<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
(X) QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the quarterly period ended April 30, 1999
----------------------------------------------
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
--------------------- -----------------------
Commission File Number 0-12188
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DEB SHOPS, INC.
- ------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Pennsylvania 23-1913593
- ------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
9401 Blue Grass Road, Philadelphia, Pennsylvania 19114
- ------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(215) 676-6000
- --------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
Not Applicable
- --------------------------------------------------------------------------------
(Former name and address and former fiscal year, if changed since last report)
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 l934 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 the number of shares outstanding of each of the issuer's classes of
Common Stock, as of the latest practicable date.
Common Stock, Par Value $.01 13,198,880
- ---------------------------- -------------------------------
(Class) (Outstanding at April 30, 1999)
<PAGE>
DEB SHOPS, INC. AND SUBSIDIARIES
I N D E X
---------
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
PART I. Item 1. Financial Information:
Consolidated Balance Sheets - 1
April 30, 1999 and January 31, 1999
Consolidated Statements of Operations 2
Three Months Ended April 30, 1999 and April 30, 1998
Consolidated Statements of Cash Flows - 3
Three Months Ended April 30, 1999 and April 30, 1998
Notes to Consolidated Financial Statements - 4
April 30, 1999
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations - April 30, 1999 5-11
Item 3. Quantitative and Qualitative Disclosures About 11
Market Risk
PART II. Other Information 11
</TABLE>
<PAGE>
DEB SHOPS, INC. & SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
APRIL 30, JANUARY 31,
1999 1999
- -------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 68,808,458 $ 70,228,227
Merchandise inventories 25,459,848 23,934,155
Prepaid expenses and other 2,088,087 2,083,285
Deferred income taxes 1,786,050 1,706,050
------------ ------------
Total Current Assets 98,142,443 97,951,717
------------ ------------
PROPERTY, PLANT AND EQUIPMENT, at cost
Land 150,000 150,000
Buildings 4,338,863 4,338,863
Leasehold improvements 30,729,087 29,416,173
Furniture and equipment 16,692,874 16,649,890
------------ ------------
51,910,824 50,554,926
------------ ------------
Less accumulated depreciation
and amortization 36,167,564 36,202,184
------------ ------------
15,743,260 14,352,742
------------ ------------
OTHER ASSETS
Goodwill, net of accumulated amortization
of $767,679 and $714,120, respectively 2,450,726 2,504,285
Deferred income taxes 2,625,290 2,505,290
Other 1,712,223 1,712,223
------------ ------------
Total Other Assets 6,788,239 6,721,798
------------ ------------
$120,673,942 $119,026,257
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Trade accounts payable $ 17,538,421 $ 16,090,608
Accrued expenses 6,642,966 6,658,918
Income taxes payable 1,478,251 2,727,892
------------ ------------
Total Current Liabilities 25,659,638 25,477,418
------------ ------------
Capital Lease Obligation 1,319,016 1,392,255
------------ ------------
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 - April 30, 1999: 15,688,290;
January 31, 1999: 15,688,290 156,883 156,883
Additional paid in capital 5,541,944 5,541,944
Retained earnings 103,383,114 101,844,410
------------ ------------
109,082,401 107,543,697
Less common treasury shares, at cost -
April 30, 1999: 2,489,410;
January 31, 1999: 2,489,410 15,387,113 15,387,113
------------ ------------
93,695,288 92,156,584
------------ ------------
$120,673,942 $119,026,257
============ ============
</TABLE>
The notes to consolidated financial statements are an integral part of these
financial statements.
