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SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
(Mark One)
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended January 31, 2000
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OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission File Number 0-12188
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DEB SHOPS, INC.
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(Exact name of registrant as specified in its charter)
9401 Blue Grass Road, Philadelphia, PA 19114
--------------------------------------------
(Address of principal executive offices and zip code)
Pennsylvania 23-1913593
------------ ----------
(State of Incorporation) (IRS Employer Identification No.)
(215) 676-6000
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(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act: Common Stock, par
value $.01 per share.
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days:
Yes X No
----- -----
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.
As of March 31, 2000, 13,359,900 shares of the Company's Common Stock,
par value $.01 per share, were outstanding. The aggregate market value (based
upon the closing price on March 31, 2000) held by non-affiliates was
approximately $55,400,125.
DOCUMENTS INCORPORATED BY REFERENCE
Registrant's Definitive Proxy Statement to be filed within 120 days
after the end of the fiscal year in connection with the Annual Meeting to be
held on May 17, 2000 - incorporated in Part III.
Forward-Looking Statements
The Company has made in this report, and from time to time may
otherwise make, "forward-looking statements" (as that term is defined under
federal securities laws) concerning the Company's future operations,
performance, profitability, revenues, expenses and financial condition. This
report includes, in particular, forward-looking statements regarding store
openings and closings and other matters. Such forward-looking statements are
subject to various risks and uncertainties. Actual results could differ
materially from those currently anticipated due to a number of factors. Such
factors may include, but are not limited to, the Company's ability to improve
margins, respond to changes in fashion, find suitable retail locations and
retain key management personnel. Such factors may also include other risks and
uncertainties detailed in the Company's other filings with the Securities and
Exchange Commission.
PART 1
Item 1. Business
General
Deb Shops, Inc. (the "Company") operates 285 women's specialty apparel
retail stores ("DEB") offering moderately priced, fashionable, coordinated
women's sportswear, dresses, coats, lingerie, accessories and shoes for junior
and plus sizes. DEB merchandise consists of clothing and accessories appealing
primarily to the fashion-conscious junior and plus sized female consumers
between the ages of 13 and 18. In addition to 268 stores operating under the
name "DEB" the Company operates five plus size stores under the name "DEB PLUS"
and four outlet stores under the name "CSO." The outlet stores offer the same
merchandise as DEB and DEB PLUS at reduced prices and serve as clearance stores
for slow-moving inventory. Fifty three of the DEB stores contain plus size
departments.
The Company operates an additional eight apparel retail stores under
the name Tops 'N Bottoms. Tops 'N Bottoms sells moderately priced men's and
women's apparel. Seventeen of the DEB stores contain Tops 'N Bottoms
departments.
The Company also operates 17 retail book stores trading as "Atlantic
Book Warehouse" and "Atlantic Book Shops." The Company operates 11 locations as
"Atlantic Book Shops," which are small, limited selection book stores, generally
open seasonally in Delaware, Maryland, New Jersey and Pennsylvania resort towns.
The Company also operates six "Atlantic Book Warehouses" which carry a full line
of best sellers, new titles and magazines in addition to remainder books. The
Atlantic Book Warehouse stores are located in Delaware, Maryland, Minnesota, New
Jersey and Pennsylvania.
Merchandising and Marketing
DEB specializes in junior-sized merchandise and offers an extensive
selection of colors and styles. The merchandise is attractively presented in
groups coordinated by color and style to assist customers in locating items of
their choice and creating outfits of their own.
-1-
The DEB PLUS division caters to the plus size customer between the ages
of 13 to 18. The merchandise is young looking and the fit is adjusted to the
plus size customer. Prices are affordable and very competitive.
Tops 'N Bottoms caters primarily to young men and junior-sized women.
Much of the merchandise is brand named and unisex.
The Company purchases merchandise in volume, sells at popular prices,
and has a policy of early markdowns of slow-moving inventory. A special effort
is made to select and present coordinated outfits on a rotating basis and
featured merchandise is changed approximately twice a week.
A computerized point-of-sale merchandise data system provides detailed
daily information regarding sales and inventory levels by style, color, class
and department, thereby permitting the Company to analyze market trends and
changing store needs. Since merchandise control statistics are available on a
daily basis, the Company can identify slow-moving merchandise and respond to
customer buying trends when making repurchase decisions and markdown
adjustments. This permits the Company to maintain current and fresh merchandise
in its stores.
The Company experiences the normal seasonal pattern of the retail
apparel industry with its peak sales occurring during the Christmas,
Back-to-School and Easter periods. To keep merchandise fresh and fashionable,
slow-moving merchandise is marked down throughout the year. End-of-season sales
are conducted twice per year (in the second and fourth quarters), in keeping
with the Company's policy of carrying a minimal amount of seasonal merchandise
over from one year to another. At the end of the season, any unsold, merchandise
is transferred to the Company's CSO stores.
Stores
During the fiscal year ended January 31, 2000, the Company opened 17
stores (while closing four stores). Five of the new stores and three of the
closed stores had Plus Departments. The Company also closed one Tops `N Bottoms
store and closed one Tops `N Bottoms department. At the present time, the
Company currently plans to open 10-20 new stores in fiscal 2001. The current
plans include the opening of three to six Plus departments in the new stores.
The Company is currently scheduled to close two stores in the first half of
fiscal 2001. The Company plans to continue to evaluate carefully the
profitability of individual stores and close those stores that it believes
cannot become profitable or maintain profitability.
-2-
The following table shows apparel store openings and closings for the
last five fiscal years.
Year Ended January 31,
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
Open at beginning of fiscal year.. 273 269 285 308 341
Opened during fiscal year............ 17 17 5 2 1
Closed during fiscal year............. ( 5) (13) (21) (25) (34)
------ ------ ------ ------ ------
Open at end of fiscal year........... 285 273 269 285 308
====== ====== ====== ====== =====
The following table shows the states in which the Company's 285
existing apparel stores are located:
New England East Midwest
Connecticut 3 Delaware 1 Illinois 18
Maine 4 Maryland 8 Indiana 9
Massachusetts 9 New Jersey 13 Iowa 3
Rhode Island 1 New York 34 Kansas 3
-------- Pennsylvania 40 Kentucky 3
17 Virginia 12 Michigan 24
West Virginia 6 Minnesota 7
--- Missouri 7
114 Nebraska 1
North Dakota 3
Ohio 23
South Dakota 1
Wisconsin 12
-----
114
South West
Georgia 1 Arizona 1
North Carolina 1 California 2
Tennessee 4 Colorado 3
--- Idaho 2
6 New Mexico 3
Oklahoma 4
Oregon 6
Texas 6
Utah 3
Washington 4
--
34
DEB stores, which average 6,000 square feet, are located primarily in
enclosed regional malls and selected strip shopping centers. DEB stores with
Tops 'N Bottoms or DEB PLUS departments average 8,000 square feet and are
located primarily in enclosed regional malls. Tops 'N Bottoms stores are all
located in enclosed regional malls and range in
-3-
size from 2,700 to 3,400 square feet. New stores are opened in existing malls,
existing mall expansions, new malls and occasionally strip shopping centers
(although the Company generally is not currently seeking strip shopping center
locations). Factors considered in opening new stores include the availability of
suitable locations and satisfactory lease terms, both of which are considered
essential to successful operations. Key considerations in selecting sites for
new stores include the geographic location of the center, the demographics of
the surrounding area, the principal specialty and "anchor" stores within the
center, expected customer traffic within the center, and the location of the
Company's store within the center itself.
Stores are distinctively designed for customer identification and are
remodeled periodically as necessary. The stores are open during mall operating
hours, which are generally from 10:00 A.M. to 9:30 P.M., Monday through
Saturday, and from Noon to 5:00 P.M. on Sunday.
Operations
Payments for most of the Company's sales are made in cash or check,
with the balance made with MasterCard, Visa or Discover credit cards. For
customer convenience, the Company provides lay-away plans. The Company's policy
is to permit returns of merchandise for exchange or for a full cash or credit
refund, at the customer's preference.
The Company purchases its merchandise from a number of suppliers, both
domestic and foreign, and is not materially dependent on any one supplier. All
merchandise is shipped directly from vendors to the Company's central
distribution facility, where it is inspected and price-marked before being
shipped to the individual stores. The Company distributes its inventory by
common carrier and leased trucks.
