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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 2006
OR
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number 000-23157
A.C. MOORE ARTS & CRAFTS, INC.
(Exact name of registrant as specified in its charter)
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Pennsylvania
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22-3527763 |
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(State or other jurisdiction of incorporation or organization)
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(I.R.S. Employer Identification No.) |
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130 A.C. Moore Drive, Berlin, New Jersey
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08009 |
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(Address of principal executive offices)
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(Zip Code) |
Registrants telephone number, including area code: (856) 768-4930
Securities registered pursuant to Section 12(b) of the Act:
Common stock, no par value
(Title of class)
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule
405 of the Securities Act. o Yes þ No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or
Section 15(d) of the Act. o Yes þ No
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.
þ Yes No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K
(§229.405 of this Chapter) is not contained herein, and will not be contained, to the best of the
registrants knowledge, in definitive proxy or information statements incorporated by reference in
Part III of this Form 10-K or any amendment to this Form 10-K. þ
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer,
or a non-accelerated filer. See definition of accelerated filer and large accelerated filer in
Rule 12b-2 of the Exchange Act. (Check one):
o Large accelerated filer þ Accelerated filer o Non-accelerated filer
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). o Yes þ No
As of June 30, 2006, the aggregate market value of the voting stock held by non-affiliates of the
registrant was approximately $329,000,000 based on $16.31, the closing price per share of the
registrants common stock on such date, as reported on the Nasdaq Stock Market.(1)
The number
of shares of the registrants common stock outstanding as of
March 9, 2007 was 20,188,898.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive proxy statement for the 2007 Annual Meeting of Shareholders are
incorporated into Part III of this Form 10-K; provided, however, that the Compensation Committee
Report, the Audit Committee Report and
any other information in the proxy statement that is not required to be included in this Annual
Report on Form 10-K shall not be deemed to be incorporated herein by reference.
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(1) |
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The aggregate market value of the voting stock set forth above equals the number
of shares of the registrants common stock outstanding, reduced by the number of shares of common
stock held by executive officers, directors and shareholders owning in excess of 10% of the
registrants common stock, multiplied by the last reported sale price for the registrants common
stock on the last business day of the registrants most recently completed second fiscal quarter.
The information provided shall in no way be construed as an admission that any person whose
holdings are excluded from this figure is an affiliate of the registrant or that any person whose
holdings are included in this figure is not an affiliate of the registrant and any such admission
is hereby disclaimed. The information provided herein is included solely for record keeping
purposes of the Securities and Exchange Commission. |
TABLE OF CONTENTS
Cautionary Statement Relating to Forward-Looking Statements
As used herein, unless the context otherwise requires, all references to A.C. Moore, the
Company, we, our, us and similar terms in this report refer to A.C. Moore Arts & Crafts,
Inc. together with its subsidiaries.
Certain oral statements made by our management from time to time and certain statements
contained herein or in other reports filed by us with the Securities and Exchange Commission or
incorporated by reference herein or therein are forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended and Section 21E of the Securities Exchange
Act of 1934, as amended (Exchange Act), with respect to our results of operations and our
business. All such statements, other than statements of historical facts, including those
regarding market trends, our financial position and results of operations, business strategy,
projected costs, and plans and objectives of management for future operations, are forward-looking
statements. In general, such statements are identified by the use of forward-looking words or
phrases including, but not limited to, intended, will, should, may, believes, expects,
expected, anticipates and anticipated or the negative thereof or variations thereon or
similar terminology. These forward-looking statements are based on our current expectations.
Although we believe that the expectations reflected in forward- looking statements are reasonable,
there can be no assurance that such expectations will prove to be correct. These forward-looking
statements represent our current judgment. We disclaim any intent or obligation to update our
forward-looking statements. Because forward-looking statements involve risks and uncertainties,
our actual results could differ materially. Important factors that could cause actual results to
differ materially from our expectations (Cautionary Statements) include those that are discussed
in this Annual Report on Form 10-K, particularly in Item 1. Business, Item 1A. Risk Factors and
Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations.
All subsequent written and oral forward-looking statements attributable to us or persons acting on
our behalf are expressly qualified in their entirety by the Cautionary Statements.
PART I
ITEM 1. BUSINESS.
Our Company
We are a specialty retailer offering a vast selection of arts, crafts, and floral merchandise
to a broad demographic of consumers. Our stores are located in the eastern United States from
Maine to Florida. We have grown from 17 stores in January 1997 to 122 stores as of December 31,
2006. Our stores typically range from 20,000 to 25,000 square feet. In 2006, for stores open for
the full calendar year, our average sales per square foot was $234, and our average sales per store
was $5.4 million.
Our assortment of merchandise consists of more than 60,000 stock keeping units, or SKUs, with
approximately 45,000 SKUs offered at each store at any one time. We believe we offer an arts and
crafts shopping experience that is differentiated by our broad merchandise assortment, high
in-stock positions, exciting stores, knowledgeable sales associates and competitive prices. We
also offered custom framing in 53 stores as of December 31, 2006 and anticipate that the number of
stores with custom framing will increase to approximately 100 stores by the end of 2007. In-store
events and programs for children and adults provide hands-on arts and crafts experience and
encourage the creativity of our customers.
Due to the importance of our peak selling season, which includes Fall/Halloween, Thanksgiving
and Christmas, the fourth quarter has historically contributed, and is expected to continue to
contribute, a significant portion of our profitability for the entire year. As a result, any
factors negatively affecting us
during the fourth quarter of any year, including adverse weather
and unfavorable economic conditions, would have a material adverse effect on our results of
operations for the entire year.
We became a holding company in July 1997 by incorporating in Pennsylvania and exchanging
4,300,000 shares of our common stock for all of the capital stock of our operating subsidiary which
was organized in 1984.
Our Market
In its 2006 Attitude & Usage Study, the Craft and Hobby Association (CHA) found that
industry size was approximately $30.2 billion as a result of a 2.6% annual growth rate since 2002.
Our market is highly fragmented and is served by multi-store arts and crafts retailers, mass
merchandisers, small, local specialty retailers, mail order vendors, hardware stores and a variety
of other retailers. According to this study, only 14% of crafters stated that they have a specific
purchase in mind when shopping, with the majority of purchases made on impulse.
The size and growth of our market is sustained by the popularity of arts and crafts. The CHA
study referred to above reported that 57% of U.S. households, or approximately 62 million,
participated in crafts in the past year, with the average annual spending per crafting household
averaging $476. A December 2005 Craftrends magazine consumer participation survey identified that
94% of all crafters are female, 70% are under the age of 55, 48% are between the ages of 35 and 54,
74% have incomes over $40,000 per year and 44% have incomes over $60,000 per year. The crafter is
educated, with 92% having graduated from high school and almost 60% having attended college.
Our Merchandise
Our merchandising strategy is to offer the broadest and deepest assortment of arts, crafts and
floral merchandise and to provide our customers with all of the components necessary for their
crafting projects on a regular basis. Below is a representative list of our merchandise:
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Art Supplies and Scrapbooking: paints, brushes, canvas, drawing tools,
rubber stamps and stationery, scrapbooking supplies and stencils. |
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Traditional Crafts: stitchery, yarn, cake and candy making supplies, glass
crafts, wood crafts, kids crafts, felt, glitter, dollmaking, dollhouses and furniture,
and instructional books. |
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Floral, Floral Accessories and Silk Plants: silk flowers, silk plants,
accessories like vases and other products to assist in the arrangement of flowers and
pre-made and custom made floral arrangements. |
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Fashion Crafts: t-shirts and sweatshirts, decorative items like patches and
rhinestones, and jewelry making supplies like beads. |
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Frames: custom framing, ready-made frames, frame hardware and accessories,
framed art and prints. |
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Home Décor: ribbon and lace, wedding-related items, potpourri, candles,
candle making supplies, wicker baskets, decorative storage containers and childrens
furniture. |
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Seasonal Items: craft making materials, decorations and floral products for
all major holidays and seasons, including Christmas, Fall/Halloween, Spring/Easter,
Valentines Day and St. Patricks Day. |
Recent Developments in Business and Operating Strategy
The year 2006 was a year of transition for our Company, as the composition of our senior
management team changed substantially. Our new Chief Executive Officer joined us on June 1, 2006
and our new Chief Financial Officer joined us on September 13, 2006. See Item 1A. Risk Factors
and Item 7. Managements Discussion and Analysis of Financial Condition and Results of
Operations for more information on recent changes in management.
Our financial and sales performance for 2006 was disappointing. See Item 7. Managements
Discussion and Analysis of Financial Condition and Results of Operations for further discussion of
our results in 2006. We expect that 2007 will also be a year of transition as our new management
team is focused on reviewing and adjusting various aspects of our business and operations to
position ourselves for improved performance. The business and operating initiatives discussed
below supplement the business and operating strategies discussed under Business and Operating
Strategy.
Selling, general and administrative expense reduction
We are aggressively reviewing all facets of our business for opportunities to reduce expenses.
The following are our major expense reduction initiatives:
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Store payroll costs. We introduced a new store general manager compensation
plan based on pay-for-performance beginning in January 2007. Bonuses earned in one
year are no longer rolled into base salary for the coming year. We also tested
different store staffing models, including an appropriate mix of full- and
part-time team members, in the second half of 2006 that we believe will assist us
in improving our results of operations through payroll savings. |
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Advertising spending. We are in the process of experimenting with the reach,
frequency and timing of our advertisements. During the fourth quarter of 2006, we
moved approximately 75% of our print advertising from a mid-week, varying between
Wednesday, Thursday and Friday, to Sunday. While we are still analyzing the
results from this change, we believe that a uniform approach within the chain to
advertising strategy will result in overall efficiencies. |
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Real estate site location strategy. We believe that our selling, general and
administrative expenses may be significantly reduced if we increase store openings
in existing markets in order to leverage advertising costs. In the future, we
intend to increase store density in existing markets. In addition, previously we entered new markets opening only a single store. When we enter new
markets in the future, as appropriate, we intend to open more than one store at the same time that
we enter that market.
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Inventory reduction
During the fourth quarter of 2006, we reviewed the level and composition of our store
inventories and took steps to reduce excess inventory. We will attempt to improve control in the
future over inventory through aggressive clearance procedures and more centrally directed
purchasing.
Improved information technology
We are committed to enhancing our information technology to increase operating efficiencies,
improve merchandise selection and better serve our customers. During the fourth quarter of 2006,
we completed the upgrade of our point of sales, or POS, system and began to construct a sales audit
system which will help us better manage the information available from our POS system. We are
currently investigating the development of both a perpetual inventory and an automated
replenishment system, which we anticipate will be implemented in 2007 and 2008, respectively.
Globally sourced and private label products
We are currently investigating increased global sourcing of products. We anticipate that
products imported directly through an arrangement with a global sourcing supplier will be sold in
our stores beginning in the second half of 2007. We expect that the number of products globally
sourced will substantially increase in the future as a result of this new arrangement. We also
intend to introduce in our stores private-label products bearing the A.C. Moore name and logo
beginning in the second half of 2007. We believe that increased global sourcing and sale of
private label products will result in substantial margin improvement.
Centrally directed operations
We are committed to increasing the level of standardization in our operations and centrally
directed management practices. This initiative includes, without limitation, standardizing the
presentation in our stores, managing store classroom programs from our corporate office and
advertising strategy. We believe that increased centrally directed management will improve our
operating efficiencies.
Business and Operating Strategy
Our goal is to provide our customers with the tools and ideas for their creative endeavors in
a solution-oriented environment that exceeds their expectations and encourages repeat business. We
believe that our assortment, convenience, service and pricing differentiate us from our
competitors. In addition to the business and operating priorities discussed above under Recent
Developments in Business and Operating Strategy, we pursue the business and operating strategies
described below in order to achieve our goal.
We
strive to offer the broadest and deepest assortment of arts, crafts and floral merchandise.
We believe key elements in our customers decision as to where to shop are variety and
selection of merchandise. We strive to offer the broadest and deepest selection of arts, crafts
and floral merchandise in our industry. Each of our stores stocks more than 60,000 SKUs across our
major merchandise categories during the course of a year, with approximately 45,000 SKUs offered at
each store at any one time.
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We strive to maintain a superior in-stock merchandise position.
Craft projects usually require multiple components. Providing all of the components for a
particular craft project in a single store on a regular basis is critical to meeting the demands of
our customers. Therefore, we designed our merchandise distribution systems and distribution
operations to ensure rapid replenishment of inventory and high levels of in-stock positions in our
stores and distribution operations.
We strive to operate exciting, easy-to-shop stores.
We believe that our customers expect exceptional service in an exciting and easy-to-shop
store. We regularly provide in-store presentations of various crafting techniques, completed
projects and consumer crafting events. We offer a multitude of in-store classes for children and
adults in most of our stores on a wide variety of craft skills such as scrapbooking and knitting.
Our stores are designed to be well organized and well lit. Store personnel, whom we provide with
educational materials about various crafting products and techniques, assist customers with
merchandise selection and project ideas.
We strive to drive sales and optimize profit through merchandising creativity.
We strive to foster merchandising creativity in our stores while providing centralized
direction and support from our corporate office. General managers and store personnel are
empowered and encouraged to identify merchandising opportunities and to tailor displays to local
preferences for craft projects. If proven successful, merchandising ideas generated by a general
manager can be implemented quickly throughout our chain. We believe this helps us to increase
sales and profitability. Our focus on empowering our employees helps in recruiting, hiring and
retaining talented personnel.
We strive to provide superior price/value for our customers.
We believe that our customers consider the relationship between the price and quality of
merchandise to be important factors in their buying decisions. Therefore, we strive to be the
price/value leader in all of our merchandise categories. Our merchants and general managers
actively monitor competitors prices to ensure we maintain low prices while preserving merchandise
quality. We believe that our price/value strategy enhances customer loyalty.
Growth Strategy
The industry in which we operate is large and fragmented. We believe that this presents an
opportunity to continue to grow our business for the foreseeable future. Our objective is to
improve our market share in existing geographic markets and to expand into new geographic markets
while enhancing our profitability through greater leverage of our corporate infrastructure. We
believe by systematically increasing our store base we can obtain economies of scale in
advertising, distribution, purchasing and management costs and, as a result, improve our operating
margins.
During the next two years we intend to increase our store base of 122 locations at December
31, 2006 by approximately 10% to 15% per year. Our current strategy is to open new stores within
the range of our corporate headquarters and distribution center located in suburban Philadelphia.
Ultimately, we believe that we can operate a minimum of 175 stores within the range of our
distribution center without significantly diluting sales in our existing stores. In the future, we
anticipate opening stores in other regions.
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Our site selection strategy is overseen by our Vice President of Real Estate who is
responsible for identifying favorable store locations in both existing and new markets. Our site
selection criteria include an assessment of demographic characteristics of the trade area,
including growth trends, customer traffic patterns, demographic analysis, performance of other
retailers, co-tenants within potential projects, potential cannibalization, competition and
projected profitability. We also employ the services of two real estate brokerage firms to
facilitate real estate research, selection and leasing.
We have developed a standardized procedure for opening new stores which we continue to refine.
Our new store opening team develops the floor plan and merchandise plan based on our store
prototype and hires and trains team members in preparation for the opening of each new store. For
each new store we open in the next two years, we expect to spend approximately $1.4 million, which
includes $400,000 for fixtures and equipment, $300,000 in pre-opening costs (including lease costs
from date of possession) and $700,000 for in-store inventory, net of accounts payable.
In 2006, for stores open at least one full calendar year, our average sales per square foot
was $234 and our average sales per store was approximately $5.4 million. In each of 2006 and 2005,
sales in comparable stores declined by 3%. Previously, our comparable store sales grew by 4% in
2004, 2% in 2003, 5% in 2002 and 8% in 2001. Stores are added to the comparable store base at the
beginning of their fourteenth full month of operation. Our primary method of growing sales in our
existing stores over the long-term is to successfully execute our business and operating
strategies, including reducing expenses as a percentage of sales, described above under Recent
Developments in Business and Operating Strategy and Business and Operating Strategy. There
can be no assurance that our comparable store sales will increase in the future.
Merchandising
Our merchandising strategy is to offer the broadest and deepest assortment of arts, crafts and
floral merchandise and to provide our customers with all of the components necessary for their
crafting projects on a regular basis. We believe our merchandise appeals to a wide range of
recreational and professional crafters of all ages and economic backgrounds, with our primary
customers being women ages 25 to 55. Our buyers actively seek new merchandising opportunities by
monitoring industry trends, working with domestic and international vendors, and regularly
attending trade and consumer shows.
The following table describes net sales for each of our merchandise categories as a percentage
of our total net sales for the years ended December 31, 2004 through 2006:
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Year Ended December 31, |
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2006 |
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Art & scrapbooking |
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25.2 |
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24.6 |
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24.8 |
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Traditional crafts |
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25.8 |
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28.4 |
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29.4 |
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Floral and accessories |
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12.1 |
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12.0 |
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12.2 |
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Fashion crafts |
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9.8 |
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9.6 |
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7.6 |
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Frames |
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9.3 |
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8.6 |
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9.2 |
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Home décor |
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13.6 |
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12.9 |
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13.3 |
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Seasonal items |
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4.2 |
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3.9 |
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3.5 |
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Total |
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100.0 |
% |
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100.0 |
% |
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100.0 |
% |
Our buyers develop a planogram for each of our basic and seasonal merchandise categories
which is implemented at the store level. A planogram is a diagram that shows how and where each
specific
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retail product should be placed on shelves or displays. The planograms are developed by a team
consisting of our buyers and members of our planogram department, with input from key vendors. The
planograms are developed using information about the products, such as size, shape, colors, theme,
sales volume and inventory levels. By analyzing past and current sales patterns, we can then
adjust our planograms to present merchandise in a manner that helps maximize sales.
Our POS system allows us to make better merchandising decisions by identifying sales volume
and seasonality patterns of particular items of merchandise. With this information we can make
better decisions regarding when to stock, reorder, mark-down and discontinue merchandise.
Our purchasing staff and general managers actively monitor competitors prices to ensure we
maintain low prices while preserving merchandise quality and value. Our policy of beating any
competitors advertised price by 10% is displayed in our stores. On a weekly basis, we advertise
select items generally at 20% to 50% off their everyday low prices. We also accept competitors
coupons. We believe that our strategy of price/value enhances customer loyalty.
Our stores regularly feature seasonal merchandise that complements our core merchandising
strategy. Seasonal merchandise is offered for all major holidays and seasons, including Christmas,
Fall/Halloween, Spring/Easter, Valentines Day and St. Patricks Day. By far the greatest portion
of our seasonal merchandise is sold during the Christmas season. This includes merchandise in our
seasonal department as well as seasonal products sold in other merchandise categories. Our
Christmas holiday merchandise is given floor and shelf space in our stores beginning in late
summer. The Christmas holiday season is longer for our stores than for many traditional retailers
because of the project-oriented nature of Christmas crafts and gift-making ideas.
Stores
Our stores typically range from 20,000 to 25,000 square feet. Most of our stores are located
in strip centers that are easily accessible from main traffic arteries and have convenient parking.
Our store size varies based on market demographics and real estate availability. Store leases
generally have an initial term of ten years, with three five year renewal options, and provide for
predetermined escalations in minimum annual rent. Rent payments are amortized over the initial
lease term commencing on the date we take possession. Our stores are generally open from 9:30 a.m.
to 9:00 p.m., Monday through Saturday, and from 10:00 a.m. to 6:00 p.m. on Sunday.
