-----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, QK1FHwPmiBSiaarr2kvQe17sxDGEjA/xRaYPxqu8Ufn/H3qFpUl8Ws1zJuLbFtPE dtuuHbhgyFVeQ6WvH4xu5A== 0001005794-01-500089.txt : 20020413 0001005794-01-500089.hdr.sgml : 20020413 ACCESSION NUMBER: 0001005794-01-500089 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20011103 FILED AS OF DATE: 20011214 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: 1934 Act SEC FILE NUMBER: 001-14565 FILM NUMBER: 1813464 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 freds10q12-01.txt QUARTERLY REPORT 3 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 November 3, 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 16,904,036 shares of Class A voting, no par value common stock outstanding as of December 7, 2001. FRED'S, INC. INDEX Page No. - ------------------------------------------------------------------------------- Part I - Financial Information Item 1 - Financial Statements (unaudited): Consolidated Balance Sheets as of November 3, 2001 and February 3, 2001 3 Consolidated Statements of Income for the Thirteen Weeks Ended November 3, 2001 and October 28, 2000 and the Thirty-Nine Weeks Ended November 3, 2001 and October 28, 2000 4 Consolidated Statements of Cash Flows for the Thirty-Nine Weeks Ended November 3, 2001 and October 28, 2000 5 Notes to Consolidated Financial Statements 6 - 9 Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations 10 - 14 Item 3 - Quantitative and Qualitative Disclosure about Market Risk 14 Part II - Other Information 15 - --------------------------- Signatures 16 - ---------- 2 Item 1 - Financial Statements (unaudited) FRED'S, INC. CONSOLIDATED BALANCE SHEETS (unaudited) (in thousands, except for number of shares)
November 3, February 3, 2001 2001 ---- ---- ASSETS Current assets: Cash and cash equivalents $1,712 $2,569 Receivables, less allowance for doubtful accounts of $345 ($516 at February 3, 2001) 16,537 15,430 Inventories 185,381 149,602 Deferred income taxes 745 2,022 Other current assets 2,337 2,306 ----- ----- Total current assets 206,712 171,929 Property and equipment, at depreciated cost 78,398 76,360 Equipment under capital leases, less accumulated amortization of $1,708 ($1,305 at February 3,2001) 1,674 1,387 Deferred income taxes 497 98 Other noncurrent assets 5,069 5,021 ----- ----- Total assets $292,350 $254,795 ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable $60,323 $40,432 Current portion of indebtedness 563 2,175 Current portion of capital lease obligations 652 503 Accrued liabilities 13,966 14,012 Income taxes payable 2,283 4,278 ------ ------- Total current liabilities 77,787 61,400 ------ ------ Long term portion of indebtedness 281 30,475 Capital lease obligations 1,358 1,230 Other noncurrent liabilities 2,043 2,003 ------ ------ Total liabilities 81,469 95,108 ------ ------ Shareholders' equity: Common stock, Class A voting, no par value, 16,863,562 shares issued and outstanding (15,085,648 shares at February 3, 2001) 110,066 68,557 Retained earnings 100,921 91,342 Deferred compensation on restricted stock incentive plan (106) (212) ------ ------ Total shareholders' equity 210,881 159,687 ------- ------- Total liabilities and shareholders' equity $292,350 $254,795 ======== ========
See accompanying notes to consolidated financial statements 3 FRED'S, INC. CONSOLIDATED STATEMENTS OF INCOME (unaudited) (in thousands, except per share amounts)
Thirteen Weeks Ended Thirty-Nine Weeks Ended ---------------------- ----------------------- November 3, October 28, November 3, October 28, 2001 2000 2001 2000 ---------------------- ----------------------- Net sales $219,242 $180,141 $636,879 $536,626 Cost of goods sold 157,204 128,291 460,302 386,726 ------- --------- -------- -------- Gross profit 62,038 51,850 176,577 149,900 Selling, general and administrative expenses 53,697 45,143 157,235 134,341 ------ --------- -------- -------- Operating income 8,341 6,707 19,342 15,559 Interest expense, net 439 898 1,775 2,334 ------ --------- -------- -------- Income before income taxes 7,902 5,809 17,567 13,225 Provision for income taxes 2,774 1,980 6,166 4,397 -------- --------- -------- -------- Net income $ 5,128 $ 3,829 $ 11,401 $ 8,828 ======== ======== ======== ======== Net income per share Basic .32 $ .26 $ .74 $ .59 ======= ======== ======== ======== Diluted .32 $ .25 $ .72 $ .58 ======= ======== ======== ======== Weighted average shares outstanding Basic 15,833 14,950 15,308 14,918 ======= ======== ======== ======== Diluted 15,963 15,307 15,833 15,223 ======= ======== ======== ========
