Item 1. Business - ------- --------
General
Deb Shops, Inc. (the "Company") operates 309 women's and men's specialty apparel retail stores. The 301 DEB stores offer moderately priced, fashionable, coordinated women's sportswear, dresses, coats, lingerie, accessories and shoes for junior and plus sizes. DEB merchandise consists of clothing and accessories appealing primarily to the fashion-conscious junior and plus sized female consumers between the ages of 13 and 18. In addition to 296 stores operating under the name "DEB" the Company operates one plus size store under the name "DEB PLUS" and four outlet stores under the name "CSO." The outlet stores offer the same merchandise as DEB and DEB PLUS at reduced prices and serve as clearance stores for slow-moving inventory. Eighty of the DEB stores contain plus size departments. The Company also operates eight apparel retail stores under the name "Tops `N Bottoms." Tops `N Bottoms sells moderately priced men's and women's apparel. Seventeen of the DEB stores contain Tops `N Bottoms departments.
Merchandising and Marketing
DEB specializes in junior-sized merchandise and offers an extensive selection of colors and styles. The merchandise is attractively presented in groups coordinated by color and style to assist customers in locating items of their choice and creating outfits of their own.
The DEB PLUS division caters to the plus size customer between the ages of 13 to 18. The merchandise is young looking and the fit is adjusted to the plus size customer. Prices are affordable and very competitive.
Tops `N Bottoms caters primarily to young men and junior-sized women. Much of the merchandise is brand named and unisex.
The Company purchases merchandise in volume, sells at popular prices, and has a policy of early markdowns of slow-moving inventory. A special effort is made to select and present coordinated outfits on a rotating basis and featured merchandise is changed approximately twice a week.
A computerized point-of-sale merchandise data system provides detailed daily information regarding sales and inventory levels by style, color, class and department, thereby permitting the Company to analyze market trends and changing store needs. Since merchandise control statistics are available on a daily basis, the Company can identify slow-moving merchandise and respond to customer buying trends when making repurchase decisions and markdown adjustments. This permits the Company to maintain current and fresh merchandise in its stores.
The Company experiences the normal seasonal pattern of the retail apparel industry with its peak sales occurring during the Christmas, Back-to-School and Easter periods. To keep merchandise fresh and fashionable, slow-moving merchandise is marked down throughout the year. End-of-season sales are conducted twice per year (in the second and fourth quarters), in keeping with the Company's policy of carrying a minimal amount of seasonal merchandise over from one year to another. At the end of the season, any unsold merchandise is transferred to the Company's CSO stores.
Stores
During the fiscal year ended January 31, 2002 ("fiscal 2002"), the Company opened 23 stores (while closing five stores, including one Plus store). Thirteen of the new stores have Plus departments. The Company also added Plus departments to three existing DEB stores. The Company currently plans to open 15-25 new stores in the fiscal year ending January 31, 2003 ("fiscal 2003"). The current plans include the opening of ten to 15 Plus departments in the new stores. The Company is currently scheduled to close two stores in the first half of fiscal 2003. The Company plans to continue to evaluate carefully the profitability of individual stores and close those stores that it believes cannot become profitable or maintain profitability.
The following table shows apparel store openings and closings for the last five fiscal years.
The following table shows the states in which the Company's 309 existing apparel stores are located:
DEB stores, which average 6,000 square feet, are located primarily in enclosed regional malls and selected strip shopping centers. DEB stores with Tops `N Bottoms or DEB PLUS departments average 8,000 square feet and are located primarily in enclosed regional malls. Tops `N Bottoms stores are all located in enclosed regional malls and range in size from 2,400 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 in cash or check, with the balance made with MasterCard, Visa or Discover credit cards. For customer convenience, the Company provides lay-away plans. The Company's policy is to permit returns of merchandise for exchange or a full cash or credit refund, at the customer's preference.
The Company purchases its merchandise from a number of suppliers, both domestic and foreign, and is not materially dependent on any one supplier. All merchandise is shipped directly from vendors to the Company's central distribution facility, where it is inspected and price-marked before being shipped to the individual stores. The Company distributes its inventory by common carrier and leased trucks.
