FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934.
For the quarterly period ended April 29, 2000.
OR
[] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the transition period from to .
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Commission file number 000-19288
FRED'S, INC.
(Exact name of registrant as specified in its charter)
Tennessee 62-0634010
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
4300 New Getwell Rd., Memphis, Tennessee 38118
(Address of principal executive offices) (zip code)
(901) 365-8880
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X . No .
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The registrant had 12,025,096 shares of Class A voting, no par value common
stock outstanding as of June 9, 2000.
<PAGE>
FRED'S, INC.
INDEX
Page No.
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Part I - Financial Information
Item 1 - Financial Statements (unaudited):
Consolidated Balance Sheets as of
April 29, 2000 and January 29, 2000 3
Consolidated Statements of Income
for the Thirteen Weeks Ended April 29, 2000
and May 1, 1999 4
Consolidated Statements of Cash Flows
for the Thirteen Weeks Ended April 29, 2000
and May 1, 1999 5
Notes to Consolidated Financial Statements 6 - 8
Item 2 - Management's Discussion and
Analysis of Financial Condition and
Results of Operations 9 - 11
Item 3 - Quantitative and Qualitative Disclosure
about Market Risk 11
Part II - Other Information 12
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Signatures 13
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<PAGE>
FRED'S, INC.
CONSOLIDATED BALANCE SHEETS
(unaudited)
(in thousands, except for number of shares)
<TABLE>
<CAPTION>
April 29, January 29,
2000 2000
---- ----
<S> <C> <C>
ASSETS:
Current assets:
Cash and cash equivalents $ 4,486 $ 3,036
Receivables, less allowance for doubtful
Accounts of $452 ($452 at January 29, 2000) 11,118 10,911
Inventories 145,143 141,612
Deferred income taxes 2,162 3,002
Other current assets 649 1,865
--- -----
Total current assets 163,558 160,426
Property and equipment, at depreciated cost 74,952 73,459
Equipment under capital leases, less accumulated
amortization of $968 ($856 at January 29,2000) 1,723 1,835
Deferred income taxes 1,441 866
Other noncurrent assets 4,116 3,636
----- -----
Total assets $ 245,790 $ 240,222
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 37,608 $ 39,653
Current portion of indebtedness 2,045 30,306
Current portion of capital lease obligations 447 430
Accrued liabilities 9,075 9,680
Income taxes payable 2,270 650
----- ---
Total current liabilities 51,445 80,719
------ ------
Long term portion of indebtedness 42,184 10,027
Capital lease obligations 1,615 1,734
Other noncurrent liabilities 1,873 1,829
----- -----
Total liabilities 97,117 94,309
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Shareholders' equity:
Common stock, Class A voting, no par value,
11,976,728 shares issued and outstanding
(11,988,276 shares at January 29, 2000) 67,209 67,326
Retained earnings 81,734 78,902
Deferred compensation on restricted
Stock incentive plan (270) (315)
---- ----
Total shareholders' equity 148,673 145,913
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Total liabilities and shareholders equity $ 245,790 $ 240,222
========= =========
</TABLE>
See accompanying notes to consolidated financial statements
<PAGE>
FRED'S, INC.
CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
(in thousands, except per share amounts)
Thirteen Weeks Ended
--------------------
April 29, May 1,
2000 1999
---- ----
Net Sales $176,660 $154,934
Cost of goods sold 127,538 110,615
------- -------
Gross Profit 49,122 44,319
Selling, general and administrative
Expenses 43,162 39,421
------ ------
Operating income 5,960 4,898
Interest expense 673 452
--- ---
Income before income taxes 5,287 4,446
Provision for income taxes 1,855 1,560
----- -----
Net income $ 3,432 $ 2,886
======== ========
Net income per share:
Basic $ .29 $ .24
======== ========
Diluted $ .28 $ .24
======== ========
Weighed average shares outstanding:
Basic 11,890 11,813
====== ======
Diluted 12,080 12,036
====== ======
See accompanying notes to consolidated financial statements
<PAGE>
FRED'S, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(in thousands)
Thirteen Weeks Ended
--------------------
April 29, May 1,
2000 1999
---- ----
Cash flows from operating activities:
Net income $ 3,432 $ 2,886
Adjustments to reconcile net income
To net cash flows from operating activities:
Depreciation and amortization 3,335 2,776
Lifo reserve 200 200
Deferred income taxes 265 624
Amortization of deferred compensation on
restricted stock incentive plan 38 69
Cancellation of restricted stock (202) --
(Increase)decrease in assets:
Receivables (207) (679)
Inventories (3,731) (5,684)
Other assets 408 (273)
Increase (decrease) in liabilities:
Accounts payable and accrued liabilities (2,650) (6,774)
Income taxes payable 1,620 940
Other noncurrent liabilities 44 40
----- ------
Net cash provided by (used in)operating
activities 2,552 (5,875)
----- ------
Cash flows from investing activities:
Capital expenditures (4,388) (3,985)
------ ------
Net cash used in investing activities (4,388) (3,985)
------ ------
Cash flows from financing activities:
Reduction of indebtedness and capital lease
obligations (102) (420)
Proceeds from revolving line of credit,
net of payments 3,896 6,300
Proceeds from term loan ---- 2,250
Proceeds from exercise of options 92 107
Cash dividends paid (600) (599)
----- ------
Net cash provided by financing
activities 3,286 7,638
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Increase (decrease) in cash and cash
Equivalents 1,450 (2,222)
Beginning of period cash and cash
Equivalents 3,036 2,406
----- -----
End of period cash and cash equivalents $ 4,486 $ 184
======= =======
Supplemental disclosures of cash flow information:
Interest paid $ 361 $ 453
======= =======
Income taxed paid -- --
======= =======
See accompanying notes to consolidated financial statements
<PAGE>
FRED'S, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: BASIS OF PRESENTATION
Fred's, Inc. ("Fred's" or the "Company") operates 322 discount general
merchandise stores, including 26 franchised Fred's stores, in ten states in the
southeastern United States. One hundred and eighty-five of the stores have full
service pharmacies.
The accompanying unaudited consolidated financial statements of Fred's have
been prepared in accordance with the instructions to Form 10-Q and therefore do
not include all information and notes necessary for a fair presentation of
financial position, results of operations and cash flows in conformity with
generally accepted accounting principles. The statements do reflect all
adjustments (consisting of only normal recurring accruals) which are, in the
opinion of management, necessary for a fair presentation of financial position
in conformity with generally accepted accounting principles. The statements
should be read in conjunction with the Notes to the Consolidated Financial
Statements for the fiscal year ended January 29, 2000 incorporated into the
Company's Annual Report on Form 10-K.
The results of operations for the thirteen-week period ended April 29, 2000
are not necessarily indicative of the results to be expected for the full fiscal
year.
Certain prior quarter amounts have been reclassified to conform to the 2000
presentation.
NOTE 2: INVENTORIES
Wholesale inventories are stated at the lower of cost or market using the
FIFO (first-in, first-out) method. Retail inventories are stated at the lower of
cost or market as determined by the retail inventory method. For pharmacy
inventories, which comprise approximately 16% of the retail inventories at April
29, 2000, cost was determined using the LIFO (last-in, first-out) method. For
the remainder of the retail inventories, the FIFO method was applied. The
current cost of inventories exceeded the LIFO cost by approximately $3,408,000
and $3,208,000 at April 29, 2000 and January 29, 2000, respectively.
LIFO inventory costs can only be determined annually when inflation rates and
inventory levels are finalized; therefore, LIFO inventory costs for interim
financial statements are estimated.
<PAGE>
NOTE 3: NET INCOME PER SHARE
Basic income per share is based on the weighted average number of common shares
outstanding, and diluted net income per share is based on the weighted average
number of common shares and common equivalent shares outstanding.
