FORM 10-Q/A
(Amendment No. 1)
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(MARK ONE)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For Quarter Ended November 30, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Transition Period From ... to...
Commission File No. 0-19194
RAG SHOPS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 51-0333503
(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) Number)
111 WAGARAW ROAD
HAWTHORNE, NEW JERSEY 07506
(Address of principal executive (Zip Code)
offices)
Registrant's telephone number, including area code (973) 423-1303
Indicate by check mark whether the registrant (1) has filed all reports
required by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
Yes__X__ No____
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
CLASS OUTSTANDING AT DECEMBER 31, 2002
Common stock, par value $.01 4,797,983
EXPLANATORY NOTE - AMENDMENT
This Form 10-Q/A is being filed to amend and restate Rag Shops, Inc.'s unaudited
consolidated financial statements for the quarterly period ended November 30,
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 November 30,
2002 was $283,214. Please refer to amendments to periodic reports filed with the
Securities and Exchange Commission for periods between December 1, 2001 and
November 29, 2003 for related restatements. Refer to Note 1 - Recent
Developments in the Notes to Condensed Consolidated Financial Statements.
For purposes of this Form 10-Q/A, and in accordance with Rule 12b-15 under the
Securities and Exchange Act of 1934, as amended, each item of the Form 10-Q for
the quarterly period ended November 30, 2002, as originally filed on January 10,
2003, that was affected has been amended to the extent affected by the
referenced correction and restated in its entirety. All other financial
information and disclosures remain unchanged.
Page 2 of 17
RAG SHOPS, INC. AND SUBSIDIARIES
INDEX
Page
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed consolidated balance sheets - November 30, 2002 (unaudited
and restated), December 1, 2001 (unaudited and previously
restated) and August 31, 2002 (previously restated) 4
Condensed consolidated statements of income - three months ended
November 30, 2002 (unaudited) and December 1, 2001 (unaudited
and previously restated) 5
Condensed consolidated statements of cash flows - three months
ended November 30, 2002 (unaudited) and December 1, 2001
(unaudited and previously restated) 6
Notes to condensed consolidated financial statements 7-10
Item 2. Management's Discussion and Analysis of Results of
Operations and Financial Condition 11-14
Item 3. Quantitative and Qualitative Disclosures About Market Risk 14
Item 4. Controls and Procedures 14
Part II - OTHER INFORMATION
Items 1. - 5. 15
Item 6. Exhibits and Reports on Form 8-K 15
SIGNATURES 15
CERTIFICATIONS 16-17
EXHIBITS
99.1 Certification
99.2 Certification
Page 3 of 17
RAG SHOPS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(All amounts in thousands)
November 30, November 30, December 1, August 31,
2002 2002 2001 2002
---- ---- ---- ----
(Unaudited (Unaudited (Unaudited (Note A)
and Restated) and Previously and Previously
Reported) Restated)
ASSETS
CURRENT ASSETS:
Cash $ 2,433 $ 2,433 $ 6,320 $ 959
Investment in common stock 283 - 224 286
Merchandise inventories 29,812 29,812 24,883 30,327
Prepaid expenses 655 655 445 1,249
Other current assets 705 705 447 454
Deferred taxes 790 790 855 790
------- ------- ------- -------
Total current assets 34,678 34,395 33,174 34,065
Property and equipment, net 4,282 4,282 4,044 4,251
Deferred income taxes 370 497 336 369
Other assets 41 41 49 43
------- ------- ------- -------
TOTAL ASSETS $ 39,371 $ 39,215 $ 37,603 $ 38,728
======= ======= ======= =======
LIABILITIES AND STOCKHOLDERS'EQUITY
CURRENT LIABILITIES:
Accounts payable-trade $ 9,854 $ 9,854 $ 7,902 $ 10,308
Accrued expenses and other current liabilities 3,637 3,637 3,244 2,797
Accrued salaries and wages 1,066 1,066 768 1,298
Income taxes payable 136 136 454 156
------- ------- ------- -------
Total current liabilities 14,693 14,693 12,368 14,559
STOCKHOLDERS' EQUITY:
Common stock 48 48 48 48
Additional paid-in capital 6,236 6,236 6,236 6,236
Unamortized restricted stock awards - - (1) -
Retained earnings 18,402 18,302 18,992 17,891
Unrealized gain on investment in common
stock, net of tax 56 - 24 58
Treasury stock, at cost, 26,880 shares (64) (64) (64) (64)
-------- -------- -------- --------
Total stockholders' equity 24,678 24,522 25,235 24,169
------- ------- ------- -------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 39,371 $ 39,215 $ 37,603 $ 38,728
======= ======= ======= =======
Note A: Previously restated and derived from the August 31, 2002 audited balance
sheet.
