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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
X ANNUAL REPORT PURSUANT TO SECTION
13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended August 30, 1997
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 Number: 0-19194
RAG SHOPS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 51-0333503
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
111 WAGARAW ROAD
HAWTHORNE, NEW JERSEY 07506
(Address of principal executive (Zip Code)
offices)
Registrant's telephone number including area code: (973) 423-1303
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $.01 PAR VALUE
(Title of Class)
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months, and
(2) has been subject to such filing requirements for the past 90
days. Yes x No
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K is not contained herein, and
will not be contained, to the best of registrant's knowledge, in
definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this
Form 10-K. Yes x No
As of October 20, 1997, there were outstanding 4,514,400
shares of Common Stock. Based on the price at which such stock was
sold on that date, the approximate aggregate market value of such
shares held by non-affiliates was $6,531,544.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's 1997 Definitive Proxy Statement,
which statement will be filed not later than 120 days after the end
of the fiscal year covered by this Report, are incorporated by
reference in Part III hereof.
Certain exhibits are incorporated by reference to the
Company's Registration Statement on Form S-1 and Amendment No. 1
thereto, as listed in response to Item 14(a)(3).
[The remainder of this page is intentionally blank.]
PART I
ITEM 1. BUSINESS.
General
Rag Shops, Inc., a Delaware corporation formed in April 1991,
is the successor by merger to a New Jersey corporation having the
same name which was incorporated in September 1984, as a holding
company for numerous subsidiaries that have operated retail stores
since 1963. As of August 30, 1997, Rag Shops, Inc. operates 66
specialty retail stores which sell competitively priced fabric and
craft merchandise. The Company caters to value conscious consumers
who sew and create decorative accessories. The Company believes
that its wide selection of currently popular merchandise, value-
pricing policy and commitments to both customer service and
advertising are principal factors contributing to its
profitability. The Company's stores are destination-oriented and
also attract shoppers from other stores located in the same
shopping center.
As of August 30, 1997, the Company operated 33 retail stores
in New Jersey, 19 in Florida, seven in Pennsylvania, six in New
York and one in Connecticut. The Company anticipates opening two to
four stores, relocating one store and closing three stores during
the remainder of its fiscal year ending August 29, 1998. The
Company's expansion strategy is to grow by expanding within areas
from which it presently attracts customers and into contiguous
market areas, enabling the Company to capitalize on pre-existing
advertising and name recognition. The following table sets forth
information with respect to store openings and closings since
fiscal 1993:
Fiscal Years
1997 1996 1995 1994 1993
Stores open at beginning of period 67 69 68 61 54
Stores opened during period 4 1 2 8 10
Stores closed during period 5 3 1 1 3
Stores open at end of period 66 67 69 68 61
Products
The Company's stores offer a diverse and extensive assortment
of value-priced crafts, fabrics and related items to creative craft
and sewing consumers. For fiscal years 1995, 1996 and 1997, sales
of crafts accounted for approximately 66.2%, 65.3% and 67.3%
respectively, of the Company's net sales, and sales of fabrics
accounted for the remainder.
Each of the Company's stores offers fabric, craft and related
products. Fabric items available at the Company's stores include
apparel and home decorative fabrics, trimmings, patterns and sewing
notions. Craft items include silk flowers, wicker, picture frames,
wood products, stitchery, yarn, wearable art, art supplies and
craft supplies. As of August 30, 1997, fifty-seven stores offer
custom picture framing. The Company also sells a wide variety of
seasonal merchandise with special emphasis on the Easter, Back-to-
School, Halloween and Christmas seasons.
Through their purchase of craft, fabric and other items, used
either individually or in combination, the Company's customers can
hand make a wide variety of finished products for personal use,
gifts, home beautification and seasonal decoration. For example,
fabrics can be made into career, leisure, children's, bridal and
special occasion fashions, draperies and upholstery for home
decoration and hand made quilts and, from the Company's selection
of craft items, customers can create needle point and stitchery,
personalized hand painted apparel, floral arrangements and dolls.
Merchandising and Advertising
The Company's marketing and merchandising strategy emphasizes
the sale of multiple products to be used by the customer to create
a single project. To assist customers in making their own
selections and to encourage their purchase of several products, the
Company's stores display finished models that incorporate a variety
of merchandise in close proximity to where the components are sold.
The models are created by employees at the stores conforming to
Company guidelines.
Craft or sewing classes are offered every week at a select
number of each of the Company's stores to further promote both
specific products and store business. During each class,
participants complete a project using materials purchased from the
store at which the class is offered. Merchandise instructional
demonstrations are held periodically at charitable organizations,
conventions and schools as an effective method of attracting
customers and generating the purchase of fabrics, crafts and
related merchandise necessary for the customer to create the
featured apparel.
Merchandise at the Company's stores is displayed on
conveniently arranged fabric tables and fixtures to facilitate
customer access. The general layout of merchandise, adjusted
seasonally and as otherwise necessary to adapt to marketing
conditions, is planned by the Company's management to give
prominence to the types of merchandise currently in demand.
Approximately five percent of the Company's sales is expended
for a 52 week per year advertising program. In September 1996 the
Company commenced utilizing free standing newspaper inserts,
alternating with newspaper print advertisements. These newspaper
inserts are also displayed at the front of each store and describe
a calendar of promotions emphasizing special sale items, seasonal
products and other currently popular merchandise. Previously the
Company utilized direct mail, newspaper print, weekly in-store
promotions and television in the New Jersey metropolitan area and
in Florida. The free standing newspaper inserts are received by
approximately 3 million people as compared to the direct mail
previously utilized that was received by approximately 1 million
people.
For the Back-to-School season and holiday seasons of Easter,
Halloween and Christmas, the Company utilizes a fully developed
merchandising program including special inventory, layout,
instructional ideas and promotions with highly focused displays.
During these peak seasons approximately 25% of store selling space
is devoted to seasonal merchandise.
Seasonality
The Company's business is seasonal, which the Company believes
is typical of the retail fabric and craft industry. The Company's
highest sales and earnings levels historically occur between
September and December. The Company has generally operated at a
loss during its fourth fiscal quarter, the June through August
summer period. The Company's results of operations depend
significantly upon the sales generated from September through
December and any material decrease in sales for such period could
have a material adverse effect upon the Company's profitability.
See "Management's Discussion and Analysis of Financial Condition
and Results of Operations--Seasonality."
Store Operations
The Company's store operations are divided into six geographic
districts, each managed by a district manager. Stores typically
are staffed with a manager, an assistant manager, one department
head each for fabrics and crafts, sales personnel, cashiers and
stock clerks.
District managers supervise store management, monitor the
Company's stores to ensure compliance with procedures, policies and
budgets, determine whether adequate levels of merchandise are
available at the stores and reallocate merchandise among stores as
dictated by selling trends at individual stores. Store managers
are responsible for operation of individual stores, including
recruiting and hiring store personnel.
