-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, GqocHYx1ja4npvqW5w5sLoyu5msBJ9TXylGGzibMuiDk1PBwr1n0/auIDDFKAdUT aLVjzxsmKA3XhRtX6wsv9g== 0001125282-06-004835.txt : 20060810 0001125282-06-004835.hdr.sgml : 20060810 20060810141718 ACCESSION NUMBER: 0001125282-06-004835 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20060630 FILED AS OF DATE: 20060810 DATE AS OF CHANGE: 20060810 FILER: COMPANY DATA: COMPANY CONFORMED NAME: A.C. Moore Arts & Crafts, Inc. CENTRAL INDEX KEY: 0001042809 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-HOBBY, TOY & GAME SHOPS [5945] IRS NUMBER: 223527763 STATE OF INCORPORATION: PA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-23157 FILM NUMBER: 061020743 BUSINESS ADDRESS: STREET 1: 130 A.C. MOORE DRIVE CITY: BERLIN STATE: NJ ZIP: 08009 BUSINESS PHONE: (856) 768-4930 MAIL ADDRESS: STREET 1: 130 A.C. MOORE DRIVE CITY: BERLIN STATE: NJ ZIP: 08009 FORMER COMPANY: FORMER CONFORMED NAME: A C MOORE ARTS & CRAFTS INC DATE OF NAME CHANGE: 19970722 10-Q 1 p414453_10-q.txt FORM 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 2006 OR [_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ____________ to ____________ Commission File Number: 000-23157 A.C. MOORE ARTS & CRAFTS, INC. (Exact name of registrant as specified in its charter) Pennsylvania 22-3527763 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 130 A.C. Moore Drive, Berlin, NJ 08009 (Address of principal executive offices) (Zip Code) (856) 768-4930 (Registrant's telephone number, including area code) N/A (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. [X] Yes [_] No Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of "accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check one): [_] Large accelerated filer [X] Accelerated filer [_] Non-accelerated filer Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). [_] Yes [X] No Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: CLASS OUTSTANDING AT AUGUST 4, 2006 Common Stock, no par value 19,857,896 A.C. MOORE ARTS & CRAFTS, INC. TABLE OF CONTENTS
PAGE NUMBER ------ PART I: FINANCIAL INFORMATION Item 1. Financial Statements (Unaudited) Consolidated Balance Sheets as of June 30, 2006, December 31, 2005 and June 30, 2005..................... 1 Consolidated Statements of Operations for the three and six month periods ended June 30, 2006 and 2005.......... 2 Consolidated Statements of Cash Flows for the six month periods ended June 30, 2006 and 2005.................... 3 Notes to Consolidated Financial Statements................. 4 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.................................. 10 Item 3. Quantitative and Qualitative Disclosures About Market Risk.... 16 Item 4. Controls and Procedures....................................... 16 PART II: OTHER INFORMATION Item 1. Legal Proceedings............................................. 18 Item 1A. Risk Factors.................................................. 18 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds... 18 Item 3. Defaults Upon Senior Securities............................... 18 Item 4. Submission of Matters to a Vote of Security Holders........... 19 Item 5. Other Information............................................. 19 Item 6. Exhibits...................................................... 19 SIGNATURES........................................................................ 20
i PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS A.C. MOORE ARTS & CRAFTS, INC. CONSOLIDATED BALANCE SHEETS (dollars in thousands)
June 30, December 31, June 30, 2006 2005 2005 ----------- ------------ ----------- (unaudited) (unaudited) ASSETS Current assets: Cash and cash equivalents ..................................... $ 24,716 $ 57,748 $ 22,229 Marketable securities ......................................... -- 5,224 14,237 Inventories ................................................... 176,068 152,646 154,019 Prepaid expenses and other current assets ..................... 5,688 6,900 6,567 Prepaid income taxes .......................................... 2,134 -- 3,946 Deferred tax asset ............................................ 981 734 258 -------- -------- -------- 209,587 223,252 201,256 Non current assets: Property and equipment, net ................................... 91,834 88,098 83,060 Other assets .................................................. 1,390 1,407 1,398 -------- -------- -------- $302,811 $312,757 $285,714 ======== ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Current portion of long-term debt ............................. $ 2,571 $ 2,571 $ 2,571 Trade accounts payable ........................................ 41,002 46,445 34,432 Accrued payroll and payroll taxes ............................. 2,480 3,928 4,329 Accrued expenses .............................................. 9,939 10,044 6,211 Income taxes payable .......................................... -- 1,679 -- -------- -------- -------- 55,992 64,667 47,543 -------- -------- -------- Non current liabilities: Long-term debt ................................................ 22,929 24,215 25,500 Deferred tax liability ........................................ 7,430 8,039 8,076 Accrued lease liability ....................................... 17,402 17,327 15,176 -------- -------- -------- 47,761 49,581 48,752 -------- -------- -------- 103,753 114,248 96,295 -------- -------- -------- Shareholders' Equity: Preferred stock, no par value, 10,000,000 shares authorized; none issued ....................................... -- -- -- Common stock, no par value, 40,000,000 shares authorized; issued and outstanding 19,857,896 shares at June 30, 2006, 19,816,774 at December 31, 2005 and 19,687,982 at June 30, 2005 ....... 113,451 111,383 111,133 Retained earnings ................................................ 85,607 87,126 78,286 -------- -------- -------- 199,058 198,509 189,419 -------- -------- -------- $302,811 $312,757 $285,714 ======== ======== ========
See accompanying notes to financial statements. 1 A.C. MOORE ARTS & CRAFTS, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (dollars in thousands, except per share data) (unaudited)