The responsibility for managing the Company's stores rests with the Director of Store Operations and a staff of 40 employees consisting of an Assistant Director of Store Operations and Regional and District Managers. A Regional Manager is responsible for an average of six districts. A District Manager is responsible for an average of 10 stores, each of which is staffed by a Store Manager and two Assistant Store Managers. The District and Regional Managers visit the stores regularly to review merchandise levels, content and presentation, staff training and other personnel issues, store security and cleanliness and adherence to standard operating procedures.
The merchandising department consists of 43 employees, including the Senior Vice President, Merchandising; Vice President, Merchandising; Merchandise Managers and Buyers. The department is responsible for purchasing, pricing (including markdowns), inventory planning and allocating merchandise among the stores. The merchandising department's staff is organized in the following apparel categories: sportswear, dresses, coats, lingerie, hosiery, shoes, accessories and plus sizes.
At January 31, 2002, the Company had approximately 3,400 employees, 64% of whom were employed on a part-time basis. The Company has a collective bargaining agreement with the United Paperworkers International Union, Philadelphia Local 286 ("UPIU") that expires on December 31, 2004. The UPIU represents the Company's warehouse employees. The collective bargaining agreement covers approximately 82 employees. The Company considers its employee relations to be good.
Competition
The retail sale of apparel is an extremely competitive business with numerous individual and chain store competitors, including specialty shops as well as regional and national department store chains. Many of the Company's competitors are considerably larger than the Company and have substantially greater financial and other resources.
The primary elements of competition are merchandise style, selection, quality, display and price, as well as store location and design. The Company believes that its strategy for the DEB stores of specializing in the junior and plus size sportswear market and its ability to effect volume purchases are important elements in its operations. Brand name merchandise is not a significant factor in the Company's sales.
Atlantic Books
The Atlantic Books chain was acquired on October 20, 1996, and was sold on October 16, 2001, effective as of September 30, 2001. For a discussion of the results of operations of the book business for the period ended September 30, 2001, and the effect of the sale of the book business on the Company, see Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.
Item 2.
Item 2. Properties - ------ ----------
The Company leases all of its stores. The internal layout and fixtures of each store are designed and constructed under contracts with third parties.
Under most leases, the Company is required to pay, in addition to fixed minimum rental payments, charges for real estate taxes, common area maintenance fees, utility charges, insurance premiums, mall association charges and contingent rentals based upon a percentage of sales in excess of specified amounts.
The following table shows the current expiration dates of executed store leases, existing at January 31, 2002. In many cases, the Company has renewal options.
Calendar Years Number of Leases Expiring -------------- -------------------------
2002 - 2003........................... 50 2004 - 2005........................... 89 2006 - 2007........................... 66 2008 - 2009........................... 30 2010 - 2011........................... 33 2012 - 2013........................... 21 2014 and thereafter................... 20 --- Total.............. 309 ===
The Company leases its warehouse, distribution and office space, aggregating 280,000 square feet, pursuant to a lease which, as amended, expires in 2007. This facility is a modern, one-story industrial building situated on approximately 20 acres in the northeast section of Philadelphia, Pennsylvania. See Item 13. Certain Relationships and Related Transactions.
With respect to the locations of present stores, see Item 1. Business - Stores.
Item 3.
Item 3. Legal Proceedings - ------- -----------------
The Company is subject to legal proceedings, employment issues and claims that arise in the ordinary course of its business. Management, after consultation with outside legal counsel, does not believe that the ultimate disposition of such proceedings will have a materially adverse effect on the Company's consolidated financial position or results of operations.
Item 4.
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 30, 2002.
The executive officers of the Company, each of whom serves at the discretion of the Board of Directors, are as follows:
Marvin Rounick has been employed by the Company since 1961. Since 1979, he has served as President and Chief Executive Officer. Prior to that time, he served as Vice President, Operations and General Merchandise Manager.
Warren Weiner was employed by the Company from 1965 until 1975. He rejoined the Company in January 1982, as Executive Vice President, Secretary and Treasurer.
Allan Laufgraben has been employed by the Company since December 1995, as Senior Vice President, Merchandising.
