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  **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 April 30, 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.**(Exact name of registrant as specified in its charter)   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)(215) 676-6000(Registrant’s telephone number, including area code)Not Applicable(Former name, former address and former fiscal year, if changed since last report)     Indicate by check mark if the registrant is not required to file reports pursuant to Section13 or Section 15(d) of the Act:Yes o       No þ     Indicate by check mark whether the registrant (1) has filed all reports required to be filedby Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (orfor such shorter period that the registrant was required to file such reports), and (2) has beensubject to such filing requirements for the past 90 days.Yes þ       No o     Indicate by check mark whether the registrant is a large accelerated filer, an acceleratedfiler, or a non-accelerated filer. See definition of “accelerated filer and large acceleratedfiler” in Rule 12b-2 of the Exchange Act. (Check one):Large accelerated filer o      Accelerated filer þ      Non-accelerated filero     Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).Yes o       No þIndicate the number of shares outstanding of each of the issuer’s classes of Common Stock, as ofthe latest practicable date.       Common Stock, Par Value $.01 (Class)   14,330,808 (Outstanding at June 8, 2007)    
 

 
**DEB SHOPS, INC. AND SUBSIDIARIES****INDEX**       **Page**PART I. Financial Information:         Item 1. Financial Statements         Consolidated Balance SheetsApril 30, 2007 (Unaudited) and January 31, 2007  1      Consolidated Statements of Operations (Unaudited)Three Months Ended April 30, 2007 and 2006  2      Consolidated Statements of Cash Flows (Unaudited)Three Months Ended April 30, 2007 and 2006  3      Notes to Consolidated Financial StatementsApril 30, 2007 (Unaudited)  4-5      Item 2. Management’s Discussion and Analysis of Financial Conditionand Results of Operations  6-9      Item 3. Quantitative and Qualitative Disclosures AboutMarket Risk  10      Item 4. Controls and Procedures  10      PART II. Other Information:         Item 1. Legal Proceedings  10      Item 1A. Risk Factors  10      Items 2 - 5.  10      Item 6. Exhibits  11      Signatures  11      Exhibit Index  12 
 

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**DEB SHOPS, INC. AND SUBSIDIARIES****CONSOLIDATED BALANCE SHEETS**           **APRIL 30,** **JANUARY 31,**  **2007** **2007**  **(Unaudited)**     **ASSETS**        **Current Assets**        Cash and cash equivalents **$****25,444,065**  **$****25,779,592** Marketable securities  **106,150,000**   **101,950,000** Merchandise inventories  **27,176,447**   **34,473,012** Prepaid expenses and other  **3,989,251**   **3,270,411** Deferred income taxes  **1,256,258**   **1,256,258**    Total current assets  **164,016,021**   **166,729,273**          **Property, Plant and Equipment — at cost**        Land  **150,000**   **150,000** Buildings  **2,365,697**   **2,365,697** Leasehold improvements  **59,963,321**   **59,125,715** Furniture and equipment  **18,440,923**   **18,341,551**       **80,919,941**   **79,982,963**          Less accumulated depreciation and amortization  **54,918,960**   **54,238,784**    Net property, plant and equipment  **26,000,981**   **25,744,179**          **Other Assets**        Deferred income taxes  **11,264,957**   **10,094,965** Other  **1,712,223**   **1,712,223**    Total other assets  **12,977,180**   **11,807,188**    Total assets **$****202,994,182**  **$****204,280,640**             **LIABILITIES AND SHAREHOLDERS’ EQUITY**        **Current Liabilities**        Trade accounts payable **$****26,190,495**  **$****27,686,466** Accrued expenses and other  **9,358,717**   **9,290,878** Income taxes payable  **1,101,097**   **3,308,247**    Total current liabilities  **36,650,309**   **40,285,591**          Deferred lease credits  **12,990,741**   **12,654,669** Tax uncertainties  **8,184,804**   **5,294,685**             Total liabilities  **57,825,854**   **58,234,945**          **Shareholders’ Equity**        Series A preferred stock, par value $1.00 per share:        Authorized - 5,000,000 shares        Issued and outstanding – 460 shares,liquidation value $460,000  **460**   **460** Common stock, par value $.01 per share:        Authorized - 50,000,000 shares        Issued - 15,688,290 shares  **156,883**   **156,883** Additional paid in capital  **14,514,045**   **14,447,128** Retained earnings  **138,915,836**   **139,878,726**       **153,587,224**   **154,483,197**          Less common treasury shares, at cost:        April 30, 2007: 1,357,482; January 31, 2007: 1,360,482  **8,418,896**   **8,437,502**    Total shareholders’ equity  **145,168,328**   **146,045,695**    Total liabilities and shareholders’ equity **$****202,994,182**  **$****204,280,640**    See notes to consolidated financial statements.
