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 November 30, 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 DECEMBER 27, 1996
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 - November 30, 1996
(unaudited), December 2, 1995 (unaudited) and August 31, 1996 3
Condensed consolidated statements of income - three
months ended November 30, 1996 (unaudited) and
December 2, 1995 (unaudited) 4
Condensed consolidated statements of cash flows -
three months ended November 30, 1996 (unaudited) and
December 2, 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<PAGE>
RAG SHOPS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(All amounts in thousands)
November 30, December 2, August 31,
1996 1995 1996
(Unaudited) (Unaudited) (Note A)
ASSETS
Current assets:
Cash $ 4,297 $ 1,748 $ 821
Merchandise inventories 24,314 23,271 26,280
Prepaid expenses 920 973 345
Other current assets 394 100 474
Deferred taxes 728 674 728
Total current assets 30,653 26,766 28,648
Property and equipment, net 4,369 4,501 4,462
Other assets 416 313 445
$35,438 $31,580 $33,555
LIABILITIES AND STOCKHOLDERS'
EQUITY
Current liabilities:
Note payable-bank $ - $ 500 $ 1,130
Accounts payable-trade 7,828 6,195 7,604
Accrued expenses and other
current liabilities 2,812 2,923 1,565
Accrued salaries and wages 723 652 583
Income taxes payable 781 368 150
Current portion of
long-term debt 645 - 632
Total current liabilities 12,789 10,638 11,664
Deferred taxes 68 133 68
Long-term debt 1,067 - 1,230
Stockholders' equity:
Preferred stock - - -
Common stock 45 45 45
Additional paid-in capital 6,039 6,039 6,039
Retained earnings 15,430 14,725 14,509
Total stockholders'
equity 21,514 20,809 20,593
$35,438 $31,580 $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
November 30, December 2,
1996 1995
Net sales $ 26,181 $ 27,782
Cost of merchandise sold and occupancy costs 16,390 17,340
Gross profit 9,791 10,442
Store expenses 5,803 6,548
General and administrative expenses 2,420 2,620
Total operating expenses 8,223 9,168
Income from operations 1,568 1,274
Interest expense 49 80
Income before provision for income taxes 1,519 1,194
Provision for income taxes 598 458
Net income $ 921 $ 736
PER SHARE DATA:
Net income per share $ .20 $ .16
Dividends per share $ - $ -
Weighted average shares outstanding 4,514,484 4,518,884
See notes to the condensed consolidated financial statements.
Page 4 of 10<PAGE>
RAG SHOPS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(All amounts in thousands)
Three Months Ended
November 30, December 2,
1996 1995
Cash flows from operating activities:
Net income $ 921 $ 736
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 365 297
Loss on disposition of property and equipment 7 14
Changes in assets and liabilities:
(Increase) decrease in:
Merchandise inventories 1,966 4,288
Prepaid expenses (575) (432)
Other current assets 80 (8)
Other assets 24 -
Increase (decrease) in:
Accounts payable-trade 224 (1,253)
Accrued expenses and other current liabilities 1,247 1,142
Accrued salaries and wages 140 -
Income taxes payable 631 368
Net cash provided by operating activities 5,030 5,152
Cash flows from investing activities:
Payments for purchases of property and equipment (274) (82)
Proceeds from sale of property and equipment - 2
Net cash used in investing activities (274) (80)
Cash flows from financing activities:
Proceeds from issuance of note payable-bank 7,075 11,535
Repayments of note payable-bank (8,205) (15,770)
Repayments of long-term debt (150) -
Net cash used in financing activities (1,280) (4,235)
Net increase in cash 3,476 837
Cash, beginning of period 821 911
Cash, end of period $ 4,297 $ 1,748
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 59 $ 59
Income taxes $ 117 $ 3
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 MONTHS ENDED NOVEMBER 30, 1996 AND DECEMBER 2, 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 three months ended November 30, 1996 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
November 30, December 2,
1996 1995
Net sales 100.0% 100.0%
Cost of merchandise sold and occupancy costs 62.6 62.4
Gross profit 37.4 37.6
Store expenses 22.2 23.6
General and administrative expenses 9.2 9.4
Income from operations 6.0 4.6
Net income 3.5% 2.7%
The Company's net sales decreased by $1,601,000 or 5.8% for the three months
ended November 30, 1996 over the comparable prior period primarily due to
decreases in comparable store sales of $1,108,500 or 4.1% partially offset by
new store sales of $497,000. The shift in the Thanksgiving holiday weekend
from the penultimate week of the first quarter last year, resulted in one
week during the peak selling period between Thanksgiving and Christmas last
year, as compared to none this year, since the quarter ended the Saturday
immediately following Thanksgiving. The absence of that holiday week in this
year's quarter played a significant role in these sales results. Management
believes that the marketing plan launched in September 1996 has begun to show
positive results due to a reversal of comparable store sales from a decrease
of 5.2% in fiscal September 1996 to an increase of 6.4% for the four week
period ending the Saturday after Thanksgiving over the comparable prior
period.
