FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Quarterly Period Ended May 29, 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 JUNE 30, 2004
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 - May 29, 2004
(unaudited), May 31, 2003 (unaudited) and August 30,
2003 3
Condensed consolidated results of operations- three
and nine months ended May 29, 2004 (unaudited) and
May 31, 2003 (unaudited) 4
Condensed consolidated statements of cash flows -
nine months ended May 29, 2004 (unaudited) and
May 31, 2003 (unaudited) 5
Notes to condensed consolidated financial statements 6-10
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10-14
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 14-15
Item 4. Controls and Procedures 15
Part II - OTHER INFORMATION
Items 1.-5. 16
Item 6. Exhibits and Reports on Form 8-K 16
SIGNATURES 16
CERTIFICATIONS 17-18
Page 2 of 18
RAG SHOPS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(All amounts in thousands)
May 29, May 31, August 30,
2004 2003 2003
---- ---- ----
(Unaudited) (Unaudited) (Note A)
ASSETS
CURRENT ASSETS:
Cash $ 1,041 $ 2,283 $ 835
Investment in common stock - 310 307
Merchandise inventories 29,577 27,449 31,995
Prepaid expenses 1,175 851 1,490
Other current assets 624 436 431
Deferred income taxes 918 790 918
--------- --------- ---------
Total current assets 33,335 32,119 35,976
Property and equipment, net 4,301 4,686 4,580
Deferred income taxes 646 361 324
Other assets 31 33 29
--------- --------- ---------
TOTAL ASSETS $ 38,313 $ 37,199 $ 40,909
========= ========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-term bank borrowings $ 2,640 $ - $ -
Accounts payable-trade 7,661 7,628 11,432
Accrued expenses and other current liabilities 3,785 3,533 4,315
Accrued salaries and wages 776 748 1,103
Deferred income 58 756 582
--------- --------- ---------
Total current liabilities 14,920 12,665 17,432
STOCKHOLDERS' EQUITY:
Common stock 48 48 48
Additional paid-in capital 6,235 6,235 6,235
Retained earnings 17,174 18,241 17,186
Unrealized gain on investment in common
stock, net of tax - 74 72
Treasury stock, at cost, 26,880 shares (64) (64) (64)
--------- --------- ---------
Total stockholders' equity 23,393 24,534 23,477
--------- --------- ---------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 38,313 $ 37,199 $ 40,909
========= ========= =========
Note A: Derived from the August 30, 2003 audited balance sheet.
See notes to the condensed consolidated financial statements.
Page 3 of 18
RAG SHOPS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED RESULTS OF OPERATIONS
(Unaudited)
(All amounts in thousands, except share data)
Three Months Ended Nine Months Ended
------------------ -----------------
May 29, May 31, May 29, May 31,
2004 2003 2004 2003
---- ---- ---- ----
Net sales $ 27,245 $ 27,920 $ 93,326 $ 91,949
Cost of merchandise
sold, occupancy and
distribution costs 18,243 18,733 61,909 61,094
--------- --------- --------- ---------
Gross profit 9,002 9,187 31,417 30,855
Selling, general and
administrative expenses 9,935 9,646 31,538 30,221
--------- --------- --------- ---------
(933) (459) (121) 634
Gain from sale of securities - - 161 -
--------- --------- --------- ---------
Income (loss) from operations (933) (459) 40 634
Interest income (expense), net (9) 1 (33) 2
---------- --------- ---------- ---------
Income (loss) before
income tax provision (benefit) (942) (458) 7 636
Income tax provision (benefit) (342) (207) 19 286
---------- ---------- --------- ---------
Net income (loss) $ (600) $ (251) $ (12) $ 350
========== ========== ========== =========
EARNINGS (LOSS) PER
COMMON SHARE:
Basic and diluted $ (.13) $ (.05) $ - $ .07
========== ========== ========== ==========
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING:
Basic 4,797,983 4,797,983 4,797,983 4,797,983
========= ========= ========= =========
Diluted 4,797,983 4,797,983 4,797,983 4,825,987
========= ========= ========= =========
See notes to the condensed consolidated financial statements
Page 4 of 18
RAG SHOPS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(All amounts in thousands)
Nine Months Ended
May 29, 2004 May 31, 2003
------------ ------------
Cash flows from operating activities:
Net income (loss) $ (12) $ 350
Adjustments to reconcile net income to cash
provided by (used in) operating activities:
Depreciation and amortization 1,213 1,007
Loss on disposition of property and equipment - 31
Amortization of deferred income (524) (640)
Deferred income taxes (187) -
Gain from sale of securities (161) -
Changes in assets and liabilities:
(Increase) decrease in:
Merchandise inventories 2,418 4,274
Prepaid expenses 233 398
Other current assets (193) 18
Other assets (2) 10
Increase (decrease) in:
Accounts payable-trade (3,771) (2,680)
Accrued expenses and other current liabilities (530) 579
Accrued salaries and wages (327) (550)
---------- ---------
Net cash provided by (used in) operating activities (1,843) 2,797
---------- ---------
Cash flows from investing activities:
Proceeds from sale of securities 343 -
Proceeds from sale of property and equipment 3 -
Payments for purchases of property and
equipment (937) (1,473)
---------- ----------
Net cash used in investing activities (591) (1,473)
---------- ----------
Cash flows from financing activities:
Proceeds from issuance of note payable - bank 17,140 6,750
Repayments of note payable - bank (14,500) (6,750)
---------- ---------
Net cash provided by financing activities 2,640 -
--------- ---------
Net increase in cash 206 1,324
Cash, beginning of period 835 959
--------- ---------
Cash, end of period $ 1,041 $ 2,283
========= =========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 45 $ 5
========= =========
Income taxes $ 191 $ 57
========= =========
See notes to the condensed consolidated financial statements
Page 5 of 18
RAG SHOPS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE AND NINE MONTHS ENDED MAY 29, 2004 AND MAY 31, 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 nine months ended May 29, 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.
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 $358,000 and $1,177,000 for the three and nine months ended May 29,
2004, and $294,000 and $851,000 for the three and nine months ended May 31,
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
$1,188,000 and $5,320,000 for the three and nine months ended May 29, 2004 and
$1,332,000 and $5,076,000 for the three and nine months ended May 31, 2003,
respectively.
Recent Developments
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. See
Note 8.
Page 6 of 18
Recent Accounting Pronouncements
On March 31, 2004, the Financial Accounting Standards Board (FASB) issued a
proposed Statement, Share-Based Payment that addresses the accounting for
share-based awards to employees, including employee-stock-purchase-plans
(ESPPs). The FASB formally proposed to require companies to recognize the fair
value of stock options and other stock-based compensation to employees. The
proposed Statement would eliminate the ability to account for stock-based
compensation transactions using the intrinsic value method under APB Opinion No.
25, "Accounting for Stock Issued to Employees", and generally would require
instead that such transactions be accounted for using a fair-value-based method.
The proposed requirements in the exposure draft would be effective for public
companies as of the beginning of the first fiscal year beginning after December
15, 2004. The Company currently accounts for its stock-based compensation plans
in accordance with APB Opinion No. 25. Therefore, if the FASB adopts this
proposed statement, as currently drafted, the Company will have to recognize
fair value of the stock-based compensation in the consolidated statement of
income rather than disclosing the pro forma impact of the stock-based
compensation as the Company currently does.
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 and nine months ended
May 29, 2004 and May 31, 2003 as all options have been issued with exercise
prices equal to the underlying stock's market price.
