-----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, SHglLJiULyVwhB4rv9Ls2girT8xHqCK7myXh+pcOHFFJo8nnRbhoNfuiOwgQjE1e MOXNgYbbVUo0cVJ4qhAHLw== 0000950116-98-000660.txt : 19980327 0000950116-98-000660.hdr.sgml : 19980327 ACCESSION NUMBER: 0000950116-98-000660 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980326 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: A C MOORE ARTS & CRAFTS INC CENTRAL INDEX KEY: 0001042809 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-RETAIL STORES, NEC [5990] IRS NUMBER: 223527763 STATE OF INCORPORATION: PA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-23157 FILM NUMBER: 98574651 BUSINESS ADDRESS: STREET 1: 500 UNIVERSITY COURT CITY: BLACKWOOD STATE: NJ ZIP: 08012 BUSINESS PHONE: 6092286700 MAIL ADDRESS: STREET 1: 500 UNIVERSITY COURT CITY: BLACKWOOD STATE: NJ ZIP: 08012 10-K 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1997 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ______ to ______ Commission file number 000-23157 A.C. MOORE ARTS & CRAFTS, INC. (Exact name of registrant as specified in its charter) Pennsylvania 23-3527763 (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 500 University Court, Blackwood, NJ 08012 (Address of principal executive offices) (Zip code) Registrant's telephone number, including area code: (609) 228-6700 Securities registered pursuant to section 12(b) of the Act: None Securities registered pursuant to section 12(g) of the Act: Common Stock, no par value (Title of Class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES [X] NO [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] The aggregate market value of the voting stock held by non-affiliates of the registrant is approximately $47,351,250.(1) The number of shares of Common Stock outstanding as of March 16, 1998 was 7,405,000. DOCUMENTS INCORPORATED BY REFERENCE Portions of the definitive proxy statement for the 1998 Annual Meeting of Shareholders are incorporated into Part III of this Form 10-K. - -------------- (1) The aggregate dollar amount of the voting stock set forth equals the number of shares of Common Stock outstanding, reduced by the number of shares of Common Stock held by executive officers, and directors and shareholders owning in excess of 10% of the registrant's Common Stock multiplied by the closing price for the Common Stock on the Nasdaq National Market on March 16, 1998. The information provided shall in no way be construed as an admission that any person whose holdings are excluded from this figure is an affiliate of the registrant or that any person whose holdings are included in this figure is not an affiliate of the registrant and any such admission is hereby disclaimed. The information provided herein is included solely for record keeping purposes of the Securities and Exchange Commission. PART I ITEM 1. BUSINESS. General A.C. Moore is a rapidly growing operator of arts and crafts superstores that offer a vast assortment of traditional and contemporary arts and crafts merchandise for a wide range of customers. The Company's business strategy is to provide the broadest and deepest selection of high quality merchandise at the lowest prices in an inviting, attractive superstore environment with superior customer service. The Company's objective is to become the leading arts and crafts retailer in each of its markets. A.C. Moore opened its first store in 1985 and since then has focused on developing and refining its retail concept. The Company became a holding company in July 1997 by incorporating in Pennsylvania and exchanging 4,300,000 shares of Common Stock for all the capital stock of its operating subsidiary which was organized in Delaware in 1984. As of December 31, 1997, the Company was operating 25 superstores in the mid-Atlantic and Northeast regions. A. C. Moore's prototype superstore ranges in size from 20,000 to 25,000 square feet, with approximately 80% devoted to selling space. A typical store offers approximately 65,000 SKUs across 26 merchandise categories during the course of a year, with more than 45,000 SKUs offered at any one time. Merchandise is presented in a distinctive manner designed to maximize shopping convenience and to reinforce themes and colors often associated with holidays, seasonal events or specific merchandise categories. Completed arts and crafts projects are prominently displayed in each department throughout the store to stimulate new project ideas for customers and to enhance the shopping environment. Market Overview According to the Hobby Industry Association ("HIA"), consumer expenditures for arts and crafts increased by 37% from approximately $7.8 billion in 1994 to approximately $10.9 billion in 1996. The Company believes demographic changes, particularly an aging baby boom population, an increasing focus on home-based, family activities and the trend toward making (rather than buying) gift items are contributing to the industry's growth. The Company also believes that industry growth is the result of continuing increases in the range and quality of available arts and crafts merchandise. Business Strategy The key elements of the Company's business strategy are as follows: 1 Vast Merchandise Selection. The Company's merchandising strategy is to offer the broadest and deepest selection of arts and crafts merchandise so that customers can obtain everything necessary to create and finish any arts and crafts project. The Company's key merchandise categories include silk and dried flowers, floral arrangements and accessories, ribbon, wedding crafts, potpourri, stitchery, yarn, jewelry crafts, kids crafts, art supplies, picture frames, stamps, doll-making, seasonal items and a variety of unfinished wood crafts. The Company believes its merchandise appeals to a wide range of recreational and professional crafters of all ages across diverse economic backgrounds. The Company actively seeks new merchandise by monitoring industry trends, working with domestic and international vendors, attending trade shows and craft fairs and regularly interacting with customers. The Company has designed its merchandise distribution systems to ensure rapid replenishment and the highest levels of in-stock positions. Each superstore receives merchandise daily from vendors or the Company's distribution center, which during peak periods will deliver a minimum of three and up to five times per week to the superstores. Customer Friendly Superstores. The Company believes that its high level of customer service and its attractive, easy-to-shop superstores are important competitive advantages. To ensure prompt and personalized service, the Company staffs its stores with a high ratio of store personnel to customers, including a store manager, three associate managers and a staff of up to 60 full-time and part-time sales associates. Store personnel, many of whom are arts and crafts enthusiasts, assist customers with merchandise selection and project ideas. All superstores are furnished with a customer service area, a counter for the free arrangement of floral merchandise, eight to ten registers to ensure quick customer checkout and a room in which classes are held up to seven days a week for adults and children on a wide variety of craft skills. The Company's superstores are typically located in power strip centers with convenient parking and are easily accessible from main arteries. Price Leadership. The Company seeks to maintain the lowest prices on all merchandise. Buyers and store managers actively monitor competitors' prices to ensure that the Company maintains the lowest prices. The Company's policy to beat any competitor's advertised price by 10% is clearly displayed in all superstores. In addition, on a weekly basis, the Company advertises select items at 20% to 40% off their everyday low prices. The Company believes that its strategy of price leadership enhances customer loyalty and provides superior value. Entrepreneurial Culture. Since inception, the Company has strived to foster an ownership culture and merchandising creativity at all levels of the organization. This culture allows A.C. Moore to have numerous merchandising initiatives, which, if proven successful, can be implemented very quickly throughout the Company. For example, each store manager is empowered to purchase merchandise to meet the unique needs of the local customer base. Store managers and associate managers earn incentive bonuses based upon annual increases in store profitability, and in 1997, average compensation for store managers was $100,000. The Company believes its focus on empowering and rewarding its employees helps in recruiting, hiring and retaining talented personnel. 2 Growth Strategy The Company has developed a rapid expansion plan to become the leading arts and crafts retailer in each of its markets and plans to open at least 25 superstores in 1998 and 1999. The Company has no current plans to expand through acquisitions, but may consider possible acquisitions in the future. The Company is targeting its expansion in both existing and new markets within an approximate 400-mile radius of the Company's southern New Jersey distribution center. This area contains more than 25% of the United States' population. Merchandising The Company's typical superstore offers approximately 65,000 SKUs across 26 merchandise categories during the course of a year, with more than 45,000 SKUs offered at any one time. The merchandise offered by the Company, by major product category, is as follows: Floral and Accessories Silk Flowers - includes a wide, seasonally changing assortment of high quality silk flowers, hand wrapped flowers, polystems, potted plants and green and flowering bushes. Dried Flowers - includes baby's breath, eucalyptus and many styles and colors of a seasonally changing assortment of bouquets of dried flowers. Floral Accessories - includes clay, brass, glass and ceramic containers, assorted mosses, styrofoam shapes, wreaths and other components to create floral displays. Floral Arrangements - the Company's floral designers work with customers to make any arrangement, free of charge, from silk or dried flowers purchased from the Company. The superstores also carry a large assortment of pre-made arrangements. Ribbon - includes ribbon by the spool, lace, a large selection of specialty ribbon sold by the yard and pre-made bows. Wedding - includes wedding supplies, bridal headpieces, bridal flowers, bouquet holders, ribbon roses and items used for christenings and baby showers. Potpourri - includes dried potpourri, potpourri oils, packaged scents and a wide assortment of candles, ranging from tealights to five pound three wick candles. Candle Making - includes blocks of paraffin wax, wicks and other materials necessary to make candles, as well as candle kits and brass and glass candle holders. 3 Wicker - includes a wide assortment of wicker baskets in various shapes and sizes. In each of 1997, 1996 and 1995, floral and accessories accounted for approximately 27% of sales. Traditional Crafts Stitchery - includes a broad range of stitchery kits which appeal to beginner and experienced stitchers, cross stitch supplies, stitchery accessories, floss and sewing notions. Yarn - includes acrylic, crochet cotton, cotton blends, rayon and other blends, as well as a full assortment of hooks, needles and other accessories. Wood - includes a variety of unfinished wood products, such as shelves, bird houses, clocks and other decorative pieces which can be finished in various ways such as painting, staining or stenciling. Cake and Candy Making - includes cake boards, bakeware, candy molds, chocolate melts, cookie cutters, icing coloring and flavors and spices. Miniatures - includes dollhouses and dollhouse furnishings, such as room settings, wallpaper, flooring and lighting, as well as miniature porcelains and ceramics. Doll Making - includes bodies, heads and hair used to make dolls and clothing for dolls, as well as teddy bears and other stuffed animals. Kids Crafts - includes sand art, sidewalk chalk, bead art supplies, children's stitchery kits, coloring and other books and children's crafts similar to crafts done by adults. Felt, Glitter - includes felt, glitter, pom-poms, chenille stems and loupy, all of which are used in the creation of craft projects. Books - includes a wide range of books to assist crafters in all categories, such as how-to books for the beginner and books for the experienced crafter. In 1997, 1996 and 1995, traditional crafts accounted for approximately 28%, 28% and 29% of sales, respectively. 4 Art Supplies and Frames Art Supplies - includes bottled and tube paints (oil, acrylic and water based), pastels, brushes, tablets, canvas pieces, drawing pencils, markers and art palettes. Stamps and Stationery - includes decorative stamps, stamp pads, fashion stickers, embossing tools, photo and memory albums, memory album accessories, scissors, hole punchers and note and fashion papers. Stencils - includes decorative stencils, crayons and paints for use on walls, wood, metal, clothing and other products. Frames - includes frames of all types and sizes, including empty frames and frames with glass, matting, posters and framing hardware. In 1997, 1996 and 1995, art supplies and frames accounted for approximately 28%, 26% and 24% of sales, respectively. Fashion Crafts Clothing - includes adult's and children's T-shirts and sweatshirts to be decorated with fabric art, as well as related accessories. Transfers - includes pictures which are ironed or sewn onto clothing, most of which can be further embellished with glitter and fabric paints. Jewelry Making - includes jewelry making components such as beads, sequins, rhinestones and findings, as well as the tools required to complete the project. In 1997, 1996 and 1995, fashion crafts accounted for approximately 8%, 10% and 11% of sales, respectively. Seasonal Items Seasonal items include a wide range of merchandise used as decorations for all major holidays and seasons, including the two most popular holiday seasons, Christmas and Easter. Other holidays, such as Valentine's Day, St. Patrick's Day and Halloween also result in significant sales of seasonal merchandise. In each of 1997, 1996 and 1995, seasonal items accounted for approximately 9% of sales. 5 Purchasing The Company's purchasing programs are designed to support its business strategy of providing customers with the broadest and deepest selection of high quality arts and crafts merchandise at the lowest prices and maintaining high in-stock positions. In order to manage its inventory of approximately 65,000 SKUs, the Company has organized its product offerings into 26 merchandise categories. The Company's 15 person corporate buying staff develops corporate buying programs to establish the merchandise direction for the Company and creates "planograms" to provide store managers with detailed descriptions and illustrations of store layout and merchandise presentation. The Company's product offering at a superstore is often enhanced by merchandise purchased by that store's manager to meet the unique needs of the superstore's customer base. The Company monitors these purchases through vendor master file controls. In-store department managers are responsible for daily reordering of merchandise and are monitored by store managers. Ordering occurs frequently, and the Company seeks vendors who can deliver on a timely basis. More than 94% of merchandise orders are placed through the Company's Electronic Data Interchange ("EDI") system, which allows for the automated reordering of merchandise from most domestic vendors. Approximately one-half of orders are shipped directly from the vendor to the Company's superstores. The remaining one-half, over 40% of which are floral and seasonal items, are shipped from the Company's distribution center. An early morning stocking crew unpacks deliveries and stocks merchandise before the superstore opens. The Company purchases its inventory from more than 400 vendors world-wide. The largest 17 suppliers accounted for approximately 42% of the dollar volume of the Company's purchases in 1997, and the largest supplier, SBAR'S, accounted for approximately 19% of the dollar volume of the Company's purchases in 1997. Approximately 13% of the Company's merchandise, primarily floral and seasonal items, is imported directly from foreign manufacturers or their agents, principally in the Far East. All of the Company's overseas purchases are denominated in dollars. SBAR'S is a large distributor of arts and crafts merchandise, primarily to independent arts and crafts retailers. SBAR'S maintains an inventory of many of the items the Company purchases directly from other vendors, thereby allowing the Company to obtain merchandise from SBAR'S which cannot be delivered by vendors on a timely basis. SBAR'S maintains a product development and design department which assists the Company in identifying craft trends, and the Company often obtains from SBAR's product samples and displays which are utilized in the Company's superstores to generate customer interest. The Company has developed a disciplined purchasing and ordering relationship with SBAR'S, which includes daily reordering and two to five deliveries by SBAR'S per store each week, depending on the size of the store and time of the year. SBAR'S has equipped the Company's superstores with handheld scanners to aid in product re-ordering. Merchandise purchased from SBAR'S typically has a high SKU count but small dollar volume, requires greater volume purchases from a manufacturer to obtain competitive pricing or involves a small number of SKUs from individual vendors with whom it would be impractical for the Company to establish a direct buying relationship. The 6 Company does not have a purchase agreement or an exclusive arrangement with SBAR's, and ordering of merchandise typically occurs through the issuance of individual purchase orders. The Company's buying operation led by the Chief Operating Officer is divided into two divisions. One division, headed by an Executive Vice President assisted by five buyers, handles merchandising for all floral and seasonal items. The other division, headed by a Senior Vice President assisted by a Vice President, Merchandise Planning/Advertising and five buyers, is responsible for merchandising all other items, which comprised approximately 64% of net sales in 1997. Buyers and store management regularly attend trade shows and craft fairs to monitor industry trends and to obtain new craft ideas. Superstore Format and Operations A.C. Moore's superstores are typically located in power strip centers with convenient parking and are easily accessible from main traffic arteries. The Company's prototype superstore ranges in size from 20,000 to 25,000 square feet, with approximately 80% devoted to selling space and the remainder consisting of delivery, storage, classroom and office areas. Superstores are typically open from 9:30 am to 9:00 pm, Monday through Saturday and from 10:00 am to 6:00 pm on Sunday. Superstores are designed with a layout intended to lead customers through the entire store in order to expose them to all 26 merchandise categories. Merchandise is grouped to aid the customer in finding project related items. Extensive use is made of the display shelving at both ends of each aisle to present the best selling items. Generally, the center of the superstore contains the floral area, which includes a counter for floral arrangement and a ribbon center. Superstores also contain a customer service area, eight to ten registers for quick customer checkout and a room for classes. Classes are regularly held on a wide variety of craft skills. Classes are taught by sales associates as well as outside professionals. Typical classes provide instruction on oil painting, cake decorating, advanced stamping, and on making bows, children's beaded necklaces and memory albums. Classes are free of charge unless there is an extensive use of materials. A major component of the Company's promotional strategy is its use of in-store displays and samples. Because many customers browse for new craft ideas, eye-catching displays of completed craft projects are effective at motivating impulse purchases. These displays enhance the image of store departments. Knowledgeable store personnel are available to describe displays in detail to customers and to offer assistance on related arts and crafts projects. The Company has three field design coordinators who are responsible for ensuring high quality floral displays in all superstores. The Company's President is responsible for store operations and is assisted by four Vice Presidents, each of whom is responsible for six to eight superstores. Each superstore employs approximately 60 full and part-time sales associates and is managed by a store manager, assisted by three associate 7 store managers, each of whom is responsible for approximately one-third of a superstore's selling space. New superstores are opened by the Company's new store development team which consists of the Vice President, New Store Development, a set-up-crew, and staff from the human resources and planogram departments. The Company seeks to develop the management capabilities of its managers through both Company training programs and on-the-job training. In addition, store managers and associate store managers attend several Company-sponsored conferences each year to refine and develop their skills in merchandising, merchandise trends, store operations, finance, interviewing, performance appraisals and general management. Training sessions are also held for floral designers and classroom coordinators at various times during the year. Distribution The Company's objective of maintaining high in-stock positions in all merchandise categories in all superstore locations is supported by its distribution system. Approximately 50% of the selling value of all merchandise is delivered to stores from the Company's distribution center, 20% is delivered by SBAR'S and the balance is drop-shipped by other vendors. Deliveries are made from the Company's distribution center two or three times per week, depending on superstore size, during eight months of the year and three to five times during the peak selling season of September through December. The Company maintains its own leased fleet of tractors and trailers. The Company has contracted with an outside carrier to deliver to superstores for which deliveries will require an overnight stay. The distribution center's mission is to support the Company's superstores. The distribution center is used strategically to distribute merchandise which is imported, cannot be delivered by a vendor on a timely basis or in the small quantities demanded by the store ordering process or is bulky and, therefore, difficult to store in the superstores. Also, the Company will order merchandise in large quantities for delivery to the distribution center when the vendor offers substantial volume discounts or other economic incentives. The Company's 120,000 square foot distribution center and adjoining 10,000 square foot office complex in Blackwood, New Jersey is leased for a term which expires in May, 2002 with an option to renew for six years. Approximately one-third of the distribution center is used for order picking, with the balance used for bulk stock storage. The distribution center and office complex will be expanded by 130,000 square feet for both warehouse and office needs by the end of 1998. In 1997, the Company completed the installation of a distribution center management system. The system includes the use of handheld computers to record all merchandise movement throughout the distribution center and to instantly update inventory records through the use of radio frequency communication. The Company believes that this new system, which operates in a paperless environment, enables the Company to enhance the tracking of inventory in the distribution center, increases the efficiency of distribution 8 center personnel and help ensure the distribution center's ability to maintain high in-stock positions in each of the Company's superstores as the Company expands its superstore base. Advertising and Promotion The Company creates its own advertising using photo art scanned into a Macintosh system supported by Pagemaker(R) software. The Company advertises 52 weeks per year, typically in midweek editions of local and/or regional newspapers. Approximately three times per year the Company runs multi-page newspaper inserts in local and regional newspapers. In addition, prior to store openings, the Company uses radio advertisements to develop customer awareness and runs special pre-opening ads, normal advertising copy and/or grand opening inserts in newspapers. In 1997, the Company's net advertising expenditures were approximately 3% of net sales. The Company uses in-store displays and samples of completed arts and crafts projects as a major component of its promotional strategy. Because many customers browse for new craft ideas, eye-catching displays of completed craft projects are effective at motivating impulse purchases. The Company also promotes customer interest in crafting by offering classes on a wide variety of craft skills. The Company believes that teachers, who often purchase arts and crafts merchandise for in-school projects, are an important customer segment. To generate goodwill, the Company offers teachers who join its Teachers Program a 10% discount on all regularly and sale priced merchandise. Over 250,000 discount cards have been issued to teachers. The Company's "Crafty Kids Birthday Club" and "Teen Club" are intended to develop future crafters as customers. Members of these clubs receive a birthday card containing a $5.00 gift certificate each year through their fifteenth birthday. These clubs have over 240,000 members. The Company also sponsors a "Kids Week" annually in July, during which each store is transformed into a mini carnival featuring events such as Make It & Take It Home Projects and Face Painting. This week-long event is free of charge. Management Information Systems A.C. Moore operates its accounting, merchandising and distribution center systems and all computer support functions on a PC-based local area network ("LAN"), currently with 91 local workstations and 50 remote workstations. Each superstore has two personal computers linked to the main office LAN by modem. Connection is made whenever information is sent from the superstore, such as an order transmission, or