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 28, 1999
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 29, 1999, there were outstanding 4,810,883
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 $4,348,163.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's 1999 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 28, 1999, Rag Shops, Inc. operates 69
specialty retail stores which sell competitively priced craft and
fabric merchandise. The Company caters to value conscious consumers
who create decorative accessories and sew. 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 28, 1999, the Company operated 33 retail stores
in New Jersey, 21 in Florida, seven in Pennsylvania, six in New
York and two in Connecticut. The Company anticipates opening three
stores and closing two stores during the remainder of its fiscal
year ending September 2, 2000. 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 1995:
Fiscal Years
1999 1998 1997 1996 1995
Stores open at beginning of period 66 66 67 69 68
Stores opened during period 5 2 4 1 2
Stores closed during period 2 2 5 3 1
Stores open at end of period 69 66 66 67 69
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 1997, 1998 and 1999, sales
of crafts accounted for approximately 67.3%, 68.2% and 69.3%
respectively, of the Company's net sales, and sales of fabrics
accounted for the remainder.
Each of the Company's stores offers craft, fabric and related
products. Craft items include silk flowers, wicker, picture frames,
wood products, stitchery, yarn, wearable art, art supplies and
craft supplies. Fabric items available at the Company's stores
include apparel and home decorative fabrics, trimmings, patterns
and sewing notions. As of August 28, 1999, sixty-two 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 six 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 craft and fabric 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 seven
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 are placed by the store manager on a regular basis.
Commencing in January 1999 orders for merchandise are entered into
a scanning gun, down loaded to a computer in the store and polled
by the Company's corporate data processing system. Merchandise
received at the Company's stores is entered into the store computer
and included in the polling. 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. Approximately
65% 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 $12.50.
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, 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 frequently issued to 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 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 Arts & Crafts, Inc., Jo-Ann Stores,
Inc., and Michaels Stores, Inc.
Employees
As of August 28, 1999, the Company has approximately 1,200
employees, consisting of approximately 400 full time and 800 part
time employees. Full time personnel consist of approximately 220
salaried and 180 hourly employees. All part time personnel are
hourly employees. During seasonal peak periods, the Company hires
temporary personnel. Approximately 56 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
2002. 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 expects to lease approximately 50,000 square
feet of warehouse space for eight months of the year 2000, as
compared to twelve months for the year 1999, to accommodate
seasonal merchandise.
The Company's stores, all of which are located in leased
facilities, range in size from approximately 6,200 square feet to
17,700 square feet. The average size of the Company's stores is
approximately 10,100 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 2014 3
2001 2 2016 3
2003 2 2017 10
2004 2 2018 6
2005 2 2019 8
2006 2 2020 3
2008 3 2021 2
2010 2 2023 2
2011 4 2024 2
2012 2 2026 1
2013 5 2027 2
Sixty-six 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 involved in various legal proceedings
incidental to the conduct of its business. The Company currently is
not engaged in any legal proceedings that is expected to have a
material adverse effect on the Company's results of operations or
financial position.
<PAGE>
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 28, 1999.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED
STOCKHOLDER MATTERS.
Effective September 24, 1999 the Company's Common Stock began
trading on the NASDAQ SmallCap Market ("NASDAQ") under the symbol
"RAGS". The Company's Common Stock was previously traded on the
NASDAQ National Market.
The following table sets forth, for the periods indicated, the
high and low sale prices of the Company's Common Stock as reported
by NASDAQ. 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 Year Ended August 28, 1999
First Quarter $ 2.875 $2.3125
Second Quarter 2.875 2.25
Third Quarter 2.50 1.9375
Fourth Quarter 2.5625 2.00
Fiscal Year Ended August 29, 1998
First Quarter $ 3.50 $2.125
Second Quarter 3.438 2.625
Third Quarter 3.688 2.813
Fourth Quarter 3.75 2.50
On October 29, 1999, the closing price of the Common Stock was
$1.938.
The approximate number of stockholders of record of the Common
Stock at October 29, 1999 was 407. The number of beneficial owners
whose shares are held by banks, brokers and other nominees exceeds
700.
On June 28, 1999, the Company declared a 5% stock dividend on
the Company's common stock which was paid on August 10, 1999 to
stockholders of record on July 14, 1999. The Company has not paid
any cash 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
cash 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.
