<PAGE>
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of
the Securities Exchange Act of 1934 (Amendment No. )
<TABLE>
<S> <C>
Filed by the Registrant /X/
Filed by a Party other than the Registrant / /
Check the appropriate box:
/ / Preliminary Proxy Statement
/ / Preliminary Additional Materials
/X/ Definitive Proxy Statement
/ / Definitive Additional Materials
/ / Soliciting Material Pursuant to Section240.14a-12
RAG SHOPS, INC.
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(Name of Registrant as Specified In Its Charter)
RAG SHOPS, INC.
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(Name of Person(s) Filing Proxy Statement, if other than the
Registrant)
</TABLE>
Payment of Filing Fee (Check the appropriate box):
<TABLE>
<S> <C> <C>
/X/ No fee required.
/ / Fee computed on table below per Exchange Act Rules 14a-6(i)(1)
and 0-11.
(1) Title of each class of securities to which transaction
applies:
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(2) Aggregate number of securities to which transaction
applies:
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(3) Per unit price or other underlying value of transaction
computed pursuant to Exchange Act Rule 0-11 (set forth the
amount on which the filing fee is calculated and state how
it was determined):
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(4) Proposed maximum aggregate value of transaction:
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(5) Total fee paid:
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/ / Fee paid previously with preliminary materials.
/ / Check box if any part of the fee is offset as provided by
Exchange Act Rule 0-11(a)(2) and identify the filing for which
the offsetting fee was paid previously. Identify the previous
filing by registration statement number, or the Form or
Schedule and the date of its filing.
(1) Amount Previously Paid:
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(2) Form, Schedule or Registration Statement No.:
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(3) Filing Party:
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(4) Date Filed:
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</TABLE>
<PAGE>
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD THURSDAY, JANUARY 25, 2001
To the Stockholders of
RAG SHOPS, INC.:
Notice is hereby given that the 2001 Annual Meeting of Stockholders of Rag
Shops, Inc., a Delaware corporation (the "Company"), will be held at 9:30 a.m.
(Eastern Daylight Time) on Thursday, January 25, 2001, at the Regency House
Hotel, 140 Highway 23 North, Pompton Plains, New Jersey, to consider and vote
upon:
1. Election of two existing directors for a three-year term and the
election of a nominee for a one year term.
2. Ratification of the selection by the Board of Directors of Grant
Thornton LLP as independent public accountants for the Company's 2001
fiscal year.
3. Any other business that may properly come before the meeting.
The Board of Directors has fixed the close of business on December 18, 2000,
as the record date for the determination of stockholders entitled to receive
notice of and to vote at said meeting. Stock transfer books will not be closed.
To assure representation of your shares, YOU ARE REQUESTED, WHETHER OR NOT
YOU PLAN TO BE PRESENT AT THE MEETING, TO COMPLETE, DATE, SIGN AND RETURN THE
ACCOMPANYING PROXY IN THE ENCLOSED POSTAGE PREPAID ENVELOPE.
If your shares are held of record by a broker, bank, or other nominee and
you wish to vote your shares at the meeting, you must obtain and bring to the
meeting a letter from the broker, bank, or other nominee confirming your
beneficial ownership of the shares.
By Order of the Board of Directors
/s/ DORIS BERENZWEIG
Doris Berenzweig
SECRETARY
Hawthorne, New Jersey
December 22, 2000
<PAGE>
---------------------
PROXY STATEMENT
-------------------
ANNUAL MEETING OF STOCKHOLDERS
The proxy accompanying this Proxy Statement is solicited by the Board of
Directors of Rag Shops, Inc. (the "Company"). All proxies in the accompanying
form, which are properly executed and duly returned, will be voted at the Annual
Meeting of Stockholders to be held on Thursday, January 25, 2001, at 9:30 a.m,
at the Regency House Hotel, 140 Highway 23 North, Pompton Plains, New Jersey,
for the purposes set forth in the accompanying Notice of Annual Meeting.
This proxy statement and the enclosed form of proxy are being mailed to
stockholders on or about December 22, 2000.
VOTING AND SOLICITATION OF PROXIES
Only holders of record of the Company's common stock, par value $.01 per
share (the "Common Stock"), at the close of business on December 18, 2000, will
be entitled to notice of and to vote at the meeting. On that date there were
issued and outstanding 4,801,583 shares of Common Stock. Each outstanding share
of Common Stock is entitled to one vote on all matters to come before the
meeting.
The cost of soliciting proxies will be borne by the Company. In addition to
the use of the mails, officers, directors and regular employees of the Company
may solicit proxies personally or by telephone, telegraph or facsimile
transmission. The Company also intends to request that brokerage houses, banks,
custodians, nominees, and fiduciaries forward soliciting material to the
beneficial owners of Common Stock held of record by such persons, and will
reimburse such persons for their reasonable expenses in forwarding such
material.