See accompanying notes to consolidated financial statements 4 FRED'S, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited) (in thousands)
Thirty-Nine Weeks Ended ---------------------- November 3, October 28, 2001 2000 ----- ---- Cash flows from operating activities: Net income $11,401 $8,828 Adjustments to reconcile net income to net cash flows from operating activities: Depreciation and amortization 13,125 10,453 Lifo reserve 700 600 Deferred income taxes 878 661 Provision for uncollectible receivable (171) 117 Tax benefit on exercise of stock options 610 267 Amortization of deferred compensation on restricted stock incentive plan 106 110 Cancellation of restricted stock (32) (203) (Increase)decrease in assets: Receivables (936) (3,187) Inventories (36,170) (33,409) Other assets (31) (37) Increase (decrease) in liabilities: Accounts payable and accrued liabilities 19,844 14,957 Income taxes payable (1,994) 3,491 Other noncurrent liabilities 40 131 ------- -------- Net cash provided by operating activities 7,370 2,779 ------- -------- Cash flows from investing activities: Capital expenditures (13,436) (12,558) Intangible assets, net of cash acquired (742) (1,978) Net cash used in investing activities (14,178) (14,536) -------- -------- Cash flows from financing activities: Reduction of indebtedness and capital lease obligations (9,597) (1,842) Proceeds from revolving line of credit, net of payments (22,623) 13,763 Proceeds from exercise of options 1,905 978 Proceeds from public offering, net of expenses 38,088 --- Cash dividends paid (1,822) (1,803) --------- ---------- Net cash provided by financing activities 5,951 11,096 ------ ------ Decrease in cash and cash equivalents (857) (661) Cash and cash equivalents: Beginning of period 2,569 3,036 ------- -------- End of period $1,712 $2,375 ======= ========= Supplemental disclosures of cash flow information: Interest paid $1,696 $2,237 ====== ====== Income taxes paid $6,700 ---- ====== ====== Non cash investing and financing activities: Assets acquired through capital lease obligations $691 ---- ===== ===== Common stock issued for acquisition $937 ---- ===== =====
See accompanying notes to consolidated financial statements 5 FRED'S, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- NOTE 1: BASIS OF PRESENTATION - -------------------------------------------------------------------------------- Fred's, Inc. ("Fred's" or the "Company") operates 377 discount general merchandise stores, including 27 franchised Fred's stores, in eleven states primarily in the southeastern United States. Two hundred and three of the stores have full service pharmacies. The accompanying unaudited consolidated financial statements of Fred's have been prepared in accordance with the instructions to Form 10-Q and therefore do not include all information and notes necessary for a fair presentation of financial position, results of operations and cash flows in conformity with accounting principles generally accepted in the United States of America. The statements do reflect all adjustments (consisting of only normal recurring accruals) which are, in the opinion of management, necessary for a fair presentation of financial position in conformity with accounting principles generally accepted in the United States of America. The statements should be read in conjunction with the Notes to the Consolidated Financial Statements for the fiscal year ended February 3, 2001 incorporated into the Company's Annual Report on Form 10-K. The results of operations for the thirty-nine week period ended November 3, 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 18% of the retail inventories at November 3, 2001, cost was determined using the LIFO (last-in, first-out) method. The current cost of inventories exceeded the LIFO cost by approximately $4,661,000 and $3,808,000 at November 3, 2001 and October 28, 2000, respectively. LIFO inventory costs can only be determined annually when inflation rates and inventory levels are finalized; therefore, LIFO inventory costs for interim financial statements are estimated. 6 - -------------------------------------------------------------------------------- NOTE 3: NET INCOME PER SHARE - -------------------------------------------------------------------------------- Basic earnings per share excludes dilution and is computed by dividing income available to common stockholders by the weighted-average number of common shares outstanding for the period. Diluted earnings per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the entity. Restricted stock is considered contingently issuable and is excluded from the computation of basic earnings per share. COMPUTATION OF NET INCOME PER SHARE* (unaudited) (in thousands, except per share amounts)
