-----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, OBUYpSyAgUf+9s+jgk5/oBn5swx3eVNG3P4RC9kUyzimHPekdvs6vOGOH8YGUl07 lb7Tk9muZ4ANly4SKcLdVQ== 0000950116-02-000264.txt : 20020414 0000950116-02-000264.hdr.sgml : 20020414 ACCESSION NUMBER: 0000950116-02-000264 CONFORMED SUBMISSION TYPE: S-3/A PUBLIC DOCUMENT COUNT: 4 FILED AS OF DATE: 20020221 FILER: COMPANY DATA: COMPANY CONFORMED NAME: A C MOORE ARTS & CRAFTS INC CENTRAL INDEX KEY: 0001042809 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-HOBBY, TOY & GAME SHOPS [5945] IRS NUMBER: 223527763 STATE OF INCORPORATION: PA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-3/A SEC ACT: 1933 Act SEC FILE NUMBER: 333-76500 FILM NUMBER: 02554716 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 S-3/A 1 s3a.txt S-3/A As filed with the Securities and Exchange Commission on February 21, 2002 Registration No. 333-76500 ================================================================================ SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 -------------------- Amendment No. 1 to Form S-3 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 -------------------- A.C. MOORE ARTS & CRAFTS, INC. (Exact name of registrant as specified in its charter) Pennsylvania 22-3527763 - -------------------------------- ----------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 500 University Court Blackwood, NJ 08012 (856) 228-6700 (Address, including zip code, and telephone number, including area code, of principal executive offices) John E. Parker Chief Executive Officer A.C. Moore Arts & Crafts, Inc. 500 University Court Blackwood, NJ 08012 (856) 228-6700 (Name, address, including zip code, and telephone number, including area code, of agent for service) -------------------- Copies to: SOL GENAUER, ESQ. ROSLYN G. DAUM, ESQ. Blank Rome Comisky & McCauley LLP Choate, Hall & Stewart One Logan Square Exchange Place Philadelphia, PA 19103 53 State Street (215) 569-5500 Boston, MA 02109 (617) 248-5000 -------------------- Approximate date of proposed sale to the public: As soon as practicable after the effective date of this registration statement. If the only securities being registered on this Form are being offered pursuant to dividend or interest reinvestment plans, please check the following box. [ ] If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, as amended, other than securities offered only in connection with dividend or interest reinvestment plans, please check the following box. [ ] If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] ______________. If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement of the earlier effective registration statement for the same offering. [ ] _____________. If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. [ ] -------------------- The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine. ================================================================================ The information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted. Subject to Completion, Dated February 21, 2002 2,550,000 shares [A.C. MOORE LOGO] Common Stock ---------------- This is a public offering of 2,550,000 shares of common stock of A.C. Moore Arts & Crafts, Inc. We are offering 1,750,000 shares and the selling shareholders identified in this prospectus under "Principal and Selling Shareholders" on page 37 are offering an additional 800,000 shares. We will not receive any proceeds from the sale of shares by the selling shareholders. Our common stock is quoted on the Nasdaq National Market under the symbol "ACMR." The last reported sale price of our common stock on the Nasdaq National Market on February 15, 2002, was $29.23 per share. ---------------- Investing in our common stock involves a high degree of risk. Please see the section entitled "Risk Factors" starting on page 7 to read about risks that you should consider carefully before buying shares of our common stock. Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense. ----------------
Per Share Total --------- ------ Public offering price .................................... $ $ Underwriting discounts ................................... $ $ Proceeds, before expenses, to A.C. Moore ................. $ $ Proceeds, before expenses, to selling shareholders ....... $ $
Some selling shareholders have granted the underwriters the right to purchase up to 382,500 additional shares of common stock to cover any over- allotments. The underwriters can exercise this right at any time within 30 days after the offering. The underwriters expect to deliver the shares of common stock to investors on March , 2002. ---------------- Adams, Harkness & Hill, Inc. Fahnestock & Co. Inc. Wedbush Morgan Securities Inc. Prospectus dated March , 2002 [Map of the United States from which will be projected the eastern United States highlighting the locations of our 61 existing stores is included on the inside front cover of the prospectus] [Also included on the inside front cover of the prospectus is a photograph of the exterior of an A.C. Moore store] TABLE OF CONTENTS
Page ---- PROSPECTUS SUMMARY ...................................................... 4 RISK FACTORS ............................................................ 7 INFORMATION REGARDING FORWARD-LOOKING STATEMENTS ........................ 14 USE OF PROCEEDS ......................................................... 15 DIVIDEND POLICY ......................................................... 15 PRICE RANGE OF COMMON STOCK ............................................. 15 CAPITALIZATION .......................................................... 16 SELECTED CONSOLIDATED FINANCIAL DATA .................................... 17 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.................................................. 18 BUSINESS ................................................................ 23 MANAGEMENT .............................................................. 32 PRINCIPAL AND SELLING SHAREHOLDERS ...................................... 37 DESCRIPTION OF CAPITAL STOCK ............................................ 39 SHARES ELIGIBLE FOR FUTURE SALE ......................................... 42 UNDERWRITING ............................................................ 43 VALIDITY OF COMMON STOCK ................................................ 44 EXPERTS ................................................................. 44 WHERE YOU CAN FIND MORE INFORMATION ..................................... 45 INCORPORATION OF INFORMATION WE FILE WITH THE SEC ....................... 45 INDEX TO FINANCIAL STATEMENTS ........................................... F-1
As used in this prospectus, the terms "we," "us," "our," the "company" and "A.C. Moore" mean A.C. Moore Arts & Crafts, Inc. and its subsidiaries and the term "common stock" means our common stock, no par value per share. The name "A.C. Moore" is a tradename and a service mark that belongs to us. Our "A.C. Moore" logo is a service mark that belongs to us. This prospectus also contains the trademarks, trade names and service marks of other entities that are the property of their owners. A.C. Moore Arts & Crafts, Inc. became a holding company in July 1997 by incorporating in Pennsylvania and exchanging shares of our common stock for all of the capital stock of our operating subsidiary organized in Delaware in 1984. We are located at 500 University Court, Blackwood, New Jersey 08012. Our telephone number is (856) 228-6700 and our website address is www.acmoore.com. Information contained on our website is not part of this prospectus. You should rely only on the information contained in this prospectus. We have not authorized anyone to provide you with information different from that contained in this prospectus. We are offering to sell, and seeking offers to buy, shares of common stock only in jurisdictions where offers and sales are permitted. The information contained in this prospectus is accurate only as of the date of this prospectus, regardless of the time of delivery of this prospectus or of any sale of our common stock. 3 PROSPECTUS SUMMARY This is only a summary and does not contain all of the information that may be important to you. You should read the more detailed information and our consolidated financial statements, the notes to those financial statements and the other financial information appearing elsewhere in this prospectus. A.C. Moore Arts & Crafts, Inc. We are a rapidly growing specialty retailer offering a vast selection of arts, crafts and floral merchandise to a broad demographic of consumers. Our target customers are primarily women between the ages of 25 and 55 who are looking for ideas to decorate their homes, create handmade items or otherwise engage in arts and crafts activities. We have grown from 17 stores in January 1997 to 61 stores in December 2001. In 2001, for stores open for the full calendar year, our average sales per square foot were $273, which we believe to be the highest in our industry, and our average sales per store were approximately $6.1 million. Our stores are located in the eastern United States from New England to the Carolinas. For the foreseeable future, we intend to open new stores within 700 miles of our suburban Philadelphia distribution center, an area encompassing approximately 45% of the United States population. We believe we can double our current store base within this geographic area and support this growth from our distribution center. We compete in a $23 billion market comprised primarily of arts and crafts products, silk and dried flowers and picture frames. Our market is highly fragmented and is served by multi-store arts and crafts retailers, mass merchandisers, small local specialty retailers, mail order vendors, hardware stores and a variety of other retailers. This fragmentation provides opportunities for our growth. We intend to grow our profits by increasing sales at existing stores, opening new stores and leveraging our corporate infrastructure. During the next two years, we intend to increase our store base by approximately 20% per year. To support our growth, we expect to expand our facilities, upgrade our management information systems and hire additional corporate personnel. We believe by increasing our store base we can obtain economies of scale in advertising, distribution, purchasing and management costs and, as a result, improve our operating margins. We believe that our customers expect exceptional service and a broad assortment of in-stock merchandise at competitive prices in an exciting and easy-to-shop store. Our goal is to consistently deliver an overall value proposition that exceeds our customers' expectations and offers them a superior shopping experience. In order to achieve this goal we pursue the following five primary business and operating strategies: o We strive to offer the broadest and deepest assortment of arts, crafts and floral merchandise. We believe that key elements in a customer's decision where to shop are variety and selection of merchandise. Each of our stores stocks 60,000 stock keeping units, or SKUs, across five major merchandise categories during the course of a year, with more than 45,000 SKUs offered at each store at any one time. o We strive to maintain a superior in-stock merchandise position. Craft projects usually require multiple components. Providing all of the components for a particular craft project in a single store on a regular basis is critical to meeting the demands of our customers. Therefore, we designed our merchandise distribution systems to ensure rapid replenishment of inventory and the highest levels of in-stock positions in our stores. Our distribution center will deliver merchandise to each of our stores three to five times per week during our peak selling season, and two to three times per week throughout the balance of the year. In our peak selling season, our store managers can replenish 65% of their shelf merchandise assortment within two to three days. 4 o We strive to operate exciting, easy-to-shop stores. We provide our customers with project ideas by displaying samples of completed craft projects throughout our stores. Our stores are designed to be uncluttered, well-organized and well-lit. Wide aisles and easy to read signage help our customers locate merchandise and make our stores easy- to-shop. On average, we staff our stores with four managers and approximately 58 other employees. Store personnel, many of whom are crafters themselves, assist customers with merchandise selection and project ideas. o We strive to attract and retain experienced and entrepreneurial store management. To provide optimal customer service, we strive to foster merchandising creativity and an entrepreneurial culture throughout all levels of our organization. Store managers are empowered and encouraged to identify merchandising opportunities and to tailor displays to local preferences for craft projects. They earn incentive bonuses based on annual increases in the profitability of their stores and in 2001 earned average annual compensation of $106,000. We believe our focus on empowering and rewarding our employees helps in recruiting, hiring and retaining talented personnel. o We strive to provide superior price/value for our customers. We believe that our customers consider the relationship between the quality and price of our merchandise to be important factors in their buying decisions. Therefore, we strive to be the price/value leader in all of our merchandise categories. Our purchasing professionals and store managers actively monitor competitors' prices to ensure we maintain low prices while preserving merchandise quality and value. We believe that our price/value strategy enhances customer loyalty. The Offering
Common stock offered by A.C. Moore ..... 1,750,000 shares Common stock offered by selling shareholders ........................... 800,000 shares Common stock to be outstanding after this offering .......................... 9,286,735 shares Use of proceeds ........................ For general corporate purposes, including store opening expenses, fixtures and equipment for new stores and a new distribution center, and for working capital. Nasdaq National Market symbol .......... ACMR Risk factors ........................... See "Risk Factors" for a discussion of factors you should carefully consider before deciding to invest in shares of our common stock.
The underwriters have an option to purchase 382,500 additional shares of our common stock from some selling shareholders to cover any over-allotments. The number of shares of our common stock that will be outstanding after this offering excludes 870,125 shares of common stock issuable upon exercise of outstanding stock options under our 1997 Stock Option Plan at February 15, 2002 at a weighted average exercise price of $10.02. 5 Summary Consolidated Financial Data
Year Ended December 31, ------------------------------------------------------ 1997 1998 1999 2000 2001 -------- -------- -------- -------- -------- (In thousands, except per share and operating data) Statement of Income Data: Net sales.............................................................. $138,056 $187,005 $222,998 $262,057 $332,413 Gross margin........................................................... 51,229 68,278 79,920 96,207 124,098 Store contribution (1)................................................. 15,982 16,217 17,952 22,497 30,569 Store pre-opening expenses............................................. 1,477 2,234 609 1,928 2,518 Income from operations................................................. 7,781 5,830 8,975 10,763 16,133 Net income............................................................. 3,992 3,935 5,664 6,557 9,507 EBITDA (2)............................................................. 9,242 8,032 11,874 14,592 21,353 Net income per share: Basic................................................................. $ 0.80 $ 0.53 $ 0.76 $ 0.89 $ 1.28 Diluted............................................................... $ 0.79 $ 0.52 $ 0.76 $ 0.88 $ 1.23 Weighted average shares outstanding: Basic................................................................. 4,982 7,405 7,405 7,406 7,437 Diluted............................................................... 5,078 7,517 7,405 7,444 7,753 Pro Forma Income Data: (3) Pro forma net income................................................... $ 4,431 Pro forma net income per share......................................... $ 0.87 Pro forma weighted average shares outstanding.......................... 5,093 Operating Data: Number of stores open at end of period................................. 25 37 40 50 61 Net sales per total square foot (4).................................... $ 326 $ 302 $ 271 $ 271 $ 273 Average net sales per store (000's) (4)................................ $ 6,728 $ 6,329 $ 5,915 $ 5,919 $ 6,070 Comparable store sales increase (5).................................... 4% 3% 6% 3% 8%
As of December 31, 2001 ------------------------- Actual As Adjusted(6) -------- -------------- Balance Sheet Data: Cash and cash equivalents........................ $ 10,818 $ 58,730 Working capital.................................. 56,422 104,334 Total assets..................................... 123,811 171,723 Total debt....................................... 3,174 3,174 Shareholders' equity............................. 73,727 122,230
- --------------- (1) Represents gross margin, less direct store operating expenses. There can be no assurance that our calculation of store contribution is comparable to similarly titled items reported by other companies. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." (2) EBITDA is defined as earnings before interest, taxes, depreciation and amortization. EBITDA is not intended to represent cash flow from operations as defined by accounting principles generally accepted in the United States of America and should not be considered as an alternative to net income as an indicator of operating performance or to cash flows as a measure of liquidity. (3) Until October 1997, we were an S Corporation and, accordingly, we were not subject to federal and certain state corporate income taxes. The pro forma information has been computed as if we were subject to federal and all applicable state corporate income taxes for 1997, assuming the tax rate that would have applied had we been taxed as a C Corporation. (4) Includes only stores open during the entire period. (5) Stores are added to the comparable store base at the beginning of their fourteenth full month of operation. (6) As adjusted to give effect to the sale of 1,750,000 shares of common stock offered by us at an assumed public offering price of $29.23 per share and the exercise of a stock option for 64,500 shares by Richard Lesser, an outside director and a selling shareholder, and the related tax benefit. 6 RISK FACTORS You should carefully consider the following risks and all other information contained in this prospectus before purchasing our common stock. Additional risks and uncertainties not presently known to us or that we currently see as immaterial may also impair our business operations. Risks Related to Our Business An increase in our sales, profitability and cash flow will depend on our ability to increase the number of stores we operate and increase the productivity and profitability of our existing stores. The key components of our growth strategy are to increase the number of stores we operate and increase the productivity and profitability of our existing stores. If we are unable to implement this strategy, our ability to increase our sales, profitability and cash flow could be significantly impaired. To the extent we are unable to open new stores as planned, our sales growth would come only from increases in comparable store sales. Growth in profitability in that case would depend significantly on our ability to increase margins or reduce our costs as a percentage of sales. There are many factors, some of which are beyond our control, which could impact our ability to implement our strategy for opening new stores. These factors include: o our ability to identify suitable markets in which to expand, o the availability of suitable sites for additional stores, o the ability to negotiate acceptable lease terms for sites we identify, o the availability of acceptable financing to support our growth, and o our ability to hire, train and retain a sufficient number of qualified managers and other store personnel. Our success will depend on how well we manage our growth. Even if we are able to implement, to a significant degree, our key growth strategies of expanding our store base and increasing the productivity and profitability of our existing stores, we may experience problems relating to our growth, which may prevent any significant increase in profitability or negatively impact our cash flow. For example: o The costs of opening and operating new stores may offset the increased sales generated by the additional stores; o The opening of additional stores in an existing market could reduce net sales from existing stores in that market; o The opening of stores in new geographic markets may present competitive and merchandising challenges that are different than those we face in our existing geographic markets; o The closure or relocation of under-performing stores may result in us retaining liability for expensive leases; o Our growth may outpace our ability to expand, upgrade and improve our administrative, operational and management systems, controls and resources; o We may be unable to hire and train sufficient qualified managers and other store personnel; o Our suppliers may be unable to meet our increased demand for merchandise as a result of the additional stores and increased productivity of our existing stores; and o We may be unable to expand our existing distribution capabilities, or employ third-party distribution services on a cost effective basis, to provide sufficient merchandise for sale by our new stores. 7 A weak fourth quarter would have a material adverse effect on our operating results for the year. Our business is affected by the seasonality pattern common to most retailers. Due to the importance of our peak selling season, which includes Fall/Halloween, Thanksgiving and Christmas, the fourth quarter has historically contributed, and is expected to continue to contribute, virtually all of our net income for the entire year. In anticipation of increased sales activity during the fourth quarter, we increase our short-term borrowings and incur significant additional expense both prior to and during the fourth quarter. These expenses may include acquisition of additional inventory, advertising, in-store promotions, seasonal staffing needs and other similar items. As a result, any factors negatively affecting us during the fourth quarter of any year, including adverse weather and unfavorable economic conditions, would have a material adverse effect on our results of operations for the entire year. Our quarterly results fluctuate due to a variety of factors and are not a meaningful indicator of future performance. Our quarterly results have fluctuated in the past and may fluctuate significantly in the future depending upon a variety of factors, including, among other things: o the mix of merchandise sold, o the timing and level of markdowns, o promotional events, o store openings and closings, o remodels or relocations of our stores, o length and timing of the holiday seasons, o competitive factors, and o general economic conditions. Our comparable store sales growth was 15% in the fourth quarter of 2001, which was somewhat higher than we had projected internally. We believe that this growth and other period-to-period comparisons of our operating results cannot be relied upon as indicators of future performance. If our operating results in any future period fall below the expectations of securities analysts and investors, the market price of our securities would likely decline. Our success depends on key personnel whom we may not be able to retain or hire. We are currently dependent upon the continued services, ability and experience of our senior management team, particularly John E. ("Jack") Parker, our Chief Executive Officer and Lawrence H. Fine, our President. The loss of the services of Mr. Parker or Mr. Fine or other members of senior management could have a material adverse effect on us. We do not maintain any key man life insurance on any members of our senior management team. Our success in the future will also be dependent upon our ability to attract and retain other qualified personnel, including store managers. We face an extremely competitive retail business market. The arts and crafts retailing business is highly competitive. We currently compete against a diverse group of retailers, including multi-store arts and crafts retailers, mass merchandisers, small local specialty retailers, mail order vendors, hardware stores and a variety of other retailers. Almost all of our stores face aggressive competition in their market area from one or more of our major competitors. In addition, alternative methods of selling crafts, such as over the Internet or direct marketing, could result in additional future competitors and increased price competition because our customers could more readily comparison shop. Some of our competitors, particularly the mass merchandisers and national arts and crafts chains, have substantially greater financial resources and operate more stores than we do. We also compete with these and other retailers for customers, suitable retail locations, suppliers and qualified employees and management 8 personnel. Moreover, increased competition may result in potential or actual litigation between us and our competitors relating to such activities as competitive sales and hiring practices, exclusive relationships with key suppliers and manufacturers and other matters. As a result, increased competition may adversely affect our future financial performance, and we cannot assure you that we will be able to compete effectively in the future. We may not be able to successfully anticipate changes in merchandise trends and consumer demands and our failure to do so may lead to loss of sales and the closing of under-performing stores. Our success depends, in large part, on our ability to anticipate and respond in a timely manner to changing merchandise trends and consumer demands. Accordingly, any delay or failure by us in identifying and correctly responding to changing merchandise trends and consumer demand could adversely affect consumer acceptance of the merchandise in our stores. In addition, we make decisions regarding merchandise well in advance of each of the seasons in which such merchandise will be sold. Significant deviations from projected demand for merchandise would have a material adverse effect on our 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. A material decline in sales and other adverse conditions resulting from our failure to accurately anticipate changes in merchandise trends and consumer demands may require us to close under-performing stores. Closing stores would subject us to additional costs including, but not limited to, taking reserves on impaired assets, loss of customer goodwill and costs associated with outstanding lease obligations. Because of our small store base adverse events could have a greater impact on us than if we had a larger store base. As of December 31, 2001, we operated a chain of 61 stores. The results achieved to date by our relatively small store base may not be indicative of the results of the larger number of stores which we intend to operate in existing and new geographic markets. Because our current and planned stores are located in the eastern United States, the effect on us of adverse events in this region (such as weather or unfavorable regional economic conditions) may be greater than if our stores were more geographically dispersed. Because overhead costs are spread over a smaller store base, increases in our general and administrative expenses could affect our profitability more negatively than if we had a larger store base. Due to our relatively small store base, one or more unsuccessful new stores, or a decline in sales at an existing store, will have a more significant effect on our results of operations than would be the case if we had a larger store base. A disruption in the operations of our distribution center could have a material adverse effect on our financial condition and results of operations. Our distribution center in suburban Philadelphia handles much of the distribution for our stores. Our distribution center, and thus our distribution operations, are vulnerable to damage or interruption from fire, flood, power loss, break-ins and similar events. We have no formal disaster recovery plan. The occurrence of unanticipated problems at our distribution center, all of which may not be covered by insurance, could cause interruptions or delays in our business which would have a material adverse effect on our financial condition and results of operations. We depend on a number of key vendors to supply our merchandise, and the loss of any one of our key vendors may result in a loss of sales and significantly harm our operating results. Our performance depends on our ability to purchase our merchandise in sufficient quantities at competitive prices. Although we have many sources of merchandise, SBAR'S Inc., or SBAR'S, our largest supplier of merchandise, accounted for approximately 18% of the aggregate dollar volume of our purchases in 2001. We depend on SBAR'S to provide us with low-cost merchandise that would be less efficient for us to obtain directly from other vendors or manufacturers. Our future success is dependent upon our ability to maintain a good relationship with SBAR'S and our other principal suppliers. We do not have any long-term purchase agreements or other contractual assurances of continued supply, pricing or access to new products, 9 and any vendor or distributor could discontinue selling to us at any time. We may not be able to acquire desired merchandise in sufficient quantities or on terms acceptable to us in the future, or be able to develop relationships with new vendors to replace discontinued vendors. Our inability to acquire suitable merchandise in the future or the loss of one or more key vendors and our failure to replace any one or more of them may have a material adverse effect on our business, results of operation and financial condition. Our smaller vendors generally have limited resources, production capacities and operating histories, and some of our vendors have limited the distribution of their merchandise in the past. These vendors may be susceptible to cash flow problems, downturns in economic conditions, production difficulties, quality control issues and difficulty delivering agreed-upon quantities on schedule. We also cannot assure you that we would be able, if necessary, to return product to these vendors and obtain refunds of our purchase price or obtain reimbursement or indemnification from any of our vendors if their products prove defective. We face risks associated with sourcing and obtaining merchandise from foreign sources. We have in recent years placed increased emphasis on obtaining floral and seasonal items from overseas vendors, with approximately 11% of all of our merchandise being purchased from overseas vendors in 2001. In addition, many of our domestic suppliers purchase a portion of their merchandise from foreign sources. Our future success will depend in large measure upon our ability to maintain our existing foreign supplier relationships and to develop new ones. While we rely on our long-term relationships with our foreign vendors, we have no long-term contracts with them. In addition, virtually all of the merchandise which we purchase from foreign sources is manufactured in the People's Republic of China. Since adoption of an "open-door policy" in 1978, the Chinese government has been pursuing economic reform policies, including the encouragement of foreign trade and investment and greater economic decentralization. We cannot assure you, however, that China will continue to pursue these policies. Many of our imported products are subject to duties, tariffs and quotas that may limit the quantity of some types of goods which we may import into the United States. Our dependence on foreign imports also makes us vulnerable to risks associated with products manufactured abroad, including, among other things: o changes in import duties, tariffs and quotas, o loss of "most favored nation" trading status by the United States in relation to a particular foreign country, including the People's Republic of China, o work stoppages, o delays in shipments, o freight cost increases, o economic uncertainties, including inflation, o foreign government political unrest, and o trade restrictions, including the United States retaliating against protectionist foreign trade practices. If any of these or other factors were to render the conduct of business in particular countries undesirable or impractical, our financial condition and results of operations could be materially and adversely affected because we would have difficulty sourcing the merchandise we need to remain competitive. An interruption or delay in supply from our foreign sources, or the imposition of additional duties, taxes or other charges on these imports could have a material adverse effect on our business, financial condition and results of operations unless and until alternative supply arrangements are secured. Products from alternative sources may be of lesser quality and/or more expensive than those we currently purchase, resulting in a loss of sales to us. Transition to a new distribution center may cause disruption in our operations. We are currently negotiating the leasing and construction of a new 450,000 square foot distribution center in suburban Philadelphia which we plan to open in 2003 to support our growing store base. We intend to expand the new distribution center to 900,000 square feet by the end of 2005 and use it at that time as a 10 replacement for our current distribution center. If the systems and controls we set-up for the new facility do not work as planned, or if the new facility is not ready at the time we anticipate, our ability to supply our stores could be impaired which could have a material adverse effect on our sales and financial performance. We face risks relating to inventory. We depend upon our in-store department managers to reorder merchandise. The failure of these department managers to accurately respond to inventory requirements could adversely affect consumer acceptance of the merchandise in our stores and negatively impact sales which could have a material adverse effect on our results of operations and financial condition. If we misjudge the market, we may significantly overstock unpopular products and be forced to take significant inventory markdowns, which would have a negative impact on our operating results and cash flow. Conversely, shortages of key items could have a material adverse impact on our operating results. In addition, we conduct a physical inventory in our stores once a year, and quarterly results are based on an estimated gross margin and accrual for estimated inventory shrinkage. Our management information systems may prove inadequate. We depend on our management information systems for many aspects of our business. Some of our key software has been developed by our own programmers and this software may not be easily integrated with other software and systems. Our business will be materially and adversely affected if our management information systems are disrupted or if we are unable to improve, upgrade, integrate or expand upon our systems, particularly in light of our intention to significantly increase the number of stores that we operate and our planned move to a new distribution center. Risks Related to this Offering Our common stock price may be volatile. The market price of our common stock has fluctuated significantly in the past, and is likely to continue to be highly volatile. In addition, the trading volume in our common stock has fluctuated, and significant price variations can occur as a result. We cannot assure you that the market price of our common stock will not fluctuate or decline significantly in the future. In addition, the United States equity markets have from time to time experienced significant price and volume fluctuations that have particularly affected the market prices for the stocks of emerging growth companies such as ours. These broad market fluctuations may have a material adverse effect on the market price of our common stock in the future. Such variations may be the result of changes in the trading characteristics that prevail in the market for our common stock, including low trading volumes, trading volume fluctuations and other similar factors that are particularly common among highly volatile securities of companies such as ours. Variations also may be the result of: o changes in our business, operations or prospects, o announcements or activities by our competitors, o entering into new contractual relationships or other arrangements with key suppliers or manufacturers by us or our competitors, o proposed acquisitions by us or our competitors, o financial results that fail to meet public market analysts' expectations, o changes in stock market analysts' recommendations regarding us, other retail companies or the retail industry in general, and o domestic and international market and economic conditions. 11 If our stock price is volatile, we may be subject to securities class action litigation, which would distract our management and could result in substantial costs or large judgments against us. In the past, securities class action litigation has often been brought against companies following periods of volatility in the market prices of their stock. We may in the future be the target of similar litigation. Securities class action litigation could result in substantial costs and distract management's attention and resources. Future sales of our common stock in the public market could adversely affect our stock price and our ability to raise funds in new equity offerings. We cannot predict the effect, if any, that future sales of shares of our common stock or the availability for future sale of shares of our common stock or securities convertible into or exercisable for our common stock will have on the market price of our common stock prevailing from time to time. Sale, or the availability for sale, of substantial amounts of common stock by our existing shareholders pursuant to an effective registration statement or under Rule 144, through the issuance of shares of common stock upon the exercise of stock options or the perception that such sales or issuances could occur, could adversely affect prevailing market prices for our common stock and could materially impair our future ability to raise capital through an offering of equity securities. Our two largest shareholders will continue to have substantial influence over matters requiring a shareholder vote. Upon the closing of this offering, our two largest shareholders will own approximately 35% of our outstanding common stock, or 33% if the underwriters exercise their over-allotment option in full. These shareholders, therefore, have the ability to exert significant influence over our board of directors and the outcome of shareholder votes. If these shareholders vote together, they may have the ability to elect our board of directors and determine the outcome of all corporate actions requiring shareholder approval. We are subject to anti-takeover provisions that could delay or prevent an acquisition of our company and could adversely affect the price of our common stock. Provisions of our articles of incorporation and bylaws and of Pennsylvania law may make it difficult in some respects to cause a change in control of our company and replace incumbent management. For example, our articles of incorporation and bylaws provide for a classified board of directors. With a classified board of directors, at least two annual meetings of shareholders, instead of one, will generally be required to effect a change in the majority of the board. As a result, a provision relating to a classified board may discourage proxy contests for the election of directors or purchases of a substantial block of our common stock because its provisions could operate to prevent obtaining control of the board in a relatively short period of time. Our articles of incorporation also provide that our directors may be removed only for cause and upon the vote of not less than 80% of the shares of common stock represented at a shareholders' meeting, making it more difficult to effect a change of control in our board of directors. In addition, our bylaws may not be amended by shareholders except by a similar 80% vote. Our board of directors also has the authority to fix the rights and preferences of, and to issue shares of, our preferred stock, which may have the effect of delaying or preventing a change in control of our company without action by our shareholders. Because we do not intend to pay dividends, you will benefit from an investment in our common stock only if it appreciates in value. We have not declared or paid any cash dividends on our common stock since becoming a public company. We currently intend to retain our future earnings, if any, to finance the expansion of our business and do not expect to pay any cash dividends in the foreseeable future. As a result, the success of your investment in our common stock will depend entirely upon its future appreciation. There is no guaranty that our common stock will appreciate in value after the offering or even maintain the price at which you purchased your shares. 12 General Risks Terrorist attacks and threats or actual war may impact all aspects of our operations, revenues, costs and stock price in unpredictable ways. Recent terrorist attacks in the United States, as well as future events occurring in response or in connection to them, including, without limitation, future terrorist attacks against United States targets, rumors or threats of war, actual conflicts involving the United States or its allies or military or trade disruptions impacting our domestic or foreign suppliers of merchandise, may impact our operations, including, among other things, causing delays or losses in the delivery of merchandise to us and decreased sales of the products we carry. More generally, any of these events could cause consumer confidence and spending to decrease or result in increased volatility in the United States and worldwide financial markets and economy. They also could result in a deepening of any economic recession in the United States or abroad. These events could also temporarily increase demand for our products as consumers respond by traveling less and engaging in home-based leisure activities which could contribute to a temporary increase in our sales which may not be sustainable. Any of these occurrences could have a significant impact on our operating results, revenues and costs and may result in the volatility of the market price for our common stock and on the future price of our common stock. 13 INFORMATION REGARDING FORWARD-LOOKING STATEMENTS This prospectus contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. The forward-looking statements are principally contained in the sections on "Prospectus Summary," "Business" and "Management's Discussion and Analysis of Financial Condition and Results of Operations." These statements involve known and unknown risks, uncertainties and other factors which may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward- looking statements. Forward-looking statements include, but are not limited to: o our business and operating strategies, and o our plans, objectives, expectations and intentions contained in this prospectus that are not historical facts. In some cases, you can identify forward-looking statements by terms such as "may," "will," "should," "could," "expect," "anticipate," "believe," "estimate," "project," "predict," "intend," "potential," "continue" and similar expressions intended to identify forward-looking statements. You should read statements that contain these words carefully because they discuss our future expectations, contain projections of our future results of operations or of our financial condition, or state other "forward-looking" information but are not statements of fact. We believe that it is important to communicate our future expectations to our investors. However, there may be events in the future that we are not able to accurately predict or control and that may cause our actual results to differ materially from the expectations we describe in our forward-looking statements. You are cautioned that all forward-looking statements involve risks and uncertainties, and actual results may differ materially from those discussed as a result of various factors, including those factors described in the "Risk Factors" section of this prospectus. You should not place undue reliance on our forward-looking statements. Before you invest in our common stock, you should be aware that the occurrence of the events described in the "Risk Factors" section and elsewhere in this prospectus could harm our business, prospects, operating results and financial condition. 14 USE OF PROCEEDS The net proceeds to us from our sale of 1,750,000 shares of common stock in this offering are estimated to be approximately $47,611,000, based on an assumed offering price of $29.23 per share, after deducting the underwriting discounts and commissions and estimated offering expenses payable by us. We intend to use the proceeds of this offering for general corporate purposes, including store opening expenses, fixtures and equipment for new stores and a new distribution center, and for working capital. We will not receive any proceeds from the sale of shares by selling shareholders, including any shares sold by them if the underwriters exercise their over-allotment option. Until used, we intend to invest these proceeds in government securities and other short-term or long-term investment-grade securities. DIVIDEND POLICY Since becoming a public company we have never declared or paid any cash dividends on our common stock. We currently intend to retain our future earnings, if any, to finance the expansion of our business and do not expect to pay any cash dividends in the foreseeable future. PRICE RANGE OF COMMON STOCK Our common stock is quoted on the Nasdaq National Market and trades under the symbol "ACMR." The following table sets forth the high and low sales prices per share of our common stock as reported on the Nasdaq National Market for the periods indicated.
