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, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission File Number: 000-23157
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A.C. MOORE ARTS & CRAFTS, INC.
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(Exact name of registrant as specified in its charter)
Pennsylvania 22-3527763
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
500 University Court, Blackwood, NJ 08012
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(Address of principal executive offices)
(Zip Code)
(856) 228-6700
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(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 August 8, 2001
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Common Stock, no par value 7,434,264
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, 2001
and December 31, 2000 3
Consolidated Statements of Income for the three
and six month periods ended June 30, 2001 and 2000 4
Consolidated Statements of Cash Flows for the six
month periods ended June 30, 2001 and 2000 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 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 11
Item 6. Exhibits and Reports on Form 8-K 11
SIGNATURES 12
EXHIBIT INDEX 13
A.C. MOORE ARTS & CRAFTS, INC.
CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
June 30, December 31,
2001 2000
---------------- ------------------
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 4,016 $ 10,310
Inventories 82,921 72,786
Prepaid expenses and other current assets 2,316 2,052
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89,253 85,148
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Property and equipment, net 24,000 21,517
Other assets 799 727
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$ 114,052 $ 107,392
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term debt $ 17,500 $
Current portion of capital leases 1,260 389
Accounts payable to trade and others 18,135 26,237
Accrued payroll and payroll taxes 2,197 3,822
Accrued expenses 3,630 4,274
Income taxes payable 143 3,258
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42,865 37,980
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Long-term liabilities:
Capital leases 2,540 812
Deferred taxes 2,320 2,320
Other long-term liabilities 2,863 2,599
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7,723 5,731
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50,588 43,711
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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, 7,428,833 shares outstanding at June 30,
2001 and 7,415,333 outstanding at December 31, 2000 43,345 43,268
Retained earnings 20,119 20,413
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63,464 63,681
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$ 114,052 $ 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 Six months ended
June 30, June 30,
------------------------------ ------------------------------
2001 2000 2001 2000
--------- --------- --------- ---------
Net sales $ 67,132 $ 55,186 $ 133,555 $ 107,970
Cost of sales (including buying and
distribution costs) 42,265 34,919 84,243 68,295
--------- --------- --------- ---------
Gross margin 24,867 20,267 49,312 39,675
Selling, general and administrative expenses 24,718 19,920 48,157 38,516
Pre-opening expenses 374 311 1,449 956
--------- --------- --------- ---------
Income (loss) from operations (225) 36 (294) 203
Net interest expense (income) 149 12 181 (54)
--------- --------- --------- ---------
Income (loss) before income taxes (374) 24 (475) 257
Income tax expense (benefit) (142) 9 (181) 98
--------- --------- --------- ---------
Net income (loss) $ (232) $ 15 $ (294) $ 159
========= ========= ========= =========
Basic net income (loss) per share $ (0.03) $ 0.00 $ (0.04) $ 0.02
========= ========= ========= =========
Weighted average shares outstanding 7,428,833 7,405,000 7,424,619 7,405,000
========= ========= ========= =========
Diluted net income (loss) per share $ (0.03) $ 0.00 $ (0.04) $ 0.02
========= ========= ========= =========
Weighted average shares outstanding
plus impact of stock options 7,428,833 7,435,000 7,424,619 7,419,000
========= ========= ========= =========
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,
--------------------------
2001 2000
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Cash flows from operating activities:
Net Income (loss) $ (294) $ 159
Adjustments to reconcile net income (loss) to net cash
(used in) operating activities:
Depreciation and amortization 2,357 1,768
Compensation expense related to stock options - 68
Changes in assets and liabilities:
Inventories (10,135) (5,567)
Prepaid expenses and other current assets (264) (307)
Accounts payable, accrued payroll
payroll taxes and accrued expenses (10,371) (6,832)
Income taxes payable (3,115) (1,963)
Other long-term liabilities 264 237
Other (72) (37)
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Net cash (used in) operating activities (21,630) (12,474)
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Cash flows (used in) investing activities: Capital expenditures (4,840) (4,896)
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Cash flows from financing activities:
Proceeds from bank overdraft - 865
Proceeds from line of credit 17,500 3,000
Exercise of stock options 77 -
Proceeds from capital leases 2,791 -
Repayment of capital leases (192) (180)
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Net cash provided by financing activities 20,176 3,685
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Net (decrease) in cash (6,294) (13,685)
Cash and cash equivalents at beginning of period 10,310 14,553
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Cash and cash equivalents at end of period $ 4,016 $ 868
======= =======
5
See accompanying notes to financial statements
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 55 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 six month periods ended June 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 and six month periods ended June 30, 2001 excludes potentially dilutive
shares as the result would be antidilutive.
