-----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, ByzLUmn8oZ1MW/hFUMKo/YAFbuW0IJHDHgdSW4jQfNjLqM4q3B7GGUAiTTmTPOqj lU97WTJMHoXrg+YJtEtfwA== 0000950116-97-001731.txt : 19970918 0000950116-97-001731.hdr.sgml : 19970918 ACCESSION NUMBER: 0000950116-97-001731 CONFORMED SUBMISSION TYPE: S-1/A PUBLIC DOCUMENT COUNT: 9 FILED AS OF DATE: 19970916 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: A C MOORE ARTS & CRAFTS INC CENTRAL INDEX KEY: 0001042809 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-RETAIL STORES, NEC [5990] STATE OF INCORPORATION: PA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-1/A SEC ACT: SEC FILE NUMBER: 333-32859 FILM NUMBER: 97681083 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-1/A 1 AMENDED S-1 As filed with the Securities and Exchange Commission on September 16, 1997 Registration No. 333 -32859 ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------- AMENDMENT NO. 1 TO FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ------------------- A.C. MOORE ARTS & CRAFTS, INC. (Exact name of registrant as specified in its charter)
Pennsylvania 5999 22-3527763 - ------------------------------------------ ----------------------------------------- --------------------------------------- (State or other jurisdiction of (Primary standard industrial (I.R.S. employer incorporation or organization) classification code number) identification no.)
500 UNIVERSITY COURT Blackwood, NJ 08012 (609) 228-6700 (Address, including zip code, and telephone number, including area code, of registrant's principal executive offices) John E. Parker, President and Chief Executive Officer A.C. Moore Arts & Crafts, Inc. 500 University Court Blackwood, NJ 08012 (609) 228-6700 (Name, address, including zip code, and telephone number, including area code, of agent for service) ---------------------- Copies to: Fred Blume, Esquire Richard C. Tilghman, Jr., Esquire Sol Genauer, Esquire Piper & Marbury L.L.P. Blank Rome Comisky & McCauley Charles Center South One Logan Square 36 South Charles Street Philadelphia, Pennsylvania 19103 Baltimore, MD 21201 (215) 569-5500 (410) 576-1678 -------------------- Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date of this Registration Statement. 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, check the following box. [_] If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [_] If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [_] If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. [_] The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall 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. Information contained herein is subject to completion or amendment. A registration statement relating to these securities has been filed with the Securities and Exchange Commission. These securities may not be sold nor may offers to buy be accepted prior to the time the registration statement becomes effective. This prospectus shall not constitute an offer to sell or the solicitation of an offer to buy nor shall there be any sale of these securities in any State in which such offer, solicitation or sale would be unlawful prior to registration or qualification under the securities laws of any such State. Subject to Completion September 16, 1997 2,700,000 SHARES A.C. Moore Arts & Crafts, Inc. COMMON STOCK ------------ All of the 2,700,000 shares of Common Stock offered hereby are being sold by A.C. Moore Arts & Crafts, Inc. ("A.C. Moore" or the "Company"). Prior to this offering, there has been no public market for the Common Stock of the Company. It is currently estimated that the initial public offering price will be between $12.00 and $14.00 per share. See "Underwriting" for a discussion of the factors to be considered in determining the initial public offering price. Approximately $14.8 million of the net proceeds from this offering will be used to repay subordinated shareholder loans. See "Use of Proceeds." Application has been made to have the Common Stock approved for quotation on the Nasdaq National Market under the symbol "ACMR." ---------- The Common Stock offered hereby involves a high degree of risk. See "Risk Factors" commencing on page 7. ---------- THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
=========================================================================================================== Price Underwriting Proceeds to Discounts and to Public Commissions Company (1) - -------------------------------------------------------------- -------------------------------------------- Per Share .............................. $ $ $ - -------------------------------------------------------------- -------------------------------------------- Total (2)............................... $ $ $ ============================================================== ============================================
(1) Before deducting expenses of this offering payable by the Company, estimated at $550,000. (2) The Company has granted to the Underwriters a 30-day option to purchase up to 405,000 additional shares of Common Stock solely to cover over-allotments, if any. To the extent that the option is exercised, the Underwriters will offer the additional shares at the Price to Public shown above. If the option is exercised in full, the total Price to Public, Underwriting Discounts and Commissions and Proceeds to Company will be $ , $ and $ , respectively. See "Underwriting." ---------- The shares of Common Stock are offered by the several Underwriters, subject to prior sale, when, as and if delivered to and accepted by them, and subject to the right of the Underwriters to reject any order in whole or in part. It is expected that delivery of the shares of Common Stock will be made at the offices of BT Alex. Brown Incorporated, Baltimore, Maryland, on or about , 1997. BT ALEX. BROWN JANNEY MONTGOMERY SCOTT INC. The date of this Prospectus is , 1997. [Photographs depicting the following scenes are included on page 2 and the inside front cover of the Prospectus. Page 2: Exterior of A.C. Moore Store in Moorestown, N.J. Inside Front Page 2 Cover: Interior pictures of the following areas: - Wood products - Dollhouse - Kids - Embossing Stamps - Memory albums and accessories - Seasonal - Floral - Ribbon Center] ---------- The Company intends to furnish its shareholders with annual reports containing audited financial statements certified by an independent public accounting firm and unaudited quarterly reports for the first three quarters of each fiscal year. ---------- CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK. SPECIFICALLY, THE UNDERWRITERS MAY OVER-ALLOT IN CONNECTION WITH THE OFFERING AND MAY BID FOR AND PURCHASE SHARES OF THE COMMON STOCK IN THE OPEN MARKET. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING." -2- PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information and the financial statements, including the notes thereto, appearing elsewhere in this Prospectus. Unless otherwise indicated, the terms "Company" and "A.C. Moore" refer collectively to A.C. Moore Arts & Crafts, Inc. and its subsidiary, and all information in this Prospectus (i) assumes no exercise of the Underwriters' over-allotment option and (ii) reflects the reorganization of the Company's corporate structure effected in July 1997. Upon completion of the offering, the Company will convert from an S Corporation to a C Corporation. THE COMPANY A.C. Moore is a rapidly growing operator of arts and crafts superstores that offer a vast assortment of traditional and contemporary arts and crafts merchandise for a wide range of customers. The Company's business strategy is to provide the broadest and deepest selection of high quality merchandise at the lowest prices in an inviting, attractive superstore environment with superior customer service. The Company's objective is to become the leading arts and crafts retailer in each of its markets. A.C. Moore opened its first store in 1985 and since then has focused on developing and refining its retail concept. As of June 30, 1997, the Company was operating 21 superstores in the mid-Atlantic and Northeast regions. A.C. Moore plans to open at least 30 superstores through the end of 1999, including eight in 1997, four of which were open as of June 30. A.C. Moore has consistently achieved high levels of net sales per total square foot and average net sales per store. From 1992 to 1996, the Company achieved average annual net sales of $315 per square foot and $6.3 million per store. A.C. Moore's prototype superstore ranges in size from 20,000 to 25,000 square feet, with approximately 80% devoted to selling space. A typical store offers approximately 65,000 SKUs (stock keeping units) across 26 merchandise categories during the course of a year, with more than 45,000 SKUs offered at any one time. Merchandise is presented in a distinctive manner designed to maximize shopping convenience and to reinforce themes and colors associated with holidays, seasonal events or specific merchandise categories. Arts and crafts projects are prominently displayed in each department throughout the store to stimulate new project ideas for customers and to enhance the shopping environment. According to the Hobby Industry Association ("HIA"), the retail market for arts and crafts increased at a compound annual growth rate of 11% from approximately $6.6 billion in 1990 to approximately $11.0 billion in 1995. An HIA survey also determined that eight of every ten households surveyed had at least one member who had engaged in a craft activity within the last year. The Company believes demographic changes, particularly an aging baby boom population, an increasing focus on home-based, family activities and the trend toward making (rather than buying) gift items are contributing to the industry's growth. The Company also believes that industry growth is the result of continuing increases in the range and quality of available arts and crafts merchandise. -3- The key elements of A.C. Moore's business strategy are as follows: Vast Merchandise Selection. The Company's merchandising strategy is to offer the broadest and deepest selection of arts and crafts merchandise so that customers can obtain everything necessary to create and finish any arts and crafts project. The Company's key merchandise categories include silk and dried flowers, floral arrangements and accessories, ribbon, wedding crafts, potpourri, stitchery, yarn, jewelry crafts, kids crafts, art supplies, picture frames, stamps, doll-making, seasonal items and a variety of unfinished wood crafts. The Company believes its merchandise appeals to a wide range of recreational and professional crafters of all ages across diverse economic backgrounds. The Company actively seeks new merchandise by monitoring industry trends, working with domestic and international vendors, attending trade shows and craft fairs and regularly interacting with customers. The Company has designed its merchandise distribution systems to ensure rapid replenishment and the highest levels of in-stock positions. Each superstore receives merchandise daily from vendors or the Company's distribution center, which during peak periods will deliver a minimum of three and up to five times per week to the superstores. Customer Friendly Superstores. The Company believes that its high level of customer service and its attractive, easy-to-shop superstores are important competitive advantages. To ensure prompt and personalized service, the Company staffs its stores with a high ratio of store personnel to customers, including a store manager, three associate managers and a staff of up to 60 full-time and part-time sales associates. Store personnel, many of whom are arts and crafts enthusiasts, assist customers with merchandise selection and project ideas. All superstores are furnished with a customer service area, a counter for the free arrangement of floral merchandise, eight to ten registers to ensure quick customer checkout and a room in which classes are held up to seven days a week for adults and children on a variety of craft skills. The Company's superstores are typically located in power strip centers with convenient parking and are easily accessible from main arteries. Price Leadership. The Company seeks to maintain the lowest prices on all merchandise. Buyers and store managers actively monitor competitors' prices to ensure that the Company maintains the lowest prices. The Company's policy to beat any competitor's advertised price by 10% is clearly displayed in all superstores. In addition, on a weekly basis, the Company advertises select items at 20% to 40% off their everyday low prices. The Company believes that its strategy of price leadership enhances customer loyalty and provides superior value. Entrepreneurial Culture. Since inception, the Company has strived to foster an ownership culture and merchandising creativity at all levels of the organization. This culture allows A.C. Moore to have numerous merchandising initiatives, which, if proven successful, can be implemented very quickly throughout the Company. For example, each store manager is empowered to purchase merchandise to meet the unique needs of the local customer base. Store managers and associate managers earn incentive bonuses based upon annual increases in store profitability, and in 1996, average compensation for store managers exceeded $100,000. The Company believes its focus on empowering and rewarding its employees helps in recruiting, hiring and retaining talented personnel. -4- Investment in Management and Infrastructure. To prepare for rapid expansion and to complement the existing management team, over the past 18 months, the Company recruited three senior managers with an average of 30 years retail experience in the areas of operations, merchandising and finance. The Company also made key additions in other areas such as buying, information systems, human resources and real estate. In May 1996, the Company relocated to a 130,000 square foot distribution center and office complex which can be expanded to double its current size. The Company also completed installation of an Electronic Data Interchange ("EDI") system to allow for automated reordering of merchandise from most domestic vendors. The Company has developed a rapid expansion plan to become the leading arts and crafts retailer in each of its markets and plans to open at least 30 superstores through the end of 1999. The Company is targeting its expansion in both existing and new markets within an approximate 400-mile radius of the Company's southern New Jersey distribution center. This area contains more than 25% of the United States' population. The Company became a holding company in July 1997 by incorporating in Pennsylvania and exchanging 4,300,000 shares of Common Stock for all of the capital stock of its operating subsidiary which was organized in Delaware in 1984. The Company's executive offices are located at 500 University Court, Blackwood, New Jersey 08012, and its telephone number is (609) 228-6700.
The Offering Common Stock offered by the Company............................ 2,700,000 shares Common Stock to be outstanding after the offering.............. 7,000,000 shares (1) Use of proceeds................................................ To repay debt, to finance new store openings and for working capital. See "Use of Proceeds." Proposed Nasdaq National Market symbol......................... "ACMR"
- ---------------------------- (1) Excludes (i) 444,500 shares issuable upon exercise of outstanding options under the Company's 1997 Employee, Director and Consultant Stock Option Plan (the "1997 Plan"), with an exercise price of $9.00 per share, (ii) 64,500 shares issuable upon exercise of an option granted in 1995 to an outside director, with an exercise price of $4.66 per share (the "Director's Option") and (iii) 555,500 shares reserved for future option grants under the 1997 Plan. The options granted to date under the 1997 Plan vest one-third in 1998, one-third in 1999 and one-third in 2000. See "Management -- Stock Option Plan" and "-- Director Compensation." -5-
Summary Financial and Operating Data (In thousands, except per share and operating data) Year Ended December 31, Six Months Ended June 30, ----------------------------------------------------------- ---------------------------- 1992 1993 1994 1995 1996 1996 1997 ----------- ---------- ---------- ---------- ------------ -------------- ------------- Statement of Income Data: Net sales............................. $ 41,887 $ 62,503 $ 86,376 $100,106 $109,319 $44,979 $53,657 Gross margin.......................... 15,484 21,929 31,686 36,762 40,124 16,241 19,696 Store contribution (1)................ 6,051 6,659 9,256 11,074 12,648 3,350 4,511 Income (loss) from operations (2)..... (193) 64 5,209 7,248 6,943 468 433 Net income (loss) (2)................. (535) (225) 4,580 6,409 6,306 190 146 Pro Forma and Supplemental Income Data: Pro forma net income (3).............. 1,694 2,228 2,695 3,840 3,817 124 92 Pro forma net income per share (3).... $ 0.84 $ 0.02 Pro forma weighted average shares outstanding (3).............. 4,532 4,532 Supplemental pro forma net income per share (4)....................... $ 0.69 $ 0.04 Supplemental pro forma weighted average shares outstanding (4)...... 6,182 6,479 Operating Data: Net sales per total square foot (5)... $ 316 $ 332 $ 302 $ 303 $ 320 $ 132 $ 139 Average net sales per store (in thousands) (5) ............ $ 5,831 $ 6,641 $ 6,161 $ 6,245 $ 6,586 $ 2,720 $ 2,860 Number of stores, end of period (6) 8 12 16 16 17 17 21 Comparable store sales increase (7)... 14.3% 13.8% 1.8% 8.1% 5.5% 1.3% 7.3%
June 30, 1997 ----------------------------------------- Pro Pro Forma as Actual Forma(8) Adjusted(8) ------------ -------------- ------------- Balance Sheet Data: Working capital...................................................................... $ 15,784 $ 15,734 $ 27,302 Total assets......................................................................... 38,971 38,971 43,757 Long-term debt, excluding current portion............................................ 5,725 5,725 -- Shareholder loans - subordinated (9)................................................. 14,800 14,800 -- Shareholders' equity................................................................. 909 200 32,293
- -------------------------- (1) Represents gross margin, which includes certain distribution and purchasing costs, less store operating expenses, which include labor, advertising, depreciation and other store expenses, but exclude store pre-opening and corporate-level general and administrative expenses. There can be assurance that the Company's 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) For the years ended December 31, 1992 and December 31, 1993 the Company distributed earnings to its shareholders as compensation in the amounts of $3,434,000 and $4,000,000, respectively, which was charged to income. A portion of these distributions, which amounts were in addition to salaries paid to shareholders as officers of the Company, were used to pay taxes on S Corporation earnings and the balance was loaned to the Company for working capital purposes. In subsequent years shareholder distributions were charged directly to retained earnings. See Note 9 below. (3) For each of the periods presented, the Company was an S Corporation and, accordingly, was not subject to federal and certain state corporate income taxes. The Company will terminate its status as an S Corporation upon completion of this offering. The pro forma information has been computed as if the Company was subject to federal and all applicable state corporate income taxes for each of the periods presented, assuming the tax rate that would have applied had the Company been taxed as a C Corporation. Amounts for 1992 and 1993 were adjusted to treat shareholder distributions consistent with the 1994 to 1996 periods. See Note 2 above, "Dividend Policy and Prior S Corporation Status" and Note 3 of Notes to the Financial Statements. (4) The supplemental pro forma net income per share is based on pro forma net income per share, increased to give effect to the reduction in interest costs of $198,000 for the six months ended June 30, 1997 and $420,000 for the year ended December 31, 1996 (net of the applicable income taxes), which would have resulted assuming the application of a portion of the net proceeds from the offering were used to repay certain indebtedness of the Company. (5) Includes only stores open during the entire period, except that the year ended December 31, 1992 includes a store which closed as a result of a mall fire on December 22, 1992 and reopened in a new location in June 1993 (the "Relocated Store"). (6) The number of stores open at December 31, 1992 includes the Relocated Store. (7) Stores are added to the comparable store base at the beginning of their fourteenth full month of operation. (8) Pro forma to give effect to an S Corporation distribution of approximately $25,000 from 1997 earnings to each of Mr. Kaplan, a shareholder and director of the Company, and Mr. Parker, a shareholder, a director, and the President and Chief Executive Officer of the Company, recognition of a $659,000 deferred tax liability associated with the Company's conversion from an S Corporation to a C Corporation; and as adjusted to reflect the sale by the Company of the shares of Common Stock offered hereby at an assumed initial offering price of $13.00 per share and application of the estimated net proceeds therefrom. See "Use of Proceeds" and "Dividend Policy and Prior S Corporation Status." (9) The shareholder loans are non-interest bearing and subordinated to the Company's bank debt. The loans were made periodically by the shareholders contemporaneously with distributions of certain earnings and were used to provide working capital to the Company. The shareholder loans will be repaid in full with a portion of the net proceeds of this offering. See "Use of Proceeds." -6- RISK FACTORS In addition to the other information contained in this Prospectus, the following factors should be considered carefully in evaluating an investment in shares of the Common Stock offered by this Prospectus. Risks Associated With Rapid Expansion. The Company's strategy to increase its net sales and earnings will depend in large part on its ability to open new superstores and to operate them on a profitable basis. The Company opened four superstores in the first six months of 1997 and currently anticipates opening four additional superstores in 1997, ten superstores in 1998 and 12 superstores in 1999, in both existing and new geographic markets. The opening of additional superstores in an existing market could result in lower net sales from the Company's existing superstores in that market. Opening superstores in new geographic markets may present competitive and merchandising challenges that are different from those currently faced by the Company in its existing geographic markets. The Company may incur higher costs related to advertising and distribution in connection with entering new markets. If the Company opens superstores that do not perform to the Company's expectations or if superstore openings are delayed, the Company's results of operations and financial condition could be materially adversely affected. The success of the Company's planned expansion will be dependent upon many factors, including the identification of suitable markets, the availability and leasing of suitable sites on acceptable terms, the availability of acceptable financing, the ability to expand the Company's distribution facility in a timely manner, the hiring, training and retention of qualified management and other store personnel and general economic conditions. The Company's rapid expansion will place significant demands on the Company's management, resources, operations and existing information systems, and the Company must ensure the continuing adequacy of its financial controls, operating procedures and information systems. Also, the Company's continued growth will depend on its ability to increase sales in its existing superstores. There can be no assurance that the Company will be successful in any of these areas, and, as a result, there can be no assurance that the Company will achieve its planned expansion or that new superstores will be effectively integrated into the Company's existing operations or will be profitable. See "Business -- Growth Strategy." Dependence on Key Personnel; New Management Team. The success of the Company and its growth strategy is dependent upon the active involvement of senior management personnel, particularly John E. ("Jack") Parker, its President and Chief Executive Officer. The loss of the services of Mr. Parker or other members of senior management could have a materially adverse effect on the Company. The Company has not entered into employment agreements with any members of its senior management team nor does it maintain any key man life insurance on them. Three of the members of senior management have joined the Company during the past 18 months. Accordingly, there can be no assurance that senior management will function together effectively as a management team. The failure to function effectively as a team could have a materially adverse effect on the ability of the Company to implement its growth strategy as well as on its results of operations and financial condition. The Company's success in the future will also be dependent upon its ability to attract and retain other qualified personnel, including store managers. See "Management." -7- Small Store Base. As of June 30, 1997 the Company operated a chain of only 21 superstores, four of which were opened in the first half of 1997. The Company has historically had strong comparable store sales; however, there can be no assurance that the level of comparable store sales can be maintained as the superstores mature and the number of comparable stores increase. The results achieved to date by the Company's relatively small store base may not be indicative of the results of the larger number of superstores which the Company intends to operate in existing or new markets. Because the Company's current and planned superstores are located in the mid-Atlantic and Northeast regions, the effect on the Company of adverse events in these regions (such as weather or unfavorable regional economic conditions) may be greater than if the Company's superstores were more geographically dispersed. Furthermore, due to the Company's relatively small store base, one or more unsuccessful new superstores, or a decline in sales at an existing superstore, will have a more significant effect on the Company's results of operations than would be the case if the Company had a larger store base. Quarterly Fluctuations. The Company's business is affected by the seasonality pattern common to most retailers. Due to the importance of the fall selling season, which includes Halloween, Thanksgiving and Christmas, the fourth calendar quarter has historically contributed, and is expected to continue to contribute, a substantial majority of the Company's operating income for the entire year. As a result, any factors negatively affecting the Company during the fourth quarter of any year, including adverse weather and unfavorable economic conditions, would have a materially adverse effect on the Company's results of operations for the entire year. The Company's quarterly results of operations also may fluctuate based upon such factors as the timing of certain holiday seasons, the number and timing of new superstore openings, the amount of superstore pre-opening expenses, the amount of net sales contributed by new and existing superstores, the mix of products sold, the timing and level of markdowns, competitive factors, weather and general economic conditions. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Quarterly Results and Seasonality." Competition. The arts and crafts retailing business is highly competitive. The Company currently competes against a diverse group of retailers, including several national and regional chains of arts and crafts retailers, a substantial number of local merchants that specialize in one or more aspects of arts and crafts and various mass merchandisers that typically dedicate a portion of their selling space to a limited selection of arts and crafts items. These mass merchandisers and some of the national chains have substantially greater financial resources and operate more stores than the Company. See "Business -- Competition." Risks Associated With Merchandising. The Company's success depends, in large part, on its ability to anticipate and respond, in a timely manner, to changing merchandise trends and consumer demands. Accordingly, any delay or failure by the Company in identifying and responding to changing merchandise trends could adversely affect consumer acceptance of the merchandise in the Company's superstores. In addition, the Company makes decisions regarding merchandise well in advance of each of the seasons in which such merchandise will be sold. Significant deviations from projected demand for products would have a materially adverse effect on the Company's results of -8- operations and financial condition, either from lost sales due to insufficient inventory or lower margins due to the need to mark down excess inventory. See "Business -- Merchandising." Risks Associated with Product Sourcing. Although the Company purchases its merchandise from more than 500 vendors world-wide, the largest 16 suppliers accounted for approximately 44% of the dollar volume of the Company's purchases in 1996 and the largest supplier, SBAR'S Inc. ("SBAR'S"), accounted for approximately 20% of the dollar volume of the Company's purchases in 1996. The Company's future success is dependent upon its ability to maintain good relationships with SBAR'S and its other principal suppliers. The Company does not have any purchase agreements or exclusive arrangements with any vendors, and ordering of merchandise typically occurs through the issuance of individual purchase orders. The failure to maintain such relationships could have a materially adverse effect on the Company's results of operations, financial condition and planned store expansion. In addition, the Company in recent years has placed increased emphasis on obtaining floral and seasonal items from overseas vendors, with approximately 8% of all merchandise being purchased from overseas vendors in 1996. A change in the competitiveness of a particular country's exports, whether due to a change in trade regulations, currency fluctuations or other reasons is likely to increase the cost of items purchased by the Company overseas or make such items unavailable with a possible resulting materially adverse effect on the Company's results of operations and financial condition. In addition, since many arts and crafts customers will forgo any purchase unless they can obtain all the items necessary to complete a project, it is important that the Company maintain a high in-stock position of merchandise. As a result, any interruption in the supply of merchandise may preclude the Company from maintaining a sufficient in-stock position in all superstores, with a resulting decline in sales. See "Business -- Purchasing." Inventory Risk. The Company depends upon in-store department managers to reorder merchandise. The failure of the Company's staff to accurately respond to inventory requirements could adversely affect consumer acceptance of the merchandise in the Company's stores and thereby negatively impact sales which could have a materially adverse effect on the Company's results of operations and financial condition. In addition, as do most other retailers, the Company conducts a physical inventory once a year, and quarterly results are based on an estimated gross margin and accrual for estimated inventory shrinkage. Therefore, fourth quarter and full year results may be subject to adjustment based on actual gross margin and inventory quantities. Future Capital Needs. The Company currently intends to finance the opening of new superstores with a portion of the proceeds from this offering, cash flow from operations and borrowings. The Company plans to open eight superstores in 1997, including the four opened through June 30, ten superstores in 1998 and 12 superstores in 1999. The Company expects that the average cash investment, including pre-opening expenses, required to open a superstore will be approximately $1,230,000. There can be no assurance that the actual cost of opening a superstore will not be significantly greater than that expected by the Company. The Company may be required to seek additional debt and/or equity financing in order to fund its continued expansion. There can be no assurance that such additional financing will be available on terms acceptable to the Company, if at all. In addition, the Company's ability to incur additional indebtedness or issue equity or debt securities could be limited by covenants in present and future loan agreements and debt instruments. -9- See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources." Control by Existing Shareholders. Upon completion of the offering, the Company's current shareholders will own 61.4% of the Company's outstanding Common Stock. As a result, those shareholders, if acting together, will have the ability to elect all of the Company's directors and determine the outcome of all corporate actions requiring shareholder approval, irrespective of the vote of other shareholders of the Company. See "Principal Shareholders." Dividend Policy; Prior S Corporation Status. Until immediately prior to the completion of this offering, the Company will be treated as an S Corporation under the Internal Revenue Code of 1986, as amended (the "Code"). Accordingly, the Company has made and, prior to completion of this offering will continue to make, periodic distributions to its shareholders from the Company's earnings. Following consummation of this offering, the Company does not anticipate paying any cash dividends for the foreseeable future. The Company's loan agreement with KeyBank National Association ("KeyBank") prohibits the payment of cash dividends by the Company without KeyBank's consent. Immediately prior to the completion of this offering, the Company will convert from S Corporation to C Corporation status. In connection with this conversion, the Company will effect a distribution of approximately $50,000 to the Company's shareholders (the "S Corporation Distribution"). In addition, the Company will record a one-time, non-cash charge against earnings in the third quarter of 1997, resulting from a deferred tax liability in connection with the Company's conversion from S Corporation to C Corporation status, which would have been approximately $659,000 had the Company recorded this liability on June 30, 1997 (the "Deferred Tax Liability"). See "Dividend Policy and Prior S Corporation Status." Benefits of Offering to Existing Shareholders. William Kaplan, a shareholder and director of the Company, and Jack Parker, a shareholder, director and President and Chief Executive Officer of the Company, will each receive approximately $7.4 million of the net proceeds of this offering as repayment of loans advanced to the Company. See "Use of Proceeds" and "Certain Transactions." Effect of Certain Charter And Bylaw Provisions; Anti-takeover Matters. The Company's Articles of Incorporation (the "Articles") and Bylaws (the "Bylaws") contain provisions which may be deemed to be "anti-takeover" in nature in that such provisions may deter, discourage or make more difficult the assumption of control of the Company by another corporation or person through a tender offer, merger, proxy contest or similar transaction. The Articles permit the Board of Directors to establish the rights, preferences, privileges and restrictions of, and to issue, up to 5,000,000 shares of Preferred Stock without shareholder approval. The Articles also provide for the staggered election of directors to serve for one-, two- and three-year terms, and for successive three-year terms thereafter, subject to removal only for cause upon the vote of not less than 80% of the shares of Common Stock represented at a shareholders' meeting. The Bylaws may not be amended by shareholders except by a similar 80% vote. In addition, the Company is subject to certain anti-takeover provisions of the Pennsylvania Business Corporation law. See "Description of Capital Stock." -10- Shares Eligible For Future Sale. The Company and all of its existing shareholders have agreed with the Underwriters not to offer, sell, contract to sell or otherwise dispose of any shares of Common Stock for a period of 180 days after the date of this Prospectus (the "Lock-Up Period"), without the prior written consent of BT Alex. Brown Incorporated. Following this offering, the Company will have outstanding 7,000,000 shares of Common Stock. Of such shares, the 2,700,000 shares offered hereby will be freely tradable by persons who are not affiliates of the Company and all of the remaining shares will be subject to the 180-day lock-up agreements with the Underwriters. These remaining shares will have been outstanding for more than one year following the expiration of the Lock-Up Period and, therefore, will be saleable in the public market pursuant to the volume and other limitations of Rule 144 under the Securities Act of 1933, as amended. Sales of substantial amounts of Common Stock in the public market following the offering, or the perception that such sales could occur, could have a materially adverse effect on the market price of the Common Stock. See "Description of Capital Stock" and "Shares Eligible for Future Sale." No Prior Public Trading Market; Volatility. Prior to this offering, there has been no public market for the Common Stock, and there can be no assurance that an active public market for the Common Stock will develop or be sustained after the offering. The initial public offering price of the Common Stock will be determined by negotiations between the Company and the Representatives of the Underwriters. See "Underwriting." The initial public offering price may not necessarily be indicative of the market price of the Common Stock after the offering, which may be highly volatile. Factors such as announcements of fluctuations in the Company's or its competitors' operating results and market conditions for retail industry stocks in general could have a significantly negative effect on the future market price of the Common Stock. Dilution. Investors participating in this offering will incur immediate and substantial dilution in the amount of $8.39 per share. To the extent that currently outstanding options to purchase Common Stock are exercised, there will be further dilution. See "Dilution." -11- USE OF PROCEEDS The net proceeds to the Company from the sale of the 2,700,000 shares of Common Stock offered hereby are estimated to be $32.1 million ($37.0 million if the Underwriters' over-allotment option is exercised in full), assuming an initial public offering price of $13.00 per share, after deduction of underwriting discounts and commissions and estimated expenses payable by the Company. The Company will use (i) approximately $12.5 million to repay outstanding indebtedness under the Loan Agreement, dated January 23, 1997, between the Company and KeyBank (the "Loan Agreement"), (ii) approximately $14.8 million to repay the outstanding balance of subordinated shareholder loans (approximately $7.4 million to each of Messrs. Kaplan and Parker) and (iii) approximately $50,000 to pay the S Corporation Distribution. The $4.8 million of remaining net proceeds will be used to finance new superstore openings and for working capital. Pending such use by the Company, the net proceeds of this offering will be invested in short-term investment-grade, interest-bearing instruments. The funds advanced to the Company under the Loan Agreement were advanced under two facilities, a term loan facility and a line of credit facility. At June 30, 1997, the Company's outstanding indebtedness under the term loan facility, which matures on July 1, 2001, and the line of credit facility, which matures on December 31, 1998, was $7,582,000 and $4,875,000, respectively. Each facility permits the Company to select an interest rate based on either the bank's base or LIBOR rate of interest (as such terms are defined in the Loan Agreement). The interest rate on the indebtedness outstanding under the term loan facility and line of credit facility was 7.3% per annum as of June 30, 1997. The Company used the funds advanced to it under the Loan Agreement for superstore expansion and working capital. Historically, the Company borrowed funds from its shareholders periodically for working capital purposes, subject to the terms of a subordination agreement among the shareholders and KeyBank. The loans from the Company's shareholders are payable on demand and are non-interest bearing. The shareholders have agreed not to demand payment of the loans on or before June 30, 1998, except upon the date of the Company's completion of an initial public offering or consummation of a refinancing on a long-term basis. -12- DIVIDEND POLICY AND PRIOR S CORPORATION STATUS From its inception in 1985 until immediately prior to completion of this offering, the Company was subject to taxation under Subchapter S of the Code. As a result, the net income of the Company, for federal and certain state income tax purposes, was taxable directly to the Company's shareholders during that time rather than to the Company. To provide funds for tax obligations payable by its shareholders on account of the Company's taxable income in 1995 and 1996 and as distributions of earnings, the Company made aggregate distributions to its shareholders of $6.6 million and $6.7 million during 1996 and the first half of 1997, respectively. The funds distributed to shareholders, reduced by the amounts used to pay tax obligations on account of the Company's taxable income, were loaned to the Company contemporaneously with their distribution to provide working capital to the Company. In connection with its conversion from S Corporation to C Corporation status, the Company will effect the S Corporation Distribution of approximately $50,000 to the Company's shareholders. The S Corporation Distribution represents the shareholders' proportionate interest in the Company's earnings which have not been distributed to the shareholders prior to the conversion date. Following this offering, the Company does not anticipate paying any cash dividends as it intends to retain its earnings to finance the expansion of its business. Future dividends, if any, will depend upon the Company's results of operations, financial condition, cash requirements and other factors deemed relevant by the Board of Directors. Furthermore, the Loan Agreement prohibits the payment of cash dividends by the Company without the bank's consent. -13- CAPITALIZATION The following table sets forth the short-term debt and capitalization of the Company at June 30, 1997 (i) on an actual basis, (ii) pro forma to give effect to the S Corporation Distribution and Deferred Tax Liability and (iii) pro forma as adjusted to further give effect to the sale of 2,700,000 shares of Common Stock offered by the Company hereby at an assumed initial offering price of $13.00 per share, after deduction of underwriting discounts and commissions and estimated offering expenses, and application of the net proceeds therefrom. This table should be read in conjunction with the Company's Financial Statements and Notes thereto included elsewhere in this Prospectus. See "Use of Proceeds," "Dividend Policy and Prior S Corporation Status" and "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources."
June 30, 1997 ----------------------------------------------- Pro Pro Forma Actual Forma as Adjusted ------------ ------------- -------------- (In thousands) Borrowings under line of credit..................................... $ 4,875 $ 4,875 $ -- Current portion of long-term debt................................... 1,857 1,857 -- ------------ ------------- -------------- Total short-term debt.......................................... $ 6,732 $ 6,732 $ -- ============ ============= ============== Long-term debt, less current portion................................ $ 5,725 $ 5,725 $ -- Loans from shareholders-subordinated................................ 14,800 14,800 -- Other long-term liabilities......................................... 1,064 1,723 1,723 ------------ ------------- -------------- Total long-term liabilities.................................... 21,589 22,248 1,723 Shareholders' Equity: Preferred Stock, no par value, 5,000,000 shares authorized; no shares issued and outstanding actual, pro forma and pro forma as adjusted........................... -- -- -- Common Stock, no par value, 20,000,000 shares authorized; 4,300,000 shares issued and outstanding, actual and pro forma; 7,000,000 shares issued and outstanding, pro forma as adjusted(1).......................................... 200 200 32,293 Retained earnings................................................ 709 -- -- ------------ ------------- -------------- Total shareholders' equity.................................... 909 200 32,293 ------------ ------------- -------------- Total capitalization.............................. $ 22,498 $ 22,448 $ 34,016 ============ ============= ==============
- --------------------------- (1) Excludes (i) 444,500 shares issuable upon exercise of outstanding options under the 1997 Plan, with an exercise price of $9.00 per share, (ii) 64,500 shares issuable upon exercise of the Director's Option, and (iii) 555,550 shares reserved for future option grants under the 1997 Plan. The options granted to date under the 1997 Plan vest one-third in 1998, one-third in 1999 and one-third in 2000. See "Management - Stock Option Plan" and " -- Director Compensation." -14- DILUTION The pro forma net tangible book value of the Company's Common Stock at June 30, 1997 was $200,000, or approximately $0.05 per share, after giving effect to the S Corporation Distribution and the Deferred Tax Liability. Pro forma net tangible book value per share is determined by dividing the pro forma tangible book value of the Common Stock (total tangible assets less total liabilities) by the number of outstanding shares of Common Stock immediately prior to this offering. After giving effect to the sale of the shares of Common Stock in this offering, at an assumed offering price of $13.00 per share, and deduction of underwriting discounts and commissions and estimated offering expenses, the pro forma net tangible book value of the Company as of June 30, 1997 would have been $32,293,000 or $4.61 per share. This represents an immediate increase in pro forma net tangible book value of $4.56 per share to existing shareholders and an immediate dilution to new investors of $8.39 per share. The following table illustrates the per share dilution:
Assumed initial public offering price............................................. $ 13.00 Pro forma net tangible book value per share before offering ................. $ 0.05 Increase per share attributable to new investors ............................ 4.56 ------------ Pro forma net tangible book value per share after the offering ................... 4.61 ------------ Dilution per share to new investors .............................................. $ 8.39 ===========
On a pro forma basis, the following table summarizes as of June 30, 1997, differences between existing shareholders and new investors with respect to the number of shares of Common Stock purchased from the Company, the total consideration paid and the average price paid per share before deducting underwriting discounts and commissions and estimated offering expenses:
Shares Owned Total Consideration -------------------------- ------------------------------ Average Price Number Percent Amount Percent Per Share ------------ ----------- --------------- ------------ ------------------ Existing shareholders ............. 4,300,000 61.4% $200,000 0.6% $ 0.05 New investors ..................... 2,700,000 38.6 35,100,000 99.4 $ 13.00 ------------ ---------- -------------- -------- Total ........................ 7,000,000 100.0% $35,300,000 100.0% ============ ========== ============== ========
The computations in the tables set forth above exclude shares issuable upon exercise of options granted pursuant to the 1997 Plan and the Director's Option. See "Management - Stock Option Plan" and "-- Director Compensation." -15- SELECTED FINANCIAL AND OPERATING DATA (In thousands, except per share and operating data) Set forth below is selected financial and operating data for, and as of the end of, each of the five years ended December 31, 1996, and for the six month periods ended June 30, 1996 and 1997. The selected statement of income and balance sheet data for each of the four years ended December 31, 1996 have been derived from financial statements of the Company, which have been audited by Price Waterhouse LLP. The financial statements as of December 31, 1995 and December 31, 1996, and for each of the years in the three-year period ended December 31, 1996, and the report thereon, are included elsewhere in this Prospectus. The financial data for the year ended December 31, 1992, and for the six months ended June 30, 1996 and June 30, 1997, are derived from unaudited financial statements of the Company and reflect all adjustments, consisting only of normal recurring accruals, that the Company considers necessary for a fair presentation of the financial position and results of operations for these periods. The information set forth below should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Company's Financial Statements and the Notes thereto included elsewhere in this Prospectus.
