FORM 10-Q/A
(Amendment No. 1)
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 May 31, 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 MAY 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 May 31, 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 May 31, 2003
was $310,168. 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 May 31, 2003, as originally filed on July 15, 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 21
RAG SHOPS, INC. AND SUBSIDIARIES
INDEX
Page
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed consolidated balance sheets - May 31, 2003 (unaudited and
restated), June 1, 2002 (unaudited and previously restated) and
August 31, 2002 (previously restated) 4
Condensed consolidated results of operations - three and nine
months ended May 31, 2003 (unaudited) and June 1, 2002 (unaudited
and previously restated) 5
Condensed consolidated statements of cash flows - nine months ended
May 31, 2003 (unaudited) and June 1, 2002 (unaudited and
previously restated) 6
Notes to condensed consolidated financial statements 7-13
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 14-17
Item 3. Quantitative and Qualitative Disclosures About Market Risk 17-18
Item 4. Controls and Procedures 18
Part II - OTHER INFORMATION
Items 1.- 5. 19
Item 6. Exhibits and Reports on Form 8-K 19
SIGNATURES 19
CERTIFICATIONS 20-21
EXHIBITS
99.1 Certification
99.2 Certification
Page 3 of 21
RAG SHOPS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(All amounts in thousands)
May 31, May 31, June 1, August 31,
2003 2003 2002 2002
---- ---- ---- ----
(Unaudited (Unaudited (Unaudited (Note A)
and Restated) and Previously and Previously
Reported) Restated)
ASSETS
CURRENT ASSETS:
Cash $ 2,283 $ 2,283 $ 4,347 $ 959
Investment in common stock 310 - 297 286
Merchandise inventories 27,449 27,449 26,293 30,327
Prepaid expenses 851 851 777 1,249
Other current assets 436 436 362 454
Deferred taxes 790 790 855 790
------- ------- ------- -------
Total current assets 32,119 31,809 32,931 34,065
Property and equipment, net 4,686 4,686 3,714 4,251
Deferred income taxes 361 497 303 369
Other assets 33 33 48 43
------- ------- ------- -------
TOTAL ASSETS $ 37,199 $ 37,025 $ 36,996 $ 38,728
======= ======= ======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable-trade $ 7,628 $ 7,628 $ 7,355 $ 10,308
Accrued expenses and other current liabilities 3,363 3,363 2,841 2,797
Accrued salaries and wages 748 748 764 1,298
Deferred income 756 756 - -
Income taxes payable 169 169 541 156
------- ------- ------- -------
Total current liabilities 12,664 12,664 11,501 14,559
STOCKHOLDERS' EQUITY:
Common stock 48 48 48 48
Additional paid-in capital 6,236 6,236 6,236 6,236
Retained earnings 18,241 18,141 19,211 17,891
Unrealized gain on investment in common
stock, net of tax 74 - 64 58
Treasury stock, at cost, 26,880 shares (64) (64) (64) (64)
------- ------- ------- --------
Total stockholders' equity 24,535 24,361 25,495 24,169
------- ------- ------- -------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 37,199 $ 37,025 $ 36,996 $ 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 21
RAG SHOPS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED RESULTS OF OPERATIONS
(Unaudited)
(All amounts in thousands, except share data)
Three Months Ended Nine Months Ended
------------------ -----------------
May 31, June 1, May 31, June 1,
2003 2002 2003 2002
---- ---- ---- ----
(Previously
Restated)
Net sales $ 27,920 $ 25,523 $ 91,949 $ 87,006
Cost of merchandise sold, occupancy
and distribution costs 18,733 16,587 61,094 56,902
------- ------- ------- -------
Gross profit 9,187 8,936 30,855 30,104
Selling, general and
administrative expenses 9,646 8,802 30,221 27,505
------- ------- ------- -------
(459) 134 634 2,599
Gain from demutualization - - - 181
------- ------- ------- -------
Income (loss) from operations (459) 134 634 2,780
Interest income, net 1 14 2 39
------- ------- ------- -------
Income (loss) before income tax
provision (benefit) (458) 148 636 2,819
Income tax provision (benefit) (207) 58 286 1,110
-------- ------- ------- -------
Net income (loss) $ (251) $ 90 $ 350 $ 1,709
======== ======= ======= =======
EARNINGS (LOSS) PER COMMON
SHARE:
Basic $ (.05) $ .02 $ .07 $ .36
======= ======= ======= =======
Diluted $ (.05) $ .02 $ .07 $ .35
======= ======= ======= =======
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING:
Basic 4,797,983 4,799,183 4,797,983 4,799,183
========= ========= ========= =========
Diluted 4,797,983 4,834,724 4,825,987 4,820,468
