FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934.
For the quarterly period ended August 1, 1998.
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934.
For the transition period from to
Commission file number 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 No.)
4300 New Getwell Rd., Memphis, Tennessee 38118
(Address of principal executive offices) (zip code)
(901) 365-8880
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X . No .
The registrant had 11,916,540 shares of common stock outstanding as of September
11, 1998.
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FRED'S, INC.
INDEX
Page No.
Part I - Financial Information
Item 1 - Financial Statements (unaudited):
Consolidated Balance Sheets as of
August 1, 1998 and January 31, 1998 3
Consolidated Statements of Operations
for the Thirteen Weeks Ended and the
Twenty-Six Weeks Ended August 1, 1998
and August 2, 1997 4
Consolidated Statements of Cash Flows
for the Twenty-Six Weeks Ended August 1, 1998
and August 2, 1997 5
Notes to Consolidated Financial Statements 6
Item 2 - Management's Discussion and
Analysis of Financial Condition and
Results of Operations 7-10
Part II - Other Information 11
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Signatures 12
- 2 -
<PAGE>
FRED'S, INC.
CONSOLIDATED BALANCE SHEETS
(unaudited)
(in thousands, except for number of shares)
August 1, January 31,
1998 1998
ASSETS
Current assets:
Cash and cash equivalents .................. $ 339 $ 5,303
Receivables, less allowance for doubtful
accounts .................................. 5,767 7,086
Inventories ................................ 117,804 115,021
Deferred income taxes ...................... 4,581 5,441
Other current assets ....................... 1,463 1,005
-------- --------
Total current assets ..................... 129,954 133,856
Property and equipment, at depreciated cost .. 62,174 53,099
Equipment under capital leases, less
accumulated amortization .................... 1,221 1,352
Deferred income taxes ........................ 2,769 3,284
Other noncurrent assets ...................... 4,463 3,816
-------- --------
$200,581 $195,407
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable ........................... $ 38,767 $ 49,438
Current portion of indebtedness ............ 4,215
Current portion of capital lease obligations 231 214
Accrued liabilities ........................ 12,906 11,817
Income taxes payable ....................... 440 1,716
-------- --------
Total current liabilities ................ 56,559 63,185
Indebtedness ................................. 6,810
Capital lease obligations .................... 1,245 1,368
Other noncurrent liabilities ................. 1,591 1,495
-------- --------
Total liabilities ........................ 66,205 66,048
-------- --------
Shareholders' equity:
Common stock, Class A voting, no par value,
11,915,916 shares issued and outstanding
(11,866,789 shares at January 31, 1998) .. 66,577 65,700
Retained earnings ......................... 68,491 64,147
Deferred compensation on restricted
stock incentive plan ..................... (692) (488)
-------- --------
Total shareholders' equity ............. 134,376 129,359
-------- --------
$200,581 $195,407
======== ========
See accompanying notes to consolidated financial statements
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<PAGE>
FRED'S, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
(in thousands, except per share amounts)
Thirteen Weeks Ended Twenty-Six Weeks Ended
August 1, August 2, August 1, August 2,
1998 1997 1998 1997
---------- --------- -------- -------
Net sales ......................... $141,635 $110,196 $285,791 $222,864
Cost of goods sold ................ 102,488 80,017 206,477 161,611
-------- -------- -------- --------
Gross profit .................... 39,147 30,179 79,314 61,253
Selling, general and administrative
expenses ......................... 36,154 28,233 70,319 55,040
-------- -------- -------- --------
Operating income ................ 2,993 1,946 8,995 6,213
Interest (income) expense, net .... 170 (55) 216 (76)
-------- -------- -------- --------
Income before income taxes ...... 2,823 2,001 8,779 6,289
Provision for income taxes ........ 1,044 750 3,248 2,358
-------- -------- -------- --------
Net income ........................ $ 1,779 $ 1,251 $ 5,531 $ 3,931
======== ======== ======== ========
Net income per share
Basic ........................... $ .15 $ .11 $ .47 $ .34
======== ======== ======== ========
Diluted ......................... $ .15 $ .11 $ .46 $ .34
======== ======== ======== ========
Weighted average shares outstanding
Basic ........................... 11,799 11,636 11,784 11,635
======== ======== ======== ========
Diluted ......................... 12,109 11,820 12,097 11,730
======== ======== ======== ========
See accompanying notes to consolidated financial statements
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<PAGE>
FRED'S, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(in thousands)
Twenty-Six Weeks Ended
August 1, August 2,
