capital stock or any such options, rights, convertible securities or obligations, except that the Company has preemptive rights to acquire shares of its subsidiaries' stock. (e) No shareholder of the Company has any right which has not been waived or satisfied to require the Company to register the sale of any shares owned by such shareholder under the Act in the public offering contemplated by this Agreement. No further approval or authority of the shareholders or the Board of Directors of the Company will be required for the transfer and sale of the Common Shares and Warrants to be sold by the Selling Shareholders. (f) The Company has full legal right, power and authority to enter into this Agreement and perform the transactions 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 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 -4- 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 of the Common Shares and Warrants and the 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 LLP, who have expressed their opinion with respect to the financial statements and schedules of the Company filed with the Commission and incorporated by reference in the Prospectus and in the Registration Statement, are independent accountants as required by the Act and the Rules and Regulations. (h) The financial statements and schedules of the Company, and the related notes thereto, incorporated by reference in the Registration Statement and the Prospectus present fairly the financial position of the Company as of the respective dates of such financial statements and schedules, and the results of operations and cash flows of the Company for the respective periods covered thereby. Such statements, schedules and related notes have been prepared in accordance with generally accepted accounting principles applied on a consistent basis. No other financial statements or schedules are required to be included in the Registration Statement or in the documents incorporated by reference therein. The selected financial data set forth in the Prospectus under the captions "Summary Financial Information and Operating Data" and "Selected Financial Data" fairly present the information set forth therein on the basis stated in the Registration Statement. (i) Except as disclosed in the Prospectus, or as to violations, defaults and breaches which individually or in the aggregate would not be material to the Company and its subsidiaries, taken as a whole, (A) 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 (B) 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. -5- (j) There are no contracts or other documents required to be described in the Registration Statement or to be filed as exhibits to the Registration Statement or to any documents incorporated by reference therein by the Act, by the Exchange Act or by the rules and regulations thereunder which have not been described or filed as required. Except as disclosed in the Prospectus, the contracts so described in the Prospectus are in full force and effect on the date hereof; and neither the Company nor any of its subsidiaries, nor to the best of the Company's knowledge, any other party is in breach of or default under any of such contracts. (k) Except as disclosed in the Prospectus, there are no legal or governmental actions, suits or proceedings pending or, to the best of the Company's knowledge, threatened to which the Company or any of its subsidiaries is or may be a party or of which property owned or leased by the Company or any of its subsidiaries is or may be the subject, or related to environmental or discrimination matters, which actions, suits or proceedings might, individually or in the aggregate, prevent or materially adversely affect the transactions contemplated by this Agreement or result in a material adverse change in the condition (financial or otherwise), properties, business, results of operations or prospects of the Company and its subsidiaries; the descriptions in the Prospectus of the litigation matters described therein are accurate and complete in all material respects; and, except as disclosed in the Prospectus, no labor disturbance by the employees of the Company or any of its subsidiaries exists or is imminent which might be expected to materially adversely affect such condition, properties, business, results of operations or prospects. Neither the Company nor any of its subsidiaries is a party or subject to the provisions of any material injunction, judgment, decree or order of any court, regulatory body, administrative agency or other governmental body. (l) The Company or the applicable subsidiary has good and valid 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 (except, as of any Closing Date, for any change as a result of the exercise of the Warrants by the Underwriters) or indebtedness material to the -6- Company and its subsidiaries (other than in the ordinary course of business); and (v) there has not been any material adverse change in the condition (financial or otherwise), business, properties, results of operations or prospects of the Company and its subsidiaries. (n) Except as disclosed in or specifically contemplated by the Prospectus, the Company and its subsidiaries have sufficient trademarks, trade names, copyrights, licenses, approvals and governmental authorizations to conduct their businesses as now conducted, with such exceptions as would not have a material adverse effect on the condition (financial or otherwise), business, properties, results of operations or prospects of the Company and its subsidiaries, taken as a whole (a "Material Adverse Effect"); the expiration of any trademarks (other than "Dollar Tree", "Only $One", "Dollar Express" or "Dollar Bill$"), trade names, copyrights, licenses, approvals or governmental authorizations would not have a Material Adverse Effect; and the Company has no knowledge of any infringement by it or its subsidiaries of trademark, trade name rights, copyrights, licenses, trade secret or other similar rights of others which could have a Material Adverse Effect, 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. (o) The Company has not been advised, and has no reason to believe, that either it or any of its subsidiaries is not conducting business in compliance with all applicable laws, rules and regulations of the jurisdictions in which it is conducting business, including, without limitation, all applicable local, state and federal environmental laws and regulations, except where failure to be so in compliance would not materially adversely affect the condition (financial or otherwise), business, properties, results of operations or prospects of the Company and its subsidiaries, taken as a whole. (p) The Company and its subsidiaries have filed all necessary federal, state and foreign income and franchise tax returns and have paid all taxes shown as due thereon; and the Company has no knowledge of any tax deficiency which has been or might be asserted or threatened against the Company or its subsidiaries which could materially and adversely affect the condition (financial or otherwise) business, properties, results of