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 1, 1997
Commission File Number 000-19288
FRED'S, INC.
------------
(Exact Name of Registrant as Specified in its Charter)
TENNESSEE 62-0634010
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification Number)
4300 New Getwell Road
MEMPHIS, TENNESSEE 38118
(Address of Principal Executive Offices)
Registrant's telephone number, including area code (901) 365-8880
Securities Registered Pursuant to Section 12(b) of the Act: None
Securities Registered Pursuant to Section 12(g) of the Act:
Title of Each Class
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Class A Common Stock, no par value
Indicate by check mark whether the Registrant: (1) has filed
all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the Registrant was required to file
such reports), and (2) has been subject to such filing requirements
for the past 90 days.
Yes X No
----- -----
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K is not contained herein, and
will not be contained, to the best of Registrant's knowledge, in
definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this
Form 10-K [ X ].
As of April 25, 1997, there were 9,384,741 shares outstanding
of the Registrant's Class A no par value voting common stock.
Based on the last reported sale price of $9.8125 per share on the
NASDAQ Stock Market on April 25, 1996, the aggregate market value
of the Registrant's Common Stock held by those persons deemed by
the Registrant to be non-affiliates was $92,087,771.
As of April 25, 1997, 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 1, 1997 are incorporated by reference into Part II,
Items 5, 6, 7 and 8, and into Part IV, Item 14.
Portions of the Company's Proxy Statement are incorporated by
reference into Part III, Items 11, 12 and 13.
Portions of the Company's Registration Statement on Form S-1
(file no. 33-45637) are incorporated as exhibits into Part IV.
With the exception of those portions that are specifically
incorporated herein by reference, the aforesaid documents are not
to be deemed filed as part of this report.
PART I
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Item 1: Business
General
Fred's, Inc. ("Fred's" or the "Company"), founded in 1947,
operates 213 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). One hundred and one of the
Company's stores have full service pharmacies. The Company also
markets goods and services to 32 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, everyday low prices on certain 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 13,277 square feet and had
average sales of $2,051,000 in fiscal 1996.
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, the inclusion of pharmacies in 101 of its
stores, and Lawn and Garden centers in 89 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 an everyday low 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 opened a net of 7 stores in 1996 and anticipates
opening up to a net twenty stores in 1997. The Company's store
prototype has from 13,000 to 16,000 square feet of space. Opening
a new store currently costs between $350,000 and $450,000 for
inventory, furniture, fixtures, equipment and leasehold
improvements. The Company has 13 stand-alone Xpress locations
which sell pharmaceuticals and other health and beauty related
items. These locations range in size from 1,000 to 6,000 square
feet, and enable the Company to enter a new market with an initial
investment of under $150,000. It is the Company's intent to expand
these locations into a full size Fred's location as market
conditions dictate.
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 15 pharmacies in 1996, of which four were incremental to
stores that already had a pharmacy and eleven were additions to
stores that had not previously had a pharmacy. The Company
anticipates acquiring up to 30 more pharmacies in 1997. 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).
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-convenient than a larger
discount store. The variety and depth of merchandise offered at
Fred's stores in high traffic departments, such as health and
beauty aids and paper and cleaning supplies, are comparable to
those of larger discount retailers. Management believes that its
knowledge of regional and local consumer preferences, developed in
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 two Senior Vice Presidents-Merchandising who
are supported by a staff of 19 buyers and assistants. The buyers
and assistants are participants in an incentive compensation
program, which is based upon various factors primarily relating to
gross margin returns on inventory controlled by each individual
buyer. The Company believes that adequate alternative sources of
products are available for all of its categories of merchandise.
Sales Mix
The Fred's store sales mix by major merchandise category
during 1996 was as follows:
<TABLE>
<S> <C>
Household Goods 27.0%
Pharmaceuticals 19.5%
Apparel and Linens 15.9%
Health and Beauty Aids 15.5%
Paper and Cleaning Supplies 11.3%
Food and Tobacco Products 10.8%
</TABLE>
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 1996, the stores' average customer
transaction size was approximately $11.15, and the number of
customer transactions totaled approximately 34 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 30% of
the total sales by these full-line stores in 1996. Sales per
selling square foot averaged $162 for full-line stores compared to
$112 for non full-line stores. Average sales per store during 1996
were $2,677,000 for full-line stores compared to $1,454,000 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 1996. 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 an everyday low pricing strategy (EDLP)
in December 1994 included price reductions for many key items and
the elimination of four sale events for 1995 and two for 1996.
During 1996, the Company began to realize the benefits of the EDLP
strategy as customers recognized Fred's as a store that offers good
values everyday, and began to shop Fred's stores more regularly,
not just during sale events.
Advertising and Promotions
Advertising and promotion costs represented 1.5% of sales in
1996. 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>
1992 1993 1994 1995 1996
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Stores open at beginning
of period 144 156 170 184 206
Stores opened/acquired
during period 13 18 20 36 13
Stores closed during
period (1) (4) (6) (14) (6)
------ ------ ------ ------ ------
Stores open at end of
period 156 170 184 206 213
====== ====== ====== ====== ======
Pharmacies open at
beginning of period 45 60 75 83 92
Pharmacies opened/acquired
during period 15 16 8 9 11
Pharmacies closed during
period - (1) - - (2)
------ ------ ------ ------ ------
Pharmacies open at end
of period 60 72 83 92 101
====== ====== ====== ====== ======
Square feet of selling
space at end of period
(in thousands) 2,071 2,311 2,625 2,797 2,828
====== ====== ====== ====== ======
Average square feet of
selling space per store 13,277 13,594 14,266 13,915 13,277
====== ====== ====== ====== ======
Franchise stores at end
of period 39 37 35 34 32
====== ====== ====== ====== ======
</TABLE>
Pharmacy Operations
Fred's operates 101 in-store pharmacies 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 19.5% in 1996.
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.
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 data processing center. Data received from the
stores is used to automatically replenish frequently purchased
merchandise on a weekly basis and to assist the Company's buyers in
their decision making process.
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 four 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.
During 1996, the Company performed an extensive evaluation of
the impact of the year 2000 as it relates to its information
systems, and determined that a substantial number of the Company's
software programs will be affected by the millennium change.
Various alternatives are currently being reviewed to address the
issues, including the potential replacement of certain systems.
The Company anticipates completing its plan of action and
assessment of the financial impact of the required changes by the
end of 1997.
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 over the next
several years. The Company has recently purchased a new warehouse
management computer system and will be upgrading the automation of
its distribution center in 1997 in order to increase the center's
capacity and efficiencies. Significant opportunities exist to
reduce operating costs by upgrading the distribution center's
technology and improving its processes. It is anticipated that
realization of these changes will begin in early 1998.
Approximately 76% of the merchandise received by Fred's stores in
1996 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 tractors, as well as common
carriers.
Wholesale and Franchise Sales
The Company engages in wholesale sales to its 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 $36,600,000 in 1996,
$40,300,000 in 1995 and $39,000,000 in 1994. 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). The Company has
not expanded it's wholesale and franchise network over the past few
years, nor has the Company any intention to do so in the immediate
future.
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.
Employees
At February 1, 1997, the Company had approximately 4,200 full-
time and part-time employees, comprising 450 corporate employees
and 3,750 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. The Company maintains very open and strong employee
relations, as evidenced by the labor force's rejection, by a wide
margin, of a 1996 unionization attempt at the Company's Memphis
distribution center.
Forward-Looking Statements
Certain statements contained in this report that are not
historical facts are forward-looking statements that are subject to
certain risks and uncertainties that could cause actual results to
differ materially from those set forth in the forward-looking
statement. These risks and uncertainties include, but are not
limited to, changes in customer demand, changes in the competitive
pricing for products, the impact of competitor store openings and
closings, the availability of acceptable store locations, the
availability of merchandise, general economic conditions and other
risk factors discussed in documents filed by the Company with the
Securities and Exchange Commission.
