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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, 2001
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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.
---------------
(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
----------------------------------------------------
(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 30, 2001, 13,551,900 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 30, 2001) held by non-affiliates was
approximately $78,396,157.
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 15, 2001 - 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
sales, margins, respond to changes in fashion, find suitable retail locations
and attract 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 291 women's and men's
specialty apparel retail stores. The 283 DEB stores offer 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 277
stores operating under the name "DEB," the Company operates two 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. Sixty-four of the DEB
stores contain plus size departments. The Company also operates 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 11 locations as "Atlantic Book
Shops," are small, limited selection book stores, generally open seasonally in
Delaware, Maryland and New Jersey resort towns. The six "Atlantic Book
Warehouses" 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, 2001 ("fiscal 2001"), the
Company opened 13 stores (while closing seven stores including two Plus stores).
Six of the new stores have Plus departments. The Company also added Plus
departments to five existing DEB stores and converted one Plus store to a DEB
store with a Plus department. At the present time, the Company currently plans
to open 10-20 new stores in the fiscal year ending January 31, 2002 ("fiscal
2002"). The current plans include the opening of five to ten Plus departments in
the new stores. The Company is currently scheduled to close three stores in the
first half of fiscal 2002. 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,
----------------------
2001 2000 1999 1998 1997
---- ---- ---- ---- ----
Open at beginning of fiscal year.. 285 273 269 285 308
Opened during fiscal year............ 13 17 17 5 2
Closed during fiscal year............ (7) (5) (13) (21) (25)
--- --- --- --- ---
Open at end of fiscal year........... 291 285 273 269 285
=== === === === ===
The following table shows the states in which the Company's 291
existing apparel stores are located:
New England East Midwest
Connecticut 4 Delaware 1 Illinois 19
Maine 4 Maryland 7 Indiana 10
Massachusetts 8 New Jersey 15 Iowa 3
New Hampshire 1 New York 34 Kansas 3
Rhode Island 1 Pennsylvania 40 Kentucky 3
-- Virginia 12 Michigan 26
18 West Virginia 6 Minnesota 8
--- Missouri 7
115 Nebraska 1
North Dakota 3
Ohio 25
South Dakota 1
Wisconsin 12
---
121
South West
Georgia 1 Arizona 1
North Carolina 1 California 2
Tennessee 4 Colorado 2
- Idaho 2
6 New Mexico 3
Oklahoma 4
Oregon 5
Texas 6
Utah 3
Washington 3
--
31
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 size from 2,700
-3-
to 3,400 square feet. New stores are opened in existing malls, existing mall
expansions, new malls and occasionally strip shopping centers. 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 37 employees consisting of an
Assistant Director of Store Operations and Regional and District Managers. A
Regional Manager is responsible for an average of five 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 40 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, 2001, the Company had approximately 3,600 employees, 61%
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") that expires on December 31, 2004. The UPIU
represents the Company's warehouse employees. The collective bargaining
agreement covers approximately 97 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, 1996, 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 remainder books.
The Company intends to critically review the operation of the book
chain and to re-evaluate the opening of additional stores. If the book chain can
be returned to profitability, the Company will resume its plans to expand by
opening primarily warehouse stores in high traffic areas. The current focus is
on stand-alone sites and strip shopping centers for the new stores. Where
appropriate, mall locations will also be considered.
-5-
Item 2. Properties
The Company leases all of its apparel and 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, 2001, can be terminated. In many cases,
the Company has renewal options.
Calendar Years Number of Leases Expiring
-------------- -------------------------
2001 - 2002...................... 67
2003 - 2004...................... 67
2005 - 2006...................... 54
2007 - 2008...................... 35
2009 - 2010...................... 34
2011 - 2012...................... 16
2013 and thereafter.............. 18
---
Total............ 291
===
The Company leases its warehouse, distribution and office space,
aggregating 280,000 square feet, pursuant to a lease which, as amended, expires
in 2007. 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 15, 2001.
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 61 Director, President and Chief Executive Officer 1973
Warren Weiner 57 Director, Executive Vice President, Secretary and Treasurer 1973
Allan Laufgraben 62 Senior Vice President, Merchandising 1995
Barry Vesotsky 55 Vice President, Merchandising 1981
Stanley A. Uhr 55 Vice President, Real Estate and Corporate Counsel 1988
Lewis Lyons 47 Vice President, Finance, Chief Financial Officer and
Assistant Secretary 1992
Stephen P. Smith 41 Vice President - Information Systems 1998
Joan M. Nolan 48 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, also 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.
