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 31, 1996
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: (201) 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 <PAGE>
As of October 21, 1996, 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 $4,706,775.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's 1996 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.]<PAGE>
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 October 15, 1996, Rag Shops, Inc. operates 67
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 31, 1996, the Company operated 32 retail stores
in New Jersey, 18 in Florida, eight in Pennsylvania, seven in New
York, one in Rhode Island and one in Connecticut. The Company has
opened one store in Florida and closed one store in Rhode Island
since August 31, 1996. The Company anticipates opening an
additional two to four stores and closing three stores during the
remainder of its fiscal year ending August 30, 1997. 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 1992:
Fiscal Years
1996 1995 1994 1993 1992
Stores open at beginning of period 69 68 61 54 44
Stores opened during period 1 2 8 10 10
Stores closed during period 3 1 1 3 -
Stores open at end of period 67 69 68 61 54
Products
The Company's stores offer a diverse and extensive assortment
of value-priced fabrics, crafts and related items to creative
sewing and craft consumers. For fiscal years 1994, 1995 and 1996
sales of crafts accounted for approximately 67.4%, 66.2% and 65.3%
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 31, 1996, fifty-six 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.
Each of the Company's stores offers at least three craft or
sewing classes every week 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. Approximately 77% of
receipts at the Company's stores are for cash or check, with the
balance paid for with MasterCard, Visa or Discover. The average
sale is approximately $11.50.
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,
Thailand, 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.
<PAGE>
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, Ben Franklin Craft
franchisees, Fabri-Centers of America, Inc., House of Fabrics, Inc.
and Michaels Stores, Inc.
The Industry has experienced a recent consolidation and
contraction. National specialty retailer acquisitions include
Fabri-Centers of America, Inc.'s acquisition of Cloth World, a
division of Brown Group, Inc. in October 1994 and Michaels Stores,
Inc.'s acquisition of Leewards Creative Crafts , Inc. in July 1994
and Aaron Brothers, Inc. in March 1995. These acquisitions were a
catalyst for store closures where duplicate stores within a
specific geographic market resulted. In addition, House of Fabrics,
Inc. closed 458 stores during the three years ended January 31,
1996. The Company believes these store closures were an impetus for
accelerated markdowns and inventory liquidation sales in the
Industry. In addition, there have been bankruptcies in the industry
including House of Fabrics, Inc. and Piece Goods Shop Co.
Employees
As of August 31, 1996, the Company has approximately 1,140
employees, consisting of approximately 340 full time and 800 part
time employees. Full time personnel consist of approximately 190
salaried and 150 hourly employees. All part time personnel are
hourly employees. During seasonal peak periods, the Company hires
temporary personnel. Effective April 1, 1996, approximately 45
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 1998. The
Company has one option to renew the lease for a period of two
years. The Company also expects to lease approximately 20,000 to
30,000 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 5,000 square feet to
17,600 square feet. The average size of the Company's stores is
approximately 9,200 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 (i) sets forth the number of store leases due to expire,
including options to renew, during the year indicated, (ii)
includes one store opened in October 1996 and (iii) excludes one
store closed in September 1996. The closed store lease expires June
1999, however, the Company is negotiating with the landlord to
terminate the lease effective December 31, 1996.
LEASE EXPIRATIONS
Year Number Year Number
1997 3 2012 3
2000 1 2013 6
2001 3 2014 3
2003 2 2015 1
2004 2 2016 2
2005 2 2017 9
2006 2 2018 5
2008 4 2019 4
2009 3 2020 2
2010 2 2021 2
2011 4 2023 1
2026 1
Sixty-five 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.
<PAGE>
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 31, 1996.<PAGE>
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 4, 1994, through August 31, 1996. 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
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
Fiscal Quarter Ended
December 3, 1994 $ 3.00 $2.125
March 4, 1995 4.75 1.625
June 3, 1995 4.50 3.00
September 2, 1995 3.75 2.50
On October 21, 1996, the closing price of the Common Stock was
$2.25.
