<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[ x ] Quarterly report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934
FOR THE QUARTERLY PERIOD ENDED OCTOBER 28, 1995
-----------------------------------------------
[ ] Transition report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934
0-5179
(Commission File Number)
FAY'S INCORPORATED
(Exact name of registrant as specified in its charter)
State of New York 16-0919350
(State of Incorporation) (I.R.S. Employer Identification No.)
7245 HENRY CLAY BOULEVARD, LIVERPOOL, NEW YORK 13088
(Address of principal executive offices)
Registrant's telephone number, including area code: (315) 451-8000
Indicate by check mark whether registrant (1) has filed all reports required to
be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes X No
---- ----
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 December 1, 1995
- ---------------------------- -------------------------------
Common Stock, $.10 par value 20,595,080
11 Pages
<PAGE>
FAY'S INCORPORATED AND SUBSIDIARIES
Index
PART I. FINANCIAL INFORMATION Page No.
--------
Item 1. Financial Statements
Consolidated Condensed Balance Sheets -
October 28, 1995 and January 28, 1995 3
Consolidated Condensed Statements of Earnings -
Thirteen and Thirty-Nine Weeks Ended October 28, 1995
and October 29, 1994 4
Consolidated Condensed Statements of Cash Flows -
Thirty-Nine Weeks Ended October 28, 1995 and October 29, 1994 5
Notes to Consolidated Financial Statements 6-7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8-9
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 9
Item 6. Exhibits and Reports on Form 8-K. 10
2
<PAGE>
FAY'S INCORPORATED AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(in thousands of dollars)
<TABLE>
<CAPTION>
October 28,
1995 January 28,
ASSETS: (Unaudited) 1995
------------ ------------
<S> <C> <C>
Current Assets:
Cash $ 1,625 $ 1,941
Accounts receivable 34,267 35,992
Merchandise inventories 184,973 166,956
Prepaid expenses 6,928 8,457
Refundable income taxes 1,424 -
------- -------
Total Current Assets 229,217 213,346
Deferred Income Taxes 1,572 1,572
Property and Equipment, net 72,179 70,395
Intangible and Other Assets, net 31,130 28,815
------- -------
Total Assets $ 334,098 $ 314,128
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current Liabilities:
Notes payable, bank $ 14,855 $ 13,100
Accounts payable, trade 86,811 57,411
Accrued payroll and related taxes 7,729 9,423
Other current liabilities 21,282 20,176
Federal and state income taxes payable - 1,866
Current portion of long-term debt and
obligation under leases 10,147 10,294
------- -------
Total Current Liabilities 140,824 112,270
Long-Term Debt 74,127 81,656
Obligation Under Leases 1,282 1,587
Deferred Gain and Other Liabilities 3,236 4,229
Accrued Postretirement Benefit
Obligation 7,394 7,405
Stockholders' Equity:
Common stock, par value $.10 per share 2,061 2,055
Additional paid-in capital 61,407 61,050
Retained earnings 43,868 43,977
Common stock held in treasury, at cost (101) (101)
------- -------
Total Stockholders' Equity 107,235 106,981
------- -------
Total Liabilities and Stockholders' $ 334,098 $ 314,128
Equity ======= =======
</TABLE>
See notes to consolidated financial statements.