========= ========= ========= =========
See notes to the condensed consolidated financial statements
Page 5 of 21
RAG SHOPS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(All amounts in thousands)
Nine Months Ended
May 31, 2003 June 1, 2002
------------ ------------
(Previously Restated)
Cash flows from operating activities:
Net income $ 350 $ 1,709
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 1,007 990
Loss on disposition of property and equipment 31 56
Amortization of deferred income (640) -
Amortization of restricted stock awards - 1
Gain from demutualization - (181)
Deferred income taxes - 81
Changes in assets and liabilities:
(Increase) decrease in:
Merchandise inventories 4,274 1,514
Prepaid expenses 398 417
Other current assets 18 (208)
Other assets 10 1
Increase (decrease) in:
Accounts payable-trade (2,680) (993)
Accrued expenses and other current liabilities 566 161
Accrued salaries and wages (550) 44
Income taxes payable 13 376
------- -------
Net cash provided by operating activities 2,797 3,968
------- -------
Cash flows from investing activities:
Payments for purchases of property and
equipment (1,473) (574)
-------- -------
Net cash used in investing activities (1,473) (574)
-------- -------
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 1,324 3,394
Cash, beginning of period 959 953
------- -------
Cash, end of period $ 2,283 $ 4,347
======= =======
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest paid $ 5 $ -
======= =======
Income taxes paid $ 57 $ 65
======= =======
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 21
RAG SHOPS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE AND NINE MONTHS ENDED MAY 31, 2003 AND JUNE 1, 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 nine months ended May 31, 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.
Recent Developments
In December 2003, the Company received a check from Principal Financial Group,
Inc. ("Principal") reflecting dividends payable in connection with common stock
of Principal. Receipt of the dividend check prompted a Company inquiry which
revealed that, due to its ownership of certain life insurance policies issued by
Principal Life Insurance Company, a subsidiary of Principal, and maintained by
the Company for certain key executive officers, the Company had received 9,766
shares of Principal's common stock (the "Shares") in December 2001 as
consideration in the demutualization of Principal's predecessor. The effective
date of the demutualization was in October 2001 and the Shares were issued in
December 2001 to one of the Company's subsidiaries, the owner of the life
insurance policies, in book-entry form as uncertificated shares and maintained
in an account with Mellon Investor Services established by Principal in
connection with its demutualization transaction. The Company had not previously
recognized or recorded the Shares issued pursuant to such event.
The Company has determined it will restate prior financial statements to
properly reflect the transaction in the first quarter of fiscal 2002. In its
restated financial statements, the Company has recorded the then fair market
value ($180,671) of the Shares as part of operating income as of October 2001,
in accordance with Emerging Issues Task Force Issue No. 99-4, "Accounting for
Stock Received from the Demutualization of a Mutual Insurance Company". The
Company has classified its holding in the Shares as "available-for-sale"
pursuant to Statement of Financial Accounting Standards No. 115 "Accounting for
Investments", whereby the investment will be carried at fair market value and
subsequent changes in the market value of the investment will be reflected as an
unrealized gain or loss in the stockholders' equity section of the balance
sheets, net of deferred income taxes. Other Comprehensive Income will be
presented for all periods pursuant to Statement of Financial Accounting
Standards No. 130 "Reporting Comprehensive Income" either in the Consolidated
Statements of Changes in Stockholders' Equity or Notes to Consolidated Financial
Statements. Comprehensive income consists of net income or loss for the current
period as well as income, expenses, gains or losses, net of income taxes arising
during the period that are included in separate components of equity. It
includes the unrealized gains and losses on the Company's available-for-sale
security, net of taxes.
The fair market value of the Shares as of the close of business on May 31, 2003
was $310,168. 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.