(4) New Accounting Standard
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.
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 Six months ended
June 30, June 30,
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2001 2000 2001 2000
------ ------ ------ ------
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of sales 63.0% 63.3% 63.1% 63.3%
------- ------ ------- ------
Gross margin 37.0% 36.7% 36.9% 36.7%
Selling, general and administrative expenses 36.8% 36.1% 36.0% 35.6%
Store pre-opening expenses 0.5% 0.6% 1.1% 0.9%
------- ------ ------- ------
Income (loss) from operations (0.3)% 0.0% (0.2)% 0.2%
Net interest expense (income) 0.2% 0.0% 0.2% 0.0%
------- ------ ------- ------
Income (loss) before income taxes (0.5)% 0.0% (0.4)% 0.2%
Income tax expense (benefit) (0.2)% 0.0% (0.2)% 0.1%
------- ------ ------- ------
Net income (loss) (0.3)% 0.0% (0.2)% 0.1%
======= ====== ======= ======
Number of stores open at end of period 55 45
7
Three Months Ended June 30, 2001 Compared to Three Months Ended June 30, 2000
Net Sales. Net sales increased $11.9 million, or 21.6%, to $67.1 million
in the three months ended June 30, 2001 from $55.2 million in the comparable
2000 period. This increase resulted from (i) net sales of $4.2 million from five
new stores opened in 2001, (ii) net sales of $5.3 million from stores opened in
2000 not included in the comparable store base, and (iii) a comparable store
sales increase of $2.4 million, or 4%. 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 $7.3 million,
or 21%, to $42.3 million in the three months ended June 30, 2001 from $34.9
million in the three months ended June 30, 2000. The gross margin increased $4.6
million, or 22.7%, to $24.9 million in the three months ended June 30, 2001 from
$20.3 million in the three months ended June 30, 2000. The gross margin
increased to 37.0% of net sales in the three months ended June 30, 2001 from
36.7% in the three months ended June 30, 2000. The increase is due to cost
reductions achieved from our vendors and leveraging of our buying and
distribution expense, offset 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 $4.8 million, or 24.1%, in the
three months ended June 30, 2001 to $24.7 million from $19.9 million in the
three months ended June 30, 2000. Of the increase, $3.7 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 $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
36.8% of net sales in the three months ended June 30, 2001 from 36.1% of net
sales in the three months ended June 30, 2000. This increase is primarily due to
newer 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 two new stores opened in the
second quarter of 2001, the new store which opened in July and one store which
was relocated amounted to $374,000. In the second quarter of 2000, the Company
incurred store pre-opening costs of $311,000 related to the three stores opened
in that quarter.
Net Interest Expense (Income). In the second quarter of 2001, the
Company had net interest expense of $149,000 compared with interest expense of
$12,000 in 2000. The change 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 second quarters ended June 30, 2001 and June 30, 2000.
Six Months Ended June 30, 2001 Compared to Six Months Ended June 30, 2000.
Net Sales. Net sales increased $25.6 million, or 23.7%, to $133.6
million in the six months ended June 30, 2001 from $108.0 million in the
comparable 2000 period. This increase resulted from (i) net sales of $6.5
million from five new stores opened in 2001, (ii) net sales of $14.9 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 4%.
Gross Margin. Cost of sales increased $15.9 million, or 23.4%, to $84.2
million in the six months ended June 30, 2001 from $68.3 million in the six
months ended June 30, 2000. The gross margin increased $9.6 million, or 24.3%,
to $49.3 million in the six months ended June 30, 2001 from $39.7 million in the
six months ended June 30, 2000. The gross margin increased to 36.9% of net sales
in the six months ended June 30, 2001 from 36.7% in the six months ended June
30, 2000.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $9.6 million, or 25.0% in the six months ended
June 30, 2001 to $48.2 million from $38.5 million in the six months ended June
30, 2000. Of the increase, $7.6 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, $1.2 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 36.0% of net sales in the six
months ended June 30, 2001 from 35.6% of net sales in the six months ended June
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.
Store Pre-Opening Expenses. Pre-opening expense for the five new stores
opened in the first half of 2001, the new store which opened in July and two
stores which were relocated during the period amounted to $1.4 million. In the
first six months of 2000 the Company opened five new stores and incurred
pre-opening expenses of $956,000.