for the download of updated merchandise information. Various other critical functions, such as the annual distribution center physical inventory and bar-coded tracking of distribution center stock locations are supported by the LAN. 9 The Company's management information and control system has been designed to support the Company's key business objective of maintaining high in-stock merchandise positions in all of the Company's superstores. The internally developed system is based upon EDI with most of the Company's vendors as well as with the Company's distribution center. Stores electronically transmit their orders via modem to the corporate office where data is electronically sorted, processed and transmitted to the appropriate vendor. Orders are also fed automatically into the accounts payable system. This system captures daily purchases by SKU. The information is then used to develop planograms and is integrated into reports for the buyers and store managers. Competition The arts and crafts retailing business is highly competitive. The Company currently competes against a diverse group of retailers, including several national and regional chains of arts and crafts retailers (such as publicly-held Michaels Stores and privately-held M.J. Designs and Frank's Nursery and Crafts), local merchants that specialize in one or more aspects of arts and crafts and various mass merchandisers that typically dedicate a portion of their selling space to a limited selection of arts and crafts items. These mass merchandisers and some of the national chains have substantially greater financial resources and operate more stores than the Company. The Company believes that the principal competitive factors in its business are pricing, breadth of merchandise selection, in-stock merchandise position and customer service. The Company believes that it is well positioned to compete on each of these factors. Employees As of December 31, 1997, the Company had 729 full-time and 1,165 part-time employees, 1,736 of whom worked at superstores, 82 at the distribution center and 76 at the corporate offices. None of the Company's employees is covered by a collective bargaining agreement, and the Company considers its relationship with its employees to be good. Trademarks The Company uses the "A.C. Moore" name as a tradename and as a service mark in connection with the sale of its merchandise. The Company has applied to the United States Patent and Trademark Office to register the "A.C. Moore" logo as a service mark. Cautionary Statement Relating to Forward Looking Statements Certain oral statements made by management of the Company from time to time and certain statements contained herein or in other periodic reports filed by the Company with the Securities and Exchange Commission or incorporated by reference herein or therein are "forward-looking statements" 10 within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, as amended ("Exchange Act") with respect to results of operations and the business of the Company. All such statements, other than statements of historical facts, including those regarding market trends, the Company's financial position, business strategy, projected costs, and plans and objectives of management for future operations, are forward-looking statements. In general, such statements are identified by the use of forward-looking words or phrases including, but not limited to, "intended," "will," "should," "may," "expects," "expected," "anticipates," and "anticipated" or the negative thereof or variations thereon or similar terminology. These forward-looking statements are based on the Company's current expectations. Although the Company believes that the expectations reflected in such forward looking statements are reasonable, there can be no assurance that such expectations will prove to be correct. These forward-looking statements represent the Company's current judgment. The Company disclaims any intent or obligation to update its forward-looking statements. Because forward-looking statements involve risks and uncertainties, the Company's actual results could differ materially. Important factors that could cause actual results to differ materially from the Company's expectations ("Cautionary Statements") include those that are discussed below. All subsequent written and oral forward-looking statements attributable to the Company or persons acting on behalf of the Company are expressly qualified in their entirety by the Cautionary Statements. Risks Associated With Rapid Expansion. The Company's strategy to increase its net sales and earnings will depend in large part on its ability to open new superstores and to operate them on a profitable basis. The Company opened eight superstores in 1997 and anticipates opening 11 superstores in 1998 and 14 superstores in 1999, in both existing and new geographic markets. The opening of additional superstores in an existing market could result in lower net sales from the Company's existing superstores in that market. Opening superstores in new geographic markets may present competitive and merchandising challenges that are different from those currently faced by the Company in its existing geographic markets. The Company may incur higher costs related to advertising and distribution in connection with entering new markets. If the Company opens superstores that do not perform to the Company's expectations or if superstore openings are delayed, the Company's results of operations and financial condition could be materially adversely affected. The success of the Company's planned expansion will be dependent upon many factors, including the identification of suitable markets, the availability and leasing of suitable sites on acceptable terms, the availability of acceptable financing, the ability to expand the Company's distribution facility in a timely manner, the hiring, training and retention of qualified management and other store personnel and general economic conditions. The Company's rapid expansion will place significant demands on the Company's management, resources, operations and existing information systems, and the Company must ensure the continuing adequacy of its financial controls, operating procedures and information systems. Also, the Company's continued growth will depend on its ability to increase sales in its existing superstores. There can be no assurance that the Company will be successful in any of these areas, and, as a result, there can be no assurance that the 11 Company will achieve its planned expansion or that new superstores will be effectively integrated into the Company's existing operations or will be profitable. Dependence on Key Personnel; New Management Team. The success of the Company and its growth strategy is dependent upon the active involvement of senior management personnel, particularly John E. ("Jack") Parker, its President and Chief Executive Officer. The loss of the services of Mr. Parker or other members of senior management could have a materially adverse effect on the Company. The Company has not entered into employment agreements with any members of its senior management team nor does it maintain any key man life insurance on them. The Company's success in the future will also be dependent upon its ability to attract and retain other qualified personnel, including store managers. Small Store Base. As of December 31, 1997 the Company operated a chain of only 25 superstores. The Company has historically had strong comparable store sales; however, there can be no assurance that the level of comparable store sales can be maintained as the superstores mature and the number of comparable stores increase. The results achieved to date by the Company's relatively small store base may not be indicative of the results of the larger number of superstores which the Company intends to operate in existing or new markets. Because the Company's current and planned superstores are located in the mid-Atlantic and Northeast regions, the effect on the Company of adverse events in these regions (such as weather or unfavorable regional economic conditions) may be greater than if the Company's superstores were more geographically dispersed. Furthermore, due to the Company's relatively small store base, one or more unsuccessful new superstores, or a decline in sales at an existing superstore, will have a more significant effect on the Company's results of operations than would be the case if the Company had a larger store base. Quarterly Fluctuations. The Company's business is affected by the seasonality pattern common to most retailers. Due to the importance of the fall selling season, which includes Halloween, Thanksgiving and Christmas, the fourth calendar quarter has historically contributed, and is expected to continue to contribute, a substantial majority of the Company's operating income for the entire year. As a result, any factors negatively affecting the Company during the fourth quarter of any year, including adverse weather and unfavorable economic conditions, would have a materially adverse effect on the Company's results of operations for the entire year. The Company's quarterly results of operations also may fluctuate based upon such factors as the timing of certain holiday seasons, the number and timing of new superstore openings, the amount of superstore pre-opening expenses, the amount of net sales contributed by new and existing superstores, the mix of products sold, the timing and level of markdowns, competitive factors, weather and general economic conditions. Competition. The arts and crafts retailing business is highly competitive. The Company currently competes against a diverse group of retailers, including several national and regional chains of arts and crafts retailers, a substantial number of local merchants that specialize in one or 12 more aspects of arts and crafts and various mass merchandisers that typically dedicate a portion of their selling space to a limited selection of arts and crafts items. These mass merchandisers and some of the national chains have substantially greater financial resources and operate more stores than the Company. Risks Associated With Merchandising. The Company's success depends, in large part, on its ability to anticipate and respond, in a timely manner, to changing merchandise trends and consumer demands. Accordingly, any delay or failure by the Company in identifying and responding to changing merchandise trends could adversely affect consumer acceptance of the merchandise in the Company's superstores. In addition, the Company makes decisions regarding merchandise well in advance of each of the seasons in which such merchandise will be sold. Significant deviations from projected demand for products would have a materially adverse effect on the Company's results of operations and financial condition, either from lost sales due to insufficient inventory or lower margins due to the need to mark down excess inventory. Risks Associated with Product Sourcing. Although the Company purchases its merchandise from more than 400 vendors world-wide, the largest 17 suppliers accounted for approximately 42% of the dollar volume of the Company's purchases in 1997 and the largest supplier, SBAR'S Inc. ("SBAR'S"), accounted for approximately 19% of the dollar volume of the Company's purchases in 1997. The Company's future success is dependent upon its ability to maintain good relationships with SBAR'S and its other principal suppliers. The Company does not have any purchase agreements or exclusive arrangements with any vendors, and ordering of merchandise typically occurs through the issuance of individual purchase orders. The failure to maintain such relationships could have a materially adverse effect on the Company's results of operations, financial condition and planned store expansion. In addition, the Company in recent years has placed increased emphasis on obtaining floral and seasonal items from overseas vendors, with approximately 13% of all merchandise being purchased from overseas vendors in 1997. A change in the competitiveness of a particular country's exports, whether due to a change in trade regulations, currency fluctuations or other reasons is likely to increase the cost of items purchased by the Company overseas or make such items unavailable with a possible resulting materially adverse effect on the Company's results of operations and financial condition. In addition, since many arts and crafts customers will forgo any purchase unless they can obtain all the items necessary to complete a project, it is important that the Company maintain a high in-stock position of merchandise. As a result, any interruption in the supply of merchandise may preclude the Company from maintaining a sufficient in-stock position in all superstores, with a resulting decline in sales. Inventory Risk. The Company depends upon in-store department managers to reorder merchandise. The failure of the Company's staff to accurately respond to inventory requirements could adversely affect consumer acceptance of the merchandise in the Company's stores and thereby negatively impact sales which could have a materially adverse effect on the Company's results of operations and financial condition. In addition, as do most other retailers, the Company conducts a physical inventory once a year, and quarterly results 13 are based on an estimated gross margin and accrual for estimated inventory shrinkage. Future Capital Needs. The Company currently intends to finance the opening of new superstores with a portion of the proceeds from its initial public offering, cash flow from operations and borrowings. The Company plans to open 11 superstores in 1998 and 14 superstores in 1999. The Company expects that the average cash investment, including pre-opening expenses, required to open a superstore will be approximately $1,230,000. There can be no assurance that the actual cost of opening a superstore will not be significantly greater than that expected by the Company. The Company may be required to seek additional debt and/or equity financing in order to fund its continued expansion. There can be no assurance that such additional financing will be available on terms acceptable to the Company, if at all. In addition, the Company's ability to incur additional indebtedness or issue equity or debt securities could be limited by covenants in present and future loan agreements and debt instruments. 14 EXECUTIVE OFFICERS OF THE REGISTRANT The executive officers of the Company are currently as follows: Name Age Position ---- --- -------- John E. (Jack) Parker......... 56 President, Chief Executive Officer and Director Rex A. Rambo.................. 56 Executive Vice President, Chief Operating Officer Patricia A. Parker............ 55 Executive Vice President, Merchandising and Director Leslie H. Gordon.............. 54 Senior Vice President, Treasurer and Chief Financial Officer Janet Parker-Vandenberg....... 35 Senior Vice President, Merchandising Mr. Parker is a co-founder of the Company and has been President, Chief Executive Officer and a director of the Company since its inception. From 1959 to 1984, Mr. Parker worked for the F.W. Woolworth Company ("Woolworth") in various management positions, most recently as President and Chief Executive Officer of the U.S. General Merchandise Group where he had responsibility for more than 1,000 stores, including the entire domestic chain of Woolworth retail stores. Mr. Parker is the husband of Patricia A. Parker and the father of Janet Parker-Vandenberg. Mr. Rambo has been Executive Vice President and Chief Operating Officer of the Company since December 1997. From December 1996 to December 1997, Mr. Rambo served as Executive Vice President, Strategic Development, Merchandising and Marketing of the Company. In 1995 and 1996, Mr. Rambo was Executive Vice President, Merchandising and Marketing of Michaels Stores, Inc., an arts and crafts retailer. From 1992 to 1995, Mr. Rambo served in various management capacities with Montgomery Ward & Co. and its affiliates, first, from 1992 to 1994 as a Vice President of Montgomery Ward and most recently as President and Chief Operating Officer of Montgomery Ward's subsidiary Lechmere, Inc., a retailer of electronics and other home products. In July 1997, Lechmere, Inc. filed a petition in bankruptcy under Chapter 11. From 1963 to 1992, Mr. Rambo worked for Sears, Roebuck and Co. in various management capacities, including National Marketing Manager. Ms. Parker has been Executive Vice President, Merchandising of the Company since September 1990. From 1985 to 1990, she served as a Vice President of the Company. Ms. Parker is responsible for purchasing all floral and seasonal merchandise and the Company's import purchasing program. Ms. Parker is the wife of Jack Parker. Mr. Gordon has been Senior Vice President, Treasurer and Chief Financial Officer of the Company since March 1996. From 1992 to 1995, Mr. Gordon was Senior Vice President, Finance of C & J Clark America, Inc., a shoe 15 manufacturer, wholesaler and retailer. From 1986 to 1992, Mr. Gordon served as Senior Vice President, Finance of SILO, Inc., an electronics retailer. Ms. Parker-Vandenberg has been Senior Vice President, Merchandising of the Company since 1994. From 1990 to 1994, Ms. Parker-Vandenberg served as Vice President of Administration of the Company, and from 1985 to 1990, she was the Company's Accounting Manager. Ms. Parker-Vandenberg is the daughter of Jack and Patricia A. Parker. ITEM 2. PROPERTIES. As of March 16, 1998, the Company operated nine superstores in Pennsylvania, seven superstores in New Jersey, seven superstores in New York, two superstores in Delaware, one superstore in Maryland and Connecticut and two superstores in Massachusetts, all of which are leased. In addition, the Company has five superstores (one each in New Jersey, New York and Maryland and two in Massachusetts) under lease, four of which the Company plans to open in 1998 and one of which the Company plans to open in 1999. Most superstore leases have an average initial term of ten years, with three five year renewal options, and provide for predetermined escalations in future minimum annual rent or additional rent contingent upon store sales levels.] The pro rata portion of scheduled rent escalations has been included in other long-term liabilities in the Company's balance sheet. The Company selects superstore sites on the basis of various factors, including physical location, demographics, anchor and other tenants, location within the center, parking and available lease terms. The Company looks for co-tenants that generate a high rate of shopping traffic, such as specialty value-oriented women's retailers, leading chain supermarkets, discount chains, home improvement centers, book superstores and domestics superstores. The Company believes its superstores are attractive to developers because they attract high rates of customer traffic and generate above average net sales per square foot. The Company's superstore site selection process is headed by a Senior Vice President. ITEM 3. LEGAL PROCEEDINGS. From time to time, the Company is involved in litigation arising in the ordinary course of its business. None of the pending litigation, in the opinion of management, is likely to have a materially adverse effect on the Company's results of operations or financial condition. The Company maintains general liability insurance in amounts deemed adequate by management. 16 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. No matters were submitted to a vote of security holders during the fourth quarter of fiscal 1997, through the solicitation of proxies or otherwise. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. The Company's common stock is traded on the NASDAQ National Market under the symbol ACMR. The following table shows the quarterly range of high and low sales prices of the common stock on the NASDAQ National Market since October 9, 1997, the date the Company's Common Stock became publicly traded: Quarter Ended High Low ------------- ---- --- December 31, 1997 $18 1/2 $10 7/8 As of March 16, 1998, there were approximately 64 stockholders of record. From its inception in 1985 until immediately prior to completion of its initial public offering, the Company was subject to taxation under Subchapter S of the Internal Revenue Code of 1986 (the "Code"). As a result, the net income of the Company, for federal and certain state income tax purposes, was taxable directly to the Company's shareholders during that time rather than to the Company. To provide funds for tax obligations payable by its shareholders on account of the Company's taxable income in 1996 and 1995 and as distributions of earnings, the Company made aggregate distributions to its shareholders of $7.0 million and $6.6 million during 1997 and 1996, respectively. The funds distributed to shareholders, reduced by the amounts used to pay tax obligations on account of the Company's taxable income, were loaned to the Company contemporaneously with their distribution to provide working capital to the Company. In connection with its conversion from S Corporation to C Corporation status, the Company distributed $256,000 to the Company's shareholders. This distribution represented the shareholders' proportionate interest in the Company's earnings which had not been distributed to the shareholders prior to the Company's conversion to a C Corporation. The Company does not intend to pay any cash dividends as it intends to retain its earnings to finance the expansion of its business. Future dividends, if any, will depend upon the Company's results of operations, financial condition, cash requirements and other factors deemed relevant by the Board of Directors. Furthermore, the Company's credit agreement prohibits the payment of cash dividends by the Company without the bank's consent. 17 The Company filed a Registration Statement on Form S-1 with the Securities and Exchange Commission (Commission file number 333-32859) for the sale of Common Stock in the Company's initial public offering (the "Offering"). The Company registered 3,105,000 shares of Common Stock, including 405,000 shares of Common Stock for sale upon exercise of an option granted to the underwriters to cover over-allotments. The effective date of the Registration Statement was October 8, 1997. The Offering commenced on October 9, 1997 and was terminated after the sale of all securities registered. The management underwriters for the Offering were BT Alex. Brown Incorporated and Janney Montgomery Scott, Inc. The aggregate price to the public of the 3,105,000 shares of Common Stock registered was $46,575,000. The Company completed the Offering, selling all 3,105,000 shares of Common Stock registered for the aggregate offering price of $46,575,000. The Company incurred the following expenses in connection with the issuance and distribution of its Common Stock in the Offering: Underwriting Discounts and Commissions . . . . . . . . . $3,260,250 Expenses paid to or for Underwriters . . . . . . . . . -- Other Expenses . . . . . . . . . . . . . . . . . . . . 724,375 ---------- Total Expenses . . $3,984,625 ========== All payments of expenses were direct or indirect payments to persons other than directors or officers of the Company or their associates, persons owning ten percent or more of any class of equity securities of the Company, or affiliates of the Company. The Company used the net proceeds of the Offering ($42,590,375 after deducting total expenses set forth above) for the following purposes: Repayment of outstanding bank indebtedness . . . . . .. . $13,198,902 Repayment of subordinated shareholder loans . . . . .. . 14,800,000 Repayment of S Corporation Distribution . . . . . .. . 256,000 Working Capital . . . . . . . . . . . . . . . . . . .. . 1,445,723 Temporary investment in Evergreen Institutional Fund. . . 12,889,750 ----------- Net Proceeds . . . . . . . . . . . . . . . . . . . .. . $42,590,375 =========== ITEM 6. SELECTED FINANCIAL DATA. The selected Financial data for the five years ended December 31, 1997 should be read in conjunction with the Company's consolidated financial statements and notes thereto and "Management's Discussion and Analysis of Financial Condition and Results of Operations" appearing elsewhere herein. 18
Year Ended December 31, ------------------------------------------------------------------------- 1997 1996 1995 1994 1993(2) ----------- ----------- ----------- ----------- ----------- OPERATING DATA: Net sales ............................... $ 138,056 $ 109,319 $ 100,106 $ 86,376 $ 62,503 Income from operations .................. 7,781 6,943 7,248 5,209 64 Net income (loss) ....................... 3,992 6,306 6,409 4,580 (225) Net income (loss) per share, diluted .... 0.79 1.46 1.48 1.07 (0.05) Pro forma net income(1) ................. 4,431 3,817 3,840 2,695 2,228 Pro forma diluted net income per share(1) 0.87 0.88 0.89 0.63 0.52 Weighted average shares outstanding ..... 5,078,000 4,326,000 4,326,000 4,300,000 4,300,000 Stores open, end of year ................ 25 17 16 16 12 Comparable store sales increase ......... 4% 5% 8% 2% 14% Average sales per store ................. $ 6,728 $ 6,586 $ 6,245 $ 6,161 $ 6,641 Sales per total square foot ............. 326 320 303 302 332 BALANCE SHEET DATA: Working capital ......................... $ 40,974 $ 20,597 $ 20,224 $ 16,937 $ 9,521 Total assets ............................ 66,067 37,799 34,571 30,720 22,680 Long-term debt, excluding current portion -- 17,748 16,105 16,881 13,258 Shareholders' equity (deficit) .......... 47,086 7,492 7,756 3,915 (641)
