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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[ X ] Quarterly report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934
FOR THE QUARTERLY PERIOD ENDED JULY 30, 1994
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[ ] Transition report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934
0-5179
(Commission File Number)
FAY'S INCORPORATED
(Exact name of registrant as specified in its charter)
State of New York 16-0919350
(State of incorporation) (I.R.S. Employer
Identification No.)
7245 HENRY CLAY BOULEVARD, LIVERPOOL, NEW YORK 13088
(Address of principal executive offices)
Registrant's telephone number, including area code: (315) 451-8000
- - -------------------------------------------------------------------------------
Indicate by check mark whether registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or 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
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- - -------------------------------------------------------------------------------
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at September 9, 1994
- - ---------------------------- -------------------------------------
Common Stock, $.10 par value 20,290,898
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FAY'S INCORPORATED AND SUBSIDIARIES
Index
Page No.
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Condensed Balance Sheets -
July 30, 1994 and January 29, 1994 3
Consolidated Condensed Statements of Net Earnings -
Thirteen and Twenty-Six Weeks Ended July 30, 1994
and July 31, 1993 4
Consolidated Condensed Statements of Cash Flows -
Twenty-Six Weeks Ended July 30 ,1994 and July 31, 1993 5
Notes to Consolidated Condensed Financial Statements 6 - 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8 - 9
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders 10
Item 6. Exhibits and Reports on Form 8-K 10
2
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FAY'S INCORPORATED AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(in thousands of dollars)
<TABLE>
<CAPTION>
July 30,
1994 January 29,
ASSETS (Unaudited) 1994
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<S> <C> <C>
Current Assets:
Cash $ 2,779 $ 1,006
Accounts receivable 33,935 32,066
Merchandise inventories 159,201 153,627
Prepaid expenses 6,733 8,080
Refundable income taxes 1,263 -
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Total Current Assets 203,911 194,779
Deferred Income Taxes 1,114 534
Property and Equipment, Net 69,134 67,243
Intangible and Other Assets, Net 26,403 17,158
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Total Assets $ 300,562 $ 279,714
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LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Notes payable bank $ 4,000 $ 14,605
Accounts payable, trade 53,881 54,890
Accrued payroll and related taxes 7,715 8,102
Other current liabilities 24,758 15,901
Federal and state income taxes payable - 1,758
Current portion of long-term debt and obligation under leases 6,504 8,996
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Total Current Liabilities 96,858 104,252
Long-Term Debt 90,205 65,307
Obligation Under Leases 1,832 2,106
Deferred Gain and Other Liabilities 4,699 3,585
Accrued Postretirement Benefit Obligation (Note 3) 7,493 7,626
Commitments
Stockholders' Equity:
Common stock, par value $.10 per share 2,028 2,027
Additional paid-in capital 59,644 59,515
Retained earnings 37,920 35,413
Common stock held in treasury, at cost (117) (117)
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Total Stockholders' Equity 99,475 96,838
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Total Liabilities and Stockholders' Equity $ 300,562 $ 279,714
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</TABLE>
See notes to consolidated condensed financial statements.
3
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FAY'S INCORPORATED AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF NET EARNINGS
(Unaudited)
(In thousands of dollars except per share data)
<TABLE>
<CAPTION>
Thirteen Weeks Ended Twenty-Six Weeks Ended
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July 30, July 31, July 30, July 31,
1994 1993 1994 1993
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<S> <C> <C> <C> <C>
Net sales $ 252,379 $ 221,925 $ 491,440 $ 438,667
Cost and expenses:
Cost of merchandise sold 180,395 156,554 350,533 308,808
Selling, general and administrative expenses 61,404 54,842 120,690 110,347
Depreciation and amortization expenses 3,960 4,116 8,156 8,165
Interest expense, net 2,142 2,043 4,147 4,008
Unusual charge (credit)-store closings - (850) - 3,995
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Total cost and expenses 247,901 216,705 483,526 435,323
---------- ---------- ---------- ----------
Earnings before income taxes 4,478 5,220 7,914 3,344
Provision for income taxes 1,897 2,154 3,360 1,375
---------- ---------- ---------- ----------
Earnings before cumulative effect of accounting change 2,581 3,066 4,554 1,969
Cumulative effect of accounting change, net of tax (Note 3) - - - (4,806)
---------- ---------- ---------- ----------
Net earnings (loss) $ 2,581 $ 3,066 $ 4,554 $ (2,837)
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
EARNINGS (LOSS) PER SHARE:
Earnings before cumulative effect of accounting change $ 0.13 $ 0.15 $ 0.22 $ 0.10
Cumulative effect of accounting change - - - (0.24)
---------- ---------- ---------- ----------
Earnings (loss) per share $ 0.13 $ 0.15 $ 0.22 $ (0.14)
---------- ---------- ---------- ----------
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Cash dividends paid per share $ 0.05 $ 0.05 $ 0.10 $ 0.10
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Stores in operation at end of period 368 308 368 308
</TABLE>
See notes to consolidated condensed financial statements.
