<PAGE>
FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
/X/ Annual Report pursuant to section 13 or 15(d) of the Securities Exchange
Act of 1934
For Fiscal Year Ended January 29, 1994 or
----------------
/ / Transition report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934
Commission File Number 0-5179
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FAY'S INCORPORATED
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(Exact name of registrant as specified in its charter)
State of New York 16-0919350
- ------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
7245 Henry Clay Boulevard, Liverpool, New York 13088
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (315) 451-8000
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Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange on
Title of each class which registered
Common Stock, $.10 par value New York Stock Exchange
- ------------------------------ -------------------------
Securities registered pursuant to section 12(g) of the Act: None
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 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 by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated reference in Part III of this Form 10-K or any amendment
to this Form 10-K. X
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State the aggregate market value of the voting stock held by non-affiliates
of the registrant as of April 20, 1994 $ 89,874,693
<PAGE>
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 April 20, 1994
- ---------------------------- -----------------------------
Common Stock, $.10 par value 20,269,946
DOCUMENTS INCORPORATED BY REFERENCE
List hereunder the following documents if incorporated by reference
and the Part of the Form 10-K (e.g., Part I, Part II, etc.) into which the
document is incorporated: (1) Any annual report to security holders; (2) Any
proxy or information statement; and (3) Any prospectus filed pursuant to Rule
424(b) or (c) under the Securities Act of 1933. The listed documents should be
clearly described for identification purposes.
PART I - None.
PART II - None.
PART III - Item 10. Pages 4, 5 and 14 of the Company's Proxy Statement for
the Annual Meeting of Shareholders to be held May 27,
1994, under "Election of Directors" and "Compliance
with Section 16(a) of the Securities Act of 1934."
- Item 11. Pages 6 through 13 of the Company's Proxy Statement for
the Annual Meeting of Shareholders to be held May 27,
1994, under "Executive Compensation and Other
Information," "Compensation of Directors," "Report of
Compensation Committee on Executive Compensation,"
"Performance Graph Comparison of Cumulative Return for
the Five Years ended January 29, 1994" and
"Compensation Committee Interlocks and Insider
Participation."
- Item 12. Pages 2 and 3 of the Company's Proxy Statement for the
Annual Meeting of Shareholders to be held May 27, 1994,
under "Security Ownership of Certain Beneficial Owners"
and "Security Ownership of Management."
- Item 13. Page 13 of the Company's Proxy Statement for the Annual
Meeting of Shareholders to be held May 27, 1994, under
"Certain Business Relationships."
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PART I
Item 1. BUSINESS.
Fay's Incorporated (the "Company") was incorporated under the laws of
the State of New York on October 20, 1966 as Fay's Drug Company, Inc. The first
Fay's Drug Store was opened in 1958. The Company maintains its executive offices
at 7245 Henry Clay Boulevard, Liverpool, New York. In June 1989, the Company
changed its name to Fay's Incorporated.
The Company's principal business is the operation of a chain of super
drug stores under the name "Fay's Drugs." The Company also operates a chain of
discount automotive parts and supply stores under the name "Wheels Discount Auto
Supply Stores" and a chain of discount office supply, book, party supply and
greeting card stores under the name "The Paper Cutter."
The Company is organized into three retail operating divisions (each
responsible for the marketing, distribution and operations functions of one of
the Company's three retail concepts) and a mail order pharmacy services
division. A corporate support services group provides central support services
to the four divisions.
As of January 29, 1994, the Company's Fay's Drug Store Division was
responsible for the operation of 209 Fay's Drug Stores, of which 188 were
located in Upstate New York, 19 in Pennsylvania, one in Vermont and one in New
Hampshire. The Company's Fay's Drug Store Division is also responsible for the
operation of 51 traditional drug stores and a liquor store. Forty-nine of the
Company's 51 traditional drug stores (which range in size from 864 to 16,653
square feet) were acquired from independent owners. Thirty-nine of the
traditional drug stores are operated under the respective tradenames used by the
previous owners, and 12 are operated under either the tradename Fay's Cornerdrug
or FDC Corner Drug. Forty-three of the Company's traditional drug stores are
located in Upstate New York, six in Pennsylvania and two in Vermont.
During the fiscal year ended January 29, 1994, the Company opened two Fay's
Drug Stores and acquired 17 traditional drug stores. In addition, three
traditional drug store were converted into Fay's Drug Stores. On January 26,
1993, the Company sold 10 Fay's Drug Store in southeastern Pennsylvania for $4.1
million in cash. Since the end of the fiscal year, the Company has closed one
traditional drug store.
The Fay's Drug Store Division also provides pharmacy services to
institutional customers on a contract basis, including nursing homes, adult
homes and prison facilities. Currently under contract are 330 long-term care
facilities housing approximately 21,000 residents and 53 New York State prisons
with over 43,000 inmates. Contract pharmacy services are provided from 87 Fay's
Drug Stores as well as from five dispensing facilities dedicated solely to the
servicing of Fay's contract pharmacy services customers. In February 1994, the
Company acquired two long-term care pharmacy services businesses which, at the
time of acquisition, were servicing 65 nursing and adult homes.
At fiscal year end, the Wheels Discount Auto Supply Store Division was
operating 32 Wheels Discount Auto Supply Stores and The Paper Cutter Division,
29
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Paper Cutter stores. At fiscal year end, all of the Company's Wheels Discount
Auto Supply Stores and Paper Cutter Stores are located in Upstate New York.
During the fiscal year ended January 29, 1994, the Company opened two
Wheels Discount Auto Supply Stores and four Paper Cutter Stores. Since the end
of the fiscal year, the Company has opened three Wheels Discount Auto Supply
Stores, including its first store to be located in the State of Pennsylvania. On
April 14, 1993, the Company closed nine Paper Cutter Stores located in the
Philadelphia metropolitan area (see Note 9 to Consolidated Financial
Statements).
In October 1992 the Company established a mail order pharmacy services
division under the name "PostScript." PostScript was formed to market mail order
prescription services to prescription benefit programs. During May 1993
PostScript began filling prescriptions from its 5,000 square foot dispensing
facility located in Aliquippa, Pennsylvania.
The Company acquired the common stock of Carls Drug Co., Inc.
("Carls") from Victory Markets Inc. on April 29, 1991. Carls operated a chain of
48 drug stores, of which five have been closed and one sold since the
acquisition. Since July 31, 1991, the Company has operated 43 of the former
Carls Drug Stores as Fay's Drug Stores. On May 1, 1993, Carls was merged into
the Company.
The Company's business is the retail sale of various products and is
not fractionalized into more than one industry segment.
Major classifications of products sold by the Company's drug stores
include traditional drug store items (such as prescription and proprietary
drugs, health and beauty aids and tobacco products), consumer hard goods (such
as small appliances, electronics, automotive supplies, housewares and hardware)
and miscellaneous merchandise (such as food and beverage items, seasonal
merchandise, toys, photo-finishing and greeting cards). The following table sets
forth the approximate percentage of drug store revenues attributable to each of
these major categories for each of the last three fiscal years:
<TABLE>
<CAPTION>
Percentage of Revenues
Year Ended
Categories 1/29/94 1/30/93 1/25/92
- ---------- ------- ------- -------
<S> <C> <C> <C>
Traditional Drug Store Items:
Prescription and Proprietary Drugs 48.7 47.3 44.1
Health and Beauty Aids 10.6 11.3 11.8
Tobacco 6.6 7.0 7.5
Consumer Hard Goods 7.4 7.8 8.6
Miscellaneous Merchandise 26.7 26.6 28.0
</TABLE>
All but one Fay's Drug Store contain a prescription drug department.
Each carries a broad range of health related products and general consumer
merchandise. In addition to selling a full line of nationally advertised
products, the Company markets over 750 products under its own "Fay's" brand
label.
Each of the Company's pharmacies is equipped with a computerized
pharmacy system which the Company promotes under the tradename "AccuFays." The
AccuFays
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pharmacy system enables the Company to reduce the paperwork normally involved in
third party programs (governmental and private prescription drug plans) and
significantly reduces the time it takes to receive payment from these programs.
Currently, 169 of the Company's Fay's Drug Stores are equipped with
point-of-sale optical scanning cash register systems. The Company intends to
have such equipment installed in all of its Fay's Drug Stores by the end of
fiscal 1995. These systems, by accurately tracking item movement, assist in
buying, marketing and merchandising decisions, as well as reducing the time
customers spend at the checkout counter.
Merchandise sold in the Company's stores is purchased from a large
number of manufacturers, distributors and wholesalers. The Company did not
experience any difficulty during the fiscal year ended January 29, 1994 in
obtaining needed merchandise. No one supplier accounted for a significant
portion of the Company's purchases. Since the Company sells to the general
public, it is not dependent upon a single or few customers.
Merchandise for the Company's stores is primarily supplied through the
Company's two distribution centers located in Liverpool, New York. Additional
merchandise is distributed directly to the stores by manufacturers,
distributors, publishers and jobbers.
The Company has numerous trademarks and service marks registered with
the U.S. Patent and Trademark Office, including: Fay's, Fay's Drugs, The Paper
Cutter, Wheels Discount Auto Supply, PostScript, AccuFays and Senior Savers.
Said trademarks and service marks expire between the years 1999 and 2006. The
Company believes that such trademarks and service marks are important to the
conduct of its operations. The Company also maintains appropriate licensing for
its pharmacy operations, licenses for the sale of beer in its drugstores (where
such sales are allowed by law), as well as other retail business licenses. The
Company holds a 10 year franchise granted by Ben Franklin Crafts, Inc. to
operate a Ben Franklin Crafts Store within its Fay's Drug Store located in
Watertown, New York and the right to open an additional Ben Franklin Crafts
Store anywhere within Jefferson County, St. Lawrence County or Franklin County,
New York prior to April 1, 1997. The Company does not consider such franchises
materially important to the conduct of its business.
The Company's business is seasonal, with the highest revenues and
income normally generated during the Christmas season and the lowest in the
early months of the calendar year. For the three fiscal years ended January 29,
1994, January 30, 1993 and January 25, 1992, the fourth quarter accounted for
approximately 28%, 29% and 29%, respectively, of the Company's revenues, and
58%, 47% and 52%, respectively, of the Company's earnings before accounting
changes.
Working capital used to acquire merchandise inventory for resale and
to equip and fixture new stores is primarily internally generated, but may be
augmented by short term borrowings from several banks where the Company has
lines of credit.
The Company faces competition in all of its marketing areas. Due to
the broad merchandise mix in each Fay's Drug Store, the Company's super drug
store business competes with national chain drug stores, independent drug
stores, supermarkets, discount department stores and traditional department
stores. The main source of competition for the Company's Wheels Discount Auto
Supply and Paper
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Cutter Stores are retailers with specialized product lines similar to those
carried by the stores, as well as discount department stores and chain drug
stores. Many of the businesses with which the Company competes are considerably
larger, have been in business longer or have substantially greater financial
resources, marketing capabilities and experience than the Company. However, due
to factors such as price, product selection, merchandising, advertising,
customer service, convenience and number of store locations, the Company
believes that it is competitive in its major market areas.
During fiscal 1994, compliance with Federal, state and local
provisions which have been enacted or adopted regulating the discharge of
materials into the environment, or otherwise relating to the protection of the
environment, did not have a material affect upon capital expenditures, earnings
or the Company's competitive position. In this regard, there are no material
capital expenditures planned for environmental control facilities.
As of January 29, 1994, the Company employed approximately 9,000
persons, consisting of full and part-time store, office, distribution and
pharmacy personnel.
Item 2. PROPERTIES.
The majority of the Company's Fay's Drug Stores range in size from
12,000 to 16,000 square feet. The smallest Fay's Drug Store is 6,500 square feet
and the largest 58,450 square feet. The current Fay's Drug Store prototype is
11,840 square feet. The Company's Wheels Discount Auto Supply Stores range in
size from 6,609 square feet to 19,283 square feet. The current Wheels Discount
Auto Supply Store prototype is 8,050 square feet. The Company's Paper Cutter
Stores range in size from 8,316 square feet to 19,283 square feet. The current
Paper Cutter prototype is 10,800 square feet.
All of the Company's store locations are leased rather than owned by
the Company. The Company's policy of leasing store locations is designed to
permit it to retain capital for use in its merchandising operation. The
Company's leases provide for fixed rentals and, in many instances, additional
rentals based on store sales. The store leases have terms expiring between 1994
and 2014 and typically include renewal options. See Note 5 to Consolidated
Financial Statements. As of January 29, 1994, five of the Company's store
locations were subject to ground leases.
The stores now in operation or planned are, or will be, primarily
located in suburban shopping centers with adjacent paved and lighted parking
facilities. All stores are air-conditioned and have modern fixtures and
equipment. In seeking new locations, the Company is dependent on the activities
of real estate developers as to the availability of sites, choice of locations
and timing of openings. This, in turn, is heavily dependent upon the ability of
the real estate developer to obtain financing. There can be no assurance that
leases for any new locations will be signed or that, once a lease is signed, a
store will be constructed by the developer.
The Company's main distribution facility, located in Liverpool, New
York, contains approximately 580,000 square feet and is devoted almost
exclusively to servicing the Company's Fay's Drug Store Division. The Company's
executive offices, which house both central corporate services personnel and
Fay's Drug Store Division personnel, contains approximately 45,000 square feet
and is located adjacent to the
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Company's main distribution center. The executive office/main distribution
center complex is owned in fee by the Company.
The Company's Wheels Discount Auto Supply and Paper Cutter stores are
serviced from a 172,000 square foot office/distribution center complex located
on a 27 3/4 acre parcel approximately two miles from the Company's executive
office/main distribution center. This complex, which is owned in fee, is
comprised of a 150,000 square foot distribution center and 22,000 square feet of
office space.
The Company leases, with an option to purchase, a 20,000 square foot
office building located in Liverpool, New York. Including renewal periods, the
lease expires in the year 2000. The option to purchase is exercisable at any
time during the lease term. This facility houses certain corporate services
personnel.
The Company's owns, in fee, an office/distribution facility in Rome,
New York which contains approximately 116,000 square feet. Prior to the
acquisition of Carls Drug Co., Inc. by the Company, this facility served as
Carls' distribution center and administrative offices. It was closed subsequent
to acquisition of Carls by the Company and is presently vacant. The Company is
currently attempting to sell or lease this facility.
Loan agreements with an institutional lender contain a restriction on
the amount of fixed charges (which includes minimum rent) paid by the Company in
any fiscal year. During the fiscal year ended January 29, 1994, the Company was
in compliance with this restriction.
The Company also owns 33 1/2 acres of vacant land located adjacent to
the parcel of land on which Company's executive office/main distribution center
complex is situated.
Both the Company's main executive office/main distribution center
complex and the office/distribution center complex servicing the Company's
Wheels Discount Auto Supply and Paper Cutter Divisions are pledged as security
for a mortgage loan. See Note 3 to the Consolidated Financial Statements.