Barry Vesotsky has been employed by the Company since 1970. Since 1981, he has served as Vice President, Merchandising.
Stanley A. Uhr has been employed by the Company since 1987. Since March 1988, he has served as Vice President, Real Estate and Corporate Counsel.
Lewis Lyons has been employed by the Company since 1990. Since May 1993, he has served as Vice President, Finance and Chief Financial Officer and from October 2, 1995, also as Assistant Secretary.
Stephen P. Smith has been employed by the Company since 1985. From 1985 to 1994, as a programmer and systems analyst; from 1994 to 1995, as Manager - Information Systems; from 1995 to 1998, as Director - Information Systems and from May 27, 1998, as Vice President - Information Systems.
Joan M. Nolan has been employed by the Company since November 2, 1998, as Controller. From July 1997 to July 1998, she was an accounting manager with Innovest Group, Inc., and from May 1975 to July 1996, she was Assistant to the Treasurer for Strawbridge & Clothier.
PART II
Item 5.
Item 5. Market for the Registrant's Common Stock and Related Stockholder Matters - ------ ------------------------------------------------------------------------
Market Information
The Company's Common Stock is traded on the NASDAQ National Market under the symbol: DEBS.
The following table sets forth quarterly high and low sales prices for the two most recent fiscal years.
2002 High Low - ---- ---- ---
First Quarter $22.700 $15.500 Second Quarter $24.200 $18.000 Third Quarter $25.750 $19.230 Fourth Quarter $26.850 $22.670
2001 High Low - ---- ---- ---
First Quarter $18.8750 $13.0000 Second Quarter 15.1875 8.5000 Third Quarter 13.6250 9.6875 Fourth Quarter 16.5000 11.1875
Holders
As of April 10, 2002, there were 209 record holders and approximately 2,732 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 for fiscal 2001 and the first two quarters of fiscal 2002 was $0.05 and the per-share amount of the quarterly dividends paid for the last two quarters of fiscal 2002 was $0.075. The Company also paid a special one-time dividend of $0.05 per share in the third quarter of fiscal 2002. 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.
Item 6.
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.
Not covered by Report of Independent Auditors.
Item 7.
Item 7. - -------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - ---------------------------------------------------------------
Forward-Looking Statements
Deb Shops, Inc. (the "Company") has made in this report, and from time to time may otherwise make, "forward-looking statements" (as that term is defined under federal securities laws) concerning the Company's future operations, performance, profitability, revenues, expenses and financial condition. This report includes, in particular, forward-looking statements regarding store openings, closings and other matters. Such forward-looking statements are subject to various risks and uncertainties. Actual results could differ materially from those currently anticipated due to a number of factors. Such factors may include, but are not limited to, the Company's ability to improve sales 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.
Overview
The Company operates women's specialty retail apparel stores offering popularly priced, fashionable, coordinated sportswear, dresses, coats, lingerie, accessories and shoes for junior and plus-sized women. The Company also operates Tops `N Bottoms stores which sell moderately priced men's and women's apparel.
Effective as of September 30, 2001, the Company sold the stock of its subsidiary, Books Management, Inc. ("BMI"). For the eight months ended September 30, 2001, BMI had net sales of $11,897,000 and operating income of $662,000. As a result of the transaction, the Company recorded a nonrecurring pretax loss of $7,381,000 ($4,611,000 net of tax, or a loss per share of ($0.34)).
Results of operations for the Company for the fiscal years ended January 31, 2002 ("fiscal 2002"), 2001 ("fiscal 2001") and 2000 ("fiscal 2000"), are discussed below on a consolidated basis and separately for the apparel business to provide relevant information concerning the Company's retail apparel store business.
Results of Operations - Consolidated
Consolidated net sales increased $20,319,000 (7.1%) to $307,582,000 in fiscal 2002 from $287,263,000 in fiscal 2001, and increased $17,232,000 (6.4%) in fiscal 2001 over fiscal 2000. The increases in fiscal 2002 and 2001 were primarily the result of increased sales in the apparel division.
The changes in net sales, cost of sales, selling and administrative expenses and operating income are more fully described in the section on the apparel business that follows.
