TABLE OF CONTENTS
PART I.
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FINANCIAL INFORMATION
Item 1. Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition and
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures
PART II.
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OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
SIGNATURES
EXHIBIT INDEX
EX 10.16
EX 10.17
EX-31.1
EX-31.2
EX-32
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, 2004.
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 001-14565
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 .
----------- -----------
Indicate by check mark whether the registrant is an accelerated filer.
Yes X No
----------- -----------
The registrant had 39,384,148 shares of Class A voting, no par value common
stock outstanding as of December 3, 2004.
1
FRED'S, INC.
INDEX
Page No.
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Part I - Financial Information
Item 1 - Financial Statements (unaudited):
Condensed Consolidated Balance Sheets as of
October 30, 2004 and January 31, 2004 3
Condensed Consolidated Statements of Income
for the Thirteen Weeks Ended October 30, 2004
and November 1, 2003 and the Thirty-nine Weeks
Ended October 30, 2004 and November 1, 2003 4
Condensed Consolidated Statements of Cash Flows
for the Thirty-nine Weeks Ended October 30, 2004
and November 1, 2003 5
Notes to Condensed Consolidated Financial Statements 6 - 7
Item 2 - Management's Discussion and
Analysis of Financial Condition and
Results of Operations 8 - 12
Item 3 - Quantitative and Qualitative Disclosure
about Market Risk 12
Item 4 - Controls and Procedures 12 - 13
Part II - Other Information 14
- ---------------------------
Item 6 - Exhibits and Reports on Form 8-K
Signatures 15
- ----------
Exhibit - 31.1
Exhibit - 31.2
Exhibit - 32
2
FRED'S, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except for number of shares)
October 30, January 31,
2004 2004
---- ----
ASSETS: (unaudited)
- -------
Current assets:
Cash and cash equivalents $5,303 $4,741
Receivables, less allowance for doubtful
accounts of $659 ($1,437 at January 31, 2004) 24,363 23,931
Inventories 318,271 239,748
Other current assets 6,266 4,094
-------- --------
Total current assets 354,203 272,514
Property and equipment, less accumulated depreciation
of $154,868 ($138,685 at January 31, 2004) 142,359 135,433
Equipment under capital leases, less accumulated
amortization of $3,622 ($3,169 at January 31,2004) 1,346 1,798
Other noncurrent assets 4,141 4,005
-------- --------
Total assets $502,049 $413,750
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $91,088 $74,799
Accrued expenses and other 20,814 19,113
Income taxes payable 4,481 930
Current portion of indebtedness 11,800 18
Current portion of capital lease obligations 660 725
Current deferred income tax liability 13,506 11,487
-------- --------
Total current liabilities 142,349 107,072
------- -------
Long-term portion of indebtedness, less current portion 40,072 5,603
Deferred income tax liability 8,103 6,335
Capital lease obligations, less current portion 1,178 1,686
Other noncurrent liabilities 2,406 2,441
-------- ------
Total liabilities 194,108 123,137
-------- -------
Shareholders' equity:
- ------------- -------
Preferred stock, nonvoting, no par value,
10,000,000 shares authorized, none outstanding --- ---
Preferred stock, Series A junior participating
nonvoting, no par value, 224,594 shares
authorized, none outstanding --- ---
Common stock, Class A voting, no par value,
60,000,000 shares authorized, 39,329,065
shares issued and outstanding
(39,105,639 shares at January 31, 2004) 128,328 126,430
Common stock, Class B nonvoting, no par value,
11,500,000 shares authorized, none outstanding --- ---
Retained earnings 179,870 164,183
Deferred compensation on restricted stock incentive plan (257) ---
-------- --------
Total shareholders' equity 307,941 290,613
-------- --------
Total liabilities and shareholders' equity $502,049 $413,750
======== ========
See accompanying notes to condensed consolidated financial statements.
