<PAGE>
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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 JULY 27, 1996
--------------------------------------------
[ ] 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
----- ------
Number of shares of Common Stock, $.10 par value, outstanding at August 30,
1996: 21,210,140
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<PAGE>
PART I - FINANCIAL INFORMATION
FAY'S INCORPORATED AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(in thousands of dollars)
<TABLE>
<CAPTION>
July 27, January 27,
1996 1996
----------- ------------
ASSETS: (Unaudited)
<S> <C> <C>
Current Assets:
Cash $ 11,847 $ 1,448
Accounts receivable 39,249 40,833
Merchandise inventories 123,525 149,597
Prepaid expenses 8,648 6,811
Deferred income taxes 7,304 7,304
-------- --------
Total Current Assets 190,573 205,993
Deferred Income Taxes 6,147 6,147
Property and Equipment, net 62,534 59,859
Intangible and Other Assets, net 25,585 26,594
-------- --------
Total Assets $284,839 $298,593
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current Liabilities:
Notes payable $ 17,665 $ 10,815
Accounts payable, trade 56,525 68,631
Accrued payroll and related taxes 9,149 9,347
Other accrued expenses 25,315 33,599
Federal and state income taxes payable - 975
Current portion of long-term debt and
obligation under leases 10,151 10,149
-------- --------
Total Current Liabilities 118,805 133,516
Long-Term Debt 46,687 46,915
Obligation Under Leases 958 1,166
Deferred Gain and Other Liabilities 14,100 14,623
Accrued Postretirement Benefit Obligation 7,072 7,099
Stockholders' Equity:
Common stock, par value $.10 per share 2,099 2,090
Additional paid-in capital 63,551 63,040
Retained earnings 31,668 30,245
Common stock held in treasury, at cost (101) (101)
-------- --------
Total Stockholders' Equity 97,217 95,274
-------- --------
Total Liabilities and Stockholders' Equity $284,839 $298,593
======== ========
</TABLE>
See notes to consolidated financial statements.
2
<PAGE>
FAY'S INCORPORATED AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(Unaudited)
(in thousands of dollars except per share data)
<TABLE>
<CAPTION>
Thirteen Weeks Ended Twenty-Six Weeks Ended
-------------------- ----------------------
July 27, July 29, July 27, July 29,
1996 1995 1996 1995
--------- -------- -------- --------
<S> <C> <C> <C> <C>
Net sales $253,563 $236,845 $502,117 $472,457
Cost and Expenses:
- ------------------
Cost of merchandise sold 189,356 174,630 373,409 345,908
Selling, general and
administrative expenses 57,020 55,684 113,143 112,287
Depreciation and amortization expenses 3,227 3,767 6,494 7,354
Interest expense, net 1,421 1,597 2,911 3,164
-------- -------- -------- --------
Total cost and expenses 251,024 235,678 495,957 468,713
-------- -------- -------- --------
Income from continuing operations
before income taxes 2,539 1,167 6,160 3,744
Income taxes 1,093 498 2,645 1,588
-------- -------- -------- --------
Income from continuing operations 1,446 669 3,515 2,156
Income (loss) from discontinued
operations (Note 3) - 304 - (412)
-------- -------- -------- --------
Net income $ 1,446 $ 973 $ 3,515 $ 1,744
======== ======== ======== ========
Earnings per share:
- -------------------
Continuing operations $ .07 $ .03 $ .17 $ .10
Discontinued operations - .02 - (.02)
-------- -------- -------- --------
Net income $ .07 $ .05 $ .17 $ .08
======== ======== ======== ========
Cash dividends paid per share $ .05 $ .05 $ .10 $ .10
======== ======== ======== ========
Stores in operation at end of period 271 276 271 276
</TABLE>
See notes to consolidated condensed financial statements.
3
<PAGE>
FAY'S INCORPORATED AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands of dollars)
<TABLE>
<CAPTION>
Twenty-Six Weeks Ended
----------------------
July 27, July 29,
1996 1995
-------- ---------
<S> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES:
Net income $ 3,515 $ 1,746
Adjustments to reconcile net income to
net cash provided from operating activities:
Depreciation and amortization 6,913 8,871
Decrease in current assets 13,280 7,410
Decrease in current liabilities (19,603) (3,407)
Decrease in other long-term liabilities (550) (843)
-------- --------
Net cash provided from operating activities 3,555 13,777
CASH FLOW FOR INVESTING ACTIVITIES:
Expenditures for property and equipment (11,096) (5,894)
Sale of The Paper Cutter Division 13,547 -
Increase in intangibles and other assets (451) (4,555)
-------- --------
Net cash provided from (used for)
investing activities 2,000 (10,449)
CASH FLOW FROM FINANCING ACTIVITIES:
Increase (decrease) in notes payable 6,850 (1,400)
Repayment of long-term debt and
reduction of obligation under leases (434) (539)
Cash dividends paid (2,092) (2,056)
Sale of common stock 520 127
Other - 24
-------- --------
Net cash provided from (used for)
financing activities 4,844 (3,844)
Net increase (decrease) in cash 10,399 (516)
Cash balance, beginning of period 1,448 1,941
-------- --------
Cash balance, end of period $ 11,847 $ 1,425
======== ========
</TABLE>
See notes to consolidated condensed financial statements.