High Low ------ ------ Year Ended December 31, 2000 First Quarter ............................................... $ 7.94 $ 4.63 Second Quarter .............................................. 7.88 4.50 Third Quarter ............................................... 9.50 6.31 Fourth Quarter .............................................. 8.63 5.75 Year Ended December 31, 2001 First Quarter ............................................... $ 9.44 $ 7.94 Second Quarter .............................................. 15.40 8.63 Third Quarter ............................................... 19.05 11.65 Fourth Quarter .............................................. 34.00 15.15 Year Ending December 31, 2002 First Quarter (through February 15, 2002) ................... $33.69 $26.23
On February 15, 2002, the closing sale price of our common stock on the Nasdaq National Market was $29.23 per share. The number of record holders of our common stock as of December 31, 2001 was approximately 87. 15 CAPITALIZATION The following table sets forth our capitalization at December 31, 2001 on an actual basis and as adjusted to give effect to the application of the net proceeds from our sale of 1,750,000 shares of common stock at an assumed public offering price of $29.23 per share, after deduction of underwriting discounts and commissions and estimated offering expenses, and the exercise of a stock option for 64,500 shares and related tax benefit. This table should be read in conjunction with our Financial Statements and Notes thereto included elsewhere in this prospectus. See "Use of Proceeds" and "Management's Discussion and Analysis of Financial Condition and Results of Operations-- Liquidity and Capital Resources."
December 31, 2001 --------------------- Actual As Adjusted ------- ----------- (In thousands) Cash and cash equivalents ............................. $10,818 $ 58,730 ======= ======== Revolving Credit Facility ............................. -- -- Total equipment leases, including current portion ..... 3,174 3,174 ------- -------- Shareholders' Equity: Preferred stock, no par value, 5,000,000 shares authorized; no shares issued and outstanding actual and as adjusted..................................... -- -- Common stock, no par value, 20,000,000 shares authorized; 7,466,006 shares issued and outstanding, actual and 9,280,506 shares issued and outstanding, as adjusted......................................... 43,807 92,310 Retained earnings .................................... 29,920 29,920 ------- -------- Total shareholders' equity ........................... 73,727 122,230 ------- -------- Total capitalization................................ $76,901 $125,404 ======= ========
The above table excludes 876,354 shares of common stock issuable upon exercise of outstanding stock options under our 1997 Stock Option Plan as of December 31, 2001 at a weighted average exercise price of $10.04 per share. 16 SELECTED CONSOLIDATED FINANCIAL DATA The following selected consolidated financial data should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our consolidated financial statements and related notes included elsewhere in this prospectus. The statement of income data for the years ended December 31, 1999, 2000 and 2001 and the balance sheet data at December 31, 2000 and 2001 are derived from our audited consolidated financial statements appearing elsewhere in this prospectus. The statement of income data for the years ended December 31, 1997 and 1998 and the balance sheet data at December 31, 1997, 1998 and 1999 are derived from our audited consolidated financial statements not included in this prospectus.
Year Ended December 31, ------------------------------------------------------ 1997 1998 1999 2000 2001 -------- -------- -------- -------- -------- (In thousands, except per share and operating data) Statement of Income Data: Net sales.............................................................. $138,056 $187,005 $222,998 $262,057 $332,413 Gross margin........................................................... 51,229 68,278 79,920 96,207 124,098 Selling, general and administrative expenses........................... 41,971 60,214 70,336 83,516 105,447 Store pre-opening expenses............................................. 1,477 2,234 609 1,928 2,518 Income from operations................................................. 7,781 5,830 8,975 10,763 16,133 Interest expense (income) ............................................. 429 (405) (39) 187 675 Provisions for income taxes............................................ 3,360 2,300 3,350 4,019 5,951 Net income............................................................. 3,992 3,935 5,664 6,557 9,507 Net income per share, diluted.......................................... $ 0.79 $ 0.52 $ 0.76 $ 0.88 $ 1.23 Weighted average shares outstanding, diluted........................... 5,078 7,517 7,405 7,444 7,753 Pro Forma Income Data: (1) Pro forma net income................................................... $ 4,431 Pro forma net income per share......................................... $ 0.87 Pro forma weighted average shares outstanding.......................... 5,093 Balance Sheet Data (as of): Working capital........................................................ $ 40,974 $ 42,721 $ 46,625 $ 47,168 $ 56,422 Total assets........................................................... 66,067 82,357 90,617 107,392 123,811 Total debt............................................................. -- 1,918 1,568 1,201 3,174 Shareholders' equity................................................... 47,086 51,171 56,972 63,681 73,727 Operating Data: Number of stores open at end of period................................. 25 37 40 50 61 Net sales per total square foot (2).................................... $ 326 $ 302 $ 271 $ 271 $ 273 Average net sales per store (000's) (2)................................ $ 6,728 $ 6,329 $ 5,915 $ 5,919 $ 6,070 Comparable store sales increase (3).................................... 4% 3% 6% 3% 8%
- --------------- (1) Until October 1997, we were an S Corporation and, accordingly, we were not subject to federal and certain state corporate income taxes. The pro forma information has been computed as if we were subject to federal and all applicable state corporate income taxes for 1997, assuming the tax rate that would have applied had we been taxed as a C Corporation. (2) Includes only stores open during the entire period. (3) Stores are added to the comparable store base at the beginning of their fourteenth full month of operation. 17 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Overview We are a rapidly growing specialty retailer offering a vast selection of arts, crafts and floral merchandise to a broad demographic of consumers. Our target customers are primarily women between the ages of 25 and 55 who are looking for ideas to decorate their homes, create handmade items, or otherwise engage in arts and crafts activities. We have grown from 17 stores in January 1997 to 61 stores in December 2001. Our stores are located in the eastern United States from New England to the Carolinas. We established our first store in Moorestown, New Jersey in 1984 and grew to five stores by the end of 1993. We added a total of 12 additional stores in 1994 and 1995. In 1995, we began implementing an aggressive expansion plan and built our infrastructure to position us for that growth. By the end of 1996, we had recruited experienced senior retail executives in the areas of operations, merchandising and finance, and made key additions and changes in other areas such as buying, information systems, human resources and real estate. From 1997 through 2001 we continued to strengthen and expand our management team including the addition of Lawrence H. Fine as our President in June 2001. We also continued to develop our operating systems, the most important of which was our new point of sale, or POS, system implemented in August 2000. In 1996, we leased a new 131,000 square foot distribution center and office complex in suburban Philadelphia, which was expanded to 263,000 square feet in 1998. We also developed an automated ordering system using electronic data interchange, or EDI, to link us electronically with most of our vendors and developed a real estate program to accommodate our expansion plan. In 1997, we received financing for our growth through an initial public offering of our common stock with net proceeds, after the payment of outstanding debt, of approximately $16 million. In 1997 and 1998, we continued implementing our expansion strategy by opening a total of 20 new stores. In 1998 we did not meet our profit objectives. As a result, in 1999, we made a decision to concentrate on improving the profitability of our existing store base and to open only three stores. We revamped our store opening procedures, prepared our systems for further expansion, and strengthened our merchandising with improved communication between our store management and our buyers. With the changes we made in 1999, we re-established our expansion plan and opened ten new stores in 2000 and 11 new stores in 2001. During the next two years, we intend to increase our store base by approximately 20% per year, all within 700 miles of our suburban Philadelphia distribution center, an area encompassing approximately 45% of the United States population. We believe we can operate at least 120 stores in this area without significantly diluting sales in our existing stores. To accommodate this growth, we are in the process of negotiating the leasing and construction of a new distribution center which will initially be 450,000 square feet plus 30,000 square feet of office space and will be located near our existing distribution center. We plan to expand the new distribution center to 900,000 square feet by the end of 2005 and then vacate our existing distribution center. For each new store we plan to open in the next two years, we expect to spend on average approximately $1.3 million per store, which includes $365,000 for fixtures and equipment, $190,000 in pre-opening costs, and $700,000 for in- store inventory, net of accounts payable. Although the majority of our stores are built by the landlord to suit our needs, from time to time we may perform some of the construction ourselves. This generally occurs in those instances where we are taking over an existing lease from another retailer. In 1998, 1999, 2000 and 2001, these construction costs totaled approximately $895,000, $0, $1.1 million and $2.5 million, respectively. All pre-opening costs are expensed as incurred. Initially, new stores generate lower average sales volume than mature stores which have a more fully developed customer base. During the period from 1996 through 2001, average sales per square foot declined from $320 to $273. This decline resulted from the addition of 34 new stores. We project new store sales based on a five-year maturity cycle with average sales per store in their first full calendar year of operation of $4.6 million growing to $6.0 million in their fifth full calendar year of 18 operation. We project that each new store will achieve "four wall" cash return on investment of over 40% in their third year of operation. Four wall cash return represents the gross margin generated by a store before the allocation of buying and distribution costs, less store expenses and excluding depreciation. We cannot assure you that our new stores will achieve these sales and four wall cash returns in the future. 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, ---------------------- 1999 2000 2001 ----- ----- ----- Net sales.................................................................................... 100.0% 100.0% 100.0% Cost of sales................................................................................ 64.2 63.3 62.7 ----- ----- ----- Gross margin................................................................................. 35.8 36.7 37.3 Selling, general and administrative expenses................................................. 31.5 31.9 31.7 Store pre-opening expenses................................................................... 0.3 0.7 0.7 ----- ----- ----- Income from operations....................................................................... 4.0 4.1 4.9 Interest expense(income), net................................................................ (0.0) 0.1 0.2 ----- ----- ----- Income before income taxes................................................................... 4.0 4.0 4.7 Provision for income taxes................................................................... 1.5 1.5 1.8 ----- ----- ----- Net income................................................................................... 2.5% 2.5% 2.9% ===== ===== =====
2001 Compared to 2000 Net Sales. Net sales increased $70.4 million, or 26.8%, to $332.4 million in 2001 from $262.1 million in 2000. This increase resulted from (i) net sales of $28.9 million from eleven new stores opened in 2001, (ii) net sales of $19.9 million from stores opened in 2000 which were not included in the 2000 comparable store base, and (iii) a comparable store sales increase of $21.6 million, or 8%. Stores are added to the comparable store base at the beginning of the fourteenth full month of operation. Gross Margin. Gross margin is net sales minus the cost of sales and certain distribution and purchasing costs. The gross margin increased to 37.3% of net sales in 2001 from 36.7% in 2000. The increase is due to changes in our product mix, cost reductions obtained from our vendors and from leveraging our buying and distribution expense over a larger store base, offset somewhat by higher freight costs. Selling, General and Administrative Expenses. Selling, general and administrative expenses include (i) direct store level expenses, including rent and related operating costs, payroll, advertising, depreciation and other direct costs, and (ii) 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 $21.9 million, or 26.3%, in 2001 to $105.4 million from $83.5 million in 2000. Of the $21.9 million increase, $15.8 million was attributable to the stores opened in 2001 which were not open during 2000 and the stores opened in 2000 which were not included in the 2000 comparable store base. Of the remainder, $3.9 million is due to increases in the comparable stores and $2.2 million is attributable to the increase in corporate costs to support our growth. As a percentage of net sales, selling, general and administrative costs decreased to 31.7% of net sales in 2001 from 31.9% of net sales in 2000. This decrease is primarily due to leveraging store and central costs over a greater sales base. Store Pre-Opening Expenses. We expense store pre-opening costs as they are incurred. Pre-opening expenses for the 11 new stores opened in 2001, and two stores which were relocated during the year amounted to $2.5 million. In 2000, we opened ten new stores and incurred pre-opening expenses of $1.9 million. 19 Interest Expense. Interest expense was $781,000 for 2001, an increase of $436,000 from 2000. The increase is due to the use of short term borrowings to fund the new stores added in 2000 and 2001. Interest Income. Interest income was $106,000 in 2001, a decrease of $52,000 from 2000. The decrease was due to a lower balance of cash investments as the proceeds of our 1997 initial public offering of common stock were used to fund our growth. Income Taxes. Our effective income tax rate was 38.5% for 2001 and 38.0% for 2000. 2000 Compared to 1999 Net Sales. Net sales increased $39.1 million, or 17.5%, to $262.1 million in 2000 from $223.0 million in 1999. This increase resulted from (i) net sales of $25.2 million from ten new stores opened during 2000, (ii) net sales of $7.5 million from stores opened in 1999 not included in the 1999 comparable store base and (iii) a comparable store sales increase of $6.4 million, or 3%. Gross Margin. Gross margin increased to 36.7% of net sales in 2000 from 35.8% in 1999 mainly due to cost reductions obtained from both domestic and foreign suppliers and also because of fewer seasonal markdowns in the fourth quarter of 2000 as compared to the fourth quarter of 1999. Selling, General and Administrative Expenses. Selling, general and administrative expenses increased $13.2 million, or 18.7%, in 2000 to $83.5 million from $70.3 million in 1999. Of the $13.2 million increase, $10.2 million was attributable to the ten stores open during 2000 which were not open during 1999 and the stores opened in 1999 not included in the 1999 comparable store base. The remainder of the increase is attributable to $1.6 million in operating expenses in the comparable stores and $1.4 million in corporate costs. The increase in corporate costs is the result of continued expansion of our infrastructure to support our growth. As a percentage of sales, selling, general and administrative costs increased to 31.9% of net sales in 2000 from 31.5% of net sales in 1999. This increase is primarily due to the new stores which, on average, initially have higher operating costs as a percent of sales than older stores. Store Pre-Opening Expenses. Pre-opening expenses for the ten new stores opened in 2000 amounted to $1.9 million. In 1999, we opened three stores and had pre-opening expenses of $609,000. Interest Expense. Interest expense was $345,000 for 2000, an increase of $173,000 from 1999. This increase was the result of greater short-term bank borrowings to fund the new stores added in 2000. Interest Income. Interest income was $158,000 in 2000, a decrease of $53,000 from 1999. The decrease was due to a lower balance of cash investments as the proceeds of our 1997 initial public offering of common stock were used to fund our growth. Income Taxes. Our effective tax rate was 38.0% for 2000, which was 0.8% greater than the effective rate in 1999 due to the level of income which moved us into a higher federal income tax bracket. 20 Quarterly Results and Seasonality The following tables set forth our unaudited quarterly operating results for our eight most recent quarterly periods and the number of stores open at the end of each period (dollars in thousands, except share and store data).
2000 2001 -------------------------------------- --------------------------------------- First Second Third Fourth First Second Third Fourth Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter ------- ------- ------- ------- ------- ------- ------- -------- Net sales .................................... $52,783 $55,186 $60,906 $93,182 $66,423 $67,131 $76,220 $122,639 Cost of sales ................................ 33,374 34,919 38,550 59,007 41,978 42,264 47,951 76,122 ------- ------- ------- ------- ------- ------- ------- -------- Gross margin................................ 19,409 20,267 22,356 34,175 24,445 24,867 28,269 46,517 Selling, general and administrative......... 18,597 19,920 21,778 23,221 23,438 24,718 26,936 30,355 Pre-opening expense......................... 645 311 576 396 1,075 374 625 444 ------- ------- ------- ------- ------- ------- ------- -------- Income (loss) from operations ................ 167 36 2 10,558 (68) (225) 708 15,718 Interest expense (income), net.............. (66) 12 149 92 32 149 297 197 ------- ------- ------- ------- ------- ------- ------- -------- Income (loss) before income taxes ............ 233 24 (147) 10,466 (100) (374) 411 15,521 Income tax expense (benefit) ................. 89 9 (56) 3,977 (38) (141) 156 5,974 ------- ------- ------- ------- ------- ------- ------- -------- Net income (loss) ............................ 144 15 (91) 6,489 (62) (233) 255 9,547 ======= ======= ======= ======= ======= ======= ======= ======== Net income (loss) per share, diluted ......... $ 0.02 $ 0.00 $ (0.01) $ 0.87 $ (0.01) $ (0.03) $ 0.03 $ 1.20 Weighted average shares outstanding .......... 7,411 7,435 7,472 7,463 7,423 7,429 7,788 7,957 Number of stores open at end of period ....... 42 45 48 50 53 55 58 61 Comparable store sales increase .............. 3% 7% 5% (1%) 4% 4% 7% 15%
Due to the importance of our peak selling season, which includes Fall/ Halloween, Thanksgiving and Christmas, the fourth quarter has historically contributed, and is expected to continue to contribute, virtually all of our profitability for the entire year. As a result, any factors negatively affecting us during the fourth quarter of any year, including adverse weather and unfavorable economic conditions, would have a material adverse effect on our results of operations for the entire year. Our quarterly results of operations also may fluctuate based upon such factors as the length of holiday seasons, the date on which holidays fall, the number and timing of new store openings, the amount of store pre-opening expenses, the amount of net sales contributed by new and existing stores, the mix of products sold, the amount of sales returns, the timing and level of markdowns and other competitive factors. Liquidity and Capital Resources Our cash is used primarily for working capital to support our inventory requirements and fixtures and equipment, pre-opening expenses and beginning inventory for new stores. In recent years, we have financed our operations and new store openings primarily with cash from operations, the net proceeds we received from our initial public offering in 1997 and with borrowings under bank financing agreements. At December 31, 2001 and 2000, our working capital was $56.4 million and $47.2 million, respectively. During 2001, 2000 and 1999, cash of $6.8 million, $6.7 million and $9.8 million was generated by operations, respectively. In these three periods, $12.9 million, $13.5 million and $4.9 million of cash, respectively, was used to increase inventory levels to support both new and existing stores. In these periods, part of the inventory increase was financed through increases in accounts payable of $1.3 million, $8.1 million and $2.6 million, respectively. Net cash used in investing activities during 2001, 2000 and 1999 was $8.7 million, $10.6 million and $1.7 million, respectively. This use of cash was for capital expenditures of $8.7 million in 2001, $10.6 million in 2000, and $5.5 million in 1999. In 2001, capital expenditures related principally to new store openings. In 2000, capital expenditures related principally to new store openings and the implementation of the POS system. In 1999, capital expenditures included $2.5 million for new store openings and for major renovations in existing stores and $2.0 million relating to POS and other systems development. In 1999, we received $3.9 million in cash upon the maturity of investment grade securities held by us. In 2002, we expect to spend approximately $12.0 million on capital expenditures, which includes approximately $8.0 million for new store openings, and the remainder for remodeling existing stores, upgrading systems in existing stores, warehouse equipment and corporate systems development. There are no other material commitments for capital expenditures. 21 In the year ended December 31, 2001, net cash provided by financing activities was $2.4 million, principally as a result of $2.8 million of proceeds received from equipment financing. On August 3, 2001, we replaced our $25 million credit facility with a new $50 million three year revolving credit agreement with KeyBank National Association, on its own behalf and as administrative agent, and First Union National Bank. Borrowings under this credit facility accrue interest at rates that will vary between LIBOR plus 150 basis points and LIBOR plus 200 basis points, depending on the fixed charge coverage ratio at the time of borrowing. The borrowings under our credit facility are secured by all of our assets. At December 31, 2001, based upon the eligibility criteria contained in the agreement, the maximum borrowings available were $43.3 million. We believe that cash generated from our operations and available borrowings under our credit facility, will be sufficient to finance our working capital and capital expenditure requirements for at least the next 12 months. We lease our retail stores, distribution center, satellite warehouse facilities and corporate headquarters under noncancelable operating leases. At December 31, 2001 our total obligations under these operating leases was $160.7 million. In addition, we had capital lease obligations of $3.2 million at December 31, 2001. The following table reflects as of December 31, 2001 the payments due for the periods indicated under our capital and operating leases.