3
FRED'S, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
(in thousands, except per share amounts)
Thirteen Weeks Ended Thirty-nine Weeks Ended
-------------------- -----------------------
October 30, November 1, October 30, November 1,
2004 2003 2004 2003
----------- ----------- ----------- -----------
Net sales $349,139 $311,668 $1,031,475 $924,627
Cost of goods sold 247,890 220,477 739,462 660,544
------- ------- --------- --------
Gross profit 101,249 91,191 292,013 264,083
Selling, general and
administrative expenses 89,986 77,303 264,287 231,533
------- ------- -------- --------
Operating income 11,263 13,888 27,726 32,550
Interest expense,net 260 93 542 290
------ ------- ------- --------
Income before income taxes 11,003 13,795 27,184 32,260
Provision for income taxes 3,482 4,767 9,145 10,990
------ ------- ------ --------
Net income $ 7,521 $ 9,028 $ 18,039 $ 21,270
======== ======== ======== ========
Net income per share
Basic $ .19 $ .23 $ .46 $ .55
====== ======== ======== ========
Diluted $ .19 $ .23 $ .46 $ .54
====== ======== ======== ========
Weighted average shares outstanding
Basic 39,220 38,901 39,130 38,680
Effect of dilutive stock options 297 937 455 914
------ ----- ---- -----
Diluted 39,517 39,838 39,585 39,594
====== ====== ====== ======
Dividends per common share $ .02 $ .02 $ .06 $ .06
====== ====== ====== ======
See accompanying notes to condensed consolidated financial statements.
4
FRED'S, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(in thousands)
Thirty-nine Weeks Ended
-----------------------
October 30, November 1,
2004 2003
---- ----
Cash flows from operating activities:
Net income $18,039 $21,270
Adjustments to reconcile net income
to net cash flows from operating activities:
Depreciation and amortization 20,789 18,994
Provision for uncollectible receivables --- 1
Lifo reserve provision 1,314 1,132
Deferred income tax provision 3,787 3,226
Amortization of deferred compensation on
restricted stock incentive plan 59 35
Tax benefit upon exercise of stock options 407 1,360
(Increase)decrease in assets:
Receivables (432) 1,571
Inventories (79,837) (68,215)
Other assets (2,172) 2,824
Increase (decrease) in liabilities:
Accounts payable and accrued expenses 17,990 23,533
Income taxes payable 3,551 ---
Other noncurrent liabilities (35) 300
-------- -----
Net cash (used in) provided by operating activities (16,540) 6,031
-------- -----
Cash flows from investing activities:
Capital expenditures (25,980) (34,798)
Asset acquisition (primarily intangibles) (1,419) (776)
-------- ------
Net cash used in investing activities (27,399) (35,574)
-------- -------
Cash flows from financing activities:
Reduction of indebtedness and capital lease obligations (586) (710)
Proceeds from revolving line of credit, net of payments 46,264 19,284
Proceeds from exercise of stock options 1,175 1,919
Proceeds from sale of additional shares --- 8,110
Repurchase of shares --- (2,646)
Cash dividends paid (2,352) (2,344)
-------- --------
Net cash provided by financing activities 44,501 23,613
-------- --------
Increase (decrease) in cash and cash equivalents 562 (5,930)
Beginning of period cash and cash equivalents 4,741 8,209
-------- --------
End of period cash and cash equivalents $5,303 $2,279
======== ========
Supplemental disclosures of cash flow information:
Interest paid $452 $285
==== ====
Income taxes paid $1,400 $---
====== ====
See accompanying notes to condensed consolidated financial statements.
5
FRED'S, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
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NOTE 1: BASIS OF PRESENTATION
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Fred's, Inc. ("We", "Our" or "Us") operates 574 discount general
merchandise stores, including 25 franchised Fred's stores, in fourteen states in
the southeastern United States. Two hundred and fifty-three of the stores have
full service pharmacies.
