10-Q 1 a10q3-02e.txt FORM 10Q 3RD QUARTER 2002 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 1, 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 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 JULY 1, 2002 Common stock, par value $.01 4,799,183 RAG SHOPS, INC. AND SUBSIDIARIES INDEX Page PART I - FINANCIAL INFORMATION Item 1. Financial Statements Condensed consolidated balance sheets - June 1, 2002 (unaudited), June 2, 2001 (unaudited) and September 1, 2001 3 Condensed consolidated statements of income - three and nine months ended June 1, 2002 (unaudited), and June 2, 2001 (unaudited) 4 Condensed consolidated statements of cash flows - nine months ended June 1, 2002 (unaudited) and June 2, 2001 (unaudited) 5 Notes to condensed consolidated financial statements 6-7 Item 2. Management's Discussion and Analysis of Financial 8-10 Condition and Results of Operations Part II - OTHER INFORMATION Item 1. - 5. 11 Item 6. Exhibits and Reports on Form 8-K 11 SIGNATURES 11 Page 2 of 11 RAG SHOPS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (All amounts in thousands)
June 1, June 2, September 1, 2002 2001 2001 ---- ---- ---- (Unaudited) (Unaudited) (Note A) ASSETS CURRENT ASSETS: Cash $ 4,347 $ 4,097 $ 953 Merchandise inventories 26,293 24,308 27,807 Prepaid expenses 777 489 1,194 Other current assets 362 200 154 Deferred taxes 855 852 855 ------- ------- ------- Total current assets 32,634 29,946 30,963 Property and equipment, net 3,714 3,863 4,186 Deferred income taxes 436 350 436 Other assets 48 51 49 ------- ------- ------- TOTAL ASSETS $ 36,832 $ 34,210 $ 35,634 ======= ======= ======= LIABILITIES AND STOCKHOLDERS' EQUITY ------------------------------------ CURRENT LIABILITIES: Accounts payable-trade $ 7,355 $ 5,846 $ 8,348 Accrued expenses and other current liabilities 2,841 2,374 2,680 Accrued salaries and wages 764 655 720 Income taxes payable 541 287 165 ------- ------- ------- Total current liabilities 11,501 9,162 11,913 STOCKHOLDERS' EQUITY: Common stock 48 48 48 Additional paid-in capital 6,236 6,242 6,238 Unamortized restricted stock awards - (6) (3) Retained earnings 19,111 18,828 17,502 Treasury stock, at cost, 26,880 shares (64) (64) (64) ------- ------- ------- Total stockholders' equity 25,331 25,048 23,721 ------- ------- ------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 36,832 $ 34,210 $ 35,634 ======= ======= =======
Note A: Derived from the September 1, 2001 audited balance sheet. See notes to the condensed consolidated financial statements. Page 3 of 11 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 1, June 2, June 1, June 2, 2002 2001 2002 2001 ---- ---- ---- ---- Net sales $ 25,523 $ 23,692 $ 87,006 $ 79,500 Cost of merchandise sold and occupancy costs 16,199 15,313 55,565 50,683 ------- ------- ------- ------- Gross profit 9,324 8,379 31,441 28,817 ------- ------- ------- ------- Store expenses 6,282 6,049 20,392 19,144 General and administrative expenses 2,908 2,288 8,450 7,541 ------- ------- ------- ------- Total operating expenses 9,190 8,337 28,842 26,685 ------- ------- ------- ------- Income from operations 134 42 2,599 2,132 Interest income, net 14 34 39 117 ------- ------- ------- ------- Income before provision for income taxes 148 76 2,638 2,249 Provision for income taxes 58 30 1,029 877 ------- ------- ------- ------- Net income $ 90 $ 46 $ 1,609 $ 1,372 ======= ======= ======= ======= EARNINGS PER COMMON SHARE: Basic $ .02 $ .01 $ .34 $ .29 ======= ======= ======= ======= Diluted $ .02 $ .01 $ .33 $ .29 ======= ======= ======= =======
See notes to the condensed consolidated financial statements. Page 4 of 11 RAG SHOPS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (All amounts in thousands)
Nine Months Ended ----------------- June 1, 2002 June 2, 2001 ------------- ------------ Cash flows from operating activities: Net income $ 1,609 $ 1,372 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 990 1,069 Loss on disposition of property and equipment 56 13 Amortization of restricted stock awards 1 6 Changes in assets and liabilities: (Increase) decrease in: Merchandise inventories 1,514 3,497 Prepaid expenses 417 (6) Other current assets (208) (101) Other assets 1 16 Increase (decrease) in: Accounts payable-trade (993) (1,917) Accrued expenses and other current liabilities 161 362 Accrued salaries and wages 44 (238) Income taxes payable 376 45 ------- ------- Net cash provided by operating activities 3,968 4,118 ------- ------- Cash flows from investing activities: Proceeds from sale of property and equipment - 6 Payments for purchases of property and equipment (574) (1,338) ------- ------- Net cash used in investing activities (574) (1,332) ------- ------- Cash flows from financing activities - - ------- ------- Net increase in cash 3,394 2,786 Cash, beginning of period 953 1,311 ------- ------- Cash, end of period $ 4,347 $ 4,097 ======= ======= Supplemental disclosures of cash flow information: Cash paid during the period for: Interest $ - $ - ======= ======= Income taxes $ 65 $ 818 ======= =======
