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 January 31, 1998
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
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].
<PAGE>
As of April 30, 1998, there were 11,891,432 shares outstanding of the
Registrant's Class A no par value voting common stock. Based on the last
reported sale price of $25.00 per share on the NASDAQ Stock Market on April 30,
1998, the aggregate market value of the Registrant's Common Stock held by those
persons deemed by the Registrant to be non-affiliates was $297,285,800.
As of April 30, 1998, 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 January
31, 1998 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.
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.
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PART I
Item 1: Business
General
Fred's, Inc. ("Fred's" or the "Company"), founded in 1947, operates 261
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
forty-one of the Company's stores have full service pharmacies. The Company also
markets goods and services to 31 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, everyday low prices on
key products and regularly advertised departmental promotions and seasonal
specials. Fred's stores have average selling space of 13,875 square feet and had
average sales of $2,022,000 in fiscal 1997. No single store accounted for more
than 1.3% of sales during fiscal 1997.
Business Strategy
The Company's strategy is to meet the general merchandise and pharmacy
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 141 of its stores, and
Lawn and Garden centers in 123 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 and an Everyday Low Pricing program that
focuses on strong values day in and day out, while minimizing the
Company's reliance on promotional activities. As part of this strategy,
Fred's maintains low opening price points and competitive prices on key
products across all departments, and regularly offers seasonal specials
and departmental promotions supported by strong tabloid, television and
radio advertising.
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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 will occur primarily within its
present geographic area and will be focused in small to medium sized towns. The
Company may also enter larger metropolitan and urban markets where it already
has a market presence in the surrounding area.
Fred's added a net 48 stores in 1997, of which seventeen were acquired via
an acquisition, and the remaining 31 represented new store openings. The Company
anticipates opening up to a net of thirty stores in 1998. The Company's store
prototype has from 14,000 to 17,000 square feet of space. Opening a new store
currently costs between $325,000 and $450,000 for inventory, furniture,
fixtures, equipment and leasehold improvements. The Company has 26 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 $200,000.
It is the Company's intent to expand these locations into a full size Fred's
location as market conditions dictate.
Merchandising and Marketing
The business in which the Company is engaged is highly competitive. The
principal competitive factors include location of stores, price and quality of
merchandise, in-stock consistency, merchandise assortment and presentation, and
customer service. The Company competes for sales and store locations in varying
degrees with national, regional and local retailing establishments, including
department stores, discount stores, variety stores, dollar stores, discount
clothing stores, drug stores, grocery stores, outlet stores, warehouse stores
and other stores. Many of the largest retail merchandising companies in the
nation have stores in areas in which the Company operates.
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 over fifty years of operation by
the Company and its predecessors, enables the Company to compete effectively in
its region.
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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
Sales of merchandise through stores which include company-owned and
franchised Fred's locations is the only significant industry segment of which
the Company is a part.
The Fred's store sales mix by major merchandise category during 1997
was as follows:
Household Goods...........................................................26.1%
Pharmaceuticals...........................................................22.8%
Health and Beauty Aids....................................................15.2%
Apparel and Linens........................................................14.1%
Paper and Cleaning Supplies...............................................10.9%
Food and Tobacco Products.................................................10.9%
The sales mix varies from store to store depending upon local consumer
preferences and whether the stores include pharmacies and/or a full-line of
apparel. In 1997, the stores' average customer transaction size was
approximately $11.78, and the number of customer transactions totaled
approximately 35 million.
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 5% of total sales in 1997. 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.
In addition to the above, the Company engages in wholesale sales to its
franchised "Fred's" stores and to certain other retailers. Wholesale sales
during the last three years were $37,700,000 in 1997, $36,600,000 in 1996 and
$40,300,000 in 1995, representing 7.7%, 8.7% and 9.8% of total revenue,
respectively. Franchise and other fees totaling approximately $2 million have
been earned by Fred's in each of these 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.
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Highly Competitive Pricing Strategy
The implementation of an everyday low pricing strategy (EDLP) in December
1994 included price reductions for many key items, and has proven to be a
successful element of the Company's sales strategy. In January 1998, the Company
implemented additional price reductions on over 1,200 key items in appreciation
of our customers' recognition of Fred's as a store that offers good values
everyday.
Advertising and Promotions
Advertising and promotion costs represented 1.5% of sales in 1997. The
Company uses direct mail, television, radio and newspaper advertising to promote
its merchandise, special promotional events and a discount retail image.
The Company's buyers have discretion to mark down slow moving items. 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 store
to meet competitive conditions within each store's marketing area.
Store and Pharmacy Operations
All Fred's stores and pharmacies 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 and those stores
with a pharmacy are also managed by a full-time pharmacist. The Company's
fifteen district managers supervise the management and operation of Fred's
stores and pharmacies.
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 increase customer traffic and repeat visits and are an
integral part of the store's operation.
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.
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The following tables set forth certain information with respect to stores
and pharmacies for each of the last five years:
<TABLE>
<CAPTION>
1993 1994 1995 1996 1997
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Stores open at beginning of period ........................... 156 170 184 206 213
Stores opened/acquired during period ......................... 18 20 36 13 49
Stores closed during period .................................. (4) (6) (4) (6) (1)
---- ---- ---- ---- ----
Stores open at end of period ................................. 170 184 206 213 261
=== === === === ===
Number of stores with Pharmacies at end
of period ................................................... 72 83 92 101 141
=== === === === ===
Square feet of selling space at end of
period (in thousands) ....................................... 2,311 2,625 2,797 2,828 3,362
===== ===== ===== ===== =====
Average square feet of selling space
per store .................................................. 13,594 14,266 13,915 13,277 13,875
====== ====== ===== ====== ======
Franchise stores at end of period ............................ 37 35 34 32 31
====== ====== ====== ====== ======
</TABLE>
Inventory Control and Distribution
Inventory Control
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.
