3
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the quarterly period ended November 3, 2001.
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the transition period from to .
--------------- ---------------
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 No.)
4300 New Getwell Rd., Memphis, Tennessee 38118
(Address of principal executive offices) (zip code)
(901) 365-8880
(Registrant's telephone number, including area code)
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 .
----------- -----------
The registrant had 16,904,036 shares of Class A voting, no par value common
stock outstanding as of December 7, 2001.
FRED'S, INC.
INDEX
Page No.
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Part I - Financial Information
Item 1 - Financial Statements (unaudited):
Consolidated Balance Sheets as of
November 3, 2001 and February 3, 2001 3
Consolidated Statements of Income
for the Thirteen Weeks Ended November 3, 2001
and October 28, 2000 and the Thirty-Nine Weeks
Ended November 3, 2001 and October 28, 2000 4
Consolidated Statements of Cash Flows
for the Thirty-Nine Weeks Ended November 3, 2001
and October 28, 2000 5
Notes to Consolidated Financial Statements 6 - 9
Item 2 - Management's Discussion and
Analysis of Financial Condition and
Results of Operations 10 - 14
Item 3 - Quantitative and Qualitative Disclosure
about Market Risk 14
Part II - Other Information 15
- ---------------------------
Signatures 16
- ----------
2
Item 1 - Financial Statements (unaudited)
FRED'S, INC.
CONSOLIDATED BALANCE SHEETS
(unaudited)
(in thousands, except for number of shares)
November 3, February 3,
2001 2001
---- ----
ASSETS
Current assets:
Cash and cash equivalents $1,712 $2,569
Receivables, less allowance for doubtful
accounts of $345 ($516 at February 3, 2001) 16,537 15,430
Inventories 185,381 149,602
Deferred income taxes 745 2,022
Other current assets 2,337 2,306
----- -----
Total current assets 206,712 171,929
Property and equipment, at depreciated cost 78,398 76,360
Equipment under capital leases, less accumulated
amortization of $1,708 ($1,305 at February 3,2001) 1,674 1,387
Deferred income taxes 497 98
Other noncurrent assets 5,069 5,021
----- -----
Total assets $292,350 $254,795
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $60,323 $40,432
Current portion of indebtedness 563 2,175
Current portion of capital lease obligations 652 503
Accrued liabilities 13,966 14,012
Income taxes payable 2,283 4,278
------ -------
Total current liabilities 77,787 61,400
------ ------
Long term portion of indebtedness 281 30,475
Capital lease obligations 1,358 1,230
Other noncurrent liabilities 2,043 2,003
------ ------
Total liabilities 81,469 95,108
------ ------
Shareholders' equity:
Common stock, Class A voting, no par value,
16,863,562 shares issued and outstanding
(15,085,648 shares at February 3, 2001) 110,066 68,557
Retained earnings 100,921 91,342
Deferred compensation on restricted
stock incentive plan (106) (212)
------ ------
Total shareholders' equity 210,881 159,687
------- -------
Total liabilities and shareholders' equity $292,350 $254,795
======== ========
See accompanying notes to consolidated financial statements
3
FRED'S, INC.
CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
(in thousands, except per share amounts)
Thirteen Weeks Ended Thirty-Nine Weeks Ended
---------------------- -----------------------
November 3, October 28, November 3, October 28,
2001 2000 2001 2000
---------------------- -----------------------
Net sales $219,242 $180,141 $636,879 $536,626
Cost of goods sold 157,204 128,291 460,302 386,726
------- --------- -------- --------
Gross profit 62,038 51,850 176,577 149,900
Selling, general and
administrative expenses 53,697 45,143 157,235 134,341
------ --------- -------- --------
Operating income 8,341 6,707 19,342 15,559
Interest expense, net 439 898 1,775 2,334
------ --------- -------- --------
Income before income taxes 7,902 5,809 17,567 13,225
Provision for income taxes 2,774 1,980 6,166 4,397
-------- --------- -------- --------
Net income $ 5,128 $ 3,829 $ 11,401 $ 8,828
======== ======== ======== ========
Net income per share
Basic .32 $ .26 $ .74 $ .59
======= ======== ======== ========
Diluted .32 $ .25 $ .72 $ .58
======= ======== ======== ========
Weighted average shares outstanding
Basic 15,833 14,950 15,308 14,918
======= ======== ======== ========
Diluted 15,963 15,307 15,833 15,223
======= ======== ======== ========
See accompanying notes to consolidated financial statements
4
FRED'S, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(in thousands)
Thirty-Nine Weeks Ended
----------------------
November 3, October 28,
2001 2000
----- ----
Cash flows from operating activities:
Net income $11,401 $8,828
Adjustments to reconcile net income
to net cash flows from operating activities:
Depreciation and amortization 13,125 10,453
Lifo reserve 700 600
Deferred income taxes 878 661
Provision for uncollectible receivable (171) 117
Tax benefit on exercise of stock options 610 267
Amortization of deferred compensation on
restricted stock incentive plan 106 110
Cancellation of restricted stock (32) (203)
(Increase)decrease in assets:
Receivables (936) (3,187)
Inventories (36,170) (33,409)
Other assets (31) (37)
Increase (decrease) in liabilities:
Accounts payable and accrued liabilities 19,844 14,957
Income taxes payable (1,994) 3,491
Other noncurrent liabilities 40 131
------- --------
Net cash provided by operating activities 7,370 2,779
------- --------
Cash flows from investing activities:
Capital expenditures (13,436) (12,558)
Intangible assets, net of cash acquired (742) (1,978)
Net cash used in investing activities (14,178) (14,536)
-------- --------
Cash flows from financing activities:
Reduction of indebtedness and capital lease
obligations (9,597) (1,842)
Proceeds from revolving line of credit,
net of payments (22,623) 13,763
Proceeds from exercise of options 1,905 978
Proceeds from public offering, net of expenses 38,088 ---
Cash dividends paid (1,822) (1,803)
--------- ----------
Net cash provided by financing activities 5,951 11,096
------ ------
Decrease in cash and cash equivalents (857) (661)
Cash and cash equivalents:
Beginning of period 2,569 3,036
------- --------
End of period $1,712 $2,375
======= =========
Supplemental disclosures of cash flow information:
Interest paid $1,696 $2,237
====== ======
Income taxes paid $6,700 ----
====== ======
Non cash investing and financing activities:
Assets acquired through capital lease obligations $691 ----
===== =====
Common stock issued for acquisition $937 ----
===== =====
See accompanying notes to consolidated financial statements
5
FRED'S, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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NOTE 1: BASIS OF PRESENTATION
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Fred's, Inc. ("Fred's" or the "Company") operates 377 discount general
merchandise stores, including 27 franchised Fred's stores, in eleven states
primarily in the southeastern United States. Two hundred and three of the stores
have full service pharmacies.
The accompanying unaudited consolidated financial statements of Fred's have
been prepared in accordance with the instructions to Form 10-Q and therefore do
not include all information and notes necessary for a fair presentation of
financial position, results of operations and cash flows in conformity with
accounting principles generally accepted in the United States of America. The
statements do reflect all adjustments (consisting of only normal recurring
accruals) which are, in the opinion of management, necessary for a fair
presentation of financial position in conformity with accounting principles
generally accepted in the United States of America. The statements should be
read in conjunction with the Notes to the Consolidated Financial Statements for
the fiscal year ended February 3, 2001 incorporated into the Company's Annual
Report on Form 10-K.
The results of operations for the thirty-nine week period ended November 3,
2001 are not necessarily indicative of the results to be expected for the full
fiscal year.
Certain prior quarter amounts have been reclassified to conform to the 2001
presentation.
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NOTE 2: 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 18% of the retail inventories at
November 3, 2001, cost was determined using the LIFO (last-in, first-out)
method. The current cost of inventories exceeded the LIFO cost by approximately
$4,661,000 and $3,808,000 at November 3, 2001 and October 28, 2000,
respectively.
LIFO inventory costs can only be determined annually when inflation rates and
inventory levels are finalized; therefore, LIFO inventory costs for interim
financial statements are estimated.
6
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NOTE 3: 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.
