FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the quarterly period ended July 29, 2000.
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 12,042,941 shares of Class A voting, no par value common
stock outstanding as of September 8, 2000.
<PAGE>
FRED'S, INC.
INDEX
Page No.
Part I - Financial Information
Item 1 - Financial Statements (unaudited):
Consolidated Balance Sheets as of
July 29, 2000 and January 29, 2000 3
Consolidated Statements of Income for the Thirteen Weeks
Ended July 29, 2000 and July 31, 1999 and the Twenty-Six Weeks
Ended July 29, 2000 and July 31, 1999 4
Consolidated Statements of Cash Flows
for the Twenty-six Weeks Ended July 29, 2000
and July 31, 1999 5
Notes to Consolidated Financial Statements 6 - 7
Item 2 - Management's Discussion and
Analysis of Financial Condition and
Results of Operations 8 - 11
Item 3 - Quantitative and Qualitative Disclosure
about Market Risk 11
Part II - Other Information 12
Signatures 13
<PAGE>
FRED'S, INC.
CONSOLIDATED BALANCE SHEETS
(unaudited)
(in thousands, except for number of shares)
July 29, January 29,
2000 2000
-------- --------
ASSETS:
Current assets:
Cash and cash equivalents $1,158 $3,036
Receivables, less allowance for doubtful
accounts of $528 ($452 at January 29, 2000) 10,789 10,911
Inventories 153,818 141,612
Deferred income taxes 2,091 3,002
Other current assets 1,405 1,865
----- -----
Total current assets 169,261 160,426
Property and equipment, at depreciated cost 75,758 73,459
Equipment under capital leases, less
accumulated amortization of $1,080
($856 at January 29,2000) 1,611 1,835
Deferred income taxes 1,394 866
Other noncurrent assets 4,152 3,636
----- -----
Total assets $252,176 $240,222
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $42,636 $39,653
Current portion of indebtedness 2,349 30,306
Current portion of capital lease obligations 465 430
Accrued liabilities 10,645 9,680
Income taxes payable 2,611 650
----- ---
Total current liabilities 58,706 80,719
------ ------
Long term portion of indebtedness 39,407 10,027
Capital lease obligations 1,492 1,734
Other noncurrent liabilities 1,916 1,829
----- -----
Total liabilities 101,521 94,309
------- ------
Shareholders' equity:
Common stock, Class A voting, no par value,
12,034,354 shares issued and outstanding
(11,988,276 shares at January 29, 2000) 68,081 67,326
Retained earnings 82,854 78,902
Deferred compensation on restricted
stock incentive plan (280) (315)
---- ----
Total shareholders' equity 150,655 145,913
------- -------
Total liabilities and shareholders equity $252,176 $240,222
======== ========
See accompanying notes to consolidated financial statements
<PAGE>
FRED'S, INC.
CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Thirteen Weeks Ended Twenty-Six Weeks Ended
---------------------- ----------------------
July 29, July 31, July 29, July 31,
2000 1999 2000 1999
---------- ---------- ---------- ------
<S> <C> <C> <C> <C>
Net sales $180,806 $156,498 $357,466 $311,432
Cost of goods sold 131,635 112,546 259,173 223,161
------- --------- -------- --------
Gross profit 49,171 43,952 98,293 88,271
Selling, general and
administrative expenses 46,036 41,659 89,198 81,080
------ --------- -------- --------
Operating income 3,135 2,293 9,095 7,191
Interest expense, net 763 694 1,436 1,146
------ --------- -------- --------
Income before income taxes 2,372 1,599 7,659 6,045
Provision for income taxes 645 562 2,500 2,122
-------- --------- -------- --------
Net income $ 1,727 $ 1,037 $ 5,159 $ 3,923
======== ======== ======== ========
Net income per share
Basic .14 $ .09 $ .43 $ .33
======= ======== ======== ========
Diluted .14 $ .09 $ .42 $ .33
======= ======== ======== ========
Weighted average shares outstanding
Basic 11,928 11,826 11,919 11,819
======== ========= ======== ========
Diluted 12,172 12,079 12,149 12,057
======== ======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements
<PAGE>
FRED'S, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(in thousands)
Twenty-six Weeks Ended
July 29, July 31,
2000 1999
---- ----
Cash flows from operating activities:
Net income $5,159 $3,923
Adjustments to reconcile net income
to net cash flows from operating activities:
Depreciation and amortization 6,883 5,734
Lifo reserve 400 200
Deferred income taxes 383 (151)
Amortization of deferred compensation on
restricted stock incentive plan 76 142
Cancellation of restricted stock (203) ----
(Increase)decrease in assets:
Receivables 122 1,024
Inventories (12,606) (10,823)
Other assets (780) 302
Increase (decrease) in liabilities:
Accounts payable and accrued liabilities 3,948 (12,838)
Income taxes payable 1,961 49