Page 7 of 21
The following table shows the impact of the restatement from the previously
filed financial statements as of May 31, 2003 and for the three months then
ended (unaudited):
Previously
Reported Adjustments Restated
-------- ----------- --------
(Amounts in thousands)
Current assets - Investment in common stock $ - $ 310 $ 310
Deferred income taxes - long term 497 (136) 361
Stockholders' equity - Unrealized gain on
investment in common stock, net of taxes - 74 74
Stockholders' equity - Retained earnings 18,141 100 18,241
Other comprehensive income - 28 28
Total comprehensive income (loss) (251) 28 (223)
The following table shows the impact of the restatement from the previously
filed financial statements as of May 31, 2003 and for the nine months then ended
(unaudited):
Previously
Reported Adjustments Restated
-------- ----------- --------
(Amounts in thousands)
Other comprehensive income $ - $ 16 $ 16
Total comprehensive income 350 16 366
The following tables show the impact of the restatement from the previously
filed financial statements, as of June 1, 2002 and for the three months then
ended:
Previously
Reported Adjustments Restated
-------- ----------- --------
(Amounts in thousands)
Current assets - Investment in common stock $ - $ 297 $ 297
Deferred income taxes - long term 436 (133) 303
Stockholders' equity - Unrealized gain on
Investment in common stock, net of taxes - 64 64
Stockholders' equity - Retained earnings 19,111 100 19,211
Other comprehensive income - 30 30
Total comprehensive income 90 30 120
The following tables show the impact of the restatement from the previously
filed financial statements, as of June 1, 2002 and for the nine months then
ended:
Previously
Reported Adjustments Restated
-------- ----------- --------
(Amounts in thousands except earnings per share)
Gain from demutualization $ - $ 181 $ 181
Provision for income taxes 1,029 81 1,110
Net income 1,609 100 1,709
Other comprehensive income - 64 64
Total comprehensive income 1,609 164 1,773
Earnings per share - Basic $ 0.34 $ 0.02 $ 0.36
Earnings per share - Diluted $ 0.33 $ 0.02 $ 0.35
Page 8 of 21
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 Nine Months Ended
------------------ -----------------
May 31, June 1, May 31, June 1,
2003 2002 2003 2002
---- ---- ---- ----
(Amounts in thousands) (Amounts in thousands)
Net income (loss) $ (251) $ 90 $ 350 $ 1,709
Other comprehensive income, net of taxes:
Unrealized gain on investment in
common stock 28 30 16 64
--------- --------- ---------- ------------
Total comprehensive income (loss) $ (223) $ 120 $ 366 $ 1,773
========== ========= ========== ============
Accounting Policies
Cost of merchandise sold, distribution and occupancy costs include merchandise
purchases, inbound freight costs, distribution costs, shrinkage provision,
cooperative advertising, vendor allowances, vendor rebates, store rent and other
store-related occupancy costs.
Distribution costs have been reclassified to cost of merchandise sold as of the
beginning of the quarter ended May 31, 2003. These expenses were previously
included in selling, general and administrative expenses. All comparative
periods have been restated.
Cooperative advertising payments received from vendors have been reclassified to
cost of merchandise sold as of the beginning of the quarter ended March 1, 2003.
These payments were previously offset against advertising expenses. All
comparative periods have been restated.
Advertising costs are expensed as incurred and are included in store expenses as
part of selling, general and administrative expenses.
Certain reclassifications have been made to prior year amounts in order to
conform to the presentation for the current year.
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
Page 9 of 21
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 plan a change to the fair value method
of accounting for stock based compensation and has included the disclosure
requirements of SFAS 148 in the accompanying financial statements.
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 from vendors have been recorded as a
reduction of cost of merchandise sold for the three and nine month periods ended
May 31, 2003. These payments were previously offset against advertising
expenses. All comparative periods have been restated. The amounts included in
cost of merchandise sold relating to cooperative advertising payments received
was $294,000 and $851,000 for the three and nine months ended May 31, 2003 and
$322,000 and $891,000 for the three and nine months ended June 1, 2002. The
adoption of this pronouncement did not change net income or earnings per share
in any period reported herein.
