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 2, 2002
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 19, 2002, there were 25,405,002 shares outstanding of the
Registrant's Class A no par value voting common stock. Based on the last
reported sale price of $36.95 per share on the NASDAQ Stock Market on April 19,
2002, the aggregate market value of the Registrant's Common Stock held by those
persons deemed by the Registrant to be non-affiliates was $938,714,824.
As of April 19, 2002, 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 2001 Annual Report to Shareholders for the year ended
February 2, 2002 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 for the 2002 annual shareholders
meeting 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, government
regulations and other factors affecting business beyond the Company's
control. Consequently, all of the forward-looking statements are qualified
by this cautionary statement 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 353
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). Two hundred and two 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 14,517 square feet and had average
sales of $2,702,763 in fiscal 2001. No single store accounted for more than 1.0%
of sales during fiscal 2001.
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 202 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 30%
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 type of
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 opened 33 stores in 2001, and anticipates a net increase of
fifty-five to sixty new stores in 2002. 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 13 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. During 2001, the
Company converted six Xpress locations to full size Fred's locations. During
2002 the Company anticipates opening three to five new Xpress locations. It is
the Company's intent to expand these locations into a full size Fred's location
as market conditions dictate.
A significant growth area for the Company has been its pharmaceuticals
business. In 2001, the Company added a net 4 new pharmacies. During 2002, the
Company anticipates adding at least 30 additional pharmacies. Approximately 57%
of Fred's stores contain a pharmacy and sell prescription drugs. The Company's
primary mechanism for obtaining customers for 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:
1997 1998 1999 2000 2001
---------------------------------------------------
Stores open at beginning of period 213 261 283 293 320
Stores opened/acquired during period 49 29 20 31 33
Stores closed during period (1) (7) (10) (4) (0)
---------------------------------------------------
Stores open at end of period 261 283 293 320 353
===================================================
Number of stores with Pharmacies at
End of period 141 180 182 198 202
===================================================
Square feet of selling space at end of
period (in thousands) 3,362 3,680 3,968 4,346 4,892
===================================================
Average square feet of selling space
per store 13,875 13,925 14,015 14,690 14,517
===================================================
Franchise stores at end of period 31 29 26 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-five years of operation by the Company and its predecessors, enables
the Company to compete effectively in its region. 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 2001, all of the Company's prescription drugs were purchased by its
pharmacies individually and shipped direct from a pharmaceutical wholesaler. In
November 1999, the Company entered into a supply agreement with Bergen Brunswig
Drug Company (Bergen). Under this agreement, Bergen is Fred's new primary
pharmaceutical wholesaler and provides substantially all of the Company's
prescription drugs. During 2001, approximately 30% of the Company's total
purchases were made from Bergen. 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 2001 was as follows:
Pharmaceuticals...................................................34.4%
Household Goods...................................................22.4%
Apparel and Linens................................................12.3%
Food and Tobacco Products..........................................9.5%
Health and Beauty Aids.............................................9.4%
Paper and Cleaning Supplies........................................8.3%
Sales to Franchised Fred's Stores..................................3.7%
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 2001 the average customer transaction size was approximately $16.25,
and the number of customer transactions totaled approximately 54 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 3% of total sales in 2001. 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 $33,452,000 in 2001, $34,281,000 in
2000,and $32,850,000 in 1999, representing 3.7%, 4.4%, and 4.9% of total
revenue, respectively. Franchise and other fees earned totaled $1,764,000 in
2001, $1,806,000 in 2000, and $1,761,000 in 1999. 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 2001. 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
most stores are open seven days a week (other than pharmacy). 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 twenty
district managers supervise the management and operation of Fred's stores.
Fred's operates 202 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). Approximately 56% of the
merchandise received by Fred's stores in 2001 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.
On March 22, 2002, the Company announced plans to construct a new
distribution center in Dublin, Laurens County, Georgia, pending the completion
of final documentation and the receipt of all required governmental approvals.
The $25 million, 600,000 square-foot distribution center will augment the
capacity provided by the Company's original Memphis center. Construction of the
Dublin distribution center is expected to begin promptly and it is estimated
that the facility will be fully operational by March 2003.
