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 February 26, 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 MARCH 24, 2000
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 - February 26,
2000 (unaudited), February 27, 1999 (unaudited) and
August 28, 1999 3
Condensed consolidated statements of income - three
and six months ended February 26, 2000 (unaudited) and
February 27, 1999 (unaudited) 4
Condensed consolidated statements of cash flows -
six months ended February 26, 2000 (unaudited) and
February 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 8-11
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders 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)
February 26,February 27,August 28,
2000 1999 1999
---- ---- ----
(Unaudited) (Unaudited) (Note A)
ASSETS
Current assets:
Cash $ 4,803 $ 2,989 $ 934
Merchandise inventories 23,198 24,063 30,563
Prepaid expenses 312 376 536
Other current assets 146 252 225
Deferred taxes 805 707 805
------- ------- -------
Total current assets 29,264 28,387 33,063
Property and equipment, net 3,862 4,692 4,490
Other assets 270 283 316
------- ------- -------
$33,396 $33,362 $37,869
====== ====== ======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Note payable-bank $ - $ - $ 6,570
Accounts payable-trade 5,484 6,635 5,928
Accrued expenses and other current
liabilities 2,447 2,189 2,505
Accrued salaries and wages 709 667 605
Income taxes payable 844 669 157
Current portion of long-term debt - 197 -
------ ------ ------
Total current liabilities 9,484 10,357 15,765
Stockholders' equity:
Common Stock 48 45 48
Additional paid-in capital 6,268 6,039 6,268
Unamortized restricted stock awards (96) - (207)
Retained earnings 17,756 16,921 16,059
Treasury stock, at cost (64) - (64)
------ ------ ------
Total stockholders' equity 23,912 23,005 22,104
------ ------ ------
$33,396 $33,362 $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 Six Months Ended
February 26,February 27,February 26,February 27,
2000 1999 2000 1999
---- ---- ---- ----
Net sales $26,492 $25,061 $54,678 $51,756
Cost of merchandise sold and
occupancy costs 16,914 15,909 34,381 32,587
------ ------ ------ ------
Gross profit 9,578 9,152 20,297 19,169
------ ------ ------ ------
Store expenses 6,115 6,008 12,254 11,760
General and administrative
expenses 2,649 2,741 5,515 5,324
------ ------ ------ ------
Total operating expenses 8,764 8,749 17,769 17,084
------ ------ ------ ------
Income from operations 814 403 2,528 2,085
Interest income (expense), net 36 15 (72) (13)
------ ------ ------ ------
Income before income taxes and
cumulative effect of change in
accounting 850 418 2,456 2,072
Provision for income taxes 332 164 958 809
------ ------ ------ ------
Income before cumulative effect
of change in accounting 518 254 1,498 1,263
Cumulative effect of change in
accounting for merchandise
inventories, net of income taxes - - 198 -
------ ------ ------ ------
Net income $ 518 $ 254 $ 1,696 $ 1,263
====== ====== ====== ======
EARNINGS PER COMMON SHARE :
Basic and diluted
Income before cumulative effect
of change in accounting $ .11 $ .05 $ .31 $ .27
Cumulative effect of change in
accounting - - .04 -
------ ------ ------ ------
Net income $ .11 $ .05 $ .35 $ .27
====== ====== ====== ======
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)
Six Months Ended
February 26, 2000 February 27, 1999
Cash flows from operating activities:
Net income $ 1,696 $ 1,263
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 675 685
Loss on disposition of property and equipment 14 20
Amortization of restricted stock awards 112 -
Cumulative effect of accounting change (325) -
Changes in assets and liabilities:
(Increase) decrease in:
Merchandise inventories 7,690 2,396
Prepaid expenses 225 156
Other current assets 79 (175)
Other assets 45 37
Increase (decrease) in:
Accounts payable-trade (445) 80
Accrued expenses and other current liabilities (29) 224
Accrued salaries and wages 104 49
Income taxes payable 687 425
------ ------
Net cash provided by operating activities 10,528 5,160
------ ------
Cash flows from investing activities:
Payments for purchases of property and equipment (89) (1,070)
------ ------
Net cash used in investing activities (89) (1,070)
------ ------
Cash flows from financing activities:
Proceeds from issuance of note payable-bank 5,805 6,595
Repayments of note payable-bank (12,375) (8,230)
Repayments of long-term debt - (362)
------ ------
Net cash used in financing activities (6,570) (1,997)
------ ------
Net increase in cash 3,869 2,093
Cash, beginning of period 934 896
------ ------
Cash, end of period $ 4,803 $ 2,989
====== ======
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 197 $ 47
====== ======
Income taxes $ 353 $ 258
====== ======
See notes to the condensed consolidated financial statements.