1998 1997
---------- --------
Cash flows from operating activities:
Net income $ 5,531 $ 3,931
Adjustments to reconcile net income
to net cash flows from operating
activities:
Depreciation and amortization 4,096 3,250
Amortization of deferred compensation on
restricted stock incentive plan 148 108
Deferred income taxes 1,375 (212)
(Increase) decrease in assets:
Receivables 1,319 101
Inventories (2,783) (1,114)
Other current assets (45) 119
Increase (decrease) in liabilities:
Accounts payable (10,671) (5,114)
Accrued liabilities 1,089 3,236
Income taxes payable (1,070) (1,188)
Other noncurrent liabilities 96 114
-------- --------
Net cash (used in) provided by
operating activities (1,328) 3,231
-------- --------
Cash flows from investing activities:
Additions to property and equipment (12,486) (3,674)
Additions to intangible assets (1,201) (286)
Net cash (used in) provided by
investing activities (13,687) (3,960)
-------- --------
Cash flows from financing activities:
Proceeds from borrowings 11,025 -
Reduction of indebtedness and
capital lease obligations (106) (904)
Proceeds and tax effect from exercise
of stock options 320 -
Cash dividends paid (1,188) (936)
-------- -------
Net cash (used in) provided by
financing activities 10,051 (1,840)
-------- --------
Increase (decrease) in cash and cash equivalents 4,964 (2,569)
Cash and cash equivalents:
Beginning of period 5,303 8,569
-------- --------
End of period $ 339 $ 6,000
======== ========
Supplemental disclosures of cash flow information:
Interest paid (received) $ 203 (90)
Income taxes paid $ 2,933 $ 2,985
See accompanying notes to consolidated financial statements
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<PAGE>
FRED'S, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements of Fred's, Inc.
("Fred's" or the "Company") have been prepared in accordance with the
instructions to Form 10-Q and therefore do not include all information and notes
necessary for a fair presentation of financial position, results of operations
and cash flows in conformity with generally accepted accounting principles. The
statements do reflect all adjustments (consisting of only normal recurring
accruals) which are, in the opinion of management, necessary for a fair
presentation of financial position in conformity with generally accepted
accounting principles. The statements should be read in conjunction with the
Notes to the Consolidated Financial Statements for the fiscal year ended January
31, 1998 incorporated in the Company's Annual Report on Form 10-K.
The results of operations for the thirteen week and twenty-six week periods
ended August 1, 1998 are not necessarily indicative of the results to be
expected for the full fiscal year.
NOTE 2: NET INCOME PER SHARE
Basic income per share is based on the weighted average number of common shares
outstanding, and diluted net income per share is based on the weighted average
number of common shares and common equivalent shares outstanding. See Exhibit
11.
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<PAGE>
Management's Discussion and Analysis of Financial
Condition and Results of Operations
GENERAL
The Private Securities Litigation Reform Act of 1995 ("the Act") provides a safe
harbor for forward-looking statements made by or on behalf of the Company.
Certain statements contained in Management's Discussion and Analysis and in
other Company filings are forward-looking statements. These statements discuss
among other things, expected growth, future revenues, future cash flows and
future performance. The forward-looking statements are subject to risks and
uncertainties including but not limited to competitive pressures, inflation,
consumer debt levels, currency exchange fluctuations, trade restrictions,
changes in tariff and freight rates, capital market conditions, and other risks
indicated in the Company's filings with the Securities and Exchange Commission.
Actual results may materially differ from anticipated results described in these
statements.
Fred's operates 306 discount general merchandise stores, including 30 franchised
Fred's stores, in ten states in the southeastern United States. One hundred and
sixty of the stores have full service pharmacies.
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 pharmacy business. The fourth
quarter is typically the most profitable quarter because it includes the
Christmas selling season. The overall strength of the fourth quarter is
partially mitigated, however, by the inclusion of the month of January, which is
generally the least profitable month of the year.
The impact of inflation on labor and occupancy costs can significantly affect
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.
Year 2000
In fiscal 1997, the Company completed its plan of action and assessment of the
impact of the Year 2000 as it relates to its information systems (processing
concerns created by the changes in the century and the traditional two-digit
year fields embedded in most data processing systems commonly referred to as the
"Year 2000" concern).