Item 3. LEGAL PROCEEDINGS.
Other than routine litigation incidental to the business, there are no
material pending legal proceedings to which the Company is a party or of which
any of its property is subject.
Item 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS.
No matters were submitted during the fourth quarter of the fiscal year
to a vote of security holders.
PART II
Item 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
The Company's Common Stock, $.10 par value, is traded on The New York
Stock Exchange. As of April 20, 1994, there were 9,174 holders of record of the
Company's Common Stock.
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The price range of the Company's Common Stock and the dividends paid
in respect of such Common Stock during the last two fiscal years is shown in the
table below:
<TABLE>
<CAPTION>
Cash Dividend
High Low Per Share
Fiscal 1994 ----- ----- -------------
<S> <C> <C> <C>
Fourth Quarter 7 1/4 6 3/8 $ .05
Third Quarter 7 1/2 6 1/2 $ .05
Second Quarter 7 6 1/8 $ .05
First Quarter 7 1/8 6 1/4 $ .05
<CAPTION>
Cash Dividend
Fiscal 1993 High Low Per Share
Fiscal 1993 ----- ----- -------------
<S> <C> <C> <C>
Fourth Quarter 8 1/8 7 $ .05
Third Quarter 8 3/8 7 1/4 $ .05
Second Quarter 8 1/8 7 3/8 $ .05
First Quarter 9 1/4 7 1/4 $ .04
</TABLE>
Under certain long-term debt agreements, there are restrictions on the
Company's ability to pay cash dividends. Under the most restrictive terms, the
Company may declare and pay dividends of up to $17,470,000. See Note 3 to the
Consolidated Financial Statements.
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<PAGE>
Item 5. Selected Financial Data
FIVE YEAR FINANCIAL SUMMARY
<TABLE>
<CAPTION>
(In thousands of dollars, except per share data)
1994 1993 1992 1991 1990
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Operating Results:
Net sales $919,719 $902,643 $836,157 $672,638 $574,061
Cost and expenses:
Cost of merchandise sold 649,078 636,286 590,115 469,331 400,756
Selling, general and administrative expenses 225,837 222,968 208,145 166,629 142,229
Depreciation and amortization expenses 16,180 15,309 14,429 11,105 10,052
Interest expense 7,893 8,383 7,853 4,959 5,122
Unusual charges 3,471 -- 1,064 -- --
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Total cost and expenses 902,459 882,946 821,606 652,024 558,159
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Earnings before income taxes 17,260 19,697 14,551 20,614 15,902
Taxes on income 7,231 8,466 5,898 8,267 5,539
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Earnings before extraordinary charge 10,029 11,231 8,653 12,347 10,363
Extraordinary charge, net of tax (a) -- -- -- (1,238) --
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Earnings before cumulative effect of accounting change 10,029 11,231 8,653 11,109 10,363
Cumulative effect of accounting change, net of tax (b) (4,806) -- -- -- --
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Net earnings $ 5,223 $ 11,231 $ 8,653 $ 11,109 $ 10,363
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Per Share Data (c):
Earnings per common share:
Earnings before extraordinary charge $ .50 $.56 $.44 $ .64 $.54
Extraordinary charge -- -- -- (.06) --
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Earnings before cumulative effect of accounting change .50 .56 .44 .58 .54
Cumulative effect of accounting change (.24) -- -- -- --
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Net earnings $ .26 $.56 $.44 $ .58 $.54
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Cash dividends per common share $ .20 $.19 $.16 $ .16 $.16
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Financial Position:
Current assets $194,779 $174,054 $173,752 $138,681 $122,643
Current liabilities 104,252 83,830 83,855 75,017 61,346
Working capital 90,527 90,224 89,897 63,664 61,297
Total assets 279,714 261,150 263,683 209,285 190,564
Long-term debt 65,307 73,715 87,451 48,753 52,594
Obligation under leases 2,106 2,825 3,709 3,127 3,526
Stockholders' equity 96,838 94,026 84,851 77,247 67,779
Return on average stockholders' equity 5.5% 12.6% 10.7% 15.3% 16.4%
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Stores in Operation at Year End 321 308 313 249 215
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<FN>
(a) The extraordinary charge was the result of the Company's repurchase of $27.3 million of its 13.75% subordinated debentures
during fiscal 1991.
(b) In fiscal 1994 the Company changed its method of accounting for postretirement benefits to conform with Statement of Financial
Accounting Standards No. 106.
(c) Per share data has been adjusted to reflect a five-for-four stock split on June 19, 1992 and a 10% stock dividend on July 3,
1989.
</TABLE>
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF OPERATIONS AND FINANCIAL
CONDITION
SALES AND GROSS PROFIT
Net sales for fiscal 1994 were $919.7 million compared to $902.6 million in
fiscal 1993, which was a 53-week year. Adjusting fiscal 1993 for the additional
week, net sales increased 3.5% in fiscal 1994. Net sales in fiscal 1993
increased 8% over fiscal 1992 net sales of $836.2 million. Adjusted for the
additional week, fiscal 1993 net sales increased 6.2% over the prior year.
Fiscal 1992 net sales represented a 24.3% increase over fiscal 1991 sales of
$672.6 million.
In fiscal 1994 the Company opened or acquired 25 stores, closed eleven stores,
including nine Paper Cutter stores located in the Philadelphia metropolitan
area, and sold one store. Sales growth in 1993 and 1992 was, in part, supported
by the April 1991 acquisition of Carls Drug Co., Inc. which resulted in the
addition of 43 stores. Adjusted for the additional week in fiscal 1993, sales
for comparable stores (those open one year or more as of the end of the fiscal
year), increased 3.5% in fiscal 1994, compared to increases of .8% in fiscal
1993 and 5% in fiscal 1992. Prescription sales increases continue to outpace
total sales increases, due to volume increases and inflation. Adjusted for the
additional week in fiscal 1993, total prescription sales increased 7.1% in
fiscal 1994, 16.8% in fiscal 1993, and 35% in fiscal 1992 and, on a comparable
store basis, increased 6.2% in 1994, 8.3% in 1993 and 12.6% in 1992.
The gross profit rate on net sales was 29.43% in fiscal 1994, 29.51% in fiscal
1993, and 29.43% in fiscal 1992. Gross margins declined due in part to increases
in lower margin third party pharmacy sales. Third party pharmacy sales were
66.4% of total pharmacy sales in fiscal 1994 compared to 61.7% in fiscal year
1993. The Company also experienced deflation in its general merchandise
categories which resulted in a reduction of its LIFO inventory reserve of $.7
million which largely offset declines in pharmacy gross margins and increased
promotional sales.
The effective LIFO inflation rates for fiscal 1993 and 1992 were 1.1% and 3.0%,
respectively, and resulted in pretax charges of $1.4 million and $2.8 million in
those fiscal years.
EXPENSES
Selling, general and administrative expenses, as a percentage of sales, were
24.55% in fiscal 1994, compared to 24.70% and 24.89% in fiscal 1993 and 1992,
respectively. The reduction in fiscal 1994 was due primarily to the closure of
nine Paper Cutter stores in the first quarter of fiscal 1994 and the sale of ten
drug stores at the end of fiscal 1993, as well as the result of ongoing efforts
to control expenses. These reductions were partially offset by expenses incurred
by the Company's PostScript Mail Order Division, which began operations in
fiscal 1994. The reduction in fiscal 1993 expenses was principally due to
expenses incurred in fiscal 1992 in connection with the conversion and
integration of the former Carls Drug Stores acquired in that fiscal year.
Payroll and occupancy costs are major expenses of the Company, particularly in
the operation of its retail locations. Payroll costs for the Company's stores,
as a percentage of sales, were 11.3% in fiscal 1994 compared to 11.2% and 11.1%
in fiscal 1993 and 1992, respectively. These increases were reflective of wage
inflation, the opening and remodeling of new and existing stores, and increases
in benefit costs. Occupancy costs (including rent, common area maintenance and
real estate taxes) were 3.5% of sales in fiscal 1994, 3.8% in fiscal 1993, and
3.6% in fiscal 1992. The reduction achieved in fiscal 1994 is primarily
attributable to the sale or closure of under-performing locations.
Administrative and distribution costs,
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as a percentage of sales, increased in fiscal 1994 to 5.2% of sales, as compared
to 5.1% in both fiscal 1993 and 1992.
Net interest expense was $7.9 million in fiscal 1994, $8.4 million in fiscal
1993 and $7.9 million in fiscal 1992. The decrease in fiscal 1994 was due in
part to lower long-term debt levels offset partially by increased short-term
borrowings.
The Company's effective tax rates were 41.9% in fiscal 1994, 43% in fiscal 1993,
and 40.5% in fiscal 1992. The fiscal 1994 effective rate includes a 1% federal
tax rate increase resulting from the Omnibus Budget Reconciliation Act passed in
1993. There was no other significant impact to the Company from this Act. The
increase in fiscal 1993 is due to the settlement of prior year tax audits.
EARNINGS
Net earnings for fiscal 1994 were $5.2 million which were net of a charge of
$4.8 million, net of tax, due to the adoption of a new accounting standard for
postretirement benefits, and a charge of $2 million, net of tax, pertaining to
the closing of nine Paper Cutter stores in fiscal 1994. Excluding these
nonrecurring items, net earnings were $12 million in fiscal 1994. Net earnings
for fiscal 1993 increased to $11.2 million compared to $8.7 million in fiscal
1992. The improvement in fiscal 1994 and 1993 earnings resulted from sales
increases combined with proportionally lower operating costs. In addition,
fiscal 1992 earnings were affected by a $1.1 million pretax charge for the
settlement of a lawsuit, and pretax expenses of $2.5 million associated with the
assimilation of the former Carls Drug Stores.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash requirements arise primarily from the need to finance the
opening and equipping of new stores, the purchase of inventory, debt service,
and the payment of dividends. Management believes that the Company is in sound
financial condition, and that its operations and capital resources will provide
sufficient cash availability to meet its liquidity needs and to finance planned
growth.
At January 29, 1994, the Company had $1 million in cash and short-term
investments, compared to $.9 million at January 30, 1993. Cash flow from
operating activities was $6.1, $10.2, and $24.0 million in fiscal 1994, 1993 and
1992, respectively. Cash flow was further supplemented in fiscal 1992 by the
proceeds of an additional $40 million in debt, most of which was used to finance
the $35.5 million acquisition of Carls Drug Co., Inc. and in fiscal 1994 short-
term borrowings of $14.6 million.
Capital expenditures represent a major investment of cash and totaled $9.5
million in fiscal 1994, $7.0 million in fiscal 1993, and $14.6 million in 1992.
These expenditures are principally for improvements to new and existing leased
store locations, store equipment and fixtures, and distribution and office
facilities. The Company anticipates capital expenditures of approximately $20
million in fiscal 1995. The Company generally enters into long-term lease
arrangements for new stores. (For information regarding future minimum rental
payments, refer to Note 5 of the Notes to Consolidated Financial Statements.)
The Company is required to adopt Statement of Financial Accounting Standards No.
112, Employers' Accounting for Postemployment Benefits, in fiscal 1995. The
effect of this Statement on fiscal 1995 net earnings is expected to be
immaterial.
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Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The financial statements required by this item are included in this
Report on pages F-1 through F-11. The supplementary financial statement
schedules required by this item are included in this Report on pages S-1 through
S-4.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Information relating to directors of the Company is incorporated
herein by reference to pages 4, 5 and 14 of the Company's Proxy Statement for
the Annual Meeting of Shareholders to be held on May 27, 1994 (see "Election of
Directors" and "Compliance with Section 16(a) of the Securities Act of 1934.").
The following lists the names and ages of all executive officers of
the Company, all persons chosen to become executive officers, all positions and
offices within the Company held by such persons and the business experience
during the past five years of such persons. Unless otherwise noted, each of the
persons listed below have served in various executive or managerial capacities
with the Company for the past five years. All officers were elected or
re-elected to their present positions for terms ending May 26, 1994 and until
their respective successors are elected and qualified.
<TABLE>
<CAPTION>
Name Age Position and Business Experience
- ------------------------ --- -------------------------------------------
<S> <C> <C>
Henry A. Panasci, Jr. 65 Chairman of the Board and Chief Executive
Officer; also served as President and Chief
Operating Officer of the Company between
August 7, 1992 and March 26, 1993
David H. Panasci 35 President and Chief Operating Officer since
March 26, 1993; served as Executive Vice
President of the Company between July 24,
1992 and March 26, 1993; previously
President - The Paper Cutter Division and
Vice President - Corporate Development of
the Company
John A. Kogut 51 President - Fay's Drug Store Division since
1989; previously Senior Vice President -
Operations of the Company
Gale T. Mitchell 44 President - Wheels Discount Auto Supply
Division of the Company since 1991;
previously Vice President - General Manager
of the Wheels Discount Auto Supply Division
and Vice President - Merchandise
Presentation and Store Layout of the
Company
Page 12
<PAGE>
John K. Whitehead 47 President - The Paper Cutter Division of
the Company since 1992; previously Director
of Marketing of The Paper Cutter Division
of the Company and President of the McKids
Specialty Store Division of Sears, Roebuck
& Company
David B. Eilerman 46 Vice President and General Manager -
PostScript Mail Order Services Division of
the Company since 1992; previously Regional
Vice President for America's Pharmacy, a
subsidiary of Systemed, Inc.
Warren D. Wolfson 45 Senior Vice President, General Counsel and
Secretary since 1989; previously Vice
President, General Counsel and Secretary of
the Company
James F. Poole, Jr. 39 Vice President - Finance and Chief
Financial Officer since 1989; previously
Vice President - Planning and Treasurer of
the Company
</TABLE>
Item 11. EXECUTIVE COMPENSATION.
Information relating to executive compensation is incorporated by
reference to pages 6 through 9 and page 13 of the Company's Proxy Statement for
the Annual Meeting of Shareholders to be held May 27, 1994 (see "Executive
Compensation and Other Information," "Report of Compensation Committee on
Executive Compensation," "Performance Graph Comparison for the Five Years Ended
January 29, 1994" and "Compensation Committee Interlocks and Insider
Participation").
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
Information relating to the security holdings of more than five
percent holders and directors and executive officers of the Company is
incorporated herein by reference to pages 2 and 3 of the Company's Proxy
Statement for the Annual Meeting of Shareholders to be held May 27, 1994 (see
"Security Ownership of Certain Beneficial Owners" and "Security Ownership of
Management").
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Information relating to certain transactions with directors and
officers of the Company is incorporated by reference to page 13 of the Company's
Proxy Statement for the Annual Meeting of Shareholders to be held May 27, 1994
(see "Certain Business Relationships").
