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 31, 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 JUNE 27, 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 - May 31, 1997
(unaudited), June 1, 1996 (unaudited) and August 31, 1996 3
Condensed consolidated statements of income - three
and nine months ended May 31, 1997 (unaudited) and
June 1, 1996 (unaudited) 4
Condensed consolidated statements of cash flows -
nine months ended May 31, 1997 (unaudited) and
June 1, 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)
May 31, June 1, August 31,
1997 1996 1996
(Unaudited) (Unaudited) (Note A)
ASSETS
Current assets:
Cash $ 2,372 $ 785 $ 821
Merchandise inventories 21,827 21,040 26,280
Prepaid expenses 655 832 345
Other current assets 411 376 474
Deferred taxes 728 674 728
Total current assets 25,993 23,707 28,648
Property and equipment, net 4,483 4,448 4,462
Other assets 272 513 445
$30,748 $28,668 $33,555
LIABILITIES AND STOCKHOLDERS'
EQUITY
Current liabilities:
Note payable-bank $ - $ - $ 1,130
Accounts payable-trade 4,481 3,402 7,604
Accrued expenses and other
current liabilities 1,331 1,451 1,565
Accrued salaries and wages 939 556 583
Income taxes payable 632 245 150
Current portion of
long-term debt 670 619 632
Total current liabilities 8,053 6,273 11,664
Deferred taxes 68 133 68
Long-term debt 728 1,391 1,230
Stockholders' equity:
Common stock 45 45 45
Additional paid-in capital 6,039 6,039 6,039
Retained earnings 15,815 14,787 14,509
Total stockholders'
equity 21,899 20,871 20,593
$30,748 $28,668 $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 Nine Months Ended
May 31, June 1, May 31, June 1,
1997 1996 1997 1996
Net sales $ 19,629 $ 18,506 $ 69,517 $ 67,351
Cost of merchandise sold
and occupancy costs 12,509 11,750 43,888 43,005
Gross profit 7,120 6,756 25,629 24,346
Store expenses 4,577 3,991 16,186 15,658
General and administrative
expenses 2,260 2,141 7,224 7,272
Total operating expenses 6,837 6,132 23,410 22,930
Income from operations 283 624 2,219 1,416
Interest expense-net 6 30 64 120
Income before provision
for income taxes 277 594 2,155 1,296
Provision for income taxes 110 228 849 497
Net income $ 167 $ 366 $ 1,306 $ 799
PER SHARE DATA:
Net income per share $ .04 $ .08 $ .29 $ .18
Dividends per share $ - $ - $ - $ -
Weighted average shares
outstanding 4,557,905 4,514,400 4,532,901 4,515,895
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)
Nine Months Ended
May 31, June 1,
1997 1996
Cash flows from operating activities:
Net income $ 1,306 $ 799
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 1,096 929
Loss on disposition of property and equipment 45 14
Changes in assets and liabilities:
(Increase) decrease in:
Merchandise inventories 4,453 6,519
Prepaid expenses (310) (291)
Other current assets 63 (284)
Other assets 160 (209)
Increase (decrease) in:
Accounts payable-trade (3,123) (4,046)
Accrued expenses and other current liabilities (234) (330)
Accrued salaries and wages 356 (96)
Income taxes payable 482 245
Net cash provided by operating activities 4,294 3,250
Cash flows from investing activities:
Payments for purchases of property and equipment (1,150) (645)
Proceeds from sale of property and equipment 1 4
Net cash used in investing activities (1,149) (641)
Cash flows from financing activities:
Proceeds from issuance of note payable-bank 7,075 25,880
Repayments of note payable-bank (8,205) (30,615)
Long-term borrowings - 2,000
Repayments of long-term debt (464) -
Net cash used in financing activities (1,594) (2,735)
Net increase (decrease) in cash 1,551 (126)
Cash, beginning of period 821 911
Cash, end of period $ 2,372 $ 785
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 122 $ 147
Income taxes $ 518 $ 198
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 NINE MONTHS ENDED MAY 31, 1997 AND JUNE 1, 1996
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 31, 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.