Contractual Payments Due By Period ($000) --------------------------------------------------------------------- Obligations Total Less than 1 Year 1-3 Years 4-5 Years After 5 Years - ----------- ----- ---------------- --------- --------- ------------- Capital Lease Obligations................................. $ 3,174 $ 1,329 $ 1,845 -- -- Operating Leases.......................................... $160,656 $18,710 $52,809 $31,995 $57,142
Recent Accounting Pronouncements In June 1998, the Financial Accounting Standards Board, or FASB, issued Statement of Financial Accounting Standards, or SFAS, No. 133, Accounting for Derivative Instruments and Hedging Activities, which requires that all derivative financial instruments be recognized as either assets or liabilities in the balance sheet. SFAS No. 133, which was effective for our first quarter of 2001, has not had a material impact on our consolidated results of operation, financial position or cash flows. In July 2001, FASB issued SFAS No. 141, "Business Combinations" and SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 requires business combinations initiated after June 30, 2001 to be accounted for using the purchase method of accounting, and broadens the criteria for recording intangible assets separate from goodwill. SFAS No. 142 requires the use of a non-amortization approach to account for purchased goodwill and certain intangibles, effective January 1, 2002. We do not believe that the adoption of these pronouncements will have a material impact on our financial statements. FASB also recently issued Statement No. 143, "Accounting for Asset Retirement Obligations" and Statement No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." Statement No. 143 requires the recognition of a liability for the estimated cost of disposal as part of the initial cost of a long-lived asset. Statement No. 144 supersedes Statement No. 121 to supply a single accounting approach for measuring impairment of long-lived assets, including segment of a business accounted for as a discontinued operation or those to be sold or disposed of other than by sale. We must adopt Statement No. 143 in 2003 and Statement No. 144 in 2002. We believe that adopting these pronouncements on our financial statements will not have a material impact on our consolidated results of operation, financial position or cash flows. 22 BUSINESS Our Company We are a rapidly growing specialty retailer offering a vast selection of arts, crafts and floral merchandise to a broad demographic of consumers. Our target customers are primarily women between the ages of 25 and 55 who are looking for ideas to decorate their homes, create handmade items, or otherwise engage in arts and crafts activities. We have grown from 17 stores in January 1997 to 61 stores in December 2001. In 2001, for stores open for the full calendar year, our average sales per square foot were $273, which we believe to be the highest in our industry, and our average sales per store were approximately $6.1 million. Our stores are located in the eastern United States from New England to the Carolinas. For the foreseeable future we intend to locate our new stores within 700 miles of our distribution center, an area encompassing approximately 45% of the United States population. We believe we can support at least 120 stores in this geographic area from our distribution center. Our assortment of merchandise consists of approximately 60,000 SKUs, with more than 45,000 SKUs offered at each store at any one time. We believe we offer a superior shopping experience that is differentiated by our broad merchandise assortment, high in-stock positions, exciting stores, attentive and knowledgeable sales associates and competitive prices. We have a highly experienced management team which is comprised of executives who have each participated in the expansion of several large retailers. Collectively, our Chief Executive Officer, President, Chief Operating Officer and Chief Financial Officer have more than 125 years experience in retailing. Our Market We compete in a $23 billion market comprised primarily of arts and crafts products, silk and dried flowers and picture frames. Our market is highly fragmented and is served by multi-store arts and crafts retailers, mass merchandisers, small, local specialty retailers, mail order vendors, hardware stores and a variety of other retailers. The size and growth of our market is sustained by the popularity of arts and crafts. According to a 2001 Hobby Industry Association report, 54% of United States households participated in crafts and craft-related hobbies during 2000. Further, a June 2001 Harris Poll reports that the popularity of crafts is similar to the popularity of watching sports, listening to music, playing golf, boating, hunting and other similar leisure activities. The current popularity of crafts is reflected in the national media. For example, crafts are prominently featured on Martha Stewart Living(R) and The Rosie O'Donnell Show(R) and in related publications. Our Merchandise Our merchandising strategy is to offer the broadest and deepest assortment of arts, crafts and floral merchandise and to provide our customers with all of the components necessary for their crafting projects on a regular basis. Below is a representative list of our merchandise: o Art Supplies and Frames: paints, brushes, canvas, drawing tools, rubber stamps and stationery, scrapbooking supplies, stencils and frames. o Traditional Crafts: stitchery, yarn for knitting and rug hooking, cake and candy making supplies, glass crafts, decoupage, wood crafts, kids crafts, felt, glitter, dollmaking, dollhouses and furniture, and instructional books. o Floral and Accessories: silk and dried flowers, accessories like vases and other products to assist in the arrangement of flowers, pre-made and custom made floral arrangements, ribbon and lace, wedding related items, potpourri, candles, candle making supplies and wicker baskets. o Fashion Crafts: t-shirts and sweatshirts, decorative items like patches and rhinestones and jewelry making supplies like beads. 23 o Seasonal Items: craft making materials, decorations and floral products for all major holidays and seasons, including Christmas, Fall/Halloween, Spring/Easter, Valentine's Day and St. Patrick's Day. Business and Operating Strategy We believe that our customers expect exceptional service and a broad assortment of in-stock merchandise at competitive prices in an exciting and easy-to-shop store. Our goal is to consistently deliver an overall value proposition that exceeds our customers' expectations and offers them a superior shopping experience. In order to achieve this goal we pursue the following five primary business and operating strategies: We strive to offer the broadest and deepest assortment of arts, crafts and floral merchandise. We believe that key elements in a customer's decision where to shop are variety and selection of merchandise. We believe our stores offer the broadest and deepest selection of arts, crafts and floral merchandise in our industry. Each of our stores stocks 60,000 SKUs across five major merchandise categories during the course of a year, with more than 45,000 SKUs offered at each store at any one time. Our buyers actively seek new merchandising opportunities by monitoring industry trends, working with domestic and international vendors, attending trade shows and craft fairs and regularly interacting with our customers. We believe that our ability to provide new merchandise to our customers on a continuous basis differentiates us from our competitors. We strive to maintain a superior in-stock merchandise position. Craft projects usually require multiple components. Providing all of the components for a particular craft project in a single store on a regular basis is critical to meeting the demands of our customers. Therefore, we designed our merchandise distribution systems to ensure rapid replenishment of inventory and the highest levels of in-stock positions in our stores. Our distribution center will deliver merchandise to each of our stores three to five times per week during our peak selling season, and two to three times per week throughout the balance of the year. In our peak selling season, our store managers can replenish 65% of their shelf merchandise assortment within two to three days. We strive to operate exciting, easy-to-shop stores. We provide our customers with project ideas by displaying samples of completed craft projects throughout our stores. We believe that these displays generate excitement and foster impulse buying and return visits to our stores. We regularly provide video and live in-store crafting demonstrations. We offer frequent in-store classes for children and adults in most of our stores on a wide variety of craft skills. Our stores are designed to be uncluttered, well- organized and well-lit. Wide aisles and easy to read signage help our customers locate merchandise and make our stores easy-to-shop. To ensure prompt and personalized service, we staff our stores with a high ratio of store personnel to customers, typically including a store manager, three associate managers, nine department managers and a staff of approximately 49 additional full-time and part-time employee team members. Store personnel, many of whom are crafters themselves, assist customers with merchandise selection and project ideas. We strive to attract and retain experienced and entrepreneurial store management. To provide optimal customer service, we strive to foster merchandising creativity and an entrepreneurial culture throughout all levels of our organization. Store managers are empowered and encouraged to identify merchandising opportunities and to tailor displays to local preferences for craft projects. While receiving direction and support from corporate level management, this autonomy allows store managers to use individual creativity to cater to the needs and demands of customers. If proven successful, merchandising ideas generated by a store manager can be implemented quickly throughout our chain. We believe this helps us to increase sales and profitability. Store managers and associate managers earn incentive bonuses based on annual increases in the profitability of their stores. The average annual compensation for our store managers (based upon store managers in position for the full fiscal year) was approximately $106,000 in 2001. We 24 believe our focus on empowering and rewarding our employees, all of whom are "team members," helps in recruiting, hiring and retaining talented personnel. Our turnover rate for store managers averaged 7% per year from 1997 through 2001. We strive to provide superior price/value for our customers. We believe that our customers consider the relationship between the quality and price of our merchandise to be important factors in their buying decisions. Therefore, we strive to be the price/value leader in all of our merchandise categories. Our purchasing professionals and store managers actively monitor competitors' prices to ensure we maintain low prices while preserving merchandise quality and value. Our policy to beat any competitor's advertised price by 10% is clearly displayed in our stores. In addition, on a weekly basis, we advertise select items at 20% to 40% off their everyday low prices. We believe that our price/value strategy exceeds our customers' expectations and enhances customer loyalty. Growth Strategy The market in which we operate is large and fragmented. We believe that this presents an opportunity to continue to grow our business for the foreseeable future. Our objective is to improve our market share in existing geographic markets and to expand into new geographic markets while enhancing our profitability through greater leverage of our corporate infrastructure. To support our growth, we expect to expand our facilities, upgrade our management information systems and hire additional corporate personnel. We believe by increasing our store base we can obtain economies of scale in advertising, distribution, purchasing and management costs and, as a result, improve our operating margins. Opening New Stores: During the next two years we intend to increase our store base of 61 locations at December 31, 2001 by approximately 20% per year. Our current strategy is to open new stores within a 700 mile radius of our existing corporate headquarters and distribution center located in suburban Philadelphia. This geographic area contains approximately 45% of the United States population. Ultimately, we believe that we can at least double the number of our existing stores within this geographic area without significantly diluting the sales in our existing stores. In the future, we may open stores in other regions. Our site selection strategy is overseen by a Vice President of Real Estate who is responsible for identifying favorable store locations in both existing and new geographic markets. Our site selection criteria include an assessment of population and demographic characteristics of the market area, customer traffic, performance of other retailers within the area, co-tenants at the proposed site, projected profitability and cash return on investment. We have developed a standardized procedure for opening new stores. Our new store opening team develops the floor plan and inventory layout based on our store prototype and hires and trains team members in connection with the opening of each new store. For each new store we plan to open in the next two years, we expect to spend approximately $1.3 million, which includes $365,000 for fixtures and equipment, $190,000 in pre-opening costs, and $700,000 for in-store inventory, net of accounts payable. Increasing Sales in Existing Stores: In 2001, for stores open at least one full calendar year, our average sales per square foot were $273, which we believe to be the highest in our industry, and our average sales per store were approximately $6.1 million. Our comparable store sales growth was 4% in 1997, 3% in 1998, 6% in 1999, 3% in 2000 and 8% in 2001. Stores are added to the comparable store base at the beginning of their fourteenth full month of operation. Our primary method of increasing sales in our existing stores is to successfully execute our business and operating strategies, including: o providing the broadest and deepest merchandise assortment, o maintaining a superior in-stock position, 25 o operating exciting and easy-to-shop stores, o providing new merchandise and crafting ideas to our customers, o hiring and retaining entrepreneurial and knowledgeable store managers and sales teams, and o providing superior price/value for our customers. Merchandising Our merchandising strategy is to offer the broadest and deepest assortment of arts, crafts and floral merchandise and to provide our customers with all of the components necessary for their crafting projects on a regular basis. We believe our merchandise appeals to a wide range of recreational and professional crafters of all ages and economic backgrounds. However, our primary customers are women ages 25 to 55. We maintain a fresh and exciting shopping environment by frequently introducing new merchandise into our stores and by regularly updating our displays of completed craft projects. Our buyers actively seek new merchandising opportunities by monitoring industry trends, working with domestic and international vendors, and regularly attending trade shows and craft fairs. The following table describes net sales for each of our merchandise categories as a percentage of our total net sales for the years ended December 31, 1999 through 2001:
Year Ended December 31, ---------------------- 1999 2000 2001 ----- ----- ----- Art supplies and frames ...................................................................... 30.0% 31.0% 32.0% Traditional crafts ........................................................................... 31.0 30.0 30.0 Floral and accessories ....................................................................... 27.0 26.0 25.0 Fashion crafts ............................................................................... 7.0 8.0 8.0 Seasonal items ............................................................................... 5.0 5.0 5.0 ----- ----- ----- Total...................................................................................... 100.0% 100.0% 100.0%
Our corporate office develops a planogram for each of our basic and seasonal merchandise categories which is implemented at the store level. A planogram is a diagram that shows how and where each specific retail product should be placed on shelves or displays. The planograms are developed by a team consisting of our buyers and members of our planogram department, with input from key vendors. The planograms are developed using information about the products, such as size, shape, colors, or theme, sales volume and inventory levels. By analyzing past and current sales patterns, we can then adjust our planograms to present merchandise in a manner that helps maximize sales. Our POS system allows us to make better merchandising decisions by identifying sales volume and seasonality patterns of particular items of merchandise. With this information we can make better decisions regarding when to stock, reorder, mark-down and discontinue merchandise. Our purchasing professionals and store managers actively monitor competitors' prices to ensure we maintain low prices while preserving merchandise quality and value. Our policy of beating any competitor's advertised price by 10% is clearly displayed in our stores. On a weekly basis, we advertise select items at 20% to 40% off their everyday low prices. We also accept competitors' coupons. We believe that our strategy of price/value leadership enhances customer loyalty and provides superior value. Our stores regularly feature seasonal merchandise that complements our core merchandising strategy. Seasonal merchandise is offered for all major holidays and seasons, including Christmas, Fall/Halloween, Spring/Easter, Valentine's Day and St. Patrick's Day. By far the greatest portion of our seasonal merchandise is sold during the Christmas season. Our Christmas holiday merchandise is given floor and shelf space in our stores beginning in late summer. The Christmas holiday season is longer for our stores than for many traditional retailers because of the project-oriented nature of Christmas crafts and gift-making ideas. We believe that our holiday merchandise assortment differs from some of our competitors because a substantial amount of our seasonal merchandise is used to create holiday crafts and gifts rather than consisting of traditional Christmas trees and decorations. 26 Stores Our stores are typically 20,000 to 25,000 square feet. Most of our stores are located in strip centers that are easily accessible from main traffic arteries and have convenient parking. Our store size varies based on market demographics and real estate availability. Most of our store leases have an average initial term of ten years, with two five year renewal options, and provide for predetermined escalations in future minimum annual rent or additional rent contingent upon store sales levels. Our stores are generally open from 9:30 a.m. to 9:00 p.m., Monday through Saturday, and from 10:00 a.m. to 6:00 p.m. on Sunday. Store layout and operations Our stores provide a "one-stop-shopping" destination for arts, crafts and floral merchandise in an exciting and spacious shopping environment. We design our stores to be attractive and easy-to-shop with a layout intended to lead customers through the entire store in order to expose them to all of our merchandise categories. Wide aisles and easy to read signage help our customers locate merchandise. We use end-of-aisle displays to feature best- selling items and promotional merchandise. Generally, the center of the store contains the floral area, which includes a ribbon center and counter for free floral arrangement services. Our stores also contain a customer service area and eight to 11 registers for quick checkout. Our prototype store is apportioned approximately 80% to selling space with the remainder devoted to delivery, storage, classroom and office areas. We emphasize the display of completed craft projects in each department to provide customers with crafting ideas. Because many customers browse for new craft ideas, we believe eye-catching displays of completed craft projects are effective at motivating impulse purchases. Our knowledgeable store team members, many of whom are crafters themselves, are available to explain the displays in detail to customers and to offer assistance on related craft projects. We offer frequent in-store classes for children and adults in most of our stores in a dedicated classroom typically located at the rear of the store. Classes are taught by employee team members and outside professionals. Typical classes provide instruction on oil painting, cake decorating, advanced stamping, ribbon making or scrapbooking. Store management and training Each store is managed by a store manager who is typically assisted by three associate store managers and nine department managers, and employs up to approximately 49 additional full-time and part-time team members. Our store managers and associate store managers are responsible primarily for customer service, training, hiring store level team members, merchandise ordering and inventory management. We develop new store managers by promoting from within our organization. We selectively hire experienced store managers from other retailers who start at our stores as associate store managers. A key part of our strategy and management style is to foster an entrepreneurial culture and merchandising creativity throughout all levels of our organization which we believe helps to promote customer loyalty. Store managers are empowered and encouraged to identify merchandising opportunities and to tailor displays to local preferences for craft projects. While receiving direction and support from corporate level management, this autonomy allows store managers to use their own creativity to cater to the needs and demands of their customers. If proven successful, merchandising ideas generated by a store manager can be implemented quickly throughout our chain. We believe this helps to increase sales and profitability. Our store managers and associate store managers earn incentive bonuses based upon annual increases in the profitability of their stores. The average annual compensation for our store managers was approximately $106,000 in 2001. We believe our focus on empowering and rewarding our team members helps in recruiting, hiring and retaining talented personnel. Our training program for store managers and associate store managers includes several annual company-sponsored conferences to refine and develop their skills in merchandising, merchandise trends, store operations, financial controls, human resources and general management. Training sessions are also held for floral designers and classroom coordinators at various times during the year. Many of our team members are 27 crafters themselves and we provide them with training to create a sales staff with a strong focus on customer service and a willingness to assist customers in assembling and coordinating their craft projects. Store locations As of December 31, 2001, we operated 61 stores in twelve states, all of which are leased and located within a 700 mile radius of our suburban Philadelphia distribution center. The number of our stores located in each state and the city in which each store is located is shown in the following table:
Connecticut (3) New Hampshire (1) North Carolina (6) Rhode Island (1) - --------------- ----------------- ------------------ ---------------- New London Nashua Cary Warwick Orange Concord Plainville New Jersey (11) Hickory South Carolina (1) --------------- Raleigh ------------------ Delaware (2) Brick Town Wilmington Greenville - ------------ Clifton Winston-Salem Dover Deptford West Virginia (1) Wilmington Edison Pennsylvania (14) ----------------- English Creek ----------------- Clarksburg Maryland (4) Hamilton Allentown - ------------ Linden Altoona Frederick Moorestown Bensalem Glen Burnie Parsippany Broomall Hagerstown Shrewsbury Exton White Marsh Watchung Hanover Harrisburg Massachusetts (8) New York (9) Lancaster - ----------------- ------------ Langhorne Bellingham Binghamton Montgomeryville Brockton Latham Muncy Danvers Middletown Philadelphia Framingham Nanuet Reading Holyoke Poughkeepsie Scranton Hyannis Saratoga Springs Medford Syracuse North Dartmouth Utica Yorktown Heights
Purchasing Our purchasing programs are designed to support our business strategy of providing customers with the broadest and deepest assortment of high quality arts, crafts and floral merchandise at value prices while maintaining high in-stock positions. A 27 person corporate buying staff oversees all of our purchasing. Buyers and store management regularly attend trade shows and craft fairs to monitor industry trends and to obtain new craft ideas. In-store department managers are responsible for daily reordering of merchandise for their departments. In 2001, approximately 96% of our merchandise orders were placed through our EDI system. Approximately 59% of our orders were shipped directly from vendors to our stores; the remaining 41%, approximately one-third of which are floral and seasonal items, were shipped from our distribution center. Merchandise assortments at our stores are often enhanced by products ordered by store managers to meet the unique needs of their customers. All of these purchases are monitored through centralized system controls. In 2001, we purchased our inventory from more than 500 vendors worldwide. One of the key criteria for the selection of vendors is their responsiveness to our delivery requirements and timing needs. In 2001: 28 o the largest 25 domestic vendors accounted for approximately 44% of the aggregate dollar volume of our purchases, o the largest vendor, SBAR'S, accounted for approximately 18% of the aggregate dollar volume of our purchases, and o approximately 11% of our merchandise, primarily floral and seasonal items, was imported directly from foreign manufacturers or their agents, almost exclusively from the People's Republic of China. All of our overseas purchases are denominated in United States dollars. SBAR'S is a specialty distributor of arts and crafts merchandise, primarily to independent arts and crafts retailers. We believe that our relationship with SBAR'S provides us with a significant competitive advantage for the following reasons: o Merchandise purchased from SBAR'S typically has a high SKU count but small dollar volume, is uneconomical to purchase directly from a manufacturer or to distribute from our distribution center, has a low turnover, or has been developed by them. o Merchandise which cannot be timely delivered by other vendors can often be obtained quickly from SBAR'S because SBAR'S regularly maintains an inventory of many of the items we sell. o SBAR'S maintains a product development and design department which assists us in identifying craft trends, and we often obtain from SBAR'S merchandise samples and displays which are utilized in our stores to generate customer interest. o We have been purchasing merchandise from SBAR'S since our inception and have developed a disciplined purchasing and ordering relationship with them, which includes two to five deliveries by SBAR'S per store each week, depending on the size of the store and the time of the year. Distribution Our distribution strategy is focused on supporting our stores and maintaining high in-stock positions in all of our merchandise categories. Our stores receive merchandise deliveries three to five times per week from our distribution center during our peak selling season, and two to three times per week throughout the balance of the year, depending on store size. We lease 461,000 square feet of distribution and warehouse facilities, consisting of our 253,000 square foot distribution center and adjoining 10,000 square foot office complex in suburban Philadelphia and our two nearby satellite warehouses which total an additional 208,000 square feet. Our distribution center is leased for a term which expires in March 2005, subject to our option to renew the term for an additional six years. Our satellite warehouses are leased for a term which expires in March 2003. Our distribution center and warehouse operations are supported by our warehouse management system which uses hand-held computers and radio frequency communication technology to track merchandise. Our warehouse management system enables us to update our inventory records instantly to reflect all of the merchandise receiving and shipping activities that occur at our distribution center throughout the day. We believe our warehouse management system helps to make our distribution center and warehouse operations efficient and is instrumental in helping us meet our commitment to provide superior inventory replenishment to each of our stores. We lease a fleet of tractors and trailers to deliver merchandise to 40 of our 61 stores directly from our distribution center. Additionally, we have contracted with an outside carrier to deliver merchandise to the 21 stores where an overnight stay is required because of travel time. In 2001, approximately 41% of our merchandise was delivered from our distribution center to our stores. We are currently negotiating the leasing and construction of a new distribution center and office complex. We anticipate that this new distribution center, which will be located near our existing distribution center, will initially be 450,000 square feet plus 30,000 square feet of office space. We plan to expand the new distribution center to 900,000 square feet by the end of 2005. We intend to discontinue using our 29 satellite warehouses once the first 450,000 square feet of the new distribution center is completed, which we anticipate will be sometime in 2003. We will continue to operate our current distribution center until the second phase of construction of our new distribution center is completed. We believe that our new facility, when completed, will enable us to effectively service all of our existing and planned store locations within a 700 mile radius of the new distribution center. Marketing Our marketing and advertising is designed to attract our target customers consisting primarily of women between the ages of 25 and 55. A study published in Craftrends in November 2001, surveyed 1,000 craft customers across the country. Of the 1,000 participants, 66% were between the ages of 26 and 54, 89% were female and 46% had an income greater than $60,000. We believe that our target customer is consistent with this demographic profile. We advertise 51 weeks per year, typically in midweek editions of local and/ or regional newspapers. Approximately 12 times per year, we run multi-page newspaper inserts in local and regional newspapers. In addition, prior to store openings, we use radio advertisements to develop customer awareness and we place special pre-opening advertisements, normal advertising copy and/or grand opening inserts in newspapers. We create most of our advertising in- house. Our net advertising expense was 2.5% of net sales in 2001. We believe that teachers, who often purchase arts and crafts merchandise for in-school projects, are an important customer segment. To generate goodwill, we offer teachers who join our "Teachers Program" a 10% discount on all regularly and sale priced merchandise. We have issued over 500,000 discount cards to teachers in this program. Similarly, our "Crafty Kids Birthday Club," with over 400,000 members, is intended to develop future crafters as customers. Members of this club receive a birthday card containing a $5.00 gift certificate each year through their twelfth birthday. We recently re-launched our website, www.acmoore.com. The primary goal of our website is to drive additional store traffic and serve as an additional marketing channel to build brand name awareness. Our website features weekly advertisements, a store locator and an in-store class schedule, as well as suggested craft projects for children and adults with accompanying instructions and shopping lists for merchandise to be purchased at our stores. The craft projects on our website change both seasonally and according to new trends. We do not sell our merchandise on our website, although gift certificates may be purchased on-line. Management Information Systems We believe that we have implemented leading information technology systems which support merchandising, store ordering, warehouse inventory management, finance and administration. Our management information systems are secure, redundant and scalable. We expect to continue to enhance the performance of our systems through software and hardware upgrades and other improvements, such as the systems integration of our stores and distribution center to improve our inventory processing capabilities. In August 2000, we completed the installation of our POS system in every store. This system, which includes merchandise universal product code or bar code scanning at the registers along with the expansion of our radio frequency re-order system, allows our stores to reduce or re-deploy employee team members that had previously been used to price mark each SKU. With the POS data capturing capabilities, faster and more detailed sales and margin information is available. We have improved our merchandising efforts by polling the POS system on a regular basis to evaluate sale and pricing trends for each SKU. In addition, we are able to generate data to assess the performance of our advertising and promotional programs. This system also improves the speed of the check-out process, reduces pricing errors and provides greater control over register operations. Our real-time management information and control system has been designed to support our key business objective of maintaining a high in-stock position. Utilizing a radio frequency based hand-held computer, our department managers electronically record and then transmit their orders to the corporate office. These orders are then automatically sent to the appropriate vendor. This internally developed system is 30 based upon EDI and connects with most of our vendors as well as with our distribution center. Those vendors that lack EDI capability are given an option to use a web-based solution that links with our systems. Competition The market in which we compete is highly fragmented, containing multi-store arts and crafts retailers, mass merchandisers, small local specialty retailers, mail order vendors, hardware stores and a variety of other retailers. We believe we are one of only six retailers in the United States dedicated to serving the arts and crafts market that have annual sales in excess of $100 million. We compete with many retailers and classify our principal competition within the following three categories: o Multi-store specialty chains. This category includes several multi-store specialty chains operating more than 35 stores and comprises: Michaels Stores, Inc., a chain which operates approximately 700 Michaels Stores throughout the United States; Jo-Ann Stores, Inc. which operates approximately 1,000 Jo-Ann Stores and approximately 60 Jo-Ann etc. stores nationwide; Hobby Lobby Stores, Inc. a chain which operates approximately 260 stores primarily in the Midwestern United States; Garden Ridge, Inc., which operates approximately 40 stores primarily in the southeast and midwest United States; and Rag Shops, Inc. which operates approximately 70 stores located primarily in New Jersey and Florida. o Mass merchandisers. This category includes companies such as Wal-Mart Stores, Inc., Ames Department Stores, Inc. and other mass merchandisers. These retailers typically dedicate only a relatively small portion of their selling space to a limited assortment of arts and crafts supplies and floral merchandise. o Small, local specialty retailers. This category includes thousands of local "Mom & Pop" arts and crafts retailers. Typically, these are single store operations managed by the owner. The stores generally offer a limited selection and have limited resources for advertising, purchasing and distribution. Many of these stores have established a loyal customer base within a given community and compete on customer service. We believe that the principal competitive factors of our business are pricing, breadth of merchandise selection, in-stock position and customer service. We believe that we are well positioned to compete on each of these factors. Employees As of December 31, 2001, we had 1,412 full-time and 2,679 part-time team members, 3,809 of whom worked at our stores, 141 at the distribution center and 141 at the corporate offices. None of our employees is covered by a collective bargaining agreement, and we consider our relationship with our employees to be good. Trademarks We use the "A.C. Moore" name as a tradename and as a service mark in connection with the sale of our merchandise. Our "A.C. Moore" logo has been registered with the United States Patent and Trademark Office as a service mark. Litigation From time to time, we are involved in litigation arising in the ordinary course of our business. None of the pending litigation, in the opinion of management, is likely to have a material adverse effect on our results of operations or financial condition. We maintain general liability insurance in amounts deemed adequate by management. 31 MANAGEMENT Executive Officers and Directors Our executive officers and directors are as follows:
Name Age Position - ---- --- -------- William Kaplan ................................. 74 Chairman John E. (Jack) Parker .......................... 60 Chief Executive Officer and Director Lawrence H. Fine ............................... 48 President Rex A. Rambo ................................... 60 Executive Vice President and Chief Operating Officer Patricia A. Parker ............................. 59 Executive Vice President, Merchandising and Director Leslie H. Gordon ............................... 58 Executive Vice President, Treasurer and Chief Financial Officer Janet Parker ................................... 39 Senior Vice President, Merchandising Richard Lesser (1)(2) .......................... 67 Director Richard J. Bauer (1)(2) ........................ 76 Director Richard J. Drake (2) ........................... 68 Director
- --------------- (1) Member of the Compensation Committee (2) Member of the Audit Committee Mr. Kaplan, our co-founder, has been Chairman of the board of directors since our inception. Mr. Kaplan also serves as the Chairman of the board of directors of Regal Bag Corporation, an importer and distributor of women's handbags, which he founded in 1947. Mr. Parker, our co-founder, has been Chief Executive Officer and a director since our inception and was our President from inception until June, 2001. From 1959 to 1984, Mr. Parker worked for the F.W. Woolworth Company in various management positions, most recently as President and Chief Executive Officer of the United States General Merchandise Group where he was responsible 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. Mr. Fine has served as our President since June 2001. Mr. Fine was most recently Executive Vice President--General Merchandise Manager for arts and crafts retailer Michaels Stores, Inc., a position he held since December 1996. From 1995 until joining Michaels in December 1996, he was Senior Vice President of Merchandising for Party City Corp. Prior to joining Party City, Mr. Fine held a variety of merchandising positions with the Jamesway Corporation for nearly 16 years. Mr. Rambo has served as our Executive Vice President and Chief Operating Officer since December 1997. From December 1996 to December 1997, he was our Executive Vice President, Strategic Development, Merchandising and Marketing. In 1995 and 1996, Mr. Rambo was Executive Vice President, Merchandising and Marketing for Michaels Stores, Inc. 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. Patricia Parker has served as our Executive Vice President, Merchandising since September 1990. From 1985 to 1990, she served as our Vice President. Ms. Parker is responsible for purchasing all of our floral and seasonal merchandise and our import purchasing program. Ms. Parker is the wife of Jack Parker and the mother of Janet Parker. 32 Mr. Gordon has served as our Executive Vice President, Treasurer and Chief Financial Officer since February 1999. From March 1996 to January 1999, Mr. Gordon served as our Senior Vice President, Treasurer and Chief Financial Officer. From 1992 to 1995, Mr. Gordon was Senior Vice President, Finance of C & J Clark America, Inc., a shoe manufacturer, wholesaler and retailer. From 1986 to 1992, Mr. Gordon served as Senior Vice President, Finance, of SILO, Inc., an electronics retailer. Ms. Janet Parker has served as our Senior Vice President, Merchandising since 1994. From 1990 to 1994, Ms. Parker served as our Vice President of Administration and from 1985 to 1990, she served as our Accounting Manager. Ms. Parker is the daughter of Jack and Patricia A. Parker. Mr. Lesser has been a director since March 1993. He is currently a director of The TJX Companies, Inc., a New York Stock Exchange traded retail company, and served as The TJX Companies, Inc.'s Executive Vice President from 1991 until December 6, 2001. Mr. Lesser is also a director of Reebok International, a New York Stock Exchange traded shoe and apparel manufacturer and Dollar Tree Stores, Inc., a Nasdaq traded retail company. Mr. Bauer has been a director since September 1990. Mr. Bauer is Chairman of the Board and Chief Executive Officer of Eastern Alloys, Inc., an independent zinc alloyer, which he founded in 1965. Mr. Bauer is the co-founder and current Chairman of the Board of Service Aluminum Corporation, an aluminum trading company. Mr. Drake has been a director since our founding. He is Chairman of Drake, Sommers, Loeb, Tarshis & Catania, P.L.L.C., a professional limited liability company which renders legal services. Board Composition Our board of directors is divided into three classes, each of whose members serve for a staggered three-year term. Our class A directors consist of Patricia A. Parker and Richard Lesser, whose terms expire at our 2002 annual meeting of shareholders. Our class B directors consist of William Kaplan and Jack Parker, whose terms expire at our 2003 annual meeting of shareholders. Our class C directors consist of Richard J. Bauer and Richard J. Drake, whose terms expire at our 2004 annual meeting of shareholders. At each annual meeting of shareholders, a class of directors will be elected for a three-year term. Board Committees Compensation Committee. The board of directors has established a Compensation Committee, which provides recommendations concerning salaries and incentive compensation for our employees and administers our stock option plan. The current members of the Compensation Committee are Messrs. Bauer and Lesser. Audit Committee. The board of directors has established an Audit Committee, which reviews the results and scope of the annual audit of our financial statements, proposed changes in our financial and accounting standards and principles and our policies and procedures with respect to our internal accounting and financial controls. The Audit Committee also makes recommendations to the board of directors on the engagement of our independent accountants as well as other matters which may come before the Audit Committee or at the direction of the board of directors. The current members of the Audit Committee are Messrs. Bauer, Drake and Lesser. Director Compensation Except for Mr. Kaplan, who receives annual director's compensation of $150,000 for his services as Chairman of the Board, directors who are not officers, employees or consultants receive a directors fee of $5,000 annually plus $400 cash compensation for each board of directors' meeting they attend and $100 for each committee meeting they attend. In addition, we reimburse all directors for their reasonable expenses in connection with the performance of their duties. 33 Executive Compensation The following table sets forth the total compensation paid or awarded during the fiscal years 1999, 2000 and 2001 to our Chief Executive Officer and the four other most highly compensated executive officers, each of whose aggregate compensation exceeded $100,000.
