UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2005
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to ____________
Commission File Number: 000-23157
A.C. MOORE ARTS & CRAFTS, INC.
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(Exact name of registrant as specified in its charter)
Pennsylvania 22-3527763
------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
130 A.C. Moore Drive, Berlin, NJ 08009
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(Address of principal executive offices) (Zip Code)
(856) 768-4930
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(Registrant's telephone number,
including area code)
N/A
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(Former name, former address and former fiscal year, if
changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. [ X ] Yes [ ] No
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Exchange Act). [ X ] Yes [ ] No
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act). [ ] Yes [ X ] No
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date:
CLASS OUTSTANDING AT OCTOBER 27, 2005
-------------------------- -------------------------------
Common Stock, no par value 19,816,374
A.C. MOORE ARTS & CRAFTS, INC.
TABLE OF CONTENTS
PAGE
NUMBER
PART I: FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets as of September 30, 2005
and December 31, 2004...................................................................1
Consolidated Statements of Operations for the three and nine month periods
ended September 30, 2005 and 2004.......................................................2
Consolidated Statements of Cash Flows for the nine month periods ended
September 30, 2005 and 2004.............................................................3
Notes to Consolidated Financial Statements..............................................4
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.......8
Item 3. Quantitative and Qualitative Disclosures About Market Risk.................................13
Item 4. Controls and Procedures....................................................................13
PART II: OTHER INFORMATION
Item 1. Legal Proceedings..........................................................................14
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds................................14
Item 3. Defaults Upon Senior Securities............................................................14
Item 4. Submission of Matters to a Vote of Security Holders........................................14
Item 5. Other Information..........................................................................14
Item 6. Exhibits...................................................................................14
SIGNATURES...................................................................................................15
i
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
A.C. MOORE ARTS & CRAFTS, INC.
CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
(unaudited)
September 30, December 31,
2005 2004
------------- ------------
ASSETS
Current assets:
Cash and cash equivalents ............................ $ 15,701 $ 48,428
Marketable securities ................................ 12,554 17,558
Inventories .......................................... 166,997 142,832
Prepaid expenses and other current assets ............ 6,415 7,655
Prepaid income taxes ................................. 5,473 --
Deferred tax asset ................................... 47 2,673
-------- --------
207,187 219,146
Non-current assets:
Property and equipment, net ........................... 87,089 83,219
Other assets .......................................... 1,432 1,747
-------- --------
$295,708 $304,112
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt ..................... $ 2,571 $ 2,571
Trade accounts payable ................................ 45,225 50,256
Accrued payroll and payroll taxes ..................... 2,878 3,706
Accrued expenses ...................................... 7,496 8,573
Income taxes payable .................................. -- 3,626
-------- --------
58,170 68,732
-------- --------
Long-term liabilities:
Long-term debt ........................................ 24,857 26,786
Deferred tax liability ................................ 7,841 8,584
Accrued lease liability ............................... 16,939 13,795
-------- --------
49,637 49,165
-------- --------
107,807 117,897
-------- --------
Shareholders' Equity:
Preferred stock, no par value, 10,000,000 shares
authorized; none issued ............................... -- --
Common stock, no par value, 40,000,000 shares
authorized; issued and outstanding 19,814,374 shares at
September 30, 2005 and 19,655,100 at December 31, 2004 111,515 109,131
Retained earnings .......................................... 76,386 77,084
-------- --------
187,901 186,215
-------- --------
$295,708 $304,112
======== ========
See accompanying notes to financial statements.
