<Page>
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of
the Securities Exchange Act of 1934 (Amendment No. )
<Table>
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 Section240.149-11(c) or
Section240.14a-12
RAG SHOPS, INC.
-----------------------------------------------------------------------
(Name of Registrant as Specified in its Charter)
-----------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement if other than the Registrant)
</Table>
<Page>
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD THURSDAY, JANUARY 24, 2002
To the Stockholders of
RAG SHOPS, INC.:
Notice is hereby given that the 2002 Annual Meeting of Stockholders of Rag
Shops, Inc., a Delaware corporation (the "Company"), will be held at 9:30 a.m.
(Eastern Standard Time) on Thursday, January 24, 2002, at the Regency House
Hotel, 140 Highway 23 North, Pompton Plains, New Jersey, to consider and vote
upon:
1. Election of two existing directors and one nominee for a three-year
term.
2. Ratification of the selection by the Board of Directors of Grant
Thornton LLP as independent public accountants for the Company's 2002
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 17, 2001,
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 21, 2001
<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 24, 2002, 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 21, 2001.
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 17, 2001, will
be entitled to notice of and to vote at the meeting. On that date there were
issued and outstanding 4,799,183 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 20, 2001, 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
- ------------- ------------------ ----------
Stanley Berenzweig.......................................... 1,003,132(1) 20.9%
Doris Berenzweig............................................ 1,066,942(1) 22.2%
Dimensional Fund Advisors, Inc.............................. 313,360(2) 6.5%
1299 Ocean Avenue
11th Floor
Santa Monica, CA 90401
Evan Berenzweig............................................. 249,675(3) 5.2%
Judith Lombardo............................................. 196,125(3) 4.1%
Steven Barnett.............................................. 196,125(3) 4.1%
Jeffrey C. Gerstel.......................................... 6,000 0.1%
Alan C. Mintz............................................... 2,100 *
Fred J. Damiano............................................. 1,050 *
Mario Ciampi................................................ -0- *
Leonard Settanni............................................ 10,000(4) 0.2%
Bruce Miller................................................ 3,500(5) 0.1%
All directors, nominees and executive
officers as a group (10) persons.......................... 2,631,749 54.8%
</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, 2001.
(3) Includes 12,000 shares subject to presently exercisable stock options at
$2.34 per share.
(4) Represents shares subject to presently exercisable stock options at $3.188
per share.
(5) Represents shares subject to presently exercisable stock options at $2.375
per share.
* Less than 0.1 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 desire to add the
President of the Corporation as a Board member, the Board determined at its
November 20, 2001 meeting to (i) set the number of Directors to constitute the
Board of Directors at eight effective immediately upon the conclusion for the
next annual meeting; and (ii) nominate Jeffrey C. Gerstel, Judith Lombardo and
Mario Ciampi for election as the Class II Directors to the Board of Directors by
the stockholders at the 2002 Annual Meeting. 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 three nominees for election as Class II
directors at this year's Annual Meeting is set forth below.
<Table>
<Caption>
NAME AGE POSITION
- ---- -------- --------
Judith Lombardo....................... 53 Senior Vice President and Class II
Director
Mario Ciampi.......................... 41 Class II Director
Jeffrey Gerstel....................... 37 President and nominee for Class II
Director
</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.
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.
JEFFREY C. GERSTEL joined the Company in September 2001 as the President and
Chief Operating Officer. Mr. Gerstel was formerly Executive Vice President of
The Parts Plus Group, Inc., a distributor and retailer of automotive parts and
accessories, from 1997 to 2001. Prior thereto, from 1990 to 1997, Mr. Gerstel
was with Family Bargain Corporation (which changed its name to Factory 2-U
Stores, Inc.) where he served in several executive operational and financial
positions including Executive Vice President.
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
- ---- -------- --------
Stanley Berenzweig.................... 81 Chairman of the Board, Chief Executive
Officer, Chief Operating Officer and
Class I Director
Steven B. Barnett..................... 54 Executive Vice President, Treasurer
and Class III Director
Fred J. Damiano....................... 57 Class I Director
Evan Berenzweig....................... 45 Senior Vice President and Class III
Director
Alan C. Mintz......................... 69 Class III Director
Doris Berenzweig...................... 77 Secretary
Frederick A. Gunzel................... 55 Vice President, Chief Financial
Officer
Bruce Miller.......................... 46 Vice President
Leonard M. Settanni................... 59 Vice President
</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.
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.
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.
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 was a partner in the firm of Mintz Rosenfeld &
Company LLC, Certified Public Accountants, and its predecessors from 1957 to the
date of his retirement on December 31, 2000. While a partner with the firm, Mr.
Mintz rendered tax and consulting services to the Company through Mintz
Rosenfeld & Company LLC.
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.
