UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K/A
(Amendment No.1)
FOR ANNUAL AND TRANSITION REPORT PURSUANT TO
SECTIONS 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURTIES EXCHANGE
ACT OF 1934
For the fiscal year ended August 31, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURTIES
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
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $.01 PAR VALUE
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be files 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 by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this
Form 10-K/A or any amendment to this Form 10-K/A. X
---
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Exchange act Rule 12b-2).
Yes No X
------- ------
As of October 31, 2002, there were outstanding 4,797,983 shares of Common Stock.
Based on the price at which stock was sold on that date, the approximate
aggregate market value of such shares held by non-affiliates was $10,000,515.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's 2002 Definitive Proxy Statement, which statement
will be filed not later than 120 days after the end of the fiscal year covered
by this Report, are incorporated by reference in Part III hereof.
Certain exhibits are incorporated by reference to the Company's Registration
Statement on Form S-1 and Amendment No. 1 thereto, as listed in response to Item
14(a)(3).
EXPLANATORY NOTE - AMENDMENT
This Form 10-K/A is being filed to amend and restate Rag Shops, Inc.'s audited
consolidated financial statements for the fiscal year ended August 31, 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 August 31,
2002 was $286,437. 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-K/A, and in accordance with Rule 12b-15 under the
Securities and Exchange Act of 1934, as amended, each item of the Form 10-K
for the fiscal year ended August 31, 2002, as originally filed on November 29,
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.
2
PART I
ITEM 1. BUSINESS
GENERAL
Rag Shops, Inc., a Delaware corporation formed in April 1991, is the successor
by merger to a New Jersey corporation having the same name which was
incorporated in September 1984, as a holding company for numerous subsidiaries
that have operated retail stores since 1963. As of August 31, 2002 Rag Shops,
Inc. operated 68 specialty retail stores that sell competitively priced craft
and fabric merchandise. The Company caters to value conscious consumers who
create decorative projects and accessories, and sew. The Company believes that
its wide selection of currently popular merchandise, value-oriented pricing
policy and commitments to both customer service and advertising are principal
factors contributing to its results. The Company's stores are
destination-oriented and also attract shoppers from other stores located in the
same shopping centers.
As of August 31, 2002, the Company operated 36 retail stores in New Jersey, 18
in Florida, six in New York, five in Pennsylvania and three in Connecticut. The
Company anticipates opening three stores and closing three stores during its
fiscal year ending August 30, 2003. The Company's expansion strategy is to grow
by expanding within areas from which it presently attracts customers and into
contiguous market areas, enabling the Company to capitalize on pre-existing
advertising and name recognition. The following table sets forth information
with respect to store openings and closings since fiscal 1998.
FISCAL YEARS
2002 2001 2000 1999 1998
---- ---- ---- ---- ----
Stores open at beginning of period 66 65 69 66 66
Stores opened during period 4 5 0 5 2
Stores closed during period 2 4 4 2 2
Stores open at end of period 68 66 65 69 66
Retail square footage at end of
period 764,600 707,800 663,300 695,400 642,000
PRODUCTS
The Company's stores offer a diverse and extensive assortment of value-priced
crafts, fabrics, and related items to creative craft and sewing consumers.
Each of the Company's stores offers craft, fabric and related products. Craft
items include silk flowers, wicker, picture frames, wood products, stitchery,
yarn, wearable art, scrapbooking, art, craft supplies and children's creative
related products. Fabric items available at the Company's stores include
apparel, quilting and home decorative fabrics, as well as trimmings, patterns
and sewing notions. As of August 31, 2002, 63 stores offer custom picture
framing. The Company also sells a wide variety of seasonal merchandise with
special emphasis on the Spring, Easter, Back-to-School, Halloween and Christmas
seasons.
Through their purchase of craft, fabric and other items, used either
individually or in combination, the Company's customers can hand-make a wide
variety of finished products for personal use, gifts, home beautification and
seasonal decoration. For example, fabrics can be made into career, leisure,
children's, bridal and special occasion fashions, draperies and upholstery for
home decoration and hand made quilts and, from the Company's selection of craft
items, customers can create needle point and stitchery, personalized hand
painted apparel, floral arrangements, dolls and specialized scrapbooks.
3
MERCHANDISING AND ADVERTISING
The Company's marketing and merchandising strategy emphasizes the sale of
multiple products to be used by the customer to create a single project. To
assist customers in making their own selections and to encourage their purchase
of several products, the Company's stores display finished models that
incorporate a variety of merchandise in close proximity to where the components
are sold. The models are created by the Company's display staff, as well as
store staff, conforming to Company guidelines.
Craft or sewing classes are offered monthly at a select number of each of the
Company's stores to further promote both specific products and store business.
During each class, participants complete a project using materials purchased
from the store at which the class is offered.
Merchandise at the Company's stores is displayed on conveniently arranged
fixtures to facilitate customer access. The general layout of merchandise,
adjusted seasonally and as otherwise necessary to adapt to marketing conditions,
is planned by the Company's management to give prominence to the types of
merchandise currently in demand.
Approximately five percent of the Company's net sales are expended on a 52-week
per year advertising program. The Company primarily utilizes freestanding
newspaper inserts and, secondarily, newspaper print advertisements. These
newspaper inserts are also displayed at the front of each store and describe a
calendar of promotions emphasizing special sales items, seasonal products and
other currently popular merchandise. Approximately three million people
regularly receive the freestanding newspaper inserts.
For the Spring and Back-to-School seasons, and the holiday seasons of Easter,
Halloween and Christmas, the Company utilizes a fully developed merchandising
program including special inventory, layout, instructional ideas and promotions
with highly focused displays. During these peak seasons approximately 25% of
store selling space is devoted to seasonal merchandise.
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 historically occur between September and December. Historically the
Company has operated at a loss during its fourth fiscal quarter, the June
through August summer period. The Company's results of operations depend
significantly upon the sales generated from September through December and any
material decrease in sales for such period could have a material adverse effect
upon the Company's profitability. See "Management's Discussion and Analysis of
Financial condition and Results of Operations-Seasonality."
STORE OPERATIONS
The Company's store operations are divided into seven geographic districts, each
managed by a district manager. Stores typically are staffed with a manager, an
assistant manager, one department head each for fabrics and crafts, sales
personnel, cashiers and stock clerks.
District managers supervise store management, monitor the Company's stores to
ensure compliance with procedures, policies and budgets, determine whether
adequate levels of merchandise are available at the stores and reallocate
merchandise among stores as dictated by selling trends and stock levels at
individual stores (aided by access to the Company's databases). Store managers
are responsible for operation of individual stores, including recruiting and
hiring store personnel.
Store managers place orders to replenish inventory from the Company's 85,000
square foot distribution center in Paterson, New Jersey, and may also directly
order certain core merchandise designated by management from the Company's
suppliers. Orders for merchandise are placed by the store manager on a regular
basis. Orders for merchandise are entered into a scanning gun, downloaded to a
computer in the store and polled by the Company's corporate data processing
system. Merchandise received at the Company's stores is entered into the store
computer and included in the polling. Deliveries from the distribution center
are made by Company-owned vehicles or by independent trucking companies.
4
Stores are generally open from 10:00 A.M. to 9:00 P.M. Monday through Saturday
and 11:00 A.M. to 6:00 P.M. on Sunday, with extended hours during the Christmas
season. All stores are operating with point-of-sale cash register systems.
Approximately 55% of receipts at the Company's stores are in the form of cash or
check, with the balance paid for with MasterCard, Visa, Discover or American
Express charge and debit cards.
EXPANSION STRATEGY
While management does not believe there are significant geographic constraints
on the locations of future stores, the Company's strategy is to grow by
expanding within areas from which it presently attracts customers and into
contiguous market areas, enabling the Company to capitalize on pre-existing
advertising and name recognition. When deciding whether to open a new store, the
principal factors the Company typically evaluates are the amount of consumer
traffic generated by the market area, the demographic composition of the
customer base in the market area, store position in and customer attraction to
the shopping center, rent structure, available media, advertising expense, and
other costs associated with opening the store. Historically, new stores tend to
become profitable after six to twenty-four months.
SOURCES OF SUPPLY
The Company purchases its merchandise from more than 300 suppliers. The
Company's merchandise is primarily purchased from domestic suppliers (including
distributors that import goods from the Far East) and the balance is acquired
directly from manufacturers in the Far East, including China, Hong Kong, Korea,
the Philippines and Taiwan. The merchandise purchased directly from foreign
manufacturers, consisting primarily of silk flowers, seasonal merchandise and
staple craft products, is sold under the Company's private label. As is
customary in the industry, the Company does not have any long-term or exclusive
contracts with any suppliers. The Company believes that alternate sources of
merchandise are readily available at comparable prices.
Consistent with industry practice, merchandise from manufacturers in the Far
East is ordered four to six months in advance to assure delivery prior to the
selling season for the merchandise. Letters of credit are frequently issued to
foreign manufacturers with specific terms regarding the merchandise ordered,
inspection prior to shipment, and time and place of delivery. The Company
assumes the risk of loss on a F.O.B. basis when goods are delivered to a shipper
and is insured against casualty losses arising during shipping.
COMPETITION
The retail craft and fabric industry is highly competitive. The Company competes
with other national, regional and independent specialty craft and/or fabric
retailers and mass merchandisers, some of which have greater financial and other
resources than the Company. The Company believes it competes on the basis of
merchandise selection, customer service, price and advertising. Competitors
include A.C. Moore Arts & Crafts, Inc., Jo-Ann Stores, Inc., and Michaels
Stores, Inc.