1
A.C. MOORE ARTS & CRAFTS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(dollars in thousands, except per share data)
(unaudited)
Three months ended Nine months ended
September 30, September 30,
2005 2004 2005 2004
--------- --------- --------- ---------
Net sales .................................. $ 115,094 $ 107,713 $ 351,462 $ 320,376
Cost of sales (including buying and
distribution costs) .................. 68,402 64,010 210,953 195,401
--------- --------- --------- ---------
Gross margin ............................... 46,692 43,703 140,509 124,975
Selling, general and administrative expenses 48,426 40,795 139,036 118,800
Store pre-opening expenses ................. 1,194 1,488 2,300 2,456
--------- --------- --------- ---------
Income (loss) from operations .............. (2,928) 1,420 (827) 3,719
Interest expense ....................... 331 133 881 148
Interest (income) ...................... (129) (119) (557) (377)
--------- --------- --------- ---------
Income (loss) before income taxes .......... (3,130) 1,406 (1,151) 3,948
Provision for income taxes ............ (1,230) 541 (453) 1,520
--------- --------- --------- ---------
Net income (loss) .......................... $ (1,900) $ 865 $ (698) $ 2,428
========= ========= ========= =========
Basic net income (loss) per share .......... $ (0.10) $ 0.04 $ (0.04) $ 0.12
========= ========= ========= =========
Diluted net income (loss) per share ........ $ (0.10) $ 0.04 $ (0.04) $ 0.12
========= ========= ========= =========
See accompanying notes to financial statements.
2
A.C. MOORE ARTS & CRAFTS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
(unaudited)
Nine months ended
September 30,
2005 2004
-------- --------
Cash flows from operating activities:
Net (loss) income ...................................................... $ (698) 2,428
Adjustments to reconcile net (loss) income to net cash used in operating
activities:
Depreciation and amortization ...................................... 7,837 6,290
Disposal of assets ................................................. 438 --
Changes in assets and liabilities:
Inventories ..................................................... (24,165) (16,483)
Prepaid expenses and other current assets ....................... 1,240 (2,598)
Accounts payable, accrued payroll,
payroll taxes and accrued expenses ........................... (6,936) 4,853)
Income taxes .................................................... (5,840) (7,316)
Deferred lease liability ........................................ 3,144 1,915
Other ........................................................... 315 59
-------- --------
Net cash used in operating activities .................................. (24,665) (10,852)
-------- --------
Cash flows from investing activities:
Capital expenditures ............................................... (12,145) (36,094)
Net proceeds from marketable securities ............................ 5,004 764
-------- --------
Cash flows used in investing activities ................................ (7,141) (35,330)
-------- --------
Cash flows from financing activities:
Exercise of stock options .......................................... 1,008 716
Increase in long-term debt ......................................... -- 30,000
Repayment of long-term debt ........................................ (1,929) (504)
-------- --------
Net cash provided by (used in) financing activities .................... (921) 30,212
-------- --------
Net decrease in cash and cash equivalents .............................. (32,727) (15,970)
Cash and cash equivalents at beginning of period ....................... 48,428 43,700
-------- --------
Cash and cash equivalents at end of period ............................. $ 15,701 $ 27,730
======== ========
See accompanying notes to financial statements.
3
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(1) BASIS OF PRESENTATION
The consolidated financial statements included herein include the accounts of
A.C. Moore Arts & Crafts, Inc. and its wholly owned subsidiaries (collectively
the "Company"). The Company is a chain of 105 retail stores selling arts and
crafts merchandise. The stores are located throughout the eastern United States.
These financial statements have been prepared by management without audit and
should be read in conjunction with the consolidated financial statements and
notes thereto included in the Company's Annual Report on Form 10-K for the year
ended December 31, 2004. Due to the seasonality of the Company's business, the
results for the interim periods are not necessarily indicative of the results
for the year. The accompanying consolidated financial statements reflect, in the
opinion of management, all adjustments necessary for a fair statement of the
interim financial statements. In the opinion of management, all such adjustments
are of a normal and recurring nature.
(2) STOCK-BASED COMPENSATION
The Company accounts for its employee stock options using the intrinsic value
method prescribed in Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees" (APB 25). Compensation cost for stock options is
measured as the excess of the quoted market price of the Company's stock at the
date of grant over the amount an employee must pay to acquire the stock. No
stock-based compensation has been included in the determination of net income.
