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 June 1, 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 JUNE 30, 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 - June 1, 1996
(unaudited) and September 2, 1995 3
Condensed consolidated statements of income - three
months and nine months ended June 1, 1996 (unaudited)
and June 3, 1995 (unaudited) 4
Condensed consolidated statements of cash flows -
nine months ended June 1, 1996 (unaudited) and
June 3, 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)
June 1, September 2,
1996 1995
(Unaudited) (Note A)
ASSETS
Current assets:
Cash $ 785 $ 911
Merchandise inventories 21,040 27,559
Prepaid expenses 832 541
Other current assets 376 92
Deferred income taxes 674 674
Total current assets 23,707 29,777
Property and equipment, net 4,448 4,726
Other assets 513 318
$28,668 $34,821
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Note payable-bank $ - $ 4,735
Accounts payable-trade 3,402 7,448
Accrued expenses and other current liabilities 1,451 1,781
Accrued salaries and wages 556 652
Income taxes payable 245-
Current portion of long-term debt 619 -
Total current liabilities 6,273 14,616
Deferred income taxes 133 133
Long-term debt 1,391-
Stockholders' equity:
Preferred stock--
Common stock 45 45
Additional paid-in capital 6,039 6,039
Retained earnings 14,787 13,988
Total stockholders' equity 20,871 20,072
$28,668 $34,821
Note A: Derived from the September 2, 1995 audited balance sheet.
See notes to the condensed consolidated financial statements.
Page 3 of 10
RAG SHOPS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(All amounts in thousands, except share data)
Three Months Ended Nine Months Ended
June 1, June 3, June 1, June 3,
1996 1995 1996 1995
Net sales $ 18,506 $ 19,816 $ 67,351 $ 68,497
Cost of merchandise sold
and occupancy costs 11,750 12,345 43,005 42,646
Gross profit 6,756 7,471 24,346 25,851
Store expenses 3,991 4,730 15,658 15,505
General and administrative
expenses 2,141 2,260 7,272 7,321
Total operating expenses 6,132 6,990 22,930 22,826
Income from operations 624 481 1,416 3,025
Interest (expense) income,
net (30) 8 (120) (84)
Income before provision for
income taxes 594 489 1,296 2,941
Provision for income taxes 228 191 497 1,147
Net income $ 366 $ 298 $ 799 $ 1,794
PER SHARE DATA:
Net income per share $ .08 $ .07 $ .18 $ .40
Dividends per share $ - $ - $ - $ -
Weighted average shares
outstanding 4,514,400 4,535,847 4,515,895 4,526,583
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)
Nine Months Ended
June 1, June 3,
1996 1995
Cash flows from operating activities:
Net income $ 799 $1,794
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 929 915
Loss on disposition of property and equipment 14 -
Changes in assets and liabilities:
(Increase) decrease in:
Merchandise inventories 6,519 5,995
Prepaid expenses (291) (412)
Other current assets (284) 27
Other assets (209) (6)
Increase (decrease) in:
Accounts payable-trade (4,046) (1,491)
Accrued expenses and other current liabilities(330) (299)
Accrued salaries and wages (96) (161)
Income taxes payable 245 621
Net cash provided by operating
activities 3,250 6,983
Cash flows from investing activities:
Payments for purchases of property and equipment (645) (191)
Proceeds from sale of property and equipment 4 -
Net cash used in investing activities (641) (191)
Cash flows from financing activities:
Proceeds from issuance of note payable-bank 25,880 16,946
Repayments of note payable-bank (30,615) (23,501)
Long-term borrowings 2,000 -
Net cash used in financing activities (2,735) (6,555)
Net (decrease) increase in cash (126) 237
Cash, beginning of period 911 1,180
Cash, end of period $ 785 $ 1,417
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 147 $ 103
Income taxes $ 198 $ 463
Supplemental schedule of non-cash investing and
financing activities:
Purchase of property and equipment in exchange
for long-term 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
NINE MONTHS ENDED JUNE 1, 1996 AND JUNE 3, 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 nine months ended June 1, 1996
are not necessarily indicative of results for the fiscal year.
Certain information and footnote disclosures normally included in finan-
cial 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 1995.
NOTE 2 - LONG TERM DEBT
During the quarter ended June 1, 1996, the Company borrowed $2,000,000
("term loan") under the terms of its credit facility with a bank to
finance its new point-of-sale cash register software, data collection
and computer systems. The term loan, which bears interest at a fixed
rate of 8%, matures May 1, 1999 and is collateralized by property and
equipment.
Page 6 of 10
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
June 1, June 3, June 1, June 3,
1996 1995 1996 1995
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of merchandise sold and
occupancy costs 63.5 62.3 63.9 62.3
Gross profit 36.5 37.7 36.1 37.7
Store expenses 21.5 23.9 23.2 22.6
General and administrative expenses 11.6 11.4 10.8 10.7
Income from operations 3.4 2.4 2.1 4.4
Net income 2.0% 1.5% 1.2% 2.6%
Net sales decreased by $1,310,000 and $1,146,000 for the three and nine
months ended June 1, 1996 representing a decrease of 6.6% and 1.7%,
respectively, over the comparable prior periods primarily due to
decreases in comparable store sales offset by new store sales of
$613,000 and $2,341,000, respectively. During the three and nine months
ended June 1, 1996, comparable store sales decreased 8.8% and 4.5%,
respectively. Management believes these decreases were primarily due to
a weak retail environment which existed throughout the spring selling
season in its business segment. The Company is revising marketing plans
for the upcoming year in an attempt to improve comparable store sales.
