<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1998
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.)
500 University Court, Blackwood, NJ 08012
-----------------------------------------
(Address of principal executive offices)
(Zip Code)
(609) 228-6700
--------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) 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.
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 May 8, 1998
- ----- --------------------------
Common Stock, no par value 7,405,000
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A.C. MOORE ARTS & CRAFTS, INC.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
Number
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PART I: FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheet as of March 31, 1998
and December 31, 1997 3
Consolidated Statement of Income for the three
months ended March 31, 1998 and 1997 4
Consolidated Statement of Cash Flows for the three
months ended March 31, 1998 and 1997 5
Notes to Financial Statements (Unaudited) 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 7
Item 3. Quantitative and Qualitative Disclosure About
Market Risk 9
PART II: OTHER INFORMATION
Item 1. Legal Proceedings 10
Item 2. Changes in Securities and Use of Proceeds 10
Item 3. Defaults Upon Senior Securities 10
Item 4. Submission of Matters to a Vote of Security Holders 11
Item 5. Other Information 11
Item 6. Exhibits and Reports on Form 8-K 11
SIGNATURES 12
EXHIBIT INDEX 13
</TABLE>
2
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A.C. MOORE ARTS & CRAFTS, INC.
CONSOLIDATED BALANCE SHEET
(dollars in thousands)
(unaudited)
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
------- -------
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 8,409 $15,835
Marketable securities 3,944 4,004
Inventories 41,951 37,022
Prepaid expenses and other current assets 1,002 1,034
------- -------
55,306 57,895
Property and equipment, net 8,440 7,655
Other assets 532 517
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$64,278 $66,067
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Trade accounts payable $11,232 $12,479
Accrued payroll and payroll taxes 1,168 2,353
Accrued expenses 2,218 2,089
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14,618 16,921
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Long-term liabilities:
Deferred taxes 830 830
Other long-term liabilities 1,299 1,230
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2,129 2,060
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16,747 18,981
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SHAREHOLDERS' EQUITY
Preferred stock, no par value, 5,000,000 shares
authorized, none issued
Common stock, no par value, 20,000,000 shares
authorized, 7,405,000 shares outstanding 42,867 42,829
Retained earnings 4,664 4,257
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47,531 47,086
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$64,278 $66,067
======= =======
</TABLE>
See accompanying notes to financial statements
3
<PAGE>
A.C. MOORE ARTS & CRAFTS, INC.
CONSOLIDATED STATEMENT OF INCOME
(dollars in thousands, except per share data)
(unaudited)
<TABLE>
<CAPTION>
Three months ended
March 31,
---------------------------------------
1998 1997
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<S> <C> <C>
Net sales $ 38,219 $ 27,252
Cost of sales (including buying
and distribution costs) 24,192 17,408
----------- -----------
Gross margin 14,027 9,844
Selling, general and administrative expenses 12,787 8,884
Pre-opening expenses 771 449
----------- -----------
Income from operations 469 511
Net interest (income) expense (197) 111
----------- -----------
Income before income taxes 666 400
Income tax expense 260 7
----------- -----------
Net income $ 406 $ 393
=========== ===========
Basic net income per share $ 0.05 $ 0.09
=========== ===========
Weighted average shares outstanding 7,405,000 4,300,000
=========== ===========
Diluted net income per share $ 0.05 $ 0.09
=========== ===========
Weighted average shares outstanding plus
impact of stock options 7,566,000 4,326,000
=========== ===========
Pro forma income and per share data:
Income before income taxes, as reported $ 400
Pro forma income tax provision 160
-----------
Pro forma net income $ 240
===========
Pro forma basic net income per share $ 0.06
===========
Pro forma diluted net income per share $ 0.06
===========
</TABLE>
See accompanying notes to financial statements
4
<PAGE>
A.C. MOORE ARTS & CRAFTS, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(dollars in thousands)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
---------------------------------
1998 1997
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<S> <C> <C>
Cash flows from operating activities:
Net income $ 406 $ 393
Adjustments to reconcile net income to net cash
(used in) operating activities:
Depreciation and amortization 470 327
Compensation expense related to stock options 38 --
Changes in assets and liabilities:
Inventories (4,929) (1,092)
Prepaid expenses and other current assets 32 (14)
Accounts payable and accrued expenses (2,302) (256)
Other assets (15) 42
Other long-term liabilities 69 29
-------- --------
Net cash (used in) operating activities (6,231) (571)
-------- --------
Cash flows (used in) investing activities: Capital expenditures (1,255) (710)
-------- --------
Cash flows from financing activities:
Proceeds from redemption of marketable securities 4,004 --
Investment in marketable securities (3,944) --
Proceeds from shareholders' loans -- 3,705
Repayment of long-term debt -- (464)
Distributions to shareholders -- (6,633)
-------- --------
Net cash provided by (used in) financing activities 60 (3,392)
-------- --------
Net (decrease) in cash (7,426) (4,673)
Cash and cash equivalents at beginning of period 15,835 6,431
-------- --------
Cash and cash equivalents at end of period $ 8,409 $ 1,758
======== ========
</TABLE>
See accompanying notes to financial statements
5
<PAGE>
NOTES TO 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 30 retail superstores (29 of which
were open as of March 31, 1998) selling arts and crafts merchandise. The stores
are located in the mid-Atlantic and northeast regions.
