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 29, 2000
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].
As of April 24, 2000, there were 11,976,728 shares outstanding of the
Registrant's Class A no par value voting common stock. Based on the last
reported sale price of $14.625 per share on the NASDAQ Stock Market on April 24,
2000, the aggregate market value of the Registrant's Common Stock held by those
persons deemed by the Registrant to be non-affiliates was $175,159,647.
As of April 24, 2000, 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
29, 2000 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.
Cautionary Statement Regarding Forward-looking Information
Statements, other than those based on historical facts, that the Company expects
or anticipates may occur in the future 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.
PART I
Item 1: Business
General
Fred's, Inc. ("Fred's" or the "Company"), founded in 1947, operates 293
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
eighty-two of the Company's stores have full service pharmacies. The Company
also markets goods and services to 26 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 14,015 square feet and had average
sales of $2,207,000 in fiscal 1999. No single store accounted for more than 1.0%
of sales during fiscal 1999.
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,
and the inclusion of pharmacies in 182 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 tabloid, television and radio
advertising.
Convenient shopper-friendly environment - Fred's stores are typically
located in convenient shopping and/or residential areas. Approximately 30%
of the Company's stores are freestanding as opposed to being located in
strip shopping center sites. Freestanding sites allow for easier access and
shorter distances to the store entrance, and will be the primary site
growth in the future. 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 10 stores in 1999, and anticipates opening a net of
twenty-five to thirty new stores in 2000. The Company's new store prototype has
14,000 square feet of space. Opening a new store currently costs between
$320,000 and $420,000 for inventory, furniture, fixtures, equipment and
leasehold improvements. The Company has 19 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. During 1999, the Company converted seven Xpress locations to
full size Fred's locations and anticipates converting up to seven more Xpress
locations during 2000.
A significant growth area for the Company has been its pharmacy business.
In 1999, the Company added a net 2 new pharmacies. During 2000, the Company
anticipates adding at least 20 additional pharmacies. Approximately 62% of
Fred's stores contain a pharmacy and sell prescription drugs. The Company's
primary mechanism for adding new pharmacies is through the acquisition of
prescription files from independent pharmacies. These acquisitions provide an
immediate sales benefit, and in many cases, the independent pharmacist will move
to Fred's, thereby providing continuity in the pharmacist-patient relationship.
The following tables set forth certain information with respect to stores
and pharmacies for each of the last five years:
<TABLE>
<CAPTION>
1995 1996 1997 1998 1999
----------------------------------------------
<S> <C> <C> <C> <C> <C>
Stores open at beginning of period 184 206 213 261 283
Stores opened/acquired during period 36 13 49 29 20
Stores closed during period (14) (6) (1) (7) (10)
-------------------------------------------------
Stores open at end of period 206 213 261 283 293
=================================================
Number of stores with Pharmacies at
End of period 92 101 141 180 182
=================================================
Square feet of selling space at end of
period (in thousands) 2,797 2,828 3,362 3,680 3,966
=================================================
Average square feet of selling space
per store 13,915 13,277 13,875 13,925 14,015
=================================================
Franchise stores at end of period 34 32 31 29 26
=================================================
</TABLE>
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.
Purchasing
The Company's primary non-prescription drug buying activities are directed
from the corporate office by three 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 these categories of merchandise.
During 1999 all of the Company's prescription drugs were purchased
individually by its pharmacies and shipped direct from a pharmaceutical
wholesaler. On November 24, 1999, the company entered into a supply agreement
with Bergen Brunswig Drug Company to be Fred's new primary pharmaceutical
wholesaler and to provide substantially all of the company's prescription drugs.
During 1999, approximately 30% of the Company's total purchases were made from
its pharmaceutical wholesalers. Although there are alternative wholesalers that
supply pharmaceutical products, the Company operates under a purchase and supply
contract with one supplier as its primary wholesaler. Accordingly, the unplanned
loss of this particular supplier could have a short-term gross margin impact on
the Company's business until an alternative wholesaler arrangement could be
implemented.
Sales Mix
Sales of merchandise through Company owned stores and to franchised Fred's
locations are the only significant industry segment of which the Company is a
part.
The Company's sales mix by major category during 1999 was as follows:
Pharmaceuticals...................................................30.6%
Household Goods...................................................21.8%
Apparel and Linens................................................13.5%
Health and Beauty Aids............................................11.9%
Food and Tobacco Products........................................ 9.0%
Paper and Cleaning Supplies...................................... 8.3%
Sales to Franchised Fred's Stores..................................4.9%
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 1999 the average customer transaction size was approximately $14.72,
and the number of customer transactions totaled approximately 43 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 1999. 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.
As previously mentioned, the Company sells merchandise to its 26 franchised
"Fred's" stores. These sales during the last three years totaled $32,850,000 in
1999, $35,766,000 in 1998, and $37,700,000 in 1997 representing 4.9%, 6.0%, and
7.7% of total revenue, respectively. Franchise and other fees totaling
$1,761,000 in 1999, $1,957,000 in 1998,and $1,967,000 in 1997 have been earned
by Fred's. These fees represent a reimbursement for use of the Fred's name and
other administrative cost incurred on behalf of the franchised stores. The
Company does not intend to expand its franchise network, and therefore, expects
that this category will continue to decrease as a percentage of the Company's
total revenues.
Advertising and Promotions
Advertising and promotion costs represented 1.4% of net sales in 1999. The
Company uses direct mail, television, radio and newspaper advertising to promote
its merchandise, special promotional events and a discount retail image. During
1999, the Company eliminated the distribution of two major circulars, and now
distributes thirteen major advertising circulars per year.
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
seventeen district managers supervise the management and operation of Fred's
stores and pharmacies.
Fred's operates 182 in-store pharmacies which offer brand name and generic
pharmaceuticals and are staffed by licensed pharmacists. 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.
Inventory Control and Distribution
Inventory Control
The Company's computerized central management information system (known as
"AURORA," which stands for Automation Utilizing Replenishment Ordering and
Receiving Accuracy) 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 850,000 square foot centralized distribution center in
Memphis, Tennessee (see "Properties" below). During 1998, the Company completed
a $12 million project to modernize and automate its distribution center. This
project, including implementation of a new warehouse management computer system,
has increased the center's capacity sufficiently to accommodate the Company's
store expansion plans for the next several years. Approximately 60% of the
merchandise received by Fred's stores in 1999 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 suppliers. For distribution, the Company uses owned
and leased trailers and tractors, as well as common carriers.
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 29, 2000, the Company had approximately 7,010 full-time and
part-time employees, comprising 710 corporate and distribution center employees
and 6,300 store employees. The number of employees varies during the year,
reaching a peak during the Christmas selling season. The Company's labor force
is not subject to a collective bargaining agreement. Management believes it has
good relationships with its employees.
Item 2: Properties
As of January 29, 2000, the geographical distribution of the Company's 293
locations was as follows:
State Number of Stores
--------------------------------------------------
Mississippi 86
Tennessee 59
Arkansas 57
Alabama 32
Louisiana 25
Georgia 23
Kentucky 3
North Carolina 2
Missouri 5
Florida 1
The Company owns the real estate and the buildings for 57 locations, and
owns the buildings at five locations which are subject to ground leases. The
Company leases the remaining 231 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. Two hundred and four
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.
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 850,000 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, cash flows, 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 29, 2000.
PART II
Item 5: Market for the Registrant's Common Equity and Related Stockholder
Matters
The information required by this item is incorporated herein by reference
to Page 29 of the Annual Report to Shareholders for the year ended January 29,
2000 (the "Annual Report to Shareholders").
Item 6: Selected Financial Data
The selected financial data for the five years ended January 29, 2000,
which appears on page 8 of the Annual Report to Shareholders is incorporated
herein by reference.
Item 7: Management's Discussion and Analysis of Financial Condition and Results
of Operations
Management's Discussion and Analysis of financial condition and results of
operations appearing on pages 9 through 13 of the Annual Report to Shareholders
is incorporated herein by reference.
Item 7a: Quantitative and Qualitative Disclosure about Market Risk
The Company has no holdings of derivative financial or commodity
instruments as of January 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 never had a significant impact on the Company, and they are not expected to
in the foreseeable future.
Item 8: Financial Statements and Supplementary Data
The consolidated financial statements appearing on pages 14 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.
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:
<TABLE>
<CAPTION>
Name Age Positions and Offices
- ---- --- ---------------------
<S> <C> <C>
Michael J. Hayes(1) 58 Director, Managing Director (2), Chief Executive Officer
David A. Gardner(1) 52 Director and Managing Director (2)
John R. Eisenman(1) 58 Director
Roger T. Knox(1) 62 Director
John Reier 59 President
Edwin C. Boothe 42 Executive Vice President and Chief Operating Officer
John A. Casey 53 Executive Vice President - Pharmacy Operations
Jerry A Shore 47 Executive Vice President and Chief Financial Officer
Charles S. Vail 57 Corporate Secretary, Vice President - Legal Services and General Counsel
</TABLE>
(1) Four directors, constituting the entire Board of Directors, are to be
elected at the Annual Meeting to serve one year or until their successors
are elected.
(2) According to the By-laws of the Company, the Managing Directors (Messrs.
Hayes and Gardner) are the chief executive officers of the Company and have
general supervisory responsibility for the business of the Company.
Michael J. Hayes was elected a director of the Company in January 1987 and
has been a Managing Director of the Company since October 1989. Mr. Hayes has
been Chief Executive Officer since October 1989. 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
Organogenesis, Inc., Wynd Communications Corporation, 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.
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. Additionally, Mr. Knox is a director of Hancock Fabrics, Inc.
John Reier is President. Mr. Reier joined the company in May of 1999. Prior
to joining the company, Mr.Reier was President and Chief Executive Officer of
Sunny's Great Outdoors Stores, Inc. from 1997 to 1999, and was President, Chief
Operating Officer, Senior Vice President of Merchandising, and General
Merchandise Manager at Family Dollar Stores, Inc. from 1987 to 1997.
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 - Pharmacy Operations. Mr. Casey
joined the Company in 1979 and has served in various positions in Pharmacy
Operations. Mr. Casey is a registered Pharmacist.
Jerry A. Shore joined the Company in April 2000 as Executive Vice President
and Chief Financial Officer. Prior to joining the Company, Mr. Shore was
employed by Wang's International, a major importing and wholesale distribution
company, as Chief Financial Officer from 1989 to 2000, and in various financial
management capacities with IPS Corp., and Caterpillar, Inc. from 1975 to 1989.
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.
Item 11: Executive Compensation
Information regarding executive compensation is incorporated herein by
reference from the information on pages 6 through 9 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 2 and 3 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 10 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 14 through 26 of the Annual Report to Shareholders for
the year ended January 29, 2000.
Report of Independent Accountants.
Consolidated Statements of Income for the years ended January 29,
2000, January 30, 1999, and January 31, 1998.
Consolidated Balance Sheets as of January 29, 2000, and January 30,
1999.
Consolidated Statements of Changes in Shareholders' Equity for the
years ended January 29, 2000, January 30, 1999, and January 31, 1998.
Consolidated Statements of Cash Flows for the years ended January 29,
2000, January 30, 1999, and January 31, 1998.
Notes to Consolidated Financial Statements.
(a)(2) Financial Statement Schedules
Report of Independent Accountants on Financial Statement Schedules for each
of the three years for the period ended January 29, 2000.
II Valuation and qualifying accounts
(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]
10.2 Form of Fred's, Inc. Franchise Agreement [incorporated herein by
reference to Exhibit 10.8 to the Form S-1].
10.3 401(k) Plan dated as of May 13, 1991 [incorporated herein by
reference to Exhibit 10.9 to the Form S-1].
10.4 Employee Stock Ownership Plan (ESOP) dated as of January 1, 1987
[incorporated herein by reference to Exhibit 10.10 to the Form
S-1].
*10.5 Incentive Stock Option Plan dated as of December 22, 1986
[incorporated herein by reference to Exhibit 10.11 to the Form
S-1].
10.6 Lease Agreement by and between Hogan Motor Leasing, Inc. and
Fred's, Inc. dated February 5, 1992 for the lease of truck
tractors to Fred's, Inc. and the servicing of those vehicles and
other equipment of Fred's, Inc. [incorporated herein by reference
to Exhibit 10.15 to Pre-Effective Amendment No. 1 to the Form
S-1].
10.7 Revolving Loan and Credit Agreement between Fred's, Inc. and
Union Planters National Bank dated as of May 15, 1992
[incorporated herein by reference to the Company's report on Form
10-Q for the quarter ended May 2, 1992].
*10.8 1993 Long Term Incentive Plan dated as of January 21, 1993
[incorporated herein by reference to the Company's report on Form
10-Q for the quarter ended July 31, 1993].
*Management Compensatory Plan
10.9 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].
10.10 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].
10.11 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].
10.12 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].
10.13 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].
10.14 Term Loan Agreement between Fred's, Inc. and Union Planters
National Bank dated as of May 5, 1998 [incorporated herein by
reference to the Company's Report on Form 10-Q for the quarter
ended May 2, 1998].
10.15 Fourth Modification Agreement between Fred's, Inc. and Union
Planters National Bank dated as of September 1998. [Incorporated
herein by reference to the Company's Report on Form 10-Q for the
quarter ended August 1, 1998].
10.16 Preferred Share Purchase Plan [Incorporated herein by reference
to the Company's Report on Form 10-Q for the quarter ended
October 31, 1998].
10.17 Seasonal Overline Agreement between Fred's, Inc. and Union
Planters National Bank dated as of February 3, 1999.
[Incorporated herein by reference to the Company's Report on Form
10-Q for the quarter ended May 1, 1999.]
10.18 Seasonal Overline Agreement between Fred's, Inc. and Union
Planters National Bank dated s of May 12, 1999. [Incorporated
herein by reference to the Company's Report on From 10-Q for the
quarter ended May 1, 1999.]
10.19 Term Loan Agreement between Fred's, Inc. and First American
National Bank dated as of April 23, 1999. [Incorporated herein by
reference to the Company's Report on Form 10-Q for the quarter
ended May 1, 1999.]
10.20 Seasonal Overline Agreement between Fred's, Inc. and Union
Planters National Bank dated as of August 3, 1999. [Incorporated
herein by reference to the Company's Report on Form 10-Q for the
quarter ended July 31, 1999.]
10.21 Prime Vendor Agreement between Fred's Stores of Tennessee, Inc.
and Bergen Brunswig Drug Company, dated as of November 24, 1999.
[Incorporated herein by reference to Company's Report on Form
10-Q for the quarter ended October 31, 1999.]
**10.22 Addendum to Leasing Agreement and Form of Schedules 7 through
8 of Schedule A, by and between Hogan Motor Leasing, Inc. and
Fred's, Inc dated September 20, 1999. [Modifies the Lease
Agreement included as Exhibit 10.6]
**10.23 Revolving Loan Agreement between Fred's, Inc. and Union
Planters Bank, NA and Suntrust Bank dated April 3, 2000.
**13.1 Annual report to shareholders for the year ended January 29,
2000 (to the extent incorporated herein by reference).
**21.1 Subsidiaries of Registrant
**23.1 Consent of PricewaterhouseCoopers LLP
**27. Financial Data Schedule
** Filed herewithin
(b) Reports on Form 8-K
None
<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 24th day of
April, 2000.
FRED'S, INC.
By: /s/ Michael J. Hayes
------------------------
Michael J. Hayes, Chief Executive
Officer
By: /s/ Jerry A. Shore
----------------------
Jerry A. Shore, 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 24th day of April, 2000.
Signature Title
/s/ Michael J. Hayes Director, Managing Director,
-------------------------- Chief Executive Officer
Michael J. Hayes
/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
<PAGE>
(a)(1) Consolidated Financial Statements
Fred's, Inc.
Consolidated Financial Statements
January 29, 2000
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 stockholders' equity and of
cash flows present fairly, in all material respects, the financial position of
Fred's, Inc. and its subsidiaries at January 29, 2000 and January 30, 1999, and
the results of their operations and their cash flows for each of the three years
in the period ended January 29, 2000, in conformity with accounting principles
generally accepted in the United States. 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 auditing standards generally
accepted in the United States, 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.
As discussed in Note 1 to the consolidated financial statements, the Company
changed its method of accounting for pharmacy inventories during the year ended
January 30, 1999.
PricewaterhouseCoopers LLP
Memphis, TN
March 13, 2000
except for Note 5, as
to which the date
is April 3, 2000
<PAGE>
Fred's, Inc.
Consolidated Balance Sheets
(in thousands, except for number of shares)
<TABLE>
<CAPTION>
January 29, January 30,
2000 1999
---- ----
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 3,036 $ 2,406
Receivables, less allowance for doubtful accounts of $452
($644 at January 30, 1999) 10,911 8,931
Inventories 141,612 126,577
Deferred income taxes 3,002 3,783
Other current assets 1,865 1,367
------------------- -------------------
Total current assets 160,426 143,064
Property and equipment, at depreciated cost 73,459 68,923
Equipment under capital leases, less accumulated amortization of
$856 ($501 at January 30, 1999) 1,835 1,578
Deferred income taxes 866 2,598
Other noncurrent assets, net 3,636 4,594
------------------- -------------------
Total assets $ 240,222 $ 220,757
=================== ===================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 39,653 $ 46,767
Current portion of indebtedness 30,306 11,606
Current portion of capital lease obligations 430 308
Accrued liabilities 9,680 10,776
Income taxes payable 650 826
------------------- -------------------
Total current liabilities 80,719 70,283
Long-term portion of indebtedness 10,027 10,264
Capital lease obligations 1,734 1,557
Other noncurrent liabilities 1,829 1,670
------------------- -------------------
Total liabilities 94,309 83,774
------------------- -------------------
Commitments and contingencies (Notes 7 and 11)
Shareholders' equity:
Common stock, Class A voting, no par value, 11,988,276 shares
issued and outstanding (11,946,772 shares at January 30, 1999) 67,326 66,951
Retained earnings 78,902 70,596
Deferred compensation on restricted stock incentive plan (315) (564)
------------------- -------------------
Total shareholders' equity 145,913 136,983
------------------- -------------------
$ 240,222 $ 220,757
==================== ==================
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
Fred's, Inc.
