-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, EurQnDx55ZUN8uEVijirGqzKNl6VzrtozS05x6gQDFMaWoUgWc+PwyVAAknpgKPY /sCZMyGzf3Y+YvsChgjtHA== 0000874385-04-000005.txt : 20040120 0000874385-04-000005.hdr.sgml : 20040119 20040120165130 ACCESSION NUMBER: 0000874385-04-000005 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20031129 FILED AS OF DATE: 20040120 FILER: COMPANY DATA: COMPANY CONFORMED NAME: RAG SHOPS INC CENTRAL INDEX KEY: 0000874385 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-HOBBY, TOY & GAME SHOPS [5945] IRS NUMBER: 510333503 STATE OF INCORPORATION: DE FISCAL YEAR END: 0831 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-19194 FILM NUMBER: 04533026 BUSINESS ADDRESS: STREET 1: 111 WAGARAW RD CITY: HAWTHORNE STATE: NJ ZIP: 07506 BUSINESS PHONE: 9734231303 MAIL ADDRESS: STREET 1: 111 WAGARAW RD CITY: HAWTHORNE STATE: NJ ZIP: 07506 10-Q 1 a10q1-04e.txt FORM 10-Q1-04 FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 (MARK ONE) [X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarterly Period Ended November 29, 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 DECEMBER 31, 2003 Common stock, par value $.01 4,797,983 RAG SHOPS, INC. AND SUBSIDIARIES INDEX Page PART I - FINANCIAL INFORMATION Item 1. Financial Statements Condensed consolidated balance sheets - November 29, 2003 (unaudited), November 30, 2002 (unaudited and restated) and August 30, 2003 (restated) 3 Condensed consolidated statements of income - three months ended November 29, 2003 (unaudited) and November 30, 2002 (unaudited) 4 Condensed consolidated statements of cash flows - three months ended November 29, 2003 (unaudited) and November 30, 2002 (unaudited) 5 Notes to condensed consolidated financial statements 6-11 Item 2.Management's Discussion and Analysis of Financial Condition and Results of Operations 12-17 Item 3.Quantitative and Qualitative Disclosures About Market Risk 17 Item 4.Controls and Procedures 17 Part II - OTHER INFORMATION Items 1. - 5. 18 Item 6. Exhibits and Reports on Form 8-K 18 SIGNATURES 18 CERTIFICATIONS 19-20 EXHIBITS 99.1 Certification 99.2 Certification Page 2 of 20 RAG SHOPS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (All amounts in thousands)
November 29, November 30, August 30, 2003 2002 2003 ---- ---- ---- (Unaudited) (Unaudited) (Note A) (Restated) (Restated) ASSETS CURRENT ASSETS: Cash $ 2,473 $ 2,433 $ 835 Investment in common stock 323 283 307 Merchandise inventories 30,188 29,812 31,995 Prepaid expenses 1,091 655 1,490 Other current assets 633 705 431 Deferred income taxes 918 790 918 ------- ------- ------- Total current assets 35,626 34,678 35,976 Property and equipment, net 4,561 4,282 4,580 Deferred income taxes - long term 318 370 324 Other assets 32 41 29 ------- ------- ------- TOTAL ASSETS $ 40,537 $ 39,371 $ 40,909 ======= ======= ======= LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Short-term bank borrowings $ 175 $ - $ - Accounts payable-trade 10,859 9,854 11,432 Accrued expenses and other current liabilities 4,580 3,774 4,315 Accrued salaries and wages 785 1,066 1,103 Deferred income 407 - 582 ------- ------- ------- Total current liabilities 16,806 14,694 17,432 STOCKHOLDERS' EQUITY: Common stock 48 48 48 Additional paid-in capital 6,235 6,235 6,235 Retained earnings 17,430 18,402 17,186 Unrealized gain on investment in common stock, net of tax 82 56 72 Treasury stock, at cost, 26,880 shares (64) (64) (64) -------- -------- -------- Total stockholders' equity 23,731 24,677 23,477 ------- ------- ------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 40,537 $ 39,371 $ 40,909 ======= ======= =======
Note A: Derived from the August 30, 2003 audited balance sheet. See notes to the condensed consolidated financial statements. Page 3 of 20 RAG SHOPS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited) (All amounts in thousands, except share data)
Three Months Ended November 29, November 30, 2003 2002 ---- ---- Net sales $ 33,814 $ 33,357 Cost of merchandise sold, occupancy and distribution costs 22,310 21,686 ------ ------ Gross profit 11,504 11,671 Selling, general and administrative expenses 11,080 10,737 ------ ------ Income from operations 424 934 Interest expense, net (25) (5) ------- ------- Income before provision for income taxes 399 929 Provision for income taxes 155 418 ------ ------ Net income $ 244 $ 511 ====== ====== EARNINGS PER COMMON SHARE: Basic and diluted $ .05 $ .11 ====== ====== WEIGHTED AVERAGE COMMON SHARES OUTSTANDING: Basic 4,797,983 4,797,983 ========= ========= Diluted 4,837,942 4,835,603 ========= =========