4
<PAGE>
FAY'S INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
July 27, 1996
(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 27, 1996 balance sheet data is derived from audited
financial statements.
(2) COMMON STOCK AND EARNINGS PER SHARE
In October 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based
Compensation," which is effective for the Company in fiscal 1997. SFAS No. 123
requires expanded disclosures of stock-based compensation arrangements with
employees and encourages (but does not require) compensation cost to be measured
based on the fair value of the equity instrument awarded. Companies are
permitted, however, to continue to apply APB Opinion No. 25, which recognizes
compensation cost based on the intrinsic value of the equity instrument awarded.
The Company will continue to apply APB Opinion No. 25 to its stock-based
compensation awards to employees and will disclose the required pro forma effect
on net income and earnings per share in its fiscal 1997 Annual Report on Form
10-K.
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
21,373,680 and 20,858,472 for the thirteen weeks ended July 27, 1996 and July
29, 1995, respectively, and 21,220,015 and 20,793,640 for the twenty-six weeks
ended July 27, 1996 and July 29, 1995, respectively.
(3) DISCONTINUED OPERATIONS
On July 25, 1996, the Company sold the inventory and store assets of its Paper
Cutter Division to Party Experience Inc., a wholly owned subsidiary of Party
Stores Holdings, Inc., for approximately $14 million in cash. The purchase
price, which was based on the net book value of such assets as of January 27,
1996, will be adjusted for changes in the net book value of those assets up to
the closing date and is also subject to an audit which is not yet complete. The
Company anticipates that the final purchase price will approximate $13.5
million. Party Experience Inc. did not assume liabilities of the Paper Cutter
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 Company provided for the anticipated loss on
disposal in fiscal 1996, including a provision for estimated operating losses
during the phase-out period.
The Company also sold its Wheels Discount Auto Supply Division in November 1995.
Both the Wheels and Paper Cutter Divisions are reported as discontinued
operations and the consolidated financial statements have been reclassified to
separately report their operating results. The Company's prior year operating
results have been restated to reflect continuing operations.
Net sales for the discontinued operations totaled $9,702,000 and $33,001,000 for
the thirteen weeks ended July 27, 1996 and July 29, 1995, respectively, and
$20,702,000 and $63,792,000 for the twenty-six weeks ended July 27, 1996 and
July 29, 1995, respectively. Fiscal 1996 income (loss) from discontinued
operations
5
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was net of a provision for income taxes of $227,000 for the thirteen weeks ended
July 29, 1995 and an income tax benefit of $298,000 for the twenty-six weeks
ended July 29, 1995.
(4) PROPOSED MERGER
On August 5, 1996, the Company entered into an Agreement and Plan of Merger (the
"Merger Agreement") with J.C. Penney Company, Inc. ("JCPenney"), pursuant to
which, among other things, a wholly owned subsidiary of JCPenney will be merged
with and into Fay's and Fay's will become a wholly owned subsidiary of JCPenney
(the "Merger"). Under the terms of the Merger Agreement, each outstanding share
of Fay's common stock will be converted into the right to receive a fractional
share of JCPenney common stock, valued at $12.75, subject to a minimum per share
exchange of .2253397 of a share of JCPenney stock and a maximum per share
exchange of .2754151. The actual exchange ratio, subject to the minimum and
maximum exchange ratios, will be based on the average of the per share price of
JCPenney common stock during the ten consecutive trading days preceding the date
which is two trading days prior to the Fay's stockholders meeting. For Federal
income tax purposes, the Merger has been structured as a reorganization within
the meaning of Section 368(a) of the Internal Revenue Code of 1986, as amended.
The Merger is subject to, among other things, approval by the stockholders of
Fay's and the receipt of requisite regulatory approvals.
In connection with the Merger, Fay's largest stockholders, Henry A. Panasci, Jr.
and David H. Panasci entered into a Stockholders Agreement with JCPenney
pursuant to which, among other things, each of the stockholders has agreed to
vote all shares beneficially owned by him in favor of the Merger.
6
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
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 July 27, 1996, the Company was
operating 223 Fay's Drug stores and 48 traditional drug stores. Since the end
of the second quarter of last year the Company has acquired two super drug
stores, opened two new Fay's Drug stores and converted six traditional drug
stores to super drug stores. In addition, it has closed seven traditional drug
stores and two super drug stores, combining their operations with other existing
super drug stores.
In November 1995, the Company sold its Wheels Discount Auto Supply Division and
in July 1996 it sold its Paper Cutter Division. The results of these two
divisions have been segregated in the statement of income as discontinued
operations and the Company's prior year operating results have been restated to
reflect continuing operations.
