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, 2001
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)
(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 6, 2001
----- ---------------------------------
Common Stock, no par value 7,457,146
A.C. MOORE ARTS & CRAFTS, INC.
TABLE OF CONTENTS
Page
Number
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PART I: FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets as of September 30, 2001
and December 31, 2000 3
Consolidated Statements of Income for the three
and nine month periods ended September 30, 2001 and 2000 4
Consolidated Statements of Cash Flows for the nine
month periods ended September 30, 2001 and 2000 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 7
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 10
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 10
Item 5. Other Information 10
Item 6. Exhibits and Reports on Form 8-K 10
SIGNATURES 11
2
A.C. MOORE ARTS & CRAFTS, INC.
CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
September 30, December 31,
2001 2000
------------- ------------
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 3,722 $ 10,310
Inventories 86,864 72,786
Prepaid expenses and other current assets 1,920 2,052
-------- --------
92,506 85,148
Property and equipment, net 24,938 21,517
Other assets 1,112 727
-------- --------
$118,556 $107,392
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term debt $ 16,500 $ --
Current portion of capital leases 1,260 389
Accounts payable to trade and others 21,128 26,237
Accrued payroll and payroll taxes 3,084 3,822
Accrued expenses 4,803 4,274
Income taxes payable 273 3,258
-------- --------
47,048 37,980
-------- --------
Long-term liabilities:
Capital leases 2,230 812
Deferred taxes 2,320 2,320
Other long-term liabilities 3,013 2,599
-------- --------
7,563 5,731
-------- --------
54,611 43,711
-------- --------
SHAREHOLDERS' EQUITY
Preferred stock, no par value, 5,000,000 shares
authorized, none issued
Common stock, no par value, 20,000,000 shares
authorized, 7,454,597 shares outstanding at September 30, 43,572 43,268
2001 and 7,415,333 outsanding at December 31, 2000
Retained earnings 20,373 20,413
-------- --------
63,945 63,681
-------- --------
$118,556 $107,392
======== ========
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 Nine months ended
September 30, September 30,
------------------------- --------------------------
2001 2000 2001 2000
----------- ----------- ----------- -----------
Net sales $ 76,220 $ 60,906 $ 209,774 $ 168,876
Cost of sales (including buying and
distribution costs) 47,951 38,550 132,193 106,844
----------- ----------- ----------- -----------
Gross margin 28,269 22,356 77,581 62,032
Selling, general and administrative expenses 26,936 21,778 75,092 60,295
Pre-opening expenses 625 576 2,074 1,532
----------- ----------- ----------- -----------
Income from operations 708 2 415 205
Net interest expense 297 149 478 95
----------- ----------- ----------- -----------
Income (loss) before income taxes 411 (147) (63) 110
Income tax expense (benefit) 156 (56) (23) 42
----------- ----------- ----------- -----------
Net income (loss) $ 255 $ (91) $ (40) $ 68
=========== =========== =========== ===========
Basic net income (loss) per share $ 0.03 $ (0.01) $ (0.01) $ 0.01
=========== =========== =========== ===========
Weighted average shares outstanding 7,437,940 7,405,167 7,429,526 7,405,067
=========== =========== =========== ===========
Diluted net income (loss) per share $ 0.03 $ (0.01) $ (0.01) $ 0.01
=========== =========== =========== ===========
Weighted average shares outstanding
plus impact of stock options 7,787,798 7,405,167 7,429,526 7,440,978
=========== =========== =========== ===========
See accompanying notes to financial statements
4
A.C. MOORE ARTS & CRAFTS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
(unaudited)
Nine Months Ended
September 30,
--------------------
2001 2000
-------- --------
Cash flows from operating activities:
Net Income (loss) $ (40) $ 68
Adjustments to reconcile net income (loss) to net cash
(used in) operating activities:
Depreciation and amortization 3,644 2,690
Compensation expense related to stock options -- 102
Changes in assets and liabilities:
Inventories (14,078) (13,604)
Prepaid expenses and other current assets 132 (627)
Accounts payable, accrued payroll
payroll taxes and accrued expenses (8,303) (1,283)
Other long-term liabilities 414 371
Other (385) (63)
-------- --------
Net cash (used in) operating activities (18,616) (12,346)
-------- --------
Cash flows (used in) investing activities: Capital expenditures (7,065) (7,580)
-------- --------
Cash flows from financing activities:
Proceeds from line of credit 16,500 7,750
Exercise of stock options 304 --
Proceeds from equipment financing 2,791 --
Repayment of equipment financing (502) (273)
-------- --------
Net cash provided by financing activities 19,093 7,477
-------- --------
Net (decrease) in cash (6,588) (12,449)
Cash and cash equivalents at beginning of period 10,310 14,553
-------- --------
Cash and cash equivalents at end of period $ 3,722 $ 2,104
======== ========
See accompanying notes to financial statements
5
A.C. MOORE ARTS & CRAFTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(1) Basis of Presentation
The consolidated financial statements included herein include the accounts of
A.C. Moore Arts & Crafts, Inc. and its wholly owned subsidiaries (collectively
the "Company"). The Company is a chain of 58 retail stores selling arts and
crafts merchandise. The stores are located throughout the Eastern United States.