EMPLOYEES
As of August 31, 2002, the Company has approximately 1,475 employees, consisting
of approximately 375 full time and 1,100 part time employees. Full time
personnel consist of approximately 260 salaried and 115 hourly employees. All
part time personnel are hourly employees. During seasonal peak periods, the
Company hires temporary personnel. Approximately 53 employees in the Company's
distribution center are covered by a collective bargaining agreement with Local
161 of the Union of Needletrades, Industrial and Textile Employees, AFL-CIO.
This agreement expires in March 2005. The Company considers its relationships
with its employees to be good.
TRADEMARKS
The Company's trademark "THE RAG SHOP" was registered with the United States
Patent and Trademark Office on September 9, 1969 for fabrics, wearing apparel
and home furnishings; and has been renewed through September 9, 2009. Variations
of this mark have been registered by the Company to stand for its retail
services and for numerous goods sold by the Company at its retail outlets. These
marks are all renewable indefinitely so long as the marks are used by the
Company.
5
ITEM 2. PROPERTIES
The Company's executive office facilities and its Hawthorne, New Jersey store
occupy approximately 15,900 and 17,600 square feet, respectively, in the same
strip shopping center in Hawthorne, New Jersey. The store and offices are leased
from Momar Realty L.L.C., the two members of which are Stanley Berenzweig,
Chairman of the Board and Doris Berenzweig, Secretary. The Company's
distribution center and all of its other stores are leased from non-affiliates
of the Company.
The Company's 85,000 square foot distribution center is located in Paterson, New
Jersey. The Company believes that its distribution center is adequate for its
needs through the expiration of the current term of the lease in July 2004. The
Company leases approximately 50,000 square feet of additional warehouse space on
a month-to-month basis to accommodate seasonal merchandise and expedite
distribution of merchandise to stores. Such additional space was leased for the
full twelve months of the year 2002 and is expected to be leased or replaced
with other warehouse space of comparable or greater size for the full twelve
months of 2003.
The Company's stores, all of which are located in leased facilities, range in
size from approximately 7,000 square feet to 20,000 square feet. The average
size of the Company's stores is approximately 11,200 square feet with
approximately 90% of the area of each store representing selling space. The
Company seeks to open new stores in the range of approximately 15,000 to 20,000
square feet. However, the Company often maintains options to expand store size
and will exercise those options or otherwise enlarge particular stores as
circumstances warrant. The following table sets forth the number of store leases
due to expire, including options to renew, during the calendar year indicated.
LEASE EXPIRATIONS
YEAR NUMBER YEAR NUMBER
---- ------ ---- ------
2003 2 2017 9
2004 2 2018 6
2005 2 2019 8
2006 1 2020 4
2008 3 2021 2
2011 3 2022 2
2012 2 2023 2
2013 4 2024 2
2014 1 2026 5
2016 4 2027 3
2031 1
Sixty-five of the above stores are located in strip shopping centers, and the
remaining three are free-standing buildings. The stores generally are located in
close proximity to population centers and other retail operations and are
usually on a major highway or thoroughfare, making them easily accessible by
automobile. All of the stores provide free parking.
The leases for the Company's stores are generally for a term of five years,
usually with four options to renew for five years each. Under most leases, the
Company is required to pay, in addition to fixed minimum rental payments,
additional rent based on charges for real estate taxes, common area maintenance
fees, utility charges and insurance premiums. Certain leases provide for
contingent rentals based on a percentage of sales.
ITEM 3. LEGAL PROCEEDINGS
The Company is involved in various legal proceedings incidental to the conduct
of its business. The Company currently is not engaged in any legal proceeding
that is expected to have a material adverse effect on the Company's results of
operations or financial position.
6
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company did not submit any matters to vote of its stockholders, through the
solicitation of proxies or otherwise, during the fourth quarter of the fiscal
year ended August 31, 2002.
7
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
Effective September 24, 1999 the Company's Common Stock began trading on the
NASDAQ SmallCap Market ("NASDAQ") under the symbol "RAGS". The Company's Common
Stock previously traded on the NASDAQ National Market.
The following table sets forth, for the periods indicated, the high and low sale
prices of the Company's Common Stock as reported by NASDAQ. These prices reflect
interdealer prices and do not include retail mark-ups, mark-downs or
commissions, and do not necessarily represent actual transactions.
HIGH LOW
FISCAL YEAR ENDED AUGUST 31, 2002
First Quarter $ 2.400 $ 2.100
Second Quarter 4.400 2.100
Third Quarter 6.050 3.000
Fourth Quarter 6.630 3.350
FISCAL YEAR ENDED SEPTEMBER 1, 2001
First Quarter $ 2.750 $ 1.938
Second Quarter 3.000 2.000
Third Quarter 2.750 2.080
Fourth Quarter 2.800 2.050
On October 31, 2002, the closing price of the Common Stock was $4.320.
The approximate number of stockholders of record of the Common Stock at October
31, 2002 was 316. The number of beneficial owners whose shares are held by
banks, brokers and other nominees exceeds 950.
On June 28, 1999, the Company declared a 5% stock dividend on the Company's
common stock which was paid on August 10, 1999 to stockholders of record on July
14, 1999. The Company has not paid any cash dividends. The Company presently
intends to retain all earnings for the operation and expansion of its business
and does not anticipate paying cash dividends on its Common Stock in the
foreseeable future. Any future determination as to the payment of cash dividends
on the Common Stock will depend upon future earnings, results of operations,
capital requirements, the financial condition of the Company and any other
factors the Board of Directors of the Company may consider. In addition,
pursuant to the Company's bank line of credit, the Company is prohibited from
declaring dividends in any year in excess of its earnings for such year or which
would otherwise result in a violation of the Company's covenant to maintain a
tangible net worth (as defined in the line of credit commitment letter) of
$9,000,000. The Company's tangible net worth for the period ended August 31,
2002 was $24,168,609.
8
ITEM 6. SELECTED FINANCIAL DATA
The following table presents selected financial data derived from the audited
consolidated financial statements of the Company for each of the five years in
the period ended August 31, 2002. The selected financial data should be read in
conjunction with "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the Consolidated Financial Statements
and Notes thereto contained elsewhere in this report.
FISCAL YEAR ENDED (1)
August 31, August 31, September 1, September 2, August 28, August 29,
2002 2002 2001 2000 1999 1998
---- ---- ---- ---- ---- ----
(Restated) (Previously
Reported)
(In thousands, except common stock data and statistics)
OPERATIONS
Net sales $110,672 $110,672 $100,888 $100,208 $ 94,781 $ 90,566
Gross profit 39,297 39,297 35,756 36,543 33,915 32,722
Store expenses and general
and administrative expenses 38,809 38,809 35,740 34,582 33,163 31,167
Gain from demutualization 181 0 0 0 0 0
Interest income (expense), net 38 38 128 31 (83) (61)
Income before income taxes and
cumulative effect of change in
accounting principle 706 526 143 1,991 668 1,544
Income before cumulative effect of
change in accounting principle 389 290 46 1,198 402 942
Cumulative effect of change in
accounting principle, net of tax 0 0 0 198 0 0
Net income $ 389 $ 290 $ 46 $ 1,396 $ 402 $ 942
COMMON STOCK DATA (2)
Basic and diluted earnings per
share:
Income before cumulative effect of
change in accounting principle $ .08 $ .06 $ .01 $ .25 $ .08 $ .20
Cumulative effect of change in
accounting principle 0 0 0 .04 0 0
------- ------- ------- ------- ------- ------
Net income $ .08 $ .06 $ .01 $ .29 $ .08 $ .20
Book value per share $ 5.04 $ 5.00 $ 4.94 $ 4.93 $ 4.59 $ 4.59
Weighted average shares and
equivalents outstanding:
Basic 4,799,183 4,799,183 4,801,583 4,813,476 4,744,408 4,740,063
Diluted 4,826,119 4,826,119 4,807,010 4,813,871 4,754,996 4,788,196
FINANCIAL POSITION
Working capital $ 19,506 $ 19,220 $ 19,049 $ 19,640 $ 17,298 $ 17,095
Total assets 38,728 38,570 35,634 34,580 37,869 33,318
Short-term debt 0 0 0 0 6,570 2,194
Long-term debt 0 0 0 0 0 0
Stockholders' equity $ 24,169 $ 24,011 $ 23,720 $ 23,670 $ 22,104 $ 21,742
9
FISCAL YEAR ENDED (1)
August 31, August 31, September 1, September 2, August 28, August 29,
2002 2002 2001 2000 1999 1998
---- ---- ---- ---- ---- ----
(Restated) (Previously
Reported)
STATISTICS
Net sales increase 9.7% 9.7% 0.7% 5.7% 4.7% 4.7%
Comparable store net sales
increase (decrease) (3) 4.9% 4.9% (0.7%) 4.2% 0.2% 3.2%
Comparable store net sales
increases on a 52 week
aligned basis (3) 4.9% 4.9% 0.8% 2.5% 0.2% 3.2%
Return on net sales, after
income taxes 0.4% 0.3% 0.1% 1.4% 0.4% 1.0%
Return on average
stockholders' equity 1.6% 1.2% 0.2% 6.1% 1.8% 4.4%
Average net sales per gross
square foot (4) $ 153 $ 153 $ 146 $ 147 $ 141 $ 143
Average net sales per store
(000's) (4) $ 1,668 $ 1,668 $ 1,534 $1,490 $1,399 $ 1,374
Stores open at end of
period 68 68 66 65 69 66
(1) Fiscal 2000 is a 53-week fiscal year. All other years shown are 52-week
fiscal years.
