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SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
(Mark One)
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended January 31, 1997
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OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission File Number 0-12188
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DEB SHOPS, INC.
(Exact name of registrant as specified in its charter)
9401 Blue Grass Road, Philadelphia, PA 19114
--------------------------------------------
(Address of principal executive offices and zip code)
Pennsylvania 23-1913593
------------ ----------
(State of Incorporation) (I.R.S. Employer Identification No.)
(215) 676-6000
--------------
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act: Common Stock, par
value $.01 per share.
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days:
Yes X No
--------- ---------
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.
As of April 11, 1997, 12,844,680 shares of the Company's Common Stock,
par value $.01 per share, were outstanding. The aggregate market value (based
upon the closing price on April 11, 1997) held by non-affiliates was
approximately $14,604,463.
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 30, 1997 - incorporated in Part III.
===============================================================================
Forward-Looking Statements
The Company has made in this report, and from time to time may otherwise
make, "forward-looking statements" (as that term is defined under Federal
Securities Laws) concerning the Company's future operations, performance,
profitability, revenues, expenses and financial condition. This report includes,
in particular, forward-looking statements regarding store closings and other
matters. Such forward-looking statements are subject to various risks and
uncertainties. Actual results could differ materially from those currently
anticipated due to a number of factors. Such factors may include, but are not
limited to, the Company's ability to improve margins, respond to changes in
fashion and the Company's ability to retain key management personnel. Such
factors may also include other risks and uncertainties detailed in the Company's
filings with the Securities and Exchange Commission, including the Company's
Annual Report on Form 10-K for the fiscal year ended January 31, 1997.
PART 1
Item 1. Business
- ------ --------
General
Deb Shops, Inc. (the "Company") operates 275 women's specialty apparel
retail stores ("Deb") offering moderately priced, fashionable, coordinated
women's sportswear, dresses, coats, lingerie, accessories and shoes for junior
and plus sizes. Deb merchandise consists of clothing and accessories appealing
primarily to the fashion-conscious junior and plus sized female consumers
between the ages of 13 and 35. In addition to 261 stores operating under the
name "DEB" and one operating under the name "JOY", the Company operates nine
plus size stores under the name "DEB PLUS" and four outlet stores under the name
"CSO." The outlet stores offer the same merchandise as DEB, JOY and DEB PLUS at
reduced prices and serve as clearance stores for slow-moving inventory.
Ninety-two of the DEB stores contain plus size departments.
The Company operates an additional 10 apparel retail stores under the
name Tops 'N Bottoms. Tops 'N Bottoms sells moderately priced men's and women's
apparel. Eighteen of the DEB stores contain Tops 'N Bottoms departments.
In October 1995, the Company acquired substantially all of the net
assets of the Atlantic Book chain for a purchase price of approximately
$4,500,000. Atlantic operates 15 locations, including 10 "Atlantic Book Shops",
which are small, limited selection book stores, generally open seasonally in
Delaware and New Jersey shore resort towns. Atlantic Books also operates five
"Atlantic Book Warehouses" which carry a full line of best sellers, new titles
and magazines in addition to remainder books. The Atlantic Book Warehouse stores
are located in Delaware, Maryland, Pennsylvania and New Jersey.
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 in creating outfits of their own.
The plus division caters to the plus customer between the ages of 16 to
35. The merchandise is young looking and the fit is adjusted to the plus
customer. Prices are affordable and very competitive.
-1-
Tops 'N Bottoms caters primarily to young men and junior-sized women.
Much of the merchandise is brand names and is unisex, capable of being worn by
men or women.
The Company purchases its merchandise in volume, sells it at moderate
prices, and has a policy of early mark-downs of slow-moving inventory. A special
effort is made to select and present coordinated outfits on a rotating basis and
featured merchandise is changed approximately twice a week.
A computerized point-of-sale merchandise data system provides detailed
daily information regarding sales and inventory levels by style, color, class
and department, thereby permitting the Company to analyze market trends and
changing store needs. Since merchandise control statistics are available on a
daily basis, the Company can identify slow-moving merchandise and respond to
customer buying trends when making repurchase decisions and mark-down
adjustments. This permits the Company to maintain current and fresh merchandise
in its stores.
The Company experiences the normal seasonal pattern of the retail
apparel industry with its peak sales occurring during the Christmas,
Back-to-School and Easter periods. To keep merchandise fresh and fashionable,
slow-moving merchandise is marked down throughout the year. End-of-season sales
are conducted twice a year (in the second and fourth quarters), in keeping with
the Company's policy of carrying a minimal amount of seasonal merchandise over
from one year to another. If unsold at the end of the seasonal sales,
merchandise is transferred to the Company's CSO stores.
Stores
During the fiscal year ended January 31, 1997, Deb opened two additional
stores (while closing 25 stores, including one Deb Plus store). Deb also
converted 18 Tops 'N Bottoms departments to Plus departments within Deb stores
and introduced Plus departments into 74 additional DEB stores. At the present
time the Company does not have any new stores or departments scheduled to open
in fiscal 1998. The Company is currently scheduled to close 6 stores in the
first half of fiscal 1998. During the first quarter of fiscal 1998 the Company
will convert two of the DEB PLUS stores to DEB stores and will eliminate 39 DEB
PLUS departments in DEB stores. The Company plans to continue to carefully
evaluate the profitability of individual stores and close those stores which it
believes cannot become profitable or maintain profitability.
The following table shows apparel store openings and closings for the
last five fiscal years.
Year Ended January 31,
-------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
Open at beginning of fiscal year..... 308 341 368 373 365
Opened during fiscal year............ 2 1 8 11 24
Closed during fiscal year............ (25) (34) (35) (16) (16)
--- --- --- --- ---
Open at end of fiscal year........... 285 308 341 368 373
=== === === === ===
-2-
The following table shows the states in which the Company's 285 existing
apparel stores are located.
New England East Midwest
Connecticut 1 Delaware 1 Illinois 15
Maine 4 Maryland 6 Indiana 10
Massachusetts 8 New Jersey 12 Iowa 4
Rhode Island 1 New York 35 Kansas 3
--- Pennsylvania 45 Kentucky 5
14 Virginia 13 Michigan 20
West Virginia 7 Minnesota 7
--- Missouri 7
119 Nebraska 1
North Dakota 2
Ohio 27
South Dakota 1
Wisconsin 12
---
114
South West
Georgia 1 California 2
Tennessee 4 Colorado 3
--- Idaho 2
5 New Mexico 3
Oklahoma 4
Oregon 6
Texas 6
Utah 2
Washington 5
---
33
Deb stores, which average 5,900 square feet, are located primarily in
enclosed regional shopping malls and selected strip shopping centers. Deb stores
with Tops 'N Bottoms or Plus departments average 7,200 square feet and are all
located in enclosed regional shopping malls. Tops 'N Bottoms stores are all
located in enclosed regional shopping malls and range in size from 2,300 to
3,400 square feet. New stores are opened in existing malls, existing mall
expansions, new malls and occasionally strip centers. Factors considered in
opening new stores include the availability of suitable locations and
negotiation of 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 generally from 10:00
A.M. to 9:30 P.M., Monday through Saturday, and from Noon to 5:00 P.M. on
Sunday.
-3-
Operations
Payments for most of the Company's sales are made in cash or check, and
the balance are made with MasterCard, Visa and Discover. For customer
convenience, the Company provides lay-away plans. The Company's policy is to
permit returns of merchandise for exchange or for a full cash or credit refund,
at the customer's preference.
The Company purchases its merchandise from a number of suppliers, both
domestic and foreign, and is not materially dependent on any one supplier. All
merchandise is shipped directly from vendors to the Company's central
distribution facility, where it is received, inspected and price-marked before
being shipped to the individual stores. The Company distributes its inventory by
common carrier and leased trucks.
The responsibility for managing the Company's stores rests with the
Director of Store Operations and a staff of thirty-five employees consisting of
Regional and District Supervisors. A District Supervisor is responsible for an
average of ten stores, each of which is staffed by a Store Manager and an
Assistant Store Manager and two Junior Assistant Store Managers. The District
and Regional Supervisors 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 42 employees, including the
Senior Vice President, Merchandising; Vice President, Merchandising; Merchandise
Managers and Buyers. The department is responsible for purchasing, pricing
(including mark-downs), inventory planning and allocating merchandise among the
stores. The merchandising department's staff is organized in the following
apparel categories: sportswear, dresses, coats, lingerie, hosiery, accessories
and plus sizes.
