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, 2004
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 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 the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date:
CLASS OUTSTANDING AT NOVEMBER 5, 2004
----------------------------- -------------------------------
Common Stock, no par value 19,604,785
A.C. MOORE ARTS & CRAFTS, INC.
TABLE OF CONTENTS
PAGE
NUMBER
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PART I: FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets as of September 30, 2004 3
and December 31, 2003
Consolidated Statements of Income for the three and nine 4
month periods ended September 30, 2004 and 2003
Consolidated Statements of Cash Flows for the nine 5
month periods ended September 30, 2004 and 2003
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial 9
Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About 15
Market Risk
Item 4. Controls and Procedures 15
PART II: OTHER INFORMATION
Item 1. Legal Proceedings 16
Item 2. Unregistered Sales of Equity Securities
and Use of Proceeds 16
Item 3. Defaults Upon Senior Securities 16
Item 4. Submission of Matters to a Vote of Security Holders 16
Item 5. Other Information 16
Item 6. Exhibits 16
SIGNATURES 17
2
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
A.C. MOORE ARTS & CRAFTS, INC.
CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
September 30, December 31,
2004 2003
------------- ------------
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 27,730 $ 43,700
Marketable securities 13,368 --
Inventories 137,976 121,493
Prepaid income taxes 4,706 --
Prepaid expenses and other current assets 5,560 2,962
-------- --------
189,340 168,155
Non-current assets:
Marketable securities -- 14,132
Property and equipment, net 76,588 47,706
Other assets 1,742 1,801
-------- --------
$267,670 $231,794
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 2,571 $ 504
Trade accounts payable 40,602 33,558
Accrued payroll and payroll taxes 3,935 4,501
Accrued expenses 8,390 10,015
Income taxes payable -- 6,826
-------- --------
55,498 55,404
-------- --------
Long-term liabilities:
Long-term debt 27,429 --
Deferred tax liability 8,027 4,950
Other long-term liabilities 5,500 4,729
-------- --------
40,956 9,679
-------- --------
96,454 65,083
-------- --------
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 19,505,215 shares at
September 30, 2004 and 19,357,541 at December 31, 2003 106,963 105,023
Retained earnings 64,253 61,688
-------- --------
171,216 166,711
-------- --------
$267,670 $231,794
======== ========
See accompanying notes to financial statements
3
A.C. MOORE ARTS & CRAFTS, INC.
CONSOLIDATED STATEMENT OF INCOME
(dollars in thousands, except per share data)
(unaudited)
Three months ended Nine months ended
September 30, September 30,
----------------------- -----------------------
2004 2003 2004 2003
---------- ---------- ---------- ----------
Net sales $ 107,713 $ 98,600 $ 320,376 $ 284,238
Cost of sales (including buying and
distribution costs) 64,010 61,987 195,401 179,297
---------- ---------- ---------- ----------
Gross margin 43,703 36,613 124,975 104,941
Selling, general and administrative expenses 40,857 33,842 118,986 99,266
Store pre-opening expenses 1,229 821 2,048 1,571
---------- ---------- ---------- ----------
Income from operations 1,617 1,950 3,941 4,104
Interest expense 133 19 148 70
Interest (income) (119) (111) (377) (389)
---------- ---------- ---------- ----------
Income before income taxes 1,603 2,042 4,170 4,423
Provision for income taxes 617 780 1,605 1,690
---------- ---------- ---------- ----------
Net income $ 986 $ 1,262 $ 2,565 $ 2,733
========== ========== ========== ==========
Net income per share:
Basic $ 0.05 $ 0.07 $ 0.13 $ 0.14
========== ========== ========== ==========
Diluted $ 0.05 $ 0.06 $ 0.13 $ 0.14
========== ========== ========== ==========
See accompanying notes to financial statements
4
A.C. MOORE ARTS & CRAFTS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
(unaudited)
Nine Months Ended
September 30,
-----------------------
2004 2003
---------- ----------
Cash flows from operating activities:
Net income $ 2,565 $ 2,733
Adjustments to reconcile net income to net cash
provided by (used in) operating
activities:
Depreciation and amortization 5,954 5,014
Provision for deferred income taxes 3,077 869
Changes in assets and liabilities:
Inventories (16,483) (22,587)
Prepaid expenses and other current assets (2,598) (2,925)
Accounts payable, accrued payroll,
payroll taxes and accrued expenses 4,853 7,042
Income taxes (10,308) (1,041)
Other long-term liabilities 771 522
Other assets 59 (22)
---------- ----------
