[10Q2-01]
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 March 3, 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 MARCH 30, 2001
Common stock, par value $.01 4,801,583
Page 1 of 11
RAG SHOPS, INC. AND SUBSIDIARIES
INDEX
Page
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed consolidated balance sheets - March 3, 2001
(unaudited), February 26, 2000 (unaudited) and
September 2, 2000 3
Condensed consolidated statements of income - three
and six months ended March 3, 2001 (unaudited) and
February 26, 2000 (unaudited) 4
Condensed consolidated statements of cash flows - six
months ended March 3, 2001 (unaudited) and February
26, 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 8-10
Part II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders 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)
March 3, February September
26, 2,
2001 2000 2000
---- ---- ----
(Unaudited) (Unaudited) (Note A)
ASSETS
------
CURRENT ASSETS:
Cash $ 4,894 $ 4,803 $ 1,311
Merchandise inventories 24,602 23,198 27,805
Prepaid expenses 415 312 483
Other current assets 95 146 99
Deferred taxes 852 805 852
------- -------- -------
Total current assets 30,858 29,264 30,550
Property and equipment, net 3,951 3,862 3,613
Deferred income taxes 350 212 350
Other assets 52 58 67
------- -------- -------
TOTAL ASSETS $35,211 $33,396 $34,580
======= ======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
CURRENT LIABILITIES:
Accounts payable-trade $ 6,388 $ 5,484 $ 7,763
Accrued expenses and other current
liabilities 2,634 2,447 2,012
Accrued salaries and wages 636 709 893
Income taxes payable 553 844 242
------- -------- ------
Total current liabilities 10,211 9,484 10,910
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock - - -
Common stock 48 48 48
Additional paid-in capital 6,242 6,268 6,242
Unamortized restricted stock awards (8) (96) (12)
Retained earnings 18,782 17,756 17,456
Treasury stock, at cost, 26,880 shares (64) (64) (64)
------- ------- -------
Total stockholders' equity 25,000 23,912 23,670
------- ------- -------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $35,211 $33,396 $34,580
======= ======= =======
Note A: Derived from the September 2, 2000 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 Six Months Ended
March 3, February 26, March 3, February 26,
2001 2000 2001 2000
---- ---- ---- ----
Net sales $25,760 $26,492 $55,808 $54,678
Cost of merchandise sold and 16,765 16,914 35,370 34,381
occupancy costs
------- ------- ------- ------
Gross profit 8,995 9,578 20,438 20,297
------- ------- ------- ------
Store expenses 6,225 6,291 12,988 12,579
General and administrative 2,762 2,473 5,360 5,190
expenses
------- ------- ------- ------
Total operating operating expenses 8,987 8,764 18,348 17,769
------- ------- ------- ------
Income from operations 8 814 2,090 2,528
Interest income (expense), net 64 36 84 (72)
------- ------- ------- ------
Income before provision for
income taxes and cumulative effect
of change in accounting principle 72 850 2,174 2,456
Provision for income taxes 28 332 848 958
------- ------- ------- ------
Income before cumulative effect of
change in accounting principle 44 518 1,326 1,498
Cumulative effect of change in
accounting principle, net of
income tax effect of $127 - - - 198
------- ------- ------- ------
Net income $ 44 $ 518 $ 1,326 $ 1,696
======= ======= ======= ======
BASIC AND DILUTED EARNINGS PER
COMMON SHARE:
Income before cumulative effect of
change in accounting principle $ .01 $ .11 $ .28 $ .31
Cumulative effect of change in
accounting principle - - - .04
------- ------- ------ ------
Net income $ .01 $ .11 $ .28 $ .35
======= ======= ====== ======
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)
Six Months Ended
March 3, February 26,
2001 2000
----- ----
Cash flows from operating activities:
Net income $ 1,326 $ 1,696
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 700 675
Loss on disposition of property and
equipment 13 14
Amortization of restricted stock awards 4 112
Cumulative effect of accounting change - (325)
Changes in assets and liabilities:
(Increase) decrease in:
Merchandise inventories 3,203 7,690
Prepaid expenses 68 225
Other current assets 4 79
Other assets 15 45
Increase (decrease) in:
Accounts payable-trade (1,375) (445)
Accrued expenses and other current