Gross profit percentage decreased by 1.2% and 1.6% for the three and
nine months ended June 1, 1996, respectively, from the comparable prior
periods. The decrease for the three month period was primarily
attributable to increased occupancy costs and a decrease in comparable
store net sales. The decrease for the nine month period was primarily
attributable to increased competitive promotional sales activity during
the Christmas season and secondarily attributable to increased occupancy
costs.
Stores expenses decreased by $739,000 and increased by $153,000 for the
three and nine months ended June 1, 1996, respectively. The decrease for
the three month period was primarily a result of a planned reduction in
advertising costs through increased efficiencies and secondarily due to
a reduction in payroll and payroll related expenses. The increase for
the nine month period was primarily due to the planned accelerated
advertising program for the first six months of the fiscal year. As a
percentage of net sales, store expenses decreased by 2.4% and increased
by 0.6% for the three and nine months ended June 1, 1996, respectively,
over comparable prior periods primarily as a result of the advertising
and payroll variances discussed above.
Page 7 of 10 <PAGE>
RAG SHOPS, INC. AND SUBSIDIARIES
General and administrative expenses remained relatively constant, both
in actual dollars and as a percentage of net sales, during each period.
The effective tax rate for the three and nine months ended June 1, 1996
was estimated at 38.3% as compared to 39.0% for the comparable prior
periods. The 38.3% represents the Company's estimate of what the
effective tax rate will be for the fiscal year ending August 31, 1996.
Net income increased $68,000 and decreased $995,000 for the three and
nine months ended June 1, 1996, respectively, compared to the comparable
prior periods. The increase in net income for the three month period is
due to the decrease in advertising, payroll and payroll related expenses
offset by the decrease in gross profit. The decrease in net income for
the nine month period is due to the increase in promotional sales during
the first half of the fiscal year which resulted in a decrease in gross
profit, the increase in occupancy costs which resulted in a decrease in
gross profit and the net increase in advertising costs which resulted in
an increase 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 June 1, 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 $2,273,000 for the nine
months ended June 1, 1996 as compared to the September 2, 1995 amount as
a result of the Company retaining its net income for this period.
The Company maintains a $10,000,000 credit facility with a bank. The
credit facility is renewable annually on or before each December 31 and
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 (8.25% at June 1, 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
Page 8 of 10
RAG SHOPS, INC. AND SUBSIDIARIES
covenants. The Company has satisfied its line of credit clean-up
provision for 1996 during the three months ended June 1, 1996.
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 $4,935,000 and $6,930,000 for the nine
months ended June 1, 1996 and June 3, 1995, respectively. The Company
intends to maintain the availability of the 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 the fiscal year and
anticipates completing installation in all stores by spring 1997. Since
the Company's expectation as to the timing of the completion of the
installation of its point-of-sale system is forward-looking, and since
the timing may be impacted by factors outside of the Company's control,
including defects in equipment, there can be no assurance that the
point-of-sale system will be installed within the anticipated time
frame.
Net cash provided by operating activities for the nine months ended June
1, 1996 and June 3, 1995 amounted to $3,250,000 and $6,983,000,
respectively, and $645,000 and $191,000, respectively, was used for
purchases of property and equipment. The Company has opened one new
store, closed two stores and will complete expansion of two stores
during the current year. Costs associated with 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.
Page 9 of 10
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 11, 1996
Stanley Berenzweig
Chairman Of The Board and
Principal Executive Officer
Date: July 11, 1996
Steven B. Barnett
Principal Financial Officer and
Principal Accounting Officer
Page 10 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 11, 1996 /s/ Stanley Berenzweig
Stanley Berenzweig
Chairman Of The Board and
Principal Executive Officer
Date: July 11, 1996 /s/ Steven B. Barnett
Steven B. Barnett
Principal Financial Officer and
Principal Accounting Officer
Page 10 of 10
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> AUG-31-1996
<PERIOD-END> JUN-01-1996
<CASH> 785,000
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 21,040,000
<CURRENT-ASSETS> 23,707,000
<PP&E> 11,532,000
<DEPRECIATION> 7,084,000
<TOTAL-ASSETS> 28,668,000
<CURRENT-LIABILITIES> 6,273,000
<BONDS> 0
0
0
<COMMON> 45,000
<OTHER-SE> 20,826,000
<TOTAL-LIABILITY-AND-EQUITY> 28,668,000
<SALES> 67,351,000
<TOTAL-REVENUES> 67,351,000
<CGS> 43,005,000
<TOTAL-COSTS> 22,930,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 120,000
<INCOME-PRETAX> 1,296,000
<INCOME-TAX> 497,000
<INCOME-CONTINUING> 799,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 799,000
<EPS-PRIMARY> 0.18
<EPS-DILUTED> 0.18
</TABLE>