Annual Compensation Long Term ---------------------------------- Compensation Securities Other Annual Underlying All Other Name Year Salary Bonus Compensation Options Compensation - ---- ---- ------ ----- ------------ ------- ------------ Jack Parker ........................................... 2001 $300,000 -- $28,393 (1) -- $19,310 (2) Chief Executive Officer 2000 300,000 -- 26,126 (1) -- 19,982 (2) 1999 300,000 -- 24,886 (1) -- 19,340 (2) Lawrence H. Fine ...................................... 2001 $175,000 $50,000 50,000 $51,500 (3) President Rex A. Rambo .......................................... 2001 $300,000 $47,500 -- 14,000 $ 1,500 (4) Executive Vice President and 2000 300,000 25,000 -- 25,000 1,500 (4) Chief Operating Officer 1999 300,000 25,000 -- 30,000 1,500 (4) Patricia A. Parker .................................... 2001 $215,000 $30,000 -- -- $19,310 (2) Executive Vice President, 2000 215,000 15,000 -- 7,500 19,982 (2) Merchandising 1999 215,000 15,000 -- 10,000 19,340 (2) Leslie H. Gordon ...................................... 2001 $225,000 $47,500 -- 9,000 $ 1,500 (4) Executive Vice President, Chief 2000 225,000 25,000 -- 17,000 1,500 (4) Financial Officer and Treasurer 1999 207,000 25,000 -- 20,000 1,500 (4)
- --------------- (1) Represents life insurance premiums paid by us. (2) Reflects one-half of the value of the benefit to Jack Parker and Patricia A. Parker of the premium paid by us for a split-dollar second-to-die life insurance policy. Also includes in each year, a $1,500 annual contribution by us pursuant to our 401(k) Plan. (3) Represents a $50,000 employment signing bonus and a $1,500 contribution to our 401(k) Plan. (4) Represents annual contribution by us pursuant to our 401(k) Plan. Option Grants in Last Fiscal Year The following table sets forth information regarding stock options granted during 2001 to the executive officers listed in the Summary Compensation Table. The exercise price per share of each option was equal to the fair market value of the common stock at the grant date as determined by the board of directors. Option Grants in Last Fiscal Year
Individual Grants ----------------------------------------------------- Potential Realizable Value at Assumed Annual Rates of Percent of Stock Number of Total Price Appreciation Securities Options for Underlying Granted to Exercise or Option Term(1) Options Employees in Base Price Expiration ------------------- Name - ---- Granted Fiscal Year ($/Share) Date 5% 10% ---------- ------------ ----------- ---------- -------- -------- Jack Parker ....................................... -- -- -- -- -- -- Lawrence H. Fine .................................. 50,000 32.6 10.90 5/10/2011 $342,500 $868,500 Rex A. Rambo ...................................... 14,000 9.1 16.64 7/18/2011 146,440 371,200 Patricia A. Parker ................................ -- -- -- -- -- -- Leslie H. Gordon .................................. 9,000 5.9 16.64 7/18/2011 94,140 238,680
- --------------- (1) This column shows the hypothetical gain or option spreads of the options granted based on assumed annual compound stock appreciation rates of 5% and 10% over the full term of the options. The 5% and 10% assumed rates of appreciation are mandated by the rules of the Securities and Exchange Commission, or SEC, and do not represent our estimate or projection of future common stock prices. The gains shown are net of the option exercise price, but do not include deductions for taxes or other expenses associated with the exercise of the option or the sale of the underlying shares, or reflect non-transferability, vesting or termination provisions. The actual gains, if any, on the exercise of stock options will depend on the future performance of the common stock. 34 Fiscal Year-End Option Values The following table sets forth information concerning the number and value of unexercised options to purchase common stock held as of December 31, 2001 by the executive officers listed in the Summary Compensation Table. None of the executive officers listed in the Summary Compensation Table exercised any stock options in 2001. Aggregate Option Exercises and Fiscal Year-End Option Values
Number of Securities Value of Unexercised In- Underlying Unexercised The Money Options at Shares Options at Fiscal Year-End Fiscal Year End(1) Acquired on Value -------------------------- ------------------ Name Exercise Realized Exercisable Unexercisable Exercisable Unexercisable ---- -------- -------- ----------- ------------- ----------- ------------- Jack Parker ............................... -- -- -- -- -- -- Lawrence H. Fine .......................... -- -- -- 50,000 -- $915,000 Rex A. Rambo .............................. -- -- 78,334 40,666 $1,561,063 765,652 Patricia A. Parker ........................ -- -- 9,167 8,333 209,641 184,759 Leslie H. Gordon .......................... -- -- 61,501 26,999 1,244,182 510,986
______________ (1) Based upon the latest reported sale price on the Nasdaq National Market on December 31, 2001 ($29.20 per share) less the option exercise price. Stock Option Plan In July 1997, we adopted, and the shareholders approved, the 1997 Stock Option Plan. The purpose of the 1997 Stock Option Plan is to attract and retain key employees, directors, and certain consultants and to provide additional incentive to them by encouraging them to invest in our common stock and acquire an increased personal interest in our business. Options exercisable for an aggregate of 1,000,000 shares of common stock may be granted under the 1997 Stock Option Plan. As of December 31, 2001, we have granted options to purchase an aggregate of 937,368 shares of common stock under the 1997 Stock Option Plan, of which options to purchase 876,354 share are outstanding. Options granted under the 1997 Stock Option Plan generally vest over three years and terminate on the tenth anniversary of the date of grant. Employment Agreements On June 11, 2001, we entered into an employment agreement with our President, Lawrence H. Fine. The term of Mr. Fine's employment agreement is three years, unless earlier terminated by us or him. Mr. Fine's employment agreement entitles him to receive an annual base salary of $325,000 for his first year of employment, $350,000 for his second year of employment and $375,000 for his third year of employment. Mr. Fine's employment agreement also provides for the payment of a minimum guaranteed annual bonus in the amount of $50,000. Mr. Fine's employment agreement provides for severance payments to be paid to Mr. Fine if his employment is terminated by us without cause or in the event of a change in control transaction. In accordance with the terms of his employment agreement, Mr. Fine was granted options to acquire 50,000 shares of our common stock under our 1997 Stock Option Plan upon the commencement of his employment. Mr. Fine's employment agreement further provides that on or about July 31, 2002 Mr. Fine will be granted additional options to acquire no less than 50,000 shares and that in the third year of his employment, and in each subsequent year, Mr. Fine will be a participant in our 1997 Stock Option Plan, and that further stock options grants will be in accordance with the provisions of that plan. Mr. Fine's employment agreement also prohibits him from divulging confidential information regarding us or our business to any other party. In addition, Mr. Fine's employment agreement prohibits him, during the term of his employment with us and for a period of two years following termination of his employment, from engaging in a business that competes with us and from soliciting as executives or managers any individuals who were our executives or managers at the time of his employment. 35 Severance Arrangement We have agreed to pay each of Leslie H. Gordon and Rex A. Rambo a sum equal to one year of his then current salary if his employment is terminated by us without cause. CERTAIN TRANSACTIONS Richard J. Drake, one of our directors, is a member of a law firm which we have retained during 2001 and which we intend to retain during 2002. In 2001, we reimbursed Regal Bag Corporation and related companies $93,000 for its cost and expense in providing clerical and mailing services to us and $279,000 for merchandise sold in our stores. William Kaplan, one of our directors, is an executive officer and principal shareholder of Regal Bag Corporation. We no longer utilize the clerical and mailing services of Regal Bag Corporation. It is our policy that all material transactions between us and our officers, directors and other affiliates must be approved by a majority of the disinterested members of our board of directors and be on terms no less favorable to us than could be obtained from unaffiliated third parties. 36 PRINCIPAL AND SELLING SHAREHOLDERS The following table sets forth information regarding the beneficial ownership of our common stock as of February 15, 2002 and on an as adjusted basis to reflect the sale of common stock offered by this prospectus by: o all persons known by us to own beneficially 5% or more of our outstanding common stock, o each of our directors, o the executive officers listed in the summary compensation table, o each shareholder selling shares in this offering, and o all of our directors and executive officers as a group. The footnotes to the table provide information with respect to the number of shares of common stock that some of the selling shareholders are obligated to sell if the underwriters exercise their over-allotment option and the impact that this will have on those shareholders' post-offering common stock holdings. Unless otherwise indicated, each of the shareholders has sole voting and investment power with respect to the shares of common stock beneficially owned by the shareholder. The address of each of Messrs. Kaplan and Parker and Ms. Patricia A. Parker is 500 University Court, Blackwood, New Jersey 08012. The number of shares beneficially owned by each shareholder is determined under rules issued by the SEC and includes voting or investment power with respect to securities. Under these rules, beneficial ownership includes any shares as to which the individual or entity has sole or shared voting power or investment power and includes any shares as to which the individual or entity has the right to acquire beneficial ownership within 60 days after February 15, 2002 through the exercise of any warrant, stock option or other right. The inclusion in this prospectus of such shares, however, does not constitute an admission that the named shareholder is a direct or indirect beneficial owner of such shares.
Beneficial Beneficial Ownership Ownership Prior to Offering After Offering (1) ----------------- ------------------ Shares to Name of Beneficial Owner be ------------------------ Shares Percent Sold Shares Percent --------- ------- --------- --------- ------- Jack Parker ...................................................... 2,140,000 (2) 28.6 367,750 1,772,250 (2)(3) 19.1 Patricia A. Parker ............................................... 9,166 (4) * -- 9,166 (4) * Rex A. Rambo ..................................................... 102,732 (5) 1.4 -- 102,732 1.1 Leslie H. Gordon ................................................. 73,999 (6) 1.0 -- 73,999 * Janet Parker ..................................................... 31,832 (7) * -- 31,832 * Lawrence H. Fine ................................................. 2,000 * -- 2,000 * William Kaplan ................................................... 1,491,000 20.0 -- 1,491,000 16.1 Richard Lesser ................................................... 77,166 (8) 1.0 64,500 12,666 * Richard J. Bauer ................................................. 29,066 (9) * -- 29,066 * Richard J. Drake ................................................. 24,666 (9) * -- 24,666 * FMR Corp. ........................................................ 546,465 (10) 7.3 -- 546,465 5.9 Dimensional Fund Advisors ........................................ 404,700 (11) 5.4 -- 404,700 4.4 Kaplan Family Private Foundation ................................. 244,500 3.3 148,875 95,625 (12) 1.0 William & Elaine Kaplan Private Foundation ....................... 244,500 3.3 148,875 95,625 (12) 1.0 Elaine & William Kaplan Family Private Foundation (13) ................................................ 70,000 * 70,000 -- * All executive officers and directors as a group (10 persons)................................................... 3,981,627 (14)51.3 432,250 3,549,377 (15) 37.3
- --------------- * Denotes less than 1% (1) All percentages assume the underwriters do not elect to exercise the over-allotment option to purchase an additional 382,500 shares of common stock from some of the selling shareholders. (2) Does not include 9,166 shares subject to presently exercisable options owned by Patricia A. Parker. Mr. Parker disclaims beneficial ownership of these shares. (3) Mr. Parker has granted an option to the underwriters to purchase 191,250 shares of our common stock to cover over-allotments. If the underwriters exercise this option in full, Mr. Parker would beneficially own 1,590,166 shares of our common stock, or 17.1% of our outstanding common stock after the offering. 37 (4) Ms. Parker's total includes 9,166 shares subject to presently exercisable options. Does not include 2,140,000 shares owned of record by Jack Parker. Ms. Parker disclaims beneficial ownership of these shares. (5) Includes 78,332 shares subject to presently exercisable options. (6) Includes 61,499 shares subject to presently exercisable options. (7) Includes 30,832 shares subject to presently exercisable options. (8) Represents 77,166 shares subject to presently exercisable options. (9) Includes 22,666 shares subject to presently exercisable options. (10) Information with respect to FMR Corp. is derived from FMR's Schedule 13G relating to A.C. Moore filed with the SEC. The address of FMR Corp. is 82 Devonshire Street, Boston, MA 02109. Fidelity Management & Research Company ("Fidelity"), 82 Devonshire Street, Boston, MA 02109, a wholly- owned subsidiary of FMR Corp. and an investment adviser registered under Section 203 of the Investment Advisers Act of 1940, is the beneficial owner of 490,265 shares or 6.575% of the Common Stock outstanding of AC Moore as a result of acting as investment adviser to various investment companies registered under Section 8 of the Investment Company Act of 1940. The ownership of one investment company, Fidelity OTC Portfolio, amounted to 390,265 shares or 5.234% of the Common Stock outstanding. Fidelity OTC Portfolio has its principal business office at 82 Devonshire Street, Boston, MA 02109. Edward C. Johnson 3d, FMR Corp., through its control of Fidelity, and the funds each has sole power to dispose of the 490,265 shares owned by the Funds. Neither FMR Corp. nor Edward C. Johnson 3d, Chairman of FMR Corp., has the sole power to vote or direct the voting of the shares owned directly by the Fidelity Funds, which power resides with the Funds' Boards of Trustees. Fidelity carries out the voting of the shares under written guidelines established by the Funds' Boards of Trustees. Fidelity Management Trust Company, 82 Devonshire Street, Boston, MA 02109, a wholly-owned subsidiary of FMR Corp. and a bank as defined in Section 3(a)(6) of the Securities Exchange Act of 1934, is the beneficial owner of 56,200 shares or 0.754% of the Common Stock outstanding of the Company as a result of its serving as investment manager of the institutional account(s). Edward C. Johnson 3d and FMR Corp., through its control of Fidelity Management Trust Company, each has sole dispositive power over 56,200 shares and sole power to vote or to direct the voting of 56,200 shares of Common Stock owned by the institutional account(s) as reported above. Members of the Edward C. Johnson 3d family are the predominant owners of Class B shares of common stock of FMR Corp., representing approximately 49% of the voting power of FMR Corp. Mr. Johnson 3d owns 12.0% and Abigail Johnson owns 24.5% of the aggregate outstanding voting stock of FMR Corp. Mr. Johnson 3d is Chairman of FMR Corp. and Abigail P. Johnson is a Director of FMR Corp. The Johnson family group and all other Class B shareholders have entered into a shareholders' voting agreement under which all Class B shares will be voted in accordance with the majority vote of Class B shares. Accordingly, through their ownership of voting common stock and the execution of the shareholders' voting agreement, members of the Johnson family may be deemed, under the Investment Company Act of 1940, to form a controlling group with respect to FMR Corp. (11) Information with respect to Dimensional Fund Advisors Inc. is derived from Dimensional's Schedule 13G relating to A.C. Moore filed with the SEC. Dimensional, an investment advisor registered under Section 203 of the Investment Advisors Act of 1940, furnishes investment advice to four investment companies registered under the Investment Company Act of 1940, and serves as investment manager to certain other commingled group trusts and separate accounts. Those investment companies, trusts and accounts are referred to as the "Funds." In its role as investment adviser or manager, Dimensional possesses voting and/or investment power over our securities reflected in the table, all of which are owned by the Funds. Dimensional disclaims beneficial ownership of such securities. The address of Dimensional is 1299 Ocean Avenue, 11th Floor, Santa Monica, CA 90401. (12) Kaplan Family Private Foundation and William & Elaine Kaplan Private Foundation, each a charity engaged in charitable and philanthropic activities, have each granted options to the underwriters to purchase 95,625 shares of our common stock to cover over-allotments. If the underwriters exercise this option in full, neither Kaplan Family Private Foundation nor William & Elaine Kaplan Private Foundation will own any shares of our common stock after the offering. (13) Elaine & William Kaplan Family Private Foundation is a charity engaged in charitable and philanthropic activities. (14) Includes 302,327 shares subject to presently exercisable options. (15) Mr. Parker, an executive officer and director, has granted an option to the underwriters to purchase 191,250 shares of our common stock to cover over-allotments. If the underwriters exercise this option in full, our executive officers and directors, as a group, would beneficially own 3,358,127 shares of our common stock, or 35.3% of our outstanding common stock after the offering. 38 DESCRIPTION OF CAPITAL STOCK Our authorized capital stock consists of 20,000,000 shares of common stock, no par value, 9,286,735 shares of which will be outstanding (assuming no exercise of options) upon completion of this offering and 5,000,000 shares of preferred stock, no par value, issuable in series, the relative rights, limitations and preferences of which may be designated by the board of directors, none of which are outstanding or will be outstanding upon the completion of this offering. Common Stock The holders of common stock are entitled to one vote per share on all matters to be voted upon by shareholders. Subject to preferences that may be applicable to any then outstanding preferred stock, the holders of common stock are entitled, among other things, to share ratably in dividends if, when and as declared by the board of directors out of funds legally available for distribution; and in the event of our liquidation, dissolution or winding-up, to share ratably in the distribution of assets legally available for distribution, after payment of debts and expenses. The holders of common stock do not have cumulative voting rights in the election of directors and have no preemptive rights to subscribe for additional shares of our capital stock. All currently outstanding shares of the common stock are, and the shares offered by this prospectus, when sold in the manner contemplated by this prospectus will be, fully paid and nonassessable. The rights, preferences and privileges of holders of common stock are subject to the terms of any series of preferred stock which we may issue in the future. Preferred Stock Our preferred stock may be issued from time to time by our board of directors as shares of one or more classes or series. Subject to the provisions of our articles of incorporation and limitations prescribed by law, the board of directors is expressly authorized to adopt resolutions to issue the shares, to fix the number of shares, to change the number of shares constituting any series, and to provide for or change the voting powers, designations, preferences and relative, participating, optional or other special rights, qualifications, limitations or restrictions of the shares, including dividend rights (including whether dividends are cumulative), dividend rates, terms of redemption (including sinking fund provisions), redemption prices, conversion rights and liquidation preferences of the shares constituting any class or series of the preferred stock, in each case without any further action or vote by the shareholders. We have no current plans to issue any shares of preferred stock. One of the effects of undesignated preferred stock may be to enable our board of directors to render more difficult or to discourage an attempt to obtain control by means of a tender offer, proxy contest, merger or otherwise, and thereby to protect the continuity of our management. The issuance of shares of the preferred stock pursuant to the board of directors' authority described above may adversely affect the rights of the holders of common stock. For example, preferred stock that we issue may rank prior to the common stock as to dividend rights, liquidation preference or both, may have full or limited voting rights and may be convertible into shares of common stock. Accordingly, the issuance of shares of preferred stock may discourage bids for the common stock or may adversely affect the market price of the common stock. Anti-Takeover Provisions Our articles of incorporation and bylaws contain several provisions intended to limit the possibility of a takeover, or make a takeover more difficult. In addition to providing for a classified board of directors and the issuance of preferred stock having terms established by the board of directors without shareholder approval, our articles of incorporation and bylaws provide that: o at least 80% of the votes entitled to be cast by shareholders is required to approve amendments to the bylaws, unless at least a majority of the incumbent directors on the board of directors has voted in favor of the amendment, in which case only a majority of the votes cast by shareholders is required to approve the amendment; 39 o directors can be removed only for cause and only by a vote of at least 80% of the votes entitled to be cast by shareholders; o our shareholders are not entitled to call special meetings of the shareholders; and o the articles of incorporation provide that actions by shareholders, which have not been previously approved by the board of directors, without a meeting must receive the unanimous written consent of all shareholders. Our articles of incorporation also permit our board of directors to oppose, in its sole discretion, a tender offer or other offer for our securities and to take into consideration all pertinent issues. Should the board of directors determine to reject such an offer, it may take any lawful action to accomplish its purpose, including, among other things, advising shareholders not to accept the offer and commencing litigation against the offeror. Our bylaws establish procedures for the nomination of directors by shareholders and the proposal by shareholders of matters to be considered at meetings of the shareholders, including the submission of certain information within the times prescribed in the bylaws. In addition, under the Pennsylvania Business Corporation Law of 1988, subject to certain exceptions, a business combination between a Pennsylvania corporation and a person owning 20% or more of such corporation's voting stock (an "interested person") may be accomplished only if: o the business combination is approved by the corporation's directors prior to the date on which such person acquired 20% or more of such stock, or if the board approved such person's acquisition of 20% or more of such stock, prior to such acquisition; o the interested person owns shares entitled to cast at least 80% of the votes all shareholders would be entitled to cast in the election of directors, the business combination is approved by the vote of shareholders entitled to cast a majority of votes that all shareholders would be entitled to cast in an election of directors (excluding shares held by the interested person), which vote may occur no earlier than three months after the interested person acquired its 80% ownership, and the consideration received by shareholders in the business combination satisfies certain minimum conditions; o the business combination is approved by the affirmative vote of all outstanding shares of common stock; or o the business combination is approved by the vote of shareholders entitled to cast a majority of the votes that all shareholders would be entitled to cast in the election of directors (excluding shares held by the interested person), which vote may occur no earlier than five years after the interested person became an interested person. A corporation may exempt itself from this provision by an amendment to its articles of incorporation that requires shareholder approval. Our articles of incorporation do not provide an exemption from this provision. Pennsylvania has also adopted other anti-takeover legislation from which we have elected to exempt ourselves in our articles of incorporation. The Pennsylvania Business Corporation Law of 1988 also provides that the directors of a corporation, in making decisions concerning takeovers or any other matters, may consider, to the extent that they deem appropriate, among other things, o the effects of any proposed transaction upon any or all groups affected by such action, including, among others, shareholders, employees, suppliers, customers and creditors; o the short-term and long-term interests of the corporation; and o the resources, intent and conduct of the person seeking control. The existence of the provisions of our articles of incorporation, bylaws and Pennsylvania Business Corporation Law of 1988 described above may discourage other persons or companies from making a tender offer for, or seeking to acquire a substantial amount of our common stock. 40 Limitations on Directors' Liabilities and Indemnification As permitted by the Pennsylvania Business Corporation Law of 1988, our articles of incorporation provide that a director shall not be personally liable in his/her capacity as a director for monetary damages for any action taken, or any failure to take any action, unless the director breaches or fails to perform the duties of his or her office under the Pennsylvania Business Corporation Law of 1988 and the breach or failure to perform constitutes self-dealing, willful misconduct or recklessness. These provisions of our articles of incorporation, however, do not apply to the responsibility or liability of a director pursuant to any criminal statute, or to the liability of a director for the payment of taxes pursuant to local, Pennsylvania or federal law. These provisions offer persons who serve on our board of directors protection against awards of monetary damages for negligence in the performance of their duties. Our bylaws also provide that every person who is serving or has served as our director or executive officer, or has served as a director or executive officer of any corporation at our request, shall be indemnified by us to the fullest extent permitted by law against all expenses and liabilities reasonably incurred by him, in connection with any proceeding to which he may be made, or threatened to be made, a party, or in which he may become involved by reason of his serving or having served as our director or executive officer, or as the director or executive officer of the other corporation, whether or not he is serving as our director or executive officer of the other corporation at the time the expenses or liabilities are incurred. No indemnification shall be provided, however, with respect to: o liabilities arising under Section 16(b) of the Securities Exchange Act of 1934, as amended; o if a final unappealable judgment or award establishes that such officer or director engaged in intentional misconduct or a transaction from which the director or officer derived an improper personal benefit; o expenses or liabilities which have been paid directly to, or for the benefit of, such person by an insurance carrier; or o amounts paid in settlement of actions without the written consent of the board of directors. Obligations that we may have pursuant to the Bylaws to provide indemnification to our directors and executive officers for liabilities arising under the Securities Act of 1933 may not be enforceable. Transfer Agent and Registrar The transfer agent and registrar for the common stock is StockTrans, Inc., Ardmore, Pennsylvania. 41 SHARES ELIGIBLE FOR FUTURE SALE Upon the completion of this offering, there will be 9,286,735 shares of our common stock outstanding, assuming no exercise of outstanding options. All of the shares which are being sold in this offering will be freely transferable without restriction or further registration under the Securities Act of 1933 unless the shares are purchased by "affiliates" as that term is defined in Rule 144 under the Securities Act of 1933. Of the remaining 6,736,735 shares of outstanding common stock, 3,425,185 shares are freely transferable without restriction or further registration under the Securities Act of 1933 and 3,311,550 shares are currently "restricted securities" as defined in Rule 144 or held by affiliates, and may be sold in the future subject to compliance with the provisions of Rule 144 under the Securities Act of 1933. In addition, as of February 15, 2002 options to purchase 870,125 shares of our common stock were outstanding, of which options to purchase 562,447 shares were fully vested and immediately exercisable. All shares of our common stock issuable upon exercise of outstanding options are freely transferable without restriction or further registration under the Securities Act of 1933, except that affiliates must comply with Rule 144. In connection with this offering, assuming no exercise of the over-allotment option, our executive officers and directors and the selling shareholders, who collectively will own an aggregate of 3,502,800 shares of common stock after this offering and 237,827 shares of common stock issuable upon exercise of outstanding stock options, have agreed under lock-up agreements with the underwriters that, subject to exceptions, they will not sell or dispose of any of their shares of common stock other than shares that may be sold by selling shareholders in connection with this offering for periods of 90-days to 180- days, as the case may be. Of these shares and options subject to lock-up agreements, 3,463,666 shares and options are subject to 180-day lock-up agreements, and 276,961 shares and options are subject to 90-day lock-up agreements. Adams, Harkness & Hill, Inc. may, in its sole discretion and at any time without notice, release all or any portion of the shares subject to lock-up restrictions. In general, under Rule 144, as currently in effect, a person who has beneficially owned shares for at least one year is entitled to sell, within any three-month period, a number of shares that does not exceed the greater of: o one percent of the then outstanding shares of common stock which is expected to be approximately 92,800 shares upon the completion of this offering, or o the average weekly trading volume of the common stock during the four calendar weeks preceding the date on which a notice of sale is filed, subject to manner of sale provisions and notice requirements and to the availability of current public information about us. Affiliates may sell shares not constituting restricted securities in accordance with the volume limitations set forth above and other restrictions, but without regard to the one-year holding period. In addition, a person who was not an affiliate of ours, as defined in Rule 144, at any time during the 90 days preceding a sale and who has beneficially owned for at least two years the shares proposed to be sold would be entitled to sell such shares under Rule 144(k) without regard to the requirements described above. Generally, to the extent that shares were acquired from an affiliate of ours, the acquiror's holding period for the purpose of effecting a sale under Rule 144 commences on the date of transfer from the affiliate. We cannot predict the effect, if any, that sales of shares or the availability of shares for sale will have on the market price of our common stock prevailing from time to time. We are unable to estimate the number of our shares that may be sold in the public market pursuant to Rule 144 because this will depend on the market price of our common stock, the personal circumstances of the sellers and other factors. Nevertheless, sales of significant amounts of our common stock in the public market could adversely affect the market price of our common stock. We have agreed not to sell or otherwise dispose of any shares of common stock during the 180-day period following the date of this prospectus, except we may issue, and grant options to purchase, shares of common stock under the 1997 Stock Option Plan. 42 UNDERWRITING Under the underwriting agreement, which is filed as an exhibit to the registration statement relating to this prospectus, each underwriter named below has agreed to purchase from us and the selling shareholders the respective number of shares of common stock shown opposite its name below:
