-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, QiSxXly+hz4kd+S/rr1/N/znrG81ntHaamX/e9SeifsGhDdPMauuCNJP85aS3Xrq JjXkut4kadpl9+2YAAetfg== 0000928585-99-000050.txt : 19991215 0000928585-99-000050.hdr.sgml : 19991215 ACCESSION NUMBER: 0000928585-99-000050 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19991030 FILED AS OF DATE: 19991214 FILER: COMPANY DATA: COMPANY CONFORMED NAME: FREDS INC CENTRAL INDEX KEY: 0000724571 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-VARIETY STORES [5331] IRS NUMBER: 620634010 STATE OF INCORPORATION: TN FISCAL YEAR END: 0127 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-14565 FILM NUMBER: 99774387 BUSINESS ADDRESS: STREET 1: 4300 NEW GETWELL RD CITY: MEMPHIS STATE: TN ZIP: 38118 BUSINESS PHONE: 9013658880 MAIL ADDRESS: STREET 1: 4300 NEW GETWELL ROAD CITY: MEMPHIS STATE: TN ZIP: 38118 FORMER COMPANY: FORMER CONFORMED NAME: BADDOUR INC DATE OF NAME CHANGE: 19910620 10-Q 1 QUARTERLY REPORT FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 [ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. For the quarterly period ended October 30, 1999. OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. For the transition period from to --------------- -------------- Commission file number 000-19288 FRED'S, INC. (Exact name of registrant as specified in its charter) Tennessee 62-0634010 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 4300 New Getwell Rd., Memphis, Tennessee 38118 (Address of principal executive offices) (zip code) (901) 365-8880 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No The registrant had 11,979,846 shares of common stock outstanding as of December 13, 1999. FRED'S, INC. INDEX Page No. Part I - Financial Information Item 1 - Financial Statements (unaudited): Consolidated Balance Sheets as of October 30, 1999 and January 30, 1999 3 Consolidated Statements of Operations for the Thirteen Weeks Ended and the Thirty-Nine Weeks Ended October 30, 1999 and October 31, 1998 4 Consolidated Statements of Cash Flows for the Thirty-Nine Weeks Ended October 30, 1999 and October 31, 1998 5 Notes to Consolidated Financial Statements 6 - 8 Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations 9 - 14 Part II - Other Information 15 - --------------------------- Signatures 16 - 2 - FRED'S, INC. CONSOLIDATED BALANCE SHEETS (unaudited) (in thousands, except for number of shares)
October 30, January 30, 1999 1999 ---- ---- ASSETS Current assets: Cash and cash equivalents $ 821 $ 2,406 Receivables, less allowance for doubtful accounts 10,770 8,931 Inventories 155,643 126,577 Deferred income taxes 3,544 3,783 Other current assets 1,003 1,367 --------- --------- Total current assets 171,781 143,064 Property and equipment, at depreciated cost 70,784 68,923 Equipment under capital leases, less accumulated amortization 1,318 1,578 Deferred income taxes 2,362 2,598 Other noncurrent assets 3,886 4,594 --------- --------- Total assets $ 250,131 $ 220,757 ========= ========= LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable $ 53,228 $ 46,767 Current portion of indebtedness 26,869 11,606 Current portion of capital lease obligations 347 308 Accrued liabilities 11,585 10,776 Income taxes payable 1,979 826 --------- --------- Total current liabilities 94,008 70,283 Long term portion of indebtedness 10,552 10,264 Capital lease obligations 1,290 1,557 Other noncurrent liabilities 1,789 1,670 --------- --------- Total liabilities 107,639 83,774 --------- --------- Shareholders' equity: Common stock, Class A voting, no par value, 11,978,660 shares issued and outstanding (11,946,772 shares at January 30, 1999) 67,293 66,951 Retained earnings 75,618 70,596 Deferred compensation on restricted stock incentive plan (419) (564) --------- --------- Total shareholders' equity 142,492 136,983 --------- --------- Total liabilities and shareholders' equity $ 250,131 $ 220,757 ========= =========
See accompanying notes to consolidated financial statements - 3 - FRED'S, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited) (in thousands, except per share amounts)
Thirteen Weeks Ended Thirty-Nine Weeks Ended October 30, October 31, October 30, October 31, 1999 1998 1999 1998 ---- ---- ---- ---- Net sales $158,049 $142,339 $469,481 $428,130 Cost of goods sold 110,932 100,890 334,093 310,198 -------- -------- -------- -------- Gross profit 47,117 41,449 135,388 117,932 Selling, general and administrative expenses 41,933 36,936 123,013 107,255 -------- -------- -------- -------- Operating income 5,184 4,513 12,375 10,677 Interest (income) expense, net 723 404 1,869 620 -------- -------- -------- -------- Income before income taxes 4,461 4,109 10,506 10,057 Provision for income taxes 1,565 1,541 3,687 3,773 -------- -------- -------- -------- Net income $ 2,896 $ 2,568 $ 6,819 $ 6,284 ======== ======== ======== ======== Net income per share: Basic $ .24 $ .22 $ .58 $ .53 ======== ======== ======== ======== Diluted $ .24 $ .21 $ .57 $ .52 ======== ======== ======== ======== Weighted average number of common shares and common equivalent shares outstanding Basic 11,832 11,808 11,823 11,795 ======== ======== ======== ======== Diluted 12,076 12,044 12,063 12,087 ======== ======== ======== ========
See accompanying notes to consolidated financial statements - 4 - FRED'S, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited) (in thousands) Thirty-Nine Weeks Ended ----------------------- October 30, October 31, 1999 1998 -------- -------- Cash flows from operating activities: Net income $ 6,819 $ 6,284 Adjustments to reconcile net income to net cash flows from operating activities: Depreciation and amortization 8,572 6,291 Amortization of deferred compensation on restricted stock incentive plan 215 173 Deferred income taxes 475 1,537 (Increase) decrease in assets: Receivables (1,839) (1,280) Inventories (29,036) (19,346) Other current assets 364 (1,244) Increase (decrease) in liabilities: Accounts payable 6,461 (352) Accrued liabilities 809 585 Income taxes payable 1,153 (1,027) Other noncurrent liabilities 119 136 -------- -------- Net cash used in operating activities (5,888) (8,243) -------- -------- Cash flows from investing activities: Additions to property and equipment (9,196) (19,003) Additions to intangible assets (270) (1,664) -------- -------- Net cash used in investing activities (9,466) (20,667) -------- -------- Cash flows from financing activities: Proceeds from borrowings 16,763 25,725 Reduction of indebtedness and capital lease obligations (1,440) (160) Proceeds from exercise of stock options 241 325 Cash dividends paid (1,795) (1,784) -------- -------- Net cash provided by financing activities 13,769 24,106 -------- -------- Increase (decrease) in cash and cash equivalents (1,585) (4,804) Cash and cash equivalents: Beginning of period 2,406 5,303 -------- -------- End of period $ 821 $ 499 ======== ======== Supplemental disclosures of cash flow information: Interest paid $ 1,808 $ 581 Income taxes paid $ 2,200 $ 2,879 See accompanying notes to consolidated financial statements - 5 - FRED'S, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS GENERAL Fred's operates 320 discount general merchandise stores, including 26 franchised Fred's stores, in ten states in the southeastern United States. One hundred and eighty-four of the stores have full service pharmacies. Fred's business is subject to seasonal influences, but the Company has tended to experience less seasonal fluctuation than many other retailers due to the Company's mix of everyday basic merchandise and pharmacy business. The fourth quarter is typically the most profitable quarter because it includes the Christmas selling season. The overall strength of the fourth quarter is partially mitigated, however, by the inclusion of the month of January, which is generally the least profitable month of the year. The impact of inflation on labor and occupancy costs can significantly affect Fred's operations. Many of Fred's employees are paid hourly rates related to the federal minimum wage and, accordingly, any increase affects Fred's. In addition, payroll taxes, employee benefits and other employee-related costs continue to increase. Occupancy costs, including rent, maintenance, taxes