Had compensation cost for the Company's stock-based compensation plan been
determined based on the fair value at the grant date for awards under those
plans, consistent with the requirements of SFAS No. 123, "Accounting for
Stock-Based Compensation," net income and earnings per share would have been
reduced to the following pro forma amounts:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------ -------------------------
2005 2004 2005 2004
-------- --------- ---------- ----------
(in thousands, except per share
data)
Net income (loss)........... As reported $ (1,900) $ 865 $ (698) $ 2,428
Compensation cost, net 454 403 1,401 1,274
Pro forma (2,354) 462 (2,099) 1,154
Basic earnings (loss) per
share....................... As reported $ (.10) $ .04 $ (.04) $ .12
Pro forma (.12) .02 (.11) .06
Diluted earnings (loss) per
share....................... As reported $ (.10) $ .04 $ (.04) $ .12
Pro forma (.12) .02 (.11) .06
The pro forma results may not be representative of the effects on reported
operations for future years. The fair value of the options was calculated using
a Black-Scholes options pricing model with the following weighted-average
assumptions:
4
2005 2004 2003 2002
-------- --------- ---------- ----------
Average fair value
of options granted.................... $9.79 $11.15 $12.99 $10.08
Risk free interest rate............... 4.4% 3.8% 3.2% 4.1%
Dividend yield........................ -- -- -- --
Average expected life................. 5.0 yrs 4.9 yrs 4.5 yrs 7 yrs
Expected stock price volatility....... 38.9% 54.9% 56.0% 45.2%
On December 16, 2004, the Financial Accounting Standards Board (FASB) issued
FASB Statement No. 123(R), Share-Based Payment (FAS 123(R)). FAS 123(R) revised
FASB Statement No. 123, Accounting for Stock-Based Compensation (FAS 123) and
requires companies to expense the fair value of employee stock options and other
forms of stock-based compensation. Companies must adopt FAS 123(R) no later than
the beginning of their next fiscal year that begins after June 15, 2005.
Accordingly, the Company will be required to adopt FAS 123(R) in its first
quarter of 2006.
Previously, in complying with FAS 123, the Company disclosed the value of stock
options granted and its pro forma impact on its net income in a footnote to its
financial statements. The Company is currently considering which transition
method it expects to select in adopting FAS 123(R), and whether this new
accounting requirement will result in any changes in compensation strategies.
Information contained in the Company's footnotes provides the impact on pro
forma net income for past financial statements. The impact of the adoption of
FAS 123(R) on future financial statements is expected to be material.
(3) MANAGEMENT ESTIMATES
The preparation of these consolidated financial statements in conformity with
accounting principles generally accepted in the United States of America
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 reported amounts of expenses during the reported period and related
disclosures. Significant estimates made as of and for the three and nine month
periods ended September 30, 2005 and 2004 include provisions for shrinkage,
capitalized buying, warehousing and distribution costs related to inventory, and
markdowns of merchandise inventories. Actual results could differ materially
from those estimates.
(4) MARKETABLE SECURITIES
Marketable securities represent investments in fixed financial instruments, are
classified as held-to-maturity and recorded at amortized cost. Securities with
maturities in excess of 12 months are classified as long-term.
(5) 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 stated at
cost determined on a first-in, first-out basis. The Company includes as
inventoriable costs certain indirect costs, such as purchasing and receiving
costs, inbound freight, duties related to import purchases, internal transfer
costs and warehousing costs. The Company records vendor monies which support its
advertising programs as a reduction in the cost of inventory, and are recognized
as a reduction of cost of goods sold when the inventory is sold. The Company
adopted this accounting effective January 1, 2004.
5
(6) 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. Buildings and
building improvements are depreciated over periods of twenty to forty years,
furniture, fixtures and equipment are depreciated over periods of five to ten
years and leasehold improvements are depreciated over the shorter of their
estimated useful lives or the term of the related lease.
(7) LONG-TERM DEBT
The Company maintains two mortgage agreements with Wachovia Bank on its new
corporate offices and distribution center of which $27.4 million and $29.4
million was outstanding at September 30, 2005 and December 31, 2004,
respectively. The mortgages are secured by land, building, and equipment. Of the
original $30.0 million in mortgages, $22.5 million ($21.0 million at September
30, 2005) is repayable over 15 years and $7.5 million ($6.4 million at September
30, 2005) is repayable over 7 years. Monthly payments totaling $214,000 started
in October 2004. The mortgages bear interest at rates that will vary between
LIBOR plus 85 basis points and LIBOR plus 135 basis points, depending on the
debt service coverage ratio and the length of the mortgage payment. The Company
has the option of fixing the interest rate at any time. The mortgages contain
covenants that, among other things, restrict the Company's ability to incur
additional indebtedness or guarantee obligations in excess of $8.0 million,
engage in mergers or consolidations, dispose of assets, make acquisitions
requiring a cash outlay in excess of $10.0 million, make loans or advances in
excess of $1.0 million, or change the nature of its business. The Company is
restricted in capital expenditures, paying dividends and making other
distributions unless certain financial covenants are maintained including those
relating to tangible net worth, funded debt and a current ratio. The mortgages
also define various events of default, including cross default provisions,
defaults for any material judgments or a change in control. At September 30,
2005 the Company was in compliance with these agreements.