Store managers place orders to replenish inventory from the
Company's 85,000 square foot distribution center in Paterson, New
Jersey, and may also directly order certain core merchandise
designated by management from the Company's suppliers. Orders for
merchandise stocked in the distribution center are placed by the
store manager on a regular basis through a computer in the store.
Deliveries from the distribution center are made by Company-owned
vehicles or by independent trucking companies.
Stores are generally open from 10:00 A.M. to 9:00 P.M. Monday
through Saturday and 11:00 A.M. to 6:00 P.M. on Sunday, with
extended hours during the Christmas season. All stores are
operating with point-of-sale cash register systems as of July 1997.
Approximately 73% of receipts at the Company's stores are for cash
or check, with the balance paid for with MasterCard, Visa, Discover
or American Express. The average sale is approximately $12.00.
Expansion Strategy
While management does not believe there are significant
geographic constraints on the locations of future stores, the
Company's strategy is to grow by expanding within areas from which
it presently attracts customers and into contiguous market areas,
enabling the Company to capitalize on pre-existing advertising and
name recognition. When deciding whether to open a new store, the
principal factors the Company typically evaluates are the amount of
consumer traffic generated by the market area, the demographic
composition of the customer base in the market area, store position
in the shopping center, rent structure, available media,
advertising expense, and other costs associated with opening the
store. Historically, stores tend to become profitable after six to
twenty-four months.
Sources of Supply
The Company purchases its merchandise from more than 300
suppliers. The Company's merchandise is primarily purchased from
domestic suppliers (including distributors that import goods from
the Far East) and the balance is acquired directly from
manufacturers in the Far East, including Hong Kong, Taiwan, Korea,
China and the Philippines. All of the merchandise purchased
directly from foreign manufacturers, consisting primarily of silk
flowers, seasonal merchandise and staple craft products, is sold
under the Company's private label. As is customary in the industry,
the Company does not have any long-term or exclusive contracts with
any suppliers. The Company believes that alternate sources of
merchandise are readily available at comparable prices.
Consistent with industry practice, merchandise from
manufacturers in the Far East is ordered four to six months in
advance to assure delivery prior to the selling season for the
merchandise. Letters of credit are issued to the foreign
manufacturers with specific terms regarding the merchandise
ordered, inspection prior to shipment and time and place of
delivery. The Company assumes the risk of loss on a F.O.B. basis
when goods are delivered to a shipper and is insured against
casualty losses arising during shipping.
Competition
The retail craft and fabric industry (the "Industry") is
highly competitive. The Company competes with other national,
regional and independent specialty craft and/or fabric retailers
and mass merchandisers, some of which have greater financial and
other resources than the Company. The Company believes it competes
on the basis of merchandise selection, customer service, price and
advertising. Competitors include A.C. Moore, Fabri-Centers of
America, Inc., and Michaels Stores, Inc.
Employees
As of August 30, 1997, the Company has approximately 1,080
employees, consisting of approximately 320 full time and 760 part
time employees. Full time personnel consist of approximately 190
salaried and 130 hourly employees. All part time personnel are
hourly employees. During seasonal peak periods, the Company hires
temporary personnel. Approximately 35 employees in the Company's
distribution center are covered by a collective bargaining
agreement with Local 161 of the Union Of Needletrades, Industrial
And Textile Employees, AFL-CIO. This agreement expires in March
1999. The Company considers its relationships with its employees to
be good.
Trademarks
The Company's trademark "THE RAG SHOP" was registered in the
United States Patent Office on September 9, 1969 and thereafter
renewed. This registration is renewable indefinitely so long as
the mark is used by the Company.
ITEM 2. PROPERTIES.
The Company's office facilities and its Hawthorne, New Jersey
store occupy approximately 15,900 and 17,600 square feet,
respectively, in the same strip shopping center in Hawthorne, New
Jersey. The store and offices are leased from Momar Realty L.L.C.,
the two members of which are Stanley Berenzweig, Chairman of the
Board and Doris Berenzweig, Secretary. The Company's distribution
center and all of its other stores are leased from non-affiliates
of the Company.
The Company's 85,000 square foot distribution center is
located in Paterson, New Jersey. The Company believes that its
distribution center is adequate for its needs through the
expiration of the current term of the lease in July 2000. The
Company has one option to renew the lease for a period of two
years. The Company also expects to lease approximately 30,000 to
50,000 square feet of warehouse space for approximately eight
months each year to accommodate seasonal merchandise.
The Company's stores, all of which are located in leased
facilities, range in size from approximately 5,200 square feet to
17,600 square feet. The average size of the Company's stores is
approximately 9,400 square feet with approximately 90% of the area
of each store representing selling space. The Company seeks to
open new stores in the range of approximately 12,000 to 15,000
square feet. However, the Company often maintains options to
expand store size and will exercise those options or otherwise
enlarge particular stores as circumstances warrant. The following
table sets forth the number of store leases due to expire,
including options to renew, during the year indicated.
LEASE EXPIRATIONS
Year Number Year Number
2000 1 2013 5
2001 3 2014 3
2003 2 2015 1
2004 2 2016 3
2005 2 2017 9
2006 2 2018 5
2008 4 2019 4
2009 3 2020 2
2010 2 2021 2
2011 4 2023 1
2012 3 2026 1
2027 2
Sixty-three of the above stores are located in strip shopping
centers, and the remaining three are free-standing buildings. The
stores generally are located in close proximity to population
centers and other retail operations and are usually on a major
highway or thoroughfare, making them easily accessible by
automobile. All of the stores provide free parking.
The leases for the Company's stores are generally for a term
of five years, usually with four options to renew for five years
each. Under most leases, the Company is required to pay, in
addition to fixed minimum rental payments, additional rent based on
charges for real estate taxes, common area maintenance fees,
utility charges and insurance premiums.
ITEM 3. LEGAL PROCEEDINGS.
The Company is not a party to, nor is any of its property the
subject of, any material pending legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The Company did not submit any matters to vote of its
stockholders, through the solicitation of proxies or otherwise,
during the fourth quarter of the fiscal year ended August 30, 1997.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED
STOCKHOLDER MATTERS.
The Company's Common Stock is traded on the NASDAQ National
Market System ("NASDAQ/NMS") under the symbol "RAGS."
The following table sets forth, for the periods indicated, the
range of high and low sale prices of the Common Stock as reported
by NASDAQ from September 3, 1995, through August 30, 1997. These
prices reflect interdealer prices and do not include retail mark-
ups, mark-downs or commissions, and do not necessarily represent
actual transactions.
High Low
Fiscal Quarter Ended
November 30, 1996 $ 2.50 $1.938
March 1, 1997 4.313 2.00
May 31, 1997 3.75 2.688
August 30 3.688 2.50
Fiscal Quarter Ended
December 2, 1995 $ 3.25 $1.875
March 2, 1996 2.625 1.875
June 1, 1996 2.50 2.00
August 31, 1996 2.50 2.00
On October 20, 1997, the closing price of the Common Stock was
$3.15625.
