SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended February 3, 2001
Commission File Number 000-19288
FRED'S, INC.
(Exact Name of Registrant as Specified in its Charter)
TENNESSEE 62-0634010
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification Number)
4300 New Getwell Road
MEMPHIS, TENNESSEE 38118
(Address of Principal Executive Offices)
Registrant's telephone number, including area code (901) 365-8880
Securities Registered Pursuant to Section 12(b) of the Act: None
Securities Registered Pursuant to Section 12(g) of the Act:
Title of Each Class
-------------------
Class A Common Stock, no par value
Indicate by check mark whether the 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 by reference in Part III of this Form 10-K or any amendment to this
Form 10-K [X].
As of April 20, 2001, there were 12,087,329 shares outstanding of the
Registrant's Class A no par value voting common stock. Based on the last
reported sale price of $23.50 per share on the NASDAQ Stock Market on April 20,
2001, the aggregate market value of the Registrant's Common Stock held by those
persons deemed by the Registrant to be non-affiliates was $284,052,232.
As of April 20, 2001, there were no shares outstanding of the Registrant's
Class B no par value non-voting common stock.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Annual Report to Shareholders for the year ended February
3, 2001 are incorporated by reference into Part II, Items 5, 6, 7 and 8, and
into Part IV, Item 14.
Portions of the Company's Proxy Statement are incorporated by reference
into Part III, Items 11, 12 and 13.
Portions of the Company's Registration Statement on Form S-1 (file no.
33-45637) are incorporated as exhibits into Part IV.
With the exception of those portions that are specifically incorporated
herein by reference, the aforesaid documents are not to be deemed filed as part
of this report.
Cautionary Statement Regarding Forward-looking Information
Statements, other than those based on historical facts that the Company expects
or anticipates may occur in the future are forward-looking statements which are
based upon a number of assumptions concerning future conditions that may
ultimately prove to be inaccurate. Actual events and results may materially
differ from anticipated results described in such statements. The Company's
ability to achieve such results is subject to certain risks and uncertainties,
including, but not limited to, economic and weather conditions which affect
buying patterns of the Company's customers, changes in consumer spending and the
Company's ability to anticipate buying patterns and implement appropriate
inventory strategies, continued availability of capital and financing,
competitive factors, changes in reimbursement practices for pharmaceuticals,
governmental regulation, and other factors affecting business beyond the
Company's control. Consequently, all of the forward-looking statements are
qualified by these cautionary statements and there can be no assurance that the
results or developments anticipated by the Company will be realized or that they
will have the expected effects on the Company or its business or operations.
PART I
Item 1: Business
General
Fred's, Inc. ("Fred's" or the "Company"), founded in 1947, operates 320
discount general merchandise stores in eleven states in the southeastern United
States. Fred's stores generally serve low, middle and fixed income families
located in small to medium sized towns (approximately 65% of Fred's stores are
in markets with populations of 15,000 or fewer people). One hundred and
ninety-eight of the Company's stores have full service pharmacies. The Company
also markets goods and services to 26 franchised "Fred's" stores.
Fred's stores stock over 12,000 frequently purchased items which address
the everyday needs of its customers, including nationally recognized brand name
products, proprietary "Fred's" label products and lower priced off-brand
products. Fred's management believes its customers shop Fred's stores as a
result of the stores' convenient location and size, everyday low prices on key
products and regularly advertised departmental promotions and seasonal specials.
Fred's stores have average selling space of 14,690 square feet and had average
sales of $2,440,000 in fiscal 2000. No single store accounted for more than 1.0%
of sales during fiscal 2000.
Business Strategy
The Company's strategy is to meet the general merchandise and pharmacy
needs of the small to medium sized towns it serves by offering a wider variety
of quality merchandise and a more attractive price-to-value relationship than
either drug stores or smaller variety/dollar stores and a shopper-friendly
format which is more convenient than larger sized discount merchandise stores.
The major elements of this strategy include:
Wide variety of frequently purchased, basic merchandise -Fred's combines
everyday basic merchandise with certain specialty items to offer its
customers a wide selection of general merchandise. The selection of
merchandise is supplemented by seasonal specials, private label products,
and the inclusion of pharmacies in 198 of its stores.
Discount prices - The Company provides value and low prices to its
customers (i.e., a good "price-to-value relationship") through a
coordinated discount strategy and an Everyday Low Pricing program that
focuses on strong values day in and day out, while minimizing the Company's
reliance on promotional activities. As part of this strategy, Fred's
maintains low opening price points and competitive prices on key products
across all departments, and regularly offers seasonal specials and
departmental promotions supported by direct mail, television, radio and
newspaper advertising.
Convenient shopper-friendly environment - Fred's stores are typically
located in convenient shopping and/or residential areas. Approximately 31%
of the Company's stores are freestanding as opposed to being located in
strip shopping center sites. Freestanding sites allow for easier access and
shorter distances to the store entrance, and will be the primary site
growth in the future. Fred's stores are of a manageable size and have an
understandable store layout, wide aisles and fast checkouts.
Expansion Strategy
The Company expects that expansion will occur primarily within its present
geographic area and will be focused in small to medium sized towns. The Company
may also enter larger metropolitan and urban markets where it already has a
market presence in the surrounding area.
Fred's added a net 27 stores in 2000, and anticipates a net increase of
twenty-five to thirty new stores in 2001. The Company's new store prototype has
14,000 square feet of space. Opening a new store currently costs between
$320,000 and $420,000 for inventory, furniture, fixtures, equipment and
leasehold improvements. The Company has 19 stand-alone Xpress locations which
sell pharmaceuticals and other health and beauty related items. These locations
range in size from 1,000 to 6,000 square feet, and enable the Company to enter a
new market with an initial investment of under $200,000. It is the Company's
intent to expand these locations into a full size Fred's location as market
conditions dictate. During 2000, the Company converted two Xpress locations to
full size Fred's locations and anticipates converting up to six more Xpress
locations during 2001.
A significant growth area for the Company has been its pharmaceuticals
business. In 2000, the Company added a net 16 new pharmacies. During 2001, the
Company anticipates adding at least 20 additional pharmacies. Approximately 62%
of Fred's stores contain a pharmacy and sell prescription drugs. The Company's
primary mechanism for adding new pharmacies is through the acquisition of
prescription files from independent pharmacies. These acquisitions provide an
immediate sales benefit, and in many cases, the independent pharmacist will move
to Fred's, thereby providing continuity in the pharmacist-patient relationship.
The following tables set forth certain information with respect to stores
and pharmacies for each of the last five years:
1996 1997 1998 1999 2000
- --------------------------------------------------------------------------------------------------------
Stores open at beginning of period 206 213 261 283 293
Stores opened/acquired during period 13 49 29 20 31
Stores closed during period (6) (1) (7) (10) (4)
-------------------------------------------------
Stores open at end of period 213 261 283 293 320
=================================================
Number of stores with Pharmacies at
End of period 101 141 180 182 198
=================================================
Square feet of selling space at end of
period (in thousands) 2,828 3,362 3,680 3,966 4,353
=================================================
Average square feet of selling space
per store 13,277 13,875 13,925 14,015 14,690
=================================================
Franchise stores at end of period 32 31 29 26 26
=================================================
Merchandising and Marketing
The business in which the Company is engaged is highly competitive. The
principal competitive factors include location of stores, price and quality of
merchandise, in-stock consistency, merchandise assortment and presentation, and
customer service. The Company competes for sales and store locations in varying
degrees with national, regional and local retailing establishments, including
department stores, discount stores, variety stores, dollar stores, discount
clothing stores, drug stores, grocery stores, outlet stores, warehouse stores
and other stores. Many of the largest retail merchandising companies in the
nation have stores in areas in which the Company operates.
Management believes that Fred's has a distinctive niche in that it offers a
wider variety of merchandise at a more attractive price-to-value relationship
than either a drug store or smaller variety/dollar store and is more
shopper-convenient than a larger discount store. The variety and depth of
merchandise offered at Fred's stores in high traffic departments, such as health
and beauty aids and paper and cleaning supplies, are comparable to those of
larger discount retailers. Management believes that its knowledge of regional
and local consumer preferences, developed in over fifty years of operation by
the Company and its predecessors, enables the Company to compete effectively in
its region. Purchasing
Purchasing
The Company's primary non-prescription drug buying activities are directed
from the corporate office by three Vice Presidents-Merchandising who are
supported by a staff of 19 buyers and assistants. The buyers and assistants are
participants in an incentive compensation program, which is based upon various
factors primarily relating to gross margin returns on inventory controlled by
each individual buyer. The Company believes that adequate alternative sources of
products are available for these categories of merchandise.
During 2000, all of the Company's prescription drugs were purchased
individually by its pharmacies and shipped direct from a pharmaceutical
wholesaler. On November 24, 1999, the Company entered into a supply agreement
with Bergen Brunswig Drug Company to be Fred's new primary pharmaceutical
wholesaler and to provide substantially all of the Company's prescription drugs.
During 2000, approximately 30% of the Company's total purchases were made from
its pharmaceutical wholesalers. Although there are alternative wholesalers that
supply pharmaceutical products, the Company operates under a purchase and supply
contract with one supplier as its primary wholesaler. Accordingly, the unplanned
loss of this particular supplier could have a short-term gross margin impact on
the Company's business until an alternative wholesaler arrangement could be
implemented.
Sales Mix
Sales of merchandise through Company owned stores and to franchised Fred's
locations are the only significant industry segment of which the Company is a
part.
The Company's sales mix by major category during 2000 was as follows:
Pharmaceuticals..................................................32.7%
Household Goods..................................................20.4%
Apparel and Linens...............................................13.8%
Health and Beauty Aids...........................................11.0%
Food and Tobacco Products.........................................9.4%
Paper and Cleaning Supplies.......................................8.3%
Sales to Franchised Fred's Stores.................................4.4%
The sales mix varies from store to store depending upon local consumer
preferences and whether the stores include pharmacies and/or a full-line of
apparel. In 2000 the average customer transaction size was approximately $15.25,
and the number of customer transactions totaled approximately 48 million.
The private label program, includes household cleaning supplies, health and
beauty aids, disposable diapers, pet foods, paper products and a variety of
beverage and other products. Private label products sold constituted
approximately 5% of non-pharmaceutical sales in 2000. Private label products
afford the Company higher than average gross margins while providing the
customer with lower priced products that are of a quality comparable to that of
competing branded products. An independent laboratory testing program is used
for substantially all of the Company's private label products.
