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 30, 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 JUNE 26, 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 - May 30, 1998 (unaudited),
May 31, 1997 (unaudited) and August 30, 1997 3
Condensed consolidated statements of income - three and nine months
ended May 30, 1998 (unaudited) and May 31, 1997 (unaudited) 4
Condensed consolidated statements of cash flows - nine months ended
May 30, 1998 (unaudited) and May 31, 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
Items 1.-5. 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)
May 30, May 31, August 30,
1998 1997 1997
(Unaudited) (Unaudited) (Note A)
ASSETS
Current assets:
Cash $ 2,508 $ 2,372 $ 764
Merchandise inventories 23,108 21,827 25,123
Prepaid expenses 195 655 299
Other current assets 70 411 242
Deferred taxes 697 728 697
Total current assets 26,578 25,993 27,125
Property and equipment, net 4,544 4,483 4,886
Other assets 291 272 253
$31,413 $30,748 $32,264
LIABILITIES AND STOCKHOLDERS'
EQUITY
Current liabilities:
Note payable-bank $ - $ - $ 2,435
Accounts payable-trade 4,839 4,481 5,081
Accrued expenses and other current
liabilities 1,965 1,331 1,857
Accrued salaries and wages 652 939 812
Income taxes payable 744 632 -
Current portion of long-term debt 735 670 684
Total current liabilities 8,935 8,053 10,869
Deferred taxes 41 68 41
Long-term debt - 728 554
Stockholders' equity:
Common stock 45 45 45
Additional paid-in capital 6,039 6,039 6,039
Retained earnings 16,353 15,815 14,716
Total stockholders' equity 22,437 21,899 20,800
$31,413 $30,748 $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 Nine Months Ended
May 30, May 31, May 30, May 31,
1998 1997 1998 1997
Net sales $20,699 $19,629 $71,974 $69,517
Cost of merchandise sold
and occupancy costs 13,209 12,509 45,696 43,888
Gross profit 7,490 7,120 26,278 25,629
Store expenses 4,928 4,577 16,195 16,186
General and administrative
expenses 2,204 2,260 7,360 7,224
Total operating expenses 7,132 6,837 23,555 23,410
Income from operations 358 283 2,723 2,219
Interest income (expense)-net 10 (6) (39) (64)
Income before provision for
income taxes 368 277 2,684 2,155
Provision for income taxes 144 110 1,047 849
Net income $ 224 $ 167 $ 1,637 $ 1,306
Earnings per common share
Basic $ .05 $ .04 $ .36 $ .29
Diluted $ .05 $ .04 $ .36 $ .29
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)
Nine Months Ended
May 30, May 31,
1998 1997
Cash flows from operating activities:
Net income $ 1,637 $ 1,306
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation and amortization 1,091 1,096
Loss on disposition of property and
equipment 23 45
Changes in assets and liabilities:
(Increase) decrease in:
Merchandise inventories 2,015 4,453
Prepaid expenses 104 (310)
Other current assets 172 63
Other assets (40) 160
Increase (decrease) in:
Accounts payable-trade (242) (3,123)
Accrued expenses and other current
liabilities 108 (234)
Accrued salaries and wages (160) 356
Income taxes payable 744 482
Net cash provided by operating
activities 5,452 4,294
Cash flows from investing activities:
Payments for purchases of property
and equipment (773) (1,150)
Proceeds from sale of property and
equipment 3 1
Net cash used in investing
activities (770) (1,149)
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 (503) (464)
Net cash used in financing
activities (2,938) (1,594)
Net increase in cash 1,744 1,551
Cash, beginning of period 764 821
Cash, end of period $ 2,508 $ 2,372
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 94 $ 122
Income taxes $ 209 $ 518
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 NINE MONTHS ENDED MAY 30, 1998 AND MAY 31, 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 nine months ended May 30, 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 Nine Months Ended
May 30, May 31, May 30, May 31,
1998 1997 1998 1997
Numerator:
Net income for basic and diluted
earnings per share $ 224,000 $ 167,000 $1,637,000 $1,306,000
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 43,856 43,505 39,035 12,824
Denominator for diluted earnings
per share--adjusted weighted-
average shares and assumed
conversions 4,558,256 4,557,905 4,553,435 4,527,224
Basic earnings per share $ .05 $ .04 $ .36 $ .29
Diluted earnings per share $ .05 $ .04 $ .36 $ .29
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 Nine Months Ended
May 30, May 31, May 30, May 31,
1998 1997 1998 1997
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of merchandise sold and
occupancy costs 63.8 63.7 63.5 63.1
Gross profit 36.2 36.3 36.5 36.9
Store expenses 23.8 23.3 22.5 23.3
General and administrative expenses 10.7 11.5 10.2 10.4
Income from operations 1.7 1.5 3.8 3.2
Net Income 1.1% 0.9% 2.3% 1.9%
The Company's net sales increased by $1,070,000 and $2,457,000 for the three and
nine months ended May 30, 1998 representing an increase of 5.5% and 3.5%,
respectively, over the comparable prior periods. These increases were primarily
due to increases in comparable store sales of $696,000 or 3.7% and $1,450,000 or
2.2%, over the comparable prior periods, in addition to new store sales of
$953,000 and $3,083,000 offset by closed store sales of $579,000 and $2,076,000
for the three and nine month periods, respectively.