2001 High Low
- ---- ---- ---
First Quarter $18.8750 $13.0000
Second Quarter 15.1875 8.5000
Third Quarter 13.6250 9.6875
Fourth Quarter 16.5000 11.1875
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
Holders
As of March 30, 2001, there were 231 record holders and approximately
1,072 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 $0.05 for each fiscal quarter. The Company
currently intends to follow a policy of regular quarterly 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) 2001 2000 1999 1998 1997
- ---------------------------------------------------------------------------------------------------------------------------------
Net Sales $287,263 $270,032 $234,724 $205,066 $187,493
Gross Margin 97,206 92,634 70,710 52,723 35,723
Operating Income (Loss) 34,477 35,566 21,312 8,142 (7,711)
Net Income (Loss) 24,841 24,462 15,496 6,637 (3,855)
Net Income (Loss) Per Common Share - Basic 1.85 1.84 1.18 .51 (.30)
Net Income (Loss) Per Common Share - Diluted 1.83 1.81 1.17 .51 (.30)
Weighted Average Shares Outstanding - Basic 13,379 13,230 13,057 12,845 12,845
Weighted Average Shares Outstanding - Diluted 13,519 13,494 13,215 12,947 12,845
Total Assets 172,916 148,271 119,026 103,495 94,531
Capital Lease Obligations 741 1,099 1,392 1,631 1,827
Shareholders' Equity 137,759 114,818 92,157 78,027 74,014
Book Value Per Share at Year End 10.23 8.61 6.98 6.07 5.76
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 sales, margins, respond to changes in fashion, find suitable retail
locations and attract 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, 2001 ("fiscal 2001"), 2000 ("fiscal 2000"), and 1999 ("fiscal 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 $17,232,000 (6.4%) to $287,263,000 in
fiscal 2001 from $270,032,000 in fiscal 2000, and increased $35,308,000 (15.0%)
in fiscal 2000 over fiscal 1999. The increase in fiscal 2001 was primarily the
result of increased sales in the apparel division. The increase in fiscal 2000
was 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 operating income (loss) are more fully described in the sections on
"Apparel Business" and "Book Business" that follow.
-10-
Other income, principally interest, increased $1,668,000 (46.4%) to
$5,264,000 in fiscal 2001 from $3,596,000 in fiscal 2000, and increased $613,000
(20.5%) in fiscal 2000 over fiscal 1999. Other income is offset by losses on
disposition of fixed assets. The increases in fiscal 2001 and 2000 are the
result of earnings on higher cash balances and decreased write-offs from the
disposition of fixed assets.
Income before income taxes increased $579,000 (1.5%) to $39,741,000 in
fiscal 2001 from $39,162,000 in fiscal 2000, and increased $14,866,000 (61.2%)
in fiscal 2000 over fiscal 1999. The improvement in fiscal 2001 is comprised of
a decrease in operating income offset by an increase in other income,
principally interest. 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 effective income tax rate was 37.5%
for fiscal 2001, 37.5% for fiscal 2000 and 36.2% for fiscal 1999. The effective
income tax rates for fiscal 2001, fiscal 2000 and fiscal 1999 are greater than
the statutory federal rate, primarily as the result of state income tax expense.