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**DEB SHOPS, INC. AND SUBSIDIARIES****CONSOLIDATED STATEMENTS OF OPERATIONS****(Unaudited)**           **Three Months Ended April 30,**  **2007** **2006** Net sales **$****83,779,449**  **$****81,457,556**          Cost of sales, including buyingand occupancy costs  **60,497,032**   **58,573,389**    Gross profit  **23,282,417**   **22,884,167**          Operating expenses:        Selling and administrative  **19,334,778**   **18,255,023** Depreciation and amortization  **1,249,812**   **1,264,148**       **20,584,590**   **19,519,171**             Operating income  **2,697,827**   **3,364,996** Other income, principally interest  **1,213,562**   **933,074**    Income before income taxes  **3,911,389**   **4,298,070** Income tax provision  **1,349,000**   **1,560,000**    Net income **$****2,562,389**  **$****2,738,070**             Net income per common share        Basic **$****0.18**  **$****0.19**    Diluted **$****0.18**  **$****0.19**             Cash dividend declaredper common share **$****0.125**  **$****0.125**             Weighted average number ofcommon shares outstanding        Basic  **14,330,100**   **14,323,392**    Diluted  **14,350,510**   **14,352,326**    See notes to consolidated financial statements.
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**DEB SHOPS, INC. AND SUBSIDIARIES****CONSOLIDATED STATEMENTS OF CASH FLOWS****(Unaudited)**           **Three Months Ended April 30,**  **2007** **2006** Cash flows from operating activities:        Net income **$****2,562,389**  **$****2,738,070** Adjustments to reconcile net income tonet cash provided by operating activities:        Depreciation and amortization  **1,249,812**   **1,264,148** Stock compensation expense  **10,473**   **47,549** Loss on retirement of property, plant and equipment  **526**   **54,640** Changes in operating assets and liabilities:        Decrease in merchandise inventories  **7,296,565**   **7,244,971** Increase in prepaid expenses and other  **(718,840****)**  **(435,495****)**Decrease in trade accounts payable  **(1,495,971****)**  **(2,192,975****)**Increase (decrease) in accrued expenses and other  **67,464**   **(550,441****)**Decrease in income taxes payable  **(2,207,150****)**  **(3,141,655****)**Increase in deferred lease credits  **336,072**   **257,413**    Net cash provided by operating activities  **7,101,340**   **5,286,225**             Cash flows from investing activities:        Purchases of property, plant and equipment  **(1,507,141****)**  **(2,376,793****)**Purchases of investment securities  **(5,750,000****)**  **(800,000****)**Sales of investment securities  **1,550,000**   **300,000**    Net cash used in investing activities  **(5,707,141****)**  **(2,876,793****)**            Cash flows from financing activities:        Preferred stock cash dividends paid  **(13,800****)**  **(13,800****)**Common stock cash dividends paid  **(1,790,976****)**  **(1,790,226****)**Proceeds from exercise of stock options  **71,250**   **142,500** Tax benefitfrom stock-based compensation  **3,800**   **11,800**    Net cash used in financing activities  **(1,729,726****)**  **(1,649,726****)**            (Decrease) increase in cash and cash equivalents  **(335,527****)**  **759,706** Cash and cash equivalents at beginning of period  **25,779,592**   **26,520,757**    Cash and cash equivalents at end of period **$****25,444,065**  **$****27,280,463**             Supplemental disclosures of cash flow information:        Cash paid during the period for:        Income taxes, net **$****3,572,000**  **$****4,842,000**    See notes to consolidated financial statements.
