-----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, DSfO+bgIPaUKZjuarKLGwgrk28A6+FicjxFf6+gn/jyFTHsmsiAV3L8cM6Re6fHj qhoTRD8mr7y6372z5b/eEA== 0000874385-04-000017.txt : 20040128 0000874385-04-000017.hdr.sgml : 20040128 20040127184735 ACCESSION NUMBER: 0000874385-04-000017 CONFORMED SUBMISSION TYPE: 10-Q/A PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20030301 FILED AS OF DATE: 20040128 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/A SEC ACT: 1934 Act SEC FILE NUMBER: 000-19194 FILM NUMBER: 04547491 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/A 1 a10q2-032a2e.txt AMENDED FORM 10Q2-03A2 FORM 10-Q/A (Amendment No. 2) SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 (MARK ONE) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarterly Period Ended March 1, 2003 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Transition Period From ... to... Commission File No. 0-19194 RAG SHOPS, INC. (Exact name of registrant as specified in its charter) DELAWARE 51-0333503 (State or other jurisdiction of (I.R.S. Employer Identification incorporation or organization) Number) 111 WAGARAW ROAD HAWTHORNE, NEW JERSEY 07506 (Address of principal executive (Zip Code) offices) (973) 423-1303 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes__X__ No____ Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes____ No__X__ Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. CLASS OUTSTANDING AT MARCH 31, 2003 Common Stock, par value $.01 4,797,983 EXPLANATORY NOTE - AMENDMENT This Form 10-Q/A is being filed to amend and restate Rag Shops, Inc.'s unaudited consolidated financial statements for the quarterly period ended March 1, 2003 In December 2003, the Company received a check from Principal Financial Group, Inc. ("Principal") reflecting dividends payable in connection with common stock of Principal. Receipt of the dividend check prompted a Company inquiry which revealed that, due to its ownership of certain life insurance policies issued by Principal Life Insurance Company, a subsidiary of Principal, and maintained by the Company for certain key executive officers, the Company had received 9,766 shares of Principal's common stock (the "Shares") in December 2001 as consideration in the demutualization of Principal's predecessor. The effective date of the demutualization was in October 2001 and the Shares were issued in December 2001 to one of the Company's subsidiaries, the owner of the life insurance policies, in book-entry form as uncertificated shares and maintained in an account with Mellon Investor Services established by Principal in connection with its demutualization transaction. The Company had not previously recognized or recorded the Shares issued pursuant to such event. The Company has determined it will restate prior financial statements to properly reflect the transaction in the first quarter of fiscal 2002. In its restated financial statements, the Company has recorded the then fair market value ($180,671) of the Shares as part of operating income as of October 2001, in accordance with Emerging Issues Task Force Issue No. 99-4, "Accounting for Stock Received from the Demutualization of a Mutual Insurance Company". The Company has classified its holding in the Shares as "available-for-sale" pursuant to Statement of Financial Accounting Standards No. 115 "Accounting for Investments", whereby the investment will be carried at fair market value and subsequent changes in the market value of the investment will be reflected as an unrealized gain or loss in the stockholders' equity section of the balance sheets, net of deferred income taxes. Other Comprehensive Income will be presented for all periods pursuant to Statement of Financial Accounting Standards No. 130 "Reporting Comprehensive Income" either in the Consolidated Statements of Changes in Stockholders' Equity or Notes to Consolidated Financial Statements. Comprehensive income consists of net income or loss for the current period as well as income, expenses, gains or losses, net of income taxes arising during the period that are included in separate components of equity. It includes the unrealized gains and losses on the Company's available-for-sale security, net of taxes. The fair market value of the Shares as of the close of business on March 1, 2003 was $269,249. Please refer to amendments to periodic reports filed with the Securities and Exchange Commission for periods between December 1, 2001 and November 29, 2003 for related restatements. Refer to Note 1 - Recent Developments in the Notes to Condensed Consolidated Financial Statements. For purposes of this Form 10-Q/A, and in accordance with Rule 12b-15 under the Securities and Exchange Act of 1934, as amended, each item of the Form 10-Q for the quarterly period ended March 1, 2003, as originally filed on April 4, 2003 and previously amended on June 20, 2003, that was affected has been amended to the extent affected by the referenced correction and restated in its entirety. All other financial information and disclosures remain unchanged. Page 2 of 18 RAG SHOPS, INC. AND SUBSIDIARIES INDEX Page PART I - FINANCIAL INFORMATION Item 1. Financial Statements Condensed consolidated balance sheets - March 1, 2003 (unaudited and restated), March 2, 2002 (unaudited and previously restated) and August 31, 2002 (previously restated) 4 Condensed consolidated statements of income - three and six months ended March 1, 2003 (unaudited) and March 2, 2002 (unaudited and previously restated) 5 Condensed consolidated statements of cash flows - six months ended March 1, 2003 (unaudited) and March 2, 2002 (unaudited and previously restated) 6 Notes to condensed consolidated financial statements 7-10 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 11-14 Item 3. Quantitative and Qualitative Disclosures About Market Risk 14 Item 4. Controls and Procedures 15 Part II - OTHER INFORMATION Item 4. Submission of Matters to a Vote of Security Holders 16 Item 6. Exhibits and Reports on Form 8-K 16 SIGNATURES 16 CERTIFICATIONS 17-18 EXHIBITS 99.1 Certification 99.2 Certification Page 3 of 18 RAG SHOPS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (All amounts in thousands)
March 1, March 1, March 2, August 31, 2003 2003 2002 2002 ---- ---- ---- ---- (Unaudited (Unaudited (Unaudited) (Note A) and Restated) and Previously and Previously Reported) Restated) ASSETS CURRENT ASSETS: Cash $ 2,048 $ 2,048 $ 5,964 $ 959 Investment in common stock 269 - 242 286 Merchandise inventories 28,525 28,525 25,880 30,327 Prepaid expenses 230 230 460 1,249 Other current assets 610 610 520 454 Deferred taxes 790 790 855 790 ------- ------- ------- ------- Total current assets 32,472 32,203 33,921 34,065 Property and equipment, net 4,648 4,648 3,736 4,251 Deferred income taxes 374 497 328 369 Other assets 35 35 47 43 ------- ------- ------- ------- TOTAL ASSETS $ 37,529 $ 37,383 $ 38,032 $ 38,728 ======= ======= ======= ======= LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable-trade $ 7,743 $ 7,743 $ 8,432 $ 10,308 Accrued expenses and other current liabilities 2,845 2,845 2,931 2,797 Accrued salaries and wages 1,055 1,055 798 1,298 Deferred Income 931 931 - - Income taxes payable 196 196 496 156 ------- ------- ------- ------- Total current liabilities 12,770 12,770 12,657 14,559 STOCKHOLDERS' EQUITY: Common stock 48 48 48 48 Additional paid-in capital 6,236 6,236 6,236 6,236 Retained earnings 18,493 18,393 19,121 17,891 Unrealized gain on investment in common stock, net of taxes 46 - 34 58 Treasury stock, at cost, 26,880 shares (64) (64) (64) (64) -------- -------- ------- -------- Total stockholders' equity 24,759 24,613 25,375 24,169 ------- ------- ------- ------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 37,529 $ 37,383 $ 38,032 $ 38,728 ======= ======= ======= =======
Note A: Previously restated and derived from the August 31, 2002 audited balance sheet. See notes to the condensed consolidated financial statements. Page 4 of 18 RAG SHOPS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited) (All amounts in thousands, except share data)
Three Months Ended Six Months Ended March 1, March 2, March 1, March 2, 2003 2002 2003 2002 ---- ---- ---- ---- (Previously Restated) Net sales $ 30,672 $ 28,931 $ 64,029 $ 61,483 Cost of merchandise sold and occupancy Costs 19,782 18,900 40,692 38,796 ------- ------- ------- ------- Gross profit 10,890 10,031 23,337 22,687 Selling, general and administrative expenses 10,730 9,839 22,243 20,222 ------- ------- ------- ------- Income from operations 160 192 1,094 2,465 Gain from demutualization - - - 181 ------- ------- ------- ------- Income from operations 160 192 1,094 2,646 Interest income, net 6 20 1 25 ------- ------- ------- ------- Income before provision for income taxes 166 212 1,095 2,671 Provision for income taxes 75 83 493 1,052 ------- ------- ------- ------- Net income $ 91 $ 129 $ 602 $ 1,619 ======= ======= ======= ======= EARNINGS PER COMMON SHARE: Basic and diluted $ .02 $ .03 $ .13 $ .34 ======= ======= ======= =======
See notes to the condensed consolidated financial statements Page 5 of 18 RAG SHOPS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (All amounts in thousands)
Six Months Ended March 1, 2003 March 2, 2002 ------------- ------------- (Previously Restated) Cash flows from operating activities: Net income $ 602 $ 1,619 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 663 655 Loss on disposition of property and equipment 34 44 Amortization of restricted stock awards - 1 Amortization of deferred income (465) - Gain from demutualization - (181) Deferred income taxes - 81 Changes in assets and liabilities: (Increase) decrease in: Merchandise inventories (see Note) 3,198 1,927 Prepaid expenses 1,019 734 Other current assets (156) (366) Other assets 8 2 Increase (decrease) in: Accounts payable-trade (2,565) 84 Accrued expenses and other current liabilities 14 226 Accrued salaries and wages (243) 78 Income taxes payable 40 331 ------- ------- Net cash provided by operating activities 2,149 5,235 ------- ------- Cash flows from investing activities: Payments for purchases of property and Equipment (1,060) (224) -------- ------- Net cash used in investing activities (1,060) (224) -------- ------- Cash flows from financing activities Proceeds from issuance of note payable - bank 6,750 3,325 Repayments of note payable - bank (6,750) (3,325) ------- ------- Net cash provided by financing activities - - ------- ------- Net increase in cash 1,089 5,011 Cash, beginning of period 959 953 ------- ------- Cash, end of period $ 2,048 $ 5,964 ======= ======= Supplemental disclosures of cash flow information: Cash paid during the period for: Interest $ 5 $ - ======= ======= Income taxes $ 17 $ 47 ======= =======
