##### 



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, DC 20549
 FORM 10-Q
 (Mark One)
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended July 31, 2007
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For
the transition period from
 to
 Commission File Number 0-12188
 DEB SHOPS, INC.
  Pennsylvania
    
    23-1913593(State or other jurisdiction of
    
    (I.R.S. Employerincorporation or organization)
    
    Identification No.)9401 Blue Grass Road, Philadelphia, Pennsylvania
    
    19114(Address of principal executive offices)
    
    (Zip Code)
 
 
  þ o
  o þ o
  o þ
  Common Stock, Par Value $.01
    
    14,330,808(Class)
    
    (Outstanding at September 5, 2007)




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##### 



DEB SHOPS, INC. AND SUBSIDIARIES
 I N D E X
 PagePART I.
    
    Financial Information:Item 1.
    
    Financial StatementsConsolidated Balance Sheets
July 31, 2007 (Unaudited) and January 31, 2007
    
    
    1Consolidated Statements of Operations (Unaudited)
Three Months and Six Months Ended July 31, 2007 and 2006
    
    
    2Consolidated Statements of Cash Flows (Unaudited)
Six Months Ended July 31, 2007 and 2006
    
    
    3Notes to Consolidated Financial Statements
July 31, 2007 (Unaudited)
    
    4-6Item 2.
    
    Managements Discussion and Analysis of Financial Condition
and Results of Operations
    
    7-12Item 3.
    
    Quantitative and Qualitative Disclosures About
Market Risk
    
    
    13Item 4.
    
    Controls and Procedures
    
    
    13PART II.
    
    Other Information:Item 1.
    
    Legal Proceedings
    
    
    13Item 1A.
    
    Risk Factors
    
    
    13Items 2 - 3.
    
    
    
    
    13Item 4.
    
    Submission of Matters to a Vote of Security Holders
    
    
    13Item 5.
    
    
    
    
    14Item 6.
    
    Exhibits
    
    
    14Signatures
    
    
    
    
    14Exhibit Index
    
    
    
    
    15




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##### 



DEB SHOPS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
 JULY 31,
    
    JANUARY 31,2007
    
    2007(Unaudited)ASSETSCurrent AssetsCash and cash equivalents
    
    $
    20,034,824
    
    
    $
    25,779,592Marketable securities
    
    
    110,900,000
    
    
    
    101,950,000Merchandise inventories
    
    
    33,973,207
    
    
    
    34,473,012Prepaid expenses and other
    
    
    3,447,291
    
    
    
    3,270,411Deferred income taxes
    
    
    1,256,258
    
    
    
    1,256,258Total current assets
    
    
    169,611,580
    
    
    
    166,729,273Property, Plant and Equipment  at costLand
    
    
    150,000
    
    
    
    150,000Buildings
    
    
    2,365,697
    
    
    
    2,365,697Leasehold improvements
    
    
    60,253,507
    
    
    
    59,125,715Furniture and equipment
    
    
    19,094,937
    
    
    
    18,341,55181,864,141
    
    
    
    79,982,963Less accumulated depreciation and amortization
    
    
    55,509,312
    
    
    
    54,238,784Net property, plant and equipment
    
    
    26,354,829
    
    
    
    25,744,179Other AssetsDeferred income taxes
    
    
    11,264,957
    
    
    
    10,094,965Other
    
    
    1,712,223
    
    
    
    1,712,223Total other assets
    
    
    12,977,180
    
    
    
    11,807,188Total assets
    
    $
    208,943,589
    
    
    $
    204,280,640LIABILITIES AND SHAREHOLDERS EQUITYCurrent LiabilitiesTrade accounts payable
    
    $
    28,249,298
    
    
    $
    27,686,466Accrued expenses and other
    
    
    8,823,029
    
    
    
    9,290,878Income taxes payable
    
    
    1,395,197
    
    
    
    3,308,247Total current liabilities
    
    
    38,467,524
    
    
    
    40,285,591Deferred lease credits
    
    
    12,759,269
    
    
    
    12,654,669Tax uncertainties
    
    
    8,184,804
    
    
    
    5,294,685Total liabilities
    
    
    59,411,597
    
    
    
    58,234,945Shareholders EquitySeries A preferred stock, par value $1.00 per share:Authorized - 5,000,000 shares
Issued and outstanding  460 shares,
liquidation value $460,000
    
    
    460
    
    
    
    460Common stock, par value $.01 per share:Authorized - 50,000,000 shares
Issued - 15,688,290 shares
    
    
    156,883
    
    
    