(8) REVENUE RECOGNITION
The Company recognizes revenue at the time of sale of merchandise to its
customers. The value of point of sale coupons, which have a very limited life,
and other discounts that result in a reduction of the price paid by the customer
are recorded as a reduction of sales. Sales returns, which are reserved for
based on historical experience, are provided for in the period that the related
sales are recorded. Proceeds from the sale of gift cards are recorded as gift
card liability and recognized as revenue when redeemed by the holder.
(9) INSURANCE CLAIMS
The Company records any insurance claim receivable based upon their net
realizable value when the amounts are estimable and the recovery is probable.
Gains on recovery of inventory in excess of cost are recognized in gross margin.
6
(10) EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per
share:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------ -----------------------------
2005 2004 2005 2004
--------- ---------- ---------- ----------
(in thousands, except per share data)
Net income (loss).......................... $ (1,900) $ 865 $ (698) $ 2,428
========= ========== ========== ==========
Weighted average shares:
Basic................................ 19,808 19,491 19,740 19,435
Incremental shares from assumed
exercise of stock options.......... -- 623 -- 620
--------- ---------- ---------- ----------
Diluted.............................. 19,808 20,114 19,740 20,055
========= ========== ========== ==========
Basic net income (loss) per share......... $ (0.10) $ 0.04 $ (.04) $ 0.12
========= ========== ========== ==========
Diluted net income (loss) per share....... $ (0.10) $ 0.04 $ (.04) $ 0.12
========= ========== ========== ==========
Stock options excluded from calculation
because exercise price was greater than
average market price................. 0 314 0 314
--------- ---------- ---------- ----------
The diluted weighted average shares outstanding for both the three and nine
month periods ended September 30, 2005 excludes 1,170,990 potentially dilutive
shares as the result would be anti-dilutive.
7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
OVERVIEW
The following discussion and analysis contains certain forward-looking
statements. These forward-looking statements do not constitute historical facts
and involve risks and uncertainties. Actual results could differ materially from
those referred to in the forward-looking statements due to a number of factors,
including, but not limited to, the following: the impact of EITF Issue 02-16,
the impact of the adoption of FAS 123(R) (as defined below), customer demand and
trends in the arts and crafts industry, the effect of economic conditions and
rising gasoline prices, the impact of unfavorable weather conditions, the impact
of competitors' locations or pricing, the availability of acceptable real estate
locations for new stores, difficulties with respect to new information system
technologies, achieving the expected efficiencies in our new distribution
center, supply constraints or difficulties, the effectiveness of advertising
strategies, the impact of the threat of terrorist attacks and war, the
uncertainty of the final resolution of the insurance claim relating to the roof
collapse and our ability to maintain an effective system of internal control
over financial reporting. For additional information concerning factors that
could cause actual results to differ materially from the information contained
herein, reference is made to the information under the heading "Cautionary
Statement Relating to Forward-Looking Statements" in our Annual Report on Form
10-K as filed with the Securities and Exchange Commission.
Due to the importance of our peak selling season, which includes Fall/Halloween,
Thanksgiving and Christmas, the fourth quarter has historically contributed, and
we expect it will continue to contribute, disproportionately to our
profitability for the entire year. As a result, our quarterly results of
operations may fluctuate. In addition, results of a period shorter than a full
year may not be indicative of results expected for the entire year.
Our quarterly results of operations also may fluctuate based upon such factors
as the length of holiday seasons, the date on which holidays fall, the number
and timing of new store openings, the amount of store pre-opening expenses, the
amount of net sales contributed by new and existing stores, the mix of products
sold, the amount of sales returns, the timing and level of markdowns and other
competitive factors.