Distribution
The Company has an 800,000 square foot centralized distribution center in
Memphis, Tennessee (see "Properties" below). The Company has recently purchased
a new warehouse management computer system and will be modernizing and
automating its distribution center during 1998 in order to increase the center's
capacity and its workers' efficiency to accommodate the Company's store
expansion plans for the next several years. 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 late 1998. Approximately 77% of the merchandise received by Fred's
stores in 1997 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.
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Seasonality
The Company's business is seasonal to a certain extent. Generally, the
highest volume of sales and net income occurs in the fourth fiscal quarter and
the lowest volume occurs during the second fiscal quarter.
Employees
At January 31, 1998, the Company had approximately 5,400 full-time and
part-time employees, comprising 575 corporate employees and 4,825 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.
Item 2: Properties
As of January 31, 1998, the geographical distribution of the Company's 261
locations was as follows:
State Number of Stores
----- ----------------
Mississippi 82
Tennessee 56
Arkansas 44
Louisiana 20
Georgia 23
Alabama 26
Kentucky 4
North Carolina 3
Missouri 2
Florida 1
The Company owns the real estate and the buildings for 56 locations, and
owns the buildings at five locations which are subject to ground leases. The
Company leases the remaining 200 locations from third parties pursuant to leases
that provide for monthly rental payments primarily at fixed rates (although a
number of leases provide for additional rent based on sales). Store locations
range in size from 1,000 square feet to 27,000 square feet. One hundred and
ninety-one of the 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 expansion program 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 relocation flexibility in the future,
since continued availability of existing buildings is anticipated in the
Company's market areas.
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The Company owns its distribution center and corporate headquarters
situated on a 60 acre site in Memphis, Tennessee. The site contains the
distribution center with approximately 800,000 square feet of space, and 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 site.
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 January 31, 1998.
PART II
Item 5: Market for the Registrant's Common Stock and Related Stockholder
Matters
The information required by this item is incorporated herein by reference
to Page 28 of the Annual Report to Shareholders for the year ended January 31,
1998 (the "Annual Report to Shareholders").
Item 6: Selected Financial Data
The selected financial data for the five years ended January 31, 1998,
which appears on page 8 of the Annual Report to Shareholders is incorporated
herein by reference.
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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 12 of the Annual Report to Shareholders
is incorporated herein by reference.
Item 7A: Quantitative and Qualitative Disclosure About Market Risk
Not Applicable.
Item 8: Financial Statements and Supplementary Data
The consolidated financial statements appearing on pages 13 through 26
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.
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PART III
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:
Name Age Positions and Offices
- ---- --- ---------------------
Michael J. Hayes(1) 56 Director, Managing Director (2),
Chief Executive Officer and President
David A. Gardner(1) 50 Director and Managing Director (2)
John R. Eisenman(1) 56 Director
Roger T. Knox(1) 60 Director
Edwin C. Boothe 40 Executive Vice President and
Chief Operating Officer
John A. Casey 51 Executive Vice President -
Store/Pharmacy Operations
Richard B. Witaszak 37 Executive Vice President and
Chief Financial Officer
D. Keith Curtis 38 Senior Vice President - Merchandising
Brett W. Little 44 Senior Vice President - Merchandising
Charles S. Vail 55 Corporate Secretary, Vice President
Legal Services and General Counsel
- -------------------
(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
NumeriX, LLC 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.
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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.
Edwin C. Boothe is Executive Vice President and Chief Operating Officer.
Mr. Boothe joined the Company in 1975 and has served in various positions in
Store Operations and Loss Prevention, and was elected to Chief Operating Officer
in January 1998.
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.
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.
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.
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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
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 13 through 26 of the Annual Report to
Shareholders for the year ended January 31, 1998.
Consolidated Statements of Income for the years ended January
31, 1998, February 1, 1997 and February 3, 1996.
Consolidated Balance Sheets as of January 31, 1998 and
February 1, 1997.
Consolidated Statements of Changes in Shareholders' Equity for
the years ended January 31, 1998, February 1, 1997 and
February 3, 1996.
Consolidated Statements of Cash Flows for the years ended
January 31, 1998, February 1, 1997 and February 3, 1996.
Notes to Consolidated Financial Statements.
Report of Independent Accountants.
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(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:
2.1 Asset Purchase Agreement between CVS Revco D.S., Inc.,
Fred's Stores of Tennessee, Inc., CVS Corporation and
Fred's, Inc., dated as of October 10, 1997 [incorporated
herein by reference to Exhibit 2.1 to the Company's
Current Report on Form 8-K dated December 1, 1997].
2.2 Letter Agreement between CVS Revco D.S., Inc. Fred's
Stores of Tennessee, Inc., CVS Corporation and Fred's,
Inc. dated as of November 1, 1997 [incorporated herein by
reference to Exhibit 2.2 to the Company's Current Report
on Form 8-K dated December 1, 1997].
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].
* Management Compensatory Plan
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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)
[incorporated herein by reference to the Company's report
on Form 10-K for the year ended February 1, 1997].
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) [incorporated herein by
reference to the Company's report on Form 10-K for the
year ended February 1, 1997].
11.1** Computation of Net Income per Share
13.1** Annual report to shareholders for the year ended January
31, 1998 (to the extent incorporated herein by
reference).