These financial statements have been prepared by management without audit and
should be read in conjunction with the consolidated financial statements and
notes thereto for the year 1997. Due to the seasonality of the Company's
business, the results for the interim periods are not necessarily indicative of
the results for the year. The accompanying consolidated financial statements
reflect, in the opinion of management, all adjustments necessary for a fair
presentation of the interim financial statements. In the opinion of management,
all such adjustments are of a normal and recurring nature.
(2) Management Estimates
The preparation of these consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities at
the date of the financial statements and the reported amounts of expenses during
the reported period and related disclosures. Significant estimates made as of
and for the three month period ended March 31, 1998 and March 31, 1997 include
provisions for shrinkage, capitalized buying, warehousing and distribution costs
related to inventory and markdowns of merchandise inventories. Actual results
could differ from those estimates.
(3) Pro Forma Information
Prior to the Company's initial public offering completed on October 9, 1997 the
Company elected to be taxed under the S Corporation provisions of the Internal
Revenue Code. Under these provisions, the shareholders of the Company included
their pro rata share of income or loss in their individual federal and state tax
returns. A portion of the distributions to shareholders was related to their
individual income tax liabilities resulting from S Corporation taxable earnings.
The Company's earnings subsequent to conversion to C Corporation status reflect
all applicable income taxes.
For the three months ended March 31, 1997, pro forma taxes have been computed as
if the Company was subject to all applicable federal and state income taxes,
assuming the tax rate that would have applied had the Company been taxed as a C
Corporation.
6
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion and analysis contains certain forward-looking
statements. These forward-looking statements do not constitute historical facts
and involve risks and uncertainties. Actual results could differ materially from
those referred to in the forward-looking statements due to a number of factors,
including, but not limited to, the following: ability to open and operate new
stores; weather and economic conditions; dependence on key personnel;
competition; ability to anticipate merchandise trends and consumer demands;
ability to maintain relationships with suppliers, successful implementation of
systems, and ability to meet future capital needs. For additional information
concerning factors that could cause actual results to differ materially from the
information contained herein, reference is made to the information under the
heading "Cautionary Statement Relating to Forward Looking Statements" in the
Company's Annual Report on Form 10-K as filed with the Securities and Exchange
Commission.
Due to the importance of the fall selling season, the fourth quarter has
historically contributed, and the Company expects it will continue to
contribute, disproportionately to the Company's profitability for the entire
year. As a result, the Company's 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.
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:
For the three months
ended March 31,
---------------------
1998 1997
----- -----
Net sales 100.0% 100.0%
Cost of sales 63.3% 63.9%
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Gross margin 36.7% 36.1%
Selling, general and
administrative expenses 33.5% 32.6%
Pre-opening expenses 2.0% 1.6%
----- -----
Income from operations 1.2% 1.9%
Net interest expense (income) (0.5)% 0.4%
----- ----
Income before income taxes 1.7% 1.5%
Income tax expense 0.6% 0.1%
----- -----
Net income 1.1% 1.4%
===== =====
Pro forma income tax provision 0.6%
-----
Pro forma net income 0.9%
=====
Number of stores open at end of period 29 20
7
<PAGE>
Three Months Ended March 31, 1998 Compared to Three Months Ended March 31, 1997
Net Sales. Net sales increased $11.0 million, or 40.2%, to $38.2 million in
the three months ended March 31, 1998 from $27.3 million in the comparable 1997
period. This increase resulted from (i) net sales of $2.2 million from four new
superstores opened during the period (ii) net sales of $7.5 million from
superstores opened in 1997 not included in the comparable store base, and (iii)
a comparable store sales increase of $1.3 million, or 5%. Stores are added to
the comparable store base at the beginning of the fourteenth full month of
operation.