(1) Prior to the Company's initial public offering completed on October 9, 1997 the Company elected to be taxed under the S Corporation provisions of the Internal Revenue Code. Under these provisions, the shareholders of the Company included their pro rata share of income or loss in their individual returns. The pro forma information has been computed as if the Company was subject to federal and all applicable state corporate income taxes for each year presented, assuming the tax rate that would have applied had the Company been taxed as a C Corporation (2) For the year ended December 31, 1993 the Company distributed $4,000,000 to its shareholders as compensation which was charged to income. A portion of this distribution was used to pay taxes and the balance was loaned to the Company for working capital purposes. In subsequent years shareholder distributions were charged directly to retained earnings 19 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION. The following discussion of the Company's historical results of operations and its liquidity and capital resources should be read in conjunction with the selected financial data and the consolidated financial statements of the Company and related notes thereto appearing elsewhere in this report. Overview A.C. Moore Arts & Crafts, Inc. (the "Company") is a rapidly growing operator of arts and crafts superstores that offers a vast assortment of traditional and contemporary arts and crafts merchandise for a wide range of customers. In 1995, the Company implemented a plan to build its infrastructure to position the Company for rapid future growth. By the end of 1996, the Company had recruited experienced senior retail executives in the areas of operations, merchandising and finance, made key additions in other areas such as buying, information systems, human resources and real estate, leased a new 130,000 square foot distribution center and office complex, developed its automated ordering system to electronically link the Company with most vendors, and developed a real estate program to accommodate the Company's expansion plan. In 1996, the Company opened one new superstore. In 1997, the Company continued the implementation of its expansion strategy by opening eight new superstores and achieved a sales growth in the existing store base of 4%. The Company plans to open at least 25 new superstores in 1998 and 1999, all within 400 miles of its southern New Jersey distribution center. This area contains more than 25% of the United States' population. The distribution center and office complex is currently being expanded by 130,000 square feet for both warehouse and office needs and this expanded facility will be available by the end of the year. The Company successfully completed an initial public offering on October 9, 1997 by issuing 3,105,000 shares of common stock including shares issued upon the exercise of an underwriters' option and received $42.6 million in net proceeds. The Company retired all outstanding bank debt and shareholder loans totaling $28.0 million with the proceeds. 20 Results of Operations The following table sets forth, for the periods indicated, selected statement of operations data expressed as a percentage of net sales: Year Ended December 31, ----------------------------- 1997 1996 1995 ------ ------ ------ Net sales .................................. 100.0% 100.0% 100.0% Cost of sales .............................. 62.9 63.3 63.3 ------ ------ ------ Gross margin ............................... 37.1 36.7 36.7 Selling, general and administrative expenses 30.4 30.2 29.5 Pre-opening expense ........................ 1.1 0.1 0.0 ------ ------ ------ Income from operations ..................... 5.6 6.4 7.2 Interest expense, net ...................... 0.3 0.5 0.7 ------ ------ ------ Income before income taxes ................. 5.3 5.9 6.5 Income tax expense ......................... 2.4 0.1 0.1 ------ ------ ------ Net income ................................. 2.9% 5.8% 6.4% ====== ====== ====== Pro forma income tax provision ............. 2.1 2.3 2.6 ------ ------ ------ Pro forma net income ....................... 3.2% 3.5% 3.8% ====== ====== ====== 1997 Compared to 1996 Net Sales. Net sales increased $28.7 million, or 26.3%, to $138.1 million in 1997 from $109.3 million in 1996. This increase resulted from (i) net sales of $23.7 million from eight new superstores opened during the period, (ii) $400,000 from the superstore opened in 1996 not included in the comparable store base, and (iii) a comparable store sales increase of $4.6 million, or 4%. Stores are added to the comparable store base at the beginning of the fourteenth full month of operation. Gross Margin. Cost of sales includes the cost of merchandise, plus certain distribution and purchasing costs. Cost of sales increased $17.6 million, or 25.5%, to $86.8 million in 1997 from $69.2 million in 1996. The gross margin increased $11.1 million, or 27.7%, to $51.2 million in 1997 from $40.1 million in 1996. The gross margin increased to 37.1% of net sales in 1997 from 36.7% in 1996. Selling, General and Administrative Expenses. Selling, general and administrative expenses include (a) direct store level expenses, including rent and related operating costs, payroll, advertising, depreciation and other direct costs, and (b) corporate level costs not directly associated with or allocable to cost of sales including executive salaries, accounting and finance, corporate information systems, office facilities and other corporate expenses. Selling, general and administrative expenses increased $8.9 million, 21 or 27.0%, in 1997 to $42.0 million from $33.0 million in 1996. Of the increase, $7.3 million was attributable to the eight superstores open during 1997 which were not open during 1996 and the one superstore opened in the first half of 1996 not in the comparable store base. The remainder of the increase is attributable to $900,000 in operating expenses in the comparable superstores and $700,000 in corporate costs, principally from the addition of corporate staff and infrastructure to support the expected growth of the Company. As a percentage of sales, selling, general and administrative costs increased to 30.4% of net sales in 1997 from 30.2% of net sales in 1996. This increase is primarily due to the new stores, which, on average, have higher operating costs as a percent of sales than older stores. Pre-Opening Expense. The Company expenses store pre-opening expense in the quarter that a superstore is opened. Pre-opening expense for the eight new superstores opened in 1997 amounted to $1.5 million. In 1996, the Company opened one superstore which had pre-opening expense of $140,000. Interest Expense. Interest expense was $631,000 for 1997, a decrease of $69,000 from 1996. This decrease was due to the repayment of bank debt resulting from the cash received from the sale of common shares in October 1997. Interest Income. Interest income was $202,000 in 1997, an increase of $59,000 from 1996. The increase was due to the investment of cash received from the sale of common shares. Income taxes. Prior to the Company's initial public offering on October 9, 1997 the Company elected to be taxed under the S Corporation provisions of the Internal Revenue Service. Under these provisions, the shareholders of the Company included their pro rata share of income or loss in their individual returns. On October 9, 1997 the Company converted to C Corporation status and the Company's earnings subsequent to that date reflect all applicable income taxes. Effective with the termination of its S Corporation status, the Company recognized deferred income taxes of $659,000 for cumulative temporary differences between income for financial and tax reporting purposes. 1996 Compared to 1995 Net Sales. Net sales increased $9.2 million, or 9.2%, to $109.3 million in 1996 from $100.1 million in 1995. This increase resulted from (i) net sales of $3.9 million from the one new superstore opened during 1996 and (ii) a comparable superstore sales increase of $5.3 million, or 5%. Gross Margin. Cost of sales increased $5.9 million, or 9.3%, to $69.2 million in 1996 from $63.3 million in 1995. The gross margin increased $3.3 million, or 9.1%, to $40.1 million in 1996 from $36.8 million in 1995. The gross margin was 36.7% in both years. Selling, General and Administrative Expenses. General and administrative expenses increased $3.5 million, or 12.0%, to $33.0 million in 1996 from $29.5 million in 1995. Of the increase, $1.1 million resulted from 22 the one superstore opened in 1996 and $700,000 from superstores opened before December 31, 1995. The remainder resulted from the addition of senior management and other corporate staff during 1996, the cost of moving the Company's distribution and office facilities in May 1996 and the increased rent and maintenance of these new facilities. All of these added expenditures were designed to support the planned growth of the Company. Selling, general and administrative expenses increased to 30.2% of net sales in 1996 from 29.5% of net sales in 1995. Pre-Opening Expense. Pre-opening expense was $140,000 in 1996 for the one superstore opened in that year. No stores were opened in 1995. Interest Expense. Interest expense decreased by $141,000 to $700,000 in 1996 from $841,000 in 1995. This decrease was due to lower bank borrowings in 1996 as the Company was able to use the proceeds of shareholder loans and internally generated cash to fund operations and the addition of one superstore. Interest Income. Interest income increased by $62,000 to $143,000 in 1996 from $81,000 in 1995. This increase was due to additional cash the Company was able to accumulate from internally generated funds during non-peak borrowing periods. Seasonality and Quarterly Results Due to the importance of the fall selling season, which includes Halloween, Thanksgiving and Christmas, the fourth calendar quarter has historically contributed, and is expected to continue to contribute, a substantial majority of the Company's profitability for the entire year. As a result, any factors negatively affecting the Company during the fourth quarter of any year, including adverse weather and unfavorable economic conditions, would have a materially adverse effect on the Company's results of operations for the entire year. The Company's quarterly results of operations also may fluctuate based upon such factors as the timing of certain holiday seasons, the number and timing of new superstore openings, the amount of superstore pre-opening expenses, the amount of net sales contributed by new and existing superstores, the mix of products sold, the timing and level of markdowns, competitive factors, weather and general economic conditions. 23 Set forth below is certain summary information with respect to the Company's operations for the most recent eight fiscal quarters:
First Second Third Fourth Quarter Quarter Quarter Quarter ----------- ------------ ------------ -------------- (in thousands except per share amounts) Year ended December 31, 1997 Net Sales................................... $27,252 $26,405 $31,295 $53,104 Income (loss) from operations............... 511 (78) 349 6,999 Income (loss) before income taxes........... 400 (247) 89 7,110 Net income (loss)........................... 393 (247) 89 3,757 Net income (loss) per share, diluted........ 0.09 (0.06) 0.02 0.52 Pro forma net income (loss)(1).............. 240 (148) 53 4,286 Pro forma diluted net income (loss) per share.............................. 0.06 (0.03) 0.01 0.60 Weighted average shares outstanding......... 4,326 4,326 4,326 7,155 Year ended December 31, 1996 Net sales................................... $23,176 $21,803 $25,687 $38,653 Income (loss) from operations............... 494 (26) 1,095 5,380 Income (loss) before income taxes........... 376 (169) 925 5,254 Net income (loss)........................... 354 (164) 911 5,205 Net income (loss) per share, diluted........ 0.08 (0.04) 0.21 1.20 Pro forma net income (loss)(1).............. 232 (108) 561 3,132 Pro forma diluted net income (loss) per share.............................. 0.05 (0.02) 0.13 0.72 Weighted average shares outstanding......... 4,326 4,326 4,326 4,326
- ------------- (1) The pro forma information has been computed as if the Company was subject to federal and all applicable state corporate income taxes for each of the periods presented, assuming the tax rate that would have applied had the Company been taxed as a C Corporation. 24 Liquidity and Capital Resources The Company's cash needs are primarily for working capital to support its inventory requirements and capital expenditures, pre-opening expenses and beginning inventory for new superstores. Prior to the sale of common shares in October 1997, the Company had financed its operations and new store openings primarily with cash from operations, borrowing under bank financing agreements and subordinated loans from its shareholders. In October 1997 the Company completed an initial public offering of 3,105,000 shares of its common stock, including shares issued upon exercise of an underwriters' overallotment option in November 1997. Net proceeds to the Company, after deducting underwriting commissions and discounts and expenses, was $42.6 million. Approximately $28.0 million of the proceeds were used to retire long-term debt, borrowings under the line of credit and the loans from shareholders. At December 31, 1997 and 1996, the Company's working capital was $41.0 million and $20.6 million, respectively. During 1997 and 1996, cash generated by operations was $1.5 million and $6.7 million, respectively. In these periods, $11.8 million and $1.6 million of cash, respectively, was used to increase inventory levels to support both new and existing stores. In 1997 part of the inventory increase was financed through increases in accounts payable of $7.2 million. Net cash used in investing activities during 1997 and 1996 was $8.0 million and $2.3 million, respectively. This use of cash was primarily the result of new store openings and, in 1997, the investment of $4.0 million of proceeds from the sale of shares into marketable securities. In 1998, the Company expects to spend approximately $5.7 million on capital expenditures, which includes approximately $4.0 million for new store openings and the remainder for distribution equipment in support of the warehouse expansion, systems development and fixtures for existing stores. There are no other material commitments for capital expenditures other than new store openings in the next 12 months. On March 11, 1998 the Company entered into a new four year financing agreement with a bank which provides a $25 million revolving credit facility, $15 million of which is available immediately with the remainder available in $5 million increments in 1999 and 2000 providing the Company is in compliance with the agreement's covenants. The Company believes the proceeds from the public offering, together with cash generated from operations and available borrowings under the financing agreement will be sufficient to finance its working capital and capital expenditure requirements for at least the next 12 months. 25 Inflation Management does not believe that inflation has had a material effect on its financial condition or results of operations during the past three years. Year 2000 Management has evaluated the issues relating to the Year 2000 as it may affect the Company's operating systems and future operating results and has determined the cost of addressing the Year 2000 issue is immaterial and the changes required are of a magnitude which is unlikely to impact future operating performance. Recent Accounting Pronouncements On February 18, 1998, the Financial Accounting Standards Board cleared, subject to certain editorial changes, the proposed Statement of Position (SOP), "Reporting on the Costs of Start-Up Activities". The statement provides guidance on the financial reporting for start-up costs and requires entities to expense start-up activities as they are incurred. The SOP, effective for fiscal years beginning after December 15, 1997, is expected to be issued by the end of April 1998. The Company does not anticipate the issuance of the SOP to have a material impact on its results of operations or financial position. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK. Not applicable. 26 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS A.C. MOORE ARTS & CRAFTS, INC. Page Report of Independent Accountants.................................. 28 Consolidated Balance Sheet at December 31, 1997 and 1996........... 29 Consolidated Statement of Income for each of the three years in the period ended December 31, 1997..................... 30 Statement of Changes in Shareholders' Equity for each of the three years in the period ended December 31, 1997......... 31 Consolidated Statement of Cash Flows for each of the three years in the period ended December 31,1997................ 32 Notes to Consolidated Financial Statements......................... 33 27 Report of Independent Accountants To the Board of Directors and Shareholders of A.C. Moore Arts & Crafts, Inc. In our opinion, the consolidated financial statements listed in the accompanying index present fairly, in all material respects, the financial position of A.C. Moore Arts & Crafts, Inc. and its subsidiaries at December 31, 1997 and 1996, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. PRICE WATERHOUSE LLP Philadelphia, Pennsylvania February 27, 1998 28 A.C. MOORE ARTS & CRAFTS, INC. CONSOLIDATED BALANCE SHEET (dollars in thousands)
December 31, -------------------- 1997 1996 ------- ------- ASSETS Current assets: Cash and cash equivalents ........................................... $15,835 $ 6,431 Marketable securities ............................................... 4,004 -- Accounts receivable ................................................. 131 162 Inventories ......................................................... 37,022 25,255 Prepaid expenses and other current assets ........................... 903 361 ------- ------- 57,895 32,209 Property and equipment, net .............................................. 7,655 5,114 Other assets ............................................................. 517 476 ------- ------- $66,067 $37,799 ======= ======= LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Current portion of long-term debt ................................... $ -- $ 1,857 Trade accounts payable .............................................. 12,479 6,226 Accrued payroll and payroll taxes ................................... 2,353 2,209 Accrued expenses .................................................... 2,089 1,320 ------- ------- 16,921 11,612 ------- ------- Long-term liabilities: Long-term debt ...................................................... -- 6,653 Loans from shareholders-subordinated ................................ -- 11,095 Deferred taxes ...................................................... 830 -- Other long-term liabilities ......................................... 1,230 947 ------- ------- 2,060 18,695 ------- ------- 18,981 30,307 ------- ------- Shareholders' equity: Preferred stock, no par value, 5,000,000 shares authorized, none issued ............................................. -- -- Common stock, no par value, 20,000,000 shares authorized, 7,405,000 shares outstanding at December 31, 1997; 4,300,000 shares outstanding at December 31, 1996 ................................................ 42,829 200 Retained earnings ................................................... 4,257 7,292 ------- ------- 47,086 7,492 ------- ------- $66,067 $37,799 ======= =======
The accompanying notes are an integral part of these financial statements 29 A.C. MOORE ARTS & CRAFTS, INC. CONSOLIDATED STATEMENT OF INCOME (dollars in thousands except per share data)
Year Ended December 31, ----------------------------------------------- 1997 1996 1995 ----------- ----------- ----------- Net sales ...................................................... $ 138,056 $ 109,319 $ 100,106 Cost of sales (including buying and distribution costs) ......................................... 86,827 69,195 63,344 ----------- ----------- ----------- Gross margin ................................................... 51,229 40,124 36,762 Selling, general and administrative expenses ................... 41,971 33,041 29,514 Pre-opening expenses ........................................... 1,477 140 -- ----------- ----------- ----------- Income from operations ......................................... 7,781 6,943 7,248 Interest expense ............................................ 631 700 841 Interest income ............................................. (202) (143) (81) ----------- ----------- ----------- Income before income taxes ..................................... 7,352 6,386 6,488 Income tax expense .......................................... 3,360 80 79 ----------- ----------- ----------- Net income ..................................................... $ 3,992 $ 6,306 $ 6,409 =========== =========== =========== Basic net income per share ..................................... $ 0.80 $ 1.47 $ 1.49 =========== =========== =========== Weighted average shares outstanding ............................ 4,982,000 4,300,000 4,300,000 =========== =========== =========== Diluted net income per share ................................... $ 0.79 $ 1.46 $ 1.48 =========== =========== =========== Weighted average shares outstanding plus impact of stock options ................................ 5,078,000 4,326,000 4,326,000 =========== =========== =========== Pro forma income and per share data (unaudited) (Notes 2 and 3): Income before income taxes, as reported ........................ $ 7,352 $ 6,386 $ 6,488 Pro forma income tax provision .............................. 2,921 2,569 2,648 ----------- ----------- ----------- Pro forma net income ........................................... $ 4,431 $ 3,817 $ 3,840 =========== =========== =========== Pro forma basic net income per share ........................... $ 0.89 $ 0.89 $ 0.89 =========== =========== =========== Pro forma diluted net income per share............... $ 0.87 $ 0.88 $ 0.89 =========== =========== ===========
The accompanying notes are an integral part of these financial statements 30 A.C. MOORE ARTS & CRAFTS INC. STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY (dollars in thousands)
Common Retained Shares Stock Earnings Total --------- --------- --------- --------- Balance, December 31, 1994 ....... 4,300,000 $ 200 $ 3,715 $ 3,915 Net income ....................... -- -- 6,409 6,409 Distributions to shareholders .... -- -- (2,568) (2,568) --------- --------- --------- --------- Balance, December 31, 1995 ....... 4,300,000 $ 200 7,556 7,756 Net income ....................... -- -- 6,306 6,306 Distributions to shareholders .... -- -- (6,570) (6,570) --------- --------- --------- --------- Balance, December 31, 1996 ....... 4,300,000 $ 200 7,292 7,492 Net income ....................... -- -- 3,992 3,992 Distributions to shareholders .... -- -- (7,027) (7,027) Proceeds from sale of common stock 3,105,000 42,590 -- 42,590 Compensation expense related to stock options ........... -- 39 -- 39 --------- --------- --------- --------- Balance, December 31, 1997 ....... 7,405,000 $ 42,829 $ 4,257 $ 47,086 ========= ========= ========= =========
The accompanying notes are an integral part of these financial statements 31 A.C. MOORE ARTS & CRAFTS, INC. CONSOLIDATED STATEMENT OF CASH FLOWS (in thousands)
Year Ended December 31, -------------------------------------- 1997 1996 1995 -------- -------- -------- Cash flows from operating activities: Net Income $ 3,992 $ 6,306 $ 6,409 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization ................. 1,461 1,145 975 Compensation expenses related to stock options ....................................... 39 Provisions for deferred income taxes .......... 830 Changes in assets and liabilities: Accounts receivable ..................... 31 12 (94) Inventories ............................. (11,767) (1,596) (3,028) Prepaid expenses and other current assets (542) 31 (41) Accounts payable and accrued expenses ... 7,166 656 (133) Other assets ............................ (41) (13) (56) Other long-term liabilities ............. 283 112 158 -------- -------- -------- Net cash provided by operating activities .............. 1,452 6,653 4,190 -------- -------- -------- Cash flows (used in) investing activities: Capital expenditures .......................... (4,002) (2,251) (853) Investment in marketable securities ........... (4,004) -- -- -------- -------- -------- Net cash (used in) investing activities ................ (8,006) (2,251) (853) -------- -------- -------- Cash flows from financing activities: Proceeds from sale of common stock ............ 42,590 -- -- Proceeds from long-term debt .................. -- -- 3,380 Proceeds from shareholders' loans ............. 3,705 3,500 -- Repayment of shareholders' loans .............. (14,800) -- -- Repayment of long-term debt ................... (8,510) (776) (3,397) Distributions to shareholders ................. (7,027) (6,570) (2,568) -------- -------- -------- Net cash provided by (used in) financing activities .... 15,958 (3,846) (2,585) -------- -------- -------- Net increase in cash ................................... 9,404 556 752 Cash and cash equivalents at beginning of year ......... 6,431 5,875 5,123 ======== ======== ======== Cash and cash equivalents at end of year ............... $ 15,835 $ 6,431 $ 5,875 ======== ======== ======== Cash paid during the year for: Interest ...................................... $ 679 $ 709 $ 838 ======== ======== ======== Income taxes .................................. $ 2,707 $ 82 $ 41 ======== ======== ========