Other noncurrent liabilities 87 80
--- ---
Net cash provided by (used in)operating
activities 5,430 (12,358)
----- -------
Cash flows from investing activities:
Capital expenditures (8,233) (6,000)
------ ------
Net cash used in investing activities (8,233) (6,000)
------ ------
Cash flows from financing activities:
Reduction of indebtedness and capital lease
obligations (998) (983)
Proceeds from revolving line of credit,
net of payments 2,214 16,800
Proceeds from term loan ---- 2,250
Proceeds from exercise of options 725 208
Tax benefit on exercise of stock options 185 28
Cash dividends paid (1,201) (1,196)
------ ------
Net cash provided by financing
activities 925 17,107
--- ------
Increase (decrease) in cash and cash
equivalents (1,878) (1,251)
Cash and cash equivalents:
Beginning of Period 3,036 2,406
----- -----
End of period $1,158 $1,155
====== ======
Supplemental disclosures of cash flow information:
Interest paid $1,537 $1,097
====== ======
Income taxed paid ---- $2,200
====== ======
See accompanying notes to consolidated financial statements
<PAGE>
FRED'S, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: BASIS OF PRESENTATION
Fred's, Inc. ("Fred's" or the "Company") operates 335 discount general
merchandise stores, including 26 franchised Fred's stores, in eleven states in
the southeastern United States. One hundred and eighty-nine of the stores have
full service pharmacies.
The accompanying unaudited consolidated financial statements of Fred's 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 29, 2000 incorporated into the
Company's Annual Report on Form 10-K.
The results of operations for the twenty-six week period ended July 29,
2000 are not necessarily indicative of the results to be expected for the full
fiscal year.
Certain prior quarter amounts have been reclassified to conform to the 2000
presentation.
NOTE 2: INVENTORIES
Wholesale inventories are stated at the lower of cost or market using the
FIFO (first-in, first-out) method. Retail inventories are stated at the lower of
cost or market as determined by the retail inventory method. For pharmacy
inventories, which comprise approximately 19% of the retail inventories at July
29, 2000, cost was determined using the LIFO (last-in, first-out) method. For
the remainder of the retail inventories, the FIFO method was applied. The
current cost of inventories exceeded the LIFO cost by approximately $3,608,000
and $3,208,000 at July 29, 2000 and January 29, 2000, respectively.
LIFO inventory costs can only be determined annually when inflation rates and
inventory levels are finalized; therefore, LIFO inventory costs for interim
financial statements are estimated.
<PAGE>
NOTE 3: 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.
<TABLE>
<CAPTION>
COMPUTATION OF NET INCOME PER SHARE
(unaudited)
(in thousands, except per share amounts)
Thirteen Weeks Ended Twenty-Six Weeks Ended
---------------------- ----------------------
July 29, July 31, July 29, July 31,
2000 1999 2000 1999
---------- ---------- ---------- ------
<S> <C> <C> <C> <C>
Basic net income per share
Net income $ 1,727 $ 1,037 $ 5,159 $3,923
======= ======= ======= ======
Weighted average number of common shares
outstanding during the period
11,928 11,826 11,919 11,819
======= ======= ======= ======
Net income per share $ .14 $ .09 $ .43 $ .33
======= ======= ======= ======
Diluted net income per share
Net income $ 1,727 $ 1,037 $ 5,159 $3,923
======= ======= ======= ======
Weighted average number of common shares
outstanding during the period
11,928 11,826 11,919 11,819
Additional shares attributable to common
stock equivalents 244 253 230 238
------- ------- ------- ------
12,172 12,079 12,149 12,057
======= ======= ======= ======
Net income per share $ .14 $ .09 $ .42 $ .33
======= ======= ======= ======
</TABLE>
<PAGE>
Management's Discussion and Analysis of Financial
Condition and Results of Operations
GENERAL
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.
RESULTS OF OPERATIONS
Thirteen Weeks Ended July 29, 2000 and July 31, 1999
-------------------------------------------------------
Net sales increased to $180.8 million in 2000 from $156.5 million in 1999, an
increase of $24.3 million or 15.5%. The increase was attributable to comparable
store sales increases of 10.0% ($14.5 million) and sales by stores not yet
included as comparable stores ($9.9 million). Sales to franchisees decreased $.1
million in 2000. The sales mix for the period was 50.9% Hardlines, 32.8%
Pharmacy, 12.0% Softlines, and 4.3% Franchise. This compares with 49.7%
Hardlines, 31.3% Pharmacy, 14.0% Softlines, and 5.0% Franchise for the same
period last year.