Three months ended Six months ended June 30, June 30, ------------------- ------------------- 2006 2005 2006 2005 -------- -------- -------- -------- Net sales ..................................... $129,815 $113,489 $262,733 $236,368 Cost of sales (including buying and distribution costs) ........................ 77,023 67,800 156,788 142,551 -------- -------- -------- -------- Gross margin .................................. 52,792 45,689 105,945 93,817 Selling, general and administrative expenses 53,185 44,766 105,029 90,610 Costs related to change in management ......... 1,811 -- 2,027 -- Store pre-opening expenses .................... 671 944 1,295 1,105 -------- -------- -------- -------- Income (loss) from operations ................. (2,875) (21) (2,406) 2,102 Interest expense ........................ 390 292 758 550 Interest (income) ....................... (317) (231) (632) (428) -------- -------- -------- -------- Income (loss) before income taxes ............. (2,948) (82) (2,532) 1,980 Provision (benefit) for income taxes .... (1,179) (32) (1,013) 778 -------- -------- -------- -------- Net income (loss) ............................. $ (1,769) $ (50) $ (1,519) $ 1,202 ======== ======== ======== ======== Basic net income (loss) per share ............. $ (0.09) $ (0.00) $ (0.08) $ 0.06 ======== ======== ======== ======== Diluted net income (loss) per share ........... $ (0.09) $ (0.00) $ (0.08) $ 0.06 ======== ======== ======== ========
See accompanying notes to financial statements. 2 A.C. MOORE ARTS & CRAFTS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (dollars in thousands) (unaudited)
Six months ended June 30, ------------------- 2006 2005 -------- -------- Cash flows from operating activities: Net income (loss) ........................................... $ (1,519) $ 1,202 Adjustments to reconcile net income to net cash (used in) operating activities: Depreciation and amortization ............................ 5,850 5,220 Stock based compensation ................................. 1,734 -- Disposal of assets ....................................... -- 438 Provision for (benefit of) deferred income taxes, net .... (857) -- Changes in assets and liabilities: Inventories ........................................... (23,422) (11,187) Prepaid expenses and other current assets ............. (922) 1,088 Accounts payable, accrued payroll, payroll taxes and accrued expenses ................................... (6,996) (17,563) Income taxes payable .................................. (1,679) (4,501) Accrued lease liability ............................... 75 1,381 Other ................................................. 17 349 -------- -------- Net cash (used in) operating activities ..................... (27,719) (23,573) -------- -------- Cash flows from investing activities: Capital expenditures .................................. (9,586) (5,499) Proceeds from maturation of marketable securities ..... 5,224 3,598 Investment in marketable securities ................... -- (277) -------- -------- Cash flows (used in) investing activities ................... (4,362) (2,178) -------- -------- Cash flows from financing activities: Exercise of stock options ............................. 216 838 Tax benefit of stock based compensation ............... 119 -- Repayment of long-term debt ........................... (1,286) (1,286) -------- -------- Net cash (used in) financing activities ..................... (951) (448) -------- -------- Net (decrease) in cash and cash equivalents ................. (33,032) (26,199) Cash and cash equivalents at beginning of period ............ 57,748 48,428 -------- -------- Cash and cash equivalents at end of period .................. $ 24,716 $ 22,229 ======== ========
See accompanying notes to financial statements. 3 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (1) BASIS OF PRESENTATION The consolidated financial statements included herein include the accounts of A.C. Moore Arts & Crafts, Inc. and its wholly owned subsidiaries (collectively the "Company"). The Company is a chain of 114 retail stores selling arts and crafts merchandise. The stores are located throughout the eastern United States. These financial statements have been prepared by management without audit and should be read in conjunction with the consolidated financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 2005. Due to the seasonality of the Company's business, the results for the interim periods are not necessarily indicative of the results for the year. The accompanying consolidated financial statements reflect, in the opinion of management, all adjustments necessary for a fair statement of the interim financial statements. In the opinion of management, all such adjustments are of a normal and recurring nature. On January 1, 2006, the Company adopted Statement of Financial Accounting Standards ("SFAS") No. 123(R), "Share-Based Payment." 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 is an interpretation of Statement of Financial Accounting Standards ("SFAS") No. 109, "Accounting for 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 enterprise's 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 entity's first fiscal year that begins after December 15, 2006. The Company will adopt FIN 48 as of January 1, 2007, and is currently evaluating the impact to the Company's consolidated financial statements. (2) COSTS RELATED TO CHANGE IN MANAGEMENT On June 1, 2006 the Company appointed a new Chief Executive Officer to replace the previous Chief Executive Officer who retired June 1, 2006. In June 2006, the Company also announced the retirement of its Chief Financial Officer, effective July 31, 2006, and its Executive Vice President, Merchandising, effective June 30, 2006. In connection with these and other similar changes, effective July 31, 2006, the Company incurred costs of $1.8 million and $2.0 million in the three and six month periods ended June 30, 2006, respectively, including severance costs relating to departing executives as well as the recruitment costs for new executives. It is anticipated that the Company will continue to incur additional expenses of this nature as it implements various other changes. (3) STOCK-BASED COMPENSATION The Company has two stock option plans under which the Company may grant up to 3,500,000 shares of common stock. Stock options expire ten years from the date of grant and vest ratably over a three-year period. Shares available for future grants under the plans amounted to 487,508 at June 30, 2006. 4 On January 1, 2006 the Company adopted SFAS No. 123(R), "Share-Based Payment," requiring the recognition of compensation expense in the Consolidated Statement of Income related to the fair value of its employee share-based options. SFAS No. 123(R) revises SFAS No. 123, "Accounting for Stock-Based Compensation," and supercedes APB Opinion No. 25, "Accounting for Stock Issued to Employees." SFAS No. 123(R) is supplemented by SEC Staff Accounting Bulletin ("SAB") No. 107. SAB No. 107 expresses the SEC staff's views regarding the interaction between SFAS No. 123(R) and certain SEC rules and regulations including the valuation of share-based payment arrangements. The Company will recognize the cost of all employee stock options on a straight-line attribution basis over their respective vesting periods, net of estimated forfeitures. The Company has selected the modified prospective method of transition; accordingly, prior periods have not been restated. Prior to adopting SFAS No. 123(R), the Company applied APB Opinion No. 25, and related interpretations in accounting for its stock-based compensation plans. Subsequent to the Company's initial public offering in 1997, 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 2003 ----- ----- ------ ------ Average fair value of options granted... $8.90 $9.79 $11.15 $12.99 Risk free interest rate................. 5.0% 4.4% 3.8% 3.2% Dividend yield.......................... -- -- -- -- Average expected life................... 6.0 yrs 5.0 yrs 4.9 yrs 4.5 yrs Expected stock price volatility...... 44.4% 38.9% 54.9% 56.0%
