<PAGE>
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)
<TABLE>
<CAPTION>
Pennsylvania 5999 22-3527763
- ------------------------------------------ ----------------------------------------- ---------------------------------------
<S> <C> <C>
(State or other jurisdiction of (Primary standard industrial (I.R.S. employer
incorporation or organization) classification code number) identification no.)
</TABLE>
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.
<PAGE>
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.
<TABLE>
<CAPTION>
===========================================================================================================
Price Underwriting Proceeds
to Discounts and to
Public Commissions Company (1)
- -------------------------------------------------------------- --------------------------------------------
<S> <C> <C> <C>
Per Share .............................. $ $ $
- -------------------------------------------------------------- --------------------------------------------
Total (2)............................... $ $ $
============================================================== ============================================
</TABLE>
(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.
<PAGE>
[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-
<PAGE>
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-
<PAGE>
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-
<PAGE>
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.
<TABLE>
<CAPTION>
The Offering
<S> <C>
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"
</TABLE>
- ----------------------------
(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-
<PAGE>
<TABLE>
<CAPTION>
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
----------- ---------- ---------- ---------- ------------ -------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
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%
</TABLE>
<TABLE>
<CAPTION>
June 30, 1997
-----------------------------------------
Pro Pro Forma as
Actual Forma(8) Adjusted(8)
------------ -------------- -------------
<S> <C> <C> <C>
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
</TABLE>
- --------------------------
(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.
<PAGE>
(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-
<PAGE>
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-
<PAGE>
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-
<PAGE>
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-
<PAGE>
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-
<PAGE>
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-
<PAGE>
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-
<PAGE>
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-
<PAGE>
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."
<TABLE>
<CAPTION>
June 30, 1997
-----------------------------------------------
Pro Pro Forma
Actual Forma as Adjusted
------------ ------------- --------------
(In thousands)
<S> <C> <C> <C>
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
============ ============= ==============
</TABLE>
- ---------------------------
(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-
<PAGE>
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:
<TABLE>
<CAPTION>
<S> <C> <C>
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
===========
</TABLE>
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:
<TABLE>
<CAPTION>
Shares Owned Total Consideration
-------------------------- ------------------------------ Average Price
Number Percent Amount Percent Per Share
------------ ----------- --------------- ------------ ------------------
<S> <C> <C> <C> <C> <C>
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%
============ ========== ============== ========
</TABLE>
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-
<PAGE>
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.
<TABLE>
<CAPTION>
Six Months Ended
Year Ended December 31, June 30,
---------------------------------------------------- ---------------------
1992 1993 1994 1995 1996 1996 1997
--------- -------- -------- --------- --------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
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
</TABLE>
(footnotes on next page)
-16-
<PAGE>
- ----------------------------------------
(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-
<PAGE>
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-
<PAGE>
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-
<PAGE>
Results of Operations
The following table sets forth, for the periods indicated, selected
statement of operations data expressed as a percentage of net sales:
<TABLE>
<CAPTION>
Six Months
Year Ended December 31, Ended June 30,
---------------------------------------- -------------------------
1994 1995 1996 1996 1997
-------- ----------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C>
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%
==== ===== ===== ===== =====
</TABLE>
-20-
<PAGE>
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-
<PAGE>
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-
<PAGE>
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-
<PAGE>
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).
<TABLE>
<CAPTION>
Three Months Ended
------------------------------
March 31, June 30,
1997 1997
------------- -------------
<S> <C> <C>
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
========== =========
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended
------------------------------------------------------------------
March 31, June 30, September 30, December 31,
1996 1996 1996 1996
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
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
========== ========= ========= =========
</TABLE>
-24-
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended
------------------------------------------------------------------------------
March 31, June 30, September 30, December 31,
1995 1995 1995 1995
-------------- ---------------- ---------------- ---------------
<S> <C> <C> <C> <C>
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
========== ============ ========== =========
</TABLE>
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-
<PAGE>
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-
<PAGE>
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-
<PAGE>
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-
<PAGE>
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-
<PAGE>
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-
<PAGE>
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-
<PAGE>
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-
<PAGE>
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-
<PAGE>
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-
<PAGE>
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-
<PAGE>
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-
<PAGE>
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-
<PAGE>
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-
<PAGE>
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-
<PAGE>
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:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
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.
</TABLE>
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-
<PAGE>
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-
<PAGE>
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-
<PAGE>
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-
<PAGE>
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-
<PAGE>
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:
<TABLE>
<CAPTION>
Annual Compensation
-----------------------------------
Name and All Other
Principal Position Salary Bonus Compensation
- ----------------------------------------------------------- ---------------- ---------------- -------------------
<S> <C> <C> <C>
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
</TABLE>
- ---------------
(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-
<PAGE>
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-
<PAGE>
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-
<PAGE>
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.