Fiscal Year Ended(1)
August 28, August 29, August 30, August 31, September 2,
1999 1998 1997 1996 1995
(in thousands, except Common Stock Data and Statistics)
OPERATIONS
Net sales $ 94,781 $ 90,566 $ 86,528 $ 83,767 $ 86,089
Gross profit 33,915 32,772 31,044 30,440 31,592
Store expenses and
general and
administrative
expenses 33,163 31,167 30,578 29,500 30,566
Interest expense, net 83 61 115 161 134
Income before income
taxes 668 1,544 351 779 893
Net income $ 402 $ 942 $ 207 $ 520 $ 542
COMMON STOCK DATA (2)
Net income per share
Basic and diluted $ .08 $ .20 $ .04 $ .11 $ .11
Book value per
share $ 4.59 $ 4.59 $ 4.39 $ 4.34 $ 4.23
Weighted average shares and
equivalents outstanding
Basic 4,744,408 4,740,063 4,740,063 4,740,063 4,740,063
Diluted 4,754,996 4,788,196 4,764,977 4,740,672 4,751,401
FINANCIAL POSITION
Working capital $ 17,298 $ 17,095 $ 16,256 $ 16,985 $ 15,161
Total assets 37,869 33,318 32,264 33,555 34,821
Short-term debt 6,570 2,194 3,119 1,762 4,735
Long-term debt - - 554 1,231 -
Stockholders' equity$ 22,104 $ 21,742 $ 20,800 $ 20,593 $ 20,073
Fiscal Year Ended(1)
August 28, August 29, August 30, August 31, September 2,
1999 1998 1997 1996 1995
(in thousands, except Common Stock Data and Statistics)
STATISTICS
Net sales increase
(decrease) 4.7% 4.7% 3.3% (2.7%) (3.8%)
Comparable store net
sales increases
(decreases) (4) .2% 3.2% 3.8% (4.9%) (7.3%)
Return on net sales,
after income taxes .4% 1.0% .2% .6% .6%
Return on average
stockholders' equity 1.8% 4.4% 1.0% 2.6% 2.7%
Average net sales per
gross square foot(3) $ 141 $ 143 $ 139 $ 135 $ 141
Average net sales per
store (000's)(3) $ 1,399 $ 1,374 $ 1,296 $ 1,214 $ 1,265
Stores open at end of
period 69 66 66 67 69
(1) All years are 52 week fiscal years.
(2) On June 28, 1999, the Company declared a 5% stock dividend on the
Company's common stock which was paid on August 10, 1999 to
stockholders of record on July 14, 1999. Share and per share data
presented for all periods has been adjusted to give retroactive
effect to the dividend.
(3) 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."
(4) 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 years.
Year Ended
1999 1998 1997
Net sales 100.0% 100.0% 100.0%
Cost of merchandise sold
and occupancy costs 64.2 63.8 64.1
Gross profit 35.8 36.2 35.9
Store expenses 24.0 23.4 23.9
General and administrative
expenses 11.0 11.0 11.5
Income from operations .8 1.8 0.5
Net income .4% 1.0% .2%
The Company's net sales increased in 1999 by $4,215,000 or 4.7% due
to increases in comparable store sales of $205,000 or .2% in addition to
new store sales of $6,377,000 net of the impact of closed store sales.
Management believes that the planned inventory build up, that was
initiated in the third fiscal quarter and facilitated by the
implementation of our new automated store ordering system, was the
principal factor for an increase in comparable store sales of 3.0% in the
second half of the fiscal year as compared to a decrease in comparable
store sales of 1.9% in the first half of the fiscal year. The Company's
net sales increased in 1998 by $4,038,000 or 4.7% due to increases in
comparable store sales of $2,647,000 or 3.2% in addition to new store
sales of $3,891,000 net of the impact of closed store sales. Management
believes the increases in comparable store sales in 1998 were primarily
due to improved buying and timely inventory replenishment based on
information from the Company's point-of-sale cash register software, data
collection and computer systems ("point-of-sale systems") installed in
the prior year and from the continuation of its marketing plan that
commenced in the prior year.
Gross profit percentage decreased by .4% in 1999 as compared to 1998
primarily as a result of an increase in occupancy costs. Gross profit
percentage increased by .3% in 1998 as compared to 1997 primarily as a
result of a decrease in markdowns, which was partially attributable to
the improved buying and timely inventory replenishment mentioned above.
Store expenses increased by $1,497,000 or 7.1%, and as a percentage
of net sales increased by .6%, in 1999 as compared to 1998 principally
due to an increase in payroll and payroll related expenses that was
primarily due to new store openings net of store closings. Store expenses
increased by $507,000 or 2.5% in 1998 as compared to 1997. The dollar
increase in 1998 was primarily the result of an increase in (i) the cost
of operating the point-of-sale systems for an entire fiscal year, (ii)
credit card processing costs principally due to accepting a new credit
card at the beginning of this fiscal year and (iii) payroll and payroll
related expenses. As a percentage of net sales, store expenses decreased
by .5% in 1998 as compared to 1997 principally due to the company
leveraging these expenses against the increase in net sales.