Consolidated Statements of Income
(in thousands, except share and per share amounts)
<TABLE>
<CAPTION>
For the Years Ended
-------------------
January 29, January 30, January 31,
2000 1999 1998
---- ---- ----
<S> <C> <C> <C>
Net sales $ 665,777 $ 600,902 $ 492,236
Cost of goods sold 478,138 436,523 357,135
------------- ------------------ ------------------
Gross profit 187,639 164,379 135,101
Selling, general and administrative expenses 168,696 149,668 119,590
------------- ------------------ ------------------
Operating income 18,943 14,711 15,511
Interest expense (income), net 2,504 1,106 (149)
------------- ------------------ ------------------
Income before taxes 16,439 13,605 15,660
Income taxes 5,737 4,775 5,873
------------- ------------------ ------------------
Net income $ 10,702 $ 8,830 $ 9,787
============= ================== ==================
Net income per share
Basic $ .90 $ .75 $ .84
============= ================== ==================
Diluted $ .89 $ .73 $ .83
============= ================== ==================
Weighted average shares outstanding
Basic 11,827 11,798 11,670
============= ================== ==================
Diluted 12,072 12,078 11,863
============= ================== ==================
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
Fred's, Inc.
Consolidated Statement of Changes in Shareholders' Equity
(in thousands, except share data)
<TABLE>
<CAPTION>
Common Stock Retained Deferred
Shares Amount Earnings Compensation Total
------ ------ -------- ------------ -----
<S> <C> <C> <C> <C> <C>
Balance, February 1, 1997 9,328,822 $ 63,369 $ 56,364 $ (154) $ 119,579
Cash dividends paid ($.17 per share) (1,999) (1,999)
Repurchase of shares (80)
Issuance of restricted stock 56,491 507 (507)
Exercises of stock options 97,557 1,211 1,211
Other issuances 18,046 300 300
Amortization of deferred compensation
on restricted stock incentive plan 173 173
Tax benefit on exercise of stock
options 313 313
Five-for-four stock split 2,365,953 (5) (5)
Net income 9,787 9,787
-- ---- --------- ---------- ------------- ------------ ----------
Balance, January 31, 1998 11,866,789 65,700 64,147 (488) 129,359
Cash dividends paid ($.20 per share) (2,381) (2,381)
Repurchase of shares (30) -
Issuance of restricted stock 46,182 752 (362) 390
Cancellation of restricted stock (5,500) (38) 38 -
Exercises of stock options 39,331 329 329
Amortization of deferred compensation
on restricted stock incentive plan 248 248
Tax benefit on exercise of stock
options 208 208
Net income 8,830 8,830
-- ---- --------- ---------- ------------- ------------ ----------
Balance, January 30, 1999 11,946,772 66,951 70,596 (564) 136,983
Cash dividends paid ($.20 per share) (2,396) (2,396)
Issuance of restricted stock 9,900 124 (124)
Cancellation of restricted stock (5,700) (118) 118
Other issuances 1,714 30 30
Exercises of stock options 35,590 296 296
Amortization of deferred compensation
on restricted stock incentive plan 255 255
Tax benefit on exercise of stock
options 43 43
Net income 10,702 10,702
-- ---- --------- ---------- ------------- ------------ ----------
Balance, January 29, 2000 11,988,276 $ 67,326 $ 78,902 $ (315) $ 145,913
=== ==== ========== ========== ============= ============= ===========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
Fred's, Inc.
Consolidated Statements of Cash Flows
(in thousands)
<TABLE>
<CAPTION>
For the Years Ended
January 29, January 30, January 31,
2000 1999 1998
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 10,702 $ 8,830 $ 9,787
Adjustments to reconcile net income to net cash flows
from operating activities:
Depreciation and amortization 11,830 8,939 7,112
Provision for uncollectible receivables 80 124 589
LIFO Reserve 100 3,108 -
Deferred income taxes 2,513 2,344 (652)
Amortization of deferred compensation on restricted
stock incentive plan 255 248 173
Issuance of restricted stock - 390 -
Gain on sale of fixed assets (41) - (114)
(Increase) decrease in assets:
Receivables (2,060) (1,969) (3,182)
Inventories (15,135) (14,664) (16,852)
Other assets (847) (2,354) (1,099)
Increase (decrease) in liabilities:
Accounts payable and accrued liabilities (8,210) (3,712) 25,137
Income taxes payable (176) (890) 68
Other noncurrent liabilities 159 175 1
-------------- -------------- -----------------
Net cash (used in) provided by operating activities (830) 569 20,968
-------------- -------------- -----------------
Cash flows from investing activities:
Capital expenditures (14,848) (23,266) (9,696)
Proceeds from dispositions of property and equipment 215 - 279
Acquisition, net of cash acquired - - ( 12,850)
-------------- -------------- -----------------
Net cash used in investing activities (14,633) (23,266) (22,267)
-------------- -------------- -----------------
Cash flows from financing activities:
Reduction of indebtedness and capital lease obligations (2,139) (556) (1,487)
Proceeds from revolving line of credit, net of payments 18,040 10,200 -
Proceeds from term loan 2,249 12,000 -
Proceeds from exercise of options 296 329 1,211
Tax benefit upon exercise of stock options 43 208 313
Payment of cash for dividends and fractional shares (2,396) (2,381) (2,004)
-------------- -------------- -----------------
Net cash provided by (used in) financing activities 16,093 19,800 (1,967)
-------------- -------------- -----------------
Increase (decrease) in cash and cash equivalents 630 (2,897) (3,266)
Cash and cash equivalents:
Beginning of year 2,406 5,303 8,569
-------------- -------------- -----------------
End of year $ 3,036 $ 2,406 $ 5,303
-------------- -------------- -----------------
Supplemental disclosures of cash flow information:
Interest paid $ 2,399 $ 1,239 $ 346
Income taxes paid $ 3,810 $ 2,828 $ 6,154
Non cash investing and financing activities:
Assets acquired through capital lease obligations $ 612 $ 509 $ 1,290
Common stock issued for acquisition $ 30 $ - $ 300
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
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 its 293 retail discount stores located
in the southeastern United States. In addition, the Company sells general
merchandise to its 26 franchisees.
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. Fiscal years 1999, 1998 and 1997, as used
herein, refer to the years ended January 29, 2000, January 30, 1999, and January
31, 1998, 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 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 18% and 16% of the retail
inventories at January 29, 2000 and January 30, 1999, respectively, cost was
determined using the LIFO (last-in, first-out) method. For the remainder of the
retail inventories, the FIFO (first- in, first-out) method was applied. The
current cost of inventories exceeded the LIFO cost by approximately $3,208,000
at January 29, 2000 and $3,108,000 at January 30, 1999.
During the fourth quarter of fiscal 1998, the Company adopted the LIFO method of
accounting for its pharmacy inventories. The change was made to address the
significant inflation experienced in pharmacy inventory costs during 1998 and
provide for a better matching of costs and revenues. Net income for the year
ended January 30, 1999 was reduced by $2,017,000 as a result of this adoption.
Depreciation and amortization. Depreciation is computed using 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.
<PAGE>
Fred's, Inc.
Notes to Consolidated Financial Statements
Selling, general and administrative expenses. The Company includes buying,
warehousing, transportation 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
1999, 1998, and 1997 was $8,926,000, $9,621,000, and $7,383,000, respectively.
Preopening costs. The Company charges to expense the preopening costs of new
stores as incurred. These costs are primarily labor to stock the store,
preopening advertising, store supplies and other expendable items.
Revenue Recognition. The Company markets goods and services through Company
owned stores and 26 franchised stores. Sales are recorded at Company owned
stores when sold to the public. Sales to franchised stores are recorded when
purchased from the Company's warehouse. In addition, the Company charges the
franchised stores a fee based on a percentage of their purchases from the
Company. These fees represent a reimbursement for use of the Fred's name and
other administrative cost incurred on behalf of the franchised stores. Total
franchise income for 1999, 1998, and 1997 was $1,761,000, $1,957,000, and
$1,967,000, respectively.
Other intangibles assets. Other identifiable intangible assets which are
included in other noncurrent assets primarily represents amounts associated with
acquired pharmacies and are being amortized over five years. These intangibles,
net of accumulated amortization, totaled $3,559,000 at January 29, 2000,
$4,521,000 at January 30, 1999, and $3,742,000 at January 31, 1998. Amortization
expense for 1999, 1998 and 1997 was $1,307,000, $1,214,000, and $739,000,
respectively.
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. Included in accounts payable is outstanding
checks in excess of funds on deposit which totaled $14,089,000 at January 29,
2000 and $15,818,000 at January 30, 1999.
Financial instruments. At January 29, 2000, 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.
<PAGE>
Fred's, Inc.
Notes to Consolidated Financial Statements
Business segments. The Company has one reportable operating segment, its sales
of merchandise through its Company owned stores and to franchised Fred's
locations, which are organized around the products sold and markets served.
Comprehensive income. The Company discloses all comprehensive income items in
accordance with Statement of Financial Accounting Standards No. 130. Reporting
Comprehensive Income. Comprehensive income does not differ from the consolidated
net income presented in the consolidated statements of income.
Reclassifications. Certain prior year amounts have been reclassified to conform
to the 1998 presentation.
Recent Accounting Pronouncements. In June 1999, the FASB issued SFAS No. 137,
Accounting for Derivative Instruments and Hedging Activities - Deferral of the
effective date of FASB Statement No. 133, which deferred the effective date
provisions of SFAS No. 133 for the company to the first quarter of 2001. The
Company does not believe this new standard will have an impact on its financial
statements since it currently has no derivative instruments.
NOTE 2 - ACQUISITION
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 identifiable intangible assets acquired.
NOTE 3 - PROPERTY AND EQUIPMENT
Property and equipment, at cost, consist of the following (in thousands):
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Buildings and improvements $ 65,660 $ 63,975
Furniture, fixtures and equipment 81,424 71,612
------------ ------------
147,084 135,587
Less accumulated depreciation and amortization (78,018) (70,966)
------------ ------------
69,066 64,621
Land 4,393 4,302
------------ ------------
$ 73,459 $ 68,923
============ ============
</TABLE>
Depreciation expense totaled $10,168,000, $7,442,000, and $6,115,000 for 1999,
1998 and 1997, respectively.
<PAGE>
Fred's, Inc.
Notes to Consolidated Financial Statements
NOTE 4 - ACCRUED LIABILITIES
The components of accrued liabilities are as follows (in thousands):
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Payroll and benefits $ 2,992 $ 2,761
Sales and use taxes 1,726 1,909
Insurance 2,904 3,328
Other 2,058 2,778
------------ -----------
$ 9,680 $ 10,776
============ ===========
</TABLE>
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 $15 million, and
is also supplemented with $15 million of seasonal overline capabilities and
bears interest at 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 shareholders' equity and net income levels. There were $28,240,000 and
$10,200,000 borrowings outstanding under the Agreement at January 29, 2000 and
January 30, 1999, respectively. 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.
On April 3, 2000, a new Revolving Loan and Credit Agreement (the "Agreement")
was entered into to replace the May 15, 1992 Revolving Loan and Credit
Agreement, as amended. The new Agreement increases the revolving line of credit
commitment to $40 million and the term of the Agreement extends to April 3,
2003. All other provisions of the Agreement are essentially the same as the May
15, 1992 Agreement, as amended.
On April 23, 1999, the Company and a bank entered into a loan Agreement (the
"Loan Agreement"). The Loan Agreement provided the Company with a four-year
unsecured term loan of $2.3 millionto finance the replacement of the Company's
mainframe computer system. The Loan Agreement bears interest of 6.15% per annum
and matures on April 15, 2003. Borrowings outstanding under this agreement at
January 29, 2000 were $1,828,000 and the principal maturity on this loan is as
follows: $562,500 in fiscal 2000; $562,500 in fiscal 2001; $562,500 in fiscal
2002; $140,500 in fiscal 2003.
On May 5, 1998, the Company and a bank entered into a Loan Agreement (the "Loan
Agreement"). The 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 Loan Agreement bears interest
of 6.82% per annum and matures on November 1, 2005. Under the most restrictive
covenants of the Loan Agreement, the Company is required to maintain specified
shareholders' equity and net income levels. Borrowings outstanding under this
Loan Agreement totaled $10,265,000 at January 29, 2000 and $11,670,000 at
January 30, 1999. The principal maturity under this Agreement for debt
outstanding at January 29, 2000 is as follows: $1,503,358 in fiscal 2000;
$1,612,742 in fiscal 2001; $1,727,860 in fiscal 2002; $1,851,199 in fiscal 2003;
$1,983,338 in fiscal 2004; and $1,586,503 thereafter.
Interest expense for 1999, 1998 and 1997 totaled $2,504,000, $1,206,000 and
$343,000, respectively.
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):
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Current
Federal $ 3,224 $ 2,639 $ 6,225
State - (208) 300
3,224 2,431 6,525
----------- ------------- ----------
Deferred
Federal 2,116 1,974 (840)
State 397 370 188
----------- ------------- ----------
2,513 2,344 (652)
----------- ------------- ----------
$ 5,737 $ 4,775 $ 5,873
=========== ============= ==========
</TABLE>
<PAGE>
Fred's, Inc.
Notes to Consolidated Financial Statements
Deferred tax assets (liabilities) are comprised of the following (in thousands):
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Current deferred tax assets:
Inventory valuation methods $ 758 $ 861
Accrual for inventory shrinkage 672 1,028
Allowance for doubtful accounts 285 358
Insurance accruals 990 1,160
Other 749 1,084
----------- ---------------
Gross current deferred tax assets 3,454 4,491
Deferred tax asset valuation allowance (182) (328)
----------- ---------------
3,272 4,163
Current deferred tax liabilities (270) (380)
----------- ---------------
Net current deferred tax asset $ 3,002 $ 3,783
=========== ===============
1999 1998
---- ----
Noncurrent deferred tax assets:
Net operating loss carryforwards $ 1,421 $ 1,028
Postretirement benefits other than pensions 694 634
Restructuring costs 82 229
Other 1,583 1,759
----------- ---------------
Gross noncurrent deferred tax assets 3,780 3,650
Deferred tax asset valuation allowance (1,239) (700)
----------- ---------------
2,541 2,950
Noncurrent deferred tax liabilities:
Depreciation (1,648) (319)
Other (27) (33)
----------- ---------------
Gross noncurrent deferred tax liabilities (1,675) (352)
----------- ---------------
Net noncurrent deferred tax asset $ 866 $ 2,598
=========== ===============
</TABLE>
The ultimate realization of these assets is dependent upon the generation of
future taxable income sufficient to offset the related deductions and loss
carryforwards within the applicable carryforward periods as described below. The
valuation allowance is based upon management's conclusion that certain tax
carryforward items will expire unused. During 1999 and 1998, the valuation
allowance increased $393,000 and $98,000, respectively, as the result of the
company generating additional net operating loss carry forwards in certain
states. The release of valuation allowance of $206,000 for the year ended
January 31, 1998 resulted from the Company's ability to assure utilization of
certain state net operating loss carry forwards and tax credits that were
originally anticipated to expire unused.
<PAGE>
Fred's, Inc.
Notes to Consolidated Financial Statements
At January 29, 2000, the Company has certain net operating loss carry forwards
which were acquired in reorganizations and purchase transactions which are
available to reduce income taxes, subject to usage limitations. These carry
forwards total approximately $36,687,000 for state income tax purposes, and
expire at various times during the period 2001 through 2021. If certain
substantial changes in the Company's ownership should occur, there would be an
annual limitation on the amount of carry forwards which can be utilized.
A reconciliation of the statutory Federal income tax rate to the effective tax
rate is as follows:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Income tax provision at statutory rate 35.0% 35.0% 35.0%
State income taxes, net of federal benefit 1.6 0.8 3.4
Change in valuation allowance - 0.7 (1.3)
Surtax Exemptions (1.0) (1.0) (1.0)
Other (0.7) (0.4) 1.4
---- ---- ---
34.9% 35.1% 37.5%
</TABLE>
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 $15,329,000, $13,618,000, and $10,239,000 for
1999, 1998 and 1997, respectively. Amortization expense on assets under capital
lease for 1999, 1998 and 1997 was $355,000, $283,000, and $258,000,
respectively.
<PAGE>
Fred's, Inc.
Notes to Consolidated Financial Statements
Future minimum rental payments under all operating and capital leases as of
January 29, 2000 are as follows (in thousands):
<TABLE>
<CAPTION>
Operating Capital
Leases Leases
------ ------
<S> <C> <C>
2000 $ 14,738 $ 741
2001 12,842 741
2002 11,032 741
2003 8,618 364
2004 6,021 255
Thereafter 13,465 142
-------------- -----------
Total minimum lease payments $ 66,716 2,984
==============
Imputed interest (820)
-----------
Present value of net minimum lease payments, including
-----------
$430 classified as current portion of capital lease obligations $ 2,164
===========
</TABLE>
NOTE 8 - SHAREHOLDERS' EQUITY
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.
