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UNITED STATES
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, 2004
----------------
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________________ to ___________________
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
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(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 Exchange Act Rule 12b-2). Yes X No
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As of March 31, 2004, 13,684,900 shares of the registrant's Common
Stock, par value $.01 per share, were outstanding. As of July 31, 2003, the
aggregate market value of the registrant's Common Stock, par value $.01 per
share, held by non-affiliates was approximately $89,298,000.
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 19, 2004 - 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, earnings 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 332 women's and men's specialty apparel retail
stores in regional malls and strip shopping centers principally located in the
East and Midwest regions of the United States. The Company operates 323 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 three outlet
stores under the name "CSO." The outlet stores offer the same merchandise as DEB
at reduced prices and serve as clearance stores for slow-moving inventory. One
hundred and twenty-eight 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, 2004 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 merchandise offered in DEB's plus-sized departments caters to the
plus-size customer between the ages of 13 and 25. The merchandise is young
looking and the fit is adjusted to this 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 merchandising 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
assists the Company in its effort 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, 2004 ("fiscal 2004"), the
Company opened 13 stores and closed eight stores. Eleven of the new stores have
Plus departments. The Company also added Plus departments to 12 existing DEB
stores and converted one Plus location to a Junior / Plus combination store. The
Company currently plans to open 10-15 new stores in the fiscal year ending
January 31, 2005 ("fiscal 2005"), 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 2005. 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,
--------------------------------------------
2004 2003 2002 2001 2000
---- ---- ---- ---- ----
Open at beginning of fiscal year ....... 327 309 291 285 273
Opened during fiscal year .............. 13 23 23 13 17
Closed during fiscal year .............. (8) (5) (5) (7) (5)
---- ---- ---- ---- ----
Open at end of fiscal year ............. 332 327 309 291 285
==== ==== ==== ==== ====
The Company's 332 stores are located in 41 states, principally in the East and
Midwest portions of the United States. The following table lists the number of
stores operating within each geographic region of the country.
Number
Region of stores
------ ---------
Midwest 143
East 119
West 37
New England 22
South 11
---
Total 332
===
-2-
DEB stores, which average 5,900 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 2,400 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.
Operations
Payments for most of the Company's sales are made by cash or Visa,
MasterCard or Discover credit card, with the balance made by check. For customer
convenience, the Company provides layaway 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 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 41 employees consisting of an
Assistant Director of Store Operations and Regional and District Managers. A
Regional Manager is responsible for an average of six districts. A District
Manager is responsible for an average of 10 stores, each of which is staffed by
a Store Manager and two Assistant Store Managers. The District and Regional
Managers visit the stores regularly to review merchandise levels, content and
presentation, staff training and other personnel issues, store security and
cleanliness and adherence to standard operating procedures.
The merchandising department consists of 41 employees, including the
Senior 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, 2004, the Company had approximately 3,600 employees, 68%
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 approximately 100 of the Company's warehouse 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.
-3-
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 SEC. The Company's historical
filings can also be accessed directly from the SEC's website at www.sec.gov. The
Company's Audit and Nominating Committee charters, as well as the Company's Code
of Business Conduct & Ethics, are also available on www.debshops.com.
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, 2004. In many cases, the Company has
renewal options.
Number of Leases
Calendar Years Expiring
-------------- ----------------
2004 - 2005 81
2006 - 2007 76
2008 - 2009 63
2010 - 2011 29
2012 - 2013 44
2014 - 2015 25
2016 and thereafter 14
---
Total 332
===
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 geographic locations of present stores, see Item
1. Business - Stores.
-4-
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 material 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.
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 19, 2004.
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 60 Director, Executive Vice President, Secretary and Treasurer 1973
Allan Laufgraben 65 Senior Vice President, Merchandising 1995
Barry J. Susson 41 Chief Financial Officer 2003
Stanley A. Uhr 58 Vice President, Real Estate and Corporate Counsel 1988
Stephen P. Smith 44 Vice President, Information Systems 1998
Joan M. Nolan 51 Controller 1998
Marvin Rounick has been employed by the Company since 1961. Since 1979,
he has served as President and Chief Executive Officer.
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.
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.
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. Since May
1998, he has served as Vice President - Information Systems.
Joan M. Nolan has been employed by the Company since November 1998, as
Controller.
-5-
PART II
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:
2004 High Low
---- ---- ---
First Quarter $20.010 $16.850
Second Quarter $20.450 $18.640
Third Quarter $20.090 $17.780
Fourth Quarter $22.350 $18.900
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
Holders
As of March 31, 2004, there were 186 record holders and approximately
2,332 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 2003 was $0.075 and in each of the last
two quarters of fiscal 2003 and in each of the first two quarters of fiscal 2004
was $0.10. The per-share amount of the quarterly dividends paid in each of the
last two quarters of fiscal 2004 was $0.125. The Company also paid special
dividends of $0.05 per share in the third quarters of fiscal 2003 and 2004. 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.