Page 5 of 12
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RAG SHOPS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE AND SIX MONTHS ENDED FEBRUARY 26, 2000 AND FEBRUARY 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 period. Since the Company's business is seasonal, the operating
results for the three and six months ended February 26, 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 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 Six Months Ended
February 26,February 27, February 26,February 27,
2000 1999 2000 1999
---- ---- ---- ----
Numerator:
Income before cumulative effect
of change in accounting $ 518,000 $ 254,000 $1,498,000 $1,263,000
Cumulative effect of change in
accounting - - 198,000 -
----------- ----------- ----------- -----------
Net income $ 518,000 $ 254,000 $1,696,000 $1,263,000
========== ======== ========= =========
Denominator:
Denominator for basic earnings
per share-weighted average
shares 4,810,883 4,740,063 4,810,883 4,740,063
Effect of dilutive securities:
Employee stock options - 18,272 20 18,731
--------- --------- --------- ----------
Denominator for diluted earnings per
share-adjusted weighted average
shares and assumed conversions 4,810,883 4,758,335 4,810,903 4,758,794
========= ========= ========= =========
Page 6 of 12
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RAG SHOPS, INC. AND SUBSIDIARIES
Three Months Ended Six Months Ended
February 26,February 27, February 26,February 27,
2000 1999 2000 1999
---- ---- ---- ----
Basic earnings per share:
Income before cumulative
effect of change in
accounting $ .11 $ .05 $ .31 $ .27
Cumulative effect of
change in accounting - - .04 -
--------- ------------ ------------- -----------
Net income $ .11 $ .05 $ .35 $ .27
=========== ============ ============ ============
Diluted earnings per share:
Income before cumulative
effect of change
in accounting $ .11 $ .05 $ .31 $ .27
Cumulative effect of
change in accounting - - .04 -
---------- ------------ ------------ ------------
Net income $ .11 $ .05 $ .35 $ .27
=========== ============ ============ ============
Earnings per share calculations for the three and six months ended February 27,
1999 have 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
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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 Six Months Ended
February 26,February 27,February 26, February 27,
2000 1999 2000 1999
---- ---- ---- ----
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of merchandise sold and
occupancy costs 63.8 63.5 62.9 63.0
----- ----- ----- -----
Gross profit 36.2 36.5 37.1 37.0
Store expenses 23.1 24.0 22.4 22.7
General and administrative expenses 10.0 10.9 10.1 10.3
----- ----- ----- -----
Income from operations 3.1 1.6 4.6 4.0
Income before cumulative effect of
change in accounting 2.0 1.0 2.7 2.4
Cumulative effect of change in
accounting - - .4 -
Net income 2.0% 1.0% 3.1% 2.4%
==== ===== ==== =====
The Company's net sales increased by $1,431,000 and $2,922,000 for the three and
six months ended February 26, 2000 representing an increase of 5.7% and 5.6%,
respectively, over the comparable prior periods due to new store sales of
$1,324,000 and $3,611,000, respectively, in addition to increases in comparable
store sales of $732,000 or 3.1% and $657,000 or 1.3%, respectively, over the
comparable prior periods, and closed store sales of $625,000 and $1,346,000 for
the three and six month periods, respectively. The increase in comparable store
sales was primarily attributable to strong December sales.
Gross profit as a percentage of net sales decreased by .3% for the three months
ended February 26, 2000, from the comparable prior period primarily due to an
increase in occupancy costs, principally attributable to the five new stores
opened in the prior fiscal year, and promotional markdowns. These amounts were
partially offset by an improvement in the initial markup of inventory purchases
due to an increase in the mix of direct imports, which are more profitable than
domestic purchases. Gross profit as a percentage of net sales increased by .1%
for the six months ended February 26, 2000 from the comparable prior period due
to an increase in the initial markup, offset by an increase in occupancy costs,
as mentioned above.
Store expenses increased by $107,000 and $494,000 for the three and six months
ended February 26, 2000, respectively, from the comparable prior period, due to
an increase in payroll and payroll related expenses that were principally
attributable to new stores opened net of closed stores in the prior fiscal year.
As a percentage of net sales, store expenses decreased by .9% and .3% for the
three and six months ended February 26, 2000, respectively, over the comparable
prior period as these expenses were leveraged against the increase in net sales.
General and administrative expenses decreased by $92,000 and .9% as a percentage
of net sales for the three months ended February 26, 2000, over the comparable
prior period principally due to
Page 8 of 12
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RAG SHOPS, INC. AND SUBSIDIARIES
the reduction of costs in our distribution center operation. General and
administrative expense increased $191,000 for the six months ended February
26,2000 primarily due to an increase in professional fees. As a percentage of
net sales, general and administrative expenses decreased .2% from the comparable
prior period as the Company was able to leverage these expenses against the
increase in net sales.