Gross Margin. Cost of sales includes the cost of merchandise, plus certain
distribution and purchasing costs. Cost of sales increased $6.8 million, or
39.0%, to $24.2 million in the three months ended March 31, 1998 from $17.4
million in the three months ended March 31, 1997. The gross margin increased
$4.2 million, or 42.5%, to $14.0 million in the three months ended March 31,
1998 from $9.8 million in the three months ended March 31, 1997. The gross
margin increased to 36.7% of net sales in the three months ended March 31, 1998
from 36.1% in the three months ended March 31, 1997.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses include (a) direct store level expenses, including rent
and related operating costs, payroll, advertising, depreciation and other direct
costs, and (b) corporate level costs not directly associated with or allocable
to cost of sales including executive salaries, accounting and finance, corporate
information systems, office facilities and other corporate expenses. Selling,
general and administrative expenses increased $3.9 million, or 43.9%, in the
three months ended March 31, 1998 to $12.8 million from $8.9 million in the
three months ended March 31, 1997. Of the increase, $3.1 million was
attributable to the nine superstores open during 1998 which were not open during
1997 and the superstores opened in the first quarter of 1997 not in the
comparable store base. The remainder of the increase is attributable to $300,000
in operating expenses in the comparable superstores and $500,000 in corporate
costs, principally from the addition of corporate staff and infrastructure to
support the growth of the Company. As a percentage of sales, selling, general
and administrative costs increased to 33.5% of net sales in the three months
ended March 31, 1998 from 32.6% of net sales in the three months ended March 31,
1997. This increase is primarily due to the new stores, which, on average, have
higher operating costs as a percent of sales than older stores.
Pre-Opening Expense. The Company has adopted the Financial Accounting
Standards Board Statement of Position 98-5 "Reporting on the Costs of Start-Up
Activities" and accordingly expenses store pre-opening expense as incurred.
Pre-opening expense for the four new superstores opened in the first quarter of
1998 amounted to $771,000. In the first quarter of 1997, the Company opened
three superstores which had pre-opening expense of $449,000.
Net Interest (Income) Expense. In the first quarter of 1998 the Company had
interest income of $197,000 from the investment of cash received from the sale
of common shares in October 1997. In the first quarter of 1997, the Company had
net interest expense of $111,000 due to outstanding balances under its long-term
debt agreements.
Income Taxes. Prior to the Company's initial public offering on October 9,
1997 the Company elected to be taxed under the S Corporation provisions of the
Internal Revenue Service. Under these provisions, the shareholders of the
Company included their pro rata share of income or loss in their individual
returns. On October 9, 1997 the Company converted to C Corporation status and
the Company's earnings subsequent to that date reflect all applicable income
taxes.
8
<PAGE>
Liquidity and Capital Resources.
The Company's cash needs are primarily for working capital to support its
inventory requirements and capital expenditures, pre-opening expenses and
beginning inventory for new superstores. Prior to the sale of common shares in
October 1997, the Company had financed its operations and new store openings
primarily with cash from operations, borrowing under bank financing agreements
and subordinated loans from its shareholders.
In October 1997 the Company completed an initial public offering of
3,105,000 shares of its common stock, including shares issued upon exercise of
an underwriters' overallotment option in November 1997. Net proceeds to the
Company, after deducting underwriting commissions and discounts and expenses,
was $42.6 million. Approximately $28.0 million of the proceeds were used to
retire long-term debt, borrowings under the line of credit and the loans from
shareholders.
At March 31, 1998 and December 31, 1997 the Company's working capital was
$40.7 million and $41.0 million, respectively. Cash used in operations was $6.2
million for the three months ended March 31, 1998 as a result of additions to
inventory in the amount of $4.9 million for new stores and for the buildup of
imported product for the spring and Easter selling seasons. Cash was also used
in the reduction of accrued payroll and other expenses of $1.1 million.
Net cash used in investing activities during the three months ended March
31, 1998 and 1997 was $1.3 million and $700,000, respectively. This use of cash
was primarily the result of new store openings. In 1998, the Company expects to
spend approximately $5.7 million on capital expenditures, which includes
approximately $4.0 million for new store openings and the remainder for
distribution equipment in support of the warehouse expansion, systems
development and fixtures for existing stores. There are no other material
commitments for capital expenditures other than new store openings in the next
12 months.
On March 11, 1998 the Company entered into a new four year financing
agreement with a bank which provides a $25 million revolving credit facility,
$15 million of which is available immediately with the remainder available in $5
million increments in 1999 and 2000, provided the Company is in compliance with
the agreement's covenants.
The Company believes the proceeds from the public offering, together with
cash generated from operations and available borrowings under the financing
agreement will be sufficient to finance its working capital and capital
expenditure requirements for at least the next 12 months.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not Applicable.
9
<PAGE>
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Not Applicable.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
The Company filed a Registration Statement on Form S-1 with the Securities
and Exchange Commission (Commission file number 333-32859) for the sale of
Common Stock in the Company's initial public offering (the "Offering"). The
Company registered 3,105,000 shares of Common Stock, including 405,000 shares of
Common Stock for sale upon exercise of an option granted to the underwriters to
cover over-allotments. The effective date of the Registration Statement was
October 8, 1997. The Offering commenced on October 9, 1997 and was terminated
after the sale of all securities registered. The managing underwriters for the
Offering were BT Alex. Brown Incorporated and Janney Montgomery Scott Inc. The
aggregate price to the public of the 3,105,000 shares of Common Stock registered
was $46,575,000. The Company completed the Offering, selling all 3,105,000
shares of Common Stock registered for the aggregate offering price of
$46,575,000.
