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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2003
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
-----------------------------------------
(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 November 12, 2003
- ----------------------------- --------------------------------
Common Stock, no par value 19,346,891
A.C. MOORE ARTS & CRAFTS, INC.
TABLE OF CONTENTS
Page
Number
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PART I: FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets as of September 30, 2003 and December 31, 2002..................3
Consolidated Statements of Income for the three and nine month periods
ended September 30, 2003 and 2002...........................................................4
Consolidated Statements of Cash Flows for the nine month periods
ended September 30, 2003 and 2002...........................................................5
Notes to Consolidated Financial Statements..................................................6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations...................................................................8
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 2. Changes in 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 and Reports on Form 8-K...........................................................15
SIGNATURES...................................................................................................17
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
A. C. MOORE ARTS & CRAFTS, INC.
CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
September 30, December 31,
2003 2002
-------- --------
ASSETS (unaudited)
Current assets:
Cash and cash equivalents $ 24,989 $ 61,584
Inventories 125,084 102,497
Prepaid expenses and other current assets 5,654 2,729
-------- --------
155,727 166,810
Marketable securities 14,161 --
Property and equipment, net 36,524 27,997
Other assets 1,873 1,851
-------- --------
$208,285 $196,658
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of capital leases $ 815 $ 1,342
Trade accounts payable 34,042 24,253
Accrued payroll and payroll taxes 3,794 5,737
Accrued expenses 7,522 8,326
Income taxes payable -- 3,341
-------- --------
46,173 42,999
-------- --------
Long-term liabilities:
Capitalized equipment leases, less current portion -- 504
Deferred tax liability 6,019 5,150
Other long-term liabilities 4,496 3,974
-------- --------
10,515 9,628
-------- --------
56,688 52,627
-------- --------
SHAREHOLDERS' EQUITY
Preferred stock, no par value, 10,000,000 shares
authorized, none issued
Common stock, no par value, 40,000,000 shares
authorized, 19,319,195 shares outstanding at September 30, 2003
and 18,806,047 outstanding at December 31, 2002 104,487 99,654
Retained earnings 47,110 44,377
-------- --------
151,597 144,031
-------- --------
$208,285 $196,658
======== ========
See accompanying notes to financial statements
3
A. C. MOORE ARTS & CRAFTS, INC.
CONSOLIDATED STATEMENTS OF INCOME
(dollars in thousands, except per share data)
(unaudited)
Three months ended Nine months ended
September 30, September 30,
---------------------------- ----------------------------
2003 2002 2003 2002
------------ ------------ ------------ ------------
Net sales $ 98,600 $ 89,726 $ 284,238 $ 258,445
Cost of sales (including buying and distribution costs) 61,987 56,423 179,297 162,756
------------ ------------ ------------ ------------
Gross Margin 36,613 33,303 104,941 95,689
Selling, general and administrative expenses 33,842 31,180 99,266 90,278
Pre-opening expenses 821 850 1,571 1,888
------------ ------------ ------------ ------------
Income from operations 1,950 1,273 4,104 3,523
Net interest (income) (92) (150) (319) (326)
------------ ------------ ------------ ------------
Income before income taxes 2,042 1,423 4,423 3,849
Income tax expense 780 566 1,690 1,532
------------ ------------ ------------ ------------
Net income $ 1,262 $ 857 $ 2,733 $ 2,317
============ ============ ============ ============
Basic net income per share $ 0.07 $ 0.05 $ 0.14 $ 0.13
============ ============ ============ ============
Weighted average shares outstanding 19,247,590 18,741,640 19,042,513 17,582,762
============ ============ ============ ============
Diluted net income per share $ 0.06 $ 0.04 $ 0.14 $ 0.12
============ ============ ============ ============
Weighted average shares outstanding plus impact of
stock options 19,980,409 19,807,463 19,655,988 18,605,664
============ ============ ============ ============
See accompanying notes to financial statements
4
A.C. MOORE ARTS & CRAFTS, INC
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
(unaudited)
Nine Months Ended
---------------------------
September 30,
2003 2002
-------- --------
Cash flows from operating activities:
Net income $ 2,733 $ 2,317
Adjustments to reconcile net income to net cash (used in) operating activities:
Depreciation and amortization 5,014 4,550
Provision for deferred income taxes 869 --
Changes in assets and liabilities:
Inventories (22,587) (22,237)
Prepaid expenses and other current assets (2,925) (823)