See notes to the condensed consolidated financial statements. Page 4 of 20 RAG SHOPS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (All amounts in thousands)
Three Months Ended November 29, 2003 November 30, 2002 ----------------- ----------------- Cash flows from operating activities: Net income $ 244 $ 511 Adjustments to reconcile net income to net cash provided by operating activities: Amortization of deferred income (175) - Depreciation and amortization 359 332 Changes in assets and liabilities: (Increase) decrease in: Merchandise inventories 1,807 515 Prepaid expenses 399 594 Other current assets (202) (251) Other assets (3) 2 Increase (decrease) in: Accounts payable-trade (573) (454) Accrued expenses and other current liabilities 265 820 Accrued salaries and wages (318) (232) ------- ------- Net cash provided by operating activities 1,803 1,837 ------- ------- Cash flows from investing activities: Proceeds form sale of property and equipment 3 - Payments for purchases of property and equipment (343) (363) ------- ------- Net cash used in investing activities (340) (363) -------- ------- Cash flows from financing activities Proceeds from issuance of note payable - bank 10,320 6,750 Repayments of note payable - bank (10,145) (6,750) -------- ------- Net cash provided by financing activities 175 - ------- ------- Net increase in cash 1,638 1,474 Cash, beginning of period 835 959 ------- ------- Cash, end of period $ 2,473 $ 2,433 ======= ======= Supplemental disclosures of cash flow information: Cash paid during the period for: Interest $ 25 $ 5 ======= ======= Income taxes $ 8 $ 2 ======= =======
See notes to the condensed consolidated financial statements Page 5 of 20 RAG SHOPS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS THREE MONTHS ENDED NOVEMBER 29, 2003 AND NOVEMBER 30, 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 months ended November 29, 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 30, 2003 filed with the Securities and Exchange Commission in November 2003. As noted in Recent Developments, the Company has restated its financial statements for fiscal years 2003 and 2002 and the applicable interim periods. Accounting Policies Refer to the financial statements and notes included in the Company's Annual Report on Form 10-K for the complete disclosure of the Company's accounting policies. Certain policies are as follows: 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. The amounts included in cost of merchandise sold related to cooperative advertising payments received was $372,000 and $338,000 for the three months ended November 29, 2003 and November 30, 2002, respectively. 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 which amounted to $2,493,000 and $2,268,000 for the three months ended November 29, 2003 and November 30, 2002, respectively. 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 Page 6 of 20 consideration inthe 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. A Schedule of Other Comprehensive Income will be presented for all periods pursuant to Statement of Financial Accounting Standards No. 130 "Reporting Comprehensive Income". Comprehensive income consists of net income or loss for the current period as well as income, expenses, gains or losses net of income taxes arising during the period that are included in separate components of equity. It includes the unrealized gains and losses on the Company's available-for-sale security, net of taxes. The fair market value of the Shares as of the close of business on November 29, 2003 was $323,352. Amendments to previous reports of the Company filed with the Securities and Exchange Commission, under the Securities Exchange Act of 1934, as amended, will be filed expeditiously and will include restatement of the financial statements therein, respectively, summarized as follows:
Current Earnings assets Stockholders' Equity per share ------ Deferred -------------------- Provision --------- Total Investment income Unrealized Gain from for Net Basic compre- in common taxes- gain, net Retained demutual- income income and hensive stock long term of taxes earnings ization taxes (loss) Diluted income ----- --------- -------- -------- ------- ----- ------ ------- ------ (Amounts in thousands except earnings per share) Quarterly Period Ended December 1, 2001 Reported $ - $ 436 $ - $18,892 $ - $ 888 $1,390 $ 0.29 $ 1,390 Restated 224 336 24 18,992 181 969 1,490 0.31 1,514 Quarterly Period Ended March 2, 2002 Reported - 436 - 19,021 129 129 Restated 242 328 34 19,121 129 139 Quarterly Period Ended June 1, 2002 Reported - 436 - 19,111 90 90 Restated 297 303 64 19,211 90 120 Fiscal Year Ended August 31, 2002 Reported - 497 - 17,791 - 236 290 0.06 290 Restated 286 369 58 17,891 181 317 390 0.08 448 Quarterly Period Ended November 30, 2002 Reported - 497 - 18,302 511 511 Restated 283 370 56 18,402 511 509
