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 September 1, 2001 Rag Shops, Inc. operated 66 specialty retail stores that 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-oriented pricing policy and commitments to both customer service and advertising are principal factors contributing to its results. The Company's stores are destination-oriented and also attract shoppers from other stores located in the same shopping centers.
As of September 1, 2001, the Company operated 36 retail stores in New Jersey, 18 in Florida, five in Pennsylvania, five in New York and two in Connecticut. The Company anticipates opening three stores and closing three stores during its fiscal year ending August 31, 2002. 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 1997.
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.
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 September 1, 2001, 62 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 monthly 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 at the Company's stores is displayed on conveniently arranged fixtures to facilitate customer access. The general layout of merchandise, adjusted seasonally and as otherwise necessary to adapt to marketing conditions, is planned by the Company's management to give prominence to the types of merchandise currently in demand.
Approximately five percent of the Company's net sales are expended on a 52-week per year advertising program. The Company utilizes freestanding 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 sales items, seasonal products and other currently popular merchandise. Approximately three million people regularly receive the freestanding newspaper inserts.
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. Historically the Company has 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. 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 57% of receipts at the Company's stores are in the form of cash or check, with the balance paid for with MasterCard, Visa, Discover or American Express charge cards.
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, new 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.
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 September 1, 2001, the Company has approximately 1,290 employees, consisting of approximately 310 full time and 980 part time employees. Full time personnel consist of approximately 210 salaried and 100 hourly employees. All part time personnel are hourly employees. During seasonal peak periods, the Company hires temporary personnel. Approximately 43 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 with the United States Patent and Trademark Office on September 9, 1969 for fabrics, wearing apparel and home furnishings; and has been renewed through September 9, 2009. Variations of this mark have been registered by the Company to stand for its retail services and for numerous goods sold by the Company at its retail outlets. These marks are all renewable indefinitely so long as the marks are used by the Company.
ITEM 2.
ITEM 2. PROPERTIES
The Company's executive 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 2004. The Company leases approximately 50,000 square feet of additional warehouse space on a month-to-month basis to accommodate seasonal merchandise and expedite distribution of merchandise to stores. Such additional space was leased for the full twelve months of the year 2001 and is expected to be leased for the full twelve months of 2002.
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 10,700 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 15,000 to 20,000 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 calendar year indicated.
LEASE EXPIRATIONS
YEAR NUMBER YEAR NUMBER ---- ------ ---- ------
2002 2 2016 4 2003 2 2017 9 2004 2 2018 6 2005 2 2019 8 2006 1 2020 4 2008 3 2021 3 2011 3 2023 2 2012 2 2024 2 2013 4 2026 4 2014 1 2027 2
Sixty-three of the above stores are located in strip shopping centers, and the remaining three are free-standing buildings. The stores generally are located in close proximity to population centers and other retail operations and are usually on a major highway or thoroughfare, making them easily accessible by automobile. All of the stores provide free parking.
The leases for the Company's stores are generally for a term of five years, usually with four options to renew for five years each. Under most leases, the Company is required to pay, in addition to fixed minimum rental payments, additional rent based on charges for real estate taxes, common area maintenance fees, utility charges and insurance premiums. Certain leases provide for contingent rentals based on a percentage of sales.
ITEM 3.
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.
ITEM 4.
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 September 1, 2001.
PART II
ITEM 5.
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 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 SEPTEMBER 1, 2001
First Quarter $ 2.750 $ 1.938 Second Quarter 3.000 2.000 Third Quarter 2.750 2.080 Fourth Quarter 2.800 2.050
FISCAL YEAR ENDED SEPTEMBER 2, 2000
First Quarter $ 2.438 $ 1.625 Second Quarter 2.250 1.813 Third Quarter 2.344 1.813 Fourth Quarter 3.094 2.156
On October 31, 2001, the closing price of the Common Stock was $2.360.
The approximate number of stockholders of record of the Common Stock at October 31, 2001 was 352. The number of beneficial owners whose shares are held by banks, brokers and other nominees exceeds 950.