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**DEB SHOPS, INC. AND SUBSIDIARIES****NOTES TO CONSOLIDATED FINANCIAL STATEMENTS****(UNAUDITED)****APRIL 30, 2007****– A – Organization / Basis Of Presentation**     Deb Shops, Inc. operates 335 women’s and men’s specialty apparel retail storesin regional malls and strip shopping centers principally located in the East and Midwestregions of the United States. We operate 329 stores under the name “DEB” which offermoderately priced, fashionable, coordinated women’s tops, bottoms, dresses, coats,lingerie, accessories, shoes and novelty items for junior and plus-sizes. DEBmerchandise consists of clothing and accessories appealing primarily to fashion-consciousjunior and plus-sized female consumers between the ages of 13 and 25. One hundredeighty-six of the DEB stores contain plus-size departments. In addition, we operate twooutlet stores under the name “CSO.” The outlet stores offer the same merchandise as DEBat reduced prices and serve as clearance stores for slow-moving inventory. We alsooperate four apparel retail stores under the name “Tops ‘N Bottoms.” The Tops ‘N Bottomsstores sell moderately priced men’s and women’s apparel. Thirteen of the DEB storescontain Tops ‘N Bottoms departments.     The accompanying unaudited consolidated financial statements have been prepared inaccordance with accounting principles generally accepted in the United States of America(“GAAP”) for interim financial information. Accordingly, they do not include all of theinformation and footnotes required by GAAP for complete financial statements. In thefirst and third quarters, cost of goods sold and inventories are estimated based on theuse of the gross profit method. In the opinion of management, all adjustments(consisting of normal recurring accruals) considered necessary for a fair presentationhave been included. Operating results for the three months ended April 30, 2007 are notnecessarily indicative of the results that may be expected for the fiscal year endingJanuary 31, 2008. For further information, refer to the consolidated financialstatements and footnotes thereto included in our Annual Report on Form 10-K for thefiscal year ended January 31, 2007.     The preparation of the consolidated financial statements in conformity with GAAPrequires management to make estimates and assumptions that affect the reported amounts ofassets and liabilities and disclosure of contingent assets and liabilities at the date ofthe financial statements and the reported amounts of revenues and expenses during thereporting period. Actual results could differ from those estimates.     Certain amounts appearing in the prior period financial statements have beenreclassified to conform to current presentation.**– B – Net Income Per Common Share**     The table below sets forth the reconciliation of the numerators anddenominators of the basic and diluted net income per common share computations.           **Three Months Ended April 30,**  **2007** **2006**   Net income **$****2,562,389**  **$****2,738,070** Dividends on preferred stock  **(13,800****)**  **(13,800****)**   Income available to commonshareholders **$****2,548,589**  **$****2,724,270**             Basic weighted average numberof common shares outstanding  **14,330,100**   **14,323,392** Effect of dilutive stock options  **20,410**   **28,934**    Diluted weighted average number ofcommon shares outstanding  **14,350,510**   **14,352,326**    