The responsibility for managing the Company's stores rests with the
Director of Store Operations and a staff of 35 employees consisting of an
Assistant Director of Store Operations and Regional and District Managers. A
Regional Manager is responsible for an average of six districts. A District
Manager is responsible for an average of 10 stores, each of which is staffed by
a Store Manager and two Assistant Store Managers. The District and Regional
Managers visit the stores regularly to review merchandise levels, content and
presentation, staff training and other personnel issues, store security and
cleanliness and adherence to standard operating procedures.
The merchandising department consists of 38 employees, including the
Senior Vice President, Merchandising; Vice President, Merchandising; Merchandise
Managers and Buyers. The department is responsible for purchasing, pricing
(including markdowns), inventory planning and allocating merchandise among the
stores. The merchandising department's staff is organized in the following
apparel categories: sportswear, dresses, coats, lingerie, hosiery, shoes,
accessories and plus sizes.
At January 31, 2000, the Company had approximately 3,200 employees, 60%
of whom were employed on a part-time basis. The Company has a collective
bargaining agreement with the United Paperworkers International Union,
Philadelphia Local 286 (UPIU) which expires on December 31, 2001. The UPIU
represents the Company's warehouse employees. The collective bargaining
agreement covers approximately 70 employees. The Company considers its employee
relations to be good.
-4-
Competition
The retail sale of apparel is an extremely competitive business with
numerous individual and chain store competitors, including specialty shops as
well as regional and national department store chains. Many of the Company's
competitors are considerably larger than the Company and have substantially
greater financial and other resources.
The primary elements of competition are merchandise style, selection,
quality, display and price, as well as store location and design. The Company
believes that its strategy for the DEB stores of specializing in the junior and
plus size sportswear market and its ability to effect volume purchases are
important elements in its operations. Brand name merchandise is not a
significant factor in the Company's sales.
Atlantic Books
The Atlantic Books chain, which was acquired on October 20, 1995, now
consists of 17 stores including six full-service warehouse stores located in
Delaware, Maryland, Minnesota, New Jersey and Pennsylvania. Atlantic Books
emphasizes convenience, selection and value. The Company considers the warehouse
format to be positioned to capitalize on today's consumers' demands for these
features. Atlantic Books' main concentration is in bargain books that are sold
at significant discounts from publishers' original retail prices. Atlantic Books
also offers an extensive selection of best sellers and other hard cover and
paperback books and magazines. Each warehouse store is conducive to browsing and
shopping; including the availability of supermarket-style shopping carts for the
customer who wants to purchase multiple selections.
Atlantic Books competes with both national super-store chains as well
as local book stores. Atlantic Books offers selections similar to the national
super-stores, in a no-frills atmosphere and at larger discounts.
The chain trades as Atlantic Book Shops and Atlantic Book Warehouse.
The 11 non-warehouse stores are located in resort areas in Delaware, Maryland
and New Jersey. These resort stores range in size from 1,000 to 4,600 square
feet. The warehouse stores range in size from 12,000 to 24,000 square feet. The
warehouse store in Montgomeryville, PA includes the offices for the chain.
The resort stores sell primarily remainder books and some new titles.
The warehouse stores carry a full line of bestsellers, new titles, and magazines
in addition to the remainder books.
The Company intends to expand the book chain principally through the
addition of warehouse stores and the addition of resort stores when appropriate.
The current focus is on stand-alone sites and strip shopping centers for the new
stores. Where appropriate, mall locations will also be considered. The current
plans include the opening of one warehouse book store in fiscal 2000.
-5-
Item 2. Properties
The Company leases all of its apparel stores and all but one of its
book stores. The internal layout and fixtures of each store are designed and
constructed under contracts with third parties.
Under most leases, the Company is required to pay, in addition to fixed
minimum rental payments, charges for real estate taxes, common area maintenance
fees, utility charges, insurance premiums, mall association charges and
contingent rentals based upon a percentage of sales in excess of specified
amounts.
The following table shows the earliest years that executed apparel
store leases, existing at January 31, 2000, can be terminated. In many cases,
the Company has renewal options.
Calendar Years Number of Leases Expiring
-------------- -------------------------
2000 - 2001...................... 73
2002 - 2003...................... 61
2004 - 2005...................... 76
2006 - 2007...................... 16
2008 - 2009...................... 27
2010 - 2011...................... 20
2012 and thereafter.............. 12
---
Total............ 285
===
The Company leases its warehouse, distribution and office space,
aggregating 280,000 square feet, pursuant to a twenty-year lease which commenced
June 15, 1982. On January 3, 1999, the lease was amended to extend the term for
an additional five years. This facility is a modern, one story industrial
building situated on approximately 20 acres in the northeast section of
Philadelphia, Pennsylvania. See Item 13. Certain Relationships and Related
Transactions.
With respect to the locations of present stores, see Item 1.
Business - Stores.
Item 3. Legal Proceedings
The Company is subject to legal proceedings, employment issues and
claims that arise in the ordinary course of its business. Management, after
consultation with outside legal counsel, does not believe that the ultimate
disposition of such proceedings will have a materially adverse effect on the
Company's consolidated financial position or results of operations.
Item 4. Submission of Matters to a Vote of Security Holders
None.
-6-
EXECUTIVE OFFICERS OF THE REGISTRANT
Pursuant to General Instruction G(3) of Form 10-K, the following list
is included as an unnumbered Item in Part I of this Report in lieu of being
included in the Definitive Proxy Statement for the Annual Meeting of
Shareholders to be held on May 17, 2000.
The executive officers of the Company, each of whom serves at the
discretion of the Board of Directors, are as follows:
Name Age Position with Company Officer Since
- ---- --- --------------------- -------------
Marvin Rounick 60 Director, President and Chief Executive Officer 1973
Warren Weiner 56 Director, Executive Vice President, Secretary and Treasurer 1973
Allan Laufgraben 61 Senior Vice President, Merchandising 1995
Barry Vesotsky 54 Vice President, Merchandising 1981
Stanley A. Uhr 54 Vice President, Real Estate and Corporate Counsel 1988
Lewis Lyons 46 Vice President, Finance, Chief Financial Officer and
Assistant Secretary 1992
Stephen P. Smith 40 Vice President - Information Systems 1998
Joan M. Nolan 47 Controller 1998
Marvin Rounick has been employed by the Company since 1961. Since 1979,
he has served as President and Chief Executive Officer. Prior to that time, he
served as Vice President, Operations and General Merchandise Manager.
Warren Weiner was employed by the Company from 1965 until 1975. He
rejoined the Company in January 1982, as Executive Vice President, Secretary and
Treasurer.
Allan Laufgraben has been employed by the Company since December 1995,
as Senior Vice President, Merchandising. For more than five years, prior to
joining the Company he was with Petrie Stores Corporation as Executive Vice
President and with Petrie Retail, Inc. as President and Chief Executive Officer.
Petrie Retail, Inc. filed a petition under the federal bankruptcy laws on
October 12, 1995.
Barry Vesotsky has been employed by the Company since 1970. Since 1981,
he has served as Vice President, Merchandising. From 1978 to 1981, he was a
Buyer and Merchandise Manager with the Company.
Stanley A. Uhr has been employed by the Company since 1987, first as
Director of Real Estate and Corporate Counsel and, from March 31, 1988, as Vice
President, Real Estate and Corporate Counsel.
Lewis Lyons has been employed by the Company since 1990, first as
Director of Taxes; from May 20, 1992, as Vice President, Finance; and from May
26, 1993, as Vice President, Finance and Chief Financial Officer and from
October 2, 1995, as Assistant Secretary.
Stephen P. Smith has been employed by the Company since 1985. From 1985
to 1994 as a programmer and systems analyst; from 1994 to 1995 as Manager -
Information Systems; from 1995 to 1998 as Director - Information Systems and
from May 27, 1998 as Vice President - Information Systems.
-7-
Joan M. Nolan has been employed by the Company since November 2, 1998
as Controller. From July 1997 to July 1998 she was an accounting manager with
Innovest Group, Inc., and from May 1975 to July 1996, she was Assistant to the
Treasurer for Strawbridge & Clothier.
-PART II
Item 5. Market for the Registrant's Common
Stock and Related Stockholder Matters
Market Information
The Company's Common Stock is traded on the NASDAQ National Market
under the symbol: DEBS.
The following table sets forth quarterly high and low sales prices for
the two most recent fiscal years.
2000 High Low
- ---- ---- ---
First Quarter $14.0000 $10.0000
Second Quarter 22.3125 12.1250
Third Quarter 21.2500 13.7500
Fourth Quarter 24.5000 14.5000
1999 High Low
- ---- ---- ---
First Quarter $ 8.750 $ 5.875
Second Quarter 11.000 7.000
Third Quarter 10.000 6.750
Fourth Quarter 15.750 8.375
Holders
As of March 31, 2000, there were 247 record holders and approximately
1,442 beneficial holders of the Company's Common Stock.