Effective October 12, 1998 the Company adopted a Shareholders Rights Plan which
granted a dividend of one preferred share purchase right ("the Right") for each
common share outstanding at that date. Each Right represents the right to
purchase one-hundredth of a preferred share of stock at a preset price to be
exercised when any one individual, firm, corporation or other entity acquires
15% or more of the Company's common stock. The Rights will become dilutive at
the time of exercise and will expire, if unexercised, on October 12, 2008.
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 9 - EMPLOYEE BENEFIT PLANS
Incentive stock option plan. The Company has a long-term incentive plan under
which an aggregate of 1,168,750 shares may be granted. These options expire five
years from the date of grant. Options outstanding at January 29, 2000 expire in
2000 through 2004.
A summary of activity in the plan follows:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
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 490,139 $ 13.40 411,298 $ 8.55 297,113 $ 10.60
Granted 136,750 11.82 150,695 25.61 364,355 8.61
Canceled (26,101) 14.79 (32,523) 12.46 (16,353) 9.81
Expired (1,744) 11.33 - - (120,778) 14.45
Exercised (35,590) 8.38 (39,331) 8.42 (113,039) 10.65
------- ---- ------- ---- -------- -----
Outstanding at end of year 563,454 13.13 490,139 13.40 411,298 8.55
======= ===== ======= ===== ======= ====
Exercisable at end of year 169,313 9.10 152,483 9.85 90,115 10.70
======= ==== ======= ==== ====== =====
</TABLE>
The weighted average remaining contractual life of all outstanding options was
2.9 years at January 29, 2000.
<PAGE>
Fred's, Inc.
Notes to Consolidated Financial Statements
The following table summarizes information about stock options outstanding at
January 29, 2000:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------- -------------------
Weighted
Average
Remaining Weighted Weighted
Number Contractual Average Number Average
<S> <C> <C> <C> <C> <C>
Range of Outstanding at Life Exercise Exercisable at Exercise
Exercise Prices January 29, 2000 (in Years) Price January 29, 2000 Price
--------------- ---------------- ---------- ----- ---------------- -----
$5.90 to $8.00 247,951 2.0 $ 7.15 131,160 $ 7.09
$11.00 to $17.90 189,228 3.8 $ 12.69 34,053 $ 14.85
$22.75 to $25.88 126,275 3.2 $ 25.54 4,100 $ 25.50
------- -------
563,454 169,313
======= =======
</TABLE>
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
1999, 1998 and 1997 consistent with the method prescribed by SFAS No. 123,
Accounting for Stock- Based Compensation, the Company's operating results for
1999, 1998 and 1997 would have been reduced to the pro forma amounts indicated
below:
(in thousands, except per share data) 1999 1998 1997
- ------------------------------------- ---- ---- ----
Net income
As reported $ 10,702 $ 8,830 $ 9,787
Pro forma 10,363 8,322 9,492
Basic earnings per share
As reported 0.90 0.75 0.84
Pro forma 0.88 0.71 0.81
Diluted earnings per share
As reported 0.89 0.73 0.83
Pro forma 0.86 0.69 0.80
<PAGE>
Fred's, Inc.
Notes to Consolidated Financial Statements
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 1999, 1998 and 1997, respectively:
1999 1998 1997
---- ---- ----
Average expected life (years) 3.0 3.0 3.0
Average expected volatility 43.3% 41.5% 37.6%
Risk-free interest rates 4.8% 5.5% 6.0%
Dividend yield 1.5% 1.3% 2.4%
The weighted average grant-date fair value of options granted during 1999, 1998
and 1997 was $4.17, $7.85, and $2.40 respectively.
Restricted Stock. During 1999, 1998 and 1997, the Company issued a net of 4,200,
40,682, and 56,491 restricted shares, 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. The Company has not made any contributions
to the plan since 1996.
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 29, 2000, January 30, 1999, and January 31, 1998 were $96,000,
$83,000, and $65,000, respectively.
<PAGE>
Fred's, Inc.
Notes to Consolidated Financial Statements
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 change in benefit obligation based upon an actuarial valuation is as
follows:
<TABLE>
<CAPTION>
For the Year Ended
------------------
January 29, January 30, January 31,
2000 1999 1998
---- ---- ----
<S> <C> <C> <C>
(in thousands)
Benefit obligation at beginning of year $ 1,252 $ 1,132 $ 1,235
Service cost 127 103 97
Interest cost 91 85 83
Participant contributions - 4 2
Amendments - - (7)
Actuarial (gain) loss (17) (67) (258)
Benefits paid (76) (5) (20)
----------------- ---------------- ----------------
Benefit obligation at end of year $ 1,377 $ 1,252 $ 1,132
================= ================ ================
</TABLE>
A reconciliation of the Plan's funded status to accrued benefit cost follows:
<TABLE>
<CAPTION>
January 29, January 30, January 31,
2000 1999 1998
<S> <C> <C> <C>
(in thousands)
Funded status $ (1,377) $ (1,252) $ (1,132)
Unrecognized net actuarial loss (gain) (406) (405) (356)
Unrecognized prior service cost (6) (6) (7)
----------------- ---------------- ----------------
Accrued benefit costs $ (1,789) $ (1,663) $ (1,495)
================ ================ ================
</TABLE>
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 $202,000. The discount rate used in
calculating the obligation was 7.75% in 1999, 6.75% in 1998 and 7.5% in 1997.
<PAGE>
Fred's, Inc.
Notes to Consolidated Financial Statements
The annual net postretirement cost is as follows:
<TABLE>
<CAPTION>
For the Year Ended
------------------
January 29, January 30, January 31,
2000 1999 1998
---- ---- ----
<S> <C> <C> <C>
(in thousands)
Service cost $ 127 $ 103 $ 97
Interest cost 91 85 83
Amortization of net loss (gain) from prior periods (17) (21) (19)
Amortization of unrecognized prior service cost 1 1 -
--------------- --------------- ---------------
Net periodic postretirement benefit cost $ 202 $ 168 $ 161
=============== =============== ===============
</TABLE>
The Company's policy is to fund claims as incurred.
NOTE 10 - NET INCOME 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 is
considered contingently issuable 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 29, 2000 January 31, 1999 January 31, 1998
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 $10,702 11,827 $ .90 $ 8,830 11,798 $ .75 $ 9,787 11,670 $ .84
------- ------ ---------- ------- ------ ---------- ------- ------ ----------
Effect of Dilutive
Securities
Restricted stock 108 79 42
Stock options 137 201 151
------- ------ ---------- ------- ------ ---------- ------- ------ ----------
Diluted EPS $10,702 12,072 $ .89 $ 8,830 12,078 $ .73 $ 9,787 11,863 $ .83
======= ====== ========== ======= ====== ========== ======= ====== ==========
</TABLE>
NOTE 11 - COMMITMENTS AND CONTINGENCIES
Commitments. At January 29, 2000, the Company had commitments approximating
$5,695,000 on issued letters of credit which support purchase orders for
merchandise. Additionally, the Company had outstanding letters of credit
aggregating $2,240,000 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, cash flows, or the
financial condition of the Company.
NOTE 12 - OTHER EXPENSES
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 included an accrual for closed facility
lease obligations of $1,156,000. The remaining lease obligation at January 29,
2000 represents remaining future base payments required on one location that has
been closed.
The 1999 activity in this reserve is as follows:
<TABLE>
<CAPTION>
January 31, January 30, January 29,
1998 1999 Payments 2000
---- ---- -------- ----
<S> <C> <C> <C> <C>
Lease obligations $ 666 $ 400 $ (185) $ 215
</TABLE>
<PAGE>
Fred's, Inc.
Notes to Consolidated Financial Statements
NOTE 13 - QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
<S> <C> <C> <C> <C>
(in thousands, except per share data)
Year Ended January 29, 2000
- ---------------------------
Net sales $ 154,934 $ 156,498 $ 158,049 $ 196,296
Gross profit 44,319 43,952 47,117 52,251
Net income 2,886 1,037 2,896 3,883
Net income per share
Basic 0.24 0.09 0.24 0.33
Diluted 0.24 0.09 0.24 0.32
Cash dividends paid per share 0.05 0.05 0.05 0.05
Year Ended January 30, 1999(1)
- ------------------------------
Net sales $ 144,156 $ 141,635 $ 142,339 $ 172,772
Gross profit 37,869 38,614 41,449 46,447
Net income 2,286 1,430 2,568 2,546
Net income per share
Basic 0.19 0.12 0.22 0.22
Diluted 0.19 0.12 0.21 0.21
Cash dividends paid per share 0.05 0.05 0.05 0.05
</TABLE>
(1) The quarterly data for the year ended January 30, 1999 includes the impact
of the accounting change described in Note 1.
<PAGE>
Report of Independent Accountants on
Financial Statement Schedules
To the Board of Directors
of Fred's, Inc.
Our audits of the consolidated financial statements referred to in our report
dated March 13, 2000, except for Note 5, as to which the date is April 3,
2000, appearing in the 1999 Annual Report to Shareholders of Fred's, Inc.
(which report and consolidated financial statements are incorporated by
reference in this Annual Report on Form 10-K) also included an audit of the
financial statement schedule listed in Item 14(a)(2) of this Form 10-K. In our
opinion, the financial statement schedule presents fairly, in all material
respects, the information set forth therein when read in conjunction with the
related consolidated financial statements.
PricewaterhouseCoopers LLP
Memphis, TN
March 13, 2000
<PAGE>
Schedule II - Valuation and Qualifying Accounts
Balance at Charged to Balance at
Beginning Costs and Deductions End
of Period Expenses Write-offs of Period
Allowance for doubtful Accounts:
Year ended January 31, 1998 946 860 (1,040) 766
Year ended January 30, 1999 766 124 (246) 644
Year ended January 29, 2000 644 80 (272) 452
<PAGE>
EXHIBIT 10.22
<TABLE>
<CAPTION>
SCHEDULE A TO LEASING AGREEMENT SCHEDULE NO. 7
PAGE 1 OF 2
Between Hogan Motor Leasing Inc. (Hogan) and Fred's, Inc. (Customer) LEASE DATED 1/31/92
LOCATION OF HOGAN FACILITY: Memphis, TN
Veh.# Date of Term VEHICLE DESCRIPTION Licensed Orig. Deprec. Est. Fixed Mileage Refrig.
Del. in Yrs Weight Value Annual Charge per Rate Maint
Mileage Wk/Mo per Rate
Mile per Hr.
Yr. & Model & Serial # Monthly
Make Type Amt.
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
L-5386 1/13/00 6 2000 8100 T/A 1HSHCAHR7YH298330 80,000 $67,980 $610 75,000 $331.75/wk $.06/Mi N/A
Navistar Tractor
L-5387 1/13/00 " " " 1HSHCAHR9YH298331 " " " " " " "
L-5388 1/13/00 " " " 1HSHCAHR0YH298332 " " " " " " "
L-5389 1/13/00 " " " 1HSHCAHR2YH298333 " " " " " " "
L-5390 1/13/00 " " " 1HSHCAHR4YH298334 " " " " " " "
L-5391 1/13/00 " " " 1HSHCAHR6YH298335 " " " " " " "
(Side One)
NOTE: The above (6) six vehicles will replace vehicle #'s L-387, L-5235, L-5237, L-5238, L-5239 and L-5240.
</TABLE>
<PAGE>
1. If prior to the date that a Vehicle is placed in service of the Customer,
the purchase price of the Vehicle has been increased by the manufacturer of
the Vehicle, then the original agreed value as set forth in the Schedule A
and the fixed lease charge per week for that Vehicle shall be adjusted
upward accordingly.
2. Liability Insurance Responsibility: [ ] Hogan [X] Customer
Limits: Check only one block and complete the appropriate blank(s).
X Combined Single Limits $ 1,000,000 per occurrence
---- -----------------
Bodily Injury $ per person
---- -----------------
Bodily Injury $ per occurrence
-----------------
Property Damage $ per occurrence
-----------------
Liability
Deductible: $ 0 per occurrence.
----
3. Physical Damage Responsibility by: Hogan $ deductible
----- ----------
Customer X $ 25,000.00 deductible
----- ----------
4. Fuel tax reporting responsibility: X Hogan Customer
--- ---
5. Domicile of the Vehicle(s) by city: Memphis, TN
-------------------
6. The base index of 168.3 will be used to compute the Consumer Price Index
for Urban Consumers, 1982-84 base period.
7. Allowances/year: License Fee $ 1,400.00 Federal Heavy Vehicle Use Tax
-----------
$550.00
-------
Fuel/Road/Mile permit charges totaling $included for each Vehicle listed on
---------
the Schedule shall be included in Customer's Fixed Rental Charge for the
states of: TN, AR, MS, MO, AL, KY, GA, LA
--------------------------------
8. Painting and lettering fee: $ 0 . Any amount in excess will be billed to
-----
Customer.
9. Washing provided by Hogan Power Units 26 Trailers times per year.
----- --- -----------
(Hogan/Customer)
10. Estimated Annual Mileage: If the estimated mileage as of the Date of
Delivery for each Vehicle shown on the front of this Schedule A increases
by 20%, the parties agree to negotiate in good faith the charges,
depreciation and term for that Vehicle.
This Schedule A is a part of the Leasing Agreement between the parties hereto.
HOGAN MOTOR LEASING, INC. (HOGAN) FRED'S, INC. (CUSTOMER)
By: /s/ Brian J. Hogan By: /s/ Richard Witaszak
------------------------ -------------------------
Name: Brian J. Hogan Name: Richard Witaszak
-------------- ----------------
Title: President Title:Chief Financial Officer
--------- -----------------------
Date: 1/13/00 Date: Sept. 20, 1999
------- --------------
(Side Two)
<PAGE>
<TABLE>
<CAPTION>
SCHEDULE A TO LEASING AGREEMENT SCHEDULE NO. 8
PAGE 1 OF 2
Between Hogan Motor Leasing Inc. (Hogan) and Fred's, Inc. (Customer) LEASE DATED 1/31/92
LOCATION OF HOGAN FACILITY: Memphis, TN
Veh.# Date of Term VEHICLE DESCRIPTION Licensed Orig. Deprec. Est. Fixed Mileage Refrig.
Del. in Yrs Weight Value Annual Charge per Rate Maint
Mileage Wk/Mo per Rate
Mile per Hr.
Yr. & Model & Serial # Monthly
Make Type Amt.
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
L-5392 1/13/00 6 2000 8100 T/A 1HSHCAHR8YH298336 80,000 $67,980 $610 75,000 $331.75/wk $.06/Mi N/A
Navistar Tractor
L-5393 1/13/00 " " " 1HSHCAHRXYH298337 " " " " " " "
L-5394 2/07/00 " " " 1HSHCAHR9YH307908 " " " " " " "
</TABLE>
(Side One)
<PAGE>
1. If prior to the date that a Vehicle is placed in service of the Customer,
the purchase price of the Vehicle has been increased by the manufacturer of
the Vehicle, then the original agreed value as set forth in the Schedule A
and the fixed lease charge per week for that Vehicle shall be adjusted
upward accordingly.
2. Liability Insurance Responsibility: [ ] Hogan [X] Customer
Limits: Check only one block and complete the appropriate blank(s).
X Combined Single Limits $ 1,000,000 per occurrence
---- -----------------
Bodily Injury $ per person
---- -----------------
Bodily Injury $ per occurrence
-----------------
Property Damage $ per occurrence
-----------------
Liability
Deductible: $ 0 per occurrence.
----
3. Physical Damage Responsibility by: Hogan $ deductible
----- ----------
Customer X $ 25,000.00 deductible
----- ----------
4. Fuel tax reporting responsibility: X Hogan Customer
--- ---
5. Domicile of the Vehicle(s) by city: Memphis, TN
-------------------
6. The base index of 168.3 will be used to compute the Consumer Price Index
for Urban Consumers, 1982-84 base period.
7. Allowances/year: License Fee $ 1,400.00 Federal Heavy Vehicle Use Tax
-----------
$550.00
-------
Fuel/Road/Mile permit charges totaling $included for each Vehicle listed on
---------
the Schedule shall be included in Customer's Fixed Rental Charge for the
states of: TN, AR, MS, MO, AL, KY, GA, LA
--------------------------------
8. Painting and lettering fee: $ 0 . Any amount in excess will be billed to
-----
Customer.
9. Washing provided by Hogan Power Units 26 Trailers times per year.
----- --- -----------
(Hogan/Customer)
10. Estimated Annual Mileage: If the estimated mileage as of the Date of
Delivery for each Vehicle shown on the front of this Schedule A increases
by 20%, the parties agree to negotiate in good faith the charges,
depreciation and term for that Vehicle.
This Schedule A is a part of the Leasing Agreement between the parties hereto.
HOGAN MOTOR LEASING, INC. (HOGAN) FRED'S, INC. (CUSTOMER)
By: /s/ Brian J. Hogan By: /s/ Richard Witaszak
------------------------ -------------------------
Name: Brian J. Hogan Name: Richard Witaszak
-------------- ----------------
Title: President Title:Chief Financial Officer
--------- -----------------------
Date: 1/13/00 Date: Sept. 20, 1999
------- --------------
(Side Two)
EXHIBIT 10.23
CREDIT AGREEMENT
(RESTATED)
Between
Union Planters Bank, National Association
(on its own behalf as Lender and as Administrative Agent),
SunTrust Bank
(as Documentation Agent)
and
Fred's Inc.
