FORM 10-Q/A
(Amendment No. 2)
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 1, 2003
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)
(973) 423-1303
(Registrant's telephone number, including area code)
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 by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes____ No__X__
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 MARCH 31, 2003
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 March 1, 2003
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 March 1, 2003
was $269,249. 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 March 1, 2003, as originally filed on April 4, 2003
and previously amended on June 20, 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 18
RAG SHOPS, INC. AND SUBSIDIARIES
INDEX
Page
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed consolidated balance sheets - March 1, 2003 (unaudited
and restated), March 2, 2002 (unaudited and previously restated)
and August 31, 2002 (previously restated) 4
Condensed consolidated statements of income - three and six months
ended March 1, 2003 (unaudited) and March 2, 2002 (unaudited and
previously restated) 5
Condensed consolidated statements of cash flows - six months ended
March 1, 2003 (unaudited) and March 2, 2002 (unaudited and
previously restated) 6
Notes to condensed consolidated financial statements 7-10
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 11-14
Item 3. Quantitative and Qualitative Disclosures About Market Risk 14
Item 4. Controls and Procedures 15
Part II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders 16
Item 6. Exhibits and Reports on Form 8-K 16
SIGNATURES 16
CERTIFICATIONS 17-18
EXHIBITS
99.1 Certification
99.2 Certification
Page 3 of 18
RAG SHOPS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(All amounts in thousands)
March 1, March 1, March 2, August 31,
2003 2003 2002 2002
---- ---- ---- ----
(Unaudited (Unaudited (Unaudited) (Note A)
and Restated) and Previously and Previously
Reported) Restated)
ASSETS
CURRENT ASSETS:
Cash $ 2,048 $ 2,048 $ 5,964 $ 959
Investment in common stock 269 - 242 286
Merchandise inventories 28,525 28,525 25,880 30,327
Prepaid expenses 230 230 460 1,249
Other current assets 610 610 520 454
Deferred taxes 790 790 855 790
------- ------- ------- -------
Total current assets 32,472 32,203 33,921 34,065
Property and equipment, net 4,648 4,648 3,736 4,251
Deferred income taxes 374 497 328 369
Other assets 35 35 47 43
------- ------- ------- -------
TOTAL ASSETS $ 37,529 $ 37,383 $ 38,032 $ 38,728
======= ======= ======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable-trade $ 7,743 $ 7,743 $ 8,432 $ 10,308
Accrued expenses and other current liabilities 2,845 2,845 2,931 2,797
Accrued salaries and wages 1,055 1,055 798 1,298
Deferred Income 931 931 - -
Income taxes payable 196 196 496 156
------- ------- ------- -------
Total current liabilities 12,770 12,770 12,657 14,559
STOCKHOLDERS' EQUITY:
Common stock 48 48 48 48
Additional paid-in capital 6,236 6,236 6,236 6,236
Retained earnings 18,493 18,393 19,121 17,891
Unrealized gain on investment in common
stock, net of taxes 46 - 34 58
Treasury stock, at cost, 26,880 shares (64) (64) (64) (64)
-------- -------- ------- --------
Total stockholders' equity 24,759 24,613 25,375 24,169
------- ------- ------- -------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 37,529 $ 37,383 $ 38,032 $ 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 18
RAG SHOPS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(All amounts in thousands, except share data)
Three Months Ended Six Months Ended
March 1, March 2, March 1, March 2,
2003 2002 2003 2002
---- ---- ---- ----
(Previously
Restated)
Net sales $ 30,672 $ 28,931 $ 64,029 $ 61,483
Cost of merchandise
sold and occupancy
Costs 19,782 18,900 40,692 38,796
------- ------- ------- -------
Gross profit 10,890 10,031 23,337 22,687
Selling, general and
administrative
expenses 10,730 9,839 22,243 20,222
------- ------- ------- -------
Income from operations 160 192 1,094 2,465
Gain from demutualization - - - 181
------- ------- ------- -------
Income from operations 160 192 1,094 2,646
Interest income, net 6 20 1 25
------- ------- ------- -------
Income before provision
for income taxes 166 212 1,095 2,671
Provision for income
taxes 75 83 493 1,052
------- ------- ------- -------
Net income $ 91 $ 129 $ 602 $ 1,619
======= ======= ======= =======
EARNINGS PER
COMMON SHARE:
Basic and diluted $ .02 $ .03 $ .13 $ .34
======= ======= ======= =======
See notes to the condensed consolidated financial statements
Page 5 of 18
RAG SHOPS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(All amounts in thousands)
Six Months Ended
March 1, 2003 March 2, 2002
------------- -------------
(Previously Restated)
Cash flows from operating activities:
Net income $ 602 $ 1,619