(2) On June 28, 1999, the Company declared a 5% stock dividend on the
Company's common stock, which was paid on August 10, 1999 to
stockholders of record on July 14, 1999. Share and per share data
presented for the fiscal year ended August 29, 1998 has been adjusted to
give retroactive effect to the dividend.
(3) Comparable store sales increases (decreases) for a fiscal year include
stores commencing with their thirteenth consecutive entire fiscal month.
Comparable store net sales increases on a 52 week aligned basis are
arrived at by eliminating the unaligned 53rd week from fiscal 2000
before comparing the result with the prior and succeeding year.
(4) For purposes of calculating these amounts, the number of stores and the
amount of gross square footage have been adjusted to reflect the number
of months during the period that new stores were open. These amounts
have not been adjusted to reflect the seasonal nature of the Company's
net sales or the resulting impact of opening stores in different periods
during the year. See "Management's Discussion and Analysis of Financial
condition and Results of Operations-Seasonality."
10
ITEM 7. 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 Company's Consolidated Income Statements for the indicated
years.
YEAR ENDED
August 31, August 31, September 1, September 2,
2002 2002 2001 2000
---- ---- ---- ----
(Restated) (Previously
Reported)
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of merchandise sold and
occupancy costs 64.5 64.5 64.6 63.5
------- ------- ------- -------
Gross profit 35.5 35.5 35.4 36.5
Store expenses 24.6 24.6 25.3 24.3
General and administrative expenses 10.5 10.5 10.1 10.2
Gain from demutualization 0.2 - - -
------- ------ ------ ------
Income from operations 0.6% 0.4% 0.0% 2.0%
Net income 0.4% 0.3% 0.1% 1.4%
The Company's net sales increased in fiscal 2002 by $9,784,000 or 9.7%. Sales
from comparable stores open at least one year increased $4,802,000 or 4.9%.
Management believes the increases are due to continuing efforts to maintain
better in-stock position, add new products and improve merchandise display that,
along with positive industry trends, resulted in increases in both average sale
and customer transactions during the fiscal year. Strong Christmas season sales
also contributed. In fiscal 2001, the Company's net sales increased by $680,000
or 0.7%. Sales from comparable stores opened at least one year decreased
$637,000 or 0.7%. The sales comparison is affected by the number of weeks
contained in each fiscal year since fiscal 2000 includes a 53rd fiscal week
while fiscal 2001 is based on a 52 week period. On a fully aligned,
week-for-week comparative basis, net sales in fiscal 2001 increased by
$2,206,000 or 2.2% over the comparable prior period due to increases in
comparable store sales of $746,000 or 0.8%, in addition to new store sales of
$1,460,000 net of the impact of closed stores. The comparable store sales
increase was negatively affected in the Company's fiscal 2001 fourth quarter by
an unsuccessful change in promotional strategy and later distribution of
seasonal merchandise compared to fiscal 2000.
Gross profit improved by $3,501,000 and 9.8% in fiscal 2002 as compared to the
prior fiscal year. The improvement was principally due to the additional revenue
cited above, as gross profit remained relatively unchanged year-to-year as a
percent of net sales. Gross profit decreased $787,000, or 1.0% as a percent of
net sales, in fiscal 2001 as compared to fiscal 2000. The percentage change in
fiscal 2001 was primarily due to higher inventory shrinkage as compared to
fiscal 2000, coupled with a combination of increases in occupancy and freight
costs. Occupancy expense increased because of higher square footage and rent
costs of new stores as compared to closed stores as well as contractual
increases in rent for existing stores. Freight expense rose primarily due to
higher unit costs.
Store expenses increased by $1,637,000 or 6.4%, and, as a percentage of sales,
decreased by 0.7% in fiscal 2002 as compared to 2001. The increase in fiscal
2002 was primarily due to an increase in payroll and payroll related expenses
and rose in support of larger stores and higher sales. The decrease in store
expenses as a percent of net sales was principally due to the ability of the
Company to leverage expenses against the increase in net sales. Store expenses
in fiscal 2001 increased by $1,249,000 or 5.1%, and, as a percentage of net
sales, increased by 1.0% as compared to fiscal 2000 principally due to an
increase in payroll and payroll related expenses that was primarily due to new
store openings net of store closings, and additional costs incurred in
connection with the Company's annual physical inventory to inaugurate a company
11
wide SKU (stock keeping unit) level inventory system to help improve the
Company's sales performance and tighten inventory control.
General and administrative expenses in fiscal 2002 increased by $1,392,000, or
0.4% as a percent of net sales, as compared to fiscal 2001. These increases were
primarily attributable to additional payroll and payroll related expenses
incurred in connection with filling executive and management positions that were
vacant in the prior comparable period, plus increased insurance expenses.
General and administrative expenses decreased by $90,000 or 0.9% in fiscal 2001,
and, as a percentage of net sales, decreased by 0.1% as compared to fiscal 2000.
The lower general and administrative expense in fiscal 2001 is primarily due to
decreases in payroll and related expenses, and professional fees, partially
offset by increases in property and casualty insurance premiums and rent for the
Company's distribution center.
In fiscal 2002, interest income, net decreased from the prior fiscal year due to
the material fall in interest rates on short-term investments in the first half
of the current year compared to relative interest rate stability and higher
interest rate availability during the prior comparable period. There was
virtually no change in average invested balances during the two years. Interest
income, net increased in fiscal 2001 as compared to fiscal 2000 because the
Company entered fiscal 2001 without bank debt and was able to maintain that
condition throughout the majority of the year, thus allowing an increase in
investment of cash provided by operating activities over that experienced in
fiscal 2000. See "Liquidity and Capital Resources."
The effective tax rate for 2002 was 44.9% as compared to 67.8% in 2001. The
decrease is primarily due to a lower effective state and local income tax rate.
The effective tax rate for 2001 was 67.8% as compared to 39.7% in 2000. The
increase is primarily due to a higher effective state and local income tax rate
due to the effect of minimum tax requirements on lower income.
Net income increased by $343,000 for fiscal 2002 as compared to fiscal 2001 as a
result of the increase in net sales and due to the gain from demutualization,
partially offset by increases in store and general and administrative expenses,
and the decrease in interest income, net. Net income decreased by $1,350,000 for
fiscal 2001 as compared to fiscal 2000 (a 53 week year) due to the decrease in
gross profit and the increase in store expenses, which was partially offset by
the decrease in general and administrative expenses and the increase in interest
income, net.
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 historically occur between September and December. This period includes
the Back-to-School, Halloween and Christmas seasons. The Company has
historically operated at a loss during its fourth quarter, the June through
August summer period. See "Business - Seasonality."
Year to year comparisons of quarterly results and comparable store sales can be
affected by a variety of factors, including (1) the timing and duration of
holiday selling seasons, (2) the timing of new store openings and promotional
markdowns and (3) every seven years, the retail calendar contains a 53rd week as
compared to a 52 week year for all other years.
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. In fiscal 2002
and fiscal 2001, the Company relied on internally generated funds, trade credit
made available by suppliers and short-term borrowings to finance inventories and
new store openings. Nearly all of the Company financing was provided through
internally generated funds and trade credit.
The Company's working capital has increased $457,000 in fiscal 2002 as compared
to 2001 primarily as a result of an increase in merchandise inventory partially
offset by an increase in trade payables.
12
The Company maintains a 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 August 31, 2002). The credit facility requires the
Company to maintain a compensating balance of $400,000 in addition to certain
financial covenants which require a minimum defined working capital and tangible
net worth, a maximum ratio of debt to tangible net worth and set limits on the
payment of dividends. As of August 31, 2002, the Company was in compliance with
such 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 outstanding at
a point in time under the line was $750,000, $545,000, and $7,490,000 during
fiscal 2002, fiscal 2001 and fiscal 2000, respectively. There were no direct
borrowings outstanding under the line of credit at August 31, 2002 or September
1, 2001. 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.
The Company purchases merchandise directly from manufacturers in the Far East.
These purchases are payable in United States dollars and are either by direct
payment or supported by letters of credit. The results of operations of the
Company have not been affected by foreign currency fluctuation. At August 31,
2002, the Company had outstanding letters of credit in the amount of $159,690.
During fiscal 2002, fiscal 2001 and fiscal 2000, the Company had net cash
provided by operating activities of $1,356,000, $1,526,000 and $7,537,000,
respectively, and used $1,359,000, $1,890,000 and $591,000, respectively for
purchases of property and equipment. Cash provided by operating activities in
fiscal 2002 resulted primarily from depreciation, and increases in trade
payables and other current obligations, offset by an increase in merchandise
inventory. In fiscal 2003, the Company expects to open three new stores and
close three existing stores. Costs associated with opening of new stores,
including capital expenditures, inventory and pre-opening expenses, approximated
$825,000 per store in fiscal 2002. 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 re-deploy assets of stores being closed to the new
stores as opportunities evolve in order to curtail the costs of opening stores.
The Company believes that its cash at August 31, 2002, working capital generated
from operations and cash available from the bank line of credit will be
sufficient for the Company's operating needs for at least the next 12 months.
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 the
Company's filings with the Securities and Exchange Commission).
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.
RECENT ACCOUNTING STANDARDS
In August 2001, the FASB issued Statement of Financial Accounting Standards No.