The approximate number of stockholders of record of the Common
Stock at October 21, 1996 was 296. 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.<PAGE>
ITEM 6.SELECTED FINANCIAL DATA.
Year Ended(1)
August 31,September 2,September 3,August 28,August 29,
1996 1995 1994 1993 1992
(in thousands, except Common Stock Data and Statistics)
OPERATIONS
Net sales $ 83,767 $ 86,089 $ 89,529 $ 84,151 $ 73,581
Gross profit 30,440 31,592 33,886 34,293 31,154
Store expenses and G&A
expenses 29,500 30,566 32,504 30,953 26,222
Interest inc/(exp),
net (161) (134) (266) (46) 49
Income before income taxes 779 893 1,117 3,294 4,981
Income before cum effect
of change in accounting
principle 520 542 692 2,011 2,983
Net income $ 520 $ 542 $ 767 $ 2,011 $ 2,983
COMMON STOCK DATA
Net income per share before
cum effect of change
in acctg principle $ .12 $ .12 $ .15 $ .44 $ .65
Net income per share .12 .12 .17 .44 .65
Dividends per share - - - - -
Stockholders' equity per
share $ 4.56 $ 4.45 $ 4.33 $ 4.16 $ 3.71
Weighted average out-
standing 4,515,527 4,526,108 4,515,102 4,571,305 4,606,246
FINANCIAL POSITION
Working capital $ 16,985 $ 15,161 $ 13,851 $ 13,308 $ 12,497
Total assets 33,555 34,821 36,079 32,136 28,292
Short-term debt 1,762 4,735 6,555 2,796 3,491
Long-term debt 1,231 - - - 4
Stockholders' equity 20,593 20,073 19,531 18,764 16,689
<PAGE>
Year Ended(1)
August 31,September 2,September 3,August 28,August 29,
1996 1995 1994 1993 1992
(in thousands, except Common Stock Data and Statistics)
STATISTICS
Net sales increase
(decrease) (2.7%) (3.8%) 6.4% 14.4% 27.2%
Comparable store net
sales increases(decreases)
(1)(3) (4.9%) (7.3%) (4.1%) (.5%) 8.2%
Return on net sales,
after income taxes .6% .6% .9% 2.4% 4.1%
Return on average
stockholders' equity 2.6% 2.7% 4.0% 11.3% 19.6%
Average net sales per
gross square foot(2) $ 135 $ 141 $ 154 $ 166 $ 174
Average net sales per
store (000's)(2) $1,214 $ 1,265 $ 1,362 $ 1,447 $ 1,422
Stores open at end of
period 67 69 68 61 54
(1) Data for the fiscal years ended August 29, 1992, August 28, 1993,
September 3, 1994, September 2, 1995 and August 31, 1996 include
the results of operations for 52 weeks, 52 weeks, 53 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.<PAGE>
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 years.
Year Ended
1996 1995 1994
Net sales 100.0% 100.0% 100.0%
Cost of merchandise sold
and occupancy costs 63.7 63.3 62.2
Gross profit 36.3 36.7 37.8
Store expenses 23.8 23.9 24.9
General and administrative
expenses 11.4 11.6 11.4
Income from operations 1.1 1.2 1.5
Net income .6% .6% .9%
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 were primarily due to inclement
weather conditions in the northeast region during the winter this year
compared to the comparable period last year and the weak retail
environment which existed throughout the spring and summer selling
seasons in our industry segment. In an attempt to improve comparable
store sales, the Company has commenced a new marketing plan in September
1996 which utilizes free standing newspaper inserts, alternating with
newspaper print advertisements which significantly increases the
distribution and frequency of the Company's advertisements. The Company's
net sales decreased in 1995 by $3,440,000 or 3.8% due to decreases in
comparable store sales of $6,414,000 or 7.3% partially offset by new
store sales of $4,621,000. Approximately $1,582,000 or 46% of the
decrease in net sales was due to the fifty-third week in 1994 versus
fifty-two weeks in 1995. The remaining portion of the decrease in net
sales was primarily a result of the continued consolidation in our
industry causing inventory liquidation sales by competitors. Management
believes that the marketing plan which commenced in the first quarter of
1996 was a principal factor that contributed to the trend of comparable
store sales decreases diminishing from 7.3% for 1995, including a
decrease of 8.2% for the initial six months, to a decrease of 1.3% for
the initial six months of 1996.