Gross profit decreased to 27.2% of sales in 2000 compared with 28.1% of sales in
the prior-year period. Gross profit margins decreased as a result of the
increased promotional activities toward soft drink and food products which carry
lower margins.
Selling, general and administrative expenses increased to $46.0 million in 2000
from $41.7 million in 1999. As a percentage of sales, expenses decreased to
25.5% of sales compared to 26.6% of sales last year. Selling, general and
administrative expenses were improved primarily due to controlling costs and
improving efficiencies in the store and pharmacy operations. Improved
performance in the distribution operations and better merchandising practices
have resulted in stronger control of labor and related costs at the store.
Interest expense increased to $.8 million in 2000 from $.7 million in 1999,
reflecting higher average revolver borrowings than last year as well as rising
interest rates.
Twenty-six Weeks Ended July 29, 2000 and July 31, 1999
-------------------------------------------------------
Net sales increased to $357.5 million in 2000 from $311.4 million in 1999, an
increase of $46.1 million or 14.8%. The increase was attributable to comparable
store sales increases of 9.7% ($27.9 million) and sales by stores not yet
included as comparable stores ($18.3 million). Sales to franchisees decreased
$.1 million in 2000. The sales mix for the period was 50.0% Hardlines, 33.0%
Pharmacy, 12.4% Softlines, and 4.6% Franchise. This compares with 48.9%
Hardlines, 32.0% Pharmacy, 13.8% Softlines, and 5.3% Franchise for the same
period last year.
Gross profit decreased to 27.5% of sales in 2000 compare with 28.3% of sales in
the prior-year period. Gross profit margins decreased as a result of the
increased mix of certain categories in hardline sales and strong quarterly sales
in pharmacy which typically carry lower margins.
Selling, general and administrative expenses increased to $89.2 million in 2000
from $81.1 million in 1999. As a percentage of sales, expenses decreased to
25.0% of sales compared to 26.0% of sales last year. Selling, general and
administrative expenses were improved primarily due to continued improved
performance in the distribution operations and better merchandising practices
which has resulted in stronger control of labor and related costs at the store.
Interest expense increased to $1.4 million in 2000 from $1.1 million in 1999,
reflecting higher average revolver borrowings than last year for inventory
purchases to improve store in-stock positions.
The provision for income taxes has been reduced by $188,000 to reflect the Work
Opportunity Tax Credit that the Company has earned during the first half of the
year to reduce the Federal Tax liability for the year ended February 3, 2001.
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.
Net cash flow provided by operating activities totaled $5.4 million during the
twenty-six week period ended July 29, 2000. Cash was primarily used to increase
inventories and reduce accounts payable. Total inventories increased
approximately $12.6 million in the first half of 2000. This increase was
primarily attributable to 17 new stores and 7 new pharmacies in the first half
of 2000, coupled with the additional inventory necessary to improve store in-
stock positions over 1999. Accounts payable increased approximately $3.9 million
in the first half of 2000.
Net cash flows used by investing activities totaled $8.2 million, and was used
primarily for capital expenditures associated with the Company's store and
pharmacy expansion program. During the first half of 2000, the Company opened 17
stores and closed 1 store. The Company expects to open approximately 30 to 40
stores for the year. The Company's capital expenditure plan for the year 2000 is
approximately $12 million dollars and will approximate depreciation expense for
the year.
Net cash flows provided by financing activities totaled $.9 million and included
$2.2 million of borrowings under the Company's revolver for inventory and
accounts payable needs.
On April 3, 2000, the Company and a bank entered into a new Revolving Loan and
Credit Agreement (the "Agreement") to replace the May 15, 1992 Revolving Loan
and Credit Agreement, as amended. The Agreement provides the Company with an
unsecured revolving line of credit commitment of up to $40 million and bears
interest at the lesser of 1.5% below prime rate or a LIBOR-based rate. Under the
most restrictive covenants of the Agreement, the Company is required to maintain
specified shareholder's equity and net income levels. The Company is required to
pay a commitment fee to the bank at a rate per annum equal to .18% on the
unutilized portion of the revolving line commitment over the term of the
agreement. The term of the Agreement extends to April 3, 2003. The borrowings
outstanding under this agreement at July 29, 2000 were $30.4 million. The
borrowings outstanding under the previous Agreement at July 31, 1999 were $27.1
million.
