ASSETS HELD-FOR-SALE AND DISCONTINUED OPERATIONS

3 Months Ended

May 05, 2018

Assets Held-for-sale And Discontinued Operations

ASSETS HELD-FOR-SALE AND DISCONTINUED OPERATIONS

NOTE 2: ASSETS HELD-FOR-SALE AND DISCONTINUED OPERATIONS

As discussed in Note 1, during the fourth quarter of 2017, Fred’s Board of Directors approved a plan to actively market its specialty pharmacy business. Accordingly, the specialty pharmacy business met the criteria for “Assets Held-for-Sale” in accordance with ASC 360 as of February 3, 2018. The specialty pharmacy assets and liabilities are reflected as “held for sale” on the consolidated balance sheets in accordance with ASC 360 at May 5, 2018 and April 29, 2017. In addition, the results of operations for the specialty pharmacy business have been presented as discontinued operations in accordance with ASC 205-20 for all periods presented.

The results of the specialty pharmacy business were previously allocated to the Pharmacy segment within the sales mix. The specialty pharmacy recorded a loss from discontinued operations, net of tax, of $2.2 million for the first quarter of 2018, and income of $1.3 million for the first quarter of 2017.

Certain corporate overhead and other costs previously allocated to the specialty pharmacy for segment reporting purposes did not qualify for classification within discontinued operations and have been reallocated to continuing operations.

On May 4, 2018, Fred’s entered into an Asset Purchase Agreement (“the Asset Purchase Agreement”) with Advance Care Scripts, Inc. (“the Buyer”), pursuant to which the Buyer agreed to purchase certain Specialty Pharmacy assets of National Pharmaceutical Network, Inc. and Reeves-Sain Drug Store, Inc. (collectively known as “Entrust”), consisting of three pharmacy locations, pharmaceutical inventory, and related intellectual property. The amount to be paid by the Buyer to Fred’s for the purchased assets is $40.0 million (plus an additional amount for inventory, not to exceed $5.5 million), subject to any adjustments. On June 1, 2018, the specialty pharmacy assets were sold. See Note 13, Subsequent Events for additional information.

Summarized Discontinued Operations Financial Information

The following table provides a reconciliation of the carrying amounts of major classes of assets and liabilities which are included in assets and liabilities held for sale in the accompanying consolidated balance sheet for each of the periods presented:

	May 5, 2018		February 3,
(in thousands)	(unaudited)		2018
Current assets:
Accounts Receivable, net	$	15,308	$	15,983
Inventories		5,586		3,756
Other non-trade receivables		87		152
Prepaid expenses and other current assets		11		12
Total current assets held-for-sale	$	20,992	$	19,903
Property and equipment, less accumulated depreciation and amortization	$	90	$	1,036
Goodwill		30,609		30,609
Intangible assets, net		8,941		9,533
Other noncurrent assets, net		539		539
Total noncurrent assets held-for-sale	$	40,179	$	41,717
Current liabilities:
Accounts payable	$	28,036	$	22,045
Accrued expenses and other		2,868		4,527
Total current liabilities held-for-sale	$	30,904	$	26,572
Deferred income taxes	$	—	$	—
Other noncurrent liabilities		—		48
Total noncurrent liabilities held-for-sale	$	—	$	48

The following table summarizes the results of discontinued operations for the quarters ended May 5, 2018, and April 29, 2017:

	For the Thirteen Weeks Ended
	(unaudited)
	May 5,			April 29,
(in thousands)	2018			2017
Revenues	$	69,846		$	68,148
Cost of Goods Sold		67,470			63,802
Gross Profit		2,376			4,346
Depreciation and amortization		608			748
Selling, general and administrative expenses		3,924			2,567
Income (loss) from discontinued operations before Income taxes		(2,156	)		1,031
Income tax expense (benefit)		—			(278	)
Income (loss) from discontinued operations, net of tax		(2,156	)		1,309