10-Q 1 a10q3-01e.txt FORM 10-Q QUARTER ENDING 6/2/01 FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 (MARK ONE) [X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For Quarter Ended June 2, 2001 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECUTITIES EXCHANGE ACT OF 1934 For the Transition Period From...to... Commission File No. 0-19194 RAG SHOPS, INC. (Exact name of registrant as specified in its charter) DELAWARE 51-0333503 (State or other jurisdiction of (I.R.S. Employer Identification incorporation or organization) Number) 111 WAGARAW ROAD HAWTHORNE, NEW JERSEY 07506 (Address of principal executive (Zip Code) offices) Registrant's telephone number, including area code (973) 423-1303 Indicate by check mark whether the registrant (1) has filed all reports required by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or 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 JUNE 29, 2001 Common stock, par value $.01 4,801,583 Page 1 of 12 RAG SHOPS, INC. AND SUBSIDIARIES INDEX Page PART I - FINANCIAL INFORMATION Item 1. Financial Statements Condensed consolidated balance sheets - June 2, 2001 (unaudited), May 27, 2000 (unaudited) and September 2, 2000 3 Condensed consolidated statements of income - three and nine months ended June 2, 2001 (unaudited) and May 27, 2000 (unaudited) 4 Condensed consolidated statements of cash flows - nine months ended June 2, 2001 (unaudited) and May 27, 2000 (unaudited) 5 Notes to condensed consolidated financial statements 6-7 Item 2. Management's Discussion and Analysis of Results of Operations and Financial Condition 8-11 Part II - OTHER INFORMATION Items 1. - 5. 12 Item 6. Exhibits and Reports on Form 8-K 12 SIGNATURES 12 Page 2 of 12 RAG SHOPS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (All amounts in thousands) June 2, May 27, September 2, 2001 2000 2000 ---- ---- ---- (Unaudited) (Unaudited) (Note A) ASSETS CURRENT ASSETS: Cash $ 4,097 $ 4,764 $ 1,311 Merchandise inventories 24,308 23,270 27,805 Prepaid expenses 489 608 483 Other current assets 200 163 99 Deferred taxes 852 805 852 -------- -------- -------- Total current assets 29,946 29,610 30,550 Property and equipment, net 3,863 3,690 3,613 Deferred income taxes 350 212 350 Other assets 51 58 67 -------- -------- -------- TOTAL ASSETS $ 34,210 $ 33,570 $ 34,580 ======== ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable-trade $ 5,846 $ 5,535 $ 7,763 Accrued expenses and other current liabilities 2,374 2,333 2,012 Accrued salaries and wages 655 798 893 Income taxes payable 287 686 242 -------- -------- -------- Total current liabilities 9,162 9,352 10,910 COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' EQUITY: Preferred stock - - - Common stock 48 48 48 Additional paid-in capital 6,242 6,285 6,242 Unamortized restricted stock awards (6) (56) (12) Retained earnings 18,828 18,005 17,456 Treasury stock, at cost, 26,880 shares (64) (64) (64) -------- -------- -------- Total stockholders' equity 25,048 24,218 23,670 -------- -------- -------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 34,210 $ 33,570 $ 34,580 ======== ======== ======== Note A: Derived from the September 2, 2000 audited balance sheet. See notes to the condensed consolidated financial statements. Page 3 of 12 RAG SHOPS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited) (All amounts in thousands, except share data) Three Months Ended Nine Months Ended ------------------ ----------------- June 2, May 27, June 2, May 27, 2001 2000 2001 2000 ---- ---- ---- ----
Net sales $23,692 $22,730 $79,500 $ 77,408 Cost of merchandise sold and occupancy costs 15,313 14,677 50,683 49,058 ------- ------- ------- -------- Gross profit 8,379 8,053 28,817 28,350 ------- ------- ------- -------- Store expenses 6,015 5,285 19,002 17,863 General and administrative expenses 2,322 2,421 7,683 7,612 ------- ------- ------- -------- Total operating operating expenses 8,337 7,706 26,685 25,475 ------- ------- ------- -------- Income from operations 42 347 2,132 2,875 Interest income (expense), net 34 62 117 (10) ------- ------- ------- -------- Income before provision for income taxes and cumulative effect of change in accounting principle 76 409 2,249 2,865 Provision for income taxes 30 159 877 1,117 ------- ------- ------- -------- Income before cumulative effect of change in accounting principle 46 250 1,372 1,748 Cumulative effect of change in accounting principle, net of income tax effect of $127 - - - 198 ------- ------- ------- -------- Net income $ 46 $ 250 $ 1,372 $ 1,946 ======= ======= ======= ======== BASIC AND DILUTED EARNINGS PER COMMON SHARE: Income before cumulative effect of change in accounting principle $ .01 $ .05 $ .29 $ .36 Cumulative effect of change in accounting principle - - - .04 ------- ------- ------- -------- Net income $ .01 $ .05 $ .29 $ .40 ======= ======= ======= ========
See notes to the condensed consolidated financial statements. Page 4 of 12 RAG SHOPS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (All amounts in thousands) Nine Months Ended ----------------- June 2, 2001 May 27, 2000 ------------- ------------