Results of Operations - Apparel Business
Net sales increased $16,931,000 (6.7%) to $269,610,000 in fiscal 2001
from $252,679,000 in fiscal 2000, and increased $35,084,000 (16.1%) in fiscal
2000 over fiscal 1999. The increase in fiscal 2001 resulted primarily from an
increase in the number of stores in operation and to a lesser extent from an
increase in comparable store sales of 1.5%. The increase in fiscal 2001 was
lower than in prior years primarily as a result of weak sales during the spring
selling season due to cool, wet weather in the northeast and midwest parts of
the country. Sales in the back-to-school and holiday selling seasons rebounded
from the spring season. The increase in fiscal 2000 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, in fiscal 2000, were evidenced by increased comparable store sales
of 13.0%. 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,
-------------------------------------------------
2001 2000 1999
---- ---- ----
Stores open at end of the year 291 285 273
Average number in operation during the year 290 276 278
Average net sales per store (in thousands) $930 $916 $783
Average operating income per store (in thousands) $121 $128 $ 74
Comparable store sales(2) - percent change 1.5% 13.0% 10.1%
- ----------
(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
$11,923,000 (7.2%) to $176,816,000 in fiscal 2001 from $164,892,000 in fiscal
2000, and increased $12,707,000 (8.3%) in fiscal 2000 over fiscal 1999. The
fiscal 2001 and fiscal 2000 increases in cost of sales, including buying and
occupancy costs, are principally due to the increases in net sales, and in
fiscal 2000, partially offset by increasing margins. As a percentage of net
sales, these costs were 65.6% for fiscal 2001, 65.3% for fiscal 2000 and 69.9%
for fiscal 1999. For fiscal 2001, the increased cost of sales, including buying
and occupancy costs, percentage is the result of decreased margins principally
in the second quarter. For fiscal 2000, the decreased cost of sales, including
buying and occupancy costs, percentage is the result of increased net sales and
increased margins. Buying and occupancy costs were 15.4%, 15.4% and 16.6% of net
sales for the fiscal years 2001, 2000 and 1999, respectively. The percentage
decrease in fiscal 2001 and in fiscal 2000 as compared to fiscal 1999, is
principally a result of increased sales during these years.
Selling and administrative expenses increased $4,814,000 (9.9%) to
$53,553,000 in fiscal 2001 from $48,739,000 in fiscal 2000, and increased
$7,092,000 (17.0%) in fiscal 2000 over fiscal 1999. The increases in these
expenses for fiscal 2001 and fiscal 2000 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 19.9%, 19.3% and 19.1% during fiscal 2001, 2000 and 1999,
respectively.
Depreciation expense increased $553,000 to $4,176,000 in fiscal 2001
from $3,623,000 in fiscal 2000, and increased $312,000 in fiscal 2000 over
fiscal 1999. The increase from fiscal 2000 to fiscal 2001 and from fiscal 1999
to fiscal 2000 is principally attributable to the opening of new stores,
remodeling of existing stores and the accelerated write-off of leasehold
improvements.
Operating income decreased ($360,000) (1.0%) to $35,064,000 in fiscal
2001 from $35,425,000 in fiscal 2000, and increased $14,973,000 (73.2%) in
fiscal 2000 over fiscal 1999. As a percentage of net sales, operating income was
13.0% in fiscal 2001, 14.0% in fiscal 2000 and 9.4% in fiscal 1999. In fiscal
2001, the decrease in operating income is primarily the result of slower sales
growth and a slight decrease in margins. In fiscal 2000, the increase in
operating income is primarily the result of an increase in margins as discussed
above.
-12-
Results of Operations - Book Business
Net sales increased $301,000 (1.7%) to $17,653,000 in fiscal 2001 from
$17,353,000 in fiscal 2000, and increased $224,000 (1.3%) in fiscal 2000 over
fiscal 1999. The increases in net sales in fiscal 2001 and fiscal 2000 were
impacted by increased competition.
The following table sets forth certain store information:
Store Data
Year Ended January 31,
-----------------------------------------
2001 2000 1999
---- ---- ----
Resort stores open at end of year 11 11 12
Average number in operation during the year 11 12 11
Average net sales per resort store (in thousands) $520 $467 $458
Warehouse stores open at end of year 6 6 6
Average number in operation during the year 6 6 6
Average net sales per warehouse store (in thousands) $1,989 $1,958 $2,015
Comparable store sales(1) - percent change 2.8% Flat (1.5%)
Cost of sales, including buying and occupancy costs, increased $647,000
(5.1%) to $13,332,000 in fiscal 2001 from $12,685,000 in fiscal 2000, and
increased $676,000 (5.6%) in fiscal 2000 over fiscal 1999. The fiscal 2001 and
the fiscal 2000 increases in cost of sales, including buying and occupancy
costs, were principally due to decreased margins partially offset by increased
sales during the period. As a percentage of net sales, these costs were 75.5%,
73.1% and 70.1% for fiscal 2001, 2000 and 1999, respectively. For fiscal 2001
and 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. Buying and occupancy costs were 15.4%,
15.3% and 14.5% of net sales during fiscal 2001, 2000 and 1999, respectively.