<TABLE>
<CAPTION>
Shares Beneficially Owned(1) Shares Beneficially Owned(1)
Prior to Offering After Offering
--------------------------------- --------------------------------
Name and Address Number Percent Number Percent
- -------------------------------------------- ------------------ ------------- ----------------- -------------
<S> <C> <C> <C> <C>
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%
</TABLE>
- ----------
* 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-
<PAGE>
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-
<PAGE>
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-
<PAGE>
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-
<PAGE>
Transfer Agent and Registrar
The transfer agent and registrar for the Common Stock is StockTrans,
Inc., Ardmore, Pennsylvania.
-52-
<PAGE>
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-
<PAGE>
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-
<PAGE>
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-
<PAGE>
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-
<PAGE>
A.C. MOORE ARTS & CRAFTS, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
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
</TABLE>
F-1
<PAGE>
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
<PAGE>
A.C. MOORE ARTS & CRAFTS, INC.
BALANCE SHEET
(dollars in thousands, except share data)
<TABLE>
<CAPTION>
December 31, June 30, 1997
------------------- ------------------------
1995 1996 Actual Pro Forma
---- ---- ------ ---------
(Note 3)
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
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
======= ======= ======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
A.C. MOORE ARTS & CRAFTS, INC.
STATEMENT OF INCOME
(dollars in thousands, except share data)
<TABLE>
<CAPTION>
Six Months Ended
Year Ended December 31, June 30,
------------------------------- ------------------------
1994 1995 1996 1996 1997
---- ---- ---- ---- ----
(unaudited)
<S> <C> <C> <C> <C> <C>
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
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
A.C. MOORE ARTS & CRAFTS, INC.
STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
(dollars in thousands)
<TABLE>
<CAPTION>
Common Retained
Stock Earnings Total
------ -------- -----
<S> <C> <C> <C>
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
========== =============== =============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
A.C. MOORE ARTS & CRAFTS, INC.
STATEMENT OF CASH FLOWS
(dollars in thousands)
<TABLE>
<CAPTION>
Six Months Ended
Year Ended December 31, June 30,
-------------------------------------- --------------------
1994 1995 1996 1996 1997
---- ---- ---- ---- ----
(unaudited)
<S> <C> <C> <C> <C> <C>
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
======= ======= ======= ======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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:
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------
1994 1995 1996
---- ---- ----
(in thousands)
<S> <C> <C> <C>
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
=======
</TABLE>
F-10
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
(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)
<PAGE>
<TABLE>
<CAPTION>
============================================================== ============================================================
<S> <C>
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
============================================================== ============================================================
</TABLE>
<PAGE>
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.
<PAGE>
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.
<PAGE>
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.
<PAGE>
(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.
<PAGE>
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.
<TABLE>
<CAPTION>
SIGNATURE CAPACITY DATE
- -------------------------------------- ---------------------------------------------- --------------------------
<S> <C> <C>
/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
</TABLE>
<PAGE>
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.
<PAGE>
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 -
<PAGE>
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-
<PAGE>
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-
<PAGE>
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-
<PAGE>
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-
<PAGE>
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-
<PAGE>
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-
<PAGE>
(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-
<PAGE>
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-
<PAGE>
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-
<PAGE>
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-
<PAGE>
(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-
<PAGE>
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-
<PAGE>
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-
<PAGE>
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-
<PAGE>
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-
<PAGE>
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-
<PAGE>
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-
<PAGE>
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-
<PAGE>
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-
<PAGE>
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-
<PAGE>
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-
<PAGE>
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-
<PAGE>
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-
<PAGE>
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-
<PAGE>
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-
<PAGE>
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-
<PAGE>
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-
<PAGE>
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-
<PAGE>
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
<PAGE>
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.
<PAGE>
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-
<PAGE>
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-
<PAGE>
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-
<PAGE>
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-
<PAGE>
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-
<PAGE>
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-
<PAGE>
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
<PAGE>
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-
<PAGE>
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-
<PAGE>
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-
<PAGE>
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-
<PAGE>
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-
<PAGE>
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-
<PAGE>
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-
<PAGE>
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-
<PAGE>
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-
<PAGE>
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-
<PAGE>
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-
<PAGE>
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-
<PAGE>
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-
<PAGE>
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-
<PAGE>
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-
<PAGE>
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-
<PAGE>
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.
<PAGE>
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-
<PAGE>
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-
<PAGE>
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-
<PAGE>
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-
<PAGE>
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-
<PAGE>
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-
<PAGE>
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-
<PAGE>
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-
<PAGE>
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-
<PAGE>
and mail the certificate to me at the following address:
- --------------------------------------
- --------------------------------------
-11-
<PAGE>
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
<PAGE>
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
<PAGE>
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,
<PAGE>
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.
<PAGE>
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
<PAGE>
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,
<PAGE>
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.
<PAGE>
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
<PAGE>
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.
<PAGE>
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.
<PAGE>
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.
<PAGE>
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.
<PAGE>
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
<PAGE>
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
<PAGE>
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.
<PAGE>
(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
<PAGE>
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
<PAGE>
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.
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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-
<PAGE>
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-
<PAGE>
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-
<PAGE>
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-
<PAGE>
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-
<PAGE>
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.
<PAGE>
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
<PAGE>
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
