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 May 27, 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 JUNE 23, 2000
Common stock, par value $.01 4,819,883
Page 1 of 11
<PAGE>
RAG SHOPS, INC. AND SUBSIDIARIES
INDEX
Page
PART 1 - FINANCIAL INFORMATION
Item 1.Financial Statements
Condensed consolidated balance sheets - May 27,
2000 (unaudited), May 29, 1999 (unaudited) and
August 28, 1999 3
Condensed consolidated statements of income - three
and nine months ended May 27, 2000 (unaudited) and
May 29, 1999 (unaudited) 4
Condensed consolidated statements of cash flows -
nine months ended May 27, 2000 (unaudited) and
May 29, 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 2 of 11
<PAGE>
<TABLE>
<CAPTION>
RAG SHOPS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(All amounts in thousands)
<S> <C> <C> <C>
May 27, May 29, August 28,
2000 1999 1999
---- ---- ----
(Unaudited) (Unaudited) (Note A)
ASSETS
Current assets:
Cash $ 4,764 $ 778 $ 934
Merchandise inventories 23,270 27,262 30,563
Prepaid expenses 608 405 536
Other current assets 163 103 225
Deferred taxes 805 707 805
------- ------- -------
Total current assets 29,610 29,255 33,063
Property and equipment, net 3,690 4,731 4,490
Other assets 270 307 316
------- ------- -------
$33,570 $34,293 $37,869
====== ====== ======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Note payable-bank $ - $ - $ 6,570
Accounts payable-trade 5,535 7,851 5,928
Accrued expenses and other current
liabilities 2,333 2,355 2,505
Accrued salaries and wages 798 657 605
Income taxes payable 686 503 157
------- ------- -------
Total current liabilities 9,352 11,366 15,765
Stockholders' equity:
Common Stock 48 45 48
Additional paid-in capital 6,285 6,039 6,268
Unamortized restricted stock awards (56) - (207)
Retained earnings 18,005 16,843 16,059
Treasury stock, at cost (64) - (64)
--------- ----------- --------
Total stockholders' equity 24,218 22,927 22,104
------ ------ ------
$33,570 $34,293 $37,869
====== ====== ======
</TABLE>
Note A: Derived from the August 28, 1999 audited balance sheet.
See notes to the condensed consolidated financial statements.
Page 3 of 11
<PAGE>
<TABLE>
<CAPTION>
RAG SHOPS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(All amounts in thousands, except share data)
Three Months Ended Nine Months Ended
May 27, May 29, May 27, May 29,
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales $22,730 $22,430 $77,408 $74,186
Cost of merchandise sold and
occupancy costs 14,677 14,861 49,058 47,448
------ ------ ------ ------
Gross profit 8,053 7,569 28,350 26,738
------ ------ ------ ------
Store expenses 5,125 5,179 17,379 16,939
General and administrative
expenses 2,581 2,534 8,096 7,858
------ ------ ------ ------
Total operating expenses 7,706 7,713 25,475 24,797
------ ------ ------ ------
Income (loss) from operations 347 (144) 2,875 1,941
Interest income (expense), net 62 15 (10) 2
-------- -------- --------- ----------
Income (loss) before income taxes
and cumulative effect of change in
accounting 409 (129) 2,865 1,943
Income tax provision (benefit) 159 (51) 1,117 758
------- ---------- ------- -------
Income (loss) before cumulative effect
of change in accounting 250 (78) 1,748 1,185
Cumulative effect of change in
accounting for merchandise
inventories, net of income taxes - - 198 -
---------- --------- ------- -----------
Net income (loss) $ 250 $ (78) $ 1,946 $ 1,185
======= ========== ======== ========
EARNINGS (LOSS) PER COMMON
SHARE:
Basic and diluted
Income (loss) before cumulative effect
of change in accounting $ .05 $ (.02) $ .36 $ .25
Cumulative effect of change in
accounting - - .04 -
------- --------- -------- --------
Net income (loss) $ .05 $ (.02) $ .40 $ .25
======= ========== ======== ========
</TABLE>
See notes to the condensed consolidated financial statements.
