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FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
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[X] Annual Report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
FOR FISCAL YEAR ENDED JANUARY 27, 1996 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
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
STATE OF NEW YORK 16-0919350
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
7245 HENRY CLAY BOULEVARD, 13088
LIVERPOOL, NEW YORK (Zip Code)
(Address of principal executive offices)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (315) 451-8000
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
Name of each exchange
Title of each class on 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]
State the aggregate market value of the voting stock held by non-affiliates
of the registrant as of April 18, 1996--$105,335,872.
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Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
<TABLE>
<CAPTION>
OUTSTANDING AT
CLASS APRIL 18, 1996
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<S> <C>
Common Stock, $.10 par value............................... 20,906,783
</TABLE>
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.
<TABLE>
<S> <C>
PART I-- None.
PART II-- None.
PART III--Item 10. Pages 4, 5 and 18 of the Company's Proxy Statement for the Annual
Meeting of Shareholders to be held May 24, 1996, under "Election of
Directors" and "Compliance with Section 16(a) of the Securities Act
of 1934."
--Item 11. Page 6 through 13 of the Company's Proxy Statement for the Annual
Meeting of Shareholders to be held May 24, 1996, 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 27, 1996" 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 24, 1996, 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 24, 1996, under "Certain Business
Relationships."
</TABLE>
2
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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 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." As of January 27, 1996, the Company
operated 218 Fay's Drug Stores, of which 192 were located in Upstate New York,
23 in Pennsylvania, two in Vermont and one in New Hampshire. The Company also
operates 55 traditional drug stores and a liquor store. All but two of the
Company's 55 traditional drug stores were acquired from independent owners.
Ten of the traditional drug stores are operated under the respective
tradenames used by the previous owners and 45 are operated under the tradename
"Fay's Cornerdrug." Forty-nine of the Company's traditional drug stores are
located in Upstate New York, five in Pennsylvania and one in Vermont.
During the fiscal year ended January 27, 1996, the Company opened three
Fay's Drug Stores. In addition, three traditional drug stores were converted
into Fay's Drug Stores and one Fay's Drug Store and six traditional drug
stores were closed.
Over the past five years, the Company has converted, by expansion or
relocation, 20 traditional drug stores into super drug stores. In the fourth
quarter of fiscal year 1996, the Company announced a restructuring related to
the repositioning and relocation of 50 undersized and underperforming drug
stores. See Note 2 to Consolidated Financial Statement. The majority of these
stores are traditional drug stores operated by the Company.
At year end, the Company was also operating 29 Paper Cutter stores. Paper
Cutter is a chain of stores that sells office supplies, party supplies, and
greeting cards. The Company has authorized the sale of its Paper Cutter stores
and, in the fourth quarter of the fiscal 1996, recorded a charge for the
estimated loss on the disposal of the chain and a charge for the estimated
operating losses during the phase-out period. See Note 3 to Consolidated
Financial Statements. The sale of The Paper Cutter stores is currently being
negotiated and the sale is expected to be completed by the middle of fiscal
1997.
The Company's Managed Pharmacy Services Division provides pharmacy services
to institutional customers on a contract basis, including nursing homes, adult
homes and prison facilities. At fiscal year end, under contract were over 500
long and intermediate-term care facilities housing approximately 28,000
residents and 74 New York State prisons with over 48,000 inmates. Contract
pharmacy services are provided from 78 Fay's Drug Stores as well as eight
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 service business which, at the time of acquisition, were
servicing 65 nursing and adult homes. In April 1995, the Company acquired an
additional long-term pharmacy services business which, at the time of
acquisition, was servicing 75 nursing and adult homes.
In October 1992 the Company established a mail order pharmacy services
division under the name "PostScript Mail Order Pharmacy Services." PostScript
was formed to market mail order prescription services to prescription benefit
programs. PostScript fills prescriptions from a 10,000 square foot dispensing
facility located in Aliquippa, Pennsylvania. At the fiscal year end,
PostScript had contracted to provide mail order pharmacy services to 774
prescription benefit plans covering 232,000 lives.
During fiscal 1995, the Company created a pharmacy benefits management group
under the name "Optium Pharmacy Services." Optium Pharmacy Services provides
management and administrative
3
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services to prescription drug benefit plans. Their services include such
things as plan design, implementation of procedures to monitor drug
utilization, detecting opportunities for the dispensing of generic drugs and
monitoring of plan participants for compliance with prescribed drug therapies.
On June 14, 1994, the Company acquired the assets of 26 National Auto Supply
Stores located in the State of New York and four Whitlock Auto Stores located
in Pennsylvania. During fiscal 1995, the Company closed one of the acquired
National Stores and converted the remaining National and Whitlock Auto Stores
to Wheels Discount Auto Supply Stores. During the fiscal year ended
January 27, 1996, the Company opened eight Wheels Discount Auto Supply Stores.
On November 30, 1995, the Company sold to Western Auto Supply Company the
assets comprising the Wheels Discount Auto Supply Division for approximately
$39 million. At the time of the sale, the Company was operating 82 Wheels
Discount Auto Supply Stores. All of the assets comprising said stores and the
inventories held for sale were sold as part of transaction. See Note 3 to
Consolidated Financial Statements.
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. In
July 1991, 43 of the former Carls Drug Stores were converted into Fay's Drug
Stores. On May 1, 1993, Carls was merged into the Company. On January 26,
1993, the Company sold 10 Fay's Drug Stores in southeastern Pennsylvania for
$4.1 million cash. On August 4, 1994, the Company acquired all of the capital
stock of Peterson Drug Company of Western New York, Inc. ("Peterson"), which
operated 12 Peterson Drug Stores in Western New York State. On January 19,
1995, Peterson 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 prescriptions 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, photofinishing
and greeting cards). The following table sets forth the approximate percentage
of drug store revenues attributabled to each of these major categories for
each of the last three fiscal years.
<TABLE>
<CAPTION>
PERCENTAGE OF REVENUES
-----------------------
YEAR ENDED
-----------------------
CATEGORIES 1/27/96 1/28/95 1/29/94
---------- ------- ------- -------
<S> <C> <C> <C>
Traditional Drug Store Items:
Prescription and Proprietary Drugs................. 54.4 51.8 48.7
Health and Beauty Aids............................. 9.0 9.8 10.6
Tobacco............................................ 5.1 5.8 6.6
Consumer Hard Goods.................................. 6.1 6.6 7.4
Miscellaneous Merchandise............................ 25.4 26.0 26.7
</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 900 products under its own name "Fay's"
brand label.
The Company positions the pharmacy as the most important department in its
drug stores. In fiscal 1996, the Company filled 14.9 million prescriptions, a
10.5% increase from 1995. The Company's store average in excess of 54,000
prescriptions per year.
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Each of the Company's pharmacies is equipped with a computerized pharmacy
system which the Company promotes under the tradename "AccuFays." The AccuFays
pharmacy system enables the Company to reduce the paperwork normally involved
in third party programs (governmental and private prescription drug plans) and
significantly reduce the time it takes to receive payment from these programs.
The AccuFays pharmacy computer systems provide prescription customers with an
AccuFacts patient information leaflet each time a prescription is dispensed.
The AccuFacts leaflet describes the proper usage of the patient's prescription
medication, augmenting patient counseling provided by Fay's pharmacists.
Currently, 192 of the Company's Fay's Drug Stores are equipped with point-
of-sale optical scanning cash register systems. 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 27, 1996 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 drug stores is primarily provided through the
Company's main distribution center 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, PostScript, AccuFays, AccuFacts 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 27,
1996, January 28, 1995 and January 29, 1994, the fourth quarter accounted for
approximately 27%, 28% and 28%, respective, of the Company's revenues, and
51%, 47% and 58%, respectively, of the Company's earnings before accounting
changes and restructuring charges.
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 Paper Cutter Stores are
retailers with specialized product lines similar to those carried by the
stores, as well as discount department stores
5
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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 1996, 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 27, 1996, 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 7,060 square feet and the
largest 58,450 square feet. The current Fay's Drug store prototype is 13,500
square feet. The Company's Paper Cutter Stores range in size from 7,979 square
feet to 19,283 square feet.
All of the Company's store locations are leased 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 1996 and 2014 and
typically include renewal options. See Note 7 to Consolidated Financial
Statements. As of January 27, 1996, five of the Company's store locations were
subject to ground leases.
The stores now in operation are 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 has given priority to the opening of new Fay's Drug Stores in
freestanding locations with drive through pharmacy windows. Such locations
provide an enhanced level of convenience to the Company's customers and give
the Company the flexibility to locate stores in more densely populated areas
not conducive to large-scale development.
The Company's main distribution facility, located in Liverpool, New York,
contains approximately 580,000 square feet and is devoted exclusively to
servicing the Company's Fay's Drug Store Division. The Company's executive
offices, which house both administrative personnel and Fay's Drug Store
personnel, contains approximately 45,000 square feet and is located adjacent
to the Company's main distribution center. The executive office/main
distribution center complex is owned in fee by the Company.
