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 29, 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 (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 DECEMBER 26, 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 - November 29, 1997
(unaudited), November 30, 1996 (unaudited) and August 30, 1997 3
Condensed consolidated statements of income - three
months ended November 29, 1997 (unaudited) and
November 30, 1996 (unaudited) 4
Condensed consolidated statements of cash flows -
three months ended November 29, 1997 (unaudited) and
November 30, 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)
November 29, November 30, August 30,
1997 1996 1997
(Unaudited) (Unaudited) (Note A)
ASSETS
Current assets:
Cash $ 3,843 $ 4,297 $ 764
Merchandise inventories 24,078 24,314 25,123
Prepaid expenses 716 920 299
Other current assets 193 394 242
Deferred taxes 697 728 697
Total current assets29,527 30,653 27,125
Property and equipment, net 4,804 4,369 4,886
Other assets 271 416 253
$34,602 $35,438 $32,264
LIABILITIES AND STOCKHOLDERS'
EQUITY
Current liabilities:
Note payable-bank $ - $ - $ 2,435
Accounts payable-trade 7,841 7,828 5,081
Accrued expenses and other
current liabilities 2,719 2,812 1,857
Accrued salaries and wages 623 723 812
Income taxes payable 521 781-
Current portion of
long-term debt 698 645 684
Total current liabilities12,402 12,789 10,869
Deferred taxes 41 68 41
Long-term debt 377 1,067 554
Stockholders' equity:
Preferred stock---
Common stock 45 45 45
Additional paid-in capital 6,039 6,039 6,039
Retained earnings 15,698 15,430 14,716
Total stockholders'
equity 21,782 21,514 20,800
$34,602 $35,438 $32,264
Note A: Derived from the August 30, 1997 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 29, November 30,
1997 1996
Net sales $ 26,277 $ 26,181
Cost of merchandise sold and occupancy costs 16,536 16,390
Gross profit 9,741 9,791
Store expenses 5,566 5,803
General and administrative expenses 2,511 2,420
Total operating expenses 8,077 8,223
Income from operations 1,664 1,568
Interest expense 54 49
Income before provision for income taxes 1,610 1,519
Provision for income taxes 628 598
Net income $ 982 $ 921
PER SHARE DATA:
Net income per share $ .22 $ .20
Dividends per share $ - $ -
Weighted average shares outstanding 4,557,717 4,514,484
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 29, November 30,
1997 1996
Cash flows from operating activities:
Net income $ 982 $ 921
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 361 365
Loss on disposition of property and equipment - 7
Changes in assets and liabilities:
(Increase) decrease in:
Merchandise inventories 1,045 1,966
Prepaid expenses (417) (575)
Other current assets 49 80
Other assets (18) 24
Increase (decrease) in:
Accounts payable-trade 2,760 224
Accrued expenses and other current liabilities 862 1,247
Accrued salaries and wages (189) 140
Income taxes payable 521 631
Net cash provided by operating activities5,956 5,030
Cash flows from investing activities:
Payments for purchases of property and equipment (278) (274)
Net cash used in investing activities (278) (274)
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 (164) (150)
Net cash used in financing activities (2,599) (1,280)
Net increase in cash 3,079 3,476
Cash, beginning of period 764 821
Cash, end of period $ 3,843 $ 4,297
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 34 $ 59
Income taxes $ 12 $ 117
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 29, 1997 AND NOVEMBER 30, 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 months ended November 29, 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 1997.
NOTE 2 - ADOPTION OF ACCOUNTING STANDARDS
In February 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 128, "Earnings per Share"
(SFAS No. 128), which establishes new standards for computing and presenting
net income per share and replaces the standards previously found in
Accounting Principles Board Opinion No. 15, "Earnings Per Share." The Company
will begin reporting net income per share according to this new standard in
its second quarter of fiscal 1998. The Company does not expect the
implementation of SFAS No. 128 to have a material effect on the Company's
computation of earnings per share.
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 29, November 30,
1997 1996
Net sales 100.0% 100.0%
Cost of merchandise sold and occupancy costs 62.9 62.6
Gross profit 37.1 37.4
Store expenses 21.2 22.2
General and administrative expenses 9.6 9.2
Income from operations 6.3 6.0
Net income 3.7% 3.5%
The Company's net sales increased by $96,000 or .4% for the three months
ended November 29, 1997 over the comparable prior period due to new store
sales of $1,166,000 offset by decreases in comparable store sales of $184,000
or .7% and closed store sales in the comparable prior period of $886,000.
Gross profit percentage decreased by .3% for the three months ended November
29, 1997 from the comparable prior period primarily due to an increase of .4%
in the Company's shrinkage reserve.
Store expenses decreased by $237,000 and as a percentage of net sales
decreased by 1.0% for the three months ended November 29, 1997 from the
comparable prior period. The decrease in store expenses and as a percentage
of net sales was primarily due to a decrease in payroll and payroll related
expenses.
General and administrative expenses increased by $91,000 and as a percentage
of net sales increased by .4% during the three months ended November 29, 1997
over the comparable prior period. The increase in general and administrative
expenses and as a percentage of net sales was primarily due to an increase in
payroll and payroll related expenses.
Interest expense remained relatively constant for the three months ended
November 29, 1997 from the comparable prior period. See "Liquidity and
Capital Resources".
The effective tax rate for the three months ended November 29, 1997 was
estimated at 39.0% as compared to 39.4% for the comparable prior period. This
decrease is attributed to a lower effective state and local income tax rate.
Page 7 of 10<PAGE>
RAG SHOPS, INC. AND SUBSIDIARIES
Net income increased by $61,000 for the three months ended November 29, 1997
as compared to the comparable prior period. The increase in net income is due
to the decrease in store expenses partially offset by the decrease in gross
profit and an 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.
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 29, 1997 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 $869,000 for the three months
ended November 29, 1997 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. The credit
facility is renewable annually on or before each December 31 and has been
renewed for 1998 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 prime rate (8.50% at November 29, 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 $2,785,000 and $1,460,000 for the three months
ended November 29, 1997 and November 30, 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 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.
Page 8 of 10 <PAGE>
RAG SHOPS, INC. AND SUBSIDIARIES
Net cash provided by operating activities for the three months ended November
29, 1997 and November 30, 1996 amounted to $5,956,000 and $5,030,000,
respectively, and $278,000 and $274,000, respectively, was used for purchases
of property and equipment. During the three months ended November 29, 1997
the Company expanded and retrofitted two existing stores by taking
additional contiguous space to more closely represent its new prototype
larger format stores. There were no new stores opened or existing stores
closed during this period. The Company expects to open an additional two to
four new stores, relocate and expand one existing store and close two
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, lease negotiations
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 5, 1998 /s/ Stanley Berenzweig
Stanley Berenzweig
Chairman Of The Board and
Principal Executive Officer
Date: January 5, 1998 /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-29-1998
<PERIOD-START> AUG-31-1997
<PERIOD-END> NOV-29-1997
<CASH> 3,843,000
<SECURITIES> 0
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<INVENTORY> 24,078,000
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<COMMON> 45,000
<OTHER-SE> 21,737,000
<TOTAL-LIABILITY-AND-EQUITY> 34,602,000
<SALES> 26,277,000
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