The accompanying unaudited consolidated financial statements 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 Notes to the Consolidated Financial Statements for
the fiscal year ended January 31, 2004 incorporated into Our Annual Report on
Form 10-K.
The results of operations for the thirty-nine week period ended October 30,
2004 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 2004
presentation.
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NOTE 2: INVENTORIES
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Warehouse 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. Under the retail
inventory method ("RIM"), the valuation of inventories at cost and the resulting
gross margin are calculated by applying a calculated cost-to-retail ratio to the
retail value of inventories. RIM is an averaging method that has been widely
used in the retail industry due to its practicality. Also, it is recognized that
the use of the RIM will result in valuing inventories at lower of cost or market
if markdowns are currently taken as a reduction of the retail value of
inventories. Inherent in the RIM calculation are certain significant management
judgments and estimates including, among others, initial markups, markdowns, and
shrinkage, which significantly impact the ending inventory valuation at cost as
well as resulting gross margin. These significant estimates, coupled with the
fact that the RIM is an averaging process, can, under certain circumstances,
produce distorted or inaccurate cost figures. Management believes that our RIM
provides an inventory valuation which reasonably approximates cost and results
in carrying inventory at the lower of cost or market.
For pharmacy inventories, which are $35.2 million and $33.1 million at
October 30, 2004 and January 31, 2004, respectively, cost was determined using
the LIFO (last-in, first-out) method. The current cost of inventories exceeded
the LIFO cost by $9.1 million at October 30, 2004 and $7.8 million at January
31, 2004. LIFO pharmacy inventory costs can only be determined annually when
inflation rates and inventory levels are finalized; therefore, LIFO pharmacy
inventory costs for interim financial statements are estimated.
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NOTE 3: INCENTIVE STOCK OPTIONS
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6
We account for our stock-based compensation plans using the intrinsic value
method prescribed in Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees," and related Interpretations. No stock-based employee
compensation expense is reflected in net income because the exercise price of
our incentive employee stock options equals the market price of the underlying
stock on the date of grant. The following table illustrates the effect on net
income and earnings per share if we had applied the fair value recognition
provisions of Statement of Financial Accounting Standards No. 123, "Accounting
for Stock-Based Compensation" (SFAS No. 123), to stock-based employee
compensation.
Thirteen Weeks Ended Thirty-nine Weeks Ended
October 30, November 1, October 30, November 1,
----------- ----------- ----------- -----------
2004 2003 2004 2003
---- ---- ---- ----
(Amounts in thousands, except per share data)
---------------------------------------------
Net income, as reported $7,521 $9,028 $18,039 $21,270
SFAS No. 123 pro forma
compensation expense,
net of income taxes (258) (257) (601) (770)
------- ------- -------- --------
SFAS No. 123 pro forma
Net income $ 7,263 $ 8,771 $ 17,438 $ 20,500
======== ======== ========= =========
Earnings per share, as reported:
Basic $ 0.19 $ 0.23 $ .46 $ .55
====== ====== ===== =====
Diluted $ 0.19 $ 0.23 $ .46 $ .54
====== ====== ===== =====
Pro forma earnings per share:
Basic $ 0.19 $ 0.23 $ .45 $ .55
====== ====== ===== =====
Diluted $ 0.18 $ 0.22 $ .44 $ .54
====== ====== ===== =====
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NOTE 4: CHANGE IN ESTIMATE - INVENTORY SHRINKAGE
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During the first quarter of fiscal 2004, we adopted a change in methodology for
estimating shrinkage to attain a more accurate estimate of the shrink accrual.
This change decreased net income during the quarter by approximately $0.2
million and increased net income year to date by approximately $0.5 million.
