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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, 2003
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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
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(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
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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. X
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Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Act).
Yes X No
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As of April 10, 2003, 13,684,900 shares of the Company's Common Stock,
par value $.01 per share, were outstanding. The aggregate market value (based
upon the closing price on July 31, 2002) held by non-affiliates was
approximately $131,657,000.
------------
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 29, 2003 - incorporated in Part III.
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 expectations of future performance, 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 or maintain sales and 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 ("SEC"). The Company assumes no obligation to update or
revise its forward-looking statements even if experience or future changes make
it clear that any projected results expressed or implied therein will not be
realized.
PART 1
Item 1. Business
General
The Company operates 327 women's and men's specialty apparel retail
stores. The Company operates 317 stores under the name "DEB" which 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 25. In addition, the Company operates one plus size store under the name
"DEB PLUS" and three 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. One hundred and seven of the DEB
stores contain plus-size departments. The Company also operates six apparel
retail stores under the name "Tops 'N Bottoms." The Tops 'N Bottoms stores sell
moderately priced men's and women's apparel. Eighteen of the DEB stores contain
Tops 'N Bottoms departments. Store information is as of January 31, 2003 unless
otherwise indicated.
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.
The DEB PLUS division caters to the plus-size customer between the ages
of 13 and 25. 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.
-1-
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 Spring 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, 2003 ("fiscal 2003"), the
Company opened 23 stores while closing five stores, including two Tops 'N
Bottoms stores. Fifteen of the new stores have Plus departments. The Company
also added Plus departments to 13 existing DEB stores. The Company currently
plans to open 10-15 new stores in the fiscal year ending January 31, 2004
("fiscal 2004"), 7-12 of which are expected to have Plus departments. The
Company also expects to remodel 10-15 locations. The Company is currently
scheduled to close four stores in the first half of fiscal 2004. The Company
plans to continue to carefully evaluate the profitability of individual stores
and close those stores that it believes cannot become profitable or maintain
profitability.
The following table shows apparel store openings and closings for the
last five fiscal years:
Year Ended January 31,
----------------------
2003 2002 2001 2000 1999
---- ---- ---- ---- ----
Open at beginning of fiscal year.... 309 291 285 273 269
Opened during fiscal year........... 23 23 13 17 17
Closed during fiscal year........... ( 5) ( 5) ( 7) ( 5) (13)
---- ---- ---- ---- ----
Open at end of fiscal year.......... 327 309 291 285 273
---- ---- ---- ---- ----
-2-
The following table shows the states in which the Company's 327 stores
are located:
New England East Midwest
Connecticut 4 Delaware 2 Illinois 21
Maine 4 Maryland 10 Indiana 13
Massachusetts 12 New Jersey 16 Iowa 3
New Hampshire 1 New York 34 Kansas 4
Rhode Island 1 Pennsylvania 38 Kentucky 3
Vermont 1 Virginia 14 Michigan 30
------- West Virginia 6 Minnesota 9
23 ------- Missouri 9
120 Nebraska 2
North Dakota 3
Ohio 27
South Dakota 2
Wisconsin 12
------
138
South West
Georgia 1 Arizona 1
North Carolina 3 California 2
South Carolina 1 Colorado 3
Tennessee 6 Idaho 2
------- New Mexico 3
11 Oklahoma 4
Oregon 5
Texas 7
Utah 3
Washington 3
Wyoming 2
-------
35
DEB stores, which average 6,100 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 8,100 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 2,400 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.
-3-
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 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 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 42 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 9 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 44 employees, including the
Senior Vice President, Merchandising; Vice President, Merchandising; Merchandise
Managers, Buyers and Support Staff. 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 categories: sportswear, dresses, coats, lingerie, hosiery,
shoes and accessories.
At January 31, 2003, the Company had approximately 3,600 employees, 73%
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 89 employees. The Company considers its employee
relations to be good.
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 ("BMI") was acquired in October 1995, and was
sold effective as of September 30, 2001. For a discussion of the results of
operations of the book business for the period ended September 30, 2001, and the
effect of the sale of the book business on the Company, see Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations.
Available Information
The Company's principal Internet address is www.debshops.com. The
Company makes available free of charge on www.debshops.com its annual,
quarterly, and current reports, and amendments to those reports, including
exhibits thereto, as soon as reasonably practicable after it electronically
files such material with, or furnishes it to, the Securities and Exchange
Commission ("SEC").
-4-
Item 2. Properties
The Company leases all of its 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 current expiration dates of executed
store leases, existing at January 31, 2003. In many cases, the Company has
renewal options.
Calendar Years Number of Leases Expiring
-------------- -------------------------
2003 - 2004........................... 75
2005 - 2006........................... 63
2007 - 2008........................... 77
2009 - 2010........................... 34
2011 - 2012........................... 31
2013 - 2014........................... 30
2015 and thereafter................... 17
---
Total................. 327
---
The Company leases its warehouse, distribution and office space,
aggregating 280,000 square feet, pursuant to a lease that, 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.
-5-
EXECUTIVE OFFICERS OF THE REGISTRANT
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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 29, 2003.
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 63 Director, President and Chief Executive Officer 1973
Warren Weiner 59 Director, Executive Vice President, Secretary and Treasurer 1973
Allan Laufgraben 64 Senior Vice President, Merchandising 1995
Lewis Lyons 49 Senior Vice President, Finance, and Assistant Secretary 1992
Barry J. Susson 40 Chief Financial Officer 2003
Barry Vesotsky 57 Vice President, Merchandising 1981
Stanley A. Uhr 57 Vice President, Real Estate and Corporate Counsel 1988
Stephen P. Smith 43 Vice President, Information Systems 1998
Joan M. Nolan 50 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.
Lewis Lyons has been employed by the Company since 1990. Since February
2003, he has served as Senior Vice President, Finance and from October 2, 1995,
also as Assistant Secretary. From May 1993 to February 2003, he served as Vice
President, Finance and Chief Financial Officer.