-1-
<PAGE>
DEB SHOPS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended April 30,
------------------------------------
1999 1998
---- ----
<S> <C> <C>
Net Sales $59,517,393 $49,759,163
----------- -----------
Costs and Expenses
Cost of Sales, including
buying and occupancy costs 43,711,793 38,373,835
Selling and administrative 12,224,928 10,510,313
Depreciation and amortization 963,869 934,469
----------- -----------
56,900,590 49,818,617
----------- -----------
Operating Income (Loss) 2,616,803 ( 59,454)
Other Income, Principally Interest 842,645 678,734
----------- -----------
Income Before Income Taxes 3,459,448 619,280
Income Taxes 1,247,000 217,000
----------- -----------
Net Income $ 2,212,448 $ 402,280
=========== ===========
Net Income Available Per Common Share
Basic $ 0.17 $ 0.03
=========== ===========
Diluted $ 0.16 $ 0.03
=========== ===========
Cash Dividend Declared
Per Common Share $ 0.05 $ 0.05
=========== ===========
Weighted Average Number of
Common Shares Outstanding
Basic 13,198,880 12,914,725
=========== ===========
Diluted 13,427,809 13,158,097
=========== ===========
</TABLE>
The notes to consolidated financial statements are an integral part of these
financial statements.
-2-
<PAGE>
DEB SHOPS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended April 30,
--------------------------------------
1999 1998
---- ----
<S> <C> <C>
Cash flows provided by (used in) operating activities:
Net income 2,212,448 402,280
Adjustments to reconcile net income to net
Cash provided by (used in) operating activities:
Depreciation and amortization 963,869 934,469
Deferred income tax (benefit) ( 200,000) ( 108,000)
Loss on retirement of property, plant and equipment 16,281 75,191
Change in assets and liabilities:
(Increase) in merchandise inventories ( 1,525,693) ( 2,760,691)
(Increase) in prepaid expenses and other ( 4,802) ( 937 526)
Increase in trade accounts payable 1,447,813 2,798,831
(Decrease) increase in accrued expenses ( 15,952) 85,219
(Decrease) in income taxes payable ( 1,249,641) ( 1,801,942)
------------- -------------
Net cash provided by (used in) operating activities 1,644,323 ( 1,312,169)
------------- -------------
Cash flows (used in) investing activities:
Purchase of property, plant and equipment, net ( 2,317,109) ( 838,932)
------------- -------------
Net cash (used in) investing activities ( 2,317,109) ( 838,932)
------------- -------------
Cash flows (used in) financing activities:
Preferred stock cash dividends paid ( 13,800) ( 13,800)
Common stock cash dividends paid ( 659,944) ( 651,239)
Proceeds from exercise of stock options -- 594,042
Principal payments under capital lease obligations ( 73,239) ( 59,802)
------------- -------------
Net cash (used in) financing activities ( 746,983) ( 130,799)
------------- -------------
(Decrease) in cash and cash equivalents ( 1,419,769) ( 2,281,900)
Cash and cash equivalents at beginning of period 70,228,227 57,912,689
-------------- ------------
Cash and cash equivalents at end of period $68,808,458 $55,630,789
============== ============
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest on capital lease obligation $ 64,261 $ 77,700
Income taxes, net $ 2,697,402 $ 2,127,932
</TABLE>
The notes to consolidated financial statements are an integral part of these
financial statements.
-3-
<PAGE>
DEB SHOPS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
APRIL 30, 1999
NOTE A - BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information. Accordingly, they do not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the three months ended April 30, 1999 are
not necessarily indicative of the results that may be expected for the fiscal
year ending January 31, 2000. For further information, refer to the consolidated
financial statements and footnotes thereto included in the Company's Annual
Report on Form 10-K for the fiscal year ended January 31, 1999. The Balance
Sheet at January 31, 1999 has been derived from the audited financial statements
at that date.
NOTE B - NET INCOME 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.
As required by SFAS No. 128 all prior-period per share data has been restated to
conform with the provisions of this statement.