Accounts payable, accrued payroll, payroll taxes
and accrued expenses 7,042 3,990
Income taxes payable (1,041) (3,314)
Other long-term liabilities 522 547
Other (22) (1,021)
-------- --------
Net cash (used in) operating activities (10,395) (15,991)
-------- --------
Cash flows from investing activities:
Capital expenditures (13,541) (7,809)
Investment in marketable securities (14,161) --
-------- --------
Cash flows (used in) investing activities (27,702) (7,809)
-------- --------
Cash flows from financing activities:
Proceeds from sale of shares -- 52,130
Proceeds from line of credit -- 2,000
Repayment of line of credit -- (2,000)
Exercise of stock options 2,533 1,326
Repayment of capital leases (1,031) (974)
-------- --------
Net cash provided by financing activities 1,502 52,482
-------- --------
Net increase (decrease) in cash (36,595) 28,682
Cash and cash equivalents at beginning of period 61,584 10,818
-------- --------
Cash and cash equivalents at end of period $ 24,989 $ 39,500
======== ========
See accompanying notes to financial statements
5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(1) Basis of Presentation
The consolidated financial statements included herein include the accounts of
A.C. Moore Arts & Crafts, Inc. and its wholly owned subsidiaries (collectively
the "Company"). The Company is a chain of 78 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, 2002. 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) Common Stock and Earnings per Share
On June 25, 2002, the Company's Board of Directors declared a two-for-one stock
split to shareholders of record as of the close of business on July 15, 2002
payable on July 31, 2002. All references to the number of shares of common
stock, per share prices and earnings per share amounts in the consolidated
financial statements and accompanying notes included in this Quarterly Report on
Form 10-Q have been adjusted to reflect the split on a retroactive basis.
(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 and nine month periods ended September 30, 2003 and 2002
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 municipal bonds with maturities
of twelve months or longer from time of purchase. They are classified as
held-to-maturity and recorded at amortized cost.
6
(5) Recent Accounting Pronouncements
In November 2002, the Emerging Issues Task Force reached consensus on Issue
02-16, Accounting by a Customer (including a Reseller) for Cash Consideration
Received from a Vendor. EITF Issue 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 EITF is
effective for agreements modified or entered into after January 1, 2003.
The Company has historically treated cooperative advertising allowances as a
reduction of advertising expense. Under EITF 02-16, cooperative advertising
allowances should be treated as a reduction of inventory cost unless they
represent a reimbursement of specific, incremental and identifiable costs
incurred by the customer to sell the vendor's product. The Company does not
expect this issue to have a material impact on the 2003 financial statements
since substantially all of the cooperative advertising allowance agreements for
2003 were entered into prior to January 1, 2003.
The Company has assessed the historic volume of cooperative advertising
reimbursements that have been received in order to determine which of these
reimbursements would meet the specific, identifiable and incremental criteria
outlined under this issue and accordingly, qualify as a direct offset to
advertising expense. Based on the Company's analysis of the impact on net
income, and the administrative cost to identify and track reimbursements between
those qualifying for expense offset and those requiring inventory cost
reduction, beginning in 2004 the Company has elected to treat all cooperative
advertising funds received from vendors as a reduction in the cost of inventory
and recognize them as a reduction to cost of goods sold when the inventory is
sold. We estimate that the prospective change in the timing of income
recognition will reduce 2004 EPS by approximately $0.12 per share.
The adoption of this accounting principle does not change the ultimate cash to
be received under these agreements, only the timing of when it is reflected in
net income. This change will have a positive effect on our cash flow.
7
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure an amendment of FASB Statement No.
123". SFAS 148 amends SFAS 123 to provide alternative methods of transition for
an entity that voluntarily changes to the fair value based method of accounting
for stock-based employee compensation. It also amends the disclosure provisions
of SFAS 123 to require prominent disclosure about the effects on reported net
income of an entity's accounting policy decisions with respect to stock-based
employee compensation. It also amends APB Opinion No. 28, "Interim Financial
Reporting", to require disclosure about those effects in interim financial
information. The Company adopted the disclosure requirements of SFAS 148 for the
fiscal year ended December 31, 2002.