Selling and administrative expenses increased $175,000 (4.2%) to
$4,364,000 in fiscal 2001 from $4,188,000 in fiscal 2000, and increased $252,000
(6.4%) in fiscal 2000 over fiscal 1999. The fiscal 2001 and the fiscal 2000
increases in selling and administrative expenses were principally due to the
increased cost of personnel and benefits. As a percentage of net sales, these
expenses were 24.7%, 24.1% and 23.0% for fiscal 2001, 2000 and 1999,
respectively. For fiscal 2001 and fiscal 2000, the increased selling and
administrative percentage resulted from increased personnel and warehousing
costs.
- ----------
(1) Comparable store sales include stores open 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-
Depreciation and amortization expense increased $17,000 to $475,000 in
fiscal 2001 from $458,000 in fiscal 2000 and increased $15,000 in fiscal 2000
over fiscal 1999. The increases are principally attributable to the opening of a
new store, in fiscal 2000, and expansion of existing stores.
Operating income decreased ($538,000) to an operating loss of
($516,000) in fiscal 2001 from operating income of $22,000 in fiscal 2000, and
decreased ($719,000) (97.1%) in fiscal 2000 from fiscal 1999. In fiscal 2001 and
fiscal 2000, the decreases in operating income were primarily the result of
decreasing margins caused by increased competition, changing product mix and
increased personnel costs and increased expenses due to store expansions and, in
fiscal 2000, the opening of a new store. As a percentage of net sales, operating
loss was (2.9%) in fiscal 2001 compared to operating income of 0.1% and 4.3% in
fiscal 2000 and 1999, respectively.
Liquidity and Capital Resources - Consolidated
As of January 31, 2001, the Company had cash and cash equivalents of
$111,649,000 compared to $90,307,000 as of January 31, 2000, and $70,228,000 as
of January 31, 1999. 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 bookstores and the remodeling of existing apparel and bookstores.
Total cash provided by operating activities, for fiscal 2001, 2000 and 1999, was
$28,380,000, $30,015,000 and $17,831,000, respectively. For fiscal 2001, cash
provided by operating activities was the result of the fiscal 2001 net income
increased by non-cash charges for depreciation and amortization and changes in
operating assets and liabilities, including a decrease in prepaid expenses and
an increase in trade accounts payable offset by an increase in merchandise
inventories. For fiscal 2000, cash provided by operating activities was the
result of the fiscal 2000 net income increased by non-cash 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. The inventory turnover rate for the apparel business was approximately
3.4, 3.6 and 3.4 times for fiscal 2001, 2000 and 1999, respectively. The
inventory turnover rate for the book business was approximately 1.3, 1.3 and 1.5
times for fiscal 2001, 2000 and 1999, respectively.
-14-
Net cash used in investing activities was $4,781,000, $7,520,000 and
$3,910,000 for fiscal 2001, 2000 and 1999, respectively. During these fiscal
years, these funds were principally used for the purchase of property, plant and
equipment relating to the opening of new apparel and book stores and for the
remodeling and/or expanding of existing stores.
Net cash used in financing activities was $2,258,000, $2,417,000 and
$1,606,000 for fiscal 2001, 2000 and 1999, respectively. During these fiscal
years 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.
The Company's present intention is to critically review the operation
of the bookstore business and to re-evaluate the opening of additional stores.
If the bookstore business can be returned to profitability the Company will
resume its plans to expand by opening primarily warehouse stores. Opening a
warehouse book store 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 2001, the Company did not open any new book stores.
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.
Seasonal Nature of Operations
Approximately 54% and 72% of the Company's net sales and net income,
respectively, for fiscal 2001 occurred during the last six months, as compared
to 53% and 62%, respectively, for 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 Disclosure About Market Risk
Please see the first paragraph under the caption "Liquidity and Capital
Resources - Consolidated" in the Annual Report on Form 10-K for a discussion
regarding quantitative and qualitative disclosures about market risk.
-15-
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
To the Board of Directors and Shareholders of Deb Shops, Inc.