Item 2: Properties
As of February 1, 1997, the geographical distribution of
Fred's 213 Company-owned locations was as follows:
<TABLE>
<CAPTION>
State Number of Stores
----- ----------------
<S> <C>
Mississippi 68
Tennessee 46
Arkansas 43
Louisiana 18
Georgia 15
Alabama 15
North Carolina 3
Missouri 2
Kentucky 2
Florida 1
</TABLE>
The Company owns the real estate and the buildings for 59
locations, of which five are subject to ground leases. The Company
leases the remaining 154 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 locations range in size from 1,000 square feet to 27,000
square feet. One hundred and forty-eight of Fred's locations 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 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
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 1, 1997.
PART II
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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 1, 1997.
Item 6: Selected Financial Data
The selected financial data for the five years ended February
1, 1997, 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 7, 1997,
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
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Item 10: Directors and Executive Officers of the Registrant
The following information is furnished with respect to each of
the directors and executive officers of the Registrant:
<TABLE>
<CAPTION>
Name Age Positions and Offices
---- --- ---------------------
<S> <C> <C>
Michael J. Hayes(1) 55 Director, Managing Director (2),
Chief Executive Officer and President
David A. Gardner(1) 49 Director and Managing Director (2)
John R. Eisenman(1) 55 Director
Roger T. Knox(1) 59 Director
Richard B. Witaszak 36 Executive Vice President and Chief
Financial Officer
Edwin C. Boothe 39 Executive Vice President - Store/
Pharmacy Operations
John A. Casey 50 Executive Vice President - Store/
Pharmacy Operations
D. Keith Curtis 37 Senior Vice President - Merchandising
Brett W. Little 43 Senior Vice President - Merchandising
Charles S. Vail 54 Corporate Secretary, Vice President -
Legal Services and General Counsel
</TABLE>
- --------------------
(1) Four directors, constituting the entire Board of Directors,
are to be elected at the Annual Meeting to serve one year or
until their successors are elected.
(2) According to the By-laws of the Company, the Managing
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. and Joyce International, Inc.
John R. Eisenman is involved in real estate investment and
development with REMAX Island Realty, Inc., located in Hilton Head
Island, South Carolina. Mr. Eisenman has been engaged in
commercial and industrial real estate brokerage and development
since 1983. Previously, he founded and served as President of
Sally's, a chain of fast food restaurants from 1976 to 1983, and
prior thereto held various management positions in manufacturing
and in securities brokerage.
Roger T. Knox has served the Memphis Zoological Society as its
President and Chief Executive Officer since January 1989. Mr. Knox
was the President and Chief Operating Officer of Goldsmith's
Department Stores, Inc. (a full-line department store in Memphis
and Jackson, Tennessee) from 1983 to 1989 and its Chairman of the
Board and Chief Executive Officer from 1987 to 1989. Prior
thereto, Mr. Knox was with Foley's Department Stores in Houston,
Texas for 20 years.
Richard B. Witaszak joined the Company in October 1996 as
Executive Vice President and Chief Financial Officer. Prior to
joining the Company, Mr. Witaszak was employed by AE Clevite, Inc.,
a Distributor of Engine Parts as Executive Vice President of
Finance and Operations from 1989 to 1996, and in various capacities
with Coopers & Lybrand from 1985 to 1989.
Edwin C. Boothe is Executive Vice President - Store/Pharmacy
Operations. Mr. Boothe joined the Company in 1975 and has served
in various positions in Store Operations and Loss Prevention.
John A. Casey is Executive Vice President - Store/Pharmacy
Operations. Mr. Casey joined the Company in 1979 and has served in
various positions in Pharmacy Operations. Mr. Casey is a
registered Pharmacist.
D. Keith Curtis is Senior Vice President - Merchandising. Mr.
Curtis joined the Company in 1980 and has served in various
positions in Merchandising and Store Operations.
Brett W. Little is Senior Vice President - Merchandising. Mr.
Little joined the Company in August of 1996 and was with Dollar
General Stores from 1993 to 1996 as the General Merchandise Manager
of their Softlines Division. Prior thereto, Mr. Little was with
Big Bear/Hart's stores in Columbus, Ohio for 18 years.
Charles S. Vail has served the Company as General Counsel
since 1973, as Corporate Secretary since 1975, and as Vice
President - Legal since 1984. Mr. Vail joined the Company in 1968.
Compliance with Section 16(a) of the Exchange Act
Based solely upon a review of reports of beneficial ownership
of the Company's Common Stock and written representations furnished
to the Company by its officers, directors and principal
shareholders, the Company is not aware of any such reporting person
who or which failed to file with the Securities and Exchange
Commission on a timely basis any required reports of changes in
beneficial ownership.
Item 11: Executive Compensation
Information regarding executive compensation is incorporated
herein by reference from the information on pages 4 through 7 of
the Company's Proxy Statement, which will be filed within 120 days
of the Registrant's fiscal year end.
Item 12: Security Ownership of Certain Beneficial Owners and
Management
Information regarding security ownership of certain beneficial
owners and management is incorporated herein by reference from
pages 1 and 2 of the Company's Proxy Statement, which will be filed
within 120 days of the Registrant's fiscal year end.
Item 13: Certain Relationships and Related Transactions
This information is incorporated herein by reference from the
information under the caption "Compensation Committee Interlocks
and Insider Participation" on page 8 of the Company's Proxy
Statement, which will be filed within 120 days of the Registrant's
fiscal year end.
PART IV
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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
1, 1997.
Consolidated Statements of Income for the years
ended February 1, 1997, February 3, 1996 and
January 28, 1995.
Consolidated Balance Sheets as of February 1, 1997
and February 3, 1996.
Consolidated Statements of Changes in Shareholders'
Equity for the years ended February 1, 1997,
February 3, 1996 and January 28, 1995.
Consolidated Statements of Cash Flows for the years
ended February 1, 1997, February 3, 1996 and
January 28, 1995.
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 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]
10.1 Lease Agreement dated November 12, 1991 with the
U.S. Government [incorporated herein by reference
to Exhibit 10.6 to the Form S-1].
10.2 Form of Fred's, Inc. Franchise Agreement
[incorporated herein by reference to Exhibit 10.8
to the Form S-1].
10.3 401(k) Plan dated as of May 13, 1991 [incorporated
herein by reference to Exhibit 10.9 to the Form S-
1].
10.4 Employee Stock Ownership Plan (ESOP) dated as of
January 1, 1987 [incorporated herein by reference
to Exhibit 10.10 to the Form S-1].
10.5* Incentive Stock Option Plan dated as of December
22, 1986 [incorporated herein by reference to
Exhibit 10.11 to the Form S-1].
10.6 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].
10.7 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].
10.8 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].
10.9* 1993 Long Term Incentive Plan dated as of January
21, 1993 [incorporated herein by reference to the
Company's report on Form 10-Q for the quarter ended
July 31, 1993].
10.10 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].
10.11 Modification Agreement between Fred's, Inc. and
Union Planters National Bank dated as of May 31,
1995 (modifies the Revolving Loan and Credit
Agreement included as Exhibit 10.7) [incorporated
herein by reference to the Company's report on Form
10-Q for the quarter ended July 29, 1995].
10.12 Second Modification Agreement between Fred's, Inc.
and Union Planters National Bank dated as of July
31, 1995 (modifies the Revolving Loan and Credit
Agreement included as Exhibit 10.7) [incorporated
herein by reference to the Company's report on Form
10-Q for the quarter ended July 29, 1995].
10.13 Seasonal Overline Revolving Credit Agreement
between Fred's, Inc. and Union Planters National
Bank dated as of July 23, 1996 [incorporated herein
by reference to the Company's report on Form 10-Q
for the quarter ended August 3, 1996].