<TABLE>
<CAPTION>
Three Months Ended April 30,
1999 1998
--------------------------------------
<S> <C> <C>
Net income $ 2,212,448 $ 402,280
Dividends on preferred stock (13,800) (13,800)
------------ ------------
Income available to
Common shareholders $ 2,198,648 $ 388,480
============ ============
Basic weighted average
Number of common
Shares outstanding 13,198,880 12,914,725
Effect of dilutive stock options 228,929 243,372
------------ ------------
Diluted weighted average
Number of common
Shares outstanding 13,427,809 13,158,097
============ ============
</TABLE>
NOTE C - RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In March 1998, the Accounting Standards Executive Committee issued
Statement of Position 98-1 ("SOP 98-1"), "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use." SOP 98-1 requires all costs
related to the development of internal use software other than those incurred
during the application development stage to be expensed as incurred. Costs
incurred during the application development stage are required to be capitalized
and amortized over the estimated useful life of the software. SOP 98-1 is
effective for the Company's first quarter ending April 30, 1999. Adoption does
not have a material effect on the Company's consolidated financial statements.
-4-
<PAGE>
Item 2.
- -------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND 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
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
margins, respond to changes in fashion, and the Company's ability to attract and
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, 1999.
Overview
Deb Shops, Inc. (the "Company") operates 267 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 eight Tops `N Bottoms stores which sell moderately
priced men's and women's apparel.
The Company also operates 18 Atlantic book stores. The book division
includes 12 "Atlantic Book Shops", which are small limited selection book
stores, generally open seasonally in Delaware, Maryland, New Jersey and
Pennsylvania resort towns. Atlantic Books also operates six 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, Minnesota, New Jersey and Pennsylvania.
Results of operations for the Company for the three months ended April
30, 1999 and 1998, are presented on a consolidated basis and divisional basis 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 $9,758,000 (19.6%) to $59,517,000 in
the three months ended April 30, 1999 from $49,759,000 in the three months ended
April 30, 1998, and increased $5,830,000 (13.3%) in the three months ended April
30, 1998 from the three months ended April 30, 1997. The increases during the
three months ended April 30, 1999 and 1998, are primarily the result of
increased comparable store sales in the apparel division.
The changes in net sales, cost of sales, selling and administrative
expense and net income (loss) are more fully described in the sections on
"Apparel Business" and "Book Business" that follow.
Other income, principally interest, increased $164,000 (24.1%) to
$843,000 in the three months ended April 30, 1999 from $679,000 in the three
months ended April 30, 1998 and increased $238,000 (54.0%) for the three months
ended April 30, 1998 from the three months ended April 30, 1997. Interest income
is offset by losses on the disposition of fixed assets. The increase in the
three months ended April 30, 1999 is primarily the result of earnings on higher
cash balances. The increase in the three months ended April 30, 1998 is the
result of earnings on higher cash balances and decreased write-offs from the
disposition of fixed assets.
-5-
<PAGE>
Net income before income taxes increased $2,840,000 (458.6%) to
$3,459,000 in the three months ended April 30, 1999 from $619,000 in the three
months ended April 30, 1998 and increased $2,885,000 (127.3%) for the three
months ended April 30, 1998 from the three months ended April 30, 1997. The
improvement for the three months ended April 30, 1999 and 1998 is primarily
comprised of an increase in the apparel business sales and apparel business
margins.
Results of Operations - Apparel Business
Net sales increased $9,818,000 (21.0%) to $56,594,000 in the three
months ended April 30, 1999 from $46,776,000 in the three months ended April 30,
1998 and increased $5,358,000 (12.9%) in the three months ended April 30, 1998
from the three months ended April 30, 1997. The increase in net sales in the
three months ended April 30, 1999 resulted primarily from increased customer
acceptance of the Company's products, which is attributed to the Company's
continual refining of its focus on its younger customers, in addition to
continuing efforts to improve visual merchandising. The increase in net sales in
the three months ended April 30, 1998 was principally attributable to a
continued return of fashion direction in the woman's specialty apparel industry,
the Company's focus on a younger customer, and improved visual merchandising in
the stores.
The following table sets forth certain per store information.
