FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(MARK ONE)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Quarterly Period Ended November 29, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Transition Period From ... to...
Commission File No. 0-19194
RAG SHOPS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 51-0333503
(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) Number)
111 WAGARAW ROAD
HAWTHORNE, NEW JERSEY 07506
(Address of principal executive (Zip Code)
offices)
(973) 423-1303
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
Yes__X__ No____
-
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes____ No__X__
-
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
CLASS OUTSTANDING AT DECEMBER 31, 2003
Common stock, par value $.01 4,797,983
RAG SHOPS, INC. AND SUBSIDIARIES
INDEX
Page
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed consolidated balance sheets - November 29,
2003 (unaudited), November 30, 2002 (unaudited and restated)
and August 30, 2003 (restated) 3
Condensed consolidated statements of income - three
months ended November 29, 2003 (unaudited) and
November 30, 2002 (unaudited) 4
Condensed consolidated statements of cash flows -
three months ended November 29, 2003 (unaudited) and
November 30, 2002 (unaudited) 5
Notes to condensed consolidated financial statements 6-11
Item 2.Management's Discussion and Analysis of Financial
Condition and Results of Operations 12-17
Item 3.Quantitative and Qualitative Disclosures About Market Risk 17
Item 4.Controls and Procedures 17
Part II - OTHER INFORMATION
Items 1. - 5. 18
Item 6. Exhibits and Reports on Form 8-K 18
SIGNATURES 18
CERTIFICATIONS 19-20
EXHIBITS
99.1 Certification
99.2 Certification
Page 2 of 20
RAG SHOPS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(All amounts in thousands)
November 29, November 30, August 30,
2003 2002 2003
---- ---- ----
(Unaudited) (Unaudited) (Note A)
(Restated) (Restated)
ASSETS
CURRENT ASSETS:
Cash $ 2,473 $ 2,433 $ 835
Investment in common stock 323 283 307
Merchandise inventories 30,188 29,812 31,995
Prepaid expenses 1,091 655 1,490
Other current assets 633 705 431
Deferred income taxes 918 790 918
------- ------- -------
Total current assets 35,626 34,678 35,976
Property and equipment, net 4,561 4,282 4,580
Deferred income taxes - long term 318 370 324
Other assets 32 41 29
------- ------- -------
TOTAL ASSETS $ 40,537 $ 39,371 $ 40,909
======= ======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-term bank borrowings $ 175 $ - $ -
Accounts payable-trade 10,859 9,854 11,432
Accrued expenses and other current liabilities 4,580 3,774 4,315
Accrued salaries and wages 785 1,066 1,103
Deferred income 407 - 582
------- ------- -------
Total current liabilities 16,806 14,694 17,432
STOCKHOLDERS' EQUITY:
Common stock 48 48 48
Additional paid-in capital 6,235 6,235 6,235
Retained earnings 17,430 18,402 17,186
Unrealized gain on investment in common stock, net of tax 82 56 72
Treasury stock, at cost, 26,880 shares (64) (64) (64)
-------- -------- --------
Total stockholders' equity 23,731 24,677 23,477
------- ------- -------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 40,537 $ 39,371 $ 40,909
======= ======= =======
Note A: Derived from the August 30, 2003 audited balance sheet.
See notes to the condensed consolidated financial statements.
Page 3 of 20
RAG SHOPS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(All amounts in thousands, except share data)
Three Months Ended
November 29, November 30,
2003 2002
---- ----
Net sales $ 33,814 $ 33,357
Cost of merchandise sold, occupancy and
distribution costs 22,310 21,686
------ ------
Gross profit 11,504 11,671
Selling, general and administrative expenses 11,080 10,737
------ ------
Income from operations 424 934
Interest expense, net (25) (5)
------- -------
Income before provision for income taxes 399 929
Provision for income taxes 155 418
------ ------
Net income $ 244 $ 511
====== ======
EARNINGS PER COMMON SHARE:
Basic and diluted $ .05 $ .11
====== ======
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING:
Basic 4,797,983 4,797,983
========= =========
Diluted 4,837,942 4,835,603
========= =========
See notes to the condensed consolidated financial statements.
