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 May 3, 2003.
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934.
For the transition period from to .
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Commission file number 001-14565
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
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Indicate by check mark whether the registrant is an accelerated filer.
Yes X No
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The registrant had 25,962,897 shares of Class A voting, no par value common
stock outstanding as of June 6, 2003.
1
FRED'S, INC.
INDEX
Page No.
Part I - Financial Information
Item 1 - Financial Statements (unaudited):
Consolidated Balance Sheets as of
May 3, 2003 and February 1, 2003 3
Consolidated Statements of Income
for the Thirteen Weeks Ended May 3, 2003
and May 4, 2002 4
Consolidated Statements of Cash Flows
for the Thirteen Weeks Ended May 3, 2003
and May 4, 2002 5
Notes to Consolidated Financial Statements 6
Item 2 - Management's Discussion and
Analysis of Financial Condition and
Results of Operations 8 - 10
Item 3 - Quantitative and Qualitative Disclosure
about Market Risk 11
Item 4 - Controls and Procedures 11
Part II - Other Information 12
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Signatures 13
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Certifications
- --------------
Certification of the Chief Executive Officer Pursuant to Section 302 22
of the Sarbanes-Oxley Act of 2002
Certification of the Chief Financial Officer Pursuant to Section 302
of the Sarbanes-Oxley Act of 2002 23
2
FRED'S, INC.
CONSOLIDATED BALANCE SHEETS
(unaudited)
(in thousands, except for number of shares)
May 3, February 1,
2003 2003
----- -----
ASSETS:
Current assets:
Cash and cash equivalents $7,277 $8,209
Receivables, less allowance for doubtful
accounts of $975 ($975 at February 1, 2003) 17,702 18,400
Inventories 212,480 193,506
Other current assets 2,944 7,775
--------- --------
Total current assets 240,403 227,890
Property and equipment, at depreciated cost 118,423 110,794
Equipment under capital leases, less accumulated
amortization of $2,725 ($2,542 at February 1,2003) 2,242 2,425
Other noncurrent assets 4,745 4,739
-------- --------
Total assets $365,813 $345,848
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $71,028 $58,489
Current portion of indebtedness 36 177
Current portion of capital lease obligations 676 728
Accrued liabilities 15,100 19,484
Current deferred tax liability 10,895 10,559
Income taxes payable 2,735 ---
-------- --------
Total current liabilities 100,470 89,437
-------- --------
Long term portion of indebtedness 104 121
Deferred tax liability 1,503 676
Capital lease obligations 2,239 2,389
Other noncurrent liabilities 2,555 2,455
-------- --------
Total liabilities 106,871 95,078
-------- --------
Shareholders' equity:
Preferred stock, nonvoting, no par value,
10,000,000 shares authorized, none outstanding --- ---
Preferred stock, Series A junior participating
nonvoting, no par value, 224,594 shares
authorized, none outstanding --- ---
Common stock, Class A voting, no par value,
60,000,000 shares authorized 25,744,970
shares issued and outstanding
(25,673,259 shares at February 1, 2003) 118,279 117,209
Common stock, Class B nonvoting, no par value,
11,500,000 shares authorized, none outstanding --- ---
Retained earnings 140,676 133,589
Deferred compensation on restricted
Stock incentive plan (13) (28)
-------- --------
Total shareholders' equity 258,942 250,770
-------- --------
Total liabilities and shareholders' equity $365,813 $345,848
======== ========
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
--------------------
May 3, May 4,
2003 2002
-------- --------
Net Sales $310,689 $258,427
Cost of goods sold 222,741 189,002
-------- --------
Gross Profit 87,948 69,425
Selling, general and administrative
Expenses 75,971 60,012
-------- --------
Operating income 11,977 9,413
Interest (income) expense 97 (74)
-------- --------
Income before income taxes 11,880 9,487
Provision for income taxes 4,023 3,212
-------- --------
Net income $ 7,857 $ 6,275
======== ========
Net income per share:
Basic $ .31 $ .25
======== ========
Diluted $ .30 $ .24
======== ========
Weighed average shares outstanding:
Basic 25,637 25,358
Effect of diluted stock options 655 747
-------- --------
Diluted 26,292 26,105
======== ========
Dividends paid per common share $ .03 $ .03
======== ========
See accompanying notes to consoidated financial statements.