operations or prospects of the Company and its subsidiaries, taken as a whole. (q) The Company is not an "investment company" within the meaning of the Investment Company Act of 1940, as amended. (r) The Company has not distributed and will not distribute prior to the First Closing Date any offering material in connection with the offering and sale of the 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. -7- (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 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 Shares) have been listed on the National Market of the Nasdaq Stock Market. (w) Of the 2,250,000 Optional Shares, 438,597 Shares (the "Escrow Shares") are subject to the terms of that certain Escrow Agreement, dated as of May 5, 2000 (the "Escrow Agreement"), by and among the Company, certain holders of the Company's Common Stock State Street Bank & Trust Company, and Bernard Spain and David Mussafer. The Company has consented to the sale of the Escrow Shares pursuant to the terms of this Agreement. Effective upon the sale of the Escrow Shares to the Underwriters pursuant to the exercise of the option described in Section 5 hereof, the Company will have validly and completely released any claim or interest it might have with respect to the sale of the Escrow Shares (but not with respect to the proceeds of the sale of the Escrow Shares), and the Underwriters will acquire the Escrow Shares free and clear of any claim or interest arising under the Escrow Agreement. (x) The Company has filed with the Commission, on a timely basis, all documents required to have been filed by the Company pursuant to the Exchange Act or the rules and regulations promulgated thereunder. Each such document, when filed with the Commission, conformed in all material respects to the requirements of the Exchange Act and the rules and regulations promulgated thereunder, and did not contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading. SECTION 3. Representations, Warranties and Covenants of the Selling Shareholders. (a) Each of the Selling Shareholders severally represents and warrants to, and agrees with, the several Underwriters that: (i) Such Selling Shareholder has, and on the First Closing Date and the Second Closing Date (if applicable) hereinafter mentioned will have, good and valid title to the Common Shares and Warrants 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 and Warrants hereunder, free and clear of all voting trust arrangements, liens, encumbrances, equities, security interests, restrictions and claims whatsoever, except for any claims on or interests in the Escrow Shares arising under the Escrow Agreement, which will be -8- released in full effective upon the sale of the Escrow Shares to the Underwriters pursuant to the exercise of the option described in Section 5 hereof; upon delivery of and payment for such Common Shares and Warrants hereunder, assuming the Underwriters acquire such Common Shares and Warrants 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, and, in the case of the Warrants, the Underwriters will have the right to exercise the Warrants in full in accordance with the terms thereof and will acquire good and valid title to the Shares issuable upon exercise thereof, free and clear of all liens, encumbrances, equities, claims, restrictions, security interests, voting trusts or other defects of title whatsoever; and, if such Selling Shareholder is selling Warrants hereunder, the exercise price of such Warrants is $_____ per share. (ii) This Agreement has been duly authorized, executed and delivered by such Selling Shareholder and constitutes the valid and binding obligation and agreement of such Selling Shareholder, enforceable against such Selling Shareholder in accordance with its terms, except as rights to indemnity and contribution hereunder may be limited by applicable law. (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, or the original instruments or agreements evidencing the Warrants properly endorsed for transfer, as the case may be, for the Common Shares and Warrants 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 and Warrants to be sold by such Selling Shareholder on deposit with the Agent are subject to the interests of the Company and the Underwriters, that the arrangements made for such custody are to that extent irrevocable (except as otherwise provided in this Agreement or the Shareholders Agreement), and that the obligations of such Selling Shareholder hereunder shall not be terminated, except as provided in this Agreement or in the Shareholders Agreement, by any act of such Selling Shareholder, by operation of law, by the death or incapacity of such Selling Shareholder or by the occurrence of any other event. If the Selling Shareholder should die or become incapacitated, or if any other event should occur, before the delivery of the Common Shares and Warrants hereunder, the documents evidencing Common Shares and Warrants 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. -9- (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, (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 and, if the Selling Shareholder is selling Warrants hereunder, (D) the agreements or instruments evidencing such Warrants. 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 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 Shares. (vi) Each Preliminary Prospectus and the Prospectus, solely insofar as each relates 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, solely insofar as each 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. The liability of a Selling Shareholder for a breach of this representation shall not exceed the Maximum Indemnity Amount (as defined in SCHEDULE C to this Agreement) of such Selling Shareholder, and no Selling Shareholder shall be liable to any Underwriter for a breach of this representation unless (1) the Representatives shall have first made demand for payment on the Company with respect to any damages alleged to -10- result from the breach of this representation, (2) the Representatives shall thereafter have used all reasonable efforts to obtain such payment from the Company, including active pursuit in a court of law of any rights to indemnity or contribution based on the facts giving rise to the alleged breach of this representation, and (3) the Company shall have failed to make such payment within one year after receipt of the notice described in clause (1). (b) Each of the Selling Shareholders agree with the Company and the Underwriters not to offer to sell, sell or contract to sell or otherwise dispose of any shares of Common Stock or securities convertible into or exchangeable for any shares of Common Stock, for a period of 90 days after the date of the Prospectus, without the prior written consent of Goldman, Sachs & Co., as a Representative of the Underwriters, which consent may be withheld at the sole discretion of Goldman, Sachs & Co. 