On July 27, 2004, a section of the roof on our Blackwood, New Jersey warehouse
and corporate headquarters facility collapsed. At the time of the incident, we
had been in the process of moving into a new distribution center in Winslow
Township, New Jersey. The effort of recovering from the roof collapse delayed
our ability to achieve the productivity we anticipated in the new facility in
2004. During the first half of 2005, we significantly increased the productivity
of the distribution center and we are now operating this new facility at the
level of productivity we had expected.
We insure our warehouse inventory at selling value. Included in our 2004 results
is an estimate of the insurance claim recovery for lost merchandise and other
expenses related to the roof collapse of $2.2 million, which includes estimated
gross margin of $1.3 million. This claim was originally estimated at $4.2
million, of which $3.4 million has been received. The estimated gross margin of
$1.3 million was recorded as a reduction in the cost of goods sold during the
third quarter of 2004.
8
On December 16, 2004, the Financial Accounting Standards Board ("FASB") issued
FASB Statement No. 123(R), Share-Based Payment ("FAS 123(R)"). FAS 123(R)
revised FASB Statement No. 123, Accounting for Stock-Based Compensation ("FAS
123") and requires companies to expense the fair value of employee stock options
and other forms of stock-based compensation. Companies must adopt FAS 123(R) no
later than the beginning of their next fiscal year that begins after June 15,
2005. Accordingly, we will be required to adopt FAS 123(R) in our first quarter
of 2006. Previously, in complying with FAS 123, we disclosed the value of stock
options granted and its pro forma impact on our net income in a footnote to our
financial statements. We are currently considering which transition method we
expect to select in adopting FAS 123(R) and whether this new accounting
requirement will result in any changes in compensation strategies. Information
contained in our footnotes provides the impact on pro forma net income for past
financial statements. The impact of the adoption of FAS 123(R) on future
financial statements is expected to be material.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, selected statement of
operations data expressed as a percentage of net sales and the number of stores
open at the end of each such period:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------- --------------------
2005 2004 2005 2004
------ ------ ------ ------
Net sales.............................................. 100.0% 100.0% 100.0% 100.0%
Cost of sales.......................................... 59.4% 59.4% 60.0% 61.0%
-------- ------- ------- -------
Gross margin........................................... 40.6% 40.6% 40.0% 39.0%
Selling, general and administrative expenses........... 42.1% 37.9% 39.6% 37.1%
Store pre-opening expenses............................. 1.0% 1.4% 0.6% 0.8%
-------- ------- ------- -------
Income (loss) from operations.......................... (2.5)% 1.3% (0.2)% 1.1%
Net interest (income) expense.......................... 0.2 % 0.0% 0.1% (0.1)%
-------- ------- ------- -------
Income (loss) before income taxes...................... (2.7)% 1.3% (0.3)% 1.2%
Provision for income taxes............................. (1.1)% 0.5% (0.1)% 0.4%
-------- ------- ------- -------
Net income (loss)...................................... (1.6)% 0.8% (0.2)% 0.8%
======== ======= ======= =======
Number of stores open at end of period................. 105 91
Three Months Ended September 30, 2005 Compared to Three Months Ended
September 30, 2004
NET SALES. Net sales increased $7.4 million or 6.9% to $115.1 million in the
three months ended September 30, 2005 from $107.7 million in the comparable 2004
period. This increase is comprised of (i) net sales of $3.8 million from nine
stores opened in 2005, (ii) net sales of $8.1 million from stores opened in 2004
not included in the comparable store base, and (iii) a comparable store sales
decrease of $4.5 million or 4.3%. For the three months ended September 30, 2005,
customer transactions in comparable stores were down 6.2% and the average sale
increased by 1.9% compared with the same period in 2004. We believe that sales
in the quarter were negatively impacted by rising gasoline prices and unusually
hot and dry weather. We experienced a decline in our yarn sales as last year we
were achieving major sales increases that we could not repeat given the large
supply of yarn in the marketplace. Sales were strongest in our jewelry and
wearables categories.