The accompanying notes are an integral part of these financial statements 32 A.C. MOORE ARTS & CRAFTS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. Summary Of Significant Accounting Policies Organization and basis of presentation. A.C. Moore Arts & Crafts, Inc. became a holding company in July 1997 by incorporating in Pennsylvania and exchanging its common stock for all of the capital stock of A.C. Moore Inc. held by its shareholders. The consolidated financial statements include the accounts of A.C. Moore Arts & Crafts, Inc. and its wholly owned subsidiaries (collectively the "Company"). All intercompany accounts and transactions have been eliminated. As of December 31, 1997, the Company operated a 25-store chain of retail arts and crafts stores in the mid-Atlantic and northeast regions of the United States. Cash and cash equivalents. Cash and cash equivalents are stated at cost, which approximates market value. Cash equivalents include only securities having a maturity of three months or less at the time of purchase. Marketable securities. The Company's investments, consisting of federal agency securities, are classified as available-for-sale and are recorded at cost which approximates fair market value. Fair market value is based upon quoted market prices on the last day of the year. These securities were called in their entirety by the agency in January 1998. Concentration of credit risk. Financial instruments, which potentially subject the Company to concentrations of credit risk, are cash, cash equivalents and marketable securities. The Company limits its credit risk by placing its investments in highly rated, highly liquid funds. Inventories. Inventories, which consist of general consumer merchandise held for sale, are stated at the lower of cost or market. The cost of store inventories is determined by the retail inventory method. Warehouse inventories are determined on a first-in, first-out basis. The Company includes as inventoriable costs certain indirect costs, principally purchasing, warehousing and distribution. Property and equipment. Property and equipment are stated at cost. Depreciation is provided on a straight-line basis over the estimated useful lives of the assets. Furniture, fixtures and equipment are depreciated over periods of five to ten years and leasehold improvements are depreciated over the shorter of their estimated useful lives or the term of the related lease. Maintenance and repairs are charged to operations as incurred and major improvements are capitalized. When property and equipment are retired or sold, the cost and related accumulated depreciation are removed from the accounts and the net amount, less any proceeds from disposal, is reflected in income. 33 Store pre-opening expenses. Direct incremental costs incurred to prepare a store for opening are deferred until the quarter the store opens at which time such costs are fully charged to expense. Advertising costs. The costs incurred for advertising are expensed the first time the advertising takes place and are offset by reimbursements received under cooperative advertising programs with certain vendors. Net advertising expense during 1997, 1996 and 1995 was $4,083,000, $2,985,000 and $2,808,000, respectively. Fair value of investments. The carrying amounts of cash, cash equivalents and marketable securities, accounts receivable, other current assets, accounts payable, accrued expenses and other liabilities approximate fair value because of the short maturity of these instruments. The carrying amount of long-term debt approximates fair value, as the interest rates on the debt approximate rates currently available to the Company for debt with similar terms and remaining maturities. Use of estimates. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements, and the amount of revenues and expenses during the reporting period. Differences from those estimates, if any, are recorded in the period they become known. Recent accounting pronouncements. On February 18, 1998, the Financial Accounting Standards Board cleared, subject to certain editorial changes, the proposed Statement of Position (SOP), "Reporting on the Costs of Start-Up Activities". The statement provides guidance on the financial reporting for start-up costs and requires entities to expense start-up activities as they are incurred. The SOP, effective for fiscal years beginning after December 15, 1997, is expected to be issued by the end of April 1998. The Company does not anticipate the issuance of the SOP to have a material impact on its results of operations or financial position. 2. Income Taxes and Pro Forma Income Taxes Prior to the Company's initial public offering completed on October 9, 1997 the Company elected to be taxed under the S Corporation provisions of the Internal Revenue Code. Under these provisions, the shareholders of the Company included their pro rata share of income or loss in their individual federal and state tax returns. A portion of the distributions to shareholders was related to their individual income tax liabilities resulting from S Corporation taxable earnings. The Company's earnings subsequent to conversion to C Corporation status reflect all applicable income taxes. 34 The Company utilizes the liability method of accounting for income taxes. Under this method, deferred tax liabilities and assets are recognized for the expected future tax consequences of temporary differences between the carrying amounts and the tax bases of assets and liabilities. Effective with the termination of its S Corporation status the Company recognized deferred income taxes of $659,000 for cumulative temporary differences between income for financial and tax reporting purposes. As of December 31, 1997, the deferred tax liability of $830,000 comprised principally temporary differences related to depreciation. Pro forma taxes have been computed as if the Company was subject to all applicable federal and state income taxes for each year presented, assuming the tax rate that would have applied had the Company been taxed as a C Corporation. A reconciliation of income tax expense at the federal income tax rate to the income tax provision is as follows: Year Ended December 31, ----------------------------- 1997 1996 1995 ------- ------- ------- (in thousands) U.S. federal taxes at statutory rate ........ $ 2,500 $ 2,171 $ 2,206 State and local taxes, net .................. 355 393 421 Effect of S Corporation taxable earnings .... (212) (2,489) (2,569) Recognition of cumulative deferred income tax 659 -- -- Other ....................................... 58 5 21 ------- ------- ------- Income tax provision ........................ $ 3,360 $ 80 $ 79 ======= ======= ======= The income tax provision for 1997 consists of the following: Current tax expense: Federal .............................. $2,035 State ................................ 495 ------ Total current ............... 2,530 ------ Deferred tax expense: Federal-1997 ......................... 128 Federal-prior years .................. 659 State ................................ 43 ------ Total deferred .............. 830 ------ Total income tax provision .. $3,360 ====== For the years ended December 31, 1996 and 1995 the Company, as an S Corporation for federal and state tax purposes, provided current and deferred taxes in the financial statements for the states of New Jersey and New York corporate-level tax on S Corporations which rates were approximately 2%. The effective tax rates differed from the statutory rates principally because of the effects of certain permanent differences and apportionment ratios. 35 3. Earnings Per Share The Company has adopted the provisions of SFAS No. 128, "Earnings Per Share" and the Securities and Exchange Commission's Staff Accounting Bulletin 98. All prior period earnings per share data presented has been restated in accordance with SFAS No. 128. The following is a reconciliation of the denominators of the basic and diluted earnings per share computations: For the Years Ended December 31, ----------------------------------- 1997 1996 1995 -------- ------ ------ Basic earnings per share . . . . . . 4,982,000 4,300,000 4,300,000 Effect of dilutive options . . . . . 96,000 26,000 26,000 ---------- ---------- ---------- Diluted earnings per share . . . . . 5,078,000 4,326,000 4,326,000 ========== ========= ========== 4. Property and Equipment Property and equipment consists of: December 31, ------------------ 1997 1996 -------- ------- (in thousands) Furniture, fixtures and equipment ..................... $11,783 $ 7,557 Leasehold improvements ................................ 714 664 Equipment for future stores ........................... 331 604 ------- ------- 12,828 8,825 Less: Accumulated depreciation and amortization ...... 5,173 3,711 ------- ------- $ 7,655 $ 5,114 ======= ======= 5. Leases The Company leases its retail stores, administrative offices and warehouse facilities under noncancelable operating leases. The lease for the administrative offices and distribution center has an initial lease term of six years with a six-year renewal option. The Company also has short-term warehouse space with a one year initial lease term. Most store leases have an average initial term of ten years, with three five year renewal options, and provide for predetermined escalations in future minimum annual rent or 36 additional rent contingent upon store sales levels. The pro rata portion of scheduled rent escalations has been included in other long-term liabilities in the accompanying balance sheet. For the years 1997 and 1996 the amount of accrued rent expense recognized over the amount paid were $285,000 and $140,000 respectively and has been included in other long-term liabilities in the accompanying consolidated balance sheet. Rent expense under operating leases consists of: Year Ended December 31, ------------------------ 1997 1996 1995 ----- ------ ------ (in thousands) Minimum rentals .................................... $6,444 $4,815 $4,739 Contingent payments ................................ 232 244 200 ------ ------ ------ $6,676 $5,059 $4,939 ====== ====== ====== In 1997, the Company entered into six leases for stores to open in 1998 and 1999. During January and February 1998, the Company entered into leases for three stores which are planned to open in 1998. Future minimum lease payments (including those for unopened stores) as of December 31, 1997 for non-cancelable operating leases with terms in excess of one year are as follows (in thousands): 1998.................................... $7,850 1999.................................... 8,471 2000.................................... 8,710 2001.................................... 8,768 2002.................................... 7,916 Thereafter.............................. 37,986 ------ Total minimum future rentals....... $79,701 ======= 6. Long-Term Debt At December 31, 1996 long-term debt consisted of a term loan payable monthly with interest at LIBOR plus 2% which was repaid in its entirety from the proceeds of the initial public offering. The Company has two revolving lines of credit along with an operating line of credit. The loan agreement is collateralized by all of the Company's assets and contains certain financial and restrictive covenants including limitations on incurring other debt and paying dividends. The revolving lines of credit in the amounts of $3,200,000 and $5,000,000 are available solely for costs associated with opening new stores and related inventory purchases. Both revolving lines of credit are available until December 31, 1998, at which time 37 the Company may elect to convert the lines to a 60-month term loan maturing on December 31, 2003. The $16,000,000 operating line of credit is available to the Company solely for working capital purposes; $9,000,000 is currently available, and $7,000,000 will be made available to the Company on March 31, 1998 upon achievement of certain performance measurements. The agreement bears elective interest rates which vary based upon the bank's base rate or LIBOR. The Company is required to pay an annual commitment fee of 0.125% on the unused portion of the lines of credit. There were no amounts outstanding at December 31, 1997 under the revolving or operating lines of credit. 7. Loans From Shareholders - Subordinated The loans from shareholders were repaid in their entirety with the proceeds from the initial public offering. Such loans were non-interest bearing, payable to the shareholders upon their written request for payment, and subject to the subordination provisions. 8. Stock Incentive Plan and Stock Options The Company's Employee, Director and Consultant Stock Option Plan (the "1997 Plan"), pursuant to which 1,000,000 shares of common stock may be granted, was adopted by the Company's Board of Directors in July 1997 for the purpose of securing for the Company and its shareholders the benefits arising from the ownership of Company stock options by key employees and non-employee directors. Effective September 15, 1997 options to purchase 444,500 shares of common stock were granted under the 1997 Plan at an exercise price per share of $9.00 with an exercise term of ten years. The estimated fair value of the shares on the measurement date was $10.20. The options granted to date under the 1997 Plan vest one-third in 1998, one-third in 1999 and one-third in 2000. During the period subsequent to grant, options for 58,000 shares were forfeited. The balance outstanding at December 31, 1997 was 386,500 shares, none of which were exercisable. The Company will record aggregate compensation expense of approximately $464,000 spread ratably over the three year vesting period, $39,000 in 1997. The Company has adopted the disclosure-only provisions of SFAS No. 123 "Accounting for Stock-Based Compensation." Had compensation cost for the Company's plan been determined based on the fair value provisions of SFAS No. 123, the Company's net income and net income per share would not have changed during 1996 as no options were granted during that year. The Company would have recorded additional expense during 1997 of approximately $128,000, resulting in adjusted net income of $3,864,000. Pro forma basic and diluted net income per share, adjusted for the additional compensation cost, would have been $.78 and $.76 per share, respectively, for the year ended December 31, 1997. The pro forma results may not be representative of the effects on reported operations for future years. 38 The fair value of the options was calculated using a Black-Scholes options pricing model with the following weighted-average assumptions: risk-free interest rate of 6.4%; no dividend yield; and a weighted average expected life of the options of seven years. In accordance with the provisions of SFAS No. 123, no expected volatility was utilized in determining fair value, as the options were granted prior to the Company becoming a public entity. On February 28, 1995, in recognition of financial consulting services, the Company granted a Board member an option to purchase 64,500 shares of common stock, representing a 1.5% ownership interest in the Company. The option, which expires February 28, 2005, has an exercise price of $4.66. The Company utilized the Black-Scholes option-pricing model to estimate the fair value of the option. The fair value of the option did not materially impact the results of operations over the periods benefited. 9. Shareholder's Equity In October 1997 the Company completed an initial public offering of 2,700,000 shares of its common stock. Net proceeds to the Company, after deducting underwriting discounts and commissions and expenses, were $36,990,000. Approximately $28,000,000 of the proceeds were used to retire long-term debt, borrowings under a line of credit and loans from shareholders. In November 1997, an additional 405,000 shares of common stock were sold pursuant to the underwriters' over-allotment option, providing additional net proceeds to the Company of approximately $5,600,000 The Company has authorized 5,000,000 shares of undesignated preferred stock. The Company may issue preferred stock in one or more series by vote of its Board of Directors having the dividend rights, dividend rates, conversion rights, voting rights, terms of redemption, redemption prices and liquidation preferences approved by the Board of Directors. 11. Commitments and Contingencies The Company is not a party to any material legal proceedings other than routine litigation incidental to its business. In the opinion of management, the amount of ultimate liability with respect to these actions will not materially affect the financial position, operating results or cash flows of the Company. 12. Subsequent Event (Unaudited) Loan agreement. On March 11, 1998, the Company entered into a four year financing agreement with a bank which provides a $25,000,000 revolving credit facility, $15,000,000 of which is available immediately, an additional $5,000,000 is available on July 1, 1999 and $5,000,000 which becomes available 39 on July 1, 2000 providing the Company is in compliance with the leverage and debt service ratios contained in the agreement. The agreement is collateralized by all of the Company's assets and bears elective interest rates which vary based upon the bank's prime rate or LIBOR. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. The Company had no changes in or disagreements with accountants on accounting and financial disclosure of the type referred to in Item 304 of Regulation S-K. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. The information concerning the directors of the Company is set forth in the Proxy Statement to be delivered to shareholders in connection with the Company's 1998 Annual Meeting of Shareholders (the "Proxy Statement") under the heading "Election of Directors," which information is incorporated herein by reference. The name, age and position of each executive officer of the Company is set forth under the heading "Executive Officers of the Registrant" in Item 1 of this report, which information is incorporated herein by reference. ITEM 11. EXECUTIVE COMPENSATION. The information concerning executive compensation is set forth in the Proxy Statement under the heading "Executive Compensation," which information is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. The information concerning security ownership of certain beneficial owners and management is set forth in the Proxy Statement under the heading APrincipal Stockholders and Management Ownership," which information is incorporated herein by reference. 40 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. The information concerning certain relationships and related transactions is set forth in the Proxy Statement under the heading ACertain Transactions," which information is incorporated herein by reference. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K. (a) The following documents are filed as part of this Annual Report on Form 10-K: (i) Financial Statements: Report of Independent Accountants Consolidated Balance Sheet at December 31, 1997 and 1996 Consolidated Statement of Income for each of the three years in the period encded December 31, 1997 Statement of Changes in Shareholders' Equity for each of the three years in the period ended December 31, 1997 Consolidated Statement of Cash Flows for each of the three years in the period ended December 31,1997 Notes to Consolidated Financial Statements (2) Financial Statement Schedules: No financial statement schedules are required to be filed as part of this report. (3) Exhibits: The exhibits filed as part of this report are listed under exhibits at subsection (c) of this Item 14. (b) Current Reports on Form 8-K: No report on Form 8-K was filed on behalf of the Registrant during the last quarter of the period covered by this report. 41 (c) Exhibits: Exhibit Number Description *3.1 Articles of Incorporation *3.2 Bylaws *+10.1 1997 Employee, Director and Consultant Stock Option Plan *+10.2 Form of Stock Option Award Agreement 10.3 Loan Agreement, dated March 11, 1998, between the Company and KeyBank National Association *+10.4 Correspondence reflecting option granted to Richard Lesser *10.5 Tax Indemnification Agreement, dated July 22, 1997, among the Company, John E. Parker and William Kaplan *10.6 Lease, dated August 14, 1995, between Freeport 130 LLC and A.C. Moore, Inc. 21.1 Subsidiaries of the Company 27.1 Financial Data Schedule - ------------------- + Management contract or compensatory plan or arrangement * Incorporated by reference to the Company's Registration Statement on Form S-1 (#333-32859) 42 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. A.C. MOORE ARTS & CRAFTS, INC. Date: March 23 , 1998 By: /s/ John E. Parker ----------------------- John E. Parker, President and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
SIGNATURE CAPACITY DATE ------------------------------------- ---------------------------------------------- --------------- /s/ John E. Parker President, Chief Executive Officer, and March 23, 1998 ------------------------------------- Director (Principal Executive Officer) John E. Parker /s/ Leslie H. Gordon Senior Vice President and Chief Financial March 23, 1998 ------------------------------------- Officer (Principal Financial and Accounting Leslie H. Gordon Officer) /s/ William Kaplan Chairman of the Board March 23, 1998 ------------------------------------- William Kaplan /s/ Patricia A. Parker Director March 23, 1998 ------------------------------------- Patricia A. Parker /s/ Richard Lesser Director March 23, 1998 ------------------------------------- Richard Lesser /s/ Richard J. Bauer Director March 23, 1998 ------------------------------------- Richard J. Bauer /s/ Richard J. Drake Director March 23, 1998 ------------------------------------- Richard J. Drake
43 EXHIBIT INDEX Exhibit No. Description *3.1 Articles of Incorporation *3.2 Bylaws *+10.1 1997 Employee, Director and Consultant Stock Option Plan *+10.2 Form of Stock Option Award Agreement 10.3 Loan Agreement, dated March 11, 1998, between the Company and KeyBank National Association *+10.4 Correspondence reflecting option granted to Richard Lesser *10.5 Tax Indemnification Agreement, dated July 22, 1997, among the Company, John E. Parker and William Kaplan *10.6 Lease, dated August 14, 1995, between Freeport 130 LLC and A.C. Moore, Inc. 21.1 Subsidiaries of the Company 27.1 Financial Data Schedule - ------------------- + Management contract or compensatory plan or arrangement * Incorporated by reference to the Company's Registration Statement on Form S-1 (#333-32859) 44 EX-10.3 2 LOAN AGREEMENT EXHIBIT 10.3 ============================================================================== $25,000,000.00 LOAN AGREEMENT BETWEEN A.C. MOORE INCORPORATED AND KEYBANK NATIONAL ASSOCIATION March ___, 1998 ============================================================================== TABLE OF CONTENTS Article 1. Definitions.................................................... 1 Article 2. Commitments; Loans; Collateral; Subordinations................. 14 Section 2.1 Loans.............................................. 14 Section 2.2 Notices Relating to Loans.......................... 14 Section 2.3 Disbursement of Loan Proceeds...................... 14 Section 2.4 Note............................................... 14 Section 2.5 Payments........................................... 15 Section 2.6 Fees............................................... 15 Section 2.7 Use of Proceeds of Loans........................... 15 Section 2.8 Advances........................................... 15 Section 2.9 Computations....................................... 16 Section 2.10 Time and Method of Payments........................ 16 Section 2.11 [Intentionally Omitted]............................ 16 Section 2.12 Several Obligations................................ 16 Section 2.13 [Intentionally Omitted]............................ 16 Section 2.14 Guaranties......................................... 16 Section 2.15 Security........................................... 17 Section 2.16 Subordinations..................................... 17 Section 2.17 Pro Rata Treatment Among Bank...................... 18 Section 2.18 ................................................... 18 Section 2.19 Sharing of Payments and Set-Off Among Bank..................... 18 Section 2.20 Additional Costs................................... 18 Section 2.21 Conversion to Term Loan............................ 20 Article 3. Representations and Warranties................................. 21 Section 3.1 Organization....................................... 21 Section 3.2 Power, Authority, Consents......................... 21 Section 3.3 No Violation of Law or Agreements.................. 22 Section 3.4 Due Execution, Validity, Enforceability............ 22 Section 3.5 Properties, Priority of Liens...................... 22 Section 3.6 Judgments, Actions, Proceedings.................... 23 Section 3.7 No Defaults, Compliance With Laws.................. 23 Section 3.8 Burdensome Documents............................... 23 Section 3.9 Financial Statements; Pro Forma Balance Sheet; Projections................. 23 Section 3.10 Tax Returns........................................ 24 Section 3.11 Intangible Assets.................................. 24 Section 3.12 Regulation U....................................... 24 Section 3.13 Name Changes, Mergers, Acquisitions; Location of Collateral....... 25 Section 3.14 Full Disclosure.................................... 25 Section 3.15 Licenses and Approvals............................. 25 Section 3.16 Labor Disputes; Collective Bargaining Agreements; Employee Grievances.................... 25 Section 3.17 Condition of Assets................................ 26 Section 3.18 ERISA.............................................. 26 -i- Article 4. The Closing; Conditions to the Loans........................... 28 Section 4.1 The Closing........................................ 28 Section 4.2 Conditions to Initial Advances..................... 28 Section 4.3 Conditions to Subsequent Advances.................. 30 Article 5. Delivery of Financial Reports, Documents and Other Information........................ 31 Section 5.1 Annual Financial Statements........................ 31 Section 5.2 Quarterly Financial Statements..................... 31 Section 5.3 Compliance Information............................. 32 Section 5.4 No Default Certificate............................. 32 Section 5.5 Report of Accountants.............................. 32 Section 5.6 Other Accounting Information....................... 32 Section 5.7 Accountants' Reports............................... 33 Section 5.8 Copies of Documents................................ 33 Section 5.9 Notices of Defaults................................ 33 Section 5.10 ERISA Notices...................................... 33 Section 5.11 Additional Information............................. 34 Article 6. Affirmative Covenants.......................................... 35 Section 6.1 Books and Records.................................. 35 Section 6.2 Inspections and Audits............................. 35 Section 6.3 Maintenance and Repairs............................ 35 Section 6.4 Continuance of Business............................ 35 Section 6.5 Copies of Corporate Documents...................... 36 Section 6.6 Perform Obligations................................ 36 Section 6.7 Notice of Litigation............................... 36 Section 6.8 Insurance.......................................... 36 Section 6.9 Financial Covenants................................ 37 Section 6.10 Intentionally Omitted.............................. 38 Section 6.11 Notice of Certain Events........................... 38 Section 6.12 Comply with ERISA.................................. 38 Section 6.13 Environmental Compliance........................... 38 Section 6.14 Deposit Accounts................................... 