(as Borrower)
WYATT TARRANT & COMBS
6800 POPLAR AVENUE, SUITE 200
MEMPHIS, TENNESSEE 38138-7445
901.537.1000, FACSIMILE 901.537.1010
WWW.WYATTFIRM.COM
<PAGE>
CREDIT AGREEMENT
(RESTATED)
This Revolving Loan and Credit Agreement (restated) is made and entered
into this 28 day of March, 2000, to be effective as of the 3rd day of April,
2000, by and between
UNION PLANTERS BANK, NATIONAL ASSOCIATION
a national banking association which has an address at 6200 Poplar Avenue,
Memphis, Tennessee, 38119, (the "Lender" or "Administrative Agent"), and
SUNTRUST BANK
a banking association which has an address at 6410 Poplar Avenue, Suite 320,
Memphis, TN, 38119, (the "Documentation Agent"), and
FRED'S, INC., a Tennessee corporation
having its corporate offices at 4300 New Getwell Road, Memphis, Tennessee,
38118, (the "Borrower").
1. RECITALS
1.1. Borrower's Operations. The Borrower is engaged in the general retail
merchandising of goods through company-owned and franchised stores located
in the south and southeast United States.
1.2. Prior Credit Facility. The Lender has traditionally provided credit to the
Borrower in making available to the Borrower certain credit facilities in
order to finance its acquisition of inventory and for general business
purposes and to refinance certain capital expenditures and to generally
finance the business operations of the Borrower.
1.3. Application for Credit. The Borrower has requested that the Lender continue
to provide credit to the Borrower under terms and conditions herein set
forth, and to otherwise extend the existing credit line with the
modifications set forth in this restatement of the existing credit
agreement.
1.4. Agreement of Lender. The Lender is willing to extend the credit facilities
described below and to issue its Credits for the account of the Borrower
from time to time on the terms and conditions hereinafter set forth.
1.5. Agreement. Now, therefore, in consideration of the premises and of other
good and valuable consideration, the adequacy and receipt of which are
hereby acknowledged, the parties hereto hereby agree as follows:
2. DEFINITIONS
2.1. Definitions. In addition to terms defined elsewhere in this Agreement, the
following terms shall have the meanings indicated, which meanings shall be
equally applicable to both the singular and plural forms of such terms:
"Advance" shall mean the drawing down by the Borrower of funds from the
Lender on any given Advance Date.
"Advance Date" shall mean the date as of which the Bank advances funds to
or for the account of the Borrower.
"Affiliate" of any Person shall mean any other Person which, directly or
indirectly, controls, or is controlled by, or is under common control with, such
Person. For purposes of this definition, "control" of any Person shall mean the
power, directly or indirectly, either to (i) vote fifty percent 50% or more of
the securities having ordinary voting power for the election of directors of
such Person or (ii) direct the management and policies of such Person, whether
by contract or otherwise. The term "Affiliate" shall include, without
limitation, any partnership of which the Borrower or any Affiliate of the
Borrower are a general partner or is a limited partner with more than a fifty
percent (50%) interest.
"Administrative Agent", unless changed by notice to the Borrower hereafter,
shall mean the Lender, and shall refer to the Lender's capacity as servicing
agent.
"Agreement" or "Credit Agreement" shall mean this revolving loan and credit
agreement, as a restatement and modification of the existing credit agreement
between the Lender and the Borrower.
"Authorized Party shall mean any of the following individuals:
Chief Executive Officer
President
Chief Financial Officer
Treasurer,
Secretary
Additional Authorized Parties may be added and removed from time to time by
the Borrower by written correspondence to the Lender executed by Secretary of
the Borrower. The Lender may require specimen signatures of any Authorized Party
from time to time.
"Balance Sheet" shall have the meaning ascribed thereto in Section 3.3.
"Business Day" shall mean a day on which federally chartered commercial
banks are required to be open for business in Memphis, Tennessee.
"Charges" are defined as fixed asset impairments or LIFO inventory
adjustments, including inventory writedowns.
"Closing Date" shall mean the date upon which this Agreement is executed.
"Commitment" means the sum of $40,000,000.00. Notwithstanding the use of
the term "commitment" with respect to calculations of fees, the actual amount
which the Lender has agreed to lend or provide credit to the Borrower shall be
limited by the ratios and conditions set forth in this Credit Agreement.
"Consolidated Net Income" shall mean the Net Income for all the Significant
Subsidiaries and Affiliates.
"Costs" shall have the meaning defined in Section 6.9.
"Default" shall mean any event which, with the lapse of time, the giving of
notice, or both, would become an Event of Default hereunder.
"Documentation Agent" shall mean SunTrust Bank absent contrary notice to
the Borrower, and shall denote a party holding documents or other items of
collateral or deposits on behalf of all parties having an interest in the
Borrower's Obligations hereunder.
"EBITDA" means, for any period, the total of the following each calculated
without duplication on a consolidated basis for such period: (a) Consolidated
Net Income; plus (b) any provision for (or less any benefit from) income or
franchise taxes included in determining Consolidated Net Income; plus (c)
interest expense (including the interest portion of Capital Lease Obligations)
deducted in determining Consolidated Net Income; plus (d) amortization and
depreciation expense deducted in determining Consolidated Net Income.
"EBITDAR" shall be defined as EBITDA plus operating lease and rent expenses
(including rent expenses from operating leases which are treated as financing
for all purposes other than accounting purposes), excluding up to $5,000,000.00
worth of Charges in any twelve (12) month period.
"Environmental Laws" means any present or future federal, state or local
law, rule, regulation or order relating to pollution, waste, disposal or the
protection of human health or safety, plant life or animal life, natural
resources or the environment.
"Event of Default" shall have the meaning defined in Section 9.1.
"Fixed Charges" shall mean interest expense plus currently scheduled
principal reduction plus capital and operating lease expenses and rent expenses.
"Hazardous Material" means all or any of the following: (a) substances that
are defined or listed in, or otherwise classified pursuant to, any Environmental
Laws or regulations as "hazardous substances", "hazardous materials", "hazardous
wastes", "toxic substances" or any other formulation intended to define, list or
classify substances by reason of deleterious properties such as ignitability,
corrosivity, reactivity, carcinogenicity, or toxicity; (b) oil, petroleum or
petroleum derived substances, natural gas, natural gas liquids or synthetic gas
and drilling fluids, produced waters and other wastes associated with the
exploration, development or production of crude oil, natural gas or geothermal
resources; (c) any flammable substances or explosives or any radioactive
materials; and (d) asbestos in any form or electrical equipment which contains
any oil or dielectric fluid containing polychlorinated biphenyls.
"Indebtedness" shall mean, for any Person, (a) all indebtedness or other
obligations of such Person for borrowed money or for the deferred purchase price
of property or services, (b) all indebtedness or other obligations of any other
Person the payment or collection of which such Person has guaranteed (except by
reason of endorsement for collection in the ordinary course of business) or in
respect of which such Person is liable, contingently or otherwise, including
without limitation liable by way of agreement to purchase, to provide funds for
payment, to supply funds to or otherwise to invest in such other Person, or
otherwise to assure a creditor against loss, (c) all indebtedness or other
obligations of any other Person for borrowed money or for the deferred purchase
price of property or services secured by (or for which the holder of such
indebtedness has an existing right, contingent or otherwise, to be secured by)
any mortgage, deed of trust, pledge, lien, security interest or other charge or
encumbrance upon or in property (including without limitation accounts and
contract rights) owned by such Person, whether or not such Person has assumed or
become liable for the payment of such indebtedness or obligations, and (d)
capitalized lease obligations of such Person.
"Interest Rate" shall mean the interest rate as selected by the Borrower
or, absent such selection the interest rate otherwise provided under the terms
of this Agreement. Calculation of interest based upon the Prime Rate shall be
based upon the actual number of days elapsed in a 365/366 day year. Calculations
of interest which is indexed to LIBOR shall be based upon number of days lapsed
assuming a 360 day year.
"LIBOR" shall mean the London Inter-Bank Offering Rate as distributed by
Bloomberg Financial Markets. Effective on any applicable LIBOR Change Date the
LIBOR based Interest Rates charged the Borrower with respect to any Advance or
other segregated portion of the outstanding indebtedness affected shall be
adjusted by a corresponding number of points (and fractional parts thereof),
rounded to four decimal points, provided however, that the rate, as adjusted
shall not exceed the maximum rate of interest from time to time during the term
hereof which Lender is permitted by law to contract for and charge.
"LIBOR Change Date" shall mean, with respect to any Advance or other
segregated portion of the outstanding indebtedness collectively bearing interest
at a rate based upon LIBOR, that day, 30, 60 or 90 days after the date on which
the then current LIBOR rate was selected, as appropriate. On the LIBOR Change
Date, the interest rate chargeable with respect to any Advance or other such
segregated portion of the outstanding indebtedness, shall revert to the Prime
Rate, unless the Borrower has affirmatively selected another LIBOR based rate
with respect to such Advance or other such segregated portion of the outstanding
indebtedness.
"LIBOR Period" shall mean, with respect to any Advance or other segregated
portion of the outstanding indebtedness collectively accruing interest at a rate
based upon the LIBOR rate, the applicable period selected (i.e. 30, 60 or 90
days) as the term for which LIBOR Quotes are to be selected. With respect to any
Advance or other such segregated portion of the outstanding indebtedness, the
interest rate chargeable under this agreement shall remain fixed during its
applicable LIBOR Period, changing only upon a LIBOR Change Date.
"Lien" means any mortgage, pledge, security interest, encumbrance, lien,
charge or deposit arrangement or other arrangement having the practical effect
of the foregoing and shall include the interest of a vendor or lessor under any
conditional sale agreement, capitalized lease or other title retention
agreement, but shall not include any consignment filing made on inventory not
belonging to the Borrower.
"Loan" means the entire indebtedness of the Borrower to the Lender arising
under the terms of this Agreement.
"Loan Account" shall mean an account on the books of the Lender in the name
of the Borrower in which shall be recorded loans and Advances made by the Lender
to and for the account of the Borrower pursuant to this Agreement; all other
charges, expenses and other items properly chargeable to the Borrower; all
Costs; all fees charged the Borrower pursuant to Section 4.8 hereof; all
payments made by the Borrower on account of indebtedness evidenced by the Loan
Account; all setoffs of bank accounts which are made by the Lender; and other
appropriate debits and credits.
"Loan Documents" shall mean each of this Agreement, the Notes, and each
other document or instrument executed by the Borrower in favor of the Lender in
connection with the transaction contemplated hereby, and shall include any other
supporting documentation for the Notes.
"Maturity Date" means April 3, 2003.
"Net Income" of the Borrower for any period shall mean the net income,
determined in accordance with generally accepted accounting principles, but in
any event by deducting from the amount of its gross income for such period all
operating expenses and other proper charges to income for such period, including
(without in any respect limiting the generality of the foregoing) interest on
all outstanding Indebtedness, amortization of debt discount and expense,
amortization of all other deferred charges properly subject to amortization,
provisions for all taxes including taxes based on or measured by income,
provisions for all contingency reserves whether general or special, made in
accordance with generally accepted accounting principles (but, to the extent
that any such provision is subsequently determined to have been unnecessary and
is reversed on the books of such Person, the amount thereof (less the amount of
taxes, if any, with respect thereto) may be included in computations of "Net
Income" subsequently made for the period in which such provision was created),
and provisions for depreciation, retirements and obsolescence in accordance with
generally accepted accounting principles and in amounts not less than those
actually deducted on the books of such Person.
"Note" means the Borrower's promissory note in the amount of the Commitment
and also embodying the additional obligations set forth in this Agreement.
"Obligations" include, without limitation, any and all liabilities, debts,
and obligations of the Borrower to the Lender, of each and every kind, nature
and description, under this Agreement, under any other Loan Document or under
any other agreement between the Borrower and the Lender. "Obligations" also
includes, without limitation, any and all obligations of the Borrower to act or
to refrain from acting in accordance with the terms, provisions, and covenants
of this Agreement or of any other agreement between the Borrower and the Lender
or any other instrument furnished by the Borrower to the Lender. The Lender's
books and records shall be prima facie evidence of the amount of the Borrower's
Indebtedness to the Lender hereunder.
"Person" shall mean any natural person, corporation, unincorporated
organization, trust, joint-stock company, joint venture, association, company,
partnership or government, or any agency or political subdivision of any
government.
"Prime Rate" shall mean the Prime Rate announced by Union Planters Bank,
N.A. as in effect from time to time for commercial loans. Effective on the day
on which any change occurs such announced rate, the Prime Rate based Interest
Rates charged the Borrower shall be adjusted upward or downward by a number of
percentage points (and fractional parts thereof) equal to the adjustment upward
or downward in such announced rate, and calculated on the basis of a 365-day
year; provided, however, that the rate, as adjusted, shall not exceed the
maximum rate of interest from time to time during the term hereof, which Lender
is permitted by law to contract for and charge.
"Quote" shall mean the published reference rates found in the Northeast
Edition of the Wall Street Journal for any applicable day if under the heading
"Money Rates". In the event that such quotes ceased to be published, any
reference to Prime shall be deemed to be the "Prime Rate", and any reference to
LIBOR Rates shall be based upon a rate determined by the Bank in good faith to
be the current London Inter-Bank Offering Rate for U. S. Currency.
"Significant Subsidiary" means, at any date of determination, any
Subsidiary (i) whose Total Assets equals or exceeds five percent (5%) of the
Total Assets of the Borrower, or (ii) whose Net Income for the most recently
completed four fiscal quarters equals or exceeds five percent (5%) of the
Borrower's Consolidated Net Income for such period.
"Tangible Net Worth" shall mean GAAP Net Worth less deferred taxes and less
intangible assets (which include trademarks, copyrights, goodwill, computer
software, customer lists and capitalized advertising costs).
"Total Adjusted Liabilities" shall equal GAAP liabilities plus contingent
liabilities under letters of credit as well as guaranties or other
contingencies.
"Total Assets" shall mean all assets of the Borrower and its subsidiaries
on an consolidated basis determined in accordance with generally accepted
accounting principles.
"Total Capital" shall equal Total Adjusted Liabilities + GAAP Net Worth.
Accounting Definitions. Accounting terms not specifically defined in this
Agreement shall have the meanings given to them under accounting principles and
practices generally accepted in the United States, ("GAAP") applied on a basis
consistent with prior periods.
2.2. Other Definitional Provisions. The words "hereof", "herein" and
"hereunder", and words of similar import when used in this Agreement shall
refer to this Agreement as a whole and not any particular provision of this
Agreement. Any Section, Exhibit or Schedule references are to this
Agreement unless otherwise specified.
3. REPRESENTATIONS AND WARRANTIES OF THE BORROWER
In order to induce the Lender to enter into this Agreement and to make the
loans provided for herein, the Borrower makes the following representations and
warranties to the Lender, all of which shall survive the execution and delivery
of this Agreement and the Note. In addition, with each application by the
Borrower to the Lender for any Advance, the following representations and
warranties shall be deemed restated and incorporated by reference with such
Advance request. In the event any of the following are not accurate at the time
of such request, the Borrower shall affirmatively so state, except that Section
3.3 shall be deemed updated as additional 10-Q's and 10-K's are filed.
3.1. Corporate Existence and Power. The Borrower and each of its subsidiaries is
a corporation duly incorporated, validly existing and in good standing
under the laws of the jurisdiction of its incorporation and is duly
qualified or licensed to transact business in all places where the nature
of the properties owned by it or the business conducted by it makes such
qualification necessary or where the failure to be so qualified or licensed
might have a material adverse effect upon the financial condition, business
or properties of the Borrower.
3.2. Corporate Authority. Neither the authorization, execution, delivery, nor
performance by the Borrower of this Agreement or of the other Loan
Documents, nor the performance of the transactions contemplated hereby or
thereby will violate any provision of the corporate charter or by-laws of
the Borrower, and none of the foregoing do or will with the passage of time
or the giving of notice, result in a breach of, or result in a default or
require any consent under or result in the creation of any lien, charge or
encumbrance upon any property or assets of the Borrower pursuant to, any
instrument or agreement to which the Borrower is a party or by which
Borrower or its respective properties may be bound or affected. In
addition, neither the foregoing nor the terms and conditions of the
Guaranties shall have any similar affect or result with respect to any of
the Borrower's subsidiaries, including those guaranteeing the Obligations
of the Borrower.
3.3. Financial Condition. The consolidated balance sheet of the Borrower and its
subsidiaries dated as of October 30, 1999, (the "Balance Sheet"), as
contained in the 10-K filings and the 10-Q filings made by the Borrower
with the Securities and Exchange Commission, (the "Filings"), a copy of
which has been reviewed by the Lender, any statements of income, statement
of cash flows and shareholders' equity of the Borrower and its subsidiaries
for the fiscal period ending on that date, including any related notes
(collectively, the "Financial Statements"), which were heretofore furnished
to the Lender, are true, correct and complete and fairly present the
financial condition of the Borrower and its subsidiaries as of the date of
such statements. Other than as reflected in such Filings, the Borrower and
its subsidiaries have no direct or contingent obligations or liabilities
which are or would be material to the financial condition of the Borrower
or its subsidiaries, nor any material unrealized or unanticipated losses
from any commitment of the Borrower or its subsidiaries. Such financial
statements contained in the Filings have been prepared in accordance with
generally accepted accounting principles consistently applied throughout
the periods involved. Since the date of the Filings, there has been no
material adverse change in the business or assets, or in the condition or
prospects, financial or otherwise, of the Borrower or its subsidiaries from
that set forth in the Filings.