The Company incurred the following expenses in connection with the issuance
and distribution of its Common Stock in the Offering:
Underwriting Discounts and Commissions ............. $3,260,250
Expenses paid to or for Underwriters ............... --
Other Expenses ..................................... 724,375
----------
Total Expenses ............... $3,984,625
==========
All payments of expenses were direct or indirect payments to persons other
than directors or officers of the Company or their associates, persons owning
ten percent or more of any class of equity securities of the Company, or
affiliates of the Company.
The Company used the net proceeds of the Offering ($42,590,375 after
deducting total expenses set forth above) for the following purposes:
Repayment of outstanding bank indebtedness ......... $13,198,902
Repayment of subordinated shareholder loans ........ 14,800,000
Payment of S Corporation Distribution .............. 256,000
Working capital .................................... 1,445,723
Temporary investment in Evergreen Institutional
Fund .............................................. 12,889,750
-----------
Net Proceeds ............................... $42,590,375
===========
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not Applicable.
10
<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable.
ITEM 5. OTHER INFORMATION
Not Applicable.
ITEM 6. EXHIBITS AND REPORTS ON 8-K
(a) Exhibits:
3.1 Articles of Incorporation*
3.2 By-laws*
10.1 1997 Employee, Director and Consultant Stock Option
Plan**
10.2 Form of Stock Option Award Agreement**
10.3 Loan Agreement, dated March 11, 1998, between the
Company and KeyBank National Association***
10.4 Correspondence reflecting option granted to Richard
Lesser*
10.5 Tax Indemnification Agreement, dated July 22, 1997,
among the Company, John E. Parker and William Kaplan*
10.6 Lease, dated August 14, 1995, between Freeport 130
LLC and A.C. Moore, Inc.**
27.1 Financial Data Schedule
(b) There were no reports on Form 8-K filed during the quarter
ended March 31, 1998.
- -------------------
* Incorporated by reference to the Company's Registration Statement on Form
S-1 filed August 5, 1997, Registration Number 333-32859.
** Incorporated by reference to Amendment No. 1 to the Company's
Registration Statement on Form S-1 filed September 16, 1997,
Registration Number 333-32859.
*** Incorporated by reference to the Company's Annual Report on Form 10-K for
the fiscal year ended December 31, 1997.
11
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
A.C. MOORE ARTS & CRAFTS, INC.
Date: May 11, 1998 By: /s/ Leslie H. Gordon
----------------------------------
Senior Vice President and Chief
Financial Officer (duly authorized
officer and principal financial
officer)
12
<PAGE>
EXHIBIT INDEX
3.1 Articles of Incorporation*
3.2 By-laws*
10.1 1997 Employee, Director and Consultant Stock Option
Plan**
10.2 Form of Stock Option Award Agreement**
10.3 Loan Agreement, dated March 11, 1998, between the
Company and KeyBank National Association***
10.4 Correspondence reflecting option granted to Richard
Lesser*
10.5 Tax Indemnification Agreement, dated July 22, 1997,
among the Company, John E. Parker and William Kaplan*
10.6 Lease, dated August 14, 1995, between Freeport 130
LLC and A.C. Moore, Inc.**
27.1 Financial Data Schedule
- -------------------
* Incorporated by reference to the Company's Registration Statement on Form
S-1 filed August 5, 1997, Registration Number 333-32859.
** Incorporated by reference to Amendment No. 1 to the Company's
Registration Statement on Form S-1 filed September 16, 1997,
Registration Number 333-32859.
*** Incorporated by reference to the Company's Annual Report on Form 10-K for
the fiscal year ended December 31, 1997.
13
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 8,409
<SECURITIES> 3,944
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 41,951
<CURRENT-ASSETS> 55,306
<PP&E> 14,082
<DEPRECIATION> (5,642)
<TOTAL-ASSETS> 64,278
<CURRENT-LIABILITIES> 14,618
<BONDS> 0
0
0
<COMMON> 42,867
<OTHER-SE> 4,664
<TOTAL-LIABILITY-AND-EQUITY> 64,278
<SALES> 38,219
<TOTAL-REVENUES> 38,219
<CGS> 24,192
<TOTAL-COSTS> 13,558
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (197)
<INCOME-PRETAX> 666
<INCOME-TAX> 260
<INCOME-CONTINUING> 406
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 406
<EPS-PRIMARY> .05
<EPS-DILUTED> .05
</TABLE>