Gross profit percentage remained consistent for the three and nine months ended
May 30, 1998, respectively, from the comparable prior periods.
Store expenses increased by $351,000 and as a percentage of net sales increased
by .5% for the three months ended May 30, 1998 over the comparable prior period.
The increases were primarily due to an increase in payroll and payroll related
expenses. Store expenses remained relatively constant and as a percentage of net
sales decreased by .8% for the nine months ended May 30, 1998 over the
comparable prior period. The decrease in store expenses as a percentage of net
sales was principally due to the Company leveraging these expenses against the
increase in net sales.
General and administrative expenses decreased marginally and increased by
$136,000 for the three and nine months ended May 30, 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 decreased by .8% and .2% for the three and nine months ended May 30,
1998, respectively, over the comparable prior periods as the Company was able to
leverage these costs against the increase in net sales.
The effective tax rate for the three and nine months ended May 30, 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 $57,000 for the three months ended May 30, 1998 as
compared to the comparable prior period primarily due to the comparable store
net sales increases and related increase in gross profit partially offset by an
increase in store expenses. Net income increased by $331,000 for the nine months
ended May 30, 1998 primarily due to the comparable store net sales increases and
related increase in gross profit 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
nine months ended May 30, 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 $1,387,000 for the nine months ended
May 30, 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 May 30, 1998) and under the term loan are fixed
at seven and one-half percent (7.5%) 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. 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 nine months ended May 30, 1998
and May 31, 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 completing installation in the spring of 1999.
Net cash provided by operating activities for the nine months ended May 30, 1998
and May 31, 1997 amounted to $5,452,000 and $4,294,000, respectively, and
$773,000 and $1,150,000, respectively, was used for purchases of property
and equipment. For the nine months ended May 30, 1998 the Company has opened
two new stores, relocated and expanded one existing store, closed two and
expanded and retrofitted two existing stores by taking additional contiguous
space to more closely represent its new prototype larger format stores. The
Company does not expect to open any additional new stores or close any existing
stores during the remainder of 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
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 10, 1998 /s/ Stanley Berenzweig
Stanley Berenzweig
Chairman Of The Board and
Principal Executive Officer
Date: July 10, 1998 /s/ Steven B. Barnett
Steven B. Barnett
Principal Financial Officer and
Principal Accounting Officer
Page 9 of 9
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<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> AUG-29-1998
<PERIOD-START> AUG-31-1997
<PERIOD-END> MAY-30-1998
<CASH> 2,508,000
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 23,108,000
<CURRENT-ASSETS> 26,578,000
<PP&E> 14,144,000
<DEPRECIATION> 9,600,000
<TOTAL-ASSETS> 31,413,000
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0
0
<COMMON> 45,000
<OTHER-SE> 22,392,000
<TOTAL-LIABILITY-AND-EQUITY> 31,413,000
<SALES> 71,974,000
<TOTAL-REVENUES> 71,974,000
<CGS> 45,696,000
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<INCOME-CONTINUING> 1,637,000
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