liabilities 609 (29)
Accrued salaries and wages (257) 104
Income taxes payable 311 687
------- ------
Net cash provided by operating
activities 4,621 10,528
------- ------
Cash flows from investing activities:
Payments for purchases of property and
equipment (1,038) (89)
------- ------
Net cash used in investing activities (1,038) (89)
------- -------
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 3,583 3,869
Cash, beginning of period 1,311 934
------- -------
Cash, end of period $ 4,894 $ 4,803
======= =======
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ - $ 197
======= =======
Income taxes $ 523 $ 353
======= =======
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 SIX MONTHS ENDED MARCH 3, 2001 AND FEBRUARY 26, 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 six months ended March 3, 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 Six Months Ended
March 3, February March 3, February
26, 26,
2001 2000 2001 2000
---- ---- ---- ----
Numerator:
Income before cumulative
effect of change in
accounting $ 44,000 $ 518,000 $1,326,000 $1,498,000
Cumulative effect of
change in accounting - - - 198,000
-------- --------- --------- ---------
Net income $ 44,000 $ 518,000 $1,326,000 $1,696,000
======== ========= ========= =========
Denominator:
Denominator for basic
earnings per share-weighted
average shares 4,801,583 4,810,883 4,801,583 4,810,883
Effect of dilutive securities:
Employee stock options 6,942 - 4,100 20
--------- ---------- ---------- ----------
Denominator for diluted
earnings per share-adjusted
weighted average shares
and assumed conversions 4,808,525 4,810,883 4,805,683 4,810,903
========= ========== ========== ==========
Page 6 of 11
RAG SHOPS, INC. AND SUBSIDIARIES
Three Months Ended Six Months Ended
March 3, February March 3, February
26, 26,
2001 2000 2001 2000
---- ---- ---- ----
Basic and diluted earnings per share:
Income before cumulative effect
of change in accounting $ .01 $ .11 $ .28 $ .31
Cumulative effect of change
in accounting - - - .04
------- ------- -------- ------
Net income $ .01 $ .11 $ .28 $ .35
======= ======= ======== ======
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 11
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 Six Months Ended
March 3, February March 3, February
26, 26,
2001 2000 2001 2000
---- ---- ---- ----
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of merchandise sold
and occupancy costs 65.1 63.8 63.4 62.9
------ ------- ------ ------
Gross profit 34.9 36.2 36.6 37.1
Store expenses 24.2 23.8 23.3 23.0
General and administrative 10.7 9.3 9.6 9.5
expenses
------ ------- ------- ------
Income from operations - 3.1 3.7 4.6
------ ------- ------- ------
Income before cumulative
effect of change in
accounting .2 2.0 2.4 2.7
Cumulative effect of change
in accounting - - - .4
------ ------- ------- ------
Net income .2% 2.0% 2.4% 3.1%
====== ======= ======= ======
The Company's net sales decreased by $732,000 and increased by $1,130,000 for
the three and six months ended March 3, 2001 representing a decrease of 2.8% and
an increase of 2.1%, respectively, over the comparable prior periods. The
decrease in net sales was due to a decrease in comparable store sales of
$795,000 or 3.1% over the comparable prior period which was attributable to a
shift in the accounting calendar that resulted in the historically high sales
week after Thanksgiving falling into the first quarter of the current year as
compared to the second quarter of last year. The increase in net sales was
attributable to an increase in comparable store sales of $1,581,000 or 3.0% over
the comparable prior period. On a week-for-week aligned basis, sales from stores
opened at least one year improved 3.6% and 2.3% for the three and six months
ended March 31, 2001, respectively.
Gross profit as a percentage of net sales decreased by 1.3% for the three months
ended March 3, 2001, from the comparable prior period due to the decrease in net
sales accompanied by an increase in occupancy costs and an increase in freight
costs, as a result of a planned increase in seasonal merchandise purchases and
an increase in freight rates. Gross profit as a percentage of net sales
decreased by .5% for the six months ended March 3, 2001 from the comparable
prior period primarily due to an increase in freight costs as mentioned above.