Store layout and operations
Our stores provide a one-stop-shopping destination for arts, crafts and floral merchandise.
We design our stores to be attractive and easy-to-shop with a layout intended to lead customers
through the entire store in order to expose them to all of our merchandise categories. We use
end-of-aisle displays to feature best-selling items and promotional merchandise. Generally, the
center of the store contains the floral area, which includes a ribbon center and counter for free
floral arrangement services. Our stores contain a customer service area and typically eight or
more checkout registers. Our prototype store is apportioned approximately 80% to selling space
with the remainder devoted to delivery, storage, classroom and office areas.
Store management and training
Each store is managed by a general manager who is assisted by two or three assistant general
managers, three to five department managers and an appropriate mix of full-time and part-time team
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members to service our customers. The number of store personnel is substantially higher
during our peak selling season. Our general managers and assistant general managers are
responsible for store results, primarily merchandising, customer service, training, hiring store
level team members, inventory management and expense control. The department managers are
responsible for merchandise ordering, inventory management and customer service. Typically,
general managers are promoted from within our organization. We selectively hire experienced store
managers from other retailers. We also develop assistant general managers from retail trainees and
other internal candidates.
Our training program for store management includes Company-sponsored forums to refine and
develop skills in merchandising, merchandise trends, store operations, financial controls, human
resources and general management. We provide our team members with educational materials on
various crafting products and techniques to create a sales staff with a strong focus on customer
service and a willingness to assist customers in assembling and coordinating their craft projects.
Each general manager reports to a district manager. Our stores are organized into ten
districts. Our district managers also participate in Company-sponsored forums that focus on human
resources, profit improvement, general management, marketing and other initiatives.
Purchasing
Our purchasing programs are designed to support our business strategy of providing customers
with the broadest and deepest assortment of high quality arts, crafts and floral merchandise at
value prices while maintaining high in-stock positions. Our buying staff oversees all of our
purchasing. Buyers regularly attend trade and consumer shows to monitor industry trends and to
obtain new craft ideas.
In-store department managers are responsible for daily reordering of merchandise for their
departments. In 2006, approximately 99% of our merchandise orders were placed through our
electronic data interchange, or EDI, system. Approximately 63% of our orders were shipped directly
from vendors to our stores; the remaining 37%, approximately one-third of which are floral and
seasonal items, were shipped from our distribution center. Merchandise assortments at our stores
can be enhanced by products ordered by general managers to meet the unique needs of their
customers. All purchases are monitored through centralized system controls.
In 2006, we purchased our inventory from more than 500 vendors worldwide. One of the key
criteria for the selection of vendors is their responsiveness to our delivery requirements and
timing needs. In 2006:
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the largest 25 domestic vendors accounted for approximately 48% of our
purchases, |
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the largest vendor, SBARS, Inc., a distributor of arts and crafts
merchandise, accounted for approximately 22% of our purchases, and |
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approximately 13% of our merchandise, primarily floral and seasonal items,
was directly imported from foreign manufacturers or their agents, almost exclusively
from the Peoples Republic of China. |
All of our overseas purchases are denominated in U.S. dollars.
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Distribution
Our distribution strategy is focused on supporting our stores and maintaining high in-stock
positions in all of our merchandise categories. Our stores receive merchandise deliveries one to
three times per week, depending on store volume and time of year.
In the third quarter of 2004 we moved into our new distribution center and office facility.
This facility contains 710,000 square feet for distribution and warehousing plus 60,000 square feet
of office space. We believe this facility is positioned to handle our future expansion and will
enable us to service at least 175 stores. The new facility includes an automated picking and
sortation system. The total cost of this facility was $46.3 million.
Our distribution center and warehouse operations are supported by our real-time warehouse
management system which uses hand-held computers and radio frequency communication technology to
track merchandise. We believe our warehouse management system, which was upgraded in 2004, helps
to make our distribution center and warehouse operations efficient and is instrumental in helping
us meet our commitment to provide superior inventory replenishment to each of our stores.
We lease a fleet of tractors and trailers to deliver merchandise to 61 of our 122 stores
directly from our distribution center. Additionally, we have contracted with a dedicated
third-party carrier to deliver merchandise to the 61 stores where an overnight stay is required
because of travel time. In 2006, approximately 37% of our merchandise was delivered from our
distribution center to our stores. In the second half of 2006, we implemented new processes within
our supply chain, including routing, or cross-docking, which increased amounts of merchandise and
additional SKUs through our distribution center.
Marketing
Our marketing and advertising is designed to attract current customers and appeal to
prospective customers. A study published in Craftrends magazine in December 2005 surveyed over
1,000 craft customers across the country. Of the participants, 61% were between the ages of 26 and
54, 94% were female and 44% had an annual income greater than $60,000. We believe that our target
customer is consistent with this demographic profile.
In 2006, we advertised 50 weeks of the year, typically in midweek editions of local and/or
regional newspapers. In September 2006, we changed approximately 75% of our print advertising from
mid-week, varying between Wednesday, Thursday and Friday, to Sunday. We are currently analyzing
the results from this switch in advertising strategy. In addition, prior to store openings, we
generally use radio advertisements to develop customer awareness and we place special pre-opening
advertisements, normal advertising copy and/or grand opening inserts in newspapers. We create all
of our advertising in-house. We are currently experimenting with the overall visual presentation
of our ads in an effort to increase impact.
Our website, www.acmoore.com, is designed to drive additional store traffic by providing
information, inspiration and ideas to our visitors. It also serves as another marketing channel to
build brand name awareness. Our website offers a collection of over 300 different how-to videos
that customers can view to learn the latest crafting tips, techniques and project ideas. Our
website also features weekly advertisements, a store locator and an in-store class schedule, as
well as suggested craft projects for children and adults with accompanying instructions and
shopping lists for merchandise to be purchased at our stores. We also employ e-marketing that
allows us to email all customers in our
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database our weekly advertisements, news flashes regarding upcoming events and special offers. Gift cards may be
purchased online. At this time, we do not sell our merchandise on our website.
Information Technology
As discussed above under Recent Developments in Business and Operating Strategy, we are
committed to enhanced information technology as an operating priority. During the fourth quarter
of 2006, we analyzed our current information technology situation to determine how we can become a
more technologically driven company and better utilize computer generated metrics to drive
performance.
A technology project life cycle was introduced to the organization in the fourth quarter of
2006. This is a formal, structured approach to application development initiatives. This will
ensure that proper coding and testing disciplines are woven into our project practices as we build
quality systems that will serve as the back bone for future growth.
We completed the conversion of our POS systems in the fourth quarter of 2006. In addition to
faster transaction speeds and an improved customer returns database, this conversion provided
additional functionality such as debit cards and zip code collection. More importantly, it now
provides us the framework for future initiatives that bring additional value and a better
experience to the customer.
During the fourth quarter of 2006, we began to build a sales audit system that will be used
for data cleansing from the POS to assure we have a single source of data in which to feed all
reporting. We recently held initial discovery meetings with our business teams and various vendors
to determine the best approach for delivering perpetual inventory. Introduction of a perpetual
inventory program will be a significant milestone as it is a prerequisite to launching an automated
replenishment system. Automated replenishment utilizes sales history and vendor lead times to
automatically place orders to vendors on a by SKU, by store basis. This eliminates manual
involvement for ordering basic, repeatable product. This system will help us better control our
inventories, make better buying decisions and reduce our store labor costs. We remain confident
that we will have automated replenishment in place during the 2008 calendar year.
Competition
The market in which we compete is highly fragmented, containing multi-store arts and crafts
retailers, mass merchandisers, small local specialty retailers, mail order vendors, hardware stores
and a variety of other retailers. We believe we are one of five retailers in the United States
dedicated to serving the arts and crafts market that have annual sales in excess of $100.0 million.
We compete with many retailers and classify our principal competition within the following three
categories:
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Multi-store arts and crafts retailers. This category includes several
multi-store arts and crafts chains operating more than 35 stores and comprises:
Michaels Stores, Inc., a chain which operates approximately 925 Michaels stores
throughout the United States and Canada; Jo-Ann Stores, Inc., which operates
approximately 630 traditional Jo-Ann Fabrics and Crafts stores and 175 Jo-Ann
superstores nationwide; Hobby Lobby Stores, Inc., a chain which operates approximately
390 stores primarily in the midwest United States; Garden Ridge, Inc., which operates
approximately 35 stores primarily in the southeast and midwest United States; and Rag
Shops, Inc., which operates approximately 60 stores located primarily in New Jersey and
Florida. |
10
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Mass merchandisers. This category includes Wal-Mart Stores, Inc., and
other mass merchandisers. These retailers typically dedicate a relatively small
portion of their selling space to a limited assortment of arts and crafts supplies and
floral merchandise. |
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|
Small, local specialty retailers. This category includes thousands of
local independent arts and crafts retailers. Typically, these are single store
operations managed by the owner. The stores generally offer a limited selection and
have limited resources for advertising, purchasing and distribution. Many of these
stores have established a loyal customer base within a given community and compete on
customer service. |
We believe that the principal competitive factors of our business are assortment, convenience,
service and pricing. We believe that we are well positioned to compete on each of these factors.
Team Members
As of December 31, 2006, we had 2,109 full-time and 2,832 part-time team members, 4,622 of
whom worked at our stores, 164 at our distribution center and 155 at our corporate offices. None
of our team members are covered by a collective bargaining agreement, and we believe our
relationship with our team members is good.
Trademarks
A.C. Moore, Fashion Forward, Splendor of Spring, Holiday Hues, Harvest Hues, Easy
as 1*2*3, Shades of the Season and Creations for All Generations are trademarks that have
been registered with the U. S. Patent and Trademark Office. Stow N Go, Make It Yours, Make It
for Less, Frames N Moore, Frames @ Moore, Frames and Moore and Frames & Moore are common
law trademarks for which applications are now pending with the U.S. Patent and Trademark Office.
We use the A.C. Moore name and logo as a trade name and as a service mark in connection with the
sale of our merchandise. The Fashion Forward name and logo is used on the exclusive packaging of
some of our picture frames. Splendor of Spring, Holiday Hues, Harvest Hues, Shades of the
Season are all used on packaging for products. All other trademarks are used in advertising
campaigns and point of purchase displays.
Website and Availability of Information
Our internet address is www.acmoore.com. We make available free of charge on or through
www.acmoore.com our annual report on Form 10-K, quarterly reports on Form 10-Q and current reports
on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d)
of the Exchange Act, as soon as reasonably practicable after we electronically file such material
with, or furnish it to, the SEC. Additionally, charters for the Audit, Compensation and Nominating
and Corporate Governance Committees of our Board of Directors and our Corporate Code of Ethics can
be found on our Internet website at www.acmoore.com under the heading Investor Relations,
Corporate Profile.
We will provide, at no cost, paper or electronic copies of our reports and other filings made
with the SEC. Requests should be directed to:
Marc Katz
Chief Financial Officer
A.C. Moore Art & Crafts, Inc.
11
130 A.C. Moore Drive
Berlin, New Jersey 08009
The information on the website listed above is not, and should not be considered, part of this
annual report on Form 10-K, and is not incorporated by reference in this document. This website is
only intended to be an inactive textual reference.
ITEM 1A. RISK FACTORS.
An increase in our sales, profitability and cash flow will depend on our ability to increase the
number of stores we operate and increase the productivity and profitability of our existing stores.
Key components of our operating strategy are to increase the number of stores we operate and
increase the productivity and profitability of our existing stores. If we are unable to implement
this strategy, our ability to increase our sales, profitability and cash flow could be
significantly impaired. To the extent we are unable to open new stores as planned, our sales
growth would come only from increases in comparable store sales. There can be no assurance that we will be able to increase our comparable store sales, improve our margins or reduce costs as a percentage of sales. Growth in profitability in that
case would depend significantly on our ability to increase margins or reduce our costs as a
percentage of sales. Further, as we implement new initiatives to reduce the cost of operating our
stores, our sales and profitability may be negatively impacted. In particular, we are currently
evaluating our store model as it relates to levels of staffing and compensation. There can be no
assurance as to whether and to what extent a new store format will be successful.
There are many factors, some of which are beyond our control, which could impact our ability
to implement our strategy to increase productivity and profitability of our current and future
store locations. These factors include:
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our ability to identify suitable markets in which to expand, |
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the availability of suitable sites for additional stores, |
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the ability to negotiate acceptable lease terms for sites we identify, |
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the availability of acceptable financing to support our growth, |
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our ability to hire, train and retain a sufficient number of qualified
general managers and other store personnel, which ability may be impacted by changes to
store personnel compensation and staffing, and |
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the effectiveness of our advertising strategies. |
If we fail to maintain an effective system of internal controls, we may not be able to accurately
report our financial results or prevent fraud.
Effective internal controls are necessary for us to provide reliable financial reports and
effectively prevent or detect fraud. Any inability to provide reliable financial reports or
prevent or detect fraud could harm our business. We continue to evaluate our internal control
procedures to satisfy the requirements of the Sarbanes-Oxley Act of 2002, which requires management
and our independent registered public accounting firm to evaluate and assess the effectiveness of
our internal controls. If we fail to maintain the adequacy of our internal controls, as such
standards are modified, supplemented or amended from time to time, we could be subject to
regulatory scrutiny, civil or criminal penalties or shareholder litigation. In addition, failure to
maintain adequate internal controls could result in financial statements that do not accurately
reflect our financial condition or results.
12
Our success will depend on how well we manage our growth.
Even
if we are able to implement, to a significant degree, our operating strategies of expanding
our store base and increasing the productivity and profitability of our existing stores, we may
experience problems relating to our growth, which may prevent any significant increase in
profitability or negatively impact our cash flow. For example:
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The costs of opening and operating new stores may offset the increased
sales generated by the additional stores; |
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The opening of additional stores in an existing market could reduce net
sales from existing stores in that market; |
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The opening of stores in new geographic markets may present competitive and
merchandising challenges that are different than those we face in our existing
geographic markets; |
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The closing or relocation of under-performing stores may result in us
retaining liability for outstanding lease obligations; |
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Our growth may outpace our ability to expand, upgrade and improve our
administrative, operational and management systems, controls and resources; |
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Our suppliers may be unable to meet our increased demand for merchandise as
a result of the additional stores and increased productivity of our existing stores;
and |
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We may be unable to expand our existing distribution capabilities, or
employ third-party distribution services on a cost-effective basis, to provide
sufficient merchandise for sale by our new stores. |
A weak fourth quarter would have a material adverse effect on our operating results for the year.
Our business is affected by the seasonality pattern common to most retailers. Due to the
importance of our peak selling season, which includes Fall/Halloween, Thanksgiving and Christmas,
the fourth quarter has historically contributed, and is expected to continue to contribute, a
significant portion of our net income for the entire year. In anticipation of increased sales
activity during the fourth quarter, we incur significant additional expense both prior to and
during the fourth quarter. These expenses may include acquisition of additional inventory,
advertising, in-store promotions, seasonal staffing needs and
13
other similar items. As a result,
any factors negatively affecting us during the fourth quarter of any year,
including adverse weather and unfavorable economic conditions, would have a material adverse
effect on our results of operations for the entire year.
Our quarterly results fluctuate due to a variety of factors and are not a meaningful indicator of
future performance.
Our quarterly results have fluctuated in the past and may fluctuate significantly in the
future depending upon a variety of factors, including, among other things:
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the mix of merchandise sold, |
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the timing and level of markdowns, |
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promotional events and changes in advertising, |
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adverse weather conditions, |
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store openings and closings, |
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remodels or relocations of our stores, |
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length and timing of the holiday seasons, |
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competitive factors, and |
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general economic and political conditions. |
We believe that period-to-period comparisons of past operating results cannot be relied upon as
indicators of future performance. If our operating results in any future period fall below the
expectations of securities analysts and investors, the market price of our securities would likely
decline.
Our success depends on key personnel whom we may not be able to retain or hire.
We are dependent on the services, abilities and experience of our senior management team. The
year 2006 involved substantial change in our senior management team. On June 1, 2006, we appointed
Rick A. Lepley as our new Chief Executive Officer. On September 13, 2006, we appointed Marc Katz
as our new Chief Financial Officer. The loss of the services of senior executives and any general
instability in the composition of our senior management team could have a negative impact on our
ability to execute on our business and operating strategy. Our business may be impacted by the
familiarity of newly appointed executives with our business, and their abilities to develop
relationships with each other, our team members and vendors and to implement or change our business
and operating strategy. In addition, our success in the future is dependent upon our ability to
attract and retain other qualified personnel, including general managers. Any inability to do so
may have a material adverse impact on our business and operating results.
We face an extremely competitive retail business market.
The arts and crafts retailing business is highly competitive. We currently compete against a
diverse group of retailers, including multi-store arts and crafts retailers, mass merchandisers,
small local
14
specialty retailers, mail order vendors, hardware stores and a variety of other
retailers. Almost all of our
stores face aggressive competition in their market area from one or more of our major
competitors. In addition, alternative methods of selling crafts, such as over the Internet or
direct marketing, could result in additional future competitors and increased price competition
because our customers could more readily comparison shop. Some of our competitors, particularly
the mass merchandisers and national arts and crafts chains, have substantially greater financial
resources and operate more stores than we do. We also compete with these and other retailers for
customers, suitable retail locations, suppliers and qualified employees and management personnel.
Moreover, increased competition may result in potential or actual litigation between us and our
competitors relating to such activities as competitive sales and hiring practices, exclusive
relationships with key suppliers and manufacturers and other matters. As a result, increased
competition may adversely affect our future financial performance, and we cannot assure you that we
will be able to compete effectively in the future.
We may not be able to successfully anticipate changes in merchandise trends and consumer demands
and our failure to do so may lead to loss of sales and the closing of
under-performing stores.
Our success depends, in large part, on our ability to anticipate and respond in a timely
manner to changing merchandise trends and consumer demand. Accordingly, any delay or failure by us
in identifying and correctly responding to changing merchandise trends and consumer demand could
adversely affect consumer acceptance of the merchandise in our stores. In addition, we make
decisions regarding merchandise well in advance of each of the seasons in which such merchandise
will be sold. Significant deviations from projected demand for merchandise would have a material
adverse effect on our results of operations and financial condition, either from lost sales due to
insufficient inventory or lower margins due to the need to mark down excess inventory.
A material decline in sales and other adverse conditions resulting from our failure to
accurately anticipate changes in merchandise trends and consumer demands may require us to close
under-performing stores. Closing stores would subject us to additional costs including, but not
limited to, taking reserves on impaired assets, loss of customer goodwill and costs associated with
outstanding lease obligations.
Unexpected consumer response to changes in our advertising strategy could materially and adversely
affect our sales, profitability and cash flow.
Advertising promotions have a significant impact on consumers shopping decisions. We are in
the process of experimenting with the reach, frequency and timing of our print advertisements, as
well as the overall visual presentation. During the fourth quarter of 2006, we moved approximately
75% of our print advertising from mid-week, varying between Wednesday, Thursday and Friday, to
Sunday. We are still analyzing the results from these changes and are unable to predict what
effect these changes will have on our business. In addition, we may
from time to time change our other promotional activities. If we misjudge consumer response to these changes,
our financial condition and operating results could be materially and adversely impacted.
Because of our small store base adverse events could have a greater impact on us than if we had a
larger store base.