10.14** Addendum to Leasing Agreement and form of schedules
2 through 6 of Schedule A by and between Hogan
Motor Leasing, Inc. and Fred's, Inc. dated December
19, 1996 (modifies the Lease Agreement included as
Exhibit 10.6).
10.15** Third Modification Agreement between Fred's, Inc.
and Union Planters National Bank dated as of
February 28, 1997 (modifies the Revolving Loan and
Credit Agreement included as Exhibit 10.7).
11.1** Computation of Net Income per Share
13.1** Annual report to shareholders for the year ended
February 1, 1997 (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.
* Management Compensatory Plan
** Filed herewith
SIGNATURES
----------
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant has duly caused
this report to be signed on its behalf by the undersigned,
thereunto duly authorized, on this 30th day of April, 1997.
FRED'S, INC.
By: /s/ Michael J. Hayes
------------------------------------
Michael J. Hayes, Chief Executive
Officer and President
By: /s/ Richard B. Witaszak
------------------------------------
Richard B. Witaszak, 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
30th day of April, 1997.
<TABLE>
<CAPTION>
Signature Title
--------- -----
<S> <C>
/s/ Michael J. Hayes
- ------------------------------ Director, Managing Director,
Michael J. Hayes Chief Executive Officer and
President
/s/ David A. Gardner
- ------------------------------ Director and Managing Director
David A. Gardner
/s/ Roger T. Knox
- ------------------------------ Director
Roger T. Knox
/s/ John R. Eisenman
- ------------------------------ Director
John R. Eisenman
</TABLE>
EXHIBIT 10.14
ADDENDUM TO LEASING AGREEMENT
The parties have agreed to the following additions, changes,
deletions and/or modifications to the Leasing Agreement dated
January 31, 1992.
In the event that any provision set forth in this Addendum is
inconsistent with or contrary to the provisions set forth in the
above referenced Leasing Agreement, the provisions set forth in
this Addendum shall supersede the provisions contained in the
Leasing Agreement.
Delete Item #10 of the Addendum to Leasing Agreement and replace
with: With prior ninety (90) day written notice, Fred's, Inc. may
cancel this Leasing Agreement at the end of the third year (in-
service date) and on each anniversary date of the date of in-
service thereafter. Fred's, Inc. agrees to pay Hogan $4,000 per
unit in the event this option is exercised.
THIS ADDENDUM TO THE LEASING AGREEMENT IS HEREBY MADE A PART OF
THAT CERTAIN LEASING AGREEMENT BETWEEN THE PARTIES HERETO.
HOGAN MOTOR LEASING, INC. FRED'S STORES OF TENNESSEE,
("HOGAN") INC. ("CUSTOMER")
By: /s/ Brian J. Hogan By: /s/ Bruce D. Smith
--------------------------- --------------------------
Name: Brian J. Hogan Name: Bruce D. Smith
Title: President Title: EVP & CFO
Date: 3/3/97 Date: 9/30/96
1. If prior to the date that a Vehicle is placed in service of
the Customer, the purchase price of the Vehicle has been
increased by the manufacturer of the Vehicle, then the
original agreed value as set forth in the Schedule A and the
fixed lease charge per week for that Vehicle shall be adjusted
upward accordingly.
2. Liability Insurance Responsibility: Hogan X Customer
--- ---
Limits: Check only one block and complete the appropriate
blank(s).
X Combined Single Limits $ 1,000,000 per occurrence
--- ----------
___ Bodily Injury $__________ per person
Bodily Injury $__________ per occurrence
Property Damage $__________ per occurrence
Liability
Deductible: $ 0 per occurrence
---
3. Physical Damage
Responsibility by: ___ Hogan $______________ deductible
X Customer $ 25,000,000 deductible
--- --------------
4. Fuel tax reporting responsibility: X Hogan Customer
--- ---
5. Domicile of the Vehicle(s) by city: Memphis, Tennessee
------------------
6. The base index of 159.6 (to be entered upon delivery of
vehicles) will be used to compute the Consumer Price Index for
Urban Customers, 1982-84 base period.
7. Allowances/year: License Fee $1,400.00
--------
Federal Heavy Vehicle Use Tax $550.00
------
Fuel/Road/Mile permit charges totaling $ included for each
Vehicle listed on the Schedule shall be included in Customer's
Fixed Rental Charge for the states of: TN, AR, MS, MO, AL,
KY, GA, LA
8. Painting and lettering fee: $ 0 . Any amount in excess will
be billed to the Customer. ---
9. Washing provided by: Hogan Power Units 26 Trailers ____
times per year. (Hogan/Customer) At regular PM service
intervals.
10. Estimated Annual Mileage: If the estimated mileage as of the
Date of Delivery for each Vehicle shown on the front of this
Schedule A increases by 20%, the parties agree to negotiate in
good faith the charges, depreciation and term for that
Vehicle.
This Schedule A is a part of the Leasing Agreement between the
parties hereto.
HOGAN MOTOR LEASING, INC. FRED'S STORES OF TENNESSEE,
(HOGAN) INC. (CUSTOMER)
By: /s/ Brian J. Hogan By: /s/ Richard Witaszak
Name: Brian J. Hogan Name: Richard Witaszak
Title: President Title: Vice President
Date: 3/3/97 Date: 12/19/96
(Side Two)
EXHIBIT 10.14
FORM OF SCHEDULE 2 THROUGH 6 OF SCHEDULE A
TO LEASING AGREEMENT
(Summarized Data)
<TABLE>
<CAPTION>
(1) (1) (1) (1) (1) (1)
Deprec Estimated Fixed Mileage
No. Date of Lease Original Monthly Annual Charge Rate Per Base
Vehicles Delivery Term Value Amount Mileage Per Week Mile Index
- -------- -------- ----- -------- ------- --------- -------- -------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
2 06/16/94 6 yrs 61,975.00 590.00 75,000 318.75 .06 147.4
5 11/18/94 6 yrs 62,865.00 590.00 75,000 318.75 .06 149.4
1 02/14/95 6 yrs 62,865.00 590.00 75,000 318.75 .06 149.7
15 03/03/97 6 yrs 61,985.00 570.00 75,000 310.95 .06 159.6
5 03/10/97 6 yrs 61,985.00 570.00 75,000 310.95 .06 159.6
3 03/13/97 6 yrs 61,985.00 570.00 75,000 310.95 .06 159.6
1 03/28/97 6 yrs 61,985.00 570.00 75,000 310.95 .06 159.6
1 04/02/97 6 yrs 61,985.00 570.00 75,000 310.95 .06 159.6
3 03/17/97 6 yrs 61,985.00 570.00 75,000 310.95 .06 159.6
</TABLE>
(1) Items are on a per vehicle basis
Note: All vehicles are International Model 8100 T/A Tractors
EXHIBIT 10.15
THIRD MODIFICATION AGREEMENT
This THIRD MODIFICATION AGREEMENT made and entered into as of
the 28th day of February, 1997, by and between UNION PLANTERS
NATIONAL BANK, a national banking association with its principal
office in Memphis, Tennessee ("Lender") and FRED'S, INC., a
Tennessee corporation having its offices at 4300 New Getwell Road,
Memphis, Tennessee 38118 (referred to herein as "Borrower").
WITNESSETH:
WHEREAS, Borrower is indebted to Lender for Advances made to
Borrower pursuant to a Revolving Loan made pursuant to that certain
Revolving Loan and Credit Agreement dated May 15, 1992, as amended
and modified by a Modification Agreement dated May 31, 1995,
providing for advances up to a maximum amount of $12,000,000.00
(the "Commitment"), and as further amended by a Second Modification
Agreement dated July 1995 (said agreement as modified being
referred to herein as the "Agreement"); and,
WHEREAS, Borrower has requested and Lender has agreed to again
modify the terms of the Agreement.
