Table of Contents PART I. - -------------------------------------------------------------------------------- FINANCIAL INFORMATION Item 1. Financial Statements Item 2. Management's Discussion and Analysis of Financial Condition and Item 3. Quantitative and Qualitative Disclosures About Market Risk Item 4. Controls and Procedures PART II. - -------------------------------------------------------------------------------- OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K SIGNATURES EXHIBIT INDEX EX-31.1 EX-31.2 EX-32 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 1, 2004. OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. For the transition period from to . --------------- --------------- Commission file number 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 . ----------- ----------- Indicate by check mark whether the registrant is an accelerated filer. Yes X No ----------- ----------- The registrant had 39,207,444 shares of Class A voting, no par value common stock outstanding as of June 4, 2004. FRED'S, INC. ------------ INDEX ----- Page No. - -------------------------------------------------------------------------------- Part I - Financial Information - ------------------------------ Item 1 - Financial Statements (unaudited): Consolidated Balance Sheets as of May 1, 2004 and January 31, 2004 3 Consolidated Statements of Income for the Thirteen Weeks Ended May 1, 2004 and May 3, 2003 4 Consolidated Statements of Cash Flows for the Thirteen Weeks Ended May 1, 2004 and May 3, 2003 5 Notes to Consolidated Financial Statements 6 - 8 Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations 9 - 11 Item 3 - Quantitative and Qualitative Disclosure about Market Risk 11 Item 4 - Controls and Procedures 11 Part II - Other Information 12 - --------------------------- Item 6 - Exhibits and Reports on Form 8-K Signatures 13 - ---------- FRED'S, INC. CONSOLIDATED BALANCE SHEETS (unaudited) (in thousands, except for number of shares) May 1, January 31, 2004 2004 ---- ---- ASSETS: - ------- Current assets: Cash and cash equivalents $4,573 $8,209 Receivables, less allowance for doubtful accounts of $703 ($1,437 at January 31, 2004) 21,086 23,931 Inventories 263,689 239,748 Other current assets 5,284 4,094 -------- -------- Total current assets 294,632 272,514 Property and equipment, at depreciated cost 137,614 135,433 Equipment under capital leases, less accumulated amortization of $3,312 ($3,169 at January 31,2004) 1,655 1,798 Other noncurrent assets 4,078 4,005 -------- ------ Total assets $437,979 $413,750 ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY - ------------------------------------ Current liabilities: Accounts payable $75,962 $74,799 Current portion of indebtedness 18 18 Current portion of capital lease obligations 689 725 Accrued liabilities 16,595 19,113 Current deferred tax liability 11,855 11,487 Income taxes payable 2,836 930 ------- ------- Total current liabilities 107,955 107,072 ======= ======= Long term portion of indebtedness 21,660 5,603 Deferred tax liability 6,539 6,335 Capital lease obligations 1,543 1,686 Other noncurrent liabilities 2,507 2,441 ------- ----- Total liabilities 140,204 123,137 ------- ------- 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 39,167,627 shares issued and outstanding (39,105,639 shares at January 31, 2004) 126,950 126,430 Common stock, Class B nonvoting, no par value, 11,500,000 shares authorized, none outstanding --- --- Retained earnings 170,825 164,183 ------- ------- Total shareholders' equity 297,775 290,613 ------- ------- Total liabilities and shareholders' equity $437,979 $413,750 ======== ======== See accompanying notes to consolidated financial statements. FRED'S, INC. CONSOLIDATED STATEMENTS OF INCOME (unaudited) (in thousands, except per share amounts) Thirteen Weeks Ended -------------------- May 1, May 3, 2004 2003 -------- -------- Net Sales $341,486 $310,689 Cost of goods sold 244,692 222,741 ------- ------- Gross Profit 96,794 87,948 Selling, general and administrative Expenses 85,311 75,971 ------ ------ Operating income 11,483 11,977 Interest expense 62 97 ---- ---- Income before income taxes 11,421 11,880 Provision for income taxes 3,997 4,023 ----- ----- Net income $7,424 $7,857 ====== ====== Net income per share: Basic $ .19 $ .20 ===== ===== Diluted $ .19 $ .20 ===== ===== Weighed average shares outstanding: Basic 39,060 38,456 Effect of diluted stock options 646 982 --- --- Diluted 39,706 39,438 ====== ====== Dividends paid per common share $.02 $.02 ==== ==== See accompanying notes to consolidated financial statements. FRED'S, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited) (in thousands) Thirteen Weeks Ended -------------------- May 1, May 3, 2004 2003 ---- ---- Cash flows from operating activities: Net income $7,424 $7,857 Adjustments to reconcile net income to net cash flows from operating activities: Depreciation and amortization 6,529 5,698 Lifo reserve 367 370 Deferred income taxes 572 594 Amortization of deferred compensation on restricted stock incentive plan -- 15 Tax benefit upon