As of December 31, 2006, we operated a chain of 122 stores. Because our current and planned
stores are located in the eastern United States, the effect on us of adverse events in this region
(such as weather or unfavorable regional economic conditions) may be greater than if our stores
were more
15
geographically dispersed. Because overhead costs are spread over a smaller store base,
increases in our general and administrative expenses could affect our profitability more negatively
than if we had a larger store base. Due to our relatively small store base, one or more
unsuccessful new stores, or a decline in
sales at an existing store, will have a more significant effect on our results of operations
than would be the case if we had a larger store base.
A disruption in the operations of our distribution center could have a material adverse effect on
our financial condition and results of operations.
Our distribution center in suburban Philadelphia currently handles approximately 37% of the
merchandise sold in our stores. As part of our efforts to improve operating efficiencies, we are
implementing new processes within our supply chain, including routing, or cross-docking, increased
amounts of merchandise and additional SKUs through our distribution center. Significant changes to
our supply chain could have a material adverse impact on our operating results. Our distribution
center, and thus our distribution operations, is vulnerable to damage or interruption from fire,
flood, power loss, break-ins and similar events. We have no formal disaster recovery plan for our
distribution center. The occurrence of unanticipated problems at our distribution center, all of
which may not be covered by insurance, could cause interruptions or delays in our business which
would have a material adverse effect on our financial condition and results of operations.
We depend on a number of key vendors to supply our merchandise, and the loss of any one of our key
vendors may result in a loss of sales and significantly harm our operating results.
Our performance depends on our ability to purchase our merchandise in sufficient quantities at
competitive prices. Our future success is dependent upon our ability to maintain a good
relationship with our suppliers. SBARS, one of our suppliers, accounted for approximately 22% of
the aggregate dollar volume of our purchases in 2006. We do not have any long-term purchase
agreements or other contractual assurances of continued supply, pricing or access to new products,
and any vendor or distributor could discontinue selling to us at any time. We may not be able to
acquire desired merchandise in sufficient quantities or on terms acceptable to us in the future, or
be able to develop relationships with new vendors to replace discontinued vendors. Our inability
to acquire suitable merchandise in the future or the loss of one or more key vendors and our
failure to replace any one or more of them may have a material adverse effect on our business,
results of operations and financial condition. Our smaller vendors generally have limited
resources, production capacities and operating histories, and some of our vendors have limited the
distribution of their merchandise in the past. These vendors may be susceptible to cash flow
problems, downturns in economic conditions, production difficulties, quality control issues and
difficulty delivering agreed-upon quantities on schedule. We also cannot assure you that we would
be able, if necessary, to return product to these vendors and obtain refunds of our purchase price
or obtain reimbursement or indemnification from any of our vendors if their products prove
defective.
We face risks associated with sourcing and obtaining merchandise from foreign sources.
We
have in recent years placed increased emphasis on obtaining floral,
seasonal and other items from
overseas vendors, with approximately 13% of all of our merchandise being purchased directly by us
from overseas vendors in 2006. In addition, many of our domestic suppliers purchase a portion of
their merchandise from foreign sources. Our future success will depend in large measure upon our
ability to
16
maintain our existing foreign supplier relationships and to develop new ones. While we
rely on our long-term relationships with our foreign vendors, we have no long-term contracts with
them. Virtually all of the merchandise which we purchase from foreign sources is
manufactured in the Peoples Republic of China. Many of our imported products are subject to duties, tariffs and quotas
that may limit the quantity of some types of goods which we may import into the United States. Our
dependence on foreign imports also makes us vulnerable to risks associated with products
manufactured abroad, including, among other things:
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changes in import duties, tariffs and quotas, |
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loss of most favored nation trading status by the United States in
relation to a particular foreign country, including the Peoples Republic of China, |
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work stoppages, |
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delays in shipments, |
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revaluation of the Chinese currency and fluctuations in
exchange rates, |
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freight cost increases, |
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economic uncertainties, including inflation, |
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foreign government political unrest, and |
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trade restrictions, including the United States retaliating against
protectionist foreign trade practices. |
If any of these or other factors were to render the conduct of business in particular
countries undesirable or impractical, our financial condition and results of operations could be
materially and adversely affected because we would have difficulty sourcing the merchandise we need
to remain competitive. An interruption or delay in supply from our foreign sources, or the
imposition of additional duties, taxes or other charges on these imports could have a material
adverse effect on our business, financial condition and results of operations unless and until
alternative supply arrangements are secured. Products from alternative sources may be of lesser
quality and/or more expensive than those we currently purchase, resulting in a loss of sales and/or
profit to us.
We face risks relating to inventory.
We depend upon our in-store department managers to reorder the majority of our merchandise.
The failure of these department managers to accurately respond to inventory requirements could
adversely affect consumer acceptance of the merchandise in our stores and negatively impact sales
which could have a material adverse effect on our results of operations and financial condition.
If we misjudge the market, we may significantly overstock unpopular products and be forced to take
significant inventory markdowns, which would have a negative impact on our operating results and
cash flow. Conversely, shortages of key items could have a material adverse impact on our
operating results. In addition, we
17
conduct a physical inventory in our stores once a year, and
quarterly results are based on an estimated gross margin and accrual for estimated inventory
shrinkage.
Our information technology may prove inadequate.
We depend on our information technology systems for many aspects of our business. Some of our
key software has been developed by our own programmers and this software may not be easily
integrated with other software and systems. Our business will be materially and adversely affected
if our systems are disrupted or if we are unable to improve, upgrade, integrate or expand upon our
systems, particularly in light of our intention to significantly increase the number of stores that
we operate.
An increase in the cost of fuel oil and oil-based products could impact our earnings and margins.
Prices for oil have fluctuated dramatically in the past and rose substantially in 2006. These
fluctuations impact our distribution costs and the distribution costs of our vendors. If the price
of fuel oil continues to increase, our distribution costs will increase, which could impact our
earnings. In addition, many of the products we sell, such as paints, are oil-based. If the price
of oil continues to increase, the price of the oil-based products we purchase and sell may
increase, which could impact our margins.
Terrorist attacks and threats or actual war may impact all aspects of our operations, revenues,
costs and stock price in unpredictable ways.
Terrorist attacks in the United States, as well as future events occurring in response or in
connection to them, including, without limitation, future terrorist attacks against U.S. targets,
rumors or threats of war, actual conflicts involving the United States or its allies or military or
trade disruptions impacting our domestic or foreign suppliers of merchandise, may impact our
operations, including, among other things, causing delays or losses in the delivery of merchandise
to us and decreased sales of the products we carry. More generally, any of these events could
cause consumer confidence and spending to decrease or result in increased volatility in the United
States and worldwide financial markets and economy. They also could result in a deepening of any
economic recession in the United States or abroad. These events could also temporarily increase
demand for our products as consumers respond by traveling less and engaging in home-based leisure
activities which could contribute to a temporary increase in our sales which may not be
sustainable. Any of these occurrences could have a significant impact on our operating results,
revenues and costs and may result in the volatility of the market price for our common stock.
18
EXECUTIVE OFFICERS OF THE REGISTRANT
Our executive officers are as follows:
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Name |
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Age |
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Position |
Rick A. Lepley
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56 |
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Chief Executive Officer and Director |
Lawrence H. Fine
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53 |
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President, Chief Operating Officer and Director |
Marc Katz
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42 |
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Executive Vice President and Chief Financial Officer |
Amy Rhoades
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35 |
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Vice President and General Counsel |
Mr. Lepley has served as Chief Executive Officer and a director of the Company since June
2006. Previously, Mr. Lepley was Executive Vice President of North American Retail for Office
Depot, Inc., global supplier of office products and services, a position he held from March 2004 to
April 2006. Mr. Lepley was President, Office Depot Japan from May 2001 to March 2004 and was
responsible for all of that companys operations in Japan. From 1994 to 2000, Mr. Lepley served as
founder and President of Retail Investment Concepts, Inc., an independent retailer and Office Depot
licensee for Eastern Europe. From 1982 to 1993, Mr. Lepley was employed by Mitsubishi Motor Sales
of America, Inc., the exclusive U.S. distributor of Mitsubishi Motors-brand cars and vehicles,
where he held various positions, including Senior Vice President of Sales and Marketing, and was
responsible for more than 500 Mitsubishi Motors dealerships in the United States. He was one of 11
executives who founded Mitsubishi Motor Sales of America, Inc. in 1982.
Mr. Fine has served as the President of the Company since June 2001, a director since August
2002 and Chief Operating Officer since February 2003. Previously, Mr. Fine was Executive Vice
President General Merchandise Manager for arts and crafts retailer Michaels Stores, Inc., a
position he held since November 1996. From 1995 until joining Michaels in November 1996, he was
Senior Vice President of Merchandising for Party City Corp., a specialty retailer of party
merchandise. Prior to joining Party City, Mr. Fine held a variety of merchandising positions with
the Jamesway Corporation, a retail mass-merchandiser, for nearly 16 years.
Mr. Katz has served as Executive Vice President and Chief Financial Officer of the Company
since September 2006. Previously, Mr. Katz was Senior Vice President and Chief Information Officer
of Foot Locker, Inc., a specialty athletic retailer, a position he held from May 2003 to September
2006. Mr. Katz served as Vice President and Chief Information Officer of Foot Locker from July 2002
to May 2003. From 1997 to 2002, Mr. Katz served in the following capacities at the financial
services center of Foot Locker: Vice President and Controller from July 2001 to July 2002;
Controller from December 1999 to July 2001; Retail Controller from October 1997 to December 1999;
and Director Inventory Control from June 1997 to October 1997. Prior to his employment with Foot
Locker, Mr. Katz served for eight years at The May Department Stores Company, an operator of
department store chains, in various financial positions.
Ms. Rhoades has served as Vice President and General Counsel of the Company since July 2006.
From April 2003 to July 2006, Ms. Rhoades was an attorney at Blank Rome LLP, a law firm based in
Philadelphia, Pennsylvania. Ms. Rhoades joined Blank Rome as a summer associate in 2001.
ITEM 1B. UNRESOLVED STAFF COMMENTS.
19
None.
ITEM 2. PROPERTIES.
As of December 31, 2006, we operated 122 stores in 18 states, the majority of which are
located within an approximate 500 mile radius of our suburban Philadelphia distribution center.
All of our stores are leased. The number of our stores located in each state and the city in which
each store is located is shown in the table below.
Store leases generally have an initial term of 10 years, with three five-year renewal options,
and provide for predetermined escalations in future minimum annual rent. Rent payments are
amortized over the initial lease term commencing on the date we take possession. The pro rata
portion of scheduled rent payments has been included in other long-term liabilities in our balance
sheet.
We select store locations on the basis of various factors, including market dynamics,
demographics, co-tenants, location within the center, parking and lease terms. We look for
co-tenants that generate a high rate of shopping traffic, such as specialty womens retailers,
leading supermarkets, discount chains, home improvement centers, book stores and domestics stores.
We believe our stores are attractive to landlords because they attract a high volume of customer
traffic.
In the third quarter of 2004 we moved into our new distribution center and office facility.
This facility contains 710,000 square feet for distribution and warehousing plus 60,000 square feet
of office space. We believe this facility is positioned to handle our future expansion and will
enable us to service at least 175 stores. The new facility includes an automated picking and
sortation system. The total cost of this facility was $46.3 million.
20
Store Locations by City and State:
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Alabama (1) |
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Massachusetts (12) |
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New York (21) |
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Pennsylvania (19) |
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Montgomery
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Bellingham
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Amherst
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Allentown |
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Brockton
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Binghamton
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Altoona |
Connecticut (4) |
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Danvers |
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Carle Place |
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Bensalem |
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Manchester
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Dedham
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DeWitt
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Broomall |
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New London
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Framingham
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Glendale
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Erie |
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Orange
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Hanover
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Greece
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Exton |
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Plainville
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Holyoke
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Hamburg
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Hanover |
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Hyannis
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Hauppauge
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Harrisburg |
Delaware (2) |
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North Dartmouth |
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Henrietta |
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Lancaster |
|
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Dover
|
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Somerville
|
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Holbrook
|
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Langhorne |
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Wilmington
|
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Woburn
|
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Ithaca
|
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Mechanicsburg |
|
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Worcester
|
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Latham
|
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Montgomeryville |
Florida (6) |
|
|
|
|
|
|
|
Middletown |
|
|
|
Muncy |
|
|
Daytona Beach |
|
New Hampshire (4) |
|
|
|
Nanuet |
|
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|
Philadelphia |
|
|
Ft. Walton Beach
|
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|
|
Manchester
|
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Plainedge
|
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Reading |
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Jacksonville
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Nashua
|
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Poughkeepsie
|
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Royersford |
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Orlando
|
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Portsmouth
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Saratoga Springs
|
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Scranton |
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|
Pompano Beach
|
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Salem
|
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|
Staten Island
|
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Stroudsburg |
|
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Viera
|
|
|
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Syracuse
|
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|
Wilkes Barre |
|
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|
|
New Jersey (15) |
|
|
|
Utica |
|
|
|
|
Georgia (2) |
|
|
|
Brick Town |
|
|
|
Yorktown Heights |
|
Rhode Island (1) |
|
|
Columbus
|
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|
Clifton
|
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Warwick |
|
|
Savannah |
|
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Deptford |
|
North Carolina (11) |
|
|
|
|
|
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|
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|
East Brunswick |
|
|
|
Asheville |
|
South Carolina (4) |
Maine (2) |
|
|
|
English Creek |
|
|
|
Cary |
|
|
|
Columbia |
|
|
Bangor
|
|
|
|
Hamilton
|
|
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|
Concord
|
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|
|
Greenville |
|
|
Portland
|
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|
Linden
|
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|
|
Durham
|
|
|
|
Myrtle Beach |
|
|
|
|
|
|
Manalapan
|
|
|
|
Fayetteville
|
|
|
|
N. Charleston |
Maryland (7) |
|
|
|
Moorestown |
|
|
|
Greensboro |
|
|
|
|
|
|
Bowie |
|
|
|
Paramus |
|
|
|
Hickory |
|
Tennessee (2) |
|
|
Frederick
|
|
|
|
Parsippany
|
|
|
|
Matthews
|
|
|
|
Chattanooga |
|
|
Glen Burnie
|
|
|
|
Rockaway
|
|
|
|
Raleigh
|
|
|
|
Knoxville |
|
|
Hagerstown
|
|
|
|
Secaucus
|
|
|
|
Wilmington |
|
|
|
|
|
|
Rockville |
|
|
|
Shrewsbury |
|
|
|
Winston-Salem |
|
Virginia (7) |
|
|
Waldorf
|
|
|
|
Watchung
|
|
|
|
|
|
|
|
Fairfax |
|
|
White Marsh
|
|
|
|
|
|
|
|
|
|
|
|
Falls Church |
|
|
|
|
|
|
|
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|
|
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|
Fredericksburg |
|
|
|
|
|
|
|
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|
|
|
|
Manassas |
|
|
|
|
|
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|
|
|
|
|
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|
|
Roanoke |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sterling |
|
|
|
|
|
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|
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|
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|
Virginia Beach |
|
|
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|
West Virginia (2) |
|
|
|
|
|
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|
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|
Clarksburg |
|
|
|
|
|
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|
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|
|
Huntington |
21
ITEM 3. LEGAL PROCEEDINGS.
On April 4, 2003, Kathleen Stahl, a former store merchandiser for the Company, filed a civil
action against us in the Superior Court of New Jersey, Burlington CountyLaw Division for alleged
retaliatory harassment and constructive discharge under the New Jersey Conscientious Employee
Protection Act. The plaintiff sought lost wages, compensatory and punitive damages, and costs.
The complaint was dismissed without prejudice on December 5, 2003 and reinstated on April 15, 2005.
On October 23, 2006, a jury trial on the case began. On October 30, 2006, the jury returned a
verdict in favor of the plaintiff for $19,600 in lost wages, $1.8 million for emotional distress
and $1.5 million in punitive damages. We are disappointed with the jurys verdict and believe it
is not supported by the evidence. We are vigorously pursuing an appeal.
We are involved in other legal proceedings from time to time in the ordinary course of
business. Management believes that none of these other legal proceedings will have a materially
adverse effect on our financial condition or results of operations. However, there can be no
assurance that future costs of such litigation would not be material to our financial condition or
results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of security holders during the fourth quarter of 2006,
through the solicitation of proxies or otherwise.
22
PART II
ITEM 5. MARKET FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF
EQUITY SECURITIES.
Our
common stock is quoted on the Nasdaq Stock Market and trades under the symbol ACMR.
The following table sets forth the high and low sales prices per share of our common stock as
reported on the Nasdaq Stock Market for the periods indicated.
|
|
|
|
|
|
|
|
|
|
|
High |
|
Low |
Year Ended December 31, 2006 |
|
|
|
|
|
|
|
|
First Quarter |
|
$ |
18.64 |
|
|
$ |
12.55 |
|
Second Quarter |
|
|
19.47 |
|
|
|
14.96 |
|
Third Quarter |
|
|
19.42 |
|
|
|
14.98 |
|
Fourth Quarter |
|
|
23.54 |
|
|
|
18.42 |
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2005 |
|
|
|
|
|
|
|
|
First Quarter |
|
$ |
30.09 |
|
|
$ |
24.91 |
|
Second Quarter |
|
|
31.89 |
|
|
|
24.81 |
|
Third Quarter |
|
|
33.25 |
|
|
|
18.52 |
|
Fourth Quarter |
|
|
19.84 |
|
|
|
12.40 |
|
The
number of record holders of our common stock as of March 9, 2007
was 95.
Since becoming a public company we have never declared or paid any cash dividends on our
common stock. We currently intend to retain our future earnings, if any, to finance the expansion
of our business and do not expect to pay any cash dividends in the foreseeable future.
See Part III, Item 12 for a description of our equity compensation plans.
23
ITEM 6. SELECTED FINANCIAL DATA.