-6-
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
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) 2004 2003 2002 2001 2000
- --------------------------------------------------------- --------------- -------------- --------------- -------------- ------------
Net sales $298,646 $317,722 $307,582 $287,263 $270,032
Gross margin 91,952 110,171 107,257 97,206 92,634
Operating income 18,530 39,097 33,439 34,477 35,566
Net income 12,767 25,488 23,590 24,841 24,462
Net income per common share - basic 0.93 1.86 1.74 1.85 1.84
Net income per common share - diluted 0.93 1.84 1.73 1.83 1.81
Weighted average shares outstanding - basic 13,685 13,672 13,546 13,379 13,230
Weighted average shares outstanding - diluted 13,685 13,815 13,629 13,519 13,494
Total assets 222,748 213,390 195,943 172,916 148,271
Capital lease obligation - long-term --- --- --- 301 741
Shareholders' equity 183,564 178,038 157,958 137,759 114,818
Book value per share at year end 13.41 13.01 11.59 10.23 8.61
Cash dividends declared per share of
common stock .525 .425 .325 .200 .200
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Overview
This Management's Discussion and Analysis of Financial Condition and
Results of Operations should be read in conjunction with the financial
statements and accompanying notes appearing elsewhere in this report. As used in
this report, the terms "fiscal 2004," "fiscal 2003," and "fiscal 2002," refer to
our fiscal years ended January 31, 2004, 2003 and 2002, respectively. The term
"fiscal 2005" refers to our fiscal year that will end on January 31, 2005.
The Company operates 332 women's and men's specialty apparel retail
stores in regional malls and strip shopping centers principally located in the
East and Midwest regions of the United States. The Company operates 323 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. In addition, the Company operates three outlet stores under the
name "CSO." The outlet stores offer the same merchandise as DEB at reduced
prices and serve as clearance stores for slow-moving inventory. One hundred and
twenty-eight 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.
-7-
By most of the Company's operating measures, fiscal 2004 was
disappointing. Declines in the Company's same-store sales that began in the
summer of fiscal 2003 continued throughout fiscal 2004, resulting in decreases
in sales and earnings versus fiscal 2003. The Company believes this difficult
operating environment was the result of economic softness in the Company's core
markets, poor weather in the early part of the year and an overall decline in
mall traffic. Combined with a lack of clear fashion direction within the
fashion-conscious junior market, these factors caused the Company's financial
performance to fall below expectations.
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).
Comparison of the Company's results of operations for fiscal 2003
versus fiscal 2002 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. Since BMI was sold during fiscal 2002,
its operations are not included in fiscal 2004 or fiscal 2003. As a result, this
separate comparison is not necessary when comparing fiscal 2004 to fiscal 2003.
The following table sets forth certain store information:
Store Data(1)
Year Ended January 31,
--------------------------------------
2004 2003 2002
---- ---- ----
Stores open at end of the year 332 327 309
Average number in operation during the year 331 320 295
Average net sales per store (in thousands) $902 $994 $1,002
Average operating income per store (in thousands) $ 56 $122 $ 138
Comparable store sales(2) - percent change (9.7)% 0.1% 3.8%
Fiscal 2004 compared to Fiscal 2003
Net sales
Net sales decreased $19,076,000, or 6.0%, to $298,646,000 in fiscal
2004 from $317,722,000 in fiscal 2003. The decrease in net sales was due to a
9.7% or $31,066,000 decrease in comparable store sales, partially offset by
sales from new stores of $11,990,000. The decrease is believed to be
attributable to economic softness in the Company's core markets, principally the
East and Midwest portions of the United States. Additional factors that are
believed to have contributed to the decrease during this period were higher gas
prices, unfavorable weather conditions during the first four months of fiscal
2004 and the resulting merchandising challenges created by those conditions.
Cost of sales, including buying and occupancy costs
Cost of sales, including buying and occupancy costs, decreased $856,000
or 0.4%, to $206,694,000 in fiscal 2004 from $207,550,000 in fiscal 2003. As a
percentage of net sales, these costs increased to 69.2% in fiscal 2004 from
65.3% in fiscal 2003. The nominal decrease between periods was due to the
overall decrease in sales. The increase as a percentage of net sales was due to
increased markdowns taken to stimulate sales as well as the de-leveraging of
buying and occupancy costs as a result of the comparable store sales decrease.
Buying and occupancy costs were 17.4% and 15.7% of net sales for fiscal 2004 and
2003, respectively.
- -------------------
(1) Includes Tops 'N Bottoms stores
(2) Comparable store sales include stores opened for both periods. A store is
added to the comparable store base in its 13th month of operation.
-8-
Selling and administrative expenses
Selling and administrative expenses increased $1,895,000 or 2.8%, to
$69,100,000 in fiscal 2004 from $67,205,000 in fiscal 2003. As a percentage of
net sales, these costs increased to 23.1% in fiscal 2004 from 21.1% in fiscal
2003. The $1,895,000 increase was due to increases in health, property and
casualty insurance costs as well as an increase in store payroll costs,
partially resulting from an increase in the number of stores in operation. The
increase as a percentage of sales was also due to these cost increases as well
as the de-leveraging of selling and administrative costs as a result of the
comparable store sales decrease.
Depreciation and amortization
Depreciation and amortization expense increased $452,000 or 11.7%, to
$4,322,000 in fiscal 2004 from $3,869,000 in fiscal 2003. As a percentage of net
sales, these expenses increased to 1.5% in fiscal 2004 from 1.2% in fiscal 2003.
The $452,000 increase was due to the full year depreciation expense recorded in
fiscal 2004 for stores placed in service during fiscal 2003, additional
depreciation expense related to the new and remodeled stores opened in fiscal
2004 and from $181,000 in asset impairment charges recorded for two unprofitable
stores. The increase as a percentage of sales was also due to these expense
increases as well as the de-leveraging of depreciation and amortization expense
as a result of the comparable store sales decrease.
