-----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, JVFJaOcg2btcemaGXqzBaORToEHaB4MJ+zgA/SGhfydAB50Ob1RyFh9aOXMyCEtP HnnLscWSnFH+REkttyPZ7w== 0001005794-01-500030.txt : 20010615 0001005794-01-500030.hdr.sgml : 20010615 ACCESSION NUMBER: 0001005794-01-500030 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20010505 FILED AS OF DATE: 20010614 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: 1660436 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 freds10q1st01.txt 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 May 5, 2001. OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. For the transition period from to . --------------- --------------- Commission file number 000-19288 FRED'S, INC. (Exact name of registrant as specified in its charter) Tennessee 62-0634010 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 4300 New Getwell Rd., Memphis, Tennessee 38118 (Address of principal executive offices) (zip code) (901) 365-8880 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X . No . ----------- ----------- The registrant had 12,155,722 shares of Class A voting, no par value common stock outstanding as of June 8, 2001, which shares have not been adjusted for June stock split. FRED'S, INC. INDEX Page No. - -------------------------------------------------------------------------------- Part I - Financial Information Item 1 - Financial Statements (unaudited): Consolidated Balance Sheets as of May 5, 2001 and February 3, 2001 3 Consolidated Statements of Income for the Thirteen Weeks Ended May 5, 2001 and April 29, 2000 4 Consolidated Statements of Cash Flows for the Thirteen Weeks Ended May 5, 2001 and April 29, 2000 5 Notes to Consolidated Financial Statements 6 - 9 Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations 10 - 12 Item 3 - Quantitative and Qualitative Disclosure about Market Risk 12 Part II - Other Information 13 - --------------------------- Signatures 14 - ----------
FRED'S, INC. CONSOLIDATED BALANCE SHEETS (unaudited) (in thousands, except for number of shares) May 5, February 3, 2001 2001 -------- ------------ ASSETS: Current assets: Cash and cash equivalents $2,605 $2,569 Receivables, less allowance for doubtful Accounts of $350 ($516 at February 3, 2001) 14,604 15,430 Inventories 159,609 149,602 Deferred income taxes 1,080 2,022 Other current assets 2,409 2,306 -------- -------- Total current assets 180,307 171,929 Property and equipment, at depreciated cost 77,478 76,360 Equipment under capital leases, less accumulated amortization of $1,426 ($1,305 at February 3,2001) 1,609 1,387 Deferred income taxes 720 98 Other noncurrent assets 4,980 5,021 -------- -------- Total assets $265,094 $254,795 ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable $42,625 $40,432 Current portion of indebtedness 2,160 2,175 Current portion of capital lease obligations 564 503 Accrued liabilities 10,846 14,012 Income taxes payable 3,034 4,278 ------ ------ Total current liabilities 59,229 61,400 ------ ------ Long term portion of indebtedness 38,884 30,475 Capital lease obligations 1,390 1,230 Other noncurrent liabilities 2,022 2,003 ------ ------ Total liabilities 101,525 95,108 ------- ------ Shareholders' equity: Common stock, Class A voting, no par value, 12,090,679 shares issued and outstanding (12,068,518 shares at February 3, 2001) 68,851 68,557 Retained earnings 94,896 91,342 Deferred compensation on restricted Stock incentive plan (178) (212) ------ ------ Total shareholders' equity 163,569 159,687 ------- ------- Total liabilities and shareholders equity $265,094 $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 -------------------- (restated) May 5, April 29, 2001 2000 -------- -------- Net Sales $207,359 $176,132 Cost of goods sold 149,601 127,142 ------- ------- Gross Profit 57,758 48,990 Selling, general and administrative Expenses 50,721 43,162 ------ ------ Operating income 7,037 5,828 Interest expense 630 673 ----- ----- Income before income taxes 6,407 5,155 Provision for income taxes 2,248 1,810 ----- ----- Net income $4,159 $3,345 ====== ====== Net income per share: Basic $ .35 $ .28 ===== ===== Diluted $ .34 $ .28 ===== ===== Weighed average shares outstanding: Basic 12,016 11,890 ====== ====== Diluted 12,304 12,080 ====== ======
See accompanying notes to consolidated financial statements.