Expected volatilities were based on a blend of historical and implied volatilities of our 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 our historical exercise patterns; and the risk-free rate is based on the U.S. Treasury yield curve in effect at the time of grant for periods corresponding with the expected life of the option. For the first half of 2006, the Company recognized $1,734,000 of share-based compensation expense. Of this amount $1,584,000 was included as a component of selling, general and administrative expense and $150,000 was included in costs related to a change in management. The effect on net income was $621,000 or $.03 per diluted share in the second quarter and $1,040,000 or $.05 per share in the first six months of 2006. Prior to January 1, 2006, the Company accounted for stock-based awards to employees using the intrinsic value method in accordance with APB Opinion No. 25, "Accounting for Stock Issued to Employees." The following table illustrates the effect on first half and second-quarter 2005 net income and earnings per share if the Company had applied the fair value recognition provisions of SFAS No. 123, as amended by SFAS No. 148: 5
Six Months Ended June 30, 2005 Three Months Ended June 30, 2005 (in thousands except per share data) (in thousands except per share data) -------------------------------------- -------------------------------------- Stock-Based Stock-Based Compensation Compensation As Reported Cost Pro forma As Reported Cost Pro forma ----------- ------------ --------- ----------- ------------ --------- Income (loss) from operations................. $2,102 $1,560 $ 542 $ (21) $ 778 $ (799) Income (loss) before income taxes ..................... 1,980 1,560 420 (82) 778 (860) Net Income (loss)............. 1,202 947 255 (50) 472 (522) Basic net income (loss) per share...................... 0.06 0.05 $0.01 (0.00) (0.02) (0.03) Diluted net income (loss) per share...................... $ 0.06 $ 0.05 $0.01 $(0.00) $(0.02) $(0.03)
Activity in the Company's stock option plans for the first half of 2006 was as follows: Weighted Average Outstanding at beginning of year Options Exercise Price - -------------------------------- --------- -------------- Activity: 1,485,067 $16.87 Granted 160,000 17.74 Forfeited 10,348 22.72 Exercised 41,122 5.21 --------- ------ Outstanding at end of period 1,593,597 $17.31 ========= ====== The aggregate intrinsic value of stock options outstanding at June 30, 2006 was $5.2 million, all of which related to vested awards. Intrinsic value for stock options is calculated based on the exercise price of the underlying awards and the quoted price of the Company's common stock as of the reporting date where there is positive value. The total market value at date of exercise in excess of grant price of options exercised during the first half of 2006 was $460,000. As of June 30, 2006, there was $3.9 million of total unrecognized compensation cost related to nonvested share-based compensation arrangements granted under the Company's stock options plans. That cost is expected to be recognized over the next 26 months. 6 The following table summarizes information about stock options outstanding at June 30, 2006.
STOCK OPTIONS OUTSTANDING STOCK OPTIONS EXERCISABLE --------------------------------------------- ------------------------- WEIGHTED AVERAGE WEIGHTED WEIGHTED RANGE OF REMAINING LIFE AVERAGE AVERAGE EXERCISE PRICES SHARES (YEARS) EXERCISE PRICE SHARES EXERCISE PRICE - --------------- --------- ---------------- -------------- -------- -------------- 2.88-4.50 321,309 2.8 $ 3.77 321,309 $ 3.77 7.69-8.32 140,636 3.9 8.10 140,636 8.10 17.74 160,000 9.9 17.74 0 -- 19.11-21.95 450,144 7.0 20.35 319,221 19.70 23.51-27.15 521,508 8.0 25.38 199,642 26.68 --------- --- ------ ------- ------ 1,593,597 6.5 $17.31 980,808 $14.24 ========= === ====== ======= ======
(4) MANAGEMENT ESTIMATES The preparation of these consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of expenses during the reported period and related disclosures. Significant estimates made as of and for the three and six month periods ended June 30, 2006 and 2005 include provisions for shrinkage, capitalized buying, warehousing and distribution costs related to inventory, and markdowns of merchandise inventories. Actual results could differ materially from those estimates. (5) MARKETABLE SECURITIES Marketable securities represent investments in fixed financial instruments, are classified as held-to-maturity and recorded at amortized cost. Securities with maturities in excess of 12 months are classified as long-term. (6) INVENTORIES Inventories, which consist of general consumer merchandise held for sale, are stated at the lower of cost or market. The cost of store inventories is determined by the retail inventory method. Warehouse inventories are stated at cost determined on a first-in, first-out basis. The Company includes as inventoriable costs certain indirect costs, such as purchasing and receiving costs, inbound freight, duties related to import purchases, internal transfer costs and warehousing costs. The Company records vendor monies which support its advertising programs as a reduction in the cost of inventory, and are recognized as a reduction of cost of goods sold when the inventory is sold. 7 (7) PROPERTY AND EQUIPMENT Property and equipment are stated at cost. Depreciation is provided on a straight-line basis over the estimated useful lives of the assets. Buildings and building improvements are depreciated over periods of twenty to forty years, furniture, fixtures and equipment are depreciated over periods of five to ten years and leasehold improvements are depreciated over the shorter of their estimated useful lives or the term of the related lease. (8) LONG-TERM DEBT The Company maintains two mortgage agreements with Wachovia Bank on its corporate offices and distribution center of which $25.5 million and $26.7 million was outstanding at June 30, 2006 and December 31, 2005, respectively. The mortgages are secured by land, building, and