The Company's Paper Cutter stores are serviced from an 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.
6
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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 administrative services
personnel.
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. As of January 27, 1996, the Company was not in compliance
with these restrictions. However, the Company has obtained waivers from such
restrictions and the loan agreements have been amended to modify such
restrictions through October 26, 1996.
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. On March 1, 1995, the Company acquired an additional
3 1/2 acres of vacant land adjacent to the Company's executive office/main
distribution center complex.
Both the Company's main executive office/main distribution center complex
and the office/distribution center complex servicing the Company's Paper
Cutter Divisions are pledged as security for a mortgage loan. See Note 5 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 19, 1996, there were 9,008 holders of record of the
Company's Common Stock.
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
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<S> <C> <C> <C>
FISCAL 1996
Fourth quarter................................... 8 1/4 6 1/2 $.05
Third quarter.................................... 8 3/8 7 1/2 $.05
Second quarter................................... 9 1/8 6 5/8 $.05
First quarter.................................... 9 3/8 6 1/4 $.05
FISCAL 1995
Fourth quarter................................... 7 6 $.05
Third quarter.................................... 8 6 1/2 $.05
Second quarter................................... 7 3/8 6 1/4 $.05
First quarter.................................... 7 1/4 6 1/8 $.05
</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 $9,575,000. See Note 5 to the
Consolidated Financial Statements.
7
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ITEM 6. SELECTED FINANCIAL DATA
Five Year Financial Summary
<TABLE>
<CAPTION>
1996 1995 1994 1993 1992
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Summary of Operations:
Net sales................... $973,809 $921,307 $831,007 $815,253 $765,237
Cost and expenses:
Cost of merchandise sold.. 715,354 664,532 595,246 582,972 547,270
Selling, general and
administrative expenses.. 227,587 215,125 195,400 190,658 180,741
Depreciation and
amortization expenses.... 13,730 13,300 13,551 12,735 12,046
Interest expense.......... 5,964 5,793 6,626 6,325 5,990
Restructuring and other
charges.................. 20,087 -- -- -- 1,064
-------- -------- -------- -------- --------
Total cost and expenses. 982,722 898,750 810,823 792,690 747,111
-------- -------- -------- -------- --------
Income (loss) from
continuing operations
before income taxes........ (8,913) 22,557 20,184 22,563 18,126
Income taxes................ (3,363) 9,634 8,456 9,698 7,347
-------- -------- -------- -------- --------
Income (loss) from
continuing operations
before accounting changes.. (5,550) 12,923 11,728 12,865 10,779
Discontinued operations, net
of income taxes (a)........ (4,067) (287) (1,699) (1,634) (2,126)
Cumulative effect of
accounting change, net of
tax (b).................... -- -- (4,806) -- --
-------- -------- -------- -------- --------
Net income (loss)........... $ (9,617) $ 12,636 $ 5,223 $ 11,231 $ 8,653
======== ======== ======== ======== ========
Per Share Data (c):
Earnings (loss) per common
share:
Continuing operations
before accounting
changes.................. $ (0.27) $ 0.63 $ 0.58 $ 0.65 $ 0.55
Discontinued operations... (0.20) (0.01) (0.08) (0.09) (0.11)
Cumulative effect of
accounting change........ -- -- (0.24) -- --
-------- -------- -------- -------- --------
Net income (loss)......... $ (0.47) $ 0.62 $ 0.26 $ 0.56 $ 0.44
======== ======== ======== ======== ========
Dividends per share......... $ 0.20 $ 0.20 $ 0.20 $ 0.19 $ 0.16
-------- -------- -------- -------- --------
Financial Position:
Current assets.............. $205,993 $213,346 $194,779 $174,054 $173,752
Current liabilities......... 133,516 112,270 104,252 83,830 83,855
Working capital............. 72,477 101,076 90,527 90,224 89,897
Total assets................ 298,593 314,128 279,714 261,150 263,683
Long-term debt.............. 46,915 81,656 65,307 73,715 87,451
Obligations under leases.... 1,166 1,587 2,106 2,825 3,709
Stockholders' equity........ 95,274 106,981 96,838 94,026 84,851
Return on average
stockholders' equity....... (9.5)% 12.4% 5.5% 12.6% 10.7%
-------- -------- -------- -------- --------
Other Data:
Number of retail drug
stores..................... 273 277 260 244 252
-------- -------- -------- -------- --------
</TABLE>
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(a) During fiscal 1996, the Company sold its Wheels Discount Auto Supply
Division and announced plans to sell its Paper Cutter Division. These
businesses have been reported as discontinued operations and prior year
operating results have been restated to reflect continuing operations.
(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.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION
RESULTS OF OPERATIONS
Sales
Net sales for the fiscal year ended January 27, 1996, increased 5.7% to
$973.8 million. Sales gains have been supported by continued growth in
pharmacy sales which continued to outpace total sales increases with an 11.7%
increase during the year. Sales in comparable stores (those open at least one
year) were up 1.8% including a 7% increase in pharmacy sales. Sales increases
were somewhat modest in fiscal 1996 reflecting weak Christmas, seasonal and
general merchandise sales.
For fiscal years 1995 and 1994, net sales were $921.3 million and $831.0
million, respectively, representing increases of 10.9% and 1.9% over their
year-earlier periods. These gains can be attributed to increases in pharmacy
sales of 18.8% in fiscal 1995 and 7.1% in fiscal 1994. Comparable store sales
increased 4.3% in 1995 and 3.5% in 1994, with increases of 8.4% and 6.2% in
pharmacy sales.
Costs and Expenses
The gross profit rate was 26.5% in 1996 compared to 27.8% in 1995 and 28.4%
in 1994. The decline in gross margins is largely attributable to continued
pressure on third-party pharmacy margins, combined with the trend of third-
party prescription sales accounting for a greater portion of total pharmacy
revenues. Prescription sales paid by third-party payers were 80% of total
pharmacy sales in fiscal 1996 compared to 73.1% in fiscal 1995 and 66.4% in
1994.
The Company principally uses the last-in, first-out (LIFO) method of
inventory valuation which states cost of sales at the most recent costs. The
Company has experienced deflation in the past three years resulting in a
reduction to its LIFO inventory reserve of $.6 million in fiscal 1996, $1.4
million in fiscal 1995 and $.7 million in fiscal 1994.
Selling, general and administrative expenses, as a percentage of sales, were
23.4%, 23.3% and 23.5% for fiscal years 1996, 1995 and 1994, respectively. The
current period's higher operating expense ratio resulted from a lower
comparable store sales increase which limited the company's ability to
leverage operating expenses, particularly store payroll costs. 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 were
11.7% in 1996 compared to 11.4% in 1995 and 11.3% in 1994, reflecting
increases due to wage inflation. Occupancy costs (including rent, common area
maintenance and real estate taxes) were 2.9% of sales in 1996, 2.8% in 1995
and 2.9% in 1994.
Net interest expense was $6.0 million in fiscal 1996 compared to $5.8
million in fiscal 1995 and $6.6 million in fiscal 1994. The increase in fiscal
1996 was mostly due to higher short-term borrowing rates.
Restructuring Charge
In January 1996, the Company announced a restructuring related to the
repositioning and relocation of 50 undersized or underperforming drug stores.
The majority of the targeted stores were former independent pharmacies
acquired by Fay's, many of which operate under the "Cornerdrug" tradename.
Consequently, a pre-tax charge of $20,087,000 was recorded in the fourth
quarter of fiscal 1996 for costs associated with the store repositioning
process, predominantly consisting of reserves for lease obligations and for
the writedown of fixed assets. The process of relocating these stores is
targeted to be complete within an eighteen month time frame.
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Income from Continuing Operations
As a result of the restructuring charge mentioned above, the Company
incurred a loss from continuing operations of $5.5 million in fiscal 1996.
Excluding the after-tax effect of this provision, income from continuing
operations for fiscal 1996 would have been $7.0 million compared to
$12.9 million in fiscal 1995. The decline in operating results was largely due
to the decline in pharmacy gross margins.
Discontinued Operations
As part of the Company's strategy of concentrating its focus and resources
on core drug store and pharmacy related businesses, the Company authorized the
sale of it's two non-pharmacy divisions. These businesses included the Wheels
Discount Auto Supply Division which had 82 auto parts stores, and The Paper
Cutter Division, a specialty retailer which operates 29 stores.
The Company incurred a loss from these discontinued operations of $4.1
million, including a provision of $3.6 million recorded in fiscal 1996 for the
loss on disposal of the two divisions. Their prior years' net losses were $.3
million for 1995 and $1.7 million for 1994, and were segregated in the
statement of net earnings as discontinued operations. The Wheels Division was
sold during fiscal 1996. The sale of Paper Cutter is currently being
negotiated and is expected to be completed by the middle of fiscal 1997.
