10-Q/A 1 a10q2-04ae.txt FROM 10Q2-04AMENDMENT FORM 10-Q/A 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 February 28, 2004 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, 2004 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 February 28, 2004. Subsequent to filing Form 10-Q for the period ended May 29, 2004, the Company met (the "Meeting") with its new group health insurance broker (the "Broker") to discuss the status of the Company's group health insurance plan (the "Plan") renewal effective September 1, 2004. The Plan is self-funded and supplemented with an insurance policy for individual stop loss and aggregate stop loss coverage. The nature of this arrangement contemplates that the Company negotiate aggregate stop loss attachment factors ("Factors") with its insurance carrier annually and, based upon such Factors, that the Company accrue, on a monthly basis, an amount for the Plan's insurance expense which is then included in selling, general and administrative expenses. The Factors are multiplied by the covered lives to determine the Company's maximum Plan insurance expense amount (the "Maximum"). At the Meeting, the Broker presented comparative Plan information that included Factors for the Plan year effective September 1, 2003 (the "Current Plan"). The Factors for the Current Plan, obtained by the Broker from the Plan's insurance carrier, were greater than the Factors used by the Company in determining its accrual for the Plan insurance expense during the first three quarterly fiscal periods for the year ended August 28, 2004. Upon further investigation following the Meeting, the Company was able to ascertain that the Factors used to accrue for the Current Plan insurance expense were the Factors from the prior year rather than the current year. In accordance with APB Opinion No. 20 "Accounting Changes", the Company has determined the aforementioned to be an error in previously issued financial statements resulting from the use of the incorrect Factors. In its restated financial statements, the Company has reflected the corrected accrual amount based upon applicable current year Factors to record additional Plan insurance expense of $144,000, $136,000 and $139,000 for the three months ended November 29, 2003, February 28, 2004 and May 29, 2004, respectively. The Company is accruing to the Maximum since the Company estimates that the actual amount of health insurance claims to be paid for the current fiscal year is at or near the Maximum. The Company will restate prior financial statements pursuant to Financial Accounting Standards Board Statement No. 3 "Reporting Accounting Changed in Interim Financial Statements" for this item and the resulting income tax effect. Please refer to amendments to periodic reports filed with the Securities and Exchange Commission for periods between November 29, 2003 and May 29, 2004 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 February 28, 2004, as originally filed on April 13, 2004, that was affected has been amended to the extent affected by the referenced correction and restated in its entirety. All other financial information and disclosures remain unchanged. Page 2 of 21 RAG SHOPS, INC. AND SUBSIDIARIES INDEX Page PART I - FINANCIAL INFORMATION Item 1. Financial Statements Condensed consolidated balance sheets - February 28, 2004 (unaudited and restated), February 28, 2004 (unaudited and previously reported), March 1, 2003 (unaudited and previously restated) and August 30, 2003 (previously restated) 4 Condensed consolidated statements of income - three and six months ended February 28, 2004 (unaudited and restated), February 28, 2004 (unaudited and previously reported), and March 1, 2003 (unaudited and previously restated) 5 Condensed consolidated statements of cash flows - six months ended February 28, 2004 (unaudited and restated) and March 1, 2003 (unaudited and previously restated) 6 Notes to condensed consolidated financial statements 7-11 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 17-18 Part II - OTHER INFORMATION Item 4. Submission of Matters to a Vote of Security Holders 19 Item 6. Exhibits and Reports on Form 8-K 19 SIGNATURES 19 CERTIFICATIONS 20-21 EXHIBITS 99.1 Certification 99.2 Certification Page 3 of 21 RAG SHOPS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (All amounts in thousands)