COMPUTATION OF NET INCOME PER SHARE
(unaudited)
(in thousands, except per share amounts)
Thirteen Weeks Ended
--------------------
April 29, May 1,
2000 1999
---- ----
Basic net income per share
Net income $ 3,432 $ 2,886
======= =======
Weighted average number of common shares
Outstanding during the period 11,890 11,813
====== ======
Net income per share $ .29 $ .24
======= =======
Diluted net income per share
Net income $ 3,432 $ 2,886
======= =======
Weighted average number of common shares
Outstanding during the period 11,890 11,813
Additional shares attributable to common
Stock equivalents 190 223
--- ---
12,080 12,036
====== ======
Net income per share $ .28 $ .24
======= =======
NOTE 4: LOAN AND LOAN MODIFICATION AGREEMENT
On April 3, 2000, the Company and a bank entered into a new Revolving Loan and
Credit Agreement (the "Agreement") to replace the May 15, 1992 Revolving Loan
and Credit Agreement, as amended. The Agreement provides the Company with an
unsecured revolving line of credit commitment of up to $40 million and bears
interest at the lesser of 1.5% below prime rate or a LIBOR-based rate. Under the
most restrictive covenants of the Agreement, the Company is required to maintain
specified shareholder's equity and net income levels. The Company is required to
pay a commitment fee to the bank at a rate per annum equal to .18% on the
unutilized portion of the revolving line commitment over the term of the
agreement. The term of the Agreement extends to April 3, 2003.
On May 26, 2000, subsequent to the press release dated May 16, 2000, the Company
negotiated a modification to its revolving loan and credit agreement (the
"agreement") entered into on April 3, 2000. The agreement modified the terms
"Due on Demand" and accordingly the Company has reclassified the debt as long
term.
Management's Discussion and Analysis of Financial
Condition and Results of Operations
GENERAL
Fred's business is subject to seasonal influences, but the Company has tended to
experience less seasonal fluctuation than many other retailers due to the
Company's mix of everyday basic merchandise and pharmacy business. The fourth
quarter is typically the most profitable quarter because it includes the
Christmas selling season. The overall strength of the fourth quarter is
partially mitigated, however, by the inclusion of the month of January, which is
generally the least profitable month of the year.
The impact of inflation on labor and occupancy costs can significantly affect
Fred's operations. Many of Fred's employees are paid hourly rates related to the
federal minimum wage and, accordingly, any increase affects Fred's. In addition,
payroll taxes, employee benefits and other employee-related costs continue to
increase. Occupancy costs, including rent, maintenance, taxes and insurance,
also continue to rise. Fred's believes that maintaining adequate operating
margins through a combination of price adjustments and cost controls, careful
evaluation of occupancy needs, and efficient purchasing practices is the most
effective tool for coping with increasing costs and expenses.
RESULTS OF OPERATIONS
Thirteen Weeks Ended April 29, 2000 and May 1, 1999
Net sales increased to $176.7 million in 2000 from $154.9 million in 1999, an
increase of $21.8 million or 14.1%. The increase was attributable to comparable
store sales increases of 9.4% ($13.5 million) and sales by stores not yet
included as comparable stores ($8.4 million). Sales to franchisees decreased $.1
million in 2000. The sales mix for the period was 47.6% Hardlines, 32.8%
Pharmacy, 14.6% Softlines, and 5.0% Franchise. This compares with 47.9%
Hardlines, 32.7% Pharmacy, 13.7% Softlines, and 5.7% Franchise for the same
period last year.
Gross profit decreased to 27.8% of sales in 2000 compared with 28.6% of sales in
the prior-year period. Gross profit margins decreased as a result of the
increased mix of certain categories in hardline sales and strong quarterly sales
in pharmacy which typically carry lower margins.