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 last sentence of text on the cover page of the Prospectus and (ii) in the fifth paragraph under "Underwriting" in the Prospectus concerning the terms of the offering by the Underwriters and in the seventh, eighth and ninth paragraphs of text under "Underwriting" was furnished to the Company by and on behalf of the Underwriters for use in connection with the preparation of the Registration Statement and the Prospectus and is correct in all material respects. The Representatives represent and warrant that they have been authorized by each of the other Underwriters as the Representatives to enter into this Agreement on its behalf and to act for it in the manner herein provided. SECTION 5. PURCHASE, SALE AND DELIVERY OF COMMON SHARES AND WARRANTS. On the basis of the representations, warranties and agreements herein contained, but subject to the terms and conditions herein set forth, the Selling Shareholders agree, severally and not jointly, to sell to the Underwriters in the respective amounts set forth in Schedule B hereto, the Firm Common Shares and the Warrants. The Underwriters agree, severally and not jointly, to purchase from the Selling Shareholders the number of Firm Common Shares and Warrants described below. The purchase price to be paid by the several Underwriters to the Selling Shareholders shall be (A) in the case of the Common Shares, $_____ per share (the "Common Share Price") and (2) in the case of the Warrants, an amount equal to the Common Share Price less $_____ per share [THE WARRANT EXERCISE PRICE], multiplied by the number of Shares issuable upon exercise of the Warrants purchased by the Underwriters. The Company agrees, upon exercise and tender by the respective Underwriters of the applicable warrant exercise price, to issue to the respective Underwriters the number of Shares issuable upon exercise of the Warrants so exercised. The obligation of each Underwriter to the Selling Shareholders shall be to purchase from the Selling Shareholders that number of Firm Common Shares and/or Warrants set forth opposite the name of such Underwriter in Schedule A hereto. Delivery of certificates for the Firm Common Shares and original warrant agreements or instruments for the Warrants to be purchased by the Underwriters and payment therefor shall be made at the offices of Hofheimer Nusbaum, P.C., 999 Waterside Drive, Norfolk, Virginia (or such other place as may be agreed upon by the Company and the Representatives) at such time -11- and date, not later than the third (or, if the 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 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 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 and original warrant agreements or instruments representing the Warrants shall be made by or on behalf of the Selling Shareholders to you, for the respective accounts of the Underwriters, against payment by you, for the accounts of the several Underwriters, of the purchase price therefor by wire transfer of same day funds to the order of the Agent. The certificates for the Firm Common Shares and the Shares issuable upon exercise of the Warrants 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 Norfolk, Virginia, as may be designated by you. Time shall be of the essence, and delivery at the time and place specified in this Agreement is a further condition to the obligations of the Underwriters. In addition, on the basis of the representations, warranties and agreements herein contained, but subject to the terms and conditions herein set forth, the Selling Shareholders hereby grant an option to the several Underwriters to purchase, severally and not jointly, in the respective amounts set forth in Schedule B hereto, up to an aggregate of 2,250,000 Optional Common Shares at the Common Share Price, 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 and the Shares issuable upon exercise of the Warrants. 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 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 Optional Common 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 plus the number of Shares issuable upon the exercise of Warrants to be purchased by such Underwriter, as set forth opposite its name in Schedule A, and the denominator of which is 15,000,000 (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 -12- 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 2,250,000 (subject to such adjustments to eliminate any fractional share purchases as you and the Selling Shareholders may mutually agree). Certificates for the Optional Common Shares will be made available for checking and packaging on the business day preceding the Second Closing Date at a location in Norfolk, Virginia, as may be designated by you. The manner of payment for and delivery of the Optional Common Shares shall be the same as for the Firm Common Shares purchased from the Selling Shareholders as specified in the two preceding paragraphs. At any time before lapse of the option, you may cancel such option by giving written notice of such cancellation to the Company and the Agent. You have advised the Company and the Selling Shareholders that each Underwriter has authorized you to accept delivery of its Common Shares and/or Warrants and to make payment and 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 and Warrants 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 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, 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 -13- such filing or to which you reasonably object (except to the extent any amendment or supplement to which you object is necessary in the opinion of counsel to the Company to ensure that the Prospectus does not include an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading) or which is not in compliance in all material respects with the Act and the Rules and Regulations. (b) The Company will fully and completely comply with the provisions of Rule 430A of the Rules and Regulations with respect to information omitted from the Registration Statement in reliance upon such Rule. (c) If during such period after the first date of the public offering of the 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 date of the Registration Statement which will satisfy the provisions of the last paragraph of Section 11(a) of the Act. (e) During such period as a prospectus is required by law to be delivered in connection with sales by an Underwriter or dealer, the Company, at its expense, but only for the nine-month period referred to in Section 10(a)(3) of the Act, will furnish to you or mail to your order copies of the Registration Statement, the Prospectus, the Preliminary Prospectus and all amendments and supplements to any such documents (other than periodic filings under the Exchange Act) in each case as soon as available and in such quantities as you may reasonably request, for the purposes contemplated by the Act. (f) The Company shall cooperate with you and your counsel in order to qualify or register the 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 -14- laws and will continue such qualifications, registrations and exemptions in effect so long as reasonably required for the distribution of the 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 Shares for offering, sale