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 Nine Months Ended
September 30, September 30,
-------------------------- -------------------------
2003 2002 2003 2002
---------- ---------- ---------- ----------
Net income.................. As reported $1,262,000 $ 857,000 $2,733,000 $2,317,000
Compensation cost, net 305,000 188,000 860,000 466,000
Pro forma 957,000 669,000 1,873,000 1,851,000
Basic earnings per share.... As reported $ .07 $ .05 $ .14 $ .13
Pro forma .05 .04 .10 .11
Diluted earnings per share.. As reported $ .06 $ .04 $ .14 $ .12
Pro forma .05 .03 .10 .10
The pro forma results may not be representative of the effects on reported
operations for future years. The fair value of the options was calculated using
a Black-Scholes options pricing model with the following weighted-average
assumptions: 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.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion and analysis contains certain forward-looking
statements. These forward-looking statements do not constitute historical facts
and involve risks and uncertainties. Actual results could differ materially from
those referred to in the forward-looking statements due to a number of factors,
including, but not limited to, the following: the impact of the adoption of EITF
Issue 02-16, customer demand, the effect of economic conditions, the impact of
adverse weather conditions, the impact of competitors' locations or pricing, the
availability of acceptable real estate locations for new stores, difficulties
with respect to new information system technologies, 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.
8
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.
Results of Operations
The following table sets forth, for the periods indicated, selected statement of
operations data expressed as a percentage of net sales and the number of stores
open at the end of each such period:
Three months ended Nine months ended
September 30, September 30,
-------------------- -------------------
2003 2002 2003 2002
----- ----- ----- -----
Net sales.............................................. 100.0% 100.0% 100.0% 100.0%
Cost of sales.......................................... 62.9% 62.9% 63.1% 63.0%
----- ----- ----- -----
Gross margin........................................... 37.1% 37.1% 36.9% 37.0%
Selling, general and administrative expenses........... 34.3% 34.8% 34.9% 34.9%
Store pre-opening expenses............................. 0.8% 0.9% 0.5% 0.7%
----- ----- ----- -----
Income from operation.................................. 2.0% 1.4% 1.5% 1.4%
Net interest (income) expense.......................... (0.1)% (0.2)% (0.1)% (0.1)%
----- ----- ----- -----
Income before income taxes............................. 2.1% 1.6% 1.6% 1.5%
Income tax expense..................................... 0.8% 0.6% 0.6% 0.6%
----- ----- ----- -----
Net income............................................. 1.3% 1.0% 1.0% 0.9%
===== ===== ===== =====
Number of stores open at end of period................. 78 70
Three Months Ended September 30, 2003 Compared to Three Months Ended
September 30, 2002
Net Sales. Net sales increased $8.9 million, or 9.9%, to $98.6 million
in the three months ended September 30, 2003 from $89.7 million in the
comparable 2002 period. This increase is comprised of (i) net sales of $5.2
million from seven new stores opened in 2003, (ii) net sales of $2.1 million
from stores opened in 2002 not included in the comparable store base, and (iii)
a comparable store sales increase of $1.6 million, or 2%. Stores are added to
the comparable store base at the beginning of the fourteenth full month of
operation.
9
Gross Margin. Gross margin is net sales minus the cost of merchandise
and certain distribution and purchasing costs. The gross margin was 37.1% of
net sales in both the three month periods ended September 30, 2003 and September
30, 2002.
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 $2.7 million, or 8.5%, in the
three months ended September 30, 2003 to $33.8 million from $31.2 million in the
three months ended September 30, 2002. The increase is principally accountable
from stores opened in 2003 which were not open during 2002 and the stores opened
in 2002 not in the comparable store base. As a percentage of sales, selling,
general and administrative costs decreased to 34.3% of net sales in the three
months ended September 30, 2003 from 34.8% of net sales in the three months
ended September 30, 2002. This decrease is primarily due to leveraging store and
central costs from the increase in sales in our comparable store base.
Store Pre-Opening Expenses. We expense store pre-opening expenses as
incurred. Pre-opening expenses for the four new stores which opened in the third
quarter of 2003 and the store which we relocated in August, amounted to
$821,000. In the third quarter of 2002, we incurred store pre-opening expenses
of $850,000 related to the six stores opened in that quarter.
Net Interest (Income). In the third quarter of 2003, we had net
interest income of $92,000 compared with net interest income of $150,000 in
2002. The change is due to lower interest rates earned on proceeds from the
proceeds of our sale of shares in March 2002.