Net cash used in operating activities (12,110) (10,395)
---------- ----------
Cash flows from investing activities:
Capital expenditures (34,836) (13,541)
Investment in marketable securities 764 (14,161)
---------- ----------
Cash flows used in investing activities (34,072) (27,702)
---------- ----------
Cash flows from financing activities:
Exercise of stock options 716 2,533
Increase in long-term debt 30,000 -
Repayment of equipment leases (504) (1,031)
---------- ----------
Net cash provided by financing activities 30,212 1,502
---------- ----------
Net decrease in cash (15,970) (36,595)
Cash and cash equivalents at beginning of period 43,700 61,584
---------- ----------
Cash and cash equivalents at end of period $ 27,730 $ 24,989
========== ==========
See accompanying notes to financial statements
5
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 91 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, 2003. 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 presentation of the
interim financial statements. In the opinion of management, all such adjustments
are of a normal and recurring nature.
(2) Management Estimates
The preparation of these consolidated 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 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, 2004 and 2003
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.
(3) 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.
(4) 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.
(5) Long-Term Debt
On October 28, 2003 we signed two mortgage agreements with Wachovia Bank
relating to the new corporate offices and distribution center. The mortgages
totaling $30.0 million, all of which was outstanding at September 30, 2004, are
secured by land, building, and equipment. Of the $30 million, $22.5 million is
repayable over 15 years and $7.5 million is repayable over 7 years. Monthly
payments totaling $214,000 started in October 2004. The mortgages bear interest
6
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 the Company's
ability to incur additional indebtedness or guarantee obligations in excess of
$8 million, engage in mergers or consolidations, dispose of assets, make
acquisitions requiring a cash outlay in excess of $10 million, make loans or
advances in excess of $1 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,
2004 the Company was in compliance with these agreements.
(6) 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.
(7) 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.
(8) 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,
----------------------------- -----------------------------
2004 2003 2004 2003
------------ ------------ ------------ ------------
(in thousands, except per share data)
Net income $ 986 $ 1,262 $ 2,565 $ 2,733
============ ============ ============ ============
Weighted average shares:
Basic 19,491 19,248 19,435 19,043
Incremental shares from
assumed exercise of stock option 623 732 620 613
------------ ------------ ------------ ------------
Diluted 20,114 19,980 20,055 19,656
============ ============ ============ ============
Basic net income per share $ 0.05 $ 0.07 $ 0.13 $ 0.14
============ ============ ============ ============
Diluted net income per share $ 0.05 $ 0.06 $ 0.13 $ 0.14
============ ============ ============ ============
Stock options excluded from calculation
because exercise price was greater than
average market price 314 322 314 620
------------ ------------ ------------ ------------
7
(9) 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,
-------------------------- --------------------------
2004 2003 2004 2003
---------- ----------- ----------- -----------
Net income................ As reported $ 986,000 $ 1,262,000 $ 2,565,000 $ 2,733,000
Compensation cost, net 403,000 305,000 1,274,000 860,000
Pro forma 583,000 957,000 1,291,000 1,873,000
Basic earnings per share.. As reported $ .05 $ .07 $ .13 $ .14
Pro forma .03 .05 .07 .10
Diluted earnings per share As reported $ .05 $ .06 $ .13 $ .14
Pro forma .03 .05 .06 .10
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:
---------- ---------- ---------- ---------
2004 2003 2002 2001
---------- ---------- ---------- ---------
Average fair value
of options granted $ 11.15 $ 12.99 $ 10.08 $ 4.59
Risk free interest rate 3.8% 3.2% 4.1% 5.1%
Dividend yield ----- ----- ----- -----
Average expected life 4.9 yrs 4.5 yrs 7 yrs 7 yrs
Expected stock price volatility 54.9% 56% 45.2% 48.4%
(10) Change in Accounting Principle
For all vendor contracts entered into or modified after January 1, 2003, the
Company has adopted the Emerging Issues Task Force (EITF) 02-16, Accounting by a
Customer (including a Reseller) for Cash Consideration Received from a Vendor.