February 28, February 28, March 1, August 30, 2004 2004 2003 2003 ---- ---- ---- ---- (Unaudited (Unaudited (Unaudited (Note A) and Restated) and Previously and Previously (Previously Reported) Restated) Restated) ASSETS CURRENT ASSETS: Cash $ 1,439 $ 1,439 $ 2,048 $ 835 Investment in common stock - - 269 307 Merchandise inventories 30,075 30,075 28,525 31,995 Prepaid expenses 690 583 230 1,490 Other current assets 761 761 610 431 Deferred taxes 918 918 790 918 ------ ------ ------ ------ Total current assets 33,883 33,776 32,472 35,976 Property and equipment, net 4,258 4,258 4,648 4,580 Deferred income taxes 459 459 374 324 Other assets 31 31 35 29 ------ ------ ------ ------ TOTAL ASSETS $ 38,631 $ 38,524 $ 37,529 $ 40,909 ====== ====== ====== ====== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable-trade $ 9,587 $ 9,587 $ 7,743 $ 11,432 Accrued expenses and other current liabilities 3,877 3,597 3,042 4,315 Accrued salaries and wages 1,114 1,114 1,055 1,103 Deferred Income 233 233 931 582 ------ ------ ------ ------ Total current liabilities 14,811 14,531 12,771 17,432 STOCKHOLDERS' EQUITY: Common stock 48 48 48 48 Additional paid-in capital 6,235 6,235 6,235 6,235 Retained earnings 17,601 17,774 18,493 17,186 Unrealized gain on investment in common stock, net of tax - - 46 72 Treasury stock, at cost, 26,880 shares (64) (64) (64) (64) ------ ------ ------ ------ Total stockholders' equity 23,820 23,993 24,758 23,477 ------ ------ ------ ------ TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 38,631 $ 38,524 $ 37,529 $ 40,909 ====== ====== ====== ======
Note A: Derived from the August 30, 2003 audited balance sheet. See notes to the condensed consolidated financial statements. Page 4 of 21 RAG SHOPS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited) (All amounts in thousands, except share data)
Three Months Ended Six Months Ended ------------------ ---------------- February 28, February 28, March 1, February 28, February 28, March 1, 2004 2004 2003 2004 2004 2003 ---- ---- ---- ---- ---- ---- (Restated) (Previously (Previously (Restated) (Previously (Previously Reported) Restated) Reported) Restated) Net sales $ 32,268 $ 32,268 $ 30,672 $ 66,081 $ 66,081 $ 64,029 Cost of merchandise sold, occupancy and distribution costs 21,356 21,356 20,675 43,666 43,666 42,361 --------- --------- --------- -------- -------- --------- Gross profit 10,912 10,912 9,997 22,415 22,415 21,668 Selling, general and administrative expenses 10,660 10,524 9,837 21,883 21,603 20,574 --------- --------- --------- -------- -------- --------- 252 388 160 532 812 1,094 Gain from sale of securities 161 161 - 161 161 - --------- --------- --------- -------- -------- --------- Income from operations 413 549 160 693 973 1,094 Interest income (expense), net 1 1 6 (24) (24) 1 --------- --------- --------- -------- -------- --------- Income before provision for income taxes 414 550 166 669 949 1,095 Provision for income taxes 155 206 75 254 361 493 --------- --------- --------- -------- --------- --------- Net income $ 259 $ 344 $ 91 $ 415 $ 588 $ 602 ========= ========= ========= ========= ========= ========= EARNINGS PER COMMON SHARE: Basic and diluted $ .05 $ .07 $ .02 $ .09 $ .12 $ .13 ========= ========= ========= ========= ========= ========= WEIGHTED AVERAGE COMMON SHARES OUTSTANDING: Basic 4,797,983 4,797,983 4,797,983 4,797,983 4,797,983 4,797,983 ========= ========= ========= ========= ========= ========= Diluted 4,829,344 4,829,344 4,816,793 4,833,658 4,833,658 4,828,015 ========= ========= ========= ========= ========= =========
See notes to the condensed consolidated financial statements Page 5 of 21 RAG SHOPS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (All amounts in thousands)
Six Months Ended ---------------- February 28, 2004 February 28, 2004 March 1, 2003 ----------------- ----------------- ------------- (Restated) (Previously (Previously Reported) Restated) Cash flows from operating activities: Net income $ 415 $ 588 $ 602 Adjustments to reconcile net income to cash provided by operating activities: Depreciation and amortization 758 758 663 Loss on disposition of property and equipment - - 34 Amortization of deferred income (349) (349) (465) Gain from sale of securities (161) (161) - Changes in assets and liabilities: (Increase) decrease in: Merchandise inventories 1,920 1,920 3,198 Prepaid expenses 718 825 1,019 Other current assets (330) (330) (156) Other assets (2) (2) 8 Increase (decrease) in: Accounts payable-trade (1,845) (1,845) (2,565) Accrued expenses and other current liabilities (438) (718) 54 Accrued salaries and wages 11 11 (243) -------- -------- ------- Net cash provided by operating activities 697 697 2,149 -------- -------- ------- Cash flows from investing activities: Proceeds from sale of securities 343 343 - Proceeds from sale of property and equipment 3 3 - Payments for purchases of property and equipment (439) (439) (1,060) -------- -------- ------- Net cash used in investing activities (93) (93) (1,060) -------- -------- ------- Cash flows from financing activities: Proceeds from issuance of note payable - bank 11,665 11,665 6,750 Repayments of note payable - bank (11,665) (11,665) (6,750) -------- -------- ------- Net cash provided by financing activities - - - -------- -------- ------- Net increase in cash 604 604 1,089 Cash, beginning of period 835 835 959 -------- -------- ------- Cash, end of period $ 1,439 $ 1,439 $ 2,048 ======== ======== ======== Supplemental disclosures of cash flow information: Cash paid during the period for: Interest $ 36 $ 36 $ 5 ======== ======== ======== Income taxes $ 121 $ 121 $ 17 ======== ======== ========