Underwriters Number of Shares of ------------ Common Stock ------------------- Adams, Harkness & Hill, Inc. ............................. Fahnestock & Co. Inc. .................................... Wedbush Morgan Securities Inc. ........................... --------- Total ................................................... 2,550,000 =========
The underwriting agreement provides that the underwriters' obligation to purchase shares of common stock depends on the satisfaction of the conditions contained in the underwriting agreement and that, if any of the shares of common stock are purchased by the underwriters under the underwriting agreement, all of the shares of common stock that the underwriters have agreed to purchase under the underwriting agreement must be purchased. The conditions contained in the underwriting agreement include the requirement that the representations and warranties made by us and the selling shareholders to the underwriters are true, that there is no material change in the financial markets and that we deliver to the underwriters customary closing documents. The underwriters have advised us that they propose to offer the shares of common stock directly to the public at the public offering price set forth on the cover page of this prospectus, and to dealers, who may include the underwriters, at the public offering price less a selling concession not in excess of $ per share. The underwriters may also allow, and dealers may reallow, a concession not in excess of $ per share to brokers and dealers. After the offering, the underwriters may change the offering price and other selling terms. The following table shows the per share and total public offering price, underwriting discount to be paid to the underwriters and the proceeds before expenses to us and the selling shareholders. This information is presented assuming both no exercise and full exercise by the underwriters of their over- allotment option.
Total ---------------- Without With Per Share Option Option --------- ------- ------ Public offering price............................................................................. $ $ $ Underwriting discount............................................................................. Proceeds, before expenses, to A.C. Moore.......................................................... Proceeds, before expenses, to the selling shareholders............................................
We estimate that the expenses of this offering payable by us, exclusive of the underwriting discount, will be approximately $600,000. Some of the selling shareholders have granted to the underwriters an option to purchase 382,500 additional shares of common stock, exercisable solely to cover over-allotments, if any, at the public offering price less the underwriting discount shown on the cover page of this prospectus. The underwriters may exercise this option at any time until 30 days after the date of the underwriting agreement. If this option is exercised, each underwriter will be committed, so long as the conditions of the underwriting agreement are satisfied, to purchase a number of additional shares of common stock proportionate to the underwriters' initial commitment as indicated in the preceding table and the selling shareholders will be obligated, under the over-allotment option, to sell the shares of common stock to the underwriters. We have agreed that, without the prior consent of Adams, Harkness & Hill, Inc., we will not, directly or indirectly, offer, sell or otherwise dispose of any shares of common stock or any securities which may be converted into or exchanged for any such shares of common stock for a period of 180 days from the date of this prospectus. Our executive officers and directors and the selling shareholders following this offering, will 43 hold in the aggregate 3,502,800 shares, or 37.7%, of our outstanding common stock, or 3,120,300 shares, or 33.6%, of our outstanding common stock, if the underwriters' over-allotment option is exercised in full. Also, they will own an additional 237,827 share of common stock issuable upon exercise of outstanding stock options. Our executive officers and selling shareholders have agreed under lock-up agreements that, without the prior written consent of Adams, Harkness & Hill, Inc., they will not, directly or indirectly, offer, sell or otherwise dispose of their shares of common stock, other than the 800,000 shares that will be sold by selling shareholders in this offering and the 382,500 shares that may be sold by selling shareholders in connection with the underwriters' exercise of the over-allotment option from 90-days to 180- days, as the case may be. Of these shares and options subject to lock-up agreements, 3,463,666 shares and options are subject to 180-day lock-up agreements and 276,961 shares and options are subject to 90-day lock-up agreements. We and the selling shareholders will indemnify the underwriters against certain liabilities, including liabilities under the Securities Act of 1933 and liabilities arising from breaches of representations and warranties contained in the underwriting agreement, and will contribute to payments that the underwriters may be required to make for certain liabilities. In connection with the offering, the underwriters may purchase and sell the common stock in the open market. These transactions may include over-allotment and stabilizing transactions, "passive" market making and purchases to cover syndicate short positions created in connection with the offering. Stabilizing transactions consist of certain bids or purchases made for the purpose of preventing or retarding a decline in the market price of the common stock. Syndicate short positions involve the sale by the underwriters of a greater number of shares of common stock than they are required to purchase from us in the offering. The underwriters also may impose a penalty bid, whereby the syndicate may reclaim selling concessions allowed to syndicate members or other broker-dealers in respect of the common stock sold in the offering for their account if the syndicate repurchases the shares in stabilizing or covering transactions. These activities may stabilize, maintain or otherwise affect the market price of the common stock, which may be higher than the price that might otherwise prevail in the open market. These activities, if commenced, may be discontinued at any time. These transactions may be effected on the Nasdaq National Market, in the over-the-counter market or otherwise. In general, the rules of the SEC will prohibit the underwriters from making a market in the common stock during the "cooling off" period immediately preceding the commencement of sales in the offering. The Commission has, however, adopted exemptions from these rules that permit passive market making under certain conditions. These rules permit an underwriter to continue to make a market subject to the conditions, among others, that its bid not exceed the highest bid by a market maker not connected with the offering and that its net purchases on any one trading day not exceed prescribed limits. Pursuant to these exemptions, certain underwriters, selling group members (if any), or their respective affiliates may engage in passive market making in the common stock during the cooling off period. VALIDITY OF COMMON STOCK An opinion will be delivered by Blank Rome Comisky & McCauley LLP, Philadelphia, Pennsylvania to the effect that the shares of our common stock being offered by this prospectus will, when issued as contemplated in this prospectus, be validly issued, fully paid and non-assessable. Various legal matters related to this offering will be passed upon for the underwriters by Choate, Hall & Stewart, Boston, Massachusetts. EXPERTS The financial statements as of December 31, 2000 and 2001, and for each of the three years in the period ended December 31, 2001 included in this prospectus have been so included in reliance on the report of PricewaterhouseCoopers LLP, independent accountants, given on the authority of said firm as experts in auditing and accounting. 44 WHERE YOU CAN FIND MORE INFORMATION We file annual, quarterly and current reports, proxy statements and other information with the SEC. You may read and copy any reports, statements and other information we file with the SEC at the SEC's public Reference Room at 450 Fifth Street, N.W., Washington, D.C., 20549. You may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC- 0330. Our SEC filings are also available on the SEC's Internet site as part of the EDGAR database (http://www.sec.gov). We have filed with the SEC, a registration statement on Form S-3 (including the exhibits and schedules thereto) under the Securities Act of 1933 and the rules and regulations thereunder, for the registration of the common stock offered hereby. This prospectus is part of the registration statement. This prospectus does not contain all the information included in the registration statement because we have omitted certain parts of the registration statement as permitted by the SEC rules and regulations. For further information about us and our common stock, you should refer to the registration statement. Statements contained in this prospectus as to any contract, agreement or other document referred to are not necessarily complete. Where the contract or other document is an exhibit to the registration statement, each statement is qualified by the provisions of that exhibit. INCORPORATION OF INFORMATION WE FILE WITH THE SEC The SEC allows us to incorporate by reference the information we file with them, which means: o incorporated documents are considered part of this prospectus; o we can disclose important information to you by referring you to these documents; and o information that we file with the SEC will automatically update and supercede this incorporated information. We incorporate by reference the documents listed below which were filed with the SEC under the Exchange Act: o our annual report on Form 10-K for the fiscal year ended December 31, 2001; o the description of our common stock contained in our Registration Statement on Form 8-A filed with the SEC on October 1, 1997 including any amendment or reports filed for the purpose of updating such description. We are also incorporating by reference all other reports that we file with the SEC pursuant to Section 13(a), 13(c), 14 or 15(d) of the Securities Exchange Act of 1934 between the date of this prospectus and the termination of the offering. You should rely only on information contained or incorporated by reference in this prospectus. We have not authorized any other person to provide you with different information. If anyone provides you with different or inconsistent information, you should not rely on it. We are not making an offer to sell these securities in any jurisdiction where the offer or sale is not permitted. You should assume that the information appearing in this prospectus is accurate as of the date of this prospectus only. Our business, financial condition and results of operations may have changed since that date. You may request a copy of any of the filings referred to above (excluding exhibits) at no cost by contacting us at A.C. Moore Arts & Crafts, Inc., 500 University Court, Blackwood, NJ 08012, (856) 228-6700. 45 INDEX TO FINANCIAL STATEMENTS INDEX TO CONSOLIDATED FINANCIAL STATEMENTS A.C. MOORE ARTS & CRAFTS, INC.
Page --- Report of Independent Accountants ....................................... F-2 Consolidated Balance Sheets at December 31, 2000 and 2001 ............... F-3 Consolidated Statements of Income for each of the three years in the period ended December 31, 2001...................................................... F-4 Consolidated Statements of Changes in Shareholders' Equity for each of the three years in the period ended December 31, 2001................................................ F-5 Consolidated Statements of Cash Flows for each of the three years in the period ended December 31, 2001...................................................... F-6 Notes to Consolidated Financial Statements .............................. F-7
F-1 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, 2001 and 2000, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2001 in conformity with accounting principles generally accepted in the United States of America. 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 auditing standards generally accepted in the United States of America which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. PricewaterhouseCoopers LLP Philadelphia, Pennsylvania February 15, 2002 F-2 A.C. MOORE ARTS & CRAFTS, INC. CONSOLIDATED BALANCE SHEETS (dollars in thousands)
December 31, ------------------- 2000 2001 -------- -------- ASSETS Current assets: Cash and cash equivalents .............................. $ 10,310 $ 10,818 Accounts receivable .................................... 830 703 Inventories ............................................ 72,786 85,674 Prepaid expenses and other current assets .............. 1,222 823 -------- -------- 85,148 98,018 Property and equipment, net ............................. 21,517 24,969 Other assets ............................................ 727 824 -------- -------- $107,392 $123,811 ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Current portion of equipment leases .................... $ 389 $ 1,329 Trade accounts payable ................................. 26,237 23,322 Accrued payroll and payroll taxes ...................... 3,822 5,098 Accrued expenses ....................................... 4,274 7,247 Income taxes payable ................................... 3,258 4,600 -------- -------- 37,980 41,596 -------- -------- Long-term liabilities: Capitalized equipment leases, less current portion ..... 812 1,845 Deferred tax liability ................................. 2,320 3,427 Other long-term liabilities ............................ 2,599 3,216 -------- -------- 5,731 8,488 -------- -------- 43,711 50,084 -------- -------- Commitments and contingencies Shareholders' equity: Preferred stock, no par value, 5,000,000 shares authorized, none issued............................... -- -- Common stock, no par value, 20,000,000 shares authorized, 7,415,333 shares at December 31, 2000 and 7,466,006 shares at December 31, 2001................. 43,268 43,807 Retained earnings...................................... 20,413 29,920 -------- -------- 63,681 73,727 -------- -------- $107,392 $123,811 ======== ========
The accompanying notes are an integral part of these consolidated financial statements. F-3 A.C. MOORE ARTS & CRAFTS, INC. CONSOLIDATED STATEMENTS OF INCOME (dollars in thousands except per share data)
December 31, ------------------------------------- 1999 2000 2001 ---------- ---------- ---------- Net sales................................................................................. $ 222,998 $ 262,057 $ 332,413 Cost of sales (including buying and distribution costs).................................. 143,078 165,850 208,315 ---------- ---------- ---------- Gross margin.............................................................................. 79,920 96,207 124,098 Selling, general and administrative expenses.............................................. 70,336 83,516 105,447 Store pre-opening expenses................................................................ 609 1,928 2,518 ---------- ---------- ---------- Income from operations.................................................................... 8,975 10,763 16,133 Interest expense........................................................................ 172 345 781 Interest income......................................................................... (211) (158) (106) ---------- ---------- ---------- Income before income taxes................................................................ 9,014 10,576 15,458 Provision for income taxes.............................................................. 3,350 4,019 5,951 ---------- ---------- ---------- Net income................................................................................ $ 5,664 $ 6,557 $ 9,507 ========== ========== ========== Basic net income per share................................................................ $ 0.76 $ 0.89 $ 1.28 ========== ========== ========== Weighted average shares outstanding....................................................... 7,405,000 7,405,897 7,437,199 Diluted net income per share.............................................................. $ 0.76 $ 0.88 $ 1.23 ========== ========== ========== Weighted average shares outstanding plus impact of stock options............................................................ 7,405,000 7,444,113 7,752,645
The accompanying notes are an integral part of these consolidated financial statements. F-4 A.C. MOORE ARTS & CRAFTS, INC. CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY (in thousands except share data)
Common Retained Shares Stock Earnings Total --------- ------- ------- ------- Balance, December 31, 1998 ........................................................... 7,405,000 $42,979 $ 8,192 $51,171 Net income ........................................................................... -- -- 5,664 5,664 Compensation expense related to stock options ........................................ -- 137 -- 137 --------- ------- ------- ------- Balance, December 31, 1999 ........................................................... 7,405,000 43,116 13,856 56,972 Net income ........................................................................... -- -- 6,557 6,557 Compensation expense related to stock options ........................................ -- 102 -- 102 Exercise of stock options ............................................................ 10,333 50 -- 50 --------- ------- ------- ------- Balance, December 31, 2000 ........................................................... 7,415,333 43,268 20,413 63,681 Net income ........................................................................... -- -- 9,507 9,507 Exercise of stock options ............................................................ 50,673 439 -- 439 Tax benefit from exercise of stock options ........................................... -- 100 -- 100 --------- ------- ------- ------- Balance, December 31, 2001 ........................................................... 7,466,006 $43,807 $29,920 $73,727 ========= ======= ======= =======
The accompanying notes are an integral part of these consolidated financial statements. F-5 A.C. MOORE ARTS & CRAFTS, INC. CONSOLIDATED STATEMENT OF CASH FLOWS (in thousands)
Year Ended December 31, ------------------------------ 1999 2000 2001 ------- -------- -------- Cash flows from operating activities: Net income ...................................................................................... $ 5,664 $ 6,557 $ 9,507 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization................................................................... 2,899 3,829 5,220 Compensation expense related to stock options................................................... 137 102 -- Provision for deferred income taxes............................................................. 739 600 1,107 Changes in assets and liabilities: Accounts receivable........................................................................... 378 (339) 127 Inventories................................................................................... (4,948) (13,459) (12,888) Prepaid expenses and other current assets..................................................... 177 (319) 399 Accounts payable, accrued payroll and payroll taxes and accrued expenses............................................................................. 2,582 8,085 1,334 Income taxes payable.......................................................................... 1,791 1,226 1,342 Other long-term liabilities................................................................... 416 522 617 Other......................................................................................... (27) (95) 3 ------- -------- -------- Net cash provided by operating activities........................................................ 9,808 6,709 6,768 ------- -------- -------- Cash flows from investing activities: Capital expenditures............................................................................ (5,526) (10,635) (8,672) Proceeds from maturity of marketable securities................................................. 3,865 -- -- ------- -------- -------- Net cash (used in) investing activities.......................................................... (1,661) (10,635) (8,672) ------- -------- -------- Cash flows from financing activities: Proceeds from exercise of stock options......................................................... -- 50 439 Repayment of bank overdraft..................................................................... (2,719) -- -- Proceeds from line of credit.................................................................... 9,500 9,750 20,250 Repayment of line of credit..................................................................... (9,500) (9,750) (20,250) Proceeds from equipment financing............................................................... -- -- 2,791 Repayment of equipment financing................................................................ (350) (367) (818) ------- -------- -------- Net cash provided by (used in) financing activities.............................................. (3,069) (317) 2,412 ------- -------- -------- Net increase (decrease) in cash and cash equivalents............................................. 5,078 (4,243) 508 Cash and cash equivalents at beginning of year................................................... 9,475 14,553 10,310 ------- -------- -------- Cash and cash equivalents at end of year......................................................... $14,553 $ 10,310 $ 10,818 ======= ======== ======== Supplemental cash flow information:.............................................................. Cash paid during the year for: Interest........................................................................................ $ 171 $ 339 $ 756 ======= ======== ======== Income taxes.................................................................................... $ 701 $ 2,249 $ 3,399 ======= ======== ========
The accompanying notes are an integral part of these consolidated financial statements. F-6 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, 2001, the Company operated a 61-store chain of retail arts and crafts stores in the eastern region 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 an original maturity of three months or less. Concentration of credit risk. Financial instruments, which potentially subject the Company to concentrations of credit risk, are cash and cash equivalents. 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. Amortization of assets recorded under capital leases is included in depreciation expense. The Company periodically reviews long-lived assets for impairment by comparing the carrying value of assets with their estimated future undiscounted cash flows. If it is determined that an impairment loss has occurred, the loss would be recognized during that period. The impairment loss is calculated as the difference between assets carrying values and the present value of estimated net cash flows or comparable market values, giving consideration to recent operating performance and pricing trends. The Company had no impairment losses related to long-lived assets during 1999, 2000 or 2001. Revenue recognition. Revenue is recognized at point of retail sale. Store pre-opening expenses. Direct incremental costs incurred to prepare a store for opening are charged to expense as incurred. 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 1999, 2000 and 2001 was $6,305,000, $6,518,000 and $8,173,000, respectively. Fair value of financial 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 capital lease obligations approximate fair value, as the interest rates on the obligations approximate rates currently available to the Company for obligations with similar terms and remaining maturities. Use of estimates. The preparation of financial statements in conformity with accounting principles generally accepted in the United States 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. F-7 A.C. MOORE ARTS & CRAFTS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued) 1. Summary of Significant Accounting Policies -- (Continued) Stock option plan. The Company accounts for its employee stock options using the intrinsic value method prescribed in Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB 25). Compensation cost for stock options is measured as the excess of the quoted market price of the Company's stock at the date of grant over the amount an employee must pay to acquire the stock. Recent Accounting Pronouncements. In June 1998, the Financial Accounting Standards Board, or FASB, issued Statement of Financial Accounting Standards, or SFAS, No. 133, Accounting for Derivative Instruments and Hedging Activities, which requires that all derivative financial instruments be recognized as either assets or liabilities in the balance sheet. SFAS No. 133, which was effective for our first quarter of 2001, has not had a material impact on our consolidated results of operation, financial position or cash flows. In July 2001, FASB issued SFAS No. 141, "Business Combinations" and SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 requires business combinations initiated after June 30, 2001 to be accounted for using the purchase method of accounting, and broadens the criteria for recording intangible assets separate from goodwill. SFAS No. 142 requires the use of a non-amortization approach to account for purchased goodwill and certain intangibles, effective January 1, 2002. We do not believe that the adoption of these pronouncements will have a material impact on our financial statements. FASB also recently issued Statement No. 143, "Accounting for Asset Retirement Obligations" and Statement No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." Statement No. 143 requires the recognition of a liability for the estimated cost of disposal as part of the initial cost of a long-lived asset. Statement No. 144 supersedes Statement No. 121 to supply a single accounting approach for measuring impairment of long-lived assets, including segment of a business accounted for as a discontinued operation or those to be sold or disposed of other than by sale. We must adopt Statement No. 143 in 2003 and Statement No. 144 in 2002. We believe that adopting these pronouncements on our financial statements will not have a material impact on our consolidated results of operation, financial position or cash flows. 2. Earnings Per Share The following is a reconciliation of the denominators of the basic and diluted earnings per share computations:
Year Ended December 31, ---------------------- 1999 2000 2001 ----- ----- ----- (in thousands) Basic............................................................................................ 7,405 7,406 7,437 Effect of dilutive options....................................................................... -- 38 316 ----- ----- ----- Diluted.......................................................................................... 7,405 7,444 7,753 ===== ===== =====
Options whose exercise price is in excess of the average market price have not been considered as dilutive options. F-8 A.C. MOORE ARTS & CRAFTS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued) 3. Property and Equipment Property and equipment consists of:
December 31, ------------------- 2000 2001 -------- -------- (in thousands) Furniture, fixtures and equipment ....................... $ 29,725 $ 37,066 Leasehold improvements .................................. 599 548 Equipment for future stores ............................. 2,489 542 Capital leases .......................................... 1,924 4,715 -------- -------- 34,737 42,871 Less: Accumulated depreciation and amortization ......... 13,220 17,902 -------- -------- $ 21,517 $ 24,969 ======== ========
4. Financing Agreement On August 3, 2001 the Company entered into a new $50 million three year revolving credit agreement with KeyBank National Association, agent, and First Union National Bank (the "Credit Facility"). Borrowings under the credit agreement will bear interest rates that will vary between LIBOR plus 150 basis points and LIBOR plus 200 basis points, depending on the fixed charge coverage ratio. The maximum amount of borrowings under this facility is equal to 50% of the value of inventory as defined in the agreement. The agreement is collateralized by all of the Company's assets. The Credit Facility contains certain financial covenants including those related to the ratio of funded debt to total capital, a fixed charge coverage ratio, and a capital expenditures limitation. The Company was in compliance with this agreement at December 31, 2001. At December 31, 2001, interest was based on LIBOR plus 175 basis points. There were no amounts outstanding at December 31, 2001 under this revolving line of credit nor were there amounts outstanding at December 31, 2000 under the previous revolving line of credit. The average outstanding borrowings in 2001 under these agreements was $10.4 million. 5. Income Taxes The Company utilizes the asset and 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. As of December 31, 2000 and 2001, the deferred tax liability of $2,320,000 and $3,427,000, respectively, is comprised principally of temporary differences related to depreciation. A reconciliation of income tax expense at the federal income tax rate to the income tax provision is as follows:
Year Ended December 31, ------------------------- 1999 2000 2001 ------ ------ ------ (in thousands) United States federal taxes at statutory rate................................................. $3,065 $3,701 $5,410 State and local taxes, net.................................................................... 193 206 514 Non-deductible stock option expense........................................................... 47 31 -- Other......................................................................................... 45 81 27 ------ ------ ------ Income tax provision.......................................................................... $3,350 $4,019 $5,951 ====== ====== ======
F-9 A.C. MOORE ARTS & CRAFTS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued) 5. Income Taxes -- (Continued) The income tax provision consists of the following:
Year Ended December 31, ------------------------- 1999 2000 2001 ------ ------ ------ Current tax expense: Federal..................................................................................... $2,566 $3,254 $4,253 State....................................................................................... 45 165 591 ------ ------ ------ Total current.............................................................................. 2,611 3,419 4,844 ====== ====== ====== Deferred tax expense: Federal..................................................................................... 526 448 909 State....................................................................................... 213 152 198 ------ ------ ------ Total deferred............................................................................. 739 600 1,107 ------ ------ ------ Total income tax provision.............................................................. $3,350 $4,019 $5,951 ====== ====== ======
6. Shareholders' Equity 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. At December 31, 2001, under the Company's Employee, Director and Consultant Stock Option Plan (the "1997 Plan"), the Company may grant up to 1,000,000 shares of common stock. Stock options expire ten years from the date of grant and vest ratably over a three year period. Shares available for future grants amounted to 198,384 at December 31, 2000 and 62,640 at December 31, 2001. For 1999, 2000 and 2001, the Company's stock option activity is summarized below:
1999 2000 2001 ------------------ ------------------ ------------------ Weighted Weighted Weighted Average Average Average Exercise Exercise Exercise Options Price Options Price Options Price ------- -------- ------- -------- ------- -------- Outstanding at beginning of year ................................ 507,000 $10.80 665,300 $ 9.31 791,283 $ 7.21 Granted ......................................................... 203,900 5.62 184,200 7.88 153,300 15.15 Forfeited ....................................................... 45,600 9.59 47,884 10.88 17,556 8.98 Exercised ....................................................... -- -- 10,333 4.78 50,673 8.66 ------- ------ ------- ------ ------- ------ Outstanding at end of year ...................................... 665,300 $ 9.31 791,283 $ 7.21 876,354 $10.04 ======= ====== ======= ====== ======= ====== Exercisable at end of year ...................................... 279,385 $10.00 405,268 $10.17 562,447 $ 9.47 ======= ====== ======= ====== ======= ======
F-10 A.C. MOORE ARTS & CRAFTS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued) 6. Shareholders' Equity -- (Continued) The following table summarizes information about stock options outstanding at December 31, 2001.
