-----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, QScW141AsBdJg8eHRrDVbh75ggwNgrOQELmB1APKfHGNolDn5y3hOi6csxukq5FC 8zMJniRhzh29QPP61Sf2Pw== 0000874385-98-000003.txt : 19980410 0000874385-98-000003.hdr.sgml : 19980410 ACCESSION NUMBER: 0000874385-98-000003 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980228 FILED AS OF DATE: 19980409 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: SEC FILE NUMBER: 000-19194 FILM NUMBER: 98590459 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 February 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 MARCH 27, 1998 Common stock, par value $.01 4,514,400 Page 1 of 9 RAG SHOPS, INC. AND SUBSIDIARIES INDEX Page PART 1 - FINANCIAL INFORMATION Item 1.Financial Statements Condensed consolidated balance sheets - February 28, 1998 (unaudited), March 1, 1997 (unaudited) and August 30, 1997 3 Condensed consolidated statements of income - three and six months ended February 28, 1998 (unaudited) and March 1, 1997 (unaudited) 4 Condensed consolidated statements of cash flows - six months ended February 28, 1998 (unaudited) and March 1, 1997 (unaudited) 5 Notes to condensed consolidated financial statements 6 Item 2.Management's Discussion and Analysis of Results of Operations and Financial Condition 7-8 PART II - OTHER INFORMATION Item 4.Submission of Matters to a Vote of Security Holders 9 Item 6.Exhibits and Reports on Form 8-K 9 SIGNATURES 9 Page 2 of 9 RAG SHOPS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (All amounts in thousands) February 28, March 1, August 30, 1998 1997 1997 (Unaudited) (Unaudited) (Note A) ASSETS Current assets: Cash $ 3,048 $ 4,195 $ 764 Merchandise inventories 22,630 22,249 25,123 Prepaid expenses 755 825 299 Other current assets 149 408 242 Deferred taxes 697 728 697 Total current assets 27,279 28,405 27,125 Property and equipment, net 4,727 4,243 4,886 Other assets 271 336 253 $32,277 $32,984 $32,264 LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Note payable-bank $ - $ - $ 2,435 Accounts payable-trade 5,091 5,982 5,081 Accrued expenses and other current liabilities 2,591 2,114 1,857 Accrued salaries and wages 651 887 812 Income taxes payable 783 644 - Current portion of long-term debt 716 657 684 Total current liabilities 9,832 10,284 10,869 Deferred taxes 41 68 41 Long-term debt 191 900 554 Stockholders' equity: Common stock 45 45 45 Additional paid-in capital 6,039 6,039 6,039 Retained earnings 16,129 15,648 14,716 Total stockholders' equity 22,213 21,732 20,800 $32,277 $32,984 $32,264 Note A: Derived from the August 30, 1997 audited balance sheet. See notes to the condensed consolidated financial statements. Page 3 of 9 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 28, March 1, February 28, March 1, 1998 1997 1998 1997 Net sales $24,998 $23,707 $51,275 $49,888 Cost of merchandise sold and occupancy costs 15,951 14,989 32,487 31,379 Gross profit 9,047 8,718 18,788 18,509 Store expenses 5,701 5,806 11,267 11,609 General and administrative expenses 2,645 2,544 5,156 4,964 Total operating expenses 8,346 8,350 16,423 16,573 Income from operations 701 368 2,365 1,936 Interest income (expense) 6 (9) (49) (58) Income before provision for income taxes 707 359 2,316 1,878 Provision for income taxes 276 141 903 739 Net income $ 431 $ 218 $ 1,413 $ 1,139 Earnings per common share Basic $ .10 $ .05 $ .31 $ .25 Diluted $ .09 $ .05 $ .31 $ .25 See notes to the condensed consolidated financial statements. Page 4 of 9 RAG SHOPS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (All amounts in thousands) Six Months Ended February 28, March 1, 1998 1997 Cash flows from operating activities: Net income $ 1,413 $ 1,139 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 721 731 Loss on disposition of property and equipment 19 34 Changes in assets and liabilities: (Increase) decrease in: Merchandise inventories 2,493 4,031 Prepaid expenses (456) (480) Other current assets 93 66 Other assets (18) 99 Increase (decrease) in: Accounts payable-trade 10 (1,622) Accrued expenses and other current liabilities 734 549 Accrued salaries and wages (161) 304 Income taxes payable 783 494 Net cash provided by operating activities 5,631 5,345 Cash flows from investing activities: Payments for purchases of property and equipment (584) (537) Proceeds from sale of property and equipment 3 1 Net cash used in investing activities (581) (536) Cash flows from financing activities: Proceeds from issuance of note payable-bank 5,810 7,075 Repayments of note payable-bank (8,245) (8,205) Repayments of long-term debt (331) (305) Net cash used in financing activities (2,766) (1,435) Net increase in cash 2,284 3,374 Cash, beginning of period 764 821 Cash, end of period $ 3,048 $ 4,195 Supplemental disclosures of cash flow information: Cash paid during the period for: Interest $ 78 $ 92 Income taxes $ 27 $ 395 See notes to the condensed consolidated financial statements. Page 5 of 9 RAG SHOPS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS THREE AND SIX MONTHS ENDED FEBRUARY 28, 1998 AND MARCH 1, 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 and six months ended February 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 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 1997. NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES In 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 128, Earnings per Share. Statement 128 replaced the previously reported primary and fully diluted earnings per share with basic and diluted earnings per share. Unlike primary earnings per share, basic earnings per share excludes any dilutive effects of options, warrants, and convertible securities. Diluted earnings per share is very similar to the previously reported fully diluted earnings per share. All earnings per share amounts for all periods have been presented, and where necessary, restated to conform to the Statement 128 requirements. NOTE 3 - EARNINGS PER SHARE Three Months Ended Six Months Ended February 28, March 1, February 28, March 1, 1998 1997 1998 1997 Numerator: Net income for basic and diluted earnings per share $ 431,000 $ 218,000 $1,413,000 $1,139,000 Denominator: Denominator for basic earnings per share--weighted-average shares 4,514,400 4,514,400 4,514,400 4,514,400 Effect of dilutive securities: Employee stock options 30,905 36,462 11,915 1,733 Denominator for diluted earnings per share--adjusted weighted- average shares and assumed conversions 4,545,305 4,550,862 4,526,315 4,516,133 Basic earnings per share$ .10 $ .05 $ .31 $ .25 Diluted earnings per share$ .09 $ .05 $ .31 $ .25 Page 6 of 9 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 28,March 1,February 28,March 1, 1998 1997 1998 1997 Net sales 100.0% 100.0% 100.0% 100.0% Cost of merchandise sold and occupancy costs 63.8 63.2 63.4 62.9 Gross profit 36.2 36.8 36.6 37.1 Store expenses 22.8 24.5 22.0 23.3 General and administrative expenses 10.6 10.7 10.0 9.9 Income from operations 2.8 1.6 4.6 3.9 Net income 1.7% 0.9% 2.8% 2.3% The Company's net sales increased by $1,291,000 and $1,387,000 for the three and six months ended February 28, 1998 representing an increase of 5.4% and 2.8%, respectively, over the comparable prior periods. These increases were primarily due to increases in comparable store sales of $938,000 or 4.1% and $754,000 or 1.6%, over the comparable prior periods, in addition to new store sales of $963,000 and $2,129,000 offset by closed store sales of $610,000 and $1,496,000 for the three and six month periods, respectively. Gross profit percentage decreased by .6% and .5% for the three and six months ended February 28, 1998, respectively, from the comparable prior periods primarily due to an increase of .4% in the Company's shrinkage reserve. Store expenses decreased by $105,000 and $342,000 and as a percentage of net sales decreased by 1.7% and 1.3% for the three and six months ended February 28, 1998, respectively, over the comparable prior periods. The decrease in store expenses and as a percentage of net sales for the three and six months ended February 28, 1998 was primarily due to adecrease in payroll and payroll related expenses. General and administrative expenses increased by $101,000 and $192,000 for the three and six months ended February 28, 1998, respectively, over the comparable prior periods. The increase in general and administrative expenses was primarily due to an increase in payroll and payroll related expenses. As a percentage of net sales, general and administrative expenses remained relatively constant as the Company was able to leverage these costs against the increase in net sales. Interest income (expense) remained relatively constant for the three and six months ended February 28, 1998 from the comparable prior periods. See "Liquidity and Capital Resources". The effective tax rate for the three and six months ended February 28, 1998 was estimated at 39.0% as compared to 39.4% for the comparable prior periods. This decrease is attributed to a lower effective state and local income tax rate. Net income increased by $213,000 for the three months ended February 28, 1998 as compared to the comparable prior period due to the comparable store net sales increases and related increase in gross profit. Net income increased by $274,000 for the six months ended February 28, 1998 primarily due to the comparable store net sales increases and related increase in gross profit and secondarily to the decrease in store expenses which was partially offset by the increase 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. Page 7 of 9 RAG SHOPS, INC. AND SUBSIDIARIES 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 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 $1,191,000 for the six months ended February 28, 1998 as compared to the August 30, 1997 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 (8.50% at February 28, 1998) and under the term loan are fixed at seven and one-half percent (7.50%) 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 1998 during the three months ended February 28, 1998. 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 $2,785,000 and $1,460,000 for the six months ended February 28, 1998 and March 1, 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 is continuing with the development of its automated store ordering systems and anticipates commencing installation in the spring of 1998. Net cash provided by operating activities for the six months ended February 28, 1998 and March 1, 1997 amounted to $5,631,000 and $5,345,000, respectively, and $584,000 and $537,000, respectively, was used for purchases of property and equipment. For the six months ended February 28, 1998 the Company has opened one new store, relocated and expanded one existing store, closed one and expanded and retrofitted two existing stores by taking additional contiguous space to more closely represent its new prototype larger format stores. The Company expects to open an additional two to four new stores 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, lease negotiations and other risk factors. Page 8 of 9 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 22, 1998. Mr. Stanley Berenzweig was elected a Class I Director by a vote of 4,230,367 shares in favor and 97,245 shares withheld. Mr. Michael Aaronson was also elected a Class I Director by a vote of 4,230,067 shares in favor and 97,545 shares withheld. The firm of Deloitte & Touche, LLP was appointed as auditors for the Company's fiscal year ending August 29, 1998 by a vote of 4,295,267 in favor, 25,045 against and 7,300 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 8, 1998 /s/ Stanley Berenzweig Stanley Berenzweig Chairman Of The Board and Principal Executive Officer Date:April 8, 1998 /s/ Steven B. Barnett Steven B. Barnett Principal Financial Officer and Principal Accounting Officer Page 9 of 9 EX-27 2
5 6-MOS AUG-29-1998 AUG-31-1997 FEB-28-1998 3,048,000 0 0 0 22,630,000 27,279,000 13,963,000 9,236,000 32,277,000 9,832,000 0 0 0 45,000 22,168,000 32,277,000 51,275,000 51,275,000 32,487,000 48,910,000 0 0 49,000 2,316,000 903,000 1,413,000 0 0 0 1,413,000 0.31 0.31
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