The holders of a majority of the total shares of Common Stock issued and
outstanding, whether present in person or represented by proxy, will constitute
a quorum for the transaction of business at the meeting. The affirmative vote of
a majority of the total shares of Common Stock represented in person or by proxy
at the meeting is required for the election of directors and the ratification of
the appointment of independent public accountants. Since only affirmative votes
are counted as votes in favor of these matters, abstentions and broker non-votes
have the same effect as votes against these matters. Proxies and ballots will be
tabulated by the inspectors of election.
It is important that proxies be returned promptly. Therefore, whether or not
you plan to attend in person, you are urged to execute and return your proxy in
the enclosed envelope, to which no postage need be affixed if mailed in the
United States. The proxy may be revoked at any time before it is exercised by
filing with the Secretary of the Company an instrument revoking such proxy or a
duly executed proxy bearing a later date, or by attending the meeting and voting
in person.
BENEFICIAL OWNERSHIP
The following table sets forth information, as of December 1, 2000, as to
the beneficial ownership of Common Stock (including shares which may be acquired
within sixty days pursuant to stock options) of each director of the Company,
each nominee for Director and each executive officer of the Company listed in
the Summary Compensation Table below, all directors and executive officers as a
group and persons known by the Company to beneficially own 5% of the Common
Stock. Except as set forth below, no person beneficially owns 5% or more of the
Common Stock. Unless otherwise
1
<PAGE>
indicated, the address of each person below is care of the Company, 111 Wagaraw
Road, Hawthorne, New Jersey 07506-2711.
<TABLE>
<CAPTION>
SHARES OF
COMMON STOCK PERCENTAGE
NAME OF OWNER BENEFICIALLY OWNED OF CLASS
------------- ------------------ ----------
<S> <C> <C>
Stanley Berenzweig.......................................... 1,003,132(1) 20.5%
Doris Berenzweig............................................ 1,066,942(1) 21.8%
Dimensional Fund Advisors, Inc.............................. 324,660(2) 6.8%
1299 Ocean Avenue
11th Floor
Santa Monica, CA 90101
Evan Berenzweig............................................. 258,675(3) 5.4%
Judith Lombardo............................................. 205,125(3) 4.3%
Steven Barnett.............................................. 205,125(3) 4.3%
Fred J. Damiano............................................. 1,050 *
Alan C. Mintz............................................... 17,100(4) 0.4%
Mario Ciampi................................................ -0- *
Leonard Settanni............................................ 10,000(5) 0.2%
Bruce Miller................................................ 2,100(6) *
All directors, nominees and executive
officers as a group (10) persons.......................... 2,769,249 55.3%
</TABLE>
------------------------
(1) Excludes shares held by spouse and includes 102,900 shares beneficially
owned by the Stanley and Doris Berenzweig Charitable Foundation, Inc. of
which Mr. and Mrs. Berenzweig are trustees. Mr. and Mrs. Berenzweig each
disclaim beneficial ownership of the shares held by the other and by the
Foundation.
(2) Based solely upon information set forth in a Schedule 13G filed with the
Securities and Exchange Commission, dated February 3, 2000.
(3) Includes 15,000 shares and 9,000 shares subject to presently exercisable
stock options at $6.25 per share and $2.34 per share, respectively.
(4) Includes 15,000 shares subject to presently exercisable stock options at
$6.25 per share.
(5) Represents shares subject to presently exercisable stock options at $3.188
per share.
(6) Represents shares subject to presently exercisable stock options at $2.375
per share.
* Less than 1 percent.
2
<PAGE>
ELECTION OF DIRECTORS
The Company's Certificate of Incorporation provides for the division of the
Company's Board of Directors into three classes whose respective three-year
terms of office expire in different years. Each year the directors in one class
are elected to serve for a term of three years. Due to the resignation of a
Class I Director on November 17, 2000 and the desire to add an additional
independent director, a realignment was effected by the Board of Directors by
(i) nominating Fred J. Damiano, presently a Class II Director, for election as a
Class I Director and (ii) nominating Mario Ciampi, as an independent Class II
Director. The Company's Class I Directors have terms expiring at the 2001 Annual
Meeting, and until their respective successors are fully elected and qualified.
The Company's Class II Directors have terms expiring at the 2002 Annual Meeting,
and until their respective successors are fully elected and qualified. The
officers of the Company are appointed by the Board of Directors to hold office
until their successors are duly elected and qualified. Vacancies on the Board of
Directors are filled by the remaining directors.
Certain information regarding the two nominees for election as Class I
directors at this year's Annual Meeting is set forth below.
<TABLE>
<CAPTION>
NAME AGE POSITION
---- -------- --------
<S> <C> <C>
Stanley Berenzweig.................... 80 Chairman of the Board, Chief Executive
Officer, Chief Operating Officer and
Class I Director
Fred J. Damiano....................... 56 Presently Class II Director
</TABLE>
STANLEY BERENZWEIG, who co-founded the Company in 1963, has been Chairman of
the Board of the Company since August 1986, Chief Executive Officer and Director
since April 1991 and Chief Operating Officer of the Company from September 1994
to April 1995. Mr. Berenzweig reassumed the office of Chief Operating Officer in
November 2000.
