<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
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[ x ] Quarterly report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934
FOR THE QUARTERLY PERIOD ENDED APRIL 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 May 31, 1996:
20,926,119
7 Pages
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PART I - FINANCIAL INFORMATION
FAY'S INCORPORATED AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(in thousands of dollars)
April 27, January 27,
1996 1996
----------- ------------
ASSETS: (Unaudited)
Current Assets:
Cash $ 1,540 $ 1,448
Accounts receivable 40,430 40,833
Merchandise inventories 144,592 149,597
Prepaid expenses 7,004 6,811
Deferred income taxes 7,304 7,304
-------- --------
Total Current Assets 200,870 205,993
Deferred Income Taxes 6,147 6,147
Property and Equipment, net 61,225 59,859
Intangible and Other Assets, net 25,912 26,594
-------- --------
Total Assets $294,154 $298,593
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current Liabilities:
Notes payable $ 16,930 $ 10,815
Accounts payable, trade 64,947 68,631
Accrued payroll and related taxes 8,340 9,347
Other accrued expenses 28,277 33,599
Federal and state income taxes payable - 975
Current portion of long-term debt and
obligation
under leases 10,149 10,149
-------- --------
Total Current Liabilities 128,643 133,516
Long-Term Debt 46,767 46,915
Obligation Under Leases 1,062 1,166
Deferred Gain and Other Liabilities 14,137 14,623
Accrued Postretirement Benefit 7,085 7,099
Obligation
Stockholders' Equity:
Common stock, par value $.10 per share 2,099 2,090
Additional paid-in capital 63,193 63,040
Retained earnings 31,269 30,245
Common stock held in treasury, at cost (101) (101)
-------- --------
Total Stockholders' Equity 96,460 95,274
-------- --------
Total Liabilities and Stockholders' $294,154 $298,593
Equity ======== ========
See notes to consolidated financial statements.
2
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FAY'S INCORPORATED AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(Unaudited)
(in thousands of dollars except per share data)
Thirteen Weeks Ended
---------------------
April 27, April 29,
1996 1995
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Net sales $248,554 $235,612
Cost and Expenses:
- ------------------
Cost of merchandise sold 184,053 171,278
Selling, general and
administrative expenses 56,123 56,603
Depreciation and amortization expenses 3,267 3,587
Interest expense, net 1,490 1,567
-------- --------
Total cost and expenses 244,933 233,035
-------- --------
Income from continuing operations
before income taxes 3,621 2,577
Income taxes 1,552 1,090
-------- --------
Income from continuing operations 2,069 1,487
Income (loss) from discontinued
operations, net of income tax - ( 716)
benefits of $ - and $(525) -------- --------
Net income $ 2,069 $ 771
======== ========
Earnings per share:
- -------------------
Continuing operations $ .10 $ .07
Discontinued operations - ( .03)
-------- --------
Net income $ .10 $ .04
======== ========
Cash dividends paid per share $ .05 $ .05
======== ========
Stores in operation at end of period 272 276
See notes to consolidated condensed financial statements.
3
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FAY'S INCORPORATED AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands of dollars)
Thirteen Weeks Ended
--------------------
April 27, April 29,
1996 1995
---------- ----------
CASH FLOW FROM OPERATING ACTIVITIES:
Net income $ 2,069 $ 772
Adjustments to reconcile net income to
net cash
provided from operating activities:
Depreciation and amortization 3,481 4,351
Decrease (increase) in current
assets 5,215 (2,359)
(Decrease) increase in current
liabilities (10,988) 4,148
Decrease in other long-term
liabilities (500) (251)
-------- -------
Net cash (used for) provided from
operating activities (723) 6,661
CASH FLOW FOR INVESTING ACTIVITIES:
Expenditures for property and equipment (4,210) (2,907)
Decrease (increase) in intangibles and
other assets 45 (3,322)
-------- -------
Net cash used for investing activities (4,165) (6,229)
CASH FLOW FROM FINANCING ACTIVITIES:
Increase in notes payable 6,115 200
Repayment of long-term debt and
reduction of
obligation under leases (252) (305)
Cash dividends paid (1,045) (1,027)
Other 162 43
-------- -------
Net cash provided from financing
activities 4,980 (1,089)
Net increase (decrease) in cash 92 (657)
Cash balance, beginning of period 1,448 1,941
-------- -------
Cash balance, end of period $ 1,540 $ 1,284
======== =======
See notes to consolidated condensed financial statements.
