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 2, 2000
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 for such 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 2, 2000
Common stock, par value $.01 4,801,583
<PAGE>
RAG SHOPS, INC. AND SUBSIDIARIES
INDEX
Page
PART 1 - FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed consolidated balance sheets - December 2,
2000 (unaudited), November 27, 1999 (unaudited) and
September 2, 2000 3
Condensed consolidated statements of income - three
months ended December 2, 2000 (unaudited) and
November 27, 1999 (unaudited) 4
Condensed consolidated statements of cash flows - three months
ended December 2, 2000 (unaudited) and November 27, 1999
(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>
RAG SHOPS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(All amounts in thousands)
December 2, November 27, September 2,
2000 1999 2000
---- ---- ----
(Unaudited)(Unaudited) (Note A)
ASSETS
------
CURRENT ASSETS:
Cash $ 6,314 $ 2,286 $ 1,311
Merchandise inventories 26,086 27,207 27,805
Prepaid expenses 302 226 483
Other current assets 222 329 99
Deferred income taxes 852 805 852
------ --------- ---------
Total current assets 33,776 30,853 30,550
Property and equipment, net 3,770 4,186 3,613
Deferred income taxes 350 212 350
Other assets 63 64 67
------ ------- ---------
TOTAL ASSETS $37,959 $ 35,315 $ 34,580
======= ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Note payable-bank $ - $ 1,145 $ -
Accounts payable-trade 8,395 6,417 7,763
Accrued expenses and other current
liabilities 2,914 2,872 2,012
Accrued salaries and wages 704 708 893
Income taxes payable 992 835 242
------ --------- --------
Total current liabilities 13,005 11,977 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 (10) (151) (12)
Retained earnings 18,738 17,237 17,456
Treasury stock, at cost, 26,880 shares (64) (64) (64)
------ ------- -------
Total stockholders' equity 24,954 23,338 23,670
------ ------- -------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $37,959 $ 35,315 $ 34,580
====== ======= =======
Note A: Derived from the September 2, 2000 audited balance sheet.
See notes to the condensed consolidated financial statements.
<PAGE>
RAG SHOPS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(All amounts in thousands, except share data)
Three Months Ended
------------------
December 2, November 27,
2000 1999
Net sales $30,048 $28,186
Cost of merchandise sold and occupancy costs 18,606 17,467
------ ------
Gross profit 11,442 10,719
------ ------
Store expenses 6,762 6,288
General and administrative expenses 2,598 2,717
----- -----
Total operating expenses 9,360 9,005
------ -----
Income from operations 2,082 1,714
Interest income (expense), net 19 (108)
------ -----
Income before provision for income taxes and
cumulative effect of change in accounting
principle 2,101 1,606
Provision for income taxes 819 626
------ -----
Income before cumulative effect of change in
accounting principle 1,282 980
Cumulative effect of change in accounting
principle, net of income tax effect of $127 - 198
------ -----
Net income $ 1,282 $ 1,178
========= ======
Basic and diluted earnings per common share:
Income before cumulative effect of change in
accounting principle $ .27 $ .20
Cumulative effect of change in accounting
principle - .04
--------- -------
Net income $ .27 $ .24
======== =======
See notes to the condensed consolidated financial statements.
<PAGE>
RAG SHOPS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(All amounts in thousands)
Three Months Ended
December 2, November 27,
2000 1999
Cash flows from operating activities:
Net income $ 1,282 $ 1,178
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 347 330
Amortization of restricted stock awards 2 56
Cumulative effect of change in accounting - (325)
principle
Changes in assets and liabilities:
(Increase) decrease in:
Merchandise inventories 1,719 3,681
Prepaid expenses 181 310
Other current assets (123) (104)
Other assets 4 40
Increase (decrease) in:
Accounts payable-trade 632 489
Accrued expenses and other current liabilities 902 367
Accrued salaries and wages (189) 103
Income taxes payable 750 678
----- -----
Net cash provided by operating activities 5,507 6,803
----- -----
Cash flows from investing activities:
Payments for purchases of property and equipment (504) (26)
----- ------
Net cash used in investing activities (504) (26)
----- ------
Cash flows from financing activities:
Proceeds from issuance of note payable-bank - 5,305
Repayments of note payable-bank - (10,730)
----- ------
Net cash used in financing activities - (5,425)
----- -------
Net increase in cash 5,003 1,352
Cash, beginning of period 1,311 934
----- -----
Cash, end of period $ 6,314 $ 2,286
====== ======
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ - $ 101
======= =======
Income taxes $ 58 $ 28
======= =======
See notes to the condensed consolidated financial statements.