FRED'S, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited) (in thousands) Thirteen Weeks Ended -------------------- (restated) May 5, April 29, 2001 2000 ---- ---- Cash flows from operating activities: Net income $4,159 $3,345 Adjustments to reconcile net income To net cash flows from operating activities: Depreciation and amortization 4,110 3,335 Provision for uncollectible receivables (165) --- Lifo reserve 200 200 Deferred income taxes 320 265 Amortization of deferred compensation on restricted stock incentive plan 34 38 Cancellation of restricted stock --- (202) (Increase)decrease in assets: Receivables 991 183 Inventories (10,207) (4,127) Other assets (103) 408 Increase (decrease) in liabilities: Accounts payable and accrued liabilities (973) (2,512) Income taxes payable (1,243) 1,575 Other noncurrent liabilities 19 44 ------ ----- Net cash (used in) provided by operating activities (2,858) 2,552 -------- ----- Cash flows from investing activities: Capital expenditures (4,682) (3,620) Asset acquisition, net of cash acquired (primarily intangibles) (383) (768) ---- ---- Net cash used in investing activities (5,065) (4,388) ------- ------- Cash flows from financing activities: Reduction of indebtedness and capital lease obligations (662) (102) Proceeds from revolving line of credit, net of payments 8,931 3,896 Proceeds from exercise of options 293 92 Cash dividends paid (603) (600) ---- ---- Net cash provided by financing activities 7,959 3,286 ------ ------ Increase in cash and cash equivalents 36 1,450 Beginning of period cash and cash equivalents 2,569 3,036 ----- ----- End of period cash and cash equivalents $2,605 $4,486 ======= ====== Supplemental disclosures of cash flow information: Interest paid $361 $361 ==== ==== Non cash investing and financing activities: Assets acquired through capital lease obligations $344 $--- ==== ====
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 357 discount general merchandise stores, including 26 franchised Fred's stores, in eleven states in the southeastern United States. One hundred and ninety-nine of the stores have full service pharmacies. The accompanying unaudited consolidated financial statements of Fred's have been prepared in accordance with the instructions to Form 10-Q and therefore do not include all information and notes necessary for a fair presentation of financial position, results of operations and cash flows in conformity with generally accepted accounting principles. The statements do reflect all adjustments (consisting of only normal recurring accruals) which are, in the opinion of management, necessary for a fair presentation of financial position in conformity with generally accepted accounting principles. The statements should be read in conjunction with the Notes to the Consolidated Financial Statements for the fiscal year ended February 3, 2001 incorporated into the Company's Annual Report on Form 10-K. The results of operations for the thirteen-week period ended May 5, 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 May 5, 2001, cost was determined using the LIFO (last-in, first-out) method. The current cost of inventories exceeded the LIFO cost by approximately $4,161,000 and $3,961,000 at May 5, 2001 and February 3, 2001, 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 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 -------------------- (restated) May 5, April 29, 2001 2000 ---- ---- Basic net income per share -------------------------- Net income $4,159 $3,345 ====== ====== Weighted average number of common shares Outstanding during the period 12,016 11,890 ====== ====== Net income per share $ .35 $ .28 ===== ===== Diluted net income per share ---------------------------- Net income $4,159 $3,345 ====== ====== Weighted average number of common shares Outstanding during the period 12,016 11,890 Additional shares attributable to common Stock equivalents 288 190 ------ ------ 12,304 12,080 ====== ====== Net income per share $ .34 $ .28 ===== =====
- -------------------------------------------------------------------------------- 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 quarter ended April 29, 2000 are as follows:
(as reported) (restated) April 29, April 29, 2000 2000 -------- -------- Net Sales $176,660 $176,132 Gross profit 49,122 48,990 Net income 3,432 3,345 Net income per share Basic 0.29 0.28 Diluted 0.28 0.28
- -------------------------------------------------------------------------------- NOTE 5: PRO FORMA NET INCOME PER SHARE - -------------------------------------------------------------------------------- On May 24, 2001, the Company announced that its Board of Directors approved a five-for-four stock split, to be effected as a 25% stock dividend, of its common stock, class A voting, no par value. The new shares, one additional share for each four shares currently held by stockholders, will be distributed on June 18, 2001 to stockholders of record on June 4, 2001.