Stock-Based Compensation
The Company has a stock based compensation plan which is described more fully in
Note 4. The Company applies APB Opinion 25, "Accounting for Stock Issued to
Employees", and related interpretations in accounting for its plan. There has
been no compensation expense recognized during the three and nine months ended
May 31, 2003 and June 1, 2002 as all options have been issued with exercise
prices equal to the underlying stock's market price.
The following table illustrates the effect on net income (loss) and earnings
(loss) per share if the Company had applied the fair value recognition
provisions of FASB Statement No. 123, "Accounting for Stock Based Compensation"
("SFAS 123"), using the assumptions described below to its stock based employee
plans:
Page 10 of 21
Three Months Ended Nine Months Ended
------------------ -----------------
May 31, June 1, May 31, June 1,
2003 2002 2003 2002
---- ---- ---- ----
(Previously
Restated)
Net income (loss), as reported $ (251,000) $ 90,000 $ 350,000 $ 1,709,000
Deduct: Total stock based employee
compensation determined under fair
value based method for options granted,
modified, or settled, net of related tax
effects 2,000 - 3,000 1,000
--------- ---------- ---------- -----------
Pro forma net income (loss) $ (253,000) $ 90,000 $ 347,000 $ 1,708,000
========= ========== ========== ===========
Earnings (loss) per share
Basic - as reported $ (.05) $ .02 $ .07 $ .36
========= ========== ========== ===========
Basic - pro forma $ (.05) $ .02 $ .07 $ .36
========= ========== ========== ===========
Diluted - as reported $ (.05) $ .02 $ .07 $ .35
========= ========== ========== ===========
Diluted - pro forma $ (.05) $ .02 $ .07 $ .35
========= ========== ========== ===========
The assumptions used for the fair value calculation are as follows:
Three Months Ended Nine Months Ended
------------------ -----------------
May 31, June 1, May 31, June 1,
2003 2002 2003 2002
---- ---- ---- ----
Volatility 30% 30% 30% 30%
Risk free rate 5% 5% 5% 5%
Dividend yield - - - -
Page 11 of 21
NOTE 2 - EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings
(loss) per share:
Three Months Ended Nine Months Ended
------------------ -----------------
May 31, June 1, May 31, June 1,
2003 2002 2003 2002
---- ---- ---- ----
(Previously
Restated)
Numerator for basic and diluted arnings per share:
Net income (loss) $ (251,000) $ 90,000 $ 350,000 $ 1,709,000
========== ========== ========== ===========
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 - 35,541 28,004 21,285
--------- ---------- ---------- -----------
Denominator for diluted earnings per
share-adjusted weighted average
shares and assumed conversions 4,797,983 4,834,724 4,825,987 4,820,468
========= ========== ========== ===========
Basic earnings (loss) per share $ (.05) $ .02 $ .07 $ .36
========= ========== ========== ===========
Diluted earnings (loss) per share $ (.05) $ .02 $ .07 $ .35
========= ========== ========== ===========
Stock options excluded from the above calculation, as the effect of such options
would be anti-dilutive, aggregated 173,700 and 0 for the three and nine months
ended May 31, 2003, respectively, and 2,250 for the three and nine months ended
June 1, 2002.
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. As of May 31, 2003 an aggregate of 74,000 options remain
outstanding under the prior plan.
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. 99,700 options have been granted pursuant to the Plan as of May 31,
2003.
Page 12 of 21
NOTE 5 - ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
The following table sets forth selected accrued expenses and other current
liabilities consisting of the following:
As of:
May 31, 2003 June 1, 2002 August 31, 2002
------------ ------------ ---------------
Straight line rent $ 805 $ 623 $ 696
Other accrued expenses and current liabilities 2,558 2,218 2,101
----- ----- -----
$ 3,363 $ 2,841 $ 2,797
====== ===== =====
Page 13 of 21.
RAG SHOPS, INC. AND SUBSIDIARIES
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Results of Operations
The following table sets forth, as a percentage of net sales, certain items
appearing in the condensed consolidated statements of income for the indicated
periods.