9
GROSS MARGIN. Gross margin is net sales minus the cost of merchandise which
includes purchasing and receiving costs, inbound freight, duties related to
import purchases, internal transfer costs and warehousing costs. Gross margin as
a percent of net sales was 40.6% in both the three month periods ended September
30, 2005, and September 30, 2004. The mix of merchandise sold increased margins
by 0.5% and the improved productivity in our warehouse increased margins by 0.3%
as a result of a reduction in distribution costs. In the third quarter of 2004
the Company recorded $1.3 million of insurance proceeds in excess of cost from
an insurance claim which added 1.2% to the gross margin. The application of
Emerging Issues Task Force ("EITF") Issue 02-16, Accounting by a Customer
(including a Reseller) for Cash Consideration Received from a Vendor ("EITF
02-16"), relating to our accounting for vendor monies which support our
advertising programs on our gross margin resulted in an increase of 0.4% in
margin rate in the three months ended September 30, 2005 compared with the three
months ended September 30, 2004.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses include (a) direct store level expenses, including rent
and related operating costs, payroll, advertising, depreciation and other direct
costs, and (b) corporate level costs not directly associated with or allocable
to cost of sales including executive salaries, accounting and finance, corporate
information systems, office facilities and other corporate expenses.
Selling, general and administrative expenses, as a percent of sales, increased
4.2% in the three months ended September 30, 2005, to 42.1% from 37.9% in the
three months ended September 30, 2004. Selling, general and administrative costs
increased by 2.4% in the comparable store base as a result of the decline in
comparable store sales. On a per store basis, selling, general and
administrative expenses increased by 2.6% in the third quarter of 2005 as
compared with the same period in 2004. There was a 1.5% increase attributable to
new stores opened in 2004 and 2005 which have higher selling, general and
administrative expenses as a percentage of sales than existing stores. There was
a 0.3% increase in corporate office costs.
STORE PRE-OPENING EXPENSES. We expense store pre-opening expenses as they are
incurred which would include rent holidays prior to store opening. Pre-opening
expenses for the seven stores we opened in the third quarter of 2005, and lease
costs related to the new stores which will open in the fourth quarter amounted
to $1.2 million. In the third quarter of 2004, we incurred store pre-opening
expenses of $1.5 million related to the seven stores we opened in that quarter
and lease costs related to stores opened in the fourth quarter of 2004.
NET INTEREST (INCOME) EXPENSE. In the third quarter of 2005, we had net interest
expense of $202,000 compared with net interest expense of $14,000 for the same
period in 2004. The third quarter of 2005 includes $331,000 in interest expense
related to our mortgages on which interest expense commenced in August 2004.
INCOME TAXES. Our effective income tax rate was 39.3% for the three months ended
September 30, 2005 and 38.5% for the three months ended September 30, 2004. The
increase is due to tax changes in several of the states in which we operate.
Nine Months Ended September 30, 2005 Compared to Nine Months Ended
September 30, 2004
NET SALES. Net sales increased $31.1 million or 9.7% to $351.5 million in the
nine months ended September 30, 2005 from $320.4 million in the comparable 2004
period. This increase is comprised of (i) net sales of $4.4 million from nine
stores opened in 2005, (ii) net sales of $32.4 million from stores opened in
2004 not included in the comparable store base, and (iii) a comparable store
sales decrease of $5.7 million or 1.8%. Sales during the nine months ended
September 30, 2005 were significantly impacted by severe winter weather
conditions in the first quarter throughout our northern store base and by
unusually hot and dry weather and rising gasoline prices in the third quarter.
For the nine months ended September 30, 2005, customer transactions in
comparable stores were down 2.4% compared with 2004 and the average sale
increased by 0.6%. Sales were strongest in our jewelry and wearables categories.
10
GROSS MARGIN. Gross margin as a percent of net sales increased 1.0% in the nine
months ended September 30, 2005, to 40.0% from 39.0% in the nine months ended
September 30, 2004. The mix of merchandise sold increased margins by 0.7%. The
application of EITF 02-16 relating to our accounting for vendor monies which
support our advertising programs on our gross margin resulted in an increase of
0.7% in margin rate in the nine months ended September 30, 2005 compared with
the nine months ended September 30, 2004. The insurance claim proceeds added
0.4% to the margins in 2004.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses, as a percent of sales, increased 2.5% in the nine
months ended September 30, 2005, to 39.6% from 37.1% in the nine months ended
September 30, 2004. Selling, general and administrative costs increased by 1.4%
in the comparable store base as a result of the decrease in comparable store
sales. On a per store basis, selling, general and administrative expenses
increased by 2.3% in the first nine months of 2005 compared with the same period
in 2004. There was a 1.1% increase attributable to new stores opened in 2004 and
2005 which have higher selling, general and administrative expenses as a
percentage of sales than existing stores.
