SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended February 3, 1996
Commission File Number 000-19288
FRED'S, INC.
(Exact Name of Registrant as Specified in its Charter)
TENNESSEE 62-0634010
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification Number)
4300 New Getwell Road
MEMPHIS, TENNESSEE 38118
(Address of Principal Executive Offices)
Registrant's telephone number, including area code (901) 365-8880
Securities Registered Pursuant to Section 12(b) of the Act:
Title of Each Class Name of Exchange on
Which Registered
Class A Common Stock, no par value NASDAQ Stock Market
Securities Registered Pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the Registrant: (1) has filed
all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the Registrant was required to file
such reports), and (2) has been subject to such filing requirements
for the past 90 days.
Yes X No ______
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K is not contained herein, and
will not be contained, to the best of Registrant's knowledge, in
definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this
Form 10-K [ ].
As of April 10, 1996, there were 9,335,232 shares outstanding
of the Registrant's Class A no par value voting common stock.
Based on the last reported sale price of $8.00 per share on the
NASDAQ Stock Market on April 10, 1996, the aggregate market value
of the Registrant's Common Stock held by those persons deemed by
the Registrant to be non-affiliates was $59,745,192.
As of April 10, 1996, there were no shares outstanding of the
Registrant's Class B no par value non-voting common stock.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Annual Report to Shareholders for the year
ended February 3, 1996 are incorporated by reference into Part II,
Items 5, 6, 7 and 8, and into Part IV, Item 14.
Portions of the Proxy Statement for the annual shareholders'
meeting (expected to be held during July 1996) are incorporated
into Part III, Items 10, 11, 12 and 13.
Portions of the Company's Registration Statement on Form S-1
(file no. 33-45637) are incorporated as exhibits into Part IV.
With the exception of those portions that are specifically
incorporated herein by reference, the aforesaid documents are not
to be deemed filed as part of this report.
PART I
Item 1: Business
General
Fred's, Inc. ("Fred's" or the "Company"), founded in 1947,
operates 201 discount general merchandise stores in ten states in
the southeastern United States. Fred's stores generally serve low,
middle and fixed income families located in small to medium sized
towns (approximately 65% of Fred's stores are in markets with
populations of 15,000 or fewer people). Eighty-seven of the
Company's stores have full service pharmacies and there are five
stand-alone Fred's Xpress pharmacies. The Company also markets
goods and services to 34 franchised "Fred's" stores.
Fred's stores stock over 12,000 frequently purchased items
which address the everyday needs of its customers, including
nationally recognized brand name products, proprietary "Fred's"
label products and lower priced off-brand products. Fred's
management believes its customers shop Fred's stores as a result of
the stores' convenient location and size, low opening price points
in key product categories, consistent discount positions in health
and beauty aids and paper and cleaning supplies and regularly
advertised departmental promotions and seasonal specials. Fred's
stores have average selling space of 13,900 square feet and had
average sales of $1,979,000 in 1995.
Business Strategy
The Company's strategy is to meet the general merchandise
needs of the small to medium sized towns it serves by offering a
wider variety of quality merchandise and a more attractive price-
to-value relationship than either drug stores or smaller
variety/dollar stores and a shopper-friendly format which is more
convenient than larger sized discount merchandise stores. The
major elements of this strategy include:
Wide variety of frequently purchased, basic merchandise.
Fred's combines everyday basic merchandise with certain
specialty items to offer its customers a wide selection of
general merchandise. The selection of merchandise is
supplemented by seasonal specials, private label products and
the inclusion of pharmacies in 87 of its stores.
Discount prices. The Company provides value and low prices to
its customers (i.e., a good "price-to-value relationship")
through a coordinated discount strategy. As part of this
strategy, Fred's maintains low opening price points on the
basic items in each of its departments, maintains competitive
prices on the entire stock in the health and beauty aids and
paper and cleaning supplies departments, offers double value
for manufacturers' coupons, and regularly offers seasonal
specials and departmental promotions supported by strong
tabloid, television and radio advertising. During December
1994, Fred's implemented a highly competitive pricing program
that focuses on strong values day in and day out, while
reducing the Company's reliance on promotional activities.
Convenient shopper-friendly environment. Fred's stores are
typically located in a convenient strip shopping center, which
allows for easy access and shorter distances to the store
entrance. Fred's stores are of a manageable size and have an
understandable store layout, wide aisles and fast checkouts.
Expansion Strategy
The Company expects that expansion of the Fred's concept will
occur primarily within its present market area and will be focused
in small to medium sized towns, although the Company may also enter
urban markets where it already has a market presence.
Addition of Stores
Fred's added a net of 17 new stores in 1995 and anticipates
opening up to ten stores and closing ten stores in 1996. The
Company's store prototype has from 10,000 to 15,000 square feet of
selling space. Opening a new store currently costs between
$350,000 and $450,000 for inventory, furniture, fixtures, equipment
and leasehold improvements.
Addition of Pharmacies
The addition of pharmacies to existing stores has increased
comparable store sales by adding sales of pharmaceuticals while
maintaining sales of non-pharmaceutical items. The Company
acquired 19 pharmacies in 1995, of which ten were incremental to
stores that already had a pharmacy, five were established as stand-
alone Fred's Xpress pharmacies, and four were additions to stores
that had not previously had a pharmacy. The Company plans to
acquire at least 15 more pharmacies in 1996. In substantially all
cases, Fred's intends to add pharmacies through the acquisition of
established independent pharmacies (either by employment of
formerly independent pharmacists or purchase of customer lists from
retiring independent pharmacists).
Proposed Acquisition of Rose's
On March 1, 1996, the Company signed a letter of intent to
acquire all of the outstanding stock of Rose's Stores, Inc., a
retailer that operates 105 stores in ten states in the southeastern
United States (primarily North Carolina and Virginia). The merger
is subject to satisfaction of the execution of a definitive merger
agreement, approval by the shareholders of Fred's and Rose's, and
certain other conditions.
Merchandising and Marketing
Management believes that Fred's has a distinctive niche in
that it offers a wider variety of merchandise at a more attractive
price-to-value relationship than either a drug store or smaller
variety/dollar store and is more shopper-friendly than a larger
discount store. The variety and depth of merchandise offered at
Fred's stores in high traffic departments, such as health and
beauty aids and paper and cleaning supplies, are comparable to
those of larger discount retailers. Management believes that its
knowledge of regional and local consumer preferences, developed in
almost fifty years of operation by the Company and its
predecessors, enables the Company to compete effectively in its
region.
Purchasing
The Company's buying activities are directed from the
corporate office by the Executive Vice President-Merchandising who
is supported by three Vice Presidents - Merchandising and a staff
of 22 buyers and assistants. The buyers and assistants are
participants in an incentive compensation program, which is based
upon various factors primarily relating to gross margin returns on
inventory controlled by each individual buyer. The Company
believes that adequate alternative sources of products are
available for all of its categories of merchandise.
Sales Mix
The Fred's store sales mix by major merchandise category
during 1995 was as follows:
Household Goods........................................27.1%
Pharmaceuticals........................................17.7%
Apparel and Linens.....................................17.2%
Health and Beauty Aids.................................16.0%
Paper and Cleaning Supplies............................12.3%
Food and Tobacco Products...............................9.7%
The sales mix varies from store to store depending upon local
consumer preferences and whether the stores include pharmacies and
a full-line of apparel. In 1995, the stores' average customer
transaction size was approximately $11.25, and the number of
customer transactions totaled approximately 33 million.
The Company presently has 81 full-line stores (those stores
with both pharmacy and apparel departments) that have been open
longer than 12 months. The pharmacy department contributed 28% of
the total sales by these full-line stores in 1995. Sales per
selling square foot averaged $157 for full-line stores compared to
$113 for non full-line stores. Average sales per store during 1995
were $2,585,000 for full-line stores compared to $1,434,000 for non
full-line stores.
Products sold under the "Fred's" private label program,
including household cleaning supplies, health and beauty aids,
disposable diapers, pet foods, paper products and a variety of
beverage and other products, constituted approximately 4% of total
sales in 1995. Private label products afford the Company higher
than average gross margins while providing the customer with lower
priced products that are of a quality comparable to that of
competing branded products. An independent laboratory testing
program is used for substantially all of the Company's private
label products.
Highly Competitive Pricing Strategy
The implementation of a new pricing strategy in December 1994
included price reductions for many key items and the elimination of
four sale events for 1995. The price reductions and fewer sale
events resulted in lower sales and negatively impacted gross
margins. However, management expects that as customers begin to
recognize Fred's as a store that offers good values everyday, they
will shop Fred's stores more regularly, not just during sale
events. The Company plans to eliminate an additional four sale
events in 1996.
Advertising and Promotions
Advertising and promotion costs represented 1.9% of sales in
1995. The Company uses direct mail, television, radio and
newspaper advertising to promote its merchandise, special
promotional events and discount retail image. The Company's
advertising is directed towards a typical Fred's customer, a female
over the age of 25 in a rural location with household income
averaging $25,000.
The Company's buyers have discretion to mark down slow moving
items, and the Company runs regular clearances of seasonal
merchandise and conducts sales and promotions of particular items.
The Company also encourages its store managers to create in-store
advertising displays and signage in order to increase customer
traffic and impulse purchases. The store managers, with corporate
approval, are permitted to tailor the price structure at their
particular stores to meet competitive conditions within each
store's marketing area.
Store Operations
All Fred's stores are open six days a week (Monday through
Saturday), and many stores are open seven days a week. Store hours
are generally from 9:00 a.m. to 9:00 p.m.; however, certain stores
are open only until 6:00 p.m. Each Fred's store is managed by a
full-time store manager. The Company's twelve district managers
supervise the management and operation of Fred's stores.
The Company has an incentive compensation plan for store
managers, pharmacists and district managers based on meeting or
exceeding targeted profit percentage contributions. Various
factors included in determining profit percentage contribution are
gross profits and controllable expenses at the store level.
Management believes that this incentive compensation plan, together
with the Company's store management training program, are
instrumental in maximizing store performance.
The following tables set forth certain information with
respect to stores and pharmacies for each of the last five years:
<TABLE>
<CAPTION>
1991 1992 1993 1994 1995
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Stores open at beginning
of period 136 144 156 170 184
Stores opened/acquired
during period 9 13 18 20 31
Stores closed during period (1) (1) (4) (6) (14)
------ ------ ------ ------ ------
Stores open at end of
period 144 156 170 184 201
====== ====== ====== ====== ======
Pharmacies open at
beginning of period 40 45 60 75 83
Pharmacies opened/acquired
during period 6 15 16 8 9
Pharmacies closed during
period (1) - (1) - -
------ ------ ------ ------ ------
Pharmacies open at end of
period 45 60 75 83 92
====== ====== ====== ====== ======
Square feet of selling
space at end of period
(in thousands) 1,877 2,071 2,311 2,625 2,797
====== ====== ====== ====== ======
Average square feet of
selling space per store 13,033 13,277 13,594 14,266 13,915
====== ====== ====== ====== ======
Franchise stores at end
of period 43 39 37 35 34
====== ====== ====== ====== ======
</TABLE>
Pharmacy Operations
Fred's operates 87 in-store pharmacies and five Fred's Xpress
pharmacies, all of which offer brand name and generic
pharmaceuticals and are staffed by licensed pharmacists. Pharmacy
sales have become an increasingly important segment of the
Company's sales, increasing from 9.4% of retail sales in 1988 to
17.7% in 1995.
The addition of acquired pharmacies in the Company's stores
has resulted in increased store sales and sales per selling square
foot. Management believes that in-store pharmacies also increase
customer traffic and repeat visits.
The pharmacies in Fred's stores that are clustered together
typically operate at a lower cost because three pharmacists are
able to staff two Fred's stores (versus competitors' typical two
pharmacists per store). This competitive advantage will accelerate
because the Company is continuing to add pharmacies in clustered
stores.
Inventory Control and Distribution
SWORD and POS Systems
The Company's computerized central management information
system (known as "SWORD," which stands for Store Warehouse Order
Replenishment and Distribution) maintains a daily SKU level
inventory and current and historical sales information for each
store and the distribution center. This system is supported by in-
store point-of-sale ("POS") cash registers which capture SKU and
other data at the time of sale for daily transmission to the
Company's central computer. Data received from the stores is used
to automatically replenish frequently purchased merchandise on a
weekly basis and to assist the Company's buyers in their decision
making process.
Maintaining an "in-stock" supply of high-turn, low gross
margin items, such as health and beauty aids and paper and cleaning
supplies and frequently consumed items in other categories,
preserves customer loyalty which leads to purchases of higher gross
margin items in other product categories.
Over the past three years, the Company has installed enhanced
POS register systems in all of its stores. The new registers have
improved labor productivity at the stores and continue to be the
data gathering device for the SWORD system. The scanning and price
look-up features included in the new system significantly reduce
the amount of labor required to tag merchandise in connection with
the Company's sale events and reduce the number of cashier errors.
Distribution
Fred's has an 800,000 square foot centralized distribution
center in Memphis, Tennessee (see "Properties" below). Excess
capacity exists in the distribution center which will accommodate
the Company's expansion plans for Fred's stores for the next two
years. The Company is reviewing opportunities to enhance the
logistics of the distribution center and to modernize the related
sortation and handling equipment in order to increase the center's
capacity and efficiencies. Approximately 78% of the merchandise
received by Fred's stores in 1995 was shipped through the
distribution center, with the remainder (primarily pharmaceuticals,
certain snack food items, greeting cards, beverages and tobacco
products) being shipped directly to the stores by vendors. For
distribution, the Company uses owned and leased trailers and leased
tractors, as well as common carriers.