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. The Company's tangible net worth for the period ended September 1, 2001 was $23,720,421.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
(1) Fiscal 2000 is a 53-week fiscal year. All other years shown 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) Comparable store sales increases (decreases) for a fiscal year include stores commencing with their thirteenth consecutive entire fiscal month. Comparable store net sales increases on a 52 week aligned basis are arrived at by eliminating the unaligned 53rd week from fiscal 2000 before comparing the result with the prior and succeeding year.
(4) 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 condition and Results of Operations-Seasonality."
ITEM 7.
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.
The Company's net sales increased in fiscal 2001 by $680,000 or .7%. Sales from comparable stores opened at least one year decreased $637,000 or .7%. The sales comparison is affected by the number of weeks contained in each fiscal year since fiscal 2000 includes a 53rd fiscal week while fiscal 2001 is based on a 52 week period. On a fully aligned, week-for-week comparative basis, net sales in fiscal 2001 increased by $2,206,000 or 2.2% over the comparable prior period due to increases in comparable store sales of $746,000 or .8%, in addition to new store sales of $1,460,000 net of the impact of closed stores. The comparable store sales increase was negatively affected in the Company's fiscal 2001 fourth quarter by an unsuccessful change in promotional strategy and later distribution of seasonal merchandise compared to fiscal 2000. Net sales increased in fiscal 2000 by $5,427,000 or 5.7%. Sales from comparable stores increased $3,811,000 or 4.2%. The 53rd fiscal week contributed sales of $1,529,000 or an increase of 1.6% of the sales increase over fiscal 1999. Management believes that refinements to the presentation of its bi-weekly newspaper insert in addition to an enhanced selection of promotional items in the fourth quarter of fiscal 2000 were significant factors in the improvement of comparable store sales.
Gross profit decreased $787,000, or 1.0% as a percent of net sales, in fiscal 2001 as compared to fiscal 2000. The percentage change was primarily due to a return to historic inventory shrinkage results, as compared to the favorable inventory shrinkage result experienced in fiscal 2000, coupled with a combination of increases in occupancy and freight costs. Occupancy expense increased because of higher square footage and rent costs of new stores as compared to closed stores as well as contractual increases in rent for existing stores. Freight expense rose primarily due to higher unit costs. Gross profit improved by $2,628,000 and 0.7% in fiscal 2000 as compared to fiscal 1999. The increase was primarily due to the favorable inventory shrinkage results and an improvement in the initial mark-up on seasonal import merchandise.
Store expenses increased by $1,230,000 or 5.1%, and, as a percentage of net sales, increased by 1.0% in fiscal 2001 as compared to fiscal 2000 principally due to an increase in payroll and payroll related expenses that was primarily due to new store openings net of store closings, and additional costs incurred in connection with the Company's annual physical inventory to inaugurate a company wide SKU (stock keeping unit) level inventory system to help improve the Company's sales performance and tighten inventory control. Store expenses increased by $839,000 or 3.6%, and, as a percentage of sales, decreased by .5% in fiscal 2000 as compared to 1999. The increase in fiscal 2000 store expenses was primarily due to an increase in payroll and payroll related expenses, an extra week of expenses to support the 53rd fiscal week of sales and an increase in credit card processing costs resulting from an increase in credit card tenders. The increase in fiscal 2000 store expenses was partially offset by reduced advertising expenses. The decrease in store expenses as a percent of net sales was principally due to the ability of the Company to leverage expenses against the increase in net sales.
General and administrative expenses decreased by $72,000 or .7% in fiscal 2001, and, as a percentage of net sales, decreased by .1% as compared to fiscal 2000. The lower general and administrative expense in fiscal 2001 is primarily due to decreases in payroll and related expenses, and professional fees, partially offset by increases in property and casualty insurance premiums and rent for the Company's distribution center. In fiscal 2000, general and administrative expenses increased by $580,000 or 5.9% as compared to fiscal 1999. The increase is primarily due to an extra fiscal week of operating expenses, an increase in payroll, due to higher bonuses earned by non-officers and an increase in the amortization of restricted stock awards, and increases in health insurance costs and professional fees. As a percentage of net sales, general and administrative expenses remained relatively constant in fiscal 2000 and 1999 as the Company was able to leverage these expenses against increases in net sales.