Thirteen Weeks Ended Thirty-Nine Weeks Ended ---------------------- ----------------------- November 3, October 28, November 3, October 28, 2001 2000 2001 2000 ----------------------- ----------------------- Basic net income per share Net income $ 5,128 $ 3,829 $ 11,401 $8,828 ======= ======= ======== ====== Weighted average number of common shares outstanding during the period 15,833 14,950 15,308 14,918 ======= ======= ======= ====== Net income per share $ .32 $ .26 $ .74 $ .59 ======= ======= ======= ====== Diluted net income per share Net income $ 5,128 $ 3,829 $ 11,401 $8,828 ======= ======= ======== ====== Weighted average number of common shares outstanding during the period 15,833 14,950 15,308 14,918 Additional shares attributable to common stock equivalents 130 357 525 305 ------- ------- ------- ------ 15,963 15,307 15,833 15,223 ======= ======= ======= ====== Net income per share $ .32 $ .25 $ .72 $ .58 ======= ======= ======== ======
* All per share amounts have been adjusted to reflect the five-for-four stock split effective on June 18, 2001. 7 - -------------------------------------------------------------------------------- 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 third quarter ended October 28, 2000 are as follows: Thirteen Weeks Ended Thirty-nine Weeks Ended ---------------------- ----------------------- (as reported) (as adjusted) (as reported) (as adjusted) October 28, October 28, October 28, October 28, 2000 2000 2000 2000 ---- ---- ---- ---- Net Sales $181,092 $180,141 $538,558 $536,626 Gross profit 52,089 51,850 150,382 149,900 Net income 3,987 3,829 9,146 8,828 Net income per share Basic * 0.27 0.26 0.61 0.59 Diluted * 0.26 0.25 0.60 0.58 *All per share amounts have been adjusted to reflect the five-for-four stock split effective on June 18, 2001. - -------------------------------------------------------------------------------- NOTE 5: STOCK SPLIT - -------------------------------------------------------------------------------- On May 24, 2001, the Company announced a five-for-four stock split of its common stock, Class A voting, no par value. The new shares, one additional share for each four shares held by stockholders, were distributed on June 18, 2001 to stockholders of record on June 4, 2001. All share and per share amounts included in the accompanying financial statements have been adjusted to reflect this stock split. - -------------------------------------------------------------------------------- NOTE 6: COMMON STOCK OFFERING - -------------------------------------------------------------------------------- On September 25, 2001, the Company sold, pursuant to an underwritten public offering, 1,585,000 shares of its common stock at a price of $25.50 per share. Approximately $38,088,000 in net cash proceeds (the "Common Stock Offering"), after deducting underwriting commission and offering expense was credited to common stock. A portion of the proceeds was used to pay down the Company's Revolving Loan Agreement and to pay off the 1998 Loan Agreement. The remaining funds will be used for working capital, other general corporate purposes and to accelerate new store and pharmacy openings. 8 - -------------------------------------------------------------------------------- NOTE 7: RECENT ACCOUNTING PRONOUNCEMENTS - -------------------------------------------------------------------------------- In June 1998, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards ("SFAS") No. 133, Accounting for Derivative Instruments and Hedging Activities. In June 2000, the FASB issued SFAS No. 138, Accounting for Certain Derivative Instruments and Certain Hedging Activities - an Amendment of FASB Statement No. 133, SFAS No. 133, as amended by SFAS No. 138, requires all derivatives to be measured at fair value and recognized as either assets or liabilities on the balance sheet. Changes in such fair value are required to be recognized immediately in net income to the extent the derivatives are not effective as hedges. In September 1999, the FASB issued SFAS No. 137, Accounting for Derivative Instruments and Hedging Activities - Deferral of the effective Date of FASB Statement No. 133, an amendment to delay the effective date of SFAS No. 133 to fiscal years beginning after June 15, 2000. The Company does not hold derivative instruments or engage in hedging activities. In June 2001, the FASB issued SFAS No. 141, Business Combinations. SFAS No. 141 supercedes Accounting Principles Board Opinion ("APB") No. 16, Business Combinations, and SFAS No. 38, Accounting for Preacquisition Contingencies of Purchased Enterprises. SFAS No. 