<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 July 31, 1999
--------------------------------------------------
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from to
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Commission File Number 0-12188
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DEB SHOPS, INC.
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(Exact name of registrant as specified in its charter)
Pennsylvania 23-1913593
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
9401 Blue Grass Road, Philadelphia, Pennsylvania 19114
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(Address of principal executive offices) (Zip Code)
(215) 676-6000
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(Registrant's telephone number, including area code)
Not Applicable
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(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 13,243,400
- ---------------------------- ------------------------------------
(Class) (Outstanding at July 31, 1999)
<PAGE>
DEB SHOPS, INC. AND SUBSIDIARIES
I N D E X
---------
<TABLE>
<CAPTION>
Page
----
<S> <C>
PART I. Item 1, Financial Information:
Consolidated Balance Sheets - 1
July 31, 1999 and January 31, 1999
Consolidated Statements of Operations - Six Months and 2
Three Months Ended July 31, 1999 and July 31, 1998
Consolidated Statements of Cash Flows - 3
Six Months Ended July 31, 1999 and July 31, 1998
Notes to Consolidated Financial Statements - 4
July 31, 1999
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations - July 31, 1999 5-11
Item3. Quantitative and Qualitative Disclosures About 11
Market Risk
PART II. Other Information 11-12
</TABLE>
<PAGE>
DEB SHOPS, INC. & SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
JULY 31, JANUARY 31,
1999 1999
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 73,980,906 $ 70,228,227
Merchandise inventories 32,058,058 23,934,155
Prepaid expenses and other 1,893,491 2,083,285
Deferred income taxes 1,738,050 1,706,050
------------ ------------
Total Current Assets 109,670,505 97,951,717
------------ ------------
PROPERTY, PLANT AND EQUIPMENT, at cost
Land 150,000 150,000
Buildings 4,347,697 4,338,863
Leasehold improvements 31,499,700 29,416,173
Furniture and equipment 16,849,251 16,649,890
------------ ------------
52,846,648 50,554,926
------------ ------------
Less accumulated depreciation
and amortization 35,982,374 36,202,184
------------ ------------
16,864,274 14,352,742
------------ ------------
OTHER ASSETS
Goodwill, net of accumulated amortization
of $821,238 and $714,120, respectively 2,397,167 2,504,285
Deferred income taxes 2,843,290 2,505,290
Other 1,712,223 1,712,223
------------ ------------
Total Other Assets 6,952,680 6,721,798
------------ ------------
$133,487,459 $119,026,257
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Trade accounts payable $ 20,448,107 $ 16,090,608
Accrued expenses 8,340,176 6,658,918
Income taxes payable 3,253,954 2,727,892
------------ ------------
Total Current Liabilities 32,042,237 25,477,418
------------ ------------
Capital Lease Obligation 1,245,777 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 - 15,688,290 156,883 156,883
Additional paid in capital 5,541,944 5,541,944
Retained earnings 109,612,093 101,844,410
------------ ------------
115,311,380 107,543,697
Less common treasury shares, at cost -
July 31, 1999: 2,444,890;
January 31, 1999: 2,489,410 15,111,935 15,387,113
------------ ------------
100,199,445 92,156,584
------------ ------------
$133,487,459 $119,026,257
============ ============
</TABLE>
The notes to consolidated financial statements are an integral part of these
financial statements.
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<PAGE>
DEB SHOPS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended July 31, Three Months Ended July 31,
---------------------------------------------------------------------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues
Net Sales $126,227,817 $108,246,822 $66,710,424 $58,487,659
------------ ------------ ----------- -----------
Costs and Expenses
Cost of Sales, including
buying and occupancy costs 85,820,815 79,407,581 42,109,022 41,033,746
Selling and administrative 25,013,155 22,039,011 12,788,227 11,528,698
Depreciation and amortization 1,951,919 1,874,657 988,050 940,188
----------- ----------- ---------- ----------
112,785,889 103,321,249 55,885,299 53,502,632
----------- ----------- ---------- ----------
Operating Income 13,441,928 4,925,573 10,825,125 4,985,027
Other income, principally interest 1,535,183 1,560,590 692,538 881,856
----------- ----------- ---------- ----------
Income Before Income Taxes 14,977,111 6,486,163 11,517,663 5,866,883
Income Taxes 5,691,000 2,270,000 4,444,000 2,053,000
----------- ----------- ---------- ----------
Net Income $ 9,286,111 $ 4,216,163 $7,073,663 $ 3,813,883
=========== =========== ========== ===========
Net Income Per Common Share
Basic $ 0.70 $ 0.32 $ 0.53 $ 0.29
=========== =========== ========= ===========
Diluted $ 0.69 $ 0.32 $ 0.52 $ 0.29
=========== =========== ========= ===========
Cash Dividend Declared
Per Common Share $ 0.10 $ 0.10 $ 0.05 $ 0.05
=========== =========== ========= ===========
Weighted Average Number of
Common Shares Outstanding
Basic 13,209,671 12,979,736 13,217,765 13,044,748
=========== =========== ========== ==========
Diluted 13,464,381 13,193,110 13,492,866 13,228,123
=========== =========== ========== ==========
</TABLE>
The notes to consolidated financial statements are an integral part of these
financial statements.