Page 4 of 20
RAG SHOPS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(All amounts in thousands)
Three Months Ended
November 29, 2003 November 30, 2002
----------------- -----------------
Cash flows from operating activities:
Net income $ 244 $ 511
Adjustments to reconcile net income to net cash
provided by operating activities:
Amortization of deferred income (175) -
Depreciation and amortization 359 332
Changes in assets and liabilities:
(Increase) decrease in:
Merchandise inventories 1,807 515
Prepaid expenses 399 594
Other current assets (202) (251)
Other assets (3) 2
Increase (decrease) in:
Accounts payable-trade (573) (454)
Accrued expenses and other current liabilities 265 820
Accrued salaries and wages (318) (232)
------- -------
Net cash provided by operating activities 1,803 1,837
------- -------
Cash flows from investing activities:
Proceeds form sale of property and equipment 3 -
Payments for purchases of property and equipment (343) (363)
------- -------
Net cash used in investing activities (340) (363)
-------- -------
Cash flows from financing activities
Proceeds from issuance of note payable - bank 10,320 6,750
Repayments of note payable - bank (10,145) (6,750)
-------- -------
Net cash provided by financing activities 175 -
------- -------
Net increase in cash 1,638 1,474
Cash, beginning of period 835 959
------- -------
Cash, end of period $ 2,473 $ 2,433
======= =======
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 25 $ 5
======= =======
Income taxes $ 8 $ 2
======= =======
See notes to the condensed consolidated financial statements
Page 5 of 20
RAG SHOPS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED NOVEMBER 29, 2003 AND NOVEMBER 30, 2002
NOTE 1 - BASIS OF PRESENTATION
The accompanying financial statements are unaudited, but in the opinion of
management reflect all adjustments, which consist of normal recurring accruals
necessary for a fair presentation of the consolidated financial statements for
the interim periods. Since the Company's business is seasonal, the operating
results for the three months ended November 29, 2003 are not necessarily
indicative of results for other quarters or the fiscal year.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted. It is suggested that these condensed
consolidated financial statements be read in conjunction with the financial
statements and notes included in the Company's Annual Report on Form 10-K for
the year ended August 30, 2003 filed with the Securities and Exchange Commission
in November 2003.
As noted in Recent Developments, the Company has restated its financial
statements for fiscal years 2003 and 2002 and the applicable interim periods.
Accounting Policies
Refer to the financial statements and notes included in the Company's Annual
Report on Form 10-K for the complete disclosure of the Company's accounting
policies. Certain policies are as follows:
Cost of merchandise sold, distribution and occupancy costs include merchandise
purchases, inbound freight costs, distribution costs, shrinkage provision,
cooperative advertising, vendor allowances, vendor rebates, store rent and other
store-related occupancy costs. Distribution costs have been reclassified to cost
of merchandise sold as of the beginning of the quarter ended May 31, 2003. These
expenses were previously included in selling, general and administrative
expenses. All comparative periods have been restated.
Cooperative advertising payments received from vendors have been reclassified to
cost of merchandise sold as of the beginning of the quarter ended March 1, 2003.
These payments were previously offset against advertising expenses. The amounts
included in cost of merchandise sold related to cooperative advertising payments
received was $372,000 and $338,000 for the three months ended November 29, 2003
and November 30, 2002, respectively. All comparative periods have been restated.
Advertising costs are expensed as incurred and are included in store expenses as
part of selling, general and administrative expenses which amounted to
$2,493,000 and $2,268,000 for the three months ended November 29, 2003 and
November 30, 2002, respectively.
Recent Developments
In December 2003, the Company received a check from Principal Financial Group,
Inc. ("Principal") reflecting dividends payable in connection with common stock
of Principal. Receipt of the dividend check prompted a Company inquiry which
revealed that, due to its ownership of certain life insurance policies issued by
Principal Life Insurance Company, a subsidiary of Principal, and maintained by
the Company for certain key executive officers, the Company had received 9,766
shares of Principal's common stock (the "Shares") in December 2001 as
Page 6 of 20
consideration inthe demutualization of Principal's predecessor. The effective
date of the demutualization was in October 2001 and the Shares were issued in
December 2001 to one of the Company's subsidiaries, the owner of the life
insurance policies, in book-entry form as uncertificated shares and maintained
in an account with Mellon Investor Services established by Principal in
connection with its demutualization transaction. The Company had not previously
recognized or recorded the Shares issued pursuant to such event.
The Company has determined it will restate prior financial statements to
properly reflect the transaction in the first quarter of fiscal 2002. In its
restated financial statements, the Company has recorded the then fair market
value ($180,671) of the Shares as part of operating income as of October 2001,
in accordance with Emerging Issues Task Force Issue No. 99-4, "Accounting for
Stock Received from the Demutualization of a Mutual Insurance Company". The
Company has classified its holding in the Shares as "available-for-sale"
pursuant to Statement of Financial Accounting Standards No. 115 "Accounting for
Investments", whereby the investment will be carried at fair market value and
subsequent changes in the market value of the investment will be reflected as an
unrealized gain or loss in the stockholders' equity section of the balance
sheets, net of deferred income taxes. A Schedule of Other Comprehensive Income
will be presented for all periods pursuant to Statement of Financial Accounting
Standards No. 130 "Reporting Comprehensive Income". Comprehensive income
consists of net income or loss for the current period as well as income,
expenses, gains or losses net of income taxes arising during the period that are
included in separate components of equity. It includes the unrealized gains and
losses on the Company's available-for-sale security, net of taxes.