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**– B – Net Income Per Common Share (continued)**     During the quarters ended April 30, 2007 and 2006, we issued 3,000 and 6,000shares, respectively, as a result of employee stock option exercises. The effect ofthese exercises is included in the basic and diluted weighted average number of commonshares outstanding.     Options to purchase 139,000 shares of common stock, at a weighted average exerciseprice of $23.92 per share, were outstanding at April 30, 2007. At April 30, 2006,options to purchase 142,000 shares of common stock, at a weighted average exercise priceof $23.91 were outstanding. The effect of these options on the diluted weighted averagenumber of common shares outstanding at April 30, 2007 and 2006 is reflected in the abovetable.**– C – Income Taxes**     We adopted the provisions of FASB Interpretation No. 48, Accounting forIncome Taxes (FIN 48), on February 1, 2007. As a result of adoption, we recorded anincrease of $2,890,000 in reserves for uncertain tax positions. We also recorded arelated increase in deferred tax assets of $1,170,000. The net of these amounts wasaccounted for as a reduction to the beginning balance of retained earnings. Including thecumulative effect increase on February 1, 2007, we have $8,185,000 of unrecognized taxbenefits, all of which would affect the effective tax rate if recognized. Our reservefor uncertain tax positions is included as a long term liability on the consolidatedbalance sheet. Included in these unrecognized benefits are approximately $2,077,000 ofaccrued interest and $263,000 of penalties. Consistent with our prior practice, interestand penalties, if any, related to tax matters will be recorded as a component of incometax expense.     We are subject to U.S. Federal income tax as well as income tax of many statejurisdictions. We have substantially concluded all material tax matters in jurisdictionswhere we file returns through our fiscal year ended January 31, 2003. We do have variousstate tax audits and appeals in process at any given time. We do not anticipate anyadjustments that would result in a material change to our financial position or resultsof operations.     Our effective tax provision rate for the first quarter of 2007 was 34.5% as comparedto 36.3% in the first quarter of 2006. The 36.3% was the rate we initially anticipatedfor the fiscal year ended January 31, 2007. The actual effective rate was 34.93%. Thedecrease in our effective rate during the first quarter versus the fiscal year endedJanuary 31, 2007 is due principally to the fact that current year tax-exempt interestearnings is expected to represent a greater percentage of net income.**– D – Stock Related Compensation**     We have a stock option plan whereby options may be granted to employees ornon-employee directors on the basis of contributions to our operations. Detailsconcerning the plan are described in Note F to the financial statements included in ourAnnual Report on Form 10-K for the fiscal year ended January 31, 2007.     We recognize the cost of all employee stock options on a straight-line attributionbasis over the respective vesting periods, net of estimated forfeitures. During thequarters ended April 30, 2007 and 2006, we recognized share-based compensation expense ofapproximately $10,000 and $48,000, respectively. These amounts are included as acomponent of selling and administrative expenses. The effect on net income was less than$0.01 per diluted share in both quarters.     As of April 30, 2007, there was $54,000 of total unrecognized compensation costrelated to nonvested share-based compensation arrangements granted under our stock optionplan. Of this amount, $21,000 is expected to be recognized over the remainder of thefiscal year ending January 31, 2008.**– E – Revenue Recognition**     We recognize revenue at the time of sale of merchandise to our customers.Sales relating to lay-a-way transactions are recognized at the time the customer remitsfinal payment and takes possession of the merchandise. The value of promotional couponsand other discounts that result in a reduction of the price paid by the customer arerecorded as a reduction of sales. Sales returns, which are reserved for based onhistorical experience, are provided for in the period that the related sales arerecorded. Proceeds from the sale of gift cards are recorded as a gift card liability.Revenue is recognized when the gift card is redeemed by the holder.
