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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, 2005
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
DEB SHOPS, INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
9401 BLUE GRASS ROAD, PHILADELPHIA, PA 19114
-----------------------------------------------------
(Address of principal executive offices and zip code)
PENNSYLVANIA 23-1913593
------------------------ ---------------------------------
(State of Incorporation) (IRS Employer Identification No.)
(215) 676-6000
----------------------------------------------------
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act: Common Stock, par
value $.01 per share.
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days: Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Exchange Act Rule 12b-2).
Yes [X] No [ ]
As of March 31, 2005, 13,762,011 shares of the registrant's Common
Stock, par value $.01 per share, were outstanding. As of July 30, 2004 (the last
business day of the registrant's second fiscal quarter), the aggregate market
value of the registrant's Common Stock, par value $.01 per share, held by
non-affiliates was approximately $110,180,000.
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 11, 2005 - 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 323 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 314 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 forty 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.
Seventeen of the DEB stores contain Tops 'N Bottoms departments. Store
information is as of January 31, 2005 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 merchandising season to another. Most of the Company's seasonal
merchandise is liquidated through this process. At the end of each season, any
remaining seasonal merchandise is transferred to the Company's CSO stores.
STORES
During the fiscal year ended January 31, 2005 ("fiscal 2005"), the
Company opened eight stores, closed 17 stores and remodeled 11. Seven of the new
stores have plus-size departments. The Company also added plus-size departments
to nine existing DEB stores. The Company currently plans to open five to ten new
stores in the fiscal year ending January 31, 2006 ("fiscal 2006"), the majority
of which are expected to have plus-size departments. The Company also expects to
remodel 10-15 locations. The Company is currently scheduled to close one store
in the first half of fiscal 2006. The Company plans to continue to carefully
evaluate the profitability of individual stores and close those stores that it
believes cannot meet a level of profitability deemed acceptable by the Company.
This profitability review process undertaken during fiscal 2005 resulted in the
closing of the aforementioned 17 locations.
The following table shows store openings and closings for the last five
fiscal years:
YEAR ENDED JANUARY 31,
----------------------------------------------------
2005 2004 2003 2002 2001
-------- -------- -------- -------- --------
Open at beginning of fiscal year ....... 332 327 309 291 285
Opened during fiscal year .............. 8 13 23 23 13
Closed during fiscal year .............. (17) (8) (5) (5) (7)
-------- -------- -------- -------- --------
Open at end of fiscal year ............. 323 332 327 309 291
======== ======== ======== ======== ========
The Company's 323 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 144
East 110
West 35
New England 23
South 11
-----------
Total 323
===========
-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 plus-sized 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, Discover or American Express credit cards, 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 42 employees consisting of an
Assistant Director of Store Operations and Regional and District Managers. A
Regional Manager is responsible for an average of five districts. A District
Manager is responsible for an average of 10 stores, each of which is staffed by
a Store Manager and two Assistant Store Managers. The District and Regional
Managers visit the stores regularly to review merchandise levels, content and
presentation, staff training and other personnel issues, store security and
cleanliness and adherence to standard operating procedures.
The merchandising department consists of 44 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, 2005, the Company had approximately 3,700 employees, 61%
of whom were employed on a part-time basis. The Company has a collective
bargaining agreement with the United Paperworkers International Union,
Philadelphia Local 286 ("UPIU") that expires on December 31, 2008. 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 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.
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.
In addition, the Company will provide, at no cost, paper or electronic
copies of its reports and other filings made with the SEC. Requests should be
directed to:
Barry J. Susson, Chief Financial Officer
Deb Shops, Inc.
9401 Blue Grass Road
Philadelphia, PA 19114
The information on the Company's website listed above is not, and
should not be considered, part of this annual report on Form 10-K, and is not
incorporated by reference in this document.
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. Certain leases provide for predetermined escalations in future minimum
annual rentals.
The following table shows the current expiration dates of executed
store leases, existing at January 31, 2005. In many cases, the Company has
renewal options.
NUMBER OF LEASES
CALENDAR YEARS EXPIRING
------------------- ----------------
2005 - 2006 75
2007 - 2008 87
2009 - 2010 57
2011 - 2012 29
2013 - 2014 48
2015 - 2016 18
2017 and thereafter 9
----------------
Total 323
================
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 11, 2005.
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 64 Director, President and
Chief Executive Officer 1973
Warren Weiner 61 Director, Executive Vice President,
Secretary and Treasurer 1973
Allan Laufgraben 66 Senior Vice President, Merchandising 1995
Barry J. Susson 42 Chief Financial Officer 2003
Stanley A. Uhr 59 Vice President, Real Estate and
Corporate Counsel 1988
Stephen P. Smith 45 Vice President, Information Systems 1998
Joan M. Nolan 52 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, RELATED STOCKHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES
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:
2005 HIGH LOW
- --------------------- -------- --------
First Quarter $ 26.85 $ 20.20
Second Quarter $ 26.00 $ 22.27
Third Quarter $ 25.00 $ 22.05
Fourth Quarter $ 27.52 $ 23.76
2004 HIGH LOW
- --------------------- -------- --------
First Quarter $ 20.01 $ 16.85
Second Quarter $ 20.45 $ 18.64
Third Quarter $ 20.09 $ 17.78
Fourth Quarter $ 22.35 $ 18.90
HOLDERS
As of March 31, 2005, there were 187 record holders and approximately
2,057 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 2004 was $0.10 and in each of the last
two quarters of fiscal 2004 and in each of the four quarters of fiscal 2005 was
$0.125. The Company also paid special dividends of $0.05 per share in the third
quarter of fiscal 2004 and $0.40 per share in the third quarter of fiscal 2005.
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.
ISSUER PURCHASES OF EQUITY SECURITIES
There were no repurchases of the Company's equity securities during the
fourth quarter of fiscal 2005.
-6-
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data is derived from the consolidated
financial statements of the Company and have been restated to reflect
adjustments to the originally filed financial statements. These restatements are
discussed in "Note B. Restatement of Financial Statements" under Notes to
Consolidated Financial Statements included in Item 8. Financial Statements and
Supplementary Data of this Form 10-K. 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,
-----------------------------------------------------------------------------
(in thousands, except per share data) 2005 2004 2003 2002 2001
- ------------------------------------------------ ------------- ------------- ------------- ------------- -------------
(AS RESTATED) (AS RESTATED) (AS RESTATED) (AS RESTATED)
Net sales $ 303,778 $ 298,646 $ 317,722 $ 307,582 $ 287,263
Gross margin 100,940 93,074 110,790 107,118 96,365
Operating income 26,200 18,234 38,653 32,676 32,428
Net income 17,944 12,601 25,284 23,223 23,560
Net income per common share - basic 1.30 0.92 1.85 1.71 1.76
Net income per common share - diluted 1.30 0.92 1.83 1.70 1.74
Weighted average shares outstanding - basic 13,729 13,685 13,672 13,546 13,379
Weighted average shares outstanding - diluted 13,753 13,685 13,815 13,629 13,519
Total assets 242,880 231,697 221,153 201,272 175,827
Capital lease obligation - long-term -- -- -- -- 301
Shareholders' equity 188,911 181,547 176,186 156,311 136,479
Book value per share at year end 13.73 13.27 12.87 11.47 10.13
Cash dividends declared per share of
common stock .900 .525 .425 .325 .200
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
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 2005," "fiscal 2004," and "fiscal 2003," refer to
the Company's fiscal years ended January 31, 2005, 2004 and 2003, respectively.
The term "fiscal 2006" refers to the Company's fiscal year that will end on
January 31, 2006.