The fair market value of the Shares as of the close of business on November 29,
2003 was $323,352. Amendments to previous reports of the Company filed with the
Securities and Exchange Commission, under the Securities Exchange Act of 1934,
as amended, will be filed expeditiously and will include restatement of the
financial statements therein, respectively, summarized as follows:
Current Earnings
assets Stockholders' Equity per share
------ Deferred -------------------- Provision --------- Total
Investment income Unrealized Gain from for Net Basic compre-
in common taxes- gain, net Retained demutual- income income and hensive
stock long term of taxes earnings ization taxes (loss) Diluted income
----- --------- -------- -------- ------- ----- ------ ------- ------
(Amounts in thousands except earnings per share)
Quarterly Period Ended December 1, 2001
Reported $ - $ 436 $ - $18,892 $ - $ 888 $1,390 $ 0.29 $ 1,390
Restated 224 336 24 18,992 181 969 1,490 0.31 1,514
Quarterly Period Ended March 2, 2002
Reported - 436 - 19,021 129 129
Restated 242 328 34 19,121 129 139
Quarterly Period Ended June 1, 2002
Reported - 436 - 19,111 90 90
Restated 297 303 64 19,211 90 120
Fiscal Year Ended August 31, 2002
Reported - 497 - 17,791 - 236 290 0.06 290
Restated 286 369 58 17,891 181 317 390 0.08 448
Quarterly Period Ended November 30, 2002
Reported - 497 - 18,302 511 511
Restated 283 370 56 18,402 511 509
Page 7 of 20
Current Earnings
assets Stockholders' Equity per share
------ Deferred -------------------- Provision --------- Total
Investment income Unrealized Gain from for Net Basic compre-
in common taxes- gain, net Retained demutual- income income and hensive
stock long term of taxes earnings ization taxes (loss) Diluted income
----- --------- -------- -------- ------- ----- ------ ------- ------
(Amounts in thousands except earnings per share)
Quarterly Period Ended March 1, 2003
Reported $ - $ 497 $ - $ 18,393 $ 91 $ 91
Restated 269 374 46 18,493 91 81
Quarterly Period Ended May 31, 2003
Reported - 497 - 18,141 (251) (251)
Restated 310 361 74 18,241 (251) (223)
Fiscal Year Ended August 30, 2003
Reported - 459 - 17,086 (705) (705)
Restated 307 324 72 17,186 (705) (691)
Recent Accounting Pronouncements
In November 2002, the Emerging Issues Task Force reached a consensus on Issue
No. 00-21, "Revenue Arrangements with Multiple Deliverables," ("Issue No.
00-21") which requires that revenue from sales with multiple deliverables be
accounted for based on a determination of whether the multiple deliverables
qualify to be accounted for as separate units of accounting. The consensus is
effective prospectively for arrangements entered into in fiscal periods
beginning after June 15, 2003. The Company adopted the provision of this
statement, which did not have an impact in its consolidated financial position
or results of operations.
In May 2003, the Financial Accounting Standards Board issued SFAS No. 150,
"Accounting for Certain Instruments with Characteristics of Both Liabilities and
Equity" ("SFAS No. 150"), which establishes standards for how an issuer
classifies and measures certain financial instruments with characteristics of
both liabilities and equity. SFAS No. 150 requires that an issuer classify a
financial instrument that is within its scope, which may have previously been
reported as equity, as a liability or an asset in some circumstances. SFAS No.
150 is effective for financial instruments entered into or modified after May
31, 2003, and otherwise is effective at the beginning of the first interim
period beginning after June 15, 2003. The Company adopted the provision of this
statement, which did not have an impact in its consolidated financial position
or results of operations.
Stock-Based Compensation
The Company has a stock based compensation plan which is described more fully in
Note 5. The Company applies APB Opinion No. 25, "Accounting for Stock Issued to
Employees", and related interpretations in accounting for its plan. There has
been no compensation expense recognized during the three months ended November
29, 2003 and November 30, 2002 as all options have been issued with exercise
prices equal to the underlying stock's market price and there were no options
granted during these periods.