COMPUTATION OF NET INCOME PER SHARE*
(unaudited)
(in thousands, except per share amounts)
Thirteen Weeks Ended Thirty-Nine Weeks Ended
---------------------- -----------------------
November 3, October 28, November 3, October 28,
2001 2000 2001 2000
----------------------- -----------------------
Basic net income per share
Net income $ 5,128 $ 3,829 $ 11,401 $8,828
======= ======= ======== ======
Weighted average number of common shares
outstanding during the period
15,833 14,950 15,308 14,918
======= ======= ======= ======
Net income per share $ .32 $ .26 $ .74 $ .59
======= ======= ======= ======
Diluted net income per share
Net income $ 5,128 $ 3,829 $ 11,401 $8,828
======= ======= ======== ======
Weighted average number of common shares
outstanding during the period
15,833 14,950 15,308 14,918
Additional shares attributable to common
stock equivalents 130 357 525 305
------- ------- ------- ------
15,963 15,307 15,833 15,223
======= ======= ======= ======
Net income per share $ .32 $ .25 $ .72 $ .58
======= ======= ======== ======
* All per share amounts have been adjusted to reflect the five-for-four stock
split effective on June 18, 2001.
7
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NOTE 4: LAYAWAY SALES
- --------------------------------------------------------------------------------
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 restated change
on the previously reported third quarter ended October 28, 2000 are as follows:
Thirteen Weeks Ended Thirty-nine Weeks Ended
---------------------- -----------------------
(as reported) (as adjusted) (as reported) (as adjusted)
October 28, October 28, October 28, October 28,
2000 2000 2000 2000
---- ---- ---- ----
Net Sales $181,092 $180,141 $538,558 $536,626
Gross profit 52,089 51,850 150,382 149,900
Net income 3,987 3,829 9,146 8,828
Net income per share
Basic * 0.27 0.26 0.61 0.59
Diluted * 0.26 0.25 0.60 0.58
*All per share amounts have been adjusted to reflect the five-for-four stock
split effective on June 18, 2001.
- --------------------------------------------------------------------------------
NOTE 5: STOCK SPLIT
- --------------------------------------------------------------------------------
On May 24, 2001, the Company announced a five-for-four stock split of its common
stock, Class A voting, no par value. The new shares, one additional share for
each four shares held by stockholders, were distributed on June 18, 2001 to
stockholders of record on June 4, 2001. All share and per share amounts included
in the accompanying financial statements have been adjusted to reflect this
stock split.
- --------------------------------------------------------------------------------
NOTE 6: COMMON STOCK OFFERING
- --------------------------------------------------------------------------------
On September 25, 2001, the Company sold, pursuant to an underwritten public
offering, 1,585,000 shares of its common stock at a price of $25.50 per share.
Approximately $38,088,000 in net cash proceeds (the "Common Stock Offering"),
after deducting underwriting commission and offering expense was credited to
common stock. A portion of the proceeds was used to pay down the Company's
Revolving Loan Agreement and to pay off the 1998 Loan Agreement. The remaining
funds will be used for working capital, other general corporate purposes and to
accelerate new store and pharmacy openings.
8
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NOTE 7: RECENT ACCOUNTING PRONOUNCEMENTS
- --------------------------------------------------------------------------------
In June 1998, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards ("SFAS") No. 133, Accounting for Derivative
Instruments and Hedging Activities. In June 2000, the FASB issued SFAS No. 138,
Accounting for Certain Derivative Instruments and Certain Hedging Activities -
an Amendment of FASB Statement No. 133, SFAS No. 133, as amended by SFAS No.
138, requires all derivatives to be measured at fair value and recognized as
either assets or liabilities on the balance sheet. Changes in such fair value
are required to be recognized immediately in net income to the extent the
derivatives are not effective as hedges. In September 1999, the FASB issued SFAS
No. 137, Accounting for Derivative Instruments and Hedging Activities - Deferral
of the effective Date of FASB Statement No. 133, an amendment to delay the
effective date of SFAS No. 133 to fiscal years beginning after June 15, 2000.
The Company does not hold derivative instruments or engage in hedging
activities.
In June 2001, the FASB issued SFAS No. 141, Business Combinations. SFAS No. 141
supercedes Accounting Principles Board Opinion ("APB") No. 16, Business
Combinations, and SFAS No. 38, Accounting for Preacquisition Contingencies of
Purchased Enterprises. SFAS No. 141 requires that the purchase method of
accounting be used for all business combinations initiated after June 30, 2001
and for all business combinations accounted for by the purchase method for which
the date of acquisition is after June 30, 2001. The Company does not expect the
adoption of SFAS No. 141 to have a material impact on its financial statements.