RESTATEMENT OF FINANCIAL STATEMENTS
As a result of the publicity on the restaurant industry financial
statement restatements related to leases, the Company commenced a review of
certain of its accounting policies related to leases during January 2005.
Subsequently, on February 7, 2005, the Office of the Chief Accountant of the
Securities and Exchange Commission ("SEC") issued a letter to the American
Institute of Certified Public Accountants expressing its views regarding certain
operating-lease-related accounting issues and their application under generally
accepted accounting principles in the United States of America ("GAAP"). Based
on the Company's internal review, and after consultation with the Audit
Committee of the Company's Board of Directors and predecessor independent
registered public accounting firm on April 15, 2005, the Company restated its
financial statements for years prior to fiscal 2005 to correct its accounting
for landlord allowances, calculation of straight-line rent expense, recognition
of rent holiday periods, and depreciation of leasehold improvements for its
retail stores.
-7-
Certain of the Company's store leases contain provisions that enable
the Company or the landlord to terminate the lease if sales during a defined
measurement period fall below agreed-upon levels. The Company has historically
recorded rent expense on a straight-line basis, beginning with the lease
commencement date, which generally coincides with the store opening date,
through the early termination date. The period during which a store was prepared
for opening historically was excluded from the straight-line rent schedule.
Financial Accounting Standards Board ("FASB") Technical Bulletin 85-3 ("FTB
85-3"), "Accounting for Operating Leases with Scheduled Rent Increases," states,
however, that rent holidays should be recognized on a straight-line basis over
the lease term, which according to FASB Technical Bulletin 88-1, "Issues
Relating to Accounting for Leases ("FTB 88-1"), commences on the date the
Company is given the right to control the use of the leased property. Consistent
with this guidance, the Company has changed the period used for determining the
deferred rent calculation to commence on the date the Company began controlling
the use of the property (i.e. began preparing a store for opening) through the
initial non-cancelable life of the lease.
Depreciation of leasehold improvements has historically been calculated
based upon the term of the lease. The Company has changed its accounting for
leasehold improvements to depreciate leasehold improvements over the lesser of
the term of the lease or 10 years. In addition, the Company has historically
accounted for tenant improvement allowances as a reduction of the cost of
leasehold improvements, resulting in lower depreciation expense, and reflected
the cash received within investing activities in the consolidated statement of
cash flows as a reduction of purchases of property, plant, and equipment. This
treatment was consistent whether the improvement allowance was provided in cash
or in the form of a rent abatement. FTB 88-1 requires that lease incentives such
as tenant allowances be recorded as a deferred liability, amortized over the
term of the lease and reflected as a reduction to rent expense. Previously,
amortization commenced on the date the store was opened and was reflected as a
reduction to depreciation and amortization. Consistent with the recording of
rent expense described above, the Company now amortizes tenant allowances
commencing on the date the Company has the right to control the use of the
leased property. Tenant allowances in the form of rent abatements were
historically charged to rent expense on a straight-line basis over the number of
months the rent was abated. Tenant allowances are now included as a component of
operating activities in the consolidated statement of cash flows.
The effects of the adjustments relating to the above items include a
reduction to retained earnings of $1,647,000, net of tax, as of February 1, 2002
and decreases to net income of $166,000 or $0.01 per diluted share, and $205,000
or $0.01 per diluted share for fiscal 2004 and 2003, respectively.
See Note B to Consolidated Financial Statements of this annual report
on Form 10-K for a summary of the effects of these changes on the consolidated
balance sheet as of January 31, 2004, as well as on the consolidated statements
of operations, changes in shareholders' equity and cash flows for fiscal 2004
and fiscal 2003. The discussion contained in "Management's Discussion and
Analysis of Financial Condition and Results of Operations" gives effect to these
corrections.
OVERVIEW
The Company operates 323 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 314 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
forty 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. Seventeen of the DEB
stores contain Tops 'N Bottoms departments.
-8-
During fiscal 2005, the Company made meaningful strides in improving
operating performance. Continued improvements in the Company's operating
platform allowed the Company to better leverage fixed costs and report
significant gains in net income and earnings per share in each quarter. Due in
large part to a reduction in markdowns as a percentage of sales, the Company's
gross margin increased 210 basis points to 33.2%, operating margin improved 250
basis points to 8.6% and net income and diluted earnings per share increased 43%
to $17.9 million and $1.30, respectively. The Company also continued its
expansion of the number of stores offering plus-sized merchandise, ending the
year with 140 plus-sized departments. The Company believes that its stores
offering both junior and plus-sized merchandise present more of a
destination-shopping environment for its customers. The Company also closed
seventeen under-performing locations, which is expected to provide improvement
in gross margins and inventory turnover in fiscal 2006. The Company is currently
scheduled to close one store in the first half of fiscal 2006 and will continue
to carefully evaluate the profitability of individual stores and close those
stores that it believes cannot meet a level of profitability it deems
acceptable.
The following table sets forth certain store information:
STORE DATA(1)
YEAR ENDED JANUARY 31,
-------------------------------------------------
2005 2004 2003
------------- ------------- -------------
Stores open at end of the year 323 332 327
Average number in operation during the year 327 331 320
Average net sales per store (in thousands) $ 929 $ 902 $ 994
Average operating income per store (in thousands) $ 80 $ 55(2) $ 121(2)
Comparable store sales(3) - percent change 1.0% (9.7)% 0.1%
The following table sets forth, for the periods indicated, selected
statement of operations data expressed as a percentage of net sales:
YEAR ENDED JANUARY 31,
-------------------------------------------------
2005 2004 2003
------------- ------------- -------------
(as restated) (as restated)
Net sales 100.0% 100.0% 100.0%
Gross margin 33.2% 31.2% 34.9%
Operating income 8.6% 6.1% 12.2%
Income before income taxes 9.4% 6.5% 12.8%
Income tax provision 3.5% 2.3% 4.8%
------------- ------------- -------------
Net income 5.9% 4.2% 8.0%
============= ============= =============
- ----------
(1) Includes Tops 'N Bottoms stores
(2) As Restated
(3) Comparable store sales include stores opened for both periods. A store is
added to the comparable store base in its 13th month of operation.
-9-
FISCAL 2005 COMPARED TO FISCAL 2004
NET SALES
Net sales increased $5,132,000, or 1.7%, to $303,778,000 in fiscal 2005
from $298,646,000 in fiscal 2004. The increase in net sales was due to a 1.0% or
$3,000,000 increase in comparable store sales, as well as from new store sales
of $2,132,000. The increase is believed to be due to improved acceptance of the
Company's merchandise offering versus last year, particularly as evidenced by a
340 basis point reduction in markdowns in fiscal 2005 versus fiscal 2004.
COST OF SALES, INCLUDING BUYING AND OCCUPANCY COSTS
Cost of sales, including buying and occupancy costs, decreased
$2,734,000 or 1.3%, to $202,838,000 in fiscal 2005 from $205,572,000 in fiscal
2004. As a percentage of net sales, these costs decreased to 66.8% in fiscal
2005 from 68.8% in fiscal 2004. The nominal decrease between periods was due to
the aforementioned 340 basis point reduction in markdowns in fiscal 2005 versus
fiscal 2004. The decrease as a percentage of sales was also due to the markdown
reduction, partially offset by an increase relating to the increase in sales.
Buying and occupancy costs were 16.7% and 17.0% of net sales for fiscal 2005 and
2004, respectively.