exercise of stock options 121 384 Issuance of restricted shares -- 8 (Increase)decrease in assets: Receivables 2,845 698 Inventories (24,308) (19,344) Other assets (1,190) (79) Increase (decrease) in liabilities: Accounts payable and accrued liabilities (1,355) 8,153 Income taxes payable 1,906 8,215 Other noncurrent liabilities 66 100 -------- ------- Net cash (used in) provided by operating activities (7,023) 12,669 -------- ------- Cash flows from investing activities: Capital expenditures (8,165) (12,692) Asset acquisition, net of cash acquired (primarily intangibles) (475) (457) ----- ----- Net cash used in investing activities (8,640) (13,149) ------- -------- Cash flows from financing activities: Reduction of indebtedness and capital lease obligations (183) (360) Proceeds from revolving line of credit, net of payments 16,061 --- Proceeds from exercise of options 399 678 Cash dividends paid (782) (770) ----- ----- Net cash provided by (used in) financing activities 15,495 (452) ------- ------ Decrease in cash and cash equivalents (168) (932) Beginning of period cash and cash equivalents 4,741 8,209 ------- ------ End of period cash and cash equivalents $4,573 $7,277 ======== ======= Supplemental disclosures of cash flow information: Interest paid $ 62 $92 ===== ==== Income taxes paid $1,400 $--- ======= ===== See accompanying notes to consolidated financial statements. FRED'S, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ------------------------------------------ - -------------------------------------------------------------------------------- NOTE 1: BASIS OF PRESENTATION - -------------------------------------------------------------------------------- Fred's, Inc. ("We", "Our" or "Us") operates 534 discount general merchandise stores, including 26 franchised Fred's stores, in fourteen states in the southeastern United States. Two hundred and forty-three 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 January 31, 2004 incorporated into Our Annual Report on Form 10-K. The results of operations for the thirteen-week period ended May 1, 2004 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 2004 presentation. - -------------------------------------------------------------------------------- NOTE 2: INVENTORIES - -------------------------------------------------------------------------------- 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 $40.7 million and $29.4 million at May 1, 2004 and May 3, 2003, respectively, cost was determined using the LIFO (last-in, first-out) method. The current cost of inventories exceeded the LIFO cost by $8.1 million at May 1, 2004 and $6.5 million at May 3, 2003. 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. - -------------------------------------------------------------------------------- NOTE 3: INCENTIVE STOCK OPTIONS - -------------------------------------------------------------------------------- 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 1, 2004 May 3, 2003 ----------- ----------- (In thousands, except per share data) Net income $ 7,424 $ 7,857 SFAS No. 123 pro forma compensation expense, net of income taxes (164) (81) ----- ------- SFAS No. 123 pro forma net income $ 7,260 $ 7,776 ============ ============ Pro forma earnings per share: Basic $ 0.19 $ 0.20 Diluted $ 0.18 $ 0.20 Earnings per share, as reported: Basic $ 0.19 $ 0.20 Diluted $ 0.19 $ 0.20 - -------------------------------------------------------------------------------- NOTE 4: CHANGE IN ESTIMATE - INVENTORY SHRINKAGE - -------------------------------------------------------------------------------- During the quarter we adopted a change in methodology for estimating shrinkage, as recommended by our external auditors to attain a more accurate estimate of the shrink accrual. This change increased net income by approximately $.9 million and increased basic earnings per share by $.02 and diluted earnings per share by $.03. Item 2: Management's Discussion and Analysis of Financial Condition and Results of Operations - -------------------------------------------------------------------------------- GENERAL - -------------------------------------------------------------------------------- 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. - -------------------------------------------------------------------------------- RESULTS OF OPERATIONS - -------------------------------------------------------------------------------- Thirteen Weeks Ended May 1, 2004 and May 3, 2003 - ------------------------------------------------ Net sales increased to $341.5 million in 2004 from $310.7 million in 2003, an increase of $30.8 million or 9.9%. The increase was attributable to comparable store sales increases of 2.7% ($8.0 million) and sales by stores not yet included as comparable stores ($22.8 million). Sales to franchisees remained the same as last year. The sales mix for the period was 49.1% Hardlines, 33.7% Pharmacy, 14.6% Softlines, and 2.6% Franchise. This compares with 49.2% Hardlines, 33.3% Pharmacy, 14.8% Softlines, and 2.7% Franchise for the same period last