The approximate number of stockholders of record of the Common
Stock at October 20, 1997 was 270. The number of beneficial owners
whose shares are held by banks, brokers and other nominees exceeds
1,000.
The Company has not paid any dividends. The Company presently
intends to retain all earnings for the operation and expansion of
its business and does not anticipate paying cash dividends on its
Common Stock in the foreseeable future. Any future determination
as to the payment of dividends on the Common Stock will depend upon
future earnings, results of operations, capital requirements, the
financial condition of the Company and any other factors the Board
of Directors of the Company may consider. In addition, pursuant to
the Company's bank line of credit, the Company is prohibited from
declaring dividends in any year in excess of its earnings for
such year or which would otherwise result in a violation of the
Company's covenant to maintain a tangible net worth (as defined in
the line of credit commitment letter) of $9,000,000.
ITEM 6. SELECTED FINANCIAL DATA.
Year Ended(1)
August 30, August 31, September 2, September 3, August 28,
1997 1996 1995 1994 1993
(in thousands, except Common Stock Data and Statistics)
OPERATIONS
Net sales $ 86,528 $ 83,767 $ 86,089 $ 89,529 $ 84,151
Gross profit 31,044 30,440 31,592 33,886 34,293
Store exp & general
and administrative
expenses 30,578 29,500 30,566 32,504 30,953
Interest expense, net 115 161 134 266 46
Income before inc taxes 351 779 893 1,117 3,294
Income before cumulative effect
of change in accounting
principle 207 520 542 692 2,011
Net income $ 207 $ 520 $ 542 $ 767 $ 2,011
COMMON STOCK DATA
Net income per share before
cumulative effect of change
in acctg principle
$ .05 $ .12 $ .12 $ .15 $ .44
Net income per share .05 .12 .12 .17 .44
Dividends per share - - - - -
Stockholders' equity per
share $ 4.61 $ 4.56 $ 4.45 $ 4.33 $ 4.16
Weighted average out-
standing 4,538,971 4,515,527 4,526,108 4,515,102 4,571,305
FINANCIAL POSITION
Working capital $ 16,256 $ 16,985 $ 15,161 $ 13,851 $ 13,308
Total assets 32,264 33,555 34,821 36,079 32,136
Short-term 3,119 1,762 4,735 6,555 2,796
Long-term debt 554 1,231 - - -
Stockholders'
equity $ 20,800 $ 20,593 $ 20,073 $ 19,531 $ 18,764
Year Ended(1)
August 30, August 31, September 2, September 3, August 28,
1997 1996 1995 1994 1993
(in thousands, except Common Stock Data and Statistics)
STATISTICS
Net sales increase
(decrease) 3.3% (2.7%) (3.8%) 6.4% 14.4%
Comparable store net
sales increases(decreases)
(1)(3) 3.8% (4.9%) (7.3%) (4.1%) (.5%)
Return on net sales,
after income taxes .2% .6% .6% .9% 2.4%
Return on average
stockholders' equity 1.0% 2.6% 2.7% 4.0% 11.3%
Average net sales per
gross square ft(2) $ 139 $ 135 $ 141 $ 154 $ 166
Average net sales per
store (000's)(2) $ 1,296 $ 1,214 $ 1,265 $ 1,362 $ 1,447
Stores open at end of
period 66 67 69 68 61
(1) Data for the fiscal years ended August 28, 1993, September 3,
1994, September 2, 1995, August 31, 1996 and August 30, 1997
include the results of operations for 52 weeks, 53 weeks, 52
weeks, 52 weeks and 52 weeks, respectively.
(2) For purposes of calculating these amounts, the number of stores
and the amount of gross square footage have been adjusted to
reflect the number of months during the period that new stores
were open. These amounts have not been adjusted to reflect the
seasonal nature of the Company's net sales or the resulting
impact of opening stores in different periods during the year.
See "Management's Discussion and Analysis of Financial
Information and Results of Operations--Seasonality."
(3) Comparable store sales increases for a fiscal year include stores
commencing with their thirteenth consecutive entire fiscal month.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.
Results of Operations
The following table sets forth as a percentage of net sales, certain
items appearing in the Company's Consolidated Income Statements for the
indicated year
Year Ended
1997 1996 1995
Net sales 100.0% 100.0% 100.0%
Cost of merchandise sold
and occupancy costs 64.1 63.7 63.3
Gross profit 35.9 36.3 36.7
Store expenses 23.9 23.8 23.9
General and administrative
expenses 11.5 11.4 11.6
Income from operations 0.5 1.1 1.2
Net income .2% .6% .6%
The Company's net sales increased in 1997 by $2,761,000 or 3.3% due
to increases in comparable store sales of $3,038,000 or 3.8% in addition
to new store sales of $3,417,000 net of the impact of closed store sales.
Management believes that the marketing plan launched in September 1996
and the mild weather conditions in the northeast region during the fiscal
second quarter compared to the comparable prior periods contributed
significantly to the positive comparable store sales results. The
Company's net sales decreased in 1996 by $2,323,000 or 2.7% due to
decreases in comparable store sales of $4,169,000 or 4.9% partially
offset by new store sales of $2,732,000. Management believes the
decreases in comparable store sales in 1996 were primarily due to
inclement weather conditions in the northeast region during the winter
compared to the comparable prior period and the weak retail environment
which existed throughout the spring and summer selling seasons in our
industry segment.
Gross profit percentage decreased by .4% in 1997 as compared to 1996
as a result of an increase in the annual shrinkage of inventory of .7%
partially offset by a decrease in markdowns of .4% due to improved
control of promotions during the Christmas selling season. Gross profit
percentage decreased by .4% in 1996 as compared to 1995 as a result of a
1.2% increase in markdowns, which was primarily attributed to increased
competitive promotional sales activity during the Christmas selling
season and secondarily to a .7% increase in occupancy costs. These
amounts were partially offset by the Company's ability to obtain a .7%
increase on the initial markup of inventory purchases by increasing the
mix of direct imports, which are more profitable than domestic purchases,
and improve the annual shrinkage results by .8%.
Store expenses increased by $754,000 or 3.8% in 1997 as compared to
1996. The dollar increase was primarily due to an increase in (i) payroll
and payroll related expenses, (ii) depreciation expense due to the
installation of the Company's point-of-sale cash register software, data
collection and computer systems ("point-of-sale systems") and (iii)
advertising in connection with the new marketing plan. As a percentage of
net sales, store expenses in 1997 remained relatively constant compared
to 1996. Store expenses decreased by $675,000 or 3.3% in 1996 as compared
to 1995. The decrease was primarily the result of an expanded vendor
cooperative advertising program and secondarily due to a reduction in
payroll and payroll related expenses. As a percentage of net sales, store
expenses in 1996 remained relatively constant compared to 1995.