Six Months Ended Year Ended December 31, June 30, ---------------------------------------------------- --------------------- 1992 1993 1994 1995 1996 1996 1997 --------- -------- -------- --------- --------- -------- -------- Statement of Income Data: Net sales..................................... $ 41,887 $ 62,503 $ 86,376 $ 100,106 $109,319 $ 44,979 $ 53,657 Cost of sales................................. 26,403 40,574 54,690 63,344 69,195 28,738 33,961 -------- -------- -------- --------- -------- -------- -------- Gross margin................................ 15,484 21,929 31,686 36,762 40,124 16,241 19,696 Operating expenses: Store operating............................. 9,433 15,270 22,430 25,688 27,476 12,891 15,185 General and administrative.................. 2,196 2,338 3,472 3,826 5,565 2,742 3,369 Pre-opening expense......................... 525 664 575 -- 140 140 709 Shareholder distribution (1)................ 3,434 4,000 -- -- -- -- -- Casualty (gain) loss........................ 89 (407) -- -- -- -- -- -------- -------- -------- --------- -------- -------- -------- Income (loss) from operations............... .. (193) 64 5,209 7,248 6,943 468 433 Interest expense, net....................... 342 289 592 760 557 261 280 -------- -------- -------- --------- -------- -------- -------- Income (loss) before income taxes............. (535) (225) 4,617 6,488 6,386 207 153 State income tax expense ................... -- -- 37 79 80 17 7 -------- -------- -------- --------- -------- -------- -------- Net income (loss) ............................ $ (535) $ (225) $ 4,58 $ 6,409 $ 6,306 $ 190 146 ======== ======== ======== ========= ======== ======== ======== Pro Forma and Supplemental Income Data: Income before income taxes (2)................ $ 2,901 $ 3,775 $ 4,61 $ 6,488 $ 6,386 $ 207 $ 153 Pro forma income tax provision (2).......... 1,207 1,547 1,922 2,648 2,569 83 61 -------- -------- -------- --------- -------- -------- -------- Pro forma net income (2)...................... $ 1,694 $ 2,228 $ 2,69 $ 3,840 $ 3,817 $ 124 $ 92 ======== ======== ======== ========= ======== ========= ======== Pro forma net income per share (2)............ $ 0.84 $ 0.02 ======== ======== Pro forma weighted average shares outstanding (2) 4,532 4,532 Supplemental pro forma net income per share(3) $ 0.69 $ 0.04 ======== ======== Supplemental pro forma weighted average shares outstanding(3).......................... 6,182 6,479 Operating Data: Net sales per square foot (4)................. $ 316 $ 332 $ 302 $ 303 $ 320 $ 132 $ 139 Average net sales per store (in thousands) (4) $ 5,831 $ 6,641 $ 6,161 $ 6,245 $ 6,586 $ 2,720 2,860 Number of stores, end of period (5)........... 8 12 16 16 17 17 21 Total square feet, end of period.............. 160,202 244,820 329,740 329,740 350,884 350,884 434,666 Comparable store sales increase(6) ........... 14.3% 13.8% 1.8% 8.1% 5.5% 1.3% 7.3% Store contribution (in thousands) (7)......... $ 6,051 $ 6,659 $ 9,256 $ 11,074 $ 12,648 $ 3,350 $ 4,511 Balance Sheet Data (at period end): Working capital............................... $ 6,575 $ 9,521 $ 16,937$ $ 20,224 $ 20,597 $ 16,250 $ 15,784 Total assets.................................. 13,295 22,680 30,720 34,571 37,799 29,850 38,971 Long-term debt, excluding current portion..... 3,655 5,663 9,286 8,510 6,653 7,581 5,725 Shareholder loans - subordinated (8).......... 5,132 7,595 7,595 7,595 11,095 11,095 14,800 Shareholders' equity (deficit)................ (415) (641) 3,915 7,756 7,492 1,505 909
(footnotes on next page) -16- - ---------------------------------------- (1) For the years ended December 31, 1992 and December 31, 1993 the Company distributed earnings to its shareholders as compensation in the amounts of $3,434,000 and $4,000,000, respectively, which was charged to income. A portion of these distributions, which amounts were in addition to salaries paid to shareholders as officers of the Company, were used to pay taxes on S Corporation earnings and the balance was loaned to the Company for working capital purposes. In subsequent years shareholder distributions were charged directly to retained earnings. (2) For each of the periods presented, the Company was an S Corporation and, accordingly, was not subject to federal and certain state corporate income taxes. The Company will terminate its status as an S Corporation upon completion of this offering. The pro forma information has been computed as if the Company was subject to federal and all applicable state corporate income taxes for each of the periods presented, assuming the tax rate that would have applied had the Company been taxed as a C Corporation. Amounts for 1992 and 1993 were adjusted to treat shareholder distributions consistent with the 1994 to 1996 periods. See Note 1 above, "Dividend Policy and Prior S Corporation Status" and Note 3 of Notes to the Financial Statements. (3) The supplemental pro forma net income per share is based on pro forma net income per share, increased to give effect to the reduction in interest costs of $198,000 for the six months ended June 30, 1997 and $420,000 for the year ended December 31, 1996 (net of the applicable income taxes), which would have resulted assuming the application of a portion of the net proceeds from the offering were used to repay certain indebtedness of the Company. (4) Includes only stores open during the entire period, except that the year ended December 31, 1992 includes the Relocated Store. (5) The number of stores open at December 31, 1992 includes the Relocated Store. (6) Stores are added to the comparable store base at the beginning of their fourteenth full month of operation. (7) Represents gross margin, which includes certain distribution and purchasing costs, less store operating expenses, which include labor, advertising, depreciation and other store expenses, but exclude store pre-opening and corporate-level general and administrative expenses. There can be no assurance that the Company's calculation of store contribution is comparable to similarly titled items reported by other companies. See "Management's Discussion and Analysis of Financial Conditions and Results of Operations." (8) The shareholder loans are non-interest bearing and subordinated to the Company's bank debt. The loans were made periodically by the shareholders contemporaneously with certain distributions of earnings and were used to provide working capital to the Company. The shareholder loans will be repaid in full with a portion of the net proceeds of this offering. See "Use of Proceeds." -17- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis contains certain forward-looking statements. Actual results could differ materially from those referred to in the forward-looking statements due to a number of factors, including those set forth below and elsewhere in this Prospectus. Overview A.C. Moore is a rapidly growing operator of arts and crafts superstores that offer a vast assortment of traditional and contemporary arts and crafts merchandise for a wide range of customers. The Company was founded in 1984 by William Kaplan, its Chairman, and Jack Parker, its President and Chief Executive Officer. Mr. Parker had been the President and Chief Executive Officer of the U.S. General Merchandise Group of F.W. Woolworth Company where he was responsible for more than 1,000 store locations. The Company was founded by Messrs. Kaplan and Parker primarily because of the broad customer base to which arts and crafts activities are appealing and the fragmented nature of the category. By December 31, 1992, the Company had developed and refined its superstore concept and was operating eight superstores with aggregate 1992 net sales of $41.9 million. Beginning in 1993, the Company implemented a two-year plan to rapidly expand its superstore base. The Company doubled its store base to 16 as of December 31, 1994, opening eight superstores in the 16-month period ended October 1994. The Company maintained its high level of sales productivity in 1994, averaging net sales per total square foot and annual net sales per store in excess of $300 and $6 million, respectively. The eight new superstores which were opened in 1993 and 1994 averaged 21,200 total square feet, with an average initial store investment of $1,153,000, comprised of pre-opening expenses, leasehold improvements, fixtures and inventory, net of accounts payable. In their second full year of operation, these superstores achieved an average store-level EBITDA (store contribution plus depreciation and amoritization) of $546,000, representing an average return on invested capital of approximately 47%. The Company measures each store's performance using store contribution, defined as gross margin, which includes certain distribution and buying costs, less store operating expenses, which include labor, advertising, depreciation and other expenses, but exclude store pre-opening costs and corporate-level general and administrative expenses. Management believes that this measurement allows the Company to evaluate the profitability of each superstore location. Pre-opening costs are excluded since they are considered to be part of the investment in a new superstore and do not have a bearing on future store contribution. The Company allocates a portion of general and administrative costs to store contribution by including certain distribution and buying costs in gross margin. There can be no assurance that the Company's calculation of store contribution is comparable to similiarly-titled items reported by other companies. In 1995, the Company implemented a plan to build its infrastructure to position the Company for rapid future growth. By the end of 1996, the Company had recruited three experienced senior retail executives in the areas of operations, merchandising and finance, made key additions in other -18- areas such as buying, information systems, human resources and real estate, leased a new 130,000 square foot distribution center and office complex, developed its EDI system to electronically link the Company with most vendors and developed a real estate program to accommodate the Company's expansion plan. In 1996, the Company opened one new superstore, had a 5.5% increase in comparable store sales compared to 1995 and an increase of $1.6 million in store contribution, but as a result of $1.2 million in expenses incurred to implement its infrastructure plan, experienced a decrease in income from operations of $305,000. Stores are added to the comparable store base at the beginning of their fourteenth full month of operation. The Company plans to open at least 30 new superstores by the end of 1999, including eight in 1997, ten in 1998 and 12 in 1999. Through June 30, 1997, the Company had opened four of these superstores and had signed leases for four superstores expected to open in 1997. The four new superstores opened through June 30, 1997 averaged 20,900 total square feet, with an average store investment of $1,185,000, comprised of approximately $177,000 in pre-opening expenses, approximately $303,000 in leasehold improvements and fixtures and approximately $705,000 in inventory, net of accounts payable. The Company expects that its existing distribution center will support its expansion through the end of 1998. The distribution center and office complex can be expanded by 120,000 square feet for both warehouse and office needs. Since its founding, the Company has been financed primarily through bank financing and the reinvestment, as subordinated loans, of earnings distributed by the Company to its shareholders. The Company has been subject to taxation as an S Corporation. As a result, the net income of the Company, for federal and certain state income tax purposes, was taxed directly to the Company's shareholders rather than to the Company. Accordingly, the Company has calculated the pro forma income tax provision, pro forma net income and pro forma net income per share for each period presented herein as if the Company were a C Corporation subject to federal and all applicable state income taxes, assuming the tax rates that would have applied had the Company been taxed as a C Corporation. The Company will record a one time, non-cash charge against earnings in the fourth quarter of 1997, resulting from a deferred tax liability in connection with the Company's conversion from S Corporation to C Corporation status, which would have been approximately $659,000 had the Company recorded this liability on June 30, 1997. -19- Results of Operations The following table sets forth, for the periods indicated, selected statement of operations data expressed as a percentage of net sales:
Six Months Year Ended December 31, Ended June 30, ---------------------------------------- ------------------------- 1994 1995 1996 1996 1997 -------- ----------- ---------- ---------- ----------- Net sales............................................... 100.0% 100.0% 100.0% 100.0% 100.0% Cost of sales........................................... 63.3 63.3 63.3 63.9 63.3 ------- --------- -------- -------- -------- Gross margin......................................... 36.7 36.7 36.7 36.1 36.7 Operating expenses: Store operating...................................... 26.0 25.7 25.1 28.7 28.3 General and administrative........................... 4.0 3.8 5.1 6.1 6.3 Pre-opening expense.................................. 0.7 0.0 0.1 0.3 1.3 -------- --------- -------- -------- -------- Income from operations.................................. 6.0 7.2 6.4 1.0 0.8 Interest expense, net................................ 0.7 0.7 0.5 0.6 0.5 -------- --------- -------- -------- -------- Income before income taxes.............................. 5.3 6.5 5.9 0.4 0.3 State income tax expense............................. -- 0.1 0.1 -- -- --------- --------- -------- -------- -------- Net income.............................................. 5.3% 6.4% 5.8% 0.4% 0.3% ==== ==== ===== ===== ===== Pro forma income tax provision ...................... 2.1 2.6 2.3 0.1 0.1 ---- ----- ----- ----- ----- Pro forma net income ................................... 3.2% 3.8% 3.5% 0.3% 0.2% ==== ===== ===== ===== =====
-20- Six Months Ended June 30, 1997 Compared to Six Months Ended June 30, 1996 Net Sales. Net sales increased $8.7 million, or 19.3%, to $53.7 million in the six months ended June 30, 1997 from $45.0 million in the comparable 1996 period. This increase resulted from (i) net sales of $5.0 million from four new superstores opened during the period, (ii) $400,000 from the superstore opened in 1996 not included in the comparable store base, and (iii) a comparable store sales increase of $3.3 million, or 7.3%. Net Sales were adversely affected by unusually heavy snowfall in the first quarter of 1996. Gross Margin. Cost of sales includes the cost of merchandise, plus certain distribution and purchasing costs. Cost of sales increased $5.3 million, or 18.5%, to $34.0 million in the six months ended June 30, 1997 from $28.7 million in the six months ended June 30, 1996. The gross margin increased $3.5 million, or 21.3%, to $19.7 million in the six months ended June 30, 1997 from $16.2 million in the six months ended June 30, 1996. The gross margin increased slightly to 36.7% of net sales in the first half of 1997 from 36.1% in the first half of 1996. Store Operating Expenses. Store operating expenses increased $2.3 million, or 17.8%, to $15.2 million in the six months ended June 30, 1997 from $12.9 million in the six months ended June 30, 1996. Of the increase, $2.0 million was attributable to the four superstores opened during the first half of 1997 and the one superstore opened in the first half of 1996 not included in the comparable store base and $300,000 from increases in operating expenses at the comparable superstores. Store operating expenses as a percent of net sales decreased to 28.3% in the first half of 1997 from 28.7% in the first half of 1996. General and Administrative Expenses. General and administrative expenses increased $627,000, or 22.9%, in the six months ended June 30, 1997 to $3.4 million from $2.7 million in the prior comparable period and increased to 6.3% of net sales from 6.1% of net sales. The dollar increase resulted from the addition of corporate staff and infrastructure to support the expected growth of the Company, including the members of senior management that joined the Company in 1996. Pre-Opening Expense. The Company expenses store pre-opening expense in the quarter that a superstore is opened. Pre-opening expense for the four new superstores opened in the first half of 1997 amounted to $709,000. In the six months ended June 30, 1996, the Company opened one superstore which had pre-opening expense of $140,000. Interest Expense, Net. Interest expense, net was approximately $280,000 for the six months ended June 30, 1997, an increase of $19,000 from the comparable period in 1996. This increase was due to greater borrowings in the first half of 1997 to fund operations and the addition of the four superstores. -21- 1996 Compared to 1995 Net Sales. Net sales increased $9.2 million, or 9.2%, to $109.3 million in 1996 from $100.1 million in 1995. This increase resulted from (i) net sales of $3.9 million from the one new superstore opened during 1996 and (ii) a comparable superstore sales increase of $5.3 million, or 5.5%. Gross Margin. Cost of sales increased $5.9 million, or 9.3%, to $69.2 million in 1996 from $63.3 million in 1995. The gross margin increased $3.3 million, or 9.1%, to $40.1 million in 1996 from $36.8 million in 1995. The gross margin was 36.7% in both years. Store Operating Expenses. Store operating expenses increased $1.8 million, or 7.0%, to $27.5 million in 1996 from $25.7 million in 1995. Of the increase, $1.1 million resulted from the one superstore opened in 1996 and $700,000 from superstores opened before December 31, 1995. Store operating expenses declined to 25.1% of net sales in 1996 from 25.7% of net sales in 1995. General and Administrative Expenses. General and administrative expenses increased $1.8 million, or 45.5%, to $5.6 million in 1996 from $3.8 million in 1995. This increase resulted from the addition of senior management and other corporate staff during 1996, the cost of moving the Company's distribution and office facilities in May 1996 and the increased rent and maintenance of these new facilities. All of these added expenditures were designed to support the planned growth of the Company. As a result, general and administrative expenses increased to 5.1% of net sales in 1996 from 3.8% of net sales in 1995. Pre-Opening Expense. Pre-opening expense was $140,000 in 1996 for the one superstore opened in that year. No stores were opened in 1995. Interest Expense, Net. Interest expense, net decreased by $203,000 to $557,000 in 1996 from $760,000 in 1995. This decrease was due to lower bank borrowings in 1996 as the Company was able to use the proceeds of shareholder loans and internally generated cash to fund operations and the addition of one superstore. 1995 Compared to 1994 Net Sales. Net sales increased $13.7 million, or 15.9%, to $100.1 million in 1995 from $86.4 million in 1994. This increase resulted from (i) net sales of $6.9 million from the four superstores opened prior to 1995 not included in the comparable superstore base and (ii) a comparable superstore sales increase of $6.8 million, or 8.1%. Gross Margin. Cost of sales increased $8.6 million, or 15.7%, to $63.3 million in 1995 from $54.7 million in 1994. The gross margin increased by $5.1 million, or 16.0%, to $36.8 million in 1995 from $31.7 million in 1994. The gross margin was 36.7% in both years. Store Operating Expenses. Store operating expenses increased $3.3 million, or 14.5%, to $25.7 million in 1995 from $22.4 million in 1994. Of the increase, $2.5 million resulted from the -22- four superstores opened in 1994 not included in the comparable superstore base and $800,000 from higher comparable superstore expenses. Store operating expenses as a percent of net sales decreased to 25.7% in 1995 from 26.0% in 1994. General and Administrative Expenses. General and administrative expenses increased $354,000, or 10.2%, to $3.8 million in 1995 from $3.5 million in 1994. The increase consisted of $500,000 of additional buying and distribution costs and $200,000 of costs to establish children's promotional programs, offset by a $400,000 reduction in professional fees as the Company engaged a consultant for a distribution center feasibility study in 1994. As a percentage of net sales, general and administration expenses declined to 3.8% in 1995 from 4.0% in 1994. Pre-Opening Expense. There were no superstores opened in 1995. In 1994, the Company opened four superstores and incurred pre-opening costs of $575,000. Interest Expense, Net. Interest expense, net increased $168,000 to $760,000 in 1995 from $592,000 in 1994. This increase resulted from higher bank borrowings in 1995 to support the full year effect of the four superstores opened in 1994. -23- Quarterly Results and Seasonality The following tables set forth the Company's unaudited quarterly operating results for its ten most recent quarterly periods and the number of stores open at the end of each period (dollars in thousands).
Three Months Ended ------------------------------ March 31, June 30, 1997 1997 ------------- ------------- Net sales....................................... $ 27,252 $ 26,405 Cost of sales................................... 17,408 16,553 ---------- --------- Gross margin.............................. 9,844 9,852 Operating expenses: Store operating.............................. 7,176 8,009 General and administrative................ 1,708 1,661 Pre-opening expense....................... 449 260 ---------- --------- Income (loss) from operations................... 511 (78) Interest expense, net..................... 111 169 ---------- --------- Income (loss) before income taxes............... 400 (247) State income tax expense.................. 7 -- ---------- --------- Net income (loss)............................... $ 393 $ (247) ========== ========= Income (loss) before income taxes, as reported.. $ 400 $ (247) Pro forma income tax provision ........... 160 (99) ----------- --------- Pro forma net income (loss)..................... $ 240 $ (148) ========== ========= Stores open at end of period.................... 20 21 ========== =========
Three Months Ended ------------------------------------------------------------------ March 31, June 30, September 30, December 31, 1996 1996 1996 1996 ------------- ------------- ------------- ------------- Net sales....................................... $ 23,176 $ 21,803 $ 25,687 $ 38,653 Cost of sales................................... 14,808 13,930 16,416 24,041 ---------- --------- --------- --------- Gross margin.............................. 8,368 7,873 9,271 14,612 Operating expenses: Store operating........................... 6,423 6,468 6,818 7,767 General and administrative................ 1,311 1,431 1,358 1,465 Pre-opening expense....................... 140 -- -- -- ---------- --------- --------- --------- Income (loss) from operations................... 494 (26) 1,095 5,380 Interest expense, net..................... 118 143 170 126 ---------- --------- --------- --------- Income (loss) before income taxes............... 376 (169) 925 5,254 State income tax expense.................. 22 (5) 14 49 ---------- --------- --------- --------- Net income (loss)............................... $ 354 $ (164) $ 911 $ 5,205 ========== ========= ========= ========= Income (loss) before income taxes, as reported.. $ 376 $ (169) $ 925 $ 5,254 Pro forma income tax provision............ 144 (61) 364 2,122 ---------- --------- --------- --------- Pro forma net income (loss)..................... $ 232 $ (108) $ 561 $ 3,132 ========== ========= ========= ========= Stores open at end of period.................... 17 17 17 17 ========== ========= ========= =========
-24-
Three Months Ended ------------------------------------------------------------------------------ March 31, June 30, September 30, December 31, 1995 1995 1995 1995 -------------- ---------------- ---------------- --------------- Net sales.................................. $ 22,407 $ 20,588 $ 22,234 $ 34,877 Cost of sales.............................. 14,173 13,043 14,146 21,982 ---------- --------- ---------- --------- Gross margin......................... 8,234 7,545 8,088 12,895 Operating expenses: Store operating...................... 6,158 6,071 6,297 7,162 General and administrative .......... 1,110 1,048 1,085 583 Pre-opening expense.................. -- -- -- -- ---------- ----------- ---------- --------- Income from operations..................... 966 426 706 5,150 Interest expense, net................ 159 208 246 147 ---------- ----------- ---------- --------- Income before income taxes................. 807 218 460 5,003 State income tax expense............. 1 22 16 40 ---------- ------------ ---------- --------- Net income................................. $ 806 $ 196 $ 444 $ 4,963 ========== ========== ========== ========= Income before income taxes, as reported.... $ 807 $ 218 $ 460 $ 5,003 Pro forma income tax provision ...... 323 87 184 2,054 ---------- ------------ ---------- --------- Pro forma net income ...................... $ 484 $ 131 $ 276 $ 2,949 ========== ========== ========== ========= Stores open at end of period............... 16 16 16 16 ========== ============ ========== =========
Due to the importance of the fall selling season, which includes Halloween, Thanksgiving and Christmas, the fourth calendar quarter has historically contributed, and is expected to continue to contribute, a substantial majority of the Company's profitability for the entire year. As a result, any factors negatively affecting the Company during the fourth quarter of any year, including adverse weather and unfavorable economic conditions, would have a materially adverse effect on the Company's results of operations for the entire year. The Company's quarterly results of operations also may fluctuate based upon such factors as the timing of certain holiday seasons, the number and timing of new superstore openings, the amount of superstore pre-opening expenses, the amount of net sales contributed by new and existing superstores, the mix of products sold, the timing and level of markdowns, competitive factors, weather and general economic conditions. Liquidity and Capital Resources The Company's cash needs are primarily for working capital to support its inventory requirements and capital expenditures, pre-opening expenses and beginning inventory for new superstores. In recent years, the Company has financed its operations and new store openings primarily with cash from operations, borrowing under bank financing agreements and subordinated loans from its shareholders. At June 30, 1996 and June 30, 1997, the Company's working capital was $16.3 million and $15.8 million, respectively. Cash used in operations was $1.1 million for the six months ended June 30, 1996, primarily as a result of a reduction of $691,000 in trade accounts payable and a $1.3 -25- million reduction in accrued liabilities, principally for the payment of employee compensation and accrued bonuses. For the six months ended June 30, 1997, approximately $4.6 million of cash was used in operations. This was the result of a $5.3 million increase in inventory to support the four new superstores and $1.0 million to reduce accrued liabilities as a result of payment of employee compensation and accrued bonuses, partially offset by a $1.0 million increase in trade accounts payables. At December 31, 1995 and 1996, the Company's working capital was $20.2 million and $20.6 million, respectively. During 1994, 1995 and 1996, cash generated by operations was $0.5 million, $4.2 million and $6.7 million, respectively. In these three periods, $4.8 million, $3.0 million and $1.6 million of cash, respectively, was used to increase inventory levels to support both new and existing stores. Net cash used in investing activities during the first six months of 1996 and 1997 was approximately $900,000 and $1.8 million, respectively. Net cash used in investing activities during 1994, 1995 and 1996 was $1.7 million, $900,000 and $2.3 million, respectively. This use of cash was primarily the result of new store openings and, in 1996, relocating the distribution center to a new, larger facility. In 1997, the Company expects to spend approximately $3.2 million on capital expenditures, which includes approximately $2.0 million for new store openings, approximately $700,000 for the new warehouse management system and management information systems upgrades and $500,000 for fixtures and equipment in existing stores and the Company's warehouse complex. There are no other material commitments for capital expenditures other than new store openings in the next 12 months. Net cash of $2.9 million was used in financing activities during the first half of 1996. In the first half of 1997, cash of $900,000 was generated by financing activities. Net cash was provided by financing activities in 1994 in the amount of $3.6 million and used in financing activities in 1995 and 1996 in the amounts of $2.6 million and $3.8 million, respectively. The Company distributed $6.4 million and $6.7 million to shareholders in the first half of 1996 and 1997, respectively. The shareholders loaned $3.5 million and $3.7 million to the Company for working capital in the first half of 1996 and 1997 respectively. In 1995 and 1996, the Company distributed $2.6 million and $6.6 million, respectively, to shareholders. In 1996, the shareholders loaned $3.5 million to the Company for working capital. The outstanding balances under the Loan Agreement were $9.3 million, $8.5 million and $12.5 million at December 31, 1995, December 31, 1996 and June 30, 1997, respectively. See "Certain Transactions" for further information with respect to the shareholder loans. On January 23, 1997, the Company entered into the Loan Agreement with KeyBank to refinance a term loan and to provide two revolving lines of credit and an operating line of credit. The Loan Agreement is collateralized by all of the Company's assets and contains various financial covenants, including limitations on other debt and cash dividends and distributions to shareholders. The two revolving lines of credit, in the amounts of $3.2 million and $5.0 million, are available solely for costs associated with opening new stores and related inventory purchases. The $3.2 million revolving line of credit is available to the Company until December 31, 1998, at which time -26- the Company may elect to convert the line to a 60-month term loan maturing on December 31, 2003. The $5.0 million revolving line of credit is available to the Company, provided the Company meets various performance measurements, including no event of default and covenant compliance, and will remain available until December 31, 1998, at which time the Company may elect to convert the line to a 60-month term loan maturing December 31, 2003. The $16.0 million operating line of credit is available to the Company solely for working capital purposes, $9.0 million of which is currently available and $7.0 million will be available to the Company on March 31, 1998, subject to achievement of certain performance measurements. All borrowings under the Loan Agreement bear interest based upon either the bank's base or LIBOR rate of interest, at the Company's option. Currently, the Company has elected 1.5% over LIBOR, which resulted in an interest rate of 7.3% as of June 30, 1997. The Company is required to pay an annual commitment fee of 0.125% on the unused portion of the lines of credit. The Company believes that the net proceeds from this offering, together with cash generated from operations and available borrowings under the Loan Agreement will be sufficient to finance its working capital and capital expenditure requirements for at least the next 12 months. Recent Accounting Pronouncements The Financial Accounting Standards Board ("FASB") has issued Statement of Financial Accounting Standards No. 128, "Earnings per Share" which is effective for financial statements issued after December 15, 1997. The new standard eliminates primary and fully diluted earnings per share and requires presentation of basic and diluted earnings per share together with disclosure of how the per share amounts were computed. The adoption of this new standard is not expected to have a material impact on the disclosure of earnings per share in the Company's financial statements. The FASB also issued Statement of Financial Accounting Standards No. 131, "Disclosure about Segments of an Enterprise and Related Information" which establishes reporting requirements for operating segments in annual and interim financial reports. It established standards for related disclosures about products and services, geographic locations and major customers. The statement is effective for financial statements for periods beginning after December 15, 1997. The adoption of this standard will not have a significant impact on the disclosures in the Company's financial statements. Inflation Management does not believe that inflation has had a material effect on its financial condition or results of operations during the past three years. However, there can be no assurance that inflation will not have a materially adverse effect on the Company's future financial condition or results of operations. -27- BUSINESS Introduction A.C. Moore is a rapidly growing operator of arts and crafts superstores that offer a vast assortment of traditional and contemporary arts and crafts merchandise for a wide range of customers. The Company's business strategy is to provide the broadest and deepest selection of high quality merchandise at the lowest prices in an inviting, attractive superstore environment with superior customer service. The Company's objective is to become the leading arts and crafts retailer in each of its markets. A.C. Moore opened its first store in 1985 and since then has focused on developing and refining its retail concept. As of June 30, 1997, the Company was operating 21 superstores in the mid-Atlantic and Northeast regions. A.C. Moore plans to open at least 30 superstores through the end of 1999, including eight in 1997, four of which were open as of June 30. A. C. Moore has consistently achieved high levels of net sales per total square foot and average net sales per store. From 1992 to 1996, the Company achieved average annual net sales of $315 per total square foot and $6.3 million per store. A. C. Moore's prototype superstore ranges in size from 20,000 to 25,000 square feet, with approximately 80% devoted to selling space. A typical store offers approximately 65,000 SKUs across 26 merchandise categories during the course of a year, with more than 45,000 SKUs offered at any one time. Merchandise is presented in a distinctive manner designed to maximize shopping convenience and to reinforce themes and colors often associated with holidays, seasonal events or specific merchandise categories. Completed arts and crafts projects are prominently displayed in each department throughout the store to stimulate new project ideas for customers and to enhance the shopping environment. Market Overview According to the Hobby Industry Association ("HIA"), the retail market for arts and crafts increased at a compound annual growth rate of 11% from approximately $6.6 billion in 1990 to approximately $11.0 billion in 1995. An HIA survey also determined that eight of every ten households surveyed had at least one member who had engaged in a craft activity within the last year. The Company believes demographic changes, particularly an aging baby boom population, an increasing focus on home-based, family activities and the trend toward making (rather than buying) gift items are contributing to the industry's growth. The Company also believes that industry growth is the result of continuing increases in the range and quality of available arts and crafts merchandise. Business Strategy The key elements of the Company's business strategy are as follows: Vast Merchandise Selection. The Company's merchandising strategy is to offer the broadest and deepest selection of arts and crafts merchandise so that customers can obtain everything necessary to create and finish any arts and crafts project. The Company's key merchandise -28- categories include silk and dried flowers, floral arrangements and accessories, ribbon, wedding crafts, potpourri, stitchery, yarn, jewelry crafts, kids crafts, art supplies, picture frames, stamps, doll-making, seasonal items and a variety of unfinished wood crafts. The Company believes its merchandise appeals to a wide range of recreational and professional crafters of all ages across diverse economic backgrounds. The Company actively seeks new merchandise by monitoring industry trends, working with domestic and international vendors, attending trade shows and craft fairs and regularly interacting with customers. The Company has designed its merchandise distribution systems to ensure rapid replenishment and the highest levels of in-stock positions. Each superstore receives merchandise daily from vendors or the Company's distribution center, which during peak periods will deliver a minimum of three and up to five times per week to the superstores. Customer Friendly Superstores. The Company believes that its high level of customer service and its attractive, easy-to-shop superstores are important competitive advantages. To ensure prompt and personalized service, the Company staffs its stores with a high ratio of store personnel to customers, including a store manager, three associate managers and a staff of up to 60 full-time and part-time sales associates. Store personnel, many of whom are arts and crafts enthusiasts, assist customers with merchandise selection and project ideas. All superstores are furnished with a customer service area, a counter for the free arrangement of floral merchandise, eight to ten registers to ensure quick customer checkout and a room in which classes are held up to seven days a week for adults and children on a wide variety of craft skills. The Company's superstores are typically located in power strip centers with convenient parking and are easily accessible from main arteries. Price Leadership. The Company seeks to maintain the lowest prices on all merchandise. Buyers and store managers actively monitor competitors' prices to ensure that the Company maintains the lowest prices. The Company's policy to beat any competitor's advertised price by 10% is clearly displayed in all superstores. In addition, on a weekly basis, the Company advertises select items at 20% to 40% off their everyday low prices. The Company believes that its strategy of price leadership enhances customer loyalty and provides superior value. Entrepreneurial Culture. Since inception, the Company has strived to foster an ownership culture and merchandising creativity at all levels of the organization. This culture allows A.C. Moore to have numerous merchandising initiatives, which, if proven successful, can be implemented very quickly throughout the Company. For example, each store manager is empowered to purchase merchandise to meet the unique needs of the local customer base. Store managers and associate managers earn incentive bonuses based upon annual increases in store profitability, and in 1996, average compensation for store managers exceeded $100,000. The Company believes its focus on empowering and rewarding its employees helps in recruiting, hiring and retaining talented personnel. Investment in Management and Infrastructure. To prepare for rapid expansion and to complement the existing management team, over the past 18 months, the Company recruited three senior managers with an average of 30 years retail experience in the areas of operations, merchandising and finance. The Company also made key additions in other areas such as buying, information systems, human resources and real estate. In May 1996, the Company relocated to a -29- 130,000 square foot distribution center and office complex which can be expanded to double its current size. The Company also completed installation of an Electronic Data Interchange ("EDI") system to allow for the automated reordering of merchandise from most domestic vendors. Growth Strategy The Company has developed a rapid expansion plan to become the leading arts and crafts retailer in each of its markets and plans to open at least 30 superstores through the end of 1999. The Company has no current plans to expand through acquisitions, but may consider possible acquisitions in the future. The Company is targeting its expansion in both existing and new markets within an approximate 400-mile radius of the Company's Southern New Jersey distribution center. This area contains more than 25% of the United States' population. Merchandising The Company's typical superstore offers approximately 65,000 SKUs across 26 merchandise categories during the course of a year, with more than 45,000 SKUs offered at any one time. The merchandise offered by the Company, by major product category, is as follows: Floral and Accessories Silk Flowers - includes a wide, seasonally changing assortment of high quality silk flowers, hand wrapped flowers, polystems, potted plants and green and flowering bushes. Dried Flowers - includes baby's breath, eucalyptus and many styles and colors of a seasonally changing assortment of bouquets of dried flowers. Floral Accessories - includes clay, brass, glass and ceramic containers, assorted mosses, styrofoam shapes, wreaths and other components to create floral displays. Floral Arrangements - the Company's floral designers work with customers to make any arrangement, free of charge, from silk or dried flowers purchased from the Company. The superstores also carry a large assortment of pre-made arrangements. Ribbon - includes ribbon by the spool, lace, a large selection of specialty ribbon sold by the yard and pre-made bows. Wedding - includes wedding supplies, bridal headpieces, bridal flowers, bouquet holders, ribbon roses and items used for christenings and baby showers. Potpourri - includes dried potpourri, potpourri oils, packaged scents and a wide assortment of candles, ranging from tealights to five pound three wick candles. -30- Candle Making - includes blocks of paraffin wax, wicks and other materials necessary to make candles, as well as candle kits and brass and glass candle holders. Wicker - includes a wide assortment of wicker baskets in various shapes and sizes. In 1996, floral and accessories accounted for approximately 27% of sales. Traditional Crafts Stitchery - includes a broad range of stitchery kits which appeal to beginner and experienced stitchers, cross stitch supplies, stitchery accessories, floss and sewing notions. Yarn - includes acrylic, crochet cotton, cotton blends, rayon and other blends, as well as a full assortment of hooks, needles and other accessories. Wood - includes a variety of unfinished wood products, such as shelves, bird houses, clocks and other decorative pieces which can be finished in various ways such as painting, staining or stenciling. Cake and Candy Making - includes cake boards, bakeware, candy molds, chocolate melts, cookie cutters, icing coloring and flavors and spices. Miniatures - includes dollhouses and dollhouse furnishings, such as room settings, wallpaper, flooring and lighting, as well as miniature porcelains and ceramics. Doll Making - includes bodies, heads and hair used to make dolls and clothing for dolls, as well as teddy bears and other stuffed animals. Kids Crafts - includes sand art, sidewalk chalk, bead art supplies, children's stitchery kits, coloring and other books and children's crafts similar to crafts done by adults. Felt, Glitter - includes felt, glitter, pom-poms, chenille stems and loupy, all of which are used in the creation of craft projects. Books - includes a wide range of books to assist crafters in all categories, such as how-to books for the beginner and books for the experienced crafter. In 1996, traditional crafts accounted for approximately 28% of sales. Art Supplies and Frames Art Supplies - includes bottled and tube paints (oil, acrylic and water based), pastels, brushes, tablets, canvas pieces, drawing pencils, markers and art palettes. -31- Stamps and Stationery - includes decorative stamps, stamp pads, fashion stickers, embossing tools, photo and memory albums, memory album accessories, scissors, hole punchers and note and fashion papers. Stencils - includes decorative stencils, crayons and paints for use on walls, wood, metal, clothing and other products. Frames - includes frames of all types and sizes, including empty frames and frames with glass, matting, posters and framing hardware. In 1996, art supplies and frames accounted for approximately 26% of sales. Fashion Crafts Clothing - includes adult's and children's T-shirts and sweatshirts to be decorated with fabric art, as well as related accessories. Transfers - includes pictures which are ironed or sewn onto clothing, most of which can be further embellished with glitter and fabric paints. Jewelry Making - includes jewelry making components such as beads, sequins, rhinestones and findings, as well as the tools required to complete the project. In 1996, fashion crafts accounted for approximately 10% of sales. Seasonal Items Seasonal items include a wide range of merchandise used as decorations for all major holidays and seasons, including the two most popular holiday seasons, Christmas and Easter. Other holidays, such as Valentine's Day, St. Patrick's Day and Halloween also result in significant sales of seasonal merchandise. In 1996, seasonal items accounted for approximately 9% of sales. Purchasing The Company's purchasing programs are designed to support its business strategy of providing customers with the broadest and deepest selection of high quality arts and crafts merchandise at the lowest prices and maintaining high in-stock positions. In order to manage its inventory of approximately 65,000 SKUs, the Company has organized its product offerings into 26 merchandise categories. The Company's 14 person corporate buying staff develops corporate buying programs to establish the merchandise direction for the Company and creates "planograms" to provide store managers with detailed descriptions and illustrations of store layout and merchandise presentation. The Company's product offering at a superstore is often enhanced by -32- merchandise purchased by that store's manager to meet the unique needs of the superstore's customer base. The Company