Registration No. 333-______
As filed with the Securities and Exchange Commission on August 28, 2001
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
Fred's, Inc.
(Exact name of registrant as specified in its charter)
Tennessee
(State or other jurisdiction of
incorporation or organization)
62-0634010
(I.R.S. Employer Identification Number)
4300 New Getwell Road
Memphis, Tennessee 38118
(901) 365-8880
(Address, including zip code, and telephone number, including
area code, of registrant's principal executive offices)
Michael J. Hayes
Chief Executive Officer
Fred's, Inc.
4300 New Getwell Road
Memphis, Tennessee 38118
(901) 365-8880
(Name, address, including zip code, and telephone number, including
area code, of agent for service)
With copies to:
Samuel D. Chafetz, Esq. Michael M. Froy, Esq.
Baker, Donelson, Bearman & Caldwell P.C. Sonnenschein Nath & Rosenthal
First Tennessee Building, Suite 2000 8000 Sears Tower
Memphis, Tennessee 38103 Chicago, Illinois 60606
(901) 526-2000 (312) 876-8000
---------------------------
Approximate date of commencement of proposed sale to the public: As soon as
practicable after the effective date of this Registration Statement.
---------------------------
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, check the following
box: [ ]
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act
of 1933, other than securities offered only in connection with dividend or
interest reinvestment plans, check the following box: [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering: [ ]
If this Form is to be a post-effective amendment filed pursuant to Rule
462(c) under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering: [ ]
If the delivery of the prospectus is expected to be made pursuant to Rule
434, check the following box: [ ]
CALCULATION OF REGISTRATION FEE
==================================== =================== ======================== ========================== ======================
Title of Each Class of Securities Amount to be Proposed Maximum Proposed Maximum Amount of
to be Registered Registered Offering Price per Aggregate Offering Price Registration Fee (1)
Unit (1) (1)
------------------------------------ ------------------- ------------------------ -------------------------- ----------------------
Class A Common Stock, no par value 1,815,000 $26.80 $48,642,000 $12,160.50
==================================== =================== ======================== ========================== ======================
(1) Estimated solely for the purpose of calculating the registration fee.
Pursuant to Rule 457(c) under the Securities Act of 1933, as amended,
the proposed maximum offering price per share and the registration fee
have been computed based on the average of the high and low sales
prices of the Common Stock as quoted on the Nasdaq National Market on
August 20, 2001.
The registrant hereby amends this registration statement on such date or
dates as may be necessary to delay its effective date until the registrant shall
file a further amendment which specifically states that this registration
statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the registration statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
SUBJECT TO COMPLETION, DATED AUGUST 27, 2001
PROSPECTUS
1,650,000 Shares
[FRED'S LOGO]
Class A Common Stock
Fred's, Inc., and the selling shareholders are offering shares of Class A
Common Stock in a firmly underwritten offering. Fred's is offering 1,500,000
shares and the selling shareholders are offering 150,000 shares. Fred's will not
receive any of the proceeds of shares sold by the selling shareholders.
The Class A Common Stock is quoted on the Nasdaq National Market under the
symbol "FRED." On August 23, 2001, the last reported sale price of the Class A
Common Stock on the Nasdaq National Market was $30.05 per share.
Investing in our stock involves risks. See "Risk Factors" beginning on page
7.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined that
this prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
=============================================================== ====================== ======================
Per Share Total
--------------------------------------------------------------- ---------------------- ----------------------
Public Offering Price $ $
Underwriting Discount $ $
Proceeds to Fred's, Inc. $ $
Proceeds to Selling Shareholders $ $
=============================================================== ====================== ======================
The underwriters may purchase up to an additional 165,000 shares at the
public offering price, less the underwriting discount, from the selling
shareholders, within 30 days from the date of this prospectus to cover
over-allotments.
William Blair & Company SunTrust Robinson Humphrey
Morgan Keegan & Company, Inc.
The date of this prospectus is , 2001.
[Inside front cover:
Map of U.S. indicating
states with Fred's stores
and the number thereof
per state.]
Our principal executive offices are
located at 4300 New Getwell Road,
Memphis, Tennessee 38118 and our
telephone number is (901)
365-8880. Our website is
www.fredsinc.com.
PROSPECTUS SUMMARY
This summary highlights selected information from this prospectus and may
not contain all of the information that may be important to you. Before you
decide to invest in Fred's, Inc., you should read the entire prospectus
carefully, including the "Risk Factors" section, our financial statements and
the related notes included in this prospectus, and the documents incorporated by
reference into this prospectus. References to "Fred's", "we", "our", and "us"
refer to Fred's, Inc., but not to the underwriters or selling shareholders.
The information presented in this prospectus has been adjusted to reflect
the 5-for-4 stock-split of our common stock effected June 18, 2001.
Except as otherwise noted, the term "common stock" refers to our Class A
Common Stock when used in this prospectus. References to a fiscal year by date
refer to the year in which the fiscal year begins. For example, the fiscal year
which began on January 30, 2000, and ended on February 3, 2001, is referred to
as "fiscal 2000. "
FRED'S, INC.
Fred's, Inc., founded in 1947, operates 373 discount general merchandise
stores, including 27 franchised Fred's stores, in 11 states primarily in the
southeastern United States. 202 of our stores have full service pharmacies. Our
stores offer the convenience of a small-format discount retailer or drug store,
but typically offer a broader selection of merchandise.
Our stores stock over 12,000 frequently purchased items which address the
everyday needs of our customers, including household goods, apparel, health and
beauty aids, food, tobacco and cleaning supplies. In addition to nationally
recognized brand name products, our merchandise includes private label products
and, to a lesser extent, opportunistic buys. At an average of approximately
15,000 square feet, our stores are smaller than those of a mass merchant
(typically over 100,000 square feet), but larger than a small-format discount or
dollar store (typically under 10,000 square feet). We believe our customers shop
at Fred's stores for our convenient locations, merchandise assortment,
competitive prices and advertised promotions.
Our stores generally serve low, middle and fixed income families in small
to medium-sized markets. The typical Fred's customer is female with an average
household income of less than $30,000. Our convenient format enables us to
capture small ticket, high frequency shopping trips. As a result, our average
transaction size is approximately $11.80 for general merchandise, or
approximately $16.00 if pharmacy sales are included.
During the past three years, we have grown our net sales and net income
significantly. In fiscal 2000, we generated net sales of approximately $781.2
million, reflecting compound annual growth of 14.0% since fiscal 1998. During
the same period, we grew our net income at a compound annual growth rate of
29.7% to $14.9 million. We have also achieved attractive financial results
during the first 26 weeks of fiscal 2001, with a net sales increase of 17.2% and
net income growth of 25.5% over the same period in the prior year.
--------------------------------------------------------------------------------
Competitive Differentiation
--------------------------------------------------------------------------------
We believe our store format and strategy, which combine attractive elements
of a discount or dollar store, drug store and mass merchant, provide us
significant competitive advantages.
Convenient Store Locations and Format. Our store location strategy targets
shoppable, neighborhood locations with ample storefront parking and easy access.
Most of our stores are located in rural and suburban towns that have populations
under 15,000. Additionally, our stores are designed to be easily navigable for
our customers. Our emphasis on convenience positions us to compete effectively
with various retail formats and capture a higher share of our customers' small
ticket, frequent shopping requirements.
Pricing and Promotion. A key element of our strategy is to offer
competitive pricing on consumable items and a strong price-to-value relationship
on our expanded general merchandise assortment. As part of our strategy to
appeal to the high frequency shopper, we recently introduced everyday low
pricing at all of our locations. In addition, we employ an aggressive
promotional strategy generally utilizing 13 advertising circulars per year,
which we believe is more than our competitors.
Broad Product and Service Offerings. With an average store size of
approximately 15,000 square feet, we are able to offer a much broader assortment
of merchandise and services than our small-format competitors. Our merchandise
mix features a high proportion of national-brand items, private label products
including "Fred's" branded products and, to a lesser extent, opportunistic buys.
In addition to lower margin consumable goods typically found at a small-format
discount retailer or dollar store, we offer our customers an attractive
selection of higher margin categories, such as apparel and home furnishings, to
complement our merchandise assortment and enhance our store profitability.
Pharmacy Services. 202 of our 373 stores have a full-service pharmacy
offering branded and generic pharmaceuticals. We believe our pharmacies generate
improved overall sales productivity, attract a wider income and age customer
base and enhance customer loyalty. 124 of our pharmacies have added
drive-through windows which further enhances our convenient shopping experience.
Given continued expansion of insurance coverage and the introduction of new
prescription medicines, the retail prescription drug industry is expected to be
one of the fastest growing retail segments in the United States over the next
ten years.
--------------------------------------------------------------------------------
Growth And Expansion Strategy
--------------------------------------------------------------------------------
Over the past two years, we have added several key members to our senior
management team and strengthened our store operations and merchandising
strategies. Numerous improvements have been made to our merchandise assortment,
buying process, pricing strategy, marketing programs and real estate selection
and development expertise. We have significantly improved our information
systems and enhanced our distribution center capacity. We believe these
enhancements to management and infrastructure, and the growing advantages of
scale and sophistication, position us well for accelerated growth and improved
profitability.
Accelerate Store Growth. We believe there are a significant number of
markets and sites which meet our demographic criteria for opening a new store.
Our new store development process has also recently been improved, reducing the
time and costs of opening new stores. Consequently, we plan to open
approximately 35 stores in fiscal 2001, 25 of which were opened in the first
half of this year, and 60 stores in fiscal 2002. We anticipate new store growth
of approximately 15% over the next several years, as compared to a rate of 10%
during the past three years. Because we have also expanded the size of our new
store prototype, we also expect square footage to grow at a slightly faster rate
than in the past. We expect to continue to focus our new store development
primarily in small to medium sized markets within our present geographic area.
Expansion of our pharmacy operations will also continue to be a component of our
growth strategy.
Increase Store Sales. We have implemented and continue to undertake a
number of merchandising and marketing initiatives to improve our comparable
store sales. As a result of our efforts, we have produced comparable store sales
increases averaging 9.2% in fiscal 2000 and 8.6% during the first 26 weeks of
fiscal 2001. We believe that we can continue to achieve further growth in
comparable store sales in the future. Such enhancements include improved
merchandise presentation, heightened focus on customer satisfaction, better
internal and external signage, enhanced marketing programs and continued store
remodeling.
THE OFFERING
Common stock offered by Fred's, Inc..........................1,500,000 shares
Common stock offered by the selling shareholders............. 150,000 shares
Total shares to be offered.................................. 1,650,000 shares
Common stock outstanding after the offering.................16,744,986 shares(1)
Use of proceeds.................................We will receive approximately
$ million in net proceeds
in this offering. We intend
to use the proceeds:
o for working capital and other
general corporate purposes;
o to accelerate new store and
pharmacy openings; and
o to repay long-term debt and to
reduce debt under our
revolving line of credit.
Nasdaq National Market symbol..........................................FRED
(1)The information regarding shares of common stock outstanding after the
offering is based on the number of shares of common stock outstanding as of
August 23, 2001 and assumes that the underwriters do not exercise their
over-allotment option for 165,000 shares.
SUMMARY CONSOLIDATED FINANCIAL AND OPERATING DATA
The statement of operations for the five years ended February 3, 2001 have
been derived from the audited consolidated financial statements included
elsewhere in this prospectus. The balance sheet statement of operations data as
of and for the 26 weeks ended July 29, 2000 and August 4, 2001 have been derived
from our unaudited consolidated financial statements which were prepared on the
same basis as our audited financial statements and include, in our opinion, all
adjustments necessary to present fairly the information presented for interim
periods. Interim period results, however, are not necessarily indicative of
results that will be obtained for the full year. The summary financial
information below has been adjusted to reflect the 5-for-4 stock-split effected
June 18, 2001.
For the Years Ended 26 Weeks Ended
--------------------------------------------------------- -------------------
February 1, January 31, January 30, January 29, February 3, July 29, August 4,
1997 1998 1999(3) 2000 2001 2000 2001
---- ---- ---- ---- ---- ---- ----
(unaudited)
(in thousands, except per share amounts and selected operating data)
Statement of Operations Data:
Net sales $ 418,297 492,236 600,902 $ 665,777 781,249 356,485 $ 417,637
Cost of goods sold 306,054 357,135 436,523 478,138 566,115 258,435 303,098
------- ------- ------- ------- ------- ------- -------
Gross profit
112,243 135,101 164,379 187,639 215,134 98,050 114,539
Selling, general and administrative
expenses 102,175 119,590 149,668 168,696 189,414 89,198 103,538
Restructuring and other charges 3,289 - - - - - -
------- ------- ------- ------- ------- ------- -------
Operating income
6,779 15,511 14,711 18,943 25,720 8,852 11,001
Interest expense, net 271 (149) 1,106 2,504 3,226 1,436 1,336
------- ------- ------- ------- ------- ------- -------
Income before taxes
6,508 15,660 13,605 16,439 22,494 7,416 9,665
Income taxes 702 5,873 4,775 5,737 7,645 2,417 3,392
------- ------- ------- ------- ------- ------- -------
Net income $ 5,806 $ 9,787 $ 8,830 $ 10,702 $ 14,849 $ 4,999 $ 6,273
======== ======== ======== ========= ========= ======== ========
Net Income per share
Basic $0.40 $0.67 $0.60 $0.72 $0.99 $0.34 $0.42
Diluted $0.40 $0.66 $0.58 $0.71 $0.98 $0.33 $0.41
Weighted average shares outstanding:
Basic 14,542 14,587 14,748 14,784 14,921 14,860 15,056
Diluted 14,571 14,828 15,098 15,090 15,246 15,194 15,485
Selected Operating Data: (1)
Stores open at beginning of period 206 213 261 283 293 293 321
Stores opened/acquired during period 13 49 29 20 32 18 25
Stores closed during period (6) (1) (7) (10) (4) (2) 0
------- ------- ------- ------- ------- ------- -------
Stores open at end of period 213 261 283 293 321 309 346
Number of stores with pharmacies at end 101 141 180 182 198 189 202
of period
Average net sales per store $2,051,000 $2,022,000 $2,036,000 $2,207,000 $2,440,000
Average sales per square foot $ 149 $ 159 $ 171 $ 174 $ 189
Square feet of selling space at end of 2,828,000 3,362,000 3,680,000 3,966,000 4,346,000 4,171,000 4,761,000
period
Average square feet of selling space per 13,277 13,875 13,925 14,015 14,690 14,669 14,662
store
Comparable store sales increases 2.20% 8.30% 5.60% 5.20% 9.20% 9.70% 8.60%
As of August 4, 2001
------------------------
Actual As Adjusted(2)
------------------------
(in thousands)
Balance Sheet Data:
Working capital $119,556 $
Total assets 262,875
Total debt 39,013
Shareholders' equity 167,019
------------------------------------------
(1) Excludes franchise stores. There were 32, 31, 29, 26, 26 and 27 franchise
stores at the end of each of fiscal 1996, 1997, 1998, 1999, 2000, and the
26 weeks ended August 4, 2001, respectively.
(2) As adjusted for this offering, less expenses and underwriting discount.
(3) Results for fiscal 1998 include the effect of the 1998 adoption of LIFO for
pharmacy inventories ($3,108,000).
RISK FACTORS
You should carefully consider the following risks, as well as the other
information contained in this prospectus, before investing in shares of our
common stock. If any of the following risks actually occur, our business could
be harmed. In that case, the trading price of the common stock could decline,
and you might lose all or part of your investment. You should refer to the other
information set forth in this prospectus and our consolidated financial
statements and the related notes included elsewhere in this prospectus.
--------------------------------------------------------------------------------
We may not be able to successfully execute our expansion plan.
--------------------------------------------------------------------------------
The growth of our net sales and earnings will depend in part on our ability
to expand our operations through the opening of new stores in existing and new
markets and to operate those stores profitably. We have grown rapidly primarily
through opening new stores, some of which include a pharmacy. We may not be able
to open all of the stores contemplated by our growth strategy, and new stores
that we open may not be profitable. A significant growth area for us has been
our pharmacy business. In fiscal 2000, we added a net of 16 new pharmacies. Our
primary mechanism for adding new pharmacies is through the acquisition of
prescription files from independent pharmacies. The availability of pharmacy
file acquisition candidates in our targeted expansion areas may be limited and
will depend on a variety of factors.
Our operating complexity and management responsibilities have increased,
and will continue to increase, as we grow. Our growth also requires that we
continue to expand and improve our operating and financial systems and to
expand, train and manage our employee base. Also, expansion into new market
areas may prove to be difficult and costly. In addition, as we continue to open
or acquire new stores, we may be unable to hire a sufficient number of qualified
store personnel or successfully integrate the stores into our business. Our
expansion prospects also depend on a number of other factors, many of which are
out of our control, including, among other things:
o general and local economic conditions;
o acceptance of the Fred's concept in particular markets;
o competition;
o consumer preferences;
o financing and working capital requirements;
o our ability to provide adequate distribution capabilities as well
as the costs and risks associated with the potential need to
construct additional distribution facilities to support growth;
o our ability to negotiate store leases on favorable terms;
o our ability to improve costs and timing associated with opening
new locations; and
o availability of quantities of close out or special situation
products.