year. Gross profit for the first quarter remained at 28.3% of sales, the same as in the prior-year period. Gross profit margins during the quarter were affected by a change in methodology for estimating shrinkage, as recommended by our external auditors to attain a more accurate estimate of the shrink accrual. This change increased gross margin during the quarter by approximately $1.4 million. The pharmacy margin decreased in the quarter due to changes in third party reimbursement amounts. Selling, general and administrative expenses increased to $85.3 million in 2004 from $76.0 million in 2003. As a percentage of sales, expenses increased to 25.0% of sales compared to 24.5% of sales last year. Selling, general and administrative expenses increased primarily due to the de-leverage of store labor cost as a percent of sales. In the quarter, distribution cost as a percentage of general merchandise sales improved 40 basis over the same quarter last year. For the first quarter of 2004 interest expense was less than $.1 million, the same as in the first quarter of last year. For the first quarter, the effective income tax rate was 35.0%, as compared to 33.9% in the first quarter of last year. The income tax rate is higher than last year due to state tax credits that were earned last year that resulted in the rate reduction. We anticipate the tax rate for the remainder of the year to be in the 35% range. - -------------------------------------------------------------------------------- LIQUIDITY AND CAPITAL RESOURCES - -------------------------------------------------------------------------------- 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 used by operating activities totaled $7.0 million during the thirteen-week period ended May 1, 2004. Cash was primarily used to increase inventories by approximately $24.3 million in the first quarter of 2004. This increase was primarily attributable to 21 new stores and 14 remodeled stores in the first quarter of 2004. Cash flows used in investing activities totaled $8.6 million, and consisted primarily of capital expenditures associated with the store and pharmacy expansion program ($6.3 million) and for technology and other corporate expenditures ($1.8 million). During the first quarter, we opened 21 stores, closed 1 store, opened 7 pharmacies, closed 1 pharmacy and remodeled 14 stores. We expect to open 20 to 25 stores in the second quarter and approximately 80 to 100 stores for the year. In 2004, the Company is planning capital expenditures totaling approximately $41.6 million. Expenditures are planned totaling approximately $31.1 million for upgrades, remodels, or new stores and pharmacies; $6.9 million for technology upgrades, distribution center equipment and capital maintenance; and $3.6 million for the acquisition of customer lists and other pharmacy related items. Depreciation expense for the year will be approximately $28 million. Cash flows provided by financing activities totaled $15.5 million and included $16.1 million of borrowings under the Company's revolver for inventory needs. On July 31, 2003, we entered into the third loan modification agreement (the "Agreement") to modify the April 3, 2000 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 $251,389,000 at May 1, 2004) and net income levels. We are required to pay a commitment fee to the bank at a rate per annum equal to .15% on the unutilized portion of the revolving line commitment over the term of the Agreement. The term of the Agreement extends to July 31, 2006. There were $21.6 million in borrowings outstanding at May 1, 2004. 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. - -------------------------------------------------------------------------------- CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION - -------------------------------------------------------------------------------- Other than statements based on historical facts, many of the matters discussed in this Form 10-Q relate to events which we expect or anticipate may occur in the future. Such statements are defined as "forward-looking statements" under the Private Securities Litigation Reform Act of 1995 (the "Reform Act"), 15 U.S.C.A. Sections 77z-2 and 78u-5 (Supp. 1996). The Reform Act created a safe harbor to protect companies from securities law liability in connection with forward-looking statements. Fred's Inc. ("Fred's" or the "Company") intends to qualify both its written and oral forward-looking statements for protection under the Reform Act and any other similar safe harbor provisions. The words "believe", "anticipate", "project", "plan", "expect", "estimate", "objective", "forecast", "goal", "intend", "will likely result", or "will continue" and similar expressions generally identify forward-looking statements. All forward-looking statements are inherently uncertain, and concern matters that involve risks and other factors which may cause the actual performance of the Company to differ materially from the performance expressed or implied by these statements. Therefore, forward-looking statements