Net Income
The Company incurred a net loss of $9.6 million as a result of the $4.1
million loss from discontinued operations and the $12.5 million after-tax
restructuring charge. Net income was $12.6 million in fiscal 1995 and $5.2
million in fiscal 1994. Fiscal 1994 net income included a non-recurring charge
of $4.8 million related to the adoption of Statement of Financial Accounting
Standards No. 106, "Employers' Accounting for Postretirement Benefits Other
Than Pensions".
The Company's effective tax rates were 37.7%, 42.7% and 41.9%, respectively
for fiscal 1996, 1995 and 1994. The decrease in fiscal 1996 was related to
decreases in the effective state tax rate. The increase in 1995 was due to a
reduction in tax credits.
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 27, 1996, the Company had $1.4 million in cash compared to $1.9
million at January 28, 1995. Cash flow from operating activities was $17.7,
$22.7 and $6.1 million in fiscal 1996, 1995 and 1994, respectively. In 1996,
the Company sold certain specified assets of its Wheels Division, primarily
consisting of inventories and store fixed assets, for approximately $39
million. The proceeds from this transaction were used to reduce long-term
debt, to liquidate trade liabilities of the Wheels Division, and for other
costs related to the sale.
Capital expenditures represent a major investment of cash and totaled $12.3
million in fiscal 1996, $15.7 million in fiscal 1995 and $9.5 million in
fiscal 1994. 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 $19 million in fiscal 1997. The Company
generally enters into long-term lease arrangements for new stores. (For
information regarding future minimum rental payments, refer to Note 7 of the
Notes to Consolidated Financial Statements.)
10
<PAGE>
Except for the historical information contained herein, the matters
discussed in this annual report are foward-looking statements which involve
risks and uncertainties, including but not limited to economic, competitive,
governmental and technological factors affecting the Company's operations,
markets, products, services and prices, and other factors discussed in the
Company's filing with the Securities and Exchange Commission.
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-16.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
11
<PAGE>
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 18 of the Company's Proxy Statement for the Annual
Meeting of Shareholders to be held on May 24, 1996 (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 24, 1996 and
until their respective successors are elected and qualified.
<TABLE>
<CAPTION>
NAME AGE POSITION AND BUSINESS EXPERIENCE
---- --- --------------------------------
<S> <C> <C>
Henry A. Panasci, Jr. .. 67 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........ 37 President and Chief Operating Officer since 1993;
previous Executive Vice President of the Company
and President--The Paper Cutter Division of the
Company
David B. Eilerman....... 48 Vice President and General Manager--PostScript Mail
Order Services Division of the Company since 1992;
previous Regional Vice President for America's
Pharmacy, a subsidiary of Systemed, Inc.
Gale T. Mitchell........ 46 Senior Vice President--Store Operations; since
November 29, 1995, previous President--Wheels
Discount Auto Supply Division of the Company
Craig C. Painter........ 49 Vice President--Chief Information Officer since
1993; previous Senior Vice President Management
Information Systems for Jewel Companies, Inc., a
subsidiary of American Stores Company
James F. Poole, Jr. .... 41 Senior Vice President--Finance and Chief Financial
Officer since May 25, 1995, previous Vice
President--Finance and Chief Financial Officer of
the Company
Warren D. Wolfson....... 47 Senior Vice President, General Counsel and Secretary
James R. Wuest.......... 45 Senior Vice President--Marketing since 1995;
previous Vice President--Fay's Drug Store Marketing
</TABLE>
ITEM 11. EXECUTIVE COMPENSATION.
Information relating to executive compensation is incorporated by reference
to pages 6 through 13 of the Company's Proxy Statement for the Annual Meeting
of Shareholders to be held May 24, 1996 (see "Executive Compensation and Other
Information," "Report of Compensation Committee on Executive Compensation,"
"Preference Graph Comparison for the Five Years Ended January 27, 1996" and
"Compensation Committee Interlocks and Insider Participation").
12
<PAGE>
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 24, 1996 (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 24, 1996 (see
"Certain Business Relationships").
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>
PAGE NO.
----------
<S> <C>
1. CONSOLIDATED FINANCIAL STATEMENTS:
Independent Auditors' Report................................ F-1
Consolidated Balance Sheets as of January 27, 1996 and Janu-
ary 28, 1995............................................... F-2
Consolidated Statements of Net Earnings for each of the
three fiscal years in the period ended January 27, 1996.... F-3
Consolidated Statements of Stockholders' Equity for each of
the three fiscal years in the period ended January 27,
1996....................................................... F-4
Consolidated Statements of Cash Flows for each of the three
fiscal years in the period ended January 27, 1996 ......... F-5
Notes to Consolidated Financial Statements.................. F-6 - F-15
Selected Quarterly Financial Data........................... F-16
</TABLE>
2. Consolidated Financial Statement Schedules:
Financial Statement Schedules required by Rule 5-04 have not been filed
because the conditions requiring the filing do not exist or the required
information is included in the Consolidated Financial Statements, including
the Notes thereto.
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.
(b) A report on Form 8-K was filed on December 15, 1995, related to the sale
of the Company's Wheels Discount Auto Supply Division.
(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.
14
<PAGE>
(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 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.
(4.6) Loan Agreement dated as of June 9, 1994 with Chemical Bank, as
Agent, and Chemical Bank is incorporated by reference to Annual Report
on Form 10-K for the fiscal year ended January 28, 1995.
(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 Report on Form 8-K dated May 10, 1991.
(10.5) The Fay's Incorporated Key Management Incentive Plan is
incorporated by reference to Annual Report on Form 10-K for the fiscal
year ended January 29, 1994.
(10.6) The form of Agreement providing for the employment by the
Company of David H. Panasci, Warren D. Wolfson, James F. Poole, Jr,
Craig C. Painter, Gale T. Mitchell and James R. Wuest is incorporated
by reference to Annual Report on Form 10-K for the fiscal year
ended January 29, 1994.
(10.7) The form of Agreement providing for the employment by the
Company of Henry A. Panasci, Jr. accompanies this Report.
(10.8) The form of amendment to the Agreements providing for the
employment of David H. Panasci, Warren D. Wolfson, James F. Poole, Jr.,
Craig C. Painter, Gale T. Mitchell and James R. Wuest accompanies this
Report.
(10.9) Asset Purchase Agreement dated October 20, 1995 by and among
Wheels Discount Auto Supply, Inc., Fay's Incorporated and Western Auto
Supply Company is incorporated by reference to Report on Form 8-K dated
December 15, 1995.
(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 28, 1995. Carls Drug Co., Inc. was merged into the
Company on May 1, 1993. Peterson Drug Company of Western New York, Inc. was
merged into the Company on January 30, 1995.
15
<PAGE>
(27) Financial Data Schedule.
[TYPE] -- 27
[DESCRIPTION] -- Article 5 Financial Data Schedule for the year ended
January 27, 1996:
<TABLE>
<S> <C>
[MULTIPLIER].............................................. 1,000
[PERIOD-TYPE]............................................. 12 Months
[FISCAL-YEAR-END]......................................... January 27, 1996
[PERIOD-START]............................................ January 29, 1995
[PERIOD-END].............................................. January 27, 1996
[CASH].................................................... 1,448
[SECURITIES].............................................. 0
[RECEIVABLES]............................................. 40,833
[ALLOWANCES].............................................. 0
[INVENTORY]............................................... 149,597
[CURRENT-ASSETS].......................................... 205,993
[PP&E].................................................... 185,249
[DEPRECIATION]............................................ 125,390
[TOTAL-ASSETS]............................................ 298,593
[CURRENT-LIABILITIES]..................................... 133,516
[BONDS]................................................... 46,915
[PREFERRED-MANDATORY]..................................... 0
[PREFERRED]............................................... 0
[COMMON].................................................. 2,090
[OTHER-SE]................................................ 93,184
[TOTAL-LIABILITY-AND-EQUITY].............................. 298,593
[SALES]................................................... 973,809
[TOTAL-REVENUES].......................................... 973,809
[CGS]..................................................... 715,354
[TOTAL-COSTS]............................................. 982,722
[OTHER-EXPENSES].......................................... 0
[LOSS-PROVISION].......................................... 0
[INTEREST-EXPENSE]........................................ 5,964
[INCOME-PRETAX]........................................... (8,913)
[INCOME-TAX].............................................. (3,363)
[INCOME-CONTINUING]....................................... (5,550)
[DISCONTINUED]............................................ (4,067)
[EXTRAORDINARY]........................................... 0
[CHANGES]................................................. 0
[NET-INCOME].............................................. (9,617)
[EPS-PRIMARY]............................................. (.47)
[EPS-DILUTED]............................................. (.47)
</TABLE>
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
/s/ David H. Panasci
By: _________________________________
DAVID H. PANASCI PRESIDENT AND
CHIEF OPERATING OFFICER
DATED: APRIL 24, 1996
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.