We have audited the accompanying consolidated balance sheets of Deb Shops, Inc.
and subsidiaries as of January 31, 2001 and 2000, and the related consolidated
statements of operations, shareholders' equity, and cash flows for each of the
three years in the period ended January 31, 2001. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. 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 consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Deb
Shops, Inc. and subsidiaries at January 31, 2001 and 2000, and the consolidated
results of their operations and their cash flows for each of the three years in
the period ended January 31, 2001, in conformity with accounting principles
generally accepted in the United States.
ERNST & YOUNG LLP
Philadelphia, Pennsylvania
March 7, 2001
-16-
DEB SHOPS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended January 31,
---------------------------------------------------------------------
2001 2000 1999
- --------------------------------------------------------------------------------------------------------------------------
Net Sales $287,263,105 $270,031,603 $234,723,932
------------- ------------- -------------
Costs and Expenses
Cost of sales, including buying
and occupancy costs 190,057,520 177,397,452 164,014,391
Selling and administrative 57,992,175 52,927,297 45,583,150
Depreciation and amortization 4,736,679 4,141,263 3,814,034
------------ ------------ ------------
252,786,374 234,466,012 213,411,575
------------ ------------ ------------
Operating Income 34,476,731 35,565,591 21,312,357
Other Income, Principally Interest 5,264,089 3,596,343 2,983,782
------------ ------------ ------------
Income Before Income Taxes 39,740,820 39,161,934 24,296,139
Income Tax Provision 14,900,000 14,700,000 8,800,000
------------- ------------- ------------
Net Income $ 24,840,820 $ 24,461,934 $ 15,496,139
============ ============ ============
Net Income Per Common Share
Basic $ 1.85 $ 1.84 $ 1.18
============ ============ ============
Diluted $ 1.83 $ 1.81 $ 1.17
============ ============ ============
Weighted Average Number of
Common Shares Outstanding
Basic 13,378,666 13,230,490 13,057,108
============ ============ ============
Diluted 13,518,653 13,494,006 13,214,869
============ ============ ============
See notes to consolidated financial statements.
-17-
DEB SHOPS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
January 31,
---------------------------
2001 2000
- -----------------------------------------------------------------------------------------------------------
ASSETS
Current Assets
Cash and cash equivalents $111,648,544 $ 90,307,234
Merchandise inventories 31,017,772 26,550,433
Prepaid expenses and other 3,154,388 4,219,237
Deferred income taxes 1,622,556 2,234,691
------------ ------------
Total current assets 147,443,260 123,311,595
------------ ------------
Property, Plant and Equipment - at cost
Land 150,000 150,000
Buildings 4,347,697 4,347,697
Leasehold improvements 35,034,367 33,312,055
Furniture and equipment 18,357,475 17,521,878
------------ ------------
57,889,539 55,331,630
Less accumulated depreciation and amortization 40,108,200 37,608,972
------------ ------------
17,781,339 17,722,658
------------ ------------
Other Assets
Goodwill, net of accumulated amortization of $1,303,269
and $1,089,033, respectively 2,075,813 2,290,049
Deferred income taxes 3,903,101 3,234,966
Other 1,712,223 1,712,223
------------ ------------
Total other assets 7,691,137 7,237,238
------------ ------------
$172,915,736 $148,271,491
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Trade accounts payable $ 20,624,227 $ 17,495,977
Accrued expenses 10,477,004 10,932,950
Income taxes payable 3,314,659 3,925,540
------------ ------------
Total current liabilities 34,415,890 32,354,467
------------ ------------
Capital Lease Obligation 740,517 1,099,299
------------ ------------
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 - 15,688,290 shares 156,883 156,883
Additional paid-in capital 5,864,790 5,864,790
Retained earnings 145,495,311 123,390,856
------------ ------------
151,517,444 129,412,989
Less common treasury shares, at cost -
2001: 2,218,390; 2000: 2,353,390 13,758,115 14,595,264
------------ ------------
137,759,329 114,817,725
------------ ------------
$172,915,736 $148,271,491
============ ============
See notes to consolidated financial statements.
-18-
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, 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)
Net income 24,840,820
Dividends on preferred stock ($120 per share) (55,200)
Dividends on common stock ($.20 per share) (2,680,130)
Stock options exercised (1,035) 837,149
----------------------------------------------------------------------
Balance January 31, 2001 $460 $156,883 $5,864,790 $145,495,311 ($13,758,115)
==== ======== ========== ============ ============
See notes to consolidated financial statements.