Selling, general and administrative expenses increased to $43.2 million in 2000
from $39.4 million in 1999. As a percentage of sales, expenses decreased to
24.4% of sales compared to 25.4% of sales last year. Selling, general and
administrative expenses were improved primarily due to controlling costs and
improving efficiencies in the store and pharmacy operations. Improved
performance in the distribution operations and better merchandising practices
have resulted in stronger control of labor and related costs at the store.
Interest expense increased to $.7 million in 2000 from $.5 million in 1999,
reflecting higher average revolver borrowings than last year for inventory
purchases to improve store in-stock positions.
LIQUIDITY AND CAPITAL RESOURCES
Due to the seasonality of Fred's business and the continued increase in the
number of stores and pharmacies, inventories are generally lower at year-end
than at each quarter-end of the following year.
Cash flow provided by operating activities totaled $2.6 million during the
thirteen-week period ended April 29, 2000. Cash was primarily used to increase
inventories and reduce accounts payable. Total inventories increased
approximately $3.7 million in the first quarter of 2000. This increase was
primarily attributable to 4 new stores and 3 new pharmacies in the first quarter
of 2000, coupled with the additional inventory necessary to improve store
in-stock positions over 1999. Accounts payable decreased approximately $2.6
million in the first quarter of 2000.
Cash flows used by investing activities totaled $4.4 million, and consisted
primarily for capital expenditures associated with the Company's store and
pharmacy expansion program. During the first quarter, the Company opened 4
stores and closed 1 store. The Company expects to open 12 to 15 stores in the
second quarter, and approximately 20 to 30 stores for the year. The Company's
capital expenditure plan for the year 2000 is in the $12 million dollar range
and will approximate depreciation expense for the year.
Cash flows provided by financing activities totaled $3.3 million and included
$3.9 million of borrowings under the Company's revolver for inventory and
accounts payable needs.
On April 3, 2000, the Company and a bank entered into a new Revolving Loan and
Credit Agreement (the "Agreement") to replace the May 15, 1992 Revolving Loan
and Credit Agreement, as amended. The Agreement provides the Company with an
unsecured revolving line of credit commitment of up to $40 million and bears
interest at the lesser of 1.5% below prime rate or a LIBOR-based rate. Under the
most restrictive covenants of the Agreement, the Company is required to maintain
specified shareholder's equity and net income levels. The Company is required to
pay a commitment fee to the bank at a rate per annum equal to .18% on the
unutilized portion of the revolving line commitment over the term of the
agreement. The term of the Agreement extends to April 3, 2003. The borrowings
outstanding under this agreement at April 29, 2000 were $32.5 million. The
borrowings outstanding under the previous Agreement at May 1, 1999 were $16.5
million.
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. Borrowings outstanding under
this Loan Agreement totaled $9,954,000 at April 29, 2000 and $11,322,000 at May
1, 1999.
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 $2,250,000 to 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
totaled $1,734,000 at April 29, 2000 and $2,250,000 at May 1, 1999.
The Company believes that sufficient capital resources are available in both the
short-term and long-term through currently available cash and cash generated
from future operations and, if necessary, the ability to obtain additional
financing.
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.
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The Company has no holdings of derivative financial or commodity instruments as
of April 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.
RECENT ACCOUNTING PRONOUNCEMENTS
In December 1999, the Securities and Exchange Commission issued Staff Accounting
Bulletin No. 101 "Revenue Recognition in Financial Statements" (SAB 101). SAB
101 deals with various revenue recognition issues, several which are common
within the retail industry including treatment of revenue recognition on layaway
sales. The company is currently developing a system to report the effects of SAB
101. However, the effect of layaway sales in this quarter is not material in
relation to the overall financial statements.
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Not Applicable.
Item 2. Changes in Securities
Not Applicable.
Item 3. Defaults Upon Senior Securities
Not Applicable.
Item 4. Submission of Matters to a Vote of Securities Holders
Not Applicable.
Item 5. Other Information
Not Applicable.