4
FRED'S, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(in thousands)
Thirteen Weeks Ended
May 3, May 4,
2003 2002
-------- --------
Cash flows from operating activities:
Net income $7,857 $6,275
Adjustments to reconcile net income
to net cash flows from operating activities:
Depreciation and amortization 5,698 4,958
Provision for uncollectible receivables -- 6
Lifo reserve 370 300
Deferred income taxes 594 474
Amortization of deferred compensation on
restricted stock incentive plan 15 4
Tax benefit upon exercise of stock options 384 690
Issuance of restricted shares 8 --
(Increase)decrease in assets:
Receivables 698 (373)
Inventories (19,344) (6,415)
Other assets (79) (1,367)
Increase (decrease) in liabilities:
Accounts payable and accrued liabilities 8,153 4,014
Income taxes payable 8,215 1,048
Other noncurrent liabilities 100 100
-------- --------
Net cash provided by operating activities 12,669 9,714
-------- --------
Cash flows from investing activities:
Capital expenditures (12,692) (8,896)
Asset acquisition, net of cash acquired
(primarily intangibles) (457) (298)
-------- --------
Net cash used in investing activities (13,149) (9,194)
-------- --------
Cash flows from financing activities:
Reduction of indebtedness and capital lease
obligations (360) (300)
Proceeds from exercise of options 678 545
Proceeds from sale of additional shares -- 3,537
Cash dividends paid (770) (784)
-------- --------
Net cash (used in) provided by financing activities (452) 2,998
-------- --------
Increase (decrease)in cash and cash equivalents (932) 3,518
Beginning of period cash and cash equivalents $ 8,209 15,906
-------- --------
End of period cash and cash equivalents $ 7,277 $19,424
======== ========
Supplemental disclosures of cash flow information:
Interest (received) paid $ 92 ($81)
======== ========
Income taxes paid $ --- $3,500
======== ========
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. ("We", "Our" or "Us") operates 447 discount general
merchandise stores, including 26 franchised Fred's stores, in thirteen
states in the southeastern United States. Two hundred and twenty-two of the
stores have full service pharmacies.
The accompanying unaudited consolidated financial statements 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
generally accepted accounting principles. 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 generally accepted accounting principles. The
statements should be read in conjunction with the Notes to the Consolidated
Financial Statements for the fiscal year ended February 1, 2003
incorporated into Our Annual Report on Form 10-K.
The results of operations for the thirteen-week period ended May 3,
2003 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
2003 presentation.
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NOTE 2: INVENTORIES
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Warehouse 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. Under
the retail inventory method ("RIM"), the valuation of inventories at cost
and the resulting gross margin are calculated by applying a calculated
cost-to-retail ratio to the retail value of inventories. RIM is an
averaging method that has been widely used in the retail industry due to
its practicality. Also, it is recognized that the use of the RIM will
result in valuing inventories at lower of cost or market if markdowns are
currently taken as a reduction of the retail value of inventories. Inherent
in the RIM calculation are certain significant management judgments and
estimates including, among others, initial markups, markdowns, and
shrinkage, which significantly impact the ending inventory valuation at
cost as well as resulting gross margin. These significant estimates,
coupled with the fact that the RIM is an averaging process, can, under
certain circumstances, produce distorted or inaccurate cost figures.
Management believes that our RIM provides an inventory valuation which
reasonably approximates cost and results in carrying inventory at the lower
of cost or market. For pharmacy inventories, which are $29,368 and $26,372
at May 3, 2003 and May 4, 2002, respectively, cost was determined using the
LIFO (last-in, first-out) method. The current cost of inventories exceeded
the LIFO cost by $6,508 at May 3, 2003 and $4,903 at May 4, 2002.
LIFO pharmacy inventory costs can only be determined annually when
inflation rates and inventory levels are finalized; therefore, LIFO
pharmacy inventory costs for interim financial statements are estimated.
6
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NOTE 3: INCENTIVE STOCK OPTIONS
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We account for our stock-based compensation plans using the intrinsic value
method prescribed in Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees," and related Interpretations. No
stock-based employee compensation expense is reflected in net income
because the exercise price of our incentive employee stock options equals
the market price of the underlying stock on the date of grant. The
following table illustrates the effect on net income and earnings per share
if we had applied the fair value recognition provisions of Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" (SFAS No. 123), to stock-based employee compensation.
For the Quarter Ended
May 3, 2003 May 4, 2002
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(In thousands, except per share data)
Net income $7,857 $6,275
SFAS No. 123 pro forma compensation
expense, net of income taxes (81) (118)
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SFAS No. 123 pro forma
net income $7,776 $6,157
========== ===========
Pro forma earnings per share:
Basic $ 0.30 $ 0.24
Diluted $ 0.30 $ 0.24
Earnings per share, as reported:
Basic $ 0.31 $ 0.25
Diluted $ 0.30 $ 0.24
7
Item 2:
Management's Discussion and Analysis of Financial
Condition and Results of Operations
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GENERAL
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Our business is subject to seasonal influences, but has tended to
experience less seasonal fluctuation than many other retailers due to the
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 our operations. Many of our employees are paid hourly rates related
to the federal minimum wage and, accordingly, any increase affects us. 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. We believe that maintaining adequate
operating margins through a combination of price adjustments and cost
controls, careful evaluation of occupancy needs, and efficient purchasing
practices are the most effective tools for coping with increasing costs and
expenses.
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RESULTS OF OPERATIONS
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Thirteen Weeks Ended May 3, 2003 and May 4, 2002 Net sales increased to
$310.7 million in 2003 from $258.4 million in 2002, an increase of $52.3
million or 20.2%. The increase was attributable to comparable store sales
increases of 6.8% ($16.8 million) and sales by stores not yet included as
comparable stores ($35.5 million). Sales to franchisees remained the same
as last year. The sales mix for the period was 49.2% Hardlines, 33.3%
Pharmacy, 14.8% Softlines, and 2.7% Franchise. This compares with 48.0%
Hardlines, 35.2% Pharmacy, 13.3% Softlines, and 3.5% Franchise for the same
period last year.
Gross profit increased to 28.3% of sales in 2003 compared with 26.9% of
sales in the prior-year period. Gross profit margins increased as a result
of higher initial markup in stores and the pharmacy department, product
mix, lower markdowns which were heavy in the first quarter of last year and
better control of shrinkage.