-19-
DEB SHOPS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended January 31,
------------------------------------------
2001 2000 1999
- -------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net income $ 24,840,820 $24,461,934 $15,496,139
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 4,736,679 4,141,263 3,814,034
Deferred income tax benefit (56,000) (1,258,000) (900,000)
Loss on retirement of property, plant and
equipment 199,570 222,912 201,076
Changes in operating assets and liabilities:
(Increase) in merchandise inventories (4,467,339) (2,616,278) (1,826,927)
Decrease (increase) in prepaid expenses & other 1,064,849 (2,135,952) (594,537)
Increase (decrease) in trade accounts payable 3,128,250 1,405,369 (7,688)
(Decrease) increase in accrued expenses (455,946) 4,274,032 779,367
(Decrease) increase in income taxes payable (610,881) 1,520,177 869,513
------------ ----------- -----------
Net cash provided by operating activities 28,380,002 30,015,457 17,830,977
------------ ----------- -----------
Cash flows from investing activities:
Increase in other assets -- -- (544,709)
Purchases of property, plant and equipment (4,780,694) (7,519,855) (3,365,071)
------------ ----------- -----------
Net cash used in investing activities (4,780,694) (7,519,855) (3,909,780)
------------ ----------- -----------
Cash flows from financing activities:
Preferred stock cash dividends paid (55,200) (55,200) (55,200)
Common stock cash dividends paid (2,680,130) (2,651,029) (2,622,401)
Proceeds from exercise of stock options 836,114 582,590 1,311,150
Principal payments under capital lease obligation (358,782) (292,956) (239,208)
------------ ----------- -----------
Net cash used in financing activities (2,257,998) (2,416,595) (1,605,659)
------------ ----------- -----------
Increase in cash and cash equivalents 21,341,310 20,079,007 12,315,538
Cash and cash equivalents at beginning of year 90,307,234 70,228,227 57,912,689
------------ ----------- -----------
Cash and cash equivalents at end of year $111,648,544 $90,307,234 $70,228,227
============ =========== ===========
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest on capital lease obligation $ 191,215 $ 257,044 $ 311,792
Income taxes, net $ 13,805,344 $14,171,761 $ 8,937,812
See notes to consolidated financial statements.
-20-
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 291 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 accounting principles generally accepted in the United States
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 and amortization of
property, plant and equipment, which includes depreciation on a capitalized
lease asset, was $4,522,000, $3,927,000 and $3,600,000, for the years ended
January 31, 2001, 2000 and 1999, 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.
Cost of Sales: Cost of sales includes the cost of merchandise, buying (including
freight costs) and occupancy costs. The cost of handling merchandise is included
in selling and administrative costs.
-21-
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, 2001 is $107,809,000 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,
------------------------------------------
2001 2000 1999
------------------------------------------
Net income $24,840,820 $24,461,934 $15,496,139
Dividends on preferred stock (55,200) (55,200) (55,200)
-----------------------------------------
Income available to
common shareholders $24,785,620 $24,406,734 $15,440,939
=========== =========== ===========
Basic weighted average
number of common
shares outstanding 13,378,666 13,230,490 13,057,108
Effect of dilutive stock options 139,987 263,516 157,761
-----------------------------------------
Diluted weighted average
number of common
shares outstanding 13,518,653 13,494,006 13,214,869
=========== =========== ===========
-22-
- -C- INCOME TAXES
Income tax provision consists of the following components:
Year Ended January 31,
--------------------------------------------------------------
2001 2000 1999
- ---------------------------------------------------------------------------------------------------
Current:
Federal......................... $13,200,000 $13,558,000 $8,700,000
State........................... 1,756,000 2,400,000 1,000,000
----------- ----------- ----------
14,956,000 15,958,000 9,700,000
----------- ----------- ----------
Deferred:
Federal......................... (49,000) (1,058,000) (350,000)
State........................... (7,000) (200,000) (550,000)
----------- ----------- ----------
(56,000) (1,258,000) (900,000)
----------- ----------- ----------
$14,900,000 $14,700,000 $8,800,000
=========== =========== ==========
A reconciliation of the Company's effective income tax rate with the
statutory federal rate follows:
Year Ended January 31,
------------------------------------------------------
2001 2000 1999
- ---------------------------------------------------------------------------------------------------
Tax provision at statutory rate $13,909,000 $13,721,000 $8,504,000
State income taxes, net of federal tax 1,128,000 1,464,000 293,000
Other (137,000) (485,000) 3,000
------------ ------------ -----------
$14,900,000 $14,700,000 $8,800,000
============ ============ ===========
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,
------------------------------------------------------
2001 2000
- ---------------------------------------------------------------------------------------------------
Deferred Tax Assets
- -------------------
Uniform cost capitalization $ 674,000 $ 654,000
Capital lease obligation 106,000 293,000
Deferred rent 245,000 347,000
Depreciation 3,757,000 2,941,000
Accrued expenses 1,000,000 1,485,000
---------- ----------
5,782,000 5,720,000
Deferred Tax Liabilities
- ------------------------
Prepaid expenses (256,000) (250,000)
---------- ----------
$5,526,000 $5,470,000
========== ==========
-23-
- -D- LEASES
The Company leases all of its retail apparel stores and all 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 $199,000 at January 31, 2001 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
$191,000, $257,000 and $312,000 for the years ended January 31, 2001, 2000 and
1999, respectively, and is included in selling and administrative expenses.