21.1** Subsidiaries of Registrant
23.1** Consent of Price Waterhouse LLP.
27. ** Financial Data Schedule (EGAR Filing Only)
* Management Compensatory Plan
** Filed herewith
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(b) Reports on Form 8-K
Current report on Form 8-K dated December 1, 1997 (filed December 2,
1997) reporting under Item 5 of Form 8-K, Other Events, information
related to the Company's acquisition of 17 stores from CVS Revco, D.S.,
Inc., and announcement of Board of Director approval of five-for-four
stock split and declaration of a quarterly cash dividend of $.05 per
share.
16
<PAGE>
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, 1998.
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, 1998.
Signature Title
--------- -----
/s/ Michael J. Hayes
- -------------------- Director, Managing Director, Chief
Michael J. Hayes 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
17
EXHIBIT 11.1
FRED'S, INC.
COMPUTATION OF NET INCOME PER SHARE
(unaudited)
(in thousands, except
for per share amounts)
Years Ended
-----------
January 31, February 1, February 3,
1998 1997 1996
---------- ---------- ----------
Basic net income per share
Net income ............................. $ 9,787 $ 5,806 $ 2,733
======= ======= =======
Weighted average number of
common shares outstanding
during the period .................... 11,670 11,634 11,634
======= ======= =======
Net income per share ................... $ .84 $ .50 $ .23
======= ======= =======
Diluted net income per share
Net income ............................. $ 9,787 $ 5,806 $ 2,733
======= ======= =======
Weighted average number of
common shares outstanding
during the period .................... 11,670 11,634 11,634
Additional shares attributable
to common stock equivalents .......... 193 23 19
------- ------- -------
11,863 11,657 11,653
======= ======= =======
Net income per share ................... $ .83 $ .50 $ .23
======= ======= =======
All share and per share amounts have been adjusted to reflect the five-for-four
stock split in December 1997.
Selected Financial Data
(dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
1997 1996 1995(1) 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Statement of Income Data:
Net Sales ......................... $492,236 $418,297 $410,086 $380,702 $347,903
Operating income .................. 15,511 6,779(2) 4,771 13,563 15,244
Income before income taxes ........ 15,660 6,508 4,337 13,103 14,937
Provision for income taxes ........ 5,873 702 1,604 4,730 5,195
Net income ........................ 9,787 5,806 2,733 8,373 9,742
Net income per share:
Basic ............................. .84 .50 .23 .72 .84
Diluted ........................... .83 .50 .23 .72 .84
Selected Operating Data:
Operating income as a percentage of
sales ............................ 3.2% 1.6%(2) 1.2% 3.6% 4.4%
Increase in comparable store sales(3) 8.3% 2.2% 1.3% 3.6% 3.6%
Stores open at end of period ...... 261 213 206 184 170
Balance Sheet Data (at period end):
Total assets ...................... $195,407 $161,148 $158,023 $151,585 $139,064
Short-term debt (including
capital leases) .................. 214 1,641 1,961 2,037 436
Long-term debt (including
capital leases) .................. 1,368 138 1,779 3,740 1,496
Shareholders' equity .............. 129,359 119,579 115,570 114,457 107,803
</TABLE>
- ------------------
(1)Results for 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.
<PAGE>
Management's Discussion and Analysis
Results of Operations
The following table provides a comparison of Fred's financial results for
the past three years. In this table, categories of income and expense are
expressed as a percentage of net sales, and the year-over-year percentage
changes for the past two years are shown.
<TABLE>
<CAPTION>
Change from Prior Year
----------------------
1997 1996
Versus Versus
1997 1996 1995 1996 1995
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net Sales 100.0% 100.0% 100.0% 17.7% 2.0%
Cost of goods sold 72.5 73.2 74.5 16.7 .1
----- ----- ----- ----- ----
Gross profit 27.5 26.8 25.5 20.4 7.5
Selling, general and
administrative expenses 24.3 24.4 24.3 17.0 2.5
Restructuring and other charges - .8 -
--- ---- ----
Operating income 3.2 1.6 1.2
Interest expense, net - - .1
--- ---- ----
Income before taxes 3.2 1.6 1.1
Income taxes 1.2 .2 .4
--- --- ---
Net income 2.0% 1.4% .7%
==== ==== ====
</TABLE>
Fiscal 1997 Compared to Fiscal 1996
Sales
Net sales increased 17.7% ($74 million) for 1997. Approximately $42 million
of the increase was attributable to the net addition of 48 store locations and
40 pharmacies during 1997, together with the sales of 13 stores and 9 pharmacies
that were opened during 1996. Additionally, wholesale and franchise
sales were up $1 million in 1997, while comparable store sales increased 8.3%
($31 million), with strong performances in the pharmacy, stationery, pets,
giftware, home furnishings and domestics departments. Average sales per square
foot increased to $146 in 1997 from $136 in 1996.
Gross Margin
Gross margin as a percentage of sales was 27.5% in 1997 versus 26.8% in
1996. The increase in percentage was due to higher initial purchase margins
resulting from improved sourcing and higher volumes of import and opportunistic
purchases, coupled with a higher ratio of softline and pharmacy sales, which
generally yield slightly higher margins than hardline sales. Wholesale sales,
which carry lower gross margins than retail sales, also decreased as a
percentage of total sales.
Selling, General and Administrative Expenses
Selling, general and administrative expenses as a percentage of sales
improved to 24.3% in 1997 compared to 24.4% in 1996. The improvement in
comparable store sales for 1997 contributed to higher leveraging of expenses,
and therefore, an improved expense ratio. This leveraging more than offset the
adverse impact of October 1996 and September 1997 minimum wage increases, higher
incentive compensation accruals and the costs of an additional advertising
circular distributed during 1997.
