-----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, GqvCP9m4R5EMEg6j8UIpdFWqcYFKc/Jxyhm+55avH9QQ5pkuk6OMGlCh7No5cXN+ rpREnuf1PpURaT2mZrE3Vw== 0000874385-99-000003.txt : 19990707 0000874385-99-000003.hdr.sgml : 19990707 ACCESSION NUMBER: 0000874385-99-000003 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990529 FILED AS OF DATE: 19990706 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: 99659333 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 May 29, 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 JUNE 25, 1999 Common stock, par value $.01 4,488,800 Page 1 of 11 RAG SHOPS, INC. AND SUBSIDIARIES INDEX Page PART 1 - FINANCIAL INFORMATION Item 1.Financial Statements Condensed consolidated balance sheets - May 29, 1999 (unaudited), May 30, 1998 (unaudited) and August 29, 1998 3 Condensed consolidated statements of operations - three and nine months ended May 29, 1999 (unaudited) and May 30, 1998 (unaudited) 4 Condensed consolidated statements of cash flows - nine months ended May 29, 1999 (unaudited) and May 30, 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 8-10 PART II - OTHER INFORMATION Items 1.-5. 11 Item 6. Exhibits and Reports on Form 8-K 11 SIGNATURES 11 Page 2 of 11 RAG SHOPS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (All amounts in thousands) May 29, May 30, August 29, 1999 1998 1998 (Unaudited) (Unaudited) (Note A) ASSETS Current assets: Cash $ 778 $ 2,508 $ 896 Merchandise inventories 27,262 23,108 26,459 Prepaid expenses 405 195 532 Other current assets 103 70 77 Deferred taxes 707 697 707 Total current assets 29,255 26,578 28,671 Property and equipment, net 4,731 4,544 4,327 Other assets 307 291 320 $34,293 $31,413 $33,318 LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Note payable-bank $ - $ - $ 1,635 Accounts payable-trade 7,851 4,839 6,555 Accrued expenses and other current liabilities 2,355 1,965 1,976 Accrued salaries and wages 657 652 618 Income taxes payable 503 744 244 Current portion of long-term debt - 735 548 Total current liabilities 11,366 8,935 11,576 Deferred taxes - 41 - Stockholders' equity: Common stock 45 45 45 Additional paid-in capital 6,039 6,039 6,039 Retained earnings 16,843 16,353 15,658 Total stockholders' equity 22,927 22,437 21,742 $34,293 $31,413 $33,318 Note A: Derived from the August 29, 1998 audited balance sheet. See notes to the condensed consolidated financial statements. Page 3 of 11 RAG SHOPS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) (All amounts in thousands, except share data) Three Months Ended Nine Months Ended May 29, May 30, May 29, May 30, 1999 1998 1999 1998 Net sales $22,430 $20,699 $74,186 $71,974 Cost of merchandise sold and occupancy costs 14,861 13,209 47,448 45,696 Gross profit 7,569 7,490 26,738 26,278 Store expenses 5,179 4,928 16,939 16,195 General and administrative expenses 2,534 2,204 7,858 7,360 Total operating expenses 7,713 7,132 24,797 23,555 Income (loss) from operations (144) 358 1,941 2,723 Interest income (expense), net 15 10 2 (39) Income (loss) before income tax provision (benefit) (129) 368 1,943 2,684 Income tax provision (benefit) (51) 144 758 1,047 Net income (loss) $ (78) $ 224 $ 1,185 $ 1,637 EARNINGS (LOSS) PER COMMON SHARE: Basic and diluted $ (.02) $ .05 $ .26 $ .36 See notes to the condensed consolidated financial statements. Page 4 of 11 RAG SHOPS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (All amounts in thousands) Nine Months Ended May 29, May 30, 1999 1998 Cash flows from operating activities: Net income $ 1,185 $ 1,637 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 1,035 1,091 Loss on disposition of property and equipment 25 23 Changes in assets and liabilities: (Increase) decrease in: Merchandise inventories (803) 2,015 Prepaid expenses 127 104 Other current assets (26) 172 Other assets 13 (40) Increase (decrease) in: Accounts payable-trade 1,296 (242) Accrued expenses and other current liabilities 379 108 Accrued salaries and wages 39 (160) Income taxes payable 259 744 Net cash provided by operating activities 3,529 5,452 Cash flows from investing activities: Payments for purchases of property and equipment (1,464) (773) Proceeds from sale of property and equipment - 3 Net cash used in investing