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 November 27, 1999
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 24, 1999
Common stock, par value $.01 4,810,883
Page 1 of 12
<PAGE>
RAG SHOPS, INC. AND SUBSIDIARIES
INDEX
Page
PART 1 - FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed consolidated balance sheets - November 27, 1999
(unaudited), November 28, 1998 (unaudited) and August 28, 1999 3
Condensed consolidated statements of income - three months
ended November 27, 1999 (unaudited) and November 28, 1998
(unaudited) 4
Condensed consolidated statements of cash flows - three
months ended November 27, 1999 (unaudited) and November 28,
1998 (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
<PAGE>
RAG SHOPS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(All amounts in thousands)
November 27, November 28, August 28,
1999 1998 1999
---- ---- ----
(Unaudited) (Unaudited) (Note A)
ASSETS
Current assets:
Cash $ 2,286 $ 4,577 $ 934
Merchandise inventories 27,207 24,624 30,563
Prepaid expenses 226 408 536
Other current assets 329 145 225
Deferred taxes 805 707 805
------- ------- -------
Total current assets 30,853 30,461 33,063
Property and equipment, net 4,186 4,257 4,490
Other assets 276 329 316
------- ------- -------
$35,315 $35,047 $37,869
======= ======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Note payable-bank $ 1,145 $ - $ 6,570
Accounts payable trade 6,417 7,609 5,928
Accrued expenses and other
current liabilities 2,872 2,834 2,505
Accrued salaries and wages 708 734 605
Income taxes payable 835 751 157
Current portion of long-term debt
- 368 -
------- ------- ------
Total current liabilities 11,977 12,296 15,765
Stockholders' equity:
Preferred stock - - -
Common Stock 48 45 48
Additional paid-in capital 6,268 6,039 6,268
Unamortized restricted stock awards (151) - (207)
Retained earnings 17,237 16,667 16,059
Treasury stock, at cost (64) - (64)
------ ------ ------
Total stockholders' equity 23,338 22,751 22,104
------ ------ ------
$35,315 $35,047 $37,869
======= ======= =======
Note A: Derived from the August 28, 1999 audited balance sheet.
See notes to the condensed consolidated financial statements.
Page 3 of 12
<PAGE>
RAG SHOPS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(All amounts in thousands, except share data)
Three Months Ended
November 27, November 28,
1999 1998
---- ----
Net sales $ 28,186 $ 26,695
Cost of merchandise sold and occupancy costs 17,467 16,678
-------- --------
Gross profit 10,719 10,017
-------- -------
Store expenses 6,139 5,751
General and administrative expenses 2,866 2,583
-------- --------
Total operating expenses 9,005 8,334
-------- --------
Income from operations 1,714 1,683
Interest expense, net 108 28
-------- --------
Income before income taxes and cumulative
effect of change in accounting 1,606 1,655
Provision for income taxes 626 646
-------- --------
Income before cumulative effect of
change in accounting 980 1,009
Cumulative effect of change in accounting for
merchandise inventories, net of income taxes 198 -
-------- --------
Net income $ 1,178 $ 1,009
======== ========
EARNINGS PER COMMON SHARE:
Basic and diluted
Income before cumulative effect of
change in accounting $ .20 $ .21
Cumulative effect of change in accounting .04 -
-------- --------
Net Income $ .24 $ .21
======== ========
See notes to the condensed consolidated financial statements.