At January 31, 1997, the Company had approximately 2,700 employees,
approximately 60% of whom were employed on a part-time basis. The Company has a
collective bargaining agreement with the United Paperworkers International
Union, Philadelphia Local 286 (UPIU) which expires on December 31, 1998. The
UPIU represents the Company's warehouse employees. The collective bargaining
agreement covers approximately 80 employees. The Company considers its employee
relations to be good.
Competition
The retail sale of apparel is an extremely competitive business with
numerous individual and chain store competitors, including specialty shops as
well as regional and national department store chains. Many of the Company's
competitors are considerably larger than the Company and have substantially
greater financial and other resources.
The primary elements of competition are merchandise style, selection,
quality, display and price, as well as store location and design. The Company
believes that its strategy for the Deb stores of specializing in the junior and
plus size sportswear market and its ability to effect volume purchases are
important elements in its operations. Brand name merchandise is not a
significant factor in the Company's sales.
Acquisition of Atlantic Books
On October 20, 1995 (the "Closing Date") the Company acquired
substantially all of the net assets of the Atlantic Book chain for a purchase
price of approximately $4,500,000. The Atlantic Book chain consists of 15 stores
-4-
including five full service warehouse stores located in Delaware, Maryland,
Pennsylvania and New Jersey. Atlantic emphasizes convenience, selection and
value. The Company considers the warehouse format to be positioned to capitalize
on today's consumers' demands for these features. Atlantic's main concentration
is in bargain books that are sold at significant discounts from publishers'
original retail prices. Atlantic also offers an extensive selection of
best-sellers and other hardcover and paperback books and magazines. Each
warehouse store is conducive to browsing and shopping, including super-market
style shopping carts for the customer who wants to purchase multiple selections.
Atlantic Books competes with both national super-store chains as well as
local book stores. Atlantic Books offers selection similar to the national
super-stores, however, in a no-frills atmosphere and at larger discounts.
The chain trades as Atlantic Books Shops and Atlantic Book Warehouse.
The ten non-warehouse stores are located in resort areas in Delaware and New
Jersey. These resort stores range in size from 1,000 to 4,600 square feet. The
warehouse stores range in size from 12,000 to 26,000 square feet. The warehouse
store in Montgomeryville, PA includes the offices for the chain and general
warehouse space as well as the retail store.
The resort stores sell primarily remainder books and some new titles.
The warehouse stores carry a full line of best sellers, new titles, and
magazines in addition to the remainder books.
The Company intends to expand the book chain principally through the
addition of warehouse stores in high traffic areas. The current focus is on
stand alone sites and strip centers for the new stores. Where appropriate, new
resort stores will also be considered. Current plans call for one new resort
store, the enlargement and relocation of two resort stores and the closing of
one resort store.
Item 2. Properties
- ------- ----------
The Company leases all of its apparel stores and all but one of its book
stores. The internal layout and fixtures of each store are designed and
constructed under contracts with third parties.
Under most leases, the Company is required to pay, in addition to fixed
minimum rental payments, charges for real estate taxes, common area maintenance
fees, utility charges, insurance premiums, mall association charges and
contingent rentals based upon a percentage of sales in excess of specified
amounts.
-5-
The following table shows the earliest years in which executed apparel
store leases existing at January 31, 1997 can be terminated. In many cases the
Company has renewal options.
Calendar Years Number of Leases Expiring
-------------- -------------------------
1997 - 1998........................... 73
1999 - 2000........................... 69
2001 - 2002........................... 67
2003 - 2004........................... 36
2005 - 2006........................... 19
2007 - 2008........................... 15
2009 and thereafter................... 6
---
Total.................... 285
===
The Company leases its warehouse, distribution and office space,
aggregating 280,000 square feet, pursuant to a twenty year lease which commenced
June 15, 1982. This facility is a modern, one story industrial building situated
on approximately 20 acres located in the northeast section of Philadelphia. See
Item 13. Certain Relationships and Related Transactions.
With respect to the locations of present stores, see Item 1.
Business-Stores.
Item 3. Legal Proceedings
- ------- -----------------
The Company is subject to legal proceedings, employment issues and
claims which arise in the ordinary course of its business. In the opinion of
management, after consultation with outside legal counsel, the ultimate
disposition of such proceedings will not have a materially adverse effect on the
Company's consolidated financial position or results of operations.
Item 4. Submission of Matters to a Vote of Security Holders.
- ------- ----------------------------------------------------
None.
-6-
EXECUTIVE OFFICERS OF THE REGISTRANT
Pursuant to General Instruction G(3) of Form 10-K, the following list is
included as an un-numbered 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 30, 1997.
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 57 Director, President and Chief Executive Officer 1973
Warren Weiner 53 Director, Executive Vice President, Secretary and
Treasurer 1973
Allan Laufgraben 58 Senior Vice President, Merchandising 1995
Barry Vesotsky 51 Vice President, Merchandising 1981
Stanley A. Uhr 51 Vice President, Real Estate and Corporate Counsel 1988
Lewis Lyons 43 Vice President, Finance and Chief Financial Officer 1992
William F. Gallagher 32 Controller 1996
Marvin Rounick has been employed by the Company since 1961. Since 1979,
he has served as the President and Chief Executive Officer. Prior to that time,
he served as Vice President, Operations and General Merchandise Manager.
Warren Weiner was employed by the Company from 1965 until 1975. He
rejoined the Company in January, 1982, as Executive Vice President, Secretary
and Treasurer.
Allan Laufgraben has been employed by the Company since December 1995,
as Senior Vice President, Merchandising. For more than five years prior thereto
he was with Petrie Stores Corporation as Executive Vice President and with
Petrie Retail, Inc. as President and Chief Executive Officer.
Barry Vesotsky has been employed by the Company since 1970. Since 1981,
he has served as Vice President, Merchandising. From 1978 to 1981, he was a
Buyer and Merchandise Manager with the Company.
Stanley A. Uhr has been employed by the Company since 1987, first as
Director of Real Estate and Corporate Counsel and, from March 31, 1988, as Vice
President, Real Estate and Corporate Counsel.
Lewis Lyons has been employed by the Company since 1990, first as
Director of Taxes; from May 20, 1992, as Vice President, Finance; and from May
26, 1993, as Vice President, Finance and Chief Financial Officer.
William F. Gallagher has been employed by the Company since 1992; first
as Assistant Controller; and from July 1, 1996 as Controller.
-7-
PART II
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Item 5. Market for the Registrant's Common Stock and Related Stockholder Matters
- ------- ------------------------------------------------------------------------
Market Information
The Company's Common Stock is traded on the over-the-counter market
(NASDAQ National Market). Symbol: DEBS.
The following table sets forth quarterly high and low sales prices for
the two most recent fiscal years.
1997 High Low
- ---- ---- ---
First Quarter $5.2500 $3.0000
Second Quarter 6.5000 4.2500
Third Quarter 6.1250 4.3750
Fourth Quarter 5.3750 4.1250
1996 High Low
- ---- ---- ---
First Quarter $5.1250 $3.7500
Second Quarter 4.2500 2.8750
Third Quarter 4.1250 3.3750
Fourth Quarter 3.8125 3.2500
Holders
As of April 11, 1997, there were 399 holders of record of the Company's
Common Stock.
Dividends
The Company paid regular quarterly dividends for each of the fiscal
quarters in the two most recent fiscal years. During this time period, the per
share amount of these dividends on Common Stock was $.05 for each such fiscal
quarter of fiscal 1996 and 1997. The Company currently intends to follow a
policy of regular quarterly cash dividends, subject to earnings, capital
requirements and the operating and financial condition of the Company, among
other factors.
-8-
Item 6. Selected Financial Data
- ------- -----------------------
The following selected financial data are derived from the consolidated
financial statements of the Company. The data should be read in conjunction with
the consolidated financial statements, related notes, and other financial
information included herein.