FRED J. DAMIANO has been a Director of the Company since April 1991 and an
Executive Vice President of Haband Company, Inc., a direct marketer of clothing,
since 1981. Mr. Damiano has been President of Fashion Outlets, Inc., a retail
clothing operation, since October 1990.
Certain information regarding the one nominee for election as a Class II
director at this year's Annual Meeting is set forth below.
<TABLE>
<CAPTION>
NAME AGE POSITION
---- -------- --------
<S> <C> <C>
Mario Ciampi.......................... 50 nominee for Class II Director
</TABLE>
MARIO CIAMPI has been the Senior Vice President of Store Development and
Logistics for The Children's Place Retail Stores, Inc. since March 1996 and
prior to that was a private consultant to the retail industry.
3
<PAGE>
DIRECTORS CONTINUING IN OFFICE
AND OTHER EXECUTIVE OFFICERS
Certain information regarding Directors who are not standing for election at
this year's Annual Meeting and executive officers who are not directors is set
forth below:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- -------- --------
<S> <C> <C>
Steven B. Barnett..................... 53 Executive Vice President, Treasurer
and Class III Director
Judith Lombardo....................... 52 Senior Vice President and Class II
Director
Evan Berenzweig....................... 44 Senior Vice President and Class III
Director
Alan C. Mintz......................... 68 Class III Director
Doris Berenzweig...................... 75 Secretary
Bruce Miller.......................... 45 Vice President
Stephen Provenzano.................... 40 Vice President, Chief Financial
Officer
Leonard M. Settanni................... 58 Vice President
</TABLE>
JUDITH LOMBARDO, who joined the Company in 1966, has been a Senior Vice
President of the Company since August 1986 and a Director since April 1991. Ms.
Lombardo was a Vice President from 1982 to 1986, and prior to 1982, she served
the Company in various capacities in merchandising, advertising and store
operations.
STEVEN B. BARNETT, who joined the Company in 1984, has been Executive Vice
President of the Company since July 2000 and Treasurer and a Director of the
Company since April 1991. Mr. Barnett was the Chief Financial Officer of the
Company from August 1986 to July 2000. From August 1986 to April 1991, Mr.
Barnett was a Vice President of the Company and from December 1984 to August
1986 he was the Controller.
EVAN BERENZWEIG, who joined the Company in 1980, has been a Senior Vice
President since November 1994 and a Director of the Company since April 1991.
Mr. Berenzweig served as the Treasurer of the Company from August 1986 to April
1991 and Vice President from April 1991 to November 1994, and, prior to 1986, he
served the Company in various capacities in merchandising, store operations and
distribution.
ALAN C. MINTZ, a Certified Public Accountant, has been a Director of the
Company since April 1991 and has been a partner in the firm of Mintz Rosenfeld &
Company LLC, Certified Public Accountants, and its predecessors, since 1957. Mr.
Mintz, through Mintz Rosenfeld & Company LLC, continues to render tax and
consulting services to the Company
DORIS BERENZWEIG, who is a co-founder of the Company, has been the Secretary
of the Company since its inception and was a Director from that time until April
1991.
STEPHEN PROVENZANO, who joined the Company in August 2000 as Vice President
and Chief Financial Officer, was formerly Executive Vice President and Chief
Financial Officer at Creativity Crafts, LLC, a craft specialty store retail
chain, from November 1997 to January 2000. From 1994 to 1997 Mr. Provenzano was
Treasurer of Rickel Home Centers, Inc. a chain of retail home improvement
stores. Prior to 1994 Mr. Provenzano was with the Home Improvement division of
Supermarkets General Corp. in various capacities in finance and operations.
BRUCE MILLER, who joined the Company in 1993, has been Vice President
Merchandising since May of 2000. From 1993 to 1997 Mr. Miller was a Merchandise
Manager for the Company. Prior to 1993 Mr. Miller served in various capacities
in merchandising at Consumers Distributing, a catalog retailer.
4
<PAGE>
LEONARD M. SETTANNI, who joined the Company in January 1995 as Vice
President of Management Information Systems, was formerly Vice President of
Management Information Systems of Mothercare Stores, a maternity and children's
specialty store retail chain, from July 1988 to April 1994.
Stanley Berenzweig and Doris Berenzweig are husband and wife. Evan
Berenzweig is their son.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Based on material provided to the Company, all forms and reports with
respect to directors and executive officers of the Company were timely filed
with the Securities and Exchange Commission.
DIRECTORS' MEETINGS
The Board of Directors met six times during fiscal year 2000. Each Director
attended more than 75% of the combined number of meetings of both the Board of
Directors and of any committees of the Board on which the Director served.
COMMITTEES OF THE BOARD OF DIRECTORS
The Board of Directors has established compensation, audit and option
committees. The Compensation Committee consists of Fred J. Damiano, Alan C.