The Company sells merchandise to its 26 franchised "Fred's" stores. These
sales during the last three years totaled $34,281,000 in 2000, $32,850,000 in
1999,and $35,766,000 in 1998, representing 4.4%, 4.9%, and 6.0% of total
revenue, respectively. Franchise and other fees earned totaled $1,806,000 in
2000, $1,761,000 in 1999,and $1,957,000 in 1998. These fees represent a
reimbursement for use of the Fred's name and other administrative cost incurred
on behalf of the franchised stores. The Company does not intend on expanding its
franchise network, and therefore, expects that this category will continue to
decrease as a percentage of the Company's total revenues.
Advertising and Promotions
Advertising and promotion costs represented 1.3% of net sales in 2000. The
Company uses direct mail, television, radio and newspaper advertising to promote
its merchandise, special promotional events and a discount retail image. During
1999, the Company eliminated the distribution of two major circulars, and now
distributes thirteen major advertising circulars per year.
The Company's buyers have discretion to mark down slow moving items. The
Company runs regular clearances of seasonal merchandise and conducts sales and
promotions of particular items. The Company also encourages its store managers
to create in-store advertising displays and signage in order to increase
customer traffic and impulse purchases. The store managers, with corporate
approval, are permitted to tailor the price structure at their particular store
to meet competitive conditions within each store's marketing area. Store
Operations
All Fred's stores are open six days a week (Monday through Saturday), and
many stores are open seven days a week. Store hours are generally from 9:00 a.m.
to 9:00 p.m.; however, certain stores are open only until 6:00 p.m. Each Fred's
store is managed by a full-time store manager and those stores with a pharmacy
employ a full-time pharmacist. The Company's seventeen district managers
supervise the management and operation of Fred's stores.
Fred's operates 198 in-store pharmacies, which offer brand name and generic
pharmaceuticals and are staffed by licensed pharmacists. The addition of
acquired pharmacies in the Company's stores has resulted in increased store
sales and sales per selling square foot. Management believes that in-store
pharmacies increase customer traffic and repeat visits and are an integral part
of the store's operation.
The Company has an incentive compensation plan for store managers,
pharmacists and district managers based on meeting or exceeding targeted profit
percentage contributions. Various factors included in determining profit
percentage contribution are gross profits and controllable expenses at the store
level. Management believes that this incentive compensation plan, together with
the Company's store management training program, are instrumental in maximizing
store performance.
Inventory Control and Distribution
Inventory Control
The Company's computerized central management information system (known as
"AURORA," which stands for Automation Utilizing Replenishment Ordering and
Receiving Accuracy) maintains a daily SKU level inventory and current and
historical sales information for each store and the distribution center. This
system is supported by in-store point-of-sale ("POS") cash registers, which
capture SKU and other data at the time of sale for daily transmission to the
Company's central data processing center. Data received from the stores is used
to automatically replenish frequently purchased merchandise on a weekly basis
and to assist the Company's buyers in their decision making process.
Distribution
The Company has an 850,000 square foot centralized distribution center in
Memphis, Tennessee (see "Properties" below). During 1998, the Company completed
a $12 million project to modernize and automate its distribution center. This
project, including implementation of a new warehouse management computer system,
has increased the center's capacity sufficiently to accommodate the Company's
store expansion plans for the next several years. Approximately 60% of the
merchandise received by Fred's stores in 2000 was shipped through the
distribution center, with the remainder (primarily pharmaceuticals, certain
snack food items, greeting cards, beverages and tobacco products) being shipped
directly to the stores by suppliers. For distribution, the Company uses owned
and leased trailers and tractors, as well as common carriers.
Seasonality
The Company's business is somewhat seasonal. Generally, the highest volume
of sales and net income occurs in the fourth fiscal quarter and the lowest
volume occurs during the second fiscal quarter.
Employees
At February 3, 2001, the Company had approximately 7,620 full-time and
part-time employees, comprising 725 corporate and distribution center employees
and 6,895 store employees. The number of employees varies during the year,
reaching a peak during the Christmas selling season. The Company's labor force
is not subject to a collective bargaining agreement. Management believes it has
good relationships with its employees.
Item 2: Properties
As of February 3, 2001, the geographical distribution of the Company's 320
locations was as follows:
State Number of Stores
--------------------------------------------------
Mississippi 85
Tennessee 69
Arkansas 61
Alabama 36
Louisiana 27
Georgia 25
Missouri 8
Kentucky 4
North Carolina 2
Illinois 2
Florida 1
The Company owns the real estate and the buildings for 60 locations, and
owns the buildings at 5 locations which are subject to ground leases. The
Company leases the remaining 255 locations from third parties pursuant to leases
that provide for monthly rental payments primarily at fixed rates (although a
number of leases provide for additional rent based on sales). Store locations
range in size from 1,000 square feet to 27,000 square feet. Two hundred and
twenty-seven of the locations are in strip centers or adjoined with a
downtown-shopping district, with the remainder being freestanding.
It is anticipated that existing buildings and buildings to be developed by
others will be available for lease to satisfy the Company's expansion program in
the near term. It is management's intention to enter into leases of relatively
moderate length with renewal options, rather than entering into long-term
leases. The Company will thus have maximum relocation flexibility in the future,
since continued availability of existing buildings is anticipated in the
Company's market areas.
The Company owns its distribution center and corporate headquarters
situated on a 60 acre site in Memphis, Tennessee. The site contains the
distribution center with approximately 850,000 square feet of space, and 250,000
square feet of office and retail space. Presently, the Company utilizes 90,000
square feet of office space and 22,000 square feet of retail space at the site.
The retail space is operated as a Fred's store and is used to test new products,
merchandising ideas and technology.
Item 3: Legal Proceedings
The Company is party to several pending legal proceedings and claims.
Although the outcome of the proceedings and claims cannot be determined with
certainty, management of the Company is of the opinion that it is unlikely that
these proceedings and claims will have a material effect on the results of
operations, cash flows, or the financial condition of the Company.
Item 4: Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal year ended February 3, 2001.
PART II
Item 5: Market for the Registrant's Common Equity and Related Stockholder
Matters
Information required by this item is incorporated herein by reference to
Page 33 (inside back cover) of the Annual Report to Shareholders for the year
ended February 3, 2001 (the "Annual Report to Shareholders"). The Company has
paid cash dividends of $0.20 per share for each of the last five fiscal years.
Item 6: Selected Financial Data
The selected financial data for the five years ended February 3, 2001,
which appears on page 10 of the Annual Report to Shareholders is incorporated
herein by reference.
Item 7: Management's Discussion and Analysis of Financial Condition and
Results of Operations
Management's Discussion and Analysis of financial condition and results of
operations appearing on pages 11 through 15 of the Annual Report to Shareholders
is incorporated herein by reference.
Item 7a: Quantitative and Qualitative Disclosure about Market Risk
The Company has no holdings of derivative financial or commodity
instruments as of February 3, 2001. The Company is exposed to financial market
risks, including changes in interest rates. All borrowings under the Company's
Revolving Credit Agreement bear interest at 1.5% below prime rate or a
LIBOR-based rate. An increase in interest rates of 100 basis points would not
significantly affect the Company's income. All of the Company's business is
transacted in U.S. dollars and, accordingly, foreign exchange rate fluctuations
have never had a significant impact on the Company, and they are not expected to
in the foreseeable future.
Item 8: Financial Statements and Supplementary Data
The consolidated financial statements appearing on pages 16 through 31 of
the Annual Report to Shareholders are incorporated herein by reference.
Item 9: Changes In and Disagreements With Accountants on Accounting and
Financial Disclosure
None.
PART III
Item 10: Directors and Executive Officers of the Registrant
The following information is furnished with respect to each of the
directors and executive officers of the Registrant:
Name Age Positions and Offices
---- --- ---------------------
Michael J. Hayes(1) 59 Director, Managing Director (2), Chief Executive Officer
David A. Gardner(1) 53 Director and Managing Director (2)
John R. Eisenman(1) 59 Director
Roger T. Knox(1) 63 Director
John Reier (1) 61 President and Director
Thomas H. Tashjian (1) 46 Director
John A. Casey 54 Executive Vice President - Pharmacy Operations
Jerry A Shore 48 Executive Vice President and Chief Financial Officer
Charles S. Vail 58 Corporate Secretary, Vice President - Legal Services and General Counsel
(1) Six directors, constituting the entire Board of Directors, are to be
elected at the Annual Meeting to serve one year or until their successors
are elected.
(2) According to the By-laws of the Company, the Managing Directors (Messrs.
Hayes and Gardner) are the chief executive officers of the Company and have
general supervisory responsibility for the business of the Company.
Michael J. Hayes was elected a director of the Company in January 1987 and
has been a Managing Director of the Company since October 1989. Mr. Hayes has
been Chief Executive Officer since October 1989. He was previously employed by
Oppenheimer & Company, Inc. in various capacities from 1976 to 1985, including
Managing Director and Executive Vice President - Corporate Finance and Financial
Services.
David A. Gardner was elected a director of the Company in January 1987 and
has been a Managing Director of the Company since October 1989. Mr. Gardner has
been President of Gardner Capital Corporation, a real estate and venture capital
investment firm since April 1980. Additionally, Mr. Gardner is a director of
Organogenesis, Inc., Wynd Communications Corporation, NumeriX, LLC and Joyce
International, Inc.
John R. Eisenman is involved in real estate investment and development with
REMAX Island Realty, Inc., located in Hilton Head Island, South Carolina. Mr.
Eisenman has been engaged in commercial and industrial real estate brokerage and
development since 1983. Previously, he founded and served as President of
Sally's, a chain of fast food restaurants from 1976 to 1983, and prior thereto
held various management positions in manufacturing and in securities brokerage.
Roger T. Knox has served the Memphis Zoological Society as its President
and Chief Executive Officer since January 1989. Mr. Knox was the President and
Chief Operating Officer of Goldsmith's Department Stores, Inc. (a full-line
department store in Memphis and Jackson, Tennessee) from 1983 to 1989 and its
Chairman of the Board and Chief Executive Officer from 1987 to 1989. Prior
thereto, Mr. Knox was with Foley's Department Stores in Houston, Texas for 20
years. Additionally, Mr. Knox is a Director of Hancock Fabrics, Inc.