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 2, 2002, the Company had approximately 7,850 full-time and
part-time employees, comprising 750 corporate and distribution center employees
and 7,100 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 2, 2002, the geographical distribution of the Company's 353
locations was as follows:
State Number of Stores
--------------------------------------------------
Mississippi 87
Tennessee 73
Arkansas 64
Alabama 45
Louisiana 28
Georgia 27
Missouri 10
Kentucky 10
Illinois 6
North Carolina 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 288 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
forty-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 2, 2002.
PART II
Item 5: Market for the Registrant's Common Equity and Related Stockholder
Matters
The information required by this item is incorporated herein by reference
to "Stock Market Information"(inside back cover) of the 2001 Annual Report to
Shareholders for the year ended February 2, 2002 (the "Annual Report to
Shareholders"). The Company has paid cash dividends of $0.05 per share (not
adjusted for stock splits) in each of the last four fiscal years. During the
fiscal year 2001, the Company paid cash dividends of $0.05 per share (not
adjusted for stock splits) for the first quarter and $0.04 per share (not
adjusted for stock split) for all subsequent quarters.
Item 6: Selected Financial Data
The selected financial data for the five years ended February 2, 2002, are
incorporated herein by reference to the 2001 Annual Report to Shareholders under
the caption "Selected Financial Data".
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 are incorporated herein by reference to the 2001 Annual Report to
Shareholders under the caption "Management's Discussion and Analysis".
Item 7a: Quantitative and Qualitative Disclosure about Market Risk
The Company has no holdings of derivative financial or commodity
instruments as of February 2, 2002. 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 are incorporated herein by reference
to the 2001 Annual Report to Shareholders.
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) 60 Director, Managing Director (2),
Chief Executive Officer
John R. Eisenman(1) 60 Director
Roger T. Knox(1) 64 Director
John Reier(1) 62 President and Director
Thomas H. Tashjian(1) 47 Director
John A. Casey 55 Executive Vice President - Pharmacy Operations
Jerry A Shore 49 Executive Vice President and
Chief Financial Officer
Charles S. Vail 59 Corporate Secretary, Vice President -
Legal Services and General Counsel
(1) Five 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 Director is the
chief executive officer of the Company and has 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.
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 has served as Executive Vice President - Pharmacy Operations
since February 1997. 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 to the Company's 2002 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 to the Company's 2002 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 16 through 31 of the 2001 Annual Report
to Shareholders for the year ended February 2, 2002.
Report of Independent Accountants.
Consolidated Statements of Income for the years ended February 2,
2002, February 3, 2001, and January 29, 2000.
Consolidated Balance Sheets as of February 2, 2002, and February
3, 2001.
Consolidated Statements of Changes in Shareholders' Equity for
the years ended February 2, 2002, February 3, 2001, and January
29, 2000.
Consolidated Statements of Cash Flows for the years ended
February 2, 2002, February 3, 2001, and January 29, 2000.
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 2, 2002.
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].
3.3 Articles of Amendment to the Charter of Fred's,
Inc., dated September 6, 2001, as filed with the
Secretary of the 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.]
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].
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 2, 2002 (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 January 15, 2002 (filed on
March 6, 2002) announcing a three-for-two stock split.
Current report on Form 8-K dated March 22, 2002 (filed on
March 22, 2002) announcing plans to construct a new
distribution center.
* Management Compensatory Plan
** Filed herewith
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 19th day of
April, 2002.
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 19th day of April, 2002.
Signature Title
--------- -----
/s/ Michael J. Hayes Director, Managing Director,
- --------------------------
Michael J. Hayes Chief Executive Officer, President
/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
Report of Independent Accountants on
Financial Statement Schedules
Our audits of the consolidated financial statements referred to in our report
dated March 15, 2002 in the 2001 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
March 15, 2002
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 29, 2000 644 80 (272) 452
Year ended February 3, 2001 452 194 (130) 516
Year ended February 2, 2002 516 809 (668) 657
EXHIBIT 13.1
Fred's, Inc.
