-----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, HhE/QEXBR1/ybypPm/5S230F1F1KFFgbsLVQhu9EPRb5KfYVmPQElTXpmaDtB+/S 9nX0j17AucQE3UlsgOBpgA== 0000874385-99-000002.txt : 19990406 0000874385-99-000002.hdr.sgml : 19990406 ACCESSION NUMBER: 0000874385-99-000002 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990227 FILED AS OF DATE: 19990405 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: 99587016 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 February 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 MARCH 26, 1999 Common stock, par value $.01 4,514,400 Page 1 of 10 RAG SHOPS, INC. AND SUBSIDIARIES INDEX Page PART 1 - FINANCIAL INFORMATION Item 1.Financial Statements Condensed consolidated balance sheets - February 27, 1999 (unaudited), February 28, 1998 (unaudited) and August 29, 1998 3 Condensed consolidated statements of income - three and six months ended February 27, 1999 (unaudited) and February 28, 1998 (unaudited) 4 Condensed consolidated statements of cash flows - six months ended February 27, 1999 (unaudited) and February 28, 1998 (unaudited) 5 Notes to condensed consolidated financial statements 6 Item 2.Management's Discussion and Analysis of Results of Operations and Financial Condition 7-9 PART II - OTHER INFORMATION Item 4.Submission of Matters to a Vote of Security Holders 10 Item 6.Exhibits and Reports on Form 8-K 10 SIGNATURES 10 Page 2 of 10 RAG SHOPS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (All amounts in thousands) February 27, February 28, August 29, 1999 1998 1998 (Unaudited) (Unaudited) (Note A) ASSETS Current assets: Cash $ 2,989 $ 3,048 $ 896 Merchandise inventories 24,063 22,630 26,459 Prepaid expenses 376 755 532 Other current assets 252 149 77 Deferred taxes 707 697 707 Total current assets 28,387 27,279 28,671 Property and equipment, net 4,692 4,727 4,327 Other assets 283 271 320 $33,362 $32,277 $33,318 LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Note payable-bank $ - $ - $ 1,635 Accounts payable-trade 6,635 5,091 6,555 Accrued expenses and other current liabilities 2,189 2,591 1,965 Accrued salaries and wages 667 651 618 Income taxes payable 669 783 244 Current portion of long-term debt 197 716 559 Total current liabilities 10,357 9,832 11,576 Deferred taxes - 41 - Long-term debt - 191 - Stockholders' equity: Common stock 45 45 45 Additional paid-in capital 6,039 6,039 6,039 Retained earnings 16,921 16,129 15,658 Total stockholders' equity 23,005 22,213 21,742 $33,362 $32,277 $33,318 Note A: Derived from the August 29, 1998 audited balance sheet. See notes to the condensed consolidated financial statements. Page 3 of 10 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 27, February 28, February 27, February 28, 1999 1998 1999 1998 Net sales $25,061 $24,998 $51,756 $51,275 Cost of merchandise sold and occupancy costs 15,909 15,951 32,587 32,487 Gross profit 9,152 9,047 19,169 18,788 Store expenses 6,008 5,701 11,760 11,267 General and administrative expenses 2,741 2,645 5,324 5,156 Total operating expenses 8,749 8,346 17,084 16,423 Income from operations 403 701 2,085 2,365 Interest income (expense), net 15 6 (13) (49) Income before provision for income taxes 418 707 2,072 2,316 Provision for income taxes 164 276 809 903 Net income $ 254 $ 431 $ 1,263 $ 1,413 EARNINGS PER COMMON SHARE: Basic $ .06 $ .10 $ .28 $ .31 Diluted $ .06 $ .09 $ .28 $ .31 See notes to the condensed consolidated financial statements. Page 4 of 10 RAG SHOPS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (All amounts in thousands) Six Months Ended February 27, February 28, 1999 1998 Cash flows from operating activities: Net income $ 1,263 $ 1,413 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 685 721 Loss on disposition of property and equipment 20 19 Changes in assets and liabilities: (Increase) decrease in: Merchandise inventories 2,396 2,493 Prepaid expenses 156 (456) Other current assets (175) 93 Other assets 37 (18) Increase (decrease) in: Accounts payable-trade 80 10 Accrued expenses and other current liabilities 224 734 Accrued salaries and wages 49 (161) Income taxes payable 425 783 Net cash provided by operating activities 5,160 5,631 Cash flows from investing activities: Payments for purchases of property and equipment (1,070) (584) Proceeds from sale of property and equipment - 3 Net cash used in investing activities (1,070) (581) 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 (362) (331) Net cash used in financing activities (1,997) (2,766) Net increase in cash 2,093 2,284 Cash, beginning of period 896 764 Cash, end of period $ 2,989 $ 3,048 Supplemental disclosures of cash flow information: Cash paid during the period for: Interest $ 47 $ 78 Income taxes $ 258 $ 27 See notes to the condensed consolidated financial statements. Page 5 of 10 RAG SHOPS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS THREE AND SIX MONTHS ENDED FEBRUARY 27, 1999 AND FEBRUARY 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 and six months ended February 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 1998. 