Operating income
Operating income decreased $20,567,000 or 52.6%, to $18,530,000 in
fiscal 2004 from $39,097,000 in fiscal 2003. As a percentage of net sales,
operating income declined to 6.2% in fiscal 2004 from 12.3% in fiscal 2003. The
absolute and percentage decreases were due to the aforementioned decrease in
gross profit margin, and increases in selling and administrative and
depreciation and amortization expenses.
Other income, principally interest
Other income, principally interest, decreased $498,000 or 26.7% to
$1,365,000 in fiscal 2004 from $1,864,000 in fiscal 2003. Other income is offset
by losses on disposition of fixed assets of $280,000 in fiscal 2004 and $138,000
in fiscal 2003. The decrease between fiscal periods was primarily the result of
lower average interest rates in fiscal 2004 versus fiscal 2003, partially offset
by higher cash balances.
Income tax provision
The income tax provision for fiscal 2004 was $7,129,000, resulting in a
35.8% effective tax rate, as compared to $15,472,000 and a 37.8% effective tax
rate for fiscal 2003. The decrease in the effective rate between fiscal periods
resulted from the fact that, due to the decline in year over year earnings,
current year tax-exempt interest earnings represented a greater percentage of
pretax earnings. The effective tax rate in both fiscal years was greater than
the statutory federal rate, primarily as a result of state income taxes,
partially offset by tax-exempt interest.
Fiscal 2003 compared to Fiscal 2002 - Consolidated
Net sales
Net sales increased $10,139,000, or 3.3%, to $317,722,000 in fiscal
2003 from $307,582,000 in fiscal 2002. The increase resulted from an increase in
the number of stores in operation and a comparable store sales increase of 0.1%,
offset by the fiscal 2002 sale of BMI. As previously mentioned, BMI had net
sales of $11,897,000 in fiscal 2002.
Other income, principally interest
Other income, principally interest, decreased $2,037,000 or 52.2% to
$1,864,000 in fiscal 2003 from $3,901,000 in fiscal 2002. Other income is offset
by losses on disposition of fixed assets. The decrease between fiscal periods
was primarily the result of declining interest rates throughout fiscal 2003,
partially offset by higher cash balances.
-9-
Income before income taxes
Income before income taxes increased $3,621,000 or 9.7% to $40,960,000
in fiscal 2003 from $37,340,000 in fiscal 2002. As a percentage of net sales,
income before income taxes increased to 12.9% in fiscal 2003 from 12.1% in
fiscal 2002. The absolute and percentage increases were 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.
Income tax provision
The income tax provision for fiscal 2003 was $15,472,000, resulting in
a 37.8% effective tax rate, as compared to $13,750,000 and a 36.8% effective tax
rate for fiscal 2002. The increase in the effective rate between fiscal periods
resulted from the fact that tax-exempt earnings represented a smaller percentage
of pretax earnings in fiscal 2003 versus fiscal 2002. The effective tax rate in
both fiscal years was greater than the statutory federal rate, primarily as a
result of state income taxes, partially offset by tax-exempt interest.
Fiscal 2003 compared to Fiscal 2002 - Apparel Business
Net sales
Net sales increased $22,037,000, or 7.5%, to $317,722,000 in fiscal
2003 from $295,685,000 in fiscal 2002. The increase resulted from an increase in
the number of stores in operation and a comparable store sales increase of 0.1%.
Cost of sales, including buying and occupancy costs
Cost of sales, including buying and occupancy costs, increased
$15,742,000 or 8.2%, to $207,526,000 in fiscal 2003 from $191,784,000 in fiscal
2002. As a percentage of net sales, these costs increased to 65.3% in fiscal
2003 from 64.9% in fiscal 2002. The $15,742,000 increase was principally due to
the increase in net sales. The increase as a percentage of net sales was due to
decreased gross profit margins in the fourth quarter of fiscal 2003. Buying and
occupancy costs were 15.7% and 15.6% of net sales for fiscal 2003 and 2002,
respectively.
Selling and administrative expenses
Selling and administrative expenses increased $7,404,000 or 12.4%, to
$67,184,000 in fiscal 2003 from $59,780,000 in fiscal 2002. As a percentage of
net sales, these costs increased to 21.1% in fiscal 2003 from 20.2% in fiscal
2002. The increase in these expenses between fiscal years was primarily due to
increased personnel and benefit costs, partially resulting from the increase in
the number of stores in operation during fiscal 2003.
Depreciation and amortization
Depreciation and amortization expense increased $283,000 or 8.0%, to
$3,811,000 in fiscal 2003 from $3,528,000 in fiscal 2002. As a percentage of net
sales, these expenses remained consistent at 1.2%. The $283,000 increase was due
to the additional fixed assets placed into service from the net opening of 18
new stores.
Operating income
Operating income decreased $1,393,000 or 3.4%, to $39,201,000 in fiscal
2003 from $40,594,000 in fiscal 2002. As a percentage of net sales, operating
income declined to 12.3% in fiscal 2003 from 13.7% in fiscal 2002. The absolute
and percentage decreases were due to the aforementioned decrease in gross profit
margin and increases in selling and administrative and depreciation and
amortization expenses.