Wholesale and Franchise Sales
The Company engages in wholesale sales to its 34 franchised
"Fred's" stores and to certain other retailers. The franchised
stores utilize the Company's SWORD system. Revenues from wholesale
sales during the last three years were $40,300,000 in 1995,
$39,000,000 in 1994 and $40,800,000 in 1993. In addition,
franchise and other fees totaling approximately $2 million have
been earned by Fred's in each of the three years (recorded as a
reduction to the Company's operating expenses).
Each of the Company's franchised stores operates under a
franchise agreement whereby the Company is the primary provider of
merchandise and the store is granted an exclusive market area.
Franchisees purchase merchandise from the Company at wholesale
prices and pay a franchise fee for the right to use the Fred's
tradename. The fee is equal to 3% of the retail price of a
franchisee's purchases. A franchisee may elect to have merchandise
delivered by the Company for a fee ranging from 1.75% to 2.75% of
the retail value of the merchandise delivered, varying with the
distance between the Company's distribution center and the
franchisee's store. Franchisees participate in advertising for
"Fred's" stores in their marketing area by paying for the cost of
advertising on television and distributing tabloid advertisements.
At this time, the Company is not soliciting new franchisees.
Employees
At February 3, 1996, the Company had approximately 4,800 full-
time and part-time employees, comprising 500 corporate employees
and 4,300 store employees. The number of employees varies during
the year, reaching a peak during the Christmas selling season. The
Company's labor force is not subject to a collective bargaining
agreement.
Almost all of the Company's salaried employees not covered by
the store or merchandising incentive compensation programs are
covered by incentive compensation plans, under which compensation
is payable based upon the Company meeting or exceeding profit
targets.
Item 2: Properties
As of February 3, 1996, the geographical distribution of
Fred's 201 Company-owned stores was as follows:
State Number of Stores
----- ----------------
Mississippi 63
Arkansas 42
Tennessee 38
Louisiana 19
Georgia 16
Alabama 15
North Carolina 3
Missouri 2
Kentucky 2
Florida 1
The Company owns the real estate and the buildings for 61
store locations, of which five are subject to ground leases. The
Company leases the remaining 140 locations from third parties
pursuant to leases that provide for monthly rental payments
primarily at fixed rates (although a few provide for additional
rent based on sales). Fred's stores range in size from 5,000
square feet to 27,000 square feet. One hundred and forty-two of
Fred's stores are in strip centers or adjoined with a downtown
shopping district, with the remainder being free-standing.
It is anticipated that existing buildings and buildings to be
developed by others will be available for lease to satisfy the
Company's present store growth intentions in the near term. It is
management's intention to enter into leases of relatively moderate
length with renewal options, rather than entering into long-term
leases. The Company will thus have maximum flexibility in store
relocation in the future, since continued availability of existing
buildings is anticipated in the Company's market areas.
The Company owns its distribution center and corporate
headquarters situated on a 60 acre complex in Memphis, Tennessee.
The distribution center contains approximately 800,000 square feet
of space. The site also contains 250,000 square feet of office and
retail space. Presently, the Company utilizes 90,000 square feet
of office space and 22,000 square feet of retail space at the
complex; of the balance, approximately 75,000 square feet is leased
to the U.S. Government. The retail space is operated as a Fred's
store and is used to test new products, merchandising ideas and
technology.
Item 3: Legal Proceedings
The Company is party to several pending legal proceedings and
claims. Although the outcome of the proceedings and claims cannot
be determined with certainty, management of the Company is of the
opinion that it is unlikely that these proceedings and claims will
have a material effect on the results of operations or the
financial condition of the Company.
Item 4: Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders during
the fourth quarter of the fiscal year ended February 3, 1996.
PART II
Item 5: Market for the Registrant's Common Stock and Related
Stockholder Matters
The information required by this item is furnished by
incorporation by reference of Page 25 of the Annual Report to
Shareholders for the year ended February 3, 1996.
Item 6: Selected Financial Data
The selected financial data for the five years ended February
3, 1996, which appears on page 8 of the Annual Report to
Shareholders is incorporated herein by reference.
Item 7: Management's Discussion and Analysis of Financial
Condition and Results of Operations
Management's Discussion and Analysis of financial condition
and results of operations appearing on pages 9 through 11 of the
Annual Report to Shareholders is incorporated herein by reference.
Item 8: Financial Statements and Supplementary Data
The consolidated financial statements, together with the
report thereon of Price Waterhouse LLP dated March 8, 1996,
appearing on pages 12 through 24 of the Annual Report to
Shareholders are incorporated herein by reference.
Item 9: Changes In and Disagreements With Accountants on
Accounting and Financial Disclosure
None.
PART III
Item 10: Directors and Executive Officers of the Registrant
Information regarding directors is incorporated herein by
reference from the information under the caption "Election of
Directors" in the Company's Proxy Statement relating to the Annual
Meeting of Shareholders, expected to be held in July 1996 (the
"Proxy Statement").
The following information is furnished with respect to each of
the executive officers of the Registrant:
<TABLE>
<CAPTION>
Name Age Positions and Offices
- ---- --- ---------------------
<S> <C> <C>
Michael J. Hayes 54 Director, Managing Director (1),
Chief Executive Officer and President
David A. Gardner 48 Director and Managing Director (1)
Michael K. Spear 51 Executive Vice President -
Merchandising
Bruce D. Smith 37 Executive Vice President and Chief
Financial Officer
Victor Saig 60 Senior Vice President - Store
Operations
Blanchard J. Box 57 Senior Vice President - Management
Information Systems
John A. Casey 49 Senior Vice President - Pharmacy
Operations
Charles S. Vail 52 Corporate Secretary, Vice President -
Legal Services and General Counsel
</TABLE>
________________________________
(1) According to the By-laws of the Company, the Managing
Directors (Messrs. Hayes and Gardner) are the chief executive
officers of the Company and have general supervisory
responsibility for the business of the Company.
Michael J. Hayes was elected a director of the Company in
January 1987 and has been a Managing Director of the Company since
October 1989. Mr. Hayes has been Chief Executive Officer since
October 1989 and President since May 1991. Additionally, Mr. Hayes
is a Managing Director of Hayes Financial Corp. He was previously
employed by Oppenheimer & Company, Inc. in various capacities from
1976 to 1985, including Managing Director and Executive Vice
President - Corporate Finance and Financial Services.
David A. Gardner was elected a director of the Company in
January 1987 and has been a Managing Director of the Company since
October 1989. Mr. Gardner has been President of Gardner Capital
Corporation, a real estate and venture capital investment firm
since April 1980. Additionally, Mr. Gardner is a director of
Gulfstar Energy, Inc., Great American Management and Investment,
Inc. and Joyce International, Inc.
Michael K. Spear was hired in March 1995 as Executive Vice
President - Merchandising. Mr. Spear had previously spent 21 years
with Wal-Mart Stores, Inc., including 4 years in store operations,
followed by 17 years in merchandising. Most recently he served
Wal-Mart as Vice President, Divisional Merchandise Manager for the
Sam's Clubs.
Bruce D. Smith joined the Company in September 1991 as
Executive Vice President and Chief Financial Officer. Prior to
joining the Company, Mr. Smith was employed by Price Waterhouse LLP
for eleven years and attained the position of Senior Audit Manager.
Victor Saig is the Senior Vice President - Store Operations,
a position he has held since November 1989. Mr. Saig joined the
Company in 1963. Prior to this appointment, Mr. Saig served as
Vice President - Hard Lines Merchandising and in various other
operational and merchandising positions.
Blanchard J. Box is the Senior Vice President - Management
Information Systems of the Company, a position he has held since
May 1991. Mr. Box, who joined the Company in 1989, was previously
Vice President - Management Information Systems. Prior thereto,
Mr. Box was responsible for management information systems at
OTASCO, Inc., an Oklahoma retailer, from 1984 until 1989.
John A. Casey was promoted to Senior Vice President - Pharmacy
Operations in January 1994. Mr. Casey joined the Company in 1979.
Prior to this appointment, Mr. Casey was Vice President - Pharmacy
Operations from 1990 to 1994 and Director of Pharmacy Operations
from 1988 to 1990. Prior to 1988, Mr. Casey was a pharmacy
district manager and a pharmacist.
Charles S. Vail has served the Company for more than nine
years as Corporate Secretary, Vice President - Legal Services and
General Counsel. Mr. Vail joined the Company in 1973.
Item 11: Executive Compensation
Information regarding executive compensation is incorporated
herein by reference from the information in the Company's Proxy
Statement.
Item 12: Security Ownership of Certain Beneficial Owners and
Management
Information regarding security ownership of certain beneficial
owners and management is incorporated herein by reference from the
Company's Proxy Statement.
Item 13: Certain Relationships and Related Transactions
This information is incorporated herein by reference from the
information under the caption "Compensation Committee Interlocks
and Insider Participation" in the Company's Proxy Statement.
PART IV
Item 14: Exhibits, Financial Statement Schedules and Reports on
Form 8-K
(a)(1) Consolidated Financial Statements
The following consolidated financial statements are
incorporated herein by reference from pages 12 through 24
of the Annual Report to Shareholders for the year ended
February 3, 1996.
Consolidated Statements of Income for the years
ended February 3, 1996, January 28, 1995 and
January 29, 1994.
Consolidated Balance Sheets as of February 3, 1996
and January 28, 1995.
Consolidated Statements of Changes in Shareholders'
Equity for the years ended February 3, 1996,
January 28, 1995 and January 29, 1994.
Consolidated Statements of Cash Flows for the years
ended February 3, 1996, January 28, 1995 and
January 29, 1994.
Notes to Consolidated Financial Statements.
Report of Independent Accountants.
(a)(2) Financial Statement Schedules:
All schedules are omitted because they are not applicable
or not required, or because the information is included
in the financial statements or notes thereto.
(a)(3) Those exhibits required to be filed as Exhibits to this
Annual Report on Form 10-K pursuant to Item 601 of
Regulation S-K are as follows:
3.1 Certificate of Incorporation, as amended
[incorporated herein by reference to Exhibit
3.1 to the Form S-1 as filed with the
Securities and Exchange Commission February
7, 1992 (SEC File No. 33-45637) (the "Form
S-1")].
3.2 By-laws, as amended [incorporated herein by
reference to Exhibit 3.2 to the Form S-1].
4.1 See Exhibits 3.1 and 3.2 hereto.
4.2 Specimen Common Stock Certificate
[incorporated herein by reference to Exhibit
4.2 to Pre-Effective Amendment No. 3 to the
Form S-1]
9.1 Baddour, Inc. (Registrant changed its name to
"Fred's, Inc." in 1991) Shareholders
Agreement dated as of June 28, 1986
[incorporated herein by reference to Exhibit
C, pages C-1 through C-42 to Baddour, Inc.'s
Report on Form 8-K dated July 1, 1986]
10.6 Lease Agreement dated November 12, 1991 with
the U.S. Government [incorporated herein by
reference to Exhibit 10.6 to the Form S-1].
10.8 Form of Fred's, Inc. Franchise Agreement
[incorporated herein by reference to Exhibit
10.8 to the Form S-1].
10.9 401(k) Plan dated as of May 13, 1991
[incorporated herein by reference to Exhibit
10.9 to the Form S-1].
10.10 Employee Stock Ownership Plan (ESOP) dated as
of January 1, 1987 [incorporated herein by
reference to Exhibit 10.10 to the Form S-1].
10.11* Incentive Stock Option Plan dated as of
December 22, 1986 [incorporated herein by
reference to Exhibit 10.11 to the Form S-1].
10.15 Lease Agreement by and between Hogan Motor
Leasing, Inc. and Fred's, Inc. dated February
5, 1992 for the lease of truck tractors to
Fred's, Inc. and the servicing of those
vehicles and other equipment of Fred's, Inc.
[incorporated herein by reference to Exhibit
10.15 to Pre-Effective Amendment No. 1 to the
Form S-1].
10.17 Revolving Loan and Credit Agreement between
Fred's, Inc. and Union Planters National Bank
dated as of May 15, 1992 [incorporated herein
by reference to the Company's report on Form
10-Q for the quarter ended May 2, 1992].
10.18 Note and Security Agreement between National
Bank of Commerce as Trustee for the ESOP of
Fred's, Inc., together with the Limited
Guaranty of Fred's, Inc. dated as of May 29,
1992 [incorporated herein by reference to the
Company's report on Form 10-Q for the quarter
ended August 1, 1992].
10.19* 1993 Long Term Incentive Plan dated as of
January 21, 1993 [incorporated herein by
reference to the Company's report on Form 10-
Q for the quarter ended July 31, 1993].
* Management Compensatory Plan
10.20 Negative Pledge and Loan Agreement between
Fred's, Inc. and National Bank of Commerce
dated as of February 17, 1994 [incorporated
herein by reference to the Company's report
on Form 10-K for the year ended January 29,
1994].
10.21 Modification Agreement between Fred's, Inc.
and Union Planters National Bank dated as of
May 31, 1995 (modifies the Revolving Loan and
Credit Agreement included as Exhibit 10.17)
[incorporated herein by reference to the
Company's report on Form 10-Q for the quarter
ended July 29, 1995].