Failure to realize these growth plans could be detrimental to our goals of
increasing market share and increasing same store revenues. Additionally, we
cannot assure you that our newly opened stores will not adversely affect the
revenues and profitability of our existing stores.
We depend on key personnel and may not be able to retain these employees or
recruit additional qualified personnel, which would harm our business.
Our success depends to a large extent on the continued service of our
executive management team. Departures by our executive officers could have a
negative impact on our business, as we may not be able to find suitable
management personnel to replace departing executives on a timely basis. We do
not maintain key-man life insurance on any of our executive officers.
In addition, as our business expands, we believe that our future success
will depend greatly on our continued ability to attract and retain highly
skilled and qualified personnel. Recently, competition for qualified pharmacists
and other pharmacy professionals has been especially strong. Although we
generally have been able to meet our staffing requirements in the past, our
inability to do so in the future at costs that are favorable to us, or at all,
could impair our ability to increase revenue, and our customers could experience
lower levels of customer care.
--------------------------------------------------------------------------------
We may not be able to achieve comparable store sales gains in the future.
--------------------------------------------------------------------------------
A variety of factors affect our comparable store sales results, including:
o economic conditions;
o the retail sales environment;
o the availability and cost of credit from vendors;
o the results of our merchandising strategies;
o the success of our marketing and promotional programs; and
o our ability to otherwise execute our business strategy.
There can be no assurance that we will continue to achieve comparable
stores sales gains. Our comparable store sales results could cause the price of
our common stock to fluctuate substantially.
--------------------------------------------------------------------------------
We face significant competition in our markets.
--------------------------------------------------------------------------------
We operate in highly competitive markets. In our markets, we compete
against national, regional and local discount or dollar store retailers, chain
drug stores, supermarkets, combination food and drugstores, discount general
merchandise stores, mass merchandisers, independent drugstores and local
merchants. In addition, other chain stores may enter our markets and become
significant competitors in the future. Many of our competitors have greater
financial resources than we do. Economic pressures on or bankruptcies of vendors
or competitors could result in increased pricing pressures. This competition
could adversely affect our results of operations and financial condition in the
future. In addition to competition from the discount retail and drugstore
chains, our pharmacy business also competes with hospitals, health maintenance
organizations, mail order and internet-based prescription drug providers. Our
stores compete, among other things, on the basis of convenience of location and
store layout, product mix, selection, customer convenience and price.
--------------------------------------------------------------------------------
We require a significant amount of cash flow from operations and third party
financing to expand our business in accordance with our growth strategy and to
fund our other liquidity needs.
--------------------------------------------------------------------------------
We cannot assure you that we will be able to generate sufficient cash flow
from operations or that future borrowings will be available to us under our
existing credit agreement in an amount adequate to grow our business as
currently planned and to fund our other liquidity needs. We currently expect to
spend approximately $14 million in fiscal 2001 on capital expenditures,
primarily for new and replacement stores, and, in addition, we plan to spend
approximately $1.5 million in fiscal 2001 for lease and pharmacy customers file
acquisition costs. We also require working capital to support inventory for our
existing stores. Failure to generate or raise sufficient funds may require us to
modify, delay or abandon some of our future growth or expenditure plans. Also,
our results would be adversely affected if interest rates increase from present
levels.
--------------------------------------------------------------------------------
We would be materially and adversely affected if our distribution center is shut
down.
--------------------------------------------------------------------------------
We operate an approximately 850,000 square foot centralized distribution
center in Memphis, Tennessee. Approximately 60% of the merchandise received by
our stores in fiscal 2000 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. If our distribution center is shut down for any reason, we could
incur significantly higher costs and longer lead times associated with
distributing our products to our stores during the time it takes for us to
reopen or replace the center. We maintain business interruption insurance to
protect us from the costs relating to matters such as a shutdown, but we cannot
assure you that our insurance will be sufficient, or that the insurance proceeds
will be timely paid to us, in the event of a shutdown.
--------------------------------------------------------------------------------
Our operations are subject to trends in the healthcare industry.
--------------------------------------------------------------------------------
Pharmacy sales represent a significant and growing percentage of our total
sales. Pharmacy sales accounted for 32.7% of our net sales for fiscal 2000 and
35.5% of our net sales for the first 26 weeks of fiscal 2001. Revenues are
affected by changes within the health care industry, including changes in
programs providing for reimbursement of the cost of prescription drugs by
third-party payors, such as government and private sources, and regulatory
changes relating to the approval process for prescription drugs. Pharmacy sales
generally have not only lower margins than general merchandise sales, but are
also subject to increasing margin pressure, as managed care organizations,
insurance companies, employers and other third-party payors, which collectively
we call third-party plans, become more prevalent in our market area and as these
plans continue to seek cost containment. A growing percentage of our
prescription drug volume has been accounted for by sales to customers who are
covered by third-party payment programs. Pharmacy sales to persons covered by
third-party plans accounted for 83% of our total pharmacy sales for fiscal 2000
and 84% of our total pharmacy sales for the first 26 weeks of fiscal 2001.
Although contracts with third-party payors may increase the volume of
prescription sales and gross profits, third-party payors typically reimburse us
at lower rates than those on non third-party prescriptions. Accordingly, there
has been downward pressure on gross profit margins on sales of prescription
drugs which is expected to continue in the future. Also, any substantial delays
in reimbursement, significant reduction in coverage or payment rates from
third-party plans can have a material adverse effect on our business.
Healthcare reform initiatives of federal and state governments may also
affect our revenues from prescription drug sales. These initiatives (at both the
federal and state levels) include:
o changes in programs providing for reimbursement for the cost of
prescription drugs by third-party plans;
o proposals designed to significantly reduce spending on Medicare,
Medicaid and other government programs; and
o regulatory changes relating to the approval process for
prescription drugs.
These initiatives could lead to the enactment of federal and state
regulations that could adversely impact our prescription drug sales and,
accordingly, our results of operations. Various proposals relating to federal
prescription drug payment legislation or regulation are currently being
considered which would likely have the effect of lowering the payment or
reimbursement received by pharmacies from purchases made by persons covered by
the program.
--------------------------------------------------------------------------------
Our operations are subject to federal and state laws and regulations and
potential liabilities, which could adversely impact our business if changed.
--------------------------------------------------------------------------------
Our business is subject to various federal and state regulations. For
example, we are subject to federal, state and local licensing and registration
regulations relating to, among other things, our pharmacy operations. Violations
of any of these regulations could result in various penalties, including
suspension or revocation of our licenses or registrations or monetary fines. We
are also subject to federal and state laws that require our pharmacists to offer
counseling, without additional charge, to their customers about medication,
dosage, delivery systems, common side effects and other information the
pharmacists deem significant. Our pharmacists also may have a duty to warn
customers regarding any potential negative effects of a prescription drug if the
warning could reduce or negate these effects. Additionally, we are subject to
federal Drug Enforcement Agency and state regulations relating to our pharmacy
operations, including purchasing, storing and dispensing of controlled
substances. We are also subject to various laws and regulations relating to
food, over the counter medications and other products sold by us, including
products sold by us on a private label basis. Failure to comply with such laws
or regulations or sales of products that are defective or result in injury to
people or property could adversely affect our business or profitability. Laws
governing our employee relations, including minimum wage requirements, overtime
and working conditions also impact our business. Increases in the federal
minimum wage rate, employee benefit costs or other costs associated with
employees could significantly increase our cost of operations, which could
adversely affect our level of profitability.
--------------------------------------------------------------------------------
We depend on our major suppliers for merchandise.
--------------------------------------------------------------------------------
Our business is dependent upon our ability to purchase brand name and other
merchandise at competitive prices. A loss of one or more key suppliers in
certain product categories could have a material adverse effect on our business.
Although our relations with key suppliers are currently satisfactory and we have
adequate sources of brand name and other merchandise at competitive prices,
there can be no assurance that we will be able to acquire such merchandise at
comparable prices or on comparable terms in the future.
Also, we currently operate under a purchase and supply contract with one
supplier as our primary wholesaler to provide substantially all of our
prescription drugs. During fiscal 2000, approximately 95% of our total
prescription drug purchases were made from this primary pharmaceutical
wholesaler. Although there are alternative wholesalers that supply
pharmaceutical products, any unplanned loss of this supplier could have a
short-term gross margin impact on our business until an alternative wholesaler
arrangement could be implemented.
--------------------------------------------------------------------------------
An increase in the cost or a disruption in the flow of our imported goods may
decrease our sales and profits.
--------------------------------------------------------------------------------
We rely on imported goods to sell in our stores. Merchandise imported
directly from overseas manufacturers and agents accounts for a portion of our
total purchases. In addition, we believe that a small portion of our goods
purchased from domestic vendors is imported. East Asia is the source of a
substantial majority of our imports. Imported goods are generally less expensive
than domestic goods and contribute significantly to our favorable profit
margins. A disruption in the flow of our imported merchandise or an increase in
the cost of those goods may decrease our sales and profits.
If imported merchandise becomes more expensive or unavailable, the
transition to alternative sources may not occur in time to meet our demands.
Products from alternative sources may also be of lesser quality and more
expensive than those we currently import. Risks associated with our use of
imported goods include disruptions in the flow of imported goods because of
factors such as raw material shortages, work stoppages, strikes and political
unrest; problems with oceanic shipping, including shipping container shortages;
economic crises and international disputes; and increases in the cost of
purchasing or shipping foreign merchandise resulting from failure of the United
States to maintain normal trade relations with source countries; import duties,
import quotas and other trade sanctions; and increases in shipping rates imposed
by the trans-Pacific shipping cartel.
--------------------------------------------------------------------------------
Shares eligible for public sale after this offering could adversely affect our
stock price.
--------------------------------------------------------------------------------
As of August 23, 2001, we had 15,244,986 shares of Class A Common Stock
outstanding. All of the shares of common stock being sold in this offering by
this prospectus will be freely tradeable without restriction or further
registration under the Securities Act of 1933, as amended, unless held by one of
our "affiliates," as that term is defined under Rule 144 under the Securities
Act, and those shares will be subject to the resale limitations of Rule 144
while those shares are held by one of our affiliates. We cannot predict the
effect, if any, that market sales of shares of common stock or the availability
of shares of common stock for sale will have on the market price of our common
stock from time to time. The sale of a substantial number of shares held by the
existing shareholders, whether pursuant to a subsequent public offering or
otherwise, or the perception that these sales could occur, could adversely
affect the market price of our common stock and could materially impair our
future ability to raise capital through an offering of equity securities.
--------------------------------------------------------------------------------
Our stock price may be volatile and could decline substantially.
--------------------------------------------------------------------------------
The stock market has, from time to time, experienced extreme price and
volume fluctuations. Many factors may cause the market price for our common
stock to decline following this offering, including:
o our operating results failing to meet the expectations of
securities analysts or investors in any quarter;
o downward revisions in securities analysts' estimates;
o material announcements by us or our competitors; and
o the other risk factors recited in this prospectus.
In the past, companies that have experienced volatility in the market price
of their stock have been the subject of securities class action litigation. If
we become involved in a securities class action litigation in the future, it
could result in substantial costs and diversion of management attention and
resources, thus harming our business.
--------------------------------------------------------------------------------
Our quarterly operating results will fluctuate due to seasonality and other
factors, and variation in quarterly results could cause the price of our common
stock to decline.
--------------------------------------------------------------------------------
Our business is seasonal. Historically, the highest volume of sales,
working capital requirements and net income occurs during the fourth fiscal
quarter and the lowest volume occurs during the second fiscal quarter. We expect
to continue to experience fluctuations in our net sales and net income due to a
variety of factors. A shortfall in results for the fourth quarter of any fiscal
year could have a material adverse effect on our annual results of operations.
Our quarterly results of operations also may fluctuate significantly as a result
of a variety of factors including:
o the timing of new store openings;
o net sales contributed by new stores;
o increases or decreases in comparable store sales;
o timing of certain holidays;
o changes in our merchandise, general economic, industry and
weather conditions that affect consumer spending; and
o actions of our competitors.
--------------------------------------------------------------------------------
Purchasers of our common stock in this offering will experience immediate and
substantial dilution.
--------------------------------------------------------------------------------
The price per share of our common stock in this offering is substantially
higher than the net tangible book value per share of our outstanding common
stock immediately after this offering. The net tangible book value per share
represents the amount of our total tangible assets less our total liabilities
divided by the total number of shares of common stock outstanding prior to this
offering. Accordingly, purchasers of common stock will experience immediate and
substantial net tangible book value dilution of approximately $ per share, or
approximately % of the offering price of $ per share.
--------------------------------------------------------------------------------
Provisions in our shareholder rights plan might deter acquisition bids for us.
--------------------------------------------------------------------------------
On October 12, 1998, we adopted a Shareholders Rights Plan granting a
dividend of one preferred share purchase right (a "Right") for each common share
outstanding. Each Right represents the right to purchase one-hundredth of a
share of preferred stock at a preset price to be exercised when any one
individual, firm, corporation or other entity acquires 15% or more of the common
stock then outstanding. The Rights would dilute the interests of an acquirer at
the time of exercise. The purpose of the Shareholders Rights Plan is to cause
prospective acquirers to approach our Board of Directors before attempting to
obtain control of Fred's. The potential for dilution as a result of the exercise
of Rights may deter otherwise interested parties from making acquisition bids.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION
Statements, other than those based on historical facts that we expect or
anticipate 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. Our ability to
achieve such results is subject to certain risks and uncertainties, including:
o economic and weather conditions which affect buying patterns of
our customers;
o changes in consumer spending and our ability to anticipate buying
patterns and implement appropriate inventory strategies;
o continued availability of capital and financing;
o competitive factors;
o changes in reimbursement practices for pharmaceuticals;
o governmental regulation; and
o other factors affecting business beyond our 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 us will be realized or that they will have the
expected effects on our business or operations. Actual results, performance or
achievements can differ materially from results suggested by these
forward-looking statements because of a variety of factors including those
described in the section of this prospectus entitled "Risk Factors" beginning on
page 8 in addition to those described above. We undertake no obligation to
update any forward-looking statement to reflect events or circumstances arising
after the date on which it was made.
USE OF PROCEEDS
Proceeds are estimated to be $ , assuming a price to the public of $ per
share, after deducting the underwriting discount and estimated offering expenses
payable by us. We will not receive any proceeds from the sale of shares by the
selling shareholders.
We will use the proceeds from the sale of common stock for working capital
and general corporate purposes, including continued store and pharmacy growth.
Until the funds are needed for such purposes, we plan to use the proceeds of the
offering to repay our long-term indebtedness and to reduce the amount of
indebtedness under our revolving line of credit; however, we are not committed
to do so, and we may instead use the proceeds for general working capital
purposes. We intend to maintain the availability of funds under our revolving
line of credit. We will retire unsecured term loans having balances at August 4,
2001 of $1.0 million (bearing interest at 6.15% and maturing on April 15, 2003)
and $8.0 million (bearing interest at 6.82% and maturing on November 1, 2005).
DIVIDEND POLICY
We have declared quarterly dividends without interruption since February
1993. However, we are not obligated to declare dividends, and we do so only at
the discretion of our Board of Directors after consideration of multiple
factors, including the availability of funds and our other needs for funds. As
adjusted for all stock splits, including the stock split effected on June 18,
2001, we have declared and paid quarterly dividends of $.04 per share each
quarter since February 1993.
PRICE RANGE OF COMMON STOCK
The Common Stock trades on the Nasdaq National Market under the symbol
"FRED". The table below sets forth the high and low stock prices for each fiscal
quarter since the first quarter of fiscal 1999 (adjusted for stock splits).
High Low
--------- ---------
Fiscal 1999
First Quarter................................... $12.00 $ 7.80
Second Quarter.................................. $14.10 $ 8.25
Third Quarter................................... $14.40 $ 8.55
Fourth Quarter.................................. $14.10 $ 9.20
Fiscal 2000
First Quarter................................... $12.90 $11.20
Second Quarter.................................. $17.00 $10.80
Third Quarter................................... $20.30 $14.40
Fourth Quarter.................................. $19.10 $13.60
Fiscal 2001
First Quarter................................... $21.00 $15.60
Second Quarter.................................. $26.75 $19.36
Third Quarter (through August 23, 2001).......... $30.30 $23.55
CAPITALIZATION
The following table sets forth our capitalization as of August 4, 2001, on
an actual basis and on an as adjusted basis to reflect the issuance of the
1,500,000 shares of common stock to be sold by us in this offering (after
deducting underwriting discounts and estimated offering expenses). You should
read this table in conjunction with our consolidated financial statements and
related notes contained in our Quarterly Report on Form 10-Q for the quarterly
period ended August 4, 2001, and with our consolidated financial statements and
related notes contained in our Annual Report on Form 10-K for the fiscal year
ended February 3, 2001, both of which are incorporated in this prospectus by
reference, and our audited and unaudited consolidated financial statements
included in this prospectus beginning on page F-2. Also, see the section of this
prospectus entitled "Selected Historical Financial and Operating Data" beginning
on page 16.