144, "Accounting for the Impairment of Disposal of Long-Lived Assets" ("SFAS
144"). This statement is effective for fiscal years beginning after December 15,
2001. This supercedes Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of", while retaining many of the requirements of such statement.
After review of the provisions of this Statement, management's assessment is
that the Statement has no material impact on the Company's financial position or
results of operations.
13
In June 2002, the FASB issued SFAS No. 146, Accounting for Exit or Disposal
Activities ("SFAS 146"). SFAS 146 addresses the recognition, measurement, and
reporting of costs that are associated with exit and disposal activities,
including costs related to terminating a contract that is not a capital lease
and termination benefits that employees who are involuntarily terminated receive
under the terms of a one-time benefit arrangement that is not an ongoing benefit
arrangement or an individual deferred-compensation contract. SFAS 146 supersedes
Emerging Issues Task Force Issue No. 94-3, Liability Recognition for Certain
Employee Termination Benefits and Other Costs to Exit an Activity (including
Certain Costs Incurred in a Restructuring), and requires liabilities associated
with exit and disposal activities to be expensed as incurred. SFAS 146 is
effective for exit or disposal activities of the Company that are initiated
after December 31, 2002. The Company is currently evaluating the impact of the
Statement.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk is the potential change in a financial instrument's value caused by
fluctuations in interest or currency exchange rates, or in equity and commodity
prices. The Company's activities expose it to certain risks that management
evaluates carefully to minimize earnings volatility. At August 31, 2002, and
during each of the three years in the period then ended, the Company was not a
party to any derivative arrangement and the Company does not engage in trading,
market-making or other speculative activities in the derivatives markets. The
Company does not have any foreign currency exposure. As discussed in Note 3 of
the Notes to Consolidated Financial Statements, loans outstanding under the
Company's unsecured line of credit bear interest at the bank's prime rate (4.75%
at August 31, 2002). There were no loans outstanding under any such line of
credit at August 31, 2002 or September 1, 2001.
The following table details future projected payments for the Company's
significant contractual obligations as of August 31, 2002:
Computer and
Other Technology
Fiscal Year Ended Operating Leases Related Commitments Total
2003 $ 9,055,236 $ 386,364 $ 9,441,600
2004 8,009,700 120,317 8,130,017
2005 7,201,393 98,330 7,299,723
2006 6,020,264 54,670 6,074,934
2007 4,788,695 1,519 4,790,214
Thereafter 11,207,047 0 11,207,047
---------- --------- ----------
$ 46,282,335 $ 661,200 $ 46,943,535
=========== ========= ==========
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Item 15(a) in Part IV.
14
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required for this item is incorporated by reference to the
Company's 2002 Definitive Proxy Statement which the Company will file with the
Securities and Exchange Commission no later than 120 days subsequent to August
31, 2002.
ITEM 11. EXECUTIVE COMPENSATION
The information required for this item is incorporated by reference to the
Company's 2002 Definitive Proxy Statement which the Company will file with the
Securities and Exchange Commission no later than 120 days subsequent to August
31, 2002.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required for this item is incorporated by reference to the
Company's 2002 Definitive Proxy Statement which the Company will file with the
Securities and Exchange Commission no later than 120 days subsequent to August
31, 2002.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required for this item is incorporated by reference to the
Company's 2002 Definitive Proxy Statement which the Company will file with the
Securities and Exchange Commission no later than 120 days subsequent to August
31, 2002.
ITEM 14. CONTROLS AND PROCEDURES
The Company maintains controls and procedures designed to ensure that
information required to be disclosed in the reports that the Company files or
submits under the Securities Exchange Act of 1934 is recorded, processed,
summarized and reported within the time periods specified in the rules and forms
of the Securities and Exchange Commission. Based upon their evaluation of those
controls and procedures performed within 90 days of the filing date of this
report, the Chief Executive and Chief Financial officers of the Company
concluded that the Company's disclosure controls and procedures were adequate.
The Company made no significant changes in its internal controls or in other
factors that could significantly affect these controls subsequent to the date of
the evaluation of those controls by the Chief Executive and Acting Chief
Financial officers.
15
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) FINANCIAL STATEMENTS PAGE Report of Independent Certified
Public Accountants F-1
Consolidated Balance Sheets as of August 31, 2002 (restated)
and September 1, 2001 F-2
Consolidated Statements of Income for the years ended August
31, 2002 (restated), September 1, 2001 and September 2, 2000 F-3
Consolidated Statements of Stockholders' Equity for the
years ended August 31, 2002 (restated), September 1, 2001
and September 2, 2000 F-4 - F-5
Consolidated Statements of Cash Flows for
the years ended August 31, 2002 (restated),
September 1, 2001 and September 2, 2000 F-6
Notes to Consolidated Financial Statements F-7 - F-16
(b) The Company did not file a Current Report on Form 8-K during
the last quarter of the period covered by this Report.
(c) EXHIBITS
3.1* Certificate of Incorporation of the Company
3.2* By-Laws of the Company
10.1* Promissory Note (Revolving) with Valley National
Bank
10.2* 1991 Stock Option Plan
10.3* Lease between Momar Realty Co. and the Company,
dated as of March 1, 1991
10.4** 1999 Incentive Stock Award Plan
10.5** Change in Registrants Certifying Accountant
21.1 List of subsidiaries of the Company
23.1 Consent of Grant Thornton LLP
24.1 Power of Attorney to sign Form 10-K/A (set forth on page 17)
27 Financial Data Schedule (Filed electronically with SEC only)
99.1 Certification
99.2 Certification
(d) FINANCIAL STATEMENT SCHEDULES None of these schedules are
required.
* Incorporated by reference to the Company's Registration Statement on Form
S-1 and Amendment No. 1 thereto.
**Incorporated by reference to the Company's Registration Statement on
Form S-8 filed on September 3, 1999.
16
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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, in the City of Hawthorne,
New Jersey, on January 27, 2004.
RAG SHOPS, INC.
By: /S/ STANLEY BERENZWEIG
--------------------------
STANLEY BERENZWEIG, Chairman
POWER OF ATTORNEY
Each of the undersigned hereby appoints Stanley Berenzweig and Steven Barnett as
his or her attorneys-in-fact to sign his or her name, in any and all capacities,
to any amendments to this Form 10-K/A and any other documents filed in
connection therewith to be filed with the Securities and Exchange Commission.
Each of such attorneys has the power to act with or without the others.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following person on behalf of the Registrant and in
the capacities and on the dates indicated.
SIGNATURE TITLE(S) DATE
/S/ STEVEN B. BARNETT Executive Vice President and January 27, 2004
---------------------- Director
Steven B. Barnett
/S/ STANLEY BERENZWEIG Principal Executive January 27, 2004
---------------------- Officer and Director
Stanley Berenzweig
/S/ MARIO CIAMPI Director January 27, 2004
----------------
Mario Ciampi
/S/ FRED J. DAMIANO Director January 27, 2004
--------------------
Fred J. Damiano
/S/ JEFFREY C. GERSTEL President and January 27, 2004
---------------------- Director
Jeffrey C. Gerstel
/S/ JUDITH LOMBARDO Senior Vice President and January 27, 2004
-------------------- Director
Judith Lombardo
/S/ ALAN C. MINTZ Director January 27, 2004
------------------
Alan C. Mintz
17
CERTIFICATIONS
I, Stanley Berenzweig, certify that:
1. I have reviewed this annual report on Form 10-K/A of Rag Shops, Inc.;
2. Based on my knowledge, this annual 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 annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual 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 annual 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 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 annual 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 annual report on January 27, 2004; and c)
presented in this annual 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: 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
annual 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
18
CERTIFICATIONS
I, Steven B. Barnett, certify that:
1. I have reviewed this annual report on Form 10-K/A of Rag Shops, Inc.;
2. Based on my knowledge, this annual 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 annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual 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 annual 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 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 annual 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 annual report on January 27, 2004; and c)
presented in this annual 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: 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
annual 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
- --------------------- and Acting Chief Financial
Steven B. Barnett Officer
19
RAG SHOPS, INC.
INDEX TO EXHIBITS
Exhibit Sequentially
NUMBER DESCRIPTION OF EXHIBITS NUMBERED PAGES
3.1 Certificate of Incorporation of the Company *
3.2 By-Laws of the Company *
10.1 Promissory Note (Revolving) with Commercial Lending *
Institution
10.2 1991 Stock Option Plan *
10.3 Lease between Momar Realty Co. and the Company, *
dated as of March 1, 1991
10.4 1999 Incentive Stock Award Plan **
10.5 Change in Registrants Certifying Accountant **
21.1 List of subsidiaries of the Company
23.1 Consent of Grant Thornton LLP
24.1 Power of Attorney to sign Form 10-K/A
(set forth on page 17)
99.1 Certification
99.2 Certification
- --------------------------------
* Incorporated by reference to the Company's Registration Statement on Form S-1
and Amendment No. 1 thereto.
** Incorporated by reference to the Company's Registration Statement on Form S-8
filed on September 3, 1999.
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors and Stockholders
Rag Shops, Inc.
We have audited the accompanying consolidated balance sheets of Rag Shops, Inc.
and Subsidiaries as of August 31, 2002 and September 1, 2001 and the related
consolidated statements of income, changes in stockholders' equity and cash
flows for each of the three years in the period ended August 31, 2002. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Rag Shops, Inc.
and Subsidiaries as of August 31, 2002 and September 1, 2001, and the
consolidated results of their operations and their consolidated cash flows for
each of the three years in the period ended August 31, 2002, in conformity with
accounting principles generally accepted in the United States of America.