Consolidated Financial Statements
February 2, 2002
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 2, 2002 and February 3, 2001, and
the results of their operations and their cash flows for each of the three years
in the period ended February 2, 2002, 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.
PricewaterhouseCoopers LLP
Memphis, Tennessee
March 15, 2002
Fred's, Inc.
Consolidated Balance Sheets
(in thousands, except for number of shares)
- --------------------------------------------------------------------------------
February 2, February 3,
2002 2001
-------------------- -------------------
ASSETS
Current assets:
Cash and cash equivalents $ 15,906 $ 2,569
Receivables, less allowance for doubtful accounts of $657
($516 at February 3, 2001) 15,705 15,430
Inventories 163,560 149,602
Deferred income taxes 1,790 2,022
Other current assets 2,499 2,306
-------------------- -------------------
Total current assets 199,460 171,929
Property and equipment, at depreciated cost 78,225 76,360
Equipment under capital leases, less accumulated amortization of
$1,849 ($1,305 at February 3, 2001) 1,533 1,387
Deferred income taxes - 98
Other noncurrent assets, net 4,841 5,021
-------------------- -------------------
Total assets $ 284,059 $ 254,795
==================== ===================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 43,747 $ 40,432
Current portion of indebtedness 562 2,175
Current portion of capital lease obligations 678 503
Accrued liabilities 14,228 14,012
Income taxes payable 1,866 4,278
-------------------- -------------------
Total current liabilities 61,081 61,400
Long-term portion of indebtedness 141 30,475
Deferred tax liability 696 -
Capital lease obligations 1,179 1,230
Other noncurrent liabilities 2,055 2,003
-------------------- -------------------
Total liabilities 65,152 95,108
-------------------- -------------------
Commitments and contingencies (Notes 6 and 10)
Shareholders' equity:
Common stock, Class A voting, no par value, 25,361,112 shares
issued and outstanding (22,628,471 shares at February 3, 2001) 110,508 68,557
Retained earnings 108,462 91,342
Deferred compensation on restricted stock incentive plan (63) (212)
-------------------- -------------------
Total shareholders' equity 218,907 159,687
-------------------- -------------------
Total liabilities and shareholders' equity $ 284,059 $ 254,795
==================== ===================
See accompanying notes to consolidated financial statements.
Fred's, Inc.
Consolidated Statements of Income
(in thousands, except share and per share amounts)
- --------------------------------------------------------------------------------
For the Years Ended
--------------------------------------------------------------------
February 2, February 3, January 29,
2002 2001 2000
--------------------------------------------------------------------
Net sales $ 910,831 $ 781,249 $ 665,777
Cost of goods sold 661,110 566,115 478,138
--------------------- ------------------ -----------------------
Gross profit 249,721 215,134 187,639
Selling, general and administrative expenses 217,970 189,414 168,696
--------------------- ------------------ -----------------------
Operating income 31,751 25,720 18,943
Interest expense, net 1,611 3,226 2,504
--------------------- ------------------ -----------------------
Income before taxes 30,140 22,494 16,439
Income taxes 10,511 7,645 5,737
--------------------- ------------------ -----------------------
Net income $ 19,629 $ 14,849 $ 10,702
===================== ================== =======================
Net income per share
Basic $ .83 $ .66 $ .48
===================== ================== =======================
Diluted $ .81 $ .65 $ .47
===================== ================== =======================
Weighted average shares outstanding
Basic 23,553 22,382 22,176
===================== ================== =======================
Diluted 24,197 22,869 22,635
===================== ================== =======================
See accompanying notes to consolidated financial statements.