Other income, principally interest, decreased ($1,364,000) (25.9%) to $3,901,000 in fiscal 2002 from $5,264,000 in fiscal 2001, and increased $1,668,000 (46.4%) in fiscal 2001 over fiscal 2000. Other income is offset by losses on disposition of fixed assets. The decrease in fiscal 2002 was primarily the result of gradually declining interest rates, partially offset by higher cash balances and, to a lesser extent, decreased write-offs from the disposition of fixed assets. The increase in fiscal 2001 was primarily the result of earnings on higher cash balances, gradually rising interest rates and, to a lesser extent, decreased write-offs from the disposition of fixed assets.
Income before income taxes decreased ($2,401,000) (6.0%) to $37,340,000 in fiscal 2002 from $39,741,000 in fiscal 2001, and increased $579,000 (1.5%) in fiscal 2001 over fiscal 2000. The reduction in fiscal 2002 is the result of the nonrecurring loss from the sale of BMI and a reduction in other income which offset an increase in operating income before the effect of the nonrecurring loss. The improvement in fiscal 2001 is comprised of a decrease in operating income offset by an increase in other income, principally interest. The effective income tax rate was 36.8% for fiscal 2002, 37.5% for fiscal 2001 and 37.5% for fiscal 2000. The effective income tax rates for fiscal 2002, fiscal 2001 and fiscal 2000 are greater than the statutory federal rate, primarily as the result of state income tax expense.
Results of Operations - Apparel Business
Net sales increased $26,075,000 (9.7%) to $295,685,000 in fiscal 2002 from $269,610,000 in fiscal 2001, and increased $16,931,000 (6.7%) in fiscal 2001 over fiscal 2000. The increase in fiscal 2002 resulted primarily from an increase in the number of stores in operation and, to a lesser extent, from an increase in comparable store sales of 3.8%. The increase in fiscal 2001 resulted primarily from an increase in the number of stores in operation and, to a lesser extent, from an increase in comparable store sales of 1.5%. Management continues to adjust the product mix, pricing and visual merchandising to stimulate sales further.
The following table sets forth certain store information:
Cost of sales, including buying and occupancy costs, increased $14,968,000 (8.5%) to $191,784,000 in fiscal 2002 from $176,816,000 in fiscal 2001, and increased $11,923,000 (7.2%) in fiscal 2001 over fiscal 2000. The fiscal 2002 and fiscal 2001 increases in cost of sales, including buying and occupancy costs, are principally due to the increases in net sales. As a percentage of net sales, these costs were 64.9% for fiscal 2002, 65.6% for fiscal 2001 and 65.3% for fiscal 2000. For fiscal 2002, the decreased cost of sales, including buying and occupancy costs, percentage is primarily the result of increased margins. For fiscal 2001, the increased cost of sales, including buying and occupancy costs, percentage is the result of decreased margins principally in the second quarter. Buying and occupancy costs were 15.6%, 15.4% and 15.4% of net sales for the fiscal years 2002, 2001 and 2000, respectively.
Selling and administrative expenses increased $6,226,000 (11.6%) to $59,780,000 in fiscal 2002 from $53,553,000 in fiscal 2001, and increased $4,814,000 (9.9%) in fiscal 2001 over fiscal 2000. The increases in these expenses for fiscal 2002 and fiscal 2001 are mainly due to increased costs of personnel and benefits, partially resulting from an increase in the number of stores and an increase in average sales per store. As a percentage of net sales, these expenses were 20.2%, 19.9% and 19.3% during fiscal 2002, 2001 and 2000, respectively.
Depreciation expense decreased ($648,000) to $3,528,000 in fiscal 2002 from $4,176,000 in fiscal 2001, and increased $553,000 in fiscal 2001 over fiscal 2000. The decrease in fiscal 2002 from fiscal 2001 and the increase in fiscal 2001 from fiscal 2000 are principally attributable to the accelerated write-off of leasehold improvements in fiscal 2001.
