-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, BbCAyb40nueUJ0/Qxjf1AFp2czz4WO2aIhdVCb7wGa5IQI/RYOaB9uITFtD9R2I/ 0VUCIEc9TrkSLgOj/5aR6Q== 0000874385-99-000001.txt : 19990111 0000874385-99-000001.hdr.sgml : 19990111 ACCESSION NUMBER: 0000874385-99-000001 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19981128 FILED AS OF DATE: 19990108 FILER: COMPANY DATA: COMPANY CONFORMED NAME: RAG SHOPS INC CENTRAL INDEX KEY: 0000874385 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-HOBBY, TOY & GAME SHOPS [5945] IRS NUMBER: 510333503 STATE OF INCORPORATION: DE FISCAL YEAR END: 0831 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-19194 FILM NUMBER: 99502551 BUSINESS ADDRESS: STREET 1: 111 WAGARAW RD CITY: HAWTHORNE STATE: NJ ZIP: 07506 BUSINESS PHONE: 9734231303 MAIL ADDRESS: STREET 1: 111 WAGARAW RD CITY: HAWTHORNE STATE: NJ ZIP: 07506 10-Q 1 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 28, 1998 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 28, 1998 Common stock, par value $.01 4,514,400 Page 1 of 12 RAG SHOPS, INC. AND SUBSIDIARIES INDEX Page PART 1 - FINANCIAL INFORMATION Item 1. Financial Statements Condensed consolidated balance sheets - November 28, 1998 (unaudited), November 29, 1997 (unaudited) and August 29, 1998 3 Condensed consolidated statements of income - three months ended November 28, 1998 (unaudited) and November 29, 1997 (unaudited) 4 Condensed consolidated statements of cash flows - three months ended November 28, 1998 (unaudited) and November 29, 1997 (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 RAG SHOPS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (All amounts in thousands) November 28, November 29, August 29, 1998 1997 1998 (Unaudited) (Unaudited) (Note A) ASSETS Current assets: Cash $ 4,577 $ 3,843 $ 896 Merchandise inventories 24,624 24,078 26,459 Prepaid expenses 408 716 532 Other current assets 145 193 77 Deferred taxes 707 697 707 Total current assets 30,461 29,527 28,671 Property and equipment, net 4,257 4,804 4,327 Other assets 329 271 320 $35,047 $34,602 $33,318 LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Note payable-bank $ - $ - $ 1,635 Accounts payable-trade 7,609 7,841 6,555 Accrued expenses and other current liabilities 2,823 2,719 1,965 Accrued salaries and wages 734 623 618 Income taxes payable 751 521 244 Current portion of long-term debt 379 698 559 Total current liabilities 12,296 12,402 11,576 Deferred taxes - 41 - Long-term debt - 377 - Stockholders' equity: Preferred stock - - - Common stock 45 45 45 Additional paid-in capital 6,039 6,039 6,039 Retained earnings 16,667 15,698 15,658 Total stockholders' equity 22,751 21,782 21,742 $35,047 $34,602 $33,318 Note A: Derived from the August 29, 1998 audited balance sheet. See notes to the condensed consolidated financial statements. Page 3 of 12 RAG SHOPS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited) (All amounts in thousands, except share data) Three Months Ended November 28, November 29, 1998 1997 Net sales $ 26,695 $ 26,277 Cost of merchandise sold and occupancy costs 16,678 16,536 Gross profit 10,017 9,741 Store expenses 5,751 5,566 General and administrative expenses 2,583 2,511 Total operating expenses 8,334 8,077 Income from operations 1,683 1,664 Interest expense, net 28 54 Income before provision for income taxes 1,655 1,610 Provision for income taxes 646 628 Net income $ 1,009 $ 982 EARNINGS PER COMMON SHARE: Basic and diluted $ .22 $ .22 See notes to the condensed consolidated financial statements. Page 4 of 12 RAG SHOPS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (All amounts in thousands) Three Months Ended November 28, November 29, 1998 1997 Cash flows from operating activities: Net income $ 1,009 $ 982 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 337 361 Changes in assets and liabilities: (Increase) decrease in: Merchandise inventories 1,835 1,045 Prepaid expenses 124 (417) Other current assets (68) 49 Other assets (9) (18) Increase (decrease) in: Accounts payable-trade 1,054 2,760 Accrued expenses and other current liabilities 858 862 Accrued salaries and wages 116 (189) Income taxes payable 507 521 Net cash provided by operating activities 5,763 5,956 Cash flows from investing activities: Payments for purchases of property and equipment (267) (278) Net cash used in investing activities (267) (278) Cash flows from financing activities: Proceeds from issuance of note payable-bank 6,595 5,810 Repayments of note payable-bank (8,230) (8,245) Repayments of long-term debt (180) (164) Net cash used in financing activities (1,815) (2,599) Net increase in cash 3,681 3,079 Cash, beginning of period 896 764 Cash, end of period $ 4,577 $ 3,843 Supplemental disclosures of cash flow information: Cash paid during the period for: Interest $ 9 $ 34 Income taxes $ 13 $ 12 See notes to the condensed consolidated financial statements. Page 5 of 12 RAG SHOPS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS THREE MONTHS ENDED NOVEMBER 28, 1998 AND NOVEMBER 29, 1997 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 28, 1998 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 con- densed 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 1998. NOTE 2 - EARNINGS PER SHARE The following table sets forth the computation of basic and diluted earnings per share: Three Months Ended November 28, November 29, 1998 1997 Numerator: Net income for basic and diluted earnings per share $1,009,000 $ 982,000 Denominator: Denominator for basic earnings per share-weighted average shares 4,514,400 4,514,400 Effect of dilutive securities: Employee stock options 11,755 43,317 Denominator for diluted earnings per share-adjusted weighted average shares and assumed conversions 4,526,155 4,557,717 Basic earnings per share $ .22 $ .22 Diluted earnings per share $ .22 $ .22 Page 6 of 12 RAG SHOPS, INC. AND SUBSIDIARIES NOTE 3 - ADOPTION OF ACCOUNTING STANDARDS In April 1998, the Financial Accounting Standards Board issued Statement of Position (SOP) No. 98-5 "Reporting on the Costs of Start-Up Activities". This SOP requires the costs associated with start-up activities, such as opening a new store, be expensed as incurred. This SOP is effective for financial statements for fiscal years beginning after December 15, 1998. While a final determination has not been made, it