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, 2005
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to ____________
Commission File Number: 000-23157
A.C. MOORE ARTS & CRAFTS, INC.
--------------------------------------------------
(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
---------------------------------------------------
(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 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 APRIL 29, 2005
-------------------------- -----------------------------
Common Stock, no par value 19,729,832
A.C. MOORE ARTS & CRAFTS, INC.
TABLE OF CONTENTS
PART I FINANCIAL INFORMATION............................................................................... 1
ITEM 1. FINANCIAL STATEMENTS....................................................................... 1
Consolidated Balance Sheets as of March 31, 2005 and December 31, 2004................. 1
Consolidated Statements of Income for the three months
ended March 31, 2005 and 2004......................................................... 2
Consolidated Statements of Cash Flows for the three months
ended March 31, 2005 and 2004......................................................... 3
Notes to Consolidated Financial Statements............................................. 4
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS...... 8
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK................................. 12
ITEM 4. CONTROLS AND PROCEDURES.................................................................... 12
PART II OTHER INFORMATION.................................................................................. 13
ITEM 1. LEGAL PROCEEDINGS.......................................................................... 13
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS................................ 13
ITEM 3. DEFAULTS UPON SENIOR SECURITIES............................................................ 13
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS........................................ 13
ITEM 5. OTHER INFORMATION.......................................................................... 13
ITEM 6. EXHIBITS................................................................................... 13
SIGNATURES................................................................................................. 14
i
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
A.C. MOORE ARTS & CRAFTS, INC.
CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
MARCH 31, DECEMBER 31,
2005 2004
------------ ------------
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 30,028 $ 48,428
Marketable securities 17,835 17,558
Inventories 145,525 142,832
Prepaid expenses and other current assets 7,245 7,655
Prepaid income taxes 1,770 --
Deferred tax asset 586 2,673
------------ ------------
202,989 219,146
Non-current assets:
Property and equipment, net 81,716 83,219
Other assets 1,131 1,747
------------ ------------
$ 285,836 $ 304,112
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 2,571 $ 2,571
Trade accounts payable 36,822 50,256
Accrued payroll and payroll taxes 3,062 3,706
Accrued expenses 6,519 8,573
Income taxes payable -- 3,626
------------ ------------
48,974 68,732
------------ ------------
Non-current liabilities:
Long-term debt 26,143 26,786
Deferred tax liability 8,311 8,584
Accrued lease liability 14,446 13,795
------------ ------------
48,900 49,165
------------ ------------
97,874 117,897
------------ ------------
Shareholders' Equity:
Preferred stock, no par value, 10,000,000 shares authorized;
none issued -- --
Common stock, no par value, 40,000,000 shares authorized;
issued and outstanding 19,687,982 shares at March 31, 2005
and 19,655,100 at December 31, 2004 109,626 109,131
Retained earnings 78,336 77,084
------------ ------------
187,962 186,215
------------ ------------
$ 285,836 $ 304,112
============ ============
See accompanying notes to financial statements.
1
A.C. MOORE ARTS & CRAFTS, INC.
CONSOLIDATED STATEMENTS OF INCOME
(dollars in thousands, except per share data)
(unaudited)
Three months ended
March 31,
---------------------------
2005 2004
------------ ------------
Net sales $ 122,879 $ 111,469
Cost of sales (including buying and distribution costs) 74,751 69,539
------------ ------------
Gross margin 48,128 41,930
Selling, general and administrative expenses 45,844 39,464
Store pre-opening expenses 161 588
------------ ------------
Income from operations 2,123 1,878
Interest expense 258 10
Interest (income) (197) (130)
------------ ------------
Income before income taxes 2,062 1,998
Provision for income taxes 810 770
------------ ------------
Net income $ 1,252 $ 1,228
============ ============
Basic net income per share $ 0.06 $ 0.06
============ ============
Diluted net income per share $ 0.06 $ 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,
----------------------------
2005 2004
------------ ------------
Cash flows from operating activities:
Net income $ 1,252 $ 1,228
Adjustments to reconcile net income to net cash
used in operating activities:
Depreciation and amortization 2,629 1,990
Disposal of assets 438 --
Changes in assets and liabilities:
Inventories (2,693) (3,131)
Prepaid expenses and other current assets 410 (406)
Accounts payable, accrued payroll,
payroll taxes and accrued expenses (16,132) 1,178
Income taxes (3,280) (5,140)
Deferred lease liability 651 94
Other 616 10
------------ ------------
Net cash used in operating activities (16,109) (4,177)
------------ ------------
Cash flows from investing activities:
Capital expenditures (1,564) (14,022)
Net proceeds (investment) in marketable securities (277) 308
------------ ------------
Cash flows used in investing activities (1,841) (13,714)
------------ ------------
Cash flows from financing activities:
Exercise of stock options 193 141
Increase in long-term debt -- 10,000
Repayment of long-term debt (643) (249)
------------ ------------
Net cash provided by (used in) financing activities (450) 9,892
------------ ------------
Net decrease in cash (18,400) (7,999)
Cash and cash equivalents at beginning of period 48,428 43,700
------------ ------------
Cash and cash equivalents at end of period $ 30,028 $ 35,701
============ ============
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 96 retail stores selling arts and
crafts merchandise. The stores are located throughout the eastern United States.
