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
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