Barry J. Susson has been employed by the Company since February 2003,
as Chief Financial Officer. From September 2000 to January 2003, he was Vice
President of Finance of Forman Mills, Inc.; from October 1998 to August 2000, he
was Executive Vice President and Chief Financial Officer of Dollar Express, Inc.
and from July 1984 to September 1998, he was employed by Ernst & Young LLP,
where from October 1, 1992, he was a Senior Manager.
Barry Vesotsky has been employed by the Company since 1970. Since 1981,
he has served as Vice President, Merchandising.
Stanley A. Uhr has been employed by the Company since 1987. Since March
1988, he has served as Vice President, Real Estate and Corporate Counsel.
Stephen P. Smith has been employed by the Company since 1985. From 1985
to 1994, he served 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.
Joan M. Nolan has been employed by the Company since November 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.
-6-
PART II
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Item 5. Market for the Registrant's Common Equity 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:
2003 High Low
- ---- ---- ---
First Quarter $29.990 $23.650
Second Quarter $33.779 $27.320
Third Quarter $29.100 $19.110
Fourth Quarter $26.469 $20.000
2002 High Low
- ---- ---- ---
First Quarter $22.700 $15.500
Second Quarter $24.200 $18.000
Third Quarter $25.750 $19.230
Fourth Quarter $26.850 $22.670
Holders
As of April 10, 2003, there were 194 record holders and approximately
1,291 beneficial holders of the Company's Common Stock.
Dividends
The Company paid regular quarterly dividends for each of the two most
recent fiscal years. The per-share amount of the quarterly dividends paid in
each of the first two quarters of fiscal 2002 was $0.05 and in each of the last
two quarters of fiscal 2002 and in each of the first two quarters of fiscal 2003
was $0.075. The per-share amount of the quarterly dividends paid in each of the
last two quarters of fiscal 2003 was $0.10. The Company also paid special
dividends of $0.05 per share in the third quarters of fiscal 2002 and 2003. 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.
-7-
Item 6. Selected Financial Data
The following selected financial data are derived from the consolidated
financial statements of the Company. The data should be read in conjunction with
Management's Discussion and Analysis of Financial Condition and Results of
Operations as well as the consolidated financial statements, related notes, and
other financial information included herein.
Deb Shops, Inc. and Subsidiaries
Consolidated Financial Highlights
Year Ended January 31,
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(in thousands, except per-share data) 2003 2002 2001 2000 1999
- --------------------------------------------------------------------------------------------------------------------------------
Net sales $317,722 $307,582 $287,263 $270,032 $234,724
Gross margin 110,171 107,257 97,206 92,634 70,710
Operating income 39,097 33,439 34,477 35,566 21,312
Net income 25,488 23,590 24,841 24,462 15,496
Net income per common share - basic 1.86 1.74 1.85 1.84 1.18
Net income per common share - diluted 1.84 1.73 1.83 1.81 1.17
Weighted average shares outstanding - basic 13,672 13,546 13,379 13,230 13,057
Weighted average shares outstanding - diluted 13,815 13,629 13,519 13,494 13,215
Total assets 213,390 195,943 172,916 148,271 119,026
Capital lease obligation - long-term --- --- 301 741 1,099
Shareholders' equity 178,038 157,958 137,759 114,818 92,157
Book value per share at year end 13.01 11.59 10.23 8.61 6.98
Cash dividends declared per share of
common stock .425 .325 .20 .20 .20
Item 7.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Overview
The Company operates women's specialty retail apparel stores offering
popularly priced, fashionable, coordinated sportswear, dresses, coats, lingerie,
accessories, shoes and novelty items for junior and plus-sizes. The Company also
operates Tops 'N Bottoms stores which sell moderately priced men's and women's
apparel.
Effective as of September 30, 2001, the Company sold the stock of its
subsidiary, Books Management, Inc. ("BMI"). For the eight months ended September
30, 2001, BMI had net sales of $11,897,000 and operating income of $662,000. As
a result of the transaction, the Company recorded a pretax loss of $7,381,000
($4,611,000 net of tax, or a loss per share of ($0.34)).
Results of operations for the Company for the fiscal years ended
January 31, 2003 ("fiscal 2003"), 2002 ("fiscal 2002") and 2001 ("fiscal 2001"),
are discussed below on a consolidated basis and separately for the apparel
business to provide relevant information concerning the Company's retail apparel
store business.
-8-
Results of Operations - Consolidated
Consolidated net sales increased $10,139,000 (3.3%) to $317,722,000 in
fiscal 2003 from $307,582,000 in fiscal 2002, and increased $20,319,000 (7.1%)
in fiscal 2002 over fiscal 2001. The increases in fiscal 2003 and 2002 were the
result of increased sales in the apparel division.
The changes in net sales, cost of sales, selling and administrative
expenses and operating income are more fully described in the section on the
apparel business that follows.
Other income, principally interest, decreased ($2,037,000) (52.2%) to
$1,864,000 in fiscal 2003 from $3,901,000 in fiscal 2002 and decreased
($1,364,000) (25.9%) in fiscal 2002 compared to fiscal 2001. Other income is
offset by losses on disposition of fixed assets. The decrease in both fiscal
periods was primarily the result of declining interest rates, partially offset
by higher cash balances.
Income before income taxes increased $3,621,000 (9.7%) to $40,960,000
in fiscal 2003 from $37,340,000 in fiscal 2002 and decreased ($2,401,000) (6.0%)
in fiscal 2002 compared to fiscal 2001. The increase in fiscal 2003 is primarily
due to the loss from the sale of BMI recorded in fiscal 2002. Increases in cost
of sales and selling and administrative expenses and a reduction in other income
were the primary contributors to the overall decline in income before income
taxes after considering the loss on the sale of BMI in fiscal 2002. The decrease
in fiscal 2002 was due to the loss on the sale of BMI and a reduction in other
income that offset an increase in operating income before the effect of the BMI
loss. The effective income tax rate was 37.8% for fiscal 2003, 36.8% for fiscal
2002 and 37.5% for fiscal 2001. The effective income tax rates for fiscal 2003,
fiscal 2002 and fiscal 2001 are greater than the statutory federal rate,
primarily as the result of state income tax expense, partially offset by
tax-exempt interest.
