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 2, 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 APRIL 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 - March 2, 2002
(unaudited), March 3, 2001 (unaudited) and September 1, 2001 3
Condensed consolidated statements of income - three and
six months ended March 2, 2002 (unaudited), and
March 3, 2001 (unaudited) 4
Condensed consolidated statements of cash flows - six months
ended March 2, 2002 (unaudited) and March
3, 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 4. Submission of Matters to a Vote of Security Holders 11
Item 6. Exhibits and Reports on Form 8-K 11
SIGNATURES 11
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RAG SHOPS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(All amounts in thousands)
March 2, March 3, September 1,
2002 2001 2001
---- ---- ----
(Unaudited) (Unaudited) (Note A)
ASSETS
CURRENT ASSETS:
Cash $ 5,964 $ 4,894 $ 953
Merchandise inventories 25,880 24,602 27,807
Prepaid expenses 460 415 1,194
Other current assets 520 95 154
Deferred taxes 855 852 855
------- ------- -------
Total current assets 33,679 30,858 30,963
Property and equipment, net 3,736 3,951 4,186
Deferred income taxes 436 350 436
Other assets 47 52 49
------- ------- -------
TOTAL ASSETS $ 37,898 $ 35,211 $ 35,634
======= ======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Accounts payable-trade $ 8,432 $ 6,388 $ 8,348
Accrued expenses and other current liabilities 2,931 2,634 2,680
Accrued salaries and wages 798 636 720
Income taxes payable 496 553 165
------- ------- -------
Total current liabilities 12,657 10,211 11,913
STOCKHOLDERS' EQUITY:
Common stock 48 48 48
Additional paid-in capital 6,236 6,242 6,238
Unamortized restricted stock awards - (8) (3)
Retained earnings 19,021 18,782 17,502
Treasury stock, at cost, 26,880 shares (64) (64) (64)
------- ------- -------
Total stockholders' equity 25,241 25,000 23,721
------- ------- -------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 37,898 $ 35,211 $ 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 Six Months Ended
------------------ ----------------
March 2, March 3, March 2, March 3,
2002 2001 2002 2001
---- ---- ---- ----
Net sales $ 28,931 $ 25,760 $ 61,483 $ 55,808
Cost of merchandise sold and
occupancy costs 19,095 16,765 39,366 35,370
------- ------- ------- -------
Gross profit 9,836 8,995 22,117 20,438
------- ------- ------- -------
Store expenses 6,759 6,284 14,110 13,095
General and administrative expenses 2,885 2,703 5,542 5,253
------- ------- ------- -------
Total operating expenses 9,644 8,987 19,652 18,348
------- ------- ------- -------
Income from operations 192 8 2,465 2,090
Interest income, net 20 64 25 84
------- ------- ------- -------
Income before provision for income
taxes 212 72 2,490 2,174
Provision for income taxes 83 28 971 848
------- ------- ------- -------
Net income 129 44 1,519 1,326
======= ======= ======= =======
EARNINGS PER COMMON SHARE:
Basic $ .03 $ .01 $ .32 $ .28
======= ======= ======= =======
Diluted $ .03 $ .01 $ .31 $ .28
======= ======= ======= =======
See notes to the condensed consolidated financial statements.
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RAG SHOPS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(All amounts in thousands)
Six Months Ended
----------------
March 2, 2002 March 3, 2001
-------------- -------------
Cash flows from operating activities:
Net income $ 1,519 $ 1,326
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 655 700
Loss on disposition of property and equipment 44 13
Amortization of restricted stock awards 1 4
Changes in assets and liabilities:
(Increase) decrease in:
Merchandise inventories 1,927 3,203
Prepaid expenses 734 68
Other current assets (366) 4
Other assets 2 15
Increase (decrease) in:
Accounts payable-trade 84 (1,375)
Accrued expenses and other current liabilities 226 609
Accrued salaries and wages 78 (257)
Income taxes payable 331 311
------- -------
Net cash provided by operating activities 5,235 4,621
------- -------
Cash flows from investing activities:
Payments for purchases of property and equipment (224) (1,038)
------- -------
Net cash used in investing activities (224) (1,038)
------- -------
Cash flows from financing activities - -
------- -------
Net increase in cash 5,011 3,583
Cash, beginning of period 953 1,311
------- -------
Cash, end of period $ 5,964 $ 4,894
======= =======
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ - $ -
======= =======
Income taxes $ 640 $ 523
======= =======
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 2, 2002 AND MARCH 3, 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 six months ended March 2, 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 Six Months Ended
------------------ ----------------
March 2, March 3, March 2, March 3,
2002 2001 2002 2001
---- ---- ---- ----
Numerator for basic and diluted
earnings per share:
Net income $ 129,000 $ 44,000 $ 1,519,000 $ 1,326,000
========= ========== ========== ===========
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 41,938 6,942 24,164 4,100
--------- ---------- ---------- -----------
Denominator for diluted earnings per
share-adjusted weighted average
shares and assumed conversions 4,841,121 4,808,525 4,823,347 4,805,683
========= ========== ========== ===========
Basic earnings per share $ .03 $ .01 $ .32 $ .28
========= ========== ========== ===========
Diluted earnings per share $ .03 $ .01 $ .31 $ .28
========= ========== ========== ===========
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.