John D. Reier is President and a Director. Mr. Reier joined the Company in
May of 1999 as President and was elected a director of the Company in August
2000. Prior to joining the company, Mr. Reier was President and Chief Executive
Officer of Sunny's Great Outdoors Stores, Inc. from 1997 to 1999, and was
President, Chief Operating Officer, Senior Vice President of Merchandising, and
General Merchandise Manager at Family Dollar Stores, Inc. from 1987 to 1997.
Thomas H. Tashjian was elected a director of the Company in March 2001. Mr.
Tashjian is a private investor. Mr. Tashjian has served as a managing director
and consumer group leader at Banc of America Montgomery Securities in San
Francisco. Prior to that, Mr. Tashjian held similar positions at First Manhattan
Company, Seidler Companies, and Prudential Securities. Mr. Tashjian's earlier
retail operating experience was in discount retailing at the Ayrway Stores,
which were acquired by Target , and in the restaurant business at Noble Roman's.
John A. Casey is Executive Vice President - Pharmacy Operations. Mr. Casey
joined the Company in 1979 and has served in various positions in Pharmacy
Operations. Mr. Casey is a registered Pharmacist.
Jerry A. Shore joined the Company in April 2000 as Executive Vice President
and Chief Financial Officer. Prior to joining the Company, Mr. Shore was
employed by Wang's International, a major importing and wholesale distribution
company as Chief Financial Officer from 1989 to 2000, and in various financial
management capacities with IPS Corp., and Caterpillar, Inc. from 1975 to 1989.
Charles S. Vail has served the Company as General Counsel since 1973, as
Corporate Secretary since 1975, and as Vice President - Legal since 1984. Mr.
Vail joined the Company in 1968.
Item 11: Executive Compensation
Information regarding executive compensation is incorporated herein by
reference from the information on pages 7 through 9 of the Company's Proxy
Statement, which will be filed within 120 days of the registrant's fiscal year
end.
Item 12: Security Ownership of Certain Beneficial Owners and Management
Information regarding security ownership of certain beneficial owners and
management is incorporated herein by reference from pages 2 and 3 of the
Company's Proxy Statement, which will be filed within 120 days of the
Registrant's fiscal year end.
Item 13: Certain Relationships and Related Transactions
This information is incorporated herein by reference from the information
under the caption "Compensation Committee Interlocks and Insider Participation"
on page 11 of the Company's Proxy Statement, which will be filed within 120 days
of the Registrant's fiscal year end.
PART IV
Item 14: Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a)(1) Consolidated Financial Statements
The following consolidated financial statements are incorporated herein by
reference from pages 14 through 26 of the Annual Report to Shareholders for the
year ended February 3, 2001.
Report of Independent Accountants.
Consolidated Statements of Income for the years ended February 3, 2001,
January 29, 2000,and January 30, 1999.
Consolidated Balance Sheets as of February 3, 2001, and January 29, 2000.
Consolidated Statements of Changes in Shareholders' Equity for the years
ended February 3, 2001, January 29, 2000,and January 30, 1999.
Consolidated Statements of Cash Flows for the years ended February 3,
2001, January 29, 2000, and January 30, 1999.
Notes to Consolidated Financial Statements.
(a)(2) Financial Statement Schedules
Report of Independent Accountants on Financial Statement Schedules for
each of the three years for the period ended February 3, 2001.
II Valuation and qualifying accounts
(a)(3) Those exhibits required to be filed as Exhibits to this Annual
Report on Form 10-K pursuant to Item 601 of Regulation S-K are as
follows:
2.1 Asset Purchase Agreement between CVS Revco D.S., Inc., Fred's
Stores of Tennessee, Inc., CVS Corporation and Fred's, Inc.,
dated as of October 10, 1997 [incorporated herein by reference to
Exhibit 2.1 to the Company's Current Report on Form 8-K dated
December 1, 1997].
2.2 Letter Agreement between CVS Revco D.S., Inc., Fred's Stores of
Tennessee, Inc., CVS Corporation and Fred's, Inc. dated as of
November 1, 1997 [incorporated herein by reference to Exhibit 2.2
to the Company's Current Report on Form 8-K dated December 1,
1997].
3.1 Certificate of Incorporation, as amended [incorporated herein by
reference to Exhibit 3.1 to the Form S-1 as filed with the
Securities and Exchange Commission February 7, 1992 (SEC File No.
33-45637) (the "Form S-1")].
3.2 By-laws, as amended [incorporated herein by reference to Exhibit
3.2 to the Form S-1].
4.1 Specimen Common Stock Certificate [incorporated herein by
reference to Exhibit 4.2 to Pre-Effective Amendment No. 3 to the
Form S-1].
4.2 Preferred Share Purchase Plan [incorporated herein by reference
to the Company's Report on Form 10-Q for the quarter ended
October 31, 1998].
9.1 Baddour, Inc. (Registrant changed its name to "Fred's, Inc." in
1991) Shareholders Agreement dated as of June 28, 1986
[incorporated herein by reference to Exhibit C, pages C-1 through
C-42 to Baddour, Inc.'s Report on Form 8-K dated July 1, 1986]
10.1 Form of Fred's, Inc. Franchise Agreement [incorporated herein by
reference to Exhibit 10.8 to the Form S-1].
10.2 401(k) Plan dated as of May 13, 1991 [incorporated herein by
reference to Exhibit 10.9 to the Form S-1].
10.3 Employee Stock Ownership Plan (ESOP) dated as of January 1, 1987
[incorporated herein by reference to Exhibit 10.10 to the Form
S-1].
*10.4 Incentive Stock Option Plan dated as of December 22, 1986
[incorporated herein by reference to Exhibit 10.11 to the Form
S-1].
10.5 Lease Agreement by and between Hogan Motor Leasing, Inc. and
Fred's, Inc. dated February 5, 1992 for the lease of truck
tractors to Fred's, Inc. and the servicing of those vehicles and
other equipment of Fred's, Inc. [incorporated herein by reference
to Exhibit 10.15 to Pre-Effective Amendment No. 1 to the Form
S-1].
10.6 Revolving Loan and Credit Agreement between Fred's, Inc. and
Union Planters National Bank dated as of May 15, 1992
[incorporated herein by reference to the Company's report on Form
10-Q for the quarter ended May 2, 1992].
*10.7 1993 Long Term Incentive Plan dated as of January 21, 1993
[Incorporated herein by reference to the Company's report on Form
10-Q for the quarter ended July 31, 1993].
*Management Compensatory Plan
10.8 Modification Agreement between Fred's, Inc. and Union Planters
National Bank dated as of May 31, 1995 (modifies the Revolving
Loan and Credit Agreement included as Exhibit 10.7) [incorporated
herein by reference to the Company's report on Form 10-Q for the
quarter ended July 29, 1995].
10.9 Second Modification Agreement between Fred's, Inc. and Union
Planters National Bank dated as of July 31, 1995 (modifies the
Revolving Loan and Credit Agreement included as Exhibit 10.7)
[incorporated herein by reference to the Company's report on Form
10-Q for the quarter ended July 29, 1995].
10.10 Seasonal Overline Revolving Credit Agreement between Fred's,
Inc. and Union Planters National Bank dated as of July 23, 1996
[incorporated herein by reference to the Company's report on Form
10-Q for the quarter ended August 3, 1996].
10.11 Addendum to Leasing Agreement and form of schedules 2 through 6
of Schedule A by and between Hogan Motor Leasing, Inc. and
Fred's, Inc. dated December 19, 1996 (modifies the Lease
Agreement included as Exhibit 10.6) [incorporated herein by
reference to the Company's report on Form 10-K for the year ended
February 1, 1997].
10.12 Third Modification Agreement between Fred's, Inc. and Union
Planters National Bank dated as of February 28, 1997 (modifies
the Revolving Loan and Credit Agreement included as Exhibit 10.7)
[incorporated herein by reference to the Company's report on Form
10-K for the year ended February 1, 1997].
10.13 Term Loan Agreement between Fred's, Inc. and Union Planters
National Bank dated as of May 5, 1998 [incorporated herein by
reference to the Company's Report on Form 10-Q for the quarter
ended May 2, 1998].
10.14 Fourth Modification Agreement between Fred's, Inc. and Union
Planters National Bank dated as of September 1998 [incorporated
herein by reference to the Company's Report on Form 10-Q for the
quarter ended August 1, 1998].
10.15 Seasonal Overline Agreement between Fred's, Inc. and Union
Planters National Bank dated as of February 3, 1999 [incorporated
herein by reference to the Company's Report on Form 10-Q for the
quarter ended May 1, 1999].
10.16 Seasonal Overline Agreement between Fred's, Inc. and Union
Planters National Bank dated s of May 12, 1999 [incorporated
herein by reference to the Company's Report on From 10-Q for the
quarter ended May 1, 1999].
10.17 Term Loan Agreement between Fred's, Inc. and First American
National Bank dated as of April 23, 1999 [incorporated herein by
reference to the Company's Report on Form 10-Q for the quarter
ended May 1, 1999].
10.18 Seasonal Overline Agreement between Fred's, Inc. and Union
Planters National Bank dated as of August 3, 1999 [incorporated
herein by reference to the Company's Report on Form 10-Q for the
quarter ended July 31, 1999].
10.19 Prime Vendor Agreement between Fred's Stores of Tennessee, Inc.
and Bergen Brunswig Drug Company, dated as of November 24, 1999
[incorporated herein by reference to Company's Report on Form
10-Q for the quarter ended October 31, 1999].
10.20 Addendum to Leasing Agreement and Form of Schedules 7 through 8
of Schedule A, by and between Hogan Motor Leasing, Inc. and
Fred's, Inc dated September 20, 1999 (modifies the Lease
Agreement included as Exhibit 10.6) [incorporated herein by
reference to the Company's report on Form 10-K for the year ended
January 29, 2000].
10.21 Revolving Loan Agreement between Fred's, Inc. and Union Planters
Bank, NA and Suntrust Bank dated April 3, 2000 [incorporated
herein by reference to the Company's report on form 10-K for year
ended January 29, 2000].
10.22 Loan modification agreement dated May 26, 2000 (modifies the
Revolving Loan Agreement included as Exhibit 10.23) [Incorporated
herein by reference to the Company's report on Form 10-K for the
year ended January 29, 2000].