Net Interest Expense (Income). In the first six months of 2001 the
Company had net interest expense of $181,000 compared with interest income of
$54,000 in 2000. The change 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 six month periods ended June 30, 2001 and June 30, 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 June 30, 2001 and December 31, 2000 the Company's working capital was
$46.4 million and $47.2 million, respectively. Cash used in operations was $21.6
million for the six months ended June 30, 2001 primarily as a result of the
seasonal reduction of accounts payable and accrued liabilities in the amount of
$10.4 million, payments for income taxes of $3.1 million and an increase in
inventory of $10.1 million to support the new stores and as a result of
accelerating the receipt of product for the fall and Christmas seasons.
9
Net cash used in investing activities during the six months ended June
30, 2001 was $4.8 million. This use of cash was for capital expenditures,
primarily related to new stores. In 2001, the Company expects to spend
approximately $11.0 million on capital expenditures, which includes
approximately $9.0 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 includes $17.5 million in
borrowings under the Company's $25 million revolving credit facility and $2.8
million of proceeds from capital leases. The proceeds were used to fund new
store openings, including related capital expenditures.
On August 3, 2001 the Company signed a new $50 million three year
revolving credit agreement with KeyBank, agent, and First Union National Bank.
Borrowings under the credit agreement will bear interest rates that will vary
between LIBOR plus 150 basis points and LIBOR plus 200 basis points, depending
on the fixed charge coverage ratio. The Company believes the cash generated from
operations during the year and available borrowings under the new 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
The Company held its Annual Meeting of Shareholders on May 17, 2001. 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
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Richard J. Bauer 6,925,583 21,860
Richard J. Drake 6,920,668 26,775
The term of office for each of the following directors continued after
the meeting: William Kaplan, John E. (Jack) Parker, Patricia A. Parker and
Richard Lesser.
10
ITEM 5. OTHER INFORMATION
Not Applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
+ 10.8 Employment Agreement, dated June 4, 2001, between Rex A.
Rambo and A.C. Moore, Inc.
+ 10.9 Employment Agreement, dated June 11, 2001, between
Lawrence H. Fine and A.C. Moore, Inc.
10.10 Credit Agreement, dated as of August 3, 2001, among A.C.
Moore Incorporated, The Lenders Party Thereto, and
KeyBank National Association, as Administrative Agent and
Lead Arranger.
10.11 Security Agreement, dated as of August 3, 2001, among
A.C. Moore Incorporated, A.C. Moore Arts & Crafts, Inc.,
Moorestown Finance, Inc., Blackwood Assets, Inc., each of
A.C. Moore Incorporated's subsidiaries, and KeyBank
National Association.
10.12 Guarantee Agreement, dated as of August 3, 2001, among
A.C. Moore Arts & Crafts, Inc., A.C. Moore Incorporated,
Moorestown Finance, Inc., Blackwood Assets, Inc., each of
the subsidiaries of A.C. Moore Incorporated listed in
Schedule 1 to the Guarantee Agreement, and KeyBank
National Association.
(b) There were no reports on Form 8-K filed during the quarter ended
June 30, 2001.
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+ Management Contract or compensatory plan or arrangement.
11
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: August 10, 2001 By: /s/ Leslie H. Gordon
----------------------------------------
Executive Vice President and Chief
Financial Officer(duly authorized
officer and principal financial officer)
12
EXHIBIT INDEX
Exhibit No. Description
----------- -----------
+ 10.8 Employment Agreement, dated June 4, 2001, between Rex A.
Rambo and A.C. Moore, Inc.
+ 10.9 Employment Agreement, dated June 11, 2001, between
Lawrence H. Fine and A.C. Moore, Inc.
10.10 Credit Agreement, dated as of August 3, 2001, among A.C.
Moore Incorporated, The Lenders Party Thereto, and
KeyBank National Association, as Administrative Agent and
Lead Arranger.
10.11 Security Agreement, dated as of August 3, 2001, among
A.C. Moore Incorporated, A.C. Moore Arts & Crafts, Inc.,
Moorestown Finance, Inc., Blackwood Assets, Inc., each of
A.C. Moore Incorporated's subsidiaries, and KeyBank
National Association.
10.12 Guarantee Agreement, dated as of August 3, 2001, among
A.C. Moore Arts & Crafts, Inc., A.C. Moore Incorporated,
Moorestown Finance, Inc., Blackwood Assets, Inc., each of
the subsidiaries of A.C. Moore Incorporated listed in
Schedule 1 to the Guarantee Agreement, and KeyBank
National Association.
--------
+ Management Contract or compensatory plan or arrangement.
13