monitors these purchases through vendor master file controls. In-store department managers are responsible for daily reordering of merchandise and are monitored by store managers. Ordering occurs frequently, and the Company seeks vendors who can deliver on a timely basis. More than 94% of merchandise orders are placed through the Company's EDI system. Approximately one-half of orders are shipped directly from the vendor to the Company's superstores. The remaining one-half, over 40% of which are floral and seasonal items, are shipped from the Company's distribution center. An early morning stocking crew unpacks deliveries and stocks merchandise before the superstore opens. The Company purchases its inventory from more than 500 vendors world-wide. The largest 16 suppliers accounted for approximately 44% of the dollar volume of the Company's purchases in 1996, and the largest supplier, SBAR'S, accounted for approximately 20% of the dollar volume of the Company's purchases in 1996. Approximately 8% of the Company's merchandise, primarily floral and seasonal items, is imported directly from foreign manufacturers or their agents, principally in the Far East. All of the Company's overseas purchases are denominated in dollars. SBAR'S is a large distributor of arts and crafts merchandise, primarily to independent arts and crafts retailers. SBAR'S maintains an inventory of many of the items the Company purchases directly from other vendors, thereby allowing the Company to obtain merchandise from SBAR'S which cannot be delivered by vendors on a timely basis. SBAR'S maintains a product development and design department which assists the Company in identifying craft trends, and the Company often obtains from SBAR's product samples and displays which are utilized in the Company's superstores to generate customer interest. The Company has developed a disciplined purchasing and ordering relationship with SBAR'S, which includes daily reordering and two to five deliveries by SBAR'S per store each week, depending on the size of the store and time of the year. SBAR'S has equipped the Company's superstores with handheld scanners to aid in product re-ordering. Merchandise purchased from SBAR'S typically has a high SKU count but small dollar volume, requires greater volume purchases from a manufacturer to obtain competitive pricing or involves a small number of SKUs from individual vendors with whom it would be impractical for the Company to establish a direct buying relationship. The Company does not have a purchase agreement or an exclusive arrangement with SBAR's, and ordering of merchandise typically occurs through the issuance of individual purchase orders. The Company's buying operation, led by an Executive Vice President, is divided into two divisions. One division, headed by an Executive Vice President assisted by five buyers, handles merchandising for all floral and seasonal items. The other division, headed by a Senior Vice President assisted by a Vice President, Merchandise Planning/Advertising and five buyers, is responsible for merchandising all other items, which comprised approximately 64% of net sales in 1996. Buyers and store management regularly attend trade shows and craft fairs to monitor industry trends and to obtain new craft ideas. -33- Superstore Format and Operations A.C. Moore's superstores are typically located in power strip centers with convenient parking and are easily accessible from main traffic arteries. The Company's prototype superstore ranges in size from 20,000 to 25,000 square feet, with approximately 80% devoted to selling space and the remainder consisting of delivery, storage, classroom and office areas. Superstores are typically open from 9:30 am to 9:00 pm, Monday through Saturday and from 10:00 am to 6:00 pm on Sunday. Superstores are designed with a layout intended to lead customers through the entire store in order to expose them to all 26 merchandise categories. Merchandise is grouped to aid the customer in finding project related items. Extensive use is made of the display shelving at both ends of each aisle to present the best selling items. Generally, the center of the superstore contains the floral area, which includes a counter for floral arrangement and a ribbon center. Superstores also contain a customer service area, eight to ten registers for quick customer checkout and a room for classes. Classes are regularly held on a wide variety of craft skills. Classes are taught by sales associates as well as outside professionals. Typical classes provide instruction on oil painting, cake decorating, advanced stamping, and on making bows, children's beaded necklaces and memory albums. Classes are free of charge unless there is an extensive use of materials. A major component of the Company's promotional strategy is its use of in-store displays and samples. Because many customers browse for new craft ideas, eye-catching displays of completed craft projects are effective at motivating impulse purchases. These displays enhance the image of store departments. Knowledgeable store personnel are available to describe displays in detail to customers and to offer assistance on related arts and crafts projects. The Company has three field design coordinators who are responsible for ensuring high quality floral displays in all superstores. The Company's Chief Operating Officer is responsible for store operations and is assisted by three Vice Presidents, each of whom is responsible for six to eight superstores. Each superstore employs approximately 60 full and part-time sales associates and is managed by a store manager, assisted by three associate store managers, each of whom is responsible for approximately one-third of a superstore's selling space. New superstores are opened by the Company's new store development team which consists of the Vice President, New Store Development, a set-up-crew, and staff from the human resources and planogram departments. The Company seeks to develop the management capabilities of its managers through both Company training programs and on-the-job training. In addition, store managers and associate store managers attend several Company-sponsored conferences each year to refine and develop their skills in merchandising, merchandise trends, store operations, finance, interviewing, performance appraisals and general management. Training sessions are also held for floral designers and classroom coordinators at various times during the year. -34- Superstore Locations As of June 30, 1997, the Company operated eight superstores in Pennsylvania, six superstores in New Jersey, five superstores in New York and two superstores in Delaware, all of which are leased. In addition, the Company has six superstores (one each in Pennsylvania, Connecticut, Massachusetts and New York and two in New Jersey) under lease, two of which the Company plans to open in the third quarter of 1997, two of which the Company plans to open in the fourth quarter of 1997 and two of which the Company plans to open in 1998. Most superstore leases have an average initial term of ten years, with three five year renewal options, and provide for predetermined escalations in future minimum annual rent or additional rent contingent upon store sales levels. The pro rata portion of scheduled rent escalations has been included in other long-term liabilities in the Company's balance sheet. The following provides information about each of the Company's superstores and new locations planned for 1997: Superstore Location Month/Year Opened ------------------- ----------------- Moorestown, NJ January 1985 (relocated in 1993) English Creek, NJ September 1988 Reading, PA January 1990 Allentown, PA January 1991 Bensalem, PA July 1991 Wilmington, DE February 1992 Broomall, PA July 1992 Edison, NJ August 1992 Binghampton, NY February 1993 Harrisburg, PA August 1993 Brick Town, NJ September 1993 Hamilton, NJ November 1993 Montgomeryville, PA January 1994 Latham, NY April 1994 Lancaster, PA June 1994 Middletown, NY October 1994 Dover, DE March 1996 Exton, PA January 1997 Poughkeepsie, NY February 1997 Deptford, NJ March 1997 -35- Nanuet, NY April 1997 Orange, CT August 1997 Parsipanny, NJ September 1997 Framingham, MA Scheduled to open in fourth quarter 1997 Scranton, PA Scheduled to open in fourth quarter 1997 The Company selects superstore sites on the basis of various factors, including physical location, demographics, anchor and other tenants, location within the center, parking and available lease terms. The Company looks for co-tenants that generate a high rate of shopping traffic, such as specialty value-oriented women's retailers, leading chain supermarkets, discount chains, home improvement centers, book superstores and domestics superstores. The Company believes its superstores are attractive to developers because they attract high rates of customer traffic and generate above average net sales per square foot. The Company's superstore site selection process is headed by a Senior Vice President. Distribution The Company's objective of maintaining high in-stock positions in all merchandise categories in all superstore locations is supported by its distribution system. Approximately 50% of the selling value of all merchandise is delivered to stores from the Company's distribution center, 20% is delivered by SBAR'S and the balance is drop-shipped by other vendors. Deliveries are made from the Company's distribution center two or three times per week, depending on superstore size, during eight months of the year and three to five times during the peak selling season of September through December. The Company maintains its own leased fleet of tractors and trailers. The Company has contracted with an outside carrier to deliver to superstores for which deliveries will require an overnight stay. The distribution center's mission is to support the Company's superstores. The distribution center is used strategically to distribute merchandise which is imported, cannot be delivered by a vendor on a timely basis or in the small quantities demanded by the store ordering process or is bulky and, therefore, difficult to store in the superstores. Also, the Company will order merchandise in large quantities for delivery to the distribution center when the vendor offers substantial volume discounts or other economic incentives. The Company's 120,000 square foot distribution center and adjoining 10,000 square foot office complex in Blackwood, New Jersey is leased for a term which expires in May, 2002 with an option to renew for six years. Approximately one-third of the distribution center is used for order picking, with the balance used for bulk stock storage. The Company believes that the distribution center will support the Company's planned superstore expansion through the end of 1998. The distribution center and office complex can be expanded by 120,000 square feet for both warehouse and office needs. -36- Currently, the Company is in the process of implementing a distribution center management system. The Company anticipates completing the installation of this system in 1997. The system includes the use of handheld computers to record all merchandise movement throughout the distribution center and to instantly update inventory records through the use of radio frequency communication. The Company believes that this new system, which operates in a paperless environment, will enable the Company to enhance the tracking of inventory in the distribution center, increase the efficiency of distribution center personnel and help ensure the distribution center's ability to maintain high in-stock positions in each of the Company's superstores as the Company expands its superstore base. Advertising and Promotion The Company creates its own advertising using photo art scanned into a Macintosh system supported by Pagemaker(R) software. The Company advertises 52 weeks per year, typically in midweek editions of local and/or regional newspapers. Approximately three times per year the Company runs multi-page newspaper inserts in local and regional newspapers. In addition, prior to store openings, the Company uses radio advertisements to develop customer awareness and runs special pre-opening ads, normal advertising copy and/or grand opening inserts in newspapers. In 1996, the Company's net advertising expenditures were approximately 3% of net sales. The Company uses in-store displays and samples of completed arts and crafts projects as a major component of its promotional strategy. Because many customers browse for new craft ideas, eye-catching displays of completed craft projects are effective at motivating impulse purchases. The Company also promotes customer interest in crafting by offering classes on a wide variety of craft skills. The Company believes that teachers, who often purchase arts and crafts merchandise for in-school projects, are an important customer segment. To generate goodwill, the Company offers teachers who join its Teachers Program a 10% discount on all regularly and sale priced merchandise. Over 250,000 discount cards have been issued to teachers. The Company's "Crafty Kids Birthday Club" and "Teen Club" are intended to develop future crafters as customers. Members of these clubs receive a birthday card containing a $5.00 gift certificate each year through their fifteenth birthday. These clubs have over 165,000 members. The Company also sponsors a "Kids Week" annually in July, during which each store is transformed into a mini carnival featuring events such as Make It & Take It Home Projects and Face Painting. This week-long event is free of charge. Management Information Systems A.C. Moore operates its accounting, merchandising and distribution center systems and all computer support functions on a PC-based local area network ("LAN"), currently with 84 local workstations and 42 remote workstations. Each superstore has two personal computers linked to the main office LAN by modem. Connection is made whenever information is sent from the superstore, -37- such as an order transmission, or for the download of updated merchandise information. Various other critical functions, such as the annual distribution center physical inventory and bar-coded tracking of distribution center stock locations are supported by the LAN. The Company's management information and control system has been designed to support the Company's key business objective of maintaining high in-stock merchandise positions in all of the Company's superstores. The internally developed system is based upon EDI with most of the Company's vendors as well as with the Company's distribution center. Stores electronically transmit their orders via modem to the corporate office where data is electronically sorted, processed and transmitted to the appropriate vendor. Orders are also fed automatically into the accounts payable system. This system captures daily purchases by SKU. The information is then used to develop planograms and is integrated into reports for the buyers and store managers. Competition The arts and crafts retailing business is highly competitive. The Company currently competes against a diverse group of retailers, including several national and regional chains of arts and crafts retailers (such as publicly-held Michaels Stores and Frank's Nursery and Crafts and privately-held M.J. Designs), local merchants that specialize in one or more aspects of arts and crafts and various mass merchandisers that typically dedicate a portion of their selling space to a limited selection of arts and crafts items. These mass merchandisers and some of the national chains have substantially greater financial resources and operate more stores than the Company. The Company believes that the principal competitive factors in its business are pricing, breadth of merchandise selection, in-stock merchandise position and customer service. The Company believes that it is well positioned to compete on each of these factors. Employees As of June 30, 1997, the Company had 577 full-time and 873 part-time employees, 1,335 of whom worked at superstores, 44 at the distribution center and 71 at the corporate offices. None of the Company's employees is covered by a collective bargaining agreement, and the Company considers its relationship with its employees to be good. Trademarks The Company uses the "A.C. Moore" name as a tradename and as a service mark in connection with the sale of its merchandise. The Company has applied to the United States Patent and Trademark Office to register the "A.C. Moore" logo as a service mark. -38- Litigation From time to time, the Company is involved in litigation arising in the ordinary course of its business. None of the pending litigation, in the opinion of management, is likely to have a materially adverse effect on the Company's results of operations or financial condition. The Company maintains general liability insurance in amounts deemed adequate by management. -39- MANAGEMENT Executive Officers, Directors and Key Employees The following table sets forth certain information regarding executive officers, directors and certain other key employees of the Company:
Name Age Position ---- --- -------- Directors and Executive Officers William Kaplan.......................... 69 Chairman of the Board John E. (Jack) Parker................... 56 President, Chief Executive Officer and Director Robert M. Spencer....................... 57 Executive Vice President and Chief Operating Officer Rex A. Rambo............................ 55 Executive Vice President, Strategic Development, Merchandising and Marketing Patricia A. Parker...................... 55 Executive Vice President, Merchandising and Director Leslie H. Gordon........................ 54 Senior Vice President, Treasurer and Chief Financial Officer Janet Parker-Vandenberg................. 35 Senior Vice President, Merchandising Richard Lesser (1)(2)................... 62 Director Richard J. Bauer (1).................... 72 Director Richard J. Drake (2).................... 64 Director Key Employees Ivo M. DiPalma.......................... 42 Senior Vice President, Real Estate Jack A. Robinson........................ 45 Vice President, Store Operations Mark V. Verseput........................ 35 Vice President, Store Operations David A. Bellumori...................... 44 Vice President, Store Operations Frederick W. Thorpe..................... 47 Vice President, New Store Development Patricia T. Vandenberg.................. 55 Vice President, Human Resources Lori A. McKeage......................... 35 Vice President, Finance Louis Grieco............................ 49 Vice President, Merchandise Planning/Advertising Joette F. Metzler....................... 31 Vice President, Projects and Planning - ------------------------ (1) Member of the Compensation Committee. (2) Member of the Audit Committee.
Mr. Kaplan is a co-founder of the Company and has been Chairman of the Board of Directors of the Company since its inception. Mr. Kaplan also serves as the Chairman of the Board of Directors of Regal Bag Corporation, a manufacturer of women's handbags which he founded in 1947. -40- Mr. Parker is a co-founder of the Company and has been President, Chief Executive Officer and a director of the Company since its inception. From 1959 to 1984, Mr. Parker worked for the F.W. Woolworth Company ("Woolworth") in various management positions, most recently as President and Chief Executive Officer of the U.S. General Merchandise Group where he had responsibility for more than 1,000 stores, including the entire domestic chain of Woolworth retail stores. Mr. Parker is the husband of Patricia A. Parker and the father of Janet Parker-Vandenberg. Mr. Spencer has been Executive Vice President and Chief Operating Officer of the Company since September 1996. In February 1996, Mr. Spencer joined Ben Franklin Crafts Inc., a distributor and retailer of arts and crafts and other general merchandise ("Ben Franklin"), as part of its attempt to return to financial health. In July 1996, Ben Franklin filed a petition in bankruptcy under Chapter 11 of the United States Bankruptcy Code ("Chapter 11"). From 1993 to 1995, Mr. Spencer was a private investor while subject to the terms of a non-competition agreement. From 1984 to 1993, Mr. Spencer worked for McCrory Stores Corp., a retailer of general merchandise, serving in various management capacities, including President, Chief Executive Officer and Chief Operating Officer. In February 1992, McCrory Stores Corp. filed a petition in bankruptcy under Chapter 11. From 1976 to 1982, Mr. Spencer worked for Target Stores, Inc. in various management capacities, including Regional Merchandise Manager. Mr. Rambo has been Executive Vice President, Strategic Development, Merchandising and Marketing of the Company since December 1996. In 1995 and 1996, Mr. Rambo was Executive Vice President, Merchandising and Marketing of Michaels Stores, Inc., an arts and crafts retailer. From 1992 to 1995, Mr. Rambo served in various management capacities with Montgomery Ward & Co. and its affiliates, first, from 1992 to 1994 as a Vice President of Montgomery Ward and most recently as President and Chief Operating Officer of Montgomery Ward's subsidiary Lechmere, Inc., a retailer of electronics and other home products. In July 1997, Lechmere, Inc. filed a petition in bankruptcy under Chapter 11. From 1963 to 1992, Mr. Rambo worked for Sears, Roebuck and Co. in various management capacities, including National Marketing Manager. Ms. Parker has been Executive Vice President, Merchandising of the Company since September 1990. From 1985 to 1990, she served as a Vice President of the Company. Ms. Parker is responsible for purchasing all floral and seasonal merchandise and the Company's import purchasing program. Ms. Parker is the wife of Jack Parker. Mr. Gordon has been Senior Vice President, Treasurer and Chief Financial Officer of the Company since March 1996. From 1992 to 1995, Mr. Gordon was Senior Vice President, Finance of C & J Clark America, Inc., a shoe manufacturer, wholesaler and retailer. From 1986 to 1992, Mr. Gordon served as Senior Vice President, Finance of SILO, Inc., an electronics retailer. Ms. Parker-Vandenberg has been Senior Vice President, Merchandising of the Company since 1994. From 1990 to 1994, Ms. Parker-Vandenberg served as Vice President of Administration of the Company, and from 1985 to 1990, she was the Company's Accounting Manager. Ms. Parker- Vandenberg is the daughter of Jack and Patricia A. Parker. -41- Mr. Lesser has been a director of the Company since March 1993. He is currently Executive Vice President and Chief Operating Officer of The TJX Companies, Inc., a New York Stock Exchange traded retail company. Mr. Lesser is a director of Reebok International, a New York Stock Exchange traded shoe and apparel manufacturer. Mr. Bauer has been a director of the Company since September 1990. Mr. Bauer is President 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. Bauer has been a member of the Regional Board of Directors of the Bank of New York since 1989. Mr. Drake has been a director of the Company since its founding. He is President of Drake, Sommers, Loeb, Tarshis & Catania, P.C., a professional corporation which renders legal services. Mr. DiPalma has been Senior Vice President, Real Estate of the Company since September 1996. From 1992 to 1996, Mr. DiPalma served as Senior Vice President, Store Operations of the Company and from 1990 to 1992 he was Vice President, Operations of the Company. Mr. Robinson has been Vice President, Store Operations of the Company since January 1993. From October 1990 to December 1992, Mr. Robinson served as a store manager of one of the Company's superstores. Mr. Verseput has been Vice President, Store Operations of the Company since 1995. From 1992 to 1995, Mr. Verseput served as Director of Sales of the Company and from 1988 to 1992, he was a store manager of one of the Company's superstores. Mr. Bellumori has been Vice President, Store Operations of the Company since January 1997. From 1993 to 1997, Mr. Bellumori was a store manager of one of the Company's superstores. From 1974 to 1993, Mr. Bellumori worked for Woolworth where he served in various capacities including district manager. Mr. Thorpe has been Vice President, New Store Development of the Company since January 1997. From October 1994 to 1997, Mr. Thorpe served as Vice President, Store Operations of the Company and from September 1991 to 1994, he was Director of Development of the Company. Ms. Vandenberg has been Vice President, Human Resources since March 1996. From September 1991 to 1996, Ms. Vandenberg served as Director of Human Resources of the Company. Ms. McKeage has been Vice President, Finance of the Company since May 1992. From September 1990 to 1992, Ms. McKeage served as Treasurer of the Company and from 1989 to 1990, she served as Controller of the Company. Mr. Grieco has been Vice President, Merchandise Planning/Advertising of the Company since January 1994. From 1987 to 1993, Mr. Grieco served as General Merchandise Manager for -42- Carrefour USA, a retail hypermarket, and from 1979 to 1987, he served as Divisional Merchandise Manager of Pomeroy's Department Store. Ms. Metzler has been Vice President, Projects and Planning of the Company since March 1997. From 1993 to 1997, Ms. Metzler was Projects and Planning Coordinator of the Company. The Board of Directors and Committees Board Reorganization. Following completion of this offering, the Board of Directors will be reorganized by dividing the Board into three classes. Class A will consist of Richard J. Bauer and Richard J. Drake, whose terms will expire at the Company's 1998 annual meeting of shareholders. Class B will consist of Richard Lesser and Patricia A. Parker, whose terms will expire at the 1999 annual meeting of shareholders. Class C will consist of William Kaplan and John E. Parker, whose terms will expire at the annual meeting of shareholders held in 2000. Beginning with the 1998 annual meeting of shareholders, directors whose terms are expiring will be elected to serve for three-year terms. Compensation Committee. The Board of Directors has established a Compensation Committee, which provides recommendations concerning salaries and incentive compensation for employees of the Company and administers the 1997 Plan. The current members of the Compensation Committee are Messrs. Bauer and Lesser. Prior to July 1997, the Company had no separate Compensation Committee or other Board committee performing equivalent functions, and these functions were performed by the Company's President and Chief Executive Officer, Jack Parker who determined his own salary with the concurrance of the Chairman of the Board. Salary levels for the Company's executive officers have been determined by Mr. Parker on a basis which is intended to be competitive with salary levels at companies in peer businesses. In determining base salaries, Mr. Parker has also taken into account individual experience and performance. The Company's annual performance bonuses, also determined by Mr. Parker, are intended to provide a direct cash incentive to executive officers and other key employees to maximize the Company's profitability. Audit Committee. The Board of Directors has established an Audit Committee, which reviews the results and scope of the annual audit of the Company's financial statements, proposed changes in the Company's financial and accounting standards and principles and the Company's policies and procedures with respect to its internal accounting and financial controls. The Audit Committee also makes recommendations to the Board of Directors on the engagement of the Company's independent accountants as well as other matters which may come before the Committee or at the direction of the Board of Directors. The current members of the Audit Committee are Messrs. Drake and Lesser. -43- Director Compensation Except for Mr. Kaplan, the Chairman of the Board, who receives annual director's compensation of $150,000 in recognition of his efforts in the development of marketing programs and his assistance in obtaining long-term debt financing for the Company, directors who are not officers, employees or consultants of the Company receive $400 cash compensation for each Board of Directors meeting and $400 for each committee meeting (except for committee meetings held in conjunction with regular board meetings) at which they are present, not to exceed $800 per director in any calendar year with respect to committee meetings. In addition, all directors are reimbursed for their reasonable expenses in connection with the performance of their duties. Messrs. Bauer and Drake, directors of the Company, have each been granted an option to acquire 10,000 shares of Common Stock under the 1997 Plan. In 1995, Mr. Lesser, a director of the Company, was granted the Director's Option which is exercisable for 64,500 shares of Common Stock at an exercise price of $4.66 per share. The Director's Option expires on February 28, 2005. -44- Executive Compensation The following table sets forth the compensation earned by the Company's Chief Executive Officer and each of the other four most highly compensated officers of the Company (collectively, the "Named Executive Officers") for services rendered in all capacities to the Company during 1996:
Annual Compensation ----------------------------------- Name and All Other Principal Position Salary Bonus Compensation - ----------------------------------------------------------- ---------------- ---------------- ------------------- Jack Parker............................................... $200,000 -- $ 19,682 (1) President, Chief Executive Officer Robert M. Spencer (2)...................................... 100,000 -- -- Executive Vice President, Chief Operating Officer Patricia A. Parker......................................... 200,000 -- 19,682 (1) Executive Vice President, Merchandising Leslie H. Gordon (3)....................................... 138,542 $13,452 -- Senior Vice President, Treasurer and Chief Financial Officer Janet Parker-Vandenberg.................................... 124,600 6,000 -- Senior Vice President, Merchandising
- --------------- (1) Reflects one-half of the value of the benefit to Jack Parker and Patricia A. Parker of the premium paid by the Company for a split-dollar second-to-die life insurance policy. (2) Mr. Spencer joined the Company on September 2, 1996, and his base compensation for 1997 is $300,000. (3) Mr. Gordon joined the Company on March 18, 1996, and his base compensation for 1997 is $192,000. Stock Option Plan In July 1997, the Company adopted, and the shareholders approved, the 1997 Plan. The purpose of the 1997 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 the Common Stock and acquire an increased personal interest in the Company's business. Options exercisable for an aggregate of 1,000,000 shares of Common Stock may be granted under the 1997 Plan. Options to purchase an aggregate of 444,500 shares of Common Stock have been granted under the 1997 Plan at an exercise price of $9.00 per share, including options to purchase 35,000 shares of Common Stock granted to each of Messrs. Spencer, Rambo and Gordon and options to purchase 20,000 shares of Common Stock granted to Ms. Parker-Vandenberg. The 1997 Plan is administered by the Board of Directors. The Board of Directors may delegate its authority to administer the 1997 Plan to a committee of the Board of Directors. The Board of Directors will interpret the provisions of the 1997 Plan, select the optionees and will determine the nature of the option granted, the number of shares subject to each option, the option vesting schedule and other terms and conditions of each option. -45- The Board of Directors may amend or supplement the 1997 Plan and outstanding options. Payment of the exercise price for options granted under the 1997 Plan may be made in cash, shares of Common Stock or by delivery of an interest bearing recourse note or a combination of cash, Common Stock and/or recourse note. All options granted under the 1997 Plan are exercisable in accordance with a vesting schedule which is set at the time of the issuance of the option and, except as indicated below, incentive stock options may not be exercised more than ten years from the date of grant. Options granted under the 1997 Plan may be incentive stock options intended to qualify under Section 422 of the Internal Revenue Code of 1986, as amended (the "Code"), or options not intended to qualify. The 1997 Plan requires the exercise price of incentive stock options to be at least equal to the fair market value of the Common Stock on the date of the grant. In the case of incentive stock options granted to a shareholder owning, directly or indirectly, in excess of 10% of the Common Stock, the incentive stock option exercise price must be at least equal to 110% of the fair market value of the Common Stock on the date of grant and such incentive stock option may not be exercised more than five years from the date of grant. All unexercised incentive stock options terminate no later than three months following the date on which an optionee's employment by, or relationship with, the Company or any parent or subsidiary of the Company, terminates other than by reason of "for cause" (as defined in the 1997 Plan), disability or death (but not later than the expiration date) whether or not such termination is voluntary. Any option held by an employee who dies or who ceases to be employed because of disability must be exercised by the employee or his representative within one year after the employee dies or ceases to be an employee (but not later than the scheduled termination date). Options are not transferable except to the decedent's estate in the event of death. No additional incentive stock options may be granted under the Plan after July 2007. Severance Arrangement The Company has agreed to pay Leslie H. Gordon a lump sum equal to one year of his then current salary if Mr. Gordon's employment is terminated without cause. -46- CERTAIN TRANSACTIONS Richard J. Drake, a director of the Company, is a member of a law firm which the Company has retained during 1996 and which the Company intends to retain during 1997. In 1996, the Company reimbursed Regal Bag Corporation ("Regal") $164,000 for Regal's cost and expense in providing clerical and mailing services to the Company related to the Company's Teacher's Program, "Crafty Kid's Club" and "Teen Club." William Kaplan, a director of the Company, is an executive officer and principal shareholder of Regal. The Company intends to continue to utilize the clerical and mailing services of Regal after completion of this offering. Since December 1990, the Company has periodically borrowed funds from Messrs. Kaplan and Parker contemporaneously with distributions of certain earnings and has used the funds borrowed for working capital. Messrs. Kaplan and Parker have agreed not to demand payment of the loans on or before June 30, 1998, except upon the date of the Company's completion of an initial public offering or consummation of a refinancing on a long-term basis. These loans are not collateralized and are non-interest bearing. As of June 30, 1997, the Company was indebted to each of Messrs. Kaplan and Parker in the aggregate principal amount of $7,400,000. This indebtedness will be repaid with a portion of the proceeds from this offering. See "Use of Proceeds." It is the Company's policy that all material transactions between the Company and its officers, directors and other affiliates must be approved by a majority of the disinterested members of the Company's Board of Directors and be on terms no less favorable to the Company than could be obtained from unaffiliated third parties. -47- PRINCIPAL SHAREHOLDERS The following table sets forth information as of immediately prior to and immediately after completion of this offering relating to beneficial ownership of the Company's Common Stock by the current shareholders of the Company, each of the directors, each of the executive officers and all directors and executive officers as a group.
Shares Beneficially Owned(1) Shares Beneficially Owned(1) Prior to Offering After Offering --------------------------------- -------------------------------- Name and Address Number Percent Number Percent - -------------------------------------------- ------------------ ------------- ----------------- ------------- William Kaplan (2) ......................... 2,150,000 50.0% 2,150,000 30.7% Jack Parker (2)............................. 2,150,000 50.0% 2,150,000 30.7% Robert M. Spencer........................... -- -- -- -- Rex A. Rambo................................ -- -- -- -- Patricia A. Parker (2)...................... 2,150,000 (3) 50.0% 2,150,000 (3) 30.7% Leslie H. Gordon............................ -- -- -- -- Janet Parker-Vandenberg..................... -- -- -- -- Richard Lesser.............................. 64,500 (4) 1.5% 64,500 (4) * Richard J. Bauer............................ -- -- -- -- Richard J. Drake............................ -- -- -- -- All executive officers and directors as a group (10 persons)................................ 4,364,500 100% 4,364,500 61.8%
- ---------- * Denotes less than 1%. (1) Beneficial ownership is determined in accordance with the rules of the Securities and Exchange Commission (the "SEC") and includes voting or investment power with respect to the Common Stock. Shares of Common Stock issuable upon the exercise of securities currently exercisable or exercisable within 60 days of the date hereof are deemed outstanding for computing the share ownership and percentage ownership of the person holding such securities, but are not deemed outstanding for computing the percentage of any other person. The persons named in the table above have sole voting and investment power with respect to all shares of Common Stock shown as beneficially owned by them. (2) The address of each of Messrs. Kaplan and Parker and Ms. Parker is 500 University Court, Blackwood, New Jersey 08012. (3) In accordance with the SEC's rules Ms. Parker is deemed to be the beneficial owner of the shares owned of record by her husband, Jack Parker. Ms. Parker disclaims beneficial ownership of these shares. (4) Represents 64,500 shares of Common Stock which may be acquired upon the exercise of currently exercisable options. -48- DESCRIPTION OF CAPITAL STOCK The Company is authorized to issue 20,000,000 shares of Common Stock, no par value, 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 ("Preferred Stock"). As of the date of this Prospectus, 4,300,000 shares of Common Stock were issued and outstanding and held of record by two shareholders and no shares of Preferred Stock were outstanding. 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, (i) to share ratably in dividends if, when and as declared by the Board of Directors out of funds legally available therefor; and (ii) in the event of liquidation, dissolution or winding-up of the Company to share ratably in the distribution of assets legally available therefor, 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 capital stock of the Company. All currently outstanding shares of the Common Stock are, and the shares offered hereby, 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 the Company may issue in the future. Preferred Stock The Preferred Stock may be issued from time to time by the Board of Directors as shares of one or more classes or series. Subject to the provisions of the Company's Articles 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 thereof, 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. The Company has no current plans to issue any shares of Preferred Stock. One of the effects of undesignated Preferred Stock may be to enable the Board of Directors to render more difficult or to discourage an attempt to obtain control of the Company by means of a tender offer, proxy contest, merger or otherwise, and thereby to protect the continuity of the Company's 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 issued by the Company may rank prior to the Common Stock as to dividend rights, liquidation preference or both, may have full or limited voting rights and may -49- 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 The Company's Articles and Bylaws contain several provisions intended to limit the possibility of, or make more difficult, a takeover of the Company. 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, the Articles provide that: (i) 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, (ii) 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, and (iii) the shareholders of the Company are not entitled to call special meetings of the shareholders. In addition, the Articles provide that actions by shareholders without a meeting must receive the unanimous written consent of all shareholders. The Articles also permit the Board of Directors to oppose, in its sole discretion, a tender offer or other offer for the Company's 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. The Company's 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, as amended (the "BCL"), 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: (i) 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; (ii) 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; (iii) the business combination is approved by the affirmative vote of all outstanding shares of common stock; or (iv) 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. The Articles do not -50- provide an exemption from this provision. Pennsylvania has also adopted other anti-takeover legislation from which the Company has elected to exempt itself in the Articles. The BCL 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, (i) the effects of any proposed transaction upon any or all groups affected by such action, including, among others, shareholders, employees, suppliers, customers and creditors, (ii) the short-term and long-term interests of the corporation and (iii) the resources, intent and conduct of the person seeking control. The existence of the foregoing provisions of the Articles, Bylaws and BCL may discourage other persons or companies from making a tender offer for, or seeking to acquire substantial amounts of the Company's Common Stock. Limitations on Directors' Liabilities and Indemnification As permitted by the BCL, the Company's Bylaws provide that a director shall not be personally liable in such capacity 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 BCL and the breach or failure to perform constitutes self-dealing, willful misconduct or recklessness. These provisions of the Bylaws, 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 the Board of Directors of the Company protection against awards of monetary damages for negligence in the performance of their duties. The Bylaws also provide that every person who is or was a director or executive officer of the Company, or of any corporation which he served as such at the request of the Company, shall be indemnified by the Company to the fullest extent permitted by law against all expenses and liabilities reasonably incurred by or imposed upon 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 being or having been a director or executive officer of the Company, or of such other corporation, whether or not he is a director or executive officer of the Company or such other corporation at the time the expenses or liabilities are incurred. No indemnification shall be provided, however, with respect to: liabilities arising under Section 16(b) of the Securities Exchange Act of 1934, as amended, if a final unappealable judgment or award establishes that such officer or director engaged in self-dealing, willful misconduct or recklessness, for expenses or liabilities which have been paid directly to, or for the benefit of, such person by an insurance carrier or for amounts paid in settlement of actions without the written consent of the Board of Directors. Obligations that the Company may have pursuant to the Bylaws to provide indemnification to its directors and executive officers for liabilities arising under the Securities Act of 1933 may not be enforceable. -51- Transfer Agent and Registrar The transfer agent and registrar for the Common Stock is StockTrans, Inc., Ardmore, Pennsylvania. -52- SHARES ELIGIBLE FOR FUTURE SALE Upon completion of the offering, the Company will have 7,000,000 shares of Common Stock outstanding. All shares of Common Stock being sold hereby will be freely tradable without restriction or further registration under the Securities Act, except for shares purchased by "affiliates" of the Company which will be subject to the resale and volume limitations of Rule 144 under the Securities Act ("Rule 144"). All remaining shares were issued and sold by the Company in private transactions and are "restricted" stock within the meaning of Rule 144. Consequently, such shares may not be resold unless they are registered under the Securities Act or are sold pursuant to an applicable exemption from registration, such as Rule 144 or Rule 144A under the Securities Act ("Rule 144A"). The Company and all its existing shareholders who will beneficially own 4,300,000 shares of Common Stock immediately following this offering have agreed not to offer, sell or otherwise dispose of any shares of Common Stock for a period of 180 days after the date of this Prospectus without the prior written consent of BT Alex. Brown Incorporated. In general, under Rule 144 as currently in effect, a shareholder (or shareholders whose shares are aggregated) who has beneficially owned "restricted" shares (as defined under Rule 144) for at least one year, and any affiliate who owns shares that are not "restricted" shares, is entitled to sell, within any three-month period, a number of shares that does not exceed the greater of (i) one percent (70,000) of the then outstanding shares of Common Stock or (ii) the average weekly trading volume of the Common Stock reported through the Nasdaq Stock Market during the four calendar weeks preceding the date on which notice of the sale is filed with the SEC. Sales under Rule 144 are subject to certain manner of sale provisions, notice requirements and the availability of current public information about the Company. In addition, a shareholder who is not deemed an affiliate of the Company at any time during the 90 days preceding a sale and who has beneficially owned his shares for at least two years, is entitled to sell such shares under Rule 144(k) without regard to volume limitations, manner of sale provisions, notice requirements or the availability of current public information concerning the Company. Rule 144A under the Securities Act permits the immediate sale by the current holders of "restricted " shares of all or a portion of their shares to certain qualified institutional buyers, as defined in Rule 144A. The Company has granted options to purchase an aggregate of 509,000 shares of Common Stock to certain directors, officers and key employees pursuant to the 1997 Plan and the Director's Option. The Company intends to file a Registration Statement on Form S-8 under the Securities Act to register the shares of Common Stock reserved for issuance under the 1997 Plan. After the effective date of such Registration Statement, shares of Common Stock issued under the 1997 Plan, subject to the terms of the 1997 Plan and any agreements entered into pursuant to the terms of the 1997 Plan, will be available for sale in the open market by holders who are not affiliates of the Company. Prior to this offering, there has been no public market for the Common Stock and there can be no assurances with respect to the effect, if any, that public sales of shares or the availability of shares will have on the market price of the Common Stock prevailing from time to time. Sales of substantial amounts of Common Stock in the public market following this offering, or the perception that such sales may occur, could adversely affect the market price of the Common Stock. -53- UNDERWRITING Subject to the terms and conditions of the Underwriting Agreement, the underwriters named below (the "Underwriters"), through their representatives, BT Alex. Brown Incorporated and Janney Montgomery Scott Inc. (the "Representatives"), have severally agreed to purchase from the Company the following respective numbers of shares of Common Stock at the initial public offering price less the underwriting discounts and commissions set forth on the cover page of this Prospectus: Underwriters Number of Shares ------------ ---------------- BT Alex. Brown Incorporated.................. Janney Montgomery Scott Inc. ................ ----------- Total ...................................... 2,700,000 =========== The Underwriting Agreement provides that the obligations of the Underwriters are subject to certain conditions precedent and that the Underwriters will purchase all shares of the Common Stock offered hereby if any of such shares are purchased. The Company has been advised by the Representatives of the Underwriters that the Underwriters propose to offer the shares of Common Stock to the public at the initial public offering price set forth on the cover page of this Prospectus and to certain dealers at such price less a concession not in excess of $ per share. The Underwriters may allow, and such dealers may reallow, a concession not in excess of $ per share to certain other dealers. After the commencement of this offering, the offering price and other selling terms may be changed by the Representatives of the Underwriters. The Company has granted to the Underwriters an option, exercisable not later than 30 days after the date of this Prospectus, to purchase up to 405,000 additional shares of Common Stock at the initial public offering price less the underwriting discounts and commissions set forth on the -54- cover page of this Prospectus. To the extent that the Underwriters exercise such option, each of the Underwriters will have a firm commitment to purchase approximately the same percentage thereof that the number of shares of Common Stock to be purchased by it shown in the above table bears to 2,700,000 and the Company will be obligated, pursuant to the option, to sell such shares to the Underwriters. The Underwriters may exercise such option only to cover over-allotments made in connection with the sale of Common Stock offered hereby. If purchased, the Underwriters will offer such additional shares on the same terms as those on which the 2,700,000 shares are being offered. To facilitate the offering of the Common Stock, the Underwriters may engage in transactions that stabilize, maintain or otherwise affect the price of the Common Stock. Specifically, the Underwriters may over-allot shares of Common Stock in connection with the offering, thereby creating a short position in the Underwriters' syndicate account. In addition, to cover such over-allotments or to stabilize the market price of the Common Stock, the Underwriters may bid for, and purchase, shares of Common Stock in the open market. Any of these activities may maintain the market price of the Common Stock at a level above that which might otherwise prevail in the open market. The Underwriters are not required to engage in these activities, and, if commenced, any such activities may be discontinued at any time. The Representatives on behalf of the Underwriters also may reclaim selling concessions allowed to an underwriter or dealer, if the syndicate repurchases shares distributed by that Underwriter or dealer. The Company has agreed to indemnify the Underwriters against certain liabilities, including liabilities under the Securities Act. The Company has agreed that it will not sell or offer any shares of Common Stock or options, rights or warrants to acquire any Common Stock for a period of 180 days after the date of this Prospectus, except for shares issued (i) in connection with acquisitions or (ii) pursuant to the exercise of options granted under the 1997 Plan, without the prior written consent of BT Alex. Brown Incorporated. Further, the Company and all of its existing shareholders, who beneficially own 4,300,000 shares of Common Stock in the aggregate have agreed not to sell, contract to sell or otherwise dispose of any shares of Common Stock for a period of 180 days after the date of this Prospectus without the prior written consent of BT Alex. Brown Incorporated. See "Shares Eligible for Future Sale." The Representatives have advised the Company that the Underwriters do not intend to confirm sales to any account over which they exercise discretionary authority. Prior to this offering, there has been no public market for the Common Stock. Consequently, the initial public offering price for the Common Stock has been determined by negotiation between the Company and the Representatives. Among the factors considered in such negotiations were prevailing market conditions, the results of operations of the Company in recent periods, the market capitalizations and stages of development of other companies that the Company and the Representatives believe to be comparable to the Company, estimates of the business potential of the Company, the present state of the Company's development and other factors deemed relevant. -55- LEGAL MATTERS An opinion will be delivered by Blank Rome Comisky & McCauley, Philadelphia, Pennsylvania to the effect that the shares of Common Stock being offered hereby will, when issued as contemplated in this Prospectus, be validly issued, fully paid and non-assessable. Certain legal matters related to this offering will be passed upon for the Underwriters by Piper & Marbury L.L.P., Baltimore, Maryland. EXPERTS The financial statements as of December 31, 1996 and 1995, and for each of the years in the three-year period ended December 31, 1996, included in this Prospectus have been so included in reliance upon the report of Price Waterhouse LLP, independent accountants, given on the authority of said firm as experts in accounting and auditing. ADDITIONAL INFORMATION A Registration Statement on Form S-1 under the Securities Act relating to the Common Stock offered hereby has been filed by the Company with the SEC in Washington, D.C. This Prospectus does not contain all of the information set forth in the Registration Statement and the exhibits and schedules thereto, certain portions having been omitted from this Prospectus in accordance with the rules and regulations of the Commission. Statements contained in this Prospectus concerning the contents of any contract or any other document referred to are not necessarily complete; reference is made in each instance to the copy of such contract or document filed as an exhibit to the Registration Statement, each such statement being qualified in all respects by such reference. For further information with respect to the Company and the Common Stock offered hereby, reference is made to such Registration Statement, exhibits thereto and the financial statements, notes and schedules filed as a part thereof. The Registration Statement may be inspected and copied at the public reference facilities maintained by the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, and at the Commission's regional offices located in New York at Seven World Trade Center, New York, N.Y. 10048 and in Chicago at Citicorp Center, Suite 1400, 500 West Madison Street, Chicago, Illinois 60661. Copies of such materials, including the Registration Statement, can be obtained from the Public Reference Section of the Commission, 450 Fifth Street, N.W., Washington, D.C. 20549 at prescribed rates. The Commission also maintains a World Wide Web site that contains reports, proxy and information statements, and other information regarding registrants that file electronically with the Commission. The site and this Registration Statement may be accessed at http://www.sec.gov. Copies of the Registration Statement may also be inspected at the offices of Nasdaq Operations, 1735 K Street, N.W., Washington, D.C. 20006. -56- A.C. MOORE ARTS & CRAFTS, INC. INDEX TO FINANCIAL STATEMENTS
Page ---- Report of Independent Accountants.....................................................................F-2 Balance Sheet at December 31, 1995 and 1996, at June 30, 1997 (unaudited) and Pro Forma at June 30, 1997 (unaudited)..........................................................F-3 Statement of Income for each of the three years in the period ended December 31, 1996 and for the six months ended June 30, 1996 and 1997 (unaudited)....................................................................................F-4 Statement of Changes in Shareholders' Equity for each of the three years in the period ended December 31, 1996 and the six months ended June 30, 1997 (unaudited)...........................................................................F-5 Statement of Cash Flows for each of the three years in the period ended December 31, 1996 and for the six months ended June 30, 1996 and 1997 (unaudited)................................................................................F-6 Notes to 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 accompanying balance sheet and the related statements of income, changes in shareholders' equity and of cash flows present fairly, in all material respects, the financial position of A.C. Moore Arts & Crafts, Inc. at December 31, 1995 and 1996 and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1996, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. PRICE WATERHOUSE LLP Philadelphia, Pennsylvania February 28, 1997, except for Note 11 which is as of July 18, 1997 F-2 A.C. MOORE ARTS & CRAFTS, INC. BALANCE SHEET (dollars in thousands, except share data)
December 31, June 30, 1997 ------------------- ------------------------ 1995 1996 Actual Pro Forma ---- ---- ------ --------- (Note 3) (unaudited) (unaudited) Assets Current assets: Cash and cash equivalents ..................... $ 5,875 $ 6,431 $ 917 $ 917 Accounts receivable ........................... 174 162 221 221 Inventories ................................... 23,659 25,255 30,550 30,550 Prepaid expenses and other current assets ............................. 392 361 569 569 ------- ------- ------- ------- 30,100 32,209 32,257 32,257 Property and equipment, net ...................... 4,008 5,114 6,234 6,234 Other assets, net ................................ 463 476 480 480 ------- ------- ------- ------- $34,571 $37,799 $38,971 $38,971 ======= ======= ======= ======= Liabilities and Shareholders' Equity Current liabilities: Borrowings under line of credit ............... $ -- $ -- $ 4,875 $ 4,875 Current portion of long-term debt ............. 776 1,857 1,857 1,857 Trade accounts payable ........................ 5,899 6,226 7,257 7,257 Accrued payroll ............................... 1,632 1,795 1,054 1,054 Accrued income, payroll and sales taxes ................................ 830 1,022 660 660 Accrued expenses .............................. 739 712 770 820 ------- ------- ------- ------- 9,876 11,612 16,473 16,523 ------- ------- ------- ------- Long-term liabilities: Long-term debt ................................ 8,510 6,653 5,725 5,725 Loans from shareholders - subordinated ........ 7,595 11,095 14,800 14,800 Deferred tax liability ........................ -- -- -- 659 Other long-term liabilities ................... 834 947 1,064 1,064 ------- ------- ------- ------- 16,939 18,695 21,589 22,248 ------- ------- ------- ------- 26,815 30,307 38,062 38,771 ------- ------- ------- ------- Commitments and Contingencies (Note 10) Shareholders' equity: Preferred stock, no par value, 5,000,000 shares authorized, none issued ............. -- -- -- -- Common stock, no par value, 20,000,000 shares authorized, 4,300,000 shares outstanding at December 31, 1995 and 1996 and June 30, 1997 ................. 200 200 200 200 Retained earnings ............................. 7,556 7,292 709 -- ------- ------- ------- ------- 7,756 7,492 909 200 ------- ------- ------- ------- $34,571 $37,799 $38,971 $38,971 ======= ======= ======= =======
The accompanying notes are an integral part of these financial statements. F-3 A.C. MOORE ARTS & CRAFTS, INC. STATEMENT OF INCOME (dollars in thousands, except share data)
Six Months Ended Year Ended December 31, June 30, ------------------------------- ------------------------ 1994 1995 1996 1996 1997 ---- ---- ---- ---- ---- (unaudited) Net sales ....................... $ 86,376 $ 100,106 $ 109,319 $ 44,979 $ 53,657 Cost of sales (including buying and distribution costs) .... 54,690 63,344 69,195 28,738 33,961 --------- --------- --------- --------- --------- Gross margin .................... 31,686 36,762 40,124 16,241 19,696 Operating expenses: Store operating .............. 22,430 25,688 27,476 12,891 15,185 General and administrative ... 3,472 3,826 5,565 2,742 3,369 Pre-opening expense .......... 575 -- 140 140 709 --------- --------- --------- --------- --------- Income from operations .......... 5,209 7,248 6,943 468 433 Interest expense ............. 639 841 700 357 330 Interest (income) ............ (47) (81) (143) (96) (50) --------- --------- --------- --------- --------- Income before income taxes ...... 4,617 6,488 6,386 207 153 State income tax expense ..... 37 79 80 17 7 --------- --------- --------- --------- --------- Net income ...................... $ 4,580 $ 6,409 $ 6,306 $ 190 $ 146 ========= ========= ========= ========= ========= Pro forma and supplemental income data (unaudited) (Note 3): Income before income taxes, as reported ..................... $ 4,617 $ 6,488 $ 6,386 $ 207 $ 153 Pro forma income tax provision 1,922 2,648 2,569 83 61 --------- --------- --------- --------- --------- Pro forma net income ............ $ 2,695 $ 3,840 $ 3,817 $ 124 $ 92 ========= ========= ========= ========= ========= Pro forma net income per share .. $ 0.84 $ 0.02 ========= ========= Pro forma weighted average shares outstanding....................... 4,532,413 4,532,413 Supplemental pro forma net income per share............ $ 0.69 $ 0.04 ========= ========= Supplemental pro forma weighted average shares outstanding..................... 6,181,753 6,479,038
The accompanying notes are an integral part of these financial statements. F-4 A.C. MOORE ARTS & CRAFTS, INC. STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY (dollars in thousands)
Common Retained Stock Earnings Total ------ -------- ----- Balance, December 31, 1993.................... $ 200 $ (841) $ (641) Net income.................................... -- 4,580 4,580 Distributions to shareholders................. -- (24) (24) ---------- ---------------- -------------- Balance, December 31, 1994.................... 200 3,715 3,915 Net income.................................... -- 6,409 6,409 Distributions to shareholders................. -- (2,568) (2,568) ---------- ---------------- -------------- Balance, December 31, 1995.................... 200 7,556 7,756 Net income.................................... -- 6,306 6,306 Distributions to shareholders................. -- (6,570) (6,570) ---------- ---------------- -------------- Balance, December 31, 1996.................... 200 7,292 7,492 Unaudited: Net income.................................... -- 146 146 Distributions to shareholders................. -- (6,729) (6,729) ---------- ---------------- -------------- Balance, June 30, 1997 (unaudited)............ $ 200 $ 709 $ 909 ========== =============== =============
The accompanying notes are an integral part of these financial statements. F-5 A.C. MOORE ARTS & CRAFTS, INC. STATEMENT OF CASH FLOWS (dollars in thousands)
Six Months Ended Year Ended December 31, June 30, -------------------------------------- -------------------- 1994 1995 1996 1996 1997 ---- ---- ---- ---- ---- (unaudited) Cash flows from operating activities: Net income ........................ $4,580 $6,409 $6,306 $190 $146 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization. . 778 975 1,145 545 670 Changes in assets and liabilities: Accounts receivable. . . . . . (2) (94) 12 65 (59) Inventories................ (4,759) (3,028) (1,596) (1) (5,295) Prepaid expenses and other current assets.......... 165 (41) 31 41 (208) Accounts payable and accrued expenses........ (355) (133) 656 (2,018) (14) Other assets............... (75) (56) (13) 3 (4) Other long-term liabilities 214 158 112 51 116 -------- -------- -------- --------- -------- Net cash provided by (used in) operating activities............ 546 4,190 6,653 (1,124) (4,648) -------- -------- -------- -------- -------- Cash flows (used in) investing activities: Capital expenditures............... (1,678) (853) (2,251) (894) (1,789) -------- --------- -------- -------- -------- Cash flows from financing activities: Proceeds from line of credit....... -- -- -- -- 4,875 Proceeds from shareholders' loans.. -- -- 3,500 3,500 3,705 Proceeds from long-term debt....... 12,922 3,380 -- -- -- Repayment of long-term debt........ (9,306) (3,397) (776) (2) (928) Distributions to shareholders...... (24) (2,568) (6,570) (6,442) (6,729) ---------- ------- ------- ------- ------- Net cash provided by (used in) financing activities............... 3,592 (2,585) (3,846) (2,944) 923 -------- ------- ------- ------- -------- Net increase (decrease) in cash....... 2,460 752 556 (4,962) (5,514) Cash and cash equivalents at beginning of year............... 2,663 5,123 5,875 5,875 6,431 -------- ------- -------- ------- ------- Cash and cash equivalents at end of year..................... $ 5,123 $ 5,875 $ 6,431 $ 913 $ 917 ======= ======= ======= ======= ======= Cash paid during the year for: Interest .......................... $ 639 $ 838 $ 709 $ 357 $ 330 ======= ======= ======= ======= ======= Income taxes....................... $ 30 $ 41 $ 82 $ 79 $ 30 ======= ======= ======= ======= =======
The accompanying notes are an integral part of these financial statements. F-6 A.C. MOORE ARTS & CRAFTS, INC. NOTES TO FINANCIAL STATEMENTS 1. Operations A.C. Moore Arts & Crafts, Inc. became a holding company in July 1997 by incorporating in Pennsylvania and exchanging 4,300,000 shares of its common stock pro rata for all of the capital stock of A.C. Moore Incorporated held by its shareholders (the "Reorganization"). A.C. Moore Arts & Crafts, Inc. and its operating subsidiary, A.C. Moore Incorporated, are collectively referred to as the "Company." As of June 30, 1997, A.C. Moore Incorporated, a Delaware corporation formed in June 1984, operated a 21 store chain of retail arts and crafts stores in the mid-Atlantic and Northeast regions. Four of these stores were opened in 1997. The Company's Board of Directors approved an initial public offering of the Company's common stock. The Company intends to file a Registration Statement on Form S-1 with the Securities and Exchange Commission (the "Offering"). The effects of the S Corporation distribution and a charge to recognize deferred income taxes are reflected in the unaudited pro forma balance sheet as of June 30, 1997 (see Note 3). 2. Summary of Significant Accounting Policies Cash and cash equivalents. Cash and cash equivalents are stated at cost which approximates market value. Cash equivalents include only securities having a maturity of three months or less at the time of purchase. 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 associated with cash and cash equivalents by placing its investments in 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. Inventories at December 31, 1995 and 1996 include $607,000 and $986,000 of such costs, respectively. 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 seven years and leasehold improvements are depreciated over the shorter of their estimated useful lives or the term of the related lease. Maintenance and repairs are charged to operations as incurred and major improvements are capitalized. When property and equipment are retired or sold, the cost and related accumulated depreciation are removed from the accounts and the net amount, less any proceeds from disposal, is reflected in income. Capitalized software costs. Purchased software and internally developed software costs are capitalized and amortized over the estimated economic life of the asset, generally five years. F-7 A.C. MOORE ARTS & CRAFTS, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) Approximately $91,000, $131,000 and $85,000 of internally developed software costs were capitalized during 1994, 1995 and 1996, respectively. Long-lived assets. In March 1995, Statement of Financial Accounting Standards (SFAS) No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of," was issued. SFAS No. 121 requires that long-lived assets and certain identifiable intangibles to be held and used or disposed of by an entity be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. During 1996, the Company adopted this statement and determined that no impairment loss need be recognized for applicable assets of continuing operations. Income taxes. The Company utilizes the liability method of accounting for state 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. The Company elected to be taxed under the S Corporation provisions of the Internal Revenue Code. Historically, the shareholders of the Company included their pro rata share of income or loss in their individual returns. A portion of the distributions to shareholders was related to their individual income tax liabilities, resulting from S Corporation taxable earnings. Effective with the completion of the Offering, the Company's S Corporation status will be converted to C Corporation status and the Company's subsequent earnings will be subject to corporate taxes (see Note 3). Lease acquisition fees. Lease acquisition fees are being amortized on a straight-line basis over the respective lease terms. No new lease acquisition fees were incurred for lease agreements entered into during the three years ended 1996. Store pre-opening expenses. Direct incremental costs incurred to prepare a store for opening are deferred until the quarter the store opens at which time such costs are fully charged to expense. Deferred pre-opening expenses were $45,000 at December 31, 1996. No such expense was deferred at December 31, 1995 or 1994. F-8 A.C. MOORE ARTS & CRAFTS, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 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 1994, 1995 and 1996 was $2,402,000, $2,808,000 and $2,985,000, respectively. Accounting for stock-based compensation. In October 1995, SFAS No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123") was issued. This statement required the fair value of stock options and other stock-based compensation issued either to be recognized as compensation expense in the statement of income or to be disclosed as a pro forma effect on net income in the notes to the Company's financial statements. The Company will adopt SFAS 123 on a disclosure basis only. Fair value of investments. The following methods and assumptions were used to estimate the fair value of each class of financial instruments: The carrying amounts of cash and cash equivalents, accounts receivable, other current assets, accounts payable, accrued expenses and other liabilities approximate fair value because of the short maturity of those instruments. The carrying amount of long-term debt approximates fair value, as the interest rates on the debt approximate rates currently available to the Company for debt with similar terms and remaining maturities. Use of estimates. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements, and the amount of revenues and expenses during the reporting period. Differences from those estimates, if any, are recorded in the period they become known. Interim financial information. The interim financial data is unaudited; however, in the opinion of the Company, the interim data includes all adjustments, consisting only of normal recurring adjustments, necessary for a fair statement of the results of the interim period and are prepared on the same basis as the audited annual financial statements. 3. Pro Forma and Supplemental Information (Unaudited) Pro forma and supplemental net income per share. The computation of primary pro forma earnings per share is based on the weighted average number of outstanding common shares during the period plus common stock equivalents, if dilutive, consisting of certain shares subject to stock options (see Notes 9 and 12). Pursuant to the requirements of the Securities and Exchange Commission, common and common equivalents shares issued by the Company during the twelve month period immediately preceding the filing of the initial public offering have been included in the calculation of the shares used in computing net income per share as if they were outstanding for all periods presented, using the treasury stock method and an assumed initial public offering price of $13.00 per F-9 A.C. MOORE ARTS & CRAFTS, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) share. Additionally, the weighted average number of outstanding common shares includes the effects of the incremental number of shares required to fund distributions to shareholders in excess of earnings for the preceding 12 months (including the estimated distribution of $50,000 to be paid from a portion of the net proceeds of the Offering). Historical net income per share data has not been presented since such amounts are not deemed to be meaningful due to the significant change in the Company's capital structure which is to occur in connection with the Offering. The supplemental pro forma net income per share is based on pro forma net income per share, increased to give effect to the reduction in interest costs of $198,000 for the six months ended June 30, 1997 and $420,000 for the year ended December 31, 1996 (net of the applicable income taxes), which would have resulted assuming the application of a portion of the net proceeds from the Offering were used to repay certain indebtedness of the Company. Pro forma balance sheet information. The unaudited pro forma balance sheet reflects the S Corporation distribution of $50,000 and a charge associated with the provision for deferred income taxes of $659,000 which the Company will recognize upon its termination of S Corporation status assuming the termination had occurred at June 30, 1997. Pro forma taxes. Upon termination of its S Corporation status, the Company will be required to recognize deferred income taxes for cumulative temporary differences between income for financial and tax reporting purposes. Had the termination occurred at June 30, 1997, the cumulative deferred income tax liability, calculated in accordance with SFAS No. 109, "Accounting for Income Taxes," would have approximated $659,000. The reconciliation between the effective pro forma income tax rate and the U.S. federal statutory rate is as follows:
Year Ended December 31, ------------------------------- 1994 1995 1996 ---- ---- ---- (in thousands) U.S. federal taxes at statutory rate................................... $ 1,570 $ 2,206 $ 2,171 State and local taxes, net............................................. 330 421 393 Other.................................................................. 22 21 5 -------- --------- ---------- Income tax provision................................................... $ 1,922 $ 2,648 $ 2,569 ======== ========= ========== The pro forma deferred tax liability at June 30, 1997 is comprised as follows (in thousands): Depreciation........................................................... $ 569 Other.................................................................. 90 ------- Total.................................................................. $ 659 =======
F-10 A.C. MOORE ARTS & CRAFTS, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 4. Property and Equipment Property and equipment consist of the following at: December 31, --------------------- 1995 1996 ---- ---- (in thousands) Furniture, fixtures and equipment ......... $5,650 $6,865 Leasehold improvements .................... 563 664 Equipment for future stores ............... -- 604 Capitalized software costs ................ 504 692 ------ ------ 6,717 8,825 Less: Accumulated depreciation and amortization ......................... 2,709 3,711 ------ ------ $4,008 $5,114 ====== ====== 5. Leases The Company leases its retail stores, administrative offices and warehouse facilities under noncancelable operating leases. The lease for the administrative offices and distribution center has an initial lease term of six years with a six year renewal option. The Company also has short-term warehouse space with a one year initial lease term. Most store leases have an average initial term of ten years, with three five year renewal options, and provide for predetermined escalations in future minimum annual rent or 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 1995 and 1996 the amount of accrued rent expense recognized over the amount paid was $158,000 and $140,000, respectively. F-11 A.C. MOORE ARTS & CRAFTS, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) Rent expense under operating leases consists of: 1994 1995 1996 ---- ---- ---- (in thousands) Minimum rentals ......................... $4,127 $4,739 $4,815 Contingent payments ..................... 157 200 244 ------ ------ ------ $4,284 $4,939 $5,059 ====== ====== ====== In 1996, the Company entered into four leases for stores to open in 1997. During January and February 1997, the Company entered into four more leases. These stores will open later in 1997 or in 1998. Future minimum lease payments (including those for unopened stores) as of December 31, 1996 for noncancelable operating leases with terms in excess of one year are as follows (in thousands): 1997 ......................................... $ 5,297 1998 ......................................... 6,285 1999 ......................................... 6,500 2000 ......................................... 6,422 2001 ......................................... 6,413 Thereafter ................................... 26,340 ------- Total minimum future rentals ................. $57,257 ======= 6. Long-Term Debt Long-term debt consists of the following: December 31, -------------- 1995 1996 ---- ---- (in thousands) Term loan and revolving line of credit (monthly interest payable at LIBOR plus 2%) ............... $9,284 $8,510 Equipment loans ..................................... 2 -- ------ ------ 9,286 8,510 Less: Current maturities ............................ 776 1,857 ------ ------ Total long-term debt ................................ $8,510 $6,653 ====== ====== The Company's revolving line of credit matured on July 1, 1996, at which time the outstanding balance was converted to a term loan payable in sixty monthly installments commencing on August 1, 1996. The loan is collateralized by all of the Company's assets and contains certain financial and restrictive covenants including limitations on incurring other debt and on dividends and F-12 A.C. MOORE ARTS & CRAFTS, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) distributions to the shareholders. The Company also has a $6,000,000 operating line of credit maturing on April 30, 1997 (see Note 11). There were no amounts outstanding under the operating line of credit at December 31, 1996 and 1995. The loans bear elective interest rates which vary based on the bank's base rate or LIBOR (or a fixed rate based upon five-year Treasury securities for the term loan). At December 31, 1995 and 1996 the rate of interest on the Company's outstanding bank debt was 8.5% and 7.8%, respectively. Aggregate annual principal payments on long-term debt for five years subsequent to December 31, 1996, are (in thousands): 1997 ................................... $1,857 1998 ................................... 1,857 1999 ................................... 1,857 2000 ................................... 1,856 2001 ................................... 1,083 ------ $8,510 ====== 7. Loans From Shareholders - Subordinated The loans from shareholders are subordinated to the bank loans and are classified by the bank as part of the Company's equity in determining the net worth for financial debt covenant calculations. The loans, which are non-interest bearing, are payable to the shareholders upon their written request for payment, subject to the subordination provisions. The shareholders agreed not to demand payment of the loans on or before June 30, 1998, except upon the date of the Company's completion of initial public offering or consummation of a refinancing on a long-term basis. 8. Income Taxes The Company is an S Corporation for federal and state tax purposes and accordingly the taxes related thereto are substantially the responsibility of the shareholders individually. Current and deferred taxes have been provided in the financial statements for the States of New Jersey and New York corporate-level tax on S Corporations, which rates are approximately 2%. The effective tax rates differ from the statutory rates principally because of the effects of certain permanent differences and apportionment ratios (see Note 3). 9. Stock Option 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 benefitted. F-13 A.C. MOORE ARTS & CRAFTS, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 10. Commitments and Contingencies The Company is not a party to any material legal proceedings other than routine litigation incidental to its business. In the opinion of management, the amount of ultimate liability with respect to these actions will not materially affect the financial position, operating results or cash flows of the Company. 11. Subsequent Events Shareholder Distribution. During 1997, the Company declared distributions to the shareholders for the payment of taxes of $3,204,000. In March 1997, the Company distributed $3,705,000 which was contemporaneously loaned back to the Company. Loan Agreement. On January 23, 1997, the Company entered into a new Loan Agreement with KeyBank which refinanced the term loan and provided two revolving lines of credit along with an operating line of credit. The agreement is collateralized by all of the Company's assets and contains certain financial and restrictive covenants including limitations on incurring other debt and on dividends and distributions to the shareholders. The two revolving lines of credit in the amounts of $3,200,000 and $5,000,000 are available solely for costs associated with opening new stores and related inventory purchases. The $3,200,000 revolving line of credit is presently available to the Company until December 31, 1998, at which time the Company may elect to convert the line to a 60-month term loan maturing on December 31, 2003. The $5,000,000 revolving line of credit is available to the Company providing the Company is meeting the performance measurements, such as no event of default and certain covenant compliance, and will remain available until December 31, 1998, at which time the Company may elect to convert the line to a 60-month term loan maturing December 31, 2003. The $16,000,000 operating line of credit is available to the Company solely for working capital purposes; $9,000,000 is currently available, and $7,000,000 will be made available to the Company on March 31, 1998 upon achievement of certain performance measurements. The agreement bears elective interest rates which vary based upon the bank's base rate or LIBOR. Currently the Company is paying 1.5% over LIBOR. The Company is required to pay an annual commitment fee of 0.125% on the unused portion of the lines of credit. Reorganization. The Company effected a Reorganization of its corporate structure on July 18, 1997 (see Note 1). The new corporate entity, A.C. Moore Arts & Crafts, Inc., has authorized capital stock of 20,000,000 common shares and 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. All amounts in the financial statements have been restated to reflect the Reorganization. F-14 A.C. MOORE ARTS & CRAFTS, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 12. Subsequent Event (Unaudited) Stock Incentive Plan. The Company's Employee, Director and Consultant Stock Option Plan (the "1997 Plan"), pursuant to which 1,000,000 shares of common stock may be granted, was adopted by the Company's Board of Directors in July 1997 for the purpose of securing for the Company and its shareholders the benefits arising from the ownership of Company stock options by key employees and non-employee directors who are expected to contribute to the Company's future growth and success. On July 22, 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. On September 15, 1997, the Company amended the 1997 Plan to permit the exercise of options granted under the 1997 Plan without regard to whether the Company has completed an initial public offering. The Company's estimated fair value at the grant date and on the date the 1997 Plan was amended was $9.00. The options granted to date under the 1997 Plan vest one-third in 1998, one-third in 1999 and one-third in 2000. F-15 (Photographs depicting the following scenes are included on the inside back cover of the Prospectus: Interior pictures of the following areas: - cash registers - cake making - artist supplies - paint - artist supplies - sketchpads)
============================================================== ============================================================ No person has been authorized in connection with the offering made hereby to give any information or to make any 2,700,000 SHARES representation not contained in this Prospectus, and if given or made, such information or representation must not be relied upon as having been authorized by the Company or any Underwriter. This Prospectus does not constitute an offer to sell or a solicitation of any offer to buy any of the securities [LOGO] offered hereby to any person or by anyone in any jurisdiction in which it is unlawful to make such offer or solicitation. Neither the delivery of this Prospectus nor any sale made hereunder shall, under any circumstances, create any implication that the information contained herein is correct as of any date A.C. Moore Arts & Crafts, Inc. subsequent to the date hereof. COMMON STOCK ------------------- TABLE OF CONTENTS ------------------- Page ---- Prospectus Summary...........................................3 Risk Factors.................................................7 Use of Proceeds.............................................12 Dividend Policy and Prior S Corporation Status............. 13 Capitalization..............................................14 Dilution....................................................15 ---------- Selected Financial and Operating Data.......................16 Management's Discussion and Analysis of PROSPECTUS Financial Condition and Results of Operations............18 Business....................................................28 ---------- Management..................................................40 Certain Transactions........................................47 Principal Shareholders......................................48 Description of Capital Stock................................49 Shares Eligible for Future Sale.............................53 Underwriting................................................54 Legal Matters...............................................56 Experts.....................................................56 Additional Information......................................56 Index to Financial Statements............................. F-1 Until , 1997, (25 days after the date BT ALEX. BROWN of this Prospectus) all dealers effecting transactions in the Common Stock offered hereby, whether or not participating in this distribution, may be required to deliver a Prospectus. This is in addition to the obligation of dealers to deliver a JANNEY MONTGOMERY SCOTT INC. Prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions. , 1997 ============================================================== ============================================================
PART II INFORMATION NOT REQUIRED IN PROSPECTUS Item 13. Other Expenses of Issuance and Distribution. The following table sets forth the various expenses to be incurred in connection with the sale and distribution of the securities being registered, all of which will be paid solely by the Company. SEC Registration Fee*....................................... $ 13,173 NASD Filing Fee*............................................ 4,847 NASDAQ Listing Fee*......................................... 35,000 Printing, Engraving and Mailing Expenses ................... 125,000 Legal Fees and Expenses..................................... 150,000 Accounting Fees and Expenses................................ 150,000 Transfer Agent Fees and Expenses............................ 5,000 Blue Sky Fees and Expenses.................................. 5,000 Miscellaneous............................................... 61,980 ------------ TOTAL............................................ $550,000 ============ - ------------- * Exact; all other fees and expenses are estimates Item 14. Indemnification of Directors and Officers. Sections 1741 through 1750 of Subchapter D, Chapter 17, of the Pennsylvania Business Corporation Law of 1988, as amended (the "BCL"), 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. 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 if the appropriate standards of conduct are met. 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 the circumstances of 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. 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 or director, whether or not the corporation would have the power to Subchapter 17D of the BCL. Section 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 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 the Company 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 the Company's Articles of Incorporation and Bylaws, copies of which are filed as Exhibits 3.1 and 3.2, respectively, which provide in general that the Company shall indemnify its officers and directors to the fullest extent authorized by law. Reference is also made to Section 8 of the Underwriting Agreement as filed as Exhibit 1 to this Registration Statement. Item 15. Recent Sales of Unregistered Securities. None. Item 16. Exhibits and Financial Statements (a) Exhibits: Exhibit Number Description ------- ----------- 1.1 Form of Underwriting Agreement 3.1 Articles of Incorporation* 3.2 Bylaws* 4.1 Specimen of Common Stock Certificate 5.1 Opinion of Blank Rome Comisky & McCauley** 10.1 1997 Employee, Director and Consultant Stock Option Plan 10.2 Form of Stock Option Award Agreement 10.3 Loan Agreement, dated January 23, 1997, between the Company and KeyBank National Association* 10.4 Correspondence reflecting option granted to Richard Lesser* 10.5 Tax Indemnification Agreement, dated July 22, 1997, among the Company, John E. Parker and William Kaplan* 10.6 Lease, dated August 14, 1995, between Freeport 130, L.L.C. and A.C. Moore, Inc. 10.7 Shareholders Loan Agreement dated December 30, 1990 between A.C. Moore Incorporated, William Kaplan and John E. Parker. 10.8 Amendment to Shareholders Loan Agreement dated July 22, 1997 by and among A.C. Moore Incorporated, William Kaplan and John E. Parker. 11.1 Computation of pro forma net income per share* 11.2 Computation of supplemental pro forma net income per share* 21.1 Subsidiaries of the Company* 23.1 Consent of Price Waterhouse LLP 23.2 Consent of Blank Rome Comisky & McCauley (See Exhibit 5.1) 24.1 Power of attorney (included on signature page)* 27.1 Financial Data Schedule* - ------------------- * Previously filed. ** To be filed by amendment. (b) No financial statement schedules are filed as part of this Registration Statement. Item 17. Undertakings. (a) The undersigned hereby undertakes to provide to the underwriter at the closing specified in the underwriting agreements certificates in such denominations and registered in such names as required by the underwriter to permit prompt delivery to each purchaser. (b) Insofar as indemnification for liabilities arising under the Securities Act of 1933 (the "Securities Act") may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, 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 Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. (c) The undersigned hereby undertakes that: (1) For purposes of determining any liability under the Securities Act, 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 under 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; and (2) For the purpose of determining any liability under the Securities Act, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and that offering of such securities at that time shall be deemed as the initial bona fide offering of those securities. SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the Registrant has duly caused this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Blackwood, State of New Jersey on September 16, 1997. A.C. MOORE ARTS & CRAFTS, INC. By: /s/ John E. Parker ----------------------------------------- John E. Parker, President, Chief Executive Officer and Director (Duly Authorized Officer) In accordance with the requirements of the Securities Act of 1933, this Registration Statement has been duly signed below by the following persons in the capacities and on the dates stated.