The following selected financial data are derived from the consolidated financial statements
of A.C. Moore Arts & Crafts, Inc. The data set forth below should be read in conjunction with
Managements Discussion and Analysis of Financial Condition and Results of Operations, Risk
Factors and the Companys Consolidated Financial Statements and Notes thereto.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
2006 |
|
2005 |
|
2004 |
|
2003 |
|
2002 |
(in thousands except per share data) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Statement of Income Data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales |
|
$ |
589,506 |
|
|
$ |
539,436 |
|
|
$ |
497,626 |
|
|
$ |
433,928 |
|
|
$ |
393,392 |
|
Gross margin (1) |
|
|
230,781 |
|
|
|
212,855 |
|
|
|
197,754 |
|
|
|
161,894 |
|
|
|
148,791 |
|
Selling, general and administrative expenses (1) |
|
|
219,298 |
|
|
|
192,878 |
|
|
|
166,485 |
|
|
|
131,890 |
|
|
|
122,984 |
|
Store pre-opening expenses |
|
|
3,241 |
|
|
|
3,459 |
|
|
|
4,036 |
|
|
|
2,842 |
|
|
|
2,884 |
|
Income from operations |
|
|
4,866 |
|
|
|
16,518 |
|
|
|
27,233 |
|
|
|
27,162 |
|
|
|
22,923 |
|
Net income |
|
|
2,434 |
|
|
|
10,042 |
|
|
|
16,848 |
|
|
|
17,034 |
|
|
|
14,208 |
|
Net income per share, diluted (2) |
|
$ |
0.12 |
|
|
$ |
0.50 |
|
|
$ |
0.84 |
|
|
$ |
0.86 |
|
|
$ |
0.75 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding, diluted (2) |
|
|
20,019 |
|
|
|
20,149 |
|
|
|
20,012 |
|
|
|
19,729 |
|
|
|
18,828 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance Sheet Data (as of): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Working capital |
|
$ |
158,779 |
|
|
$ |
158,432 |
|
|
$ |
150,414 |
|
|
$ |
112,751 |
|
|
$ |
123,811 |
|
Total assets |
|
|
329,837 |
|
|
|
312,757 |
|
|
|
304,112 |
|
|
|
235,163 |
|
|
|
198,559 |
|
Total debt |
|
|
24,214 |
|
|
|
26,786 |
|
|
|
29,357 |
|
|
|
504 |
|
|
|
1,846 |
|
Shareholders equity |
|
|
207,778 |
|
|
|
198,509 |
|
|
|
186,215 |
|
|
|
165,259 |
|
|
|
142,856 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in thousands except sales per square foot) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from operating activities |
|
$ |
31,496 |
|
|
$ |
14,620 |
|
|
$ |
18,495 |
|
|
$ |
23,227 |
|
|
$ |
9,656 |
|
Number of stores open at end of period |
|
|
122 |
|
|
|
109 |
|
|
|
96 |
|
|
|
81 |
|
|
|
71 |
|
Net sales per total square foot (3) |
|
$ |
234 |
|
|
$ |
241 |
|
|
$ |
256 |
|
|
$ |
260 |
|
|
$ |
272 |
|
Average net sales per store (3) |
|
$ |
5,401 |
|
|
$ |
5,417 |
|
|
$ |
5,802 |
|
|
$ |
5,839 |
|
|
$ |
6,064 |
|
Comparable store sales increase (decrease ) (4) |
|
|
0 |
% |
|
|
(3 |
%) |
|
|
4 |
% |
|
|
2 |
% |
|
|
5 |
% |
|
|
|
(1) |
|
As of January 1, 2004, for all vendor contracts entered into or modified after December 31,
2002, the Company 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 Companys 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 Companys income statement. In 2004, net income was reduced by $3.4 million
or $0.17 per share, gross margin increased by $11.9 million, selling, general and
administrative costs increased by $17.4 million and inventory decreased by $5.5 million. |
|
(2) |
|
All share and per share data reflect the two-for-one stock split paid July 31, 2002. |
|
(3) |
|
Includes only stores open during the entire period. |
|
(4) |
|
Stores are added to the comparable store base at the beginning of their fourteenth full month
of operation. |
24
ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
Overview
We are a specialty retailer offering a vast selection of arts, crafts and floral merchandise
to a broad demographic of consumers. We have grown from 17 stores in January 1997 to 122 stores in
December 2006. Our stores are located in the eastern United States from Maine to Florida.
We established our first store in Moorestown, New Jersey in 1984 and grew to five stores by
the end of 1993. We added a total of 12 additional stores in 1994 and 1995. In 1995, we began
implementing an aggressive expansion plan and developing our infrastructure to position us for that
growth.
We continued to develop our operating systems including a point of sale system, a radio
frequency re-order system, a real time merchandise information and control system, a warehouse
management system and an automated ordering system using EDI (electronic data interchange) to link
us electronically with most of our vendors. We also implemented updated general ledger and payroll
systems.
In 1997, we received financing for our growth through an initial public offering of our common
stock with net proceeds, after the payment of outstanding debt, of approximately $16.0 million. We
received an additional $52.1 million from the secondary offering of shares in March 2002.
Our expansion plans continued as we opened 43 new stores in the period 2000 to 2003, 15 new
stores in 2004, 13 new stores in 2005 and 14 new stores in 2006. We closed one store in 2006. We
believe we can operate at least 175 stores within the range of our new distribution center without
significantly diluting sales in our existing stores. We constructed our new distribution center,
which opened in the third quarter of 2004 and is 710,000 square feet plus 60,000 square feet of
office space.
Starting in 2004, vendor monies which support our advertising programs are recorded as a
reduction in the cost of inventory, and are recognized as a reduction to 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. For 2006, this resulted in a reduction in net income of $0.3 million, or $0.02
per share. For the year, gross margin increased by $20.3 million, selling, general, and
administrative costs increased by $21.0 million and inventory decreased by $0.7 million. In 2005,
net income was reduced by $1.3 million, or $0.06 per share, gross margin increased by $16.7
million, selling, general and administrative costs increased by $18.7 million and inventory
decreased by $2.0 million. In 2004, net income was reduced by $3.4 million, or $0.17 per share,
gross margin increased by $11.9 million, selling, general and administrative costs increased by
$17.4 million and inventory decreased by $5.5 million.
Our sales for the year ended December 31, 2006 were $589.5 million, an increase of 9% over
2005 sales of $539.4 million. Same store sales were flat. Net income for the year 2006 decreased
to $2.4 million or $0.12 per diluted share. In 2005, our net income was $10.0 million or $0.50 per
diluted share.
Effective January 1, 2006 we adopted FAS 123(R), Share Based Payment, using the modified
prospective application method. The impact of the adoption of FAS 123(R) on 2006 net income,
including options granted in 2006, was $2.3 million or $0.11 per diluted share.
25
Recent Developments and Business Update
The year 2006 was a year of transition for our Company, as the composition of our senior
management team changed substantially. Our financial and sales performance for 2006 was
disappointing. We expect that 2007 will also be a year of transition as our new management team is
focused on reviewing and adjusting various aspects of our business and operations to position
ourselves for improved performance. New managements primary business and operating initiatives
are discussed below.
Selling, general and administrative expense reduction
We are aggressively reviewing all facets of our business for opportunities to reduce expenses.
The following are our major expense reduction initiatives:
|
|
|
Store payroll costs. We introduced a new general manager compensation plan
based on pay-for-performance beginning in January 2007. Bonuses earned in one year
are no longer rolled into base salary for the coming year. We also tested
different store staffing models, including an appropriate mix of full- and
part-time team members, in the second half of 2006 that we believe will assist us
in improving our results of operations through payroll savings. |
|
|
|
|
Advertising spending. We are in the process of experimenting with the reach,
frequency and timing of our advertisements. During the fourth quarter of 2006, we
moved approximately 75% of our print advertising from mid-week, varying between
Wednesday, Thursday and Friday, to Sunday. While we are still analyzing the
results from this change, we believe that a uniform approach within the chain to
advertising strategy will result in overall efficiencies. |
|
|
|
|
Real estate site location strategy. We believe that our selling, general and
administrative expenses may be significantly reduced if we increase store openings
in existing markets in order to leverage advertising costs. In the future, we
intend to increase store density in existing markets. In addition, previously we entered new markets opening only a single store. When we enter new
markets in the future, as appropriate, we intend to open more than one store at the same time that
we enter that market. |
Inventory reduction
During the fourth quarter of 2006, we reviewed the level and composition of our store
inventories and took steps to reduce excess inventory. We will attempt to improve control in the
future over inventory through aggressive clearance procedures and more centrally directed
purchasing.
Improved information technology
We are committed to enhancing our information technology to increase operating efficiencies,
improve merchandise selection and better serve our customers. During the fourth quarter of 2006,
we completed the upgrade of our POS system and began to construct a sales audit system which will
help us better manage the information available from our POS system. We are currently
investigating the development of both a perpetual inventory and an automated replenishment system,
which we anticipate will be implemented in 2007 and 2008, respectively.
26
Globally sourced and private label products
We are currently investigating increased global sourcing of products. We anticipate that
products imported directly through an arrangement with a global sourcing supplier will be sold in
our stores beginning in the second half of 2007. We expect that the number of products globally
sourced will substantially increase in the future. We also intend to introduce in our stores
private-label products bearing our Company name and logo beginning in the second half of 2007. We
believe that increased global sourcing and sale of private label products will result in
substantial margin improvement.
Centrally directed operations
We are committed to increasing the level of standardization in operations and centrally
directed management practices. This initiative includes, without limitation, standardizing the
presentation in our stores, managing store classroom programs from our corporate office and
advertising strategy. We believe that increased centrally directed management will improve our
operating efficiencies.
Results of Operations
The following table sets forth, for the periods indicated, selected statement of operations
data expressed as a percentage of net sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
2006 |
|
2005 |
|
2004 |
Net sales |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
Cost of sales |
|
|
60.9 |
|
|
|
60.5 |
|
|
|
60.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin |
|
|
39.1 |
|
|
|
39.5 |
|
|
|
39.7 |
|
Selling, general and administrative expenses |
|
|
37.2 |
|
|
|
35.8 |
|
|
|
33.4 |
|
Costs related to change in management |
|
|
0.6 |
|
|
|
|
|
|
|
|
|
Store pre-opening expenses |
|
|
0.5 |
|
|
|
0.6 |
|
|
|
0.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations |
|
|
0.8 |
|
|
|
3.1 |
|
|
|
5.5 |
|
Interest expense (income), net |
|
|
0.0 |
|
|
|
0.1 |
|
|
|
(0.0 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes |
|
|
0.8 |
|
|
|
3.0 |
|
|
|
5.5 |
|
Provision for income taxes |
|
|
0.4 |
|
|
|
1.1 |
|
|
|
2.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
0.4 |
% |
|
|
1.9 |
% |
|
|
3.4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
2006 Compared to 2005
Net Sales. Net sales increased $50.1 million, or 9%, to $589.5 million in 2006 from $539.4
million in 2005. This increase resulted from (i) net sales of $24.5 million from 14 new stores
opened in 2006, (ii)
net sales of $27.1 million from stores opened in 2005 not included in the comparable store
base, and (iii) a comparable store sales decrease of $1.5 million, or 0.3%. For the year, customer
transactions in comparable stores decreased 0.6% compared with 2005 and the average sale increased
0.3%. Stores are added to the comparable store base at the beginning of the fourteenth full month
of operation.
Merchandise categories that exhibited strength during 2006 included seasonal, wedding, basic
crafts and candy making. Our entry into the custom framing business in the beginning of the third
quarter gained momentum throughout the fall season and we ended up with 53 custom frame shops by
end of year. Custom framing volume picked up throughout the fourth quarter with the average ticket
27
dramatically increasing. Yarn continued to have a negative effect on overall sales. In addition,
various tests conducted with regard to advertising reach, frequency and timing (mid-week versus
Sunday) negatively impacted comparable store sales.
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 decreased 0.4% in
2006, to 39.1 % from 39.5% in 2005. The mix of merchandise sold was the primary reason for the
decrease in gross margin.
During the fourth quarter we reviewed the level and composition of our inventories in some
detail and determined that some stores had inventory in excess of what was required to support
current sales levels. We addressed this situation by reducing store purchases and then moving
excess inventory in the stock rooms to the sales floor. This strategy resulted in a 14% reduction
in average store inventory.
Selling, General and Administrative Expenses. Selling, general and administrative expenses
include (i) direct store level expenses, including rent and related operating costs, payroll,
advertising, depreciation and other direct costs, and (ii) corporate level costs not directly
associated with or allocable to cost of sales including executive salaries, accounting and finance,
corporate information systems, office facilities, stock based compensation and other expenses.
Selling, general and administrative expenses, as a percent of net sales, increased 1.4% in
2006, to 37.2% from 35.8 % in 2005. In 2006, we began expensing stock-based compensation as
required by SFAS No. 123(R). This expense accounted for 0.5% of the increase in selling, general
and administrative expenses. Additional increases were the closure of our Birmingham location and a
lease termination representing a 0.2% increase, consulting studies performed during the year
representing a 0.1% increase, and the remainder was due to the de-leveraging of expenses versus
sales that occurred in the first and fourth quarters of 2006.
In 2006, the Company recognized $3.1 million of share-based compensation expense. Of this
amount, $2.8 million was included as a component of selling, general and administrative expense and
$326,000 was included in costs related to changes in management.
Costs Related to Changes in Management. We incurred a cost of $3.4 million in 2006 related to
changes in management. This cost includes severance for departing officers and employees as well as
recruiting costs for new officers. As of December 31, 2006, there was $518,000 of unpaid severance
costs included in accrued expenses. On June 1, 2006, we had a total of 26 officers at the
vice president level and above. As of December 31, 2006, we had 11 officers at this level and
above.
Changes in management since June 1, 2006 include but are not limited to the following: (i)
appointment of a new Chief Executive Officer on June 1, 2006 to replace the previous Chief
Executive Officer who retired on June 1, 2006; (ii) appointment of a new Chief Financial Officer on
September 13, 2006 to replace the former Chief Financial Officer who retired on July 31, 2006,
(iii) replacement of 11 field vice president positions with seven district manager positions; (iv)
retirement of the Executive Vice President, Merchandising on June 30, 2006; (v) departure of the
Executive Vice President, Merchandising and Marketing on July 31, 2006; (vi) departure of our
Executive Vice President, Store Operations on November 22, 2006; (vii) departure of two senior vice
presidents and five vice presidents, of which two were replaced; and (viii) hiring of three new
vice presidents to fill newly created positions. It is anticipated that the Company will continue
to incur additional expenses of this nature as it implements
28
various other changes through at least
June 30, 2007. Subsequent to year-end, our Vice President of Distribution and our Senior Vice
President of Finance left the Company.
Net Interest Expense (Income). In 2006, we had net interest expense of $323,000 compared with
net interest expense of $450,000 in 2005. The decrease is principally due to additional interest
income received during the year based on our higher cash position.
Store Pre-Opening Expenses. We expense store pre-opening costs as they are incurred, which
would include straight-line expense of rent holidays prior to store opening. Pre-opening expenses
for the 14 new stores opened in 2006 amounted to $3.2 million. In 2005, we opened 13 new stores
and relocated one store and incurred pre-opening expenses of $3.5 million.
Income Taxes. Our effective income tax rate was 46.4% for 2006 and 37.5% for 2005. The
increase is primarily attributable to the adoption of SFAS No.123(R) and the resulting permanent
difference for non-deductible compensation expense from incentive stock options, or ISOs, when
applied against a lower level of pre-tax profits. Tax benefits from the exercise of ISOs will be
recognized in future periods if disqualifying dispositions occur.
2005 Compared to 2004
Net Sales. Net sales increased $41.8 million, or 8.4%, to $539.4 million in 2005 from $497.6
million in 2004. This increase resulted from (i) net sales of $19.4 million from 13 new stores
opened in 2005, (ii) net sales of $35.0 million from stores opened in 2004 not included in the
comparable store base, and (iii) a comparable store sales decrease of $12.6 million, or 2.6%. For
the year, customer transactions in comparable stores decreased by 3.2% compared with 2004 and the
average sale increased by 0.6%. Stores are added to the comparable store base at the beginning of
the fourteenth full month of operation.
Sales in 2005 were impacted by adverse weather conditions in the first three quarters of the
year, and by the significant decline in the yarn category in the second half of the year. We had
achieved major sales increases in yarn during 2004 and the spring of 2005, at which time there was
a large supply of yarn in the marketplace coupled with a decline in customer demand. This resulted
in our yarn sales declining by approximately 30% in the second half of the year. Merchandise
categories that exhibited strength during the year included jewelry making, wearables and basic
crafts. Additionally, our floral and seasonal businesses strengthened considerably in the fourth
quarter.
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 decreased 0.2% in
2005, to 39.5 % from 39.7% in 2004.
The mix of merchandise sold decreased margins by 0.9%, principally as the result of heavy
discounting that occurred throughout the arts and crafts sector during the fourth quarter. 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 0.7% in margin rate for the
year ended December 31, 2005 compared with the year ended December 31, 2004. Improved productivity
in our warehouse increased margins by 0.3% in 2005 as a result of a reduction in distribution
costs. Insurance claim proceeds added 0.3% to the margins in 2004.
29
Selling, General and Administrative Expenses. Selling, general and administrative expenses
include (i) direct store level expenses, including rent and related operating costs, payroll,
advertising, depreciation and other direct costs, and (ii) 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 expenses.
Selling, general and administrative expenses, as a percent of net sales, increased 2.4% in
2005, to 35.8% from 33.4% in 2004. As a percent to net sales on a per store basis, selling,
general and administrative expenses increased by 2.4% in 2005 as compared with 2004. Selling,
general and administrative costs increased by 1.3% in the comparable store base as a result of the
decline in comparable store sales. There was a 1.1% increase attributable to new stores opened in
2004 and 2005 which have higher selling, general and administrative expenses as a percentage of
sales than existing stores.
Net Interest Expense (Income). In 2005 we had net interest expense of $450,000 compared with
net interest income of $163,000 in 2004. The increase is principally due to interest expense from
mortgages related to our new distribution center and corporate offices which were outstanding for a
full year in 2005 compared with five months in 2004.
Store Pre-Opening Expenses. We expense store pre-opening costs as they are incurred, which
would include straight-line expense of rent holidays prior to store opening. Pre-opening expenses
for the 13 new stores opened in 2005 and the one store which was relocated during the year,
amounted to $3.5 million. In 2004, we opened fifteen new stores and relocated two stores and
incurred pre-opening expenses of $4.0 million.
Income Taxes. Our effective income tax rate was 37.5% for 2005 and 38.5% for 2004. The
reduction in rates is consistent with the lower level of profits and the graduated income tax
rates.
30
Quarterly Results and Seasonality
The following table sets forth our unaudited quarterly operating results for our eight most
recent quarterly periods, and the number of stores open at the end of each period (dollars in
thousands, except share and store data).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First |
|
Second |
|
Third |
|
Fourth |
|
|
Quarter |
|
Quarter |
|
Quarter |
|
Quarter |
2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales |
|
$ |
132,918 |
|
|
$ |
129,815 |
|
|
$ |
128,936 |
|
|
$ |
197,839 |
|
Gross margin |
|
|
53,153 |
|
|
|
52,792 |
|
|
|
52,981 |
|
|
|
71,853 |
|
Income (loss) from operations |
|
|
469 |
|
|
|
(2,875 |
) |
|
|
(4,193 |
) |
|
|
11,464 |
|
Net income (loss) |
|
|
250 |
|
|
|
(1,769 |
) |
|
|
(2,645 |
) |
|
|
6,595 |
|
Net income (loss) per share, diluted |
|
$ |
0.01 |
|
|
$ |
(0.09 |
) |
|
$ |
(0.13 |
) |
|
$ |
0.33 |
|
Diluted average shares outstanding |
|
|
20,070 |
|
|
|
19,857 |
|
|
|
19,916 |
|
|
|
20,192 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of stores open at end of period |
|
|
113 |
|
|
|
114 |
|
|
|
117 |
|
|
|
122 |
|
Comparable store sales increase (decrease) |
|
|
(2.0 |
%) |
|
|
3.0 |
% |
|
|
2.0 |
% |
|
|
(3.0 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales |
|
$ |
122,879 |
|
|
$ |
113,489 |
|
|
$ |
115,094 |
|
|
$ |
187,974 |
|
Gross margin |
|
|
48,128 |
|
|
|
45,689 |
|
|
|
46,692 |
|
|
|
72,346 |
|
Income (loss) from operations |
|
|
2,123 |
|
|
|
(21 |
) |
|
|
(2,928 |
) |
|
|
17,344 |
|
Net income (loss) |
|
|
1,252 |
|
|
|
(50 |
) |
|
|
(1,900 |
) |
|
|
10,740 |
|
Net income (loss) per share, diluted |
|
$ |
0.06 |
|
|
$ |
(0.00 |
) |
|
$ |
(.10 |
) |
|
$ |
0.53 |
|
Diluted average shares outstanding |
|
|
20,209 |
|
|
|
19,743 |
|
|
|
19,808 |
|
|
|
20,105 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of stores open at end of period |
|
|
96 |
|
|
|
98 |
|
|
|
105 |
|
|
|
109 |
|
Comparable store sales increase (decrease) |
|
|
(2.0 |
%) |
|
|
1.0 |
% |
|
|
(4.0 |
%) |
|
|
(4.0 |
%) |
Due to the importance of our peak selling season, which includes Fall/Halloween,
Thanksgiving and Christmas, the fourth quarter has historically contributed, and is expected to
continue to contribute, a significant portion of our profitability for the entire year. As a
result, any factors negatively affecting us during the fourth quarter of any year, including
adverse weather and unfavorable economic conditions, would have a material adverse effect on our
results of operations 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.