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 30, 1999 11,946,772 $ 66,951 $ 70,596 $ (564) $ 136,983
Stock split - (Note 7) 2,986,693
Stock split - (Note 7) 7,466,732
Cash dividends paid ($.11 per share) (2,396) (2,396)
Issuance of restricted stock 18,562 124 (124)
Cancellation of restricted stock (10,687) (118) 118
Other issuances 3,213 30 30
Exercises of stock options 66,732 296 296
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 22,478,017 $ 67,326 $ 78,902 $ (315) $ 145,913
Cash dividends paid ($.11 per share) (2,409) (2,409)
Issuance of restricted stock 7,125 57 (57) -
Cancellation of restricted stock (54,510) (218) 15 (203)
Exercises of stock options 197,839 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 22,628,471 $ 68,557 $ 91,342 $ (212) $ 159,687
Proceeds from public offering 2,377,500 $ 38,156 38,156
Cash dividends paid ($.12 per share) (2,509) (2,509)
Cancellation of restricted stock (15,185) (63) 12 (51)
Other issuances 55,980 937 937
Exercises of stock options 314,346 2,165 2,165
Amortization of deferred compensation
on restricted stock incentive plan 137 137
Tax benefit on exercise of stock
options 756 756
Net income 19,629 19,629
---------- -------- --------- ----------- -----------
Balance, February 2, 2002 25,361,112 $110,508 $ 108,462 $ (63) $ 218,907
---------- -------- --------- ----------- -----------
See accompanying notes to consolidated financial statements.
Fred's, Inc.
Consolidated Statements of Cash Flows
(in thousands)
- --------------------------------------------------------------------------------
For the Years Ended
-------------------
February 2, February 3, January 29,
2002 2001 2000
---- ---- ----
Cash flows from operating activities:
Net income $ 19,629 $ 14,849 $ 10,702
Adjustments to reconcile net income to net cash flows
from operating activities:
Depreciation and amortization 17,846 14,277 11,830
Provision for uncollectible receivables 142 64 80
LIFO Reserve 642 753 100
Deferred income taxes 1,026 1,747 2,513
Amortization of deferred compensation on restricted
stock incentive plan 137 145 255
Issuance (net of cancellation) of restricted stock (52) (203) -
Tax benefit upon exercise of stock options 756 313 43
Gain on sale of fixed assets - - (41)
(Increase) decrease in assets:
Receivables (416) (4,583) (2,060)
Inventories (14,291) (8,743) (15,135)
Other assets (194) (444) (847)
Increase (decrease) in liabilities:
Accounts payable and accrued liabilities 3,532 5,110 (8,210)
Income taxes payable (2,411) 3,628 (176)
Other noncurrent liabilities 52 174 159
--------- ---------- -----------
Net cash provided by (used in) operating activities 26,398 27,087 (787)
========= ========== ===========
Cash flows from investing activities:
Capital expenditures (17,372) (15,801) (14,043)
Proceeds from dispositions of property and equipment - 493 215
Asset acquisition, net of cash acquired (primarily intangibles) (986) (2,807) (805)
--------- ---------- -----------
Net cash used in investing activities (18,358) (18,115) (14,633)
========= ========== ===========
Cash flows from financing activities:
Reduction of indebtedness and capital lease obligations (9,892) (2,495) (2,139)
Proceeds from revolving line of credit, net of payments (22,623) (5,617) 18,040
Proceeds from term loan - - 2,249
Proceeds from public offering, net of expenses 38,156
Proceeds from exercise of options 2,165 1,079 296
Payment of cash for dividends and fractional shares (2,509) (2,406) (2,396)
--------- ---------- -----------
Net cash provided by (used in) financing activities 5,297 (9,439) 16,050
========= ========== ===========
Increase (decrease) in cash and cash equivalents 13,337 (467) 630
Cash and cash equivalents:
Beginning of year 2,569 3,036 2,406
--------- ---------- -----------
End of year $ 15,906 $ 2,569 $ 3,036
========= ========== ===========
Supplemental disclosures of cash flow information:
Interest paid $ 1,775 $ 3,332 $ 2,399
Income taxes paid $ 11,000 $ 2,000 $ 3,810
Non cash investing and financing activities:
Assets acquired through capital lease obligations $ 691 $ - $ 612
Common stock issued for acquisition $ 937 $ - $ 30
See accompanying notes to consolidated financial statements.
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 353 retail
discount stores located in eleven states 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 2001, 2000 and 1999, as used
herein, refer to the years ended February 2, 2002, February 3, 2001, and January
29, 2000, 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 20% and 19% of the retail
inventories at February 2, 2002 and February 3, 2001, respectively, cost was
determined using the LIFO (last-in, first-out) method. The current cost of
inventories exceeded the LIFO cost by approximately $4,603,000 at February 2,
2002 and $3,961,000 at February 3, 2001.