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<PAGE>
The Company operates its Merchandising and Inventory Replenishment/ Distribution
Systems with software that is not Year 2000 compliant. However, the Company has
started a rewrite of this software to be Year 2000 compliant. The Company has
critically evaluated the time frame for completion of the rewrite and is 75%
complete with plans for the modified system to be fully operational by the end
of 1998. The Company's financial information systems are heavily dependent on
date fields and are also in the process of being rewritten. The expected
completion date for this system to be Year 2000 complaint is October 1999.
Costs of addressing Year 2000 issues are not expected to have a material adverse
impact on the Company's financial position, results of operations or cash flows
in future periods.
The Company depends heavily on its major vendors to meet the purchasing
requirements dictated by the Company's business needs, and therefore, has
explored the impact Year 2000 issues will have on their ability to source
products for the Company and process purchase orders with the delivery
requirements and terms involving the Year 2000. Each of these vendors has
likewise taken measures to address the risks imposed by the Year 2000 and
adequately prepare their own processing systems so that their businesses will
not be interrupted as a result of this issue. Accordingly, the Company believes
there will be no significant interruption of its ability to source its product
needs from significant vendors. As an ongoing measure, the Company will continue
to address this risk with each new significant vendor to ensure similar
safeguards.
Finally, the Company recognizes the potential impact the Year 2000 issue
may have relative to its customers, creditors, and other service providers. The
Company has reviewed its exposure to business interruption or substantial loss
in these areas and believes that any risks previously identified will be
resolved before the end of fiscal 1999 and that, as of today, is not aware of
any other risk of material adverse consequences.
RESULTS OF OPERATIONS
Thirteen Weeks Ended August 1, 1998 and August 2, 1997
Net sales increased from $110.2 million in 1997 to $141.6 million in 1998, an
increase of $31.4 million or 28.5%. The increase was attributable to comparable
store sales increases of 6.2% ($6.2 million) and sales by stores not yet
included as comparable stores ($25.2 million). Franchise sales remained the same
as last year due to the conversion of one franchise store to a company store.
Gross profit increased from 27.4% of sales in 1997 to 27.6% in 1998 primarily
due to strong quarterly sales in certain higher-margin departments, combined
with a decrease in lower-margin franchise sales as a percentage of total sales.
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<PAGE>
Selling, general and administrative expenses increased from $28.2 million in
1997 to $36.1 million in 1998. As a percentage of sales, these expenses
decreased from 25.6% to 25.5%. The improvement in comparable store sales for the
quarter contributed to a higher leveraging of expenses. Additional labor and
supply cost associated with eight new store openings offset most of the second
quarter expense ratio improvement.
Twenty-Six Weeks Ended August 1, 1998 and August 2, 1997
Net sales increased from $222.9 million in 1997 to $285.8 million in 1998, an
increase of $62.9 million or 28.2%. The increase was attributable to comparable
store sales increases of 6.5% ($13.2 million) and sales by stores not yet
included as comparable stores ($49.6 million). Franchise sales increased $.1
million or .5% in 1998.
Gross profit increased from 27.5% of sales in 1997 to 27.8% in 1998 for the
aforementioned reasons.
Selling, general and administrative expenses increased from $55.0 million in
1997 to $70.3 million in 1998. As a percentage of sales, these expenses
decreased from 24.7% to 24.6%. The improvement in comparable store sales for the
first half of 1998 contributed to higher leveraging of expenses and, therefore,
an improved expense ratio. However, higher distribution expenses related to the
modernization and automation of the Company's distribution, along with the
decreased percentage of franchise sales which carry a lower expense percentage
than retail sales mostly offset any expense benefit. Selling, general and
administrative expenses for the first half of 1998 also included an additional
52 store and pharmacy locations than in the first half of 1997.
LIQUIDITY AND CAPITAL RESOURCES
Due to the seasonality of Fred's business and the continued increase in the
number of stores and pharmacies, inventories are generally lower at year-end
than at each quarter-end of the following year.
Cash flows used by operating activities totaled ($1,328,000) during the
twenty-six week period ended August 1, 1998. Cash was primarily used to increase
inventories $2,783,000, and reduce trade vendors by $10,671,000. These cash
outlays were financed primarily from earnings before depreciation and
amortization of $9,627,000 and higher levels of accrued liabilities.
Cash flows used by investing activities totaled ($13,687,000), and was
primarily used to fund $7,525,000 of progress payments on the modernization and
automation of the Company's distribution center and the Company's store and
pharmacy expansion program.
