FORM 10-Q/A
(Amendment No. 1)
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, 2002
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 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 JULY 1, 2002
Common stock, par value $.01 4,799,183
EXPLANATORY NOTE - AMENDMENT
This Form 10-Q/A is being filed to amend and restate Rag Shops, Inc.'s unaudited
consolidated financial statements for the quarterly period ended June 1, 2002.
In December 2003, the Company received a check from Principal Financial Group,
Inc. ("Principal") reflecting dividends payable in connection with common stock
of Principal. Receipt of the dividend check prompted a Company inquiry which
revealed that, due to its ownership of certain life insurance policies issued by
Principal Life Insurance Company, a subsidiary of Principal, and maintained by
the Company for certain key executive officers, the Company had received 9,766
shares of Principal's common stock (the "Shares") in December 2001 as
consideration in the demutualization of Principal's predecessor. The effective
date of the demutualization was in October 2001 and the Shares were issued in
December 2001 to one of the Company's subsidiaries, the owner of the life
insurance policies, in book-entry form as uncertificated shares and maintained
in an account with Mellon Investor Services established by Principal in
connection with its demutualization transaction. The Company had not previously
recognized or recorded the Shares issued pursuant to such event.
The Company has determined it will restate prior financial statements to
properly reflect the transaction in the first quarter of fiscal 2002. In its
restated financial statements, the Company has recorded the then fair market
value ($180,671) of the Shares as part of operating income as of October 2001,
in accordance with Emerging Issues Task Force Issue No. 99-4, "Accounting for
Stock Received from the Demutualization of a Mutual Insurance Company". The
Company has classified its holding in the Shares as "available-for-sale"
pursuant to Statement of Financial Accounting Standards No. 115 "Accounting for
Investments", whereby the investment will be carried at fair market value and
subsequent changes in the market value of the investment will be reflected as an
unrealized gain or loss in the stockholders' equity section of the balance
sheets, net of deferred income taxes. Other Comprehensive Income will be
presented for all periods pursuant to Statement of Financial Accounting
Standards No. 130 "Reporting Comprehensive Income" either in the Consolidated
Statements of Changes in Stockholders' Equity or Notes to Consolidated Financial
Statements. Comprehensive income consists of net income or loss for the current
period as well as income, expenses, gains or losses, net of income taxes arising
during the period that are included in separate components of equity. It
includes the unrealized gains and losses on the Company's available-for-sale
security, net of taxes.
The fair market value of the Shares as of the close of business on June 1, 2002
was $296,886. Please refer to amendments to periodic reports filed with the
Securities and Exchange Commission for periods between December 1, 2001 and
November 29, 2003 for related restatements. Refer to Note 1 - Recent
Developments in the Notes to Condensed Consolidated Financial Statements.
For purposes of this Form 10-Q/A, and in accordance with Rule 12b-15 under the
Securities and Exchange Act of 1934, as amended, each item of the Form 10-Q for
the quarterly period ended June 1, 2002 as originally filed on July 3, 2002,
that was affected has been amended to the extent affected by the referenced
correction and restated in its entirety. All other financial information and
disclosures remain unchanged.
Page 2 of 15
RAG SHOPS, INC. AND SUBSIDIARIES
INDEX
Page
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed consolidated balance sheets - June 1, 2002
(unaudited and restated), June 2, 2001 (unaudited) and 4
September 1 2001
Condensed consolidated statements of income - three and
nine months ended June 1, 2002 (unaudited and restated) and
June 2, 2001 (unaudited) 5
Condensed consolidated statements of cash flows - nine
months ended June 1, 2002 (unaudited and restated) and June
2, 2001 (unaudited) 6
Notes to condensed consolidated financial statements 7-9
Item 2. Management's Discussion and Analysis of Financial 10-12
Condition and Results of Operations
Part II - OTHER INFORMATION
Item 1. - 5. 13
Item 6. Exhibits and Reports on Form 8-K 13
SIGNATURES 13
CERTIFICATIONS 14-15
EXHIBITS
99.1 Certification
99.2 Certification
Page 3 of 15
RAG SHOPS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(All amounts in thousands)
June 1, June 1, June 2, September 1,
2002 2002 2001 2001
---- ---- ---- ----
(Unaudited (Unaudited (Unaudited) (Note A)
and Restated) and Previously
Reported)
ASSETS
CURRENT ASSETS:
Cash $ 4,347 $ 4,347 $ 4,097 $ 953
Investment in common stock 297 - - -
Merchandise inventories 26,293 26,293 24,308 27,807
Prepaid expenses 777 777 489 1,194
Other current assets 362 362 200 154
Deferred taxes 855 855 852 855
------- ------- ------- ------
Total current assets 32,931 32,634 29,946 30,963