COMPUTATION OF PRO FORMA NET INCOME PER SHARE (unaudited) (in thousands, except per share amounts) Thirteen Weeks Ended -------------------- (restated) May 5, April 29, 2001 2000 Basic net income per share -------------------------- Net income $4,159 $3,345 ====== ====== Weighted average number of common shares outstanding during the period (post-split) 15,020 14,863 ====== ====== Net income per share (post-split) $ .28 $ .23 ===== ===== Diluted net income per share ---------------------------- Net income $4,159 $3,345 ====== ====== Weighted average number of common shares outstanding during the period (post-split) 15,020 14,863 Additional shares attributable to common stock equivalents (post-split) 360 237 ------ ------ 15,380 15,100 ====== ====== Net income per share (post-split) $ .27 $ .22 ===== =====
Management's Discussion and Analysis of Financial Condition and Results of Operations - -------------------------------------------------------------------------------- GENERAL - -------------------------------------------------------------------------------- Fred's business is subject to seasonal influences, but the Company has tended to experience less seasonal fluctuation than many other retailers due to the Company's mix of everyday basic merchandise and pharmacy business. The fourth quarter is typically the most profitable quarter because it includes the Christmas selling season. The overall strength of the fourth quarter is partially mitigated, however, by the inclusion of the month of January, which is generally the least profitable month of the year. The impact of inflation on labor and occupancy costs can significantly affect Fred's operations. Many of Fred's employees are paid hourly rates related to the federal minimum wage and, accordingly, any increase affects Fred's. In addition, payroll taxes, employee benefits and other employee-related costs continue to increase. Occupancy costs, including rent, maintenance, taxes and insurance, also continue to rise. Fred's believes that maintaining adequate operating margins through a combination of price adjustments and cost controls, careful evaluation of occupancy needs, and efficient purchasing practices is the most effective tool for coping with increasing costs and expenses. - -------------------------------------------------------------------------------- RESULTS OF OPERATIONS - -------------------------------------------------------------------------------- Thirteen Weeks Ended May 5, 2001 and April 29, 2000 - --------------------------------------------------- Net sales increased to $207.4 million in 2001 from $176.1 million in 2000, an increase of $31.3 million or 17.8%. The increase was attributable to comparable store sales increases of 10.0% ($16.5 million) and sales by stores not yet included as comparable stores ($15.1 million). Sales to franchisees decreased $.3 million in 2001. The sales mix for the period was 48.2% Hardlines, 36.2% Pharmacy, 11.9% Softlines, and 3.7% Franchise. This compares with 47.6% Hardlines, 32.8% Pharmacy, 14.6% Softlines, and 5.0% Franchise for the same period last year. Gross profit increased to 27.9% of sales in 2001 compared with 27.8% of sales in the prior-year period. Gross profit margins increased as a result of controlling markdowns and improved company store initial markups. Selling, general and administrative expenses increased to $50.7 million in 2001 from $43.2 million in 2000. As a percentage of sales, expenses were 24.5% of sales unchanged from the percentage for the same quarter last year. The fact that operating expenses were unchanged as a percentage of sales was especially noteworthy considering that fuel and utilities costs have advanced significantly since the first quarter of 2000. Interest expense decreased to $.6 million in 2001 from $.7 million in 2000, reflecting lower average revolver borrowings and lower interest rates than last year. - -------------------------------------------------------------------------------- LIQUIDITY AND CAPITAL RESOURCES - -------------------------------------------------------------------------------- Due to the seasonality of Fred's business and the continued increase in the number of stores and pharmacies, inventories are generally lower at year-end than at each quarter-end of the following year. Cash flows used in operating activities totaled $2.9 million during the thirteen-week period ended May 5, 2001. Cash was primarily used to increase inventories. Total inventories increased approximately $10.2 million in the first quarter of 2001. This increase was primarily attributable to 11 new stores, 4 major upgrades and 1 new pharmacy in the first quarter of 2001, coupled with the additional inventory necessary to open an additional 15 to 20 stores in the second quarter. Cash flows used in investing activities totaled $5.1 million, and consisted primarily of capital expenditures associated with the Company's store and pharmacy expansion program. During the first quarter, the Company opened 11 stores and 1 pharmacy. The Company expects to open 15 to 20 stores in the second quarter, and approximately 30 to 35 stores for the year. The Company's capital expenditure plan for the year 2001 is in the $18 million dollar range and will approximate depreciation expense for the year. Cash flows provided by financing