See notes to the condensed consolidated financial statements Page 6 of 21 RAG SHOPS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS THREE AND SIX MONTHS ENDED FEBRUARY 28, 2004 AND MARCH 1, 2003 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 February 28, 2004 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/A for the year ended August 30, 2003 filed with the Securities and Exchange Commission in January 2004. Certain reclassifications have been made to prior year amounts in order to conform to the presentation for the current year. Restatement Subsequent to filing Form 10-Q for the period ended May 29, 2004, the Company met (the "Meeting") with its new group health insurance broker (the "Broker") to discuss the status of the Company's group health insurance plan (the "Plan") renewal effective September 1, 2004. The Plan is self-funded and supplemented with an insurance policy for individual stop loss and aggregate stop loss coverage. The nature of this arrangement contemplates that the Company negotiate aggregate stop loss attachment factors ("Factors") with its insurance carrier annually and, based upon such Factors, that the Company accrue, on a monthly basis, an amount for the Plan's insurance expense which is then included in selling, general and administrative expenses. The Factors are multiplied by the covered lives to determine the Company's maximum Plan insurance expense amount (the "Maximum"). At the Meeting, the Broker presented comparative Plan information that included Factors for the Plan year effective September 1, 2003 (the "Current Plan"). The Factors for the Current Plan, obtained by the Broker from the Plan's insurance carrier, were greater than the Factors used by the Company in determining its accrual for the Plan insurance expense during the first three quarterly fiscal periods for the year ended August 28, 2004. Upon further investigation following the Meeting, the Company was able to ascertain that the Factors used to accrue for the Current Plan insurance expense were the Factors from the prior year rather than the current year. In accordance with APB Opinion No. 20 "Accounting Changes", the Company has determined the aforementioned to be an error in previously issued financial statements resulting from the use of the incorrect Factors. In its restated financial statements, the Company has reflected the corrected accrual amount based upon applicable current year Factors to record additional Plan insurance expense of $144,000, $136,000 and $139,000 for the three months ended November 29, 2003, February 28, 2004 and May 29, 2004, respectively. The Company is accruing to the Maximum since the Company estimates that the actual amount of health insurance claims to be paid for the current fiscal year is at or near the Maximum. The Company will restate prior financial statements pursuant to Financial Accounting Standards Board Statement No. 3 "Reporting Accounting Changed in Interim Financial Statements" for this item and the resulting income tax effect. Page 7 of 21 Please refer to amendments to periodic reports filed with the Securities and Exchange Commission for periods between November 29, 2003 and May 29, 2004. Accounting Policies Refer to the financial statements and notes included in the Company's Annual Report on Form 10-K/A 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 $446,000 and $819,000 for the three and six months ended February 28, 2004, and $219,000 and $557,000 for the three and six months ended March 1, 2003, 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 $1,639,000 and $4,132,000 for the three and six months ended February 28, 2004 and $1,476,000 and $3,744,000 for the three and six months ended March 1, 2003, respectively. Recent Developments-Previous Restatement On February 25, 2004, the Company announced that it had retained the investment banking firm of SunTrust Robinson Humphrey to provide financial advisory services and review possible strategic alternatives for the Company, including, but not necessarily limited to, sale, merger or other corporate transactions, in an effort to maximize shareholder value. There is no assurance that any transaction will result from the engagement or that, if a transaction does occur, it will be on terms that all shareholders consider favorable. As of the date of this filing, the Company has no further developments to report. 