equipment. Of the original $30.0 million in mortgages, $22.5 million ($19.8 million at June 30, 2006) is repayable over 15 years and $7.5 million ($5.7 million at June 30, 2006) is repayable over 7 years. Monthly payments are $214,000. The mortgages bear interest at rates that will vary between LIBOR plus 85 basis points and LIBOR plus 135 basis points, depending on the debt service coverage ratio and the length of the mortgage payment. The Company has the option of fixing the interest rate at any time. The mortgages contain covenants that, among other things, restrict the Company's ability to incur additional indebtedness or guarantee obligations in excess of $8.0 million, engage in mergers or consolidations, dispose of assets, make acquisitions requiring a cash outlay in excess of $10.0 million, make loans or advances in excess of $1.0 million, or change the nature of its business. The Company is restricted in capital expenditures, paying dividends and making other distributions unless certain financial covenants are maintained including those relating to tangible net worth, funded debt and a current ratio. The mortgages also define various events of default, including cross default provisions, defaults for any material judgments or a change in control. At June 30, 2006 the Company was in compliance with these agreements. (9) REVENUE RECOGNITION The Company recognizes revenue at the time of sale of merchandise to its customers, or if the merchandise is custom framing, at the time of delivery of the finished product. The value of point of sale coupons, which have a very limited life, and other discounts that result in a reduction of the price paid by the customer are recorded as a reduction of sales. Sales returns, which are reserved for based on historical experience, are provided for in the period that the related sales are recorded. Proceeds from the sale of gift cards are recorded as gift card liability and recognized as revenue when redeemed by the holder. (10) INSURANCE CLAIMS The Company records any insurance claim receivable based upon its net realizable value when the amounts are estimable and the recovery is probable. Gains on recovery of inventory in excess of cost are recognized in gross margin. (11) INCOME TAXES The Company's effective tax rate for the first half of 2006 was 40.0%, compared to 39.3% for the first half of 2005. This is the result of an expected tax rate of 38.0% for the year ended December 31, 2006 plus the expected impact of accounting for incentive stock options (ISOs) under SFAS No. 123(R). Tax benefits relating to ISOs are recognized in future periods when and if disqualifying dispositions occur. 8 The effective tax rate was 40.0% for the second quarter of 2006 compared to 39.0% for the second quarter of 2005. (12) EARNINGS PER SHARE The following table sets forth the computation of basic and diluted earnings per share:
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, ------------------ ----------------- 2006 2005 2006 2005 ------- -------- ------- ------- (in thousands, except per share data) Net Income (loss) ........................ $(1,769) $ (50) $(1,519) $ 1,202 ======= ======= ======= ======= Weighted average shares: Basic ................................. 19,857 19,743 19,847 19,709 Incremental shares from assumed exercise of stock options .......... -- -- -- 477 ------- ------- ------- ------- Diluted ............................... 19,857 19,743 19,847 20,186 ======= ======= ======= ======= Basic net income (loss) per share ........ $ (0.09) $ (0.00) $ (0.08) $ 0.06 ======= ======= ======= ======= Diluted net income (loss) per share ...... $ (0.09) $ (0.00) $ (0.08) $ 0.06 ======= ======= ======= ======= Stock options excluded from calculation because exercise price was greater than average market price .................. 1,132 0 1,132 0 ------- ------- ------- ------- Potentially dilutive shares excluded from calculation as the result would be anti-dilutive ......................... 462 491 462 0 ------- ------- ------- -------
9 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW The following discussion and analysis contains certain forward-looking statements. These forward-looking statements do not constitute historical facts and involve risks and uncertainties. Actual results could differ materially from those referred to in the forward-looking statements due to a number of factors, including, but not limited to, the following: the impact of the adoption of SFAS No. 123(R) (as defined below), customer demand and trends in the arts and crafts industry, related inventory risks due to shifts in customer demand, the effect of economic conditions and rising gasoline prices, the impact of unfavorable weather conditions, the impact of competitors' locations or pricing, the availability of acceptable real estate locations for new stores, difficulties with respect to new information system technologies, difficulties in implementing measures to reduce costs and expenses, supply constraints or difficulties, the effectiveness of advertising strategies, the impact of the threat of terrorist attacks and war, the costs associated with a change in senior management and our ability to maintain an effective system of internal control over financial reporting. For additional information concerning factors that could cause actual results to differ materially from the information contained herein, reference is made to the information under Part I, "Item 1A. Risk Factors" in our Annual Report on Form 10-K for the year ended December 31, 2005 as filed with the Securities and Exchange Commission (the "SEC"), as updated in this Quarterly Report on Form 10-Q under Part II, "Item 1A. Risk Factors." Due to the importance of our peak selling season, which includes Fall/Halloween, Thanksgiving and Christmas, the fourth quarter has historically contributed, and we expect it will continue to contribute, disproportionately to our profitability for the entire year. As a result, our quarterly results of operations may fluctuate. In addition, results of a period shorter than a full year may not be indicative of results expected for the entire year. Our quarterly results of operations also may fluctuate based upon such factors as the length of holiday seasons, the date on which holidays fall, the number and timing of new store openings, the amount of store pre-opening expenses, the amount of net sales contributed by new and existing stores, the mix of products sold, the amount of sales returns, the timing and level of markdowns and other competitive factors. CHANGE IN ACCOUNTING: STOCK-BASED COMPENSATION On January 1, 2006, we adopted SFAS No. 123(R), "Share-Based Payment" ("SFAS No. 123(R)") requiring the recognition of compensation expense in the consolidated statement of income related to the fair value of our employee share-based options. SFAS No. 123(R) revises SFAS No. 123, "Accounting for Stock-Based Compensation," and supercedes APB Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB Opinion No. 25"). SFAS No. 123(R) is supplemented by SEC Staff Accounting Bulletin ("SAB") No. 107. SAB No. 107 expresses the SEC staff's views regarding the interaction between SFAS No. 123(R) and certain SEC rules and regulations including the valuation of share-based payment arrangements. We have two stock option plans under which we may grant up to 3,500,000 shares of common stock. Stock options expire ten years from the date of grant and vest ratably over a three-year period. Shares available for future grants under the plans amounted to 487,508 at June 30, 2006. 