SIGNATURE CAPACITY DATE - -------------------------------------- ---------------------------------------------- -------------------------- /s/ John E. Parker President, Chief Executive Officer, and September 16, 1997 - -------------------------------------- Director (Principal Executive Officer) John E. Parker /s/ Leslie H. Gordon Senior Vice President and Chief Financial September 16, 1997 - -------------------------------------- Officer (Principal Financial and Accounting Leslie H. Gordon Officer) * Chairman of the Board September , 1997 - -------------------------------------- William Kaplan * Director September , 1997 - -------------------------------------- Patricia A. Parker * Director September , 1997 - -------------------------------------- Richard Lesser * Director September , 1997 - -------------------------------------- Richard J. Bauer * Director September , 1997 - -------------------------------------- Richard J. Drake By: /s/ John E. Parker September 16, 1997 ----------------------------------- John E. Parker, Attorney-In-Fact
EXHIBIT INDEX Exhibit Number Description ------- ----------- 1.1 Form of Underwriting Agreement 3.1 Articles of Incorporation* 3.2 Bylaws* 4.1 Specimen of Common Stock Certificate 5.1 Opinion of Blank Rome Comisky & McCauley** 10.1 1997 Employee, Director and Consultant Stock Option Plan 10.2 Form of Stock Option Award Agreement 10.3 Loan Agreement, dated January 23, 1997, between the Company and KeyBank National Association 10.4 Correspondence reflecting option granted to Richard Lesser* 10.5 Tax Indemnification Agreement, dated July 22, 1997, among the Company, John E. Parker and William Kaplan* 10.6 Lease, dated August 14, 1995, between Freeport 130, L.L.C. and A.C. Moore, Inc. 10.7 Shareholders Loan Agreement dated December 30, 1990 between A.C. Moore Incorporated, William Kaplan and John E. Parker. 10.8 Amendment to Shareholders Loan Agreement dated July 22, 1997 by and among A.C. Moore Incorporated, William Kaplan and John E. Parker. 11.1 Computation of pro forma net income per share* 11.2 Computation of supplemental pro forma net income per share* 21.1 Subsidiaries of the Company* 23.1 Consent of Price Waterhouse LLP 23.2 Consent of Blank Rome Comisky & McCauley (See Exhibit 5.1) 24.1 Power of attorney (included on signature page)* 27.1 Financial Data Schedule* - ---------------- * Previously filed. ** To be filed by amendment. EX-1.1 2 EXHIBIT 1.1 2,700,000 Shares A.C. MOORE ARTS & CRAFTS, INC. Common Stock UNDERWRITING AGREEMENT _______________, 1997 BT ALEX. BROWN INCORPORATED JANNEY MONTGOMERY SCOTT INC. As Representatives of the Several Underwriters c/o BT Alex. Brown Incorporated One South Street Baltimore, Maryland 21202 Gentlemen: A.C. Moore Arts & Crafts, Inc., a Pennsylvania corporation (the "Company"), proposes to sell to the several underwriters (the "Underwriters") named in Schedule I hereto for whom you are acting as representatives (the "Representatives") an aggregate of 2,700,000 shares of the Company's Common Stock (the "Firm Shares"). The respective amounts of the Firm Shares to be so purchased by the several Underwriters are set forth opposite their names in Schedule I hereto. The Company also proposes to sell at the Underwriters' option an aggregate of up to 405,000 additional shares of the Company's Common Stock (the "Option Shares") as set forth below. As the Representatives, you have advised the Company (a) that you are authorized to enter into this Agreement on behalf of the several Underwriters, and (b) that the several Underwriters are willing, acting severally and not jointly, to purchase the numbers of Firm Shares set forth opposite their respective names in Schedule I, plus their pro rata portion of the - 1 - Option Shares if you elect to exercise the over-allotment option in whole or in part for the accounts of the several Underwriters. The Firm Shares and the Option Shares (to the extent the aforementioned option is exercised) are herein collectively called the "Shares." In consideration of the mutual agreements contained herein and of the interests of the parties in the transactions contemplated hereby, the parties hereto agree as follows: 1. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company represents and warrants to each of the Underwriters as follows: (a) A registration statement on Form S-1 (File No. 333-32859) with respect to the Shares has been carefully prepared by the Company, in all material respects, in conformity with the requirements of the Securities Act of 1933, as amended (the "Act"), and the Rules and Regulations (the "Rules and Regulations") of the Securities and Exchange Commission (the "Commission") thereunder and has been filed with the Commission. Copies of such registration statement, including any amendments thereto, the preliminary prospectuses (meeting the requirements of the Rules and Regulations) contained therein and the exhibits, financial statements and schedules, as finally amended and revised, have heretofore been delivered by the Company to you. Such registration statement, together with any registration statement filed by the Company which meets the requirements for becoming effective upon filing with the Commission pursuant to Rule 462 (b) of the Act, herein referred to as the "Registration Statement," which shall be deemed to include all information omitted therefrom in reliance upon Rule 430A and contained in the Prospectus referred to below, has become effective under the Act and no post-effective amendment to the Registration Statement has been filed as of the date of this Agreement. "Prospectus" means (a) the form of prospectus first filed with the Commission pursuant to Rule 424(b) or (b) the last preliminary prospectus included in the Registration Statement filed prior to the time it becomes effective or filed pursuant to Rule 424(a) under the Act that is delivered by the Company to the Underwriters for delivery to purchasers of the Shares, together with the term sheet or abbreviated term sheet filed with the Commission pursuant to Rule 424(b)(7) under the Act. Each preliminary prospectus included in the Registration Statement prior to the time it becomes effective is herein referred to as a "Preliminary Prospectus." (b) The Company has been duly organized and is validly existing as a corporation in good standing under the laws of the Commonwealth of Pennsylvania, with corporate power and authority to own or lease its properties and conduct its business as described in the Registration Statement. Each of the subsidiaries of the -2- Company, as listed in Exhibit A hereto, (collectively, the "Subsidiaries") has been duly organized and is validly existing as a corporation in good standing under the laws of the jurisdiction of its incorporation, with corporate power and authority to own or lease its properties and conduct its business as described in the Registration Statement. The Subsidiaries are the only subsidiaries, direct or indirect, of the Company. The Company and each of the Subsidiaries are duly qualified to transact business in all jurisdictions in which the conduct of their business requires such qualification, except where the failure to be so qualified does not have a material adverse effect on the earnings, business, management, properties, assets, rights, operations, condition (financial or otherwise) or prospects of the Company and its Subsidiaries taken as a whole. The outstanding shares of capital stock of each of the Subsidiaries have been duly authorized and validly issued, are fully paid and non-assessable and are owned by the Company or another Subsidiary free and clear of all liens, encumbrances and equities and claims; and no options, warrants or other rights to purchase, agreements or other obligations to issue or other rights to convert any obligations into shares of capital stock or ownership interests in the Subsidiaries are outstanding. (c) The outstanding shares of Common Stock of the Company have been duly authorized and validly issued and are fully paid and non-assessable; the Shares to be issued and sold by the Company have been duly authorized and when issued and paid for as contemplated herein will be validly issued, fully paid and non-assessable; and no preemptive rights of stockholders exist with respect to any of the Shares or the issue and sale thereof. Neither the filing of the Registration Statement nor the offering or sale of the Shares as contemplated by this Agreement gives rise to any rights, other than those which have been waived or satisfied, for or relating to the registration of any shares of Common Stock. (d) The information set forth under the caption "Capitalization" in the Prospectus is true and correct. All of the Shares conform to the description thereof contained in the Registration Statement. The form of certificates for the Shares conforms to the corporate law of the jurisdiction of the Company's incorporation. (e) The Commission has not issued an order preventing or suspending the use of any Prospectus relating to the proposed offering of the Shares nor instituted proceedings for that purpose. The Registration Statement contains, and the Prospectus and any amendments or supplements thereto will contain, all statements which are required to be stated therein by, and will conform in all material respects to, the requirements of the Act and the Rules and Regulations. The Registration Statement and any amendment thereto do not contain, and will not contain, any untrue statement of a material fact and do not omit, and will not omit, to state any material fact required to be -3- stated therein or necessary to make the statements therein not misleading. The Prospectus and any amendments and supplements thereto do not contain, and will not contain, any untrue statement of material fact; and do not omit, and will not omit, to state any 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 the Company makes no representations or warranties as to information contained in or omitted from 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 or on behalf of any Underwriter through the Representatives, specifically for use in the preparation thereof. (f) The financial statements of the Company and the Subsidiaries, together with related notes as set forth in the Registration Statement, present fairly, in all material respects, the financial position and the results of operations and cash flows of the Company and the Subsidiaries, at the indicated dates and for the indicated periods. Such financial statements have been prepared in accordance with generally accepted accounting principles, consistently applied throughout the periods involved, except as disclosed herein, and all adjustments necessary for a fair presentation of results for such periods have been made. The summary financial and statistical data included in the Registration Statement presents fairly, in all material respects, the information shown therein and such data has been compiled on a basis consistent with the financial statements presented therein and the books and records of the Company. The pro forma financial information included in the Registration Statement and the Prospectus present fairly the information shown therein, have been properly compiled on the pro forma bases described therein, and, in the opinion of the Company, the assumptions used in the preparation thereof are reasonable and appropriate to give effect to the transactions or circumstances referred to therein. (h) There is no action, suit, claim or proceeding pending or, to the knowledge of the Company, threatened against the Company or any of the Subsidiaries before any court or administrative agency or otherwise which if determined adversely to the Company or any of its Subsidiaries might result in any material adverse change in the earnings, business, management, properties, assets, rights, operations, condition (financial or otherwise) or prospects of the Company and of the Subsidiaries taken as a whole or to prevent the consummation of the transactions contemplated hereby, except as set forth in the Registration Statement. (i) The Company and the Subsidiaries have good and marketable title to all of -4- the properties and assets reflected in the financial statements (or as described in the Registration Statement) hereinabove described, subject to no lien, mortgage, pledge, charge or encumbrance of any kind except those reflected in such financial statements (or as described in the Registration Statement) or which are not material in amount. The Company and the Subsidiaries occupy their leased properties under valid and binding leases. (j) The Company and the Subsidiaries have filed all Federal, state, local and foreign income tax returns which have been required to be filed or have requested and obtained extensions thereof and have paid all taxes indicated by said returns and all assessments received by them or any of them to the extent that such taxes have become due, except for any such assessment that is currently being contested in good faith or as described in or contemplated by the Registration Statement or Prospectus. All tax liabilities have been adequately provided for on a pro forms basis in the financial statements of the Company. (k) Since the respective dates as of which information is given in the Registration Statement, as it may be amended or supplemented, there has not been any material adverse change or any development involving a prospective material adverse change in or affecting the earnings, business, management, properties, assets, rights, operations, condition (financial or otherwise), or prospects of the Company and its Subsidiaries taken as a whole, whether or not occurring in the ordinary course of business, and there has not been any material transaction entered into or any material transaction that is probable of being entered into by the Company or the Subsidiaries, other than transactions in the ordinary course of business and changes and transactions described in the Registration Statement, as it may be amended or supplemented. The Company and the Subsidiaries have no material contingent obligations which are not disclosed in the Company's financial statements which are included in the Registration Statement. (l) Neither the Company nor any of the Subsidiaries is or with the giving of notice or lapse of time or both, will be, in violation of or in default under its Articles or By-Laws or under any agreement, lease, contract, indenture or other instrument or obligation to which it is a party or by which it, or any of its properties, is bound and which default is of material significance in respect of the condition, financial or otherwise of the Company and its Subsidiaries taken as a whole or the business, management, properties, assets, rights, operations, condition (financial or otherwise) or prospects of the Company and the Subsidiaries taken as a whole. The execution and delivery of this Agreement and the consummation of the transactions herein contemplated and the fulfillment of the terms hereof will not conflict with or result in a -5- breach of any of the terms or provisions of, or constitute a default under, any indenture, mortgage, deed of trust or other agreement or instrument to which the Company or any Subsidiary is a party, or of the Articles or By-laws of the Company or any order, rule or regulation applicable to the Company or any Subsidiary of any court or of any regulatory body or administrative agency or other governmental body having jurisdiction. (m) Each approval, consent, order, authorization, designation, declaration or filing by or with any regulatory, administrative or other governmental body necessary in connection with the execution and delivery by the Company of this Agreement and the consummation of the transactions herein contemplated (except such additional steps as may be required by the Commission, the National Association of Securities Dealers, Inc. (the "NASD") or such additional steps as may be necessary to qualify the Shares for public offering by the Underwriters under state securities or Blue Sky laws) has been obtained or made and is in full force and effect. (n) The Company and each of the Subsidiaries holds all material licenses, certificates and permits from governmental authorities which are necessary to the conduct of their businesses; and, to the Company's knowledge, neither the Company nor any of the Subsidiaries has infringed any patents, patent rights, trade names, trademarks or copyrights, which infringement is material to the business of the Company and the Subsidiaries taken as a whole. The Company knows of no material infringement by others of patents, patent rights, trade names, trademarks or copyrights owned by or licensed to the Company. (o) Neither the Company, nor to the Company's best knowledge, any of its affiliates, has taken or may take, directly or indirectly, any action designed to cause or result in, or which has constituted or which might reasonably be expected to constitute, the stabilization or manipulation of the price of the shares of Common Stock to facilitate the sale or resale of the Shares. The Company acknowledges that the Underwriters may engage in passive market making transactions in the Shares on The Nasdaq Stock Market in accordance with Rule 103 under the Exchange Act. (p) Neither the Company nor any Subsidiary is an "investment company" within the meaning of such term under the Investment Company Act of 1940 and the rules and regulations of the Commission thereunder. (q) The Company maintains a system of internal accounting controls sufficient to provide reasonable assurances that (i) transactions are executed in accordance with management's general or specific authorization; (ii) transactions are recorded as -6- necessary to permit preparation of financial statements in conformity with generally accepted accounting principles and to maintain accountability for assets; (iii) access to assets is permitted only in accordance with management's general or specific authorization; and (iv) the recorded accountability for assets is compared with existing assets at reasonable intervals and appropriate action is taken with respect to any differences. (r) The Company and each of its Subsidiaries carry, or are covered by, insurance in such amounts and covering such risks as is adequate for the conduct of their respective businesses and the value of their respective properties and as is customary for companies engaged in similar industries. (s) The Company does not sponsor or contribut to any "pension plan" (as defined in the Employee Retirement Income Security Act of 1974, as amended, including the regulations and published interpretations thereunder ("ERISA")). 2. PURCHASE, SALE AND DELIVERY OF THE FIRM SHARES. (a) On the basis of the representations, warranties and covenants herein contained, and subject to the conditions herein set forth, the Company agrees to sell to the Underwriters and each Underwriter agrees, severally and not jointly, to purchase, at a price of $_____ per share, the number of Firm Shares set forth opposite the name of each Underwriter in Schedule I hereof, subject to adjustments in accordance with Section 9 hereof. (b) Payment for the Firm Shares to be sold hereunder is to be made in New York Clearing House funds by certified or bank cashier's checks drawn to the order of the Company against delivery of certificates therefor to the Representatives for the several accounts of the Underwriters. Such payment and delivery are to be made at the offices of BT Alex. Brown Incorporated, One South Street, Baltimore, Maryland, at 10:00 a.m., Baltimore time, on the third business day after the date of this Agreement or at such other time and date not later than five business days thereafter as you and the Company shall agree upon, such time and date being herein referred to as the "Closing Date." As used herein, "business day" means a day on which the New York Stock Exchange is open for trading and on which banks in New York are open for business and are not permitted by law or executive order to be closed. The certificates for the Firm Shares will be delivered in such denominations and in such registrations as the Representatives request in writing not later than the second full business day prior to the Closing Date, and will be made available for inspection by the Representatives at least one business day prior to the Closing Date. -7- (c) In addition, on the basis of the representations and warranties herein contained and subject to the terms and conditions herein set forth, the Company hereby grants an option to the several Underwriters to purchase the Option Shares at the price per share as set forth in the first paragraph of this Section 2. The option granted hereby may be exercised in whole or in part by giving written notice (i) at any time before the Closing Date and (ii) only once thereafter within 30 days after the date of this Agreement, by you, as Representatives of the several Underwriters, to the Company setting forth the number of Option Shares as to which the several Underwriters are exercising the option, the names and denominations in which the Option Shares are to be registered and the time and date at which such certificates are to be delivered. The time and date at which certificates for Option Shares are to be delivered shall be determined by the Representatives but shall not be earlier than three nor later than 10 full business days after the exercise of such option, nor in any event prior to the Closing Date (such time and date being herein referred to as the "Option Closing Date"). If the date of exercise of the option is three or more days before the Closing Date, the notice of exercise shall set the Closing Date as the Option Closing Date. The number of Option Shares to be purchased by each Underwriter shall be in the same proportion to the total number of Option Shares being purchased as the number of Firm Shares being purchased by such Underwriter bears to 2,700,000, adjusted by you in such manner as to avoid fractional shares. The option with respect to the Option Shares granted hereunder may be exercised only to cover over-allotments in the sale of the Firm Shares by the Underwriters. You, as Representatives of the several Underwriters, may cancel such option at any time prior to its expiration by giving written notice of such cancellation to the Company. To the extent, if any, that the option is exercised, payment for the Option Shares shall be made on the Option Closing Date in New York Clearing House funds by certified or bank cashier's check drawn to the order of the Company against delivery of certificates therefor at the offices of BT Alex. Brown Incorporated, One South Street, Baltimore, Maryland. 3. OFFERING BY THE UNDERWRITERS. It is understood that the several Underwriters are to make a public offering of the Firm Shares as soon as the Representatives deem it advisable to do so. The Firm Shares are to be initially offered to the public at the initial public offering price set forth in the Prospectus. The Representatives may from time to time thereafter change the public offering price and other selling terms. To the extent, if at all, that any Option Shares are purchased pursuant to Section 2 hereof, the Underwriters will offer them to the public on the foregoing terms. -8- It is further understood that you will act as the Representatives for the Underwriters in the offering and sale of the Shares in accordance with a Master Agreement Among Underwriters entered into by you and the several other Underwriters. -9- 4. COVENANTS OF THE COMPANY. The Company covenants and agrees with the several Underwriters that: (a) The Company will (i) use its best efforts to cause the Registration Statement to become effective or, if the procedure in Rule 430A of the Rules and Regulations is followed, to prepare and timely file with the Commission under Rule 424(b) of the Rules and Regulations a Prospectus in a form approved by the Representatives containing information previously omitted at the time of effectiveness of the Registration Statement in reliance on Rule 430A of the Rules and Regulation and (ii) not file any amendment to the Registration Statement or supplement to the Prospectus of which the Representatives shall not previously have been advised and furnished with a copy or which is not in compliance with the Rules and Regulations. (b) The Company will advise the Representatives promptly (i) when the Registration Statement or any post-effective amendment thereto shall have become effective, (ii) of receipt of any comments from the Commission, (iii) of any request of the Commission for amendment of the Registration Statement or for supplement to the Prospectus or for any additional information, and (iv) of the issuance by the Commission of any stop order suspending the effectiveness of the Registration Statement or the use of the Prospectus or of the institution of any proceedings for that purpose. The Company will use its best efforts to prevent the issuance of any such stop order preventing or suspending the use of the Prospectus and to obtain as soon as possible the lifting thereof, if issued. (c) The Company will cooperate with the Representatives in endeavoring to qualify the Shares for sale under the securities laws of such jurisdictions as the Representatives may reasonably have designated in writing and will make such applications, file such documents, and furnish such information as may be reasonably required for that purpose, provided 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 where it is not now so qualified or required to file such a consent. The Company will, from time to time, prepare and file such statements, reports, and other documents, as are or may be required to continue such qualifications in effect for so long a period as the Representatives may reasonably request for distribution of the Shares. (d) The Company will deliver to, or upon the order of, the Representatives, from time to time, as many copies of any Preliminary Prospectus as the Representatives may reasonably request. The Company will deliver to, or upon the order of, the Representatives during the period when delivery of a Prospectus is required under the -10- Act, as many copies of the Prospectus in final form, or as thereafter amended or supplemented, as the Representatives may reasonably request. The Company will deliver to the Representatives at or before the Closing Date, four signed copies of the Registration Statement and all amendments thereto including all exhibits filed therewith, and will deliver to the Representatives such number of copies of the Registration Statement (including such number of copies of the exhibits filed therewith that may reasonably be requested), and of all amendments thereto, as the Representatives may reasonably request. (e) The Company will comply with the Act and the Rules and Regulations, and the Securities Exchange Act of 1934 (the "Exchange Act"), and the rules and regulations of the Commission thereunder, so as to permit the completion of the distribution of the Shares as contemplated in this Agreement and the Prospectus. If during the period in which a prospectus is required by law to be delivered by an Underwriter or dealer, any event shall occur as a result of which, in the judgment of the Company or in the reasonable opinion of the Underwriters, it becomes necessary to amend or supplement the Prospectus in order to make the statements therein, in the light of the circumstances existing at the time the Prospectus is delivered to a purchaser, not misleading, or, if it is necessary at any time to amend or supplement the Prospectus to comply with any law, the Company promptly will prepare and file with the Commission an appropriate amendment to the Registration Statement or supplement to the Prospectus so that the Prospectus as so amended or supplemented will not, in the light of the circumstances when it is so delivered, be misleading, or so that the Prospectus will comply with the law. (f) The Company will make generally available to its security holders, as soon as it is practicable to do so, but in any event not later than March 31, 1999, an earning statement (which need not be audited) in reasonable detail, covering a period of at least 12 consecutive months beginning after the effective date of the Registration Statement, which earning statement shall satisfy the requirements of Section 11(a) of the Act and Rule 158 of the Rules and Regulations. (g) The Company will, for a period of five years from the Closing Date, deliver to the Representatives copies of annual reports and copies of all other documents, reports and information furnished by the Company to its stockholders or filed with any securities exchange pursuant to the requirements of such exchange or with the Commission pursuant to the Act or the Securities Exchange Act of 1934, as amended. The Company will deliver to the Representatives similar reports with respect to significant subsidiaries, as that term is defined in the Rules and Regulations, which are not consolidated in the Company's financial statements. -11- (h) No offering, sale, short sale or other disposition of any shares of Common Stock of the Company or other securities convertible into or exchangeable or exercisable for shares of Common Stock or derivative of Common Stock (or agreement for such) will be made for a period of 180 days after the date of this Agreement, directly or indirectly, by the Company otherwise than hereunder or with the prior written consent of BT Alex. Brown Incorporated. (i) The Company will use its best efforts to list, subject to notice of issuance, the Shares on the The Nasdaq Stock Market. (j) The Company has caused each officer and director of the Company to furnish to you, on or prior to the date of this Agreement, a letter or letters, in form and substance satisfactory to the Underwriters, pursuant to which each such person shall agree not to offer, sell, sell short or otherwise dispose of any shares of Common Stock of the Company or other capital stock of the Company, or any other securities convertible, exchangeable or exercisable for Common Shares or derivative of Common Shares owned by such person or request the registration for the offer or sale of any of the foregoing (or as to which such person has the right to direct the disposition of) for a period of 180 days after the date of this Agreement, directly or indirectly, except with the prior written consent of BT Alex. Brown Incorporated ("Lockup Agreements"). (k) The Company shall apply the net proceeds of its sale of the Shares as set forth in the Prospectus. (l) The Company shall not invest, or otherwise use the proceeds received by the Company from its sale of the Shares in such a manner as would require the Company or any of the Subsidiaries to register as an investment company under the Investment Company Act of 1940, as amended (the "1940 Act"). (m) The Company will maintain a transfer agent and, if necessary under the jurisdiction of incorporation of the Company, a registrar for the Common Stock. (n) The Company will not take, directly or indirectly, any action designed to cause or result in, or that has constituted or might reasonably be expected to constitute, the stabilization or manipulation of the price of any securities of the Company. 5. COSTS AND EXPENSES. The Company will pay all costs, expenses and fees incident to the performance -12- of the obligations of the Company under this Agreement, including, without limiting the generality of the foregoing, the following: accounting fees of the Company; the fees and disbursements of counsel for the Company; the cost of printing and delivering to, or as requested by, the Underwriters copies of the Registration Statement, Preliminary Prospectuses, the Prospectus, this Agreement, the Underwriters' Invitation Letter, the Listing Application, the Blue Sky Survey and any supplements or amendments thereto; the filing fees of the Commission; the filing fees and expenses (including legal fees and disbursements) incident to securing any required review by the National Association of Securities Dealers, Inc. (the "NASD") of the terms of the sale of the Shares; the Listing Fee of the Nasdaq Stock Market; and the expenses, including the fees and disbursements of counsel for the Underwriters, incurred in connection with the qualification of the Shares under State securities or Blue Sky laws. The Company shall not, however, be required to pay for any of the Underwriters expenses (other than those related to qualification under NASD regulation and State securities or Blue Sky laws) except that, if this Agreement shall not be consummated because the conditions in Section 6 hereof are not satisfied, or because this Agreement is terminated by the Representatives pursuant to Section 11(b)(1) hereof, or by reason of any failure, refusal or inability on the part of the Company to perform any undertaking or satisfy any condition of this Agreement or to comply with any of the terms hereof on its part to be performed, unless such failure to satisfy said condition or to comply with said terms be due to the default or omission of any Underwriter, then the Company shall reimburse the several Underwriters for reasonable out-of-pocket expenses, including fees and disbursements of counsel, reasonably incurred in connection with investigating, marketing and proposing to market the Shares or in contemplation of performing their obligations hereunder; but the Company shall not in any event be liable to any of the several Underwriters for damages on account of loss of anticipated profits from the sale by them of the Shares. 6. CONDITIONS OF OBLIGATIONS OF THE UNDERWRITERS. The several obligations of the Underwriters to purchase the Firm Shares on the Closing Date and the Option Shares, if any, on the Option Closing Date are subject to the accuracy, as of the Closing Date or the Option Closing Date, as the case may be, of the representations and warranties of the Company contained herein, and to the performance by the Company of its covenants and obligations hereunder and to the following additional conditions: (a) The Registration Statement and all post-effective amendments thereto shall have become effective and any and all filings required by Rule 424 and Rule 430A of the Rules and Regulations shall have been made, and any request of the Commission for -13- additional information (to be included in the Registration Statement or otherwise) shall have been disclosed to the Representatives and complied with to their reasonable satisfaction. No stop order suspending the effectiveness of the Registration Statement, as amended from time to time, shall have been issued and no proceedings for that purpose shall have been taken or, to the knowledge of the Company, shall be contemplated by the Commission and no injunction, restraining order, or order of any nature by a Federal or state court of competent jurisdiction shall have been issued as of the Closing Date which would prevent the issuance of the Shares. (b) The Representatives shall have received on the Closing Date or the Option Closing Date, as the case may be, the opinion of Blank Rome Comisky & McCauley, counsel for the Company, dated the Closing Date or the Option Closing Date, as the case may be, addressed to the Underwriters (and stating that it may be relied upon by counsel to the Underwriters) to the effect that: (i) The Company has been duly organized and is subsisting as a corporation in good standing under the laws of the Commonwealth of Pennsylvania with corporate power and authority to own or lease its properties and conduct its business as described in the Registration Statement; each of the Subsidiaries has been duly organized and is validly existing as a corporation in good standing under the laws of the jurisdiction of its incorporation, with corporate power and authority to own or lease its properties and conduct its business as described in the Registration Statement; the Company and each of the Subsidiaries are duly qualified to transact business in all jurisdictions in which the conduct of their business requires such qualification, and in which the failure to qualify would have a materially adverse effect upon the business of the Company and the Subsidiaries taken as a whole; and the outstanding shares of capital stock of each of the Subsidiaries have been duly authorized and validly issued and are fully paid and non-assessable and are owned by the Company or a Subsidiary; and, to such counsel's knowledge, the outstanding shares of capital stock of each of the Subsidiaries is owned free and clear of all liens, encumbrances and equities and claims, and no options, warrants or other rights to purchase, agreements or other obligations to issue or other rights to convert any obligations into any shares of capital stock or of ownership interests in the Subsidiaries are outstanding. (ii) The Company has authorized and outstanding capital stock as set forth under the caption "Capitalization" in the Prospectus; the authorized shares of the Company's Common Stock have been duly authorized; the outstanding shares of the Company's Common Stock have been duly authorized and validly -14- issued and are fully paid and non-assessable; all of the Shares conform to the description thereof contained in the Prospectus; the certificates for the Shares, assuming they are in the form filed with the Commission, are in due and proper form; the shares of Common Stock, including the Option Shares, if any, to be sold by the Company pursuant to this Agreement have been duly authorized and will be validly issued, fully paid and non-assessable when issued and paid for as -15- contemplated by this Agreement; and no preemptive rights of stockholders exist with respect to any of the Shares or the issue or sale thereof. (iii) Except as described in or contemplated by the Prospectus, to the knowledge of such counsel, there are no outstanding securities of the Company convertible or exchangeable into or evidencing the right to purchase or subscribe for any shares of capital stock of the Company and there are no outstanding or authorized options, warrants or rights of any character obligating the Company to issue any shares of its capital stock or any securities convertible or exchangeable into or evidencing the right to purchase or subscribe for any shares of such stock; and except as described in the Prospectus, to the knowledge of such counsel, no holder of any securities of the Company or any other person has the right, contractual or otherwise, which has not been satisfied or effectively waived, to cause the Company to sell or otherwise issue to them, or to permit them to underwrite the sale of, any of the Shares or the right to have any Common Shares or other securities of the Company included in the Registration Statement or the right, as a result of the filing of the Registration Statement, to require registration under the Act of any shares of Common Stock or other securities of the Company. (iv) The Registration Statement has become effective under the Act and, to the knowledge of such counsel, no stop order proceedings with respect thereto have been instituted or are pending or threatened under the Act. (v) The Registration Statement, the Prospectus and each amendment or supplement thereto comply as to form in all material respects with the requirements of the Act and the applicable rules and regulations thereunder (except that such counsel need express no opinion as to the financial statements and related schedules herein). (vi) The statements under the captions "Business-Litigation," "Management-Executive Compensation," "Management-Stock Option Plan," "Management-Severance Arrangement," "Certain Transactions," "Description of Capital Stock" and "Shares Eligible for Future Sale" in the Prospectus, insofar as such statements constitute a summary of documents referred to therein or matters of law, fairly summarize in all material respects the information called for with respect to such documents and matters. (vii) Such counsel does not know of any contracts or documents required to be filed as exhibits to the Registration Statement or described in the Registration Statement or the Prospectus which are not so filed or described as -16- required, and such contracts and documents as are summarized in the Registration Statement or the Prospectus are fairly summarized in all material respects. (viii) Such counsel knows of no material legal or governmental proceedings pending or threatened against the Company or any of the Subsidiaries except as set forth in the Prospectus. (ix) The execution and delivery of this Agreement and the consummation of the transactions herein contemplated do not and will not conflict with or result in a breach of any of the terms or provisions of, or constitute a default under, the Articles of Incororation or By-laws of the Company, or any agreement or instrument known to such counsel to which the Company or any of the Subsidiaries is a party or by which the Company or any of the Subsidiaries may be bound. (x) This Agreement has been duly authorized, executed and delivered by the Company. (xi) No approval, consent, order, authorization, designation, declaration or filing by or with any regulatory, administrative or other governmental body is necessary in connection with the execution and delivery of this Agreement and the consummation of the transactions herein contemplated (other than as may be required by the NASD or as required by State securities and Blue Sky laws as to which such counsel need express no opinion) except such as have been obtained or made. (xii) The Company is not, and will not become, as a result of the consummation of the transactions contemplated by this Agreement, and application of the net proceeds therefrom as described in the Prospectus, required to register as an investment company under the 1940 Act. In rendering such opinion Blank Rome Comisky & McCauley may rely as to matters governed by the laws of states other than Pennsylvania or Federal laws on local counsel in such jurisdictions, and as to matters of fact on certificates of officers of the Company and of government officials, provided that in each case Blank Rome Comisky & McCauley shall state that they believe that they and the Underwriters are justified in relying on such other counsel or certificates. In addition to the matters set forth above, such opinion shall also include a statement to the effect that nothing has come to the attention of such counsel which leads them to believe that (i) the Registration Statement, at the time it became effective under the Act (but after giving effect to any -17- modifications incorporated therein pursuant to Rule 430A under the Act) and as of the Closing Date or the Option Closing Date, as the case may be, contained an untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading, and (ii) the Prospectus, or any supplement thereto, on the date it was filed pursuant to the Rules and Regulations and as of the Closing Date or the Option Closing Date, as the case may be, contained an untrue statement of a material fact or omitted to state a material fact necessary in order to make the statements, in the light of the circumstances under which they are made, not misleading (except that such counsel need express no view as to financial statements, schedules and financial and statistical information therein). With respect to such statement, Blank Rome Comiskey & McCauley may state that their belief is based upon the procedures set forth therein, but is without independent check and verification. (c) The Representatives shall have received from Piper & Marbury L.L.P., counsel for the Underwriters, an opinion dated the Closing Date or the Option Closing Date, as the case may be, substantially to the effect specified in subparagraphs (ii), (iii), (iv) and (xi) of Paragraph (b) of this Section 6, and that the Company is a duly organized and subsisting corporation under the laws of the Commonwealth of Pennsylvania. In rendering such opinion Piper & Marbury L.L.P. may rely as to all matters governed other than by the laws of the State of Maryland or Federal laws on the opinion of counsel referred to in Paragraph (b) of this Section 6. In addition to the matters set forth above, such opinion shall also include a statement to the effect that nothing has come to the attention of such counsel which leads them to believe that (i) the Registration Statement, or any amendment thereto, as of the time it became effective under the Act (but after giving effect to any modifications incorporated therein pursuant to Rule 430A under the Act) as of the Closing Date or the Option Closing Date, as the case may be, contained an untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading, and (ii) the Prospectus, or any supplement thereto, on the date it was filed pursuant to the Rules and Regulations and as of the Closing Date or the Option Closing Date, as the case may be, contained an untrue statement of a material fact or omitted to state a material fact, necessary in order to make the statements, in the light of the circumstances under which they are made, not misleading (except that such counsel need express no view as to financial statements, schedules and statistical information therein). With respect to such statement, Piper & Marbury L.L.P. may state that their belief is based upon the procedures set forth therein, but is without independent check and verification. (d) The Representatives shall have received at or prior to the Closing Date from -18- Piper & Marbury L.L.P. a memorandum or summary, in form and substance satisfactory to the Representatives, with respect to the qualification for offering and sale by the Underwriters of the Shares under the State securities or Blue Sky laws of such jurisdictions as the Representatives may reasonably have designated to the Company. (e) The Representatives shall have received, on each of the dates hereof, the Closing Date and the Option Closing Date, as the case may be, a letter dated the date hereof, the Closing Date or the Option Closing Date, as the case may be, in form and substance satisfactory to you, of Price Waterhouse LLP confirming that they are independent public accountants within the meaning of the Act and the applicable published Rules and Regulations thereunder and stating that in their opinion the financial statements and schedules examined by them and included in the Registration Statement comply in form in all material respects with the applicable accounting requirements of the Act and the related published Rules and Regulations; and containing such other statements and information as is ordinarily included in accountants' "comfort letters" to Underwriters with respect to the financial statements and certain financial and statistical information contained in the Registration Statement and Prospectus. (f) The Representatives shall have received on the Closing Date or the Option Closing Date, as the case may be, a certificate or certificates of the Chief Executive Officer and the Chief Financial Officer of the Company (each on behalf of the Company and not in an individual capacity) to the effect that, as of the Closing Date or the Option Closing Date, as the case may be, each of them severally represents as follows: (i) The Registration Statement has become effective under the Act and no stop order suspending the effectiveness of the Registrations Statement has been issued, and no proceedings for such purpose have been taken or are, to his knowledge, contemplated by the Commission; (ii) The representations and warranties of the Company contained in Section 1 hereof are true and correct in all material respects as of the Closing Date or the Option Closing Date, as the case may be; (iii) All filings required to have been made pursuant to Rules 424 or 430A under the Act have been made; (iv) As of the effective date of the Registration Statement, the statements contained in the Registration Statement were true and correct, and such -19- Registration Statement and Prospectus did not omit to state a material fact required to be stated therein or necessary in order to make the statements therein not misleading, and since the effective date of the Registration Statement, no event has occurred which should have been set forth in a supplement to or an amendment of the Prospectus which has not been so set forth in such supplement or amendment; and (v) Since the respective dates as of which information is given in the Registration Statement and Prospectus, there has not been any material adverse change or any development involving a prospective material adverse change in or affecting the condition, financial or otherwise, of the Company and its Subsidiaries taken as a whole or the earnings, business, management, properties, assets, rights, operations, condition (financial or otherwise) or prospects of the Company and the Subsidiaries taken as a whole, whether or not arising in the ordinary course of business. (g) The Company shall have furnished to the Representatives such further certificates and documents confirming the representations and warranties, covenants and conditions contained herein and related matters as the Representatives may reasonably have requested. (h) The Firm Shares and Option Shares, if any, have been approved for designation upon notice of issuance on the Nasdaq Stock Market. (i) The Lockup Agreements described in Section 4 (j) are in full force and effect. The opinions and certificates mentioned in this Agreement shall be deemed to be in compliance with the provisions hereof only if they are in all material respects reasonably satisfactory to the Representatives and to Piper & Marbury L.L.P., counsel for the Underwriters. If any of the conditions hereinabove provided for in this Section 6 shall not have been fulfilled when and as required by this Agreement to be fulfilled, the obligations of the Underwriters hereunder may be terminated by the Representatives by notifying the Company of such termination in writing or by telegram at or prior to the Closing Date or the Option Closing Date, as the case may be. In such event, the Company and the Underwriters shall not be under any obligation to each other (except to the extent provided in Sections 5 and 8 hereof). -20- 7. CONDITIONS OF THE OBLIGATIONS OF THE COMPANY. The obligations of the Company to sell and deliver the portion of the Shares required to be delivered as and when specified in this Agreement are subject to the conditions that at the Closing Date or the Option Closing Date, as the case may be, no stop order suspending the effectiveness of the Registration Statement shall have been issued and in effect or proceedings therefor initiated or threatened. 