Note - Non-cash transaction for acquisition of $1,396 of inventory in recognition of deferred income. See notes to the condensed consolidated financial statements Page 6 of 18 RAG SHOPS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS THREE AND SIX MONTHS ENDED MARCH 1, 2003 AND MARCH 2, 2002 NOTE 1 - BASIS OF PRESENTATION The accompanying financial statements are unaudited, but in the opinion of management reflect all adjustments, which consist of normal recurring accruals necessary for a fair presentation of the consolidated financial statements for the interim periods. Since the Company's business is seasonal, the operating results for the three and six months ended March 1, 2003 are not necessarily indicative of results for other quarters or the fiscal year. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. It is suggested that these condensed consolidated financial statements be read in conjunction with the financial statements and notes included in the Company's Annual Report on Form 10-K for the year ended August 31, 2002 filed with the Securities and Exchange Commission in November 2002. Certain reclassifications have been made to prior year amounts in order to conform to the presentation for the current year. Restatement In December 2003, the Company received a check from Principal Financial Group, Inc. ("Principal") reflecting dividends payable in connection with common stock of Principal. Receipt of the dividend check prompted a Company inquiry which revealed that, due to its ownership of certain life insurance policies issued by Principal Life Insurance Company, a subsidiary of Principal, and maintained by the Company for certain key executive officers, the Company had received 9,766 shares of Principal's common stock (the "Shares") in December 2001 as consideration in the demutualization of Principal's predecessor. The effective date of the demutualization was in October 2001 and the Shares were issued in December 2001 to one of the Company's subsidiaries, the owner of the life insurance policies, in book-entry form as uncertificated shares and maintained in an account with Mellon Investor Services established by Principal in connection with its demutualization transaction. The Company had not previously recognized or recorded the Shares issued pursuant to such event. The Company has determined it will restate prior financial statements to properly reflect the transaction in the first quarter of fiscal 2002. In its restated financial statements, the Company has recorded the then fair market value ($180,671) of the Shares as part of operating income as of October 2001, in accordance with Emerging Issues Task Force Issue No. 99-4, "Accounting for Stock Received from the Demutualization of a Mutual Insurance Company". The Company has classified its holding in the Shares as "available-for-sale" pursuant to Statement of Financial Accounting Standards No. 115 "Accounting for Investments", whereby the investment will be carried at fair market value and subsequent changes in the market value of the investment will be reflected as an unrealized gain or loss in the stockholders' equity section of the balance sheets, net of deferred income taxes. Other Comprehensive Income will be presented for all periods pursuant to Statement of Financial Accounting Standards No. 130 "Reporting Comprehensive Income" either in the Consolidated Statements of Changes in Stockholders' Equity or Notes to Consolidated Financial Statements. Comprehensive income consists of net income or loss for the current period as well as income, expenses, gains or losses, net of income taxes arising during the period that are included in separate components of equity. It includes the unrealized gains and losses on the Company's available-for-sale security, net of taxes. Page 7 of 18 The fair market value of the Shares as of the close of business on March 1, 2003 was $269,249. Please refer to amendments to periodic reports filed with the Securities and Exchange Commission for periods between December 1, 2001 and November 29, 2003 for related restatements. The following table shows the impact of the restatement from the previously filed financial statements as of March 1, 2003 and for the three months then ended (unaudited):
Previously Reported Adjustments Restated -------- ----------- -------- (Amounts in thousands) Current assets - Investment in common stock $ - $ 269 $ 269 Deferred income taxes - long term 497 (123) 374 Stockholders' equity - Unrealized gain on investment in common stock, net of taxes - 46 46 Stockholders' equity - Retained earnings 18,393 100 18,493 Other comprehensive income (loss) - (10) (10) Total comprehensive income 91 (10) 81
The following table shows the impact of the restatement from the previously filed financial statements as of March 1, 2003 and for the six months then ended (unaudited):