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 2, 2002 and February 3, 2001, no material adjustments to
the carrying value of such assets were necessary.
Selling, general and administrative expenses. The Company includes buying,
warehousing, distribution, depreciation 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
2001, 2000, and 1999 was $12,079,000, $10,166,000, and $8,926,000 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 and are
therefore netted against selling, general and administrative expenses. Total
franchise income for 2001, 2000, and 1999 was $1,764,000, $1,806,000, and
$1,761,000 respectively.
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.
During the year ended February 2, 2002, the Company issued 55,980
(split-adjusted) shares for pharmacy acquisitions. These intangibles, net of
accumulated amortization, totaled $4,778,000 at February 2, 2002, and $4,945,000
at February 3, 2001. Accumulated amortization for 2001 and 2000 totaled
$5,272,000 and $3,490,000, respectively. Amortization expense for 2001, 2000,
and 1999 was $1,795,000, $1,421,000, and $1,307,000, respectively.
Cash and cash equivalents. Cash on hand and in banks, together with other highly
liquid investments which are subject to market fluctuations and 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 for
which there was no excess amounts at February 2, 2002 and $5,823,000 at February
3, 2001.
Financial instruments. At February 2, 2002, 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.
Insurance reserves. The Company is largely self-insured for workers
compensation, general liability and medical insurance. The Company's liability
for self-insurance is determined based on known claims and estimates for
incurred but not reported claims.
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.
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 2001 presentation.
Recent Accounting Pronouncements. 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 February 2, 2002, the Company has intangible assets, net of accumulated
amortization, of $4.8 million and has recognized amortization expense of
approximately $1.8 million during the year February 2, 2002. The Company will
continue to amortize intangible assets in accordance with its existing policy
and accordingly does not anticipate a material impact on adoption of SFAS No.
142.
In October 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets, effective for years beginning after December 15,
2001. This Statement supersedes SFAS No. 121, Accounting for the Impairment of
Long-Lived Assets to Be Disposed of, but retains the fundamental provision of
SFAS 121 for recognition and measurement of the impairment of long-lived assets
to be held and used and measurement of long-lived assets to be held for sale.
The statement requires that whenever events or changes in circumstances indicate
that a long-lived asset's carrying value may not be recoverable, the asset
should be tested for recoverability. The statement also requires that a
long-lived asset classified as held for sale should be carried at the lower of
its carrying value or fair value, less cost to sell. The Company is evaluating
the potential impact the provisions of SFAS 144 could have on it's financial
statements but does not believe there will be a material effect on the financial
statements upon adoption.
NOTE 2 - PROPERTY AND EQUIPMENT
Property and equipment, at cost, consist of the following (in thousands):
2001 2000
------------------- --------------------
Buildings and improvements $ 69,217 $ 67,068
Furniture, fixtures and equipment 103,889 89,152
------------------- --------------------
173,106 156,220
Less accumulated depreciation and amortization (99,121) (84,100)
------------------- --------------------
73,985 72,120
Land 4,240 4,240
------------------- --------------------
Total property and equipment, at depreciated cost $ 78,225 $ 76,360
=================== ====================
Depreciation expense totaled $15,507,000, $12,407,000, and $10,168,000 for 2001,
2000 and 1999, respectively.
NOTE 3 - ACCRUED LIABILITIES
The components of accrued liabilities are as follows (in thousands):
2001 2000
------------------- --------------------
Payroll and benefits $ 6,727 $ 5,136
Sales and use taxes 2,694 2,000
Insurance 1,753 2,497
Other 3,054 4,379
------------------- --------------------
Total accrued liabilities $ 14,228 $ 14,012
=================== ====================
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 a 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 no
borrowings outstanding under the Agreement at February 2, 2002 and the
borrowings outstanding under the Agreement at February 3, 2001 totaled
$22,623,000.
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 $703,000 and $1,265,500 borrowings outstanding under the Agreement at
February 2, 2002 and February 3, 2001, respectively. The principal maturity
under this Agreement for debt outstanding at February 2, 2002 is as follows:
$562,500 in fiscal 2002 and $140,500 in fiscal 2003.