Page 4 of 11
<PAGE>
<TABLE>
<CAPTION>
RAG SHOPS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(All amounts in thousands)
Nine Months Ended
May 27, 2000 May 29, 1999
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 1,946 $ 1,185
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 1,020 1,035
Loss on disposition of property and equipment 14 25
Amortization of restricted stock awards 169 -
Cumulative effect of accounting change (325) -
Changes in assets and liabilities:
(Increase) decrease in:
Merchandise inventories 7,618 (803)
Prepaid expenses (72) 127
Other current assets 62 (26)
Other assets 46 13
Increase (decrease) in:
Accounts payable-trade (393) 1,296
Accrued expenses and other current liabilities (141) 379
Accrued salaries and wages 193 39
Income taxes payable 529 259
------- -------
Net cash provided by operating activities 10,666 3,529
------ ------
Cash flows from investing activities:
Payments for purchases of property and equipment (266) (1,464)
------- ------
Net cash used in investing activities (266) (1,464)
--------- -------
Cash flows from financing activities:
Proceeds from issuance of note payable-bank 5,805 6,645
Repayments of note payable-bank (12,375) (8,280)
Repayments of long-term debt - (548)
---------- --------
Net cash used in financing activities (6,570) (2,183)
------ ------
Net increase (decrease) in cash 3,830 (118)
Cash, beginning of period 934 896
------- -------
Cash, end of period $ 4,764 $ 778
====== =======
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 198 $ 50
======= ========
Income taxes $ 684 $ 372
======= ========
</TABLE>
See notes to the condensed consolidated financial statements.
Page 5 of 11
<PAGE>
RAG SHOPS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE AND NINE MONTHS ENDED MAY 27, 2000 AND MAY 29, 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 nine months ended May 27, 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:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
May 27, May 29, May 27, May 29,
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Numerator:
Income (loss) before cumulative
effect of change in accounting $ 250,000 $ (78,000) $1,748,000 $1,185,000
Cumulative effect of change in
accounting - - 198,000 -
----------- ------------ ---------- ----------
Net income (loss) $ 250,000 $ (78,000) $1,946,000 $1,185,000
========== =========== ========= =========
Denominator:
Denominator for basic earnings (loss)
per share-weighted average shares 4,818,103 4,740,063 4,813,290 4,740,063
Effect of dilutive securities:
Employee stock options 140 339 60 11,725
----------- ----------- ---------- ----------
Denominator for diluted earnings (loss)
per share-adjusted weighted average
shares and assumed conversions 4,818,243 4,740,402 4,813,350 4,751,788
========= ========= ========= =========
</TABLE>
Page 6 of 11
<PAGE>
<TABLE>
<CAPTION>
RAG SHOPS, INC. AND SUBSIDIARIES
Three Months Ended Nine Months Ended
May 27, May 29, May 27, May 29,
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Basic earnings (loss) per share:
Income (loss) before cumulative
effect of change in accounting $ .05 $ (.02) $ .36 $ .25
Cumulative effect of change in
accounting - - .04 -
------------ ------------ ---------- ----------
Net income (loss) $ .05 $ (.02) $ .40 $ .25
============ ============ ========== ==========
Diluted earnings (loss) per share:
Income (loss) before cumulative
effect of change in accounting $ .05 $ (.02) $ .36 $ .25
Cumulative effect of change in
accounting - - .04 -
------------ ------------ ---------- ----------
Net income (loss) $ .05 $ (.02) $ .40 $ .25
============ ============ ========== ==========
</TABLE>
Earnings (loss) per share calculations for the three and nine months ended May
29, 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.