39 Section 6.15 Retention of Earnings.............................. 39 Article 7. Negative Covenants............................................. 40 Section 7.1 Indebtedness....................................... 40 Section 7.2 Liens.............................................. 40 Section 7.3 Guaranties......................................... 41 Section 7.4 Mergers, Acquisitions.............................. 41 Section 7.5 Redemptions; Distributions......................... 42 Section 7.6 Stock Issuance..................................... 42 Section 7.7 Changes in Business................................ 42 Section 7.8 Prepayments........................................ 42 Section 7.9 Investments........................................ 42 Section 7.10 Fiscal Year........................................ 43 Section 7.11 ERISA Obligations.................................. 43 Section 7.12 Amendments of Documents............................ 43 Section 7.13 Intentionally Omitted.............................. 43 Section 7.14 Intentionally Omitted.............................. 43 Section 7.15 Intentionally Omitted.............................. 43 Section 7.16 Transactions with Affiliates....................... 43 -ii- Section 7.17 Stock Transfer....................................... 43 Article 8. Inter-Creditor Agreement....................................... 44 Article 9. Events of Default.............................................. 44 Section 9.1 Payments........................................... 44 Section 9.2 Certain Covenants.................................. 44 Section 9.3 Other Defaults..................................... 44 Section 9.4 Representations and Warranties..................... 45 Section 9.5 Bankruptcy......................................... 45 Section 9.6 Judgments.......................................... 46 Section 9.7 ERISA.............................................. 46 Section 9.8 Liens.............................................. 46 Section 9.9 Cross-Defaults..................................... 46 Article 10. Miscellaneous Provisions...................................... 48 Section 10.1 Fees and Expenses; Indemnity....................... 48 Section 10.2 Taxes.............................................. 49 Section 10.3 Payments........................................... 50 Section 10.4 Survival of Agreements and Representations; Construction.............. 50 Section 10.5 Lien on and Set-off of Deposits.................... 50 Section 10.6 Modifications, Consents and Waivers; Entire Agreement.................. 51 Section 10.7 Remedies Cumulative................................ 51 Section 10.8 Further Assurances................................. 52 Section 10.9 Notices............................................ 52 Section 10.10 Counterparts....................................... 53 Section 10.11 Severability....................................... 53 Section 10.12 Binding Effect; No Assignment or Delegation by Borrower.................. 54 Section 10.13 Assignments and Participations by Bank............. 54 Section 10.14 GOVERNING LAW; CONSENT TO JURISDICTION; WAIVER OF TRIAL BY JURY.................... 56 Section 10.15 Rights of Bank..................................... 57 Section 10.16 Receipt by Bank of Payments........................ 57 Section 10.17 Non-Reliance on other Bank......................... 58 -iii- LOAN AGREEMENT AGREEMENT, made this ____ day of March, 1998, by and among: A.C. MOORE INCORPORATED a Delaware corporation (the "Borrower") ; and KEYBANK NATIONAL ASSOCIATION a national banking association (the "Bank"). W I T N E S S E T H: WHEREAS, the Borrower has requested that the Bank enter into a credit facility with Borrower pursuant to which the Bank will make a revolving credit loan facility (the "Loan") available to the Borrower and pursuant to which the Bank will issue for the benefit of the Borrower banker's acceptances (the "Banker's Acceptances"), commercial letters of credit (the "Commercial Letters of Credit") and standby letters of credit (the "Standby Letters of Credit") on the terms and conditions hereinafter set forth; NOW, THEREFORE, the parties hereto agree as follows: Article 1. Definitions. As used in this Agreement, the following terms shall have the following meanings: "Acceptable Payments" - as defined in Section 7.10 hereof. "Accountant" - Price Waterhouse & Company or any other independent certified public accountant selected by the Borrower and approved by the Bank. "Advance(s)" - the advance of Loan proceeds by the Bank to the Borrower. "Advance Account" - account number 323330006897 maintained by the Borrower with the Bank. "Affiliate" - as to any Person, any other Person which directly or indirectly controls, or is under common control with, or is controlled by, such Person. As used in this definition, "control" (including, with its correlative meanings, "controlled by" and "under common control with") shall mean possession, directly or indirectly, of power to direct or cause the direction of management or policies (whether through ownership of securities or partnership or other ownership interests, by contract or otherwise), provided that, in any event, any Person which owns directly or indirectly 20% or more of the securities having ordinary voting power for the election of directors or other governing body of a corporation or 20% or more of the partnership or other ownership interests of any other Person (other than as a limited partner of such other Person) will be deemed to control such corporation or other Person. "Applicable Lending Office" - the Lending Office designated on the signature pages hereof or such other office as the Bank may from time to time specify to the Borrower. "Bankers Acceptance Agreements" - the agreements executed by the Borrower relating to the Bankers Acceptances. "Bankruptcy Code" - the United States Bankruptcy Code as the same may be amended from time to time. "Borrower Security Agreement" - as defined in Section 2.10 hereof. "Borrowing Notice" - as defined in Section hereof. "Business Day" - any day other than Saturday, Sunday or other day on which commercial banks in New York, are authorized or required to close under the laws of the State of New York. "Capital Expenditures" - for any period, the aggregate amount of all payments made by any Person directly or indirectly for the purpose of acquiring, constructing or maintaining fixed assets, real property or equipment which, in accordance with GAAP, would be added as a debit to the fixed asset account of such Person, including, without limitation, all amounts paid or payable with respect to Capitalized Lease Obligations and interest which are required to be capitalized in accordance with GAAP. "Capitalized Lease" - any lease the obligations to pay rent or other amounts under which constitute Capitalized Lease Obligations. "Capitalized Lease Obligations" - as to any Person, the obligations of such Person to pay rent or other amounts under a lease of (or other agreement conveying the right to use) real and/or personal property which obligations are required to be classified and accounted for as a capital lease on a balance sheet of such Person under GAAP and, for purposes of this Agreement, the amount of such obligations shall be the capitalized amount thereof, determined in accordance with GAAP. "Cash" - as to any Person, such Person's cash and cash equivalents, as defined in accordance with GAAP. "Closing" - as defined in Section hereof. 2 "Code" - the Internal Revenue Code of 1986, as it may be amended from time to time. "Collateral" - as defined in Section 3.5 hereof. "Commitment" - Twenty Five Million and no/100 ($25,000,000.00) Dollars. "Commitment Termination Date" - April 1, 2002. "Compliance Certificate" - a certificate executed by the president or chief financial officer of a Borrower to the effect that: (i) as of the effective date of the certificate, no Event of Default under this Agreement exists or would exist after giving effect to the action intended to be taken by the Borrower as described in such certificate, including, without limitation, that the covenants set forth in Section 6.8 hereof would not be breached after giving effect to such action, together with a calculation in reasonable detail, and in form and substance satisfactory to the Bank, of such compliance, and (ii) the representations and warranties contained in Article hereof are true and with the same effect as though such representations and warranties were made on the date of such certificate, except for changes in the ordinary course of business none of which, either singly or in the aggregate, have had a Material Adverse Effect. "Controlled Group" - all members of a controlled group of corporations and all trades or businesses (whether or not incorporated) under common control which, together with the Borrowers, are treated as a single employer under Section 414(b), 414(c) or 414(m) of the Code and Section 4001(a)(2) of ERISA. "Debt Service" - as to any Person as at any date, the sum of all payments of principal and interest on Indebtedness of such Person for borrowed money which are due and payable during the 365- day period immediately succeeding such date; provided, however, that for the purposes of this definition, with respect to: (i) each item of Indebtedness which bears interest at a fixed rate throughout such 365-day period, such item shall be deemed to bear interest at the actual fixed rate applicable thereto throughout such 365-day period; and (ii) each item of Indebtedness which bears interest at other than a fixed rate, such item shall be deemed to bear interest as though the interest rate in effect throughout such 365-day period (or such shorter period if such item of Indebtedness is to be repaid during such 365-day period) were the same as the interest rate in effect on such item of Indebtedness on the date of the most recent scheduled interest payment date for such item of Indebtedness. "Debt Service Coverage Ratio" - as at any date, the ratio of net income (loss) before taxes, plus interest expense, plus depreciation plus 3 amortization plus Rental Expense to interest expense, the current portion of long term debt and Rental Expense. "Default Rate" - those increased rates of interest as set forth in the definition of Interest Rate which become effective on the occurrence of certain Events of Default. "Dollars" and "$" - lawful money of the United States of America. "Environmental Laws and Regulations" - all environmental, health and safety laws, regulations, resolutions, and ordinances applicable to the Borrower or any other Loan Party, or any of its respective assets or properties, including, without limitation: (i) all regulations, resolutions, ordinances, decrees, and other similar documents and instruments of all courts and governmental authorities, bureaus and agencies, domestic and foreign, whether issued by environmental regulatory agencies or otherwise, and (ii) all laws, regulations, resolutions, ordinances and decrees relating to Environmental Matters. "Environmental Liability" - any liability under any applicable law for any Release of a Hazardous Substance caused by the seeping, spilling, leaking, pumping, pouring, emitting, emptying, discharging, injecting, escaping, leaching, dumping or disposing of hazardous wastes or other chemical substances, pollutants or contaminants into the environment, and any liability for the costs of any clean-up or other remedial action including, without limitation, costs arising out of security fencing, alternative water supplies, temporary evacuation and housing and other emergency assistance undertaken by any environmental regulatory body having jurisdiction over the Borrower or any other Loan Party to prevent or minimize any actual or threatened Release by the Borrower or any other Loan Party of any Hazardous Substances or other chemical substances, pollutants and contaminants into the environment that would endanger the public health or the environment. "Environmental Matter(s)" - a release of any toxic or Hazardous Substance or other chemical substance, pollutant or contaminant into the environment or the generation, treatment, storage or disposal of any toxic or Hazardous Substances or other chemical substances. "Environmental Proceeding" - any judgment, action, proceeding or investigation pending before any court or governmental authority, bureau or agency, including, without limitation, any environmental regulatory body, with respect to or threatened against or affecting the Borrower or any other Loan Party or relating to the assets or liabilities of any of them, including, without limitation, in respect of any "facility" owned, leased or operated by any of them under the Comprehensive 4 Environmental Response, Compensation and Liability Act of 1980, as amended, or under any state, local or municipal statute, ordinance or regulation in respect thereof, in connection with any release of any toxic or Hazardous Substance or other chemical substance, pollutant or contaminant into the environment, or with the generation, storage or disposal of any toxic or Hazardous Substances or other chemical substances. "ERISA" - the Employee Retirement Income Security Act of 1974, as it may be amended from time to time, and the regulations promulgated thereunder. "Event of Default" - as defined in Article 8 hereof. "Facilities" - the Loan, the Banker's Acceptances, the Commercial Letters of Credit and the Standby Letters of Credit. "Final Period" - the period beginning July 1, 2000 through and including the Commitment Termination Date. "Final Period Sublimits" - as set forth in Section 2.1(c) hereof. "GAAP" - generally accepted accounting principles, consistently applied. "Hazardous Substances" - means, without limitation, any flammables, explosives, radon, radioactive materials, asbestos, urea formaldehyde foam insulation, polychlorinated-biphenyls, petroleum and petroleum based products or by-products, methane, hazardous materials, medical waste, hazardous wastes, hazardous or toxic substances or related materials, as defined in the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended (42 U.S.C. Sections 9601, et seq.), the Hazardous Materials Transportation Act, as amended (49 U.S.C. Sections 1801, et seq.), The Toxic Substances Control Act, as amended (15 U.S.C. Sections 2601, et seq.), Articles 15 and 27 of the New York State Environmental Conservation Law and in the regulations promulgated thereunder and as defined in any other statute or regulation in effect from time to time in any other state in which the Borrower conducts business. The term "Hazardous Substance" does not include consumer products which are stored and used by a consumer with reasonable care and for their intended use. "Indebtedness" - with respect to any Person, all: (i) liabilities or obligations, direct and contingent, which in accordance with GAAP would be included in determining total liabilities as shown on the liability side of a balance sheet of such Person at the date as of which Indebtedness is to be determined, including, without limitation, contingent liabilities which, in accordance with such principles, would be set forth in a specific Dollar amount on the liability side of such balance sheet, 5 and Capitalized Lease Obligations of such Person; (ii) liabilities or obligations of others for which such Person is directly or indirectly liable, by way of guaranty (whether by direct guaranty, suretyship, discount, endorsement, take-or-pay agreement, agreement to purchase or advance or keep in funds or other agreement having the effect of a guaranty) or otherwise; (iii) liabilities or obligations secured by Liens on any assets of such Person, whether or not such liabilities or obligations shall have been assumed by it; and (iv) liabilities or obligations of such Person, direct or contingent, with respect to letters of credit issued for the account of such Person (except letters of credit issued by Bank of New York and still outstanding on the date of this Agreement) and bankers acceptances created for such Person. "Initial Period" - the period between the date of this Agreement through and including June 30, 1999. "Initial Period Sublimits" - as set forth in Section 2.1(a) hereof. "Interest Rate" - as defined in the Note. "Investment" - by any Person: (a) the amount paid or committed to be paid, or the value of property or services contributed or committed to be contributed, by such Person for or in connection with the acquisition by such Person of any stock, bonds, notes, debentures, partnership or other ownership interests or other securities of any other Person; and (b) the amount of any advance, loan or extension of credit by such Person, to any other Person, or guaranty or other similar obligation of such Person of such Person with respect to any Indebtedness of such other Person, and (without duplication) any amount committed to be advanced, loaned, or extended by such Person to any other Person, or any amount the payment of which is committed to be assured by a guaranty or similar obligation by such Person for the benefit of, such other Person. "IRS" - Internal Revenue Service. "Latest Balance Sheet" - as defined in Section hereof. "Letter of Credit Agreements" - the agreements executed by the Borrower relating to the Letters of Credit. "Letters of Credit" - the Commercial Letters of Credit and the Standby Letters of Credit. 6 "Lien" - any mortgage, deed of trust, pledge, security interest, encumbrance, lien or charge of any kind (including any agreement to give any of the foregoing), any conditional sale or other title retention agreement, any lease in the nature of any of the foregoing, and the filing of or agreement to give any financing statement under the Uniform Commercial Code or other statute, rule or regulations of any jurisdiction. "Loan Documents" - this Agreement, the Note, the Security Documents, the Bankers Acceptance Agreements, the Letter of Credit Agreements, and all other documents executed and delivered in connection herewith or therewith, including all amendments, modifications and supplements of or to all such documents. "Loan Party" - the Borrower, any Subsidiary and any other Person (other than the Bank) which now or hereafter executes and delivers to the Bank any Loan Document. "Material Adverse Effect" - shall mean a material adverse effect on the business, property, assets, financial condition or results of operations of the Parent, the Borrower or any other Loan Party. "Note" - as defined in subsection hereof. "Obligations" - the Indebtedness evidenced by the Note, the Bankers Acceptance Agreements, the Letter of Credit Agreements and any other liabilities and obligations of Borrower to the Bank. "Parent" - A.C. Moore Arts & Crafts, Inc., a Pennsylvania corporation. "Payment Account" - account number 323330006897 maintained by the Borrower with the Bank. "Payment Dates" - those dates on which payments are due under the Note. "Payment Office" - the offices of the Bank specified to the Borrower from time to time. "PBGC" - Pension Benefit Guaranty Corporation. "Period" - the Initial Period, the Second Period or the Final Period. "Permitted Liens" - as to any Person shall mean the following: (a) Liens for taxes, assessments or other governmental charges the payment of which is being contested by 7 appropriate proceedings promptly instituted and diligently conducted. (b) Liens of landlords and Liens of carriers, warehousemen, mechanics, suppliers and materialmen and similar Liens incurred in the ordinary course of business for sums not yet due or the payment of which is being contested by appropriate proceedings promptly instituted and diligently conducted. (c) Liens incurred or deposits made incidental to the conduct of such Person's business or the ownership of its property including, without limitation, (i) pledges or deposits in connection with workers' compensation, unemployment insurance and other social security legislation, (ii) deposits to secure insurance, the performance of bids, tenders, contracts, leases, licenses, franchises and statutory obligations, each in the ordinary course of business, and (iii) other obligations which were not incurred or made in connection with the borrowing of money, the obtaining of advances or credit or the payment of the deferred purchase price of property and which do not in the aggregate materially detract from the value of the Collateral or materially impair the use of such Collateral in the operation of such Person's business. (d) Subsequent to the date of this Agreement, any attachment or judgment lien under $500,000.00 in the aggregate at any time. (e) Leases or subleases granted to others, easements, rights-of-way, restrictions and other similar charges or encumbrances, which, in each case, and in the aggregate, do not materially interfere with the ordinary conduct of the business of such Person. (f) Liens created in favor of the Bank in connection with the transactions contemplated by this Agreement. (g) Any Lien existing prior to the time of acquisition upon any real or personal property acquired by such Person after the date hereof through purchase, merger or consolidation or otherwise, whether or not assumed by the Person or placed upon property at (or within 30 days after) the later of the time of acquisition or the completion of construction by the Person to secure all or a portion of (or to secure indebtedness incurred solely to pay all or a portion of) the purchase price or cost of construction thereof, provided that (i) subsequent to the date of this Agreement, written consent has been obtained by the Person from the Bank, (x) to incur additional indebtedness, and (y) to make additional capital expenditures if capital expenditures are involved which exceed any limits set forth in Section hereof, (ii) any such Lien does not encumber any other property of the Person, and (iii) the aggregate principal amount of the 8 indebtedness secured by any such Lien at no time exceeds 100% of the total cost to the Person of the property subject to such Lien. (h) Any Lien on any real or personal property representing the interest of a lessor of such property in connection with any capital lease entered into by the Person after the date hereof, provided that as to those leases, upon which costs in connection therewith are required to be capitalized on the balance sheet of the Person in accordance with GAAP, and which the aggregate cost basis during a fiscal year may exceed any aggregate amount limitation set forth in this Agreement; written consent has been obtained by the Person from each Bank to incur the additional amount. (i) The interest of any consignor in any property on consignment with the Person. (j) Any renewal, extension, refunding or refinancing of or in respect of any Lien permitted by clause (g) or (h) of this definition, provided that, in the case of clause (g), the principal amount of purchase money indebtedness secured is not increased and, in either case, the Lien is not extended to other property. (k) Those Liens previously disclosed to the Bank. (l) Liens created in favor of the Bank pursuant to any security documents or instruments relating to the Loan Agreement dated the date hereof between the Bank and the Borrower. "Person" - an individual, a corporation, a partnership, a joint venture, a trust or unincorporated organization, a joint stock company or other similar organization, a government or any political subdivision thereof, a court, or any other legal entity, whether acting in an individual, fiduciary or other capacity. "Plan" - at any time an employee pension benefit plan which is covered by Title IV of ERISA or subject to the minimum funding standards under Section 412 of the Code and is either: (i) maintained by the Borrower or any member of the Controlled Group for employees of the Borrower, or by the Borrower for any other member of such Controlled Group, or (ii) maintained pursuant to a collective bargaining agreement or any other arrangement under which more than one employer makes contributions and to which the Borrower or any member of the Controlled Group is then making or accruing an obligation to make contributions or has within the preceding five plan years made contributions. "Regulation D" - Regulation D of the Board of Governors of the Federal Reserve System, as the same may be amended or supplemented from time to time. 9 "Regulatory Change" - as to any Bank, any change after the date of this Agreement in United States federal, state or foreign laws or regulations (including Regulation D and the laws or regulations which designate any assessment rate relating to certificates of deposit or otherwise (including the "Assessment Rate" if applicable to any Facility)) or the adoption or making after such date of any interpretations, directives or requests applying to a class of banks, including such Bank, of or under any United States federal, state or foreign laws or regulations (whether or not having the force of law) by any court or governmental or monetary authority charged with the interpretation or administration thereof. "Release" - means any spilling, leaking, pumping, pouring, emitting, emptying, discharging, injecting, escaping, leaching, dumping, or disposing into the environment, including the abandonment or discarding of barrels, containers, and other receptacles containing any Hazardous Substance. "Rental Expense" - means the annualized base rent for operating lease commitments. "Second Period" - means the period commencing July 1, 1999 through and including June 30, 2000. "Second Period Sublimits" - as set forth in Section 2.1(b) hereof. "Security Documents" - as defined in subsection 2.10(b) hereof. "Store(s)" - retail arts and craft supply stores owned or leased by the Borrower from time to time. "Sublimit" - either the Final Period Sublimit, the Initial Period Sublimit or the Second Period Sublimit. "Subsidiary" - with respect to any Person, any corporation, partnership or joint venture whether now existing or hereafter organized or acquired: (i) in the case of a corporation, of which a majority of the securities having ordinary voting power for the election of directors (other than securities having such power only by reason of the happening of a contingency) are at the time owned by such Person and/or one or more Subsidiaries of such Person, or (ii) in the case of a partnership or joint venture in which such Person is a general partner or joint venturer or of which a majority of the partnership or other ownership interests are at the time owned by such Person and/or one or more of its Subsidiaries. Unless the context otherwise requires, references in this Agreement to "Subsidiary" or "Subsidiaries" shall be deemed to be references to a Subsidiary or Subsidiaries of the Borrower. 