<PAGE>
Operating Income
Operating income increased to $15.5 million in 1997 from $6.8 million in
1996. This increase was a direct result of the 17.7% increase in sales
experienced during 1997, and the higher gross margin as a percentage of sales
discussed above. Operating income for 1996 also included $3.3 million of
restructuring and other charges as discussed below.
Net Interest Income
Net interest income of $.1 million was generated in 1997 due to lower
average revolver borrowings and the pay-down of the remaining balance of a 1994
term loan.
Income Taxes
The effective income tax rate increased to 37.5% in 1997 from 10.8% in
1996. The 1996 rate included a benefit resulting from the Company's ability to
assure utilization of certain net operating loss carryforwards and tax credits
that were originally anticipated to expire unused. See Note 6 to the
Consolidated Financial Statements.
Fiscal 1996 Compared to Fiscal 1995
Sales
Net sales increased 2.0% ($8 million) in 1996. An $11 million increase in
net sales 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 during 1995. 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
upon comparable pharmacy sales increases of 10.1% and comparable store sales
increases in non-pharmaceutical departments 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.
Gross Margin
Gross margin as a percentage of sales was 26.8% in 1996 versus 25.5% in
1995. The Company'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.
Additionally, retail sales, which carry higher gross margins than wholesale
sales, increased as a percentage of total sales.
<PAGE>
Selling, General and Administrative Expenses
Selling, general and administrative expenses as a percentage of sales
increased to 24.4% in 1996 compared to 24.3% in 1995. This increase was 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
Restructuring and other charges for 1996 represent $.4 million related to an
unsuccessful merger transaction and $2.9 million related to the closure of
certain underperforming stores and the repositioning of certain merchandise
categories. See Note 13 to the Consolidated Financial Statements.
Income Taxes
The effective income tax rate decreased to 10.8% in 1996 from 37.0% in
1995. The income tax rate decreased in 1996 due to the Company's ability to
assure utilization of certain net operating loss carryforwards and the credits
that were originally anticipated to expire unused. See Note 6 to the
Consolidated Financial Statements.
Liquidity and Capital Resources
Fred's primary sources of working capital are cash flow from operations and
borrowings under its current facility. The Company had working capital of $70.7
million and $66.5 million at year end 1997 and 1996, respectively. Working
capital fluctuates in relation to profitability, seasonal inventory levels net
of trade accounts payable and the level of store openings and closings.
The Company has a $12 million revolving credit commitment with a bank that has
generally been used to build inventory levels for the Christmas selling season.
The Company had no borrowings outstanding on its Revolver as of year ends 1997
and 1996.
<PAGE>
Cash provided by operations was $21.3 million in 1997 compared to $10.0 million
in 1996. Net cash used in investing activities was $22.3 million in 1997
compared to $3.1 million in 1996. Cash used in investing activities for 1997
included capital expenditures of $9.7 million for expenditures associated with
new and upgraded stores and pharmacies and annual capital maintenance, as well
as $12.9 million for the acquisition of inventory, fixed assets and pharmacy
customer lists of a 17-store chain. Cash used in investing activities for 1996
consisted of $3.1 million of capital expenditures associated with new and
upgraded stores and pharmacies and annual capital maintenance.
Net cash used in financing activities was $2.3 million in 1997 compared to
$3.8 million in 1996. Financing activity in both years included payments under
capital lease obligations related to tractor leases and payments associated with
a 1994 42-month term loan, the balance of which was repaid during 1997. Also
included in financing activities was the payment of cash dividends, with higher
1997 dividends as a result of the Company's 5 for 4 stock split in December
1997. Financing activity for 1997 included $1.2 million of cash generated from
stock option exercises.
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 January 31, 1998, 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 $23.5 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.
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.
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).
<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 has
planned for the system to be 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 compliant 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 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 with existing vendors.
As an ongoing measure, the Company will continue to address this risk with each
new 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 no risk of material adverse consequences presently
exists or that any risks previously identified will be resolved before the end
of fiscal 1999.
Impact of Proposed 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 will
adopt 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
will be adopted by the Company in fiscal 1998.
<PAGE>
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.
<PAGE>
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 January 31, 1998 and February
1, 1997, and the results of their operations and their cash flows for each of
the three years in the period ended January 31, 1998, 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.
PRICE WATERHOUSE LLP
Memphis, Tennessee
March 4, 1998
<PAGE>
Freds, Inc.
Consolidated Balance Sheets
(in thousands, except for number of shares)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
January 31, February 1,
1998 1997
---- ----
ASSETS
- ------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 5,303 $ 8,569
Receivables, less allowance for doubtful accounts of $766
($946 at February 1, 1997) 7,086 4,493
Inventories 115,021 88,505
Deferred income taxes 5,441 4,152
Other current assets 1,005 895
----- ------
Total current assets 133,856 106,614
Property and equipment, at depreciated cost 53,099 48,379
Equipment under capital leases, less accumulated amortization
of $218 ($923 at February 1, 1997) 1,352 320
Deferred income taxes 3,284 3,921
Other noncurrent assets 3,816 1,914
----- -------
$ 195,407 $ 161,148
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES:
- ---------------------------------------------------------
Accounts payable $ 49,438 $ 27,862
Current portion of indebtedness - 1,278
Current portion of capital lease obligations 214 363
Accrued liabilities 11,817 8,935
Income taxes payable 1,716 1,648
----- ------
Total current liabilities 63,185 40,086
Capital lease obligations 1,368 138
Other noncurrent liabilities 1,495 1,345
----- -----
Total liabilities 66,048 41,569
------ ------
Commitments and contingencies (Notes 7 and 12)
Shareholders' equity:
Common stock, Class A voting common, no par value, 11,866,789 shares issued
and outstanding (9,328,822 shares at February 1, 1997) 65,700 63,369
Retained earnings 64,147 56,364
Deferred compensation on restricted stock incentive plan (488) (154)
-------- --------
Total shareholders' equity 129,359 119,579
-------- --------
$ 195,407 $ 161,148
======= ========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
Freds, Inc.