10.23 Seasonal Overline Agreement between Fred's, Inc. and Union
Planters National Bank dated as of October 11, 2000 [incorporated
herein by reference to the Company's Report on Form 10-Q for the
quarter ended October 28, 2000].
**13.1 Annual report to shareholders for the year ended February 3,
2001 (to the extent incorporated herein by reference).
**21.1 Subsidiaries of Registrant
**23.1 Consent of PricewaterhouseCoopers LLP
(b) Reports on Form 8-K
Current report on Form 8-K dated March 19, 2001 (filed on March 29,
2001) reporting under item 5 of Form 8-K, other events, information
related to the Company's announcing the appointment of Thomas H.
Tashjian to its Board of Directors.
** Filed herewith
Report of Independent Accountants on
Financial Statement Schedules
Our audits of the consolidated financial statements referred to in our report
dated April 4, 2001 in the 2000 Annual Report to Shareholders of Fred's, Inc.
and subsidiaries (which report and consolidated financial statements are
incorporated by reference in this Annual Report on Form 10-K) also included an
audit of the financial statement schedule listed in Item 14(a)(2) of this Form
10-K. In our opinion, this financial statement schedule presents fairly, in all
material respects, the information set forth therein when read in conjunction
with the related consolidated financial statements.
PricewaterhouseCoopers LLP
Memphis,Tennessee
April 4, 2001
Schedule II - Valuation and Qualifying Accounts
Balance at Charged to Balance at
Beginning Costs and Deductions End
of Period Expenses Write-offs of Period
Allowance for doubtful Accounts:
Year ended January 30, 1999 766 124 (246) 644
Year ended January 29, 2000 644 80 (272) 452
Year ended February 3, 2001 452 194 (130) 516
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, on this 20th day of
April, 2001.
FRED'S, INC.
By: /s/ Michael J. Hayes
--------------------
Michael J. Hayes, Chief Executive
Officer
By: /s/ Jerry A. Shore
------------------
Jerry A. Shore, Executive Vice
President and Chief Financial
Officer (Principal Accounting
and Financial Officer)
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 indicated on this 20th day of April, 2001.
Signature Title
/s/ Michael J. Hayes Director, Managing Director,
--------------------------
Michael J. Hayes Chief Executive Officer, President
/s/ David A. Gardner Director and Managing Director
--------------------------
David A. Gardner
/s/ Roger T. Knox Director
--------------------------
Roger T. Knox
/s/ John R. Eisenman Director
--------------------------
John R. Eisenman
/s/ John D. Reier Director
--------------------------
John D. Reier
/s/ Thomas H. Tashjian Director
--------------------------
Thomas H. Tashjian
EXHIBIT 13.1
------------
Selected Financial Data
(dollars in thousands, except per share amounts)
2000(1) 1999 1998(2) 1997 1996
------- ---- ------- ---- ----
Statement of Income Data:
Net sales $781,249 $665,777 $600,902 $492,236 $418,297
Operating income 25,720 18,943 14,711 15,511 6,779(3)
Income before income taxes 22,494 16,439 13,605 15,660 6,508
Provision for income taxes 7,645 5,737 4,775 5,873 702
Net income 14,849 10,702 8,830 9,787 5,806
Net income per share:
Basic 1.24 .90 .75 .84 .50
Diluted 1.22 .89 .73 .83 .50
Selected Operating Data:
Operating income as a percentage of sales 3.3% 2.9% 2.4% 3.2% 1.6%(3)
Increase in comparable store sales (4) 9.2%(5) 5.2% 5.6% 8.3% 2.2%
Stores open at end of period 320 293 283 261 213
Balance Sheet Data (at period end):
Total assets $254,795 $240,222 $220,757 $195,407 $161,148
Short-term debt (including capital leases) 2,678 30,736 11,914 214 1,641
Long-term debt (including capital leases) 31,705 11,761 11,821 1,368 138
Shareholders' equity 159,687 145,913 136,983 129,359 119,579
(1) Results for 2000 include 53 weeks.
(2) Results for 1998 include the effect of the 1998 adoption of LIFO for
pharmacy inventories.
(3) After $3,289 of restructuring and other charges.
(4) A store is first included in the comparable store sales calculation after
the end of the twelfth month following the store's grand opening month.
(5) The increase in comparable store sales for 2000 is computed on the same 53
week period for 1999.
-10-
Management's Discussion and Analysis
Fiscal 2000 Compared to Fiscal 1999
Sales
Net sales increased 17.3% ($115 million) in 2000. Approximately $57 million of
the increase was attributable to the addition of 31 new or upgraded stores, and
16 pharmacies during 2000, together with the sales of 20 store locations and 2
pharmacies that were opened or upgraded during 1999 and contributed a full year
of sales in 2000. During 2000, the Company also closed 4 store locations.
Comparable store sales based on a 53-week comparison, consisting of sales from
stores that have been open for more than one year, increased 9.2% in 2000.
The Company's front store (non-pharmacy) sales increased approximately 15% over
1999 front store sales. Front store sales growth benefited from the above
mentioned store additions, and solid performances in categories such as home
furnishings, floor coverings, bath, small appliances, giftware, ladies intimate,
ladies accessories, men's and boy's apparel, ethnic products, beverages, food
and snacks, and tobacco. Lawn and garden sales decreased due to reduced emphasis
of large lawn and garden equipment that carried lower margins and required
additional labor outside the stores.
Fred's pharmacy sales grew to 33% of total sales in 2000 from 31% of total sales
in 1999 and continues to rank as the largest sales category within the Company.
The total sales in this department, including the Company's mail order
operation, increased 25% over 1999, with third party prescription sales
representing approximately 83% of total pharmacy sales, compared with 77% of
total pharmacy sales in 1999. The Company's pharmacy sales growth continued to
benefit from an ongoing program of purchasing prescription files from
independent pharmacies, the addition of pharmacy departments in existing store
locations, and inflation caused by drug manufacturer increases.
Sales to Fred's 26 franchised locations increased approximately $1 million in
2000 and represented 4% of the Company's total sales, as compared to 5% in 1999.
It is anticipated that this category of business will decline as a percentage of
total Company sales since the Company has not added and does not intend to add
any additional franchisees.
Gross Margin
Gross margin as a percentage of sales was 27.5% in 2000 compared to 28.2% in
1999. The decrease in gross margin is primarily attributed to the changes in
sales mix and promotional activities to increase customer traffic.
-11-
Selling, General and Administrative Expenses
Selling, general and administrative expenses were 24.2% of net sales in 2000
compared with 25.3% of net sales in 1999. Labor expenses improved in the stores
and pharmacies as a result of the strong sales coupled with store productivity
initiatives. Advertising expense improved as a percentage of sales by reducing
the cost of advertising circulars while maintaining the same number of circulars
issued during the year. Other expenses such as store supplies and distribution
center equipment rental also improved as a result of cost control efforts.
Operating Income
Operating income increased approximately $6.8 million or 35.8% to $25.7 million
in 2000 from $18.9 million in 1999. Operating income as a percentage of sales
increased to 3.3% in 2000 from 2.9% in 1999, due to the above-mentioned reasons.
Interest Expense, Net
Interest expense for 2000 totaled $3.2 million compared to net interest expense
of $2.5 million in 1999.
The interest expense for 2000 reflects higher average revolver borrowings for
inventory purchases, caused by significantly improved in-stock positions over
1999 and inventory for the new stores opened throughout the year. Higher
interest rates during 2000 were also a factor in the higher expense.
Income Taxes
The effective income tax rate decreased to 34.0% in 2000 from 34.9% in 1999, due
to changes made in the Company's organizational structure during the fourth
quarter of 1998 and the implementation of a federal program to generate
employment related tax credits, which resulted in a reduction in the Company's
liability for taxes.
At February 3, 2001, the Company had certain net operating loss carryforwards
which were acquired in reorganizations and certain purchase transactions and are
available to reduce income taxes, subject to usage limitations. These
carryforwards total approximately $43.8 million for state income tax purposes,
which expire during the period 2002 through 2022. If certain substantial changes
in the Company's ownership should occur, there would be an annual limitation on
the amount of carryforwards which can be utilized.
Net Income
Net income for 2000 was $14.8 million (or $1.22 per diluted share) or
approximately 39% higher than the $10.7 million (or $.89 per diluted share)
reported in 1999.
-12-
Fiscal 1999 Compared to Fiscal 1998
(No change from last year's annual report)
Liquidity and Capital Resources
Fred's primary sources of working capital are cash flow from operations and
borrowings under its current facility. The Company had working capital of $110.5
million, $79.7 million and $72.8 million at year end 2000, 1999 and 1998,
respectively. Working capital fluctuates in relation to profitability, seasonal
inventory levels, net of trade accounts payable, and the level of store openings
and closings.
On April 3, 2000, the Company and a bank entered into a new Revolving Loan and
Credit Agreement to replace the existing $15 million unsecured revolving credit
commitment that has generally been used to finance inventory levels at specified
periods. The expanded credit capacity is necessary to accommodate the Company's
continued growth and shifting seasonal inventory needs. This $40 million credit
commitment was supplemented with a $5 million seasonal overline, for a total
revolving borrowing capacity of $45 million. The credit commitment expires on
April 3, 2003 and bears interest at 1.5% below prime rate or a LIBOR-based rate
(weighted average interest rate of 7.4% on 2000 outstanding borrowings). All
other provisions of the new agreement are essentially the same as the prior
agreement.
At February 3, 2001, approximately $22.6 million of inventories were financed
with outstanding borrowings under the Company's revolver. The reduction in
borrowings from the prior year results from the Company's focus on inventory
management and the accelerated payment made in the prior year as explained
below.
At January 29, 2000, approximately $28.2 million of inventories were financed
with outstanding borrowings under the Company's revolver. Higher year-end
revolver borrowings resulted from significantly improved in-stock positions
compared to 1998, duplicate inventories in several re-merchandised inventory
categories, and the accelerated repayment of approximately $7.5 million in
accounts payable, originally due in February, as a result of a change made in
the Company's pharmacy drug wholesaler in December 1999.
