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 December 1, 2001
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 DECEMBER 31, 2001
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 - December 1, 2001
(unaudited), December 2, 2000 (unaudited) and
September 1, 2001 3
Condensed consolidated statements of income - three months
ended December 1, 2001 (unaudited), and December 2, 2000
(unaudited) 4
Condensed consolidated statements of cash flows - three
months ended December 1, 2001 (unaudited) and December
2, 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
Items 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)
December 1, December 2, September 1,
----------- ---------- ------------
2001 2000 2001
---- ---- ----
(Unaudited) (Unaudited) (Note A)
ASSETS
------
CURRENT ASSETS:
Cash $ 6,320 $ 6,314 $ 953
Merchandise inventories 24,883 26,086 27,807
Prepaid expenses 445 302 1,194
Other current assets 447 222 154
Deferred taxes 855 852 855
--------- --------- ---------
Total current assets 32,950 33,776 30,963
Property and equipment, net 4,044 3,770 4,186
Deferred income taxes 436 350 436
Other assets 49 63 49
--------- --------- ---------
TOTAL ASSETS $ 37,479 $ 37,959 $ 35,634
========= ========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Accounts payable-trade $ 7,902 $ 8,395 $ 8,348
Accrued expenses and other current liabilities 3,244 2,914 2,680
Accrued salaries and wages 768 704 720
Income taxes payable 454 992 165
--------- --------- ---------
Total current liabilities 12,368 13,005 11,913
STOCKHOLDERS' EQUITY:
Common stock 48 48 48
Additional paid-in capital 6,236 6,242 6,238
Unamortized restricted stock awards (1) (10) (3)
Retained earnings 18,892 18,738 17,502
Treasury stock, at cost, 26,880 shares (64) (64) (64)
---------- ---------- ----------
Total stockholders' equity 25,111 24,954 23,721
--------- --------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 37,479 $ 37,959 $ 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
------------------
December 1, December 2,
2001 2000
---- ----
Net sales $ 32,552 $ 30,048
Cost of merchandise sold and occupancy costs 20,271 18,606
-------- --------
Gross profit 12,281 11,442
-------- --------
Store expenses 7,351 6,810
General and administrative expenses 2,657 2,550
-------- --------
Total operating expenses 10,008 9,360
-------- --------
Income from operations 2,273 2,082
Interest income, net 5 19
-------- --------
Income before provision for income taxes 2,278 2,101
Provision for income taxes 888 819
-------- --------
Net income $ 1,390 $ 1,282
======== ========
EARNINGS PER COMMON SHARE:
Basic and diluted $ .29 $ .27
======== ========
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)
Three Months Ended
------------------
December 1, 2001 December 2, 2000
----------------- ----------------
Cash flows from operating activities:
Net income $ 1,390 $ 1,282
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 326 347
Amortization of restricted stock awards - 2
Changes in assets and liabilities:
(Increase) decrease in:
Merchandise inventories 2,924 1,719
Prepaid expenses 749 181
Other current assets (293) (123)
Other assets - 4
Increase (decrease) in:
Accounts payable-trade (446) 632
Accrued expenses and other current liabilities 564 902
Accrued salaries and wages 48 (189)
Income taxes payable 289 750
--------- ---------
Net cash provided by operating activities 5,551 5,507
--------- ---------
Cash flows from investing activities:
Payments for purchases of property and equipment (184) (504)
--------- ---------
Net cash used in investing activities (184) (504)
--------- ---------
Cash flows from financing activities - -
--------- ---------
Net increase in cash 5,367 5,003
Cash, beginning of period 953 1,311
--------- ---------
Cash, end of period $ 6,320 $ 6,314
========= =========
Supplemental disclosures of cash flow information: Cash paid during the period
for:
Interest $ - $ -
========= =========
Income taxes $ 6 $ 58
========= =========
See notes to the condensed consolidated financial statements
Page 5 of 11
RAG SHOPS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED DECEMBER 1, 2001 AND DECEMBER 2, 2000
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 months ended December 1, 2001 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
------------------
December 1, December 2,
2001 2000
---- ----
Numerator for basic and diluted earnings per share:
Net income $ 1,390,000 $ 1,282,000
============= =============
Denominator:
Denominator for basic earnings per
share-weighted average shares 4,799,183 4,801,583
Effect of dilutive securities:
Employee stock options 1,590 3,509
------------- -------------
Denominator for diluted earnings per
share-adjusted weighted average
shares and assumed conversions 4,800,773 4,805,092
============= =============
Basic and diluted earnings per share $ .29 $ .27
============= =============
Stock options excluded from the above calculation, as the effect of such options
would be anti-dilutive, aggregated 76,250 for the three months ended December 1,
2001 and 166,300 for the three months ended December 2, 2000.