General and administrative expenses increased by $499,000 or 5.0% in
1999 as compared to 1998. 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 1999 remained constant compared to
1998. General and administrative expenses increased marginally in 1998 as
compared to 1997. As a percentage of net sales, general and
administrative expenses decreased by .5% as the Company was able to
leverage these costs against the increase in net sales.
Interest expense, net increased in 1999 as compared to 1998 as a
result of higher borrowings on the Company's line of credit to finance
the planned inventory build up. This increase was net of a decrease in
interest on the Company's term loan which was paid in April 1999.
Interest expense, net decreased in 1998 as compared to 1997 as a result
of the reduction in the Company's term loan. See "Liquidity and Capital
Resources."
The effective tax rate for 1999 was 39.9% as compared to 39.0% in
1998. The increase is primarily due to a higher effective state and local
income tax rate. The effective tax rate for 1998 was 39.0% as compared to
41.0% in 1997. The decrease is primarily attributed to a tax settlement
in 1997.
Net income decreased by $540,000 for 1999 as compared to 1998 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
increased by $734,000 for 1998 as compared to 1997 due to the increase in
sales and the related increase in gross profit which was partially offset
by the increase in operating expenses.
Seasonality
The Company's business is seasonal, which the Company believes is
typical of the retail craft and fabric industry. The Company's highest
sales and earnings levels 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.
<PAGE>
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 1999 and 1998, 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 $204,000 in 1999 as
compared to 1998 primarily as a result of the Company retaining its net
income for the period.
The Company maintains a credit facility with a bank. The credit
facility is renewable annually on or before each December 31 and consists
of a discretionary unsecured line of credit for direct borrowings and the
issuance and refinance of letters of credit. The line of credit was
increased from $8,000,000 to $10,000,000 on August 31, 1999. Borrowings
under the line of credit bear interest at the bank's prime rate (8.25%
at August 28, 1999). The Company's term loan, initiated during the fiscal
year ended August 31, 1996 to finance its new point-of-sale systems, was
paid in April 1999. 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 28, 1999, 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 $7,010,000,
$2,785,000 and $2,755,000 in 1999, 1998 and 1997, respectively. As of
August 28, 1999 and August 29, 1998, $6,570,000 and $1,635,000,
respectively, was outstanding under the line of credit for direct
borrowings and $548,000 was outstanding as of August 29, 1998 under the
term loan that matured in 1999. 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
Company's point-of-sale and automated store ordering and receiving
systems were completely installed in all stores as of July 1997 and March
1999, respectively, and are now fully operational.
The Company purchases merchandise directly from manufacturers in the
Far East. These purchases are payable in United States dollars and are
either by direct payment or supported by letters of credit. The results
of operations of the Company have not been significantly affected by
foreign currency fluctuation. At August 28, 1999, the Company had
outstanding letters of credit in the approximate amount of $26,800.
During 1999, 1998 and 1997, the Company had net cash (used in)
provided by operating activities of $(2,707,000), $2,443,000 and
$1,135,000, respectively, and used $1,579,000, $835,000 and $1,877,000,
respectively for purchases of property and equipment. Cash provided by
operating activities decreased in 1999 primarily as a result of the
increase in merchandise inventories. The Company expects to open three
stores and close two existing stores during 2000. 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.
Year 2000
To conduct its business efficiently, the Company relies on several
critical information technology ("IT") systems for functions including
point-of-sale operations, inventory control, financial and accounting
management, communications, purchasing, records retention, and general
administrative procedures. Beginning in 1997, the Company began an
internal review of its IT systems to ensure their viability in light of
the highly-publicized "Year 2000" problem. The Company has also
continued to assess other non-IT systems (such as security and
electrical) to identify potential Year 2000 issues that may arise from
embedded chip technology. Because the Company's use of internal systems
that include such technology is limited, management does not expect its
non-IT systems to pose a material Year 2000 issue.
Concurrently, management has been undertaking a general reevaluation of
the Company's IT systems in its effort to enhance efficiency and increase
profitability in a highly competitive marketplace. In several cases,
this modernization program has allowed management to address Year 2000
compliance issues by entirely replacing certain obsolete technology with
new systems that are Year 2000-compliant. Among the systems whose
modernization is completed or underway are those controlling inventory,
purchasing, point-of-sale data and central administration.
As part of this review, management has also communicated with its most
important suppliers and other vendors to ensure their Year 2000
compliance. The Company is cooperating with these vendors to upgrade
certain software and maintain Year 2000 compliance both internally and
externally.