The following table illustrates the effect on net income 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 Nine Months Ended
------------------ -----------------
May 29, May 31, May 29, May 31,
2004 2003 2004 2003
---- ---- ---- ----
Net income (loss), as reported $ (600,000) $ (251,000) $ (12,000) $ 350,000
Deduct: Total stock based employee
compensation determined under fair
value based method for options granted,
modified, or settled, net of related tax effect 8,000 2,000 23,000 3,000
----------- ---------- ---------- ----------
Pro forma net income (loss) $ (608,000) $ (253,000) $ (35,000) $ 347,000
=========== =========== ========== ==========
Earnings (loss) per share
Basic - as reported $ (.13) $ (.05) $ - $ .07
=========== =========== =========== ===========
Basic - pro forma $ (.13) $ (.05) $ (.01) $ .07
=========== =========== =========== ===========
Diluted - as reported $ (.13) $ (.05) $ - $ .07
=========== =========== =========== ===========
Diluted - pro forma $ (.13) $ (.05) $ (.01) $ .07
=========== =========== =========== ===========
Page 7 of 18
NOTE 2 - EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per
share:
Three Months Ended Nine Months Ended
------------------ -----------------
May 29, May 31, May 29, May 31,
2004 2003 2004 2003
---- ---- ---- ----
Numerator for basic and diluted Earnings per share:
Net income (loss) $ (600,000) $ (251,000) $ (12,000) $ 350,000
=============== =============== ============= ============
Denominator:
Denominator for basic earnings per
share-weighted average shares 4,797,983 4,797,983 4,797,983 4,797,983
Effect of dilutive securities:
Employee stock options - - - 28,004
------------- ------------- --------------- ---------------
Denominator for diluted
earnings per share adjusted
weighted average shares
and assumed conversions 4,797,983 4,797,983 4,797,983 4,825,987
------------ ------------ ------------ ------------
Basic earnings (loss) per share $ (.13) $ (.05) $ - $ .07
============= ============= ============= =============
Diluted earnings (loss) per share $ (.13) $ (.05) $ - $ .07
============= ============= ============= =============
Stock options excluded from the above calculation, as the effect of such options
would be anti-dilutive, aggregated 146,700 both for the three and nine months
ended May 29, 2004, and 173,700 and 0 for the three and nine months ended May
31, 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 8 of 18
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 May 29, 2004 an aggregate of 57,000 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 May 29, 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:
May 29, 2004 May 31, 2003 August 30, 2003
------------ ------------ ---------------
(Amounts in thousands)
Straight line rent $ 990 $ 805 $ 882
Other accrued expenses and current liabilities 2,795 2,728 3,433
--------- --------- ----------
$ 3,785 $ 3,533 $ 4,315
========== ========== ==========
NOTE 7 - SCHEDULE OF COMPREHENSIVE INCOME (LOSS)
The Schedule of Comprehensive Income (Loss) is as follows:
Three Months Ended Nine Months Ended
------------------ -----------------
May 29, May 31, May 29, May 31,
2004 2003 2004 2003
---- ---- ---- ----
(Amounts in thousands)
Net income (loss) $ (600) $ (251) $ (12) $ 350
Other comprehensive income, net of taxes:
Unrealized gain on investment in
common stock - 28 - 16
Reversal of unrealized gain due to sale
of securities - - (72) -
---------- ---------- ---------- ----------
Comprehensive income (loss) $ (600) $ (223) $ (84) $ 366
=========== ========== =========== ==========
As a result of the sale of securities from "investment in common stock" in the
second quarter of the current fiscal year, the "unrealized gain on investment in
common stock, net of tax", previously reported in stockholders' equity, has been
realized in net income.
NOTE 8 - COMMITMENTS
The Company entered into letter agreements dated May 12, 2004 with each of eight
employees for retention payments to such employee(s) in the event that a change
in control (as defined under the Company's Change of Control Agreement) occurs
on or before December 31, 2004 and the employee remains employed by the Company,
or its successor, ninety (90) days after such change of control. The aggregate
potential amount of the payments that could be made by the Company under these
agreements equals $540,000.
Page 9 of 18
NOTE 9 - CREDIT FACILITY
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 of 4.00% which remained constant throughout
the nine months ended May 29, 2004. The credit facility requires the Company to
maintain a compensating balance of $400,000 which is included in cash in the
accompanying balance sheet and is subject to interest charges if not met, 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
nine month periods ended May 29, 2004 and May 31, 2003, respectively. There was
$2,640,000 of direct borrowings outstanding under the line of credit at May 29,
2004 and no direct borrowings were outstanding at May 31, 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. At May 29, 2004, the Company had outstanding letters of credit in
the aggregate amount of $306,000.
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
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.
Page 10 of 18
Results of Operations
The Company operated 67 and 69 stores, and leased retail square footage of
805,700 and 798,000 at the end of the third 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 Nine Months Ended
------------------ -----------------
May 29, May 31, May 29, May 31,
2004 2003 2004 2003
---- ---- ---- ----
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of merchandise
sold, occupancy and
distribution costs 67.0 67.1 66.3 66.4
-------- -------- -------- --------
Gross profit 33.0 32.9 33.7 33.6
Selling general and
administrative expenses 36.4 34.5 33.8 32.9
Gain from sale of securities - - 0.1 -
-------- -------- -------- --------
Income (loss) from operations (3.4) (1.6) 0.0 0.7
-------- -------- -------- --------
Net income (loss) (2.2)% (0.9)% (0.0)% 0.4%
-------- -------- -------- --------
The Company's net sales decreased by $675,000 or 2.4% and increased $1,377,000
or 1.5% for the three and nine months ended May 29, 2004, respectively, compared
to the comparable prior year periods. The decrease in net sales for the three
months ended May 29, 2004 resulted from a decrease in comparable store sales of
$891,000 or 3.3% partially offset by an increase of $216,000 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 May 29, 2004 were adversely affected by the
shift of Memorial Day from fiscal May to fiscal June in 2004, one less newspaper
circular in the three months ended May 29, 2004 that was utilized in the
immediate prior quarter compared to the comparable prior year periods, the
inability to offer new merchandise as a result of the Company's efforts to
manage the increase in merchandise inventories, and management's continuing
expenditures of time and resources on the exploration of strategic alternatives
consistent with its prior announcements. The increase in net sales for the nine
months ended May 29, 2004 was attributable to a $2,759,000 increase from the
larger new store sales, net of sales reductions from the smaller closed stores,
partially offset by a $1,382,000 or 1.5% decrease in comparable store sales. In
addition to the aforementioned shift of Memorial Day, the inability to offer new
merchandise and management's diversion of time and resources in the three months
ended May 29, 2004, sales for the nine months ended May 29, 2004 were also
adversely affected by inclement weather in the three months ended February 28,
2004 and by changes in the Company's advertising program, implemented in the
fourth quarter of 2003 that continued during the first quarter of fiscal 2004.
The Company divides its business into three broad categories - fabrics, crafts
and floral. For the nine-month period this year, crafts sales increased
significantly over the comparable prior year period reflecting the Company's
expanded merchandising programs and industry strength. Fabric sales continued to
trend downwards for the three-month and nine-month periods this year compared to
last year. Fabric sales continued to be soft in the third quarter, especially in
apparel fabrics. The Company attributes softness in this area to its decision to
reduce space allocated to fabrics in its stores and to general softness in the
Page 11 of 18
fabrics industry. Floral sales declined for the nine-month period this year
compared to last year. We attribute the decline in floral sales to reductions in
inventory during the nine months ended May 29, 2004 as we prepared for product
line changes that are currently being implemented at the direction of our new
floral buyer.
Gross profit, as a percentage of net sales, increased by 0.1 % for the three and
nine months ended May 29, 2004, compared to the prior comparable periods. The
increase for the current quarter resulted from an increase in vendor
participation programs and 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,
that was offset by the increase in occupancy costs resulting from the Company's
termination of the lease of an underperforming store that required a payment of
$147,000 to settle all lease obligations and due to additional square footage
and rent costs associated with new larger stores as compared to smaller closed
stores as well as lease term renewal increases in rent for existing stores. The
increase in gross profit, as a percentage of net sales, for the nine months
ended May 29, 2004 compared to the comparable prior period was principally due
to the decrease in the provision for shrinkage and an increase in vendor
participation programs that was offset by an increase in occupancy costs, all as
previously mentioned, and by an increase in promotional markdowns, primarily in
the three months ended November 29, 2003.