See notes to the condensed consolidated financial statements.
Page 4 of 17
RAG SHOPS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(All amounts in thousands, except share data)
Three Months Ended
------------------
November 30, December 1,
2002 2001
---- ----
(Previously
Restated)
Net sales $ 33,357 $ 32,552
Cost of merchandise sold and occupancy costs 21,248 20,271
------ ------
Gross profit 12,109 12,281
Selling, general and administrative expenses 11,175 10,008
------ ------
934 2,273
Gain from demutualization - 181
------ ------
Income from operations 934 2,454
Interest (expense) income, net (5) 5
------- ------
Income before provision for income taxes 929 2,459
Provision for income taxes 418 969
------ ------
Net income $ 511 $ 1,490
====== ======
EARNINGS PER COMMON SHARE:
Basic and diluted $ .11 $ .31
====== ======
See notes to the condensed consolidated financial statements.
Page 5 of 17
RAG SHOPS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(All amounts in thousands)
Three Months Ended
November 30, 2002 December 1, 2001
----------------- ----------------
(Previously
Restated)
Cash flows from operating activities:
Net income $ 511 $ 1,490
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 332 326
Gain from demutualization - (181)
Deferred income taxes - 81
Changes in assets and liabilities:
(Increase) decrease in:
Merchandise inventories 515 2,924
Prepaid expenses 594 749
Other current assets (251) (293)
Other assets 2 -
Increase (decrease) in:
Accounts payable-trade (454) (446)
Accrued expenses and other current liabilities 840 564
Accrued salaries and wages (232) 48
Income taxes payable (20) 289
------- -------
Net cash provided by operating activities 1,837 5,551
------- -------
Cash flows from investing activities:
Payments for purchases of property and equipment (363) (184)
------- -------
Net cash used in investing activities (363) (184)
------- -------
Cash flows from financing activities
Proceeds from issuance of note payable - bank 6,750 3,325
Repayments of note payable - bank (6,750) (3,325)
------- -------
Net cash provided by financing activities 0 0
------- -------
Net increase in cash 1,474 5,367
Cash, beginning of period 959 953
------- -------
Cash, end of period $ 2,433 $ 6,320
======= =======
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 5 $ -
======= =======
Income taxes $ 2 $ 6
======= =======
See notes to the condensed consolidated financial statements
Page 6 of 17
RAG SHOPS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED NOVEMBER 30, 2002 AND DECEMBER 1, 2001
NOTE 1 - BASIS OF PRESENTATION
The accompanying financial statements are unaudited, but in the opinion of
management reflect all adjustments, which consist of normal recurring accruals
necessary for a fair presentation of the consolidated financial statements for
the interim periods. Since the Company's business is seasonal, the operating
results for the three months ended November 30, 2002 are not necessarily
indicative of results for other quarters or the fiscal year.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted. It is suggested that these condensed
consolidated financial statements be read in conjunction with the financial
statements and notes included in the Company's Annual Report on Form 10-K for
the year ended August 31, 2002 filed with the Securities and Exchange Commission
in November 2002.
Certain reclassifications have been made to prior year amounts in order to
conform to the presentation for the current year.
Recent Developments
In December 2003, the Company received a check from Principal Financial Group,
Inc. ("Principal") reflecting dividends payable in connection with common stock
of Principal. Receipt of the dividend check prompted a Company inquiry which
revealed that, due to its ownership of certain life insurance policies issued by
Principal Life Insurance Company, a subsidiary of Principal, and maintained by
the Company for certain key executive officers, the Company had received 9,766
shares of Principal's common stock (the "Shares") in December 2001 as
consideration in the demutualization of Principal's predecessor. The effective
date of the demutualization was in October 2001 and the Shares were issued in
December 2001 to one of the Company's subsidiaries, the owner of the life
insurance policies, in book-entry form as uncertificated shares and maintained
in an account with Mellon Investor Services established by Principal in
connection with its demutualization transaction. The Company had not previously
recognized or recorded the Shares issued pursuant to such event.