Stock Options Outstanding Stock Options Exercisable ---------------------------------------------- -------------------------- Weighted Average Weighted Range of Exercise Remaining Life Average Exercise Weighted Average Prices Shares (Years) Price Shares Exercise Price - --------------------------------------------------- ------- ---------------- ---------------- ------- ---------------- 5.75-7.88 321,254 8.0 $ 6.84 159,547 $ 6.48 9.00-10.90 346,450 6.1 9.27 296,450 9.00 13.38-15.38 107,450 6.5 15.28 106,450 15.29 16.64 95,200 9.5 16.64 -- -- 20.00-28.05 6,000 9.8 26.71 -- -- ------- --- ------ ------- ------ 876,354 7.3 $10.04 562,447 $ 9.47 ======= === ====== ======= ======
Had compensation cost for the Company's stock-based compensation plan been determined based on the fair value at the grant date for awards under those plans, consistent with the requirements of SFAS No. 123, "Accounting for Stock-Based Compensation," net income and earnings per share would have been reduced to the following pro-forma amounts:
1999 2000 2001 ---------- ---------- ---------- Net income ...................................................... -- As reported $5,664,000 $6,557,000 $9,507,000 -- Pro forma 5,223,000 6,034,000 9,029,000 Basic earnings per share ........................................ -- As reported $ .76 $ .89 $ 1.28 -- Pro forma .71 .81 1.21 Diluted earnings per share ...................................... -- As reported $ .76 $ .88 $ 1.23 -- Pro forma .71 .81 1.16
The pro forma results may not be representative of the effects on reported operations for future years. 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 5.7% for 1999, 6.3% for 2000, 5.1% for 2001 and; no dividend yield; and a weighted average expected life of the options of seven years. In accordance with the provisions of SFAS No. 123 the expected stock price volatility was 54.6% for 1999, 46.6% for 2000, and 48.4% for 2001. 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 related compensation expense is being amortized ratably over the three year vesting period. At December 31, 2000, all such compensation had been recognized. 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. 7. Retirement Plan In January 1999 the Company established a 401(k) savings plan (the "401(k) Plan") for eligible team members. Participation in the 401(k) Plan is voluntary and available to any team member who is 21 years of age and has completed a three month eligibility period. Participants may elect to contribute up to 20% of their compensation. In accordance with the provisions of the 401(k) Plan, the Company makes a matching F-11 A.C. MOORE ARTS & CRAFTS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued) 7. Retirement Plan -- (Continued) contribution to the account of each participant in an amount equal to 25% of the first 6% of eligible compensation contributed by each participant with a maximum match of $1,500. The Company's matching contribution expense for 1999 was $168,000, for 2000 was $170,000 and for 2001 was $206,000. 8. Commitments and Contingencies Commitments 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. 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 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 2000 and 2001 the amounts of accrued rent expense recognized over the amounts paid were $522,000 and $617,000, 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, ---------------------------- 1999 2000 2001 ------- ------- ------- (in thousands) Minimum rentals............................................................................ $10,846 $12,883 $16,124 Contingent payments........................................................................ 146 118 150 ------- ------- ------- $10,992 $13,001 $16,274 ======= ======= =======
In 2001, the Company entered into 3 leases for stores to open in 2002. Future minimum lease payments (including those for unopened stores) as of December 31, 2001 for non-cancelable operating leases with terms in excess of one year are as follows (in thousands):
2002 ................................................................ $ 18,710 2003 ................................................................ 18,576 2004 ................................................................ 17,574 2005 ................................................................ 16,660 2006 ................................................................ 16,419 Thereafter .......................................................... 72,717 -------- Total minimum future rentals ........................................ $160,656 ========
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. F-12 [Photographs depicting the following scenes are included on the inside of the back cover of the prospectus: Interior pictures of the following areas: o Floral o Memory Books o Arts o Kids Crafts] =============================================================================== 2,550,000 shares [A.C. MOORE LOGO] Common Stock -------------------- PROSPECTUS -------------------- Adams, Harkness & Hill, Inc. Fahnestock & Co. Inc. Wedbush Morgan Securities Inc. March , 2002 =============================================================================== PART II Information Not Required In Prospectus Item 14. Other Expenses Of Issuance And Distribution. The following table sets forth the Company's estimates (other than of the SEC registration fee) of the expenses in connection with the issuance and distribution of the shares of common stock being registered: SEC registration fee................................ $ 20,592 Transfer agents' fees............................... 1,000 Printing expenses................................... 125,000 Legal fees and expenses............................. 150,000 Accountants' fees and expenses...................... 160,000 Miscellaneous expenses.............................. 143,408 -------- Total.......................................... $600,000 ======== Item 15. Indemnification Of Directors And Officers. Sections 1741 through 1750 of Subchapter D, Chapter 17, of the Pennsylvania Business Corporation Law of 1988, as amended, contain provisions for mandatory and discretionary indemnification of a corporation's directors, officers and other personnel and related matters. Under Section 1741, subject to certain limitations, a corporation has the power to indemnify directors and officers under certain prescribed circumstances against expenses (including attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred in connection with an action or proceeding, whether civil, criminal, administrative or investigative, to which any of them is a party by reason of his being a representative, director or officer of the corporation or serving at the request of the corporation as a representative of another corporation, partnership, joint venture, trust or other enterprise, if he acted in good faith and in a manner he reasonably believed to be in, or not opposed to, the best interests of the corporation and, with respect to any criminal proceeding, had no reasonable cause to believe his conduct was unlawful. Section 1742 provides for indemnification in derivative actions except in respect of any claim, issue or matter as to which the person has been adjudged to be liable to the corporation unless and only to the extent that the proper court determines upon application that, despite the adjudication of liability but in view of all circumstances of the case, the person is fairly and reasonably entitled to indemnity for the expenses that the court deems proper. Section 1744 provides that, unless ordered by a court, any indemnification under Section 1741 or 1742 shall be made by the corporation only as authorized in the specific case upon a determination that the representative met the applicable standard of conduct, and such determination will be made by the board of directors (i) by a majority vote of a quorum of directors not parties to the action or proceeding; (ii) if a quorum is not obtainable, or if obtainable and a majority of disinterested directors so directs, by independent legal counsel, or (iii) by the shareholders. Under Section 1743, indemnification is mandatory to the extent that the officer or director has been successful on the merits or otherwise in defense of any action or proceeding under Section 1741 or Section 1742 if the appropriate standards of conduct are met. II-1 Section 1745 provides that expenses (including attorney's fees) incurred by an officer, director, employee or agent in defending a civil or criminal action or proceeding may be paid by the corporation in advance of the final disposition of such action or proceeding upon receipt of an undertaking by or on behalf of such person to repay such amount if it shall ultimately be determined that he or she is not entitled to be indemnified by the corporation. Section 1746 provides generally that, except in any case where the act or failure to act giving rise to the claim for indemnification is determined by a court to have constituted willful misconduct or recklessness, the indemnification and advancement of expenses provided by Subchapter 17D of the BCL shall not be deemed exclusive of any other rights to which a person seeking indemnification or advancement of expenses may be entitled under any bylaw, agreement, vote of shareholders or disinterested directors or otherwise, both as to action in his or her official capacity and as to action in another capacity while holding that office. Section 1747 grants to a corporation the power to purchase and maintain insurance on behalf of any director or officer against any liability incurred by him or her in his or her capacity as officer of director, whether or not the corporation would have the power to Subchapter 17D of the BCL. Sections 1748 and 1749 extend the indemnification and advancement of expenses provisions contained in Subchapter 17D of the BCL to successor corporations in fundamental changes and to representatives serving as fiduciaries of employee benefit plans. Section 1750 provides that the indemnification and advancement of expenses provided by, or granted pursuant to, Subchapter 17D of the BCL, shall, unless otherwise provided when authorized or ratified, continue as to a person who has ceased to be a director, officer, employee or agent and shall inure to the benefit of the heirs and personal representative of such person. For information regarding provisions under which a director or officer of A.C. Moore may be insured or indemnified in any manner against any liability which he or she may incur in his or her capacity as such, reference is made to A.C. Moore's Articles of Incorporation and Bylaws, which provide in general that A.C. Moore shall indemnify its officers and directors to the fullest extent authorized by law. Item 16. Exhibits
Exhibit Number Description - -------------- --------------------------------------------------------------------------- 1.1 Form of Underwriting Agreement 4.1 Specimen Common Stock Certificate (Incorporated by reference to the Company's Registration Statement on Form S-1 (#333-32859)) 5.1 Opinion of Blank Rome Comisky & McCauley LLP 23.1 Consent of PricewaterhouseCoopers LLP 23.2 Consent of Blank Rome Comisky & McCauley LLP (included in Exhibit 5.1) 24.1 Power of Attorney**
- ------- ** Previously filed. II-2 Item 17. Undertakings. (a) The undersigned registrant hereby undertakes: (1) To file, during any period in which offers or sales are being made, a post-effective amendment to this registration statement: (i) To include any prospectus required by section 10(a)(3) of the Securities Act of 1933; (ii) To reflect in the prospectus any facts or events arising after the effective date of the registration statement (or most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the registration statement. Notwithstanding the foregoing, any increase or decrease in volume of securities offered (if the total dollar value of securities offered would not exceed that which was registered) and any deviation from the low or high end of the estimated maximum offering range may be reflected in the form of prospectus filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the changes in volume and price represent no more than a 20 percent change in the maximum aggregate offering price set forth in the "Calculation of Registration Fee" table in the effective registration statement; (iii) To include any material information with respect to the plan of distribution not previously disclosed in the registration statement or any material change to such information in the registration statement; provided, however, that paragraphs (a)(1)(i) and (a)(1)(ii) do not apply if the information required to be included in a post-effective amendment by those paragraphs is contained in periodic reports filed by the registrant pursuant to Section 13 or Section 15(d) of the Securities Exchange Act of 1934 that are incorporated by reference in the registration statement. (2) That, for the purpose of determining any liability under the Securities Act of 1933, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. (3) To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering. (b) Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the registrant pursuant to the provisions described under Item 15 above, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. (c) The undersigned registrant hereby undertakes that: (1) For purposes of determining any liability under the Securities Act of 1933, the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this registration statement as of the time it was declared effective by the Securities and Exchange Commission. (2) For the purposes of determining any liability under the Securities Act of 1933, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. II-3 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the Registrant certifies that it has reasonable grounds to believe that it meets all of the requirements for filing on Form S-3 and has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in Blackwood, New Jersey, on February 19, 2002. A. C. MOORE ARTS & CRAFTS, INC. By: /s/ John E. Parker ---------------------------------- John E. Parker Chief Executive Officer Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed by the following persons as of February 19, 2002 in the capacities indicated. SIGNATURE TITLE(S) - -------------------------------- -------------------------------------------- /s/ John E. Parker Chief Executive Officer (Principal Executive - -------------------------------- Officer) John E. Parker /s/ Leslie H. Gordon Executive Vice President and Chief Financial - -------------------------------- Officer (Principal Financial and Accounting Leslie H. Gordon Officer) /s/ William Kaplan Chairman of the Board - -------------------------------- William Kaplan /s/ Patricia A. Parker Director - -------------------------------- Patricia A. Parker /s/ Richard Lesser Director - -------------------------------- Richard Lesser /s/ Richard J. Bauer Director - -------------------------------- Richard J. Bauer /s/ Richard J. Drake Director - -------------------------------- Richard J. Drake II-4 Exhibit Index
Exhibit Number Description - -------------- ---------------------------------------------------------------------------- 1.1 Form of Underwriting Agreement 4.1 Specimen Common Stock Certificate (Incorporated by reference to the Company's Registration Statement on Form S-1 (#333-32859)) 5.1 Opinion of Blank Rome Comisky & McCauley LLP 23.1 Consent of PricewaterhouseCoopers LLP 23.2 Consent of Blank Rome Comisky & McCauley LLP (included in Exhibit 5.1) 24.1 Power of Attorney**
- ------- ** Previously filed. EX-1.1 3 ex1-1.txt EXHIBIT 1.1 Exhibit 1.1 A.C. MOORE ARTS & CRAFTS, INC. 2,932,500 Shares* Common Stock (no par value) -------------- Underwriting Agreement March __, 2002 Adams, Harkness & Hill, Inc. Fahnestock & Co. Inc. Wedbush Morgan Securities Inc. As representatives of the several Underwriters named in Schedule I hereto, c/o Adams, Harkness & Hill, Inc. 60 State Street Boston, Massachusetts 02109 Dear Sirs: A.C. Moore Arts & Crafts, Inc., a Pennsylvania corporation (the "Company"), and the shareholders of the Company named in Schedule II hereto (the "Selling Shareholders") propose, subject to the terms and conditions stated herein, to issue and sell to you and the several Underwriters named in Schedule I hereto (collectively, the "Underwriters"), for whom you are acting as representatives (the "Representatives"), an aggregate of 2,550,000 shares (the "Firm Shares") of common stock of the Company, no par value ("Common Stock"), of which 1,750,000 Firm Shares will be sold by the Company and 800,000 Firm Shares will be sold by the Selling Shareholders. In addition, solely for the purpose of covering over-allotments, if any, certain Selling Shareholders propose to grant the Underwriters the option to purchase up to an additional 382,500 shares (the "Optional Shares") of Common Stock. The Firm Shares and the Optional Shares, which the Underwriters elect to purchase pursuant to Section 3 hereof, are herein collectively called the "Shares". 1. Representations and Warranties of the Company. The Company represents and warrants to, and agrees with, each of the Underwriters that: (a) A registration statement on Form S-3 (File No. 333-76500) (the "Initial Registration Statement") in respect of the Shares has been filed with the Securities and Exchange Commission (the "Commission"); the Initial Registration Statement (including any - -------- * Includes 382,500 shares subject to an option to purchase additional shares to cover over-allotments. pre-effective amendments thereto) and any post-effective amendments thereto, each in the form heretofore delivered to you, and, excluding exhibits thereto, to you for each of the other Underwriters, have been declared effective by the Commission in such form; other than a registration statement, if any, increasing the size of the offering (a "Rule 462(b) Registration Statement"), filed pursuant to Rule 462(b) under the Securities Act of 1933, as amended (the "Act"), which became effective upon filing, no other document with respect to the Initial Registration Statement has heretofore been filed with the Commission; and no stop order suspending the effectiveness of the Initial Registration Statement, any post-effective amendment thereto or the Rule 462(b) Registration Statement, if any, has been issued and, to the Company's knowledge, no proceeding for that purpose has been initiated or threatened by the Commission (any preliminary prospectus included in the Initial Registration Statement and incorporated by reference in the Rule 462(b) Registration Statement, if any, or filed with the Commission pursuant to Rule 424(a) of the rules and regulations of the Commission under the Act is hereinafter called a "Preliminary Prospectus"; the various parts of the Initial Registration Statement and the Rule 462(b) Registration Statement, if any, including all exhibits thereto and including the information contained in the form of final prospectus filed with the Commission pursuant to Rule 424(b) under the Act in accordance with Section 6(a) hereof and deemed by virtue of Rule 430A under the Act to be part of the Initial Registration Statement at the time it was declared effective or the Rule 462(b) Registration Statement, if any, at the time it became effective, each as amended at the time such part of such registration statement became effective, are hereinafter collectively called the "Registration Statement"; and such final prospectus, in the form first filed pursuant to Rule 424(b) under the Act, is hereinafter called the "Prospectus"); (b) No order preventing or suspending the use of any Preliminary Prospectus has been issued by the Commission, and each Preliminary Prospectus, at the time of filing thereof, conformed in all material respects to the requirements of the Act and the rules and regulations of the Commission thereunder, and did not contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading; provided, however, that this representation and warranty shall not apply to any statements or omissions made in reliance upon and in conformity with information furnished in writing to the Company by an Underwriter through you expressly for use therein. (c) The Registration Statement conforms, and the Prospectus and any further amendments or supplements to the Registration Statement or the Prospectus will conform, in all material respects to the requirements of the Act and the rules and regulations of the Commission thereunder and do not and will not, as of the applicable effective date as to the Registration Statement and any amendment thereto and as of the applicable dates of the Prospectus and any amendment or supplement thereto, contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein (in the case of the Prospectus taken in light of the circumstances under which they were made) not misleading; 2 provided, however, that this representation and warranty shall not apply to any statements or omissions made in reliance upon and in conformity with information furnished in writing to the Company by an Underwriter through you expressly for use therein; (d) There are no contracts or other documents required to be described in the Registration Statement or the Prospectus or to be filed as exhibits to the Registration Statement by the Act or by the rules and regulations thereunder which have not been described or filed as required; the contracts so described in the Prospectus to which the Company or any of its subsidiaries is a party have been duly authorized, executed and delivered by the Company and its subsidiaries, as are party thereto, constitute valid and binding agreements of the Company and its subsidiaries, as are party thereto, and are enforceable in accordance with their respective terms against the Company and its subsidiaries, as are party thereto, except as such enforceability may be limited by (i) applicable bankruptcy, insolvency, moratorium, reorganization, fraudulent conveyance or similar laws in effect which affect the enforcement of creditors' rights generally, (ii) general principles of equity, whether considered in a proceeding at law or in equity and (iii) state or federal securities laws or policies relating to the nonenforceability of the indemnification provisions contained therein, and, to the Company's knowledge, such contracts are enforceable in accordance with their respective terms by the Company and its subsidiaries, as are party thereto, against the other parties thereto, except as such enforceability may be limited by (i) applicable bankruptcy, insolvency, moratorium, reorganization, fraudulent conveyance or similar laws in effect which affect the enforcement of creditors' rights generally, (ii) general principles of equity, whether considered in a proceeding at law or in equity and (iii) state or federal securities laws or policies relating to the nonenforceability of the indemnification provisions contained therein, and such contracts are in full force and effect on the date hereof; and neither the Company nor any of its subsidiaries, nor, to the Company's knowledge, any other party is in breach of or default under any of such contracts, except as set forth in the Prospectus or for such breaches or defaults that will not result in a material adverse change in the business, assets, management, financial position or results of operations of the Company and its subsidiaries taken as a whole (hereinafter, a "Material Adverse Change"); (e) Neither the Company nor any of its subsidiaries has sustained since the date of the latest audited financial statements included in the Prospectus any loss or interference with its business from fire, explosion, flood or other calamity, whether or not covered by insurance, or from any labor dispute or court or governmental action, order or decree, except as set forth in the Prospectus or as would not have a Material Adverse Change; and, since the respective dates as of which information is given in the Registration Statement and the Prospectus, there has not been any change in the capital stock (other than issuances of Common Stock pursuant to stock options granted by the Company pursuant to stock option plans or otherwise described in the Registration Statement and Prospectus or in documents incorporated by reference in the Registration Statement or Prospectus) or long-term debt of the Company or any of its subsidiaries (except for debt incurred in the ordinary course of business) or any Material Adverse Change, otherwise than as set forth in the Prospectus; 3 (f) The Company and its subsidiaries have good title to all properties and assets described in the Prospectus as owned by it, in each case free and clear of all liens, charges, encumbrances or restrictions, except such as are described in the Prospectus or are not material to the business of the Company; any real property and buildings held under lease by the Company or any of its subsidiaries are held under valid, subsisting and enforceable leases with such exceptions as are not material and do not interfere with the use made and proposed to be made of such property and buildings by the Company and its subsidiaries; the Company and its subsidiaries own or lease all such properties as are necessary to their operations as now conducted or as proposed to be conducted, except where the failure to so own or lease would not result in a Material Adverse Change; (g) Each of the Company and its subsidiaries has been duly incorporated and exists as a corporation in good standing under the laws of its respective jurisdiction of organization, each with full corporate power and authority to own its properties and conduct its business as described in the Prospectus, and each has been duly qualified as a foreign corporation for the transaction of business and is in good standing under the laws of each other jurisdiction in which it owns or leases properties, or conducts any business, so as to require such qualification, except where the failure to be so qualified in any such jurisdiction would not result in a Material Adverse Change; (h) The Company has an authorized capitalization as set forth in the Prospectus, and all the issued shares of capital stock of the Company have been duly authorized and validly issued, are fully paid and non-assessable and conform in all material respects to the description of the Common Stock contained in the Prospectus; all of the issued shares of capital stock of each subsidiary of the Company (i) have been duly authorized and validly issued, are fully paid and non-assessable and (ii) except as disclosed in the Prospectus and for pledges pursuant to the Credit Agreement among the Company, Key Bank National Association, on its own behalf and as Administrative Agent thereunder, and First Union National Bank and for any liens, encumbrances or claims on the Company's assets created in the ordinary course of business, are owned of record by the Company or a wholly-owned subsidiary of the Company, free and clear of all liens, encumbrances or claims; except as disclosed in the Prospectus, neither the Company nor any subsidiary has outstanding any options to purchase, or any preemptive rights or other rights to subscribe for or to purchase any securities or obligations convertible into, or any contracts or commitments to issue or sell, shares of its capital stock or any such options, rights, convertible securities or obligations; (i) The unissued Shares to be issued and sold by the Company to the Underwriters hereunder have been duly authorized and, when issued and delivered against payment therefor as provided herein, will be validly issued and fully paid and non-assessable and will conform in all material respects to the description of the Common Stock contained in the Prospectus; no preemptive rights or other rights to subscribe for or purchase exist with respect to the issuance and sale of the Shares by the Company pursuant to this Agreement; no shareholder of the Company has any right, which has not been satisfied or waived, to require the Company to register the sale of any shares of capital stock owned by such shareholder under the Act in the public offering contemplated by this Agreement (except with respect to the Shares to be sold by the Selling Shareholders pursuant to this Agreement); no shareholder of the Company has any right to require the Company to 4 register the sale of any shares of capital stock owned by such shareholder under the Act in either the 180-day period or the 90-day period (as applicable to such shareholder) after the date of the Prospectus; and no further approval or authority of the shareholders or the Board of Directors of the Company will be required for the issuance and sale of the Shares to be sold by the Company as contemplated herein; (j) The Company has full corporate power and authority to enter into this Agreement; this Agreement has been duly authorized, executed and delivered by the Company, constitutes a valid and binding obligation of the Company and is enforceable against the Company in accordance with its terms; (k) The issue and sale of the Shares by the Company and the compliance by the Company with all of the provisions of this Agreement and the consummation of the transactions herein contemplated will not conflict with or result in a breach or violation of any of the terms or provisions of, or constitute a default under, any material indenture, mortgage, deed of trust, loan agreement or other agreement or instrument to which the Company or any of its subsidiaries is a party or by which the Company or any of its subsidiaries is bound or to which any of the property or assets of the Company or any of its subsidiaries is subject, nor will such action result in any violation of the provisions of the Articles of Incorporation or By-laws of the Company or similar documents of any of its subsidiaries or any statute or any order, rule or regulation of any court or governmental agency or body having jurisdiction over the Company or any of its subsidiaries or any of their properties or assets; and no consent, approval, authorization, order, filing, registration or qualification of or with any such court or governmental agency or body is required for the issue and sale of the Shares by the Company or the consummation by the Company of the transactions contemplated by this Agreement, except the registration under the Act of the Shares and such consents, approvals, authorizations, filings, registrations or qualifications as may be required under state securities or Blue Sky laws or the by-laws and rules of the National Association of Securities Dealers, Inc. ("NASD") in connection with the purchase and distribution of the Shares by the Underwriters; (l) Except as disclosed in the Prospectus, there are no legal or governmental actions, suits or proceedings pending or, to the Company's knowledge, threatened to which the Company or any of its subsidiaries is or may be a party or of which property owned or leased by the Company or any of its subsidiaries is or may be the subject, or related to environmental or discrimination matters, which actions, suits or proceedings, would adversely affect the transactions contemplated by this Agreement or would, if adversely determined, result in a Material Adverse Change; no labor disturbance by the employees of the Company or any of its subsidiaries exists or, to the knowledge of the Company, is imminent which would result in a Material Adverse Change; and neither the Company nor any of its subsidiaries is a party or subject to the provisions of any injunction, judgment, decree or order of any court, regulatory body, administrative agency or other governmental body which might be expected to result in a Material Adverse Change; 5 (m) The Company and its subsidiaries possess all licenses, certificates, authorizations or permits that are necessary to enable them to own, lease and operate their respective properties and to carry on their respective businesses as presently conducted and which the failure to possess would result in a Material Adverse Change, and neither the Company nor any of its subsidiaries has received any notice of proceedings relating to the revocation or modification of any such license, certificate, authority or permit which, singly or in the aggregate, would be expected to