On May 5, 1998, the Company and a bank entered into a Loan Agreement (the "1998
Loan Agreement"). The 1998 Loan Agreement provided the Company with an unsecured
term loan of $12 million to finance the modernization and automation of the
Company's distribution center and corporate facilities. The 1998 Loan Agreement
bears interest of 6.82% per annum and matures on November 1, 2005. Borrowings
outstanding under this 1998 Loan Agreement totaled $9.7 million at July 29, 2000
and $11.1 million at July 31, 1999.
On April 23, 1999, the Company and a bank entered into a Loan Agreement (the
"1999 Loan Agreement"). The 1999 Loan Agreement provided the Company with a
four-year unsecured term loan of $2,250,000 to finance the replacement of the
Company's mainframe computer system. The 1999 Loan Agreement bears interest of
6.15% per annum and matures on April 15, 2003. Borrowings outstanding under this
1999 Loan Agreement totaled $1.6 million at July 29, 2000 and $2.1 million at
July 31, 1999.
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.
RECENT ACCOUNTING PRONOUNCEMENTS
In December 1999, the Securities and Exchange Commission issued Staff Accounting
Bulletin No. 101 "Revenue Recognition in Financial Statements" (SAB 101). SAB
101 deals with various revenue recognition issues, several which are common
within the retail industry including treatment of revenue recognition on layaway
sales. The Company has not implemented the changes of Staff Accounting Bulletin
No. 101. The most recent announcement by the SEC delays the implementation date
of SAB 101 and would require the Company to implement changes by the fourth
quarter of this fiscal year. The new accounting treatment of layaway sales would
cause an adjustment of earnings from the third quarter to the fourth quarter
since revenue would not be recorded until the layaway sale is complete. However
based on historicial customer patterns, the financial effect on the year end
result of the Company is not expected to be material. Historically, layaway
purchases not totally complete by fiscal year end are minimal in relation to
total revenues and the effect on Earnings Per Share of the Company would be less
than $.01 per share.
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The Company has no holdings of derivative financial or commodity instruments as
of July 29, 2000. The Company is exposed to financial market risks, including
changes in interest rates. All borrowings under the Company's Revolving Credit
Agreement bear interest at 1.5% below prime rate or a LIBOR based rate. An
increase in interest rates of 100 basis points would not significantly affect
the Company's income. All of the Company's business is transacted in U.S.
dollars and, accordingly, foreign exchange rate fluctuations have not had a
significant impact on the Company, and they are not expected to in the
foreseeable future
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION
Statements, other than those based on historical facts, are forward-looking
statements which are based upon a number of assumptions concerning future
conditions that may ultimately prove to be inaccurate. Actual events and results
may materially differ from anticipated results described in such statements. The
Company's ability to achieve such results is subject to certain risks and
uncertainties, including, but not limited to, economic and weather conditions
which affect buying patterns of the Company's customers, changes in consumer
spending and the Company's ability to anticipate buying patterns and implement
appropriate inventory strategies, continued availability of capital and
financing, competitive factors, and other factors affecting business beyond the
Company's control. Consequently, all of the forward- looking statements are
qualified by these cautionary statements and there can be no assurance that the
results or developments anticipated by the Company will be realized or that they
will have the expected effects on the Company or its business or operations.
<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 21, 2000. 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
PricewaterhouseCoopers LLP as independent public accountants for
the fiscal year ending February 3, 2001.
The results of the voting were as follows:
Abstain/
For Against Withheld Broker Non-Vote
--- ------- -------- ---------------
Election of Directors:
Michael J. Hayes 9,900,469 212,414 1,863,845
David A. Gardner 8,606,048 1,112,940 2,257,740
John R. Eisenman 10,115,627 56 1,861,045
Roger T. Knox 10,144,157 56 1,832,515
Appointment of
PricewaterhouseCoopers LLP:
10,167,759 698 7,715 1,800,556
Item 5. Other Information
Not Applicable.
Item 6. Exhibits and Reports on Form 8-K
Exhibits:
Exhibit 27 - Financial Data Schedule (Edgar Filing only)
Reports on Form 8-K:
Not Applicable.
<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.
Date: September 12, 2000 /s/ Michael J. Hayes
------------------------- -------------------------
Michael J. Hayes
Chief Executive Officer
Date: September 12, 2000 /s/ Jerry A. Shore
------------------------ -------------------------
Jerry A. Shore
Chief Financial Officer