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 ("FASB") 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 Page 8 of 21 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. In January 2003, the FASB issued FASB Interpretation No. 46, "Consolidation of Variable Interest Entities" ("FIN 46"). FIN 46 clarifies the application of Accounting Research Bulletin 51, "Consolidation Financial Statements," for entities that do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties or in which equity investors do not have the characteristics of a controlling financial interest ("variable interest entities"). Variable interest entities within the scope of FIN 46 will be required to be consolidated by their primary beneficiary. The primary beneficiary of a variable interest entity is determined to be the party that absorbs a majority of the entity's expected losses, receives a majority of its expected returns or both. FIN 46 applies immediately to variable interest entities created after January 31, 2003, and to variable interest entities in which an enterprise obtains an interest after that date. The Company's operations and financial position have not been affected by the adoption of FIN 46. In December 2003, a modification to FIN 46 was issued ("FIN 46R"), which delayed the effective date until no later than fiscal periods ending after March 15, 2004, and provided additional technical clarification to implementation issues. The Company currently does not have any variable interest entities as defined in FIN 46R. 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 six months ended February 28, 2004 and March 1, 2003 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. 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 Six Months Ended ------------------ ---------------- February 28, February 28, March 1, February 28, February 28, March 1, 2004 2004 2003 2004 2004 2003 ---- ---- ---- ---- ---- ---- (Restated) (Previously (Previously (Restated) (Previously (Previously Reported) Restated) Reported) Restated) Net income as reported $ 259,000 $ 344,000 $ 91,000 $ 415,000 $ 588,000 $ 602,000 Deduct: Total stock based employee Compensation determined under fair Value based method for options granted, modified, or settled, net of related tax effect 6,000 6,000 1,000 15,000 15,000 1,000 ----------- --------- ---------- ----------- ---------- --------- Pro forma net income $ 253,000 $ 338,000 $ 90,000 $ 400,000 $ 573,000 $ 601,000 =========== ========= ========== =========== =========== =========== Earnings per share Basic - as reported $ .05 $ .07 $ .02 $ .09 $ .12 $ .13 =========== ========= ========== =========== =========== =========== Basic - pro forma $ .05 $ .07 $ .02 $ .08 $ .12 $ .13 =========== ========= ========== =========== =========== =========== Diluted - as reported $ .05 $ .07 $ .02 $ .09 $ .12 $ .13 =========== ========= ========== =========== =========== =========== Diluted - pro forma $ .05 $ .07 $ .02 $ .08 $ .12 $ .13 =========== ========= ========== =========== =========== ===========
Page 9 of 21 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 ------------------ ---------------- February 28, February 28, March 1, February 28, February 28, March 1, 2004 2004 2003 2004 2004 2003 ---- ---- ---- ---- ---- ---- (Restated) (Previously (Previously (Restated) (Previously (Previously Reported) Restated) Reported) Restated) Numerator for basic and diluted earnings per share: Net Income $ 259,000 $ 344,000 $ 91,000 $ 415,000 $ 588,000 $ 602,000 =========== =========== =========== =========== =========== =========== Denominator: Denominator for basic earnings per share- weighted average shares 4,797,983 4,797,983 4,797,983 4,797,983 4,797,983 4,797,983 Effect of dilutive securities: Employee stock options 31,361 31,361 18,810 35,675 35,675 30,032 ---------- ----------- ---------- ----------- ---------- ----------- Denominator for diluted earnings per share adjusted weighted average shares And assumed conversions 4,829,344 4,829,344 4,816,793 4,833,658 4,833,658 4,828,015 =========== =========== =========== =========== =========== =========== Basic earnings per share $ .05 $ .07 $ .02 $ .09 $ .12 $ .13 =========== =========== =========== =========== =========== =========== Diluted earnings per share $ .05 $ .07 $ .02 $ .09 $ .12 $ .13 =========== =========== =========== =========== =========== ===========
Stock options excluded from the above calculation, as the effect of such options would be anti-dilutive, aggregated 10,000 and 0 for the three and six months ended February 28, 2004 and 2,000 and 0 for the three and six months ended March 1, 2003, 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. 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. Page 10 of 21 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 February 28, 2004 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 February 28, 2004, 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: ------ February 28, 2004 February 28, 2004 March 1, 2003 August 30, 2003 ----------------- ----------------- ------------- --------------- (Amounts in thousands) (Restated) (Previously (Previously (Previously Reported) Restated) Restated) Straight line rent $ 954 $ 954 $ 768 $ 882 Other accrued expenses and current liabilities 2,923 2,643 2,274 3,433 -------- -------- -------- -------- $ 3,877 $ 3,597 $ 3,042 $ 4,315 ======== ======== ======== ========