or trading in any jurisdiction or any initiation or threat of any proceeding for any such purpose, and in the event of the issuance of any order suspending such qualification, registration or exemption, the Company, with your cooperation, will use its best efforts to obtain the withdrawal thereof. (g) During the period of five years hereafter, the Company will furnish to the Representatives: (i) as soon as practicable after the end of each fiscal year, copies of the Annual Report of the Company containing the balance sheet of the Company as of the close of such fiscal year and statements of income, shareholders' equity and cash flows for the year then ended and the opinion thereon of the Company's independent public accountants; (ii) as soon as practicable after the filing thereof, copies of each proxy statement, Annual Report on Form 10-K, Quarterly Report on Form 10-Q, Report on Form 8-K or other report filed by the Company with the Commission, the NASD or any securities exchange; and (iii) as soon as available, copies of any report or communication of the Company mailed generally to holders of its Common Stock. (h) During the period of 90 days after the first date that any of the Shares are released by you for sale to the public, without the prior written consent of Goldman, Sachs & Co., 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 use its best efforts to qualify or register its Common Stock for sale in non-issuer transactions under (or obtain exemptions from the application of) the Blue Sky laws of the State of California (and thereby permit market making transactions and secondary trading in the Company's Common Stock in California), will comply with such Blue Sky laws and will continue such qualifications, registrations and exemptions in effect for a period of five years after the date hereof. (j) The Company will cause its counsel to promptly prepare a reasonable number of copies of bound closing volumes for the Representatives and their counsel. -15- 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 Selling Shareholders and the Company together agree to pay all costs, fees and expenses incurred in connection with the performance of the obligations of the Company or the Selling Shareholders hereunder, including without limiting the generality of the foregoing, (i) all expenses incident to the delivery of the Shares (including all printing, copying, and engraving costs), (ii) all fees and expenses of the registrar and transfer agent of the Common Stock, (iii) all necessary transfer and other stamp taxes in connection with the transfer and sale of the Common Shares and the Warrants to the Underwriters and the sale of Shares to the Underwriters upon exercise of the Warrants, (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 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. Nothing in this Section 7 shall be construed to modify any agreement among the Company and the Selling Shareholders with respect to the allocation of such expenses among them. 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). SECTION 8. CONDITIONS OF THE OBLIGATIONS OF THE UNDERWRITERS. The obligations of the several Underwriters to purchase and pay for the Firm Common Shares and the Warrants on the First Closing Date and the Optional Common Shares on the Second Closing Date shall be subject to the accuracy of the representations and warranties on the part of the Company and the Selling Shareholders herein set forth as of the date hereof and as of the First Closing Date or the Second Closing Date, as the case may be, to the accuracy of the statements of Company officers and the Selling Shareholders made pursuant to the provisions hereof, to the performance by the Company and the Selling Shareholders of their respective obligations hereunder, and to the following additional conditions: (a) The Registration Statement shall have become effective not later than 5:00 P.M. (or, in the case of a registration statement filed pursuant to Rule 462(b) of the Rules and Regulations relating to the 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 -16- 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 whole, which makes it impractical or inadvisable in the judgment of the Representatives to proceed with the public offering of the Shares or the purchase the Common Shares and Warrants as contemplated hereby. (c) There shall have been furnished to you, as Representatives of the Underwriters, on each Closing Date, in form and substance satisfactory to you, except as otherwise expressly provided below: (i) An opinion of Hofheimer Nusbaum, P.C., counsel for the Company and the Selling Shareholders identified as the "Virginia Selling Shareholders" on Schedule B hereto (the "Virginia Selling Shareholders"), addressed to the Underwriters and dated the First Closing Date, or the Second Closing Date, as the case may be, in the form attached as EXHIBIT A. (ii) An opinion of Ropes & Gray, special counsel for the Selling Shareholders identified as the "New York Selling Shareholders" on Schedule B hereto (the "New York Selling Shareholders"), addressed to the Underwriters and dated the First Closing Date, or the Second Closing Date, as the case may be, in the form attached as EXHIBIT B. (iii) An opinion of Fox, Rothschild, O'Brien & Frankel, LLP, special counsel for the Selling Shareholders identified as the "Pennsylvania Selling Shareholders" on Schedule B hereto (the "Pennsylvania Selling Shareholders"), addressed to the -17- Underwriters and dated the First Closing Date, or the Second Closing Date, as the case may be, in the form attached as EXHIBIT C. (iv) An opinion of Pepper Hamilton LLP, special counsel for the Selling Shareholders identified as the "Advent Selling Shareholders" on Schedule B hereto (the "Advent Selling Shareholders"), addressed to the Underwriters and dated the First Closing Date, or the Second Closing Date, as the case may be, in the form attached as EXHIBIT D. (v) Such opinion or opinions of Hale and Dorr LLP, counsel for the Underwriters, dated the First Closing Date or the Second Closing Date, as the case may be, with respect to the incorporation of the Company, the sufficiency of all corporate proceedings and other legal matters relating to this Agreement, the validity of the Shares, the Registration Statement and the Prospectus and other related matters as you may reasonably require, and the Company and the Selling Shareholders shall have furnished to such counsel such documents and shall have exhibited to them such papers and records as they may reasonably request for the purpose of enabling them to pass upon such matters. In connection with such opinions, such counsel may rely on representations or certificates of officers of the Company and governmental officials. (vi) 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; -18- (4) Since the initial date on which the Registration Statement was filed, no agreement, written or oral, transaction or event has occurred which should have been set forth in an amendment to the Registration Statement or in a supplement to or amendment of any prospectus which has not been disclosed