Results of Operations - Apparel Business
Net sales increased $22,037,000 (7.5%) to $317,722,000 in fiscal 2003
from $295,685,000 in fiscal 2002 and increased $26,075,000 (9.7%) in fiscal 2002
over fiscal 2001. The increase in fiscal 2003 resulted primarily from an
increase in the number of stores in operation. Comparable store sales increased
0.1% during the period. The increase in fiscal 2002 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 3.8%.
The following table sets forth certain store information:
Store Data(1)
Year Ended January 31,
-----------------------------------------
2003 2002 2001
---- ---- ----
Stores open at end of the year 327 309 291
Average number in operation during the year 320 295 290
Average net sales per store (in thousands) $994 $1,002 $930
Average operating income per store (in thousands) $122 $ 138 $121
Comparable store sales(2) - percent change 0.1% 3.8% 1.5%
-9-
- ---------------------------------
(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.
Cost of sales, including buying and occupancy costs, increased
$15,742,000 (8.2%) to $207,526,000 in fiscal 2003 from $191,784,000 in fiscal
2002, and increased $14,968,000 (8.5%) in fiscal 2002 over fiscal 2001. The
fiscal 2003 and fiscal 2002 increases in cost of sales, including buying and
occupancy costs, are principally due to the increases in net sales. As a
percentage of net sales, these costs were 65.3% for fiscal 2003, 64.9% for
fiscal 2002 and 65.6% for fiscal 2001. For fiscal 2003, the increase in cost of
sales, including buying and occupancy costs, as a percentage of net sales, was
due to decreased margins in the fourth quarter. For fiscal 2002, the decrease in
cost of sales, including buying and occupancy costs, as a percentage of net
sales, was primarily the result of increased margins. Buying and occupancy costs
were 15.7%, 15.6% and 15.4% of net sales for the fiscal years 2003, 2002 and
2001, respectively.
Selling and administrative expenses increased $7,404,000 (12.4%) to
$67,184,000 in fiscal 2003 from $59,780,000 in fiscal 2002, and increased
$6,226,000 (11.6%) in fiscal 2002 over fiscal 2001. The increases in these
expenses for fiscal 2003 and fiscal 2002 are mainly due to increased costs of
personnel and benefits, partially resulting from an increase in the number of
stores in operation. As a percentage of net sales, these expenses were 21.1%,
20.2% and 19.9% during fiscal 2003, 2002 and 2001, respectively.
Depreciation expense increased $283,000 (8.0%) to $3,811,000 in fiscal
2003 from $3,528,000 in fiscal 2002, and decreased ($648,000) in fiscal 2002
compared to fiscal 2001. The increase in fiscal 2003 was due to the additional
fixed assets placed into service from the net opening of 18 new stores. The
decrease in fiscal 2002 from fiscal 2001 was principally attributable to the
accelerated write-off of leasehold improvements in fiscal 2001.
Operating income decreased ($1,393,000) (3.4%) to $39,201,000 in fiscal
2003 from $40,594,000 in fiscal 2002, and increased $5,529,000 (15.8%) in fiscal
2002 from fiscal 2001. As a percentage of net sales, operating income was 12.3%
in fiscal 2003, 13.7% in fiscal 2002 and 13.0% in fiscal 2001. The decrease in
fiscal 2003 versus fiscal 2002 was due to the aforementioned decrease in gross
profit margin and increase in selling and administrative expenses. The fiscal
2002 versus fiscal 2001 increase was primarily the result of increased margins.
Liquidity and Capital Resources - Consolidated
As of January 31, 2003, the Company had cash and cash equivalents of
$152,617,000 compared to $135,252,000 as of January 31, 2002, and $111,649,000
as of January 31, 2001. 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
stores and the remodeling of existing stores. Total cash provided by operating
activities, for fiscal 2003, 2002 and 2001, was $27,612,000, $32,341,000 and
$28,380,000, respectively. For fiscal 2003, cash provided by operations was the
result of net income increased by depreciation and a reduction in inventory,
offset by a net decrease in accounts payable and accrued expenses. For fiscal
2002, cash provided by operations was the result of net income adjusted for the
loss on the sale of BMI and noncash charges for depreciation and amortization
and changes in operating assets and liabilities, including an increase in trade
accounts payable and income taxes payable offset by an increase in merchandise
inventories. For fiscal 2001, cash provided by operating activities was the
result of net income increased by noncash 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. The inventory turnover rate for the
apparel business was approximately 3.0, 3.2 and 3.4 times for fiscal 2003, 2002
and 2001, respectively.
-10-
Net cash used in investing activities was $4,841,000, $5,256,000 and
$4,781,000 for fiscal 2003, 2002 and 2001, respectively. During these fiscal
years, these funds were principally used for the opening of new stores and the
remodeling of existing stores and in fiscal 2002 were partially offset by the
proceeds from the sale of BMI.
Net cash used in financing activities was $5,406,000, $3,482,000 and
$2,258,000 for fiscal 2003, 2002 and 2001, 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 believes that internally generated funds will be sufficient
to meet its anticipated capital expenditures, none of which are material, and
current operating needs. The Company had an unsecured line of credit in the
amount of $20,000,000 as of January 31, 2003. Of this amount, $664,000 was
outstanding as letters of credit for the purchase of inventory. The Company
leases its retail apparel stores, warehouse and office building for periods
ranging from one to 20 years. Following is a summary of the Company's
contractual obligations for minimum rental payments on its non-cancelable
operating leases and minimum payments on its other commitments as of January 31,
2003:
Payments Due by Period
Within 1 1 - 3 4 - 5 After 5
Total year years years years
---------------------------------------------------------------------------------------------------
Operating
Leases $ 144,062,000 $ 24,148,000 $ 40,306,000 $ 31,623,000 $ 47,985,000
Other
commitments 664,000 664,000 -- -- --
---------------------------------------------------------------------------------------------------
Total $ 144,726,000 $ 24,812,000 $ 40,306,000 $ 31,623,000 $ 47,985,000
===================================================================================================
Seasonal Nature of Operations
During fiscal 2003, approximately 52% and 59% of the Company's net
sales and net income occurred during the last six months, as compared to 54% and
69% of the Company's net sales and net income before effect of the loss on the
sale of BMI, respectively, for fiscal 2002. 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-Apparel Business."