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 <PAGE>
increasing the mix of direct imports, which are more profitable than
domestic purchases, and improve the annual shrinkage results by .8%.
Gross profit percentage decreased by 1.1% in 1995 as compared to 1994
primarily as a result of an increase in occupancy costs of .7% and an
increase in the annual shrinkage results of .5%.
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 remained relatively constant. Store expenses decreased by
$1,719,000 or 7.7% in 1995 as compared to 1994, notwithstanding an
additional new store. As a percentage of net sales, store expenses
decreased by 1.0%. The decrease in store expenses and as a percentage of
net sales was predominately a result of a reduction in payroll expense
and to a lesser extent the result of a reduction in advertising costs.
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. General and administrative
expenses decreased in 1995 as compared to 1994 primarily as a result of
a reduction in payroll, including the officers' decision to waive their
bonuses due to the Company's lower operating results. As a percentage of
net sales, general and administrative expenses increased by .2% in 1995
as compared to 1994 due to these relatively fixed expenses being absorbed
by a decrease in net sales and comparable store sales.
Interest expense increased in 1996 as compared to 1995 as a result
of the Company's new term loan to finance its point-of-sale cash register
software, data collection and computer systems. See "Liquidity and
Capital Resources". Interest expense decreased in 1995 as compared to
1994 as a result of cash provided by operating activities.
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. The
effective tax rate increase for 1995 as compared to 38.0% in 1994 is
attributed to a higher effective state and local income tax rate.
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 1996 and 1995 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 increased $1,824,000 in 1996 as
compared to 1995 primarily as a result of the Company reducing its line
of credit balance and retaining its net income for the year.
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 (8.25%
at August 31, 1996) 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 31, 1996, 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 $4,935,000, $6,930,000, and $6,965,000
in 1996, 1995 and 1994, respectively. As of August 31, 1996 and September
2, 1995, $1,130,000 and $4,735,000, respectively, was outstanding under
the line of credit for direct borrowings. 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. The
term loan is being used to finance point-of-sale cash register software,
data collection and computer systems ("point-of-sale systems"). The
Company anticipates completing installation of its point-of-sale systems
in all stores by spring 1997.
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 31, 1996, the Company had outstanding letters of
credit in the approximate amount of $38,700.
During 1996, 1995 and 1994, the Company had net cash provided by
(used in) operating activities of $2,659,000, $1,982,000 and
($2,058,000), respectively, and used $1,001,000, $432,000 and $1,334,000,
respectively, for purchases of property and equipment. The Company
expects to open an aggregate of three to five stores and close four
existing stores during 1997. 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.
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 and other risk factors.
New Accounting Standards
In March 1995, the Financial Accounting Standards Board (FASB)
issued 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. This Statement is effective for the Company for
the fiscal year ended August 30, 1997. The Company believes that the
provisions of SFAS No. 121 will not have any impact on the Company's
financial position or results of operations.
In October 1995, the FASB issued Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation" (SFAS No.
123), which allows for a fair value based method of accounting for
employee stock options and similar equity instruments, but permits the
Company to continue with its current recognition and measurement policy.
The Company does not intend to adopt the recognition and measurement
provisions of SFAS No. 123.<PAGE>
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.