SELLING AND ADMINISTRATIVE EXPENSES
Selling and administrative expenses increased $256,000 or 0.4%, to
$69,356,000 in fiscal 2005 from $69,100,000 in fiscal 2004. As a percentage of
net sales, these costs decreased to 22.8% in fiscal 2005 from 23.1% in fiscal
2004. All material components of selling and administrative expenses were
consistent between fiscal periods. The decrease as a percentage of sales was a
result of the comparable store sales increase in fiscal 2005.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization expense decreased $356,000 or 6.2%, to
$5,384,000 in fiscal 2005 from $5,740,000 in fiscal 2004. As a percentage of net
sales, these expenses decreased to 1.8% in fiscal 2005 from 1.9% in fiscal 2004.
A portion of the Company's store assets and corporate computer equipment became
fully depreciated during the year, resulting in a reduction in depreciation
expense versus fiscal 2004. During fiscal 2005 and 2004, the Company recognized
$176,000 and $181,000 in impairment charges related to unprofitable stores.
OPERATING INCOME
Operating income increased $7,966,000 or 43.7%, to $26,200,000 in
fiscal 2005 from $18,234,000 in fiscal 2004. As a percentage of net sales,
operating income increased to 8.6% in fiscal 2005 from 6.1% in fiscal 2004. The
nominal and percentage increases were due primarily to the aforementioned
increases in sales and gross profit margin and the reduction in depreciation and
amortization expense, slightly offset by the increase in selling and
administrative expenses.
OTHER INCOME, PRINCIPALLY INTEREST
Other income, principally interest, increased $954,000 or 70.0% to
$2,316,000 in fiscal 2005 from $1,362,000 in fiscal 2004. Other income is offset
by losses on disposition of fixed assets of $70,000 in fiscal 2005 and $279,000
in fiscal 2004. The increase between fiscal periods was primarily due to higher
average interest rates in fiscal 2005 versus fiscal 2004, greater average
invested balances in fiscal 2005 versus fiscal 2004, as well as the reduction in
losses related to fixed asset dispositions.
INCOME TAX PROVISION
The income tax provision for fiscal 2005 was $10,572,000, resulting in
a 37.1% effective tax rate, as compared to $6,995,000 and a 35.7% effective tax
rate for fiscal 2004. The increase in the effective rate between fiscal periods
was due to a higher effective state income tax rate and, due to the increase in
year over year earnings, current year tax-exempt interest earnings represented a
smaller 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.
-10-
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
$1,360,000 or 0.7%, to $205,571,000 in fiscal 2004 from $206,931,000 in fiscal
2003. As a percentage of net sales, these costs increased to 68.8% in fiscal
2004 from 65.1% 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 17.0% and 15.5% of net sales for fiscal 2004 and
2003, respectively.
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 $808,000 or 16.4%, to
$5,740,000 in fiscal 2004 from $4,931,000 in fiscal 2003. As a percentage of net
sales, these expenses increased to 1.9% in fiscal 2004 from 1.6% in fiscal 2003.
The $808,000 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 $20,419,000 or 52.8%, to $18,234,000 in
fiscal 2004 from $38,653,000 in fiscal 2003. As a percentage of net sales,
operating income declined to 6.1% in fiscal 2004 from 12.2% 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 $595,000 or 30.4% to
$1,362,000 in fiscal 2004 from $1,958,000 in fiscal 2003. Other income was
offset by losses on disposition of fixed assets of $279,000 in fiscal 2004 and
$38,000 in fiscal 2003. The decrease between fiscal periods was primarily the
result of lower average interest rates in fiscal 2004 versus fiscal 2003 and the
increase in the losses related to fixed asset dispositions, partially offset by
higher cash balances.
-11-
INCOME TAX PROVISION
The income tax provision for fiscal 2004 was $6,995,000, resulting in a
35.7% effective tax rate, as compared to $15,327,000 and a 37.7% 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.
LIQUIDITY AND CAPITAL RESOURCES
As of January 31, 2005, the Company had cash and cash equivalents of
$30,299,000 and marketable securities of $146,100,000 compared to cash and cash
equivalents of $34,064,000 and marketable securities of $132,200,000 as of
January 31, 2004. The cash and cash equivalents are invested principally in
money market mutual funds while the marketable securities are invested
principally in auction market securities, which trade on a par-in, par-out basis
and provide interest-rate reset options on a revolving 35-day basis. Because the
Company regularly liquidates its investments in these securities for reasons
including, among others, changes in market interest rates and changes in the
availability of and the yield on alternative investments, the Company has
classified these securities as available for sale. 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, as well as for expenditures
pertaining to upgrades to the Company's merchandise distribution system. Total
cash provided by operating activities, for fiscal 2005, 2004 and 2003, was
$24,940,000, $24,777,000 and $30,818,000 and, respectively. For fiscal 2005,
cash provided by operations was primarily the result of net income, increased by
depreciation, increases in income taxes and trade accounts payable and accrued
expenses, offset by an increase in merchandise inventories. For fiscal 2004,
cash provided by operations was primarily the result of net income, increased by
depreciation, increases in trade accounts payable and deferred lease credits 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, an increase in deferred
lease credits and a reduction in merchandise inventories, offset by a net
decrease in accounts payable and accrued expenses. The Company's inventory
turnover rate was approximately 2.9, 2.9 and 3.0 times for fiscal 2005, 2004 and
2003, respectively.
Net cash used in investing activities was $18,121,000, $18,182,000 and
$18,826,000 for fiscal 2005, 2004 and 2003, respectively. During these fiscal
years, these funds were principally used for the purchase of marketable
securities and for the opening of new stores and the remodeling of existing
stores. During the past three fiscal years, the number of store openings and
remodels were as follows:
Fiscal 2005 Fiscal 2004 Fiscal 2003
------------- ------------- -------------
New stores 8 13 23
Remodeled stores 11 17 16
Net cash used in financing activities was $10,585,000, $6,898,000 and
$5,406,000 for fiscal 2005, 2004 and 2003, respectively. During these fiscal
years, these funds were principally used for the payment of dividends on
preferred and common stock. In fiscal 2005 and fiscal 2003, these amounts were
partially offset by the proceeds from the exercise of stock options. There were
no stock option exercises during fiscal 2004.
-12-
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, 2005. Of this amount, $695,000 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,
2005:
Payments Due by Period
----------------------------------------------------------------------------------
Less than 1 1 - 3 3 - 5 More than 5
Total year years years years
-------------- -------------- -------------- -------------- --------------
Operating leases $ 133,651,000 $ 24,086,000 $ 40,950,000 $ 28,860,000 $ 39,755,000
Other commitments 695,000 695,000 -- -- --
-------------- -------------- -------------- -------------- --------------
Total $ 134,346,000 $ 24,781,000 $ 40,950,000 $ 28,860,000 $ 39,755,000
============== ============== ============== ============== ==============
The above table excludes $1,734,000 in dividends, which were accrued at
January 31, 2005 and were paid in February, 2005.
SEASONAL NATURE OF OPERATIONS
During fiscal 2005, approximately 27% and 59% of the Company's net
sales and net income occurred during the fourth quarter, as compared to 27% and
67% of the Company's net sales and net income for fiscal 2004. The fourth
quarter includes the Christmas selling season. The decrease in the percentage of
the Company's fiscal 2005 fourth quarter net income compared to the fourth
quarter of fiscal 2004 was due to the increase in net income for the first three
quarters of fiscal 2005 versus the comparable period in fiscal 2004. See
"Quarterly Financial Information (Unaudited)" and the preceding discussions on
"Fiscal 2005 compared to Fiscal 2004" and "Fiscal 2004 compared to Fiscal 2003."
CRITICAL ACCOUNTING POLICIES
The Company's accounting policies are more fully described in Note A of
the Notes to Consolidated Financial Statements included herein. The consolidated
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.