As of August 4, 2001
--------------------
Actual As Adjusted(1)
------ --------------
(unaudited; in thousands)
Short-term debt:
Current portion of long-term debt $ 2,228 $
Current installments of capital leases $ 627 $
Long-term debt, excluding current portion $ 34,627 $
Capital lease obligations, excluding current installments 1,531
------------- -------------
Total Debt $ 39,013 $
Shareholders' equity
Preferred stock, no par value, 10,000,000 shares
authorized; none issued or outstanding (actual or as
adjusted) --
Class A Common Stock, no par value, 30,000,000 shares
authorized; 15,229,044 shares issued and outstanding
(actual); 16,729,044 shares issued and outstanding (as
adjusted)(2) 70,767
Class B Common Stock, no par value, 11,500,000 shares
authorized; no shares issued and outstanding; (actual
or as adjusted) --
Retained earnings 96,395
Deferred Compensation on Restricted Stock Incentive Plan
(143)
------------- -------------
Total shareholders' equity $ 167,019 $
------------- -------------
Total capitalization $ 206,032 $
--------------
(1) As adjusted to reflect the receipt of the estimated net proceeds of this
offering of $ million.
(2) On an actual basis, excludes 655,677 shares subject to outstanding options
with a weighted average exercise price of $11.30 per share; 354,401 shares
are available for future grants under our Incentive Stock Option Plan. On
an as adjusted basis, excludes shares subject to outstanding options with a
weighted average exercise price of $ per share; shares are available for
future grants under our Incentive Stock Option Plan.
SELECTED FINANCIAL AND OPERATING DATA
The statement of operations and balance sheet data for the five years ended
February 3, 2001 have been derived from the audited consolidated financial
statements included elsewhere in this prospectus. The data as of and for the 26
weeks ended July 29, 2000 and August 4, 2001 have been derived from our
unaudited consolidated financial statements which were prepared on the same
basis as our audited financial statements and include, in our opinion, all
adjustments necessary to present fairly the information presented for interim
periods. However, interim period results are not necessarily indicative of
results that will be obtained for the full year. The selected financial
information below has been adjusted to reflect the 5-for-4 stock-split effected
June 18, 2001.
For the Years Ended 26 Weeks Ended
---------------------------------------------------------- ------------------
February 1, January 31, January 30, January 29, February 3, July 29, August 4,
1997 1998(3) 1999 2000 2001 2000 2001
---- ---- ---- ---- ---- ---- ----
(unaudited)
(in thousands, except per share amounts and selected operating data)
Statement of Operations Data:
Net sales $ 418,297 492,236 600,902 $ 665,777 781,249 356,485 $ 417,637
Cost of goods sold 306,054 357,135 436,523 478,138 566,115 258,435 303,098
------- ------- ------- ------- ------- ------- -------
Gross profit
112,243 135,101 164,379 187,639 215,134 98,050 114,539
Selling, general and administrative
expenses 102,175 119,590 149,668 168,696 189,414 89,198 103,538
Restructuring and other charges 3,289 - - - - - -
------- ------- ------- ------- ------- ------- -------
Operating income
6,779 15,511 14,711 18,943 25,720 8,852 11,001
Interest expense, net 271 (149) 1,106 2,504 3,226 1,436 1,336
------- ------- ------- ------- ------- ------- -------
Income before taxes
6,508 15,660 13,605 16,439 22,494 7,416 9,665
Income taxes 702 5,873 4,775 5,737 7,645 2,417 3,392
------- ------- ------- ------- ------- ------- -------
Net income $ 5,806 $ 9,787 $ 8,830 $ 10,702 $ 14,849 $ 4,999 $ 6,273
======== ======== ======== ========= ========= ======== ========
Net Income per share
Basic $0.40 $0.67 $0.60 $0.72 $0.99 $0.34 $0.42
Diluted $0.40 $0.66 $0.58 $0.71 $0.98 $0.33 $0.41
Weighted average shares outstanding:
Basic 14,542 14,587 14,748 14,784 14,921 14,860 15,056
Diluted 14,571 14,828 15,098 15,090 15,246 15,194 15,485
Selected Operating Data: (1)
Stores open at beginning of period 206 213 261 283 293 293 321
Stores opened/acquired during period 13 49 29 20 32 18 25
Stores closed during period (6) (1) (7) (10) (4) (2) 0
------- ------- ------- ------- ------- ------- -------
Stores open at end of period 213 261 283 293 321 309 346
Number of stores with pharmacies at end 101 141 180 182 198 189 202
of period
Average net sales per store $2,051,000 $2,022,000 $2,036,000 $2,207,000 $2,440,000
Average sales per square foot $ 149 $ 159 $ 171 $ 174 $ 189
Square feet of selling space at end of 2,828,000 3,362,000 3,680,000 3,966,000 4,346,000 4,171,000 4,761,000
period
Average square feet of selling space per 13,277 13,875 13,925 14,015 14,690 14,669 14,662
store
Comparable store sales increases 2.20% 8.30% 5.60% 5.20% 9.20% 9.70% 8.60%
As of August 4, 2001
------------------------
Actual As Adjusted(2)
------------------------
(in thousands)
Balance Sheet Data:
Working capital $119,556 $
Total assets 262,875
Total debt 39,013
Shareholders' equity 167,019
------------------------------------------
(1) Excludes franchise stores. There were 32, 31, 29, 26, 26 and 27 franchise
stores at the end of each of fiscal 1996, 1997, 1998, 1999, 2000, and the
26 weeks ended August 4, 2001, respectively.
(2) As adjusted for this offering, less expenses and underwriting discount.
(3) Results for fiscal 1998 include the effect of the 1998 adoption of LIFO for
pharmacy inventories ($3,108,000).
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion of our financial condition, results of operations
and liquidity and capital resources should be read in conjunction with our
consolidated financial statements, related notes and other financial information
included elsewhere in this prospectus.
Fred's, Inc., founded in 1947, operates 373 discount general merchandise
stores, including 27 franchised Fred's stores, in eleven states primarily in the
southeastern United States. 202 of our stores have full service pharmacies. Our
stores offer the convenience of a small-format discount retailer or drug store,
but typically offer a broader selection of merchandise.
We market goods and services through our owned and franchised stores. Net
sales includes sales of merchandise from Company owned stores, net of returns
and exclusive of sales taxes. Sales to franchised stores are recorded when the
merchandise is shipped from our warehouse. Revenues resulting from layaway sales
are recorded upon delivery of the merchandise to the customer. We calculate same
store sales based on the change in sales of only those stores open during both
full periods being compared.
Cost of goods sold consists primarily of product costs, which may be
affected by variations in our product mix, price changes in response to
competitive factors and fluctuations in merchandise costs, inventory shrinkages
and vendor programs. Operating, selling general and administrative expenses
consist primarily of store payroll, store occupancy, advertising expenses, other
store expenses and general and administrative expenses, including salaries and
related benefits of corporate employees, administrative office occupancy
expenses, data processing, professional expenses and other related expenses.
Results Of Operations
The following table sets forth certain of our summary statement of
operations data as a percentage of net sales for the fiscal years and the
periods indicated:
For the Years Ended 26 Weeks Ended
---------------------------------------------- ---------------------------------
January 30, January 29, February 3, July 29, August 4,
1999(1) 2000 2001 2000 2001
-------------- ----------------- ------------- ---------------- ----------------
Net Sales 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of Goods Sold 72.6 71.8 72.5 72.5 72.6
-------------- ----------------- ------------- ---------------- ----------------
Gross Profit 27.4 28.2 27.5 27.5 27.4
Selling, general and
administrative expenses 24.9 25.3 24.2 25.0 24.8
-------------- ----------------- ------------- ---------------- ----------------
Operating Income 2.5 2.9 3.3 2.5 2.6
Interest expense, net .2 .4 .4 0.4 .3
-------------- ----------------- ------------- ---------------- ----------------
Income before taxes 2.3 2.5 2.9 2.1 2.3
Income taxes .8 .9 1.0 .7 .8
-------------- ----------------- ------------- ---------------- ----------------
Net Income 1.5% 1.6% 1.9% 1.4% 1.5%
============== ================= ============= ================ ================
(1) Results for fiscal 1998 include the effect of the 1998 adoption of LIFO for
pharmacy inventories ($3,108,000).
26 Weeks Ended August 4, 2001 Compared to 26 Weeks Ended July 29, 2000
Sales
Net sales increased to $417.6 million in the 26 weeks ended August 4, 2001
from $356.5 million in the 26 weeks ended July 29, 2000, an increase of $61.1
million or 17.2%. The increase was attributable to comparable store sales
increases of 8.6% ($28.4 million) and sales by stores not yet included as
comparable stores ($33.1 million), including the contribution of 25 new stores,
five upgraded stores and six new pharmacies. Sales to franchisees decreased $.4
million in 2001. The sales mix for the period was 49.2% Hardlines, 35.5%
Pharmacy, 11.7% Softlines, and 3.6% Franchise. This compares with 50.0%
Hardlines, 33.0% Pharmacy, 12.4% Softlines, and 4.6% Franchise for the same
period last year.
Gross Margin
Gross profit decreased to 27.4% of sales in the 2001 period compared with
27.5% of sales in the prior-year period. Gross profit margins decreased as a
result of greater pricing pressure on pharmacy department sales. General
merchandise gross margins have improved by approximately 100 basis points over
the last year period.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased to $103.5
million in the 2001 period from $89.2 million in 2000. As a percentage of sales,
selling and administrative expenses decreased to 24.8% of sales compared to
25.0% of sales last year. Selling, general and administrative expenses as a
percent of sales decreased primarily due to improved productivity and controlled
labor cost throughout our organization.
Operating Income
Operating income increased 31.1% to $11.0 million or 2.6% of sales compared
with $8.9 million or 2.5% of sales in the first 26 weeks of fiscal 2000.
Interest Expense, Net
Interest expense decreased to $1.3 million in 2001 from $1.4 million in the
2000 period, reflecting lower average revolver borrowings than last year as well
as lower interest rates.
Income Tax
Income tax expense was $3.4 million in the 26 weeks of fiscal 2001 compared
with $2.4 million for the same period last year. The effective tax rate for the
period increased to 35.1% from 32.6% during the same period last year.
Net Income
Net income for the 26 weeks of fiscal 2001 increased 25.5% to $6.3 million
or $.41 per diluted share versus net income of $5.0 million or $.33 per diluted
share in the same period last year.
Fiscal 2000 Compared to Fiscal 1999
Sales
Net sales increased 17.3% ($115 million) in fiscal 2000. Approximately $57
million of the increase was attributable to the addition of 31 new or upgraded
stores, and 16 pharmacies during fiscal 2000, together with the sales of 20
store locations and two pharmacies that were opened or upgraded during fiscal
1999 and contributed a full year of sales in fiscal 2000. During fiscal 2000,
Fred's also closed four store locations. Comparable store sales based on a
53-week comparison, consisting of sales from stores that have been open for more
than one year, increased 9.2% in 2000.
Our general merchandise sales increased approximately 15% over fiscal 1999
general merchandise sales. General merchandise sales growth benefited from the
above mentioned store additions, and solid performances in categories such as
home furnishings, floor coverings, bath, small appliances, giftware, ladies
intimate, ladies accessories, men's and boy's apparel, ethnic products,
beverages, food and snacks, and tobacco. Lawn and garden sales decreased due to
reduced emphasis of large lawn and garden equipment that carried lower margins
and required additional labor outside the stores.
Our pharmacy sales grew to 33% of total sales in fiscal 2000 from 31% of
total sales in fiscal 1999. The total sales in this department, including our
mail order operation, increased 25% over fiscal 1999, with third party
prescription sales representing approximately 83% of total pharmacy sales,
compared with 77% of total pharmacy sales in fiscal 1999. Our 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 our 26 franchised locations increased approximately $1 million in
fiscal 2000 and represented 4% of our total sales, as compared to 5% in fiscal
1999. It is anticipated that this category of business will decline as a
percentage of our total sales since we have not added and do not intend to add
any additional franchisees.
Gross Margin
Gross profit as a percentage of sales was 27.5% in fiscal 2000 compared to
28.2% in fiscal 1999. The decrease in gross margin is primarily attributed to
the changes in sales mix and promotional activities to increase customer
traffic.
Selling, General and Administrative Expenses
Selling, general and administrative expenses were 24.2% of net sales in
fiscal 2000 compared with 25.3% of net sales in fiscal 1999. Labor expenses as a
percentage of sales improved in the stores and pharmacies as a result of the
strong sales coupled with store productivity initiatives. Advertising expense
improved as a percentage of sales by reducing the cost of advertising circulars
while maintaining the same number of circulars issued during the year. Other
expenses such as store supplies and distribution center equipment rental also
improved as a result of cost control efforts.
Operating Income
Operating income increased approximately $6.8 million or 35.8% to $25.7
million in fiscal 2000 from $18.9 million in fiscal 1999. Operating income as a
percentage of sales increased to 3.3% in fiscal 2000 from 2.9% in fiscal 1999,
due to the above-mentioned reasons.
Interest Expense, Net
Interest expense for fiscal 2000 totaled $3.2 million compared to net
interest expense of $2.5 million in fiscal 1999.
The interest expense for fiscal 2000 reflects higher average revolver
borrowings for inventory purchases, caused by significantly improved in-stock
positions over fiscal 1999 and inventory for the new stores opened throughout
the year. Higher interest rates during fiscal 2000 were also a factor in the
higher expense.
Income Taxes
The effective income tax rate decreased to 34.0% in fiscal 2000 from 34.9%
in fiscal 1999, due to changes made in our organizational structure during the
fourth quarter of fiscal 1998 and the implementation of federal program to
generate employment related tax credits, which resulted in a reduction in our
liability for taxes.
At February 3, 2001, we had certain net operating loss carryforwards which
were acquired in reorganizations and certain purchase transactions which are
available to reduce income taxes, subject to usage limitations. These
carryforwards total approximately $43.8 million for state income tax purposes,
which expire during the period 2002 through 2022. If certain substantial changes
in our ownership should occur, there would be an annual limitation on the amount
of carryforwards which can be utilized.
Net Income
Net income for fiscal 2000 was $14.8 million (or $.98 per diluted share) or
approximately 39% higher than the $10.7 million (or $.71 per diluted share)
reported in fiscal 1999.
Fiscal 1999 Compared to Fiscal 1998
Sales
Net sales increased 10.8% ($65 million) in fiscal 1999. Approximately $37
million of the increase was attributable to the addition of 20 new stores, five
upgrades, and two pharmacies during fiscal 1999, together with the sales of 29
stores and 39 pharmacies that were opened or upgraded during fiscal 1998 and
contributed a full year of sales in fiscal 1999. During fiscal 1999, Fred's 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 fiscal
1999.
Our general merchandise sales increased approximately 6% over fiscal 1998
general merchandise sales. General merchandise 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.
Our pharmacy sales grew from 27% of total sales in fiscal 1998 to 31% of
total sales in fiscal 1999, and continues to rank as the largest sales category.
The total sales in this department, including our mail order operation,
increased 27% over fiscal 1998, with third party prescription sales representing
approximately 77% of total pharmacy sales, compared with 71% of total pharmacy
sales in fiscal 1998. Our 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 fiscal 1999 and represented 5% of Fred's total sales compared with
approximately 6% of fiscal 1998 total sales. It is anticipated that this
category of business will continue to decline as a percentage of our total sales
since we have not added and do not intend to add any additional franchisees.
Gross Margin
Gross profit as a percentage of sales was 28.2% in fiscal 1999 compared to
27.4% in fiscal 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
fiscal 1999 compared with 24.9% of net sales in fiscal 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 our build-to-suit
prototype store, an increase in repairs and maintenance expense resulting from
store improvement programs implemented during fiscal 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 fiscal 1999.
These increases were partially offset by the elimination of mailing costs
associated with two major advertising circulars during fiscal 1999.
Operating Income
Operating income increased approximately $4.2 million or 28.8% to $18.9
million in fiscal 1999 from $14.7 million in fiscal 1998. Operating income as a
percentage of sales, increased to 2.9% in fiscal 1999 from 2.5% in fiscal 1998,
due to the above mentioned reasons.
Interest Expense, Net
Interest expense for fiscal 1999 totaled $2.5 million compared to net
interest expense of $1.1 million in fiscal 1998 (interest expense of $1.2
million less interest income of $.1 million).
The interest expense for fiscal 1999 reflects higher average revolver
borrowings for inventory purchases, caused by significantly improved in-stock
positions over fiscal 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 our pharmacy drug wholesaler in December of fiscal 1999. We 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 fiscal 1999 from 35.1%
in fiscal 1998, due primarily to changes made in our organizational structure
during the fourth quarter of fiscal 1998, which resulted in a reduction in our
liability for taxes. At January 29, 2000, we had certain net operating loss
carryforwards which were acquired in reorganizations and certain purchase
transactions and are available to educe 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 Fred's ownership should occur, there would be an
annual limitation on the amount of carryforwards which can be utilized.
Net Income
Net income for fiscal 1999 was $10.7 million (or $.71 per diluted share) or
approximately 21% higher than the $8.8 million (or $.58 per diluted share)
reported in fiscal 1998.
Liquidity And Capital Resources
On April 3, 2000, we and a bank entered into a new Revolving Loan and
Credit Agreement (the "Agreement"). The Agreement provides us 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, we are required to maintain specified
shareholder's equity and net income levels. We are 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 totaled $27.9 million at August 4, 2001 and $30.4 million at July 29,
2000.