In June 2001, the FASB issued SFAS No. 142, Goodwill and Other Intangible
Assets. SFAS No. 142 supercedes APB No. 17, Intangible Assets, and its
provisions are effective for fiscal years beginning after December 15, 2001.
SFAS No. 142 requires that: 1) goodwill and indefinite lived intangible assets
will no longer be amortized; 2) goodwill will be tested for impairment at least
annually at the reporting unit level (reporting unit levels to be determined
upon adoption); 3) intangible assets deemed to have an indefinite life will be
tested for impairment at least annually; and 4) the amortization period of
intangible assets with finite lives will no longer be limited to forty years. As
of November 3, 2001, the Company has intangible assets, net of accumulated
amortization, of $5.0 million and has recognized amortization expense of
approximately $1.3 million during the nine months ended November 3, 2001. The
Company has not completed the process of evaluating the impact that will result
from adopting SFAS No. 142.
9
Item 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations
- --------------------------------------------------------------------------------
GENERAL
- --------------------------------------------------------------------------------
Fred's business is subject to seasonal influences, but the Company has tended to
experience less seasonal fluctuation than many other retailers due to the
Company's mix of everyday basic merchandise and pharmacy business. The fourth
quarter is typically the most profitable quarter because it includes the
Christmas selling season. The overall strength of the fourth quarter is
partially mitigated, however, by the inclusion of the month of January, which is
generally the least profitable month of the year.
The impact of inflation on labor and occupancy costs can significantly affect
Fred's operations. Many of Fred's employees are paid hourly rates related to the
federal minimum wage and, accordingly, any increase affects Fred's. In addition,
payroll taxes, employee benefits and other employee-related costs continue to
increase. Occupancy costs, including rent, maintenance, taxes and insurance,
also continue to rise. Fred's believes that maintaining adequate operating
margins through a combination of price adjustments and cost controls, careful
evaluation of occupancy needs, and efficient purchasing practices is the most
effective tool for coping with increasing costs and expenses.
- --------------------------------------------------------------------------------
RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
Thirteen Weeks Ended November 3, 2001 and October 28, 2000
- ----------------------------------------------------------
Net sales increased to $219.2 in 2001 from $180.1 million in 2000, an increase
of $39.1 million or 21.7%. The increase was attributable to comparable store
sales increases of 12.7% ($21.8 million) and sales by stores not yet included as
comparable stores ($17.6 million). Sales to franchisees decreased $.3 million in
2001. The sales mix for the period was 48.3% Hardlines, 35.7% Pharmacy, 12.1%
Softlines, and 3.9% Franchise. This compares with 47.7% Hardlines, 35.3%
Pharmacy, 12.0% Softlines, and 5.0% Franchise for the same period last year.
Gross profit decreased to 28.3% of sales in 2001 compared with 28.8% of sales in
the prior-year period. The decrease in gross profit margins is attributable to
pricing pressure on pharmacy sales.
Selling, general and administrative expenses increased to $53.7 million in 2001
from $45.1 million in 2000. As a percentage of sales, expenses decreased to
24.5% of sales compared to 25.1% of sales last year. Selling, general and
administrative expenses were improved primarily by leveraging the higher sales
to improved productivity and control of labor costs throughout the Company. In
the third quarter, labor as a percent of sales was 1.2% better than last year.
Additionally, pharmacy and corporate expenses have been controlled to leverage
the higher sales.
Interest expense decreased to $.4 million in 2001 from $.9 million in 2000,
reflecting the effect of the public offering which was used to paydown the debt.
10
Thirty-nine Weeks Ended November 3, 2001 and October 28, 2000
- ---------------------------------------------------------------------
Net sales increased to $636.9 million in 2001 from $536.6 million in 2000, an
increase of $100.3 million or 18.7%. The increase was attributable to comparable
store sales increases of 9.9% ($50.4 million) and sales by stores not yet
included as comparable stores ($50.7 million). Sales to franchisees decreased
$.8 million in 2001. The sales mix for the period was 48.4% Hardlines, 35.6%
Pharmacy, 12.1% Softlines, and 3.9% Franchise. This compares with 49.5%
Hardlines, 33.5% Pharmacy, 12.2% Softlines, and 4.8% Franchise for the same
period last year.
