UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.
FORM 10-Q/A
(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, 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.
--------------------------------------------------
(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.)
500 University Court, Blackwood, NJ 08012
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(Address of principal executive offices) (Zip Code)
(856) 228-6700
-------------------------------
(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 MAY 6, 2004
-------------------------- --------------------------
Common Stock, no par value 19,458,892
EXPLANATORY NOTE
As previously disclosed in our Form 8-K filed on March 3, 2005 and in our Form
10-K for the year ended December 31, 2004, following a review of our
lease-related accounting policies, we determined that our method of accounting
for leasehold improvements funded by landlord incentives or allowances (tenant
improvement allowances) and our method of accounting for rent holidays were not
in accordance with accounting principles generally accepted in the United States
of America. As a result, we have restated, by means of our Annual Report on Form
10-K for the year ended December 31, 2004, filed on March 16, 2005, our
consolidated balance sheet at December 31, 2003, and our consolidated statements
of income, cash flows, and shareholders' equity for the years ended December 31,
2003 and 2002. The restatement also affected periods prior to 2002. Note 2 to
the financial statements included in our 2004 Form 10-K shows the impact of the
restatement adjustments to retained earnings as of January 1, 2002, to reflect
the impact of the restatement on periods prior to 2002. For information on the
impact of the restatement on the years 2001 and 2000, reference is made to Item
6. Selected Financial Data in our 2004 Form 10-K. Concurrently with the filing
of this Form 10-Q/A, we are filing quarterly reports on Form 10-Q/A for the
quarterly periods June 30, 2004 and September 30, 2004 to reflect restated
amounts for the second and third quarters of 2004 and the comparable interim
periods in 2003.
We have historically accounted for tenant improvement allowances as a reduction
of the property, plant and equipment account on our balance sheet, amortized the
allowances as a reduction to depreciation expense in our income statement and
reflected the cash received within investing activities in our statement of cash
flows. FASB Technical Bulletin 88-1 ("FTB 88-1"), "Issues Relating to Accounting
for Leases," requires these allowances to be recorded as deferred rent
liabilities on the consolidated balance sheets and amortized as a reduction to
rent expense on the income statement. In addition, the cash received by us
should have been recorded as a component of operating activities on our
consolidated statements of cash flows. Depreciation of the leasehold improvement
begins effective with the opening of the store as we have accounted for it in
the past. However, amortization of the landlord allowance commences on the date
we have the right to control the use of the leased property, which is consistent
with the recording of rent expense as described below. Previously, we had
commenced amortization on the date the store was opened.
We have historically recognized rent holiday periods on a straight-line basis
over the lease term commencing with the opening date for each store. The period
during which the store was being fixtured and stocked with merchandise was
excluded from the straight-line rent schedule. FASB Technical Bulletin 85-3
("FTB 85-3"), "Accounting for Operating Leases with Scheduled Rent Increases,"
states that rent holidays should be recognized on a straight-line basis over the
lease term, which commences on the date we have the right to control the use of
the leased property. For us, this is generally one to three months prior to a
store opening date. The amount of rent expensed prior to store opening will be
included in "Pre-opening expenses" on our consolidated statements of income.
This Amendment No. 1 on Form 10-Q/A to our quarterly report on Form 10-Q for the
quarter ended March 31, 2004 ("Original Filing"), initially filed with the
Securities and Exchange Commission ("SEC") on May 7, 2004, is being filed to
reflect restatements of our consolidated balance sheet at March 31, 2004 and our
consolidated statements of income and consolidated cash flows for the three
month periods ended March 31, 2004 and 2003 and the notes related thereto. For a
more detailed description of these restatements, see Note 2, "Restatement of
Financial Statements" to the accompanying consolidated financial statements and
the section entitled "Restatement" in Management's Discussion and Analysis of
Financial Condition and Results of Operations contained in this Form 10-Q/A.