Page 7 of 20
Current Earnings assets Stockholders' Equity per share ------ Deferred -------------------- Provision --------- Total Investment income Unrealized Gain from for Net Basic compre- in common taxes- gain, net Retained demutual- income income and hensive stock long term of taxes earnings ization taxes (loss) Diluted income ----- --------- -------- -------- ------- ----- ------ ------- ------ (Amounts in thousands except earnings per share) Quarterly Period Ended March 1, 2003 Reported $ - $ 497 $ - $ 18,393 $ 91 $ 91 Restated 269 374 46 18,493 91 81 Quarterly Period Ended May 31, 2003 Reported - 497 - 18,141 (251) (251) Restated 310 361 74 18,241 (251) (223) Fiscal Year Ended August 30, 2003 Reported - 459 - 17,086 (705) (705) Restated 307 324 72 17,186 (705) (691)
Recent Accounting Pronouncements In November 2002, the Emerging Issues Task Force reached a consensus on Issue No. 00-21, "Revenue Arrangements with Multiple Deliverables," ("Issue No. 00-21") which requires that revenue from sales with multiple deliverables be accounted for based on a determination of whether the multiple deliverables qualify to be accounted for as separate units of accounting. The consensus is effective prospectively for arrangements entered into in fiscal periods beginning after June 15, 2003. The Company adopted the provision of this statement, which did not have an impact in its consolidated financial position or results of operations. In May 2003, the Financial Accounting Standards Board issued SFAS No. 150, "Accounting for Certain Instruments with Characteristics of Both Liabilities and Equity" ("SFAS No. 150"), which establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. SFAS No. 150 requires that an issuer classify a financial instrument that is within its scope, which may have previously been reported as equity, as a liability or an asset in some circumstances. SFAS No. 150 is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. The Company adopted the provision of this statement, which did not have an impact in its consolidated financial position or results of operations. Stock-Based Compensation The Company has a stock based compensation plan which is described more fully in Note 5. The Company applies APB Opinion No. 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 months ended November 29, 2003 and November 30, 2002 as all options have been issued with exercise prices equal to the underlying stock's market price and there were no options granted during these periods. Page 8 of 20 The following table illustrates the effect on net income and earnings per share if the Company had applied the fair value recognition provisions of FASB Statement No. 123, "Accounting for Stock Based Compensation": Three Months Ended November 29, November 30, 2003 2002 ---- ---- Net income as reported $ 244,000 $ 511,000 ========= ========== Deduct: Total stock based employee compensation determined under fair value based method for options granted, modified, or settled, net of related tax effects 9,000 - --------- ---------- Pro forma net income $ 235,000 $ 511,000 ========= ========== Earnings per share Basic - as reported $ .05 $ .11 ========= ========== Basic - pro forma $ .05 $ .11 ========= ========== Diluted - as reported $ .05 $ .11 ========= ========== Diluted - pro forma $ .05 $ .11 ========= ========== NOTE 2 - EARNINGS PER SHARE The following table sets forth the computation of basic and diluted earnings per share: Three Months Ended November 29, November 30, 2003 2002 ---- ---- Numerator for basic and diluted earnings per share: Net income $ 244,000 $ 511,000 =========== =========== Denominator: Denominator for basic earnings per share-weighted average shares 4,797,983 4,797,983 Effect of dilutive securities: Employee stock options 39,959 37,620 ----------- ----------- Denominator for diluted earnings per share-adjusted weighted average shares and assumed conversions 4,837,942 4,835,603 =========== =========== Basic earnings per share $ .05 $ .11 =========== =========== Diluted earnings per share $ .05 $ .11 =========== =========== Page 9 of 20 There were no anti-dilutive stock options for the three months ended November 29, 2003 and November 30, 2002. Therefore, no stock options or other common stock equivalents were excluded from the above calculation. 