3.4. Pending Litigation. Except as heretofore disclosed in the Filings to
Lender, there are no suits or proceedings pending, or to the knowledge of
the Borrower or its subsidiaries, threatened, before any court or by or
before any governmental or regulatory authority, commission, bureau or
agency or public regulatory body against or affecting the Borrower or its
subsidiaries which if adversely determined might have a material adverse
effect on the financial condition or business of the Borrower or its
subsidiaries, or otherwise affect the ability of the Lenders to comply with
the terms hereof.
3.5. Payment of Taxes. The Borrower and its subsidiaries have properly prepared
and filed or caused to be properly prepared and filed all federal, state
and local tax returns which are required to be filed and has paid all taxes
shown thereon to be due. No extensions of any statute of limitations are in
effect with respect to any tax liability of the Borrower or its
subsidiaries.
3.6. Certain Agreements. Borrower and its subsidiaries are not parties to any
agreement or instrument or subject to any court order or governmental
decree materially and adversely affecting their business properties or
assets, operations or condition (financial or otherwise) in any material
respect.
3.7. Authorization, Etc. All authorizations, consents, approvals and licenses
required under the corporate charters or by-laws of the Borrower and its
subsidiaries or under applicable law or regulation for the ownership or
operation of the property owned or operated by the Borrower and its
subsidiaries or the conduct of any business or activity conducted by the
Borrower and its subsidiaries have been duly issued and are in full force
and effect, and the Borrower and its subsidiaries are not in default, nor
has any event occurred which with the passage of time or the giving of
notice, or both, would constitute a default under any of the terms or
provisions thereof, or under any order, decree, ruling, regulation or other
decision or instrument of any governmental commission, bureau or other
administrative agency or public regulatory body having jurisdiction over
the Borrower and its subsidiaries, which default might have a material
adverse effect on the financial condition or business of the Borrower and
its subsidiaries. No approval, consent or authorization of or filing or
registration with any governmental commission, bureau or other regulatory
authority or agency or any other third party is required with respect to
the execution, delivery or performance of any of the Loan Documents.
3.8. Use of Loans. The proceeds of the Advances shall be used to finance its
acquisition of inventory and for general business purposes and to refinance
certain capital expenditures and to generally finance the business
operations of the Borrower. No use of the Loan for the purpose of
purchasing or carrying margin stock within the meaning of Regulation U, or
in any manner that might cause the borrowing or the application of such
proceeds to violate Regulation T or Regulation X or any other regulation of
the Board of Governors of the Federal Reserve System or to violate the
Exchange Act or the rules and regulations of any exchange will be made.
3.9. No Violation. The execution, delivery and performance by the Borrower of
the Loan Documents do not and will not result in the breach of or
constitute a default, which default materially affects the financial
condition of the Borrower, under any indenture or loan or credit agreement
or any other agreement in effect as of the date hereof or any lease or
instrument to which the Borrower is a party or by which it or its
properties may be bound or affected, and do not and will not violate any
provision of law or regulation applicable to the Borrower, or any writ,
order or decree of any court or governmental or regulatory authority or
agency applicable to the Borrower. The Borrower is not in default, which
default materially affects the financial condition of the Borrower, in the
performance, observance or fulfillment of any of the obligations, covenants
or conditions contained in any agreement or instrument to which the
Borrower is a party, or any law, regulation, decree or order.
3.10.Binding Effect. Each of the Loan Documents constitutes the legal, valid
and binding obligation of the Borrower, enforceable against the Borrower,
in accordance with its respective terms.
3.11.Transactions With Affiliates, Officers, Directors and Shareholders. Except
as heretofore disclosed to Lender, the Borrower and its subsidiaries have
no indebtedness to any of its Affiliates, officers, directors or
shareholders.
3.12.Ownership of Properties, Liens. The Borrower and its subsidiaries have
good and marketable title to all its properties and assets, real and
personal, which are now carried on their books and reflected on the Balance
Sheet, and have valid leasehold interests in its properties and assets,
real and personal, which they purports to lease, subject to no mortgage,
security interest, pledge, lien, charge, encumbrance or title retention or
other security agreement or arrangement of any nature whatsoever, excluding
those liens and encumbrances previously disclosed to the Lender in the
Filings and otherwise.
3.13.Environmental Compliance. Except as disclosed in writing to Lender by
Borrower or environmental consultants engaged by Borrower or Lenders, no
Hazardous Material has, to the knowledge of Borrowers, ever been disposed,
released, discharged or spilled on or under any real property now or
heretofore ever owned, leased, operated or controlled by any Borrower or
any past, present or anticipated future Subsidiary or Affiliate of any
Borrower, no such real property has ever been used as a dump or landfill,
and no litigation or administrative action or proceeding has been commenced
or, to any Borrower's knowledge, threatened against Borrower or any
subsidiary or Affiliate of Borrower alleging a violation of any
Environmental Law.
3.14.Indebtedness. Except as previously disclosed to Lender, the Borrower has
no outstanding Indebtedness.
3.15.Capitalization. Except as disclosed in the public filings, all of the
issued shares of the common stock of the Borrower have been duly authorized
and validly issued, are fully paid and nonassessable. Except as disclosed
in the public filings, there are no outstanding preemptive, conversion or
other rights, options, warrants or agreements granted or issued by or
binding upon the Borrower for the purchase or acquisition of any shares of
its capital stock except any existing or contemplated stock benefit plans,
restricted stock options and Employee Stock Ownership Plans ("ESOP").
3.16.Accuracy of Information. All information furnished to the Lender by the
Borrower for purposes of this Agreement or any Loan document or any
transaction contemplated hereby or thereby is, and all such information
hereinafter furnished will be, true and accurate on the date furnished and
will not omit any material fact necessary to make such information not
misleading at such time.
3.17.Legal Compliance. The Borrower is, to the best of their knowledge, in
substantial compliance with all federal regulatory and administrative
rulings or orders applicable to its operations, and is not in violation of
any criminal or penal code, regulation or act applicable to its operations
which would result in a material adverse effect to the Borrower's Net
Income, net worth or its ability to debt service all of its Obligations as
well as its third party Obligations. The Borrower is in compliance with all
environmental, wetlands and endangered species acts applicable to its
operations. The Borrower is, to the best of their knowledge, in compliance
with all labor, OSHA, ADA and other federal, state and local rules and
regulations to the effect that none of the foregoing adversely affects the
Borrower's operations and that the Borrower has received no notice of any
violation with respect to any of the same.
3.18.ERISA Compliance. The Borrower is in compliance with ERISA and has
adequately reserved or funded all employee benefit plans.
3.19.No Investment Company. Neither the Borrower nor any of its subsidiaries is
subject to regulation under the Public Utility Holding Company Act of 1935,
the Federal Power Act or the Investment Company Act of 1940 or to any
federal or state statute or regulation limiting its ability to incur
Indebtedness for borrowed money.
4. AMOUNTS AND TERMS OF CREDIT
4.1. Commitment. Subject to and upon the terms and conditions herein set forth,
the Lender agrees to lend to the Borrower, and the Borrower agrees to
borrow from the Lender the sum of Forty Million Dollars ($40,000,000.00)
(the "Commitment") the same to be advanced on or after the Closing Date and
repaid in accordance with the terms hereof (the "Loan"). The Loan shall be
used to finance its acquisition of inventory and for general business
purposes and to refinance certain capital expenditures and to generally
finance the business operations of the Borrower.
4.2. Note. The Loan shall be evidenced by the Note in the form of that attached
hereto as Exhibit 4.2. The Borrower may prepay and reborrow sums under the
Loan from time to time and any readvance of sums shall continue to be
administered as an Advance under the Loan, and shall continue to be
evidenced by the Note.
4.3. Interest Rate. Interest shall accrue on each Advance or other segregated
portion of the outstanding principal balance as the same may increase or
decrease during the term thereof, or as any Advance may be prepaid or
reborrowed, at an annual floating or temporarily fixed rate of interest
equal to the Borrower's selection of:
4.3.1. A rate fixed for a LIBOR Period by the Borrower's selection of 30, 60, or
90 day LIBOR in effect on the date of such selection and adding to such
annual rate .75 percentage points. Such rate shall remain in effect for the
remainder of the applicable LIBOR Period and shall, at the LIBOR Change
Date revert to Prime Rate unless instructions to the contrary are given the
Bank by the Borrower; or
4.3.2. One hundred and fifty basis points (1.5%) BELOW the daily Quote of Prime
Rate.
The Interest Rate shall be adjusted daily (with respect to Prime Rate
indices) or on a LIBOR Change Date in accordance with any increase or
decrease in the calculation of the two amounts above, but no adjustment
shall be made which may result in the imposition of interest at a rate in
excess of that rate which the Bank, as a national bank, is permitted by law
to charge.
4.4. Maturity and Repayment of the Loan. The Loan shall mature and become due
and payable as follows:
4.4.1. As to interest, The Borrower shall pay the full amount thereof accruing
on all outstanding balance of the Loan which has been advanced upon the
basis of Prime rate or which represent sums advanced upon LIBOR but
extended beyond the LIBOR Period without instruction for re-indexing to
LIBOR, commencing on the first day of the calendar month following the
extension or continuation of any such interest based Advance or segregated
portion, and continuing upon the first day of each succeeding calendar
month. With respect to Advances or segregated portions of the outstanding
principal balance of the Loan which have been indexed to a particular LIBOR
Quote, the Borrower shall pay interest in the full amount thereof accruing
at the end of the LIBOR Period applicable for such Advance or segregated
portion. All outstanding and unpaid interest, including interest on any
LIBOR indexed Advances not yet due shall be due and payable in full on the
maturity of the Loan, whether the same occurs on the Maturity Date or by
acceleration upon Borrower's default.
4.4.2. As to principal, the Borrower shall pay the same to the extent any
Advance results in any outstanding principal balance in excess of the
Commitment immediately upon demand by the Bank. At maturity (whether on the
Maturity Date or upon acceleration as a result of Borrower's default), the
entire outstanding principal balance shall be due and payable in full, the
Commitment shall expire, and the availability of funds under the Loan shall
terminate.
4.5. LIBOR Interest Periods. At any LIBOR Change Date the rate charged under the
applicable Advance or segregated portion of the Loan shall automatically
convert to Prime Rate, unless otherwise directed by the Borrower by written
notice three business days prior to such date. At any time that any Advance
or other segregated portion of the Loan is Prime Rate Based, the Borrower
may elect to fix the same for a LIBOR Period by notice to the Lender at
least two business days prior to the beginning of such LIBOR. With respect
to any request for indexing an Advance or a segregated part of the Loan to
LIBOR, the Borrower shall provide the Lender with three business days
notice of the applicable LIBOR Period and the amount which the Borrower
wishes to be advanced or segregated. In the event any Advance or segregated
portion is to reach the end of its applicable LIBOR Interest Period,
Borrower shall give notice of reindexing at least three business days prior
to the end of such LIBOR Interest Period, absent which such Advance or
segregated portion shall become a Prime based portion of the Loan. LIBOR
based Advances or segregated portions shall be no less than $2,000,000, and
shall be in integral multiple of $1,000,000.00. Upon fulfillment of the
conditions set forth in Section 5 hereof and upon delivery by the Borrower
to the Lender of a notice of Advance executed by an Authorized Party, the
Lender on the applicable date shall make available to the Borrower the
amount of the requested Advance (provided that the aggregate amount of all
Advances outstanding at any one time shall not exceed the respective
Commitment) by transfer of immediately available funds to an account
maintained by the Borrower with the Lender.
4.6. Advances. Advances will be made upon the written request of the Borrower,
executed by an Authorized Party and containing information sufficient to
determine the amount of the Advance and the applicable Interest Rate to
apply to such Advance. The form of advance request shall be prescribed by
the Lender substantially in the form of that attached as EXHIBIT 4.6.
4.7. Interest Rate on Default. From the Maturity Date or extension thereof, or
in the event that an Event of Default, as described in Section 9.1 hereof
should occur, the Borrower promises to pay interest on the entire
outstanding principal balance of the entire Loan (including amounts
previously indexed to LIBOR), at a rate equal to one half of one percentage
point (.50%) in excess of the Prime Rate. All payments received by the
Lender on the Borrower's account shall be first applied to interest
accrued, and then to the prepayment of any Loan or portion of any Loan
which would not give rise to the indemnity provisions of Section 4.12, in
such order as the Lender may select.
4.8. Loan Account. Advances and payments on the Note shall be recorded by the
Lender in the Loan Account of the Borrower. A statement of interest due and
the debit balance of the Loan Account, disclosing the amount of Borrower's
indebtedness to the Lender from time to time by reason of Advances, loans
and other appropriate charges hereunder and showing the applicable Interest
Rates, shall be delivered to the Borrower by the Lender monthly. The
Borrower agrees to review each such statement promptly after receipt and to
bring any errors or discrepancies to the Lender's attention promptly.
4.9. Reserve Fee. In addition to the Interest Rate charged the Borrower, the
Borrower shall pay to the Lender eighteen one-hundredths percent (18/100%)
on an annualized basis, applied to the average daily difference between the
Commitment (unreduced by any ratio requirement or other condition) and the
aggregate of all Advances outstanding on each day, payable monthly.
4.10.Service Fee. Beginning on the first anniversary of this agreement, the
Lender as Administrative Bank may charge the Borrower an annual service fee
of $10,000.
4.11.Origination Fee. The Borrower shall pay to the Lender an Origination fee
at closing equal to $10,000.
4.12.Indemnity. The Borrower agrees to indemnify the Lender and to hold the
Lender harmless from any loss or expense which the Lender may sustain or
incur as a consequence of (a) default by the Borrower in payment of the
principal amount of or interest on any Loans of the Lender, including, but
not limited to, any such loss or expense arising from interest or fees
payable by the Lender to lenders of funds obtained by it in order to
maintain its Loans hereunder, (b) default by a Borrower in making a
borrowing based upon a 30, 60 or 90 day LIBOR Rate after the Borrower has
given notice to such effect in accordance with Section 4.5 or in making a
conversion of Prime Loans to LIBOR Loans based upon 30, 60 or 90 day LIBOR
Rates (c) a payment or prepayment of a 30, 60 or 90 day based LIBOR Loan or
conversion of any 30, 60 or 90 day based LIBOR Loan into a Prime Loan, in
either case on a day which is not the last day of a LIBOR Period with
respect thereto, including, but not limited to, any such loss or expense
arising from interest or fees payable by the Lender to lenders of funds
obtained by it in order to maintain its Loans hereunder. With respect to
LIBOR Loans based on 30, 60 or 90 day LIBOR Rates, the Borrower further
agrees to pay to the Lender an amount equal to the excess, if any, of (i)
the amount of any interest which otherwise would have accrued on the
principal amount paid, prepaid, converted or not borrowed for (A) the
period from the date of such payment or prepayment to the last day of the
LIBOR Period applicable to such Loan, (B) in the case of a failure to
borrow or to convert to a LIBOR Loan, the Interest Period applicable to
such loan which would have commenced on the date specified for such
borrowing or conversion, at the applicable rate of interest for such Loan
provided for herein exclusive of any margin applicable thereto minus (ii)
the interest component of the amount such Lender would ----- have bid in
the London interbank market. This covenant shall survive termination of
this Agreement and payment of the outstanding Notes.
5. CONDITIONS TO LOANS OR ADVANCES
5.1. Preconditions to Loans. The Lender shall not be obligated to make the Loan
or any Advance to the Borrower hereunder unless the following conditions
have been satisfied, in the reasonable opinion of Lender and its counsel.
5.1.1. The Lender shall have received the Note, executed by the duly authorized
officer of Borrower;
5.1.2. The Lender shall have received an opinion of counsel to Borrower in form
and substance satisfactory to Lender;
5.1.3. The Lender shall have received duly executed guarantees by the
subsidiaries of Borrower listed in Exhibit 8.1, (the "Guarantor
Subsidiaries") in the form as attached hereto as Exhibit 8;
5.1.4. The Lender shall have received a certified copy of resolutions of
Borrower, duly adopted, which authorize the execution of this Agreement,
the Notes, and any other reasonable documents required by Lender or its
counsel relating to this transaction; and
5.1.5. The Lender shall have determined the solvency of the Borrower in
accordance with sound banking practices based upon current audited
financial statements of the Borrower.
The representations and warranties of Section 3 hereof shall be true and
correct.
5.2. Each Advance. The obligation of the Lender to make each Advance hereunder
is subject to the following conditions precedent, each of which shall have
been met or performed on or before the Advance Date:
5.2.1. No Default. No Default or Event of Default shall have occurred and be
continuing or will occur upon the making of the Advance.
5.2.2. Correctness of Representations. The representations and warranties made
by the Borrower in Section 3 of this Agreement shall be with the same force
and effect as though such representations and warranties had been made on
and as of the Closing Date.
5.2.3. Notice of Advance. The Borrower shall have delivered to the Lender the
notice of Advance provided for in Section 4.6 hereof.
5.2.4. No Litigation; Certain Other Conditions. There shall be no suit or
proceeding pending or threatened before any court or by or before any
governmental or regulatory authority, commission, bureau or agency or
public regulatory body which suit or proceeding which, if determined
adversely to the Borrower, could reasonably be expected to have a material
adverse effect on the financial condition or business of the Borrower.
5.2.5. No Material Adverse Change. There shall have been no material adverse
change in the financial condition, business or prospects of the Borrower
since the date of the initial Balance Sheet, other than disclosed in the
Filings and which change has not or cannot be remedied by Borrower within
ninety (90) days.