Selling, general and administrative expenses increased for the three and nine
months ended May 29, 2004 by $289,000 and $1,317,000, respectively, from the
comparable prior periods. The increase for the current quarter was principally
attributable to $241,000 of professional fees incurred in connection with the
retention of SunTrust Robinson Humphrey, as described above, and higher
depreciation due to the acceleration for leasehold improvements of four closed
stores aggregating $112,000 in the current quarter in accordance with Financial
Accounting Standards Board Statement No.146 "Accounting for Costs Associated
with Exit or Disposal Activities", such increases were partially offset by a
decrease in advertising costs as a result of one less newspaper circular, as
mentioned above. The increase for the nine months ended May 29, 2004 was
primarily due to the increase in professional fees and depreciation, as
previously mentioned, an increase in advertising expense as a result of
additional advertising and market penetration in the six months ended February
28, 2004 compared to the comparable period last year and higher insurance costs
as a result of adverse market conditions when the Company's primary insurance
policies were renewed in the third and fourth quarters last year. Selling,
general and administrative expenses, as a percentage of net sales, increased by
1.9% and 0.9% for the three and nine months ended May 29, 2004, respectively,
compared to the comparable prior year periods principally due to these expenses
increasing at a greater rate than net sales. Excluding the additional
professional fees and depreciation mentioned above, selling, general and
administrative expenses, as a percentage of net sales, increased by 0.6% for the
three and nine months ended May 29, 2004 compared to the comparable prior year
periods.
Interest income, net, decreased $10,000 for the three months ended May 29, 2004
from the comparable prior period due to increased borrowings under the credit
facility and a decrease in average investment levels. Interest income, net,
decreased by $35,000 for the nine months ended May 29, 2004, as compared to the
comparable prior year period, due to a decrease in average investment levels
coupled with a decline in interest rates on short-term investments in the six
months ended February 28, 2004 versus the comparable prior year period and
increased borrowings under the credit facility, as mentioned above. See
"Liquidity and Capital Resources".
Net loss increased by $349,000 for the three months ended May 29, 2004, as
compared to the prior comparable period. The increase in net loss resulted from
a decrease in net sales and the related decrease in gross profit, in addition to
an increase in selling, general and administrative expenses. Net income
decreased by $362,000 for the nine months ended May 29, 2004, as compared to the
prior period. The decrease in net income is primarily due to an increase in
selling, general and administrative expenses that was partially offset by the
increase in net sales and the related increase in gross profit in addition to
the realized gain from the sale of securities.
Page 12 of 18
Seasonality
The Company's business is seasonal, which the Company believes is typical of the
retail craft and fabric industry. The Company's highest sales and earnings
levels traditionally occur between September and December. The Company has
historically operated at a loss during the fourth quarter of its fiscal year,
the June through August summer period.
Year to year comparisons of quarterly results and comparable store sales can be
affected by a variety of factors, including the timing and duration of holiday
selling seasons and the timing of new store openings and promotional markdowns.
Liquidity and Capital Resources
The Company's primary needs for liquidity are to maintain inventory for the
Company's existing stores and to fund the costs of opening new stores, including
capital improvements, initial inventory and pre-opening expenses. During the
nine months ended May 29, 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 decreased
$129,000 for the nine months ended May 24, 2004 as compared to the August 30,
2003 amount.
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 of 4.00% which remained constant throughout
the nine months ended May 29, 2004. The credit facility requires the Company to
maintain a compensating balance of $400,000 which is included in cash in the
accompanying balance sheet and is subject to interest charges if not met, 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
nine month periods ended May 29, 2004 and May 31, 2003, respectively. There was
$2,640,000 of direct borrowings outstanding under the line of credit at May 29,
2004 and no direct borrowings were outstanding at May 31, 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. At May 29, 2004, the Company had outstanding letters of credit in
the aggregate amount of $306,000.
Net cash used by operating activities for the nine months ended May 29, 2004
amounted to $1,843,000, and $937,000 was used for purchases of property and
equipment. Net cash used by operating activities resulted primarily from a
decrease in accounts payable-trade of $3,771,000 and a decrease in accrued
expenses and other current liabilities of $530,000 that were partially offset by
a decrease in merchandise inventories of $2,418,000. During the nine months
ended May 29, 2004, the Company opened one store, closed two stores, relocated
two stores and was operating sixty-seven stores at the end of the period. During
the remainder of the fiscal year ending August 28, 2004, the Company will open
one additional new store and anticipates relocating one store and not closing
any 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 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
May 29, 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 13 of 18
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 $358,000 and $1,177,000 for the three and nine months ended May 29,
2004, and $294,000 and $851,000 for the three and nine months ended May 31,
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
$1,188,000 and $5,320,000 for the three and nine months ended May 29, 2004 and
$1,332,000 and $5,076,000 for the and nine months ended May 31, 2003,
respectively.
Recent Accounting Standards
On March 31, 2004, the Financial Accounting Standards Board (FASB) issued a
proposed Statement, Share-Based Payment that addresses the accounting for
share-based awards to employees, including employee-stock-purchase-plans
(ESPPs). The FASB formally proposed to require companies to recognize the fair
value of stock options and other stock-based compensation to employees. The
proposed Statement would eliminate the ability to account for stock-based
compensation transactions using the intrinsic value method under APB Opinion No.
25, "Accounting for Stock Issued to Employees", and generally would require
instead that such transactions be accounted for using a fair-value-based method.
The proposed requirements in the exposure draft would be effective for public
companies as of the beginning of the first fiscal year beginning after December
15, 2004. The Company currently accounts for its stock-based compensation plans
in accordance with APB Opinion No. 25. Therefore, if the FASB adopts this
proposed statement, as currently drafted, the Company will have to recognize
fair value of the stock-based compensation in the consolidated statement of
income rather than disclosing the pro forma impact of the stock-based
compensation as the Company currently does.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk is the potential change in a financial instrument's value caused by
fluctuations in interest or currency exchange rates, or in equity and commodity
prices. The Company's activities expose it to certain risks that management
evaluates carefully to minimize earnings volatility. At May 29, 2004 and May 31,
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 May 29, 2004). There was $2,640,000 of direct borrowings outstanding under
the line of credit at May 29, 2004 and no direct borrowings were outstanding at
May 31, 2003.
Page 14 of 18
The following table details future projected payments for the Company's
significant contractual obligations as of May 29, 2004:
Computer and
Other Technology
Operating Leases Related Commitments Total
Three Months Ending:
2004 $ 2,445,809 $ 111,475 $ 2,557,284
Fiscal Year Ending:
2005 9,644,415 98,761 9,743,176
2006 8,381,106 55,061 8,436,167
2007 7,060,410 1,519 7,061,929
2008 5,767,464 0 5,767,464
Thereafter 13,150,174 0 13,150,174
------------- ----------- ----------
$ 46,449,378 $ 266,816 $ 46,716,194
============= =========== ==========
The Company entered into letter agreements dated May 12, 2004 with each of eight
employees for retention payments to such employee(s) in the event that a change
in control (as defined under the Company's Change of Control Agreement) occurs
on or before December 31, 2004 and the employee remains employed by the Company,
or its successor, ninety (90) days after such change of control. The aggregate
potential amount of the payments that could be made by the Company under these
agreements equals $540,000.
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.
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 15 of 18
PART II - OTHER INFORMATION
Items 1.-5. Not Applicable
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
10.1 Change of Control Agreement, effective May 12, 2004 made by the
Company on behalf of John Alberto
10.2 Change of Control Agreement, effective May 12, 2004 made by the
Company on behalf of Steven B. Barnett
10.3 Change of Control Agreement, effective May 12, 2004 made by the
Company on behalf of Patricia Dahlem
10.4 Change of Control Agreement, effective May 12, 2004 made by the
Company on behalf of Jeffrey C. Gerstel
10.5 Change of Control Agreement, effective May 12, 2004 made by the
Company on behalf of Judith Lombardo
10.6 Change of Control Agreement, effective May 12, 2004 made by the
Company on behalf of Bruce Miller
10.7 Change of Control Agreement, effective May 12, 2004 made by the
Company on behalf of Leonard Settanni
99.1 Certification of Chief Executive 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) No reports on Form 8-K have been filed during the quarter ended May 29,
2004.