STORE PRE-OPENING EXPENSES. Pre-opening expenses for the nine stores we opened
and the store we relocated in the first nine months of 2005, and lease costs
related to the new stores which will open in the fourth quarter amounted to $2.3
million. In the first nine months of 2004, we incurred store pre-opening
expenses of $2.5 million related to the 10 stores opened in that period and
lease costs related to stores opened in the fourth quarter of 2004.
NET INTEREST (INCOME) EXPENSE. In the first nine months of 2005, we had net
interest expense of $324,000 compared with net interest income of $229,000 for
the same period in 2004. The first nine months of 2005 includes $881,000 in
interest expense related to our mortgages on which interest expense commenced in
August 2004.
INCOME TAXES. Our effective income tax rate was 39.3% for the nine months ended
September 30, 2005 and 38.5% for the nine months ended September 30, 2004. The
increase is due to tax changes in several of the states in which we operate.
LIQUIDITY AND CAPITAL RESOURCES
Our cash is used primarily for working capital to support inventory requirements
and capital expenditures, pre-opening expenses and beginning inventory for new
stores. In recent years, we have financed our operations and new store openings
primarily with cash from operations, the net proceeds we received from our
initial public offering in 1997 and from a secondary offering in 2002. In the
first half of 2004 we borrowed $30.0 million under two mortgage agreements we
have with Wachovia Bank to finance the construction of our new corporate offices
and distribution center.
At September 30, 2005 and December 31, 2004, our working capital was $149.0
million and $150.4 million, respectively. Cash used in operations was $24.7
million for the nine months ended September 30, 2005 principally as a result of
a seasonal increase in inventories of $24.2 million, the seasonal decrease in
accounts payable and other accrued expenses of $6.9 million and income tax
payments of $5.8 million.
11
Net cash used in investing activities during the nine months ended September 30,
2005 was $7.1 million, including $12.1 million for capital expenditures. In
2005, we expect to spend approximately $15.0 million on capital expenditures,
which includes $10.0 million for new store openings, and the remainder for
remodeling existing stores, upgrading systems in existing stores, warehouse
equipment and corporate systems development. Of the $10.0 million in new store
capital expenditures, we expect to receive $2.5 million back from landlords.
We maintain two mortgage agreements with Wachovia Bank on our new corporate
offices and distribution center of which $27.4 million was outstanding at
September 30, 2005. The mortgages are secured by land, building and equipment.
Of the original $30.0 million in mortgages, $22.5 million ($21.0 million as of
September 30, 2005) is repayable over 15 years and $7.5 million ($6.4 million as
of September 30, 2005) is repayable over 7 years. Monthly payments totaling
$214,000 started in October 2004. The mortgages bear interest at rates that will
vary between LIBOR plus 85 basis points and LIBOR plus 135 basis points,
depending on the debt service coverage ratio and the length of the mortgage
payment. We have the option of fixing the interest rate at any time. The
mortgages contain covenants that, among other things, restrict our ability to
incur additional indebtedness or guarantee obligations in excess of $8.0
million, engage in mergers or consolidations, dispose of assets, make
acquisitions requiring a cash outlay in excess of $10.0 million, make loans or
advances in excess of $1.0 million, or change the nature of our business. We are
restricted in capital expenditures, paying dividends and making other
distributions unless certain financial covenants are maintained including those
relating to tangible net worth, funded debt and a current ratio. The mortgages
also define various events of default, including cross default provisions,
defaults for any material judgments or a change in control. At September 30,
2005, we were in compliance with these agreements.
We currently have a $25.0 million line of credit agreement with Wachovia Bank,
which expires on May 1, 2006. Borrowing under this line will bear interest at
LIBOR plus 95 basis points and is subject to the same covenants as the mortgages
described above. At September 30, 2005, there were no borrowings outstanding
under this agreement.