Income Taxes. Our effective income tax rate was 38.2% for the third
quarter ended September 30, 2003 and 39.8% for the third quarter ended September
30, 2002. The decrease in the effective tax rate is principally the result of
tax free interest income in 2003.
Nine Months Ended September 30, 2003 Compared to Nine Months Ended
September 30, 2002
Net Sales. Net sales increased $25.8 million, or 10.0%, to $284.2
million in the nine months ended September 30, 2003 from $258.4 million in the
comparable 2002 period. This increase is comprised of (i) net sales of $7.5
million from seven new stores opened in 2003, (ii) net sales of $15.3 million
from stores opened in 2002 not included in the comparable store base, and (iii)
a comparable store sales increase of $3.0 million, or 1%. Sales were
significantly impacted by severe weather conditions throughout our trading area
in the first quarter.
Gross Margin. The gross margin decreased to 36.9% of net sales in the
nine months ended September 30, 2003 from 37.0% in the nine months ended
September 30, 2002. The decrease occurred during the first quarter due to more
aggressive promotions in response to the difficult sales environment and to a
change in sales mix resulting from the weather and a later Easter.
Selling, General, and Administrative Expenses. Selling, general and
administrative expenses increased $9.0 million, or 10.0%, in the nine months
ended September 30, 2003 to $99.3 million from $90.3 million in the nine months
ended September 30, 2002. The increase is principally accountable from stores
opened in 2003 which were not open during 2002 and the stores opened in 2002 not
in the comparable store base. As a percentage of sales, selling, general and
administrative costs was 34.9% of net sales in both the nine month periods ended
September 30, 2003 and September 30, 2002.
10
Store Pre-Opening Expenses. Pre-opening expenses for the seven new
stores opened in the first nine months of 2003 and the stores we relocated
amounted to $1.6 million. In the first nine months of 2002, we opened 10 stores
and incurred store pre-opening expenses of $1.9 million.
Net Interest (Income). In the first nine months of 2003, we had net
interest income of $319,000 compared with net interest income of $326,000 in
2002. The change is due to interest earned over the full nine months from the
proceeds of our sale of shares in March 2002, offset by lower interest rates in
2003 compared with 2002.
Income Taxes. Our effective income tax rate was 38.2% for the nine
months ended September 20, 2003 and 39.8% for the nine months ended September
30, 2002. The decrease in the effective tax rate is principally the result of
tax free interest income in 2003.
Liquidity and Capital Resources
Our cash is used primarily for working capital to support inventory
requirements and capital expenditures, pre-opening expenses and beginning
inventory for new stores. In recent years, we have financed our operations and
new store openings primarily with cash from operations, the net proceeds we
received from our initial public offering in 1997 and with borrowing under bank
financing agreements. In March 2002 we completed a secondary offering in which
we sold 3,500,000 new post-split shares, with net cash proceeds of $52,130,000.
At September 30, 2003 and December 31, 2002 our working capital was
$109.6 million and $123.8 million, respectively. Cash used in operations was
$10.4 million for the nine months ended September 30, 2003 as a result of an
increase in inventory of $22.6 million to support the new stores and the
increase of accounts payable and accrued expenses of $7.0 million.
Net cash used in investing activities during the nine months ended
September 30, 2003 was $27.7 million. This included $14.2 million for
investments in marketable securities with a maturity of over one year and $13.5
million for capital expenditures. In 2003, we expect to spend approximately
$31.0 million on capital expenditures, which includes approximately $22.0
million for land, building, equipment and systems for our new distribution
center, $6.5 million for new store openings, and the remainder for remodeling
existing stores, upgrading systems in existing stores, warehouse equipment, and
corporate systems development. The total cost of the new distribution center is
estimated to be between $40.0 and $42.0 million. We expect to finance $30.0
million of this project through long-term debt.
In the year ended December 31, 2002, net cash provided by financing
activities was principally the $52.1 million proceeds from our sale of shares in
March 2002.
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 September 30, 2003 there were no
borrowings outstanding under this agreement.
On October 28, 2003 we signed two mortgage loans with Wachovia Bank
relating to the new corporate offices and distribution center. The mortgages
total $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.
11
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 will be sufficient to finance our working
capital and capital expenditure requirements for at least the next 12 months.