<PAGE>
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 1996 Definitive Proxy Statement which the Company will
file with the Securities and Exchange Commission no later than 120 days
subsequent to August 31, 1996.
ITEM 11. EXECUTIVE COMPENSATION.
The information required for this item is incorporated by reference
to the Company's 1996 Definitive Proxy Statement which the Company will
file with the Securities and Exchange Commission no later than 120 days
subsequent to August 31, 1996.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required for this item is incorporated by reference
to the Company's 1996 Definitive Proxy Statement which the Company will
file with the Securities and Exchange Commission no later than 120 days
subsequent to August 31, 1996.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required for this item is incorporated by reference
to the Company's 1996 Definitive Proxy Statement which the Company will
file with the Securities and Exchange Commission no later than 120 days
subsequent to August 31, 1996.<PAGE>
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
31, 1996 and September 2, 1995 F-2
Consolidated Statements of Income for the
years ended August 31, 1996,
September 2, 1995 and September 3, 1994 F-3
Consolidated Statements of Stockholders'
Equity for the years ended August 31, 1996,
September 2, 1995, and September 3, 1994 F-4
Consolidated Statements of Cash Flows for
the years ended August 31, 1996,
September 2, 1995 and September 3, 1994 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
<PAGE>
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.<PAGE>
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 15, 1996.
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 15, 1996
Michael Aaronson
/s/ Steven Barnett Principal Financial November 15, 1996
Steven Barnett Officer, Principal
Accounting Officer and
Director
/s/ Evan Berenzweig Director November 15, 1996
Evan Berenzweig
/s/ Stanley Berenzweig Principal Executive November 15, 1996
Stanley Berenzweig Officer and Director
/s/ Fred J. Damiano Director November 15, 1996
Fred J. Damiano
/s/ Judith Lombardo Director November 15, 1996
Judith Lombardo
/s/ Alan C. Mintz Director November 15, 1996
Alan C. Mintz
<PAGE>
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.<PAGE>
RAG SHOPS, INC. AND SUBSIDIARIES
Consolidated Financial Statements and Independent
Auditors' Report for the Three Years
Ended August 31, 1996<PAGE>
RAG SHOPS, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
Page
INDEPENDENT AUDITORS' REPORT F-1
CONSOLIDATED BALANCE SHEETS F-2
CONSOLIDATED STATEMENTS OF INCOME F-3
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY F-4
CONSOLIDATED STATEMENTS OF CASH FLOWS F-5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS F-7<PAGE>
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 31, 1996 and September 2,
1995 and the related consolidated statements of income, stockholders'
equity and cash flows for each of the three years in the period ended
August 31, 1996. 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 31, 1996 and September 2, 1995, and the results
of their operations and their cash flows for each of the three years in
the period ended August 31, 1996, in conformity with generally accepted
accounting principles.
As discussed in Note 1 to the financial statements, effective August 29,
1993 the Company adopted Statement of Financial Accounting Standards No.
109, "Accounting for Income Taxes".
