-----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, S88K67J4QgFf6a0mLVfIVx12GDvcSOcEmQ734B+oiXgKhV06Z+aHRoojeP3+H3Ns rG+ZDrdTFDiOtj4CIsfDUQ== 0000874385-98-000004.txt : 19980714 0000874385-98-000004.hdr.sgml : 19980714 ACCESSION NUMBER: 0000874385-98-000004 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980530 FILED AS OF DATE: 19980710 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: 98664048 BUSINESS ADDRESS: STREET 1: 111 WAGARAW RD CITY: HAWTHORNE STATE: NJ ZIP: 07506 BUSINESS PHONE: 9734231303 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 May 30, 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 JUNE 26, 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 - May 30, 1998 (unaudited), May 31, 1997 (unaudited) and August 30, 1997 3 Condensed consolidated statements of income - three and nine months ended May 30, 1998 (unaudited) and May 31, 1997 (unaudited) 4 Condensed consolidated statements of cash flows - nine months ended May 30, 1998 (unaudited) and May 31, 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 Items 1.-5. 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) May 30, May 31, August 30, 1998 1997 1997 (Unaudited) (Unaudited) (Note A) ASSETS Current assets: Cash $ 2,508 $ 2,372 $ 764 Merchandise inventories 23,108 21,827 25,123 Prepaid expenses 195 655 299 Other current assets 70 411 242 Deferred taxes 697 728 697 Total current assets 26,578 25,993 27,125 Property and equipment, net 4,544 4,483 4,886 Other assets 291 272 253 $31,413 $30,748 $32,264 LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Note payable-bank $ - $ - $ 2,435 Accounts payable-trade 4,839 4,481 5,081 Accrued expenses and other current liabilities 1,965 1,331 1,857 Accrued salaries and wages 652 939 812 Income taxes payable 744 632 - Current portion of long-term debt 735 670 684 Total current liabilities 8,935 8,053 10,869 Deferred taxes 41 68 41 Long-term debt - 728 554 Stockholders' equity: Common stock 45 45 45 Additional paid-in capital 6,039 6,039 6,039 Retained earnings 16,353 15,815 14,716 Total stockholders' equity 22,437 21,899 20,800 $31,413 $30,748 $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 Nine Months Ended May 30, May 31, May 30, May 31, 1998 1997 1998 1997 Net sales $20,699 $19,629 $71,974 $69,517 Cost of merchandise sold and occupancy costs 13,209 12,509 45,696 43,888 Gross profit 7,490 7,120 26,278 25,629 Store expenses 4,928 4,577 16,195 16,186 General and administrative expenses 2,204 2,260 7,360 7,224 Total operating expenses 7,132 6,837 23,555 23,410 Income from operations 358 283 2,723 2,219 Interest income (expense)-net 10 (6) (39) (64) Income before provision for income taxes 368 277 2,684 2,155 Provision for income taxes 144 110 1,047 849 Net income $ 224 $ 167 $ 1,637 $ 1,306 Earnings per common share Basic $ .05 $ .04 $ .36 $ .29 Diluted $ .05 $ .04 $ .36 $ .29 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) Nine Months Ended May 30, May 31, 1998 1997 Cash flows from operating activities: Net income $ 1,637 $ 1,306 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 1,091 1,096 Loss on disposition of property and equipment 23 45 Changes in assets and liabilities: (Increase) decrease in: Merchandise inventories 2,015 4,453 Prepaid expenses 104 (310) Other current assets 172 63 Other assets (40) 160 Increase (decrease) in: Accounts payable-trade (242) (3,123) Accrued expenses and other current liabilities 108 (234) Accrued salaries and wages (160) 356 Income taxes payable 744 482 Net cash provided by operating activities 5,452 4,294 Cash flows from investing activities: Payments for purchases of property and equipment (773) (1,150) Proceeds from sale of property and equipment 3 1 Net cash used in investing activities (770) (1,149) 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 (503) (464) Net cash used in financing activities (2,938) (1,594) Net increase in cash 1,744 1,551 Cash, beginning of period 764 821 Cash, end of period $ 2,508 $ 2,372 Supplemental disclosures of cash flow information: Cash paid during the period for: Interest $ 94 $ 122 Income taxes $ 209 $ 518 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 NINE MONTHS ENDED MAY 30, 1998 AND MAY 31, 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 nine months ended May 30, 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 Nine Months Ended May 30, May 31, May 30, May 31, 1998 1997 1998 1997 Numerator: Net income for basic and diluted earnings per share $ 224,000 $ 167,000 $1,637,000 $1,306,000 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 43,856 43,505 39,035 12,824 