Property and equipment, net 3,714 3,714 3,863 4,186
Deferred income taxes 303 436 350 436
Other assets 48 48 51 49
------- ------- ------- ------
TOTAL ASSETS $ 36,996 $ 36,832 $ 34,210 $ 35,634
======= ======= ======= ======
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable-trade $ 7,355 $ 7,355 $ 5,846 $ 8,348
Accrued expenses and other current liabilities 2,841 2,841 2,374 2,680
Accrued salaries and wages 764 764 655 720
Income taxes payable 541 541 287 165
------- ------- ------- ------
Total current liabilities 11,501 11,501 9,162 11,913
STOCKHOLDERS' EQUITY:
Common stock 48 48 48 48
Additional paid-in capital 6,236 6,236 6,242 6,238
Unamortized restricted stock awards - - (6) (3)
Retained earnings 19,211 19,111 18,828 17,502
Unrealized gain on investment in common stock,
net of taxes 64 - - -
Treasury stock, at cost, 26,880 shares (64) (64) (64) (64)
------- ------- ------- ------
Total stockholders' equity 25,495 25,331 25,048 23,721
------- ------- ------- ------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $ 36,996 $ 36,832 $ 34,210 $ 35,634
======= ======= ======= ======
Note A: Derived from the September 1, 2001 audited balance sheet.
See notes to the condensed consolidated financial statements.
Page 4 of 15
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 2, June 1, June 1, June 2,
2002 2001 2002 2002 2001
---- ---- ---- ---- ----
(Restated) (Previously
Reported)
Net sales $ 25,523 $ 23,692 $ 87,006 $ 87,006 $ 79,500
Cost of merchandise sold and
occupancy costs 16,199 15,313 55,565 55,565 50,683
------- ------- ------- ------- -------
Gross profit 9,324 8,379 31,441 31,441 28,817
------- ------- ------- ------- -------
Store expenses 6,282 6,049 20,392 20,392 19,144
General and administrative expenses 2,908 2,288 8,450 8,450 7,541
------- ------- ------- ------- -------
Total operating expenses 9,190 8,337 28,842 28,842 26,685
------- ------- ------- ------- -------
134 42 2,599 2,599 2,132
Gain from demutualization - - 181 - -
------- ------- ------- ------- -------
Income from operations 134 42 2,780 2,599 2,132
Interest income, net 14 34 39 39 117
------- ------- ------- ------- -------
Income before provision for income
taxes 148 76 2,819 2,638 2,249
Provision for income taxes 58 30 1,110 1,029 877
------- ------- ------- ------- -------
Net income $ 90 $ 46 $ 1,709 $ 1,609 $ 1,372
======= ======= ======= ======= =======
EARNINGS PER COMMON:
SHARE:
Basic $ .02 $ .01 $ .36 $ .34 $ .29
======= ======= ======= ======= =======
Diluted $ .02 $ .01 $ .35 $ .33 $ .29
======= ======= ======= ======= =======
See notes to the condensed consolidated financial statements.
Page 5 of 15
RAG SHOPS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(All amounts in thousands)
Nine Months Ended
-----------------
June 1, 2002 June 1, 2002 June 2, 2001
------------- ------------- ------------
(Restated) (Previously
Reported)
Cash flows from operating activities:
Net income $ 1,709 $ 1,609 $ 1,372
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 990 990 1,069
Loss on disposition of property and equipment 56 56 13
Amortization of restricted stock awards 1 1 6
Gain from demutualization (181) - -
Deferred income taxes 81 - -
Changes in assets and liabilities:
(Increase) decrease in:
Merchandise inventories 1,514 1,514 3,497
Prepaid expenses 417 417 (6)
Other current assets (208) (208) (101)
Other assets 1 1 16
Increase (decrease) in:
Accounts payable-trade (993) (993) (1,917)
Accrued expenses and other current liabilities 161 161 362
Accrued salaries and wages 44 44 (238)
Income taxes payable 376 376 45
------- ------- -------
Net cash provided by operating activities 3,968 3,968 4,118
------- ------- -------
Cash flows from investing activities:
Proceeds from sale of property and equipment - - 6
Payments for purchases of property and equipment (574) (574) (1,338)
------- ------- -------
Net cash used in investing activities (574) (574) (1,332)
------- ------- -------
Cash flows from financing activities - - -
------- ------- -------
Net increase in cash 3,394 3,394 2,786
Cash, beginning of period 953 953 1,311
------- ------- -------
Cash, end of period $ 4,347 $ 4,347 $ 4,097
======= ======= =======
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ - $ - $ -
======= ======= =======
Income taxes $ 65 $ 65 $ 818
======= ======= =======
See notes to the condensed consolidated financial statements
Page 6 of 15
RAG SHOPS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE AND NINE MONTHS ENDED JUNE 1, 2002 AND JUNE 1, 2001
NOTE 1 - BASIS OF PRESENTATION
The accompanying financial statements are unaudited, but in the opinion of
management reflect all adjustments, which consist of normal recurring accruals
necessary for a fair presentation of the consolidated financial statements for
the interim periods. Since the Company's business is seasonal, the operating
results for the three and nine months ended June 1, 2002 are not necessarily
indicative of results for other quarters or 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 included in the Company's Annual Report on Form 10-K for
the year ended September 1, 2001 filed with the Securities and Exchange
Commission in December 2001.