Selling, general and administrative expenses increased to $76.0 million in
2003 from $60.0 million in 2002. As a percentage of sales, expenses
increased to 24.4% of sales compared to 23.2% of sales last year. Selling,
8
general and administrative expenses increased primarily due to higher
distribution cost at the Company's Memphis distribution center related to
the opening of the new distribution center in Dublin, Georgia, as well as
higher insurance costs and additional costs associated with opening 13 more
new stores than last year.
For the first quarter of 2003 interest expense was $.1 million as compared
to interest income of $.1 million last year. The difference is primarily
due to increases in capital expenditures spending for new stores and the
Dublin, Georgia distribution center.
For the first quarter, the effective income tax rate was 33.9%, the same as
the first quarter of last year. Income taxes in the quarter benefited from
an adjustment in excess of the original estimate of $330,559 related to the
enterprise zone credits allowable for the 2002 tax year. A similar amount
will be taken ratably over the year for the 2003 credit. We anticipate the
tax rate for the remainder of the year to be in the 35% range.
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LIQUIDITY AND CAPITAL RESOURCES
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Due to the seasonality of our 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.
Cash flows provided by operating activities totaled $12.7 million during
the thirteen-week period ended May 3, 2003. Cash was primarily used to
increase inventories by approximately $19.3 million in the first quarter of
2003. This increase was primarily attributable to 33 new stores in the
first quarter of 2003. Accounts payable increased approximately $8.2
million during the first quarter of 2003.
Cash flows used in investing activities totaled $13.1 million, and
consisted primarily of capital expenditures associated with the store and
pharmacy expansion program ($7.0 million), expenditures for the new
distribution center to be constructed in Dublin, Georgia ($4.1 million) and
($1.6 million) for technology and other corporate expenditures. During the
first quarter, we opened 34 stores, closed 1 store, opened 7 pharmacies,
closed 1 pharmacy and remodeled 9 stores. We expect to open 20 to 25 stores
in the second quarter and approximately 70 to 75 stores for the year. Our
capital expenditure plan for 2003 is in the $31 million dollar range for
store and pharmacy expansion. Depreciation expense for the year is in the
$21 million dollar range.
Cash flows used in financing activities totaled $0.5 million and was used
primarily to pay dividends.
On April 3, 2000, we entered into a new Revolving Loan and Credit Agreement
(the "Agreement") with a bank to replace the May 15, 1992 Revolving Loan
and Credit Agreement, as amended. The Agreement provides us 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, we are required to maintain
specified shareholders' equity (which was $191,660,000 at May 3, 2003)and
net income levels. We are 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 March 31, 2004. There were no borrowings outstanding under the
Agreement at May 3, 2003.
On April 23, 1999, we entered into a Loan Agreement (the "Loan Agreement")
with a bank. The Loan Agreement provided us with a four-year unsecured term
9
loan of $2.3 million to finance the replacement of our 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,
we are required to maintain specified debt service levels. The Loan
Agreement was paid off during the first quarter of 2003.
We have other miscellaneous financing obligations totaling $140,000 which
relate primarily to business acquisitions. The Company's indebtedness under
miscellaneous financing matures as follows: 2003 - $36,000; 2004 - $17,000;
2005 - $18,000; 2006 - $19,000; 2007 - $21,000; and $29,000 thereafter.
We financed the construction of our Dublin, Georgia distribution center
with taxable industrial development revenue bonds issued by the City of
Dublin and County of Laurens Development Authority. We purchased 100% of
the issued bonds and intend to hold them to maturity, effectively financing
the construction with internal cash flow. We have offset the investment in
the bonds ($18,485,000) against the related liability and neither is
reflected on the consolidated balance sheet.
We believe 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.
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STOCK SPLIT
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On June 5, 2003, we announced a three-for-two stock split to be effected as
a stock dividend. The stock dividend will be distributed on July 1, 2003 to
shareholders of record on June 16, 2003.
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CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION
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Statements, other than those based on historical facts that we expect or
anticipate 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.
Our ability to achieve such results is subject to certain risks and
uncertainties, including:
o Economic and weather conditions which affect buying patterns of
our customers;
o Changes in consumer spending and our ability to anticipate buying
patterns and implement appropriate inventory strategies;
o Continued availability of capital and financing;
o Competitive factors;
o Changes in reimbursement practices for pharmaceuticals;
o Governmental regulation;
o Increases in fuel and utility rates; and
o Other factors affecting business beyond our 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 us will be realized or that they will have the
expected effects on our business or operations. Actual results, performance
or achievements can differ materially from results suggested by this
forward-looking statement because of a variety of factors. We undertake no
obligation to update any forward-looking statement to reflect events or
circumstances arising after the date on which it was made.
10
Item 3.
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QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
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We have no holdings of derivative financial or commodity instruments as of
May 3, 2003. We are exposed to financial market risks, including changes in
interest rates. All borrowings under our 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 our
income. All of our business is transacted in U.S. dollars and, accordingly,
foreign exchange rate fluctuations have never had a significant impact on
us, and they are not expected to in the foreseeable future.
Item 4.
