-----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, GkqRboEwlpfI54c3i/uvjoZeQvai1DrvepujsJtjBM9UigapscY98dAOYYI00XBS /OyAdD54kPkXihBuRNAjHw== 0000874385-96-000007.txt : 19960724 0000874385-96-000007.hdr.sgml : 19960724 ACCESSION NUMBER: 0000874385-96-000007 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19960601 FILED AS OF DATE: 19960712 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: RAG SHOPS INC CENTRAL INDEX KEY: 0000874385 STANDARD INDUSTRIAL CLASSIFICATION: 5945 IRS NUMBER: 510333503 STATE OF INCORPORATION: DE FISCAL YEAR END: 0831 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-19194 FILM NUMBER: 96594108 BUSINESS ADDRESS: STREET 1: 111 WAGARAW RD CITY: HAWTHORNE STATE: NJ ZIP: 07506 BUSINESS PHONE: 2014231303 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 June 1, 1996 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 (201) 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 30, 1996 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 - June 1, 1996 (unaudited) and September 2, 1995 3 Condensed consolidated statements of income - three months and nine months ended June 1, 1996 (unaudited) and June 3, 1995 (unaudited) 4 Condensed consolidated statements of cash flows - nine months ended June 1, 1996 (unaudited) and June 3, 1995 (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 Items 1. - 5. 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) June 1, September 2, 1996 1995 (Unaudited) (Note A) ASSETS Current assets: Cash $ 785 $ 911 Merchandise inventories 21,040 27,559 Prepaid expenses 832 541 Other current assets 376 92 Deferred income taxes 674 674 Total current assets 23,707 29,777 Property and equipment, net 4,448 4,726 Other assets 513 318 $28,668 $34,821 LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Note payable-bank $ - $ 4,735 Accounts payable-trade 3,402 7,448 Accrued expenses and other current liabilities 1,451 1,781 Accrued salaries and wages 556 652 Income taxes payable 245- Current portion of long-term debt 619 - Total current liabilities 6,273 14,616 Deferred income taxes 133 133 Long-term debt 1,391- Stockholders' equity: Preferred stock-- Common stock 45 45 Additional paid-in capital 6,039 6,039 Retained earnings 14,787 13,988 Total stockholders' equity 20,871 20,072 $28,668 $34,821 Note A: Derived from the September 2, 1995 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 Nine Months Ended June 1, June 3, June 1, June 3, 1996 1995 1996 1995 Net sales $ 18,506 $ 19,816 $ 67,351 $ 68,497 Cost of merchandise sold and occupancy costs 11,750 12,345 43,005 42,646 Gross profit 6,756 7,471 24,346 25,851 Store expenses 3,991 4,730 15,658 15,505 General and administrative expenses 2,141 2,260 7,272 7,321 Total operating expenses 6,132 6,990 22,930 22,826 Income from operations 624 481 1,416 3,025 Interest (expense) income, net (30) 8 (120) (84) Income before provision for income taxes 594 489 1,296 2,941 Provision for income taxes 228 191 497 1,147 Net income $ 366 $ 298 $ 799 $ 1,794 PER SHARE DATA: Net income per share $ .08 $ .07 $ .18 $ .40 Dividends per share $ - $ - $ - $ - Weighted average shares outstanding 4,514,400 4,535,847 4,515,895 4,526,583 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) Nine Months Ended June 1, June 3, 1996 1995 Cash flows from operating activities: Net income $ 799 $1,794 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 929 915 Loss on disposition of property and equipment 14 - Changes in assets and liabilities: (Increase) decrease in: Merchandise inventories 6,519 5,995 Prepaid expenses (291) (412) Other current assets (284) 27 Other assets (209) (6) Increase (decrease) in: Accounts payable-trade (4,046) (1,491) Accrued expenses and other current liabilities(330) (299) Accrued salaries and wages (96) (161) Income taxes payable 245 621 Net cash provided by operating activities 3,250 6,983 Cash flows from investing activities: Payments for purchases of property and equipment (645) (191) Proceeds from sale of property and equipment 4 - Net cash used in investing activities (641) (191) Cash flows from financing activities: Proceeds from issuance of note payable-bank 25,880 16,946 Repayments of note payable-bank (30,615) (23,501) Long-term borrowings 2,000 - Net cash used in financing activities (2,735) (6,555) Net (decrease) increase in cash (126) 237 Cash, beginning of period 911 1,180 Cash, end of period $ 785 $ 1,417 Supplemental disclosures of cash flow information: Cash paid during the period for: Interest $ 147 $ 103 Income taxes $ 198 $ 463 Supplemental schedule of non-cash investing and financing activities: Purchase of property and equipment in exchange for long-term debt $ 10 $ - See notes to the condensed consolidated financial statements. Page 5 of 10 RAG SHOPS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS NINE MONTHS ENDED JUNE 1, 1996 AND JUNE 3, 1995 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 nine months ended June 1, 1996 are not necessarily indicative of results for the fiscal year. Certain information and footnote disclosures normally included in finan- cial 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 1995. NOTE 2 - LONG TERM DEBT During the quarter ended June 1, 1996, the Company borrowed $2,000,000 ("term loan") under the terms of its credit facility with a bank to finance its new point-of-sale cash register software, data collection and computer systems. The term loan, which bears interest at a fixed rate of 8%, matures May 1, 1999 and is collateralized by property and equipment. 