-10-
Liquidity and Capital Resources - Consolidated
As of January 31, 2004, the Company had cash and cash equivalents of
$166,264,000 compared to $152,617,000 as of January 31, 2003, and $135,252,000
as of January 31, 2002. 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 2004, 2003 and 2002, was $22,398,000, $27,612,000 and
$32,341,000, respectively. For fiscal 2004, cash provided by operations was the
result of net income, increased by depreciation; an increase in trade accounts
payable and a decrease in merchandise inventories, offset by a net decrease in
accrued expenses and income taxes payable. 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. The inventory turnover rate for the
apparel business was approximately 2.9, 3.0, and 3.2 times for fiscal 2004, 2003
and 2002, respectively.
Net cash used in investing activities was $1,853,000, $4,841,000 and
$5,256,000 for fiscal 2004, 2003 and 2002, 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. The fiscal 2004 versus fiscal 2003 decrease in
cash used in investing activities was due to the fact that during fiscal 2004,
the Company opened 13 new stores and remodeled 17 as compared to 23 new stores
and 16 remodels during fiscal 2003.
Net cash used in financing activities was $6,898,000, $5,406,000 and
$3,482,000 for fiscal 2004, 2003 and 2002, respectively. During these fiscal
years, these funds were principally used for the payment of dividends on
preferred and common stock. In fiscal 2003 and fiscal 2002, these amounts were
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, 2004. Of this amount, $1,638,000 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,
2004:
Payments Due by Period
Less than 1 1 - 3 3 - 5 More than 5
Total year years years years
------------------------------------------------------------------------
Operating leases $143,501,000 $ 24,427,000 $ 42,840,000 $ 30,427,000 $ 45,807,000
Other commitments 1,638,000 1,638,000 -- -- --
------------------------------------------------------------------------
Total $145,139,000 $ 26,065,000 $ 42,840,000 $ 30,427,000 $ 45,807,000
========================================================================
-11-
Seasonal Nature of Operations
During fiscal 2004, approximately 27% and 67% of the Company's net
sales and net income occurred during the fourth quarter, as compared to 26% and
46% of the Company's net sales and net income for fiscal 2003. The fourth
quarter includes the Christmas selling season. The increase in the percentage of
the Company's fiscal 2004 fourth quarter net income compared to the fourth
quarter of fiscal 2003 was due to the decline in net income for the first three
quarters of fiscal 2004 versus the comparable period in fiscal 2003. See
"Quarterly Financial Information (Unaudited)" and the preceding discussions on
"Fiscal 2004 compared to Fiscal 2003" and "Fiscal 2003 compared to Fiscal 2002."
Critical Accounting Policies
The financial statements and accompanying notes included in Item 8.
Financial Statements and Supplementary Data 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 in Item 8. Financial Statements and Supplementary Data. However, the
Company considers the following accounting policies to be more dependent on the
use of estimates and assumptions.
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 effects 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, markups, 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.
-12-
Impairment of Long-Lived Assets
As required under Statement of Financial Accounting Standards ("SFAS")
No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS
144"), the Company is required to assess its long-lived assets for
recoverability whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. When evaluating potential
impairment, consideration is given to historical performance and future
estimated results. The carrying amount of the asset is then compared to the
estimated future undiscounted cash flows expected to result from the use of the
asset. If the estimated future undiscounted cash flows are less than the
carrying amount of the asset, such asset is written down to its estimated fair
value and an impairment loss is recognized. During fiscal 2004, the Company
recognized $181,000 in impairment charges related to two unprofitable stores. No
impairment charges were recorded during fiscal 2003 or 2002.
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.
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, 2004 and 2003, and the related consolidated
statements of operations, shareholders' equity, and cash flows for each of the
three years in the period ended January 31, 2004. 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, 2004 and 2003, and the consolidated
results of their operations and their cash flows for each of the three years in
the period ended January 31, 2004, in conformity with accounting principles
generally accepted in the United States.
ERNST & YOUNG LLP
Philadelphia, Pennsylvania
March 8, 2004
-13-
DEB SHOPS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended January 31,
------------------------------------------
2004 2003 2002
------------ ------------ ------------
Net sales $298,645,811 $317,721,720 $307,582,342
------------ ------------ ------------
Costs and expenses:
Cost of sales, including buying
and occupancy costs 206,693,546 207,550,269 200,324,875
Selling and administrative 69,100,302 67,205,182 62,511,260
Depreciation and amortization 4,321,598 3,869,277 3,925,895
Loss on sale of subsidiary -- -- 7,381,152
------------ ------------ ------------
280,115,446 278,624,728 274,143,182
Operating income 18,530,365 39,096,992 33,439,160
Other income, principally interest 1,365,255 1,863,502 3,900,582
------------ ------------ ------------
Income before income taxes 19,895,620 40,960,494 37,339,742
Income tax provision 7,129,000 15,472,000 13,750,000
------------ ------------ ------------
Net income $ 12,766,620 $ 25,488,494 $ 23,589,742
============ ============ ============
Net income per common share
Basic $ 0.93 $ 1.86 $ 1.74
============ ============ ============
Diluted $ 0.93 $ 1.84 $ 1.73
============ ============ ============
Weighted average number of
common shares outstanding
Basic 13,684,900 13,672,073 13,546,132
============ ============ ============
Diluted 13,684,900 13,815,059 13,628,621
============ ============ ============
See notes to consolidated financial statements.