activities totaled $8.0 million and included $8.9 million of borrowings under the Company's revolver for inventory and accounts payable needs. On April 3, 2000, the Company and a bank entered into a new Revolving Loan and Credit Agreement (the "Agreement") to replace the May 15, 1992 Revolving Loan and Credit Agreement, as amended. The Agreement provides the Company with an unsecured revolving line of credit commitment of up to $40 million and bears interest at the lesser of 1.5% below prime rate or a LIBOR-based rate. Under the most restrictive covenants of the Agreement, the Company is required to maintain specified shareholder's equity and net income levels. The Company is required to pay a commitment fee to the bank at a rate per annum equal to .18% on the unutilized portion of the revolving line commitment over the term of the agreement. The term of the Agreement extends to April 3, 2003. The borrowings outstanding under this Agreement totaled $31,554,000 at May 5, 2001 and $32,540,000 at April 29, 2000. 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 borrowings outstanding under this Loan Agreement totaled $1,125,000 at May 5, 2001 and $1,734,000 at April 29, 2000. 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. The borrowings outstanding under this Term Loan Agreement totaled $8,365,000 at May 5, 2001 and $9,954,000 at April 29, 2000. The Company believes that sufficient capital resources are available in both the short-term and long-term through currently available cash and cash generated from future operations and, if necessary, the ability to obtain additional financing. - -------------------------------------------------------------------------------- RECENT ACCOUNTING PRONOUNCEMENTS - -------------------------------------------------------------------------------- In December 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 101 "Revenue Recognition in Financial Statements" (SAB 101). SAB 101 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 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. Annual financial results were not affected. - -------------------------------------------------------------------------------- QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK - -------------------------------------------------------------------------------- The Company has no holdings of derivative financial or commodity instruments as of May 5, 2001. The Company is exposed to financial market risks, including changes in interest rates. All borrowings under the Company's Revolving Credit Agreement bear interest at 1.5% below prime rate or a LIBOR-based rate. An increase in interest rates of 100 basis points would not significantly affect the Company's income. All of the Company's business is transacted in U.S. dollars and, accordingly, foreign exchange rate fluctuations have never had a significant impact on the Company, and they are not expected to in the foreseeable future - -------------------------------------------------------------------------------- CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION - -------------------------------------------------------------------------------- Statements, other than those based on historical facts, are forward-looking statements which are based upon a number of assumptions concerning future conditions that may ultimately prove to be inaccurate. Actual events and results may materially differ from anticipated results described in such statements. The Company's ability to achieve such results is subject to certain risks and uncertainties, including, but not limited to, economic and weather conditions which affect buying patterns of the Company's customers, changes in consumer spending and the Company's ability to anticipate buying patterns and implement appropriate inventory strategies, continued availability of capital and financing, competitive factors, changes in reimbursement practices for pharmaceuticals, government regulations, increases in fuel and utility rate and other factors affecting business beyond the Company's control. Consequently, all of the forward-looking statements are qualified by these cautionary statements and there can be no assurance that the results or developments anticipated by the Company will be realized or that they will have the expected effects on the Company or its business or operations. PART 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/A Exhibits: Exhibit 99.2 - Press release dated May 24, 2001, announcing the Fred's stock split and dividend (incorporated herein by reference to Exhibit 99.1 to the Company's Current Report on Form 8-K/A dated June 5, 2001) Reports on Form 8-K/A: Current report on Form 8-K/A dated June 5, 2001 reporting under Item 5, Other Events, information related to announcement by Board of Directors approval of five-for-four stock split and declaration of quarterly cash dividend of $0.05 per share on a pre-split basis ($0.04 per share on a post-split basis). SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. FRED'S, INC. Date: June 11, 2001 /s/ Michael J. Hayes - -------------------- ----------------------- Michael J. Hayes Chief Executive Officer Date: June 11, 2001 /s/ Jerry A. Shore - -------------------- ----------------------- Jerry A. Shore Chief Financial Officer -----END PRIVACY-ENHANCED MESSAGE-----