In May 1998, the Company entered into a seven-year unsecured term loan of $12
million to finance the modernization and automation of the Company's
distribution center and corporate facilities. The Loan Agreement bears interest
of 6.82% per annum and matures on November 1, 2005. At year-end 2000, the
outstanding principal balance on the term loan was approximately $8.8 million
compared with $10.3 million at year-end 1999.
In April 1999, the Company entered into a four-year unsecured term loan of $2.3
million to finance the replacement of the Company's mainframe computer system.
The Loan Agreement bears interest at 6.15% per annum and matures on April 15,
2003. At year-end 2000, the outstanding principal balance on the term loan was
approximately $1.3 million compared with $1.8 million at year-end 1999.
Cash provided by operations was $27.1 million in 2000 compared to cash used in
operations of ($.8) million in 1999 and cash provided by operations of $.7
million in 1998. Year-end 2000 inventory levels were better managed to improve
turnover and reduce duplicate inventories in several product categories. Also,
income taxes payable increased as a result of tax strategies put in place in
prior years that had a favorable effect in 2000. Year-end 1999 inventory levels
were impacted by improved in-stock positions and duplicate inventories compared
to 1998, and accounts payable were impacted by the accelerated repayment of $7.5
million of payables. Year-end 1998 accounts payable levels were adversely
impacted as a result of merchandise processing delays, and were supplemented
with short-term borrowings at year-end.
-14-
Capital expenditures in 2000 totaled $15.8 million compared with $14.0 million
in 1999 and $21.3 million in 1998. The 2000 capital expenditures included
approximately $12.2 million of expenditures associated with upgraded or new
stores and pharmacies. Approximately $3.6 million in expenditures related to
technology upgrades, distribution center equipment, freight equipment, and
capital maintenance. The 1999 capital expenditures included approximately $2.3
million of expenditures associated with replacement of the Company's mainframe
computer system, and approximately $11.7 million of expenditures associated with
new stores and pharmacies, store and pharmacy upgrades, distribution center
equipment and annual capital maintenance. The 1998 capital expenditures included
$12.0 million of expenditures associated with the Company's modernization and
automation of its distribution center, $4.7 million of expenditures associated
with new stores and pharmacies, and $4.6 million for store and pharmacy upgrades
and annual capital maintenance. Cash used for investing activities also includes
$2.8 million in 2000, $.8 million in 1999, and $2.0 million in 1998 for the
acquisition of customer lists and other pharmacy related items.
The Company believes that sufficient capital resources are available in both the
short-term and long-term through currently available cash, cash generated from
future operations and, if necessary, the ability to obtain additional financing.
Recent Accounting Pronouncements
In June 1999, the FASB issued SFAS no. 137, Accounting for Derivative
Instruments and Hedging Activities - Deferral of the effective date of FASB
Statement No. 133, which deferred the effective date provisions of SFAS No. 133
for the company to the first quarter of 2001. The Company does not believe this
new standard will have an impact on its financial statements since it currently
has no derivative instruments.
In December 1999, the Securities and Exchange Commission issued Staff Accounting
Bulletin No. 101 "Revenue Recognition in Financial Statements" (SAB 101). SAB
101 identifies various revenue recognition issues, several of which are common
within the retail industry including treatment of revenue recognition on layaway
sales. In the fourth quarter of 2000, the Company revised its revenue
recognition for layaway sales to defer revenue recognition until all terms of
the sale have been satisfied and the customer takes delivery of the merchandise.
Under the prior method of accounting, net sales were recognized at the time the
customer put the merchandise into layaway. The effects of this change on prior
quarters in 2000 and the proforma effects on 1999 are reflected in Note 12. The
effects of this change on the fourth quarter of 2000 was an increase in net
sales, gross profit, net income and net income per share (basic and diluted) of
$1,932, $482, $318 and $.02 respectively. Annual financial results were not
affected.
Cautionary Statement Regarding Forward-looking Information
Statements, other than those based on historical facts that the Company expects
or anticipates may occur in the future are forward-looking statements which are
based upon a number of assumptions concerning future conditions that may
ultimately prove to be inaccurate. Actual events and results may materially
differ from anticipated results described in such statements. The Company's
ability to achieve such results is subject to certain risks and uncertainties,
including, but not limited to, economic and weather conditions which affect
buying patterns of the Company's customers, changes in consumer spending and the
Company's ability to anticipate buying patterns and implement appropriate
inventory strategies, continued availability of capital and financing,
competitive factors, changes in reimbursement practices for pharmaceuticals,
governmental regulation, and other factors affecting business beyond the
Company's control. Consequently, all of the forward-looking statements are
qualified by these cautionary statements and there can be no assurance that the
results or developments anticipated by the Company will be realized or that they
will have the expected effects on the Company or its business or operations.
-15-
Fred's, Inc.
Consolidated Statements of Income
(in thousands, except share and per share amounts)
For the Years Ended
-----------------------------------------------
February 3, January 29, January 30,
2001 2000 1999
--------- ----------- ---------
Net sales $ 781,249 $ 665,777 $ 600,902
Cost of goods sold 566,115 478,138 436,523
--------- ----------- ---------
Gross profit 215,134 187,639 164,379
Selling, general and administrative expenses 189,414 168,696 149,668
--------- ----------- ---------
Operating income 25,720 18,943 14,711
Interest expense, net 3,226 2,504 1,106
--------- ----------- ---------
Income before taxes 22,494 16,439 13,605
Income taxes 7,645 5,737 4,775
--------- ----------- ---------
Net income $ 14,849 $ 10,702 $ 8,830
========= =========== =========
Net income per share
Basic $ 1.24 $ .90 $ .75
=========== =========== =============
Diluted $ 1.22 $ .89 $ .73
=========== =========== =============
Weighted average shares outstanding
Basic 11,937 11,827 11,798
=========== =========== =============
Diluted 12,197 12,072 12,078
=========== =========== =============
See accompanying notes to consolidated financial statements.
-16-
Fred's, Inc.
Consolidated Balance Sheets
(in thousands, except for number of shares)
- --------------------------------------------------------------------------------
February 3, January 29,
2001 2000
---- ----
ASSETS
Current assets:
Cash and cash equivalents $ 2,569 $ 3,036
Receivables, less allowance for
doubtful accounts of $516
($452 at January 29, 2000) 15,430 10,911
Inventories 149,602 141,612
Deferred income taxes 2,022 3,002
Other current assets 2,306 1,865
------------ -------------
Total current assets 171,929 160,426
Property and equipment, at depreciated
cost 76,360 73,459
Equipment under capital leases, less
accumulated amortization of
$1,305 ($856 at January 29, 2000) 1,387 1,835
Deferred income taxes 98 866
Other noncurrent assets, net 5,021 3,636
------------ -------------
Total assets $ 254,795 $ 240,222
============ =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 40,432 $ 39,653
Current portion of indebtedness 2,175 30,306
Current portion of capital lease
obligations 503 430
Accrued liabilities 14,012 9,680
Income taxes payable 4,278 650
------------ -------------
Total current liabilities 61,400 80,719
Long-term portion of indebtedness 30,475 10,027
Capital lease obligations 1,230 1,734
Other noncurrent liabilities 2,003 1,829
------------ -------------
Total liabilities 95,108 94,309
------------ -------------
Commitments and contingencies (Notes 6
and 10)
Shareholders' equity:
Common stock, Class A voting, no par
value, 12,068,518 shares
issued and outstanding (11,988,276
shares at January 29, 2000) 68,557 67,326
Retained earnings 91,342 78,902
Deferred compensation on restricted
stock incentive plan (212) (315)
------------ -------------
Total shareholders' equity 159,687 145,913
------------ -------------
$ 254,795 $ 240,222
============ =============
See accompanying notes to consolidated financial statements.
-17-
Fred's, Inc.
Consolidated Statements of Changes in Shareholders' Equity
(in thousands, except share data)
Common Stock Retained Deferred
---------------------------
Shares Amount Earnings Compensation Total
------ ------ -------- ------------ -----
Balance, January 31, 1998 11,866,789 $65,700 $ 64,147 $ (488) $ 129,359
Cash dividends paid ($.20 per share) (2,381) (2,381)
Repurchase of shares (30) -
Issuance of restricted stock 46,182 752 (362) 390
Cancellation of restricted stock (5,500) (38) 38 -
Exercises of stock options 39,331 329 329
Amortization of deferred compensation
on restricted stock incentive plan 248 248
Tax benefit on exercise of stock
options 208 208
Net income 8,830 8,830
---------- ------- --------- ----------- -----------
Balance, January 30, 1999 11,946,772 $66,951 $ 70,596 $ (564) $ 136,983
Cash dividends paid ($.20 per share) (2,396) (2,396)
Issuance of restricted stock 9,900 124 (124)
Cancellation of restricted stock (5,700) (118) 118
Other issuances 1,714 30 30
Exercises of stock options 35,590 296 296
Amortization of deferred compensation
on restricted stock incentive plan 255 255
Tax benefit on exercise of stock
options 43 43
Net income 10,702 10,702
---------- ------- --------- ----------- -----------
Balance, January 29, 2000 11,988,276 $67,326 $ 78,902 $ (315) $ 145,913
Cash dividends paid ($.20 per share) (2,409) (2,406)
Issuance of restricted stock 3,800 57 (57)
Cancellation of restricted stock (29,072) (218) 15 (203)
Exercises of stock options 105,514 1,079 1,079
Amortization of deferred compensation
on restricted stock incentive plan 145 145
Tax benefit on exercise of stock
options 313 313
Net income 14,849 14,849
---------- ------- --------- ----------- -----------
Balance, February 3, 2001 12,068,518 $68,557 $ 91,342 $ (212) $ 159,690
========== ======= ========= =========== ===========
See accompanying notes to consolidated financial statements.
-18-
Fred's, Inc.