General and administrative expenses increased by $324,000 or 3.4% in
1997 as compared to 1996. The increase was primarily due to an increase
in payroll and payroll related expenses. As a percentage of net sales,
general and administrative expenses in 1997 remained relatively constant
compared to 1996. General and administrative expenses decreased by
$391,000 or 3.9% in 1996 as compared to 1995. As a percentage of net
sales, general and administrative expenses decreased by .2%
notwithstanding the decrease in net sales and comparable store sales. The
decrease in general and administrative expenses and as a percentage of
net sales was primarily due to a reduction in payroll and related
expenses and secondarily a result of a reduction in professional fees.
Interest expense-net decreased in 1997 as compared to 1996 as a
result of lower borrowings on the Company's line of credit. This decrease
was net of additional interest on the Company's term loan to finance its
point-of-sale systems. See "Liquidity and Capital Resources." Interest
expense increased in 1996 as compared to 1995 as a result of the
Company's term loan discussed above.
The effective tax rate for 1997 was 41.0% as compared to 33.2% in
1996. The increase is primarily due to a $15,000 tax settlement paid in
1997 for the tax years 1993 through 1995 based upon the results of an
Internal Revenue Service audit. The effective tax rate for 1996 was 33.2%
as compared to 39.3% in 1995. The decrease is attributed to Corporate
state tax planning that resulted in a lower effective state and local
income tax rate.
Net income decreased by $313,000 for 1997 as compared to 1996 due to
the increase in operating expenses which was partially offset by the
increase in sales and the related increase in gross profit. Net income
for 1996 remained relatively constant when compared to 1995.
Seasonality
The Company's business is seasonal, which the Company believes is
typical of the retail fabric and craft industry. The Company's highest
sales and earnings levels historically occur between September and
December. This period includes the Back-to-School, Halloween and
Christmas seasons. The Company has generally operated at a loss during
its fourth quarter, the June through August summer period. See "Business-
- -Seasonality."
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. In 1997 and 1996, the Company relied on short-term borrowings,
internally generated funds and credit made available by suppliers to
finance inventories and new store openings.
The Company's working capital has decreased $729,000 in 1997 as
compared to 1996 primarily as a result of the reduction in its
merchandise inventories.
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 $8,000,000 unsecured line of credit for
direct borrowings and the issuance and refinance of letters of credit and
a $2,000,000 three (3) year term loan maturing May 1, 1999. Borrowings
under the line of credit bear interest at the bank's prime rate (8.50%
at August 30, 1997) and under the term loan are fixed at eight percent
(8%). The credit facility requires the Company to maintain a compensating
balance of $400,000 in addition to certain financial covenants which
require a minimum defined working capital and tangible net worth, a
maximum ratio of debt to tangible net worth and set limits on the payment
of dividends. As of August 30, 1997, the Company was in compliance with
such 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 $2,755,000, $4,935,000 and $6,930,000
in 1997, 1996 and 1995, respectively. As of August 30, 1997 and August
31, 1996, $2,435,000 and $1,130,000, respectively, was outstanding under
the line of credit for direct borrowings and $1,227,000 and $1,852,000,
respectively, was outstanding under the term loan with $678,000 and
$549,000 maturing in 1998 and 1999, respectively. The Company intends to
maintain the availability of the line of credit for working capital
requirements and in order to be able to take advantage of future
opportunities and to continue to utilize the term loan to finance its new
point-of-sale systems. The Company completed installation of its point-
of-sale systems in all stores as of July 1997. In addition, the Company
is continuing with the development of its automated store ordering
systems and anticipates commencing installation in January 1998.
The Company purchases merchandise directly from manufacturers in the
Far East. Generally, these purchases are supported by letters of credit
payable in United States dollars. The results of operations of the
Company have not been significantly affected by foreign currency
fluctuation. At August 30, 1997, the Company had outstanding letters of
credit in the approximate amount of $146,600.
During 1997, 1996 and 1995, the Company had net cash provided by
operating activities of $1,135,000, $2,659,000 and $1,982,000,
respectively, and used $1,877,000, $1,001,000 and $432,000, respectively,
for purchases of property and equipment. Cash provided by operating
activities decreased in 1997 primarily as a result of a reduction in
accounts payable due to the timing of merchandise receipts at year end.
The Company expects to open two to four stores, relocate one store and
close three existing stores during 1998. Costs associated with opening of
new stores, including capital expenditures, inventory and pre-opening
expenses have approximated $350,000 per store. These costs will be
financed primarily from cash provided by operating activities, credit
made available by suppliers to finance inventories and, if necessary,
from the Company's bank line of credit. However, the Company will
redeploy assets of stores being closed to the new stores as opportunities
evolve in order to curtail the costs of opening stores.
Forward-Looking Statements
Certain statements contained in this report that are not historical
facts are forward-looking statements that are subject to certain risks
and uncertainties that could cause actual results to differ materially
from those set forth in the forward-looking statement. These risks and
uncertainties include, but are not limited to, changes in customer
demand, changes in trends in the fabric and craft industry, changes in
competitive pricing for products, the impact of competitor store openings
and closings, the availability of merchandise, general economic
conditions, lease negotiations and other risk factors.
New Accounting Standards
In February 1997, the Financial Accounting Standards Board (FASB)
issued Statement of Financial Accounting Standards No. 128, "Earnings per
Share" (SFAS No. 128), which establishes new standards for computing and
presenting net income per share and replaces the standards previously
found in Accounting Principles Board Opinion No. 15, "Earnings Per
Share." The Company will begin reporting net income per share according
to this new standard in its 1998 annual report on Form 10-K. The Company
does not expect the implementation of SFAS No. 128 to have a material
effect on the Company's computation of earnings per share.
In June 1997, the FASB issued Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income" (SFAS No. 130) and
No. 131 "Disclosure about Segments of an Enterprise and Related
Information" (SFAS No. 131). SFAS No. 130 establishes standards for
reporting the display of comprehensive income and its components in a
full set of general-purpose financial statements. This Statement requires
that an enterprise (a) classify items of other comprehensive income by
their nature in a financial statement and (b) display the accumulated
balance of other comprehensive income separately from retained earnings
and additional paid-in capital in the equity section of a statement of
financial position.
SFAS No. 131 establishes standards for the way that public business
enterprises report information about operating segments in annual
financial statements and requires that those enterprises report selected
information about operating segments in interim financial reports issued
to shareholders. It also establishes standards for related disclosures
about products and services, geographic areas and major customers.
Both SFAS No. 130 and SFAS No. 131 are effective for fiscal periods
beginning after December 15, 1997. The Company has not yet determined the
impact, if any, of adopting these standards.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
See Item 14(a)1 in Part IV.
ITEM 9. CHANGES IN AND DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
Not Applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information required for this item is incorporated by reference
to the Company's 1997 Definitive Proxy Statement which the Company will
file with the Securities and Exchange Commission no later than 120 days
subsequent to August 30, 1997.
ITEM 11. EXECUTIVE COMPENSATION.