As discussed in Note 1 Merchandise Inventories, the Company changed its method
of calculating inventory for the year ended September 2, 2000.
As discussed in Note 1 Recent Developments, the accompanying financial
statements as of and for the years ended August 31, 2002 have been restated.
GRANT THORNTON LLP
Edison, New Jersey
November 13, 2002, except for the item titled "Recent Developments" in Note 1,
as to which the date is January 23, 2004
F-1
RAG SHOPS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
August 31, August 31, September 1,
2002 2002 2001
---- ---- ----
(Restated) (Previously
(See Note 1) (Reported)
ASSETS
CURRENT ASSETS
Cash $ 958,852 $ 958,852 $ 953,224
Investment in common stock 286,437 0 0
Merchandise inventories 30,327,095 30,327,095 27,806,578
Prepaid expenses 1,248,932 1,248,932 1,194,277
Other current assets 453,858 453,858 153,565
Deferred income taxes 789,846 789,846 855,346
----------- ----------- -----------
Total current assets 34,065,020 33,778,583 30,962,990
PROPERTY AND EQUIPMENT, NET 4,250,885 4,250,885 4,186,012
DEFERRED INCOME TAXES 368,492 497,102 436,002
OTHER ASSETS 43,194 43,194 49,485
----------- ----------- -----------
TOTAL ASSETS $ 38,727,591 $ 38,569,764 $ 35,634,489
=========== =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable - trade $ 10,307,909 $ 10,307,909 $ 8,348,552
Accrued expenses and other current
liabilities 2,797,432 2,797,432 2,680,378
Accrued salaries and wages 1,297,857 1,297,857 719,952
Income taxes payable 155,784 155,784 165,186
----------- ----------- -----------
Total current liabilities 14,558,982 14,558,982 11,914,068
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value
2,000,000 shares authorized;
No shares issued or outstanding 0 0 0
Common stock, $.01 par value,
13,000,000 shares authorized;
4,824,863 (4,797,983) shares and 4,826,063 (4,799,183)
shares issued (outstanding) at August 31, 2002
and September 1, 2001, respectively 48,249 48,249 48,261
Additional paid-in capital 6,235,352 6,235,352 6,237,666
Unamortized restricted stock awards 0 0 (3,065)
Retained earnings 17,890,805 17,791,255 17,501,633
Unrealized gain on investment in common stock, net of taxes 58,277 0 0
Treasury stock, at cost, 26,880 shares (64,074) (64,074) (64,074)
----------- ----------- -----------
Total stockholders' equity 24,168,609 24,010,782 23,720,421
----------- ----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 38,727,591 $ 38,569,764 $ 35,634,489
=========== =========== ===========
The accompanying notes are an integral part of these consolidated financial
statements.
F-2
RAG SHOPS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Fiscal Year Ended
-----------------
August 31, August 31, September 1, September 2,
2002 2002 2001 2000
---- ---- ---- ----
(Restated) (Previously
(See Note 1) Reported)
NET SALES $110,672,263 $110,672,263 $100,887,768 $100,207,583
COST OF MERCHANDISE SOLD AND
OCCUPANCY COSTS 71,375,224 71,375,224 65,131,965 63,665,075
---------- ---------- ---------- ----------
Gross profit 39,297,039 39,297,039 35,755,803 36,542,508
---------- ---------- ---------- ----------
OPERATING EXPENSES:
Store expenses 27,249,108 27,249,108 25,572,373 24,323,794
General and administrative
expenses 11,560,192 11,560,192 10,167,994 10,258,354
---------- ---------- ---------- ----------
Total operating expenses 38,809,300 38,809,300 35,740,367 34,582,148
---------- ---------- ---------- ----------
487,739 487,739 15,436 1,960,360
Gain from demutualization 180,671 0 0 0
---------- ---------- ---------- ----------
INCOME FROM OPERATIONS 668,410 487,739 15,436 1,960,360
INTEREST INCOME, Net 37,783 37,783 127,885 30,562
---------- ---------- ---------- ----------
INCOME BEFORE PROVISION FOR INCOME
TAXES AND CUMULATIVE EFFECT OF
CHANGE IN ACCOUNTING PRINCIPLE 706,193 525,522 143,321 1,990,922
PROVISION FOR INCOME TAXES 317,021 235,900 97,200 793,000
---------- ---------- ---------- ----------
INCOME BEFORE CUMULATIVE EFFECT OF
CHANGE IN ACCOUNTING PRINCIPLE 389,172 289,622 46,121 1,197,922
CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE, NET OF INCOME
TAX EFFECT OF $127,000 0 0 0 198,496
---------- ---------- ---------- ----------
NET INCOME $ 389,172 $ 289,622 $ 46,121 $ 1,396,418
=========== =========== =========== ===========
BASIC AND DILUTED EARNINGS PER
COMMON SHARE:
INCOME BEFORE CUMULATIVE EFFECT OF
CHANGE IN ACCOUNTING PRINCIPLE $ .08 $ .06 $ .01 $ .25
CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE 0 0 0 .04
---------- ---------- ---------- ----------
NET INCOME $ .08 $ .06 $ .01 $ .29
========== =========== ============ ==========
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
RAG SHOPS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY FOR YEARS ENDED
SEPTEMBER 2, 2000, SEPTEMBER 1, 2001, AND AUGUST 31, 2002
Unrealized
Gain on
Investment
Unamortized in
Additional Restricted Common
Common Stock Paid-In Stock Retained Stock, net Treasury
Shares Dollars Capital Awards Earnings of taxes Stock Total
(See Note 1)
BALANCE, AUGUST
28, 1999 4,837,763 $48,378 $6,267,827 $ (207,488) $16,059,094 $ 0 $ (64,074) $22,103,737
Issuance of
restricted
stock awards 9,000 90 17,352 (17,442) 0 0 0 0
Amortization of
restricted stock
awards 0 0 0 169,761 0 0 0 169,761
Forfeiture of
restricted stock
awards (18,300) (183) (42,886) 43,069 0 0 0 0
Net income 0 0 0 0 1,396,418 0 0 1,396,418
-------- ------- --------- --------- --------- --------- ------ ---------
BALANCE,
SEPTEMBER 2, 2000 4,828,463 48,285 6,242,293 (12,100) 17,455,512 0 (64,074) 23,669,916
Amortization of
restricted stock
awards 0 0 0 4,384 0 0 0 4,384
Forfeiture of
restricted stock
awards (2,400) (24) (4,627) 4,651 0 0 0 0
Net income 0 0 0 0 46,121 0 0 46,121
-------- ------- --------- --------- --------- --------- ------ --------
BALANCE,
SEPTEMBER 1, 2001 4,826,063 48,261 6,237,666 (3,065) 17,501,633 0 (64,074) 23,720,421
Amortization of
restricted stock
awards 0 0 0 739 0 0 0 739
Forfeiture of
restricted stock
awards (1,200) (12) (2,314) 2,326 0 0 0 0
Net income 0 0 0 0 289,622 0 0 289,622
-------- ------- --------- --------- --------- --------- ------ --------
BALANCE, AUGUST
31, 2002
(Previously
Reported) 4,824,863 $48,249 $6,235,352 $ 0 $17,791,255 $ 0 $ (64,074) $24,010,782
========= ====== ========= ========= ========== ========= ========= ==========
F-4
Unrealized
Gain on
Investment
Unamortized in
Additional Restricted Common
Common Stock Paid-In Stock Retained Stock, net Treasury
Shares Dollars Capital Awards Earnings of taxes Stock Total
(See Note 1)
BALANCE,
SEPTEMBER 1, 2001 4,826,063 $48,261 $6,237,666 $ (3,065) $ 17,501,633 $ 0 $ (64,074) $23,720,421
Amortization of
restricted stock
awards 0 0 0 739 0 0 0 739
Forfeiture of
restricted stock
awards (1,200) (12) (2,314) 2,326 0 0 0 0
Unrealized gain on
investment in
common stock, net
of taxes 0 0 0 0 0 58,277 0 58,277
Net income 0 0 0 0 389,172 0 0 389,172
-------
Total comprehensive
income 447,449
-------- ------- ---------- ---------- ----------- -------- -------- -------
BALANCE, AUGUST
31, 2002 (Restated)
(See Note 1) 4,824,863 $48,249 $6,235,352 $ 0 $ 17,890,805 $ 58,277 $ (64,074) $24,168,609
========= ====== ========= ========= ========== ======= ========= ==========
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
RAG SHOPS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Fiscal Year Ended
-----------------
August 31, August 31, September 1, September 2,
2002 2002 2001 2000
---- ---- ---- ----
(Restated) (Previously
(See Note 1) Reported)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 389,172 $ 289,622 $ 46,121 $ 1,396,418
Adjustments to reconcile net income to net cash
Provided by operating activities:
Depreciation and amortization 1,224,726 1,224,726 1,276,297 1,414,572
Gain from demutualization (180,671) 0 0 0
Deferred income taxes 85,521 4,400 (89,500) (187,090)
Loss on disposition of property and equipment 60,705 60,705 34,136 52,399
Amortization of restricted stock awards 739 739 4,384 169,761
Cumulative effect of change in accounting 0 0 0 (325,000)
principle
Changes in assets and liabilities:
(Increase) decrease in:
Merchandise inventories (2,520,517) (2,520,517) (1,260) 3,082,800
Prepaid expenses (54,655) (54,655) (710,963) 53,440
Other current assets (300,293) (300,293) (54,627) 125,821
Other assets 6,291 6,291 17,222 38,893
Increase (decrease) in:
Accounts payable - trade 1,959,357 1,959,357 585,832 1,834,152
Accrued expenses 117,054 117,054 668,555 (493,205)
Accrued salaries and wages 577,905 577,905 (173,171) 288,354
Income taxes payable (9,402) (9,402) (77,176) 85,450
----------- ----------- ----------- ----------
Net cash provided by operating activities 1,355,932 1,355,932 1,525,850 7,536,765
---------- ---------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of property and equipment 9,040 9,040 6,300 400
Payments for purchases of property and equipment (1,359,344) (1,359,344) (1,889,530) (590,634)
---------- ---------- ---------- ----------
Net cash used in investing activities (1,350,304) (1,350,304) (1,883,230) (590,234)
---------- ---------- ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of note payable - bank 4,075,000 4,075,000 1,090,000 5,805,000
Repayments of note payable - bank (4,075,000) (4,075,000) (1,090,000) (12,375,000)
---------- ---------- ---------- -----------
Net cash used in financing activities 0 0 0 (6,570,000)
---------- ---------- ---------- ----------
NET INCREASE (DECREASE) IN CASH 5,628 5,628 (357,380) 376,531
CASH, BEGINNING OF YEAR 953,224 953,224 1,310,604 934,073
---------- ---------- ---------- ----------
CASH, END OF YEAR $ 958,852 $ 958,852 $ 953,224 $ 1,310,604
========= ========= ========= ==========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the year for:
Interest $ 3,248 $ 3,248 $ 561 $ 198,269
========= ========= ========= ==========
Income taxes $ 98,042 $ 98,042 $ 843,731 $ 1,002,981
========= ========= ========= ==========
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
RAG SHOPS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED AUGUST 31, 2002, SEPTEMBER 1, 2001 AND SEPTEMBER 2, 2000
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND RECENT DEVELOPMENTS
ORGANIZATION AND NATURE OF BUSINESS
Rag Shops, Inc. (the "Company"), a Delaware corporation formed in April 1991, is
the successor by merger to a New Jersey Corporation having the same name which
was incorporated in 1984. The Company operates a chain of retail craft and
fabric stores through its subsidiaries which are located in New Jersey, New
York, Pennsylvania, Florida and Connecticut.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company and
its subsidiaries, all of which are wholly owned. All significant intercompany
transactions and balances have been eliminated.