EITF 02-16 addresses the accounting for cash consideration received by a
customer from a vendor (e.g., slotting fees, cooperative advertising payments,
buydowns) and rebates or refunds from a vendor that is payable only if the
customer completes a specified cumulative level of purchases or remains a
customer for a specified time period. The change in accounting means that vendor
monies which support the Company's advertising programs are now being recorded
8
as a reduction in the cost of inventory, and are recognized as a reduction of
cost of goods sold when the inventory is sold. Previously, they were accounted
for as an offset to advertising costs. This accounting change results in a
timing difference as to when these monies are recognized in the Company's income
statement. The adoption of EITF 02-16 reduced the Company's third quarter net
income by $0.7 million or $0.04 per share and the nine months net income by $2.4
million or $0.12 per share. In the third quarter, the change increased gross
margin by $2.7 million, increased selling, general and administrative costs by
$4.0 million, and decreased inventory by $1.2 million. For the nine months, the
change increased gross margin by $5.9 million, increased selling, general and
administrative costs by $9.8 million, and decreased inventory by $3.9 million.
In 2003 we recorded vendor advertising support as a reduction of selling general
and administrative expenses in the amount of $2.8 million in the third quarter
and $6.2 million in the nine-month period.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
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 the adoption of EITF
Issue 02-16, customer demand, the effect of economic conditions, the impact of
adverse 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, and the uncertainty of the final resolution of the
insurance claim relating to the roof collapse. 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.
Starting in 2004, vendor monies which support our advertising programs are now
being recorded as a reduction in the cost of inventory, and are being recognized
as a reduction to cost of goods sold when the inventory is sold. Through 2003,
they were accounted for as an offset to advertising costs. This accounting
change results in a timing difference as to when these monies are recognized in
our income statement. The accounting change related to the adoption of EITF
02-16 reduced our third quarter net income by $0.7 million or $0.04 per share.
For the nine months, the accounting change reduced our net income by $2.4
million or $0.12 per share.
9
On July 27, 2004 a section of the roof on the Company's Blackwood, NJ warehouse
and corporate headquarters facility collapsed. The facility employs over 150
team members, none of whom were injured in the incident.
At the time of the incident, the Company had been in the process of moving into
a new distribution center in Winslow Township, NJ. The move of the offices was
expedited and completed on August 4th.
The roof collapse in our then existing distribution center was a major
disruption to our business. We lost the ability to ship any merchandise from our
warehouses for one week. During the next seven weeks, over $7 million in
merchandise at cost was unavailable to be shipped to the stores as we had to
relocate the merchandise to the new distribution center and ensure that the
merchandise was salable.
The effort of recovering from the roof collapse resulted in delaying our ability
to bring our new facility up to the level of operation that we had anticipated.
We did not ship merchandise to stores in our customary manner. We lost a great
deal of imported fall ribbon, flags, fall seasonal and basic floral merchandise
that could not be replaced domestically. As we could not ensure merchandise
availability, we reduced two key promotions in August and September. We estimate
the unavailability of merchandise and the reduction in promotional events
negatively impacted third quarter sales in excess of $4 million. The events
surrounding the roof collapse also required us to add to staff and will delay
our ability to achieve the productivity we anticipated in the new facility in
the fourth quarter.