8. INDEMNIFICATION. (a) The Company agrees to indemnify and hold harmless each Underwriter and each person, if any, who controls any Underwriter within the meaning of the Act, against any losses, claims, damages or liabilities to which such Underwriter or any such controlling person may become subject under the Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions or proceedings in respect thereof) arise out of or are based upon (i) any untrue statement or alleged untrue statement of any material fact contained in the Registration Statement, any Preliminary Prospectus, the Prospectus or any amendment or supplement thereto, or (ii) 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 each Underwriter and each such controlling person upon demand for any legal or other expenses reasonably incurred by such Underwriter or such controlling person in connection with investigating or defending any such loss, claim, damage or liability, action or proceeding or in responding to a subpoena or governmental inquiry related to the offering of the Shares, whether or not such Underwriter or controlling person is a party to any action or proceeding; provided, however, that the Company will not be liable in any such case to the extent that any such loss, claim, damage or liability arises out of or is based upon an untrue statement or alleged untrue statement, or omission or alleged omission made in the Registration Statement, any Preliminary Prospectus, the Prospectus, or any amendment or supplement thereto, in reliance upon and in conformity with written information furnished to the Company by or through the Representatives specifically for use in the preparation thereof. This indemnity agreement will be in addition to any liability which the Company may otherwise have. (b) Each Underwriter severally and not jointly will indemnify and hold harmless the Company, each of its directors, each of its officers who have signed the Registration Statement and each person, if any, who controls the Company within the meaning of the Act, against any losses, claims, damages or liabilities to which the Company or any such director, officer, or controlling person may become subject under the Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions or -21- proceedings in respect thereof) arise out of or are based upon (i) any untrue statement or alleged untrue statement of any material fact contained in the Registration Statement, any Preliminary Prospectus, the Prospectus or any amendment or supplement thereto, or (ii) the omission or the alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading in the light of the circumstances under which they were made; and will reimburse any legal or other expenses reasonably incurred by the Company or any such director, officer, or controlling person in connection with investigating or defending any such loss, claim, damage, liability, action or proceeding; provided, however, that each Underwriter will be liable in each case to the extent, but only to the extent, that such untrue statement or alleged untrue statement or omission or alleged omission has been made in the Registration Statement, any Preliminary Prospectus, the Prospectus or such amendment or supplement, in reliance upon and in conformity with written information furnished to the Company by or through the Representatives specifically for use in the preparation thereof. This indemnity agreement will be in addition to any liability which such Underwriter may otherwise have. (c) In case any proceeding (including any governmental investigation) shall be instituted involving any person in respect of which indemnity may be sought pursuant to this Section 8, such person (the "indemnified party") shall promptly notify the person against whom such indemnity may be sought (the "indemnifying party") in writing. No indemnification provided for in Section 8(a) or (b) shall be available to any party who shall fail to give notice as provided in this Section 8(c) if the party to whom notice was not given was unaware of the proceeding to which such notice would have related and was materially prejudiced by the failure to give such notice, but the failure to give such notice shall not relieve the indemnifying party or parties from any liability which it or they may have to the indemnified party for contribution or otherwise than on account of the provisions of Section 8(a) or (b). In case any such proceeding 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 satisfactory to such indemnified party and shall pay as incurred the fees and disbursements of such counsel related to such proceeding. In any such proceeding, any indemnified party shall have the right to retain its own counsel at its own expense. Notwithstanding the foregoing, the indemnifying party shall pay as incurred (or within 30 days of presentation) the fees and expenses of the counsel retained by the indemnified party in the event (i) the indemnifying party and the indemnified party shall have mutually agreed to the retention of such counsel, (ii) the named parties to any such proceeding (including any impleaded parties) include both the indemnifying party and the indemnified party and -22- representation of both parties by the same counsel would be inappropriate due to actual or potential differing interests between them or (iii) the indemnifying party shall have failed to assume the defense and employ counsel acceptable to the indemnified party within a reasonable period of time after notice of commencement of the action. It is understood that the indemnifying party shall not, in connection with any proceeding or related proceedings in the same jurisdiction, be liable for the reasonable fees and expenses of more than one separate firm for all such indemnified parties. Such firm shall be designated in writing by you in the case of parties indemnified pursuant to Section 8(a) and by the Company in the case of parties indemnified pursuant to Section 8(b). The indemnifying party shall not be liable for any settlement of any proceeding effected without its written consent but if settled with such consent or if there be a final judgment for the plaintiff, the indemnifying party agrees to indemnify the indemnified party from and against any loss or liability by reason of such settlement or judgment. In addition, the indemnifying party will not, without the prior written consent of the indemnified party, settle or compromise or consent to the entry of any judgment in any pending or threatened claim, action or proceeding of which indemnification may be sought hereunder (whether or not any indemnified party is an actual or potential party to such claim, action or proceeding) unless such settlement, compromise or consent includes an unconditional release of each indemnified party from all liability arising out of such claim, action or proceeding. (d) If the indemnification provided for in this Section 8 is unavailable to or insufficient to hold harmless an indemnified party under Section 8(a) or (b) above in respect of any losses, claims, damages or liabilities (or actions or proceedings 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 or proceedings in respect thereof) in such proportion as is appropriate to reflect the relative benefits received by the Company 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 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 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 or proceedings in respect thereof), as well as any other relevant equitable considerations. The relative benefits received by the Company 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 bear to the total underwriting discounts and commissions received by the Underwriters, in each case as set forth in -23- the table on the cover page of the Prospectus. 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 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 and the Underwriters agree that it would not be just and equitable if contributions pursuant to this Section 8(d) 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 Section 8(d). The amount paid or payable by an indemnified party as a result of the losses, claims, damages or liabilities (or actions or proceedings in respect thereof) referred to above in this Section 8(d) 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 (d), (i) no Underwriter shall be required to contribute any amount in excess of the underwriting discounts and commissions applicable to the Shares purchased by such Underwriter and (ii) 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 Section 8(d) to contribute are several in proportion to their respective underwriting obligations and not joint. (e) In any proceeding relating to the Registration Statement, any Preliminary Prospectus, the Prospectus or any supplement or amendment thereto, each party against whom contribution may be sought under this Section 8 hereby consents to the jurisdiction of any court having jurisdiction over any other contributing party, agrees that process issuing from such court may be served upon him or it by any other contributing party and consents to the service of such process and agrees that any other contributing party may join him or it as an additional defendant in any such proceeding in which such other contributing party is a party. (f) Any losses, claims, damages, liabilities or expenses for which an indemnified party is entitled to indemnification or contribution under this Section 8 shall be paid by the indemnifying party to the indemnified party as such losses, claims, damages, liabilities or expenses are incurred. The indemnity and contribution agreements contained in this Section 8 and the representations and warranties of the Company set forth in this Agreement shall remain operative and in full force and effect, regardless of (i) any investigation made by or on behalf of any Underwriter or any -24- person controlling any Underwriter, the Company, its directors or officers or any persons controlling the Company, (ii) acceptance of any Shares and payment therefor hereunder, and (iii) any termination of this Agreement. A successor to any Underwriter, or to the Company, its directors or officers, or any person controlling the Company, shall be entitled to the benefits of the indemnity, contribution and reimbursement agreements contained in this Section 8. 9. DEFAULT BY UNDERWRITERS. If on the Closing Date or the Option Closing Date, as the case may be, any Underwriter shall fail to purchase and pay for the portion of the Shares which such Underwriter has agreed to purchase and pay for on such date (otherwise than by reason of any default on the part of the Company), you, as Representatives of the Underwriters, shall use your reasonable efforts to procure within 36 hours thereafter one or more of the other Underwriters, or any others, to purchase from the Company such amounts as may be agreed upon and upon the terms set forth herein, the Firm Shares or Option Shares, as the case may be, which the defaulting Underwriter or Underwriters failed to purchase. If during such 36 hours you, as such Representatives, shall not have procured such other Underwriters, or any others, to purchase the Firm Shares or Option Shares, as the case may be, agreed to be purchased by the defaulting Underwriter or Underwriters, then (a) if the aggregate number of shares with respect to which such default shall occur does not exceed 10% of the Firm Shares or Option Shares, as the case may be, covered hereby, the other Underwriters shall be obligated, severally, in proportion to the respective numbers of Firm Shares or Option Shares, as the case may be, which they are obligated to purchase hereunder, to purchase the Firm Shares or Option Shares, as the case may be, which such defaulting Underwriter or Underwriters failed to purchase, or (b) if the aggregate number of shares of Firm Shares or Option Shares, as the case may be, with respect to which such default shall occur exceeds 10% of the Firm Shares or Option Shares, as the case may be, covered hereby, the Company or you as the Representatives of the Underwriters will have the right, by written notice given within the next 36-hour period to the parties to this Agreement, to terminate this Agreement without liability on the part of the non-defaulting Underwriters or of the Company except to the extent provided in Section 8 hereof. In the event of a default by any Underwriter or Underwriters, as set forth in this Section 9, the Closing Date or Option Closing Date, as the case may be, may be postponed for such period, not exceeding seven days, as you, as Representatives, may determine in order that the required changes in the Registration Statement or in the Prospectus or in any other documents or arrangements may be effected. The term "Underwriter" includes any person substituted for a defaulting Underwriter. Any action taken under this Section 9 shall not relieve any defaulting Underwriter from liability in respect of any default of such Underwriter under this Agreement. -25- 10. NOTICES. All communications hereunder shall be in writing and, except as otherwise provided herein, will be mailed, delivered, telecopied or telegraphed and confirmed as follows: if to the Underwriters, to BT Alex. Brown Incorporated, 1290 Avenue of the Americas, 10th Floor, New York, New York 10104, Attention: Edward D. Fitzgerald; with a copy to BT Alex. Brown Incorporated, One South Street, Baltimore, Maryland 21202. Attention: General Counsel; if to the Company, to A.C. Moore Arts & Crafts, Inc., 500 University Court, Blackwood, New Jersey, 08012, Attention: John E. Parker; with a copy to Blank Rome Comisky & McCauley, 1200 Four Penn Center Plaza, Philadelphia, Pennsylvania 19103, Attention: Sol Genauer. 11. TERMINATION. This Agreement may be terminated by you by notice to the Company as follows: (a) at any time prior to the earlier of (i) the time the Shares are released by you for sale by notice to the Underwriters, or (ii) 11:30 a.m. on the day of this Agreement; (b) at any time prior to the Closing Date if any of the following has occurred: (i) since the respective dates as of which information is given in the Registration Statement and the Prospectus, any material adverse change or any development involving a prospective material adverse change in or affecting the condition, financial or otherwise, of the Company and its Subsidiaries taken as a whole or the earnings, business, management, properties, assets, rights, operations, condition (financial or otherwise) or prospects of the Company and its Subsidiaries taken as a whole, whether or not arising in the ordinary course of business, (ii) any outbreak or escalation of hostilities or declaration of war or national emergency or other national or international calamity or crisis or change in economic or political conditions if the effect of such outbreak, escalation, declaration, emergency, calamity, crisis or change on the financial markets of the United States would, in your reasonable judgment, make it impracticable to market the Shares or to enforce contracts for the sale of the Shares, or (iii) suspension of trading in securities generally on the New York Stock Exchange or the American Stock Exchange or limitation on prices (other than limitations on hours or numbers of days of trading) for securities on either such Exchange, (iv) the enactment, publication, decree or other promulgation of any statute, regulation, rule or order of any court or other governmental authority which in your opinion materially and -26- adversely affects or may materially and adversely affect the business or operations of the Company, (v) declaration of a banking moratorium by United States or New York State authorities, (vi) the suspension of trading of the Company's common stock by the Commission on the Nasdaq Stock Market or (vii) the taking of any action by any governmental body or agency in respect of its monetary or fiscal affairs which in your reasonable opinion has a material adverse effect on the securities markets in the United States; or (c) as provided in Sections 6 and 9 of this Agreement. 12. SUCCESSORS. This Agreement has been and is made solely for the benefit of the Underwriters and the Company and their respective successors, executors, administrators, heirs and assigns, and the officers, directors and controlling persons referred to herein, and no other person will have any right or obligation hereunder. No purchaser of any of the Shares from any Underwriter shall be deemed a successor or assign merely because of such purchase. 13. INFORMATION PROVIDED BY UNDERWRITERS. The Company and the Underwriters acknowledge and agree that the only information furnished or to be furnished by any Underwriter to the Company for inclusion in any Prospectus or the Registration Statement consists of the information set forth in the last paragraph on the front cover page (insofar as such information relates to the Underwriters), legends required by Item 502(d) of Regulation S-K under the Act and the information under the caption "Underwriting" in the Prospectus. 14. MISCELLANEOUS. The reimbursement, indemnification and contribution agreements contained in this Agreement and the representations, warranties and covenants in this Agreement shall remain in full force and effect regardless of (a) any termination of this Agreement, (b) any investigation made by or on behalf of any Underwriter or controlling person thereof, or by or on behalf of the Company or its directors or officers and (c) delivery of and payment for the Shares under this Agreement. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. This Agreement shall be governed by, and construed in accordance with, the laws of the State of Maryland. -27- If the foregoing letter is in accordance with your understanding of our agreement, please sign and return to us the enclosed duplicates hereof, whereupon it will become a binding agreement among the Company and the several Underwriters in accordance with its terms. Very truly yours, A.C. MOORE ARTS & CRAFTS, INC. ___________________________________ By: John E. Parker President The foregoing Underwriting Agreement is hereby confirmed and accepted as of the date first above written. BT ALEX. BROWN INCORPORATED JANNEY MONTGOMERY SCOTT INC. As Representatives of the several Underwriters listed on Schedule I By: BT Alex. Brown Incorporated By:____________________________________ Authorized Officer -28- SCHEDULE I SCHEDULE OF UNDERWRITERS Number of Firm Shares Underwriter to be Purchased ----------- --------------------- BT Alex. Brown Incorporated Janney Montgomery Scott Inc. --------- Total 2,700,000 -29- EX-4.1 3 EXHIBIT 4.1 NUMBER_____________ SHARES ______________ COMMON STOCK CUSIP No. 00086T 10 3 See reverse for certain definitions A.C. MOORE ARTS & CRAFTS, INC. INCORPORATED UNDER THE LAWS OF THE COMMONWEALTH OF PENNSYLVANIA This Certifies that is the owner of FULLY PAID AND NONASSESSABLE SHARES OF COMMON STOCK, NO PAR VALUE, OF A.C. Moore Arts & Crafts, Inc. transferable on the books of the Corporation by the holder hereof in person or by duly authorized attorney upon surrender of this certificate properly endorsed. This certificate is not valid until countersigned and registered by the Transfer Agent and Registrar. Witness the facsimile seal of the Corporation and the facsimile signatures of its duly authorized officers. DATED:______________________________ President and Chief Executive Officer___________ Secretary____________ [Seal] Countersigned and Registered: StockTrans, Inc. Transfer Agent and Registrar By:_____________________________________________________________ Authorized Signature A.C. MOORE ARTS & CRAFTS, INC. The Corporation will furnish to any shareholder upon request and without charge a full or summary statement of the designations, voting rights, preferences, limitations and special rights of the shares of each class or series authorized to be issued so far as they have been fixed and determined and the authority of the board of directors to fix and determine the designations, voting rights, preferences, limitations and special rights of the classes and series of shares of the Corporation. The following abbreviations, when used in the inscription on the face of this certificate, shall be construed as though they were written out in full according to applicable laws or regulations: TEN COM - as tenants in common UNIF TRAN MIN ACT_____ Custodian______ TEN ENT - as tenants by the entireties (Cust) Minor JT TEN - as joint tenants with right of under the Uniform Transfers to survivorship and not as tenants Minors Act of ___________ in common. (State) Additional abbreviations may also be used though not in the above list. FOR VALUE RECEIVED,_________________________________________________ (Name of Assignor) hereby sell, assign and transfer unto PLEASE INSERT SOCIAL SECURITY OR OTHER IDENTIFYING NUMBER OF ASSIGNEE ______________________________________ ______________________________________ ________________________________________________________________________________ (PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE, OF ASSIGNEE) ________________________________________________________________________________ ________________________________________________________________________________ shares of the common stock represented by the within certificate and do hereby irrevocably constitute and appoint______________________________________________ Attorney to transfer the said shares on the books of the within named Corporation with full power of substitution in the premises. Dated____________________ X____________________________________________________ X____________________________________________________ NOTICE: the signature(s) to this assignment must correspond with the name(s) as written upon the face of the certificate in every particular, without alteration or enlargement or any change whatever. SIGNATURE(S) GUARANTEED: _________________________________________________________ THE SIGNATURE(S) SHOULD BE GUARANTEED BY AN ELIGIBLE GUARANTOR INSTITUTION (BANKS, STOCKBROKERS, SAVINGS AND LOAN ASSOCIATIONS AND CREDIT UNIONS WITH MEMBERSHIP IN AN APPROVED SIGNATURE GUARANTEE MEDALLION PROGRAM), PURSUANT TO S.E.C. RULE 17Ad-15. EX-10 4 EXHIBIT 10.1 A.C. MOORE ARTS & CRAFTS, INC. 1997 EMPLOYEE, DIRECTOR AND CONSULTANT STOCK OPTION PLAN 1. DEFINITIONS. Unless otherwise specified or unless the context otherwise requires, the following terms, as used in this A.C. MOORE ARTS & CRAFTS, INC. 1997 Employee, Director and Consultant Stock Option Plan, have the following meanings: Administrator means the Board of Directors, unless it has delegated power to act on its behalf to a committee. (See Article 4) Affiliate means a corporation which, for purposes of Section 424 of the Code, is a parent or subsidiary of the Company, direct or indirect. Board of Directors means the Board of Directors of the Company. Code means the United States Internal Revenue Code of 1986, as amended. Committee means the Committee to which the Board of Directors has delegated power to act under or pursuant to the provisions of the Plan. Common Stock means shares of the Company's common stock, no par value. Company means A.C. Moore ARTS & CRAFTS, INC., a Pennsylvania corporation. Disability or Disabled means permanent and total disability as defined in Section 22(e) (3) of the Code. Fair Market Value of a Share of Common Stock means: (1) If the Common Stock is listed on a national securities exchange or traded in the over-the-counter market and sales prices are regularly reported for the Common Stock, the average of the closing or last sale prices of the Common Stock on the Composite Tape or other comparable reporting system for the ten (10) -1- consecutive trading days immediately preceding such applicable date; (2) If the Common Stock is not traded on a national securities exchange but is traded on the over-the-counter market, if sales prices are not regularly reported for the Common Stock for the ten (10) days referred to in clause (1), and if bid and asked prices for the Common Stock are regularly reported, the average of the mean between the bid and the asked price for the Common Stock at the close of trading in the over-the-counter market for the ten (10) days on which Common Stock was traded immediately preceding such applicable date; and (3) If the Common Stock is neither listed on a national securities exchange nor traded in the over-the-counter market, such value as the Administrator, in good faith, shall determine. ISO means an option meant to qualify as an incentive stock option under Code Section 422. Key Employee means an employee of the Company or of an Affiliate (including, without limitation, an employee who is also serving as an officer or director of the company or of an Affiliate), designated by the Administrator to be eligible to be granted one or more Options under the Plan. Non-Qualified Option means an option which is not intended to qualify as an ISO. Option means an ISO or Non-Qualified option granted under the Plan. Option Agreement means an agreement between the Company and a Participant executed and delivered pursuant to the Plan. Participant means a Key Employee, director or consultant to whom one or more Options are granted -2- under the Plan. As used herein, "Participant" shall include "Participant's Survivors" where the context requires. Participant's Survivors means a deceased Participant's legal representatives and/or any person or persons who acquired the Participant's rights to an Option by will or by the laws of descent and distribution. Plan means this A.C. Moore Arts & Crafts, Inc. 1997 Employee, Director and Consultant Stock Option Plan. Profit Shares means the Shares purchased by a Participant pursuant to one or more Options that have the value equal to the excess of the Fair Market Value of the Shares subject to such Option or Options over the purchase price of the option as set forth in the applicable Option Agreement. Shares means shares of the Common Stock as to which options have been or may be granted under the Plan or any shares of capital stock into which the Shares are changed or for which they are exchanged within the provisions of Paragraph 3 of the Plan. The Shares issued upon exercise of Options granted under the Plan may be authorized and unissued shares or shares held by the Company in its treasury, or both. 2. PURPOSES OF THE PLAN. -------------------- The Plan is intended to encourage ownership of Shares by Key Employees, directors and certain consultants to the Company in order to attract such people, to induce them to work for the benefit of the Company or of an Affiliate and to provide additional incentive for them to promote the success of the Company or of an Affiliate. 3. EFFECTIVENESS OF PLAN. --------------------- This Plan shall become effective on the date of its adoption by the Company's Board of Directors, subject however to approval by the holders of the Company's Common Stock in the manner as prescribed in the Code and the regulations thereunder. Options -3- may be granted under this Plan prior to obtaining shareholder approval, provided such options shall not be exercisable before such shareholder approval is obtained. 4. SHARES SUBJECT TO THE PLAN. -------------------------- The number of Shares subject to this Plan as to which Options may be granted from time to time shall be 1,000,000, or the equivalent of such number of Shares after the Administrator, in its sole discretion, has interpreted the effect of any stock split, stock dividend, combination, recapitalization or similar transaction effected after such date in accordance with Paragraph 16 of the Plan. No individual may receive options under the Plan exercisable for more than 50% of the total number of shares of Common Stock authorized for issuance under this Plan. If an Option ceases to be "outstanding", in whole or in part, the Shares which were subject to such Option shall be available for the granting of other Options under the Plan. Any Option shall be treated as "outstanding" until such Option is exercised in full, or terminates or expires under the provisions of the Plan, or by agreement of the parties to the pertinent Option Agreement. 5. ADMINISTRATION OF THE PLAN. -------------------------- The Administrator of the Plan will be the Board of Directors, except to the extent the Board of Directors delegates its authority to a Committee of the Board of Directors. Following the date on which the Common Stock is registered under the Securities and Exchange Act of 1934, as amended (the "1934 Act"), the Plan is intended to comply in all respects with Rule 16b-3 or its successors, promulgated pursuant to Section 16 of the 1934 Act with respect to Participants who are subject to Section 16 of the 1934 Act, and any provision in this Plan with respect to such persons contrary to Rule 16b-3 shall be deemed null and void to the extent permissible by law and deemed appropriate by the Administrator. Subject to the provisions of the Plan, the Administrator is authorized to: a. Interpret the provisions of the Plan or of any option or Option Agreement and to make all rules and determinations which it deems necessary or advisable for the administration of the Plan; -4- b. Determine which employees of the Company or of an Affiliate shall be designated as Key Employees and which of the Key Employees, directors and consultants shall be granted Options; c. Determine the number of Shares for which an Option or Options shall be granted; and d. Specify the terms and conditions upon which an Option or options may be granted; provided, however, that all such interpretations, rules, determinations, terms and conditions shall be made and prescribed in the context of preserving the tax status under Code Section 422 of those Options which are designated as ISOs. Subject to the foregoing, the interpretation and construction by the Administrator of any provisions of the Plan or of any Option granted under it shall be final, unless otherwise determined by the Board of Directors, if the Administrator is other than the Board of Directors. No member of the Administrator shall be liable for any act or omission (whether or not negligent) taken or omitted in good faith, or for the exercise of any authority or discretion granted in connection with the Plan to the Administrator, or for the acts or omissions of any other members of the Administrator. 6. ELIGIBILITY FOR PARTICIPATION. ----------------------------- The Administrator will, in its sole discretion, name the Participants in the Plan, provided, however, that each Participant must be a Key Employee, director or consultant of the Company or of an Affiliate at the time an Option is granted. Notwithstanding any of the foregoing provisions, the Administrator may authorize the grant of an Option to a person not then an employee, director or consultant of the Company or of an Affiliate. The actual grant of such Option, however, shall be conditioned upon such person becoming eligible to become a Participant at or prior to the time of the execution of the Option Agreement evidencing such Option. ISOs may be granted only to Key Employees. Non-Qualified Options may be granted to any Key Employee, director or consultant of the Company or an Affiliate. The granting of any Option to any individual shall neither entitle that individual to, nor disqualify him or her from, participation in any other grant of options. -5- 7. TERMS AND CONDITIONS OF OPTIONS. ------------------------------- Each Option shall be set forth in writing in an Option Agreement, duly executed by the Company and by the Participant. The Administrator may provide that Options be granted subject to such conditions as the Administrator may deem appropriate including, without limitation, subsequent approval by the stockholders of the Company of this Plan or any amendments thereto. The Option Agreements shall be subject to at least the following terms and conditions: A. Non-Qualified Options: Each Option intended to be a Non-Qualified Option shall be subject to the terms and conditions which the Administrator determines to be appropriate and in the best interest of the Company, subject to the following minimum standards for any such Non-Qualified Option; a. Option Price: The option price (per share) of the Shares covered by each Option shall be determined by the Administrator; b. Each Option Agreement shall state the number of Shares to which it pertains; c. Each Option Agreement shall state the date or dates on which it first is exercisable and the date after which it may no longer be exercised, and may provide that the Option rights accrue or become exercisable in installments over a period of months or years, or upon the attainment of stated goals; and d. Provided that the Common Stock is not a class of securities registered under the Securities Exchange Act of 1934, as amended, exercise of any Option may be conditioned upon the Participant's execution of a Share purchase agreement in form satisfactory to the Administrator providing for certain protections for the Company and its other shareholders including requirements that: i. The Participant's or the Participant's Survivors' right to sell the Shares may be restricted; and -6- ii. The Participant or the Participant's Survivors may be required to execute letters of investment intent and must also acknowledge that the Shares will bear legends noting any applicable restrictions. B. ISOs: Each Option intended to be an ISO shall be issued only to a Key Employee and be subject to at least the following terms and conditions, with such additional restrictions or changes as the Administrator determines are appropriate but not in conflict with Code Section 422 and relevant regulations and rulings of the Internal Revenue Service: a. Minimum Standards: The ISO shall meet the minimum standards required of Participants who are granted Non-Qualified Options, as described above, except clause (a) thereunder. b. Option Price: Immediately before the Option is granted, if the Participant owns, directly or by reason of the applicable attribution rules in Code Section 424(d): i. Ten percent (10%) or less of the total ------- combined voting power of all classes of share capital of the Company or an Affiliate, the Option price (per share) of the Shares covered by each Option shall not be less than one hundred percent (100%) of the Fair Market Value (per share) of the Shares on the date of the grant of the Option. ii. More than ten percent (10%) of the total combined voting power of all classes of share capital of the Company or an Affiliate, the Option price (per share) of the Shares covered by each Option shall not be less than one hundred ten percent (110%) of the said Fair Market Value on the date of grant. c. Term of Option: For Participants who own i. Ten percent (10%) or less of the total combined voting power of all classes of share capital of the Company or an Affiliate, each Option shall terminate not more than ten (10) years from the date of the grant or at such earlier time as the Option Agreement may provide. ii. More than 10% of the total combined voting power of all classes of share capital of the Company or an Affiliate, each Option shall terminate not more than five (5) years from the date of the grant or at such earlier time as the Option Agreement may provide. d. Medium of Payment: The Option price shall be payable upon the exercise of the Option and only in such form as the Administrator determines and as is permitted by Section 422 of the Code. e. Limitation on Yearly Exercise: The Option Agreements shall restrict the amount of Options which may be exercisable in any calendar year (under this or any other ISO plan of the Company or an Affiliate) so that the aggregate Fair Market Value (determined at the time each ISO is granted) of the stock with respect to which ISOs are exercisable for the first time by the Participant in any calendar year does not exceed one hundred thousand dollars ($100,000), provided that this subparagraph (e) shall have no force or effect if its inclusion in the Plan is not necessary for options issued as ISOs to qualify as ISOs pursuant to Section 422(d) of the Code. f. Limitation on Grant of ISOS: No ISOs shall be granted after July 18, 2007, the date which is the earlier of ten (10) years from the date of the adoption of the Plan by the Company and the date of the approval of the Plan by the shareholders of the Company. Neither the Company nor any of its current or future parent, subsidiaries or affiliates, nor their officers, directors, shareholders, stock option plan committees, employees or agents shall have any liability to -8- any optionee in the event: (i) an option granted as a ISO hereof does not qualify as an ISO as set forth in Section 422 of the Code and regulations thereunder; (ii) any optionee does not obtain the tax treatment pertaining to an ISO; or (iii) any option granted as a Non-Qualified Option hereof is an ISO. C. Directors' Options: Each initial director who is not an employee of the Company or an Affiliate and does not hold an existing option shall be granted an initial Non-Qualified Option. The Option shall (i) have an exercise price equal to the Fair Market Value (per share) of the Shares on the date of grant of the option, (ii) have a term of ten (10) years, and (iii) be exercisable upon completion of one full year of service on the Board of Directors after the date of grant. Notwithstanding the provisions of Paragraph 23 concerning amendment of the Plan, the provisions of this Subparagraph C shall not be amended more than once every six months, other than to comport with changes in the Code, the Employee Retirement Income Security Act, or the rules thereunder. D. Offer of Stock on Grant Date: Corporate action constituting an offer of stock for sale to any employee under the terms of the options to be granted hereunder shall be deemed complete as of the date when the Administrator authorized the grant of the option to the employee, regardless of when the option is actually delivered to the employee or acknowledged or agreed to by him. 8. EXERCISE OF OPTION AND ISSUANCE OF SHARES. ----------------------------------------- a. An Option (or any part or installment thereof) shall be exercised by giving written notice to the Company at its principal office address, together with the tender of the full purchase price for the Shares as to which such Option is being exercised, and upon compliance with any other condition(s) set forth in the Option Agreement. Such written notice shall be signed by the person exercising the Option, shall state the number of Shares with respect to which the Option is being exercised and shall contain any representation required -9- by the Plan or the Option Agreement. Full payment of the purchase price for the Shares as to which such Option is being exercised shall be made (a) in United States dollars in cash or by check, or (b) at the discretion of the Administrator, through delivery of shares of Common Stock valued at a fair market value as of the date of exercise equal to the cash exercise price of the Option, subject to such limitations on the tender of Common Stock as the Committee may impose, or by a combination of cash and shares of Common Stock, or (c) at the discretion of the Administrator, by delivery of the grantee's personal recourse note bearing interest payable not less than annually at no less than 100% of the applicable Federal rate, as defined in Section 1274(d) of the Code, or (d) at the discretion of the Administrator, by any combination of (a), (b) and (c) above. b. The Company shall then reasonably promptly deliver the Shares as to which such Option was exercised to the Participant (or to the Participant's Survivors, as the case may be). In determining what constitutes "reasonably promptly," it is expressly understood that the delivery of the Shares may be delayed by the Company in order to comply with any law or regulation which requires the Company to take any action with respect to the Shares prior to their issuance. The Shares shall, upon delivery, be evidenced by an appropriate certificate or certificates for fully paid, non-assessable Shares. c. The Administrator shall have the right to accelerate the date of exercise of any installment of any Option; provided that the Administrator shall not accelerate the exercise date of any installment of any Option granted to any Key Employee as an ISO (and not previously converted into a Non-Qualified Option pursuant to paragraph 19) if such acceleration would violate the annual vesting limitation contained in Section 422(d) of the Code, as described in paragraph 6.B.(e). d. To the extent a Participant satisfies the exercise price under Paragraph 7(a) using Common Stock, such Participant shall receive a grant of new options -10- subject to the terms set forth under Paragraph 6, except the exercise price under the new option grant ("Reload Grant") will be equal to the Fair Market Value of the Stock on the date of grant (as determined in good faith by the Administrator. 9. RIGHTS AS A SHAREHOLDER. ----------------------- No Participant to whom an Option has been granted shall have rights as a shareholder with respect to any Shares covered by such Option, except after due exercise of the Option and tender of the full purchase price for the Shares being purchased pursuant to such exercise and registration of the Shares in the Company's share register in the name of the Participant. 10. ASSIGNABILITY AND TRANSFERABILITY OF OPTIONS. -------------------------------------------- By its terms, an Option granted to a Participant shall not be transferable by the Participant other than by will or by the laws of descent and distribution and shall be exercisable, during the Participant's lifetime, only by such Participant (or by his or her legal representative). Such Option shall not be assigned, pledged or hypothecated in any way (whether by operation of law or otherwise) and shall not be subject to execution, attachment or similar process. Any attempted transfer, assignment, pledge, hypothecation or other disposition of any Option or of any rights granted thereunder contrary to the provisions of this Plan, or the levy of any attachment or similar process upon an Option, shall be null and void. -11- 11. EFFECT OF TERMINATION OF SERVICE OTHER THAN "FOR CAUSE". ------------------------------------------------------ Except as otherwise provided in the pertinent Option Agreement, in the event of a termination of service (whether as an employee, director or consultant) with the Company or an Affiliate before the Participant has exercised all Options, the following rules apply: a. A Participant who ceases to be an employee, director or consultant of the Company or of an Affiliate (for any reason other than termination "for cause", Disability, or death for which events there are special rules in Paragraphs 11, 12, and 13, respectively), may exercise any Option granted to him or her to the extent that the right to purchase Shares has accrued on the date of such termination of service, but only within such term as the Administrator has designated in the pertinent Option Agreement. b. In no event may an Option Agreement provide, if the option is intended to be an ISO, that the time for exercise be later than three (3) months after the Participant's termination of employment. c. The provisions of this paragraph, and not the provisions of Paragraph 12 or 13, shall apply to a Participant who subsequently becomes disabled or dies after the termination of employment, director status or consultancy, provided, however, in the case of a Participant's death within three (3) months after the termination of employment, director status or consultancy, the Participant's Survivors may exercise the Option within one (1) year after the date of the Participant's death, but in no event after the date of expiration of the term of the Option. d. Notwithstanding anything herein to the contrary, if subsequent to a Participant's termination of employment, termination of director status or termination of consultancy, but prior to the exercise of an Option, the Board of Directors determines that, either prior or subsequent to the Participant's termination, the Participant engaged in conduct which would constitute "cause", then such Participant shall -12- forthwith cease to have any right to exercise any Option. e. A Participant to whom an Option has been granted under the Plan who is absent from work with the Company or with an Affiliate because of temporary disability (any disability other than a permanent and total Disability as defined in Paragraph 1 hereof), or who is on leave of absence for any purpose, shall not, during the period of any such absence, be deemed, by virtue of such absence alone, to have terminated such Participant's employment, director status or consultancy with the Company or-with an Affiliate, except as the Administrator may otherwise expressly provide. f. Options granted under the Plan shall not be affected by any change of employment or other service within or among the Company and any Affiliates, so long as the Participant continues to be an employee, director or consultant of the Company or any Affiliate, provided, however, if a Participant's employment by either the Company or an Affiliate should cease (other than to become an employee of an Affiliate or the Company), such termination shall affect the Participant's rights under any Option granted to such Participant in accordance with the terms of the Plan and the pertinent Option Agreement. 12. EFFECT OF TERMINATION OF SERVICE "FOR CAUSE". ------------------------------------------- Except as otherwise provided in the pertinent Option Agreement, the following rules apply if the Participant's service (whether as an employee, director or consultant) with the Company or an Affiliate is terminated "for cause" prior to the time that all of his or her outstanding Options have been exercised: a. All outstanding and unexercised options as of the date the Participant is notified his or her service is terminated "for cause", will immediately be forfeited, unless the Option Agreement provides otherwise. b. For purposes of this Article, "cause" shall include (and is not limited to) dishonesty with respect to the employer, insubordination, substantial malfeasance or -13- non-feasance of duty, unauthorized disclosure of confidential information, and conduct substantially prejudicial to the business of the Company or any Affiliate. The determination of the Administrator as to the existence of cause will be conclusive on the Participant and the Company. c. "Cause" is not limited to events which have occurred prior to a Participant's termination of service, nor is it necessary that the Administrator's finding of "cause" occur prior to termination. If the Administrator determines, subsequent to a Participant's termination of service but prior to the exercise of an Option, that either prior or subsequent to the Participant's termination the Participant engaged in conduct which would constitute "cause", then the right to exercise any Option is forfeited. d. Any definition in an agreement between the Participant and the Company or an Affiliate, which contains a conflicting definition of "cause" for termination and which is in effect at the time of such termination, shall supersede the definition in this Plan with respect to such Participant. 13. EFFECT OF TERMINATION OF SERVICE FOR DISABILITY. ----------------------------------------------- Except as otherwise provided in the pertinent Option Agreement, a Participant who ceases to be an employee, director or consultant of the Company or of an Affiliate by reason of Disability may exercise any Option granted to such Participant: a. To the extent that the right to purchase Shares has accrued on the date of his or her Disability; and b. In the event rights to exercise the Option accrue periodically, to the extent of a pro rata portion of any additional rights as would have accrued had the Participant not become Disabled prior to the end of the accrual period which next ends following the date of Disability. The proration shall be based upon the number of days of such accrual period prior to the date of Disability. -14- A Disabled Participant may exercise such rights only within a period of not more than one (1) year after the date that the Participant became Disabled, notwithstanding that the Participant might have been able to exercise the Option as to some or all of the Shares on a later date if he or she had not become disabled and had continued to be an employee, director or consultant or, if earlier, within the originally prescribed term of the Option. The Administrator shall make the determination both of whether Disability has occurred and the date of its occurrence (unless a procedure for such determination is set forth in another agreement between the Company and such Participant, in which case such procedure shall be used for such determination). if requested, the Participant shall be examined by a physician selected or approved by the Administrator, the cost of which examination shall be paid for by the Company. 14. EFFECT OF DEATH WHILE AN EMPLOYEE, DIRECTOR OR CONSULTANT. --------------------------------------------------------- Except as otherwise provided in the pertinent Option Agreement, in the event of the death of a Participant to whom an Option has been granted while the Participant is an employee, director or consultant of the Company or of an Affiliate, such option may be exercised by the Participant's Survivors: a. To the extent exercisable but not exercised on the date of death; and b. In the event rights to exercise the Option accrue periodically, to, the extent of a pro rata portion of any additional rights which would have accrued had the Participant not died prior to the end of the accrual period which next ends following the date of death. The proration shall be based upon the number of days of such accrual period prior to the Participant's death. If the Participant's Survivors wish to exercise the Option, they must take all necessary steps to exercise the Option within one (1) year after the date of death of such Participant, notwithstanding that the decedent might have been able to exercise the Option as to some or all of the Shares on a later date if he or she had not died and had continued to be an employee, director or consultant or, if earlier, within the originally prescribed term of the Option. -15- 15. DISSOLUTION OR LIQUIDATION OF THE COMPANY. ----------------------------------------- Upon the dissolution or liquidation of the Company, all Options granted under this Plan which as of such date shall not have been exercised will terminate and become null and void; provided, however, that if the rights of a Participant or a Participant's Survivors have not otherwise terminated and expired, the Participant or the Participant's Survivors will have the right immediately prior to such dissolution or liquidation to exercise any option to the extent that the right to purchase Shares has accrued under the Plan as of the date immediately prior to such dissolution or liquidation. 