-13-
REVENUE RECOGNITION
Revenue from merchandise sales is net of returns and allowances and
excludes sales tax. The provisions of the SEC Staff Accounting Bulletin ("SAB")
No. 101, "Revenue Recognition in Financial Statements," (as amended by SAB 104)
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.
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 2005 and 2004, the
Company recognized $176,000 and $181,000 in impairment charges related to
unprofitable stores. No impairment charges were recorded during fiscal 2003.
RECENT ACCOUNTING PRONOUNCEMENTS
On December 16, 2004, the FASB issued SFAS No. 123(R), "Share-Based
Payment" ("FAS 123(R)"). FAS 123(R) revised FASB Statement No. 123, "Accounting
for Stock-Based Compensation" ("FAS 123") and requires companies to expense the
fair value of employee stock options and other forms of stock-based
compensation. FAS 123(R) must be adopted no later than for fiscal years
beginning after June 15, 2005, which for the Company will be the fiscal year
beginning February 1, 2006.
-14-
Previously, in complying with FAS 123, the Company disclosed the value
of stock options granted and its pro-forma impact on net income in a footnote to
the consolidated financial statements. The Company is currently considering
which transition method to select in adopting FAS 123(R), and whether this new
accounting requirement will result in any changes in compensation strategies.
Information contained in the footnotes provides the impact on pro forma net
income for past financial statements. The adoption of FAS 123(R) is not expected
to have a material impact on the Company's future financial statements.
In November 2004, the FASB issued SFAS No. 151 ("FAS 151"), "Inventory
Costs." This Statement amends the guidance in Accounting Research Bulletin No.
43, Chapter 4, "Inventory Pricing," to clarify the accounting for abnormal
amounts of idle facility expense, freight, handling costs, and wasted material.
FAS 151 requires that those items be recognized as current-period charges
regardless of whether they meet the criterion of "so abnormal." In addition, FAS
151 requires that allocation of fixed production overheads to the costs of
conversion be based on the normal capacity of the production facilities. The
provisions of FAS 151 are effective for fiscal years beginning after June 15,
2005. The adoption of FAS 151 is not expected to have a material impact on the
Company's future financial statements.
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 INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Shareholders
Deb Shops, Inc.
Philadelphia, Pennsylvania
We have audited the accompanying consolidated balance sheet of Deb Shops, Inc.
and subsidiaries as of January 31, 2005, and the related consolidated statement
of operations, shareholders' equity and cash flows for the year ended January
31, 2005. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall consolidated 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 financial position of Deb Shops, Inc. and
subsidiaries at January 31, 2005, and the results of their operations and their
cash flows for the year ended January 31, 2005 in conformity with accounting
principles generally accepted in the United States of America.
As discussed in Note B to the consolidated financial statements, the fiscal 2004
and 2003 financial statements have been restated to correct errors in accounting
for leases.
April 5, 2005
/s/ BDO Seidman, LLP
- --------------------------
BDO Seidman, LLP
Philadelphia, Pennsylvania
-15-
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
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 the related consolidated statements
of operations, shareholders' equity, and cash flows for each of the two 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 the standards of the Public Company
Accounting Oversight Board (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. We were not engaged to perform an
audit of the Company's internal control over financial reporting. Our audits
included consideration of internal control over financial reporting as a basis
for designing audit procedures that are appropriate in the circumstances, but
not for the purpose of expressing an opinion on the effectiveness of the
Company's internal control over financial reporting. Accordingly, we express no
such opinion. An audit also includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
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 the consolidated results
of their operations and their cash flows for each of the two years in the period
ended January 31, 2004, in conformity with U.S. generally accepted accounting
principles.
As discussed in note B, the accompanying consolidated financial statements for
fiscal 2004 and 2003 have been restated.
ERNST & YOUNG LLP
Philadelphia, Pennsylvania
March 8, 2004,
except for note B as to which the date is
April 15, 2005
-16-
DEB SHOPS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED JANUARY 31,
------------------------------------------------
2005 2004 2003
-------------- -------------- --------------
(as restated, (as restated,
see Note B) see Note B)
Net sales $ 303,778,103 $ 298,645,811 $ 317,721,720
-------------- -------------- --------------
Costs and expenses:
Cost of sales, including buying
and occupancy costs 202,837,874 205,571,543 206,931,391
Selling and administrative 69,356,328 69,100,302 67,205,182
Depreciation and amortization 5,384,283 5,740,192 4,931,845
-------------- -------------- --------------
277,578,485 280,412,037 279,068,418
Operating income 26,199,618 18,233,774 38,653,302
Other income, principally interest 2,316,312 1,362,198 1,957,614
-------------- -------------- --------------
Income before income taxes 28,515,930 19,595,972 40,610,916
Income tax provision 10,572,000 6,995,000 15,327,000
-------------- -------------- --------------
Net income $ 17,943,930 $ 12,600,972 $ 25,283,916
============== ============== ==============
Net income per common share
Basic $ 1.30 $ 0.92 $ 1.85
============== ============== ==============
Diluted $ 1.30 $ 0.92 $ 1.83
============== ============== ==============
Weighted average number of
common shares outstanding
Basic 13,729,100 13,684,900 13,672,073
============== ============== ==============
Diluted 13,753,461 13,684,900 13,815,059
============== ============== ==============
See notes to consolidated financial statements.
-17-
DEB SHOPS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JANUARY 31,
-------------------------------
2005 2004
-------------- --------------
(as restated,
see Note B)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 30,298,970 $ 34,064,418
Marketable securities 146,100,000 132,200,000
Merchandise inventories 30,560,176 28,264,675
Prepaid expenses and other 2,616,185 2,718,323
Deferred income taxes 910,889 1,055,940
-------------- --------------
Total current assets 210,486,220 198,303,356
PROPERTY, PLANT AND EQUIPMENT - AT COST
Land 150,000 150,000
Buildings 2,365,697 2,365,697
Leasehold improvements 53,168,985 52,088,624
Furniture and equipment 16,568,516 16,680,575
-------------- --------------
72,253,198 71,284,896
Less accumulated depreciation and amortization 48,993,382 46,791,260
-------------- --------------
Net property, plant and equipment 23,259,816 24,493,636
-------------- --------------
OTHER ASSETS
Deferred income taxes 7,421,935 6,937,420
Other 1,712,223 1,962,223
-------------- --------------
Total other assets 9,134,158 8,899,643
-------------- --------------
Total assets $ 242,880,194 $ 231,696,635
============== ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Trade accounts payable $ 26,921,683 $ 26,523,559
Accrued expenses and other 11,314,244 10,141,456
Income taxes payable 4,618,905 2,564,688
-------------- --------------
Total current liabilities 42,854,832 39,229,703
Deferred lease credits 11,114,224 10,920,087
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 7,232,646 5,864,790
Retained earnings 193,467,638 187,949,432
-------------- --------------
200,857,627 193,971,565
Less common treasury shares, at cost:
January 31, 2005: 1,926,279; January 31, 2004: 2,003,390 11,946,489 12,424,720
-------------- --------------
188,911,138 181,546,845
-------------- --------------
Total liabilities and shareholders' equity $ 242,880,194 $ 231,696,635
============== ==============
See notes to consolidated financial statements.