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<PAGE>
Cash flows provided by financing activities totaled $10,051,000 and reflect
$3,500,000 of borrowings under the Company's revolver for seasonal inventory
needs, and $7,525,000 of borrowings under the Company's term loan agreement to
fund progress payments on the modernization and automation of the Company's
distribution center.
The Company has a $15,000,000 revolving credit commitment available from a bank
through June 1, 2003. At August 1, 1998, $3,500,000 in borrowings have been made
under the revolving credit agreement.
The Company has a $12,000,000 term loan Agreement with a bank. The Agreement
provides the Company with up to $12,000,000 to finance the automation and
modernization of the Company's distribution center and corporate facilities. The
loan bears interest at 6.82% and requires interest only payments during the
initial six-month draw period and then monthly payments sufficient to amortize
the loan over 84 months. At August 1, 1998, $7,525,000 in borrowings have been
drawn against the term loan agreement.
The Company believes that sufficient capital resources are available in both the
short-term and long-term through currently available cash and cash generated
from future operations and, if necessary, the ability to obtain additional
financing.
IMPACT OF RECENT ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 131, "Disclosure about Segments
of an Enterprise and Related Information". SFAS No. 131 revises the current
requirements for reporting business segments by redefining such segments as the
way management desegregates the business for purposes of making operating
decisions and allocating internal resources. SFAS No. 131 is effective for
fiscal years beginning after December 15, 1997, and, although management
believes that SFAS No. 131 will not impact the Company's presentation, the
Company has adopted SFAS No.
131 in fiscal 1998.
In February 1998, the FASB issued SFAS No. 132, "Employers Disclosures about
Pensions and Other Postretirement Benefits". SFAS No. 132 standardizes the
disclosure requirements for pensions and other postretirement benefits. The
statement is effective for fiscal years beginning after December 15, 1997 and
has been adopted by the Company in fiscal 1998.
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<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Not Applicable.
Item 2. Changes in Securities
Not Applicable.
Item 3. Defaults Upon Senior Securities
Not Applicable.
Item 4. Submission of Matters to a Vote of Securities Holders
The Annual Meeting of the Shareholders of Fred's, Inc.
was held on June 17, 1998. Michael J. Hayes, David A.
Gardner, John R. Eisenman and Roger T. Knox were
elected to continue as directors of the Company. The
shareholders also ratified the appointment of Price
Waterhouse LLP as independent public accountants for
the fiscal year ending January 30, 1999.
The results of the voting were as follows:
Abstain/
For Against Withheld Broker Non-Vote
Election of Directors:
Michael J. Hayes ... 9,479,864 230,165 2,181,403
David A. Gardner ... 9,479,695 230,334 2,181,403
John R. Eisenman ... 9,534,121 175,908 2,181,403
Roger T. Knox ...... 9,533,941 176,088 2,181,403
Appointment of Price
Waterhouse LLP ..... 9,684,047 163 25,819 2,181,403
Item 5. Other Information
Not Applicable.
Item 6. Exhibits and Reports on Form 8-K
Exhibits:
Exhibit 10.17 - Fourth Modification Agreement between
Fred's, Inc. and Union Planters National
Bank dated as of September 1,1998.
Exhibit 11 - Computation of Net Income Per Share
Exhibit 27 - Financial Data Schedule (Edgar
Filing only)
Reports on Form 8-K:
Not Applicable.
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<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FRED'S, INC.