Interest income, net increased in fiscal 2001 as compared to fiscal 2000 because the Company entered fiscal 2001 without bank debt and was able to maintain that condition throughout the majority of the year, thus allowing an increase in investment of cash provided by operating activities over that experienced in fiscal 2000. Interest income, net increased in fiscal 2000 as compared to fiscal 1999 due to an increase in cash provided by operating activities and a decrease in cash used for the purchase of property and equipment. These factors enabled the Company to repay all borrowings under the Company's line of credit and remain free of bank debt commencing in January 2000 through the end of the year. See "Liquidity and Capital Resources."
The effective tax rate for 2001 was 67.8% as compared to 39.7% in 2000. The increase is primarily due to a higher effective state and local income tax rate due to minimum tax requirements. The effective tax rate for 2000 was 39.7% as compared to 39.9% in 1999. The decrease is primarily due to a lower effective state and local income tax rate.
Net income decreased by $1,350,000 for fiscal 2001 as compared to fiscal 2000 due to the decrease in gross profit and the increase in store expenses, which was partially offset by the decrease in general and administrative expenses and the increase in interest income, net. Net income increased by $995,000 for fiscal 2000 as compared to fiscal 1999 due to the increase in net sales and gross profit and a change in accounting for merchandise inventories that was partially offset by an 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 historically 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 (1) the timing and duration of holiday selling seasons, (2) the timing of new store openings and promotional markdowns and (3) every seven years, the retail calendar, contains a 53rd week as compared to a 52 week year for all other years.
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 fiscal 2001 and fiscal 2000, the Company relied on internally generated funds, trade credit made available by suppliers and short-term borrowings to finance inventories and new store openings. Nearly all of the Company financing was provided through internally generated funds and trade credit.
The Company's working capital has decreased $591,000 in fiscal 2001 as compared to 2000 primarily as a result of an increase in trade payables and other current obligations partially offset by an increase in prepaid expenses.
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 (6.50% at September 1, 2001). 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 September 1, 2001, 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 outstanding at a point in time under the line was $545,000, $7,490,000, and $7,010,000 during fiscal 2001, fiscal 2000 and fiscal 1999, respectively. There were no direct borrowings outstanding under the line of credit at September 1, 2001 or September 2, 2000. 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 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 affected by foreign currency fluctuation. At September 1, 2001, the Company had outstanding letters of credit in the amount of $196,854.
During fiscal 2001, fiscal 2000 and fiscal 1999, the Company had net cash provided by (used in) operating activities of $1,526,000, $7,537,000 and $(2,707,000), respectively, and used $1,890,000, $591,000 and $1,579,000, respectively for purchases of property and equipment. Cash provided by operating activities in fiscal 2001 resulted primarily from depreciation, and increases in trade payables and other current obligations, partially offset by an increase in prepaid expenses. In fiscal 2002, the Company expects to open three new stores and close three existing stores. Costs associated with opening of new stores, including capital expenditures, inventory and pre-opening expenses have historically 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 re-deploy assets of stores being closed to the new stores as opportunities evolve in order to curtail the costs of opening stores. The Company believes that its cash at September 1, 2001, working capital generated from operations and cash available from the bank line of credit will be sufficient for the Company's operating needs for at least the next 12 months.
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 the Company's filings with the Securities and Exchange Commission).
RECENT ACCOUNTING STANDARDS
On July 20, 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) 141, Business Combinations, and SFAS 142, Goodwill and Intangible Assets. SFAS 141 is effective for all business combinations completed after June 30, 2001. SFAS 142 is effective for fiscal years beginning after December 15, 2001; however, certain provisions of this Statement apply to goodwill and other intangible assets acquired between July 1, 2001 and the effective date of SFAS 142. Major provisions of these Statements and their effective dates for the Company are as follows:
o all business combinations initiated after June 30, 2001 must use the purchase method of accounting. The pooling of interest method of accounting is prohibited except for transactions initiated before July 1, 2001.