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**Item 2.****Management’s Discussion and Analysis of Financial Condition and Results Of Operations****Forward-Looking Statements**     We have 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 our future operations, performance, profitability, revenues, expenses,earnings and financial condition. This report includes, in particular, forward-lookingstatements regarding expectations of future performance, store openings and closings andother matters. Such forward-looking statements are subject to various risks anduncertainties. Actual results could differ materially from those currently anticipateddue to a number of factors. Such factors may include, but are not limited to, ourability to improve or maintain sales and margins, respond to changes in fashion, findsuitable retail locations and our ability to attract and retain key management personnel.Such factors may also include other risks and uncertainties detailed in our otherfilings with the Securities and Exchange Commission, including our Annual Report on Form10-K for the fiscal year ended January 31, 2007 (the “2007 10-K”). We assume noobligation to update or revise our forward-looking statements even if experience orfuture changes make it clear that any projected results expressed or implied therein willnot be realized.     Investors should also be aware that while we do communicate with securities analystsfrom time to time, it is against our policy to disclose to them any material non-publicinformation or other confidential information. Accordingly, investors should not assumethat we agree with any statement or report issued by any analyst irrespective of thecontent of the statement or report. Furthermore, we have a policy against confirmingfinancial forecasts or projections issued by others. Therefore, to the extent thatreports issued by securities analysts contain any projections, forecasts or opinions,such reports are not our responsibility.**Critical Accounting Policies**     Our critical accounting policies are discussed in Management’s Discussion andAnalysis of Financial Condition and Results of Operations and notes accompanying theconsolidated financial statements that appear in the 2007 10-K. Other than accountingfor uncertain tax positions under FIN 48, which is described below, there were nomaterial changes subsequent to the filing of the 2007 10-K in our critical accountingpolicies or in the assumptions or estimates used to prepare the financial informationappearing in this report.**Accounting For Uncertain Tax Positions Under FIN 48**     Effective February 1, 2007 we began accounting for uncertain tax positions under theprovisions of Financial Accounting Standards Board Interpretation No. 48, Accounting forUncertainty in Income Taxes (“FIN 48”). FIN 48 prescribes a comprehensive model for how acompany should recognize and measure the impact of uncertain tax positions on itsfinancial statements. Determining whether an uncertain tax position should be recognizedand how to measure the amount of the tax benefit requires significant judgment. As ofFebruary 1, 2007 our reserve for uncertain tax positions totaled $8,185,000 and wasclassified as a long term liability. For further discussion of accounting for uncertaintax positions and FIN 48, see Note C in our notes to consolidated financial statementscontained in this Quarterly Report on Form 10-Q.**Overview**     This Management’s Discussion and Analysis of Financial Condition and Results ofOperations should be read in conjunction with the financial statements and accompanyingnotes appearing elsewhere in this report. As used in this report, the terms “fiscal2008” and “fiscal 2009” refer to our fiscal years that will end on January 31, 2008 andJanuary 31, 2009, respectively. The term “fiscal 2007” refers to our fiscal year thatended on January 31, 2007.     We operate 335 women’s and men’s specialty apparel retail stores in regional mallsand strip shopping centers principally located in the East and Midwest regions of theUnited States. We operate 329 stores under the name “DEB” which offer moderately priced,fashionable, coordinated women’s tops, bottoms, dresses, coats, lingerie, accessories,shoes and novelty items for junior and plus-sizes. DEB merchandise consists of clothingand accessories appealing primarily to fashion-conscious junior and plus-sized femaleconsumers between the ages of 13 and 25. One hundred eighty-six of the DEB stores containplus-size departments. In addition, we operate two outlet stores under the name “CSO.”The outlet stores offer the same merchandise as DEB at reduced prices and serve asclearance stores for slow-moving inventory. We also operate four apparel retail storesunder the name “Tops ‘N Bottoms.” The Tops ‘N Bottoms stores sell moderately pricedmen’s and women’s apparel. Thirteen of the DEB stores contain Tops ‘N Bottomsdepartments.