Three Months Ended Nine Months Ended
------------------ -----------------
May 31, June 1, May 31, June 1,
2003 2002 2003 2002
---- ---- ---- ----
(Previously
Restated)
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of merchandise sold, occupancy
and distribution costs 67.1 65.0 66.4 65.4
----------- ----------- ----------- -----------
Gross profit 32.9 35.0 33.6 34.6
Selling, general and administrative
expenses 34.5 34.5 32.9 31.6
Gain from demutualization - - - 0.2
----------- ----------- ----------- -----------
Income (loss) from operations (1.6) 0.5 0.7 3.2
------------ ----------- ----------- -----------
Net income (loss) (0.9)% 0.4% 0.4% 2.0%
============ =========== =========== ===========
The Company's net sales increased $2,397,000 and $4,943,000 for the three and
nine months ended May 31, 2003, representing a 9.4% and 5.7% increase,
respectively, over the comparable prior periods. The increase in net sales for
the three months ended May 31, 2003 resulted from an increase in comparable
store sales of $435,000 or 1.7%. The Company's comparable store sales include
stores commencing with their thirteenth consecutive entire fiscal month,
including stores that were expanded but excluding stores that were relocated, if
any. The balance of the net sales increase of $1,962,000 related to revenue from
larger new store openings, net of sales reductions for smaller closed stores.
The increase in net sales for the nine months ended May 31, 2003 was
attributable to a $579,000 or 0.7% increase in comparable store sales plus
$4,364,000 from the larger new store sales, net of sales reductions from the
smaller closed stores.
Gross profit, as a percentage of net sales, decreased by 2.1% for the three
months and 1.0% for the nine months ended May 31, 2003 compared to the prior
comparable periods primarily as a result of 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, an increase in promotional markdowns due to a difficult retail
environment in addition to the Company's planned reduction in merchandise
inventory levels, and 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. These decreases were partially offset by the recognition of
deferred income relating to the forgiveness of certain obligations through
modification of certain agreements with suppliers and an increase in vendor
participation programs.
Selling, general and administrative expenses increased for the three and nine
months ended May 31, 2003 by $844,000 and $2,716,000, respectively, from the
comparable prior periods. Additional payroll and payroll related expense,
Page 14 of 21
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 in the first and second fiscal
quarters this year 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 0.0% and 1.3% for the three
and nine months ended May 31, 2003, respectively, compared to the comparable
prior periods.
Interest income, net, decreased $13,000 and $37,000 for the three and nine
months ended May 31, 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 $341,000 and $1,359,000 for the three and nine months
ended May 31, 2003, respectively, as compared to the prior comparable periods.
These decreases are due mainly to an increase in the cost of merchandise sold,
occupancy and distribution costs and increases in selling, general and
administrative expenses.
Seasonality
The Company's business is seasonal, which the Company believes is typical of the
retail craft and fabric industry. The Company's highest sales and earnings
levels traditionally occur between September and December. The Company has
historically operated at a loss during the fourth quarter of its fiscal year,
the June through August summer period.
Year to year comparisons of quarterly results and comparable store sales can be
affected by a variety of factors, including the timing and duration of holiday
selling seasons and the timing of new store openings and promotional markdowns.
Liquidity and Capital Resources
The Company's primary needs for liquidity are to maintain inventory for the
Company's existing stores and to fund the costs of opening new stores, including
capital improvements, initial inventory and pre-opening expenses. During the
nine months ended May 31, 2003, the Company relied on internally generated
funds, credit made available by suppliers and short-term borrowings to finance
inventories and new store openings.
The Company's working capital decreased $51,000 for the nine months ended May
31, 2003 as compared to the August 31, 2002 amount primarily due to a planned
reduction in merchandise inventory levels 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 May 31, 2003).
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
Page 15 of 21
each fiscal year. The maximum amount borrowed under the line was $1,635,000 and
$730,000 during the nine month periods ended May 31, 2003 and June 1, 2002,
respectively. There were no direct borrowings outstanding under the line of
credit at May 31, 2003 or June 1, 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 nine months ended May 31, 2003
amounted to $2,797,000, and $1,473,000 was used for purchases of property and
equipment. Net cash from operating activities resulted primarily from net income
of $350,000, non-cash depreciation of $1,007,000 and decreases in merchandise
inventories of $4,274,000 and prepaid expenses of $398,000, partially offset by
the amortization of deferred income of $640,000, decreases in accounts
payable-trade and accrued salaries and wages of $2,680,000 and $550,000,
respectively. During the nine months ended May 31, 2003 the Company opened two
stores, expanded two stores, closed two 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 does not anticipate opening, expanding or closing
any additional stores. Costs associated with opening of new stores, including
capital expenditures, inventory and pre-opening expenses, approximated $720,000
per store in fiscal 2003. 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 May 31, 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.