Gross profit decreased to 28.3% of sales in 2001 compared with 28.8% of sales in
the prior-year period. Gross profit margins decreased as a result of the change
in sales mix, promotional activities to increase customer traffic and pricing
pressure on pharmacy sales.
Selling, general and administrative expenses increased to $157.2 million in 2001
from $134.3 million in 2000. As a percentage of sales, expenses decreased to
24.7% of sales compared to 25.0% of sales last year. Selling, general and
administrative expenses were improved primarily due to improved productivity and
controlled labor cost throughout the Company.
Interest expense decreased to $1.8 million in 2001 from $2.3 million in 2000,
reflecting lower average revolver borrowings than last year as well as lower
interest rates and the effect of the public offering in reducing the debt.
- --------------------------------------------------------------------------------
LIQUIDITY AND CAPITAL RESOURCES
- --------------------------------------------------------------------------------
Due to the seasonality of Fred's business and the continued increase in the
number of stores and pharmacies, inventories are generally lower at year end
than at each quarter end of the following year.
Net cash flow provided by operating activities totaled $7.4 million during the
thirty-nine week period ended November 3, 2001. Cash was primarily used to
increase inventories by approximately $36.2 million in the first nine months of
2001. This increase was primarily attributable to 30 new stores and 5 new
pharmacies in the first nine months of 2001. Accounts payable increased
approximately $19.8 million during the first nine months of 2001.
Net cash flows used by investing activities totaled $14.2 million, and was used
primarily for capital expenditures associated with the Company's store and
pharmacy expansion program. During the first nine months of 2001, the Company
opened 30 stores and upgraded 6 stores. The Company expects to open
approximately 35 stores for the year. The Company's capital expenditure plan for
the year 2001 is approximately $16 million dollars.
Net cash flows provided by financing activities totaled $6.0 million. $38.1
million in funds were provided by the Company's public offering of 1,585,000
shares of common stock on September 28, 2001. $7.8 million was used to pay off
the Company's 1998 Loan Agreement and the balance of the net proceeds to pay
down on the Company's Revolving Loan and Credit Agreement.
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
11
and bears interest at the lesser of 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 shareholder's 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. The Company used
the proceeds of the public offering to pay down the borrowings at November 3,
2001 to zero and the borrowings outstanding totaled $40.0 million at October 28,
2000.
On April 23, 1999, the Company and a bank entered into a Loan Agreement (the
"1999 Loan Agreement"). The 1999 Loan Agreement provided the Company with a
four-year unsecured term loan of $2,250,000 to finance the replacement of the
Company's mainframe computer system. The 1999 Loan Agreement bears interest of
6.15% per annum and matures on April 15, 2003. Borrowings outstanding under this
1999 Loan Agreement totaled $.8 million at November 3, 2001 and $1.4 million at
October 28, 2000.
On May 5, 1998, the Company and a bank entered into a Loan Agreement (the "1998
Loan Agreement"). The 1998 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 1998 Loan Agreement
bore interest of 6.82% per annum and would have matured on November 1, 2005. The
Company used the proceeds of the public offering to pay off the Loan Agreement
prior to November 3, 2001 and the borrowing outstanding at October 28, 2000
totaled $9.2 million.
On October 11, 2000, the Company and a bank entered into a Seasonal Overline
Revolving Credit Agreement (the "2000 Seasonal Agreement"). The 2000 Seasonal
Agreement provides the Company with a ninety day unsecured loan of $5,000,000.
The 2000 Seasonal Agreement bears interest at .5% below prime rate. Borrowings
outstanding under this 2000 Seasonal Agreement totaled $2.0 million at October
28, 2000.
The Company believes that sufficient capital resources are available in both the
short term and long term through currently available cash and cash generated
from future operations and, if necessary, the ability to obtain additional
financing.