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: July 13, 2004 /S/ Stanley Berenzweig
Stanley Berenzweig
Chairman of the Board and
Chief Executive Officer
Date: July 13, 2004 /S/ Steven B. Barnett
---------------------
Steven B. Barnett
Acting Principal Financial
Officer, and Acting Principal
Accounting Officer
Page 16 of 18
CERTIFICATIONS
I, Stanley Berenzweig, certify that:
1. I have reviewed this 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 we have: a)
designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared; b) evaluated the
effectiveness of the registrant's disclosure controls and procedures as of a
date within 90 days prior to the filing date of this quarterly report ( the
"Evaluation Date"); and c) presented in this quarterly report our conclusions
about the effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and b) any fraud, whether
or not material, that involves management or other employees who have a
significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether there were significant changes in internal controls or
in other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
SIGNATURE TITLE(S) DATE
/S/ STANLEY BERENZWEIG Principal Executive July 13, 2004
- ---------------------- and Director
Stanley Berenzweig
Page 17 of 18
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 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, July 13, 2004
- ---------------------- Acting Chief Financial Officer
Steven B. Barnett
Page 18 of 18
EXHIBIT 10.1
CHANGE OF CONTROL AGREEMENT
THIS CHANGE OF CONTROL AGREEMENT (this "Agreement") is effective as of
the 12th day of May, 2004 (the "Effective Date"), and made by RAG SHOPS, INC. on
behalf of itself and its subsidiaries (collectively, the "Company") for the
benefit of John Alberto (the "Employee").
WHEREAS, the Employee is currently employed by the Company; and
WHEREAS, the Board of Directors of the Company or a committee thereof
(collectively, the "Board") has determined that it is in the best interests of
the Company and its stockholders to assure that the Company will have the
continued services and dedication of the Employee, notwithstanding the
possibility or occurrence of a sale of the Company or a tender offer, merger,
consolidation, dissolution or other corporate transaction involving the Company
resulting in a change of control which would require the filing by the Company
under the Securities Exchange Act of 1934, as amended, of a Current Report on
Form 8-K (collectively, a "Change of Control"); and
WHEREAS, in order to accomplish the foregoing objective, the Board has
authorized and directed the Company to enter into this Agreement;
NOW, THEREFORE, the Company hereby agrees for the benefit of the
Employee as follows:
1. Change of Control Payment. In the event that prior to the
termination of this Agreement (as determined in accordance with Section 3
hereof), (i) a Change of Control shall have occurred, and (ii) (A) the
Employee's employment with the Company is terminated by the Company without
Cause (as hereinafter defined) within the period ending ninety (90) calendar
days after such Change of Control (the "Relevant Period") or (B) the Employee
remains an employee of the Company for the entire Relevant Period, then the
Company shall pay to the Employee (in addition to any other amounts that may be
due and owing to the Employee by the Company), in a single lump sum payment
within thirty (30) days after the Relevant Period, an amount equal to
$30,000.00.
2. Cause. The term "Cause" shall mean (i) the willful failure of the
Employee substantially to perform the duties of his employment (other than any
such failure resulting from incapacity due to physical or mental illness) for at
least five (5) days after a written demand for substantial performance is
delivered to the Employee by the Company which specifically identifies the
manner in which the Company believes the Employee has not substantially
performed the duties of his employment; (ii) the Employee's engaging in conduct
that constitutes neglect or willful misconduct in carrying out the duties of his
employment or that is injurious to the Company or any of its affiliates; (iii)
the Employee's arrest for, conviction of, or entering a plea of guilty, nolo
contendere (or similar plea) to a crime that constitutes a felony or any crime
of moral turpitude; (iv) the Employee's directly or indirectly selling, passing
on or otherwise using or disclosing, without permission, any confidential
information of the Company; or (v) the Employee's direct or indirect
participation in business activities in competition with the Company.
3. Term. This Agreement shall become effective on the Effective Date
and shall terminate on the earliest to occur of the following events: (i) on
December 31, 2004, if no Change of Control has occurred prior to December 31,
2004; and (ii) on the date of the cessation of employment with the Company, (a)
if the Employee ceases to be employed by the Company for any reason (including,
without limitation, as a result of death, disability, resignation or termination
with or without Cause) prior to the occurrence of a Change of Control or (b) if
the Employee ceases to be employed by the Company for any reason other than
termination of the employment by the Company without Cause after a Change of
Control shall have occurred, but within the Relevant Period.
4. Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of New Jersey, without reference to the
choice of law principles thereof.
5. Assignability. This Agreement is personal to the Employee and
without the prior written consent of the Company shall not be assignable by the
Employee. This Agreement shall inure to the benefit of and be enforceable by the
Employee. This Agreement shall inure to the benefit of and be binding upon the
Company and its successors and assigns. The Company shall require any
corporation, entity, individual or other person who is the successor (whether
direct or indirect, by purchase, merger, consolidation, reorganization, or
otherwise) to all or substantially all of the business and/or assets of the
Company, to expressly assume and agree to perform, by a written agreement, all
of the obligations of the Company under this Agreement, prior to or
contemporaneously with a Change of Control. As used in this Agreement, the term
"Company" shall mean the Company as defined above and any successor to its
business and/or assets as described herein which assumes and agrees to perform
this Agreement by operation of law, written agreement, or otherwise.
6. Waiver. This Agreement may not be changed or terminated without the
prior written agreement of both the Company and the Employee. The waiver of any
breach of any term or condition of this Agreement shall not be deemed to
constitute the waiver of any breach of the same or any other term or condition
of this Agreement.
7. Severability. In the event any provision of this Agreement is found
to be unenforceable or invalid, such provision shall be severable from this
Agreement and shall not affect the enforceability or validity of any other
provision of this Agreement. If any provision of this Agreement is capable to
two constructions, one of which would render the provision void and the other
that would render the provision valid, then the provision shall have the
construction that renders it valid.
8. This Agreement Not a Contract of Employment For Any Reason. This
Agreement is not a contract of employment and the terms of employment of the
Employee including, without limitation, his or her status as an
employee-at-will, shall not be affected in any way by this Agreement. The grant
and delivery of this Agreement shall not be construed as conferring any legal
rights upon the Employee for a continuation of employment, nor shall it
interfere with the right of the Company or any subsidiary to discharge the
Employee.
IN WITNESS WHEREOF, the undersigned has duly executed this Agreement as
of the Effective Date on behalf of the Company.
RAG SHOPS, INC.
By: /S/ Jeffrey C. Gerstel
-----------------------------
Name: Jeffrey C. Gerstel
Title: President
EXHIBIT 10.2
CHANGE OF CONTROL AGREEMENT
THIS CHANGE OF CONTROL AGREEMENT (this "Agreement") is effective as of
the 12th day of May, 2004 (the "Effective Date"), and made by RAG SHOPS, INC. on
behalf of itself and its subsidiaries (collectively, the "Company") for the
benefit of Steven B. Barnett (the "Employee").