FREDERICK A. GUNZEL, who joined the Company in April 2001 as Vice President
and Chief Financial Officer, was a private financial consultant from March 2000
to April 2001. From 1993 to 2000 Mr. Gunzel was Chief Operating and Financial
Officer of Industrial Products Enterprises, a wholesale
4
<Page>
distributor of packaging and industrial supplies. Prior to 1993 Mr. Gunzel
served in various capacities in finance and operations, primarily in the service
industry.
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.
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 four times during fiscal year 2001. 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 Mario Ciampi, Fred
J. Damiano and Alan C. Mintz and the Option Committee consists of Stanley
Berenzweig and Fred J. Damiano. The audit committee met three times, and the
compensation and option committees each met once in fiscal 2001.
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 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.
5
<Page>
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 2001 (the year ended September 1, 2001) whose aggregate compensation
exceeded $100,000.
SUMMARY COMPENSATION TABLE
<Table>
<Caption>
ANNUAL COMPENSATION LONG TERM COMPENSATION
NAME AND ---------------------- ----------------------
PRINCIPAL POSITION YEAR SALARY ($) BONUS ($) OPTION AWARDS(#)
- ------------------ -------- ---------- --------- ----------------------
Stanley Berenzweig, Chief Executive Officer... 2001 175,000 -0- -0-
2000 175,000 -0- -0-
1999 175,000 -0- -0-
Steven B. Barnett, Executive Vice President... 2001 145,000 -0- -0-
2000 145,000 -0- -0-
1999 145,000 -0- -0-
Judith Lombardo, Senior Vice President........ 2001 145,000 -0- -0-
2000 145,000 -0- -0-
1999 145,000 -0- -0-
Evan Berenzweig, Senior Vice President........ 2001 130,000 -0- -0-
2000 130,000 -0- -0-
1999 124,577 -0- -0-
Bruce Miller, Vice President (1).............. 2001 125,000 -0- -0-
2000 109,997 6,500 6,500
Leonard Settanni, Vice President.............. 2001 127,981 -0- -0-
2000 115,000 -0- -0-
1999 113,192 -0- -0-
</Table>
- ------------------------
(1) 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 2001. On April 23, 2001 Mr. Gunzel was granted
25,000 shares exercisable at $2.21. On September 17, 2001 Mr. Gerstel was
granted 50,000 shares exercisable at $2.20.
<Table>
<Caption>
VALUE OF UNEXERCISED
NUMBER OF UNEXERCISED IN-THE-MONEY
OPTIONS 9/1/01 OPTIONS 9/1/01($)(1)
--------------------------- ---------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- ----------- ------------- ----------- -------------
Stanley Berenzweig............................. -0- -0- N/A N/A
Jeffrey C. Gerstel............................. -0- 50,000 2,500
Steven Barnett................................. 12,000 3,000 -0- -0-
Judith Lombardo................................ 12,000 3,000 -0- -0-
Evan Berenzweig................................ 12,000 3,000 -0- -0-
Frederick Gunzel............................... -0- 25,000 -0- 1,000
Bruce Miller................................... 3,500 6,500 -0- 2,535
Leonard Settanni............................... 10,000 -0- -0- -0-
</Table>
- ------------------------
(1) The closing price of the Common Stock on August 31, 2001 was $2.25.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION.
Messrs. Berenzweig, Damiano and Mintz were members of the Compensation
Committee in fiscal 2001. 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 $268,612 of basic rent for each of the third 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 second 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 2001, the Company paid Momar an aggregate of $340,349
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 retired partner
of Mintz Rosenfeld. During fiscal 2001, Mintz Rosenfeld received $72,394 for
services rendered to the Company, $4,150 of which is attributable to the period
prior to December 31, 2000, the date of Mr. Mintz' retirement.
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
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<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 2001 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 Evan Berenzweig, Bruce Miller and Leonard
Settanni) have not been increased since the IPO or their date of employment, if
later. Effective January 1, 1999 base salary increases were effected for 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, Steven Barnett, Judith Lombardo and Evan Berenzweig were not paid
any bonuses since fiscal year 1993 in light of the Company's financial
performance. In connection with his appointment as President of the Company on
September 17, 2001, the Board approved compensation for Mr. Gerstel consisting
of a base salary of $200,000 and a two year bonus agreement. The bonus agreement
provides for the payment of additional compensation to Mr. Gerstel consisting of
5% of the improvement in the Company's pretax earnings measured year-to-year and
is capped at 25% of base compensation for each year of the agreement.
COMPONENTS OF EXECUTIVE COMPENSATION
The primary components of the compensation of the Company's executive
officers for fiscal 2001 consisted of salary and stock option grants. Bonuses
were also potentially available.
The salaries of Messrs. Berenzweig, Barnett, Gerstel, Gunzel, 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.