On April 23, 1999, we and a bank entered into a Loan Agreement (the "1999
Loan Agreement"). The 1999 Loan Agreement provided us with a four-year unsecured
term loan of $2.25 million to finance the replacement of our mainframe computer
system. The 1999 Loan Agreement bears interest of 6.15% per annum and matures on
April 15, 2003. Borrowings outstanding under this 1999 Loan Agreement totaled
$1.0 million at August 4, 2001, and $1.6 million at July 29, 2000.
On May 5, 1998, we and a bank entered into a Loan Agreement (the "1998 Loan
Agreement"). The 1998 Loan Agreement provided us with an unsecured term loan of
$12 million to finance the modernization and automation of our distribution
center and corporate facilities. The 1998 Loan Agreement bears interest of 6.82%
per annum and matures on November 1, 2005. Borrowings outstanding under this
1998 Loan Agreement totaled $8.0 million at August 4, 2001 and $9.7 million at
July 29, 2000.
Net cash flow provided by operating activities totaled $5.5 million during
the 26 week period ended August 4, 2001. Cash was primarily used to increase
inventories by approximately $10.6 million during the period. This increase was
primarily attributable to our adding 25 new stores, upgrading five stores and
adding six new pharmacies during the period. Accounts receivable decreased by
approximately $3.5 million due to improved collections. Income taxes payable
decreased by approximately $3.2 million as a result of estimated tax payments.
Net cash flows used by investing activities totaled $10.1 million during
the 26 week period ended August 4, 2001, and was used primarily for capital
expenditures associated with our store and pharmacy expansion program.
Net cash flows provided by financing activities totaled $4.0 million and
included $5.3 million of borrowings under Fred's revolver for inventory needs.
For the 26 week period ending August 4, 2001, capital expenditures totaled
approximately $9.2 million compared with approximately $8.2 million for the
first 26 weeks of the last fiscal year. During the first 26 weeks of 2001, we
opened 25 stores, upgraded five stores and added six new pharmacies. We expect
to open approximately 35 stores for the year. Our capital expenditure plan for
fiscal 2001 is approximately $14 million. Capital expenditures in fiscal 2000
totaled $15.8 million compared with $14.0 million in fiscal 1999 and $21.3
million in fiscal 1998. The fiscal 2000 capital expenditures included
approximately $12.2 million of expenditures associated with upgraded or new
stores and pharmacies. Approximately $3.6 million in expenditures related to
technology upgrades, distribution enter equipment, freight equipment, and
capital maintenance.
We believe 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.
Seasonality and Inflation
Our business is subject to seasonal influences, but we have tended to
experience less seasonal fluctuation than many other retailers due to our mix of
everyday basic merchandise and our pharmacy business. The fourth quarter is
typically the most profitable quarter because it includes the Christmas selling
season, even though it also includes the month of January, which is generally
the least profitable month of the year. The impact of inflation on labor and
occupancy costs also can significantly affect our operations.
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 identifies various revenue recognition issues, several of which
are common within the retail industry including treatment of revenue recognition
on layaway sales. In the fourth quarter of 2000, we revised our revenue
recognition for layaway sales to defer revenue recognition until all terms of
the sale have been satisfied and the customer takes delivery of the merchandise.
Under the prior method of accounting, net sales were recognized at the time the
customer put the merchandise into layaway. The effects of this restated change
on previously reported net sales, gross profit, net income and net income per
share (basic & diluted) was a decrease of $528,000, $132,000, $87,000 and $.01,
respectively, for the first quarter ended April 29, 2000; a decrease of
$453,000, $111,000, $73,000 and $.00, respectively, for the second quarter ended
July 29, 2000. Annual financial results were not affected.
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 us to the first quarter of 2001. We do not believe this new standard will
have an impact on our financial statements since we currently have no derivative
instruments.
In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards ("SFAS") No. 133, Accounting for
Derivative Instruments and Hedging Activities. In June 2000, the FASB issued
SFAS No. 138, Accounting for Certain Derivative Instruments and Certain Hedging
Activities - an Amendment of FASB Statement No. 133, SFAS No. 133, as amended by
SFAS No. 138, requires all derivatives to be measured at fair value and
recognized as either assets or liabilities on the balance sheet. Changes in such
fair value are required to be recognized immediately in net income to the extent
the derivatives are not effective as hedges. In September 1999, the FASB issued
SFAS No. 137, Accounting for Derivative Instruments and Hedging Activities -
Deferral of the effective Date of FASB Statement No. 133, an amendment to delay
the effective date of SFAS No. 133 to fiscal years beginning after June 15,
2000. We do not hold derivative instruments or engage in hedging activities.
In June 2001, the FASB issued SFAS No. 141, Business Combinations. SFAS No.
141 supercedes Accounting Principles Board Opinion ("APB") No. 16, Business
Combinations, and SFAS No. 38, Accounting for Preacquisition Contingencies of
Purchased Enterprises. SFAS No. 141 requires that the purchase method of
accounting be used for all business combinations initiated after June 30, 2001
and for all business combinations accounted for by the purchase method for which
the date of acquisition is after June 30, 2001. We do not expect the adoption of
SFAS No. 141 to have a material impact on our financial statements.
In June 2001, the FASB issued SFAS No. 142, Goodwill and Other Intangible
Assets. SFAS No. 142 supercedes APB No. 17, Intangible Assets, and its
provisions are effective for fiscal years beginning after December 15, 2001.
SFAS No. 142 requires that: 1) goodwill and indefinite lived intangible assets
will no longer be amortized; 2) goodwill will be tested for impairment at least
annually at the reporting unit level (reporting unit levels to be determined
upon adoption); 3) intangible assets deemed to have an indefinite life will be
tested for impairment at least annually; and 4) the amortization period of
intangible assets with finite lives will no longer be limited to forty years. As
of August 4, 2001, we have intangible assets, net of accumulated amortization,
of $4.9 million and have recognized amortization expense of approximately $.8
million during the six months ended August 4, 2001. We have not completed the
process of evaluating the impact that will result from adopting SFAS No. 142.
BUSINESS
Fred's, Inc.
Fred's, Inc., founded in 1947, operates 373 discount general merchandise
stores, including 27 franchised Fred's stores, in 11 states primarily in the
southeastern United States. 202 of our stores have full service pharmacies. Our
stores offer the convenience of a small-format discount retailer or drug store,
but typically offer a broader selection of merchandise.
Our stores stock over 12,000 frequently purchased items which address the
everyday needs of our customers, including household goods, apparel, health and
beauty aids, food, tobacco and cleaning supplies. In addition to nationally
recognized brand name products, our merchandise includes private label products
and, to a lesser extent, opportunistic buys. At an average of approximately
15,000 square feet, our stores are smaller than those of a mass merchant
(typically over 100,000 square feet), but larger than a small-format discount or
dollar store (typically under 10,000 square feet). We believe our customers shop
at Fred's stores for our convenient locations, merchandise assortment,
competitive prices and advertised promotions.
Our stores generally serve low, middle and fixed income families in small
to medium-sized markets. The typical Fred's customer is female with an average
household income of less than $30,000. Our convenient format enables us to
capture small ticket, high frequency shopping trips. As a result, our average
transaction size is approximately $11.80 for general merchandise, or
approximately $16.00 if pharmacy sales are included.
During the past three years, we have grown our net sales and net income
significantly. In fiscal 2000, we generated net sales of approximately $781.2
million, reflecting compound annual growth of 14.0% since fiscal 1998. During
the same period, we grew our net income at a compound annual growth rate of
29.7% to $14.9 million. We have also achieved attractive financial results
during the first 26 weeks of fiscal 2001, with a net sales increase of 17.2% and
net income growth of 25.5% over the same period in the prior year.
Competitive Differentiation
We believe our store format and strategy, which combine attractive elements
of a discount or dollar store, drug store and mass merchant, provide us
significant competitive advantages.
Convenient Store Locations and Format. Our store location strategy targets
shoppable, neighborhood locations with ample storefront parking and easy access.
Most of our stores are located in rural and suburban towns that have populations
under 15,000. Additionally, our stores are designed to be easily navigable for
our customers. Our emphasis on convenience positions us to compete effectively
with various retail formats and capture a higher share of our customers' small
ticket, frequent shopping requirements.
Pricing and Promotion. A key element of our strategy is to offer
competitive pricing on consumable items and a strong price-to-value relationship
on our expanded general merchandise assortment. As part of our strategy to
appeal to the high frequency shopper, we recently introduced everyday low
pricing at all of our locations. In addition, we employ an aggressive
promotional strategy generally utilizing 13 advertising circulars per year,
which we believe is more than our competitors.
Broad Product and Service Offerings. With an average store size of
approximately 15,000 square feet, we are able to offer a much broader assortment
of merchandise and services than our small-format competitors. Our merchandise
mix features a high proportion of national-brand items, private label products
including "Fred's" branded products and, to a lesser extent, opportunistic buys.
In addition to lower margin consumable goods typically found at a small-format
discount retailer or dollar store, we offer our customers an attractive
selection of higher margin categories, such as apparel and home furnishings, to
complement our merchandise assortment and enhance our store profitability.
Pharmacy Services. 202 of our 373 stores have a full-service pharmacy
offering branded and generic pharmaceuticals. We believe our pharmacies generate
improved overall sales productivity, attract a wider income and age customer
base and enhance customer loyalty. 124 of our pharmacies have added
drive-through windows which further enhances our convenient shopping experience.
Given continued expansion of insurance coverage and the introduction of new
prescription medicines, the retail prescription drug industry is expected to be
one of the fastest growing retail segments in the United States over the next
ten years.
Growth And Expansion Strategy
Over the past two years, we have added several key members to our senior
management team and strengthened our store operations and merchandising
strategies. Numerous improvements have been made to our merchandise assortment,
buying process, pricing strategy, marketing programs and real estate selection
and development expertise. We have significantly improved our information
systems and enhanced our distribution center capacity. We believe these
enhancements to management and infrastructure, and the growing advantages of
scale and sophistication, position us well for accelerated growth and improved
profitability.
Accelerate Store Growth. We believe there are a significant number of
markets and sites which meet our demographic criteria for opening a new store.
Our new store development process has also recently been improved, reducing the
time and costs of opening new stores. Consequently, we plan to open
approximately 35 stores in fiscal 2001, 25 of which were opened in the first
half of this year, and 60 stores in fiscal 2002. We anticipate new store growth
of approximately 15% over the next several years, as compared to a rate of 10%
during the past three years. Because we have also expanded the size of our new
store prototype, we also expect square footage to grow at a slightly faster rate
than in the past. We expect to continue to focus our new store development
primarily in small to medium sized markets within our present geographic area.
Expansion of our pharmacy operations will also continue to be a component of our
growth strategy.
Increase Store Sales. We have implemented and continue to undertake a
number of merchandising and marketing initiatives to improve our comparable
store sales. As a result of our efforts, we have produced comparable store sales
increases averaging 9.2% in fiscal 2000 and 8.6% during the first 26 weeks of
fiscal 2001. We believe that we can continue to achieve further growth in
comparable store sales in the future. Such enhancements include improved
merchandise presentation, heightened focus on customer satisfaction, better
internal and external signage, enhanced marketing programs and continued store
remodeling.
Merchandising
Our stores range in size from 5,700 to 30,000 square feet, with an average
selling square feet of approximately 15,000 per store. Our stores are designed
to be easily navigable. The presentation and display of merchandise in our
stores is critical to communicating value to our customers. We attempt to group
merchandise in a manner that enables customers to locate items quickly and to
stimulate impulse purchases. Our stores stock over 12,000 frequently purchased
items which address the household, apparel and pharmacy needs of our customers.
We combine everyday basic merchandise with certain specialty items to offer our
customers a wide selection of general merchandise. Our merchandise assortment is
supplemented by seasonal specials, private label products, opportunistic buys
and the inclusion of pharmacies in 202 of our stores.
Our mix varies from store to store depending upon local consumer
preferences and whether the stores include pharmacies and/or a full line of
apparel. We recently instituted a formalized process to increase our return on
investment on a per-item basis. As a result, we have reduced the assortment of
certain consumable products to the highest-turn items. Our sales mix by major
category during fiscal 2000 was as follows:
Pharmaceuticals 32.7%
Household Goods 20.4%
Apparel and Linens 13.8%
Health and Beauty Aids 11.0%
Food and Tobacco Products 9.4%
Paper and Cleaning Supplies 8.3%
Sales to Franchised Fred's Stores 4.4%
In addition to a wide array of name brand products, we offer our own
private label program, which includes apparel, linens, household cleaning
supplies, health and beauty aids, disposable diapers, pet foods, paper products
and a variety of beverage, food and other products. An independent laboratory
testing program is used for substantially all of our private label products.
Private label products sold constituted approximately 5% of general merchandise
sales in fiscal 2000. Private label products afford us higher gross margins
while providing our customer with lower priced products that are of a quality
comparable to that of competing branded products.
Our stores also include a limited selected of closeout merchandise, which
we believe can be effective in generating recognized value. We expect to
increase the proportion of opportunistic buys from historical levels. Our
customers have reacted favorably to products, and we have been able to achieve a
significant markup on these products. While there are risks inherent in
opportunistic buys, we limit our exposure to individual items and aggressively
promote the buys in our advertising circulars.
We provide a strong price-to-value relationship to our customers through a
coordinated discount strategy and an everyday low pricing program that focuses
on strong values day in and day out. As part of this strategy, we maintain low
opening price points and competitive prices on key products across all
departments. Our buyers have discretion to mark down slow moving items. We
utilize system-wide pricing; however, our 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. We run
regular clearances of seasonal merchandise and conduct sales and promotions of
particular items. We also encourage our store managers to create in-store
advertising displays and signage in order to increase customer traffic and
impulse purchases.
Advertising and promotion costs represented 1.3% of net sales in fiscal
2000. We use direct mail circulars, television, radio and newspaper advertising
to promote our merchandise, special promotional events and a discount retail
image.
Purchasing
General Merchandise
Our primary general merchandise buying activities are directed from the
corporate office by three vice presidents of 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. Our buying team has forged closer relationships with selected
national vendors. These relationships have allowed us to secure better
purchasing terms (through purchase allowances and rebates) than we achieved in
the past. If necessary, we believe that adequate alternative sources of products
are available for our general merchandise categories.
Pharmacy
Through our November 24, 1999, supply agreement with Bergen Brunswig Drug
Company, a pharmaceutical wholesaler, we purchase substantially all of our
prescription drugs. During fiscal 2000, approximately 30% of our total purchases
were made from our pharmaceutical wholesalers. Although there are alternative
wholesalers that supply pharmaceutical products, we operate under a purchase and
supply contract with one supplier as our primary wholesaler. Accordingly, the
unplanned loss of this particular supplier could have a short-term gross margin
impact on our business until an alternative wholesaler arrangement could be
implemented.
Store Operations
Our 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.
Stores are typically staffed with 12 to 15 store employees, with additional
part-time employees during the busy, holiday season. Additionally, our stores
are staffed with assistant managers who report to the full-time store manager.
Stores with a pharmacy employ a full-time pharmacist. Store managers are
responsible for receiving and stocking store merchandise and hiring, training
and supervising store employees. Our 19 district managers supervise the
management and operation of our stores and report to three regional managers. We
have also sharpened the focus of our district managers on store operations by
reducing the number of stores they oversee from 25 to 18 stores, on average.
We have an incentive compensation plan for store managers, pharmacists and
district managers based on meeting or exceeding targeted profit percentage
contributions. Regional managers receive a significant amount of their
compensation based on the profits generated by the stores under their
management. Various factors included in determining profit percentage
contribution are gross profits and controllable expenses at the store level. We
believe that this incentive compensation plan, together with our store
management training program, is instrumental in maximizing store performance.
Distribution
We have an 850,000 square foot centralized distribution center in Memphis,
Tennessee. Approximately 60% of the merchandise received by our stores in fiscal
2000 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,
we use owned and leased trailers and tractors, as well as common carriers.
During fiscal 1998, we completed an approximately $12 million project to
modernize and automate our distribution center. This project, including
implementation of a new warehouse management computer system, has increased the
center's capacity sufficiently to accommodate our store expansion plans for the
next several years. Expansion may require the development of a new distribution
center in approximately two years.
Information Systems
Our 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 cash registers, which capture SKU and other data at
the time of sale for daily transmission to our central data processing center.
Data received from the stores is used to automatically replenish frequently
purchased merchandise on a weekly basis and to assist our buyers in their
decision making process.
Competition
The discount retail industry is highly competitive. We compete with
national and regional mass merchandisers (such as Wal-Mart and K-Mart), drug
retailers (such as Walgreen's and CVS), small-format discount retailers (such as
Dollar General and Family Dollar) and dollar stores (such as Dollar Tree
Stores). Certain of our competitors are substantially larger and have greater
financial resources, improving their ability to take advantage of national
advertising programs and preferential vendor arrangements.
Intellectual Property
We have registered trademarks using "Fred's" as well as trademarks relating
to our other private label merchandise. We believe that we have sufficient
protection of our intellectual property to conduct our business as it is
currently operated and as it is anticipated to be conducted.
Seasonality
Our business is seasonal. 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 August 23, 2001, we had approximately 6,159 full-time and part-time
employees, comprised of 781 corporate and distribution center employees and
5,378 store employees. The number of employees varies during the year, reaching
a peak during the Christmas selling season. Our labor force is not subject to a
collective bargaining agreement. We believe we have good relationships with our
employees.