The Company believes it has successfully achieved Year 2000 compliance
with all of its significant computer hardware and software. Because the
Company has focused its attention primarily on updating its systems, it
has commenced the development of a contingency plan in the event of any
interruption of key internal or external services. Management expects to
complete such a plan prior to January 2000. In particular, the Company's
plan will seek to establish alternatives in the event of any disturbance
in external telecommunications, electric power, financial or
transportation networks. Although at this time the Company cannot
estimate the impact of an interruption in any of these services, it is
possible that a sustained disruption would materially affect the
Company's operations and financial results.
Since most of the Company's Year 2000 compliance expenses have arisen in
the context of a general IT modernization, these remediation costs did
not rise to a material level.
Forward-Looking Statements
This report contains certain forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended, which are
intended to be covered by safe harbors created hereby. Such forward-
looking statements include those regarding the Company's future results
in light of current management activities, and involve known and unknown
risks, including competition within the craft retail industry, weather-
related changes in the selling cycle, and other uncertainties (including
those risk factors referenced in Company's filings with the Securities
and Exchange Commission).
New Accounting Standards
In April 1998, the Financial Accounting Standards Board ("FASB")
issued Statement of Position No. 98-5 "Reporting on the Costs of Start-Up
Activities" ("SOP"). This SOP requires the costs associated with start-up
activities, such as opening a new store, be expensed as incurred.
Effective August 29, 1999 the Company adopted this SOP. The adoption of
this SOP did not have a material effect on the Company's results of
operations.
In June 1998, the FASB issued Statement of Financial Accounting Standards
No. 133, "Accounting for Derivative Instruments and Hedging Activities"
("SFAS No. 133"). SFAS No. 133 established accounting and reporting
standards for derivative instruments and requires recognition of all
derivatives as assets or liabilities in the statement of position and
measurement of these instruments at fair value. SFAS No. 133 is effective
for the Company in the year ending August 30, 2001. Management believes
that adopting this statement will not have a material impact on the
financial position, results of operations or cash flows of the Company.
Subsequent Event
Effective August 29, 1999, the Company changed its method of calculating
ending merchandise inventories under the retail inventory method. Prior
to August 29, 1999, the Company utilized an average cost-to-retail ratio
to value ending inventory. In fiscal year 2000, the Company began
utilizing a method that weights the cost-to-retail ratio using multiple
inventory categories. Management believes that this change in accounting
improves the measurement of the Company's profitability based upon a
changing product mix. The cumulative effect of this accounting change
will increase the Company's first quarter fiscal 2000 profit by
approximately $325,000 (net of tax effect $195,000).
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Market risk is the potential change in a financial instrument's
value caused by fluctuations in interest or currency exchange rates, or
in equity and commodity prices. The Company's activities expose it to
certain risks that Management evaluates carefully to minimize earnings
volatility. At August 28, 1999, the Company was not a party to any
derivative arrangement and the Company does not engage in trading,
market-making or other speculative activities in the derivatives markets.
The Company's foreign currency exposure is not material and the Company
does not engage in regular hedging activities to minimize the impact of
foreign currency fluctuations. As discussed in Note 3 of the Notes to
Consolidated Financial Statements, loans outstanding under the Company's
unsecured line of credit bear interest at the bank's prime rate (8.25% at
August 28, 1999).
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 1999 Definitive Proxy Statement which the Company will
file with the Securities and Exchange Commission no later than 120 days
subsequent to August 28, 1999.
ITEM 11. EXECUTIVE COMPENSATION.
The information required for this item is incorporated by reference
to the Company's 1999 Definitive Proxy Statement which the Company will
file with the Securities and Exchange Commission no later than 120 days
subsequent to August 28, 1999.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required for this item is incorporated by reference
to the Company's 1999 Definitive Proxy Statement which the Company will
file with the Securities and Exchange Commission no later than 120 days
subsequent to August 28, 1999.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required for this item is incorporated by reference
to the Company's 1999 Definitive Proxy Statement which the Company will
file with the Securities and Exchange Commission no later than 120 days
subsequent to August 28, 1999.
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
28, 1999 and August 29, 1998 F-2
Consolidated Statements of Income for the
years ended August 28, 1999,
August 29, 1998 and August 30, 1997 F-3
Consolidated Statements of Stockholders'
Equity for the years ended August 28, 1999,
August 29, 1998 and August 30, 1997 F-4
Consolidated Statements of Cash Flows for
the years ended August 28, 1999, August 29,
1998 and August 30, 1997 F-5
Notes to Consolidated Financial Statements F-6
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
10.4**1999 Incentive Stock Award Plan
21.1List of subsidiaries of the Company
23.1Consent of Deloitte & Touche LLP
24.1Power 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.
**Incorporated by reference to the Company's Registration Statement
on Form S-8 filed on September 3, 1999.
(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 22, 1999.