5.2.6. Borrowing Limit. No Advance shall be made which would result in the total
Advances exceeding the respective Facility Commitment.
6. AFFIRMATIVE COVENANTS OF THE BORROWER
Borrower covenants and agrees that from the date of execution of this
Agreement and until the payment in full of the principal of and interest upon
the Notes and all other Obligations of Borrower to Lender hereunder:
6.1. Reporting Requirements. The Borrower, will, unless the Lender shall
otherwise consent in writing, furnish to the Lender the following:
6.1.1. Financial Reports
6.1.1.1. (Omitted)
6.1.1.2. Borrower will provide Lender with a copy of its Form 10-Q filed with
the Securities Exchange Commission for the same quarter concurrently with
such filing.
6.1.1.3. Borrower will provide Lender with audited annual financial statements
including balance sheets and income statements prepared by a certified
public accounting firm of national recognition within one hundred twenty
(120) days of the end of each fiscal year, as well as Borrower's 10-K as
filed with the Securities Exchange Commission concurrently with the filing
thereof.
6.1.2. Reporting status and events
6.1.2.1. Promptly after the commencement thereof, notice of all material
actions, suits and proceedings of the type described in Section 5.2.4
before any court or governmental department, commission, board, bureau,
agency or instrumentality, domestic or foreign, affecting the Borrower;
6.1.2.2. As soon as possible, and in any event within ten (10) days after the
occurrence of any Default or Event of Default, the statement of the chief
financial officer or Treasurer of the Borrower setting forth details of
such Default or Event of Default and action which the Borrower proposes to
take with respect thereto; and
6.1.2.3. As soon as possible and in any event within ten (10) days after the
occurrence thereof, notice as to any other event which with the passage of
time, the giving of notice or otherwise, could reasonably be expected to
result in a material adverse change in the financial condition, business or
prospects of the Borrower;
6.2. Loan Proceeds. The Borrower will use the proceeds of the Loans only for the
purposes set forth in this Agreement, and will furnish the Lender with all
evidence that it may reasonably require with respect to such use.
6.3. Maintenance of Business and Properties; Insurance. The Borrower will
continue to engage in businesses of the same general nature as the business
engaged in by the Borrower during the present and preceding fiscal year; at
all times maintain, preserve and protect all material franchises and trade
names and preserve all the Borrower's tangible property used or useful in
the conduct of its business and keep the same in good repair, working order
and condition, ordinary wear and tear excepted, and from time to time make
all needful and proper repairs, renewals, replacements, betterments, and
improvements thereto so that the business carried on in connection
therewith may be conducted properly and advantageously at all times. The
Borrower shall maintain adequate insurance covering its tangible personal
property at all times. The Borrower shall continue all of its current
operations in its name, and the Borrower shall not commence any operation
or business in competition with the current operations and businesses of
the Borrower.
6.4. Financial Covenants. The Borrower agrees to observe and fully comply with
the following financial covenants:
6.4.1. The Borrower's Total Adjusted Liabilities shall not exceed fifty percent
(50%) of Total Capitalization.
6.4.2. The Borrower's EBITDAR to Fixed Charges ratio will not be less than 1.75
: 1.
6.4.3. The Borrower's Consolidated Net Income calculated on a trailing four
quarters basis shall be positive.
6.4.4. The Borrower shall maintain a Tangible Net Worth no less than
$120,000,000 plus fifty percent (50%) of annual Net Income for calendar
year 2000 and following, plus the net proceeds of any equity offering.
6.4.5. Concurrently with the delivery of financial statements in Sections
6.1.1.2 and 6.1.1.3, the Borrower shall issue a signed certificate of
compliance to Lender in the form attached hereto as Exhibit 6.4 signed by
an authorized party, (i) setting forth the calculation of the above
financial covenants, and (ii) certifying as to whether a default or event
of default has occurred, and if such does exist, specifying the details
thereof and any action taken or proposed to be taken with respect thereto.
6.5. Payment of Taxes. The Borrower will pay and discharge all taxes,
assessments, and governmental charges or levies imposed upon the Borrower
or upon its income or profits, or upon any other properties belonging to
the Borrower, prior to the date on which penalties attach thereto, and all
lawful claims which, if unpaid, might become a lien or charge upon any
properties of the Borrower.
6.6. Compliance with Laws, etc. The Borrower will comply with the requirements
of all applicable laws, rules, regulations and orders of any governmental
authority, noncompliance with which might have a material adverse effect on
the business, operation or credit of the Borrower or its subsidiaries,
including, without limitation, all labor laws, ERISA rules and regulations,
environmental laws, and equal access and disability laws, and shall remain
in compliance with all material obligations to third parties, default in
which may have a material adverse effect on the Borrower.
6.7. Books and Records. The Borrower shall keep true and correct records and
books of account, in which entries will be made in accordance with
generally accepted accounting principles consistently applied, reflecting
all financial transactions. Lender or its representatives (including
officers or employees of Union Planters National Bank) shall be afforded
reasonable access to and the right to examine and copy at Lender's expense
any such books and records at any time during normal business hours upon
three (3) Business Days prior notice.
6.8. Repayment of Excess Borrowing. The Borrower agrees to pay over to the
Lender forthwith and without demand any amount by which the Borrower's
total outstanding Loans hereunder may at any time exceed the then-current
Commitment set forth in Section 4.
6.9. Payment of Expenses. The Borrower shall pay any and all legal fees and
stamp and other taxes payable or determined to be payable in connection
with the execution and delivery of any Loan Documents. All obligations
provided for in this Section shall survive any termination of this
Agreement. In the event of a Default hereunder, Borrower shall indemnify
Lender against all reasonable costs and expenses (including, without
limitation, reasonable legal fees, costs and expenses and including costs
of attending and preparing for depositions and other court proceedings)
("Costs") of whatsoever kind and nature incurred by Lender in the
collection, enforcement or administration of the Loan and this Agreement or
the protection of Lender's rights.
6.10.Payment of Legal Fees. The Borrower shall pay any and all reasonable legal
fees and expenses determined to be payable in connection with the
Commitments and with the documentation of the Loans. All obligations
provided for in this Section shall survive any termination of this
Agreement.
6.11.Maintenance of Account. So long as Lender provides a reasonable service at
a reasonable price, the Borrower shall maintain its primary depository
relationship with the Lender throughout the term of this Agreement.
7. NEGATIVE COVENANTS OF THE BORROWER AND GUARANTORS
The Borrower covenants and agrees that from the date of execution of this
Agreement and until the payment in full of the principal of and interest upon
the Note, the Borrower will not, without the prior written consent of the
Lender:
7.1. Other Indebtedness. Incur any Indebtedness in excess of five million
dollars ($5,000,000.00) in the aggregate to any other party or parties
whether direct or indirect by way of guaranty or surety, without first
giving the Lender or the Documentation Agent the opportunity to make a
proposal for such loan.
7.2. Borrowings in Excess of the Facility Commitments. Absent separate
arrangements with the Lender, Borrower shall not request Advances in an
aggregate at any time exceeding the respective Facility Commitment. To the
extent that the aggregate Advances at any time exceed the respective
Facility Commitment, the Borrower shall repay the Advance to the extent
necessary to meet the Facility Commitment requirements.
7.3. Negative Pledge on Assets. So long as the lender has any Commitment
hereunder or any Loan shall remain unpaid, the Borrower will not, and will
not allow any Significant Subsidiary or Affiliate to create, incur, assume
or suffer to exist, any Lien on any of its property now owned or hereafter
acquired to secure any Indebtedness of the Borrower, other than:
7.3.1. Liens imposed under the Loan Documents;
7.3.2. Any Lien on any equipment used in connection with the Borrower's
business, securing Indebtedness incurred or assumed for the purpose of
financing all or any part of the acquisition cost of such property,
provided that such Lien is created substantially contemporaneously with
such acquisition and does not extend to any other property;
7.3.3. Liens for taxes not yet due or which are being contested in good faith by
appropriate proceedings and with respect to which adequate reserves in
accordance with Generally Accepted Accounting Principles are being
maintained;
7.3.4. Statutory Liens of producers of farm products and of landlords and liens
of carriers, warehousemen, mechanics, materialmen and other Liens imposed
by law created in the ordinary course of business for amounts not yet due
or which are being contested in good faith by appropriate proceedings and
with respect to which adequate reserves in accordance with Generally
Accepted Accounting Principles are being maintained;
7.3.5. Liens (other than any Lien imposed by ERISA) incurred or deposits made in
the ordinary course of business in connection with workers' compensation,
unemployment insurance and other types of social security, or to secure the
performance of tenders, statutory obligations, surety and appeal bonds,
bids, leases, government contracts, performance and return-of-money bonds
and other similar obligations (exclusive of obligations for the payment of
borrowed money);
7.3.6. Easements, rights-of-way, restrictions and other similar charges or
encumbrances not interfering with the ordinary conduct of the business of
the Borrower;
7.3.7. Liens existing on any property prior to the acquisition thereof by the
Borrower, in each case, which Lien was not created in contemplation of such
acquisition;
7.3.8. Extensions, renewals or replacements of any Lien referred to in
paragraphs 1 through 7 of this Section 7.3, provided that the principal
amount of the Indebtedness or obligation secured thereby is not increased
and that any extension, renewal or replacement is limited to the property
originally encumbered thereby, and is incurred in the ordinary course of
the Borrower's business.
7.4. Material Acquisitions or Dispositions. The Borrower shall not make any
acquisitions of other businesses or assets over a rolling 12 month period
in an aggregate amount greater than ten percent (10%) of the Consolidated
Total Assets of the Borrower without the prior written consent of the Bank,
nor shall the Borrower sell or dispose of any material portion of its
assets outside the ordinary course of business without the prior written
consent of the Bank.
7.5. Mergers and Consolidation. The Borrower shall not merge or consolidate its
operations with those of any other company, without the prior written
consent of the Bank. Notwithstanding the compliance of the Borrower with
the foregoing, the Lender may request, as additional security and as a
condition to the continued existence of the Commitment, that a guaranty
described in Section 8 be supplied.
8. GUARANTEES
At the request of the Lender, the Borrower shall also cause any future
Significant Subsidiary to execute a guaranty in similar form to that described
on the attached Exhibit 8.
9. EVENTS OF DEFAULT
9.1. Events of Default. The occurrence of any one of the following events
("Events of Default") shall be an event of default hereunder:
9.1.1. Any representation or warranty made by the Borrower herein, in any other
Loan Document, or in any certificate or report furnished by the Borrower
hereunder or thereunder, shall prove to have been incorrect in any material
adverse respect when or as of when made and not corrected and/or cured
within 30 days; or
9.1.2. Default shall be made by the Borrower in the payment within ten (10) days
of the due date of any principal or interest installment on the Notes, or
in the payment, when due, of any other instrument relating to borrowed
funds, or there shall be any material default under any other material
agreement from time to time in effect between the Borrower and the Lender;
or
9.1.3. Default shall be made by the Borrower in any of its obligations under
Section 6.1 (relating to reporting requirements) and shall not be cured
within ten (10) days after written notice thereof by the Lender to the
Borrower; or
9.1.4. Default shall be made by the Borrower in the due observance or
performance of any other material covenant, condition or agreement on the
part of Borrower to be observed or performed (i) under the terms of this
Agreement or (ii) under any other agreement between the Borrower and the
Lender/Administrative Agent or the Documentation Agent or (iii) under any
agreement with third parties, where such default involves a sum in the
aggregate in excess of $5,000,000 in each case where the same shall not be
cured within thirty (30) days after written notice thereof by the
Lender/Administrative Agent or the Documentation Agent or such third party
to the Borrower; or
9.1.5. The Borrower shall (1) voluntarily terminate operations or apply for or
consent to the appointment of, or the taking of possession by, a receiver,
custodian, trustee or liquidator of the Borrower, or of all or of a
substantial part of the assets of the Borrower, (2) admit in writing its
inability, or be generally unable, to pay its debts as the debts become
due, (3) make a general assignment for the benefit of its creditors, (4)
commence a voluntary case under the Federal Bankruptcy Code (as now or
hereafter in effect), (5) file a petition seeking to take advantage of any
other law relating to bankruptcy, insolvency, reorganization, winding-up,
or composition or adjustment of debts, (6) fail to controvert in a timely
and appropriate manner, or acquiesce in writing to, any petition filed
against it in an involuntary case under the Federal Bankruptcy Code or
applicable state bankruptcy laws or (7) take any corporate action for the
purpose of effecting any of the foregoing; or
9.1.6. Without its application, approval or consent, a proceeding shall be
commenced, in any court of competent jurisdiction, seeking in respect of
the Borrower: the liquidation, reorganization, dissolution, winding-up, or
composition or readjustment of debt, the appointment of a trustee,
receiver, liquidator or the like of the Borrower or of all or any
substantial part of the assets of the Borrower, or any Affiliate or other
like relief in respect of the Borrower under any law relating to
bankruptcy, insolvency, reorganization, winding-up, or composition or
adjustment of debts; and, if the proceeding is being contested in good
faith by the Borrower, as the case may be, the same shall continue
undismissed, or unstayed and in effect for any period of thirty (30)
consecutive days, or an order for relief against the Borrower shall be
entered in any involuntary case under the Federal Bankruptcy Code or
applicable state bankruptcy laws; or
9.1.7. Any foreclosure or other proceedings shall be commenced to enforce,
execute or realize upon any lien, encumbrance, attachment, trustee process,
mortgage or security interest which is (or purports to be) prior to or on a
parity with the liens, mortgages, security interests or other rights in the
Borrower's property created under any Loan Document;
9.1.8. Entry of a materially adverse final and non-appealable judgement against
the Borrower
9.1.9. The actual or asserted invalidity of any of the Loan documentation, or
9.1.10. The change of controlling management of the Borrower
THEREUPON, in the case of any such event, the Lender may, at its option:
(A) immediately reduce to zero the Commitments hereunder, and/or (B) immediately
declare any Obligations not otherwise due and payable at such time to be
forthwith due and payable, whereupon the same shall become forthwith due and
payable; and, in the case of any event described in Sections 9.1.5, 9.1.6 or
9.1.7, the Commitments hereunder shall automatically be reduced to zero, without
any action on the part of the Lender. Upon the declaration by the Lender that
the entire Indebtedness of the Borrower to the Lender is immediately due and
payable, any Obligation not otherwise due and payable at such time shall become
immediately due and payable without presentment, demand, protest, or other
notice of any kind, all of which are hereby expressly waived, anything contained
herein or in the Notes to the contrary notwithstanding; and, further, in each
and every such occurrence the Lender may proceed to protect and enforce its
rights by suit in equity, action or law and/or other appropriate proceedings
either for specific performance of any covenant or condition contained in this
Agreement or in any instrument or assignment delivered to the Lender pursuant to
this Agreement, or in aid of the exercise of any power granted in this Agreement
or any instrument or assignment.
10. MISCELLANEOUS
10.1.No Waiver, Remedies Cumulative. No failure on the part of the Lender to
exercise and no delay in exercising any right hereunder shall operate as a
waiver thereof, nor shall any single or partial exercise of any right
hereunder preclude any other or further exercise thereof or the exercise of
any other right. The remedies herein provided are cumulative and are not
exclusive of any remedies provided by law.
10.2.Survival of Representations. All representations and warranties made
herein shall survive the making of the Loans hereunder and the delivery of
the Note.
10.3.Notices. Unless telephonic notice is specifically permitted pursuant to
the terms of this Agreement, any notice or other communication hereunder to
any party hereto shall be by telegram, telephone facsimile, telex or
registered or certified mail (return receipt requested) and shall be
effective upon actual receipt. Notice shall be in the mails, postage
prepaid, addressed to the party at its address specified beneath its
signature hereto (or at any other address that such party may here after
specify to the other parties in writing).
10.4.Tennessee Law. This Agreement and each of the Loan Documents shall be
deemed a contract made under the law of the State of Tennessee and shall be
governed by and construed in accordance with the internal laws of said
state (without regard to its conflict of laws rules).
10.5.Successors and Assigns. This Agreement shall be binding upon and shall
inure to the benefit of the Borrower and the Lender, and their respective
successors and assigns; provided that the Borrower may not assign any of
their rights hereunder. It is anticipated that the Lender may from time to
time participate a portion of the Borrower's indebtedness hereunder to
other institutional lenders, and that specifically, the Bank shall
participate portions of the Borrower's indebtedness to the Documentation
Agent by means of direct assignment of the Borrower's indebtedness to such
lenders.
10.6.Counterparts. This Agreement may be executed in any number of counterparts
and by different parties hereto in separate counterparts, each of which
when so executed and delivered shall be deemed an original and all of which
when taken together shall constitute one and the same instrument.
10.7.Jurisdiction, Service of Process. Any suit, action or proceeding against
the Borrower with respect to any of the Loan Documents or any judgment
entered by any court in respect of any thereof may be brought in a court of
competent jurisdiction as the Lender (in its sole discretion) may elect,
and Borrower hereby accepts the nonexclusive jurisdiction of such courts
for the purpose of any suit, action or proceeding.
10.8.Limit on Interest. Anything herein or in the Notes to the contrary
notwithstanding, the obligations of the Borrower under this Agreement and
the Notes to the Lender shall be subject to the limitation that payments of
interest to the Lender shall not be required to the extent that receipt of
any such payment by the Lender would be contrary to provisions of law
applicable to the Lender (if any) or the Borrower which limit the maximum
rate of interest which may be charged or collected by the Lender; provided,
however, that nothing herein shall be construed to limit the Lender to
presently existing maximum legal rates of interest, if an increased
interest rate is hereafter permitted by reason of applicable federal or
state legislation.