Dividends
The Company paid regular quarterly dividends for each of the two most
recent fiscal years. During this time period, the per-share amount of these
dividends on Common Stock was $.05 for each such fiscal quarter. The Company
currently intends to follow a policy of regular quarterly cash dividends,
subject to earnings, capital requirements and the operating and financial
condition of the Company, among other factors.
-8-
Item 6. Selected Financial Data
The following selected financial data is derived from the consolidated
financial statements of the Company. The data should be read in conjunction with
the consolidated financial statements, related notes, and other financial
information included herein.
Deb Shops, Inc. and Subsidiaries
Consolidated Financial Highlights
Year Ended January 31,
----------------------------------------------------------------------
(in thousands, except per share data) 2000 1999 1998 1997 1996
- --------------------------------------------------------------------------------------------------------------------------------
Net Sales $270,032 $234,724 $205,066 $187,493 $176,733
Gross Margin 92,634 70,710 52,723 35,723 34,386
Operating Income (Loss) 35,566 21,312 8,142 (7,711) (7,910)
Net Income (Loss) 24,462 15,496 6,637 (3,855) (4,224)
Net Income (Loss) Per Common Share - Basic $ 1.84 $ 1.18 $ .51 $ (.30) $ (.33)
Net Income (Loss) Per Common Share - Diluted 1.81 1.17 .51 (.30) (.33)
Weighted Average Shares Outstanding - Basic 13,230 13,057 12,845 12,845 12,845
Weighted Average Shares Outstanding - Diluted 13,494 13,215 12,947 12,845 12,845
Total Assets 148,271 119,026 103,495 94,531 95,597
Capital Lease Obligations 1,099 1,392 1,631 1,827 1,986
Shareholders' Equity 114,818 92,157 78,027 74,014 80,493
Book Value Per Share at Year End 8.61 6.98 6.07 5.76 6.27
Cash Dividend Per Share of Common Stock .20 .20 .20 .20 .20
Not covered by report of Independent Auditors.
-9-
Item 7.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Forward-Looking Statements
Deb Shops, Inc. (the "Company") has made in this report, and from time
to time may otherwise make, "forward-looking statements" (as that term is
defined under federal securities laws) concerning the Company's future
operations, performance, profitability, revenues, expenses and financial
condition. This report includes, in particular, forward-looking statements
regarding store openings, closings and other matters. Such forward-looking
statements are subject to various risks and uncertainties. Actual results could
differ materially from those currently anticipated due to a number of factors.
Such factors may include, but are not limited to, the Company's ability to
improve margins, respond to changes in fashion, find suitable retail locations
and retain key management personnel. Such factors may also include other risks
and uncertainties detailed in the Company's other filings with the Securities
and Exchange Commission.
Overview
The Company operates women's specialty retail apparel stores offering
popularly priced, fashionable, coordinated sportswear, dresses, coats, lingerie,
accessories and shoes for junior and plus-sized women. The Company also operates
Tops `N Bottoms stores which sell moderately priced men's and women's apparel.
The Company also operates Atlantic Books, a chain of retail bookstores
consisting of 17 locations. Six of the stores, trading as Atlantic Book
Warehouse, carry a full line of bestsellers, new titles and magazines in
addition to remainder books. The remaining 11 stores, trading as Atlantic Book
Shops, are limited-selection book stores, generally open seasonally.
Results of the Company's operations for the fiscal years ended January
31, 2000 and 1999, are presented on a consolidated and divisional basis to
provide relevant information concerning the Company's retail apparel store
business, which is the Company's principal line of business, and the retail book
business.
Results of Operations - Consolidated
Consolidated net sales increased $35,308,000 (15.0%) to $270,032,000 in
fiscal 2000 from $234,724,000 in fiscal 1999, and increased $29,658,000 (14.5%)
in fiscal 1999 over fiscal 1998. The increases in fiscal 2000 and 1999 were
primarily the result of increased comparable store sales in the apparel division
and, to a lesser extent, increased sales in the book division.
The changes in net sales, cost of sales, selling and administrative
expenses and net income (loss) are more fully described in the sections on
"Apparel Business" and "Book Business" that follow.
-10-
Other income, principally interest, increased $613,000 (20.5%) to
$3,596,000 in fiscal 2000 from $2,984,000 in fiscal 1999, and increased $889,000
(42.4%) in fiscal 1999 over fiscal 1998. Other income is offset by losses on
disposition of fixed assets. The increases in fiscal 2000 and 1999 are the
result of earnings on higher cash balances and decreased write-offs from the
disposition of fixed assets.
Income before income taxes increased $14,866,000 (61.2%) to $39,162,000
in fiscal 2000 from $24,296,000 in fiscal 1999, and increased $14,059,000
(137.3%) in fiscal 1999 over fiscal 1998. The improvement in fiscal 2000 is
comprised of an increase in the operating results of the apparel business offset
by a decrease in the operating results of the book business. The improvement
from fiscal 1998 to fiscal 1999 is comprised of an increase in the operating
results of the apparel business and to a lesser extent by the increase in the
operating results of the book business. The effective income tax provision rate
was 37.5% for fiscal 2000, 36.2% for fiscal 1999 and 35.2% for fiscal 1998. The
effective income tax provision rates for fiscal 2000, fiscal 1999 and fiscal
1998 are greater than the statutory rate, primarily as the result of state
income tax expense.
Results of Operations - Apparel Business
Net sales increased $35,084,000 (16.1%) to $252,679,000 in fiscal 2000
from $217,595,000 in fiscal 1999, and increased $27,106,000 (14.2%) in fiscal
1999 over fiscal 1998. The increase in fiscal 2000 and fiscal 1999 resulted
primarily from increased customer acceptance of the Company's products, which is
attributed to the Company's continual refining of its focus on its younger
customers, in addition to continuing efforts to improve visual merchandising.
These improvements are evidenced by increases in comparable store sales of 13.0%
in fiscal 2000 and 10.1% in fiscal 1999. Management continues to adjust the
product mix, pricing and visual merchandising to further stimulate sales.
The following table sets forth certain store information:
Store Data(1)
Year Ended January 31,
-------------------------------------------
2000 1999 1998
---- ---- ----
Stores open at end of the year 285 273 269
Average number in operation during the year 276 278 277
Average net sales per store (in thousands) $916 $783 $688
Average operating income per store (in thousands) $128 $ 74 $ 27
Comparable store sales(2) - Percent change 13.0% 10.1% 12.6%
- -------------
(1) Includes Tops 'N Bottoms stores
(2) Comparable store sales includes stores opened for both periods, in the
current format and location. A store is added to the comparable store base
in its 13th month of operation.
-11-
Cost of sales, including buying and occupancy costs, increased
$12,707,000 (8.3%) to $164,892,000 in fiscal 2000 from $152,185,000 in fiscal
1999, and increased $9,981,000 (7.0%) in fiscal 1999 over fiscal 1998. The
fiscal 2000 and fiscal 1999 increases in cost of sales, including buying and
occupancy costs, are principally due to the increases in net sales partially
offset by increasing margins. As a percentage of net sales, these costs were
65.3% for fiscal 2000, 69.9% for fiscal 1999 and 74.7% for fiscal 1998. For
fiscal 2000 and fiscal 1999, the decreased cost of sales percentages are the
result of increased net sales and increased margins. Buying and occupancy costs
were 15.4%, 16.6% and 17.3% of net sales for the fiscal years 2000, 1999 and
1998, respectively. The percentage decrease in fiscal 2000 as compared to fiscal
1999, and in fiscal 1999 as compared to fiscal 1998, is principally a result of
increased sales during these years.
Selling and administrative expenses increased $7,092,000 (17.0%) to
$48,739,000 in fiscal 2000 from $41,647,000 in fiscal 1999, and increased
$4,483,000 (12.1%) in fiscal 1999 over fiscal 1998. The increases in these
expenses for fiscal 2000 and fiscal 1999 are mainly due to increased costs of
personnel and benefits, partially resulting from an increase in the number of
stores and an increase in average sales per store. As a percentage of net sales,
these expenses were 19.3%, 19.1% and 19.5% during fiscal 2000, 1999 and 1998,
respectively.
