As Of                Filer                Filing    For·On·As Docs:Size              Issuer               Agent

 2/08/05  Rag Shops Inc                     10-Q/A     11/29/03    5:290K                                   Merrill Corp-MD/FA

Document/Exhibit                   Description                      Pages   Size 

 1: 10-Q/A      Amendment to Quarterly Report                       HTML    164K 
 2: EX-31.1     Certification per Sarbanes-Oxley Act (Section 302)  HTML     14K 
 3: EX-31.2     Certification per Sarbanes-Oxley Act (Section 302)  HTML     14K 
 4: EX-32.1     Certification per Sarbanes-Oxley Act (Section 906)  HTML      9K 
 5: EX-32.2     Certification per Sarbanes-Oxley Act (Section 906)  HTML      9K 

FORM 10-Q/A
(Amendment No. 2)

 

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

(MARK ONE)

 

Commission File No. 0-19194

 

RAG SHOPS, INC.

(Exact name of registrant as specified in its charter)

 

(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   ý

No   o

 

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

 

Yes   o

No   ý

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

 

CLASS		OUTSTANDING AT DECEMBER 31, 2003
Common stock, par value $.01		4,797,983

 

 

EXPLANATORY NOTE – AMENDMENT

 

This Amendment No. 2 to the Quarterly Report on Form 10-Q for the quarterly period ended November 29, 2003 is being filed to amend the disclosure (i) in Part I, Item 1. “Financial Statements”, Note 1 to Rag Shops’ Notes to Consolidated Financial Statements to provide greater detail regarding Rag Shops’ previous disclosures about shares of common stock received in connection with the demutualization of Principal Financial Group, Inc., (ii) in Part I, Item 4.  “Controls and Procedures” and (iii) to correct Part II, Item 6 “Exhibits and Reports on Form 8-K” to provide updated certifications adopted pursuant to the Sarbanes-Oxley Act of 2002.

 

For purposes of this Form 10-Q/A, and in accordance with Rule 12b-15 under the Securities and Exchange Act of 1934, as amended, each item of the Form 10-Q for the quarterly period ended November 29, 2003, as originally filed on January 20, 2004, that was affected has been amended to the extent affected by the referenced amendment/correction and restated in its entirety. All other financial information and disclosures not otherwise amended hereby remain unchanged.

 

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PART I – FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

RAG SHOPS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

THREE MONTHS ENDED NOVEMBER 29, 2003 AND NOVEMBER 30, 2002

 

NOTE 1 – BASIS OF PRESENTATION

 

Recent Developments-Previous Restatement

 

In December 2003, the Company received a check from Principal Financial Group, Inc. (“Principal”) reflecting dividends payable in connection with common stock of Principal. Receipt of the dividend check prompted a Company inquiry which revealed that, due to its ownership of certain life insurance policies issued by Principal Life Insurance Company, a subsidiary of Principal, and maintained by the Company for certain key executive officers, the Company had received 9,766 shares of Principal’s common stock (the “Shares”) in December 2001 as consideration in the demutualization of Principal’s predecessor.  The effective date of the demutualization was in October 2001 and the Shares were issued in December 2001 to one of the Company’s subsidiaries, the owner of the life insurance policies.  The Shares were issued in book-entry form as uncertificated shares and maintained in an account with Mellon Investor Services established by Principal in connection with its demutualization transaction. The Company had not previously recognized or recorded the Shares issued pursuant to such event as it did not discover the existence and its ownership of the common stock because the Company received no communications regarding the demutualization plan, the demutualization compensation or the resultant issuance of the common stock until its receipt in December 2003 of the dividend check which prompted the Company’s inquiries in this regard.  Since the common stock was issued in book-entry form and since the Company continued to receive premium invoices relating to the insurance coverage, no other communications, indications or events occurred which would have prompted earlier inquiry and, therefore, earlier discovery of the stock.  Upon its inquiries, the Company determined that a prior dividend check had been issued in December 2002; this check was never received and, accordingly, never cashed (though upon the determination that such amount was owed to the Company, upon the Company’s request, a replacement check was subsequently issued and cashed in January 2004).