and insurance, also continue to rise. Fred's believes that maintaining adequate operating margins through a combination of price adjustments and cost controls, careful evaluation of occupancy needs, and efficient purchasing practices is the most effective tool for coping with increasing costs and expenses. NOTE 1: BASIS OF PRESENTATION The accompanying unaudited consolidated financial statements of Fred's, Inc. ("Fred's" or the "Company") have been prepared in accordance with the instructions to Form 10-Q and therefore do not include all information and notes necessary for a fair presentation of financial position, results of operations and cash flows in conformity with generally accepted accounting principles. The statements do reflect all adjustments (consisting of only normal recurring accruals) which are, in the opinion of management, necessary for a fair presentation of financial position in conformity with generally accepted accounting principles. The statements should be read in conjunction with the Notes to the Consolidated Financial Statements for the fiscal year ended January 30, 1999 incorporated into the Company's Annual Report on Form 10-K. The results of operations for the thirteen week and thirty-nine week period ended October 30, 1999 are not necessarily indicative of the results to be expected for the full fiscal year. - 6 - The results of operations for the thirteen week and thirty-nine week period ended October 31, 1998 have been restated to reflect the Company's adoption of the last-in, first-out ("LIFO") method of accounting for its pharmacy inventories during the fourth quarter of 1998. NOTE 2: NET INCOME PER SHARE Basic income per share is based on the weighted average number of common shares outstanding, and diluted net income per share is based on the weighted average number of common shares and common equivalent shares outstanding. COMPUTATION OF NET INCOME PER SHARE (unaudited) (in thousands, except per share amounts)
Thirteen Weeks Ended Thirty-Nine Weeks Ended October 30, October 31, October 30, October 31, 1999 1998 1999 1998 ---- ---- ---- ---- Basic net income per share Net income $ 2,896 $ 2,568 $ 6,819 $ 6,284 ======= ======= ======= ======= Weighted average number of common shares outstanding during the period 11,832 11,808 11,823 11,795 ======= ======= ======= ======= Net income per share $ .24 $ .22 $ .58 $ .53 ======= ======= ======= ======= Diluted net income per share Net income $ 2,896 $ 2,568 $ 6,819 $ 6,284 ======= ======= ======= ======= Weighted average number of common shares outstanding during the period 11,832 11,808 11,823 11,795 Additional shares attributable to common stock equivalents 244 236 240 292 ------- ------- ------- ------- 12,076 12,044 12,063 12,087 ======= ======= ======= ======= Net income per share $ .24 $ .21 $ .57 $ .52 ======= ======= ======= =======
- 7 - NOTE 3: 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 17% of the retail inventories at October 30, 1999, cost was determined using the LIFO (last-in, first-out) method. For the remainder of the retail inventories, the FIFO method was applied. The current cost of inventories exceeded the LIFO cost by approximately $3,109,000 at both October 30, 1999 and January 30, 1999. 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 4: RESTRUCTURING RESERVE 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 related to an accrual for closed facility lease obligations ($1,156,000) and the write-off of fixed assets and other store closing costs ($1,044,000). In addition, $660,000 of costs to eliminate certain product lines were incurred. These product lines were eliminated in 1997 and the reserves were fully utilized upon such disposition. Fixed asset write-offs were taken against assets being disposed. The remaining lease obligation reserves at October 30, 1999 represent future base payments required for two locations that have been closed. The 1999 activity in this reserve is as follows: January 30, October 30, (in thousands) 1999 Charges 1999 ----------- ------- ----------- Lease obligations $ 400 $ (186) $ 214 - 8 - Management's Discussion and Analysis of Financial Condition and Results of Operations RESULTS OF OPERATIONS Thirteen Weeks Ended October 30, 1999 and October 31, 1998. Net sales increased to $158.0 million in 1999 from $142.3 million in 1998, an increase of $15.7 million or 11.0%. The increase was attributable to comparable store sales increases of 6.0% ($7.8 million) and sales by stores not yet included as comparable stores ($8.9 million). Sales to franchisees decreased $1 million in 1999. The sales mix for the period was 48.5% Hardlines, 32.7% Pharmacy, 13.7% Softlines, and 5.1% Franchise. This compares with 50.7% Hardlines, 29.0% Pharmacy, 13.8% Softlines, and 6.5% Franchise for the same period last year. Gross profit increased to 29.8% of sales in 1999 compared with 29.1% of sales in the prior-year period. Gross profit margins benefitted from higher initial purchase margins, strong quarterly sales in various higher margin departments, such as home furnishings, domestics, footwear and electronics, and a reduction in franchise sales as a percentage of total sales, which carry substantially lower gross margins than the retail business. Selling, general and administrative expenses increased to $41.9 million in 1999 from $36.9 million in 1998. As a percentage of sales, expenses increased to 26.5% of sales compared with 25.9% of sales last year. Selling, general and administrative expenses were impacted by higher employee benefit costs, increased marketing expenses associated with additional promotional activities during the quarter, higher store labor and supply costs associated with the opening or upgrading of 10 locations during the quarter, and a decrease in franchise sales as a percentage of total sales, which carries a significantly lower selling, general and administrative ratio than retail sales. Interest expense increased to $.7 million in 1999 from $.4 million in 1998. The increased interest expense reflects higher average revolver borrowings for inventory purchases, as well as interest costs on term loan borrowings to finance a distribution center upgrade and acquisition of a new mainframe computer system. The company's average borrowing cost for the third quarter of 1999 was approximately 6.3%. - 9 - Thirty-Nine Weeks Ended October 30, 1999 and October 31, 1998. Net sales increased to $469.5 million in 1999 from $428.1 million in 1998, an increase of $41.4 million or 9.7%. The increase was attributable to comparable store sales increases of 3.8% ($14.8 million) and sales by stores not yet included as comparable stores ($29.5 million). Sales to franchisees decreased $2.9 million in 1999. The sales mix for the period was 48.5% Hardlines, 32.2% Pharmacy, 14.0% Softlines, and 5.3% Franchise. This compares with 52.0% Hardlines, 27.3% Pharmacy, 14.2% Softlines, and 6.5% Franchise for the same period last year. Gross profit increased to 28.8% of sales in 1999 compared with 27.5% of sales in the prior-year period. Gross profit margins improved as a result of higher initial purchase margins, strong sales in various higher margin categories, and a reduction in franchise sales as a percentage of total sales, which carry substantially lower gross margins than the retail business. Gross profit margins were also impacted by a reduction in the LIFO inventory provision, as a percentage of sales, in comparison to 1998. Selling, general and administrative expenses increased to $123.0 million in 1999 from $107.3 million in 1998. As a percentage of sales, expenses increased to 26.2% of sales compared with 25.0% of sales last year. Selling, general and administrative expenses were impacted by a reduction in franchise sales as a percentage of total sales, which carry a significantly lower expense ratio than retail sales, higher employee benefit costs, and increased levels of store labor, supply and repair and maintenance costs associated with store appearance upgrades at many of the stores throughout the year. Interest expense increased to $1.9 million in 1999 from $.6 million in 1998, reflecting higher average revolver borrowings than last year, as well as interest