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001 and for all business combinations accounted for by the purchase method for which the date of acquisition is after June 30, 2001. The Company does not expect the adoption of SFAS No. 141 to have a material impact on its financial statements. In June 2001, the FASB issued SFAS No. 142, Goodwill and Other Intangible Assets. SFAS No. 142 supercedes APB No. 17, Intangible Assets, and its provisions are effective for fiscal years beginning after December 15, 2001. SFAS No. 142 requires that: 1) goodwill and indefinite lived intangible assets will no longer be amortized; 2) goodwill will be tested for impairment at least annually at the reporting unit level (reporting unit levels to be determined upon adoption); 3) intangible assets deemed to have an indefinite life will be tested for impairment at least annually; and 4) the amortization period of intangible assets with finite lives will no longer be limited to forty years. As of November 3, 2001, the Company has intangible assets, net of accumulated amortization, of $5.0 million and has recognized amortization expense of approximately $1.3 million during the nine months ended November 3, 2001. The Company has not completed the process of evaluating the impact that will result from adopting SFAS No. 142. 9 Item 2 - 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 November 3, 2001 and October 28, 2000 - ---------------------------------------------------------- Net sales increased to $219.2 in 2001 from $180.1 million in 2000, an increase of $39.1 million or 21.7%. The increase was attributable to comparable store sales increases of 12.7% ($21.8 million) and sales by stores not yet included as comparable stores ($17.6 million). Sales to franchisees decreased $.3 million in 2001. The sales mix for the period was 48.3% Hardlines, 35.7% Pharmacy, 12.1% Softlines, and 3.9% Franchise. This compares with 47.7% Hardlines, 35.3% Pharmacy, 12.0% Softlines, and 5.0% Franchise for the same period last year. Gross profit decreased to 28.3% of sales in 2001 compared with 28.8% of sales in the prior-year period. The decrease in gross profit margins is attributable to pricing pressure on pharmacy sales. Selling, general and administrative expenses increased to $53.7 million in 2001 from $45.1 million in 2000. As a percentage of sales, expenses decreased to 24.5% of sales compared to 25.1% of sales last year. Selling, general and administrative expenses were improved primarily by leveraging the higher sales to improved productivity and control of labor costs throughout the Company. In the third quarter, labor as a percent of sales was 1.2% better than last year. Additionally, pharmacy and corporate expenses have been controlled to leverage the higher sales. Interest expense decreased to $.4 million in 2001 from $.9 million in 2000, reflecting the effect of the public offering which was used to paydown the debt. 10 Thirty-nine Weeks Ended November 3, 2001 and October 28, 2000 - --------------------------------------------------------------------- Net sales increased to $636.9 million in 2001 from $536.6 million in 2000, an increase of $100.3 million or 18.7%. The increase was attributable to comparable store sales increases of 9.9% ($50.4 million) and sales by stores not yet included as comparable stores ($50.7 million). Sales to franchisees decreased $.8 million in 2001. The sales mix for the period was 48.4% Hardlines, 35.6% Pharmacy, 12.1% Softlines, and 3.9% Franchise. This compares with 49.5% Hardlines, 33.5% Pharmacy, 12.2% Softlines, and 4.8% Franchise for the same period last year. Gross profit decreased to 28.3% of sales in 2001 compared with 28.8% of sales in the prior-year period. Gross profit margins decreased as a result of the change in sales mix, promotional