Certain reclassifications have been made to prior year amounts in order to
conform to the presentation for the current year.
Recent Developments
In December 2003, the Company received a check from Principal Financial Group,
Inc. ("Principal") reflecting dividends payable in connection with common stock
of Principal. Receipt of the dividend check prompted a Company inquiry which
revealed that, due to its ownership of certain life insurance policies issued by
Principal Life Insurance Company, a subsidiary of Principal, and maintained by
the Company for certain key executive officers, the Company had received 9,766
shares of Principal's common stock (the "Shares") in December 2001 as
consideration in the demutualization of Principal's predecessor. The effective
date of the demutualization was in October 2001 and the Shares were issued in
December 2001 to one of the Company's subsidiaries, the owner of the life
insurance policies, in book-entry form as uncertificated shares and maintained
in an account with Mellon Investor Services established by Principal in
connection with its demutualization transaction. The Company had not previously
recognized or recorded the Shares issued pursuant to such event.
The Company has determined it will restate prior financial statements to
properly reflect the transaction in the first quarter of fiscal 2002. In its
restated financial statements, the Company has recorded the then fair market
value ($180,671) of the Shares as part of operating income as of October 2001,
in accordance with Emerging Issues Task Force Issue No. 99-4, "Accounting for
Stock Received from the Demutualization of a Mutual Insurance Company". The
Company has classified its holding in the Shares as "available-for-sale"
pursuant to Statement of Financial Accounting Standards No. 115 "Accounting for
Investments", whereby the investment will be carried at fair market value and
subsequent changes in the market value of the investment will be reflected as an
unrealized gain or loss in the stockholders' equity section of the balance
sheets, net of deferred income taxes. Other Comprehensive Income will be
presented for all periods pursuant to Statement of Financial Accounting
Standards No. 130 "Reporting Comprehensive Income" either in the Consolidated
Statements of Changes in Stockholders' Equity or Notes to Consolidated Financial
Statements. Comprehensive income consists of net income or loss for the current
period as well as income, expenses, gains or losses, net of income taxes arising
during the period that are included in separate components of equity. It
includes the unrealized gains and losses on the Company's available-for-sale
security, net of taxes.
The fair market value of the Shares as of the close of business on June 1, 2002
was $296,886. Please refer to amendments to periodic reports filed with the
Page 7 of 15
Securities and Exchange Commission for periods between December 1, 2001 and
November 29, 2003 for related restatements.