<TABLE>
<CAPTION>
Per Store Data(1)
Three Months Ended April 30,
---------------------------------------
1999 1998
---- ----
<S> <C> <C>
Stores open at end of the period 275 280
Average number in operation during the period 275 278
Average net sales per store (in thousands) $206 $168
Average operating income (loss) $ 9 ($ 1)
per store (in thousands)
Comparable Store Sales(2) - Percent Change 18.3% 10.9%
</TABLE>
Cost of sales, including buying and occupancy costs, increased
$5,326,000 (14.7%) to $41,676,000 in the three months ended April 30, 1999 from
$36,351,000 in the three months ended April 30, 1998 and increased $2,084,000
(6.1%) in the three months ended April 30, 1998 from the three months ended
April 30, 1997. The increase in the three months ended April 30, 1999 and 1998
in cost of sales, including buying and occupancy costs, was principally due to
the increase in sales during the period. As a percentage of net sales, these
costs were 73.6% during the three months ended April 30, 1999, and 77.7% during
the three month period ended April 30, 1998. For the three months ended April
30, 1999 and April 30, 1998, the decreased cost of sales percentage resulted
primarily from increased margins. Buying and occupancy costs were 16.3% and
18.9% of sales for the three months ended April 30, 1999 and 1998, respectively.
The percentage decrease in the three months ended April 30, 1999 as compared to
the three months ended April 30, 1998, resulted principally from an increase in
sales for the period.
- --------
(1) Includes Tops `N Bottoms stores
(2) Comparable store sales include stores open for both periods in the current
format and location. A store is added to the comparable store base in its
13th month of operation.
-6-
<PAGE>
Selling and administrative expenses increased $1,620,000 (16.4%) to
$11,497,000 in the three months ended April 30, 1999 from $9,877,000 in the
three months ended April 30, 1998 and increased $760,000 (8.3%) in the three
months ended April 30, 1998 from the three months ended April 30, 1997. The
increase in selling and administrative costs for the three months ended April
30, 1999 was primarily due to increased store operating costs and increased
administrative costs. The increase in selling and administrative costs for the
three months ended April 30, 1998, was mainly due to an increase in store
operating costs. As a percentage of net sales, these expenses were 20.3% during
the three months ended April 30, 1999, and 21.1% during the three months ended
April 30, 1998. The percentage decrease in the three months ended April 30, 1999
was the result of an increase in sales for the period.
Depreciation expense increased $28,000 to $838,000 in the three months
ended April 30, 1999 from $810,000 in the three months ended April 30, 1998 and
decreased ($141,000) in the three months ended April 30, 1998 from the three
months ended April 30, 1997. The increase for the three months ended April 30,
1999 is principally attributed to new store openings and remodeling of existing
stores. The decrease for the three months ended April 30, 1998 is principally
attributed to a reduction in the number of stores to be closed and the
write-offs associated with them.
Operating income was $2,583,000 in the three months ended April 30,
1999 as compared to an operating (loss) of ($262,000) in the three months ended
April 30, 1998 and an operating (loss) of ($2,918,000) in the three months ended
April 30, 1997. As a percentage of sales, operating income was 4.6% in the three
months ended April 30, 1999, and the operating (loss) was (0.6%) in the three
months ended April 30, 1998. The increase in operating income for the three
months ended April 30, 1999 and the reduction in operating loss for the three
months ended April 30, 1998 was primarily attributable to the increase in sales
and an increase in margins, partially offset by an increase in selling and
administrative expenses.
Results of Operations - Book Business
Net sales decreased $60,000 (2.0%) to $2,923,000 in the three months
ended April 30, 1999 from $2,983,000 in the three months ended April 30, 1998
and increased $472,000 (18.8%) in the three months ended April 30, 1998 from the
three months ended April 30, 1997. The decrease in net sales in the three months
ended April 30, 1999 resulted primarily from increasing competition as evidenced
by the reduction in same store sales. The increase in net sales in the three
months ended April 30, 1998 resulted primarily from the addition of one
warehouse store.