Recent Accounting Pronouncements
In November 2002, the Emerging Issues Task Force reached consensus on
Issue 02-16, Accounting by a Customer (including a Reseller) for Cash
Consideration Received from a Vendor. EITF Issue 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 EITF
is effective for agreements modified or entered into after January 1, 2003. See
Note 5 to the Consolidated Financial Statements for further description of the
estimated impact of the adoption of EITF 02-16.
In December 2002, the FASB issued SFAS No. 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure an amendment of FASB
Statement No. 123". SFAS 148 amends SFAS 123 to provide alternative methods of
transition for an entity that voluntarily changes to the fair value based method
of accounting for stock-based employee compensation. It also amends the
disclosure provisions of SFAS 123 to require prominent disclosure about the
effects on reported net income of an entity's accounting policy decisions with
respect to stock-based employee compensation. It also amends APB Opinion No. 28,
"Interim Financial Reporting", to require disclosure about those effects in
interim financial information. The Company adopted the disclosure requirements
of SFAS 148 for the fiscal year ended December 31, 2002 and the subsequent
interim periods.
General
On June 25, 2002, our Board of Directors approved a two-for-one stock
split to shareholders of record as of the close of business on July 15, 2002.
The shares were distributed on July 31, 2002.
12
Critical Accounting Policies
Our significant accounting policies are described in Note 1 to the
Consolidated Financial Statements presented in our Annual Report on Form 10-K
for the year ended December 31, 2002. Management believes that the following
accounting policies affect the more significant estimates used in preparing the
consolidated financial statements.
Inventory Valuation
We value our inventories at stores at the lower of cost or market as
determined using the retail inventory method. Because we do not have perpetual
inventory records for inventory in our stores, we perform complete physical
inventories in each of our stores at the end of each year. The actual physical
count of merchandise is made principally by third party inventory counting
service firms. We believe our process results in reasonable estimates of our
retail inventory on hand at year end.
Inventory valuation methods also require certain management estimates
and judgments. These include estimates of net realizable value on product
designated for clearance or on slow moving merchandise. The accuracy of our
estimates can be affected by many factors, some of which are outside of our
control, including changes in economic conditions and consumer buying trends.
Historically, we have not experienced significant differences in our estimates
of recovery compared with actual results. We believe our process results in
reasonable estimates of our inventory each quarter.
Co-Operative Advertising Allowances
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.
Under the guidance set forth in Emerging Issues Task Force (EITF) 02-16
"Accounting by a Customer (Including a Reseller) for Certain Consideration
Received From a Vendor," cooperative advertising allowances should be treated as
a reduction of inventory cost unless they represent a reimbursement of specific,
incremental and identifiable costs incurred by the customer to sell the vendor's
product. Under the transition rules set forth in EITF 02-16, this treatment is
required for all agreements entered into or modified after January 1, 2003.
We have historically treated cooperative advertising allowances as a
reduction of advertising expense. Under EITF 02-16, cooperative advertising
allowances should be treated as a reduction of inventory cost unless they
represent a reimbursement of specific, incremental, identifiable costs incurred
by the customer to sell the vendor's product. We do not expect this issue to
have a material impact on our 2003 financial statements since substantially all
of the cooperative advertising allowance agreements for 2003 were entered into
prior to January 1, 2003.
We have assessed the historic volume of cooperative advertising
reimbursements that have been received in order to determine which of these
reimbursements would meet the specific, identifiable and incremental criteria
outlined under this issue and accordingly, qualify as a direct offset to
advertising expense. Based on our analysis of the impact on net income, and the
administrative cost to identify and track reimbursements between those
qualifying for expense offset and those requiring inventory cost reduction,
beginning in 2004 we have elected to treat all cooperative advertising funds
received from vendors as a reduction in the cost of inventory and recognize them
as a reduction to cost of goods sold when the inventory is sold. We estimate
that the prospective change in the timing of income recognition will reduce 2004
EPS by approximately $0.12 per share.
13
The adoption of this accounting principle does not change the ultimate cash to
be received under these agreements, only the timing of when it is reflected in
net income. This change will have a positive effect on our cash flow.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not Applicable.
ITEM 4. CONTROLS AND PROCEDURES
As required by Rule 13a-15(b), A.C. Moore management, including its
chief executive officer and chief financial officer, conducted an evaluation as
of the end of the period covered by this report, of the effectiveness of A.C.