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CONTROLS AND PROCEDURES
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Within 90 days prior to the date of this report, the Company carried out an
evaluation, under the supervision and with the participation of our Chief
Executive Officer and Chief Financial Officer, of the effectiveness of the
Company's disclosure controls and procedures (as defined in Rules
13a-14((c) and 15d-1(c) under the Securities Exchange Act of 1934). Based
on that evaluation, the Chief Executive Officer and the Chief Financial
Officer, concluded that, as of the date of their evaluation, the Company's
disclosure controls and procedures are effective in timely alerting them to
material information required to be included in the Company's periodic SEC
reports. There have been no significant changes (including corrective
actions with regard to significant deficiencies and material weaknesses) in
the Company's internal controls or in other factors that could
significantly affect internal controls subsequent to the date of their most
recent evaluation.
11
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 6. Exhibits and Reports on Form 8-K
Exhibits:
10.1 Employment agreement with Michael J. Hayes effective April
30, 2003.
10.2 Employment agreement with John D. Reier effective April 30,
2003.
99.1 Press release dated June 5, 2003, announcing the Fred's
stock split (incorporated herein by reference to Exhibit
99.1 to the Company's current report on Form 8-K dated June
5, 2003).
99.2 Certification of Chief Executive Officer pursuant to 18
U.S.C. Section 1350.
99.3 Certification of Chief Financial Officer pursuant to 18
U.S.C. Section 1350.
Reports on Form 8-K:
1) Form 8-K dated May 22, 2003 with press release dated
May 22, 2003, reporting sales and earnings for the
first quarter ended May 3, 2003, and other matters
relating to the Company's operation and financial
condition.
2) Current report on Form 8-K dated June 5, 2003 reporting
under Item 5, Other Events, information related to
announcement by Board of Directors approval of
three-for-two stock split.
12
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.
Date: June 16, 2003 /s/Michael J. Hayes
------------------------
Michael J. Hayes
Chief Executive Officer
Date: June 16, 2003 /s/Jerry A. Shore
-------------------------
Jerry A. Shore
Chief Financial Officer
13
Exhibit 10.1
EMPLOYMENT AGREEMENT
OF
MICHAEL J. HAYES
AGREEMENT, dated as of April 30, 2003 by and between FRED'S, INC., a
Tennessee corporation, with offices at 4300 New Getwell Road, Memphis, Tennessee
38118 ("Company") and MICHAEL J. HAYES, currently residing at Riverbluff
Condominiums, 355-I Riverbluff Place, Memphis, Tennessee 38103 ("Executive").
In consideration of the many years of devoted service of Executive to
Company, at nominal compensation as compared to his competence and dedication to
enhancing the value of Company to its shareholders, and the mutual covenants and
conditions herein set forth, the parties hereto and each of them agree as
follows:
1. Company hereby agrees to employ Executive to serve as its "Chief
Executive Officer" or as its "Chairman of the Board", at the discretion of
Company's Board of Directors, for a term of two (2) years commencing from and
after May 1, 2003 (the "Initial Term"). At the end of each day in the Initial
Term, the term of this Agreement shall be automatically extended for an
additional day, unless either party shall have given to the other written notice
of termination, which termination shall become effective at the end of the
Initial Term measured from and after the date of such notice.
2. Executive agrees to serve as Company's "Chief Executive Officer" during
the term of this Agreement. As such, he shall have and agrees to assume primary
responsibility (subject at all time to the control of the Board of Directors of
the Company) for matters assigned to him by the Board of Directors. In the
performance of such duties, Executive agrees to make available to Company all of
his professional and managerial knowledge and skill and such portion of his time
as may be required for the proper fulfillment of his duties. In addition, during
the term of this Agreement, Executive shall continue to serve in the aforesaid
capacity and in such other offices and capacities to which he may be appointed
or elected by the Board of Directors of Company.
3. As compensation for all of the services to be performed hereunder,
Company agrees to pay and Executive agrees to accept an annual base salary of
$250,000. The annual base salary of Executive during the term of discretion of
the Board of Directors of Company. Executive's compensation will be paid in
conformity with Company's practice for payment of its executives' compensation,
as such practice may be established or modified from time to time. Company will
make available to Executive such benefits on terms no less favorable than those
currently in effect for Executive (see Schedule A hereto) and, if better than
such current terms, such terms as are or shall be granted or made available by
Company to its other executive employees. In addition, Executive shall (i) be
considered for any bonus awards on the same basis as are other executives of
Company, and (ii) be considered for and granted qualified options and other
consideration based upon shares of Company's Common Stock on the same basis as
are other executives of Company.
4. Company shall reimburse Executive, upon the submission of receipts or
vouchers therefore, for all necessary expenses and disbursements reasonably
incurred by him for the proper performance of his duties as Chief Executive
Officer of Company. Executive, as a condition to such reimbursement, shall
submit reports of such expenses and disbursements to the chief financial officer
of Company (i) not later than one month from the date such expenses and
disbursements are incurred and determinable and (ii) together with proper
vouchers and receipts therefor.
5. (a) This Agreement shall continue unless and until terminated by either
party, (i) with or without cause, upon written notice of termination as provided
in Section 1 above, or (ii) for cause, effective upon not less than one hundred
eighty (180) days prior written notice to the other (except that such notice of
termination may be effective immediately in the case of termination (x) by
Company for acts of Executive involving a felony committed against Company or
breach of duty of loyalty or (y) by Executive).