USE OF ESTIMATES
The preparation of financial statements in accordance with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the Company's financial statements and
accompanying notes to financial statements. Actual results could differ from
those estimates.
FISCAL YEAR
The Company's fiscal year end is the Saturday closest to August 31. The
financial statements for fiscal year ended September 2, 2000 ("2000") were
comprised of 53 weeks. Fiscal years ended August 31, 2002 ("2002") and September
1, 2001 ("2001") were each comprised of 52 weeks.
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform to the current year
presentations.
ADVERTISING EXPENSES
Advertising costs are expensed as incurred. Advertising expense net of co-op
advertising was $4,196,085, $4,161,928 and $4,107,476 for 2002, 2001 and 2000,
respectively.
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. Effective August 29, 1999, the Company changed its method of
calculating ending merchandise inventories under the retail inventory method.
Prior to August 29, 1999, the Company utilized an average cost-to-retail ratio
to value ending inventory. Effective August 30, 1999, the Company began
utilizing a method that weights the cost-to-retail ratio using multiple
inventory categories. Management believes that this change in accounting
improves the measurement of the Company's profitability based upon a changing
product mix. The cumulative effect of this accounting change has increased the
Company's net income for 2000 by $198,496 (net of tax effect $127,000).
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is computed over the
estimated useful lives of the assets using straight-line and accelerated
methods. Leasehold improvements are amortized by the straight-line method over
F-7
an estimated useful life or the term of the related lease, whichever is shorter.
For tax purposes, depreciation is computed using accelerated methods.
The Company follows Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed of" ("SFAS No. 121"). This Statement established accounting
standards for the impairment of long-lived assets, certain identifiable
intangibles and goodwill related to those assets to be held and used, and for
long-lived assets and certain identifiable intangibles to be held and used by an
entity to be reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable.
REVENUE RECOGNITION
Revenue is recognized when merchandise is sold to customers.
FAIR VALUE OF FINANCIAL INSTRUMENTS
In management's opinion, the fair value of amounts outstanding under its line of
credit approximate fair value due to their variable interest rate.
PRE-OPENING AND CLOSING STORE EXPENSES
All pre-opening costs incurred in connection with the opening of new retail
stores are charged to expense when incurred. Costs associated with closing
stores, which consists primarily of write-downs of leasehold improvements, are
charged to expense at the time the decision to close a store is determined.
STOCK BASED COMPENSATION
The Company has adopted statement of Financial Accounting Standards No. 123
"Accounting for Stock-Based Compensation" ("SFAS No. 123"). As permitted under
SFAS No. 123, the Company has elected to follow Accounting Principles Board
opinion No. 25 ("APB No. 25"), "Accounting for Stock Issued to Employees", and
related interpretations in accounting for its employee stock options. Under APB
No. 25, when the exercise price of the employee stock options equals or exceeds
the market price of the underlying stock on the date of grant, no compensation
expense is recorded.
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
F-8
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 August 31,
2002 was $286,437. 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.
The following tables show the impact of the restatement from the previously
filed financial statements, as of August 31, 2002 and for the fiscal year then
ended:
Restated
Previously --------
Reported Adjustments (See Note 1)
-------- -----------
(Amounts in thousands except earnings per share)
Current assets - Investment in common stock $ - $ 286 $ 286
Deferred income taxes - long term 497 (129) 368
Stockholders' equity - Unrealized gain on
investment in common stock, net of taxes - 58 58
Stockholders' equity - Retained earnings 17,791 100 17,891
Gain from demutualization - 181 181
Provision for income taxes 236 81 317
Net income 289 100 389
Other comprehensive income - 58 58
Total comprehensive income 289 158 447
Earnings per share - Basic $ 0.06 $ 0.02 $ 0.08
Earnings per share - Diluted $ 0.06 $ 0.02 $ 0.08
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:
Fiscal Year Ended
-----------------
August 31, September 1,
2002 2001
---- ----
(Amounts in thousands)
Net income $ 389 $ 46
Other comprehensive income, net of taxes:
Unrealized gain on investment in common
stock 58 -
------------ ------------
Total comprehensive income $ 447 $ 46
============ ============
RECENT ACCOUNTING PRONOUNCEMENTS
In August 2001, the FASB issued Statement of Financial Accounting Standards No.
144, "Accounting for the Impairment of Disposal of Long-Lived Assets" ("SFAS
144"). This statement is effective for fiscal years beginning after December 15,
2001. This supercedes Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of", while retaining many of the requirements of such statement.
After review of the provisions of this Statement, management's assessment is
that the Statement has no material impact on the Company's financial position or
results of operations.
F-9
In June 2002, the FASB issued SFAS No. 146, Accounting for Exit or Disposal
Activities ("SFAS 146"). SFAS 146 addresses the recognition, measurement, and
reporting of costs that are associated with exit and disposal activities,
including costs related to terminating a contract that is not a capital lease
and termination benefits that employees who are involuntarily terminated receive
under the terms of a one-time benefit arrangement that is not an ongoing benefit
arrangement or an individual deferred-compensation contract. SFAS 146 supersedes
Emerging Issues Task Force Issue No. 94-3, Liability Recognition for Certain
Employee Termination Benefits and Other Costs to Exit an Activity (including
Certain Costs Incurred in a Restructuring), and requires liabilities associated
with exit and disposal activities to be expensed as incurred. SFAS 146 is
effective for exit or disposal activities of the Company that are initiated
after December 31, 2002. The Company is currently evaluating the impact of the
Statement.
NOTE 2. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
Useful August 31, September 1,
Lives 2002 2001
----- ---- ----
Furniture and fixtures 5-10 years $ 9,697,500 $ 9,070,071
Leasehold improvements 10 years 3,889,181 3,582,809
Transportation equipment 3-7 years 573,132 600,706
Data processing equipment 5 years 4,371,559 4,232,438
----------- -----------
18,531,372 17,486,024
Less accumulated depreciation and
Amortization 14,280,487 13,300,012
----------- -----------
$ 4,250,885 $ 4,186,012
============ ============
NOTE 3. NOTE PAYABLE - BANK
The Company maintains a credit facility with a bank. The credit facility is
renewable annually on or before each December 31 and currently consists of a
discretionary unsecured line of credit for direct borrowings and the issuance
and refinance of letters of credit. There were no direct borrowings outstanding
under the line of credit at both August 31, 2002 and September 1, 2001 and the
unused line of credit for direct borrowings and the issuance of letters of
credit at August 31, 2002 was $9,840,310. The facility requires the Company to
maintain a compensating balance of $400,000 in addition to certain financial
covenants which require a minimum defined working capital and tangible net
worth, a maximum ratio of debt to tangible net worth and set limits on the
payment of dividends. As of August 31, 2002, the Company was in compliance with
such covenants. Borrowings under the line of credit bear interest payable
quarterly at the bank's prime rate (4.75% and 6.50% at August 31, 2002 and
September 1, 2001, respectively).
NOTE 4. COMMITMENTS AND CONTINGENCIES
Leases
The Company leases its facilities in accordance with operating leases, having
initial terms of more than one year, which expire in various years through 2012.