10 SFAS No. 123(R) requires us to measure compensation cost for all outstanding unvested share-based awards at fair value and recognize compensation over the service period for awards expected to vest. The estimation of stock awards that will ultimately vest requires judgment, and to the extent actual results differ from our estimates, such amounts will be recorded as a cumulative adjustment in the period estimates are revised. We consider many factors when estimating expected forfeitures, including types of awards, employee class and historical experience. Actual results may differ substantially from these estimates. We will recognize the cost of all employee stock options on a straight-line attribution basis over their respective vesting periods, net of estimated forfeitures. We have selected the modified prospective method of transition; accordingly, prior periods have not been restated. Prior to adopting SFAS No. 123(R), we applied APB Opinion No. 25, and related interpretations in accounting for our stock-based compensation plans. Subsequent to our initial public offering in 1997, 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. We recognized share-based compensation expense of $1,035,000 in the second quarter and $1,734,000 in the first half of 2006. We also recognized a deferred tax asset of $406,000 in the first half of 2006. The effect on net income was $621,000, or $.03 per diluted share in the second quarter of 2006 and $1,040,000 or $.05 per share in the first six months of 2006. Prior to January 1, 2006, we accounted for stock-based awards to employees using the intrinsic value method in accordance with APB Opinion No. 25. The following table illustrates the effect on first-half and first quarter 2005 net income and earnings per share if we had applied the fair value recognition provisions of SFAS No. 123, as amended by SFAS No. 148:
Six Months Ended June 30, 2005 Three Months Ended June 30, 2005 -------------------------------------- -------------------------------------- (in thousands except per share data) (in thousands except per share data) Stock-Based Stock-Based Compensation Compensation As Reported Cost Pro forma As Reported Cost Pro forma ----------- ------------ --------- ----------- ------------ --------- Income (loss) from operations .............. $2,102 $1,560 $ 542 $ (21) $ 778 $ (799) Income (loss) before income taxes ............ 1,980 1,560 420 (82) 778 (860) Net Income (loss) .................. 1,202 947 255 (50) 472 (522) Basic net income (loss) per share ............... 0.06 0.05 $0.01 (0.00) (0.02) (0.03) Diluted net income (loss) per share ............... $ 0.06 $ 0.05 $0.01 $(0.00) $(0.02) $(0.03)
11 As of June 30, 2006, there was $3.9 million of total unrecognized compensation cost related to nonvested share-based compensation arrangements granted under our stock option plans. That cost is expected to be recognized over the next 26 months. RESULTS OF OPERATIONS The following table sets forth, for the periods indicated, selected statement of operations data expressed as a percentage of net sales and the number of stores open at the end of each such period:
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, ------------------ ---------------- 2006 2005 2006 2005 ----- ----- ----- ----- Net sales...................................... 100.0% 100.0% 100.0% 100.0% Cost of sales.................................. 59.3 59.7 59.7 60.3 ----- ----- ----- ----- Gross margin................................... 40.7 40.3 40.3 39.7 Selling, general and administrative expenses... 41.0 39.5 40.0 38.3 Costs related to change in management.......... 1.4 0.0 0.7 0.0 Store pre-opening expenses..................... 0.5 0.8 0.5 0.5 ----- ----- ----- ----- Income (loss) from operations.................. (2.2) (0.0) (0.9) 0.9 Net interest expense........................... 0.1 0.0 0.1 0.1 ----- ----- ----- ----- Income (loss) before income taxes.............. (2.3) (0.0) (1.0) 0.8 Provision (benefit) for income taxes........... (0.9) (0.0) (0.4) 0.3 ----- ----- ----- ----- Net income (loss).............................. (1.4)% (0.0)% (0.6)% 0.5% ===== ===== ===== ===== Number of stores open at end of period......... 114 98
THREE MONTHS ENDED JUNE 30, 2006 COMPARED TO THREE MONTHS ENDED JUNE 30, 2005 NET SALES. Net sales increased $16.3 million or 14.0% to $129.8 million in the three months ended June 30, 2006 from $113.5 million in the comparable 2005 period. This increase is comprised of (i) net sales of $3.3 million from stores opened in 2006, (ii) net sales of $9.7 million from stores opened in 2005 not included in the comparable store base, and (iii) a comparable store sales increase of $3.3 million or 3.0%. For the three months ended June 30, 2006, in comparable stores the number of customer transactions were flat and the average sale increased by 3.0% compared with the same period in 2005. GROSS MARGIN. Gross margin is net sales minus the cost of merchandise which includes purchasing and receiving costs, inbound freight, duties related to import purchases, internal transfer costs and warehousing costs. Gross margin as a percent of net sales was 40.7% for the three months ended June 30, 2006, and 40.3% for the three months ended June 30, 2005. The mix of merchandise sold increased margins by 0.3% and the improved productivity in our warehouse increased margins by 0.1% as a result of a reduction in our distribution costs. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and administrative expenses include (a) direct store level expenses, including rent and related operating costs, payroll, advertising, 12 depreciation and other direct costs, and (b) corporate level costs not directly associated with or allocable to cost of sales, including executive salaries, accounting and finance, corporate information systems, office facilities and other corporate expenses. Selling, general and administrative expenses, as a percent of sales, increased 1.5% in the three months ended June 30, 2006 to 41.0% from 39.5% in the three months ended June 30, 2005. In 2006 we began expensing stock-based compensation as required by SFAS No.123(R). This expense totaled $1,035,000 for the second quarter, of which $885,000 was included in selling, general and administrative expenses. Stock based compensation accounted for 0.7% for the increase in selling, general and administrative expenses. Costs associated with workers compensation, general liability claims and medical expenses, were 0.8% greater in the second quarter of 2006 than in 2005. COSTS RELATED TO CHANGE IN MANAGEMENT. On June 1, 2006 we appointed a new Chief Executive Officer to replace the previous Chief Executive Officer who retired June 1, 2006. In June 2006, we also announced the retirement of our Chief Financial Officer, effective July 31, 2006, and our Executive Vice President, Merchandising, effective June 30, 2006. In connection with these and other similar changes, we incurred $1.8 million in costs including severance and stock compensation expense costs relating to departing executives as well as the recruitment costs for new executives. It is anticipated that we will continue to incur additional expenses of this nature as we implement various other changes. STORE PRE-OPENING EXPENSES. We expense store pre-opening expenses as they are incurred which include rent holidays prior to a store opening. Pre-opening expenses for the one store we opened in the second quarter of 2006, and lease costs related to the new stores which we will open later in 2006 amounted to $671,000. In the second quarter of 2005, we incurred store pre-opening expenses of $944,000 related to the stores opened in that quarter and lease costs related to stores opened later in 2005. NET INTEREST EXPENSE. In the second quarter of 2006, we had net interest expense of $73,000 compared with net interest expense of $61,000 for the same period in 2005. INCOME TAXES. Our tax provision rate for the second quarter of 2006 was 40.0%. This tax provision is the result of an expected income tax rate 38.0% for the year ended December 31, 2006 plus the expected impact of accounting for incentive stock options ("ISOs") under SFAS No. 123(R). Tax benefits relating to ISOs are recognized in future periods when and if disqualifying dispositions occur. The effective tax rate was 39.0% for the three months ended June 30, 2005. SIX MONTHS ENDED JUNE 30, 2006 COMPARED TO SIX MONTHS ENDED JUNE 30, 2005 NET SALES. Net sales increased $26.4 million or 11% to $262.7 million in the six months ended June 30, 2006 from $236.4 million in the comparable 2005 period. This increase is comprised of (i) net sales of $4.9 million from four stores opened in 2006, (ii) net sales of $20.5 million from stores opened in 2005 not included in the comparable store base, and (iii) a comparable store sales increase of $1.0 million. For the six months ended June 30, 2006, customer transactions in comparable stores were down 0.4% and the average sale increased by 0.9% compared with the same period in 2005. GROSS MARGIN. Gross margin as a percent of net sales was 40.3% for the six months ended June 30, 2006, and 39.7% for the six months ended June 30, 2005. The mix of merchandise sold increased margins by 0.3% and the improved productivity in our warehouse increased margins by 0.3% as a result of a reduction in our distribution costs. 13 SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and administrative expenses, as a percent of sales, increased 1.7% in the six months ended June 30, 2006 to 40.0% from 38.3% in the six months ended June 30, 2005. Stock-based compensation totaled $1,734,000 for the six months ended June 30, 2006, of which $1,584,000 was included in selling, general and administrative expenses. Stock- based compensation accounted for 0.6% of the increase in selling, general and administrative expenses. Workers compensation, general liability claims and medical costs were 0.3% greater in the first half of 2006 compared with the same period in 2005. The remainder of the increase was due to greater first quarter advertising costs and the impact of a first quarter comparable store sales decrease. COSTS RELATED TO CHANGE IN MANAGEMENT. On June 1, 2006 we appointed a new Chief Executive Officer to replace the previous Chief Executive Officer who retired June 1, 2006. In June 2006 we also announced the retirement of our Chief Financial Officer, effective July 31, 2006, and our Executive Vice President, Merchandising, effective June 30, 2006. In connection with these and other similar changes in the first half of 2006 we incurred $2.0 million in costs including severance costs and stock compensation expense relating to departing executives as well as the recruitment costs for new executives. It is anticipated that we will continue to incur additional expenses of this nature as we implement various other changes. STORE PRE-OPENING EXPENSES. Pre-opening expenses for the five stores we opened in the first six months of 2006, and lease costs related to the new stores which we will open later in 2006 amounted to $1,295,000. In the first six months of 2005, we incurred store pre-opening expenses of $1,105,000 related to the stores opened and lease costs related to stores opened later in 2005. NET INTEREST EXPENSE. In the first six months of 2006, we had net interest expense of $126,000 compared with net interest expense of $122,000 for the same period in 2005. INCOME TAXES. Our tax provision rate for the first half of 2006 was 40.0%. This tax provision is the result of an expected income tax rate 38.0% for the year ended December 31, 2006 plus the expected impact of accounting for incentive stock options ("ISOs") under SFAS No. 123(R). Tax benefits relating to ISOs are recognized in future periods when and if disqualifying dispositions occur. The effective tax rate was 39.3% for the six months ended June 30, 2005. LIQUIDITY AND CAPITAL RESOURCES Our cash is used primarily for working capital to support inventory requirements and capital expenditures, pre-opening expenses and beginning inventory for new stores. In recent years, we have financed our operations and new store openings primarily with cash from operations and the net proceeds we received from a secondary offering in 2002. In the first half of 2004 we borrowed $30.0 million under two mortgage agreements we have with Wachovia Bank to finance the construction of our corporate offices and distribution center. At June 30, 2006 and December 31, 2005, our working capital was $153.6 million and $158.6 million, respectively. Cash used in operations was $27.7 million for the six months ended June 30, 2006 principally as a result of an increase in inventories of $23.4 million due to expected seasonal increases and to support new stores. For the six months ended June 30, 2005, cash used in operations was $23.6 million, principally as a result of a seasonal increase in inventories of $11.2 million and a seasonal decrease in accounts payable and accrued expenses of $17.6 million. 