10.22 Second Modification Agreement between Fred's,
Inc. and Union Planters National Bank dated
as of July 31, 1995 (modifies the Revolving
Loan and Credit Agreement included as Exhibit
10.17) [incorporated herein by reference to
the Company's report on Form 10-Q for the
quarter ended July 29, 1995].
10.23 Seasonal Overline Revolving Credit Agreement
between Fred's, Inc. and Union Planters
National Bank dated as of July 31, 1995
[incorporated herein by reference to the
Company's report on Form 10-Q for the quarter
ended July 29, 1995].
10.24** Employment Agreement between Fred's, Inc. and
Michael K. Spear dated as of March 6, 1995.
11.1** Computation of Net Income per Share
13.1** Annual report to shareholders for the year
ended February 3, 1996 (to the extent
incorporated herein by reference).
21.1** Subsidiaries of Registrant
23.1** Consent of Price Waterhouse LLP.
27. ** Financial Data Schedule.
(b) No reports on Form 8-K were filed by the registrant during
the last quarter of the period covered by this report.
However, a report on Form 8-K dated March 1, 1996 was filed
subsequent to the fourth quarter regarding the proposed
acquisition by merger of Rose's Stores, Inc. by Fred's.
** Filed herewith
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant has duly caused
this report to be signed on its behalf by the undersigned,
thereunto duly authorized, on this 29th day of April, 1996.
FRED'S, INC.
By: /s/ Michael J. Hayes
-----------------------------------------
Michael J. Hayes, Chief Executive
Officer and President
By: /s/ Bruce D. Smith
-----------------------------------------
Bruce D. Smith, Executive Vice President
and Chief Financial Officer (Principal
Accounting and Financial Officer)
Pursuant to the requirements of the Securities Exchange Act
of 1934, this report has been signed below by the following
persons on behalf of the Registrant and in the capacities
indicated on this 29th day of April, 1996.
Signature Title
--------- -----
/s/ Michael J. Hayes Director, Managing Director,
Michael J. Hayes Chief Executive Officer and
President
/s/ David A. Gardner Director and Managing
David A. Gardner Director
/s/ Roger T. Knox Director
Roger T. Knox
/s/ John R. Eisenman Director
John R. Eisenman
EXHIBIT 10.24
EMPLOYMENT AGREEMENT
OF
MICHAEL K. SPEAR
AGREEMENT, dated as of March 6, 1995 by and between FRED'S,
INC., a Tennessee corporation, with offices at 4300 New Getwell
Road, Memphis, Tennessee 38118 ("Company") and MICHAEL K. SPEAR,
currently residing at 3293 Piedmont Cove, Memphis, Tennessee
38115, ("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 "Executive Vice President and Director of Merchandising,
Advertising and Purchasing", for a term of three (3) years from
and after the date hereof (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 for an additional one year term
("Additional Terms"), unless either party shall have given to the
other written notice of termination at least six (6) months 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 "Executive Vice
President and Director of Merchandising, Advertising and
Purchasing" during the term of this Agreement. As such, he shall
have and agrees to assume primary responsibility (subject at all
times 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 $165,000. 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 (i) be paid a minimum bonus of $35,000 with respect to each
of the first three twelve-month periods under this Agreement, and
shall thereafter be considered for any bonus awards on the same
basis as are other executives of Company, (ii) be granted
qualified options for 40,000 shares of Company's Common Stock at
fair market value therefor as of the date first written above
pursuant to the Incentive Stock Option Agreement attached hereto
as Exhibit A, and (iii) be conditionally awarded 20,000 shares of
Company's Common Stock pursuant to the Restricted Stock Award
Agreement attached hereto as Exhibit B. Company shall also
assist Executive with the sale of his current residence in
Bentonville, Arkansas and the expenses of moving his family to
Memphis, Tennessee, in accordance with the Executive Moving
Package attached hereto as Exhibit C.
4. Company shall reimburse Executive, upon the submission
of receipts or vouchers therefor, for all necessary expenses and
disbursements reasonably incurred by him for the proper
performance of his duties as Executive Vice 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,
(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, (i) with or without cause, by written notice of
termination as provided in Section 1 above, (ii) by either party
for cause, upon not less than ninety (90) days prior written
notice to the other (except that such notice of termination may
be (x) effective immediately in the case of termination by
Company for acts of Executive involving moral turpitude or breach
of duty of loyalty, or (y) effective in ten (10) days in the case
of termination by Executive due to non-payment of Executive's
salary or bonus by the Company), or (iii) as otherwise provided
herein.
(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
and minimum bonus) 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.
(d) In the event of any termination hereunder, whether
by Company or by Executive, other than termination by Company for
cause and other than pursuant to Section 1, Company shall
continue, from and after the termination date for the greater of
one (1) year or the remaining portion of the then current term
hereof (the "Extension Period"), (i) to pay Executive at the same
annual base rate of compensation (plus any minimum bonus referred
to in Section 3 above) as Company was paying Executive prior to
the date of termination, and (ii) to provide Executive and his
family the same benefits provided to other executives and their
families as fully as if he were still employed by the Company.
Provided, however, if Executive or his family becomes ineligible
to receive such benefits during the Extension Period, then
Company shall provide for him and them the level of benefits
obtainable by expending the same amount therefor as Company would
have expended had Executive and his family continued to be
eligible under the Company's employee plans. Provided, further,
that such extended pay and benefits (i) shall not be paid or
provided in the event Executive is terminated for cause, and (ii)
shall be abated to the extent that Executive obtains alternate
employment during the Extension Period (and Executive hereby
covenants to use reasonable efforts to find and to accept such
alternate employment with compensation and benefits comparable to
those provided under this Agreement). "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, or (iv) violation of
his duty of loyalty to Company. "Cause", for purposes of this
Agreement and as invoked by Executive, shall be deemed to be
failure of Company to pay the compensation required to be paid or
to provide the benefits required to be provided by Company
hereunder.
6. For a period of one (1) year from and after any
termination of this Agreement (other than by either party
pursuant to Section 1 or 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), in the discount
retail sales or pharmacy businesses, 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 the 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 Non-compete Period, 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, com-
puter cards, memory or tapes, or embodied in any other form what-
soever.
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.
IN WITNESS WHEREOF, the parties hereto have executed this
Agreement as of the date first above written.
FRED'S, INC.
ATTEST:
/s/ Charles S. Vail By: /s/ Michael J. Hayes
- ------------------------------ ---------------------------
Secretary MICHAEL J. HAYES, Chief
Executive Officer and
President
WITNESS:
/s/ Michael K. Spear
/s/ Carolyn Tilman ------------------------------
- ------------------------------ MICHAEL K. SPEAR, Executive
Exhibit A
INCENTIVE STOCK OPTION AGREEMENT
PURSUANT TO THE FRED'S, INC.
INCENTIVE STOCK OPTION PLAN
FRED'S, INC., a Tennessee corporation (the "Company"),
hereby grants to Mike K. Spear (the "Optionee") an option
("Option") to purchase a total of 40,000 shares of no par value
Class A common stock of the Company (the "Shares"), at the price
determined as provided herein, and in all respects subject to the
terms, definitions and provisions of the INCENTIVE STOCK OPTION
PLAN (the "Plan") adopted by the Company which is incorporated
herein by reference.
1. Nature of the Option. This Option is intended to be an
"incentive stock option" within the meaning of section 422 of the
Internal Revenue Code of 1986, as amended (the "Code").
2. Option Price. Except as otherwise provided in Section
8, the option price is $9.75 for each Share, which is the fair
market value of the Shares on the date of grant set forth below
("Date of Grant"), as determined by the Plan Administrator.
3. Exercise of Option. This Option shall be exercisable
only in accordance with the provisions of the Plan, and only by
written notice which shall:
(a) state the election to exercise the Option, the
number of Shares in respect of which it is being exercised,
the person in whose name the stock certificate or
certificates for such Shares is to be registered, his or her
address and Social Security Number (or if more than one, the
names, addresses and Social Security Numbers of such
persons);
(b) contain such representations and agreements as to
the holder's investment intent with respect to such Shares
as may be required by the Company pursuant to the Plan or
this Agreement;
(c) be signed by the person or persons entitled to
exercise the Option, and if the Option is being exercised by
any person or persons other than the Optionee, be
accompanied by proof, satisfactory to the Company, of the
right of such person or persons to exercise the Option;
(d) be in writing and delivered in person or by
certified mail to the Secretary of the Company; and
(e) be accompanied by payment in full (including
applicable withholding taxes, if any, as described in
Section 8 of this Agreement). Payment of the purchase price
shall be in cash, currency or by certified or bank cashier's
check, or a combination thereof pursuant to the provisions
of the Plan.
Unless the sale of Shares pursuant to this Option has been
registered under the Securities Act of 1933 on Form S-8 or
successor form, the certificate or certificates for Shares as to
which the Option shall be exercised shall contain the following
legend:
"THE SHARES REPRESENTED BY THIS CERTIFICATE
HAVE NOT BEEN REGISTERED UNDER THE SECURITIES
ACT OF 1933 AND HAVE BEEN ACQUIRED FOR
INVESTMENT PURPOSES ONLY AND NOT WITH A VIEW
TO THE DISTRIBUTION THEREOF, AND SUCH
SECURITIES MAY NOT BE SOLD OR TRANSFERRED
UNLESS SUCH SALE OR TRANSFER IS REGISTERED
UNDER SUCH ACT OR THE COMPANY RECEIVES AN
OPINION OF COUNSEL FOR THE HOLDER OF THESE
SECURITIES SATISFACTORY TO THE COMPANY
STATING THAT SUCH SALE OR TRANSFER IS EXEMPT
FROM THE REGISTRATION REQUIREMENTS OF THE
ACT, AND UNLESS SUCH SALE OR TRANSFER IS
AUTHORIZED UNDER APPLICABLE STATE LAW."
4. Extent of Exercise. This Option shall be exercisable
in such amounts and at such times as are set forth below:
This Option shall be exercisable to the extent of 25% of the
Shares covered hereby on or after the Date of Grant; exercisable
to the extent of an additional 25% of the Shares covered hereby
on or after the first anniversary of the Date of Grant;
exercisable to the extent of an additional 25% of the Shares
covered hereby on or after the second anniversary of the Date of
Grant; and exercisable to the extent of the remaining 25% of the
Shares covered hereby on or after the third anniversary of the
Date of Grant; provided, however, that the aggregate fair market
value (determined as of the Date of Grant) of the Shares with
respect to which this Option are exercisable for the first time
by the Optionee in any calendar year (under all plans of the
Company and its subsidiary corporations (which term, as used
hereinafter, shall have the meaning ascribed thereto in section
425(f) of the Code )) shall not exceed $100,000.
5. Restrictions on Exercise. This Option may not be
exercised if the issuance of such Shares upon such exercise would
constitute a violation of any applicable federal or state
securities laws or other law or regulation. As a condition to
the exercise of this Option, the Company may require the Optionee
to make any representation and warranty to the Company as may be
required by any applicable law or regulation or may otherwise be
appropriate.
6. Nontransferability of Option. This Option may not be
sold, assigned, transferred, exchanged, pledged, hypothecated, or
otherwise encumbered, other than by will or by the laws of
descent and distribution. During the lifetime of the Optionee
this Option is exercisable only by the Optionee. The terms of
this Option shall be binding upon the executors, administrators,
heirs, successors and assigns of the Optionee.
7. Term of Option. Except as provided in this Section 7
and in Section 8 below, this Option may not be exercised more
than five (5) years from the date of grant of this Option and may
be exercised during such term only in accordance with the Plan
and the terms of this Agreement. In the event that an Optionee
ceases to be an employee of the Company for any cause other than
Retirement (as defined below), death or Disability (as defined
below), the Optionee shall have the right to exercise this Option
during its term within a period of 30 days after such termination
to the extent that this Option was exercisable at the time of
termination, or within such other period, and subject to such
terms and conditions, as may be specified by the Plan
Administrator. (As used herein, the term "Retirement" means
retirement from active employment with the Company on or after
age 65, or such earlier age with the express written consent for
purposes of the Plan of the Company at or before the time of such
retirement, and the term "Retires" has the corresponding meaning.
As used herein, the term "Disability" means a condition that, in
the judgment of the Plan Administrator, has rendered an Optionee
completely and presumably permanently unable to perform any and
every duty of his or her regular occupation, and the term
"Disabled" has the corresponding meaning). In the event that an
Optionee Retires, dies or becomes Disabled prior to the
expiration of this Option and without having fully exercised this
Option, the Optionee or his or her Beneficiary (as defined below)
shall have the right to exercise this Option during its term
within a period of (i) one year after termination of employment
due to Retirement, death or Disability, or (ii) one year after
death if death occurs either within one year after termination of
employment due to Retirement or Disability or within 30 days
after termination of employment for other reasons, to the extent
that the option was exercisable at the time of death or
termination, or within such other period, and subject to such
terms and conditions, as may be specified by the Plan
Administrator. (As used herein, the term "Beneficiary" means the
person or persons designated in writing by the Optionee as his or
her Beneficiary with respect to this Option; or, in the absence
of an effective designation or if the designated person or
persons predecease the Optionee, the Optionee's Beneficiary shall
be the person or persons who acquire by bequest or inheritance
the Optionee's rights in respect this Option). In order to be
effective, the designation of a Beneficiary must be on file with
the Plan Administrator before the Optionee's death, but any such
designation may be revoked and a new designation substituted
therefor at any time before the Optionee's death.