Critical Accounting Policies
The financial statements and accompanying notes included elsewhere in
this report have been prepared in conformity with accounting principles
generally accepted in the United States. This requires the Company to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. These estimates and assumptions are based on
historical experience, analysis of current trends, and various other factors
that the Company believes to be reasonable under the circumstances. Actual
results could differ from those estimates under different assumptions or
conditions.
Periodically, the Company's accounting policies, assumptions, and
estimates are reevaluated and adjustments are made when facts and circumstances
warrant. Historically, actual results have not differed materially from those
determined using required estimates. The Company's significant accounting
policies are described in the notes accompanying the financial statements
included elsewhere in this report. However, the Company considers the following
accounting policies to be more dependent on the use of estimates and
assumptions.
-11-
Revenue Recognition
Revenue from merchandise sales is net of returns and allowances and
excludes sales tax. The provisions of the SEC Staff Accounting Bulletin No. 101,
"Revenue Recognition in Financial Statements," have been applied, and as a
result, a reserve is provided for estimated future sales returns that is based
on an analysis of actual returns received following the end of each fiscal
period. The Company also defers the recognition of layaway sales to the date of
delivery. A change in the actual rate of sales returns and layaway sales
experience would affect the amount of revenue recognized.
Inventories
Merchandise inventories are valued at the lower of cost or market as
determined by the retail inventory method (first-in, first-out method), which is
an averaging method that is widely used in the retail industry. Under the retail
inventory method ("RIM"), the valuation of inventories at cost and the resulting
gross margins are adjusted based on the effect of markdowns and shrinkage
relating to the Company's retail inventories. The use of the RIM will result in
valuing inventories at the lower of cost or market if markdowns are currently
taken as a reduction of the retail value of inventories. The RIM calculation
involves certain significant management judgments and estimates including, among
others, initial merchandise pricing, markup, markdowns, and shrinkage, all of
which affect the ending inventory valuation at cost as well as resulting gross
margins. Events such as store closings, liquidations, and the general economic
environment for retail apparel sales could result in an increase in the level of
markdowns, which under the RIM would result in lower inventory values and an
increase to cost of goods sold as a percentage of net sales in future periods.
In addition, failure to estimate markdowns currently would result in an
overstatement of inventory cost under the lower of cost or market principle.
Income Taxes
As part of the periodic financial statement closing process, the
Company estimates its income tax liability and assesses the recoverability of
deferred tax assets. Income taxes payable are estimated based on enacted tax
rates applied to the income expected to be taxed currently. The realizability of
deferred tax assets is assessed based on the availability of carrybacks of
future deductible amounts and the projection of future taxable income. The
Company cannot guarantee that it will be profitable in future years.
Historically there have not been significant differences between the estimated
tax accrual versus actual amounts.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
See the first paragraph under the caption "Liquidity and Capital
Resources - Consolidated" in this Annual Report on Form 10-K for a discussion
regarding quantitative and qualitative disclosures about market risk.
-12-
Item 8. Financial Statements and Supplementary Data
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, 2003 and 2002, and the related consolidated
statements of operations, shareholders' equity, and cash flows for each of the
three years in the period ended January 31, 2003. 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, 2003 and 2002, and the consolidated
results of their operations and their cash flows for each of the three years in
the period ended January 31, 2003, in conformity with accounting principles
generally accepted in the United States.
ERNST & YOUNG LLP
Philadelphia, Pennsylvania
March 5, 2003
-13-
DEB SHOPS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended January 31,
------------------------------------------------------------------------
2003 2002 2001
- -----------------------------------------------------------------------------------------------------------------------------
Net sales $317,721,720 $307,582,342 $287,263,105
------------------------------------------------------------------------
Costs and expenses:
Cost of sales, including buying
and occupancy costs 207,550,269 200,324,875 190,057,520
Selling and administrative 67,205,182 62,511,260 57,992,175
Depreciation and amortization 3,869,277 3,925,895 4,736,679
Loss on sale of subsidiary --- 7,381,152 ---
------------------------------------------------------------------------
278,624,728 274,143,182 252,786,374
Operating income 39,096,992 33,439,160 34,476,731
Other income, principally interest 1,863,502 3,900,582 5,264,089
------------------------------------------------------------------------
Income before income taxes 40,960,494 37,339,742 39,740,820
Income tax provision 15,472,000 13,750,000 14,900,000
------------------------------------------------------------------------
Net income $ 25,488,494 $ 23,589,742 $ 24,840,820
========================================================================
Net income per common share
Basic $ 1.86 $ 1.74 $ 1.85
========================================================================
Diluted $ 1.84 $ 1.73 $ 1.83
========================================================================
Weighted average number of
common shares outstanding
Basic 13,672,073 13,546,132 13,378,666
========================================================================
Diluted 13,815,059 13,628,621 13,518,653
========================================================================
See notes to consolidated financial statements.
-14-
DEB SHOPS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
January 31,
---------------------------------------------
2003 2002
- -----------------------------------------------------------------------------------------------------------------------------
ASSETS
Current Assets
Cash and cash equivalents $152,617,355 $135,251,663
Merchandise inventories 29,911,290 31,041,713
Prepaid expenses and other 2,692,479 2,863,473
Deferred income taxes 1,453,227 1,240,047
---------------------------------------------
Total current assets 186,674,351 170,396,896
Property, Plant and Equipment - at cost
Land 150,000 150,000
Buildings 2,365,697 4,347,697
Leasehold improvements 42,135,335 39,058,583
Furniture and equipment 17,619,473 17,025,868
---------------------------------------------
62,270,505 60,582,148
Less accumulated depreciation and amortization 42,409,030 41,554,322
---------------------------------------------
19,861,475 19,027,826
Other Assets
Deferred income taxes 4,892,273 4,306,068
Other 1,962,223 2,212,223
---------------------------------------------
Total other assets 6,854,496 6,518,291
---------------------------------------------
$213,390,322 $195,943,013
=============================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Trade accounts payable $21,616,666 $24,222,316
Accrued expenses and other 9,864,161 9,417,972
Income taxes payable 3,871,945 4,344,448
---------------------------------------------
Total current liabilities 35,352,772 37,984,736
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 184,440,137 164,732,974
---------------------------------------------
190,462,270 170,755,107
Less common treasury shares, at cost -
2003: 2,003,390; 2002: 2,063,390 12,424,720 12,796,830
---------------------------------------------
178,037,550 157,958,277
---------------------------------------------
$213,390,322 $195,943,013
=============================================
See notes to consolidated financial statements.