Regulation
A major issue for the pharmacy business is the growing regulation of the
industry, both at the state and federal levels. Pharmacy reimbursement levels
recently have declined as state governments have implemented programs to control
rapidly rising health care costs, particularly for pharmaceuticals. At the
federal level, we expect the government actively to pursue universal coverage
for uninsured consumers across the United States. While the shape of any drug
benefit remains unclear, we expect rising utilization and lower reimbursement
levels to be largely offsetting factors for us overall.
Real Estate
As of August 4, 2001, the geographical distribution of our 373 locations
was as follows:
State Number of Stores(1)
----- ----------------
Mississippi......................................................99
Tennessee........................................................76
Arkansas.........................................................65
Alabama..........................................................48
Louisiana........................................................32
Georgia..........................................................26
Missouri.........................................................11
Kentucky..........................................................8
Illinois..........................................................5
North Carolina....................................................2
Florida...........................................................1
----
Total................................................... 373
====
-------------------
(1) Includes 27 Fred's franchise stores.
We own the real estate and the buildings for 60 locations, and own just the
buildings at 5 locations which are subject to ground leases. Our owned
properties are not encumbered by any indebtedness. We lease the remaining 281
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). Stores range in size from approximately 5,700
square feet to 30,000 square feet. 227 of our locations are in strip centers or
a downtown-shopping district. The remainder of our stores are freestanding.
We anticipate that existing buildings and buildings to be developed by
others will be available for lease to satisfy the our expansion program in the
near term. We intend to enter into leases of relatively moderate length with
renewal options, rather than entering into long-term leases.
We own our 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 approximately 250,000 square
feet of office and retail space. Presently, we utilize approximately 90,000
square feet of office space and approximately 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.
Legal Proceedings
We are party to several pending legal proceedings and claims. Although the
outcome of the proceedings and claims cannot be determined with certainty, we
are of the opinion that it is unlikely that these proceedings and claims will
have a material effect on our results of operations, cash flows or financial
condition.
MANAGEMENT
Directors and Executive Officers
The following information is furnished with respect to each of our
directors and executive officers:
Name Age Position
Michael J. Hayes(1)(2)...................... 60 Director, Managing Director, Chief Executive
Officer
David A. Gardner(1)(2)...................... 54 Director and Managing Director
John R. Eisenman(1)......................... 60 Director
Roger T. Knox(1)............................ 63 Director
John Reier(1)............................... 61 President and Director
Thomas H. Tashjian(1)....................... 46 Director
John A. Casey............................... 55 Executive Vice President - Pharmacy Operations
Jerry A Shore............................... 49 Executive Vice President and Chief Financial
Officer
Charles S. Vail............................. 58 Corporate Secretary, Vice President - Legal
Services and General Counsel
------------------
(1) Six directors, constituting the entire Board of Directors, are elected at
each annual meeting of shareholders to serve one year or until their
successors are elected.
(2) According to the By-laws of Fred's, the Managing Directors (Messrs. Hayes
and Gardner) are the chief executive officers of Fred's and have general
supervisory responsibility for the business of Fred's.
Michael J. Hayes was elected a director of Fred's in January 1987 and has
been a Managing Director of Fred's 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 Fred's in January 1987 and has
been a Managing Director of Fred's since October 1989. Mr. Gardner has been
President of Gardner Capital Corporation, a private 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 D. Reier is President and a Director. Mr. Reier joined Fred's in May
of 1999 as President and was elected a director of Fred's in August 2000. Prior
to joining Fred's, 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.
Thomas H. Tashjian was elected a Director of Fred's in March 2001. Mr.
Tashjian is a private investor. Mr. Tashjian has served as a managing director
and consumer group leader at Banc of America Montgomery Securities in San
Francisco. Prior to that, Mr. Tashjian held similar positions at First Manhattan
Company, Seidler Companies, and Prudential Securities. Mr. Tashjian's earlier
retail operating experience was in discount retailing at the Ayrway Stores,
which were acquired by Target, and in the restaurant business at Noble Roman's.
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 Fred's in April 2000 as Executive Vice President and
Chief Financial Officer. Prior to joining the Company, Mr. Shore was employed by
Wang's International, an 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 Fred's as General Counsel since 1973, as
Corporate Secretary since 1975, and as Vice President - Legal since 1984. Mr.
Vail joined Fred's in 1968.
PRINCIPAL AND SELLING SHAREHOLDERS
The following table sets forth the beneficial ownership of Common Stock as
of August 23, 2001, by Michael J. Hayes, David A. Gardner (Messrs. Hayes and
Gardner, the "Selling Shareholders"), and each other person who is known by us
to own beneficially more than 5% percent of the Common Stock, and all directors
and executive officers of Fred's as a group.
Shares Shares
Beneficially Owned Before Number of Shares Beneficially Owned After
the Offering(1) to be Sold in the the Offering(1)
Name of Beneficial Owner Number(2) Percentage(3) Offering Number(2) Percentage(3)
------------------------ ------ ---------- -------- ------ ----------
Michael J. Hayes(4)(9) 1,363,867 8.8% 75,000 1,288,867 7.6%
David A. Gardner(5)(9) 1,312,762 8.4% 75,000 1,237,762 7.3%
Daruma Asset Management, Inc.(6)(9) 1,157,625 7.4% 1,157,625 6.8%
Dimensional Fund Advisors, Inc.(7)(9) 1,003,627 6.5% 1,003,627 5.9%
Franklin Resources, Inc.(8)(9) 937,500 6.0% 937,500 5.5%
All Directors and Executive Officers 2,921,542 18.8% 2,771,542 16.3%
as a Group (9 persons including the
directors named above)(11)
---------------------------
(1) As used in this table, beneficial ownership means the sole or shared power
to vote, or direct the voting of, a security, or the sole or shared power
to dispose, or direct the disposition, of a security. Except as otherwise
indicated, all persons listed above have (i) sole voting power and
investment power with respect to their shares of Common Stock, except to
the extent that authority is shared by spouses under applicable law, and
(ii) record or beneficial ownership with respect to their shares of Common
Stock.
(2) Includes stock options that are exercisable as of August 23, 2001.
(3) The percentage beneficially owned before the offering is calculated as the
number of shares owned, divided by 15,559,851, which consists of the
15,244,986 total outstanding shares of common stock and 314,865 vested
options as of August 23, 2001. The percentage beneficially owned after the
offering is calculated as the number of shares divided by 17,059,851, which
consists of the 16,744,986 total outstanding shares of common stock and
314,865 vested options after the offering.
(4) Includes 102,381 shares owned by Mr. Hayes' wife.
(5) Excludes 125,627 shares of Common Stock owned by Mr. Gardner's wife as to
which Mr. Gardner disclaims beneficial ownership. Mr. Gardner has informed
us that, immediately prior to the sale of the shares offered by him hereby,
he intends to convey to Columbia University a portion of those offered
shares sufficient to endow a professorship in the amount of $1.5 million.
Proceeds from the sale of the shares offered and so conveyed shall go
directly to Columbia University.
(6) Amount is based on Daruma Asset Management, Inc. most recent filing with
the Commission with respect to Common Stock. The source of this information
is the latest Schedule 13F filed by Daruma Asset Management, Inc. with the
Commission on August 9, 2001 and reflects their ownership as of June 30,
2001.
(7) Amount is based on Dimensional Fund Advisors, Inc. most recent filing with
the Commission with respect to Common Stock. The source of this information
is a Schedule 13F filed by Dimensional Fund Advisors, Inc. with the
Commission on August 2, 2001, and reflects their ownership as of June 30,
2001.
(8) Amount is based on Franklin Resources, Inc. most recent filing with the
Commission with respect to Common Stock. The source of this information is
the latest Schedule 13F filed by Franklin Resources, Inc. with the
Commission on August 10, 2001, and reflects their ownership as of June 30,
2001.
(9) Mr. Hayes' address is 4300 New Getwell Rd., Memphis, TN 38118. Mr.
Gardner's address is 445 Park Avenue, Suite 1600, New York, New York 10022.
The address of Daruma Asset Management, Inc. is 60 East 42nd Street, Suite
1111, New York, New York 10165. The address of Dimensional Fund Advisors,
Inc. is 1299 Ocean Avenue, Santa Monica, CA 90401. The address of Franklin
Resources, Inc. is 777 Mariners Island Blvd., San Mateo, California 94404.
The selling shareholders (and/or their respective affiliates) are each
offering for sale 75,000 shares of common stock in this Offering, and may
provide an aggregate of up to an additional 165,000 shares in connection with
the underwriters' over-allotment option.
DESCRIPTION OF CAPITAL STOCK
As of August 4, 2001, Fred's authorized capital stock consisted of
30,000,000 shares of "Class A" Common Stock, having no par value, of which
15,229,044 shares were issued and outstanding, which were held of record by
approximately 5,400 record holders (including beneficial owners holding shares
in nominee or street name), 11,500,000 shares of "Class B" Common Stock, having
no par value, which do not carry voting rights and none of which have ever been
issued, and 10,000,000 shares of preferred stock, having no par value and none
of which have ever been issued. The shares offered hereby are all "Class A"
Common Stock ("Common Stock"), which class of stock has all of the voting rights
of common stockholders in Fred's. Fred's has no current plans to issue "Class B"
Common Stock or preferred stock. All references to shares of Fred's Common Stock
in this Prospectus reflect all of the declarations of stock splits and stock
dividends by Fred's through the date hereof.
Common Stock
Holders of shares of Common Stock are entitled to vote one vote per share
for the election of directors and on all matters to be submitted to a vote of
Fred's shareholders. Subject to the rights of any holders of preferred stock and
any Class B Common Stock which may be issued in the future, the holders of
shares of Common Stock are entitled to share ratably in such dividends as may be
declared by the Board of Directors and paid by Fred's out of funds legally
available therefore. In the event of dissolution, liquidation or winding up of
Fred's, holders of shares of Common Stock, along with holders of any Class B
Common Stock, are entitled to share ratably in assets remaining after payment of
all liabilities and liquidation preferences, if any.
Holders of shares of Common Stock have no preemptive, subscription,
redemption or conversion rights. The outstanding shares of Common Stock are, and
any shares of Common Stock to be issued by Fred's in connection with the
Offering will be, duly authorized, validly issued, fully paid and nonassessable.
Preferred Stock
The Certificate of Incorporation authorizes the Board of Directors (without
shareholder approval) to, among other things, issue shares of preferred stock
from time to time in one or more series, each series to have such powers,
designations, preferences and rights, and qualifications, limitations or
restrictions, as may be determined by the Board of Directors. The issuance of
preferred stock in certain circumstances may have the effect of delaying or
preventing a change of control of Fred's, because such shares may be issued
without approval of the shareholders of Fred's and may provide for such voting
or other rights which could hinder the ability of a third party to control
Fred's. The issuance of preferred stock with voting and conversion rights may
adversely affect the voting power of the holders of shares of Common Stock.
Fred's has no present plans to issue any shares of preferred stock.
Rights Plan
On October 12, 1998, we adopted a Shareholders Rights Plan which granted a
dividend of one preferred share purchase right (a "Right") for each common share
outstanding at that date. Each Right represents the right to purchase
one-hundredth of a share of preferred stock at a preset price to be exercised
when any one individual, firm, corporation or other entity acquires 15% or more
of the common stock then outstanding. The Rights will become dilutive to the
interests of such acquirer at the time of exercise and will expire, if
unexercised, on October 12, 2008. The purpose of the Shareholders Rights Plan is
to seek to cause any prospective acquirer to first approach our Board of
Directors before such person attempts to obtain control of Fred's, so that the
Board of Directors can seek to maximize the value of the common stock for all of
the holders thereof.
Shares Reserved for Issuance
Fred's has a long-term incentive plan under which an aggregate of 1,460,937
shares of common stock may be granted. Options granted under the plan expire
five years from the date of grant. Options outstanding at August 4, 2001, expire
in 2002 through 2006. (See Note 8 to Fred's Financial Statements for the fiscal
year ended February 3, 2001.)
UNDERWRITING
The several underwriters named below have severally agreed, subject to the
terms and conditions set forth in the underwriting agreement by and among
Fred's, the selling shareholders and the underwriters, to purchase from Fred's
and the selling shareholders the respective number of shares of common stock set
forth opposite each underwriter's name in the table below.
Number of
Underwriter Shares
----------- ------
William Blair & Company, L.L.C............................................
SunTrust Capital Markets, Inc.............................................
Morgan Keegan & Company, Inc..............................................
Total............................................................
This offering will be underwritten on a firm commitment basis. In the
underwriting agreement, the underwriters have agreed, subject to the terms and
conditions set forth therein, to purchase the shares of common stock being sold
pursuant thereto at a price per share equal to the public offering price less
the underwriting discount specified on the cover page of this prospectus.
According to the terms of the underwriting agreement, the underwriters will
either purchase all of the shares or none of them. In the event of default by
any underwriter, in certain circumstances the purchase commitments of the
non-defaulting underwriters may be increased or the underwriting agreement may
be terminated.
The underwriters have advised Fred's and the selling shareholders that the
underwriters propose to offer the common stock to the public initially at the
public offering price set forth on the cover page of this prospectus and to
selected dealers at such price less a concession of not more than $ per share.
The underwriters may allow, and such dealers may re-allow, a concession not in
excess of $ per share to certain other dealers. The underwriters will offer the
shares subject to prior sale and subject to receipt and acceptance of the shares
by the underwriters. The underwriters may reject any order to purchase shares in
whole or in part. The underwriters expect that Fred's and the selling
shareholders will deliver the shares to the underwriters through the facilities
of the Depository Trust Company in New York, New York on or about September ,
2001. At that time, the underwriters will pay Fred's and the selling
shareholders for the shares in immediately available funds. After commencement
of the public offering, the public offering price and other selling terms may be
changed by the underwriters.
The selling shareholders have granted to the underwriters an option,
exercisable within 30 days after the date of this prospectus, to purchase up to
an aggregate of 165,000 additional shares of common stock at the same price per
share to be paid by the underwriters for the other shares offered hereby for the
purpose of covering the sale of shares in excess of the shares initially
allocated in the offering. If the underwriters purchase any such additional
shares pursuant to this option, each of the underwriters will be committed to
purchase such additional shares in approximately the same proportion as set
forth in the table above. The underwriters may exercise the option only for the
purpose of covering excess sales, if any, made in connection with the
distribution of the shares of common stock offered hereby.
The following table summarizes the compensation to be paid by Fred's and
the selling shareholders to the underwriters:
Total
-----------------------------------
Per Without With
Share Over-Allotment Over-Allotment
----- -------------- --------------
Public Offering Price.....................................
Underwriting discount paid by Fred's, Inc.................
Underwriting discount paid by the
selling shareholders....................................
Fred's estimates that its share of the total expenses of this offering,
excluding the underwriting discount, will be approximately $ .
Certain shareholders, all directors and executive officers of Fred's, who
hold in the aggregate 2,921,542 shares of common stock, and Fred's have agreed
that for a period of 90 days after the date of this prospectus, without the
prior written consent of the underwriters, they will not, directly or
indirectly, offer, sell, assign, transfer, encumber, pledge, contract to sell,
grant an option to purchase, or otherwise dispose of, other than by operation of
law, any shares of common stock or securities convertible or exchangeable into,
or exercisable for, common stock. This agreement does not extend to bona fide
gifts to immediate family members of such persons who agree to be bound by such
restrictions, or to limited partners or shareholders, who agree to be bound by
such restrictions. In considering a request for its consent to a sale or
transfer within the 90-day period, the underwriters will take into account
various factors, including the number of shares requested to be sold, the
anticipated manner and timing of sale, the potential impact of the sale on the
market for the common stock, and market conditions generally. Fred's may grant
options and issue common stock under existing stock option or stock purchase
plans and issue unregistered shares in connection with any outstanding
convertible securities or options during the 90-day period.
Fred's and the selling shareholders have agreed to indemnify the
underwriters and their controlling persons against certain liabilities,
including liabilities under the Securities Act, or to contribute to payments the
underwriters may be required to make in respect thereof.
The representatives have informed Fred's that the underwriters will not
confirm, without client authorization, sales to their client accounts as to
which they have discretionary authority.
In connection with this offering, the underwriters and other persons
participating in this offering may engage in transactions which affect the
market price of the common stock. These may include stabilizing and
over-allotment transactions and purchases to cover syndicate short positions.
Stabilizing transactions consist of bids or purchases for the purpose of
pegging, fixing or maintaining the price of the common stock. Over-allotment
involves selling more shares of common stock in this offering than are specified
on the cover page of this prospectus, which results in a syndicate short
position. The underwriters may cover this short position by purchasing common
stock in the open market or by exercising all or part of their over-allotment
option. In addition, the representatives may impose a penalty bid. This allows
the underwriters to reclaim the selling concession allowed to an underwriter or
selling group member if common stock sold by such underwriter or selling group
member in this offering is repurchased by the representatives in stabilizing or
syndicate short covering transactions. These transactions, which may be effected
on the Nasdaq National Market or otherwise, may stabilize, maintain or otherwise
affect the market price of the common stock and could cause the price to be
higher than it would be without these transactions. The underwriters and other
participants in this offering are not required to engage in any of these
activities and may discontinue any of these activities at any time without
notice. Fred's, the underwriters and the selling shareholders make no
representation or prediction as to whether the underwriters will engage in such
transactions or choose to discontinue any transactions engaged in or as to the
direction or magnitude of any effect that these transactions may have on the
price of the common stock.