Deb Shops, Inc. and Subsidiaries
Consolidated Financial Highlights
Year Ended January 31,
----------------------------------------------------------------------------
(in thousands, except per share and ratio data) 1997 1996 1995 1994 1993
- --------------------------------------------------------------------------------------------------------------------------------
Net sales $187,493 $176,733 $202,938 $221,070 $229,459
Cost of Sales, Including Buying and
Occupancy Costs 151,770 142,347 162,000 166,569 172,027
(Loss) Income Before Income Taxes (5,655) (6,224) (4,619) 7,396 10,352
Net (Loss) Income (3,855) (4,224) (2,719) 5,146 7,252
Net (Loss) Income as a Percent of Net Sales (2.1%) (2.4%) (1.3%) 2.3% 3.2%
Net (Loss) Income Per Common Share (.30) (.33) (.21) .33 .46
Total Assets 94,531 95,597 106,202 132,932 131,238
Capital Lease Obligations 1,827 1,986 2,040 2,040 2,040
Shareholders' Equity 74,014 80,493 87,383 109,389 107,346
Book Value per Share at Year End 5.76 6.27 6.80 6.98 6.86
Cash Dividend per Share of Common Stock .20 .20 .20 .20 .20
Not covered by report of Independent Public Accountants.
-9-
Item 7.
- -------
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND OPERATIONS
Overview
Deb Shops, Inc. (the "Company") operates 275 women's specialty apparel retail
stores offering moderately priced, fashionable, coordinated sportswear, dresses,
coats, lingerie, accessories and shoes for junior and plus sized women. The
Company also operates 10 Tops `N Bottoms stores which sell moderately priced
men's and women's apparel.
In October 1995, the Company acquired substantially all of the net
assets of the Atlantic Book chain for a purchase price of approximately
$4,500,000. Atlantic operates 15 locations, including 10 "Atlantic Book Shops",
which are small limited selection book stores, generally open seasonally in
Delaware and New Jersey shore resort towns. Atlantic Books also operates five
much larger "Atlantic Book Warehouses" which carry a full line of best sellers,
new titles and magazines in addition to remainder books. The Atlantic Book
Warehouse stores are located in Delaware, Maryland,. Pennsylvania and New Jersey
Results of operations for the Company for the fiscal year ended January
31, 1997 and 1996, are presented on a consolidated basis and are segmented to
provide relevant information concerning the Company's retail apparel store
business which is the Company's principal line of business and the retail book
business.
Results of Operations - Consolidated
Consolidated net sales increased $10,759,000 (6.1%) from fiscal 1996 to
1997 as compared to a decrease of $26,205,000 (12.9%) from fiscal 1995 to 1996.
The increase during fiscal 1997 is primarily the result of a full year of sales
in the book business and, to lesser extent, an increase in the apparel business.
The decrease during fiscal 1996 was primarily due to reduced apparel sales
partially offset by sales in the book business which was acquired in October of
1995.
The changes in net sales, cost of sales, selling and administrative
expense and net loss are more fully described in the sections on "Apparel
Business" and "Book Business" that follow.
Other income, principally interest, increased $372,000 (22.1%) from
fiscal 1996 to 1997 and increased $841,000 (99.7%) from fiscal 1995 to 1996.
Interest income is offset by losses on disposition of fixed assets. The increase
in fiscal 1997 is primarily the result of lower write-offs in fiscal 1997 as
compared to fiscal 1996 from the disposition of fixed assets. The increase in
fiscal 1996 is primarily the result of the increase in the interest rate as the
Company moved its investments from tax-free to higher yielding investments.
Net loss before income taxes decreased $570,000 (9.2%) from fiscal 1996
to 1997 and increased $1,606,000 (34.8%) from fiscal 1995 to 1996. The
improvement from 1996 to 1997 is comprised of an increase in the book business
partially offset by a decline in the apparel business. The effective income tax
(benefit) rate for fiscal 1997, 1996 and 1995 was (31.8%) (32.1%) and (41.1%),
respectively. The effective tax rate benefit for fiscal 1997 and 1996 is lower
than the statutory rate primarily as the result of state income tax expense. The
effective tax rate for fiscal 1995 is higher than the statutory rate primarily
as the result of tax-free interest income.
-10-
Results of Operations - Apparel Business
Net sales increased to $176,416,000 from $173,554,000 or $2,862,000
(1.6%) in fiscal 1997 and 1996, respectively and decreased to $173,554,000 from
$202,938,000 or $29,384,000 (14.5%) in fiscal 1996 and 1995, respectively. The
increase in net sales in fiscal 1997 was principally attributable to a return of
fashion direction in the woman's specialty apparel industry, the Company's new
focus on a younger customer and improved visual merchandising in the stores. The
decrease in net sales in fiscal 1996 was principally attributable to continued
customer resistance to product and pricing and a lack of fashion direction in
the women's specialty apparel industry.
Management continues to try to adjust the product mix and pricing
philosophy in an effort to stimulate sales. During fiscal 1997 the Company
introduced plus sizes into approximately one-third of the chain. Plus sizes
generated sales of approximately $15,000,000 in 1997. This strategy offers a
larger assortment of merchandise to an expanded customer base in an effort to
increase sales per store. During fiscal 1998 the Company will reduce the number
of stores carrying plus sizes by approximately 50% in order to better focus the
plus sizes in the appropriate markets and improve the profitability of the plus
size business. In fiscal 1996 the Company introduced shoes into 200 of its
locations in an attempt to generate new business and add-on sales. The addition
of shoes added approximately $6,400,000 and $4,600,000 to sales for fiscal 1997
and 1996, respectively.
The following table sets forth certain per store information.
Per Store Data(1)
Year Ended January 31,
--------------------------
1997 1996 1995
---- ---- ----
Stores open at end of the period 285 308 341
Average number in operation during the period 299 334 357
Average net sales per store (in thousands) $590 $520 $568
Average net operating loss per store (in thousands) ($ 30) ($ 25) ($ 15)
Comparable Store Sales(2) - Percent Change 9.5% (10.4%) (7.9%)
- -------------------
(1) Includes Tops 'N Bottoms stores
(2) Comparable store sales includes stores opened for both periods, in the
current format and location. A store is added to the comparable store base
in its 13th month of operation.
-11-
Cost of sales, including buying and occupancy costs, increased to
$144,275,000 from $140,190,000 or $4,085,000 (2.9%) in fiscal 1997 and 1996,
respectively and decreased to $140,190,000 from $162,000,000 or $21,810,000
(13.5%) in fiscal 1996 and 1995, respectively. The fiscal 1997 increase in cost
of sales, including buying and occupancy costs was principally due to the
decrease in margins related to the introduction of plus sizes as discussed
above. The 1996 fiscal decrease in cost of sales, including buying and occupancy
costs was principally due to a decline in average net sales per store and a
decline in the average number of stores in operation during the periods. As a
percentage of net sales, these costs were 81.8% during fiscal 1997, 80.8% during
fiscal 1996, and 79.8% during fiscal 1995. For fiscal 1997, the increased cost
of sales percentage resulted from decreased margins in the plus size business
which was added during the year. For fiscal 1996, the increased cost of sales
percentage resulted from the need to markdown inventory to reduce inventory
levels and the decrease in sales for that fiscal year. Buying and occupancy
costs were 19.5%, 21.8% and 19.7% of sales for the fiscal years 1997, 1996 and
1995, respectively. The percentage decrease in fiscal 1997 as compared to 1996
resulted principally from increased sales during the period and the favorable
effect of closing underperforming stores during 1997 and 1996. The percentage
increases in fiscal 1996 as compared to 1995 resulted principally from decreased
sales during the periods.
Selling and administrative expenses decreased to $37,423,000 from
$37,922,000 or $499,000 (1.3%) in fiscal 1997 and 1996, respectively and to
$37,922,000 from $42,314,000 or $4,392,000 (10.4%) in fiscal 1996 and 1995,
respectively. The decrease in these expenses for fiscal 1997 and 1996 was mainly
due to cost controls and the reduction in the number of stores. The decrease in
selling and administrative costs for fiscal 1997 was offset by the $560,000 cost
for the termination of the Company's private label credit card program. As a
percentage of net sales, these expenses were 21.4% during fiscal 1997, 21.9%
during fiscal 1996 and 20.9% during fiscal 1995. The percentage increases in
fiscal 1996 was the result of sales for the period being insufficient to cover
fixed overhead.