Substantially all of the leases contain renewal options. In addition, certain
leases require that the Company pay its pro rata share of utilities, taxes,
insurance and maintenance. Rent expense for 2002, 2001 and 2000 amounted to
$8,789,191, $8,175,209, and $7,651,778, respectively, and includes contingent
rentals (computed on a percentage of sales, as defined in the leases) of
$40,211, $28,050 and $29,079 respectively.
The Company leases certain premises from an entity controlled by the majority
stockholders of the Company. For the years 2002, 2001 and 2000, rental payments
under this agreement amounted to $349,269, $340,349 and $338,265, respectively.
F-10
Future minimum annual rental commitments under non-cancelable operating leases
are as follows:
Fiscal Year Ended
2003 $9,055,236
2004 8,009,700
2005 7,201,393
2006 6,020,264
2007 4,788,695
Thereafter 11,207,047
----------
$46,282,335
==========
Letters of Credit
In addition, at August 31, 2002 the Company has outstanding letters of credit
for the purchase of merchandise inventories of approximately $159,690.
Legal Matters
The Company is involved in various legal proceedings incidental to the conduct
of its business. The Company currently is not engaged in any legal proceeding
that is expected to have a material adverse effect on the Company's results of
operations or financial position.
NOTE 5. EARNINGS PER SHARE
Basic and diluted earnings per share are calculated in accordance with Statement
of Financial Accounting Standards No. 128, "Earnings per Share" ("SFAS No.
128"). In accordance with SFAS No. 128, basic net income per share has been
computed based on the weighted average of common shares outstanding. Diluted net
income per share gives the effect of outstanding stock options. All of the net
income reported in the financial statements is available to common stockholders.
Fiscal Year Ended
August 31, August 31, September 1, September 2,
2002 2002 2001 2000
---- ---- ---- ----
(Restated) (Previously
(See Note 1) Reported)
Numerator for basic and diluted earnings per
Share:
Income before cumulative effect of change
in Accounting principle $ 389,172 $ 289,622 $ 46,121 $1,197,922
Cumulative effect of change in accounting
principle, net of income taxes 0 0 0 198,496
--------- --------- --------- ---------
Net income $ 389,172 $ 289,622 $ 46,121 $1,396,418
========= ========= ========= =========
Denominator:
Denominator for basic earnings per
share-weighted average shares 4,799,183 4,799,183 4,801,583 4,813,476
Effect of dilutive securities:
Employee stock options 26,936 26,936 5,427 395
--------- --------- --------- ---------
Denominator for diluted earnings
per share-adjusted weighted
average shares and assumed
conversions 4,826,119 4,826,119 4,807,010 4,813,871
========= ========= ========= =========
F-11
Fiscal Year Ended
August 31, August 31, September 1, September 2,
2002 2002 2001 2000
---- ---- ---- ----
(Restated) (Previously
(See Note 1) Reported)
Basic and diluted earnings per share:
Income before cumulative effect of change
in accounting principle $ .08 $ .06 $ .01 $ .25
Cumulative effect of change in accounting
principle - - - .04
-------- -------- -------- ---------
Net income $ .08 $ .06 $ .01 $ .29
======== ======== ======== ========
Stock options excluded from the above calculation, as the effect of such options
would be anti-dilutive, aggregated 2,250 in 2002, 17,750 in 2001 and 323,800 in
2000.
NOTE 6. STOCKHOLDERS' EQUITY
Each share of common stock is entitled to one vote.
In April 1991, the Company adopted the 1991 Stock Option Plan (the "Plan")
covering employees and non-employee directors. The Plan permitted options to
purchase a total of 450,000 shares of common stock, of which 435,600 shares were
reserved by the Company as of April 18, 2001. Such options may be incentive
stock options ("ISO") or nonqualified options. The term of an option will not
exceed ten years and an option is exercisable as determined by the Option
Committee of the Board of Directors. The exercise price of the shares covered by
an ISO may not be less than the fair market value of the shares at the time of
grant. The exercise price of the shares covered by a nonqualified option is
determined by the Option Committee. The options granted are generally
exercisable 40% after two years and 20% per year thereafter. The Plan expired on
April 18, 2001. However, the Company intends to extend the Plan termination date
and grant options on a minimum of 90,000 shares upon extension of the Plan. Such
options are not included in the tables below.
No compensation cost has been recognized for the stock options awarded since
they were granted at the fair market value on the date of grant. Had
compensation cost for the Company's stock option plan been recorded based on the
fair value at the grant date for awards in 2000 (the last grant dates under the
Plan prior to expiration), consistent with the provisions of SFAS No. 123, the
Company's net income and income per share would have been reduced to the pro
forma amounts indicated below:
Fiscal Year Ended
2002 2002 2001 2000
---- ---- ---- ----
(Restated) (Previously
(See Note 1) Reported)
Net income-as reported $ 389,172 $ 289,622 $ 46,121 $ 1,396,418
Net income-pro forma $ 388,198 $ 288,648 $ 34,455 $ 1,388,349
Net income per share-as reported, basic and $ .08 $ .06 $ .01 $ .29
diluted
Net income per share pro forma, basic and $ .08 $ .06 $ .01 $ .29
diluted
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants in fiscal 2000: dividends yield of 0%, expected
volatility of 30%, risk-free interest rate of 5.0% and expected life of 10
years. The weighted average grant date fair value of options issued during
fiscal year 2000 was $0.97.
F-12
Information with respect to options granted under the Plan is as follows:
Number of Exercise Price Weighted-Average
Shares Per Share Exercise Price
Outstanding, August 28, 1999 280,300 $2.02-$11.76 $3.70
Granted 56,500 $1.86-$2.325 $2.27
Forfeited or Expired (4,500) $2.125-$3.00 $2.42
--------
Outstanding, September 2, 2000 332,300 $1.86-$11.76 $3.51
Granted 0
Forfeited or Expired (250,550) $2.340-$6.250 $3.88
--------
Outstanding, September 1, 2001 81,750 $1.86-$11.76 $2.77
Granted 0
Forfeited or Expired (3,500) $2.340-$12.375 $6.64
--------
Outstanding, August 31, 2002 78,250 $1.86-$11.76 $2.59
========
Exercisable, September 2, 2000 229,400 $2.02-$11.76 $4.02
Exercisable, September 1, 2001 63,250 $2.02-$11.76 $2.94
Exercisable, August 31, 2002 73,950 $2.02-$11.76 $2.64
The weighted-average remaining contractual life of stock options outstanding at
August 31, 2002 is 4.4 years and at September 1, 2001 is 5.3 years. The majority
of options as of August 31, 2002 have an exercise price from $1.86 to $3.21.
Effective July 20, 1999, the Company adopted the 1999 Incentive Stock Award Plan
(the "Incentive Plan"). The Incentive Plan provides for the award of up to
300,000 shares of the Company's common stock (the "shares") to key employees
(including non-executive officers), independent contractors or consultants as
determined by the Option Committee of the Board of Directors. The Incentive Plan
participants are entitled to dividends and to vote their respective shares,
however, the sale or transfer of the shares is restricted during a vesting
period. As of August 31, 2002, 107,900 shares have been issued under the
Incentive Plan. On July 31, 2000, 80,300 of the outstanding shares vested. On
March 31, 2002, an additional 4,500 shares vested. As of August 31, 2002, 23,100
shares had been forfeited by individuals who were no longer employed by the
Company prior to the end of their required vesting period and no shares remain
unvested. The Company estimated the value of the stock issued based on the
market price on the date of grant.
Unamortized restricted stock awards was charged for the market value of the
restricted shares at the date of grant. The unamortized restricted stock awards
is shown as a reduction of stockholders' equity in the accompanying consolidated
balance sheet and is being amortized ratably over the vesting period. In 2002,
2001, and 2000, $739, $4,384 and $169,761, respectively, were charged to expense
relating to the Incentive Plan.
On May 21, 1999 the Company's Board of Directors approved a discretionary
program whereby the Company is authorized to purchase up to 200,000 shares of
its outstanding common stock. As of August 31, 2002, September 1, 2001 and
September 2, 2000, 26,880 shares are held in treasury.
F-13
NOTE 7. INCOME TAXES
The components of income tax expense relating to income consists of the
following:
Fiscal Year Ended
August 31, 2002 August 31, 2002 September 1, 2001 September 2, 2000
--------------- --------------- ----------------- -----------------
(Restated) (Previously
(See Note 1) Reported)
Federal:
Current $ 157,800 $ 157,800 $ 121,300 $ 920,090
Deferred 85,521 4,400 (89,500) (187,090)
State:
Current 73,700 73,700 65,400 187,000
---------- ---------- ---------- ----------
$ 317,021 $ 235,900 $ 97,200 $ 920,000
========== ========== ========== ==========
The deferred income tax (expense) benefit arises from the following temporary
differences.
Fiscal Year Ended
August 31, 2002 August 31, 2002 September 1, 2001 September 2, 2000
--------------- --------------- ----------------- -----------------
(Restated) (Previously
(See Note 1) Reported)
Uniform inventory capitalization $ 2,200 $ 2,200 $ 1,600 $ (10,400)
Depreciation 12,200 12,200 48,200 108,290
Straight-line of leases 48,900 48,900 38,000 31,500
Amortization of incentive stock
awards (67,700) (67,700) 1,700 57,700
Gain from demutalization (81,121) 0 0 0
------------ ----------- ----------- -----------
$ (85,521) $ (4,400) $ 89,500 $ 187,090
============ ============ =========== ===========
The effective tax rate differs from the Federal statutory rate as follows:
Fiscal Year Ended
August 31, 2002 August 31, 2002 September 1, 2001 September 2, 2000
--------------- --------------- ----------------- -----------------
(Restated) (Previously
(See Note 1) Reported)
Statutory tax rate 34.0% 34.0% 34.0% 34.0%
State and local income taxes,
net of federal income tax benefit 9.3 9.3 30.1 5.3
Effect of permanent differences and
other 1.6 1.6 3.7 0.4
----- ----- ----- -----
Effective tax rate 44.9% 44.9% 67.8% 39.7%
===== ===== ===== =====
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. The Company's state
deferred tax asset has been reduced by a valuation allowance based on current
evidence indicating that it is not more likely than not that the future benefits
of these temporary differences will be realized.