NOTE 7- SCHEDULE OF COMPREHENSIVE INCOME The Schedule of Comprehensive Income is as follows:
Three Months Ended Six Months Ended ------------------ ---------------- February 28, February 28, March 1, February 28, February 28, March 1, 2004 2004 2003 2004 2004 2003 ---- ---- ---- ---- ---- ---- (Amounts in thousands) (Restated) (Previously (Previously (Restated) (Previously (Previously Reported) Restated) Reported) Restated) Net income $ 259 $ 344 $ 91 $ 415 $ 588 $ 602 Other comprehensive income, net of taxes: Unrealized loss on investment in common stock - - (10) - - (12) Reversal of unrealized gain due to sale of securities (82) (82) - (72) (72) - --------- ---------- ---------- ---------- ---------- ---------- Comprehensive income $ 177 $ 262 $ 81 $ 343 $ 516 $ 590 ========= ========== ========== ========== ========== ==========
As a result of the sale of securities from "investment in common stock" in the current quarter, the "unrealized gain on investment in common stock, net of tax", previously reported in stockholders' equity, has been realized in net income. Page 11 of 21 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. Restatement Subsequent to filing Form 10-Q for the period ended May 29, 2004, the Company met (the "Meeting") with its new group health insurance broker (the "Broker") to discuss the status of the Company's group health insurance plan (the "Plan") renewal effective September 1, 2004. The Plan is self-funded and supplemented with an insurance policy for individual stop loss and aggregate stop loss coverage. The nature of this arrangement contemplates that the Company negotiate aggregate stop loss attachment factors ("Factors") with its insurance carrier annually and, based upon such Factors, that the Company accrue, on a monthly basis, an amount for the Plan's insurance expense which is then included in selling, general and administrative expenses. The Factors are multiplied by the covered lives to determine the Company's maximum Plan insurance expense amount (the "Maximum"). At the Meeting, the Broker presented comparative Plan information that included Factors for the Plan year effective September 1, 2003 (the "Current Plan"). The Factors for the Current Plan, obtained by the Broker from the Plan's insurance carrier, were greater than the Factors used by the Company in determining its accrual for the Plan insurance expense during the first three quarterly fiscal periods for the year ended August 28, 2004. Upon further investigation following the Meeting, the Company was able to ascertain that the Factors used to accrue for the Current Plan insurance expense were the Factors from the prior year rather than the current year. In accordance with APB Opinion No. 20 "Accounting Changes", the Company has determined the aforementioned to be an error in previously issued financial statements resulting from the use of the incorrect Factors. In its restated financial statements, the Company has reflected the corrected accrual amount based upon applicable current year Factors to record additional Plan insurance expense of $144,000, $136,000 and $139,000 for the three months ended November 29, 2003, February 28, 2004 and May 29, 2004, respectively. The Company is accruing to the Maximum since the Company estimates that the actual amount of health insurance claims to be paid for the current fiscal year is at or near the Maximum. The Company will restate prior financial statements pursuant to Financial Accounting Standards Board Statement No. 3 "Reporting Accounting Changed in Interim Financial Statements" for this item and the resulting income tax effect. Please refer to amendments to periodic reports filed with the Securities and Exchange Commission for periods between November 29, 2003 and May 29, 2004 for related restatements. Refer to Note 1 - Recent Developments in the Notes to Condensed Consolidated Financial Statements. Page 12 of 21 Recent Developments-Previous Restatement On February 25, 2004, the Company announced that it had retained the investment banking firm of SunTrust Robinson Humphrey to provide financial advisory services and review possible strategic alternatives for the Company, including, but not necessarily limited to, sale, merger or other corporate transactions, in an effort to maximize shareholder value. There is no assurance that any transaction will result from the engagement or that, if a transaction does occur, it will be on terms that all shareholders consider favorable. As of the date of this filing, the Company has no further developments to report. 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 second 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.