Page 6 of 11
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
------------------
December 1, December 2,
2001 2000
---- ----
Net sales 100.0% 100.0%
Cost of merchandise sold and
occupancy costs 62.3 61.9
---------- ----------
Gross profit 37.7 38.1
Store expenses 22.6 22.7
General and administrative expenses 8.1 8.5
---------- ----------
Income from operations 7.0 6.9
---------- ----------
Net income 4.3% 4.3%
========== ==========
The Company's net sales increased $2,504,000 or 8.3% for the three months ended
December 1, 2001 compared to the three months ended December 2, 2000. Of this
increase, $2,207,000 was due to sales related to new larger store openings, net
of sales reductions from closed smaller stores, and the balance represents an
increase in comparable store sales of $297,000 or 1% over the prior comparable
period.
Gross profit decreased 0.4% as a percentage of net sales for the current quarter
compared to the prior comparable period due primarily to an increase in
occupancy expenses because of higher square footage and rent costs of new stores
as compared to closed stores as well as contractual increases in rent for
existing stores and, secondarily, due to changes in the cost of merchandise.
Merchandise cost in the three months ended December 1, 2001 was effected by a
shift in the weighting of purchases toward domestic merchandise that carries a
higher cost than import merchandise.
Store expenses increased $541,000 for the three months ended December 1, 2001
and, as a percentage of net sales, decreased 0.1% compared to the three months
ended December 2, 2000. Additional payroll and payroll related expense in
support of higher sales and larger stores was the primary cause of the increase.
The decrease in store expenses as a percentage of net sales was principally due
to the ability of the Company to leverage expenses against the increase in net
sales.
For the three months ended December 1, 2001, general and administrative expenses
increased $107,000 and, as a percentage of net sales, decreased 0.4% compared to
the prior comparable period. The increase was primarily attributable to higher
payroll and payroll related expenses while the decline as a percentage of net
sales was principally a result of the ability to also leverage general and
administrative expenses against the increase in net sales.
Page 8 of 11
RAG SHOPS, INC. AND SUBSIDIARIES
Interest income, net decreased $15,000 due to the continued decline in interest
rates on short-term investments during the quarter ended December 1, 2001
compared to relative interest rate stability during the prior comparable
quarter. See "Liquidity and Capital Resources".
Net income increased $124,000 or 9.7% for the three months ended December 1,
2001 compared to the three months ended December 2, 2000 as a result of the
increase in net sales, partially offset by increases in store and general and
administrative expenses, and the decrease in interest income, net.
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
three months ended December 1, 2001, 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 $1,532,000 for the three months ended
December 1, 2001 as compared to the September 1, 2001 amount primarily because
the Company retained 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. At December 31, 2001 the credit line
facility was extended until March 31, 2002 pending annual renewal and management
expects that the credit facility will be renewed for an additional year.
Borrowings under the line of credit bear interest at the bank's prime rate
(5.00% at December 1, 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. There were no borrowings under the line
during either of the three month periods ended December 1, 2001 and December 2,
2000. 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 9 of 11
RAG SHOPS, INC. AND SUBSIDIARIES
Net cash provided by operating activities for the three months ended December 1,
2001 amounted to $5,551,000, and $184,000 was used for purchases of property and
equipment. Net cash from operating activities increased primarily due to net
income of $1,390,000 and a decrease in merchandise inventories of $2,924,000.
During the three months ended December 1, 2001 the Company opened one store and
was operating sixty-seven stores at the end of the period. During the remainder
of the fiscal year ending August 31, 2002, the Company anticipates opening at
least two additional new stores and closing two 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 thereby. 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 retail craft 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: January 11, 2002 /s/ Stanley Berenzweig
---------------------------
Stanley Berenzweig
Chairman of the Board and
Chief Executive Officer
Date: January 11, 2002 /s/ Frederick A. Gunzel
-----------------------------
Frederick A. Gunzel
Principal Financial Officer and
Principal Accounting Officer
Page 11 of 11