Depreciation expense increased $312,000 to $3,623,000 in fiscal 2000
from $3,311,000 in fiscal 1999, and decreased ($449,000) in fiscal 1999 over
fiscal 1998. The increase from fiscal 1999 to fiscal 2000 is principally
attributable to the accelerated write-off of leasehold improvements. The
decrease from fiscal 1998 to fiscal 1999 is principally attributable to an
increase in the amount of fully depreciated assets.
Operating income increased $14,973,000 (73.2%) to $35,425,000 in fiscal
2000 from $20,452,000 in fiscal 1999, and increased $13,091,000 (177.8%) in
fiscal 1999 over fiscal 1998. As a percentage of net sales, operating income was
14.0% in fiscal 2000, 9.4% in fiscal 1999 and 3.9% in fiscal 1998. In fiscal
2000 and fiscal 1999, the increases in operating income are primarily the result
of an increase in margins as discussed above.
-12-
Results of Operations - Book Business
Net sales increased $224,000 (1.3%) to $17,353,000 in fiscal 2000 from
$17,129,000 in fiscal 1999, and increased $2,552,000 (17.5%) in fiscal 1999 over
fiscal 1998. The increase in net sales in fiscal 2000 was impacted by increased
competition. The increase in net sales in fiscal 1999 resulted primarily from
the opening of new stores and the expansion of existing stores.
The following table sets forth certain store information:
Store Data
Year Ended January 31,
----------------------------------------
2000 1999 1998
---- ---- ----
Resort stores open at end of year 11 12 11
Average number in operation during the year 12 11 10
Average net sales per resort store (in thousands) $467 $458 $392
Warehouse stores open at end of year 6 6 6
Average number in operation during the year 6 6 5
Average net sales per warehouse store (in thousands) $1,958 $2,015 $2,132
Comparable store sales1 - Percent change Flat (1.5%) 1.3%
Cost of sales, including buying and occupancy costs, increased $676,000
(5.6%) to $12,685,000 in fiscal 2000 from $12,009,000 in fiscal 1999, and
increased $1,690,000 (16.4%) in fiscal 1999 over fiscal 1998. The fiscal 2000
increase in cost of sales, including buying and occupancy costs, was principally
due to decreased margins partially offset by increased sales during the period.
The fiscal 1999 increase in cost of sales, including buying and occupancy costs,
was principally due to the increase in net sales during these periods. As a
percentage of net sales, these costs were 73.1%, 70.1% and 70.8% for fiscal
2000, 1999 and 1998, respectively. For fiscal 2000 the increased cost of sales,
including buying and occupancy cost, percentage resulted from decreased margins
as a result of increased competition and changing product mix. For fiscal 1999
the decreased cost of sales, including buying and occupancy costs, percentage
resulted from increased sales and improved margins. Buying and occupancy costs
were 15.3%, 14.5% and 14.6% of net sales during fiscal 2000, 1999 and 1998,
respectively.
Selling and administrative expenses increased $252,000 (6.4%) to
$4,188,000 in fiscal 2000 from $3,936,000 in fiscal 1999, and increased $755,000
(23.7%) in fiscal 1999 over fiscal 1998. The fiscal 2000 increases in selling
and administrative expenses were principally due to the increased cost of
personnel and benefits. The fiscal 1999 increases in selling and administrative
expenses were principally due to the increase in the number of stores. As a
percentage of net sales, these expenses were 24.1%, 23.0% and
- --------------------------------------
1 Comparable store sales include stores opened for both periods in the current
format and location. A store is added to the comparable store base in its 13th
month of operation.
-13-
21.8% for fiscal 2000, 1999 and 1998, respectively. For fiscal 2000 and fiscal
1999, the increased selling and administrative percentage resulted from
increased personnel and warehousing costs partially resulting from an increase
in the number of stores, the expansion of stores and increased sales volume.
Depreciation and amortization expense increased $15,000 to $458,000 in
fiscal 2000 from $443,000 in fiscal 1999 and increased $28,000 in fiscal 1999
over fiscal 1998. The increases are principally attributable to the opening of
new stores and expansion of existing stores.
Operating income decreased ($719,000) (97.1%) to $22,000 in fiscal 2000
from $741,000 in fiscal 1999, and increased $79,000 (12.0%) in fiscal 1999 from
fiscal 1998. In fiscal 2000, the decrease in operating income was primarily the
result of decreasing margins caused by increased competition, changing product
mix and increased expenses due to new store openings and expansions. In fiscal
1999 the increase in operating income was primarily the result of increased
sales and margins partially offset by increased selling and administrative
expenses. As a percentage of net sales, operating income was 0.1%, 4.3% and 4.5%
in fiscal 2000, 1999 and 1998, respectively.
Liquidity and Capital Resources - Consolidated
As of January 31, 2000, the Company had cash and cash equivalents of
$90,307,000 compared to $70,228,000 as of January 31, 1999, and $57,913,000 as
of January 31, 1998. These funds are invested principally in money market mutual
funds and short-term municipal bonds, all of which are fully insured or
guaranteed by letters-of-credit. The Company does not invest for trading
purposes. Accordingly, the Company does not believe it has significant exposure
to market risk with respect to its investments.
During the past three fiscal years, the Company internally funded all
of its operating needs, including capital expenditures for the opening of new
apparel and book stores and the remodeling of existing apparel and book stores.
Total cash provided by operating activities, for fiscal years ended January 31,
2000, 1999 and 1998, was $29,693,000, $17,831,000 and $17,904,000, respectively.
For fiscal 2000, cash provided by operating activities was the result of the
fiscal 2000 net income increased by noncash charges for depreciation and
amortization and changes in operating assets and liabilities, including an
increase in trade accounts payable, accrued expenses and income taxes payable
offset by increases in merchandise inventories and prepaid expenses. For fiscal
1999, cash provided by operating activities was the result of the fiscal 1999
net income increased by noncash charges for depreciation and amortization and
changes in operating assets and liabilities, including an increase in accrued
expenses and income taxes payable offset by an increase in merchandise
inventories. The inventory turnover rate for the apparel business was
approximately 3.6, 3.4 and 3.1 times for the fiscal years ended January 31,
2000, 1999 and 1998, respectively. The inventory turnover rate for the book
business was approximately 1.3, 1.5 and 1.3 times for the fiscal years ended
January 31, 2000, 1999 and 1998, respectively.
-14-
Net cash used in investing activities was $7,520,000, $3,910,000 and
$2,023,000 for the fiscal years ended January 31, 2000, 1999 and 1998,
respectively. During these fiscal years, these funds were principally used in
the purchase of property, plant and equipment additions to open new apparel and
book stores and to remodel and/or expand existing stores.
Net cash used in financing activities was $2,094,000, $1,606,000 and
$2,819,000 for the fiscal years ended January 31, 2000, 1999 and 1998,
respectively. For fiscal 2000 and fiscal 1999, these funds were principally used
for the payment of dividends on preferred and common stock, partially offset by
the proceeds from the exercise of stock options. During fiscal 1998, these funds
were principally used for the payment of dividends on preferred and common
stock.
In February 1998, the Company purchased nine stores from Petrie Retail,
Inc. and subsidiaries, for $720,000. These locations were made available as a
result of Petrie's ongoing bankruptcy proceedings. The stores are located in
regional malls and were opened in the first quarter of fiscal 1999.
The Company's present intention is to expand the book store business,
principally by opening additional warehouse stores. Opening a warehouse
bookstore is capital-intensive because of the leasehold improvements and initial
inventory required. The Company anticipates that the funds to finance this
expansion will come from cash and cash equivalents on hand. During fiscal 2000,
the Company opened one warehouse store closed one warehouse store and one resort
store.
The Company believes that internally generated funds will be sufficient
to meet its anticipated capital expenditures, none of which are material, and
current operating needs.
Year 2000 Readiness Disclosure
The Company has not experienced any material Year 2000 compliance
problems to date and, to the Company's knowledge, none of its significant
vendors or service providers have suffered material problems related to Year
2000 compliance that the Company believes are likely to materially adversely
affect the Company. The Company continues to monitor its Year 2000 program for
unexpected issues that could possibly still develop. The Year 2000 program has
many aspects and potential consequences, some of which are not reasonably
foreseeable, and there can be no assurance that unforeseen consequences will not
arise.
-15-
Seasonal Nature of Operations
Approximately 53% and 62% of the Company's net sales and net income,
respectively, for fiscal 2000 occurred during the last six months, as compared
to 54% and 73%, respectively, in the prior fiscal year. The last six months
include the Back-to-School and Christmas selling seasons. See "Quarterly
Financial Information (Unaudited)," and the preceding discussion on "Results of
Operations."