Consolidated Statements of Income
(in thousands, except per share amounts)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
For the Year Ended
------------------
January 31, February 1, February 3,
1998 1997 1996(1)
---- ---- -------
<S> <C> <C> <C>
Net sales $ 492,236 $ 418,297 $ 410,086
Cost of goods sold 357,135 306,054 305,668
------- ------- -------
Gross profit $ 135,101 112,243 104,418
Selling, general and administrative expenses 119,590 102,175 99,647
Restructuring and other charges - 3,289 -
------ ------- -------
Operating income 15,511 6,779 4,771
Interest expense (income), net (149) 271 434
------ ----- ------
Income before taxes 15,660 6,508 4,337
Income taxes 5,873 702 1,604
----- ---- -----
Net income $ 9,787 $ 5,806 $ 2,733
====== ===== =====
Net income per share
Basic $ .84 $ .50 $ .23
=== === ===
Diluted $ .83 $ .50 $ .23
=== === ===
Weighted average shares outstanding
Basic 11,670 11,634 11,634
====== ====== ======
Diluted 11,863 11,657 11,653
====== ====== ======
</TABLE>
(1) Results for the year ended February 3, 1996 include 53 weeks.
See accompanying notes to consolidated financial statements.
<PAGE>
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 28, 1995 9,307,373 63,185 $ 51,555 $ $ (283) $ 114,457
Cash dividends paid
($.16 per share) (1,864) (1,864)
Repurchase of shares (134)
Issuance of restricted stock 28,000 273 (273)
Amortization of deferred
compensation on restricted
stock incentive plan 104 104
Contribution to ESOP
to reduce loan balance 140 140
Net income 2,733 2,733
--------- ------ ------ --- ----- -----
Balance, February 3, 1996 9,335,239 $ 63,458 $ 52,424 $ (169) $ (143) $ 115,570
Cash dividends paid
($.16 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
compensation 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
Cash dividends paid
($.17 per share) (1,999) (1,999)
Repurchase of shares (80)
Issuance of restricted
stock 56,491 507 (507)
Exercises of stock options 97,557 1,211 1,211
Other issuances 18,046 300 300
Amortization of deferred
compensation on restricted
stock incentive plan 173 173
Tax benefit on exercise
of stock options 313 313
Five-for-four stock split 2,365,953 (5) (5)
Net income 9,787 9,787
---------- ------ ------ ----- ----- ------
Balance, January 31, 1998 11,866,789 $ 65,700 $ 64,147 $ (488) $ - $ 129,359
========== ====== ====== ===== ===== =======
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
Fred's, Inc.
Consolidated Statements of Cash Flows
(in thousands)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
For the Year Ended
------------------
January 31, February 1, February 3,
----------- ----------- -----------
<S> <C> <C> <C>
1998 1997 1996
Cash flows from operating activities:
Net income $ 9,787 $ 5,806 $ 2,733
Adjustments to reconcile net income to net cash
flows from operating activities:
Depreciation and amortization 7,112 6,149 5,493
Provision for uncollectible receivables 589 261 595
Contribution to ESOP to reduce ESOP loan balance - 143 140
Deferred income taxes (652) (962) (351)
Amortization of deferred compensation on
restricted stock incentive plan 173 15 104
Cancellation of restricted stock - (90) -
Write-down of fixed assets - 1,044 -
Gain on sale of fixed assets (114) - -
(Increase) decrease in assets:
Receivables (3,182) 361 (1,591)
Inventories (16,852) (3,294) (427)
Other assets (1,099) (488) (964)
Increase (decrease) in liabilities:
Accounts payable and accrued liabilities 25,137 17 7,426
Income taxes payable 381 834 (229)
Other noncurrent liabilities 1 225 165
------- ------ ------
Net cash provided by operating activities 21,281 10,021 13,094
------- ------ -------
Cash flows from investing activities:
Capital expenditures (9,696) (3,122) (6,694)
Proceeds from dispositions of property and equipment 279 - -
Acquisition, net of cash acquired (12,850) - (2,947)
-------- ------ -------
Net cash used in investing activities (22,267) (3,122) (9,641)
-------- ------ -------
Cash flows from financing activities:
Reduction of indebtedness and capital lease obligations (1,487) (1,961) (2,037)
Proceeds from exercise of options 1,211 1 -
Payment of cash for dividends and fractional shares (2,004) (1,866) (1,864)
------- ------- -------
Net cash used in financing activities (2,280) (3,826) (3,901)
------- ------- -------
Increase (decrease) in cash and cash equivalents (3,266) 3,073 (448)
Cash and cash equivalents:
Beginning of year 8,569 5,496 5,944
----- ----- -----
End of year $ 5,303 $ 8,569 $ 5,496
====== ===== =====
Supplemental disclosures of cash flow information:
Interest paid $ 346 $ 276 $ 535
=== === ===
Income taxes paid $ 6,154 $ 773 $ 2,184
===== === =====
Non cash investing and financing activities:
Assets acquired through capital lease obligations $ 1,290 $ - $ -
===== ==== =====
Tax benefit upon exercise of stock options $ 313 $ - $ -
===== ==== =====
Common stock issued for acquisition $ 300 $ - $ -
===== ==== =====
</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 261 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 - 53 week accounting period which
ends on the Saturday closest to January 31. The year ended February 3, 1996
included 53 weeks. Fiscal years 1997, 1996 and 1995, as used herein, refer to
the years ended January 31, 1998, February 1, 1997 and February 3, 1996,
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
1997, 1996 and 1995 was $7,383,000, $6,400,000 and $7,625,000, respectively.