should be evaluated in the context of these uncertainties and risks, including but not limited to: - Economic and weather conditions which affect buying patterns of our customers and supply chain efficiency; - Changes in consumer spending and our ability to anticipate buying patterns and implement appropriate inventory strategies; - Continued availability of capital and financing; - Competitive factors; - Changes in reimbursement practices for pharmaceuticals; - Governmental regulation; - Increases in fuel and utility rates; - Other factors affecting business beyond our control. Consequently, all forward-looking statements are qualified by this cautionary statement. We undertake no obligation to update any forward-looking statement to reflect events or circumstances arising after the date on which it was made. Item 3. - -------------------------------------------------------------------------------- QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK - -------------------------------------------------------------------------------- We have no holdings of derivative financial or commodity instruments as of May 1, 2004. 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. - -------------------------------------------------------------------------------- CONTROLS AND PROCEDURES - -------------------------------------------------------------------------------- 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. PART II. OTHER INFORMATION Item 1. Legal Proceedings Not Applicable. Item 2. Changes in Securities Not Applicable. Item 3. Defaults Upon Senior Securities Not Applicable. Item 4. Submission of Matters to a Vote of Securities Holders Not Applicable. Item 5. Other Information Not Applicable. Item 6. Exhibits and Reports on Form 8-K Exhibits: 31.1 Certification of Chief Executive Officer. 31.2 Certification of Chief Financial Officer. 32.0 Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350. Reports on Form 8-K: 1) Form 8-K dated February 5, 2004 with press release dated February 5, 2004, reporting its sales for the four-week month of January, the fiscal fourth quarter, and the full fiscal year ended January 31, 2004. 2) Form 8-K dated March 11, 2004 with press release dated March 11, 2004, reporting its quarterly earnings results for its fourth quarter and full fiscal year ended January 31, 2004. 3) Form 8-K dated April 26, 2004 with press release dated April 26, 2004, reporting that it is revising its earnings outlook for 2004. 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 10, 2004 /s/ Michael J. Hayes - -------------------- --------------------------------- Michael J. Hayes Chief Executive Officer Date: June 10, 2004 /s/ Jerry A. Shore - -------------------- --------------------------------- Jerry A. Shore Chief Financial Officer 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. /s/ Michael J. Hayes ------------------------ Michael J. Hayes Date: June 10, 2004 Chief Executive Officer - -------------------- /s/ Jerry A. Shore ------------------------ Jerry A. Shore Date: June 10, 2004 Chief Financial Officer - ------------------- Exhibit 31.1 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 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 report; 3. Based on my knowledge, the financial statements, and other financial information included in this 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 report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designated under our supervision, 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 report is being prepared; b) Designated such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors: a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: June 10, 2004 /s/ Michael J. Hayes ------------------------------- Michael J. Hayes Chief Executive Officer Exhibit 31.2 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 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 report; 3. Based on my knowledge, the financial statements, and other financial information included in 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 report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designated under our supervision, 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 report is being prepared; b) Designated such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d) Disclosed in this report any changes in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors: a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: June 10, 2004 /s/ Jerry A. Shore ------------------------------------ Jerry A. Shore Executive Vice President and Chief Financial Officer Exhibit 32 Certification of Chief Executive Officer AND 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. each of the undersigned, Michael J. Hayes and Jerry A. Shore, certifies, 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 10, 2004 /s/ Michael J. Hayes ----------------------------------- Michael J. Hayes Chief Executive Officer /s/ Jerry A. Shore ----------------------------------- Jerry A. Shore Executive Vice President and Chief Financial Officer