Page 4 of 12
<PAGE>
RAG SHOPS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(All amounts in thousands)
Three Months Ended
November 27, November 28,
1999 1998
---- ----
Cash flows from operating activities:
Net income $ 1,178 $ 1,009
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 330 337
Amortization of restricted stock awards 56 -
Cumulative effect of accounting change (325) -
Changes in assets and liabilities:
(Increase) decrease in:
Merchandise inventories 3,681 1,835
Prepaid expenses 310 124
Other current assets (104) (68)
Other assets 40 (9)
Increase (decrease) in:
Accounts payable-trade 489 1,054
Accrued expenses and other current liabilities 367 858
Accrued salaries and wages 103 116
Income taxes payable 678 507
-------- --------
Net cash provided by operating activities 6,803 5,763
-------- --------
Cash flows from investing activities:
Payments for purchases of property and
equipment (26) (267)
-------- --------
Net cash used in investing activities (26) (267)
-------- --------
Cash flows from financing activities:
Proceeds from issuance of note-payable bank 5,305 6,595
Repayments of note payable-bank (10,730) (8,230)
Repayments of long-term debt - (180)
-------- --------
Net cash used in financing activities (5,425) (1,815)
-------- --------
Net increase in cash 1,352 3,681
Cash, beginning of period 934 896
-------- --------
Cash, end of period $ 2,286 $ 4,577
======== ========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 101 $ 9
======== ========
Income taxes $ 28 $ 13
======== ========
See notes to the condensed consolidated financial statements.
Page 5 of 12
<PAGE>
RAG SHOPS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED NOVEMBER 27, 1999 AND NOVEMBER 28, 1998
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 period. Since the Company's business is seasonal, the operating
results for the three months ended November 27, 1999 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 thereto included in the Company's Annual Report on Form
10-K filed with the Securities and Exchange Commission in November 1999.
Certain reclassifications have been made to prior year amounts in order to
conform with 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
November 27, November 28,
1999 1998
---- ----
Numerator:
Income before cumulative effect of
change in accounting $ 980,000 $1,009,000
Cumulative effect of change in accounting 198,000 -
---------- ----------
Net income $1,178,000 $1,009,000
========== ==========
Denominator:
Denominator for basic earnings per share-
weighted average shares 4,810,883 4,740,063
Effect of dilutive securities:
Employee stock options 123 19,428
---------- ----------
Denominator for diluted earnings per share-
adjusted weighted average shares and assumed
conversions 4,811,006 4,759,491
========== ==========
Page 6 of 12
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RAG SHOPS, INC. AND SUBSIDIARIES
Basic earnings per share:
Income before cumulative effect of
change in accounting $ .20 $ .21
Cumulative effect of change in accounting .04 -
--------- ---------
Net income $ .24 $ .21
========= =========
Diluted earnings per share:
Income before cumulative effect of
change in accounting $ .20 $ .21
Cumulative effect of change in accounting .04 -
--------- ---------
Net income $ .24 $ .21
========= =========
Earnings per share calculations for the three months ended November 28, 1998 has
been adjusted to give retroactive effect to the 5% stock dividend on the
Company's common stock declared by the Company on June 28, 1999 which was paid
on August 10, 1999 to stockholders of record on July 14, 1999.
NOTE 3 - CHANGE IN ACCOUNTING PRINCIPLE
Effective August 29, 1999, the Company changed its method of calculating ending
merchandise inventories under the retail inventory method. Prior to August 29,
1999, the Company utilized an average cost-to-retail ratio to value ending
inventory. In fiscal year 2000, 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 first quarter fiscal
2000 profit, net of income taxes, by approximately $198,000.
NOTE 4 - ADOPTION OF ACCOUNTING STANDARDS
In April 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Position No. 98-5 "Reporting on the Costs of Start-Up Activities"
("SOP"). This SOP requires the costs associated with start-up activities, such
as opening a new store, be expensed as incurred. Effective August 29, 1999 the
Company adopted this SOP. The adoption of this SOP did not have any effect on
the Company's results of operations.
Page 7 of 12
<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
----------------------
November 27, November 28,
1999 1998
---- ----
Net sales 100.0% 100.0%
Cost of merchandise sold and occupancy costs 62.0 62.5
----- -----
Gross profit 38.0 37.5
Store expenses 21.8 21.5
General and administrative expenses 10.2 9.7
----- -----
Income from operations 6.0 6.3
Income before cumulative effect of change
in accounting 3.5 3.8
Cumulative effect of change in accounting 0.7 -
Net income 4.2% 3.8%
===== =====
The Company's net sales increased by $1,491,000 or 5.6% for the three months
ended November 27, 1999 over the comparable prior period due to new store sales
of $2,287,000 offset by decreases in comparable store sales of $74,000 or .3%
and closed store sales in the comparable prior period of $722,000.