Denominator for diluted earnings per share--adjusted weighted- average shares and assumed conversions 4,558,256 4,557,905 4,553,435 4,527,224 Basic earnings per share $ .05 $ .04 $ .36 $ .29 Diluted earnings per share $ .05 $ .04 $ .36 $ .29 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 Nine Months Ended May 30, May 31, May 30, May 31, 1998 1997 1998 1997 Net sales 100.0% 100.0% 100.0% 100.0% Cost of merchandise sold and occupancy costs 63.8 63.7 63.5 63.1 Gross profit 36.2 36.3 36.5 36.9 Store expenses 23.8 23.3 22.5 23.3 General and administrative expenses 10.7 11.5 10.2 10.4 Income from operations 1.7 1.5 3.8 3.2 Net Income 1.1% 0.9% 2.3% 1.9% The Company's net sales increased by $1,070,000 and $2,457,000 for the three and nine months ended May 30, 1998 representing an increase of 5.5% and 3.5%, respectively, over the comparable prior periods. These increases were primarily due to increases in comparable store sales of $696,000 or 3.7% and $1,450,000 or 2.2%, over the comparable prior periods, in addition to new store sales of $953,000 and $3,083,000 offset by closed store sales of $579,000 and $2,076,000 for the three and nine month periods, respectively. Gross profit percentage remained consistent for the three and nine months ended May 30, 1998, respectively, from the comparable prior periods. Store expenses increased by $351,000 and as a percentage of net sales increased by .5% for the three months ended May 30, 1998 over the comparable prior period. The increases were primarily due to an increase in payroll and payroll related expenses. Store expenses remained relatively constant and as a percentage of net sales decreased by .8% for the nine months ended May 30, 1998 over the comparable prior period. The decrease in store expenses as a percentage of net sales was principally due to the Company leveraging these expenses against the increase in net sales. General and administrative expenses decreased marginally and increased by $136,000 for the three and nine months ended May 30, 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 decreased by .8% and .2% for the three and nine months ended May 30, 1998, respectively, over the comparable prior periods as the Company was able to leverage these costs against the increase in net sales. The effective tax rate for the three and nine months ended May 30, 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 $57,000 for the three months ended May 30, 1998 as compared to the comparable prior period primarily due to the comparable store net sales increases and related increase in gross profit partially offset by an increase in store expenses. Net income increased by $331,000 for the nine months ended May 30, 1998 primarily due to the comparable store net sales increases and related increase in gross profit 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 nine months ended May 30, 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 $1,387,000 for the nine months ended May 30, 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 May 30, 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 $2,785,000 and $1,460,000 for the nine months ended May 30, 1998 and May 31, 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 completing installation in the spring of 1999. Net cash provided by operating activities for the nine months ended May 30, 1998 and May 31, 1997 amounted to $5,452,000 and $4,294,000, respectively, and $773,000 and $1,150,000, respectively, was used for purchases of property and equipment. For the nine months ended May 30, 1998 the Company has opened two new stores, relocated and expanded one existing store, closed two and expanded and retrofitted two existing stores by taking additional contiguous space to more closely represent its new prototype larger format stores. The Company does not expect to open any additional new stores or close any existing stores during the remainder of 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 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 10, 1998 /s/ Stanley Berenzweig Stanley Berenzweig Chairman Of The Board and Principal Executive Officer Date: July 10, 1998 /s/ Steven B. Barnett Steven B. Barnett Principal Financial Officer and Principal Accounting Officer Page 9 of 9 EX-27 2
5 9-MOS AUG-29-1998 AUG-31-1997 MAY-30-1998 2,508,000 0 0 0 23,108,000 26,578,000 14,144,000 9,600,000 31,413,000 8,935,000 0 0 0 45,000 22,392,000 31,413,000 71,974,000 71,974,000 45,696,000 69,251,000 0 0 39,000 2,684,000 1,047,000 1,637,000 0 0 0 1,637,000 0.36 0.36
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