<PAGE>
RAG SHOPS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED DECEMBER 2, 2000 AND NOVEMBER 27, 1999
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 months ended December 2, 2000 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
December 2, November 27,
2000 1999
Numerator for basic and diluted earnings per share:
Income before cumulative effect of
change in accounting principle $ 1,282,000 $ 980,000
Cumulative effect of change in
accounting principle,
net of income taxes - 198,000
Net income $ 1,282,000 $1,178,000
========== =========
Denominator:
Denominator for basic earnings
per share-weighted average shares 4,801,583 4,810,883
Effect of dilutive securities:
Employee stock options 3,509 123
------ -----
Denominator for diluted earnings
per share-adjusted weighted average
shares and assumed conversions 4,805,092 4,811,006
========== =========
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RAG SHOPS, INC. AND SUBSIDIARIES
Three Months Ended
December 2, November 27,
2000 1999
Basic and diluted earnings per share:
Income before cumulative effect
of change in accounting principle $ .27 $ .20
Cumulative effect of change in
accounting principle - .04
Net income $ .27 $ .24
======= ======
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>
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
December 2, November 27,
2000 1999
Net sales 100.0% 100.0%
Cost of merchandise sold and
occupancy costs 61.9 62.0
---- ----
Gross profit 38.1 38.0
Store expenses 22.5 22.3
General and administrative expenses 8.7 9.7
---- ---
Income from operations 6.9 6.0
--- ---
Income before cumulative effect
of change in accounting principle 4.3 3.5
Cumulative effect of change in
accounting principle - 0.7
---- ---
Net income 4.3% 4.2%
=== ===
The Company's net sales increased by $1,862,000 or 6.6% for the three month
ended December 2, 2000 as compared to the three months ended November 27, 1999.
The improvement in net sales was due to an increase in sales from stores opened
at least one year of $2,376,000 or 8.7%, partially offset by $514,000 for the
impact of four stores which closed throughout last fiscal year net of one new
store which opened during the first quarter of the current year. Net sales for
the three months ended December 2, 2000 benefited from 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 the prior year. On a week-for-week aligned basis, sales from stores
opened at least one year improved by 1.2%.
Gross profit as a percentage of net sales remained relatively constant for the
three months ended December 2, 2000 as compared to the three month period ended
November 27, 1999.
Store expenses increased by $474,000 for the three months ended December 2, 2000
as compared to the three months ended November 27, 1999. The increase was
principally due to an increase in payroll and payroll related expenses in
support of higher sales and an increase in advertising expenses related to the
shift in the accounting calendar. As a percentage of net sales, store expenses
increased by only 0.2% for the three months ended December 2, 2000, as compared
to the three months ended November 27, 1999 primarily due to the increase in
advertising expenses.
General and administrative expenses declined by $119,000 and, as a percentage of
net sales, declined by 1.0% for the three months ended December 2, 2000, as
compared to the three months ended November 27, 1999. The decline in general
<PAGE>
RAG SHOPS, INC. AND SUBSIDIARIES
and administrative expenses was primarily attributable to lower professional
fees. As a percentage of net sales, the decrease in general and administrative
expenses was principally the result of the lower professional fees and the
ability of the Company to leverage expenses against the increase in net sales.
Interest income, net increased by $127,000 due to income earned on short-term
investments during the three months ended December 2, 2000 as compared to
interest expense incurred on our line of credit for the three months ended
November 27, 1999. See "Liquidity and Capital Resources".
Net income increased by $104,000 for the three months ended December 2, 2000 as
compared to the three months ended November 27, 1999 due to increases in
comparable stores sales and gross profit, a decrease in general and
administrative expenses and an increase in interest income, net, partially
offset by higher store expenses and the cumulative effect of change in
accounting principle of $198,000 in the prior year.
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 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.
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 2, 2000, the Company relied on internally generated
funds and credit made available by suppliers to finance inventories and new
store openings. During the three months ended November 27, 1999 the Company also
utilized short-term borrowings to finance inventories and new store openings.
The Company's working capital increased by $1,131,000 for the three months ended
December 2, 2000 as compared to the September 2, 2000 amount, primarily as a
result of the Company retaining its net income for this period and reducing its
inventory partially offset by increases in trade payables, income taxes payable
and accrued expenses.
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 (9.50% at December 2, 2000). The line of
credit was renewed in December 2000 for the year 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 three months
<PAGE>
RAG SHOPS, INC. AND SUBSIDIARIES
ended December 2, 2000 and November 27, 1999, 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 three months ended December 2,
2000 and November 27, 1999 amounted to $5,507,000 and $6,803,000, respectively,
and used $504,000 and $26,000, respectively, for purchases of property and
equipment. During the three months ended December 2, 2000 the Company opened one
new store, did not close any 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 two additional new store openings and
closing three stores. 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 re-deploy 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's
filings with the Securities and Exchange Commission).
<PAGE>
Page 11 of 11
[10Q3-00]
RAG SHOPS, INC. AND SUBSIDIARIES
PART II - OTHER INFORMATION
Items 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 16, 2001 /s/ Stanley Berenzweig
---------------------------
Stanley Berenzweig
Chairman Of The Board and
Principal Executive Officer
Date: January 16, 2001 /s/ Stephen Provenzano
----------------------------
Stephen Provenzano
Principal Financial Officer and
Principal Accounting Officer