-14-
DEB SHOPS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
January 31,
---------------------------
2004 2003
------------ ------------
ASSETS
Current Assets
Cash and cash equivalents $166,264,418 $152,617,355
Merchandise inventories 28,264,675 29,911,290
Prepaid expenses and other 3,150,882 2,692,479
Deferred income taxes 1,260,191 1,453,227
------------ ------------
Total current assets 198,940,166 186,674,351
Property, Plant and Equipment - at cost
Land 150,000 150,000
Buildings 2,365,697 2,365,697
Leasehold improvements 40,566,558 42,135,335
Furniture and equipment 16,656,545 17,619,473
------------ ------------
59,738,800 62,270,505
Less accumulated depreciation and amortization 42,625,923 42,409,030
------------ ------------
Net property, plant and equipment 17,112,877 19,861,475
Other Assets
Deferred income taxes 4,732,846 4,892,273
Other 1,962,223 1,962,223
------------ ------------
Total other assets 6,695,069 6,854,496
------------ ------------
Total assets $222,748,112 $213,390,322
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Trade accounts payable $ 26,523,559 $ 21,616,666
Accrued expenses and other 10,649,923 9,864,161
Income taxes payable 2,010,234 3,871,945
------------ ------------
Total current liabilities 39,183,716 35,352,772
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 189,966,983 184,440,137
------------ ------------
195,989,116 190,462,270
Less 2,003,390 common treasury shares, at cost 12,424,720 12,424,720
------------ ------------
183,564,396 178,037,550
------------ ------------
Total liabilities and shareholders' equity $222,748,112 $213,390,322
============ ============
See notes to consolidated financial statements.
-15-
DEB SHOPS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Additional
Preferred Common Paid-In Retained Treasury
Stock Stock Capital Earnings Stock
----------------------------------------------------------------------------------------------
Balances - February 1, 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)
Net income 12,766,620
Dividends on preferred stock
($120 per share) (55,200)
Dividends on common stock
($.525 per share) (7,184,574)
----------------------------------------------------------------------------------------------
Balances - January 31, 2004 $ 460 $ 156,883 $ 5,864,790 $ 189,966,983 $ (12,424,720)
==============================================================================================
See notes to consolidated financial statements.
-16-
DEB SHOPS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended January 31,
-------------------------------------------------------------
2004 2003 2002
- --------------------------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net income $ 12,766,620 $ 25,488,494 $ 23,589,742
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 4,321,598 3,869,277 3,925,895
Deferred income tax (benefit) provision (449,000) (799,000) 13,000
Loss on retirement of property,
plant and equipment 280,397 138,021 116,274
Loss on sale of subsidiary --- --- 4,611,152
Changes in operating assets and liabilities,
net of disposition of BMI:
Decrease (increase) in merchandise inventories 1,646,615 1,130,423 (8,073,992)
(Increase) decrease in prepaid expenses and other (458,022) 170,609 164,556
Increase (decrease) in trade accounts payable 4,906,893 (2,605,650) 5,550,856
Increase (decrease) in accrued expenses and other 443,639 650,684 (1,361,967)
(Decrease) increase in income taxes payable (1,060,629) (430,439) 3,805,517
-------------------------------------------------------------
Net cash provided by operating activities 22,398,111 27,612,419 32,341,033
-------------------------------------------------------------
Cash flows from investing activities:
Purchases of property, plant and equipment (1,853,397) (4,840,947) (6,264,862)
Proceeds from sale of subsidiary, net of cash retained --- --- 1,008,769
-------------------------------------------------------------
Net cash used in investing activities (1,853,397) (4,840,947) (5,256,093)
-------------------------------------------------------------
Cash flows from financing activities:
Preferred stock cash dividends paid (55,200) (55,200) (55,200)
Common stock cash dividends paid (6,842,451) (5,469,463) (4,062,220)
Proceeds from exercise of stock options --- 420,000 1,074,999
Principal payments under capital lease obligation --- (301,117) (439,400)
-------------------------------------------------------------
Net cash used in financing activities (6,897,651) (5,405,780) (3,481,821)
-------------------------------------------------------------
Increase in cash and cash equivalents 13,647,063 17,365,692 23,603,119
Cash and cash equivalents at beginning of year 152,617,355 135,251,663 111,648,544
-------------------------------------------------------------
Cash and cash equivalents at end of year $ 166,264,418 $ 152,617,355 $ 135,251,663
=============================================================
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest on capital lease obligation $ --- $ --- $ 110,600
=============================================================
Income taxes, net $ 8,542,787 $ 15,072,466 $ 12,117,156
=============================================================
See notes to consolidated financial statements.
-17-
DEB SHOPS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- - A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Operation: Deb Shops, Inc. (the "Company") operates 332 women's and men's
specialty apparel retail stores. The Company operates 323 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. In addition, the Company operates three outlet stores under the name
"CSO." The outlet stores offer the same merchandise as DEB at reduced prices and
serve as clearance stores for slow-moving inventory. One hundred and
twenty-eight 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. 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.
Consolidation: The consolidated financial statements of the Company include the
accounts of the Company and its subsidiaries, after elimination of all
intercompany transactions and accounts.
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. 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.
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: 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.