4
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FAY'S INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
April 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
21,066,350 and 20,728,787 for the thirteen weeks ended April 27, 1996 and April
29, 1995, respectively.
(3) DISCONTINUED OPERATIONS
In June 1996, the Company announced that it had entered into a definitive
agreement to sell 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 was based on the net
book value of such assets as of January 27, 1996 and will be subject to
adjustment for changes up to the closing date which is anticipated to be in
August 1996. 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, as well as for estimated operating losses during the phase-out
period, in fiscal 1996 and believes that such provisions are adequate.
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 totalled $11,000,000 and $30,792,000 for the thirteen
weeks ended April 27, 1996 and April 29, 1995, respectively.
5
<PAGE>
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 April 27, 1996, the Company was
operating 220 Fay's Drug stores and 52 traditional drug stores. Since the end
of the first quarter of last year the Company has acquired one super drug store,
opened two new Fay's Drug stores and converted five traditional drug stores to
super drug stores. In addition, it has closed five traditional drug stores and
two super drug stores, and has combined their operations with other existing
super drug stores.
As part of the Company's strategy of concentrating its focus and resources on
core drug store and related pharmacy businesses, the Company sold its Wheels
Discount Auto Supply Division during fiscal 1996 and began negotiations to sell
its Paper Cutter Division. Consequently, 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 was $2,069,000 for the first quarter ended April 27, 1996 compared to
$771,000 in the first quarter of last year. Included in last year's results
were losses of $716,000 relating to discontinued operations. Income from
continuing operations increased 39% over the prior year.
Sales for the first quarter of fiscal 1997 were $248.6 million representing an
increase of 5.5% over the same period last year. Sales from comparable stores
(those open one year or more as of April 27, 1996) increased 4.4% for the
quarter including an 8.3% increase in pharmacy sales.
The gross profit rate on sales was 25.95% in the first quarter compared to
27.31% for the same period last year. The decline was 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 83% of total pharmacy
sales in the first quarter compared to approximately 78% in the previous year.
Selling, general and administrative expenses decreased $481,000 from the prior
year and, as a percentage of sales, declined from 24.0% to 22.6%. 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 April 27, 1996, the Company had cash of $1.5
million and total working capital of $72.2 million. Cash flow used by
operations totaled $723,000 reflecting reductions in a number of liabilities.
During the first quarter there were payments related to obligations associated
with the discontinued Wheels Division including the liquidation of trade
liabilities, professional fees related to the sale and severance. The final
payment for the sale of Wheels (approximately $3.6 million) was received
subsequent to the end of the first quarter. In addition, the Company made a
final payment of approximately $1 million related to a June 1994 acquisition.
Cash was also used for expenditures on property and equipment and for the
payment of cash dividends.
6
<PAGE>
As discussed in Note 3, the Company has an agreement for the sale of its Paper
Cutter Division. Proceeds of the sale will be available to reduce debt and to
make further investments in the Company's drug store operations.
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
27 Article 5 Financial Data Schedule for the quarter ended April 27, 1996.
(b) Reports on Form 8-K: There were no reports on Form 8-K filed during the
fiscal quarter ended April 27, 1996.
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: June 7, 1996 /s/ James F. Poole, Jr.
-----------------------
James F. Poole, Jr.
Senior Vice President-Finance
and Chief Financial Officer
Dated: June 7, 1996 /s/ Warren D. Wolfson
---------------------
Warren D. Wolfson
Senior Vice President
7
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<PAGE>
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<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> FEB-1-1997
<PERIOD-START> JAN-28-1996
<PERIOD-END> APR-27-1996
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<SECURITIES> 0
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0
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