<PAGE>
Fred's, Inc.
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
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.
Franchise fees. The Company markets goods and services to 31 franchised
stores. Franchise revenues are recognized upon sale of merchandise to those
stores based on a percentage of their purchases from the Company's warehouse.
Total franchise income for 1997, 1996 and 1995 was $1,967,000 $1,931,000 and
$2,155,000, respectively.
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 $355,000 at January 31, 1998 and
$403,000 at February 1, 1997. Other identifiable intangibles associated with
acquired pharmacies are being amortized over five years. These intangibles, net
of accumulated amortization, totaled $3,387,000 at January 31, 1998 and
$1,425,000 at February 1, 1997. Amortization expense for 1997, 1996 and 1995 was
$739,000, $528,000 and $369,000, respectively. 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 its net book value as of the assessment date.
Cash and cash equivalents. Cash on hand and in banks, together with other
highly liquid investments having original maturities of three months or less,
are classified as cash equivalents.
Financial instruments. At January 31, 1998, 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 assets
acquired ($80,000) and was recorded as goodwill.
<PAGE>
Fred's, Inc.
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Effective October 10, 1997, the Company executed an Asset Purchase
Agreement for the purchase of inventory and other selected assets of CVS Revco
D.S., Inc. for $12.85 million in cash. Tangible assets acquired consisted of
inventory of $9.7 million and fixed assets of $2.0 million. The remaining
purchase price was allocated to the identifiable intangible assets acquired.
NOTE 3 - PROPERTY AND EQUIPMENT
Property and equipment, at cost, consist of the following (in thousands):
1997 1996
---- ----
Buildings and improvements $ 55,553 $ 52,159
Furniture, fixtures and equipment 56,794 50,875
------ ------
112,347 103,034
Less accumulated depreciation and amortization (63,550) (59,079)
------- --------
48,797 43,955
Land 4,302 4,424
------ ------
$ 53,099 48,379
====== ======
Depreciation expense totaled $6,115,000, $5,381,000 and $4,863,000 for 1997,
1996 and 1995, respectively.
NOTE 4 - ACCRUED LIABILITIES
The components of accrued liabilities are as follows (in thousands):
1997 1996
---- ----
Payroll and benefits $ 3,414 $ 1,467
Sales and use taxes 1,727 1,395
Insurance 3,746 2,621
Other 2,930 3,452
----- -----
$ 11,817 $ 8,935
====== =====
<PAGE>
Fred's, Inc.
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
NOTE 5 - INDEBTEDNESS
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 January 31, 1998 and February 1, 1997. 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. At February 1, 1997, $1,278,000 was outstanding
under this line which was repaid in 1997. During the period outstanding in 1997,
the weighted average interest rate was 7.5%.
NOTE 6 - 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. The provision for income taxes consists of the
following (in thousands):
1997 1996 1995
---- ---- ----
Current
Federal $ 6,225 $ 894 $ 1,653
State 300 770 302
----- --- -----
6,525 1,664 1,955
----- ----- -----
Deferred
Federal (840) (431) (150)
State 188 (531) (201)
----- ------ ------
(652) (962) (351)
----- ------ ------
$ 5,873 $ 702 $ 1,604
===== ====== =====
<PAGE>
Fred's, Inc.
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Deferred tax assets (liabilities) comprise the following (in thousands):
1997 1996
---- ----
Current deferred tax assets:
Inventory cost capitalization $ 1,825 $ 1,501
Accrual for inventory shrinkage 1,481 1,415
Allowance for doubtful accounts 431 579
Insurance accruals 1,262 908
Other 1,181 373
----- ----
Gross current deferred tax assets 6,180 4,776
Deferred tax asset valuation allowance (385) (311)
------ -----
5,795 4,465
Current deferred tax liabilities (354) (313)
------ ------
Net current deferred tax asset $ 5,441 $ 4,152
====== =====
1997 1996
---- ----
Noncurrent deferred tax assets:
Net operating loss carryforwards $ 930 $ 1,484
Depreciation 873 777
Postretirement benefits other than pensions 567 511
Restructuring costs 391 1,086
Other 1,099 920
----- -----
Gross noncurrent deferred tax assets 3,860 4,778
Deferred tax asset valuation allowance (546) (826)
------ ------
3,314 3,952
Noncurrent deferred tax liabilities (30) (31)
------ ------
Net noncurrent deferred tax asset $ 3,284 $ 3,921
===== ======
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
$206,000 and $1,624,000 for the years ended January 31, 1998 and February 1,
1997, respectively, resulted from the Company's ability to assure utilization of
certain state net operating loss carryforwards and tax credits that were
originally anticipated to expire unused.
At January 31, 1998, 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
<PAGE>
Fred's, Inc.