Page 13
<PAGE>
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) The following documents are filed as part of this report:
<TABLE>
<CAPTION>
1. Consolidated Financial Statements: Page No.
--------
<S> <C>
Independent Auditors' Report . . . . . . . . . . . . F-1
Consolidated Balance Sheets as of January 29, 1994 and
January 30, 1993 . . . . . . . . . . . . . . . . . . F-2
Consolidated Statements of Net Earnings for each of
the three fiscal years in the period ended
January 29, 1994 . . . . . . . . . . . . . . . . . . F-3
Consolidated Statements of Stockholders' Equity for
each of the three fiscal years in the period ended
January 29, 1994 . . . . . . . . . . . . . . . . . . F-4
Consolidated Statements of Cash Flows for each of the
three fiscal years in the period ended
January 29, 1994 . . . . . . . . . . . . . . . . . . F-5
Notes to Consolidated Financial Statements . . . . . F-6 - F-11
Selected Quarterly Financial Data . . . . . . . . . . F-11
<CAPTION>
2. Consolidated Financial Statement Schedules:
Page No.
--------
<S> <C>
Schedule V -- Property and Equipment S-1
Schedule VI -- Accumulated Depreciation and Amortization of
Property and Equipment S-2
Schedule IX -- Short-Term Borrowings S-3
Schedule X -- Supplementary Income Statement Information S-4
</TABLE>
Schedules other than those listed above are omitted because they are
not applicable or not required.
Individual financial statements of subsidiaries of the Company have
been omitted as the Company is primarily an operating company and all
subsidiaries included in the consolidated financial statements filed, in the
aggregate, do not have minority equity interests and/or indebtedness to any
person other than the Company or its consolidated subsidiaries in amounts which,
together (excepting indebtedness incurred in the ordinary course of business
which is not overdue and matures within one year from the date of its creation,
whether or not evidenced by securities, and indebtedness of subsidiaries which
is collateralized by the Company by guarantee, pledge, assignment or otherwise)
exceed 5 percent of the total assets as shown by the most recent year-end
consolidated balance sheet. There are no unconsolidated subsidiaries or 50% or
less owned persons accounted for by the equity method.
Page 14
<PAGE>
(b) No reports on Form 8-K were filed during the fourth quarter of
fiscal 1994.
(c) Exhibits (numbered in accordance with Item 601 of Regulation
S-K).
(3) ARTICLES OF INCORPORATION AND BY-LAWS.
(3.1) Restated Certificate of Incorporation filed
November 9, 1990 with the Department of State of the State of New
York is incorporated by reference to Annual Report on Form 10-K
for the fiscal year ended January 26, 1991.
(3.2) By-Laws of the Company, amended and restated on
July 24, 1992, is incorporated by reference to Annual Report on
Form 10-K for the fiscal year ended January 30, 1993.
(4) INSTRUMENTS DEFINING THE RIGHTS OF SECURITY HOLDERS,
INCLUDING INDENTURES.
(4.1) Restatement of Note Purchase Agreement, dated as
of December 15, 1982, with Massachusetts Mutual Life Insurance
Company, is incorporated by reference to Annual Report on Form
10-K for the fiscal year ended January 31, 1986.
(4.2) Restatement of Note Purchase Agreement, dated as
of January 15, 1983, with Massachusetts Mutual Life Insurance
Company and MassMutual Corporate Investors, is incorporated by
reference to Annual Report on Form 10-K for the fiscal year ended
January 31, 1986.
(4.3) Note Agreement dated as of November 15, 1989 with
Massachusetts Mutual Life Insurance Company and MassMutual
Participating Investors is incorporated by reference to Annual
Report on Form 10-K for the fiscal year ended January 27, 1990.
(4.4) Note Agreement dated as of July 30, 1990 with
Nationwide Life Insurance Company and Employers Life Insurance
Company of Wausau is incorporated by reference to Annual Report
on Form 10-K for the fiscal year ended January 26, 1991.
(4.5) Loan Agreement dated as of April 29, 1991 with
Chemical Bank, as Agent, and Chemical Bank is incorporated by
reference to Quarterly Report on Form 10-Q for the quarter ended
July 27, 1991.
(4.6) Loan Agreement dated as of August 15, 1991 with
Mutual of Omaha Insurance Company, United of Omaha Life Insurance
Company, American Republic Insurance Company, Companion Life
Insurance Company, The Canada Life Assurance Company, General
American Life Insurance Company and The Manufacturers Life
Insurance Company is incorporated by reference to Quarterly
Report on Form 10-Q for the quarter ended October 26, 1991.
Page 15
<PAGE>
(10) MATERIAL CONTRACTS.
(10.1) 1982 Stock Option Plan is incorporated by
reference to Exhibit A to Proxy Statement dated April 17, 1987.
(10.2) Dividend Reinvestment and Stock Purchase Plan of
the Company is incorporated by reference to Appendix B to Proxy
Statement dated April 30, 1982.
(10.3) 1990 Fay's Incorporated Stock Option Plan for
Non-Employee Directors is incorporated by reference to Exhibit A
to Proxy Statement dated April 19, 1990.
(10.4) Stock Purchase Agreement dated as of April 29,
1991 by and among Victory Markets Inc., Galoz Investments B.V.
and Fay's Incorporated is incorporated by reference to Current
Report on Form 8-K dated May 10, 1991.
(10.5) The Fay's Incorporated Key Management Incentive
Plan accompanies this Report.
(10.6) The form of Agreement providing for the employment
by the Company of David H. Panasci, John A. Kogut, Warren D.
Wolfson and James F. Poole, Jr. accompanies this Report.
(21) SUBSIDIARIES OF REGISTRANT.
The Company's subsidiaries, all of which are wholly owned,
considered in the aggregate as a single subsidiary, would not
constitute a significant subsidiary as of January 29, 1994. Carls
Drug Co., Inc. was merged into the Company on May 1, 1993.
Page 16
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
FAY'S INCORPORATED
By: /S/ David H. Panasci
---------------------------------
David H. Panasci
President and Chief Operating
Officer
Dated: April 28, 1994
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
/S/ Henry A. Panasci, Jr. /S/ Robert H. Altman
- ------------------------------------ -------------------------------------
Henry A. Panasci, Jr., Chairman of Robert H. Altman, Director
the Board, Chief Executive Officer
and Director
/S/ John D. Burke
-------------------------------------
/S/ James F. Poole, Jr. John D. Burke, Director
- ------------------------------------
James F. Poole, Jr., Vice President -
Finance and Chief Financial Officer
-------------------------------------
Robert J. Bennett, Director
/S/ John A. Kogut
-------------------------------------
John A. Kogut, Director
/S/ Tarky Lombardi, Jr.
-------------------------------------
Tarky Lombardi, Jr., Director
/S/ Hyman M. Miller
-------------------------------------
Hyman M. Miller, Director
Page 17
<PAGE>
Gary L. Moreau, Director
-------------------------------------
/S/ David H. Panasci
-------------------------------------
David H. Panasci, Director
-------------------------------------
John Saril, Director
/S/ Warren D. Wolfson
-------------------------------------
Warren D. Wolfson, Director
Dated: April 28, 1994
Page 18
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders
of Fay's Incorporated
Liverpool, New York
We have audited the accompanying consolidated balance sheets of Fay's
Incorporated and subsidiaries of January 29, 1994 and January 30, 1993, and the
related consolidated statements of net earnings, stockholders' equity, and cash
flows for each of the three fiscal years in the period ended January 29, 1994.
Our audits also included the consolidated financial statement schedules listed
in the Index at Item 14(a)2. These financial statements and financial statement
schedules are the responsibility of the Company's management. Our responsibility
is to express an opinion on these financial statements and financial statement
schedules based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Fay's Incorporated and subsidiaries
at January 29, 1994 and January 30, 1993, and the results of their operations
and their cash flows for each of the three fiscal years in the period ended
January 29, 1994 in conformity with generally accepted accounting principles.
Also, in our opinion, such consolidated financial statement schedules, when
considered in relation to the basic consolidated financial statements taken as a
whole, present fairly in all material respects the information set forth herein.
As discussed in the notes to the consolidated financial statements, in fiscal
1994 the Company changed its method of accounting for postretirement benefits
other than pensions to conform with Statement of Financial Accounting Standards
No. 106 and also changed its method of accounting for income taxes to conform
with Statement of Financial Accounting Standards No. 109.
/s/ DELOITTE & TOUCHE
Rochester, New York
March 8, 1994
F-1
<PAGE>
Fay's Incorporated and Subsidiaries
CONSOLIDATED BALANCE SHEETS
January 29, 1994 and January 30, 1993
<TABLE>
<CAPTION>
(In thousands of dollars)
-------------------------
1994 1993
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Current Assets:
Cash, including temporary investments of $53 at January 30, 1993 $ 1,006 $ 917
Accounts receivable 32,066 27,017
Merchandise inventories 153,627 137,896
Prepaid expenses 8,080 8,224
- --------------------------------------------------------------------------------------------------------------------
Total Current Assets 194,779 174,054
Property and Equipment (Notes 3 and 5):
Land 3,837 3,768
Buildings 29,807 29,769
Leasehold improvements 32,281 30,082
Furniture, fixtures and equipment 95,155 88,138
Property under capital leases 12,473 12,617
- --------------------------------------------------------------------------------------------------------------------
173,553 164,374
Less accumulated depreciation and amortization 106,310 93,388
- --------------------------------------------------------------------------------------------------------------------
67,243 70,986
Intangible and Other Assets, less accumulated amortization
of $11,280 in 1994 and $8,373 in 1993 (Note 4) 17,158 16,110
Deferred Income Taxes (Note 4) 534 --
- --------------------------------------------------------------------------------------------------------------------
Total Assets $279,714 $261,150
- --------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------
Current Liabilities:
Notes payable (Note 2) $ 14,605 $ --
Accounts payable, trade 54,890 56,096
Accrued payroll and related taxes 8,102 7,519
Other accrued expenses 15,901 14,145
Federal and state income taxes payable 1,758 74
Deferred income taxes (Note 4) -- 1,376
Current portion of long-term debt and obligation under leases 8,996 4,620
- --------------------------------------------------------------------------------------------------------------------
Total Current Liabilities 104,252 83,830
Long-Term Debt (Note 3) 65,307 73,715
Obligation Under Leases (Note 5) 2,106 2,825
Deferred Gain and Other Liabilities (Note 5) 3,585 3,281
Deferred Income Taxes (Note 4) -- 3,473
Accrued Postretirement Benefit Obligation (Note 7) 7,626 --
Commitments (Note 5)
Stockholders' Equity (Notes 3 and 8):
Preferred stock, par value $1 per share:
Authorized, 5,000,000 shares
Issued and outstanding, no shares -- --
Common stock, par value $.10 per share:
Authorized, 30,000,000 shares
Issued, 20,270,092 and 20,000,539 shares, respectively 2,027 2,000
Additional paid-in capital 59,515 57,954
Retained earnings 35,413 34,203
Less cost of common stock held in treasury (117) (131)
- --------------------------------------------------------------------------------------------------------------------
96,838 94,026
- --------------------------------------------------------------------------------------------------------------------
Total Liabilities and Stockholders' Equity $279,714 $261,150
- --------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Consolidated Financial Statements.
F-2
<PAGE>
Fay's Incorporated and Subsidiaries
CONSOLIDATED STATEMENTS OF NET EARNINGS
Years ended January 29, 1994, January 30, 1993 and January 25, 1992
<TABLE>
<CAPTION>
(In thousands of dollars, except per share data)
--------------------------------------------------
1994 1993 1992
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net sales $919,719 $902,643 $836,157
Cost and expenses:
Cost of merchandise sold 649,078 636,286 590,115
Selling, general and administrative expenses 225,837 222,968 208,145
Depreciation and amortization expenses 16,180 15,309 14,429
Interest expense 7,893 8,383 7,853
Unusual charges (Note 9) 3,471 -- 1,064
- ---------------------------------------------------------------------------------------------------------------------
Total cost and expenses 902,459 882,946 821,606
- ---------------------------------------------------------------------------------------------------------------------
Earnings before income taxes 17,260 19,697 14,551
Taxes on income (Note 4) 7,231 8,466 5,898
- ---------------------------------------------------------------------------------------------------------------------
Earnings before cumulative effect of accounting change 10,029 11,231 8,653
Cumulative effect of accounting change, net of tax (Note 7) (4,806) -- --
- ---------------------------------------------------------------------------------------------------------------------
Net earnings $ 5,223 $ 11,231 $ 8,653
- ---------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------
Earnings per share:
Earnings before cumulative effect of accounting change $ .50 $.56 $.44
Cumulative effect of accounting change (.24) -- --
- ---------------------------------------------------------------------------------------------------------------------
Net earnings $ .26 $.56 $.44
- ---------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Consolidated Financial Statements.
F-3
<PAGE>
Fay's Incorporated and Subsidiaries
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years ended January 29, 1994, January 30, 1993 and January 25, 1992
<TABLE>
<CAPTION>
(In thousands of dollars)
--------------------------------------------------------
Common Additional
Stock $.10 Paid-In Retained Treasury
Par Value Capital Earnings Stock
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance January 26, 1991 $1,547 $54,637 $21,206 $(143)
Net earnings for the year 8,653
Cash dividends paid ($.16 per share) (3,101)
Exercise of stock options 10 586
Issuance of stock pursuant to conversion of 10% convertible
note (76,452 shares) 8 492
Tax benefit from exercise and early disposition of stock options 35
Sale of stock under stock purchase plan 13 908
- -----------------------------------------------------------------------------------------------------------------------------------
Balance January 25, 1992 1,578 56,658 26,758 (143)
Net earnings for the year 11,231
Cash dividends paid ($.19 per share) (3,769)
Exercise of stock options 2 109
Issuance of stock pursuant to 5 for 4 stock split (3,944,849 shares) 395 (394) (1)
Issuance of stock pursuant to conversion of 10% convertible
note (95,602 shares) 10 490
Issuance of treasury stock for employee service awards 4 (17) 13
Tax benefit from exercise and early disposition of stock options 67
Sale of stock under stock purchase plan 15 1,020
- -----------------------------------------------------------------------------------------------------------------------------------
Balance January 30, 1993 2,000 57,954 34,203 (131)
Net earnings for the year 5,223
Cash dividends paid ($.20 per share) (3,998)
Exercise of stock options 2 113
Issuance of stock pursuant to conversion of 10% convertible
note (95,602 shares) 10 490
Issuance of treasury stock for employee service awards 1 (15) 14
Tax benefit from exercise and early disposition of stock options 24
Sale of stock under stock purchase plan 15 933
- -----------------------------------------------------------------------------------------------------------------------------------
Balance January 29, 1994 $2,027 $59,515 $35,413 $(117)
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Consolidated Financial Statements.