Liquidity and Capital Resources
Our cash is used primarily for working capital to support our inventory requirements and
fixtures and equipment, 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 2004 we borrowed $30.0 million under two mortgage agreements we have with Wachovia
Bank N.A. (Wachovia) to finance our new distribution center and corporate offices.
31
At December 31, 2006 and 2005, our working capital was $158.8 million and $158.4 million,
respectively. During 2006, 2005 and 2004, cash of $31.5 million, $14.6 million and $18.5 million
was generated by operations, respectively. In 2006, the Company executed an inventory reduction
plan which
amounted to $5.9 million, and increases in accounts payable accounted for $8.6 million. In
2005 and 2004, $9.8 million and $21.3 million of cash, respectively, was used to increase inventory
levels to support both new and existing stores.
Net cash used in investing activities during 2006, 2005 and 2004 was $14.3 million, $3.8
million and $44.4 million, respectively. In 2006, this use of cash was for $19.5 million of
capital expenditures, which includes $10.1 million for new store openings, and the remainder for
remodeling existing stores, upgrading systems in existing stores, warehouse equipment and corporate
systems development; paid for in part through the sale of $5.2 million in marketable securities. In
2005, this use of cash was for capital expenditures of $16.1 million, paid for in part through the
sale of $12.3 million in marketable securities. We spent $11.0 million for new stores and the
remainder for remodeling existing stores and upgrading systems. In 2004 we spent $27.0 million for
the construction of our new distribution center, $11.1 million for new stores and $6.3 million for
remodeling existing stores and upgrading systems. In 2007, we expect to spend approximately $19.0
million on capital expenditures, which includes $10.0 million for new store openings, and the
remainder for remodeling existing stores, upgrading systems in existing stores, warehouse equipment
and corporate systems development.
We maintain two mortgage agreements with Wachovia related to our distribution center and
corporate offices, of which $24.2 and $26.8 million was outstanding at December 31, 2006 and 2005,
respectively. The mortgages are secured by land, building, and equipment. Of the original $30.0
million in mortgages, $22.5 million ($19.1 million at December 31, 2006) is repayable over 15 years
and $7.5 million ($5.1 million at December 31, 2006) is repayable over seven years. Fixed monthly
payments totaling $214,000 started in October 2004. As of November 2006, we effectively converted
these mortgages from a variable interest rate to fixed interest rates of 5.77% on the 15-year
mortgage and 5.72% on the seven-year mortgage through the use of an interest rate swap.
In March 2007, we amended these two mortgages to modify certain covenants. See Item 9B.
Other Information for more information on this amendment. The mortgages, as amended, contain
covenants that, among other things, restrict our ability to incur additional indebtedness or
guarantee obligations in excess of $18.0 million, engage in mergers or consolidations, dispose of
assets, make acquisitions requiring a cash outlay in excess of $20.0 million, make loans or
advances in excess of $1.0 million, permit liens relating to capitalized lease obligations or
purchase money financing in excess of $2.0 million, or change the nature of our business. We are
restricted in capital expenditures unless certain financial covenants are maintained including
those relating to tangible net worth and funded debt. The mortgages also define various events of
default, including cross default provisions, defaults for any material judgments or a change in
control. At December 31, 2006, we were in compliance with these covenants.
At December 31, 2006, we had a $35.0 million line of credit agreement with Wachovia, which
would have expired on May 31, 2007. In March 2007, we extended our line of credit agreement with
Wachovia from May 31, 2007 to May 31, 2008. Borrowing under this line bears interest at LIBOR plus
65 basis points and is subject to the same covenants as the mortgages described above. As of
December 31, 2006, there were no borrowings outstanding under this agreement.
32
We believe the cash generated from operations during the year and available borrowings under
our line of credit agreement with Wachovia will be sufficient to finance our working capital and
capital expenditure requirements for at least the next 12 months.
We lease our retail stores and some vehicles and equipment under non-cancelable operating
leases. At December 31, 2006 our total obligations under these operating leases were $271.9
million. The following table reflects as of December 31, 2006 the payments due (including those
for unopened stores) for the periods indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due By Period ($000) |
|
|
|
|
|
|
Less than |
|
|
|
|
|
|
|
|
|
After 5 |
Contractual Obligations |
|
Total |
|
1 Year |
|
1-3 Years |
|
4-5 Years |
|
Years |
Long-term debt (1) |
|
$ |
31,998 |
|
|
$ |
3,898 |
|
|
$ |
10,808 |
|
|
$ |
5,171 |
|
|
$ |
12,121 |
|
Store operating leases (2) |
|
|
270,322 |
|
|
|
37,414 |
|
|
|
105,547 |
|
|
|
56,909 |
|
|
|
70,452 |
|
Vehicle and equipment leases |
|
|
1,534 |
|
|
|
435 |
|
|
|
950 |
|
|
|
149 |
|
|
|
|
|
Purchase obligations (3) |
|
|
15 |
|
|
|
15 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liability (4) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total contractual cash obligations |
|
$ |
303,869 |
|
|
$ |
41,762 |
|
|
$ |
117,305 |
|
|
$ |
62,229 |
|
|
$ |
82,573 |
|
|
|
|
(1) |
|
Includes interest calculated using the effective rates of 5.77% and 5.72% as of December 31,
2006. In November 2006, the Company entered into two interest rate swap agreements with
Wachovia Bank. The swaps effectively convert the Companys variable interest rate mortgage
obligations to a fixed rate. See Note 1 of the Notes to Consolidated Financial Statements for
additional information on these swaps. |
|
(2) |
|
Most store leases have an average initial term of ten years, with three five year renewal
options, and provide for predetermined escalation in future minimum annual rent. Rent
payments are amortized over the initial lease term commencing on the date we take possession.
The pro rata portion of scheduled rent escalations has been included in other long-term
liabilities in the balance sheet. |
|
(3) |
|
Purchase obligations include agreements for goods and services that are enforceable and
legally binding on the Company and that specify all significant terms. As of December 31,
2006, such obligations include telephone services for information technology. |
|
(4) |
|
The amount of deferred income taxes has been excluded from the above table as the timing of
any cash payment is uncertain. See Note 6 of the Notes to Consolidated Financial Statements
for additional information regarding our deferred tax position. |
Critical Accounting Estimates
Our accounting policies are more fully described in Note 1 of the Notes to Consolidated
Financial Statements included herein. As disclosed in Note 1 of the Notes to Consolidated
Financial Statements, 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 the 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 future events cause us to change our assumptions. 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
33
under the circumstances. Management believes the
following critical accounting estimates encompass the more significant judgments and estimates used
in preparation of the Consolidated Financial Statements.
Merchandise Inventories. We value our inventories at the lower of cost or market. The retail
inventory method is used to determine cost at our store locations. For our warehouse inventories
cost is determined on a first-in, first-out basis. We perform complete physical inventories in our
stores and warehouse at the end of each year. The physical count of merchandise is made by a
combination of store personnel and a third-party inventory counting service firm. We include 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.
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. Quarterly, our inventory valuation includes estimates for shrinkage, capitalized
buying, warehousing and distribution costs related to inventory, and markdowns of merchandise
inventories. 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 an appropriate value of our inventory on
hand at year-end.
Impairment of Long-Lived Assets. In accordance with generally accepted accounting principles,
we review long-lived assets for impairment by comparing the carrying value of assets with their
estimated future undiscounted cash flows. To the extent these future estimates change, the
conclusion regarding impairment may differ from our current estimates, and the loss, if any, would
be recognized at that time. The impairment loss is calculated as the difference between asset
carrying values and the present value of estimated net cash flows or comparable market values,
giving consideration to recent operating performance and pricing trends.
Income Taxes. We do business in various jurisdictions that impose income taxes. Management
determines the aggregate amount of income tax expense to accrue and the amount currently payable
based upon the tax statutes of each jurisdiction. This process involves adjusting income
determined using generally accepted accounting principles for items that are treated differently by
the applicable taxing authorities. Deferred taxes are reflected on our balance sheet for temporary
differences that will reverse in subsequent years. If different judgments had been made, our tax
expense, assets and liabilities could have been different.
Other Estimates. Management uses estimates in the determination of the required accruals for
general liability, workers compensation and health insurance. These estimates are based upon
examination of historical trends, industry claims experience and, in certain cases, calculations
performed by third-party experts. Projected claims information may change in the future and may
require management to revise these accruals.
We are periodically involved in various legal actions arising in the normal course of
business. Management is required to assess the probability of any adverse judgments as well as the
potential range of any losses. Management determines the required accruals after a careful review
of the facts of each legal action. Our accruals may change in the future due to new developments
in these matters.
34
Change in Accounting Principles
Effective January 1, 2006 we adopted FAS123(R) using the modified prospective application
method. As of December 31, 2005, the compensation cost related to non-vested stock options not yet
recognized totaled $3.4 million. This amount will be recognized over the next 20 months. The
impact of the adoption of FAS 123(R) on 2006 net income was $2.3 million or $0.11 per diluted
share.
New Accounting Pronouncements
In July 2006, the Financial Accounting Standards Board (FASB) issued Financial Accounting
Standards Board Interpretation (FIN) No. 48, Accounting for Uncertainty in Income Taxes. FIN 48
prescribes a recognition threshold and measurement attribute for the financial statement
recognition and measurement of a tax position taken or expected to be taken in an enterprises tax
return. This interpretation also provides guidance on the derecognition, classification, interest
and penalties, accounting in interim periods, disclosure, and transition of tax positions. The
recognition threshold and measurement attribute is part of a two step tax position evaluation
process prescribed in FIN 48. FIN 48 is effective after the beginning of an entitys first fiscal
year that begins after December 15, 2006. We will adopt FIN 48 as of January 1, 2007. We are
currently assessing the impact to our consolidated financial statements.
In September 2006, FASB issued SFAS No. 157, Fair Value Measurements, which defines fair
value, establishes a framework for measuring fair value in generally accepted accounting principles
(GAAP), and expands disclosures about fair value measurements. SFAS No. 157 is effective for
financial statements issued in 2008. The company is currently assessing the impact of SFAS No. 157
to its consolidated financial statements.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE 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 December 31, 2006 approximated carrying value. A
hypothetical decrease in interest rates of 10% compared to the rates in effect at year end would
reduce our interest income $311,000 annually.
We had no borrowings outstanding under our line of credit at December 31, 2006. The interest
rates on our mortgages fluctuate with market rates and therefore the value of these financial
instruments will not be impacted by a change in interest rates. In November 2006, we entered into
an interest rate swap that had the effect of converting our variable mortgages to a fixed rate. As
a result, a 10% increase or decrease in interest rates would have no impact on our interest expense
as the increase/decrease in interest paid on our mortgages would be offset by a corresponding
increase/decrease in the interest received from our swap.
A 10% decrease in interest rates would cause the fair market value of the swap to decrease by
$652,000.
35
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
A.C. MOORE ARTS & CRAFTS, INC.
|
|
|
|
|
|
|
Page |
Report of Independent Registered Public Accounting Firm |
|
|
37 |
|
Consolidated Balance Sheets at December 31, 2006 and 2005 |
|
|
39 |
|
Consolidated Statements of Income for each of the three years
in the period ended December 31, 2006 |
|
|
40 |
|
Consolidated Statements of Changes in Shareholders Equity for each of the
three years in the period ended December 31, 2006 |
|
|
41 |
|
Consolidated Statements of Cash Flows for each of the three years
in the period ended December 31, 2006 |
|
|
42 |
|
Notes to Consolidated Financial Statements |
|
|
43 |
|
36
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of A.C. Moore Arts & Crafts, Inc.:
We have completed integrated audits of A.C. Moore Arts & Crafts, Inc.s consolidated financial
statements and of its internal control over financial reporting as of December 31, 2006, in
accordance with the standards of the Public Company Accounting Oversight Board (United States).
Our opinions, based on our audits, are presented below.
Consolidated financial statements and financial statement schedule
In our opinion, the consolidated financial statements listed in the accompanying index present
fairly, in all material respects, the financial position of A.C. Moore Arts & Crafts, Inc. and its
subsidiaries at December 31, 2006 and 2005, and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 2006 in conformity with
accounting principles generally accepted in the United States of America. In addition, in our
opinion, the financial statement schedule listed in the index appearing under Item 15(a)(2)
presents fairly, in all material respects, the information set forth therein when read in
conjunction with the related consolidated financial statements. These financial statements and
financial statement schedule are the responsibility of the Companys management. Our
responsibility is to express an opinion on these financial statements and financial statement
schedule based on our audits. We conducted our audits of these statements in accordance with the
standards of the Public Company Accounting Oversight Board (United States). Those standards
require that we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit of financial statements includes
examining, on a test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
As discussed in Note 1, the Company adopted a new financial accounting standard for share-based
compensation during 2006.
Internal control over financial reporting
Also, in our opinion, managements assessment, included in Managements Report on Internal
Control Over Financial Reporting appearing under Item 9A, that the Company maintained effective
internal control over financial reporting as of December 31, 2006 based on criteria established
in Internal Control Integrated Framework issued by the Committee of Sponsoring Organizations of
the Treadway Commission (COSO), is fairly stated, in all material respects, based on those
criteria. Furthermore, in our opinion, the Company maintained, in all material respects,
effective internal control over financial reporting as of December 31, 2006, based on criteria
established in Internal Control Integrated Framework issued by the COSO. The Companys
management is responsible for maintaining effective internal control over financial reporting and
for its assessment of the effectiveness of internal control over financial reporting. Our
responsibility is to express opinions on managements assessment and on the effectiveness of the
Companys internal control over financial reporting based on our audit. We conducted our audit of
internal control over financial reporting in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether effective internal control over financial
reporting
was maintained in all material respects. An audit of internal control over financial reporting
includes obtaining an understanding of internal control over financial reporting, evaluating
37
managements assessment, testing and evaluating the design and operating effectiveness of
internal control, and performing such other procedures as we consider necessary in the
circumstances. We believe that our audit provides a reasonable basis for our opinions.
A companys internal control over financial reporting is a process designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted accounting principles. A
companys internal control over financial reporting includes those policies and procedures that (i)
pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of financial statements in accordance
with generally accepted accounting principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of management and directors of the company;
and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the companys assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or
detect misstatements. Also, projections of any evaluation of effectiveness to future periods are
subject to the risk that controls may become inadequate because of changes in conditions, or that
the degree of compliance with the policies or procedures may deteriorate.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Philadelphia, Pennsylvania
March 12, 2007
38
A.C. MOORE ARTS & CRAFTS, INC.
CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2006 |
|
|
2005 |
|
ASSETS |
|
|
|
|
|
|
|
|
Current assets: |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
76,120 |
|
|
$ |
57,748 |
|
Marketable securities |
|
|
|
|
|
|
5,224 |
|
Inventories |
|
|
146,751 |
|
|
|
152,646 |
|
Prepaid expenses and other current assets |
|
|
7,653 |
|
|
|
6,900 |
|
Deferred tax asset |
|
|
2,636 |
|
|
|
734 |
|
|
|
|
|
|
|
|
|
|
|
233,160 |
|
|
|
223,252 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non current assets: |
|
|
|
|
|
|
|
|
Property and equipment, net |
|
|
95,268 |
|
|
|
88,098 |
|
Other assets |
|
|
1,409 |
|
|
|
1,407 |
|
|
|
|
|
|
|
|
|
|
$ |
329,837 |
|
|
$ |
312,757 |
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS EQUITY |
|
|
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
|
|
|
Current portion of long-term debt |
|
$ |
2,571 |
|
|
$ |
2,571 |
|
Trade accounts payable |
|
|
48,703 |
|
|
|
46,445 |
|
Accrued payroll and payroll taxes |
|
|
3,011 |
|
|
|
3,928 |
|
Accrued expenses |
|
|
17,336 |
|
|
|
10,044 |
|
Accrued lease liability |
|
|
825 |
|
|
|
153 |
|
Income taxes payable |
|
|
1,935 |
|
|
|
1,679 |
|
|
|
|
|
|
|
|
|
|
|
74,381 |
|
|
|
64,820 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non current liabilities: |
|
|
|
|
|
|
|
|
Long-term debt |
|
|
21,643 |
|
|
|
24,215 |
|
Deferred tax liability |
|
|
6,605 |
|
|
|
8,039 |
|
Accrued lease liability |
|
|
19,430 |
|
|
|
17,174 |
|
|
|
|
|
|
|
|
|
|
|
47,678 |
|
|
|
49,428 |
|
|
|
|
|
|
|
|
|
|
|
122,059 |
|
|
|
114,248 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 20,167,098 shares at December 31,
2006 and 19,816,774 shares at December 31, 2005 |
|
|
118,218 |
|
|
|
111,383 |
|
|
|
|
|
|
|
|
|
|
Retained earnings |
|
|
89,560 |
|
|
|
87,126 |
|
|
|
|
|
|
|
|
|
|
|
207,778 |
|
|
|
198,509 |
|
|
|
|
|
|
|
|
|
|
$ |
329,837 |
|
|
$ |
312,757 |
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
39
A.C. MOORE ARTS & CRAFTS, INC.