Cash flows from operating activities: Net income $ 1,372 $ 1,946 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 1,069 1,020 Loss on disposition of property and equipment 13 14 Amortization of restricted stock awards 6 169 Cumulative effect of accounting change - (325) Changes in assets and liabilities: (Increase) decrease in: Merchandise inventories 3,497 7,618 Prepaid expenses (6) (72) Other current assets (101) 62 Other assets 16 46 Increase (decrease) in: Accounts payable-trade (1,917) (393) Accrued expenses and other current liabilities 362 (141) Accrued salaries and wages (238) 193 Income taxes payable 45 529 ------- -------- Net cash provided by operating activities 4,118 10,666 ------- -------- Cash flows from investing activities: Proceeds from sale of property and equipment 6 - Payments for purchases of property and equipment (1,338) (266) ------- -------- Net cash used in investing activities (1,332) (266) ------- -------- Cash flows from financing activities: Proceeds from issuance of note payable-bank - 5,805 Repayments of note payable-bank - (12,375) ------- -------- Net cash used in financing activities - (6,570) ------- -------- Net increase in cash 2,786 3,830 Cash, beginning of period 1,311 934 ------- -------- Cash, end of period $ 4,097 $ 4,764 ======= ======== Supplemental disclosures of cash flow information: Cash paid during the period for: Interest $ - $ 198 ======= ======== Income taxes $ 818 $ 684 ======= ========
See notes to the condensed consolidated financial statements Page 5 of 12 RAG SHOPS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS THREE AND NINE MONTHS ENDED JUNE 2, 2001 AND MAY 27, 2000 NOTE 1 - BASIS OF PRESENTATION The accompanying financial statements are unaudited, but in the opinion of management reflect all adjustments, which include normal recurring accruals necessary for a fair presentation of the consolidated financial statements for the interim periods. Since the Company's business is seasonal, the operating results for the three and nine months ended June 2, 2001 are not necessarily indicative of results for the fiscal year. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. It is suggested that these condensed consolidated financial statements be read in conjunction with the financial statements and notes included in the Company's Annual Report on Form 10-K for the year ended September 2, 2000 filed with the Securities and Exchange Commission in December 2000. Certain reclassifications have been made to prior year amounts in order to conform to the presentation for the current year. NOTE 2 - EARNINGS PER SHARE The following table sets forth the computation of basic and diluted earnings per share: Three Months Ended Nine Months Ended ------------------ ----------------- June 2, May 27, June 2, May 27, 2001 2000 2001 2000 ---- ---- ---- ----
Numerator: Income before cumulative effect of change in accounting principle $ 46,000 $ 250,000 $1,372,000 $1,748,000 Cumulative effect of change in accounting principle - - - 198,000 ---------- ---------- ---------- ---------- Net income $ 46,000 $ 250,000 $1,372,000 $1,946,000 ========== ========== ========== ========== Denominator: Denominator for basic earnings per share-weighted average shares 4,801,583 4,818,103 4,801,583 4,813,290 Effect of dilutive securities: Employee stock options 5,182 140 4,422 60 ---------- ---------- ---------- ---------- Denominator for diluted earnings per share-adjusted weighted average shares and assumed conversions 4,806,765 4,818,243 4,806,005 4,813,350 ========== ========== ========== ==========
Page 6 of 12 RAG SHOPS, INC. AND SUBSIDIARIES Three Months Ended Nine Months Ended ------------------ ----------------- June 2, May 27, June 2, May 27, 2001 2000 2001 2000 ---- ---- ---- ----
Basic and diluted earnings per share: Income before cumulative effect of change in accounting principle $ .01 $ .05 $ .29 $ .36 Cumulative effect of change in accounting principle - - - .04 ---- ---- ---- ---- Net income $ .01 $ .05 $ .29 $ .40 ==== ==== ==== ====
NOTE 3 - MERCHANDISE INVENTORIES Merchandise inventories (which are all finished goods) are stated at the lower of cost (first-in, first-out method) or market as determined by the retail inventory method. Effective August 29, 1999, the Company changed its method of calculating ending merchandise inventories under the retail inventory method. Effective August 30, 1999, the Company began utilizing a method that weights the cost-to-retail ratio using multiple inventory categories. Management believes that this change in accounting improves the measurement of the Company's profitability based upon a changing product mix. The cumulative effect of this accounting change was to increase the Company's net income for the three months ended November 27, 1999 by $198,496 (net of tax effect of $127,000). Page 7 of 12 RAG SHOPS, INC. AND SUBSIDIARIES Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION Results of Operations The following table sets forth as a percentage of net sales, certain items appearing in the condensed consolidated statements of income for the indicated periods. Three Months Ended Nine Months Ended ------------------ ----------------- June 2, May 27, June 2, May 27, 2001 2000 2001 2000 ---- ---- ---- ----