For the convenience of the reader, this Form 10-Q/A includes the Original Filing
in its entirety. However, this Form 10-Q/A only amends and restates Items 1, 2,
3 and 4 of Part I of the Original Filing and
i
no other material information in the Original Filing is amended hereby. The
foregoing items have not been updated to reflect other events concerning our
business or financial condition occurring after the Original Filing or to modify
or update those disclosures affected by subsequent events. In addition, pursuant
to the rules of the SEC, Item 6 of Part II of the Original Filing has been
amended to contain currently-dated certifications from our Chief Executive
Officer and Chief Financial Officer, as required by Sections 302 and 906 of the
Sarbanes-Oxley Act of 2002. The certifications of our Chief Executive Officer
and Chief Financial Officer are attached to this Form 10-Q/A as Exhibits 31.1,
31.2 and 32, respectively.
ii
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, 2004 (Restated) and December 31, 2003.......1
Consolidated Statements of Income for the three months ended
March 31, 2004 and 2003 (Restated)......................................................2
Consolidated Statements of Cash Flows for the three month periods ended
March 31, 2004 and 2003 (Restated)......................................................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.................................13
Item 4. Controls and Procedures....................................................................14
PART II: OTHER INFORMATION
Item 1. Legal Proceedings..........................................................................15
Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of
Equity Securities..........................................................................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 and Reports on Form 8-K...........................................................15
SIGNATURES...............................................................................................16
iii
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
A.C. MOORE ARTS & CRAFTS, INC.
CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
March 31, December 31,
2004 2003
------------- -------------
(as restated,
See Note 2)
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 35,701 $ 43,700
Marketable securities 7,525 --
Inventories 124,624 121,493
Prepaid expenses and other current assets 3,368 2,962
------------- -------------
171,218 168,155
Marketable securities 6,299 14,132
Property and equipment, net 63,107 51,075
Other assets 1,807 1,801
------------- -------------
$ 242,431 $ 235,163
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of capital leases $ 255 $ 504
Trade accounts payable 35,281 33,558
Accrued payroll and payroll taxes 2,598 4,501
Accrued expenses 11,373 10,015
Income taxes payable 1,501 6,826
------------- -------------
51,008 55,404
------------- -------------
Long-term liabilities:
Long-term debt 10,000 --
Deferred tax liability 3,993 3,977
Other long-term liabilities 10,617 10,523
------------- -------------
24,610 14,500
------------- -------------
75,618 69,904
------------- -------------
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 19,382,593 shares
at March 31, 2004 and 19,357,541 at December 31, 2003 105,349 105,023
Retained earnings 61,464 60,236
------------- -------------
166,813 165,259
------------- -------------
$ 242,431 $ 235,163
============= =============
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,
------------------------------
2004 2003
------------- -------------
(as restated, (as restated,
See Note 2) See Note 2)
Net sales $ 111,469 $ 91,952
Cost of sales (including buying and
distribution costs) 69,539 58,417
------------- -------------
Gross margin 41,930 33,535
Selling, general and administrative expenses 39,464 32,530
Store pre-opening expenses 588 404
------------- -------------
Income from operations 1,878 601
Net interest (income) (120) (109)
------------- -------------
Income before income taxes 1,998 710
Provision for income taxes 770 272
------------- -------------
Net income $ 1,228 $ 438
============= =============
Basic net income per share $ 0.06 $ 0.02
============= =============
Diluted net income per share $ 0.06 $ 0.02
============= =============
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,
------------------------------
2004 2003
------------- -------------
(as restated, (as restated,
See Note 2) see Note 2)
Cash flows from operating activities:
Net income $ 1,228 $ 438
Adjustments to reconcile net income to net cash
(used in) operating activities:
Depreciation and amortization 1,990 1,705
Changes in assets and liabilities:
Inventories (3,131) (6,500)
Prepaid expenses and other current assets (406) (293)
Accounts payable, accrued payroll
payroll taxes and accrued expenses 1,178 4,270
Income taxes payable (5,140) (2,884)
Other long-term liabilities 94 41
Other 10 22
------------- -------------
Net cash (used in) operating activities (4,177) (3,201)
------------- -------------
Cash flows from investing activities:
Capital expenditures (14,022) (2,464)
Investment in marketable securities 308 (1,461)
------------- -------------
Net cash (used in) investing activities (13,714) (3,925)
------------- -------------
Cash flows from financing activities:
Exercise of stock options 141 331
Increase in long-term debt 10,000 -
Repayment of equipment leases (249) (340)
------------- -------------
Net cash provided by (used in) financing activities 9,892 (9)
------------- -------------
Net (decrease) in cash (7,999) (7,135)
Cash and cash equivalents at beginning of period 43,700 61,584
------------- -------------
Cash and cash equivalents at end of period $ 35,701 $ 54,449
============= =============
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 84 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) RESTATEMENT OF FINANCIAL STATEMENTS
Subsequent to the issuance of the Company's interim consolidated financial
statements for the period ended March 31, 2004, and following a review of its
lease-related accounting policies, the Company's management determined that its
method of accounting for leasehold improvements funded by landlord incentives or
allowances (tenant improvement allowances) and its method of accounting for rent
holidays were not in accordance with accounting principles generally accepted in
the United States of America. As a result, the Company's management is restating
its interim financial statements as of and for the quarterly period ended March
31, 2004 in this Amendment No. 1 on Form 10-Q/A.