in such a supplement or amendment; (5) Since the respective dates as of which information is given in the Registration Statement and the Prospectus, and except as disclosed in or contemplated by the Prospectus, there has not been any material adverse change or a development involving a material adverse change in the condition (financial or otherwise), business, properties, results of operations, management or prospects of the Company and its subsidiaries, taken as a whole; and no legal or governmental action, suit or proceeding is pending or threatened against the Company or any of its subsidiaries which is material to the Company and its subsidiaries, taken as a whole, whether or not arising from transactions in the ordinary course of business, or which may adversely affect the transactions contemplated by this Agreement; since such dates and except as so disclosed, neither the Company nor any of its subsidiaries has entered into any verbal or written agreement or other transaction that is material to the Company and its subsidiaries, taken as a whole, which is not in the ordinary course of business or incurred any material liability or obligation, direct, contingent or indirect, made any change in its capital stock, made any material change in its short-term debt or funded debt or repurchased or otherwise acquired any of the Company's capital stock; and the Company has not declared or paid any dividend, or made any other distribution, upon its outstanding capital stock payable to shareholders of record on a date prior to the First Closing Date or Second Closing Date, as the case may be; and (6) Since the respective dates as of which information is given in the Registration Statement and the Prospectus and except as disclosed in or contemplated by the Prospectus, the Company and its subsidiaries have not sustained a material loss or damage by strike, fire, flood, windstorm, accident or other calamity (whether or not insured). (vii) On the First Closing Date or the Second Closing Date, as the case may be, a certificate, dated such Closing Date and addressed to you, signed by or on behalf of each of the Selling Shareholders to the effect that the representations and warranties of such Selling Shareholder in this Agreement are true and correct, as if made at and as of the First Closing Date or the Second Closing Date, as the case may be, and such Selling Shareholder has complied with all the agreements and satisfied all the conditions on his part to be performed or satisfied prior to the First Closing Date or the Second Closing Date, as the case may be. (viii) 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 -19- Underwriters, from KPMG 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 LLP, counsel for the Underwriters. The Company shall furnish you with such manually signed or conformed copies of such opinions, certificates, letters and documents as you request. Any certificate signed by any officer of the Company and delivered to the Representatives or to counsel for the Underwriters shall be deemed to be a representation and warranty by the Company to the Underwriters as to the statements made therein. 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 and the Warrants at the First Closing is not consummated because of any refusal, inability or failure on the part of the Company or any Selling Shareholder to perform any agreement herein or to comply with any provision hereof, the Company agrees to reimburse you and the other Underwriters upon demand for all out-of-pocket expenses that shall have been reasonably incurred by you and them in connection with the proposed purchase and the sale of the Common Shares and the Warrants, including but not limited to fees and disbursements of counsel, printing expenses, travel expenses, postage, telegraph charges and telephone charges relating directly to the offering contemplated by the Prospectus. Any such termination shall be without liability of any party to any other party except that the provisions of this Section, Section 7 and Section 11 shall at all times be effective and shall apply. SECTION 10. EFFECTIVENESS OF REGISTRATION STATEMENT. You, the Company and the Selling Shareholders will use your and its best efforts to cause the Registration Statement to become effective, to prevent the issuance of any stop order suspending the effectiveness of the Registration Statement and, if such stop order be issued, to obtain as soon as possible the lifting thereof. SECTION 11. INDEMNIFICATION. (a) The Company (in furtherance of its agreements, including that certain agreement set forth in Section 22 of that certain Underwriting Agreement, dated March 18, 1998, among the Company, certain of the Company's shareholders and the Representatives of the underwriters identified in such agreement) 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 -20- 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 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 Maximum Indemnity Amount (as defined in SCHEDULE C) of such Selling Shareholder; PROVIDED FURTHER that no Selling Shareholder shall be required to provide indemnification hereunder unless (1) the Representatives shall have first made demand for payment on the Company with respect to any such loss, claim, damage, liability or expense, (2) the Representatives shall thereafter have used all reasonable efforts to obtain such payment from the Company, including active pursuit in a court of law of any rights hereunder to indemnity or contribution for such loss, claim, damage, liability or expense, and (3) the Company shall have failed to make such payment within one year after receipt of the notice described in clause (1); and 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 -21- 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 The Chase Manhattan Bank, New York, New York (the "Prime Rate"). Any such interim reimbursement payments which are not made to an Underwriter within 30 days of a request for reimbursement shall bear interest at the Prime Rate from the date of such request. This indemnity agreement will be in addition to any liability which the Company or the Selling Shareholders may otherwise have. (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 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 -22- of such request. This indemnity agreement will be in addition to any liability which such Underwriter may otherwise have. (c) Promptly after receipt by an indemnified party under this Section of notice of the commencement of any action, such indemnified party will, if a claim in respect thereof is to be made against an indemnifying party under this Section, notify the indemnifying party in writing of the commencement thereof; but the omission so to notify the indemnifying party will not relieve it from any liability which it may have to any indemnified party for contribution or otherwise than under the indemnity agreement contained in this Section or to the extent it is not prejudiced as a proximate result of such failure. In case any such action is brought against any indemnified party and such indemnified party seeks or