Net sales 100.0% 100.0% 100.0% 100.0% Cost of merchandise sold and occupancy costs 64.6 64.6 63.8 63.4 ----- ----- ----- ----- Gross profit 35.4 35.4 36.2 36.6 Store expenses 25.4 23.2 23.9 23.1 General and administrative expenses 9.8 10.7 9.7 9.8 ----- ----- ----- ----- Income from operations .2 1.5 2.6 3.7 ----- ----- ----- ----- Income before cumulative effect of change in accounting principle .2 1.1 1.7 2.2 Cumulative effect of change in accounting principle - - - .3 ----- ----- ----- ----- Net income .2% 1.1% 1.7% 2.5% ===== ===== ===== =====
The Company's net sales increased $962,000 and $2,092,000 for the three and nine months ended June 2, 2001, representing a 4.2% and 2.7% increase, respectively, over the comparable prior periods. Of the 4.2% increase in net sales for the three months ended June 2, 2001, $751,000 was due to sales related to new store openings, net of sales reductions from closed stores, and the balance represents an increase in comparable store sales of $211,000 or 1% over the comparable prior period. The increase in net sales for the nine months ended June 2, 2001 was primarily attributable to a $1,792,000 or 2.4% increase in comparable store sales over the comparable prior period. On a week-for-week aligned basis due to a shift in the accounting calendar as a result of the fiscal year ending September 2, 2000 having an extra week, sales from stores opened at least one year improved .9% and 1.8% for the three and nine months ended June 2, 2001, respectively. Gross profit as a percentage of net sales remained unchanged for the three months ended June 2, 2001 as compared to the comparable prior period. Gross profit as a percentage of net sales decreased .4% for the nine months ended June 2, 2001 from the comparable prior period due to an increase in freight costs as a result of addditional shipments to facilitate new store openings, and higher freight rates. Page 8 of 12 RAG SHOPS, INC. AND SUBSIDIARIES Store expenses for the three months ended June 2, 2001 increased $730,000 from the comparable prior period, or 2.2% as a percentage of net sales, principally due to payroll and payroll related expenses incurred in connection with new stores opened during the current fiscal year plus additional advertising expense, partially offset by reductions in expenses related to closed stores. The increase in advertising costs is due to higher penetration costs in the new store markets as compared to the closed store markets, and a decrease in vendor participation. Store expenses increased $1,139,000, or .8% as a percentage of net sales, for the nine months ended June 2, 2001 from the comparable prior period principally due to an increase in payroll and payroll related expenses that were primarily attributable to new stores opened in the current fiscal year. Advertising costs as a percentage of net sales remained unchanged for the current nine month period compared to the comparable prior period. General and administrative expenses decreased $99,000 and increased $71,000 for the three and nine months ended June 2, 2001, respectively, over the comparable prior periods. The decrease for the three months ended June 2, 2001 is primarily due to reductions in payroll and payroll related expenses partially offset by the cost of operation of a secondary distribution center to facilitate the flow of additional imported seasonal merchandise for the entire three months of this fiscal quarter as compared to only one month of the comparable prior fiscal quarter. The increase in general and administrative expenses for the nine months ended June 2, 2001 is primarily due to the operation of the secondary distribution center for nine months in the current fiscal year-to-date compared to five months in the prior comparable period, partially offset by reductions in payroll and payroll related expenses. As a percentage of net sales, general and administrative expenses decreased .9% for the three months ended June 2, 2001 and remained virtually unchanged for the nine months ended June 2, 2001 with a .1% decrease from the comparable prior period. The decrease for the three months ended June 2, 2001 is a result of the decrease in expenses accompanied by an increase in net sales, and the decrease for the nine months ended June 2, 2001 is a result of the Company being able to leverage the increase in expenses against the increase in net sales. Interest income, net decreased $28,000 and increased $127,000 for the three and nine months ended June 2, 2001, respectively, from the comparable prior periods. The decrease for the three months was due to a decrease in average investment levels, primarily due to the opening of four new stores in the current fiscal year as compared to no new store openings during the prior comparable period, and lowering of short-term investment rates. The increase for the nine months was also affected by these factors but was primarily the result of the repayment of borrowings on the Company's line of credit in the first quarter of last fiscal year. See "Liquidity and Capital Resources". Net income decreased $204,000 for the three months ended June 2, 2001 as compared to the comparable prior period due to the increase in store expenses partially offset by an increase in net sales and reduction in general and administrative