3
<PAGE>
FAY'S INCORPORATED AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF NET EARNINGS
(Unaudited)
(in thousands of dollars except per share data)
<TABLE>
<CAPTION>
Thirteen Weeks Ended Thirty-Nine Weeks Ended
---------------------------- ----------------------------
October 28, October 29, October 28, October 29,
1995 1994 1995 1994
------------ ----------- ------------ -----------
<S> <C> <C> <C> <C>
Net sales $ 250,169 $ 241,304 $ 744,816 $ 705,741
Cost and Expenses:
Cost of merchandise sold 183,178 172,922 542,822 507,665
Selling, general and
administrative expenses 59,405 59,031 179,581 170,931
Depreciation and amortization expenses 3,545 3,723 11,492 11,162
Interest expense, net 1,773 1,811 5,667 5,651
------- ------- ------- -------
Total cost and expenses 247,901 237,487 739,562 695,409
------- ------- ------- -------
Earnings from continuing operations
before income taxes 2,268 3,817 5,254 10,332
Provision for income taxes 940 1,612 2,205 4,379
------- ------- ------- -------
Earnings from continuing operations 1,328 2,205 3,049 5,953
Earnings (loss) from
discontinued operations (Note 3) (109) 1 (84) 807
------- ------- ------- -------
Net earnings $ 1,219 $ 2,206 $ 2,965 $ 6,760
======= ======= ======= =======
Earnings per share:
Earnings from continuing operations $ .06 $ .11 $ .14 $ .29
Earnings (loss) from
discontinued operations - - - .04
------- ------- ------- -------
Net earnings $ .06 $ .11 $ .14 $ .33
======= ======= ======= =======
Cash dividends paid per share $ .05 $ .05 $ .15 $ .15
======= ======= ======= =======
Stores in operation at end of period 305 305 305 305
</TABLE>
See notes to consolidated condensed financial statements.
4
<PAGE>
FAY'S INCORPORATED AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands of dollars)
<TABLE>
<CAPTION>
Thirty-Nine Weeks Ended
-------------------------------
October 28, October 29,
1995 1994
------------ --------------
<S> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES:
Net earnings $ 2,965 $ 6,760
Adjustments to reconcile net earnings
to net cash
provided from operating activities:
Depreciation and amortization 12,883 12,305
Increase in current assets (16,187) (34,833)
Increase in current liabilities 26,947 20,168
Decrease in other long-term (1,007) (615)
liabilities
Changes in deferred tax assets and - (580)
liabilities ------- -------
Net cash provided from operating 25,601 3,205
activities
CASH FLOW FOR INVESTING ACTIVITIES:
Expenditures for property and equipment (12,092) (12,960)
Increase in intangibles and other assets (4,890) (10,834)
------- -------
Net cash used for investing activities (16,982) (23,794)
CASH FLOW FROM FINANCING ACTIVITIES:
Increase in notes payable, bank 1,755 4,395
Increase in long-term debt - 26,265
Repayment of long-term debt and
reduction of obligation under leases (7,978) (6,772)
Cash dividends paid (3,085) (3,041)
Other 373 110
------- -------
Net cash provided from financing (8,935) 20,957
activities
Net increase (decrease) in cash (316) 368
Cash balance, beginning of period 1,941 1,006
------- -------
Cash balance, end of period $ 1,625 $ 1,374
======= =======
</TABLE>
See notes to consolidated condensed financial statements.
5
<PAGE>
FAY'S INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
October 28, 1995
(1) STATEMENT OF MANAGEMENT
The condensed financial statements included herein have been prepared by the
Company, without audit, pursuant to the rules and regulations of the Securities
and Exchange Commission. In the opinion of Management, the information
contained herein reflects all normal and recurring adjustments necessary for a
fair presentation of the results of operations for the periods. The
consolidated financial statements and notes thereto should be read with the
financial statements and notes included in the Company's latest Annual Report on
Form 10-K. The January 28, 1995 balance sheet data is derived from audited
financial statements.
(2) COMMON STOCK AND EARNINGS PER SHARE
Earnings per share data are based on the weighted average number of shares of
common stock and common stock equivalents (stock options) with a dilutive effect
outstanding during the period. The average number of shares of common stock and
dilutive common stock equivalents used to calculate earnings per share were
20,901,500 and 20,404,914 for the thirteen weeks ended October 28, 1995 and
October 29, 1994, respectively, and 20,829,593 and 20,361,766 for the thirty-
nine weeks ended October 28, 1995 and October 29, 1994, respectively.