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 22, 1999
Michael Aaronson
/s/ Steven Barnett Principal Financial November 22, 1999
Steven Barnett Officer, Principal
Accounting Officer and
Director
/s/ Evan Berenzweig Director November 22, 1999
Evan Berenzweig
/s/ Stanley Berenzweig Principal Executive November 22, 1999
Stanley Berenzweig Officer and Director
/s/ Fred J. Damiano Director November 22, 1999
Fred J. Damiano
/s/ Judith Lombardo Director November 22, 1999
Judith Lombardo
/s/ Alan C. Mintz Director November 22, 1999
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 *
10.4 1999 Incentive Stock Award Plan **
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.
** Incorporated by reference to the Company's Registration Statement on Form
S-8 filed on September 3, 1999.
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 28, 1999 and August 29,
1998, 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 28, 1999. 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 28, 1999 and August 29, 1998, and the results
of their operations and their cash flows for each of the three years in
the period ended August 28, 1999, in conformity with generally accepted
accounting principles.
Deloitte & Touche LLP
Parsippany, New Jersey
November 11, 1999
F-1
RAG SHOPS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
August 28, August 29,
ASSETS 1999 1998
CURRENT ASSETS:
Cash $ 934,073 $ 896,123
Merchandise inventories 30,563,118 26,458,628
Prepaid expenses 536,754 531,535
Other current assets 224,759 77,475
Deferred taxes 804,746 707,346
Total current assets 33,063,450 28,671,107
PROPERTY AND EQUIPMENT, NET 4,489,952 4,327,559
OTHER ASSETS 315,612 319,690
$37,869,014 $33,318,356
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Note payable - bank $ 6,570,000 $ 1,635,000
Accounts payable - trade 5,928,568 6,555,499
Accrued expenses and other current
liabilities 2,505,028 1,976,274
Accrued salaries and wages 604,769 618,112
Income taxes payable 156,912 243,821
Current portion of long-term debt - 547,873
Total current liabilities 15,765,277 11,576,579
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;
4,837,763 shares and 4,514,400
shares issued at August 28, 1999
and August 29, 1998, respectively 48,378 45,144
Additional paid-in capital 6,267,827 6,039,162
Unamortized restricted stock awards (207,488) -
Retained earnings 16,059,094 15,657,471
Treasury stock, at cost, 26,880 shares (64,074) -
Total stockholders' equity 22,103,737 21,741,777
$37,869,014 $33,318,356
See notes to the consolidated financial statements.
RAG SHOPS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Fiscal Year Ended
August 28, August 29, August 30,
1999 1998 1997
NET SALES $94,780,965 $90,565,996 $86,527,566
COST OF MERCHANDISE SOLD AND
OCCUPANCY COSTS 60,866,108 57,793,619 55,483,180
Gross profit 33,914,857 32,772,377 31,044,386
OPERATING EXPENSES:
Store expenses 22,697,097 21,199,678 20,692,692
General and administrative
expenses 10,466,253 9,967,252 9,885,242
Total operating expenses 33,163,350 31,166,930 30,577,934
INCOME FROM OPERATIONS 751,507 1,605,447 466,452
INTEREST EXPENSE, Net 83,184 61,430 115,129
INCOME BEFORE PROVISION FOR
INCOME TAXES 668,323 1,544,017 351,323
PROVISION FOR INCOME TAXES 266,700 602,500 143,900
NET INCOME $ 401,623 $ 941,517 $ 207,423
EARNINGS PER COMMON SHARE:
Basic and diluted $.08 $.20 $.04
See notes to the consolidated financial statements.
RAG SHOPS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Additional Unamortized
Common Stock Paid-In Restricted Retained Treasury
Shares Dollars Capital Stock Awards Earnings Stock Total
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
Net income - - - - 941,517 - 941,517
BALANCE, AUGUST
29, 1998 4,514,400 45,144 6,039,162 - 15,657,471 - 21,741,777
Acquisition
of treasury
stock - - - - - (64,074) (64,074)
Issuance of
restricted
stock awards 97,700 977 231,061 (232,038) - - -
Stock
dividend 225,663 2,257 (2,396) - - - (139)
Amortization
of restricted
stock awards - - - 24,550 - - 24,550
Net income - - - - 401,623 - 401,623
BALANCE, AUGUST
28,
1999 4,837,763$48,378$6,267,827$(207,488) $16,059,094 $(64,074)$22,103,737
See notes to the consolidated financial statements.