Deloitte & Touche LLP
Parsippany, New Jersey
October 16, 1996
F-1
<PAGE>
RAG SHOPS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
August 31, September 2,
ASSETS 1996 1995
CURRENT ASSETS:
Cash $ 820,985 $ 911,237
Merchandise inventories 26,280,442 27,558,819
Prepaid expenses 345,449 540,887
Other current assets 473,979 92,031
Deferred taxes 727,746 673,946
Total current assets 28,648,601 29,776,920
PROPERTY AND EQUIPMENT, NET 4,462,121 4,725,886
OTHER ASSETS 444,539 318,195
$33,555,261 $34,821,001
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Note payable - bank $ 1,130,000 $ 4,735,000
Accounts payable - trade 7,604,083 7,447,962
Accrued expenses and other current
liabilities 1,714,346 1,780,552
Accrued salaries and wages 583,085 652,296
Current portion of long-term debt 631,969 -
Total current liabilities 11,663,483 14,615,810
DEFERRED TAXES 68,061 132,661
LONG-TERM DEBT 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 31,
1996 and September 2, 1995 45,144 45,144
Additional paid-in capital 6,039,162 6,039,162
Retained earnings 14,508,531 13,988,224
Total stockholders' equity 20,592,837 20,072,530
$33,555,261 $34,821,001
See notes to the consolidated financial statements.<PAGE>
RAG SHOPS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Year Ended
August 31, September 2, September 3,
1996 1995 1994
NET SALES $83,766,651 $86,089,364 $89,528,893
COST OF MERCHANDISE SOLD AND
OCCUPANCY COSTS 53,326,702 54,497,390 55,642,426
Gross profit 30,439,949 31,591,974 33,886,467
OPERATING EXPENSES:
Store expenses 19,938,761 20,614,048 22,333,136
General and administrative
expenses 9,561,294 9,951,815 10,170,452
Total operating expenses 29,500,055 30,565,863 32,503,588
INCOME FROM OPERATIONS 939,894 1,026,111 1,382,879
INTEREST EXPENSE, Net 160,887 133,602 265,845
INCOME BEFORE PROVISION FOR
INCOME TAXES 779,007 892,509 1,117,034
PROVISION FOR INCOME TAXES 258,700 350,600 424,800
INCOME BEFORE CUMULATIVE EFFECT OF
CHANGE IN ACCOUNTING PRINCIPLE 520,307 541,909 692,234
CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING FOR INCOME TAXES - - 74,700
NET INCOME $ 520,307 $ 541,909 $ 766,934
PER SHARE DATA:
INCOME BEFORE CUMULATIVE EFFECT OF
CHANGE IN ACCOUNTING PRINCIPLE $.12 $.12 $.15
CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING FOR INCOME TAXES - - .02
NET INCOME PER SHARE $.12 $.12 $.17
WEIGHTED AVERAGE SHARES
OUTSTANDING 4,515,527 4,526,108 4,515,102
See notes to the consolidated financial statements.<PAGE>
RAG SHOPS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Additional
Common Stock Paid-In Retained
Shares Dollars Capital Earnings Total
BALANCE, AUG 28, 1993 4,514,400 $45,144 $6,039,162 $12,679,381 $18,763,687
Net income - - - 766,934 766,934
BALANCE, SEP 3, 1994 4,514,400 45,144 6,039,162 13,446,315 19,530,621
Net income - - - 541,909 541,909
BALANCE, SEP 2, 1995 4,514,400 45,144 6,039,162 13,988,224 20,072,530
Net income - - - 520,307 520,307
BALANCE, AUG 31, 1996 4,514,400 $45,144 $6,039,162 $14,508,531 $20,592,837
See notes to the consolidated financial statements.<PAGE>
RAG SHOPS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended
August 31, September 2, September 3,
1996 1995 1994
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 520,307 $ 541,909 $ 766,934
Adjustments to reconcile net income to
net cash provided by (used in)
operating activities:
Depreciation and amortization 1,273,770 1,175,746 1,145,720
Deferred taxes (132,900) (113,600) (98,600)
Loss on disposition of property
and equipment 15,613 47,397 27,313
Cum effect of change in accounting for
income taxes - - (74,700)
Changes in assets and liabilities:
(Increase) decrease in:
Merchandise inventories 1,278,377 302,872 (3,399,554)
Prepaid expenses 195,438 6,946 309,350
Other current assets (381,948) (37,457) 62,453
Other assets (129,917) 15,659 (59,644)
Increase (decrease) in:
Accounts payable - trade 156,121 144,322 580,788
Accrued expenses and other
current liabilities (66,206) 170,632 (538,129)
Accrued salaries and wages (69,211) (272,904) (779,889)
Net cash provided by (used in)
operating activities 2,659,444 1,981,522 (2,057,958)
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of property and
equipment 3,895 2,350 -
Payments for purchases of property
and equipment (1,000,511) (432,155) (1,333,843)
Net cash used in investing
activities (996,616) (429,805) (1,333,843)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of note
payable - bank 34,415,000 29,101,000 28,522,000
Repayments of note payable - bank (38,020,000)(30,921,000) (24,759,000)
Long-term borrowings 2,000,000 - -
Repayments of long-term debt (148,080) - (4,275)
Net cash (used in) provided
by financing activities (1,753,080) (1,820,000) 3,758,725
NET (DECREASE) INCREASE IN CASH (90,252) (268,283) 366,924
CASH, BEGINNING OF YEAR 911,237 1,179,520 812,596
CASH, END OF YEAR $ 820,985 $ 911,237 $ 1,179,520
(continued)
RAG SHOPS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Cash paid during the year for:
Interest $ 232,667 $ 104,004 $ 290,220
Income taxes $ 200,013 $ 463,756 $ 396,906
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.<PAGE>
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.