Future minimum rental commitments for all non cancelable leases at
January 31, 2001 are as follows:
Capital Operating
Lease Leases
- --------------------------------------------------------------------------------
Fiscal Year Ending January 31,
- ------------------------------
2002.................................... 550,000 $ 18,714,000
2003.................................... 230,000 16,657,000
2004.................................... --- 15,077,000
2005.................................... --- 12,667,000
2006.................................... --- 10,412,000
Thereafter.............................. --- 41,803,000
-------- ------------
Total minimum rental commitments ....... 780,000 $115,330,000
============
Imputed interest (39,483)
....................................... --------
Present value of net minimum
lease payments ....................... $740,517
========
Total rental expense under operating leases amounted to $23,102,000,
$21,624,000 and $19,824,000 in fiscal 2001, 2000 and 1999, respectively. Such
amounts include contingent rentals based upon a percentage of sales of
$2,370,000, $2,729,000 and $2,992,000 in fiscal 2001, 2000 and 1999,
respectively.
-24-
- -E- STOCK OPTION PLAN
Effective October 1996, 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, options to purchase up to 2,000,000 shares
of the Company's common stock, par value $.01 per share, may be granted to
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, 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 6.11
Canceled during period........................................ (5,000) (7.00)
Exercised during period....................................... (135,000) (6.19)
--------- ------
Outstanding, January 31, 2001.......................................... 215,000 $ 6.95
======== ======
Outstanding Options Exercisable Options
--------------------------- -------------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Exercise Contractual Exercise Exercise
Price Range Number Life Price Number Price
----------- ------ ----------- -------- ------ --------
$6.00 - $7.00 215,000 3.0 years $6.95 90,000 $6.89
The Company applies Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees," and the related interpretations in
accounting for the Plan. In 1996, 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.
-25-
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 rate of 4.2%, a volatility factor of 41.7%,
expected dividend yield of 2.9%, and an expected life of three years for the
options. For purposes of pro forma disclosure, the estimated fair value of the
options, $2.34 for the fiscal 1999 grants, is amortized to expense over the
assumed vesting period of the options.
Had the Company recognized compensation cost for the 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,
----------------------
2001 2000 1999
---- ---- ----
Pro forma net income $24,649,623 $24,123,119 $15,271,556
Pro forma basic net income
per common share $ 1.84 $ 1.82 $ 1.17
Pro forma diluted net income
per common share $ 1.83 $ 1.79 $ 1.16
- -F- COMMITMENTS AND CONTINGENCIES
The Company has an unsecured line of credit in the amount of
$20,000,000 at January 31, 2001. Of this amount, $1,260,000 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. No
payment was required in fiscal 1997 or fiscal 2001 under the agreement. In
fiscal 1999 and 2000, bonuses of $300,000 for each year were earned under the
agreement. The fiscal 2000 amount is included in accrued expenses on the
accompanying consolidated balance sheet as of January 31, 2000.
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.
-26-
Deb Shops, Inc.
