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<PAGE>
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<PAGE>
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<PAGE>
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<PAGE>
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<PAGE>
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<PAGE>
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 <PAGE>
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<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: 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
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