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
The required information, with respect to Market Risk, is contained in
Item 7 in the section on Liquidity and Capital Resources.
-16-
Item 8. Financial Statements and Supplementary Data
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
To the Board of Directors
of Deb Shops, Inc.
We have audited the accompanying consolidated balance sheets of Deb Shops, Inc.
and subsidiaries as of January 31, 2000 and 1999, and the related consolidated
statements of operations, shareholders' equity, and cash flows for each of the
two years in the period ended January 31, 2000. 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. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the 2000 and 1999 consolidated financial statements referred to
above present fairly, in all material respects, the consolidated financial
position of Deb Shops, Inc. and subsidiaries as of January 31, 2000 and 1999,
and the consolidated results of their operations and their cash flows for each
of the two years in the period ended January 31, 2000, in conformity with
accounting principles generally accepted in the United States.
ERNST & YOUNG LLP
Philadelphia, Pennsylvania
March 7, 2000
-17-
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors
of Deb Shops, Inc.:
We have audited the accompanying consolidated statements of operations,
shareholders' equity and cash flows of Deb Shops, Inc. (a Pennsylvania
corporation) and subsidiaries for the year ended January 31, 1998. 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 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, the consolidated financial statements referred to above present
fairly, in all material respects, the results of operations and cash flows of
Deb Shops, Inc. and subsidiaries for the year ended January 31, 1998, in
conformity with generally accepted accounting principles.
ARTHUR ANDERSEN, LLP
Philadelphia, Pennsylvania
February 27, 1998
-18-
DEB SHOPS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended January 31,
------------------------------------------------------------------------
2000 1999 1998
- -----------------------------------------------------------------------------------------------------------------------------
Net Sales $270,031,603 $234,723,932 $205,066,028
------------- ------------- -------------
Costs and Expenses
Cost of sales, including buying
and occupancy costs 177,397,452 164,014,391 152,343,401
Selling and administrative 52,927,297 45,583,150 40,345,285
Depreciation and amortization 4,141,263 3,814,034 4,235,537
------------- ------------- -------------
234,466,012 213,411,575 196,924,223
------------- ------------- -------------
Operating Income 35,565,591 21,312,357 8,141,805
Other Income, Principally Interest 3,596,343 2,983,782 2,094,987
------------- ------------- -------------
Income Before Income Taxes 39,161,934 24,296,139 10,236,792
Income Tax Provision 14,700,000 8,800,000 3,600,000
------------- ------------- -------------
Net Income $ 24,461,934 $ 15,496,139 $ 6,636,792
============= ============= =============
Net Income Available Per Common Share
Basic $ 1.84 $ 1.18 $ .51
============= ============= =============
Diluted $ 1.81 $ 1.17 $ .51
============= ============= =============
Weighted Average Number of
Common Shares Outstanding
Basic 13,230,490 13,057,108 12,844,680
============= ============= =============
Diluted 13,494,006 13,214,869 12,947,341
============= ============= =============
See notes to consolidated financial statements.
-19-
DEB SHOPS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
January 31,
---------------------------------------------
2000 1999
- -----------------------------------------------------------------------------------------------------------------------------
ASSETS
Current Assets
Cash and cash equivalents $ 90,307,234 $ 70,228,227
Merchandise inventories 26,550,433 23,934,155
Prepaid expenses and other 4,219,237 2,083,285
Deferred income taxes 2,234,691 1,706,050
------------ -----------
Total current assets 123,311,595 97,951,717
------------ -----------
Property, Plant and Equipment - at cost
Land 150,000 150,000
Buildings 4,347,697 4,338,863
Leasehold improvements 33,312,055 29,416,173
Furniture and equipment 17,521,878 16,649,890
------------ -----------
55,331,630 50,554,926
Less accumulated depreciation and amortization 37,608,972 36,202,184
------------ -----------
17,722,658 14,352,742
------------ -----------
Other Assets
Goodwill, net of accumulated amortization of $928,356
and $714,120, respectively 2,290,049 2,504,285
Deferred income taxes 3,234,966 2,505,290
Other 1,712,223 1,712,223
------------ -----------
Total other assets 7,237,238 6,721,798
------------ -----------
$148,271,491 $119,026,257
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Trade accounts payable $ 17,495,977 $ 16,090,608
Accrued expenses 10,932,950 6,658,918
Income taxes payable 3,925,540 2,727,892
------------ ------------
Total current liabilities 32,354,467 25,477,418
------------ ------------
Capital Lease Obligation 1,099,299 1,392,255
------------ ------------
Shareholders' Equity
Series A Preferred stock, par value $1.00 per share:
Authorized - 5,000,000 shares
Issued and outstanding - 460 shares,
Liquidation value $460,000 460 460
Common stock, par value $.01 per share:
Authorized - 50,000,000 shares
Issued shares - 2000: 15,688,290; 1999: 15,688,290 156,883 156,883
Additional paid-in capital 5,864,790 5,541,944
Retained earnings 123,390,856 101,844,410
----------- -----------
129,412,989 107,543,697
Less common treasury shares, at cost -
2000: 2,353,390; 1999: 2,489,410 14,595,264 15,387,113
---------- ----------
114,817,725 92,156,584
----------- ----------
$148,271,491 $119,026,257
============ ============
See notes to consolidated financial statements.
-20-
DEB SHOPS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Additional
Preferred Common Paid-In Retained Treasury
Stock Stock Capital Earnings Stock
----------------------------------------------------------------------------
Balance January 31, 1997 $460 $156,883 $5,541,944 $85,891,376 ($17,576,423)
Net income 6,636,792
Dividends on preferred stock ($120 per share) (55,200)
Dividends on common stock ($.20 per share) (2,568,936)
----------------------------------------------------------------------------
Balance January 31, 1998 460 156,883 5,541,944 89,904,032 (17,576,423)
Net income 15,496,139
Dividends on preferred stock ($120 per share) (55,200)
Dividends on common stock ($.20 per share) (2,622,401)
Stock Options exercised (878,160) 2,189,310
----------------------------------------------------------------------------
Balance January 31, 1999 460 156,883 5,541,944 101,844,410 (15,387,113)
Net income 24,461,934
Dividends on preferred stock ($120 per share) (55,200)
Dividends on common stock ($.20 per share) (2,651,029)
Stock options exercised (209,259) 791,849
Tax benefit from exercise of stock options 322,846
----------------------------------------------------------------------------
Balance January 31, 2000 $460 $156,883 $5,864,790 $123,390,856 ($14,595,264)
==== ========= =========== ============= ============
See notes to consolidated financial statements.
-21-
DEB SHOPS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended January 31,
------------------------------------------------------------
2000 1999 1998
- --------------------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net income $24,461,934 $15,496,139 $ 6,636,792
Adjustments to reconcile net income to
Net cash provided by operating activities:
Depreciation and amortization 4,141,263 3,814,034 4,235,537
Deferred income tax benefit (1,258,317) (900,000) (700,000)
Loss on retirement of property, plant and
Equipment 222,912 201,076 516,844
Changes in operating assets and liabilities,:
(Increase) decrease in merchandise inventories (2,616,278) (1,826,927) 799,844
(Increase) decrease in prepaid expenses & other (2,135,952) ( 594,537) 1,268,560
Increase (decrease) in trade accounts payable 1,405,369 ( 7,688) 2,306,016
Increase in accrued expenses 4,274,032 779,367 982,142
Increase in income taxes payable 1,197,648 869,513 1,858,379
------------ ------------ -----------
Net cash provided by operating activities 29,692,611 17,830,977 17,904,114
------------ ------------ -----------
Cash flows from investing activities:
Increase in other assets --- ( 544,709) ---
Purchases of property, plant and equipment ( 7,519,855) ( 3,365,071) (2,022,860)
------------ ------------ -----------
Net cash used in investing activities ( 7,519,855) ( 3,909,780) (2,022,860)
------------ ------------ -----------
Cash flows from financing activities:
Preferred stock cash dividends paid (55,200) (55,200) (55,200)
Common stock cash dividends paid (2,651,029) (2,622,401) (2,568,936)
Proceeds from exercise of stock options 905,436 1,311,150 ---
Principal payments under capital lease obligations (292,956) (239,208) (195,324)
------------ ------------ -----------
Net cash used in financing activities (2,093,749) (1,605,659) (2,819,460)
------------ ------------ -----------
Increase in cash and cash equivalents 20,079,007 12,315,538 13,061,794
Cash and cash equivalents at beginning of year 70,228,227 57,912,689 44,850,895
----------- ---------- -----------
Cash and cash equivalents at end of year $90,307,234 $70,228,227 $57,912,689
=========== =========== ===========
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest on capital lease obligation $ 257,044 $ 311,792 $ 354,676
Income taxes, net $ 14,171,761 $ 8,937,812 $ 1,151,476
See notes to consolidated financial statements.