14 Net cash used in investing activities during the three months ended June 30, 2006 was $4.4 million, including $9.6 million for capital expenditures offset by proceeds from maturation of marketable securities of $5.2 million. In 2006, we expect to spend approximately $19.0 million on capital expenditures, which includes $11.0 million for new store openings, and the remainder for remodeling existing stores, upgrading systems in existing stores, warehouse equipment and corporate systems development. Of the $11.0 million in new store capital expenditures, we expect to receive $1.5 million back from landlords. We have two mortgage agreements with Wachovia Bank on our corporate offices and distribution center of which $25.5 million was outstanding at June 30, 2006. The mortgages are secured by land, building and equipment. Of the original $30.0 million in mortgages, $22.5 million ($19.8 million as of June 30, 2006) is repayable over 15 years and $7.5 million ($5.7 million as of June 30, 2006) is repayable over 7 years. Monthly payments are $214,000. The mortgages bear interest at rates that will vary between LIBOR plus 85 basis points and LIBOR plus 135 basis points, depending on the debt service coverage ratio and the length of the mortgage payment. We have the option of fixing the interest rate at any time. The mortgages contain covenants that, among other things, restrict our ability to incur additional indebtedness or guarantee obligations in excess of $8.0 million, engage in mergers or consolidations, dispose of assets, make acquisitions requiring a cash outlay in excess of $10.0 million, make loans or advances in excess of $1.0 million, or change the nature of our business. We are restricted in capital expenditures, paying dividends and making other distributions unless certain financial covenants are maintained including those relating to tangible net worth, funded debt and a current ratio. The mortgages also define various events of default, including cross default provisions, defaults for any material judgments or a change in control. At June 30, 2006, we were in compliance with these agreements. We currently have a $35.0 million line of credit with Wachovia Bank which expires on May 31, 2007. Borrowings under this line will bear interest at LIBOR plus 95 basis points and are subject to the same covenants as the mortgages described above. At June 30, 2006, there were no borrowings outstanding under this agreement. We believe the cash generated from operations during the year and available borrowings under the line of credit agreement will be sufficient to finance our working capital and capital expenditure requirements for at least the next 12 months. CRITICAL ACCOUNTING ESTIMATES Except as described below, our accounting policies are fully described in Note 1 of our notes to consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2005. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions about future events that affect the amounts reported in our consolidated financial statements and accompanying notes. Since future events and their effects cannot be determined with absolute certainty, actual results may differ from those estimates. Management makes adjustments to its assumptions and judgments when facts and circumstances dictate. The amounts currently estimated by us are subject to change if different assumptions as to the outcome of future events were made. We evaluate our estimates and judgments on an ongoing basis and predicate those estimates and judgments on historical experience and on various other factors that management believes to be reasonable under the circumstances. Management believes the following critical accounting estimates encompass the more significant judgments and estimates used in preparation of our consolidated financial statements: 15 o merchandise inventories; o impairment of long-lived assets; o stock-based compensation under SFAS No. 123(R); o income taxes; and o other estimates. Other than accounting for stock-based compensation under SFAS No. 123(R), which is described below, the foregoing critical accounting estimates are more fully described in our Annual Report on Form 10-K for the year ended December 31, 2005. We believe that there have been no significant changes during the three months ended June 30, 2006 to the items that we disclosed as our critical accounting policies and estimates in our Annual Report Form 10-K for the year ended December 31, 2005, except as described below. STOCK-BASED COMPENSATION EXPENSE UNDER SFAS NO. 123(R) Effective January 1, 2006, we account for stock-based compensation in accordance with the provisions of SFAS No. 123(R). Under the fair value recognition provisions of SFAS No. 123(R), stock-based compensation cost is estimated at the grant date based on the fair value of the award and is recognized as expense ratably over the service period for awards expected to vest. Determining the appropriate fair value model and calculating the fair value of stock-based awards requires judgment, including estimating stock price volatility, forfeiture rates and expected lives. For more discussion of stock-based compensation under SFAS No. 123(R), see Note 3 in our notes to consolidated financial statements contained in this Quarterly Report on Form 10-Q. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK We invest cash balances in excess of operating requirements primarily in money market mutual funds and to a lesser extent in interest-bearing securities with maturities of less than two years. The fair value of our cash and equivalents at June 30, 2006 approximated carrying value. We had no borrowings outstanding under our line of credit at June 30, 2006. The interest rates on our mortgages fluctuate with market rates and therefore the value of these financial instruments will not be impacted by a change in interest rates. Based on the amounts outstanding at June 30, 2006, the impact of a hypothetical increase or decrease in interest rates of 10% compared with the rates in effect at June 30, 2006 would result in an increase or decrease in our interest expense of $160,000 annually, and an increase or decrease in our interest income of $112,000 annually. ITEM 4. CONTROLS AND PROCEDURES We carried out an evaluation, with the participation of our principal executive officer and principal financial officer, of the effectiveness of our disclosure controls and procedures as of June 30, 2006. Based on this evaluation, our principal executive officer and principal financial officer concluded that, as of June 30, 2006, our disclosure controls and procedures, as defined in Rule 13a-15(e), were effective at the reasonable assurance level, to ensure that (i) information required to be disclosed by the issuer in the reports that it files or submits under the Securities Exchange Act of 1934 (the "Exchange Act") is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms and (ii) information required to be disclosed by an issuer in the reports that it files or submits under the Exchange Act is accumulated and communicated to the issuer's 16 management including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. 