F-4
<PAGE>
Fay's Incorporated and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended January 29, 1994, January 30, 1993 and January 25, 1992
<TABLE>
<CAPTION>
(In thousands of dollars)
----------------------------------------
1994 1993 1992
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash Flow From Operating Activities:
Net earnings $ 5,223 $ 11,231 $ 8,653
Adjustments to reconcile net earnings to net cash
provided from operating activities:
Cumulative effect of accounting change 7,998 -- --
Depreciation and amortization 16,180 15,309 14,429
(Increase) decrease in merchandise inventories (15,731) (10,674) 582
Increase in accounts receivable and prepaid expenses (4,905) (2,070) (4,475)
Increase (decrease) in other liabilities 1,065 (705) 4,783
Increase (decrease) in federal and state income taxes payable 1,684 (2,965) 1,347
(Decrease) increase in deferred income taxes payable (5,383) 76 (1,272)
- -------------------------------------------------------------------------------------------------------------------
Net cash provided from operating activities 6,131 10,202 24,047
- -------------------------------------------------------------------------------------------------------------------
Cash Flow For Investing Activities:
Expenditures for property and equipment (9,502) (6,994) (14,588)
Increase in intangible and other assets (3,983) (527) (2,269)
Proceeds from sale of assets -- 4,186 --
Purchase of Carls Drug Co., Inc. -- -- (35,541)
- -------------------------------------------------------------------------------------------------------------------
Net cash used for investing activities (13,485) (3,335) (52,398)
- -------------------------------------------------------------------------------------------------------------------
Cash Flow From Financing Activities:
Increase (decrease) in notes payable 14,605 -- (3,500)
Proceeds from long-term debt -- -- 40,574
Repayment of long-term debt (3,217) (11,281) (1,741)
Reductions in obligation under leases (1,034) (1,052) (1,001)
Sale of common stock under option plans 1,087 1,214 1,552
Cash dividends paid (3,998) (3,769) (3,101)
- -------------------------------------------------------------------------------------------------------------------
Net cash provided from (used for) financing activities 7,443 (14,888) 32,783
- -------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash 89 (8,021) 4,432
Cash balance, beginning of year 917 8,938 4,506
- -------------------------------------------------------------------------------------------------------------------
Cash balance, end of year $ 1,006 $ 917 $ 8,938
- -------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------
Supplemental Cash Flow Information:
Cash paid during the year for:
Interest $ 7,809 $ 8,523 $ 6,739
Income taxes 7,815 10,019 6,357
</TABLE>
Supplemental disclosure of non-cash investing and financing activity: On January
15 of 1994, 1993 and 1992, respectively, 95,602, 95,602 and 76,452 shares of
common stock were issued upon conversion of $500,000 of unsecured 10%
convertible notes.
See Notes to Consolidated Financial Statements.
F-5
<PAGE>
Fay's Incorporated and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended January 29, 1994, January 30, 1993 and January 25, 1992
NOTE 1. Summary of Significant Accounting Policies
BASIS OF CONSOLIDATION -- The Consolidated Financial Statements include the
accounts of the Company and its wholly-owned subsidiaries. All significant
intercompany transactions and balances have been eliminated in consolidation.
FISCAL YEAR -- The Company's fiscal year ends on the last Saturday in January.
Fiscal year 1994 had 52 weeks, fiscal year 1993 had 53 weeks and fiscal year
1992 had 52 weeks.
INVENTORIES -- Inventories are valued at the lower of cost or market. The cost
of inventory is determined primarily on a last-in, first-out (LIFO) basis. Costs
of seasonal merchandise, greeting cards, toys and inventories associated with
the Company's Paper Cutter and Wheels stores are valued on a first-in first-out
(FIFO) basis. If all inventories had been valued at current replacement costs,
total inventory values would have been approximately $32,138,000, $32,792,000
and $31,404,000 higher at January 29, 1994, January 30, 1993 and January 25,
1992, respectively.
PRE-OPENING EXPENSES -- Employee costs, representing training, stocking and
equipping of new stores, as well as advertising and other expenditures of a non-
capital nature required to make ready new store locations, are expensed as
incurred.
PROPERTY AND EQUIPMENT -- Property and equipment are recorded at cost, or in the
case of property under capital leases, the present value of minimum lease
payments or fair value, whichever is lower. Depreciation is recorded principally
on a straight-line basis over the estimated useful lives of the assets.
Maintenance and repairs are charged to expense as incurred. Major expenditures
for betterments and renewals are capitalized.
INTANGIBLE ASSETS -- Intangible assets include values assigned to favorable
lease commitments, lease acquisition costs, customer lists, non-competitive
agreements and excess of purchase price over fair market value of net assets
acquired. Such assets are being amortized on a straight-line basis over their
estimated lives.
INCOME TAXES -- The Company and its subsidiaries file a consolidated federal
income tax return. The Company adopted Statement of Financial Accounting
Standards (SFAS) No. 109, Accounting for Income Taxes, in fiscal 1994
retroactive to fiscal 1992. As a result of the adoption, the Company's January
30, 1993 balance sheet has been restated due to the restatement of deferred tax
liabilities associated with the Company's purchase of Carls Drug Co., Inc. The
effect of the Statement on fiscal 1993 and 1992 statements of net earnings and
cash flows was immaterial. See Note 4 for a further discussion of income taxes.
POSTRETIREMENT BENEFITS -- The Company adopted Statement of Financial Accounting
Standards No. 106, Employers' Accounting for Postretirement Benefits Other Than
Pensions, in the first quarter of fiscal 1994. The Company elected immediate
recognition of the accumulated postretirement benefit obligation which resulted
in a non-cash reduction of fiscal 1994 net earnings of $4,806,000, net of tax.
EARNINGS PER SHARE -- Earnings per share are based on the average number of
shares of common stock and common stock equivalents (stock options) outstanding
during the respective periods, adjusted for stock dividends and splits, where
applicable. The average number of shares of common stock and dilutive common
stock equivalents outstanding were 20,085,326, 19,898,274 and 19,737,810 in
fiscal 1994, 1993 and 1992, respectively. Fully diluted earnings per share did
not differ materially from primary earnings per share.
STATEMENTS OF CASH FLOWS -- The Company considers that cash and equivalents
include all highly liquid investments with original maturities of three months
or less.
NOTE 2. Short-Term Debt
The Company maintains lines of credit with several banks to meet its short-term
borrowing requirements. At January 29, 1994 the Company had available lines of
credit amounting to $29.9 million. Maximum outstanding borrowings during fiscal
1994 were $14.8 million and average borrowings were $3.8 million. The weighted
average interest rate on short-term borrowings was 4.20% in fiscal 1994, 4.37%
in fiscal 1993 and 6.52% in fiscal 1992.
NOTE 3. Long-Term Debt
Long-term debt consisted of the following:
<TABLE>
<CAPTION>
(In thousands of dollars)
--------------------------
January 29, January 30,
1994 1993
- ----------------------------------------------------------------------
<S> <C> <C>
Secured, 9.85% senior notes $18,000 $18,000
Unsecured, 9.77% senior notes 25,000 25,000
Unsecured, 9.59% senior notes 25,000 25,000
Unsecured, 10.5% notes -- 550
Unsecured, 10% convertible notes 2,000 2,500
Mortgage note 1,234 1,401
Revolving term loan 2,500 5,000
- ----------------------------------------------------------------------
73,734 77,451
Less current portion 8,427 3,736
- ----------------------------------------------------------------------
$65,307 $73,715
- ----------------------------------------------------------------------
- ----------------------------------------------------------------------
</TABLE>
F-6
<PAGE>
Repayments to be made over the next five fiscal years are as follows (in
thousands): 1995, $8,427; 1996, $9,506; 1997, $9,528; 1998, $9,553 and 1999,
$9,026.
The 9.85% senior notes are due November 15, 2004 and are payable in annual
principal installments of $1,635,000 commencing November 15, 1994 and ending
November 15, 2003, with the remaining balance payable on November 15, 2004.
Interest is payable semi-annually on May 15 and November 15 of each year. The
carrying value of collateral for the notes, consisting primarily of real
property and certain equipment, amounted to $11,314,000 at January 29, 1994.
The 9.77% senior notes are due August 15, 2000 and are payable in equal annual
installments commencing August 15, 1994. Interest is payable semi-annually on
February 15 and November 15 of each year.
The 9.59% senior notes are due September 15, 2001 and are payable in equal
annual installments commencing September 15, 1995. Interest is payable semi-
annually on September 15 and March 15 of each year.
The 10% convertible notes are due January 15, 1998 and are payable in annual
principal installments of $500,000 through 1998 and are convertible into common
stock at $5.23 per share. The notes may be converted at any time prior to
maturity, and 382,192 shares have been reserved for such conversion. The
conversion rate is subject to adjustment for subsequent sales of common stock,
rights or options to purchase common stock or other stock or obligations
convertible to common stock at prices less than the conversion rate, and for
stock dividends, stock splits and other specified transactions. On January 15,
1994, 95,602 shares of common stock were issued upon conversion of $500,000 of
the notes.
The mortgage note bears interest at 9.25% and matures in 1998. The carrying
value of buildings pledged as collateral for the note was $2,724,000 at January
29, 1994.
The revolving term loan is payable by quarterly installments of $1,250,000. At
the Company's election, the interest rate is adjustable every thirty, sixty or
ninety days, and is tied to either prime or LIBOR rates. At January 29, 1994 the
interest rate on this loan was 4.65%.
The unsecured notes and the 9.85% senior notes contain, among other terms,
certain restrictions on the Company's consolidated retained earnings. Under the
most restrictive terms, $17,470,000 of retained earnings was not restricted as
to cash dividends and the acquisition or retirement of the Company's stock as of
January 29, 1994. Furthermore, the Company may acquire an additional 221,613
shares of its stock plus such number of shares, the aggregate price of which
does not exceed $15,000,000. The unsecured notes also require the Company to
maintain a minimum amount of consolidated working capital and require the
maintenance of certain specified ratios. At January 29, 1994 the Company was in
compliance with these requirements.
NOTE 4. Income Taxes
The Company adopted SFAS No. 109 at the beginning of fiscal 1994 retroactive to
fiscal 1992. The Company recorded additional goodwill and deferred tax
liabilities in fiscal 1992 of approximately $3.6 million as a result of
restating the acquisition values of Carls Drug Co., Inc. which was acquired in
that fiscal year. The effect of this Statement on the provisions for income
taxes and net earnings in fiscal 1993 and 1992 was not material.
The provisions for income taxes consisted of the following:
<TABLE>
<CAPTION>
(In thousands of dollars)
---------------------------------------------
1994 1993 1992
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Currently payable:
Federal $ 6,933 $5,637 $ 5,808
State 2,512 2,336 1,946
- --------------------------------------------------------------------------------
9,445 7,973 7,754
- --------------------------------------------------------------------------------
Deferred:
Federal (1,665) 382 (1,438)
State (549) 111 (418)
- --------------------------------------------------------------------------------
(2,214) 493 (1,856)
- --------------------------------------------------------------------------------
$ 7,231 $8,466 $ 5,898
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
</TABLE>
Income taxes were computed at rates other than the statutory federal income tax
rates due the following items:
<TABLE>
<CAPTION>
1994 1993 1992
- --------------------------------------------------------------------------------
Amount % Amount % Amount %
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Tax expense at federal
statutory rate $6,041 35.0 $6,697 34.0 $4,947 34.0
State taxes, net of federal
benefit 1,276 7.3 1,616 8.2 1,008 6.9
Tax credits (334) (1.9) (71) (0.3) (128) (0.9)
Amortization of goodwill
and other deferred
charges 252 1.5 187 0.9 160 1.1
Dividends and interest
exempt from federal
taxation (4) -- (37) (0.2) (32) (0.2)
Other -- -- 74 (0.4) (57) (0.4)
- --------------------------------------------------------------------------------
$7,231 41.9 $8,466 43.0 $5,898 40.5
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
</TABLE>
F-7
<PAGE>
The tax effects of the items comprising the Company's net deferred tax assets
and liabilities at January 29, 1994 and January 30, 1993 (as restated) in the
Company's consolidated balance sheets are as follows:
<TABLE>
<CAPTION>
(In thousands of dollars)
--------------------------
January 29, January 30,
1994 1993
- --------------------------------------------------------------------------------
<S> <C> <C>
Current deferred taxes:
Deferred tax assets:
Allowance for doubtful accounts $1,354 $ 990
Employee benefit accruals 1,561 617
Accruals for closed locations 576 115
Other -- 134
- --------------------------------------------------------------------------------
3,491 1,856
Valuation allowance -- --
- --------------------------------------------------------------------------------
3,491 1,856
Deferred tax liabilities:
Inventory valuation differences 3,306 3,232
Other 169 --
- --------------------------------------------------------------------------------
3,475 3,232
- --------------------------------------------------------------------------------
Net current deferred tax asset (liability) $ 16 $(1,376)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Long-term deferred taxes:
Deferred tax assets:
Accrued postretirement benefits $3,178 $ --
Recognition of rent expense 1,172 1,308
Deferred gain on sale of assets 1,296 1,281
Recognition of pension expense 40 118
Other 122 177
- --------------------------------------------------------------------------------
5,808 2,884
Valuation allowance -- --
- --------------------------------------------------------------------------------
5,808 2,884
Deferred tax liabilities:
Tax depreciation in excess of
financial statement depreciation 4,345 5,237
Financial statement basis of
acquired long-term assets in
excess of tax basis 945 1,120
- --------------------------------------------------------------------------------
5,290 6,357
- --------------------------------------------------------------------------------
Net long-term deferred tax
asset (liability) $ 518 $(3,473)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
</TABLE>
There were no changes in the valuation allowance during the year ended January
29, 1994. Effective in the third quarter of fiscal 1994, the Federal income tax
rate was increased from 34% to 35% on pretax earnings in excess of $10,000,000
as part of the Omnibus Budget Reconciliation Act. There was no other significant
impact to the Company from this Act.
NOTE 5. Obligation Under Leases
The Company conducts primarily all retailing operations on leased premises.
Leases are for varying periods from one to thirty years and are generally
renewable at the option of the Company. Certain leases for store facilities are
classified as capital leases.
Usually the leases provide that the Company pay a portion of the taxes and all
insurance and maintenance costs associated with the leased premises. Certain
leases provide for additional rentals based upon a percentage of sales. In
addition, the Company leases transportation and other equipment under leases for
periods of one to eight years.
During fiscal 1990, the Company entered into a sale and leaseback agreement for
four store properties, the net proceeds from which totalled $5.9 million. The
aggregate gain of $3.7 million was deferred and is being amortized over the 20-
year term of the store leases.