10 "Tangible Net Worth" - the sum of paid-in capital, retained earnings and capital stock minus intangibles and treasury stock, all as determined in accordance with GAAP. "Term" - the period commencing on the date of this Agreement and ending on the Commitment Termination Date. "Total Commitment" - the obligation of the Bank to make Advances of Loan proceeds and to issue Banker's Acceptances and Letters of Credit, subject to the limitations set forth herein or in any other Loan Document. "Unused Commitment" - as at any date, the difference if any between the amount of the Sublimit in effect at the time of measurement minus the then aggregate outstanding amount of the Loan, the Banker's Acceptances and the Letters of Credit. Any accounting terms used in this Agreement which are not specifically defined herein shall have the meanings customarily given to them in accordance with GAAP as in effect on the date of this Agreement, except that references in Article to such principles shall be deemed to refer to such principles as in effect on the date of the financial statements delivered pursuant thereto. 11 Article 2. Facilities; Sublimits; Collateral. Section 2.1 Facilities and Sublimits. The Bank and the Borrower agree that the Facilities shall be available to the Borrower subject to the following limits: (a) During the Initial Period: the aggregate of all Facilities shall never exceed Fifteen Million and no/100 ($15,000,000.00) Dollars subject to the following Sublimits (the "Initial Period Sublimits") to the effect that: the Loan shall not exceed Fifteen Million and no/100 ($15,000,000.00) Dollars, the total outstanding for Banker's Acceptances shall not exceed Seven Million Five Hundred Thousand and no/100 ($7,500,000.00) Dollars, the total outstanding for Commercial Letters of Credit shall not exceed Seven Million Five Hundred Thousand and no/100 ($7,500,000.00) Dollars and the total outstanding for Standby Letters of Credit shall not exceed Five Million and no/100 ($5,000,000.00) Dollars. (b) During the Second Period: the aggregate of all Facilities may be increased to Twenty Million and no/100 ($20,000,000.00) Dollars subject to the following Sublimits (the "Second Period Sublimits"): the Loan shall not exceed Twenty Million and no/100 ($20,000,000.00) Dollars, the total outstanding for Banker's Acceptances shall not exceed Seven Million Five Hundred Thousand and no/100 ($7,500,000.00) Dollars, the total outstanding for Commercial Letters of Credit shall not exceed Seven Million Five Hundred Thousand and no/100 ($7,500,000.00) Dollars and the total outstanding for Standby Letters of Credit shall not exceed Five Million and no/100 ($5,000,000.00) Dollars. (c) During the Final Period: the aggregate of all Facilities may be increased to Twenty Five Million and no/100 ($25,000,000.00) Dollars subject to the following Sublimits (the "Final Period Sublimits"): the Loan shall not exceed Twenty Five Million and no/100 ($25,000,000.00) Dollars, the total outstanding for Banker's Acceptances shall not exceed Ten Million and no/100 ($10,000,000.00) Dollars, the total outstanding for Commercial Letters of Credit shall not exceed Ten Million and no/100 ($10,000,000.00) Dollars and the total outstanding for Standby Letters of Credit shall not exceed Five Million and no/100 ($5,000,000.00) Dollars. Section 2.2 Notices Relating to Advances of Loan Proceeds. The Borrower shall give the Bank telecopied or written, notice of each request for an Advance of the Loan (in each case, a "Borrowing Notice"). Each Borrowing Notice shall be 12 irrevocable and shall be in the form of Exhibit A attached to the Note. With respect to any Borrowing Notice received by the Bank on a Business Day, the Bank shall, subject to the terms of this Loan Agreement, fund said request within two Business Days thereafter. Each Borrowing Notice shall specify the amount thereof and the requested date of the Advance (which shall be a Business Day). Section 2.3 Disbursement of Facility Proceeds. Not later than 1:00 P.M. New York City time, on the date specified for each Advance hereunder, the Bank shall transfer to the Advance Account, in immediately available funds, the amount of the Advance to be made on such date. Section 2.4 Note. The Loan shall be evidenced by a line of credit note (the "Note") which shall be dated the date of this Agreement and shall be payable to the order of the Bank. Section 2.5 Payments. Borrower shall make payments required by the Note or any other Loan Document (including, without limitation, regularly scheduled payments of principal and interest) directly to the Bank. At any time that it is determined that the aggregate balance of the Loan and the amount of Banker's Acceptances and Letters of Credit exceeds the Total Commitment available during the applicable Period, the Borrower shall promptly make payment to the Bank of all amounts necessary to reduce the aggregate of the Facilities outstanding to an amount less than or equal to the Total Commitment available during the particular Period. Section 2.6 Use of Facilities. The Facilities shall be used for working capital purposes and to support new Store openings. Section 2.7 Computations. Interest on the Loan shall be computed in accordance with the terms of the Note. Section 2.8 Time and Method of Payments. All payments of principal, interest and other amounts (including indemnities) payable hereunder shall be made in Dollars, in immediately available funds, to the Bank at its Payment 13 Office not later than 11:00 a.m. New York time, on the date on which such payment shall become due. Alternatively, the Bank will debit the Payment Account to the extent money for payments is available therein. Additional provisions relating to payments are set forth in the Note. Section 2.9 Fees. (a) Borrower shall pay an unused commitment fee (the "Unused Commitment Fee") on the daily average amount of the Unused Commitment for each quarter at the rate of one-eighth of one (.125%) percent per annum. Accrued Unused Commitment Fee shall be payable on the fifteenth day of each January, April, July and October in arrears and shall be computed on the basis of the actual number of days elapsed divided by 360. (b) Borrower will pay the following fees for the issuance of Banker's Acceptances and Letters of Credit: (1) For Banker's Acceptances, one (1%) percent of the amount thereof, annually; (2) For Standby Letters of Credit, one (1%) percent of the amount thereof, annually, and (3) For Commercial Letters of Credit, one- eighth of one (.125%) percent of the amount thereof plus standard issuance fees. Section 2.10 Security. (a) In order to secure the due payment and performance by the Borrower of all of the Obligations, the Borrower will: (1) Grant to the Bank a Lien on all of the Borrower's now and hereafter owned and/or hereafter acquired, wherever located, personal property, including without limitation, all accounts receivable, inventory, equipment, machinery, furniture, fixtures, contract rights, goods, instruments, chattel paper, choses in action, general intangibles (including but not limited to all trademarks) and all products and proceeds thereof by the execution and delivery to the Bank of a Security Agreement in form and substance satisfactory to the Bank (the "Borrower Security Agreement"); (2) Execute and deliver such other agreements, instruments, documents and UCC-1 Financing Statements and other UCC forms as the Bank may reasonably require in order to effect the purposes of the Borrower Security Agreement, this Section 2.10 and this Agreement; 14 (b) All of the agreements, instruments and documents provided for or referred to in this Section 2.10 are hereinafter sometimes referred to collectively as the "Security Documents". 15 Article 3. Representations and Warranties. The Borrower hereby represents and warrants to the Bank that: Section 3.1 Organization. (a) The Borrower is duly organized and validly existing under the laws of its state, province or country of organization and has the power to own its assets and to transact the business in which it is presently engaged and in which it proposes to be engaged. (b) The Borrower is in good standing in its state, province or country of organization and in each state in which it is qualified to do business. There are no jurisdictions other than as set forth on Exhibit A hereto in which the character of the properties owned or proposed to be owned by the Borrower or in which the transaction of the business of the Borrower as now conducted or as proposed to be conducted requires or will require the Borrower to qualify to do business and as to which failure so to qualify could have a Material Adverse Effect. Section 3.2 Power, Authority, Consents. The Borrower has the power to execute, deliver and perform the Loan Documents to be executed by it. The Borrower has the power to borrow hereunder and has taken all necessary corporate action to authorize the borrowing hereunder on the terms and conditions of this Agreement. The Borrower has taken all necessary action, corporate or otherwise, to authorize the execution, delivery and performance of the Loan Documents to be executed by it. No consent or approval of any Person (including, without limitation, any stockholder or any partner), no consent or approval of any landlord or mortgagee, no waiver of any Lien or right of distraint or other similar right and no consent, license, certificate of need, approval, authorization or declaration of any governmental authority, bureau or agency, is or will be required in connection with the execution, delivery or performance by the Borrower, or the validity, enforcement or priority, of the Loan Documents or any Lien created and granted thereunder, except as set forth on Exhibit B annexed hereto, each of which either has been duly and validly obtained on or prior to the date hereof and is now in full force and effect, or is designated on Exhibit B as waived by the Bank. Section 3.3 No Violation of Law or Agreements. The execution and delivery by the Borrower of each Loan Document to which it is a party and performance by each 16 hereunder and thereunder, will not violate any provision of law and will not, except as set forth on Exhibit B annexed hereto, conflict with or result in a breach of any order, writ, injunction, ordinance, resolution, decree, or other similar document or instrument of any court or governmental authority, bureau or agency, domestic or foreign, or any certificate of incorporation or by-laws of the Borrower, or create (with or without the giving of notice or lapse of time, or both) a default under or breach of any agreement, bond, note or indenture to which the Borrower is a party, or by which it is bound or any of their respective properties or assets is affected, or result in the imposition of any Lien of any nature whatsoever upon any of the properties or assets owned by or used in connection with the business of the Borrower, except for the Liens created and granted pursuant to the Security Documents. Section 3.4 Due Execution, Validity, Enforceability. The Loan Documents have each been duly executed and delivered by Borrower and each constitutes the valid and legally binding obligation of Borrower, enforceable in accordance with its terms, except as such enforcement may be limited by applicable bankruptcy, insolvency, reorganization, moratorium, or other similar laws, now or hereafter in effect, relating to or affecting the enforcement of creditors' rights generally and except that the remedy of specific performance and other equitable remedies are subject to judicial discretion; provided, however, that such laws shall not materially interfere with the practical realization of the benefits of the Security Documents or the Liens created thereby, except for: (i) possible delay, (ii) situations which may arise under Chapter 11 of the Bankruptcy Code, (iii) equitable orders of the Bankruptcy Court and (iv) general principles of equity in the enforcement of creditors' rights. Section 3.5 Properties, Priority of Liens. All accounts, inventory, furniture, fixtures, equipment and other personal property shown on a consolidated balance sheet of the Parent, the Borrower and any other Subsidiary of the Parent (the "Collateral") are owned by Borrower free and clear of any lien or claim of the Parent or other Subsidiary. All of the properties and assets owned by the Borrower are owned free and clear of any Lien of any nature whatsoever other than Permitted Liens, except as provided for in the Security Documents, and as permitted by Exhibit C annexed hereto. The Liens which have been created and granted by the Security Documents constitute valid perfected first Liens on the properties and assets covered by the Security Documents, subject to no prior or equal Lien except those, if any, referred to on Exhibit C annexed hereto as being prior or equal to such Liens so created and granted by the Security Documents. 17 Section 3.6 Judgments, Actions, Proceedings. Except as set forth on Exhibit D annexed hereto, there are no outstanding judgments, actions or proceedings, including, without limitation, any Environmental Proceeding, pending before any court or governmental authority, bureau or agency, with respect to or, to the best of the Borrower's knowledge, threatened against or affecting Borrower, involving, in the case of any court proceeding, a claim or claims in excess of $100,000.00 in the aggregate, nor, to the best of Borrower's knowledge, is there any reasonable basis for the institution of any such action or proceeding which is probable of assertion, nor are there any such actions or proceedings in which Borrower is a plaintiff or complainant. Section 3.7 No Defaults, Compliance With Laws. Except as set forth on Exhibit E annexed hereto, no Loan Party is in default under any agreement, ordinance, resolution, decree, bond, note, indenture, order or judgment to which it or he is a party or by which it or he is bound, or any other agreement or other instrument by which any of the properties or assets owned by it or him or used in the conduct of its or his business is affected, which default could have a Material Adverse Effect. Each Loan Party has complied and is in compliance in all respects with all applicable laws, ordinances and regulations, resolutions, ordinances, decrees and other similar documents and instruments of all courts and governmental authorities, bureaus and agencies, domestic and foreign, including, without limitation, all applicable Environmental Laws and Regulations, non-compliance with which could have a Material Adverse Effect. Section 3.8 Burdensome Documents. Except as set forth on Exhibit F annexed hereto, Borrower is not a party to or bound by, nor are any of the properties or assets owned by Borrower used in the conduct of its businesses affected by, any agreement, ordinance, resolution, decree, bond, note, indenture, order or judgment, including, without limitation, any of the foregoing relating to any Environmental Matter, which has a Material Adverse Effect. Section 3.9 Financial Statements; Pro Forma Balance Sheet; Projections. Each financial statement prior to the date of this Agreement (the "Financial Statements") submitted to the Bank is correct and complete and presents fairly the financial position of the Borrower, as at its date, and has been prepared, in accordance with GAAP. Neither the Borrower nor the Parent has a material obligation, liability or commitment, direct or contingent (including, without limitation, any Environmental Liability), which 18 is not reflected in the Financial Statements. There has been no material adverse change in the financial position or operations of the Borrower or the Parent since the date of the latest balance sheet included in the Financial Statement (the "Latest Balance Sheet"). The fiscal year of the Borrower is the twelve-month period ending on December 31 in each year. Section 3.10 Tax Returns. Borrower has filed all federal, state and local tax returns required to be filed and has not failed to pay any taxes, or interest and penalties relating thereto, on or before the due dates thereof. Except to the extent that reserves therefor are reflected in the Financial Statements: (i) there are no material federal, state or local tax liabilities of Borrower due or to become due for any tax year relating to such Person, whether incurred in respect of or measured by the income of such entity, which are not properly reflected in the Financial Statement relating to such entity or otherwise disclosed to the Bank, and (ii) there are no material claims pending or, to the knowledge of Borrower proposed or threatened against Borrower for past federal, state or local taxes, except those, if any, as otherwise disclosed to the Bank. Section 3.11 Intangible Assets. The Borrower possesses all patents, trademarks, service marks, trade names, and copyrights, and rights with respect to the foregoing, necessary to conduct its business as now conducted and as proposed to be conducted, without any conflict with the patents, trademarks, service marks, trade names, copyrights and rights with respect to the foregoing, of any other Person, and each of such patents, trademarks, service marks, trade names, copyrights and rights with respect thereto, together with any pending applications therefor, are listed on Exhibit G annexed hereto. Section 3.12 Regulation U. No part of the Loan proceeds will be used directly or indirectly for: (a) any purpose other than as set forth Section 2.6 hereof, or (b) the purpose of purchasing or carrying, or for payment in full or in part of Indebtedness which was incurred for the purposes of purchasing or carrying, any "margin stock", as such term is defined in ss.221.3 of Regulation U of the Board of Governors of the Federal Reserve System, 12 C.F.R., Chapter II, Part 221. Section 3.13 Name Changes, Mergers, Acquisitions; Location of Collateral. (a) Except as set forth on Exhibit H annexed hereto, Borrower has not within the six-year period immediately 19 preceding the date of this Agreement changed its name, been the surviving entity of a merger or consolidation, or acquired all or substantially all of the assets of any Person. (b) Except as set forth on Exhibit H annexed hereto and except for inventory in transit, no Collateral constituting personal property having an aggregate fair market value in excess of $50,000.00 covered by the Security Documents has, at any time during the four-month period immediately preceding the date hereof, been located anywhere other than at its location on the date hereof. Section 3.14 Full Disclosure. None of the Financial Statements nor any certificate, opinion, or any other statement made or furnished in writing to the Bank by or on behalf of Borrower in connection with this Agreement or the transactions contemplated herein, contains any untrue statement of a material fact, or omits to state a material fact necessary in order to make the statements contained therein or herein not misleading, as of the date such statement was made. There is no fact known to the Borrower which has, or would in the now foreseeable future have, a material adverse effect on the business, prospects or condition, financial or otherwise, of Borrower, which fact has not been set forth herein, in the Financial Statements or any certificate, opinion or other written statement so made or furnished to the Bank. Section 3.15 Licenses and Approvals. The Borrower has all necessary licenses, permits and governmental authorizations, including, without limitation, licenses, permits and authorizations relating to Environmental Matters, to own and operate its properties and to carry on its business as now conducted where failure to have such would result in a Material Adverse Effect. Section 3.16 Labor Disputes; Collective Bargaining Agreements; Employee Grievances. Except as set forth on Exhibit I annexed hereto: (a) there are no collective bargaining agreements or other labor contracts covering Borrower; (b) no such collective bargaining agreement or other labor contract (if any) will expire during the term of this Agreement; (c) no union or other labor organization is seeking to organize, or to be recognized as bargaining representative for, a bargaining unit of employees of Borrower; (d) there is no pending or threatened strike, work stoppage, material unfair labor practice claim or charge, arbitration or other material labor dispute against or affecting Borrower or its representative employees; (e) there has not been, during the two (2) year period prior to the date hereof, a strike, work stoppage, 20 material unfair labor practice claim or charge, arbitration or other material labor dispute against or affecting Borrower or any of its representative employees, and (f) there are no actions, suits, charges, demands, claims, counterclaims or proceedings pending or, to the best of the Borrower's knowledge, threatened against Borrower by or on behalf of, or with, its employees, other than employee grievances arising in the ordinary course of business which are not, in the aggregate, material. Section 3.17 Condition of Assets. All of the assets and properties of the Borrower which are reasonably necessary for the operation of its business are in good working condition, ordinary wear and tear excepted, and are able to serve the function for which they are currently being used. Section 3.18 ERISA. The Borrower does not have, and has never had, any employee pension benefit plan ("Plan") which is covered by Title IV of the employee Retirement Income Security Act of 1984, as it may be amended from time to time, and the regulations thereunder ("ERISA") in connection with which there could arise a direct or contingent liability of the Borrower to the Pension Benefit Guaranty Corporation ("PBGC"), the Department of Labor or the Internal Revenue Service ("IRS"). The Borrower is not a participating employer in: (i) any Plan under which more than one employer makes contributions as described in Sections 4063 and 4064 of ERISA, or (ii) a multiemployer plan as defined in Section 4001(a)(3) of ERISA. Section 3.19 Securities Compliance. The Parent completed an initial public offering of common stock in 1997 and the disclosures made in conjunction therewith complied in all respects with applicable regulations of the Securities and Exchange Commission (the "SEC") and other applicable statutes and regulations. Section 3.20 Parent Authority. The Parent has authorized Borrower's execution, delivery and performance of the Loan Documents and no further authorization from the Parent is necessary to carry out the intent of the Loan Documents. 21 Article 4. The Closing; Conditions to Closing. Section 4.1 The Closing. The Closing with respect to the Loan (the "Closing") shall take place on the date of this Agreement. The Bankers Acceptances and the Letters of Credit shall be issued from time to time by the Bank at the request of the Borrower provided that no Event of Default or event which but for the passage of time, the giving of notice or both would constitute an Event of Default has occurred and is continuing hereunder. At the time of issuance of any Bankers Acceptance or Letter of Credit, the Borrower will execute such standard form documentation as the Bank customarily requires for the issuance of Bankers Acceptances and Letters of Credit. The obligation of the Bank to enter into this Agreement shall be subject to the fulfillment (to the satisfaction of the Bank) on or before the date of the Closing of the conditions precedent set forth in Section below. Subject to the fulfillment (to the satisfaction of the Bank) of the conditions precedent set forth in Section , the Closing shall take place on the date hereof at such place as the parties hereto shall agree upon. Section 4.2 Conditions to Closing. The obligation of the Bank to enter into this Agreement shall be subject to the fulfillment (to the satisfaction of the Bank) of the following conditions precedent: (a) The Borrower shall have executed and delivered the Note. (b) The Borrower shall have: (1) executed and delivered the Borrower Security Documents; (2) executed and duly filed appropriate Uniform Commercial Code financing statements in order to enable the Bank to perfect and preserve its security interest in the Collateral; (3) delivered to the Bank: (A) copies of, or certificates of the issuing companies with respect to, policies of insurance owned by the Borrower covering or in any manner relating to the Collateral, including insurance covering Collateral located outside of the United States of America, if any, together with endorsements thereto which comply with the terms of the Borrower Security Agreement and are otherwise in form and substance satisfactory to the Bank, naming the Bank as additional insured as 22 its interests may appear; and (B) evidence of the Borrower's liability insurance policies; and (4) otherwise duly complied with all of the terms and conditions of the Security Documents to be executed by it; and (c) Counsel to the Borrower shall have delivered its opinion to, and in form and substance satisfactory to, the Bank. (d) The Bank shall have received true and complete copies of the following, each certified as such in a certificate executed by an officer of the Borrower: (1) All of the consents, approvals and waivers referred to on Exhibit B annexed hereto, except only those which, as stated on Exhibit B, shall not be delivered; (2) The certificate of incorporation of the Borrower; (3) The by-laws of the Borrower; (4) All corporate action taken by the Parent and the Borrower to authorize the execution, delivery and performance by the Borrower of each of the Loan Documents to which it is a party pursuant hereto or in connection herewith; (5) Good standing certificates with respect to the Borrower from the Secretary of State or other appropriate official of its state of incorporation and each other state in which it operates Stores; and (6) A General Certificate of the Borrower. (e) (1) The Borrower shall have complied and shall then be in compliance with all of the terms, covenants and conditions of this Agreement; (2) There shall exist no Event of Default hereunder; (3) The representations and warranties contained in Article hereof shall be true and correct on the date hereof; (f) The Bank shall have received such other documents, certificates and opinions as the Bank deems necessary to carry out the terms of this Agreement; and 23 (g) All legal matters incident to the Facilities shall be reasonably satisfactory to counsel to the Bank. Section 4.3 Conditions to Subsequent Advances. The obligation of the Bank to make each Advance subsequent to its initial Advance shall be subject to the fulfillment of the following conditions precedent: (a) The Bank shall have received a Borrowing Notice in accordance with Section hereof. (b) There shall exist no Event of Default hereunder. (c) Borrower shall have complied with all the terms, covenants and conditions of the Loan Documents. 