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.
Income Taxes
The Company adopted Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes" (SFAS No. 109) effective August 29, 1993.
The cumulative effect of adopting SFAS No. 109 on the Company's financial
statements was to increase net income by approximately $75,000 or $.02 per
share for the fiscal year ended September 3, 1994.
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 31, 1996.
Recent Accounting Pronouncements
In March 1995, the Financial Accounting Standards Board (FASB) issued
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. This Statement is effective for the Company for the fiscal year
ended August 30, 1997. The Company believes that the provisions of
SFAS No. 121 will not have any impact on the Company's financial position or
results of operations.
In October 1995, the FASB issued Statement of Financial Accounting Standards
No. 123, "Accounting for Stock-Based Compensation" (SFAS No. 123), which
allows for a fair value based method of accounting for employee stock options
and similar equity instruments, but permits the Company to continue with its
current recognition and measurement policy. The Company does not intend to
adopt the recognition and measurement provisions of SFAS No. 123.
<PAGE>
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 market value as of August 31, 1996 and
September 2, 1995.
Fiscal Year
The Company's fiscal year end is the Saturday closest to August 31. The
financial statements for the fiscal years ended September 3, 1994,
September 2, 1995 and August 31, 1996 were comprised of 53 weeks, 52 weeks
and 52 weeks, respectively.
Note 2. Property And Equipment
Property and equipment consists of the following:
Useful August 31, September 2,
Lives 1996 1995
Furniture and fixtures 5-10 years $6,744,696 $6,659,903
Leasehold improvements 10 years 2,340,000 2,203,254
Transportation equipment 3-7 years 440,940 439,782
Data processing equipment 5 years 2,359,911 1,693,362
11,885,547 10,996,301
Less accumulated depreciation and
amortization 7,423,426 6,270,415
$ 4,462,121 $4,725,886
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. 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 31, 1996 the Company was in compliance with such covenants. Borrowings
under the line of credit bear interest payable quarterly at the bank's prime
rate (8.25% at August 31, 1996). The borrowings outstanding under the line of
credit as of August 31, 1996 and September 2, 1995 were $1,130,000 and
$4,735,000, respectively, and the unused line of credit for direct borrowings
and the issuance of letters of credit at August 31, 1996 was $6,831,307.
<PAGE>
Note 4. Long-Term Debt
Long-term debt outstanding at August 31, 1996 consists of the following:
Term loan $1,851,920
Other 10,929
1,862,849
Less current portion 631,969
$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 property and equipment.
Aggregate annual maturities of long-term debt are as follows:
Fiscal Year Ended
1997 $ 631,969
1998 684,249
1999 546,631
$1,862,849
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 1996, 1995 and 1994
amounted to $5,863,758, $5,606,092 and $5,244,149, respectively, and includes
contingent rentals (computed on a percentage of sales, as defined in the
leases) of $42,565, $84,269, and $119,668, respectively.
