UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2002
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.
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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 May 3, 2002
----- ----------------------------
Common Stock, no par value 9,349,521
A.C. MOORE ARTS & CRAFTS, INC.
TABLE OF CONTENTS
Page
Number
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PART I: FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of March 31, 2002
and December 31, 2001 3
Consolidated Statements of Income for the three
months ended March 31, 2002 and 2001 4
Consolidated Statements of Cash Flows for the three
months ended March 31, 2002 and 2001 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 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 12
2
A.C. MOORE ARTS & CRAFTS, INC.
CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
March 31, December 31,
2002 2001
-------------- ----------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 54,231 $ 10,818
Inventories 87,858 85,674
Prepaid expenses and other current assets 1,594 1,526
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143,683 98,018
Property and equipment, net 25,890 24,969
Other assets 813 824
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$ 170,386 $ 123,811
============== ================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of equipment leases 1,329 1,329
Trade accounts payable 24,233 23,322
Accrued payroll and payroll taxes 2,551 5,098
Accrued expenses 5,759 7,247
Income taxes payable 856 4,600
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34,728 41,596
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Long-term liabilities:
Capitalized equipment leases, less current portion 1,525 1,845
Deferred tax liability 3,425 3,427
Other long-term liabilities 3,387 3,216
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8,337 8,488
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43,065 50,084
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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, 9,304,382 shares outstanding at March 31, 2002 and
7,466,006 outstanding at December 31, 2001 96,526 43,807
Retained earnings 30,795 29,920
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127,321 73,727
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$ 170,386 $ 123,811
============== ================
See accompanying notes to consolidated financial statements
3
A.C. MOORE ARTS & CRAFTS, INC.
CONSOLIDATED STATEMENTS OF INCOME
(dollars in thousands, except per share data)
(unaudited)
Three months ended
March 31,
-------------------------------------
2002 2001
---------------- -----------------
Net sales $ 85,853 $ 66,423
Cost of sales (including buying
and distribution costs) 54,162 41,978
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Gross Margin 31,691 24,445
Selling, general and administrative expenses 29,586 23,439
Store pre-opening expenses 654 1,075
--------------- --------------
Income (loss) from operations 1,451 (69)
Net interest expense 11 32
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Income (loss) before income taxes 1,440 (101)
Income tax expense (benefit) 565 (39)
--------------- --------------
Net income (loss) $ 875 $ (62)
=============== ==============
Basic net income (loss) per share $ 0.11 $ (0.01)
=============== ==============
Weighted average shares outstanding 7,933,001 7,422,958
=============== ==============
Diluted net income (loss) per share $ 0.10 $ (0.01)
=============== ==============
Weighted average shares outstanding plus
impact of stock options 8,468,102 7,505,850
=============== ==============
See accompanying notes to consolidated financial statements
4
A.C. MOORE ARTS & CRAFTS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
(unaudited)
Three months ended
March 31,
--------------------------
2002 2001
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Cash flows from operating activities:
Net income (loss) $ 875 $ (62)
Adjustments to reconcile net income (loss) to net cash
(used in) operating activities:
Depreciation and amortization 1,446 1,134
Changes in assets and liabilities:
Inventories (2,184) (3,447)
Prepaid expenses and other current assets (68) 68
Accounts payable, accrued payroll
payroll taxes and accrued expenses (3,124) (7,326)
Income taxes payable (3,744) (2,950)
Other long-term liabilities 171 126
Other 9 (23)
----------- ----------
Net cash (used in) operating activities (6,619) (12,480)
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Cash flows (used in) investing activities: Capital expenditures (2,367) (2,812)
----------- ----------
Cash flows from financing activities:
Proceeds from sale of shares 52,130 --
Proceeds from bank overdraft -- 2,197
Proceeds from line of credit 2,000 4,750
Repayment of line of credit (2,000) --
Exercise of stock options 589 48
Repayment of equipment leases (320) (95)
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Net cash provided by financing activities 52,399 6,900
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Net increase (decrease) in cash 43,413 (8,392)
Cash and cash equivalents at beginning of period 10,818 10,310
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Cash and cash equivalents at end of period $ 54,231 $ 1,918
=========== ==========
See accompanying notes to consolidated financial statements
5
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 63 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, 2001. 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
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities at the date of the financial statements and
the reported amounts of expenses during the reported period and related
disclosures. Significant estimates made as of and for the three month periods
ended March 31, 2002 and 2001 include provisions for shrinkage, capitalized
buying, warehousing and distribution costs related to inventory and markdowns of
merchandise inventories. Actual results could differ from those estimates.
(3) Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board, or FASB, issued
Statement of Financial Accounting Standards, or 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 our first quarter of
2001, has not had a material impact on our consolidated results of operations,
financial position or cash flows.
In July 2001, 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. FASB also recently issued Statement No.
144, "Accounting for the Impairment or Disposal of Long-Lived Assets." 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. The adoption of these pronouncements did not have a material
impact on our financial statements.
Statement No. 143, "Accounting for Asset Retirement Obligations" requires the
recognition of a liability for the estimated cost of disposal as part of the
initial cost of a long-lived asset. We must adopt Statement No. 143 in 2003. We
believe that adopting this pronouncement will not have a material impact on our
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 our peak selling season, which includes Fall/Halloween,
Thanksgiving and Christmas, 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.
Our quarterly results of operations also may fluctuate based upon such factors
as the length of holiday seasons, the date on which holidays fall, the number
and timing of new store openings, the amount of store pre-opening expenses, the
amount of net sales contributed by new and existing stores, the mix of products
sold, the amount of sales returns, the timing and level of markdowns and other
competitive factors.
