-----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, QAjlKEby/gHVE413T7ZcuP8kO+b6WXlcQ+GqU31wju82F9efpekeurQ62zfIF9bS OnO/Z3WzDPF+ZttA6nN1iw== 0000874385-00-000001.txt : 20000104 0000874385-00-000001.hdr.sgml : 20000104 ACCESSION NUMBER: 0000874385-00-000001 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19991127 FILED AS OF DATE: 20000103 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: 500715 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 RAG SHOPS, INC. 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 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 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 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 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 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 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 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 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 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 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 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 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 EX-27 2 EXHIBIT 27
5 3-MOS SEP-2-2000 AUG-29-1999 NOV-27-1999 2,286,000 0 0 0 27,207,000 30,853,000 15,507,000 11,321,000 35,315,000 11,977,000 0 0 0 48,000 23,290,000 35,315,000 28,186,000 28,186,000 17,467,000 26,472,000 0 0 108,000 1,606,000 626,000 980,000 0 0 198,000 1,178,000 .24 .24
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