<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 September 30, 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
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)
(856) 228-6700
--------------------------------------------------------
(Registrant's telephone number, including area code)
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.
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 November 3, 1999
- ----- -------------------------------
Common Stock, no par value 7,405,000
<PAGE>
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 September 30, 1999
and December 31, 1998 3
Consolidated Statements of Income for the three
and nine month periods ended September 30, 1999 and 1998 4
Consolidated Statements of Cash Flows for the nine
month periods ended September 30, 1999 and 1998 5
Notes to Financial Statements 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 Proceeds 11
Item 3. Defaults Upon Senior Securities 11
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 11
EXHIBIT INDEX 12
<PAGE>
A.C. MOORE ARTS & CRAFTS, INC.
CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
(unaudited)
September December
30, 1999 31, 1998
--------- --------
ASSETS
Current assets:
Cash and cash equivalents $ 1,343 $ 9,475
Marketable securities -- 3,894
Inventories 62,928 54,379
Prepaid expenses and other current assets 1,382 1,949
------- -------
65,653 69,697
Property and equipment, net 13,977 12,059
Other assets 624 601
------- -------
$80,254 $82,357
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term debt $ 500 $ --
Current portion of capital leases 350 350
Accounts payable to trade and others 18,856 20,176
Accrued payroll and payroll taxes 2,324 2,888
Accrued expenses 2,467 3,562
------- -------
24,497 26,976
------- -------
Long-term liabilities:
Capital leases 1,307 1,568
Deferred taxes 981 981
Other long-term liabilities 1,960 1,661
------- -------
4,248 4,210
------- -------
28,745 31,186
------- -------
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 43,083 42,979
Retained earnings 8,426 8,192
------- -------
51,509 51,171
------- -------
$80,254 $82,357
======= =======
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 Nine months ended
September 30, September 30,
-------------------------- --------------------------
1999 1998 1999 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net sales $ 50,245 $ 41,783 $ 143,841 $ 116,693
Cost of sales (including buying and
distribution costs) 31,908 26,499 91,300 73,878
----------- ----------- ----------- -----------
Gross margin 18,337 15,284 52,541 42,815
Selling, general and administrative expenses 18,138 15,016 51,910 41,463
Pre-opening expenses 281 662 281 1,647
----------- ----------- ----------- -----------
Income (loss) from operations (82) (394) 350 (295)
Net interest expense (income) 48 (55) (33) (355)
----------- ----------- ----------- -----------
Income (loss) before income taxes (130) (339) 383 60
Income tax expense (benefit) (51) (132) 149 24
----------- ----------- ----------- -----------
Net income (loss) $ (79) $ (207) $ 234 $ 36
=========== =========== =========== ===========
Basic net income (loss) per share $ (0.01) $ (0.03) $ 0.03 $ 0.00
=========== =========== =========== ===========
Weighted average shares outstanding 7,405,000 7,405,000 7,405,000 7,405,000
=========== =========== =========== ===========
Diluted net income (loss) per share $ (0.01) $ (0.03) $ 0.03 $ 0.00
=========== =========== =========== ===========
Weighted average shares outstanding
plus impact of stock options 7,405,000 7,524,000 7,405,000 7,553,000
=========== =========== =========== ===========
</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>
Nine months ended
September 30,
--------------------
1999 1998
-------- --------
Cash flows from operating activities:
<S> <C> <C>
Net Income $ 234 $ 36
Adjustments to reconcile net income to net cash
(used in) operating activities:
Depreciation and amortization 2,089 1,539
Compensation expense related to stock options 104 114
Changes in assets and liabilities:
Inventories (8,549) (17,818)
Prepaid expenses and other current assets 567 (227)
Accounts payable and accrued expenses (456) 4,686
Other long-term liabilities 299 314
Other (23) (77)
-------- --------
Net cash (used in) operating activities (5,735) (11,433)
-------- --------
Cash flows (used in) investing activities: Capital expenditures (4,007) (4,624)
-------- --------
Cash flows provided by (used in) financing activities:
Repayment of bank overdraft (2,523) --
Proceeds from line of credit 500 2,750
Proceeds from redemption of marketable securities 3,894 4,004
Investment in marketable securities -- (3,911)
Repayment of capital leases (261) --
-------- --------
Net cash provided by financing activities 1,610 2,843
-------- --------
Net (decrease) in cash (8,132) (13,214)
Cash and cash equivalents at beginning of period 9,475 15,835
-------- --------
Cash and cash equivalents at end of period $ 1,343 $ 2,621
======== ========
</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 39 retail superstores selling arts and
crafts merchandise. The stores are located in the mid-Atlantic and northeast
regions of the 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 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 and nine month periods ended September 30, 1999 and September
30, 1998 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.
