<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, 1999
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
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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 7, 1999
- ----- --------------------------
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
<S> <C> <C>
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets as of March 31, 1999
and December 31, 1998 3
Consolidated Statements of Income for the three
months ended March 31, 1999 and 1998 4
Consolidated Statements of Cash Flows for the three
months ended March 31, 1999 and 1998 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 10
PART II: OTHER INFORMATION
Item 1. Legal Proceedings 11
Item 2. Changes in Securities and Use of Pr11eeds
Item 3. Defaults Upon Senior Securities 11
Item 4. Submission of Matt12s to a Vote of Security Holders
Item 5. Other Information 12
Item 6. Exhibits and Reports on Form 8-K 12
SIGNATURES 13
EXHIBIT INDEX 14
</TABLE>
2
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CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
(unaudited)
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
--------- ----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 3,263 $ 9,475
Marketable securities 3,877 3,894
Inventories 54,697 54,379
Prepaid expenses and other current assets 1,571 1,949
--------- ----------
63,408 69,697
Property and equipment, net 12,227 12,059
Other assets 573 601
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$ 76,208 $ 82,357
========= ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of capital leases $ 350 $ 350
Accounts payable to trade and others 14,811 20,176
Accrued payroll and payroll taxes 1,736 2,888
Accrued expenses 3,411 3,562
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20,308 26,976
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Long-term liabilities:
Capital leases 1,482 1,568
Deferred taxes 981 981
Other long-term liabilities 1,761 1,661
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4,224 4,210
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24,532 31,186
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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 43,014 42,979
Retained earnings 8,662 8,192
--------- ----------
51,676 51,171
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$ 76,208 $ 82,357
========= ==========
</TABLE>
See accompanying notes to financial statements
3
<PAGE>
A.C. MOORE ARTS & CRAFTS, INC.
CONSOLIDATED STATEMENTS OF INCOME
(dollars in thousands, except per share data)
(unaudited)
<TABLE>
<CAPTION>
Three months ended
March 31,
1999 1998
<S> <C> <C>
Net sales $ 48,135 $ 38,219
Cost of sales (including buying
and distribution costs) 30,520 24,192
----------- -----------
Gross Margin 17,615 14,027
Selling, general and administrative expenses 16,915 12,787
Pre-opening expenses -- 771
----------- -----------
Income from operations 700 469
Net interest (income) (71) (197)
----------- -----------
Income before income taxes 771 666
Income tax expense 301 260
----------- -----------
Net income $ 470 $ 406
=========== ===========
Basic net income per share $ 0.06 $ 0.05
=========== ===========
Weighted average shares outstanding 7,405,000 7,405,000
=========== ===========
Diluted net income per share $ 0.06 $ 0.05
=========== ===========
Weighted average shares outstanding plus
impact of stock options 7,405,000 7,566,000
=========== ===========
</TABLE>
See accompanying notes to financial statements
4
<PAGE>
A.C. MOORE ARTS & CRAFTS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
(unaudited)
<TABLE>
<CAPTION>
Three months ended
March 31,
------------------------
1999 1998
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<S> <C> <C>
Cash flows from operating activities:
Net income $ 470 $ 406
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 673 470
Compensation expense related to stock options 35 38
Changes in assets and liabilities:
Inventories (318) (4,929)
Prepaid expenses and other current assets 378 32
Accounts payable and accrued expenses (3,949) (2,302)
Other long-term liabilities 100 69
Other 45 (15)
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Net cash (used in) operating activities (2,566) (6,231)
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Cash flows (used in) investing activities: Capital expenditures (841) (1,255)
--------- ---------
Cash flows provided by (used in) financing activities:
Repayment of bank overdraft (2,719) --
Proceeds from redemption of marketable securities -- 4,004
Investment in marketable securities -- (3,944)
Repayment of capital leases (86) --
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Net cash provided by (used in) financing activities (2,805) 60
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Net (decrease) in cash (6,212) (7,426)
Cash and cash equivalents at beginning of period 9,475 15,835
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Cash and cash equivalents at end of period $ 3,263 $ 8,409
========= =========
</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 37 retail superstores 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 1998. 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, 1999 and March 31, 1998 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) Earnings Per Share
The weighted average shares outstanding plus impact of stock options for the
three month period ended March 31, 1999 excludes potentially dilutive shares as
the result would be antidilutive.