SIGNATURES TITLE
/s/ Henry A. Panasci, Jr. Chairman of the
- ------------------------------------------ Board, Chief
HENRY A. PANASCI, JR. Executive Officer
and Director
/s/ James F. Poole, Jr. Vice President--
- ------------------------------------------ Finance and Chief
JAMES F. POOLE, JR. Financial Officer
/s/ Robert H. Altman Director
- ------------------------------------------
ROBERT H. ALTMAN
/s/ Robert J. Bennett Director
- ------------------------------------------
ROBERT J. BENNETT
/s/ Lee H. Flanagan Director
- ------------------------------------------
LEE H. FLANAGAN
17
<PAGE>
SIGNATURES TITLE
/s/ Tarky Lombardi, Jr. Director
- ------------------------------------------
TARKY LOMBARDI, JR.
/s/ Hyman M. Miller Director
- ------------------------------------------
HYMAN M. MILLER
- ------------------------------------------ Director
GARY L. MOREAU
/s/ David H. Panasci Director
- ------------------------------------------
DAVID H. PANASCI
Director
- ------------------------------------------
ALAIR A. TOWNSEND
/s/ Warren D. Wolfson Director
- ------------------------------------------
WARREN D. WOLFSON
Dated: April 24, 1996
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 as of January 27, 1996 and January 28, 1995, 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 27,
1996. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements 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 will 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 27, 1996 and January 28, 1995, and the results of
their operations and their cash flows for each of the three fiscal years in
the period ended January 27, 1996 in conformity with generally accepted
accounting principles.
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.
Deloitte & Touche LLP
Rochester, New York
March 6, 1996
F-1
<PAGE>
FAY'S INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JANUARY 27, 1996 AND JANUARY 28, 1995
<TABLE>
<CAPTION>
(IN THOUSANDS OF DOLLARS)
--------------------------
1996 1995
------------ ------------
<S> <C> <C>
Current Assets:
Cash............................................. $ 1,448 $ 1,941
Accounts receivable.............................. 40,833 35,992
Merchandise inventories.......................... 149,597 166,956
Prepaid expenses................................. 6,811 7,905
Deferred income taxes (Note 6)................... 7,304 552
------------ ------------
Total Current Assets........................... 205,993 213,346
Property and Equipment (Notes 5 and 7):
Land............................................. 3,096 3,837
Buildings........................................ 27,295 30,103
Leasehold improvements........................... 35,862 37,134
Furniture, fixtures and equipment................ 106,533 105,613
Property under capital leases.................... 12,463 13,025
------------ ------------
185,249 189,712
Less accumulated depreciation and amortization... 125,390 119,317
------------ ------------
59,859 70,395
Intangible and Other Assets, less accumulated
amortization of $16,907 in 1996 and $14,285 in
1995.............................................. 26,594 28,815
Deferred Income Taxes (Note 6)..................... 6,147 1,572
------------ ------------
Total Assets................................... $ 298,593 $ 314,128
============ ============
Current Liabilities:
NOTES PAYABLE (NOTE 4)........................... $ 10,815 $ 13,100
Accounts payable, trade.......................... 68,631 57,411
Accrued payroll and related taxes................ 9,347 9,423
Other accrued expenses........................... 23,168 20,176
Reserves for restructuring and discontinued
operations
(Notes 2 and 3)................................. 10,431 --
Federal and state income taxes payable........... 975 1,866
Current portion of long-term debt and obligation
under leases.................................... 10,149 10,294
------------ ------------
Total Current Liabilities...................... 133,516 112,270
Long-Term Debt (Note 5)............................ 46,915 81,656
Obligation Under Leases (Note 7)................... 1,166 1,587
Deferred Gain and Other Liabilities (Note 2)....... 14,623 4,229
Accrued Postretirement Benefit Obligation (Note 9). 7,099 7,405
Commitments (Note 5)
Stockholders' Equity (Notes 5 and 10):
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, 20,900,029 and 20,547,585 shares,
respectively.................................. 2,090 2,055
Additional paid-in capital....................... 63,040 61,050
Retained earnings................................ 30,245 43,977
Less cost of common stock held in treasury....... (101) (101)
------------ ------------
95,274 106,981
============ ============
Total Liabilities and Stockholders' Equity..... $ 298,593 $ 314,128
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-2
<PAGE>
FAY'S INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF NET EARNINGS
YEARS ENDED JANUARY 27, 1996, JANUARY 28, 1995 AND JANUARY 29, 1994
<TABLE>
<CAPTION>
(IN THOUSANDS OF DOLLARS,
EXCEPT PER SHARE DATA)
----------------------------
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Net sales........................................ $973,809 $921,307 $831,007
Cost and expenses:
Cost of merchandise sold....................... 715,354 664,532 595,246
Selling, general and administrative expenses... 227,587 215,125 195,400
Depreciation and amortization expenses......... 13,730 13,300 13,551
Interest expense............................... 5,964 5,793 6,626
Restructuring and other charges (Note 2)....... 20,087 -- --
-------- -------- --------
Total cost and expenses...................... 982,722 898,750 810,823
-------- -------- --------
Income (loss) from continuing operations before
income taxes.................................... (8,913) 22,557 20,184
Income taxes (Note 6)............................ (3,363) 9,634 8,456
-------- -------- --------
Income (loss) from continuing operations before
accounting changes.............................. (5,550) 12,923 11,728
Discontinued Operations (Note 3):
Loss from operations, net of income tax benefits
of $(299), $(217) and $(1,225), respectively.... (494) (287) (1,699)
Provision for dispositions, net of income tax
benefit of $(2,165)............................. (3,573) -- --
-------- -------- --------
Loss from discontinued operations................ (4,067) (287) (1,699)
Cumulative effect of accounting change, net of
income tax (Note 9)............................. -- -- (4,806)
-------- -------- --------
Net income (loss)................................ $ (9,617) $ 12,636 $ 5,223
======== ======== ========
Earnings (loss) per share:
Continuing operations before accounting
changes....................................... $ (0.27) $ 0.63 $ 0.58
Discontinued operations........................ (0.20) (0.01) (0.08)
Cumulative effect of accounting change......... -- -- (0.24)
-------- -------- --------
Net income (loss).............................. $ (0.47) $ 0.62 $ 0.26
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
FAY'S INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED JANUARY 27, 1996, JANUARY 28, 1995 AND JANUARY 29, 1994
<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 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)
Net earnings for the year.............. 12,636
Cash dividends paid ($.20 per share)... (4,054)
Exercise of stock options.............. 2 117
Issuance of stock pursuant to
conversion of 10% convertible note
(95,602 shares)....................... 10 490
Issuance of treasury stock for employee
service awards........................ 2 (18) 16
Tax benefit from exercise and early
disposition of stock options.......... 12
Sale of stock under stock purchase
plan.................................. 16 914
------ ------- ------- -----
Balance January 28, 1995............... 2,055 61,050 43,977 (101)
Net earnings for the year.............. (9,617)
Cash dividends paid ($.20 per share)... (4,115)
Exercise of stock options.............. 9 548
Issuance of stock pursuant to
conversion of 10% convertible note
(95,602 shares)....................... 10 490
Issuance of treasury stock for employee
service awards........................
Tax benefit from exercise and early
disposition of stock options.......... (3)
Sale of stock under stock purchase
plan.................................. 16 955
------ ------- ------- -----
Balance January 27, 1996............... $2,090 $63,040 $30,245 $(101)
====== ======= ======= =====
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
FAY'S INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JANUARY 27, 1996, JANUARY 28, 1995 AND JANUARY 29, 1994
<TABLE>
<CAPTION>
1996 1995 1994
-------- ------- --------
(IN THOUSANDS OF DOLLARS)
<S> <C> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES:
Net income (loss)............................... $ (9,617) $12,636 $ 5,223
Adjustments to reconcile net earnings to net
cash provided from operating activities:
Gain on sale of Wheels Discount Auto Division. (912) -- --
Cumulative effect of accounting change........ -- -- 7,998
Depreciation and amortization................. 16,546 16,264 16,180
Decrease (increase) in assets:
Merchandise inventories....................... (4,106) (9,558) (15,731)
Accounts receivable and prepaid expenses...... (4,848) (4,148) (4,905)
Deferred income taxes......................... (11,327) (1,038) (534)
Increase (decrease) in liabilities:
Trade payables................................ 11,220 2,521 (1,206)
Accrued expenses.............................. 11,582 5,596 2,339
Income taxes.................................. (891) 108 1,684
Deferred income taxes......................... -- -- (4,849)
Other long-term liabilities................... 10,088 328 (68)
-------- ------- --------
Net cash provided from operating activities....... 17,735 22,709 6,131
-------- ------- --------
CASH FLOW FOR INVESTING ACTIVITIES:
Expenditures for property and equipment......... (12,311) (15,684) (9,502)
Increase in intangible and other assets......... (5,211) (11,352) (3,983)
Sale of Wheels Discount Auto Division........... 38,976 -- --
Purchase of Peterson Drug Company............... -- (6,626) --
-------- ------- --------
Net cash provided from (used for) investing activ-
ities............................................ 21,454 (33,662) (13,485)
-------- ------- --------
CASH FLOW FROM FINANCING ACTIVITIES:
(Decrease) increase in notes payable............ (2,285) (1,505) 14,605
Repayment of long-term debt..................... (34,288) (8,069) (3,217)
Proceeds from long-term debt.................... -- 25,024 --
Reductions in obligation under leases........... (519) (568) (1,034)
Sale of common stock under option plans......... 1,525 1,060 1,087
Cash dividends paid............................. (4,115) (4,054) (3,998)
-------- ------- --------
Net cash provided from (used for) financing activ-
ities............................................ (39,682) 11,888 7,443
-------- ------- --------
Net increase (decrease) in cash................... (493) 935 89
Cash balance, beginning of year................... 1,941 1,006 917
-------- ------- --------
Cash balance, end of year......................... $ 1,448 $ 1,941 $ 1,006
======== ======= ========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the year for:
Interest........................................ $ 8,685 $ 8,756 $ 7,809
Income taxes.................................... 6,380 10,435 7,815
</TABLE>
Supplemental disclosure of non-cash investing and financing activity: On
January 15 of 1996, 1995 and 1994, 95,602 shares of common stock were issued
upon conversion of $500,000 of unsecured 10% convertible notes.