activities to increase customer traffic and pricing pressure on pharmacy sales. Selling, general and administrative expenses increased to $157.2 million in 2001 from $134.3 million in 2000. As a percentage of sales, expenses decreased to 24.7% of sales compared to 25.0% of sales last year. Selling, general and administrative expenses were improved primarily due to improved productivity and controlled labor cost throughout the Company. Interest expense decreased to $1.8 million in 2001 from $2.3 million in 2000, reflecting lower average revolver borrowings than last year as well as lower interest rates and the effect of the public offering in reducing the debt. - -------------------------------------------------------------------------------- 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. Net cash flow provided by operating activities totaled $7.4 million during the thirty-nine week period ended November 3, 2001. Cash was primarily used to increase inventories by approximately $36.2 million in the first nine months of 2001. This increase was primarily attributable to 30 new stores and 5 new pharmacies in the first nine months of 2001. Accounts payable increased approximately $19.8 million during the first nine months of 2001. Net cash flows used by investing activities totaled $14.2 million, and was used primarily for capital expenditures associated with the Company's store and pharmacy expansion program. During the first nine months of 2001, the Company opened 30 stores and upgraded 6 stores. The Company expects to open approximately 35 stores for the year. The Company's capital expenditure plan for the year 2001 is approximately $16 million dollars. Net cash flows provided by financing activities totaled $6.0 million. $38.1 million in funds were provided by the Company's public offering of 1,585,000 shares of common stock on September 28, 2001. $7.8 million was used to pay off the Company's 1998 Loan Agreement and the balance of the net proceeds to pay down on the Company's Revolving Loan and Credit Agreement. On April 3, 2000, the Company and a bank entered into a new Revolving Loan and Credit Agreement (the "Agreement") to replace the May 15, 1992 Revolving Loan and Credit Agreement, as amended. The Agreement provides the Company with an unsecured revolving line of credit commitment of up to $40 million 11 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 Company used the proceeds of the public offering to pay down the borrowings at November 3, 2001 to zero and the borrowings outstanding totaled $40.0 million at October 28, 2000. On April 23, 1999, the Company and a bank entered into a Loan Agreement (the "1999 Loan Agreement"). The 1999 Loan Agreement provided the Company with a four-year unsecured term loan of $2,250,000 to finance the replacement of the Company's mainframe computer system. The 1999 Loan Agreement bears interest of 6.15% per annum and matures on April 15, 2003. Borrowings outstanding under this 1999 Loan Agreement totaled $.8 million at November 3, 2001 and $1.4 million at October 28, 2000. On May 5, 1998, the Company and a bank entered into a Loan Agreement (the "1998 Loan Agreement"). The 1998 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 1998 Loan Agreement bore interest of 6.82% per annum and would have matured on November 1, 2005. The Company used the proceeds of the public offering to pay off the Loan Agreement prior to November 3, 2001 and the borrowing outstanding at October 28, 2000 totaled $9.2 million. On October 11, 2000, the Company and a bank entered into a Seasonal Overline Revolving Credit Agreement (the "2000 Seasonal Agreement"). The 2000 Seasonal Agreement provides the Company with a ninety day unsecured loan of $5,000,000. The 2000 Seasonal Agreement bears interest at .5% below prime rate. Borrowings outstanding under this 2000 Seasonal Agreement totaled $2.0 million at October 28, 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; a decrease of $453,000, $111,000, $73,000 and $.00, respectively, for the second quarter ended July 29, 2000; a 12 decrease of $951,000, $239,000, $158,000 and $.01, respectively, for the third quarter ended October 28, 2000. Annual financial results were not affected. In June 1999, the FASB issued SFAS No. 137, Accounting for Derivative Instruments and Hedging Activities - Deferral of the effective date of FASB Statement No. 133, which deferred the effective date provisions of SFAS No. 133 