Consolidated Statements of Cash Flows
(in thousands)
For the Years Ended
February 3, January 29, January 30,
2001 2000 1999
------- ------- -------
Cash flows from operating activities:
Net income $14,849 $10,702 $ 8,830
Adjustments to reconcile net income to net cash flows
from operating activities:
Depreciation and amortization 14,277 11,830 8,939
Provision for uncollectible receivables 64 80 124
LIFO Reserve 753 100 3,108
Deferred income taxes 1,747 2,513 2,344
Amortization of deferred compensation on restricted
stock incentive plan 145 255 248
Issuance (net of cancellation) of restricted stock (203) - 390
Tax benefit upon exercise of stock options 313 43 208
Gain on sale of fixed assets - (41) -
(Increase) decrease in assets:
Receivables (4,583) (2,060) (1,969)
Inventories (8,743) (15,135) (14,664)
Other assets (444) (847) (2,354)
Increase (decrease) in liabilities:
Accounts payable and accrued liabilities 5,110 (8,210) (3,712)
Income taxes payable 3,628 (176) (890)
Other noncurrent liabilities 174 159 175
------- ------- -------
Net cash (used in) provided by operating activities 27,087 (787) 777
======= ======= =======
Cash flows from investing activities:
Capital expenditures (15,801) (14,043) (21,273)
Proceeds from dispositions of property and equipment 493 215 -
Asset acquisition, net of cash acquired (primarily intangibles) (2,807) (805) (1,993)
------- ------- -------
Net cash used in investing activities (18,115) (14,633) (23,266)
======= ======= =======
Cash flows from financing activities:
Reduction of indebtedness and capital lease obligations (2,495) (2,139) (556)
Proceeds from revolving line of credit, net of payments (5,617) 18,040 10,200
Proceeds from term loan - 2,249 12,000
Proceeds from exercise of options 1,079 296 329
Payment of cash for dividends and fractional shares (2,406) (2,396) (2,381)
------- ------- -------
Net cash provided by (used in) financing activities (9,439) 16,050 19,592
======= ======= =======
Increase (decrease) in cash and cash equivalents (467) 630 (2,897)
Cash and cash equivalents:
Beginning of year 3,036 2,406 5,303
------- ------- -------
End of year $ 2,569 $ 3,036 $ 2,406
======= ======= =======
Supplemental disclosures of cash flow information:
Interest paid $ 3,332 $ 2,399 $ 1,239
Income taxes paid $ 2,000 $ 3,810 $ 2,828
Non cash investing and financing activities:
Assets acquired through capital lease obligations $ - $ 612 $ 509
Common stock issued for acquisition $ - $ 30 $ -
See accompanying notes to consolidated financial statements.
-19-
Fred's, Inc.
Notes to Consolidated Financial Statements
NOTE 1 - DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of business. The primary business of Fred's, Inc. and subsidiaries
(the "Company") is the sale of general merchandise through its 320 retail
discount stores located in the southeastern United States. In addition, the
Company sells general merchandise to its 26 franchisees.
Consolidated financial statements. The consolidated financial statements include
the accounts of the Company and its subsidiaries. All significant intercompany
accounts and transactions are eliminated.
Fiscal year. The Company utilizes a 52 - 53 week accounting period which ends on
the Saturday closest to January 31. Fiscal years 2000, 1999 and 1998, as used
herein, refer to the years ended February 3, 2001, January 29, 2000, and January
30, 1999, respectively.
Use of estimates. The preparation of financial statements in accordance 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 reported
period. Actual results could differ from those estimates.
Inventories. Wholesale inventories are stated at the lower of cost or market
using the FIFO (first-in, first-out) method. Retail inventories are stated at
the lower of cost or market as determined by the retail inventory method. For
pharmacy inventories, which comprise approximately 19% and 18% of the retail
inventories at February 3, 2001 and January 29, 2000, respectively, cost was
determined using the LIFO (last-in, first-out) method. The current cost of
inventories exceeded the LIFO cost by approximately $3,961,000 at February 3,
2001 and $3,208,000 at January 29, 2000.
Property and equipment. Buildings, furniture, fixtures and equipment are stated
at cost and depreciation is computed using the straight-line method over their
estimated useful lives. Leasehold costs and improvements are amortized over the
lesser of their estimated useful lives or the remaining lease terms. Average
useful lives are as follows: buildings and improvements - 8 to 30 years;
furniture and fixtures - 5 to 10 years; and equipment - 3 to 10 years.
Amortization on equipment under capital leases is computed on a straight-line
basis over the terms of the leases. Gains or losses on the sale of assets are
recorded at disposal.
Long lived assets. The Company's policy is to review the recoverability of all
long-lived assets annually and whenever events or changes indicate that the
carrying amount of an asset may not be recoverable. Based upon the Company's
review as of February 3, 2001 and January 29, 2000, no material adjustments to
the carrying value of such assets were necessary.
Selling, general and administrative expenses. The Company includes buying,
warehousing, transportation and occupancy costs in selling, general and
administrative expenses.
Advertising. The Company charges advertising, including production costs, to
expense on the first day of the advertising period. Advertising expense for
2000, 1999, and 1998 was $10,166,000, $8,926,000, and $9,621,000 respectively.
Preopening costs. The Company charges to expense the preopening costs of new
stores as incurred. These costs are primarily labor to stock the store,
preopening advertising, store supplies and other expendable items.
Revenue Recognition. The Company markets goods and services through Company
owned stores and 26 franchised stores. Net sales includes sales of merchandise
from Company owned stores, net of returns and exclusive of sales taxes. Sales to
franchised stores are recorded when the merchandise is shipped from the
Company's warehouse. Revenues resulting from layaway sales are recorded upon
delivery of the merchandise to the customer. In addition, the Company charges
the franchised stores a fee based on a percentage of their purchases from the
Company. These fees represent a reimbursement for use of the Fred's name and
other administrative costs incurred on behalf of the franchised stores. Total
franchise income for 2000, 1999 and 1998 was $1,809,000, $1,761,000 and
$1,957,000 respectively.
-20-
Other intangible assets. Other identifiable intangible assets which are included
in other noncurrent assets primarily represent amounts associated with acquired
pharmacies and are being amortized on a straight line basis over five years.
These intangibles, net of accumulated amortization, totaled $4,945,000 at
February 3, 2001, and $3,559,000 at January 29, 2000. Accumulated amortization
for 2000 and 1999 totaled $3,964,000 and $2,543,000, respectively. Amortization
expense for 2000, 1999 and 1998 was $1,421,000, $1,307,000 and $1,214,000
respectively.
Cash and cash equivalents. Cash on hand and in banks, together with other highly
liquid investments having original maturities of three months or less, are
classified as cash equivalents. Included in accounts payable are outstanding
checks in excess of funds on deposit which totaled $5,823,000 at February 3,
2001 and $14,089,000 at January 29, 2000.
Financial instruments. At February 3, 2001, the Company did not have any
outstanding derivative instruments. The recorded value of the Company's
financial instruments, which include cash and cash equivalents, receivables,
accounts payable and indebtedness, approximates fair value. The following
methods and assumptions were used to estimate fair value of each class of
financial instrument: (1) the carrying amounts of current assets and liabilities
approximate fair value because of the short maturity of those instruments and
(2) the fair value of the Company's indebtedness is estimated based on the
current borrowing rates available to the Company for bank loans with similar
terms and average maturities.
Business segments. The Company's only reportable operating segment is its sale
of merchandise through its Company owned stores and to franchised Fred's
locations, which are organized around the products sold and markets served.
Comprehensive income. Comprehensive income does not differ from the consolidated
net income presented in the consolidated statements of income.
Reclassifications. Certain prior year amounts have been reclassified to conform
to the 2000 presentation.
Recent Accounting Pronouncements. In December 1999, the Securities and Exchange
Commission issued Staff Accounting Bulletin No. 101 "Revenue Recognition in
Financial Statements" (SAB 101). SAB 101 identifies various revenue recognition
issues, several of which are common within the retail industry including
treatment of revenue recognition on layaway sales. In the fourth quarter of
2000, the Company revised its revenue recognition for layaway sales to defer
revenue recognition until all terms of the sale have been satisfied and the
customer takes delivery of the merchandise. Under the prior method of
accounting, net sales were recognized at the time the customer put the
merchandise into layaway. The effects of this change on prior quarters in 2000
and the proforma effects on 1999 are reflected in Note 12. The effects of this
change on the fourth quarter of 2000 was an increase in net sales, gross profit,
net income and net income per share (basic and diluted) of $1,932, $482, $318
and $.02 respectively. Annual financial results were not affected.
In June 1999, the FASB issued SFAS No. 137, Accounting for Derivative
Instruments and Hedging Activities - Deferral of the effective date of FASB
Statement No. 133, which deferred the effective date provisions of SFAS No. 133
for the company to the first quarter of 2001. The Company does not believe this
new standard will have an impact on its financial statements since it currently
has no derivative instruments.
-21-
NOTE 2 - PROPERTY AND EQUIPMENT
Property and equipment, at cost, consist of the following (in thousands):
2000 1999
------------------ -------------------
Buildings and improvements $ 67,068 $ 65,660
Furniture, fixtures and equipment 89,152 81,424
------------------ -------------------
156,220 147,084
Less accumulated depreciation and amortization (84,100) (78,018)
------------------ -------------------
72,120 69,066
Land 4,240 4,393
------------------ -------------------
$ 76,360 $ 73,459
------------------ -------------------
Depreciation expense totaled $12,407,000, $10,168,000 and $7,442,000 for 2000,
1999 and 1998, respectively.
NOTE 3 - ACCRUED LIABILITIES
The components of accrued liabilities are as follows (in thousands):
2000 1999
------------------ -------------------
Payroll and benefits $ 5,136 $ 2,992
Sales and use taxes 2,000 1,726
Insurance 2,497 2,904
Other 4,379 2,058
------------------ -------------------
$ 14,012 $ 9,680
------------------ -------------------
NOTE 4 - INDEBTEDNESS
On April 3, 2000, the Company and a bank entered into a new Revolving Loan and
Credit Agreement (the "Agreement") to replace the May 15, 1992 Revolving Loan
and Credit Agreement, as amended. The Agreement provides the Company with an
unsecured revolving line of credit commitment of up to $40 million and bears
interest at 1.5% below prime rate or a LIBOR-based rate. Under the most
restrictive covenants of the Agreement, the Company is required to maintain
specified shareholders' equity and net income levels. The Company is required to
pay a commitment fee to the bank at a rate per annum equal to .18% on the
unutilized portion of the revolving line commitment over the term of the
Agreement. The term of the Agreement extends to April 3, 2003. There were
$22,623,000 and $28,240,000 of borrowings outstanding under the Agreement at
February 3, 2001 and January 29, 2000, respectively.