The Company has historically accounted for tenant improvement allowances as a
reduction of the property, plant and equipment account on its balance sheet,
amortized the allowances as a reduction to depreciation expense in its income
statement and reflected the cash received within investing activities in its
statement of cash flows. FASB Technical Bulletin 88-1 ("FTB 88-1"), "Issues
Relating to Accounting for Leases," requires these allowances to be recorded as
deferred rent liabilities on the consolidated balance sheets and amortized as a
reduction to rent expense on the income statement. In addition, the cash
received by the Company should have been recorded as a component of operating
activities on the consolidated statements of cash flows. Depreciation of the
leasehold improvement begins effective with the opening of the store as the
Company has accounted for it in the past. However, amortization of the landlord
allowance commences on the date the Company has the right to control the use of
the leased property, which is consistent with the recording of rent expense as
described below. Previously, the Company had commenced amortization on the date
the store was opened.
The Company has historically recognized rent holiday periods on a straight-line
basis over the lease term commencing with the opening date for each store. The
period during which the store was being fixtured and stocked with merchandise
was excluded from the straight-line rent schedule. FASB Technical Bulletin 85-3
("FTB 85-3"), "Accounting for Operating Leases with Scheduled Rent Increases,"
states that rent holidays should be recognized on a straight-line basis over the
lease term, which commences on the date the Company has the right to control the
use of the leased property. For our Company, this is generally one to three
months prior to a store opening date. The amount of rent expensed prior to store
opening will be included in "Pre-opening expenses" on the Company's consolidated
statements of income. The correction of this accounting resulted in the Company
recording additional deferred rent in "Accrued lease liability," additional
leasehold improvements in "Property and equipment, net" and to
4
adjust "Retained earnings" on the consolidated balance sheets, as well as to
correct "Pre-opening expenses" and "Selling, general and administrative
expenses" in the consolidated statements of income.
The following is a summary of the impact of the restatement on the consolidated
statements of income for the three month periods ended March 31, 2004 and 2003,
the consolidated balance sheets at December 31, 2003 and March 31, 2004 and the
consolidated statements of cash flows for the three month periods ended March
31, 2004 and 2003.
CONSOLIDATED STATEMENTS OF INCOME
----------------------------------------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
AS PREVIOUSLY
REPORTED ADJUSTMENT AS RESTATED
------------- ------------- -------------
Three months ended March 31, 2004
Selling, general and administrative expenses ..... 39,526 (62) 39,464
Store pre-opening expenses ....................... 566 22 588
Income from operations ........................... 1,838 40 1,878
Income before income taxes ....................... 1,958 40 1,998
Provision for income taxes ....................... 754 16 770
Net income ....................................... 1,204 24 1,228
Three months ended March 31, 2003
Selling, general and administrative expenses ..... 32,585 (55) 32,530
Store pre-opening expenses ....................... 379 25 404
Income from operations ........................... 571 30 601
Income before income taxes ....................... 680 30 710
Provision for income taxes ....................... 260 12 272
Net income ....................................... 420 18 438
CONSOLIDATED BALANCE SHEETS
----------------------------------------------
(DOLLARS IN THOUSANDS)
AS PREVIOUSLY
REPORTED ADJUSTMENT AS RESTATED
------------- ------------- -------------
March 31, 2004
Property and equipment, net ...................... 59,850 3,257 63,107
Deferred tax liability ........................... 4,950 (957) 3,993
Other long-term liabilities ...................... 4,975 5,642 10,617
Retained earnings ................................ 62,892 (1,428) 61,464
Shareholders' equity ............................. 168,241 (1,428) 166,813
Total liabilities and shareholders' equity ....... 239,174 3,257 242,431
CONSOLIDATED STATEMENTS OF CASH FLOWS
----------------------------------------------
(DOLLARS IN THOUSANDS)
AS PREVIOUSLY
REPORTED ADJUSTMENT AS RESTATED
------------- ------------- -------------
Three months ended March 31, 2004
Net cash (used in) operating activities .......... (4,177) -- (4,177)
Cash flows (used in) investing activities ........ (13,714) -- (13,714)
Three months ended March 31, 2003
Net cash (used in) operating activities .......... (3,201) -- (3,201)
Cash flows (used in) investing activities ........ (3,925) -- (3,925)
5
(3) 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 months ended March 31, 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.