These financial statements have been prepared by management without audit and
should be read in conjunction with the consolidated financial statements and
notes thereto included in the Company's Annual Report on Form 10-K for the year
ended December 31, 2004. Due to the seasonality of the Company's business, the
results for the interim periods are not necessarily indicative of the results
for the year. The accompanying consolidated financial statements reflect, in the
opinion of management, all adjustments necessary for a fair 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 month periods ended March 31, 2005 and 2004 include provisions
for shrinkage, capitalized buying, warehousing and distribution costs related to
inventory, and markdowns of merchandise inventories. Actual results could differ
materially from those estimates.
(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) INVENTORIES
Inventories, which consist of general consumer merchandise held for sale, are
stated at the lower of cost or market. The cost of store inventories is
determined by the retail inventory method. Warehouse inventories are stated at
cost determined on a first-in, first-out basis. The Company includes as
inventoriable costs certain indirect costs, such as purchasing and receiving
costs, inbound freight, duties related to import purchases, internal transfer
costs and warehousing costs. The Company records vendor monies which support its
advertising programs as a reduction in the cost of inventory, and are recognized
as a reduction of cost of goods sold when the inventory is sold. The Company
adopted this accounting effective January 1, 2004.
(5) 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.
4
(6) LONG-TERM DEBT
The Company maintains two mortgage agreements with Wachovia Bank on its new
corporate offices and distribution center of which $28.7 million and $29.4
million was outstanding at March 31, 2005 and December 31, 2004, respectively.
The mortgages are secured by land, building, and equipment. Of the original
$30.0 million in mortgages, $22.5 million 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. 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, 2005
the Company was in compliance with these agreements.
(7) 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.
(8) 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.
5
(9) EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per
share:
THREE MONTHS ENDED
MARCH 31,
----------------------------
2005 2004
------------ ------------
(in thousands, except
per share data)
Net Income ............................. $ 1,252 $ 1,228
============ ============
Weighted average shares:
Basic ................................ 19,669 19,370
Incremental shares from assumed
exercise of stock options ........... 540 673
------------ ------------
Diluted .............................. 20,209 20,043
============ ============
Basic net income per share ............. $ 0.06 $ 0.06
============ ============
Diluted net income per share ........... $ 0.06 $ 0.06
============ ============
Stock options excluded from calculation
because exercise price was greater than
average market price .................. 15 317
------------ ------------
(10) 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:
6
THREE MONTHS ENDED
MARCH 31,
---------------------------
2005 2004
------------ ------------
Net income.................. As reported $ 1,252,000 $ 1,228,000
Compensation cost, net 474,000 438,000
Pro forma 778,000 790,000
Basic earnings per share.... As reported $ 0.06 $ 0.06
Pro forma 0.04 0.04
Diluted earnings per share.. As reported $ 0.06 $ 0.06
Pro forma 0.04 0.04
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:
2005 2004 2003 2002
-------- -------- -------- --------
Average fair value
of options granted .............. $ 13.27 $ 11.15 $ 12.99 $ 10.08
Risk free interest rate .......... 3.7% 3.8% 3.2% 4.1%
Dividend yield ................... -- -- -- --
Average expected life ............ 4.9 yrs 4.9 yrs 4.5 yrs 7 yrs
Expected stock price volatility... 52.8% 54.9% 56.0% 45.2%
On December 16, 2004, the Financial Accounting Standards Board (FASB) issued
FASB Statement No. 123(R), Share-Based Payment (FAS 123(R)). FAS 123(R) revised
FASB Statement No. 123, Accounting for Stock-Based Compensation (FAS 123) and
requires companies to expense the fair value of employee stock options and other
forms of stock-based compensation. Companies must adopt FAS 123(R) no later than
the beginning of their next fiscal year that begins after June 15, 2005.