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 663 655
Loss on disposition of property and equipment 34 44
Amortization of restricted stock awards - 1
Amortization of deferred income (465) -
Gain from demutualization - (181)
Deferred income taxes - 81
Changes in assets and liabilities:
(Increase) decrease in:
Merchandise inventories (see Note) 3,198 1,927
Prepaid expenses 1,019 734
Other current assets (156) (366)
Other assets 8 2
Increase (decrease) in:
Accounts payable-trade (2,565) 84
Accrued expenses and other current liabilities 14 226
Accrued salaries and wages (243) 78
Income taxes payable 40 331
------- -------
Net cash provided by operating activities 2,149 5,235
------- -------
Cash flows from investing activities:
Payments for purchases of property and
Equipment (1,060) (224)
-------- -------
Net cash used in investing activities (1,060) (224)
-------- -------
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 - -
------- -------
Net increase in cash 1,089 5,011
Cash, beginning of period 959 953
------- -------
Cash, end of period $ 2,048 $ 5,964
======= =======
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 5 $ -
======= =======
Income taxes $ 17 $ 47
======= =======
Note - Non-cash transaction for acquisition of $1,396 of inventory in
recognition of deferred income.
See notes to the condensed consolidated financial statements
Page 6 of 18
RAG SHOPS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE AND SIX MONTHS ENDED MARCH 1, 2003 AND MARCH 2, 2002
NOTE 1 - BASIS OF PRESENTATION
The accompanying financial statements are unaudited, but in the opinion of
management reflect all adjustments, which consist of normal recurring accruals
necessary for a fair presentation of the consolidated financial statements for
the interim periods. Since the Company's business is seasonal, the operating
results for the three and six months ended March 1, 2003 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.
Restatement
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 18
The fair market value of the Shares as of the close of business on March 1, 2003
was $269,249. 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 March 1, 2003 and for the three months then
ended (unaudited):
Previously
Reported Adjustments Restated
-------- ----------- --------
(Amounts in thousands)
Current assets - Investment in common stock $ - $ 269 $ 269
Deferred income taxes - long term 497 (123) 374
Stockholders' equity - Unrealized gain on
investment in common stock, net of taxes - 46 46
Stockholders' equity - Retained earnings 18,393 100 18,493
Other comprehensive income (loss) - (10) (10)
Total comprehensive income 91 (10) 81
The following table shows the impact of the restatement from the previously
filed financial statements as of March 1, 2003 and for the six months then ended
(unaudited):
Previously
Reported Adjustments Restated
-------- ----------- --------
(Amounts in thousands)
Other comprehensive income (loss) $ - $ (12) $ (12)
Total comprehensive income 602 (12) 590
The following table shows the impact of the restatement from the previously
filed financial statements, as of March 2, 2002 and for the three months then
ended (unaudited):
Previously
Reported Adjustments Restated
-------- ----------- --------
(Amounts in thousands)
Current assets - Investment in common stock $ - $ 242 $ 242
Deferred income taxes - long term 436 (108) 328
Stockholders' equity - Unrealized gain on
investment in common stock, net of taxes - 34 34
Stockholders' equity - Retained earnings 19,021 100 19,121
Other comprehensive income - 10 10
Total comprehensive income 129 10 139
The following table shows the impact of the restatement from the previously
filed financial statements, as of March 2, 2002 and for the six months then
ended (unaudited):
Previously
Reported Adjustments Restated
-------- ----------- --------
(Amounts in thousands except earnings per share)
Gain from demutualization $ - $ 181 $ 181
Provision for income taxes 971 81 1,052
Net income 1,519 100 1,619
Other comprehensive income - 34 34
Total comprehensive income 1,519 134 1,653
Earnings per share - Basic $ 0.32 $ 0.02 $ 0.34
Earnings per share - Diluted $ 0.31 $ 0.03 $ 0.34
Page 8 of 18
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
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 Six Months Ended
------------------ ----------------
March 1, March 2, March 1, March 2,
2003 2002 2003 2002
---- ---- ---- ----
(Amounts in thousands) (Amounts in thousands)
Net income $ 91 $ 129 $ 602 $ 1,619
Other comprehensive income, net of taxes:
Unrealized gain (loss) on investment in
common stock (10) 10 (12) 34
---------- --------- ----------- ------------
Total comprehensive income $ 81 $ 139 $ 590 $ 1,653
========= ========= ========== ============
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.