7
Item 2:
Management's Discussion and Analysis of Financial
Condition and Results of Operations
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GENERAL
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Executive Overview
- ------------------
In 2004, the company has continued the strategic direction that it implemented
in 2001 to grow its store base by approximately 15% per year and achieve same
store sales growth producing strong earnings per share growth. Fred's operates
574 discount general merchandise stores in fourteen states primarily in the
southeastern United States. In the first three quarters of 2004, the company has
opened 66 new stores. The majority of our new store openings were in Alabama,
Georgia, Florida, and South Carolina. We have not entered into any new states in
2004. Additionally, we have opened 13 new pharmacies during the year.
We continue to focus our merchandising and store direction on maintaining a
competitive differentiation within the $25 shopping trip. Our unique store
format and strategy combine the attractive element of a discount dollar store,
drug store and mass merchant. Our average customer transaction was approximately
$17.64. In comparison, the discount dollar stores average $8 - $9 and chain
drugs and mass merchants average in the range of $40 - $80 per transaction. Our
stores operate equally well in rural and urban markets. Our everyday low pricing
strategy is supplemented by 14 promotional circulars per year. Our product
selection is enhanced by a private label program and opportunistic buys.
Although our comparable sales performance this year remains positive, it has
nonetheless fallen short of plan. With the significant added expense of gasoline
this year, our customers are more cautious in their spending and more focused on
lower-margin merchandise, and this impact is reflected in both our sales and
gross profit lines. This, along with the unusual expenses incurred as a result
of the hurricanes and associated clean-up, as well as a surge in our fuel,
transportation and utility expenses, led to the reduced financial results.
During the year, the Company has implemented program improvements in employee
training, store POS systems upgrades, allocation system upgrades, and SKU level
inventory management.
Our business is subject to seasonal influences, but has tended to experience
less seasonal fluctuation than many other retailers due to the mix of everyday
basic merchandise and pharmacy business. Our fiscal 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
our operations. Many of our employees are paid hourly rates related to the
federal minimum wage and, accordingly, any increase affects us. 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. We believe that maintaining adequate operating margins
through a combination of price adjustments and cost controls, careful evaluation
of occupancy needs, and efficient purchasing practices are the most effective
tools for coping with increasing costs and expenses.
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RESULTS OF OPERATIONS
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Thirteen Weeks Ended October 30, 2004 and November 1, 2003
- ----------------------------------------------------------
8
Net sales increased to $349.1 million in 2004 from $311.7 million in 2003, an
increase of $37.4 million or 12.0%. The increase was attributable to comparable
store sales increases of 3.6% ($11.2 million) and sales by stores not yet
included as comparable stores ($27.2 million). Sales to franchisees decreased
$1.0 million in 2004. The sales mix for the period was 51.8% Hardlines, 34.0%
Pharmacy, 11.8% Softlines, and 2.4% Franchise. This compares with 49.6%
Hardlines, 34.1% Pharmacy, 13.4% Softlines, and 2.9% Franchise for the same
period last year. During the quarter, 17 new stores and 3 new pharmacies were
opened and there were 2 store closings.
Gross profit decreased to 29.0% of sales in 2004 compared with 29.3% of sales in
the prior-year period. Gross profit margin decreased by 30 basis points in the
quarter primarily from the continued shift of product mix toward more basic and
consumable product. Additionally, last year's gross margin included vendor
allowances ($0.6 million) related to the Georgia Distribution Center startup.
The LIFO inventory effect on pharmacy inventories and gross margin returned to a
more normal level in the third quarter after a sharp increase experienced in the
last quarter. These increases were partial offset by favorable shrinkage (20
basis points) and double coupon expense (10 basis points) when compared to the
same period last year.
Selling, general and administrative expenses increased to $90.0 million in 2004
from $77.3 million in 2003. As a percentage of sales, expenses increased to
25.8% of sales compared to 24.8% of sales last year. The increase in expenses is
primarily due to increases in store occupancy cost ($8.0 million) as a percent
of sales and cost related to fuel increases on utilities ($0.8 million) and
shipping expenses ($1.0 million). Also, in the quarter, the pharmacy division
incurred an unusual expense of approximately $.5 million related to Medicare
reimbursements.