(4) MARKETABLE SECURITIES
Marketable securities represent investments in fixed financial instruments, are
classified as held-to-maturity and recorded at amortized cost.
(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.
(6) 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
make available $30.0 million and are secured by land, building, and equipment.
Borrowings under the mortgages are repayable at between seven and 15 years and
will bear interest 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. At March 31, 2004 there was $10.0 million outstanding under
these mortgages. Monthly payments totaling $214,000 are expected to start in
October 2004. 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 March 31, 2004
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.
6
(8) EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per
share:
THREE MONTHS ENDED
MARCH 31,
-----------------------------
2004 2003
------------- -------------
(as restated) (as restated)
(in thousands, except per
share data)
Net Income ..................................... $ 1,228 $ 438
============= =============
Weighted average shares:
Basic ..................................... 19,370 18,834
Incremental shares from assumed
exercise of stock option ................ 673 769
------------- -------------
Diluted ................................... 20,043 19,603
============= =============
Basic net income per share ..................... $ 0.06 $ 0.02
============= =============
Diluted net income per share ................... $ 0.06 $ 0.02
============= =============
Stock options excluded from calculation
because exercise price was greater than
average market price ...................... 317 316
------------- -------------
(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.
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
MARCH 31,
--------------------------
2004 2003
------------ -----------
Net income (as restated)........ As reported $ 1,228,000 $ 438,000
Compensation cost, net 438,000 277,000
Pro forma 790,000 161,000
Basic earnings per share........ As reported $ .06 $ .02
Pro forma .04 .01
Diluted earnings per share...... As reported $ .06 $ .02
Pro forma .04 .01
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
7
following weighted-average assumptions: risk-free interest rate of 3.2% for
2003, 4.1% for 2002, 5.1% for 2001, 6.3% for 2000 and; no dividend yield; and a
weighted average expected life of the options of 4.5 years for 2003 and seven
years for 2002, 2001 and 2000. In accordance with the provisions of SFAS No. 123
the expected stock price volatility was 56.0% for 2003, 45.2% for 2002, 48.4%
for 2001, and 46.6% for 2000.
(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
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 first quarter net
income by $1.0 million or $0.05 per share. The change increased gross margin by
$1.1 million, increased selling, general and administrative costs by $2.7
million, and decreased inventory by $1.6 million. In the first quarter of 2003,
the Company recorded vendor advertising support as a reduction of selling,
general and administrative expenses in the amount of $2.0 million.
8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESTATEMENT
Following a review of our lease-related accounting policies, management
determined that our method of accounting for leasehold improvements funded by
landlord incentives or allowances (tenant improvement allowances) and our method
of accounting for rent holidays were not in accordance with accounting
principles generally accepted in the United States of America. As a result, we
are restating our interim financial statements as of and for the quarterly
period ended March 31, 2004 in this Amendment No. 1 on Form 10-Q/A.
We have historically accounted for tenant improvement allowances as a reduction
of the property, plant and equipment account on our balance sheet, amortized the
allowances as a reduction to depreciation expense in our income statement and
reflected the cash received within investing activities in our statement of cash
flows. FASB Technical Bulletin 88-1 ("FTB 88-1"), "Issues Relating to Accounting
for Leases," requires these allowances to be recorded as deferred rent
liabilities on the consolidated balance sheets and amortized as a reduction to
rent expense on the income statement. In addition, the cash received by us
should have been recorded as a component of operating activities on the
consolidated statements of cash flows. Depreciation of the leasehold improvement
begins effective with the opening of the store as we have accounted for it in
the past. However, amortization of the landlord allowance commences on the date
we have the right to control the use of the leased property, which is consistent
with the recording of rent expense as described below. Previously, we had
commenced amortization on the date the store was opened.