Mintz and Stanley Berenzweig, the Audit Committee consists of Fred J. Damiano
and Alan C. Mintz and the Option Committee consists of Stanley Berenzweig and
Fred J. Damiano. The audit committee met two times and the option committee met
three times in fiscal 2000. The compensation committee did not meet in fiscal
2000.
The Audit Committee reviews and examines detailed reports of the Company's
independent public accountants; consults with the independent public accountants
regarding internal accounting controls, audit results and financial reporting
procedures; recommends the engagement and continuation of engagement of the
Company's independent public accountants; and meets with, and reviews and
considers recommendations of, the independent public accountants. The audit
committee has adopted a formal written audit committee charter, a copy of which
is attached to this proxy statement as Appendix I.
The Option Committee administers the 1991 Stock Option Plan and the 1999
Incentive Stock Award Plan (collectively hereinafter referred to as the "Plans")
and, to the extent provided by such Plans, determines the persons to whom
options or awards are granted, the exercise price, term and number of shares
covered by each option or award and the type of option or award to be granted.
In addition, the Option Committee exercises all discretionary power regarding
the Plans' operation.
The Compensation Committee reviews the performance of senior management and
key employees whose compensation is the subject of review and approval by the
Committee; periodically reviews and recommends to the Board of Directors
compensation arrangements for senior management and key employees; and
periodically reviews the main elements of and administers the Company's
compensation and benefit programs, other than the 1991 Stock Option Plan and the
1999 Incentive Stock Award Plan.
EXECUTIVE COMPENSATION
The following table sets forth the total annual compensation paid or accrued
by the Company for services in all capacities for the Chief Executive Officer
and all executive officers of the Company who were serving as such at the end of
fiscal 2000 (the year ended September 2, 2000) whose aggregate compensation
exceeded $100,000.
5
<PAGE>
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG TERM COMPENSATION
NAME AND ---------------------- ----------------------
PRINCIPAL POSITION YEAR SALARY ($) BONUS ($) OPTION AWARDS(#)
------------------ -------- ---------- --------- ----------------------
<S> <C> <C> <C> <C>
Stanley Berenzweig, Chief Executive Officer... 2000 175,000 -0- -0-
1999 175,000 -0- -0-
1998 172,402 -0- -0-
Michael Aaronson (1).......................... 2000 180,000 -0- -0-
1999 176,385 -0- -0-
1998 166,978 -0- -0-
Steven B. Barnett, Executive Vice President... 2000 145,000 -0- -0-
1999 145,000 -0- -0-
1998 142,846 -0- -0-
Judith Lombardo, Senior Vice President........ 2000 145,000 -0- -0-
1999 145,000 -0- -0-
1998 142,471 -0- -0-
Evan Berenzweig, Senior Vice President........ 2000 130,000 -0- -0-
1999 124,577 -0- -0-
1998 115,284 -0- -0-
Bruce Miller, Vice President (2).............. 2000 109,997 6,500 6,500
Leonard Settanni, Vice President.............. 2000 115,000 -0- -0-
1999 113,192 -0- -0-
1998 108,077 -0- -0-
</TABLE>
------------------------
(1) Mr. Aaronson resigned as a Director and officer of the Company as of
November 17, 2000.
(2) Mr. Miller was elected Vice President as of May 9, 2000.
6
<PAGE>
OPTION EXERCISES AND FISCAL YEAR-END VALUE TABLE
The table set forth below shows the value of unexercised options held by the
executive officers during fiscal 2000. On May 9, 2000 Mr. Miller was granted
6,500 shares exercisable at $1.86. On July 31, 2000 Mr. Provenzano was granted
50,000 shares exercisable at $2.328.
<TABLE>
<CAPTION>
VALUE OF UNEXERCISED
NUMBER OF UNEXERCISED IN-THE-MONEY
OPTIONS 9/2/00 OPTIONS 9/2/00($)(1)
--------------------------- ---------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Stanley Berenzweig............................. -0- -0- N/A N/A
Michael Aaronson(2)............................ 80,000 20,000 $11,050 $3,200
Steven Barnett................................. 24,000 6,000 1,440 960
Judith Lombardo................................ 24,000 6,000 1,440 960
Evan Berenzweig................................ 24,000 6,000 1,440 960
Bruce Miller................................... 2,100 7,900 263 4,335
Stephen Provenzano............................. -0- 50,000 -0- 8,600
Leonard Settanni............................... 10,000 -0- -0- -0-
</TABLE>
------------------------
(1) The closing price of the Common Stock on September 1, 2000 was $2.50.
(2) Mr. Aaronson resigned as a Director and officer of the Company as of
November 17, 2000.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION.