-18-
DEB SHOPS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
ADDITIONAL
PREFERRED COMMON PAID-IN RETAINED TREASURY
STOCK STOCK CAPITAL EARNINGS STOCK
------------- ------------- ------------- ------------- -------------
Balances - February 1, 2002
(as previously reported) $ 460 $ 156,883 $ 5,864,790 $ 164,732,974 $ (12,796,830)
Adjustment for restated beginning balance
(see Note B) (1,647,325)
------------- ------------- ------------- ------------- -------------
Balances - February 1, 2002
(as restated - See Note B) 460 156,883 5,864,790 163,085,649 (12,796,830)
Net income - (as restated - See Note B) 25,283,916
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
(as restated - See Note B) 460 156,883 5,864,790 182,588,234 (12,424,720)
Net income - (as restated - See Note B) 12,600,972
Dividends on preferred stock ($120 per share) (55,200)
Dividends on common stock ($.525 per share) (7,184,574)
------------- ------------- ------------- ------------- -------------
Balances - January 31, 2004
(as restated - See Note B) 460 156,883 5,864,790 187,949,432 (12,424,720)
Net income 17,943,930
Dividends on preferred stock ($120 per share) (55,200)
Dividends on common stock ($.90 per share) (12,370,524)
Stock options exercised 1,353,156 478,231
Tax benefit from exercise of stock options 14,700
------------- ------------- ------------- ------------- -------------
Balances - January 31, 2005 $ 460 $ 156,883 $ 7,232,646 $ 193,467,638 $ (11,946,489)
============= ============= ============= ============= =============
See notes to consolidated financial statements.
-19-
DEB SHOPS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED JANUARY 31,
---------------------------------------------
2005 2004 2003
------------- ------------- -------------
(as restated, (as restated,
see Note B) see Note B)
Cash flows from operating activities:
Net income $ 17,943,930 $ 12,600,972 $ 25,283,916
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 5,384,283 5,740,192 4,931,845
Deferred income tax benefit (235,000) (740,000) (1,105,000)
Loss on retirement of property,
plant and equipment 70,401 278,910 37,962
Changes in operating assets and liabilities:
(Increase) decrease in merchandise inventories (2,295,501) 1,646,615 1,130,423
Decrease (increase) in prepaid expenses and other 351,618 (470,872) 286,276
Increase (decrease) in trade accounts payable 398,124 4,906,893 (2,621,060)
Increase in accrued expenses and other 1,163,149 465,528 549,287
Increase (decrease) in income taxes payable 1,964,973 (903,419) (270,708)
Increase in deferred lease credits 194,137 1,251,819 2,596,413
------------- ------------- -------------
Net cash provided by operating activities 24,940,114 24,776,638 30,818,356
------------- ------------- -------------
Cash flows from investing activities:
Purchases of property, plant and equipment (4,220,861) (4,231,924) (8,046,884)
Purchases of investment securities (79,600,000) (70,350,000) (143,650,000)
Sales of investment securities 65,700,000 56,400,000 132,870,460
------------- ------------- -------------
Net cash used in investing activities (18,120,861) (18,181,924) (18,826,424)
------------- ------------- -------------
Cash flows from financing activities:
Preferred stock cash dividends paid (55,200) (55,200) (55,200)
Common stock cash dividends paid (12,360,887) (6,842,451) (5,469,463)
Proceeds from exercise of stock options 1,831,386 -- 420,000
Principal payments under capital lease obligation -- -- (301,117)
------------- ------------- -------------
Net cash used in financing activities (10,584,701) (6,897,651) (5,405,780)
------------- ------------- -------------
(Decrease) increase in cash and cash equivalents (3,765,448) (302,937) 6,586,152
Cash and cash equivalents at beginning of year 34,064,418 34,367,355 27,781,203
------------- ------------- -------------
Cash and cash equivalents at end of year $ 30,298,970 $ 34,064,418 $ 34,367,355
============= ============= =============
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Income taxes, net $ 8,991,179 $ 8,542,787 $ 15,072,466
============= ============= =============
See notes to consolidated financial statements.
-20-
DEB SHOPS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- - A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
OPERATION: Deb Shops, Inc. (the "Company") operates 323 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 314 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 forty 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. Seventeen of the DEB stores contain
Tops 'N Bottoms departments.
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 ("SAB") No. 101, "Revenue Recognition in Financial Statements," (as
amended by SAB 104) 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.
LEASE ACCOUNTING: Accounting for store leases commences on the date the Company
takes possession of the leased space, which generally is one month prior to
lease commencement. Landlord allowances and incentives are recorded as deferred
lease credits. These amounts are amortized as a reduction of rent expense over
the initial term of the lease, commencing with the date of possession.
Certain store leases provide for predetermined escalations in future
minimum annual rentals. The pro rata portion of future minimum rent escalations
is recorded as deferred lease credits.
MARKETABLE SECURITIES: Marketable securities represent investments in auction
market debt instruments issued primarily by student loan financing entities.
These securities, which trade on a par-in, par-out basis provide for interest
rate resets every 35 days. They are classified as available for sale and stated
at fair value. Interest income is recognized when earned.
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.
-21-
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 2005 and
2004, the Company recognized $176,000 and $181,000 in impairment charges related
to unprofitable stores. These amounts are included in depreciation and
amortization in the accompanying consolidated statement of operations. No
impairment charges were recorded during fiscal 2003.
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, 2005 and January 31, 2004
is $26,050,000 and $31,689,000, respectively of investments in money market
mutual funds. These investments are carried at cost, which approximates market.
STOCK-BASED COMPENSATION PLANS: In December 2002, the Financial Accounting
Standards Board ("FASB") 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 G. 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.
-22-
For purposes of pro forma disclosures, the estimated fair value of the
stock options under the Plan are amortized to expense over their vesting
periods.
YEAR ENDED JANUARY 31,
---------------------------------------------------
2005 2004 2003
--------------- --------------- ---------------
(as restated) (as restated)
Net income as reported $ 17,943,930 $ 12,600,972 $ 25,283,916
Stock-based employee compensation cost (662,316) (2,061,296) (4,038,246)
--------------- --------------- ---------------
Pro forma net income $ 17,281,614 $ 10,539,676 $ 21,245,670
=============== =============== ===============
Basic net income per common share, as reported $ 1.30 $ 0.92 $ 1.85
Pro forma basic net income per common share $ 1.25 $ 0.77 $ 1.55
Diluted net income per common share, as reported $ 1.30 $ 0.92 $ 1.83
Pro forma diluted net income per common share $ 1.25 $ 0.77 $ 1.53
RECENT ACCOUNTING PRONOUNCEMENTS: On December 16, 2004, the FASB issued FASB
Statement No. 123(R), "Share-Based Payment" ("FAS 123(R)"). FAS 123(R) revised
FASB Statement No. 123, "Accounting for Stock-Based Compensation" ("FAS 123")
and requires companies to expense the fair value of employee stock options and
other forms of stock-based compensation. FAS 123(R) must be adopted no later
than for fiscal years beginning after June 15, 2005, which for the Company will
be the fiscal year beginning February 1, 2006.
Previously, in complying with FAS 123, the Company disclosed the value
of stock options granted and its pro forma impact on net income in a footnote to
the consolidated financial statements. The Company is currently considering
which transition method to select in adopting FAS 123(R), and whether this new
accounting requirement will result in any changes in compensation strategies.
Information contained in the footnotes provides the impact on pro forma net
income for past financial statements. The adoption of FAS 123(R) is not expected
to have a material impact on the Company's future financial statements.
In November 2004, the FASB issued SFAS No. 151 ("FAS 151"), "Inventory
Costs." This Statement amends the guidance in Accounting Research Bulletin No.
43, Chapter 4, "Inventory Pricing," to clarify the accounting for abnormal
amounts of idle facility expense, freight, handling costs, and wasted material.
FAS 151 requires that those items be recognized as current-period charges
regardless of whether they meet the criterion of "so abnormal." In addition, FAS
151 requires that allocation of fixed production overheads to the costs of
conversion be based on the normal capacity of the production facilities. The
provisions of FAS 151 are effective for fiscal years beginning after June 15,
2005. The adoption of FAS 151 is not expected to have a material impact on the
Company's future financial statements.
