-----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, M6AJdBkvEzSlSC7r6MWttDBp5eboJVQKX8JVwKKsTKCcF8BQq3J/wkiSSLNYGwVb BaVseS8pWjfoKrguIlmuiA== 0000874385-97-000002.txt : 19970402 0000874385-97-000002.hdr.sgml : 19970402 ACCESSION NUMBER: 0000874385-97-000002 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19970301 FILED AS OF DATE: 19970401 SROS: NONE 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: 1934 Act SEC FILE NUMBER: 000-19194 FILM NUMBER: 97572976 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 March 1, 1997 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 MARCH 28, 1997 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 - March 1, 1997 (unaudited), March 2, 1996 (unaudited) and August 31, 1996 3 Condensed consolidated statements of income - three and six months ended March 1, 1997 (unaudited) and March 2, 1996 (unaudited) 4 Condensed consolidated statements of cash flows - six months ended March 1, 1997 (unaudited) and March 2, 1996 (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) March 1, March 2, August 31, 1997 1996 1996 (Unaudited) (Unaudited) (Note A) ASSETS Current assets: Cash $ 4,195 $ 954 $ 821 Merchandise inventories 22,249 22,829 26,280 Prepaid expenses 825 925 345 Other current assets 408 85 474 Deferred taxes 728 674 728 Total current assets 28,405 25,467 28,648 Property and equipment, net 4,243 4,332 4,462 Other assets 336 305 445 $32,984 $30,104 $33,555 LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Note payable-bank $ - $ 1,150 $ 1,130 Accounts payable-trade 5,982 5,326 7,604 Accrued expenses and other current liabilities 2,114 2,298 1,565 Accrued salaries and wages 887 589 583 Income taxes payable 644 93 150 Current portion of long-term debt 657 5 632 Total current liabilities 10,284 9,461 11,664 Deferred taxes 68 133 68 Long-term debt 900 5 1,230 Stockholders' equity: Common stock 45 45 45 Additional paid-in capital 6,039 6,039 6,039 Retained earnings 15,648 14,421 14,509 Total stockholders' equity 21,732 20,505 20,593 $32,984 $30,104 $33,555 Note A: Derived from the August 31, 1996 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 March 1, March 2, March 1, March 2, 1997 1996 1997 1996 Net sales $ 23,707 $ 21,063 $ 49,888 $ 48,845 Cost of merchandise sold and occupancy costs 14,989 13,915 31,379 31,255 Gross profit 8,718 7,148 18,509 17,590 Store expenses 5,806 5,119 11,609 11,667 General and administrative expenses 2,544 2,511 4,964 5,131 Total operating expenses 8,350 7,630 16,573 16,798 Income (loss) from operations 368 (482) 1,936 792 Interest expense 9 10 58 90 Income (loss) before income tax expense (benefit) 359 (492) 1,878 702 Income tax expense (benefit) 141 (189) 739 269 Net income (loss) $ 218 $ (303) $ 1,139 $ 433 PER SHARE DATA: Net income (loss) per share $ .05 $ (.07) $ .25 $ .10 Dividends per share $ - $ - $ - $ - Weighted average shares outstanding 4,526,315 4,514,400 4,520,400 4,516,642 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 March 1, March 2, 1997 1996 Cash flows from operating activities: Net income $ 1,139 $ 433 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 731 594 Loss on disposition of property and equipment 34 14 Changes in assets and liabilities: (Increase) decrease in: Merchandise inventories 4,031 4,730 Prepaid expenses (480) (384) Other current assets 66 7 Other assets 99 4 Increase (decrease) in: Accounts payable-trade (1,622) (2,122) Accrued expenses and other current liabilities 549 517 Accrued salaries and wages 304 (63) Income taxes payable 494 93 Net cash provided by operating activities 5,345 3,823 Cash flows from investing activities: Payments for purchases of property and equipment (537) (197) Proceeds from sale of property and equipment 1 2 Net cash used in investing activities (536) (195) Cash flows from financing activities: Proceeds from issuance of note payable-bank 7,075 19,145 Repayments of note payable-bank (8,205) (22,730) Repayments of long-term debt (305) - Net cash used in financing activities (1,435) (3,585) Net increase in cash 3,374 43 Cash, beginning of period 821 911 Cash, end of period $ 4,195 $ 954 Supplemental disclosures of cash flow information: Cash paid during the period for: Interest $ 92 $ 135 Income taxes $ 395 $ 111 Supplemental schedule of non-cash investing and financing activities: Purchase of property and equipment in exchange for 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 THREE AND SIX MONTHS ENDED MARCH 1, 1997 AND MARCH 2, 1996 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 March 1, 1997 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 1996. NOTE 2 - ADOPTION OF ACCOUNTING STANDARDS The Company has adopted Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed Of". This Statement establishes accounting standards for the measurement of the impairment of long-lived assets, certain identifiable intangibles and goodwill related to those assets. This Statement requires that an asset to be held and used by an entity be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The Company's long-lived assets are not impaired based on a review of such assets. In October 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" (SFAS No. 123), which is effective for the Company beginning September 1, 1996. SFAS No. 123 requires expanded disclosures of stock-based compensation arrangements with employees in Notes to Annual Financial Statements and encourages (but does not require) compensation cost to be measured based on the fair value of the equity instrument awarded. Companies are permitted, however, to continue to apply APB Opinion No. 25, which recognizes compensation cost based on the intrinsic value of the equity instrument awarded. The Company will continue to apply APB Opinion No. 25 to its stock based compensation awards to employees and will disclose the required pro forma effect on net income and earnings per share in its annual financial statements. 