During the third quarter of 2004, interest expense, net increased by $0.2
million when compared to the 2003 quarter, reflecting additional borrowings
during the quarter for the store growth program and inventory purchases.
For the third quarter of 2004, the effective income tax rate was 31.6%, compared
with 34.6% for last year. The lower income tax rate is a result of reduced state
taxes this year as compared to last year.
Thirty-nine Weeks Ended October 30, 2004 and November 1, 2003
- -------------------------------------------------------------
Net sales increased to $1,031.5 million in 2004 from $924.6 million in 2003,an
increase of $106.9 million or 11.6%. The increase was attributable to comparable
store sales increases of 3.3% ($29.6 million) and sales by stores not yet
included as comparable stores ($78.2 million). Sales to franchisees decreased
$0.9 million in 2004. The sales mix for the period was 50.6% Hardlines, 33.7%
Pharmacy, 13.3% Softlines, and 2.4% Franchise. This compares with 49.6%
Hardlines, 33.5% Pharmacy, 14.1% Softlines, and 2.8% Franchise for the same
period last year. For the 2004 year to date we opened 66 new stores and 13 new
pharmacies and we closed 5 stores and 1 pharmacy.
Gross profit decreased to 28.3% of sales in 2004 compared with 28.6% of sales in
the prior-year period. Gross profit margins decreased as a result of sales mix
toward more basic and consumable products, increased freight costs ($0.2
million) and an increase in the LIFO inventory reserve ($0.9 million) on
pharmacy inventories. During the first quarter of 2004 we adopted a change in
methodology for estimating shrinkage to attain a more accurate estimate of the
shrink accrual. This change increased net income year to date by approximately
$0.5 million.
Selling, general and administrative expenses increased to $264.3 million in 2004
from $231.5 million in 2003. As a percentage of sales, expenses increased to
25.6% of sales compared to 25.1% of sales last year. The increase is primarily
due to increases in store and pharmacy expenses as a percent of sales and higher
fuel cost. These cost have been partially offset by productivity gains in the
distribution centers.
For the first nine months of 2004, we incurred interest expense, net of $0.5
million as compared to interest expense, net of $0.3 million last year. The
9
difference is primarily resulting from increased borrowing related to inventory
purchases and new store growth.
For the first nine months of 2004, the effective income tax rate was 33.6%,
compared with 34.1% for last year. The lower income tax rate is a result of
reduced state taxes this year as compared to last year. We anticipate the tax
rate for the balance of the year to remain in the 34% range.
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LIQUIDITY AND CAPITAL RESOURCES
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Due to the seasonality of our business inventories are generally lower at
year-end. However, due to the continued increase in the number of stores and
pharmacies, inventories are generally higher at each quarter-end than at each
quarter-end of the previous year.
Cash flows used in operating activities totaled $16.5 million during the
thirty-nine week period ended October 30, 2004. Cash was primarily used to
increase inventories by approximately $79.8 million in the first nine months of
2004. This increase was primarily attributable to 66 new stores and 13 new
pharmacies in the first nine months of 2004 as well as earlier receiving of
seasonal merchandise.
Cash flows used in investing activities totaled $27.4 million, and consisted
primarily of capital expenditures associated with the store and pharmacy
expansion program ($21.4 million) and for technology and other corporate
expenditures ($6.0 million). During the first nine months, we opened 66 stores,
closed 5 stores, opened 13 pharmacies, closed 1 pharmacy and remodeled 29
stores. We expect to open approximately 80 to 85 stores for the year. For all of
fiscal 2004, the Company is planning capital expenditures totaling approximately
$35.0 million comprising approximately $26.1 million for upgrades, remodels, or
new stores and pharmacies; $6.9 million for technology upgrades, distribution
center equipment and capital maintenance; and $2.0 million for the acquisition
of customer lists and other pharmacy related items. Depreciation expense for the
year will be approximately $28 million. Capital expenditures in 2003 totaled
$48.0 million and depreciation expense was $25.7 million.