Page 7 of 11
<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.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
May 27, May 29, May 27, May 29,
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of merchandise sold and
occupancy costs 64.6 66.3 63.4 64.0
----- ----- ----- -----
Gross profit 35.4 33.7 36.6 36.0
Store expenses 22.5 23.0 22.5 22.8
General and administrative expenses 11.4 11.3 10.4 10.6
----- ----- ----- -----
Income (loss) from operations 1.5 (.6) 3.7 2.6
Income (loss) before cumulative effect
of change in accounting 1.1 (.3) 2.2 1.6
Cumulative effect of change in
accounting - - .3 -
Net income (loss) 1.1% (.3)% 2.5% 1.6%
==== ==== ==== ====
</TABLE>
The Company's net sales increased by $300,000 and $3,222,000 for the three and
nine months ended May 27, 2000 representing an increase of 1.3% and 4.3%,
respectively, over the comparable prior periods due to new store sales of
$357,000 and $3,968,000, respectively, in addition to increases in comparable
store sales of $528,000 or 2.4% and $1,185,000 or 1.7%, respectively, over the
comparable prior periods, and closed store sales of $585,000 and $1,931,000 for
the three and nine month periods, respectively.
Gross profit as a percentage of net sales increased by 1.7% for the three months
ended May 27, 2000, from the comparable prior period primarily due to a decrease
in promotional markdowns and secondarily a result of 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 .6% for the nine months ended May 27, 2000
from the comparable prior period primarily due to an increase in the initial
markup, as mentioned above, and secondarily a result of a reduction in
promotional markdowns that were partially offset by an increase in occupancy
costs.
Store expenses decreased by $54,000 and increased by $440,000 for the three and
nine months ended May 27, 2000, respectively, from the comparable prior periods.
The increase for the nine months ended May 27, 2000 was principally due to an
increase in payroll and payroll related expenses that were partially
attributable to new stores opened net of closed stores in the prior fiscal year.
As a percentage of net sales, store expenses decreased by .5% and .3% for the
three and nine months ended May 27, 2000, respectively, over the comparable
prior period as these expenses were leveraged against the increase in net sales.
General and administrative expenses increased marginally and as a percentage of
net sales remained relatively unchanged for the three months ended May 27, 2000,
over the comparable
Page 8 of 11
<PAGE>
RAG SHOPS, INC. AND SUBSIDIARIES
prior period. General and administrative expenses increased $238,000 for the
nine months ended May 27, 2000 primarily due to an increase in payroll, payroll
related expenses and professional fees that were partially offset by a reduction
of costs in our distribution center operation. As a percentage of net sales,
general and administrative expenses decreased .2% for the nine months ended May
27, 2000 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 $47,000 for the three months ended May 27,
2000 from the comparable prior period due to an increase in cash provided by
operating activities. Interest expense, net increased by $12,000 for the nine
months ended May 27, 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 $328,000 for the three months ended May 27, 2000 as
compared to the comparable prior period due to increases in comparable stores
sales and gross profit, in addition to a decrease in store expenses, that was
partially offset by a marginal increase in general and administrative expenses.
Net income increased $761,000 for the nine months ended May 27, 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
nine months ended May 27, 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 $2,960,000 for the nine months ended
May 27, 2000 as compared to the August 28, 1999 amount primarily as a result of
the Company retaining its net income for this period and a planned 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 (9.50% at May 27, 2000). 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 nine months
ended May 27, 2000 and May 29, 1999, respectively. The Company intends to
Page 9 of 11
<PAGE>
RAG SHOPS, INC. AND SUBSIDIARIES
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 nine months ended May 27, 2000
and May 29, 1999 amounted to $10,666,000 and $3,529,000, respectively, and
$266,000 and $1,464,000, respectively, was used for purchases of property and
equipment. During the nine months ended May 27, 2000 the Company did not open
any new stores, closed three existing stores and was operating sixty-six 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 one
additional store 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.
Impact of the Year 2000
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. The Company, however,
continues to monitor its systems, suppliers, and customers for any unanticipated
issues that have yet to surface.
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 10 of 11
<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 - None
(b) During the three months ended May 27, 2000, a Report on Form 8-K dated
April 18, 2000 was filed on April 21, 2000 reporting an Item 4 Changes in
Registrant's Certifying Accountants.
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: June 26, 2000 /s/ Stanley Berenzweig
Stanley Berenzweig
Chairman Of The Board and
Principal Executive Officer
Date: June 26, 2000 /s/ Steven B. Barnett
Steven B. Barnett
Principal Financial Officer and
Principal Accounting Officer
Page 11 of 11
<PAGE>