Depreciation expense decreased $449,000 from fiscal 1996 to 1997 and
$470,000 from fiscal 1996 to 1995. The decrease is principally attributed to the
write-off of leasehold improvements of closed stores.
The operating loss increased to $8,450,000 from $8,176,000 or $274,000
(3.4%) in fiscal 1997 and 1996, respectively, and to $8,176,000 from $5,463,000
or $2,713,000 (49.7%) in 1996 and 1995, respectively. As a percentage of sales,
the operating loss was (4.8%) in fiscal 1997, (4.7%) in fiscal 1996 and (2.7%)
in fiscal 1995. In fiscal 1997, the increase in operating loss was primarily
attributable to lower margins principally resulting from the start-up of the
plus size business. As a result of the introduction of plus sizes in April 1996,
and the necessity to sell through that first season's inventory in three months,
margins were only maintained at minimal levels. The second season of plus size
business showed an improvement in margins; however, margins remain below normal
levels as a result of the promotional nature of the introduction of the line.
These lower margins on the plus size business were sufficient to adversely
affect overall margins for the entire apparel business. The operating loss in
fiscal 1996 was primarily attributable to the decrease in total sales for that
year. The operating loss for fiscal 1995 was partially offset (to the extent of
$600,000) by refunds of insurance premiums received during the first quarter of
that year.
-12-
Results of Operations - Book Business
Fiscal 1997 was the first full year the Company operated its book
business. The book business was acquired in 1995 and was operated for four
months during fiscal 1996.
Net sales increased to $11,077,000 from $3,179,000 or $7,898,000
(248.4%) from the inception period in fiscal 1996 to fiscal 1997. The increase
resulted from a full years operation in fiscal 1997 as compared to four months
in the inception period in 1996, as well as the addition of two warehouse stores
during fiscal 1997.
The following table sets forth certain per store information:
Per Store Data
Year Ended January 31, 1997
---------------------------
Stores open at end of year-Resort Stores 10
Average number in operation during the period 10
Average net sales per store Resort store (in thousands) $288
Stores open at end of year - Warehouse Stores 5
Average number in operation during the period 3
Average net sales per Warehouse Store (in thousands) $2,732
Comparable Store Sales (1) Percent Change 4.9%
Cost of sales, including buying and occupancy costs, increased to
$7,496,000 from $2,157,000 or $5,339,000 (247.5%) from the inception period in
1996 to fiscal 1997. As a percentage of net sales, cost of sales, buying and
occupancy costs were 67.7% in fiscal 1997 and 67.8% in the inception period in
1996. As a percentage of net sales, buying and occupancy costs were 12.9% in
fiscal 1997 and 10.3% in the inception period in 1996.
Selling and administrative costs increased to $2,513,000 from $639,000
or $1,874,000 (293.3%) from the inception period in 1996 to fiscal 1997. As a
percentage of net sales, selling and administrative costs were 22.7% in fiscal
1997 and 20.1% in the inception period in 1996.
Depreciation and amortization expense was $322,000 in fiscal 1997 which
represents 2.9% of net sales.
Operating income increased to $746,000 from $267,000 or $479,000
(179.7%) from the inception period in 1996 to fiscal 1997. As a percentage of
net sales, operating income represents 6.7% in fiscal 1997 and 8.4% in the
inception period in 1996.
- ----------------------------------
1 Comparable store sales includes stores opened for both periods in the current
format and location. A store is added to the comparable store base in its 13th
month of operation. The "Percent Change" represents the comparison of the
period, from the date of acquisition to January 31, 1996, with the same time
period in fiscal 1997.
-13-
Liquidity and Capital Resources - Consolidated
During the past three fiscal years the Company funded internally all of
its operating needs, including capital expenditures for the opening of new
apparel and book stores, remodeling of existing apparel and book stores, the
purchase of the book business and its related net assets and the acquisition of
treasury stock. Total cash (used in) or provided by operating activities, for
fiscal years ended January 31, 1997, 1996 and 1995 was ($178,000), $9,897,000
and $65,000, respectively. For fiscal 1997, cash used in operations was caused
by the fiscal 1997 loss and an increase in merchandise inventories and was
partially offset by an increase in trade accounts payable and non-cash charges
for depreciation and amortization. For fiscal 1996 and 1995, the net loss was
offset by cash provided by operations as a result of non-cash charges for
depreciation and decreased merchandise inventories. The inventory turn-over rate
for the apparel business was approximately 4.3 times during fiscal year ended
January 31, 1997 and 3.1 times during the fiscal year ended January 31, 1996 and
2.5 times during the fiscal year ended January 31, 1995. The improved inventory
turn-over rate in fiscal 1997 did not result in an improvement in profitability
due to the decreased margins as previously discussed. The inventory turn-over
rate for the book business was approximately 1.5 times during the fiscal year
ended January 31, 1997.
Net cash used in investing activities was $3,756,000, $5,347,000 and
$1,735,000 for the fiscal years ended January 31, 1997, 1996, and 1995,
respectively. In October 1995, the Company acquired substantially all of the net
assets of the Atlantic Book chain for a purchase price of approximately
$4,468,000, which was funded from the Company's internal funds. During fiscal
1997 and 1995, these funds were principally used in the purchase of property,
plant and equipment, net of proceeds from the sale of investments in fiscal
1995. During fiscal 1997, the Company expended $3.8 million for property and
equipment additions to open 2 new book stores and 2 new apparel stores and
remodel existing stores. During fiscal 1995, the Company expended $2.6 million
for property and equipment additions to open 8 new stores and remodel existing
stores.
Net cash used in financing activities was $2,784,000, $3,592,000 and
$19,334,000 for the fiscal years 1997, 1996 and 1995, respectively. For the
fiscal year ended January 31, 1995, these funds were used for the purchase of
treasury stock and the payment of dividends on preferred and common stock. On
April 4, 1994, the Company purchased the 2,761,800 shares of its common stock
owned by Petrie Stores Corporation at a cash price of $6.05 per share, for a
total cash outlay of approximately $16,800,000, including transaction costs.
That price represented a substantial discount from book value of $6.98 per
share. The purchase price was funded entirely from a portion of the Company's
short-term investments. For the fiscal years ended January 31, 1997 and 1996,
these funds were used for the payment of dividends on preferred and common
stock.
As of January 31, 1997, the Company had cash and cash equivalents of
$44,851,000 compared with $51,569,000 at January 31, 1996 and $50,610,000 at
January 31, 1995. From fiscal 1993 to 1996, the Company has trended toward lower
sales and from fiscal 1991 to 1996 the Company has trended toward lower
earnings. The Company opened a plus sized operation during the first quarter of
fiscal 1997 in approximately one-third of its stores. This required the hiring
of a buying staff, the remodeling of certain locations, and the purchase of
inventory. The Company's present intention is to expand the book store business
by opening additional warehouse stores. Opening a warehouse book store is
capital intensive, between leasehold improvements and initial inventory. It is
-14-
anticipated that the funds to finance this expansion will come from the cash and
cash equivalents on hand. During fiscal 1997, the Company opened two additional
warehouse stores. One of the locations is leased and the other location is
owned. The Company purchased the store for approximately $2,100,000 in May 1996.
It is not the Company's intention to purchase store locations. However, when the
location and the economics are suitable, such transactions will be evaluated.
Other than these items there are no known other trends or commitments, events or
other uncertainties that are reasonably likely to result in the Company's
liquidity increasing or decreasing in any material way. 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.
Income Taxes
The effective income tax (benefit) rate for fiscal 1997, 1996 and 1995
was (31.8%) (32.1%) and (41.1%), respectively. The effective tax rate benefit
for fiscal 1997 and 1996 is lower than the statutory rate primarily as the
result of state income tax expense. The effective tax rate for fiscal 1995 is
higher than the statutory rate primarily as the result of tax-free interest
income.
Inflation
Inflation has had little impact on the operating results of the Company
since inflation rates are relatively low and inventory turns are frequent.
Inflation has had no meaningful effect on the other assets of the Company.