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:
Three months
ended March 31,
------------------------
1999 1998
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Net sales 100.0 % 100.0 %
Cost of sales 63.4 % 63.3 %
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Gross margin 36.6 % 36.7 %
Selling, general and
administrative expenses 35.1 % 33.5 %
Pre-opening expenses 0.0 % 2.0 %
------- -------
Income from operations 1.5 % 1.2 %
Net interest (income) (0.1)% (0.5)%
------- -------
Income before income taxes 1.6 % 1.7 %
Income tax expense 0.6 % 0.6 %
------- -------
Net income 1.0 % 1.1 %
======= =======
Number of stores open at end of period 37 29
7
<PAGE>
Three Months Ended March 31, 1999 Compared to Three Months Ended March 31, 1998
Net Sales. Net sales increased $9.9 million, or 25.9%, to $48.1 million
in the three months ended March 31, 1999 from $38.2 million in the comparable
1998 period. This increase resulted from (i) net sales of $9.1 million from
superstores opened in 1998 not included in the comparable store base, and (ii) a
comparable store sales increase of $800,000, or 2%. 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 $6.3 million,
or 26.2%, to $30.5 million in the three months ended March 31, 1999 from $24.2
million in the three months ended March 31, 1998. The gross margin increased
$3.6 million, or 25.6%, to $17.6 million in the three months ended March 31,
1999 from $14.0 million in the three months ended March 31, 1998. The gross
margin decreased to 36.6% of net sales in the three months ended March 31, 1999
from 36.7% in the three months ended March 31, 1998.
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 $4.1 million, or 32.3%, in the
three months ended March 31, 1999 to $16.9 million from $12.8 million in the
three months ended March 31, 1998. Of the increase, $4.0 million was
attributable to the 12 superstores open in 1999 which were not in the comparable
store base. The remaining $100,000 of the increase is attributable to operating
expenses in the comparable superstores. As a percentage of sales, selling,
general and administrative costs increased to 35.1% of net sales in the three
months ended March 31, 1999 from 33.5% of net sales in the three months ended
March 31, 1998. This increase is primarily due to the newer stores, which, on
average, have higher operating costs as a percent of sales than older stores.
Pre-Opening Expense. The Company expenses store pre-opening expense as
incurred. In the first quarter of 1999, the Company did not open any superstores
and incurred no pre-opening expense. Pre-opening expense for the four new
superstores opened in the first quarter of 1998 amounted to $771,000.
Net Interest (Income). In the first quarter of 1999 the Company had net
interest income of $71,000 compared with interest income of $197,000 in 1998.
The reduction is due to lower cash balances resulting from the use of cash to
fund the new stores added in 1998.
Income Taxes. The Company's effective income tax rate was 39% for both
the first quarters ended March 31, 1999 and March 31, 1998.
Liquidity and Capital Resources.
The Company's cash needs are primarily for working capital to support
its inventory requirements and capital expenditures, pre-opening costs and
beginning inventory for new superstores.
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
8
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$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, 1999 and December 31, 1998 the Company's working capital
was $43.1 million and $42.7 million, respectively. Cash used in operations was
$2.6 million for the three months ended March 31, 1999 as a result of the
seasonal reduction of accounts payable and accrued payroll in the amount of $3.9
million.
Net cash used in investing activities during the three months ended
March 31, 1999 was $.8 million. In 1999, the Company expects to spend
approximately $5.2 million on capital expenditures, which includes approximately
$2.1 million for new store openings, $2.0 million for remodeling and systems in
existing stores, and the remainder for warehouse equipment and systems
development. There are no other material commitments for capital expenditures
other than new store openings in the next 12 months.