WHEREAS, the Employee is currently employed by the Company; and
WHEREAS, the Board of Directors of the Company or a committee thereof
(collectively, the "Board") has determined that it is in the best interests of
the Company and its stockholders to assure that the Company will have the
continued services and dedication of the Employee, notwithstanding the
possibility or occurrence of a sale of the Company or a tender offer, merger,
consolidation, dissolution or other corporate transaction involving the Company
resulting in a change of control which would require the filing by the Company
under the Securities Exchange Act of 1934, as amended, of a Current Report on
Form 8-K (collectively, a "Change of Control"); and
WHEREAS, in order to accomplish the foregoing objective, the Board has
authorized and directed the Company to enter into this Agreement;
NOW, THEREFORE, the Company hereby agrees for the benefit of the
Employee as follows:
1. Change of Control Payment. In the event that prior to the
termination of this Agreement (as determined in accordance with Section 3
hereof), (i) a Change of Control shall have occurred, and (ii) (A) the
Employee's employment with the Company is terminated by the Company without
Cause (as hereinafter defined) within the period ending ninety (90) calendar
days after such Change of Control (the "Relevant Period") or (B) the Employee
remains an employee of the Company for the entire Relevant Period, then the
Company shall pay to the Employee (in addition to any other amounts that may be
due and owing to the Employee by the Company), in a single lump sum payment
within thirty (30) days after the Relevant Period, an amount equal to
$145,000.00.
2. Cause. The term "Cause" shall mean (i) the willful failure of the
Employee substantially to perform the duties of his employment (other than any
such failure resulting from incapacity due to physical or mental illness) for at
least five (5) days after a written demand for substantial performance is
delivered to the Employee by the Company which specifically identifies the
manner in which the Company believes the Employee has not substantially
performed the duties of his employment; (ii) the Employee's engaging in conduct
that constitutes neglect or willful misconduct in carrying out the duties of his
employment or that is injurious to the Company or any of its affiliates; (iii)
the Employee's arrest for, conviction of, or entering a plea of guilty, nolo
contendere (or similar plea) to a crime that constitutes a felony or any crime
of moral turpitude; (iv) the Employee's directly or indirectly selling, passing
on or otherwise using or disclosing, without permission, any confidential
information of the Company; or (v) the Employee's direct or indirect
participation in business activities in competition with the Company.
3. Term. This Agreement shall become effective on the Effective Date
and shall terminate on the earliest to occur of the following events: (i) on
December 31, 2004, if no Change of Control has occurred prior to December 31,
2004; and (ii) on the date of the cessation of employment with the Company, (a)
if the Employee ceases to be employed by the Company for any reason (including,
without limitation, as a result of death, disability, resignation or termination
with or without Cause) prior to the occurrence of a Change of Control or (b) if
the Employee ceases to be employed by the Company for any reason other than
termination of the employment by the Company without Cause after a Change of
Control shall have occurred, but within the Relevant Period.
4. Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of New Jersey, without reference to the
choice of law principles thereof.
5. Assignability. This Agreement is personal to the Employee and
without the prior written consent of the Company shall not be assignable by the
Employee. This Agreement shall inure to the benefit of and be enforceable by the
Employee. This Agreement shall inure to the benefit of and be binding upon the
Company and its successors and assigns. The Company shall require any
corporation, entity, individual or other person who is the successor (whether
direct or indirect, by purchase, merger, consolidation, reorganization, or
otherwise) to all or substantially all of the business and/or assets of the
Company, to expressly assume and agree to perform, by a written agreement, all
of the obligations of the Company under this Agreement, prior to or
contemporaneously with a Change of Control. As used in this Agreement, the term
"Company" shall mean the Company as defined above and any successor to its
business and/or assets as described herein which assumes and agrees to perform
this Agreement by operation of law, written agreement, or otherwise.
6. Waiver. This Agreement may not be changed or terminated without the
prior written agreement of both the Company and the Employee. The waiver of any
breach of any term or condition of this Agreement shall not be deemed to
constitute the waiver of any breach of the same or any other term or condition
of this Agreement.
7. Severability. In the event any provision of this Agreement is found
to be unenforceable or invalid, such provision shall be severable from this
Agreement and shall not affect the enforceability or validity of any other
provision of this Agreement. If any provision of this Agreement is capable to
two constructions, one of which would render the provision void and the other
that would render the provision valid, then the provision shall have the
construction that renders it valid.
8. This Agreement Not a Contract of Employment For Any Reason. This
Agreement is not a contract of employment and the terms of employment of the
Employee including, without limitation, his or her status as an
employee-at-will, shall not be affected in any way by this Agreement. The grant
and delivery of this Agreement shall not be construed as conferring any legal
rights upon the Employee for a continuation of employment, nor shall it
interfere with the right of the Company or any subsidiary to discharge the
Employee.
IN WITNESS WHEREOF, the undersigned has duly executed this Agreement as
of the Effective Date on behalf of the Company.
RAG SHOPS, INC.
By: /S/ Jeffrey C. Gerstel
----------------------------
Name: Jeffrey C. Gerstel
Title: President
EXHIBIT 10.3
CHANGE OF CONTROL AGREEMENT
THIS CHANGE OF CONTROL AGREEMENT (this "Agreement") is effective as of
the 12th day of May, 2004 (the "Effective Date"), and made by RAG SHOPS, INC. on
behalf of itself and its subsidiaries (collectively, the "Company") for the
benefit of Patricia Dahlem (the "Employee").
WHEREAS, the Employee is currently employed by the Company; and
WHEREAS, the Board of Directors of the Company or a committee thereof
(collectively, the "Board") has determined that it is in the best interests of
the Company and its stockholders to assure that the Company will have the
continued services and dedication of the Employee, notwithstanding the
possibility or occurrence of a sale of the Company or a tender offer, merger,
consolidation, dissolution or other corporate transaction involving the Company
resulting in a change of control which would require the filing by the Company
under the Securities Exchange Act of 1934, as amended, of a Current Report on
Form 8-K (collectively, a "Change of Control"); and
WHEREAS, in order to accomplish the foregoing objective, the Board has
authorized and directed the Company to enter into this Agreement;
NOW, THEREFORE, the Company hereby agrees for the benefit of the
Employee as follows:
1. Change of Control Payment. In the event that prior to the
termination of this Agreement (as determined in accordance with Section 3
hereof), (i) a Change of Control shall have occurred, and (ii) (A) the
Employee's employment with the Company is terminated by the Company without
Cause (as hereinafter defined) within the period ending ninety (90) calendar
days after such Change of Control (the "Relevant Period") or (B) the Employee
remains an employee of the Company for the entire Relevant Period, then the
Company shall pay to the Employee (in addition to any other amounts that may be
due and owing to the Employee by the Company), in a single lump sum payment
within thirty (30) days after the Relevant Period, an amount equal to
$30,000.00.
2. Cause. The term "Cause" shall mean (i) the willful failure of the
Employee substantially to perform the duties of his employment (other than any
such failure resulting from incapacity due to physical or mental illness) for at
least five (5) days after a written demand for substantial performance is
delivered to the Employee by the Company which specifically identifies the
manner in which the Company believes the Employee has not substantially
performed the duties of his employment; (ii) the Employee's engaging in conduct
that constitutes neglect or willful misconduct in carrying out the duties of his
employment or that is injurious to the Company or any of its affiliates; (iii)
the Employee's arrest for, conviction of, or entering a plea of guilty, nolo
contendere (or similar plea) to a crime that constitutes a felony or any crime
of moral turpitude; (iv) the Employee's directly or indirectly selling, passing
on or otherwise using or disclosing, without permission, any confidential
information of the Company; or (v) the Employee's direct or indirect
participation in business activities in competition with the Company.
3. Term. This Agreement shall become effective on the Effective Date
and shall terminate on the earliest to occur of the following events: (i) on
December 31, 2004, if no Change of Control has occurred prior to December 31,
2004; and (ii) on the date of the cessation of employment with the Company, (a)
if the Employee ceases to be employed by the Company for any reason (including,
without limitation, as a result of death, disability, resignation or termination
with or without Cause) prior to the occurrence of a Change of Control or (b) if
the Employee ceases to be employed by the Company for any reason other than
termination of the employment by the Company without Cause after a Change of
Control shall have occurred, but within the Relevant Period.
4. Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of New Jersey, without reference to the
choice of law principles thereof.