o intangible assets acquired in a business combination must be recorded separately from goodwill if they arise from contractual or other legal rights or are separable from the acquired entity and can be sold, transferred, licensed, rented or exchanged, either individually or as part of a related contract, asset or liability.
o goodwill, as well as intangible assets with indefinite lives, acquired after June 30, 2001, will not be amortized. Effective September 1, 2002, all previously recognized goodwill and intangible assets with indefinite lives will no longer be subject to amortization.
o effective September 1, 2002, goodwill and intangible assets with indefinite lives will be tested for impairment annually and whenever there is an impairment indicator.
o all acquired goodwill must be assigned to reporting units for purposes of impairment testing and segment reporting.
In August 2001, the FASB issued Statement of Financial Accounting Standards No. 144, "Accounting for the Impairment of Disposal of Long-Lived Assets" ("SFAS 144"). This statement is effective for fiscal years beginning after December 15, 2001. This supercedes Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of", while retaining many of the requirements of such statement.
Although it is still reviewing the provisions of these Statements, management's preliminary assessment is that these Statements will not have a material impact on the Company's financial position or results of operations.
ITEM 7A.
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 September 1, 2001, and during each of the three years in the period then ended, 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 does not have any foreign currency exposure. 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 (6.50% at September 1, 2001). There were no loans outstanding under any such line of credit at September 1, 2001 or September 2, 2000.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Item 14(a) in Part IV.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
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 for the year ended August 28, 1999 was 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.
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.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required for this item is incorporated by reference to the Company's 2001 Definitive Proxy Statement which the Company will file with the Securities and Exchange Commission no later than 120 days subsequent to September 1, 2001.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
The information required for this item is incorporated by reference to the Company's 2001 Definitive Proxy Statement which the Company will file with the Securities and Exchange Commission no later than 120 days subsequent to September 1, 2001.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required for this item is incorporated by reference to the Company's 2001 Definitive Proxy Statement which the Company will file with the Securities and Exchange Commission no later than 120 days subsequent to September 1, 2001.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required for this item is incorporated by reference to the Company's 2001 Definitive Proxy Statement which the Company will file with the Securities and Exchange Commission no later than 120 days subsequent to September 1, 2001.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) FINANCIAL STATEMENTS PAGE --------------------- Report of Independent Certified Public Accountants
Independent Auditors' Report
Consolidated Balance Sheets as of September 1, 2001 and September 2, 2000
Consolidated Statements of Income for the years ended September 1, 2001, September 2, 2000 and August 28, 1999
Consolidated Statements of Stockholders' Equity for the years ended September 1, 2001, September 2, 2000 and August 28, 1999
Consolidated Statements of Cash Flows for the years ended September 1, 2001, September 2, 2000 and August 28, 1999
Notes to Consolidated Financial Statements -
(b) 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 10.5** Change in Registrants Certifying Accountant 21.1 List of subsidiaries of the Company 23.1 Consent of Grant Thornton LLP 23.2 Consent of Deloitte & Touche LLP 24.1 Power of Attorney to sign Form 10-K (set forth on page 16) 27 Financial Data Schedule (Filed electronically with SEC only)
(c) FINANCIAL STATEMENT SCHEDULES ----------------------------- None of these schedules are required.
(d) The Company did not file a Current Report on Form 8-K during the last quarter of the period covered by this Report.
* 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.
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 December 14, 2001.
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/ STEVEN B. BARNETT Executive Vice President and December 14, 2001 -------------------- Director Steven B. Barnett
/S/ EVAN BERENZWEIG Senior Vice President and December 14, 2001 -------------------- Director Evan Berenzweig
/S/ STANLEY BERENZWEIG Principal Executive December 14, 2001 ---------------------- Officer and Director Stanley Berenzweig
/S/ MARIO CIAMPI Director December 14, 2001 ---------------- Mario Ciampi
/S/ FRED J. DAMIANO Director December 14, 2001 ------------------- Fred J. Damiano
/S/ FREDERICK A. GUNZEL Vice President and Chief December 14, 2001 ----------------------- Financial Officer Frederick A. Gunzel
/S/ JUDITH LOMBARDO Senior Vice President and December 14, 2001 ------------------- Director Judith Lombardo
/S/ ALAN C. MINTZ Director December 14, 2001 ----------------- Alan C. Mintz
RAG SHOPS, INC.