These financial statements have been prepared by management without audit and
should be read in conjunction with the consolidated financial statements and
notes thereto included in the Company's Annual Report on Form 10-K for the year
ended December 31, 2000. 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, 2001 and 2000
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 months ended September 30, 2000 and for the nine month period ended
September 30, 2001 excludes potentially dilutive shares as the result would be
antidilutive.
(4) New Accounting Standards
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 133, Accounting for Derivative
Instruments and Hedging Activities, which requires that all derivative financial
instruments be recognized as either assets or liabilities in the balance sheet.
SFAS No. 133, which was effective for the Company's first quarter of 2001, has
not had a material impact on the Company's consolidated results of operation,
financial position or cash flows.
In July 2001, the Financial Accounting Standards Board (FASB) issued SFAS No.
141, "Business Combinations" and SFAS No. 142, "Goodwill and Other Intangible
Assets." SFAS No. 141 requires business combinations initiated after June 30,
2001 to be accounted for using the purchase method of accounting, and broadens
the criteria for recording intangible assets separate from goodwill. SFAS No.
142 requires the use of a non-amortization approach to account for purchased
goodwill and certain intangibles, effective January 1, 2002. We do not believe
that the adoption of these pronouncements will have a material impact on our
financial statements. FASB also recently issued Statement No. 143, "Accounting
for Asset Retirement Obligations" and Statement No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." Statement No. 143 requires the
recognition of a liability for the estimated cost of disposal as part of the
initial cost of a long-lived asset. Statement No. 144 supersedes Statement No.
121 to supply a single accounting approach for measuring impairment of
long-lived assets, including segment of a business accounted for as a
discontinued operation or those to be sold or disposed of other than by sale. We
must adopt Statement No. 143 in 2003 and Statement No. 144 in 2002. We have not
determined the impact, if any, of adopting these pronouncements on our financial
statements.
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: 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, 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:
Three months ended Nine months ended
September 30, September 30,
-------------------- --------------------
2001 2000 2001 2000
--------- --------- --------- ---------
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of sales 62.9% 63.3% 63.0% 63.3%
--------- -------- --------- ---------
Gross Margin 37.1% 36.7% 37.0% 36.7%
Selling, general and administrative expenses 35.3% 35.8% 35.8% 35.7%
Store pre-opening expenses 0.8% 0.9% 1.0% 0.9%
--------- -------- --------- ---------
Income from operations 0.9% 0.0% 0.2% 0.1%
Net interest expense 0.4% 0.2% 0.2% 0.1%
--------- -------- --------- ---------
Income (loss) before income taxes 0.5% (0.2)% 0.0% 0.0%
Income tax expense (benefit) 0.2% (0.1)% 0.0% 0.0%
--------- --------- --------- ---------
Net income (loss) 0.3% (0.1)% 0.0% 0.0%
========= ========= ========= =========
Number of stores open at end of period 58 48
7
Three Months Ended September 30, 2001 Compared to Three Months Ended September
30, 2000
Net Sales. Net sales increased $15.3 million, or 25.1%, to $76.2 million
in the three months ended September 30, 2001 from $60.9 million in the
comparable 2000 period. This increase resulted from (i) net sales of $7.0
million from eight new stores opened in 2001, (ii) net sales of $4.1 million
from stores opened in 2000 not included in the comparable store base, and (iii)
a comparable store sales increase of $4.2 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 $9.4 million,
or 24.4%, to $48.0 million in the three months ended September 30, 2001 from
$38.6 million in the three months ended September 30, 2000. The gross margin
increased $5.9 million, or 26.4%, to $28.3 million in the three months ended
September 30, 2001 from $22.4 million in the three months ended September 30,
2000. The gross margin increased to 37.1% of net sales in the three months ended
September 30, 2001 from 36.7% in the three months ended September 30, 2000. The
increase is due to the mix of sales, cost reductions achieved from our vendors
and leveraging of our buying and distribution expense, offset somewhat by higher
freight costs.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses include (a) direct store level expenses, including rent
and related operating costs, payroll, advertising, 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 $5.1 million, or 23.7%, in the
three months ended September 30, 2001 to $26.9 million from $21.8 million in the
three months ended September 30, 2000. Of the increase, $4.2 million was
attributable to the stores opened in 2001 which were not open during 2000 and
the stores opened in 2000 not in the comparable store base. Of the remainder,
$800,000 is due to increases in the comparable stores and $100,000 is
attributable to the increase in corporate costs. As a percentage of sales,
selling, general and administrative costs decreased to 35.3% of net sales in the
three months ended September 30, 2001 from 35.8% of net sales in the three
months ended September 30, 2000. This decrease is primarily due to the
leveraging of corporate overhead costs offset in part by the impact of new
stores, which, on average, have higher operating costs as a percent of sales
than older stores.