In November 2002, the Emerging Issues Task Force (the "EITF") reached consensus
on Issue 02-16, Accounting by a Customer (including a Reseller) for Cash
Consideration Received from a Vendor ("EITF Issue 02-16"). EITF Issue 02-16
addresses the classification of cash consideration received by a customer from a
vendor (e.g., cooperative advertising payments) and rebates or refunds from a
vendor that is payable only if the customer completes a specified cumulative
level of purchases or remains a customer for a specified time period. The
classification provisions of EITF Issue 02-16 became effective for arrangements
entered into after December 31, 2002. The Company has adopted the provisions of
EITF Issue 02-16 as of the beginning of the quarter ended March 1, 2003.
Cooperative advertising payments received by vendors have been recorded as a
Page 9 of 18
reduction of cost of merchandise sold for the three and six month periods ended
March 1, 2003. These payments were previously offset against advertising
expenses. All comparative periods have been restated. The adoption of this
pronouncement did not change net income or earnings per share in any period
reported herein.
NOTE 2 - EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per
share:
Three Months Ended Six Months Ended
------------------ ----------------
March 1, March 2, March 1, March 2,
2003 2002 2003 2002
---- ---- ---- ----
(Previously
Restated)
Numerator for basic and diluted earnings per share:
Net income $ 91,000 $ 129,000 $ 602,000 $ 1,619,000
=========== =========== ========== ===========
Denominator:
Denominator for basic earnings per
share-weighted average shares 4,797,983 4,799,183 4,797,983 4,799,183
Effect of dilutive securities:
Employee stock options 18,810 19,042 30,032 11,411
----------- ------------ ------------ ------------
Denominator for diluted
earnings per share adjusted
weighted average shares
and assumed conversions 4,816,793 4,818,225 4,828,015 4,810,594
----------- ----------- ----------- -----------
Basic and diluted earnings
per share $ .02 $ .03 $ .13 $ .34
=========== =========== =========== ===========
Stock options excluded from the above calculation, as the effect of such options
would be anti-dilutive, aggregated 2,000 and 0 for the three and six months
ended March 1, 2003 and 5,750 and 15,750 for the three and six months ended
March 2, 2002, respectively.
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 January 23, 2003, the stockholders of the Company unanimously approved the
Company's 2002 Stock Option Plan (the "Plan"). 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 18
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 Six Months Ended
March 1, March 2, March 1, March 2,
2003 2002 2003 2002
---- ---- ---- ----
(Previously
Restated)
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of merchandise
sold and occupancy
costs 64.5 65.3 63.6 63.1
--------- --------- --------- ---------
Gross profit 35.5 34.7 36.4 36.9
Selling general and
administrative expenses 35.0 34.0 34.7 32.9
Gain from demutualization - - - 0.3
--------- --------- --------- ---------
Income from operations 0.5 0.7 1.7 4.3
--------- --------- --------- ---------
Net Income 0.3% 0.4% 0.9% 2.6%
--------- --------- --------- ---------
The Company's net sales increased $1,741,000 and $2,546,000 for the three and
six months ended March 1, 2003, representing a 6.0% and 4.1% increase,
respectively, over the comparable prior periods. The increase in net sales for
the three months ended March 1, 2003 resulted from an increase in comparable
store sales of $600,000 or 2.1% and the balance of $1,141,000 related to revenue
from larger new store openings, net of sales reductions for smaller closed
stores. The increase in net sales for the six months ended March 1, 2003 was
attributable to a $145,000 or 0.2% increase in comparable store sales plus
$2,401,000 from the larger new store sales, net of sales reductions from the
smaller closed stores. Sales for the three and six months ended March 1, 2003
were adversely affected by February snow storms in the northeast where our main
concentration of stores is located.