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
FAY'S INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JANUARY 27, 1996, JANUARY 28, 1995 AND JANUARY 29, 1994
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 years 1996, 1995 and 1994 all consisted of 52 weeks.
Estimates--The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
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 and toys 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
$30,159,000, $30,140,000 and $32,138,000 higher at January 27, 1996, January
28, 1995 and January 29, 1994, 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 (goodwill). 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, on a retroactive basis, Statement of
Financial Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes",
in fiscal 1994. See Note 6 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
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 20,585,189, 20,356,910 and
20,085,326 in fiscal 1996, 1995 and 1994, respectively. Fully diluted earnings
per share did not differ materially from primary earnings per share.
F-6
<PAGE>
FAY'S INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Statements of Cash Flows--The Company considers that cash and equivalents
include all highly liquid investments with original maturities of three months
or less.
Concentration of Credit Risk--Financial instruments which potentially
subject the Company to concentration of credit risk consist principally of
accounts receivable. Concentration of credit risk with respect to accounts
receivable is limited due to the large number of customers comprising the
Company's customer base. The Company generally does not require collateral or
other security to support customer receivables.
Stock-Based Compensation--In October 1995, the Financial Accounting
Standards Board issued Statement of Financial Standards No. 123, "Accounting
for Stock-Based Compensation," which requires adoption by the Company in
fiscal 1997. Pursuant to the new standard, companies are encouraged, but not
required, to adopt the fair value method of accounting for employee stock-
based transactions. Under the fair value method, compensation cost is measured
at the grant date based on the fair value of the award and is recognized over
the service period, which is usually the vesting period. Companies are also
permitted to continue to account for such transactions under Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees,"
but would be required to disclose in a note to the consolidated financial
statements pro forma net income and earnings per share as if the Company had
applied the new method of accounting. The Company has not yet determined if it
will elect to change to the fair value method, nor has it determined the
effect the new standard will have on net income and earnings per share should
it elect to make such a change. Adoption of the new standard will have no
effect on the Company's cash flows.
NOTE 2--RESTRUCTURING AND OTHER CHARGES
In January 1996, the Company announced a restructuring related to the
repositioning and relocation of 50 undersized or underperforming drug stores.
The majority of the targeted stores were former independent pharmacies
acquired by Fay's, many of which operate under the "Cornerdrug" tradename.
Consequently, a pre-tax charge of $20,087,000 was recorded in the fourth
quarter of fiscal 1996 for costs associated with the store repositioning
process, predominantly consisting of reserves for lease obligations
($14,941,000), for the write-off of intangible and fixed assets ($4,493,000),
severance ($366,000) and other costs ($287,000). The remaining reserve
totalled $15,852,000 at January 27, 1996. Accruals for lease obligations
beyond one year totalled $10,771,000 and are included in Other Liabilities on
the balance sheet.
NOTE 3--DISCONTINUED OPERATIONS
As part of the Company's strategy of concentrating its focus and resources
on core drug store and pharmacy related businesses, the Company authorized the
sale of its two non-pharmacy divisions. These businesses included the Wheels
Discount Auto Supply Division ("Wheels"), which had 82 auto parts stores, and
The Paper Cutter Division, a specialty retailer which operates 29 stores.
A pre-tax provision of $5,738,000 for loss on disposal of these discontinued
operations was recorded in the fourth quarter of fiscal 1996 consisting of
$5,300,000 for the disposal of The Paper Cutter, $1,350,000 for estimated
operating losses for The Paper Cutter during the phase-out period, offset in
part by an estimated $912,000 gain from the disposition of the Company's
Wheels division. The after-tax charge for the estimated loss on disposal of
discontinued operations was $3,573,000.
The Wheels Division was sold on November 30, 1995 to Western Auto Supply
Company, a wholly owned subsidiary of Sears Roebuck and Co. The purchase price
was approximately $39 million and
F-7
<PAGE>
FAY'S INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
was based on the net book value of specified assets, primarily consisting of
inventories and store fixed assets. The sale of Paper Cutter is currently
being negotiated and is expected to be completed by the middle of fiscal 1997.
Discontinued operations include the Company's best estimates of the amounts
expected to be realized on the sale of Paper Cutter. The amounts the Company
will utlimately realize could differ materially from the amounts assumed in
arriving at the loss on disposal of the discontinued operations.
The consolidated financial statements have been reclassified to separately
report discontinued operating results. The Company's prior year operating
results have been restated to reflect continuing operations. Interest expense
allocated to discontinued operations includes an allocation of corporate
interest expense and amounts directly related to the discontinued businesses.
The allocation of corporate interest expense was based, in part, on a ratio of
the net assets of the discontinued operations to the sum of consolidated net
assets and consolidated debt, adjusted accordingly. The amounts allocated in
1996, 1995 and 1994 totalled $2,600,000, $2,700,000 and $1,300,000,
respectively. Net sales from discontinued operations were $121,176,000 in
1996, $116,803,000 in 1995 and $88,712,000 in 1994. The remaining net assets
of discontinued operations at January 27, 1996 totalled $7,924,000.
NOTE 4--SHORT-TERM DEBT
The Company maintains lines of credit with several banks to meet its short-
term borrowing requirements. Maximum outstanding borrowings during fiscal 1996
were $24.9 million and average borrowings were $8.2 million. The weighted
average interest rate on short-term borrowings was 6.7% in fiscal 1996, 5.4%
in fiscal 1995, and 4.20% in fiscal 1994. Revisions were made to the Company's
lines of credit subsequent to January 27, 1996 such that available lines now
total $31 million. At January 27, 1996, outstanding short-term borrowings were
$10.8 million.
NOTE 5--LONG-TERM DEBT
Long-term debt consisted of the following:
<TABLE>
<CAPTION>
JANUARY 27, JANUARY 28,
1996 1995
------------ ------------
(IN THOUSANDS OF DOLLARS)
<S> <C> <C>
Secured, 9.85% senior notes................... $ 14,730 $ 16,365
Unsecured, 9.77% senior notes................. 17,857 21,429
Unsecured, 9.59% senior notes................. 21,428 25,000
Unsecured, 10% convertible notes.............. 1,000 1,500
Mortgage note................................. 774 1,038
Revolving term loan........................... -- 25,000
Other long-term debt.......................... 853 1,099
------------ ------------
56,642 91,431
Less current portion.......................... 9,727 9,775
------------ ------------
$ 46,915 $ 81,656
============ ============
</TABLE>
Repayments to be made over the next five fiscal years are as follows (in
thousands): 1997, $9,727; 1998, $9,741; 1999, $9,191; 2000, $8,918 and 2001,
$8,857.
The 9.85% senior notes are due November 15, 2004 and are payable in annual
principal installments of $1,635,000 through November 15, 2003, with the
remaining balance payable on
F-8
<PAGE>
FAY'S INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 $10,070,000 at
January 27, 1996.
The 9.77% senior notes are due August 15, 2000 and are payable in equal
annual installments of $3,571,000. 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 191,205 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,
1996, 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 $2,444,000 at
January 27, 1996.
The Company's revolving term loan which was outstanding at January 28, 1995
was repaid using the proceeds from the sale of the Wheels Division and the
facility was subsequently cancelled.
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, $9,575,000 of retained earnings was not restricted
as to cash dividends and the acquisition or retirement of the Company's stock
as of January 27, 1996. 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 the maintenance of certain specified ratios.
As of January 27, 1996, the Company was not in compliance with a fixed charge
coverage ratio related to rent and interest payments, however, it has obtained
waivers from its lenders. The lenders have subsequently amended the related
agreements to modify this ratio through October 26, 1996 to allow the Company
to be in compliance with the covenant.