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     Driven by stores that opened during the past 12 months, total sales increased by2.9% in the quarter ended April 30, 2007 (the “Current Quarter”) compared to the quarterended April 30, 2006 (the “Comparable Quarter”). Comparable store sales declined 0.2%during the period. We also continued the expansion of our plus-size business, offeringthis merchandise in 186 locations versus 181 at January 31, 2007. Offsetting the salesincrease during the Current Quarter was a commensurate increase in cost of sales as wellas an increase in selling and administrative expenses, partly due to the increase in thenumber of stores in operation and to overall increases in prevailing wage rates.     The following table sets forth certain store information.           **Store Data****1**  **Three Months Ended**  **April 30,**  **2007** **2006**   Stores open at end of the period  **335**   **330** Average number in operation during the period  **336**   **329** Average net sales per store (in thousands) **$****250**  **$****248** Average operating incomeper store (in thousands) **$****8.0**  **$****10.2** Comparablestore sales2 - percent change  **(0.2****)%**  **2.6****%**     The following table sets forth, for the periods indicated, selected statement ofoperations data expressed as a percentage of net sales:           **Three Months Ended**  **April 30,**  **2007** **2006**   Net sales  **100.0****%**  **100.0****%**Gross profit  **27.8****%**  **28.1****%**Operating income  **3.2****%**  **4.1****%**Income before income taxes  **4.7****%**  **5.3****%**Income tax provision  **1.6****%**  **1.9****%**   Net income  **3.1****%**  **3.4****%**   **Results of Operations****Three Months Ended April 30, 2007 Compared to Three Months Ended April 30, 2006*****Net sales***     Net sales increased 2.9% during the Current Quarter to $83,779,000 from $81,458,000in the Comparable Quarter. The $2,322,000 increase was the result of operating anaverage of 336 stores during the Current Quarter as compared to 329 in the ComparableQuarter, offset by a 0.2% or $150,000 comparable store sales decrease. 1 Includes Tops ‘N Bottoms stores 2 Comparable store sales include stores open for bothperiods. A store is added to the comparable store base in its 13th month of operation.
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***Cost of sales, including buying and occupancy costs***     Cost of sales, including buying and occupancy costs, increased $1,924,000 or 3.3%during the Current Quarter to $60,497,000 from $58,573,000 in the Comparable Quarter.The increase between periods was due primarily to the overall increase in sales. As apercentage of net sales, these costs increased to 72.2% from 71.9%. As a result ofoperating an average of seven additional stores, buying and occupancy costs increased to16.2% from 15.9% in the Current Quarter versus the Comparable Quarter.***Selling and administrative expenses***     Selling and administrative expenses increased $1,080,000 or 5.9% during the CurrentQuarter to $19,335,000 from $18,255,000 in the Comparable Quarter. As a percentage ofnet sales, these costs increased to 23.1% from 22.4% in the Comparable Quarter. The$1,080,000 increase was primarily due to a $605,000 increase in store payroll costs, a$205,000 increase in professional service fees, an $81,000 increase in merchant feesrelated to credit card charges, a $68,000 increase in buyer and store-related travelcosts and a $68,000 increase in health insurance costs.***Depreciation and amortization***     Depreciation expense decreased $14,000 or 1.1% to $1,250,000 in the Current Quarterfrom $1,264,000 in the Comparable Quarter. As a percentage of net sales, these expensesdecreased to 1.5% from 1.6%. The decrease was due to the fact that a warehouse capitalimprovement became fully depreciated in January 2007. Partially offsetting this decreaseis depreciation expense related to assets placed in service for new and remodeled storesduring the past 12 months. During the period from May 1, 2006 through April 30, 2007, weopened 14 new stores and remodeled eight locations.***Other income, principally interest***     Other income, principally interest, increased $280,000 or 30.1% to $1,214,000 in theCurrent Quarter from $933,000 in the Comparable Quarter. The increase was the result ofan increase in the average interest rates during the Current Quarter versus theComparable Quarter and a $9,100,000 increase in the average amount invested.***Income tax provision***     The income tax provision for the Current Quarter was $1,349,000, resulting in a34.5% effective tax rate, as compared to $1,560,000 and a 36.3% effective tax rate forthe Comparable Quarter. The effective tax rate for the Current Quarter is the rateestimated for fiscal 2007. The effective tax rate for the Comparable Quarter was therate anticipated for fiscal 2007, based on originally budgeted earnings for that year.The actual effective rate for fiscal 2007 was 34.9%.**Liquidity and Capital Resources**     As of April 30, 2007, we had cash and cash equivalents of $25,444,000 andmarketable securities of $106,150,000 compared to cash and cash equivalents of$27,280,000 and marketable securities of $91,500,000 as of April 30, 2006. The increasein our total cash and cash equivalents and marketable securities compared to last year isprimarily the result of the cash generated from operations, offset by capitalacquisitions related to new and remodeled stores and dividend payments.     The cash and cash equivalents are invested principally in money market mutual fundswhile the marketable securities are invested principally in auction market securities,which trade on a par-in, par-out basis and provide interest-rate reset options on arevolving 35-day basis. Because we regularly liquidate our investments in thesesecurities for reasons including, among others, changes in market interest rates andchanges in the availability of and the yield on alternative investments, we haveclassified these securities as available for sale. We do not invest for trading purposesand therefore do not believe we have significant exposure to market risk with respect toour investments.     During the Current Quarter and Comparable Quarter, we funded all of our operatingneeds internally, including capital expenditures for the opening of new stores and theremodeling of existing stores. For the Current Quarter, cash provided by operations was$7,101,000, resulting primarily from the seasonal decrease in merchandise inventories,net income and the non-cash charge for depreciation and amortization. Offsetting theseitems were the seasonal decreases in income taxes payable, accounts payable and anincrease in prepaid expenses.