16. ADJUSTMENTS. ----------- Upon the occurrence of any of the following events, a Participant's rights with respect to any Option granted to him or her hereunder which have not previously been exercised in full shall be adjusted as hereinafter provided, unless otherwise specifically provided in the written agreement between the Participant and the Company relating to such Option: A. Stock Dividends and Stock Splits. If the shares of Common Stock shall be subdivided or combined into a greater or smaller number of shares or if the Company shall issue any shares of Common Stock as a stock dividend on its outstanding Common stock, the number of shares of Common Stock deliverable upon the exercise of such Option shall be appropriately increased or decreased proportionately, and appropriate adjustments shall be made in the purchase price per share to reflect such subdivision, combination or stock dividend. B. Consolidations or Mergers. If the Company is to be consolidated with or acquired by another entity in a merger, sale of all or substantially all of the Company's assets or otherwise (an "Acquisition"), the Administrator or the board of directors of any entity assuming the obligations of the Company hereunder (the "Successor Board"), shall, as to outstanding Options, either (i) make appropriate provision for the continuation of such Options by substituting on an equitable basis for the Shares then subject to such Options either the consideration payable with respect to the outstanding shares of Common Stock in connection with the Acquisition or securities of any successor or acquiring entity; or (ii) upon written notice to the Participants, provide that all Options must be exercised, to the extent then -16- exercisable, within a specified number of days of the date of such notice, at the end of which period the options shall terminate; or (iii) terminate all Options in exchange for a cash payment equal to the excess of the fair market value of the shares subject to such Options (to the extent then exercisable) over the exercise price thereof. C. Recapitalization or Reorganization. In the event of a recapitalization or reorganization of the Company (other than a transaction described in subparagraph B above) pursuant to which securities of the Company or of another corporation are issued with respect to the outstanding shares of Common Stock, a Participant upon exercising an option shall be entitled to receive for the purchase price paid upon such exercise the securities he or she would have received if he or she had exercised such Option prior to such recapitalization or reorganization. D. Modification of ISOs. Notwithstanding the foregoing, any adjustments made pursuant to subparagraphs A, B or C with respect to ISOs shall be made only after the Administrator, after consulting with counsel for the Company, determines whether such adjustments would constitute a "modification" of such ISO (as that term is defined in Section 424(h) of the Code) or would cause any adverse tax consequences for the holders of such ISOs. If the Administrator determines that such adjustments made with respect to ISOs would constitute a modification of such ISOS, it may refrain from making such adjustments, unless the holder of an ISO specifically requests in writing that such adjustment be made and such writing indicates that the holder has full knowledge of the consequences of such "modification" on his or her income tax treatment with respect to the ISO. 17. ISSUANCES OF SECURITIES. ----------------------- Except as expressly provided herein, no issuance by the Company of shares of stock of any class, or securities convertible into shares of stock of any class, shall affect, and no adjustment by reason thereof shall be made with respect to, the number or price of shares subject to Options. Except as expressly provided herein, no adjustments shall be made for dividends paid in cash or in property (including without limitation, securities) of the Company. -17- 18. FRACTIONAL SHARES. ----------------- No fractional share shall be issued under the Plan and the person exercising such right shall receive from the Company cash in lieu of such fractional share equal to the fair market value thereof determined in good faith by the Board of Directors of the Company. 19. CONVERSION OF ISOs INTO NON-QUALIFIED OPTIONS: ---------------------------------------------- TERMINATION OF ISOs. ------------------- The Administrator, at the written request of any Participant, may in its discretion take such actions as may be necessary to convert such Participant's ISOs (or any portions thereof) that have not been exercised on the date of conversion into Non-Qualified Options at any time prior to the expiration of such ISOs, regardless of whether the Participant is an employee of the Company or an Affiliate at the time of such conversion. Such actions may include, but not be limited to, extending the exercise period or reducing the exercise price of the appropriate installments of such Options. At the time of such conversion, the Administrator (with the consent of the Participant) may impose such conditions on the exercise of the resulting Non-Qualified Option as the Administrator in its discretion may determine, provided that such conditions shall not be inconsistent with this Plan. Nothing in the Plan shall be deemed to give any Participant the right to have such Participants ISO's converted into Non-Qualified Options, and no such conversion shall occur until and unless the Administrator takes appropriate action. The Administrator, with the consent of the Participant, may also terminate any portion of any ISO that has not been exercised at the time of such termination. 20. WITHHOLDING. ----------- Upon the exercise of a Non-Qualified Option for less than the then Fair Market Value or the making of a Disqualifying Disposition (as defined in paragraph 21), the Company may withhold from the Participant's wages, if any, or other remuneration, or may require the Participant to pay additional federal, state, and local income tax withholding and employee contributions to employment taxes in respect of the amount that is considered compensation includible in such person's gross income. The Administrator in its discretion may condition the -18- exercise of an option for less than the then Fair Market Value on the Participant's payment of such additional income tax withholding and employee contributions to employment taxes. 21. NOTICE TO COMPANY OF DISQUALIFYING DISPOSITION. ---------------------------------------------- Each Key Employee who receives an ISO must agree to notify the Company in writing immediately after the Key Employee makes a Disqualifying Disposition of any shares acquired pursuant to the exercise of an ISO . A Disqualifying Disposition is any disposition (including any sale) of such shares before the later of (a) two years after the date the Key Employee was granted the ISO, or (b) one year after the date the Key Employee acquired shares by exercising the ISO. If the Key Employee has died before such stock is sold, these holding period requirements do not apply and no Disqualifying Disposition can occur thereafter. 22. TERMINATION OF THE PLAN. ----------------------- The Plan will terminate on July 18, 2007, the date which is ten (10) years from the earlier of the date of its adoption and the date of its approval by the stockholders of the Company. The Plan may be terminated at an earlier date by vote of the stockholders of the Company; provided, however, that any such earlier termination will not affect any Options granted or Option Agreements executed prior to the effective date of such termination. 23. AMENDMENT OF THE PLAN. --------------------- The Plan may be amended by the stockholders of the Company. The Plan may also be amended by the Administrator, including, without limitation, to the extent necessary to qualify any or all outstanding Options granted under the Plan or Options to be granted under the Plan for favorable federal income tax treatment (including deferral of taxation upon exercise) as may be afforded incentive stock options under Section 422 of the Code, to the extent necessary to ensure the qualification of the Plan under Rule 16b-3, and to the extent necessary to qualify the Shares issuable upon exercise of any outstanding Options granted, or Options to be granted, under the Plan for listing on any national securities exchange or quotation in any national automated quotation system of securities dealers. Any amendment approved by the Administrator which is of a scope that requires stockholder approval in order to ensure favorable federal income -19- tax treatment for any incentive stock options or requires stockholder approval in order to ensure the compliance of the Plan with Rule 16b-3 shall be subject to obtaining such stockholder approval. Any modification or amendment of the Plan shall not, without the consent of a Participant, affect his or her rights under an Option previously granted to him or her. With the consent of the Participant affected, the Administrator may amend outstanding Option Agreements in a manner not inconsistent with the Plan. 24. EMPLOYMENT OR OTHER RELATIONSHIP. -------------------------------- Nothing in this Plan or any Option Agreement shall be deemed to prevent the Company or an Affiliate from terminating the employment, consultancy or director status of a Participant, nor to prevent a Participant from terminating his or her own employment, consultancy or director status or to give any Participant a right to be retained in employment or other service by the Company or any Affiliate for any period of time. 25. GOVERNING LAW. ------------- This Plan shall be construed and enforced in accordance with the law of the State of Pennsylvania. -20- AMENDMENT NUMBER ONE TO A.C. MOORE ARTS & CRAFTS, INC. 1997 EMPLOYEE, DIRECTOR AND CONSULTANT STOCK OPTION PLAN This Amendment Number One to the A.C. Moore Arts & Crafts, Inc. 1997 Employee, Director and Consultant Stock Option Plan is made as of _________________________, 1997. 1. The first paragraph of Section 3 of the Plan, "Shares subject to the Plan," is hereby deleted in its entirety and the following is substituted therefor: The number of Shares subject to this Plan as to which Options may be granted from time to time shall be _________________, or the equivalent of such number of Shares after the Administrator, in its sole discretion, has interpreted the effect of any stock split, stock dividend, combination, recapitalization or similar transaction effected after such date in accordance with Paragraph 16 of the Plan. 2. In all other respects the Plan shall remain in full force and effect. -21- A.C. MOORE ARTS & CRAFTS, INC. Following is a summary of the federal income tax consequences resulting from a sale of stock or an exercise of options. Because the tax consequences depend in part on each shareholder's individual circumstances, we recommend shareholders consult with their own tax advisors for more detailed evaluation of alternatives. Nonqualified Stock Options -------------------------- A holder of a nonqualified stock option (NQSO) will recognize taxable compensation income at the time of exercise of the option in an amount equal to the difference between the value of the stock acquired and the option price paid for the stock. The amount of compensation income will be added to the option price paid in determining the stockholder's basis in the acquired stock. Any gain or loss on a subsequent disposition will be capital gain, long or short term depending on the holding period, which begins at the time of exercise of the NQSO. Long term capital gain is taxed at a nominal maximum rate of 28 percent, as compared to a nominal maximum rate of 31 percent currently applicable to other income. The actual marginal rate for long term capital gain and other income may be higher than the nominal rate as a result of the phaseout of personal exemptions and the reduction of allowable itemized deductions based on adjusted gross income. Various tax bills now pending in Congress may lower the maximum rate for long term capital gain or raise the maximum rate for other income, or both. Example 1: The Company granted you a nonqualified stock option two years ago. You now exercise the option and immediately sell the shares. The result is that you will recognize compensation income equal to the difference between the value of the stock on the date of exercise and the exercise price. Example 2: Three years ago the Company granted you a nonqualified stock option to purchase shares at $6 per share. Fourteen months ago you exercised the option to purchase 100 shares at $6 per share. At the time of exercise the stock had a value of $9.00 per share. The result is that you recognize $3 per share of compensation at -22- the time of exercise of the option and $1 per share of long term capital gain at the time of sale. There is no tax preference item or alternative minimum tax effect. -23- EX-10 5 EXHIBIT 10.2 A.C. MOORE ARTS & CRAFTS, INC. INCENTIVE STOCK OPTION AGREEMENT AGREEMENT made _____________, 1997, between A.C. MOORE ARTS & CRAFTS, INC. (the "Company"), a Pennsylvania corporation having a principal place of business in Blackwood, New Jersey and ____________________ (the "Participant"). WHEREAS, the Company desires to grant to the Participant an Option to purchase shares of its common stock, no par value (the "Shares") under and for the purposes of the 1997 Employee, Director and Consultant Stock Option Plan of the Company (the "Plan"); WHEREAS, the Company and the Participant understand and agree that any terms used and not defined herein have the same meanings as in the Plan; WHEREAS, the Company and the Participant each intend that the Option granted herein shall be a Incentive Stock Option ("ISO"). NOW, THEREFORE, in consideration of the mutual covenants hereinafter set forth and for other good and valuable consideration, the parties hereto agree as follows: 1. GRANT OF OPTION. --------------- The Company hereby irrevocably grants to the Participant the right and option to purchase all or any part of an aggregate of ___________ Shares, on the terms and conditions and subject to all the limitations set forth herein and in the Plan, which is incorporated herein by reference. The Participant acknowledges receipt of a copy of the Plan. 2. PURCHASE PRICE. -------------- The purchase price of the Shares covered by the Option shall be $9.00 per Share, subject to adjustment, as provided in the Plan, in the event of a stock split, reverse stock split or other events affecting the holders of Shares. Payment shall be made in accordance with Paragraph 7 of the Plan. 3. EXERCISE OF OPTION. ------------------ Subject to the terms and conditions set forth in this Agreement and the Plan, the Option granted hereby shall be exercisable as follows: On the first anniversary of the up to 1/3 of the Shares date of this Agreement On the second anniversary of the an additional 1/3 of the date of this Agreement Shares On the third anniversary of the an additional 1/3 of the date of this Agreement Shares The foregoing rights are cumulative and are subject to the other terms and conditions of this Agreement and the Plan. Should the Company (i) merge or consolidate with another corporation under circumstances where the Company is not the surviving corporation, (ii) sell all or substantially all of its assets, (iii) liquidate or dissolve, or (iv) register the transfer of eighty percent (80%) or more of its outstanding Common Stock to persons who were not owners (or considered to be owners pursuant to Section 318 of the Code) of Common Stock immediately prior to such transfer, and the Participant continues his/her employment with the Company, or its successor, for a period of not less than twelve (12) months from the date of the merger, sale or transfer then 100% of such Option not yet vested shall vest at the end of such 12-month term, and the holder of this Option shall have the right to exercise any and all of the Option shares, unless this Option has otherwise expired or been terminated pursuant to its terms or the terms hereof. At any time after the Company is involved in a merger, consolidation, sale or transfer as described above, and a) the Participant shall fail to be vested with power and authority analogous to the Participant's title and/or office prior to the merger, consolidation, sale or transfer, or b) the Participant shall lose any significant duties or responsibilities attending such office, or -2- c) if there shall occur a reduction in the Participant's base compensation, or d) the Participant's employment with the Company, or its successor, is terminated without cause, then 100% of such option not yet vested shall immediately vest and the holder of this Option shall have the right, immediately prior to the effectiveness of consummation of such event, to exercise any and all of the Option shares, unless this option has otherwise expired or been terminated pursuant to its terms or the terms hereof. 4. TERM OF OPTION. -------------- The Option shall terminate ten (10) years from the date of this Agreement, but shall be subject to earlier termination as provided herein or in the Plan. If the Participant ceases to be an employee, director or consultant of the Company or of an Affiliate (for any reason other than death or Disability or termination for "cause" as defined in the Plan), the Option may be exercised within ninety (90) days after the date the Participant ceases to be an employee, director or consultant of the Company or an Affiliate, or within the originally prescribed term of the Option, whichever is earlier, but may not be exercised thereafter. In such event, the Option shall be exercisable only to the extent that the right to purchase Shares under this Agreement or the Plan has accrued and is in effect at the date of such cessation of employment, consultancy or directorship. The provisions of this paragraph shall apply if the Participant subsequently becomes disabled or dies after ceasing to be an employee, consultant or director, provided, however, in the case of the Participant's death within three (3) months after ceasing to be an employee, consultant or director, the Option may be exercised by the Participant's Survivors within one (1) year after the date of the Participant's death but in no event after the date of expiration of the term of the Option. In the event the Participant's employment, directorship or consultancy is terminated for "cause" (as defined in the Plan), the Participant's right to exercise any unexercised portion of this Option shall cease forthwith, and this Option shall thereupon terminate. Notwithstanding anything herein to the contrary, if subsequent to the Participant's termination as an -3- employee, director or consultant but prior to the exercise of the Option, the Board of Directors of the Company determines that, either prior or subsequent to the Participant's termination, the Participant engaged in conduct which would constitute "cause", then the Participant shall forthwith cease to have any right to exercise the Option. In the event of the Disability of the Participant, as determined in accordance with the Plan, the Option shall be exercisable within one (1) year after the date of such Disability or, if earlier, the term originally prescribed by the Option. In such event, the Option shall be exercisable: a) to the extent that the right to purchase the Shares hereunder has accrued on the date the Participant becomes Disabled and is in effect as of the date of Disability; and b) in the event rights to exercise the Option accrue periodically, to the extent of a pro rata portion of any additional rights as would have accrued had the Participant not become Disabled prior to the end of the particular year. The proration shall be based upon the number of days of the accrual period during which the Participant was not Disabled. In the event of the death of the Participant while an employee, consultant or director of the Company or of an Affiliate, the Option: x) to the extent exercisable but not exercised as of the date of death; and y) in the event rights to exercise the Option accrue periodically, to the extent of a pro rata portion of any additional rights to exercise the Option as would have accrued had the Participant not died during that year may be exercised by the Participant's Survivors. The proration shall be based upon the number of days during the accrual period prior to the Participant's death. In such event, the Option must be exercised, if at all, within one (1) year after the date of death of the Participant or, if earlier, within the originally prescribed term of the Option. -4- 5. METHOD OF EXERCISING OPTION. ---------------------------- Subject to the terms and conditions of this Agreement, the Option may be exercised by written notice to the Company, at the principal executive office of the Company. Such notice shall state the election to exercise the Option and the number of Shares in respect of which it is being exercised, shall be signed by the person or persons so exercising the Option, and shall be in substantially the form attached hereto as Exhibit A. Payment of the full purchase price for such Shares shall be made in accordance with Paragraph 7 of the Plan, and the Company shall deliver a certificate or certificates representing such Shares as soon as practicable after the notice shall be received, provided, however, that the Company may delay issuance of such Shares until completion of any action or obtaining of any consent, which the Company deems necessary under any applicable law (including, without limitation, state securities or "blue sky" laws). The certificate or certificates for the Shares as to which the Option shall have been so exercised shall be registered in the name of the person or persons so exercising the Option (or, if the Option shall be exercised by the Participant and if the Participant shall so request in the notice exercising the Option, shall be registered in the name of the Participant and another person jointly, with right of survivorship) and shall be delivered as provided above to or upon the written order of the person or persons exercising the Option. In the event the Option shall be exercised, pursuant to Section 4 hereof, by any person or persons other than the Participant, such notice shall be accompanied by appropriate proof of the right of such person or persons to exercise the Option. All Shares that shall be purchased upon the exercise of the Option as provided herein shall be fully paid and non-assessable. 6. PARTIAL EXERCISE. ---------------- Exercise of this Option to the extent above stated may be made in part at any time and from time-to-time within the above limits, except that no fractional share shall be issued pursuant to this Option. 7. NON-ASSIGNABILITY. ------------------ The Option shall not be transferable by the Participant otherwise than by will or by the laws of descent and distribution -5- and shall be exercisable, during the Participant's lifetime, only by the Participant. Except as provided in the preceding sentence, the Option shall not be assigned, pledged or hypothecated in any way (whether by operation of law or otherwise) and shall not be subject to execution, attachment or similar process. Any attempted transfer, assignment, pledge, hypothecation or other disposition of the Option or of any rights granted hereunder contrary to the provisions of this Section 7, or the levy of any attachment or similar process upon the Option or such rights, shall be null and void. 8. NO RIGHTS AS STOCKHOLDER UNTIL EXERCISE. --------------------------------------- The Participant shall have no rights as a stockholder with respect to Shares subject to this Agreement until a stock certificate therefore has been issued to the Participant and is fully paid for. Except as is expressly provided in the Plan with respect to certain changes in the capitalization of the Company, no adjustment shall be made for dividends or similar rights for which the record date is prior to the date such stock certificate is issued. 9. CAPITAL CHANGES AND BUSINESS SUCCESSIONS. ---------------------------------------- The Plan contains provisions covering the treatment of Options in a number of contingencies such as stock splits and mergers. Provisions in the Plan for adjustment with respect to stock subject to Options and the related provisions with respect to successors to the business of the Company are hereby made applicable hereunder and are incorporated herein by reference. 10. TAXES AND WITHHOLDING. --------------------- The Participant acknowledges that upon exercise of the Option the Participant will be deemed to have taxable income measured by the difference between the then fair market value of the Shares received upon exercise and the price paid for such Shares pursuant to this Agreement (the "Taxable Income"). The Participant acknowledges that any income or other taxes due from him or her with respect to this Option or the Shares issuable pursuant to this Option shall be the Participant's responsibility. If the Company in its discretion determines that it is obligated to withhold income taxes with respect to the exercise -6- of the Option, the Participant hereby agrees that the Company may withhold from the Participant remuneration, if any, the appropriate amount of federal, state and local withholding attributable to such amount that is considered compensation includible in such person's gross income. 11. NO OBLIGATION TO EMPLOY. ----------------------- The Company is not by the Plan or this Option or any other agreement obligated to continue the Participant as an employee, consultant or director of the Company. 12. NOTICES. ------- Any notices required or permitted by the terms of this Agreement or the Plan shall be given by recognized courier service, facsimile, registered or certified mail, return receipt requested, addressed as follows: To the Company: A.C. MOORE ARTS & CRAFTS, INC. 500 University Court Blackwood, New Jersey 08012 To the Participant: (address) or to such other address or addresses of which notice in the same manner has previously been given. Any such notice shall be deemed to have been given when mailed in accordance with the foregoing provisions. 13. GOVERNING LAW. ------------- This Agreement shall be construed and enforced in accordance with the law of the State of Pennsylvania. 14. BENEFIT OF AGREEMENT. -------------------- Subject to the provisions of the Plan and the other provisions thereof, this Agreement shall be for the benefit of and shall be binding upon the heirs, executors, administrators, successors and assigns of the parties hereto. -7- 15. ENTIRE AGREEMENT. ---------------- This Agreement, together with the Plan, embodies the entire agreement and understanding between the parties hereto with respect to the subject matter hereof and supersedes all prior oral or written agreements and understandings relating to the subject matter hereof. No statement, representation, warranty, covenant or agreement not expressly set forth in this Agreement shall affect or be used to interpret, change or restrict, the express terms and provisions of this Agreement, provided, however, in any event, this Agreement shall be subject to and governed by the Plan. 16. MODIFICATIONS AND AMENDMENTS. ---------------------------- The terms and provisions of this Agreement may be modified or amended only by written agreement executed by all parties hereto. 17. WAIVERS AND CONSENTS. -------------------- The terms and provisions of this Agreement may be waived, or consent for the departure therefrom granted, only by written document executed by the party entitled to the benefits of such terms or provisions. No such waiver or consent shall be deemed to be or shall constitute a waiver or consent with respect to any other terms or provisions of this Agreement, whether or not similar. Each such waiver or consent shall be effective only in the specific instance and for the purpose for which it was given, and shall not constitute a continuing waiver or consent. 18. HOLDING PERIOD APPLICABLE TO PERSONS SUBJECT TO SECTION 16 OF ------------------------------------------------------------- THE SECURITIES EXCHANGE ACT OF 1934. ----------------------------------- If the Participant to whom the Option has been granted pursuant to this Agreement is subject to Section 16 of the Securities Exchange Act of 1934, then at least six (6) months must elapse from the date of grant of the Option to the date of disposition of the Shares. -8- IN WITNESS WHEREOF, the Company has caused this Agreement to be executed by a duly authorized officer, and the Participant has hereunto set his or her hand and seal, all as of the day and year first above written. A.C. MOORE ARTS & CRAFTS, INC. By: __________________________ John E. Parker, President PARTICIPANT -------------------------- -9- Exhibit A --------- NOTICE OF EXERCISE OF INCENTIVE STOCK OPTION To: A.C. MOORE ARTS & CRAFTS, INC. IMPORTANT NOTICE: This form of Notice of Exercise may only be used at such time as the Company has filed a Registration Statement with the Securities and Exchange Commission under which the issuance of the Shares for which this exercise is being made are registered and such Registration Statement remains effective. Ladies and Gentlemen: I hereby exercise my Incentive Stock Option to purchase ______ shares (the "Shares") of the common stock, no par value, of A.C. MOORE ARTS & CRAFTS, INC. (the "Company"), at the exercise price of $___________ per share, pursuant to and subject to the terms of that certain Incentive Stock Option Agreement between the undersigned and the Company dated _________, 1997. I understand that the nature of the investment I am making and the financial risks thereof. I am aware that it is my responsibility to have consulted with competent tax and legal advisors about the relevant national, state and local income tax and securities laws affecting the exercise of the Option and the purchase and subsequent sale of the Shares. I am paying the option exercise price for the Shares as follows:________________________________________________________ ________________________________________________________________. If I am subject to Section 16 of the Securities Exchange Act of 1934, I understand that at least six (6) months must elapse from the date of grant of the Option to the date of disposition of the Shares. Please issue the stock certificate for the Shares (check one): _____ to me _____ to me and _________________________ as joint tenants with right of survivorship -10- and mail the certificate to me at the following address: - -------------------------------------- - -------------------------------------- -11- EX-10 6 EXHIBIT 10.3 This Indenture of Lease is made the 14th day of August, 1995, between FREEWAY 130, L.L.C., with offices at P.0 Box 585, 510 Heron Drive, Bridgeport, NJ 08014 ("Landlord") and A.C. MOORE, INC., with offices at 17 Roland Avenue, Mt. Laurel, NJ 08057 ("Tenant"). ARTICLE 1 DEMISED PREMISES - USE OF DEMISED PREMISSES TERM OF LEASE - COMPLETION OF IMPROVEMENTS 1.01 The Landlord hereby demises and leases to Tenant, and Tenant hereby hires and takes from Landlord subject to the terms of the Lease, for the term specified in Section 1.03, the premises known as 5 University Court, as more fully described in Exhibit A hereto, together with the improvements to be constructed thereon by Landlord pursuant to Section 1.04 (together, the "Demised Premises"). 1.02 Tenant shall use and occupy the Demised Premises for any lawful purpose, specifically, for warehousing, distribution, corporate offices, and the necessary truck and car parking associated with those uses. 1.03 The term of this Lease shall be six (6) years, unless sooner terminated pursuant to other provisions of this Lease. The date of Commencement of the term of this Lease shall be and Tenant's obligation to pay rent shall commence on the earlier of (a) the date Landlord notifies Tenant that the Demised Premises is ready for occupancy following substantial completion of the work to be performed by Landlord pursuant to Section 1.04 hereof, and Tenant's Certificate of Occupancy is issued, or (b) the date Tenant occupies the Demised Premises or any part thereof, or (c) April 30, 1996 ("Commencement Date"). 1.04 Before the term of this Lease begins, Landlord shall construct and prepare a building and other improvements (the "Work") upon the Demised Premises in accordance with the plans and specifications set forth in Exhibit B hereto and such other working drawings and specifications as may be reasonably necessary which shall be prepared by landlord in substantial conformity, with the plans and specifications set forth in Exhibit B, but if such working drawings and specifications are not so in conformity, they shall be subject to the approval of Tenant, not to be unreasonably withheld, such approval to be considered to have been given unless Tenant, within six (6) business days after the submission of such working drawings and specifications to it, notifies Landlord in writing of Tenant's disapproval and the reasons therefor. All other work to be done or performed in or about the Demised Premises shall be by Tenant at Tenant's sole cost and expense and in accordance with the provisions or Article 5 hereof. 1.05 The Demised Premises shall conclusively be deemed ready for Tenant's occupancy as soon as the Work has been substantially completed and a Tenant Certificate of Occupancy is issued. The Demised Premises shall not be deemed to be unready for Tenant's occupancy or incomplete (a) if only minor or unsubstantial details of construction, decoration or mechanical adjustments remain to be done in the Demised Premises or any part thereof provided that none of such items are necessary to make the building reasonably tenantable for Tenant's use, or (b) if a temporary or permanent certificate of occupancy has been issued for the building, or (c) if delay in the availability of the Demised Premises for Tenant's occupancy is caused in whole or in part by Tenant. 1.06 Landlord shall give Tenant at least four (4) weeks's prior notice of the date when the building is expected to be ready for occupancy. Upon substantial completion of the Work, Landlord and "punchlist" listing incomplete items or items that need to be corrected. As soon as conditions practicably permit, Landlord shall finish the items of Work and adjustment not finished when the building is ready for occupancy. 1.07 Subject to the provisions of Section 1.06, the entry by Tenant into the Demised Premises and the taking of possession thereof shall be deemed an acknowledgment by Tenant that the Demised Premises are in good and tenantable and satisfactory condition at the beginning of the ter m of this Lease and that up to the time of such occupancy Landlord has no duty to make repairs or alterations to the Demised Premises at any time prior to or during the term of this Lease except as specifically set forth in the Lease. Notwithstanding anything in this Lease to the contrary, Landlord agrees to correct or repair any patent or latent defects in the construction of the Work occurring within one (1) year of the Commencement Date provided written notice thereof is given to Landlord by Tenant within said one (1) year period, ARTICLE 2 RENT 2.01 Tenant covenants and agrees to pay to Landlord, at Landlord's address or at such other place as Landlord may from time to time designate, during each year during the term hereof, a basic annual rental in the amount of FIVE HUNDRED AND SEVENTEEN THOUSAND ONE HUNDRED AND SEVENTY-FOUR ($517,174) DOLLARS, adjusted in accordance with Section 2.02 hereof (the "Basic Rent"). The Basic Rent shall be in addition to all other payments to be made by Tenant pursuant to this Lease and shall be paid, in advance, without notice or demand, and without deduction or set-off, in monthly installments of one-twelfth (1/12th) of such Basic Rent on the first (lst) day of each calendar month during the term of this Lease, and a prorata portion of such monthly Basic Rent shall be paid at the beginning and end of the term if the Commencement Date is or the Lease terminates on other than the first day of a calendar month. 2.02 Renewals. (a) Tenant shall have the right and option to extend the term of this Lease for ONE (1) successive renewal terms (each of which is a separate, independent option) of SIX (6) years (each of which shall be called a "Renewal Term"), provided and on condition that: (i) Tenant gives Landlord at least six (6) months written notice of its exercise of the option prior to the expiration of the then current term of the Lease, and (ii) all prior options, if any, have been exercised, and (iii) any extension of this Lease pursuant to the provisions of this Section 2.02(a) shall be upon the same terms and condition as are then in effect except that there shall be options to extend only as provided in this Section 2.02(a) and except as specifically otherwise provided in this Lease, and (iv) if Tenant fails to exercise any option to extend as provided in this Lease, this Lease shall terminate at the end of the then current term. (b) The Basic Rent for the Demised Premises during any Renewal Term shall be computed by multiplying the then existing Basic Rent times a fraction, the numerator of which shall be the "Index" (as defined below) for the month immediately prior to the applicable Renewal Term, and the denominator shall be the Index for the month in which the Commencement Date occurs, but in no event less than the Basic Rent in effect for the period immediately prior to the applicable Renewal Term. (c) The term "Index" shall mean the United States Bureau of Labor Statistics, Consumer Price Index for Urban Wage Earners and Clerical Workers, All Items, Philadelphia, PA - NJ (1982 - 100). If the Index shall be no longer published and a successor index with stated adjustments based on the Index is published such successor index shall be used; otherwise, Landlord shall select successor index. 2.03 It is the purpose and intent of Landlord and Tenant that, except as otherwise provided in this Section 2.03, the Basic Rent shall be net to Landlord, so that this Lease shall yield, net to Landlord, the Basic Rent specified in Section 2.01, and that all taxes, costs, expenses, obligations and charges of every kind and nature relating to the Demised Premises (excepting the payments by Landlord of interest and principal pursuant to any note and mortgage to which Landlord is a party secured by the Demised Premises, or any part thereof, or any real property of which the Demised Premises is a part and the one year warrantee as cited in Article 1.07), that may arise or become due during the term of this Lease shall be paid by Tenant, and Tenant agrees to indemnify, defend and save harmless Landlord from and against such costs, expenses, obligations and charges. 2.04 All taxes, charges, costs, expenses and obligations that Tenant assumes or agrees to pay under any provisions of this Lease, together with all interest and penalties that may accrue thereon in the event of Tenant's failure to pay the same as provided in this Lease, all other damages, costs and expenses that Landlord may suffer or incur, and any and all other sums that may become due, by reason of any default of Tenant or failure on Tenant's part to comply with the agreements, terms, covenants and conditions of this Lease on Tenant's part to be performed, and each or any of them, shall be deemed to be additional rent and, in the event of non-payment, Landlord shall have all the rights and remedies provided in this Lease and provided by law in the case of non-payment of rent. ARTICLE 3 TAXES AND OTHER CHARGES AND EXPENSES - UTILITIES 3.01 (a) Tenant shall bear, pay and discharge, or cause to be paid and discharged, at least fifteen (15) days before the last day upon which payment may be made without penalty or interest, all real estate taxes, use and occupancy taxes, special assessments, water rents, rates and charges, sewer rents, license fees, permit fees and other authorization fees, charges for public utilities and other governmental impositions and charges of every kind and nature whatsoever, extraordinary as well as ordinary, seen or unforeseen, and each and every installment thereof ("Impositions") that shall or may during the term hereof become due and payable, or become liens upon, or arise in connection with the use, occupancy or possession of, or be due or payable out of the proceeds of, or for or with respect to, or with respect to the rents from (i) the Demises Premises and any part thereof, the appurtenances thereto and the sidewalks, streets and vaults adjacent thereto, and any estate, right or interest therein and (ii) any occupancy, use or possession of the Demised Premises or any part thereof, and such franchises, licenses or permits that may be appurtenant to the use of the Demised Premises or any part thereof. (b) All Impositions that are charged, laid, assessed, or imposed for each fiscal or billing period in which the term of this Lease commences and terminates shall be apportioned pro-rata between Landlord and Tenant in accordance with the respective portions of each such fiscal or billing period during the term of this Lease. 3.02 So long as it is not in default under this Lease, Tenant, without postponement of payment of any Imposition, may bring appropriate proceedings in the name of Landlord or Tenant or both for contesting the validity or amount of any Imposition, or to recover payments therefor, and agrees to indemnify, defend and save Landlord harmless from all liability, costs and expenses in connection therewith. Landlord shall cooperate with Tenant with respect to the proceedings so far as reasonably necessary. Tenant shall be entitled to amounts recovered that relate to payments that, pursuant to the terms of this Lease, have been made by Tenant. 3.03 (a) Except as in this Section 3.03 provided, Tenant shall be solely responsible for the provision of, and promptly pay all charges for gas, heating, electricity, telephone, water, sewer and all other utilities and services used or consumed in connection with the Demised Premises. Tenant agrees to indemnify, defend and save Landlord harmless against any liability or charges for such utilities and services. (b) In no event shall Landlord be liable for an interruption or failure in the supply of any such utilities or services to the Demised Premises. (c) In no event shall Landlord be liable for an interruption or failure in the supply of any utilities or services to the Demised Premises, and Tenant shall not be entitled to any rent or other abatement therefor. It is expressly agreed that Landlord is not and shall not be required to render any services of any kind to Tenant. 3.04 Tenant shall promptly, timely, and fully pay all expenses pertaining to the Demised Premises. 3.05 Tenant shall promptly supply to Landlord, and in any event prior to the period in which any interest and/or penalty would accrue for non-payment, written proof of payment of all Impositions and other charges and expenses required to be paid by Tenant by this Article 3. ARTICLE 4 ASSIGNMENTS MORTGAGES AND SUBLEASES -- TRANSFER OF OWNERSHIP -- SERVICE CONTRACTS 4.01 Neither Tenant, nor Tenant's successors or assigns, shall, without Landlord's prior written consent, voluntarily or involuntarily or by operation of law, assign, transfer, mortgage, pledge or encumber this Lease or the estate created hereby, in whole or in part, or sublet the Demised Premises or any part thereof, or enter into any license agreement pertaining to the Demised Premises or any part thereof, or otherwise permit the Demised Premises or any part thereof to be used or occupied by others. Except for a public stock offering or a minority interest transfers, for the purposes of this Lease, any transfer of any ownership interest in Tenant or any entity of which Tenant is composed shall be deemed a prohibited assignment, or unless Tenant is a corporation whose stock is publicly traded. Each permitted assignee and subtenant shall assume, and be deemed to have assumed this Lease, and shall be and remain liable jointly and severally with Tenant for all payments and for the due performance on all terms, covenants and conditions to be paid and performed by Tenant. ARTICLE 5 ALTERATIONS & TRADE FIXTURES 5.01 Except for the addition of trade fixtures and equipment that do not attach to the Demised Premises, Tenant shall not make any alteration, rebuilding, replacement, change, addition or improvement in or to the Demised Premises without the prior written consent of Landlord; and if Landlord gives written consent: (a) such work shall be performed in a first class, workmanlike manner, at Tenant's sole cost and expense, and shall not weaken or impair the structural strength, or lessen the value, of the Demised Premises; (b) such work shall be made according to plans and specifications therefor, prepared at Tenant's sole cost and expense, that have received Landlord's prior written approval, and such work shall comply with the Declarations in all respects; (c) before the commencement of any such work, at Tenant's sole cost and expense, such plans and specifications shall, if required by law, statute, ordinance, rule or regulation, be filed with and approved by all governmental departments or authorities having jurisdiction, and any public utility company having an interest therein, and written evidence of such approval provided to Landlord; all such work shall be done subject to and in accordance with all requirements of law, statutes, ordinances, rules and regulations, all governmental departments or authorities having jurisdiction, public utility companies having or claiming jurisdiction, and any other body exercising similar functions; and (d) before the commencement of any such work Tenant shall obtain, and at all times when any such work is in progress Tenant shall maintain, at Tenant's sole cost and expense, such insurance coverage as covers all insurable risks during the course of such work, and such workmen's compensation insurance as covers all persons employed in connection with the work and with respect to whom death or bodily injury claims could be asserted against Landlord or the Demised Premises or Landlord's interest in the Demised Premises. 5.02 Tenant shall have the right to install trade fixtures required by Tenant or used by it in its business provided and to the extent not attached or affixed to the Demised Premises and, if installed by Tenant, to remove any or all such trade fixtures from time to time during and upon termination of this Lease, provided however, that Tenant is not otherwise in default under this Lease and that Tenant shall repair and restore any damage or injury to the Demised Premises caused by the installation and/or removal of any such trade fixtures. ARTICLE 6 REPAIRS 6.01 At all times during the term of this Lease, Tenant shall, at Tenant's own cost and expense, keep and maintain in first-class order and condition the Demised Premises, including but not limited to all lawns and planted areas, and all roadways, walkways, sidewalks, curbing and parking and loading areas thereon, and all equipment and appurtenances, and make all repairs thereto and restorations, replacements and renewals thereof, inside, and non-structural, extraordinary and ordinary, seen or unforeseen, howsoever the necessity or desirability for repairs may occur, and whether or not necessitated by (subject to the provisions of Section 1.07) latent defects or otherwise; and shall use all reasonable precaution to prevent waste, damage or injury. 6.02 Tenant shall keep the roadways, walks, parking and loading areas and sidewalks clean and free of snow and ice, and the exterior and interior of the buildings and improvements clean and neat. Without limiting the generality of the foregoing, all open storage and loading areas within the Demised Premises shall be maintained by Tenant in an orderly, neat and clean fashion, and shall be screened so as not to be visible from streets and adjoining properties. 6.03 The Demised Premises and each part thereof shall at all times be maintained by Tenant in compliance with the Declarations. 6.04 Tenant shall enter into a preventive maintenance agreement for the Heating, Air Conditioning, and Ventilating systems of the Demised Premises. ARTICLE 7 MECHANICS' AND OTHER LIENS 7.01 Tenant shall have no power to do any act or make any contract that may create or be the foundation for any lien, mortgage or other encumbrance upon the Demised Premises, the reversion or other estate of Landlord, or upon any interest of Landlord in the Demised Premises. If Tenant causes any alterations, rebuildings, replacements, changes, additions, improvements or repairs to be made to the Demised Premises, or causes any labor to be performed or material to be furnished therein, thereon or thereto, neither Landlord nor the Demised Premises nor Landlord's interest in the Demised Premises shall under any circumstances be liable for the payment of any expense incurred or for the value of any work done or material furnished, but all such alterations, rebuildings, replacements, changes, additions, improvements and repairs, and labor and material, shall be made, furnished and performed at Tenant's sole cost and expense, and Tenant shall be solely and wholly responsible to contractors, laborers and materialmen furnishing and performing such labor and material. Landlord is willing to sign a Landlord's waiver on personal property and trade fixtures as long as a waiver does not hinder financing and is acceptable to the mortgagee. 7.02 If, because of any act or omission (or alleged act or omission) of Tenant, any mechanics or other liens charge or order for the payment of money is filed against Landlord or the Demised Premises or Landlord's interest therein or any financing statement is filed for or affecting any equipment or any materials used in the construction or alteration of, or installed in, any such building or improvement in or on the Demised Premises, (whether or not such lien, charge or order, or financing statement is valid or enforceable as such), Tenant shall, at its own cost and expense, cause the same to be canceled and discharged (whether by bonding or payment) within ten (10) days after notice of filing thereof. 7.03 Prior to the performance of any alterations, additions or improvements to the Demised Premises, (i) Tenant will enter into a written contract with each contractor performing such work and with each supplier providing material and supplies in connection with such work which shall provide (A) that the contractor and supplier agree that neither they nor any subcontractors nor materialmen shall file any mechanic's or materialman's liens, or notices of intention therefor, against the Demised Premises, or any part thereof or any notices of refusal relating to any work upon or material supplied to or for the Demised Premises; (B) that all subcontracts and purchase orders executed in connection with any such work shall contain agreements similar to those referred to in (A) above, by the subcontractors and suppliers, (C) that Tenant is entering into the contract as tenant and not on behalf of Landlord and that all stop notices thereafter filed by any subcontractor or supplier will be filed only against Tenant and will be binding upon Tenant in connection with Tenant's obligation to make payments under the construction contract; and (ii) Tenant shall, pursuant to Title 2A N.J.S.A. 44-75, cause to be filed a copy of the written contract with each such contractor and supplier and all specifications accompanying the contract. ARTICLE 8 REQUIREMENTS OF LAW 8.01 Tenant, shall, at its own cost and expense, promptly observe and comply with all present and future laws, ordinances, requirements, orders, directions, rules and regulations of the federal, state, county and municipal governments and of all other governmental authorities having or claiming jurisdiction over the Demised Premises or appurtenances or any part thereof, which are applicable to the Demised Premises and/or the conduct of business thereon, and of the insurance underwriting board or insurance inspection bureau having or claiming jurisdiction, or any other body exercising similar functions, and of all insurance companies writing policies covering the Demised Premises or any part thereof. 