The following table sets forth certain per store information:
Per Store Data
Three Months Ended April 30,
----------------------------
1999 1998
---- ----
Resort Stores:
Stores open at end of period 12 11
Average number in operation during the period 12 11
Average net sales per store (in thousands) $ 39 $ 36
Warehouse Stores:
Stores open at end of period 6 6
Average number in operation during the period 6 6
Average net sales per store (in thousands) $ 409 $ 415
Comparable Store Sales (1) - Percent Change ( 4.9%) ( 5.1%)
- ---------------------------------
(1) Comparable store sales include resort and warehouse stores open for both
periods in the current format and location. A store is added to the
comparable store base in its 13th month of operation
-7-
<PAGE>
Cost of sales, including buying and occupancy costs, increased $12,000
(0.6%) to $2,080,000 in the three months ended April 30, 1999 from $2,068,000 in
the three months ended April 30, 1998 and increased $347,000 (20.2%) in the
three months ended April 30, 1998 from the three months ended April 30, 1997.
The increase in the three months ended April 30, 1999 is primarily the result of
by lower sales and increased occupancy costs offset by improved inventory
management. The increase in the three months ended April 30, 1998 is primarily
the result of increased sales as the result of additional stores. As a
percentage of net sales, cost of sales, buying and occupancy costs were 71.2% in
the three months ended April 30, 1999 and 69.3% in the three months ended April
30, 1998. As a percentage of net sales, buying and occupancy costs were 18.0% in
the three months ended April 30, 1999 and 15.7% in the three months ended April
30, 1998.
Selling and administrative expenses increased $92,000 (14.5%) to
$726,000 in the three months ended April 30, 1999 from $634,000 in the three
months ended April 30, 1998 and increased $114,000 (21.9%) in the three months
ended April 30, 1998 from the three months ended April 30, 1997. The increase in
the three months ended April 30, 1999 is primarily the result of higher
administrative costs. The increase in the three months ended April 30, 1998 is
primarily the result of additional stores. As a percentage of net sales, selling
and administrative costs were 24.8% in the three months ended April 30, 1999 and
21.2% in the three months ended April 30, 1997.
Depreciation and amortization expense increased $1,000 to $110,000 in
the three months ended April 30, 1999 from $109,000 in the three months ended
April 30, 1998 and increased $22,000 in the three months ended April 30, 1998
from the three months ended April 30, 1997. The increases are primarily the
result of additional stores.
Operating income decreased ($166,000) (96.2%) to $7,000 in the three
months ended April 30, 1999 from $172,000 in the three months ended April 30,
1998 and decreased ($11,000) (5.7%) in the three months ended April 30, 1998
from the three months ended April 30, 1997. The change in operating income for
the three months ended April 30, 1999 and 1998, which the Company believes are
not material, are primarily the result of the factors described above. As a
percentage of net sales, operating income represents 0.2% in the three months
ended April 30, 1999, and 5.0% in the three months ended April 30, 1998.
Liquidity and Capital Resources - Consolidated
During the three months ended April 30, 1999 and 1998, the Company
funded internally all of its operating needs, including capital expenditures for
the opening of new apparel stores and for the remodeling of existing apparel and
book stores. Total cash provided by or (used in), operating activities for the
three months ended April 30, 1999 and 1998 was $1,644,000 and ($1,312,000)
respectively. For the three months ended April 30, 1999, cash provided by
operations was the result of net income, increases in trade accounts payable,
and non-cash charges for depreciation and amortization partially offset by
decreases in merchandise inventories and increases income taxes payable. For the
three months ended April 30, 1998, cash used in operations resulted from an
increase in merchandise inventories, prepaid expenses and a decrease in income
taxes payable, partially offset by net income, non-cash charges for depreciation
and amortization and an increase in trade accounts payable. The inventory
turn-over rate for the apparel business was approximately 0.9 times during the
three months ended April 30, 1999 and 0.8 times during the three months ended
April 30, 1998. The inventory turn-over rate for the book business was
approximately 0.2 times during the three months ended April 30, 1999 and 0.3
times during the three months ended April 30, 1998.