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     During the Comparable Quarter, cash provided by operations was $5,286,000, resultingprimarily from the seasonal decrease in merchandise inventories, net income and thenon-cash charge for depreciation and amortization. Offsetting these items were theseasonal decreases in income taxes payable, accounts payable and a reduction in accruedand other expenses.     Using cost of sales (excluding buying and occupancy expenses) divided by averageinventory at cost for the applicable periods, the inventory turnover rates wereapproximately 1.5 and 1.6 times for the Current and Comparable Quarters, respectively.     Net cash used in investing activities was $5,707,000 and $2,877,000 for the CurrentQuarter and Comparable Quarter, respectively. During both periods, these funds were usedfor the purchase of marketable securities and for the opening of new stores and theremodeling of existing locations. During the Current Quarter, we opened two andremodeled three stores, while during the Comparable Quarter we opened six and remodeledtwo stores.     During the Current Quarter and Comparable Quarter, net cash used in financingactivities was $1,730,000 and $1,650,000. These funds were used for the payment ofdividends on common and preferred stock, partially offset by proceeds from employee stockoption exercises and by the tax benefit from stock-based compensation.     During May 2007, we began the roll-out of new point-of-sale hardware and software.We anticipate the cost of this implementation will not exceed $4,000,000 and expectcompletion during fiscal 2009. We have an unsecured line of credit in the amount of$20,000,000 as of April 30, 2007. Of this amount, $3,058,000 was outstanding as lettersof credit for the purchase of inventory. We believe that our existing cash andmarketable securities and internally generated funds will be sufficient to meet ouranticipated capital expenditures and current operating needs. Initial lease terms forour retail apparel stores, warehouse and office building range from 15 to 20 years.Following is a summary of our contractual obligations for minimum rental payments on ournon-cancelable operating leases and minimum payments on other commitments as of April 30,2007.                       Payments Due by Period      Less than 1 1 - 3 3 - 5 More than 5  Total year years years years   Operatingleases $162,812,000  $27,304,000  $46,798,000  $36,378,000  $52,332,000 Othercommitments  3,058,000   3,058,000   —   —   —                         Total $165,870,000  $30,362,000  $46,798,000  $36,378,000  $52,332,000         The above table excludes $1,805,000 in common and preferred stock dividends, whichwere accrued at April 30, 2007 and were paid in May 2007.**Other Matters**     Seasonality and Quarterly Results     Our operating results are subject to seasonal fluctuations. Highest sales levelshave historically occurred during the five-month period from August 1 to December 31 ofeach year (the back-to-school and holiday periods). Sales generated during these periodshave traditionally had a significant impact on our results of operations. Any decreasesin sales for these periods or in the availability of working capital needed in the monthspreceding these periods could have a material adverse effect on our results ofoperations. Results of operations in any one fiscal quarter are not necessarilyindicative of the results of operations that can be expected for any other fiscal quarteror for the full fiscal year.     Our results of operations may also fluctuate from quarter to quarter as a result ofthe amount and timing of expenses incurred in connection with, and sales contributed by,new stores, store remodels and the integration of new stores into our operations.