8. Ten Percent Shareholders. If the Optionee owns at the
Date of Grant stock possessing more than 10 percent of the total
combined voting power of all classes of stock of the Company or
of a subsidiary corporation of the Company, then notwithstanding
anything herein to the contrary, the option price shall be 110
percent of the fair market value (as determined by the Plan
Administrator) of the stock subject to this Option at the Date of
Grant and this Option shall not be exercisable after the
expiration of five years from the Date of Grant.
9. Withholding. Prior to the issuance of Shares under
this Option, the Optionee shall remit to the Company an amount
sufficient to satisfy any federal, state or local withholding tax
requirements. The Optionee may satisfy the withholding
requirement in whole or in part by electing to have the Company
withhold Shares having a value equal to the amount required to be
withheld. The value of the Shares to be withheld shall be the
fair market value, as determined by the Plan Administrator, of
the stock on the date that the amount of tax to be withheld is
determined (the "Tax Date"). Such election must be made prior to
the Tax Date, must comply with all applicable securities law and
other legal requirements, as interpreted by the Plan
Administrator, and may not be made unless approved in advance by
the Plan Administrator, in its discretion. The Company reserves
the right to make whatever further arrangements it deems
appropriate for the withholding of any taxes in connection with
any transaction contemplated by this Agreement or the Plan.
10. Merger. This Agreement supersedes any other agreement,
written or oral, between the parties with respect to the subject
matter hereof.
11. General Restrictions. This Option is subject to the
requirement that if at any time the Company shall determine that
(i) the listing, registration or qualification of the Shares
subject or related thereto upon any securities exchange or under
any state or federal law, or (ii) the consent or approval of any
regulatory body, or (iii) an agreement by the Optionee with
respect to the disposition of Shares, or (iv) the satisfaction of
withholding tax or other withholding liabilities, is necessary or
desirable as a condition of the issuance or purchase of Shares
hereunder, this Option shall not be exercised in whole or in part
unless such listing, registration, qualification, consent,
approval, agreement, or withholding shall have been effected or
obtained free of any conditions not acceptable to the Company.
Any such restriction affecting this Option shall not extend the
time within which this Option may be exercised; and neither the
Company nor its directors or officers nor the Plan Administrator
shall have any obligation or liability to the Optionee or to a
Beneficiary with respect to any Shares with respect to which this
Option shall lapse or with respect to which the issuance or
purchase of Shares shall not be effected, because of any such
restriction.
12. Rights of the Shareholder. The Optionee shall have no
rights as a shareholder with respect thereto unless and until
certificates for Shares are issued to him or her, and the
issuance of Shares shall confer no retroactive right to
dividends.
13. Rights to Terminate Employment. Nothing in the Plan or
in this Agreement shall confer upon any person the right to
continue in the employment of the Company or affect any right
which the Company may have to terminate the employment of such
person.
14. Adjustments. In the event of any change in the
outstanding common stock of the Company, by reason of a stock
dividend or distribution, recapitalization, merger,
consolidation, reorganization, split-up, combination, exchange or
Shares or the like, the Board of Directors shall adjust
proportionately the number of Shares subject to this Agreement,
and the exercise price hereof, and may make such other changes in
as it deems equitable in its absolute discretion to prevent
dilution or enlargement of the rights of the Optionee, provided
that any fractional Shares resulting from such adjustments shall
be eliminated.
15. Effect on Other Plans. Participation in the Plan shall
not affect the Optionee's eligibility to participate in any other
benefit or incentive plan of the Company. Any awards made
pursuant to the Plan shall not be used in determining the
benefits provided under any other plan of the Company unless
specifically provided therein.
16. Optionee Acknowledgement. Optionee acknowledges
receipt of a copy of the Plan, which is annexed hereto, and
represents that he or she is familiar with the terms and
provisions thereof, and hereby accepts this Option subject to all
the terms and provisions thereof. Optionee hereby agrees to
accept as binding, conclusive and final decisions or
interpretations of the Plan Administrator upon any questions
arising under the Plan.
DATE OF GRANT: March 6, 1995
FRED'S, INC.
By: /s/ Michael J. Hayes
-------------------------------
Its: President
Agreed to and accepted this 6th day of March, 1995.
/s/ Mike K. Spear
----------------------------------
Signature
/s/ Mike K. Spear
----------------------------------
Print Name
SUMMARY OF TERMS
40,000 shares at $9.75 which expire March 6, 2000
Vesting as follows: 25% on date of grant
50% one year from date of grant
75% two years from date of grant
100% three years from date of grant
Exhibit B
RESTRICTED STOCK AWARD AGREEMENT
PURSUANT TO THE FRED'S, INC.
1993 LONG-TERM INCENTIVE PLAN
FRED'S, INC., a Tennessee corporation (the "Company"),
hereby grants to MICHAEL K. SPEAR (the "Grantee") a conditional
award (the "Award") of 20,000 shares of no par value common stock
of the Company (the "Shares"), subject in all respects to the
terms, definitions and provisions of this agreement (the
"Agreement") and the 1993 LONG-TERM INCENTIVE PLAN (the "Plan")
adopted by the Company which is incorporated herein by reference.
Capitalized terms used in this Agreement and not otherwise
defined herein shall have the respective meanings assigned to
such terms in the Plan.
1. Restrictions and Forfeiture. The Shares shall be
subject to the following restrictions (the "Restrictions"):
(a) Except as otherwise permitted by paragraph 5 of this
Agreement or the Plan, neither this Award nor the Shares issued
hereunder may be sold, assigned, transferred, exchanged, pledged,
hypothecated, or otherwise encumbered prior to redelivery of the
Shares to the Grantee pursuant to paragraph 3(b) hereof.
(b) The Shares shall be forfeited to the Company, and all
rights of the Grantee to such Shares shall terminate without any
payment, if the Grantee fails to remain continuously as an
employee of the Company until the Restrictions lapse for any
reason other than (i) the Grantee's death, or (ii) by reason of
any other circumstances the Committee may, in its discretion,
find acceptable.
2. Restriction Period. The Restrictions on all of the
Shares covered hereby shall lapse on the second anniversary of
the date of grant set forth below (the "Date of Grant");
provided, however, in the event of Grantee's death, all remaining
Restrictions applicable to the Shares shall be deemed to have
lapsed on the day prior to such death.
3. Deposit of Certificates. In order to enforce the
Restrictions, the following procedures shall apply:
(a) Each certificate issued in respect of the Shares
subject to this Award shall be registered in the name of the
Grantee and deposited by him, together with a stock power
endorsed in blank, with the Company. Unless and until forfeited
as provided herein, the Grantee shall be entitled to vote all
Shares, receive all cash dividends with respect thereto and
otherwise be treated as a shareholder with respect to such
Shares. All other distributions with respect to the Shares,
including, without limitation, Shares received as a result of a
stock dividend, stock split, combination of shares or otherwise,
shall be retained by the Company in escrow or, if delivered to
the Grantee, the Grantee will deposit such distribution with the
Company in escrow pursuant to this paragraph 3(a).
(b) Certificates for Shares which are no longer
forfeitable pursuant to paragraphs 1 and 2 shall be redelivered
by the Company to the Grantee (or his legal representative,
beneficiary or heir) promptly after the applicable Restrictions
have lapsed; provided, however, that the Company shall be under
no obligation to redeliver such Shares to the Grantee until the
Grantee has paid or caused to be paid all taxes required to be
withheld pursuant to paragraph 6 hereof and the Plan.
(c) Each certificate issued in respect of the Shares
subject to this Award shall bear the following legend until the
Restrictions lapse:
THE SHARES EVIDENCED BY THIS CERTIFICATE ARE SUBJECT TO
THE TERMS AND CONDITIONS (INCLUDING FORFEITURE)
CONTAINED IN THAT CERTAIN RESTRICTED STOCK AWARD
AGREEMENT PURSUANT TO THE FRED'S, INC. 1993 LONG-TERM
INCENTIVE PLAN BETWEEN THE CORPORATION AND MICHAEL K.
SPEAR, DATED MARCH 6, 1995, A COPY OF WHICH IS ON FILE
IN THE OFFICE OF THE SECRETARY OF THE CORPORATION, AND
THE PROVISIONS OF WHICH ARE INCORPORATED HEREIN BY
REFERENCE.
4. General Provisions.
(a) The Grantee represents and warrants that if in the
future he should decide to offer or dispose of any Shares or
interest therein, he will be able to do so only in compliance
with this Agreement, the Act and applicable state securities
laws.
(b) The Company may require the Grantee to make any
other representation and warranty to the Company as may be
required by any applicable law or regulation or may otherwise be
appropriate.
5. Nontransferability of Award. This Award may not be
sold, assigned, transferred, exchanged, pledged, hypothecated, or
otherwise encumbered, other than by will or by the laws of
descent and distribution. The terms of this Agreement shall be
binding upon the executors, administrators, heirs, successors and
assigns of the Grantee.
6. Withholding. (a) Except as provided in paragraph
6(b) hereof, the Grantee shall remit to the Company an amount
sufficient to satisfy any federal, state or local withholding tax
requirements, prior to redelivery of the Shares under paragraph
3(b) hereof. The Grantee may satisfy the withholding requirement
in whole or in part by electing to have the Company withhold
Shares having a value equal to the amount required to be
withheld. The value of the Shares to be withheld shall be the
fair market value, as determined by the Committee, of the stock
on the date that the amount of tax to be withheld is determined
(the "Tax Date"). Such election must be made prior to the Tax
Date, must comply with all applicable securities law and other
legal requirements, as interpreted by the Committee, and may not
be made unless approved in advance by the Committee, in its
discretion.
(b) If the Grantee makes the election provided under
Section 83(b) of the Code to be taxed currently on the value of
the Shares notwithstanding the Restrictions, the Grantee shall
promptly notify the Company of such election, and shall
immediately remit to the Company in cash an amount sufficient to
satisfy any federal, state or local withholding tax requirements.
(c) The Company reserves the right to make whatever
further arrangements it deems appropriate for the withholding of
any taxes in connection with any transaction contemplated by this
Agreement or the Plan.
7. Merger. This Agreement supersedes any other agreement,
written or oral, between the parties with respect to the subject
matter hereof.
8. Grantee Acknowledgement. Grantee acknowledges receipt
of a copy of the Plan, which is annexed hereto, and represents
that he or she is familiar with the terms and provisions thereof,
and hereby accepts this Award subject to all the terms and
provisions thereof. Grantee hereby agrees to accept as binding,
conclusive and final decisions or interpretations of the
Committee upon any questions arising under the Plan.
DATE OF GRANT: March 6, 1995
FRED'S, INC.
By: /s/ Michael J. Hayes
--------------------------------
Its: President
Agreed to and accepted as of the 6th day of March, 1995.
/s/ Mike K. Spear
-----------------------------------
MIKE SPEAR
Exhibit C
Executive Relocation Package
1. Premises: The subject premises ("Premises") are the real
estate described on the attached legal description and the
improvements located thereon, and known as 1304 N.E. 10th
Street, Bentonville, Arkansas 72712. Executive represents
and warrants that there is no existing lien, mortgage or
encumbrance on the Premises.
2. Objective: Enable Executive to realize from the sale of the
Premises the full "Appraised Value."
3. Appraised Value: The "Appraised Value" is as follows:
Name of Appraiser: Cosby & Associates, Inc.
Date of Appraisal: June 6, 1994
Appraised Value: $297,500.00
4. Price Protection: Executive has listed the Premises for
sale. If Executive obtains a contract for sale of the
Premises for an amount which would net him more than the
Appraised Value, Company shall have no further obligation
under this package and Executive will be free to resell the
Premises at such higher value. If Executive obtains a
contract to purchase the Premises for an amount which would
net him less than the Appraised Value, then the Company will
have two alternatives: (i) Company may purchase the Premises
from Executive for the Appraised Value, and will have the
right to resell the Premises pursuant to the contract, and
Executive will not be obligated to refund the negative
difference to Company, or (ii) Company may lend Executive
the Appraised Value, take a mortgage on the Premises, and
seek a contract on the Premises at a higher purchase price,
pursuant to which Executive shall sell the Premises. In the
event Company makes such loan, Executive will cause to be
executed all documents necessary to give Company a first
mortgage lien on the Premises. Any such loan shall bear no
interest and shall become due and payable upon the sale of
the Premises.
5. Interim Funding: In the event Executive requires funds to
purchase a residence or to purchase a lot and build a
residence in Memphis prior to the sale of the Premises,
Company will loan Executive the funds necessary to so
purchase or build, up to the Appraised Value of the
Premises. Such loan shall bear no interest and shall become
due and payable upon the sale of the Premises. In the event
Company makes such loan, Executive will cause to be executed
all documents necessary to give Company a first mortgage
lien on the Premises. Any such loan shall bear no interest
and shall become due and payable upon the sale of the
Premises. Alternatively and in addition, the Company may
elect at any time after Executive first requests such funds,
to purchase the Premises as set forth in the preceding
paragraph.
6. Trusts: Executive and his wife will do all things necessary
to facilitate any sale of the Premises or mortgaging of the
subject Premises for the benefit of Company as contemplated
hereinabove by the Revocable Living Trusts dated September
20, 1990 under the Declarations of Trust dated September 20,
1990 for the Benefit of Michael K. Spear and Susan J. Spear.
Executive and his wife evidence their obligation so to do by
their signatures hereinbelow.