expenses. Net income decreased $574,000 for the nine months ended June 2, 2001 compared to the comparable prior period as a result of an increase in operating expenses and, in the prior year, the cumulative effect of a change in accounting principle that was partially offset by an increase in comparable store sales and the increase in interest income, net. Page 9 of 12 RAG SHOPS, INC. AND SUBSIDIARIES Seasonality The Company's business is seasonal, which the Company believes is typical of the retail craft and fabric industry. The Company's highest sales and earnings levels traditionally occur between September and December. The Company has historically operated at a loss during the fourth quarter of its fiscal year, the June through August summer period. Year to year comparisons of quarterly results and comparable store sales can be affected by a variety of factors, including the timing and duration of holiday selling seasons and the timing of new store openings and promotional markdowns. Liquidity and Capital Resources The Company's primary needs for liquidity are to maintain inventory for the Company's existing stores and to fund the costs of opening new stores, including capital improvements, initial inventory and pre-opening expenses. During the nine months ended June 2, 2001, the Company relied on internally generated funds and credit made available by suppliers to finance inventories and new store openings. In addition to these capital sources, the Company also relied on short-term borrowings during the nine months ended May 27, 2000. The Company's working capital increased $1,144,000 for the nine months ended June 2, 2001 as compared to the September 2, 2000 amount primarily because the Company retained its net income for this period and reduced its merchandise inventories, thus enabling the Company to increase its short-term investments and reduce its trade payables. The Company maintains a $10 million credit facility with a bank. The credit facility is renewable annually on or before each December 31 and consists of a discretionary unsecured line of credit for direct borrowings and the issuance and refinance of letters of credit. Borrowings under the line of credit bear interest at the bank's prime rate (7.00% at June 2, 2001). The credit facility requires the Company to maintain a compensating balance of $400,000 in addition to certain financial covenants. Historically, the amount borrowed has varied based on the Company's seasonal requirements, generally reaching a maximum amount outstanding during the fourth quarter of each fiscal year. The maximum amount borrowed under the line was $0 and $7,490,000 for the nine months ended June 2, 2001 and May 27, 2000, respectively. The Company intends to maintain the availability of a line of credit for seasonal working capital requirements and in order to be able to take advantage of future opportunities. Page 10 of 12 RAG SHOPS, INC. AND SUBSIDIARIES Net cash provided by operating activities for the nine months ended June 2, 2001 and May 27, 2000 amounted to $4,118,000 and $10,666,000, respectively, and $1,338,000 and $266,000, respectively, was used for purchases of property and equipment. During the nine months ended June 2, 2001 the Company opened four new stores, closed three existing stores and was operating sixty-six stores at the end of the period. During the remainder of the fiscal year ending September 1, 2001, the Company anticipates opening one additional new store and closing one additional store. Costs associated with the opening of new stores, including capital expenditures, inventory and pre-opening expenses have historically approximated $350,000 per store. These costs will be financed primarily from cash provided by operating activities, credit made available by suppliers to finance inventories and, if necessary, from the Company's bank line of credit. However, as opportunities evolve, the Company will redeploy assets of stores being closed to new stores in order to curtail the costs of opening new stores. Forward-Looking Statements This report contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, which are intended to be covered by safe harbors created hereby. Such forward-looking statements include those regarding the Company's future results in light of current management activities, and involve known and unknown risks, including competition within the craft retail industry, weather-related changes in the selling cycle, and other uncertainties (including those risk factors referenced in Company' filings with the Securities and Exchange Commission). Page 11of 12 RAG SHOPS, INC. AND SUBSIDIARIES PART II - OTHER INFORMATION Item 1. - 5. Not Applicable Item 6. Exhibits and Reports on Form 8-K (a) Exhibits - None (b) No reports on Form 8-K have been filed during the quarter for which this report is filed. 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. RAG SHOPS, INC. Date: July 9, 2001 s/ Stanley Berenzweig -------------------------- Stanley Berenzweig Chairman of the Board and Chief Executive Officer Date: July 9, 2001 /s/ Frederick A. Gunzel ----------------------------- Frederick A. Gunzel Principal Financial Officer and Principal Accounting Officer Page 12 of 12 <