Page 8 of 20
The following table illustrates the effect on net income and earnings per share
if the Company had applied the fair value recognition provisions of FASB
Statement No. 123, "Accounting for Stock Based Compensation":
Three Months Ended
November 29, November 30,
2003 2002
---- ----
Net income as reported $ 244,000 $ 511,000
========= ==========
Deduct: Total stock based employee
compensation determined under fair
value based method for options granted,
modified, or settled, net of related tax
effects 9,000 -
--------- ----------
Pro forma net income $ 235,000 $ 511,000
========= ==========
Earnings per share
Basic - as reported $ .05 $ .11
========= ==========
Basic - pro forma $ .05 $ .11
========= ==========
Diluted - as reported $ .05 $ .11
========= ==========
Diluted - pro forma $ .05 $ .11
========= ==========
NOTE 2 - EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per
share:
Three Months Ended
November 29, November 30,
2003 2002
---- ----
Numerator for basic and diluted earnings
per share:
Net income $ 244,000 $ 511,000
=========== ===========
Denominator:
Denominator for basic earnings per
share-weighted average shares 4,797,983 4,797,983
Effect of dilutive securities:
Employee stock options 39,959 37,620
----------- -----------
Denominator for diluted earnings per
share-adjusted weighted average
shares and assumed conversions 4,837,942 4,835,603
=========== ===========
Basic earnings per share $ .05 $ .11
=========== ===========
Diluted earnings per share $ .05 $ .11
=========== ===========
Page 9 of 20
There were no anti-dilutive stock options for the three months ended November
29, 2003 and November 30, 2002. Therefore, no stock options or other common
stock equivalents were excluded from the above calculation.
NOTE 3 - MERCHANDISE INVENTORIES
Merchandise inventories (which are all finished goods) are stated at the lower
of cost (first-in, first-out method) or market as determined by the retail
inventory method. The Company utilizes a method that weights the cost-to-retail
ratio using multiple inventory categories.
Physical inventories are conducted in the fourth quarter of the fiscal year and
reconciled to the Company's financial records to determine shrinkage for the
current fiscal year. The Company's estimated shrinkage accrual, based on
previous results, is adjusted to current results in the fourth quarter of the
fiscal year.
NOTE 4 - USE OF ESTIMATES
The preparation of financial statements in accordance with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the Company's financial statements and
accompanying notes to financial statements. Estimates have been made by
management in several areas, including but not limited to the reserve for
inventory shrinkage, and the provision for income taxes and deferred income
taxes. Management bases its estimates and judgements on historical experience
and on various other factors that are believed to be reasonable under the
circumstances, the results of which form the basis for making judgements about
the carrying values of assets and liabilities that are not readily apparent from
other sources. Actual results could differ materially from these estimates.
NOTE 5 - STOCK OPTION PLAN
On January 23, 2003, the stockholders of the Company approved the Company's 2002
Stock Option Plan (the "2002 Plan"). A copy of the 2002 Plan is set forth in the
Proxy Statement filed by the Company with the Securities and Exchange Commission
on December 30, 2002. The Company's prior stock option plan expired by its
terms. As of November 29, 2003 an aggregate of 59,000 options remain outstanding
under the prior plan. A total of 750,000 shares of Common Stock have been
reserved for issuance under the 2002 Plan. As of November 29, 2003, 109,700
options have been granted and 20,000 options were forfeited pursuant to the 2002
Plan.
NOTE 6 - ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
The following table sets forth selected accrued expenses and other current
liabilities consisting of the following:
As of:
November 29, 2003 November 30, 2002 August 30, 2003
----------------- ----------------- ---------------
(Amounts in thousands)
Straight line rent $ 918 $ 732 $ 882
Other accrued expenses and current liabilities 3,662 3,042 3,433
------- ------- --------
$ 4,580 $ 3,774 $ 4,315
======== ======== ========
Page 10 of 20
NOTE 7- SCHEDULE OF COMPREHENSIVE INCOME
The Schedule of Comprehensive Income is as follows:
Three Months Ended
November 29, 2003 November 30, 2002
----------------- -----------------
(Amounts in thousands)
Net income $ 244 $ 511
Other comprehensive income, net of taxes:
Unrealized gain on investment in common stock 10 (2)
----------- -----------
Comprehensive income $ 254 $ 509
=========== ===========
Page 11 of 20
RAG SHOPS, INC. AND SUBSIDIARIES
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the Company's
condensed consolidated financial statements and the related notes included
elsewhere in this Quarterly Report on Form 10-Q. This Quarterly Report on Form
10-Q contains certain forward-looking statements within the meaning of Section
27A of the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended, which are intended to be covered by safe
harbors created hereby. Such forward-looking statements include those regarding
the Company's future results in light of current management activities, and
involve known and unknown risks, including competition within the craft and
fabric retail industry, weather-related changes in the selling cycle, and other
uncertainties (including those risk factors referenced in the Company's filings
with the Securities and Exchange Commission). Our actual results could
materially differ from those discussed in these forward-looking statements.
Recent Developments
In December 2003, the Company received a check from Principal Financial Group,
Inc. ("Principal") reflecting dividends payable in connection with common stock
of Principal. Receipt of the dividend check prompted a Company inquiry which
revealed that, due to its ownership of certain life insurance policies issued by
Principal Life Insurance Company, a subsidiary of Principal, and maintained by
the Company for certain key executive officers, the Company had received 9,766
shares of Principal's common stock (the "Shares") in December 2001 as
consideration in the demutualization of Principal's predecessor. The effective
date of the demutualization was in October 2001 and the Shares were issued in
December 2001 to one of the Company's subsidiaries, the owner of the life
insurance policies, in book-entry form as uncertificated shares and maintained
in an account with Mellon Investor Services established by Principal in
connection with its demutualization transaction. The Company had not previously
recognized or recorded the Shares issued pursuant to such event.