Cash flows provided by financing activities totaled $44.5 million and included
$46.3 million of borrowings under the Company's revolver for inventory needs.
On July 31, 2003, we entered into the third loan modification agreement (the
"Agreement") to modify the April 3, 2000 Revolving Loan and Credit Agreement, as
amended. The Agreement provides us with an unsecured revolving line of credit
commitment of up to $40 million and bears interest at a 1.5% below prime rate or
a LIBOR-based rate. Under the most restrictive covenants of the Agreement, we
are required to maintain specified shareholders' equity (which was $256,697,000
at October 30, 2004) and net income levels. We are required to pay a commitment
fee to the bank at a rate per annum equal to .15% on the unutilized portion of
the revolving line commitment over the term of the Agreement. The term of the
Agreement extends to July 31, 2006. There were $40.0 million in borrowings
outstanding at October 30, 2004 and $5.5 million in borrowings outstanding at
January 31, 2004.
On June 28, 2004, the Company and a bank entered into the fourth loan
modification agreement(the "2004 Temporary Overline #1") to modify the April 3,
2000 Revolving Loan and Credit Agreement, as amended to grant a temporary
extension of the commitment. The 2004 Temporary Overline #1 provides the Company
with a one hundred and eighty day unsecured loan of $10.0 million. The 2004
10
Temporary Overline #1 bears interest at 1.5% below prime rate. The bank agreed
to forego the commitment fee on the unutilized portion of the Temporary Overline
#1. Borrowings outstanding under this 2004 Temporary Overline totaled $10.0
million at October 30, 2004 and will mature on December 28, 2004.
On October 19, 2004, the Company and a bank entered into the fifth loan
modification agreement(the "2004 Temporary Overline #2") to modify the April 3,
2000 Revolving Loan and Credit Agreement, as amended to grant a temporary
extension of the commitment. The 2004 Temporary Overline #2 provides the Company
with a fifty-seven day unsecured loan of $10.0 million. The 2004 Temporary
Overline #2 bears interest at 1.5% below prime rate. The bank agreed to forego
the commitment fee on the unutilized portion of the Temporary Overline #2.
Borrowings outstanding under this 2004 Temporary Overline #2 totaled $1.8
million at October 30, 2004 and will mature on December 15, 2004.
We believe that cash flows during the 4th quarter should be sufficient to retire
both overlines.
We believe that sufficient capital resources are available in both the
short-term and long-term through currently available cash and cash generated
from future operations and, if necessary, the ability to obtain additional
financing.
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RECENT ACCOUNTING PRONOUNCEMENTS
- --------------------------------------------------------------------------------
In early 2004, the Financial Accounting Standards Board ("FASB") adopted FASB
Staff Position No. FSP 106-2, "Accounting and Disclosure Requirements Related to
the Medicare Prescription Drug, Improvement and Modernization Act of 2003." This
pronouncement does not have a material impact on the Company's financial
statements as a whole.
On November 24, 2004, the FASB issued FASB Statement No. 151, Inventory Costs -
An Amendment of ARB No. 43, Chapter 4. This new standard is the result of a
broader effort by the FASB to improve financial reporting by eliminating
differences between GAAP in the United States and GAAP developed by the IASB.
Statement 151 clarifies that abnormal amounts of idle facility expense, freight,
handling costs and spoilage should be expensed as incurred and not included in
overhead. Further, Statement 151 requires that allocation of fixed production
overheads to conversion costs should be based on normal capacity of the
production facilities. The provisions in Statement 151 are effective for
inventory costs incurred during fiscal years beginning after June 15, 2005.
Companies must apply the standard prospectively. We have not yet evaluated the
impact of this new standard on our prospective financial statements.