Messrs. Berenzweig, Damiano and Mintz were members of the Compensation
Committee in fiscal 2000. Mr. Berenzweig is the Chief Executive Officer of the
Company. Since 1964, the Company has leased its principal offices and its
Hawthorne, New Jersey store from Momar Realty L.L.C. ("Momar"), the two members
of which are Stanley Berenzweig and Doris Berenzweig. The offices and store are
located in a strip shopping center owned by Momar. The initial term of the lease
commenced on March 1, 1991, expires February 28, 2006 and provides for payment
of an aggregate of $233,575 of basic rent for each of the second five years of
the lease together with a proportionate share of the costs of maintaining common
areas, insurance, real estate taxes, and other operating costs associated with
the strip shopping center. The Company has exercised its first of four options
to renew this lease, each for additional terms of five years. The basic rent for
each term will be increased by the greater of 15% of the basic rent paid for the
previous five-year term or one-half of the percentage increase in the Consumer
Price Index. During fiscal 2000, the Company paid Momar an aggregate of $338,265
of rent for these facilities. The Company believes that the terms of this lease
are no less favorable to the Company than would be the terms obtained from an
unaffiliated third party.
In addition the Company, from time to time, receives tax, accounting and
other financial consulting services from Mintz Rosenfeld & Company LLC,
Certified Public Accountants ("Mintz Rosenfeld"). Mr. Mintz is a partner of
Mintz Rosenfeld. During fiscal 2000, Mintz Rosenfeld received $75,539 for
services rendered to the Company.
BOARD COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
Decisions on compensation of the Company's executive officers generally are
made by the Compensation Committee of the Board. The Compensation Committee is
not responsible for the administration or determination of grants to be made
under the Company's 1991 Stock Option Plan or
7
<PAGE>
the 1999 Incentive Stock Award Plan (collectively hereinafter referenced to as
the "Plans"). Decisions on awards under these Plans are made solely by the
Option Committee. Pursuant to rules of the Securities and Exchange Commission
designed to enhance disclosure of companies' policies toward executive
compensation, there is set forth below a report submitted by Messrs. Berenzweig,
Mintz and Damiano, in their capacities as the members of the Board's
Compensation Committee, and Messrs. Berenzweig and Damiano, in their capacities
as the members of the Board's Option Committee, addressing the Company's
compensation policies for fiscal 2000 as they affected the Company's executive
officers generally (including the executive officers set forth in the Summary
Compensation Table above), and as they affected Mr. Berenzweig in his capacity
as Chief Executive Officer of the Company.
BACKGROUND
In June 1991, the Company consummated its initial public offering ("IPO").
In contemplation of the IPO, the Company's executive compensation levels, plans
and policies that have been followed subsequent to the IPO were established. As
part of this process, initial salaries were established and the 1991 Stock
Option Plan was adopted. The annual salaries of the individuals listed in the
Summary Compensation Table (other than Michael Aaronson, Evan Berenzweig, Bruce
Miller and Leonard Settanni) have not been increased since the IPO or their date
of employment, if later. All of the named persons (other than Bruce Miller and
Leonard Settanni) elected to temporarily reduce their base salaries by 10%
effective January 28, 1996 as did one other officer of the Company. On January
27, 1997, all of the named persons who took the 10% reduction were restored half
of the reduction to 95% of their base salaries in response to improved
operations through that portion of the fiscal year. At that time the base salary
of Evan Berenzweig was increased from $90,000 to $115,000 in connection with his
performance of new responsibilities undertaken since February 1996 for store
operations. In July 1997, Michael Aaronson's remaining 5% reduction was restored
to 100% of his base salary. On January 19, 1998 (i) all of the named persons who
took the 10% reduction effective January 28, 1996 and partially restored on
January 27, 1997 were restored to their full base salaries, and (ii) Leonard
Settanni was increased from $105,000 to $110,000 in response to improved
operations. Effective January 1, 1999 base salary increases were effected for
Michael Aaronson from $170,000 to $180,000; Evan Berenzweig from $115,000 to
$130,000 and Leonard Settanni from $110,000 to $115,000. Effective November 13,
2000 a further base salary increase was effected for Mr. Settanni from $115,000
to $130,000. Further, Stanley Berenzweig, Michael Aaronson, Steven Barnett,
Judith Lombardo and Evan Berenzweig were not paid any bonuses since fiscal year
1993 in light of the Company's financial performance.
COMPONENTS OF EXECUTIVE COMPENSATION
The primary components of the compensation of the Company's executive
officers for fiscal 2000 consisted of salary and stock option grants. Bonuses
were also potentially available.
The salaries of Messrs. Berenzweig, Aaronson, Barnett, Provenzano, Miller,
Settanni and Ms. Lombardo were set by the Compensation Committee and approved by
the Board of Directors.
The stock options granted under the Plan were granted by the Option
Committee. The size of the grants to executive officers were determined
generally by the Option Committee in accordance with the policy described below.
COMPENSATION POLICIES TOWARD EXECUTIVE OFFICERS
The Company's compensation policy toward executive officers is to base
compensation on the perceived value of each executive officer considering such
factors, which tend to be subjective, as the officer's ability to contribute to
the Company's growth, efficiency and performance and the level of responsibility
given to the officer.