7. Costs: Executive will bear no sales agent's commission
cost, no cost of any closing of sale(s) of the Premises, nor
the cost of any mortgaging of the Premises for the benefit
of Company, if bearing such costs would cause Executive to
realize less than the Appraised Value from the Premises.
Rather, all such costs shall be borne by Company.
/s/ Michael K. Spear, Co-
Trustee
------------------------------
Michael K. Spear, Co-Trustee
under the Declaration of Trust
dated September 20, 1990 for
the benefit of Michael K.
Spear and Susan J. Spear
/s/ Susan J. Spear, Co-Trustee
------------------------------
Susan J. Spear, Co-Trustee
under the Declaration of Trust
dated September 20, 1990 for
the benefit of Michael K.
Spear and Susan J. Spear
FRED'S, INC.
/s/ Michael J. Hayes
------------------------------
Michael J. Hayes
Chief Executive Officer &
President
Attest:
/s/ Charles S. Vail
- -----------------------------
Charles S. Vail, Secretary
EXHIBIT 11.1
FRED'S, INC.
COMPUTATION OF NET INCOME PER SHARE
(unaudited)
(in thousands, except
for per share amounts)
<TABLE>
<CAPTION>
Years Ended
-------------------------------------
February 3, January 28, January 29,
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Primary net income per
share
- ----------------------
Net income $2,733 $8,373 $9,742
===== ===== =====
Weighted average number
of common shares
outstanding during
the period 9,322 9,307 9,307
Additional shares
attributable to common
stock equivalents - - -
----- ----- -----
9,322 9,307 9,307
===== ===== =====
Net income per share $ .29 $ .90 $ 1.05
===== ===== =====
Fully diluted net income
per share
- ------------------------
Net income $2,733 $8,373 $9,742
===== ===== =====
Weighted average number
of common shares out-
standing during the
period 9,322 9,307 9,307
Additional shares
attributable to common
stock equivalents - - -
----- ----- -----
9,322 9,307 9,307
===== ===== =====
Net income per share $ .29 $ .90 $ 1.05
===== ===== =====
</TABLE>
1995 ANNUAL REPORT
Company Profile
Fred's, Inc., founded in 1947, operates 201 discount general
merchandise stores in 10 Southeastern states. The Company also
markets goods and services to 34 franchised stores. Fred's
stores stock more than 12,000 frequently purchased items that
address the everyday needs of its customers, including nationally
recognized brand name products, proprietary "Fred's" label
products, and lower-priced, off-brand products. The Company is
headquartered in Memphis, Tennessee.
FINANCIAL HIGHLIGHTS
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
53 Weeks 52 Weeks
Ended Ended
February 3, January 28,
1996 1995 Change
- ------------------------------------------------------------
<S> <C> <C> <C>
Operating Data
Net sales $410,086 $380,702 7.7%
Operating income 4,771 13,563 (64.8%)
Net income 2,733 8,373 (67.4%)
Net income per share .29 .90 (67.8%)
Weighted average shares
outstanding 9,322 9,307 .2%
Balance Sheet Data
Working capital $ 59,349 $ 62,053 (4.4%)
Total assets 158,023 151,585 4.2%
Long-term debt (including
capital leases) 1,779 3,740 (52.4%)
Shareholders' equity 115,570 114,457 1.0%
Long-term debt to
capitalization 1.5% 3.2%
</TABLE>
TO OUR SHAREHOLDERS
During 1995, Fred's faced tough conditions as consumers
generally remained reluctant to increase discretionary spending.
This difficult environment, which seemed to cut across all
segments of our industry, led to sluggish sales results for the
year. In addition, our transition to a new competitive pricing
strategy during 1995 had an impact on both sales and earnings.
We remain convinced that this move will enhance our competitive
position in the coming years and support our long-term growth
strategies that are intended to ensure Fred's successful future.
Financial Results
Net sales for the year ended February 3, 1996, rose 8% to
$410,086,000 compared with $380,702,000 for the year ended
January 28, 1995. Net income for 1995 totaled $2,733,000 or $.29
per share compared with $8,373,000 or $.90 per share in 1994.
It should be noted that because Fred's fiscal year falls on
the Saturday closest to January 31, fiscal 1995 was a 53-week
reporting period. As a result, the sales results for 1995 are
not directly comparable with those of the prior 52-week fiscal
year ended January 28, 1995. However, by adding the week ended
February 4, 1995, to the prior-year results, and thereby
obtaining a similar 53-week period, a meaningful comparison can
be made. On this basis, total sales for 1995 increased 5% from
$388.9 million in the 53-week period ended February 4, 1995,
while comparable store sales rose 1.3% on the continued strength
of our pharmacy department.
As part of the new competitive pricing program we introduced
in December 1994, we reduced prices on hundreds of items
throughout our stores. Primarily because of this change, gross
margins fell one and one-half percentage points, or the
equivalent of about $6.3 million at the 27.0% gross margin rate
we achieved in 1994. Ordinarily, the margin impact of lower
selling prices would have been offset by increased unit sales
volume, however this did not occur because of slow apparel sales
throughout much of the year and a weak Christmas selling season,
both of which affected most retailers in 1995.
Fred's selling, general and administrative expenses
increased as a percentage of sales during 1995 which, when
combined with the lower gross margin, caused our operating margin
to decline to 1.2% from 3.6% in the preceding year. To some
extent the higher expense percentage was due to normal inflation
in expenses which outpaced the lower-than-expected comparable
store sales increase for the year. The increase in expenses also
reflected costs associated with our October 1995 acquisition of
the inventory, fixtures and equipment, and leases for 18 Super D
stores. During the balance of 1995, we implemented a number of
changes in these stores' physical structure, layout and systems
to conform them to the Fred's format and consolidate their
operations with our other stores. Additionally, our higher
expense levels in 1995 included costs associated with a number of
operational improvements we implemented during the year. These
included changes to our distribution center operations to
implement a more competitive wage program and convert from a
four-day to a five-day work week. Also, we incurred additional
expenses in 1995 as we converted to a new management system for
our pharmacy department that provides the centralized controls
necessary to maximize the performance of our growing operations.
The implementation of this new system, used by some of the
largest pharmacy chains in the country, was completed in early
1996. Lastly, expenses relative to sales increased because the
proportion of retail sales, which carry a higher expense
percentage than wholesale sales, increased in 1995.
As to our financial position, we were able to identify the
sluggish sales trends early enough to control our inventory
levels throughout the year and maintain a strong balance sheet.
Total inventories increased less than 4% over year-earlier levels
despite a 7% increase in retail selling space during the year,
and shareholders' equity rose to $115.6 million versus $114.5
million in 1994. Again in 1995, we ended the year with virtually
no long-term debt, which provides us with the financial strength
necessary to pursue new opportunities for growth.
During 1995, Fred's paid regular cash dividends to
shareholders totaling $.20 per share. This was the third
consecutive year in which cash dividends have been paid.
New Pricing Strategy
Our decision to implement a new pricing strategy for 1995
was the initial phase of a plan to improve the long-term
performance of the Company. Historically, Fred's has relied
heavily on sales events timed throughout the year to boost sales,
particularly around holidays and other seasonal shopping
occasions. While this kind of pricing strategy produces
temporary gains, unfortunately it also trains consumers to delay
all but the most necessary of purchases until those sales events
occur, reinforcing the idea that real bargains are not possible
at other times. Operationally, this type of program also entails
additional costs associated with preparing our stores for the
sales events, as well as the significant advertising expenditures
related to each sale.
Clearly, the use of sales events will always be a part of
our business, and when we can source merchandise at particularly
attractive costs, we will use those opportunities to our
advantage. Aside from a more limited use of sales events,
though, we recognize the long-term importance of building a
strong image among our customers as a price leader. By changing
our strategy to embrace competitive prices on hundreds of
products that people need and purchase every day, our customers
know that they need not wait for a sale to get our lowest price
or our best value. As we continue to reinforce that image, we
believe customers will shop our stores more regularly, sales
patterns will become more predictable and, over time, we will
build volume beyond what we could have achieved under our old
pricing approach.
Super Dollar Concept
In July, we began the next phase of our re-imaging program
with the introduction of the Fred's Super Dollar Store concept.
This new concept better aligns Fred's with the strong
price-to-value image of the dollar store customer. The "Super"
aspect of the concept is supported by the fact that, along with
everyday dollar store pricing, our stores are twice as large as a
typical dollar store and we have twice as many items in our
stores.
Opportunities for Growth
Throughout 1995, we looked for opportunities to strengthen
our network of retail stores throughout the Southeast, including
ways to enhance our existing presence and expand on that store
base. We are pleased to note that we have made progress on
several fronts in developing new opportunities for both internal
and external growth.
Perhaps the single most significant proposal in this regard
occurred in March 1996 when we signed a letter of intent to merge
with Rose's Stores, Inc., an 80-year old chain with 105 stores
based in Henderson, North Carolina. Under the terms of the
letter of intent, Rose's shareholders will receive approximately
three-tenths of a share of Fred's Class A common stock for each
share of Rose's stock. The merger with Rose's is subject to the
execution of a definitive merger agreement, approval by the
shareholders of Fred's and Rose's, and certain other conditions.
This proposed merger, along with our acquisition of the
former Super D stores in October, presents exciting possibilities
for us to increase our penetration of our existing 10-state
market region and to expand into new areas. With these
additions, we gain entry to Delaware, Maryland, North Carolina,
South Carolina, Virginia, and West Virginia, and we strengthen
our presence in Georgia, Kentucky, Mississippi, and Tennessee.
Equally important, however, with these new stores we further
leverage our existing support capabilities and expect to realize
additional benefits through the enhanced purchasing power of a $1
billion chain.
In addition, because of the continuing success of our
pharmacy department and the strong correlation between the
presence of a pharmacy department in our stores and their overall
success, we continued an aggressive expansion program in this
area during 1995. During the year, we acquired 19 pharmacies,
five of which were converted into Fred's Xpress units, a new
concept involving a small, free-standing location focused
primarily on pharmaceuticals and other health care needs. In the
coming year, we intend to continue testing in this area and,
depending on acquisition opportunities, we expect to expand the
Fred's Xpress program to other markets.
Conclusion
Although we are disappointed by the temporary setbacks
encountered during 1995, we remain convinced that Fred's is
moving in the right direction with its new pricing strategy and
its efforts to build its competitive position in the dollar store
segment. We are convinced that the investments we have made in
new technologies and in the promising areas of our business will
lead to improved performance in the future.
As we look ahead to the coming year, we are dedicated to
enhancing shareholder value. Additionally, as demonstrated by
our proposed merger with Rose's and our 1995 acquisition of the
Super D stores, we also intend to be alert for other
opportunities to expand our chain.
/s/ Michael J. Hayes
- -------------------------------------
Michael J. Hayes
Chief Executive Officer and President
SELECTED FINANCIAL DATA
(dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
1995(1) 1994 1993 1992 1991
-------------------------------------------------
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Net sales $410,086 $380,702 $347,903 $316,494 $291,634
Operating income 4,771 13,563 15,244 14,290 11,230
Income before taxes and
cumulative effect of
changes in accounting
methods 4,337 13,103 14,937 13,101 3,886
Provision for income taxes 1,604 4,730 5,195 4,909 47
Income before cumulative
effect of changes in
accounting methods 2,733 8,373 9,742 8,192 3,839
Net income $ 2,733 $ 8,373 $ 9,742 $ 25,127 $ 3,839
Net income per share:
Before cumulative effect
of changes in
accounting methods $ .29 $ .90 $ 1.05 $ .92 $ .61
Net income $ .29 $ .90 $ 1.05 $ 2.83 $ .61
Selected Operating Data:
Operating income as a
percentage of sales 1.2% 3.6% 4.4% 4.5% 3.9%
Increase in comparable
stores sales(2) 1.3% 3.6% 3.6% 5.6% 3.3%
Stores open at end of
period 201 184 170 156 144
Balance Sheet Data (at period end):
Total assets $158,023 $151,585 $139,064 $127,009 $104,382
Short-term debt
(including capital
leases) 1,961 2,037 436 410 1,664
Long-term debt
(including capital
leases) 1,779 3,740 1,496 1,918 48,799
Shareholders' equity 115,570 114,457 107,803 99,381 28,433
</TABLE>
(1) Results of 1995 include 53 weeks.
(2) A store is first included in the comparable store sales calculation after
the end of the twelth month following the store's grand opening month.
MANAGEMENT'S DISCUSSION AND ANALYSIS
Results of Operations
The following table provides a comparison of Fred's
financial results for the past three years. In this table,
categories of income and expense are expressed as a percentage of
net sales, and the year-over-year percentage changes for the past
two years are shown.
<TABLE>
<CAPTION>
Change from
Prior Year
---------------
1995 1994
Versus Versus
1995 1994 1993 1994 1993
- ---------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net sales 100.0% 100.0% 100.0% 7.7% 9.4%
Cost of goods sold 74.5 73.0 73.6 10.0 8.6
----- ----- ----- ----- -----
Gross profit 25.5 27.0 26.4 1.7 11.7
Selling, general
and administrative
expenses 24.3 23.4 22.0 11.8 16.2
Operating income 1.2 3.6 4.4 (64.8) (11.0)
Interest expense, net .1 .1 .1 20.6 66.7
----- ----- ----- ----- -----
Income before taxes 1.1 3.5 4.3 (66.9) (12.3)
Income taxes .4 1.3 1.5 (66.1) (9.0)
----- ----- ----- ----- -----
Net income .7% 2.2% 2.8% (67.4)% (14.1)%
===== ===== ===== ===== =====
</TABLE>
Net sales increased 7.7% ($29 million) in 1995.