activities (1,464) (770) Cash flows from financing activities: Proceeds from issuance of note payable-bank 6,645 5,810 Repayments of note payable-bank (8,280) (8,245) Repayments of long-term debt (548) (503) Net cash used in financing activities (2,183) (2,938) Net (decrease) increase in cash (118) 1,744 Cash, beginning of period 896 764 Cash, end of period $ 778 $ 2,508 Supplemental disclosures of cash flow information: Cash paid during the period for: Interest $ 50 $ 94 Income taxes $ 372 $ 209 See notes to the condensed consolidated financial statements. Page 5 of 11 RAG SHOPS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS THREE AND NINE MONTHS ENDED MAY 29, 1999 AND MAY 30, 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 nine months ended May 29, 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. 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 (loss) per share: Three Months Ended Nine Months Ended May 29, May 30, May 29, May 30, 1999 1998 1999 1998 Numerator: Net income (loss) for basic and diluted earnings (loss) per share $ (78,000) $ 224,000 $1,185,000 $1,637,000 Denominator: Denominator for basic earnings (loss) per share-weighted average shares 4,514,400 4,514,400 4,514,400 4,514,400 Effect of dilutive securities: Employee stock options 97 43,856 3,752 39,035 Denominator for diluted earnings (loss) per share-adjusted weighted average shares and assumed conversions 4,514,497 4,558,256 4,518,152 4,553,435 Basic and diluted earnings (loss) per share $ (.02) $ .05 $ .26 $ .36 Page 6 of 11 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. NOTE 4 - SUBSEQUENT EVENTS On June 28, 1999 the Company's Board of Directors declared a 5% stock dividend for shareholders of record on the close of business of July 14, 1999 which will be distributed on August 10, 1999. Share and per share data presented for all periods has not been adjusted to give effect to the dividend since the dividend will be distributed subsequent to May 29, 1999. The pro forma effect on basic and diluted shares and earnings per share giving effect to the dividend for all periods presented is as follows: Three Months Ended Nine Months Ended May 29, May 30, May 29, May 30, 1999 1998 1999 1998 Basic income (loss) per share $ (.02) $ .05 $ .25 $ .35 Basic weighted average shares 4,740,120 4,740,120 4,740,120 4,740,120 Diluted income (loss) per share $ (.02) $ .05 $ .25 $ .34 Diluted weighted average shares 4,740,459 4,790,782 4,751,845 4,785,840 On May 21, 1999, the Company's Board of Directors approved a discretionary program whereby the Company is authorized to purchase up to 200,000 shares of its outstanding common stock. As of June 25, 1999, 25,600 shares have been purchased by the Company under this program. Page 7 of 11 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 operations for the indicated periods. Three Months Ended Nine Months Ended May 29, May 30, May 29, May 30, 1999 1998 1999 1998 Net sales 100.0% 100.0% 100.0% 100.0% Cost of merchandise sold and occupancy costs 66.3 63.8 64.0 63.5 Gross profit 33.7 36.2 36.0 36.5 Store expenses 23.0 23.8 22.8 22.5 General and administrative expenses 11.3 10.7 10.6 10.2 Income (loss) from operations (.6) 1.7 2.6 3.8 Net income (loss) (.3%) 1.1% 1.6% 2.3% The Company's net sales increased by $1,731,000 or 8.4% for the three months ended May 29, 1999 over the comparable prior period due to new store sales increases of $1,841,000 and comparable store sales increases of $348,000 or 1.7%, offset by closed store sales of $458,000. Management believes the increase in comparable store sales is principally attributable to a planned inventory build up facilitated by the implementation of our new automated store ordering system. The Company's net sales increased by $2,212,000 or 3.1% for the nine months ended May 29, 1999 over the comparable prior period due to new store sales increases of $4,678,000 offset by comparable store sales decreases of $603,000 or .9% and closed store sales of $1,863,000. Gross profit as a percentage of net sales decreased by 2.5% for the three months ended May 29, 1999 from the comparable prior period primarily due to increases in promotional markdowns and secondarily by increases in freight costs attributable