The Company has determined it will restate prior financial statements to
properly reflect the transaction in the first quarter of fiscal 2002. In its
restated financial statements, the Company has recorded the then fair market
value ($180,671) of the Shares as part of operating income as of October 2001,
in accordance with Emerging Issues Task Force Issue No. 99-4, "Accounting for
Stock Received from the Demutualization of a Mutual Insurance Company". The
Company has classified its holding in the Shares as "available-for-sale"
pursuant to Statement of Financial Accounting Standards No. 115 "Accounting for
Investments", whereby the investment will be carried at fair market value and
subsequent changes in the market value of the investment will be reflected as an
unrealized gain or loss in the stockholders' equity section of the balance
sheets, net of deferred income taxes. Other Comprehensive Income will be
presented for all periods pursuant to Statement of Financial Accounting
Standards No. 130 "Reporting Comprehensive Income" either in the Consolidated
Statements of Changes in Stockholders' Equity or Notes to Consolidated Financial
Statements. Comprehensive income consists of net income or loss for the current
period as well as income, expenses, gains or losses, net of income taxes arising
during the period that are included in separate components of equity. It
includes the unrealized gains and losses on the Company's available-for-sale
security, net of taxes.
Page 7 of 17
The fair market value of the Shares as of the close of business on November 30,
2002 was $283,214. 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 table shows the impact of the restatement from the previously
filed financial statements as of November 30, 2002 and for the three months then
ended (unaudited):
Previously
Reported Adjustments Restated
-------- ----------- --------
(Amounts in thousands)
Current assets - Investment in common stock $ - $ 283 $ 283
Deferred income taxes - long term 497 (127) 370
Stockholders' equity - Unrealized gain on
investment in common stock, net of taxes - 56 56
Stockholders' equity - Retained earnings 18,302 100 18,402
Other comprehensive income (loss) - (2) (2)
Total comprehensive income 511 (2) 509
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
------------------
November 30, December 1,
2002 2001
---- ----
(Amounts in thousands)
Net income $ 511 $ 1,490
Other comprehensive income, net of taxes:
Unrealized gain (loss) on investment in common stock (2) 24
------------- ------------
Total comprehensive income (loss) $ 509 $ 1,514
============ ============
The following table shows the impact of the restatement 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 - 24 24
Total comprehensive income 1,390 124 1,514
Earnings per share - Basic and diluted $ 0.29 $ 0.02 $ 0.31
Page 8 of 17
The following table shows the impact of the restatement from the previously
filed financial statements as of August 31, 2002 and for the fiscal year then
ended:
Previously
Reported Adjustments Restated
-------- ----------- --------
(Amounts in thousands)
Current assets - Investment in common stock $ - $ 286 $ 286
Deferred income taxes - long term 497 (128) 369
Stockholders' equity - Unrealized gain on
investment in common stock, net of taxes - 58 58
Stockholders' equity - Retained earnings 17,791 100 17,891
Recent Accounting Pronouncements
In December 2002, the Financial Accounting Standards Board Issued Statement No.
148, "Accounting for Stock-Based Compensation-Transition and Disclosure-an
amendment of FASB Statement No. 123", ("SFAS 148"). SFAS 148 amends FASB
Statement No. 123, "Accounting for Stock Based Compensation" ("SFAS 123") and
provides alternative methods for accounting for a change by registrants to the
fair value method of accounting for stock-based compensation. Additionally, SFAS
148 amends the disclosure requirements of SFAS 123 to require disclosure in the
significant accounting policy footnote of both annual and interim financial
statements of the method of accounting for stock-based compensation and the
related pro-forma disclosures when the intrinsic value method continues to be
used. The statement is effective for fiscal years beginning after December 15,
2002, and disclosures are effective for the first fiscal quarter beginning after
December 15, 2002. The Company does not believe that adoption of this statement
will have a material effect on the Company's financial position or results of
operations.
NOTE 2 - EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per
share:
Three Months Ended
November 30, December 1,
2002 2001
---- ----
(Previously
Restated)
Numerator for basic and diluted
earnings per share:
Net income $ 511,000 $ 1,490,000
=========== ===========
Denominator:
Denominator for basic earnings per
share-weighted average shares 4,797,983 4,799,183
Effect of dilutive securities:
Employee stock options 37,620 1,221
----------- -----------
Denominator for diluted earnings per
share-adjusted weighted average
shares and assumed conversions 4,835,603 4,800,404
=========== ===========
Basic and diluted earnings per share $ .11 $ .31
=========== ===========
Page 9 of 17
Stock options excluded from the above calculation, as the effect of such options
would be anti-dilutive, aggregated 0 for the three months ended November 30,
2002 and 71,250 for the three months ended December 1, 2001.