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**Item 3.****Quantitative and Qualitative Disclosures About Market Risk**     As of April 30, 2007, we had cash and cash equivalents of $25,444,000 andmarketable securities of $106,150,000 compared to cash and cash equivalents of$27,280,000 and marketable securities of $91,500,000 as of April 30, 2006. The increasein our total cash and cash equivalents and marketable securities compared to last year isprimarily the result of the cash generated from operations, offset by capitalacquisitions related to new and remodeled stores and dividend payments.     The cash and cash equivalents are invested principally in money market mutual fundswhile the marketable securities are invested principally in auction market securities,which trade on a par-in, par-out basis and provide interest-rate reset options on arevolving 35-day basis. Because we regularly liquidate our investments in thesesecurities for reasons including, among others, changes in market interest rates andchanges in the availability of and the yield on alternative investments, we haveclassified these securities as available for sale. We do not invest for trading purposesand therefore do not believe we have significant exposure to market risk with respect toour investments.**Item 4.****Controls and Procedures**     (a) Evaluation of Disclosure Controls and Procedures     Our chief executive officer and chief financial officer, with the participation ofother members of management, have evaluated the effectiveness of our disclosure controlsand procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934,as amended) as of the end of the period covered by this report (the “Evaluation Date”)and, based on that evaluation, concluded that, as of the Evaluation Date, the disclosurecontrols and procedures were effective for recording, processing, summarizing andreporting information that is required to be disclosed in our reports under theSecurities Exchange Act of 1934, as amended, within the time periods specified in theSEC’s rules and forms and that such information is accumulated and communicated tomanagement, including our Chief Executive Officer and Chief Financial Officer, asappropriate, to allow timely decisions regarding required disclosure.     (b) Changes in Internal Control over Financial Reporting     There has not been any change in our internal control over financial reportingduring the quarter ended April 30, 2007 that has materially affected or is reasonablylikely to materially affect our internal control over financial reporting.**PART II. Other Information****Item 1.****Legal Proceedings**Not Applicable.**Item 1A.****Risk Factors**     In addition to the other information set forth in this report, you shouldcarefully consider the factors discussed in Part 1, “Item 1A. Risk Factors” in our AnnualReport on Form 10-K for the fiscal year ended January 31, 2007, which could materiallyaffect our business, financial condition or future results. The risks described in ourAnnual Report on Form 10-K for the fiscal year ended January 31, 2007 are not the onlyrisks we face. Additional risks and uncertainties not currently known to us or that wecurrently deem to be immaterial also may materially adversely affect our business,financial condition and / or operating results.**Items 2-5.****Not Applicable**
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**Item 6.****Exhibits**   Exhibit 3.1 Restated Articles of Incorporation of the Company, as amended throughJune 4, 1999*   Exhibit 31.1 Section 302 Certification by President andChief Executive Officer, pursuant to Rule 13a-14(a) under the SecuritiesExchange Act of 1934   Exhibit 31.2 Section 302 Certification by Chief Financial Officer, pursuant to Rule13a-14(a) under the Securities Exchange Act of 1934   Exhibit 32.1 Certification of Periodic Report by President and ChiefExecutive Officer, pursuant to 18 U.S.C. Section 1350   Exhibit 32.2 Certification of Periodic Report by Chief FinancialOfficer, pursuant to 18 U.S.C. Section 1350 * The Amendment to the Company’s articles of incorporation dated June 4, 1999 wasinadvertently omitted from the Form 10-K as of and for the period ended January 31, 2003.**SIGNATURES**     Pursuant to the requirements of the Securities Exchange Act of 1934, theRegistrant has duly caused this report to be signed on its behalf by the undersigned,thereunto duly authorized.      DEB SHOPS, INC.