result in a Material Adverse Change; (n) The Company and its subsidiaries are in compliance with any and all applicable foreign, federal, state and local laws and regulations relating to the protection of human health and safety, including without limitation those relating to occupational safety and health, the environment or hazardous or toxic substances or wastes, pollutants or contaminants, including without limitation those relating to the storage, handling or transportation of hazardous or toxic materials (collectively, "Environmental Laws"), except where such noncompliance with Environmental Laws would not, singly or in the aggregate, be expected to result in a Material Adverse Change; (o) To the Company's knowledge, PricewaterhouseCoopers LLP, who have audited certain financial statements of the Company, are independent public accountants within the meaning of the Act and the rules and regulations of the Commission thereunder; (p) The consolidated financial statements and schedules of the Company, and the related notes thereto, included in the Registration Statement and the Prospectus present fairly the financial position of the Company as of the respective dates of such financial statements, and the results of operations and cash flows of the Company for the respective periods covered thereby; such statements, schedules and related notes have been prepared in accordance with generally accepted accounting principles applied on a consistent basis as certified by the independent public accountants named in paragraph (o) above; no other financial statements or schedules are required to be included in the Registration Statement; and the selected financial data set forth in the Prospectus under the captions "Summary Consolidated Financial Data," "Capitalization," "Selected Consolidated Financial Data," "Management's Discussion and Analysis of Financial Condition and Results of Operations--Results of Operations" and "Management's Discussion and Analysis of Financial Condition and Results of Operations--Quarterly Results and Seasonality" present fairly the information set forth therein on the basis stated in the Registration Statement; (q) Except as disclosed in the Registration Statement and Prospectus, the Company and its subsidiaries own or possess all trademarks, trade names, patent rights, copyrights, licenses, trade secrets and proprietary rights necessary to conduct their business as now conducted; the Company has not received notice of any infringement by the Company or its subsidiaries of trademark, trade name, patent, copyrights, licenses, trade secret, proprietary or other similar rights of others; and there is no claim of infringement being made against the Company regarding trademark, trade name, patent, copyright, license, trade secret, proprietary or other similar rights which, if adversely decided, would reasonably be expected to result in a Material Adverse 6 Change; except as disclosed in the Registration Statement and Prospectus, none of the technology employed by the Company or any of its subsidiaries has been obtained or is being used by the Company or any of its subsidiaries in violation of any contractual obligation binding on the Company or any of its subsidiaries or, to the Company's knowledge, any of their respective officers, directors, employees or consultants or otherwise in violation of the rights of any person, except for such violations that would not reasonably be expected to result in a Material Adverse Change; none of the Company or any of its subsidiaries and, to the Company's knowledge, none of its employees has received any written or oral communications alleging that the Company or any of its subsidiaries has violated or, by conducting its business as proposed, would violate any of the intellectual property or proprietary rights of any other person or entity; neither the operation of the business of the Company and its subsidiaries by the employees of the Company or any of its subsidiaries, nor the conduct of the business of the Company and its subsidiaries as proposed, will, to the Company's knowledge, result in a breach or violation of the terms, conditions or provisions of, or constitute a default under, any material contract, covenant or instrument under which any of such employees is now obligated; and the Company and its subsidiaries have taken reasonable measures to prevent the unauthorized dissemination or publication of its confidential information or the confidential information of third parties in its possession; (r) The Company and each of its subsidiaries has filed all necessary federal, state and foreign income and franchise tax returns which have been required to be filed or has requested and obtained extensions thereof and has paid all taxes shown as due thereon; and, except as disclosed in the Registration Statement and Prospectus, the Company has not received any notice of any tax deficiency which has been or is reasonably likely to be asserted against the Company or any of its subsidiaries which would result in a Material Adverse Change; (s) The Company is not an "investment company" or an "affiliated person" of, or "promoter" or "principal underwriter" for, an "investment company," as such terms are defined in the Investment Company Act of 1940, as amended (the "Investment Company Act"); (t) Each of the Company and its subsidiaries maintains insurance of the types and in the amounts which it reasonably deems adequate for its business, including, but not limited to, insurance covering real and personal property owned or leased by the Company and its subsidiaries against theft, damage, destruction, acts of vandalism and all other risks customarily insured against by companies engaged in businesses substantially similar to that of the Company, all of which insurance is in full force and effect; (u) Since incorporation, neither the Company nor any of its subsidiaries has at any time (i) made any unlawful contribution to any candidate for foreign office, or failed to disclose fully any contribution in violation of law, or (ii) made any payment to any foreign, federal or state governmental officer or official, or other person charged with similar public or quasi-public duties, other than payments required or permitted by the laws of the United States or any jurisdiction thereof; 7 (v) The Company has not taken and will not take, directly or indirectly through any of its directors, officers or controlling persons, any action which is designed to or which has constituted or which might reasonably be expected to cause or result in stabilization or manipulation of the price of any security of the Company to facilitate the sale or resale of the Shares; (w) The Company has filed a registration statement pursuant to Section 12(g) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), to register the Common Stock. The Common Stock is listed and duly admitted to trading on the National Association of Securities Dealers, Inc. Automated Quotation ("Nasdaq") National Market System. The Company has timely filed a notification with the Nasdaq National Market System concerning the listing of the Shares to be issued by it and such Shares are listed and duly admitted to trading on the Nasdaq National Market System; and (x) A.C. Moore Incorporated, Moorestown Finance, Inc., and Blackwood Assets, Inc. constitute the only subsidiaries of the Company. 2. Representations and Agreements of the Selling Shareholders. Each of the Selling Shareholders, severally and not jointly, represents and warrants to, and agrees with, each of the Underwriters that: (a) All consents, approvals, authorizations and orders necessary for the execution and delivery by such Selling Shareholder of this Agreement and the Power-of-Attorney and Custody Agreement (the "Custody Agreement") hereinafter referred to, and for the sale and delivery of the Shares to be sold by such Selling Shareholder hereunder, have been obtained; and such Selling Shareholder has full right, power and authority to enter into this Agreement and the Custody Agreement and to sell, assign, transfer and deliver the Shares to be sold by such Selling Shareholder hereunder; (b) This Agreement and the Custody Agreement have each been duly authorized, executed and delivered by such Selling Shareholder and each such document constitutes a valid and binding obligation of such Selling Shareholder, enforceable against such Selling Shareholder in accordance with its terms; (c) No consent, approval, authorization or order of, or any filing or declaration with, any court or governmental agency or body with respect to such Selling Shareholder is required in connection with the sale of the Shares by such Selling Shareholder or the consummation by such Selling Shareholder of the transactions on his, her or its part contemplated by this Agreement and the Custody Agreement, except such as have been obtained under the Act or the rules and regulations thereunder and such as may be required under state securities or Blue Sky laws or the by-laws and rules of the NASD in connection with the purchase and distribution by the Underwriters of the Shares; 8 (d) The sale of the Shares to be sold by such Selling Shareholder hereunder and the performance by such Selling Shareholder of this Agreement and the Custody Agreement and the consummation of the transactions contemplated hereby and thereby will not result in a breach or violation of any of the terms or provisions of, or constitute a default under, or give any party a right to terminate any of its obligations under, or result in the acceleration of any obligation under, any material indenture, mortgage, deed of trust, voting trust agreement, loan agreement, bond, debenture, note agreement or other evidence of indebtedness, lease, contract, agreement or instrument to which such Selling Shareholder is a party or by which such Selling Shareholder or any of his, her or its material properties is bound or affected, or violate or conflict with the organizational documents, if any, of such Selling Shareholder any judgment, ruling, decree, order, statute, rule or regulation of any court or other governmental agency or body applicable to such Selling Shareholder; (e) Such Selling Shareholder has, and at each applicable Time of Delivery (as defined in Section 5 hereof) will have, good and valid title to the Shares to be sold by such Selling Shareholder hereunder, free and clear of all liens, encumbrances or claims except those created by this Agreement and the Custody Agreement; and, upon delivery of such Shares and payment therefor pursuant hereto, good and valid title to such Shares, free and clear of all liens, encumbrances or claims, will pass to each of the several Underwriters who have purchased such Shares in good faith and without notice of any such lien, encumbrance or claim or any other adverse claim within the meaning of the Uniform Commercial Code; (f) Such Selling Shareholder has not taken and will not at any time take, directly or indirectly, any action designed, or which might reasonably be expected, to cause or result in, or which will constitute, stabilization of the price of shares of Common Stock to facilitate the sale or resale of any of the Shares. (g) To the extent that any statements or omissions made in the Registration Statement, any Preliminary Prospectus, the Prospectus or any amendment or supplement thereto are made in reliance upon and in conformity with written information about such Selling Shareholder furnished to the Company by such Selling Shareholder expressly for use therein, such statements contained in the Preliminary Prospectus and the Registration Statement in reliance thereon did, and such statements contained in the Prospectus and any further amendments or supplements to the Registration Statement and the Prospectus will, when they become effective or are filed with the Commission, as the case may be, not contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein not misleading. In order to document the Underwriters' compliance with the reporting and withholding provisions of the Tax Equity and Fiscal Responsibility Act of 1982 with respect to the transactions herein contemplated, each Selling Shareholder agrees to deliver to you prior to or at the First Time of Delivery a properly completed and executed United States Treasury Department Form W-9 (or other applicable form or statement specified by Treasury Department regulations in lieu thereof). 9 Each of the Selling Shareholders represents and warrants that certificates in negotiable form representing the Selling Shareholder Firm Shares and the Optional Shares to be sold by such Selling Shareholder have been placed in custody under the Custody Agreement, in the form heretofore furnished to you, duly executed and delivered by such Selling Shareholder to the Custodian (as defined in the Custody Agreement), and that such Selling Shareholder has duly executed and delivered a power-of-attorney, in the form heretofore furnished to you and included in the Custody Agreement (the "Power-of-Attorney"), appointing Lawrence H. Fine and Leslie H. Gordon, and each of them, as such Selling Shareholder's attorney-in-fact (the "Attorneys-in-Fact") with authority to execute and deliver this Agreement on behalf of such Selling Shareholder, to determine (subject to the provisions of the Custody Agreement) the purchase price to be paid by the Underwriters to such Selling Shareholder as provided in Section 3 hereof, to authorize the delivery of the Shares to be sold by such Selling Shareholder hereunder and otherwise to act on behalf of such Selling Shareholder in connection with the transactions contemplated by this Agreement and the Custody Agreement. Each of the Selling Shareholders specifically agrees that the Shares represented by the certificates held in custody for such Selling Shareholder under the Custody Agreement are subject to the interests of the Underwriters hereunder, and that the arrangements made by such Selling Shareholder for such custody, and the appointment by such Selling Shareholder of the Attorneys-in-Fact by the Power-of-Attorney, are to that extent irrevocable. Each of the Selling Shareholders specifically agrees that the obligations of such Selling Shareholder hereunder shall not be terminated by operation of law, whether by the death or incapacity of such Selling Shareholder or, in the case of an estate or trust, by the death or incapacity of any executor or trustee or the termination of such estate or trust, or in the case of a partnership or corporation, by the dissolution of such partnership or corporation, or by the occurrence of any other event. If such Selling Shareholder or any such executor or trustee should die or become incapacitated, or if any such estate or trust should be dissolved, or if such corporation or partnership should be dissolved, or if any other such event should occur, before the delivery of the Shares hereunder, certificates representing the Shares to be sold by such Selling Shareholder shall be delivered by or on behalf of such Selling Shareholder in accordance with the terms and conditions of this Agreement and of the Custody Agreement, and actions taken by the Attorneys-in-Fact pursuant to the Power-of-Attorney shall be as valid as if such death, incapacity, termination, dissolution or other event had not occurred, regardless of whether or not the Custodian, the Attorneys-in-Fact, or any of them, shall have received notice of such death, incapacity, termination, dissolution or other event. 3. Shares Subject to Sale. (a) On the basis of the representations, warranties and agreements of the Company and the Selling Shareholders contained herein, and subject to the terms and conditions of this Agreement, (i) the Company and the Selling Shareholders agree to sell their respective Firm Shares to the several Underwriters and (ii) each of the Underwriters agrees, severally and not jointly, to purchase from the Company and the Selling Shareholders, at a purchase price per share of $_______, the respective number of Firm Shares (to be adjusted by you so as to eliminate fractional shares) determined by multiplying the aggregate number of Firm Shares by a fraction, the numerator of which is the aggregate number of Firm Shares to be purchased by such Underwriter as set forth opposite the name of such Underwriter in Schedule I hereto and the denominator of which is the aggregate number 10 of Firm Shares to be purchased by all the Underwriters; and (b) in the event and to the extent that the Underwriters shall exercise the election to purchase the Optional Shares as provided below (i) each of the Selling Shareholders agrees, severally and not jointly, to sell his, her or its respective Optional Shares to the several Underwriters and (ii) each of the Underwriter agrees, severally and not jointly, to purchase, at the purchase price per share set forth in clause (a) of this Section 3, that portion of the number of Optional Shares as to which such election shall have been exercised (to be adjusted by you so as to eliminate fractional shares) determined by multiplying such number of Optional Shares by a fraction, the numerator of which is the maximum number of Optional Shares which such Underwriter is entitled to purchase as set forth opposite the name of such Underwriter on Schedule I hereto and the denominator of which is the maximum number of the Optional Shares which all of the Underwriters are entitled to purchase hereunder. The Selling Shareholders, as and to the extent indicated in Schedule II hereto, each hereby grants, severally and not jointly, to the Underwriters the right to purchase at their election up to 382,500 Optional Shares, respectively, at the purchase price per share set forth in the paragraph above, for the sole purpose of covering overallotments in the sale of the Firm Shares. Any such election to purchase Optional Shares shall be made in proportion to the maximum number of Optional Shares to be sold by the Selling Shareholders. Any such election to purchase Optional Shares may be exercised by written notice from you to the Company, given within a period of 30 calendar days after the date of this Agreement and setting forth the aggregate number of Optional Shares to be purchased and the date on which such Optional Shares are to be delivered, as determined by you but in no event earlier than the First Time of Delivery or, unless you and the Company otherwise agree in writing, earlier than two or later than three business days after the date of such notice. 4. Offering. Upon the authorization by you of the release of the Firm Shares, the several Underwriters propose to offer the Firm Shares for sale upon the terms and conditions set forth in the Prospectus. 5. Closing. Certificates in definitive form for the Shares to be purchased by each Underwriter hereunder, and in such denominations and registered in such names as Adams, Harkness & Hill, Inc. may request upon at least forty-eight hours' prior notice to the Company and the Attorneys-in-Fact, shall be delivered by or on behalf of the Company and each of the Selling Shareholders to you for the account of such Underwriter, against payment by such Underwriter or on its behalf of the purchase price therefor by wire transfer of same day funds, all at the office of Adams, Harkness & Hill, Inc., 60 State Street, Boston, Massachusetts 02109. The time and date of such delivery and payment shall be, with respect to the Firm Shares, 9:30 a.m., Boston time, on March___, 2002 or such other time and date as you and the Company may agree upon in writing, and, with respect to the Optional Shares, 9:30 a.m., Boston time, on the date specified by you in the written notice given by you of the Underwriters' election to purchase such Optional Shares, or at such other time and date as you and the Company may agree upon in writing. Such time and date for delivery of the Firm Shares is herein called the "First Time of Delivery," such time and date for delivery of the Optional Shares, if not the First Time of Delivery, is herein called the "Second Time of Delivery," and each such time and date for delivery is herein called a "Time of Delivery." Such certificates will be made available for checking and packaging at least twenty four hours prior to each Time of Delivery at such location as you may specify. 11 6. Covenants of the Company. The Company agrees with each of the Underwriters: (a) To prepare the Prospectus in a form approved by you and to file such Prospectus pursuant to Rule 424(b) under the Act not later than the Commission's close of business on the second business day following the execution and delivery of this Agreement, or, if applicable, such earlier time as may be required by Rule 430A(a)(3) under the Act; to make no further amendment or any supplement to the Registration Statement or Prospectus of which you shall not have been previously advised and furnished with a copy or to which you shall have reasonably objected in writing promptly after reasonable notice thereof; to advise you, promptly after it receives notice thereof, of the time when the Registration Statement, or any amendment thereto, has been filed or becomes effective or any supplement to the Prospectus or any amended Prospectus has been filed and to furnish you copies thereof; to advise you, promptly after it receives notice thereof, of the issuance by the Commission of any stop order or of any order preventing or suspending the use of any Preliminary Prospectus or Prospectus, of the suspension of the qualification of the Shares for offering or sale in any jurisdiction, of the initiation or threatening of any proceeding for any such purpose, or of any request by the Commission for the amending or supplementing of the Registration Statement or Prospectus or for additional information; and, in the event of the issuance of any stop order or of any order preventing or suspending the use of any Preliminary Prospectus or Prospectus or suspending any such qualification, to use promptly its best efforts to obtain its withdrawal; (b) Promptly from time to time to take such action as you may reasonably request to qualify the Shares for offering and sale under the securities laws of such jurisdictions as you may request and to comply with such laws so as to permit the continuance of sales and dealings therein in such jurisdictions for as long as may be necessary to complete the distribution of the Shares, provided that in connection therewith the Company shall not be required to qualify as a foreign corporation or to file a general consent to service of process in any jurisdiction; (c) To furnish the Underwriters with copies of the Prospectus in such quantities as you may from time to time reasonably request, and, if the delivery of a prospectus is required by law at any time prior to the expiration of nine months after the time of issuance of the Prospectus in connection with the offering or sale of the Shares and if at such time any events shall have occurred as a result of which the Prospectus as then amended or supplemented would include an untrue statement of a material fact or omit to state any material fact necessary in order to make the statements therein, in light of the circumstances under which they were made when such Prospectus is delivered, not misleading, or, if for any other reason it shall be necessary during such same period to amend or supplement the Prospectus in order to comply with the Act, to notify you and upon your request to prepare and furnish without charge to each Underwriter and to any dealer in securities as many copies as you may from time to time reasonably request of an amended Prospectus or a supplement to the 12 Prospectus which will correct such statement or omission or effect such compliance, and in case any Underwriter is required by law to deliver a prospectus in connection with sales of any of the Shares at any time nine months or more after the time of issue of the Prospectus, upon your request but at the expense of such Underwriter, to prepare and deliver to such Underwriter as many copies as you may request of an amended or supplemented Prospectus complying with Section 10(a)(3) of the Act; (d) To make generally available to its securityholders as soon as practicable, but in any event not later than the forty-fifth (45th) day following the end of the full fiscal quarter first occurring after the first anniversary of the effective date of the Registration Statement (as defined in Rule 158(c)), an earnings statement of the Company and its subsidiaries (which need not be audited) complying with Section 11(a) of the Act and the rules and regulations of the Commission thereunder (including, at the option of the Company, Rule 158); (e) During the period beginning from the date hereof and continuing to and including the date 180 days after the date of the Prospectus, not to offer, sell, contract to sell or otherwise dispose of any securities of the Company which are substantially similar to the Shares, including but not limited to any securities that are convertible into or exchangeable for, or that represent the right to receive, Common Stock or any such substantially similar securities (other than (i) the sale of the Shares to be sold by the Company hereunder, (ii) the Company's issuance of shares upon exercise of outstanding options and the award of options under the Company's 1997 Stock Option Plan or any plan adopted by the Company and approved by its shareholders at the Company's 2002 Annual Meeting of Shareholders (the "New Stock Option Plan") and, (iii) the Company's issuance of shares of Common Stock in connection with the acquisition by the Company of another company or entity, provided that the terms of such issuance contractually prohibit the resale or other disposition of such shares of Common Stock through the date 180 days after the date of the Prospectus), without your prior written consent. (f) During a period of five years from the effective date of the Registration Statement, to furnish to you copies of all reports or other communications (financial or other) furnished to shareholders of the Company generally, and deliver to you as soon as they are available, copies of any reports and financial statements furnished to or filed with the Commission, the Nasdaq National Market or any national securities exchange on which any class of securities of the Company is listed (such financial statements to be on a combined or consolidated basis to the extent the accounts of the Company and its subsidiaries are combined or consolidated in reports furnished to its shareholders generally or to the Commission); (g) To use the net proceeds acquired by it from the sale of the Shares in the manner specified in the Prospectus under the caption "Use of Proceeds" and in a manner such that the Company will not become an "investment company" as that term is defined in the Investment Company Act; 13 (h) Not to file with the Commission any registration statement on Form S-8 relating to shares of its Common Stock prior to 180 days after the effective date of the Registration Statement (other than with respect to the Company's Employee Stock Purchase Plan which may be filed at any time); and (i) Not to accelerate the vesting of any option issued under any stock option plan such that any such option may be exercised within 180 days from the date of the Prospectus (other than in connection with a sale of the Company). 7. Covenants of the Selling Shareholders. Each Selling Shareholder agrees to pay or cause to be paid all taxes, if any, on the transfer and sale of the Shares to be sold by such Selling Shareholder hereunder and the fees and expenses, if any, of counsel and accountants retained by such Selling Shareholder. The Company agrees with the Selling Shareholders to pay all costs and expenses incident to the performance of the obligations of the Selling Shareholders under this Agreement (except as set forth above), including, but not limited to, all expenses incident to the delivery of the certificates for the Shares to be sold by such Selling Shareholder, the costs and expenses incident to the preparation, printing and filing of the Registration Statement (including all exhibits thereto), all Preliminary Prospectuses and the Prospectus and any amendments or supplements thereto, the expenses of qualifying the Shares to be sold by the Selling Shareholders under the state securities or Blue Sky laws, all filing fees and the reasonable fees and expenses of counsel for the Underwriters payable in connection with the review of the offering of the Shares by the NASD, and the cost of furnishing to the Underwriters the required copies of the Registration Statement, all Preliminary Prospectuses and the Prospectus and any amendments or supplements thereto; provided that each Selling Shareholder agrees to pay or cause to be paid its pro rata share (based on the percentage which the number of Shares sold by such Selling Shareholder bears to the total number of Shares sold) of all underwriting discounts and commissions. 