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 March 31, 2006
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.
------------------------------------------------------
(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
--------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(856) 768-4930
----------------------------------------------------
(Registrant's telephone number, including area code)
N/A
-------------------------------------------------------
(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 a large accelerated
filer, an accelerated filer, or a non-accelerated filer. See definition of
"accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange
Act. (Check one):
[ ] Large accelerated filer [X] Accelerated filer [ ] Non-accelerated filer
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 MAY 9, 2006
----------------------------- ----------------------------
Common Stock, no par value 19,857,161
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 March 31, 2006
and December 31, 2005...................................................................1
Consolidated Statements of Operations for the three month periods
ended March 31, 2006 and 2005...........................................................2
Consolidated Statements of Cash Flows for the three month periods ended
March 31, 2006 and 2005.................................................................3
Notes to Consolidated Financial Statements..............................................4
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.......9
Item 3. Quantitative and Qualitative Disclosures About Market Risk.................................14
Item 4. Controls and Procedures....................................................................14
PART II: OTHER INFORMATION
Item 1. Legal Proceedings..........................................................................15
Item 1A. Risk Factors...............................................................................15
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds................................15
Item 3. Defaults Upon Senior Securities............................................................15
Item 4. Submission of Matters to a Vote of Security Holders........................................15
Item 5. Other Information..........................................................................15
Item 6. Exhibits...................................................................................16
SIGNATURES...................................................................................................17
i
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
A.C. MOORE ARTS & CRAFTS, INC.
CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
(unaudited)
March 31, December 31,
2006 2005
---------------- ---------------
ASSETS
Current assets:
Cash and cash equivalents....................................... $ 45,853 $ 57,748
Marketable securities........................................... 1,500 5,224
Inventories..................................................... 164,901 152,646
Prepaid expenses and other current assets....................... 5,546 6,900
Prepaid income taxes............................................ 478 --
Deferred tax asset.............................................. 1,334 734
---------------- ---------------
219,612 223,252
Non current assets:
Property and equipment, net .................................... 89,748 88,098
Other assets ................................................... 1,367 1,407
---------------- ---------------
$ 310,727 $ 312,757
================ ===============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt............................... $ 2,571 $ 2,571
Trade accounts payable ......................................... 47,998 46,445
Accrued payroll and payroll taxes............................... 2,586 3,928
Accrued expenses................................................ 9,039 10,044
Income taxes payable............................................ -- 1,679
---------------- ---------------
62,194 64,667
---------------- ---------------
Non current liabilities:
Long-term debt.................................................. 23,572 24,215
Deferred tax liability.......................................... 7,925 8,039
Accrued lease liability......................................... 17,265 17,327
---------------- ---------------
48,762 49,581
---------------- ---------------
110,956 114,248
---------------- ---------------
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 19,856,959 shares at
March 31, 2006 and 19,816,774 at December 31, 2005.............. 112,395 111,383
Retained earnings.................................................... 87,376 87,126
---------------- ---------------
199,771 198,509
---------------- ---------------
$ 310,727 $ 312,757
================ ===============
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
March 31,
-------------------------------
2006 2005
------------- ------------
Net sales.................................................... $ 132,918 $ 122,879
Cost of sales (including buying and distribution costs) ..... 79,765 74,751
------------- ------------
Gross margin................................................. 53,153 48,128
Selling, general and administrative expenses................. 52,060 45,844
Store pre-opening expenses................................... 624 161
------------- ------------
Income from operations....................................... 469 2,123
Interest expense........................................ 368 258
Interest (income) ...................................... (315) (197)
------------- ------------
Income before income taxes................................... 416 2,062
Provision for income taxes.............................. 166 810
------------- ------------
Net income .................................................. $ 250 $ 1,252
============= ============
Basic net income per share................................... $ 0.01 $ 0.06
============= ============
Diluted net income per share................................. $ 0.01 $ 0.06
============= ============
See accompanying notes to financial statements.