CONSOLIDATED STATEMENTS OF INCOME
(dollars in thousands except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
Net sales |
|
$ |
589,506 |
|
|
$ |
539,436 |
|
|
$ |
497,626 |
|
Cost of sales (including buying and distribution costs) |
|
|
358,725 |
|
|
|
326,581 |
|
|
|
299,872 |
|
|
|
|
|
|
|
|
|
|
|
Gross margin |
|
|
230,781 |
|
|
|
212,855 |
|
|
|
197,754 |
|
Selling, general and administrative expenses |
|
|
219,298 |
|
|
|
192,878 |
|
|
|
166,485 |
|
Costs related to change in management |
|
|
3,376 |
|
|
|
|
|
|
|
|
|
Store pre-opening expenses |
|
|
3,241 |
|
|
|
3,459 |
|
|
|
4,036 |
|
|
|
|
|
|
|
|
|
|
|
Income from operations |
|
|
4,866 |
|
|
|
16,518 |
|
|
|
27,233 |
|
Interest expense |
|
|
1,547 |
|
|
|
1,234 |
|
|
|
380 |
|
Interest (income) |
|
|
(1,224 |
) |
|
|
(784 |
) |
|
|
(543 |
) |
|
|
|
|
|
|
|
|
|
|
Income before income taxes |
|
|
4,543 |
|
|
|
16,068 |
|
|
|
27,396 |
|
Provision for income taxes |
|
|
2,109 |
|
|
|
6,026 |
|
|
|
10,548 |
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
2,434 |
|
|
$ |
10,042 |
|
|
$ |
16,848 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net income per share |
|
$ |
0.12 |
|
|
$ |
0.51 |
|
|
$ |
0.86 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net income per share |
|
$ |
0.12 |
|
|
$ |
0.50 |
|
|
$ |
0.84 |
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
40
A.C. MOORE ARTS & CRAFTS, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY
(in thousands except share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retained |
|
|
|
|
|
|
Shares |
|
|
Common Stock |
|
|
Earnings |
|
|
Total |
|
Balance, December 31, 2003 |
|
|
19,357,541 |
|
|
$ |
105,023 |
|
|
$ |
60,236 |
|
|
$ |
165,259 |
|
Net income |
|
|
|
|
|
|
|
|
|
|
16,848 |
|
|
|
16,848 |
|
Exercise of stock options |
|
|
297,559 |
|
|
|
1,805 |
|
|
|
|
|
|
|
1,805 |
|
Tax benefit from exercise of stock options |
|
|
|
|
|
|
2,303 |
|
|
|
|
|
|
|
2,303 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2004 |
|
|
19,655,100 |
|
|
$ |
109,131 |
|
|
$ |
77,084 |
|
|
$ |
186,215 |
|
Net income |
|
|
|
|
|
|
|
|
|
|
10,042 |
|
|
|
10,042 |
|
Exercise of stock options |
|
|
161,674 |
|
|
|
1,023 |
|
|
|
|
|
|
|
1,023 |
|
Tax benefit from exercise of stock options |
|
|
|
|
|
|
1,229 |
|
|
|
|
|
|
|
1,229 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2005 |
|
|
19,816,774 |
|
|
$ |
111,383 |
|
|
$ |
87,126 |
|
|
$ |
198,509 |
|
Net income |
|
|
|
|
|
|
|
|
|
|
2,434 |
|
|
|
2,434 |
|
Exercise of stock options |
|
|
350,324 |
|
|
|
2,152 |
|
|
|
|
|
|
|
2,152 |
|
Tax benefit from exercise of stock options |
|
|
|
|
|
|
1,606 |
|
|
|
|
|
|
|
1,606 |
|
Stock-based
compensation expense |
|
|
|
|
|
|
3,077 |
|
|
|
|
|
|
|
3,077 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2006 |
|
|
20,167,098 |
|
|
$ |
118,218 |
|
|
$ |
89,560 |
|
|
$ |
207,778 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
41
A.C. MOORE ARTS & CRAFTS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
2,434 |
|
|
$ |
10,042 |
|
|
$ |
16,848 |
|
Adjustments to reconcile net income to net cash
provided by operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
12,281 |
|
|
|
10,769 |
|
|
|
8,967 |
|
Stock based compensation expense |
|
|
3,077 |
|
|
|
|
|
|
|
|
|
Loss on disposal of assets |
|
|
83 |
|
|
|
438 |
|
|
|
|
|
Provision for (benefit of) deferred income taxes, net |
|
|
(3,336 |
) |
|
|
(484 |
) |
|
|
1,934 |
|
Changes in assets and liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
Inventories |
|
|
5,895 |
|
|
|
(9,814 |
) |
|
|
(21,339 |
) |
Prepaid expenses and other current assets |
|
|
(753 |
) |
|
|
755 |
|
|
|
(4,693 |
) |
Accounts payable, accrued payroll and payroll
taxes and accrued expenses |
|
|
8,633 |
|
|
|
(2,118 |
) |
|
|
14,461 |
|
Accrued lease liability |
|
|
2,928 |
|
|
|
3,532 |
|
|
|
3,272 |
|
Income taxes payable |
|
|
256 |
|
|
|
1,160 |
|
|
|
(897 |
) |
Other |
|
|
(2 |
) |
|
|
340 |
|
|
|
(58 |
) |
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
31,496 |
|
|
|
14,620 |
|
|
|
18,495 |
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures |
|
|
(19,534 |
) |
|
|
(16,086 |
) |
|
|
(40,999 |
) |
Proceeds from maturation of marketable securities |
|
|
5,224 |
|
|
|
22,570 |
|
|
|
686 |
|
Investment in marketable securities |
|
|
|
|
|
|
(10,236 |
) |
|
|
(4,112 |
) |
|
|
|
|
|
|
|
|
|
|
Cash flows (used in) investing activities |
|
|
(14,310 |
) |
|
|
(3,752 |
) |
|
|
(44,425 |
) |
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Exercise of stock options |
|
|
2,152 |
|
|
|
1,023 |
|
|
|
1,805 |
|
Tax benefit of stock options |
|
|
1,606 |
|
|
|
|
|
|
|
|
|
Increase in long-term debt |
|
|
|
|
|
|
|
|
|
|
30,000 |
|
Repayment of long-term debt |
|
|
(2,572 |
) |
|
|
(2,571 |
) |
|
|
(643 |
) |
Repayment of equipment leases |
|
|
|
|
|
|
|
|
|
|
(504 |
) |
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) by financing activities |
|
|
1,186 |
|
|
|
(1,548 |
) |
|
|
30,658 |
|
|
|
|
|
|
|
|
|
|
|
Net increase in cash and cash equivalents |
|
|
18,372 |
|
|
|
9,320 |
|
|
|
4,728 |
|
Cash and cash equivalents at beginning of period |
|
|
57,748 |
|
|
|
48,428 |
|
|
|
43,700 |
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period |
|
$ |
76,120 |
|
|
$ |
57,748 |
|
|
$ |
48,428 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental cash flow information: |
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid during the year for: |
|
|
|
|
|
|
|
|
|
|
|
|
Interest |
|
$ |
1,538 |
|
|
$ |
1,197 |
|
|
$ |
496 |
|
|
|
|
|
|
|
|
|
|
|
Income taxes |
|
$ |
3,639 |
|
|
$ |
5,345 |
|
|
$ |
9,553 |
|
|
|
|
|
|
|
|
|
|
|
Non-cash items: |
|
|
|
|
|
|
|
|
|
|
|
|
Tax benefit of stock options |
|
$ |
|
|
|
$ |
1,229 |
|
|
$ |
2,303 |
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
42
A.C. MOORE ARTS & CRAFTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies
Organization and basis of presentation. A.C. Moore Arts & Crafts, Inc. became a holding company in
July 1997 by incorporating in Pennsylvania and exchanging its common stock for all of the capital
stock of A.C. Moore Inc. held by its shareholders. The consolidated financial statements include
the accounts of A.C. Moore Arts & Crafts, Inc. and its wholly owned subsidiaries (collectively the
Company). All intercompany accounts and transactions have been eliminated. As of December 31,
2006, the Company operated a 122-store chain of retail arts and crafts stores in the eastern region
of the United States.
Use of estimates. The preparation of financial statements in conformity with accounting principles
generally accepted in the United States 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 amount of revenues and expenses during the reporting period. Differences from those estimates,
if any, are recorded in the period they become known.
Cash and cash equivalents. Cash and cash equivalents are stated at cost, which approximates market
value. Cash equivalents include only securities having an original maturity of three months or
less.
Concentration of credit risk. Financial instruments, which potentially subject the Company to
concentrations of credit risk, are cash and cash equivalents. The Company limits its credit risk
by placing its investments in highly rated, highly liquid funds.
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. The cost of warehouse inventories is 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.
Marketable Securities. Marketable securities represent investments in municipal bonds with
maturities of three months or longer from time of purchase. They are classified as
held-to-maturity and recorded at amortized cost.
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 are depreciated over
40 years and building improvements are depreciated principally over 20 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 original term of the related
lease. Maintenance and repairs are charged to operations as incurred and major improvements are
capitalized. Amortization of assets recorded under capital leases is included in depreciation
expense.
The Company capitalizes certain costs incurred in connection with developing or obtaining
internal use software. These capitalized software costs are included in Property and equipment,
net in the consolidated balance sheets, and are being amortized over the estimated useful life of
the software, not to exceed five years.
43
Impairment of Long-Lived Assets. The Company reviews long-lived assets for impairment by comparing
the carrying value of assets with their estimated future undiscounted cash flows. If it is
determined that an impairment loss has occurred, the loss would be recognized during that period.
The impairment loss is calculated as the difference between the carrying values of the asset and
the present value of estimated net cash flows or comparable market values, giving consideration to
recent operating performance and pricing trends. The Company had no impairment losses related to
long-lived assets during 2006, 2005 or 2004.
Other Assets. Includes amounts to obtain store leases. These amounts are being amortized over the
life of the original lease.
Revenue recognition. The Company recognizes revenue at the time of sale of merchandise to its
customers, with the exception of the sale of custom frames, which are recognized at the time of
delivery. 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 liabilities and recognized as revenue when redeemed by the holder.
Lease Accounting. The Company commences accounting for store leases on the date they take
possession of the leased space. Landlord allowances and incentives are recorded as deferred rent
liabilities and are amortized as a reduction of rent expense over the initial term of the lease,
commencing with the date of possession.
Store pre-opening expenses. Direct incremental costs incurred to prepare a store for opening,
including straight-line rent expense, are charged to expense as incurred.
Advertising costs. The costs incurred for advertising are expensed the first time the advertising
takes place and are offset by reimbursements received under cooperative advertising programs with
certain vendors. Co-op advertising funds are only recognized in gross margin when we have
performed our contractual obligations under a co-op advertising agreement. Advertising expense
before the consideration of cooperative advertising allowances was $34.2 million, $29.8 million and
$23.9 million for 2006, 2005 and 2004 respectively, and is included in selling, general, and
administrative expense.
Fair value of financial instruments. The carrying amounts of cash, cash equivalents and marketable
securities, accounts receivable, other current assets, accounts payable, accrued expenses and other
liabilities approximate fair value because of the short maturity of these instruments. The Company
invests 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 the Companys cash and equivalents at December 31, 2006 and December 31, 2005
approximated carrying value. The Company had no borrowings outstanding under the line of credit at
December 31, 2006 or December 31, 2005. The interest rates on the Companys mortgages fluctuate
with market rates and therefore the value of these financial instruments will not be impacted by a
change in interest rates.
As of November 2006, the Company entered into two interest rate swap agreements with Wachovia Bank.
These transactions were entered into as interest rate hedges as they effectively convert the
Companys variable rate mortgage obligations to a fixed rate. The first swap was for a notional
amount of $5.2 million, amortizing on a straight line basis through September 2011. On this amount
the Company will pay a fixed rate of 5.72% and receive a variable rate of LIBOR plus .65%. The
second swap was for a
44
notional amount of $19.2 million, amortizing on a straight line basis through
September 2019. On this
amount, the Company will pay a fixed rate of 5.77% and receive LIBOR plus .65%. As of December 31,
2006, these swaps have a fair market value of $42,000.
Stock-based compensation. On January 1, 2006 the Company adopted SFAS 123(R), Share-Based
Payment, requiring the recognition of compensation expense in the Consolidated Statement of
Operations related to the fair value of its employee share-based options.
The Company will recognize the cost of all employee stock options on a straight-line attribution
basis over their respective vesting periods, net of estimated forfeitures. The Company selected the
modified prospective method of application; accordingly, prior periods have not been restated.
Prior to adopting SFAS No. 123(R), the Company applied APB Opinion No. 25, and related
interpretations in accounting for its stock-based compensation plans. Subsequent to the companys
initial public offering in 1997, employee stock options were granted at the grant date market
price. Accordingly, before January 1, 2006, no compensation cost was recognized for stock option
grants. Under the modified prospective method, compensation expense will be recorded for the
unvested portion of previously issued awards that remain outstanding at January 1, 2006 using the
same estimate of the grant date fair value and the same attribution method used to determine the
pro forma disclosure under SFAS No. 123.
The company determines fair value of such awards using the Black-Scholes options pricing model with
the following weighted-average assumptions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006 |
|
2005 |
|
2004 |
Average fair value of options granted |
|
$ |
8.99 |
|
|
$ |
9.79 |
|
|
$ |
11.15 |
|
Risk free interest rate |
|
|
4.6 |
% |
|
|
4.4 |
% |
|
|
3.8 |
% |
Dividend yield |
|
|
|
|
|
|
|
|
|
|
|
|
Average expected life |
|
6.0 |
yrs |
|
5.0 |
yrs |
|
4.9 |
yrs |
|
Expected stock price volatility |
|
|
44.4 |
% |
|
|
38.9 |
% |
|
|
54.9 |
% |
Expected volatilities were based on a blend of historical and implied volatilities of the Companys
common stock for 2006 and 2005, and on historical volatilities for 2004 and 2003; the expected life
represents the weighted average period of time that options granted are expected to be outstanding
giving consideration to vesting schedules and the Companys historical exercise patterns; and the
risk-free rate is based on the U.S. Treasury yield curve in effect at the time of grant for periods
corresponding with the expected life of the option.
In 2006,
the Company recognized $3.1 million of share-based compensation expense. Of this amount,
$2.8 million was included as a component of selling, general and administrative expense and $326,000
was included in costs related to changes in management.
Had compensation cost for the Companys 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.
45
123, Accounting for Stock-Based Compensation, net income and earnings per share would have been
reduced to the following pro forma amounts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
2004 |
|
|
|
|
(In thousands, except per share data) |
Net income |
|
As reported |
|
$ |
10,042 |
|
|
$ |
16,848 |
|
|
|
Compensation cost, net of tax |
|
|
1,827 |
|
|
|
1,749 |
|
|
|
Pro forma |
|
|
8,215 |
|
|
|
15,099 |
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share |
|
As reported |
|
$ |
0.51 |
|
|
$ |
0.86 |
|
|
|
Pro forma |
|
|
0.42 |
|
|
|
0.78 |
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share |
|
As reported |
|
$ |
0.50 |
|
|
$ |
0.84 |
|
|
|
Pro forma |
|
|
0.41 |
|
|
|
0.75 |
|
Income taxes. The Company uses the asset and liability method of accounting for income taxes.
The Company does business in various jurisdictions that impose income taxes. Management determines
the aggregate amount of income tax expense to accrue and the amount currently payable based upon
the tax statutes of each jurisdiction. This process includes adjusting income determined using
generally accepted accounting principles for items that are treated differently by the applicable
taxing authorities. Deferred taxes are reflected on the Companys balance sheet for temporary
differences that will reverse in subsequent years. When the Company believes the recovery of all
or a portion of a deferred tax asset is not likely, the Company establishes a valuation allowance.
2. New Accounting Pronouncements
In July 2006, the Financial Accounting Standards Board (FASB) issued Financial Accounting
Standards Board Interpretation (FIN) No. 48, Accounting for Uncertainty in Income Taxes. FIN 48
prescribes a recognition threshold and measurement attribute for the financial statement
recognition and measurement of a tax position taken or expected to be taken in an enterprises tax
return. This interpretation also provides guidance on the derecognition, classification, interest
and penalties, accounting in interim periods, disclosure, and transition of tax positions. The
recognition threshold and measurement attribute is part of a two step tax position evaluation
process prescribed in FIN 48. FIN 48 is effective after the beginning of an entitys first fiscal
year that begins after December 15, 2006. We will adopt FIN 48 as of January 1, 2007. We are
currently assessing the impact to our consolidated financial statements.
In September 2006, FASB issued SFAS No. 157, Fair Value Measurements, which defines fair value,
establishes a framework for measuring fair value in generally accepted accounting principles
(GAAP), and expands disclosures about fair value measurements. SFAS No. 157 is effective for
financial statements issued in 2008. The company is currently assessing the impact of SFAS No. 157
to its consolidated financial statements.
3. Store Closure Costs
Store Closure Costs. The Company regularly reviews store performance. If the Company were to
determine that a store does not meet certain performance criteria over a sustained period of time,
the Company may determine to close that location. In December 2006, the Companys management
decided
46
to close its Birmingham, Alabama store effective with the close of business on December 31,
2006. The total expected cost of this closure is approximately $1.130 million. The table below
summarizes the costs and identifies the cash and non-cash components of current and future
expenditures.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in thousands) |
|
Type of Cost |
|
Total |
|
|
Current Cash |
|
|
Future Cash |
|
|
Non-Cash |
|
Lease obligations |
|
$ |
1,033 |
|
|
|
|
|
|
$ |
1,033 |
|
|
|
|
|
Severance |
|
|
10 |
|
|
$ |
10 |
|
|
|
|
|
|
|
|
|
Inventory
liquidation |
|
|
87 |
|
|
|
|
|
|
|
|
|
|
$ |
87 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
1,130 |
|
|
$ |
10 |
|
|
$ |
1,033 |
|
|
$ |
87 |
|
In the table above, Current Cash means that the charge required payment during the fourth quarter
of 2006. Future Cash relates to the payment of lease obligations over the remaining scheduled
lease term, and is net of anticipated sublease income. The lease obligations may settle earlier if
the Company negotiates an appropriate termination arrangement.
In December 2006, the Company paid a one-time fee of $275,000 in connection with the termination of
a real estate lease. The lease, which was signed in 2006, related to premises in which the Company
had not yet opened an A. C. Moore store for business. The Company terminated the lease due to a
shift in store opening strategy toward increased backfill of real estate markets in which the
Company currently operates.
4. Costs Related to Changes in Management
Costs related to changes in management. The Company incurred a cost of $3.4 million in 2006
related to changes in management. This cost includes severance for departing officers and employees
as well as recruiting costs for new officers. As of December 31, 2006, there was $518,000 of unpaid
severance costs included in accrued expenses. On June 1, 2006, the Company had a total of 26
officers at the vice president level and above. As of December 31, 2006, the Company had 11
officers at this level and above.
Changes in management since June 1, 2006 include but are not limited to the following: (i)
appointment of a new Chief Executive Officer on June 1, 2006 to replace the previous Chief
Executive Officer who retired on June 1, 2006; (ii) appointment of a new Chief Financial Officer on
September 13, 2006 to replace the former Chief Financial Officer who retired on July 31, 2006,
(iii) replacement of 11 field vice president positions with seven district manager positions; (iv)
retirement of the Executive Vice President, Merchandising on June 30, 2006; (v) departure of the
Executive Vice President, Merchandising and Marketing on July 31, 2006; (vi) departure of two
senior vice presidents and five vice presidents, of which two were replaced; and (vii) hiring of
three new vice presidents to fill newly created positions. It is anticipated that the Company will
continue to incur additional expenses of this nature as it implements various other changes through
at least June 30, 2007. Subsequent to year-end, the Companys Vice President of Distribution and
its Senior Vice President of Finance left the Company.