costs on term loan borrowings to finance modernization and automation of the Company's distribution center and acquisition of a new mainframe computer system. Income tax provision decreased to 35.1% in 1999 from 37.5% in 1998. The Company completed a realignment of its corporate organizational structure during the fourth quarter of 1998, which resulted in a reduction in the Company's liability for taxes. LIQUIDITY AND CAPITAL RESOURCES Due to the seasonality of Fred's business and the continued increase in the number of stores and pharmacies, inventories are generally lower at year-end than at each quarter-end of the following year. - 10 - Cash flow used in operating activities totaled ($5.9) million during the thirty-nine week period ended October 30, 1999. Cash was primarily used to increase inventories. Total inventories increased approximately $29.0 million in the first nine months of 1999. This increase was primarily attributable to new stores and pharmacies added in the first nine months of 1999, accelerated seasonal import receipts due to delays experienced in the prior year, improved store in-stock positions in comparison to the beginning of the year, and duplicate inventories resulting from the introduction of several new merchandising programs. Accounts payable increased approximately $6.5 million in the first nine months of 1999. Cash flows used in investing activities totaled ($9.5) million, and consisted primarily of $2.3 million of payments for the replacement of the Company's mainframe computer system and capital expenditures associated with the Company's store and pharmacy expansion program. During the first nine months, the Company opened 21 stores, closed 10 stores, and upgraded 6 stores. The Company expects to open 3 to 4 stores over the balance of the year. Cash flows provided by financing activities totaled $13.8 million and included $2.3 million of borrowings under a term loan agreement for the replacement of the Company's mainframe computer system, and $14.5 million of borrowings under the Company's primary and seasonal revolvers for inventory needs. The Company has available up to $35 million of unsecured credit commitments under a revolving Loan and Credit Agreement and Seasonal Overline Revolving Credit Agreement. The agreements bear interest at the lesser of 1.5% below prime rate or a LIBOR-based rate and mature at December 31, 1999 ($20 million) and June 1, 2003 ($15 million). Borrowings outstanding under these agreements totaled $24.7 million at October 30, 1999 compared to $13.7 million at October 31, 1998. On May 5, 1998, the Company and a bank entered into a Loan Agreement (the "Loan Agreement"). The Loan Agreement provided the Company with an unsecured term loan of $12 million to finance the modernization and automation of the Company's distribution center and corporate facilities. The Loan Agreement bears interest of 6.82% per annum and matures on November 1, 2005. Borrowings outstanding under this Loan Agreement totaled $10.7 million at October 30, 1999. Borrowings under this Loan Agreement totaled $12.0 million at October 31, 1998. 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. The Loan Balance at October 30, 1999 was $2.0 million. - 11 - The Company believes that sufficient capital resources are available in both the short-term and long-term through currently available cash and cash generated from future operations and, if necessary, the ability to obtain additional financing. YEAR 2000 The "Year 2000 Issue" relates to the inability of certain computer hardware and software to properly recognize and process date sensitive information for the Year 2000 and beyond. Without corrective measures, the Company's computer applications could fail and/or produce erroneous results. To address this concern, the Company has a Year 2000 compliance project in place to identify the potential issues that could affect its business. The following discussion is an update on where the Company stands on this important matter. The Year 2000 Compliance Project is monitored by a Year 2000 oversight committee, consisting of senior level management, that meets and reviews progress towards the Company's targeted completion dates on a regular basis. The Year 2000 compliance project at Fred's includes: Upgrading store point of sale and pharmacy hardware and software systems to be Year 2000 compliant. All work related to this activity is complete. Verifying Year 2000 compliance of computer hardware and software providers and obtaining Year 2000 product warranties as necessary. All work related to this activity is complete. Having key suppliers and service providers demonstrate or certify their Year 2000 compliance, ensuring their ability to continue to supply and provide service to the Company up to and beyond January 1, 2000. The Company is also evaluating, correcting and testing electronic data interchange systems between Fred's, and its key suppliers. This process is approximately 98% complete and the targeted completion date for the remainder is December 20, 1999. Although there can be no assurance that the Company will not be adversely affected by the Year 2000 issues of its key suppliers and service providers, management believes that ongoing communications will continue to minimize its risk. Evaluate, test and correct the Company's personal computer hardware and software, voice and data communication systems, and other date sensitive operating devices, to ensure Year 2000 compliance. The evaluation and testing phase of this process has been completed and all required replacement systems have been installed. - 12 - The Company's distribution center hardware and software were replaced during 1997 and 1998, and are completely Year 2000 compatible. The Company operates its merchandising and inventory replenishment/distribution systems with software that is being modified for Year 2000 compatibility. All mission critical systems have been rewritten and implemented, and the remaining non-critical systems are being rewritten and corrected and will be 100% completed by December 17, 1999. The Company's financial information systems are heavily dependent on date fields and have been rewritten and corrected to be Year 2000 compatible. The Company's payroll and human resource systems are moderately dependent on date fields. The systems have been rewritten and tested and are Year 2000 compatible. The potential risks associated with failing to remediate Year 2000 issues include: temporary disruptions in store operations; temporary disruptions in the ordering, receiving and shipping of merchandise and in the ordering and receiving of other goods and services; temporary disruptions in the billing and collecting of accounts receivable; temporary disruptions in services provided by banks and other financial institutions; temporary disruptions in communication services; and temporary disruptions in utility services. The Company currently estimates that the incremental cost associated with completing its Year 2000 compliance project will be approximately $.5 million, most of which has already been incurred. The cost to resolve the Year 2000 issues are being funded through operating cash flows. These costs are in addition to the costs incurred to replace the Company's distribution center hardware and software, since these systems were to be replaced irrespective of Year 2000 issues. The Company is currently in the process of completing a contingency plan for each area in the organization that could be affected by the Year 2000 issue, in the event that any of the above remediation activities prove unsuccessful. Although the Company currently anticipates minimal business disruption, the failure of either the Company or one or more of its major business partners to remediate critical Year 2000 issues could have a materially adverse impact on the Company's business, operations and financial condition. Please read the "Cautionary Statement Regarding Forward Looking Statements" section below. - 13 - CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION Statements, other than those based on historical facts, including the discussion of management's expectations for Year 2000 compliance, which address