- --------------------------------------------------------------------------------
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 restated change
on previously reported net sales, gross profit, net income and net income per
share (basic & diluted) was a decrease of $528,000, $132,000, $87,000 and $.01,
respectively, for the first quarter ended April 29, 2000; a decrease of
$453,000, $111,000, $73,000 and $.00, respectively, for the second quarter ended
July 29, 2000; a
12
decrease of $951,000, $239,000, $158,000 and $.01, respectively, for the third
quarter ended October 28, 2000. 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.
In June 1998, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards ("SFAS") No. 133, Accounting for Derivative
Instruments and Hedging Activities. In June 2000, the FASB issued SFAS No. 138,
Accounting for Certain Derivative Instruments and Certain Hedging Activities -
an Amendment of FASB Statement No. 133, SFAS No. 133, as amended by SFAS No.
138, requires all derivatives to be measured at fair value and recognized as
either assets or liabilities on the balance sheet. Changes in such fair value
are required to be recognized immediately in net income to the extent the
derivatives are not effective as hedges. In September 1999, the FASB issued SFAS
No. 137, Accounting for Derivative Instruments and Hedging Activities - Deferral
of the effective Date of FASB Statement No. 133, an amendment to delay the
effective date of SFAS No. 133 to fiscal years beginning after June 15, 2000.
The Company does not hold derivative instruments or engage in hedging
activities.
In June 2001, the FASB issued SFAS No. 141, Business Combinations. SFAS No. 141
supercedes Accounting Principles Board Opinion ("APB") No. 16, Business
Combinations, and SFAS No. 38, Accounting for Preacquisition Contingencies of
Purchased Enterprises. SFAS No. 141 requires that the purchase method of
accounting be used for all business combinations initiated after June 30, 2001
and for all business combinations accounted for by the purchase method for which
the date of acquisition is after June 30, 2001. The Company does not expect the
adoption of SFAS No. 141 to have a material impact on its financial statements.
In June 2001, the FASB issued SFAS No. 142, Goodwill and Other Intangible
Assets. SFAS No. 142 supercedes APB No. 17, Intangible Assets, and its
provisions are effective for fiscal years beginning after December 15, 2001.
SFAS No. 142 requires that: 1) goodwill and indefinite lived intangible assets
will no longer be amortized; 2) goodwill will be tested for impairment at least
annually at the reporting unit level (reporting unit levels to be determined
upon adoption); 3) intangible assets deemed to have an indefinite life will be
tested for impairment at least annually; and 4) the amortization period of
intangible assets with finite lives will no longer be limited to forty years. As
of November 3, 2001, the Company has intangible assets, net of accumulated
amortization, of $5.0 million and has recognized amortization expense of
approximately $1.3 million during the nine months ended November 3, 2001. The
Company has not completed the process of evaluating the impact that will result
from adopting SFAS No. 142.
- --------------------------------------------------------------------------------
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION
- --------------------------------------------------------------------------------
Statements, other than those based on historical facts, 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
13
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, government regulations, increases in fuel and utility rates 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.
- --------------------------------------------------------------------------------
Item 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
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The Company has no holdings of derivative financial or commodity instruments as
of November 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 not had a
significant impact on the Company, and they are not expected to in the
foreseeable future
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Not Applicable.
Item 2. Changes in Securities
Not Applicable.
Item 3. Defaults Upon Senior Securities
Not Applicable.
Item 4. Submission of Matters to a Vote of Securities Holders
Not Applicable.
Item 5. Other Information
Not Applicable.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
3.3 Articles of Amendment to the Charter of Fred's, Inc., dated
September 6, 2001, as filed with the Secretary of State of
Tennessee. (Incorporated by reference to Exhibit 3.3 of Amendment
No. 1 to our Registration Statement on Form S-3 filed on
September 10, 2001.)
99.2 Press release dated September 6, 2001, announcing the report of
Fred's sales for the four-week and seven-month sales ended
September 1, 2001.
(b) Reports on Form 8-K:
Form 8-K filed September 6, 2001 - announcing sales for period
ended September 1, 2001.
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SIGNATURES
Pursuant to the requirements 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.
FRED'S, INC.
By:/s/Michael J. Hayes
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Michael J. Hayes
Date: December 13, 2001 Chief Executive Officer
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By:/s/Jerry A. Shore
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Jerry A. Shore
Date: December 13, 2001 Chief Financial Officer
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