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.
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OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
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 July 31, 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 39,292,363 shares of Class A voting, no par value common
stock outstanding as of September 3, 2004.
1
FRED'S, INC.
INDEX
Page No.
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Part I - Financial Information
- ------------------------------
Item 1 - Financial Statements (unaudited):
Condensed Consolidated Balance Sheets as of
July 31, 2004 and January 31, 2004 3
Condensed Consolidated Statements of Income
for the Thirteen Weeks Ended July 31, 2004
and August 2, 2003 and the Twenty-six Weeks
Ended July 31, 2004 and August 2, 2003 4
Condensed Consolidated Statements of Cash Flows
for the Twenty-six Weeks Ended July 31, 2004
and August 2, 2003 5
Notes to Condensed Consolidated Financial Statements 6 - 7
Item 2 - Management's Discussion and
Analysis of Financial Condition and
Results of Operations 8 - 11
Item 3 - Quantitative and Qualitative Disclosure
about Market Risk 11
Item 4 - Controls and Procedures 11
Part II - Other Information 12 - 13
- ---------------------------
Item 4 - Submission of Matters to a Vote of Securities Holders
Item 6 - Exhibits and Reports on Form 8-K
Signatures 14
- ----------
Exhibit - 31.1
Exhibit - 31.2
Exhibit - 32
2
FRED'S, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except for number of shares)
July 31, January 31,
2004 2004
---- ----
ASSETS: (unaudited)
- -------
Current assets:
Cash and cash equivalents $5,264 $4,741
Receivables, less allowance for doubtful
accounts of $703 ($1,437 at January 31, 2004) 20,362 23,931
Inventories 270,767 239,748
Other current assets 4,711 4,094
------------ ------------
Total current assets 301,104 272,514
Property and equipment, at depreciated cost 142,266 135,433
Equipment under capital leases, less accumulated
amortization of $3,456 ($3,169 at January 31,2004) 1,511 1,798
Other noncurrent assets 4,410 4,005
---------- ----------
Total assets $449,291 $413,750
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------
Current liabilities:
Accounts payable $63,089 $74,799
Current portion of indebtedness 36 18
Current portion of capital lease obligations 675 725
Accrued expenses and other 22,631 19,113
Current deferred income tax liability 12,219 11,487
Income taxes payable 2,984 930
------- --------
Total current liabilities 101,634 107,072
------- --------
Long term portion of indebtedness 35,365 5,603
Deferred income tax liability 7,478 6,335
Capital lease obligations 1,340 1,686
Other noncurrent liabilities 2,607 2,441
------ ------
Total liabilities 148,424 123,137
------- -------
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 39,283,486
shares issued and outstanding
(39,105,639 shares at January 31, 2004) 127,815 126,430
Common stock, Class B nonvoting, no par value,
11,500,000 shares authorized, none outstanding --- ---
Retained earnings 173,135 164,183
Deferred compensation on restricted stock incentive plan (83) --
------- ---------
Total shareholders' equity 300,867 290,613
------- ---------
Total liabilities and shareholders' equity $449,291 $413,750
======== ========
See accompanying notes to condensed consolidated financial statements.
3
FRED'S, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
(in thousands, except per share amounts)
Thirteen Weeks Ended Twenty-Six Weeks Ended
July 31, August 2, July 31, August 2,
2004 2003 2004 2003
---------- -------- --------- --------
Net sales $340,850 $302,270 $682,336 $612,959
Cost of goods sold 246,880 217,326 491,572 440,067
------- ------- ------- -------
Gross profit 93,970 84,944 190,764 172,892
Selling, general and
administrative expenses 88,990 78,259 174,301 154,230
------- ------- ------- -------
Operating income 4,980 6,685 16,463 18,662
Interest expense,net 220 100 282 197
----- ----- ------ -----
Income before income taxes 4,760 6,585 16,181 18,465
Provision for income taxes 1,666 2,200 5,663 6,223
------ ------ ------ ------
Net income $ 3,094 $ 4,385 $ 10,518 $ 12,242
======== ======== ======== ========
Net income per share
Basic $ .08 $ .11 $ .27 $ .32
====== ======== ======== ========
Diluted $ .08 $ .11 $ .27 $ .31
====== ======== ======== ========
Weighted average shares outstanding
Basic 39,110 38,695 39,085 38,569
Effect of dilutive stock options 410 815 498 759
------ ----- ---- -----
Diluted 39,520 39,510 39,583 39,328
====== ====== ====== ======
Dividends per common share $ .02 $ .02 $ .02 $ .02
====== ====== ====== ======
See accompanying notes to condensed consolidated financial statements.