We have historically recognized rent holiday periods on a straight-line basis
over the lease term commencing with the opening date for each store. The period
during which the store was being fixtured and stocked with merchandise was
excluded from the straight-line rent schedule. FASB Technical Bulletin 85-3
("FTB 85-3"), "Accounting for Operating Leases with Scheduled Rent Increases,"
states that rent holidays should be recognized on a straight-line basis over the
lease term, which commences on the date we have the right to control the use of
the leased property. For us, this is generally one to three months prior to a
store opening date. The amount of rent expensed prior to store opening will be
included in "Pre-opening expenses" in our consolidated statements of income.
The effects of the restatement adjustments are discussed in Note 2 in the notes
to the consolidated financial statements. The following has been updated to give
effect to the restatement.
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, 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, supply constraints or
difficulties, the effectiveness of advertising strategies and the impact of the
threat of terrorist attacks and war. 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.
9
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 first quarter net income by $1.0 million or $0.05 per share.
The Financial Accounting Standards Board is working on a project to develop a
new standard for accounting for stock-based compensation. Tentative decisions by
the FASB indicate that expensing of stock options will be required beginning
January 1, 2005. The FASB issued an exposure draft, which is subject to public
comment, in the first quarter 2004 and expects to issue its final standard in
the second half of 2004.
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,
---------------------
2004 2003
-------- --------
Net sales ........................................ 100.0% 100.0%
Cost of Sales .................................... 62.4% 63.5%
-------- --------
Gross margin ..................................... 37.6% 36.5%
Selling, general and administrative expenses ..... 35.4% 35.4%
Store pre-opening expenses ....................... 0.5% 0.4%
-------- --------
Income from operations ........................... 1.7% 0.7%
Net interest (income) ............................ (0.1)% (0.1)%
-------- --------
Income before income taxes ....................... 1.8% 0.8%
Income tax expense ............................... 0.7% 0.3%
-------- --------
Net income ....................................... 1.1% 0.5%
======== ========
Number of stores open at end of period............ 84 73
10
Three Months Ended March 31, 2004 Compared to Three Months Ended March 31, 2003
NET SALES. Net sales increased $19.5 million, or 21.2%, to $111.5 million in the
three months ended March 31, 2004 from $92.0 million in the comparable 2003
period. This increase is comprised of (i) net sales of $1.7 million from three
new stores opened in 2004, (ii) net sales of $9.2 million from stores opened in
2003 not included in the comparable store base, and (iii) a comparable store
sales increase of $8.6 million, or 9.4%. Sales during the quarter ended March
31, 2004 benefited from positive weather conditions compared with the quarter
ended March 31, 2003. Stores are added to the comparable store base at the
beginning of the fourteenth full month of operation.
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. The gross
margin increased to 37.6% of net sales in the three months ended March 31, 2004
from 36.5% in the three months ended March 31, 2003. The impact of the change in
accounting in accordance with EITF 02-16 represented 1.0 percentage point of the
1.1% increase. The remaining difference is due to less aggressive promotions
then occurred last year.
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 increased $6.9 million, or 21.3%,
in the three months ended March 31, 2004 to $39.4 million from $32.5 million in
the three months ended March 31, 2003. Of the increase $2.7 million represents
the impact of the accounting change in accordance with EITF 02-16. The remainder
of the increase is principally accountable from stores opened in 2004 which were
not open during 2003 and the stores opened in 2003 not in the comparable store
base. As a percentage of sales, selling, general and administrative costs was
35.4% of net sales in both the three months ended March 31, 2004 and March 31,
2003. The impact of the accounting change was 2.4% of net sales. Other selling,
general and administrative costs decreased 2.4% in the three months ended March
31, 2004 compared with the three months ended March 31, 2003. This decrease came
from leveraging our store costs due to our sales increase and leveraging our
corporate office costs over a greater sales base. Corporate office costs were
reduced to 3.9% of sales in the three months ended March 31, 2004 compared with
4.1% in the same period in the prior year.
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 three new stores opened in the first quarter of 2004 and the
store we relocated amounted to $588,000. In the first quarter of 2003, we
incurred store pre-opening expenses of $404,000 related to the two stores opened
in that quarter.
NET INTEREST (INCOME). In the first quarter of 2004, we had net interest income
of $120,000 compared with net interest income of $109,000 in 2003.