RAG SHOPS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Fiscal Year Ended
August 28, August 29, August 30,
1999 1998 1997
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 401,623 $ 941,517 $ 207,423
Adjustments to reconcile
net income to net cash
provided by operating
activities:
Depreciation and
amortization 1,371,111 1,366,589 1,406,285
Deferred taxes (98,400) (73,200) 8,000
Loss on disposition
of property and
equipment 44,084 24,764 59,738
Amortization of restricted
stock awards 24,550 - -
Changes in assets and
liabilities:
(Increase) decrease in:
Merchandise inventories (4,104,490) (1,335,591) 1,157,405
Prepaid expenses (5,219) (232,712) 46,626
Other current assets (147,284) 164,822 231,682
Other assets 5,078 (45,924) 169,668
Increase (decrease) in:
Accounts payable - trade (626,931) 1,474,953 (2,523,537)
Accrued expenses and
other current liabilities 528,754 108,129 142,870
Accrued salaries and wages (13,343) (193,916) 228,943
Income taxes payable (86,909) 243,821 -
Net cash (used in) provided
by operating activities (2,707,376) 2,443,252 1,135,103
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of property
and equipment 1,300 3,350 4,331
Payments for purchases of
property and equipment (1,578,888) (834,671) (1,877,180)
Net cash used in
investing activities (1,577,588) (831,321) (1,872,849)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of
note payable - bank 20,160,000 12,810,000 14,520,000
Repayments of note
payable - bank (15,225,000) (13,610,000) (13,215,000)
Repayments of long-term debt (547,873) (679,476) (624,571)
Acquisition of treasury stock (64,074) - -
Payment in lieu of stock
dividend fractional shares (139) - -
Net cash provided by
(used in) financing
activities 4,322,914 (1,479,476) 680,429
NET INCREASE (DECREASE) IN CASH 37,950 132,455 (57,317)
CASH, BEGINNING OF YEAR 896,123 763,668 820,985
CASH, END OF YEAR $ 934,073 $ 896,123 $ 763,668
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Cash paid during the year for:
Interest $ 49,628 $ 120,725 $ 165,922
Income taxes $ 373,992 $ 464,206 $ 532,087
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 craft and
fabric 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.
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.
Fiscal Year
The Company's fiscal year end is the Saturday closest to August 31. The
financial statements for the fiscal years ended August 30, 1997 ("1997"), August
29, 1998 ("1998") and August 28, 1999 ("1999") were each comprised of 52 weeks.
Reclassifications
Certain prior year amounts have been reclassified to conform to current year
presentations.
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
crafts and fabrics.
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.
Fair Value Of Financial Instruments
Management of the Company believes that the fair value of financial instruments
approximates their cost as of August 28, 1999 and August 29, 1998. 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.
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.
Recent Accounting Pronouncements
In April 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Position No. 98-5 "Reporting on the Costs of Start-Up Activities"
("SOP"). This SOP requires the costs associated with start-up activities, such
as opening a new store, be expensed as incurred. Effective August 29, 1999 the
Company adopted this SOP. The adoption of this SOP did not have a material
effect on the Company's results of operations.
In June 1998, the FASB issued Statement of Financial Accounting Standards No.
133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS No.
133"). SFAS No. 133 established accounting and reporting standards for
derivative instruments and requires recognition of all derivatives as assets or
liabilities in the statement of position and measurement of these instruments
at fair value. SFAS No. 133 is effective for the Company in the year ending
August 30, 2001. Management believes that adopting this statement will not have
a material impact on the financial position, results of operations or cash flows
of the Company.
Note 2. Property And Equipment
Property and equipment consists of the following:
Useful August 28, August 29,
Lives 1999 1998
Furniture and fixtures 5-10 years $8,118,597 $7,506,894
Leasehold improvements 10 years 2,951,908 2,831,728
Transportation equipment 3-7 years 525,584 481,568
Data processing equipment 5 years 3,884,797 3,383,206
15,480,886 14,203,396
Less accumulated depreciation and
amortization 10,990,934 9,875,837
$ 4,489,952 $4,327,559
Note 3. Note Payable - Bank
The Company maintains a credit facility with a bank. The credit facility is
renewable annually on or before each December 31 and currently consists of a
discretionary unsecured line of credit for direct borrowings and the issuance
and refinance of letters of credit. The line of credit was increased from
$8,000,000 to $10,000,000 on August 31, 1999. 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 28, 1999, 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 28, 1999). The borrowings
outstanding under the line of credit as of August 28, 1999 and August 29, 1998
were $6,570,000 and $1,635,000, respectively, and the unused line of credit for
direct borrowings and the issuance of letters of credit at August 28, 1999 was
$1,403,182.
Note 4. Long-Term Debt
During the fiscal 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 was payable monthly at a fixed interest rate of 7.5%
effective March 1, 1998, formerly at 8%. The term loan was paid in April 1999.
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 1999, 1998 and 1997 amounted
to $7,382,116, $6,633,633 and $6,140,557, respectively, and includes contingent
rentals (computed on a percentage of sales, as defined in the leases) of
$22,499, $17,287 and $28,168, respectively.