Item 6. Exhibits and Reports on Form 8-K
Exhibits:
Exhibit 10.24-Loan modification agreement dated May
26, 2000 (modifies the Revolving Loan
agreement included as Exhibit 10.23)
[incorporated herein by reference to the
Company's report on Form 10-K for the year
ended January 29, 2000.]
Exhibit 27 - Financial Data Schedule (Edgar Filing
only)
Reports on Form 8-K:
Not Applicable.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FRED'S, INC.
Date: June 9, 2000 /s/ Michael J. Hayes
------------------- --------------------
Michael J. Hayes
Chief Executive Officer
Date: June 9, 2000 /s/ Jerry A. Shore
------------------- ------------------
Jerry A. Shore
Chief Financial Officer
<PAGE>
EXHIBIT 10.24
MODIFICATION AGREEMENT
THIS MODIFICATION AGREEMENT, made and entered into on this 26th day of
May, 2000, by and between UNION PLANTERS BANK, N.A. ("Bank"), SunTrust Bank
("Documentation Agent"), and FRED'S, INC., a Tennessee corporation ("Borrower").
WITNESSETH:
WHEREAS, Borrower executed a promissory note (the "Note") dated April
3, 2000, in the original principal sum of Forty Million Dollars ($40,000,000.00)
held by and payable to the Bank, which Note was executed in connection with the
Credit Agreement (Restated), dated March 27, 2000, effective as of April 3, 2000
(the "Agreement"), by and among Borrower, Documentation Agent and Bank; and
WHEREAS, Borrower desires to obtain from Bank and Documentation Agent a
modification of the terms of payment of the Note, and Bank and Documentation
Agent are willing to grant said modification upon the agreement of Borrower to
make, keep and perform all of the terms, conditions and covenants hereinafter
set forth.
NOW, THEREFORE, in consideration of the premises, the sum of Ten
Dollars ($10.00) cash in hand paid and other valuable consideration, the receipt
and sufficiency of which are hereby acknowledged, the parties do hereby agree as
follows:
1. The terms of the Note are hereby modified, effective as of April 3, 2000, to
provide that the Note shall not be payable on demand absent the occurrence of an
event of default or other condition which would allow Bank to accelerate the
maturity pursuant to the terms of the Agreement. The outstanding principal
balance of the Note and accrued but unpaid interest shall be due and payable on
April 3, 2003. Interest on the outstanding principal balance shall accrue and be
payable as provided in the Agreement.
2. Bank agrees to make a notation upon its records showing that the Note has
been modified as set forth herein.
3. In consideration of the modification granted herein, Borrower promises to pay
the indebtedness evidenced by the Note as set forth hereinabove, to keep and
perform all the covenants, terms and conditions contained in any agreement or
document governing the terms and conditions of the borrowing affected hereby, in
default of which the holder of said indebtedness, at its option, may declare
said indebtedness accelerated and matured for all purposes, and may proceed to
exercise, at its option, any right or privilege granted in any documents or by
law. It is expressly understood and agreed that the terms, covenants and
conditions of all instruments evidencing the aforesaid indebtedness shall remain
in full force and effect, and shall in no manner be affected by the execution of
this Modification Agreement except as the same are expressly modified herein.
4. This Modification Agreement shall be binding upon and inure to the benefit of
the parties hereto, successors, assigns, transferees and grantees, and shall be
governed and construed in accordance with the laws of the State of Tennessee.
5. IN WITNESS WHEREOF, the parties hereunto have executed this Agreement on the
date first above written.
BANK: BORROWER:
UNION PLANTERS BANK, N.A. FRED'S, INC.
By:/s/ Elizabeth Rouse By:/s/ Jerry A. Shore
------------------- ------------------
Title: Senior Vice President Title: Chief Financial Officer
DOCUMENTATION AGENT:
SUNTRUST BANK
By: /s/ B.W. Ford
-------------
Title: Vice President