4
FRED'S, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(in thousands)
Twenty-six Weeks Ended
----------------------
July 31, August 2,
2004 2003
---- ----
Cash flows from operating activities:
Net income $10,518 $12,242
Adjustments to reconcile net income
to net cash flows from operating activities:
Depreciation and amortization 13,075 12,124
Lifo reserve provision 1,174 670
Deferred income tax provision 1,875 7,366
Amortization of deferred compensation on
restricted stock incentive plan 42 28
Tax benefit upon exercise of stock options 335 1,066
(Increase)decrease in assets:
Receivables 3,569 2,433
Inventories (32,193) (25,934)
Other assets (617) (1,287)
Increase (decrease) in liabilities:
Accounts payable and accrued expenses (8,190) (5,807)
Income taxes payable 2,054 2,962
Other noncurrent liabilities 166 200
-------- -------
Net cash (used in) provided by operating activities (8,192) 6,063
-------- -------
Cash flows from investing activities:
Capital expenditures (18,792) (24,879)
Asset acquisition, net of cash acquired
(primarily intangibles) (1,236) (468)
-------- --------
Net cash used in investing activities (20,028) (25,347)
-------- --------
Cash flows from financing activities:
Reduction of indebtedness and capital lease obligations (406) (551)
Proceeds from revolving line of credit, net of payments 29,790 8,397
Proceeds from exercise of options 925 1,531
Proceeds from sale of additional shares --- 5,464
Cash dividends paid (1,566) (1,564)
------- -------
Net cash provided by financing activities 28,743 13,277
------- -------
Increase (decrease) in cash and cash equivalents 523 (6,007)
Beginning of period cash and cash equivalents 4,741 8,209
------- -------
End of period cash and cash equivalents $5,264 $2,202
====== =======
Supplemental disclosures of cash flow information:
Interest paid $234 $192
==== ====
Income taxes paid $1,400 $---
====== ====
See accompanying notes to condensed consolidated financial statements.
5
FRED'S, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
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NOTE 1: BASIS OF PRESENTATION
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Fred's, Inc. ("We", "Our" or "Us") operates 559 discount general
merchandise stores, including 25 franchised Fred's stores, in fourteen states in
the southeastern United States. Two hundred and fifty 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 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 twenty-six week period ended July 31,
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.
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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 $33.4 million and $33.1 million at July 31, 2004 and January 31, 2004,
respectively, cost was determined using the LIFO (last-in, first-out) method.
The current cost of inventories exceeded the LIFO cost by $9.0 million at July
31, 2004 and $7.8 million at January 31, 2004.
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
- --------------------------------------------------------------------------------
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.
Thirteen Weeks Ended Twenty-Six Weeks Ended
July 31, August 2, July 31, August 2,
2004 2003 2004 2003
---- ---- ---- ----
(Amounts in thousands, except per share data)
---------------------------------------------
Net income, as reported $3,094 $4,385 $10,518 $12,242
SFAS No. 123 pro forma
compensation expense,
net of income taxes (179) (432) (343) (513)
----- ----- ----- -----
SFAS No. 123 pro forma
Net income $ 2,915 $ 3,953 $ 10,175 $ 11,729
======= ======= ======== ========
Earnings per share, as reported:
Basic $ 0.08 $ 0.11 $ .27 $ .32
====== ====== ===== =====
Diluted $ 0.08 $ 0.11 $ .27 $ .31
====== ====== ===== =====
Pro forma earnings per share:
Basic $ 0.07 $ 0.10 $ .26 $ .30
====== ====== ===== =====
Diluted $ 0.07 $ 0.10 $ .26 $ .30
====== ====== ===== =====
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NOTE 4: CHANGE IN ESTIMATE - INVENTORY SHRINKAGE
- --------------------------------------------------------------------------------
During the first quarter we adopted a change in methodology for estimating
shrinkage to attain a more accurate estimate of the shrink accrual. This change
decreased net income during the quarter by approximately $0.2 million and
increased net income year to date by approximately $0.7 million.