The Company has determined it will restate prior financial statements to
properly reflect the transaction in the first quarter of fiscal 2002. In its
restated financial statements, the Company has recorded the then fair market
value ($180,671) of the Shares as part of operating income as of October 2001,
in accordance with Emerging Issues Task Force Issue No. 99-4, "Accounting for
Stock Received from the Demutualization of a Mutual Insurance Company". The
Company has classified its holding in the Shares as "available-for-sale"
pursuant to Statement of Financial Accounting Standards No. 115 "Accounting for
Investments", whereby the investment will be carried at fair market value and
subsequent changes in the market value of the investment will be reflected as an
unrealized gain or loss in the stockholders' equity section of the balance
sheets, net of deferred income taxes. A Schedule of Other Comprehensive Income
will be presented for all periods pursuant to Statement of Financial Accounting
Standards No. 130 "Reporting Comprehensive Income". Comprehensive income
consists of net income or loss for the current period as well as income,
expenses, gains or losses, net of income taxes arising during the period that
are included in separate components of equity. It includes the unrealized gains
and losses on the Company's available-for-sale security, net of taxes.
The fair market value of the Shares as of the close of business on November 29,
2003 was $323,352. Amendments to previous reports of the Company filed with the
Securities and Exchange Commission, under the Securities Exchange Act of 1934,
as amended, will be filed expeditiously and will include restatement of the
financial statements therein, respectively, summarized as follows:
Page 12 of 20
Current Earnings
assets Stockholders' Equity per share
------ Deferred -------------------- Provision --------- Total
Investment income Unrealized Gain from for Net Basic compre-
in common taxes- gain, net Retained demutual- income income and hensive
stock long term of taxes earnings ization taxes (loss) Diluted income
----- --------- -------- -------- ------- ----- ------ ------- ------
(Amounts in thousands except earnings per share)
Quarterly Period Ended December 1, 2001
Reported $ - $ 436 $ - $18,892 $ - $ 888 $1,390 $ 0.29 $ 1,390
Restated 224 336 24 18,992 181 969 1,490 0.31 1,514
Quarterly Period Ended March 2, 2002
Reported - 436 - 19,021 129 129
Restated 242 328 34 19,121 129 139
Quarterly Period Ended June 1, 2002
Reported - 436 - 19,111 90 90
Restated 297 303 64 19,211 90 120
Fiscal Year Ended August 31, 2002
Reported - 497 - 17,791 - 236 290 0.06 290
Restated 286 369 58 17,891 181 317 390 0.08 448
Quarterly Period Ended November 30, 2002
Reported - 497 - 18,302 511 511
Restated 283 370 56 18,402 511 509
Quarterly Period Ended March 1, 2003
Reported - 497 - 18,393 91 91
Restated 269 374 46 18,493 91 81
Quarterly Period Ended May 31, 2003
Reported - 497 - 18,141 (251) (251)
Restated 310 361 74 18,241 (251) (223)
Fiscal Year Ended August 30, 2003
Reported - 459 - 17,086 (705) (705)
Restated 307 324 72 17,186 (705) (691)
Results of Operations
The Company operated 69 and 68 stores, and leased retail square footage of
809,500 and 769,600 at the end of the first fiscal quarter of 2004 and 2003,
respectively. The following table sets forth, as a percentage of net sales,
certain items appearing in the condensed consolidated statements of income for
the indicated periods.
Page 13 of 20
Three Months Ended
------------------
November 29, November 30,
2003 2002
---- ----
Net sales 100.0% 100.0%
Cost of merchandise sold, occupancy
costs and distribution costs 66.0 65.0
-------- --------
Gross profit 34.0 35.0
Selling, general and administrative expenses 32.8 32.2
-------- --------
Income from operations 1.2 2.8
-------- --------
Net income 0.7% 1.5%
======== ========
The Company's net sales increased $457,000 or 1.4% for the three months ended
November 29, 2003 compared to the three months ended November 30, 2002. Net
sales from larger new store openings, net of reductions from smaller closed
stores contributed $1,037,000 in additional sales during the quarter while
comparable store sales decreased $580,000 or 1.8% as compared to the prior
comparable period. The Company's comparable store sales include stores
commencing with their thirteenth consecutive entire fiscal month, including
stores that were expanded but excluding stores that were relocated, if any.