Cost of merchandise sold, distribution and occupancy costs include merchandise
purchases, inbound freight costs, distribution costs, shrinkage provision,
cooperative advertising, vendor allowances, vendor rebates, store rent and other
store-related occupancy costs.
Distribution costs have been reclassified to cost of merchandise sold as of the
beginning of the quarter ended May 31, 2003. These expenses were previously
included in selling, general and administrative expenses. All comparative
periods have been restated.
Cooperative advertising payments received from vendors have been reclassified to
cost of merchandise sold as of the beginning of the quarter ended March 1, 2003.
These payments were previously offset against advertising expenses. All
comparative periods have been restated.
Page 16 of 21
Advertising costs are expensed as incurred and are included in store expenses as
part of selling, general and administrative expenses.
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
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 plan a change to the fair value method
of accounting for stock based compensation and have included the disclosure
requirements of SFAS 148 in the accompanying financial statements.
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 from vendors have been recorded as a
reduction of cost of merchandise sold for the three and nine month periods ended
May 31, 2003. These payments were previously offset against advertising
expenses. All comparative periods have been restated. The amounts included in
cost of merchandise sold relating to cooperative advertising payments received
was $294,000 and $851,000 for the three and nine months ended May 31, 2003 and
$322,000 and $891,000 for the three and nine months ended June 1, 2002. 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 May 31, 2003 and June 1,
2002, and during each of the quarters and nine month periods 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 May 31, 2003). There were no loans outstanding
under any such line of credit at May 31, 2003 or June 1, 2002.
Page 17 of 21
The following table details future projected payments for the Company's
significant contractual obligations as of May 31, 2003:
Computer and
Other Technology
Operating Leases Related Commitments Total
Three Months Ending:
2003 $ 2,448,905 $ 80,638 $ 2,529,543
Fiscal Year Ending:
2004 9,688,736 120,317 9,809,053
2005 9,105,845 98,330 9,204,175
2006 7,718,914 54,670 7,773,584
2007 6,309,917 1,519 6,311,436
Thereafter 14,991,382 0 14,991,382
---------- --------- -----------
$ 50,263,699 $ 355,474 $ 50,619,173
=========== ========= ===========
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 18 of 21
RAG SHOPS, INC. AND SUBSIDIARIES
PART II - OTHER INFORMATION
Items 1.- 5. Not Applicable
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
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 19 of 21
CERTIFICATIONS
I, Stanley Berenzweig, certify that:
1. I have reviewed this quarterly report on Form 10-Q/A of Rag Shops, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a)
designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared; b) evaluated the
effectiveness of the registrant's disclosure controls and procedures as of a
date within 90 days prior to the filing date of this quarterly report ( the
"Evaluation Date"); and c) presented in this quarterly report our conclusions
about the effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and b) any fraud, whether
or not material, that involves management or other employees who have a
significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether there were significant changes in internal controls or
in other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
SIGNATURE TITLE(S) DATE
/S/ STANLEY BERENZWEIG Principal Executive January 27, 2004
- ---------------------- and Director
Stanley Berenzweig
Page 20 of 21
CERTIFICATIONS
I, Steven B. Barnett, certify that:
1. I have reviewed this quarterly report on Form 10-Q/A of Rag Shops, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a)
designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared; b) evaluated the
effectiveness of the registrant's disclosure controls and procedures as of a
date within 90 days prior to the filing date of this quarterly report ( the
"Evaluation Date"); and c) presented in this quarterly report our conclusions
about the effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and b) any fraud, whether
or not material, that involves management or other employees who have a
significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether there were significant changes in internal controls or
in other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
SIGNATURE TITLE(S) DATE
/S/ Steven B. Barnett Executive Vice President, January 27, 2004
- --------------------- Acting Chief Financial Officer
Steven B. Barnett
Page 21 of 21
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 May 31, 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 Quarterly Report on Form 10-Q/A for the quarter ended May 31, 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