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
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 Agreement and
the borrowings outstanding under the Agreement at February 3, 2001 totaled
$8,762,000.
Interest expense for 2001, 2000, and 1999 totaled $1,611,000, $3,226,000, and
$2,504,000, 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):
2001 2000 1999
---------------- ---------------- ----------------
Current
Federal $ 9,485 $ 5,642 $ 3,224
State - - -
---------------- ---------------- ----------------
9,485 5,642 3,224
---------------- ---------------- ----------------
Deferred
Federal 907 1,679 2,116
State 119 324 397
---------------- ---------------- ----------------
1,026 2,003 2,513
---------------- ---------------- ----------------
$ 10,511 $ 7,645 $ 5,737
---------------- ---------------- ----------------
Deferred tax assets (liabilities) are comprised of the following(in thousands):
2001 2000
---------------- ----------------
Current deferred tax assets:
Inventory valuation methods $ 530 $ 627
Accrual for inventory shrinkage 1,060 768
Allowance for doubtful accounts 357 310
Insurance accruals 933 1,200
Other 76 26
---------------- ----------------
Gross current deferred tax assets 2,956 2,931
Deferred tax asset valuation allowance (289) (289)
---------------- ----------------
2,667 2,642
Current deferred tax liabilities (877) (620)
---------------- ----------------
Net current deferred tax asset $ 1,790 $ 2,022
---------------- ----------------
Noncurrent deferred tax assets:
Net operating loss carryforwards $ 1,532 $ 1,685
Postretirement benefits other than pensions 799 760
Restructuring costs 73 82
Other 1,768 1,769
---------------- ----------------
Gross noncurrent deferred tax assets 4,172 4,296
Deferred tax asset valuation allowance (1,243) (1,267)
---------------- ----------------
2,929 3,029
Noncurrent deferred tax liabilities:
Depreciation (3,598) (2,904)
Other (27) (27)
---------------- ----------------
Gross noncurrent deferred tax liabilities (3,625) (2,931)
---------------- ----------------
Net noncurrent deferred tax (liability) asset $ (696) $ 98
---------------- ----------------
The ultimate realization of the current deferred tax liability 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 2001 the
valuation allowance decreased ($24,000) and during 2000 the valuation allowance
increased $135,000. The Company was able to use net operating loss carryforwards
in certain states during 2001 as compared to the Company generating additional
net operating loss carryforwards in certain states during 2000.
At February 2, 2002, 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 $43,939,000 for state income tax purposes, and
expire at various times during the period 2003 through 2023. 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:
2001 2000 1999
------------------ ------------------ --------------
Income tax provision at statutory rate 35.0% 35.0% 35.0%
State income taxes, net of federal benefit 0.1 0.9 1.6
Surtax Exemptions - (1.0) (1.0)
Other (0.2) (0.9) (0.7)
------------------ ------------------ --------------
34.9% 34.0% 34.9%
------------------ ------------------ --------------
NOTE 6 - LONG-TERM LEASES
The Company leases certain of its store locations under noncancelable operating
leases that require monthly rental payments primarily at fixed rates (although a
number of the leases provide for additional rent based upon sales) 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 $22,207,000, $17,465,000, and $15,329,000 for 2001, 2000,
and 1999, respectively. Amortization expense on assets under capital lease for
2001, 2000, and 1999 was $544,000, $449,000, and $355,000, respectively.
Future minimum rental payments under all operating and capital leases as of
February 2, 2002 are as follows:
Operating Capital
Leases Leases
- -----------------------------------------------------------------------------------------------------------------------
2002 $ 20,611 $ 914
2003 18,112 536
2004 15,072 428
2005 12,280 315
2006 8,869 173
Thereafter 12,789 28
------------------ -----------------
Total minimum lease payments $ 87,733 2,394
==================
Imputed interest (537)
-----------------
Present value of net minimum lease payments, including -----------------
$678 classified as current portion of capital lease obligations $ 1,857
=================
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 (a "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.
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.