activities, events, or developments that the Company expects or anticipates may occur in the future are forward-looking statements which are based upon a number of assumptions concerning future conditions that may ultimately prove to be inaccurate. Actual events and results may materially differ from anticipated results described in such statements. The Company's ability to achieve such results is subject to certain risks and uncertainties, including, but not limited to, economic and weather conditions which affect buying patterns of the Company's customers, changes in consumer spending and the Company's ability to anticipate buying patterns and implement appropriate inventory strategies, continued availability of capital and financing, competitive factors, and other factors affecting business beyond the Company's control. Consequently, all of the forward-looking statements are qualified by these cautionary statements and there can be no assurance that the results or developments anticipated by the Company will be realized or that they will have the expected effects on the Company or its business or operations. - 14 - PART II. OTHER INFORMATION Item 1. Legal Proceedings Not Applicable. Item 2. Changes in Securities Not Applicable. Item 3. Defaults Upon Senior Securities Not Applicable. Item 4. Submission of Matters to a Vote of Securities Holders Not Applicable. Item 5. Other Information Not Applicable. Item 6. Exhibits and Reports on Form 8-K Exhibits: Exhibit 10.19 - Prime Vendor Agreement between Fred's Stores of Tennessee, Inc. and Bergen Brunswig Drug Company, dated as of November 24, 1999 Exhibit 27 - Financial Data Schedule (Edgar Filing only) Reports on Form 8-K: Not Applicable. - 15 - SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. FRED'S, INC. /s/ Michael J. Hayes -------------------- Michael J. Hayes Date: December 13, 1999 Chief Executive Officer /s/ Richard B. Witaszak ----------------------- Richard B. Witaszak Date: December 13, 1999 Chief Financial Officer - 16 - EX-10 2 EXHIBIT 10.19 Exhibit 10.19 PRIME VENDOR AGREEMENT BETWEEN FRED'S STORES OF TENNESSEE, INC. AND BERGEN BRUNSWIG DRUG COMPANY This Prime Vendor Agreement ("Agreement") is entered into this 22 day of November, 1999 by and between BERGEN BRUNSWIG DRUG COMPANY ("Bergen") and FRED'S STORES OF TENNESSEE, INC. ("Fred's"). RECITALS A. Bergen is a supply channel management company that offers pharmaceutical and other products, and related services. Fred's is a retailer of pharmaceutical and other products, and operates facilities related thereto ("Facilities") and all references to Fred's herein include each Fred's Pharmacies that is a part of Fred's now and in the future. B. The purpose of this Agreement is to establish the terms and conditions of the prime vendor relationship between Bergen and Fred's. NOW THEREFORE FOR VALUABLE CONSIDERATION the receipt and sufficiency of which is hereby acknowledged the parties hereto agree as follows: 1. Agreement Regarding Sale and Purchase. 1.1 Subject to the terms and conditions contained herein Fred's has agreed to purchase and Bergen has agreed to supply pharmaceutical and selected other products as described in Section 1.2, below (collectively, "Products") ordered by Fred's Facilities. 1.2 Prime Vendor. Fred's hereby acknowledges and agrees that Bergen is Fred's prime vendor for its Fred's Pharmacies for prescription pharmaceuticals, general merchandise and supplies ordered by Fred's Pharmacies during the term of this Agreement, including, without limitation, retail, central fill and mail order Facilities, as well as Products purchased by National Pharmaceutical Network, Inc., ("NPN") an affiliate company of Fred's Stores of Tennessee, Inc. At least ninety-five percent (95%) of all branded Prescription Drugs and ninety-nine percent (99%) of all generic Prescription Drugs initially ordered by Fred's from a wholesaler will be initially ordered from Bergen. This agreement does not apply to merchandise that is not prescription pharmaceutical Products stocked and supplied through Fred's Inc. Distribution Center. 2. Services. 2.1 Delivery. Bergen will provide five (5) deliveries per week Monday through Friday subject to Section 3.3, below. 2.2 Ordering. All orders to Bergen, with the exception of emergency orders, must be transmitted electronically. Bergen will provide Ultraphase(R) electronic ordering devices including scanning devices at no charge to facilitate such transmission. In addition to accepting six (6) digit Bergen item numbers for order transmission, Bergen will also accept NDC or UPC numbers for product identification. Order cut-off times and delivery schedules will be as set forth in Exhibit A attached hereto. 2.3 Sales and Service Representation. Bergen will provide Fred's with a Bergen management level contact for Fred's Director of Pharmacy. This specific contact will be a qualified Bergen associate that will facilitate information between Fred's and Bergen. No sales calls will be made on individual pharmacies. Customer service representatives in each distribution center will handle all customer service issues. 2.4 Returns. All merchandise returns must be processed electronically. Fred's will receive one hundred percent (100%) credit on the following returns: picking errors, ordering errors, shipping errors, billing errors, recalls, discontinued items, products received short-dated or damaged, guaranteed sales, saleable products with six (6) months or more remaining shelf life and returns handled through a third party processor or manufacturer in an amount equal to the pass-through credit through Bergen that is allowed by such third party processor or manufacturer. Programs with third party processors where Bergen assists with reconciliations, invoicing and similar services, will have a service charge equal to two percent (2%) of the return value of the Products, which charge will be assessed by Bergen and payable by Fred's upon receipt of an invoice for such services. All other returns will fall under the normal Bergen return goods policy. Short-dated products are those with less than six (6) months remaining shelf life on the date of receipt at the ordering pharmacy. A Bergen representative will handle claims and shortages. Bergen's return goods policy is attached hereto as Attachment "B" and by this reference incorporated herein. 2.5 Fill Rates. Bergen commits to a ninety-seven percent (97%) adjusted fill rate on a chain-wide basis. The adjusted fill rates are calculated as follows: (a) An item shorted on an original order will not be counted as a short for the second time until 72 hours have passed. (b) On individual line items where only a partial quantity is received, we will consider it a short if fifty percent (50%) or less of the quantity ordered is shipped. (c) On any new item, or an item previously not ordered by Fred's, a period of thirty (30) days will be given to add the item to Bergen's inventory. This period is computed from the date Fred's places the original order and provides estimates on usage. (d) The quantity of an item ordered in excess of one hundred twenty percent (120%) of the most recent month's order for such item on an aggregate basis for all Facilities will not be considered short. (e) Manufacturer's legitimate back orders, unavailability and other shortages are not computed in determining the service level. 2.6 In the event that BBDC does not provide a 97% service level for any calendar month of the agreement, BBDC agrees to pay Fred's a rebate of 0.05% of that month's net purchases (all purchase minus claims and returns). 3. Cost of Goods. 3.1 Subject to section 3.3 below, "Cost" for the purpose of this agreement is defined as that cost incurred by Bergen, represented on the manufacturers' current price list, adjusted to reflect free goods, promotional allowances and other special pricing offered by the manufacturers during deal periods and contract pricing maintained by Bergen in a bid file. Adjustments to "Cost" are not made for cash discounts, or purchase and/or performance rebates. Bergen will ad to the billed amount any applicable sales, use, business, or occupational tax. SuperNet items (primarily retail-oriented products sold at a special net cost) are not subject to the pricing set forth in Section 3.2, nor to additional discounts. SuperNet is defined as those Products sold at a special net cost quoted by Bergen. These Products are predominantly Generic Purchasing Program ("GPP"), private label, durable medical equipment and non-pharmacy general merchandise. 