Gross profit as a percentage of net sales increased by .5% for the three months
ended November 27, 1999 from the comparable prior period primarily due to a
decrease in promotional markdowns that was partially offset by an increase in
occupancy costs principally attributable to the five new stores opened, net of
two stores closed, in the prior fiscal year.
Store expenses increased by $388,000 and as a percentage of net sales increased
by .3% for the three months ended November 27, 1999 from the comparable prior
period. The increase in store expenses and as a percentage of net sales was
primarily due to an increase in payroll and payroll related expenses that was
principally due to new stores opened in the prior fiscal year.
General and administrative expenses increased by $283,000 and as a percentage of
net sales increased .5% for the three months ended November 27, 1999 over the
comparable prior period. The increase in general and administrative expenses was
primarily due to an increase in professional fees.
Interest expense, net increased by $80,000 for the three months ended November
27, 1999 from the comparable prior period as a result of the higher borrowings
on the Company's line of credit to finance the planned inventory build up that
was initiated in the third fiscal quarter ended May 29, 1999.
The effective tax rates for the three months ended November 27, 1999 and
November 28, 1998 were estimated at 39.0%.
Page 8 of 12
<PAGE>
RAG SHOPS, INC. AND SUBSIDIARIES
Income before cumulative effect of the change in accounting principle decreased
by $29,000 for the three months ended November 27, 1999 as compared to the
comparable prior period. This decrease is due to an increase in operating
expenses and interest expense partially offset by an increase in gross profit.
Net income for the three months ended November 27, 1999 increased by $169,000
due to the cumulative effect of change in accounting for merchandise
inventories, net of income taxes, of approximately $198,000 which was partially
offset by the decrease of $29,000 in income before the change in accounting
principle.
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.
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 November 27, 1999 and the comparable prior period, the
Company relied on internally generated funds, short-term borrowings and credit
made available by suppliers to finance inventories and new store openings.
The Company's working capital has increased $1,578,000 for the three months
ended November 27, 1999 as compared to the August 28, 1999 amount as a result of
the Company retaining its net income for this period.
The Company maintains a 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 line of credit was increased from $8,000,000 to
$10,000,000 for the remainder of the year 1999 on August 31, 1999 and in
December 1999 renewed for the year 2000 at $10,000,000. Borrowings under the
line of credit bear interest at the bank's prime rate (8.50% at November 27,
1999). 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 $7,490,000 and
$2,330,000 for the three months ended November 27, 1999 and November 28, 1998,
respectively. The Company intends to maintain the availability of a line of
credit for working capital requirements and in order to be able to take
advantage of future opportunities.
Page 9 of 12
<PAGE>
RAG SHOPS, INC. AND SUBSIDIARIES
Net cash provided by operating activities for the three months ended November
27, 1999 and November 28, 1998 amounted to $6,803,000 and $5,763,000,
respectively, and $26,000 and $267,000, respectively, was used for purchases of
property and equipment. During the three months ended November 27, 1999 there
were no new stores opened or existing stores closed. The Company expects to open
an additional three new stores and close three existing stores during the
current fiscal year. Costs associated with the opening of new stores, including
capital expenditures, inventory and pre-opening expenses, have 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.
Year 2000 Readiness Disclosure
To conduct its business efficiently, the Company relies on several critical
information technology ("IT") systems for functions including point-of-sale
operations, inventory control, financial and accounting management,
communications, purchasing, records retention, and general administrative
procedures. Beginning in 1997, the Company began an internal review of its IT
systems to ensure their viability in light of the highly-publicized "Year 2000"
problem. The Company has also begun to assess other, non-IT systems (such as
security and electrical) to identify potential Year 2000 issues that may arise
from embedded chip technology. Because the Company's use of internal systems
that include such technology is limited, management does not expect its non-IT
systems to pose a material Year 2000 issue.