2
A.C. MOORE ARTS & CRAFTS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
(unaudited)
Three months ended
March 31,
---------------------------
2006 2005
----------- -----------
Cash flows from operating activities:
Net income.................................................................... $ 250 $ 1,252
Adjustments to reconcile net income to net cash (used in) operating activities:
Depreciation and amortization............................................ 2,873 2,629
Stock based compensation................................................. 699 --
Disposal of assets....................................................... -- 438
Provision for (benefit of) deferred income taxes, net.................... (714) 1,814
Changes in assets and liabilities:
Inventories.......................................................... (12,255) (2,693)
Prepaid expenses and other current assets............................ 1,354 410
Accounts payable, accrued payroll, payroll taxes and accrued expenses (794) 16,132)
Income taxes payable................................................. (2,157) (5,094)
Accrued lease liability.............................................. (62) 651
Other................................................................ 40 616
----------- -----------
Net cash (used in) operating activities.................................. (10,766) (16,109)
----------- -----------
Cash flows from investing activities:
Capital expenditures................................................. (4,523) (1,564)
Proceeds from maturation of marketable securities.................... 3,724 --
Investment in marketable securities.................................. -- (277)
----------- -----------
Cash flows (used in) investing activities................................ (799) (1,841)
----------- -----------
Cash flows from financing activities:
Exercise of stock options............................................ 208 193
Tax benefit of stock based compensation.............................. 105 --
Repayment of long-term debt.......................................... (643) (643)
----------- -----------
Net cash (used in) financing activities.................................. (330) (450)
----------- -----------
Net (decrease) in cash and cash equivalents.............................. (11,895) (18,400)
Cash and cash equivalents at beginning of period......................... 57,748 48,428
----------- -----------
Cash and cash equivalents at end of period............................... $ 45,853 $ 30,028
=========== ===========
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 113 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, 2005. 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. On January 1, 2006, the Company
adopted Statement of Financial Accounting Standards ("SFAS") No. 123(R),
"Share-Based Payment."
(2) STOCK-BASED COMPENSATION
The Company has two stock option plans under which the Company may grant up to
3,500,000 shares of common stock. Stock options expire ten years from the date
of grant and vest ratably over a three-year period. Shares available for future
grants under the plans amounted to 641,689 at March 31, 2006.
On January 1, 2006 the Company adopted SFAS No. 123(R), "Share-Based Payment"
requiring the recognition of compensation expense in the Consolidated Statement
of Income related to the fair value of its employee share-based options. SFAS
No. 123(R) revises SFAS No. 123, "Accounting for Stock-Based Compensation" and
supercedes APB Opinion No. 25, "Accounting for Stock Issued to Employees." SFAS
No. 123(R) is supplemented by SEC Staff Accounting Bulletin ("SAB") No. 107. SAB
No. 107 expresses the SEC staff's views regarding the interaction between SFAS
No. 123(R) and certain SEC rules and regulations including the valuation of
share-based payment arrangements.
The Company will recognize the cost of all employee stock options on a
straight-line attribution basis over their respective vesting periods, net of
estimated forfeitures. The Company has selected the modified prospective method
of transition; accordingly, prior periods have not been restated. Prior to
adopting SFAS No. 123(R), the Company applied APB Opinion No. 25, and related
interpretations in accounting for its stock-based compensation plans. Subsequent
to the Company's initial public offering in 1997, all employee stock options
were granted at the grant date market price. Accordingly, no compensation cost
was recognized for stock option grants. Under the modified prospective method,
compensation expense will be recorded for the unvested portion of previously
issued awards that remain outstanding at January 1, 2006 using the same estimate
of the grant date fair value and the same attribution method used to determine
the pro forma disclosure under SFAS No. 123.
4
The Company determines fair value of such awards using the Black-Scholes options
pricing model with the following weighted-average assumptions:
2005 2004 2003
-------- -------- --------
Average fair value of options granted........... $9.79 $12.99 $11.15
Risk free interest rate......................... 4.4% 3.8% 3.2%
Dividend yield.................................. -- -- --
Average expected life........................... 5.0 yrs 4.9 yrs 4.5 yrs
Expected stock price volatility................. 38.9% 54.9% 56.0%
Expected volatilities were based on a blend of historical and implied
volatilities of the Company's common stock for 2005 and on historical
volatilities for 2004 and 2003; the expected life represents the weighted
average period of time that options granted are expected to be outstanding
giving consideration to vesting schedules and our historical exercise patterns;
and the risk-free rate is based on the U.S. Treasury yield curve in effect at
the time of grant for periods corresponding with the expected life of the
option.