The Company leases certain premises from an entity controlled by the majority
stockholders of the Company. For the years 1999, 1998 and 1997, rental payments
under this agreement amounted to $288,766, $209,313, and $307,695, respectively.
Future minimum annual rental commitments under noncancellable operating leases
are as follows:
Fiscal Year Ended
2000 $7,262,109
2001 6,208,518
2002 5,106,450
2003 4,118,131
2004 2,685,966
Thereafter 8,866,329
$34,247,503
In addition, at August 28, 1999 the Company has outstanding letters of credit
for the purchase of merchandise inventories of approximately $26,800.
The Company is involved in various legal proceedings incidental to the conduct
of its business. The Company currently is not engaged in any legal proceedings
that is expected to have a material adverse effect on the Company's results of
operations or financial position.
Note 6. Earnings Per Share
Basic and diluted earnings per share are calculated in accordance with Statement
of Financial Accounting Standards No. 128, "Earnings per Share"("SFAS No. 128").
In accordance with SFAS No. 128, basic net income per share has been computed
based on the weighted average of common shares outstanding. Diluted net income
per share gives the effect of outstanding stock options. All of the net income
reported in the financial statements is available to common stockholders. Prior
year net income per share data has been adjusted to reflect the adoption of SFAS
No. 128.
Fiscal Year Ended
1999 1998 1997
Numerator:
Net income for basic and diluted
earnings per share $ 401,623 $ 941,517 $ 207,423
Denominator:
Denominator for basic earnings per
share-weighted average shares 4,744,408 4,740,063 4,740,063
Effect of dilutive securities:
Employee stock options 10,588 48,133 24,914
Denominator for diluted earnings
per share-adjusted weighted
average shares and assumed
conversions 4,754,996 4,788,196 4,764,977
Basic and diluted earnings
per share $ .08 $ .20 $ .04
On June 28, 1999, the Company declared a 5% stock dividend on the Company's
common stock which was paid on August 10, 1999 to stockholders of record on July
14, 1999. Shares and per share data presented for all periods has been adjusted
to give retroactive effect to the dividend.
Note 7. Stockholders' Equity
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 28, 1999. 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. The pro forma effects of applying SFAS No. 123 are not
representative of future net income and net income per share amounts because
only options granted since 1997 are applicable. Had compensation cost for the
Company's stock option plan been recorded based on the fair value at the grant
date for awards in 1998 and the effect of grants 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:
Fiscal Year Ended
1999 1998 1997
Net income-as reported $401,623 $941,517 $207,423
Net income-pro forma $395,292 $935,066 $201,139
Net income per share-as reported,
basic and diluted $ .08 $ .20 $ .04
Net income per share-pro forma,
basic and diluted $ .08 $ .20 $ .04
There were no options granted during the year 1999. 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
1998 and 1997: dividends yield of 0%, expected volatility of 50%, risk-free
interest rate of 5.0% and 4.5%, respectively 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, August 31, 1996 214,750 $2.02-$11.76 $5.09
Granted 115,000 $2.22-$2.85 $2.24
Canceled (23,700) $2.02-$11.76 $6.87
Outstanding, August 30, 1997 306,050 $2.02-$11.76 $3.88
Granted 2,000 $3.21 $3.21
Canceled (8,000) $2.02-$5.94 $3.49
Outstanding, August 29, 1998 300,050 $2.02-$11.76 $3.89
Canceled (19,750) $2.22-$11.76 $6.51
Outstanding, August 28, 1999 280,300 $2.02-$11.76 $3.70
Exercisable, August 30, 1997 145,050 $2.26-$11.76 $5.68
Exercisable, August 29, 1998 156,050 $2.02-$11.76 $5.38
Exercisable, August 28, 1999 197,700 $2.02-$11.76 $4.30
The weighted-average remaining contractual life of stock options outstanding at
August 28, 1999 is 4.9 years. The majority of options have an exercise price
from $2.02 to $3.21.
Effective July 20, 1999, the Company adopted the 1999 Incentive Stock Award Plan
(the "Incentive Plan"). The Incentive Plan provides for the award of up to
300,000 shares of the Company's common stock (the "shares") to key employees
(including non-executive officers), independent contractors or consultants as
determined by the Option Committee of the Board of Directors. The Incentive Plan
participants are entitled to dividends and to vote their respective shares,
however, the sale or transfer of the shares is restricted during a vesting
period. As of August 28, 1999, 97,700 shares have been issued under the
Incentive Plan. The value of such stock for the Company was established by the
market price on the date of grant. Shares are forfeited when an individual
terminates prior to the end of the vesting period. The vesting period for the
shares issued expires on July 31, 2000.