Previously Reported Adjustments Restated -------- ----------- -------- (Amounts in thousands) Other comprehensive income (loss) $ - $ (12) $ (12) Total comprehensive income 602 (12) 590
The following table shows the impact of the restatement from the previously filed financial statements, as of March 2, 2002 and for the three months then ended (unaudited):
Previously Reported Adjustments Restated -------- ----------- -------- (Amounts in thousands) Current assets - Investment in common stock $ - $ 242 $ 242 Deferred income taxes - long term 436 (108) 328 Stockholders' equity - Unrealized gain on investment in common stock, net of taxes - 34 34 Stockholders' equity - Retained earnings 19,021 100 19,121 Other comprehensive income - 10 10 Total comprehensive income 129 10 139
The following table shows the impact of the restatement from the previously filed financial statements, as of March 2, 2002 and for the six months then ended (unaudited):
Previously Reported Adjustments Restated -------- ----------- -------- (Amounts in thousands except earnings per share) Gain from demutualization $ - $ 181 $ 181 Provision for income taxes 971 81 1,052 Net income 1,519 100 1,619 Other comprehensive income - 34 34 Total comprehensive income 1,519 134 1,653 Earnings per share - Basic $ 0.32 $ 0.02 $ 0.34 Earnings per share - Diluted $ 0.31 $ 0.03 $ 0.34
Page 8 of 18 The following table shows the impact of the restatement from the previously filed financial statements as of August 31, 2002 and for the fiscal year then ended:
Previously Reported Adjustments Restated -------- ----------- -------- (Amounts in thousands) Current assets - Investment in common stock $ - $ 286 $ 286 Deferred income taxes - long term 497 (128) 369 Stockholders' equity - Unrealized gain on investment in common stock, net of taxes - 58 58 Stockholders' equity - Retained earnings 17,791 100 17,891
The Company did not previously file a Schedule of Comprehensive Income as there were no differences between net income and total comprehensive income. The Schedule of Comprehensive Income is as follows:
Three Months Ended Six Months Ended ------------------ ---------------- March 1, March 2, March 1, March 2, 2003 2002 2003 2002 ---- ---- ---- ---- (Amounts in thousands) (Amounts in thousands) Net income $ 91 $ 129 $ 602 $ 1,619 Other comprehensive income, net of taxes: Unrealized gain (loss) on investment in common stock (10) 10 (12) 34 ---------- --------- ----------- ------------ Total comprehensive income $ 81 $ 139 $ 590 $ 1,653 ========= ========= ========== ============
Recent Accounting Pronouncements In December 2002, the Financial Accounting Standards Board Issued Statement No. 148, "Accounting for Stock-Based Compensation-Transition and Disclosure-an amendment of FASB Statement No. 123", ("SFAS 148"). SFAS 148 amends FASB Statement No. 123, "Accounting for Stock Based Compensation" ("SFAS 123") and provides alternative methods for accounting for a change by registrants to the fair value method of accounting for stock-based compensation. Additionally, SFAS 148 amends the disclosure requirements of SFAS 123 to require disclosure in the significant accounting policy footnote of both annual and interim financial statements of the method of accounting for stock-based compensation and the related pro-forma disclosures when the intrinsic value method continues to be used. The statement is effective for fiscal years beginning after December 15, 2002, and disclosures are effective for the first fiscal quarter beginning after December 15, 2002. The Company does not believe that adoption of this statement will have a material effect on the Company's financial position or results of operations. In November 2002, the Emerging Issues Task Force (the "EITF") reached consensus on Issue 02-16, Accounting by a Customer (including a Reseller) for Cash Consideration Received from a Vendor ("EITF Issue 02-16"). EITF Issue 02-16 addresses the classification of cash consideration received by a customer from a vendor (e.g., cooperative advertising payments) and rebates or refunds from a vendor that is payable only if the customer completes a specified cumulative level of purchases or remains a customer for a specified time period. The classification provisions of EITF Issue 02-16 became effective for arrangements entered into after December 31, 2002. The Company has adopted the provisions of EITF Issue 02-16 as of the beginning of the quarter ended March 1, 2003. Cooperative advertising payments received by vendors have been recorded as a Page 9 of 18 reduction of cost of merchandise sold for the three and six month periods ended March 1, 2003. These payments were previously offset against advertising expenses. All comparative periods have been restated. The adoption of this pronouncement did not change net income or earnings per share in any period reported herein. NOTE 2 - EARNINGS PER SHARE The following table sets forth the computation of basic and diluted earnings per share:
Three Months Ended Six Months Ended ------------------ ---------------- March 1, March 2, March 1, March 2, 2003 2002 2003 2002 ---- ---- ---- ---- (Previously Restated) Numerator for basic and diluted earnings per share: Net income $ 91,000 $ 129,000 $ 602,000 $ 1,619,000 =========== =========== ========== =========== Denominator: Denominator for basic earnings per share-weighted average shares 4,797,983 4,799,183 4,797,983 4,799,183 Effect of dilutive securities: Employee stock options 18,810 19,042 30,032 11,411 ----------- ------------ ------------ ------------ Denominator for diluted earnings per share adjusted weighted average shares and assumed conversions 4,816,793 4,818,225 4,828,015 4,810,594 ----------- ----------- ----------- ----------- Basic and diluted earnings per share $ .02 $ .03 $ .13 $ .34 =========== =========== =========== ===========
Stock options excluded from the above calculation, as the effect of such options would be anti-dilutive, aggregated 2,000 and 0 for the three and six months ended March 1, 2003 and 5,750 and 15,750 for the three and six months ended March 2, 2002, respectively. NOTE 3 - MERCHANDISE INVENTORIES Merchandise inventories (which are all finished goods) are stated at the lower of cost (first-in, first-out method) or market as determined by the retail inventory method. NOTE 4 - STOCK OPTION PLAN On January 23, 2003, the stockholders of the Company unanimously approved the Company's 2002 Stock Option Plan (the "Plan"). A copy of the Plan is set forth in the Proxy Statement filed by the Company with the Securities and Exchange Commission on December 30, 2002. The Company's prior stock option plan expired by its terms. A total of 750,000 shares of Common Stock have been reserved for issuance under the Plan. The purpose of the Plan is to promote the long-term interests of the Company and its stockholders by providing the Company with a means to attract, employ, motivate and retain experienced employees, officers, directors and consultants. No options have been granted pursuant to the Plan. Page 10 of 18 RAG SHOPS, INC. AND SUBSIDIARIES Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Results of Operations The following table sets forth, as a percentage of net sales, certain items appearing in the condensed consolidated statements of income for the indicated periods.
Three Months Ended Six Months Ended March 1, March 2, March 1, March 2, 2003 2002 2003 2002 ---- ---- ---- ---- (Previously Restated) Net sales 100.0% 100.0% 100.0% 100.0% Cost of merchandise sold and occupancy costs 64.5 65.3 63.6 63.1 --------- --------- --------- --------- Gross profit 35.5 34.7 36.4 36.9 Selling general and administrative expenses 35.0 34.0 34.7 32.9 Gain from demutualization - - - 0.3 --------- --------- --------- --------- Income from operations 0.5 0.7 1.7 4.3 --------- --------- --------- --------- Net Income 0.3% 0.4% 0.9% 2.6% --------- --------- --------- ---------
The Company's net sales increased $1,741,000 and $2,546,000 for the three and six months ended March 1, 2003, representing a 6.0% and 4.1% increase, respectively, over the comparable prior periods. The increase in net sales for the three months ended March 1, 2003 resulted from an increase in comparable store sales of $600,000 or 2.1% and the balance of $1,141,000 related to revenue from larger new store openings, net of sales reductions for smaller closed stores. The increase in net sales for the six months ended March 1, 2003 was attributable to a $145,000 or 0.2% increase in comparable store sales plus $2,401,000 from the larger new store sales, net of sales reductions from the smaller closed stores. Sales for the three and six months ended March 1, 2003 were adversely affected by February snow storms in the northeast where our main concentration of stores is located. Gross profit, as a percentage of net sales, increased by 0.8% for the current quarter compared to the prior comparable period primarily as a result of the amortization of deferred income resulting from the Company's understatement of its inventory, a reduction of freight cost, principally due to reduced purchases in the quarter, an increase in vendor participation programs that were partially offset by an increase in the provision for inventory shrinkage due to less than favorable results experienced during the physical inventory conducted in the final quarter of fiscal 2002 as compared to the prior comparable period, and an increase in occupancy expenses because of additional square footage and rent costs for new larger stores as compared to smaller closed stores as well as contractual increases in rent for existing stores. Gross profit, as a percentage of net sales, decreased by 0.5% for the six months ended March 1, 2003 compared to the comparable prior period primarily due to increases in the provision for shrinkage and occupancy expenses, as previously mentioned, in addition to higher promotional markdowns incurred in the three months ended November 30, 2002 in response to the shorter holiday selling season, that was partially offset by the amortization of deferred income, as previously mentioned, the reduction in freight cost and increase in vendor participation programs, as previously mentioned. Page 11 of 18 Selling, general and administrative expenses increased for the three and six months ended March 1, 2003 by $891,000 and $2,021,000, respectively, from the comparable prior periods. Additional payroll and payroll