7
Item 2:
Management's Discussion and Analysis of Financial
Condition and Results of Operations
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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. Our fiscal 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
- --------------------------------------------------------------------------------
Thirteen Weeks Ended July 31, 2004 and August 2, 2003
- -----------------------------------------------------
Net sales increased to $340.9 million in 2004 from $302.3 million in 2003, an
increase of $38.6 million or 12.8%. The increase was attributable to comparable
store sales increases of 4.2% ($11.6 million) and sales by stores not yet
included as comparable stores ($27.3 million). Sales to franchisees decreased
$.3 million in 2004. The sales mix for the period was 50.8% Hardlines, 33.4%
Pharmacy, 13.5% Softlines, and 2.3% Franchise. This compares with 50.2%
Hardlines, 33.2% Pharmacy, 13.9% Softlines, and 2.7% Franchise for the same
period last year. During the quarter, 28 new stores and 3 new pharmacies were
opened and there were two store closings.
Gross profit decreased to 27.6% of sales in 2004 compared with 28.1% of sales in
the prior-year period. Gross profit margin decreased as a result of sales mix
toward more basic and consumable products, higher markdowns to reduce
inventories, increased freight costs and an increase in the LIFO inventory
calculation on pharmacy inventories.
Selling, general and administrative expenses increased to $89.0 million in 2004
from $78.3 million in 2003. As a percentage of sales, expenses increased to
26.1% of sales compared to 25.9% of sales last year. The increase in expenses is
primarily due to increases in store and pharmacy expenses as a percent of sales
offset by productivity gains in the distribution centers. The distribution
productivity improved 66 basis points as a percent of store sales in the quarter
despite increases in fuel cost on outbound shipments.
During the second quarter of 2004 interest expense, net increased by $0.1
million when compared to 2003, reflecting additional borrowings during the
quarter for the store growth program and inventory purchases.
For the second quarter of 2004, the effective income tax rate was 35.0%,
compared with 33.4% for last year. The income tax rate last year benefited from
federal credits that became available in 2003 and from higher pretax
8
operating margins resulting in a decrease in the valuation allowance taken
against net operating loss carry forwards.
Twenty-six Weeks Ended July 31, 2004 and August 2, 2003
- -------------------------------------------------------
Net sales increased to $682.3 million in 2004 from $613.0 million in 2003, an
increase of $69.3 million or 11.3%. The increase was attributable to comparable
store sales increases of 3.2% ($15.6 million) and sales by stores not yet
included as comparable stores ($53.8 million). Sales to franchisees decreased
$0.1 million in 2004. The sales mix for the period was 49.9% Hardlines, 33.5%
Pharmacy, 14.1% Softlines, and 2.5% Franchise. This compares with 49.7%
Hardlines, 33.2% Pharmacy, 14.4% Softlines, and 2.7% Franchise for the same
period last year. For the year to date period we opened 49 new stores and 10 new
pharmacies opened and we closed three stores and one pharmacy.
Gross profit decreased to 28.0% of sales in 2004 compared with 28.2% of sales in
the prior-year period. Gross profit margins decreased as a result of sales mix
toward more basic and consumable products, higher markdowns to reduce
inventories, increased freight costs and an increase in the LIFO inventory
calculation on pharmacy inventories. During the first quarter we adopted a
change in methodology for estimating shrinkage to attain a more accurate
estimate of the shrink accrual. This change increased net income year to date by
approximately $0.7 million.
Selling, general and administrative expenses increased to $174.3 million in 2004
from $154.2 million in 2003. As a percentage of sales, expenses increased to
25.5% of sales compared to 25.2% of sales last year. The increase is primarily
due to increases in store and pharmacy expenses as a percent of sales offset by
productivity gains in the distribution centers.
For the first six months of 2004, we incurred interest expense, net of $0.3
million as compared to interest expense, net of $0.2 million last year. The
difference is primarily resulting from increased borrowing related to inventory
purchases and new store growth.
For the first six months of 2003, the effective income tax rate was 35.0%,
compared with 33.7% for last year. The income tax rate last year benefited from
federal credits that became available in 2003 and from higher pretax operating
margins resulting in a decrease in the valuation allowance taken against net
operating loss carry forwards. We anticipate the tax rate for the balance of the
year to remain 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 in operating activities totaled $8.2 million during the
twenty-six week period ended July 31, 2004. Cash was primarily used to increase
inventories by approximately $32.2 million in the first six months of 2004. This
increase was primarily attributable to 49 new stores and 10 new pharmacies in
the first six months of 2004.