Store Pre-Opening Expenses. The Company expenses store pre-opening
expenses as incurred. Pre-opening expense for the three new stores opened in the
third quarter of 2001, and the new store which opened in October 2001 amounted
to $625,000. In the third quarter of 2000, the Company incurred store
pre-opening costs of $576,000 related to the three stores opened in that
quarter.
Net Interest Expense. In the third quarter of 2001, the Company had net
interest expense of $297,000 compared with interest expense of $149,000 in 2000.
The increase is due to the use of short-term borrowing to fund the new stores
added in 2000 and 2001.
Income Taxes. The Company's effective income tax rate was 38.0% for
both the third quarters ended September 30, 2001 and September 30, 2000.
8
Nine Months Ended September 30, 2001 Compared to Nine Months Ended September 30,
2000
Net Sales. Net sales increased $40.9 million, or 24.2%, to $209.8
million in the nine months ended September 30, 2001 from $168.9 million in the
comparable 2000 period. This increase resulted from (i) net sales of $13.5
million from eight new stores opened in 2001, (ii) net sales of $19.3 million
from stores opened in 2000 not included in the comparable store base, and (iii)
a comparable store sales increase of $8.1 million, or 5%.
Gross Margin. Cost of sales increased $25.3 million, or 23.7%, to $132.2
million in the nine months ended September 30, 2001 from $106.8 million in the
nine months ended September 30, 2000. The gross margin increased $15.6 million,
or 25.1%, to $77.6 million in the nine months ended September 30, 2001 from
$62.0 million in the nine months ended September 30, 2000. The gross margin
increased to 37.0% of net sales in the nine months ended September 30, 2001 from
36.7% in the nine months ended September 30, 2000. The increase is due to the
mix of sales, cost reductions achieved from our vendors and leveraging of our
buying and distribution expense, offset somewhat by higher freight costs.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $14.8 million, or 24.5% in the nine months
ended September 30, 2001 to $75.1 million from $60.3 million in the nine months
ended September 30, 2000. Of the increase, $11.9 million was attributable to the
stores opened in 2001 which were not open during 2000 and the stores opened in
2000 not in the comparable store base. Of the remainder, $2.1 million is due to
increases in the comparable stores and $800,000 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 35.8% of net sales
in the nine months ended September 30, 2001 from 35.7% of net sales in the nine
months ended September 30, 2000. This increase is primarily due to the newer
stores which, on average, have higher operating costs as a percent to sales than
older stores, offset by leveraging of corporate costs.
Store Pre-Opening Expenses. Pre-opening expenses for the eight new
stores opened in the first nine months of 2001, the new store which opened in
October 2001 and two stores which were relocated during the period amounted to
$2.1 million. In the first nine months of 2000, the Company opened eight new
stores and incurred pre-opening expenses of $1.5 million.
Net Interest Expense. In the first nine months of 2001 the Company had
interest expense of $478,000 compared with interest expense of $95,000 in 2000.
The increase is due to the use of short term borrowing to fund the new stores
added in 2000 and 2001.
Income Taxes. The Company's effective income tax rate was 37% for the
nine months ended September 30, 2001 and 38% for the comparable period in 2000.
Liquidity and Capital Resources
The Company's cash needs are primarily for working capital to support
its inventory requirements and capital expenditures, store pre-opening costs and
beginning inventory for new stores.
At September 30, 2001 and December 31, 2000, the Company's working
capital was $45.5 million and $47.2 million, respectively. Cash used in
operations was $18.6 million for the nine months ended September 30, 2001
primarily as a result of seasonal reduction of accounts payable and accrued
liabilities in the amount of $5.2 million, payments for income taxes of $3.1
million and an increase in inventory of $14.1 million to support the new stores
and for the building of inventory for the fall and Christmas selling seasons.
9
Net cash used in investing activities during the nine months ended
September 30, 2001 was $7.1 million. This use of cash was for capital
expenditures, primarily related to new stores. In 2001, the Company expects to
spend approximately $10.0 million on capital expenditures, which includes
approximately $8.0 million for new store openings, and the remainder for
remodeling and systems in existing stores, 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 principally represents $16.5
million in borrowings under the Company's $50 million revolving credit facility
and $2.8 million of proceeds from equipment financing. The proceeds were used to
fund new store openings, including related capital expenditures.
The Company believes the 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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not Applicable.
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 FORM 8-K
(a) Exhibits:
None
(b) There were no reports on Form 8-K filed during the quarter
ended September 30, 2001.
10
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 9, 2001 By: /s/ Leslie H. Gordon
-----------------------------------
Executive Vice President
and Chief Financial Officer
(duly authorized officer
and principal financial
officer)
11