The information required for this item is incorporated by reference
to the Company's 1997 Definitive Proxy Statement which the Company will
file with the Securities and Exchange Commission no later than 120 days
subsequent to August 30, 1997.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required for this item is incorporated by reference
to the Company's 1997 Definitive Proxy Statement which the Company will
file with the Securities and Exchange Commission no later than 120 days
subsequent to August 30, 1997.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required for this item is incorporated by reference
to the Company's 1997 Definitive Proxy Statement which the Company will
file with the Securities and Exchange Commission no later than 120 days
subsequent to August 30, 1997.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) Documents filed as part of this report.
1. Financial Statements Page
Independent Auditors' Report F-1
Consolidated Balance Sheets as of August
30, 1997 and August 31, 1996 F-2
Consolidated Statements of Income for the
years ended August 30, 1997,
August 31, 1996 and September 2, 1995 F-3
Consolidated Statements of Stockholders'
Equity for the years ended August 30, 1997,
August 31, 1996 and September 2, 1995 F-4
Consolidated Statements of Cash Flows for
the years ended August 30, 1997, August 31,
1996 and September 2, 1995 F-5
Notes to Consolidated Financial Statements F-7
2. Financial Statement Schedules
None
3. Exhibits
3.1* Certificate of Incorporation of the Company
3.2* By-Laws of the Company
10.1* Promissory Note (Revolving) with Valley National
Bank
10.2* 1991 Stock Option Plan
10.3* Lease between Momar Realty Co. and the Company,
dated as of March 1, 1991
21.1 List of subsidiaries of the Company
23.1 Consent of Deloitte & Touche LLP
24.1 Power of Attorney to sign Form 10-K (set forth on
page 20)
27 Financial Data Schedule (Filed electronically with
SEC only)
________________________________
*Incorporated by reference to the Company's Registration Statement
on Form S-1 and Amendment No. 1 thereto.
(b) The Company did not file a Current Report on Form 8-K during the
last quarter of the period covered by this Report.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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, in the City of
Hawthorne, New Jersey, on November 12, 1997.
RAG SHOPS, INC.
By: /s/ Stanley Berenzweig
STANLEY BERENZWEIG, Chairman
POWER OF ATTORNEY
Each of the undersigned hereby appoints Stanley Berenzweig and
Steven Barnett as his or her attorneys-in-fact to sign his or her name, in
any and all capacities, to any amendments to this Form 10-K and any other
documents filed in connection therewith to be filed with the Securities and
Exchange Commission. Each of such attorneys has the power to act with or
without the others.
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following person on behalf of the
Registrant and in the capacities and on the dates indicated.
Signature Title(s) Date
/s/ Michael Aaronson Director November 12, 1997
Michael Aaronson
/s/ Steven Barnett Principal Financial November 12, 1997
Steven Barnett Officer, Principal
Accounting Officer and
Director
/s/ Evan Berenzweig Director November 12, 1997
Evan Berenzweig
/s/ Stanley Berenzweig Principal Executive November 12, 1997
Stanley Berenzweig Officer and Director
/s/ Fred J. Damiano Director November 12, 1997
Fred J. Damiano
/s/ Judith Lombardo Director November 12, 1997
Judith Lombardo
/s/ Alan C. Mintz Director November 12, 1997
Alan C. Mintz
RAG SHOPS, INC.
Index to Consolidated Financial Statements
INDEX TO EXHIBITS
Exhibit Sequentially
Number Description of Exhibits Numbered Pages
3.1 Certificate of Incorporation of the Company *
3.2 By-Laws of the Company *
10.1 Promissory Note (Revolving) with Valley National Bank *
10.2 1991 Stock Option Plan *
10.3 Lease between Momar Realty Co. and the Company, dated
as of March 1, 1991 *
21.1 List of subsidiaries of the Company
23.1 Consent of Deloitte & Touche LLP
24.1 Power of Attorney to sign Form 10-K
(set forth on page 20)
27 Financial Data Schedule
(Filed electronically with SEC only)
________________________________
* Incorporated by reference to the Company's Registration Statement on Form
S-1 and Amendment No. 1 thereto.
RAG SHOPS, INC. AND SUBSIDIARIES
Consolidated Financial Statements and Independent
Auditors' Report for the Three Years
Ended August 30, 1997
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
and Stockholders
Rag Shops, Inc.
Hawthorne, New Jersey
We have audited the accompanying consolidated balance sheets of Rag
Shops, Inc. and its subsidiaries as of August 30, 1997 and August 31,
1996, and the related consolidated statements of income, changes in
stockholders' equity and cash flows for each of the three years in the
period ended August 30, 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of Rag Shops, Inc. and
subsidiaries as of August 30, 1997 and August 31, 1996, and the results
of their operations and their cash flows for each of the three years in
the period ended August 30, 1997, in conformity with generally accepted
accounting principles.
Deloitte & Touche LLP
Parsippany, New Jersey
October 24, 1997
F-1
RAG SHOPS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
August 30, August 31,
ASSETS 1997 1996
CURRENT ASSETS:
Cash $ 763,668 $ 820,985
Merchandise inventories 25,123,037 26,280,442
Prepaid expenses 298,823 345,449
Other current assets 242,297 473,979
Deferred taxes 697,146 727,746
Total current assets 27,124,971 28,648,601
PROPERTY AND EQUIPMENT, NET 4,885,520 4,462,121
OTHER ASSETS 253,198 444,539
$32,263,689 $33,555,261
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Note payable - bank $ 2,435,000 $ 1,130,000
Accounts payable - trade 5,080,546 7,604,083
Accrued expenses and other current
liabilities 1,857,216 1,714,346
Accrued salaries and wages 812,028 583,085
Current portion of long-term debt 683,980 631,969
Total current liabilities 10,868,770 11,663,483
DEFERRED TAXES 40,361 68,061
LONG-TERM DEBT 554,298 1,230,880
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value
2,000,000 shares authorized;
no shares issued or outstanding - -
Common stock, $.01 par value,
13,000,000 shares authorized;
4,514,400 shares issued and
outstanding at August 30,
1997 and August 31, 1996 45,144 45,144
Additional paid-in capital 6,039,162 6,039,162
Retained earnings 14,715,954 14,508,531
Total stockholders' equity 20,800,260 20,592,837
$32,263,689 $33,555,261
See notes to the consolidated financial statements.
RAG SHOPS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Year Ended
August 30, August 31, September 2,
1997 1996 1995
NET SALES $86,527,566 $83,766,651 $86,089,364
COST OF MERCHANDISE SOLD AND
OCCUPANCY COSTS 55,483,180 53,326,702 54,497,390
Gross profit 31,044,386 30,439,949 31,591,974
OPERATING EXPENSES:
Store expenses 20,692,692 19,938,761 20,614,048
General and administrative
expenses 9,885,242 9,561,294 9,951,815
Total operating expenses 30,577,934 29,500,055 30,565,863
INCOME FROM OPERATIONS 466,452 939,894 1,026,111
INTEREST EXPENSE, Net 115,129 160,887 133,602
INCOME BEFORE PROVISION FOR
INCOME TAXES 351,323 779,007 892,509
PROVISION FOR INCOME TAXES 143,900 258,700 350,600
NET INCOME $ 207,423 $ 520,307 $ 541,909
PER SHARE DATA:
NET INCOME PER SHARE $.05 $.12 $.12
WEIGHTED AVERAGE SHARES
OUTSTANDING 4,538,971 4,515,527 4,526,108
See notes to the consolidated financial statements.