Page 8 of 11
RAG SHOPS, INC. AND SUBSIDIARIES
Store expenses decreased by $66,000 for the three months ended March 3, 2001
from the comparable prior period principally due to a decrease in advertising
costs, as a result of the shift in the accounting calendar for Thanksgiving
sales as mentioned above and an increase in vendor participation, partially
offset by an increase in payroll and payroll related expenses attributable to
new stores opened in the current fiscal year. As a percentage of net sales,
store expenses increased by .4% from the comparable prior period due to the
decrease in net sales. Store expenses increased by $409,000, and as a percentage
of net sales, increased by .3% for the six months ended March 3, 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, partially offset by a decrease in advertising costs as a
result of an increase in vendor participation.
General and administrative expenses increased by $289,000 and $170,000 for the
three and six months ended March 3, 2001, respectively, over the comparable
prior periods primarily due to the operation of a secondary distribution center
to facilitate the flow of additional imported seasonal merchandise for the
entire six months of this fiscal year as compared to only the first four months
of last fiscal year. As a percentage of net sales, general and administrative
expenses increased 1.4% for the three months ended March 3, 2001 from the
comparable prior period as a result of the increase in general and
administrative expenses accompanied by the decrease in net sales and remained
relatively constant for the six months ended March 3, 2001 from the comparable
prior period as the Company was able to leverage these expenses against the
increase in net sales.
Interest income, net increased by $28,000 and $156,000 for the three and six
months ended March 3, 2001 from the comparable prior periods primarily due to
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 by $474,000 for the three months ended March 3, 2001 as
compared to the comparable prior period due to decreases in comparable stores
sales and gross profit, in addition to an increase in general and administrative
expenses. Net income decreased $370,000 for the six months ended March 3, 2001
compared to the prior period as a result of an increase in operating expenses
and, in the prior year, the cumulative effect of change in accounting principle
that was partially offset by an increase in comparable store sales and the
increase in interest income, net.
Seasonality
The Company's business is seasonal, which the Company believes is typical of the
retail fabric and craft industry. The Company's highest sales and earnings
levels historically 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.
Page 9 of 11
RAG SHOPS, INC. AND SUBSIDIARIES
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 six
months ended March 3, 2001, the Company relied on internally generated funds and
credit made available by suppliers to finance inventories and new store
openings. During the six months ended February 26, 2000 the Company also relied
on short-term borrowings.
The Company's working capital has increased $1,007,000 for the six months ended
March 3, 2001 as compared to the September 2, 2000 amount primarily as a result
of the Company retaining its net income for this period.
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 (8.50% at March 3, 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 six months ended
March 3, 2001 and February 26, 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.
Net cash provided by operating activities for the six months ended March 3, 2001
and February 26, 2000 amounted to $4,621,000 and $10,528,000, respectively, and
$1,038,000 and $89,000, respectively, was used for purchases of property and
equipment. During the six months ended March 3, 2001 the Company opened three
new stores, closed three existing stores and was operating sixty-five stores at
the end of the period. During the remainder of the fiscal year ending September
1, 2001 the Company anticipates opening two additional new stores 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, the Company will redeploy assets of stores being closed to the new
stores as opportunities evolve 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 10 of 11
RAG SHOPS, INC. AND SUBSIDIARIES
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
The Annual Meeting of Stockholders of the Company was held on January 25,
2001. Mr. Stanley Berenzweig was elected a Class I Director by a vote of
4,597,078 shares in favor and 24,045 shares withheld, Mr. Fred J. Damiano was
elected a Class I Director by a vote of 4,530,178 shares in favor and 90,945
shares withheld and Mr. Mario Ciampi was elected a Class II Director by a vote
of 4,595,878 shares in favor and 25,245 shares withheld. The firm of Grant
Thornton LLP was ratified as auditors for the Company's fiscal year ending
September 1, 2001 by a vote of 4,588,995 in favor, 26,168 against and 10,960
abstaining.
No other matters were considered by the Stockholders at said Annual Meeting.
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: April 9, 2001 s/ Stanley Berenzweig
--------------------------
Stanley Berenzweig
Chairman of the Board and
Chief Executive Officer
Date: April 9, 2001 /s/ Steven B. Barnett
---------------------------
Steven B. Barnett
Principal Financial Officer and
Principal Accounting Officer
Page 11 of 11