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<PAGE>
DEB SHOPS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended July 31,
------------------------------------
1999 1998
---- ----
<S> <C> <C>
Cash flows provided by operating activities:
Net income 9,286,111 4,216,163
Adjustments to reconcile net income to net
Cash provided by operating activities:
Depreciation and amortization 1,951,918 1,874,657
Deferred income tax (benefit) ( 370,000) ( 930,000)
Loss on retirement of property, plant and equipment 211,447 146,282
Change in assets and liabilities:
Increase in merchandise inventories ( 8,123,903) ( 8,365,193)
Decrease (Increase) in prepaid expenses and other 189,794 ( 665 951)
Increase in trade accounts payable 4,357,499 7,608,619
Increase in accrued expenses 1,681,258 562,132
Increase in income taxes payable 526,062 1,095,621
------------ ------------
Net cash provided by operating activities 9,710,186 5,542,330
------------ ------------
Cash flows used in investing activities:
Increase in other assets (544,709)
Purchase of property, plant and equipment, net ( 4,567,780) ( 2,004,790)
------------ ------------
Net cash used in investing activities ( 4,567,780) ( 2,549,499)
------------ ------------
Cash flows used in financing activities:
Preferred stock cash dividends paid ( 27,600) ( 27,600)
Common stock cash dividends paid ( 1,322,114) ( 1,306,223)
Proceeds from exercise of stock options 106,465 837,500
Principal payments under capital lease obligations ( 146,478) ( 119,604)
------------ ------------
Net cash used in financing activities ( 1,389,727) ( 615,927)
------------ ------------
Increase in cash and cash equivalents 3,752,679 2,376,904
Cash and cash equivalents at beginning of period 70,228,227 57,912,689
------------ ------------
Cash and cash equivalents at end of period $73,980,906 $60,289,593
============ ============
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest on capital lease obligation $ 128,522 $ 155,000
Income taxes, net $ 5,535,919 $ 2,281,482
</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)
JULY 31, 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 six months ended July 31, 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 July 31, Six Months Ended July 31,
--------------------------- -------------------------
1999 1998 1999 1998
------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net income $7,073,662 $3,813,883 $9,286,111 $4,216,163
Dividends on preferred stock (13,800) (13,800) (27,600) (27,600)
---------- ---------- ---------- ----------
Income available to
Common shareholders $7,059,862 $3,800,083 $9,258,511 $4,188,563
========== ========== ========== ==========
Basic weighted average
Number of common
Shares outstanding 13,217,765 13,044,748 13,209,671 12,979,736
Effect of dilutive stock options 275,101 183,375 254,710 213,374
---------- ---------- ---------- ----------
Diluted weighted average
Number of common
Shares outstanding 13,492,866 13,228,123 13,464,381 13,193,110
========== ========== ========== ==========
</TABLE>
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<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 268 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 and six months
ended July 31, 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 $17,981,000 (16.6%) to $126,228,000 in
the six months ended July 31, 1999 from $108,247,000 in the six months ended
July 31, 1998, and increased $15,738,000 (17.0%) in the six months ended July
31, 1998 from the six months ended July 31, 1997. Consolidated net sales
increased $8,223,000 (14.1%) to $66,710,000 in the three months ended July 31,
1999 from $58,488,000 in the three months ended July 31, 1998 and increased
$9,907,000 (20.4%) in the three months ended July 31, 1998 from the three months
ended July 31, 1997. The increases in the three and six month periods ended July
31, 1999 were primarily the result of increased comparable store sales in the
apparel division. The increases in the three and six month periods ended July
31, 1998 were primarily the result of increased sales in the apparel business
and, to a lesser extent, an increase in the number of book stores.
The changes in net sales, cost of sales, selling and administrative
expense and net income are more fully described in the sections on "Apparel
Business" and "Book Business" that follow.
Other income, principally interest, decreased ($25,000) (1.6%) to
$1,535,000 in the six months ended July 31, 1999 from $1,561,000 in the six
months ended July 31, 1998 and increased $611,000 (64.3%) in the six months
ended July 31, 1998 from the six months ended July 31, 1997. Other income,
principally interest, decreased ($189,000) (21.5%) to $693,000 in the three
months ended July 31, 1999 from $882,000 in the three months ended July 31, 1998
and increased $373,000 (73.2%) in the three months ended July 31, 1998 from the
three months ended July 31, 1997. Interest income is offset by losses on the
-5-
<PAGE>
disposition of fixed assets. The decreases in the six and three months ended
July 31, 1999 were primarily the result of losses on disposition of fixed assets
and lower interest rates. The increases during the six and three months ended
July 31, 1998 were primarily the result of earnings on higher cash balances and
decreased write-offs from the disposition of fixed assets.
Net income before income taxes increased $8,491,000 (130.9%) to
$14,977,000 in the six months ended July 31, 1999 from $6,486,000 in the six
months ended July 31, 1998 and increased $6,891,000 (1,703.3%) in the six months
ended July 31, 1997. Net income before income taxes increased $5,561,000 (96.3%)
to $11,518,000 in the three months ended July 31, 1999 from $5,867,000 in the
three months ended July 31, 1998 and increased $4,006,000 (215.2%) in the three
months ended July 31, 1998 from the three months ended July 31, 1997. The
increases for the six and three months ended July 31, 1999 and 1998, were
primarily the result of increased sales and margins in the apparel business.
Results of Operations - Apparel Business
Net sales increased $17,896,000 (17.8%) to $118,586,000 in the six
months ended July 31, 1999 from $100,691,000 in the six months ended July 31,
1998 and increased $14,615,000 (17.0%) in the six months ended July 31, 1998
from the six months ended July 31, 1997. Net sales increased $8,077,000 (15.0%)
to $61,992,000 in the three months ended July 31, 1999 from $53,915,000 in the
three months ended July 31, 1998 and increased $9,257,000 (20.7%) in the three
months ended July 31, 1998 from the three months ended July 31, 1997. The
increases in net sales for the six and three months ended July 31, 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 its continuing efforts to improve visual
merchandising. The increases in net sales for the six and three months ended
July 31, 1998 resulted primarily from a continued return of fashion direction in
the woman's specialty apparel industry, the Company's focus on its younger
customers, and improved visual merchandising the stores.
The following table sets forth certain store information.