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 Commercial Lending * Institution
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 **
10.5 Change in Registrants Certifying Accountant **
21.1 List of subsidiaries of the Company
23.1 Consent of Grant Thornton LLP
23.2 Consent of Deloitte & Touche LLP
24.1 Power of Attorney to sign Form 10-K (set forth on page 17)
- -------------------------------- * 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.
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
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 September 1, 2001 and September 2, 2000 and the related consolidated statements of income, changes in stockholders' equity and cash flows for each of the two years in the period ended September 1, 2001. 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 auditing standards generally accepted in the United States of America. 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 audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Rag Shops, Inc. and Subsidiaries as of September 1, 2001 and September 2, 2000, and the results of their operations and their cash flows for each of the two years in the period ended September 1, 2001, in conformity with accounting principles generally accepted in the United States of America.
As discussed in Note 1, the Company changed its method of calculating inventory for the year ended September 2, 2000.
Grant Thornton LLP Edison, New Jersey November 27, 2001
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders
Rag Shops, Inc. Hawthorne, New Jersey
We have audited the accompanying statements of income, changes in stockholders' equity and cash flows of Rag Shops, Inc. and Subsidiaries for the year 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 audit.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the results of operations and cash flows of Rag Shops, Inc. and Subsidiaries for the year ended August 28, 1999, in conformity with generally accepted accounting principles.
Deloitte & Touche LLP Parsippany, New Jersey November 11, 1999
RAG SHOPS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
The accompanying notes are an integral part of these consolidated financial statements.
RAG SHOPS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
The accompanying notes are an integral part of these consolidated financial statements.
RAG SHOPS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY FOR YEARS ENDED AUGUST 28, 1999, SEPTEMBER 2, 2000 AND SEPTEMBER 1,2001
The accompanying notes are an integral part of these consolidated financial statements.
RAG SHOPS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
The accompanying notes are an integral part of these consolidated financial statements.
RAG SHOPS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED SEPTEMBER 1, 2001, SEPTEMBER 2, 2000 AND AUGUST 28, 1999
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 which are located in New Jersey, New York, Pennsylvania, Florida and Connecticut.
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 fiscal year ended September 2, 2000 ("2000") were comprised of 53 weeks. Fiscal years ended September 1, 2001 ("2001") and August 28, 1999 ("1999") were each comprised of 52 weeks.
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform to the current year presentations.
ADVERTISING EXPENSES
Advertising costs are expensed as incurred. Advertising expense net of co-op advertising was $4,161,928, $4,107,476 and $4,201,776 for the years ended September 1, 2001, September 2, 2000 and August 28, 1999, respectively.
MERCHANDISE INVENTORIES
Merchandise inventories (which are all finished goods) are stated at the lower of cost (first-in, first-out method) or market as determined by the retail inventory method. 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. Effective August 30, 1999, 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 has increased the Company's net income for fiscal 2000 by $198,496 (net of tax effect $127,000).
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. For tax purposes, depreciation is computed using accelerated methods.
The Company follows 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 established 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.
REVENUE RECOGNITION
Revenue is recognized when merchandise is sold to customers.
FAIR VALUE OF FINANCIAL INSTRUMENTS
In management's opinion, the fair value of amounts outstanding under its line of credit approximate fair value due to their variable interest rate.
PRE-OPENING AND CLOSING STORE EXPENSES
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.
All pre-opening costs incurred in connection with the opening of new retail stores are charged to expense when incurred. Costs associated with closing stores, which consists primarily of write-downs of leasehold improvements, are charged to expense at the time the decision to close a store is determined.
STOCK BASED COMPENSATION
The Company has adopted statement of Financial Accounting Standards No. 123 "Accounting for Stock-Based Compensation" ("SFAS No. 123"). As permitted under SFAS No. 123, the Company has elected to follow Accounting Principles Board opinion No. 25 ("APB No. 25"), "Accounting for Stock Issued to Employees", and related interpretations in accounting for its employee stock options. Under APB No. 25, when the exercise price of the employee stock options equals or exceeds the market price of the underlying stock on the date of grant, no compensation expense is recorded.