The Company recognized share-based compensation expense of $699,000 in the first
quarter of 2006 as a component of selling, general and administrative expense.
The Company also recognized a deferred tax asset of $258,000. The effect on net
income was $441,000, or $.02 per diluted share.
Prior to January 1, 2006, the Company accounted for stock-based awards to
employees using the intrinsic value method in accordance with APB Opinion No.
25, "Accounting for Stock Issued to Employees." The following table illustrates
the effect on first-quarter 2005 net income and earnings per share if the
Company had applied the fair value recognition provisions of SFAS No. 123, as
amended by SFAS No. 148:
THREE MONTHS ENDED MARCH 31, 2005
--------------------------------------------
(in thousands except per share data)
Stock-Based
As Reported Compensation Cost Pro Forma
----------- ----------------- ----------
Income from operations............ $ 2,123 $ 781 $ 1,342
Income before income taxes........ 2,062 781 1,281
Net Income........................ 1,252 474 778
Basic net income per share........ $ 0.06 $ 0.02 $ 0.04
Diluted net income per share...... $ 0.06 $ 0.02 $ 0.04
Activity in the Company's stock option plans for the first quarter of 2006 was
as follows:
Weighted
Average
Outstanding at beginning of year Options Exercise Price
--------- --------------
Activity: 1,485,067 $ 16.87
Granted -- --
Forfeited 4,529 21.54
Exercised 40,185 5.18
--------- ----------
Outstanding at end of period 1,440,353 $ 17.28
========= ==========
The aggregate intrinsic value of stock options outstanding at March 31, 2006 was
$6.2 million, all of which relates to vested awards. Intrinsic value for stock
options is calculated based on the exercise price of the underlying awards and
the quoted price of the Company's common stock as of the reporting date where
there is positive value. The total market value at date of exercise in excess
of grant price of options exercised during the first quarter of 2006 was
$449,000.
5
As of March 31, 2006, there was $2.7 million of total unrecognized compensation
cost related to nonvested share-based compensation arrangements granted under
the Company's stock options plans. That cost is expected to be recognized over
the next 29 months.
The following table summarizes information about stock options outstanding at
March 31, 2006.
STOCK OPTIONS OUTSTANDING STOCK OPTIONS EXERCISABLE
------------------------------------------------ ------------------------------
WEIGHTED AVERAGE WEIGHTED WEIGHTED
RANGE OF REMAINING LIFE AVERAGE AVERAGE
EXERCISE PRICES SHARES (YEARS) EXERCISE PRICE SHARES EXERCISE PRICE
--------------- --------- ---------------- -------------- --------- --------------
2.88-4.50 321,611 3.1 $ 3.77 321,611 $ 3.77
7.69-8.32 141,271 4.2 8.10 141,271 8.10
19.11-21.95 452,161 7.3 20.36 319,571 19.70
23.51-27.15 525,310 8.3 25.37 200,111 26.68
--------- ---- ------- ------- ---------
1,440,353 6.4 $ 16.97 982,564 $ 14.24
========= ==== ======= ======= =========
(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 month periods
ended March 31, 2006 and 2005 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.
6
(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 $26.1 million and $26.7
million was outstanding at March 31, 2006 and December 31, 2005, respectively.
The mortgages are secured by land, building, and equipment. Of the original
$30.0 million in mortgages, $22.5 million ($19.8 million at March 31, 2006) is
repayable over 15 years and $7.5 million ($6.3 million at March 31, 2006) is
repayable over 7 years. Monthly payments are $214,000. 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 March 31, 2006 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 its 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.
(10) INCOME TAXES
The company's tax provision rate for the first quarter of 2006 was 39.9%. This
tax provision is the result of an expected income tax rate 38.0% for the year
ended December 31, 2006 plus the expected impact of accounting for incentive
stock options (ISOs) under SFAS No. 123(R). Tax benefits relating to ISOs are
recognized in future periods when and if disqualifying dispositions occur. The
effective tax rate was 39.3% for the three months ended March 31, 2005.