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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 Six Months Ended
------------------ ----------------
March 2, March 3, March 2, March 1,
2002 2001 2002 2001
---- ---- ---- ----
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of merchandise sold and
occupancy costs 66.0 65.1 64.0 63.4
------- ------- -------- --------
Gross profit 34.0 34.9 36.0 36.6
Store expenses 23.3 24.4 23.0 23.5
General and administrative expenses 10.0 10.5 9.0 9.4
------- ------- -------- --------
Income from operations 0.7 - 4.0 3.7
------- ------- -------- --------
Net income 0.4% 0.2% 2.5% 2.4%
======= ======= ======== ========
Revenue is recognized when merchandise is sold to customers. The Company's net
sales increased $3,171,000 and $5,675,000 for the three and six months ended
March 2, 2002, representing a 12.3% and 10.2% increase, respectively, over the
comparable prior periods. Of the $3,171,000 increase in net sales for the three
months ended March 2, 2002, $1,775,000 was due to a 7.2% increase in comparable
store sales over the prior comparable period principally the result of an
acceleration of holiday seasonal merchandise sales. The $1,396,000 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 six months
ended March 2, 2002 was attributable to a $2,072,000, or 3.9%, increase in
comparable store sales, plus new store sales, net of sales reductions from
closed stores, of $3,603,000.
Gross profit, as a percent of net sales, decreased by 0.9% and 0.6% for the
three and six months ended March 2, 2002, respectively, as compared to the prior
comparable periods. These changes were due principally to increases in clearance
markdowns and secondarily to freight costs. Higher markdowns were incurred in
connection with management's decision to increase materially the extent of its
seasonal clearance program and thereby reduce the amount of holiday seasonal
inventory at the end of the period. The increase in freight is the result of an
increase in purchases.
Store expenses for the three and six months ended March 2, 2002 increased
$475,000 and $1,015,000, respectively, from the comparable prior periods.
Additional payroll and payroll related expenses were the primary cause of the
increase and additional advertising expense was secondary. Payroll and related
expenses rose in support of larger stores and higher sales, the latter augmented
by growth in advertising frequency and penetration, which resulted in the higher
advertising expense. As a percent of net sales, store expenses decreased 1.1%
and 0.5% for the three and six months ended March 2, 2002, respectively, because
of the Company's ability to continue to leverage these expenses against the
increase in net sales.
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RAG SHOPS, INC. AND SUBSIDIARIES
General and administrative expenses increased $182,000 and $289,000, and, as a
percentage of net sales, declined 0.5% and 0.4% versus the prior comparable
periods for the three and six months ended March 2, 2002, respectively. The
increases for both reporting periods are primarily due to additional payroll and
related expenses incurred predominantly in connection with key executive and
management positions that were vacant in the prior comparable periods. The
reductions in general and administrative expenses as a percent of net sales are
principally the result of the ability of the Company to also continue to
leverage these expenses against increases in net sales.
Interest income, net decreased $44,000 and $59,000 from the prior comparable
periods for the three and six months ended March 2, 2002, respectively, due to
the continued fall in interest rates on short-term investments in the current
fiscal year-to-date periods compared to relative interest rate stability during
the prior comparable periods. The diminution in interest rates was partially
offset by an increase in average investment levels during the quarter ended
March 2, 2002, as compared to the prior comparable quarter. See "Liquidity and
Capital Resources".
Net income increased $85,000 and $193,000 for the three and six months ended
March 2, 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.
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 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 six
months ended March 2, 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 $1,972,000 for the six months ended
March 2, 2002 as compared to the September 1, 2001 amount primarily because the
Company reduced its inventory and 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. The credit facility was renewed in January
2002 for the year 2002. Borrowings under the line of credit bear interest at the
bank's prime rate (4.75% at March 2, 2002). The credit facility requires the
Company to maintain a compensating balance of $400,000 in addition
Page 9 of 11
RAG SHOPS, INC. AND SUBSIDIARIES
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 six month periods ended March 2,
2002 and March 3, 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 six months ended March 2, 2002
amounted to $5,235,000, and $224,000 was used for purchases of property and
equipment. Net cash from operating activities increased primarily due to net
income of $1,519,000, depreciation of $655,000, and decreases in merchandise
inventories of $1,927,000 and prepaid expenses of $734,000. During the six
months ended March 2, 2002 the Company opened one store, closed one store 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 three
additional new stores and closing one store.
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 retail craft and fabric 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 24,
2002. Ms. Judith Lombardo was elected a Class II Director by a vote of
4,537,803 shares in favor and 1,450 shares withheld, Mr. Mario Ciampi was
elected a Class II Director by a vote of 4,537,803 shares in favor and 1,450
shares withheld, and Mr. Jeffrey Gerstel was elected a Class II Director by a
vote of 4,539,253 shares in favor and no shares withheld. The firm of Grant
Thornton LLP was ratified as auditors for the Company's fiscal year ending
August 31, 2002 by a vote of 4,537,484 in favor, 1,050 against and 719
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 4, 2002 /s/ Stanley Berenzweig
---------------------------
Stanley Berenzweig
Chairman of the Board and
Chief Executive Officer
Date: April 4, 2002 /s/ Frederick A. Gunzel
-----------------------------
Frederick A. Gunzel
Principal Financial Officer and
Principal Accounting Officer
Page 11 of 11