5. Assignability. This Agreement is personal to the Employee and
without the prior written consent of the Company shall not be assignable by the
Employee. This Agreement shall inure to the benefit of and be enforceable by the
Employee. This Agreement shall inure to the benefit of and be binding upon the
Company and its successors and assigns. The Company shall require any
corporation, entity, individual or other person who is the successor (whether
direct or indirect, by purchase, merger, consolidation, reorganization, or
otherwise) to all or substantially all of the business and/or assets of the
Company, to expressly assume and agree to perform, by a written agreement, all
of the obligations of the Company under this Agreement, prior to or
contemporaneously with a Change of Control. As used in this Agreement, the term
"Company" shall mean the Company as defined above and any successor to its
business and/or assets as described herein which assumes and agrees to perform
this Agreement by operation of law, written agreement, or otherwise.
6. Waiver. This Agreement may not be changed or terminated without the
prior written agreement of both the Company and the Employee. The waiver of any
breach of any term or condition of this Agreement shall not be deemed to
constitute the waiver of any breach of the same or any other term or condition
of this Agreement.
7. Severability. In the event any provision of this Agreement is found
to be unenforceable or invalid, such provision shall be severable from this
Agreement and shall not affect the enforceability or validity of any other
provision of this Agreement. If any provision of this Agreement is capable to
two constructions, one of which would render the provision void and the other
that would render the provision valid, then the provision shall have the
construction that renders it valid.
8. This Agreement Not a Contract of Employment For Any Reason. This
Agreement is not a contract of employment and the terms of employment of the
Employee including, without limitation, his or her status as an
employee-at-will, shall not be affected in any way by this Agreement. The grant
and delivery of this Agreement shall not be construed as conferring any legal
rights upon the Employee for a continuation of employment, nor shall it
interfere with the right of the Company or any subsidiary to discharge the
Employee.
IN WITNESS WHEREOF, the undersigned has duly executed this Agreement as
of the Effective Date on behalf of the Company.
RAG SHOPS, INC.
By: /S/ Jeffrey C. Gerstel
-----------------------------
Name: Jeffrey C. Gerstel
Title: President
EXHIBIT 10.4
CHANGE OF CONTROL AGREEMENT
THIS CHANGE OF CONTROL AGREEMENT (this "Agreement") is effective as of
the 12th day of May, 2004 (the "Effective Date"), and made by RAG SHOPS, INC. on
behalf of itself and its subsidiaries (collectively, the "Company") for the
benefit of Jeffrey C. Gerstel (the "Employee").
WHEREAS, the Employee is currently employed by the Company; and
WHEREAS, the Board of Directors of the Company or a committee thereof
(collectively, the "Board") has determined that it is in the best interests of
the Company and its stockholders to assure that the Company will have the
continued services and dedication of the Employee, notwithstanding the
possibility or occurrence of a sale of the Company or a tender offer, merger,
consolidation, dissolution or other corporate transaction involving the Company
resulting in a change of control which would require the filing by the Company
under the Securities Exchange Act of 1934, as amended, of a Current Report on
Form 8-K (collectively, a "Change of Control"); and
WHEREAS, in order to accomplish the foregoing objective, the Board has
authorized and directed the Company to enter into this Agreement;
NOW, THEREFORE, the Company hereby agrees for the benefit of the
Employee as follows:
1. Change of Control Payment. In the event that prior to the
termination of this Agreement (as determined in accordance with Section 3
hereof), (i) a Change of Control shall have occurred, and (ii) (A) the
Employee's employment with the Company is terminated by the Company without
Cause (as hereinafter defined) within the period ending ninety (90) calendar
days after such Change of Control (the "Relevant Period") or (B) the Employee
remains an employee of the Company for the entire Relevant Period, then the
Company shall pay to the Employee (in addition to any other amounts that may be
due and owing to the Employee by the Company), in a single lump sum payment
within thirty (30) days after the Relevant Period, an amount equal to
$100,000.00.
2. Cause. The term "Cause" shall mean (i) the willful failure of the
Employee substantially to perform the duties of his employment (other than any
such failure resulting from incapacity due to physical or mental illness) for at
least five (5) days after a written demand for substantial performance is
delivered to the Employee by the Company which specifically identifies the
manner in which the Company believes the Employee has not substantially
performed the duties of his employment; (ii) the Employee's engaging in conduct
that constitutes neglect or willful misconduct in carrying out the duties of his
employment or that is injurious to the Company or any of its affiliates; (iii)
the Employee's arrest for, conviction of, or entering a plea of guilty, nolo
contendere (or similar plea) to a crime that constitutes a felony or any crime
of moral turpitude; (iv) the Employee's directly or indirectly selling, passing
on or otherwise using or disclosing, without permission, any confidential
information of the Company; or (v) the Employee's direct or indirect
participation in business activities in competition with the Company.
3. Term. This Agreement shall become effective on the Effective Date
and shall terminate on the earliest to occur of the following events: (i) on
December 31, 2004, if no Change of Control has occurred prior to December 31,
2004; and (ii) on the date of the cessation of employment with the Company, (a)
if the Employee ceases to be employed by the Company for any reason (including,
without limitation, as a result of death, disability, resignation or termination
with or without Cause) prior to the occurrence of a Change of Control or (b) if
the Employee ceases to be employed by the Company for any reason other than
termination of the employment by the Company without Cause after a Change of
Control shall have occurred, but within the Relevant Period.
4. Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of New Jersey, without reference to the
choice of law principles thereof.
5. Assignability. This Agreement is personal to the Employee and
without the prior written consent of the Company shall not be assignable by the
Employee. This Agreement shall inure to the benefit of and be enforceable by the
Employee. This Agreement shall inure to the benefit of and be binding upon the
Company and its successors and assigns. The Company shall require any
corporation, entity, individual or other person who is the successor (whether
direct or indirect, by purchase, merger, consolidation, reorganization, or
otherwise) to all or substantially all of the business and/or assets of the
Company, to expressly assume and agree to perform, by a written agreement, all
of the obligations of the Company under this Agreement, prior to or
contemporaneously with a Change of Control. As used in this Agreement, the term
"Company" shall mean the Company as defined above and any successor to its
business and/or assets as described herein which assumes and agrees to perform
this Agreement by operation of law, written agreement, or otherwise.
6. Waiver. This Agreement may not be changed or terminated without the
prior written agreement of both the Company and the Employee. The waiver of any
breach of any term or condition of this Agreement shall not be deemed to
constitute the waiver of any breach of the same or any other term or condition
of this Agreement.
7. Severability. In the event any provision of this Agreement is found
to be unenforceable or invalid, such provision shall be severable from this
Agreement and shall not affect the enforceability or validity of any other
provision of this Agreement. If any provision of this Agreement is capable to
two constructions, one of which would render the provision void and the other
that would render the provision valid, then the provision shall have the
construction that renders it valid.
8. This Agreement Not a Contract of Employment For Any Reason. This
Agreement is not a contract of employment and the terms of employment of the
Employee including, without limitation, his or her status as an
employee-at-will, shall not be affected in any way by this Agreement. The grant
and delivery of this Agreement shall not be construed as conferring any legal
rights upon the Employee for a continuation of employment, nor shall it
interfere with the right of the Company or any subsidiary to discharge the
Employee.
IN WITNESS WHEREOF, the undersigned has duly executed this Agreement as
of the Effective Date on behalf of the Company.
RAG SHOPS, INC.
By: /S/ Stanley Berenzweig
-------------------------
Name: Stanley Berenzweig
Title: Chief Executive Officer
EXHIBIT 10.5
CHANGE OF CONTROL AGREEMENT
THIS CHANGE OF CONTROL AGREEMENT (this "Agreement") is effective as of
the 12th day of May, 2004 (the "Effective Date"), and made by RAG SHOPS, INC. on
behalf of itself and its subsidiaries (collectively, the "Company") for the
benefit of Judith Lombardo (the "Employee").