RAG SHOPS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Additional
Common Stock Paid-In Retained
Shares Dollars Capital Earnings Total
BALANCE, SEPTEMBER 3, 1994 4,514,400 $45,144 $6,039,162 $13,446,315 $19,530,621
Net income - - - 541,909 541,909
BALANCE, SEPTEMBER 2, 1995 4,514,400 45,144 6,039,162 13,988,224 20,072,530
Net income - - - 520,307 520,307
BALANCE, AUGUST 31, 1996 4,514,400 45,144 6,039,162 14,508,531 20,592,837
Net income - - - 207,423 207,423
BALANCE, AUGUST 30, 1997 4,514,400 $45,144 $6,039,162 $14,715,954 $20,800,260
See notes to the consolidated financial statements.
RAG SHOPS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended
August 30, August 31, September 2,
1997 1996 1995
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 207,423 $ 520,307 $ 541,909
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 1,406,285 1,273,770 1,175,746
Deferred taxes 8,000 (132,900) (113,600)
Loss on disposition of property
and equipment 59,738 15,613 47,397
Changes in assets and liabilities:
(Increase) decrease in:
Merchandise inventories 1,157,405 1,278,377 302,872
Prepaid expenses 46,626 195,438 6,946
Other current assets 231,682 (381,948) (37,457)
Other assets 169,668 (129,917) 15,659
Increase (decrease) in:
Accounts payable - trade (2,523,537) 156,121 144,322
Accrued expenses and other
current liabilities 142,870 (66,206) 170,632
Accrued salaries and wages 228,943 (69,211) (272,904)
Net cash provided by operating
activities 1,135,103 2,659,444 1,981,522
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of property
and equipment 4,331 3,895 2,350
Payments for purchases of property
and equipment (1,877,180) (1,000,511) (432,155)
Net cash used in investing
activities (1,872,849) (996,616) (429,805)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of note
payable - bank 14,520,000 34,415,000 29,101,000
Repayments of note payable - bank (13,215,000)(38,020,000) (30,921,000)
Long-term borrowings - 2,000,000 -
Repayments of long-term debt (624,571) (148,080) -
Net cash provided by (used in)
financing activities 680,429 (1,753,080) (1,820,000)
NET DECREASE IN CASH (57,317) (90,252) (268,283)
CASH, BEGINNING OF YEAR 820,985 911,237 1,179,520
CASH, END OF YEAR $ 763,668 $ 820,985 $ 911,237
(continued)
RAG SHOPS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Cash paid during the year for:
Interest $ 165,922 $ 232,667 $ 104,004
Income taxes $ 532,087 $ 200,013 $ 463,756
SUPPLEMENTAL SCHEDULE OF NON-CASH
INVESTING AND FINANCING ACTIVITIES:
Purchase of property and equipment
in exchange for debt $ - $ 10,929 $ -
See notes to the consolidated financial statements.
RAG SHOPS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Summary Of Significant Accounting Policies
Organization and Nature of Business
Rag Shops, Inc. (the "Company"), a Delaware corporation formed in April 1991,
is the successor by merger to a New Jersey Corporation having the same name
which was incorporated in 1984. The Company operates a chain of retail fabric
and craft stores through its subsidiaries predominantly located in New Jersey,
New York, Pennsylvania and Florida.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and
its subsidiaries, all of which are wholly-owned. All significant intercompany
transactions and balances have been eliminated.
Merchandise Inventories
Inventories are stated at the lower of cost (first-in, first-out method) or
market as determined by the retail inventory method, and consist primarily
of fabrics and crafts.
Property and Equipment
Property and equipment are stated at cost. Depreciation is computed over the
estimated useful lives of the assets using straight-line and accelerated
methods. Leasehold improvements are amortized by the straight-line method over
an estimated useful life or the term of the related lease, whichever is shorter.
Effective September 1, 1996, the Company adopted Statement of Financial
Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed of" (SFAS No. 121). This
Statement establishes accounting standards for the impairment of long-lived
assets, certain identifiable intangibles and goodwill related to those assets to
be held and used, and for long-lived assets and certain identifiable intangibles
to be held and used by an entity to be reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of an asset
may not be recoverable.The provisions of SFAS No. 121 did not have any impact on
the Company's financial position or results of operations.
Pre-opening and Closing Store Expenses
All pre-opening costs incurred in connection with the opening of new retail
stores are charged to expense on or before the stores opening. Costs
associated with closing stores, when material, are charged to expense at the
time the decision to close a store is determined.
Amortization
Lease acquisition costs are being amortized on the straight-line method over the
remaining lives of the leases.
Net Income Per Share
Net income per share is based on the weighted average number of shares
outstanding during each period. The dilutive effect of stock options and
warrants is included in each of the three fiscal years in the period ended
August 30, 1997.
Recent Accounting Pronouncements
In February 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 128, "Earnings per Share"
(SFAS No. 128), which establishes new standards for computing and presenting
net income per shareand replaces the standards previously found in Accounting
Principles Board Opinion No. 15, "Earnings Per Share." The Company will begin
reporting net income per share according to this new standard in its 1998 annual
report on Form 10-K. The Company does not expect the implementation of SFAS No.
128 to have a material effect on the Company's computation of earnings per
share.
In June 1997, the FASB issued Statement of Financial Accounting Standards No.
130, "Reporting Comprehensive Income" (SFAS No. 130) and No. 131 "Disclosure
about Segments of an Enterprise and Related Information" (SFAS No. 131). SFAS
No. 130 establishes standards for reporting the display of comprehensive income
and its components in a full set of general-purpose financial statements.
This Statement requires that an enterprise (a) classify items of other
comprehensive income by their nature in a financial statement and (b) display
the accumulated balance of other comprehensive income separately form retained
earnings and additional paid-in capital in the equity section of a statement of
financial position.
SFAS No. 131 establishes standards for the way that public business enterprises
report information about operating segments in annual financial statements
and requires that those enterprises report selected information about operating
segments in interim financial reports issued to shareholders. It also
establishes standards for related disclosures about products and services,
geographic areas and major customers.
Both SFAS No. 130 and SFAS No. 131 are effective for fiscal periods beginning
after December 15, 1997. The Company has not yet determined the impact, if
any, of adopting these standards.
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. Actual results could differ from
those estimates.
Fair Value Of Financial Instruments
Management of the Company believes that the fair value of financial instruments
approximates their cost as of August 30, 1997 and August 31, 1996. In
management's opinion, the fair value of its fixed-rate term loan approximates
book value based on borrowing rates currently available to the Company and
amounts outstanding under its line of credit approximate fair value due to
their variable rate.