3.2 Products purchased by Fred's will be charged at the rate set forth in Schedule 1. Weekly Terms: All payments may be received by Bergen by electronic funds transfer ("EFT"). Invoices for Products delivered by Bergen from Monday through Friday will be sent by Bergen to Fred's via a statement dated the following Monday. Payment for each statement will be due and payable, and must be received by Bergen, no later than fourteen (14) days from the date of such statement. 3.3 The pricing in Section 3.2 is based upon there being only five (5) deliveries per week. 3.4 Fred's will receive the dating set forth in Schedule 1 with respect to: (a) initial opening orders and the first fourteen (14) days' purchases after the Facility opens, for new pharmacies and (b) with respect to existing pharmacies acquired by Fred's, the amount of purchases after the acquisition equal to the value of the prescription pharmaceutical inventory on hand at the acquired pharmacy on the date of acquisition by Fred's (excluding the value of inventory that is damaged, outdated, unsaleable or otherwise unreturnable pursuant to Bergen's Return Goods Policy attached hereto as Exhibit A and incorporated herein by this reference). The inventory count to determine the inventory value for acquired pharmacies shall be performed by a mutually acceptable third party service, at Fred's expense. 3.5 Fred's will receive the dating set forth in Schedule 1 on statements reflecting invoices for the month of August. 3.6 All invoices that have not been paid when due will be assessed a one and one-half percent (1.5%) per month late charge on the outstanding balance on each statement until paid. 3.7 Once in each twelve (12) month period, Fred's shall have the right to audit Bergen's books and records, including, but not limited to, Bergen's supplier invoices which relate in any way to amounts paid by Fred's for the purpose of validating the accuracy of the amounts so paid. Fred's may use its own employees or representatives to conduct the audit or engage an outside accounting firm. Each party shall bear its own expense of any audit. Any accounting firm engaged to conduct an audit pursuant to this Agreement will sign a confidentiality statement insuring that all details and terms of books and records examined (except the total aggregate amount due to either party as a result of the audit) will be treated as confidential and will not be revealed in any manner or form by or to any person or entity. Bergen shall fully cooperate with representatives of Fred's and auditing accountants in the conduct of an audit. Audits shall be made during normal business hours, following forty-five (45) days written notice, and without undue interference to Bergen's business activity. 3.8 Bergen and Fred's will use commercially reasonable efforts to develop electronic data interchange ("EDI") capabilities that will allow certain of the transactions contemplated by this Agreement to be accomplished by EDI. The EDI standard supported by Bergen is the American National Standards (ANSI), Accredited Standards Committee (ASC) x 12 format. 4. Repackaging. Bergen will offer a comprehensive repackaging program to all Fred's pharmacies that will include a reverse substitution feature. Repackaged items will be subject to the pricing set forth in Section 3.2, with the costs to repackage and cost of money added to each repackaged Product. Any remaining margin will be split equally between Bergen and Fred's. Bergen will also provide a rebate equal to the amount set forth in Schedule 1 to be paid within thirty (30) days after the end of each twelve (12) month period of this Agreement. 5. Generic Purchasing Program. 5.1 Fred's shall participate in Bergen's GPP(R) (Generic Purchasing Program) in accordance with the current requirements for such program, as the same may be modified from time-to-time by Bergen. Fred's shall order ninety-nine percent (99%) of all generic pharmaceutical Products from Bergen and shall participate in the GPP Automatic Compliance Assurance Program ("ACAP"). Fred's authorizes Bergen to be its sole agent for the development and implementation of a pharmaceutical generic formulary for the length of this Agreement. This authorization includes the selection of Product, the manner in which substitution is made and all agreements negotiated with the generic supplier. 5.2 When a manufacturer back order occurs on a GPP item, the supplier's participation in the GPP requires the supplier to pay the difference between the GPP price and the substituted item price. This information is tracked in the General Office of Bergen and Fred's will receive credit on a semi-annual basis. 5.3 On new Product market entries only, the supplier's participation in GPP requires that Fred's will be credited for the difference, if any, between the initial invoiced amount for all GPP purchases during the first sixty (60) days and the price of such GPP Product on the 60th day after such Product is introduced into the market place. This information will also be tracked in the Bergen General Office and Fred's will receive credit on a semi-annual basis. In addition, any time during the first year of a Product introduction, if there is a price decrease for such Product, Fred's will receive a retroactive price reduction for the previous fourteen (14) days to be credited to Fred's. 5.4 A once a month consultation will be established with the Bergen GPP team and the designees from Fred's for the purposes of reviewing program changes and enhancements. Bergen will also provide updates to Fred's Corporate Office for program changes with the same frequency of updates being offered generally to GPP participants (currently once per week). 6. GPP Participation Incentive. 6.1 Bergen will pay to Fred's on a quarterly basis within thirty (30) days of the end of each quarter, contingent upon Fred's full participation in and compliance with the GPP, a rebate based upon GPP purchases for the quarter, calculated as set forth in Schedule 1. 6.2 In order to have the GPP quarterly rebate coincide with Fred's fiscal year of February 1 through January 31, a rebate will be calculated and paid to Fred's based on the percentage of GPP purchases for the period commencing December 27, 1999 and ending January 31, 2000. Depending on the percentage level of the GPP purchases for such period ending January 31, 2000, Bergen will pay to Fred's within thirty (30) days of the end of such period a rebate equal to one-third (1/3) of the amount of the quarterly rebate that would otherwise be payable for a full quarter pursuant to Section 6.1. (For example, if the percentage of GPP purchases compared to total prescription drug purchases is eight percent (8%) or greater, Fred's would be paid one-third of the corresponding quarterly rebate.) Thereafter, GPP rebates will be calculated and paid in accordance with Section 6.1 commencing on February 1, 2000. 7. Systems Development. In consideration of the development costs to be incurred by Fred's for the transition toward implementation of this Agreement, as well as development of its supply management capabilities, Bergen shall make systems development contributions to Fred's in the amounts and on the dates set forth in Schedule 1. 8. Pricing Conditions. Bergen agrees to be bound by the pricing conditions set forth in Schedule 1. 9. Central Fill. Bergen will collaborate with PDX to propose a central fill opportunity to Fred's that will include specified savings on each prescription processed by the central fill facility or facilities. 