Gross profit, as a percentage of net sales, increased by 0.8% for the current
quarter compared to the prior comparable period primarily as a result of the
amortization of deferred income resulting from the Company's understatement of
its inventory, a reduction of freight cost, principally due to reduced purchases
in the quarter, an increase in vendor participation programs that were partially
offset by 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. Gross profit, as a percentage
of net sales, decreased by 0.5% for the six months ended March 1, 2003 compared
to the comparable prior period primarily due to increases in the provision for
shrinkage and occupancy expenses, as previously mentioned, in addition to higher
promotional markdowns incurred in the three months ended November 30, 2002 in
response to the shorter holiday selling season, that was partially offset by the
amortization of deferred income, as previously mentioned, the reduction in
freight cost and increase in vendor participation programs, as previously
mentioned.
Page 11 of 18
Selling, general and administrative expenses increased for the three and six
months ended March 1, 2003 by $891,000 and $2,021,000, respectively, from the
comparable prior periods. Additional payroll and payroll related expense,
advertising, and higher insurance costs were the primary causes of the
increases. 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 and
positions that were vacant in the prior comparable period. Advertising expense
increased as a result of additional advertising and market penetration this year
compared to the comparable periods last year. Insurance costs rose as a result
of adverse market conditions when the Company's primary insurance policies were
renewed in the third and fourth fiscal quarters last year. Selling, general and
administrative expenses as a percentage of net sales increased by 1.0% and 1.8%
for the three and six months ended March 1, 2003, respectively, compared to the
comparable prior periods principally due to these expenses increasing at a
greater rate than net sales.
Interest income, net, decreased $14,000 and $24,000 for the three and six months
ended March 1, 2003, respectively, from the comparable prior periods. This
decrease was attributable to a decrease in average investment levels, coupled
with a decline in interest rates on short-term investments versus the comparable
prior periods. See "Liquidity and Capital Resources".
Net income declined by $38,000 and $1,017,000 for the three and six months ended
March 1, 2003, respectively, as compared to the prior comparable periods. These
decreases are due mainly to the increase in selling, general and administrative
expenses, and in the six month period an increase, as a percentage of net sales,
in the cost of merchandise sold and occupancy costs, that was partially offset
in the three month period by a reduction in the cost of merchandise sold and
occupancy costs as a percentage of net sales.
Seasonality
The Company's business is seasonal, which the Company believes is typical of the
retail craft and fabric industry. The Company's highest sales and earnings
levels traditionally occur between September and December. The Company has
historically operated at a loss during the fourth quarter of its fiscal year,
the June through August summer period.
Year to year comparisons of quarterly results and comparable store sales can be
affected by a variety of factors, including the timing and duration of holiday
selling seasons and the timing of new store openings and promotional markdowns.
Liquidity and Capital Resources
The Company's primary needs for liquidity are to maintain inventory for the
Company's existing stores and to fund the costs of opening new stores, including
capital improvements, initial inventory and pre-opening expenses. During the six
months ended March 1, 2003, 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 $196,000 for the six months ended March
1, 2003 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. Borrowings under the line of credit bear
interest at the bank's prime rate (4.25% at March 1, 2003). The credit
Page 12 of 19
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
six month periods ended March 1, 2003 and March 2, 2002, respectively. There
were no direct borrowings outstanding under the line of credit at March 1, 2003
or March 2, 2002. 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 six months ended March 1, 2003
amounted to $2,149,000, and $1,060,000 was used for purchases of property and
equipment. Net cash from operating activities resulted primarily from net income
of $602,000, non-cash depreciation of $663,000, offset by deferred income of
$465,000, decreases in merchandise inventories of $3,198,000 and prepaid
expenses of $1,019,000, partially offset by decreases in accounts payable-trade
and accrued salaries and wages of $2,565,000 and $243,000, respectively. During
the six months ended March 1, 2003 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 two 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 March 1, 2003, 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
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
Page 13 of 18
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.
In November 2002, the Emerging Issues Task Force (the "EITF") reached consensus
on Issue 02-16, Accounting by a Customer (including a Reseller) for Cash
Consideration Received from a Vendor ("EITF Issue 02-16"). EITF Issue 02-16
addresses the classification of cash consideration received by a customer from a
vendor (e.g., cooperative advertising payments) and rebates or refunds from a
vendor that is payable only if the customer completes a specified cumulative
level of purchases or remains a customer for a specified time period. The
classification provisions of EITF Issue 02-16 became effective for arrangements
entered into after December 31, 2002. The Company has adopted the provisions of
EITF Issue 02-16 as of the beginning of the quarter ended March 1, 2003.