See notes to the condensed consolidated financial statements Page 5 of 11 RAG SHOPS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS THREE AND NINE MONTHS ENDED JUNE 1, 2002 AND JUNE 1, 2001 NOTE 1 - BASIS OF PRESENTATION The accompanying financial statements are unaudited, but in the opinion of management reflect all adjustments, which consist of 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 1, 2002 are not necessarily indicative of results for other quarters or 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 1, 2001 filed with the Securities and Exchange Commission in December 2001. 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 1, June 2, June 1, June 2, 2002 2001 2002 2001 ---- ---- ---- ---- Numerator for basic and diluted earnings per share: Net income $ 90,000 $ 46,000 $ 1,609,000 $ 1,372,000 ========= ========== ========== =========== Denominator: Denominator for basic earnings per share-weighted average shares 4,799,183 4,801,583 4,799,183 4,801,583 Effect of dilutive securities: Employee stock options 77,021 5,182 45,588 4,422 --------- ---------- ---------- ----------- Denominator for diluted earnings per share-adjusted weighted average shares and assumed conversions 4,876,204 4,806,765 4,844,771 4,806,005 ========= ========== ========== =========== Basic earnings per share $ .02 $ .01 $ .34 $ .29 ========= ========== ========== =========== Diluted earnings per share $ .02 $ .01 $ .33 $ .29 ========= ========== ========== ===========
Page 6 of 11 In addition to the stock options included in the above calculation, options to purchase additional shares of common stock were outstanding as follows: Number Exercise Price of Shares From To Three months ended: June 1, 2002 2,250 $ 11.76 June 2, 2002 116,300 $ 2.85 $ 11.76 Nine months ended: June 1, 2002 12,250 $ 3.49 $ 11.76 June 2, 2002 116,300 $ 2.85 $ 11.76 These stock options were not included in the computation of diluted income per share because their exercise price was greater than the average market price of the Company's common stock and, therefore, the effect of such inclusion would be anti-dilutive. 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. Page 7 of 11 RAG SHOPS, INC. AND SUBSIDIARIES Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 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 1, June 2, June 1, June 2, 2002 2001 2002 2001 ---- ---- ---- ---- Net sales 100.0% 100.0% 100.0% 100.0% Cost of merchandise sold and occupancy costs 63.5 64.6 63.9 63.8 ------- ------- -------- -------- Gross profit 36.5 35.4 36.1 36.2 Store expenses 24.6 25.5 23.4 24.1 General and administrative expenses 11.4 9.7 9.7 9.5 ------- ------- -------- -------- Income from operations 0.5 0.2 3.0 2.6 ------- ------- -------- -------- Net income 0.4% 0.2% 1.8% 1.7% ======= ======= ======== ========
The Company's net sales increased $1,831,000 and $7,506,000 for the three and nine months ended June 1, 2002, representing a 7.7% and 9.4% increase, respectively, over the comparable prior periods. The increase in net sales for the three months ended June 1, 2002 was due to an increase in comparable store sales of $1,188,000 or 5.2% over the prior comparable period principally due to better in-stock position, introduction of new products, improved merchandise display and positive industry trends that resulted in increases in both average sale and customer transactions during the current period. The $643,000 balance of the increase represents sales related to new store openings, net of sales reductions from closed stores. The increase in net sales for the nine months ended June 1, 2002 was attributable to a $3,260,000 or 4.3% increase in comparable store sales, for the same reasons cited above in addition to strong Christmas season sales earlier in the year, plus new store sales, net of sales reductions from closed stores, of $4,246,000. Gross profit, as a percent of net sales, increased by 1.1% for the three months ended June 1, 2002 as compared to the prior comparable periods. This change was due principally to a reduction in merchandise markdowns. Gross profit as a percent of net sales for the nine months ended June 1, 2002 remained relatively unchanged. Store expenses for the three and nine months ended June 1, 2002 increased $233,000 