10. Other Services. Bergen offers certain other services to its customers generally, including Today's Healthcare(R), PatientPlus(R) and InterLinx(TM), which are available to Fred's at the currently published prices at the time services are requested (except in the case of InterLinx for Fred's Corporate Office, which is offered at the rate of Seventy-Four Dollars and Ninety-Five/100 ($74.95) per month regardless of when the service is requested) 11. PharmaHealth Natural Care Center. Bergen agrees to use commercially reasonable efforts, upon Fred's request, to develop a customized version of Bergen's PharmaHealth Natural Care Center(TM). Upon commencement of a mutually acceptable customized PharmaHealth program, the initial purchase of a PharmaHealth Platinum, Gold or Silver set and the appropriate product will be subject to the terms set forth in Schedule 1. 12. Pharmacy Benefit Management. Concurrently with entering into this Agreement, and in consideration of this Agreement being made applicable to purchases of Product by NPN, Bergen and NPN are entering into a separate agreement that covers pharmacy benefit management services to be provided by Bergen to NPN. 13. Term of Agreement. This Agreement is for a term as set forth in Schedule 1. Upon expiration of the original term, this Agreement shall automatically be extended for an additional two (2) years upon the same terms and conditions as the original term, unless either Fred's or Bergen gives prior written notice to the other party at least ninety (90) days prior to expiration of the term of this Agreement. 14. No Representation Regarding Products. Bergen makes, and shall be deemed to make, no representation or warranty, express or implied, as to the value, absence of defect, absence of infringement, or the absence of any obligation based on strict liability in tort or any other representation or warranty whatsoever, express or implied, with respect to the products supplied pursuant to this Agreement, except that Bergen has received title conveyed to it by the manufacturer or supplier thereof. Other than labeling and packaging changes with regard to repackaging Products in accordance with this Agreement, said product has not been altered, modified, and/or changed and it has been properly stored. Fred's understands that Bergen is not the manufacturer of any products and agrees that Fred's will settle all claims, defenses, set-offs and counterclaims it may have with or against the manufacturer thereof directly with the manufacturer and will not assert any such claims, defenses, set-offs or counterclaims against Bergen. Fred's acknowledgment or deemed acknowledgment of receipt of products shall constitute Fred's acknowledgment and agreement that the products are fit to dispense or distribute through its locations. Fred's acknowledges that Bergen has made no representation or warranty written, oral or implied about the products or their fitness for any purpose. 15. Products Liability. 15.1 Bergen and its subsidiaries obtain a certificate of insurance, a continuing guarantee and an indemnification regarding products from all suppliers (or suitable alternative documentation, if appropriate). These records are available for inspection by Fred's during normal business hours upon request. 15.2 Bergen specifically and expressly disclaims all warranties, express or implied, written or oral, including but not limited to those of merchantability and fitness for a particular purpose regarding the products or services provided herein. Except for the provisions and requirements of Section 14, Fred's agrees that Bergen, its subsidiaries, affiliates, and the directors, officers, shareholders and agents of each will not be liable to Fred's for any liability, claim, loss, damage (consequential or otherwise) or expense of any kind caused, directly or indirectly: (i) by the inadequacy of the products for any purpose, (ii) by any deficiency or defect, (iii) by any delay in providing the products, (iv) failure to provide the products, or (v) death or bodily injury which may be caused by the product (unless and except to the extent such death or bodily injury results from negligent or intentional acts of Bergen). 16. Representations and Warranties. 16.1 Representation and Warranties of Fred's. Fred's represents and warrants to Bergen that (a) it is duly organized, validly existing and in good standing under the laws of the jurisdiction in which it was organized, (b) the person executing this Agreement on behalf of it is duly authorized to bind it to all terms and conditions of this Agreement, (c) this Agreement, when executed and delivered by it, will be the legal, valid and binding obligation of it, enforceable against it in accordance with its terms, and (d) the execution, delivery and performance of this Agreement by it do not and will not (i) conflict with or constitute a breach or default under, its charter documents, delegations of authority or any material agreement, contract, commitment or instrument to which it is a party or (ii) require the consent, approval or authorization of, or notice, declaration, filing or registration with, any third party or governmental or regulatory authority. 16.2 Representation and Warranties of Bergen. Bergen represents and warrants to Fred's that (a) it is duly organized, validly existing and in good standing under the laws of the jurisdiction in which it was organized, (b) the person executing this Agreement on behalf of it is duly authorized to bind it to all terms and conditions of this Agreement, (c) this Agreement, when executed and delivered by it, will be the legal, valid and binding obligation of it, enforceable against it in accordance with its terms, and (d) the execution, delivery and performance of this Agreement by it do not and will not (i) conflict with or constitute a breach or default under, its charter documents, delegations of authority or any material agreement, contract, commitment or instrument to which it is a party or (ii) require the consent, approval or authorization of, or notice, declaration, filing or registration with, any third party or governmental or regulatory authority. 17. License Related to Certain Services. 17.1 Bergen currently offers certain services, and may develop new services in the future, which rely on certain hardware or software offered to its customers for such fees as may be published and changed from time-to-time. In the event Fred's subscribes to any such service, its license will be as set forth below. 17.2 For any software application Bergen may provide to Fred's, Bergen grants Fred's a non-exclusive, non-transferable license for the use of that Software ("Software") and its related documentation (the "Documentation"). Each license is granted solely for use in connection with one or more pharmacies. No such license grants Fred's any rights to any patents, trademarks or trade names. Fred's may not sublicense, lease, distribute or otherwise transfer a Software application, the related Documentation or Fred's right to use the Software and related Documentation except for Fred's locations. Fred's may not make, or allow anyone else to make, copies of the Software or related materials, beyond one copy for backup and archival purposes and one for each Fred's pharmacy being serviced under this Agreement. Fred's may not alter, modify or adapt any Software or related Documentation or create derivative works from them nor translate, reverse engineer, disassemble or decompile the Software. 17.3 A license to Software and related Documentation will terminate automatically upon the earlier of Fred's failure to comply with the terms of the license or any other material provision in this Agreement, the termination of services for which Fred's is using the Software, or the expiration or termination of this Agreement. Upon termination of a license, Fred's must cease using the Software and related materials and, at Bergen's election and expense, return or destroy all copies of the Software Fred's may have in its possession or under its control, and certify to Bergen that Fred's has done so. 17.4 Bergen specifically and expressly disclaims all warranties, express or implied, written or implied, written or oral, including but not limited to those of merchantability and fitness for a particular purpose, regarding the Software, the related Documentation and all other property, services or rights covered by this Agreement. Fred's acknowledges the possibility that (i) the Software may not operate in combination or in the manner which Fred's may select for use and (ii) the operation of the Software may not be uninterrupted or error free. In no event will Bergen be responsible for any consequential or special damages (including lost profits) allegedly resulting from any product, services or licensed property provided under this Agreement. 