Management believes that the decrease in comparable store sales resulted from
two factors. First, changes in the Company's advertising program, implemented in
the fourth quarter of fiscal 2003 and continued during the current quarter, did
not produce expected results. Commencing December 2003 we have reworked our
advertising program. Second, the Company's fabric business experienced sales
declines offsetting gains in the craft categories. We have initiated changes in
our fabric marketing program in December 2003 to attempt to reverse this trend.
Gross profit decreased by 1.0% as a percentage of net sales for the current
quarter compared to the prior comparable period primarily due to additional
promotional markdowns related to changes in the Company's advertising program,
as mentioned above, and secondarily due to an increase in occupancy expense
because of additional square footage and rent costs for new larger stores as
compared to smaller closed stores as well as contractual increases in rent for
existing stores. These increases were partially offset by a reduction in the
estimated provision for inventory shrinkage in the three months ended November
29, 2003 compared to the comparable prior period due to favorable results
experienced during the physical inventory conducted in the fourth quarter of
fiscal 2003 compared to the prior comparable period, and by the amortization of
deferred income relating to the forgiveness of certain obligations for
merchandise inventory through modification of certain agreements with suppliers,
which amortization commenced in the second quarter of fiscal 2003.
Selling, general, and administrative expenses increased by $343,000 for the
three months ended November 29, 2003 compared to the prior comparable period.
Additional advertising and higher insurance costs were the primary causes of the
increase. These increases were partially offset by a decrease in general and
administrative payroll due to positions that were eliminated and a reduction in
the provision for bonuses. Advertising expense increased due to additional
circular frequency and distribution and due to the grand opening of a new store
during the current quarter. Insurance costs rose as a result of adverse market
conditions when the Company's primary insurance policies were renewed in the
third and fourth fiscal quarters last year. Selling, general, and administrative
expenses as a percentage of net sales increased 0.6% for the three months ended
November 29, 2003 compared to the comparable prior period principally due to the
decrease in comparable store sales mentioned above.
The $20,000 increase in interest expense, net for the three months ended
November 29, 2003 compared to the comparable period last year is due to higher
Page 14 of 20
average borrowing levels during the current quarter. See "Liquidity and Capital
Resources".
Net income decreased $267,000 for the three months ended November 29, 2003
compared to the three months ended November 30, 2002 as a result of the decrease
in gross margin and the increases in selling, general and administrative
expenses, and interest expense, net.
Seasonality
The Company's business is seasonal, which the Company believes is typical of the
retail craft and fabric industry. The Company's highest sales and earnings
levels traditionally occur between September and December. The Company has
historically operated at a loss during the fourth quarter of its fiscal year,
the June through August summer period.
Year to year comparisons of quarterly results and comparable store sales can be
affected by a variety of factors, including the timing and duration of holiday
selling seasons and the timing of new store openings and promotional markdowns.
Liquidity and Capital Resources
The Company's primary needs for liquidity are to maintain inventory for the
Company's existing stores and to fund the costs of opening new stores, including
capital improvements, initial inventory and pre-opening expenses. During the
three months ended November 29, 2003, the Company relied on internally generated
funds, credit made available by suppliers and short-term borrowings to finance
inventories and new store openings.
The Company's working capital increased $276,000 for the three months ended
November 29, 2003 as compared to the August 30, 2003 amount primarily because
the Company retained its net income for this period.
The Company maintains a $10 million credit facility with a bank. The credit
facility is renewable annually on or before each December 31 and consists of a
discretionary unsecured line of credit for direct borrowings and the issuance
and refinance of letters of credit. During December 2003, the credit facility
was renewed for the year 2004. Borrowings under the line of credit bear interest
at the bank's prime rate (4.00% at November 29, 2003). The credit facility
requires the Company to maintain a compensating balance of $400,000 in addition
to certain financial covenants. Historically, the amount borrowed has varied
based on the Company's seasonal requirements, generally reaching a maximum
amount outstanding during the fourth quarter of each fiscal year. The maximum
amount borrowed under the line was $3,970,000 and $1,635,000 during the three
month periods ended November 29, 2003 and November 30, 2002, respectively. There
was $175,000 of direct borrowings outstanding under the line of credit at
November 29, 2003, and no direct borrowings were outstanding at November 30,
2002. The Company intends to maintain the availability of a line of credit for
seasonal working capital requirements and in order to be able to take advantage
of future opportunities.
Net cash provided by operating activities for the three months ended November
29, 2003 amounted to $1,803,000, and $343,000 was used for purchases of property
and equipment and $175,000 was provided by bank borrowings. Net cash from
operating activities resulted primarily from net income of $244,000, decreases
in merchandise inventories of $1,807,000 and prepaid expenses of $399,000, and
an increase in accrued expenses and other current liabilities of $210,000,
partially offset by decreases in accounts payable-trade and accrued salaries and
wages of $573,000 and $318,000, respectively. During the three months ended
November 29, 2003, the Company opened one store, did not close or
Page 15 of 20
expand any stores and was operating sixty-nine stores at the end of the period.