8.02 Neither Tenant nor Tenant's agents, employees, invitees or independent contractors shall discharge or permit to be discharged on, or bring on, to the Demised Premises, Building or Parcel, any "Hazardous Material", except in compliance with all applicable laws, rules, regulations, and ordinances regulating such activities. For the purposes of this Lease, "Hazardous Material" means: (A) "hazardous substances", or "toxic substances" as those terms are defined by the Comprehensive Environmental Response, Compensation, and Liability Act ("CERCLA"), 42 U.S.C. 9601 et seq.; or the Hazardous Materials Transportation Act, 49 U.S.C. 1802, all as amended and hereafter amended; (B) "hazardous wastes", as that term is defined by the Resource Conversation and Recovery Act ("RCRA"), 42 U.S.C. 6902 et seq., as amended and hereafter amended; and (C) any pollutant or contaminant or hazardous, dangerous or toxic chemicals, materials, or substances within the meaning of any other applicable federal, state or local law, regulation, ordinance, or requirement (including consent decrees and administrative orders) relating to or imposing liability or standard of conduct concerning any hazardous, toxic or dangerous waste substance or material, all as amended or hereafter amended, and (D) "hazardous substance" as defined in Section 3K of the New Jersey Spill Compensation and Control Act (Spill Act), N.J.S.A. 58:10-23.llb.k.; and (E) crude oil or any fraction thereof which is liquid at standard conditions of temperature and pressure (60 degrees Fahrenheit and 14.7 pounds per square inch absolute); (F) any radioactive material, including any source, special nuclear or by-product material as defined at 41 U.S.C. 2011 et seq., as amended or hereafter amended; (G) asbestos in any form or condition; and (H) polychlorinated biphenyls ("PCBs") or substances or compounds containing PCBs; and (I) "hazardous substance" as defined in (1) Section 3d of ECRA, N.J.S.A. 1K- 8(d), or (2) N.J.A.C. 7:lE-1.3, or (3) N.J.A.C. 87- lE-Appendix A, or (4) N.J.A.C. 7:1-33. Tenant agrees to pay for all cleanup costs necessary to cure any violation of this Section 8.02. ARTICLE 9 INSURANCE 9.01 Tenant shall, at its own cost and expense: (a) Keep the Demised Premises, including but not limited to all alternations, rebuildings, replacements, changes, additions and improvements thereto, and all fixtures and equipment and other property located on the Demised Premises, insured against loss or damage by fire and such other risks as may be included in the broadest form of extended coverage from time to time available (including but not limited to the traditional "ALL RISK" Perils) in the amount not less than the full replacement, value thereof (including, but not limited to, foundation and cost of debris removal, without any deduction for depreciation). Such replacement value shall be determined at Tenant's expense from time to time, but not more frequently than once in any twelve (12) calendar months, at the request of Landlord, by one of the insurers or, at the option or Landlord, by an appraiser who is mutually and reasonably acceptable to Landlord" and Tenant; (b) Provide and keep in force comprehensive general public liability insurance against claims for personal injury, death or property damage occurring on, in or about the Demised Premises and on, in or about the adjoining sidewalk and streets, such insurance to be in such forms and amounts as may from time to time be reasonably required by Landlord, provided that at no time shall the coverage be less than $500,000 in respect of personal injury or death to any one person, and of not less than $1,000,000 in respect of any one occurrence, and of not less than $500,000 for property damage; (c) Provide and keep in force boiler and machinery insurance in such amounts as may from time to time be required by Landlord; (d) Provide and keep in force sprinkler leakage insurance in amounts and forms satisfactory to Landlord, if a sprinkler system is in or on the Demised Premises; (e) Provide and keep in force rent insurance (covering Basic Rent and additional rent for a period of at least one year) and such other insurance and in such amounts as may from time to time be required by Landlord against such other insurable hazards as at the time are commonly insured against in the case of premises similarly situated or similarly used. 9.02 All insurance provided by Tenant is required by this Article 9, and any other insurance carried by Tenant with respect to the Demised Premises (other than casualty insurance for Tenant's personal property), shall be carried in favor of Tenant and Landlord as named insureds as their interests may appear. If requested by Landlord, all or any such insurance shall include the interest of the holder of any mortgage or bond (included but not limited to the State of New Jersey Economic Development Authority Revenue Bonds) secured by the Demised Premises or any part thereof, or any real property of which the Demised Premises is a part, and shall provide that loss, if any, shall be payable to such holder under a standard mortgagee clause, without contribution. All such insurance shall be taken in such responsible companies, licensed to do business in the State of New Jersey and having a BEST rating of A+/IX, as Landlord may approve and the policies therefor shall at all times be held by Landlord or, when appropriate, by the holder of any such mortgage, in which case copies of the policies or, certificates of such insurance shall be delivered by Tenant to Landlord. All such policies shall be non-assessable and shall require thirty (30) days notice by registered mail to the insureds and the holders of any such mortgage of any cancellation or modification thereof. All such policies to the extent permitted by law shall provide that losses shall be paid to Landlord or any such mortgagee notwithstanding any act or negligence of any insured or mortgagee that might otherwise result in forfeiture of the insurance. Tenant shall not obtain any insurance which would be deemed contributing with any required insurance without naming Landlord as an additional insured thereunder. 9.03 The loss, if any, under any policies provided for in paragraphs (a), (c) and (d) of Section 9.01 shall be adjusted by Landlord with the insurance companies (and/or Landlord's mortgagee). Subject to the rights of the holder of any mortgage covering the Demised Premises or any part thereof, or any real property of which the Demised Premises is a part, the proceeds of any such insurance, as so adjusted, shall be payable to and retained by Landlord, which shall be subject, in its use thereof, to the provisions of Article 10 hereof. 9.04 Tenant shall not violate or permit to be violated any of the conditions or provisions of any such policy, and Tenant shall so perform and satisfy the requirements of the companies writing such policies. 9.05 Tenant and Landlord shall cooperate in connection with the collection of any insurance monies that may be due in the event of loss, and Tenant shall execute and deliver to Landlord such proofs of loss and other instruments that may be required for the purpose of obtaining, the recovery of any such insurance monies. 9.06 Tenant shall pay and discharge, when and as due, all premiums on all insurance policies required to be maintained by the provisions of this Article 9, and shall, after such payment is made, promptly deliver receipts or other evidence of such payment to Landlord. Prior to the Commencement Day, Tenant shall deliver to Landlord original policies of insurance required by this Article 9 together with evidences of payment of the premiums therefor. Not less than thirty (30) days prior to the expiration date of any such policies, Tenant shall deliver to Landlord original renewal policies and evidence of payment of the premium therefor. 9.07 Each of the parties hereto hereby releases the other, to the extent of the releasing party's insurance coverage and/or coverage required under this Lease whether or not obtained, from any and all liability for any loss or damage which may be inflicted upon the property of such party even if such loss or damage shall be brought about by the fault or negligence of the other party, its agents or employees. ARTICLE 10 DESTRUCTION -- FIRE OR OTHER CAUSES 10.01 If, during the term of this Lease, the Demised Premises or any part thereof, is destroyed or damaged in whole or in part by fire or other cause, Tenant shall give to Landlord immediate notice thereof. If, from it's examination of the damage, in the reasonable opinion of the Landlord, the building is capable of being restored within 120 days, Tenant, at its own cost and expense, shall promptly repair, replace and rebuild the same promptly and with due diligence. Any such repairs shall be subject to and shall be performed in accordance with the provisions of Section 5.01 hereof. 10.02 If, from it's examination of the damages, in the reasonable option of the Landlord, the building is not capable of being restored with 120 days, either party may terminate this Lease by giving written notice to the other within sixty (60) days of such damage or destruction, such notice to be effective 30 days after receipt of such notice. 10.03 If less than fifty percent (50%) of the building being a part of the Demised Premises is damaged or destroyed, or if neither party terminates this Lease in the event of damage or destruction of fifty percent (50%) or more of the building being a part of the Demised Premises, this Lease shall not terminate or be affected in any manner, nor shall there be any suspension, diminution, abatement or reduction of rent, by reason of damage to or destruction of the Demised Premises or any part thereof. 10.04 If the Demised Premises are only partially destroyed by fire or other damage and the Lease is not terminated as above, the net proceeds of any insurance recovered by reason of such damage or destruction in excess of the cost of adjusting the insurance claim and collecting the insurance proceeds (such excess being hereinafter called the "net insurance proceeds") to the extent made available by any mortgagee for restoration shall be applied towards the reasonable cost of restoring such building and other improvements. 10.05 Whether or not this Lease is terminated pursuant to this Article 10, if insurance is not carried against the damage, or if in Landlord's sole opinion the net insurance proceeds actually so received by Landlord (excluding rent insurance proceeds) will not be adequate to pay for repairing the damage, Tenant shall pay the cost of repair in excess of net insurance proceeds so made available by mortgagees, and prior to the commencement of any restoration work shall give Landlord adequate security for the payment. Notwithstanding anything in, this Lease to the contrary, Landlord shall not be required to make insurance proceeds available for restoration during the last two years of the then existing term of this Lease, but Tenant shall nevertheless be liable to Landlord for any shortage of net insurance proceeds even if Landlord elects not to make net insurance proceeds available for restoration. Except as otherwise provided in this Lease, Tenant's obligation to pay rent shall not in any way be affected by damage to or destruction of the Demised Premises or any part thereof, regardless of cause, and there shall be no abatement diminution or reduction of rent by reason thereof except to the extent, if any, that Landlord receives rent insurance proceeds. ARTICLE 11 CONDEMNATION 11.01 In the event that the Demised Premises or any part thereof is taken in condemnation proceedings or by exercise of any right of eminent domain or by agreement between Landlord and those authorized to exercise such right, Landlord shall be entitled to collect the entire award made in any such proceeding without deduction therefrom for any estate hereby vested in or owned by Tenant. Tenant shall execute any and all further documents that may be required in order to facilitate collection by Landlord of any and all such awards. Tenant shall be entitled to claim against the condemnor for any special relocation expenses that do not reduce the award payable to Landlord. 11.02 If the whole or substantially all of the Demised Premises is so taken or condemned, this Lease shall terminate and expire on the later to occur of the date upon which title vests in the condemning authority or the date possession must be surrendered to the condemning authority, and the Basic Rent and additional rent provided to be paid by Tenant shall be apportioned and paid to such date. 11.03 In the event of a partial taking that does not result in termination of this Lease, Landlord shall promptly and with due diligence proceed to rebuild, repair and restore the remainder of any building being a part of the Demised Premises affected thereby to a complete, independent and self-contained architectural unit, for the purposes in use before the taking, provided that the cost of restoration in no event exceeds the amount of the condemnation award actually received by and made available by mortgagees to Landlord (after deducting reasonable expenses including attorneys' and/or appraiser's fees) for the part of Demised Premises taken, not including that part of such award reasonably allocable to land taken; and Tenant shall provide Landlord with assurance satisfactory to Landlord that Tenant will pay the cost of any such excess. Following such partial taking, and prior to the substantial completion of such restoration as is herein required, the then current Basic Rent shall abate in proportion to the fraction of the floor area of the building being a part of the Demised Premises that is taken and not so restored. ARTICLE 12 ACCESS TO PREMISES 12.01 Tenant shall permit Landlord and its agents to enter the Demised Premises at all reasonable hours (and in an emergency, at any hour) to inspect, to make repairs that Tenant may neglect or refuse to make in accordance with the terms of this Lease, to show the Demised Premises to persons wishing to purchase or to make a mortgage loan secured by the Demised Premises, and to show the Demised Premises at any time within six (6) months prior to the expiration of the term hereof to persons wishing to rent the Demised Premises. Tenant shall, within six (6) months prior to the expiration of the term, permit the usual notice of "For Rent" and "For Sale" to be placed on the Demised Premises and to remain thereon without hindrance or molestation. ARTICLE 13 NO UNLAWFUL OCCUPANCY -- NO VACANCY 13.01 Tenant shall not maintain, use or occupy the Demised Premises or permit the Demised Premises to be used or occupied in violation of any statute, ordinance or any requirement of any public authority or any restrictions, easements or other agreements of record affecting the Demised Premises. In the event that any public authority or Pureland Association, Inc., or Declarant under the Declarations shall hereafter at any time contend or declare by notice, violation, order or in any other manner whatsoever that the Demised Premises is being used in violation of such statute, ordinance or other requirement, Tenant shall immediately discontinue such use of the Demised Premises. 13.02 Tenant shall not vacate or desert the Demised Premises or permit the Demised Premises to be empty and unoccupied. ARTICLE 14 INDEMNITY 14.01 Tenant shall indemnify, defend and save harmless Landlord against and from all costs, expenses, liabilities, losses, damages, injunctions, suits, actions fines, penalties, claims and demands of every kind or nature, including but not limited to reasonable counsel fees, by or on behalf of any person, entity or governmental authority whatsoever arising out of (a) any failure by Tenant to perform any of the agreements, terms, covenants or conditions of this Lease on Tenant's part to be performed, (b) any accident, injury, damage, occurrence or activity that happens in or about the Demised Premises or appurtenances thereto or on or under the sidewalks, streets, roads and highways in front of or adjacent thereto, however occurring, and any matter or thing growing out of the condition, occupation, maintenance, alteration, repair, use or operation of the Demised Premises or appurtenances thereto or any part thereof, or of the sidewalks, streets, roads and highways in front of or adjacent thereto during the term hereof, unless caused by the negligent act or omission of Landlord, its agents, servants or employees, (c) failure to comply with any laws, ordinances, requirements, orders, directions, rules or regulations of any federal, state, county or municipal governmental authority or agreements of record affecting the Demised Premises, or (d) any mechanic's lien or financing statement filed against the Demised Premises or Landlord's or Tenant's interest therein or any equipment therein or any materials used in the construction or alternation of any building or improvement therein or thereon. 14.02 Tenant agrees to relieve and hereby relieves Landlord from and agrees to indemnify Landlord against all liability by reason of any injury or damage to Tenant or to any other person or property in or on the Demised Premises, whether belonging to Tenant or to any other person, caused by any fire, breakage, leakage, collapse or other event in any portion of the Demised Premises, or any portion of the building of which the Demised Premises is a part, or from water, rain or snow, that may leak into, issue or flow from any part of the Demised Premises, or of the building of which the Premises is a part, from the drain, pipes or plumbing work of the same, or from any place whatsoever, whether such fire, breakage, leakage, collapse or other event, injury or damage be caused by or result from the negligence of Landlord or any other person or persons whatsoever, and whether or not such event results in the termination of this Lease by reason of damage to or destruction of the Demised Premises. ARTICLE 15 DEFAULT 15.01 Each of the following events shall be an Event of Default hereunder by Tenant and a breach of this Lease: (a) If Tenant files a petition in bankruptcy or insolvency or for reorganization or arrangement under the bankruptcy laws of the United States or any insolvency act of any state or voluntarily takes advantage of any such law or act by answer or otherwise or is dissolved or makes an assignment for the benefit of creditors. (b) If involuntary proceedings under any such bankruptcy law or insolvency act or for the dissolution of a corporation are instituted against Tenant or if a receiver or trustee is appointed for all or substantially all of the property of Tenant and such proceedings are not dismissed or such receivership or trusteeship is not vacated within sixty (60) days after such institution or appointment. (c) If Tenant fails to pay Landlord any Basic Rent or additional rent within five (5) days of it becoming due and payable. (d) If Tenant fails to perform any of the agreements, terms, covenants, or conditions hereof on Tenant's part to be performed other than the payment or Basic Rent or additional rent and such non-performance continues for a period within which performance is required to be made by specific provision of this Lease or if no such period is so provided, for a period of fifteen (15) days after notice thereof by Landlord to Tenant or, if such default cannot be reasonably cured within such fifteen (15) day period, and does not thereafter diligently continue to proceed therewith to completion. (e) If Tenant fails to take possession of the Demised Premises within thirty (30) days after notice to Tenant that the Demised Premises are ready for occupancy by Tenant. (f) Notwithstanding anything in this Lease to the contrary with respect to 15.01 (c), Landlord shall not be required to give Tenant notice of default more than two (2) times in any twelve (12) month period. 15.02 Upon the occurrence of an Event of Default or without notice in the event of any emergency, Landlord at its option may, but shall not be obligated to make any payment required of Tenant herein or comply with any agreement, or perform any term, convenant or condition, required hereby to be performed by Tenant, and the amount so paid, together with interest thereon at the "Default Rate" (as hereafter defined) from the date of such payment by Landlord shall be deemed to be additional rent hereunder payable by Tenant and collectible as such by Landlord upon demand. Landlord shall have the right to enter the Demised Premises for the purpose of correcting or remedying any such Event of Default or emergency and to remain therein until the Event of Default or emergency is corrected or remedied, but neither any such expenditure nor any such performance by Landlord shall be deemed to terminate the Lease or suspend Tenant's obligations hereunder or to waive or release Tenant's Event of Default or the right of Landlord to take such action as may be otherwise permissible hereunder in the case of such Event of Default or emergency. 15.03 Upon occurrence of an Event of Defaultt at the sole option of Landlord and In each case without waiver of any other rights of Landlord contained in this Lease: (a) (i) The whole Basic Rent and additional rent (together sometimes cal led the "rent") for the balance of the term of, this Lease, as hereinafter computed,.or any part thereof, shall immediately become due and payable as if by the terms of this Lease such whole rent were payable in advance, and (ii) Landlord may immediately proceed to distrain, collect or bring action for the whole rent or part thereof, as being rent in arrears, or may file a proof of claim in any bankruptcy or insolvency proceeding for such rent, or Landlord may institute any other proceedings, whether similar to the foregoing or not, to enforce payment thereof. (iii) Rent for each year for the balance of the term after the occurrence of any Event of Default for the purpose of computing the whole rent for the balance of the term of this Lease under this Section 15.03 (a) shall be computed on the basis of the then current Basic Rent and additional rent payable by Tenant pursuant to Article 2 of this lease. (b) (i) Landlord may re-enter and repossess the Demised Premises, using such force (without breach of peace) for that purpose as may be reasonably necessary without being liable to prosecution or damages therefor, and Tenant shall nevertheless remain and continue liable to Landlord in a sum equal to all Basic Rent and additional rent and other charges payable hereunder for the remainder of the term hereof and, except to the extent Tenant can prove the Landlord has failed to take reasonable steps, under the circumstances, to mitigate damages; and (ii) Landlord may attempt to relet all or any parts of the Demised Premises for the account of Tenant upon such terms and to such persons or entities and for such period or periods as Landlord, in its sole discretion, determines, including a term beyond the termination of this Lease, and Landlord shall not be required to accept any tenant offered by Tenant or observe any instruction given by Tenant about such reletting, or do any act or exercise any care or diligence with respect to such reletting or to the mitigation of damages. For the purpose of such reletting, Landlord may alter, decorate or make repairs in or to the Demised Premises to the extent deemed by Landlord desirable or convenient, and the cost of such alteration , decoration and repairs, as well as any reasonable brokerage and legal fees expended by Landlord, shall be charged to and be payable by Tenant as additional rent hereunder, and any sum collected by Landlord from any new tenant obtained on account of the Tenant shall be credited against the balance of the rent due hereunder as aforesaid. Should any rent collected by Landlord as provided in this Section 15.03 (b) (ii) after the payments herein mentioned be insufficient to fully pay to Landlord a sum equal to all Basic Rent and additional rent and other charges payable hereunder for the remainder of the term hereof, the balance or deficiency shall be paid by Tenant on the rent days specified in this Lease, that is, upon each of such rent days, Tenant shall pay to Landlord the amount of the deficiency then existing; and Tenant shall be and remain liable for any such deficiency, and the right of Landlord to recover from the Tenant the amount thereof, or a sum equal to all such Basic Rent and additional rent and other charges payable hereunder, if there shall be no reletting, shall survive the issuance of any dispossessory warrant or other cancellation or termination hereof. Should any rent collected by Landlord as provided in this Section 15.03 (b) (ii) after the payments herein mentioned be in excess of all Basic Rent and additional rent and other charges payable hereunder for the remainder of the term hereof originally demised, Landlord shall retain the excess. Rent for each year for the balance of the term after the occurrence of any Event of Default for the purpose of computing the whole rent for the balance of the term of this Lease under this Section 15.03 (b) hereof shall be computed as equal to the then current Basic Rent and additional rent payable by Lessee pursuant to Article 2 of this Lease. (c) This Lease shall terminate upon notice to that effect from Landlord to Tenant. (d) From and after the occurrence of any Event of Default, any unpaid rent shall bear interest until paid at a rate per annum equal to two percent (2%) plus the interest announced from time to time by Midlantic National bank/South as its "prime rate" or "prime lending rate", adjusted on a daily basis (the "Default Rate"). (e) Tenant shall pay all legal fees and expenses of Landlord incurred by Landlord in consulting counsel and/or enforcing this Lease and/or obtaining payment or performance under this Lease, whether or not legal action actually is required or commenced. 15.04 Suit or suits for the recovery of the deficiency or damages referred to in Sections 15.03 (a) and (b), or for any installment or installments of Basic Rent and additional rent hereunder, or for a sum equal to any such installment or installments may be brought by Landlord, from time to time at Landlord's election, and nothing in this Lease contained shall be deemed to require Land 10 rd to await the date on which this Lease or the term hereof would have expired had there been no such default by Tenant or no such cancellation or termination. 15.05 Nothing contained in this Article 15 shall limit or prejudice the right of Landlord to prove and obtain as liquidated damages in any bankruptcy, insolvency, receivership, reorganization or dissolution proceeding an amount equal to the maximum allowed by any statute or rule or law governing such proceeding and in effect at the time when such damages are to be proved, whether or not such amount be greater, equal to or less than the amount of the damages referred to in any of the preceding Sections. 15.06 In the event of a breach by Tenant of any of the agreements, terms, covenants or conditions of this Lease, Landlord shall have the right of injunction to restrain such breach or threatened breach and the right to invoke any remedy allowed by law or in equity, as if specific remedies, indemnity or reimbursement were not provided elsewhere in this Lease. 15.07 The rights and remedies of Landlord stated in this are distinct, separate and cumulative, and no one of them, whether or nor exercised by Landlord, shall be deemed to be in exclusive of any of the others herein or by law or in equity provided. 15.08 No receipt of monies by Landlord from Tenant, after the cancellation or termination of this Lease shall reinstate, continue or extend the term, or affect any notice theretofore given to Tenant or operate as a waiver of the right of Landlord to enforce the payment of Basic Rent and additional rents then due or thereafter falling due, or operate as a waiver of the right of Landlord to recover possession of the Demised Premises by proper suit, action, proceeding or other remedy. After termination as provided for in Section 15.03 (c) and after the commencement of any suit, action, proceeding or other remedy or after a final order or judgment for possession of the Demised Premises, Landlord may demand, receive and collect any monies due, or therafter falling due, without in any manner affecting such notice, suit, action, proceeding, order or judgment; and any and all such monies so collected shall be deemed to by payments on account of the use and occupation of the Demise Premises or at the election of Landlord, on account of Tenant's liability under this Lease. 15.09 The failure of Landlord to insist upon a strict performance of any of the agreements, terms, covenants and conditions of this Lease shall not be deemed a waiver of any rights or remedies that Landlord may have and shall not be deemed a waiver of any subsequent breach or default in any of such agreements, terms, covenants and conditions. 15.10 It is mutually agreed by and between Landlord and Tenant that the respective parties hereto shall and hereby do waive trial by jury in any action, proceeding or counterclaim brought by either of the parties hereto against the other as to any matters whatsoever arising out of or in any way connected with this Lease, the relationship of Landlord and Tenant, Tenant's use or occupancy of the Demised Premises or any statutory remedy. ARTICLE 16 END OF TERM 16.01 On the expiration or sooner termination of the term, Tenant shall: (a) peaceably and quietly surrender and deliver the Demised Premises to Landlord broom-clean, including all buildings, replacements, alterations, additions and improvements constructed, erected, added or placed by Tenant thereon, and (b) remove all trade fixtures, equipment and personal property owned by Tenant and located on the Demised Premises, as well as all such alterations, improvements and additions with respect to which Landlord has given Tenant notice to remove, and shall repair any damage to the Demised Premises caused by the installation thereof and/or by such removal. ARTICLE 17 QUIET ENJOYMENT 17.01 Landlord covenants that, so long as Tenant shall faithfully perform the agreements, terms, covenants and conditions of this Lease, Tenant shall and may peaceably and quietly have, hold and enjoy the Demised Premises for the term granted by this Lease without molestation or disturbance by or from Landlord and free of any lien created or suffered by Landlord. ARTICLE 18 ESTOPPEL CERTIFICATE 18.01 Tenant shall, without charge, at any time and from time to time hereafter, within ten (10) days after request by Landlord, certify by a written instrument duly executed and acknowledged to any mortgagee or proposed mortgagee or any other person or entity specified by Landlord, as to the validity and force and effect of this Lease, in accordance with its tenor, as then constituted, as to the existence of any default on the part of any party thereunder, as to the existence of any offsets, counterclaims or defenses thereto on the part of Tenant, and as to any other matters that may be reasonable requested by Landlord. ARTICLE 19 SUBORDINATION 19.01 Tenant agrees that Tenant's rights under this Lease are and shall always be subject and subordinate to the lien of any mortgage or mortgages now or hereafter placed from time to time upon the Demised Premises or any part thereof, or the Parcel, or leasehold interest therein, and to any renewals, extensions, modifications or consolidations thereof, and to all advances previously and/or hereafter made from time to time upon the security thereof. Tenant shall, upon written demand from Landlord execute such other and further instruments or assurances confirming the subordination of this Lease to the lien or liens of any such mortgages and making such modifications or clarifications to this Lease as shall be required by Landlord's mortgagee or proposed mortgagee if such modification does not increase either the obligations of Tenant or the rights and remedies of Landlord under this Lease. Tenant agrees, at the election of the holder of any aforesaid mortgage, or anyone claiming by, through or under such holder, to attorn to such holder, or anyone claiming by, through or under such holder, of a mortgage to which this Lease is subordinate. If any mortgagee elects at anytime to have Landlord's or Tenant's interest in this Lease superior to the interest of such mortgagee and gives written notice to Tenant to that effect; then this Lease shall be deemed to be superior to any such mortgage whether this Lease was executed before or after such mortgage or before or after any advance made on the security of such mortgage. ARTICLE 20 NOTICES 20.01 Whenever it is provided in this Lease that notice, demand, request or other communication shall or may be given to or served upon either of the parties by the other, and whenever either of the parties desires to give or serve upon the other any notice, demand, request or other communication with respect hereto or the Demised Premises, each such notice, demand, request or other communication shall be in writing and, any law or statue to the contrary notwithstanding, shall be effective for any purpose if given or served as follows: (a) If by Landlord, by mailing the same to Tenant by registered or certified mail, postage prepaid, or by deposit for delivery with a nationally recognized overnight courier service (such as Federal Express), charges prepaid, in either event return receipt requested, addressed to Tenant at the address set forth above or at such other address as Tenant may from time to time designate by notice given to Landlord in the manner herein provided. (b) If by Tenant, by mailing the same to Landlord by registered or certified mail, postage prepaid, or by deposit for delivery with a nationally recognized overnight courier service (such as Federal Express), charges prepaid, in either event, return receipt requested, addressed to Landlord may from time to time designate by notice given to Tenant in the manner herein provided. ARTICLE 21 HOLDOVER & TERMINATION 21.01 If Tenant retains possession of the Demised Premises or any part thereof after the expiration of the term of this Lease, Tenant shall, at Landlord's option, be held to be a tenant at will for twice the Basic Rent as in effect during the last month of the Lease and otherwise upon the same terms and conditions of this Lease, provided that the provisions of this Section shall not be deemed to waive Landlord's rights of re-entry of any other rights of Landlord hereunder, including rights to any damages of Landlord sustained by reason of Tenant's wrongful retention of the Demised Premises or any part thereof. 21.02 If this Lease is terminated pursuant to any express provision of this Lease other than by reason of an Event of Default, Tenant shall not be relieved of or from any obligation under this Lease accruing or arising prior to the later of the date of termination of this lease or vacation of the Demised Premises in compliance with the requirements of this Lease. ARTICLE 22 ACCORD AND SATISFACTION 22.01 No payment by Tenant or receipt by Landlord of a lesser amount than the rent herein stipulated shall be deemed to be other than on account of the earliest stipulated rent or other charges payable by Tenant hereunder, nor shall any endorsement or statement on any check or on any letter accompanying any check or payment as rent or other charges be deemed an accord and satisfaction, and Landlord may accept such check or payment without prejudice to Landlord's right to recover the balance of such rent or other charge or pursue any other remedy in this Lease provided. ARTICLE 23 SEPARABILITY AND AMENDMENT 23.01 Landlord and Tenant intend and believe that each provision in this Lease complies with all applicable local, state and federal laws and judicial decisions. However, if any provision or provisions, or if any portion of any provision or provisions, in this Lease is found by a court of law to be in violation of any local, state or federal ordinance, statute, law, administrative or judicial decision, or public policy, and if such court should declare such portion, provision or provisions of the Lease to be illegal, invalid, unlawful, void or unenforceable, such portion, provision or provisions shall be deemed to be and shall be treated as if it were not contained in this Lease, and that rights, obligations and interest of Landlord and Tenant under the remainder of this Lease shall continue in full force and effect. ARTICLE 24 EXONERATION 24.01 The term "Landlord" as used in this Lease, so far as covenants or obligations on the part of Landlord are concerned, shall be limited to mean and include only the owner or owners at the time in question of the Demised Premises and, in the event any transfer or transfers of the title thereto after the Commencement Date by Landlord herein named, and in case of any subsequent transfers or conveyances, the then grantor shall be automatically free and relieved from and after the date of such performance of any covenants or obligations on the part of Landlord contained in this Lease thereafter to be performed. 24.02 Neither Landlord nor any principal of Landlord, whether disclosed or undisclosed, shall have any personal liability with respect to any provisions of the Lease or the Demised Premises, or property of which it is a part, and if Landlord is in breach or default with respect to its obligations under this Lease or otherwise, Tenant shall look solely to the equity of Landlord in the property of which the Demised Premises is a part for the satisfaction of Tenant's remedies. ARTICLE 25 BROKERAGE 25.01 (a) Landlord, for itself, its representatives, agents and employees, represents that it has had no dealings negotiations or consultations with any broker or finder in connection with this Lease, except for Albert M. Greenfield & Co., Inc. (the "Broker"). Landlord agrees: (i) to pay all commissions and other sums due to the Broker with regard to this Lease; and (ii) to indemnify Tenant and save Tenant harmless from any and all costs, expenses (including attorneys' fees) and liability resulting from the inaccuracy of this representation. (b) Tenant, for itself, its representatives, agents and employees, represents: (i) that it has had no dealings, negotiations or consultations with any broker or finder in connection with this Lease, and further represents that no broker or finder called the Demised Premises or Landlord to Tenant's attention, except for the Broker; and (ii) that Tenant has no agreement, whether oral or written, with the Broker. Tenant agrees to indemnify Landlord and save it harmless from any and all costs, expenses (including attorneys' fees) and liability resulting from the inaccuracy of this representation. ARTICLE 26 SIGNS 26.01 Except for signs which are located wholly within the interior of the building being a part of the Demised Premises and which are not visible from the exterior of such building, no signs shall be placed, erected, maintained or painted at any place upon the Demised Premises without the prior written consent of Landlord as to the size, design, color, location, content, illumination, composition or material and mobility thereof. Provided Tenant obtains Landlord's prior written consent as aforesaid, Tenant may to the extent and manner allowed by law or public regulation and or the Declarations, place, erect, maintain or paint signs upon the Demised Premises provided that they are maintained by Tenant in good condition during the term hereof, and Tenant shall remove all signs at the termination of this Lease, repairing any damage caused by the installation and/or removal thereof. ARTICLE 27 SECURITY DEPOSIT 27.01 Tenant has deposited with Landlord the sum of FORTY THREE THOUSAND ($43,000) DOLLARS to be retained by Landlord as security for the faithful performance and observance by Tenant of the covenants and conditions of this Lease. In the event Tenant defaults under this Lease in connection with, but not limited to, the payment of Basic Rent or additional rent or other sums payable hereunder or other performance, Landlord may use, apply or retain the whole or any part of the cash security so deposited to the extent required for the payment of any Basic Rent and any additional rent and any other sums payable hereunder as to which Tenant is in default or on account of any sum which Landlord may expend or may be required to expend by reason of Tenant's default. In the event that Tenant shall fully and faithfully comply with all to the covenants and conditions of the Lease, the cash security shall be returned to Tenant after the date fixed as the expiration of the term of this Lease and surrender of the Demised Premises to Landlord. In the event of a sale of the Demised Premises to a bona fide purchaser, Landlord shall have the right to transfer to such purchaser the aforesaid cash security, and Landlord thereupon shall be released by Tenant from all liability for the return thereof, and Tenant agrees to look to the new Landlord solely for the return thereof. ARTICLE 29 MISCELLANEOUS 29.01 This lease contains the entire agreement between the parties and cannot be changed or terminated orally, but only be an instrument in writing executed by the parties. 29.02 This agreement shall be governed by and construed in accordance with the laws of the State of New Jersey. 1 29.03 The captions of the various articles of this Lease are inserted only as a matter of convenience and for reference and in no way define, limit or describe the scope or intent of this Lease nor in any way affect this Lease. 29.04 Wherever in this Lease something may only be done with the prior written consent of Landlord, Landlord shall have the right to withhold consent for any reason or for no reason whatsoever. 29.05 The agreements, terms, covenants and conditions herein shall bind and inure to the benefit of Landlord and Tenant and their respective heirs, legal representatives, successors and, except as otherwise provided herein their assigns. IN WITNESS WHEREOF, the parties hereto have caused this Lease to be duly executed and their corporate seals to be affixed hereto on the day first above stated. LANDLORD: FREEWAY 130, L.L.C. BY: /s/ Chris Wilton -------------------- Chris Wilton TENANT: A.C. MOORE, INC. (Corporate Seal) BY: /s/ John E. Parker ---------------------- John E. Parker EX-10.7 7 EXHIBIT 10.7 SHAREHOLDERS LOAN AGREEMENT AGREEMENT made effective the 30th day of December, 1990, by and between A.C. MOORE INCORPORATED, a Delaware corporation with its principal office at 406 Bloomfield Drive, Berlin, New Jersey (hereinafter the "Corporation"); WILLIAM KAPLAN, residing in Newburgh, New York ("Kaplan"), and JOHN E. PARKER, residing in Brigantine, New Jersey ("Parker"), the Shareholders of the corporation, (hereinafter individually referred to by name and collectively the "Shareholders"). WHEREAS, the Corporation is an "S" corporation, and WHEREAS, the Shareholders have loaned money to the Corporation, and WHEREAS, the Shareholders and the Corporation wish to set forth their understanding with respect to these loans, and WHEREAS, the Corporation is authorized to enter into this Agreement by a corporate resolution adopted by a resolution of the Directors at a meeting held on the 21st day of May, 1992. NOW, THEREFORE, it is agreed: 1. S CORPORATION STATUS. The Corporation and Shareholders made an election for the Corporation to be taxed as a "small business corporation" under subchapter S of the Internal Revenue Code of 1986, as amended (the "Code"). 2. LOAN TO CORPORATION. The Shareholders have each loaned to the Corporation the following amounts representing salaries received by them from the Corporation up to the date of this Agreement: Shareholder Amount ----------------- ------------ William Kaplan $1,454,857.38 *see attached schedule John E. Parker $1,454,857.38 The Shareholders intend to continue making loans to the Corporation of their respective salaries received by them from the Corporation less sufficient sums to pay all taxes, and it is their intent and the intent of the Corporation that such loans be made subject to the terms of this Agreement. 3. INTEREST ON LOAN. The Corporation shall periodically pay to the Shareholders, but not less often than annually, interest on their outstanding loan amounts at the rate equal to that paid by the Corporation to its outside lenders. 4. REPAYMENT OF LOAN. The Corporation shall repay the entire principal of the loan outstanding to both Shareholders, together with accrued but unpaid interest to the date of repayment, upon the written demand of either Shareholder. - ------ 5. BENEFIT. This Agreement shall be binding upon and shall operate for the benefit of the Shareholders and their respective distributees, executors and administrators. 6. NOTICE. Whenever under this Agreement notice is required to be given, it shall be given in writing and shall be deemed to have been given on the date such notice is posted in a United States postal drop, postage prepaid, by certified or registered mailing, return receipt requested, to the Shareholders or the Corporation at the address of record with the Corporation or at such other address as the parties may from time to time designate with the Corporation. 7. TERMINATION. This Agreement shall cease and terminate upon the occurrence of any of the following events, namely: (a) The unanimous consent of all the Shareholders, at which time the entire unpaid principal and accrued interest shall be repaid to the Shareholders. (b) Upon the Corporation becoming a public company with its stock sold on a nationally recognized stock exchange, at which time the entire unpaid principal and accrued interest shall be repaid to the Shareholders. -2- 8. AMENDMENT. This Agreement may only be amended by the unanimous consent of the Shareholders. 9. WAIVER OF BREACH. No forbearance to exercise any rights or privileges under this Agreement, or waiver of any breach or any of its terms shall be construed as a waiver of any such terms, rights or privileges, but the same shall continue and shall remain in full force and effect the same as if no forbearance or waiver had occurred. 10. CONSTRUCTION. This Agreement shall be construed and governed in all respects pursuant to and under the laws of the State of New York. All references in this Agreement which are made to the masculine gender shall be deemed to include the feminine. 11. COOPERATION OF PARTIES. Each of the parties hereto agrees to execute and deliver such other instruments, certificates or documents which may be reasonably required to carry the full purpose and intent of this Agreement into effect. 12. ENTIRE AGREEMENT. This Agreement constitutes the entire agreement between the parties hereto with respect to the matters covered herein, and it may not be altered, modified or extended nor any of its provisions waived, except by a document in writing. 13. COUNTERPARTS. This Agreement may be executed in several counterparts, each of which when executed shall be deemed to be an original, and such counterparts shall, together, constitute and be one and the same instrument. 14. ILLEGALITY. Should any provision or provisions of this Agreement be held to be illegal or unenforceable, then the balance of this Agreement shall, nevertheless, remain in full force and effect, irrespective of the importance of any provision or provisions which may be so held to be illegal or unenforceable. -3- 15. HEADINGS. The headings used herein are inserted for convenience only, and in no way define, limit or prescribe the intent of this Agreement. IN WITNESS WHEREOF, the parties have executed this Agreement effective as of the day and year first above written. /s/ WILLIAM KAPLAN ---------------------------------- WILLIAM KAPLAN /s/ JOHN E. PARKER ---------------------------------- JOHN E. PARKER (SEAL) (Attest) A.C. MOORE INCORPORATED /s/ JANET PARKER VANDENBERG /s/ JOHN E. PARKER - ---------------------------------- ---------------------------------- JANET PARKER VANDENBERG, JOHN E. PARKER, President Secretary -4- STATE OF NJ ) ) ss: COUNTY OF CAMDEN ) On the 30th day of May, 1992, before me personally came WILLIAM KAPLAN, to me known to be the individual described in and who executed the foregoing instrument and acknowledged to me that he executed same. /s/ Gordon W. Hall, Jr. --------------------------------- Notary Public Gordon W. Hall, Jr. Notary Public of New Jersey My Commission Expires March 18, 1997 STATE OF NJ ) ) ss: COUNTY OF CAMDEN ) On the 30th day of May, 1992, before me personally came JOHN E. PARKER, to me known to be the individual described in and who executed the foregoing instrument and acknowledged to me that he executed same. /s/ Gordon W. Hall, Jr. --------------------------------- Notary Public Gordon W. Hall, Jr. Notary Public of New Jersey My Commission Expires March 18, 1997 -5- STATE OF NJ ) ) ss: COUNTY OF CAMDEN ) On the 30th day of May, 1992, before me personally came JOHN E. PARKER, to me known, who, being by me duly sworn, did depose and say that he resides at 5201 Sea Spray Road, Brigantine, New Jersey; that he is the President of A.C. MOORE INCORPORATED, the Corporation described in and which executed the foregoing instrument; that the foregoing instrument was executed by order of the Board of Directors of said Corporation, and that he signed his name thereto by like order. /s/ Gordon W. Hall, Jr. --------------------------------- Notary Public Gordon W. Hall, Jr. Notary Public of New Jersey My Commission Expires March 18, 1997 -6- EX-10.8 8 EXHIBIT 10.8 AMENDMENT TO SHAREHOLDERS LOAN AGREEMENT This Amendment to Shareholders Loan Agreement, dated July 22, 1997 by and among A.C. Moore Incorporated (the "Company"), William Kaplan ("Kaplan"), and John E. Parker ("Parker", together with Kaplan referred to as the "Shareholders"). WHEREAS, the Shareholders and Company entered into a certain Shareholders Loan Agreement, dated December 30, 1990 (the "Agreement"); and WHEREAS, the Agreement provided for the Shareholders to loan funds to the Company from time to time and as set forth in Section 3 of the Agreement that the Company shall periodically pay to the Shareholders, but not less often than annually, interest on their outstanding loan amounts at the rate equal to that paid by the Corporation to its outside lenders; and WHEREAS, effective January 1, 1993, the Company and the Shareholders orally agreed to amend the Agreement to eliminate Section 3 of the Agreement; and WHEREAS, from January 1, 1993 forward the loans have been non-interest bearing, with neither the Company having an obligation to pay nor the Shareholders having the right to receive at any time interest under the original terms of the Agreement for any period subsequent to January 1, 1993; and WHEREAS, the Company and Shareholders desire to formally memorialize the amendment to the Agreement. NOW THEREFORE, intending to be legally bound hereby, the parties agree as follows: 1. Section 3 of the Agreement shall be amended effective January 1, 1993 to read as follows: "Non-Interest Bearing Loans. All loans made to the Corporation pursuant to this Agreement shall bear no interest." 2. Section 7(b) of the Agreement shall be amended to read in its entirety as follows: "(b) Upon the Corporation becoming a public company with its stock registered under the Securities Exchange Act of 1934, the entire unpaid principal of any loans made to the Company by the Shareholders shall be repaid to the Shareholders." 3. As amended by this Amendment, the Agreement shall continue in full force and effect. 4. This Agreement may be executed in counterparts, each of which when executed shall be deemed to be an original, and such counterparts shall, together, constitute one and the same instrument. IN WITNESS WHEREOF, the parties have executed this Agreement. /s/ William Kaplan ----------------------------------- William Kaplan /s/ John E. Parker ----------------------------------- John E. Parker A.C. MOORE INCORPORATED By: /s/ John E. Parker -------------------------------- John E. Parker, President 2 EX-23.1 9 CONSENT OF PRICE WATERHOUSE LLP Exhibit 23.1 CONSENT OF INDEPENDENT ACCOUNTANT We hereby consent to the use in the Prospectus constituting part of this Amendment No. 1 to the Registration Statement on Form S-1 of our report dated February 28, 1997, except Note 11 which is as of July 18, 1997, relating to the financial statements of A.C. Moore Arts & Crafts, Inc., which appears in such Prospectus. We also consent to the reference to us under the headings "Experts" and "Selected Financial and Operating Data" in such Prospectus. However, it should be noted that Price Waterhouse LLP has not prepared or certified such "Selected Financial and Operating Data." /s/ PRICE WATERHOUSE LLP - ------------------------------- Philadelphia, Pennsylvania September 16, 1997 -----END PRIVACY-ENHANCED MESSAGE-----