Accordingly, the Company will be required to adopt FAS 123(R) in its first
quarter of fiscal 2006.
Previously, in complying with FAS 123, the Company disclosed the value of stock
options granted and its pro forma impact on our net income in a footnote to our
financial statements. The Company is currently considering which transition
method it expects to select in adopting FAS 123(R), and whether this new
accounting requirement will result in any changes in compensation strategies.
Information contained in the Company's footnotes provide the impact on pro forma
net income for past financial statements. The impact of the adoption of FAS
123(R) on future financial statements is expected to be material.
7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
The following discussion and analysis contains certain forward-looking
statements. These forward-looking statements do not constitute historical facts
and involve risks and uncertainties. Actual results could differ materially from
those referred to in the forward-looking statements due to a number of factors,
including, but not limited to, the following: the impact of the adoption of EITF
Issue 02-16 Accounting by a Customer (including a Reseller) for Cash
Consideration Received from a Vendor, the impact of the adoption of FAS 123(R),
customer demand and trends in the arts and crafts industry, 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, the
uncertainty of the final resolution of the insurance claim relating to the roof
collapse and our ability to maintain an effective system of internal control
over financial reporting. For additional information concerning factors that
could cause actual results to differ materially from the information contained
herein, reference is made to the information under the heading "Cautionary
Statement Relating to Forward-Looking Statements" in our annual report on Form
10-K as filed with the Securities and Exchange Commission.
Due to the importance of our peak selling season, which includes Fall/Halloween,
Thanksgiving and Christmas, the fourth quarter has historically contributed, and
we expect it will continue to contribute, disproportionately to our
profitability for the entire year. As a result, our quarterly results of
operations may fluctuate. In addition, results of a period shorter than a full
year may not be indicative of results expected for the entire year.
Our quarterly results of operations also may fluctuate based upon such factors
as the length of holiday seasons, the date on which holidays fall, the number
and timing of new store openings, the amount of store pre-opening expenses, the
amount of net sales contributed by new and existing stores, the mix of products
sold, the amount of sales returns, the timing and level of markdowns and other
competitive factors.
On July 27, 2004 a section of the roof on our Blackwood, New Jersey warehouse
and corporate headquarters facility collapsed. At the time of the incident, we
had been in the process of moving into a new distribution center in Winslow
Township, New Jersey. The effort of recovering from the roof collapse delayed
our ability to bring our new facility up to the level of operation that we had
anticipated. The roof collapse also delayed our ability to achieve the
productivity we anticipated in the new facility in 2004. During the first
quarter of 2005, we significantly increased the productivity of the distribution
center and we are now bringing this new facility up to the level of productivity
we had expected.
We insure our warehouse inventory at selling value. Included in our results is
an estimate of the insurance claim recovery for lost merchandise and other
expenses related to the roof collapse of $3.2 million, which includes estimated
gross margin of $1.3 million. This $1.3 million was recorded as a reduction in
the cost of goods sold during the third quarter of 2004.
On December 16, 2004, the Financial Accounting Standards Board (FASB) issued
FASB Statement No. 123(R), Share-Based Payment (FAS 123(R)). FAS 123(R) revised
FASB Statement No. 123, Accounting for Stock-Based Compensation (FAS 123) and
requires companies to expense the fair value of employee stock options and other
forms of stock-based compensation. Companies must adopt FAS 123(R) no later than
the beginning of their next fiscal year that begins after June 15, 2005.