7
Results of Operations
The following table sets forth, for the periods indicated, selected statement of
operations data expressed as a percentage of net sales and the number of stores
open at the end of each such period:
Three months
ended March 31,
-----------------------------
2002 2001
------------ ------------
Net sales 100.0% 100.0 %
Cost of sales 63.1% 63.2 %
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Gross margin 36.9% 36.8 %
Selling, general and
administrative expenses 34.5% 35.3 %
Store pre-opening expenses 0.7% 1.6 %
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Income (loss) from operations 1.7% (0.1)%
Net interest expense (income) 0.0% 0.1 %
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Income (loss) before income taxes 1.7% (0.2)%
Income tax expense (benefit) 0.7% (0.1)%
------ -------
Net income (loss) 1.0% (0.1)%
====== =======
Number of stores open at end of period 63 53
Three Months Ended March 31, 2002 Compared to Three Months Ended March 31, 2001
Net Sales. Net sales increased $19.4 million, or 29.3%, to $85.9 million
in the three months ended March 31, 2002 from $66.4 million in the comparable
2001 period. This increase resulted from (i) net sales of $1.7 million from two
new stores opened during the period, (ii) net sales of $8.8 million from stores
opened in 2001 not included in the comparable store base, and (iii) a comparable
store sales increase of $8.9 million, or 14%. Stores are added to the comparable
store base at the beginning of the fourteenth full month of operation.
Gross Margin. Cost of sales is net sales minus the cost of merchandise
and certain distribution and purchasing costs. The gross margin increased to
36.9% of net sales in the three months ended March 31, 2002 from 36.8% in the
three months ended March 31, 2001.
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 $6.1 million, or 26.2%, in the
three months ended March 31, 2002 to $29.6 million from $23.4 million in the
three months ended March 31, 2001. Of the $6.1 million increase, $3.8 million
was attributable to the stores open in 2002 which were not open during 2001 and
the stores opened in 2001 not in the comparable store base. Of the remainder,
8
$1.6 million is due to increases in the comparable stores and $700,000 is
attributable to the increase in corporate costs to support our growth. As a
percentage of sales, selling, general and administrative costs decreased to
34.5% of net sales in the three months ended March 31, 2002 from 35.3% of net
sales in the three months ended March 31, 2001. This decrease is primarily due
to leveraging store and central costs over a greater sales base.
Store pre-opening Expenses. We expense store pre-opening costs as they
are incurred. Pre-opening expenses for the two new stores opened in the first
quarter of 2002 and the two new stores which opened in the second quarter
amounted to $654,000. In the first quarter of 2001, the Company incurred store
pre-opening costs of $1.1 million related to the three stores opened in that
quarter, two stores which opened in the second quarter and one store which was
relocated.
Net Interest Expense. In the first quarter of 2002 we had net interest
expense of $11,000 compared with net interest expense of $32,000 in 2001.
Income Taxes. Our effective income tax rate was 39.2% for the first
quarter ended March 31, 2002 and 38.6% for the first quarter ended March 31,
2001.
Liquidity and Capital Resources.
Our cash is used primarily for working capital to support inventory
requirements and capital expenditures, pre-opening costs and beginning inventory
for new stores. In recent years, we have financed our operations and new store
openings primarily with cash from operations, the net proceeds we received from
our initial public offering in 1997 and with borrowing under bank financing
agreements. In March 2002 we completed a secondary offering in which we sold
1,750,000 new shares, with net cash proceeds of $52,130,000.
At March 31, 2002 and December 31, 2001 our working capital was $109.0
million and $56.4 million, respectively. Cash used in operations was $6.6
million for the three months ended March 31, 2002 as a result of the seasonal
reduction of accounts payable and accrued payroll in the amount of $3.1 million,
a reduction in income tax payables of $3.7 million and an increase in inventory
of $2.2 million to support the new stores.
Net cash used in investing activities during the three months ended
March 31, 2002 was $2.4 million. This use of cash was for capital expenditures,
primarily related to new stores. In 2002, we expect to spend approximately $12.0
million on capital expenditures, which includes approximately $8.0 million for
new store openings, and the remainder for remodeling existing stores, upgrading
systems in existing stores, warehouse equipment and corporate systems
development.
We are currently negotiating to lease or buy a new distribution center
and office complex which we plan to open in 2003. We anticipate that this new
facility, which will be located near our existing distribution center, will
initially be 450,000 square feet for distribution plus 30,000 square feet of
office space. We plan to expand the new distribution center to 900,000 square
feet by the end of 2005. The total cost of the land and building for phase one
of this facility will be financed by either lease or long-term debt. We will use
our working capital to pay for systems and equipment.
Net cash provided by financing activities includes the $52.1 million
proceeds from the sale of shares.
9
The Company believes the cash generated from operations during the year
and the available cash received from the sale of shares will be sufficient to
finance its working capital and capital expenditure requirements for at least
the next 12 months.
Critical Accounting Policies
Financial Reporting Release No. 60, recently issued by the Securities
and Exchange Commission, requires all registrants to discuss "critical"
accounting policies or methods used in the preparation of financial statements.
Our critical accounting policies relate to merchandise inventories. We value our
inventories at stores at the lower of cost or market as determined using the
retail inventory method. Because we do not have perpetual inventory records for
inventory in our stores, we perform complete physical inventories in each of our
stores at the end of each year. An actual physical count of merchandise is made
principally by third party inventory counting service firms. We believe our
process results in reasonable estimates of our retail inventory on hand at year
end.
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
Not Applicable.
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:
None.
(b) There were no reports on Form 8-K filed during the
quarter ended March 31, 2002.
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: May 8, 2002 By: /s/ Leslie H. Gordon
------------------------------------
Executive Vice President
and Chief Financial Officer
(duly authorized officer
and principal financial
officer)
12