Operating income increased $5,529,000 (15.8%) to $40,594,000 in fiscal 2002 from $35,064,000 in fiscal 2001, and decreased ($360,000) (1.0%) in fiscal 2001 from fiscal 2000. As a percentage of net sales, operating income was 13.7% in fiscal 2002, 13.0% in fiscal 2001 and 14.0% in fiscal 2000. In fiscal 2002, the increase in operating income is primarily the result of the increased margins. In fiscal 2001, the decrease in operating income is primarily the result of slower sales growth and a slight decrease in margins.
Liquidity and Capital Resources - Consolidated
As of January 31, 2002, the Company had cash and cash equivalents of $135,252,000 compared to $111,649,000 as of January 31, 2001, and $90,307,000 as of January 31, 2000. These funds are invested principally in money market mutual funds and short-term municipal bonds, all of which are fully insured or guaranteed by letters of credit. The Company does not invest for trading purposes. Accordingly, the Company does not believe it has significant exposure to market risk with respect to its investments.
- ---------------------------- (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 13 month of operation.
During the past three fiscal years, the Company internally funded all of its operating needs, including capital expenditures for the opening of new stores and the remodeling of existing stores. Total cash provided by operating activities, for fiscal 2002, 2001 and 2000, was $32,341,000, $28,380,000 and $30,015,000, respectively. For fiscal 2002, cash provided by operations was the result of net income adjusted for the nonrecurring loss on the sale of BMI and noncash charges for depreciation and amortization and changes in operating assets and liabilities, including an increase in trade accounts payable and taxes payable offset by an increase in merchandise inventories. For fiscal 2001, cash provided by operating activities was the result of the fiscal 2001 net income increased by noncash charges for depreciation and amortization and changes in operating assets and liabilities, including a decrease in prepaid expenses and an increase in trade accounts payable offset by an increase in merchandise inventories. The inventory turnover rate for the apparel business was approximately 3.2, 3.4 and 3.6 times for fiscal 2002, 2001 and 2000, respectively.
Net cash used in investing activities was $5,256,000, $4,781,000 and $7,520,000 for fiscal 2002, 2001 and 2000, respectively. During these fiscal years, these funds were principally used for the opening of new stores and the remodeling of existing stores and in fiscal 2002 was partially offset by the proceeds from the sale of BMI.
Net cash used in financing activities was $3,482,000, $2,258,000 and $2,417,000 for fiscal 2002, 2001 and 2000, respectively. During these fiscal years these funds were principally used for the payment of dividends on preferred and common stock, partially offset by the proceeds from the exercise of stock options.
The Company believes that internally generated funds will be sufficient to meet its anticipated capital expenditures, none of which are material, and current operating needs. The Company leases its retail apparel stores, warehouse and office building for periods ranging from one to 25 years. The future commitments for all noncancelable leases are listed by year in Note E to the consolidated financial statements.
Seasonal Nature of Operations
Approximately 54% and 69% of the Company's net sales and net income before effect of nonrecurring loss, respectively, for fiscal 2002 occurred during the last six months, as compared to 54% and 72%, respectively, for the prior fiscal year. The last six months include the Back-to-School and Christmas selling seasons. See "Quarterly Financial Information (Unaudited)," and the preceding discussion on "Results of Operations."
Critical Accounting Policies
Significant accounting policies are described in Note A to the consolidated financial statements, Summary of Significant Accounting Policies. Management does not believe that any of its significant accounting policies require the use of judgments that are inherently subject to significant changes.
Item 7A.
Item 7A. Quantitative and Qualitative Disclosure About Market Risk - -------- ---------------------------------------------------------
Please see the first paragraph under the caption "Liquidity and Capital Resources - Consolidated" in the Annual Report on Form 10-K for a discussion regarding quantitative and qualitative disclosures about market risk.
Item 8.
Item 8. Financial Statements and Supplementary Data - ------- -------------------------------------------
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
To the Board of Directors and Shareholders of Deb Shops, Inc.
We have audited the accompanying consolidated balance sheets of Deb Shops, Inc. and subsidiaries as of January 31, 2002 and 2001, and the related consolidated statements of operations, shareholders' equity, and cash flows for each of the three years in the period ended January 31, 2002. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Deb Shops, Inc. and subsidiaries at January 31, 2002 and 2001, and the consolidated results of their operations and their cash flows for each of the three years in the period ended January 31, 2002, in conformity with accounting principles generally accepted in the United States.