-22-
DEB SHOPS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- - A - SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
Consolidation: The consolidated financial statements of Deb Shops, Inc. ("the
Company") include the accounts of the Company and its subsidiaries, after
elimination of all inter-company transactions and accounts.
Background: The Company retails popularly priced fashion apparel for junior and
plus-sized females and males through 285 stores. The Company's stores are
located in regional malls and strip shopping centers principally located in the
east and mid-western regions of the country. The Company also operates a chain
of 17 bookstores located in Delaware, Maryland, Minnesota, New Jersey and
Pennsylvania.
Management Estimates: The preparation of the consolidated financial statements
in conformity with generally accepted accounting principles requires management
to make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Revenue Recognition: Revenues from merchandise sales are net of returns and
allowances and exclude sales tax.
Inventories: All apparel merchandise inventories are stated at the lower of cost
(first-in, first-out method) or market, as determined by the retail inventory
method. Book inventories are stated at the lower of cost (first-in, first-out
method) or market.
Property, Plant and Equipment: The provisions for depreciation and amortization
are computed using the straight-line method based upon estimated useful lives of
the assets. Leasehold improvements are amortized over the initial term of the
lease. Furniture and equipment is depreciated over seven years or the lease
term, whichever is less. Gain or loss on disposition of property, plant and
equipment is included in other income. Depreciation expense, which includes
depreciation on a capitalized lease asset, for the years ended January 31, 2000,
1999 and 1998 was $3,927,000, $3,600,000 and $4,021,000, respectively.
Cost in Excess of Net Assets Acquired (Goodwill): The Company amortizes costs in
excess of fair market value of net assets of businesses acquired using the
straight-line method over a period of 15 years. The Company evaluates whether
changes have occurred that would require revision of the remaining estimated
useful life of goodwill or render the goodwill not recoverable.
-23-
Statements of Cash Flows: The Company considers all highly liquid investments
with an original maturity of less than three months to be cash equivalents.
Included in cash and cash equivalents at January 31, 2000 is $83,296,000 of
investments in money market mutual funds and short-term municipal bonds. They
are carried at cost, which approximates market.
- - B - EARNINGS PER SHARE
The table below sets forth the reconciliation of the numerators and
denominators of the basic and diluted net income per common share computations.
Year Ended January 31,
--------------------------------------------------------------
2000 1999 1998
--------------------------------------------------------------
Net income $24,461,934 $15,496,139 $6,636,792
Dividends on preferred stock (55,200) (55,200) (55,200)
----------- ----------- -----------
Income available to
Common shareholders $24,406,734 $15,440,939 $6,581,592
=========== =========== ============
Basic weighted average
Number of common
Shares outstanding 13,230,490 13,057,108 12,844,680
Effect of dilutive stock options 263,516 157,761 102,661
----------- ----------- -----------
Diluted weighted average
number of common
Shares outstanding 13,494,006 13,214,869 12,947,341
=========== =========== ============
As of January 31, 2000 and 1999, all common stock options were included
in the computation of diluted earnings per common share. As of January 31, 1998,
165,000 common stock options were outstanding but were not included in the
computation of diluted net income per common share because the exercise price
was greater than the average market price of the Company's common shares during
the year.
-24-
- - C - INCOME TAXES
Income tax provision consists of the following components:
Year Ended January 31,
------------------------------------------------------
2000 1999 1998
- --------------------------------------------------------------------------------------------------
Current:
Federal.................................... $13,500,000 $8,700,000 $4,050,000
2,400,000 1,000,000 250,000
State...................................... ----------- ----------- -----------
15,900,000 9,700,000 4,300,000
Deferred: ----------- ----------- -----------
Federal.................................... (1,000,000) (350,000) (650,000)
(200,000) (550,000) (50,000)
State...................................... ----------- ----------- -----------
(1,200,000) (900,000) (700,000)
----------- ----------- -----------
$14,700,000 $8,800,000 $3,600,000
=========== =========== ===========
A reconciliation of the Company's effective income tax rate with the
statutory federal rate follows:
Year Ended January 31,
--------------------------------------------------------
2000 1999 1998
- -----------------------------------------------------------------------------------------------------------
Tax provision at statutory rate $13,721,000 $8,504,000 $3,481,000
State income taxes, net of federal tax 1,464,000 293,000 132,000
Other (485,000) 3,000 (13,000)
------------ ----------- -----------
$14,700,000 $8,800,000 $3,600,000
============ =========== ===========
Deferred income taxes reflect the future tax consequences of
differences between the tax bases of assets and liabilities and their financial
reporting amounts. The components of deferred tax assets and liabilities are as
follows:
January 31,
-------------------------------------------
2000 1999
- -------------------------------------------------------------------------------------------------
Deferred Tax Assets
Uniform cost capitalization $ 654,000 $ 632,000
Capital lease obligation 293,000 292,000
Deferred rent 347,000 286,000
Depreciation 2,941,000 2,213,000
Accrued expenses 1,485,000 1,003,000
----------- -----------
5,720,000 4,426,000
Deferred Tax Liabilities
Prepaid expenses (250,000) (215,000)
------------ ------------
$ 5,470,000 $ 4,211,000
============ ===========
-25-
- - D - LEASES
The Company leases all of its retail apparel stores and all but one of
its book stores for periods ranging from one to 25 years, including renewal
options. In most instances, the Company pays real estate taxes, insurance and
maintenance costs on the leased properties and contingent rentals based upon a
percentage of sales. The warehouse and office building occupied by the Company
is leased from a partnership whose partners include three of the Company's
directors including the President and Executive Vice President. The warehouse
bookstore in Montgomeryville, Pennsylvania is leased from a partnership whose
partners are Mark Simon, an employee and officer of the book subsidiary, and
Martin Simon, a consultant to the book subsidiary.
Under the terms of the warehouse and office building lease, the Company
is required to pay annual rentals as reflected under "Capital Lease" in the
lease table below. The lease term is 20 years and requires the Company to pay
all real estate taxes, utilities and maintenance costs. The warehouse and office
building lease has a net book value of $298,000 at January 31, 2000 and is
accounted for as a capital lease. Asset amounts are included in buildings and
improvements and are depreciated over 20 years. The lease was originally
scheduled to expire on June 14, 2002, however, the Company has entered into an
amendment which extends the lease for a period of five years through June 14,
2007. This extension will be accounted for as an operating lease upon the
expiration of the initial term of the existing lease.
Interest expense related to the capital lease obligation amounted to
$257,000, $312,000 and $355,000 for the years ended January 31, 2000, 1999 and
1998, respectively, and is included in selling and administrative expenses.
In February 1998, the Company purchased nine stores from Petrie Retail,
Inc. and subsidiaries for $720,000. These locations were made available as a
result of Petrie's ongoing bankruptcy proceedings. These stores are located in
regional malls and opened in the first quarter of fiscal 1999. The future
minimum rental commitment for these stores was approximately $7,400,000 at the
date of purchase.
-26-
Future minimum rental commitments for all noncancelable leases at
January 31, 2000 are as follows:
Capital Operating
Lease Leases
- -----------------------------------------------------------------------------
Fiscal Year Ending January 31,
2001.................................... $550,000 $ 18,999,000
2002.................................... 550,000 16,673,000
2003.................................... 230,000 13,947,000
2004.................................... --- 12,106,000
2005.................................... --- 9,310,000
Thereafter.............................. --- 30,928,000
--------- ------------
Total minimum rental commitments........ 1,330,000 $101,963,000
============
Imputed interest........................ ( 230,701)
----------
Present value of net minimum
lease payments........................ $1,099,299
==========
Total rental expense under operating leases amounted to $21,624,000,
$19,824,000 and $17,450,000 in fiscal 2000, 1999 and 1998, respectively. Such
amounts include contingent rentals based upon a percentage of sales of
$2,729,000, $2,992,000 and $2,026,000 in fiscal 2000, 1999 and 1998,
respectively.