Property and equipment includes the following amounts for capital leases:
<TABLE>
<CAPTION>
(In thousands of dollars)
-----------------------------
January 29, January 30,
1994 1993
- -------------------------------------------------------------------------------
<S> <C> <C>
Store facilities $ 9,085 $ 9,229
Equipment 3,388 3,388
- -------------------------------------------------------------------------------
12,473 12,617
Less accumulated amortization (10,777) (10,209)
- -------------------------------------------------------------------------------
$ 1,696 $ 2,408
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
</TABLE>
Future minimum rental payments due under leases consisted of the following at
January 29, 1994:
<TABLE>
<CAPTION>
(In thousands of dollars)
----------------------------
Fiscal Year Operating Capital
- -------------------------------------------------------------------------------
<S> <C> <C>
1995 $ 21,685 $ 1,113
1996 21,168 970
1997 20,799 790
1998 20,151 634
1999 19,578 472
2000 and thereafter 123,057 852
- -------------------------------------------------------------------------------
Total minimum lease payments $226,438 4,831
----------------------------
----------------------------
Less: Executory costs including
profit thereon (1,273)
Interest portion of payments (883)
-------
Present value of net minimum
lease payments $ 2,675
-------
</TABLE>
F-8
<PAGE>
The composition of total rental expense for the past three fiscal years was as
follows:
<TABLE>
<CAPTION>
(In thousands of dollars)
---------------------------------------
1994 1993 1992
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Minimum rentals-
operating leases $20,930 $21,580 $19,449
Contingent rentals-
operating and capital leases 1,288 1,177 1,015
- -------------------------------------------------------------------------------
$22,218 $22,757 $20,464
- -------------------------------------------------------------------------------
</TABLE>
NOTE 6. Employee Benefit Plans
PROFIT SHARING RETIREMENT PLAN -- The Company maintains a Profit Sharing
Retirement Plan which covers substantially all full-time employees who qualify
as to age and length of service. All funds are held in trust for the exclusive
benefit of participating employees. Contributions of $725,000 in fiscal 1994,
$700,000 in fiscal 1993 and $600,000 in fiscal 1992 were charged to expense.
PENSION PLAN -- The Company maintains a defined benefit Pension Plan which
covers substantially all full-time employees who qualify as to age and length of
service. Benefits are based upon years of service and employee compensation.
Annual contributions are made to the Plan sufficient to satisfy legal funding
requirements.
Net pension expense was comprised of the following:
<TABLE>
<CAPTION>
(In thousands of dollars)
------------------------------
1994 1993 1992
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Service costs-benefits earned
during the period $ 938 $ 716 $ 504
Interest on projected
benefit obligation 837 681 580
Actual return on plan assets (661) (958) (2,226)
Net amortization and deferral
of actuarial gains and losses (313) 168 1,673
- -------------------------------------------------------------------------------
$ 801 $ 607 $ 531
- -------------------------------------------------------------------------------
</TABLE>
The funded status of the Pension Plan and the related amounts that are
recognized in the consolidated balance sheets are as follows:
<TABLE>
<CAPTION>
(In thousands of dollars)
-------------------------
January 29, January 30,
1994 1993
- --------------------------------------------------------------------------------
<S> <C> <C>
Actuarial present value of
accumulated benefit obligation:
Vested $ 9,370 $ 6,938
Non-vested 566 441
- --------------------------------------------------------------------------------
Total $ 9,936 $ 7,379
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Projected benefit obligation $12,133 $ 9,971
Plan assets at fair market value,
primarily listed stocks and
fixed income securities 11,403 10,680
- --------------------------------------------------------------------------------
Plan assets (less than) in excess of
projected benefit obligation (730) 709
Unrecognized prior service cost 15 32
Unrecognized net asset in transition (222) (241)
Unrecognized net losses (gains) 283 (808)
- --------------------------------------------------------------------------------
Accrued pension expense $ (654) $ (308)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
</TABLE>
The weighted average discount rates used in determining benefit obligations were
7.75% at January 29,1994, 8.50% at January 30, 1993 and 8.75% at January 25,
1992. The expected long-term rate of return on plan assets was 9% for fiscal
1994, and 8% for fiscal 1993 and 1992. The rate of increase for future
compensation was 4.5% in fiscal 1994, and 5% for fiscal 1993 and 1992.
NOTE 7. Postretirement Benefits
The Company provides certain health care and life insurance benefits for
substantially all of its retired employees. As discussed in Note 1, the Company
adopted SFAS No. 106 effective February 1, 1993 which requires the Company to
accrue the cost of retiree benefits over the period employees provide service.
Prior to fiscal 1994, the Company expensed the cost of these benefits as
incurred and recognized an expense of $194,000 in fiscal 1993 and $117,000 in
fiscal 1992.
Effective during the first quarter of fiscal 1994, the Company amended its
retiree benefit plans to modify the eligibility and cost sharing provisions for
active employees. These changes resulted in a reduction in the accumulated
obligation of $4,413,000 which is being amortized as required by SFAS No. 106
over the average period to full eligibility for benefits.
F-9
<PAGE>
Postretirement benefit expense (credit) for the year ended January 29, 1994 was
comprised of the following (in thousands):
<TABLE>
<S> <C>
Service cost -- benefits earned during the year $ 81
Interest cost on accumulated benefit obligation 313
Amortization of prior service cost (459)
-------
$ (65)
-------
-------
</TABLE>
The amount included in the January 29, 1994 consolidated balance sheet was as
follows (in thousands):
<TABLE>
<S> <C>
Accumulated benefit obligation:
Retirees $3,645
Fully eligible active plan participants 318
Other active plan participants 675
- --------------------------------------------------------------------------------
4,638
Unrecognized actuarial losses (971)
Unrecognized prior service cost 3,959
- --------------------------------------------------------------------------------
Accrued postretirement benefit obligation $7,626
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
</TABLE>
The assumed health care cost trend rate used in measuring the accumulated
benefit obligation at January 29, 1994 was 12.3% for fiscal 1995, gradually
declining to 6% in years 2006 through 2015, and 5.5% thereafter. A one
percentage point increase in the assumed health care cost trend rate for each
year would increase the accumulated benefit obligation at January 29, 1994 by
approximately 12.7% and the sum of the service cost and interest cost components
by approximately 15.6%. The assumed discount rate used in determining the
accumulated benefit obligation at January 29, 1994 was 7.5%.
NOTE 8. Stockholders' Equity
On January 28, 1994 the Board of Directors declared a $.05 per share quarterly
cash dividend payable on April 8, 1994 to shareholders of record on March 25,
1994.
EMPLOYEE STOCK PURCHASE PLAN -- The Company's Employee Stock Purchase Plan
permits eligible employees to purchase common stock, through payroll deduction,
at a purchase price equal to 90% of the fair market value of such common stock,
in accordance with the terms of the Plan. At January 29, 1994, the Company had
1,058,436 additional shares of common stock available for issuance under this
Plan. In fiscal 1994, 1993 and 1992, employees purchased 153,458, 156,188, and
159,120 shares at average prices of $6.18 in 1994, $6.63 in 1993 and $5.79 in
1992.
STOCK OPTION PLANS -- The Company maintains a stock option program for its
officers and key employees. This Plan provides for the granting of both non-
qualified and incentive stock options, and the issuance of up to an aggregate of
4,000,000 shares of common stock. At January 29, 1994, 1,680,173 shares were
reserved for future grant.
In addition, the Company has reserved 125,000 shares of common stock in
connection with a stock option plan for non-employee directors. On July 1 of
each year, eligible directors automatically receive an option to purchase 1,500
shares at a price equal to fair market value on the date of grant. At January
29, 1994, 83,000 shares were reserved for future grant.
A summary of option transactions for all option plans is presented below:
<TABLE>
<CAPTION>
Incentive Non-Qualified
Year ended January 29, 1994: Stock Options Stock Options
- --------------------------------------------------------------------------------
<S> <C> <C>
Shares under option,
beginning of year 881,156 174,497
Options granted 412,750 10,500
Options exercised at prices
ranging from $1.32 to $8.65 (1,091) (23,060)
Options expired and cancelled (50,492) (7,956)
- --------------------------------------------------------------------------------
Shares under option,
end of year 1,242,323 153,981
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Shares exercisable 919,376 111,981
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Exercise price of
shares exercisable $4.79 to $9.35 $1.32 to $6.40
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Incentive Non-Qualified
Year ended January 30, 1993: Stock Options Stock Options
- --------------------------------------------------------------------------------
<S> <C> <C>
Shares under option,
beginning of year 804,465 177,999
Options granted 203,313 9,000
Options exercised at prices
ranging from $1.07 to $9.35 (35,120) (2,098)
Options expired and cancelled (91,502) (10,404)
- --------------------------------------------------------------------------------
Shares under option,
end of year 881,156 174,497
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Shares exercisable 684,292 189,236
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Exercise price of
shares exercisable $1.07 to $9.35 $.73 to $6.40
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
</TABLE>
NOTE 9. Unusual Charges
During the first quarter of fiscal 1994 the Company closed nine Paper Cutter
stores located in the Philadelphia metropolitan area. As a result, the Company
incurred a pretax charge in 1994 of $3,471,000 pertaining to future rental
obligations, abandoned leasehold improvements and other related closing
expenses.
On February 26, 1992, the Company entered into a settlement with the New York
State Attorney General concerning litigation involving the New York State
Employees Prescription Program. The suit was filed against the Company, its
wholly-owned subsidiary Carls Drug Co., Inc., several other companies operating
F-10
<PAGE>
chain drug stores, and several pharmaceutical trade associations in June 1990.
In full settlement of the lawsuit, the Company agreed to pay $1,064,000 which
was expensed in fiscal 1992. In addition, Carls Drug Co., Inc. agreed to pay
$384,000 which was accrued through the purchase price allocation related to the
acquisition of Carls.
NOTE 10. Fair Value of Financial Instruments
At January 29, 1994, the Company's financial instruments consisted of long-term
debt. The carrying value of long-term debt (including current portion) at
January 29, 1994 was $73,734,000. The estimated fair value of long-term debt at
January 29,1994, based on quoted market prices for similar debt or current rates
offered to the Company for debt with similar maturities, where applicable, was
$80,909,000.
NOTE 11. Quarterly Financial Information (Unaudited)
Summarized quarterly financial information for the years ended January 29, 1994
and January 30, 1993 was as follows:
<TABLE>
<CAPTION>
(In thousands of dollars except per share data)
-----------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Fiscal 1994:
Net sales $216,742 $221,925 $225,966 $255,086
Gross profit 64,488 65,371 66,480 74,302
Income taxes (779) 2,154 1,555 4,301
Earnings (loss) before
cumulative effect of
accounting change (1,097) 3,066 2,194 5,866
Net earnings (loss) (5,903) 3,066 2,194 5,866
Earnings per share:
Earnings (loss) before
cumulative effect of
accounting change $(.05) $.15 $.11 $.29
Cumulative effect of
accounting change (.24) -- -- --
Net earnings (loss) $(.29) $.15 $.11 $.29
Cash dividends
paid per share $ .05 $.05 $.05 $.05
Market price per share:
High 7 1/8 7 7 1/2 7 1/4
Low 6 1/4 6 1/8 6 1/2 6 3/8
Fiscal 1993:
Net sales $212,156 $216,364 $216,090 $258,033
Gross profit 63,030 63,296 63,305 76,726
Income taxes 1,060 2,038 1,072 4,296
Net earnings 1,537 2,944 1,510 5,240
Earnings per share $.08 $.15 $.08 $.26
Cash dividends
paid per share $.04 $.05 $.05 $.05
Market price per share:
High 9 1/4 8 1/8 8 3/8 8 1/8
Low 7 1/4 7 3/8 7 1/4 7
</TABLE>
<PAGE>
FAY'S INCORPORATED AND SUBSIDIARIES
SCHEDULE V - PROPERTY AND EQUIPMENT
(in thousands)
<TABLE>
<CAPTION>
Other
Balance at Additions Retirements Changes(a) Balance at
Beginning of at and Increase End of
Classification Period Cost Disposals (Decrease) Period
- ------------------------------- --------------- ---------- ------------ ---------- -----------
<S> <C> <C> <C> <C> <C>
Fiscal Year Ended January 29, 1994:
Land $ 3,768 $ 69 $ $ $ 3,837
Buildings 29,769 38 29,807
Leasehold Improvements 30,082 3,080 (881 ) 32,281
Furniture, Fixtures and
Equipment 88,138 7,139 (122 ) 95,155
Property Under Capital Leases 12,617 (144 ) 12,473
----------------- ------------ -------------- ------------ ------------
Totals $ 164,374 $ 10,326 $ (1,147 ) $ -0- $ 173,553
----------------- ------------ -------------- ------------ ------------
Fiscal Year Ended January 30, 1993:
Land $ 3,730 $ $ (2 ) $ 40 $ 3,768
Buildings 29,990 49 (270 ) 29,769
Leasehold Improvements 28,334 1,757 (611 ) 602 30,082
Furniture, Fixtures and
Equipment 83,789 5,687 (1,298 ) (40 ) 88,138
Property Under Capital Leases 12,598 19 12,617
----------------- ------------ -------------- ------------ ------------
Totals $ 158,441 $ 7,512 $ (1,911 ) $ 332 $ 164,374
----------------- ------------ -------------- ------------ ------------
Fiscal Year Ended January 25, 1992:
Land $ 3,258 $ 472 $ $ $ 3,730
Buildings 25,820 4,170 29,990
Leasehold Improvements 20,759 7,818 (243 ) 28,334
Furniture, Fixtures and
Equipment 71,347 12,666 (224 ) 83,789
Property Under Capital Leases 11,345 1,253 12,598
----------------- ------------ -------------- ------------ ------------
Totals $ 132,529 $ 26,379 $ (467 ) $ -0- $ 158,441
----------------- ------------ -------------- ------------ ------------
<FN>
(a) The Company adopted SFAS No. 109, Accounting for Income Taxes, in fiscal
1994. The January 30, 1993 balance sheet was restated due to the
restatement of deferred tax liabilities associated with the Company's
purchase of Carls Drug Co., Inc.
</TABLE>
Depreciation and Amortization: The annual provisions for depreciation and
amortization are computed in accordance with the following range of rates
(principally on a straight line basis).