ERNST & YOUNG LLP
Philadelphia, Pennsylvania March 6, 2002
See notes to consolidated financial statements.
See notes to consolidated financial statements.
See notes to consolidated financial statements.
See notes to consolidated financial statements.
DEB SHOPS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- - A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Consolidation: The consolidated financial statements of Deb Shops, Inc. (the "Company") include the accounts of the Company and its subsidiaries, after elimination of all intercompany transactions and accounts.
Background: The Company retails popularly priced fashion apparel for junior and plus-sized females and males through 309 stores. The Company's stores are located in regional malls and strip shopping centers principally located in the east and midwest regions of the country.
Management Estimates: The preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Revenue Recognition: Revenues from merchandise sales are net of returns and allowances and exclude sales tax.
Inventories: All apparel merchandise inventories are stated at the lower of cost (first-in, first-out method) or market, as determined by the retail inventory method.
Property, Plant and Equipment: The provisions for depreciation and amortization are computed using the straight-line method based upon estimated useful lives of the assets. Leasehold improvements are depreciated over the lesser of ten years or the remaining term of the lease. Furniture and equipment is depreciated over the lesser of seven years or the remaining term of the lease. Gain or loss on disposition of property, plant and equipment is included in other income. Depreciation and amortization of property, plant and equipment, which includes depreciation on a capitalized lease asset, was $3,783,000, $4,522,000 and $3,927,000, for the years ended January 31, 2002, 2001 and 2000, respectively.
Cost of Sales: Cost of sales includes the cost of merchandise, buying (including freight costs) and occupancy costs. The cost of handling merchandise is included in selling and administrative costs.
Statements of Cash Flows: The Company considers all highly liquid investments with a maturity of less than three months when purchased to be cash equivalents. Included in cash and cash equivalents at January 31, 2002 is $133,446,000 of investments in money market mutual funds and short-term municipal bonds. They are carried at cost, which approximates market.
Reclassifications: Certain amounts from prior periods have been reclassified to conform with the current presentation.
- - B - NONRECURRING ITEMS
Effective September 30, 2001, the Company sold the stock of its subsidiary, Books Management, Inc. ("BMI"). For the eight months ended September 30, 2001, BMI had net sales of $11,897,000 and operating income of $662,000. As a result of the transaction, the Company recorded a nonrecurring pretax loss of $7,381,000 ($4,611,000 net of tax, or a loss per share of ($0.34)).
- - C - EARNINGS PER SHARE
The table below sets forth the reconciliation of the numerators and denominators of the basic and diluted net income per common share computations.
- - D - INCOME TAXES
Income tax provision consists of the following components:
A reconciliation of the Company's effective income tax rate with the statutory federal rate follows:
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:
- - E - LEASES
The Company leases all of its retail apparel 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 and office building lease has a net book value of $33,000 at January 31, 2002 and is accounted for as a capital lease with net minimum rental commitments of $301,000 included in accrued expenses and other. The lease term is 20 years and requires the Company to pay annual rents, all real estate taxes, utilities and maintenance costs. Asset amounts are included in buildings and improvements and are depreciated over 20 years. The lease was originally scheduled to expire on June 14, 2002, however, the Company has entered into an amendment which extends the lease for a period of five years through June 14, 2007. This extension will be accounted for as an operating lease upon the expiration of the initial term of the existing lease.
Interest expense related to the capital lease obligation amounted to $111,000, $191,000 and $257,000 for the years ended January 31, 2002, 2001 and 2000, respectively, and is included in selling and administrative expenses.
Future minimum rental commitments for all noncancelable leases at January 31, 2002 are as follows: Operating Leases - --------------------------------------------------------------------------------
2003.................................... $ 21,701,000 2004.................................... 20,409,000 2005.................................... 17,891,000 2006.................................... 15,660,000 2007.................................... 14,381,000 Thereafter........................... 45,944,000 ------------
Total minimum rental commitments $135,986,000 ============
Total rental expense under operating leases amounted to $25,135,000, $23,102,000 and $21,624,000 in fiscal 2002, 2001 and 2000, respectively. Such amounts include contingent rentals based upon a percentage of sales of $2,532,000, $2,370,000 and $2,729,000 in fiscal 2002, 2001 and 2000, respectively.