/s/Michael J. Hayes
--------------------
Michael J. Hayes
Date: September 11, 1998 Chief Executive Officer
- -------------------------
/s/ Richard B. Witaszak
-----------------------
Richard B. Witaszak
Date: September 11, 1998 Chief Financial Officer
- -------------------------
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<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS
<FISCAL-YEAR-END> JAN-30-1999 JAN-30-1999
<PERIOD-END> AUG-01-1998 AUG-01-1998
<CASH> 339,000 339,000
<SECURITIES> 0 0
<RECEIVABLES> 6,545,000 6,545,000
<ALLOWANCES> (778,000) (778,000)
<INVENTORY> 117,804,000 117,804,000
<CURRENT-ASSETS> 129,954,000 129,954,000
<PP&E> 130,729,000 130,729,000
<DEPRECIATION> (67,334,000) (67,334,000)
<TOTAL-ASSETS> 200,581,000 200,581,000
<CURRENT-LIABILITIES> 56,559,000 56,559,000
<BONDS> 9,646,000 9,646,000
0 0
0 0
<COMMON> 66,577,000 66,577,000
<OTHER-SE> 67,799,000 67,799,000
<TOTAL-LIABILITY-AND-EQUITY> 200,581,000 200,581,000
<SALES> 141,635,000 285,791,000
<TOTAL-REVENUES> 141,635,000 285,791,000
<CGS> 102,488,000 206,477,000
<TOTAL-COSTS> 102,488,000 206,477,000
<OTHER-EXPENSES> 36,148,000 70,307,000
<LOSS-PROVISION> 6,000 12,000
<INTEREST-EXPENSE> 170,000 216,000
<INCOME-PRETAX> 2,823,000 8,779,000
<INCOME-TAX> 1,044,000 3,248,000
<INCOME-CONTINUING> 1,779,000 5,531,000
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 1,779,000 5,531,000
<EPS-PRIMARY> $0.15 $0.47
<EPS-DILUTED> $0.15 $0.46
</TABLE>
FOURTH MODIFICATION AGREEMENT
THIS FOURTH MODIFICATION AGREEMENT made and entered into this day of
August, 1998 to be effective as of the first day of September, 1998 by and
between UNION PLANTERS NATIONAL BANK, a national banking association with its
principal offices 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 and a Second Modification Agreement dated July 31,
1995, and a Third Modification dated February , 1997 (herein the "Agreement")
providing for advances up to a maximum amount of $12,000,000.00 (the
"Commitment"); and,
WHEREAS, Borrower has requested and Lender has agreed to again modify
the terms of the Revolving Loan.
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 hereto hereby agree as follows:
1. The Agreement is amended and modified as follows:
a. Section 2.1 Definitions is amended and shall read as follows:
"Borrowing Base" is deleted.
"Borrowing Limit" shall mean the Commitment.
"Commitment" shall mean Seventeen Million Dollars ($17,000,000.00).
"Total Liabilities" shall mean, at any date, all liabilities, including
without limitation all contingent obligations and all obligations relative to
the face amount of Letters of Credit, whether or not drawn, any banker's
acceptances and reimbursement obligations, of the Borrower and its Subsidiaries,
calculated on a consolidated basis without duplication in accordance with
generally accepted accounting principles.
"Total Capitalization" shall mean, with any date, the sum of (a) Total
Liabilities plus (b) Net Worth of the Borrower and its Subsidiaries.
b. Section 4.3 Selection of Interest Rate. shall be amended to read as
follows:
A separate rate shall be assigned to each individual Advance (excluding
Credits issued and not drawn upon, but including any Advance made to honor a
draft presented under any Credit) based upon the Borrower's
<PAGE>
selection of Interest Rate at the time of funding each individual Advance,
between the following:
4.3.1 The Lender's Prime Rate minus one and one-half percent, floating
(which rate of interest is referred to herein as the "Adjusted Prime Rate"), or
4.3.2 75 basis points in excess of the LIBOR. Available LIBOR periods were
defined in the Third Modification Agreement entered into as of the day of
February, 1997.
Selection of the Interest Rate by the Borrower shall result in the accrual
of interest on the subject Advance (excluding Credits issued and not drawn upon
) at the rate so selected for a period of thirty days, at the termination of
which, all rates shall be calculated upon the basis of the Lender's Prime Rate
minus one and one-half percent, floating. By notice to the Lender made at least
3 days prior to the end of any calendar month, the Borrower may elect to apply
the LIBOR based rate to all or any portion of the outstanding Advances (not
including any Credit issued and not drawn upon) then subject to the Prime Rate
for the following calendar month (not to extend beyond any maturity date of the
loan facility). Absent direction on the part of the Borrower, the interest rate
shall be the Lender's Prime Rate less one and one-half percent.
c. Section 4.6 Repayment of Principal and Interest. shall be amended to
read as follows:
The aggregate principal amount of all Advances and interest accrued thereon
shall be due and payable in full on demand, or if no demand is made, then as
follows:
4.6.1 Interest, in the full amount thereof accruing shall be due and
payable monthly, on the first day of each calendar month (with notice to
Borrower by Lender of the amount due and method of computation), commencing
October 1, 1998.