(b) If, during any term of this Agreement, Executive shall become unable
to perform his duties by reason of illness or incapacity, then Company, may, at
its option, terminate this Agreement. In such event, the notice period shall be
not less than the applicable elimination period in any employee disability plan
of the Company in which Executive participates.
(c) If, during any term of this Agreement, Company shall terminate this
Agreement for any reason, or Executive shall terminate this Agreement, retire or
die, whether at or prior to the end of the Initial Term, than and in that event,
the sole payments to which Executive, his heirs, legatees and legal
representatives shall be entitled, except as provided in subsection (d) below as
to certain terminations hereunder, shall be payment (i) to Executive of the
compensation herein provided (i.e., base salary plus any bonus awarded to
executives of the Company for the subject fiscal year) prorated to the date of
such termination, (ii) of health and dental benefits for the entire lives of
both Executive and his spouse comparable to those provided to Executive and his
spouse at the date hereof and as improved during the term hereof (e.g.,
Executive and spouse shall not be required to pay any deductibles), and (iii) of
14
insurance premiums during Executive's entire life on all life insurance on
Executive's life which is in force and paid by Company immediately prior to the
date of such termination.
(d) In addition, in the event of any termination hereunder by either
party (other than termination by Company for cause or by Executive pursuant to
Section 1), Company shall continue, from and after the last date upon which
Executive actually renders services to Company of the nature required hereunder
on a full-time basis, for two (2) years (the "Extension Period"), to pay
Executive at the same annual base rate of compensation as Company was paying
Executive prior to the date of termination, plus any bonus received with respect
to the last complete fiscal year of the Company during the term hereof, plus a
monthly allowance of $6,000 (at the request of Executive) to defray his cost of
an office and secretarial assistance (which cost need not be documented) during
the Extension Period. The Extension Period shall be reduced by one-half in the
event Executive is terminated by Company for cause.
(e) "Cause", for purposes of this Agreement and as invoked by Company,
shall be deemed to be (i) conviction for a felony, (ii) refusal to perform the
duties of his employment, (iii) gross negligence in the performance of the
duties of his employment, or (iv) violation of his duty of loyalty to Company.
"Cause", for purposes of this Agreement and as invoked by Executive, after prior
written notice by Executive to Company and its Board of Directors at Executive's
election and in his sole discretion, shall be deemed to be (i) failure of
Company to pay the compensation required to be paid or to provide the benefits
required to be provided by Company hereunder, (ii) after any "change in control"
of Company. For purposes of this paragraph (d), "change in control" shall mean
(a) the transfer of ownership (whether directly, indirectly, beneficially or of
record) of shares in excess of twenty percent (20%) of the outstanding shares of
Common Stock of the Company by a person or group of persons (including without
limitation, a company, trust, partnership, joint venture, individual or other
entity) for the purpose of affecting control of Company or other than in the
ordinary course of trading (b) the merger or consolidation into, or sale of
assets of the Company to, another company (i.e., where the Company is not the
surviving and operating company, or where the stockholders of the Company prior
to such transaction(s), or (c) the persons who are directors of the Company as
of the date hereof cease to constitute a majority of the Board of Directors of
the Company during any 12-month period after a transaction described in (a) or
(b).
6. For a period of six (6) months from and after any termination of this
Agreement (other than by Company pursuant to Section 1, and other than by
Executive for cause) (the "Non-compete Period"), Executive shall not, directly
or indirectly, in any capacity, (i) engage in any activity in competition with
Company, whether Executive is self-employed or employed by any person or entity,
in the "dollar store" retail business, through any retail outlet(s) located
within 25 miles of any retail outlet(s) operated or franchised by Company (a
"Prohibited Activity"), or (ii) own any interest in any entity which engages in
any Prohibited Activity (unless such entity is an entity whose equity is
publicly traded and such ownership is less than 5%).
7. Except as instructed by Company's Board of Directors or as necessary in
the course of his employment hereunder, Executive covenants and agrees that he
shall not at any time during the term of this Agreement or during the year
following the termination of his employment hereunder, directly or indirectly,
use, disseminate, disclose, publish or transfer any Confidential Information to
any persons other than then current employees of the Company. As used herein,
the term "Confidential Information" shall mean all customer and correspondence
lists, reports, vendor lists, purchase or pricing information, sales or indexing
information, employee names, marketing strategies and plans, store location and
layout plans, planograms, trade secrets, know how, marketing or merchandising
information, and statistical data, arising from or relating to the business of
Company and received or developed by Executive during the term of his employment
hereunder, whether in the form of oral communications, writings, discs,
diskettes, charts, computer cards, memory or tapes, or embodied in any other
form whatsoever. Further, Executive covenants and agrees that he shall not at
any time during the term of this Agreement or during the year following the
termination of his employment hereunder, directly or indirectly, solicit, hire,
or cause to be solicited or hired by any other person or entity or employee or
agent of the Company without the prior written consent of the Company.
8. This Agreement is personal in nature and is not assignable by Executive
or by Company except that Company, its successors and assigns, including any
other entity which succeeds to its business, whether by acquisition,
reorganization, merger, consolidation or other similar event, shall be bound by
the terms hereof and shall enjoy the benefits hereof.