and $1,248,000, respectively, from the comparable prior periods. Additional payroll and payroll related expenses were the primary reasons for the increase and rose in support of larger stores and higher sales. As a percent of net sales, store expenses decreased 0.9% and 0.7% for the three and nine months ended June 1, 2002, respectively, because of the Company's ability to continue to leverage these expenses against the increase in net sales. Page 8 of 11 RAG SHOPS, INC. AND SUBSIDIARIES General and administrative expenses increased $620,000 and $909,000, and, as a percentage of net sales, increased 1.7% and 0.2% versus the prior comparable periods for the three and nine months ended June 1, 2002, respectively. The increase for the three months ended June 1, 2002 was primarily attributable to higher insurance expenses incurred in connection with adverse market conditions and, to a lesser extent, additional payroll and payroll related expenses incurred predominantly in connection with key executive and management positions that were vacant in the prior comparable period. These two elements also caused the increase in general and administrative expenses for the nine month reporting period. However, since the majority of the Company's insurance policies renewed during the third quarter and market conditions did not have an impact until the renewal date, the insurance increase was not as great as the increase in payroll and payroll related expenses on a year-to-date basis. Interest income, net decreased $20,000 and $78,000 from the prior comparable periods for the three and nine months ended June 1, 2002, respectively, due to the material fall in interest rates on short-term investments in the first half of the current fiscal year compared to relative interest rate stability and higher interest rate availability during the prior comparable period. The diminution in interest rates was partially offset by an increase in average investment levels during the quarters ended March 2, 2002 and June 1, 2002, as compared to the prior comparable periods. See "Liquidity and Capital Resources". Net income increased $44,000 and $237,000 for the three and nine months ended June 1, 2002, as compared to the prior comparable periods, due to the increases in net sales, partially offset by increases in operating expenses and decreases in interest income, net. The current quarter increase in net income was also aided by an improvement in gross profit as a percent of net sales. 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 1, 2002, the Company relied on internally generated funds and credit made available by suppliers to finance inventories and new store openings. The Company's working capital increased $2,083,000 for the nine months ended June 1, 2002 as compared to the September 1, 2001 amount primarily because the Company reduced its inventory and retained its net income for this period. Page 9 of 11 RAG SHOPS, INC. AND SUBSIDIARIES 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 (4.75% at June 1, 2002). 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. There were no borrowings under the line during either of the nine-month periods ended June 1, 2002 and June 2, 2001. 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. Net cash provided by operating activities for the nine months ended June 1, 2002 amounted to $3,968,000, and $574,000 was used for purchases of property and equipment. Net cash from operating activities increased primarily due to net income of $1,609,000, depreciation of $990,000, decreases in merchandise inventories of $1,514,000 and prepaid expenses of $417,000, and an increase in income taxes payable of $376,000, partially offset by a decrease in accounts payable-trade of $993,000. During the nine months ended June 1, 2002 the Company opened two stores, closed two stores, and was operating sixty-six stores at the end of the period. During the remainder of the fiscal year ending August 31, 2002, the Company anticipates opening two additional new stores and closing none. Critical Accounting Policies Revenue is recognized when merchandise is sold to customers. 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. 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 and fabric 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 10 of 11 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 3, 2002 /s/ Stanley Berenzweig --------------------------- Stanley Berenzweig Chairman of the Board and Chief Executive Officer Date: July 3, 2002 /s/ Frederick A. Gunzel ----------------------------- Frederick A. Gunzel Principal Financial Officer and Principal Accounting Officer Page 11 of 11