<TABLE>
<CAPTION>
Six Months Ended July 31,(1) Three Months Ended July 31,(1)
------------------------------------------------------------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Stores open at end of the period 276 278 276 278
Average number in operation during the period 275 280 275 277
Average net sales per store (in thousands) $431 $360 $225 $195
Average operating income per store (in thousands) $ 48 $ 15 $ 38 $ 17
Comparable Store Sales(2) -- Percent Change 15.8% 13.7% 13.5% 16.3%
</TABLE>
- --------
(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
Cost of sales, including buying and occupancy costs, increased
$6,226,000 (8.4%) to $80,420,000 in the six months ended July 31, 1999 from
$74,194,000 in the six months ended July 31, 1998 and increased $6,702,000
(9.9%) in the six months ended July 31, 1998 from the six months ended July 31,
1997. Cost of sales, including buying and occupancy costs, increased $900,000
(2.4%) to $38,744,000 in the three months ended July 31, 1999 from $37,843,000
in the three months ended July 31, 1999 and increased $4,618,000 (13.9%) in the
three months ended July 31, 1998 from the three months ended July 31, 1997. The
increases in cost of sales, including buying and occupancy costs in the six and
three months ended July 31, 1999 and 1998 were principally due to the increases
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<PAGE>
in sales during the periods. As a percentage of net sales, these costs were
67.8% and 73.7% during the six months ended July 31, 1999 and 1998,
respectively, and 62.5% and 70.2% during the three months ended July 31, 1999
and 1998, respectively. For the six and three months ended July 31, 1999 and
1998, the decreased percentages resulted primarily from increased margins.
Buying and occupancy costs were 16.5% and 18.0% of sales for the six months
ended July 31, 1999 and 1998. respectively, and 16.6% and 17.2% of net sales for
the three months ended July 31, 1999 and 1998, respectively. The percentage
decreases for the six and three months ended July 31, 1999 as compared to the
six and three months ended July 31, 1998, resulted principally from an increase
in sales during the periods.
Selling and administrative expenses increased $2,844,000 (13.8%) to
$23,384,000 in the six months ended July 31, 1999 from $20,540,000 in the six
months ended July 31, 1998 and increased $1,969,000 (10.6%) in the six months
ended July 31, 1998 from the six months ended July 31, 1997. Selling and
administrative expenses increased $1,224,000 (11.5%) to $11,887,000 in the three
months ended July 31, 1999 from $10,663,000 in the three months ended July 31,
1998 and increased $1,209,000 (12.8%) in the three months ended July 31, 1998
from the three months ended July 31, 1997. The increase in selling and
administrative costs for the six and three months ended July 31, 1999 was
primarily due to increased store operating costs and increased administrative
costs. The increase in selling and administrative costs for the six and three
months ended July 31, 1998 was primarily due to increased store operating costs.
As a percentage of net sales, these expenses were 19.7% and 20.4% in the six
months ended July 31, 1999 and 1998, respectively, and 19.2% and 19.8% in the
three months ended July 31, 1999 and 1998, respectively. The percentage
decreases in the six and three months ended July 31, 1999 were primarily the
result of an increase in sales for the periods.
Depreciation expense increased $72,000 to $1,698,000 in the six months
ended July 31, 1999 from $1,626,000 in the six months ended July 31, 1998 and
decreased ($274,000) in the six months ended July 31, 1998 from the six months
ended July 31, 1997. Depreciation expense increased $44,000 to $859,000 in the
three months ended July 31, 1999 from $816,000 in the three months ended July
31, 1999 and decreased ($133,000) in the three months ended July 31, 1998 from
the three months ended July 31, 1997. The increases for the six and three months
ended July 31, 1999 were primarily attributable to new store openings and
remodeling of existing stores. The decreases for the six and three months ended
July 31, 1998 were principally attributable to a reduction in the number of
stores to be closed and the write-offs associated with them.
Operating income was $13,084,000 in the six months ended July 31, 1999
as compared to operating income of $4,330,000 in the six months ended July 31,
1998 and an operating (loss) of ($1,888,000) in the six months ended July 31,
1997. Operating income was $10,502,000 in the three months ended July 31, 1999
as compared to operating income of $4,592,000 in the three months ended July 31,
1998 and $1,030,000 in the three months ended July 31, 1997. As a percentage of
sales, operating income was 11.0% and 4.3% in the six months ended July 31, 1999
and 1998, respectively, and 16.9% and 8.5% in the three months ended July 31,
1999 and 1998, respectively. The increases in operating income for the six and
three months ended July 31, 1999 and 1998 were primarily attributable to the
increases in sales and margins, partially offset by increases in selling and
administrative expenses
Results of Operations - Book Business
Net sales increased $85,000 (1.1%) to $7,642,000 in the six months
ended July 31, 1999 from $7,556,000 in the six months ended July 31, 1998 and
increased $1,123,000 (17.4%) in the six months ended July 31, 1998 from the six
months ended July 31, 1997. Net sales increased $146,000 (3.2%) to $4,718,000 in
the three months ended July 31, 1999 from $4,573,000 in the three months ended
July 31, 1998 and increased $651,000 (16.6%) in the three months ended July 31,
1998 from the three months ended July 31, 1997. The increases in the six and
three months ended July 31, 1999 were lower than in the prior periods primarily
as a result of increased competition. The increases in the six and three months
ended July 31, 1998 resulted primarily from the addition of one warehouse store.
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<PAGE>
The following table sets forth certain store information:
<TABLE>
<CAPTION>
Per Store Data Per Store Data
Six Months Three Months
Ended July 31, Ended July 31,
-------------------------------------------------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Resort Stores:
Stores open at end of period 12 11 12 11
Average number in operation during the period 12 11 12 11
Average net sales per store (in thousands) $222 $209 $183 $172
Warehouse Stores:
Stores open at end of period 6 6 6 6
Average number in operation during the period 6 6 6 6
Average net sales per store (in thousands) $821 $ 856 $418 $441
Comparable Store Sales (1) - Percent Change (4.2%) ( 1.4%) (3.8%) 1.2%
</TABLE>
- -------
(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.
Cost of sales, including buying and occupancy costs, increased $187,000
(3.5%) to $5,491,000 in the six months ended July 31, 1999 from $5,304,000 in
the six months ended July 31, 1998 and increased $770,000 (17.0%) in the six
months ended July 31, 1998 from the six months ended July 31, 1997. Cost of
sales, including buying and occupancy costs increased $175,000 (5.4%) to
$3,410,000 in the three months ended July 31, 1999 from $3,235,000 in the three
months ended July 31, 1998 and increased $422,000 (15.0%) in the three months
ended July 31, 1998 from the three months ended July 31, 1997. The increases
during the six and three months ended July 31, 1999 were primarily the result of
increased sales and increased occupancy costs offset by improved inventory
management. The increases during the six and three months ended July 31, 1998
were primarily the result of increased sales, resulting from the addition of one
warehouse store.