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. The Company utilizes a method that weights the cost-to-retail ratio using multiple inventory categories. Physical inventories are conducted in the fourth quarter of the fiscal year and reconciled to the Company's financial records to determine shrinkage for the current fiscal year. The Company's estimated shrinkage accrual, based on previous results, is adjusted to current results in the fourth quarter of the fiscal year. NOTE 4 - USE OF ESTIMATES The preparation of financial statements in accordance with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the Company's financial statements and accompanying notes to financial statements. Estimates have been made by management in several areas, including but not limited to the reserve for inventory shrinkage, and the provision for income taxes and deferred income taxes. Management bases its estimates and judgements on historical experience and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgements about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results could differ materially from these estimates. NOTE 5 - STOCK OPTION PLAN On January 23, 2003, the stockholders of the Company approved the Company's 2002 Stock Option Plan (the "2002 Plan"). A copy of the 2002 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 November 29, 2003 an aggregate of 59,000 options remain outstanding under the prior plan. A total of 750,000 shares of Common Stock have been reserved for issuance under the 2002 Plan. As of November 29, 2003, 109,700 options have been granted and 20,000 options were forfeited pursuant to the 2002 Plan. NOTE 6 - ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES The following table sets forth selected accrued expenses and other current liabilities consisting of the following:
As of: November 29, 2003 November 30, 2002 August 30, 2003 ----------------- ----------------- --------------- (Amounts in thousands) Straight line rent $ 918 $ 732 $ 882 Other accrued expenses and current liabilities 3,662 3,042 3,433 ------- ------- -------- $ 4,580 $ 3,774 $ 4,315 ======== ======== ========
Page 10 of 20 NOTE 7- SCHEDULE OF COMPREHENSIVE INCOME The Schedule of Comprehensive Income is as follows:
Three Months Ended November 29, 2003 November 30, 2002 ----------------- ----------------- (Amounts in thousands) Net income $ 244 $ 511 Other comprehensive income, net of taxes: Unrealized gain on investment in common stock 10 (2) ----------- ----------- Comprehensive income $ 254 $ 509 =========== ===========
Page 11 of 20 RAG SHOPS, INC. AND SUBSIDIARIES Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion should be read in conjunction with the Company's condensed consolidated financial statements and the related notes included elsewhere in this Quarterly Report on Form 10-Q. This Quarterly Report on Form 10-Q contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, which are intended to be covered by safe harbors created hereby. Such forward-looking statements include those regarding the Company's future results in light of current management activities, and involve known and unknown risks, including competition within the craft and fabric retail industry, weather-related changes in the selling cycle, and other uncertainties (including those risk factors referenced in the Company's filings with the Securities and Exchange Commission). Our actual results could materially differ from those discussed in these forward-looking statements. 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. A Schedule of Other Comprehensive Income will be presented for all periods pursuant to Statement of Financial Accounting Standards No. 130 "Reporting Comprehensive Income". Comprehensive income consists of net income or loss for the current period as well as income, expenses, gains or losses, net of income taxes arising during the period that are included in separate components of equity. It includes the unrealized gains and losses on the Company's available-for-sale security, net of taxes. The fair market value of the Shares as of the close of business on November 29, 2003 was $323,352. Amendments to previous reports of the Company filed with the Securities and Exchange Commission, under the Securities Exchange Act of 1934, as amended, will be filed expeditiously and will include restatement of the financial statements therein, respectively, summarized as follows: Page 12 of 20