- - B - RESTATEMENT OF FINANCIAL STATEMENTS
As a result of the publicity on the restaurant industry financial
statement restatements related to leases, the Company commenced a review of
certain of its accounting policies related to leases during January 2005.
Subsequently, on February 7, 2005, the Office of the Chief Accountant of the
Securities and Exchange Commission ("SEC") issued a letter to the American
Institute of Certified Public Accountants expressing its views regarding certain
operating-lease-related accounting issues and their application under generally
accepted accounting principles in the United States of America ("GAAP"). Based
on the Company's internal review, and after consultation with the Audit
Committee of the Company's Board of Directors and predecessor independent
registered public accounting firm on April 15, 2005, the Company restated its
financial statements for years prior to Fiscal 2005 to correct its accounting
for landlord allowances, calculation of straight-line rent expense, recognition
of rent holiday periods, and depreciation of leasehold improvements for its
retail stores.
-23-
Certain of the Company's store leases contain provisions that enable
the Company or the landlord to terminate the lease if sales during a defined
measurement period fall below agreed-upon levels. The Company has historically
recorded rent expense on a straight-line basis, beginning with the lease
commencement date, which generally coincides with the store opening date,
through the early termination date. The period during which a store was prepared
for opening historically was excluded from the straight-line rent schedule.
Financial Accounting Standards Board ("FASB") Technical Bulletin 85-3 ("FTB
85-3"), "Accounting for Operating Leases with Scheduled Rent Increases," states,
however, that rent holidays should be recognized on a straight-line basis over
the lease term, which according to FASB Technical Bulletin 88-1, "Issues
Relating to Accounting for Leases ("FTB 88-1"), commences on the date the
Company is given the right to control the use of the leased property. Consistent
with this guidance, the Company has changed the period used for determining the
deferred rent calculation to commence on the date the Company began controlling
the use of the property (i.e. began preparing a store for opening) through the
initial non-cancelable life of the lease.
Depreciation of leasehold improvements has historically been calculated
based upon the term of the lease. The Company has changed its accounting for
leasehold improvements to depreciate leasehold improvements over the lesser of
the term of the lease or 10 years. In addition, the Company has historically
accounted for tenant improvement allowances as a reduction of the cost of
leasehold improvements, resulting in lower depreciation expense, and reflected
the cash received within investing activities in the consolidated statement of
cash flows as a reduction of purchases of property, plant, and equipment. This
treatment was consistent whether the improvement allowance was provided in cash
or in the form of a rent abatement. FTB 88-1 requires that lease incentives such
as tenant allowances be recorded as a deferred liability, amortized over the
term of the lease and reflected as a reduction to rent expense. Previously,
amortization commenced on the date the store was opened and was reflected as a
reduction to depreciation and amortization. Consistent with the recording of
rent expense described above, the Company now amortizes tenant allowances
commencing on the date the Company has the right to control the use of the
leased property. Tenant allowances in the form of rent abatements were
historically charged to rent expense on a straight-line basis over the number of
months the rent was abated. Tenant allowances are now included as a component of
operating activities in the consolidated statement of cash flows.
The primary effects of the correction discussed above resulted in the
Company reclassifying its tenant improvement allowances from "Net property,
plant and equipment" to "Deferred lease credits," recording additional deferred
rent in "Deferred lease credits," and adjusting "Retained earnings" in the
consolidated balance sheets, as well as to correct "Cost of sales, including
buying and occupancy costs" and "Depreciation and amortization" in the
consolidated statements of operations for each of the two years in the period
ended January 31, 2004. The cumulative effect of these adjustments reduced
retained earnings as of February 1, 2002 by $1,647,325, net of tax.
In prior years, the Company classified its investments in auction rate
certificates as cash and cash equivalents. During fiscal 2005, additional
clarification was provided regarding the financial statement classification of
this type of investment. Pursuant to this guidance, auction rate securities are
not to be classified as cash and cash equivalents. As a result, at January 31,
2005, the Company has classified its auction rate certificates as marketable
securities and has restated the January 31, 2004 consolidated balance sheet to
reflect this change. This change also resulted in the Company restating its
consolidated statements of cash flows for the years ended January 31, 2004 and
2003 to reflect the purchase and sale activity within the investing activities
section of the consolidated statements of cash flows. This change had no effect
on current or total assets or net income.
-24-
Following is a summary of the effects of these adjustments on the
Company's consolidated statements of operations and of cash flows for the years
ended January 31, 2004 and 2003, the Company's consolidated balance sheet as of
January 31, 2004 and the Company's consolidated statement of shareholders'
equity as of February 1, 2002:
CONSOLIDATED STATEMENTS OF OPERATIONS
AS PREVIOUSLY
REPORTED ADJUSTMENTS AS RESTATED
--------------- --------------- ---------------
YEAR ENDED JANUARY 31, 2004:
Cost of sales, including buying and occupancy
costs $ 206,693,546 $ (1,122,003) $ 205,571,543
Depreciation and amortization $ 4,321,598 $ 1,418,594 $ 5,740,192
Operating income $ 18,530,365 $ (296,591) $ 18,233,774
Other income, principally interest $ 1,365,255 $ (3,057) $ 1,362,198
Income before income taxes $ 19,895,620 $ (299,648) $ 19,595,972
Income tax provision $ 7,129,000 $ (134,000) $ 6,995,000
Net income $ 12,766,620 $ (165,648) $ 12,600,972
Basic net income per share $ 0.93 $ (0.01) $ 0.92
Diluted net income per share $ 0.93 $ (0.01) $ 0.92
YEAR ENDED JANUARY 31, 2003:
Cost of sales, including buying and occupancy
costs $ 207,550,269 $ (618,878) $ 206,931,391
Depreciation and amortization $ 3,869,277 $ 1,062,568 $ 4,931,845
Operating income $ 39,096,992 $ (443,690) $ 38,653,302
Other income, principally interest $ 1,863,502 $ 94,112 $ 1,957,614
Income before income taxes $ 40,960,494 $ (349,578) $ 40,610,916
Income tax provision $ 15,472,000 $ (145,000) $ 15,327,000
Net income $ 25,488,494 $ (204,578) $ 25,283,916
Basic net income per share $ 1.86 $ (0.01) $ 1.85
Diluted net income per share $ 1.84 $ (0.01) $ 1.83
CONSOLIDATED STATEMENTS OF CASH FLOWS
AS PREVIOUSLY
REPORTED ADJUSTMENTS AS RESTATED
--------------- --------------- ---------------
YEAR ENDED JANUARY 31, 2004:
Net cash provided by operating activities $ 22,398,111 $ 2,378,527 $ 24,776,638
Purchases of property, plant and equipment $ (1,853,397) $ (2,378,527) $ (4,231,924)
Purchases of marketable securities $ - $ (70,350,000) $ (70,350,000)
Sales of marketable securities $ - $ 56,400,000 $ 56,400,000
Net cash used in investing activities $ (1,853,397) $ (16,328,527) $ (18,181,924)
Increase (decrease) in cash and cash equivalents $ 13,647,063 $ (13,950,000) $ (302,937)
Cash and cash equivalents at beginning of year $ 152,617,355 $ (118,250,000) $ 34,367,355
Cash and cash equivalents at end of year $ 166,264,418 $ (132,200,000) $ 34,064,418
-25-
CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
AS PREVIOUSLY
REPORTED ADJUSTMENTS AS RESTATED
--------------- --------------- ---------------
YEAR ENDED JANUARY 31, 2003:
Net cash provided by operating activities $ 27,612,419 $ 3,205,937 $ 30,818,356
Purchases of property, plant and equipment $ (4,840,947) $ (3,205,937) $ (8,046,884)
Purchases of marketable securities $ - $ (143,650,000) $ (143,650,000)
Sales of marketable securities $ - $ 132,870,460 $ 132,870,460
Net cash used in investing activities $ (4,840,947) $ (13,985,477) $ (18,826,424)
Increase in cash and cash equivalents $ 17,365,692 $ (10,779,540) $ 6,586,152
Cash and cash equivalents at beginning of year $ 135,251,663 $ (107,470,460) $ 27,781,203
Cash and cash equivalents at end of year $ 152,617,355 $ (118,250,000) $ 34,367,355
CONSOLIDATED BALANCE SHEET
AS PREVIOUSLY
REPORTED ADJUSTMENTS AS RESTATED
--------------- --------------- ---------------
JANUARY 31, 2004:
Cash and cash equivalents $ 166,264,418 $ (132,200,000) $ 34,064,418
Marketable securities $ - $ 132,200,000 $ 132,200,000
Prepaid expenses and other $ 3,150,882 $ (432,559) $ 2,718,323
Net property, plant and equipment $ 17,112,877 $ 7,380,759 $ 24,493,636
Deferred income taxes - current $ 1,260,191 $ (204,251) $ 1,055,940
Deferred income taxes - long-term $ 4,732,846 $ 2,204,574 $ 6,937,420
Total assets $ 222,748,112 $ 8,948,523 $ 231,696,635
Accrued expenses and other $ 10,649,923 $ (508,467) $ 10,141,456
Income taxes payable $ 2,010,234 $ 554,454 $ 2,564,688
Total current liabilities $ 39,183,716 $ 545,987 $ 39,729,703
Deferred lease credits $ - $ 10,420,087 $ 10,420,087
Retained earnings $ 189,966,983 $ (2,017,551) $ 187,949,432
Total liabilities and shareholders' equity $ 222,748,112 $ 8,948,523 $ 231,696,635
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
AS PREVIOUSLY
REPORTED ADJUSTMENTS AS RESTATED
--------------- --------------- ---------------
FEBRUARY 1, 2002:
Retained earnings $ 164,732,974 $ (1,647,325) $ 163,085,649
-26-
- - C - MARKETABLE SECURITIES
The Company's marketable securities consist of auction market debt
instruments issued principally by state student loan financing entities. These
instruments, which trade on a par-in, par out basis, provide interest-rate reset
options on a revolving 35-day basis. Because the Company regularly liquidates
its investments in these securities for reasons including, among others, changes
in market interest rates and changes in the availability of and the yield on
alternative investments, the Company has classified these securities as
available for sale. The carrying values of these securities approximate fair
value. There were no realized gains or losses on these investments for the years
ended January 31, 2005, 2004 or 2003. Contractual maturities of available for
sale securities at January 31, 2005 consisted of $9,900,000 maturing between one
and 10 years and $136,200,000 million maturing after 10 years.
- - D - 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,
------------------------------------------------
2005 2004 2003
-------------- -------------- --------------
(AS RESTATED) (AS RESTATED)
Net income $ 17,943,930 $ 12,600,972 $ 25,283,916
Dividends on preferred stock (55,200) (55,200) (55,200)
-------------- -------------- --------------
Income available to
common shareholders $ 17,888,730 $ 12,545,772 $ 25,228,716
============== ============== ==============
Basic weighted average
number of common
shares outstanding 13,729,100 13,684,900 13,672,073
Effect of dilutive stock options 24,361 -- 142,986
-------------- -------------- --------------
Diluted weighted average
number of common
shares outstanding 13,753,461 13,684,900 13,815,059
============== ============== ==============
- - E - INCOME TAXES
Income tax provision consists of the following components:
YEAR ENDED JANUARY 31,
------------------------------------------------
2005 2004 2003
-------------- -------------- --------------
(AS RESTATED) (AS RESTATED)
CURRENT:
Federal $ 8,749,000 $ 6,585,000 $ 13,978,000
State 2,058,000 1,150,000 2,454,000
-------------- -------------- --------------
10,807,000 7,735,000 16,432,000
DEFERRED:
Federal (77,000) (420,000) (861,000)
State (158,000) (320,000) (244,000)
-------------- -------------- --------------
(235,000) (740,000) (1,105,000)
-------------- -------------- --------------
$ 10,572,000 $ 6,995,000 $ 15,327,000
============== ============== ==============
-27-
A reconciliation of the Company's effective income tax rate with the
statutory federal rate follows:
YEAR ENDED JANUARY 31,
------------------------------------------------
2005 2004 2003
-------------- -------------- --------------
(AS RESTATED) (AS RESTATED)
Tax provision at statutory rate $ 9,981,000 $ 6,859,000 $ 14,214,000
State income taxes, net of federal
income tax benefit 1,094,000 413,000 1,437,000
Permanent items, primarily tax
exempt interest income (607,000) (430,000) (462,000)
Other 104,000 153,000 138,000
-------------- -------------- --------------
$ 10,572,000 $ 6,995,000 $ 15,327,000
============== ============== ==============
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,
-------------------------------
2005 2004
-------------- --------------
(AS RESTATED)
Deferred tax assets
Depreciation and amortization $ 7,322,000 $ 6,452,000
Uniform cost capitalization 669,000 628,000
Deferred lease credits 101,000 484,000
Accrued expenses and other 529,000 725,000
-------------- --------------
8,621,000 8,289,000
Deferred tax liabilities
Prepaid expenses (288,000) (296,000)
-------------- --------------
$ 8,333,000 $ 7,993,000
============== ==============
- - F - LEASES
The Company leases all of its retail apparel stores for periods ranging
from one month 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 for
the years ended January 31, 2005 and 2004 and $321,000 for the year ended
January 31, 2003.
-28-
Future minimum rental commitments for all non-cancelable leases at
January 31, 2005 are as follows:
YEAR ENDING JANUARY 31,
--------------------------------
2006 $ 24,086,000
2007 22,695,000
2008 18,255,000
2009 15,698,000
2010 13,162,000
Thereafter 39,755,000
--------------
Total minimum rental commitments $ 133,651,000
==============
Total rental expense under operating leases amounted to $27,436,000,
$27,002,000 and $25,937,000 in fiscal 2005, 2004 and 2003, respectively. Such
amounts include contingent rentals based upon a percentage of sales of
$2,142,000, $1,975,000 and $2,464,000 in fiscal 2005, 2004 and 2003,
respectively.
- - G - 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 883,500 options
reserved for future grant under the Plan as of January 31, 2005.
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, 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
Granted 15,000 23.75
Exercised (77,111) 23.75
Cancelled (123,500) 23.75
-------------- --------------
Outstanding, January 31, 2005 1,194,389 23.77
============== ==============
The remaining contractual life of the outstanding options ranges from
2.1 to 4.3 years. Of the 1,194,389 options outstanding at January 31, 2005,
754,889 were exercisable at a weighted average exercise price of $23.77.
-29-
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 2005 Fiscal 2004 Fiscal 2003
grants grants grants
--------------- --------------- ---------------
Expected life Five years Five years Five years
Risk-free interest rate 4.3% 4.3% 4.3%
Volatility 34.7% 34.7% 42.4%
Dividend yield 2.2% 2.6% 1.7%
Estimated fair value of options granted
$6.47 $4.69 $8.84
- - H - COMMITMENTS AND CONTINGENCIES
The Company has an unsecured line of credit in the amount of
$20,000,000. As of January 31, 2005, $695,000 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 over a
base-year amount. No bonuses were earned in any of the fiscal years ended
January 31, 2005, 2004 or 2003. This agreement is applicable through fiscal
2007.
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.