Selling and administrative expenses increased $132,000 (8.8%) to
$1,626,000 in the six months ended July 31, 1999 from $1,494,000 in the six
months ended July 31, 1998 and increased $261,000 (21.2%) in the six months
ended July 31, 1998 from the six months ended July 31, 1997. Selling and
administrative expenses increased $40,000 (4.6%) to $900,000 in the three months
ended July 31, 1999 from $860,000 in the three months ended July 31, 1998 and
increased $147,000 (20.7%) in the three months ended July 31, 1997. The
increases in the six and three months ended July 31, 1999 were primarily the
result of higher administrative costs. The increases in the six and three months
ended July 31, 1998 were primarily the result of additional stores.
Depreciation and amortization expense increased $6,000 to $224,000 in
the six months ended July 31, 1999 from $218,000 in the six months ended July
31, 1998 and increased $30,000 in the six months ended July 31, 1998 from the
six months ended July 31, 1997. Depreciation and amortization increased $4,000
to $114,000 in the three months ended July 31, 1999 from $109,000 in the three
months ended July 31, 1998 and increased $8,000 in the three months ended July
31, 1998 from the three months ended July 31, 1997.
The increases are primarily the result of additional stores.
Operating income decreased ($239,000) (44.3%) to $301,000 in the six
months ended July 31, 1999 from $540,000 in the six months ended July 31, 1998
and increased $62,000 (13.1%) in the six months ended July 31, 1998 from the six
months ended July 31, 1997. Operating income decreased ($73,000) (19.9%) to
$295,000 in the three months ended July 31, 1999 from $368,000 in the three
months ended July 31, 1998 and increased $73,000 (24.7%) in the three months
ended July 31, 1998 from the three months ended July 31, 1997. The changes in
operating income for the six and three months ended July 31, 1999 and 1998,
which the Company believes are not material, are primarily the result of the
factors described above. As a percentage of sales, operating income represented
3.9% and 7.1% in the six months ended July 31, 1999 and 1998, respectively, and
6.2% and 8.0% in the three months ended July 31, 1999 and 1998, respectively.
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<PAGE>
Liquidity and Capital Resources - Consolidated
During the six months ended July 31, 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 operating activities for the six months
ended July 31, 1999 and 1998 was $9,710,000 and $5,542,000, respectively. For
the six months ended July 31, 1999 and 1998, cash provided by operations was the
result of net income, increases in trade accounts payable, accrued expenses,
income taxes payable and non-cash charges for depreciation and amortization
partially offset by decreases in merchandise inventories. The inventory
turn-over rate for the apparel business was approximately 1.7 times during the
six months ended July 31, 1999 and 1.7 times during the six months ended July
31, 1998. The inventory turn-over rate for the book business was approximately
0.6 times during the six months ended July 31, 1999 and 0.7 times during the six
months ended July 31, 1998.
Net cash used in investing activities was $4,568,000 and $2,549,000 for
the six months ended July 31, 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.
Net cash used in financing activities was $1,390,000 and $616,000 for
the six months ended July 31, 1999 and 1998, respectively. For the six months
ended July 31, 1999, these funds were principally used for the payment of
dividends on preferred and common stock . For the six months ended July 31,
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.
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 Company's fiscal 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
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
-9-
<PAGE>
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.
As of July 31, 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> <C>
Financial 100% $500,000 $475,000 COMPLETE
P.C. & Mainframe
including operating
systems 100% 250,000 250,000 COMPLETE
Merchandising/
Distribution/
Warehousing 65% 175,000 150,000 October, 1999
-------- --------
$925,000 $875,000
======== ========
</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.
<TABLE>
<CAPTION>
Net Sales Net Income
-------------------------------------- ---------------------------------
Amount % Amount %
(Dollars in Thousands)
<S> <C> <C> <C> <C>
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%
========= ====== ======= ======
</TABLE>
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 July 31, 1999, the Company had cash and cash equivalents of
$73,981,000 compared to $60,290,000 as of July 31, 1998, and $44,910,000 as of
July 31, 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 - 3. NOT APPLICABLE
- -----------
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS:
- ------
The annual meeting of the Company was held on Wednesday, May
19, 1999. Total votes present either in person or by proxy were 12,951,102. The
votes were cast as follows for the election of directors:
FOR WITHHELD
---------- --------
Marvin Rounick 12,924,268 26,834
Warren Weiner 12,924,268 26,834
Jack A. Rounick 12,924,268 26,834
Paul S. Bachow 12,923,968 27,134
Barry H. Feinberg 12,923,968 27,134
Barry H. Frank 12,924,268 26,834
There were no other matters voted on at the meeting.
-11-
<PAGE>
Item 5. NOT APPLICABLE
- -------
Item 6. EXHIBITS AND REPORTS ON FORM 8-K.
- ------- ---------------------------------
(a) Exhibits
10-20.1 Amended and Restated Deb Shops, Inc. 1995
Incentive Stock Option Plan (Amending and
Restating 1997 FORM 10-K, Exhibit 10-20)
27 Financial Data Schedule
(b) Reports on Form 8-K
No reports on Form 8-K were filed by the Company during the
quarter ended July 31, 1999.
-12-
<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: September 14, 1999 By /s/ Marvin Rounick
-----------------------------
Marvin Rounick
President
DATE: September 14, 1999 By /s/ Lewis Lyons
----------------------------
Lewis Lyons
Vice President, Finance
Chief Financial Officer
<PAGE>
Exhibit 10-20.1
AMENDED AND RESTATED
DEB SHOPS, INC.
1995 INCENTIVE STOCK OPTION PLAN
I. NAME AND PURPOSE
----------------
A. Name. The name of this Plan shall be the Amended and Restated DEB
Shops, Inc. 1995 Incentive Stock Option Plan ("Plan").