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 Nine Months Ended June 1, June 3, June 1, June 3, 1996 1995 1996 1995 Net sales 100.0% 100.0% 100.0% 100.0% Cost of merchandise sold and occupancy costs 63.5 62.3 63.9 62.3 Gross profit 36.5 37.7 36.1 37.7 Store expenses 21.5 23.9 23.2 22.6 General and administrative expenses 11.6 11.4 10.8 10.7 Income from operations 3.4 2.4 2.1 4.4 Net income 2.0% 1.5% 1.2% 2.6% Net sales decreased by $1,310,000 and $1,146,000 for the three and nine months ended June 1, 1996 representing a decrease of 6.6% and 1.7%, respectively, over the comparable prior periods primarily due to decreases in comparable store sales offset by new store sales of $613,000 and $2,341,000, respectively. During the three and nine months ended June 1, 1996, comparable store sales decreased 8.8% and 4.5%, respectively. Management believes these decreases were primarily due to a weak retail environment which existed throughout the spring selling season in its business segment. The Company is revising marketing plans for the upcoming year in an attempt to improve comparable store sales. Gross profit percentage decreased by 1.2% and 1.6% for the three and nine months ended June 1, 1996, respectively, from the comparable prior periods. The decrease for the three month period was primarily attributable to increased occupancy costs and a decrease in comparable store net sales. The decrease for the nine month period was primarily attributable to increased competitive promotional sales activity during the Christmas season and secondarily attributable to increased occupancy costs. Stores expenses decreased by $739,000 and increased by $153,000 for the three and nine months ended June 1, 1996, respectively. The decrease for the three month period was primarily a result of a planned reduction in advertising costs through increased efficiencies and secondarily due to a reduction in payroll and payroll related expenses. The increase for the nine month period was primarily due to the planned accelerated advertising program for the first six months of the fiscal year. As a percentage of net sales, store expenses decreased by 2.4% and increased by 0.6% for the three and nine months ended June 1, 1996, respectively, over comparable prior periods primarily as a result of the advertising and payroll variances discussed above. Page 7 of 10 RAG SHOPS, INC. AND SUBSIDIARIES General and administrative expenses remained relatively constant, both in actual dollars and as a percentage of net sales, during each period. The effective tax rate for the three and nine months ended June 1, 1996 was estimated at 38.3% as compared to 39.0% for the comparable prior periods. The 38.3% represents the Company's estimate of what the effective tax rate will be for the fiscal year ending August 31, 1996. Net income increased $68,000 and decreased $995,000 for the three and nine months ended June 1, 1996, respectively, compared to the comparable prior periods. The increase in net income for the three month period is due to the decrease in advertising, payroll and payroll related expenses offset by the decrease in gross profit. The decrease in net income for the nine month period is due to the increase in promotional sales during the first half of the fiscal year which resulted in a decrease in gross profit, the increase in occupancy costs which resulted in a decrease in gross profit and the net increase in advertising costs which resulted in an increase in store 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 nine months ended June 1, 1996 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 $2,273,000 for the nine months ended June 1, 1996 as compared to the September 2, 1995 amount as a result of the Company retaining its net income for this period. The Company maintains a $10,000,000 credit facility with a bank. The credit facility is renewable annually on or before each December 31 and 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 (8.25% at June 1, 1996) and under the term loan are fixed at eight percent (8%). The credit facility requires the Company to maintain a compensating balance of $400,000 in addition to certain financial Page 8 of 10 RAG SHOPS, INC. AND SUBSIDIARIES covenants. The Company has satisfied its line of credit clean-up provision for 1996 during the three months ended June 1, 1996. 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 $4,935,000 and $6,930,000 for the nine months ended June 1, 1996 and June 3, 1995, respectively. The Company intends to maintain the availability of the 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 will continue to install its point-of-sale systems during the remainder of the fiscal year and anticipates completing installation in all stores by spring 1997. Since the Company's expectation as to the timing of the completion of the installation of its point-of-sale system is forward-looking, and since the timing may be impacted by factors outside of the Company's control, including defects in equipment, there can be no assurance that the point-of-sale system will be installed within the anticipated time frame. Net cash provided by operating activities for the nine months ended June 1, 1996 and June 3, 1995 amounted to $3,250,000 and $6,983,000, respectively, and $645,000 and $191,000, respectively, was used for purchases of property and equipment. The Company has opened one new store, closed two stores and will complete expansion of two stores during the current year. Costs associated with 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. Page 9 of 10 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 11, 1996 Stanley Berenzweig Chairman Of The Board and Principal Executive Officer Date: July 11, 1996 Steven B. Barnett Principal Financial Officer and Principal Accounting Officer Page 10 of 10 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 11, 1996 /s/ Stanley Berenzweig Stanley Berenzweig Chairman Of The Board and Principal Executive Officer Date: July 11, 1996 /s/ Steven B. Barnett Steven B. Barnett Principal Financial Officer and Principal Accounting Officer Page 10 of 10 -----END PRIVACY-ENHANCED MESSAGE-----