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
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