In October 2001, the company completed a secondary stock offering of 1,585,000
company shares (unadjusted for 3-for-2 stock split completed on February 1,
2002) raising net proceeds to the Company of $38.2 million dollars.
On January 15, 2002, the Company announced a three-for-two stock split of its
common stock, Class A voting, no par value. The new shares, one additional share
for each two shares held by stockholders, were distributed on February 1, 2002
to stockholders of record on January 25, 2002. All share and per share amounts
included in the accompanying financial statements have been adjusted to reflect
this stock split.
NOTE 8 - EMPLOYEE BENEFIT PLANS
Incentive stock option plan. The Company has a long-term incentive plan under
which an aggregate of 2,191,409 shares may be granted. These options expire five
years from the date of grant. Options outstanding at February 2, 2002 expire in
2002 through 2006.
A summary of activity in the plan follows:
2001 2000 1999
-------------------------------- --------------------------------- ------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Options Price Options Price Options Price
-------------------------------- --------------------------------- ------------------------
Outstanding at beginning
of year 1,242,415 $ 8.16 1,056,475 $ 7.01 919,009 $ 7.15
Granted 288,219 9.39 647,824 8.03 256,405 6.31
Forfeited/ canceled (292,253) 9.22 (264,046) 5.88 (48,939) 7.89
Expired - - (3,270) 6.05
Exercised (314,346) 6.82 (197,838) 4.63 (66,730) 4.47
------------- ---------- ------------
Outstanding at end of year 924,035 8.65 1,242,415 8.16 1,056,475 7.01
============= ========== ============
Exercisable at end of year 356,068 8.32 288,871 5.67 317,461 4.86
============= ========== ============
The weighted average remaining contractual life of all outstanding options was
2.8 years at February 2, 2002.
The following table summarizes information about stock options outstanding at
February 2, 2002:
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 2, 2002 (in Years) Price February 2, 2002 Price
--------------- ---------------- ---------- ----- ---------------- -----
$3.15 to $3.84 37,068 0.8 $ 3.76 33,429 $ 3.75
$6.14 to $8.64 743,474 2.4 $ 7.57 243,858 $ 6.90
$10.67 to $18.53 143,493 2.2 $ 13.62 78,781 $ 13.61
---------------- ---------------
924,035 356,068
---------------- ---------------
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
2001, 2000, and 1999 consistent with the method prescribed by SFAS No. 123,
Accounting for Stock-Based Compensation, the Company's operating results for
2001, 2000, and 1999 would have been reduced to the pro forma amounts indicated
below:
(in thousands, except per share data) 2001 2000 1999
------------- --------------- --------------
Net income
As reported $19,629 $14,849 $10,702
Pro forma 19,245 14,260 10,363
Basic earnings per share
As reported 0.83 0.66 0.48
Pro forma 0.82 0.63 0.47
Diluted earnings per share
As reported 0.81 0.65 0.47
Pro forma 0.80 0.62 0.46
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 2001, 2000 and 1999, respectively:
2001 2000 1999
--------------- --------------- -------------
Average expected life (years) 3.0 3.0 3.0
Average expected volatility 41.9% 39.0% 43.3%
Risk-free interest rates 2.6% 5.6% 4.8%
Dividend yield 1.6% 1.3% 1.5%
The weighted average grant-date fair value of options granted during 2001,
2000,and 1999 was $6.90, $2.08, and $2.22, respectively.
Restricted Stock. During 2001, 2000, and 1999, the Company issued (forfeited/
cancelled) a net of (15,185),(47,385), and 7,875 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 2, 2002, February 3, 2001, and January 29, 2000 were $117,000,
$100,000, and $96,000, 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 2, February 3, January 29,
2002 2001 2000
---- ---- ----
(in thousands)
Benefit obligation at beginning of year $ 1,617 $ 1,377 $ 1,252
Service cost 140 132 127
Interest cost 123 116 91
Participant contributions 1 - -
Amendments - - -
Actuarial (gain) loss (74) 68 (17)
Benefits paid (21) (76) (76)
------- ------- -------
Benefit obligation at end of year $ 1,786 $ 1,617 $ 1,377
======= ======= =======
A reconciliation of the Plan's funded status to accrued benefit cost follows:
February 2, February 3, January 29,
2002 2001 2000
------------------ ------------------ ------------------
(in thousands)
Funded status $ (1,786) $ (1,617) $ (1,377)
Unrecognized net actuarial gain (380) (322) (406)
Unrecognized prior service cost (5) (5) (6)
------------------ ------------------ ------------------
Accrued benefit costs $ (2,171) $ (1,944) $ (1,789)
------------------ ------------------ ------------------
The medical care cost trend used in determining this obligation is 11.0%
effective December 1, 2000, decreasing annually before leveling at 5.5% in 2012.