(3) DISCONTINUED OPERATIONS
On October 20, 1995, the Company entered into a definitive agreement to sell its
Wheels Discount Auto Supply Division ("Wheels") to Western Auto Supply Company,
a wholly owned subsidiary of Sears, Roebuck and Co.. The agreement provides for
payment, in cash, of $36,965,000 for specified assets consisting primarily of
inventories and store fixed assets. The purchase price was based on the net
book value of such assets as of July 29, 1995 and will be adjusted for changes
in the net book value of those assets up to the closing date, which was November
30, 1995. The purchase price will also be subject to audit. Western did not
assume liabilities of the Wheels Division, primarily consisting of trade
payables, and therefore the net proceeds will be used in part to liquidate such
outstanding amounts along with other costs of the transaction.
The Wheels Division is reported as a discontinued operation and the consolidated
financial statements have been reclassified to separately report its operating
results. The Company's prior year operating results have been restated to
reflect continuing operations. Operating results of the discontinued business
were as follows:
<TABLE>
<CAPTION>
Thirteen Weeks Ended Thirty-Nine Weeks Ended
----------------------------- -----------------------------
October 28, October 29, October 28, October 29,
1995 1994 1995 1994
------------- ----------- ------------- -----------
<S> <C> <C> <C> <C>
Sales $ 22,506 $ 19,289 $ 64,111 $ 46,291
====== ====== ====== ======
Income (loss) before income taxes $ ( 186) $ 2 $ ( 137) $ 1,401
Income taxes (benefit) ( 77) 1 ( 53) 594
------ ------ ------ ------
Income (loss) from operations $ ( 109) $ 1 $ ( 8) 807
====== ====== ====== ======
</TABLE>
6
<PAGE>
(4) LONG-TERM DEBT
The Company's 9.77% and 9.59% unsecured senior notes, along with its revolving
term loan, contain certain covenants and restrictions, including among other
terms, a covenant requiring the Company to maintain a specified fixed charge
ratio (as defined). At October 28, 1995, the Company was not in compliance with
this provision, however, waivers have been obtained from the underlying lending
institutions through October 28, 1995.
7
<PAGE>
FAY'S INCORPORATED AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The Company's principal business is the operation of a chain of super drug
stores under the name "Fay's Drugs." At October 28,1995, the Company was
operating 217 Fay's Drug stores, 58 traditional drug stores, and 30 discount
office supply, party supply, book and greeting card stores under the name "The
Paper Cutter." Since the end of the third quarter of last year the Company has
acquired one and opened five new Fay's Drug stores, closed and combined four of
its traditional drug stores, and closed two Paper Cutter stores.
As discussed in Note 3 to the financial statements, the Company has entered an
agreement to sell its Wheels division which consisted of 81 stores at October
28, 1995. This division is reported as a discontinued operation in the
financial statements, and for the thirty-nine weeks incurred a net loss of
$84,000 in fiscal 1996 compared to earnings of $807,000 in the previous year.
This reduction was due to a decrease in comparable store sales and was
reflective of competitive and weather related factors.
Net earnings from continuing operations were $1,328,000 in the third quarter
compared to $2,205,000 in the third quarter of last year. For the thirty-nine
weeks net earnings from continuing operations were $3,049,000 in the current
year compared to $5,953,000 in fiscal 1995.
Sales for the third quarter and for the first three quarters of fiscal 1996 were
$250.2 and $744.8 million, respectively, representing increases of 3.7% and 5.5%
over the same periods a year earlier. Sales from comparable stores (those open
one year or more as of October 28, 1995) increased 1.3% for the quarter and 1.2%
for the thirty-nine weeks. The overall sales increases are reflective of
increases in pharmacy sales which increased 9.4% and 13.1% for the three and
nine months, respectively, while comparable stores increased 6.9% and 7.2%,
respectively.