intends to seek indemnity from an indemnifying party, the indemnifying party will be entitled to participate in, and, to the extent that it may wish, jointly with all other indemnifying parties similarly notified, to assume the defense thereof with counsel reasonably satisfactory to such indemnified party; provided, however, if the defendants in any such action include both the indemnified party and the indemnifying party and the indemnified party shall have reasonably concluded that there may be a conflict between the positions of the indemnifying party and the indemnified party in conducting the defense of any such action or that there may be legal defenses available to it and/or other indemnified parties which are different from or additional to those available to the indemnifying party, the indemnified party or parties shall have the right to select separate counsel to assume such legal defenses and to otherwise participate in the defense of such action on behalf of such indemnified party or parties. Upon receipt of notice from the indemnifying party to such indemnified party of its election so to assume the defense of such action and approval by the indemnified party of counsel, the indemnifying party will not be liable to such indemnified party under this Section for any legal or other expenses subsequently incurred by such indemnified party in connection with the defense thereof unless (i) the indemnified party shall have employed such counsel in connection with the assumption of legal defenses in accordance with the proviso to the next preceding sentence (it being understood, however, that the indemnifying party shall not be liable for the expenses of more than one separate counsel, approved by the Representatives in the case of paragraph (a), representing the indemnified parties who 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 -23- 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 Adjusted Offering Proceeds (as defined in SCHEDULE C) with respect to the Common Shares and Warrants sold by them to the Underwriters, and in the case of the Underwriters, on the other hand, as the underwriting commission as set forth on the cover page of the Prospectus received by them, bears to the sum of the total Adjusted Offering Proceeds of the Common Shares and Warrants sold hereunder plus the amounts 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 set forth on the cover of the Prospectus received by such Underwriter in connection with the Shares underwritten by it and distributed to the public. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. The Underwriters' obligations to contribute pursuant to this Section 11 are several in proportion to their respective underwriting commitments and not joint. (e) It is agreed that any controversy arising out of the operation of the interim reimbursement arrangements set forth in Sections 11(a) and 11(b) hereof, including the amounts of any requested reimbursement payments and the method of determining such amounts, shall be settled by arbitration conducted under the provisions of the Constitution and Rules of the Board of Governors of the New York Stock Exchange, Inc. or pursuant to the Code of Arbitration Procedure of the NASD. Any such arbitration must be commenced by service of a written demand for arbitration or written notice of intention to arbitrate, therein electing the arbitration tribunal. In the event the party demanding arbitration does not make such designation of an -24- 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 and Warrants hereunder, and of each Underwriter to purchase the Common Shares and Warrants 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 and Warrants 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 and Warrants hereunder on either the First or Second Closing Date and the aggregate number of Common Shares and Warrants 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 and Shares issuable upon exercise of Warrants 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 and Warrants 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 and Shares issuable upon exercise of Warrants 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 and Warrants 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 Selling Shareholders pursuant to Section 7 hereof and except to the extent provided in Section 11 hereof. In the event that Common Shares and Warrants to which a default relates are to be purchased by the non-defaulting Underwriters or by another party or parties, the Representatives or the Company shall have the right to postpone the First or Second Closing Date, as the case may be, for not more than five business days in order that the necessary changes in the Registration Statement, Prospectus and any other documents, as well as any other arrangements, may be effected. As used in this Agreement, the term "Underwriter" includes any person substituted for an Underwriter under this Section. Nothing herein will relieve a defaulting Underwriter from liability for its default. SECTION 13. EFFECTIVE DATE. This Agreement shall become effective immediately as to Sections 7, 9, 11, 14 and 15 and, as to all other provisions, (i) if at the time of execution of this Agreement the Registration Statement has not become effective, at 10:00 A.M., New York 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 10:00 A.M., New York 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 Shares for sale to the public. For the purposes of this Section 13, the Shares shall be deemed to have been so released upon the release for publication of any newspaper advertisement relating to the Shares or upon the release by you of telegrams -25- (i) advising Underwriters that the Shares are released for public offering, or (ii) offering the Shares for sale to securities dealers, whichever may occur first. SECTION 14. TERMINATION. Without limiting the right to terminate this Agreement pursuant to any other provision hereof: (a) This Agreement may be terminated by the Company by notice to you and the Selling Shareholders or by you by notice to the Company and the Selling Shareholders at any time prior to the time this Agreement shall become effective as to all its provisions, and any such termination shall be without liability on the part of the Company or any Selling Shareholder to any Underwriter (except for the expenses to be paid or reimbursed by the Company and the Selling Shareholders pursuant to Sections 7 and 9 hereof and except to the extent provided in Section 11 hereof) or of any Underwriter to the Company or any Selling Shareholder (except to the extent provided in Section 11 hereof). (b) This Agreement may also be terminated by you prior to the First Closing Date by notice to the Company and the Selling Shareholders (i) if additional material governmental restrictions, not in force and effect on the date hereof, shall have been imposed upon trading in securities generally or minimum or maximum prices shall have been generally established on the New York Stock Exchange or on the American Stock Exchange or in the over the counter market by the NASD, or trading in