Property, plant and equipment are reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. When such events or circumstances arise, an estimate of
the future undiscounted cash flows relating to the asset is compared to the
asset's carrying value to determine if an impairment exists pursuant to the
requirements of Statement of Financial Accounting Standards ("SFAS") No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS 144").
If the asset is determined to be impaired, the impairment loss is measured based
on the excess of its carrying value over its fair value. During fiscal 2004, the
Company recognized $181,000 in impairment charges related to two unprofitable
stores. No impairment charges were recorded during fiscal 2003 or 2002.
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, 2004 and January 31, 2003
is $164,356,000 and $151,593,000, respectively of investments in money market
mutual funds and short-term municipal bonds. These investments are carried at
cost, which approximates market.
-18-
Stock-based Compensation Plans: In December 2002, the Financial Accounting
Standards Board issued 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.
The adoption of the standard was effective for fiscal years and interim periods
beginning after December 15, 2002. Rather than adopt the fair-value method of
accounting for stock-based compensation, the Company chose to continue
accounting for such items using the intrinsic value method. As required, the
Company did adopt the disclosure provisions of this standard.
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 Plan is more fully described in Note F. The Company continues to
use the accounting method under APB Opinion No. 25, "Accounting for Stock Issued
to Employees," and related interpretations for the Plan. Under APB Opinion No.
25, generally, when the exercise price of the Company's stock options equals the
market price of the underlying stock on the date of the grant, no compensation
expense is recognized. The following table illustrates the effect on net income
and earnings per share if the Company had applied the fair value recognition
provisions of SFAS No. 123, to all stock-related compensation.
For purposes of proforma disclosures, the estimated fair value of the
stock options under the Plan are amortized to expense over their vesting
periods.
Year Ended January 31,
-----------------------------------------------------
2004 2003 2002
-----------------------------------------------------
Net income as reported $ 12,766,620 $ 25,488,494 $ 23,589,742
Stock-based employee compensation cost (2,061,296) (4,038,246) --
-----------------------------------------------------
Pro forma net income $ 10,705,324 $ 21,450,248 $ 23,589,742
=====================================================
Basic net income per common share, as reported $ 0.93 $ 1.86 $ 1.74
Pro forma basic net income per common share $ 0.78 $ 1.56 $ 1.74
Diluted net income per common share, as reported $ 0.93 $ 1.84 $ 1.73
Pro forma diluted net income per common share $ 0.78 $ 1.56 $ 1.73
- - 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 pre-tax loss of $7,381,000
($4,611,000 net of tax, or a loss per share of $0.34) in its fiscal 2002
consolidated statement of operations.
-19-
- - 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,
-------------------------------------------------------------------
2004 2003 2002
-------------------------------------------------------------------
Net income $ 12,766,620 $ 25,488,494 $ 23,589,742
Dividends on preferred stock (55,200) (55,200) (55,200)
-------------------------------------------------------------------
Income available to
common shareholders $ 12,711,420 $ 25,433,294 $ 23,534,542
===================================================================
Basic weighted average
number of common
shares outstanding 13,684,900 13,672,073 13,546,132
Effect of dilutive stock options -- 142,986 82,489
-------------------------------------------------------------------
Diluted weighted average
number of common
shares outstanding 13,684,900 13,815,059 13,628,621
===================================================================
- - D - INCOME TAXES
Income tax provision consists of the following components:
Year Ended January 31,
-------------------------------------------------------------------
2004 2003 2002
-------------------------------------------------------------------
Current:
Federal $ 6,428,000 $ 13,848,000 $ 12,132,000
State 1,150,000 2,423,000 1,605,000
-------------------------------------------------------------------
7,578,000 16,271,000 13,737,000
Deferred:
Federal (193,000) (623,000) 10,000
State (256,000) (176,000) 3,000
-------------------------------------------------------------------
(449,000) (799,000) 13,000
-------------------------------------------------------------------
$ 7,129,000 $ 15,472,000 $ 13,750,000
===================================================================
A reconciliation of the Company's effective income tax rate with the
statutory federal rate follows:
Year Ended January 31,
-------------------------------------------------------------------
2004 2003 2002
-------------------------------------------------------------------
Tax provision at statutory rate $ 6,963,000 $ 14,336,000 $ 13,069,000
State income taxes, net of federal
income tax benefit 391,000 1,461,000 1,045,000
Other (225,000) (325,000) (364,000)
-------------------------------------------------------------------
$ 7,129,000 $ 15,472,000 $ 13,750,000
===================================================================
-20-
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,
-------------------------------------------
2004 2003
-------------------------------------------
Deferred tax assets
Depreciation and amortization $ 4,733,000 $ 4,976,000
Uniform cost capitalization 628,000 852,000
Accrued expenses and other 724,000 694,000
Deferred rent 204,000 212,000
-------------------------------------------
6,289,000 6,734,000
Deferred tax liabilities
Prepaid expenses (296,000) (305,000)
Other --- (84,000)
-------------------------------------------
(296,000) (389,000)
-------------------------------------------
$ 5,993,000 $ 6,345,000
===========================================
- - 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, as defined in the lease
agreements.
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.
Rent expense recognized in conjunction with the operating lease was $550,000 and
$321,000 for the years ended January 31, 2004 and 2003, respectively. Interest
expense related to the capital lease obligation amounted to $111,000 for the
year ended January 31, 2002. This amount is included in selling and
administrative expenses.