4
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FAY'S INCORPORATED AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands of dollars)
<TABLE>
<CAPTION>
Twenty-Six Weeks Ended
----------------------
July 30, July 31,
1994 1993
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<S> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES:
Net earnings (loss) $ 4,554 $ (2,837)
Adjustments to reconcile net earnings (loss) to net
cash provided from operating activities:
Cumulative effect of accounting change - 7,998
Depreciation and amortization 8,156 8,165
Increase in current assets (2,241) (1,093)
Increase (decrease) in other current liabilities (2,172) (3,804)
Increase (decrease) in other long-term liabilities (362) 1,066
Changes in deferred income tax assets and liabilities (580) (4,339)
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Net cash provided from operating activities 7,355 5,156
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CASH FLOW FOR INVESTING ACTIVITIES:
Expenditures for property and equipment (7,909) (3,839)
Increase in intangibles and other assets (7,283) (670)
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Net cash used for investing activities (15,192) (4,509)
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CASH FLOW FROM FINANCING ACTIVITIES:
Increase (decrease) in notes payable bank (10,605) 3,015
Increase in long-term debt 25,000 -
Repayment of long-term debt and reduction
of obligation under leases (2,868) (907)
Cash dividends paid (2,027) (1,998)
Other 110 51
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Net cash provided from financing activities 9,610 161
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Net increase in cash 1,773 808
Cash balance, beginning of period 1,006 917
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Cash balance, end of period $ 2,779 $ 1,725
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-------- --------
</TABLE>
See notes to consolidated condensed financial statements.
5
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FAY'S INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
July 30, 1994
(1) STATEMENT OF MANAGEMENT
The condensed financial statements included herein have been prepared by the
Company, without audit, pursuant to the rules and regulations of the Securities
and Exchange Commission. In the opinion of Management, the information
contained herein reflects all normal and recurring adjustments necessary for a
fair presentation of the results of operations for the periods. The
consolidated financial statements and notes thereto should be read with the
financial statements and notes included in the Company's latest Annual Report on
Form 10-K. The January 29,1994 balance sheet data is derived from audited
financial statements.
(2) COMMON STOCK AND EARNINGS PER SHARE
Earnings per share data are based on the weighted average number of shares of
common stock and common stock equivalents (stock options) with a dilutive effect
outstanding during the period, where applicable. The average number of shares
of common stock and dilutive common stock equivalents used to calculate earnings
per share were 20,343,227 and 20,067,558 for the thirteen weeks ended July 30,
1994 and July 31, 1993, respectively, and 20,340,193 and 19,982,108 for the
twenty-six weeks ended July 30, 1994 and July 31, 1993 respectively.
(3) CHANGES IN ACCOUNTING
Effective January 31, 1993, the Company adopted Statement of Financial
Accounting Standards No. 106, "Employers' Accounting for Postretirement Benefits
Other than Pensions" ("SFAS No. 106"). SFAS No. 106 requires the Company to
accrue the estimated cost of retiree benefit payments during the years the
employee provides services. The Company previously expensed the cost of these
benefits, which are principally health care, as claims were incurred. The
Company elected to recognize in the first quarter of fiscal 1994 the cumulative
effect of this obligation resulting in a one-time charge against net earnings of
$4,805,992, net of $3,203,995 in income tax benefits.
(4) RECENT ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board has issued Statement of Financial
Accounting Standards No. 112, Employer's Accounting for Postemployment Benefits.
This Statement is effective for the Company's fiscal 1995 financial statements.
The effect of this Statement on the Company's consolidated financial statements
is not anticipated to be material.
6
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FAY'S INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(5) ACQUISITIONS
In the second quarter of fiscal 1995, the Company purchased the assets of 26
National Auto Supply Stores in New York, four Whitlock Auto Supply Stores in
Pennsylvania and certain distribution center inventories pertaining to these
stores from WSR Corporation. Included in other current liabilities at July 30,
1994 is $1,259,000 pertaining to this acquisition which will be paid in the
third quarter of fiscal 1995.
In the second quarter of fiscal 1995 the Company also purchased the capital
stock of Peterson Drug Company of Western New York, Inc., which operated twelve
Peterson Drug Stores. Included in other current liabilities at July 30, 1994 is
$6,616,000 pertaining to this acquisition which will be paid in the third
quarter of fiscal 1995.
7
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FAY'S INCORPORATED AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The Company's principal business is the operation of a chain of super drug
stores under the name "Fay's Drugs." As of July 30, 1994, the Company was
operating 210 Fay's Drug stores, 64 traditional drug stores, 63 discount auto
supply stores under the name "Wheels Discount Auto Supply," and 31 discount
office supply, party supply, book and greeting card stores under the name "The
Paper Cutter." On June 15, 1994 the Company acquired the assets of 26 National
Auto Supply Stores in New York and four Whitlock Auto Supply stores in
Pennsylvania. On July 30, 1994 these acquired stores were being converted into
Wheels Discount Auto Supply stores. The Company also acquired twelve
traditional drug stores via the purchase of the capital stock of Peterson Drug
Company of Western New York, Inc. in July of 1994.