Seasonal Nature of Operations
Approximately 54% and (7%) of the Company's net sales and net (loss),
respectively, for fiscal 1997 occurred during the last six months as compared to
54% and (6%) in the prior year. The last six months include the Back-to-School
and Christmas selling seasons. See "Quarterly Financial Information
(Unaudited)", and the preceding discussion on "Results of Operations".
Forward-Looking Statements
The Company has made in this report, and from time to time may otherwise
make, "forward-looking statements" (as that term is defined under Federal
Securities Laws) concerning the Company's future operations, performance,
profitability, revenues, expenses and financial condition. This report includes,
in particular, forward-looking statements regarding store closings and other
matters. Such forward-looking statements are subject to various risks and
uncertainties. Actual results could differ materially from those currently
anticipated due to a number of factors. Such factors may include, but are not
limited to, the Company's ability to improve margins, respond to changes in
fashion and the Company's ability to retain key management personnel. Such
factors may also include other risks and uncertainties detailed in the Company's
filings with the Securities and Exchange Commission, including the Company's
Annual Report on Form 10-K for the fiscal year ended January 31, 1997.
-15-
Item 8. Financial Statements and Supplementary Data
- ------ -------------------------------------------
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors
of Deb Shops, Inc.:
We have audited the accompanying consolidated balance sheets of Deb Shops, Inc.
(a Pennsylvania corporation) and subsidiaries as of January 31, 1997 and 1996,
and the related consolidated statements of operations, shareholders' equity and
cash flows for each of the three years in the period ended January 31, 1997.
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 generally accepted auditing
standards. 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
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 as of January 31, 1997 and 1996, and the results of
their operations and their cash flows for each of the three years in the period
ended January 31, 1997 in conformity with generally accepted accounting
principles.
ARTHUR ANDERSEN LLP
Philadelphia, PA
March 5, 1997
-16-
DEB SHOPS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
-------------------------------------
Year Ended January 31,
----------------------------------------------
1997 1996 1995
- -------------------------------------------------------------------------------------------------
Net Sales $187,492,861 $176,733,372 $202,937,909
------------ ----------- ------------
Costs and Expenses
Cost of sales, including buying
and occupancy costs 151,770,240 142,347,035 161,999,660
Selling and administrative 39,942,791 38,643,256 42,314,134
Depreciation and amortization 3,490,816 3,652,046 4,086,707
------------ ----------- ------------
195,203,847 184,642,337 208,400,501
------------ ----------- ------------
Operating Loss (7,710,986) (7,908,965) (5,462,592)
Other Income, Principally Interest 2,056,177 1,684,560 843,721
------------ ----------- ------------
Loss Before Income Taxes (5,654,809) (6,224,405) (4,618,871)
Income tax benefit (1,800,000) (2,000,000) (1,900,000)
------------ ----------- ------------
Net Loss ($ 3,854,809) ($4,224,405) ($ 2,718,871)
============ =========== ============
Net Loss Per Common Share ($ .30) ($ .33) ($ .21)
============ =========== ============
Weighted Average Number of Common
Shares Outstanding 12,844,680 12,845,316 13,268,236
============ =========== ============
The notes to consolidated financial statements are an integral part of these
financial statements.
-17-
DEB SHOPS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
January 31,
-----------------------------
1997 1996
- -------------------------------------------------------------------------------
ASSETS
Current Assets
Cash and cash equivalents $44,850,895 $51,569,038
Merchandise inventories 22,907,072 16,655,946
Prepaid expenses and other 2,757,308 3,890,710
Current deferred income taxes 1,374,050 949,128
----------- -----------
Total current assets 71,889,325 73,064,822
----------- -----------
Property, Plant and Equipment - at cost
Land 150,000 ---
Building 4,324,052 1,982,000
Leasehold improvements 29,131,896 29,611,550
Furniture and equipment 15,443,618 16,135,884
----------- -----------
49,049,566 47,729,434
Less accumulated depreciation and amortization 31,745,736 30,573,512
----------- -----------
17,303,830 17,155,922
----------- -----------
Other Assets
Goodwill, net of accumulated amortization of
$285,648 and $71,412, respectively 2,932,757 3,146,993
Long term deferred income taxes 1,237,290 1,062,212
Other 1,167,514 1,167,514
----------- -----------
Total other assets 5,337,561 5,376,719
----------- -----------
$94,530,716 $95,597,463
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Trade accounts payable $13,792,280 $ 8,585,210
Accrued expenses 4,897,409 4,532,801
----------- -----------
Total current liabilities 18,689,689 13,118,011
----------- -----------
Capital Lease Obligation 1,826,787 1,986,267
----------- -----------
Commitments and Contingencies (Note D and G)
Shareholders' Equity
Series A Preferred stock, par value $1.00 a share:
Authorized - 5,000,000 shares
Issued and outstanding - 460 shares,
liquidation value $460,000 460 460
Common stock, par value $.01 a share:
Authorized - 25,000,000 shares
Issued shares-1997: 15,688,290;
1996: 15,688,290 156,883 156,883
Additional paid-in capital 5,541,944 5,541,944
Retained earnings 85,891,376 92,370,321
----------- -----------
91,590,663 98,069,608
Less common treasury shares, at cost -
1997: 2,843,610; 1996: 2,843,610 17,576,423 17,576,423
----------- -----------
74,014,240 80,493,185
----------- -----------
$94,530,716 $95,597,463
=========== ===========
The notes to consolidated financial statements are an integral part of these
financial statements.
-18-
DEB SHOPS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Preferred Stock Common Stock
-----------------------------------------------
Shares Amount Shares Amount
- -------------------------------------------------------------------------------------------
Balance January 31, 1994 460 $460 15,688,290 $156,883
---- ---- ---------- --------
Exercise of stock options
Balance January 31, 1995 460 460 15,688,290 156,883
---- ---- ---------- --------
Exercise of stock options
Balance January 31, 1996 460 460 15,688,290 156,883
---- ---- ---------- --------
Exercise of stock options
Balance January 31, 1997 460 $460 15,688,290 $156,883
==== ==== ========== ========
Additional
Paid-In Retained Treasury
Capital Earnings Stock
- --------------------------------------------------------------------------------------------------
Balance January 31, 1994 $5,666,744 $104,562,522 $ 997,968
Net (loss) --- (2,718,871) ---
Dividends on preferred stock ($120 per share) --- (55,200) ---
Dividends on common stock ($.20 per share) --- (2,569,589) ---
Issuance of restricted incentive stock, net (124,800) --- (171,760)
Purchase of 2,761,800 shares of common stock --- --- 16,708,890
---------- ----------- -----------
Balance January 31, 1995 5,541,944 99,218,862 17,535,098
Net (loss) --- (4,224,405) ---
Dividends on preferred stock ($120 per share) --- (55,200) ---
Dividends on common stock ($.20 per share) --- (2,568,936) ---
Acquisition of treasury stock --- --- 41,325
---------- ----------- -----------
Balance January 31, 1996 5,541,944 92,370,321 17,576,423
Net (loss) --- (3,854,809) ---
Dividends on preferred stock ($120 per share) --- (55,200) ---
Dividends on common stock ($.20 per share) --- (2,568,936) ---
---------- ----------- -----------
Balance January 31, 1997 $5,541,944 $85,891,376 $17,576,423
========== =========== ===========
The notes to consolidated financial statements are an integral part of these
financial statements.