The gross profit rate on sales was 26.78% in the third quarter compared to
28.34% for the same period last year. For the nine months, the gross profit
rate decreased from 28.07% last year to 27.12%. These declines were largely
attributable to continued pressures on third party pharmacy margins, combined
with the trend of third party prescription sales accounting for a greater
portion of total pharmacy revenues. Third party pharmacy sales were over 79% of
total pharmacy sales in the first three quarters compared to approximately 72%
in the previous year.
Selling, general and administrative expenses were 23.7% of sales for the quarter
compared to 24.5% last year, and for the three quarters decreased from 24.2% to
24.1%. The decrease during the third quarter was due to efforts aimed at
reducing costs and due to reductions in expenses which are tied to earnings such
as bonuses and profit-sharing.
8
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
At October 28, 1995, the Company had cash of $1.6 million and total working
capital of $88.4 million. Cash flow from operations totaled $25.6 million and
was used primarily for expenditures on property and equipment, the payment of
cash dividends, and reductions in debt obligations.
As discussed in Note 3 to the financials statements the Company sold its Wheels
Division in the fourth quarter of fiscal 1996. Proceeds of the sale will be
available to reduce debt and to make further investments in the Company's drug
store operations. The Company also continues to pursue the divestiture of its
other non-drug store retail business, The Paper Cutter.
The Company continues to maintain a sound financial position and believes that
its operations and capital resources will provide sufficient cash availability
to meet its liquidity needs and to finance planned growth.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Reference is made to the Company's Quarterly Report on Form 10-Q for the quarter
ended April 29, 1995, wherein it was reported that the Company had been served
with a summons and complaint in an action filed in the U.S. District Court for
the Northern District of New York entitled David Rowitt v. Fay's Incorporated,
-----------------------------------
Henry A. Panasci, Jr. and David H. Panasci. Said complaint alleged violations
- ------------------------------------------
by the Company of Section 10(b) of the Securities and Exchange Act of 1934 and
Rule 10b-5.
On or about October 15, 1995, the class action plaintiff in the aforementioned
lawsuit filed a motion to voluntarily dismiss the action under Rules 41(a)(1)
and 23 of the Federal Rules of Civil Procedure, without prejudice and without
costs to the defendants. On December 1, 1995 the Court granted the plaintiff's
motion, dismissing the action without prejudice.
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibit 27 - Article 5 Financial Data Schedule for the nine months ended
October 28, 1995.
(b) Reports on Form 8-K: There were no reports on Form 8-K filed during the
fiscal quarter ended October 28, 1995.
9
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FAY'S INCORPORATED
------------------
(Registrant)
Dated: December 8, 1995 /s/ James F. Poole, Jr.
-----------------------
James F. Poole, Jr.
Senior Vice President-Finance
and Chief Financial Officer
Dated: December 8, 1995 /s/ Warren D. Wolfson
---------------------
Warren D. Wolfson
Senior Vice President
10
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JAN-27-1996
<PERIOD-START> JAN-29-1995
<PERIOD-END> OCT-28-1995
<CASH> 1,625
<SECURITIES> 0
<RECEIVABLES> 34,267
<ALLOWANCES> 0
<INVENTORY> 184,973
<CURRENT-ASSETS> 229,217
<PP&E> 201,600
<DEPRECIATION> 129,421
<TOTAL-ASSETS> 334,098
<CURRENT-LIABILITIES> 140,824
<BONDS> 74,127
<COMMON> 2,061
0
0
<OTHER-SE> 105,174
<TOTAL-LIABILITY-AND-EQUITY> 334,098
<SALES> 744,816
<TOTAL-REVENUES> 744,816
<CGS> 542,822
<TOTAL-COSTS> 739,562
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 5,667
<INCOME-PRETAX> 5,254
<INCOME-TAX> 2,205
<INCOME-CONTINUING> 3,049
<DISCONTINUED> (84)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,965
<EPS-PRIMARY> .14
<EPS-DILUTED> .14
</TABLE>