Net cash (used in) investing activities was $2,317,000 and $839,000 for
the three months ended April 30, 1999 and 1998, respectively. The increase in
net cash used in investing activities was principally due to the opening of new
stores and the remodeling of existing stores.
-8-
<PAGE>
Net cash (used in) financing activities was $747,000 and $131,000 for
the three months ended April 30, 1999 and 1998, respectively. For the three
months ended April 30, 1999 these funds were principally used for the payment of
dividends on preferred and common stock . For the three months ended April 30,
1998 these funds were principally used for the payment of dividends on preferred
and common stock, partially offset by the proceeds from incentive stock options
exercised.
As of April 30, 1999, the Company had cash and cash equivalents of
$68,808,000 compared with $55,631,000 at April 30, 1998. In February 1998, the
Company purchased nine stores from Petrie Retail, Inc. and subsidiaries, for
$720,000. These locations were made available as a result of Petrie's bankruptcy
proceedings. The stores are located in regional malls and were opened during the
quarter ended April 30, 1998.
Opening a warehouse book store is capital intensive, because of the
leasehold improvements and initial inventory required. It is anticipated that
the funds to finance expansion will come from the cash and cash equivalents on
hand. As of the balance sheet date, there were no commitments for the opening of
any additional resort stores, however, the opening of one warehouse store is
planned. 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.
YEAR 2000 READINESS DISCLOSURE
The Year 2000 issue exists because many software programs, computer
hardware, operating systems and microprocessor-based embedded controls in
automated equipment use two-digit date fields to designate a year. As the
century date change occurs, date-sensitive systems may recognize the year 2000
as the year 1900, or not at all. This inability to recognize or properly treat
the year 2000 may cause systems to process financial and operational information
incorrectly or fail to operate.
The operation of the Company's business is dependent, in part, on its
computer software programs and operating systems (collectively, "Programs and
Systems"). The Programs and Systems are used in several key areas of the
Company's business, including merchandising, inventory management, pricing,
sales, distribution, point-of-sale, financial reporting, as well as in various
administrative functions. The Company has been evaluating its Programs and
Systems to identify potential Year 2000 compliance issues. These actions are
necessary to ensure that the Programs and Systems will recognize dates and
process information in the Year 2000 and beyond. It is anticipated that
remediation of some of the Company's Programs and Systems and replacement of
some of the Company's Programs and Systems will be necessary to make such
Programs and Systems Year 2000 compliant. As part of its evaluation, the Company
reviewed both Information Technology ("IT") and non-"IT" systems. The Company
has concluded that non-"IT" systems are not significant to the ongoing operation
of its business. Although the Company is not currently aware of material Year
2000 compliance issues relating to systems of other companies with which the
Company does business, there is no assurance that the Company will not be
materially adversely affected by such issues affecting the systems of such other
companies.
-9-
<PAGE>
As of April 30, 1999 the status of the Company's progress toward
becoming Year 2000 compliant was as follows:
<TABLE>
<CAPTION>
Estimated Estimated Approximate Amount Estimated Completion
System % Complete Total Cost Expended to Date Date - Quarter Ending
- ------ ---------- ---------- ---------------- ----------------------
<S> <C> <C> <C>
Financial 100% $500,000 $475,000 COMPLETE
P.C. & Mainframe
including operating
systems 85% 250,000 230,000 July, 1999
Merchandising/
Distribution/
Warehousing 65% 175,000 55,000 September, 1999
------- --------
$925,000 $760,000
======== ========
</TABLE>
These projects will be funded from internally generated funds. The
Company believes that it will be able to achieve Year 2000 compliance through
the remediation of some Programs and Systems and through the replacement of
other Programs and Systems. However, no assurance can be given that these
efforts will be successful, or that the Company will not be materially adversely
affected by any failures of these remediation and replacement projects.