7
(11) EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per
share:
THREE MONTHS ENDED
MARCH 31,
---------------------------
2006 2005
---------- ---------
(in thousands except per share data)
Net income.................................... $ 250 $ 1,252
======== =========
Weighted average shares:
Basic.................................... 19,838 19,669
Incremental shares from assumed
exercise of stock options.............. 232 540
-------- ---------
Diluted.................................. 20,070 20,209
======== =========
Basic net income per share.................... $ 0.01 $ 0.06
======== =========
Diluted net income per share.................. $ 0.01 $ 0.06
======== =========
Stock options excluded from calculation
because exercise price was greater than
market price at reporting date........... 977 15
-------- ---------
8
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 the adoption of SFAS
No. 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 costs associated with a change in
senior management 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 "Item 1A. Risk
Factors" in our Annual Report on Form 10-K for the year ended December 31, 2005
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.
CHANGE IN ACCOUNTING: STOCK-BASED COMPENSATION
On January 1, 2006, we adopted SFAS No. 123(R), "Share-Based Payment" ("SFAS No.
123(R)") requiring the recognition of compensation expense in the consolidated
statement of income related to the fair value of our employee share-based
options. SFAS No. 123(R) revises SFAS No. 123, "Accounting for Stock-Based
Compensation" and supercedes APB Opinion No. 25, "Accounting for Stock Issued to
Employees" ("APB Opinion No. 25"). SFAS No. 123(R) is supplemented by SEC Staff
Accounting Bulletin (SAB") No. 107. SAB No. 107 expresses the SEC staff's views
regarding the interaction between SFAS No. 123(R) and certain SEC rules and
regulations including the valuation of share-based payment arrangements.
We have two stock option plans under which we may grant up to 3,500,000 shares
of common stock. Stock options expire ten years from the date of grant and vest
ratably over a three-year period. Shares available for future grants under the
plans amounted to 641,689 at March 31, 2006.
9
SFAS No. 123(R) requires us to measure compensation cost for all outstanding
unvested share-based awards at fair value and recognize compensation over the
service period for awards expected to vest. The estimation of stock awards that
will ultimately vest requires judgment, and to the extent actual results differ
from our estimates, such amounts will be recorded as a cumulative adjustment in
the period estimates are revised. We consider many factors when estimating
expected forfeitures, including types of awards, employee class and historical
experience. Actual results may differ substantially from these estimates.
We will recognize the cost of all employee stock options on a straight-line
attribution basis over their respective vesting periods, net of estimated
forfeitures. We have selected the modified prospective method of transition;
accordingly, prior periods have not been restated. Prior to adopting SFAS No.
123(R), we applied APB Opinion No. 25, and related interpretations in accounting
for our stock-based compensation plans. Subsequent to our initial public
offering in 1997, all employee stock options were granted at the grant date
market price. Accordingly, no compensation cost was recognized for stock option
grants. Under the modified prospective method, compensation expense will be
recorded for the unvested portion of previously issued awards that remain
outstanding at January 1, 2006 using the same estimate of the grant date fair
value and the same attribution method used to determine the pro forma disclosure
under SFAS No. 123.
We recognized share-based compensation expense of $699,000 in the first quarter
of 2006 as a component of selling, general and administrative expense. We also
recognized a deferred tax asset of $258,000. The effect on net income was
$441,000, or $.02 per diluted share.
Prior to January 1, 2006, we accounted for stock-based awards to employees using
the intrinsic value method in accordance with APB Opinion No. 25. The following
table illustrates the effect on first-quarter 2005 net income and earnings per
share if we had applied the fair value recognition provisions of SFAS No. 123,
as amended by SFAS No. 148:
THREE MONTHS ENDED MARCH 31, 2005
--------------------------------------------
(in thousands except per share data)
Stock-Based
As Reported Compensation Cost Pro Forma
----------- ----------------- ----------
Income from operations........ $ 2,123 $ 781 $ 1,342
Income before income taxes.... 2,062 781 1,281
Net income.................... 1,252 474 778
Basic net income per share.... $ 0.06 $ 0.02 $ 0.04
Diluted net income per share.. $ 0.06 $ 0.02 $ 0.04
As of March 31, 2006, there was $2.7 million of total unrecognized compensation
cost related to nonvested share-based compensation arrangements granted under
our stock option plans. That cost is expected to be recognized over the next 29
months.