Approximately $18 million of the increase was attributable to the
net addition of 17 stores and the acquisition of 19 pharmacies in
1995, together with the sales of 14 stores and 11 pharmacies that
were opened in 1994 and not included in the comparable store
sales calculation until various points in 1995. In addition,
1995 included 53 weeks versus 52 in 1994, resulting in a $7
million increase in sales, and comparable store sales increased
1.3% ($4 million). Comparable store sales increases were
comprised of the following components:
* Sales in comparable pharmacies increased 12.5%.
* Comparable store sales in non-pharmaceutical
departments experienced a decrease of 1.4% due to lower
retail prices resulting from the Company's
implementation of an everyday competitive pricing
strategy. Also, apparel sales were lower in 1995 as a
result of sluggish overall consumer spending in this
area beginning in June.
Net sales increased 9.4% ($33 million) in 1994.
Approximately $22 million of the increase was attributable to the
net addition of 14 stores and the acquisition of 11 pharmacies in
1994, together with the sales of 14 stores and 15 pharmacies that
were opened in 1993 and not included in the comparable store
sales calculation until various points in 1994. In addition,
comparable store sales increased 3.6% ($11 million) due to the
following:
* Sales in comparable pharmacies increased 8.0%.
* Eight stores were upgraded either through expansion or
relocation to larger store sites in existing markets during 1994,
allowing Fred's to expand the merchandise mix in those stores.
* Lawn and garden sales increased due to an enhanced mix
and the addition of ten garden centers.
* Ladies' apparel had higher sales due to an improved
selection.
* The aforementioned sales increases were partially
offset by lower sales of tobacco products due to price deflation
and increased competition.
Fred's gross margin decreased in 1995 due primarily to the
implementation of its competitive pricing strategy, combined with
a reduction in apparel sales (which carry a higher margin than
the Company's average), and higher than normal markdowns
associated both with selling apparel and changes made to the
merchandise mix.
Fred's gross margin increased during 1994 primarily because
retail sales, which result in higher gross margin compared with
Fred's wholesale sales, increased as a percentage of total sales.
In addition, apparel sales increased as a percentage of total
sales because all new stores included a full line of apparel.
Selling, general and administrative expenses, relative to
sales, increased in 1995 due to the following:
* Normal inflation in expenses outpaced the weak
comparable store sales increases.
* A more competitive wage program for the Company's
distribution center operations was implemented.
* Retail sales, which carry higher expense percentages
than wholesale sales, increased as a percentage of total sales
during 1995.
* Higher expenses were incurred as the result of
converting to a new pharmacy management system that provides the
centralized controls necessary to maximize the performance of a
large chain of pharmacies.
* There were nonrecurring costs associated with the third
quarter acquisition of eighteen stores and the related steps
taken to conform these stores to the Fred's concept.
* Insurance costs associated with the Company's
self-insured employee medical plan were higher due to more
large-dollar claims (i.e. individual claims in excess of
$20,000).
* Depreciation expense increased due to capital
expenditures related to enhanced point-of-sale cash register
systems and the addition of new stores and pharmacies.
Selling, general and administrative expenses, relative to
sales, increased in 1994 due to the following:
* Fred's incurred higher store payroll and supplies
expense in connection with the implementation of a
plan-o-gramming system in its high turnover merchandise
departments. This system is designed to improve merchandise
presentation and in-stock inventory positions.
* The Company's plan for general merchandise
(non-pharmacy) sales proved to be too aggressive, and when sales
did not increase at the rate expected, the stores were
over-committed to variable labor.
* Retail sales, which carry higher expense percentages
than wholesale sales, increased as a percentage of total sales
during 1994.
* Insurance costs associated with the Company's
self-insured employee medical plan were higher due to an increase
in the number of claims.
Income tax expense decreased in 1995 due to a reduction in
pretax income. In 1994, income tax expense decreased because of
lower pretax income, partially offset by a benefit of $.2 million
in 1993 from recognizing the effect of the Omnibus Budget
Reconciliation Act of 1993 on the deferred tax accounts.
Liquidity and Capital Resources
Fred's has a $12 million revolving credit commitment with a
bank that has been used during each of the last three years to
build inventory levels for the Christmas selling season. These
borrowings were repaid prior to each year end.
Cash provided by operations in 1995, 1994 and 1993 totaled
$13.1 million, $4.6 million and $11.1 million, respectively.
During those years, cash from operations was used primarily for
capital expenditures associated with new and upgraded stores and
pharmacies, the enhancement of store point-of-sale cash register
systems, and capital maintenance; the 1995 acquisition of the
inventory and fixed assets of an eighteen-store chain; repayment
of debt; and the payment of cash dividends. In 1994, the Company
borrowed $4.5 million to finance the purchase of a portion of the
new point-of-sale systems and a new mainframe computer at the
corporate information systems center. Such borrowings are being
repaid over a 42-month term. The Company believes that
sufficient capital resources are available in both the short-term
and long-term through currently available cash, cash generated
from future operations and, if necessary, the ability to obtain
additional financing.
Tax Loss Carryforwards
At February 3, 1996, the Company had certain net operating
loss carryforwards which were acquired in reorganizations and
certain purchase transactions and are available to reduce income
taxes, subject to usage limitations. These carryforwards total
approximately $7.1 million for Federal income tax purposes and
expire during the period 1996 through 1999 and $40.9 million for
state income tax purposes of which $14.8 million expire during
the period 2000 through 2008. If certain substantial changes in
the Company's ownership should occur, there would be an annual
limitation on the amount of carryforwards which can be utilized.
On the basis of tax returns filed, the Company has various tax
credit carryforwards totaling approximately $.8 million, which
are also subject to usage limitations and expire during the
period 1997 through 2000.
Seasonality
Fred's business is subject to seasonal influences, but the
Company has tended to experience less seasonal fluctuation than
many other retailers due to the Company's mix of everyday basic
merchandise. The fourth quarter is typically the most profitable
quarter because it includes the Christmas selling season. The
overall strength of the fourth quarter is mitigated, however, by
the inclusion of the month of January, which is generally the
least profitable month of the year.
Inflation
The impact of inflation on labor and occupancy costs can
significantly affect Fred's operations. Many of Fred's employees
are paid hourly rates related to the Federal minimum wage and,
accordingly, any increase affects Fred's. In addition, payroll
taxes, employee benefits and other employee-related costs
continue to increase. Occupancy costs, including rent,
maintenance, taxes, and insurance, also continue to rise. Fred's
believes that maintaining adequate operating margins through a
combination of price adjustments and cost controls, careful
evaluation of occupancy needs, and efficient purchasing practices
is the most effective tool for coping with increasing costs and
expenses.
Subsequent Event
On March 1, 1996, the Company signed a letter of intent to
acquire all of the outstanding stock of Rose's Stores, Inc.
("Rose's"), which operates 105 stores in the southeastern United
States. Pursuant to the proposed merger agreement, the Company
will exchange approximately three-tenths of a share of its Class
A Common Stock (approximately 2.4 million shares) for each
outstanding common share of Rose's. The merger is subject to the
execution of a definitive merger agreement, approval by the
shareholders of Fred's and Rose's, and certain other conditions.
At January 27, 1996, Rose's reported approximately $171 million
in total assets and $679 million in total sales for the year then
ended.
Impact of Proposed Accounting Standards
In March 1995, the Financial Accounting Standards Board
("FASB") issued Statement of Financial Accounting Standards
("SFAS") No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of" which is
effective for fiscal years beginning after December 15, 1995.
This statement addresses situations where information indicates
that a company might be unable to recover, through future
operations or sales, the carrying amount of long-lived assets.
If an impairment is determined to exist, the company must compute
the amount of impairment using discounted cash flow analysis.
The adoption of SFAS No. 121 is not expected to have a material
impact on Fred's.
In October 1995, the FASB issued SFAS No. 123, "Accounting
for Stock-Based Compensation" which is effective for fiscal years
beginning after December 15, 1995. This statement defines a
fair-value based method of accounting for employee stock options
or similar equity instruments and encourages all entities to
adopt that method of accounting for all their employee stock
compensation plans. However, it also allows an entity to
continue to measure compensation for those plans using the
intrinsic value based method currently prescribed by Accounting
Principles Board Opinion No. 25 provided certain pro forma
disclosures are made that disclose what the impact on net
earnings would have been had the company adopted the accounting
provisions of SFAS No. 123. Fred's plans to continue the current
accounting and make the disclosures required by SFAS No. 123.
Therefore, there will be no impact on Fred's from adopting this
standard.
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
For the Year Ended
-------------------------------------
February 3, January 28, January 29,
1996(1) 1995 1994
- ---------------------------------------------------------------
<S> <C> <C> <C>
Net sales $410,086 $380,702 $347,903
Cost of goods sold 305,668 277,991 255,934
------- ------- -------
Gross profit 104,418 102,711 91,969
Selling, general and
administrative expenses 99,647 89,148 76,725
------- ------- -------
Operating income 4,771 13,563 15,244
Interest expense, net 434 360 216
Other expenses 100 91
------- ------- -------
Income before taxes 4,337 13,103 14,937
Income taxes 1,604 4,730 5,195
------- ------- -------
Net income $ 2,733 $ 8,373 $ 9,742
======= ======= =======
Net income per share $ .29 $ .90 $ 1.05
======= ======= =======
Weighted average number
of common shares and
common equivalent
shares outstanding 9,322 9,307 9,307
======= ======= =======
</TABLE>
(1) Results for the year ended February 3, 1996 include 53
weeks.
See accompanying notes to consolidated financial statements.
CONSOLIDATED BALANCE SHEETS
(in thousands, except for number of shares)
<TABLE>
<CAPTION>
February 3, January 28,
1996 1995
- -----------------------------------------------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 5,496 $ 5,944
Receivables, less allowance for
doubtful accounts of $857
($457 at January 28, 1995) 5,115 4,033
Inventories 85,211 82,163
Deferred income taxes 2,125 1,590
Other current assets 956 756
------- -------
Total current assets 98,903 94,486
Property and equipment, at
depreciated cost 51,681 49,550
Equipment under capital leases,
less accumulated amortization of
$683 ($931 at January 28, 1995) 560 951
Deferred income taxes 4,986 5,170
Other noncurrent assets 1,893 1,428
------- -------
$158,023 $151,585
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 29,793 $ 24,324
Current portion of indebtedness 1,660 1,629
Current portion of capital lease
obligations 301 408
Accrued liabilities 6,987 5,030
Income taxes payable 813 1,042
------- -------
Total current liabilities 39,554 32,433
Indebtedness 1,278 2,938
Capital lease obligations 501 802
Other noncurrent liabilities 1,120 955
------- -------
Total liabilities 42,453 37,128
------- -------
Commitments and contingencies (Notes 8 and 12)
Shareholders' equity:
Common stock, Class A voting, no
par value, 9,335,239 shares issued
and outstanding (9,307,373 shares
at January 28, 1995) 63,458 63,185
Retained earnings 52,424 51,555
Deferred compensation on restricted
stock incentive plan (169)
Loan to ESOP (143) (283)
------- -------
Total shareholders' equity 115,570 114,457
------- -------
$158,023 $151,585
======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF CHANGES
IN SHAREHOLDERS' EQUITY
(in thousands, except for number of shares)
<TABLE>
<CAPTION>
Common Stock Retained Deferred Loan to
Shares Amount Earnings Compensation ESOP Total
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance, January 30, 1993 9,306,490 $63,160 $36,790 $ $ (569) $ 99,381
Cash dividends paid
($.16 per share) (1,489) (1,489)
Exercise of stock options 1,767 26 26
Repurchase of shares (830)
Contribution to ESOP
to reduce loan balance 143 143
Net income 9,742 9,742
--------- ------ ------ ------ ------ -------
Balance, January 29, 1994 9,307,427 63,186 45,043 (426) 107,803
Cash dividends paid
($.20 per share) (1,861) (1,861)
Repurchase of shares (54) (1) (1)
Contribution to ESOP
to reduce loan balance 143 143
Net income 8,373 8,373
--------- ------ ------ ------ ------ -------
Balance, January 28, 1995 9,307,373 63,185 51,555 (283) 114,457
Cash dividends paid
($.20 per share) (1,864) (1,864)
Repurchase of shares (134)
Issuance of restricted stock 28,000 273 (273)
Amortization and vesting
of deferred compensation
on restricted stock
incentive plan 104 104
Contribution to ESOP
to reduce loan balance 140 140
Net income 2,733 2,733
--------- ------ ------ ------ ------ -------
Balance, February 3, 1996 9,335,239 $63,458 $52,424 $ (169) $ (143) $115,570
========= ====== ====== ====== ===== =======
</TABLE>
See accompanying notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
For the Year Ended
-------------------------------------
February 3, January 28, January 29,
1996 1995 1994
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 2,733 $ 8,373 $ 9,742
Adjustments to reconcile net income
to net cash flows from operating
activities:
Depreciation and amortization 5,493 4,571 3,545
Provision for uncollectible
receivables 595 153 370
Contribution to ESOP to reduce
ESOP loan balance 140 143 143
Deferred income taxes (351) 2,414 3,915
Amortization of deferred
compensation on restricted
stock incentive plan 104
(Increase) decrease in assets:
Receivables (1,591) (35) (266)
Inventories (427) (13,069) (9,396)
Other current assets (200) 288 (352)
Other noncurrent assets (764) (291) (596)
Increase (decrease) in liabilities:
Accounts payable 5,469 1,179 4,889
Accrued liabilities 1,957 233 (1,508)
Income taxes payable (229) 462 516
Other noncurrent liabilities 165 148 132
------ ------- ------
Net cash provided by operating
activities 13,094 4,569 11,134
------ ------- ------
Cash flows from investing activities:
Additions to property, equipment and
equipment under capital leases (6,694) (8,678) (7,833)
Acquisition of businesses, net of cash (2,947)
------ ------- ------
Net cash used in investing
activities (9,641) (8,678) (7,833)
------ ------- ------
Cash flows from financing activities:
Proceeds from borrowings and increase
in capital lease obligations 4,500
Reduction of indebtedness and capital
lease obligations (2,037) (655) (396)
Proceeds from exercise of options 26
Repurchase of shares (1)
Payment of cash dividends (1,864) (1,861) (1,489)
------ ------- ------
Net cash provided by (used in)
financing activities (3,901) 1,983 (1,859)
------ ------- ------
Increase (decrease) in cash and cash
equivalents (448) (2,126) 1,442
Cash and cash equivalents:
Beginning of year 5,944 8,070 6,628
------ ------- ------
End of year $ 5,496 $ 5,944 $ 8,070
====== ======= ======
Supplemental disclosures of cash flow
information:
Interest paid $ 535 $ 328 $ 163
====== ======= ======
Income taxes paid $ 2,184 $ 1,854 $ 764
====== ======= ======
</TABLE>
See accompanying notes to consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Description of Business and Summary of Significant
Accounting Policies
Description of business. The primary business of Fred's, Inc.