Fiscal Year
The Company's fiscal year end is the Saturday closest to August 31. The
financial statements for the fiscal years ended September 2, 1995, August 31,
1996 and August 30, 1997 were each comprised of 52 weeks.
Note 2. Property And Equipment
Property and equipment consists of the following:
Useful August 30, August 31,
Lives 1997 1996
Furniture and fixtures 5-10 years $7,127,202 $6,744,696
Leasehold improvements 10 years 2,579,142 2,340,000
Transportation equipment 3-7 years 461,324 440,940
Data processing equipment 5 years 3,295,785 2,359,911
13,463,453 11,885,547
Less accumulated depreciation and
amortization 8,577,933 7,423,426
$ 4,885,520 $4,462,121
Note 3. Note Payable - Bank
The Company maintains a $10,000,000 credit facility with a bank. The credit
facility is renewable annually on or before each December 31 and consists of
a discretionary $8,000,000 unsecured line of credit for direct borrowings and
the issuance and refinance of letters of credit and a $2,000,000 three year
term loan (see Note 4). The facility requires the Company to maintain a
compensating balance of $400,000 in addition to certain financial covenants
which require a minimum defined working capital and tangible net worth, a
maximum ratio of debt to tangible net worth and set limits on the payment of
dividends. As of August 30, 1997, the Company was in compliance with such
covenants. Borrowings under the line of credit bear interest payable
quarterly at the bank's prime rate (8.50% at August 30, 1997). The borrowings
outstanding under the line of credit as of August 30, 1997 and August 31,
1996 were $2,435,000 and $1,130,000, respectively, and the unused line of credit
for direct borrowings and the issuance of letters of credit at August 30,
1997 was $5,418,381.
Note 4. Long-Term Debt
Long-term debt outstanding consists of the following:
August 30, August 31,
1997 1996
Term loan $1,227,349 $1,851,920
Other 10,929 10,929
1,238,278 1,862,849
Less current portion 683,980 631,969
$ 554,298 $1,230,880
During the year ended August 31, 1996, the Company borrowed $2,000,000 ("term
loan") under the terms of its credit facility with a bank to finance its new
point-of-sale cash register software, data collection and computer systems.
Interest on the term loan is payable monthly at a fixed interest rate of 8%.
The term loan matures May 1, 1999, has monthly payments of $62,673 and is
collateralized by equipment having a net book value of $1,630,945 as of
August 30, 1997.
Aggregate annual maturities of long-term debt are as follows:
Fiscal Year Ended
1998 $ 683,980
1999 554,298
$1,238,278
Note 5. Commitments And Contingencies
The Company leases its facilities in accordance with operating leases, having
initial terms of more than one year, which expire in various years through
2012. Substantially all of the leases contain renewal options. In addition,
certain leases require that the Company pay its pro rata share of utilities,
taxes, insurance and maintenance. Rent expense for 1997, 1996 and 1995 amounted
to $6,140,557, $5,863,758 and $5,606,092, respectively, and includes contingent
rentals (computed on a percentage of sales, as defined in the leases) of
$28,168, $42,565, and $84,269, respectively.
The Company leases certain premises from an entity controlled by the majority
stockholders of the Company. For the years ended 1997, 1996 and 1995, rental
payments under this agreement amounted to $307,695, $288,897, and $269,435,
respectively.
Future minimum annual rental commitments under noncancellable operating leases
are as follows:
Fiscal Year Ended
1998 $6,200,136
1999 4,944,808
2000 4,003,055
2001 2,951,617
2002 1,873,916
Thereafter 4,118,514
$24,092,046
In addition, at August 30, 1997 the Company has outstanding letters of credit
for the purchase of merchandise inventories of approximately $146,600.
Note 6. Stock Options And Warrants
In April 1991, the Company adopted the 1991 Stock Option Plan (the "Plan")
covering employees and nonemployee directors. The plan permits options to
purchase a total of 450,000 shares of common stock, of which 435,600 shares have
been reserved by the Company as of August 30, 1997. Such options may be
incentive stock options ("ISO") or nonqualified options. The term of
an option will not exceed ten years and an option is exercisable as determined
by the Option Committee of the Board of Directors. The exercise price of the
shares covered by an ISO may not be less than the fair market value of the
shares at the time of grant. The exercise price of the shares covered by a
nonqualified option is determined by the Option Committee. The options
granted are generally exercisable 20% per year.
The Company has adopted the disclosure-only provisions of Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation"
(SFAS No. 123). Accordingly, no compensation cost has been recognized for the
stock options awarded. Had compensation cost for the Company's stock option plan
been recorded based on the fair value at the grant date for awards in 1997
consistent with the provisions of SFAS No. 123, the Company's net income and
income per share would have been reduced to the pro forma amounts indicated
below:
Net income-as reported $207,423
Net income-pro forma $201,139
Net income per share as reported $ .05
Net income per share-proforma $ .04
The weighted-average fair value per share of options granted during the year is
$1.39. The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants in 1997: dividends yield of 0%, expected
volatility of 50%, risk-free interest rate of 4.5% and expected lives of
7.5 years.
Information with respect to options granted under the Plan is as follows:
Number of Exercise Price Weighted-Average
Shares Per Share Exercise Price
Outstanding, September 3, 1994 259,800 $6.00-$12.375 $7.213
Granted 70,000 $2.375-$3.188 $2.607
Canceled (105,650) $6.00-$12.375 $7.583
Outstanding, September 2, 1995 224,150 $2.375-$12.375 $5.601
Granted 12,000 $2.125 $2.125
Canceled (21,400) $3.188-$12.375 $6.107
Outstanding, August 31, 1996 214,750 $2.125-$12.375 $5.356
Granted 115,000 $2.34-$3.00 $2.362
Canceled (23,700) $2.125-$12.375 $7.228
Outstanding, August 30, 1997 306,050 $2.125-$12.375 $4.086
Exercisable, September 2, 1995 115,150 $6.00-$12.375 $6.814
Exercisable, August 31, 1996 136,200 $6.00-$12.375 $6.726
Exercisable, August 30, 1997 145,050 $2.375-$12.375 $5.980
The weighted-average remaining contractual life of stock options outstanding at
August 30, 1997 is 6.8 years.
Note 7. Income Taxes
Income tax expense consists of the following:
Year Ended
August 30, August 31, September 2,
1997 1996 1995
Federal:
Current $ 135,900 $ 362,800 $ 314,400
Deferred 8,000 (115,800) (60,400)
State:
Current - 28,800 149,800
Deferred - (17,100) (53,200)
$ 143,900 $ 258,700 $ 350,600
The deferred income tax arises from the following temporary differences:
Year Ended
August 30, August 31, September 2,
1997 1996 1995
Uniform inventory capitalization $(30,600) $ 53,800 $ 20,000
Depreciation 27,700 64,600 22,100
Straight-line of leases (5,100) 14,500 18,300
Reserves not deductible - - 53,200
$ (8,000) $ 132,900 $ 113,600
The effective tax rate differs from the Federal statutory rate as follows:
Year Ended
August 30, August 31, September 2,
1997 1996 1995
Statutory tax rate 34.0% 34.0% 34.0%
State and local income taxes,
net of federal income tax
benefit - 1.0 7.1
Other 7.0 (1.8) (1.8)
Effective tax rate 41.0% 33.2% 39.3%
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes. The Company's
state deferred tax asset has been reduced by a valuation allowance based on
current evidence indicating that it is not more likely than not that the future
benefits of these temporary differences will be realized.