-15-
DEB SHOPS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
Additional
Preferred Common Paid-In Retained Treasury
Stock Stock Capital Earnings Stock
------------------------------------------------------------------------------
Balances February 1, 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
------------------------------------------------------------------------------
Balances January 31, 2001 460 156,883 5,864,790 145,495,311 (13,758,115)
Net income 23,589,742
Dividends on preferred stock ($120 per share) (55,200)
Dividends on common stock ($.325 per share) (4,410,593)
Stock options exercised 113,714 961,285
------------------------------------------------------------------------------
Balances January 31, 2002 460 156,883 5,864,790 164,732,974 (12,796,830)
Net income 25,488,494
Dividends on preferred stock ($120 per share) (55,200)
Dividends on common stock ($.425 per share) (5,816,085)
Stock options exercised 47,890 372,110
Tax benefit from exercise of stock options 42,064
------------------------------------------------------------------------------
Balances January 31, 2003 $460 $156,883 $5,864,790 $184,440,137 ($12,424,720)
==============================================================================
See notes to consolidated financial statements.
-16-
DEB SHOPS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended January 31,
----------------------------------------------------------------
2003 2002 2001
- -----------------------------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net income $ 25,488,494 $ 23,589,742 $ 24,840,820
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 3,869,277 3,925,895 4,736,679
Deferred income tax (benefit) provision (799,000) 13,000 (56,000)
Loss on retirement of property,
plant and equipment 138,021 116,274 199,570
Loss on sale of subsidiary --- 4,611,152 ---
Changes in operating assets and liabilities,
net of disposition of BMI:
Decrease (increase) in merchandise inventories 1,130,423 (8,073,992) (4,467,339)
Decrease in prepaid expenses and other 170,609 164,556 1,064,849
(Decrease) increase in trade accounts payable (2,605,650) 5,550,856 3,128,250
Increase (decrease) in accrued expenses and other 650,684 (1,361,967) (455,946)
(Decrease) increase in income taxes payable (430,439) 3,805,517 (610,881)
----------------------------------------------------------------
Net cash provided by operating activities 27,612,419 32,341,033 28,380,002
----------------------------------------------------------------
Cash flows from investing activities:
Purchases of property, plant and equipment (4,840,947) (6,264,862) (4,780,694)
Proceeds from sale of subsidiary, net of cash retained --- 1,008,769 ---
----------------------------------------------------------------
Net cash used in investing activities (4,840,947) (5,256,093) (4,780,694)
----------------------------------------------------------------
Cash flows from financing activities:
Preferred stock cash dividends paid (55,200) (55,200) (55,200)
Common stock cash dividends paid (5,469,463) (4,062,220) (2,680,130)
Proceeds from exercise of stock options 420,000 1,074,999 836,114
Principal payments under capital lease obligation (301,117) (439,400) (358,782)
----------------------------------------------------------------
Net cash used in financing activities (5,405,780) (3,481,821) (2,257,998)
----------------------------------------------------------------
Increase in cash and cash equivalents 17,365,692 23,603,119 21,341,310
Cash and cash equivalents at beginning of year 135,251,663 111,648,544 90,307,234
----------------------------------------------------------------
Cash and cash equivalents at end of year $152,617,355 $135,251,663 $111,648,544
================================================================
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest on capital lease obligation $ -- $ 110,600 $ 191,215
================================================================
Income taxes, net $ 15,072,466 $ 12,117,156 $ 13,805,344
================================================================
See notes to consolidated financial statements.
-17-
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 intercompany transactions and accounts.
Background: The Company sells popularly priced fashion apparel for junior and
plus-sized females and males through 327 stores. The Company's stores are
located in regional malls and strip shopping centers principally located in the
East and Midwest regions of the United States.
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: Revenue from merchandise sales is net of returns and
allowances and excludes 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.
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 depreciated over the lesser of ten years
or the remaining term of the lease. Furniture and equipment is depreciated over
the lesser of seven years or the remaining term of the lease. 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
amortization on a capitalized lease asset, was $3,869,000, $3,783,000 and
$4,522,000, for the years ended January 31, 2003, 2002 and 2001, respectively.
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.
Statements of Cash Flows: The Company considers all highly liquid investments
with a maturity of less than three months when purchased to be cash equivalents.
Included in cash and cash equivalents at January 31, 2003 is $151,593,000 of
investments in money market mutual funds and short-term municipal bonds. These
investments are carried at cost, which approximates market.
-18-
Impact of Recent Accounting Pronouncements: On December 31, 2002, the Financial
Accounting Standards Board ("FASB") issued Statement of Financial Accounting
Standards ("SFAS") No. 148, "Accounting for Stock-Based Compensation--Transition
and Disclosure" ("SFAS 148"). SFAS 148 amends SFAS No. 123, "Accounting for
Stock-Based Compensation" ("SFAS 123"), to provide alternative methods for a
voluntary transition to the fair-value method of accounting for stock-based
employee compensation. SFAS 148 also amends the disclosure provisions of SFAS
123 and Accounting Principles Board ("APB") Opinion No. 28, "Interim Financial
Reporting", to require disclosure in the summary of significant accounting
policies of the effects of an entity's accounting policy with respect to
stock-based employee compensation on reported net income and earnings per share
in annual and interim financial statements. While SFAS 148 does not amend SFAS
123 to require companies to account for employee stock options using the
fair-value method, the disclosure provisions of SFAS 148 are applicable to all
companies with stock-based employee compensation, regardless of whether they
account for that compensation using the fair-value method of SFAS 123 or the
intrinsic value method of APB Opinion No. 25, "Accounting for Stock Issued to
Employees" ("APB 25"). SFAS 148's amendment of the transition and annual
disclosure requirements of SFAS 123 are effective for fiscal years ending after
December 15, 2002. The Company has adopted the annual financial statement
disclosure requirements of SFAS 148 in fiscal 2003 and will adopt the interim
financial statement disclosure requirements in the first quarter of fiscal 2004.