8
<PAGE>
RELATIONSHIP OF CORPORATE PERFORMANCE TO EXECUTIVE COMPENSATION
Any portion of compensation represented by stock options is directly related
to future corporate performance. Stock option grants tie that portion of
executive compensation attributable to the stock options to stock performance,
since the options will only have value if and to the extent the market price of
the Company's stock increases over the exercise price of the options. The
Company's policy with respect to stock options is to use stock option grants to
retain executives and motivate them to improve the Company's overall performance
with the expectation that the value of the Company's Common Stock will
thereafter increase. In determining the size of grants, the Option Committee
considers various factors, including the relative position of the grantee and
the grantee's perceived ability to influence the Company's performance, which
tend to be subjective determinations.
CHIEF EXECUTIVE OFFICER COMPENSATION
Mr. Berenzweig's initial salary and bonus were specified in his employment
agreement which was entered into in connection with the IPO and has since
expired. This initial compensation package was designed to be competitive with
compensation packages offered to other chief executive officers of leading
specialty retailers and recognized the compensation arrangement that had been in
place prior to the IPO. Mr. Berenzweig's salary has remained the same since the
expiration of his employment agreement until January 28, 1996, when it was
voluntarily and temporarily reduced by Mr. Berenzweig by 10%. This voluntary
reduction was restored by 5% on each of January 27, 1997 and January 19, 1998
when it was restored to the full salary before the voluntary reduction. Further,
as noted above, no bonus has been received by Mr. Berenzweig since fiscal year
1993.
STANLEY BERENZWEIG FRED DAMIANO ALAN MINTZ
Members of the Compensation Committee
STANLEY BERENZWEIG FRED DAMIANO
Members of the Option Committee
9
<PAGE>
COMMON STOCK PERFORMANCE GRAPH
The following line graph compares the cumulative total annual stockholder
return on the Company's Common Stock during the past five fiscal years, based on
the market price of the Common Stock and assuming reinvestment of dividends,
with the cumulative total monthly return of the S&P 500 Index and the S&P
Retail-Specialty Index. The graph is based on the assumption that $100 was
invested on August 31, 1995 in the Company's Common Stock, the S&P 500 Index and
the S&P Retail-Specialty Index.
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
AUG-95 AUG-96 AUG-97 AUG-98 AUG-99 AUG-00
<S> <C> <C> <C> <C> <C> <C>
Rag Shops, Inc. 100 75.01 104.17 85.4 74.38 87.5
S&P 500 Index 100 118.73 166.99 180.51 252.39 293.58
S&P Retail-Specialty 100 122.53 132.06 79.8 66.11 60.31
</TABLE>
DIRECTOR FEES
Directors who are employees of the Company receive no additional
compensation for services as a director. Directors not so employed receive an
annual retainer of $5,000 and fees of $1,250 for each Board meeting attended,
with no additional compensation for committee meetings attended. Commencing
September 2000, audit committee members receive $500 for each audit committee
meeting attended.
RATIFICATION OF SELECTION OF INDEPENDENT PUBLIC ACCOUNTANTS
On April 18, 2000 the Company dismissed Deloitte & Touche, LLP ("Deloitte &
Touche") as the Company's independent auditor. The decision to change
independent auditors was unanimously recommended by the Audit Committee and
unanimously approved by the Board of Directors of the Company.
Deloitte & Touche's report on the Company's financial statements over the
last two years were unqualified and there were no disagreements existing between
the Company and Deloitte & Touche with respect to any matter of accounting
principles, practices, financial statement disclosure or auditing scope or
procedure.
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On April 18, 2000, in order to replace Deloitte & Touche the Company engaged
Grant Thornton LLP ("Grant Thornton") as the Company's independent auditor and
principal accountant to audit the Company's financial statements. The Company
had not previously consulted Grant Thornton regarding either the application of
accounting principles or any other reportable matter
The Board of Directors has selected Grant Thornton to serve as the
independent public accountants of the Company for the fiscal year ending
September 1, 2001. This selection will be submitted for ratification at the
Annual Meeting. Representatives of Grant Thornton are expected to attend the
Annual Meeting. They will have the opportunity to make a statement if they
desire to do so and are expected to be available to respond to appropriate
questions.
AUDIT COMMITTEE REPORT
In the course of the fiscal year and in preparation for the Annual Meeting,
the Audit Committee has met, reviewed and discussed the audited financial
statements with management; discussed with the independent auditors the relevant
auditing standards as they apply to the Company; received from the Company's
independent accountants the written disclosures and recommendations required to
be provided to the Company by Statement on Auditing No. 61 (Communication with
Audit Committees); and has discussed with the independent accountant these
matters as well as the accountants independence as required by Independence
Standards Board Standard No. 1 (Independence Discussions with Audit Committees).
Management represented to the committee that the Company's consolidated
financial statements were prepared in accordance with generally accepted
accounting principles. Based on the foregoing, the audit committee members
recommended to the entire Board that the audited financial statements be
included in the Company's Annual Report on Form 10-K for the fiscal year ending
September 2, 2000.