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 Nine Months Ended
May 31, June 1, May 31, June 1,
1997 1996 1997 1996
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of merchandise sold and
occupancy costs 63.7 63.5 63.1 63.9
Gross profit 36.3 36.5 36.9 36.1
Store expenses 23.3 21.5 23.3 23.2
General and administrative expenses 11.5 11.6 10.4 10.8
Income from operations 1.5 3.4 3.2 2.1
Net income 0.9% 2.0% 1.9% 1.2%
The Company's net sales increased by $1,123,000 and $2,166,000 for the three
and nine months ended May 31, 1997 representing an increase of 6.1% and 3.2%,
respectively, over the comparable prior periods. These increases were
primarily due to increases in comparable store sales of $1,123,400 or 6.4%
and $2,729,600 or 4.2% in addition to new store sales of $855,300 and
$2,280,000 for the three and nine 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 remained relatively constant and increased by 0.8%
for the three and nine months ended May 31, 1997, respectively, from the
comparable prior periods. For the nine months ended May 31, 1997, the
increase was primarily due to (i) a decrease in markdowns as a percent of
sales of 0.4% primarily due to improved control of promotions during the
Christmas selling season and (ii) a 0.4% decrease in the Company's shrinkage
estimate based on the results of the fiscal 1996 annual physical inventory
and continuation of loss prevention efforts.
Store expenses increased by $586,000 and as a percentage of net sales
increased by 1.8% for the three months ended May 31, 1997 from the comparable
prior period. The increases were due primarily to increases in payroll and
payroll related expenses and secondarily to planned increases in advertising.
Store expenses increased by $528,000 and as a percentage of net sales
remained relatively constant for the nine months ended May 31, 1997 in
comparison to the corresponding prior period. The dollar increase was
primarily due to an increase in (i) payroll and payroll related expenses, and
Page 7 of 10<PAGE>
RAG SHOPS, INC. AND SUBSIDIARIES
(ii) depreciation expense due to the installation of point-of-sale equipment
net of a decrease in advertising costs as a result of an increase in vendor
contributions. As a percentage of net sales, the Company was able to leverage
these costs against the increase in sales as previously discussed.
General and administrative expenses increased by $119,000 and as a percentage
of net sales decreased by 0.1% for the three months ended May 31, 1997 from
the comparable prior period. The increase in general and administrative
expenses was primarily due to an increase in payroll and payroll related
expenses. General and administrative expenses remained relatively constant
and as a percentage of net sales decreased by 0.4% for the nine months ended
May 31, 1997 from the comparable prior period. The decrease in general and
administrative expenses as a percentage of net sales for the three and nine
month periods ending May 31, 1997 was primarily due to the Company leveraging
these relatively fixed costs against the increase in net sales as previously
discussed.
Interest expense-net decreased for the three and nine months ended May 31,
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 nine months ended May 31, 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.
Net income decreased by $199,000 for the three months ended May 31, 1997 as
compared to the comparable prior period due to the increase in operating
expenses which was partially offset by increases in comparable store sales
and the related increase in gross profit. Net income increased by $507,000
for the nine months ended May 31, 1997 primarily due to increases in
comparable store sales and the related increase in gross profit partially
offset by increases in store 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 nine months ended May 31, 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 $956,000 for the nine months
ended May 31, 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 (8.50% at May 31, 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. 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 nine months
ended May 31, 1997 and June 1, 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 fully expects to complete installation
of its point-of-sale systems in all stores by the end of July 1997. In
addition, we are continuing with the development of our automated store
ordering systems and anticipate commencing installation in January 1998.
Net cash provided by operating activities for the nine months ended May 31,
1997 and June 1, 1996 amounted to $4,294,000 and $3,250,000, respectively,
and $1,150,000 and $645,000, respectively, was used for purchases of property
and equipment. As of May 31, 1997 the Company has opened four new stores,
closed four stores and was operating sixty-seven stores. Subsequent to May
31, 1997 the Company closed one store. 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: July 3, 1997 /s/ Stanley Berenzweig
Stanley Berenzweig
Chairman Of The Board and
Principal Executive Officer
Date: July 3, 1997 /s/ Steven B. Barnett
Steven B. Barnett
Principal Financial Officer and
Principal Accounting Officer
Page 10 of 10
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<FISCAL-YEAR-END> AUG-30-1997
<PERIOD-END> MAY-31-1997
<CASH> 2,372,000
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 21,827,000
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<COMMON> 45,000
<OTHER-SE> 21,854,000
<TOTAL-LIABILITY-AND-EQUITY> 30,748,000
<SALES> 19,629,000
<TOTAL-REVENUES> 19,629,000
<CGS> 12,509,000
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