Three Months Ended Six Months Ended ------------------ ---------------- February 28, February 28, March 1, February 28, February 28, March 1, 2004 2004 2003 2004 2004 2003 ---- ---- ---- ---- ---- ---- (Restated) (Previously (Previously (Restated) (Previously (Previously Reported) Restated) Reported) Restated) Net sales 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% Cost of merchandise sold, occupancy and distribution costs 66.2 66.2 67.4 66.1 66.1 66.2 ----- ----- ----- ----- ----- ----- Gross profit 33.8 33.8 32.6 33.9 33.9 33.8 Selling general and administrative expenses 33.0 32.6 32.1 33.1 32.7 32.1 Gain from sale of securities 0.5 0.5 - 0.2 0.2 - ----- ----- ----- ----- ----- ----- Income from operations 1.3 1.7 0.5 1.0 1.5 1.7 ----- ----- ----- ----- ----- ----- Net Income 0.8% 1.1% 0.3% 0.6% 0.9% 0.9% ===== ===== ===== ===== ===== =====
The Company's net sales increased $1,596,000 and $2,052,000 for the three and six months ended February 28, 2004, representing a 5.2% and 3.2% increase, respectively, over the comparable prior periods. The increase in net sales for the three months ended February 28, 2004 resulted from an increase in comparable store sales of $89,000 or 0.3% and the balance of $1,507,000 related to revenue from larger new store openings, net of sales reductions for smaller closed stores. 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 sales for the three months ended February 28, 2004 were adversely affected by December and January inclement weather in the northeast where our main concentration of stores is located. The increase in net sales for the six months ended February 28, 2004 was attributable to a $2,543,000 increase from the larger new store sales, net of sales reductions from the smaller closed stores partially offset by a $491,000 or 0.2% decrease in comparable store sales. In addition to the aforementioned inclement weather, the six months ended February 28, 2004 were also adversely affected by changes in the Company's advertising program, implemented in the fourth quarter of fiscal 2003 that continued during the first quarter of fiscal 2004. However, management believes favorable results from changes to the Company's advertising program instituted in December 2003 were a positive factor in achieving the increase in comparable store sales in the three months ended February 28, 2004 notwithstanding the inclement weather previously mentioned. Page 13 of 21 The Company divides its business into three broad categories - fabrics, crafts and floral. For the six month period this year, crafts sales increased significantly over the comparable prior year period reflecting the Company's expanded programs and marketing. Fabric sales, while down for the six month period this year compared to last year, began to show improvement late in the current six month period resulting from improved in-stock position and changes in our marketing program implemented in December 2003. Floral sales declined slightly for the six month period this year compared to last year. We attribute the slight decline in floral to reductions in inventory as we prepare for product line changes to be implemented later in fiscal 2004. Gross profit, as a percentage of net sales, increased by 1.2% for the current quarter compared to the prior comparable period as a result of (i) an increase in vendor participation programs, (ii) a decrease in the provision for inventory shrinkage due to favorable results experienced during the physical inventory conducted in the final quarter of fiscal 2003 as compared to the prior comparable period, (iii) a decrease in promotional markdowns, and (iv) a decrease in the initial merchandise cost due to an increase in sales of merchandise with greater profit margins that was partially offset by an increase in freight costs. Gross profit, as a percentage of net sales, increased by 0.1% for the six months ended February 28, 2004 compared to the comparable prior period due to the decrease in the provision for shrinkage, increase in vendor participation programs and decrease in the initial merchandise cost, all as previously mentioned, that was partially offset by an increase in promotional markdowns, primarily in the three months ended November 29, 2003 and an increase in freight costs. Selling, general and administrative expenses increased for the three and six months ended February 28, 2004 by $823,000 and $1,309,000, respectively, from the comparable prior periods. Additional payroll and payroll related expense, increased advertising expense, higher insurance costs and increased professional fees 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. 