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
$23,547,000 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:
1997 1996 1995
---- ---- ----
Income tax provision at statutory rate 35.0% 35.0% 35.0%
State income taxes, net of federal benefit 3.4 2.4 2.0
Release of valuation allowance (1.3) (25.0) --
Other .4 (1.6) --
----- ----- -----
37.5% 10.8% 37.0%
===== ===== =====
NOTE 7 - 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 was $10,239,000,
$8,559,000 and $7,924,000, for 1997, 1996 and 1995, respectively. Amortization
expense on assets under capital lease for 1997, 1996 and 1995 was $258,000,
$240,000 and $262,000, respectively.
Minimum rental payments under all operating and capital leases as of
January 31, 1998 are as follows (in thousands):
Operating Capital
Leases Leases
------ ------
1998 $ 9,246 $ 453
1999 7,319 453
2000 5,352 453
2001 3,838 453
2002 2,630 453
Thereafter 7,944 113
----- -----
Total minimum lease payments $ 36,329 2,378
======
Imputed interest (796)
-----
Present value of net minimum lease payments, including
$214 classified as current portion of capital lease obligations $ 1,582
=====
<PAGE>
Fred's, Inc.
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
NOTE 8 - 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 9 - STOCK SPLIT
On November 20, 1997, the board of directors approved a five-for-four stock
split to be effective on December 19, 1997 for shareholders of record on
December 5, 1997. The split resulted in the issuance of 2,365,953 shares of
common stock. All per share data included herein have been restated to reflect
the stock split.
NOTE 10 - EMPLOYEE BENEFIT PLANS
Incentive stock option plan. The Company has a long-term incentive plan
under which an aggregate of 935,000 (1,168,750 after stock split) shares may be
granted. These options expire five years from the date of grant. Options
outstanding at January 31, 1998 expire in 1998 through 2002.
A summary of activity in the plan, as adjusted for the 1997 stock split,
follows:
<TABLE>
<CAPTION>
1997 1996 1995
------------------------ ---------------------- ------------------------
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 297,113 $ 10.60 362,562 $ 10.86 365,818 $ 11.72
Granted 364,355 8.61 50,262 6.04 89,125 7.80
Canceled (16,353) 9.81 (115,588) 9.44 (92,381) 11.33
Expired (120,778) 14.45 - - - -
Exercised (113,039) 10.65 (123) 5.90 - -
-------- ------- -------
Outstanding at
end of year 411,298 $ 8.55 297,113 $ 10.60 362,562 $ 10.86
======= ===== ======== ===== ======== =====
Exercisable at
end of year 90,115 $ 10.70 246,712 $ 11.23 276,981 11.66
======= ===== ======= ===== ======= $ =====
</TABLE>
<PAGE>
Fred's, Inc.
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
The options exercisable at January 31, 1998 are exercisable at prices
ranging from $5.90 to $17.90 per share. The weighted average remaining
contractual life of all outstanding options was 3.9 years at January 31, 1998.
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. Had compensation cost for the Company's stock option
plan been determined based on the fair value at the grant date for awards in
1997, 1996 and 1995 consistent with the method prescribed by SFAS No. 123,
"Accounting for Stock-Based Compensation", the Company's operating results for
1997, 1996 and 1995 would have been reduced to the pro forma amounts indicated
below (in thousands, except per share data):
1997 1996 1995
---- ---- ----
Net income
As reported $ 9,787 $ 5,806 $ 2,733
Pro forma $ 9,492 $ 5,747 $ 2,701
Basic earnings per share
As reported $ .84 $ .50 $ .23
Pro forma $ .81 $ .49 $ .23
Diluted earnings per share
As reported $ .83 $ .50 $ .23
Pro forma $ .80 $ .49 $ .23
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option pricing model with the following weighted-average
assumptions using grants in 1997, 1996 and 1995, respectively:
1997 1996 1995
---- ---- ----
Average expected life (years) 3.0 3.0 3.0
Average expected volatility 37.6% 35.6% 35.6%
Risk-free interest rates 6.0% 5.0% 6.7%
Dividend yield 2.4% 2.7% 2.0%
The weighted average grant-date fair value of options granted during 1997, 1996
and 1995 was $2.40, $1.90 and $2.72, respectively.
<PAGE>
Fred's, Inc.
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Restricted Stock. During 1996 and 1997, 21,500 and 56,491 restricted shares
were issued, respectively. 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 for 1996 and 1995
represent the amount required to enable the plan to make payments on
outstanding indebtedness and totaled $148,000 and $163,000, 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 January 31, 1998, February 1, 1997 and February 3,1996 were
$65,000, $60,000 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):
1997 1996
---- ----
Retiree benefit obligation $ 180 $ 1
Fully eligible active benefit obligation 38 90
Other active benefit obligation 914 1,144
---- -----
1,132 1,235
Unrecognized net gain (loss) 363 110
--- ---
$ 1,495 $ 1,345
===== =====
The medical care cost trend used in determining this obligation is 10.0%
effective February 1, 1997, 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 $180,000. The discount rate used in
calculating the obligation was 7.5% at January 31, 1998 and February 1, 1997.
<PAGE>
Fred's, Inc.
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
The annual net postretirement cost is as follows (in thousands):
1997 1996
---- ----
Service cost $ 97 $ 124
Interest cost on accumulated
postretirement benefit obligation 83 92
Amortization of net gain (19) -
---- ----
$ 161 $ 216
==== ====
The Company's policy is to fund claims as incurred. Claims paid in 1997, 1996
and 1995 totaled $18,000, $0 and $50,000, respectively.
NOTE 11 - NET INCOME PER SHARE
Net income per share is calculated in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 128, "Earnings Per Share", which
requires the presentation of basic and diluted earnings per share. Basic
earnings per share excludes dilution and is computed by dividing income
available to common stockholders by the weighted-average number of common shares
outstanding for the period. Diluted earnings per share reflects the potential
dilution that could occur if securities or other contracts to issue common stock
were exercised or converted into common stock or resulted in the issuance of
common stock that then shared in the earnings of the entity. Restricted stock
are considered continently issuable stock and is excluded from the computation
of basic earnings per share.