Buildings 2.0% to 4.0%
Leasehold Improvements shorter of 10% or life of lease
Furniture, Fixtures and Equipment 12.5% to 33.3%
Property Under Capital Leases 4.0% to 20.0%
S-1
<PAGE>
FAY'S INCORPORATED AND SUBSIDIARIES
SCHEDULE VI - ACCUMULATED DEPRECIATION AND
AMORTIZATION OF PROPERTY AND EQUIPMENT
(in thousands)
<TABLE>
<CAPTION>
Additions Other
Balance at Charged to Changes Balance at
Beginning of Cost and Increase End of
Classification Period Expenses Retirements (Decrease) Period
- ------------------------------- ----------------- ------------ -------------- ------------ -----------
<S> <C> <C> <C> <C> <C>
Fiscal Year Ended January 29, 1994:
Buildings $ 9,877 $ 1,293 $ $ $ 11,170
Leasehold Improvements 16,144 2,747 (236 ) 18,655
Furniture, Fixtures and
Equipment 57,158 8,613 (64 ) 65,707
Property Under Capital Leases 10,209 606 (37 ) 10,778
----------------- ------------ -------------- ------------ ------------
Totals $ 93,388 $ 13,259 $ (337 ) $ -0- $ 106,310
----------------- ------------ -------------- ------------ ------------
Fiscal Year Ended January 30, 1993:
Buildings $ 8,521 $ 1,356 $ $ $ 9,877
Leasehold Improvements 13,663 2,541 (60 ) 16,144
Furniture, Fixtures and
Equipment 48,878 8,682 (402 ) 57,158
Property Under Capital Leases 9,526 683 10,209
----------------- ------------ -------------- ------------ ------------
Totals $ 80,588 $ 13,262 $ (462 ) $ -0- $ 93,388
----------------- ------------ -------------- ------------ ------------
Fiscal Year Ended January 25, 1992:
Buildings $ 7,218 $ 1,303 $ $ $ 8,521
Leasehold Improvements 11,447 2,423 (207 ) 13,663
Furniture, Fixtures and
Equipment 41,122 7,954 (198 ) 48,878
Property Under Capital Leases 8,845 681 9,526
----------------- ------------ -------------- ------------ ------------
Totals $ 68,632 $ 12,361 $ (405 ) $ -0- $ 80,588
----------------- ------------ -------------- ------------ ------------
</TABLE>
S-2
<PAGE>
FAY'S INCORPORATED AND SUBSIDIARIES
SCHEDULE IX - SHORT-TERM BORROWINGS
(in thousands)
<TABLE>
<CAPTION>
Maximum Average Weighted
Amount Amount Average
Balance Weighted Outstanding Outstanding Interest Rate
Category of Aggregate At End of Average During the During the During
Short-Term Borrowing Period Interest Rate Period Period (A) Period (B)
- ------------------------------- --------------- -------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
Fiscal Year Ended January 29, 1994:
Notes Payable $ 14,605 4.31% $ 14,775 $ 3,810 4.20%
Fiscal Year Ended January 30, 1993
Notes Payable $ -0- -0- $ 5,000 $ 618 4.37%
Fiscal Year Ended January 25, 1992:
Notes Payable $ -0- -0- $ 13,000 $ 2,916 6.52%
<FN>
(A) Average amount outstanding during the period is computed by dividing the
total of daily principal balances outstanding by the number of days in the
period.
(B) Weighted average interest rate for the fiscal year is computed by dividing
short-term interest expense by the average short-term debt outstanding.
</TABLE>
S-3
<PAGE>
FAY'S INCORPORATED AND SUBSIDIARIES
SCHEDULE X - SUPPLEMENTARY INCOME STATEMENT INFORMATION
(in thousands)
<TABLE>
<CAPTION>
Charges to Costs and Expenses
Fiscal Year Ended
Item 1/29/94 1/30/93 1/25/92
- ------------------------------------------ ------------ ------------ ------------
<S> <C> <C> <C>
Advertising $ 13,764 $ 15,669 $ 16,009
</TABLE>
Note A: Amounts for other items required in this schedule have been omitted
since they are less than 1% of revenues.
S-4
<PAGE>
FAY'S INCORPORATED KEY MANAGEMENT INCENTIVE PLAN
1. PURPOSE. The purpose of the Fay's Incorporated Key Management
Incentive Plan (the "Plan") is to provide special incentive and motivation to
officers of Fay's Incorporated (the "Corporation") through the payment of annual
incentive awards.
2. ELIGIBILITY. All executive and corporate officers of Fay's
Incorporated employed on the last day of a fiscal year shall be eligible to
participate in the Plan in respect of such fiscal year. Officers who leave the
employ of the Corporation by reason of retirement, death or disability during
any fiscal year shall be eligible to participate in the Plan in respect of such
fiscal year in accordance with Paragraph 7 of the Plan.
3. TARGETED SALES AND EARNINGS. The Compensation Committee of the Board
of Directors (the "Committee") shall establish by March 30 of each fiscal year,
targeted levels for sales ("Targeted Sales") and earnings ("Targeted Earnings")
for such fiscal year for the Corporation and for each of the Corporation's
divisions. Targeted Sales for the Corporation and each of the Corporation's
divisions shall be formulated taking into account "comparable store sales" only,
consistent with the manner in which the Corporation accounts for its revenues
for financial reporting purposes. Targeted Earnings for the Corporation shall
be determined on a pre-tax basis consistent with the manner in which the
Corporation accounts for its pre-tax earnings for financial reporting purposes
but shall exclude (i) extraordinary income, expenses, gains and losses, (ii)
unusual income, expenses, gains and losses, (iii) deductions for profit sharing
and pension plan contributions, and (iv) deductions for bonus compensation.
Targeted Earnings for the Corporation's divisions shall be formulated consistent
with the manner that pre-tax earnings of each division are reported by the
Corporation's Chief Financial Officer to the Corporation's
<PAGE>
Board of Directors exclusive of the items not taken into account in formulating
the Corporation's Targeted Earnings. The Committee shall consider the
Corporation's budgeted sales and earnings for the fiscal year when establishing
Targeted Sales and Targeted Earnings, but will not be bound to establish
Targeted Sales or Targeted Earnings in amounts equal to the amounts so budgeted.
The Committee, after establishing Targeted Sales and Targeted Earnings, may,
prior to the end of the fiscal year, adjust such Targeted Sales and Targeted
Earnings due to circumstances unforeseen at the time such Targeted Sales and
Targeted Earnings were established.
4. CALCULATION OF ANNUAL INCENTIVE AWARDS BASED ON TARGETED SALES AND
TARGETED EARNINGS.
(a) DEFINITIONS.
(i) Senior Officers: the Corporation's Chairman of the Board,
President, divisional presidents and all other officers who shall have served on
the Corporation's Senior Management Committee for at least six (6) months during
the fiscal year.
(ii) Actual Sales: the actual revenues of the Corporation and
each of the Corporation's divisions from "comparable stores" for the fiscal
year, computed in a manner consistent with the manner in which the Committee
determined Targeted Sales for such fiscal year.
(iii) Actual Earnings: the actual consolidated pre-tax earnings
of the Corporation and the pre-tax earnings of each of the Corporation's
divisions for the fiscal year, computed in a manner consistent with the manner
in which the Committee determined Targeted Earnings for such fiscal year.
(iv) Salary: for those employed and participating in the Plan
for the entire fiscal year shall mean the officer's annual salary in effect on
the last day of the fiscal year; for those not employed or participating in the
(2)
<PAGE>
Plan for the entire fiscal year shall mean the officer's annual salary in effect
on the last day of the fiscal year divided by the number of days in said fiscal
year multiplied by the number of days the officer had been employed and
participating in the Plan during the fiscal year.
(b) DIVISIONAL AND CORPORATE PARTICIPATION. All officers who devote
substantially all of their time and effort to one of the Corporation's
divisions, other than division presidents (i.e., Vice President-Fay's Drug Store
Marketing, Vice President-Fay's Drug Store Merchandise), shall have their annual
incentive award calculated based solely on the Targeted Sales and Targeted
Earnings of that division. All officers whose responsibilities include more
than one of the Corporation's divisions (i.e., Vice President-Real Estate, Vice
President-Loss Prevention) shall have their incentive award calculated based
solely on Targeted Sales and Targeted Earnings of the Corporation. Division
presidents shall have their incentive award calculated based both on the
Targeted Sales and Targeted Earnings of the Corporation and of their respective
divisions, as set forth in subparagraph (c)(iv).
(c) SENIOR OFFICERS:
(i) Sales Bonus: Senior Officers shall be granted a sales
bonus equal to 7.5 percent of Salary should the Corporation (or the officer's
division, as the case may be) achieve Actual Sales equal to 100 percent of its
Targeted Sales. For each percent (up to 10 percent) that Actual Sales exceed
Targeted Sales, the officer's sales bonus shall be increased by 1.5 percent of
Salary. For each percent (up to 4 percent) that Actual Sales fall short of
Targeted Sales, the officer's sales bonus shall be decreased by 1.5 percent of
Salary. In addition, the officer's earnings bonus, computed in accordance with
subparagraph (c)(ii), shall be reduced by 5 percent for each .1 percent that
Actual Sales fall short of 97 percent of Targeted Sales.
(3)
<PAGE>
(ii) Earnings Bonus: Senior Officers shall be granted an
earnings bonus equal to 17.5 percent of Salary should the Corporation (or the
officer's division, as the case may be) achieve Actual Earnings equal to 100
percent of Targeted Earnings. For each percent (up to 10 percent) that Actual
Earnings exceed Targeted Earnings, the officer's earnings bonus shall be
increased by 3.5 percent of Salary. For each percent (up to 9 percent) that
Actual Earnings fall short of Targeted Earnings, the officer's earnings bonus
shall be reduced by 1.75 percent of Salary. In addition, the officer's sales
bonus, computed in accordance with subparagraph (c)(i), shall be reduced by 10
percent for each 1 percent that Actual Earnings fall short of 100 percent of
Targeted Earnings.
(iii) No Bonus: Notwithstanding the foregoing, no incentive
award shall be paid in the event the Corporation (or the officer's division, as
the case may be) does not achieve either 95 percent of its Targeted Sales or 90
percent of its Targeted Earnings.
(iv) Sales and Earnings Bonuses for Division Presidents:
Division presidents shall be granted sales and earnings bonuses equal to 70
percent of the sales and earnings bonuses computed hereunder in respect of their
division and 30 percent of the sales and earnings bonuses computed hereunder in
respect of the Corporation.
(d) OFFICERS OTHER THAN SENIOR OFFICERS:
(i) Sales Bonus: Officers other than Senior Officers shall be
granted a sales bonus equal to 5 percent of Salary should the Corporation (or
the officer's division, as the case may be) achieve Actual Sales equal to 100
percent of its Targeted Sales. For each percent (up to 10 percent) that Actual
Sales exceed Targeted Sales, the officer's sales bonus shall be increased by 1
percent of Salary. For each percent (up to 4 percent) that Actual Sales fall
(4)
<PAGE>
short of Targeted Sales, the officer's sales bonus shall be decreased by 1
percent of Salary. In addition, the officer's earnings bonus, computed in
accordance with subparagraph (d)(ii), shall be reduced by 5 percent for each .1
percent that Actual Sales fall short of 97 percent of Targeted Sales.
(ii) Earnings Bonus: Officers other than Senior Officers shall
be granted an earnings bonus equal to 15 percent of Salary should the
Corporation (or the officer's division, as the case may be) achieve Actual
Earnings equal to 100 percent of Targeted Earnings. For each percent (up to 10
percent) that Actual Earnings exceed Targeted Earnings, the officer's earnings
bonus shall be increased by 2 percent of Salary. For each percent (up to 9
percent) that Actual Earnings fall short of Targeted Earnings, the officer's
earnings bonus shall be reduced by 1.5 percent of Salary. In addition, the
officer's sales bonus, computed in accordance with subparagraph (d)(i), shall be
reduced by 10 percent for each 1 percent that Actual Earnings fall short of 100
percent of Targeted Earnings.
(iii) No Bonus: Notwithstanding the foregoing, no incentive
award shall be paid in the event the Corporation (or the officer's division, as
the case may be) does not achieve either 95 percent of its Targeted Sales or 90
percent of its Targeted Earnings.
(e) LIMITATION ON INCENTIVE AWARDS.
(i) In no event shall the total of incentive awards granted in
respect of any of the Corporation's divisions, under this Plan and any other
incentive award plan for non-officers maintained by the Corporation, be greater
than 50 percent of the amount that Actual Earnings exceed Targeted Earnings for
such division. In such event, the Committee shall proportionately reduce such
incentive awards based upon the salaries of each of the officers and
non-officers receiving such awards.
(5)
<PAGE>
(ii) In the event Actual Earnings and Actual Sales exceed
Targeted Earnings and Targeted Sales, the Committee, in its discretion, may
limit total incentive awards to up to 50 percent of the amount by which Actual
Earnings exceed Targeted Earnings. In such event, the Committee shall reduce
such incentive awards based upon the salaries of each of the officers receiving
such awards.
5. DISCRETIONARY INCENTIVE AWARDS. Whether or not an incentive award is
granted to an officer in accordance with Paragraph 4 of the Plan, the Committee
may grant a discretionary incentive award to any such officer, not to exceed 20
percent of the incentive award that would have been granted to such officer
pursuant to Paragraph 4 had both Actual Sales and Actual Earnings been 100
percent of Targeted Sales and Targeted Earnings. In granting such discretionary
incentive awards, the Committee shall consider, among other things, the
officer's: contribution to overall corporate or divisional performance,
effectiveness in budget management, performance in assigned special projects,
managerial ability, quality of management development programs and participation
in industry, public and civic affairs.
6. PAYMENT OF INCENTIVE AWARDS. Incentive awards shall be authorized by
the Committee and paid no later than the first pay period in April following the
end of each fiscal year.
7. TERMINATION OF EMPLOYMENT. Except with the approval of the Committee,
voluntary termination of employment by an officer (except for retirement) prior
to the end of any fiscal year shall be cause for cancellation of all rights to
an incentive award in respect of such fiscal year. In no event shall an
incentive award be granted to a former officer who is employed by a competitor
of the Corporation prior to the incentive award being paid. In the event of a
termination of employment by reason of retirement, death,
(6)
<PAGE>
disability or involuntary dismissal of an officer for reasons other than (i) a
material breach by an officer of any employment contract between the officer and
the Corporation, (ii) conviction of the officer of a crime constituting a
felony, or (iii) fraud, misappropriation, theft or embezzlement on the part of
the officer, such officer shall be granted an incentive award proportionate to
the number of full months employed during the fiscal year. Any officer whose
full-time services to the Corporation are suspended during a fiscal year due to
disability or other authorized leave of absence shall be granted an incentive
award proportionate to the number of full months that such officer rendered
full-time services to the Corporation.
8. MISCELLANEOUS.
(a) INTERESTS NOT TRANSFERABLE. No interest in an incentive award
may be transferred, assigned, alienated or encumbered. Any attempt, voluntary
or involuntary, to effect any action specified in the immediately preceding
sentence shall, to the full extent permitted by law, be null, void and of no
effect.
(b) WITHHOLDING TAXES. The Corporation will withhold from any
incentive award any taxes required to be withheld by federal, state or local law
or regulation.
(c) PLAN NOT AN EMPLOYMENT CONTRACT. Nothing contained in the Plan
shall be construed as an employment contract or abridgement of the right of the
Corporation to discharge any of its employees, with or without cause.
(d) AMENDMENT AND TERMINATION. The Plan may be amended or terminated
by the Corporation's Board of Directors at any time, provided, however, any such
amendment or termination shall not affect the right of any officer to receive an
incentive award theretofore authorized by the Committee.