The following tables show the impact of the restatement from the previously
filed financial statements, as of June 1, 2002 and for the three months then
ended:
Previously
Reported Adjustments Restated
-------- ----------- --------
(Amounts in thousands)
Current assets - Investment in common stock $ - $ 297 $ 297
Deferred income taxes - long term 436 (133) 303
Stockholders' equity - Unrealized gain on
Investment in common stock, net of taxes - 64 64
Stockholders' equity - Retained earnings 19,111 100 19,211
Other comprehensive income - 30 30
Total comprehensive income 90 30 120
The following tables show the impact of the restatement from the previously
filed financial statements, as of June 1, 2002 and for the nine months then
ended:
Previously
Reported Adjustments Restated
-------- ----------- --------
(Amounts in thousands except earnings per share)
Current assets - Investment in common stock $ - $ 297 $ 297
Deferred income taxes - long term 436 (133) 303
Stockholders' equity - Unrealized gain on
Investment in common stock, net of taxes - 64 64
Stockholders' equity - Retained earnings 19,111 100 19,211
Gain from demutualization - 181 181
Provision for income taxes 1,029 81 1,110
Net income 1,609 100 1,709
Other comprehensive income - 64 64
Total comprehensive income 1,609 164 1,773
Earnings per share - Basic $ 0.34 $ 0.02 $ 0.36
Earnings per share - Diluted $ 0.33 $ 0.02 $ 0.35
The Company did not previously file a Schedule of Comprehensive Income as there
were no differences between net income and total comprehensive income. The
Schedule of Comprehensive Income is as follows:
Three Months Ended Nine Months Ended
------------------ -----------------
June 1, June 2, June 1, June 2,
2002 2001 2002 2001
---- ---- ---- ----
(Amounts in thousands) (Amounts in thousands)
Net income $ 90 $ 46 $ 1,709 $ 1,372
Other comprehensive income, net of taxes:
Unrealized gain on investment in common
stock 30 - 64 -
--------- ------------ ------------ ------------
Total comprehensive income $ 120 $ 46 $ 1,773 $ 1,372
========= ============ ============ ============
Page 8 of 15
NOTE 2 - EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per
share:
Three Months Ended Nine Months Ended
------------------ -----------------
June 1, June 2, June 1, June 1, June 2,
2002 2001 2002 2002 2001
---- ---- ---- ---- ----
(Restated) (Previously
Reported)
Numerator for basic and diluted earnings per share:
Net income $ 90,000 $ 46,000 $ 1,709,000 $1,609,000 $1,372,000
========== ========== ========== ========= =========
Denominator:
Denominator for basic earnings per
share-weighted average shares 4,799,183 4,801,583 4,799,183 4,799,183 4,801,583
Effect of dilutive securities:
Employee stock options 77,021 5,182 45,588 45,588 4,422
---------- ---------- ---------- ---------- ----------
Denominator for diluted earnings per
share-adjusted weighted average
shares and assumed conversions 4,876,204 4,806,765 4,844,771 4,844,771 4,806,005
========== ========== ========== ========== ==========
Basic earnings per share $ .02 $ .01 $ .36 $ .34 $ .29
========== ========== ========== ========== ==========
Diluted earnings per share $ .02 $ .01 $ .35 $ .33 $ .29
========== ========== ========== ========== ==========
In addition to the stock options included in the above calculation, options to
purchase additional shares of common stock were outstanding as follows:
Number Exercise Price
of Shares From To
--------- ---- --
Three months ended:
June 1, 2002 2,250 $ 11.76
June 2, 2002 116,300 $ 2.85 $ 11.76
Nine months ended:
June 1, 2002 12,250 $ 3.49 $ 11.76
June 2, 2002 116,300 $ 2.85 $ 11.76
These stock options were not included in the computation of diluted income per
share because their exercise price was greater than the average market price of
the Company's common stock and, therefore, the effect of such inclusion would be
anti-dilutive.
NOTE 3 - MERCHANDISE INVENTORIES
Merchandise inventories (which are all finished goods) are stated at the lower
of cost (first-in, first-out method) or market as determined by the retail
inventory method.
Page 9 of 15
RAG SHOPS, INC. AND SUBSIDIARIES
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
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 2, June 1, June 1, June 2,
2002 2001 2002 2002 2001
---- ---- ---- ---- ----
(Restated) (Previously
Reported)
Net sales 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of merchandise sold and
occupancy costs 63.5 64.6 63.9 63.9 63.8
------- ------- ------ -------- --------
Gross profit 36.5 35.4 36.1 36.1 36.2
Store expenses 24.6 25.5 23.4 23.4 24.1
General and administrative
expenses 11.4 9.7 9.7 9.7 9.5
Gain from demutualization - - 0.2 - -
------- ------- ------ -------- --------
Income from operations 0.5 0.2 3.2 3.0 2.6
------- ------- ------ -------- --------
Net income 0.4% 0.2% 2.0% 1.8% 1.7%
======= ======= ====== ======== ========
The Company's net sales increased $1,831,000 and $7,506,000 for the three and
nine months ended June 1, 2002, representing a 7.7% and 9.4% increase,
respectively, over the comparable prior periods. The increase in net sales for
the three months ended June 1, 2002 was due to an increase in comparable store
sales of $1,188,000 or 5.2% over the prior comparable period principally due to
better in-stock position, introduction of new products, improved merchandise
display and positive industry trends that resulted in increases in both average
sale and customer transactions during the current period. The $643,000 balance
of the increase represents sales related to new store openings, net of sales
reductions from closed stores. The increase in net sales for the nine months
ended June 1, 2002 was attributable to a $3,260,000 or 4.3% increase in
comparable store sales, for the same reasons cited above in addition to strong
Christmas season sales earlier in the year, plus new store sales, net of sales
reductions from closed stores, of $4,246,000.