WHEREAS, the Employee is currently employed by the Company; and
WHEREAS, the Board of Directors of the Company or a committee thereof
(collectively, the "Board") has determined that it is in the best interests of
the Company and its stockholders to assure that the Company will have the
continued services and dedication of the Employee, notwithstanding the
possibility or occurrence of a sale of the Company or a tender offer, merger,
consolidation, dissolution or other corporate transaction involving the Company
resulting in a change of control which would require the filing by the Company
under the Securities Exchange Act of 1934, as amended, of a Current Report on
Form 8-K (collectively, a "Change of Control"); and
WHEREAS, in order to accomplish the foregoing objective, the Board has
authorized and directed the Company to enter into this Agreement;
NOW, THEREFORE, the Company hereby agrees for the benefit of the
Employee as follows:
1. Change of Control Payment. In the event that prior to the
termination of this Agreement (as determined in accordance with Section 3
hereof), (i) a Change of Control shall have occurred, and (ii) (A) the
Employee's employment with the Company is terminated by the Company without
Cause (as hereinafter defined) within the period ending ninety (90) calendar
days after such Change of Control (the "Relevant Period") or (B) the Employee
remains an employee of the Company for the entire Relevant Period, then the
Company shall pay to the Employee (in addition to any other amounts that may be
due and owing to the Employee by the Company), in a single lump sum payment
within thirty (30) days after the Relevant Period, an amount equal to
$145,000.00.
2. Cause. The term "Cause" shall mean (i) the willful failure of the
Employee substantially to perform the duties of his employment (other than any
such failure resulting from incapacity due to physical or mental illness) for at
least five (5) days after a written demand for substantial performance is
delivered to the Employee by the Company which specifically identifies the
manner in which the Company believes the Employee has not substantially
performed the duties of his employment; (ii) the Employee's engaging in conduct
that constitutes neglect or willful misconduct in carrying out the duties of his
employment or that is injurious to the Company or any of its affiliates; (iii)
the Employee's arrest for, conviction of, or entering a plea of guilty, nolo
contendere (or similar plea) to a crime that constitutes a felony or any crime
of moral turpitude; (iv) the Employee's directly or indirectly selling, passing
on or otherwise using or disclosing, without permission, any confidential
information of the Company; or (v) the Employee's direct or indirect
participation in business activities in competition with the Company.
3. Term. This Agreement shall become effective on the Effective Date
and shall terminate on the earliest to occur of the following events: (i) on
December 31, 2004, if no Change of Control has occurred prior to December 31,
2004; and (ii) on the date of the cessation of employment with the Company, (a)
if the Employee ceases to be employed by the Company for any reason (including,
without limitation, as a result of death, disability, resignation or termination
with or without Cause) prior to the occurrence of a Change of Control or (b) if
the Employee ceases to be employed by the Company for any reason other than
termination of the employment by the Company without Cause after a Change of
Control shall have occurred, but within the Relevant Period.
4. Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of New Jersey, without reference to the
choice of law principles thereof.
5. Assignability. This Agreement is personal to the Employee and
without the prior written consent of the Company shall not be assignable by the
Employee. This Agreement shall inure to the benefit of and be enforceable by the
Employee. This Agreement shall inure to the benefit of and be binding upon the
Company and its successors and assigns. The Company shall require any
corporation, entity, individual or other person who is the successor (whether
direct or indirect, by purchase, merger, consolidation, reorganization, or
otherwise) to all or substantially all of the business and/or assets of the
Company, to expressly assume and agree to perform, by a written agreement, all
of the obligations of the Company under this Agreement, prior to or
contemporaneously with a Change of Control. As used in this Agreement, the term
"Company" shall mean the Company as defined above and any successor to its
business and/or assets as described herein which assumes and agrees to perform
this Agreement by operation of law, written agreement, or otherwise.
6. Waiver. This Agreement may not be changed or terminated without the
prior written agreement of both the Company and the Employee. The waiver of any
breach of any term or condition of this Agreement shall not be deemed to
constitute the waiver of any breach of the same or any other term or condition
of this Agreement.
7. Severability. In the event any provision of this Agreement is found
to be unenforceable or invalid, such provision shall be severable from this
Agreement and shall not affect the enforceability or validity of any other
provision of this Agreement. If any provision of this Agreement is capable to
two constructions, one of which would render the provision void and the other
that would render the provision valid, then the provision shall have the
construction that renders it valid.
8. This Agreement Not a Contract of Employment For Any Reason. This
Agreement is not a contract of employment and the terms of employment of the
Employee including, without limitation, his or her status as an
employee-at-will, shall not be affected in any way by this Agreement. The grant
and delivery of this Agreement shall not be construed as conferring any legal
rights upon the Employee for a continuation of employment, nor shall it
interfere with the right of the Company or any subsidiary to discharge the
Employee.
IN WITNESS WHEREOF, the undersigned has duly executed this Agreement as
of the Effective Date on behalf of the Company.
RAG SHOPS, INC.
By: /S/ Jeffrey C. Gerstel
-----------------------------
Name: Jeffrey C. Gerstel
Title: President
EXHIBIT 10.6
CHANGE OF CONTROL AGREEMENT
THIS CHANGE OF CONTROL AGREEMENT (this "Agreement") is effective as of
the 12th day of May, 2004 (the "Effective Date"), and made by RAG SHOPS, INC. on
behalf of itself and its subsidiaries (collectively, the "Company") for the
benefit of Bruce Miller (the "Employee").
WHEREAS, the Employee is currently employed by the Company; and
WHEREAS, the Board of Directors of the Company or a committee thereof
(collectively, the "Board") has determined that it is in the best interests of
the Company and its stockholders to assure that the Company will have the
continued services and dedication of the Employee, notwithstanding the
possibility or occurrence of a sale of the Company or a tender offer, merger,
consolidation, dissolution or other corporate transaction involving the Company
resulting in a change of control which would require the filing by the Company
under the Securities Exchange Act of 1934, as amended, of a Current Report on
Form 8-K (collectively, a "Change of Control"); and
WHEREAS, in order to accomplish the foregoing objective, the Board has
authorized and directed the Company to enter into this Agreement;
NOW, THEREFORE, the Company hereby agrees for the benefit of the
Employee as follows:
1. Change of Control Payment. In the event that prior to the
termination of this Agreement (as determined in accordance with Section 3
hereof), (i) a Change of Control shall have occurred, and (ii) (A) the
Employee's employment with the Company is terminated by the Company without
Cause (as hereinafter defined) within the period ending ninety (90) calendar
days after such Change of Control (the "Relevant Period") or (B) the Employee
remains an employee of the Company for the entire Relevant Period, then the
Company shall pay to the Employee (in addition to any other amounts that may be
due and owing to the Employee by the Company), in a single lump sum payment
within thirty (30) days after the Relevant Period, an amount equal to
$10,000.00.
2. Cause. The term "Cause" shall mean (i) the willful failure of the
Employee substantially to perform the duties of his employment (other than any
such failure resulting from incapacity due to physical or mental illness) for at
least five (5) days after a written demand for substantial performance is
delivered to the Employee by the Company which specifically identifies the
manner in which the Company believes the Employee has not substantially
performed the duties of his employment; (ii) the Employee's engaging in conduct
that constitutes neglect or willful misconduct in carrying out the duties of his
employment or that is injurious to the Company or any of its affiliates; (iii)
the Employee's arrest for, conviction of, or entering a plea of guilty, nolo
contendere (or similar plea) to a crime that constitutes a felony or any crime
of moral turpitude; (iv) the Employee's directly or indirectly selling, passing
on or otherwise using or disclosing, without permission, any confidential
information of the Company; or (v) the Employee's direct or indirect
participation in business activities in competition with the Company.
3. Term. This Agreement shall become effective on the Effective Date
and shall terminate on the earliest to occur of the following events: (i) on
December 31, 2004, if no Change of Control has occurred prior to December 31,
2004; and (ii) on the date of the cessation of employment with the Company, (a)
if the Employee ceases to be employed by the Company for any reason (including,
without limitation, as a result of death, disability, resignation or termination
with or without Cause) prior to the occurrence of a Change of Control or (b) if
the Employee ceases to be employed by the Company for any reason other than
termination of the employment by the Company without Cause after a Change of
Control shall have occurred, but within the Relevant Period.
4. Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of New Jersey, without reference to the
choice of law principles thereof.
5. Assignability. This Agreement is personal to the Employee and
without the prior written consent of the Company shall not be assignable by the
Employee. This Agreement shall inure to the benefit of and be enforceable by the
Employee. This Agreement shall inure to the benefit of and be binding upon the
Company and its successors and assigns. The Company shall require any
corporation, entity, individual or other person who is the successor (whether
direct or indirect, by purchase, merger, consolidation, reorganization, or
otherwise) to all or substantially all of the business and/or assets of the
Company, to expressly assume and agree to perform, by a written agreement, all
of the obligations of the Company under this Agreement, prior to or
contemporaneously with a Change of Control. As used in this Agreement, the term
"Company" shall mean the Company as defined above and any successor to its
business and/or assets as described herein which assumes and agrees to perform
this Agreement by operation of law, written agreement, or otherwise.
6. Waiver. This Agreement may not be changed or terminated without the
prior written agreement of both the Company and the Employee. The waiver of any
breach of any term or condition of this Agreement shall not be deemed to
constitute the waiver of any breach of the same or any other term or condition
of this Agreement.
7. Severability. In the event any provision of this Agreement is found
to be unenforceable or invalid, such provision shall be severable from this
Agreement and shall not affect the enforceability or validity of any other
provision of this Agreement. If any provision of this Agreement is capable to
two constructions, one of which would render the provision void and the other
that would render the provision valid, then the provision shall have the
construction that renders it valid.
8. This Agreement Not a Contract of Employment For Any Reason. This
Agreement is not a contract of employment and the terms of employment of the
Employee including, without limitation, his or her status as an
employee-at-will, shall not be affected in any way by this Agreement. The grant
and delivery of this Agreement shall not be construed as conferring any legal
rights upon the Employee for a continuation of employment, nor shall it
interfere with the right of the Company or any subsidiary to discharge the
Employee.
IN WITNESS WHEREOF, the undersigned has duly executed this Agreement as
of the Effective Date on behalf of the Company.
RAG SHOPS, INC.
By: /S/ Jeffrey C. Gerstel
-----------------------------
Name: Jeffrey C. Gerstel
Title: President
EXHIBIT 10.7
CHANGE OF CONTROL AGREEMENT
THIS CHANGE OF CONTROL AGREEMENT (this "Agreement") is effective as of
the 12th day of May, 2004 (the "Effective Date"), and made by RAG SHOPS, INC. on
behalf of itself and its subsidiaries (collectively, the "Company") for the
benefit of Leonard Settanni (the "Employee").
WHEREAS, the Employee is currently employed by the Company; and
WHEREAS, the Board of Directors of the Company or a committee thereof
(collectively, the "Board") has determined that it is in the best interests of
the Company and its stockholders to assure that the Company will have the
continued services and dedication of the Employee, notwithstanding the
possibility or occurrence of a sale of the Company or a tender offer, merger,
consolidation, dissolution or other corporate transaction involving the Company
resulting in a change of control which would require the filing by the Company
under the Securities Exchange Act of 1934, as amended, of a Current Report on
Form 8-K (collectively, a "Change of Control"); and
WHEREAS, in order to accomplish the foregoing objective, the Board has
authorized and directed the Company to enter into this Agreement;
NOW, THEREFORE, the Company hereby agrees for the benefit of the
Employee as follows:
1. Change of Control Payment. In the event that prior to the
termination of this Agreement (as determined in accordance with Section 3
hereof), (i) a Change of Control shall have occurred, and (ii) (A) the
Employee's employment with the Company is terminated by the Company without
Cause (as hereinafter defined) within the period ending ninety (90) calendar
days after such Change of Control (the "Relevant Period") or (B) the Employee
remains an employee of the Company for the entire Relevant Period, then the
Company shall pay to the Employee (in addition to any other amounts that may be
due and owing to the Employee by the Company), in a single lump sum payment
within thirty (30) days after the Relevant Period, an amount equal to
$50,000.00.
2. Cause. The term "Cause" shall mean (i) the willful failure of the
Employee substantially to perform the duties of his employment (other than any
such failure resulting from incapacity due to physical or mental illness) for at
least five (5) days after a written demand for substantial performance is
delivered to the Employee by the Company which specifically identifies the
manner in which the Company believes the Employee has not substantially
performed the duties of his employment; (ii) the Employee's engaging in conduct
that constitutes neglect or willful misconduct in carrying out the duties of his
employment or that is injurious to the Company or any of its affiliates; (iii)
the Employee's arrest for, conviction of, or entering a plea of guilty, nolo
contendere (or similar plea) to a crime that constitutes a felony or any crime
of moral turpitude; (iv) the Employee's directly or indirectly selling, passing
on or otherwise using or disclosing, without permission, any confidential
information of the Company; or (v) the Employee's direct or indirect
participation in business activities in competition with the Company.
3. Term. This Agreement shall become effective on the Effective Date
and shall terminate on the earliest to occur of the following events: (i) on
December 31, 2004, if no Change of Control has occurred prior to December 31,
2004; and (ii) on the date of the cessation of employment with the Company, (a)
if the Employee ceases to be employed by the Company for any reason (including,
without limitation, as a result of death, disability, resignation or termination
with or without Cause) prior to the occurrence of a Change of Control or (b) if
the Employee ceases to be employed by the Company for any reason other than
termination of the employment by the Company without Cause after a Change of
Control shall have occurred, but within the Relevant Period.
4. Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of New Jersey, without reference to the
choice of law principles thereof.
5. Assignability. This Agreement is personal to the Employee and
without the prior written consent of the Company shall not be assignable by the
Employee. This Agreement shall inure to the benefit of and be enforceable by the
Employee. This Agreement shall inure to the benefit of and be binding upon the
Company and its successors and assigns. The Company shall require any
corporation, entity, individual or other person who is the successor (whether
direct or indirect, by purchase, merger, consolidation, reorganization, or
otherwise) to all or substantially all of the business and/or assets of the
Company, to expressly assume and agree to perform, by a written agreement, all
of the obligations of the Company under this Agreement, prior to or
contemporaneously with a Change of Control. As used in this Agreement, the term
"Company" shall mean the Company as defined above and any successor to its
business and/or assets as described herein which assumes and agrees to perform
this Agreement by operation of law, written agreement, or otherwise.
6. Waiver. This Agreement may not be changed or terminated without the
prior written agreement of both the Company and the Employee. The waiver of any
breach of any term or condition of this Agreement shall not be deemed to
constitute the waiver of any breach of the same or any other term or condition
of this Agreement.
7. Severability. In the event any provision of this Agreement is found
to be unenforceable or invalid, such provision shall be severable from this
Agreement and shall not affect the enforceability or validity of any other
provision of this Agreement. If any provision of this Agreement is capable to
two constructions, one of which would render the provision void and the other
that would render the provision valid, then the provision shall have the
construction that renders it valid.
8. This Agreement Not a Contract of Employment For Any Reason. This
Agreement is not a contract of employment and the terms of employment of the
Employee including, without limitation, his or her status as an
employee-at-will, shall not be affected in any way by this Agreement. The grant
and delivery of this Agreement shall not be construed as conferring any legal
rights upon the Employee for a continuation of employment, nor shall it
interfere with the right of the Company or any subsidiary to discharge the
Employee.
IN WITNESS WHEREOF, the undersigned has duly executed this Agreement as
of the Effective Date on behalf of the Company.
RAG SHOPS, INC.
By: /S/ Jeffrey C. Gerstel
-----------------------------
Name: Jeffrey C. Gerstel
Title: President
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. Section 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 May 29, 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 13th day of July 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. 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 for the quarter ended May 29, 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 13th day of July 2004.
/S/ Steven B. Barnett
---------------------
Executive Vice President,
Acting Chief Financial Officer