The Company insures its warehouse inventory at selling value and therefore
anticipates collection on their insurance claim at amounts significantly in
excess of cost. Included in the third quarter results is an estimate of the
insurance claim recovery for lost merchandise and other expenses related to the
roof collapse of $3.0 million, which exceeded claims related costs by $1.3
million. This $1.3 million has been recorded as a reduction in the cost of goods
sold during the third quarter.
The Financial Accounting Standards Board is working on a project to develop a
new standard for accounting for stock-based compensation. On October 13, 2004 in
a public announcement, the FASB indicated that expensing of stock options will
be required beginning for periods beginning after June 15, 2005. The FASB
expects to issue its final standard in the fourth quarter of 2004.
10
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,
--------------------- --------------------
2004 2003 2004 2003
-------- -------- -------- --------
Net sales.............................................. 100.0% 100.0% 100.0% 100.0%
Cost of sales.......................................... 59.4% 62.9% 61.0% 63.1%
-------- -------- -------- --------
Gross margin........................................... 40.6% 37.1% 39.0% 36.9%
Selling, general and administrative expenses........... 37.9% 34.3% 37.1% 34.9%
Store pre-opening expenses............................. 1.2% 0.8% 0.7% 0.5%
-------- -------- -------- --------
Income from operation.................................. 1.5% 2.0% 1.2% 1.5%
Net interest (income) expense.......................... 0.0% (0.1)% (0.1)% (0.1)%
-------- -------- -------- --------
Income before income taxes............................. 1.5% 2.1% 1.3% 1.6%
Income tax expense..................................... 0.6% 0.8% 0.5% 0.6%
-------- -------- -------- --------
Net income............................................. 0.9% 1.3% 0.8% 1.0%
======== ======== ======== ========
Number of stores open at end of period................. 91 78
Three Months Ended September 30, 2004 Compared to Three Months Ended
September 30, 2003
NET SALES. Net sales increased $9.1 million or 9.2% to $107.7 million in the
three months ended September 30, 2004 from $98.6 million in the comparable 2003
period. This increase is comprised of (i) net sales of $5.5 million from 10 new
stores opened in 2004, (ii) net sales of $3.3 million from stores opened in 2003
not included in the comparable store base, and (iii) a comparable store sales
increase of $300,000 or 0.3%. Sales during the quarter ended September 30, 2004
were significantly impacted by the roof collapse in our former warehouse and the
inability to deliver merchandise to our stores at normal levels. We lost over
$800,000 of imported fall ribbon, flags, fall seasonal and basic floral
merchandise that could not be replaced domestically. As we could not ensure
merchandise availability, we reduced two key promotions in August and September.
We estimate the unavailability of merchandise and the reduction in promotional
events negatively impacted third quarter sales in excess of $4 million. For the
quarter, customer transactions in comparable stores were flat compared with 2003
and the average sale increased by 0.3%. Sales growth was strongest in our
scrapbooking, yarn and jewelry making categories.
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 increased 3.5% in the three months ended September 30,
2004, to 40.6% from 37.1% in the three months ended September 30, 2003. The
impact of the change in accounting in accordance with EITF 02-16 increased gross
margin by $2.7 million, which represents 2.5% of this increase. An additional
1.2% is attributable to an estimated $1.3 million of insurance proceeds in
excess of cost from the insurance claim associated with the roof collapse in our
former warehouse. Fewer sales at promotional prices increased margins by 0.5%.
Additional distribution costs associated with the move to our new distribution
center and a loss of productivity due to the events surrounding the roof
collapse reduced our gross margin by 0.7%.
11
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 3.6% in the three months ended September 30, 2004, to 37.9% from 34.3%
in the three months ended September 30, 2003. The impact of the change in
accounting in accordance with EITF 02-16 increased expenses by $3,950,000, which
represents 3.7% of this increase. There was a 0.2% increase attributable to new
stores opened in 2004 and stores opened in 2003 that were not in the comparable
stores base which have higher selling, general and administrative expenses as a
percentage of sales than existing stores. As a percent to sales, corporate
office costs decreased by 0.3% as such costs were leveraged over the larger
sales base.