The tax effect of significant items comprising the Company's deferred tax
assets and liabilities are as follows:
Year Ended
August 30, August 31,
1997 1996
Current Deferred tax asset:
Uniform inventory capitalization $697,146 $727,746
Non-current deferred tax assets:
Straight-line of leases 111,673 116,773
Net operating losses for State purposes 404,522 219,210
Valuation allowance (329,822) (144,510)
883,519 919,219
Non-current deferred tax liability:
Difference between book and
tax depreciation methods 40,361 68,061
Net deferred tax asset $843,158 $851,158
Note 8. Employee Benefit Plan
Effective January 1, 1996, the Company adopted a voluntary 401(k) savings plan.
All non-union employees of the Company are eligible to participate on or
after reaching age 21 and completing one year of eligibility service. The
Company did not make any discretionary contributions to the 401(k) plan for
the years ended August 30, 1997 and August 31, 1996.
Note 9. Quarterly Results (Unaudited)
The following is a summary of selected quarterly financial data (thousands of
dollars, except per share amounts):
Fiscal Quarter Ended
Nov. 30, Mar. 1, May 31, Aug. 30,
Fiscal 1997 1996 1997 1997 1997
Net sales $26,181 $23,707 $19,629 $17,011
Gross profit 9,791 8,718 7,120 5,415
Net income (loss) 921 218 167 (1,099)(a)
Net income (loss) per share .20 .05 .04 (.24)(a)
Fiscal Quarter Ended
Dec. 2, Mar. 2, Jun. 1, Aug. 31,
Fiscal 1996 1995 1996 1996 1996
Net sales $27,782 $21,063 $18,506 $16,416
Gross profit 10,442 7,148 6,756 6,094
Net income(loss) 736 (303) 366 (279)(a)
Net income(loss) per share .16 (.07) .08 (.06)(a)
(a) Included in the fiscal quarter ended August 30, 1997 and August 30, 1996 was
a charge $220,000 or $.05 per share and a credit of $335,000 or $.07 per
share, respectively, based on the Company's annual shrinkage results
compared to those estimates.
Net income per share calculations are based on the weighted average number of
shares outstanding during each of the quarters. The sum of the four quarters
may not equal the full year computation due to rounding.
* * * * * *
EXHIBIT 21.1
RAG SHOPS, INC.
LIST OF SUBSIDIARY COMPANIES
Name State Incorporated
RSL, Inc. Delaware
Mobile Fabrics, Inc. New Jersey
The Rag Shop/Glen Burnie, Inc. Maryland
The Rag Shop, Inc. New York
Rag Shop/Wayne, Inc. New Jersey
Rag Shop/Parsippany, Inc. New Jersey
Rag Shop/Edison, Inc. New Jersey
The Rag Shop/West Orange, Inc. New Jersey
The Rag Shop/Middletown, Inc. New Jersey
The Rag Shop/Toms River, Inc. New Jersey
The Rag Shop/Hamilton Square, Inc. New Jersey
The Rag Shop/Hazlet, Inc. New Jersey
The Rag Shop/Howell, Inc. New Jersey
The Rag Shop/Ocean, Inc. New Jersey
The Rag Shop/Sayreville, Inc. New Jersey
The Rag Shop/Bricktown, Inc. New Jersey
The Rag Shop/Totowa, Inc. New Jersey
The Rag Shop/North Lauderdale, Inc. Florida
The Rag Shop/West Palm Beach, Inc. Florida
The Rag Shop/Palm Beach Gardens, Inc. Florida
The Rag Shop/Lancaster, Inc. Pennsylvania
The Rag Shop/Sunrise, Inc. Florida
The Rag Shop/Lantana, Inc. Florida
The Rag Shop/York, Inc. Pennsylvania
The Rag Shop/Selinsgrove, Inc. Pennsylvania
The Rag Shop/Pembroke Pines, Inc. Florida
The Rag Shop/Jacksonville, Inc. Florida
The Rag Shop/Olean, Inc. New York
The Rag Shop/Boca Raton, Inc. Florida
The Rag Shop/Port Richey, Inc. Florida
The Rag Shop/Deptford, Inc. New Jersey
The Rag Shop/Deerfield, Inc. Florida
The Rag Shop/Jacksonville-San Jose, Inc. Florida
The Rag Shop/Rostraver, Inc. Pennsylvania
The Rag Shop/Evesham, Inc. New Jersey
The Rag Shop/Allentown, Inc. Pennsylvania
The Rag Shop/Jensen Beach, Inc. Florida
The Rag Shop/Jacksonville-Orange Park, Inc. Florida
The Rag Shop/Jacksonville-Regional, Inc. Florida
The Rag Shop/Boro Park, Inc. New York
The Rag Shop/Secaucus, Inc. New Jersey
The Rag Shop/North Bergen, Inc. New Jersey
The Rag Shop/Coral Springs, Inc. Florida
The Rag Shop/Turnersville, Inc. New Jersey
The Rag Shop/Hialeah, Inc. Florida
The Rag Shop/Hollywood, Inc. Florida
The Rag Shop/Binghamton, Inc. New York
(continued)
(continued)
RAG SHOPS, INC.
LIST OF SUBSIDIARY COMPANIES
Name State Incorporated
The Rag Shop/Lacey, Inc. New Jersey
The Rag Shop/West Boca Raton, Inc. Florida
The Rag Shop/Ocala, Inc. Florida
The Rag Shop/Fishkill, Inc. New York
The Rag Shop/Hampden, Inc. Pennsylvania
The Rag Shop/East Norriton, Inc. Pennsylvania
The Rag Shop/Wall Township, Inc. New Jersey
The Rag Shop/Northern Lights, Inc. New York
The Rag Shop/Linden, Inc. New Jersey
The Rag Shop/Burlington, Inc. New Jersey
The Rag Shop/Kingstown, Inc. Rhode Island
The Rag Shop/Norwalk, Inc. Connecticut
The Rag Shop/East Hollywood, Inc. Florida
The Rag Shop/Edgewater, Inc. New Jersey
Each of the above does business under the name "The Rag Shop."
EXHIBIT 23.1
RAG SHOPS, INC.
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in the Registration Statement of
Rag Shops, Inc. on Form S-8 of our report dated October 24, 1997, appearing
in this Annual Report on Form 10-K of Rag Shops, Inc. for the year ended
August 30, 1997.
Deloitte & Touche LLP
Parsippany, New Jersey
November 12, 1997