-19-
DEB SHOPS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended January 31,
------------------------------------------------
1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net loss ($3,854,809) ($4,224,405) ($2,718,871)
Adjustments to reconcile net loss to
net cash (used in) provided by operating activities:
Depreciation and amortization 3,490,816 3,652,046 4,086,707
Issuance of restricted incentive stock, net --- (41,325) 46,960
Gain on disposition of investments --- --- (17,202)
Deferred income tax (benefit) provision (600,000) (150,000) 297,789
Loss on retirement of property, plant and equipment 331,743 947,608 835,394
Change in assets and liabilities:
(Increase) decrease in merchandise inventories (6,251,126) 14,337,455 4,196,711
Decrease (increase) in prepaid expenses and other 1,133,402 162,696 (1,938,103)
Increase (decrease) in trade accounts payable 5,207,070 (4,108,742) (1,884,985)
Increase (decrease) in accrued expenses 364,608 (678,192) (4,954)
(Decrease) in income taxes --- --- (2,834,878)
----------- ----------- -----------
Net cash (used in) provided by operating activities (178,296) 9,897,141 64,568
----------- ----------- -----------
Cash flows from investing activities:
Purchase of business and related net assets,
net of cash acquired (Note B) --- (4,468,016) ---
Purchase of property, plant and equipment, net (3,756,231) ( 878,590) (2,609,769)
Proceeds from sale of investments --- --- 874,874
----------- ----------- -----------
Net cash used in investing activities (3,756,231) (5,346,606) (1,734,895)
----------- ----------- -----------
Cash flows from financing activities:
Preferred stock cash dividends paid (55,200) (55,200) (55,200)
Common stock cash dividends paid (2,568,936) (2,568,936) (2,569,589)
Repurchase of treasury stock --- --- (16,708,890)
Repayment of notes payable --- (913,415) ---
Principal payment under capital lease obligations (159,480) ( 54,141) ---
----------- ----------- -----------
Net cash used in financing activities (2,783,616) (3,591,692) (19,333,679)
----------- ----------- -----------
(Decrease) increase in cash and cash equivalents (6,718,143) 958,843 (21,004,006)
Cash and cash equivalents at beginning of year 51,569,038 50,610,195 71,614,201
----------- ----------- -----------
Cash and cash equivalents at end of year $44,850,895 $51,569,038 $50,610,195
=========== =========== ===========
Supplemental disclosures of cash flow information:
Cash paid (refunded) during the year for:
Interest on capital lease obligation $ 391,000 $ 420,000 $ 444,000
Income taxes, net ($2,278,742) ($1,441,444) $ 2,602,263
The notes to consolidated financial statements are an integral part of these
financial statements.
-20-
DEB SHOPS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- - A - SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
Consolidation: The consolidated financial statements of Deb Shops, Inc. (the
Company) include the accounts of the Company and its subsidiaries, after
elimination of all inter-company transactions and accounts.
Background: The Company retails moderately priced fashion apparel for junior and
plus sized females and males through 285 stores. The Company's stores are
located in regional malls and strip centers principally located in the east and
mid-western regions of the country. The Company also operates a chain of 15 book
stores located in Delaware, Maryland, Pennsylvania and New Jersey.
Management Estimates: The preparation of the consolidated financial statements
in conformity with generally accepted accounting principles requires management
to make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Inventories: All apparel merchandise inventories are stated at the lower of cost
(first-in, first-out method) or market, as determined by the retail inventory
method. Book inventories are stated at the lower of cost (first-in, first-out
method) or market.
New Accounting Pronouncements: In March 1995, the Financial Accounting Standards
Board issued Statement of Financial Accounting Standards No. 121 "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of"
(SFAS No. 121). SFAS No. 121 established accounting standards for the impairment
of long-lived assets, certain identifiable intangibles and goodwill. The Company
adopted SFAS No. 121 effective February 1, 1996. The adoption did not have a
material effect on the Company's financial condition or results of operations.
In October 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 123 "Accounting for Stock-Based Compensation"
(SFAS No. 123). SFAS No. 123 established financial accounting and reporting
standards for stock-based employee compensation plans. This statement also
applies to transactions in which an entity issues its equity instruments to
acquire goods or services from non-employees. The Company has elected to adopt
the disclosure requirement of this statement. The effect of adopting SFAS No.
123 was not material.
Income Taxes: The liability method is used in accounting for income taxes. Under
this method, deferred tax assets and liabilities are determined based on
differences between the financial reporting and tax bases of assets and
liabilities and are measured using enacted tax rates and laws that are expected
to be in effect when the differences reverse. Deferred income taxes result
principally from differences in the timing of recognition of overhead in
inventory, deductibility of certain liabilities and depreciation expense.
-21-
Property, Plant and Equipment: The provisions for depreciation and amortization
are computed using the straight-line method based upon estimated useful lives of
the assets. Leasehold improvements are amortized over the initial term of the
lease. Furniture and equipment is depreciated over seven years or the lease
term, whichever is less. Gain or loss on disposition of property, plant and
equipment is included in other income.
Cost in Excess of Net Assets Acquired (Goodwill): The Company amortizes costs in
excess of fair market value of net assets of businesses acquired using the
straight-line method over a period of fifteen years. The Company evaluates
whether changes have occurred that would require revision of the remaining
estimated useful life of the assigned goodwill or render the goodwill not
recoverable.
Net Loss Per Common Share: Net loss per common share and all per share amounts
are based upon the weighted average common shares outstanding during each year
including the dilutive effect of stock options and restricted incentive stock.
Statements of Cash Flows: The Company considers all highly liquid investments
with an original maturity of less than three months to be cash equivalents.
Included in cash and cash equivalents at January 31, 1997 is $44,001,000 of
investments in money market mutual funds and municipal bonds. They are carried
at cost which approximates market.
- - B -ACQUISITION OF BUSINESS
In October 1995, the Company acquired substantially all of the assets
and liabilities of the companies doing business as Atlantic Books for $4,468,016
in cash. The purchase price was allocated to the fair market value of the assets
with $3,213,405 allocated to goodwill. The acquisition was accounted for under
the purchase method of accounting. The following table displays the assets
acquired and liabilities assumed as a result of this acquisition:
Merchandise inventories $2,417,027
Prepaid expenses and other 137,690
Property, plant and equipment 740,011
Goodwill 3,213,405
Trade accounts payable (1,029,969)
Accrued expenses (96,733)
Notes payable (913,415)
----------
$4,468,016
==========
-22-
- - C - INCOME TAXES
Income tax (benefit) consists of the following components:
Year Ended January 31,
------------------------------------------------
1997 1996 1995
----------- ----------- -----------
Current:
Federal ............. ($1,450,000) ($2,150,000) ($1,850,000)
State ............... 250,000 300,000 250,000
----------- ----------- -----------
(1,200,000) (1,850,000) (1,600,000)
----------- ----------- -----------
Deferred:
Federal ............. (550,000) (100,000) (250,000)
State ............... (50,000) (50,000) (50,000)
----------- ----------- -----------
(600,000) (150,000) (300,000)
----------- ----------- -----------
($1,800,000) ($2,000,000) ($1,900,000)
=========== =========== ===========
The tax benefit generated during fiscal 1997, 1996 and 1995 will be
realized by carrying back the loss to income generated during previous years.
The refunds are included in prepaid expenses.
A reconciliation of the Company's effective income tax with the
statutory federal rate follows:
Year Ended January 31,
------------------------------------------------
1997 1996 1995
----------- ----------- -----------
Tax (benefit) at statutory
rate ($1,923,000) ($2,116,000) ($1,570,000)
Tax-free income -- (22,000) (441,000)
State income taxes,
net of federal tax 132,000 165,000 132,000
Other (9,000) (27,000) (21,000)
----------- ----------- -----------
($1,800,000) ($2,000,000) ($1,900,000)
=========== =========== ===========
The deferred tax effect of temporary differences giving rise to the
Company's deferred tax assets are:
January 31,
------------------------------
1997 1996
----------- -----------
Deferred Tax Asset
Uniform cost capitalization $ 435,000 $ 272,000
Capital lease obligation 389,000 412,000
Deferred rent 323,000 323,000
Depreciation 848,000 650,000
Accrued expenses 636,000 592,000
Other 203,000 ---
----------- -----------
2,834,000 2,249,000
Deferred Tax Liabilities
Prepaid Expenses (223,000) (238,000)
----------- -----------
$ 2,611,000 $ 2,011,000
=========== ===========
-23-
- - D -LEASES
The Company leases all of its retail apparel stores and all but one of
its book stores for periods ranging from one to 25 years, including renewal
options. In most instances, the Company pays real estate taxes, insurance and
maintenance costs on the leased properties and contingent rentals based upon a
percentage of sales. The warehouse and office building occupied by the Company
is leased from a partnership whose partners include three of the Company's
directors including the President and Executive Vice President. The warehouse
bookstore in Montgomeryville, Pennsylvania is leased from a partnership whose
partners are Mark Simon, an employee and officer of the book subsidiary and
Martin Simon, a consultant to the book subsidiary.