F-9
<PAGE>
FAY'S INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 6--INCOME TAXES
The Company adopted, on a retroactive basis, SFAS No. 109 at the beginning
of fiscal 1994. The provision (benefit) for income taxes on continuing
operations consisted of the following:
<TABLE>
<CAPTION>
1996 1995 1994
-------- -------- --------
(IN THOUSANDS OF DOLLARS)
<S> <C> <C> <C>
Currently payable:
Federal...................................... $ 4,389 $ 7,918 $ 7,855
State........................................ 1,406 2,804 2,815
-------- -------- --------
5,795 10,722 10,670
Deferred:
Federal...................................... (7,012) (818) (1,665)
State........................................ (2,146) (270) (549)
-------- -------- --------
(9,158) (1,088) (2,214)
-------- -------- --------
$ (3,363) $ 9,634 $ 8,456
======== ======== ========
</TABLE>
Income taxes were computed at rates other than the statutory federal income
tax rates due to the following items:
<TABLE>
<CAPTION>
1996 1995 1994
-------------- ------------ ------------
AMOUNT % AMOUNT % AMOUNT %
------- ----- ------ ---- ------ ----
<S> <C> <C> <C> <C> <C> <C>
Tax expense at federal statutory
rate.............................. $(3,120) (35.0) $7,895 35.0 $7,065 35.0
State taxes, net of federal bene-
fit............................... (481) (5.4) 1,647 7.3 1,473 7.3
Tax credits........................ (130) (1.5) (153) (0.7) (334) (1.6)
Amortization of goodwill and other
deferred charges.................. 287 3.2 192 0.9 252 1.2
Other.............................. 81 1.0 53 0.2 -- --
------- ----- ------ ---- ------ ----
$(3,363) (37.7) $9,634 42.7 $8,456 41.9
======= ===== ====== ==== ====== ====
</TABLE>
F-10
<PAGE>
FAY'S INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The tax effect of the items comprising the Company's net deferred tax assets
and liabilities at January 27, 1996 and January 28, 1995 in the Company's
consolidated balance sheets are as follows:
<TABLE>
<CAPTION>
JANUARY 27, JANUARY 28,
1996 1995
------------- ------------
(IN THOUSANDS OF DOLLARS)
<S> <C> <C>
Current deferred taxes:
Deferred tax assets:
Allowance for doubtful accounts........ $ 1,068 $ 1,176
Employee benefit accruals.............. 1,171 1,129
Accruals of closed locations........... 2,192 549
Accruals for discontinued operations... 4,955 --
Other.................................. 1,299 921
------------- ------------
10,685 3,775
Valuation allowance.................... -- --
------------- ------------
10,685 3,775
Deferred tax liabilities:
Inventory valuation differences........ 3,771 3,811
Other.................................. (390) (588)
------------- ------------
3,381 3,223
------------- ------------
Net current deferred tax asset........... $ 7,304 $ 552
============= ============
Long-term deferred taxes:
Deferred tax assets:
Accrued postretirement benefits........ $ 3,053 $ 3,127
Recognition of rent expense............ 1,469 1,489
Deferred gain on sale of assets........ 1,129 1,219
Recognition of pension expense......... (66) (157)
Accruals for closed locations.......... 4,350
Accruals for discontinued operations... 474
Other.................................. 98 104
------------- ------------
10,507 5,782
Valuation allowance.................... -- --
------------- ------------
10,507 5,782
Deferred tax liabilities:
Tax depreciation in excess of financial
statement depreciation................ 2,974 3,424
Financial statement basis of acquired
long-term assets in excess of tax
basis................................. 1,386 786
------------- ------------
4,360 4,210
------------- ------------
Net long-term deferred tax asset........... $ 6,147 $ 1,572
============= ============
</TABLE>
NOTE 7--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.
F-11
<PAGE>
FAY'S INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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.
Property and equipment includes the following amounts for capital leases:
<TABLE>
<CAPTION>
JANUARY 27, JANUARY 28,
1996 1995
------------ ------------
(IN THOUSANDS OF DOLLARS)
<S> <C> <C>
Store facilities............................. $ 9,085 $ 9,085
Equipment.................................... 3,378 3,940
------------ ------------
12,463 13,025
Less accumulated amortization................ (11,704) (11,264)
------------ ------------
$ 759 $ 1,761
============ ============
</TABLE>
Future minimum rental payments due under leases consisted of the following
at January 27, 1996:
<TABLE>
<CAPTION>
FISCAL YEAR OPERATING CAPITAL
----------- ------------- -----------
(IN THOUSANDS OF DOLLARS)
<S> <C> <C>
1997............................................. $ 21,716 $ 771
1998............................................. 21,025 618
1999............................................. 20,020 473
2000............................................. 18,225 288
2001............................................. 16,771 244
2002 and thereafter.............................. 91,711 322
------------- -----------
Total minimum lease payments..................... $189,468 2,716
=============
Less: Executory costs including profit thereon.. (717)
Interest portion of payments..................... (412)
-----------
Present value of net minimum lease payments...... $ 1,587
===========
</TABLE>
The composition of total rental expense for the past three fiscal years was
as follows:
<TABLE>
<CAPTION>
1996 1995 1994
-------- -------- --------
(IN THOUSANDS OF DOLLARS)
<S> <C> <C> <C>
Minimum rentals--operating leases................ $ 19,079 $ 17,606 $ 16,308
Contingent rentals--operating and capital leases. 1,282 1,519 1,288
-------- -------- --------
$ 20,361 $ 19,125 $ 17,596
======== ======== ========
</TABLE>
NOTE 8--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 $353.000 in fiscal 1996,
$772,000 in fiscal 1995 and $725,000 in fiscal 1994 were charged to expense.
F-12
<PAGE>
FAY'S INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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>
1996 1995 1994
--------- --------- --------
(IN THOUSANDS OF DOLLARS)
<S> <C> <C> <C>
Service costs--benefits earned during the pe-
riod........................................ $ 907 $ 1,033 $ 938
Interest on projected benefit obligation..... 1,029 935 837
Actual return on plan assets................. (1,770) 178 (661)
Net amortization and deferral of actuarial
gains and losses............................ 624 (1,238) (313)
--------- --------- -------
$ 790 $ 908 $ 801
========= ========= =======
</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>
JANUARY 27, JANUARY 28,
1996 1995
------------ ------------
(IN THOUSANDS OF DOLLARS)
<S> <C> <C>
Actuarial present value of accumulated bene-
fit obligation:
Vested.................................... $ 13,505 $ 9,374
Non-vested................................ 606 457
------------ ------------
Total................................... $ 14,111 $ 9,831
============ ============
Projected benefit obligation................ $ 16,258 $ 11,838
Plan assets at fair market value, primarily
listed stocks and fixed income securities.. 14,034 12,312
------------ ------------
Plan assets in excess of (less than) pro-
jected benefit obligation.................. (2,224) 474
Unrecognized prior service cost............. 12 14
Unrecognized net asset in transition........ (183) (203)
Unrecognized net losses (gains)............. 1,920 (398)
------------ ------------
Accrued pension expense..................... $ (475) $ (113)
============ ============
</TABLE>
The weighted average discount rates used in determining benefit obligations
were 7.5% at January 27, 1996, 8.75% at January 28, 1995 and 7.75% at January
29, 1994. The expected long-term rate of return on plan assets was 9% for
fiscal 1996, 1995 and 1994. The rate of increase in future compensation levels
used in fiscal 1996 was 2% for the first three years, 3% for the next two
years and 3.5% thereafter. The rate of increase in future compensation was
4.5% in fiscal 1995 and 1994.
NOTE 9--POSTRETIREMENT BENEFITS
The Company provides certain health 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.
F-13
<PAGE>
FAY'S INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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.
Postretirement benefit expense (credit) for the years ended January 27, 1996
and January 28, 1995 was comprised of the following:
<TABLE>
<CAPTION>
1996 1995
------------ ------------
(IN THOUSANDS OF DOLLARS)
<S> <C> <C>
Service cost--benefits
earned during the year. $ 68 $ 61
Interest cost on accumu-
lated benefit obliga-
tion................... 326 339
Amortization of prior
service cost........... (498) (502)
Loss experience......... 49
------------ ------------
$(104) $ (53)
============ ============
</TABLE>
The amounts included in the consolidated balance sheets were as follows:
<TABLE>
<CAPTION>
JANUARY 27, JANUARY 28,
1996 1995
------------ ------------
(IN THOUSANDS OF DOLLARS)
<S> <C> <C>
Accumulated benefit obligation:
Retirees................................. $ 3,120 $ 3,244
Fully eligible active plan participants.. 417 379
Other active plan participants........... 863 814
------------ ------------
4,400 4,437
Unrecognized actuarial losses............ (238) (484)
Unrecognized prior service cost.......... 2,937 3,452
------------ ------------
Accrued postretirement benefit obligation.. $ 7,099 $ 7,405
============ ============
</TABLE>
The assumed health care cost trend rate used in measuring the accumulated
benefit obligation at January 27, 1996 was 10.8% for fiscal 1997, gradually
declining to 6.5% in years 2006 through 2014, and 6% 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 27, 1996 by
approximately 14% and the sum of the service cost and interest cost components
by approximately 14.4%. The assumed discount rate used in determining the
accumulated benefit obligation was 7.5% at both January 27, 1996 and January
28, 1995.