Cash flows used in investing activities totaled $20.0 million, and consisted
primarily of capital expenditures associated with the store and pharmacy
expansion program ($14.9 million) and for technology and other corporate
expenditures ($5.1 million). During the first six months, we opened 49 stores,
closed 3 stores, opened 10 pharmacies, closed 1 pharmacy and remodeled 26
stores. We expect to open 20 to 25 stores in the third quarter and approximately
80 to 90 stores for the year. In 2004, the Company is planning capital
9
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. Capital expenditures in 2003 totaled $48.0 million
and depreciation expense was $25.7 million.
Cash flows provided by financing activities totaled $28.7 million and included
$29.8 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 $252,936,000
at July 31, 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 $35.3 million in borrowings
outstanding at July 31, 2004 and $5.5 million in borrowings outstanding at
January 31, 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.
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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:
o Economic and weather conditions which affect buying patterns of our
customers and supply chain efficiency;
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;
10
o Changes in reimbursement practices for pharmaceuticals;
o Governmental regulation;
o Increases in fuel and utility rates;
o 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.
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QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
- --------------------------------------------------------------------------------
We have no holdings of derivative financial or commodity instruments as of July
31, 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
- --------------------------------------------------------------------------------
As of the end of the period covered by 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-15(e)
under the Securities Exchange Act of 1934, as amended (the "Exchange Act")).
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. Consistent with the suggestion of the Securities and Exchange
Commission, the Company has formed a Disclosure Committee consisting of key
Company personnel designed to review the accuracy and completeness of all
disclosures made by the Company. Although during this fiscal year the Company
has instituted various changes to enhance its internal controls over financial
reporting, there have been no changes during the quarter ended July 31, 2004 in
the Company's internal control over financial reporting that have materially
affected, or are reasonably likely to materially affect, the Company's internal
control over financial reporting.
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
The Annual Meeting of the Shareholders of Fred's, Inc. was held
on June 16, 2004. Michael J. Hayes, John R. Eisenman, Roger T. Knox,
John D. Reier, and Thomas H. Tashjian were elected to continue as
directors of the Company. The shareholders also ratified the
appointment of Ernst & Young LLP as independent public accountants for
the fiscal year ending January 29, 2005 (see item 6) and the
shareholders also approved the 2004 Employee Stock Purchase Plan.
The results of the voting were as follows:
Abstain/
For Against Withheld Broker Non-Vote
--- ------- -------- ---------------
Election of Directors:
Michael J. Hayes 32,260,715 3,698,808 3,208,104
John R. Eisenman 28,913,284 7,046,239 3,208,104
Roger T. Knox 28,912,553 7,046,970 3,208,104
John D. Reier 29,515,140 6,444,383 3,208,104
Thomas H. Tashjian 31,382,806 4,576,717 3,208,104
Appointment of
Ernst & Young LLP 29,737,480 6,222,041 3,208,106
Approval of 2004 Employee
Stock Purchase Plan 21,547,226 8,251,710 9,368,691
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 May 20, 2004 with press release dated
May 20, 2004, reporting its quarterly earnings result for
its first quarter ended May 1, 2004.
2) Form 8-K dated June 8, 2004 reporting Item 5 - Other Events
dated June 8, 2004, reporting form of revised section 4 of
the Fred's Inc. 2004 Employee Stock Purchase plan.
12
3) Form 8-K dated July 9, 2004 reporting item 4 - Changes in
Registrant's Certifying Accountant dated July 1, 2004,
reporting a change in certifying accountant.
4) Form 8-K/A dated July 30, 2004 reporting item 4 - Changes in
Registrant's Certifying Accountant dated July 1, 2004,
reporting a change in certifying accountant.
13
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: September 8, 2004 Chief Executive Officer
- ------------------------
/s/Jerry A. Shore
------------------------------------
Jerry A. Shore
Date: September 8, 2004 Chief Financial Officer
- ------------------------
14
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: September 8, 2004 /s/ Michael J. Hayes
-----------------------------
Michael J. Hayes
Chief Executive Officer
15
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: September 8, 2004 /s/ Jerry A. Shore
-------------------------------
Jerry A. Shore
Executive Vice President and
Chief Financial Officer
16
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: September 8, 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
17