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CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION
- --------------------------------------------------------------------------------
Other than statements based on historical facts, many of the matters discussed
in this Form 10-Q relate to events which we expect or anticipate may occur in
the future. Such statements are defined as "forward-looking statements" under
the Private Securities Litigation Reform Act of 1995 (the "Reform Act"), 15
U.S.C.A. Sections 77z-2 and 78u-5 (Supp. 1996). The Reform Act created a safe
harbor to protect companies from securities law liability in connection with
forward-looking statements. Fred's Inc. ("Fred's" or the "Company") intends to
qualify both its written and oral forward-looking statements for protection
under the Reform Act and any other similar safe harbor provisions.
The words "believe", "anticipate", "project", "plan", "expect", "estimate",
"objective", "forecast", "goal", "intend", "will likely result", or "will
11
continue" and similar expressions generally identify forward-looking statements.
All forward-looking statements are inherently uncertain, and concern matters
that involve risks and other factors which may cause the actual performance of
the Company to differ materially from the performance expressed or implied by
these statements. Therefore, forward-looking statements should be evaluated in
the context of these uncertainties and risks, including but not limited to:
o Economic and weather conditions which affect buying patterns of our
customers and supply chain efficiency;
o Changes in consumer spending and our ability to anticipate buying
patterns and implement appropriate inventory strategies;
o Continued availability of capital and financing;
o Competitive factors;
o Changes in reimbursement practices for pharmaceuticals;
o Governmental regulation;
o Increases in fuel and utility rates;
o Other factors affecting business beyond our control.
Consequently, all forward-looking statements are qualified by this cautionary
statement. We undertake no obligation to update any forward-looking statement to
reflect events or circumstances arising after the date on which it was made.
Item 3.
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QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
- --------------------------------------------------------------------------------
We have no holdings of derivative financial or commodity instruments as of
October 30, 2004. We are exposed to financial market risks, including changes in
interest rates. All borrowings under our 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 our income. All of our
business is transacted in U.S. dollars and, accordingly, foreign exchange rate
fluctuations have never had a significant impact on us, and they are not
expected to in the foreseeable future.
Item 4.
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CONTROLS AND PROCEDURES
- --------------------------------------------------------------------------------
As of the end of the period covered by this report, the Company carried out an
evaluation, under the supervision and with the participation of our Chief
Executive Officer and Chief Financial Officer, of the effectiveness of the
Company's disclosure controls and procedures (as defined in Rules 13a-15(e)
under the Securities Exchange Act of 1934, as amended (the "Exchange Act")).
Based on that evaluation, the Chief Executive Officer and the Chief Financial
Officer, concluded that, as of the date of their evaluation, the Company's
disclosure controls and procedures are effective in timely alerting them to
material information required to be included in the Company's periodic SEC
reports. Consistent with the suggestion of the Securities and Exchange
Commission, the Company has formed a Disclosure Committee consisting of key
Company personnel designed to review the accuracy and completeness of all
disclosures made by the Company. Although during this fiscal year the Company
12
has instituted various changes to enhance its internal controls over financial
reporting, there have been no changes during the quarter ended October 30, 2004
in the Company's internal control over financial reporting that have materially
affected, or are reasonably likely to materially affect, the Company's internal
control over financial reporting.
As required by Section 404 of the Sarbanes-Oxley Act, the Company has
substantially completed documenting its internal control structure. The
evaluation of the documentation and ongoing testing has revealed certain
weaknesses in internal controls that require remediation. The Company has
remediated, or is in the process of remediating these weaknesses. None of these
weaknesses have materially affected or are reasonably likely to materially
affect the Company's internal control over financial reporting. We will continue
to evaluate our internal control structure through the end of the testing
process, and will take remedial action where possible. In areas where weaknesses
were discovered and remediation was necessary, further testing will be conducted
to ensure that the remediation was effective. The Company will continue in the
fourth quarter to implement enhancements to its internal control structure in
preparation for compliance with Section 404 of the Sarbanes-Oxley Act.