 

The failure to recognize or record the Shares resulted in an error in the previously issued financial statements which prompted the Company to determine to restate prior financial statements to properly reflect the transaction in the first quarter of fiscal year 2002.  In its restated financial statements, the Company has recorded the then fair market value ($180,671) of the Shares as part of operating income as of October 2001, in accordance with Emerging Issues Task Force Issue No. 99-4, “Accounting for Stock Received from the Demutualization of a Mutual Insurance Company”. The Company has classified its holding in the Shares as “available-for-sale” pursuant to Statement of Financial Accounting Standards No. 115 “Accounting for Investments”, whereby the investment will be carried at fair market value and subsequent changes in the market value of the investment will be reflected as an unrealized gain or loss in the stockholders’ equity section of the balance sheets, net of deferred income taxes. Other Comprehensive Income will be presented for all periods pursuant to Statement of Financial Accounting Standards No. 130 “Reporting Comprehensive Income” either in the Consolidated Statements of Changes in Stockholders’ Equity or Notes to Consolidated Financial Statements. Comprehensive income consists of net income or loss for the current period as well as income, expenses, gains or losses, net of income taxes arising during the period that are included in separate components of equity. It includes the unrealized gains and losses on the Company’s available-for-sale security, net of taxes.

 

The fair market value of the Shares as of the close of business on November 29, 2003 was $323,352. Amendments to previous reports of the Company filed with the Securities and Exchange Commission, under the Securities Exchange Act of 1934, as amended, will be filed expeditiously and will include restatement of the financial statements therein, respectively, summarized as follows:

 

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		Current																					Earnings
		assets			Deferred			Stockholders’ Equity									Provision						per share
		Investment			income			Unrealized									for			Net			Basic			Total
		in common			taxes-			gain, net			Retained			Gain from			income			income			and			comprehensive
		stock			long term			of taxes			earnings			demutualization			taxes			(loss)			Diluted			income
		(Amounts in thousands except earnings per share)
Quarterly Period Ended December 1, 2001
Reported		$	—		$	436		$	—		$	18,892		$	—		$	888		$	1,390		$	0.29		$	1,390
Restated		224			336			24			18,992			181			969			1,490			0.31			1,514
Quarterly Period Ended March 2, 2002
Reported		—			436			—			19,021									129						129
Restated		242			328			34			19,121									129						139
Quarterly Period Ended June 1, 2002
Reported		—			436			—			19,111									90						90
Restated		297			303			64			19,211									90						120
Fiscal Year Ended August 31, 2002
Reported		—			497			—			17,791			—			236			290			0.06			290
Restated		286			369			58			17,891			181			317			390			0.08			448
Quarterly Period Ended November 30, 2002
Reported		—			497			—			18,302									511						511
Restated		283			370			56			18,402									511						509
Quarterly Period Ended March 1, 2003
Reported		—			497			—			18,393									91						91
Restated		269			374			46			18,493									91						81
Quarterly Period Ended May 31, 2003
Reported		—			497			—			18,141									(251		)				(251		)
Restated		310			361			74			18,241									(251		)				(223		)
Fiscal Year Ended August 30, 2003
Reported		—			459			—			17,086									(705		)				(705		)
Restated		307			324			72			17,186									(705		)				(691		)

 

Forward-Looking Statements

 

This report contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, which are intended to be covered by safe harbors created thereby. Such forward-looking statements include those regarding the Company’s future results in light of current management activities, and involve known and unknown risks, including competition within the craft and fabric retail industry, weather-related changes in the selling cycle, and other uncertainties (including those risk factors referenced in Company filings with the Securities and Exchange Commission).