10.9.Amendments, Modifications, Waivers. This Agreement and the other Loan
Documents may be amended, modified or waived only by a writing executed by
the Lender, as Administrative Agent, and the Borrower.
10.10. Headings. The headings of this Agreement are for convenience only and are
not to affect the construction of or to be taken into account in
interpreting the substance of this Agreement.
10.11. Waiver of Notice, Etc. Except to the extent that written notice is
required under the express provisions of this Agreement, Borrower waives
demand, notice, protest, notice of loans made, credit extended, collateral
received or delivered or other action taken in reliance hereon and all
other demands and notice of any description. With respect to the
Obligations, the Borrower assents to any extension or postponement of the
time of payment or any other indulgence, to the addition or release of any
party or persons primarily or secondarily liable, to the acceptance of
partial payment thereon and the settlement, compromising or adjusting of
any thereof, all in such manner and at such time or times as the Lender may
deem advisable.
10.12. Severability. In the event that any one or more of the provisions
contained in this Agreement shall for any reason be held to be invalid,
illegal or unenforceable in any respect, such invalidity, illegality or
unenforceability shall not affect any other provision of this Agreement,
but this Agreement shall be construed as if such invalid, illegal or
unenforceable provision had never been contained herein.
10.13. Entire Agreement. This Agreement and the other Loan Documents constitute
the full and entire understanding and agreement between the parties with
regard to the subjects hereof and thereof.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed as of the date first above written.
Lender: Borrower:
UNION PLANTERS BANK FRED'S, INC.
NATIONAL ASSOCIATION
By: /s/ Elizabeth Rouse By:/s/ Richard Witaszak
- ----------------------- -----------------------
Chief Financial Officer
Documentation Agent:
SUNTRUST BANK
By: /s/ Bryan W. Ford
- ---------------------
<PAGE>
EXHIBIT 4.2
PROMISSORY NOTE
$40,000,000.00 Dated: April 3, 2000
FOR VALUE RECEIVED, the undersigned, FRED'S, INC. hereby promises to pay to
the order of UNION PLANTERS NATIONAL BANK (the "Bank") on demand, or if no
demand, on April 3, 2003, the principal sum of Forty Million Dollars
($40,000,000.00) or, if less, the aggregate unpaid principal amount of the Loan
(as defined below) made by the Bank to the Borrower outstanding.
The Borrower promises to pay interest on the unpaid principal amount of the
Loan from the date of such Loan until such principal amount is paid in full, at
such interest rates, and payable at such times, as are specified in the
Agreement defined below.
Both principal and interest are payable in lawful money of the United
States of America to the Bank at its principal offices at 6200 Poplar Avenue,
Memphis, Tennessee, 38119 in same day funds. All Loans made by the Bank to the
Borrower and all payments made on account of principal hereof shall be recorded
by the Bank.
This Promissory Note is the Note referred to in, and is entitled to the
benefits of, the Credit Agreement (Restated), dated March 27, 2000, effective as
of April 3, 2000 (the "Agreement"), by and among the Borrower and the Bank. The
Agreement, among other things, (i) provides for the making of a Loan (the
"Loan") by the Bank to the Borrower in the amount first above mentioned, and
(ii) contains provisions for acceleration of the maturity hereof upon the
happening of certain stated events therein specified.
THIS PROMISSORY NOTE SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE
LAWS OF THE STATE OF TENNESSEE
FRED'S, INC.
By:/s/ Richard Witaszak
-----------------------
Title:Chief Finanical Officer
<PAGE>
EXHIBIT 4.6
FORM OF BORROWING REQUEST
Date: _____________________
VIA FACSIMILE 580-5470
Union Planters Bank N. A.
6200 Poplar Ave 4th Flr
P O Box 387
Memphis, TN 38147
RE: Credit Agreement dated March 28, 2000 by and between Fred's Inc. (the
"Borrower"), and Union Planters Bank N. A. (the "Lender")
This Borrowing Request is made by the borrower pursuant to Section 4.6 of
the Credit Agreement. Capitalized terms not otherwise defined in this Borrowing
Request have the same meaning as in the Loan Agreement. The individual signing
this request certifies that (i) he or she is an individual authorized by the
Borrower to submit Borrowing Requests to the Lender pursuant to the Credit
Agreement, (ii) the undersigned hereby irrevocably gives notice of and requests,
pursuant to Section 4.6 of the Credit Agreement, a borrowing under the Credit
Agreement, and (iii) the amount of the Proposed Advance is available to the
Borrower pursuant to the Credit Agreement. The information below is true and
correct as of the date of this Borrowing Request:
1. Amount of Proposed Advance:$ __________________
2. Date of Advance ______________________
3. 30, 60, or 90 LIBOR or Prime Based ____________
Requests must be given prior to 11:00 a.m. on the day of the Proposed
Advance.
WIRE TRANSFER PROCEEDS OF ADVANCES TO:
ABA #: ______________________
Account #: ______________________
Name of Bank:____________________
Customer Reference:______________
Other Information:_______________
In connection with the Proposed Advance the undersigned represents on the
date hereof and on the date of the Proposed Advance (a) it has not obtained
knowledge that there exists any Event of Default and (b) all representations and
warranties by the Borrower contained in Articles 4.6 of the Loan Agreement are
true and correct in accordance with Section 4.6 of the Credit Agreement.
Sincerely,
Fred's Inc.
By: ___________________________
Title: ____________________________
<PAGE>
EXHIBIT 6.4
COMPLIANCE CERTIFICATE FOR BORROWER
The undersigned, the ________________ officer of Fred's, Inc. (the
"Borrower"), does hereby certify on behalf of the Borrower pursuant to that
Revolving Loan and Credit Agreement dated May 15, 1992, as amended and modified
by a Modification Agreement dated May 31, 1995, and a Second Modification
Agreement dated July 31, 1995, and a Third Modification Agreement dated February
28, 1997, and a Fourth Modification Agreement dated September 1, 1998, ALL OF
THE FOREGOING HAVING BEEN RESTATED AS THE CREDIT AGREEMENT (RESTATED) OF EVEN
DATE HEREWITH (hereinafter the "Agreement"), by and between the Borrower and
Union Planters Bank, N.A. (the "Lender") as follows. Capitalized terms used and
not otherwise defined herein shall have the same meanings as in the Agreement.
1. No Event of Default as defined in Article 9 of the Agreement, and no event
with which notice and/or lapse of time could become an Event of Default,
has occurred and is continuing;
2. The representations and warranties of the Borrower contained in Article 3
of the Agreement are true on and as of the date hereof, with the same force
and effect as if such representations and warranties had been made on and
as of the date hereof;
3. The conditions precedent to each Advance contemplated in the Agreement,
contained in Section 5 of the Agreement, have been met and performed as of
the date hereof;
4. There has been no material adverse change in the financial condition,
business or prospects of the Borrower, considered on a consolidated basis,
since the date of the original preclosing financial statements or since the
date of the most recently submitted Financial Statements;
5. Borrower is in compliance with the covenants of Articles 6 and 7 of the
Agreement, as shown on the attached calculations;
WITNESS my hand this 3rd day of April, 2000.
BORROWER:
FRED'S, INC.
By:______________________________
Name (Print):____________________
Its:_____________________________
<PAGE>
EXHIBIT 8
GUARANTY AGREEMENT
FOR VALUE RECEIVED, and in consideration of credit given or to be given,
advances made or to be made, or other financial accommodation from time to time
afforded or to be afforded to FRED'S, INC., a Tennessee corporation, (in its
capacity as debtor being hereinafter called "Debtor") its successors or assigns,
by UNION PLANTERS BANK, NATIONAL ASSOCIATION, a national banking association,
its successors, endorsees, transferees and assigns (all of which are hereinafter
called "Lender"), the undersigned (in its capacity as guarantor being
hereinafter sometimes called "Guarantor") hereby, jointly and severally, for
itself, its heirs, executors, administrators and successors, absolutely and
unconditionally guarantees the full and prompt payment to Lender, at maturity
(whether by acceleration or otherwise) and at all times thereafter, of any and
all of the outstanding principal balance of the indebtedness arising from and
evidenced by that certain Promissory Note of even date herewith (the "Note"), in
the original principal amount of Forty Million and No/100ths Dollars
($40,000,000.00) as modified and extended, together with all interest and
expenses, legal and/or otherwise (including court costs and reasonable
attorneys' fees) incurred by Lender in collecting or endeavoring to collect such
indebtedness or any part thereof, in protecting any collateral, and in enforcing
this Guaranty (all of which are hereinafter collectively referred to as the
"indebtedness"), which amount shall be guaranteed until the indebtedness
evidenced by the Note shall have been paid in full (the "Guaranteed Amount"). In
addition to Debtor and Guarantor, one or more other persons (the "Other
Guarantors") may be obligated, jointly and severally, to Lender for part or all
of the Indebtedness. Guarantor executes and delivers this Guaranty Agreement
(the "Guaranty") to further evidence, ratify and confirm his or her obligation
to pay the Indebtedness. Neither the execution and delivery of this Guaranty nor
anything herein contained shall diminish or discharge Debtor's obligations to
Lender in any respect.
THIS GUARANTY SHALL BE A CONTINUING, ABSOLUTE, AND UNCONDITIONAL GUARANTY
and shall remain in full force and effect until the Indebtedness (and interest
thereon and reasonable expenses in connection therewith), and all renewals,
modifications, or extensions thereof, in whole or in part, shall have been fully
paid and satisfied. The death, dissolution or withdrawal of Guarantor (or any of
them, if more than one) or any Other Guarantor shall not terminate this
Guaranty, and this Guaranty shall, notwithstanding, continue and remain in force
against the estate of Guarantor and the remainder of the Other Guarantors.
Lender is hereby authorized to make from time to time, without notice to
anyone: any renewals, modifications or extensions (whether such renewals,
modifications or extensions be in whole or in part and without limit as to the
number of such extensions or of the renewal periods thereof, and without notice
to or further assent from the undersigned), sales, pledges, surrenders,
compromises, settlements, releases, indulgences, alterations, substitutions,
exchanges, changes in, modifications, or other dispositions including, without
limitation, cancellations, of all or any part of the collateral pledged to
secure the Indebtedness or any part of the Indebtedness, either express or
implied, or of any contracts or instruments evidencing any thereof, or of any
security or collateral therefor, and/or to take any security for or other
guaranties upon any of the Indebtedness, and the liability of Guarantor (or any
of them, if more than one) or any Other Guarantor shall not be in any manner
affected, diminished or impaired thereby, or by any lack of diligence, failure,
neglect or omission on the part of Lender to make any demand or protest, or give
any notice of dishonor or default, or to realize upon or protect any of said
Indebtedness, or any collateral or security therefor, or to exercise any lien
upon or right of appropriation or setoff of any monies, accounts, credits or
property of Debtor, possessed by Lender, towards the liquidation of the
Indebtedness, or by any application of payments and credits thereon. Subject to
the terms of the Credit Agreement executed herewith, Lender shall have the
exclusive right to determine how, when and what application of payments and
credits, if any, shall be made on the Indebtedness, or any part thereof, and
shall be under no obligation, at any time, to first resort to, make demand on,
file a claim against, or exhaust its remedies against Debtor, Guarantor, any
Other Guarantor, or other persons or corporations, their properties or estates,
or to resort to or exhaust its remedies against any collateral, security,
property, liens or other rights whatsoever. It is expressly agreed that Lender
may at any time make demand for payment when due on, or bring suit against,
Guarantor, or any one or more of the Other Guarantors, may compound with
Guarantor or any Other Guarantors, for such sums or on such terms as Lender may
see fit and release Guarantor (or any of them if more than one) or any Other
Guarantor from all further liability to Lender hereunder, without thereby
impairing the rights of Lender in any respect to demand, sue for and collect the
balance of the Indebtedness from Guarantor or any Other Guarantor not so
released; and that any claims against Debtor, against any Other Guarantor, or
against any collateral, accruing to Guarantor (or any of them, if more than one)
by reason of payments made hereunder shall be in all respects junior and
subordinate to any obligation then or subsequently owed by Debtor or by any such
Other Guarantor to Lender. In addition, the liability of Guarantor (or each of
them, if more than one) or any Other Guarantor shall not be affected by any lack
of validity or enforceability of the guaranteed debt. As security for the
undertakings and obligations of Guarantor, Guarantor (and each of them, if more
than one) expressly grants and gives to Lender a right of immediate setoff,
without demand or notice, of the balance of every deposit account, now or at any
time hereafter existing, of Guarantor with Lender, and a general lien upon and
security interest in all money, negotiable instruments, commercial paper, notes,
bonds, stocks, credits and/or chooses in action, or any interest therein, and
any other property, rights and interests of Guarantor (or each of them, if more
than one) or any evidence thereof, which have or at any time shall come into the
possession, custody, or control of Lender, and, in the event of default
hereunder, Lender may sell or cause to be sold at public or private sale in any
manner which may be lawful, for cash or credit and upon terms as Lender may see
fit and (except as may be otherwise expressly provided by the Uniform Commercial
Code, or other applicable law) without demand or notice to Guarantor (or any
Other Guarantor), all or any of such security, and Lender (unless prohibited by
the Uniform Commercial Code or other applicable law from so doing) or any other
person may purchase such property, rights or interests so sold and thereafter
hold the same free of any claim or right of whatsoever kind, including any right
or equity of redemption, of Guarantor (or each of them, if more than one) or any
Other Guarantor such demand, notice, right or equity of redemption, statutory or
otherwise, being hereby expressly waived and released.
In the event of the death, incompetency, dissolution, liquidation,
insolvency (however evidenced) of Debtor, or institution of bankruptcy or
receivership proceedings by or against Debtor, then and in any such event an
amount equal to the outstanding principal balance of the Indebtedness then
existing (up to the Guaranteed Amount) shall, for the purposes of this Guaranty,
and at the option of Lender, immediately become due and payable from Guarantor,
and, in such event, any and all sums or payments of any nature which may be or
become due and payable by Debtor to Guarantor are hereby assigned to Lender, and
shall be collectible by Lender, without necessity for other authority than this
instrument, until all the Indebtedness shall be fully paid, but such collection
by Lender shall not in any respect affect, impair or diminish any other rights
of Lender under the Note.
All dividends or other payments received from the Debtor, or on account of
the debt from whatsoever source, shall be taken and applied as payment in gross,
and this Guaranty shall apply at the option of Bank to and secure any ultimate
balance that shall remain owing to Bank. Any payments made by the undersigned on
the indebtedness of the Debtor shall not result in the Guarantor having any
claim against the Debtor, by claim of subrogation or otherwise, and all such
claims are expressly waived.
The granting of credit from time to time by Lender to Debtor, and without
notice to Guarantor (or any Other Guarantor), is hereby expressly authorized and
shall in no way affect or impair this Guaranty.
Lender may, without any notice whatsoever to anyone, sell, assign or
transfer all or any part of the Indebtedness; and in that event each and every
immediate and successive assignee, transferee or holder of all or any part of
the Indebtedness shall have the right to enforce this Guaranty, by suit or
otherwise, for the benefit of such assignee, transferee or holder, as fully as
though such assignee, transferee or holder were herein by name given such
rights, powers and benefits; but Lender shall have an unimpaired right, prior
and superior to that of any said assignee, transferee or holder, to enforce this
Guaranty for the benefit of Lender, as to so much of the Indebtedness that it
has not sold, assigned or transferred.
No act of commission or omission of any kind, or at any time, on the part
of Lender in respect of any matter whatsoever shall in any way affect or impair
this Guaranty. Nothing in this Guaranty is intended to diminish or discharge any
obligation of Guarantor to Lender. Guarantor (or each of them, if more than one)
waives any rights of action Guarantor (or any of them, if more than one) might
have against Lender because of the exercise by Lender in any manner howsoever of
any rights granted to Lender herein.
This instrument contains the entire agreement between Guarantor and Lender
with respect to the Guaranty; provided, however, that nothing herein shall
diminish or in any manner affect Debtor's obligations to Lender in any respect.
Every part of this Guaranty shall be binding upon Guarantor (or each of them, if
more than one) and any Other Guarantor, jointly and severally, and upon their
respective heirs, executors, administrators, personal representatives,
successors and assigns, as fully as though everywhere specifically mentioned,
and shall inure to the benefit of Lender, and its successors and assigns, and
shall be construed according to the laws of the State of Tennessee, in which
State it is accepted by Lender and shall be performed by Guarantor.
If any provision hereof is invalid or unenforceable, the remaining
provisions hereof shall not be affected by such invalidity or unenforceability.
Each term and provision contained herein shall, however, be valid and
enforceable to the fullest extent permitted by applicable law.
Guarantor (or each of them, if more than one) acknowledges that this
Guaranty is and shall be effective upon the execution by Guarantor (or each of
them, if more than one) and delivery hereof to Lender, or its agent; and that it
shall not be necessary for Lender to execute any acceptance hereof or otherwise
to signify or express its acceptance hereof.
GUARANTOR HEREBY WAIVES TRIAL BY JURY IN ANY ACTION, PROCEEDING OR
COUNTERCLAIM BROUGHT BY OR AGAINST GUARANTOR ON ANY MATTER WHATSOEVER ARISING
OUT OF OR IN ANY WAY CONNECTED WITH THIS GUARANTY OR UNDER ANY AMENDMENT,
INSTRUMENT, DOCUMENT OR AGREEMENT DELIVERED (OR WHICH MAY BE DELIVERED IN THE
FUTURE) IN CONNECTION HEREWITH OR ARISING FROM ANY RELATIONSHIP BETWEEN THE
PARTIES TO THIS GUARANTY.