The Company will continue to follow APB 25 and related interpretations in
accounting for its employee stock-based compensation.
- - B - LOSS ON SALE OF SUBSIDIARY
Effective September 30, 2001, the Company sold the stock of its
subsidiary, Books Management, Inc. ("BMI"). For the eight months ended September
30, 2001, BMI had net sales of $11,897,000 and operating income of $662,000. As
a result of the transaction, the Company recorded a pretax loss of $7,381,000
($4,611,000 net of tax, or a loss per share of ($0.34)).
- - C - 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,
---------------------------------------------------------------------------
2003 2002 2001
---------------------------------------------------------------------------
Net income $25,488,494 $23,589,742 $24,840,820
Dividends on preferred stock (55,200) (55,200) (55,200)
---------------------------------------------------------------------------
Income available to
common shareholders $25,433,294 $23,534,542 $24,785,620
===========================================================================
Basic weighted average
number of common
shares outstanding 13,672,073 13,546,132 13,378,666
Effect of dilutive stock options 142,986 82,489 139,987
---------------------------------------------------------------------------
Diluted weighted average
number of common
shares outstanding 13,815,059 13,628,621 13,518,653
===========================================================================
-19-
- - D - INCOME TAXES
Income tax provision consists of the following components:
Year Ended January 31,
-------------------------------------------------------------------
2003 2002 2001
- ---------------------------------------------------------------------------------------------------------------------
Current:
Federal....................................... $13,848,000 $12,132,000 $13,200,000
State......................................... 2,423,000 1,605,000 1,756,000
-------------------------------------------------------------------
16,271,000 13,737,000 14,956,000
Deferred:
Federal....................................... (623,000) 10,000 (49,000)
State......................................... (176,000) 3,000 (7,000)
-------------------------------------------------------------------
(799,000) 13,000 (56,000)
-------------------------------------------------------------------
$15,472,000 $13,750,000 $14,900,000
===================================================================
A reconciliation of the Company's effective income tax rate with the
statutory federal rate follows:
Year Ended January 31,
----------------------------------------------------------------
2003 2002 2001
- --------------------------------------------------- ----------------- --------------------- ------------------------
Tax provision at statutory rate $14,336,000 $13,069,000 $13,909,000
State income taxes, net of federal income
tax benefit 1,461,000 1,045,000 1,128,000
Other (325,000) (364,000) (137,000)
----------------- --------------------- ------------------------
$15,472,000 $13,750,000 $14,900,000
================= ===================== ========================
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,
------------------------------------------------------------
2003 2002
- --------------------------------------------------------------------------------------------------------------------
Deferred tax assets
Depreciation and amortization $4,976,000 $4,340,000
Uniform cost capitalization 852,000 746,000
Accrued expenses and other 694,000 605,000
Deferred rent 212,000 174,000
------------------------------------------------------------
6,734,000 5,865,000
Deferred tax liabilities
Prepaid expenses (305,000) (286,000)
Other (84,000) (33,000)
------------------------------------------------------------
(389,000) (319,000)
------------------------------------------------------------
$6,345,000 $5,546,000
============================================================
- - E - LEASES
The Company leases all of its retail apparel stores for periods ranging
from one to 20 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.
-20-
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 original expiration
date was June 14, 2002; however, the lease was amended to extend its term
through June 14, 2007. The amended arrangement is accounted for as an operating
lease. Prior to the extension, the agreement was classified as a capital lease.
At January 31, 2002, the underlying warehouse and office building had a net book
value of $33,000 and the lease had net minimum rental commitments of $301,000.
Rent expense recognized in conjunction with the operating lease in fiscal 2003
was $321,000. Interest expense related to the capital lease obligation amounted
to $111,000 and $191,000 for the years ended January 31, 2002 and 2001,
respectively, and is included in selling and administrative expenses.
Future minimum rental commitments for all non-cancelable leases at
January 31, 2003 are as follows:
Operating
Leases
- -------------------------------------------------------------------------------
2004.................................... $ 24,148,000
2005.................................... 21,265,000
2006.................................... 19,041,000
2007.................................... 17,811,000
2008.................................... 13,812,000
Thereafter.............................. 47,985,000
----------
Total minimum rental commitments $144,062,000
------------
Total rental expense under operating leases amounted to $26,235,000,
$25,135,000 and $23,102,000 in fiscal 2003, 2002 and 2001, respectively. Such
amounts include contingent rentals based upon a percentage of sales of
$2,464,000, $2,532,000 and $2,370,000 in fiscal 2003, 2002 and 2001,
respectively.
-21-
- - F- STOCK OPTION PLAN
In February 2002, the Company adopted the Deb Shops, Inc. Incentive
Stock Option Plan As Amended and Restated Effective January 1, 2002 (the
"Plan"). The Board of Directors, together with the Company's Stock Option and
Compensation Committees, administer the Plan. Under the Plan, options to
purchase up to 3,000,000 shares of the Company's common stock, par value $.01
per share, may be granted to employees or non-employee directors on the basis of
contributions to the operations of the Company. The price payable for the shares
of common stock under each stock option are fixed by the Board or the applicable
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 Board or the applicable Committee may specify.
The granted options expire through February 2009. There were 773,500 options
reserved for future grant under the Plan as of January 31, 2003.