9. This Agreement contains the entire understanding of the parties and all
prior or contemporaneous oral or written understandings of the parties with
relation thereto are void and of no effect whatsoever. Except as herein
provided, no amendment, change or modification of any of the terms hereinabove
contained shall be binding unless set forth in writing signed by the party to be
charged. Executive acknowledges and agrees that the breach of any covenant
contained herein would cause Company irreparable damage, and that the remedy at
law for such a breach would be inadequate, and that this Agreement may be
specifically enforced. Remedies available hereunder or otherwise shall not be
exclusive, but shall be cumulative. If any one or more of the provisions
contained in this Agreement shall for any reason be held invalid, illegal or
15
unenforceable in any respect, such invalidity, illegality or unenforceability
shall not affect any other provisions of this Agreement, but it shall be
construed as if such invalid, illegal or unenforceable provision shad never been
contained herein. This Agreement has been executed and shall be performed in the
State of Tennessee, and shall be construed and interpreted in accordance with
the laws thereof. In the event it should become necessary for either party to
initiate any suit or proceeding to enforce the terms of this Agreement, the
party adjudged to be in breach shall pay all costs and expenses thereof,
including reasonable attorneys' fees (except after a change in control Company
shall pay all such costs and expenses).
10. All notices required hereunder shall be deemed to have been duly given
only if contained in writing and mailed Certified Mail, Return Receipt
Requested, to the parties at the respective addresses hereinabove set forth or
to such other address as they may have designated.
11. Executive hereby represents and warrants to Company that Executive is
under no legal impediment or restraint, whether under contract or
non-competition or otherwise, which would cause him or Company to be or become
liable to any other party for costs or damages or subject to injunction or other
equitable relief, if Executive and Company were to perform their respective
duties and exercise their respective rights under this Agreement.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date first above written.
WITNESS: FRED'S, INC.
/s/ By:/s/Roger Knox
- --------------------------- -----------------------------
ROGER KNOX, Director
WITNESS:
/s/ /s/Michael Hayes
- --------------------------- -----------------------------
MICHAEL J. HAYES, Executive
SCHEDULE A
----------
Executive shall be entitled to:
1. 8 weeks of vacation per successive 12-month period under this Agreement, in
accordance with the notice and scheduling provisions of Company policy.
2. use of a late model car of Executive's choosing, paid entirely by Company
(vehicle purchase or lease costs, fuel, maintenance, licensure, repairs,
insurance).
3. waiver on medical and dental insurance plans of all deductibles and all
pre-admittance clearance requirements.
4. payment of travel expenses for Executive's spouse when deemed appropriate by
Executive for business purposes of Company.
5. any other items permitted or required under the prior employment agreement of
Paul Baddour with Company.
16
Exhibit 10.2
EMPLOYMENT AGREEMENT
OF
JOHN D. REIER
AGREEMENT, dated as of April 30, 2003 by and between FRED'S, INC., a
Tennessee corporation, with offices at 4300 New Getwell Road, Memphis, Tennessee
38118 ("Company") and JOHN D. REIER, currently residing at 160 Ascot Park,
Memphis, Tennessee 38120 ("Executive").
In consideration of the mutual covenants and conditions herein set forth,
the parties hereto and each of them agree as follows:
1. Company hereby agrees to employ Executive to serve as its "President",
for a term of two (2) years commencing from and after May 1, 2003 (the "Initial
Term"). At the end of the Initial Term and at the end of each successive
Additional Term (defined below), the term of this Agreement shall be
automatically extended annually for an additional one (1) year term (each an
"Additional Term"), unless either party shall have given to the other written
notice of termination at least ninety (90) days prior to the end of the then
current term (which termination shall become effective at the end of the then
current term).
2. Executive agrees to serve as Company's "President" during the term of
this Agreement. As such, he shall have and agrees to assume primary
responsibility (subject at all time to the control of the Chief Executive
Officer of the Company) for matters assigned to him by the Chief Executive
Officer. In the performance of such duties, Executive agrees to make available
to Company all of his professional and managerial knowledge and skill and such
portion of his time as may be required for the proper fulfillment of his duties.
In addition, during the term of this Agreement, Executive shall continue to
serve in the aforesaid capacity and in such other offices and capacities to
which he may be appointed or elected by the Board of Directors of Company.
3. As compensation for all of the services to be performed hereunder,
Company agrees to pay and Executive agrees to accept an annual base salary of
$250,000 commencing the date of this amended Agreement. The annual base salary
of Executive during the term of this Agreement shall be reviewed annually and
shall be subject to upward adjustment from the aforesaid level at the discretion
of the Board of Directors of Company. Executive's compensation will be paid in
conformity with Company's practice for payment of its executives' compensation,
as such practice may be established or modified from time to time. Company will
make available to Executive such benefits on the same terms as are or shall be
granted or made available by Company to its other executive employees, to the
extent that Executive shall become qualified or eligible for such employee
benefits or any of them (except that Executive shall be entitled to 3 weeks of
vacation per successive 12-month period under this Agreement, in accordance with
the notice and scheduling provisions of Company policy). In addition, Executive
shall be considered for any bonus awards on the same basis as are other
executives of Company.