- - F- STOCK OPTION PLAN
In February 2002, the Company adopted the Deb Shops, Inc. Incentive Stock Option Plan As Amended and Restated Effective January 1, 2002 (the "Plan"). The Board of Directors, together with the Company's Stock Option Committee 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 will be 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 January 2004. There were 2,155,000 shares reserved for future grant under the Plan as of January 31, 2002.
The Company applies Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," and the related interpretations in accounting for the Plan. In 1996, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based Compensation." SFAS No. 123 established a fair-value-based method of accounting for stock-based compensation plans.
The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model. The model uses the following assumptions: risk-free interest rate of 4.2%, a volatility factor of 41.7%, expected dividend yield of 2.9%, and an expected life of five years for the options. For purposes of pro forma disclosure, the estimated fair value of the options, $2.34 for the fiscal 1999 grants, is amortized to expense over the assumed vesting period of the options.
Had the Company recognized compensation cost for the Plan consistent with the provisions of SFAS No. 123, the Company's net income and basic and diluted net income per common share would have been adjusted to the following pro forma amounts:
- - G- COMMITMENTS AND CONTINGENCIES
The Company has an unsecured line of credit in the amount of $20,000,000 at January 31, 2002. Of this amount, $674,000 was outstanding as letters of credit for the purchase of inventory.
The Company entered into an employment agreement with a key employee during fiscal 1996, which was modified and extended in fiscal 1999 and provides for a base salary plus a bonus of 4% of the improvement in the operating results of the apparel business. The bonus was applicable through fiscal 2002. The Company also entered into a bonus agreement with a key employee during fiscal 1996 which provides for a bonus of 2% of the improvement in operating results of the apparel business. Bonuses of $332,000 and $450,000, in the aggregate, were earned under the agreements for fiscal 2002 and 2000, respectively. The fiscal 2002 amount is included in accrued expenses on the accompanying consolidated balance sheet as of January 31, 2002. During fiscal 2002, the Company entered into a new employment agreement with this key employee and an agreement with another key employee. One provides for a base salary plus a bonus of 4% of the improvement in the operating results of the apparel business. The other provides for a base salary plus a bonus of 2% of the improvement in the operating results of the apparel business. The agreements are 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 will not have a materially adverse effect on the Company's consolidated financial position or results of operations.
Item 9.
Item 9. Changes in and Disagreements with Accountants on Accounting and - ------- --------------------------------------------------------------- Financial Disclosure --------------------
None.
PART III
Item 10.
Item 10. Directors and Executive Officers of the Registrant - -------- --------------------------------------------------
The required information with respect to each director is contained in the Company's Definitive Proxy Statement in connection with its Annual Meeting to be held on May 30, 2002, which is incorporated in this Annual Report on Form 10-K by reference.
The required information with respect to each executive officer is contained at the end of Part I of this Annual Report on Form 10-K.
Item 11.
Item 11. Executive Compensation - -------- ----------------------
The required information with respect to executive compensation is contained in the Company's Definitive Proxy Statement in connection with its Annual Meeting to be held on May 30, 2002, which is incorporated in this Annual Report on Form 10-K by reference.
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management - -------- --------------------------------------------------------------
The required information with respect to security ownership of certain beneficial owners and management is contained in the Company's Definitive Proxy Statement in connection with its Annual Meeting to be held on May 30, 2002, which is incorporated in this Annual Report on Form 10-K by reference.
Item 13.
Item 13. Certain Relationships and Related Transactions - -------- ----------------------------------------------
The required information with respect to certain relationships and related transactions is contained in the Company's Definitive Proxy Statement in connection with its Annual Meeting to be held on May 30, 2002, which is incorporated in this Annual Report on Form 10-K by reference.
PART IV -------
Item 14.