INCOME TAXES. Our effective income tax rate was 38.5% for the first quarter
ended March 31, 2004 and 38.2% for the first quarter ended March 31, 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
11
received from our initial public offering in 1997 and from a secondary offering
in 2002. In the first quarter of 2004 we began borrowing monies under two
mortgage agreements we have with Wachovia Bank to finance our new corporate
offices and distribution center.
At March 31, 2004 and December 31, 2003 our working capital was $120.2 million
and $112.8 million, respectively. Cash used in operations was $4.2 million for
the three months ended March 31, 2004 as a result of an increase in inventory of
$3.1 million to support the new stores and a reduction in income tax payables of
$5.1 million.
Net cash used in investing activities during the three months ended March 31,
2004 was $13.7 million, $14.0 million for capital expenditures. In 2004, we
expect to spend approximately $41.0 million on capital expenditures, which
includes approximately $27.0 million related to the building, equipment and
systems for our new distribution center, $10.0 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 estimated to be $44.0 million.
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, of which $10.0 million was outstanding at March 31,
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 are expected to start 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 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 March
31, 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 January 1, 2005. Borrowing under this line will bear interest
at LIBOR plus 95 basis points. At March 31, 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 credit agreement (which we intend to renew) 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 re-imbursements 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
12
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 adoption of EITF 02-16 reduced our first quarter net
income by $1.0 million or $0.05 per share. For the full year 2004, we estimate
that the change in the timing of income recognition will reduce EPS by
approximately $0.12 per share.
The adoption of this issue 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 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 quarter ended March 31, 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
March 31, 2004 approximated carrying value. We had no borrowings outstanding
under the line of credit at March 31, 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 March 31, 2004, the impact of a hypothetical increase or
decrease in interest rates of 10% compared with the rates in effect at March 31,
2004 would result in an increase or decrease in our interest expense of $20,000
annually, and an increase or decrease in our interest income of $70,000
annually.
13
ITEM 4. CONTROLS AND PROCEDURES
In connection with the restatement and the filing of this Form 10-Q/A, our
management, with the participation of our chief executive officer and chief
financial officer, re-evaluated the effectiveness of our disclosure controls and
procedures, as defined in Exchange Act Rule 13a-15(e), 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 Securities Exchange Act of 1934 (the "Exchange Act") are recorded,
processed, summarized and reported within the time periods specified in the
Securities and Exchange Commission's rules and forms. In making this evaluation,
our management considered matters relating to our restatement of previously
issued financial statements for the periods covered by this report, including
the process that was undertaken to ensure that all material adjustments
necessary to correct the previously issued financial statements were recorded.
As set forth in Note 2, "Restatement of Financial Statements" to the
accompanying consolidated financial statements, we restated our financial
statements for the periods covered by this report. The restatement resulted from
a deficiency that we identified related to periodic review of the application of
generally accepted accounting principles. Following a review of our
lease-related accounting policies, we determined that our method of accounting
for leasehold improvements funded by landlord incentives or allowances (tenant
improvement allowances) and our method of accounting for rent holidays were not
in accordance with accounting principles generally accepted in the United States
of America. We have remediated the control deficiency by conducting the review
of our lease accounting practices, restating our financial statements and
correcting our accounting practices, all as further described in Note 2.
During the quarter ended March 31, 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.
14
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Not Applicable.
ITEM 2. CHANGES IN SECURITIES, USE OF PROCEEDS AND ISSUER PURCHASERS OF EQUITY
SECURITIES
Not Applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not Applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
ITEM 5. OTHER INFORMATION
Not Applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) 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.
(b) Reports on Form 8-K furnished in the quarter ended March 31, 2004:
8-K, Item 12, furnished on January 8, 2004 regarding a Company press
release concerning earnings and other information.
8-K, Item 12, furnished on February 25, 2004 regarding a Company press
release concerning earnings and other information.
15
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this Amendment No. 1 on Form 10-Q/A to be signed
on its behalf by the undersigned thereunto duly authorized.
A.C. MOORE ARTS & CRAFTS, INC.
Date: April 19, 2005 By: /s/ John E. Parker
-------------------------------
John E. Parker
Chief Executive Officer
(duly authorized officer and
principal executive officer)
Date: April 19, 2005 By: /s/ Leslie H. Gordon
-------------------------------
Leslie H. Gordon
Executive Vice President
and Chief Financial Officer
(duly authorized officer
and principal financial
officer)
16
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.