-27-
- - E- STOCK OPTION PLAN
Effective October 1995, the Company adopted an Incentive Stock Option
Plan ("the Plan"). A Stock Option Committee designated by the Board of Directors
administers the Plan. Under the Plan, a maximum of 2,000,000 shares of the
Company's common stock, par value $.01 per share, may be issued by the Company
and sold to selected key employees on the basis of contribution to the
operations of the Company. The price payable for the shares of common stock
under each stock option will be fixed by the Committee at the time of grant, but
will be no less than 100% of the fair market value of the Company's common stock
at the time the stock option is granted. Options are exercisable commencing one
year after the date of grant, subject to such vesting requirements as the
Committee may specify. The granted options expire through January 2004. There
were 1,150,000 shares reserved for future grant under the plan.
Weighted
Average
Shares Exercise Price
------ -------------
Outstanding, January 31, 1997 .............................. 390,000 $3.27
Granted during period (at $6.00 per share) ........ 165,000 6.00
--------- -----
Outstanding, January 31, 1998 .............................. 555,000 4.08
Granted during period (at $7.00 per share) ........ 305,000 7.00
Canceled during period ............................ (10,000) (6.00)
Exercised during period ........................... (354,200) (3.70)
--------- -----
Outstanding, January 31, 1999 .............................. 495,800 6.11
Exercised during period ........................... (140,800) (4.71)
--------- -----
Outstanding, January 31, 2000 .............................. 355,000 $6.67
========= =====
Outstanding Options Exercisable Options
Weighted
Average Weighted Weighted
Remaining Average Average
Exercise Contractual Exercise Exercise
Price Range Number Life Price Number Price
----------- ------ ---------------- ------------- ------ ---------
$3.25 25,000 1.0 years $3.25 25,000 $3.25
$6.00 - $7.00 330,000 4.0 years $6.92 100,000 $6.50
-28-
The Company applies Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees," and the related interpretations in
accounting for its stock option plan. In 1995, the FASB issued SFAS No. 123,
"Accounting for Stock-Based Compensation." SFAS No. 123 established a fair value
based method of accounting for stock-based compensation plans.
Option valuation models use highly subjective assumptions to determine
the fair value of traded options with no vesting or trading restrictions.
Because options granted under the Company's Stock Option Plan have vesting
requirements and cannot be traded, and because changes in assumptions can
materially affect the fair value estimate, in management's opinion, the existing
valuation models do not necessarily provide a reliable measure of the fair value
of its employee stock options.
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option-pricing model. The model uses the following
assumptions: risk-free interest rates ranging from 4.2% to 6.0%, a volatility
factor of 41.7% to 52.8%, expected dividend yield of 2.9% to 6.2%, and an
expected life of four years for the options.
For purposes of pro forma disclosure, the estimated fair value of the
options ($2.34 and $2.41 for the 1999 and 1998 grants, respectively) is
amortized to expense over the options assumed vesting period. SFAS No. 123
requires only that the income effects of options granted beginning in fiscal
1996 be included in the pro forma disclosure. Since a portion of the Company's
stock options vest over several years and additional options may be granted each
year, the pro forma effect on net income reported below is not representative of
the effect of fair value stock option expense on future years' pro forma net
income.
Had the Company recognized compensation cost for its stock option plan
consistent with the provisions of SFAS No. 123, the Company's net income and
basic and diluted net income per common share would have been adjusted to the
following pro forma amounts:
Year Ended January 31,
---------------------
2000 1999 1998
---- ---- ----
Pro forma net income $24,123,119 $15,271,556 $6,535,730
Pro forma basic net income
per common share $ 1.82 $ 1.17 $ .50
Pro forma diluted net income
per common share $ 1.79 $ 1.16 $ .50
-29-
- - F - RESTRICTED STOCK INCENTIVE PLAN
Effective June 1, 1990, the Company adopted a Restricted Stock
Incentive Plan (RSIP) administered by the Company's Stock Option Committee.
Under the RSIP, a maximum 300,000 shares of the Company's Common Stock may be
awarded as bonuses to key employees. No more than 100,000 shares may be issued
under this plan during any calendar year. Upon grant, the shares shall be
registered in the name of the recipient who shall have the right to vote the
shares and receive cash dividends. The right to receive the certificates and
retain the shares does not vest until the grantee has remained in the employ of
the Company for a period determined by the Stock Option Committee. At the time
of the vesting, a portion of the shares may be withheld to cover withholding
taxes due on the compensation income resulting from the grant.
In fiscal 2000, 1999 and 1998, no shares were granted under the RSIP.
At January 31, 2000, there were 206,000 shares reserved for future grant. The
RSIP expires May 31, 2000.
- - G- COMMITMENTS AND CONTINGENCIES
The Company has an unsecured line of credit in the amount of
$20,000,000 at January 31, 2000. Of this amount, $2,400,000 was outstanding as
letters of credit for the purchase of inventory.
The Company entered into an employment agreement with a key employee
during fiscal 1996, which was modified and extended in fiscal 1999 and provides
for a base salary plus a bonus of 4% of the improvement in the operating results
of the apparel business. The bonus is applicable through fiscal year 2002. The
Company also entered into a bonus agreement with a key employee during fiscal
1996 which provides for a bonus of 2% of the improvement in operating results of
the apparel business. No payment was required in fiscal 1997 under either
agreement. In fiscal 1998, 1999 and 2000, bonuses of $450,000, in the aggregate,
for each year, were earned under the agreements. The amount is included in
accrued expenses on the accompanying consolidated balance sheet as of January
31, 2000 and 1999.
The Company is subject to legal proceedings, employment issues and
claims that arise in the ordinary course of its business. In the opinion of
management, after consultation with outside legal counsel, the ultimate
disposition of such proceedings will not have a materially adverse effect on the
Company's consolidated financial position or results of operations.
-30-
Deb Shops, Inc.
Quarterly Financial Information
(Unaudited)
(amounts in thousands except per share data) First Second Third Fourth
Quarter Quarter Quarter Quarter
- -------------------------------------------------------------------------------------------------------------------
Net sales
2000 $59,517 $66,710 $67,725 $76,079
1999 $49,759 $58,488 $60,007 $66,470
Cost of sales, including buying
and occupancy costs
2000 $43,712 $42,109 $47,884 $43,692
1999 $38,374 $41,034 $44,350 $40,256
Net income
2000 $ 2,212 $ 7,074 $ 4,080 $11,095
1999 $ 402 $ 3,814 $ 2,491 $ 8,789
Basic net income per share
2000 $ .17 $ .53 $ .31 $ .84
1999 $ .03 $ .29 $ .19 $ .67
Diluted net income per share
2000 $ .16 $ .52 $ .30 $ .82
1999 $ .03 $ .29 $ .19 $ .66
Cash dividends per common share
2000 $ .05 $ .05 $ .05 $ .05
1999 $ .05 $ .05 $ .05 $ .05
-31-
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None, except for change in accountants previously reported on Form 8-K
filed on June 12, 1998.
PART III
Item 10. Directors and Executive Officers of the Registrant
The required information with respect to each director is contained in
the Company's Definitive Proxy Statement in connection with its Annual Meeting
to be held on May 17, 2000 which is incorporated in this Annual Report on Form
10-K by reference.
The required information with respect to each executive officer is
contained at the end of Part I of this Annual Report on Form 10-K.
Item 11. Executive Compensation
The required information with respect to executive compensation is
contained in the Company's Definitive Proxy Statement in connection with its
Annual Meeting to be held on May 17, 2000, which is incorporated in this Annual
Report on Form 10-K by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The required information with respect to security ownership of certain
beneficial owners and management is contained in the Company's Definitive Proxy
Statement in connection with its Annual Meeting to be held on May 17, 2000,
which is incorporated in this Annual Report on Form 10-K by reference.
-32-
Item 13. Certain Relationships and Related Transactions
The required information with respect to certain relationships and
related transactions is contained in the Company's Definitive Proxy Statement in
connection with its Annual Meeting to be held on May 17, 2000, which is
incorporated in this Annual Report on Form 10-K by reference.
PART IV
Item 14. Exhibits, Financial Statement Schedules
and Reports on Form 8-K
Financial Statements and Financial Statement Schedules
Document Page(s)
-------- -------
Reports of independent auditors............................. 17 - 18
Consolidated statements of operations for
the years ended January 31, 2000, 1999 and 1998............. 19
Consolidated balance sheets as of January 31,
2000 and 1999............................................... 20
Consolidated statements of shareholders'
equity for the years ended January 31, 2000,
1999 and 1998............................................... 21
Consolidated statements of cash flows for the
years ended January 31, 2000, 1999 and 1998................. 22
Notes to consolidated financial statements.................. 23 - 30
Selected quarterly financial information (unaudited)
for the years ended January 31, 2000 and 1999............... 31
All schedules are omitted because they are not applicable or not
required, or because the required information is included in the consolidated
financial statements or notes thereto.