Accordingly, we will be
8
required to adopt FAS 123(R) in our first quarter of fiscal 2006. Previously, in
complying with FAS 123, we disclosed the value of stock options granted and its
pro forma impact on our net income in a footnote to our financial statements. We
are currently considering which transition method we expect to select in
adopting FAS 123(R), and whether this new accounting requirement will result in
any changes in compensation strategies. Information contained in our footnotes
provide the impact on pro forma net income for past financial statements. The
impact of the adoption of FAS 123(R) on future financial statements is expected
to be material.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, selected statement of
operations data expressed as a percentage of net sales and the number of stores
open at the end of each such period:
THREE MONTHS ENDED
MARCH 31,
--------------------
2005 2004
-------- --------
Net sales ........................................ 100.0% 100.0%
Cost of sales .................................... 60.9 62.4
-------- --------
Gross margin ..................................... 39.1 37.6
Selling, general and administrative expenses...... 37.3 35.4
Store pre-opening expenses ....................... 0.1 0.5
-------- --------
Income from operations ........................... 1.7 1.7
Net interest (income) expense .................... 0.0 (0.1)
-------- --------
Income before income taxes ....................... 1.7 1.8
Income tax expense ............................... 0.7 0.7
-------- --------
Net income ....................................... 1.0% 1.1%
======== ========
Number of stores open at end of period ............... 96 84
Three Months Ended March 31, 2005 Compared to Three Months Ended March 31, 2004
NET SALES. Net sales increased $11.4 million or 10.2% to $122.9 million in the
three months ended March 31, 2005 from $111.5 million in the comparable 2004
period. This increase is comprised of (i) net sales of $13.1 million from stores
opened in 2004 not included in the comparable store base, and (ii) a comparable
store sales decrease of $1.7 million or 1.6%. Sales during the three months
ended March 31, 2005 were significantly impacted by severe winter weather
conditions throughout our northern store base. Comparable store sales in our 21
southern stores increased by 9%. For the three months ended March 31, 2005,
customer transactions in comparable stores were down 2.2% compared with 2004 and
the average sale increased by 0.6%. Sales were 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 1.5% in the three months ended March 31, 2005,
to 39.1% from 37.6% in the three months ended March 31, 2004. The application of
EITF 02-16 relating to our accounting for vendor monies which support our
advertising programs on our gross margin resulted in an increase of 1.6% in
margin rate in the three months ended March 31, 2005
9
compared with the three months ended March 31 2004. The mix of merchandise sold
increased margins by 0.3% and additional distribution costs, comprised of costs
related to our old facility which was retained through March 31, 2005 and the
completion of the move to our new distribution center, reduced our margin by
0.4%.
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
1.9% in the three months ended March 31, 2005, to 37.3% from 35.4% in the three
months ended March 31, 2004. There was a 0.9% increase attributable to new
stores opened in 2004 that were not in the comparable store base which have
higher selling, general and administrative expenses as a percentage of sales
than existing stores. Selling, general and administrative costs increased by
1.0% in the comparable store base as a result of the decrease in comparable
store sales.
STORE PRE-OPENING EXPENSES. We expense store pre-opening expenses as they are
incurred which would include rent holidays prior to store opening. Pre-opening
expenses for the one store we relocated in the first quarter of 2005 and lease
costs related to the two new stores which will open in the second quarter
amounted to $161,000. In the first quarter of 2004, we incurred store
pre-opening expenses of $588,000 related to the three stores opened in that
quarter and lease costs related to stores opened in the second quarter.
NET INTEREST (INCOME). In the first quarter of 2005, we had net interest expense
of $61,000 compared with net interest income of $120,000 for the same period in
2004. The first quarter of 2005 includes $258,000 in interest expense related to
our mortgages on which interest expense commenced in August 2004.
INCOME TAXES. Our effective income tax rate was 39.3% for the three months ended
March 31, 2005 and 38.5% for the three months ended March 31, 2004. The increase
is due to tax changes in several of the states in which we operate.
LIQUIDITY AND CAPITAL RESOURCES
Our cash is used primarily for working capital to support inventory requirements
and capital expenditures, pre-opening expenses and beginning inventory for new
stores. In recent years, we have financed our operations and new store openings
primarily with cash from operations, the net proceeds we received from our
initial public offering in 1997 and from a secondary offering in 2002. In the
first half of 2004 we borrowed $30.0 million under two mortgage agreements we
have with Wachovia Bank to finance our new corporate offices and distribution
center.