(7)
<PAGE>
(e) PERSONAL REPRESENTATIVES. In the event of an officer's death or
a judicial determination of his or her incompetence, reference in this Plan to
an officer shall be deemed, where appropriate, to refer to his or her legal
representative or committee or, where appropriate, to his or her beneficiary or
beneficiaries.
(f) RULES AND REGULATIONS. The Committee may adopt rules and
regulations to assist it in the administration of the Plan.
(g) PARAGRAPH TITLES. The titles to paragraphs in this Plan are
intended solely for convenience and no provision of this Plan is to be construed
by reference to the title of any paragraph.
(h) LAW GOVERNING. This Plan shall be governed by, construed and
enforced in accordance with the laws of the State of New York.
9. EFFECTIVE DATE. The Plan shall become effective as of January 30,
1994.
(8)
<PAGE>
AGREEMENT
AGREEMENT, made as of the ______ day of ____________________, 1993, by and
between FAY'S INCORPORATED, a New York corporation having its principal
executive offices located at 7245 Henry Clay Boulevard, Liverpool, New York
13088 (the "Company) and __________________________________, residing at
_________________________________, New York (the "Executive").
WITNESSETH:
WHEREAS, the Company desires to employ the Executive, and the Executive
desires to accept/continue employment with the Company, on the terms and
conditions herein set forth.
NOW, THEREFORE, in consideration of the mutual promises and agreements
herein contained, the Company and the Executive agree as follows:
1. PERIOD OF EMPLOYMENT. The Company hereby agrees to continue the
employment of the Executive pursuant to the terms of this Agreement for the
period beginning ____________________, 1993 and expiring on __________________,
1995. The term of the Executive's employment will be extended by one (1) year
at the completion of each full year of employment, provided, however, that
following the Executive attaining age 65, the employment of the Executive will
be extended only with the approval of the Company's Board of Directors.
2. POSITIONS, DUTIES AND RESPONSIBILITIES.
(a) During the Executive's period of employment, the Executive shall
continue to serve as ___________________________________ of the Company or of
such divisional profit center as shall then comprise the business, assets and
properties of the Company. The Executive shall have duties, responsibilities
and authority consistent with those which normally attend the position of
_______________________________ of an enterprise comparable to the Company.
(b) The Executive shall devote his best efforts and services to the
business and affairs of the Company, provided, however, this provision shall not
preclude the Executive from devoting reasonable periods required as a director
or member of a committee of any organization involving no conflict of interest
with the interests of the Company, from engaging in charitable and community
activities and/or from managing his personal investments and affairs.
3. COMPENSATION.
(a) For all services rendered by the Executive in any capacity during
the term of this Agreement, the Executive shall be paid as compensation
<PAGE>
a salary of $___________________ per year, payable in equal weekly installments,
or such greater amount as the Compensation Committee of the Board of Directors
of the Company may from time to time determine.
(b) The Executive shall be entitled to a paid vacation of ______
weeks per year, taken at such times as shall be elected by the Executive.
Accrual, use and any increase in the number of weeks of such paid vacations
shall be determined in accordance with the Company's policy and procedures
relating to same as then in effect.
(c) The Executive shall be entitled to reimbursement of expenses
incurred by the Executive in the course of his duties, in accordance with the
practices of the Company in effect with respect to executive officers of the
Company.
4. EMPLOYEE BENEFIT PLANS.
(a) The Executive, his dependents and beneficiaries shall be entitled
to all payments and benefits and service credit for benefits to which executive
officers of the Company, their dependents and beneficiaries are entitled under
the terms of all employee benefit plans and programs of the Company and of the
Fay's Incorporated Welfare Benefit Trust, including, without limitation, group
term life insurance, participation in the Fay's Incorporated Pension Plan and
the Fay's Incorporated Profit Sharing Plan and any other pension and retirement
plans maintained by the Company, coverage under medical, dental, prescription
drug, hospitalization, disability, health and welfare plans, sick leave,
holidays, employee store discounts and such other related benefits as are or may
be made available from time to time to executive officers of the Company.
Notwithstanding the foregoing, in the event, the Company or any successor to the
Company (as described in Paragraph 15) maintains employee benefit plans and/or
programs which provide benefits not covered or benefits that exceed those
offered by the Company prior to a Change in Control (as defined in Paragraph
10), the Executive shall be entitled to participate in and be provided coverage
under such plans and/or programs in addition to or in lieu of similar plans
and/or programs offered by the Company prior to a Change in Control.
(b) The Executive shall be designated an "Executive" under the
Company's Supplemental Executive Retirement Plan and shall be entitled to
participate in such Plan in accordance with its terms and conditions.
(2)
<PAGE>
(c) It is the intent of the parties that the Executive shall continue
to be entitled following a Change in Control to benefits and service credit for
benefits at least equal to those attached to his position prior to a Change in
Control. Without the Executive's written consent, the Company shall not reduce
the level of such benefits or service credit for benefits. In the event of any
such reduction, by amendment or termination of any plan, program or practice,
the Company or any successor Company will arrange to provide the Executive and
his dependents with benefits at least equal to the benefits existing under such
plans, programs or practices that he and his dependents would have received if
such reduction had not taken place. Payment of benefits to the Executive
hereunder shall not reduce the amount of compensation or other payments
otherwise due the Executive pursuant to the terms of this Agreement.
5. TERMINATION.
(a) The Company's Board of Directors may terminate this Agreement at
any time, subject to providing the severance compensation and benefits to the
Executive as specified herein.
(b) This Agreement shall terminate automatically upon the death of
the Executive.
(c) Upon the Executive's Disability (as defined in Paragraph 7), the
Company may terminate the Executive's employment in accordance with Paragraph 7.
(d) The Company may terminate the Executive's employment at any time
for "Cause," without further obligation to the Executive for compensation or
benefits hereunder, only on the basis of (i) a material breach by Executive of
his obligations under this Agreement, (ii) conviction of the Executive of a
crime constituting a felony, (iii) fraud, misappropriation, theft or
embezzlement on the part of the Executive, (iv) a continued deliberate and
intentional refusal by the Executive to comply with the provisions of Paragraph
2(b) relating to the devotion of the Executive's best efforts and services to
the business and affairs of the Company (except by reason of incapacity due to
illness or accident), or (v) written notice by the Company's Board of Directors
given to the Executive notifying the Executive of the termination of his
employment any time following the Executive attaining age 70. Notwithstanding
the foregoing, except by reason of a termination effectuated pursuant to
subparagraph (d)(v), the Executive shall not be deemed to have been terminated
for Cause unless there shall have been delivered to the Executive a written
notice of termination from the Company, after reasonable notice to the
(3)
<PAGE>
Executive and an opportunity for the Executive (together with the Executive's
counsel) to be heard before the Company's Board of Directors, accompanied by a
resolution duly adopted by not less than three-quarters of the directors of the
Company then in office, finding that in the good faith opinion of the Board, the
Executive was guilty of the conduct set forth above and specifying the
particulars thereof in detail.
(e) The Executive may terminate his employment hereunder for "Good
Reason." "Good Reason" shall mean (i) a failure by the Company to comply with
any material provision of this Agreement that has not been cured within thirty
(30) days after notice of such noncompliance has been given to the Company by
the Executive; (ii) any purported termination of the Executive's employment for
Cause which is not effected in accordance with Paragraph 5(d) hereof; (iii)
anytime within sixty (60) days following the request of a superior officer of
the Company for the resignation of the Executive as an officer of the Company;
(iv) anytime within thirty (30) days of reaching a mutual agreement with a
superior officer of the Company that the Executive shall resign as an officer of
the Company.
(f) Subsequent to a Change in Control, in addition to the definition
contained in Paragraph 5(e), Good Reason shall also mean any of the following
events occurring within thirty-six (36) months following a Change in Control:
(i) the assignment by the Company of duties inconsistent with
the Executive's position, duties, responsibilities and status with the
Company as of the date of the Change in Control or a change in the
Executive's reporting responsibilities, titles or offices on such date;
(ii) a reduction of the Executive's base salary in effect
immediately prior to a Change in Control;
(iii) a relocation of the Company's principal executive offices
to a location outside of Onondaga County, New York, or the relocation of
the Executive's office within the executive offices of the Company;
(iv) the failure by the Company to continue in effect without
reduction the level of benefits of any health, welfare or retirement
benefit plan or program of the Company in which the Executive was
participating immediately prior to a Change in Control;
(v) a determination made by the Executive that due to changed
circumstances occurring on or after a Change in Control he is unable to
carry out the duties and responsibilities attached to his position; or
(4)
<PAGE>
(vi) any failure by the Company to obtain the assumption of this
Agreement in accordance with Paragraph 15.
(g) Any termination by the Executive for Good Reason pursuant to
Paragraph 5(e) shall become effective upon delivery to the Company of a written
notice by the Executive indicating that the Executive is terminating his
employment for Good Reason and setting forth in reasonable detail the facts and
circumstances providing the basis for such termination.
(h) Any termination by the Executive for Good Reason following a
Change in Control pursuant to Paragraph 5(f) shall become effective no earlier
than six (6) months following a Change in Control and upon delivery to the
Company of a written notice by the Executive indicating that the Executive is
terminating his employment for Good Reason and setting forth in reasonable
detail the facts and circumstances providing the basis for such termination.
6. SEVERANCE COMPENSATION UPON TERMINATION OF EMPLOYMENT.
(a) If the Company shall terminate the Executive's employment without
Cause, or the Executive shall terminate his employment for Good Reason prior to
a Change in Control, the Company shall pay the Executive a severance benefit
equal to the Executive's base annual salary at the time of termination of
employment, plus the greater of (i) the Executive's most recent annual bonus, or
(ii) the Executive's average annual bonus for the two (2) most recent years.
Said severance benefit shall be payable in fifty-two (52) equal weekly
installments, commencing within two (2) weeks of the Executive's termination of
employment.
(b) If, following a Change in Control, the Company shall terminate
the Executive's employment without Cause, or the Executive shall terminate his
employment for Good Reason, the Company shall pay the Executive a severance
benefit equal to two (2) times the Executive's base annual salary at the time of
termination of employment, plus the greater of (i) two (2) times the Executive's
most recent annual bonus, or (ii) two (2) times the Executive's average annual
bonus for the three (3) most recent years. Said severance benefit shall be
payable, at the Executive's option, in either (i) one lump sum within two (2)
weeks of the Executive's termination of employment, or (ii) in one hundred four
(104) equal weekly installments, commencing within two (2) weeks of the
Executive's termination of employment.
(c) All amounts and benefits payable to the Executive under this
Agreement shall not be deemed or treated as damages but as severance
(5)
<PAGE>
compensation to which the Executive is entitled by reason of his past service to
the Company. The Executive shall not be required to mitigate the amount of any
payment or benefit provided hereunder by seeking other employment or otherwise,
nor shall the amount of any payment or benefit be reduced by any compensation or
benefit received as the result of the employment of the Executive following the
termination of the Executive's employment under the terms of this Agreement.
7. DISABILITY OF THE EXECUTIVE.
(a) The term "Disability," as used in this Agreement, shall mean a
physical or mental illness which has prevented the Executive from performing his
duties on a full-time basis under this Agreement for a period of six (6)
consecutive months. During said six (6) month period, the Executive shall
continue to be paid his salary which would otherwise be paid pursuant to
Paragraph 3 of this Agreement, reduced by any disability payments to which the
Executive may be entitled during such period under any benefit plan of the
Company or insurance policy maintained by the Company. If, following said six
(6) month period, the Executive shall fail to return to the full-time
performance of his duties within thirty (30) days after written notice from the
Company, the Company may terminate Executive's employment. A determination of
the Executive's Disability shall be made by a qualified medical doctor selected
by the Executive or, in the event of the Executive's incapacity to designate a
doctor, the Executive's legal representative. Such determination shall be in
writing and shall describe the nature of the Executive's physical or mental
illness and the opinion of the physician that due to such illness, the Executive
is unable to perform the services required of him pursuant to this Agreement.
(b) In the event of the termination of the Executive's employment on
account of the Executive's Disability, the Company shall pay to the Executive an
amount equal to 60 percent of the salary which would otherwise be payable
pursuant to Paragraph 3 of this Agreement for a period ending on the date the
Executive attains age 65, reduced by any disability payments to which the
Executive may be entitled during such period under any benefit plan of the
Company or insurance policy maintained by the Company.
8. CONTINUATION OF BENEFITS.
(a) Following the termination of the Executive's employment prior to
a Change in Control for any reason other than for Cause pursuant to Paragraph
(6)
<PAGE>
5(d), the Company shall, for a period of one (1) year, maintain coverage for the
Executive and/or his surviving dependents under all health and welfare plans and
programs made available by the Company and the Fay's Incorporated Employee
Welfare Benefit Trust during said one (1) year period to executive officers of
the Company.
(b) Following the termination of the Executive's employment following
a Change in Control for any reason other than for Cause pursuant to Paragraph
5(d), the Company shall maintain, in full force and effect, for the continued
benefit of the Executive and/or his surviving dependents, for a period of two
(2) years, coverage under all health and welfare plans and programs maintained
by the Company and the Fay's Incorporated Welfare Benefit Trust, as of the
earlier of (i) the date on which the Executive terminates employment, or (ii)
the date of a Change in Control, including group term life insurance, coverage
under medical, dental, prescription drug, hospitalization, disability plans and
employee store discount programs. If the terms of any such welfare benefit plan
or program does not permit the continued participation by the Executive
following the termination of employment, then the Company will arrange to
provide the Executive and/or his dependents with benefits substantially similar
to and no less favorable than the benefits the Executive would have been
entitled to receive under such plans and programs had such plans and programs
allowed for his continued participation in such plans and programs, provided,
however, that the Executive or his personal representative may elect, within
ninety (90) days after termination of the Executive's employment following a
Change in Control, to be paid in cash an amount equal to the Company's cost of
providing such benefits during the period that the Executive and/or his
dependents would have otherwise been entitled to coverage hereunder. Following
a Change in Control, the Executive shall have the option to have assigned to
him, at no cost and without apportionment of prepaid premiums, any assignable
life insurance policy owned by the Company and relating specifically to the
Executive.
9. OUTSTANDING OPTIONS.
(a) In the event the Executive shall, on the date of a Change in
Control, hold outstanding and unexercised options granted by the Company
(whether or not exercisable at that time) to acquire the Company's common stock,
the Company shall, in addition to all other amounts payable under this
Agreement, pay to the Executive, in a lump sum, an amount equal to the
(7)
<PAGE>
aggregate excess Fair Market Value of the shares of the Company's common stock
subject to such options over the aggregate exercise price for such options,
provided, however, in computing such lump sum payment, there shall be
disregarded any options held by the Executive pursuant to which the exercise
price is more than the Fair Market Value of the shares of the Company's common
stock subject to such options.