STORE PRE-OPENING EXPENSES. We expense store pre-opening expenses as
incurred. Pre-opening expenses for the seven stores we opened in the third
quarter of 2004 amounted to $1.2 million. In the third quarter of 2003, we
incurred store pre-opening expenses of $821,000 related to the four stores
opened in that quarter and the store which we relocated in August 2003.
NET INTEREST (INCOME). In the third quarter of 2004, we had net
interest expense of $14,000 compared with net interest income of $92,000 in
2003. The third quarter of 2004 includes $119,000 in interest expense related to
our mortgages on which interest expense commenced in August.
INCOME TAXES. Our effective income tax rate was 38.5% for the third
quarter ended September 30, 2004 and 38.2% for the third quarter ended September
30, 2003.
Nine Months Ended September 30, 2004 Compared to Nine Months Ended
September 30, 2003
NET SALES. Net sales increased $36.2 million, or 12.7%, to $320.4
million in the nine months ended September 30, 2004 from $284.2 million in the
comparable 2003 period. This increase is comprised of (i) net sales of $9.4
million from 10 new stores opened in 2004, (ii) net sales of $19.0 million from
stores opened in 2003 not included in the comparable store base, and (iii) a
comparable store sales increase of $7.8 million, or 3%. Sales during the nine
months ended September 30, 2004 benefited from positive weather conditions in
the first quarter but were negatively impacted by weather conditions in the
second quarter compared with the comparable periods in 2003. Sales in the third
quarter were impacted by the roof collapse. For the nine months, customer
transactions in comparable stores increased by 1% compared with 2003 and the
average sale increased 2%. Sales growth was strongest in our scrapbooking, yarn,
wedding and jewelry making categories.
GROSS MARGIN. The gross margin as a percent of net sales increased 2.1%
in the nine months ended September 30, 2004, to 39.0% from 36.9% in the nine
months ended September 30, 2003. The impact of the change in accounting in
accordance with EITF 02-16 increased gross margin by $5.8 million, which
represent 1.8% of this increase. An additional 0.4% is attributable to an
estimated $1.3 million of insurance proceeds in excess of cost from the
insurance claim associated with the roof collapse. There was a 0.4% increase due
to fewer sales at promotional prices. Additional distribution costs associated
with the move to our new distribution center and a loss of productivity due to
the events surrounding the roof collapse reduced our gross margin by 0.5%.
12
SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses, as a percent of sales, increased 2.2% in the nine
months ended September 30, 2004, to 37.1% from 34.9% in the nine months ended
September 30, 2003. The impact of the change in accounting in accordance with
EITF 02-16 increased expenses by $9.8 million, which represents 3.1% of this
increase. As a percent of sales, store costs decreased by 0.8% due to the
leveraging of our costs with the comp store sales increase. As a percent of
sales, corporate office costs decreased by 0.1%.
STORE PRE-OPENING EXPENSES. Pre-opening expenses for the 10 new stores
opened in the first nine months of 2004 and the two stores we relocated amounted
to $2.0 million. In the first nine months of 2003, we incurred store pre-opening
expenses of $1.6 million related to the seven stores opened during that period
and the one store we relocated.
NET INTEREST (INCOME). In the first nine months of 2004, we had net
interest income of $230,000 compared with net interest income of $319,000 in
2003. The decrease is principally due to interest expense from our mortgages
which expense commenced in August 2004.
INCOME TAXES. Our effective income tax rate was 38.5% for the first
nine months of 2004 and 38.2% for the first nine months of 2003.
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 million under two mortgage
agreements we have with Wachovia Bank to finance our new corporate offices and
distribution center.
At September 30, 2004 and December 31, 2003 our working capital was
$133.8 million and $112.8 million, respectively. Cash used in operations was
$12.1 million for the nine months ended September 30, 2004 as a result of an
increase in inventory of $16.5 million to support the new stores and the normal
seasonal increase to support our fourth quarter sales, an increase in accounts
payable and other accrued expenses of $4.9 million, income tax payments of $8.9
million and the establishment of a claim receivable relating to our roof
collapse in the amount of $3.0 million.