securities generally shall have been suspended on either such Exchange or in the over the counter market by the NASD, or a general banking moratorium shall have been established by federal, New York or California authorities, (ii) if an outbreak of major hostilities or other national or international calamity or any substantial change in political, financial or economic conditions shall have occurred or shall have accelerated or escalated to such an extent, as, in the judgment of the Representatives, to affect adversely the marketability of the 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 of the Company or any of its subsidiaries, which, in the reasonable judgment of the Representatives, makes it impracticable or inadvisable to offer or sell the Shares. Any termination pursuant to this subparagraph (b) shall be without liability on the part of any Underwriter to the Company or any Selling Shareholder or on the part of the Company or any Selling Shareholder to any Underwriter (except for expenses to be paid or reimbursed by the Selling Shareholders pursuant to Section 7 hereof and except to the extent provided in Section 11 hereof. SECTION 15. REPRESENTATIONS AND INDEMNITIES TO SURVIVE DELIVERY. The respective indemnities, agreements, representations, warranties and other statements of the Company, of its officers, of the Selling Shareholders and of the several Underwriters set forth in or made pursuant to this Agreement will remain in full force and effect, regardless of any investigation -26- 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 and Warrants 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 85 Broad Street New York, NY 10004, Attention: ______________, with a copy to Hale and Dorr LLP, 1455 Pennsylvania Avenue, N.W., Washington, D.C. 20004, Attention: Brent B. Siler, Esq.; if sent to the Company, shall be mailed, delivered or telecopied to the Company, at 500 Volvo Parkway, Chesapeake, Virginia 23330 with a copy to Hofheimer Nusbaum, P.C., 1700 Dominion Tower, 999 Waterside Drive, Norfolk, Virginia 23510, Attention: William A. Old, Esq.; if sent to any Virginia Selling Shareholder, shall be mailed, delivered or telecopied to the Selling Shareholder c/o the Company at 500 Volvo Parkway, Chesapeake, Virginia 23330 with a copy to Hofheimer Nusbaum, P.C., 1700 Dominion Tower, 999 Waterside Drive, Norfolk, Virginia 23510, Attention: William A. Old, Esq.; if sent to any of the New York Selling Shareholders, to the New York Selling Shareholder c/o Saunders, Karp & Megrue, 262 Harbor Drive, Stamford, Connecticut 06902 with a copy to Ropes & Gray, One International Place, Boston, Massachusetts 02110, Attention: _____________; if sent to any of the Pennsylvania Selling Shareholders, to the Pennsylvania Selling Shareholders c/o__________________ with a copy to Fox, Rothschild, O'Brien & Frankel, LLP, 2000 Market Street, 10th Floor, Philadelphia, Pennsylvania 19103, Attention: Ramon Obod, Esq.; and if sent to any of the Advent Selling Shareholders, to the Advent Selling Shareholders c/o________________________ with a copy to Pepper Hamilton LLP, 3000 Two Logan Square, Eighteenth and Arch Streets, Philadelphia, Pennsylvania 19103, Attention: Cary S. Levinson, 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 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 Goldman Sachs & Co., 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. -27- SECTION 20. NO AGENCY. This Agreement is not intended to create an agency relationship between the Underwriters, on the one hand, and the Company or the Selling Stockholders, on the other. SECTION 21. APPLICABLE LAW. This Agreement shall be governed by and construed in accordance with the internal laws (and not the laws pertaining to conflicts of laws) of the State of New York; provided, however, any closing hereunder shall be deemed to take place in the Commonwealth of Virginia, and the law of the Commonwealth of Virginia shall govern the matters described in Section 8.8A-110(a) of the Code of Virginia. SECTION 22. 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. [REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK] -28- 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: Attorney-in-Fact acting on behalf of each such Selling Shareholder The foregoing Underwriting Agreement is hereby confirmed and accepted by us in New York, New York as of the date first above written. GOLDMAN, SACHS & CO. BANC OF AMERICA SECURITIES LLC DEUTSCHE BANK SECURITIES INC. FIRST UNION SECURITIES, INC. SALOMON SMITH BARNEY INC. U.S. BANCORP PIPER JAFFRAY INC. Acting as Representatives of the several Underwriters named in the attached Schedule A. By: GOLDMAN, SACHS & CO. By:_________________________ Name: Title: -29- SCHEDULE A Number of Firm Number of Common Shares Warrants to be Name of Underwriter to be Purchased Purchased - ------------------- --------------- --------- -30- SCHEDULE B Number of Firm Number of Number of Optional Common Shares Warrants Common Shares Name of Selling Shareholders to be Sold to be Sold to be Sold* - ---------------------------- ---------- ---------- ---------- J. Douglas Perry(1) 382,630 0 0 H. Ray Compton & Jean T. 30,311 0 0 Compton, Joint Tenants1 The S.K. Equity Fund, L.P.(2) 573,160 4,166,811 822,395 Joan P. Brock1 840,992 0 525,000 Patricia W. Perry(1) 383,404 0 0 Jean T. Compton(1) 84,375 0 0 Macon F. Brock & Robert C. 564,840 0 0 Miller, Trustees of the Brock 1997 Grantor Retained Annuity Trust(1) Joan P. Brock & Robert C. 94,168 0 0 Miller, Trustees of the Brock 1999 Grantor Retained Annuity Trust(1) J. Douglas Perry & Robert 1,683,966 0 0 C. Miller, Trustees of the Patricia W. Perry Grantor Retained Annuity Trust(1) James P. Compton, Trustee 0 70,314 0 of the Brymar Descendants Trust(1) James P. Compton, Trustee 30,000 0 0 of the Bryan Compton Trust(1) James P Compton, Trustee 30,000 0 0 of the Mark Alan Compton Trust(1) Allan W. Karp(2) 0 6,832 1,185 Christopher K. Reilly(2) 0 1,365 236 -31- Melanie K. Berman, 0 3,415 593 Custodian for Kyle Galbreath Megrue(2) Melanie K. Berman, Custodian 0 3,415 593 for Christopher Galbreath Megrue(2) Bernard Spain(3) 1,413,841 0 266,650 Murray Spain(3) 1,404,681 0 264,922 Bernard Spain Family 186,159 0 35,109 Limited Partnership(3) Murray Spain Family 195,319 0 36,837 Limited Partnership(3) Global Private Equity III 2,256,805 0 238,965 Limited Partnership(4) Advent PGGM Global Limited 345,828 0 36,618 Partnership(4) Advent Partners GPE III 34,075 0 3,608 Limited Partnership(4) Advent Partners Limited 14,812 0 1,568 Partnership(4) Advent Partners (NA) GPE 10,079 0 1,067 III Limited Partnership(4) Guayacan Private Equity 79,996 0 8,470 Fund Limited Partnership(4) Dollar Express Investment 58,407 0 6,184 LLC(4) The Patricia & Douglas 50,000 0 0 Perry Foundation(1) - ---------- * Includes an aggregate of 438,597 Escrow Shares, attributable to certain of the Selling Shareholders as follows: Bernard Spain 125,427 -32- Bernard Spain Family Limited Partnership 16,542 Murray Spain 124,472 Murray Spain Family Limited Partnership 17,332 Global Private Equity III Limited Partnership 124,788 Advent PGGM Global Limited Partnership 