Gross profit percentage decreased by .2% for the three months ended November
30, 1996 from the comparable prior period primarily due to an increase in
occupancy costs as a percent to sales of .6%. This amount was partially
offset by a .4% decrease in the Company's shrinkage estimate based on the
results of the most recent annual physical inventory and continuation of loss
prevention methods.
Store expenses decreased by $745,000 and as a percentage of net sales
decreased by 1.4% for the three months ended November 30, 1996 from the
comparable prior period. The decrease in store expenses and as a percentage
of net sales was primarily due to a decrease in advertising costs as a result
of the accelerated advertising program in the comparable prior period and
secondarily due to a decrease in payroll and payroll related expenses.
Page 7 of 10<PAGE>
RAG SHOPS, INC. AND SUBSIDIARIES
General and administrative expenses decreased by $200,000 and as a percentage
of net sales decreased by .2% during the three months ended November 30, 1996
over 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 months ended November 30, 1996 from
the comparable prior period as a result of cash provided by operating
activities. This decrease was partially offset by 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 months ended November 30, 1996 was
estimated at 39.4% as compared to 38.3% for the comparable prior period. This
increase is attributed to a higher effective state and local income tax rate.
Net income increased by $185,000 for the three months ended November 30, 1996
as compared to the comparable prior period. The increase in net income is due
to the decrease in store, general and administrative expenses partially
offset by the decrease in gross profit.
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 three months ended November 30, 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 $880,000 for the three months
ended November 30, 1996 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. The credit
facility which is renewable on or before each December 31 has been renewed
for 1997 unchanged.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
Page 8 of 10 <PAGE>
RAG SHOPS, INC. AND SUBSIDIARIES
prime rate (8.25% at November 30, 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 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 $1,460,000 and $4,935,000 for the three months ended November 30,
1996 and December 2, 1995, 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 spring 1997.
Net cash provided by operating activities for the three months ended November
30, 1996 and December 2, 1995 amounted to $5,030,000 and $5,152,000,
respectively, and $274,000 and $82,000, respectively, was used for purchases
of property and equipment. As of November 30, 1996 the Company has opened two
new stores, closed one and expects to open an additional one to three new
stores and close three existing stores 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: January 8, 1997 /s/ Stanley Berenzweig
Stanley Berenzweig
Chairman Of The Board and
Principal Executive Officer
Date: January 8, 1997 /s/ Steven B. Barnett
Steven B. Barnett
Principal Financial Officer and
Principal Accounting Officer
Page 10 of 10
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<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> AUG-30-1997
<PERIOD-END> NOV-30-1996
<CASH> 4,297,000
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 24,314,000
<CURRENT-ASSETS> 30,653,000
<PP&E> 12,149,000
<DEPRECIATION> 7,780,000
<TOTAL-ASSETS> 35,438,000
<CURRENT-LIABILITIES> 12,789,000
<BONDS> 0
0
0
<COMMON> 45,000
<OTHER-SE> 21,469,000
<TOTAL-LIABILITY-AND-EQUITY> 35,438,000
<SALES> 26,181,000
<TOTAL-REVENUES> 26,181,000
<CGS> 16,390,000
<TOTAL-COSTS> 8,223,000
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<INTEREST-EXPENSE> 49,000
<INCOME-PRETAX> 1,519,000
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