17.5 All computer hardware and software and other equipment provided by Bergen (including Ultraphase devices and totes in which Product was delivered) (collectively "Bergen Property") shall be returned to Bergen at the end of the term of this Agreement or upon earlier termination for any reason. All such Bergen property shall be mutually counted by Bergen and Fred's and any Bergen property not returned or unaccounted for will be charged to Fred's at replacement cost or original cost less wear and tear and depreciation whichever is lesser. 18. Confidentiality. The parties agree that the provisions and the existence of this Agreement, and any information provided to either party as required herein including but not limited to pricing, the Cost of Goods and the reports provided related to this Agreement are confidential and proprietary in nature. Except as may be required to be disclosed by any law, the SEC or as a result of subpoena or as may be required by any person or entity advancing credit (and such third party will be bound by this confidentiality provision), Bergen and Fred's agree that the terms of this Agreement will not be disclosed to any other persons except each party's respective officers, directors, agents, representatives, or employees. 19. Trademarks, Trade Names, Etc. 19.1 Fred's shall not use the name, trade name, trademarks, servicemark(s), trade dress or logo(s) of Bergen or any of its affiliates in publicity releases, advertising, sales literature or materials or in any similar activity without Bergen's prior written consent. 19.2 Bergen shall not use the name, trade name, trademarks, service marks, trade dress or logo of Fred's or any of its affiliates in publicity releases, advertising or sales literature or materials or in any similar activity without Fred's prior written consent. 20. Indemnification. 20.1 Fred's Indemnification. Fred's agrees to indemnify, defend and hold harmless Bergen and its respective officers, trustees, directors, shareholders, affiliates, employees and agents (the "Indemnified Party") against any and all claims, actions, losses and damages of any kind (including all costs and expenses and reasonable attorneys' fees) arising out of Fred's breach of the terms hereof. 20.2 Bergen Indemnification. Bergen agrees to indemnify, defend and hold harmless Fred's and its respective officers, trustees, directors, shareholders, affiliates, employees and agents (the "Indemnified Party") against any and all claims, actions, losses and damages of any kind (including all costs and expenses and reasonable attorneys' fees) arising out of Bergen's breach of the terms hereof. 21. Open Records. Pursuant to the requirements of applicable law, Bergen and Fred's hereby agree that, if requested to do so, Bergen will make available to the Secretary of Health and Human Services ("HHS"), the Comptroller General of the Government Accounting Office ("GAO"), or their authorized representatives, all contracts, books, documents and records relating to the nature and extent of costs hereunder for a period of four (4) years after furnishing of products hereunder. In addition, Bergen and Fred's hereby agree, if services are to be provided by a subcontract with a related organization, Bergen will require by such subcontract that the subcontractor make available to the HHS and GAO, or their authorized representatives, all contracts, books, documents and records relating to the nature and extent of the costs thereunder for a period of four (4) years after furnishing of products thereunder. Notwithstanding anything set forth herein to the contrary, Bergen shall have no obligation hereunder to make public Attorney-Client privileged documents or records. 22. Force Majeure. In the event Bergen's delivery or arranging for delivery of products under this Agreement is prevented, impaired, reduced or restricted by reason of force majeure, labor disputes, fire, act of God, or any other similar or dissimilar cause beyond its control, including but not limited to the unavailability of such products, transportation, shortages of materials or fuel, delay in delivery or failure to deliver by Bergen's suppliers, loss of facilities of distribution, the voluntary foregoing of the right to acquire or use any materials in order to accommodate or comply with the orders, requests, regulations, recommendations or instructions of any governmental authority (whether in furtherance of national defense or war activities or to meet any other emergency), or the compliance with any law, order, ruling, regulation, instruction or requirements of any governmental authority or any political subdivision or agency thereof, or for any other cause whether of the same or different character than herein specified, beyond the reasonable control of the party affected thereby, Bergen, without liability or obligation, may reduce or eliminate the quantities herein specified in proportion to the prevention, impairment, reduction or restriction upon Bergen's production or delivery, on a pro rata basis among all users of its products during the period of any such disability. In any such case, the products which Bergen is unable to supply shall be eliminated from this contract by written notice describing the amounts eliminated and the estimated time period during which deliveries are to be suspended; and Bergen shall be relieved of any liability with respect thereto during such time Bergen may not be able to deliver the products in question. In addition, due to circumstances beyond its control, Bergen, at its discretion and only if added to all other customer accounts, may add to the Cost of products for any account, regardless of location, its fuel costs, including state taxes and surtaxes thereon, if any, and other related costs associated with its delivery of products so long as such circumstances continue to affect Bergen's said Costs. 23. Termination. 23.1 Default. This Agreement may be terminated by either party providing written notice of termination to the other party upon a default of the other party under this Agreement. For purposes of this provision, a default shall be deemed to have occurred upon the happening of any of the following: (a) A party has filed a petition in bankruptcy, been adjudged to be insolvent by a court of competent jurisdiction or has made a general assignment for the benefit of its creditors; (b) A party has failed to pay any amount that is due to the other party under this Agreement and such failure continues for fifteen (15) days after such party receives notice of such breach from the non-breaching party; or (c) A party fails to perform any of its material obligations or failure to correct any major service issue under this Agreement, and such failure continues for thirty (30) days after such party receives notice of such breach from the non-breaching party; provided, however, if the breaching party has commenced to cure such breach within such thirty (30) days, but such cure is not completed within said thirty (30) days, such party shall be afforded the amount of additional time reasonably necessary to complete said cure, provided that the party diligently pursues curing the breach until completion. 23.2 Notice. For the purposes of this Agreement the notice of termination required for each event of default listed in Section 23.1 is as follows: (a) Section 23.1(a) -- ten (10) days (b) Section 23.1(b) - ten (10) days (c) Section 23.1(c) -- sixty (60) days 24. Miscellaneous. 24.1 No Agency. Bergen shall be an independent contractor hereunder, and this Agreement shall not be construed to create any other relationship between the parties, as principal and agent, joint venturers or otherwise. Neither party is authorized to enter into agreements for or on behalf of the other party, collect any obligation due or owed to the other party, accept service of process for the other party, or bind the other party in any manner whatever. 