NOW, THEREFORE, in consideration of the premises and of other
good and valuable consideration, the adequacy and receipt of which
are hereby acknowledged, the parties agree as follows:
1. The Agreement is amended and modified as follows:
a. Section 2 is amended:
by deleting the definition of "LIBOR" and inserting the
following definition:
"LIBOR" shall mean the one month, two month, three
month, four month five month, or six month London
Interbank Offered Rate as published by Bloomberg
Financial Services or Telerate on the date of any
determination of an interest rate which rate is
selected by Borrower pursuant to Section 4.2 for a
chosen period.
by adding to the definition of "Interest Rate" the
following:
provided, however, the interest rate shall not be
less than the sum of one hundred basis points
(1.00%) plus the one month LIBOR rate published on
any applicable determination date; and, provided
further that the interest rate shall not exceed the
maximum rate of interest which Lender is permitted
by law to contract for and charge.
b. Section 4.2 is amended by deleting section 4.2 and by
adding the following:
4.2 Requesting Revolving Credit Loans.
If Borrower selects the Adjusted Prime Rate,
then each Advance to which such Adjusted Prime Rate
shall apply shall be made on receipt by Lender from
Borrower of one of the following: (i) Borrower's
written notice to Lender of the amount of the
Advance and selection of the Adjusted Prime Rate,
or (ii) Borrower's telephonic request specifying
the amount of the Advance and selection of the
Adjusted Prime Rate, which request shall be
followed by written notice from Borrower containing
the aforesaid information and delivered to Lender
before 11:00 A.M. of the anticipated Advance Date
or, (iii) delivery of a signed check or draft
against Borrower's account which check or draft
specifies the amount of the Advance and selection
of the Adjusted Prime Rate. Each of the foregoing
documents is referred to herein as a "Notice of
Advance". In any event, the Notice of Advance
shall be delivered to Lender not later than 11:00
A.M. on the day upon which the Advance is to be
made. A Notice of Advance received by Lender after
11:00 A.M. shall be deemed to have been received on
the next succeeding Business Day.
If Borrower selects a Chosen LIBOR Rate, then
each Advance to which such Chosen LIBOR Rate shall
apply shall be made on receipt by Lender from
Borrower at least 3 days prior to the anticipated
Advance Date of one of the following: (i)
Borrower's written notice to Lender of the amount
of the Advance, the Chosen LIBOR Period and the
selected LIBOR rate, or (ii) Borrower's telephonic
request specifying the amount of the Advance, the
Chosen LIBOR Period and the selected LIBOR rate,
which request shall be followed by written notice
from Borrower containing the aforesaid information
and delivered to Lender before 11:00 A.M. of the
anticipated Advance Date, or (iii) delivery of a
signed check or draft against Borrower's account
which check or draft specifies in writing the
amount of the Advance, the Chosen LIBOR Period and
the selected LIBOR rate. Each of the foregoing
documents is referred to herein as a "Notice of
LIBOR Advance". A Notice of LIBOR Advance received
by Lender after 11:00 A.M. shall be deemed to have
been received on the next succeeding Business Day.
c. Section 4.3 is amended by deleting section 4.3 and by
adding the following:
4.3 Selection of Interest Rate.
4.3.1 Borrower may select a one month, two
month, three month, four month, five month or
six month LIBOR rate to which there shall be
added 150 basis points (the sum being referred
to herein as the "Chosen LIBOR Rate"). The
Chosen LIBOR Rate shall apply for a period
equal to 30 days times the number of months
denominated in the LIBOR rate selected by
Borrower to compute the Chosen LIBOR Rate
(such period being referred to as the "Chosen
LIBOR Period"). Also, Borrower may select an
interest rate equal to one percent (1%) less
than Lender's Prime Rate, provided such
reduced rate shall not be less than one
percent (1.00%) over LIBOR (such prime rate as
reduced and as limited being referred to
herein as the "Adjusted Prime Rate") which
rate shall apply to an Advance until a Chosen
LIBOR Rate for a Chosen LIBOR Period applies
to such Advance.
4.3.2 A separate interest rate shall apply to
each individual Advance (excluding Credits
issued and not drawn upon, but including any
Advance made to honor a draft presented under
any Credit) which rate shall be the interest
rate selected by Borrower in a Notice of
Advance or in a Notice of LIBOR Advance or the
interest rate deemed selected by Borrower as
provided herein.
4.3.3 Upon the expiration of a Chosen LIBOR
Period, the interest rate applicable to all
amounts payable then subject to a Chosen LIBOR
Rate applicable during the expiring Chosen
LIBOR Period shall be the Adjusted Prime Rate
unless and until Borrower selects a Chosen
LIBOR Rate for a Chosen LIBOR Period as
provided below.
4.3.4 By notice to the Lender made at least 3
days prior to the expiration of any Chosen
LIBOR Period the Borrower may select a Chosen
LIBOR Rate with respect to all or any portion
of the outstanding Advances (not including any
Credits issued and not drawn upon) then
subject to a Chosen LIBOR Rate, such Chosen
LIBOR Rate to apply for a Chosen LIBOR Period
not extending beyond any maturity date of the
loan facility. By notice to the Lender made
at least 3 days prior to any Business Day,
Borrower may select a Chosen LIBOR Rate with
respect to all or any portion of the
outstanding Advances (not including any
Credits issued and not drawn upon) then
subject to the Adjusted Prime Rate, such
Chosen LIBOR Rate to apply for a Chosen LIBOR
Period not extending beyond any maturity date
of the loan facility.
4.3.5 Selection of an Interest Rate by the
Borrower shall result in the charging and
accrual of interest on each Advance for which
Borrower makes a selection of interest rate as
provided herein (excluding Credits issued and
not drawn upon) at the Chosen LIBOR Rate for
the Chosen LIBOR Period. With respect to any
Advance for which Borrower does not select a
Chosen LIBOR Rate or does not timely give
notice to Lender of a Chosen LIBOR Rate for a
Chosen LIBOR Period, the Borrower shall be
deemed to have selected the Adjusted Prime
Rate existing on the Advance Date, and the
Adjusted Prime Rate shall apply to each
Advance and all other amounts as to which a
Chosen LIBOR Rate does not apply.
4.3.6 If a Default shall have occurred and be
continuing, the Borrower shall not have the
right to select a Chosen LIBOR Rate
d. Section 4.4 is amended by deleting section 4.4 and by
adding the following:
4.4 Prepayments. The Borrower shall not have the
privilege to prepay without penalty any Advance or
portion thereof to which a Chosen LIBOR Rate
applies before the expiration of the Chosen LIBOR
Period applicable thereto. If Borrower prepays any
Advance or portion thereof subject to a Chosen
LIBOR Rate prior to the expiration of the
applicable Chosen LIBOR Period, Borrower shall pay
Lender an amount equal to all charges imposed upon
or incurred by Lender in liquidating its positions
in LIBOR funds to the extent of Borrower's
prepayment.
Borrower shall reimburse and indemnity Lender
for all charges imposed upon Lender to liquidate
its position in LIBOR funds with respect to any
part of the Loan as to which Borrower has selected
a Chosen LIBOR Rate if Lender accelerates payment
of the Note for any cause.