Current Earnings assets Stockholders' Equity per share ------ Deferred -------------------- Provision --------- Total Investment income Unrealized Gain from for Net Basic compre- in common taxes- gain, net Retained demutual- income income and hensive stock long term of taxes earnings ization taxes (loss) Diluted income ----- --------- -------- -------- ------- ----- ------ ------- ------ (Amounts in thousands except earnings per share) Quarterly Period Ended December 1, 2001 Reported $ - $ 436 $ - $18,892 $ - $ 888 $1,390 $ 0.29 $ 1,390 Restated 224 336 24 18,992 181 969 1,490 0.31 1,514 Quarterly Period Ended March 2, 2002 Reported - 436 - 19,021 129 129 Restated 242 328 34 19,121 129 139 Quarterly Period Ended June 1, 2002 Reported - 436 - 19,111 90 90 Restated 297 303 64 19,211 90 120 Fiscal Year Ended August 31, 2002 Reported - 497 - 17,791 - 236 290 0.06 290 Restated 286 369 58 17,891 181 317 390 0.08 448 Quarterly Period Ended November 30, 2002 Reported - 497 - 18,302 511 511 Restated 283 370 56 18,402 511 509 Quarterly Period Ended March 1, 2003 Reported - 497 - 18,393 91 91 Restated 269 374 46 18,493 91 81 Quarterly Period Ended May 31, 2003 Reported - 497 - 18,141 (251) (251) Restated 310 361 74 18,241 (251) (223) Fiscal Year Ended August 30, 2003 Reported - 459 - 17,086 (705) (705) Restated 307 324 72 17,186 (705) (691)
Results of Operations The Company operated 69 and 68 stores, and leased retail square footage of 809,500 and 769,600 at the end of the first fiscal quarter of 2004 and 2003, respectively. 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. Page 13 of 20 Three Months Ended ------------------ November 29, November 30, 2003 2002 ---- ---- Net sales 100.0% 100.0% Cost of merchandise sold, occupancy costs and distribution costs 66.0 65.0 -------- -------- Gross profit 34.0 35.0 Selling, general and administrative expenses 32.8 32.2 -------- -------- Income from operations 1.2 2.8 -------- -------- Net income 0.7% 1.5% ======== ======== The Company's net sales increased $457,000 or 1.4% for the three months ended November 29, 2003 compared to the three months ended November 30, 2002. Net sales from larger new store openings, net of reductions from smaller closed stores contributed $1,037,000 in additional sales during the quarter while comparable store sales decreased $580,000 or 1.8% as compared to the prior comparable period. 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. Management believes that the decrease in comparable store sales resulted from two factors. First, changes in the Company's advertising program, implemented in the fourth quarter of fiscal 2003 and continued during the current quarter, did not produce expected results. Commencing December 2003 we have reworked our advertising program. Second, the Company's fabric business experienced sales declines offsetting gains in the craft categories. We have initiated changes in our fabric marketing program in December 2003 to attempt to reverse this trend. Gross profit decreased by 1.0% as a percentage of net sales for the current quarter compared to the prior comparable period primarily due to additional promotional markdowns related to changes in the Company's advertising program, as mentioned above, and secondarily due to an increase in occupancy expense 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. These increases were partially offset by a reduction in the estimated provision for inventory shrinkage in the three months ended November 29, 2003 compared to the comparable prior period due to favorable results experienced during the physical inventory conducted in the fourth quarter of fiscal 2003 compared to the prior comparable period, and by the amortization of deferred income relating to the forgiveness of certain obligations for merchandise inventory through modification of certain agreements with suppliers, which amortization commenced in the second quarter of fiscal 2003. Selling, general, and administrative expenses increased by $343,000 for the three months ended November 29, 2003 compared to the prior comparable period. Additional advertising and higher insurance costs were the primary causes of the increase. These increases were partially offset by a decrease in general and administrative payroll due to positions that were eliminated and a reduction in the provision for bonuses. Advertising expense increased due to additional circular frequency and distribution and due to the grand opening of a new store during the current quarter. 