5. Earnings Per Share
The following table sets forth the computation of basic and diluted earnings per share:
47
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended |
|
|
|
December 31, |
|
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
|
|
(In thousands, except per share data) |
|
Net income |
|
$ |
2,434 |
|
|
$ |
10,042 |
|
|
$ |
16,848 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares: |
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
19,929 |
|
|
|
19,758 |
|
|
|
19,482 |
|
Incremental shares
from assumed exercise
of stock options |
|
|
90 |
|
|
|
391 |
|
|
|
530 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted |
|
|
20,019 |
|
|
|
20,149 |
|
|
|
20,012 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net income per share |
|
$ |
0.12 |
|
|
$ |
0.51 |
|
|
$ |
0.86 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net income per share |
|
$ |
0.12 |
|
|
$ |
0.50 |
|
|
$ |
0.84 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options excluded from
calculation because
exercise price was greater
than average market price |
|
|
937 |
|
|
|
308 |
|
|
|
306 |
|
|
|
|
|
|
|
|
|
|
|
6. Property and Equipment
Property and equipment consists of:
|
|
|
|
|
|
|
|
|
|
|
Year Ended |
|
|
|
December 31, |
|
|
|
2006 |
|
|
2005 |
|
|
|
(in thousands) |
|
Land |
|
$ |
2,466 |
|
|
$ |
2,466 |
|
Buildings and improvements |
|
|
38,370 |
|
|
|
38,370 |
|
Furniture, fixtures and equipment |
|
|
107,148 |
|
|
|
88,932 |
|
Leasehold improvements |
|
|
6,205 |
|
|
|
6,205 |
|
Equipment for future stores |
|
|
1,260 |
|
|
|
525 |
|
|
|
|
|
|
|
|
|
|
|
155,449 |
|
|
|
136,498 |
|
Less: Accumulated depreciation and amortization |
|
|
(60,181 |
) |
|
|
(48,400 |
) |
|
|
|
|
|
|
|
|
|
$ |
95,268 |
|
|
$ |
88,098 |
|
|
|
|
|
|
|
|
7. Financing Agreement
The Company maintains two mortgage agreements with Wachovia Bank on its corporate office and
distribution center which are secured by land, buildings and equipment. Of the original $30.0
million in
mortgages, $22.5 million ($19.1 million as of December 31, 2006) is repayable over 15 years and
$7.5 million ($5.1 million as of December 31, 2006) is repayable over seven years. Fixed monthly
payments
48
totaling $214,000 started in October 2004. In November 2006, the Company
effectively converted these mortgages from a variable rate to fixed interest rates of 5.77% on the
15-year mortgage and 5.72% on the seven-year mortgage through the use of an interest rate swap.
In March 2007, the Company amended these two mortgages to modify certain covenants. The mortgages,
as amended, contain covenants that, among other things, restrict the Companys ability to incur
additional indebtedness or guarantee obligations in excess of $18.0 million, engage in mergers or
consolidations, dispose of assets, make acquisitions requiring a cash outlay in excess of $20.0
million, make loans or advances in excess of $1.0 million, permit liens relating to capitalized
lease obligations or purchase money financing in excess of $2.0 million, or change the nature of
the Companys business. The Company is restricted in capital expenditures unless certain financial
covenants are maintained including those relating to tangible net worth and funded debt. The
mortgages also define various events of default, including cross default provisions, defaults for
any material judgments or a change in control. At December 31, 2006, the Company was in compliance
with these covenants.
At December 31, 2006 the Company had a $35.0 million line of credit agreement with Wachovia, which
would have expired on May 31, 2007. In March 2007, the Company extended the line of credit to May
31, 2008. Borrowing under this line bears interest at LIBOR plus 65 basis points and is subject to
the same covenants as the mortgages described above. At December 31, 2006 and 2005, there were no
borrowings outstanding under this agreement.
8. Income Taxes
A reconciliation of income tax expense at the federal income tax rate to the income tax provision
is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
|
|
(in thousands) |
|
United States federal taxes at statutory rate |
|
$ |
1,590 |
|
|
$ |
5,624 |
|
|
$ |
9,595 |
|
State and local taxes, net |
|
|
286 |
|
|
|
673 |
|
|
|
1,236 |
|
Change in estimates for uncertain tax positions |
|
|
198 |
|
|
|
0 |
|
|
|
0 |
|
Incentive stock option compensation |
|
|
468 |
|
|
|
0 |
|
|
|
0 |
|
Tax free interest |
|
|
(292 |
) |
|
|
(227 |
) |
|
|
(164 |
) |
Other |
|
|
(141 |
) |
|
|
(44 |
) |
|
|
(119 |
) |
|
|
|
|
|
|
|
|
|
|
Income tax provision |
|
$ |
2,109 |
|
|
$ |
6,026 |
|
|
$ |
10,548 |
|
|
|
|
|
|
|
|
|
|
|
49
The income tax provision consists of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
|
|
(in thousands) |
|
Current tax expense: |
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
$ |
4,834 |
|
|
$ |
5,487 |
|
|
$ |
6,407 |
|
State |
|
|
611 |
|
|
|
1,023 |
|
|
|
2,207 |
|
|
|
|
|
|
|
|
|
|
|
Total current |
|
|
5,445 |
|
|
|
6,510 |
|
|
|
8,614 |
|
|
|
|
|
|
|
|
|
|
|
Deferred tax expense: |
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
|
(3,166 |
) |
|
|
(497 |
) |
|
|
2,239 |
|
State |
|
|
(170 |
) |
|
|
13 |
|
|
|
(305 |
) |
|
|
|
|
|
|
|
|
|
|
Total deferred |
|
|
(3,336 |
) |
|
|
(484 |
) |
|
|
1,934 |
|
|
|
|
|
|
|
|
|
|
|
Total income tax provision |
|
$ |
2,109 |
|
|
$ |
6,026 |
|
|
$ |
10,548 |
|
|
|
|
|
|
|
|
|
|
|
The Company utilizes the asset and liability method of accounting for income taxes. Under
this method, deferred tax liabilities and assets are recognized for the expected future tax
consequences of temporary differences between the carrying amounts and the tax bases of assets and
liabilities. The tax effect of temporary differences and carry forwards that compromise significant
portions of deferred tax assets and liabilities is as follows:
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2006 |
|
|
2005 |
|
|
|
(in thousands) |
|
Current deferred taxes |
|
|
|
|
|
|
|
|
Inventory valuation |
|
$ |
90 |
|
|
$ |
677 |
|
Inventory claim receivable |
|
|
0 |
|
|
|
(345 |
) |
Accrued Expenses |
|
|
2,823 |
|
|
|
0 |
|
Other |
|
|
(277 |
) |
|
|
402 |
|
|
|
|
|
|
|
|
Total current deferred taxes |
|
$ |
2,636 |
|
|
$ |
734 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-current deferred taxes |
|
|
|
|
|
|
|
|
Property and equipment |
|
|
(14,798 |
) |
|
|
(12,747 |
) |
Stock Option Compensation |
|
|
701 |
|
|
|
0 |
|
Accrued rent expense |
|
|
6,773 |
|
|
|
4,708 |
|
Other |
|
|
719 |
|
|
|
0 |
|
|
|
|
|
|
|
|
Total non-current deferred taxes |
|
|
(6,605 |
) |
|
|
(8,039 |
) |
|
|
|
|
|
|
|
Net deferred tax |
|
$ |
(3,969 |
) |
|
$ |
(7,305 |
) |
|
|
|
|
|
|
|
50
At December 31, 2006 the Company had approximately $7.5 million of state net operating loss
carry forwards (NOLs) of which $0 will expire in 2007 with the balance expiring through 2026. We
have recognized a long-term deferred tax asset of $140,000 relating to these NOLs, which
represents the $653,000 value of their future tax deductions reduced by a $513,000 valuation
allowance to the amount that is more likely than not to be realized.
In connection with the adoption of FAS 123R, the Company has elected to calculate its pool of
excess tax benefits under the short cut method. At December 31, 2006 this pool was $6.8 million and
can be used to offset future tax expense if deferred tax assets relating to stock options are not
realized.
9. Shareholders Equity
The Company has authorized 10,000,000 shares of undesignated preferred stock. The Company may
issue preferred stock in one or more series by vote of its Board of Directors having the dividend
rights, dividend rates, conversion rights, voting rights, terms of redemption, redemption prices
and liquidation preferences approved by the Board of Directors.
Under the Companys Employee, Director and Consultant Stock Option Plan (the 1997 Plan), the
Company may grant up to 2,000,000 shares of common stock. Stock options expire ten years from the
date of grant and vest ratably over a three year period. Shares available for future grants under
the 1997 Plan amounted to 18,444 at December 31, 2006 and 9,877 at December 31, 2005.
In March 2002, the Companys Board of Directors adopted the Companys 2002 Stock Option Plan (the
2002 Plan). This Plan was approved by majority shareholder vote at the Companys Annual Meeting
of Shareholders on May 16, 2002. Under the 2002 Plan, the Company may grant up to 1,500,000 shares
of common stock. Stock options expire ten years from the date of grant and vest ratably over a
period of from one to three years. Shares available for future grants under the 2002 Plan amounted
to 384,981 at December 31, 2006 and 627,283 at December 31, 2005.
For 2006, 2005, and 2004, the Companys stock option activity is summarized below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
Average |
|
|
|
|
|
|
Average |
|
|
|
|
|
|
Average |
|
|
|
|
|
|
|
Exercise |
|
|
|
|
|
|
Exercise |
|
|
|
|
|
|
Exercise |
|
|
|
Options |
|
|
Price |
|
|
Options |
|
|
Price |
|
|
Options |
|
|
Price |
|
Outstanding at beginning of year |
|
|
1,485,067 |
|
|
$ |
16.97 |
|
|
|
1,431,132 |
|
|
$ |
14.76 |
|
|
|
1,544,452 |
|
|
$ |
12.23 |
|
Granted |
|
|
342,000 |
|
|
|
18.07 |
|
|
|
237,375 |
|
|
|
23.74 |
|
|
|
215,875 |
|
|
|
21.95 |
|
Forfeited |
|
|
109,065 |
|
|
|
23.67 |
|
|
|
21,766 |
|
|
|
24.42 |
|
|
|
31,636 |
|
|
|
22.40 |
|
Exercised |
|
|
350,324 |
|
|
|
6.17 |
|
|
|
161,674 |
|
|
|
6.37 |
|
|
|
297,559 |
|
|
|
6.07 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at end of year |
|
|
1,367,678 |
|
|
$ |
19.50 |
|
|
|
1,485,067 |
|
|
$ |
16.97 |
|
|
|
1,431,132 |
|
|
$ |
14.76 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at end of year |
|
|
862,366 |
|
|
$ |
19.41 |
|
|
|
1,019,544 |
|
|
$ |
13.83 |
|
|
|
930,105 |
|
|
$ |
10.14 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The aggregate intrinsic value of vested stock options outstanding at December 31, 2006 was
$3.5 million. Intrinsic value for stock options is calculated based on the exercise price of the
underlying awards and the
51
quoted price of the Companys common stock as of the reporting date where
there is positive value. The total market value at date of exercise in excess of grant price of
options exercised during 2006 was $4.0 million.
As of December 31, 2006, there was $3.7 million of total unrecognized compensation cost related to
non-vested share-based compensation arrangements granted under the Companys stock option plans.
That cost is expected to be recognized over the next 35 months.
Using a Black-Scholes options pricing model, the average grant date fair value of options granted
was $8.99, $9.79, and $11.15 for options granted in 2006, 2005 and 2004, respectively.
The following table summarizes information about stock options outstanding at December 31, 2006.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock Options Outstanding |
|
|
Stock Options Exercisable |
|
|
|
|
|
|
|
Weighted Average |
|
|
Weighted |
|
|
|
|
|
|
Weighted |
|
Range of |
|
|
|
|
|
Remaining Life |
|
|
Average |
|
|
|
|
|
|
Average |
|
Exercise Prices |
|
Shares |
|
|
(Years) |
|
|
Exercise Price |
|
|
Shares |
|
|
Exercise Price |
|
2.88-4.50 |
|
|
107,774 |
|
|
|
2.5 |
|
|
$ |
3.72 |
|
|
|
107,774 |
|
|
$ |
3.72 |
|
7.69-8.32 |
|
|
76,286 |
|
|
|
3.6 |
|
|
|
8.13 |
|
|
|
76,286 |
|
|
|
8.14 |
|
16.38-18.32 |
|
|
297,000 |
|
|
|
9.6 |
|
|
|
17.57 |
|
|
|
0 |
|
|
|
0.00 |
|
19.11-21.95 |
|
|
422,393 |
|
|
|
6.8 |
|
|
|
20.45 |
|
|
|
335,247 |
|
|
|
20.14 |
|
22.25-27.15 |
|
|
464,225 |
|
|
|
7.5 |
|
|
|
25.40 |
|
|
|
343,059 |
|
|
|
26.02 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,367,678 |
|
|
|
7.1 |
|
|
$ |
19.50 |
|
|
|
862,366 |
|
|
$ |
19.41 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10. Retirement Plan
In January 1999 the Company established a 401(k) savings plan (the 401(k) Plan) for eligible team
members. Participation in the 401(k) Plan is voluntary and available to any team member who is 21
years of age and has completed a three month eligibility period. Participants may elect to
contribute up to 100% of their compensation. In accordance with the provisions of the 401(k) Plan,
the Company makes a matching contribution to the account of each participant in an amount equal to
25% of the first 6% of eligible compensation contributed by each participant with a maximum match
of $1,500. The Companys matching contribution expense for 2006, 2005 and 2004 was $398,000,
$339,000, and $298,000, respectively.
11. Commitments and Contingencies
Commitments
The Company leases its retail stores and some vehicles under non-cancelable operating leases.
Most store leases have an average initial term of ten years, with three five year renewal options,
and provide for predetermined escalations in future minimum annual rent or additional rent
contingent upon store sales levels. Rent escalations are amortized over the initial term
commencing on the date the Company takes possession. The pro rata portion of rent holidays and
scheduled rent escalations has been included in accrued lease liabilities in the accompanying
balance sheet. For the years 2006, 2005 and 2004 the amounts of rent expense recognized over the
amounts paid were $461,000, $1,027,000, and $1,674,000 respectively.
52
Rent expense under operating leases consists of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
|
|
(in thousands) |
|
Minimum rentals |
|
$ |
33,024 |
|
|
$ |
29,017 |
|
|
$ |
27,017 |
|
Contingent payments |
|
|
76 |
|
|
|
62 |
|
|
|
84 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
33,100 |
|
|
$ |
29,079 |
|
|
$ |
27,101 |
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2006, the Company entered into five leases for stores to open in 2007 and
2008.
Future minimum lease payments (including those for unopened stores) as of December 31, 2006 for
non-cancelable operating leases with terms in excess of one year are as follows (in thousands):
|
|
|
|
|
2007 |
|
$ |
37,849 |
|
2008 |
|
|
36,813 |
|
2009 |
|
|
35,432 |
|
2010 |
|
|
34,252 |
|
2011 |
|
|
30,607 |
|
Thereafter |
|
|
96,903 |
|
|
|
|
|
Total minimum future rentals |
|
$ |
271,856 |
|
|
|
|
|
Contingencies
On April 4, 2003, Kathleen Stahl, a former store merchandiser for the Company, filed a civil action
against the Company in the Superior Court of New Jersey, Burlington CountyLaw Division for alleged
retaliatory harassment and constructive discharge under the New Jersey Conscientious Employee
Protection Act. The plaintiff sought lost wages, compensatory and punitive damages, and costs.
The complaint was dismissed without prejudice on December 5, 2003 and reinstated on April 15, 2005.
On October 23, 2006, a jury trial on the case began. On October 30, 2006, the jury returned a
verdict in favor of the plaintiff for $19,600 in lost wages, $1.8 million for emotional distress
and $1.5 million in punitive damages. The Company is disappointed with the jurys verdict and
believes it is not supported by the evidence. The Company is vigorously pursuing an appeal.
The Company believes that the requirements of Statement of Financial Accounting Standards No. 5,
Accounting for Contingencies, for accruing a charge for this matter have not been met. At this
time, the Company believes that a loss from this lawsuit is probable but cannot reasonably estimate
the amount of the loss. The Company believes that the range of loss in this matter is from $0 to
the amount of the verdict, plus interest. However, the Company cannot at this time determine a
best estimate within this range. The Company has therefore not recorded a charge.
Management may determine in the future that a charge for all or a portion of the award is required.
Any such charge could materially and adversely affect the Companys results of operations for the
quarter or the year in which such a charge may be accrued.
53
The Company is not a party to any other material legal proceedings other than routine litigation
incidental to its business. In the opinion of management, the amount of ultimate liability with
respect to these actions will not materially affect the financial position, operating results or
cash flows of the Company.
12. Related Party Transactions
Richard J. Drake, a director of the Company who retired in February 2007, is a member of a law firm
which the Company retains. The Company has paid fees to Mr. Drakes firm in the amount of $56,972,
$112,000 and $83,000 during the years ended December 31, 2006, 2005 and 2004, respectively.
Michael J. Joyce, a director of the Company since 2004 and chair of the Companys Audit Committee,
was a director of Heritage Property Investment Trust, Inc. (Heritage) until October 5, 2006, when
Heritage merged with and into affiliates of Centro Properties Group. The Company leased one of its
store locations in 2006, 2005 and 2004 from Heritage. The Company paid rent to Heritage in the
amount of $249,742, $206,000 and $193,000 during the years ended December 31, 2006, 2005 and 2004,
respectively.
54
|
|
|
ITEM 9. |
|
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. |
None.
ITEM 9A. CONTROLS AND PROCEDURES.
Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures
We carried out an evaluation, with the participation of our principal executive officer and
principal financial officer, of the effectiveness of our disclosure controls and procedures as of
December 31, 2006. Based on this evaluation, our principal executive officer and principal
financial officer concluded that, as of December 31, 2006, our disclosure controls and procedures,
as defined in Rule 13a-15(e), were effective at the reasonable assurance level, to ensure that (i)
information required to be disclosed by the issuer in the reports that it files or submits under
the Securities Exchange Act of 1934 (the Exchange Act) is recorded, processed, summarized and
reported within the time periods specified in the Securities and Exchange Commissions rules and
forms and (ii) information required to be disclosed by an issuer in the reports that it files or
submits under the Exchange Act is accumulated and communicated to the issuers management including
its principal executive and principal financial officers, or persons performing similar functions,
as appropriate to allow timely decisions regarding required disclosure.
Managements Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over
financial reporting, as defined in Exchange Act Rule 13a-15(f). Under the supervision and with the
participation of our management, including our principal executive officer and principal financial
officer, we carried out an evaluation of the effectiveness of our internal control over financial
reporting as of December 31, 2006 based on the Internal Control Integrated Framework issued by
the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on this
evaluation, our management concluded that our internal control over financial reporting was
effective as of December 31, 2006.
PricewaterhouseCoopers LLP, the independent registered public accounting firm that audited our
financial statements included in this Annual Report on Form 10-K, has audited our managements
assessment of the effectiveness of our internal control over financial reporting as of December 31,
2006 as stated in their report which is included herein.
Changes in Internal Control over Financial Reporting
Our management carried out an evaluation, with the participation of our principal executive
officer and principal financial officer, of changes in our internal control over financial
reporting, as defined in Exchange Act Rule 13a-15(f). Based on this evaluation, our management
determined that no change in our internal control over financial reporting occurred during the
fourth quarter of 2006 that has materially affected, or is reasonably likely to materially affect,
our internal control over financial reporting.
55
ITEM 9B. OTHER INFORMATION
Amendment to Loan Documents and Line of Credit
On March 12, 2007, the Company entered into a promissory note and loan modification agreement
(the loan modification) with Wachovia Bank, N.A., the lender on the Companys two mortgages dated
October 28, 2003 on its corporate offices and distribution center. The loan modification amends
these two mortgages. The two mortgages originally totaled an aggregate of $30.0 million, $22.5
million payable over 15 years and $7.5 million payable over seven years. As of December 31, 2006,
$19.1 million was outstanding on the 15-year mortgage and $5.1 million was outstanding on the
seven-year mortgage.
The original two mortgages contained covenants that restricted the Companys ability to (i)
incur additional indebtedness or guarantee obligations in excess of $8.0 million, and (ii) make
acquisitions requiring a cash outlay in excess of $10.0 million. The loan modification increased
the threshold amounts in the foregoing two covenants to $18.0 million and $20.0 million,
respectively. The loan modification also added a provision that permits the Company to incur liens
relating to capitalized lease obligations or purchase money financing not in excess of $2.0
million. In addition, the loan modification eliminated the current ratio of assets to liabilities
and decreased the threshold debt service coverage ratio from 1.35 to 1.00 to 1.25 to 1.00. These
two ratios affect the amount of interest paid by the Company on the mortgages.