Under the terms of the warehouse and office building lease, the Company
is required to pay annual rentals as reflected under "Capital Lease" in the
lease table below. The lease term is 20 years and requires the Company to pay
all real estate taxes, utilities and maintenance costs. The warehouse and office
building lease has a net book value of $595,000 at January 31, 1997 and is
accounted for as a capital lease. Asset amounts are included in buildings and
improvements and are depreciated over twenty years.
Interest expense related to the capital lease obligation amounted to
$391,000, $420,000 and $444,000 for the years ended January 31, 1997, 1996 and
1995, respectively, and is included in selling and administrative expense.
Future minimum rental commitments for all noncancellable leases at
January 31, 1997 are as follows:
Capital Operating
Lease Leases
- --------------------------------------------------------------------------------
1998.................................... $550,000 $ 15,119,000
1999.................................... 550,000 14,166,000
2000.................................... 550,000 11,945,000
2001.................................... 550,000 10,322,000
2002.................................... 550,000 8,066,000
Thereafter........................... 230,000 6,559,000
--------- ------------
Total minimum rental commitments........ 2,980,000 $ 66,177,000
============
Imputed interest........................ (1,153,213)
----------
Present value of net minimum
lease payments........................ $1,826,787
==========
Total rental expense under operating leases amounted to $17,944,000, to
$19,043,000 and $20,003,000 in fiscal 1997, 1996 and 1995, respectively. Such
amounts include contingent rentals based upon a percentage of sales of
$1,650,000, $790,000 and $730,000 in fiscal 1997, 1996 and 1995, respectively.
-24-
- - E-STOCK OPTION PLAN
Effective October 1995, the Company adopted an Incentive Stock Option
Plan (the Plan). The Plan is administered by a Stock Option Committee designated
by the Board of Directors. Under the Plan, a maximum of 2,000,000 shares of the
Company's common stock, par value $.01 per share, may be issued by the Company
and sold to selected key employees on the basis of contribution to the
operations of the Company. The price payable for the shares of Common Stock
under each stock option will be fixed by the Committee at the time of grant, but
will be no less than 100% of the fair market value of the Company's common stock
at the time the stock option is granted. Options are exercisable commencing one
year after the date of grant, subject to such vesting requirements as the
Committee may specify. The granted options expire through February 2001. The
weighted average remaining contractual life of these options is approximately 4
years. During fiscal 1996 and 1997, the Company issued 355,000 and 35,000
options, respectively, to purchase common stock at $3.25 and $3.50 per share
which was the fair market value on the date of grant, as summarized below:
Weighted
Average
Shares Exercise Price
------ --------------
Outstanding, January 31, 1995 ............................... -- --
Granted during period (at $3.25 and $3.50 per share) 355,000 $ 3.27
Canceled during period ............................. -- --
Exercised during period ............................ -- --
------- --------
Outstanding, January 31, 1996. (at $3.25 and $3.50 per share) 355,000 3.27
Granted during period (at $3.25 per share) ......... 35,000 3.25
Canceled during period ............................. -- --
Exercised during period ............................ -- --
------- --------
Outstanding, January 31, 1997 (at $3.25 and $3.50 per share) 390,000 $ 3.27
======= ========
At January 31, 1997, there were 127,500 exercisable options at prices
ranging from $3.25 to $3.50 per share with an aggregate exercise price of
$418,750. There were 1,610,000 shares reserved for future grant.
The disclosure requirements of applying SFAS No. 123 "Accounting for
Stock Based Compensation" were omitted as it was not material.
- - F -RESTRICTED STOCK INCENTIVE PLAN
Effective June 1, 1990, the Company adopted a Restricted Stock Incentive
Plan (RSIP) administered by the Company's Stock Option Committee. Under the RSIP
a maximum 300,000 shares of the Company's Common Stock may be awarded as bonuses
to key employees. No more than 100,000 shares may be issued under this plan
during any calendar year. Upon grant, the shares shall be registered in the name
of the recipient who shall have the right to vote the shares and receive cash
dividends, but the right to receive the certificates and retain the shares does
not vest until the grantee has remained in the employ of the Company for a
period determined by the Stock Option Committee. At the time of the vesting, a
portion of the shares may be withheld to cover withholding taxes due on the
-25-
compensation income resulting from the grant. During fiscal 1996 and 1995, 8,265
and 8,320 shares, respectively, of treasury stock were withheld to cover
withholding taxes. These have been included in the acquisition of treasury stock
and the issuance of restricted incentive stock, net on the consolidated
statements of shareholders' equity.
In fiscal 1997 and 1996, no shares were granted under the RSIP. During
fiscal 1995, 20,000 shares were granted under the RSIP. Compensation expense in
the year ended January 31, 1995 was $100,000. At January 31, 1997 there were
206,000 shares reserved for future grant.
- - G-COMMITMENTS AND CONTINGENCIES
The Company has an unsecured line of credit aggregating $20,000,000 at
January 31, 1997. Of this amount, $2,849,000 was outstanding as letters of
credit for the purchase of inventory.
The Company entered into a five year agreement with a bank during fiscal
1994 for the use of a private label credit card bearing the Company's name. The
Company paid a fee based on a percent of sales. The agreement was terminated as
of June 30, 1996 and the Company incurred a termination fee of $560,000. The
bank has assumed all future obligations associated with the portfolio.
The Company entered into an employment agreement with a key employee
during fiscal 1997. The agreement provides for a base salary plus a bonus of 4%
of the improvement in the operating results of the apparel business. The Company
entered into a bonus agreement with a key employee during fiscal 1997. The
agreement provides for a bonus of 2% of the improvement in operating results of
the apparel business. No payment was required in 1997 under either agreement.
The Company is subject to legal proceedings, employment issues and
claims which arise in the ordinary course of its business. In the opinion of
management, after consultation with outside legal counsel, the ultimate
disposition of such proceedings will not have a materially adverse affect on the
Company's consolidated financial position or results of operations.
- - H-RELATED PARTY TRANSACTION
On November 22, 1996, the Company loaned $8,330,000 to an affiliated
entity of a principal stockholder, in connection with a refinancing. The loan
was written on a demand basis, was secured by a first mortgage, and bore
interest at an annual rate of 8.5%. The loan was repaid, in full, on December 5,
1996.
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Deb Shops, Inc.
Quarterly Financial Information
(Unaudited)
Amounts in Thousands First Second Third Fourth
Except Per Share Data Quarter Quarter Quarter Quarter
- --------------------------------------------------------------------------------
Net sales
1997 $38,039 $48,460 $46,386 $54,608
1996 $39,101 $42,317 $41,672 $53,643
Cost of sales, including buying
and occupancy costs
1997 $31,473 $40,600 $38,887 $40,810
1996 $32,770 $34,612 $35,536 $39,429
Net (loss) income
1997 ($ 1,939) ($ 1,652) ($ 2,458) $ 2,194
1996 ($ 2,299) ($ 1,652) ($ 2,793) $ 2,520
Net (loss) income per share
1997 ($ .15) ($ .13) ($ .19) $ .17
1996 ($ .18) ($ .13) ($ .22) $ .20
Cash dividends per common share
1997 $ .05 $ .05 $ .05 $ .05
1996 $ .05 $ .05 $ .05 $ .05
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Item 9. Disagreements on Accounting and Financial Disclosure
None.
PART III
Item 10. Directors and Executive Officers of the Registrant
(a) Directors of the Registrant
The required information with respect to each director is contained in
the Company's Proxy Statement in connection with its Annual Meeting to
be held on May 30, 1997, which is incorporated in this Form 10-K Annual
Report by reference.
(b) Executive Officers of the Registrant
The required information with respect to each executive officer is
contained at the end of Part I of this Form 10-K.
(c) Family Relationships
Marvin Rounick, President, Chief Executive Officer and a Director, and
Jack A. Rounick, a Director, are brothers.
(d) Other
There have been no events under any bankruptcy act, no criminal
proceedings and no judgments or injunctions material to the evaluation
of the ability and integrity of any director or executive officer during
the past five years.
Item 11. Executive Compensation
The required information with respect to executive compensation is
contained in the Company's Proxy Statement in connection with its Annual Meeting
to be held on May 30, 1997, which is incorporated in this Form 10-K Annual
Report by reference.