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 0.6% for the three months ended November 29, 2003 compared to the comparable prior period principally due to the decrease in comparable store sales mentioned above. The $20,000 increase in interest expense, net for the three months ended November 29, 2003 compared to the comparable period last year is due to higher Page 14 of 20 average borrowing levels during the current quarter. See "Liquidity and Capital Resources". Net income decreased $267,000 for the three months ended November 29, 2003 compared to the three months ended November 30, 2002 as a result of the decrease in gross margin and the increases in selling, general and administrative expenses, and interest expense, net. Seasonality The Company's business is seasonal, which the Company believes is typical of the retail craft and fabric industry. The Company's highest sales and earnings levels traditionally occur between September and December. The Company has historically operated at a loss during the fourth quarter of its fiscal year, the June through August summer period. Year to year comparisons of quarterly results and comparable store sales can be affected by a variety of factors, including the timing and duration of holiday selling seasons and the timing of new store openings and promotional markdowns. Liquidity and Capital Resources The Company's primary needs for liquidity are to maintain inventory for the Company's existing stores and to fund the costs of opening new stores, including capital improvements, initial inventory and pre-opening expenses. During the three months ended November 29, 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 increased $276,000 for the three months ended November 29, 2003 as compared to the August 30, 2003 amount primarily because the Company retained its net income for this period. The Company maintains a $10 million credit facility with a bank. The credit facility is renewable annually on or before each December 31 and consists of a discretionary unsecured line of credit for direct borrowings and the issuance and refinance of letters of credit. During December 2003, the credit facility was renewed for the year 2004. Borrowings under the line of credit bear interest at the bank's prime rate (4.00% at November 29, 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 each fiscal year. The maximum amount borrowed under the line was $3,970,000 and $1,635,000 during the three month periods ended November 29, 2003 and November 30, 2002, respectively. There was $175,000 of direct borrowings outstanding under the line of credit at November 29, 2003, and no direct borrowings were outstanding at November 30, 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 three months ended November 29, 2003 amounted to $1,803,000, and $343,000 was used for purchases of property and equipment and $175,000 was provided by bank borrowings. Net cash from operating activities resulted primarily from net income of $244,000, decreases in merchandise inventories of $1,807,000 and prepaid expenses of $399,000, and an increase in accrued expenses and other current liabilities of $210,000, partially offset by decreases in accounts payable-trade and accrued salaries and wages of $573,000 and $318,000, respectively. During the three months ended November 29, 2003, the Company opened one store, did not close or Page 15 of 20 expand any stores and was operating sixty-nine stores at the end of the period. During the remainder of the fiscal year ending August 28, 2004, the Company anticipates opening one additional new store, relocating three stores and closing two stores. Costs associated with the opening of new stores, including capital expenditures, inventory and pre-opening expenses, approximated $725,000 per store in fiscal 2003. These costs associated with the contemplated store openings in fiscal 2004 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 arise in order to curtail the costs of opening stores. The Company believes that its cash at November 29, 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. Critical Accounting Policies Refer to the financial statements and notes included in the Company's Annual Report on Form 10-K for the complete disclosure of the Company's accounting policies. Certain policies are as follows: 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. The amounts included in cost of merchandise sold related to cooperative advertising payments received was $372,000 and $338,000 for the three months ended November 29, 2003 and November 30, 2002, respectively. 