A reconciliation of basic earnings per share to diluted earnings per share
follows (in thousands, except per share data):
<TABLE>
<CAPTION>
Year Ended
----------------------------------------------------------------------------------
January 31, 1998 February 1, 1997 February 3,1996
---------------- ---------------- ---------------
Per-Share Per-Share Per-Share
Income Shares Amount Income Shares Amount Income Shares Amount
------ ------ ------ ------ ------ ------ ------ ------ ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Basic EPS
Income available to
common stockholders $ 9,787 11,670 $ 0.84 $ 5,806 11,634 $ 0.50 $ 2,733 11,634 $ 0.23
Effect of Dilutive Securities
Restricted stock 42 23 19
Stock options 151
Diluted EPS
Income available to
common stockholders
------- ------ ------ ------- ------ ------- ------- ------ ----
plus assumed conversions $ 9,787 11,863 $0.83 $ 5,806 11,657 $ 0.50 $ 2,733 11,653 $ 0.23
======= ====== ====== ======= ====== ======= ======= ====== ====
</TABLE>
<PAGE>
Fred's, Inc.
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
NOTE 12 - COMMITMENTS AND CONTINGENCIES
Commitments. At January 31, 1998, the Company had commitments approximating
$5,580,000 on issued letters of credit which support purchase orders for
merchandise. Additionally, the Company had outstanding letters of credit
aggregating $2,308,000 utilized as collateral for their risk management
programs.
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 13 - OTHER EXPENSES
For the year ended February 1,1997, the Company recorded certain
non-recurring expenses of $3,289,000. These expenses 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. 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
eliminate certain product lines were incurred.
At January 31, 1998, the balance in the restructuring reserve was
$1,029,000. The 1995 activity in this reserve is as follows:
Balance Balance
February 1, January 31,
1997 Utilization 1998
---------- ----------- -----------
Repositioning of certain
merchandise inventory $ 660 $ 660 $ -
Lease obligations 1,156 490 666
Write-off of fixed assets 1,044 681 363
----- --- ---
$ 2,860 $ 1,831 $ 1,029
===== ===== =====
<PAGE>
Fred's, Inc.
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
NOTE 14 - QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
(in thousands, except per share data)
Year Ended January 31, 1998(1)
- ---------------------------
<S> <C> <C> <C> <C>
Net sales $ 112,668 $ 110,196 $ 114,021 $ 155,351
Gross profit 31,074 30,179 33,362 40,486
Net income 2,680 1,251 2,368 3,488
Net income per share
Basic .23 .11 .20 .30
Diluted .23 .11 .20 .29
Cash dividends paid per share .04 .04 .04 .05
Year Ended February 1, 1997 (1)
- -------------------------------
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
Basic .17 .04 .11 .18
Diluted .17 .04 .11 .18
Cash dividends paid per share .04 .04 .04 .04
</TABLE>
(1) Per share data adjusted for stock split (Note 9)
<PAGE>
Stock Market Information
The Company's common stock trades on the Nasdaq Stock Market under the
symbol FRED (CUSIP No. 356108-10-0). At May 1, 1998, the Company had
approximately 4,900 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 (all information reflects the effect of a five-for-four stock split
distributed in December 1997):
Dividends
High Low Per Share
---- --- ---------
1996
First $ 6 9/10 $ 53/8 $.04
Second $ 9 $ 61/3 $.04
Third $ 8 $ 61/3 $.04
Fourth $ 7 1/2 $ 6 1/2 $.04
1997
First $ 81/8 $ 7 $.04
Second $ 14 $ 72/3 $.04
Third $ 191/3 $ 132/3 $.04
Fourth $ 23 1/2 $ 16 $.05
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 4, 1998 appearing on page 26 of the Annual Report to
Shareholders which is incorporated in the Annual Report on Form 10-K.
PRICE WATERHOUSE LLP
Memphis, Tennessee
April 30, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED STATEMENTS OF INCOME AND CONSOLIDATED BALANCE SHEETS OF FRED'S,
INC. AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000724571
<NAME> FRED'S, INC.
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JAN-31-1998
<PERIOD-START> FEB-2-1997
<PERIOD-END> JAN-31-1998
<CASH> 5,303,000
<SECURITIES> 0
<RECEIVABLES> 7,852,000
<ALLOWANCES> (766,000)
<INVENTORY> 115,021,000
<CURRENT-ASSETS> 133,856,000
<PP&E> 118,219,000
<DEPRECIATION> (63,768,000)
<TOTAL-ASSETS> 195,407,000
<CURRENT-LIABILITIES> 63,185,000
<BONDS> 1,368,000
0
0
<COMMON> 65,700,000
<OTHER-SE> 63,659,000
<TOTAL-LIABILITY-AND-EQUITY> 195,407,000
<SALES> 492,236,000
<TOTAL-REVENUES> 492,236,000
<CGS> 357,135,000
<TOTAL-COSTS> 357,135,000
<OTHER-EXPENSES> 119,770,000
<LOSS-PROVISION> (180,000)
<INTEREST-EXPENSE> (149,000)
<INCOME-PRETAX> 15,660,000
<INCOME-TAX> 5,873,000
<INCOME-CONTINUING> 9,787,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 9,787,000
<EPS-PRIMARY> 0.84
<EPS-DILUTED> 0.83
</TABLE>