On March 12, 2007, pursuant to the loan modification, the Company also amended its $35.0
million line of credit with Wachovia to extend the maturity date from May 31, 2007 to May 31, 2008.
As of December 31, 2007, there were no amounts outstanding under this line of credit. The
promissory note and loan modification amending the two mortgages and extending the line of credit
is attached to this annual report on Form 10-K as Exhibit 10.27. This summary is not intended to
be complete and is qualified in its entirety by reference to this exhibit which is incorporated by
reference into this Item 9B.
56
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Incorporated by reference from our Proxy Statement relating to our 2007 Annual Meeting of
Shareholders to be filed in accordance with General Instruction G(3) to Form 10-K, except
information concerning our executive officers which is set forth in Part I of this Annual Report on
Form 10-K and which is incorporated herein by reference.
Code of Ethics
We have adopted a Code of Business Ethics and Conflict of Interest Policy that applies to all
of our directors and employees including, without limitation, our principal executive officer, our
principal financial officer, our principal accounting officer and all of our employees performing
similar functions. Our Code of Business Ethics and Conflict of Interest Policy is available on our
website, located at www.acmoore.com/corporate.asp. We intend to satisfy the disclosure requirement
under Item 5.05 of Form 8-K regarding an amendment to a provision of our Code of Business Ethics
and Conflict of Interest Policy by posting such information on our website at the location
specified above.
ITEM 11. EXECUTIVE COMPENSATION.
Incorporated by reference from our Proxy Statement relating to our 2007 Annual Meeting of
Shareholders to be filed in accordance with General Instruction G(3) to Form 10-K.
|
|
|
ITEM 12. |
|
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
MATTERS. |
Incorporated by reference from our Proxy Statement relating to our 2007 Annual Meeting of
Shareholders to be filed in accordance with General Instruction G(3) to Form 10-K.
57
Equity Compensation Plan Information
The following table details information regarding our existing equity compensation plans as of
December 31, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(c) |
|
|
|
|
|
|
|
|
|
|
Number of securities |
|
|
(a) |
|
|
|
|
|
remaining available for |
|
|
Number of securities |
|
(b) |
|
future issuance under |
|
|
to be issued upon |
|
Weighted-average |
|
equity compensation |
|
|
exercise of |
|
exercise price of |
|
plans (excluding |
|
|
outstanding options, |
|
outstanding options, |
|
securities reflected in |
Plan Category |
|
warrants and rights |
|
warrants and rights |
|
column (a)) |
Equity compensation
plans approved by
security holders
(1) |
|
|
1,367,678 |
|
|
$ |
19.50 |
|
|
|
403,425 |
|
Equity compensation
plans not approved
by security holders |
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
1,367,678 |
|
|
$ |
19.50 |
|
|
|
403,425 |
|
|
|
|
(1) |
|
These plans are our 1997 Employee, Director and Consultant Stock Option
Plan and our 2002 Stock Option Plan. |
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Incorporated by reference from our Proxy Statement relating to our 2007 Annual Meeting of
Shareholders to be filed in accordance with General Instruction G(3) to Form 10-K.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES.
Incorporated by reference from our Proxy Statement relating to our 2007 Annual Meeting of
Shareholders to be filed in accordance with General Instruction G(3) to Form 10-K.
58
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
|
(a) |
|
The following documents are filed as part of this Annual Report on Form 10-K: |
|
(1) |
|
Financial Statements: |
|
|
|
|
Report of Independent Registered Public Accounting Firm |
|
|
|
|
Consolidated Balance Sheets at December 31, 2006 and 2005 |
|
|
|
|
Consolidated Statements of Income for each of the three years
in the period ended December 31, 2006 |
|
|
|
|
Consolidated Statements of Changes in Shareholders Equity for each of the
three years in the period ended December 31, 2006 |
|
|
|
|
Consolidated Statements of Cash Flows for each of the three
years in the period ended December 31, 2006 |
|
|
|
|
Notes to Consolidated Financial Statements |
|
|
(2) |
|
Financial Statement Schedules: |
|
|
|
|
Schedule II Valuation and Qualifying Accounts and Reserves. |
|
|
|
|
All other schedules have been omitted because they are not applicable,
not required or the information is included elsewhere herein. |
|
|
(3) |
|
Exhibits: |
|
|
|
|
The exhibits filed as part of this report are listed under exhibits at
subsection (b) of this Item 15. |
|
|
|
Exhibit Number |
|
Description |
3.1(1)
|
|
Articles of Incorporation |
|
|
|
3.2
|
|
Amendment to Articles of Incorporation |
|
|
|
3.3(2)
|
|
Amended and Restated Bylaws |
|
|
|
+10.1(1)
|
|
1997 Employee, Director and Consultant Stock Option Plan |
59
|
|
|
Exhibit Number |
|
Description |
+10.2(3)
|
|
2002 Stock Option Plan |
|
|
|
+10.3(1)
|
|
Form of Stock Option Award Agreement under the 1997
Employee, Director and Consultant Stock Option Plan |
|
|
|
+10.4(8)
|
|
Form of Option Agreement under the 2002 Stock Option Plan |
|
|
|
10.5(1)
|
|
Tax Indemnification Agreement, dated July 22, 1997, among
the Company, John E. Parker and William Kaplan |
|
|
|
10.6(4)
|
|
Lease, dated August 14, 1995, between Freeport 130 L.L.C.
and A.C. Moore, Inc. |
|
|
|
10.7(5)
|
|
Second Amendment to Lease, dated as of March 25, 1998,
between Freeport 130 L.L.C. and A.C. Moore, Inc. |
|
|
|
10.8(6)
|
|
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. |
|
|
|
10.9(6)
|
|
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. |
|
|
|
10.10(6)
|
|
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. |
|
|
|
10.11(7)
|
|
Modification Number One to Promissory Note dated as of
November 3, 2004, 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 |
|
|
|
10.12(9)
|
|
Promissory Note and Loan Modification Agreement dated as
of February 22, 2006, 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 |
60
|
|
|
Exhibit Number |
|
Description |
+10.13 (10)
|
|
Employment Agreement, effective as of June 1, 2006,
between the Company and Rick A. Lepley. |
|
|
|
+10.14 (10)
|
|
Form of Option Agreement between the Company and Rick A.
Lepley. |
|
|
|
+10.15 (10)
|
|
Agreement and Complete and Full General Release, effective
as of June 1, 2006, between the Company and Jack Parker. |
|
|
|
+10.16 (10)
|
|
Agreement and Complete and Full General Release, effective
as of June 1, 2006, between the Company and Leslie H.
Gordon. |
|
|
|
+10.17 (11)
|
|
Agreement and Complete and Full General Release, effective
as of June 8, 2006, between the Company and Patricia A.
Parker. |
|
|
|
+10.18 (12)
|
|
Agreement and Complete and Full General Release, dated
July 31, 2006, between the Company and Janet Parker. |
|
|
|
+10.19 (13)
|
|
Employment Agreement, signed on September 6, 2006 and
effective as of September 13, 2006, between the Company
and Marc Katz. |
|
|
|
+10.20 (13)
|
|
Form of Option Agreement between the Company and Marc Katz. |
|
|
|
+10.21 (13)
|
|
Amendment No. One, dated September 6, 2006, to Agreement
and Complete and Full General Release, dated June 1, 2006,
between the Company and Leslie H. Gordon. |
|
|
|
+10.22 (14)
|
|
First Amendment, dated as of November 15, 2006, to the
Employment Agreement, dated as of June 1, 2006, between
the Company and Rick A. Lepley. |
|
|
|
10.23 (15)
|
|
Amended and Restated Swap Transaction Confirmation, signed
on December 8, 2006 and effective as of November 27, 2006. |
|
|
|
10.24 (15)
|
|
Amended and Restated Swap Transaction Confirmation, signed
on December 8, 2006 and effective as of November 27, 2006. |
|
|
|
+10.25
|
|
Employment Agreement, effective as of July 24, 2006,
between the Company and Amy Rhoades. |
|
|
|
+10.26
|
|
First Amendment, dated as of November 15, 2006, to the
Employment Agreement, dated as of July 24, 2006, between
the Company and Amy Rhoades. |
61
|
|
|
Exhibit Number |
|
Description |
10.27
|
|
Promissory Note and Loan Modification Agreement dated as
of March 12, 2007 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 |
|
|
|
21.1
|
|
Subsidiaries of the Company |
|
|
|
23.1
|
|
Consent of PricewaterhouseCoopers LLP |
|
|
|
31.1
|
|
Certification of Chief Executive Officer pursuant to Rule
13a14(a) promulgated under the Securities Exchange Act of
1934, as amended (the Exchange Act) |
|
|
|
31.2
|
|
Certification of Chief Financial Officer pursuant to Rule
13a14(a) promulgated under the Exchange Act |
|
|
|
32.1
|
|
Certification of the Companys 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 |
|
|
|
32.2
|
|
Certification of the Companys 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. |
|
(1) |
|
Incorporated by reference to the Companys Registration Statement on Form S-1 (File
No. 333-32859), filed on August 5, 1997. |
|
(2) |
|
Incorporated by reference to the Companys Form 8-K filed on August 27, 2004. |
|
(3) |
|
Incorporated by reference to the Companys Definitive Proxy Statement filed on April
22, 2002. |
|
(4) |
|
Incorporated by reference to Amendment No. 1 to the Companys Registration Statement
on Form S-1 (File No. 333-32859), filed on September 16, 1997. |
|
(5) |
|
Incorporated by reference to the Companys Form 10-K for the year ended December 31,
1998. |
|
(6) |
|
Incorporated by reference to the Companys Form 10-Q for the quarter ended September
30, 2003. |
|
(7) |
|
Incorporated by reference to the Companys Form 10-K for the year ended December 31,
2004. |
|
(8) |
|
Incorporated by reference to the Companys Form 8-K filed on August 9, 2006. |
62
|
|
|
(9) |
|
Incorporated by reference to the Companys Form 10-K for the year ended December 31,
2005. |
|
(10) |
|
Incorporated by reference to the Companys Form 8-K filed on June 7, 2006. |
|
(11) |
|
Incorporated by reference to the Companys Form 8-K filed on June 14, 2006. |
|
(12) |
|
Incorporated by reference to the Companys Form 8-K filed on July 31, 2006. |
|
(13) |
|
Incorporated by reference to the Companys Form 8-K filed on September 6, 2006. |
|
(14) |
|
Incorporated by reference to the Companys Form 8-K filed on November 16, 2006. |
|
(15) |
|
Incorporated by reference to the Companys Form 8-K filed on December 14, 2006. |
63
SCHEDULE II
A.C. MOORE ARTS & CRAFTS, INC.
Valuation and Qualifying Accounts
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Column A |
|
Column B |
|
|
Column C |
|
|
Column D |
|
|
Column E |
|
|
|
|
|
|
|
|
|
|
|
Deductions |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Write-offs, |
|
|
Balance at |
|
|
|
Balance at |
|
|
Additions |
|
|
Payments and |
|
|
End of |
|
Description |
|
Beginning of Period |
|
|
Charged to Expense |
|
|
Other Adjustments |
|
|
Period |
|
Lower of Cost or
Market Reserve |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006 |
|
$ |
1,525 |
|
|
$ |
462 |
|
|
$ |
672 |
|
|
$ |
1,315 |
|
2005 |
|
|
1,467 |
|
|
|
501 |
|
|
|
443 |
|
|
|
1,525 |
|
2004 |
|
|
1,284 |
|
|
|
628 |
|
|
|
445 |
|
|
|
1,467 |
|
64
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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: March 12, 2007 |
By: |
/s/ Rick A. Lepley
|
|
|
|
Rick A. Lepley |
|
|
|
Chief Executive Officer |
|
|
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the capacities and on the
dates indicated.
|
|
|
|
|
Signature |
|
Capacity |
|
Date |
|
/s/ Rick A. Lepley
Rick A. Lepley
|
|
Chief Executive Officer and Director
(Principal Executive Officer)
|
|
March 12, 2007 |
|
|
|
|
|
|
|
Executive Vice President and Chief
Financial Officer
(Principal Financial and
Accounting Officer)
|
|
March 12, 2007 |
|
|
|
|
|
/s/ Michael J. Joyce
Michael J. Joyce
|
|
Chairman of the Board of Directors
|
|
March 12, 2007 |
|
|
|
|
|
/s/ Joseph F. Coradino
Joseph F. Coradino
|
|
Director
|
|
March 12, 2007 |
|
|
|
|
|
/s/ Lawrence H. Fine
Lawrence H. Fine
|
|
Director
|
|
March 12, 2007 |
|
|
|
|
|
/s/ Neil A. McLachlan
Neil A. McLachlan
|
|
Director
|
|
March 12, 2007 |
|
|
|
|
|
/s/ Thomas S. Rittenhouse
Thomas S. Rittenhouse
|
|
Director
|
|
March 12, 2007 |
|
|
|
|
|
/s/ Lori J. Schafer
Lori J. Schafer
|
|
Director
|
|
March 12, 2007 |
EXHIBIT INDEX
|
|
|
Exhibit Number |
|
Description |
3.1(1)
|
|
Articles of Incorporation |
|
|
|
3.2
|
|
Amendment to Articles of Incorporation |
|
|
|
3.3(2)
|
|
Amended and Restated Bylaws |
|
|
|
+10.1(1)
|
|
1997 Employee, Director and Consultant Stock Option Plan |
|
|
|
+10.2(3)
|
|
2002 Stock Option Plan |
|
|
|
+10.3(1)
|
|
Form of Stock Option Award Agreement under the 1997 Employee,
Director and Consultant Stock Option Plan |
|
|
|
+10.4(8)
|
|
Form of Option Agreement under the 2002 Stock Option Plan |
|
|
|
10.5(1)
|
|
Tax Indemnification Agreement, dated July 22, 1997, among the
Company, John E. Parker and William Kaplan |
|
|
|
10.6(4)
|
|
Lease, dated August 14, 1995, between Freeport 130 L.L.C. and
A.C. Moore, Inc. |
|
|
|
10.7(5)
|
|
Second Amendment to Lease, dated as of March 25, 1998, between
Freeport 130 L.L.C. and A.C. Moore, Inc. |
|
|
|
10.8(6)
|
|
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. |
|
|
|
10.9(6)
|
|
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. |
|
|
|
10.10(6)
|
|
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. |
|
|
|
Exhibit Number |
|
Description |
10.11(7)
|
|
Modification Number One to Promissory Note dated as of November
3, 2004, 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 |
|
|
|
10.12(9)
|
|
Promissory Note and Loan Modification Agreement dated as of
February 22, 2006, 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 |
|
|
|
+10.13(10)
|
|
Employment Agreement, effective as of June 1, 2006, between the
Company and Rick A. Lepley. |
|
|
|
+10.14(10)
|
|
Form of Option Agreement between the Company and Rick A. Lepley. |
|
|
|
+10.15(10)
|
|
Agreement and Complete and Full General Release, effective as
of June 1, 2006, between the Company and Jack Parker. |
|
|
|
+10.16(10)
|
|
Agreement and Complete and Full General Release, effective as
of June 1, 2006, between the Company and Leslie H. Gordon. |
|
|
|
+10.17 (11)
|
|
Agreement and Complete and Full General Release, effective as
of June 8, 2006, between the Company and Patricia A. Parker. |
|
|
|
+10.18(12)
|
|
Agreement and Complete and Full General Release, dated July 31,
2006, between the Company and Janet Parker. |
|
|
|
+10.19(13)
|
|
Employment Agreement, signed on September 6, 2006 and effective
as of September 13, 2006, between the Company and Marc Katz. |
|
|
|
+10.20(13)
|
|
Form of Option Agreement between the Company and Marc Katz. |
|
|
|
+10.21(13)
|
|
Amendment No. One, dated September 6, 2006, to Agreement and
Complete and Full General Release, dated June 1, 2006, between
the Company and Leslie H. Gordon. |
|
|
|
+10.22(14)
|
|
First Amendment, dated as of November 15, 2006, to the
Employment Agreement, dated as of June 1, 2006, between the
Company and Rick A. Lepley. |
|
|
|
10.23(15)
|
|
Amended and Restated Swap Transaction Confirmation, signed on
December 8, 2006 and effective as of November 27, 2006. |
|
|
|
10.24(15)
|
|
Amended and Restated Swap Transaction Confirmation, signed on
December 8, 2006 and effective as of November 27, 2006. |
|
|
|
+10.25
|
|
Employment Agreement, effective as
of July 24, 2006, between the Company and Amy Rhoades. |
|
|
|
+10.26
|
|
First Amendment, dated as of November 15, 2006, to the
Employment Agreement, dated as of July 24, 2006, between the
Company and Amy Rhoades. |
|
|
|
Exhibit Number |
|
Description |
10.27
|
|
Promissory Note and Loan Modification Agreement dated as of
March 12, 2007 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 |
|
|
|
21.1
|
|
Subsidiaries of the Company |
|
|
|
23.1
|
|
Consent of PricewaterhouseCoopers LLP |
|
|
|
31.1
|
|
Certification of Chief Executive Officer pursuant to Rule
13a14(a) promulgated under the Securities Exchange Act of
1934, as amended (the Exchange Act) |
|
|
|
31.2
|
|
Certification of Chief Financial Officer pursuant to Rule
13a14(a) promulgated under the Exchange Act |
|
|
|
32.1
|
|
Certification of the Companys Chief Executive Officer pursuant
to 18 U.S.C. Section 1350, as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002 |
|
|
|
32.2
|
|
Certification of the Companys 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. |
|
(1) |
|
Incorporated by reference to the Companys Registration Statement on Form S-1 (File
No. 333-32859), filed on August 5, 1997. |
|
(2) |
|
Incorporated by reference to the Companys Form 8-K filed on August 27, 2004. |
|
(3) |
|
Incorporated by reference to the Companys Definitive Proxy Statement filed on April
22, 2002. |
|
(4) |
|
Incorporated by reference to Amendment No. 1 to the Companys Registration Statement
on Form S-1 (File No. 333-32859), filed on September 16, 1997. |
|
(5) |
|
Incorporated by reference to the Companys Form 10-K for the year ended December 31,
1998. |
|
(6) |
|
Incorporated by reference to the Companys Form 10-Q for the quarter ended September
30, 2003. |
|
(7) |
|
Incorporated by reference to the Companys Form 10-K for the year ended December 31,
2004. |
|
(8) |
|
Incorporated by reference to the Companys Form 8-K filed on August 9, 2006. |
|
|
|
(9) |
|
Incorporated by reference to the Companys Form 10-K for the year ended December 31,
2005. |
|
(10) |
|
Incorporated by reference to the Companys Form 8-K filed on June 7, 2006. |
|
(11) |
|
Incorporated by reference to the Companys Form 8-K filed on June 14, 2006. |
|
(12) |
|
Incorporated by reference to the Companys Form 8-K filed on July 31, 2006. |
|
(13) |
|
Incorporated by reference to the Companys Form 8-K filed on September 6, 2006. |
|
(14) |
|
Incorporated by reference to the Companys Form 8-K filed on November 16, 2006. |
|
(15) |
|
Incorporated by reference to the Companys Form 8-K filed on December 14, 2006. |