8. Expenses. The Company covenants and agrees with the several Underwriters that the Company will pay or cause to be paid the following: (i) the fees, disbursements and expenses of the Company's counsel and accountants in connection with the registration of the Shares under the Act and all other expenses in connection with the preparation, printing and filing of the Registration Statement, any Preliminary Prospectus and the Prospectus and amendments and supplements thereto and the mailing and delivering of copies thereof to the Underwriters and dealers; (ii) the cost of printing, producing and reproducing any Agreement among Underwriters, this Agreement, the Blue Sky Memorandum and any other documents in connection with the offering, purchase, sale and delivery of the Shares; (iii) all expenses and filing fees in connection with the qualification of the Shares for offering and sale under state securities laws as provided in Section 6(b) hereof and the filing fees incident to securing any required review by the NASD of the terms of the sale of the Shares; (iv) the fees and disbursements of counsel for the Underwriters in connection with the qualification of the Shares for offering and sale under state securities laws as provided in Section 6(b) hereof and in connection with the Blue Sky survey (including the fees and disbursements of counsel for the Underwriters in connection with the qualification of the Shares for offering and sale in connection with the directed share program), and the fees and expenses of counsel to the Underwriters incident to securing any required review by the NASD of the terms of the sale of the Shares; (v) the cost of preparing stock certificates; (vi) the cost and charges of any transfer agent or registrar; and 14 (vii) all other costs and expenses incident to the performance of its obligations hereunder which are not otherwise specifically provided for in this Section 8. It is understood, however, that, except as provided in this Section 8, Section 10 and Section 13 hereof, the Underwriters will pay all of their own costs and expenses, including the fees and expenses of their counsel, stock transfer taxes on resale of any of the Shares by them, and any advertising expenses connected with any offers they may make. 9. Conditions of Underwriters' Obligations. The obligations of the Underwriters hereunder, as to the Shares to be delivered at each Time of Delivery, shall be subject, to the condition that all representations and warranties and other statements of the Company and each Selling Shareholder (if applicable) herein are, at and as of such Time of Delivery, true and correct, the condition that the Company and each Selling Shareholder (if applicable) shall each have performed in all material respects all of their respective obligations hereunder theretofore to be performed, and the following additional conditions: (a) The Prospectus shall have been filed with the Commission pursuant to Rule 424(b) within the applicable time period prescribed for such filing by the rules and regulations under the Act and in accordance with Section 6(a) hereof; no stop order suspending the effectiveness of the Registration Statement or any part thereof shall have been issued and no proceeding for that purpose shall have been initiated or threatened by the Commission; and all requests for additional information on the part of the Commission shall have been complied with to your reasonable satisfaction; (b) Choate, Hall & Stewart, counsel to the Underwriters, shall have furnished to you such opinion or opinions, dated such Time of Delivery, with respect to this Agreement, the Registration Statement, the Prospectus and other related matters as you may reasonably request; (c) Blank Rome Comiskey & McCauley LLP, counsel to the Company, shall have furnished to you their written opinion, dated such Time of Delivery, in form and substance reasonably satisfactory to you, with respect to the matters set forth in Annex I hereto; (d) On the effective date of the Registration Statement at a time prior to execution of this Agreement, at 9:30 a.m. Boston time on the effective date of the most recently filed post-effective amendment to the Registration Statement and at each Time of Delivery, PricewaterhouseCoopers LLP shall have furnished to you a letter or letters, dated the respective date of delivery thereof, in form and substance reasonably satisfactory to you, to the effect set forth in Annex II hereto; (e) (i) Neither the Company nor any of its subsidiaries have sustained since the date of the latest audited financial statements included in the Prospectus any loss or interference with its business from fire, explosion, flood or other calamity, whether or not covered by insurance, or from any labor dispute or court or governmental action, order or decree, otherwise than as set forth in the Prospectus, and (ii) since the respective dates as of which information is given in the Prospectus, there shall not have been any change in the capital stock (other than issuances of Common Stock pursuant to the Company's 1997 Stock Option Plan) or long-term debt of the Company or any change, 15 or any development involving a prospective change, in or affecting the business, assets, management, financial position or results of operations of the Company and its subsidiaries taken as a whole, otherwise than as set forth in the Prospectus, the effect of which, in any such case described in clause (i) or (ii), is in the judgment of the Representatives so material and adverse as to make it impracticable or inadvisable to proceed with the public offering or the delivery of the Shares being delivered at such Time of Delivery on the terms and in the manner contemplated in the Prospectus; (f) On or after the date hereof there shall not have occurred any of the following: (i) additional material governmental restrictions, not in force and effect on the date hereof, shall have been imposed upon trading in securities generally or minimum or maximum prices shall have been generally established on the New York Stock Exchange or on the American Stock Exchange or in the NASDAQ National market, or trading in securities generally or in the Shares shall have been suspended or materially limited on the NASDAQ National Market, or a general banking moratorium shall have been established by federal or New York authorities, or (ii) an outbreak or escalation of hostilities or other national or international calamity or any substantial change in political, financial or economic conditions shall have occurred or shall have accelerated or escalated to such an extent, as, in the judgment of the Representatives, to affect adversely the marketability of the Shares; (g) The Shares to be sold by the Company at such Time of Delivery shall be listed and duly admitted to trading on the Nasdaq National Market System; (h) Each director and officer of the Company and each Selling Shareholder shall have executed and delivered to you a lock-up agreement in form and substance reasonably satisfactory to you; (i) The Company and each Selling Shareholder shall have furnished or caused to be furnished to you at such Time of Delivery certificates of officers of the Company and of such Selling Shareholder, respectively, in their capacities as such, reasonably satisfactory to you, as to the accuracy of the representations and warranties of the Company and of such Selling Shareholder, respectively, herein at and as of such Time of Delivery, as to the performance in all material respects by the Company and of such Selling Shareholder, respectively, of all of his, her or its obligations hereunder to be performed at or prior to such Time of Delivery, and as to such other matters as you may reasonably request and the Company shall have furnished or caused to be furnished certificates as to the matters set forth in subsections (a), (e), (g) and (h) of this Section 9, and as to such other matters as you may reasonably request; and (j) Counsel to each Selling Shareholder shall have furnished to you their respective written opinions, dated such Time of Delivery, in form and substance reasonably satisfactory to you, with respect to the matters set forth in Annex III hereto. 16 10. Indemnification and Contribution. (a) The Company agrees to indemnify and hold harmless each Underwriter and each person, if any, who controls such Underwriter within the meaning of Section 15 of the Act (each, a "Company Indemnified Party") against any losses, claims, damages or liabilities (a "Loss"), to which any Company Indemnified Party may become subject, under the Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon an untrue statement or alleged untrue statement of a material fact contained in any Preliminary Prospectus, the Registration Statement or the Prospectus, or any amendment or supplement thereto, or arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, and will reimburse any Company Indemnified Party for any legal or other expenses reasonably incurred by such Company Indemnified Party in connection with investigating or defending any such action or claim as such expenses are incurred; provided, however, that the Company shall not be liable in any such case to the extent that any such Loss arises out of or is based upon an untrue statement or alleged untrue statement or omission or alleged omission made in any Preliminary Prospectus, the Registration Statement or the Prospectus or any such amendment or supplement in reliance upon and in conformity with written information furnished to the Company by any Underwriter through you expressly for use therein. (b) Each Selling Shareholder, severally and not jointly, agrees to indemnify and hold harmless each Underwriter and each person, if any, who controls such Underwriter within the meaning of Section 15 of the Act (each, a "Selling Shareholder Indemnified Party") against any Loss to which any Selling Shareholder Indemnified Party may become subject, under the Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon an untrue statement or alleged untrue statement of a material fact contained in any Preliminary Prospectus, the Registration Statement or the Prospectus, or any amendment or supplement thereto, or arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, and will reimburse any Selling Shareholder Indemnified Party for any legal or other expenses reasonably incurred by such Selling Shareholder Indemnified Party in connection with investigating or defending any such action or claim as such expenses are incurred; provided, however, that this indemnity shall apply with respect to such Selling Shareholder only to the extent that any such Loss arises out of or is based upon an untrue statement or alleged untrue statement, or omission or alleged omission made in any Preliminary Prospectus, the Registration Statement or the Prospectus, or any amendment or supplement thereto, in reliance upon and in conformity with written information furnished by such Selling Shareholder specifically for use in the preparation thereof; and, provided, further, that such Selling Shareholder shall not be liable in any such case to the extent that any such Loss arises out of or is based upon an untrue statement or alleged untrue statement or omission or alleged omission made in any Preliminary Prospectus, the Registration Statement or the Prospectus or any such amendment or supplement in reliance upon and in conformity with written information furnished to the Company by any Underwriter through you expressly for use therein. In no event shall any Selling Shareholder be liable or responsible under this Agreement for any amount in the aggregate in excess of the net proceeds received by such Selling Shareholder with respect to the Shares sold by such Selling Shareholder. 17 (c) Each Underwriter will, severally and not jointly, indemnify and hold harmless the Company, each Selling Shareholder, each of the directors of the Company, each of the officers of the Company who shall have signed the Registration Statement, and each other person, if any, who controls the Company or any Selling Shareholder within the meaning of Section 15 of the Act (each, an "Underwriter Indemnified Party") against any Loss to which any Underwriter Indemnified Party may become subject, under the Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon an untrue statement or alleged untrue statement of a material fact contained in any Preliminary Prospectus, the Registration Statement or the Prospectus, or any amendment or supplement thereto, or arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, in each case to the extent, but only to the extent, that such untrue statement or alleged untrue statement or omission or alleged omission was made in any Preliminary Prospectus, the Registration Statement or the Prospectus or any such amendment or supplement in reliance upon and in conformity with written information furnished to the Company by such Underwriter through you expressly for use therein; and will reimburse any Underwriter Indemnified Party for any legal or other expenses reasonably incurred by it or them in connection with investigating or defending any such action or claim as such expenses are incurred. (d) Promptly after receipt by an indemnified party under subsection (a), (b) or (c) above of notice of the commencement of any action, such indemnified party shall, if a claim in respect thereof is to be made against the indemnifying party under such subsection, notify the indemnifying party in writing of the commencement thereof; no indemnification shall be available hereunder to any party who shall fail to give notice as provided in the preceding sentence if, and only to the extent that, the party to whom such notice was not given was unaware of the action, suit, investigation, inquiry or proceeding to which the notice would have related and was materially prejudiced by the failure to give such notice, but the omission so to notify the indemnifying party shall not relieve it from any liability which it may have to any indemnified party otherwise than under such subsection. In case any such action shall be brought against any indemnified party and it shall notify the indemnifying party of the commencement thereof, the indemnifying party shall be entitled to participate therein and, to the extent that it shall wish, jointly with any other indemnifying party similarly notified, to assume the defense thereof, with counsel reasonably satisfactory to such indemnified party, and, after notice from the indemnifying party to such indemnified party of its election so to assume the defense thereof, the indemnifying party shall not be liable to such indemnified party under such subsection for any legal expenses of other counsel or any other expenses, in each case subsequently incurred by such indemnified party, in connection with the defense thereof. No indemnifying party shall, without the written consent of the indemnified party, effect the settlement or compromise of, or consent to the entry of any judgment with respect to, any pending or threatened action or claim in respect of which indemnification or contribution may be sought hereunder (whether or not the indemnified party is an actual or potential party to such action or 18 claim) unless such settlement, compromise or judgment (i) includes an unconditional release of the indemnified party from all liability arising out of such action or claim and (ii) does not include a statement as to or an admission of fault, culpability or a failure to act, by or on behalf of any indemnified party. (e) If the indemnification provided for in this Section 10 is unavailable to or insufficient to hold harmless an indemnified party under subsection (a), (b) or (c) above in respect of any losses, claims, damages or liabilities (or actions in respect thereof) referred to therein, then each indemnifying party shall contribute to the amount paid or payable by such indemnified party as a result of such losses, claims, damages or liabilities (or actions in respect thereof) in such proportion as is appropriate to reflect the relative benefits received by the Company and the Selling Shareholders on the one hand and the Underwriters on the other from the offering of the Shares. If, however, the allocation provided by the immediately preceding sentence is not permitted by applicable law or if the indemnified party failed to give the notice required under subsection (d) above, then each indemnifying party shall contribute to such amount paid or payable by such indemnified party in such proportion as is appropriate to reflect not only such relative benefits but also the relative fault of the Company and the Selling Shareholders on the one hand and the Underwriters on the other in connection with the statements or omissions which resulted in such losses, claims, damages or liabilities (or actions in respect thereof), as well as any other relevant equitable considerations. The relative benefits received by the Company and the Selling Shareholders on the one hand and the Underwriters on the other shall be deemed to be in the same proportion as the total net proceeds from the offering (before deducting expenses) received by the Company and the Selling Shareholders, respectively, bear to the total underwriting discounts and commissions received by the Underwriters. The relative fault shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the Company or any Selling Shareholder on the one hand or the Underwriters on the other and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. The Company, the Selling Shareholders and the Underwriters agree that it would not be just and equitable if contributions pursuant to this subsection (e) were determined by pro rata allocation (even if the Underwriters were treated as one entity for such purpose) or by any other method of allocation which does not take account of the equitable considerations referred to above in this subsection (e). The amount paid or payable by an indemnified party as a result of the losses, claims, damages or liabilities (or actions in respect thereof) referred to above in this subsection (e) shall be deemed to include any legal or other expenses reasonably incurred by such indemnified party in connection with investigating or defending any such action or claim. Notwithstanding the provisions of this subsection (e), no Underwriter shall be required to contribute any amount in excess of the amount by which the total price at which the Shares underwritten by it and distributed to the public were offered to the public exceeds the amount of any damages which such Underwriter has otherwise been required to pay by reason of such untrue or alleged untrue statement or omission or alleged omission and no Selling Shareholder shall be required to contribute any amount in excess of the net proceeds received by such Selling Shareholder with respect to the Shares sold by such Selling Shareholder. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. The Underwriters' obligations in this subsection (e) to contribute are several in proportion to their respective underwriting obligations and not joint. 19 11. Termination. (a) If any Underwriter shall default in its obligation to purchase the Shares which it has agreed to purchase hereunder at a Time of Delivery, you may in your discretion arrange for you or another party or other parties to purchase such Shares on the terms contained herein. If within thirty-six hours after such default by any Underwriter you do not arrange for the purchase of such Shares, then the Company and the Selling Shareholders shall be entitled to a further period of thirty-six hours within which to procure another party or other parties satisfactory to you to purchase such Shares on such terms. In the event that, within the respective prescribed periods, you notify the Company and the Selling Shareholders that you have so arranged for the purchase of such Shares, or the Company and the Selling Shareholders notifies you that they have so arranged for the purchase of such Shares, you or the Company and the Selling Shareholders shall have the right to postpone such Time of Delivery for a period of not more than seven days, in order to effect whatever changes may thereby be made necessary in the Registration Statement or the Prospectus, or in any other documents or arrangements, and the Company agrees to file promptly any amendments or supplements to the Registration Statement or the Prospectus which in your opinion may thereby be made necessary. The term "Underwriter" as used in this Agreement shall include any person substituted under this Section 11 with like effect as if such person had originally been a party to this Agreement with respect to such Shares. (b) If, after giving effect to any arrangements for the purchase of the Shares of a defaulting Underwriter or Underwriters by you and the Company as provided in subsection (a) above, the aggregate number of such Shares which remains unpurchased does not exceed one-tenth of the aggregate number of all the Shares to be purchased at such Time of Delivery, then the Company shall have the right to require each non-defaulting Underwriter to purchase the number of Shares which such Underwriter agreed to purchase hereunder at such Time of Delivery and, in addition, to require each non-defaulting Underwriter to purchase its pro rata share (based on the number of Shares which such Underwriter agreed to purchase hereunder) of the Shares of such defaulting Underwriter or Underwriters for which such arrangements have not been made; but nothing herein shall relieve a defaulting Underwriter from liability for its default. (c) If, after giving effect to any arrangements for the purchase of the Shares of a defaulting Underwriter or Underwriters by you and the Company as provided in subsection (a) above, the aggregate number of such Shares which remains unpurchased exceeds one-tenth of the aggregate number of all the Shares to be purchased at such Time of Delivery, or if the Company shall not exercise the right described in subsection (b) above to require non-defaulting Underwriters to purchase Shares of a defaulting Underwriter or Underwriters, then this Agreement (or, with respect to the Second Time of Delivery, the obligations of the Underwriters to purchase and of the Company to sell the Optional Shares) shall thereupon terminate, without liability on the part of any non-defaulting Underwriter, the Company or any Selling Shareholder, except for the expenses to be borne by the Company, any Selling Shareholder and the Underwriters as provided in Section 8 hereof and the indemnity and contribution agreements in Section 10 hereof; but nothing herein shall relieve a defaulting Underwriter from liability for its default. 20 12. Survival. The respective indemnities, agreements, representations, warranties and other statements of the Company, each Selling Shareholder and the several Underwriters, as set forth in this Agreement or made by or on behalf of them, respectively, pursuant to this Agreement, shall remain in full force and effect, regardless of any investigation (or any statement as to the results thereof) made by or on behalf of any Underwriter or any controlling person of any Underwriter, or the Company or any Selling Shareholder, or any officer or director or controlling person of the Company or any Selling Shareholder and shall survive delivery of and payment for the Shares. 13. Expenses of Termination. If this Agreement shall be terminated pursuant to Section 11 hereof, neither the Company nor any Selling Shareholder shall then have any liability to any Underwriter except as provided in Section 8 hereof; but, if for any other reason this Agreement is terminated, the Company will reimburse the Underwriters through you for all out-of-pocket expenses, including fees and disbursements of counsel, reasonably incurred by the Underwriters in making preparations for the purchase, sale and delivery of the Shares not so delivered, but neither the Company nor any Selling Shareholder shall have any further liability to any Underwriter in respect of the Shares not so delivered except as provided in Section 8 hereof. 14. Notice. In all dealings hereunder, you shall act on behalf of each of the Underwriters, and the parties hereto shall be entitled to act and rely upon any statement, request, notice or agreement on behalf of any Underwriter made or given by you jointly or by Adams, Harkness & Hill, Inc. on behalf of you as the Representatives. All statements, requests, notices and agreements hereunder shall be in writing, and if to the Underwriters shall be delivered or sent by mail, telex or facsimile transmission to you as the Representatives in care of Adams, Harkness & Hill, Inc., 60 State Street, Boston, MA 02109, Attention: Russ Landon, with a copy to Roslyn G. Daum, Esq., Choate, Hall & Stewart, 53 State Street, Boston, MA 02109; if to the Company shall be delivered or sent by mail, telex or facsimile transmission to the address of the Company set forth in the Registration Statement, Attention: President, with a copy to Sol Genauer, Esq., Blank Rome Comisky & McCauley LLP, One Logan Square Philadelphia, PA 19103; and if to any Selling Shareholder shall be delivered or sent by mail, telex or facsimile transmission to the address of such Selling Shareholder set forth in Schedule II hereto; provided, however, that any notice to an Underwriter pursuant to Section 10(d) hereof shall be delivered or sent by mail, telex or facsimile transmission to such Underwriter at its address set forth in its Underwriter's Questionnaire or telex constituting such Questionnaire, which address will be supplied to the Company by you on request. Any such statements, requests, notices or agreements shall take effect upon receipt thereof. 21 15. Miscellaneous. (a) This Agreement shall be binding upon, and inure solely to the benefit of, the Underwriters, the Company and the Selling Shareholders and, to the extent provided in Sections 10 and 12 hereof, the officers and directors of the Company and each person who controls the Company, any Selling Shareholder or any Underwriter, and their respective heirs, executors, administrators, successors and assigns, and no other person shall acquire or have any right under or by virtue of this Agreement. No purchaser of any of the Shares from any Underwriter shall be deemed a successor or assign by reason merely of such purchase. (b) Time shall be of the essence of this Agreement. As used herein, the term "business day" shall mean any day when the Commission's office in Washington, D.C. is open for business. (c) This Agreement shall be governed by and construed in accordance with the laws of The Commonwealth of Massachusetts, without regard to the conflicts of laws principles thereof. (d) This Agreement may be executed by any one or more of the parties hereto in any number of counterparts, each of which shall be deemed to be an original, but all such counterparts shall together constitute one and the same instrument. If the foregoing is in accordance with your understanding, please sign and return to us six counterparts hereof, and upon the acceptance hereof by you, on behalf of each of the Underwriters, this letter and such acceptance hereof shall constitute a binding agreement among each of the Underwriters, the Company and the Selling Shareholders. It is understood that your acceptance of this letter on behalf of each of the Underwriters is pursuant to the authority set forth in a form of Agreement among Underwriters, the form of which shall be submitted to the Company for examination, upon request, but without warranty on your part as to the authority of the signors thereof. [SIGNATURES APPEAR ON THE FOLLOWING PAGE] 22 Any person executing and delivering this Agreement as Attorney-in-Fact for the Selling Shareholders represents by so doing that he has been duly appointed as Attorney-in-Fact by each Selling Shareholder pursuant to a validly existing and binding Power-of-Attorney which authorizes such Attorney-in-Fact to take such action. Very truly yours, A.C. MOORE ARTS & CRAFTS, INC. By: ------------------------------------- John E. Parker Chief Executive Officer SELLING SHAREHOLDERS (Named in Schedule II to the Agreement) By: ------------------------------------- Name: Title: Attorney-in-Fact Accepted as of the date hereof at Boston, Massachusetts ADAMS, HARKNESS & HILL, INC. FAHNESTOCK & CO. INC. WEDBUSH MORGAN SECURITIES INC. By: ----------------------------- (Adams, Harkness & Hill, Inc. On behalf of each of the Underwriters) 23 SCHEDULE I
- --------------------------------------------------------------------------------------------------------------------- Number of Optional Shares to Total Number of Firm be Purchased if Maximum Shares to be Purchased Option Exercised - --------------------------------------------------------------------------------------------------------------------- Adams, Harkness & Hill, Inc. - --------------------------------------------------------------------------------------------------------------------- Fahnestock & Co. Inc. - --------------------------------------------------------------------------------------------------------------------- Wedbush Morgan Securities Inc. - --------------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------------- TOTAL 2,550,000 382,500 - ---------------------------------------------------------------------------------------------------------------------
24 SCHEDULE II
- --------------------------------------------------------------------------------------------------------------------- Total Number of Firm Shares Total Number of Optional Shares to be Sold Shares to be Sold - --------------------------------------------------------------------------------------------------------------------- The Company 1,750,000 ________ - --------------------------------------------------------------------------------------------------------------------- John E. Parker 367,750 191,250 c/o A.C. Moore Arts & Crafts, Inc. 500 University Court Blackwood, New Jersey 08012 - --------------------------------------------------------------------------------------------------------------------- Richard Lesser 64,500 ________ c/o A.C. Moore Arts & Crafts, Inc. 500 University Court Blackwood, New Jersey 08012 - --------------------------------------------------------------------------------------------------------------------- Elaine & William Kaplan 70,000 ________ Family Private Foundation c/o Drake, Sommers, Loeb, Tarshis & Catania, PLLC One Corwin Court Newburgh, New York 12550 Attention: Richard J. Drake, Esq. - --------------------------------------------------------------------------------------------------------------------- Kaplan Family Private Foundation 148,875 95,625 c/o Drake, Sommers, Loeb, Tarshis & Catania, PLLC One Corwin Court Newburgh, New York 12550 Attention: Richard J. Drake, Esq. - --------------------------------------------------------------------------------------------------------------------- William & Elaine Kaplan 148,875 95,625 Private Foundation c/o Drake, Sommers, Loeb, Tarshis & Catania, PLLC One Corwin Court Newburgh, New York 12550 Attention: Richard J. Drake, Esq. - --------------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------------- TOTAL 2,550,000 382,500 - ---------------------------------------------------------------------------------------------------------------------
25 EX-5 4 ex5-1.txt EXHIBIT 5.1 February 19, 2002 A.C. Moore Arts & Crafts, Inc. 500 University Court Blackwood, New Jersey 08012 Re: A.C. Moore Arts & Crafts, Inc. Common Stock Registration Statement on Form S-3 -------------------------------------------- Gentlemen: We have acted as counsel to A.C. Moore Arts & Crafts, Inc. (the "Company") in connection with the Registration Statement on Form S-3 (the "Registration Statement") filed by the Company with the Securities and Exchange Commission under the Securities Act of 1933, as amended, relating to (i) the offer and sale by the Company of up to 1,750,000 shares of Common Stock, no par value (the "Common Stock"); (ii) the offer and sale by the Selling Shareholders named in the Registration Statement ("Selling Shareholders") of 800,000 shares of Common Stock, including 64,500 shares being sold by Richard Lesser (the "Lesser Shares"), and (iii) the offer and sale by the Selling Shareholders of up to 382,500 shares of Common stock to be purchased at the option of the Underwriters to cover over-allotments, if any. This opinion is being furnished pursuant to the requirements of Item 601(b)(5) of Regulation S-K. In rendering this opinion, we have examined only the documents listed on Exhibit "A" attached hereto. We have not performed any independent investigation other than the document examination described. Our opinion is therefore qualified in all respects by the scope of that document examination. We have assumed and relied, as to questions of fact and mixed questions of law and fact, on the truth, completeness, authenticity and due authorization of all certificates, documents and records examined, and the genuineness of all signatures. This opinion is limited to the laws of the Commonwealth of Pennsylvania and no opinion is expressed as to the laws of any other jurisdiction. Based upon and subject to the foregoing, we are of the opinion that: (i) the 1,750,000 shares of Common Stock of the Company which are being offered and sold by the Company pursuant to the Registration Statement, when sold in the manner and for the consideration contemplated by the Registration Statement, will be validly issued, fully paid and non-assessable and (ii) the 1,182,500 shares of Common Stock which are being offered by the Selling Shareholders pursuant to the Registration Statement, other than the Lesser Shares, are validly issued, fully paid and non-assessable, and (iii) The Lesser Shares, when issued upon exercise of an outstanding stock option for 64,500 shares of Common Stock held by Richard Lesser and receipt by the Company of the consideration required to be paid upon exercise of the option, will be validly issued, fully paid and non-assessable. A.C. Moore Arts & Crafts, Inc. February 19, 2002 Page 2 This opinion is given as of the date hereof. We assume no obligation to update or supplement this opinion to reflect any facts or circumstances which may hereafter come to our attention or any changes in laws which may hereafter occur. This opinion is strictly limited to the matters stated herein and no other or more extensive opinion is intended, implied or to be inferred beyond the matters expressly stated herein. We hereby consent to the filing of this opinion as an exhibit to the Registration Statement and to the reference to our firm under the caption "Validity of Common Stock" in the Prospectus, which is part of the Registration Statement. Sincerely, /s/ BLANK ROME COMISKY & McCAULEY LLP EXHIBIT "A" ----------- 1. The Company's Articles of Incorporation. 2. The Company's Bylaws. 3. Resolutions of the Board of Directors adopted by unanimous consent of the Directors with respect to the sale by the Company of its Common Stock pursuant to the Registration Statement. 4. The Registration Statement. 5. Stock Option issued to Richard Lesser. 6. The Company's Minute Book since the date of incorporation. EX-23 5 ex23-1.txt EX23-1.TXT Exhibit 23.1 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the use in this Registration Statement on Form S-3 of our report dated February 15, 2002 relating to the financial statements, which appears in such Registration Statement. We also consent to the reference to us under the heading "Experts" in such Registration Statement. /s/ PricewaterhouseCoopers LLP Philadelphia, PA February 19, 2002 -----END PRIVACY-ENHANCED MESSAGE-----