19,122 Advent Partners GPE III Limited Partnership 1,884 Advent Partners Limited Partnership 819 Advent Partners (NA) GPE III Limited 558 Partnership Guayacan Private Equity Fund Limited 4,424 Partnership Dollar Express Investment LLC 3,229 (1) Virginia Selling Shareholder (2) New York Selling Shareholder (3) Pennsylvania Selling Shareholder (4) Advent Selling Shareholder -33- SCHEDULE C CERTAIN DEFINITIONS For purposes of this Agreement: 1. The "Maximum Indemnity Amount" of a Selling Shareholder shall mean the Adjusted Offering Proceeds (as defined below) with respect to the Common Shares or Warrants sold by such Selling Shareholder hereunder, reduced to reflect (i) the amount of any taxes paid or payable by such Selling Shareholder (or, in the case of a Selling Shareholder that is a pass-through entity for tax purposes, by the persons taxable on the income of such Selling Shareholder) by virtue of the sale of such Common Shares or Warrants and (ii) the value of any tax benefit realized or realizable (taking into account the probability that any such tax benefit will be realized) by such Selling Shareholder (or, in the case of a Selling Shareholder that is a pass-through entity for tax purposes, by the persons taxable on the income of such Selling Shareholder) by virtue of the payment of amounts in regard to a breach of the representation of such Selling Shareholder set forth in Section 3(a)(vii) of this Agreement or the payment of amounts under Section 11 of this Agreement. 2. "Adjusted Offering Proceeds" means (i) with respect to Common Shares sold by a Selling Shareholder hereunder, the total price paid to such Selling Shareholder for such Common Shares (net of underwriting commissions but before deducting expenses) and (ii) with respect to Warrants sold by a Selling Shareholder hereunder, the total price paid to such Selling Shareholder for such Warrants (net of underwriting commissions but before deducting expenses) plus the aggregate exercise price paid to the Company by the Underwriters to exercise the Warrants. -34- EX-5.1 3 ex-5_1.txt EXHIBIT 5.1 EXHIBIT 5.1 Hofheimer Nusbaum, P.C. 999 Waterside Drive Dominion Tower, Suite 1700 Norfolk, Virginia 23510 August 1, 2000 Dollar Tree Stores, Inc. 500 Volvo Parkway Chesapeake, Virginia 23320 Re: Dollar Tree Stores, Inc. -- Registration Statement on Form S-3 Common Stock, $0.01 par value Ladies and Gentlemen: In connection with the registration statement on Form S-3 (the "Registration Statement"), as amended, first filed on July 12, 2000 with the Securities and Exchange Commission (the "Commission") under the Securities Act of 1933, as amended (the "Act"), with respect to the registration of up to 17,250,000 shares of the Company's common stock, par value $0.01 per share (the "Common Stock"), and any shares that may be registered pursuant to any subsequent registration statement the Company may hereafter file with the Commission in connection with such transaction pursuant to Rule 462(b) under the Act (collectively, the "Shares"), you have requested our opinion with respect to the matters set forth below. Of the Shares being registered, (i) 12,997,848 shares of Common Stock are presently issued and outstanding shares of Common Stock (the "Outstanding Shares") and (ii) 4,252,152 shares of Common Stock are issuable upon the exercise of certain outstanding warrants of the Company (the "Warrant Shares") In our capacity as your counsel in connection with such registration, we are familiar with the proceedings taken and proposed to be taken by the Company in connection with the authorization, issuance and sale of the Shares, and for the purposes of this opinion, have assumed such proceedings will be timely and properly completed in the manner presently proposed. In addition, we have made such legal and factual examinations and inquiries, including an examination of originals and copies certified or otherwise identified to our satisfaction, of all such documents, corporate records and instruments as we have deemed necessary or appropriate for purposes of this opinion. In our examination, we have assumed the genuineness of all signatures, the authenticity of all documents submitted to us as originals, and the conformity to authentic original documents of all documents submitted to us as copies. We are opining herein as to the effect on the subject transaction only of the Virginia Stock Corporation Act, and we express no opinion with respect to the applicability thereto, or the effect thereon, of the laws of any other jurisdiction or as to any matters of municipal law or the laws of any local agencies within the state. Subject to the foregoing, it is our opinion that: 1. The Outstanding Shares have been duly authorized and validly issued and are fully paid and nonassessable. 2. The Warrant Shares have been duly authorized, and, upon issuance, delivery and payment therefor in the manner contemplated by the warrants issued by the Company, will be validly issued, fully paid and nonassessable. We consent to your filing this opinion as an exhibit to the Registration Statement and to the reference to our firm contained under the heading "Legal Matters" and to the incorporation by reference of this opinion and consent into a registration statement filed with the Commission pursuant to Rule 462(b) under the Act relating to the Shares. In giving such consent, we do not hereby admit that we come within the category of persons whose consent is required under Section 7 of the Act or the Rules and Regulations of the Securities and Exchange Commission promulgated under the Act. Very truly yours, /s/ Hofheimer Nusbaum, P.C. EX-23.2 4 ex-23_2.txt EXHIBIT 23.2 EXHIBIT 23.2 INDEPENDENT AUDITORS' CONSENT The Board of Directors and Shareholders Dollar Tree Stores, Inc.: We consent to the incorporation by reference herein of our report dated May 25, 2000 relating to the supplemental consolidated balance sheets of Dollar Tree Stores, Inc. and subsidiaries as of December 31, 1999 and 1998, and the related supplemental consolidated income statements, statements of shareholders' equity and cash flows for each of the years in the three-year period ended December 31, 1999, which report appears in Dollar Tree Stores, Inc.'s Form 8-K filing dated July 12, 2000. The supplemental consolidated financial statements give retroactive effect to the merger of Dollar Tree Stores, Inc. and Dollar Express, Inc. which occurred on May 5, 2000. We also consent to the incorporation by reference herein of our report January 24, 2000 relating to the consolidated balance sheets of Dollar Tree Stores, Inc. and subsidiaries as of December 31, 1999 and 1998, and the related consolidated income statements, statements of shareholders' equity and cash flows for each of the years in the three-year period ended December 31, 1999, which report appears in the Annual Report on Form 10-K for the year ended December 31, 1999 of Dollar Tree Stores, Inc. We also consent to the reference to our firm under the headings "Selected Financial Data" and "Experts" in the prospectus. /s/ KPMG LLP Norfolk, Virginia July 31, 2000 -----END PRIVACY-ENHANCED MESSAGE-----