Borrower shall have the privilege to prepay
without penalty any Advance or portion thereof to
which the Adjusted Prime Rate applies.
e. Section 4.5 is amended by deleting section 4.5 and by
adding the following:
4.5 Payment of Interest and Charges. Borrower
promises to pay interest on the outstanding
principal balance of all Advances from the dates of
their respective fundings until the same are repaid
at a per annum rate equal to the Interest Rate
selected or deemed selected by Borrower.
f. Section 4.13 is added as follows:
4.13 Number of Chosen LIBOR periods at Any One
Time. Other provisions herein to the contrary
notwithstanding, the maximum number of advances at
any one time subject to a Chosen LIBOR Rate for a
Chosen LIBOR Period shall not exceed five. All
Advances made by Lender at a time when the number
of Advances then subject to a Chosen LIBOR Rate for
a Chosen LIBOR Period is five shall bear interest
at the Adjusted Prime Rate, and Borrower shall be
deemed to have chosen the Adjusted Prime Rate for
all such Advances.
g. Section 4.14 is added as follows:
4.14 Computation of Interest. Interest on all
Advances shall be calculated on the basis of a 360
day year form the actual days elapsed. Any change
in the interest rate resulting from the change from
a Chosen LIBOR Rate to the Adjusted Prime Rate
shall become effective on and as of the first day
next following the expiration of the applicable
Chosen LIBOR Period.
h. Section 4.15 is added as follows:
4.15 Limitation on Obligation to Make Advances.
Other provisions in the Agreement to the contrary
notwithstanding, Lender shall have no obligation to
make an Advance to bear interest at a rate
determined under Section 4.3 that is less than one
percent (1.00%) over LIBOR.
i. Section 9 is amended by adding the following section:
9.1.9 The occurrence of a default or event of
default under any document evidencing or securing
any present or future indebtedness of Borrower to
Lender in excess of $100,000.00.
2. Continuation of Terms. Except as amended and modified herein,
the Agreement and the Loan Documents remain in full force and
effect and enforceable according to their terms; and all Advances
made by Lender and all other actions taken by Lender pursuant to
the Agreement prior to the date hereof have been satisfactory to
Borrower and they are approved, ratified and confirmed by Borrower.
Borrower promises to pay the Revolving Credit Note according to its
terms.
3. Representations and Warranties of the Borrower. To induce
Lender to enter into this Modification Agreement and to make the
loans and extend the credit contemplated to be made pursuant to the
Agreement as modified by this Third Modification Agreement,
Borrower hereby makes the representations and warranties to Lender
set forth in sections 3.1 through 3.15 of the Agreement (as the
same have been and are modified and amended by this Third
Modification Agreement), all of which representations and
warranties are incorporated herein by reference and all of which
shall survive the execution and delivery of this Third Modification
Agreement.
4. Terms. The term "Agreement" as used in the Agreement shall
mean the Agreement as modified by this Third Modification
Agreement. The Agreement and the Loan Documents constitute the
complete and entire understanding and agreement between the parties
with regard to the subjects hereof and thereof. All terms defined
in the Agreement shall have the same meaning herein unless
otherwise specifically provided.
5. Successors in Interest. This Third Modification Agreement
shall be binding upon and inure to the benefit of the parties
hereto, their respective successors, assigns, transferee and
grantees.
6. Governing Law. The interpretation and performance of this
Third Modification Agreement shall be governed in all respects in
accordance with the laws of the State of Tennessee.
7. Undefined Terms. All capitalized terms not defined herein and
other terms not defined herein shall have the same definitions as
set forth in the Agreement.
IN WITNESS WHEREOF, the parties hereunto have executed this
Third Modification Agreement as of the day and year first above
written.
BORROWER:
FRED'S, INC., a Tennessee
Corporation
By: /s/ David H. Hughes
--------------------------
Name: David H. Hughes
Title: Senior Vice President &
Treasurer
LENDER:
UNION PLANTERS NATIONAL BANK
By: /s/ Victoria E. Docaver
--------------------------
Name: Victoria E. Docaver
Title: Vice President
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 1, February 3, January 28,
1997 1996 1995
----------- ----------- -----------
Primary net income per share
- ----------------------------
<S> <C> <C> <C>
Net income $5,806 $2,733 $8,373
===== ===== =====
Weighted average number of
common shares outstanding
during the period 9,325 9,322 9,307
Additional shares attributable
to common stock equivalents - - -
----- ----- -----
9,325 9,322 9,307
===== ===== =====
Net income per share $ .62 $ .29 $ .90
===== ===== =====
Fully diluted net income per share
- ----------------------------------
Net income $5,806 $2,733 $8,373
===== ===== =====
Weighted average number of
common shares outstanding
during the period 9,325 9,322 9,307
Additional shares attributable
to common stock equivalents - - -
----- ----- -----
9,325 9,322 9,307
===== ===== =====
Net income per share $ .62 $ .29 $ .90
===== ===== =====
</TABLE>
EXHIBIT 13.1
Selected Financial Data
(dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
1996 1995(1) 1994 1993 1992
---- ---- ---- ---- ----
Statement of Income Data:
<S> <C> <C> <C> <C> <C>
Net sales $418,297 $410,086 $380,702 $347,903 $316,494
Operating income 6,779(2) 4,771 13,563 15,244 14,290
Income before taxes
and cumulative
effect of changes
in accounting methods 6,508 4,337 13,103 14,937 13,101
Provision for income
taxes 702 1,604 4,730 5,195 4,909
Income before
cumulative effect of
changes in accounting
methods 5,806 2,733 8,373 9,742 8,192
Net income 5,806 2,733 8,373 9,742 25,127
Net income per share:
Before cumulative
effect of changes in
accounting methods .62 .29 .90 1.05 .92
Net income .62 .29 .90 1.05 2.83
Selected Operating Data:
Operating income as a
percentage of sales 1.6%(2) 1.2% 3.6% 4.4% 4.5%
Increase in comparable
store sales(3) 2.2% 1.3% 3.6% 3.6% 5.6%
Stores open at end
of period 213 206 184 170 156
Balance Sheet Data
(at period end):
Total assets $161,148 $158,023 $151,585 $139,064 $127,009
Short-term debt
(including capital
leases) 1,641 1,961 2,037 436 410
Long-term debt
(including capital
leases) 138 1,779 3,740 1,496 1,918
Shareholders' equity 119,579 115,570 114,457 107,803 99,381
</TABLE>
(1) Results of 1995 include 53 weeks
(2) Includes $3,289 of restructuring and other charges.
(3) A store is first included in the comparable store sales
calculation after the end of the twelfth month following the
store's grand opening month.
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
----------------------
1996 1995
Versus Versus
1996 1995 1994 1995 1994
---- ---- ____ ------ ------
<S> <C> <C> <C> <C> <C>
Net sales 100.0% 100.0% 100.0% 2.0% 7.7%
Cost of goods sold 73.2 74.5 73.0 .1 10.0
----- ----- ----- ----- -----
Gross profit 26.8 25.5 27.0 7.5 1.7
Selling, general
and administrative
expenses 24.4 24.3 23.4 2.5 11.8
Restructuring and
other charges .8 - - 100.0 -
----- ----- ----- ----- -----
Operating income 1.6 1.2 3.6 42.1 (64.8)
Interest expense, net - .1 .1 (37.6) 20.6
----- ----- ----- ----- -----
Income before taxes 1.6 1.1 3.5 50.1 (66.9)
Income taxes .2 .4 1.3 56.2 (66.1)
----- ----- ----- ----- -----
Net income 1.4% .7% 2.2% 112.4% (67.4)%
===== ===== ===== ===== =====
</TABLE>
Net sales increased 2.0% ($8 million) in 1996. Approximately
$11 million of the increase was attributable to the net addition of
seven store locations and the acquisition and addition of 11
pharmacies in 1996, together with the sales of 17 stores and 19
pharmacies that were opened in 1995 and not included in the
comparable store sales calculation until various points in 1996.
In addition, 1995 included 53 weeks versus 52 weeks in 1996,
resulting in a $7 million reduction when compared to 1996 sales.
Lastly, wholesale and franchise sales were down $4 million in 1996,
while comparable store sales increased 2.2% ($8 million) based on
the following components:
* Sales in comparable pharmacies increased 10.1%.
* Comparable store sales in non-pharmaceutical departments
experienced a slight increase of 0.5%. A positive
performance in the overall hard line categories resulting
from several new marketing and everyday low pricing
programs implemented in the second half of 1996 were
mostly offset by lower apparel sales as a result of
sluggish overall consumer spending throughout most of
1996, as well as several underperforming soft line
categories.