4. Company shall reimburse Executive, upon the submission of receipts or
vouchers therefore, for all necessary expenses and disbursements reasonably
incurred by him for the proper performance of his duties as President of
Company. Executive, as a condition to such reimbursement, shall submit reports
of such expenses and disbursements to the chief financial officer of Company (i)
not later than one month from the date such expenses and disbursements are
incurred and determinable and (ii) in a form and with such detail as will
constitute a proper record of tax deductible expenses, (iii) together with
proper vouchers and receipts therefor.
5. (a) This Agreement shall continue unless and until terminated by either
party, (i) with or without cause, upon written notice of termination as provided
in Section 1 above, or (ii) for cause, effective upon not less than ninety (90)
days prior written notice to the other (except that such notice of termination
may be effective immediately in the case of termination by Company for acts of
Executive involving moral turpitude or breach of duty of loyalty).
(b) If, during any term of this Agreement, Executive shall become unable
to perform his duties by reason of illness or incapacity, then Company, may, at
its option, terminate this Agreement. In such event, the notice period shall be
not less than the applicable elimination period in any employee disability plan
of the Company in which Executive participates.
(c) If, during any term of this Agreement, Company shall terminate this
Agreement for any reason, or Executive shall terminate this Agreement, retire or
die, whether at or prior to the end of the Initial or any additional Term, then
and in that event, the sole payments to which Executive, his heirs, legatees and
legal representatives shall be entitled, shall be payment to Executive of the
compensation herein provided (i.e., base salary) prorated to the date of such
termination, and thereafter Company shall have no further obligations or
liabilities hereunder, except as provided in subsection (d) below as to certain
terminations hereunder.
17
(d) In the event of any termination hereunder by either party (other
than termination by Company for cause or by Executive pursuant to Section 1),
Company shall continue, from and after the last date upon which Executive
actually renders services to Company of the nature required hereunder on a
full-time basis, (A) for one (1) year (the "Pay Extension Period"), to pay
Executive at the same annual base rate of compensation as Company was paying
Executive prior to the date of termination, and B) for five (5) years (the
"Medical Benefits Extension Period"), to provide to Executive and his spouse
medical benefits comparable to those provided to Executive and his spouse at the
date hereof. Provided, further that such extended pay and extended medical
benefits (i) shall not be paid or provided in the event Executive is terminated
for cause or violates Section 6 of this Agreement, and (ii) shall be reduced to
the extent that Executive received compensation or medical benefits from
alternate employment during the applicable Extension Period (and Executive
hereby covenants to use reasonable efforts to find and to accept such alternate
employment, subject to the limitation of Section 6 below, with compensation and
benefits comparable to that provided under this Agreement).
(e) "Cause", for purposes of this Agreement and as invoked by Company,
shall be deemed to be (i) conviction for a felony, (ii) refusal to perform the
duties of his employment, (iii) misconduct or negligence in the performance of
the duties of his employment, (iv) violation of his duty of loyalty to Company,
(v) violation of Section 6 of this Agreement or (vi) failure to provide the
release referred to in Section 11 in form and substance satisfactory to Company.
"Cause", for purposes of this Agreement and as invoked by Executive, shall be
deemed to be (i) failure of Company to pay the compensation required to be paid
or to provide the benefits required to be provided by Company hereunder, (ii)
beginning one (1) year after a "change in control" of Company, (x) Company's
material reduction in Executive's authority, perquisites, position, title or
responsibilities (other than such a reduction by Company for cause, because of a
temporary illness or disability or such a reduction which affects all of
Company's senior executives on a substantially equal or proportionate basis as a
result of financial results, conditions, prospects, reorganization, workout or
distressed condition of Company), or (y) the relocation of Company's primary
place of business or the relocation of Executive by Company more than 50 miles
from Company's present offices, in each and every case, after 30 days' prior
written notice by Executive to Company and its Board of Directors and Company's
failure thereafter to cure such reduction or violation within such 30 days. For
purposes of this paragraph (d) "change in control" shall mean (a) the transfer
of ownership (whether directly, indirectly, beneficially or of record) of shares
in excess of twenty percent (20%) of the outstanding shares of Common Stock of
the Company by a person or group of persons (including without limitation, a
company, trust, partnership, joint venture, individual or other entity) for the
purpose of affecting control of Company or other than in the ordinary course of
trading, (b) the merger or consolidation into, or sale of assets of the Company
to, another company (i.e., where the Company is not the surviving and operating
company, or where the stockholders of the Company prior to such transaction(s)
do not own at least fifty-one percent (51%) of the outstanding common stock of
the surviving company after such transaction(s) or (c) the persons who are
directors of the Company as of the date hereof cease to constitute a majority of
the Board of Directors of the Company during any 12-month period after a
transaction described in (a) or (b).
6. For a period of twelve (12) months from and after any termination of
this Agreement (other than by Company pursuant to Section 1, and other than by
Executive for cause) (the "Non-compete Period"), Executive shall not, directly
or indirectly, in any capacity, (i) engage in any activity in competition with
Company, whether Executive is self-employed or employed by any person or entity
(whether on a full-time or part-time basis or as a consultant or other
independent contractor) which is engaged in or plans to engage in any phase of
the discount retail sales or pharmacy businesses, through any retail outlet(s)
located or to be located within 25 miles of any retail outlet(s) operated or
franchised by Company (a "Prohibited Activity"), or (ii) own any interest in any
entity which engages in any Prohibited Activity (unless such entity is an entity
whose equity is publicly traded and such ownership is less than 5%).