B. Purpose. The purpose of the Plan is to provide favorable
opportunities for certain, select key employees and non-employee directors of
DEB Shops, Inc. ("Corporation") to purchase shares of the Corporation's Common
Stock, thereby encouraging them to acquire proprietary interests in the
Corporation's Common Stock. Further, on account of the Plan, such key employees
and non-employee directors should have an increased incentive to contribute to
the Corporation's future success and prosperity, thus enhancing the value of the
Corporation for the benefit of its shareholders. The availability and offering
of stock options under the Plan supports and increases the Corporation's
possibility to attract and retain individuals of exceptional talent upon whom,
in large measure, the sustained progress, growth and profitability of the
Corporation depends.
C. Stock Options to be Granted. Options granted under this Plan are
intended to be Incentive Stock Options within the meaning of Code '422(b) (as
hereinafter defined); however, Nonqualified Stock Options (as hereinafter
defined) may also be granted within the limitations of the Plan as described
herein.
II. DEFINITIONS
-----------
For Plan purposes, except where the context indicates otherwise, the
following terms shall have the meanings set forth below:
"Board" shall mean the Board of Directors of the Corporation.
"Code" shall mean the Internal Revenue Code of 1986, as amended, and
the rules and regulations promulgated thereunder.
"Committee" shall mean the Compensation Committee, or such other
committee of the Board, that shall be designated by the Board to administer the
Plan. The Committee shall be composed of three (3) or more persons as from time
to time are appointed to serve by the Board. Only members of the Board shall
serve on the Committee.
"Common Stock" shall mean the Common Stock, $0.01 par value, of the
Corporation.
<PAGE>
"Corporation" shall mean and include DEB Shops, Inc., a Pennsylvania
corporation, and any parent or subsidiary of DEB Shops, Inc., as defined in Code
'425(e) and (f).
"Incentive Stock Option" or "ISO" shall mean a stock option granted or
exercised under the Plan that is intended to meet and comply with the terms and
conditions for an incentive stock option as set forth in Code '422.
"Fair Market Value" shall mean the closing sale price of the Common
Stock as quoted on the NASDAQ National Market system; provided, that if no sale
of Common Stock has occurred on that day, the "Fair Market Value" shall mean the
closing price as reported on the NASDAQ National Market for the next preceding
day on which a sale occurred. During such time as the Common Stock is not listed
in the NASDAQ National Market, "Fair Market Value" shall be the mean between the
closing dealer "bid" and "asked" prices for the Common Stock, and if no "bid"
and "asked" prices are quoted, "Fair Market Value" shall be determined by
reference to such prices on the next preceding day on which such prices were
quoted. In the event that the Common Stock is not listed in the NASDAQ National
Market, and no closing "bid" and "asked" prices are available, "Fair Market
Value" shall be established by the Committee acting in good faith.
"Nonqualified Stock Option" or "NQSO" shall mean a stock option other
than an Incentive Stock Option.
"Optionee" shall mean any employee or non-employee director of the
Corporation who has been granted one or more ISOs under the Plan.
"Ten Percent Share Owner" shall mean an employee or non-employee
director who owns more than ten percent (10%) of the Common Stock of the
Corporation as such amount is calculated under Code '422(b)(6).
III. ADMINISTRATION
--------------
A. The Committee. The Committee shall be vested with full authority to
make such rules and regulations as it deems necessary or desirable to administer
the Plan and to interpret the provisions of the Plan, unless otherwise
determined by the Board. Accordingly, the Committee shall have full power to
grant ISOs and NQSOs to delegate administrative responsibilities and to perform
all other acts it believes to be reasonable and proper.
B. Discretion of the Committee. Subject to the provisions of the Plan,
the determination of those eligible to receive ISOs and/or NQSOs, and the
amount, type and timing of each ISO and NQSO and the terms and conditions of the
respective Option Documents (as hereinafter defined) shall rest in the sole
discretion of the Committee.
C. Interpretation of the Plan. The Board, or the Committee, may correct
any defect, supply any omission or reconcile any inconsistency in the Plan, or
in any granted ISO or NQSO, in the manner and to the extent it shall deem
necessary to carry the Plan into effect.
D. Decisions of the Committee. Any decision made, or action taken, by
the Committee arising out of or in connection with the interpretation and
administration of the Plan shall be final and conclusive, unless otherwise
determined by the Board.
Page 17
<PAGE>
E. Exchange of Option. The Committee may, in its sole discretion, grant
to an Optionee in exchange for surrender and cancellation of an outstanding ISO
or NQSO, an ISO or NQSO (the "Replacement Option") providing for the purchase of
not more than the number of shares of Common Stock so surrendered and canceled
and having an exercise price equal to at least the Fair Market Value of the
shares on the date of grant of the Replacement Option and containing such other
terms and conditions as the Committee may prescribe.
IV. SHARES SUBJECT TO THE PLAN
--------------------------
The total number of shares of Common Stock available for grants of ISOs
and/or NQSOs under the Plan shall be two million (2,000,000), subject to
adjustment in accordance with Section 7 of the Plan, which shares may be either
authorized but unissued or reacquired shares of Common Stock. If an ISO or an
NQSO or any portion thereof shall expire or terminate for any reason without
having been exercised in full, the unpurchased shares covered by such ISO or
NQSO shall be available for future grant.
V. ELIGIBILITY
-----------
Consistent with the Plan's purpose, ISOs and/or NQSOs may be granted to
the Corporation's employees (including officers of the Corporation) who are
performing or have been engaged to perform services of special importance to the
management, operation or development of the Corporation and to any member of the
Board (whether or not such member is an employee of the Corporation).
VI. STOCK OPTION TERMS AND CONDITIONS
---------------------------------
All ISOs and NQSOs granted under the Plan shall be evidenced by written
documents (the "Option Documents") in such form as the Committee shall from time
to time approve. The Option Documents and each ISO and/or NQSO shall comply with
and be subject to the following terms and conditions and such other terms and
conditions which the Committee shall from time to time require that are not
inconsistent with the terms of the Plan including, but not limited to, the
following provisions:
A. Price. Each Option Document shall state the price at which ISOs
and/or NQSOs may be purchased (the "Option Price"). The Option Price per share
for any Optionee other than a Ten Percent Share Owner shall not be less than one
hundred percent (100%) of the Fair Market Value of a share of Common Stock on
the date of grant. The Option Price per share for an Optionee who is a Ten
Percent Share Owner shall not be less than one hundred ten percent (110%) of the
Fair Market Value of a share of Common Stock on the date of grant. The Option
Price shall be subject to adjustment only as provided in Section 7 below.