IN WITNESS WHEREOF, the undersigned has executed this Guaranty Agreement
this 27 day of March, 2000, effective as of April 3, 2000
GUARANTOR:
FRED'S STORES OF TENNESSEE, INC.
By: /s/ Richard Witaszak
-----------------------
Title: Chief Financial Officer
<PAGE>
EXHIBIT 8.1
FRED'S STORES OF TENNESSEE, INC.
<PAGE>
EXHIBIT 13.1 Annual Report to Shareholders for the year ended January 29, 2000
<TABLE>
<CAPTION>
Selected Financial Data
(dollars in thousands, except per share amounts)
<S> <C> <C> <C> <C> <C>
1999 1998(1) 1997 1996 1995(2)
---- ------- ---- ---- -------
Statement of Income Data:
Net sales $665,777 $600,902 $492,236 $418,297 $410,086
Operating income 18,943 14,711 15,511 6,779(3) 4,771
Income before income taxes 16,439 13,605 15,660 6,508 4,337
Provision for income taxes 5,737 4,775 5,873 702 1,604
Net income 10,702 8,830 9,787 5,806 2,733
Net income per share:
Basic .90 .75 .84 .50 .23
Diluted .89 .73 .83 .50 .23
Selected Operating Data:
Operating income as a percentage of 2.9% 2.4% 3.2% 1.6%3 1.2%
sales
Increase in comparable store sales (4) 5.2% 5.6% 8.3% 2.2% 1.3%
Stores open at end of period 293 283 261 213 206
Balance Sheet Data (at period end):
Total assets $240,222 $220,757 $195,407 $161,148 $158,023
Short-term debt (including capital leases) 30,736 11,914 214 1,641 1,961
Long-term debt (including capital leases) 11,761 11,821 1,368 138 1,779
Shareholders' equity 145,913 136,983 129,359 119,579 115,570
(1) Results for 1998 include the effect of the 1998 adoption of LIFO for
pharmacy inventories ($3,108).
(2) Results for 1995 include 53 weeks.
(3) After $3,289 of restructuring and other charges.
(4) 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.
</TABLE>
Stock Market Information
The Company's common stock trades on the Nasdaq Stock Market under the symbol
FRED (CUSIP No. 356108-10-0). At April 24, 2000, the Company had an estimated
5,000 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:
Dividends
High Low Per Share
---- --- ---------
1998
- ----
First $26 7/8 $19 $.05
Second $26 1/2 $20 3/4 $.05
Third $22 3/8 $10 1/2 $.05
Fourth $18 $12 9/16 $.05
1999
- ----
First $15 $ 9 3/4 $.05
Second $17 5/8 $10 5/16 $.05
Third $18 $10 11/16 $.05
Fourth $17 5/8 $11 1/2 $.05
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.
1999 1998(1) 1997
---- ------- ----
Net Sales 100.0% 100.0% 100.0%
----- ----- -----
Cost of goods sold 71.8 72.6 72.5
---- ---- ----
Gross profit 28.2 27.4 27.5
Selling, general and
administrative expenses 25.3 24.9 24.3
---- ---- ----
Operating income 2.9 2.5 3.2
Interest expense, net .4 .2 -
-- -- --
Income before taxes 2.5 2.3 3.2
Income taxes .9 .8 1.2
-- -- ---
Net income 1.6% 1.5% 2.0%
=== === ===
(1) Results for 1998 include the effect of the 1998 adoption of LIFO for
Pharmacy inventories ($3,108,000).
Fiscal 1999 Compared to Fiscal 1998
Sales
Net sales increased 10.8% ($65 million) in 1999. Approximately $37 million of
the increase was attributable to the addition of 20 new stores,5 upgrades, and 2
pharmacies during 1999, together with the sales of 29 stores and 39 pharmacies
that were opened or upgraded during 1998 and contributed a full year of sales in
1999. During 1999, the Company also closed 10 store locations. Comparable store
sales, consisting of sales from stores that have been open for more than one
year, increased 5.2% in 1999.
The Company's front store (non-pharmacy) sales increased approximately 6% over
1998 front store sales. Front store sales growth benefited from the above
mentioned store additions, as solid performances in categories such as home
furnishings, footwear, ladies accessories, plus size and girls apparel, and
trim-a-home were mostly offset by weaker performances in missy and ladies
intimate apparel, hardware and several of the companies basic hardlines
departments.
Fred's pharmacy sales grew from 27% of total sales in 1998 to 31% of total sales
in 1999, and continues to rank as the largest sales category within the Company.
The total sales in this department, including the Company's mail order
operation, increased 27% over 1998, with third party prescription sales
representing approximately 77% of total pharmacy sales, compared with 71% of
total pharmacy sales in 1998. The Company's pharmacy sales growth continued to
benefit from an ongoing program of purchasing prescription files from
independent pharmacies, the addition of pharmacy departments in existing store
locations, and inflation caused by drug manufacturer increases.
Sales to Fred's 26 franchised locations decreased approximately $3 million in
1999 and represented 5% of the Company's total sales compared with approximately
6% of 1998 total sales. It is anticipated that this category of business will
continue to decline as a percentage of total Company sales since the Company has
not added and does not intend to add any additional franchisees.
Gross Margin
Gross margin as a percentage of sales was 28.2% in 1999 compared to 27.4% in
1998. Gross margin benefited from reduced levels of markdowns as a percentage of
sales, higher initial purchase margins resulting from greater volumes of import
and opportunistic purchases, a lesser percentage of franchise sales, which carry
substantially lower margins than retail sales, and a reduced level of inflation
in pharmacy costs.
Selling, General and Administrative Expenses
Selling, general and administrative expenses were 25.3% of net sales in 1999
compared with 24.9% of net sales in 1998. Higher rental costs as a percentage of
sales due to a greater percentage of company stores being leased and slightly
higher rent costs associated with the Company's build-to-suit prototype store,
an increase in repairs and maintenance expense resulting from store improvement
programs implemented during 1999, and higher depreciation expense associated
with capital investments made over the past 12 to 18 months contributed to most
of the higher expense ratio in 1999. These increases were partially offset by
the elimination of mailing costs associated with two major advertising circulars
during 1999.
Operating Income
Operating income increased approximately $4.2 million or 28.8% to $18.9 million
in 1999 from $14.7 million in 1998. Operating income as a percentage of sales,
increased to 2.9% in 1999 from 2.5% in 1998, due to the above mentioned reasons.
Interest Expense, Net
Interest expense for 1999 totaled $2.5 million compared to net interest expense
of $1.1 million in 1998 (interest expense of $1.2 million less interest income
of $.1 million).
The interest expense for 1999 reflects higher average revolver borrowings for
inventory purchases, caused by significantly improved in-stock positions over
1998 and duplicate inventories in several remerchandised inventory categories,
and the accelerated repayment of approximately $7.5 million in accounts payable,
originally due in February, as a result of a change made in the company's
pharmacy drug wholesaler in December of 1999. The company also experienced full
year interest costs on term loan borrowings to finance the distribution center
modernization and acquisition of a new mainframe computer.
Income Taxes
The effective income tax rate decreased to 34.9% in 1999 from 35.1% in 1998, due
primarily to changes made in the Company's organizational structure during the
fourth quarter of 1998, which resulted in a reduction in the Company's liability
for taxes.
At January 29, 2000, 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 $36.7 million for state income tax purposes,
which expire during the period 2001 through 2021. 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.
<PAGE>
Net Income
Net income for 1999 was $10.7 million (or $.89 per diluted share) or
approximately 21% higher than the $8.8 million (or $.73 per diluted share)
reported in 1998.
Fiscal 1998 Compared to Fiscal 1997
Sales
Net sales increased 22.1% ($109 million) in 1998. Approximately $84 million of
the increase was attributable to the addition of 29 store locations and 39
pharmacies during 1998, together with the net sales of 48 stores and 34
pharmacies that were opened during 1997 and contributed a full year of sales in
1998. During 1998, the Company also closed 7 store locations. Comparable store
sales, consisting of sales from stores that have been open for more than one
year, increased 5.6% in 1998.
The Company's front store (non-pharmacy) sales increased approximately 15% over
1997 front store sales. Front store sales growth benefited from the above
mentioned store additions, coupled with solid performances in categories such as
home furnishings, domestics, ladies accessories, missy and girls apparel,
housewares, hardware and photofinishing.
Fred's pharmacy sales grew from 23% of total sales in 1997 to 27% of total sales
in 1998, and now ranks as the largest sales category within the Company. The
total sales in this department, including the Company's mail order operation,
increased 54% over 1997, with third party prescription sales representing
approximately 71% of total pharmacy sales, compared with 66% of total pharmacy
sales in 1997. The Company's pharmacy sales growth continued to benefit from an
ongoing program of purchasing prescription files from independent pharmacies,
the addition of pharmacy departments in existing store locations, significant
inflation caused by drug manufacturer increases and the introduction of more
expensive drugs, and favorable industry trends.
Sales to Fred's 29 franchised locations decreased approximately $2 million in
1998 and represented 6% of the Company's total sales compared with approximately
8% of 1997 total sales. It is anticipated that this category of business will
continue to decline as a percentage of total Company sales since the Company has
not added nor intends on adding any additional franchisees.
Gross Margin
Gross margin as a percentage of sales was 27.4% in 1998 compared to 27.5% in
1997. During 1998, the Company adopted the LIFO (last in, first out) method of
accounting for its pharmacy inventories. This change was made to address the
significant inflation incurred in pharmacy costs during 1998 and to provide a
better matching of current costs with current revenues. Excluding the LIFO
change, gross margin as a percentage of sales increased to 27.9% in 1998
compared with 27.5% in 1997.
Gross margin benefited from reduced levels of markdowns as a percentage of
sales, higher initial purchase margins resulting from greater volumes of import
and opportunistic purchases and a lesser percentage of franchise sales, which
carry substantially lower margins than retail sales. This benefit was partially
offset by pharmacy sales growing at a faster pace than front store sales, since,
on average, the gross margin on pharmacy sales is lower than gross margins on
front store sales. Pharmacy gross margins were also negatively impacted by the
continuing shift in pharmacy sales to customers covered by third party insurance
programs, which generally carry lower margins than pharmacy cash sales due to
the efforts of managed care organizations and other pharmacy benefit managers to
reduce prescription drug costs.
Selling, General and Administrative Expenses
Selling, general and administrative expenses were 24.9% of net sales in 1998
compared with 24.3% of net sales in 1997. Higher labor costs associated with the
process of modernizing and automating the Company's distribution center, higher
payroll costs associated with a significant increase in average pharmacy labor
rates, and a decrease in the percentage of franchise sales, which carry a lower
expense percentage than retail sales, contributed to the higher expense ratio in
1998.
Operating Income
Operating income decreased approximately $.8 million to $14.7 million in 1998
from $15.5 million in 1997. Operating Income, excluding the effect of the
Company's adoption of LIFO in 1998, increased by approximately $2.3 millon or
15% in 1998. Operating income, excluding the effect of the Company's adoption of
LIFO in 1998, decreased from 3.2% in 1997 to 3.0% in 1998 as a percentage of
sales due to the above mentioned reasons.
Interest Expense, Net
Interest expense for 1998 totaled $1.2 million while interest income totaled $.1
million, for a net 1998 interest expense of $1.1 million compared to net
interest income of $.1 million in 1997 (interest income of $.4 million versus
interest expense of $.3 million).
The interest expense for 1998 reflects higher average revolver borrowing levels
to finance inventories and other working capital requirements. Interest expense
also includes the partial year impact of a $12 million seven-year term loan the
Company obtained to finance the modernization and automation of its distribution
center.
Income Taxes
The effective income tax rate decreased to 35.1% in 1998 from 37.5% in 1997. The
Company completed a realignment of it's corporate organizational structure
during the fourth quarter of 1998, which resulted in a reduction in the
Company's liability for taxes.
At January 30, 1999, 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 $26.3 million for state income tax purposes,
which expire during the period 2000 through 2020. 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.
Net Income
Net income for 1998 was $8.8 million (or $.73 per diluted share) versus $9.8
million (or $.83 per diluted share) in 1997. Excluding the $2.0 million (or $.17
per diluted share) impact of the Company's adoption of LIFO in 1998, net income
increased to $10.8 million (or $.90 per diluted share) and 10.2% over 1997
levels.
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 $79.7
million, $72.8 million and $70.7 million at year end 1999, 1998 and 1997,
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 five-year $15 million unsecured revolving credit commitment
with a bank that has generally been used to finance inventory levels at
specified periods. This $15 million credit commitment is also supplemented with
$15 million in seasonal overlines, for a total revolving borrowing capacity of
$30 million. The credit commitment expires in June 2003 and bears interest at
1.5% below prime rate or a LIBOR-based rate (weighted average interest rate of
6.25% on 1999 outstanding borrowings).
In April 2000, the above unsecured revolving credit commitment, and related
seasonal overlines, were replaced with a new unsecured revolving line of credit
commitment of $40 million that expires in April 2003. All other provisions of
the new agreement are essentially the same as the prior agreement. The expanded
credit capacity is necessary to accommodate the Company's continued growth and
shifting seasonal inventory needs.
At January 29, 2000, approximately $28.2 million of inventories were financed
with outstanding borrowings under the Company's revolver. Higher year-end
revolver borrowings resulted from significantly improved in-stock positions
compared to 1998, duplicate inventories in several re-merchandised inventory
categories, and the accelerated repayment of approximately $7.5 million in
accounts payable, originally due in February, as a result of a change made in
the Company's pharmacy drug wholesaler in December 1999.
Delays in the processing of merchandise receipts caused by implementation of the
Company's new distribution center automation and computer system in January 1999
resulted in a reduction of days payable at year end 1998. Accordingly,
approximately $10.2 million of inventories were financed with outstanding
borrowings under the Company's revolver at year end 1998. No borrowings were
outstanding on the revolver as of year end 1997.
In May 1998, the Company entered into a seven-year unsecured term loan of $12
million to finance the modernization and automation of the Company's
distribution center and corporate facilities. The Loan Agreement bears interest
of 6.82% per annum and matures on November 1, 2005. At year end 1999, the
outstanding principal balance on the term loan was approximately $10.3 million
compared with $11.7 million at year-end 1998.
In April 1999, the Company entered into a four-year unsecured term loan of $2.3
million to finance the replacement of the Company's mainframe computer system.
The Loan Agreement bears interest at 6.15% per annum and matures on April 15,
2003. At year-end 1999, the outstanding principal balance on the term loan was
approximately $1.8 million.
Cash used in operations was ($.8) million in 1999 compared to provided by
operations of $.6 million in 1998 and $21.0 million in 1997. As mentioned above,
year-end 1999 inventory levels were impacted by improved in-stock positions and
duplicate inventories compared to 1998, and accounts payable were impacted by
the accelerated repayment of $7.5 million of payables. Year-end 1998 accounts
payable levels were adversely impacted as a result of merchandise processing
delays, and were supplemented with short-term borrowings at year-end. The 1997
year-end accounts payable balance also included some vendor dating support
associated with the Company's November 1997 acquisition of a 17-store chain.
Capital expenditures in 1999 totaled $14.8 million compared with $23.3 million
in 1998 and $9.7 million in 1997. The 1999 capital expenditures included
approximately $2.3 million of expenditures associated with replacement of the
Company's mainframe computer system, and approximately $12.5 million of
expenditures associated with new stores and pharmacies, store and pharmacy
upgrades, distribution center equipment and annual capital maintenance. The 1998
capital expenditures included $12.0 million of expenditures associated with the
Company's modernization and automation of its distribution center, $6.7 million
of expenditures associated with new stores and pharmacies, and $4.6 million for
store and pharmacy upgrades and annual capital maintenance. This compares with
1997 capital expenditures of $6.0 million for new stores and pharmacies and $3.7
million for store and pharmacy upgrades and annual capital maintenance. Cash
used for investing activities in 1997 also included $12.9 million for the
acquisition of inventory, fixed assets and pharmacy customer lists of a 17-store
chain.
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.
Recent Accounting Pronouncements
In June 1999, the FASB issued SFAS no. 137, Accounting for Derivative
Instruments and Hedging Activities - Deferral of the effective date of FASB
Statement No. 133, which deferred the effective date provisions of SFAS No. 133
for the company to the first quarter of 2001. The Company does not believe this
new standard will have an impact on its financial statements since it currently
has no derivative instruments.
Year 2000
The Company did not experience any significant problems relating to the change
to the year 2000. All key suppliers and service vendors experienced no
significant problems. All changes to the system and established contingency
plans were effective. It is possible, although management does not consider
likely, that other dates in the year 2000 may further affect computer software
and systems. There may also be other year 2000 problems that have yet to be
discovered by the company or any third party which the company conducts
business.
<PAGE>
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>
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
Fred's Capital Finance, Inc.
<PAGE>
EXHIBIT 23.1 Consent of PricewaterhouseCoopers LLP
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statement on Form S-8 (No.33-48380 and 33-67606) of Fred's, Inc. of our report
dated March 13, 2000, except for Note 5 as to which the date is April 3, 2000,
relating to the financial statements, which appears in the Annual Report to
Shareholders, which is incorporated in this Annual Report on Form 10-K. We also
consent to the incorporation by reference of our report dated March 13, 2000
relating to the financial statement schedule, which appears in this Form 10-K.
PricewaterhouseCoopers LLP
April 28, 2000
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000724571
<NAME> Fred's, Inc.
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