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, 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 July 29, 1999 - ----- ---------------------------- Common Stock, no par value 7,405,000 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, 1999 and December 31, 1998 3 Consolidated Statements of Income for the three and six month periods ended June 30, 1999 and 1998 4 Consolidated Statements of Cash Flows for the six month periods ended June 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 12 Item 5. Other Information 12 Item 6. Exhibits and Reports on Form 8-K 12 SIGNATURES 13 EXHIBIT INDEX 14 2 A.C. MOORE ARTS & CRAFTS, INC. CONSOLIDATED BALANCE SHEETS (dollars in thousands) (unaudited) June 30, December 31, 1999 1998 -------- ------------ ASSETS Current assets: Cash and cash equivalents $ 586 $ 9,475 Marketable securities -- 3,894 Inventories 56,660 54,379 Prepaid expenses and other current assets 1,627 1,949 ------- ------- 58,873 69,697 Property and equipment, net 12,451 12,059 Other assets 564 601 ------- ------- $71,888 $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 11,736 20,176 Accrued payroll and payroll taxes 1,918 2,888 Accrued expenses 1,594 3,562 ------- ------- 16,098 26,976 ------- ------- Long-term liabilities: Capital leases 1,395 1,568 Deferred taxes 981 981 Other long-term liabilities 1,860 1,661 ------- ------- 4,236 4,210 ------- ------- 20,334 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 43,049 42,979 Retained earnings 8,505 8,192 ------- ------- 51,554 51,171 ------- ------- $71,888 $82,357 ======= ======= See accompanying notes to financial statements 3 A.C. MOORE ARTS & CRAFTS, INC. CONSOLIDATED STATEMENTS OF INCOME (dollars in thousands, except per share data) (unaudited) Three months ended Six months ended June 30, June 30, ----------------------------------- --------------------------------- 1999 1998 1999 1998 ----------- ------------- ----------- ------------ Net sales $ 45,460 $ 36,691 $ 93,596 $ 74,910 Cost of sales (including buying and distribution costs) 28,871 23,187 59,392 47,379 ----------- ----------- ----------- ----------- Gross margin 16,589 13,504 34,204 27,531 Selling, general and administrative expenses 16,857 13,660 33,772 26,447 Pre-opening expenses -- 214 -- 985 ----------- ----------- ----------- ----------- Income (loss) from operations (268) (370) 432 99 Net interest (income) (10) (103) (81) (300) ----------- ----------- ----------- ----------- Income (loss) before income taxes (258) (267) 513 399 Income tax expense (benefit) (101) (104) 200 156 ----------- ----------- ----------- ----------- Net income (loss) $ (157) $ (163) $ 313 $ 243 =========== =========== =========== =========== Basic net income (loss) per share $ (0.02) $ (0.02) $ 0.04 $ 0.03 =========== =========== =========== =========== Weighted average shares outstanding 7,405,000 7,405,000 7,405,000 7,405,000 =========== =========== =========== =========== Diluted net income (loss) per share $ (0.02) $ (0.02) $ 0.04 $ 0.03 =========== =========== =========== =========== Weighted average shares outstanding plus impact of stock options 7,405,000 7,602,000 7,405,000 7,571,000 =========== =========== =========== =========== See accompanying notes to financial statements 4 A.C. MOORE ARTS & CRAFTS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (dollars in thousands) (unaudited) Six Months Ended June 30, --------------------------- 1999 1998 ---------- -------- Cash flows from operating activities: Net Income $ 313 $ 243 Adjustments to reconcile net income to net cash (used in) operating activities: Depreciation and amortization 1,379 1,004 Compensation expense related to stock options 70 76 Changes in assets and liabilities: Inventories (2,281) (7,758) Prepaid expenses and other current assets 322 176 Accounts payable and accrued expenses (9,022) (5,999) Other long-term liabilities 199 169 Other 37 (25) -------- -------- Net cash (used in) operating activities (8,983) (12,114) -------- -------- Cash flows (used in) investing activities: Capital expenditures (1,771) (2,314) -------- -------- Cash flows provided by financing activities: Repayment of bank overdraft (2,356) -- Proceeds from line of credit 500 -- Proceeds from redemption of marketable securities 3,894 4,004 Investment in marketable securities -- (3,928) Repayment of capital leases (173) -- -------- -------- Net cash provided by financing activities 1,865 76 -------- -------- Net (decrease) in cash (8,889) (14,352) Cash and cash equivalents at beginning of period 9,475 15,835 -------- -------- Cash and cash equivalents at end of period $ 586 $ 1,483 ======== ======== See accompanying notes to financial statements 5 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 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 six month periods ended June 30, 1999 and June 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 six month periods ended June 30, 1999 excludes potentially dilutive shares as the result would be antidilutive. 6 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 Six months ended June 30, June 30, ------------------------- ----------------------- 1999 1998 1999 1998 -------- -------- -------- -------- Net sales 100.0 % 100.0 % 100.0 % 100.0 % Cost of sales 63.5 % 63.2 % 63.5 % 63.2 % ----- ----- ----- ----- Gross Margin 36.5 % 36.8 % 36.5 % 36.8 % Selling, general and administrative expenses 37.1 % 37.2 % 36.1 % 35.3 % Pre-opening expenses 0.0 % 0.6 % 0.0 % 1.3 % ----- ----- ----- ----- Income (loss) from operations (0.6)% (1.0)% 0.4 % 0.1 % Net interest (income) 0.0 % (0.3)% (0.1)% (0.4)% ----- ----- ----- ----- Income (loss) before income taxes (0.6)% (0.7)% 0.5 % 0.5 % Income tax expense (benefit) (0.2)% (0.3)% 0.2 % 0.2 % ----- ----- ----- ----- Net income (loss) (0.3)% (0.4)% 0.3 % 0.3 % ===== ===== ===== ===== Number of stores open at end of period 37 30 7 Three Months Ended June 30, 1999 Compared to Three Months Ended June 30, 1998 Net Sales. Net sales increased $8.8 million, or 23.9%, to $45.5 million in the three months ended June 30, 1999 from $36.7 million in the comparable 1998 period. This increase resulted from (i) net sales of $6.3 million from superstores opened in 1998 not included in the comparable store base, and (ii) a comparable store sales increase of $2.5 million, or 7%. 