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 $259,000. The discount rate used in
calculating the obligation was 7.25% in 2001, 7.5% in 2000 and 7.75% in 1999.
The annual net postretirement cost is as follows:
For the Year Ended
----------------------------------------------------
February 2, February 3, January 29,
2002 2001 2000
-------------- ---------------- ------------------
(in thousands)
Service cost $ 140 $ 132 $ 127
Interest cost 123 116 91
Amortization of net gain from prior periods (17) (17) (17)
Amortization of unrecognized prior service cost 1 1 1
-------------- ---------------- ------------------
Net periodic postretirement benefit cost $ 247 $ 232 $ 202
============== ================ ==================
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.
A reconciliation of basic earnings per share to diluted earnings per share
follows (in thousands, except per share data):
Year Ended
--------------------------------------------------------------------------------------------------------------
February 2, 2002 February 3, 2001 January 29, 2000
------------------------------------ -------------------------------------- ----------------------------------
Per Per Per
Share Share Share
Income Shares Amount Income Shares Amount Income Shares Amount
- -----------------------------------------------------------------------------------------------------------------------------------
Basic EPS $19,629 23,553 $ .83 $14,849 22,382 $ .66 $10,702 22,176 $ .48
Effect of Dilutive
Securities
Restricted stock 69 146 203
Stock options 575 341 256
---------- ----------- ----------- ----------- ----------- ----------- ------------- ------------ -----------
Diluted EPS $19,629 24,197 $ .81 $14,849 22,869 $ .65 $10,702 22,635 $ .47
========== =========== =========== =========== =========== =========== ============= ============ ===========
NOTE 10 - COMMITMENTS AND CONTINGENCIES
Commitments. The Company had commitments approximating $9,133,000 at February 2,
2002 and $5,082,000 at February 3, 2001 on issued letters of credit which
support purchase orders for merchandise. Additionally, the Company had
outstanding letters of credit aggregating $6,838,000 at February 2, 2002 and
$2,552,000 at February 3, 2001 utilized as collateral for its 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 - QUARTERLY FINANCIAL DATA (UNAUDITED)
First Second Third Fourth
Quarter Quarter Quarter Quarter
---------------- --------------- --------------- ---------------
(in thousands, except per share data)
Year Ended February 2, 2002 (1)
Net sales $ 207,359 $ 210,278 $ 219,242 $ 273,952
Gross profit 57,758 56,781 62,038 73,144
Net income 4,159 2,114 5,128 8,228
Net income per share
Basic 0.18 0.09 0.22 0.34
Diluted 0.18 0.09 0.22 0.32
Cash dividends paid per share 0.05 0.04 0.04 0.04
Year Ended February 3, 2001 (1)
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 0.15 0.07 0.17 0.27
Diluted 0.15 0.07 0.17 0.26
Cash dividends paid per share 0.05 0.05 0.05 0.05
(1) Per share data adjusted for stock split (Note 7).
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 INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statements on Form S-3 (No. 33-68478) and Form S-8 (No. 33-48380 and 33-67606)
of Fred's, Inc. of our report dated March 15, 2002 relating to the financial
statements, which appears in the Annual Report to Shareholders, which is
incorporated in this Annual Report on Form 10-K. We also consent to the
incorporation by reference of our report dated March 15, 2002 relating to the
financial statement schedules, which appears in this Form 10-K.
PricewaterhouseCoopers LLP
Memphis, Tennessee
April 26, 2002