NOTE 10--STOCKHOLDERS' EQUITY
On January 26, 1996 the Board of Directors declared a $.05 per share
quarterly cash dividend payable on April 5, 1996 to shareholders of record on
March 22, 1996.
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 27, 1996,
the Company had 732,780 additional shares of common stock available for
issuance under this Plan. In fiscal 1996, 1995 and 1994, employees purchased
165,053, 160,603 and 153,458 shares at average prices of $5.89 in 1996, $5.79
in 1995 and $6.18 in 1994.
F-14
<PAGE>
FAY'S INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 27, 1996, 1,016,951 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 27, 1996, 83,750 shares were reserved for future grant.
A summary of option transactions for all option plans is presented below:
<TABLE>
<CAPTION>
INCENTIVE NON-QUALIFIED
STOCK OPTIONS STOCK OPTIONS
-------------- --------------
<S> <C> <C>
Year ended January 27, 1996:
Shares under option, beginning of year..... 1,539,933 126,982
Options granted............................ 661,850 10,500
Options exercised at prices ranging
from $.73 to $7.19........................ (91,900) (9,000)
Options expired and cancelled.............. (150,616) (15,000)
-------------- --------------
Shares under option, end of year........... 1,959,267 113,482
============== ==============
Shares exercisable......................... 1,624,131 72,232
-------------- --------------
Exercise price of shares exercisable....... $4.79 to $9.35 $1.32 to $6.40
============== ==============
<CAPTION>
INCENTIVE NON-QUALIFIED
STOCK OPTIONS STOCK OPTIONS
-------------- --------------
<S> <C> <C>
Year ended January 28, 1995:
Shares under option, beginning of year..... 1,242,323 153,981
Options granted............................ 428,800 9,000
Options exercised at prices ranging
from $.77 to $9.35........................ (1,509) (21,686)
Options expired and cancelled.............. (129,681) (14,313)
-------------- --------------
Shares under option, end of year........... 1,539,933 126,982
-------------- --------------
Shares exercisable......................... 1,217,243 126,982
-------------- --------------
Exercise price of shares exercisable....... $4.79 to $9.35 $ .73 to $6.40
============== ==============
</TABLE>
NOTE 11--FAIR VALUE OF FINANCIAL INSTRUMENTS
At January 27, 1996, the Company's financial instruments include long-term
debt, the carrying value of which (including current portion) was $56,642,000.
The estimated fair value of long-term debt at January 27, 1996, based on
quoted market prices for similar debt or current rates offered to the Company
for debt with similar maturities, where applicable, was $59,693,000. The
carrying amounts of cash, accounts receivable, accounts payable, notes payable
and accrued expenses approximate fair value because of the short maturity of
those items.
F-15
<PAGE>
FAY'S INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 12--QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
Summarized quarterly financial information for the years ended January 27,
1996 and January 28, 1995 was as follows:
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
----------- ----------- ----------- -----------
(IN THOUSANDS OF DOLLARS EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Fiscal 1996:
Net sales.................. $ 235,612 $ 236,845 $ 236,980 $ 264,372
Gross profit............... 64,334 62,215 61,852 70,054
Income taxes............... 1,090 498 850 (5,801)
Income (loss) from continu-
ing operations............ 1,487 669 1,202 (8,908)
Income (loss) from discon-
tinued operations......... (716) 304 17 (3,672)
Net income (loss).......... 771 973 1,219 (12,580)
Earnings (loss) per share:
Continuing operations.... $ 0.07 $ 0.03 $ 0.06 $ (0.43)
Discontinued operations.. $ (0.03) $ 0.02 -- $ (0.18)
Net income (loss)........ $ 0.04 $ 0.05 $ 0.06 $ (0.61)
Cash dividends paid per
share..................... $ 0.05 $ 0.05 $ 0.05 $ 0.05
Market price per share:
High..................... 9 3/8 9 1/8 8 3/8 8 1/4
Low...................... 6 1/4 6 5/8 7 1/2 6 1/2
Fiscal 1995:
Net sales.................. $ 216,428 $ 224,875 $ 226,988 $253,016
Gross profit............... 60,670 61,085 62,908 72,112
Income taxes............... 1,718 1,717 1,569 4,630
Income from continuing op-
erations.................. 2,318 2,337 2,147 6,121
Income (loss) from discon-
tinued operations......... (345) 244 59 (245)
Net income................. 1,973 2,581 2,206 5,876
Earnings (loss) per share:
Continuing operations.... $ 0.11 $ 0.12 $ 0.11 $ 0.30
Discontinued operations.. $ (0.01) $ 0.01 -- $ (0.01)
Net income............... $ 0.10 $ 0.13 $ 0.11 $ 0.29
Cash dividends paid per
share..................... $ 0.05 $ 0.05 $ 0.05 $ 0.05
Market price per share:
High..................... 7 1/4 7 3/8 8 7
Low...................... 6 1/8 6 1/4 6 1/2 6
</TABLE>
In the fourth quarter of fiscal 1996, the Company recorded a pre-tax
restructuring charge of $20,087,000 related to the repositioning and
relocation of 50 stores. It also recorded an after-tax charge of $3,573,000 in
the fourth quarter for the estimated loss of discontinued operations. Refer to
Notes 2 and 3 for a more detailed discussion related to these charges.
F-16
<PAGE>
EXHIBIT 10.7
------------
AGREEMENT
---------
AGREEMENT, made as of the 29th day of January, 1996, 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 HENRY A. PANASCI, JR., residing at 3000 Howlett Hill Road, Camillus, 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 February 1, 1996 and expiring on January 31, 1997. The term of
the Executive's employment will be extended by one (1) year at the completion of
each full year of employment.
2. POSITIONS, DUTIES AND RESPONSIBILITIES.
--------------------------------------
(a) During the Executive's period of employment, the Executive shall
continue to serve as Chairman of the Board and Chief Executive Officer 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 Chairman of the Board and Chief Executive Officer 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 a salary
of $395,000.00 per year, payable in equal weekly installments, or such
<PAGE>
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 periods of paid vacation as
approved by the Executive Committee of the Board of Directors, taken at such
times as shall be elected by the Executive.
(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, provided, however, that the Executive, so long as the Executive is
employed by the Company, shall be provided the use of an automobile leased by
the Company equivalent in value to the automobile currently leased by the
Company for use by the Executive.
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 16) 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) 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
(2)
<PAGE>
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 if such death occurs prior to the Executive having a right to receive
severance benefits pursuant to Paragraph 6, except that the provisions of
Paragraph 8 dealing with continuation of benefits for the Executive's surviving
spouse shall survive such automatic termination (see also Paragraph 22(c)
hereof).
(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, or (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). 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 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
(3)
<PAGE>
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
(vi) any failure by the Company to obtain the assumption of this
Agreement in accordance with Paragraph 16.
(4)
<PAGE>
(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 two (2) times the Executive's base annual salary at the time of
termination of employment, plus two (2) times the highest annual bonus paid to
the Executive in respect of the three (3) most recent fiscal years. Said
severance benefit shall be payable in one hundred four (104) 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 three (3) times the Executive's base annual salary at the time
of termination of employment, plus three (3) times the highest annual bonus paid
to the Executive in respect of the three (3) most recent fiscal 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 fifty-six (156) 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
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
(5)
<PAGE>
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 70, 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) Upon the death of the Executive or following the termination of the
Executive's employment prior to or following a Change in Control for any reason
(including retirement) 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 spouse, during the lifetimes of the
(6)
<PAGE>
Executive and his surviving spouse, 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 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 or his surviving spouse following the termination of employment,
then the Company will arrange to provide the Executive and/or his surviving
spouse 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 surviving spouse 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.
(b) In addition to the benefits set forth in subparagraph (a), upon the
death of the Executive or following termination of the Executive's employment
following a Change in Control, the Company shall pay to the Executive and/or his
surviving spouse all medical expenses incurred not covered by the Company's
health and welfare plans, including all deductible amounts, nursing home care
and home health care services provided by trained medical personnel.
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 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,
(7)
<PAGE>
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 iTI 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 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
(8)
<PAGE>
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, either
(i) 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, or (ii) the Executive delivers to the
Board of Directors his written election not to treat such transaction(s) or
election as a Change in Control.