Quarterly Financial Information
(Unaudited)
(amounts in thousands except per First Second Third Fourth
share data) Quarter Quarter Quarter Quarter
- --------------------------------------------------------------------------------------------------------
Net sales
2001 $64,985 $66,019 $73,248 $83,012
2000 $59,517 $66,710 $67,725 $76,079
Cost of sales, including buying
and occupancy costs
2001 $47,408 $44,660 $52,471 $45,519
2000 $43,712 $42,109 $47,884 $43,692
Net income
2001 $ 2,611 $ 4,466 $ 3,946 $13,817
2000 $ 2,212 $ 7,074 $ 4,080 $11,095
Basic net income per share
2001 $ .19 $ .33 $ .29 $ 1.03
2000 $ .17 $ .53 $ .31 $ .84
Diluted net income per share
2001 $ .19 $ .33 $ .29 $ 1.02
2000 $ .16 $ .52 $ .30 $ .82
Cash dividends per common share
2001 $ .05 $ .05 $ .05 $ .05
2000 $ .05 $ .05 $ .05 $ .05
-27-
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
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 15, 2001 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 15, 2001, 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 15, 2001,
which is incorporated in this Annual Report on Form 10-K by reference.
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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 15, 2001, 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)
-------- -------
Report of independent auditors............................. 16
Consolidated statements of operations for
the years ended January 31, 2001, 2000 and 1999............ 17
Consolidated balance sheets as of January 31,
2001 and 2000.............................................. 18
Consolidated statements of shareholders'
equity for the years ended January 31, 2001,
2000 and 1999.............................................. 19
Consolidated statements of cash flows for the
years ended January 31, 2001, 2000 and 1999................ 20
Notes to consolidated financial statements................. 21 - 26
Selected quarterly financial information (unaudited)
for the years ended January 31, 2001 and 2000.............. 27
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.
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Exhibits
The following exhibits are included with this report or have been
previously filed with the Securities and Exchange Commission pursuant to the
requirements of the Acts administered by the Commission. Each exhibit,
previously filed, 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)
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, 2000 for
property Located at 9401 Blue Grass Road, Philadelphia,
Pennsylvania, 19114 (2000 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, 1999 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, 1999)
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Exhibit No. Description of Document
----------- -----------------------
10-14.5 * Amended and Restated Split Dollar Insurance Agreement
dated July 31, 1999 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, 1999)
10-14.6 * Amended and Restated Collateral Assignment dated July
31, 1999 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, 1999)
10-15.1 * Life Insurance Policy for Warren Weiner and Penny
Weiner (1993 Form 10-K, Exhibit 10-15.1)
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, 1999 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,
1999)
10-15.5 * Amended and Restated Split Dollar Insurance Agreement
dated July 31, 1999 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, 1999)
10-15.6 * Amended and Restated Collateral Assignment dated July
31, 1999 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, 1999)
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 (1998 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, 2000)
31-
Exhibit No. Description of Document
----------- -----------------------
10-21.1 * Employment Agreement dated August 1, 1999 between the
Company and Allan Laufgraben (2000 Form 10-K, Exhibit
10-21.1)
21 Subsidiaries of the Company
23 Consent of Ernst & Young LLP
Reports on Form 8-K
There were no reports on Form 8-K for the quarter ended January 31,
2001.
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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 27, 2001.
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 27, 2001
- ------------------------------------------------------------------
Marvin Rounick, President,
Chief Executive Officer and Director
(Principal Executive Officer)
/s/ Warren Weiner April 27, 2001
- ------------------------------------------------------------------
Warren Weiner, Executive Vice President,
Secretary, Treasurer and Director
/s/ Jack Rounick April 27, 2001
- ------------------------------------------------------------------
Jack A. Rounick, Assistant Secretary
and Director
/s/ Ivan Inerfeld April 27, 2001
- ------------------------------------------------------------------
Ivan Inerfeld, Director
/s/ Barry H. Feinberg April 27, 2001
- ------------------------------------------------------------------
Barry H. Feinberg, Director
/s/ Barry H. Frank April 27, 2001
- ------------------------------------------------------------------
Barry H. Frank, Esq., Director
/s/ Lewis Lyons April 27, 2001
- ------------------------------------------------------------------
Lewis Lyons, Vice President, Finance,
Chief Financial Officer and Assistant Secretary
/s/ Joan M. Nolan April 27, 2001
- ------------------------------------------------------------------
Joan M. Nolan
Controller
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