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 composed 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.
Fred's gross margin increased in 1996 due primarily to lower
markdowns resulting from a reduced dependency on promotional and
clearance activities since the Company adopted an everyday low
pricing strategy in 1995. Loss prevention programs implemented
over the last couple of years also contributed to a lower level of
inventory losses compared with 1995, and retail sales, which carry
higher gross margins than wholesale sales, increased as a
percentage of total sales.
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.
Selling, general and administrative expenses, relative to
sales, increased slightly in 1996 due to the following:
* Retail sales, which carry higher expense percentages than
wholesale sales, increased as a percentage of total sales
in 1996.
* Pharmacies, which carry higher relative payroll costs
than stores, increased as a percentage of total sales in
1996.
* The full year impact of a more competitive wage program
for the Company's distribution center operation
implemented in the second half of 1995.
* Higher payroll expenses resulting from the minimum wage
increase in October 1996.
The above increased expenses were mostly mitigated by the
Company's continued focus on cost controls and the elimination of
two advertising circulars during 1996.
Restructuring and other charges for 1996 represent $429,000
related to an unsuccessful merger transaction and $2,860,000
related to the closure of certain underperforming stores and the
repositioning of certain merchandise categories.
Income tax expense decreased in 1996 due to the Company's
ability to assure utilization of certain net operating loss
carryforwards and tax credits that were originally anticipated to
expire unused.
Selling, general and administrative expenses, as a percentage
of 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 18 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.
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 1996, 1995 and 1994 totaled
$10.0 million, $13.1 million and $4.6 million, respectively.
During those years, cash from operations was used primarily for
capital expenditures associated with new and upgraded stores and
pharmacies and the enhancement of store point-of-sale cash register
systems and capital maintenance; the 1995 acquisition of the
inventory and fixed assets of an 18-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 1, 1997, 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 $37.5 million for state income tax purposes, which
expire during the period 2000 through 2009. 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.
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 and pharmaceutical business. The fourth quarter is
typically the most profitable quarter because it includes the
Christmas selling season. The overall strength of the fourth
quarter is mitigated, however, by the inclusion of the month of
January, which is generally one of the least profitable months 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.
Impact of Proposed Accounting Standards
In February 1997, the Financial Accounting Standards Board
("FASB") issued Statement of Financial Accounting Standards
("SFAS") No. 128, Earnings Per Share, which is effective for
periods ending after December 15, 1997. This statement establishes
new standards for computing and presenting earnings per share
("EPS"). It replaces the presentation of primary EPS with a
presentation of basic EPS, and also requires a dual presentation of
basic and diluted EPS on the face of the income statement. This
statement requires restatement of all prior-period EPS data
presented and early application of the new standard is not allowed.
The adoption of SFAS No. 128 is not expected to have a material
impact on Fred's, and will be adopted at the earliest time
permitted.
Forward-Looking Statements
Certain statements contained in Management's Discussion and
Analysis that are not historical facts are forward-looking
statements that are subject to certain risks and uncertainties that
could cause actual results to differ materially from those set
forth in the forward-looking statements. These risks and
uncertainties include, but are not limited to, changes in customer
demand, changes in the competitive pricing for products, the impact
of competitor store openings and closings, the availability of
acceptable store locations, the availability of merchandise,
general economic conditions, and other risk factors discussed in
documents filed by the Company with the Securities and Exchange
Commission.
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 1, 1997 and February 3, 1996, and the
results of their operations and their cash flows for each of the
three years in the period ended February 1, 1997, 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.
/s/ Price Waterhouse LLP
Price Waterhouse LLP
Memphis, Tennessee
March 7, 1997
Fred's, Inc.
Consolidated Balance Sheets
(in thousands, except for number of shares)
<TABLE>
<CAPTION>
February 1, February 3,
1997 1996
----------- -----------
ASSETS
- ------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 8,569 $ 5,496
Receivables, less allowance for
doubtful accounts of $946
($857 at February 3, 1996) 4,493 5,115
Inventories 88,505 85,211
Deferred income taxes 4,152 2,125
Other current assets 895 956
------- -------
Total current assets 106,614 98,903
Property and equipment, at
depreciated cost 48,379 51,681
Equipment under capital leases,
less accumulated amortization of
$923 ($683 at February 3, 1996) 320 560
Deferred income taxes 3,921 4,986
Other noncurrent assets 1,914 1,893
------- -------
$161,148 $158,023
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------
Current liabilities:
Accounts payable $ 27,862 $ 29,793
Current portion of indebtedness 1,278 1,660
Current portion of capital lease
obligations 363 301
Accrued liabilities 8,935 6,987
Income taxes payable 1,648 813
------- -------
Total current liabilities 40,086 39,554
Indebtedness - 1,278
Capital lease obligations 138 501
Other noncurrent liabilities 1,345 1,120
------- -------
Total liabilities 41,569 42,453
------- -------
Commitments and contingencies
(Notes 8 and 11)
Shareholders' equity:
Common stock, Class A voting, no
par value, 9,328,822 shares
issued and outstanding (9,335,239
shares at February 3, 1996) 63,369 63,458
Retained earnings 56,364 52,424
Deferred compensation on restricted
stock incentive plan (154) (169)
Loan to ESOP - (143)
------- -------
Total shareholders' equity 119,579 115,570
------- -------
$161,148 $158,023
======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
Fred's, Inc.
Consolidated Statements of Income
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
For the Year Ended
------------------
February 1, February 3, January 28,
1997 1996(1) 1995
----------- ----------- -----------
<S> <C> <C> <C>
Net sales $418,297 $410,086 $380,702
Cost of goods sold 306,054 305,668 277,991
------- ------- -------
Gross profit 112,243 104,418 102,711
Selling, general and
administrative expenses 102,175 99,647 89,148
Restructuring and other
charges 3,289 - -
------- ------- -------
Operating income 6,779 4,771 13,563
Interest expense, net 271 434 360
Other expenses - - 100
------- ------- -------
Income before taxes 6,508 4,337 13,103
Income taxes 702 1,604 4,730
------- ------- -------
Net income $ 5,806 $ 2,733 $ 8,373
======= ======= =======
Net income per share $ .62 $ .29 $ .90
======= ======= =======
Weighted average number of
common shares and common
equivalent shares
outstanding 9,325 9,322 9,307
======= ======= =======
</TABLE>
(1) Results for the year ended February 3, 1996 include 53 weeks.
See accompanying notes to consolidated financial statements.
Fred's, Inc.
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 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 of
deferred compensa-
tion 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) $115,570
Cash dividends paid
($.20 per share) (1,866) (1,866)
Repurchase of shares (17)
Cancellation of
restricted shares,
net of issuances (6,500) (90) (90)
Exercises of stock
options 100 1 1
Contribution to ESOP
to reduce loan
balance 143 143
Amortization of
deferred compensa-
tion on restricted
stock incentive plan 15 15
Net income 5,806 5,806
--------- ------ ------ ---- ---- -------
Balance,
February 1, 1997 9,328,822 $63,369 $56,364 $(154) $ - $119,579
========= ====== ====== ==== ==== =======
</TABLE>
See accompanying notes to consolidated financial statements.
Fred's, Inc.