    156,883Additional paid in capital
    
    
    14,522,346
    
    
    
    14,447,128Retained earnings
    
    
    143,271,199
    
    
    
    139,878,726157,950,888
    
    
    
    154,483,197Less common treasury shares, at cost:July 31, 2007: 1,357,482; January 31, 2007: 1,360,482
    
    
    8,418,896
    
    
    
    8,437,502Total shareholders equity
    
    
    149,531,992
    
    
    
    146,045,695Total liabilities and shareholders equity
    
    $
    208,943,589
    
    
    $
    204,280,640
  -1-




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##### 



DEB SHOPS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
 Three Months Ended July 31,
    
    Six Months Ended July 31,2007
    
    2006
    
    2007
    
    2006Net sales
    
    $
    77,739,230
    
    
    $
    75,658,460
    
    
    $
    161,518,679
    
    
    $
    157,116,016Cost of sales, including buying
and occupancy costs
    
    
    47,883,642
    
    
    
    47,162,694
    
    
    
    108,380,674
    
    
    
    105,736,083Gross profit
    
    
    29,855,588
    
    
    
    28,495,766
    
    
    
    53,138,005
    
    
    
    51,379,933Operating expenses:Selling and administrative
    
    
    20,406,868
    
    
    
    19,450,105
    
    
    
    39,741,646
    
    
    
    37,705,128Depreciation and amortization
    
    
    1,281,578
    
    
    
    1,310,441
    
    
    
    2,531,390
    
    
    
    2,574,58921,688,446
    
    
    
    20,760,546
    
    
    
    42,273,036
    
    
    
    40,279,717Operating income
    
    
    8,167,142
    
    
    
    7,735,220
    
    
    
    10,864,969
    
    
    
    11,100,216Other income, principally interest
    
    
    1,239,373
    
    
    
    1,166,952
    
    
    
    2,452,935
    
    
    
    2,100,026Income before income taxes
    
    
    9,406,515
    
    
    
    8,902,172
    
    
    
    13,317,904
    
    
    
    13,200,242Income tax provision
    
    
    3,246,000
    
    
    
    3,040,000
    
    
    
    4,595,000
    
    
    
    4,600,000Net income
    
    $
    6,160,515
    
    
    $
    5,862,172
    
    
    $
    8,722,904
    
    
    $
    8,600,242Net income per common shareBasic
    
    $
    0.43
    
    
    $
    0.41
    
    
    $
    0.61
    
    
    $
    0.60Diluted
    
    $
    0.43
    
    
    $
    0.41
    
    
    $
    0.61
    
    
    $
    0.60Cash dividend declared
per common share
    
    $
    0.125
    
    
    $
    0.125
    
    
    $
    0.250
    
    
    $
    0.250Weighted average number of
common shares outstandingBasic
    
    
    14,330,808
    
    
    
    14,327,808
    
    
    
    14,330,454
    
    
    
    14,325,600Diluted
    
    
    14,349,493
    
    
    
    14,343,532
    
    
    
    14,350,002
    
    
    
    14,347,929
  -2-




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##### 



DEB SHOPS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
 Six Months Ended July 31,2007
    
    2006Cash flows from operating activities:Net income
    
    $
    8,722,904
    
    
    $
    8,600,242Adjustments to reconcile net income to
net cash provided by operating activities:Depreciation and amortization
    
    
    2,531,390
    
    
    
    2,574,589Stock compensation expense
    
    
    18,774
    
    
    
    90,874Loss on retirement of property, plant and equipment
    
    
    72,493
    
    
    
    55,441Changes in operating assets and liabilities:Decrease (increase) in merchandise inventories
    
    
    499,805
    
    
    
    (3,819,974
    )Increase in prepaid expenses and other
    
    
    (176,880
    )
    
    
    (300,427
    )Increase in trade accounts payable
    
    
    562,832
    
    
    
    2,893,347Decrease in accrued expenses and other
    
    
    (468,224
    )
    
    
    (1,336,634
    )Decrease in income taxes payable
    
    
    (1,913,050
    )
    
    
    (3,318,231
    )Increase in deferred lease credits
    
    
    104,600
    
    
    
    117,345Net cash provided by operating activities
    
    
    9,954,644
    
    
    
    5,556,572Cash flows from investing activities:Purchases of property, plant and equipment
    
    
    (3,214,535
    )
    
    
    (3,623,877
    )Purchases of investment securities
    
    
    (20,600,000
    )
    
    
    (9,600,000
    )Sales of investment securities
    
    
    11,650,000
    
    
    