24 Article 5. Delivery of Financial Reports, Documents and Other Information. While the Commitment is outstanding, and, in the event any Facility remains outstanding, so long as the Borrower is indebted to the Bank and until payment in full of the Note and sums due the Bank under the Loan Documents and the termination of any liability of the Bank under any Bankers Acceptances or Letters of Credit and until full and complete performance of all of its other obligations arising hereunder, the Parent shall deliver to the Bank: Section 5.1 Annual Financial Statements. Annually, as soon as available, but in any event within one hundred twenty (120) days after the last day of each of its fiscal years, a copy of the 10K Report submitted to the SEC. Section 5.2 Quarterly Financial Statements. As soon as available, but in any event within forty- five (45) days after the end of each of the Parent's fiscal quarterly periods, a copy of the 10Q Report submitted to the SEC. At the time of delivery of the 10Q contemplated pursuant to this Section , the Parent shall forward to the Bank a Compliance Certificate in the form of Exhibit "J" attached hereto. Section 5.3 Other Accounting Information. The Bank shall also receive the following from the Borrower: (a) On or before December 31 of each year, three (3) years annual projected income statements, balance sheets and cash flow statements, with the first year set forth on a quarterly basis and the remaining years set forth on an annual basis. (b) As soon as available, but in any event within forty five (45) days after the end of each of the Borrower's fiscal quarterly periods, internally prepared "Same Store Sales Analysis" statements which compares actual sales to budget and to prior years sales. (c) As soon as available, but in any event within forty five (45) days after the end of each of the Borrower's fiscal quarterly periods, a statement listing total base rent for the preceding quarter (including stores and warehouses), said statement to be used to support the calculation of Rental Expense. Section 5.4 Compliance Information. 25 Promptly after a written request therefor, such other financial data or information evidencing compliance with the requirements of this Agreement, the Note and the other Loan Documents, as the Bank may reasonably request from time to time. Section 5.5 Report of Accountants. At the same time as it delivers the financial statements required under the provisions of Section hereof, a report of the Accountant addressed specifically to both the Borrower and the Bank to the effect that during the course of their audit of the operations of the Borrower and its condition as of the end of its fiscal year, nothing has come to their attention which would indicate that an Event of Default under Section 6.8 hereof has occurred or that there was any violation of the covenants of the Borrower contained in said Sections, or, if such cannot be so certified, specifying in reasonable detail the exceptions, if any, to such statement. Section 5.6 Accountants' Reports. Promptly upon receipt thereof, copies of all other reports submitted to the Borrower by the Accountant in connection with any annual or interim audit or review of the books of the Borrower made by such Accountant, including, without limitation, any management letters. Section 5.7 Copies of Documents. Promptly upon their becoming available, copies of any: (i) financial statements, projections, notices (other than routine correspondence), requests for waivers and proxy statements, in each case, delivered by the Borrower to any lending institution other than the Bank; (ii) correspondence or notices received by the Borrower from any federal, state or local governmental authority which regulates the operations of the Borrower relating to an actual or threatened change or development which would be materially adverse to the Borrower; (iii) registration statements and any amendments and supplements thereto, and any regular and periodic reports, if any, filed by the Borrower with any securities exchange or with the SEC or any governmental authority succeeding to any or all of the functions of the SEC; (iv) letters of comment or correspondence sent to the Borrower by any such securities exchange or the SEC in relation to the Borrower and its affairs; (v) written reports submitted by the Borrower by its independent accountants in connection with any annual or interim audit of the books of the Borrower made by such accountants; and (vi) any appraisals received by the Borrower with respect to the properties or assets of the Borrower. 26 Section 5.8 Notices of Defaults. Promptly, notice of the occurrence of any Event of Default, or any event which would constitute or cause a material adverse change in the condition, financial or otherwise, or the operations of the Borrower. Section 5.9 ERISA Notices. (a) Concurrently with such filing, a copy of each Form 5500 which is filed with respect to each Plan with the IRS; and (b) Promptly, upon their becoming available, copies of: (i) all correspondence with the PBGC, the Secretary of Labor or any representative of the IRS with respect to any Plan, relating to an actual or threatened change or development which would be materially adverse to the Borrower; (ii) copies of all actuarial valuations received by the Borrower with respect to any Plan; and (iii) copies of any notices of Plan termination filed by any Plan Administrator (as those terms are used in ERISA) with the PBGC and of any notices from the PBGC to the Borrowers with respect to the intent of the PBGC to institute involuntary termination proceedings. Section 5.10 Additional Information. Permit the Bank to make or cause to be made at the Bank's expense (subject to the limitation set forth below), inspections and audits of any books, records and papers of the Borrower and to make extracts therefrom and copies thereof, or to make inspections and examinations of any properties and facilities of the Borrower, on reasonable notice, at all such reasonable times and as often as the Bank may reasonably require, in order to assure that the Borrower is and will be in compliance with its obligations under the Loan Documents or to evaluate the Bank's investment in the Note. The Borrower shall deliver to the Bank such other information regarding the business, affairs and condition of the Borrowers as the Bank may from time to time reasonably request. Section 5.11 Notification of Opening of New Stores, Etc. The Borrower shall (a) Promptly notify the Bank of the opening of any warehouse, office or other facility by the Borrower. (b) Provide the Bank within thirty (30) days of the close of each fiscal quarter with a list of all Stores opened 27 during said quarter indicating the location, annual rent (including all common area maintenance charges, operating expense charges or other sums payable to a landlord), term and number of square feet rented together with a projection of the Stores Borrower anticipates opening during the next succeeding three fiscal quarters. 28 Article 6. Affirmative Covenants. While the Commitment is outstanding, and, in the event any Facility remains outstanding, so long as the Borrower is indebted to the Bank, and until payment in full of the Note and sums due the Bank under the Loan Documents and the termination of any liability of the Bank under any Banker's Acceptances or Letters of Credit and until full and complete performance of all of its other obligations arising hereunder, the Borrower shall: Section 6.1 Books and Records. Keep proper books of record and account in a manner reasonably satisfactory to the Bank in which full, true and correct entries shall be made of all dealings or transactions in relation to its businesses and activities. Section 6.2 Maintenance and Repairs. Maintain in good repair, working order and condition, subject to normal wear and tear, all material properties and assets from time to time owned by it and used in or necessary for the operation of its business, and make all reasonable repairs, replacements, additions and improvements thereto where the failure to do so would leave a Material Adverse Effect. Section 6.3 Continuance of Business. Do, or cause to be done, all things reasonably necessary to preserve and keep in full force and effect its corporate existence and all permits, rights and privileges necessary for the proper conduct of its business and the ability to continue to engage in the same line of business and where the failure to do so would have a Material Adverse Effect and comply in all material respects with all applicable laws, regulations and orders. The Borrower shall continue to conduct its business solely in the area of opening and operating Stores for the purpose of selling arts and craft supplies. Section 6.4 Copies of Corporate Documents. Promptly deliver to the Bank copies of any amendments or modifications to its certificate of incorporation and by-laws or other comparable documents, certified with respect to the certificate of incorporation by the Secretary of State or other appropriate official of its state, province or country of incorporation and, with respect to the by-laws, by its secretary or assistant secretary. 29 Section 6.5 Perform Obligations. Pay and discharge all of its obligations and liabilities, including, without limitation, all taxes, assessments and governmental charges upon its income and properties when due, unless and to the extent only that such obligations, liabilities, taxes, assessments and governmental charges shall be contested in good faith and by appropriate proceedings and that, to the extent required by GAAP then in effect, proper and adequate book reserves relating thereto are established and then only to the extent that a bond is filed in cases where the filing of a bond is necessary to avoid the creation of a Lien (other than a Permitted Lien) against any of its properties. Section 6.6 Notice of Litigation. Promptly notify the Bank in writing of any litigation, legal proceeding or dispute, other than disputes in the ordinary course of business or, whether or not in the ordinary course of business, involving amounts in excess of $1,000,000.00 in the aggregate, affecting Borrower and regardless of the subject matter thereof (excluding, however, any actions fully covered by insurance). Section 6.7 Insurance. (a) Maintain with responsible insurance companies such insurance on such of its properties, in such amounts and against such risks as is customarily maintained by similar businesses; file with the Bank upon request a detailed list of the insurance then in effect, stating the names of the insurance companies and the amounts of the insurance, the dates of the expiration thereof and the properties and risks covered thereby; and, within ten (10) days after notice in writing from the Bank, obtain such additional insurance as the Bank may reasonably request; (b) Carry all insurance through the PBGC required by ERISA; and Section 6.8 Financial Covenants. On a consolidated basis, the Parent, the Borrower and any other Subsidiary of the Parent shall have or maintain: (a) A ratio of total liabilities to Tangible Net Worth (the "Leverage Ratio") not greater than 1.5 to 1 for each fiscal quarter as reported on the 10Q required pursuant to Section 5.2. 30 (b) A Debt Service Coverage Ratio of not less than one and one-quarter to one (1.25:1). Such Ratio shall be tested (i) each of the first three fiscal quarters taking the sums of each account category for the four most recent fiscal quarters of the Borrower as reported on the statements required pursuant to Section 5.2 hereof and (ii) at each fiscal year end from the statements required pursuant to Section 5.1 hereof. Section 6.9 Notice of Certain Events. (a) Borrower shall promptly notify the Bank in writing of the occurrence of any Reportable Event, as defined in Section 4043 of ERISA, if a notice of such Reportable Event is required under ERISA to be delivered to the PBGC within 30 days after the occurrence thereof, together with a description of such Reportable Event and a statement of the action they intend to take with respect thereto, together with a copy of the notice thereof given to the PBGC. (b) Borrower shall promptly notify the Bank in writing if the Borrower receives: (i) any notice of any violation or administrative or judicial complaint or order having been filed or about to be filed against the Borrower alleging violations of any Environmental Law and Regulation, or (ii) any notice from any governmental body or any other Person alleging that the Borrower is or may be subject to any Environmental Liability; and promptly upon receipt thereof, provide the Bank with a copy of such notice together with a statement of the action the Borrower intends to take with respect thereto. (c) Borrower shall promptly notify the Bank in writing if the Borrower receives any notice or communication from the SEC or any other commission or entity regulating any securities issued by the Parent which notice or communication deals in any way with a matter which would have a Material Adverse Effect on the Parent, the Borrower or any other Subsidiary of the Parent and shall provide the Bank with copies of such notice and any other communications relating thereto together with a statement of the action the Borrower intends to take with respect thereto. Section 6.10 Comply with ERISA. Comply with all applicable provisions of ERISA now or hereafter in effect where failure to do so would have a Material Adverse Effect. Section 6.11 Environmental Compliance. Operate all property owned or leased by it such that no obligation, including a clean-up obligation, shall arise under any Environmental Law and Regulation, which obligation would constitute a Lien on any property of the Borrower; provided, 31 however, that in the event that any such claim is made or any such obligation arises, the Borrower shall, at its own cost and expense, commence to satisfy such claim or obligation. Section 6.12 Deposit Accounts. Where the Bank is offering competitive rates, open and maintain its principal operating and other cash accounts with the Bank. Section 6.13 Collateral. Retain title to the Collateral except for Collateral disposed of to third parties (other than Parent or any other Subsidiary of Parent) in the ordinary course of business, it being agreed that notwithstanding the inclusion of the Collateral on the consolidated balance sheet of the Parent, title to the Collateral shall remain in the Borrower. 32 Article 7. Negative Covenants. While the Commitment is outstanding, and, in the event any Facility remains outstanding, so long as the Borrower is indebted to the Bank and until payment in full of the Note and sums due the Bank under the Loan Documents and the termination of any liability of the Bank under any Bankers Acceptances or Letters of Credit and until full and complete performance of all of its other obligations arising hereunder, the Borrower, without the prior written consent of the Bank, shall not do, agree to do, or permit to be done, any of the following: Section 7.1 Indebtedness. Create, incur, permit to exist or have outstanding any Indebtedness, except: (a) Indebtedness of the Borrower to the Bank under this Agreement and the Note; (b) Taxes, assessments and governmental charges, non-interest bearing accounts payable, trade debt and accrued liabilities incurred in the ordinary course of business, in any case not more than 90 days past due from the original due date thereof, and non-interest bearing deferred liabilities other than for borrowed money (e.g., deferred compensation and deferred taxes), in each case incurred and continuing in the ordinary course of business; (c) Indebtedness of not more than $1,000,000.00 in any calendar year secured by the security interests referred to in subsection 7.2(c) hereof and Capitalized Lease Obligations; Section 7.2 Liens. Create, or assume or permit to exist, any Lien on any of its properties or assets, whether now owned or hereafter acquired, except: (a) Those created and granted by the Security Documents; (b) Permitted Liens; (c) Purchase money mortgages or security interests, conditional sale arrangements and other similar security interests, on motor vehicles and equipment acquired by the Borrower (hereinafter referred to individually as a "Purchase Money Security Interest") with the proceeds of the Indebtedness referred to in subsection 7.1(c) hereof; provided, however, that: 33 (1) The transaction in which any Purchase Money Security Interest is proposed to be created is not then prohibited by this Agreement; (2) Any Purchase Money Security Interest shall attach only to the property or asset acquired in such transaction and shall not extend to or cover any other assets or properties of Borrower; (3) The Indebtedness secured or covered by any Purchase Money Security Interest shall not exceed the lesser of the cost or fair market value of the property or asset acquired and shall not be renewed, extended or prepaid from the proceeds of any borrowing by the Borrower; and (4) The aggregate amount of all Indebtedness secured by Purchase Money Security Interests shall not at any time exceed $1,000,000.00; (d) The interests of the lessor under any Capitalized Lease permitted hereunder. Section 7.3 Guaranties. Except as set forth on Exhibit K annexed hereto, assume, endorse, be or become liable for, or guarantee, the obligations of any Person, except by the endorsement of negotiable instruments for deposit or collection in the ordinary course of business. For the purposes hereof, the term "guarantee" shall include any agreement, whether such agreement is on a contingency or otherwise, to purchase, repurchase or otherwise acquire Indebtedness of any other Person, or to purchase, sell or lease, as lessee or lessor, property or services, in any such case primarily for the purpose of enabling another person to make payment of Indebtedness, or to make any payment (whether as an advance, capital contribution, purchase of an equity interest or otherwise) to assure a minimum equity, asset base, working capital or other balance sheet or financial condition, in connection with the Indebtedness of another Person, or to supply funds to or in any manner invest in another Person in connection with such Person's Indebtedness. Section 7.4 Mergers, Acquisitions. Merge or consolidate with any Person (whether or not the Borrower is the surviving entity), or acquire all or substantially all of the assets or any of the capital stock of any Person provided however, Borrower may merge or consolidate or acquire assets or stock where the aggregate cost of the merger or consolidation transactions or the acquisitions to do not exceed $5,000,000.00 over the term of the Facilities or if such activity 34 would not cause any violation of any covenant hereunder or in any other Loan Document. Section 7.5 Changes in Business. Make any material change in its business, or in the nature of its operation, or liquidate or dissolve itself (or suffer any liquidation or dissolution), or convey, sell, lease, assign, transfer or otherwise dispose of any of its property, assets or business except in the ordinary course of business and for a fair consideration or dispose of any Indebtedness, whether now owned or hereafter acquired, or discount, sell, pledge, hypothecate or otherwise dispose of accounts receivable. Section 7.6 Investments. Make, or suffer to exist, any Investment in any Person, including, without limitation, any shareholder, director, officer or employee of the Borrower, except investments in: (1) securities issued or guaranteed by the United States of America, including those of the Government National Mortgage Association, Federal Home Loan Bank, Federal Farm Credit Bank, Federal National Mortgage Association, Student Loan Marketing Association, World Bank and the Tennessee Valley Authority (securities shall include notes, discount notes, medium term notes and floating rate notes); (2) certificates of deposit, bankers acceptances and other "money market instruments" issued by the Bank or any other bank or trust company organized under the laws of the United States of America or any State thereof and having capital and surplus in an aggregate amount of not less than $100,000,000. (3) corporate securities including commercial paper rated A1/P1 or better and corporate debt instruments including medium term notes and floating rate notes issued by foreign or domestic corporations which pay in Dollars and carry a rating of A/A or better. Section 7.7 Fiscal Year. Change its fiscal year. Section 7.8 ERISA Obligations. (a) Be or become obligated to the PBGC in excess of $50,000 other than in respect of annual premium payments. (b) Be or become obligated to the IRS in excess of $50,000 with respect to excise or other penalty taxes provided for in Section 4975 of the Code. 35 Section 7.9 Amendments of Documents. Modify, amend, supplement or terminate, or agree to modify, amend, supplement or terminate, its certificate of incorporation or by-laws, or any of the subordinated notes or other agreements or evidences of indebtedness covered by the Subordination Agreement where result thereof is to cause a Material Adverse Effect. Section 7.10 Transactions with Affiliates. Directly or indirectly: (a) make any Investment in the Parent or any other Subsidiary of the Parent; (b) transfer, sell, lease, assign or otherwise dispose of any assets to the Parent or any other Subsidiary of the Parent except (i) dividends to the Parent and (ii) interest and royalty fees to be paid to other Subsidiaries of the Parent (the "Acceptable Payments") provided that the payment of any Acceptable Payments shall not result in the violation of any covenant hereunder or in any other Loan Document; (c) merge into or consolidate with or purchase or acquire assets from an Affiliate; or (d) enter into any other transaction directly or indirectly with or for the benefit of any Affiliate (including, without limitation, guaranties and assumptions of obligations of an Affiliate). 