is anticipated that such adoption will not have a material effect on the Company's results of operations. Page 7 of 12 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 28, November 29, 1998 1997 Net sales 100.0% 100.0% Cost of merchandise sold and occupancy costs 62.5 62.9 Gross profit 37.5 37.1 Store expenses 21.5 21.2 General and administrative expenses 9.7 9.6 Income from operations 6.3 6.3 Net income 3.8% 3.7% The Company's net sales increased by $418,000 or 1.6% for the three months ended November 28, 1998 over the comparable prior period due to new store sales of $1,168,000 offset by decreases in comparable store sales of $98,000 or .4% and closed store sales in the comparable prior period of $652,000. Gross profit as a percentage of net sales increased by .4% for the three months ended November 28, 1998 from the comparable prior period primarily due to a decrease in promotional markdowns that was partially offset by an increase in occupancy costs. Store expenses increased by $185,000 and as a percentage of net sales increased by .3% for the three months ended November 28, 1998 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 secondarily due to an increase in advertising costs. General and administrative expenses increased by $72,000 and as a percentage of net sales increased marginally for the three months ended November 28, 1998 over the comparable prior period. The increase in general and administrative expenses was primarily due to an increase in payroll that was partially offset by a reduction in insurance premiums. Interest expense, net decreased by $26,000 for the three months ended November 28, 1998 from the comparable prior period primarily as a result of the reduction in the Company's term loan. See "Liquidity and Capital Resources". The effective tax rates for the three months ended November 28, 1998 and November 29, 1997 were estimated at 39.0%. Page 8 of 12 RAG SHOPS, INC. AND SUBSIDIARIES Net income increased by $27,000 for the three months ended November 28, 1998 as compared to the comparable prior period. The increase in net income is due to the increase in gross profit that was reduced 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 three months ended November 28, 1998 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 $1,070,000 for the three months ended November 28, 1998 as compared to the August 29, 1998 amount as a result of the Company retaining 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 has been renewed for 1999 unchanged. The credit facility consists of a discretionary $8,000,000 unsecured line of credit for direct borrowings and the issuance and refinance of letters of credit and a $2,000,000 three (3) year term loan maturing May 1, 1999. Borrowings under the line of credit bear interest at the bank's prime rate (7.75% at November 28, 1998) and under the term loan are fixed at seven and one-half percent (7.5%) effective March 1, 1998, formerly at eight percent (8%)since inception. 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 $2,330,000 and $2,785,000 for the three months ended November 28, 1998 and November 29, 1997, 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 and to continue to utilize the term loan to finance its new point-of-sale cash register software, data collection and computer systems ("point-of-sale systems"). The Company completed installation of its point- of-sale systems in all stores as of July 1997. In addition, the Company has completed the test phase of its automated store ordering systems, is Page 9 of 12 RAG SHOPS, INC. AND SUBSIDIARIES commencing installation in January 1999 and anticipates completing installation in all stores by the end of March 1999. Net cash provided by operating activities for the three months ended November 28, 1998 and November 29, 1997 amounted to $5,763,000 and $5,956,000, respectively, and $267,000 and $278,000, respectively, was used for purchases of property and equipment. During the three months ended November 28, 1998 there were no new stores opened or existing stores closed. The Company expects to open an additional five to seven new stores and close two 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 current efforts will allow the Company to be fully Year 2000-compliant by June of 1999, 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. Page 10 of 12 RAG SHOPS, INC. AND SUBSIDIARIES Because the Company has focused its attention primarily on updating its systems, it has not yet developed a contingency plan in the event of any interruption of key internal or external services. Management currently expects to complete such a plan by the middle of calendar year 1999, subject to further review and refinement thereafter to reflect changing circumstances. In particular, the Company's plan will seek to establish alternatives in the event of any disturbance in external telecommunications, 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, management does not believe that these remediation costs will rise to a material level. Forward-Looking Statements Certain statements contained in this report that are not historical facts are forward-looking statements that are subject to certain risks and uncertainties that could cause actual results to differ materially from those set forth in the forward-looking statement. These risks and uncertainties include, but are not limited to, changes in customer demand, changes in trends in the fabric and craft industry, changes in competitive pricing for products, the impact of competitor store openings and closings, the availability of merchandise, general economic conditions, lease negotiations and other risk factors. Page 11 of 12 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 7, 1999 /s/ Stanley Berenzweig Stanley Berenzweig Chairman Of The Board and Principal Executive Officer Date: January 7, 1999 /s/ Steven B. Barnett Steven B. Barnett Principal Financial Officer and Principal Accounting Officer Page 12 of 12 EX-27 2
5 3-MOS AUG-28-1999 AUG-30-1998 NOV-28-1998 4,577,000 0 0 0 24,624,000 30,461,000 14,470,000 10,213,000 35,047,000 12,296,000 0 0 0 45,000 22,706,000 35,047,000 26,695,000 26,695,000 16,678,000 25,012,000 0 0 28,000 1,655,000 646,000 1,009,000 0 0 0 1,009,000 .22 .22
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