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
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