36 Article 8. Events of Default. If any one or more of the following events ("Events of Default") shall occur and be continuing, the Commitment shall terminate and the entire unpaid balance of the principal of and interest on the Note outstanding and all other obligations and Indebtedness of the Borrower to the Bank arising hereunder and under the other Loan Documents shall immediately become due and payable upon written notice to that effect given to the Borrower by the Bank (except that in the case of the occurrence of any Event of Default described in Section 8.5 no such notice shall be required), without further presentment or demand for payment, notice of non-payment, protest or further notice or demand of any kind, all of which are expressly waived by the Borrower: Section 8.1 Payments. Failure to make any payment of principal or interest upon the Note within ten (10) days after notice to the Borrower of the failure to make such payment pursuant to the terms of the Note. Section 8.2 Certain Covenants. Failure of the Borrower to comply with the provisions of Article 5 or Sections 6.8, 6.10, 6.11, 6.13, 7.1, 7.2, 7.3, 7.4, 7.5, 7.6, 7.8, 7.9 or 7.10. Section 8.3 Other Covenants. Failure by the Borrower to perform or observe any other agreements contained herein for thirty (30) days after the Bank has given written notice of such failure to Borrower. Section 8.4 Other Defaults. (a) Failure by Borrower to perform or observe any term, condition or covenant of any bond, note, debenture, loan agreement, indenture, guaranty, trust agreement, mortgage or similar instrument to which the Borrower is bound, or by which any of its properties or assets may be affected, so that, as a result of any such failure to perform, the Indebtedness included therein or secured or covered thereby is declared to be due and payable prior to the date on which such Indebtedness would otherwise become due and payable; or (b) Any event or condition referred to in any Debt Instrument shall occur or fail to occur, so that, as a result thereof, the Indebtedness included therein or secured or covered thereby is declared to be due and payable prior to the date on which such Indebtedness would otherwise become due and payable; or 37 (c) Failure to pay any Indebtedness for borrowed money due at final maturity or pursuant to demand. Section 8.5 Representations and Warranties. Any material representation or warranty made in writing to the Bank in any of the Loan Documents or in connection with the making of the Facilities, or any certificate, statement or report made or delivered in compliance with this Agreement, shall have been false or misleading in any material respect when made. Section 8.6 Bankruptcy. (a) Borrower shall make an assignment for the benefit of creditors, file a petition in bankruptcy, be adjudicated insolvent, petition or apply to any tribunal for the appointment of a receiver, custodian, or any trustee for it or a substantial part of its assets, or shall commence any proceeding under any bankruptcy, reorganization, arrangement, readjustment of debt, dissolution or liquidation law or statute of any jurisdiction, whether now or hereafter in effect, or the Borrower shall take any corporate action to authorize any of the foregoing actions; or there shall have been filed any such petition or application, or any such proceeding shall have been commenced against it, which remains undismissed for a period of sixty (60) days or more; or any order for relief shall be entered in any such proceeding; or Borrower by any act or omission shall indicate its consent to or, approval of or acquiescence in any such petition, application or proceeding or the appointment of a custodian, receiver or any trustee for it or any substantial part of any of its properties, or shall suffer any custodianship, receivership or trusteeship to continue undischarged for a period of sixty (60) days or more; or (b) Borrower shall generally not pay its debts as such debts become due; or (c) Borrower shall have concealed, removed, or permitted to be concealed or removed, any part of its property, with intent to hinder, delay or defraud its creditors or any of them or made or suffered a transfer of any of its property which may be fraudulent under any bankruptcy, fraudulent conveyance or similar law; or shall have made any transfer of its property to or for the benefit of a creditor at a time when other creditors similarly situated have not been paid; or shall have suffered or permitted, while insolvent, any creditor to obtain a Lien upon any of its property through legal proceedings or distraint which is not vacated within thirty (30) days from the date thereof. Section 8.7 Judgments. Any judgment against the Borrower or any attachment, levy or execution against any of its properties for any amount in 38 excess of $500,000 in the aggregate (uncovered by insurance) shall remain unpaid, unstayed on appeal, undischarged, unbonded or undismissed for a period of thirty (30) days or more. Section 8.8 ERISA. (a) The termination of any Plan or the institution by the PBGC of proceedings for the involuntary termination of any Plan, in either case, by reason of, or which results or could result in, a "material accumulated funding deficiency" under Section 412 of the Code; or (b) Failure by Borrower to make required contributions, in accordance with the applicable provisions of ERISA, to each of the Plans hereafter established or assumed by it. Section 8.9 Liens. Any of the Liens created and granted to the Bank under the Security Documents shall fail to be valid, first, perfected Liens, subject to no prior or equal Lien, except as permitted by Section hereof. Section 8.10 Cross-Defaults. The Borrower fails to comply with the terms of or an "event of default" occurs under any other loan transaction or credit arrangement of any kind with the Bank. 39 Article 9 Miscellaneous Provisions. Section 9.1 Fees and Expenses; Indemnity. Except as otherwise provided herein, the Borrower will promptly pay all reasonable costs of the Bank in preparing the Loan Documents and all costs and expenses of the issue of the Notes and of the Borrower's performance of and compliance with all agreements and conditions contained herein on its part to be performed or complied with (including, without limitation, all costs of filing or recording any assignments, mortgages, financing statements and other documents), and the reasonable fees and expenses and disbursements of counsel to the Bank in connection with the preparation, execution and delivery, administration, interpretation and enforcement of this Agreement, the other Loan Documents and all other agreements, instruments and documents relating to this transaction, the consummation of the transactions contemplated by all such documents, the preservation of all rights of the Bank, the negotiation, preparation, execution and delivery of any amendment, modification or supplement of or to, or any consent or waiver under, any such document other than an assignment or participation pursuant to Section 9.13 (or any such instrument which is proposed but not executed and delivered) and with any claim or action threatened, made or brought against the Bank arising out of or relating to any extent to this Agreement, the other Loan Documents or the transactions contemplated hereby or thereby. In addition, the Borrower will promptly pay all reasonable costs and expenses (including, without limitation, reasonable fees and disbursements of counsel) suffered or incurred by the Bank in connection with its enforcement of the payment of the Notes or any other sum due to it under this Agreement or any of the other Loan Documents or any of its other rights hereunder or thereunder. In addition to the foregoing, the Borrower shall indemnify the Bank and each of its directors, officers, employees, attorneys and agents against, and hold each of them harmless from, any loss, liabilities, damages, claims, costs and expenses (including reasonable attorneys' fees and disbursements) suffered or incurred by any of them arising out of, resulting from or in any manner connected with, the execution, delivery and performance of each of the Loan Documents, the Facilities and any and all transactions related to or consummated in connection with the Facilities, including, without limitation, losses, liabilities, damages, claims, costs and expenses suffered or incurred by the Bank or any of their respective directors, officers, employees, attorneys or agents arising out of or related to any Environmental Matter, Environmental Liability or Environmental Proceeding, or in investigating, preparing for, defending against, or providing evidence, producing documents or taking any other action in respect of any commenced or threatened litigation, administrative proceeding or investigation under any federal securities law or any other statute of any jurisdiction, or any regulation, or at common 40 law or otherwise, which is alleged to arise out of or is based upon: (i) any untrue statement or alleged untrue statement of any material fact of the Borrower, and any Subsidiaries in any document or schedule filed with the SEC or any other governmental body; (ii) any omission or alleged omission to state any material fact required to be stated in such document or schedule, or necessary to make the statements made therein, in light of the circumstances under which made, not misleading; (iii) any acts, practices or omission or alleged acts, practices or omissions of the Borrower or its agents related to the making of any acquisition, purchase of shares or assets pursuant thereto, financing of such purchases or the consummation of any other transactions contemplated by any such acquisitions which are alleged to be in violation of any federal securities law or of any other statute, regulation or other law of any jurisdiction applicable to the making of any such acquisition, the purchase of shares or assets pursuant thereto, the financing of such purchases or the consummation of the other transactions contemplated by any such acquisition; or (iv) any withdrawals, termination or cancellation of any such proposed acquisition for any reason whatsoever; provided, however, the Borrower shall not be required to indemnify the Bank in respect of any loss, liability cost or expense incurred as the result of the negligence or willful misconduct of the Bank. The indemnity set forth herein shall be in addition to any other obligations or liabilities of the Borrower to the Bank hereunder or at common law or otherwise. The provisions of this Section 9.1 shall survive the payment of the Note and the termination of this Agreement. Section 9.2 Taxes. If, under any law in effect on the date of the closing of the Facilities hereunder, or under any retroactive provision of any law subsequently enacted, it shall be determined that any Federal, state or local tax is payable in respect of the issuance of the Note, any Bankers Acceptance or any Letter of Credit or in connection with the filing or recording of any financing statements or other documents (whether measured by the amount of Indebtedness secured or otherwise) as contemplated by this Agreement, then the Borrower will pay any such tax and all interest and penalties, if any, and will indemnify the Bank against and save it harmless from any loss or damage resulting from or arising out of the nonpayment or delay in payment of any such tax. If any such tax or taxes shall be assessed or levied against the Bank or any other holder of the Note, the Bank, or such other holder, as the case may be, may notify the Borrower and make immediate payment thereof, together with interest or penalties in connection therewith, and shall thereupon be entitled to and shall receive immediate reimbursement therefor from the Borrower. Notwithstanding any other provision contained in this Agreement, the covenants and agreements of the Borrower in this Section 9.2 shall survive payment of the Note and any sums due under the other 41 Loan Documents and the termination of any Banker's Acceptances and Letters of Credit and this Agreement. Section 9.3 Payments. As set forth in Article hereof, all payments by the Borrower on account of principal, interest, fees and other charges (including any indemnities) shall be made to the Bank at its Payment Office, in lawful money of the United States of America, not later than 11:00 A.M. New York City time on the date such payment is due. Any such payment made on such date but after such time shall, if the amount paid bears interest, be deemed to have been made on, and interest shall continue to accrue and be payable thereon until, the next succeeding Business Day. If any payment of principal or interest becomes due on a day other than a Business Day on which banks in New York are required or permitted by law to remain closed, such payment may be made on the next succeeding Business Day on which such banks are open and such extension shall be included in computing interest in connection with such payment. All payments hereunder and under the Note and the other Loan Documents shall be made without set-off or counterclaim and in such amounts as may be necessary in order that all such payments shall not be less than the amounts otherwise specified to be paid under this Agreement, the Note and the other Loan Documents (after withholding for or on account of: (i) any present or future taxes, levies, imposts, duties or other similar charges of whatever nature imposed by any government or any political subdivision or taxing authority thereof, other than any tax (except those referred to in clause (ii) below) on or measured by the net income of the Bank to which any such payment is due pursuant to applicable federal, state and local income tax laws, and (ii) deduction of amounts equal to the taxes on or measured by the net income of the Bank payable by the Bank with respect to the amount by which the payments required to be made under this sentence exceed the amounts otherwise specified to be paid in this Agreement, the Note and the other Loan Documents). Upon payment in full of the Note, the holder thereof shall mark said Note "Paid" and return it to the Borrower. Section 9.4 Survival of Agreements and Representations; Construction. All agreements, representations and warranties made herein shall survive the delivery of this Agreement and the Note. The headings used in this Agreement and the table of contents are for convenience only and shall not be deemed to constitute a part hereof. All uses herein of the masculine gender or of singular or plural terms shall be deemed to include uses of the feminine or neuter gender, or plural or singular terms, as the context may require. 42 Section 9.5 Lien on and Set-off of Deposits. As security for the due payment and performance of all the Obligations, the Borrower hereby grants to the Bank a Lien on any and all deposits or other sums at any time credited by or due from the Bank to the Borrower, whether in regular or special depository accounts or otherwise, and any and all monies, securities and other property of the Borrower, and the proceeds thereof, now or hereafter held or received by or in transit to the Bank from or for the Borrower, whether for safekeeping, custody, pledge, transmission, collection or otherwise, and any such deposits, sums, monies, securities and other property, may at any time after the occurrence and during the continuance of any Event of Default be set-off, appropriated and applied by the Bank against any of the Obligations, whether or not any of such Obligations are secured by any Collateral, or, if it is so secured, whether or not the Collateral is considered to be adequate. Section 9.6 Modifications, Consents and Waivers; Entire Agreement. No modification, amendment or waiver of or with respect to any provision of this Agreement, the Note, the Security Documents, or any of the other Loan Documents and all other agreements, instruments and documents delivered pursuant hereto or thereto, nor consent to any departure by the Borrower from any of the terms or conditions thereof, shall in any event be effective unless it shall be in writing and signed by the Bank. Any such waiver or consent shall be effective only in the specific instance and for the purpose for which given. No consent to or demand on the Borrower in any case shall, of itself, entitle it to any other or further notice or demand in similar or other circumstances. This Agreement and the other Loan Documents embody the entire agreement and understanding among the Bank and the Borrower and supersede all prior agreements and understandings relating to the subject matter hereof. Section 9.7 Remedies Cumulative. Each and every right granted to the Bank hereunder or under any other document delivered hereunder or in connection herewith, or allowed it by law or equity, shall be cumulative and may be exercised from time to time. No failure on the part of the Bank to exercise, and no delay in exercising, any right shall operate as a waiver thereof, nor shall any single or partial exercise of any right preclude any other or future exercise thereof or the exercise of any other right. The due payment and performance of the Obligations shall be without regard to any counterclaim, right of offset or any other claim whatsoever which Borrower may have against the Bank and without regard to any other obligation of any nature whatsoever which the Bank may have to Borrower, and no such counterclaim or offset shall be asserted by 43 Borrower in any action, suit or proceeding instituted by the Bank for payment or performance of the Obligations. Section 9.8 Further Assurances. At any time and from time to time, upon the request of the Bank, the Borrower shall execute, deliver and acknowledge or cause to be executed, delivered and acknowledged, such further documents and instruments and do such other acts and things as the Bank may reasonably request in order to fully effect the purposes of this Agreement, the other Loan Documents and any other agreements, instruments and documents delivered pursuant hereto or in connection with the Facilities. Section 9.9 Notices. All notices, requests, reports and other communications pursuant to this Agreement shall be in writing, either by letter (delivered by hand or commercial messenger service or sent by certified mail, return receipt requested, except for routine reports delivered in compliance with Article hereof which may be sent by ordinary first-class mail) or telegram or telecopy, addressed as follows: (a) If to the Borrower: A.C. Moore Incorporated 500 University Court Blackwood, New Jersey 08012 Attention: John E. Parker, President Telecopier No. (609) 273-1475 with a courtesy copy to: Drake, Sommers, Loeb, Tarshis & Catania, P.C. One Corwin Court Post Office Box 1479 Newburgh, New York 12550 Attention: Richard J. Drake, Esq. Telecopier No. (914) 565-1999 (b) If to the Bank: KeyBank National Association 711 Westchester Avenue, 4th Floor White Plains, New York 10604 Attn: Richard M. Kulbieda, District President Telecopier No. (914) 681-8350 with a courtesy copy (other than in the case 44 of Borrowing Notices and reports and other documents delivered in compliance with Article hereof) to: Hiscock & Barclay One KeyCorp Plaza, Suite 1100 30 South Pearl Street Albany, New York 12207-3411 Attention: Edward J. Trombly, Esq. Telecopier No.: (518) 434-2621 Any notice, request or communication hereunder shall be deemed to have been given on the day on which it is telecopied to such party at the telecopier number specified above or delivered by hand or such commercial messenger service to such party at its address specified above, or, if sent by mail, on the third Business Day after the day deposited in the mail, postage prepaid, or in the case of telegraphic notice, when delivered to the telegraph company, addressed as aforesaid. Any party may change the person, address or telecopier number to whom or which notices are to be given hereunder, by notice duly given hereunder; provided, however, that any such notice shall be deemed to have been given hereunder only when actually received by the party to which it is addressed. Failure to provide a courtesy copy shall not affect the validity of any Notice. Section 9.10 Counterparts. This Agreement may be signed in any number of counterparts with the same effect as if the signatures thereto and hereto were upon the same instrument. Section 9.11 Severability. The provisions of this Agreement are severable, and if any clause or provision hereof shall be held invalid or unenforceable in whole or in part in any jurisdiction, then such invalidity or unenforceability shall affect only such clause or provision, or part thereof, in such jurisdiction and shall not in any manner affect such clause or provision in any other jurisdiction, or any other clause or provision in this Agreement in any jurisdiction. Each of the covenants, agreements and conditions contained in this Agreement is independent and compliance by the Borrower with any of them shall not excuse non-compliance by the Borrower with any other. All covenants hereunder shall be given independent effect so that if a particular action or condition is not permitted by any of such covenants, the fact that it would be permitted by an exception to, or be otherwise within the limitations of, another covenant shall not avoid the occurrence of an Event of Default if such action is taken or condition exists. 45 Section 9.12 Binding Effect; No Assignment or Delegation by Borrower. This Agreement shall be binding upon and inure to the benefit of the Borrower and its successors and to the benefit of the Bank and successors and assigns. The rights and obligations of the Borrower under this Agreement shall not be assigned or delegated without the prior written consent of the Bank, and any purported assignment or delegation without such consent shall be void. Section 9.13 Assignments and Participations by Bank. (a) The Bank may assign and/or the Borrower may request the Bank to assign to one or more banks or other entities all or a portion of the assigning Bank's rights and obligations under this Agreement (including, without limitation, all or a portion of its Commitment, the Facilities owing to it, and the Notes); provided, however, that each such assignment shall be of a constant, and not a varying, percentage of all of the Bank's rights and obligations under this Agreement. Upon such execution, delivery, acceptance and recording, from and after the effective date specified in each assignment and acceptance, which effective date shall be at least ten (10) Business Days after the execution thereof: (x) the assignee thereunder shall be a party hereto and, to the extent that rights and obligations hereunder have been assigned to it pursuant to such assignment and acceptance, have the rights and obligations of the Bank hereunder, and (y) the Bank shall, to the extent that rights and obligations hereunder have been assigned by it pursuant to such assignment and acceptance, relinquish its rights and be released from its obligations under this Agreement (and, in the case of an assignment and acceptance covering all or the remaining portion of the Bank's rights and obligations under this Agreement, the Bank shall cease to be a party hereto). (b) By executing and delivering an assignment and acceptance, the Bank and the assignee thereunder confirm to and agree with each other and the other parties hereto as follows: (i) other than as provided in such assignment and acceptance, the Bank makes no representation or warranty and assumes no responsibility with respect to any statements, warranties or representations made in or in connection with this Agreement or the execution, legality, validity, enforceability, genuineness, sufficiency or value of this Agreement or any other instrument or document furnished pursuant hereto; (ii) the Bank makes no representation or warranty and assumes no responsibility with respect to the financial condition of the Borrower or the performance or observance by the Borrower of any of its obligations under this Agreement or any other instrument or document furnished pursuant hereto; (iii) such assignee confirms that it has received a copy of this Agreement, together with copies of such financial 46 statements and such other documents and information as it has deemed appropriate to make its own credit analysis and decision to enter into such assignment and acceptance; (iv) such assignee will, independently and without reliance upon the Bank and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit decisions in taking or not taking action under this Agreement; (v) such assignee shall enter into with the Bank (and any other party acting in the capacity of a lender hereunder) an inter-creditor agreement in form and substance satisfactory to the lending parties; and (vi) such assignee agrees that it will perform in accordance with their terms all of the obligations which by the terms of this Agreement are required to be performed by it as a Bank. (c) The Bank may sell participations to one or more banks or other entities in all or a portion of its rights and obligations under this Agreement (including, without limitation, all or a portion of its Commitment, the Facilities owing to it); provided, however, that: (i) the Bank's obligations under this Agreement (including, without limitation, its Commitment to the Borrower hereunder) shall remain unchanged, (ii) the Bank shall remain solely responsible to the other parties hereto for the performance of such obligations, (iii) the Bank shall remain the holder of the Notes for all purposes of this Agreement, and the Borrower and the Bank shall continue to deal solely and directly with such Bank in connection with the Bank's rights and obligations under this Agreement, (iv) the Bank shall continue to be able to agree to any action or forbearance to take action under this Agreement or any other Loan Document, or to the exercise of any of its rights under or in respect of any of the foregoing documents, or to any modification or amendment of this Agreement or of any other Loan Document or any waiver hereunder or thereunder, in each case without the consent, approval or vote of any such participant or group of participants, other than actions, forebearances, modifications, amendments and waivers that (1) postpone any date fixed for any payment of, or reduce any payment of, principal of or interest on any of the Notes, or (2) increase the amount of the Commitment, or (3) change the interest rate payable under the Note, (v) the Borrower shall have no obligation to pay the expenses associated with the participation of any portion of the Facilities, and (vi) except as contemplated by the preceding clause (iv), no participant shall be deemed to be or to have any of the rights or obligations of a Bank hereunder or under any Loan Document. (d) The Bank may, in connection with any assignment or participation or proposed assignment or participation pursuant to this Section, disclose to the assignee or participant or proposed assignee or participant, any information relating to the Borrower furnished to the Bank by or on behalf of the Borrower; provided that, prior to any such disclosure, the assignee or participant or proposed assignee or participant shall agree to 47 preserve the confidentiality of any confidential information relating to the Borrower received by it from the Bank. Section 9.14 GOVERNING LAW; CONSENT TO JURISDICTION; WAIVER OF TRIAL BY JURY. (a) EXCEPT AS OTHERWISE PROVIDED HEREIN OR THEREIN, THIS AGREEMENT, THE OTHER LOAN DOCUMENTS AND ALL OTHER DOCUMENTS AND INSTRUMENTS EXECUTED AND DELIVERED IN CONNECTION HEREWITH AND THEREWITH, SHALL BE GOVERNED BY, AND CONSTRUED AND INTERPRETED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK. (b) EXCEPT AS OTHERWISE PROVIDED HEREIN OR IN THE APPLICABLE LOAN DOCUMENT, THE BORROWER IRREVOCABLY CONSENTS THAT ANY LEGAL ACTION OR PROCEEDING BROUGHT BY THE BORROWER AGAINST THE BANK, UNDER, ARISING OUT OF OR IN ANY MANNER RELATING TO THIS AGREEMENT, AND EACH OTHER LOAN DOCUMENT WILL BE BROUGHT IN ANY COURT OF THE STATE OF NEW YORK OR IN THE UNITED STATES DISTRICT COURT FOR A DISTRICT COURT WITHIN THE STATE OF NEW YORK. (c) THE BANK AND THE BORROWER HEREBY KNOWINGLY, VOLUNTARILY AND INTENTIONALLY WAIVE ANY RIGHTS THEY MAY HAVE HAD TO TRIAL BY JURY IN ANY LITIGATION IN ANY COURT WITH RESPECT TO, IN CONNECTION WITH, OR ARISING OUT OF (i) THIS AGREEMENT, (ii) ANY OF THE OTHER LOAN DOCUMENTS, OR ANY INSTRUMENT OR DOCUMENT DELIVERED PURSUANT TO THIS AGREEMENT, (iii) THE VALIDITY, PROTECTION, INTERPRETATION, COLLECTION OR ENFORCEMENT THEREOF, (iv) ANY COURSE OF CONDUCT, COURSE OF DEALING, STATEMENTS (WHETHER VERBAL OR WRITTEN) OR (v) ACTIONS OF THE BANK OR THE BORROWER. THE BORROWER ACKNOWLEDGES AND AGREES THAT IT HAS RECEIVED FULL AND SUFFICIENT CONSIDERATION FOR THIS PROVISION AND THAT THIS PROVISION IS A MATERIAL INDUCEMENT FOR THE BANK ENTERING INTO THIS AGREEMENT AND EACH SUCH OTHER LOAN DOCUMENT. 48 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed on the date first above written. A.C. MOORE INCORPORATED By /s/ John E. Parker ------------------------------------- John E. Parker President 49 KEYBANK NATIONAL ASSOCIATION By: /s/ Richard M. Kulbieda ------------------------------------ Richard M. Kulbieda District President 50 EX-21.1 3 SUBSIDIARIES OF THE COMPANY EXHIBIT 21.1 SUBSIDIARIES OF THE COMPANY JURISDICTION PARENT SUBSIDIARY OF INCORPORATION ------ ---------- ---------------- A.C. Moore Arts & Crafts, Inc. A.C. Moore Incorporated Delaware A.C. Moore Arts & Crafts, Inc. Moorestown Finance, Inc. Delaware Moorestown Finance, Inc. Blackwood Assets, Inc. Delaware EX-27 4
5 This schedule contains summary financial information extracted from the financial statements for the year ended December 31, 1997 and is qualified in its entirety by reference to such financial statements. 12-MOS DEC-31-1997 JAN-01-1997 DEC-31-1997 15,835 4,004 131 0 37,022 57,895 12,828 (5,173) 66,067 16,921 0 0 0 42,829 4,257 66,067 138,056 138,056 86,827 43,448 429 0 0 7,352 3,360 3,992 0 0 0 3,992 0.80 0.79 Caption altered to conform with FAS 128 financial statement presentation.
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