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 quarter ended June 30, 2006 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. 17 PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS Not Applicable. ITEM 1A. RISK FACTORS In addition to the other information set forth in this report, you should carefully consider the factors discussed in Part I, "Item 1A. Risk Factors" in our Annual Report on Form 10-K for the year ended December 31, 2005, which could materially affect our business, financial condition or future results. The risks described in our Annual Report on Form 10-K for the year ended December 31, 2005 are not the only risks facing our Company. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results. The information presented below updates, and should be read in conjunction with, the risks described in our Annual Report on Form 10-K for the year ended December 31, 2005. 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. On June 1, 2006, we appointed Rick A. Lepley as our new Chief Executive Officer. Our Chief Financial Officer and Executive Vice President, Merchandising retired in July 2006 and June 2006, respectively, and our Executive Vice President, Merchandising and Marketing resigned in July 2006. We currently have searches in process to fill these positions. There are no assurances as to when we will find suitable candidates for these positions and what the financial cost of their compensation packages will be. In addition, due to competition for qualified executives, we may be required to increase the level of compensation paid to existing and new executives, which could increase our operating expenses. 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 our team members and vendors and to implement or change our business and operating strategy. We do not maintain any key man life insurance on any members of our senior management team. Our success in the future will also be dependent upon our ability to attract and retain other qualified personnel, including store managers. ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS Not Applicable. ITEM 3. DEFAULTS UPON SENIOR SECURITIES Not Applicable. 18 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not Applicable. ITEM 5. OTHER INFORMATION Not Applicable. ITEM 6. EXHIBITS 31.1 Certification pursuant to Rule 13a-14(a) promulgated under the Securities Exchange Act of 1934, as amended ("Exchange Act"). 31.2 Certification pursuant to Rule 13a-14(a) promulgated under the Exchange Act. 32.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 32.2 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 19 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. A.C. MOORE ARTS & CRAFTS, INC. Date: August 10, 2006 By: /s/ Rick A. Lepley ---------------------------------- Rick A. Lepley Chief Executive Officer (duly authorized officer and principal executive officer) Date: August 10, 2006 By: /s/ Jason Cesare ---------------------------------- Jason Cesare Senior Vice President, Finance (duly authorized officer and principal financial officer) 20 EXHIBIT INDEX Exhibit No. Description - ----------- ----------- 31.1 Certification pursuant to Rule 13a-14(a) promulgated under the Exchange Act. 31.2 Certification pursuant to Rule 13a-14(a) promulgated under the Exchange Act. 32.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 32.2 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. EX-31.1 2 p414453_ex31-1.txt EXHIBIT 31.1 Exhibit 31.1 I, Rick A. Lepley, certify that: 1. I have reviewed this Form 10-Q of A.C. Moore Arts & Crafts, Inc; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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; (c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: August 10, 2006 /s/ Rick A. Lepley ---------------------------------------- Rick A. Lepley Chief Executive Officer (principal executive officer) EX-31.2 3 p414453_ex31-2.txt EXHIBIT 31.2 Exhibit 31.2 I, Jason Cesare, certify that: 1. I have reviewed this Form 10-Q of A.C. Moore Arts & Crafts, Inc; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; and 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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; (c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: August 10, 2006 /s/ Jason Cesare ---------------------------------------- Jason Cesare Senior Vice President, Finance (principal financial officer) EX-32.1 4 p414453_ex32-1.txt EXHIBIT 32.1 Exhibit 32.1 A.C. MOORE ARTS & CRAFTS, INC. CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Section 1350 of Chapter 63 of Title 18 of the United States Code), the undersigned officer of A.C. Moore Arts & Crafts, Inc. (the "Company"), does hereby certify with respect to this Form 10-Q of the Company for the quarterly period ended June 30, 2006 (the "Report") that: (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ Rick A. Lepley ---------------------------------------- Date: August 10, 2006 Rick A. Lepley Chief Executive Officer The foregoing certification is being furnished solely pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Section 1350 of Chapter 63 of Title 18 of the United States Code) and is not being filed as part of the Report or as a separate disclosure document. EX-32.2 5 p414453_ex32-2.txt EXHIBIT 32.2 Exhibit 32.2 A.C. MOORE ARTS & CRAFTS, INC. CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Section 1350 of Chapter 63 of Title 18 of the United States Code), the undersigned officer of A.C. Moore Arts & Crafts, Inc. (the "Company"), does hereby certify with respect to this Form 10-Q of the Company for the quarterly period ended June 30, 2006 (the "Report") that: (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Date: August 10, 2006 /s/ Jason Cesare ---------------------------------------- Jason Cesare Senior Vice President, Finance The foregoing certification is being furnished solely pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Section 1350 of Chapter 63 of Title 18 of the United States Code) and is not being filed as part of the Report or as a separate disclosure document. -----END PRIVACY-ENHANCED MESSAGE-----