In connection with this offering, certain underwriters and selling group
members, if any, who are qualified market markers on the Nasdaq National Market
may engage in passive market making transactions in our common stock on the
Nasdaq National Market in accordance with Rule 103 of Regulation M under the
Securities Exchange Act of 1934, during the business day prior to the pricing of
this offering before the commencement of offers or sales of our common stock.
Passive market makers must comply with applicable volume and price limitations
and must be identified as such. In general, a passive market maker must display
its bid at a price not in excess of the highest independent bid of such
security. If all independent bids are lowered below the passive market makers'
bid, however, such bid must then be lowered when certain purchase limits are
exceeded.
LEGAL MATTERS
The legality of the common stock offered hereby will be passed upon for
Fred's by Baker Donelson Bearman & Caldwell, PC, Memphis, Tennessee. Certain
legal matters will be passed on for the underwriters by Sonnenschein Nath &
Rosenthal, Chicago, Illinois.
EXPERTS
The financial statements as of February 3, 2001 and January 29, 2000 and
for each of the three years ended February 3, 2001 included in this Prospectus
have been so included in reliance on the report of PricewaterhouseCoopers LLP,
independent accountants, given on the authority of said firm as experts in
auditing and accounting.
WHERE YOU CAN FIND MORE INFORMATION
We file annual, quarterly and special reports, proxy statements and other
information with the Securities Exchange Commission ("SEC"). You may read and
copy any document we file at the public reference facilities of the SEC in
Washington, D.C., Chicago, Illinois, and New York, New York. Please call the SEC
at 1-800-SEC-0330 for further information on the public reference rooms. Our SEC
filings are also available to the public from the SEC's website at
http:\\www.sec.gov. You may also inspect our SEC reports and other information
at the offices of The Nasdaq Stock Market, Inc., 1735 K Street, N.W.,
Washington, D.C. 20006-1504.
We have filed with the SEC a registration statement on Form S-3, together
with any amendments or supplements thereto, under the Securities Act covering
the shares of common stock offered hereby. As permitted by the SEC, this
prospectus, which constitutes a part of such registration statement, does not
contain all the information included in the registration statement. Such
additional information may be obtained from the locations described above. This
prospectus summarizes material provisions of contracts and other documents that
we refer to you. Statements contained in this prospectus as to the contents of
any document as not necessarily complete. You should refer to the document for
all the details.
INCORPORATION OF DOCUMENTS BY REFERENCE
The SEC allows us to "incorporate by reference" the information we file
with them, which means that we can disclose important information to you by
referring you to those documents. The information incorporated by reference is
considered to be part of this prospectus and any information that we file later
with the SEC will automatically update and supersede this information. We
incorporate by reference the documents listed below and any additional documents
we file with the SEC after the date of this prospectus until the offering of the
common stock is terminated or completed. The documents we incorporate by
reference are:
o Our Annual Report on Form 10-K for the fiscal year ended February
3, 2001;
o Our Quarterly Reports on Form 10-Q for each of the quarterly
periods ended May 5, 2001, and August 4, 2001;
o Our Current Report on Form 8-K filed on June 5, 2001, as amended
by our Current Report on Form 8-K/A filed on June 5, 2001;
o Our Registration Statement on Form 8-A, filed on October 21,
1998, relating to our preferred stock purchase rights; and
o Our definitive proxy statement under Section 14 of the Exchange
Act in connection with our fiscal 2000 annual shareholders'
meeting to the extent such information discusses executive
compensation (excluding any compensation committee report),
related party transactions, directors' compensation, beneficial
ownership, and biographies of directors and officers.
We also incorporate by reference each of the following documents that we
will file with the SEC after the date of this prospectus but before all of the
common stock offered by this prospectus has been sold:
o Reports filed under Sections 13(a) and 13(c) of the Exchange Act;
o Any definitive proxy or information statements filed under
Section 14 of the Exchange Act in connection with any
shareholders' meeting to the extent such information discusses
executive compensation (excluding any compensation committee
report), related party transactions, directors' compensation,
beneficial ownership, and biographies of directors and officers;
and
o Any reports filed under Section 15(d) of the Exchange Act.
Any statement contained in this prospectus or in a document incorporated by
reference is modified or superseded for purposes of this prospectus to the
extent that a statement contained in any such document modifies or supersedes
such statement. Any such statement so modified or superseded shall not be
deemed, except as so modified or superseded, to constitute a part of this
prospectus.
You may request a copy of these filings, at no cost, by writing or
telephoning us at: Fred's, Inc., Attn: Charles S. Vail, Secretary, 4300 New
Getwell Road, Memphis, Tennessee, 38118, telephone number (901) 365-8880.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
On May 24, 2001, Fred's announced a 5-for-4 stock-split of its common
stock. The new shares, one additional share for each four shares held by
shareholders, were distributed on June 18, 2001 to shareholders of record on
June 4, 2001. All share and per share amounts included in the accompanying
consolidated annual financial statements and related notes have been
retroactively adjusted to reflect this stock split. Additionally, the
accompanying unaudited consolidated interim financial statements include the
effects of the stock split.
Page
----
Consolidated Annual Financial Statements
Report of Independent Accountants................................................... F-2
Consolidated Balance Sheets as of February 3, 2001 and January 29, 2000............. F-3
Consolidated Statements of Income for the fiscal year ended February 3, 2001, the
fiscal year ended January 29, 2000 and the fiscal year ended
January 30, 1999................................................................. F-4
Consolidated Statements of Changes in Stockholders' Equity for the fiscal year ended
February 3, 2001, the fiscal year ended January 29, 2000, and the fiscal year ended
January 30, 1999................................................................. F-5
Consolidated Statements of Cash Flows for the fiscal year ended February 3, 2001,
the fiscal year ended January 29, 2000
and the fiscal year ended January 30, 1999....................................... F-6
Notes to Consolidated Financial Statements.......................................... F-7
Consolidated Interim Financial Statements (unaudited)
Consolidated Balance Sheets as of August 4, 2001, and February 3, 2001.............. F-22
Consolidated Statements of Income for the 13 week and 26 week periods ended August 4,
2001 and July 29, 2000........................................................... F-23
Consolidated Statements of Cash Flows for the 26 weeks ended August 4, 2001, and July
29, 2000......................................................................... F-24
Notes to Financial Statements....................................................... F-26
Report of Independent Accountants
To the Board of Directors and Shareholders of Fred's, Inc.
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of income, of changes in shareholders' equity and of
cash flows present fairly, in all material respects, the financial position of
Fred's, Inc. and its subsidiaries at February 3, 2001 and January 29, 2000, and
the results of their operations and their cash flows for each of the three years
in the period ended February 3, 2001, in conformity with accounting principles
generally accepted in the United States of America. 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 of America, 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 our opinion expressed
above.
PricewaterhouseCoopers LLP
Memphis, Tennessee
April 4, 2001, except for Note 12,
as to which the date is June 18, 2001
Fred's, Inc.
Consolidated Balance Sheets
(in thousands, except for number of shares)
February 3, January 29,
2001 2000
--------------- --------------
ASSETS
Current assets:
Cash and cash equivalents $ 2,569 $ 3,036
Receivables, less allowance for doubtful accounts of $516
($452 at January 29, 2000) 15,430 10,911
Inventories 149,602 141,612
Deferred income taxes 2,022 3,002
Other current assets 2,306 1,865
--------------- --------------
Total current assets 171,929 160,426
Property and equipment, at depreciated cost 76,360 73,459
Equipment under capital leases, less accumulated amortization of
$1,305 ($856 at January 29, 2000) 1,387 1,835
Deferred income taxes 98 866
Other noncurrent assets, net 5,021 3,636
--------------- --------------
Total assets $ 254,795 $ 240,222
--------------- --------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 40,432 $ 39,653
Current portion of indebtedness 2,175 30,306
Current portion of capital lease obligations 503 430
Accrued liabilities 14,012 9,680
Income taxes payable 4,278 650
--------------- --------------
Total current liabilities 61,400 80,719
Long-term portion of indebtedness 30,475 10,027
Capital lease obligations 1,230 1,734
Other noncurrent liabilities 2,003 1,829
--------------- --------------
Total liabilities 95,108 94,309
--------------- --------------
Commitments and contingencies (Notes 6 and 10)
Shareholders' equity:
Common stock, Class A voting, no par value, 15,085,648 shares
issued and outstanding (14,985,345 shares at January 29, 2000) 68,557 67,326
Retained earnings 91,342 78,902
Deferred compensation on restricted stock incentive plan (212) (315)
-------------- --------------
Total shareholders' equity 159,687 145,913
-------------- --------------
Total liabilities and shareholders' equity $ 254,795 $ 240,222
-------------- --------------
See accompanying notes to consolidated financial statements.
Fred's, Inc.
Consolidated Statements of Income
(in thousands, except share and per share amounts)
For the Years Ended
-------------------------------------------------------
February 3, January 29, January 30,
2001 2000 1999
---- ---- ----
Net sales $ 781,249 $ 665,777 $ 600,902
Cost of goods sold 566,115 478,138 436,523
----------- ----------- -------------
Gross profit 215,134 187,639 164,379
Selling, general and administrative expenses 189,414 168,696 149,668
----------- ----------- -------------
Operating income 25,720 18,943 14,711
Interest expense, net 3,226 2,504 1,106
----------- ----------- -------------
Income before taxes 22,494 16,439 13,605
Income taxes 7,645 5,737 4,775
----------- ----------- -------------
Net income $ 14,849 $ 10,702 $ 8,830
=========== =========== ============
Net income per share
Basic $ .99 $ .72 $ .60
=========== =========== ============
Diluted $ .98 $ .71 $ .58
=========== =========== ============
Weighted average shares outstanding
Basic 14,921 14,784 14,748
=========== =========== ============
Diluted 15,246 15,090 15,098
=========== =========== ============
Fred's, Inc.
Consolidated Statements of Changes in Shareholders' Equity
(in thousands, except share data)
Common Stock Retained Deferred
------------ -------- --------
Shares Amount Earnings Compensation Total
------ ------ -------- ------------ -----
Balance, January 31, 1998 11,866,789 $65,700 $ 64,147 $ (488) $ 129,359
Stock split - (Note 12) 2,966,697
Cash dividends paid ($.16 per share) (2,381) (2,381)
Repurchase of shares (37) -
Issuance of restricted stock 57,727 752 (362) 390
Cancellation of restricted stock (6,875) (38) 38 -
Exercises of stock options 49,164 329 329
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 14,933,465 $66,951 $ 70,596 $ (564) $ 136,983
Cash dividends paid ($.16 per share) (2,396) (2,396)
Issuance of restricted stock 12,375 124 (124)
Cancellation of restricted stock (7,125) (118) 118
Other issuances 2,142 30 30
Exercises of stock options 44,488 296 296
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 14,985,345 $67,326 $ 78,902 $ (315) $ 145,913
Cash dividends paid ($.16 per share) (2,409) (2,409)
Issuance of restricted stock 4,750 57 (57)
Cancellation of restricted stock (36,340) (218) 15 (203)
Exercises of stock options 131,893 1,079 1,079
Amortization of deferred compensation
on restricted stock incentive plan 145 145
Tax benefit on exercise of stock
options 313 313
Net income 14,849 14,849
========== ======= ========= =========== ===========
Balance, February 3, 2001 15,085,648 $68,557 $ 91,342 $ (212) $ 159,687
========== ======= ========= =========== ===========
Fred's, Inc.
Consolidated Statements of Cash Flows
(in thousands)
For the Years Ended
-------------------
February 3, January 29, January 30,
2001 2000 1999
---- ---- ----
Cash flows from operating activities:
Net income $ 14,849 $ 10,702 $ 8,830
Adjustments to reconcile net income to net cash flows
from operating activities:
Depreciation and amortization 14,277 11,830 8,939
Provision for uncollectible receivables 64 80 124
LIFO Reserve 753 100 3,108
Deferred income taxes 1,747 2,513 2,344
Amortization of deferred compensation on restricted
stock incentive plan 145 255 248
Issuance (net of cancellation) of restricted stock (203) - 390
Tax benefit upon exercise of stock options 313 43 208
Gain on sale of fixed assets - (41) -
(Increase) decrease in assets:
Receivables (4,583) (2,060) (1,969)
Inventories (8,743) (15,135) (14,664)
Other assets (444) (847) (2,354)
Increase (decrease) in liabilities:
Accounts payable and accrued liabilities 5,110 (8,210) (3,712)
Income taxes payable 3,628 (176) (890)
Other noncurrent liabilities 174 159 175
--------- --------- ----------
Net cash (used in) provided by operating activities 27,087 (787) 777
========= ========= ==========
Cash flows from investing activities:
Capital expenditures (15,801) (14,043) (21,273)
Proceeds from dispositions of property and equipment 493 215 -
Asset acquisition, net of cash acquired (primarily intangibles) (2,807) (805) (1,993)
--------- --------- ----------
Net cash used in investing activities (18,115) (14,633) (23,266)
========= ========= ==========
Cash flows from financing activities:
Reduction of indebtedness and capital lease obligations (2,495) (2,139) (556)
Proceeds from revolving line of credit, net of payments (5,617) 18,040 10,200
Proceeds from term loan - 2,249 12,000
Proceeds from exercise of options 1,079 296 329
Payment of cash for dividends and fractional shares (2,406) (2,396) (2,381)
--------- --------- ----------
Net cash provided by (used in) financing activities (9,439) 16,050 19,592
========= ========= ==========
Increase (decrease) in cash and cash equivalents (467) 630 (2,897)
Cash and cash equivalents:
Beginning of year 3,036 2,406 5,303
--------- --------- ----------
End of year $ 2,569 $ 3,036 $ 2,406
========= ========= ==========
Supplemental disclosures of cash flow information:
Interest paid $ 3,332 $ 2,399 $ 1,239
Income taxes paid $ 3,693 $ 3,810 $ 2,828
Non cash investing and financing activities:
Assets acquired through capital lease obligations $ - $ 612 $ 509
Common stock issued for acquisition $ - $ 30 $ -
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. and subsidiaries
(the "Company") is the sale of general merchandise through its 320 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 2000, 1999 and 1998, as used
herein, refer to the years ended February 3, 2001, January 29, 2000, and January
30, 1999, 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 19% and 18% of the retail
inventories at February 03, 2001 and January 29, 2000, respectively, cost was
determined using the LIFO (last-in, first-out) method. The current cost of
inventories exceeded the LIFO cost by approximately $3,961,000 at February 03,
2001 and $3,208,000 at January 29, 2000.
Property and equipment. Buildings, furniture, fixtures and equipment are stated
at cost and depreciation is computed using the straight-line method over their
estimated useful lives. 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. Gains or losses on the sale of assets are
recorded at disposal.
Long lived assets. The Company's policy is to review the recoverability of all
long-lived assets annually and whenever events or changes indicate that the
carrying amount of an asset may not be recoverable. Based upon the Company's
review as of February 03, 2001 and January 29, 2000, no material adjustments to
the carrying value of such assets were necessary.
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
2000, 1999, and 1998 was $10,166,000, $8,926,000, and $9,621,000 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. Net sales includes sales of merchandise
from Company owned stores, net of returns and exclusive of sales taxes. Sales to
franchised stores are recorded when the merchandise is shipped from the
Company's warehouse. Revenues resulting from layaway sales are recorded upon
delivery of the merchandise to the customer. 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 costs incurred on behalf of the franchised stores. Total
franchise income for 2000, 1999 and 1998 was $1,809,000, $1,761,000 and
$1,957,000 respectively.
Other intangible assets. Other identifiable intangible assets which are included
in other noncurrent assets primarily represent amounts associated with acquired
pharmacies and are being amortized on a straight line basis over five years.
These intangibles, net of accumulated amortization, totaled $4,945,000 at
February 3, 2001, and $3,559,000 at January 29, 2000. Accumulated amortization
for 2000 and 1999 totaled $3,964,000 and $2,543,000, respectively. Amortization
expense for 2000, 1999 and 1998 was $1,421,000, $1,307,000 and $1,214,000
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 are outstanding
checks in excess of funds on deposit which totaled $5,823,000 at February 3,
2001 and $14,089,000 at January 29, 2000.
Financial instruments. At February 3, 2001, 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.
Business segments. The Company's only reportable operating segment is its sale
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. 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 2000 presentation.
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 identifies various revenue recognition
issues, several of which are common within the retail industry including
treatment of revenue recognition on layaway sales. In the fourth quarter of
2000, the Company revised its revenue recognition for layaway sales to defer
revenue recognition until all terms of the sale have been satisfied and the
customer takes delivery of the merchandise. Under the prior method of
accounting, net sales were recognized at the time the customer put the
merchandise into layaway. The effects of this change on prior quarters in 2000
and the proforma effects on 1999 are reflected in Note 13. The effects of this
change on the fourth quarter of 2000 was an increase in net sales, gross profit,
net income and net income per share (basic and diluted) of $1,932, $482, $318
and $.02 respectively. Annual financial results were not affected.