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
MARCH 31,
---------------------
2006 2005
------ ------
Net sales........................................ 100.0% 100.0%
Cost of sales.................................... 60.0 60.9
----- -----
Gross margin..................................... 40.0 39.1
Selling, general and administrative expenses..... 39.2 37.3
Store pre-opening expenses....................... 0.5 0.1
----- -----
Income from operations........................... 0.3 1.7
Net interest (income) expense.................... 0.0 0.0
----- -----
Income before income taxes....................... 0.3 1.7
Provision for income taxes....................... 0.2 0.7
----- -----
Net income....................................... 0.1% 1.0%
===== =====
Number of stores open at end of period........... 113 96
THREE MONTHS ENDED MARCH 31, 2006 COMPARED TO THREE MONTHS ENDED MARCH 31, 2005
NET SALES. Net sales increased $10.0 million or 8.2% to $132.9 million in the
three months ended March 31, 2006 from $122.9 million in the comparable 2005
period. This increase is comprised of (i) net sales of $1.5 million from four
stores opened in 2006, (ii) net sales of $10.7 million from stores opened in
2005 not included in the comparable store base, and (iii) a comparable store
sales decrease of $2.2 million or 1.8%. For the three months ended March 31,
2006, customer transactions in comparable stores were down 0.7% and the average
sale decreased by 1.1% compared with the same period in 2005. 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.
These yarn sales were $8.2 million below last year in comparable stores.
Excluding yarn, the performance of other merchandise categories including
jewelry making, seasonal and basic crafts increased by almost 6.0% in comparable
stores.
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 40.0% for the three month period ended March 31,
2006, and 39.1% for the three months ended March 31, 2005. The mix of
merchandise sold increased margins by 0.4% and the improved productivity in our
warehouse increased margins by 0.5% as a result of a reduction in our
distribution costs.
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.
11
Selling, general and administrative expenses, as a percent of sales, increased
1.9% in the three months ended March 31, 2006 to 39.2% from 37.3% in the three
months ended March 31, 2005. Advertising costs increased by 1.3% due to three
factors: a) we ran a circular in the first quarter of 2006 due to the timing of
the Easter holiday whereas we ran a circular for the Easter holiday in the
second quarter of 2005; b) we ran several marketing tests in the first quarter
of 2006; and c) the impact of a comparable store sales decrease. In 2006 we
commenced expensing stock-based compensation as required by SFAS No. 123(R).
This expense totaling $699,000 increased selling, general and administrative
expenses by 0.5%.
STORE PRE-OPENING EXPENSES. We expense store pre-opening expenses as they are
incurred which would include rent holidays prior to a store opening. Pre-opening
expenses for the four stores we opened in the first quarter of 2006, and lease
costs related to the new stores which we will open later in 2006 amounted to
$624,000. In the first quarter of 2005, we incurred store pre-opening expenses
of $161,000 related to the one store opened in that quarter and lease costs
related to stores opened later in 2005.
NET INTEREST EXPENSE. In the first quarter of 2006, we had net interest expense
of $53,000 compared with net interest expense of $61,000 for the same period in
2005.
INCOME TAXES. Our tax provision rate for the first quarter of 2006 was 39.9%.
This tax provision is the result of an expected income tax rate 38.0% for the
year ended December 31, 2006 plus the expected impact of accounting for
incentive stock options ("ISOs") under SFAS No. 123(R). Tax benefits relating to
ISOs are recognized in future periods when and if disqualifying dispositions
occur. The effective tax rate was 39.3% for the three months ended March 31,
2005.
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 and the net proceeds we received 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 March 31, 2006 and December 31, 2005, our working capital was $157.4 million
and $158.6 million, respectively. Cash used in operations was $10.8 million for
the three months ended March 31, 2006 principally as a result of an increase in
inventories of $12.3 million to support new stores.