Interest income, net increased by $21,000 for the three months ended February
26, 2000 from the comparable prior period due to an increase in cash provided by
operating activities. Interest expense, net increased by $59,000 for the six
months ended February 26, 2000 from the comparable prior period as a result of
higher borrowings on the Company's line of credit in the first fiscal quarter,
partially offset by the increase in interest income as previously mentioned. See
"Liquidity and Capital Resources".
Net income increased by $264,000 for the three months ended February 26, 2000 as
compared to the comparable prior period due to an increase in comparable stores
sales and a decrease in general and administrative expenses, that was partially
offset by an increase in store expenses. Net income increased $433,000 for the
six months ended February 26, 2000 compared to the prior period as a result of
increases in comparable stores sales, gross profit and the cumulative effect of
change in accounting for merchandise inventories, that was partially offset by
an increase in operating expenses.
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 six
months ended February 26, 2000 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 $2,482,000 for the six months ended
February 26, 2000 as compared to the August 28, 1999 amount primarily as a
result of the Company retaining its net income for this period and the reduction
in merchandise inventories net of the bank line of credit repayment.
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 (8.75% at February 26, 2000). The credit
facility requires the Company to maintain a compensating balance of $400,000 in
addition to certain financial covenants. The Company has satisfied its line of
credit clean-up provision for year 2000 during the three months ended February
26, 2000. 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 six months ended February 26, 2000
and
Page 9 of 12
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RAG SHOPS, INC. AND SUBSIDIARIES
February 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 six months ended February 26,
2000 and February 27, 1999 amounted to $10,528,000 and $5,160,000, respectively,
and $89,000 and $1,070,000, respectively, was used for purchases of property and
equipment. During the six months ended February 26, 2000 the Company did not
open any new stores, closed two existing stores and was operating sixty-seven
stores at the end of the period. During the remainder of the fiscal year ending
September 2, 2000 the Company anticipates no new store openings, closing two
additional stores and resume opening new stores in the ensuing 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 were to be 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,
electric power, financial or transportation networks. As of the date of this
filing, the Company has not experienced any disturbances or interruption in its
ability to transact business with its suppliers or customers as a result of the
Year 2000 transition.
Page 10 of 12
<PAGE>
RAG SHOPS, INC. AND SUBSIDIARIES
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
Item 4. Submission of Matters to a Vote of Security Holders
The Annual Meeting of Shareholders of the Company was held on January 27,
2000. Mr. Steven Barnett was elected a Class III Director by a vote of
4,575,134 shares in favor and 48,823 shares withheld, Mr. Evan Berenzweig was
elected a Class III Director by a vote of 4,575,333 shares in favor and
48,624 shares withheld and Mr. Alan Mintz was also elected a Class III
Director by a vote of 4,575,396 shares in favor and 48,561 shares withheld.
The firm of Deloitte & Touche, LLP was ratified as auditors for the Company's
fiscal year ending September 2, 2000 by a vote of 4,603,930 in favor, 16,103
against and 3,924 abstaining.
No other matters were considered by the Shareholders 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: March 30, 2000 /s/ Stanley Berenzweig
Stanley Berenzweig
Chairman Of The Board and
Principal Executive Officer
Date: March 30, 2000 /s/ Steven B. Barnett
Steven B. Barnett
Principal Financial Officer and
Principal Accounting Officer
Page 12 of 12
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> SEP-2-2000
<PERIOD-START> AUG-29-1999
<PERIOD-END> FEB-26-2000
<CASH> 4,803,000
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 23,198,000
<CURRENT-ASSETS> 29,264,000
<PP&E> 15,368,000
<DEPRECIATION> 11,506,000
<TOTAL-ASSETS> 33,396,000
<CURRENT-LIABILITIES> 9,484,000
<BONDS> 0
0
0
<COMMON> 48,000
<OTHER-SE> 23,864,000
<TOTAL-LIABILITY-AND-EQUITY> 33,396,000
<SALES> 54,678,000
<TOTAL-REVENUES> 54,678,000
<CGS> 34,381,000
<TOTAL-COSTS> 52,150,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 72,000
<INCOME-PRETAX> 2,456,000
<INCOME-TAX> 958,000
<INCOME-CONTINUING> 1,498,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 198,000
<NET-INCOME> 1,696,000
<EPS-BASIC> .35
<EPS-DILUTED> .35
</TABLE>