On April 23, 1999, the Company and a bank entered into a Loan Agreement (the
"Loan Agreement"). The Loan Agreement provided the Company with a four-year
unsecured term loan of $2.3 million to finance the replacement of the Company's
mainframe computer system. The Loan Agreement bears interest of 6.15% per annum
and matures on April 15, 2003. Under the most restrictive covenants of the Loan
Agreement, the Company is required to maintain specified debt service levels.
There were $1,265,500 and $1,828,000 borrowings outstanding under the Agreement
at February 3, 2001 and January 29, 2000, respectively. The principal maturity
under this Agreement for debt outstanding at February 3, 2001 is as follows:
$562,500 in fiscal 2001; $562,500 in fiscal 2002 and $140,500 in fiscal 2003.
-22-
On May 5, 1998, the Company and a bank entered into a Loan Agreement (the "Term
Loan Agreement"). The Term Loan Agreement provided the Company with an unsecured
term loan of $12 million to finance the modernization and automation of the
Company's distribution center and corporate facilities. The Term Loan Agreement
bears interest of 6.82% per annum and matures on November 1, 2005. Under the
most restrictive covenants of the Term Loan Agreement, the Company is required
to maintain specified shareholders' equity and net income levels. Borrowings
outstanding under this Term Loan Agreement totaled $8,762,000 at February 3,
2001 and $10,265,000 at January 29, 2000. The principal maturity under this
Agreement for debt outstanding at February 3, 2001 is as follows: $1,612,742 in
fiscal 2001; $1,727,860 in fiscal 2002; $1,851,199 in fiscal 2003; $1,983,338 in
fiscal 2004 and $1,586,503 in fiscal 2005.
Interest expense for 2000, 1999 and 1998 totaled $3,226,000, $2,504,000 and
$1,206,000, respectively.
NOTE 5 - INCOME TAXES
Deferred income taxes are provided for the tax effects of temporary differences
between the financial reporting basis and income tax basis of the Company's
assets and liabilities.
The provision for income taxes consists of the following (in thousands):
2000 1999 1998
--------------- ---------------- ---------------
Current
Federal $5,597 $3,224 $2,639
State - - (208)
--------------- ---------------- ---------------
5,597 3,224 2,431
--------------- ---------------- ---------------
Deferred
Federal 1,423 2,116 1,974
State 324 397 370
--------------- ---------------- ---------------
1,747 2,513 2,344
--------------- ---------------- ---------------
$7,344 $5,737 $4,775
--------------- ---------------- ---------------
-23-
Deferred tax assets (liabilities) are comprised of the following(in thousands):
2000 1999
---------------- ---------------
Current deferred tax assets:
Inventory valuation methods $ (465) $ 758
Accrual for inventory shrinkage 768 672
Allowance for doubtful accounts 310 285
Insurance accruals 1,200 990
Other 654 749
---------------- ---------------
Gross current deferred tax assets 2,467 3,454
Deferred tax asset valuation allowance (289) (182)
---------------- ---------------
2,178 3,272
Current deferred tax liabilities (156) (270)
---------------- ---------------
Net current deferred tax asset $ 2,022 $ 3,002
---------------- ---------------
Noncurrent deferred tax assets:
Net operating loss carryforwards $ 1,685 $ 1,421
Postretirement benefits other than pensions 760 694
Restructuring costs 82 82
Other 1,769 1,583
---------------- ---------------
Gross noncurrent deferred tax assets 4,296 3,780
Deferred tax asset valuation allowance (1,267) (1,239)
---------------- ---------------
3,029 2,541
Noncurrent deferred tax liabilities:
Depreciation (2,904) (1,648)
Other (27) (27)
---------------- ---------------
Gross noncurrent deferred tax liabilities (2,931) (1,675)
---------------- ---------------
Net noncurrent deferred tax asset $ 98 $ 866
---------------- ---------------
The ultimate realization of these assets is dependent upon the generation of
future taxable income sufficient to offset the related deductions and loss
carryforwards within the applicable carryforward periods as described below. The
valuation allowance is based upon management's conclusion that certain tax
carryforward items will expire unused. During 2000 and 1999, the valuation
allowance increased $264,000 and $393,000, respectively, as the result of the
company generating additional net operating loss carryforwards in certain
states.
At February 3, 2001, the Company has certain net operating loss carryforwards
which were acquired in reorganizations and purchase transactions which are
available to reduce income taxes, subject to usage limitations. These
carryforwards total approximately $43,784,000 for state income tax purposes, and
expire at various times during the period 2002 through 2022. If certain
substantial changes in the Company's ownership should occur, there would be an
annual limitation on the amount of carryforwards which can be utilized.
A reconciliation of the statutory Federal income tax rate to the effective tax
rate is as follows:
2000 1999 1998
----------------- ----------------- -------------
Income tax provision at statutory rate 35.0% 35.0% 35.0%
State income taxes, net of federal benefit 0.9 1.6 0.8
Change in valuation allowance - - 0.7
Surtax Exemptions (1.0) (1.0) (1.0)
Other (0.9) (0.7) (0.4)
----------------- ----------------- -------------
34.0% 34.9% 35.1%
----------------- ----------------- -------------
-24-
NOTE 6 - LONG-TERM LEASES
The Company leases certain of its store locations under noncancelable operating
leases expiring at various dates through 2031. Many of these leases contain
renewal options and require the Company to pay taxes, maintenance, insurance and
certain other operating expenses applicable to the leased properties. In
addition, the Company leases various equipment under noncancelable operating
leases and certain transportation equipment under capital leases. Total rent
expense under operating leases was $17,465,000, $15,329,000 and $13,618,000 for
2000, 1999 and 1998, respectively. Amortization expense on assets under capital
lease for 2000, 1999 and 1998 was $449,000, $355,000 and $283,000, respectively.
Future minimum rental payments under all operating and capital leases as of
February 3, 2001 are as follows:
Operating Capital
Leases Leases
- --------------------------------------------------------------------------------------------------------------------------
2001 $ 16,055 $ 741
2002 14,189 741
2003 11,505 364
2004 8,491 255
2005 6,121 142
Thereafter 11,426 0
------------------ -----------------
Total minimum lease payments $ 67,787 2,243
==================
Imputed interest (510)
-----------------
Present value of net minimum lease payments, including
$503 classified as current portion of capital lease obligations $ 1,733
=================
NOTE 7 - SHAREHOLDERS' EQUITY
The Company has 30 million shares of Class A voting common stock authorized. The
Company's authorized capital also consists of 11.5 million shares of Class B
nonvoting common stock, of which no shares have been issued. In addition, the
Company has authorized 10 million shares of preferred stock, of which no shares
have been issued.
Effective October 12, 1998 the Company adopted a Shareholders Rights Plan which
granted a dividend of one preferred share purchase right ("the Right") for each
common share outstanding at that date. Each Right represents the right to
purchase one-hundredth of a preferred share of stock at a preset price to be
exercised when any one individual, firm, corporation or other entity acquires
15% or more of the Company's common stock. The Rights will become dilutive at
the time of exercise and will expire, if unexercised, on October 12, 2008.
NOTE 8 - EMPLOYEE BENEFIT PLANS
Incentive stock option plan. The Company has a long-term incentive plan under
which an aggregate of 1,168,750 shares may be granted. These options expire five
years from the date of grant. Options outstanding at February 3, 2001 expire in
2001 through 2005.
-25-
A summary of activity in the plan follows:
2000 1999 1998
--------------------- -------------------- -------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Options Price Options Price Options Price
------- ----- ------- ----- ------- -----
Outstanding at beginning
of year 563,454 $ 13.13 490,139 $ 13.40 411,298 $8.55
Granted 345,507 15.04 136,750 11.82 150,695 25.61
Canceled (140,825) 11.02 (26,101) 14.79 (32,523) 12.46
Expired - (1,744) 11.33 - -
Exercised (105,514) 8.67 (35,590) 8.38 (39,331) 8.42
-------- ------- -------
Outstanding at end of year 662,622 15.29 563,454 13.13 490,139 13.40
======= ======= =======
Exercisable at end of year 154,065 10.62 169,313 9.10 152,483 9.85
======= ======= =======
The weighted average remaining contractual life of all outstanding options was
3.2 years at February 3, 2001.
The following table summarizes information about stock options outstanding at
February 3, 2001:
Options Outstanding Options Exercisable
----------------------------------------------- -------------------------------
Weighted
Average
Remaining Weighted Weighted
Number Contractual Average Number Average
Range of Outstanding at Life Exercise Exercisable at Exercise
Exercise Prices February 3, 2001 (in Years) Price February 3, 2001 Price
--------------- ----------------- ---------- ----- ----------------- -----
$5.90 to $7.20 70,634 1.0 $ 7.04 69,084 $ 7.03
$11.50 to $16.19 483,113 3.8 $ 14.19 80,881 $ 12.94
$20.00 to $25.88 108,875 2.1 $ 25.52 4,100 $ 25.50
----------------- -----------------
662,622 154,065
================= =================
The Company applies Accounting Principles Board Opinion No. 25, Accounting for
Stock Issued to Employees and related interpretations in accounting for its
plans. Accordingly, no compensation expense has been recognized for its
stock-based compensation. Had compensation cost for the Company's stock option
plan been determined based on the fair value at the grant date for awards in
2000, 1999, and 1998 consistent with the method prescribed by SFAS No. 123,
Accounting for Stock-Based Compensation, the Company's operating results for
2000, 1999, and 1998 would have been reduced to the pro forma amounts indicated
below:
(in thousands, except per share data) 2000 1999 1998
----------- ---------- --------
Net income
As reported $14,849 $10,702 $8,830
Pro forma 14,260 10,363 8,322
Basic earnings per share
As reported 1.24 0.90 0.75
Pro forma 1.19 0.88 0.71
Diluted earnings per share
As reported 1.22 0.89 0.73
Pro forma 1.17 0.86 0.69
-26-
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option pricing model with the following weighted-average
assumptions using grants in 2000, 1999 and 1998, respectively:
2000 1999 1998
--------------- -------------- -------------
Average expected life (years) 3.0 3.0 3.0
Average expected volatility 39.0% 43.3% 41.5%
Risk-free interest rates 5.6% 4.8% 5.5%
Dividend yield 1.3% 1.5% 1.3%
The weighted average grant-date fair value of options granted during 2000,
1999,and 1998 was $3.90, $4.17, and $7.85 respectively.