for the company to the first quarter of 2001. The Company does not believe this new standard will have an impact on its financial statements since it currently has no derivative instruments. In June 1998, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards ("SFAS") No. 133, Accounting for Derivative Instruments and Hedging Activities. In June 2000, the FASB issued SFAS No. 138, Accounting for Certain Derivative Instruments and Certain Hedging Activities - an Amendment of FASB Statement No. 133, SFAS No. 133, as amended by SFAS No. 138, requires all derivatives to be measured at fair value and recognized as either assets or liabilities on the balance sheet. Changes in such fair value are required to be recognized immediately in net income to the extent the derivatives are not effective as hedges. In September 1999, the FASB issued SFAS No. 137, Accounting for Derivative Instruments and Hedging Activities - Deferral of the effective Date of FASB Statement No. 133, an amendment to delay the effective date of SFAS No. 133 to fiscal years beginning after June 15, 2000. The Company does not hold derivative instruments or engage in hedging activities. In June 2001, the FASB issued SFAS No. 141, Business Combinations. SFAS No. 141 supercedes Accounting Principles Board Opinion ("APB") No. 16, Business Combinations, and SFAS No. 38, Accounting for Preacquisition Contingencies of Purchased Enterprises. SFAS No. 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001 and for all business combinations accounted for by the purchase method for which the date of acquisition is after June 30, 2001. The Company does not expect the adoption of SFAS No. 141 to have a material impact on its financial statements. In June 2001, the FASB issued SFAS No. 142, Goodwill and Other Intangible Assets. SFAS No. 142 supercedes APB No. 17, Intangible Assets, and its provisions are effective for fiscal years beginning after December 15, 2001. SFAS No. 142 requires that: 1) goodwill and indefinite lived intangible assets will no longer be amortized; 2) goodwill will be tested for impairment at least annually at the reporting unit level (reporting unit levels to be determined upon adoption); 3) intangible assets deemed to have an indefinite life will be tested for impairment at least annually; and 4) the amortization period of intangible assets with finite lives will no longer be limited to forty years. As of November 3, 2001, the Company has intangible assets, net of accumulated amortization, of $5.0 million and has recognized amortization expense of approximately $1.3 million during the nine months ended November 3, 2001. The Company has not completed the process of evaluating the impact that will result from adopting SFAS No. 142. - -------------------------------------------------------------------------------- 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 13 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 rates 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. - -------------------------------------------------------------------------------- Item 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK - -------------------------------------------------------------------------------- The Company has no holdings of derivative financial or commodity instruments as of November 3, 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 not had a significant impact on the Company, and they are not expected to in the foreseeable future 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 (a) Exhibits: 3.3 Articles of Amendment to the Charter of Fred's, Inc., dated September 6, 2001, as filed with the Secretary of State of Tennessee. (Incorporated by reference to Exhibit 3.3 of Amendment No. 1 to our Registration Statement on Form S-3 filed on September 10, 2001.) 99.2 Press release dated September 6, 2001, announcing the report of Fred's sales for the four-week and seven-month sales ended September 1, 2001. (b) Reports on Form 8-K: Form 8-K filed September 6, 2001 - announcing sales for period ended September 1, 2001. 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. By:/s/Michael J. Hayes ------------------------------ Michael J. Hayes Date: December 13, 2001 Chief Executive Officer - ------------------------ By:/s/Jerry A. Shore ------------------------- Jerry A. Shore Date: December 13, 2001 Chief Financial Officer - ------------------------ 16 -----END PRIVACY-ENHANCED MESSAGE-----