B. Period of the Grant. Each Option Document shall state the period for
which each ISO and/or NQSO is granted, except that neither an ISO nor an NQSO
shall be granted for a period longer than ten (10) years from the date of grant.
C. Time of Exercise. Each Option Document shall state the date on which
each ISO and/or NQSO may be exercised, except that no ISO or NQSO may be
exercised prior to the three hundred sixty-sixth (366th) day after such ISO or
NQSO was granted. The Committee may establish installment exercise terms for an
Page 18
<PAGE>
ISO such that the option becomes fully exercisable in a series of cumulating
portions. The Committee may also accelerate the exercise of any ISO. An NQSO
shall be exercisable upon such terms as the Committee shall determine.
D. Exercise
--------
(1) An ISO or NQSO, or any portion thereof, shall be exercised by
delivery of a written notice of exercise to the Corporation and payment of the
full price of the shares being acquired pursuant to such exercise. Until the
shares of Common Stock subject to an ISO or NQSO are issued to an Optionee, he
or she shall have none of the rights of a shareholder;
(2) Unless the shares to be purchased under an ISO or NQSO are covered
by a then current registration statement under the Securities Act of 1933, as
amended ("Act"), each written notice of exercise shall contain the Optionee's
acknowledgment in such form and substance satisfactory to the Corporation that:
(i) such shares are being purchased for investment and not
distribution or resale, (other than a distribution or resale which in the
opinion of counsel satisfactory to the Corporation, may be made without
violating the registration provisions of the Act); and
(ii) the Optionee has been advised and understands that the
shares purchased pursuant to such ISO or NQSO have not been registered under the
Act, are "restricted securities" within the meaning of Rule 144 under the Act
and are subject to restrictions on transfer, and that the Corporation is under
no obligation to register the shares purchased pursuant to an ISO or NQSO under
the Act or to take any action which would make available to the Optionee any
exemption from such registration.
E. Payment. The price of an exercised ISO or NQSO, or portion thereof,
may be paid:
(1) in United States dollars in cash or by check, bank draft or money
order payable to the order of the Corporation;
(2) at the discretion of the Committee, through the delivery of shares
of Common Stock, with an aggregate Fair Market Value equal to the Option Price,
provided such tendered shares have been owned by the Optionee for at least one
(l) year prior to such exercise; or
(3) by combination of both (1) and (2) above.
In addition at the request of an Optionee and to the extent permitted
by applicable law, the Corporation may, in its sole discretion, selectively
approve arrangements with a brokerage firm under which such brokerage firm, on
behalf of the Optionee, shall pay to the Corporation the Option Price of the
ISOs and/or NQSOs being exercised, and the Corporation, pursuant to an
irrevocable notice from the Optionee, shall promptly deliver the shares of
Common Stock being purchased to such brokerage firm.
F. Termination of Employment. In the event an Optionee who is an
employee of the Corporation shall cease to be employed by the Corporation while
he or she is holding one or more ISOs and/or NQSOs, each such ISO or NQSO held
shall expire at the earlier of the expiration of the term of such ISO or NQSO or
the following:
Page 19
<PAGE>
(1) up to three (3) months after termination due to discharge
without cause, retirement or death;
(2) the date which is one (1) year after termination due to
permanent and total disability within the meaning of Code '22(e)(3), as
determined by the Committee;
(3) unless the Committee shall determine otherwise, if due to
any other reasons, the date which is coincident with the date of termination.
Notwithstanding the foregoing, if the ISO or NQSO was granted less than three
hundred sixty-six (366) days prior to the date of termination of employment,
such ISO or NQSO shall expire immediately on the date of the Optionee's
termination of employment and shall not thereafter be subject to exercise.
G. Effect of Leaves of Absence. For the purposes of this section, it
shall not be considered a termination of employment when an Optionee is placed
by the Corporation on military leave, sick leave or such other type of leave of
absence that is considered as continuing intact the Optionee's employment
relationship; provided, however, for purposes of the Plan and the ISOs and NQSOs
granted hereunder, in the case of such leave of absence, the employment
relationship shall be deemed to continue until the later of the date when such
leave equals ninety (90) days or the date when the Optionee's right to
re-employment with the Corporation shall no longer be guaranteed either by
statute or contract.
H. Aggregate Fair Market Value Limitation. Each Option Document shall
state the number of shares to which each ISO or NQSO pertains. With respect to
ISOs, the aggregate Fair Market Value (determined at the time the ISO is
granted) of shares of Common Stock with respect to which ISO's under this Plan
are exercisable for the first time by an Optionee during any calendar year
(under all incentive stock option plans of the Corporation) shall not exceed one
hundred thousand dollars ($100,000).
I. Premature Disposition. The Option Documents shall provide that any
Optionee who disposes of shares of Common Stock acquired on the exercise of an
ISO by sale or exchange either:
(1) within two (2) years after the date of the grant of the
ISO under which the stock was acquired; or
(2) within one (1) year after the acquisition of such shares,
shall notify the Corporation of such disposition and of the amount realized upon
such disposition.
J. Other Provisions. The Option Documents shall contain such other
provisions, including without limitation restrictions upon the exercise of the
ISO, as the Committee shall deem advisable or shall be necessary for such ISOs
to constitute an Incentive Stock Option (within the meaning of Code Section
422). The Committee shall have the right, subject to the consent of the
Optionee, to amend the Option Documents to the extent necessary to maintain the
ISOs as Incentive
Page 20
<PAGE>
Stock Options (within the meaning of Code Section 422). In addition, the Option
Documents may contain such other provisions relative to NQSOs as the Committee
shall determine is necessary to effect the purposes of this Plan.