Net cash used in financing activities includes a $2.7 million repayment
of book overdrafts. The overdrafts represented outstanding checks at certain
banks in excess of funds on deposit at those banks. These accounts are
maintained as zero balance accounts and are covered as required from funds
available at other banks.
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. A portion of the credit facility was used to finance
the acquisition of equipment totaling $1.9 million through a series of five year
capital leases.
The Company believes the proceeds from the public offering, together
with cash generated from operations during the year 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.
Year 2000
The Company's computer systems operate on a PC-based local area network
("LAN"). Each superstore has personal computers linked to the main office LAN by
modem. Management has evaluated the issues relating to the Year 2000 (Y2K) as it
may affect (a) the Company's operating and financial systems and other systems
such as its telephone system, and (b) future operating results, and has
determined that in most instances, the Company's systems are compliant with Year
2000 requirements. In those instances where hardware or software is not
compliant, the Company has determined a course of action which should be
complete by the end of the second quarter of 1999. The Company has determined
the cost of addressing the Y2K issue is immaterial and the changes required in
the Company's systems to become Y2K compliant are of a magnitude which is
unlikely to impact future operating performance. The Company does not separately
track internal direct costs associated with the utilization of its officers and
employees in its Year 2000 readiness efforts. The Company has surveyed all of
its significant vendors and has ascertained that in most cases those vendors are
already in compliance or have plans to be compliant by the middle of 1999.
9
<PAGE>
In evaluating the risks to the Company, the most serious risk would be
if a vendor does not become compliant with the Y2K requirements and, as a
result, is unable to ship needed inventory to the Company. Should this occur,
the Company does have the ability to source product from other vendors.
The Company is in the intermediate stage of developing contingency plans
to mitigate the potential disruptions that may result from the Y2K issue. These
plans may include identifying and securing alternate suppliers, stockpiling of
select products and other measures considered appropriate by management. The
Company expects to complete these plans by the middle of 1999. Once developed
and approved, contingency plans, and the related cost estimates, if any, will be
continually refined as additional information becomes available.
Despite the Company's efforts to make its systems and facilities Year
2000 compliant, the ability of third party service providers, vendors and
certain other third parties, including governmental entities and utility
companies, to be Year 2000 compliant is beyond the Company's control.
Accordingly, the Company can give no assurances that the systems of other
parties on which the Company's systems or operations rely will be timely
converted or compatible with the Company's systems. The failure of these
entities to comply on a timely basis could have a material adverse effect on the
Company.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not Applicable.
10
<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 ................................. 10,458,473
Temporary investment in marketable securities ... 3,877,000
-----------
Net Proceeds .................. $42,590,375
===========
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not Applicable.
11
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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:
27.1 Financial Data Schedule
(b) There were no reports on Form 8-K filed during the quarter
ended March 31, 1998.
12
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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, 1999 By: /s/ Leslie H. Gordon
---------------------------
Executive Vice President
and Chief Financial Officer
(duly authorized officer
and principal financial
officer)
13
<PAGE>
EXHIBIT INDEX
27.1 Financial Data Schedule
14
<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-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 3,263
<SECURITIES> 3,877
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 54,697
<CURRENT-ASSETS> 63,408
<PP&E> 19,673
<DEPRECIATION> (7,445)
<TOTAL-ASSETS> 76,209
<CURRENT-LIABILITIES> 20,308
<BONDS> 0
0
0
<COMMON> 43,014
<OTHER-SE> 8,663
<TOTAL-LIABILITY-AND-EQUITY> 76,209
<SALES> 48,135
<TOTAL-REVENUES> 48,135
<CGS> 30,520
<TOTAL-COSTS> 16,915
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (71)
<INCOME-PRETAX> 771
<INCOME-TAX> 301
<INCOME-CONTINUING> 470
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 470
<EPS-PRIMARY> .06
<EPS-DILUTED> .06
</TABLE>