Weighted
Average
Options Exercise Price
------- --------------
Outstanding, February 1, 2000 355,000 $ 6.11
Exercised............................. (135,000) (6.19)
Cancelled............................. (5,000) (7.00)
-----------------------------------------
Outstanding, January 31, 2001........................ 215,000 6.95
Exercised............................. (155,000) (6.94)
-----------------------------------------
Outstanding, January 31, 2002........................ 60,000 7.00
Granted............................... 1,426,500 23.77
Exercised............................. (60,000) (7.00)
Cancelled............................. (45,000) (23.75)
-----------------------------------------
Outstanding, January 31, 2003........................ 1,381,500 $ 23.77
=========================================
The remaining contractual life of the outstanding options ranges from
4.1 to 6.1 years. None of the options were exercisable as of January 31, 2003.
The Company applies APB 25 and related interpretations in accounting
for the Plan. In 1996, the FASB issued SFAS 123, which established a fair-value
method of accounting for stock-based compensation plans. Consistent with the
provisions of SFAS 123, the Company continued to account for stock-based
compensation using the intrinsic value method, while disclosing the impact that
the recognition of compensation cost consistent with the provisions SFAS 123
would have had on the financial statements. As discussed in Note A to the
consolidated financial statements, the Company adopted the provisions of SFAS
148 in fiscal 2003. The Company continues to account for stock-based
compensation using the intrinsic value method, and has adopted the additional
disclosure requirements of SFAS 148 in the current year.
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option-pricing model. The model used the following
assumptions:
- -------------------------------- --------------------------- ----------------------------
Fiscal 2003 grants Fiscal 1999 grants
------------------ ------------------
- -------------------------------- --------------------------- ----------------------------
Expected life Five years Five years
- -------------------------------- --------------------------- ----------------------------
Risk-free interest rate 4.3% 4.2%
- -------------------------------- --------------------------- ----------------------------
Volatility 42.4% 41.7%
- -------------------------------- --------------------------- ----------------------------
Dividend yield 1.7% 2.9%
- -------------------------------- --------------------------- ----------------------------
-22-
For purposes of pro forma disclosure, the estimated fair value of the
options, $8.84 for the fiscal 2003 grants and $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 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,
----------------------
2003 2002 2001
-----------------------------------------------------
Net income as reported $25,488,494 $23,589,742 $24,840,820
Stock-based employee compensation cost (4,038,246) -- (191,197)
-----------------------------------------------------
Pro forma net income $21,450,248 $23,589,742 $24,649,623
=====================================================
Basic net income per common share, as reported $ 1.86 $ 1.74 $ 1.85
Pro forma basic net income per common share $ 1.56 $ 1.74 $ 1.84
Diluted net income per common share, as reported $ 1.84 $ 1.73 $ 1.83
Pro forma diluted net income per common share $ 1.56 $ 1.73 $ 1.83
- - G- COMMITMENTS AND CONTINGENCIES
The Company had an unsecured line of credit in the amount of
$20,000,000. As of January 31, 2003, $664,000 was outstanding as letters of
credit for the purchase of inventory.
Two of the Company's employees have employment agreements that provide,
among other things, a base salary plus bonuses of 4% and 2%, respectively, of
the improvement in the operating results of the Company's apparel business. No
such bonuses were earned for the fiscal year ended January 31, 2003. The
agreements are applicable through fiscal 2007.
Bonuses of $332,000 were earned under similar agreements for fiscal
2002 and are included in accrued expenses on the accompanying consolidated
balance sheet as of January 31, 2002.
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 is not expected to have a materially adverse
effect on the Company's consolidated financial position or results of
operations.
-23-
Deb Shops, Inc.
Quarterly Financial Information
(Unaudited)
(amounts in thousands, except per share data) First Second Third Fourth
Quarter Quarter Quarter Quarter
- ------------------------------------------------------------------------------------------------------------------------
Net sales
2003 $76,964 $76,682 $81,232 $82,843
2002 $70,011 $72,490 $80,465 $84,616
Cost of sales, including buying
and occupancy costs
2003 $55,629 $47,807 $58,572 $45,543
2002 $51,097 $47,523 $57,917 $43,788
Net income (loss)
2003 $ 3,284 $ 7,268 $ 3,255 $11,682
2002 $ 2,974 $ 5,788 ($ 289)(1) $15,117
Basic net income (loss) per share
2003 $ .24 $ .53 $ .24 $ .85
2002 $ .22 $ .43 ($ .02)(1) $ 1.11
Diluted net income (loss) per share
2003 $ .24 $ .52 $ .24 $ .84
2002 $ .22 $ .42 ($ .02)(1) $ 1.11
Cash dividends declared per common
share
2003 $ .075 $ .150 $ .100 $ .100
2002 $ .050 $ .125 $ .075 $ .075
Amounts are computed independently for each of the quarters presented and
therefore may not sum to totals for each of the years.
(1) As more fully described in Note B to the consolidated financial statements,
the net loss for the third quarter of fiscal 2002 includes a $4.6 million
loss ($0.34 per share) relating to the sale of the Company's BMI
subsidiary.
-24-
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 following information is incorporated herein by reference:
(a) The 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 29, 2003, (the "2003 Proxy Statement')
under the caption "Election of Directors"; and
(b) the information in the 2003 Proxy Statement under the caption
"Section 16(a) Beneficial Ownership Reporting Compliance."
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 2003 Proxy Statement under the captions "Election of
Directors," "Comparison of Five-Year Cumulative Total Shareholder Returns" and
"Executive Compensation" which is incorporated in this Annual Report on Form
10-K by reference.
-25-
Item 12. Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
The required information with respect to security ownership of certain
beneficial owners and management is contained in the 2003 Proxy Statement under
the caption "Security Ownership of Certain Beneficial Owners and Management"
which is incorporated in this Annual Report on Form 10-K by reference.
The following table provides information as of January 31, 2003 with
respect to compensation plans (including individual compensation arrangements)
under which the Company's equity securities are authorized for issuance.
Equity Compensation Plan Information
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
Number of securities
remaining available for
future issuance under
Number of securities to be Weighted-average exercise equity compensation plans
issued upon exercise of price of outstanding (excluding securities
outstanding options, options, warrants and reflected in column (a))
warrants and rights rights (c)
Plan Category (a) (b)
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
Equity compensation plans
approved by security holders 1,381,500 $23.77 773,500
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
Equity compensation plans not
approved by security holders -- -- --
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
Total 1,381,500 $23.77 773,500
- ------------------------------- ============================ ============================ ============================
Item 13. Certain Relationships and Related Transactions
The required information with respect to certain relationships and
related transactions is contained in the 2003 Proxy Statement under the captions
"Election of Directors" and "Transactions with Management and Certain Business
Relationships" which is incorporated in this Annual Report on Form 10-K by
reference.