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 and an increase in the group health insurance costs. The increase in professional fees arose from costs related to the retention of SunTrust Robinson Humphrey as described above and from costs related to the recently reported gain recognized from the demutualization of an insurance company which had issued life insurance policies on certain of the Company's executive officers. Selling, general and administrative expenses, as a percentage of net sales, increased by 0.9% and 1.0% for the three and six months ended February 28, 2004, respectively, compared to the comparable prior periods principally due to these expenses increasing at a greater rate than net sales. Interest income, net, decreased $5,000 and $25,000 for the three and six months ended February 28, 2004, respectively, from the comparable prior periods. This decrease was attributable to increased borrowings under the credit facility and 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 increased by $168,000 for the three months ended February 28, 2004, as compared to the prior comparable period. The increase resulted from increased sales and the related increase in gross profit, partially offset by an increase in selling, general and administrative expenses, and from a realized gain from the sale of securities. Net income decreased by $187,000 for the six months ended February 28, 2004, as compared to the prior period. The decrease is primarily due to an increase in selling, general and administrative expenses that was partially offset by the realized gain from the sale of securities. Page 14 of 21 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 February 28, 2004, 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 $528,000 for the six months ended February 28, 2004 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. Borrowings under the line of credit bear interest at the bank's prime rate (4.00% at February 28, 2004). 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 six month periods ended February 28, 2004 and March 1, 2003, respectively. There were no direct borrowings outstanding under the line of credit at February 28, 2004 or March 1, 2003. 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 February 28, 2004 amounted to $697,000, and $439,000 was used for purchases of property and equipment. Net cash from operating activities resulted primarily from net income of $415,000, decreases in merchandise inventories of $1,920,000 and prepaid expenses of $718,000 that were partially offset by decreases in accounts payable-trade of $1,845,000 and accrued expenses and other current liabilities of $438,000. During the six months ended February 28, 2004 the Company opened one store, did not close, expand or relocate 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 two 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 February 28, 2004, 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. Page 15 of 21 Critical Accounting Policies Refer to the financial statements and notes included in the Company's Annual Report on Form 10-K/A 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 $446,000 and $819,000 for the three and six months ended February 28, 2004, and $219,000 and $557,000 for the three and six months ended March 1, 2003, 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 $1,639,000 and $4,132,000 for the three and six months ended February 28, 2004 and $1,476,000 and $3,744,000 for the and six months ended March 1, 2003, 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 ("FASB") 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. In January 2003, the FASB issued FASB Interpretation No. 46, "Consolidation of Variable Interest Entities" ("FIN 46"). FIN 46 clarifies the application of Accounting Research Bulletin 51, "Consolidation Financial Statements," for entities that do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties or in which equity investors do not have the characteristics of a controlling financial interest ("variable interest entities"). Variable interest entities within the scope of FIN 46 will be required to be consolidated by their primary beneficiary. The primary beneficiary of a variable interest entity is determined to be the party that absorbs a majority of the entity's expected losses, receives a majority of its expected returns or both. FIN 46 applies immediately to variable interest entities created after January 31, 2003, and to Page 16 of 21 variable interest entities in which an enterprise obtains an interest after that date. The Company's operations and financial position have not been affected by the adoption of FIN 46. In December 2003, a modification to FIN 46 was issued ("FIN 46R"), which delayed the effective date until no later than fiscal periods ending after March 15, 2004, and provided additional technical clarification to implementation issues. The Company currently does not have any variable interest entities as defined in FIN 46R. 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 February 28, 2004 and March 1, 2003, 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 February 28, 2004). There were no loans outstanding under any such line of credit at February 28, 2004 or March 1, 2003. The following table details future projected payments for the Company's significant contractual obligations as of February 28, 2004:
Computer and Other Technology Operating Leases Related Commitments Total Six Months Ending: 2004 $ 4,927,340 $ 222,945 $ 5,150,285 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 ----------- ---------- ----------- $ 43,500,217 $ 378,286 $ 43,878,503 =========== ========== ===========