(the "Company") is the sale of general merchandise through 201
retail discount stores located in the southeastern United States.
In addition, the Company sells general merchandise to its
franchisees through its wholesale division.
Consolidated financial statements. The consolidated financial
statements include the accounts of the Company and its
subsidiaries. All significant intercompany accounts and
transactions are eliminated.
Fiscal year. The Company utilizes a 52 or 53 week accounting
period which ends on the Saturday closest to January 31. The
year ended February 3, 1996 included 53 weeks. Fiscal years
1995, 1994 and 1993, as used herein, refer to the years ended
February 3, 1996, January 28, 1995 and January 29, 1994,
respectively.
Use of estimates. The preparation of financial statements in
accordance with generally accepted accounting principles requires
management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses
during the reported period. Actual results could differ from
those estimates.
Inventories. Wholesale inventories are stated at the lower of
cost (first-in, first-out) or market. Retail inventories are
stated at the lower of cost (first-in, first-out) or market as
determined by the retail inventory method.
Depreciation and amortization. Depreciation is computed by use
of the straight-line method over the estimated useful lives of
buildings, furniture, fixtures and equipment. Leasehold costs
and improvements are amortized over the lesser of their estimated
useful lives or the remaining lease terms. Average useful lives
are as follows: buildings and improvements - 8 to 30 years;
furniture and fixtures - 5 to 10 years; and equipment - 3 to 10
years. Amortization on equipment under capital leases is
computed on a straight-line basis over the terms of the leases.
Selling, general and administrative expenses. The Company
includes buying, warehousing and occupancy costs in selling,
general and administrative expenses.
Advertising. The Company charges advertising, including
production costs, to expense on the first date of the advertising
period. Advertising expense for 1995, 1994 and 1993 was
$7,625,000, $7,276,000 and $6,821,000, respectively.
Preopening costs. The Company charges to expense the preopening
costs of new stores as incurred. These costs are primarily labor
to stock the store, preopening advertising, store supplies and
other expendable items.
Goodwill and other intangibles. Goodwill in connection with
acquired businesses is being amortized over periods ranging from
5 to 20 years. Goodwill, net of accumulated amortization,
totaled $451,000 at February 3, 1996 and $410,000 at January 28,
1995. Other identifiable intangibles associated with acquired
pharmacies are being amortized over five years. These
intangibles, net of accumulated amortization, totaled $1,331,000
at February 3, 1996 and $885,000 at January 28, 1995. At each
balance sheet date, the Company assesses whether there has been
an impairment in the value of such goodwill and intangibles by
determining whether projected undiscounted future cash flows from
operations exceeds its net book value as of the assessment date.
Income taxes. The Company utilizes the provisions of Statement
of Financial Accounting Standards No. 109, "Accounting for Income
Taxes." Deferred income taxes are provided for temporary
differences between the financial reporting basis and income tax
basis of the Company's assets and liabilities.
Cash and cash equivalents. Cash on hand and in banks, together
with repurchase agreements having original maturities of three
months or less, are classified as cash equivalents by the
Company.
Net income per share. Net income per share is based on the
weighted average number of common shares and common equivalent
shares outstanding. Common equivalent shares represent dilutive
stock options and restricted stock shares, reduced by the number
of shares which could be repurchased at the average fair market
value during the year with the proceeds of the options and the
income tax savings available from recognizing compensation
expense as a tax deduction.
NOTE 2 - ACQUISITION
Effective October 9, 1995, the Company entered into an Asset
Purchase Agreement for the purchase of inventory and other
selected assets of Southern Wholesale Company for $2.9 million in
cash. Assets acquired consisted of inventory aggregating $2.6
million, receivables of $86,000 and fixtures of $160,000. The
purchase price paid in excess of the fair value of the tangible
assets acquired totaled $80,000 and was recorded as goodwill.
NOTE 3 - INVENTORIES
The components of inventories are as follows (in thousands):
<TABLE>
<CAPTION>
February 3, January 28,
1996 1995
- ----------------------------------------------------------------
<S> <C> <C>
Wholesale $19,710 $20,715
Retail 65,501 61,448
------ ------
$85,211 $82,163
====== ======
</TABLE>
NOTE 4 - PROPERTY AND EQUIPMENT
Property and equipment, at cost, consist of the following
(in thousands):
<TABLE>
<CAPTION>
February 3, January 28,
1996 1995
- ----------------------------------------------------------------
<S> <C> <C>
Buildings and improvements $ 52,946 $ 52,386
Furniture, fixtures and equipment 49,132 43,061
------- -------
102,078 95,447
Less accumulated depreciation and
amortization 54,801 50,321
------- -------
47,277 45,126
4,404 4,424
------- -------
$ 51,681 $ 49,550
------- -------
</TABLE>
Depreciation expense and amortization expense on equipment
under capital leases totaled $5,114,000, $4,275,000 and
$3,345,000 for 1995, 1994 and 1993, respectively.
NOTE 5 - ACCRUED LIABILITIES
The components of accrued liabilities are as follows (in
thousands):
<TABLE>
<CAPTION>
February 3, January 28,
1996 1995
- ----------------------------------------------------------------
<S> <C> <C>
Payroll and benefits $ 989 $ 1,121
Sales and use taxes 1,699 1,154
Insurance 1,691 1,130
Other 2,608 1,625
------- -------
$ 6,987 $ 5,030
======= =======
</TABLE>
NOTE 6 - INCOME TAXES
The provision for income taxes consists of the following (in
thousands):
<TABLE>
<CAPTION>
For the Year Ended
-------------------------------------
February 3, January 28, January 29,
1996 1995 1994
- ---------------------------------------------------------------
<S> <C> <C> <C>
Current
Federal $ 1,653 $ 1,808 $ 653
State 302 508 627
------ ------ ------
1,955 2,316 1,280
Deferred
Federal (150) 2,302 3,910
State (201) 112 5
------ ------ ------
(351) 2,414 3,915
------ ------ ------
$ 1,604 $ 4,730 $ 5,195
====== ====== ======
</TABLE>
Deferred tax assets (liabilities) comprise the following (in
thousands):
<TABLE>
<CAPTION>
February 3, January 28,
1996 1995
- ----------------------------------------------------------------
<S> <C> <C>
Current deferred tax assets:
Inventory cost capitalization $ 1,313 $ 1,175
Accrual for inventory shrinkage 946 811
Allowance for doubtful accounts 462 341
Insurance accruals 575 368
Other 247 78
------ ------
Gross current deferred tax assets 3,543 2,773
Deferred tax asset valuation allowance (1,125) (870)
------ ------
2,418 1,903
Current deferred tax liabilities (293) (313)
------ ------
Net current deferred tax assets $ 2,125 $ 1,590
====== ======
Noncurrent deferred tax assets:
Net operating loss carryforwards $ 3,840 $ 4,424
Tax credit carryforwards 773 773
Depreciation 802 867
Postretirement benefits other than
pensions 429 366
Other 810 665
------ ------
Gross noncurrent deferred tax assets 6,654 7,095
Deferred tax asset valuation allowance (1,636) (1,891)
------ ------
5,018 5,204
Noncurrent deferred tax liabilities (32) (34)
------ ------
Net noncurrent deferred tax assets $ 4,986 $ 5,170
====== ======
</TABLE>
The ultimate realization of these assets is dependent upon
the generation of future taxable income sufficient to offset the
related deductions and loss carryforwards within the applicable
carryforward periods as described below. The valuation allowance
is based upon management's conclusion that certain tax
carryforward items will expire unused.
A reconciliation of the statutory Federal income tax rate to
the effective tax rate is as follows:
<TABLE>
<CAPTION>
For the Year Ended
-------------------------------------
February 3, January 28, January 29,
1996 1995 1994
- ----------------------------------------------------------------
<S> <C> <C> <C>
Income tax provision at
statutory rate 35.0% 35.0% 35.0%
State income taxes, net
of federal benefit 1.5 3.1 2.8
Effect of change in tax
rate on net deferred
tax assets (1.5)
Other .5 (2.0) (1.5)
---- ---- ----
37.0% 36.1% 34.8%
==== ==== ====
</TABLE>
At February 3, 1996, the Company has certain net operating
loss carryforwards which were acquired in reorganizations and
certain purchase transactions which are available to reduce
income taxes, subject to usage limitations. These carryforwards
total approximately $7,100,000 for Federal income tax purposes
and expire during the period 1996 through 1999 and $40,900,000
for state income tax purposes of which $14,800,000 expire during
the period 2000 through 2008. If certain substantial changes in
the Company's ownership should occur, there would be an annual
limitation on the amount of carryforwards which can be utilized.
On the basis of tax returns filed, the Company has various tax
credit carryforwards totaling approximately $773,000, which are
also subject to usage limitations and expire during the period
1997 through 2000.
NOTE 7 - INDEBTEDNESS
Indebtedness consists of the following (in thousands):
<TABLE>
<CAPTION>
February 3, January 28,
1996 1995
- ----------------------------------------------------------
<S> <C> <C>
Indebtedness to a bank $ 2,795 $ 4,284
Indebtedness of ESOP to a bank 143 283
------ ------
2,938 4,567
Less current portion 1,660 1,629
------ ------
$ 1,278 $ 2,938
====== ======
</TABLE>
On May 15, 1992, the Company and a bank entered into a
Revolving Loan and Credit Agreement (the "Agreement"). The
Agreement, as amended, provides the Company with an unsecured
revolving line of credit commitment of up to $12 million and
bears interest at the lesser of 1% below prime rate or a
LIBOR-based rate. The term of the Agreement extends to May 1,
1998, and borrowings under the Agreement are subject to a
borrowing base, as defined. Under the most restrictive covenants
of the Agreement, the Company is required to maintain specified
shareholders' equity and net income levels. There were no
borrowings outstanding under the Agreement at February 3, 1996
and January 28, 1995. The Company is required to pay a
commitment fee to the bank at a rate per annum equal to .25% on
the unutilized portion of the revolving line commitment over the
term of the Agreement.
In December 1993, the Company entered into a line of credit
agreement with a bank for the purpose of financing the purchase
of new point-of-sale equipment and a new mainframe computer. The
commitment was for up to $4.5 million, and the entire line was
drawn during 1994. Repayment terms for individual draws consist
of a six-month interest only period followed by a 36-month full
payout. At February 3, 1996, the effective rates on all
outstanding draws ranged from 5.70% to 7.47% with a weighted
average of 6.80%.
The Company's ESOP also has bank borrowings outstanding
which are reflected as indebtedness and a reduction of
shareholders' equity. The note requires four annual payments of
$143,000 which began on June 30, 1993 and bears interest at the
bank's prime rate which was 8.5% at February 3, 1996. The note
is secured by shares of the Company's common stock held by the
ESOP trust.
The principal maturities of all long-term debt subsequent to
1996 are $1,278,000 in 1997.
NOTE 8 - LONG-TERM LEASES
The Company leases certain of its store locations under
noncancelable operating leases expiring at various dates through
2029. Many of these leases contain renewal options and require
the Company to pay taxes, maintenance, insurance and certain
other operating expenses applicable to the leased properties. In
addition, the Company leases various equipment under
noncancelable operating leases and certain transportation
equipment under capital leases.
Total rent expense under operating leases for the respective
periods was as follows (in thousands):
1993 $ 5,627
1994 $ 6,506
1995 $ 7,924
Minimum rental payments under all operating and capital
leases as of February 3, 1996 are as follows (in thousands):
<TABLE>
<CAPTION>
Operating Capital
Leases Leases
- -----------------------------------------------------------------
<S> <C> <C>
1996 $ 6,380 $ 429
1997 5,432 429
1998 4,116 143
1999 2,425
2000 1,181
Thereafter 3,522
------- ------
Total minimum lease payments $ 23,056 1,001
=======
Imputed interest 199
------
Present value of net minimum lease
payments, including $301
classified as current portion
of capital lease obligations $ 802
======
</TABLE>
NOTE 9 - SHAREHOLDERS' INTEREST
The Company has 30 million shares of Class A voting common
stock authorized. The Company's authorized capital also consists
of 11.5 million shares of Class B nonvoting common stock, of
which no shares have been issued. In addition, the Company has
authorized 10 million shares of preferred stock, of which no
shares have been issued.