Net income from continuing operations was $1,446,000 for the second quarter
ended July 27, 1996 compared to $669,000 in the second quarter of the prior
year, and for the twenty-six weeks, was $3,515,000 compared to $2,156,000 in the
prior year. Fiscal 1996 net income also included the results associated with
the discontinued operations which for the quarter and twenty-six weeks ended
July 29, 1995, respectively, was income of $304,000 and a loss of $412,000.
Sales for the second quarter and for the first two quarters of fiscal 1997 were
$253.6 and $502.1 million, respectively, representing increases of 7.1% and
6.3% over the same periods a year earlier. Sales from comparable stores (those
open one year or more as of July 27, 1996) increased 5.3% for the quarter and
4.9% for the twenty-six weeks. The overall sales increases reflected gains in
pharmacy sales of 9.8% and 8.4% for the three and six months, respectively,
including comparable store increases of 10.9% and 9.6%, respectively.
The gross profit rate on sales was 25.32% in the second quarter compared to
26.27% for the same period last year. For the six month period, the gross profit
rate decreased from 26.79% to 25.63%. 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 84% of total pharmacy sales
for the six months compared to approximately 78% in the previous year.
Selling, general and administrative expenses were 22.5% of sales for the quarter
compared to 23.5% last year, and for the six months declined from 23.8% to
22.5%. This decrease reflects a number of efforts aimed at reducing costs,
including steps taken in late fiscal 1996 to eliminate certain corporate
administration and supervisory layers. In addition, efforts to contain costs in
the Company's retail locations resulted in the favorable leveraging of sales
increases and a decline in the level of store-level expenses as a percentage of
sales.
FINANCIAL CONDITION AND LIQUIDITY
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.
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. At July 27, 1996, the Company had cash of $11.8
million and total working capital of $71.8 million. Cash flow provided from
operations totaled $3.6 million and was used primarily for expenditures on
property and equipment and for the payment
7
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of cash dividends. As discussed in Note 3, the Company sold its Paper Cutter
Division on July 25, 1996. The initial proceeds from the sale were received in
the second quarter of fiscal 1996.
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
(a) The 1996 Annual Meeting of Stockholders was held on May 24, 1996.
(c) Each of the matters voted upon at the Meeting, and the number of votes cast
for, against or withheld, as well as the number of abstentions and broker
non-votes, as to each matter, including a separate tabulation with respect
to each nominee for office, is as follows:
(i) Votes cast for director nominees:
Director Nominee Votes For Votes Against
---------------- ---------- -------------
Robert H. Altman 18,202,384 484,928
Gary L. Moreau 18,292,502 394,810
David H. Panasci 18,110,640 576,673
(ii) The number of votes regarding the proposal to approve the appointment
of Deloitte & Touche LLP to audit the financial statements of the
Company and its subsidiaries for the fiscal year ending February 1,
1997 were cast as follows: for - 18,463,321; against - 148,469;
abstain - 75,521.
(iii)In addition, there were three shareholder proposals for
which proxies were solicited. None of the proposals were duly
presented to the Meeting for approval. The results of the proxy vote
on the three proposals, although not binding on the Corporation, were
as follows:
(1) A proposal recommending the elimination of pension benefits for
non-employee directors: for - 3,536,597; against - 11,689,319;
abstain - 168,249.
(2) A proposal requesting the elimination of an election of
directors by classes: for - 4,443,138; against - 10,670,838;
abstain - 280,186.
(3) A proposal recommending that non-employee directors receive 50%
of compensation in the form of the Company's stock: for -
2,106,501; against - 13,090,550; abstain- 197,111.
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
27 Article 5 Financial Data Schedule for the quarter ended July 27, 1996.
(b) Reports on Form 8-K: There were no reports on Form 8-K filed during the
fiscal quarter ended July 27, 1996.
8
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SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FAY'S INCORPORATED
------------------
(Registrant)
Dated: September 5, 1996 /s/ James F. Poole, Jr.
-----------------------
James F. Poole, Jr.
Senior Vice President-Finance
and Chief Financial Officer
Dated: September 5, 1996 /s/ Warren D. Wolfson
-----------------------
Warren D. Wolfson
Senior Vice President
9
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> FEB-01-1997
<PERIOD-START> JAN-28-1996
<PERIOD-END> JUL-27-1996
<CASH> 11,847
<SECURITIES> 0
<RECEIVABLES> 39,249
<ALLOWANCES> 0
<INVENTORY> 123,525
<CURRENT-ASSETS> 190,573
<PP&E> 184,397
<DEPRECIATION> 121,863
<TOTAL-ASSETS> 284,839
<CURRENT-LIABILITIES> 118,805
<BONDS> 46,687
0
0
<COMMON> 2,099
<OTHER-SE> 95,118
<TOTAL-LIABILITY-AND-EQUITY> 284,839
<SALES> 502,117
<TOTAL-REVENUES> 502,117
<CGS> 373,409
<TOTAL-COSTS> 495,957
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,911
<INCOME-PRETAX> 6,160
<INCOME-TAX> 2,645
<INCOME-CONTINUING> 3,515
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,515
<EPS-PRIMARY> .17
<EPS-DILUTED> .17
</TABLE>