Gross profit, as a percent of net sales, increased by 1.1% for the three months
ended June 1, 2002 as compared to the prior comparable periods. This change was
due principally to a reduction in merchandise markdowns. Gross profit as a
percent of net sales for the nine months ended June 1, 2002 remained relatively
unchanged.
Store expenses for the three and nine months ended June 1, 2002 increased
$233,000 and $1,248,000, respectively, from the comparable prior periods.
Additional payroll and payroll related expenses were the primary reasons for the
increase and rose in support of larger stores and higher sales. As a percent of
net sales, store expenses decreased 0.9% and 0.7% for the three and nine months
ended June 1, 2002, respectively, because of the Company's ability to continue
to leverage these expenses against the increase in net sales.
Page 10 of 15
RAG SHOPS, INC. AND SUBSIDIARIES
General and administrative expenses increased $620,000 and $909,000, and, as a
percentage of net sales, increased 1.7% and 0.2% versus the prior comparable
periods for the three and nine months ended June 1, 2002, respectively. The
increase for the three months ended June 1, 2002 was primarily attributable to
higher insurance expenses incurred in connection with adverse market conditions
and, to a lesser extent, additional payroll and payroll related expenses
incurred predominantly in connection with key executive and management positions
that were vacant in the prior comparable period. These two elements also caused
the increase in general and administrative expenses for the nine month reporting
period. However, since the majority of the Company's insurance policies renewed
during the third quarter and market conditions did not have an impact until the
renewal date, the insurance increase was not as great as the increase in payroll
and payroll related expenses on a year-to-date basis.
Interest income, net decreased $20,000 and $78,000 from the prior comparable
periods for the three and nine months ended June 1, 2002, respectively, due to
the material fall in interest rates on short-term investments in the first half
of the current fiscal year compared to relative interest rate stability and
higher interest rate availability during the prior comparable period. The
diminution in interest rates was partially offset by an increase in average
investment levels during the quarters ended March 2, 2002 and June 1, 2002, as
compared to the prior comparable periods. See "Liquidity and Capital Resources".
Net income increased $44,000 and $337,000 for the three and nine months ended
June 1, 2002, as compared to the prior comparable periods, due to the increases
in net sales, partially offset by increases in operating expenses and decreases
in interest income, net. The current quarter increase in net income was also
aided by an improvement in gross profit as a percent of net sales.
Seasonality
The Company's business is seasonal, which the Company believes is typical of the
retail craft and fabric industry. The Company's highest sales and earnings
levels traditionally 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, 2002, the Company relied on internally generated funds
and credit made available by suppliers to finance inventories and new store
openings.
The Company's working capital increased $2,380,000 for the nine months ended
June 1, 2002 as compared to the September 1, 2001 amount primarily because the
Company reduced its inventory and retained 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 consists of a
discretionary unsecured line of credit for direct borrowings and the issuance
and refinance of letters of credit. Borrowings under the line of credit bear
interest at the bank's prime rate (4.75% at June 1, 2002). The credit facility
requires the Company to maintain a compensating balance of $400,000 in
Page 11 of 15
RAG SHOPS, INC. AND SUBSIDIARIES
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. There
were no borrowings under the line during either of the nine-month periods ended
June 1, 2002 and June 2, 2001. The Company intends to maintain the availability
of a line of credit for seasonal working capital requirements and in order to be
able to take advantage of future opportunities.
Net cash provided by operating activities for the nine months ended June 1, 2002
amounted to $3,968,000, and $574,000 was used for purchases of property and
equipment. Net cash from operating activities increased primarily due to net
income of $1,709,000, depreciation of $990,000, decreases in merchandise
inventories of $1,514,000 and prepaid expenses of $417,000, and an increase in
income taxes payable of $376,000, partially offset by a decrease in accounts
payable-trade of $993,000. During the nine months ended June 1, 2002 the Company
opened two stores, closed two stores, and was operating sixty-six stores at the
end of the period. During the remainder of the fiscal year ending August 31,
2002, the Company anticipates opening two additional new stores and closing
none.