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K - ------- ---------------------------------------------------------------
Financial Statements and Financial Statement Schedules
Document Page(s) -------- -------
Report of independent auditors............................. 12
Consolidated statements of operations for the years ended January 31, 2002, 2001 and 2000... 13
Consolidated balance sheets as of January 31, 2002 and 2001.............................................. 14
Consolidated statements of shareholders' equity for the years ended January 31, 2002, 2001 and 2000.............................................. 15
Consolidated statements of cash flows for the years ended January 31, 2002, 2001 and 2000................ 16
Notes to consolidated financial statements................. 17-23
Selected quarterly financial information (unaudited) for the years ended January 31, 2002 and 2001.............. 24
All schedules are omitted because they are not applicable or not required, or because the required information is included in the consolidated financial statements or notes thereto.
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 denotes 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 (1992 Form 10-K, Exhibit 3-1)
3-2 By-Laws of the Company, as amended through July 19, 1990 (1993 Form 10-K, Exhibit 3-2)
10-1 Lease Agreement for property located at 9401 Blue Grass Road, Philadelphia, Pennsylvania 19114 (Registration No. 2-82222, Exhibit 10-1)
10-1.1 Amendment of Lease Agreement dated January 3, 1999 for property Located at 9401 Blue Grass Road, Philadelphia, Pennsylvania 19114 (2000 Form 10-K, Exhibit 10-1.1)
10-2.1 * Insurance Policy for Marvin Rounick and Judy Rounick (1993 Form 10-K, Exhibit 10-14.1)
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 (1993 Form 10-K, Exhibit 10-14.2)
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 (1993 Form 10-K, Exhibit 10-14.3)
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)
Exhibit No. Description of Document ----------- -----------------------
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 (1993 Form 10-K, Exhibit 10-15.1)
10-3.2 * Split Dollar Insurance Agreement dated July 31, 1987 between the Company and Barry H. Frank and Robert Shein, Trustees under the Weiner Family Irrevocable Insurance Trust dated October 27, 1986 (1993 Form 10-K, Exhibit 10-15.2)
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 (1993 Form 10-K, Exhibit 10-15.3)
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 10-15.4)
10-3.5 * Amended and Restated Split Dollar Insurance Agreement dated July 31, 1998 between the Company and Barry H. Frank and Robert Shein, Trustees under the Weiner Family Irrevocable Insurance Trust dated October 27, 1986 (Form 10-Q for the quarter ended October 31, 1999, Exhibit 10-15.5)
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 10-15.6)
10-4 * Deb Shops, Inc. Premium Conversion Plan (1996 Form 10-K, Exhibit 10-19)
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 (filed herewith)
Exhibit No. Description of Document ----------- ------------------------
10-6 * Employment Agreement dated December 20, 2001 between the Company and Allan Laufgraben (filed herewith)
10-7 * Employment Agreement dated December 20, 2001 between the Company and Barry Vesotsky (filed herewith)
21 Subsidiaries of the Company
23 Consent of Ernst & Young LLP
Reports on Form 8-K - -------------------
There were no reports on Form 8-K for the quarter ended January 31, 2002.
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, 2002.
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, 2002 - ----------------------------------------------------------------- Marvin Rounick, President, Chief Executive Officer and Director (Principal Executive Officer)
/s/ Warren Weiner April 29, 2002 - ----------------------------------------------------------------- Warren Weiner, Executive Vice President, Secretary, Treasurer and Director
/s/ Jack Rounick April 29, 2002 - ----------------------------------------------------------------- Jack A. Rounick, Assistant Secretary and Director
/s/ Ivan Inerfeld April 29, 2002 - ----------------------------------------------------------------- Ivan Inerfeld, Director
/s/ Barry H. Feinberg April 29, 2002 - ----------------------------------------------------------------- Barry H. Feinberg, Director
/s/ Barry H. Frank April 29, 2002 - ----------------------------------------------------------------- Barry H. Frank, Esq., Director
/s/ Lewis Lyons April 29, 2002 - ----------------------------------------------------------------- Lewis Lyons, Vice President, Finance, Chief Financial Officer and Assistant Secretary
/s/ Joan M. Nolan April 29, 2002 - ----------------------------------------------------------------- Joan M. Nolan Controller