related expense, advertising, and higher insurance costs were the primary causes of the increases. Selling payroll increased in support of higher sales and increased store square footage due to the new larger stores, and administrative payroll grew through the addition of management personnel to fill both new positions and positions that were vacant in the prior comparable period. Advertising expense increased as a result of additional advertising and market penetration this year compared to the comparable periods last year. Insurance costs rose as a result of adverse market conditions when the Company's primary insurance policies were renewed in the third and fourth fiscal quarters last year. Selling, general and administrative expenses as a percentage of net sales increased by 1.0% and 1.8% for the three and six months ended March 1, 2003, respectively, compared to the comparable prior periods principally due to these expenses increasing at a greater rate than net sales. Interest income, net, decreased $14,000 and $24,000 for the three and six months ended March 1, 2003, respectively, from the comparable prior periods. This decrease was attributable to a decrease in average investment levels, coupled with a decline in interest rates on short-term investments versus the comparable prior periods. See "Liquidity and Capital Resources". Net income declined by $38,000 and $1,017,000 for the three and six months ended March 1, 2003, respectively, as compared to the prior comparable periods. These decreases are due mainly to the increase in selling, general and administrative expenses, and in the six month period an increase, as a percentage of net sales, in the cost of merchandise sold and occupancy costs, that was partially offset in the three month period by a reduction in the cost of merchandise sold and occupancy costs as a percentage of net sales. Seasonality The Company's business is seasonal, which the Company believes is typical of the retail craft and fabric industry. The Company's highest sales and earnings levels traditionally occur between September and December. The Company has historically operated at a loss during the fourth quarter of its fiscal year, the June through August summer period. Year to year comparisons of quarterly results and comparable store sales can be affected by a variety of factors, including the timing and duration of holiday selling seasons and the timing of new store openings and promotional markdowns. Liquidity and Capital Resources The Company's primary needs for liquidity are to maintain inventory for the Company's existing stores and to fund the costs of opening new stores, including capital improvements, initial inventory and pre-opening expenses. During the six months ended March 1, 2003, the Company relied on internally generated funds, credit made available by suppliers and short-term borrowings to finance inventories and new store openings. Nearly all of the Company financing was provided through internally generated funds and trade credit. The Company's working capital increased $196,000 for the six months ended March 1, 2003 as compared to the August 31, 2002 amount primarily because the Company retained its net income for this period. The Company maintains a $10 million credit facility with a bank. The credit facility is renewable annually on or before each December 31 and consists of a discretionary unsecured line of credit for direct borrowings and the issuance and refinance of letters of credit. Borrowings under the line of credit bear interest at the bank's prime rate (4.25% at March 1, 2003). The credit Page 12 of 19 facility requires the Company to maintain a compensating balance of $400,000 in addition to certain financial covenants. Historically, the amount borrowed has varied based on the Company's seasonal requirements, generally reaching a maximum amount outstanding during the fourth quarter of each fiscal year. The maximum amount borrowed under the line was $1,635,000 and $730,000 during the six month periods ended March 1, 2003 and March 2, 2002, respectively. There were no direct borrowings outstanding under the line of credit at March 1, 2003 or March 2, 2002. The Company intends to maintain the availability of a line of credit for seasonal working capital requirements and in order to be able to take advantage of future opportunities. Net cash provided by operating activities for the six months ended March 1, 2003 amounted to $2,149,000, and $1,060,000 was used for purchases of property and equipment. Net cash from operating activities resulted primarily from net income of $602,000, non-cash depreciation of $663,000, offset by deferred income of $465,000, decreases in merchandise inventories of $3,198,000 and prepaid expenses of $1,019,000, partially offset by decreases in accounts payable-trade and accrued salaries and wages of $2,565,000 and $243,000, respectively. During the six months ended March 1, 2003 the Company did not open or close any stores and was operating sixty-eight stores at the end of the period. During the remainder of the fiscal year ending August 30, 2003, the Company anticipates opening two new stores and closing two stores. Costs associated with opening