Future minimum rental commitments for all non-cancelable leases at
January 31, 2004 are as follows:
Operating
Leases
- --------------------------------------------------------------------------------
2005 $ 24,427,000
2006 22,210,000
2007 20,630,000
2008 16,435,000
2009 13,992,000
Thereafter 45,807,000
------------
Total minimum rental commitments $143,501,000
============
Total rental expense under operating leases amounted to $28,124,000,
$26,556,000 and $25,135,000 in fiscal 2004, 2003 and 2002, respectively. Such
amounts include contingent rentals based upon a percentage of sales of
$1,975,000, $2,464,000 and $2,532,000 in fiscal 2004, 2003 and 2002,
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 775,000 options
reserved for future grant under the Plan as of January 31, 2004.
A summary of the Company's stock option activity and related
information for the fiscal years ended January 31 follows:
Weighted
Average
Options Exercise Price
------- --------------
Outstanding, February 1, 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
Granted 45,000 23.75
Exercised --- ---
Cancelled (46,500) 23.75
----------------------------------
Outstanding, January 31, 2004 1,380,000 $ 23.77
==================================
The remaining contractual life of the outstanding options ranges from
3.1 to 5.1 years. Of the 1,380,000 options outstanding at January 31, 2004,
451,500 were exercisable at a weighted average exercise price of $23.75.
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 2004 grants Fiscal 2003 grants Fiscal 1999 grants
------------------ ------------------ ------------------
Expected life Five years Five years Five years
Risk-free interest rate 4.3% 4.3% 4.2%
Volatility 34.7% 42.4% 41.7%
Dividend yield 2.6% 1.7% 2.9%
The estimated fair value of the options granted was $4.69 for the
fiscal 2004 grants, $8.84 for the fiscal 2003 and $2.34 for the fiscal 1999
grants.
-22-
- - G- COMMITMENTS AND CONTINGENCIES
The Company has an unsecured line of credit in the amount of
$20,000,000. As of January 31, 2004, $1,638,000 was outstanding as letters of
credit for the purchase of inventory.
One of the Company's employees has an employment agreement that
provides for, among other things, a base salary plus a bonus of 4% of the
improvement in the operating results of the Company's DEB business. No bonuses
were earned for the fiscal years ended January 31, 2004 or 2003. This agreement
is applicable through fiscal 2007.
Bonuses of $332,000 were earned under similar agreements for fiscal
2002 and are included in cost of sales, buying and occupancy expenses in the
accompanying consolidated statement of operations 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 material adverse
effect on the Company's consolidated financial position or results of
operations.
- H- QUARTERLY FINANCIAL INFORMATION (Unaudited)
(amounts in thousands, except per share First Second Third Fourth
data) Quarter Quarter Quarter Quarter
- ------------------------------------------------------------------------------------------------------------------------
Net sales
2004 $ 70,162 $ 73,019 $ 74,810 $ 80,656(1)
2003 $ 76,964 $ 76,682 $ 81,232 $ 82,843(1)
Cost of sales, including buying
and occupancy costs
2004 $ 52,394 $ 50,270 $ 55,296 $ 48,734
2003 $ 55,629 $ 47,807 $ 58,572 $ 45,543
Net income
2004 $ 280 $ 2,706 $ 1,183 $ 8,598(1)
2003 $ 3,284 $ 7,268 $ 3,255 $ 11,682(1)
Basic net income per share
2004 $ 0.02 $ 0.20 $ 0.09 $ 0.63
2003 $ 0.24 $ 0.53 $ 0.24 $ 0.85
Diluted net income per share
2004 $ 0.02 $ 0.20 $ 0.09 $ 0.63
2003 $ 0.24 $ 0.52 $ 0.24 $ 0.85
Cash dividends declared per common
share
2004 $ .100 $ .175 $ .125 $ .125
2003 $ .075 $ .150 $ .100 $ .100
Amounts are computed independently for each of the quarters presented
and therefore may not sum to totals for each of the years.
(1) During fiscal 2004, approximately 27% and 67% of the Company's net
sales and net income occurred during the fourth quarter, as compared to 46% and
52% of the Company's net sales and net income for fiscal 2003. The fourth
quarter includes the Christmas selling season. The increase in the percentage of
the Company's fiscal 2004 fourth quarter net income compared to the fourth
quarter of fiscal 2003 was due to the decline in net income for the first three
quarters of fiscal 2004 versus the comparable period in fiscal 2003.
-23-
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
Item 9A. Controls and Procedures
(a) Evaluation of Disclosure Controls and Procedures
The Company's chief executive officer and chief financial officer, with
the participation of other members of the Company's management, have evaluated
the effectiveness of the Company's disclosure controls and procedures (as
defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended)
as of the end of the period covered by 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.
(b) Change in Internal Control over Financial Reporting
There has not been any change in the Company's internal control over
financial reporting during its quarter ended January 31, 2004 that has
materially affected or is reasonably likely to materially affect its internal
control over financial reporting.
PART III
Item 10. Directors and Executive Officers of the Registrant
The Company has adopted a Code of Business Conduct & Ethics that
applies to the Company's directors, officers and employees, including its
principal executive officer, principal financial officer and controller. The
Company's Code of Business Conduct & Ethics is available on its website at
www.debshops.com. Unless disclosure in a Current Report on Form 8-K is otherwise
required under NASDAQ, SEC or other applicable rules and regulations, the
Company intends to satisfy the disclosure requirements under Item 10 of Form 8-K
regarding an amendment or waiver from a provision of the Code of Business
Conduct & Ethics that applies to its principal executive officer, principal
financial officer, controller or persons performing similar functions and that
relates to certain topics by posting such information on its website at
www.debshops.com.