24.2 Severability. The invalidity or partial invalidity or unenforceability of any term or provision of this Agreement shall not affect the validity or enforceability of any other term or provision. 24.3 Entire Agreement. This Agreement constitutes the entire agreement and understanding between the parties, is intended as a complete and exclusive statement of the terms of their agreement with respect to its subject matter, and supersedes any prior agreements or understandings between the parties relating to its subject matter. 24.4 Amendments. This Agreement may not be amended, supplemented or modified in any respect without further written agreement of both parties, signed by their respective authorized representatives. 24.5 Counterparts. This Agreement may be executed in one or more counterparts, which shall together constitute but one and the same instrument. 24.6 Waivers. Neither party's failure to insist, in one or more instances, upon the performance of any term or terms of this Agreement shall be construed as a waiver or relinquishment of such party's right to such performance or other future performance of such term or terms, and the other party's obligations with respect thereto shall continue in full force. Either party's consent to or approval of any act by the other party on any one occasion shall not be deemed a consent or approval of the same act on any subsequent occasion. 24.7 Notices. Any notice required or permitted hereunder shall be given by personal delivery, or by prepaid registered or certified mail, return receipt requested, addressed as follows: If to Bergen: Bergen Brunswig Drug Company 4000 Metropolitan Drive Orange, California 92868 Attn: President - Retail Sales with a copy to: Bergen Brunswig Corporation 4000 Metropolitan Drive Orange, California 92868 Attn: Chief Legal Officer If to Fred's: Fred's Stores of Tennessee, Inc. 4300 New Getwell Road Memphis, Tennessee Attn: E.V.P. of Pharmacy Operations with a copy to: Fred's Stores of Tennessee, Inc. 4300 New Getwell Road Memphis, Tennessee Attn: Secretary/General Counsel or to such other address as either party may designate by written notice. Notice by personal delivery shall be effective upon receipt, and notice by mail shall be effective upon the date that the return receipt is signed. 24.8 Captions. The captions and headings in this Agreement are for convenience only, and are not intended to be a part of this Agreement, or to affect its meaning or interpretation. 24.9 Assignment. Except as set forth below, Fred's and Bergen may not assign this Agreement without the prior written consent of the other party. 24.10 Successor and Assigns. Subject to the provisions Section 24.9 this Agreement shall inure to the benefit of and be an obligation of each party's successors and assigns. 24.11 Further Assurances. Each party, at its own cost and expense, at the reasonable request of the other party, agrees to undertake all such further acts and to execute all such further reasonable documents as may be necessary and reasonably requested by either party to effectuate the purchase and sale of the products contemplated herein. 24.12 Affiliate Companies. In order to better service the needs of Fred's, products or services may, from time to time be provided by an affiliate company of Bergen subject to the terms and conditions of this agreement. Fred's hereby acknowledges that products or services will be provided by an affiliate of Bergen and hereby expressly accepts and consents to this distribution arrangement and agrees to be liable for all payments due hereunder to such affiliate of Bergen or as directed by Bergen. THE TERMS OF THIS AGREEMENT HAVE BEEN APPROVED AND ACCEPTED. Fred's Stores of Tennessee, Inc. Bergen Brunswig Drug Company By: /s/ Michael Hayes By: /s/ David W. Neu ------------------------- --------------------------- Print Name: Michael Hayes Print Name: David W. Neu ----------------- ------------------- Title: President Title: President, Retail Dvsn. ------------------------ ------------------------ Date: 11/23/99 Date: 11/24/99 ---------------------- ------------------------ EXHIBIT A Distribution Centers* Order Cut Off Times* Delivery Times* - --------------------- -------------------- --------------- Nashville 7:00 pm CST 8:00 am -12:00 CST Dallas 8:00 pm CST 8:00 am -12:00 CST Houston 8:00 pm CST 8:00 am -12:00 CST Atlanta 7:00 pm EST 8:00 am -12:00 EST Montgomery 7:00 pm CST 8:00 am -12:00 EST 6:00 pm CST (GA) 8:00 AM -12:00 EST Mobile 7:00 pm CST 8:00 am -12:00 CST Meridian 7:00 pm CST 8:00 am -12:00 CST * This list of Distribution Centers is subject to change if and when Bergen adds or changes distribution centers in the normal course of its business operations, or if existing distribution centers are added upon Fred's acquisition/opening of new Facilities. In addition, order cut off times and delivery times are subject to changes as may be required by the operational requirements of each distribution center. EXHIBIT B ================================================================================ BBDC's RETURN GOODS POLICY ================================================================================ All returns to Bergen Brunswig should be transmitted via Electronic Order Entry (machine or computer). 1. The policy will allow full credit (customer acquisition cost) on the following, if returned within 90 days of purchase: a. Filling Errors b. Guaranteed Sale Items c. Ordering Errors d. Shipping Errors e. Billing Errors f. Shortages, Claims g. Concealed Shipping Damages 2. All other merchandise returned will have a handling charge applied: a. Over stock (inventory reduction) will be credited at wholesale file cost, less a 10% handing fee. b. Unsaleable merchandise (merchandise that has been damaged or has less than nine (9) months dating) accepted for return in accordance with manufacturer's policy will be credited at wholesale cost, less a thirty percent (30%) handling fee, or the product's salvage value as determined by the manufacturer's return policy. 3. Credits are posted to statements daily. a. Ordering/shipping errors and all other saleable items will be processed and posted no later than two weeks of receipt of merchandise. b. All unsaleable products (expired, outdated, shop worn, etc.) will be processed and posted no later than four weeks of receipt of merchandise. 4. Items requiring special handling: a. Schedule II Items: As a policy, we do not accept Class II items for return. In the event of a damage/shipping/ordering error, full credit will be given. b. Refrigerated Items: Saleable items requiring refrigeration should be held under proper storage for your sales representative to handle on their next call to your facility 5. Items that may not be returned: a. Unsaleable products from manufacturers whose policy WILL NOT allow the wholesaler to handle. BBDC will assist you in contacting these manufacturers to help effect the return. b. Products which are outdated past allowable time given by the manufacturer for return. c. Products with broken seals and/or partial contents. BBDC will assist you in contacting the manufacturer to help effect the return. d. Saleable or unstable products, such as "cents off", bonus pack, trial size or any item sold on a no return basis. e. Returns shipped from the following are not, or may not be, covered by this policy and will be handled by your BBDC representative. * General Merchandise Division * Gift Show Purchases * Promotions Unlimited Circular Merchandise * Fragrance Plus * Special Drop Ship Purchases 6. Any credit or return questions not covered or understood in the above-stated policy can be quickly resolved by contacting your BBDC customer service representative at your servicing division. EX-27 3 FDS --
5 0000724571 Fred's, Inc. 3-MOS JAN-29-2000 AUG-1-1999 OCT-30-1999 821,000 0 11,191,000 (421,000) 155,643,000 171,781,000 148,557,000 (76,455,000) 250,131,000 94,008,000 13,631,000 0 0 67,293,000 75,199,000 250,131,000 158,049,000 158,049,000 110,932,000 110,932,000 41,781,000 152,000 723,000 4,461,000 1,565,000 2,896,000 0 0 0 2,896,000 0.24 0.24
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