    8,600,000Net cash used in investing activities
    
    
    (12,164,535
    )
    
    
    (4,623,877
    )Cash flows from financing activities:Preferred stock cash dividends paid
    
    
    (27,600
    )
    
    
    (27,600
    )Common stock cash dividends paid
    
    
    (3,582,327
    )
    
    
    (3,581,202
    )Proceeds from exercise of stock options
    
    
    71,250
    
    
    
    142,500Tax benefit from stock based compensation
    
    
    3,800
    
    
    
    11,800Net cash used in financing activities
    
    
    (3,534,877
    )
    
    
    (3,454,502
    )Decrease in cash and cash equivalents
    
    
    (5,744,768
    )
    
    
    (2,521,807
    )Cash and cash equivalents at beginning of period
    
    
    25,779,592
    
    
    
    26,520,757Cash and cash equivalents at end of period
    
    $
    20,034,824
    
    
    $
    23,998,950Supplemental disclosures of cash flow information:Cash paid during the period for:Income taxes, net
    
    $
    6,685,000
    
    
    $
    8,303,000
  -3-




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##### 



DEB SHOPS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
JULY 31, 2007
 - A  Organization / Basis Of Presentation
     - B  Net Income Per Share
  Three Months Ended July 31,
    
    Six Months Ended July 31,2007
    
    2006
    
    2007
    
    2006Net income
    
    $
    6,160,515
    
    
    $
    5,862,172
    
    
    $
    8,722,904
    
    
    $
    8,600,242Dividends on preferred stock
    
    
    (13,800
    )
    
    
    (13,800
    )
    
    
    (27,600
    )
    
    
    (27,600
    )Income available to
common shareholders
    
    $
    6,146,715
    
    
    $
    5,848,372
    
    
    $
    8,695,304
    
    
    $
    8,572,642Basic weighted average
number of common
shares outstanding
    
    
    14,330,808
    
    
    
    14,327,808
    
    
    
    14,330,454
    
    
    
    14,325,600Effect of dilutive stock options
    
    
    18,685
    
    
    
    15,724
    
    
    
    19,548
    
    
    
    22,329Diluted weighted average
number of common
shares outstanding
    
    
    14,349,493
    
    
    
    14,343,532
    
    
    
    14,350,002
    
    
    
    14,347,929
 -4-




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##### 



-B  Net Income Per Share (continued)
   -C- Income Taxes
    - D  Stock Related Compensation
   Three Months Ended July 31,
    
    Six Months Ended July 31,2007
    
    2006
    
    2007
    
    2006Share based
compensation
expense
    
    $
    8,000
    
    
    $
    43,000
    
    
    $
    19,000
    
    
    $
    91,000
  -5-




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##### 



- E  Revenue Recognition
  - F  Merger Announcement
    -6-




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##### 



Item 2.
 Managements Discussion and Analysis of Financial Condition and Results Of Operations
 Forward-Looking Statements
   Critical Accounting Policies
  Accounting For Uncertain Tax Positions Under FIN 48
  Overview
   -7-




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Store Data(1)Three Months Ended
    
    Six Months EndedJuly 31,
    
    July 31,2007
    
    2006
    
    2007
    
    2006Stores open at end of the period
    
    
    337
    
    
    
    333
    
    
    
    337
    
    
    
    333Average number in operation during the period
    
    
    337
    
    
    
    333
    
    
    
    336
    
    
    
    331Average net sales per store (in thousands)
    
    $
    231
    
    
    $
    227
    
    
    $
    481
    
    
    $
    475Average operating income
per store (in thousands)
    
    $
    24
    
    
    $
    23
    
    
    $
    32
    
    
    $
    34Comparable store sales (2)- percent change
    
    
    0.1
    %
    
    
    (4.3
    )%
    
    
    (0.1
    )%
    
    
    (0.8
    )%
 
 (1)
    
    Includes Tops N Bottoms stores.(2)
    
    Comparable stores sales include stores open for both periods. A store is
added to the comparable store base in its 13th month of operation. -8-