-30-
- - I - QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
FIRST SECOND THIRD FOURTH
(amounts in thousands, except per share data) QUARTER QUARTER QUARTER QUARTER
- --------------------------------------------- ----------- ----------- ----------- -----------
(as restated) (as restated) (as restated)
FISCAL YEAR ENDED JANUARY 31, 2005:
Net sales $ 73,081 $ 72,831 $ 75,307 $ 82,560(1)
Cost of sales, including buying and
occupancy costs $ 53,660 $ 47,152 $ 54,844 $ 47,182
Net income $ 879 $ 4,643 $ 1,828 $ 10,594(1)
Basic net income per share $ 0.06 $ 0.34 $ 0.13 $ 0.77
Diluted net income per share $ 0.06 $ 0.34 $ 0.13 $ 0.76
Cash dividends declared per common share $ .125 $ .525 $ .125 $ .125
(as restated) (as restated) (as restated) (as restated)
FISCAL YEAR ENDED JANUARY 31, 2004:
Net sales $ 70,162 $ 73,019 $ 74,810 $ 80,656(1)
Cost of sales, including buying and
occupancy costs $ 52,114 $ 49,989 $ 55,016 $ 48,453
Net income $ 239 $ 2,664 $ 1,141 $ 8,557(1)
Basic net income per share $ 0.02 $ 0.19 $ 0.08 $ 0.62
Diluted net income per share $ 0.02 $ 0.19 $ 0.08 $ 0.62
Cash dividends declared per common share $ .100 $ .175 $ .125 $ .125
Amounts have been restated to reflect the impact of the correction of
the Company's accounting for landlord allowances, calculation of straight-line
rent expense, recognition of rent holiday periods, and depreciation of leasehold
improvements for its retail stores. See Note B.
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 2005, approximately 27% and 59% of the Company's net
sales and net income occurred during the fourth quarter, as compared to 27% and
67% of the Company's net sales and net income for fiscal 2004. The fourth
quarter includes the Christmas selling season. The decrease in the percentage of
the Company's fiscal 2005 fourth quarter net income compared to the fourth
quarter of fiscal 2004 was due to the increase in net income for the first three
quarters of fiscal 2005 versus the comparable period in fiscal 2004.
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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
No additional disclosure is required regarding the Company's change in
independent accountants. The information included in the Company's Current
Report on Form 8-K filed on July 22, 2004 is incorporated herein by reference.
ITEM 9A. CONTROLS AND PROCEDURES
CONCLUSION REGARDING THE EFFECTIVENESS 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's disclosure controls and procedures were effective to ensure that
information that is required to be disclosed in its reports under the Securities
Exchange Act of 1934 is recorded, processed, summarized and reported within the
time periods specified in the SEC's rules and forms, and that such information
is accumulated and communicated to management, including the Company's chief
executive officer and chief financial officer, as appropriate, to allow timely
decisions regarding required disclosure.
MANAGEMENT'S ANNUAL REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING AND
ATTESTATION REPORT OF THE REGISTERED PUBLIC ACCOUNTING FIRM
The Sarbanes-Oxley Act of 2002 (the "Act") imposed many requirements
regarding corporate governance and financial reporting. One requirement under
section 404 of the Act, beginning with this annual report, is for management to
report on the Company's internal control over financial reporting and for the
Company's independent registered public accountants to attest to this report. In
late November 2004, the Securities and Exchange Commission issued an exemptive
order providing a 45-day extension for the filing of these reports and
attestations by eligible companies. The Company has elected to utilize this
45-day extension and, therefore, this Form 10-K does not include these reports.
These reports will be included in an amended Form 10-K expected to be filed in
May 2005. During the fiscal year ended January 31, 2005, the Company spent
considerable time and resources analyzing, documenting and testing its system of
internal controls. Currently, the Company is not aware of any material
weaknesses in its internal control over financial reporting and related
disclosures.
CHANGES 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, 2005 that has
materially affected or is reasonably likely to materially affect its internal
control over financial reporting.
ITEM 9B. OTHER INFORMATION
None.
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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 5.05 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 2005 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 2005 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.
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 2005 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, 2005 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
Number of securities to be Weighted-average exercise future issuance under
issued upon exercise of price of outstanding equity compensation plans
outstanding options, options, warrants and (excluding securities
warrants and rights rights reflected in column (a))
Plan Category (a) (b) (c)
- ----------------------------- -------------------------- -------------------------- ----------------------------
Equity compensation plans
approved by security holders 1,194,389 $ 23.77 883,500
Equity compensation plans not
approved by security holders -- -- --
-------------------------- -------------------------- ----------------------------
Total 1,194,389 $ 23.77 883,500
========================== ========================== ============================
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ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The required information with respect to certain relationships and
related transactions is contained in the 2005 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 2005 Proxy Statement under the caption
"Relationships with Independent Auditors," which is incorporated in this Annual
Report on Form 10-K by reference.
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
DOCUMENT PAGE(S)
----------------------------------------------------------- --------
Reports of independent registered public accounting firms 15-16
Consolidated statements of operations for the years ended
January 31, 2005, 2004 and 2003 17
Consolidated balance sheets as of January 31, 2005 and 2004 18
Consolidated statements of shareholders' equity for the
years ended January 31, 2005, 2004 and 2003 19
Consolidated statements of cash flows for the years ended
January 31, 2005, 2004 and 2003 20
Notes to consolidated financial statements 21-30
Selected quarterly financial information (unaudited)
for the years ended January 31, 2005 and 2004 31
All schedules are omitted because they are not applicable, not
required, or because the required information is not material, or is included in
the consolidated financial statements or notes thereto.
-34-
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
(2004 Form 10-K, Exhibit 3-2)
10-1 Lease Agreement for property located at 9401 Blue Grass Road,
Philadelphia, Pennsylvania 19114 (Registration No. 2-82222,
Exhibit 10-1)
10-1.1 Amendment of Lease Agreement dated January 3, 1999 for
property located at 9401 Blue Grass Road, Philadelphia,
Pennsylvania 19114
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)
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EXHIBIT NO. DESCRIPTION OF DOCUMENT
----------- -------------------------------------------------------------
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)
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 Agreement and General Release dated April 23, 2004 between
the Company and Barry Vesotsky (Form 10-Q for the quarter
ended April 30, 2004, Exhibit 10-1)
21 Subsidiaries of the Company
23.1 Consent of Independent Registered Public Accounting Firm
23.2 Consent of Independent Registered Public Accounting Firm
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
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SIGNATURES
Pursuant to the requirements of Sections 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized in the City and County
of Philadelphia, Commonwealth of Pennsylvania, on April 20, 2005.
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 20, 2005
- ----------------------------------------
Marvin Rounick, President,
Chief Executive Officer and Director
(Principal Executive Officer)
Warren Weiner April 20, 2005
- ----------------------------------------
Warren Weiner, Executive Vice President,
Secretary, Treasurer and Director
Jack Rounick April 20, 2005
- ----------------------------------------
Jack A. Rounick, Assistant Secretary
and Director
Ivan Inerfeld April 20, 2005
- ----------------------------------------
Ivan Inerfeld, Director
Barry H. Feinberg April 20, 2005
- ----------------------------------------
Barry H. Feinberg, Director
Barry H. Frank April 20, 2005
- ----------------------------------------
Barry H. Frank, Esq., Director
Ned J. Kaplin April 20, 2005
- ----------------------------------------
Ned J. Kaplin, Director
Barry J. Susson April 20, 2005
- ----------------------------------------
Barry J. Susson, Chief Financial Officer
Joan M. Nolan April 20, 2005
- ----------------------------------------
Joan M. Nolan, Controller
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