Concurrently, management has been undertaking a general reevaluation of the
Company's IT systems in its effort to enhance efficiency and increase
profitability in a highly competitive marketplace. In several cases, this
modernization program has allowed management to address Year 2000 compliance
issues by entirely replacing certain obsolete technology with new systems that
are Year 2000-compliant. Among the systems whose modernization is completed or
underway are those controlling inventory, purchasing, point-of-sale data and
central administration.
As part of this review, management has also communicated with its most important
suppliers and other vendors to ensure their Year 2000 compliance. The Company is
cooperating with these vendors to upgrade certain software and maintain Year
2000 compliance both internally and externally.
Management believes that its efforts has allowed the Company to be fully Year
2000-compliant, including allowances for integrated testing. Management has
allowed for further time in the event certain system elements need additional
upgrading. However, management believes that this possibility is unlikely as
much of the necessary work has already been completed and tested.
The Company completed and implemented its contingency plan in early December of
the current fiscal year in the event there is an interruption of key internal or
external services. In particular the Company's plan establishes alternatives in
the event of any disturbance in external telecommunications,
Page 10 of 12
<PAGE>
RAG SHOPS, INC. AND SUBSIDIARIES
electric power, financial or transportation networks. Although at this time the
Company cannot estimate the impact of an interruption in any of these services,
it is possible that a sustained disruption would materially affect the Company's
operations and financial results.
Since most of the Company's Year 2000 compliance expenses have arisen in the
context of a general IT modernization, these remediation costs did not rise to a
material level.
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 11 of 12
<PAGE>
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 - Exhibit 18
(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 3, 2000 /s/ Stanley Berenzweig
Stanley Berenzweig
Chairman Of The Board and
Principal Executive Officer
Date: January 3, 2000 /s/ Steven B. Barnett
Steven B. Barnett
Principal Financial Officer and
Principal Accounting Officer
Page 12 of 12
<PAGE>
Exhibit 18
December 22, 1999
Rag Shops, Inc.
111 Wagaraw Road
Hawthorne, New Jersey 07506
At your request, we have read the description included in your Quarterly Report
on Form 10-Q to the Securities and Exchange Commission for the quarter ended
November 27, 1999, of the facts relating to the change from using an average
cost-to-retail ratio to value ending inventory to a method that weights the
cost-to-retail ratio using multiple inventory categories. We believe, on the
basis of the facts so set forth and other information furnished to us by
appropriate officials of the Company, that the accounting change described in
your Form 10-Q is to an alternative accounting principle that is preferable
under the circumstances.
We have not audited any consolidated financial statements of Rag Shops, Inc. and
its consolidated subsidiaries as of any date or for any period subsequent to
August 28, 1999. Therefore, we are unable to express, and we do not express, an
opinion on the facts set forth in the above-mentioned Form 10-Q, on the related
information furnished to us by officials of the Company, or on the financial
position, results of operations, or cash flows of Rag Shop, Inc. and its
consolidated subsidiaries as of any date or for any period subsequent to August
28, 1999.
Yours truly,
/s/ Deloitte & Touche LLP
Parsippany, New Jersey
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-2-2000
<PERIOD-START> AUG-29-1999
<PERIOD-END> NOV-27-1999
<CASH> 2,286,000
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 27,207,000
<CURRENT-ASSETS> 30,853,000
<PP&E> 15,507,000
<DEPRECIATION> 11,321,000
<TOTAL-ASSETS> 35,315,000
<CURRENT-LIABILITIES> 11,977,000
<BONDS> 0
0
0
<COMMON> 48,000
<OTHER-SE> 23,290,000
<TOTAL-LIABILITY-AND-EQUITY> 35,315,000
<SALES> 28,186,000
<TOTAL-REVENUES> 28,186,000
<CGS> 17,467,000
<TOTAL-COSTS> 26,472,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 108,000
<INCOME-PRETAX> 1,606,000
<INCOME-TAX> 626,000
<INCOME-CONTINUING> 980,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 198,000
<NET-INCOME> 1,178,000
<EPS-BASIC> .24
<EPS-DILUTED> .24
</TABLE>