Unamortized restricted stock awards was charged for the market value of the
restricted shares at the date of grant. The unamortized restricted stock awards
is shown as a reduction of stockholders' equity in the accompanying consolidated
balance sheet and is being amortized ratably over the vesting period which
approximates one year.
In 1999 $24,550 was charged to expense relating to the Incentive Plan.
On May 21, 1999 the Company's Board of Directors approved a discretionary
program whereby the Company is authorized to purchase up to 200,000 shares of
its outstanding common stock. As of August 28, 1999, 26,880 shares are held in
treasury.
Note 8. Income Taxes
Income tax expense consists of the following:
Fiscal Year Ended
1999 1998 1997
Federal:
Current $ 379,900 $ 570,200 $ 135,900
Deferred (173,100) (73,200) 8,000
State:
Current (14,800) 105,500 -
Deferred 74,700 - -
$ 266,700 $ 602,500 $ 143,900
The deferred income tax arises from the following temporary differences:
Fiscal Year Ended
1999 1998 1997
Uniform inventory capitalization $ 89,100 $ 10,200 $(30,600)
Depreciation 59,600 59,600 27,700
Straight-line of leases 16,100 3,400 (5,100)
Amortization of incentive
stock awards 8,300 - -
Increase in valuation allowance (74,700) - -
$ 98,400 $ 73,200 $ (8,000)
The effective tax rate differs from the Federal statutory rate as follows:
Fiscal Year Ended
1999 1998 1997
Statutory tax rate 34.0% 34.0% 34.0%
State and local income taxes,
net of federal income tax
benefit 5.9 4.5 -
Other - .5 7.0
Effective tax rate 39.9% 39.0% 41.0%
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:
Fiscal Year Ended
1999 1998
Current deferred tax asset:
Uniform inventory capitalization $ 796,446 $707,346
Amortization of restricted stock awards 8,300 -
804,746 707,346
Non-current deferred tax assets:
Straight-line of leases 131,173 115,073
Difference between book and tax
depreciation methods 78,839 19,239
Net operating losses for State purposes 487,584 441,100
Valuation allowance (487,584) (366,400)
210,012 209,012
Total deferred tax asset $1,014,758 $916,358
Note 9. 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 fiscal years
1999, 1998 and 1997.
Note 10. Quarterly Results (Unaudited)
The following is a summary of selected quarterly financial data (thousands of
dollars, except per share amounts):
Fiscal Quarter Ended
Nov. 28, Feb. 27, May 29, Aug. 28,
Fiscal 1999 1998 1999 1999 1999
Net sales $26,695 $25,061 $22,430 $20,595
Gross profit 10,017 9,152 7,569 7,177
Net income (loss) 1,009 254 (78) (783)
Earnings (loss) per common share (a):
Basic .21 .05 (.02) (.16)
Diluted .21 .05 (.02) (.16)
Fiscal Quarter Ended
Nov. 29, Feb. 28, May 30, Aug. 29,
Fiscal 1998 1997 1998 1998 1998
Net sales $26,277 $24,998 $20,699 $18,592
Gross profit 9,741 9,047 7,490 6,494
Net income (loss) 982 431 224 (696)
Earnings (loss) per common share (a):
Basic .21 .09 .05 (.15)
Diluted .20 .09 .05 (.15)
(a) Earnings (loss) per common share calculations for each quarter are restated
to reflect accounting changes required under Statement of Accounting Standards
No. 128, Earnings per Share and the 5% stock dividend declared June 28, 1999.
See Note 6.
The sum of the four quarters may not equal the full year computation due to
rounding.
Note 11. Subsequent Event
Effective August 29, 1999, the Company changed its method of calculating ending
merchandise inventories under the retail inventory method. Prior to August 29,
1999, the Company utilized an average cost-to-retail ratio to value ending
inventory. In fiscal year 2000, the Company began utilizing a method that
weights the cost-to-retail ratio using multiple inventory categories.
Management believes that this change in accounting improves the measurement of
the Company's profitability based upon a changing product mix. The cumulative
effect of this accounting change will increase the Company's first quarter
fiscal 2000 profit by approximately $325,000 (net of tax effect $195,000).
* * * * * *
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
The Rag Shop/Danbury, Inc. Connecticut
The Rag Shop/Voorhees, 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 November 11, 1999, appearing
in this Annual Report on Form 10-K of Rag Shops, Inc. for the year ended August
28, 1999.
Deloitte & Touche LLP
Parsippany, New Jersey
November 22, 1999
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<PERIOD-START> AUG-30-1998
<PERIOD-END> AUG-28-1999
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<COMMON> 48,378
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<INCOME-TAX> 266,700
<INCOME-CONTINUING> 401,623
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