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 28, 1998
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 28, 1998
Common stock, par value $.01 4,514,400
Page 1 of 12<PAGE>
RAG SHOPS, INC. AND SUBSIDIARIES
INDEX
Page
PART 1 - FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed consolidated balance sheets - November 28, 1998
(unaudited), November 29, 1997 (unaudited) and
August 29, 1998 3
Condensed consolidated statements of income - three
months ended November 28, 1998 (unaudited) and
November 29, 1997 (unaudited) 4
Condensed consolidated statements of cash flows -
three months ended November 28, 1998 (unaudited) and
November 29, 1997 (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<PAGE>
RAG SHOPS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(All amounts in thousands)
November 28, November 29, August 29,
1998 1997 1998
(Unaudited) (Unaudited) (Note A)
ASSETS
Current assets:
Cash $ 4,577 $ 3,843 $ 896
Merchandise inventories 24,624 24,078 26,459
Prepaid expenses 408 716 532
Other current assets 145 193 77
Deferred taxes 707 697 707
Total current assets 30,461 29,527 28,671
Property and equipment, net 4,257 4,804 4,327
Other assets 329 271 320
$35,047 $34,602 $33,318
LIABILITIES AND STOCKHOLDERS'
EQUITY
Current liabilities:
Note payable-bank $ - $ - $ 1,635
Accounts payable-trade 7,609 7,841 6,555
Accrued expenses and other
current liabilities 2,823 2,719 1,965
Accrued salaries and wages 734 623 618
Income taxes payable 751 521 244
Current portion of
long-term debt 379 698 559
Total current liabilities 12,296 12,402 11,576
Deferred taxes - 41 -
Long-term debt - 377 -
Stockholders' equity:
Preferred stock - - -
Common stock 45 45 45
Additional paid-in capital 6,039 6,039 6,039
Retained earnings 16,667 15,698 15,658
Total stockholders'
equity 22,751 21,782 21,742
$35,047 $34,602 $33,318
Note A: Derived from the August 29, 1998 audited balance sheet.
See notes to the condensed consolidated financial statements.
Page 3 of 12<PAGE>
RAG SHOPS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(All amounts in thousands, except share data)
Three Months Ended
November 28, November 29,
1998 1997
Net sales $ 26,695 $ 26,277
Cost of merchandise sold and occupancy costs 16,678 16,536
Gross profit 10,017 9,741
Store expenses 5,751 5,566
General and administrative expenses 2,583 2,511
Total operating expenses 8,334 8,077
Income from operations 1,683 1,664
Interest expense, net 28 54
Income before provision for income taxes 1,655 1,610
Provision for income taxes 646 628
Net income $ 1,009 $ 982
EARNINGS PER COMMON SHARE:
Basic and diluted $ .22 $ .22
See notes to the condensed consolidated financial statements.
Page 4 of 12<PAGE>
RAG SHOPS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(All amounts in thousands)
Three Months Ended
November 28, November 29,
1998 1997
Cash flows from operating activities:
Net income $ 1,009 $ 982
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 337 361
Changes in assets and liabilities:
(Increase) decrease in:
Merchandise inventories 1,835 1,045
Prepaid expenses 124 (417)
Other current assets (68) 49
Other assets (9) (18)
Increase (decrease) in:
Accounts payable-trade 1,054 2,760
Accrued expenses and other current liabilities 858 862
Accrued salaries and wages 116 (189)
Income taxes payable 507 521
Net cash provided by operating activities 5,763 5,956
Cash flows from investing activities:
Payments for purchases of property and equipment (267) (278)
Net cash used in investing activities (267) (278)
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 (180) (164)
Net cash used in financing activities (1,815) (2,599)
Net increase in cash 3,681 3,079
Cash, beginning of period 896 764
Cash, end of period $ 4,577 $ 3,843
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 9 $ 34
Income taxes $ 13 $ 12
See notes to the condensed consolidated financial statements.
Page 5 of 12<PAGE>
RAG SHOPS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED NOVEMBER 28, 1998 AND NOVEMBER 29, 1997
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 28, 1998 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 con-
densed 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
November 28, November 29,
1998 1997
Numerator:
Net income for basic and diluted
earnings per share $1,009,000 $ 982,000
Denominator:
Denominator for basic
earnings per share-weighted
average shares 4,514,400 4,514,400
Effect of dilutive securities:
Employee stock options 11,755 43,317
Denominator for diluted earnings
per share-adjusted weighted
average shares and assumed
conversions 4,526,155 4,557,717
Basic earnings per share $ .22 $ .22
Diluted earnings per share $ .22 $ .22
Page 6 of 12<PAGE>
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.
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 28, November 29,
1998 1997
Net sales 100.0% 100.0%
Cost of merchandise sold and occupancy costs 62.5 62.9
Gross profit 37.5 37.1
Store expenses 21.5 21.2
General and administrative expenses 9.7 9.6
Income from operations 6.3 6.3
Net income 3.8% 3.7%
The Company's net sales increased by $418,000 or 1.6% for the three months
ended November 28, 1998 over the comparable prior period due to new store
sales of $1,168,000 offset by decreases in comparable store sales of $98,000
or .4% and closed store sales in the comparable prior period of $652,000.
Gross profit as a percentage of net sales increased by .4% for the three
months ended November 28, 1998 from the comparable prior period primarily due
to a decrease in promotional markdowns that was partially offset by an
increase in occupancy costs.
Store expenses increased by $185,000 and as a percentage of net sales
increased by .3% for the three months ended November 28, 1998 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 secondarily due
to an increase in advertising costs.
General and administrative expenses increased by $72,000 and as a percentage
of net sales increased marginally for the three months ended November 28,
1998 over the comparable prior period. The increase in general and
administrative expenses was primarily due to an increase in payroll that was
partially offset by a reduction in insurance premiums.
Interest expense, net decreased by $26,000 for the three months ended
November 28, 1998 from the comparable prior period primarily as a result of
the reduction in the Company's term loan. See "Liquidity and Capital
Resources".
The effective tax rates for the three months ended November 28, 1998 and
November 29, 1997 were estimated at 39.0%.
Page 8 of 12<PAGE>
RAG SHOPS, INC. AND SUBSIDIARIES
Net income increased by $27,000 for the three months ended November 28, 1998
as compared to the comparable prior period. The increase in net income is due
to the increase in gross profit that was reduced by an increase in operating
expenses.
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 28, 1998 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 $1,070,000 for the three months
ended November 28, 1998 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. The credit
facility is renewable annually on or before each December 31 and has been
renewed for 1999 unchanged. 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 November 28, 1998) 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. 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 three
months ended November 28, 1998 and November 29, 1997, 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, is
Page 9 of 12 <PAGE>
RAG SHOPS, INC. AND SUBSIDIARIES
commencing installation in January 1999 and anticipates completing
installation in all stores by the end of March 1999.
Net cash provided by operating activities for the three months ended November
28, 1998 and November 29, 1997 amounted to $5,763,000 and $5,956,000,
respectively, and $267,000 and $278,000, respectively, was used for purchases
of property and equipment. During the three months ended November 28, 1998
there were no new stores opened or existing stores closed. The Company
expects to open an additional five to seven new stores and close two 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 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.
Page 10 of 12<PAGE>
RAG SHOPS, INC. AND SUBSIDIARIES
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 11 of 12<PAGE>
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: January 7, 1999 /s/ Stanley Berenzweig
Stanley Berenzweig
Chairman Of The Board and
Principal Executive Officer
Date: January 7, 1999 /s/ Steven B. Barnett
Steven B. Barnett
Principal Financial Officer and
Principal Accounting Officer
Page 12 of 12
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