VII. ADJUSTMENTS
-----------
A. Share Adjustments
(1) In the event that the shares of Common Stock of the
Corporation, as presently constituted, shall be changed into or exchanged for a
different number or kind of shares of stock or other securities of the
Corporation or of another corporation (whether by reason of merger,
consolidation, recapitalization, reclassification, split-up, combination of
shares or otherwise) or if the number of such shares of Common Stock shall be
increased through the payment of a stock dividend, then, subject to the
provisions of Paragraph C below, there shall be substituted for or added to each
share of Common Stock of the Corporation which was theretofore appropriated, or
which thereafter may become subject to either an ISO or NQSO under the Plan, the
number and kind of shares of stock or other securities into which each
outstanding share of the Common Stock of the Corporation shall be so changed or
for which each such share shall be exchanged or to which each such share shall
be entitled, as the case may be. Outstanding ISOs and NQSOs shall also be
appropriately amended as to price and other terms, as may be necessary to
reflect the foregoing events.
(2) If there shall be any other change in the number or kind
of the outstanding shares of the Common Stock of the Corporation, or of any
stock or other securities into which such stock shall have been changed, or for
which it shall have been exchanged, and if a majority of the disinterested
members of the Board shall, in their sole discretion, determine that such change
equitably requires an adjustment in any ISO or NQSO which was theretofore
granted or which may thereafter be granted under the Plan, then such adjustment
shall be made in accordance with such determination.
(3) The grant of an ISO or NQSO pursuant to the Plan shall not
affect in any way the right or power of the Corporation to make adjustments,
reclassifications, reorganizations or changes of its capital or business
structure, to merge, to consolidate, to dissolve, to liquidate or to sell or
transfer all or any part of its business or assets.
B. Corporate Changes
(1) A dissolution or liquidation of the Corporation shall
cause each outstanding ISO or NQSO to terminate.
(2) In the event of a merger or consolidation in which the
Corporation is not the surviving corporation, each outstanding ISO and NQSO
shall be exchanged for and converted into an ISO or NQSO to acquire stock of the
surviving corporation, subject to such adjustments as the Board may determine is
reasonable under the circumstances.
C. Fractional Shares. Fractional shares resulting from any adjustment
pursuant to this Section 7 may be settled as the Board or the Committee (as the
case may be) shall determine.
Page 21
<PAGE>
D. Binding Determination. To the extent that the foregoing adjustments
relate to Common Stock or securities of the Corporation, such adjustments shall
be made by the Board, whose determination in that respect shall be final,
binding and conclusive. Notice of any adjustment shall be given by the
Corporation to each holder of an ISO or NQSO which shall have been so adjusted.
E. Reimbursement of the Corporation. Subject to the provisions of
Paragraph F, the Corporation will require that an Optionee or any other person
or entity receiving Common Stock upon exercise of an Option, as a condition of
the exercise of such ISO or NQSO, pay or reimburse any taxes which the
Corporation is required to withhold in connection with the exercise of such ISO
or NQSO.
F. Payment by Optionee. An Optionee may satisfy the withholding
obligation described in Paragraph E, in whole or in part, by electing to have
the Corporation withhold shares of Common Stock (otherwise issuable upon the
exercise of an ISO or NQSO) having a Fair Market Value equal to the amount
required to be withheld. An election by an Optionee to have shares withheld for
this purpose shall be subject to the following restrictions:
(1) it shall be irrevocable;
(2) it shall be subject to disapproval by the Committee;
(3) if the Optionee is an officer of the Corporation within
the meaning of Section 16 of the Securities Exchange Act of 1934 (an "Officer"),
such election may not be made within six months of the grant of the Option
(except that this restriction shall not apply in the event of the death or
disability of the Optionee prior to the expiration of the six-month period);
(4) if the Optionee is an Officer, such election must be made
either at least six (6) months prior to the Tax Date or in the ten-day "window
period" beginning on the third day following the release of the Corporation's
quarterly or annual summary statement of revenues and earnings; and
(5) where the Tax Date of an Officer is deferred up to six (6)
months after the exercise of an Option, the full number of Option shares will be
issued or transferred upon exercise, but shall be unconditionally obligated to
tender back to the Corporation the proper number of shares of Common Stock on
the Tax Date.
VIII. LISTING AND REGISTRATION OF SHARES
----------------------------------
A. Restriction on Exercise of Options. No ISO or NQSO granted pursuant
to the Plan shall be exercisable in whole or in part if at any time the Board
shall determine in its discretion that the listing, registration or
qualification of the shares of Common Stock subject to such ISO or NQSO on any
securities exchange or under any applicable law, or the consent or approval of
any governmental regulatory body, is necessary or desirable as a condition of,
or in connection with, the granting of such ISO or NQSO or the issue of shares
thereunder, unless such listing, registration, qualification, consent or
approval shall have been effected or obtained free of any conditions not
acceptable to the Board.
Page 22
<PAGE>
B. Legend. If a registration statement under the Securities Act with
respect to the shares issuable upon exercise of any ISO or NQSO granted under
the Plan is not in effect at the time of exercise, as a condition of the
issuance of the shares, the person exercising such ISO or NQSO shall give the
Committee a written statement, satisfactory in form and substance to the
Committee, that such person is acquiring the shares for such person's own
account for investment and not with a view to distribution. The Corporation may
place upon any stock certificate for shares issuable upon exercise of such ISO
or NQSO the following legend or such other legend as the Committee may prescribe
to prevent disposition of the shares in violation of the Act or other applicable
law:
"THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933 ('ACT') AND MAY
NOT BE SOLD, PLEDGED, HYPOTHECATED OR OTHERWISE TRANSFERRED OR
OFFERED FOR SALE IN THE ABSENCE OF AN EFFECTIVE REGISTRATION
STATEMENT WITH RESPECT TO THEM UNDER THE ACT OR A WRITTEN
OPINION OF COUNSEL FOR THE CORPORATION THAT REGISTRATION IS
NOT REQUIRED."