Management of the Company believes that it has an effective program in
place to resolve the Year 2000 issue in a timely manner. As noted above, the
Company has not yet completed all necessary phases of its Year 2000 plan.
Because of the range of possible issues and the large number of variables
involved, it is impossible to quantify the potential cost of problems should the
Company or its trading partners not properly complete their Year 2000 plans or
become Year 2000 compliant. Such costs and any failure of compliance efforts
could have a material adverse effect on the Company. The Company believes that
the most likely risks of serious Year 2000 business disruption are from outside
parties, such as utility companies, financial institutions, telecommunications
and transportation services. In the event the Company does not properly complete
its Year 2000 efforts or is affected by the disruption of outside services, the
Company could be unable to conduct its business. In addition, disruptions in the
economy generally resulting from Year 2000 issues could have a material adverse
effect on the Company.
The Company has not developed contingency plans. Development of such
plans will be considered if the Company believes that its replacement and
remediation efforts may not be completed on a timely basis or it determines that
the inability of third parties to complete their Year 2000 resolution process
will materially affect the Company.
-10-
<PAGE>
SEASONAL NATURE OF OPERATIONS
The following table shows the Company's net sales and net earnings per
quarter for the fiscal year ended January 31, 1999 on an unaudited basis.
Net Sales Net Income
--------------------------------------------------------
Amount % Amount %
------ - ------ -
(Dollars in Thousands)
----------------------
1st Quarter $ 49,759 21.2% $ 402 2.6%
2nd Quarter 58,488 24.9% 3,814 24.6%
3rd Quarter 60,007 25.6% 2,491 16.1%
4th Quarter 66,470 28.3% 8,789 56.7%
--------- ------ ------- -------
TOTAL $234,724 100.0% $15,496 100.0%
========= ====== ======= =======
Approximately 54% and 73% of the Company's net sales and net income,
respectively, for fiscal 1999 occurred during the last six months, which
includes the Back-to-School and Christmas selling seasons.
Item 3.
- -------
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
As of April 30, 1999, the Company had cash and cash equivalents of
$68,808,000 compared to $55,631,000 as of April 30, 1998, and $44,933,000 as of
April 30, 1997. These funds are invested primarily in money market 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.
PART II. OTHER INFORMATION
Items 1 - 5. NOT APPLICABLE
- ------------
Item 6. EXHIBITS AND REPORTS ON FORM 8-K.
- ------- ---------------------------------
(a) Exhibits
None
(b) Reports on Form 8-K
No reports on Form 8-K were filed by the Company during the quarter ended
April 30, 1998.
-11-
<PAGE>
SIGNATURES
Pursuant to the requirements 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.
DEB SHOPS, INC.
DATE: June 14, 1999 By /s/ Marvin Rounick
---------------------------------
Marvin Rounick
President
DATE: June 14, 1999 By /s/ Lewis Lyons
---------------------------------
Lewis Lyons
Vice President, Finance
Chief Financial Officer
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<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JAN-31-2000
<PERIOD-END> APR-30-1999
<CASH> 68,808,458
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 25,459,848
<CURRENT-ASSETS> 98,142,443
<PP&E> 51,910,824
<DEPRECIATION> 36,167,564
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<CURRENT-LIABILITIES> 25,659,638
<BONDS> 0
0
460
<COMMON> 156,883
<OTHER-SE> 93,695,288
<TOTAL-LIABILITY-AND-EQUITY> 120,673,942
<SALES> 59,517,393
<TOTAL-REVENUES> 60,360,038
<CGS> 33,979,287
<TOTAL-COSTS> 56,900,590
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 3,459,448
<INCOME-TAX> 1,247,000
<INCOME-CONTINUING> 2,212,448
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<EXTRAORDINARY> 0
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