Net cash used in investing activities during the three months ended March 31,
2006 was $799,000, including $4.5 million for capital expenditures offset by
proceeds from maturation of marketable securities of $3.7 million. In 2006, we
expect to spend approximately $19.0 million on capital expenditures, which
includes $11.0 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 $11.0 million in new store capital
expenditures, we expect to receive $1.5 million back from landlords.
12
We have two mortgage agreements with Wachovia Bank on our new corporate offices
and distribution center of which $26.1 million was outstanding at March 31,
2006. The mortgages are secured by land, building and equipment. Of the original
$30.0 million in mortgages, $22.5 million ($19.8 million as of March 31, 2006)
is repayable over 15 years and $7.5 million ($6.3 million as of March 31, 2006)
is repayable over 7 years. Monthly payments are $214,000. 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 March 31, 2006,
we were in compliance with these agreements.
We currently have a line of credit with Wachovia Bank. On February 22, 2006, we
amended our line of credit agreement. The purpose of this amendment was to
increase the aggregate amount available under the line of credit from $25.0
million to $35.0 million and to extend the expiration date from May 1, 2006 to
May 31, 2007. Borrowings under this line will bear interest at LIBOR plus 95
basis points and are subject to the same covenants as the mortgages described
above. At March 31, 2006, there were no borrowings outstanding under this
agreement.
We believe the cash generated from operations during the year 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
Except as described below, 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, 2005. 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;
o stock-based compensation under SFAS No. 123(R);
o income taxes; and
o other estimates.
Other than accounting for stock-based compensation under SFAS No. 123(R), which
is described below, the foregoing critical accounting estimates are more fully
described in our Annual Report on Form 10-K for the year ended December 31,
2005. We believe that there have been no significant changes during the three
months ended March 31, 2006 to the items that we disclosed as our critical
accounting policies and estimates in our Annual Report Form 10-K for the year
ended December 31, 2005, except as described below.
13
STOCK-BASED COMPENSATION EXPENSE UNDER SFAS NO. 123(R)
Effective January 1, 2006, we account for stock-based compensation in
accordance with the provisions of SFAS No. 123(R). Under the fair value
recognition provisions of SFAS No. 123(R), stock-based compensation cost is
estimated at the grant date based on the fair value of the award and is
recognized as expense ratably over the service period for awards expected to
vest. Determining the appropriate fair value model and calculating the fair
value of stock-based awards requires judgment, including estimating stock price
volatility, forfeiture rates and expected lives. For more discussion of
stock-based compensation under SFAS No. 123(R), see Note 2 in our notes to
consolidated financial statements contained in this Quarterly Report on
Form 10-Q.
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
March 31, 2006 approximated carrying value. We had no borrowings outstanding
under our line of credit at March 31, 2006. 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 March 31, 2006, the impact of a hypothetical increase or
decrease in interest rates of 10% compared with the rates in effect at March 31,
2006 would result in an increase or decrease in our interest expense of $151,000
annually, and an increase or decrease in our interest income of $130,000
annually.
ITEM 4. CONTROLS AND PROCEDURES
We carried out an evaluation, with the participation of our principal executive
officer and principal financial officer, of the effectiveness of our disclosure
controls and procedures as of March 31, 2006. Based on this evaluation, our
principal executive officer and principal financial officer concluded that, as
of March 31, 2006, our disclosure controls and procedures, as defined in Rule
13a-15(e), were effective at the reasonable assurance level, to ensure that (i)
information required to be disclosed by the issuer in the reports that it files
or submits under the Securities Exchange Act of 1934 (the "Exchange Act") is
recorded, processed, summarized and reported within the time periods specified
in the Securities and Exchange Commission's rules and forms and (ii) information
required to be disclosed by an issuer in the reports that it files or submits
under the Exchange Act is accumulated and communicated to the issuer's
management including its principal executive and principal financial officers,
or persons performing similar functions, as appropriate to allow timely
decisions regarding required disclosure.
Our principal executive officer and principal financial officer note that during
the quarter ended March 31, 2006, we did not timely file a Current Report on
Form 8-K to disclose the adoption of our 2006 bonus plan on February 20, 2006.