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 of the 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 - PROPERTY AND EQUIPMENT
Property and equipment, at cost, consist of the following (in thousands):
2000 1999
Buildings and improvements $67,068 $65,660
Furniture, fixtures and equipment 89,152 81,424
------- -------
156,220 147,084
Less accumulated depreciation (84,100) (78,018)
------- -------
72,120 69,066
Land 4,240 4,393
------- -------
$76,360 $73,459
======= =======
Depreciation expense totaled $12,407,000, $10,168,000 and $7,442,000 for 2000,
1999 and 1998, respectively.
NOTE 3 - ACCRUED LIABILITIES
The components of accrued liabilities are as follows (in thousands):
2000 1999
---- ----
Payroll and benefits $ 5,136 $ 2,992
Sales and use taxes 2,000 1,726
Insurance 2,497 2,904
Other 4,379 2,058
----- -----
$ 14,012 $ 9,680
========= ==========
NOTE 4 - INDEBTEDNESS
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 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. 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. There were
$22,623,000 and $28,240,000 of borrowings outstanding under the Agreement at
February 03, 2001 and January 29, 2000, respectively.
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 million 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. Under the most restrictive covenants of the Loan
Agreement, the Company is required to maintain specified debt service levels.
There were $1,265,500 and $1,828,000 borrowings outstanding under the Agreement
at February 03, 2001 and January 29, 2000, respectively. The principal maturity
under this Agreement for debt outstanding at February 03, 2001 is as follows:
$562,500 in fiscal 2001; $562,500 in fiscal 2002 and $140,500 in fiscal 2003.
On May 5, 1998, the Company and a bank entered into a Loan Agreement (the "Term
Loan Agreement"). The Term 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 Term Loan Agreement
bears interest of 6.82% per annum and matures on November 1, 2005. Under the
most restrictive covenants of the Term Loan Agreement, the Company is required
to maintain specified shareholders' equity and net income levels. Borrowings
outstanding under this Term Loan Agreement totaled $8,762,000 at February 03,
2001 and $10,265,000 at January 29, 2000. The principal maturity under this
Agreement for debt outstanding at February 03, 2001 is as follows: $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 in fiscal 2005.
Interest expense for 2000, 1999 and 1998 totaled $3,226,000, $2,504,000 and
$1,206,000, respectively.
NOTE 5 - 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):
2000 1999 1998
---------------- ---------------- ----------------
Current
Federal $ 5,898 $ 3,224 $ 2,639
State - - (208)
-------- -------- --------
5,898 3,224 2,431
-------- -------- --------
Deferred
Federal 1,423 2,116 1,974
State 324 397 370
-------- -------- --------
1,747 2,513 2,344
-------- -------- --------
$ 7,645 $ 5,737 $ 4,775
======== ======== ========
Deferred tax assets (liabilities) are comprised of the following(in thousands):
2000 1999
---------------- ----------------
Current deferred tax assets:
Inventory valuation methods $ (465) $ 758
Accrual for inventory shrinkage 768 672
Allowance for doubtful accounts 310 285
Insurance accruals 1,200 990
Other 654 749
--------- ---------
Gross current deferred tax assets 2,467 3,454
Deferred tax asset valuation allowance (289) (182)
--------- ---------
2,178 3,272
Current deferred tax liabilities (156) (270)
--------- ---------
Net current deferred tax asset $ 2,022 $ 3,002
========= =========
Noncurrent deferred tax assets:
Net operating loss carryforwards $ 1,685 $ 1,421
Postretirement benefits other than pensions 760 694
Restructuring costs 82 82
Other 1,769 1,583
--------- ---------
Gross noncurrent deferred tax assets 4,296 3,780
Deferred tax asset valuation allowance (1,267) (1,239)
--------- ---------
3,029 2,541
Noncurrent deferred tax liabilities:
Depreciation (2,904) (1,648)
Other (27) (27)
--------- ---------
Gross noncurrent deferred tax liabilities (2,931) (1,675)
--------- ---------
Net noncurrent deferred tax asset $ 98 $ 866
========= =========
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 2000 and 1999, the valuation
allowance increased $264,000 and $393,000, respectively, as the result of the
company generating additional net operating loss carryforwards in certain
states.
At February 3, 2001, the Company has certain net operating loss carryforwards
which were acquired in reorganizations and purchase transactions which are
available to reduce income taxes, subject to usage limitations. These
carryforwards total approximately $43,784,000 for state income tax purposes, and
expire at various times during the period 2002 through 2022. If certain
substantial changes in the Company's ownership should occur, there would be an
annual limitation on the amount of carryforwards which can be utilized.
A reconciliation of the statutory Federal income tax rate to the effective tax
rate is as follows:
2000 1999 1998
------------------ ------------------ --------------
Income tax provision at statutory rate 35.0% 35.0% 35.0%
State income taxes, net of federal benefit 0.9 1.6 0.8
Change in valuation allowance - - 0.7
Surtax Exemptions (1.0) (1.0) (1.0)
Other (0.9) (0.7) (0.4)
------------------ ------------------ --------------
34.0% 34.9% 35.1%
------------------ ------------------ --------------
NOTE 6 - LONG-TERM LEASES
The Company leases certain of its store locations under noncancelable operating
leases expiring at various dates through 2031. 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 $17,465,000, $15,329,000 and $13,618,000 for
2000, 1999 and 1998, respectively. Amortization expense on assets under capital
lease for 2000, 1999 and 1998 was $449,000, $355,000 and $283,000, respectively.
Future minimum rental payments under all operating and capital leases as of
February 03, 2001 are as follows:
Operating Capital
Leases Leases
2001 $ 16,055 $ 741
2002 14,189 741
2003 11,505 364
2004 8,491 255
2005 6,121 142
Thereafter 11,426 0
---------- ----------
Total minimum lease payments $ 67,787 2,243
==========
Imputed interest (510)
----------
Present value of net minimum lease payments, including
$503 classified as current portion of capital lease obligations $ 1,733
==========
NOTE 7 - 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.
NOTE 8 - EMPLOYEE BENEFIT PLANS
Incentive stock option plan. The Company has a long-term incentive plan under
which an aggregate of 1,460,937 shares may be granted. These options expire five
years from the date of grant. Options outstanding at February 3, 2001 expire in
2001 through 2005. A summary of activity in the plan follows:
2000 1999 1998
-------------------------------- ----------------------------- ----------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Options Price Options Price Options Price
-------------------------------- ----------------------------- ----------------------------
Outstanding at beginning
of year 704,317 $ 10.50 612,673 $ 10.72 514,122 $ 6.84
Granted 431,883 12.03 170,937 9.46 188,369 20.49
Canceled (176,031) 8.82 (32,626) 11.83 (40,654) 9.97
Expired - (2,180) 9.06 - -
Exercised (131,892) 6.94 (44,487) 6.70 (49,164) 6.74
======== ======= =======
Outstanding at end of year 828,277 12.23 704,317 10.50 612,673 10.72
======== ======= =======
Exercisable at end of year 192,581 8.50 211,641 7.28 190,603 7.88
======== ======= =======
The weighted average remaining contractual life of all outstanding options was
3.2 years at February 3, 2001.
The following table summarizes information about stock options outstanding at
February 03, 2001:
Options Outstanding Options Exercisable
----------------------------------------------------------- ---------------------------------------
Weighted
Average
Remaining Weighted Weighted
Number Contractual Average Number Average
Range of Outstanding at Life Exercise Exercisable at Exercise
Exercise Prices February 3, 2001 (in Years) Price February 3, 2001 Price
----------------------------- ----------------------------------------------------------- ---------------------------------------
$4.72 to $5.76 88,292 1.0 $ 5.63 86,355 $ 5.62
$9.20 to $12.95 603,891 3.8 $ 11.35 101,101 $ 10.35
$16.00 to $20.70 136,094 2.1 $ 20.42 5,125 $ 20.40
======= =====
828,277 192,581
======= =======
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
2000, 1999, and 1998 consistent with the method prescribed by SFAS No. 123,
Accounting for Stock-Based Compensation, the Company's operating results for
2000, 1999, and 1998 would have been reduced to the pro forma amounts indicated
below:
(in thousands, except per share data) 2000 1999 1998
------------- --------------- ------------
Net income
As reported $14,849 $10,702 $8,830
Pro forma 14,260 10,363 8,322
Basic earnings per share
As reported 0.99 0.72 0.60
Pro forma 0.96 0.70 0.56
Diluted earnings per share
As reported 0.98 0.71 0.58
Pro forma 0.94 0.69 0.55
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 2000, 1999 and 1998, respectively:
2000 1999 1998
--------------- --------------- -------------
Average expected life (years) 3.0 3.0 3.0
Average expected volatility 39.0% 43.3% 41.5%
Risk-free interest rates 5.6% 4.8% 5.5%
Dividend yield 1.3% 1.5% 1.3%
The weighted average grant-date fair value of options granted during 2000,
1999,and 1998 was $3.12, $3.34, and $6.28 respectively.
Restricted Stock. During 2000, 1999, and 1998, the Company issued (cancelled) a
net of (31,590), 5,250, and 50,852 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 February 3, 2001, January 29, 2000 and January 30, 1999 were $100,000,
$96,000 and $83,000, respectively.
Postretirement benefits. The Company provides certain health care benefits to
its full-time employees that retire between the ages of 58 and 65 with certain
specified levels of credited service. Health care coverage options for retirees
under the plan are the same as those available to active employees. The
Company's change in benefit obligation based upon an actuarial valuation is as
follows:
For the Year Ended
---------------------------------------------------------
February 3, January 29, January 30,
2001 2000 1999
---------------------------------------------------------
(in thousands)
Benefit obligation at beginning of year $ 1,377 $ 1,252 $ 1,132
Service cost 132 127 103
Interest cost 116 91 85
Participant contributions - - 4
Amendments - - -
Actuarial (gain) loss 68 (17) (67)
Benefits paid (76) (76) (5)
---------------------------------------------------------
Benefit obligation at end of year $ 1,617 $ 1,377 $ 1,252
---------------------------------------------------------
A reconciliation of the Plan's funded status to accrued benefit cost follows:
February 3, January 29, January 30,
2001 2000 1999
------------------ ------------------ ------------------
(in thousands)
Funded status $ (1,617) $ (1,377) $ (1,252)
Unrecognized net actuarial gain (322) (406) (405)
Unrecognized prior service cost (5) (6) (6)
------------------ ------------------ ------------------
Accrued benefit costs $ (1,944) $ (1,789) $ (1,663)
------------------ ------------------ ------------------
The medical care cost trend used in determining this obligation is 10.0%
effective February 1, 1997, decreasing annually before leveling at 6.0% 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 $238,000. The discount rate used in
calculating the obligation was 7.5% in 2000, 7.75% in 1999 and 6.75% in 1998.
The annual net postretirement cost is as follows:
For the Year Ended
----------------------------------------------------
February 3, January 29, January 30,
2001 2000 1999
----------------------------------------------------
(in thousands)
Service cost $ 132 $ 127 $ 103
Interest cost 116 91 85
Amortization of net gain from prior periods (17) (17) (21)
Amortization of unrecognized prior service cost 1 1 1
----------------------------------------------------
Net periodic postretirement benefit cost $ 232 $ 202 $ 168
----------------------------------------------------
The Company's policy is to fund claims as incurred.
NOTE 9 - 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):
Year Ended
--------------------------------- ------------------------------ ----------------------------------
February 3, 2001 January 29,2000 January 31, 1999
--------------------------------- ------------------------------ ----------------------------------
Per Per Per
Share Share Share
Income Shares Amount Income Shares Amount Income Shares Amount
----------------------- ------------ ---------- --------- ---------- --------- --------- ----------- ---------- -----------
Basic EPS $14,849 14,921 $ .99 $10,702 14,784 $ .72 $8,830 14,748 $ .60
Effect of Dilutive
Securities
Restricted Stock 97 135 99
Stock Options 228 171 251
------------ ---------- --------- ---------- --------- --------- ----------- ---------- -----------
Diluted EPS $14,849 15,246 $ .98 $10,702 15,090 $ .71 $8,830 15,098 $ .58
NOTE 10 - COMMITMENTS AND CONTINGENCIES
Commitments. At February 3, 2001, the Company had commitments approximating
$5,082,000 on issued letters of credit which support purchase orders for
merchandise. Additionally, the Company had outstanding letters of credit
aggregating $2,552,000 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 11 - 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 February 03,
2001 represents remaining future base payments required on one location that has
been closed.
The 2000 activity in this reserve is as follows:
------------------------- ----------------------- ---------------------- ----------------------- ----------------------
January 30, January 29, February 3,
1999 2000 Payments 2001
---- ---- -------- ----
Lease Obligations $ 400 $ 215 $ (129) $ 86
------------------------- ----------------------- ---------------------- ----------------------- ----------------------
NOTE 12 - STOCK SPLIT SUBSEQUENT TO THE YEAR ENDED FEBRUARY 3, 2001
On May 24, 2001, the Company announced a five-for-four stock split of its Class
A voting common stock. The new shares, one additional share for each four shares
held by stockholders, were distributed on June 18, 2001 to stockholders of
record on June 4, 2001. All share and per share amounts included in the
accompanying financial statements and footnotes have been adjusted to reflect
this stock split.
NOTE 13 - QUARTERLY FINANCIAL DATA (UNAUDITED)
First Second Third Fourth
Quarter Quarter Quarter Quarter
------------------ -------------------- ------------------- -------------------
(in thousands, except per share data)
Year Ended February 3, 2001 -
restated (1) (2)
Net sales $ 176,132 $ 180,353 $ 180,141 $ 244,623
Gross profit 48,990 49,060 51,850 65,234
Net income 3,345 1,654 3,829 6,021
Net income per share
Basic 0.22 0.11 0.26 0.40
Diluted 0.22 0.11 0.25 0.40
Cash dividends paid per share 0.04 0.04 0.04 0.04
Year Ended January 29, 2000 -
proforma (3)
Net sales $ 154,226 $ 155,792 $ 156,741 $ 199,018
Gross profit 44,135 43,775 46,780 52,949
Net income 2,766 920 2,677 4,339
Net income per share
Basic 0.18 0.06 0.18 0.30
Diluted 0.18 0.06 0.18 0.29
Cash dividends paid per share 0.04 0.04 0.04 0.04
Year Ended January 29, 2000 - as
reported
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 0.19 0.07 0.19 0.27
Diluted 0.19 0.07 0.19 0.26
Cash dividends paid per share 0.04 0.04 0.04 0.04
(1) Based upon a 53 week year.
(2) As discussed in "Recent Accounting Prounouncements" in Note 1, the above
information has been restated to reflect the impact of the Company
implementing the interpetations in SAB 101 related to layaway sales during
the fourth quarter of 2000. In the quarters in the year ended February 3,
2001, the effects of this restated on previously reported net sales, gross
profit, net income and net income per share (basic & diluted) was a
decrease of $528, $132, $87 and $.01 respectively for the 1st quarter; a
decrease of $453, $111, $73, and .00 respectively for the 2nd quarter and a
decrease of $951, $239, $158 and $.01 respectively for the 3rd quarter.
(3) For informational purposes only, 1999 quarterly results have been restated
on proforma basis as if the effects of SAB 101 on layaway sales had been
applied to the 1999 quarterly reports.
FRED'S, INC.
CONSOLIDATED BALANCE SHEETS
(unaudited)
(in thousands, except for number of shares)
August 4, February 3,
2001 2001
-------- ----------
ASSETS
Current assets:
Cash and cash equivalents $1,928 $2,569
Receivables, less allowance for doubtful
accounts of $375 ($516 at February 3, 2001) 11,903 15,430
Inventories 160,357 149,602
Deferred income taxes 982 2,022
Other current assets 2,053 2,306
------- -------
Total current assets 177,223 171,929
Property and equipment, at depreciated cost 78,222 76,360
Equipment under capital leases, less accumulated
amortization of $1,567 ($1,305 at February 3,2001) 1,815 1,387
Deferred income taxes 655 98
Other noncurrent assets 4,960 5,021
------- -------
Total assets $262,875 $254,795
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $41,497 $40,432
Current portion of indebtedness 2,228 2,175
Current portion of capital lease obligations 627 503
Accrued liabilities 12,197 14,012
Income taxes payable 1,118 4,278
------- -------
Total current liabilities 57,667 61,400
------- -------
Long term portion of indebtedness 34,627 30,475
Capital lease obligations 1,531 1,230
Other noncurrent liabilities 2,031 2,003
------- -------
Total liabilities 95,856 95,108
------- -------
Shareholders' equity:
Common stock, Class A voting, no par value,
15,229,044 shares issued and outstanding
(15,085,648 shares at February 3, 2001) 70,767 68,557
Retained earnings 96,395 91,342
Deferred compensation on restricted
stock incentive plan (143) (212)
------- -------
Total shareholders' equity 167,019 159,687
------- -------
Total liabilities and shareholders' equity $262,875 $254,795
======== ========
See accompanying notes to consolidated financial statements
FRED'S, INC.
CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
(in thousands, except per share amounts)
Thirteen Weeks Ended Twenty-Six Weeks Ended
---------------------- ----------------------
August 4, July 29, August 4, July 29,
2001 2000 2001 2000
---------------------- ----------------------
Net sales $210,278 $180,353 $417,637 $356,485
Cost of goods sold 153,497 131,293 303,098 258,435
------- --------- -------- --------
Gross profit 56,781 49,060 114,539 98,050
Selling, general and
administrative expenses 52,817 46,036 103,538 89,198
------ --------- -------- --------
Operating income 3,964 3,024 11,001 8,852
Interest expense, net 706 763 1,336 1,436
------ --------- -------- --------
Income before income taxes 3,258 2,261 9,665 7,416
Provision for income taxes 1,144 607 3,392 2,417
------ --------- -------- --------
Net income $ 2,114 $ 1,654 $ 6,273 $ 4,999
======== ========= ======== ========
Net income per share
Basic .14 $ .11 $ .42 $ .34
======= ======== ======== ========
Diluted .14 $ .11 $ .41 $ .33
======= ======== ======== ========
Weighted average shares outstanding
Basic 15,106 14,910 15,056 14,860
======= ======== ======== ========
Diluted 15,268 15,218 15,485 15,194
======= ======== ======== ========
See accompanying notes to consolidated financial statements
FRED'S, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(in thousands)
Twenty-six Weeks Ended
August 4, July 29,
2001 2000
----- ----
Cash flows from operating activities:
Net income $6,273 $4,999
Adjustments to reconcile net income
to net cash flows from operating activities:
Depreciation and amortization 8,518 6,883
Lifo reserve 400 400
Deferred income taxes 483 383
Tax benefit on exercise of stock options 397 185
Amortization of deferred compensation on
restricted stock incentive plan 69 76
Cancellation of restricted stock (21) (203)
(Increase)decrease in assets:
Receivables 3,527 459
Inventories (10,559) (12,948)
Other assets 253 (780)
Increase (decrease) in liabilities:
Accounts payable and accrued liabilities (758) 4,064
Income taxes payable (3,160) 2,010
Other noncurrent liabilities 28 87
------- -------
Net cash provided by operating activities 5,450 5,615
------- -------
Cash flows from investing activities:
Capital expenditures (9,673) (6,993)
Intangible assets, net of cash acquired (383) (1,240)
----- -------
Net cash used in investing activities (10,056) (8,233)
-------- -------
Cash flows from financing activities:
Reduction of indebtedness and capital lease
obligations (1,343) (998)
Proceeds from revolving line of credit,
net of payments 5,281 2,214
Proceeds from exercise of options 1,238 725
Cash dividends paid (1,211) (1,201)
--------- -------
Net cash provided by financing activities 3,965 740
--------- -------
Decrease in cash and cash equivalents (641) (1,878)
Cash and cash equivalents:
Beginning of period 2,569 3,036
------- --------
End of period $1,928 $1,158
======= ========
Supplemental disclosures of cash flow information:
Interest paid $1,223 $1,537
====== ======
Income taxes paid $5,700 ----
====== =====
Non cash investing and financing activities:
Assets acquired through capital lease obligations $691 ----
===== ====
Common stock issued for acquisition $596 ----
===== ====
See accompanying notes to consolidated financial statements
FRED'S, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------------------------------
NOTE 1: BASIS OF PRESENTATION
----------------------------------------------------------------------
Fred's, Inc. ("Fred's" or the "Company") operates 373 discount general
merchandise stores, including 27 franchised Fred's stores, in eleven
states primarily in the southeastern United States. Two hundred and
two 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 accounting principles generally accepted
in the United States of America. 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 accounting principles generally
accepted in the United States of America. The statements should be
read in conjunction with the Notes to the Consolidated Financial
Statements for the fiscal year ended February 3, 2001 incorporated
into the Company's Annual Report on Form 10-K.
The results of operations for the twenty-six week period ended August
4, 2001 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
2001 presentation.
----------------------------------------------------------------------
NOTE 2: INVENTORIES
----------------------------------------------------------------------
Wholesale inventories are stated at the lower of cost or market using
the FIFO (first-in, first-out) method. Retail inventories are stated
at the lower of cost or market as determined by the retail inventory
method. For pharmacy inventories, which comprise approximately 19% of
the retail inventories at August 4, 2001, cost was determined using
the LIFO (last-in, first-out) method. The current cost of inventories
exceeded the LIFO cost by approximately $4,361,000 and $3,608,000 at
August 4, 2001 and July 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.
----------------------------------------------------------------------
NOTE 3: 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.
COMPUTATION OF NET INCOME PER SHARE
-----------------------------------
(unaudited)
(in thousands, except per share amounts)
Thirteen Weeks Ended Twenty-Six Weeks Ended
----------------------------- ----------------------
August 4, July 29, August 4, July 29,
2001 2000 2001 2000
----------------------------- -----------------------
Basic net income per share
Net income $ 2,114 $ 1,654 $ 6,273 $4,999
======= ======= ======= ======
Weighted average number of common shares
outstanding during the period
15,106 14,910 15,056 14,860
======= ======= ======= ======
Net income per share $ .14 $ .11 $ .42 $ .34
======= ======= ======= ======
Diluted net income per share
Net income $ 2,114 $ 1,654 $ 6,273 $4,999
======= ======= ======= ======
Weighted average number of common shares
outstanding during the period
15,106 14,910 15,056 14,860
Additional shares attributable to common
stock equivalents 162 308 429 334
------- ------- ------- ------
15,268 15,218 15,485 15,194
======= ======= ======= ======
Net income per share $ .14 $ .11 $ .41 $ .33
======= ======= ======== ======
----------------------------------------------------------------------
NOTE 4: LAYAWAY SALES
----------------------------------------------------------------------
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101 "Revenue Recognition in Financial
Statements" (SAB 101). SAB 101 identifies various revenue recognition
issues, several of which are common within the retail industry
including treatment of revenue recognition on layaway sales. In the
fourth quarter of 2000, the Company revised its revenue recognition
for layaway sales to defer revenue recognition until all terms of the
sale have been satisfied and the customer takes delivery of the
merchandise. Under the prior method of accounting, net sales were
recognized at the time the customer put the merchandise into layaway.
The effects of this restated change on the previously reported second
quarter ended July 29, 2000 are as follows:
Thirteen Weeks Ended Twenty-Six Weeks Ended
-------------------- ----------------------
(as reported) (as adjusted) (as reported) (as adjusted)
July 29, July29, July 29, July 29,
2000 2000 2000 2000
---- ---- ---- ----
Net Sales $180,806 $180,353 $357,466 $356,485
Gross profit 49,171 49,060 98,293 98,050
Net income 1,727 1,654 5,159 4,999
Net income per share
Basic * 0.12 0.11 0.35 0.34
Diluted * 0.11 0.11 0.34 0.33
*All per share amounts have been adjusted to reflect the five-for-four
stock split effective on June 18, 2001.
----------------------------------------------------------------------
NOTE 5: STOCK SPLIT
----------------------------------------------------------------------
On May 24, 2001, the Company announced a five-for-four stock split of
its common stock, Class A voting, no par value. The new shares, one
additional share for each four shares held by stockholders, were
distributed on June 18, 2001 to stockholders of record on June 4,
2001. All share and per share amounts included in the accompanying
financial statements have been adjusted to reflect this stock split.
----------------------------------------------------------------------
NOTE 6: RECENT ACCOUNTING PRONOUNCEMENTS
----------------------------------------------------------------------
In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards ("SFAS") No. 133,
Accounting for Derivative Instruments and Hedging Activities. In June
2000, the FASB issued SFAS No. 138, Accounting for Certain Derivative
Instruments and Certain Hedging Activities - an Amendment of FASB
Statement No. 133, SFAS No. 133, as amended by SFAS No. 138, requires
all derivatives to be measured at fair value and recognized as either
assets or liabilities on the balance sheet. Changes in such fair value
are required to be recognized immediately in net income to the extent
the derivatives are not effective as hedges. In September 1999, the
FASB issued SFAS No. 137, Accounting for Derivative Instruments and
Hedging Activities - Deferral of the effective Date of FASB Statement
No. 133, an amendment to delay the effective date of SFAS No. 133 to
fiscal years beginning after June 15, 2000. The Company does not hold
derivative instruments or engage in hedging activities.
In June 2001, the FASB issued SFAS No. 141, Business Combinations.
SFAS No. 141 supercedes Accounting Principles Board Opinion ("APB")
No. 16, Business Combinations, and SFAS No. 38, Accounting for
Preacquisition Contingencies of Purchased Enterprises. SFAS No. 141
requires that the purchase method of accounting be used for all
business combinations initiated after June 30, 2001 and for all
business combinations accounted for by the purchase method for which
the date of acquisition is after June 30, 2001. The Company does not
expect the adoption of SFAS No. 141 to have a material impact on its
financial statements.
In June 2001, the FASB issued SFAS No. 142, Goodwill and Other
Intangible Assets. SFAS No. 142 supercedes APB No. 17, Intangible
Assets, and its provisions are effective for fiscal years beginning
after December 15, 2001. SFAS No. 142 requires that: 1) goodwill and
indefinite lived intangible assets will no longer be amortized; 2)
goodwill will be tested for impairment at least annually at the
reporting unit level (reporting unit levels to be determined upon
adoption); 3) intangible assets deemed to have an indefinite life will
be tested for impairment at least annually; and 4) the amortization
period of intangible assets with finite lives will no longer be
limited to forty years. As of August 4, 2001, the Company has
intangible assets, net of accumulated amortization, of $4.9 million
and has recognized amortization expense of approximately $.8 million
during the six months ended August 4, 2001. The Company has not
completed the process of evaluating the impact that will result from
adopting SFAS No. 142.
[Inside back cover: Pictures of stores, products and customers]
You should rely only on the information contained in this prospectus. We
have not authorized anyone to provide you with information different from that
which is set forth in this prospectus. We are offering to sell shares of common
stock and seeking offers to buy shares of common stock only in jurisdictions
where offers and sales are permitted. The information contained in this
prospectus is accurate only as of the date of this prospectus, regardless of the
time of delivery of the prospectus or of any sale of common stock.
TABLE OF CONTENTS
Page
Prospectus Summary...................................
The Offering.........................................
Summary Consolidated Financial and Operating Data....
Risk Factors.........................................
Cautionary Statement Regarding Forward Looking
Information..................................
Use of Proceeds......................................
Dividend Policy......................................
Price Range of Common Stock..........................
Capitalization.......................................
Selected Financial and Operational Data..............
Management's Discussion and Analysis of Financial
Condition and Results of
Operations Business..........................
Management...........................................
Principal and Selling Shareholders...................
Description of Capital Stock.........................
Underwriting.........................................
Legal Matters........................................
Experts..............................................
Where You Can Find More Information..................
Incorporation of Certain Documents by Reference......
Index to Financial Statements........................
1,650,000 Shares
[FRED'S LOGO]
Class A Common Stock
--------------------------------
-------------------------------
PROSPECTUS
September __, 2001
--------------------------------
William Blair & Company
SunTrust Robinson Humphrey
Morgan Keegan & Company, Inc.
PART II
INFORMATION NOT REQUIRED IN THE PROSPECTUS
Item 14. Other Expenses of Issuance and Distribution.
Securities and Exchange Commission Fee $12,160.50
National Association of Securities Dealers, Inc. Filing Fee $17,500.00
Nasdaq National Market Listing Fee $ 5,364.20
Printing Fees $[____*____]
Transfer Agent Fees $[____*____]
Accountants' Fees. $[____*____]
Legal Fees and Expenses $[____*____]
Miscellaneous $[____*____]
Total $[____*____]
*To be furnished by amendment prior to effectiveness of this Registration
Statement.
Item 15. Indemnification of Directors and Officers.
The Tennessee Business Corporation Act permits a corporation to indemnify a
director or officer of the corporation (and certain other persons serving at the
request of the corporation in related capacities) if such person shall have
acted in good faith and in a manner he reasonably believed to be in the best
interests of the corporation, and in any criminal proceeding, if such person had
no reasonable cause to believe his conduct was unlawful; provided that, in the
case of actions brought by or in the right of the corporation, no
indemnification may be made with respect to any matters as to which such
director or officer shall have been adjudged to have breached his duty to the
Corporation.
Article Seven of Fred's Charter provides that Fred's shall indemnify its
directors to the full extent authorized or permitted by the Tennessee Business
Corporation Act. Paragraphs 53 through 57 of Fred's By-laws extend such
indemnification to directors and to officers of Fred's, explicate certain
mechanics of determinations to be made in connection with any requests for
indemnification, provide for advances of expenses, certain notices to
shareholders, and the non-exclusivity of those provisions.
Fred's and its directors entered into an agreement in 1989 in connection
with the settlements of a legal proceeding, which contains indemnification
provisions similar to those contained in Fred's Charter and By-laws, but which
sets forth with greater particularity the matter in which separate counsel for
an indemnified party must be selected, the conditions under which expenses may
be paid in advance, and limitations on settlement of actions subject to
indemnification.
Item 16. Exhibits.
4.1 -- Specimen Common Stock Certificate [incorporated herein by
reference to Exhibit 4.2 to Pre-Effective Amendment
No. 3 to Fred's Registration Statement on Form S-1
(Registration No. 33-45637) filed on March 17,1992].
5.1** -- Opinion of Counsel
10.26** -- Underwriters Agreement
23.1** -- Consent of Counsel (included in Exhibit 5.1)
23.2** -- Consent of Independent Accountants
24.1 -- Powers of Attorney (included in Part II)
** To be filed by amendment prior to effectiveness of this Registration
Statement.
Item 17. Undertakings.
1. The undersigned registrant hereby undertakes:
(a) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of the Securities
Act of 1933 (the "Securities Act");
(ii) To reflect in the prospectus any facts or events arising after the
effective date of the registration statement (or the most recent
post-effective amendment hereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the
registration statement. Notwithstanding the foregoing, any increase or
decrease in volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered) and any
deviation from the low or high end of the estimated maximum offering range
may be reflected in the form of prospectus filed with the Commission
pursuant to Rule 424(b) under the Securities Act if, in the aggregate, the
changes in volume and price represent no more than a 20% change in the
maximum aggregate offering price set forth in the "Calculation of
Registration Fee" table in the effective registration statement.
(iii)To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or any
material change to such information in the registration statement;
provided, however, that paragraphs (a)(i) and (a)(ii) do not apply if the
information required to be included in a post-effective amendment by those
paragraphs is contained in periodic reports filed by the registrant pursuant to
Section 13 or 15(d) of the Exchange Act of 1934 (the "Exchange Act") that are
incorporated by reference in the registration statement.
(b) That, for the purpose of determining any liability under the Securities
Act, each such post-effective amendment shall be deemed to be a new registration
statement relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide offering
thereof.
(c) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination of the
offering.
2. The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act, each filing of the
registrant's annual report pursuant to Section 13(a) or 15(d) of the Exchange
Act (and, where applicable, each filing of an employee benefit plan's annual
report pursuant to Section 15(d) of the Exchange Act) that is incorporated by
reference in the registration statement shall be deemed to be a new registration
statement relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide offering
thereof.
3. Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
registrant pursuant to the provisions described under Item 15 above, or
otherwise, the registrant has been advised that in the opinion of the Commission
such indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of expenses
incurred or paid by a director, officer or controlling person of the registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-3 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Memphis, State of Tennessee on August 27, 2001.
FRED'S, INC.
By: /s/ Michael J. Hayes
-------------------------------------
Michael J. Hayes,
Chief Executive Officer
and President
By: /s/ Jerry A. Shore
-------------------------------------
Executive Vice President and
Chief Financial Officer
(Principal Accounting and
Financial Officer)
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
Signature Title
/s/ Michael J. Hayes
--------------------
Michael J. Hayes Chief Executive Officer, Managing Director
and Director
/s/ John D. Reier
-----------------
John D. Reier President and Director
/s/ David A. Gardner
--------------------
David A. Gardner Managing Director and Director
/s/ John R. Eisenman
--------------------
John R. Eisenman Director
/s/ Roger T. Knox
-----------------
Roger T. Knox Director
/s/ Thomas H. Tashjian
----------------------
Thomas H. Tashjian Director
Exhibit 24.1
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each of the undersigned directors and
officers of Fred's, Inc., a Tennessee corporation, hereby constitutes and
appoints Michael J. Hayes and Charles S. Vail, and each of them, his true and
lawful attorney-in-fact, for him and in his name, place and stead in any and all
capacities to sign each Amendment to this Registration Statement, and to file
this Registration Statement and each Amendment so signed with all exhibits
thereto and any and all documents in connection therewith with the Securities
and Exchange Commission, hereby granting unto said attorneys-in-fact full power
and authority to do and perform any and all acts and things requisite and
necessary to be done in and about the premises, as fully to all intents and
purposes as he might do in person, hereby ratifying and confirming all that said
attorneys-in-fact may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this Power of
Attorney has been signed by the following persons on August 27, 2001.
Signature Title
/s/ Michael J. Hayes
--------------------
Michael J. Hayes Chief Executive Officer, Managing Director
and Director
/s/ John D. Reier
-----------------
John D. Reier President and Director
/s/ David A. Gardner
--------------------
David A. Gardner Managing Director and Director
/s/ John R. Eisenman
--------------------
John R. Eisenman Director
/s/ Roger T. Knox
-----------------
Roger T. Knox Director
/s/ Thomas H. Tashjian
----------------------
Thomas H. Tashjian Director