At March 31, 2005 and December 31, 2004, our working capital was $154.0 million
and $150.4 million, respectively. Cash used in operations was $16.1 million for
the three months ended March 31, 2005 principally as a result of the seasonal
decrease in accounts payable and other accrued expenses of $16.1 million and
income tax payments of $3.3 million.
Net cash used in investing activities during the three months ended March 31,
2005 was $1.8 million, of which $1.6 million was for capital expenditures. In
2005, we expect to spend approximately $17.5 million on capital expenditures,
which includes $10.5 million for new store openings, and the remainder
10
for remodeling existing stores, upgrading systems in existing stores, warehouse
equipment and corporate systems development.
The Company maintains two mortgage agreements with Wachovia Bank on its new
corporate offices and distribution center of which $28.7 million was outstanding
at March 31, 2005. The mortgages are secured by land, building, and equipment.
Of the original $30.0 million in mortgages, $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 $8.0
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. 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, 2005
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 March 31, 2005 there were no borrowings outstanding under
this agreement.
We believe the cash generated from operations during the year, funds received
through the financing of the new distribution center and available borrowings
under the line of credit agreement will be sufficient to finance our working
capital and capital expenditure requirements for at least the next 12 months.
CRITICAL ACCOUNTING ESTIMATES
Our accounting policies are fully described in Note 1 of our notes to
consolidated financial statements included in our annual report on Form 10-K for
the year ended December 31, 2004. The preparation of financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions about future events that affect the amounts
reported in our consolidated financial statements and accompanying notes. Since
future events and their effects cannot be determined with absolute certainty,
actual results may differ from those estimates. Management makes adjustments to
its assumptions and judgments when facts and circumstances dictate. The amounts
currently estimated by us are subject to change if different assumptions as to
the outcome of future events were made. We evaluate our estimates and judgments
on an ongoing basis and predicate those estimates and judgments on historical
experience and on various other factors that 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 year ended December 31, 2004. During the
three months ended March 31, 2005, we did not make
11
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
March 31, 2005 approximated carrying value. We had no borrowings outstanding
under the line of credit at March 31, 2005. The interest rates on our mortgages
fluctuate with market rates and therefore the value of these financial
instruments will not be impacted by a change in interest rates. Based on the
amounts outstanding at March 31, 2005, the impact of a hypothetical increase or
decrease in interest rates of 10% compared with the rates in effect at March 31,
2005 would result in an increase or decrease in our interest expense of $110,000
annually, and an increase or decrease in our interest income of $81,000
annually.
ITEM 4. CONTROLS AND PROCEDURES
Our management, with the participation of our chief executive officer and chief
financial officer, evaluated the effectiveness of our disclosure controls and
procedures, as defined in Rule 13a-15(e) under the Securities Exchange Act of
1934 ("Exchange Act"), as of the end of the period covered by this report. Based
on that evaluation, our chief executive officer and chief financial officer
concluded that our disclosure controls and procedures were effective at the
reasonable assurance level to ensure that information required to be disclosed
by us in the reports that we file or submit under the Exchange Act are recorded,
processed, summarized and reported within the time periods specified in the
Securities and Exchange Commission's rules and forms.
During the quarter ended March 31, 2005, there has not occurred any change in
our internal control over financial reporting, as defined in Exchange Act Rule
13a-15(f), that has materially affected, or is reasonably likely to materially
affect, our internal control over financial reporting.
12
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
On February 21, 2005, the Compensation Committee of the Board of Directors
approved a discretionary bonus of $10,000 to Janet Parker, Executive Vice
President, Merchandising and Marketing, for services performed during 2004.
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.
13
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 2, 2005 By: /s/ John E. Parker
------------------------------------
John E. Parker
Chief Executive Officer
(duly authorized officer and
principal executive officer)
Date: May 2, 2005 By: /s/ Leslie H. Gordon
------------------------------------
Leslie H. Gordon
Executive Vice President and
Chief Financial Officer
(duly authorized officer and
principal financial officer)
14
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.