Critical Accounting Policies
Revenue is recognized when merchandise is sold to customers.
Merchandise inventories (which are all finished goods) are stated at the lower
of cost (first-in, first-out method) or market as determined by the retail
inventory method.
Forward-Looking Statements
This report contains certain forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended, which are intended to be covered by
safe harbors created hereby. Such forward-looking statements include those
regarding the Company's future results in light of current management
activities, and involve known and unknown risks, including competition within
the craft and fabric retail industry, weather-related changes in the selling
cycle, and other uncertainties (including those risk factors referenced in
Company' filings with the Securities and Exchange Commission).
Page 12 of 15
RAG SHOPS, INC. AND SUBSIDIARIES
PART II - OTHER INFORMATION
Item 1. - 5. Not Applicable
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
99.1 Certification of Chief Executive Officer Pursuant to Section 906
of the Sarbanes-Oxley Act of 2002 (18 U.S.C.ss.1350)
99.2 Certification of Acting Chief Financial Officer Pursuant to Section
906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C.ss.1350)
(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 27, 2004 /s/ Stanley Berenzweig
----------------------
Stanley Berenzweig
Chairman of the Board and
Chief Executive Officer
Date: January 27, 2004 /s/ Steven B. Barnett
---------------------
Steven B. Barnett
Acting Principal Financial Officer and
Acting Principal Accounting Officer
Page 13 of 15
CERTIFICATIONS
I, Stanley Berenzweig, certify that:
1. I have reviewed this quarterly report on Form 10-Q/A of Rag Shops, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a)
designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared; b) evaluated the
effectiveness of the registrant's disclosure controls and procedures as of a
date within 90 days prior to the filing date of this quarterly report ( the
"Evaluation Date"); and c) presented in this quarterly report our conclusions
about the effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and b) any fraud, whether
or not material, that involves management or other employees who have a
significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether there were significant changes in internal controls or
in other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
SIGNATURE TITLE(S) DATE
/S/ STANLEY BERENZWEIG Principal Executive January 27, 2004
- ---------------------- and Director
Stanley Berenzweig
Page 14 of 15
CERTIFICATIONS
I, Steven B. Barnett, certify that:
1. I have reviewed this quarterly report on Form 10-Q/A of Rag Shops, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a)
designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared; b) evaluated the
effectiveness of the registrant's disclosure controls and procedures as of a
date within 90 days prior to the filing date of this quarterly report ( the
"Evaluation Date"); and c) presented in this quarterly report our conclusions
about the effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and b) any fraud, whether
or not material, that involves management or other employees who have a
significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether there were significant changes in internal controls or
in other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
SIGNATURE TITLE(S) DATE
/S/ Steven B. Barnett Executive Vice President, January 27, 2004
- --------------------- Acting Chief Financial Officer
Steven B. Barnett
Page 15 of 15
EXHIBIT 99.1
RAG SHOPS, INC.
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 (18 U.S.C.ss.1350)
The undersigned, Stanley Berenzweig, the Chief Executive Officer of Rag
Shops, Inc. (the "Company"), has executed this Certification in connection with
the filing with the Securities and Exchange Commission of the Company's
Quarterly Report on Form 10-Q/A for the quarter ended June 1, 2002 (the
"Report").
The undersigned hereby certifies that:
- the Report fully complies with the requirements of Section 13(a) of the
Securities Exchange Act of 1934; and
- the information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations
of the Company.
IN WITNESS WHEREOF, the undersigned has executed this Certification as
of the 27th day of January 2004.
/S/ Stanley Berenzweig
----------------------
Chief Executive Officer
EXHIBIT 99.2
RAG SHOPS, INC.
CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 (18 U.S.C. ss.1350)
The undersigned, Steven B. Barnett, the Acting Chief Financial Officer
of Rag Shops, Inc. (the "Company"), has executed this Certification in
connection with the filing with the Securities and Exchange Commission of the
Company's Quarterly Report on Form 10-Q/A for the quarter ended June 1, 2002
(the "Report").
The undersigned hereby certifies that:
- the Report fully complies with the requirements of Section 13(a) of the
Securities Exchange Act of 1934; and
- the information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations
of the Company.
IN WITNESS WHEREOF, the undersigned has executed this Certification as
of the 27th day of January 2004.
/S/ Steven B. Barnett
---------------------
Executive Vice President,
Acting Chief Financial Officer