The Company leases certain premises from an entity controlled by the majority
stockholders of the Company. For the years ended 1996, 1995 and 1994, rental
payments under this agreement amounted to $288,897, $269,435, and $267,613,
respectively.
Future minimum annual rental commitments under noncancellable operating leases
are as follows:
Fiscal Year Ended
1997 $ 5,834,592
1998 5,253,498
1999 3,442,663
2000 2,476,527
2001 1,787,718
Thereafter 3,335,879
$22,130,877
In addition, at August 31, 1996 the Company has outstanding letters of credit
for the purchase of merchandise inventories of approximately $38,700.
<PAGE>
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, which have been reserved
by the Company. 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.
Information with respect to options granted under the Plan is as follows:
Number of Exercise Price
Shares Per Share
Outstanding, August 28, 1993 324,400 $6.00-$12.375
Canceled (64,600) $6.00-$12.375
Outstanding, September 3, 1994 259,800 $6.00-$12.375
Granted 70,000 $2.375-$3.188
Canceled (105,650) $6.00-$12.375
Outstanding, September 2, 1995 224,150 $2.375-$12.375
Granted 12,000 $2.125
Canceled (21,400) $3.188-$12.375
Outstanding, August 31, 1996 214,750 $2.125-$12.375
Exercisable, August 31, 1996 136,200 $6.00-$12.375
Note 7. Income Taxes
Income tax expense consists of the following:
Year Ended
August 31, September 2, September 3,
1996 1995 1994
Federal:
Current $ 362,800 $ 314,400 $ 420,100
Deferred (115,800) (60,400) (85,300)
State:
Current 28,800 149,800 103,300
Deferred (17,100) (53,200) (13,300)
$ 258,700 $ 350,600 $ 424,800
<PAGE>
The deferred income tax arises from the following temporary differences:
Year Ended
August 31, September 2, September 3,
1996 1995 1994
Uniform inventory capitalization $ 53,800 $ 20,000 $122,700
Depreciation 64,600 22,100 (53,200)
Straight-line of leases 14,500 18,300 29,100
Reserves not deductible - 53,200 -
$132,900 $ 113,600 $ 98,600
The effective tax rate differs from the Federal statutory rate as follows:
Year Ended
August 31, September 2, September 3,
1996 1995 1994
Statutory tax rate 34.0% 34.0% 34.0%
State and local income taxes,
net of federal income tax
benefit 1.0 7.1 5.3
Other (1.8) (1.8) (1.3)
Effective tax rate 33.2% 39.3% 38.0%
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 31, September 2,
1996 1995
Current deferred tax asset:
Uniform inventory capitalization $727,746 $673,946
Non-current deferred tax assets:
Straight-line of leases 116,773 102,273
Net operating losses 219,210 234,629
Valuation allowance (144,510) (159,929)
919,219 850,919
Non-current deferred tax liability:
Difference between book and
tax depreciation methods 68,061 132,661
Net deferred tax asset $851,158 $718,258
<PAGE>
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 year ended 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
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)
Fiscal Quarter Ended
Dec. 3, Mar. 4, Jun. 3, Sep. 2,
Fiscal 1995 1994 1995 1995 1995
Net sales $27,926 $20,754 $19,816 $17,593
Gross profit 10,628 7,752 7,471 5,740
Net income (loss) 1,273 223 298 (1,252)(a)
Net income (loss) per share .28 .05 .07 (.28)(a)
(a) Included in the fiscal quarter ended August 31, 1996 and September 2,
1995 was a credit of $335,000 or $.07 per share and a charge of $266,000
or $.06 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.
* * * * * *<PAGE>
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."<PAGE>
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 16, 1996,
appearing in this Annual Report on Form 10-K of Rag Shops, Inc. for the
year ended August 31, 1996.
Deloitte & Touche LLP
Parsippany, New Jersey
November 15, 1996
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