Notwithstanding the missed Form 8-K filing, we believe that our disclosure
controls and procedures are effective. Information regarding the adoption of our
2006 bonus plan is contained in this quarterly report on Form 10-Q.
Our management carried out an evaluation, with the participation of our
principal executive officer and principal financial officer, of changes in our
internal control over financial reporting, as defined in Exchange Act Rule
13a-15(f). Based on this evaluation, our management determined that no change in
our internal control over financial reporting occurred during the first quarter
of 2006 that has materially affected, or is reasonably likely to materially
affect, our internal control over financial reporting.
14
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Not Applicable.
ITEM 1A. RISK FACTORS
In addition to the other information set forth in this report, you should
carefully consider the factors discussed in Part I, "Item 1A. Risk Factors" in
our Annual Report on Form 10-K for the year ended December 31, 2005, which could
materially affect our business, financial condition or future results. The risks
described in our Annual Report on Form 10-K for the year ended December 31, 2005
are not the only risks facing our company. Additional risks and uncertainties
not currently known to us or that we currently deem to be immaterial also may
materially adversely affect our business, financial condition and/or operating
results.
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
2006 BONUS PLAN
On February 20, 2006, our Compensation Committee approved the 2006 Bonus Plan,
which is not set forth in a written agreement, for certain management-level
employees. Under the 2006 Bonus Plan, if we achieve certain pre-tax profit
targets approved by our Compensation Committee, we will pay bonuses to eligible
participants at pre-determined amounts which increase as our pre-tax profit
increases. The amounts paid to eligible participants vary based upon that
participant's job responsibility. The pre-tax profit targets approved by our
Compensation Committee are based on our net income.
2006 ANNUAL MEETING OF SHAREHOLDERS
Our 2006 Annual Meeting of Shareholders (the "2006 Annual Meeting") will be held
on August 3, 2006, which date is more than 30 calendar days from the date on
which the 2005 Annual Meeting of Shareholders took place. The proxy rules
promulgated by the Securities and Exchange Commission under the Exchange Act
require us to inform shareholders of such change in date in addition to the new
deadlines for shareholder proposals in our earliest possible quarterly report on
Form 10-Q. Accordingly, we hereby notify our shareholders that shareholder
proposals for our 2006 Annual Meeting must be submitted to us by June 1, 2006 to
receive consideration for inclusion in our proxy statement relating to the 2006
Annual Meeting. Any such proposal must also comply with the proxy rules under
the Exchange Act, including Rule 14a-8.
15
In addition, shareholders are notified that the deadline for providing us timely
notice of any shareholder proposal to be submitted outside of the Rule 14a-8
process for consideration at our 2006 Annual Meeting is June 1, 2006. As to all
such matters which we do not have notice on or prior to June 1, 2006,
discretionary authority shall be granted to the persons designated in our proxy
statement related to our 2006 Annual Meeting to vote on such matters.
Shareholder proposals must be in writing, include the information required by
our bylaws and be sent either by personal delivery, nationally-recognized
express mail or United States mail, postage prepaid to A.C. Moore Arts & Crafts,
Inc., 130 A.C. Moore Drive, Berlin, New Jersey 08009, Attention: Secretary of
the Company. All late or nonconforming proposals will be rejected. Our bylaws
are available, at no cost, at the SEC's website, www.sec.gov, as Exhibit 3.3 to
our Form 8-K filed on August 27, 2004 or upon the shareholder's written request
to Leslie H. Gordon, A.C. Moore Arts & Crafts, Inc., 130 A.C. Moore Drive,
Berlin, New Jersey 08009.
ITEM 6. EXHIBITS
10.1+ Description of Directors and Named Executive Officers
Compensation.
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.
--------------------------------------------------------------------------------
+ Management Contract or Compensatory Plan or Arrangement.
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: May 9, 2006 By: /s/ John E. Parker
----------------------------------------------------
John E. Parker
Chief Executive Officer (duly authorized officer and
principal executive officer)
Date: May 9, 2006 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
----------- -----------
10.1+ Description of Directors and Named Executive Officers
Compensation.
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.
--------------------------------------------------------------------------------
+ Management Contract or Compensatory Plan or Arrangement.