Moore's disclosure controls and procedures as defined in Exchange Act Rule
13a-15(e). Based on that evaluation, A.C. Moore's chief executive officer and
chief financial officer concluded that A.C. Moore's disclosure controls and
procedures were effective in reaching a reasonable level of assurance that
management is timely alerted to material information relating to A.C. Moore
during the period when A.C. Moore's periodic reports are being prepared. As
required by Rule 13a-15(d), A.C. Moore management, including its chief executive
officer and chief financial officer, also conducted an evaluation of A.C.
Moore's internal control over financial reporting to determine whether any
changes occurred during the quarter covered by this report that have materially
affected, or are reasonably likely to materially affect, A.C. Moore's internal
control over financial reporting. Based on that evaluation, there has been no
such change during the quarter covered by this report.
14
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Not Applicable.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not Applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
10.1 Loan Agreement dated as of October 28, 2003, by and
between Wachovia Bank, National Association and A.C. Moore Arts & Crafts, Inc.,
A.C. Moore Incorporated, Moorestown Finance, Inc., Blackwood Assets, Inc. and
A.C. Moore Urban Renewal, LLC. A.C. Moore will furnish to the Securities and
Exchange Commission a copy of any omitted exhibits or schedules upon request.
10.2 Construction Loan Agreement dated as of October 28, 2003,
by and between Wachovia Bank, National Association and A.C. Moore Arts & Crafts,
Inc., A.C. Moore Incorporated, Moorestown Finance, Inc., Blackwood Assets, Inc.
and A.C. Moore Urban Renewal, LLC. A.C. Moore will furnish to the Securities and
Exchange Commission a copy of any omitted exhibits or schedules upon request.
10.3 Mortgage, Assignment of Rents and Security Agreement and
Financing Statement dated as of October 28, 2003, by and between A.C. Moore
Urban Renewal, LLC and Wachovia Bank, National Association. A.C. Moore will
furnish to the Securities and Exchange Commission a copy of any omitted exhibits
upon request.
31.1 Certification of Chief Executive Officer pursuant to
Rules 13a-14(a) and 15d-14(a) promulgated under the Securities Exchange Act of
1934, as amended ("Exchange Act").
31.2 Certification of Chief Financial Officer pursuant to
Rules 13a-14(a) and 15d-14(a) promulgated under the Exchange Act.
15
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 filed or furnished in the quarter ended
September 30, 2003:
8-K, Item 9, furnished on July 3, 2003 regarding a Company
press release concerning earnings and other information
8-K, Item 9, furnished on July 16, 2003 regarding a Company
press release concerning earnings and other information
8-K, Item 5, filed on July 28, 2003 regarding the plan of Mr.
Richard Drake under Rule 10b5-1 under the Exchange Act
16
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
A.C. MOORE ARTS & CRAFTS, INC.
Date: November 14, 2003 By: /s/ John E. Parker
---------------------------
John E. Parker
Chief Executive Officer
(duly authorized officer
and principal executive
officer)
Date: November 14, 2003 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 Loan Agreement dated as of October 28, 2003, by and between
Wachovia Bank, National Association and A.C. Moore Arts &
Crafts, Inc., A.C. Moore Incorporated, Moorestown Finance,
Inc., Blackwood Assets, Inc. and A.C. Moore Urban Renewal,
LLC. A.C. Moore will furnish to the Securities and Exchange
Commission a copy of any omitted exhibits or schedules upon
request.
10.2 Construction Loan Agreement dated as of October 28, 2003, by
and between Wachovia Bank, National Association and A.C. Moore
Arts & Crafts, Inc., A.C. Moore Incorporated, Moorestown
Finance, Inc., Blackwood Assets, Inc. and A.C. Moore Urban
Renewal, LLC. A.C. Moore will furnish to the Securities and
Exchange Commission a copy of any omitted exhibits or
schedules upon request.
10.3 Mortgage, Assignment of Rents and Security Agreement and
Financing Statement dated as of October 28, 2003, by and
between A.C. Moore Urban Renewal, LLC and Wachovia Bank,
National Association. A.C. Moore will furnish to the
Securities and Exchange Commission a copy of any omitted
exhibits upon request.
31.1 Certification of Chief Executive Officer pursuant to Rules
13a-14(a) and 15d-14(a) promulgated under the Securities
Exchange Act of 1934, as amended ("Exchange Act").
31.2 Certification of Chief Financial Officer pursuant to Rules
13a-14(a) and 15d-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.
18