Consolidated Statements of Cash Flows
(in thousands)
<TABLE>
<CAPTION>
For the Year Ended
------------------
Feb. 1, Feb. 3, Jan. 28,
1997 1996 1995
------- ------- --------
<S> <C> <C> <C>
Cash flows from operating
activities:
Net income $ 5,806 $ 2,733 $ 8,373
Adjustments to reconcile net
income to net cash flows from
operating activities:
Depreciation and amortization 6,149 5,493 4,571
Provision for uncollectible
receivables 261 595 153
Contribution to ESOP to
reduce ESOP loan balance 143 140 143
Deferred income taxes (962) (351) 2,414
Amortization of deferred
compensation on restricted
stock incentive plan 15 104 -
Cancellation of restricted
stock, net of issuances (90) - -
Write-down of fixed assets 1,044 - -
(Increase) decrease in assets:
Receivables 361 (1,591) (35)
Inventories (3,294) (427) (13,069)
Other current assets 61 (200) 288
Other noncurrent assets (549) (764) (291)
Increase (decrease) in
liabilities:
Accounts payable (1,931) 5,469 1,179
Accrued liabilities 1,948 1,957 233
Income taxes payable 834 (229) 462
Other noncurrent liabilities 225 165 148
------ ------ ------
Net cash provided by
operating activities 10,021 13,094 4,569
------ ------ ------
Cash flows from investing activities:
Net additions to property,
equipment and equipment under
capital leases (3,122) (6,694) (8,678)
Acquisition of businesses, net
of cash - (2,947) -
------ ------ ------
Net cash used in
investing activities (3,122) (9,641) (8,678)
------ ------ ------
Cash flows from financing activities:
Proceeds from borrowings and
increase in capital lease
obligations - - 4,500
Reduction of indebtedness and
capital lease obligations (1,961) (2,037) (655)
Proceeds from exercise of options 1 - -
Repurchase of shares - - (1)
Payment of cash dividends (1,866) (1,864) (1,861)
------ ------ ------
Net cash provided by
(used in) financing
activities (3,826) (3,901) 1,983
------ ------ ------
Increase (decrease) in cash and
cash equivalents 3,073 (448) (2,126)
Cash and cash equivalents:
Beginning of year 5,496 5,944 8,070
------ ------ ------
End of year $ 8,569 $ 5,496 $ 5,944
====== ====== ======
Supplemental disclosures of cash
flow information:
Interest paid $ 276 $ 535 $ 328
====== ====== ======
Income taxes paid $ 773 $ 2,184 $ 1,854
====== ====== ======
</TABLE>
See accompanying notes to consolidated financial statements.
Fred's, Inc.
Notes to Consolidated Financial Statements
NOTE 1 - DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
Description of business. The primary business of Fred's, Inc. (the
"Company") is the sale of general merchandise through 213 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 1996, 1995
and 1994, as used herein, refer to the years ended February 1,
1997, February 3, 1996 and January 28, 1995, 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 day of the advertising period.
Advertising expense for 1996, 1995 and 1994 was $6,400,000,
$7,625,000 and $7,276,000, 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
$403,000 at February 1, 1997 and $451,000 at February 3, 1996.
Other identifiable intangibles associated with acquired pharmacies
are being amortized over five years. These intangibles, net of
accumulated amortization, totaled $1,425,000 at February 1, 1997
and $1,331,000 at February 3, 1996. 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 exceed net
book value as of the assessment date.
Income taxes. Deferred income taxes are provided for the tax
effects of temporary differences between the financial reporting
basis and income tax basis of the Company's assets and liabilities.
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.
Financial instruments. At February 1, 1997, 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 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>
1996 1995
---- ----
<S> <C> <C>
Wholesale $20,879 $19,710
Retail 67,626 65,501
------ ------
$88,505 $85,211
====== ======
</TABLE>
NOTE 4 - PROPERTY AND EQUIPMENT
Property and equipment, at cost, consist of the following (in
thousands):
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Buildings and improvements $ 52,159 $ 52,946
Furniture, fixtures and equipment 50,875 49,132
------- -------
103,034 102,078
Less accumulated depreciation
and amortization (59,079) (54,801)
------- -------
43,955 47,277
Land 4,424 4,404
------- -------
$ 48,379 $ 51,681
======= =======
</TABLE>
Depreciation expense and amortization expense on equipment under
capital leases totaled $5,621,000, $5,114,000 and $4,275,000 for
1996, 1995 and 1994, respectively.
NOTE 5 - ACCRUED LIABILITIES
The components of accrued liabilities are as follows (in
thousands):
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Payroll and benefits $ 1,467 $ 989
Sales and use taxes 1,395 1,699
Insurance 2,621 1,691
Other 3,452 2,608
------ ------
$ 8,935 $ 6,987
====== ======
</TABLE>
NOTE 6 - INCOME TAXES
The provision for income taxes consists of the following (in
thousands):
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Current
Federal $ 894 $1,653 $1,808
State 770 302 508
----- ----- -----
1,664 1,955 2,316
Deferred
Federal (431) (150) 2,302
State (531) (201) 112
----- ----- -----
(962) (351) 2,414
----- ----- -----
$ 702 $1,604 $4,730
===== ===== =====
</TABLE>
Deferred tax assets (liabilities) comprise the following (in
thousands):
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Current deferred tax assets:
Inventory cost capitalization $ 1,501 $ 1,313
Accrual for inventory shrinkage 1,415 946
Allowance for doubtful accounts 579 462
Insurance accruals 908 575
Other 373 247
------ ------
Gross current deferred tax assets 4,776 3,543
Deferred tax asset valuation allowance (311) (1,125)
------ ------
4,465 2,418
Current deferred tax liabilities (313) (293)
------ ------
Net current deferred taxes $ 4,152 $ 2,125
====== ======
Noncurrent deferred tax assets:
Net operating loss carryforwards $ 1,484 $ 3,840
Tax credit carryforwards - 773
Depreciation 777 802
Postretirement benefits other than
pensions 511 429
Restructuring costs 1,086 -
Other 920 810
------ ------
Gross noncurrent deferred tax assets 4,778 6,654
Deferred tax asset valuation allowance (826) (1,636)
------ ------
3,952 5,018
Noncurrent deferred tax liabilities (31) (32)
------ ------
Net noncurrent deferred taxes $ 3,921 $ 4,986
====== ======
</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. The release of valuation allowance of
$1,624,000 for the year ended February 1, 1997 resulted from the
Company's ability to assure utilization of certain net operating
loss carryforwards and tax credits that were originally anticipated
to expire unused.
At February 1, 1997, 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 $37,500,000 for state income tax purposes, which
expire during the period 2000 through 2009. If certain substantial
changes in the Company's ownership should occur, there would be an
annual limitation on the amount of carryforwards which can be
utilized.
A reconciliation of the statutory Federal income tax rate to the
effective tax rate is as follows:
<TABLE>
<CAPTION>
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 2.4 1.5 3.1
Release of valuation allowance (25.0) - -
Other (1.6) .5 (2.0)
---- ---- ----
10.8% 37.0% 36.1%
==== ==== ====
</TABLE>
NOTE 7 - INDEBTEDNESS
Indebtedness consists of the following (in thousands):
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Indebtedness to a bank $ 1,278 $ 2,795
Indebtedness of ESOP - 143
------ ------
1,278 2,938
Less current portion (1,278) (1,660)
------ ------
$ - $ 1,278
====== ======
</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 1, 1997 and February 3, 1996. 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 1, 1997, the effective rates on all
outstanding draws ranged from 5.70% to 7.47% with a weighted
average of 6.80%.
As of February 3, 1996, the Company's ESOP had bank borrowings
outstanding which were reflected as indebtedness and a reduction of
shareholder's equity. The remaining balance of this note was
repaid in 1996.
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):
1994 $ 6,506
1995 $ 7,924
1996 $ 8,559
Minimum rental payments under all operating and capital leases as
of February 1, 1997 are as follows (in thousands):
<TABLE>
<CAPTION>
Operating Capital
Leases Leases
--------- -------
<S> <C> <C>
1997 $ 6,506 $ 429
1998 5,222 143
1999 3,324 -
2000 1,886 -
2001 1,167 -
Thereafter 4,152 -
------- ----
Total minimum lease payments $ 22,257 572
=======
Imputed interest (71)
----
Present value of net minimum
lease payments, including
$363 classified as current
portion of capital lease
obligations $ 501
====
</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 a long-term incentive
plan under which an aggregate of 935,000 shares may be granted.