We believe the cash generated from operations during the year, funds received
through the financing of the new distribution center and available borrowings
under the line of credit agreement will be sufficient to finance our working
capital and capital expenditure requirements for at least the next 12 months.
CRITICAL ACCOUNTING ESTIMATES
Our accounting policies are fully described in Note 1 of our notes to
consolidated financial statements included in our annual report on Form 10-K for
the year ended December 31, 2004. The preparation of financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions about future events that affect the amounts
reported in our consolidated financial statements and accompanying notes. Since
future events and their effects cannot be determined with absolute certainty,
actual results may differ from those estimates. Management makes adjustments to
its assumptions and judgments when facts and circumstances dictate. The amounts
currently estimated by us are subject to change if different assumptions as to
the outcome of future events were made. We evaluate our estimates and judgments
on an ongoing basis and predicate those estimates and judgments on historical
experience and on various other factors that management believes to be
reasonable under the circumstances. Management believes the following critical
accounting estimates encompass the more significant judgments and estimates used
in preparation of our consolidated financial statements:
o merchandise inventories;
o impairment of long-lived assets;
12
o income taxes; and
o other estimates.
The foregoing critical accounting estimates are more fully described in our
annual report on Form 10-K for the year ended December 31, 2004. During the
three months ended September 30, 2005, we did not make any material changes to
our estimates or methods by which estimates are derived with regard to our
critical accounting estimates.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We invest cash balances in excess of operating requirements primarily in money
market mutual funds and to a lesser extent in interest-bearing securities with
maturities of less than two years. The fair value of our cash and equivalents at
September 30, 2005 approximated carrying value. We had no borrowings outstanding
under the line of credit at September 30, 2005. The interest rates on our
mortgages fluctuate with market rates and therefore the value of these financial
instruments will not be impacted by a change in interest rates. Based on the
amounts outstanding at September 30, 2005, the impact of a hypothetical increase
or decrease in interest rates of 10% compared with the rates in effect at
September 30, 2005 would result in an increase or decrease in our interest
expense of $131,000 annually, and an increase or decrease in our interest income
of $53,000 annually.
ITEM 4. CONTROLS AND PROCEDURES
Our management, with the participation of our chief executive officer and chief
financial officer, evaluated the effectiveness of our disclosure controls and
procedures, as defined in Rule 13a-15(e) under the Securities Exchange Act of
1934 ("Exchange Act"), as of the end of the period covered by this report. Based
on that evaluation, our chief executive officer and chief financial officer
concluded that our disclosure controls and procedures were effective at the
reasonable assurance level to ensure that information required to be disclosed
by us in the reports that we file or submit under the Exchange Act are recorded,
processed, summarized and reported within the time periods specified in the
Securities and Exchange Commission's rules and forms.
During the three months ended September 30, 2005, there has not occurred any
change in our internal control over financial reporting, as defined in Exchange
Act Rule 13a-15(f), that has materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting.
13
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Not Applicable.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Not Applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not Applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable.
ITEM 5. OTHER INFORMATION
Not Applicable.
ITEM 6. EXHIBITS
31.1 Certification of Chief Executive Officer pursuant to Rule 13a-14(a)
promulgated under the Securities Exchange Act of 1934, as amended
("Exchange Act").
31.2 Certification of Chief Financial Officer pursuant to Rule 13a-14(a)
promulgated under the Exchange Act.
32 Certification of the Company's Chief Executive Officer and Chief
Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
14
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
A.C. MOORE ARTS & CRAFTS, INC.
Date: October 28, 2005 By: /s/ John E. Parker
-----------------------------------------
John E. Parker
Chief Executive Officer (duly authorized
officer and principal executive officer)
Date: October 28, 2005 By: /s/ Leslie H. Gordon
-----------------------------------------
Leslie H. Gordon
Executive Vice President and
Chief Financial Officer
(duly authorized officer and principal
financial officer)
15
Exhibit Index
Exhibit No. Description
----------- -----------
31.1 Certification of Chief Executive Officer pursuant to Rule 13a-14(a)
promulgated under the Exchange Act.
31.2 Certification of Chief Financial Officer pursuant to Rule 13a-14(a)
promulgated under the Exchange Act.
32 Certification of the Company's Chief Executive Officer and Chief
Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.