FRED DAMIANO ALAN MINTZ
Members of the Audit Committee
ANNUAL REPORT
The Annual Report to Stockholders (including financial statements) for the
fiscal year ended September 2, 2000 is mailed herewith to all stockholders.
COPIES OF THE COMPANY'S FORM 10-K AS FILED WITH THE SECURITIES AND EXCHANGE
COMMISSION MAY BE OBTAINED, WITHOUT CHARGE, BY WRITTEN REQUEST TO STEPHEN
PROVENZANO, CHIEF FINANCIAL OFFICER AND MAY BE FOUND ON THE COMMISSION'S WEB
SITE AT www.sec.gov OR AT THE COMPANY'S WEB SITE AT www.ragshop.com.
OTHER MATTERS
Management is not aware of any matters to come before the meeting which will
require the vote of stockholders other than those matters indicated in the
Notice of Meeting and this Proxy Statement. However, if any other matter calling
for stockholder action should properly come before the meeting or any
adjournments thereof, those persons named as proxies in the enclosed proxy form
will vote thereon according to their best judgment.
ADVANCE NOTICE FOR DIRECTOR NOMINATIONS
The Company's Certificate of Incorporation provides that in order for a
stockholder to nominate a candidate for election as a director at an annual
meeting of stockholders or to propose business for consideration at such
meeting, notice must be delivered to the Secretary of the Company not less than
60 days nor more than 90 days prior to the annual meeting. Based on the
scheduled meeting date for this year's annual meeting, in order for a
stockholder to propose director nominations at the 2002 Annual Meeting, the
stockholder must deliver notice to the Secretary between October 27 and
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November 26, 2001. Any stockholder desiring a copy of the Company's Certificate
of Incorporation will be furnished one without charge upon written request to
the Secretary.
STOCKHOLDER PROPOSALS FOR 2002 ANNUAL MEETING
Stockholder proposals (other than those regarding director nominations as
described above) for the 2002 Annual Meeting must be received in writing by the
Company on or before September 27, 2001 in order to be considered for inclusion
in the Company's proxy material for such meeting.
By Order of the Board of Directors
/s/ DORIS BERENZWEIG
Doris Berenzweig,
SECRETARY
Hawthorne, New Jersey
December 22, 2000
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APPENDIX I
AUDIT COMMITTEE CHARTER
ORGANIZATION
There shall be a committee appointed by the Board of Directors of Rag Shops,
Inc., a Delaware corporation (the "Corporation"), of not less than two (2)
members and, and no later than June 30, 2001, of not less than three (3) members
of the board of directors or as required by the Securities and Exchange
Commission (the "SEC"), the applicable stock exchange regulations, or other
applicable federal and state laws to be known as the audit committee (the
"Committee"). The Committee shall be composed of members of the board of
directors who are independent of the management of the Corporation and are free
of any relationship that, in the opinion of the board of directors, would
interfere with their exercise of independent judgment as a Committee member. The
members of the Committee shall have the financial knowledge or experience to
enable them to carry out their responsibilities and at least one member of the
Committee shall have past employment experience in finance or accounting,
requisite professional certification in accounting, or any other comparable
experience or background which results in the individual's financial
sophistication.
STATEMENT OF POLICY
The Committee shall provide assistance to the board of directors in
fulfilling their responsibility to the stockholders, potential stockholders, and
investment community relating to corporate accounting and reporting practices of
the Corporation, and the quality and integrity of the financial reports of the
Corporation. In so doing, it is the responsibility of the Committee to maintain
free and open means of communication between the board of directors, the
independent auditors, and the financial management of the Corporation.
RESPONSIBILITIES
In carrying out its responsibilities, the Committee believes its policies
and procedures should remain flexible, in order to best react to changing
conditions and to ensure to the board of directors and stockholders that the
corporate accounting and reporting practices of the Corporation are in
accordance with all requirements and are of the highest quality.
In carrying out these responsibilities, the Committee will:
- Review and recommend to the board of directors the independent auditors to
be selected to audit the financial statements of the Corporation and its
divisions and subsidiaries.
- Meet with the independent auditors and financial management of the
Corporation to review the scope of the proposed audit for the current year
and the audit procedures to be utilized, and at the conclusion thereof
review such audit, including any comments or recommendations of the
independent auditors.
- Review with the independent auditors, and financial and accounting
personnel, the adequacy and effectiveness of the accounting and financial
controls of the Corporation, and solicit any recommendations for the
improvement of such internal control procedures or particular areas where
new or more detailed control or procedures are desirable. Particular
emphasis should be given to the adequacy of such internal controls to
expose any payments, transactions, or procedures that might be deemed
illegal or otherwise improper. Further, the Committee periodically should
review company policy statements to determine their adherence to the code
of conduct.
- Review the proposed audit plans for the coming year, and the coordination
of such plans with the independent auditors.
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- Review the financial statements contained in the annual report on Form
10-K and interim financial statements contained in the quarterly reports
on Form 10-Q with management and the independent auditors to determine
that the independent auditors are satisfied with the disclosure and
content of the financial statements to be presented to the stockholders.