IX. AMENDMENT AND TERMINATION OF PLAN
---------------------------------
A. Amendment. The Board, without further approval of the shareholders,
may at any time, and from time to time, suspend or terminate the Plan, in whole
or in part, or amend if from time to time, in such respects as the Board may
deem appropriate and in the best interests of the Corporation; provided,
however, that no such amendment shall be made, that would, without approval of
the majority of the shareholders:
(1) materially increase the benefits accruing to an Optionee
under the Plan;
(2) except as is provided for in accordance with Section 7
under the Plan, materially increase the number of shares of Common Stock that
may be issued under the Plan;
(3) materially modify the requirements as to eligibility for
participation in the Plan;
(4) reduce the minimum Option Price per share;
(5) extend the period of granting ISOs; or
(6) otherwise require the approval of shareholders in order to
maintain the exemption available under Rule 16b-3 (or any similar rule) under
the Securities Exchange Act of 1934.
B. Anti-Cutback. No amendment, suspension or termination of this Plan
shall in any manner affect any ISO or NQSO heretofore granted under the Plan,
without the consent of the Optionee or any person or entity validly claiming
under or through the Optionee.
Page 23
<PAGE>
C. Required Changes. The Board may amend the Plan, subject to the
limitations cited above, in such manner that it deems necessary to permit the
granting of ISOs meeting the requirements of future amendments or issued
regulations, if any, to the Code.
X. GOVERNMENT AND OTHER REGULATIONS
--------------------------------
The obligation of the Corporation to issue, or transfer and deliver
shares of Common Stock to Optionees pursuant to the exercise of ISOs or NQSOs
granted under the Plan shall be subject to all applicable laws, regulations,
rules, orders and approval that shall then be in effect and required by
governmental entities and the NASDAQ National Market and/or the stock exchanges,
if any, on which the Corporation's Common Stock is traded.
XI. MISCELLANEOUS PROVISIONS
------------------------
A. No Right to Continued Employment. No person shall have any claim or
right to be granted an ISO or NQSO under the Plan, and neither the grant of an
ISO nor an NQSO hereunder shall be construed as giving an Optionee the right to
be retained in the employ of the Corporation. Further, the Corporation expressly
reserves the right at any time to dismiss an Optionee who is an employee of the
Corporation with or without cause, free from any liability, or any claim under
the Plan, except as specifically provided under the Plan or in an ISO or NQSO
granted prior to the termination of employment which right to exercise such ISO
or NQSO, if any, shall be limited in accordance with the terms of the Plan and
the applicable Option Documents.
B. Non-Transferability. Except by will or the laws of descent and
distribution, no right or interest in any ISO or NQSO shall be assignable or
transferable, and no right or interest of any Optionee in any ISO or NQSO shall
be liable for, or subject to, any obligation or liability of such Optionee.
C. Plan Expenses. Any expenses of administering the Plan shall be borne
by the Corporation.
D. Use of Exercise Proceeds. The payment received from Optionees from
the exercise of ISOs and NQSOs under the Plan shall be used for the general
corporate purposes of the Corporation.
E. Construction of Plan. The place of administration of the Plan shall
be in the Commonwealth of Pennsylvania, and the validity, construction,
interpretation, administration and effect of the Plan and its rules and
regulations, ant rights relating to the Plans shall be determined solely in
accordance with he laws of the Commonwealth of Pennsylvania, when not otherwise
governed by applicable federal law.
F. Interpretation. As may be appropriate, pronouns used in the Plan
shall be read and construed to refer to the masculine, feminine or neuter.
Likewise, words in the singular shall be read and construed to refer to the
plural.
G. Indemnification. In addition to such rights of indemnification as
they may have as members of the Board, or the Committee, and only to the extent
that costs and expenses are not recovered under an insurance contract protecting
them with respect to any legal action described in this Paragraph G, the members
Page 24
<PAGE>
of the Committee shall be indemnified by the Corporation against all costs and
expenses reasonably incurred by them in connection with any action, suit or
proceeding to which they or any of them may be a party by reason of any action
take or failure to act under or in connection with the Plan or any ISO granted
thereunder, and against all amounts paid by them in settlement thereof (provided
such settlement is approved by independent legal counsel selected by the
Corporation) or paid by them in satisfaction of a judgment in any such action,
suit or proceeding, except a judgment based upon a finding of gross negligence,
recklessness, fraudulent or criminal acts, willful misconduct or bad faith;
provided that upon the institution of any such action, suit or proceeding, a
Committee member shall, in writing, give the Corporation notice thereof and an
opportunity, at its own expense, to handle and defend such action before such
Committee member undertakes to handle and defend it on his/her own behalf.
XII. SHAREHOLDERS APPROVAL AND EFFECTIVE DATES
-----------------------------------------
Upon approval by the shareholders of the Corporation, this Plan (as
amended and restated) shall become unconditionally effective as of May 19, 1999.
If the shareholders shall not approve the Plan, the Plan shall not become
effective, and any and all action taken prior thereto shall be null and void or
shall, if necessary, be deemed to have been fully rescinded. In the event the
shareholders shall not approve the Plan within twelve (12) months from the date
of the adoption of this Plan, no ISOs may be granted under this Plan and no ISO
granted under this Plan may be exercised; all such actions taken within such
twelve (12) month period shall be null and void or shall, if necessary, be
deemed to have been fully rescinded.
Page 25
<TABLE> <S> <C>
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<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 6-Mos
<FISCAL-YEAR-END> JAN-31-2000
<PERIOD-END> JUL-31-1999
<CASH> 73,980,906
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 20,458,058
<CURRENT-ASSETS> 109,670,505
<PP&E> 52,846,648
<DEPRECIATION> 35,982,374
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<CURRENT-LIABILITIES> 32,042,237
<BONDS> 0
0
460
<COMMON> 156,883
<OTHER-SE> 100,042,102
<TOTAL-LIABILITY-AND-EQUITY> 133,487,459
<SALES> 126,227,817
<TOTAL-REVENUES> 127,763,000
<CGS> 65,109,790
<TOTAL-COSTS> 112,785,889
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
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<INCOME-PRETAX> 14,977,111
<INCOME-TAX> 5,691,000
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<EXTRAORDINARY> 0
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<NET-INCOME> 9,286,111
<EPS-BASIC> .70
<EPS-DILUTED> .69
</TABLE>