RECENT ACCOUNTING PRONOUNCEMENTS
On July 20, 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) 141, Business Combinations, and SFAS 142, Goodwill and Intangible Assets. SFAS 141 is effective for all business combinations completed after June 30, 2001 SFAS 142 is effective for fiscal years beginning after December 15, 2001; however, certain provisions of this Statement apply to goodwill and other intangible assets acquired between July 1, 2001 and the effective date of SFAS 142. Major provisions of these Statements and their effective dates for the Company are as follows:
o all business combinations initiated after June 30, 2001 must use the purchase method of accounting. The pooling of interest method of accounting is prohibited except for transactions initiated before July 1, 2001.
o intangible assets acquired in a business combination must be recorded separately from goodwill if they arise from contractual or other legal rights or are separable from the acquired entity and can be sold, transferred, licensed, rented or exchanged, either individually or as part of a related contract, asset or liability.
o goodwill, as well as intangible assets with indefinite lives, acquired after June 30, 2001, will not be amortized. Effective September 1, 2002, all previously recognized goodwill and intangible assets with indefinite lives will no longer be subject to amortization.
o effective September 1, 2002, goodwill and intangible assets with indefinite lives will be tested for impairment annually and whenever there is an impairment indicator.
o all acquired goodwill must be assigned to reporting units for purposes of impairment testing and segment reporting.
In August 2001, the FASB issued Statement of Financial Accounting Standards No. 144, "Accounting for the Impairment of Disposal of Long-Lived Assets" ("SFAS 144"). This statement is effective for fiscal years beginning after December 15, 2001. This supercedes Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of", while retaining many of the requirements of such statement.
Although it is still reviewing the provisions of these Statements, management's preliminary assessment is that these Statements will not have a material impact on the Company's financial position or results of operations.
NOTE 2. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
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. There were no direct borrowings outstanding under the line of credit at both September 1, 2001 and September 2, 2000 and the unused line of credit for direct borrowings and the issuance of letters of credit at September 1, 2001 was $9,803,146. 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 September 1, 2001, the Company was in compliance with such covenants. Borrowings under the line of credit bear interest payable quarterly at the bank's prime rate (6.50% and 9.50% at September 1, 2001 and September 2, 2000, respectively).
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
Leases 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 2001, 2000 and 1999 amounted to $8,175,209, $7,651,778, and $7,382,116, respectively, and includes contingent rentals (computed on a percentage of sales, as defined in the leases) of $28,050, $29,079 and $22,499 respectively.
The Company leases certain premises from an entity controlled by the majority stockholders of the Company. For the years 2001, 2000 and 1999, rental payments under this agreement amounted to $340,349, $338,265 and $288,766, respectively.
Future minimum annual rental commitments under non-cancelable operating leases are as follows:
Fiscal Year Ended 2002 $ 8,054,680 2003 7,707,917 2004 6,448,357 2005 5,536,338 2006 4,388,879 Thereafter 8,741,191 -------------
$ 40,877,362
Letters of Credit In addition, at September 1, 2001 the Company has outstanding letters of credit for the purchase of merchandise inventories of approximately $196,854.
Legal Matters The Company is involved in various legal proceedings incidental to the conduct of its business. The Company currently is not engaged in any legal proceeding 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.
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 the year ended August 28, 1999 has been adjusted to give retroactive effect to the dividend.
Stock options excluded from the above calculation, as the effect of such options would be anti-dilutive, aggregated 17,750 in fiscal 2001, 323,800 in fiscal 2000 and 117,800 in fiscal 1999.
NOTE 7. STOCKHOLDERS' EQUITY
Each share of common stock is entitled to one vote.
In April 1991, the Company adopted the 1991 Stock Option Plan (the "Plan") covering employees and non-employee 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 September 1, 2001. 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 40% after two years and 20% per year thereafter.