of new stores, including capital expenditures, inventory and pre-opening expenses, approximated $825,000 per store in fiscal 2002. These costs will be financed primarily from cash provided by operating activities, credit made available by suppliers to finance inventories and, if necessary, from the Company's bank line of credit. However, the Company will re-deploy assets of stores being closed to the new stores as opportunities evolve in order to curtail the costs of opening stores. The Company believes that its cash at March 1, 2003, working capital generated from operations and cash available from the bank line of credit will be sufficient for the Company's operating needs for at least the next 12 months. Forward-Looking Statements This report contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, which are intended to be covered by safe harbors created thereby. Such forward-looking statements include those regarding the Company's future results in light of current management activities, and involve known and unknown risks, including competition within the craft and fabric retail industry, weather-related changes in the selling cycle, and other uncertainties (including those risk factors referenced in Company filings with the Securities and Exchange Commission). Critical Accounting Policies Revenue is recognized when merchandise is sold to customers. Merchandise inventories (which are all finished goods) are stated at the lower of cost (first-in, first-out method) or market as determined by the retail inventory method. Recent Accounting Standards In December 2002, the Financial Accounting Standards Board Issued Statement No. 148, "Accounting for Stock-Based Compensation-Transition and Disclosure-an amendment of FASB Statement No. 123", ("SFAS 148"). SFAS 148 amends FASB Statement No. 123, "Accounting for Stock Based Compensation" ("SFAS 123") and provides alternative methods for accounting for a change by registrants to the fair value method of accounting for stock-based compensation. Additionally, SFAS 148 amends the disclosure requirements of SFAS 123 to require disclosure in the significant accounting policy footnote of both annual and interim financial statements of the method of accounting for stock-based compensation and the related pro-forma disclosures when the intrinsic value method continues to be Page 13 of 18 used. The statement is effective for fiscal years beginning after December 15, 2002, and disclosures are effective for the first fiscal quarter beginning after December 15, 2002. The Company does not believe that adoption of this statement will have a material effect on the Company's financial position or results of operations. In November 2002, the Emerging Issues Task Force (the "EITF") reached consensus on Issue 02-16, Accounting by a Customer (including a Reseller) for Cash Consideration Received from a Vendor ("EITF Issue 02-16"). EITF Issue 02-16 addresses the classification of cash consideration received by a customer from a vendor (e.g., cooperative advertising payments) and rebates or refunds from a vendor that is payable only if the customer completes a specified cumulative level of purchases or remains a customer for a specified time period. The classification provisions of EITF Issue 02-16 became effective for arrangements entered into after December 31, 2002. The Company has adopted the provisions of EITF Issue 02-16 as of the beginning of the quarter ended March 1, 2003. Cooperative advertising payments received by vendors have been recorded as a reduction of cost of merchandise sold for the three and six month periods ended March 1, 2003. These payments were previously offset against advertising expenses. All comparative periods have been restated. The adoption of this pronouncement did not change net income or earnings per share in any period reported herein. Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Market risk is the potential change in a financial instrument's value caused by fluctuations in interest or currency exchange rates, or in equity and commodity prices. The Company's activities expose it to certain risks that management evaluates carefully to minimize earnings volatility. At March 1, 2003 and March 2, 2002, and during each of the quarters then ended, the Company was not a party to any derivative arrangement and the Company does not engage in trading, market-making or other speculative activities in the derivatives markets. The Company does not have any foreign currency exposure. Loans outstanding under the Company's unsecured line of credit bear interest at the bank's prime rate (4.25% at March 1, 2003). There were no loans outstanding under any such line of credit at March 1, 2003 or March 2, 2002. The following table details future projected payments for the Company's significant contractual obligations as of March 1, 2003:
Computer and Other Technology Operating Leases Related Commitments Total Six Months Ending: 2003 $ 4,629,837 $ 161,275 $ 4,791,112 Fiscal Year Ending: 2004 8,402,645 120,317 8,522,962 2005 7,628,838 98,330 7,727,168 2006 6,447,709 54,670 6,502,379 2007 5,216,140 1,519 5,217,659 Thereafter 11,644,223 0 11,644,223 ---------- --------- ----------- $ 43,969,392 $ 436,111 $ 44,405,503 =========== ========= ===========