Restricted Stock. During 2000, 1999, and 1998, the Company issued (cancelled) a
net of (25,272), 4,200, and 40,682 restricted shares, respectively. Compensation
expense related to the shares issued is recognized over the period for which
restrictions apply.
Employee stock ownership plan. The Company has a non-contributory employee stock
ownership plan for the benefit of qualifying employees who have completed one
year of service and attained the age of 18. Benefits are fully vested upon
completion of seven years of service. The Company has not made any contributions
to the plan since 1996.
Salary reduction profit sharing plan. The Company has a defined contribution
profit sharing plan for the benefit of qualifying employees who have completed
one year of service and attained the age of 21. Participants may elect to make
contributions to the plan up to a maximum of 15% of their compensation. Company
contributions are made at the discretion of the Company's Board of Directors.
Participants are 100% vested in their contributions and earnings thereon.
Contributions by the Company and earnings thereon are fully vested upon
completion of seven years of service. The Company's contributions for the years
ended February 3, 2001, January 29, 2000 and January 30, 1999 were $100,000,
$96,000 and $83,000, respectively.
Postretirement benefits. The Company provides certain health care benefits to
its full-time employees that retire between the ages of 58 and 65 with certain
specified levels of credited service. Health care coverage options for retirees
under the plan are the same as those available to active employees. The
Company's change in benefit obligation based upon an actuarial valuation is as
follows:
For the Year Ended
------------------
February 3, January 29, January 30,
2001 2000 1999
---- ---- ----
(in thousands)
Benefit obligation at beginning of year $ 1,377 $ 1,252 $ 1,132
Service cost 132 127 103
Interest cost 116 91 85
Participant contributions - - 4
Amendments - - -
Actuarial (gain) loss 68 (17) (67)
Benefits paid (76) (76) (5)
------- ------- -------
Benefit obligation at end of year $ 1,617 $ 1,377 $ 1,252
======= ======= =======
-27-
A reconciliation of the Plan's funded status to accrued benefit cost follows:
February 3, January 29, January 30,
2001 2000 1999
----------------- ----------------- ------------------
(in thousands)
Funded status $ (1,617) $(1,377) $ (1,252)
Unrecognized net actuarial gain (322) (406) (405)
Unrecognized prior service cost (5) (6) (6)
----------------- ----------------- ------------------
Accrued benefit costs $ (1,944) $(1,789) $ (1,663)
================= ================= ==================
The medical care cost trend used in determining this obligation is 10.0%
effective February 1, 1997, decreasing annually before leveling at 6.0% in 2003.
This trend rate has a significant effect on the amounts reported. To illustrate,
increasing the health care cost trend by 1% would increase the accumulated
postretirement benefit obligation by $238,000. The discount rate used in
calculating the obligation was 7.5% in 2000, 7.75% in 1999 and 6.75% in 1998.
The annual net postretirement cost is as follows:
For the Year Ended
------------------
February 3, January 29, January 30,
2001 2000 1999
------------ ----------- -----------
(in thousands)
Service cost $ 132 $ 127 $ 103
Interest cost 116 91 85
Amortization of net gain from prior periods (17) (17) (21)
Amortization of unrecognized prior service cost 1 1 1
------------ ----------- -----------
Net periodic postretirement benefit cost $ 232 $ 202 $ 168
============ =========== ===========
The Company's policy is to fund claims as incurred.
NOTE 9 - NET INCOME PER SHARE
Basic earnings per share excludes dilution and is computed by dividing income
available to common stockholders by the weighted-average number of common shares
outstanding for the period. Diluted earnings per share reflects the potential
dilution that could occur if securities or other contracts to issue common stock
were exercised or converted into common stock or resulted in the issuance of
common stock that then shared in the earnings of the entity. Restricted stock is
considered contingently issuable and is excluded from the computation of basic
earnings per share.
-28-
A reconciliation of basic earnings per share to diluted earnings per share
follows (in thousands, except per share data):
Year Ended
----------------------------------------------------------------------------------------
February 3, 2001 January 29, 2000 January 31, 1999
---------------- ---------------- ----------------
Per Per Per
Share Share Share
Income Shares Amount Income Shares Amount Income Shares Amount
- --------------------------------------------------------------------------------------------------------------------
Basic EPS $14,849 11,937 $1.24 $10,702 11,827 $ .90 $8,830 11,798 $.75
Effect of Dilutive
Securities
Restricted stock 78 108 79
Stock options 182 137 201
------- ------ ----- ------- ------ ----- ------ ------ ----
Diluted EPS $14,849 12,197 $1.22 $10,702 12,072 $ .89 $8,830 12,078 $.73
======= ====== ===== ======= ====== ===== ====== ====== ====
NOTE 10 - COMMITMENTS AND CONTINGENCIES
Commitments. At February 3, 2001, the Company had commitments approximating
$5,082,000 on issued letters of credit which support purchase orders for
merchandise. Additionally, the Company had outstanding letters of credit
aggregating $2,552,000 utilized as collateral for their risk management
programs.
Litigation. The Company is a party to several pending legal proceedings and
claims in the normal course of business. Although the outcome of the proceedings
and claims cannot be determined with certainty, management of the Company is of
the opinion that it is unlikely that these proceedings and claims will have a
material adverse effect on the results of operations, cash flows, or the
financial condition of the Company.
NOTE 11 - OTHER EXPENSES
During the fourth quarter of 1996, the Company recorded a $2,860,000 accrual for
the closure of certain underperforming stores and the repositioning of certain
merchandise categories. This charge included an accrual for closed facility
lease obligations of $1,156,000. The remaining lease obligation at February 3,
2001 represents remaining future base payments required on one location that has
been closed.
The 2000 activity in this reserve is as follows:
January 30, January 29, February 3,
1999 2000 Payments 2001
----------------- ----------------- ---------------- ----------------
Lease obligations $ 400 $ 215 $ (129) $ 86
-29-
NOTE 12 - QUARTERLY FINANCIAL DATA (UNAUDITED)
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
(in thousands, except per share data)
Year Ended February 3, 2001 - restated (1) (2)
Net sales $176,132 $ 180,353 $ 180,141 $ 244,623
Gross profit 48,990 49,060 51,850 65,234
Net income 3,345 1,654 3,829 6,021
Net income per share
Basic 0.28 0.14 0.32 0.50
Diluted 0.28 0.14 0.31 0.49
Cash dividends paid per share 0.05 0.05 0.05 0.05
Year Ended January 29, 2000 - proforma (3)
Net sales $154,226 $ 155,792 $ 156,741 $ 199,018
Gross profit 44,135 43,775 46,780 52,949
Net income 2,766 920 2,677 4,339
Net income per share
Basic 0.23 0.08 0.22 0.37
Diluted 0.23 0.08 0.22 0.36
Cash dividends paid per share 0.05 0.05 0.05 0.05
Year Ended January 29, 2000 - as reported
Net sales $154,934 $ 156,498 $ 158,049 $ 196,296
Gross profit 44,319 43,952 47,117 52,251
Net income 2,886 1,037 2,896 3,883
Net income per share
Basic 0.24 0.09 0.24 0.33
Diluted 0.24 0.09 0.24 0.32
Cash dividends paid per share 0.05 0.05 0.05 0.05
(1) Based upon a 53 week year.
(2) As discussed in "Recent Accounting Prounouncements" in Note 1, the above
information has been restated to reflect the impact of the Company
implementing the interpetations in SAB 101 related to layaway sales during
the fourth quarter of 2000. In the quarters in the year ended February 3,
2001, the effects of this restated on previously reported net sales, gross
profit, net income and net income per share (basic & diluted) was a
decrease of $528, $132, $87 and $.01 respectively for the 1st quarter; a
decrease of $453, $111, $73, and .00 respectively for the 2nd quarter and a
decrease of $951, $239, $158 and $.01 respectively for the 3rd quarter.
(3) For informational purposes only, 1999 quarterly results have been restated
on proforma basis as if the effects of SAB 101 on layaway sales had been
applied to the 1999 quarterly reports.
-30-
Report of Independent Accountants
To the Board of Directors and Shareholders of Fred's, Inc.
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of income, of changes in shareholders' equity and of
cash flows present fairly, in all material respects, the financial position of
Fred's, Inc. and its subsidiaries at February 3, 2001 and January 29, 2000, and
the results of their operations and their cash flows for each of the three years
in the period ended February 3, 2001, in conformity with accounting principles
generally accepted in the United States of America. 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 of these statements in accordance with auditing standards
generally accepted in the United States of America, which 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, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion expressed
above.
PricewaterhouseCoopers
Memphis, TN
April 4, 2001
-31-
Stock Market Information
- ------------------------
The Company's common stock trades on the Nasdaq Stock Market under the symbol
FRED (CUSIP No. 356108-10-0). At April 20, 2001, the Company had an estimated
5,400 shareholders, including beneficial owners holding shares in nominee or
street name.
The table below sets forth the high and low stock prices, together with cash
dividends paid per share, for each fiscal quarter in the past two fiscal years:
Dividends
High Low Per Share
- --------------------------------------------------------------------------------
1999
- ----
First $15.00 $9.75 $0.05
Second $17.63 $10.31 $0.05
Third $18.00 $10.69 $0.05
Fourth $17.63 $11.50 $0.05
2000
- ----
First $16.00 $14.13 $0.05
Second $21.06 $15.00 $0.05
Third $25.00 $18.75 $0.05
Fourth $23.69 $17.13 $0.05
SIC 5331
-33-(inside back cover)
EXHIBIT 21.1
FRED'S, INC.
SUBSIDIARIES OF REGISTRANT
Fred's, Inc. has the following subsidiaries, all of which are 100% owned:
Fred's Stores of Tennessee, Inc.
Fred's Capital Management Company
Fred's Real Estate and Equipment Management Corporation
Fred's Capital Finance, Inc.
EXHIBIT 23.1
Consent of PricewaterhouseCoopers LLP
We hereby consent to the incorporation by reference in the Registration
Statements on Form S-8 (No. 33-48380 and 33-67606) of Fred's, Inc. of our report
dated April 4, 2001, relating to the financial statements, which appears in the
Annual Report to Shareholders, which is incorporated in this Annual Report on
From 10-K. We also consent to the incorporation by reference of our report dated
April 4, 2001 relating to the financial statement schedule, which appears in
this Form 10-K.
PricewaterhouseCoopers LLP
Memphis, Tennessee
May 2, 2001