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 $5.7 million, or 24.5%, to $28.9 million in the three months ended June 30, 1999 from $23.2 million in the three months ended June 30, 1998. The gross margin increased $3.1 million, or 22.8%, to $16.6 million in the three months ended June 30, 1999 from $13.5 million in the three months ended June 30, 1998. The gross margin decreased to 36.5% of net sales in the three months ended June 30, 1999 from 36.8% in the three months ended June 30, 1998 mainly due to competitive discounting in the marketplace. 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 $3.2 million, or 23.4%, in the three months ended June 30, 1999 to $16.9 million from $13.7 million in the three months ended June 30, 1998. Of the increase, $2.7 million was attributable to the superstores opened in 1998 which were not in the comparable store base. The remainder is attributable to operating expenses in the comparable superstores. As a percentage of sales, selling, general and administrative costs decreased to 37.1% of net sales in the three months ended June 30, 1999 from 37.2% of net sales in the three months ended June 30, 1998. Pre-Opening Expense. The Company expenses store pre-opening expense as incurred. In the second quarter of 1999, the Company did not open any superstores and incurred no pre-opening expense. Pre-opening expense for the one new superstore opened in the second quarter of 1998 amounted to $214,000. Net Interest (Income). In the second quarter of 1999 the Company had interest income of $10,000 compared with interest income of $103,000 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 second quarters ended June 30, 1999 and June 30, 1998. Six Months Ended June 30, 1999 Compared to Six Months Ended June 30, 1998 Net Sales. Net sales increased $18.7 million, or 24.9%, to $93.6 million in the six months ended June 30, 1999 from $74.9 million in the comparable 1998 period. This increase resulted from (i) net sales of $15.4 million from superstores opened in 1998 not included in the comparable store base, and (ii) a comparable store sales increase of $3.3 million, or 5%. 8 Gross Margin. Cost of sales increased $12.0 million, or 25.4%, to $59.4 million in the six months ended June 30, 1999 from $47.4 million in the six months ended June 30, 1998. The gross margin increased $6.7 million, or 24.2%, to $34.2 million in the six months ended June 30, 1999 from $27.5 million in the six months ended June 30, 1998. The gross margin decreased to 36.5% of net sales in the six months ended June 30, 1999 from 36.8% in the six months ended June 30, 1998 mainly due to competitive discounting in the marketplace. Selling, General and Administrative Expenses. Selling, general and administrative expenses increased $7.3 million, or 27.7%, in the six months ended June 30, 1999 to $33.8 million from $26.4 million in the six months ended June 30, 1998. Of the increase, $6.7 million was attributable to the superstores opened in 1998 which were not in the comparable store base. The remainder of the increase is attributable to operating expenses in the comparable superstores. As a percentage of sales, selling, general and administrative costs increased to 36.1% of net sales in the six months ended June 30, 1999 from 35.3% of net sales in the six months ended June 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. In the first six months of 1999, the Company did not open any superstores and incurred no pre-opening expense. Pre-opening expense for the five new superstores opened in the first six months of 1998 amounted to $985,000. Net Interest (Income). In the first six months of 1999 the Company had interest income of $81,000 compared with interest income of $300,000 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 six month periods ended June 30, 1999 and June 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 June 30, 1999 and December 31, 1998 the Company's working capital was $42.8 million and $42.7 million, respectively. Cash used in operations was $9.0 million for the six months ended June 30, 1999 principally as a result of the seasonal reduction of accounts payable and other accruals in the amount of $9.0 million. Net cash used in investing activities during the six months ended June 30, 1999 was $1.8 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 provided by financing activities includes $3.9 million from redemption of marketable securities. It also includes a $2.4 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. 9 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 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 in most instances, the Company's systems are compliant with Year 2000 requirements. As of June 30, 1999, the Company's mission critical hardware and software are compliant for Y2K with minimal exceptions. It is expected that during the third quarter, all systems will be brought to full compliance and 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 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. Follow-up surveys are in progress and are expected to be complete by the end of the third quarter. 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 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................................... 14,335,473 ----------- Net Proceeds.................... $42,590,375 =========== ITEM 3. DEFAULTS UPON SENIOR SECURITIES Not Applicable. 11 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS The Company held its Annual Meeting of Shareholders on May 27, 1999. At the meeting shareholders elected two Class A directors to hold office for a term of three years until their successors are duly elected and qualified. The nominees for director received the following votes at the meeting. For Withhold Authority --------------- ----------------------- Patricia A. Parker 6,959,298 78,015 Richard Lesser 6,961,043 76,270 The term of office for each of the following directors continued after the meeting: William Kaplan, John E. (Jack) Parker, Richard J. Bauer and Richard Lesser. 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 June 30, 1999. 12 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: July 30, 1999 By: /s/ Leslie H. Gordon -------------------------------------- Executive Vice President and Chief Financial Officer (duly authorized officer and principal financial officer) 13 EXHIBIT INDEX 27.1 Financial Data Schedule 14