NOTE 3 - MERCHANDISE INVENTORIES
Merchandise inventories (which are all finished goods) are stated at the lower
of cost (first-in, first-out method) or market as determined by the retail
inventory method.
NOTE 4 - STOCK OPTION PLAN
On December 20, 2002, the Board of Directors of the Company unanimously adopted
the Company's 2002 Stock Option Plan (the "Plan"), subject to stockholder
approval at the Company's annual meeting to be held on January 23, 2003. A copy
of the Plan is set forth in the Proxy Statement filed by the Company with the
Securities and Exchange Commission on December 30, 2002. The Company's prior
stock option plan expired by its terms.
A total of 750,000 shares of Common Stock have been reserved for issuance under
the Plan. The purpose of the Plan is to promote the long-term interests of the
Company and its stockholders by providing the Company with a means to attract,
employ, motivate and retain experienced employees, officers, directors and
consultants. No options have been granted pursuant to the Plan.
Page 10 of 17
RAG SHOPS, INC. AND SUBSIDIARIES
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Results of Operations
The following table sets forth, as a percentage of net sales, certain items
appearing in the condensed consolidated statements of income for the indicated
periods.
Three Months Ended
------------------
November 30, December 1,
2002 2001
---- ----
(Previously
Restated)
Net sales 100.0% 100.0%
Cost of merchandise sold and
occupancy costs 63.7 62.3
-------- --------
Gross profit 36.3 37.7
Selling, general and administrative expenses 33.5 30.7
Gain from demutualization - 0.6
-------- --------
Income from operations 2.8 7.6
-------- --------
Net income 1.5% 4.6%
======== ========
The Company's net sales increased $805,000 or 2.5% for the three months ended
November 30, 2002 compared to the three months ended December 1, 2001. Revenue
from larger new store openings, net of reductions from smaller closed stores,
contributed $1,260,000 in additional sales during the quarter while comparable
store sales decreased $455,000 or 1.4% as compared to the prior comparable
period. The decrease in comparable store sales is primarily due to timing of the
Friday after Thanksgiving, the traditional start of the Christmas selling
season, which was the second to last day of the Company's first quarter in 2002
compared to nine days prior to the end of the comparable period last year.
Gross profit decreased by 1.4% as a percentage of net sales for the current
quarter compared to the prior comparable period due to additional promotional
markdowns incurred in response to the shorter holiday selling season, an
increase in the provision for inventory shrinkage due to less than favorable
results experienced during the physical inventory conducted in the final quarter
of fiscal 2002 as compared to the prior comparable period and an increase in
occupancy expenses because of additional square footage and rent costs for new
larger stores as compared to smaller closed stores as well as contractual
increases in rent for existing stores.
Selling, general and administrative expenses increased $1,167,000 for the three
months ended November 30, 2002 and, as a percentage of net sales, increased 2.8%
compared to the three months ended December 1, 2001. Additional advertising,
payroll and payroll related expense, and higher insurance costs were the primary
causes of the rise. Advertising expense increased as a result of additional
advertising in the first quarter this year compared to the comparable period
last year. Selling payroll increased in support of higher sales and increased
store square footage due to the new larger stores, and administrative payroll
grew through the addition of management personnel to fill both new positions
Page 11 of 17
RAG SHOPS, INC. AND SUBSIDIARIES
and positions that were vacant in the prior comparable period. Insurance costs
rose as a result of adverse market conditions when the Company's insurance
policies were renewed in the third and fourth fiscal quarters last year. The
increase in selling, general and administrative expenses as a percentage of net
sales was principally due to the decrease in comparable store sales noted above.
The $10,000 change in interest (expense) income, net is principally due to the
one week Thanksgiving calendar change as previously mentioned, resulting in a
reduction in investment cash and, therefore, interest income from investment
cash being insufficient to offset interest expense. See "Liquidity and Capital
Resources".
