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
<PAGE>
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<PAGE>
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<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
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<PAGE>
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<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
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 <PAGE>
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
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<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> AUG-29-1998
<PERIOD-START> AUG-31-1997
<PERIOD-END> FEB-28-1998
<CASH> 3,048,000
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 22,630,000
<CURRENT-ASSETS> 27,279,000
<PP&E> 13,963,000
<DEPRECIATION> 9,236,000
<TOTAL-ASSETS> 32,277,000
<CURRENT-LIABILITIES> 9,832,000
<BONDS> 0
0
0
<COMMON> 45,000
<OTHER-SE> 22,168,000
<TOTAL-LIABILITY-AND-EQUITY> 32,277,000
<SALES> 51,275,000
<TOTAL-REVENUES> 51,275,000
<CGS> 32,487,000
<TOTAL-COSTS> 48,910,000
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<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 49,000
<INCOME-PRETAX> 2,316,000
<INCOME-TAX> 903,000
<INCOME-CONTINUING> 1,413,000
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