(3) Earnings Per Share
The weighted average shares outstanding plus impact of stock options for the
three and nine month periods ended September 30, 1999 excludes potentially
dilutive shares as the result would be antidilutive.
6
<PAGE>
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: customer demand and trends in the
arts and crafts industry, related inventory risks due to shifts in customer
demand, the effect of economic 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 and the
Company's ability to address the Year 2000 Issue, supply constraints or
difficulties, the effectiveness of advertising strategies and the ability to
meet 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:
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
----------------------------- -----------------------------
1999 1998 1999 1998
------------- ------------- ------------ ------------
<S> <C> <C> <C> <C>
Net sales 100.0 % 100.0 % 100.0 % 100.0 %
Cost of sales 63.5 % 63.4 % 63.5 % 63.3 %
------------- ------------- ------------ ------------
Gross Margin 36.5 % 36.6 % 36.5 % 36.7 %
Selling, general and administrative expenses 36.1 % 35.9 % 36.1 % 35.5 %
Pre-opening expenses 0.6 % 1.6 % 0.2 % 1.4 %
------------- ------------- ------------ ------------
Income (loss) from operations (0.2)% (0.9)% 0.2 % (0.2)%
Net interest (income) expense 0.1 % (0.1)% (0.1)% (0.3)%
------------- ------------- ------------ ------------
Income (loss) before income taxes (0.3)% (0.8)% 0.3 % 0.1 %
Income tax expense (benefit) (0.1)% (0.3)% 0.1 % 0.1 %
------------- ------------- ------------ ------------
Net income (loss) (0.2)% (0.5)% 0.2 % 0.0 %
============= ============= ============ ============
Number of stores open at end of period 38 34
</TABLE>
7
<PAGE>
Three Months Ended September 30, 1999 Compared to Three Months Ended
September 30, 1998
Net Sales. Net sales increased $8.5 million, or 20.3%, to $50.2 million
in the three months ended September 30, 1999 from $41.8 million in the
comparable 1998 period. This increase resulted from (i) net sales of $400,000
from the new superstore opened during the period, (ii) net sales of $4.7 million
from superstores opened in 1998 not included in the comparable store base, and
(iii) a comparable store sales increase of $3.4 million, or 8%. 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 $5.4 million,
or 20.4%, to $31.9 million in the three months ended September 30, 1999 from
$26.5 million in the three months ended September 30, 1998. The gross margin
increased $3.1 million, or 20.0%, to $18.3 million in the three months ended
September 30, 1999 from $15.3 million in the three months ended September 30,
1998. The gross margin decreased to 36.5% of net sales in the three months ended
September 30, 1999 from 36.6% in the three months ended September 30, 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 $3.1 million, or 20.8%, in the
three months ended September 30, 1999 to $18.1 million from $15.0 million in the
three months ended September 30, 1998. Of the increase, $2.1 million was
attributable to the superstore opened in 1999 which was not open during 1998 and
the superstores opened in 1998 not in the comparable store base. Of the
remainder, $600,000 is due to increases in the comparable superstores and
$400,000 is attributable to the increase in corporate costs to support the
growth of the Company. As a percentage of sales, selling, general and
administrative costs increased to 36.1% of net sales in the three months ended
September 30, 1999 from 35.9% of net sales in the three months ended September
30, 1998. 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 expenses store pre-opening expense as
incurred. Pre-opening expense for the new superstore opened in the third quarter
of 1999 and new superstores which are being prepared to open amounted to
$281,000. In the third quarter of 1998, the Company opened four superstores and
had pre-opening expense of $662,000.
Net Interest (Income) Expense. In the third quarter of 1999 the Company
had net interest expense of $48,000 compared with net interest income of $55,000
in 1998. The increase in cost is due to lower cash balances resulting from the
use of cash to fund the new stores added in 1998 and 1999.
Income Taxes. The Company's effective income tax rate was 39% for both
the third quarters ended September 30, 1999 and September 30, 1998.
Nine Months Ended September 30, 1999 Compared to Nine Months Ended
September 30, 1998
8
<PAGE>
Net Sales. Net sales increased $27.1 million, or 23.3%, to $143.8
million in the nine months ended September 30, 1999 from $116.7 million in the
comparable 1998 period. This increase resulted from (i) net sales of $400,000
from new superstores opened during the period, (ii) net sales of $20.0 million
from superstores opened in 1998 not included in the comparable store base, and
(iii) a comparable store sales increase of $6.7 million, or 6%.