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 as of the end of the period covered by 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. We restated our unaudited condensed consolidated statement of operations and cash flows for each of the quarterly periods in the 2004 fiscal year, and the unaudited condensed consolidated balance sheets as of November 29, 2003, February 28, 2004 and May 29, 2004. For a description of the restatement, see Note 1 "Restatement" to the consolidated financial statements in Item 1 of this Page 17 of 21 report. The Company's auditors, Grant Thornton LLP, have advised us that the failure to obtain a written countersigned amendment to our health insurance plan to reflect the current year renewal changes, including attachment factors and, subsequently, to effectively communicate the applicable factors to accounting personnel for use in determining the required self-insurance accruals recorded on a monthly basis constitutes a "significant deficiency" and a "material weakness" (as defined under the standards established by the Public Company Accounting Oversight Board) in the Company's internal controls and procedures over financial reporting. The Company has disclosed to the Audit Committee of the Board of Directors this issue as prescribed by Section 404(a) of the Sarbanes-Oxley Act of 2002. Management is in the process of revising its procedures to address this deficiency. It should be noted that any control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected. Page 18 of 21 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 13, 2004. Mr. Stanley Berenzweig was elected a Class I Director by a vote of 4,580,427 shares in favor and 136,608 shares withheld and Mr. Fred J. Damiano was elected a Class I Director by a vote of 4,546,178 shares in favor and 170,857 shares withheld. Mr. Jeffrey Gerstel, Ms. Judith Lombardo and Mr. Mario Ciampi, Class II Directors, and Mr. Steven B. Barnett and Mr. Alan C. Mintz, Class III Directors, will continue to serve for their term expiring in 2005 and 2006, respectively. The selection of the firm of Grant Thornton LLP as auditors for the Company's fiscal year ending August 28, 2004 was ratified by a vote of 4,686,999 in favor, 28,189 against, 1,847 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 Operating Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 1350) 99.2 Certification of Acting Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 1350) (b) Reports on Form 8-K filed during the quarter ended February 28, 2004: Report on Form 8-K, filed with the Securities and Exchange Commission on February 25, 2004, reporting information pursuant to Items 5 and 7. 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: September 20, 2004 /S/ Jeffrey C. Gerstel ---------------------- Jeffrey C. Gerstel President and Chief Operating Officer Date: September 20, 2004 /S/ Steven B. Barnett --------------------- Steven B. Barnett Acting Principal Financial Officer, and Acting Principal Accounting Officer Page 19 of 21 CERTIFICATIONS I, Jeffrey C. Gerstel, certify that: 1. I have reviewed this quarterly report on Form 10-Q/A of Rag Shops, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report ( the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. SIGNATURE TITLE(S) DATE /S/ JEFFREY C. GERSTEL Principal Executive September 20, 2004 ---------------------- and Director Jeffrey C. Gerstel Page 20 of 21 CERTIFICATIONS I, Steven B. Barnett, certify that: 1. I have reviewed this quarterly report on Form 10-Q/A of Rag Shops, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report ( the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. SIGNATURE TITLE(S) DATE /S/ STEVEN B. BARNETT Executive Vice President, September 20, 2004 --------------------- Acting Chief Financial Officer Steven B. Barnett Page 21 of 21 EXHIBIT 99.1 RAG SHOPS, INC. CERTIFICATION OF CHIEF OPERATING OFFICER PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 (18 U.S.C. Section 1350) The undersigned, Jeffrey C. Gerstel, the Chief Operating Officer of Rag Shops, Inc. (the "Company"), has executed this Certification in connection with the filing with the Securities and Exchange Commission of the Company's Quarterly Report on Form 10-Q/A for the quarter ended February 28, 2004 (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 September 2004. /S/ Jeffrey C. Gerstel ---------------------- Chief Operating 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. Section 1350) The undersigned, Steven B. Barnett, the Acting Chief Financial Officer of Rag Shops, Inc. (the "Company"), has executed this Certification in connection with the filing with the Securities and Exchange Commission of the Company's Quarterly Report on Form 10-Q/A for the quarter ended February 28, 2004 (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 September 2004. /S/ Steven B. Barnett --------------------- Executive Vice President, Acting Chief Financial Officer