Cooperative advertising payments received by vendors have been recorded as a
reduction of cost of merchandise sold for the three and six month periods ended
March 1, 2003. These payments were previously offset against advertising
expenses. All comparative periods have been restated. The adoption of this
pronouncement did not change net income or earnings per share in any period
reported herein.
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 March 1, 2003 and March
2, 2002, 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 March 1, 2003). There were no loans outstanding under any such line of credit
at March 1, 2003 or March 2, 2002.
The following table details future projected payments for the Company's
significant contractual obligations as of March 1, 2003:
Computer and
Other Technology
Operating Leases Related Commitments Total
Six Months Ending:
2003 $ 4,629,837 $ 161,275 $ 4,791,112
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
---------- --------- -----------
$ 43,969,392 $ 436,111 $ 44,405,503
=========== ========= ===========
Page 14 of 18
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 15 of 18
RAG SHOPS, INC. AND SUBSIDIARIES
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
The Annual Meeting of Stockholders of the Company was held on January 23,
2003. Mr. Steven Barnett was elected a Class III Director by a vote of
2,689,974 shares in favor and 312,710 shares withheld, Mr. Evan Berenzweig
was elected a Class III Director by a vote of 2,691,024 shares in favor
and 311,660 shares withheld, and Mr. Alan C. Mintz was elected a Class III
Director by a vote of 2,689,620 shares in favor and 313,064 shares withheld.
Mr. Stanley Berenzweig and Mr. Fred J. Damiano, Class I Directors, and Mr.
Jeffrey Gerstel, Ms. Judith Lombardo and Mr. Mario Ciampi, Class II
Directors, will continue to serve for their term expiring in 2004 and 2005,
respectively.
The Company's 2002 Stock Option Plan was ratified by a vote of 2,956,768 in
favor, 40,433 against, 5,483 abstaining and there were zero broker non-votes.
The firm of Grant Thornton LLP was ratified as auditors for the Company's
fiscal year ending August 30, 2003 by a vote of 2,691,606 in favor, 309,764
against, 1,314 abstaining and there were zero broker non-votes.
No other matters were considered by the Stockholders at said Annual Meeting.
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 16 of 18
CERTIFICATIONS
I, Stanley Berenzweig, certify that:
1. I have reviewed this amended quarterly report on Form 10-Q/A of Rag Shops,
Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a)
designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared; b) evaluated the
effectiveness of the registrant's disclosure controls and procedures as of a
date within 90 days prior to the filing date of this quarterly report ( the
"Evaluation Date"); and c) presented in this quarterly report our conclusions
about the effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and b) any fraud, whether
or not material, that involves management or other employees who have a
significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether there were significant changes in internal controls or
in other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
SIGNATURE TITLE(S) DATE
/S/ STANLEY BERENZWEIG Principal Executive January 27, 2004
- ---------------------- and Director
Stanley Berenzweig
Page 17 of 18
CERTIFICATIONS
I, Steven B. Barnett, certify that:
1. I have reviewed this amended quarterly report on Form 10-Q/A of Rag Shops,
Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a)
designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared; b) evaluated the
effectiveness of the registrant's disclosure controls and procedures as of a
date within 90 days prior to the filing date of this quarterly report ( the
"Evaluation Date"); and c) presented in this quarterly report our conclusions
about the effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and b) any fraud, whether
or not material, that involves management or other employees who have a
significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether there were significant changes in internal controls or
in other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
SIGNATURE TITLE(S) DATE
/S/ STEVEN B. BARNETT Executive Vice President, January 27, 2004
- --------------------- Acting Chief Financial Officer
Steven B. Barnett
Page 18 of 18
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 amended
Quarterly Report on Form 10-Q/A for the quarter ended March 1, 2003 (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 amended Quarterly Report on Form 10-Q/A for the quarter ended March 1,
2003 (the "Report").
The undersigned hereby certifies that:
- the Report fully complies with the requirements of Section 13(a) of
the Securities Exchange Act of 1934; and
- the information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations
of the Company.
IN WITNESS WHEREOF, the undersigned has executed this Certification as
of the 27th day of January 2004.
/S/ Steven B. Barnett
---------------------
Executive Vice President,
Acting Chief Financial Officer