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
8
<Page>
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, 1996 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-96 AUG-97 AUG-98 AUG-99 AUG-00 1-AUG
RAG SHOPS INC 100 138.89 113.89 99.17 116.67 105
S&P 500 INDEX 100 140.65 152.03 212.58 247.27 186.96
RETAIL (SPECIALTY)-500 100 107.78 65.13 53.95 49.22 62.78
</Table>
INDEXED RETURNS
<Table>
<Caption>
BASE YEARS ENDING
PERIOD ----------------------------------------------------
COMPANY/INDEX AUG 96 AUG 97 AUG 98 AUG 99 AUG 00 AUG 01
- ------------- -------- -------- -------- -------- -------- --------
RAG SHOPS, INC.............................. 100 138.89 113.89 99.17 116.67 105.00
S&P 500 INDEX............................... 100 140.65 152.03 212.58 247.27 186.96
S&P RETAIL-SPECIALTY INDEX.................. 100 107.78 65.13 53.95 49.22 62.78
</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.
10
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RATIFICATION OF SELECTION OF INDEPENDENT PUBLIC ACCOUNTANTS
The Board of Directors has selected Grant Thornton LLP ("Grant Thornton") to
serve as the independent public accountants of the Company for the fiscal year
ending August 31, 2002. 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 1, 2001.
The Board of Directors and the Audit Committee believe that the Audit
Committee's current member composition satisfies the rule of the National
Association of Securities Dealers, Inc. ("NASD") that governs audit committee
composition, including the requirement that a majority of the audit committee
members are "independent" directors, as that term is defined by NASD
Rule 4200(a)(14). In 2000, the Audit Committee and the Board of Directors
approved and adopted an Audit Committee Charter, which was attached to the
Company's Proxy Statement for its Annual Meeting held January 25, 2001.
MARIO CIAMPI FRED DAMIANO ALAN MINTZ
Members of the Audit Committee
RELATIONSHIP WITH INDEPENDENT AUDITORS
Grant Thornton serves as the Company's independent certified public
accountants. It is the Company's current intention to engage Grant Thornton to
act as its independent auditors for the current fiscal year which ends on
August 31, 2002 subject to approval by the Board of Directors of a final fee
proposal from such auditors. Grant Thornton has audited the Company's
consolidated financial statements for the fiscal year ended September 1, 2001.
The Audit Committee has considered the services performed by the Company's
auditors, as so performed, to be compatible with maintaining the principal
accountant's independence.
AUDIT FEES
The aggregate fees billed by Grant Thornton for the audit of the Company's
annual financial statements for the 2001 fiscal year and for the reviews of the
financial statements included in the Company's Annual Report on Form 10-K and
its Quarterly Reports on Form 10-Q were $96,400.
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FINANCIAL INFORMATION SYSTEMS DESIGN AND IMPLEMENTATION FEES,
AND OTHER FEES
Grant Thornton did not render any services related to financial information
systems and implementation, or for any other services, including tax compliance
and consulting and transaction-related services, for the fiscal year ended
September 1, 2001.
ANNUAL REPORT
The Annual Report to Stockholders (including financial statements) for the
fiscal year ended September 1, 2001 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 FREDERICK A.
GUNZEL, 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 2003 Annual Meeting, the
stockholder must deliver notice to the Secretary between October 26 and November
25, 2002. 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 2003 ANNUAL MEETING
Stockholder proposals (other than those regarding director nominations as
described above) for the 2003 Annual Meeting must be received in writing by the
Company on or before August 25, 2002 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 21, 2001
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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 17, 2001 at the Annual Meeting of Rag Shops, Inc. Stockholders to be
held on January 24, 2002 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
PLEASE VOTE THE ABOVE PROXY CARD TODAY!
YOUR PROMPT RESPONSE WILL SAVE
THE EXPENSE OF ADDITIONAL MAILINGS.
IF YOU REQUIRE SPECIAL ARRANGEMENTS TO PARTICIPATE AT THIS MEETING,
PLEASE CONTACT STEVEN B. BARNETT, THE COMPANY'S EXECUTIVE VICE PRESIDENT
AT (973) 423-1303 EXT. 165 PRIOR TO THE MEETING
IF YOUR ADDRESS HAS CHANGED, PLEASE BE SURE TO NOTIFY
THE COMPANY PROMPTLY
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.
<Page>
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.
<Table>
1. ELECTION OF THREE DIRECTORS: / / FOR / / WITHHELD
ALL NOMINEES FROM ALL NOMINEES
1. ELECTION OF THREE DIRECTORS: JUDITH LOMBARDO, MARIO CIAMPI AND JEFFREY GERSTEL
For all nominees listed above, except vote withheld as
</Table>
<Table>
2. TO RATIFY THE APPOINTMENT OF GRANT THORNTON LLP AS THE COMPANY'S INDEPENDENT AUDITORS FOR
THE FISCAL YEAR ENDING AUGUST 31, 2002.
/ / FOR / / AGAINST / / ABSTAIN
</Table>
THIS PROXY WHEN PROPERLY EXECUTED WILL BE VOTED IN THE MANNER DIRECTED BY THE
UNDERSIGNED STOCKHOLDER.
____________________________________
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.