NOTE 10 - EMPLOYEE BENEFIT PLANS
Incentive stock option plan. The Company has two long-term
incentive plans under which an aggregate of 500,000 shares may
be granted. At February 3, 1996, options for a total of 464,554
shares of Class A common stock had been granted under the
incentive stock option portion of the plans, including 2,017
shares for which options have been subsequently exercised and
172,487 shares for which options have been canceled or terminated
unexercised. These options expire five years from the date of
grant and options outstanding at February 3, 1996 expire in 1997
through 2000.
A summary of activity in the plans follows:
<TABLE>
<CAPTION>
For the Year Ended
-----------------------------------
February 3, January 28, January 29,
1996 1995 1994
- ----------------------------------------------------------------
<S> <C> <C> <C>
Outstanding at beginning
of year 292,655 274,455 293,120
------- ------- -------
Options granted
$14.25 per share 85,150
$13.75 per share 2,600
$10.00 per share 1,000
$ 9.75 per share 70,300 1,600
------- ------- -------
Total granted 71,300 89,350
------- ------- -------
Options exercised
$15.25 per share 47
$14.50 per share 1,720
------- ------- -------
Total exercised 1,767
------- ------- -------
Options canceled 73,905 71,150 16,898
------- ------- -------
Outstanding at end of year 290,050 292,655 274,455
======= ======= =======
Exercisable at end of year 221,585 197,920 154,695
======= ======= =======
</TABLE>
The options exercisable at February 3, 1996 are exercisable
at prices ranging from $9.75 to $15.25 per share.
Restricted stock. During 1995, 28,000 restricted shares were
issued under the restricted stock portion of the long-term
incentive plan to key employees. Compensation expense related to
the shares issued is recognized over the period for which
restrictions apply.
Employee stock ownership plan. The Company has a
non-contributory employee stock ownership plan for the benefit of
qualifying employees who have completed one year of service and
attained the age of 18. Benefits are fully vested upon
completion of seven years of service. Company contributions are
limited by the maximum deduction allowed by the Internal Revenue
Code, except that such amount may be exceeded if the contribution
is required to enable the plan to make payments on outstanding
indebtedness. The Company's contribution expense for the years
ended February 3, 1996, January 28, 1995 and January 29, 1994 was
$163,000, $168,000 and $173,000, respectively.
As discussed in Note 7, the ESOP has borrowings outstanding
from a bank. Interest expense on the borrowings was $20,000,
$25,000 and $30,000 for the years ended February 3, 1996, January
28, 1995 and January 29, 1994, respectively.
Salary reduction profit sharing plan. The Company has a defined
contribution profit sharing plan for the benefit of qualifying
employees who have completed one year of service and attained the
age of 21. Participants may elect to make contributions to the
plan up to a maximum of 15% of their compensation. Company
contributions are made at the discretion of the Company's Board
of Directors. Participants are 100% vested in their
contributions and earnings thereon. Contributions by the Company
and earnings thereon are fully vested upon completion of seven
years of service. The Company's contributions for the years
ended February 3, 1996, January 28, 1995 and January 29, 1994
were $58,000, $58,000 and $52,000, respectively.
Postretirement benefits. The Company provides certain health
care benefits to its full-time employees that retire between the
ages of 58 and 65 with certain specified levels of credited
service. Health care coverage options for retirees under the
plan are the same as those available to active employees. The
Company's accumulated postretirement benefit obligation is as
follows (in thousands):
<TABLE>
<CAPTION>
February 3, January 28,
1996 1995
- ----------------------------------------------------------------
<S> <C> <C>
Retiree benefit obligation $ 12 $ 25
Fully eligible active benefit
obligation 83 85
Other active benefit obligation 1,108 867
------ -----
1,203 977
Unrecognized net loss (83) (22)
------ -----
$ 1,120 $ 955
====== =====
</TABLE>
The medical care cost trend used in determining this
obligation is 10.0%, decreasing annually before leveling at 6.5%
in 2003. This trend rate has a significant effect on the amounts
reported. To illustrate, increasing the health care cost trend
by 1% would increase the accumulated postretirement benefit
obligation by $177,000. The discount rates used in calculating
the obligation were 8.0% and 8.25% at February 3, 1996 and
January 28, 1995, respectively.
The annual net postretirement cost is as follows (in
thousands):
<TABLE>
<CAPTION>
For the Year Ended
-----------------------------------
February 3, January 28, January 29,
1996 1995 1994
- ----------------------------------------------------------------
<S> <C> <C> <C>
Service cost $ 124 $ 101 $ 78
Interest cost on accumulated
postretirement benefit
obligation 92 74 60
---- ---- ----
$ 216 $ 175 $ 138
==== ==== ====
</TABLE>
The Company's policy is to fund claims as incurred. Claims
paid in 1995, 1994 and 1993 totaled $51,000, $67,000 and $16,000,
respectively.
NOTE 11 - FAIR VALUE OF FINANCIAL INSTRUMENTS
At February 3, 1996, the Company did not have any
outstanding derivative instruments. The recorded value of the
Company's financial instruments, which include cash and cash
equivalents, receivables, accounts payable and indebtedness,
approximates fair value. The following methods and assumptions
were used to estimate fair value of each class of financial
instrument: (1) the carrying amounts of current assets and
liabilities approximate fair value because of the short maturity
of those instruments and (2) the fair value of the Company's
indebtedness is estimated based on the current borrowing rates
available to the Company for bank loans with similar terms and
average maturities.
NOTE 12 - COMMITMENTS AND CONTINGENCIES
Commitments. At February 3, 1996, the Company had
commitments approximating $2,900,000 on issued letters of credit
which support purchase orders for merchandise. Additionally, the
Company had outstanding letters of credit aggregating $2,254,000
utilized as collateral for their risk management programs.
Concentration of credit risk. Financial instruments which
potentially subject the Company to concentration of credit risk
are primarily cash and cash equivalents.
Litigation. The Company is a party to several pending legal
proceedings and claims. Although the outcome of the proceedings
and claims cannot be determined with certainty, management of the
Company is of the opinion that it is unlikely that these
proceedings and claims will have a material effect on the results
of operations or the financial condition of the Company.
NOTE 13 - SUBSEQUENT EVENT (UNAUDITED)
On March 1, 1996, the Company signed a letter of intent to
acquire all of the outstanding stock of Rose's Stores, Inc.
("Rose's"), a publicly traded retailer that operates 105 stores
in the southeastern United States. The acquisition will be
accounted for as a purchase, and accordingly, the results of
operations of the acquired business will be included in the
Company's consolidated financial statements after consummation of
the transaction. Pursuant to the proposed merger agreement, the
Company will exchange approximately three-tenths of a share of
its Class A Common Stock (approximately 2.4 million shares) for
each outstanding common share of Rose's. The merger is subject
to the execution of a definitive merger agreement, approval by
the shareholders of Fred's and Rose's, and certain other
conditions. At January 27, 1996, Rose's reported approximately
$171 million in total assets and $679 million in total sales for
the year then ended.
NOTE 14 - QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
First Second Third Fourth
(in thousands, except per share data) Quarter Quarter Quarter Quarter
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Year Ended February 3, 1996
Net sales $97,050 $93,295 $95,598 $124,143
Gross profit 25,538 22,942 24,911 31,027
Net income 2,255 (427) 121 784
Net income per share(1) .24 (.05) .01 .08
Cash dividends paid per share .05 .05 .05 .05
Year Ended January 28, 1995
Net sales $90,904 $88,108 $91,376 $110,314
Gross profit 24,223 24,113 24,910 29,465
Net income 2,779 1,312 1,523 2,759
Net income per share .30 .14 .16 .30
Cash dividends paid per share .05 .05 .05 .05
</TABLE>
(1) Quarterly share amounts are based on average shares outstanding
during each quarter and may not add to the total for the year.
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Shareholders of Fred's, Inc.
In our opinion, the accompanying consolidated balance sheets and
the related consolidated statements of income, of changes in
shareholders' equity and of cash flows present fairly, in all
material respects, the financial position of Fred's, Inc. and its
subsidiaries at February 3, 1996 and January 28, 1995, and the
results of their operations and their cash flows for the three
years in the period ended February 3, 1996, in conformity with
generally accepted accounting principles. These financial
statements are the responsibility of the Company's management;
our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these
statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to
obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting
principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the
opinion expressed above.
Memphis, Tennessee
March 8, 1996
CORPORATE INFORMATION
Board of Directors
Michael J. Hayes
Chief Executive Officer and President
Fred's, Inc.
David A. Gardner
Managing Director
Fred's, Inc.
President
Gardner Capital Corporation
(a real estate and venture capital investment firm)
John R. Eisenman
Real Estate Investments
REMAX Island Realty, Inc.
Former President of Sally's, Inc.
(a restaurant chain)
Former commercial real estate developer
Roger T. Knox
Chief Executive Officer and President
Memphis Zoological Society
Former Chairman of the Board and
Chief Executive Officer
Goldsmith's Department Stores
(retailing)
Officers
Michael J. Hayes
Chief Executive Officer and President
David A. Gardner
Managing Director
Michael K. Spear
Executive Vice President--Merchandising
Bruce D. Smith
Executive Vice President and Chief Financial Officer
Victor Saig
Senior Vice President--Store Operations
John A. Casey
Senior Vice President--Pharmacy Operations
Blanchard J. Box
Senior Vice President--Information Systems
Charles S. Vail
Corporate Secretary, Vice President--Legal Services
and General Counsel
Corporate Offices
Fred's, Inc.
4300 New Getwell Road
Memphis, Tennessee 38118
901/362-3733
Transfer Agent
Union Planters National Bank
Memphis, Tennessee
Independent Accountants
Price Waterhouse LLP
Memphis, Tennessee
General Counsel
Waring Cox
Memphis, Tennessee
Annual Report on Form 10-K
A copy of the Company's Annual Report on Form 10-K for the
year ended February 3, 1996, as filed with the Securities and
Exchange Commission, may be obtained by shareholders of record
without charge upon written request to Bruce D. Smith, Executive
Vice President and Chief Financial Officer.
Stock Market Information
The Company's common stock trades on the Nasdaq Stock Market
under the symbol FRED (CUSIP No. 356108-10-0). At April 10,
1996, the Company had approximately 4,400 shareholders, including
beneficial owners holding shares in nominee or "street" name.
The table below sets forth the high and low stock prices,
together with cash dividends paid per share, for each fiscal
quarter in the past two fiscal years:
<TABLE>
<CAPTION>
Dividends
High Low Per Share
- ---------------------------------------------------------
<S> <C> <C> <C>
1994
First $ 14 3/4 $ 13 $ .05
Second $ 14 1/2 $ 11 $ .05
Third $ 14 1/4 $ 10 1/2 $ .05
Fourth $ 12 $ 9 $ .05
1995
First $ 10 1/2 $ 9 $ .05
Second $ 10 1/2 $ 9 3/4 $ .05
Third $ 10 1/2 $ 8 $ .05
Fourth $ 8 $ 7 $ .05
</TABLE>
EXHIBIT 21.1
FRED'S, INC.
SUBSIDIARIES OF REGISTRANT
Fred's, Inc. has the following subsidiaries, all of which are 100%
owned:
Fred's Stores of Tennessee, Inc.
Fred's Capital Management Company
Fred's Real Estate and Equipment Management Corporation
Exhibit 23.1
Consent of Independent Accountants
We hereby consent to the incorporation by reference in the
Registration Statements on Form S-8 (No. 33-48380 and 33-67606) of
Fred's, Inc. of our report dated March 8, 1996 appearing on page 24
of the Annual Report to Shareholders which is incorporated in this
Annual Report on Form 10-K.
PRICE WATERHOUSE LLP
Memphis, Tennessee
May 1, 1996
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial infrmation extracted from SEC Form 10-K
and is qualified is its entirety by reference to such financial statments.
</LEGEND>
<CIK> 0000724571
<NAME> FRED'S, INC.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> FEB-3-1996
<PERIOD-END> FEB-3-1996
<CASH> 5,496
<SECURITIES> 0
<RECEIVABLES> 5,972
<ALLOWANCES> (857)
<INVENTORY> 85,211
<CURRENT-ASSETS> 98,903
<PP&E> 107,725
<DEPRECIATION> (55,484)
<TOTAL-ASSETS> 158,023
<CURRENT-LIABILITIES> 39,554
<BONDS> 1,779
<COMMON> 63,458
0
0
<OTHER-SE> 52,112
<TOTAL-LIABILITY-AND-EQUITY> 158,023
<SALES> 410,086
<TOTAL-REVENUES> 410,086
<CGS> 305,668
<TOTAL-COSTS> 305,668
<OTHER-EXPENSES> 99,052
<LOSS-PROVISION> 595
<INTEREST-EXPENSE> 434
<INCOME-PRETAX> 4,337
<INCOME-TAX> 1,604
<INCOME-CONTINUING> 2,733
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,733
<EPS-PRIMARY> .29
<EPS-DILUTED> .29
</TABLE>