No compensation cost has been recognized for the stock options awarded since they were granted at the fair market value on the date of grant. Had compensation cost for the Company's stock option plan been recorded based on the fair value at the grant date for awards in 2001, 2000 and 1999, 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:
There were no options granted during fiscal 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 fiscal 2001 and fiscal 2000: dividends yield of 0%, expected volatility of 49% and 30%, respectively, risk-free interest rate of 5.7% and 5.0% respectively and expected lives of 10 years. The weighted average grant date fair value of options issued during fiscal year 2001 and 2000 was $1.50 and $0.97, respectively.
Information with respect to options granted under the Plan is as follows:
The weighted-average remaining contractual life of stock options outstanding at September 1, 2001 is 6.3 years and at September 2, 2000 is 4.9 years. The majority of options as of September 1, 2001 have an exercise price from $1.86 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 September 1, 2001, 107,900 shares have been issued under the Incentive Plan. On July 31, 2000, 80,300 of the outstanding shares vested. As of September 1, 2001, 21,900 shares had been forfeited by individuals who were no longer employed by the Company prior to the end of their required vesting period. As of September 1, 2001, 5,700 of these shares remain unvested. The Company estimated the value of the stock issued based on the market price on the date of grant.
The grant date weighted average fair value of stock awards granted in 1999 was $2.34.
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. In fiscal 2001, 2000 and fiscal 1999, $4,384, $169,761 and $24,550 respectively were 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 September 1, 2001, September 2, 2000 and August 28, 1999, 26,880 shares are held in treasury.
NOTE 8. INCOME TAXES
The components of income tax expense relating to income consists of the following:
The deferred income tax arises from the following temporary differences.
The effective tax rate differs from the Federal statutory rate as follows:
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 Company has approximately $8,419,000 of net operating losses in multiple entities and multiple states which expire on various dates from 2007 to 2021.
The tax effect of significant items comprising the Company's deferred income tax assets are as follows:
NOTE 9. EMPLOYEE BENEFIT PLAN
The Company has 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 eligible service. The Company did not make any contributions to the 401(k) plan for fiscal years 2001, 2000 and 1999.
NOTE 10. QUARTERLY RESULTS (UNAUDITED)
The following is a summary of selected quarterly financial data (in thousands of dollars, except per share amounts):
The sum of the four quarters may not equal the full year computation due to rounding.
(a) Included in the net loss of the fiscal quarter ended September 2, 2000 were credits of approximately $120,000 or $0.02 per share as a result of an extra fiscal week of sales and $130,000 or $0.03 per share based on the Company's favorable shrinkage results.
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 (continued)
RAG SHOPS, INC.
LIST OF SUBSIDIARY COMPANIES
NAME STATE INCORPORATED
Name State Incorporated
The Rag Shop/Hollywood, Inc. Florida The Rag Shop/Binghamton, Inc. New York 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 The Rag Shop/College Point, Inc. New York The Rag Shop/Franklin, Inc. New Jersey The Rag Shop/Kinnelon, Inc. New Jersey The Rag Shop/Waterbury, Inc. Connecticut
Each of the above does business under the name "The Rag Shop."
EXHIBIT 23.1
RAG SHOPS, INC.
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We have issued our report dated November 27, 2001, accompanying the consolidated financial statements included in the Annual Report of Rag Shops, Inc. and Subsidiaries on Form 10-K as of September 1, 2001. We hereby consent to the incorporation by reference of said report in the Registration Statement of Rag Shops, Inc. and Subsidiaries on Form S-8 (File No. 333-86489, effective September 3, 1999).
Grant Thornton LLP Edison, New Jersey November 27, 2001
EXHIBIT 23.2
RAG SHOPS, INC.
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We consent to the incorporation by reference in the Registration Statement No. 333-86489 of Rag Shops, Inc. and Subsidiaries on Form S-8 of our report dated November 11, 1999, relating to the Company's financial statements for the year ended August 28, 1999, appearing in this Annual Report on Form 10-K of Rag Shops, Inc. and Subsidiaries for the year ended September 1, 2001.
DELOITTE & TOUCHE LLP Parsippany, New Jersey
December 3, 2001