These options expire five years from the date of grant. Options
outstanding at February 1, 1997 expire in 1997 through 2001.
A summary of activity in the plan follows:
<TABLE>
<CAPTION>
1996 1995 1994
----------------- ----------------- -----------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Options Price Options Price Options Price
------- -------- ------- -------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at
beginning of
year 290,050 $13.57 292,655 $14.65 274,455 $14.83
Granted 40,210 7.55 71,300 9.75 89,350 14.16
Canceled (92,470) 11.80 (73,905) 14.16 (71,150) 14.70
Exercised (100) 7.38 - - - -
------- ------- -------
Outstanding at
end of year 237,690 13.25 290,050 13.57 292,655 14.65
======= ======= =======
Exercisable at
end of year 197,370 14.04 221,585 14.58 197,920 14.69
======= ======= =======
</TABLE>
The options exercisable at February 1, 1997 are exercisable at
prices ranging from $7.375 to $15.25 per share. The weighted
average remaining contractual life of all outstanding options was
1.3 years at February 1, 1997.
The Company applies Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees and related
interpretations in accounting for its plans. Accordingly, no
compensation expense has been recognized for its stock-based
compensation plans other than for restricted stock awards. Had
compensation cost for the Company's stock option plan been
determined based on the fair value at the grant date for awards in
1996 and 1995 under the plan consistent with the method prescribed
by Statement of Financial Accounting Standards No. 123, Accounting
for Stock-Based Compensation, the Company's net earnings for 1996
and 1995 would have been reduced by approximately $59,000 and
$32,000, respectively. Earnings per share would have been reduced
by $.01 and $.00 for 1996 and 1995, respectively. These pro forma
results will not be representative of the impact on future years
because only grants made in 1996 and 1995 were considered. The
weighted average grant-date fair value of options granted during
1996 and 1995 was $1.90 and $2.72, respectively. The fair value of
each option grant is estimated on the date of the grant using the
Black-Scholes option pricing model with the following weighted-
average assumptions for 1996 and 1995, respectively: dividend
yields of 2.7% and 2.0%; average expected volatility of 35.6 and
35.6; risk-free interest rates of 5.0% and 6.7%; and an average
expected life of 3 years.
Restricted stock. During 1996, 21,500 restricted shares were
issued, and 28,000 shares were canceled 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 1,
1997, February 3, 1996 and January 28, 1995 was $148,000, $163,000
and $168,000, 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 1, 1997,
February 3, 1996 and January 28, 1995 were $60,000, $58,000 and
$58,000, 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>
1996 1995
---- ----
<S> <C> <C>
Retiree benefit obligation $ 1 $ 12
Fully eligible active benefit
obligation 90 83
Other active benefit obligation 1,144 1,108
----- -----
1,235 1,203
Unrecognized net gain (loss) 110 (83)
----- -----
$1,345 $1,120
===== =====
</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
$174,000. The discount rate used in calculating the obligation was
8.0% at February 1, 1997 and February 3, 1996.
The annual net postretirement cost is as follows (in thousands):
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Service cost $ 124 $ 124 $ 101
Interest cost on accumulated
postretirement benefit
obligation 92 92 74
---- ---- ----
$ 216 $ 216 $ 175
==== ==== ====
</TABLE>
The Company's policy is to fund claims as incurred. Claims paid in
1996, 1995 and 1994 totaled $0, $50,000 and $67,000, respectively.
NOTE 11 - COMMITMENTS AND CONTINGENCIES
Commitments. At February 1, 1997, the Company had commitments
approximating $3,900,000 on issued letters of credit which support
purchase orders for merchandise. Additionally, the Company had
outstanding letters of credit aggregating $2,647,000 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 in the normal course of business. Although
the outcome of the proceedings and claims cannot be determined with
certainty, management of the Company is of the opinion that it is
unlikely that these proceedings and claims will have a material
adverse effect on the results of operations or the financial
condition of the Company.
NOTE 12 - RESTRUCTURING AND OTHER CHARGES
For the year ended February 1, 1997, the Company recorded certain
non-recurring charges of $3,289,000. These charges consist of
potential merger-related costs and restructuring charges as
discussed below.
During the third quarter of 1996, the Company terminated
discussions relative to a pending merger transaction with another
company. Non-recurring legal, travel and other expenses resulting
from this transaction totaled $429,000 and were expensed upon
termination of the potential merger.
During the fourth quarter of 1996, the Company recorded a
$2,860,000 accrual for the closure of certain underperforming
stores and the repositioning of certain merchandise categories.
Specifically, this charge relates to an accrual for closed facility
lease obligations ($1,156,000) and the write-off of fixed assets
and other store closing costs ($1,044,000). In addition, $660,000
of costs to reposition product lines were incurred.
NOTE 13 - QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
(in thousands, except per share data)
Year Ended February 1, 1997
- ---------------------------
<S> <C> <C> <C> <C>
Net sales $101,758 $99,028 $99,283 $118,228
Gross profit 27,782 26,445 28,183 29,833
Net income 2,052 414 1,261 2,079
Net income per share .22 .04 .14 .22
Cash dividends paid per
share .05 .05 .05 .05
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
</TABLE>
(1) Quarterly share amounts are based on average shares
outstanding during each quarter and may not add to the total
for the year.
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 25, 1997,
the Company had approximately 4,800 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>
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
1996
----
First $ 8 5/8 $ 6 3/4 $.05
Second $ 11 1/4 $ 7 7/8 $.05
Third $ 10 $ 8 $.05
Fourth $ 9 3/8 $ 8 1/8 $.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 (nos. 33-48380 and 33-67606) of
Fred's, Inc. of our report dated March 7, 1997 appearing on page 24
of the Annual Report to Shareholders which is incorporated in this
Annual Report on Form 10-K.
/s/ Price Waterhouse LLP
Price Waterhouse LLP
Memphis, Tennessee
April 30, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000724571
<NAME> FRED'S,INC.
<S> <C> <C>
<PERIOD-TYPE> YEAR 3-MOS
<FISCAL-YEAR-END> FEB-01-1997 FEB-01-1997
<PERIOD-END> FEB-01-1997 FEB-01-1997
<CASH> 8,569,000 8,569,000
<SECURITIES> 0 0
<RECEIVABLES> 5,439,000 5,439,000
<ALLOWANCES> (946,000) (946,000)
<INVENTORY> 88,505,000 88,505,000
<CURRENT-ASSETS> 106,614,000 106,614,000
<PP&E> 108,701,000 108,701,000
<DEPRECIATION> (60,002,000) (60,002,000)
<TOTAL-ASSETS> 161,148,000 161,148,000
<CURRENT-LIABILITIES> 40,086,000 40,086,000
<BONDS> 138,000 138,000
0 0
0 0
<COMMON> 63,369,000 63,369,000
<OTHER-SE> 56,210,000 56,210,000
<TOTAL-LIABILITY-AND-EQUITY> 161,148,000 161,148,000
<SALES> 418,297,000 118,228,000
<TOTAL-REVENUES> 418,297,000 118,228,000
<CGS> 306,054,000 88,395,000
<TOTAL-COSTS> 306,054,000 88,395,000
<OTHER-EXPENSES> 105,375,000 29,853,000
<LOSS-PROVISION> 89,000 (140,000)
<INTEREST-EXPENSE> 271,000 (44,000)
<INCOME-PRETAX> 6,508,000 164,000
<INCOME-TAX> 702,000 (1,486,000)
<INCOME-CONTINUING> 5,806,000 1,650,000
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 (429,000)
<CHANGES> 0 0
<NET-INCOME> 5,806,000 2,079,000
<EPS-PRIMARY> 0.62 0.22
<EPS-DILUTED> 0.62 0.22
</TABLE>