During the remainder of the fiscal year ending August 28, 2004, the Company
anticipates opening one additional new store, relocating three stores and
closing two stores. Costs associated with the opening of new stores, including
capital expenditures, inventory and pre-opening expenses, approximated $725,000
per store in fiscal 2003. These costs associated with the contemplated store
openings in fiscal 2004 will be financed primarily from cash provided by
operating activities, credit made available by suppliers to finance inventories
and, if necessary, from the Company's bank line of credit. However, the Company
will re-deploy assets of stores being closed to the new stores as opportunities
arise in order to curtail the costs of opening stores. The Company believes that
its cash at November 29, 2003, working capital generated from operations and
cash available from the bank line of credit will be sufficient for the Company's
operating needs for at least the next 12 months.
Critical Accounting Policies
Refer to the financial statements and notes included in the Company's Annual
Report on Form 10-K for the complete disclosure of the Company's accounting
policies. Certain policies are as follows:
Cost of merchandise sold, distribution and occupancy costs include merchandise
purchases, inbound freight costs, distribution costs, shrinkage provision,
cooperative advertising, vendor allowances, vendor rebates, store rent and other
store-related occupancy costs. Distribution costs have been reclassified to cost
of merchandise sold as of the beginning of the quarter ended May 31, 2003. These
expenses were previously included in selling, general and administrative
expenses. All comparative periods have been restated.
Cooperative advertising payments received from vendors have been reclassified to
cost of merchandise sold as of the beginning of the quarter ended March 1, 2003.
These payments were previously offset against advertising expenses. The amounts
included in cost of merchandise sold related to cooperative advertising payments
received was $372,000 and $338,000 for the three months ended November 29, 2003
and November 30, 2002, respectively. All comparative periods have been restated.
Advertising costs are expensed as incurred and are included in store expenses as
part of selling, general and administrative expenses which amounted to
$2,493,000 and $2,268,000 for the three months ended November 29, 2003 and
November 30, 2002, respectively.
Recent Accounting Standards
In November 2002, the Emerging Issues Task Force reached a consensus on Issue
No. 00-21, "Revenue Arrangements with Multiple Deliverables," ("Issue No.
00-21") which requires that revenue from sales with multiple deliverables be
accounted for based on a determination of whether the multiple deliverables
qualify to be accounted for as separate units of accounting. The consensus is
effective prospectively for arrangements entered into in fiscal periods
beginning after June 15, 2003. The Company adopted the provision of this
statement, which did not have an impact in its consolidated financial position
or results of operations.
In May 2003, the Financial Accounting Standards Board issued SFAS No. 150,
"Accounting for Certain Instruments with Characteristics of Both Liabilities and
Equity" ("SFAS No. 150"), which establishes standards for how an issuer
classifies and measures certain financial instruments with characteristics of
both liabilities and equity. SFAS No. 150 requires that an issuer classify a
financial instrument that is within its scope, which may have previously been
reported as equity, as a liability or an asset in some circumstances. SFAS No.
Page 16 of 20
150 is effective for financial instruments entered into or modified after May
31, 2003, and otherwise is effective at the beginning of the first interim
period beginning after June 15, 2003. The Company adopted the provision of this
statement, which did not have an impact in its consolidated financial position
or results of operations.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk is the potential change in a financial instrument's value caused by
fluctuations in interest or currency exchange rates, or in equity and commodity
prices. The Company's activities expose it to certain risks that management
evaluates carefully to minimize earnings volatility. At November 29, 2003 and
November 30, 2002, and during each of the quarters then ended, the Company was
not a party to any derivative arrangement and the Company does not engage in
trading, market-making or other speculative activities in the derivatives
markets. The Company does not have any foreign currency exposure. Loans
outstanding under the Company's unsecured line of credit bear interest at the
bank's prime rate (4.00% at November 29, 2003). There was $175,000 in loans
outstanding under such line of credit at November 29, 2003 and there was no loan
outstanding under the line of credit at November 30, 2002.
The following table details future projected payments for the Company's
significant contractual obligations as of November 29, 2003:
Computer and
Other Technology
Operating Leases Related Commitments Total
Nine Months Ending:
2004 $ 7,320,929 $ 334,418 $ 7,655,347
Fiscal Year Ending:
2005 9,205,138 98,761 9,303,899
2006 7,818,207 55,061 7,873,268
2007 6,409,210 1,519 6,410,729
2008 5,116,264 0 5,116,264
Thereafter 10,024,058 0 10,024,058
---------- --------- -----------
$ 45,893,806 $ 489,759 $ 46,383,565
=========== ========= ===========
Item 4. CONTROLS AND PROCEDURES
The Company maintains controls and procedures designed to ensure that
information required to be disclosed in the reports that the Company files or
submits under the Securities Exchange Act of 1934 is recorded, processed,
summarized and reported within the time periods specified in the rules and forms
of the Securities and Exchange Commission. Based upon their evaluation of those
controls and procedures performed within 90 days of the filing date of this
report, the Chief Executive and Acting Chief Financial Officers of the Company
concluded that the Company's disclosure controls and procedures were adequate.