Item 12. Security Ownership of Certain Beneficial Owners & Management
The required information with respect to security ownership of certain
beneficial owners and management is contained in the Company's Proxy Statement
in connection with its Annual Meeting to be held on May 30, 1997, which is
incorporated in this Form 10-K Annual Report by reference.
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Item 13. Certain Relationships and Related Transactions
The required information with respect to certain relationships and
related transactions is contained in the Company's Proxy Statement in connection
with its Annual Meeting to be held on May 30, 1997, which is incorporated in
this Form 10-K Annual Report by reference.
PART IV
Item 14. Exhibits, Financial Statement Schedules
and Reports on Form 8-K
Financial Statements and Financial Statement Schedules
Document Page(s)
Report of independent public accountants................... 16
Consolidated statements of operations for
the years ended January 31, 1997; January 31,
1996 and January 31, 1995.................................. 17
Consolidated balance sheets as of January 31,
1997 and January 31, 1996.................................. 18
Consolidated statements of shareholders'
equity for the years ended January 31, 1997;
January 31, 1996 and January 31, 1995...................... 19
Consolidated statements of cash flows for the years ended
January 31, 1997; January 31, 1996 and January 31, 1995.... 20
Notes to consolidated financial statements................. 21-26
Selected quarterly financial data for
the years ended January 31, 1997 and
January 31, 1996............................................ 27
All schedules are omitted because they are not applicable or not
required, or because the required information is included in the consolidated
financial statements or notes thereto.
-29-
EXHIBITS
The following exhibits have been filed with the Securities and Exchange
Commission pursuant to the requirements of the Acts administered by the
Commission. Each such exhibit is identified by the reference following the
listing of such exhibit, and each is incorporated herein by such reference.
Exhibits identified with an asterisk below comprise executive
compensation plans and arrangements.
Exhibit No. Description of Document
----------- -----------------------
3-1 Restated Articles of Incorporation of the Company, as amended
through May 29, 1984 (1992 Form 10-K, Exhibit 3-1)
3-2 By-Laws of the Company, as amended through July 19, 1990
(1993 Form 10-K, Exhibit 3-2)
4-1 * Deb Shops, Inc. Restated Savings and Protection Plan
(1992 Form 10-K, Exhibit 4-1)
4-1.1 * Amendment No. I to Deb Shops, Inc. Restated Savings and
Protection Plan (1992 Form 10-K, Exhibit 4-1.1)
4-1.2 * Amendment No. II to Deb Shops, Inc. Restated Savings and
Protection Plan (1992 Form 10-K, Exhibit 4-1.2)
4-1.3 * Amendment No. III to Deb Shops, Inc. Restated Savings and
Protection Plan (1992 Form 10-K, Exhibit 4-1.3)
4-1.4 * Amendment No. IV to Deb Shops, Inc. Restated Savings and
Protection Plan (1992 Form 10-K, Exhibit 4-1.4)
4-1.5 * Amendment No. V to Deb Shops, Inc. Restated Savings and
Protection Plan (1994 10-K Exhibit 4-1.5)
4-1.6 * Amendment No. VI to Deb Shops, Inc. Restated Savings and
Protection Plan (1994 Form 10-K, Exhibit 4-1.6)
4-1.7 * Amendment No. VII to Deb Shops, Inc. Restated Savings and
Protection Plan. (1996 10-K Exhibit 4-1.7)
4-2 * Employee Savings and Protection Trust Agreement
(Registration No. 2-99124, Exhibit 4-5)
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Exhibit No. Description of Document
----------- -----------------------
4-2.1 * Amendment No. I to Employee Savings and Protection Trust
Agreement (Form 10-Q for quarter ended July 31, 1992)
10-1 Lease Agreement for property located at 9401 Blue Grass Road,
Philadelphia, Pennsylvania, 19114 (Registration No. 2-82222,
Exhibit 10-1)
10-8 Blue Grass Partnership Agreement dated June 15, 1982
(Registration No. 2-82222, Exhibit 10-8)
10-10 Acceptance by Deb Shops, Inc. dated June 18, 1982 to guarantee
the $500,000 loan to Blue Grass Partnership (Registration No.
2-82222, Exhibit 10-10)
10-14.1 * Insurance Policy for Marvin Rounick and Judy Rounick (1993
Form 10-K, Exhibit 10-14.1)
10-14.2 * Split Dollar Insurance Agreement dated July 31, 1987 between
the Company and Jack A. Rounick and Stuart Savett, Trustees
under the Rounick Family Irrevocable Insurance Trust dated
October 27, 1986 (1993 Form 10-K, Exhibit 10-14.2)
10-14.3 * Collateral Assignment dated July 31, 1987 from Jack A. Rounick
and Stuart Savett, Trustees under the Rounick Family Irrevocable
Insurance Trust dated October 27, 1986, as assignor, and the
Company, as assignee (1993 Form 10-K, Exhibit 10-14.3)
10-15.1 * Life Insurance Policy for Warren Weiner and Penny Weiner (1993
Form 10-K, Exhibit 10-15.1)
10-15.2 * Split Dollar Insurance Agreement dated July 31, 1987 between
the Company and Barry H. Frank and Robert Shein, Trustees under
the Weiner Family Irrevocable Insurance Trust dated October 27,
1986 (1993 Form 10-K, Exhibit 10-15.2)
10-15.3 * Collateral Assignment dated July 31, 1987 from Barry H. Frank
and Robert Shein, Trustees under the Weiner Family Irrevocable
Insurance Trust dated October 27, 1986, as assignor, and the
Company, as assignee (1993 Form 10-K, Exhibit 10-15.3)
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Exhibit No. Description of Document
----------- -----------------------
10-17 * Restricted Stock Incentive Plan as amended (1995 Form 10-K,
Exhibit 10-17)
10-18 Stock Purchase Agreement dated April 4, 1994 between the Company
and Petrie Stores Corporation (1994 Form 10-K, Exhibit 10-18)
10-19 * Deb Shops, Inc. Premium Conversion Plan (1996 Form 10-K,
Exhibit 10-19)
10-19.1 * Amendment No. I to Deb Shops, Inc. Premium Conversion Plan
(1996 Form 10-K, Exhibit 10-19.1)
10-20 * Deb Shops, Inc. 1995 Incentive Stock Option Plan (1996 Form
10-K, Exhibit 10-20)
10-21 * Employment Agreement dated December 1, 1995 between the
Company and Allan Laufgraben (1996 Form 10-K, Exhibit 10-21)
10-22 * Agreement dated January 31, 1996 between the Company and Barry
Vesotsky (1996 Form 10-K, Exhibit 10-22)
11 Computation of Primary Earnings Per Share
21 Subsidiaries of the Company
23-1 Consent of Arthur Andersen LLP
27 Financial Data Schedule
Reports on Form 8-K
There were no reports on Form 8-K for the quarter ended January 31,
1997.
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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 29, 1997.
DEB SHOPS, INC.
(Registrant)
By: /s/ Marvin Rounick
---------------------------
Marvin Rounick, President
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report has been signed by the following persons in the capacities and on
the dates indicated.
/s/ Marvin Rounick
- -------------------------------------- April 29, 1997
Marvin Rounick, President,
Chief Executive Officer and Director
(Principal Executive Officer)
/s/ Warren Weiner
- -------------------------------------- April 29, 1997
Warren Weiner, Executive Vice President,
Secretary, Treasurer and Director
/s/ Jack A. Rounick
- -------------------------------------- April 29, 1997
Jack A. Rounick, Assistant Secretary
and Director
/s/ Paul S. Bachow
- -------------------------------------- April 29, 1997
Paul S. Bachow, Director
/s/ Barry H. Feinberg
- -------------------------------------- April 29, 1997
Barry H. Feinberg, Director
/s/ Barry H. Frank
- -------------------------------------- April 29, 1997
Barry H. Frank, Esq., Director
/s/ Lewis Lyons
- -------------------------------------- April 29, 1997
Lewis Lyons, Vice President, Finance,
and Chief Financial Officer
/s/ William F. Gallagher
- -------------------------------------- April 29, 1997
William F. Gallagher
Controller
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