Except as set forth under the caption, "Executive Officers of the
Registrant", in Part I of this Annual Report on Form 10-K, the information
required by this item is contained in the 2004 Proxy Statement under the
captions, "Election of Directors", "Corporate Governance - Audit Committee",
"Procedures for Nominating or Recommending for Nomination Candidates for
Director" and "Section 16(a) Beneficial Ownership Reporting Compliance" and is
hereby incorporated herein by reference.
Item 11. Executive Compensation
The required information with respect to executive compensation is
contained in the 2004 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.
-24-
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 2004 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, 2004 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 Weighted-average equity compensation
be issued upon exercise exercise price of plans (excluding
of outstanding options, outstanding options, securities reflected in
warrants and rights warrants and rights column (a))
Plan Category (a) (b) (c)
- ---------------------------------------------------------------------------------------------------------------------
Equity compensation plans
approved by security holders 1,380,000 $23.77 775,000
- ---------------------------------------------------------------------------------------------------------------------
Equity compensation plans not
approved by security holders -- -- --
- ---------------------------------------------------------------------------------------------------------------------
Total 1,380,000 $23.77 775,000
- -------------------------------======================================================================================
Item 13. Certain Relationships and Related Transactions
The required information with respect to certain relationships and
related transactions is contained in the 2004 Proxy Statement under the caption,
"Transactions With Management and Certain Business Relationships", which is
incorporated in this Annual Report on Form 10-K by reference.
Item 14. Principal Accountant Fees and Services
The required information with respect to principal accountant fees and
services is contained in the Company's 2004 Proxy Statement under the caption,
"Relationships with Independent Auditors", which is incorporated in this Annual
Report on Form 10-K by reference.
-25-
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, 2004, 2003 and 2002 14
Consolidated balance sheets as of January 31,
2004 and 2003 15
Consolidated statements of shareholders'
equity for the years ended January 31, 2004,
2003 and 2002 16
Consolidated statements of cash flows for the
years ended January 31, 2004, 2003 and 2002 17
Notes to consolidated financial statements 18-23
Selected quarterly financial information (unaudited)
for the years ended January 31, 2004 and 2003 23
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.
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 (2003 Form 10-K, Exhibit 3-1)
3-2 By-Laws of the Company, as amended through February 2, 2004
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)
-26-
Exhibit No. Description of Document
----------- -----------------------
10-2.1 * Insurance Policy for Marvin Rounick and Judy Rounick (2003 Form 10-K,
Exhibit 10-2.1)
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 (2003 Form 10-K Exhibit 10-2.2)
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 (2003 Form 10-K Exhibit 10.2-3)
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 (2003 Form 10-K Exhibit
10-3.1)
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 (2003 Form 10-K Exhibit 10-3.2)
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 (2003 Form 10-K Exhibit 10-3.3)
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)
10-3.5.1 * 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)
-27-
Exhibit No. Description of Document
----------- -----------------------
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 (2003 Form 10-K, Exhibit 10-4)
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
31.1 Certification of Chief Executive Officer, pursuant to Rule 13a-14(a) under the
Securities Exchange Act of 1934
31.2 Certification of Chief Financial Officer, pursuant to Rule 13a-14(a) under the
Securities Exchange Act of 1934
32.1 Certification of Chief Executive Officer, pursuant to 18 U.S.C. Section 1350
32.2 Certification of Chief Financial Officer, pursuant to 18 U.S.C. Section 1350
Reports on Form 8-K
- --------------------
The following reports on Form 8-K were furnished by the Company to the
Securities and Exchange Commission during the fourth quarter of the fiscal year
ended January 31, 2004:
1. Report on Form 8-K, filed November 10, 2003, including the
press release dated November 6, 2003 discussing sales
results for the month, quarter and year to date periods
ended October 31, 2003.
2. Report on Form 8-K, filed November 20, 2003, including the
press release dated November 20, 2003 discussing the
Company's financial results for the fiscal third quarter and
nine-month periods ended October 31, 2003.
-28-
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 15, 2004.
DEB SHOPS, INC.
(Registrant)
By: 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.
Marvin Rounick April 15, 2004
- ----------------------------------
Marvin Rounick, President,
Chief Executive Officer and Director
(Principal Executive Officer)
Warren Weiner April 15, 2004
- ----------------------------------
Warren Weiner, Executive Vice President,
Secretary, Treasurer and Director
Jack Rounick April 15, 2004
- ----------------------------------
Jack A. Rounick, Assistant Secretary
and Director
Ivan Inerfeld April 15, 2004
- ----------------------------------
Ivan Inerfeld, Director
Barry H. Feinberg April 15, 2004
- ----------------------------------
Barry H. Feinberg, Director
Barry H. Frank April 15, 2004
- ----------------------------------
Barry H. Frank, Esq., Director
Barry J. Susson April 15, 2004
- ----------------------------------
Barry J. Susson, Chief Financial Officer
Joan M. Nolan April 15, 2004
- ----------------------------------
Joan M. Nolan, Controller
-29-