The Company has approximately $7,702,000 of net operating losses in multiple
entities and multiple states which expire on various dates from 2003 to 2017.
F-14
The tax effect of significant items comprising the Company's deferred income tax
assets are as follows:
Fiscal Year Ended
-----------------
August 31, 2002 August 31, 2002 September 1, 2001
--------------- --------------- -----------------
(Restated) (Previously
(See Note 1) Reported)
Current deferred income tax assets:
Uniform inventory capitalization $ 789,846 $ 789,846 $ 787,646
Amortization of restricted stock awards 0 0 67,700
--------- --------- ---------
789,846 789,846 855,346
--------- --------- ---------
Non-current deferred income tax assets:
Gain from demutualization (128,610) 0 0
Straight-line of leases 249,573 249,573 200,673
Difference between book and tax depreciation methods 247,529 247,529 235,329
Net operating losses for State purposes 721,597 721,597 620,205
Valuation allowance (721,597) (721,597) (620,205)
--------- --------- ---------
368,492 497,102 436,002
--------- --------- ---------
Total deferred income tax asset $ 1,158,338 $ 1,286,948 $ 1,291,348
========== ========== =========
NOTE 8. EMPLOYEE BENEFIT PLAN
The Company has a voluntary 401(k) savings plan. All non-union employees of the
Company are eligible to participate on or after reaching age 21 and completing
one year of eligible service. The Company did not make any contributions to the
401(k) plan for 2002, 2001 and 2000.
NOTE 9. QUARTERLY RESULTS (UNAUDITED)
The following is a summary of selected quarterly financial data (in thousands of
dollars, except per share amounts):
Fiscal Quarter Ended
--------------------
December 1, December 1, March 2, June 1, August 31,
2002 2001(a) 2001 2002 2002 2002
- ---- ---- ---- ---- ---- ----
(Restated) (Previously
Reported)
Net sales $ 32,552 $ 32,552 $ 28,931 $ 25,523 $ 23,667
Gross profit 12,281 12,281 9,836 9,324 7,856
Net income (loss) 1,490 1,390 129 90 (1,320)
Earnings (loss) per common share:
Basic & Diluted .31 .29 .03 .02 (.27)
F-15
Fiscal Quarter Ended
--------------------
December 2, March 3, June 2, September 1,
2001 2000 2001 2001 2001
- ---- ---- ---- ---- ----
Net sales $ 30,048 $ 25,760 $ 23,692 $ 21,388
Gross profit 11,442 8,995 8,379 6,940
Net income (loss) 1,282 44 46 (1,326)
Earnings (loss) per common share:
Basic & Diluted .27 .01 .01 (.27)
The sum of the four quarters may not equal the full year computation due to
rounding.
(a) The following table shows the impact of the restatement related to the
dumutualization of the life insurance policies (see Note 1 "Recent
Developments") from the previously filed financial statements as of December
1, 2001 and for the three months then ended (unaudited):
Previously
Reported Adjustments Restated
-------- ----------- --------
(Amounts in thousands except earnings per share)
Current assets - Investment in common stock $ - $ 224 $ 224
Deferred income taxes - long term 436 (100) 336
Stockholders' equity - Unrealized gain on
investment in common stock, net of taxes - 24 24
Stockholders' equity - Retained earnings 18,892 100 18,992
Gain from demutualization - 181 181
Provision for income taxes 888 81 969
Net income 1,390 100 1,490
Other comprehensive income 0 24 24
Total comprehensive income 1,390 124 1,514
Earnings per share - Basic and diluted $ 0.29 $ 0.02 $ 0.31
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
------------------
December 1, December 2,
2001 2000
---- ----
(Amounts in thousands)
Net income $ 1,490 $ 1,282
Other comprehensive income, net of taxes:
Unrealized gain on investment in common stock 24 -
------------ ------------
Total comprehensive income $ 1,514 $ 1,282
============ ============
F-16
EXHIBIT 21.1
RAG SHOPS, INC.
LIST OF SUBSIDIARY COMPANIES
Name State Incorporated
RSL, Inc. Delaware
Mobile Fabrics, Inc. New Jersey
The Rag Shop/Glen Burnie, Inc. Maryland
The Rag Shop, Inc. New York
Rag Shop/Wayne, Inc. New Jersey
Rag Shop/Parsippany, Inc. New Jersey
Rag Shop/Edison, Inc. New Jersey
The Rag Shop/West Orange, Inc. New Jersey
The Rag Shop/Middletown, Inc. New Jersey
The Rag Shop/Toms River, Inc. New Jersey
The Rag Shop/Hamilton Square, Inc. New Jersey
The Rag Shop/Hazlet, Inc. New Jersey
The Rag Shop/Howell, Inc. New Jersey
The Rag Shop/Ocean, Inc. New Jersey
The Rag Shop/Sayreville, Inc. New Jersey
The Rag Shop/Bricktown, Inc. New Jersey
The Rag Shop/Totowa, Inc. New Jersey
The Rag Shop/North Lauderdale, Inc. Florida
The Rag Shop/West Palm Beach, Inc. Florida
The Rag Shop/Palm Beach Gardens, Inc. Florida
The Rag Shop/Lancaster, Inc. Pennsylvania
The Rag Shop/Sunrise, Inc. Florida
The Rag Shop/Lantana, Inc. Florida
The Rag Shop/York, Inc. Pennsylvania
The Rag Shop/Selinsgrove, Inc. Pennsylvania
The Rag Shop/Pembroke Pines, Inc. Florida
The Rag Shop/Jacksonville, Inc. Florida
The Rag Shop/Olean, Inc. New York
The Rag Shop/Boca Raton, Inc. Florida
The Rag Shop/Port Richey, Inc. Florida
The Rag Shop/Deptford, Inc. New Jersey
The Rag Shop/Deerfield, Inc. Florida
The Rag Shop/Jacksonville-San Jose, Inc. Florida
The Rag Shop/Rostraver, Inc. Pennsylvania
The Rag Shop/Evesham, Inc. New Jersey
The Rag Shop/Allentown, Inc. Pennsylvania
The Rag Shop/Jensen Beach, Inc. Florida
The Rag Shop/Jacksonville-Orange Park, Inc. Florida
The Rag Shop/Jacksonville-Regional, Inc. Florida
The Rag Shop/Boro Park, Inc. New York
The Rag Shop/Secaucus, Inc. New Jersey
The Rag Shop/North Bergen, Inc. New Jersey
The Rag Shop/Coral Springs, Inc. Florida
The Rag Shop/Turnersville, Inc. New Jersey
The Rag Shop/Hialeah, Inc. Florida
RAG SHOPS, INC.
LIST OF SUBSIDIARY COMPANIES
NAME STATE INCORPORATED
Name tate Incorporated
The Rag Shop/Hollywood, Inc. Florida
The Rag Shop/Binghamton, Inc. New York
The Rag Shop/Lacey, Inc. New Jersey
The Rag Shop/West Boca Raton, Inc. Florida
The Rag Shop/Ocala, Inc. Florida
The Rag Shop/Fishkill, Inc. New York
The Rag Shop/Hampden, Inc. Pennsylvania
The Rag Shop/East Norriton, Inc. Pennsylvania
The Rag Shop/Wall Township, Inc. New Jersey
The Rag Shop/Northern Lights, Inc. New York
The Rag Shop/Linden, Inc. New Jersey
The Rag Shop/Burlington, Inc. New Jersey
The Rag Shop/Kingstown, Inc. Rhode Island
The Rag Shop/Norwalk, Inc. Connecticut
The Rag Shop/East Hollywood, Inc. Florida
The Rag Shop/Edgewater, Inc. New Jersey
The Rag Shop/Danbury, Inc. Connecticut
The Rag Shop/Voorhees, Inc. New Jersey
The Rag Shop/College Point, Inc. New York
The Rag Shop/Franklin, Inc. New Jersey
The Rag Shop/Kinnelon, Inc. New Jersey
The Rag Shop/Waterbury, Inc. Connecticut
Each of the above does business under the name "The Rag Shop."
EXHIBIT 23.1
RAG SHOPS, INC.
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We have reissued our report dated November 13, 2002, except for the item titled
"Recent Developments" in Note 1, as to which the date is January 23, 2004,
accompanying the consolidated financial statements of Rag Shops, Inc. and
Subsidiaries included in the Form 10-K/A for the year ended August 31, 2002. We
hereby consent to the incorporation by reference of said report in the
Registration Statement of Rag Shops, Inc. and Subsidiaries on Form S-8 (File No.
333-86489, effective September 2, 1999).
GRANT THORNTON LLP
Edison, New Jersey
January 23, 2004
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 Annual
Report on Form 10-K/A for the fiscal year ended August 31, 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 Annual Report on Form 10-K/A for the fiscal year ended August 31, 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
---------------------
Acting Chief Financial Officer