Item 14. Controls and Procedures
The Company's chief executive officer and chief financial officer
evaluated the effectiveness of the Company's disclosure controls and procedures
(as defined in Rule 13a-14(c) under the Securities Exchange Act of 1934, as
amended) within 90 days of the filing date of this report (the "Evaluation
Date") and, based on that evaluation, concluded that, as of the Evaluation Date,
the Company had sufficient controls and procedures for recording, processing,
summarizing and reporting information that is required to be disclosed in its
reports under the Securities Exchange Act of 1934, as amended, within the time
periods specified in the SEC's rules and forms.
Since the Evaluation Date, there have not been any significant
changes to the Company's internal controls, including any corrective actions
with regard to significant deficiencies and material weaknesses.
-26-
PART IV
Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K
Financial Statements and Financial Statement Schedules
Document Page(s)
-------- ------
Report of independent auditors............................ 13
Consolidated statements of operations for
the years ended January 31, 2003, 2002 and 2001........... 14
Consolidated balance sheets as of January 31,
2003 and 2002............................................. 15
Consolidated statements of shareholders'
equity for the years ended January 31, 2003,
2002 and 2001............................................. 16
Consolidated statements of cash flows for the
years ended January 31, 2003, 2002 and 2001............... 17
Notes to consolidated financial statements................ 18-23
Selected quarterly financial information (unaudited)
for the years ended January 31, 2003 and 2002............. 24
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.
Item 16. Principal Accountant Fees and Services
The required information with respect to principal accountant fees and
services is contained in the Company's Definitive Proxy Statement in connection
with its Annual Meeting to be held on May 29, 2003, which is incorporated in
this Annual Report on Form 10-K by reference.
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 denote a management contract
or executive compensatory plan or arrangement.
Exhibit No. Description of Document
----------- -----------------------
3-1 Restated Articles of Incorporation of the Company, as
amended through May 29, 1984 (filed herewith)
3-2 By-Laws of the Company, as amended through July 19, 1990
(filed herewith)
-27-
Exhibit No. Description of Document
----------- -----------------------
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 (2000 Form 10-K, Exhibit 10-1.1)
10-2.1 * Insurance Policy for Marvin Rounick and Judy Rounick
(filed herewith)
10-2.2 * 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
(filed herewith)
10-2.3 * 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 (filed herewith)
10-2.4 * 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, 1999, Exhibit 10-14.4)
10-2.5 *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, 1999, Exhibit 10-14.5)
10-2.6 * 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, 1999, Exhibit 10-14.6)
10-3.1 * Life Insurance Policy for Warren Weiner and Penny Weiner
(filed herewith)
10-3.2 * 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
(filed herewith)
10-3.3 * 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 (filed herewith)
-28-
Exhibit No. Description of Document
----------- -----------------------
10-3.4 * 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, 1999, Exhibit 10-14.4)
10-3.5 * 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, 1999, Exhibit 10-14.5)
10-3.6 * 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, 1999, Exhibit 10-14.6)
10-4 * Deb Shops, Inc. Premium Conversion Plan (filed herewith)
10-4.1 * Amendment No. I to Deb Shops, Inc. Premium Conversion Plan
(1998 Form 10-K, Exhibit 10-19.1)
10-5.1 * Deb Shops, Inc. Incentive Stock Option Plan, As Amended
and Restated Effective January 1, 2002 (2002 Form 10-K,
Exhibit 10-5.1)
10-6 * Employment Agreement dated December 20, 2001 between the
Company and Allan Laufgraben (2002 Form 10-K, Exhibit 10-6)
10-7 * Employment Agreement dated December 20, 2001 between the
Company and Barry Vesotsky (2002 Form 10-K, Exhibit 10-7)
21 Subsidiaries of the Company
23 Consent of Ernst & Young LLP
99.1 Certification of Periodic Report
99.2 Certification of Periodic Report
Reports on Form 8-K
- -------------------
There were no reports on Form 8-K for the quarter ended January 31,
2003.
-29-
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 29, 2003.
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 29, 2003
- -----------------------------------------
Marvin Rounick, President,
Chief Executive Officer and Director
(Principal Executive Officer)
/s/ Warren Weiner April 29, 2003
- -----------------------------------------
Warren Weiner, Executive Vice President,
Secretary, Treasurer and Director
/s/ Jack Rounick April 29, 2003
- -----------------------------------------
Jack A. Rounick, Assistant Secretary
and Director
/s/ Ivan Inerfeld April 29, 2003
- -----------------------------------------
Ivan Inerfeld, Director
/s/ Barry H. Feinberg April 29, 2003
- -----------------------------------------
Barry H. Feinberg, Director
/s/ Barry H. Frank April 29, 2003
- -----------------------------------------
Barry H. Frank, Esq., Director
/s/ Barry J. Susson April 29, 2003
- -----------------------------------------
Barry J. Susson, Chief Financial Officer
/s/ Joan M. Nolan April 29, 2003
- -----------------------------------------
Joan M. Nolan, Controller
-30-
Section 302 Certification by President and Chief Executive Officer
I, Marvin Rounick, certify that:
1. I have reviewed this annual report on Form 10-K of Deb Shops, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing date of
this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit committee
of registrant's board of directors (or persons performing the equivalent
functions):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: April 29, 2003
/s/ Marvin Rounick
-----------------------------
Marvin Rounick, President and
Chief Executive Officer
Section 302 Certification by Chief Financial Officer
I, Barry J. Susson, certify that:
1. I have reviewed this annual report on Form 10-K of Deb Shops, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report is
being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of
the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit committee
of registrant's board of directors (or persons performing the equivalent
functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: April 29, 2003
/s/ Barry J. Susson
-----------------------------------------
Barry J. Susson, Chief Financial Officer