Net income decreased $979,000 for the three months ended November 30, 2002
compared to the three months ended December 1, 2001 as a result of fewer holiday
selling days, as mentioned above, the increase in selling, general and
administrative expenses, the gain from demutualization in the comparable prior
period, and the change in interest (expense) 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 traditionally occur between September and December. The Company has
historically operated at a loss during the fourth quarter of its fiscal year,
the June through August summer period.
Year to year comparisons of quarterly results and comparable store sales can be
affected by a variety of factors, including the timing and duration of holiday
selling seasons and the timing of new store openings and promotional markdowns.
Liquidity and Capital Resources
The Company's primary needs for liquidity are to maintain inventory for the
Company's existing stores and to fund the costs of opening new stores, including
capital improvements, initial inventory and pre-opening expenses. During the
three months ended November 30, 2002, the Company relied on internally generated
funds, 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 increased $479,000 for the three months ended
November 30, 2002 as compared to the August 31, 2002 amount primarily because
the Company retained its net income for this period.
The Company maintains a $10 million credit facility with a bank. The credit
facility is renewable annually on or before each December 31 and consists of a
discretionary unsecured line of credit for direct borrowings and the issuance
and refinance of letters of credit. During December 2002 the credit line
facility was renewed for the year 2003. Borrowings under the line of credit bear
interest at the bank's prime rate (4.25% at November 30, 2002). The credit
facility requires the Company to maintain a compensating balance of $400,000 in
addition to certain financial covenants. Historically, the amount borrowed has
varied based on the Company's seasonal requirements, generally reaching a
maximum amount outstanding during the fourth quarter of each fiscal year. The
maximum amount borrowed under the line was $1,635,000 and $730,000 during the
Page 12 of 17
RAG SHOPS, INC. AND SUBSIDIARIES
three month periods ended November 30, 2002 and December 1, 2001, respectively.
There were no direct borrowings outstanding under the line of credit at November
30, 2002 or December 1, 2001. The Company intends to maintain the availability
of a line of credit for seasonal working capital requirements and in order to be
able to take advantage of future opportunities.
Net cash provided by operating activities for the three months ended November
30, 2002 amounted to $1,837,000, and $363,000 was used for purchases of property
and equipment. Net cash from operating activities resulted primarily from net
income of $511,000, non-cash depreciation of $332,000, decreases in merchandise
inventories of $515,000 and prepaid expenses of $594,000, and an increase in
accrued expenses and other liabilities of $840,000, partially offset by
decreases in accounts payable-trade and accrued salaries and wages of $454,000
and $232,000, respectively. During the three months ended November 30, 2002 the
Company did not open or close any stores and was operating sixty-eight stores at
the end of the period. During the remainder of the fiscal year ending August 30,
2003, the Company anticipates opening three additional new stores and closing
two 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 November 30, 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 thereby. Such forward-looking statements include those
regarding the Company's future results in light of current management
activities, and involve known and unknown risks, including competition within
the craft and fabric retail industry, weather-related changes in the selling
cycle, and other uncertainties (including those risk factors referenced in
Company filings with the Securities and Exchange Commission).
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 December 2002, the Financial Accounting Standards Board Issued Statement No.
148, "Accounting for Stock-Based Compensation-Transition and Disclosure-an
amendment of FASB Statement No. 123", ("SFAS 148"). SFAS 148 amends FASB
Statement No. 123, "Accounting for Stock Based Compensation" ("SFAS 123") and
provides alternative methods for accounting for a change by registrants to the
fair value method of accounting for stock-based compensation. Additionally, SFAS
Page 13 of 17
RAG SHOPS, INC. AND SUBSIDIARIES
148 amends the disclosure requirements of SFAS 123 to require disclosure in the
significant accounting policy footnote of both annual and interim financial
statements of the method of accounting for stock-based compensation and the
related pro-forma disclosures when the intrinsic value method continues to be
used. The statement is effective for fiscal years beginning after December 15,
2002, and disclosures are effective for the first fiscal quarter beginning after
December 15, 2002. The Company does not believe that adoption of this statement
will have a material effect on the Company's financial position or results of
operations.
ITEM 3. 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 November 30, 2002 and
December 1, 2001, and during each of the quarters 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. Loans
outstanding under the Company's unsecured line of credit bear interest at the
bank's prime rate (4.25% at November 30, 2002). There were no loans outstanding
under any such line of credit at November 30, 2002 or December 1, 2001.