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. GROSS-UP PAYMENT. If following a Change in Control any amounts paid to
----------------
the Executive under this Agreement will be subject to the tax imposed by Section
4999 of the Internal Revenue Code (the "Excise Tax"), the Company shall pay to
the Executive upon the Executive's termination of employment with the Company an
additional amount (the "Gross-Up Payment") such that the net amount retained by
the Executive (after taking into account any Excise Tax and all federal, state
and local income taxes imposed upon the payment provided by this Paragraph)
shall be equal to all amounts due Executive under the terms of this Agreement.
For purposes of determining whether any payments will be subject to the Excise
Tax and the amount of such Excise Tax, the amount of taxes payable in respect of
the payments due the Executive under this Paragraph shall be determined by the
Executive's tax counsel in a written opinion delivered to the Company. Said tax
counsel shall consider all payments or benefits to be received by the Executive
in connection with a Change in Control of the Company
(10)
<PAGE>
as "parachute payments" within the meaning of Section 280G(b)(2) of the Code,
and all "excess parachute payments" within the meaning of Section 280G(b)(l)
shall be treated as subject to the Excise Tax, unless in the opinion of such tax
counsel such other payments or benefits do not constitute parachute payments, or
such excess parachute payments represent reasonable compensation for services
actually rendered within the meaning of Section 280G(b)(4) of the Code. For
purposes of determining the amount of the Gross-Up Payment, the Executive shall
be deemed to pay federal and state income taxes at the highest marginal rate of
taxation in the calendar year in which the Gross-Up Payment is to be made. In
the event that the Excise Tax is subsequently determined to be less than the
amount taken into account hereunder at the time of termination of the
Executive's employment, the Executive shall repay to the Company at the time
that the amount of such reduction in Excise Tax is finally determined the
portion of the Gross-Up Payment attributable to such reduction. In the event
that the Excise Tax is determined to exceed the amount taken into account
hereunder at the time of the termination of the Executive's employment, the
Company shall make an additional Gross-Up Payment in respect of such excess
(plus any interest payable with respect to such excess) at the time that the
amount of such excess is finally determined.
14. 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, 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
(11)
<PAGE>
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.
15. 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 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.
(12)
<PAGE>
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.
16. 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.
17. OFFICE. Following the Executive's termination of employment for any
------
reason whatsoever, including retirement, and continuing until the death of the
Executive or the Executive attaining age 75, the Company shall, at the
Executive's option, either (i) provide the Executive with an office and full-
time secretarial services within the executive offices of the Company in a
location acceptable to the Executive, or (ii) provide the Executive with an
allowance of up to $3,000.00 per month for office rent and secretarial services.
18. 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.
(13)
<PAGE>
19. 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:
Henry A. Panasci, Jr.
3000 Howlett Hill
Road
Camillus, New York
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.
20. 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.
21. 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 "hereunto 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.
22. 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.
(14)
<PAGE>
(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 Agreement
shall inure to the benefit of and be enforceable by the Executive's personal and
legal representatives, executors, administrators and heirs. If the Executive
should die subsequent to the Executive having a right to receive severance
benefits pursuant to Paragraph 6 hereof, all such amounts shall be paid in
accordance with the terms of this Agreement to the Executive's devisee, legatee
or other designee or, if there be no such designee, to the Executive's 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 16.
(h) This Agreement shall be governed by, construed and enforced in
accordance with the laws of the State of New York.
(15)
<PAGE>
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: /S/ Warren D. Wolfson
---------------------
/S/ Lori A. Pavente
- -------------------
Witness
/S/ Henry A. Panasci, Jr.
-------------------------
Henry A. Panasci, Jr., Executive
/S/ Lori A. Pavente
- -------------------
Witness
(16)
<PAGE>
EXHIBIT 10.8
------------
AMENDMENT AGREEMENT
-------------------
AGREEMENT, made as of the day of , 1996, 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
(the "Executive").
WITNESSETH:
WHEREAS, the Company and the Executive entered into an Agreement dated
December 29, 1995 relating to the Executive's employment with the Company (the
"Agreement"); and
WHEREAS, the Company and the Executive desire to amend the Agreement.
NOW, THEREFORE, in consideration of the mutual promises and agreements
herein contained, the Company and the Executive agree as follows:
1. Paragraph 4(b) of the Agreement is hereby deleted in its entirety.
2. Paragraph 5(b) of the Agreement is hereby amended to read in full as
follows:
"(b) This Agreement shall terminate automatically upon the death of the
Executive if such death occurs prior to the Executive having a right to receive
severance benefits pursuant to Paragraph 6 (see also Paragraph 21(c) hereof)."
3. Paragraphs 6(a) and 6(b) of the Agreement are hereby amended to read in
full as follows:
"(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 highest annual bonus paid to the Executive in respect of
the three (3) most recent fiscal 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 two (2) times the highest annual bonus paid to
the Executive in respect of the three (3) most recent fiscal 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
<PAGE>
weekly installments, commencing within two (2) weeks of the Executive's
termination of employment."
4. Paragraph 8 of the Agreement is hereby amended to add Paragraph 8(c) to
read in full as follows:
"(c) At the expiration of the period during which benefits are being
provided the Executive pursuant to Paragraph 8(a) or Paragraph 8(b), the
Executive shall be treated as a then terminating employee of the Company or
successor company with respect to the right to elect continued medical, dental
and prescription drug coverages in accordance with Section 4980B of the
Internal Revenue Code or any successor provision thereto and with respect to
any similar welfare benefit continuation rights."
5. The last paragraph of Paragraph 10 of the Agreement is hereby deleted
in its entirety.
6. Paragraph 16 of the Agreement is hereby deleted in its entirety and
the following substituted in its stead:
"16. GROSS-UP PAYMENT. If following a Change in Control any amounts paid to
----------------
the Executive under this Agreement will be subject to the tax imposed by
Section 4999 of the Internal Revenue Code (the "Excise Tax"), the Company shall
pay to the Executive upon the Executive's termination of employment with the
Company an additional amount (the "Gross-Up Payment") such that the net amount
retained by the Executive (after taking into account any Excise Tax and all
federal, state and local income taxes imposed upon the payment provided by this
Paragraph) shall be equal to all amounts due Executive under the terms of this
Agreement. For purposes of determining whether any payments will be subject to
the Excise Tax and the amount of such Excise Tax, the amount of taxes payable
in respect of the payments due the Executive under this Paragraph shall be
determined by the Executive's tax counsel in a written opinion delivered to the
Company. Said tax counsel shall consider all payments or benefits to be
received by the Executive in connection with a Change in Control of the Company
as "parachute payments" within the meaning of Section 280G(b)(2) of the Code,
and all "excess parachute payments" within the meaning of Section 280G(b)(l)
shall be treated as subject to the Excise Tax, unless in the opinion of such
tax counsel such other payments or benefits do not constitute parachute
payments, or such excess parachute payments represent reasonable compensation
for services actually rendered within the meaning of Section 280G(b)(4) of the
Code. For purposes of determining the amount of the Gross-Up Payment, the
Executive shall be deemed to pay federal and state income taxes at the highest
marginal rate of taxation in the calendar year in which the Gross-Up Payment is
to be made. In the event that the Excise Tax is subsequently determined to be
less than the amount taken into account hereunder at the time of termination
of the Executive's employment, the Executive shall repay to the Company at the
time that the amount of such reduction in Excise Tax is finally determined the
portion of the Gross-Up Payment attributable to such reduction. In the event
(2)
<PAGE>
that the Excise Tax is determined to exceed the amount taken into account
hereunder at the time of the termination of the Executive's employment, the
Company shall make an additional Gross-Up Payment in respect of such excess
(plus any interest payable with respect to such excess) at the time that the
amount of such excess is finally determined."
7. Paragraph 21(c) of the Agreement is hereby amended to read in full as
follows:
"(c) No right or interest to or in any payments due under this Agreement
shall be assignable by the Executive; provided, however, that this Agreement
shall inure to the benefit of and be enforceable by the Executive's personal and
legal representatives, executors, administrators and heirs. If the Executive
should die subsequent to the Executive having a right to receive severance
benefits pursuant to Paragraph 6 hereof, all such amounts shall be paid in
accordance with the terms of this Agreement to the Executive's devisee, legatee
or other designee or, if there be no such designee, to the Executive's estate."
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the day and year first above written.
FAY'S INCORPORATED
(Corporate Seal)
Witness BY:
, Executive
Witness
(3)
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<PAGE>
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<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JAN-27-1996
<PERIOD-START> JAN-29-1995
<PERIOD-END> JAN-27-1996
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0
0
<COMMON> 2,090
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<TOTAL-LIABILITY-AND-EQUITY> 298,593
<SALES> 973,809
<TOTAL-REVENUES> 973,809
<CGS> 715,354
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<INTEREST-EXPENSE> 5,964
<INCOME-PRETAX> (8,913)
<INCOME-TAX> (3,363)
<INCOME-CONTINUING> (5,550)
<DISCONTINUED> (4,067)
<EXTRAORDINARY> 0
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<NET-INCOME> (9,617)
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