We note that the design of any system of controls and procedures is based in
part upon certain assumptions about its likelihood of future events and there
can be no assurance that any such design will succeed in achieving its stated
goals under all potential conditions.
The Company made no significant changes in its internal controls or in other
factors that could significantly affect these controls subsequent to the date of
the evaluation of those controls by the Chief Executive and Acting Chief
Financial Officers.
Page 17 of 20
RAG SHOPS, INC. AND SUBSIDIARIES
PART II - OTHER INFORMATION
Item 1. - 5. Not Applicable
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
99.1 Certification of Chief Executive Officer Pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002 (18 U.S.C. ss.1350)
99.2 Certification of Acting Chief Financial Officer Pursuant to Section
906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C.ss.1350)
(b) No reports on Form 8-K have been filed during the quarter for which this
report is filed.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
RAG SHOPS, INC.
Date: January 20, 2004 /S/ Stanley Berenzweig
----------------------
Stanley Berenzweig
Chairman of the Board and
Chief Executive Officer
Date: January 20, 2004 /S/ Steven B. Barnett
---------------------
Steven B. Barnett
Acting Principal Financial Officer and
Acting Principal Accounting Officer
Page 18 of 20
CERTIFICATIONS
I, Stanley Berenzweig, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Rag Shops, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: a) designed
such disclosure controls and procedures to ensure that material information
relating to the registrant, including its consolidated subsidiaries, is made
known to us by others within those entities, particularly during the period in
which this quarterly report is being prepared; b) evaluated the effectiveness of
the registrant's disclosure controls and procedures as of a date within 90 days
prior to the filing date of this quarterly report on January 20, 2004; and c)
presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors: a) all significant deficiencies in the design
or operation of internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in internal
controls; and b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether there were significant changes in internal controls or
in other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
SIGNATURE TITLE(S) DATE
/S/ STANLEY BERENZWEIG Principal Executive January 20, 2004
- ---------------------- and Director
Stanley Berenzweig
Page 19 of 20
CERTIFICATIONS
I, Steven B. Barnett, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Rag Shops, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: a) designed
such disclosure controls and procedures to ensure that material information
relating to the registrant, including its consolidated subsidiaries, is made
known to us by others within those entities, particularly during the period in
which this quarterly report is being prepared; b) evaluated the effectiveness of
the registrant's disclosure controls and procedures as of a date within 90 days
prior to the filing date of this quarterly report on January 20, 2004; and c)
presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors: a) all significant deficiencies in the design
or operation of internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in internal
controls; and b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether there were significant changes in internal controls or
in other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
SIGNATURE TITLE(S) DATE
/S/ Steven B. Barnett Executive Vice President and January 20, 2004
- --------------------- Acting Chief Financial Officer
Steven B. Barnett
Page 20 of 20
EXHIBIT 99.1
RAG SHOPS, INC.
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 (18 U.S.C.ss.1350)
The undersigned, Stanley Berenzweig, the Chief Executive Officer of Rag
Shops, Inc. (the "Company"), has executed this Certification in connection with
the filing with the Securities and Exchange Commission of the Company's
Quarterly Report on Form 10-Q for the quarter ended November 29, 2003 (the
"Report").
The undersigned hereby certifies that:
- the Report fully complies with the requirements of Section 13(a)
of the Securities Exchange Act of 1934; and
- the information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations
of the Company.
IN WITNESS WHEREOF, the undersigned has executed this Certification as
of the 20th day of January, 2004.
/S/ Stanley Berenzweig
----------------------
Chief Executive Officer
EXHIBIT 99.2
RAG SHOPS, INC.
CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 (18 U.S.C. ss.1350)
The undersigned, Steven B. Barnett, the Acting Chief Financial Officer
of Rag Shops, Inc. (the "Company"), has executed this Certification in
connection with the filing with the Securities and Exchange Commission of the
Company's Quarterly Report on Form 10-Q for the quarter ended November 29, 2003
(the "Report").
The undersigned hereby certifies that:
- the Report fully complies with the requirements of Section 13(a) of
the Securities Exchange Act of 1934; and
- the information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations
of the Company.
IN WITNESS WHEREOF, the undersigned has executed this Certification as
of the 20th day of January, 2004.
/S/ Steven B. Barnett
---------------------
Executive Vice President and
Acting Chief Financial Officer