Net cash used in investing activities during the nine months ended
September 30, 2004 was $34.1 million of which $34.8 million was for capital
expenditures. In 2004, we expect to spend approximately $39.0 million on capital
expenditures, which includes approximately $27.5 million related to the
building, equipment and systems for our new distribution center, $8.5 million
for new store openings, and the remainder for remodeling existing stores,
upgrading systems in existing stores, and corporate systems development. The
total cost of the new distribution center is $45.0 million, including
capitalized interest of $202,000.
On October 28, 2003 we signed two mortgage agreements with Wachovia
Bank relating to the new corporate offices and distribution center. The
mortgages totaling $30.0 million, all of which was outstanding at September 30,
2004, are secured by land, building, and equipment. Of the $30 million, $22.5
million is repayable over 15 years and $7.5 million 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 million, engage in mergers or consolidations, dispose of assets, make
13
acquisitions requiring a cash outlay in excess of $10 million, make loans or
advances in excess of $1 million, or change the nature of its 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,
2004 the Company was 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, 2004 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.
CHANGE IN ACCOUNTING PRINCIPLE
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. Co-op advertising funds
are only recognized when we have performed our contractual obligation under a
co-op advertising agreement.
For all vendor contracts entered into or modified after January 1, 2003,
the Company has adopted Emerging Issues Task Force (EITF) 02-16, Accounting by a
Customer (including a Reseller) for Cash Consideration Received from a Vendor.
EITF 02-16 addresses the accounting for cash consideration received by a
customer from a vendor (e.g., slotting fees, cooperative advertising payments,
buydowns) and rebates or refunds from a vendor that is payable only if the
customer completes a specified cumulative level of purchases or remains a
customer for a specified time period. The change in accounting means that vendor
monies which support our advertising programs are now being recorded as a
reduction in the cost of inventory, and are recognized as a reduction of cost of
goods sold when the inventory is sold. Previously, they were accounted for as an
offset to advertising costs. This accounting change results in a timing
difference as to when these monies are recognized in our income statement. The
prospective adoption of EITF 02-16 reduced our net income in the first nine
months by $2.4 million or $0.12 per share. For the full year 2004, we estimate
that the change in the timing of income recognition will reduce EPS by
approximately $0.14 per share.
The adoption of this standard does not change the ultimate cash to be
received under these agreements, only the timing of when it is reflected in our
net income.
CRITICAL ACCOUNTING ESTIMATES
Except for the change in accounting principle described above, 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 fiscal
year ended December 31, 2003. 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
14
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 are believed 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;
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 fiscal year ended December 31, 2003. During
the nine months ended September 30, 2004, 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, 2004 approximated carrying value. We had no
borrowings outstanding under the line of credit at September 30, 2004. 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 existing at September 30, 2004, the impact
of a hypothetical increase or decrease in interest rates of 10% compared with
the rates in effect at September 30, 2004 would result in an increase or
decrease in our interest expense of $84,000 annually, and an increase or
decrease in our interest income of $71,000 annually.
ITEM 4. CONTROLS AND PROCEDURES
Our management, with the participation of our chief executive officer
and chief financial officer, conducted an evaluation as of the end of the period
covered by this report, of the effectiveness of our disclosure controls and
procedures, as defined in Exchange Act Rule 13a-15(e). Based on that evaluation,
our chief executive officer and chief financial officer concluded that our
disclosure controls and procedures were effective in reaching a reasonable level
of assurance that management is timely alerted to material information relating
to us during the period when our periodic reports are being prepared. During the
quarter ended September 30, 2004, 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.
15
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
None.
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.
16
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: November 8, 2004 By: /s/ John E. Parker
----------------------------
John E. Parker
Chief Executive Officer
(duly authorized officer and
principal executive officer)
Date: November 8, 2004 By: /s/ Leslie H. Gordon
----------------------------
Leslie H. Gordon
Executive Vice President
and Chief Financial Officer
(duly authorized officer
and principal financial
officer)
17
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.