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 March 1, March 2, March 1, March 2, 1997 1996 1997 1996 Net sales 100.0% 100.0% 100.0% 100.0% Cost of merchandise sold and occupancy costs 63.2 66.1 62.9 64.0 Gross profit 36.8 33.9 37.1 36.0 Store expenses 24.5 24.3 23.3 23.9 General and administrative expenses 10.7 11.9 9.9 10.5 Income (loss) from operations 1.6 (2.3) 3.9 1.6 Net income (loss) 0.9% (1.4)% 2.3% 0.9% The Company's net sales increased by $2,644,000 and $1,043,000 for the three and six months ended March 1, 1997 representing an increase of 12.6% and 2.1%, respectively, over the comparable prior periods. These increases were primarily due to increases in comparable store sales of $2,714,800 or 13.6% and $1,606,300 or 3.4% in addition to new store sales of $927,600 and $1,424,200 for the three and six month periods, respectively, over the comparable prior periods. Management believes that the marketing plan launched in September 1996 and the mild weather conditions in the northeast region during the fiscal second quarter compared to the comparable prior periods contributed significantly to the positive comparable store sales results. Gross profit percentage increased by 2.9% and 1.1% for the three and six months ended March 1, 1997, respectively, from the comparable prior periods. For the three months ended March 1, 1997, the increase was primarily due to (i) a decrease in markdowns as a percent to sales of 1.2% due to improved control of promotions during the Christmas selling season, (ii) a decrease in occupancy costs of 0.8% as a percent to sales due to the increase in sales as mentioned above and (iii) a 0.5% decrease in the Company's shrinkage estimate based on the results of the most recent annual physical inventory and continuation of loss prevention efforts. For the six months ended March 1, 1997, the increase was primarily due to (i) a decrease in markdowns as a percent to sales of 0.5% and (ii) a 0.5% decrease in the Company's shrinkage estimate as discussed above. Store expenses increased by $687,000 and as a percentage of net sales increased by 0.2% for the three months ended March 1, 1997 from the comparable prior period. The dollar increase was primarily due to a planned increase in advertising costs and secondarily due to an increase in payroll and payroll related expenses. As a percentage of net sales, the Company was able to leverage these costs against the increase in sales as previously discussed. Store expenses remained relatively constant and as a percentage of Page 7 of 10 RAG SHOPS, INC. AND SUBSIDIARIES net sales decreased by 0.6% for the six months ended March 1, 1997 from the comparable prior period. This was primarily due to a decrease in advertising costs, resulting from the accelerated advertising program in the comparable prior period, which was partially offset by an increase in depreciation expense that was due to the installation of point-of-sale equipment. General and administrative expenses remained relatively constant and as a percentage of net sales decreased by 1.2% during the three months ended March 1, 1997 over the comparable prior period. The decrease in general and administrative expenses as a percentage of net sales was primarily due to the Company leveraging these relatively fixed costs against the increase in net sales as previously discussed. General and administrative expenses decreased by $167,000 and as a percentage of net sales decreased by 0.6% for the six months ended March 1, 1997 from the comparable prior period. The decrease in general and administrative expenses and as a percentage of net sales was primarily due to a decrease in payroll and payroll related expenses. Interest expense decreased for the three and six months ended March 1, 1997 from the comparable prior periods as a result of cash provided by operating activities. This decrease was net of additional interest on the Company's term loan to finance its point-of-sale cash register software, data collection and computer systems. See "Liquidity and Capital Resources". The effective tax rate for the three and six months ended March 1, 1997 was estimated at 39.4% as compared to 38.3% for the comparable prior periods. This increase is attributed to a higher effective state and local income tax rate. The Company generated net income of $218,000 for the three months ended March 1, 1997 as compared to a net loss of $303,000 in the comparable prior period due to the comparable store net sales increases and related increase in gross profit which was partially offset by the increase in store expenses. Net income increased by $706,000 for the six months ended March 1, 1997 primarily due to the comparable store net sales increases and related increase in gross profit and secondarily to the decrease in general and administrative 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 six months ended March 1, 1997 and the comparable prior period, Page 8 of 10 RAG SHOPS, INC. AND SUBSIDIARIES 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 $1,137,000 for the six months ended March 1, 1997 as compared to the August 31, 1996 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 (8.25% at March 1, 1997) 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 covenants. The Company has satisfied its line of credit clean-up provision for 1997 during the three months ended March 1, 1997. 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 $1,460,000 and $4,935,000 for the six months ended March 1, 1997 and March 2, 1996, 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 will continue to install its point-of-sale systems during the remainder of this fiscal year and anticipates completing installation in all stores by the end of spring 1997. In addition, we are continuing with the development of our automated store ordering systems and anticipate commencing installation upon completion of our new point-of-sale systems. Net cash provided by operating activities for the six months ended March 1, 1997 and March 2, 1996 amounted to $5,345,000 and $3,823,000, respectively, and $537,000 and $197,000, respectively, was used for purchases of property and equipment. As of March 1, 1997 the Company has opened three new stores, closed three and expects to open an additional one new store and close one existing store 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. 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 and other risk factors. 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: April 1, 1997 /s/ Stanley Berenzweig Stanley Berenzweig Chairman Of The Board and Principal Executive Officer Date: April 1, 1997 /s/ Steven B. Barnett Steven B. Barnett Principal Financial Officer and Principal Accounting Officer Page 10 of 10 EX-27 2
5 3-MOS AUG-30-1997 MAR-01-1997 4,195,000 0 0 0 22,249,000 28,405,000 12,328,000 8,085,000 32,984,000 10,284,000 0 0 0 45,000 21,687,000 32,984,000 23,707,000 23,707,000 14,989,000 8,350,000 0 0 9,000 359,000 141,000 218,000 0 0 0 218,000 0.05 0.05
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