The following table details future projected payments for the Company's
significant contractual obligations as of November 30, 2002:
Computer and
Other Technology
Operating Leases Related Commitments Total
Nine Months Ending:
2003 $ 6,944,755 $ 289,840 $ 7,234,595
Fiscal Year Ending:
2004 8,402,645 120,317 8,522,962
2005 7,628,838 98,330 7,727,168
2006 6,447,709 54,670 6,502,379
2007 5,216,140 1,519 5,217,659
Thereafter 11,644,223 0 11,644,223
---------- --------- -----------
$ 46,284,310 $ 564,676 $ 46,848,986
=========== ========= ===========
Item 4. 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 Acting 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.
Page 14 of 17
RAG SHOPS, INC. AND SUBSIDIARIES
PART II - OTHER INFORMATION
Item 1. - 5. Not Applicable
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
99.1 Certification of Chief Executive Officer Pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002 (18 U.S.C. ss.1350)
99.2 Certification of Acting Chief Financial Officer Pursuant to Section
906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C.ss.1350)
(b) No reports on Form 8-K have been filed during the quarter for which this
report is filed.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
RAG SHOPS, INC.
Date: January 27, 2004 /S/ Stanley Berenzweig
---------------------------
Stanley Berenzweig
Chairman of the Board and
Chief Executive Officer
Date: January 27, 2004 /S/ Steven B. Barnett
---------------------
Steven B. Barnett
Acting Principal Financial Officer and
Acting Principal Accounting Officer
Page 15 of 17
CERTIFICATIONS
I, Stanley Berenzweig, certify that:
1. I have reviewed this quarterly report on Form 10-Q/A of Rag Shops, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: a) designed
such disclosure controls and procedures to ensure that material information
relating to the registrant, including its consolidated subsidiaries, is made
known to us by others within those entities, particularly during the period in
which this quarterly report is being prepared; b) evaluated the effectiveness of
the registrant's disclosure controls and procedures as of a date within 90 days
prior to the filing date of this quarterly report on January 27, 2004; and c)
presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors: a) all significant deficiencies in the design
or operation of internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in internal
controls; and b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether there were significant changes in internal controls or
in other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
SIGNATURE TITLE(S) DATE
/S/ STANLEY BERENZWEIG Principal Executive January 27, 2004
- ---------------------- and Director
Stanley Berenzweig
Page 16 of 17
CERTIFICATIONS
I, Steven B. Barnett, certify that:
1. I have reviewed this quarterly report on Form 10-QA of Rag Shops, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: a) designed
such disclosure controls and procedures to ensure that material information
relating to the registrant, including its consolidated subsidiaries, is made
known to us by others within those entities, particularly during the period in
which this quarterly report is being prepared; b) evaluated the effectiveness of
the registrant's disclosure controls and procedures as of a date within 90 days
prior to the filing date of this quarterly report on January 27, 2004; and c)
presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors: a) all significant deficiencies in the design
or operation of internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in internal
controls; and b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether there were significant changes in internal controls or
in other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
SIGNATURE TITLE(S) DATE
/S/ STEVEN B. BARNETT Executive Vice President and January 27, 2004
- --------------------- Acting Chief Financial Officer
Steven B. Barnett
Page 17 of 17
EXHIBIT 99.1
RAG SHOPS, INC.
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 (18 U.S.C.ss.1350)
The undersigned, Stanley Berenzweig, the Chief Executive Officer of Rag
Shops, Inc. (the "Company"), has executed this Certification in connection with
the filing with the Securities and Exchange Commission of the Company's
Quarterly report on Form 10-Q/A for the quarter ended November 30, 2002 (the
"Report").
The undersigned hereby certifies that:
- The Report fully complies with the requirements of Section 13(a) of
the Securities Exchange Act of 1934; and
- the information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations
of the Company.
IN WITNESS WHEREOF, the undersigned has executed this Certification as
of the 27th day of January, 2004.
/S/ Stanley Berenzweig
----------------------
Chief Executive Officer
EXHIBIT 99.2
RAG SHOPS, INC.
CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 (18 U.S.C. ss.1350)
The undersigned, Steven B. Barnett, the Acting Chief Financial Officer
of Rag Shops, Inc. (the "Company"), has executed this Certification in
connection with the filing with the Securities and Exchange Commission of the
Company's Quarterly report on Form 10-Q/A for the quarter ended November 30,
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