Gross Margin. Cost of sales increased $17.4 million, or 23.6%, to $91.3
million in the nine months ended September 30, 1999 from $73.9 million in the
nine months ended September 30, 1998. The gross margin increased $9.7 million,
or 22.7%, to $52.5 million in the nine months ended September 30, 1999 from
$42.8 million in the nine months ended September 30, 1998. The gross margin
decreased to 36.5% of net sales in the nine months ended September 30, 1999 from
36.7% in the nine months ended September 30, 1998.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $10.4 million, or 25.2%, in the nine months
ended September 30, 1999 to $51.9 million from $41.5 million in the nine months
ended September 30, 1998. Of the increase, $8.9 million was attributable to the
superstore opened in 1999 which was not open during 1998 and the superstores
opened in the nine months of 1998 not in the comparable store base. Of the
remainder, $1.2 million is due to increases in the comparable superstores and
$300,000 is attributable to the increase in corporate costs to support the
growth of the Company. As a percentage of sales, selling, general and
administrative costs increased to 36.1% of net sales in the nine months ended
September 30, 1999 from 35.5% of net sales in the nine months ended September
30, 1998. 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. Pre-opening expense for the new superstore opened
in the first nine months of 1999 and the superstores being prepared to open
amounted to $281,000. In the first nine months of 1998, the Company opened nine
superstores which had pre-opening expense of $1.6 million.
Net Interest (Income). In the first nine months of 1999 the Company had
net interest income of $33,000 compared with net interest income of $355,000 in
1998. The reduction is due to lower cash balances resulting from the use of cash
to fund the new stores added in 1998 and 1999.
Income Taxes. The Company's effective income tax rate was 39% for both
the nine month periods ended September 30, 1999 and September 30, 1998.
Liquidity and Capital Resources.
The Company's cash needs are primarily for working capital to support
its inventory requirements and capital expenditures.
At September 30, 1999 and December 31, 1998 the Company's working
capital was $41.2 million and $42.7 million, respectively. Cash used in
operations was $5.7 million for the nine months ended September 30, 1999
principally as a result of additions to inventory in the amount of $8.5 million
for new stores and for the buildup of imported product for the fall and
Christmas selling seasons.
Net cash used in investing activities during the nine months ended
September 30, 1999 was $4.0 million. In 1999, the Company expects to spend
approximately $5.0 million on capital expenditures, which includes approximately
$1.7 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 in
the next 12 months other than for new store openings and the implementation of a
new point of sale system.
9
<PAGE>
Net cash provided by financing activities includes $3.9 million from
redemption of marketable securities. It also includes a $2.5 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,
$20 million of which is available immediately with the remainder available in
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 current
outstanding balance on these leases is $1.7 million.
The Company believes the 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.
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 as of September 30, 1999, the Company's mission critical
hardware and software are compliant for Y2K with minimal exceptions. It is
expected that during November, all systems will be brought to full compliance
and in November and December the Company will complete final tests to ensure
compliancy. The Company has determined the cost of addressing the Y2K issue is
immaterial. 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 completed a second survey of 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 the fourth
quarter. In instances where venders are not in compliance the Company has
identified alternative sources of supply.
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.
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
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not Applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable.
ITEM 5. OTHER INFORMATION
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 September 30, 1999.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
A.C. MOORE ARTS & CRAFTS, INC.
Date: November 5, 1999 By: /s/ Leslie H. Gordon
--------------------------------
Executive Vice President and
Chief Financial Officer
(duly authorized officer and
principal financial officer)
<PAGE>
EXHIBIT INDEX
Exhibit
27.1 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 1,343
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 62,928
<CURRENT-ASSETS> 65,653
<PP&E> 22,766
<DEPRECIATION> (8,789)
<TOTAL-ASSETS> 80,254
<CURRENT-LIABILITIES> 24,497
<BONDS> 0
0
0
<COMMON> 43,083
<OTHER-SE> 8,426
<TOTAL-LIABILITY-AND-EQUITY> 80,254
<SALES> 143,841
<TOTAL-REVENUES> 143,841
<CGS> 91,300
<TOTAL-COSTS> 52,191
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (33)
<INCOME-PRETAX> 383
<INCOME-TAX> 149
<INCOME-CONTINUING> 234
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 234
<EPS-BASIC> .03
<EPS-DILUTED> .03
</TABLE>