(b) For purposes of this Paragraph, Fair Market Value shall mean the
greater of (i) the highest price per share paid in connection with any tender
offer for the Company's common stock made within one hundred twenty (120) days
prior to a Change in Control, including the value of any securities offered in
exchange for shares of the Company's common stock, (ii) the highest price per
share shown on a Schedule 13D or any amendment thereto filed by the holder of 25
percent or more of the Company's common stock, or (iii) the highest closing
price per share of the Company's common stock on the New York Stock Exchange
during the period commencing on the one hundred twentieth (120th) day prior to a
Change in Control.
(c) Said payment shall be paid by the Company to the Executive within
two (2) weeks after a Change in Control. Upon receiving the payment from the
Company called for by this Paragraph 9, the Executive shall execute and deliver
to the Company a release of the Executive's rights under any unexercised options
to purchase the Company's common stock.
10. CHANGE IN CONTROL. For purposes of this Agreement, a "Change in
Control" shall mean a change in control of the Company of a nature that would be
required to be reported in response to Item 5(f) of Schedule 14A or Regulation
14A promulgated under the Securities Act of 1934, provided that, without
limitation, such a Change in Control shall be deemed to have occurred if (a) a
tender offer shall be made and consummated for the ownership of 25 percent or
more of the outstanding voting securities of the Company, (b) the Company shall
be merged or consolidated with another corporation in which the Company is not
the continuing or surviving corporation or pursuant to which shares of the
Company's capital stock are exchanged for cash, securities or other property,
other than a merger of the Company in which the holders of the Company's voting
securities immediately prior to the merger have the same proportionate ownership
of the voting securities of the surviving corporation immediately after the
merger, (c) any person, corporation, partnership or other entity (other than the
Company, any of its profit sharing, employee stock
(8)
<PAGE>
ownership or other employee benefit plans, or a subsidiary of the Company, or
any person who beneficially owned more than 10 percent of the combined voting
power of the Company on October 1, 1993, or the successor(s) to such person as
trustee, personal representative, donee, heir or legatee) becomes the
"beneficial owner" (as such term is used in Section 13d-3 of the Securities
Exchange Act of 1934), directly or indirectly, of securities of the Company
representing 25 percent or more of the combined voting power of the Company's
then-outstanding securities, or (d) during any period of two (2) consecutive
years, individuals who at the beginning of such two (2) year period constitute
the entire Board of Directors of the Company shall cease for any reason to
constitute at least a majority of the Board of Directors of the Company, unless
the election of each director who was not a director at the beginning of such
period has been approved in advance by directors representing at least
two-thirds of the directors in office at the beginning of such period.
Notwithstanding anything herein contained to the contrary, the foregoing
events shall not be deemed a Change in Control if, within thirty (30) days
following the transaction(s) or elections causing such Change in Control, at
least two-thirds of the members of the Board of Directors of the Company in
office immediately prior to such Change in Control adopt a resolution pursuant
to which such transaction(s) or election is deemed not to be a Change in
Control for purposes of this Agreement.
11. CONFIDENTIAL INFORMATION. The Executive shall not divulge or
communicate to any person (except in performing the Executive's duties as an
officer of the Company), or use for the Executive's own purposes, trade secrets,
confidential commercial information or any other information, knowledge or data
of the Company which is not generally known to the public, and shall use the
Executive's best efforts to prevent the publication or disclosure by any other
person of any such secret, information, knowledge or data. All documents and
objects made, compiled, received, held or used by the Executive while employed
by the Company in connection with the business of the Company shall be and
remain the Company's property and shall be delivered by the Executive to the
Company upon the termination of the Executive's employment. It is understood
that the Executive shall retain ownership of the Executive's personal property,
including the Executive's private working papers not containing proprietary
information of or about the Company.
(9)
<PAGE>
12. NONCOMPETITION. The Executive agrees that during the Executive's
employment at the Company, and for a period of one (1) year after the
termination of the Executive's employment for Good Reason prior to a Change in
Control, the Executive will not, directly or indirectly, whether or not for
compensation and whether or not as an employee, be engaged in or have any
financial interest in any business competing with the business of the Company
within any state, region or locality in which the Company is then operating
retail stores. For purposes of this Agreement, the Executive shall be deemed to
be engaged in or to have a financial interest in such a business if the
Executive is an employee, officer, director or partner of any person,
partnership, corporation or other entity which is engaged in such a business, or
if the Executive, directly or indirectly, performs services for such entity, or
if the Executive or any member of the Executive's immediately family
beneficially owns an equity interest in any such entity; provided, however, that
the foregoing shall not prohibit the Executive or a member of the Executive's
immediate family from owning less than 5 percent of any class of securities of a
publicly held corporation. The Executive recognizes that a breach by the
Executive of the Executive's obligations under this Paragraph 12 would cause
irreparable injury to the Company, and the Company shall be entitled to an
injunction enjoining the Executive from violating this Paragraph 12 and to
terminate the Executive's severance benefits under Paragraph 6(a) and
Paragraph 8.
13. COUNSEL FEES. The Company is aware that upon the occurrence of a
Change in Control, the Board of Directors or a stockholder of the Company may
then cause to attempt to cause the Company to refuse to comply with its
obligations under this Agreement or may cause or attempt to cause the Company to
institute litigation seeking to have this Agreement declared unenforceable, or
attempt to take other action to deny the Executive the benefits intended under
this Agreement. It is the intent of the Company that the Executive not be
required to incur the expenses associated with the enforcement of his rights
under this Agreement by litigation or other legal action since the cost and
expense thereof would substantially detract from the benefits intended to be
extended to the Executive hereunder, nor be bound to negotiate any settlement of
his rights hereunder under threat of incurring such expenses. Accordingly, if
following a Change in Control it should appear to the Executive that the Company
has failed to comply with any of its obligations under this Agreement,
(10)
<PAGE>
or in the event the Company or any other person takes any action to declare this
Agreement void or unenforceable, or institutes any litigation or other legal
action designed to deny, diminish or to recover from the Executive the benefits
intended to be provided to the Executive hereunder, the Company irrevocably
authorizes the Executive, from time to time, to retain counsel of his choice at
the expense of the Company to represent the Executive in connection with the
initiation or defense of any litigation or other legal action, whether by or
against the Company or any director, officer, stockholder or other person
affiliated with the Company. The reasonable fees and expenses of counsel
selected from time to time by the Executive shall be paid or reimbursed to the
Executive by the Company on a regular, periodic basis upon presentation by the
Executive of a statement or statements prepared by such counsel in accordance
with his or her customary practices.
14. TRUST FOR SECURING PAYMENT. The Executive understands and agrees that
the members of the Board of Directors of the Company in office on the date of a
Change in Control may elect to secure payment of all or part of the
compensation, payments, benefits and/or legal fees due or which may come due to
the Executive pursuant to the terms of this Agreement by such method as they
shall determine, including, without limitation, the establishment of a trust
funded by the transfer of Company funds or the establishment of an irrevocable
letter of credit drawn on the Company in favor of the trust. Any such transfer
or establishment of a letter of credit will be effectuated pursuant to
resolutions adopted by such directors following a Change in Control, which
resolutions shall designate the trustee(s) of such trust, adopt and authorize
the execution of the trust agreement governing such trust and specify the
compensation, payments, benefits and/or legal fees secured by the trust.
The Executive understands and agrees that, while the Executive is
employed by the Company and following termination of such employment, the
aforementioned trust will pay to the Executive compensation, payments, benefits
and/or legal fees due the Executive hereunder to the extent set forth in the
resolutions adopted by the Company's Board of Directors, in fulfillment of the
obligations of the Company pursuant to the terms of this Agreement. The
Executive agrees he shall have no interest in the assets held by such trust
unless and until such assets become distributable to him pursuant to the terms
of the trust agreement and that the trustees of such trust shall be liable to
the Executive only for their willful misconduct or gross negligence, but only
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to such extent that such Executive is unable to collect the compensation,
payments, benefits and/or legal fees as specified by the resolutions adopted by
the members of the Company's Board of Directors.
Nothing herein contained will diminish the obligation of the Company
to provide the Executive with the compensation, payments, benefits and/or legal
fees hereunder, but to the extent any such compensation payments, benefits
and/or legal fees are actually paid by the trust to the Executive, the Company
shall be relieved of its obligations to provide such compensation, payments,
benefits and/or legal fees.
15. SUCCESSOR TO THE COMPANY. As a condition to the effectiveness of any
merger, consolidation or transfer of all or substantially all of the assets
and/or business of the Company, the Company will require any successor or
transferee to expressly and unconditionally agree, in a writing reasonably
satisfactory to the Executive, to assume and/or guarantee payment and
performance of this Agreement in the same manner and to the same extent that the
Company would be required if no such succession or transfer had taken place. Any
failure of the Company to obtain such agreement prior to the effectiveness of
any such succession or assignment shall be a breach of this Agreement and shall
entitle the Executive to terminate the Executive's employment for Good Reason
pursuant to Paragraph 5(f). As used in this Agreement, the "Company" shall mean
Fay's Incorporated and any successor or assign to its business and/or assets as
aforesaid which executes and delivers the agreement provided for in this
Paragraph or which otherwise becomes bound by all the terms and provisions of
this Agreement by operation of law. If at any time during the term of this
Agreement the Executive is employed by any corporation of which the Company owns
a majority of the voting securities, "Company" as used in this Agreement shall
include such employer.
16. LIMITATION ON PAYMENTS.
(a) Anything in this Agreement to the contrary notwithstanding, in
the event that the Company's auditors (the "Auditors") determine that any
payment or distribution by the Company to or for the benefit of the Executive
pursuant to the terms of this Agreement or otherwise (a "Payment") would be
nondeductible by the Company for federal income tax purposes because of
Section 280G of the Internal Revenue Code of 1986, as amended (the "Code"), then
the aggregate present value of the amounts payable or distributable to or for
the benefit of the Executive pursuant to this Agreement (the "Agreement
Payments")
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shall be reduced (but not below zero) to the Reduced Amount. The "Reduced
Amount" shall be an amount expressed in present value which maximizes the
aggregate present value of Agreement Payments without causing any Payment to be
nondeductible by the Company because of Section 280G of the Code.
(b) If the Auditors determine that any Payment would be nondeductible
by the Company because of Section 280G of the Code, then the Company shall
promptly give the Executive notice to that effect and a copy of the detailed
calculation thereof and of the Reduced Amount, and the Executive may then elect,
in his sole discretion, which and how much of the Agreement Payments shall be
eliminated or reduced (as long as after such election the aggregate present
value of the Agreement Payments equals the Reduced Amount) and shall advise the
Company in writing of his election within ten (10) days of his receipt of
notice. If no such election is made by the Executive within such ten (10) day
period, then the Company may elect which and how much of the Agreement Payments
shall be eliminated or reduced (as long as after such election the aggregate
present value of the Agreement Payments equals the Reduced Amount) and shall
notify the Executive promptly of such election. For purposes hereof, present
value shall be determined in accordance with Section 280G(d)(4) of the Code. All
determinations made by the Auditors under this Paragraph shall be binding upon
the Company and the Executive and shall be made within sixty (60) days of the
Executive's termination of employment.
17. WITHHOLDING. Anything to the contrary notwithstanding, all payments
required to be made by the Company hereunder to the Executive or his estate or
beneficiaries shall be subject to the withholding for income and Social Security
taxes and other payroll deductions as are required by any applicable law or
regulation.
18. NOTICES. For purposes of this Agreement, notices and all other
communications provided for in the Agreement shall be in writing and shall be
deemed to have been duly given when delivered or mailed by United States
certified mail, return receipt required, postage prepaid, as follows:
If to the Company:
Fay's Incorporated
7245 Henry Clay Boulevard
Liverpool, New York 13088
If to the Executive:
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or such other address as either party may have furnished to the other in writing
in accordance herewith, except that notices of change of address shall be
effective only upon receipt.
19. SEVERABILITY. Any provision or portion of this Agreement determined
to be in conflict with any applicable law, statute or regulation shall be
deemed, if possible, to be altered or modified to conform thereto, and the
remaining provisions and portions of this Agreement shall be unaffected thereby
and shall remain in full force and effect to the fullest extent permitted by
law.
20. AMENDMENT OR MODIFICATION; WAIVER. No provision of this Agreement may
be amended, modified or waived unless such amendment, modification or waiver
shall be authorized by the Board of Directors of the Company or any authorized
committee of the Board of Directors and shall be agreed to in writing, signed by
the Executive and by an officer of the Company thereunto authorized. Except as
otherwise specifically provided in this Agreement, no waiver by either party of
any breach by the other party shall be deemed a waiver of a subsequent breach of
such condition or provision or a waiver of a similar or dissimilar provision or
condition at the same or at any prior or subsequent time.
21. GENERAL PROVISIONS.
(a) There shall be no right of setoff or counterclaim, in respect of
any claim, debt or obligation, against any payments due the Executive, his
dependents, beneficiaries or estate provided for in this Agreement.
(b) The Company and the Executive recognize that each party will have
no adequate remedy at law for breach by the other of any of the agreements
contained herein and, in the event of any such breach, the Company and the
Executive hereby agree and consent that the other shall be entitled to a decree
of specific performance or other appropriate remedy to enforce performance of
such agreements.
(c) No right or interest to or in any payments due under this
Agreement shall be assignable by the Executive; provided, however, that this
provision shall not preclude him from designating one or more beneficiaries to
receive any amount that may be payable after his death and shall not preclude
the legal representative of his estate from assigning any right hereunder to the
person or persons entitled thereto under his Will or, in the case of
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intestacy, to the person or persons entitled thereto under the law of intestacy
applicable to his estate.
(d) No right, benefit or interest hereunder shall be subject to
anticipation, alienation, sale, assignment, encumbrance, charge, pledge,
hypothecation or setoff in respect of any claim, debt or obligation, or to
execution, attachment, levy or similar process, or assignment by operation of
law. Any attempt, voluntary or involuntary, to effect any action specified in
the immediately preceding sentence shall, to the full extent permitted by law,
be null, void and of no effect.
(e) In the event of the Executive's death or a judicial determination
of his incompetence, reference in this Agreement to the Executive shall be
deemed, where appropriate, to refer to his legal representative or committee or,
where appropriate, to his beneficiary or beneficiaries.
(f) The titles to paragraphs in this Agreement are intended solely
for convenience and no provision of this Agreement is to be construed by
reference to the title of any paragraph.
(g) This Agreement shall be binding upon and shall inure to the
benefit of the Executive, his heirs and legal representatives, and the Company
and its successors as provided in Paragraph 15.
(h) This Agreement shall be governed by, construed and enforced in
accordance with the laws of the State of New York.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the day and year first above written.
FAY'S INCORPORATED
(Corporate Seal)
By: __________________________________
___________________________________
Witness
_______________________________________
, Executive
___________________________________
Witness
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