Since the end of the second quarter of the previous fiscal year, the Company has
also opened two Fay's Drug stores, three Wheels Discount Auto Supply stores,
five Paper Cutter stores, and acquired 13 traditional drug stores. During the
same period, the Company closed 2 traditional drug stores and converted three
traditional drug stores to Fay's Drug stores. The Company also closed one
Wheels Discount Auto Supply store and one acquired National Auto Supply Store in
the second quarter of fiscal 1995.
Net earnings for the second quarter of fiscal 1995 were $2,581,000 as compared
to $3,066,000 in the second quarter of the previous year. Fiscal 1994 second
quarter net earnings included an unusual gain of $481,000, after tax, resulting
from the termination of obligations under leases for two of the nine Paper
Cutter stores closed during the first quarter of fiscal 1994. For the first
half of fiscal 1995, earnings before the effect of the accounting change for
postretirement benefits were $4,554,000 compared to $1,969,000 in fiscal 1994.
Included in fiscal 1994 year-to-date earnings are charges, after tax, of
$2,352,000 pertaining to the Paper Cutter closings. Excluding the charges for
the Paper Cutter closings and the change in accounting, net earnings for the
first half of fiscal 1995 increased 5.4% from $4,321,000 in fiscal 1994.
Sales for the second quarter and first half of fiscal 1995 were $252.4 and
$491.4 million, respectively, representing increases of 13.7% and 12.0% over the
same periods a year ago. Sales for comparable stores (those open one year or
more as of July 30, 1994) increased 4.8% for the quarter and 5.2% for the first
half of fiscal 1995. Sales increases are reflective of a 19.7% increase in
total pharmacy sales for the quarter and a 9.7% increase in pharmacy sales from
comparable stores for the quarter. Excluding the effect of closed stores, total
sales for the quarter and first half of fiscal 1995 increased 14.3% and 13.2%,
respectively,
The gross profit rate on sales was 28.52% in the second quarter of fiscal 1994
compared to 29.46% for the same period last year. For the first half of fiscal
1995, the gross profit rate decreased to 28.67% from 29.60% in the previous
year. The decline in gross profit is attributable to continued pressures on
third party pharmacy margins, an increase in third party prescription sales as a
percentage of total pharmacy sales, and a continued decline in the gross profit
rate for the Paper Cutter stores.
8
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FAY'S INCORPORATED AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
Selling, general and administrative expenses, as a percentage of sales, were
24.33% in the second quarter of fiscal 1995 compared to 24.71% for the same
period last year. For the first two quarters, these expenses decreased from
25.16% in fiscal 1994 to 24.56% of sales. These decreases are due in part to
the leveraging of payroll expenditures in connection with sales increases,
continued expense controls, reduced occupancy expenses as a percentage of sales
due also in part to the closure of underperforming locations within the past 12
months.
LIQUIDITY AND CAPITAL RESOURCES
At July 30, 1994, the Company had cash of $2.8 million and total working capital
of $107.1 million. Cash flow from operations totaled $7.4 million and was used
primarily for property and equipment expenditures, the payment of cash
dividends, and reductions in long-term obligations. Fiscal 1995 acquisitions
have been funded primarily by additional long-term borrowings.
The Company continues to maintain a sound financial position and believes that
its operations and capital resources will provide sufficient cash availability
to meet its liquidity needs and to finance planned growth.
9
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FAY'S INCORPORATED AND SUBSIDIARIES
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
(a) The 1994 Annual Meeting of Shareholders was held on May 27, 1994.
(c) Each of the matters voted upon at the Meeting, and the number of
votes cast for, against, or withheld, as well as the number of
abstentions and broker non-votes, as to each matter, including a
separate tabulation with respect to each nominee for office, is
as follows:
(i) Votes cast for nominees:
Tarky Lombardi, Jr. For 17,086,194
Against 224,627
Hyman H. Miller For 17,065,033
Against 245,788
Warren D. Wolfson For 17,110,523
Against 200,298
(ii) Proposal to approve the appointment of Deloitte & Touche to
audit the consolidated financial statements of the Company for
the fiscal year ending January 28, 1995:
For 17,175,516
Against 73,707
Abstain 61,598
Non-vote 0
Item 6. Exhibits and Reports on Form 8-K
(b) Reports on Form 8-K: There were no reports on Form 8-K filed
during the fiscal quarter ended July 30, 1994.
10
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SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FAY'S INCORPORATED
---------------------------------------
(Registrant)
Dated: September 12, 1994 /s/ James F. Poole, Jr.
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James F. Poole, Jr.
Vice President - Finance and
Chief Financial Officer
Dated: September 12, 1994 /s/ Warren D. Wolfson
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Warren D. Wolfson
Senior Vice President
11