7. Except as instructed by Chief Executive Officer or as necessary in the
course of his employment hereunder, Executive covenants and agrees that he shall
not at any time during the term of this Agreement or during the year following
the termination of his employment hereunder, directly or indirectly, use,
disseminate, disclose, publish or transfer any Confidential Information to any
persons other than then current employees of the Company. As used herein, the
term "Confidential Information" shall mean all customer and correspondence
lists, reports, vendor lists, purchase or pricing information, sales or indexing
information, employee names, marketing strategies and plans, store location and
layout plans, planograms, trade secrets, know how, marketing or merchandising
information, and statistical data, arising from or relating to the business of
Company and received or developed by Executive during the term of his employment
hereunder, whether in the form of oral communications, writings, discs,
diskettes, charts, computer cards, memory or tapes, or embodied in any other
form whatsoever. Further, Executive covenants and agrees that he shall not at
any time during the term of this Agreement or during the year following the
termination of his employment hereunder, directly or indirectly, solicit, hire,
or cause to be solicited or hired by any other person or entity or employee or
agent of the Company without the prior written consent of the Company.
18
8. This Agreement is personal in nature and is not assignable by Executive
or by Company except that Company, its successors and assigns, including any
other entity which succeeds to its business, whether by acquisition,
reorganization, merger, consolidation or other similar event, shall be bound by
the terms hereof and shall enjoy the benefits hereof.
9. This Agreement contains the entire understanding of the parties and all
prior or contemporaneous oral or written understandings of the parties with
relation thereto are void and of no effect whatsoever. Except as herein
provided, no amendment, change or modification of any of the terms hereinabove
contained shall be binding unless set forth in writing signed by the party to be
charged. Executive acknowledges and agrees that the breach of any covenant
contained herein would cause Company irreparable damage, and that the remedy at
law for such a breach would be inadequate, and that this Agreement may be
specifically enforced. Remedies available hereunder or otherwise shall not be
exclusive, but shall be cumulative. If any one or more of the provisions
contained in this Agreement shall for any reason be held invalid, illegal or
unenforceable in any respect, such invalidity, illegality or unenforceability
shall not affect any other provisions of this Agreement, but it shall be
construed as if such invalid, illegal or unenforceable provision had never been
contained herein. This Agreement has been executed and shall be performed in the
State of Tennessee, and shall be construed and interpreted in accordance with
the laws thereof. In the event it should become necessary for either party to
initiate any suit or proceeding to enforce the terms of this Agreement, the
party adjudged to be in breach shall pay all costs and expenses thereof,
including reasonable attorneys' fees.
10. All notices required hereunder shall be deemed to have been duly given
only if contained in writing and mailed Certified Mail, Return Receipt
Requested, to the parties at the respective addresses hereinabove set forth or
to such other address as they may have designated.
11. Executive hereby represents and warrants to Company that Executive is
under no legal impediment or restraint, whether under contract or
non-competition or otherwise, which would cause him or Company to be or become
liable to any other party for costs or damages or subject to injunction or other
equitable relief, if Executive and Company were to perform their respective
duties and exercise their respective rights under this Agreement.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date first above written.
WITNESS: FRED'S, INC.
/s/ By:/s/Michael H. Hayes
- ----------------------- --------------------------
MICHAEL J. HAYES,
Chief Executive Officer
WITNESS:
/s/ /s/John Reier
- ----------------------- --------------------------
JOHN D. REIER,
Executive
19
Certification of Chief Executive Officer
I, Michael J. Hayes, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Fred's, Inc.
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report; and
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report.
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: June 16, 2003
/s/Michael Hayes
------------------------
Michael J. Hayes
Chief Executive Officer
20
Certification of Chief Financial Officer
I, Jerry A. Shore, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Fred's, Inc.
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report; and
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report.
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: June 16, 2003
/s/Jerry Shore
------------------------------
Jerry A. Shore
Executive Vice President and
Chief Financial Officer
21
Exhibit 99.1
Certification of Chief Executive Officer
Pursuant to Section 18 U.S.C. Section 1350
In connection with this quarterly report on Form 10-Q of Fred's, Inc. I, Michael
J. Hayes, Chief Executive Officer of Fred's, Inc., certify, pursuant to Section
18 U.S.C. Section 1350, that:
2. The report fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
3. The information contained in this report fairly presents, in all
material respects, the financial condition and results of operations
of Fred's, Inc.
Date: June 16, 2003
/s/Michael Hayes
--------------------------
Michael J. Hayes
Chief Executive Officer
22
Exhibit 99.2
Certification of Chief Financial Officer
Pursuant to Section 18 U.S.C. Section 1350
In connection with this quarterly report on Form 10-Q of Fred's, Inc. I, Jerry
A. Shore, Executive Vice President and Chief Financial Officer of Fred's, Inc.,
certify, pursuant to Section 18 U.S.C. Section 1350, that:
1. The report fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
2. The information contained in this report fairly presents, in all
material respects, the financial condition and results of operations
of Fred's, Inc.
Date: June 16, 2003
/s/Jerry Shore
----------------------------------
Jerry A. Shore
Executive Vice President and Chief
Financial Officer
23