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 which amounted to $2,493,000 and $2,268,000 for the three months ended November 29, 2003 and November 30, 2002, respectively. Recent Accounting Standards In November 2002, the Emerging Issues Task Force reached a consensus on Issue No. 00-21, "Revenue Arrangements with Multiple Deliverables," ("Issue No. 00-21") which requires that revenue from sales with multiple deliverables be accounted for based on a determination of whether the multiple deliverables qualify to be accounted for as separate units of accounting. The consensus is effective prospectively for arrangements entered into in fiscal periods beginning after June 15, 2003. The Company adopted the provision of this statement, which did not have an impact in its consolidated financial position or results of operations. In May 2003, the Financial Accounting Standards Board issued SFAS No. 150, "Accounting for Certain Instruments with Characteristics of Both Liabilities and Equity" ("SFAS No. 150"), which establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. SFAS No. 150 requires that an issuer classify a financial instrument that is within its scope, which may have previously been reported as equity, as a liability or an asset in some circumstances. SFAS No. Page 16 of 20 150 is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. The Company adopted the provision of this statement, which did not have an impact in its consolidated financial position or results of operations. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Market risk is the potential change in a financial instrument's value caused by fluctuations in interest or currency exchange rates, or in equity and commodity prices. The Company's activities expose it to certain risks that management evaluates carefully to minimize earnings volatility. At November 29, 2003 and November 30, 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 (4.00% at November 29, 2003). There was $175,000 in loans outstanding under such line of credit at November 29, 2003 and there was no loan outstanding under the line of credit at November 30, 2002. The following table details future projected payments for the Company's significant contractual obligations as of November 29, 2003:
Computer and Other Technology Operating Leases Related Commitments Total Nine Months Ending: 2004 $ 7,320,929 $ 334,418 $ 7,655,347 Fiscal Year Ending: 2005 9,205,138 98,761 9,303,899 2006 7,818,207 55,061 7,873,268 2007 6,409,210 1,519 6,410,729 2008 5,116,264 0 5,116,264 Thereafter 10,024,058 0 10,024,058 ---------- --------- ----------- $ 45,893,806 $ 489,759 $ 46,383,565 =========== ========= ===========
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. We note that the design of any system of controls and procedures is based in part upon certain assumptions about its likelihood of future events and there can be no assurance that any such design will succeed in achieving its stated goals under all potential conditions. 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 17 of 20 RAG SHOPS, INC. AND SUBSIDIARIES PART II - OTHER INFORMATION Item 1. - 5. Not Applicable Item 6. Exhibits and Reports on Form 8-K (a) Exhibits 99.1 Certification of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. ss.1350) 99.2 Certification of Acting Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C.ss.1350) (b) No reports on Form 8-K have been filed during the quarter for which this report is filed. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. RAG SHOPS, INC. Date: January 20, 2004 /S/ Stanley Berenzweig ---------------------- Stanley Berenzweig Chairman of the Board and Chief Executive Officer Date: January 20, 2004 /S/ Steven B. Barnett --------------------- Steven B. Barnett Acting Principal Financial Officer and Acting Principal Accounting Officer Page 18 of 20 CERTIFICATIONS I, Stanley Berenzweig, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Rag Shops, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report on January 20, 2004; and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors: a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. SIGNATURE TITLE(S) DATE /S/ STANLEY BERENZWEIG Principal Executive January 20, 2004 - ---------------------- and Director Stanley Berenzweig Page 19 of 20 CERTIFICATIONS I, Steven B. Barnett, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Rag Shops, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report on January 20, 2004; and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors: a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. SIGNATURE TITLE(S) DATE /S/ Steven B. Barnett Executive Vice President and January 20, 2004 - --------------------- Acting Chief Financial Officer Steven B. Barnett Page 20 of 20 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 for the quarter ended November 29, 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 20th 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 for the quarter ended November 29, 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 20th day of January, 2004. /S/ Steven B. Barnett --------------------- Executive Vice President and Acting Chief Financial Officer -----END PRIVACY-ENHANCED MESSAGE-----