4.6.2 Principal shall be payable in full at the end of the term of this
Agreement, whether by maturity, demand or otherwise.
d. Section 4.10 Fees shall be amended to read as follows:
one quarter of one percent (.25%) shall be deleted and one eighteenth of
one percent (.18%) shall be substituted in each of subparagraphs 4.10.1 and
4.10.2.
e. Section 4.11.1 shall be amended to read as follows:
2
<PAGE>
Subject to the provisions of 4.11.2 below, the term of this Agreement and
Lender's Commitment hereunder shall continue until demand, or if no demand,
until June 1, 2003, at which time this Agreement shall be terminated, and the
entire principal balance of the Revolving Loan, together with interest, fees and
charges thereon shall be due and payable in full.
f. Section 4.12 Annual Reduction is deleted.
g. Section 6.4 Financial Covenants. is amend to add additional covenants
which read as follows:
6.4.3 The Consolidated Tangible Net Worth shall not be less than
$100,000,000.00.
6.4.4 Net Income together with depreciation and amortization shall equal at
least two percent (2%) of revenue measured quarterly on a trailing four fiscal
quarter basis.
6.4.5 The ratio of EBITDA to Debt Service shall be equal to or greater than
2.00 to 1.00, with EBITDA measured quarterly on a trailing four fiscal quarter
basis.
6.4.6 The Ratio of Total Liabilities to Total Capitalization shall not
exceed 0.50 to 1.00 as of any fiscal quarter end. Total Liabilities includes any
and all contingent liabilities.
h. Section 6.11 is added and shall read as follows:
Borrower Compliance Certificates Borrower shall deliver to Lender at the
end of each fiscal quarter during the term of this Agreement a Compliance
Certificate signed by the Chief Financial Officer or Treasurer of Borrower in
substantially the form of "Exhibit A" to this Fourth Modification.
i. Section 9.1.8 is added and shall read as follows:
Default shall be made by the Borrower under the terms of the Term Loan
Agreement, entered into by and between Borrower and Lender on the 5th day of
May, 1998.
j. Section 8.3 Exception is added and shall read as follows:
Notwithstanding any other provision of the Agreement, the Borrower shall be
permitted to grant title or liens in favor of the City of Memphis or Shelby
County, Tennessee, or entities created by either of them, for the purpose of
providing property tax reductions benefitting Borrower, so long as Borrower
retains economic benefits substantially equivalent to the economic benefits
which were enjoyed by Borrower before the assets were transferred or encumbered
3
<PAGE>
(such as retaining a long-term lease of the assets transferred). This exception
does not extend to the placement of a mortgage or other security device on the
fee or leasehold to secure bond or other financing, although it is acceptable
for the lease to obligate the lessee to make payments in lieu of taxes which
reflect property tax reductions benefitting Borrower.
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 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
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 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 Modification
Agreement.
4. Terms. The term "Agreement" as used in the Agreement shall mean the
Agreement as modified by this and prior Modification Agreements. 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
5. Successors in Interest. This Fourth 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 Fourth
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 shall have
the same definitions as set forth in the Agreement.
IN WITNESS WHEREOF, the parties hereunto have executed this Fourth
Modification Agreement as of the day and year first above written.
BORROWER:
FRED'S, INC., a Tennessee Corporation
By:
Name:____________________________
Title:______________________________
4
<PAGE>
LENDER:
UNION PLANTERS NATIONAL BANK
By:
Name:____________________________
Title:______________________________
5
<PAGE>
EXHIBIT 11
FRED'S, INC.
COMPUTATION OF NET INCOME PER SHARE
(unaudited)
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Thirteen Weeks Ended Twenty-Six Weeks Ended
August 1, August 2, August 1, August 2,
1998 1997 1998 1997
---------- ---------- ---------- ------
<S> <C> <C> <C> <C>
Basic net income per share
Net income $ 1,779 $ 1,251 $ 5,531 $3,931
======= ======= ======= ======
Weighted average number of common shares
outstanding during the period 11,799 11,636 11,784 11,635
======= ======= ======= ======
Net income per share $ .15 $ .11 $ .47 $ .34
======= ======== ======= ======
Diluted net income per share
Net income $ 1,779 $ 1,251 $ 5,531 $3,931
======= ======= ======= ======
Weighted average number of common shares
outstanding during the period 11,799 11,636 11,784 11,635
Additional shares attributable to common
stock equivalents 310 184 313 95
------- ------- ------- ------
12,109 11,820 12,097 11,730
======= ======= ======= ======
Net income per share $ .15 $ .11 $ .46 $ .34
======= ======= ======= ======
</TABLE>
<PAGE>