If the quarterly report states that the interim financial statements have
been reviewed by the independent auditors, the Committee shall obtain a
report of such review from the independent auditors and provide for such
report to be included in the quarterly report. Any changes in accounting
principles should be reviewed.
- Provide sufficient opportunity for the independent auditors to meet with
the members of the Committee without members of management present. Among
the items to be discussed in these meetings are the independent auditors'
evaluation of the Corporation's financial, and accounting auditing
personnel, and the cooperation that the independent auditors received
during the course of the audit.
- Review accounting and financial human resources and succession planning
within the Corporation.
- Submit the minutes of all meetings of the audit committee to, or discuss
the matters discussed at each committee meeting with, the board of
directors.
- Investigate, within the scope of its duties, any matter brought to its
attention with the power to retain outside counsel for this purpose, if,
in its judgment, that is appropriate.
- In reviewing the financial statements contained in the annual report on
Form 10-K, the Committee shall provide the Board of Directors with a
written report stating whether:
i) The Committee reviewed and discussed the audited financial statements
with management;
ii) The Committee has discussed with the independent auditors the
matters required to be discussed by SAS 61 (Codification of
Statements on Auditing Standards);
iii) The Committee has received the written disclosures and the letter
from the independent accountants required by Independence Standards
Board Standard No. 1, and has discussed with the independent
accountant the independent accountant's independence; and
iv) Based upon (i) through (iii), the Committee recommended to the Board
of Directors that the audited financial statements be included in the
Corporation's Annual Report on Form 10-K for the latest fiscal year
for filing with the SEC.
- Review all of the Corporation's filings with the SEC to ensure that the
rules and regulations relating to the Corporation's financial statements
are complied with.
- Comply with the rules and regulations regarding the requirements of the
Corporation's financial statements and of the composition and conduct of
an audit committee as may be required by SEC regulations; applicable stock
exchange requirements or other applicable federal and state law.
Dated May 31, 2000
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RAG SHOPS, INC.
111 WAGARAW ROAD
HAWTHORNE, NEW JERSEY 07506
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned hereby appoints STANLEY BERENZWEIG and STEVEN BARNETT as
Proxies, each with power to appoint his substitute, and hereby authorizes either
of them to represent and to vote, as designated on the reverse side, all the
shares of the Common Stock of Rag Shops, Inc. held of record by the undersigned
on December 18, 2000 at the Annual Meeting of Rag Shops, Inc. Stockholders to be
held on January 25, 2001 or any adjournment thereof.
IMPORTANT - PLEASE SIGN AND DATE ON THE BACK OF CARD.
RETURN PROXY CARD PROMPTLY USING THE ENCLOSED ENVELOPE; NO POSTAGE NECESSARY
IMPORTANT
YOUR PROMPT RESPONSE WILL SAVE THE EXPENSE OF ADDITIONAL MAILINGS.
IF YOUR ADDRESS HAS CHANGED, PLEASE BE SURE TO NOTIFY THE COMPANY PROMPTLY
<TABLE>
<S> <C> <C> <C> <C>
1. ELECTION OF THREE DIRECTORS: STANLEY BERENZWEIG FRED J. DAMIANO MARIO CIAMPI
/ / FOR / / WITHHELD
ALL NOMINEES FROM ALL NOMINEES
FOR ALL NOMINEES LISTED ABOVE, EXCEPT VOTE WITHHELD AS TO THE FOLLOWING NOMINEES (IF ANY):
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C> <C> <C>
2. TO RATIFY THE APPOINTMENT OF GRANT & THORNTON LLP AS THE COMPANY'S INDEPENDENT AUDITORS FOR
THE FISCAL YEAR ENDING SEPTEMBER 1, 2001.
/ / FOR / / AGAINST / / ABSTAIN
</TABLE>
This proxy when properly executed will be voted in the manner directed by the
undersigned stockholder. If no direction is made, this proxy will be voted FOR
Proposals 1 and 2. The Board of Directors recommends a vote FOR all nominees for
election as Directors. In their discretion, the Proxies are authorized to vote
upon such other business as may properly come before the meeting.
____________________________________
Signature Title Date
____________________________________
Signature Title Date
PLEASE SIGN EXACTLY AS NAME APPEARS
HEREON. JOINT OWNERS SHOULD EACH
SIGN. IF SIGNING AS ATTORNEY,
EXECUTOR, ADMINISTRATOR, TRUSTEE OR
GUARDIAN, GIVE FULL TITLE AS SUCH.
IF A CORPORATION, PARTNERSHIP OR
OTHER ENTITY, SIGN IN FULL ENTITY
NAME BY AUTHORIZED PERSON.
IT IS IMPORTANT THAT YOUR SHARES ARE REPRESENTED AT THIS MEETING,
WHETHER OR NOT YOU ATTEND IN PERSON.
TO MAKE SURE YOUR SHARES ARE REPRESENTED,
WE URGE YOU TO COMPLETE AND MAIL THE PROXY CARD ABOVE.