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 27, February 28, February 27, February 28, 1999 1998 1999 1998 Numerator: Net income for basic and diluted earnings per share $ 254,000 $ 431,000 $1,263,000 $1,413,000 Denominator: Denominator for basic earnings per share-weighted average shares 4,514,400 4,514,400 4,514,400 4,514,400 Effect of dilutive securities: Employee stock options 10,646 30,905 11,129 11,915 Denominator for diluted earnings per share-adjusted weighted average shares and assumed conversions 4,525,046 4,545,305 4,525,529 4,526,315 Basic earnings per share $ .06 $ .10 $ .28 $ .31 Diluted earnings per share $ .06 $ .09 $ .28 $ .31 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 6 of 10 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 27, February 28, February 27,February 28, 1999 1998 1999 1998 Net sales 100.0% 100.0% 100.0% 100.0% Cost of merchandise sold and occupancy costs 63.5 63.8 63.0 63.4 Gross profit 36.5 36.2 37.0 36.6 Store expenses 24.0 22.8 22.7 22.0 General and administrative expenses 10.9 10.6 10.3 10.0 Income from operations 1.6 2.8 4.0 4.6 Net income 1.0% 1.7% 2.4% 2.8% The Company's net sales increased by $63,000 and $481,000 for the three and six months ended February 27, 1999 representing an increase of .3% and .9%, respectively, over the comparable prior periods due to new store sales of $1,668,00 and $2,836,000, respectively, offset by decreases in comparable store sales of $853,000 or 3.6% and $951,000 or 1.9%, respectively, over the comparable prior periods, and closed store sales of $752,000 and $1,404,000 for the three and six month periods, respectively. Management believes that the decrease in comparable store sales for the three months ended February 27, 1999 was due to: (1) a one-time concept change in a newspaper insert campaign covering the last week of December and first week of January that did not meet our expectations and was not continued, (2) Northeast inclement weather conditions for the first half of January, and (3) a delay in receiving spring seasonal merchandise. This merchandise is now prominently displayed in the stores and the Company has experienced a positive comparable store sales trend for the first four weeks of March. Gross profit as a percentage of net sales increased by .3% and .4% for the three and six months ended February 27, 1999, respectively, from the comparable prior periods primarily due to decreases in promotional markdowns partially offset by increases in occupancy costs. Store expenses increased by $307,000 and 1.2% as a percentage of net sales for the three months ended February 27, 1999, over the comparable prior period, primarily due to an increase in payroll and payroll related expenses that were principally attributable to new store openings. Store expenses increased by $493,000 and .7% as a percentage of net sales for the for the six months ended February 27, 1999, over the comparable prior period, primarily due to an increase in payroll and payroll related expenses and secondarily to an increase in advertising costs. General and administrative expenses increased by $96,000 and $168,000 and .3% as a percentage of net sales for the three and six months ended February 27, 1999, respectively, over the comparable prior periods. The increases in general and administrative expenses were primarily due to increases in payroll that was partially offset by a reduction in insurance charges. Interest income, net increased by $9,000 and interest expense, net decreased by $36,000 for the three and six months ended February 27, 1999, respectively, from the comparable prior periods due principally to the reduction of the Company's term loan. See "Liquidity and Capital Resources". Page 7 of 10 RAG SHOPS, INC. AND SUBSIDIARIES Net income decreased by $177,000 and $150,000 for the three and six months ended February 27, 1999 as compared to the comparable prior periods due to the decrease in comparable store sales and increases in store and general and administrative expenses which were partially offset by increases in gross profit. 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 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 $935,000 for the six months ended February 27, 1999 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 which is renewable on or before each December 31. 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 February 27, 1999) 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. The Company has satisfied its line of credit clean-up provision for 1999 during the three months ended February 27, 1999. 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 six months ended February 27, 1999 and February 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 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 and will complete installation as planned during the first week of April 1999. Net cash provided by operating activities for the six months ended February 27, 1999 and February 28, 1998 amounted to $5,160,000 and $5,631,000, respectively, and $1,070,000 and $584,000, respectively, was used for purchases of property and equipment. For the six months ended February 27, 1999 the Company has opened four new stores and closed one existing store. The Company expects to open an additional two new stores and close one existing store during the remainder of 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 Page 8 of 10 RAG SHOPS, INC. AND SUBSIDIARIES 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. 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 9 of 10 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 28, 1999. Ms. Judith Lombardo was elected a Class II Director by a vote of 4,296,538 shares in favor and 25,800 shares withheld. Mr. Fred J. Damiano was also elected a Class II Director by a vote of 4,296,538 shares in favor and 25,800 shares withheld. The firm of Deloitte & Touche, LLP was appointed as auditors for the Company's fiscal year ending August 28, 1999 by a vote of 4,210,588 in favor, 73,500 against and 38,250 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:April 1, 1999 /s/ Stanley Berenzweig Stanley Berenzweig Chairman Of The Board and Principal Executive Officer Date:April 1, 1999 /s/ Steven B. Barnett Steven B. Barnett Principal Financial Officer and Principal Accounting Officer Page 10 of 10 EX-27 2
5 6-MOS AUG-28-1999 AUG-30-1998 FEB-27-1999 2,989,000 0 0 0 24,063,000 28,387,000 15,171,000 10,479,000 33,362,000 10,357,000 0 0 0 45,000 22,960,000 33,362,000 51,756,000 51,756,000 32,587,000 49,671,000 0 0 13,000 2,072,000 809,000 1,263,000 0 0 0 1,263,000 0.28 0.28
-----END PRIVACY-ENHANCED MESSAGE-----