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##### 



Three Months Ended
    
    Six Months EndedJuly 31,
    
    July 31,2007
    
    2006
    
    2007
    
    2006Net sales
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %Gross margin
    
    
    38.4
    %
    
    
    37.7
    %
    
    
    32.9
    %
    
    
    32.7
    %Operating income
    
    
    10.5
    %
    
    
    10.2
    %
    
    
    6.7
    %
    
    
    7.1
    %Income before income taxes
    
    
    12.1
    %
    
    
    11.8
    %
    
    
    8.2
    %
    
    
    8.4
    %Income tax provision
    
    
    4.2
    %
    
    
    4.0
    %
    
    
    2.8
    %
    
    
    2.9
    %Net income
    
    
    7.9
    %
    
    
    7.8
    %
    
    
    5.4
    %
    
    
    5.5
    %
 Results of Operations
 Three Months Ended July 31, 2007 Compared to Three Months Ended July 31, 2006
 Net sales
  Cost of sales, including buying and occupancy costs
  Selling and administrative expenses
  Depreciation and amortization
  Other income, principally interest
  -9-




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##### 



Income tax provision
  Six Months Ended July 31, 2007 Compared to Six Months Ended July 31, 2006
 Net sales
  Cost of sales, including buying and occupancy costs
  Selling and administrative expenses
  Depreciation and amortization
  Other income, principally interest
  Income tax provision
  -10-




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##### 



Liquidity and Capital Resources
           -11-




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##### 



Payments Due by PeriodContractual
    
    
    
    
    
    Less than 1
    
    1 - 3
    
    3 - 5
    
    More than 5obligations
    
    Total
    
    year
    
    years
    
    years
    
    yearsOperating
leases
    
    $
    159,610,000
    
    
    $
    27,079,000
    
    
    $
    46,171,000
    
    
    $
    36,026,000
    
    
    $
    50,334,000Letters of
credit
    
    
    988,000
    
    
    
    988,000
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    $
    160,598,000
    
    
    $
    28,067,000
    
    
    $
    46,171,000
    
    
    $
    36,026,000
    
    
    $
    50,334,000
  Other Matters
    Item 3.
 Quantitative and Qualitative Disclosures About Market Risk
   -12-




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##### 



Item 4.
 Controls and Procedures
     PART II. Other Information
 Item 1. Legal Proceedings
  Item 1A. Risk Factors
  Items 2 and 3.
  Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
   FOR
    
    WITHHELDMarvin Rounick
    
    
    13,947,621
    
    
    
    44,128Warren Weiner
    
    
    13,935,506
    
    
    
    56,243Jack A. Rounick
    
    
    13,935,828
    
    
    
    55,921Barry H. Feinberg
    
    
    13,946,028
    
    
    
    45,721Barry H. Frank
    
    
    13,946,971
    
    
    
    44,778Ivan Inerfeld
    
    
    13,926,087
    
    
    
    65,662Ned J. Kaplin
    
    
    13,666,613
    
    
    
    325,136
  -13-




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##### 



Item 5.


Item 6. Exhibits


Exhibit 2.1
    
    Agreement and Plan of Merger, dated as of July 26, 2007, among DSI
Holdings, LLC, DSI Acquisition, Inc. and Deb Shops, Inc. (incorporated
by reference to Exhibit 2.1 to our Form 8-K dated
July 27, 2007)Exhibit 31.1
    
    Section 302 Certification by President and
Chief Executive Officer, pursuant to Rule 13a-14(a) under the Securities
Exchange Act of 1934Exhibit 31.2
    
    Section 302 Certification by Chief Financial Officer, pursuant to Rule
13a-14(a) under the Securities Exchange Act of 1934Exhibit 32.1
    
    Certification of Periodic Report by President and Chief
Executive Officer, pursuant to 18 U.S.C. Section 1350Exhibit 32.2
    
    Certification of Periodic Report by Chief Financial
Officer, pursuant to 18 U.S.C. Section 1350


SIGNATURES




|                               |                 |                                                                 |  | 
|------------------------------ | --------------- | --------------------------------------------------------------- |  | 
|                               | DEB SHOPS, INC. |                                                                
|DATE:       September 10, 2007 | By:             | /s/ Marvin Rounick                                              | 
|                               |                 | Marvin Rounick                                                  | 
|                               |                 | President and Chief Executive Officer                           | 
|                              
|                               |                 |                                                                
|DATE:  September 10, 2007      | By:             | /s/ Barry J. Susson, CPA                                        | 
|                               |                 | Barry J. Susson, CPA                                            | 
|                               |                 | Vice President, Chief Financial Officer and
Assistant Secretary | 
|                              

-14-



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##### 



Exhibit Index
 Exhibit 31.1
    
    Section 302 Certification by President and Chief Executive OfficerExhibit 31.2
    
    Section 302 Certification by Chief Financial OfficerExhibit 32.1
    
    Certification of Periodic Report by President and Chief Executive OfficerExhibit 32.2
    
    Certification of Periodic Report by Chief Financial Officer
 -15-