to the planned inventory build up and occupancy costs. Gross profit as a percentage of net sales decreased by .5% for the nine months ended May 29, 1999 principally due to an increase in occupancy costs. Store expenses increased by $251,000 and decreased by .8% as a percentage of net sales for the three months ended May 29, 1999 over the comparable prior period primarily due to an increase in payroll and payroll related expenses principally as a result of the four new stores opened, net of one existing store closed, in the preceding quarter ended February 27, 1999. As a percentage of net sales, store expenses decreased as the Company was able to leverage these expenses against the increase in net sales. Store expenses increased by $744,000 or .3% as a percentage of net sales for the nine months ended May 29, 1999 over the comparable prior period primarily due to an increase in payroll and payroll related expenses. General and administrative expenses increased by $330,000 and $498,000 for the three and nine months ended May 29, 1999, respectively, and as a percentage of net sales, increased .6% and .4%, respectively, over the comparable prior periods. The increases in general and administrative expenses were principally due to increases in payroll and payroll related expenses. Net income decreased by $302,000 and $452,000 for the three and nine months ended May 29, 1999, respectively, as compared to the comparable prior periods due to increases in store and general and administrative expenses which were partially offset by increases in gross profit. Page 8 of 11 RAG SHOPS, INC. AND SUBSIDIARIES 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 29, 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 by $794,000 for the nine months ended May 29, 1999 as compared to the August 29, 1998 amount as a result of the Company retaining its net income for the period. The Company maintains a discretionary $8,000,000 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 (7.75% at May 29, 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 $2,330,000 and $2,785,000 for the nine months ended May 29, 1999 and May 30, 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. In May 1999, the Company made final payment on its $2,000,000 three (3) year term loan used for the purchase of point-of-sale and automated store ordering systems that were completely installed in all stores as of July 1997 and March 1999, respectively, and are now fully operational. Net cash provided by operating activities for the nine months ended May 29, 1999 and May 30, 1998 amounted to $3,529,000 and $5,452,000, respectively, and $1,464,000 and $773,000, respectively, was used for purchases of property and equipment. For the nine months ended May 29, 1999 the Company opened four new stores and closed one existing store. During the fourth fiscal quarter ending August 28, 1999, the Company will close one existing store and open one new store. 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, Page 9 of 11 RAG SHOPS, INC. AND SUBSIDIARIES 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 continued 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. The Company believes it has successfully achieved Year 2000 compliance with all of its significant computer hardware and software. 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 recently commenced the development of a contingency plan in the event of any interruption of key internal or external services. Management currently expects to complete such a plan by October 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 10 of 11 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:July 2, 1999 /s/ Stanley Berenzweig Stanley Berenzweig Chairman Of The Board and Principal Executive Officer Date:July 2, 1999 /s/ Steven B. Barnett Steven B. Barnett Principal Financial Officer and Principal Accounting Officer Page 11 of 11 EX-27 2
5 9-MOS AUG-28-1999 AUG-30-1998 MAY-29-1999 778,000 0 0 0 27,262,000 29,255,000 15,533,000 10,802,000 34,293,000 11,366,000 0 0 0 45,000 22,882,000 34,293,000 74,186,000 74,186,000 47,448,000 72,245,000 0 0 (2,000) 1,943,000 758,000 1,185,000 0 0 0 1,185,000 0.26 0.26
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