 

Item 4.             Controls and Procedures

 

Disclosure controls and procedures are controls and other procedures of the Company that are designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) is properly recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms.  Disclosure controls and procedures include processes to accumulate and communicate relevant information to management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow for timely decisions regarding required disclosures.  Under the supervision and with the participation of our management,

 

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including our CEO and CFO, we conducted an evaluation of our disclosure controls and procedures as of the date of the filing of the original Quarterly Report on Form 10-Q for the quarter ended November 29, 2003.  Based upon this evaluation, our management determined that the Company’s disclosure controls and procedures were adequate.

 

We restated our unaudited condensed consolidated statements of operations and cash flows for each of the quarterly periods in the 2004 fiscal year and the unaudited condensed consolidated balance sheets as of November 29, 2003, February 28, 2004 and May 29, 2004 to correct an underaccrual for medical benefits expense resulting from the Company’s application of the wrong stop loss attachment factor.  For a full description of the restatement, see Note 1 to the Notes to Consolidated Financial Statements.

 

The Company has previously restated its financial statements to reflect the issuance of common stock received upon the demutualization of Principal Life Insurance Company (“Principal”) as more fully described in Note 1 to the Notes to Consolidated Financial Statements.  The Company did not discover the existence and its ownership of Principal’s common stock because the Company received no communications regarding the demutualization plan, the demutualization compensation or the resultant issuance of the common stock until its receipt in December 2003 of a check reflecting the second dividend payment in connection with Principal’s common stock which prompted the Company’s inquiries in this regard.

 

Subsequent to management’s identification of these errors in our financial statements, the errors were reported by management to the Company’s Audit Committee and to its independent public accountants, Grant Thornton LLP, who, at the time, concurred with management’s assessment of the errors and their impact on the overall effectiveness of the Company’s internal controls and procedures.

 

At the time the error was discovered, the auditors advised management that, as to the medical benefits underaccrual, the failure to obtain a written countersigned amendment to the Company’s health insurance plan to reflect the current year renewal changes, including increased attachment factors and to effectively communicate the applicable increased attachment factors to accounting personnel for use in determining the required self-insurance accruals recorded on a monthly basis constitutes a material weakness in the Company’s internal controls and procedures over financial reporting. The Company concurred with this determination and has previously disclosed this and management is in the process of revising its procedures to address this deficiency.

 

The auditors have provided a letter to management and the Audit Committee, dated November 3, 2004, formally indicating, among other things, this determination regarding the material weakness in internal controls which allowed the underaccrual in medical benefits expense to go undetected as well as the determination that a material weakness existed which allowed the issuance of stock in the demutualization to go undiscovered.

 

In October 2004, the Company ceased to be a public company.  The Company’s Chief Executive Officer and Chief Financial Officer oversee the establishment of formalized policies and procedures throughout the organization and fully evaluate the system of internal controls.  We believe that our disclosure controls and procedures have improved due to the scrutiny over such matters by our management.  We note, however, that a control system no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the controls system are met.  Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues have been detected.  These inherent limitations include the realities that judgments in decision-making can be faulty and breakdowns can occur because of simple error or mistake.  The design of any system of controls also is based, in part, on certain assumptions about the likelihood of future events and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.  However, we believe that our disclosure controls and procedures do provide reasonable assurance that the objectives of our system of disclosure controls and procedures have been met.  Based, in part, upon the noted changes, our CEO and CFO believe that, as of the filing date of this report, our disclosure controls and procedures were effective as of the end of the period covered by this report.

 

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PART II - OTHER INFORMATION

 

Item 6.             Exhibits and Reports on Form 8-K

 

  (a) Exhibits

 

31.1		Certification of Acting Chief Executive Officer Pursuant to Exchange Act Rule 13a-14(a)/15d-14(a)
31.2		Certification of Acting Chief Financial Officer Pursuant to Exchange Act Rule 13a-14(a)/15d-14(a)
32.1		Certification of Acting Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 1350)
32.2		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 for which this report is filed.

 

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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:  February 8, 2005	/s/ Stephen G. Marble
	Stephen G. Marble
	Acting Chief Executive Officer
Date:  February 8, 2005	/s/ Steven B. Barnett
	Steven B. Barnett
	Acting Principal Financial Officer and
	Acting Principal Accounting Officer

 

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