Page 14 of 18 Item 4. CONTROLS AND PROCEDURES The Company maintains controls and procedures designed to ensure that information required to be disclosed in the reports that the Company files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission. Based upon their evaluation of those controls and procedures performed within 90 days of the filing date of this report, the Chief Executive and Acting Chief Financial Officers of the Company concluded that the Company's disclosure controls and procedures were adequate. The Company made no significant changes in its internal controls or in other factors that could significantly affect these controls subsequent to the date of the evaluation of those controls by the Chief Executive and Acting Chief Financial Officers. Page 15 of 18 RAG SHOPS, INC. AND SUBSIDIARIES PART II - OTHER INFORMATION Item 4. Submission of Matters to a Vote of Security Holders The Annual Meeting of Stockholders of the Company was held on January 23, 2003. Mr. Steven Barnett was elected a Class III Director by a vote of 2,689,974 shares in favor and 312,710 shares withheld, Mr. Evan Berenzweig was elected a Class III Director by a vote of 2,691,024 shares in favor and 311,660 shares withheld, and Mr. Alan C. Mintz was elected a Class III Director by a vote of 2,689,620 shares in favor and 313,064 shares withheld. Mr. Stanley Berenzweig and Mr. Fred J. Damiano, Class I Directors, and Mr. Jeffrey Gerstel, Ms. Judith Lombardo and Mr. Mario Ciampi, Class II Directors, will continue to serve for their term expiring in 2004 and 2005, respectively. The Company's 2002 Stock Option Plan was ratified by a vote of 2,956,768 in favor, 40,433 against, 5,483 abstaining and there were zero broker non-votes. The firm of Grant Thornton LLP was ratified as auditors for the Company's fiscal year ending August 30, 2003 by a vote of 2,691,606 in favor, 309,764 against, 1,314 abstaining and there were zero broker non-votes. No other matters were considered by the Stockholders at said Annual Meeting. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits 99.1 Certification of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C.ss.1350) 99.2 Certification of Acting Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C.ss.1350) (b) No reports on Form 8-K have been filed during the quarter for which this report is filed. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. RAG SHOPS, INC. Date: January 27, 2004 /S/ Stanley Berenzweig ---------------------- Stanley Berenzweig Chairman of the Board and Chief Executive Officer Date: January 27, 2004 /S/ Steven B. Barnett --------------------- Steven B. Barnett Acting Principal Financial Officer, and Acting Principal Accounting Officer Page 16 of 18 CERTIFICATIONS I, Stanley Berenzweig, certify that: 1. I have reviewed this amended quarterly report on Form 10-Q/A of Rag Shops, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report ( the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. SIGNATURE TITLE(S) DATE /S/ STANLEY BERENZWEIG Principal Executive January 27, 2004 - ---------------------- and Director Stanley Berenzweig Page 17 of 18 CERTIFICATIONS I, Steven B. Barnett, certify that: 1. I have reviewed this amended quarterly report on Form 10-Q/A of Rag Shops, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report ( the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. SIGNATURE TITLE(S) DATE /S/ STEVEN B. BARNETT Executive Vice President, January 27, 2004 - --------------------- Acting Chief Financial Officer Steven B. Barnett Page 18 of 18 EXHIBIT 99.1 RAG SHOPS, INC. CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 (18 U.S.C.ss.1350) The undersigned, Stanley Berenzweig, the Chief Executive Officer of Rag Shops, Inc. (the "Company"), has executed this Certification in connection with the filing with the Securities and Exchange Commission of the Company's amended Quarterly Report on Form 10-Q/A for the quarter ended March 1, 2003 (the "Report"). The undersigned hereby certifies that: - the Report fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934; and - the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. IN WITNESS WHEREOF, the undersigned has executed this Certification as of the 27th day of January 2004. /S/ Stanley Berenzweig ---------------------- Chief Executive Officer EXHIBIT 99.2 RAG SHOPS, INC. CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 (18 U.S.C. ss.1350) The undersigned, Steven B. Barnett, the Acting Chief Financial Officer of Rag Shops, Inc. (the "Company"), has executed this Certification in connection with the filing with the Securities and Exchange Commission of the Company's amended Quarterly Report on Form 10-Q/A for the quarter ended March 1, 2003 (the "Report"). The undersigned hereby certifies that: - the Report fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934; and - the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. IN WITNESS WHEREOF, the undersigned has executed this Certification as of the 27th day of January 2004. /S/ Steven B. Barnett --------------------- Executive Vice President, Acting Chief Financial Officer -----END PRIVACY-ENHANCED MESSAGE-----