-33-
EXHIBITS
The following exhibits have been filed with the Securities and Exchange
Commission pursuant to the requirements of the Acts administered by the
Commission. Each such exhibit is identified by the reference following the
listing of such exhibit, and each is incorporated herein by such reference.
Exhibits identified with an asterisk below comprise executive
compensation plans and arrangements.
Exhibit No. Description of Document
- ----------- -----------------------
3-1 Restated Articles of Incorporation of the Company, as amended
through May 29, 1984 (1992 Form 10-K, Exhibit 3-1)
3-2 By-Laws of the Company, as amended through July 19, 1990
(1993 Form 10-K, Exhibit 3-2)
4-1 * Deb Shops, Inc. Restated Savings and Protection Plan
(1992 Form 10-K, Exhibit 4-1)
4-1.1 * Amendment No. I to Deb Shops, Inc. Restated Savings and
Protection Plan (1992 Form 10-K, Exhibit 4-1.1)
4-1.2 * Amendment No. II to Deb Shops, Inc. Restated Savings and
Protection Plan (1992 Form 10-K, Exhibit 4-1.2)
4-1.3 * Amendment No. III to Deb Shops, Inc. Restated Savings and
Protection Plan (1992 Form 10-K, Exhibit 4-1.3)
4-1.4 * Amendment No. IV to Deb Shops, Inc. Restated Savings and
Protection Plan (1992 Form 10-K, Exhibit 4-1.4)
4-1.5 * Amendment No. V to Deb Shops, Inc. Restated Savings and
Protection Plan (1994 Form 10-K Exhibit 4-1.5)
4-1.6 * Amendment No. VI to Deb Shops, Inc. Restated Savings and
Protection Plan (1994 Form 10-K, Exhibit 4-1.6)
4-1.7 * Amendment No. VII to Deb Shops, Inc. Restated Savings and
Protection Plan. (1997 Form 10-K Exhibit 4-1.7)
4-2 * Employee Savings and Protection Trust Agreement
(Registration No. 2-99124, Exhibit 4-5)
-34-
Exhibit No. Description of Document
- ----------- -----------------------
4-2.1 * Amendment No. I to Employee Savings and Protection Trust
Agreement (Form 10-Q for quarter ended July 31, 1992)
10-1 Lease Agreement for property located at 9401 Blue Grass Road,
Philadelphia, Pennsylvania, 19114 (Registration No. 2-82222,
Exhibit 10-1)
10-1.1 Amendment of Lease Agreement dated January 3, 1999 for
property Located at 9401 Blue Grass Road, Philadelphia,
Pennsylvania, 19114 (1999 Form 10-K, Exhibit 10-1.1)
10-14.1 * Insurance Policy for Marvin Rounick and Judy Rounick (1993
Form 10-K, Exhibit 10-14.1)
10-14.2 * Split Dollar Insurance Agreement dated July 31, 1987 between
the Company and Jack A. Rounick and Stuart Savett, Trustees
under the Rounick Family Irrevocable Insurance Trust dated
October 27, 1986 (1993 Form 10-K, Exhibit 10-14.2)
10-14.3 * Collateral Assignment dated July 31, 1987 from Jack A.
Rounick and Stuart Savett, Trustees under the Rounick Family
Irrevocable Insurance Trust dated October 27, 1986, as
assignor, and the Company, as assignee (1993 Form 10-K,
Exhibit 10-14.3)
10-14.4 * Agreement of Settlement and General Release dated May 5,
1998 Between Jack A. Rounick and Stuart Savett, Trustees under
the Rounick Family Irrevocable Insurance Trust dated October
27, 1986 and the Manufacturers Life Insurance Company (Form
10-Q for the quarter ended October 31, 1998)
10-14.5 * Amended and Restated Split Dollar Insurance Agreement dated
July 31, 1998 between the Company and Jack A. Rounick and
Stuart Savett, Trustees under the Rounick Family Irrevocable
Insurance Trust dated October 27, 1986 (Form 10-Q for the
quarter ended October 31, 1998)
10-14.6 * Amended and Restated Collateral Assignment dated July 31,
1998 from Jack A. Rounick and Stuart Savett, Trustees under
the Rounick Family Irrevocable Insurance Trust dated October
27, 1986 (Form 10-Q for the quarter ended October 31, 1998)
10-15.1 * Life Insurance Policy for Warren Weiner and Penny Weiner
(1993 Form 10-K, Exhibit 10-15.1)
-35-
Exhibit No. Description of Document
- ----------- -----------------------
10-15.2 * Split Dollar Insurance Agreement dated July 31, 1987 between
the Company and Barry H. Frank and Robert Shein, Trustees
under the Weiner Family Irrevocable Insurance Trust dated
October 27, 1986 (1993 Form 10-K, Exhibit 10-15.2)
10-15.3 * Collateral Assignment dated July 31, 1987 from Barry H.
Frank and Robert Shein, Trustees under the Weiner Family
Irrevocable Insurance Trust dated October 27, 1986, as
assignor, and the Company, as assignee (1993 Form 10-K,
Exhibit 10-15.3)
10-15.4 * Agreement of Settlement and General Release dated May 5,
1998 between Barry H. Frank and Robert Shein, Trustees under
the Weiner Family Irrevocable Insurance Trust dated October
27, 1986 and the Manufacturers Life Insurance Company (Form
10-Q for the quarter ended October 31, 1998)
10-15.5 * Amended and Restated Split Dollar Insurance Agreement dated
July 31, 1998 between the Company and Barry H. Frank and
Robert Shein, Trustees under the Weiner Family Irrevocable
Insurance Trust dated October 27, 1986 (Form 10-Q for the
quarter ended October 31, 1998)
10-15.6 * Amended and Restated Collateral Assignment dated July 31,
1998 from Barry H. Frank and Robert Shein, Trustees under the
Weiner Family Irrevocable Insurance Trust dated October 27,
1986 (Form 10-Q for the quarter ended October 31, 1998)
10-17 * Restricted Stock Incentive Plan as amended (1995 Form 10-K,
Exhibit 10-17)
-36-
Exhibit No. Description of Document
- ----------- -----------------------
10-19 * Deb Shops, Inc. Premium Conversion Plan (1996 Form 10-K,
Exhibit 10-19)
10-19.1 * Amendment No. I to Deb Shops, Inc. Premium Conversion Plan
(1997 Form 10-K, Exhibit 10-19.1)
10-20.1 * Amended and Restated Deb Shops, Inc. 1995 Incentive Stock
Option Plan (Form 10-Q for the quarter ended July 31, 1999)
10-21.1 * Employment Agreement dated August 1, 1998 between the
Company and Allan Laufgraben (1999 Form 10-K, Exhibit 10-21.1)
21 Subsidiaries of the Company
23-1 Consent of Ernst & Young LLP
23-2 Consent of Arthur Andersen LLP
27 Financial Data Schedule
Reports on Form 8-K
- -------------------
There were no reports on Form 8-K for the quarter ended January 31,
2000.
-37-
SIGNATURES
Pursuant to the requirements of Sections 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 and County
of Philadelphia, Commonwealth of Pennsylvania, on April 28, 2000.
DEB SHOPS, INC.
(Registrant)
By: /s/ Marvin Rounick
-----------------------------
Marvin Rounick, President
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report has been signed by the following persons in the capacities and on
the dates indicated.
/s/ Marvin Rounick April 28, 2000
- --------------------------------------------------------------
Marvin Rounick, President,
Chief Executive Officer and Director
(Principal Executive Officer)
/s/ Warren Weiner April 28, 2000
- --------------------------------------------------------------
Warren Weiner, Executive Vice President,
Secretary, Treasurer and Director
/s/ Jack Rounick April 28, 2000
- --------------------------------------------------------------
Jack A. Rounick, Assistant Secretary
and Director
/s/ Paul Bachow April 28, 2000
- --------------------------------------------------------------
Paul S. Bachow, Director
/s/ Barry H. Feinberg April 28, 2000
- --------------------------------------------------------------
Barry H. Feinberg, Director
/s/ Barry H. Frank April 28, 2000
- --------------------------------------------------------------
Barry H. Frank, Esq., Director
/s/ Lewis Lyons April 28, 2000
- --------------------------------------------------------------
Lewis Lyons, Vice President, Finance,
Chief Financial Officer and Assistant Secretary
/s/ Joan M. Nolan April 28, 2000
- --------------------------------------------------------------
Joan M. Nolan
Controller
-38-