13
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 6. Exhibits and Reports on Form 8-K
Exhibits:
10.16 Fourth modification agreement dated June 28, 2004
modifying the Revolving Loan and Credit Agreement to
grant a temporary overline.
10.17 Fifth modification agreement dated October 19, 2004
modifying the Revolving Loan and Credit Agreement to
grant a temporary overline.
31.1 Certification of Chief Executive Officer.
31.2 Certification of Chief Financial Officer.
32.0 Certification of Chief Executive Officer and Chief
Financial Officer pursuant to 18 U.S.C. Section 1350.
Reports on Form 8-K:
1) Form 8-K dated August 26, 2004 with press release
dated August 26, 2004, reporting its
quarterly earnings result for its second quarter
ended July 31, 2004.
14
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 7, 2004 Chief Executive Officer
- -----------------------
/s/Jerry A. Shore
---------------------------
Jerry A. Shore
Date: December 7, 2004 Chief Financial Officer
- -----------------------
15
Exhibit 10.16
FOURTH MODIFICATION AGREEMENT
OF THE REVOLVING LOAN AND CREDIT AGREEMENT
THIS FOURTH MODIFICATION AGREEMENT OF THE REVOLVING LOAN AND CREDIT
AGREEMENT (hereafter the "Fourth Modification") made and entered into this 28th
day of June, 2004, to be effective as of the 28th day of June, 2004, by and
between UNION PLANTERS BANK NATIONAL ASSOCIATION, a national banking association
with its principal office at 6200 Poplar Avenue, Memphis, Tennessee ("Lender"),
SUNTRUST BANK, a Georgia banking corporation with its principal office at 6410
Poplar Avenue, Suite 320, Memphis, Tennessee (the "Documentation Agent"), and
FRED'S, INC., a Tennessee corporation having its principal offices at 4300 New
Getwell Road, Memphis, Tennessee (the "Borrower").
WHEREAS, Borrower is justly indebted to Lender for Advances made to
Borrower evidenced by that certain Promissory Note dated April 3, 2000 (the
"Note"), in the original principal amount of Forty Million Dollars ($40,000,000)
and that certain Credit Agreement dated March 28, 2000, effective April 3, 2000
(herein the "Credit Agreement"), providing for advances up to a maximum of Forty
Million Dollars ($40,000,000);
WHEREAS, Borrower and Lender entered into a Modification Agreement (the
"First Modification") dated May 26, 2000, providing, among other things, that
the Note, originally payable on demand, would mature and be due and payable on
April 3, 2003;
WHEREAS, Borrower and Lender entered into a second Modification Agreement
(the "Second Modification") dated April 30, 2002, providing, among other things,
that the Note would be due and payable on March 31, 2004;
WHEREAS, Borrower and Lender entered into a third Modification Agreement
(the "Third Modification") dated July 31, 2003, providing, among other things,
that the Note would be due and payable on July 31, 2006; and
WHEREAS, Borrower and Lender desire to amend the Credit Facility, to grant
a temporary extension of the Commitment in the amount of Ten Millions and 00/100
Dollars ($10,000,000.00) (the "Temporary Overline"), causing the Commitment to
temporarily increase from Forty Million and 00/100 Dollars ($40,000,000.00) to
Fifty Million and 00/100 Dollars ($50,000,000.00).
NOW THEREFORE, in consideration of the premises and of other good and
valuable consideration, the adequacy and receipt of which are hereby
acknowledged, the parties hereto agree as follows:
1. Temporary Increase of Commitment: Borrower, Lender and
Documentation Agent each agree that the Commitment shall be
temporarily increased by the amount of the Temporary Overline,
effective June 28, 2004, and that the Temporary Overline shall be
immediately due and payable as of December 28, 2004 ( such period
of time to be referred to as the "Temporary Term"). The parties
agree that the Temporary Overline shall be governed by all terms,
conditions and covenants currently in place for the Note and
Credit Facility, other than with respect to the maturity date as
set forth in this paragraph 1 of the Fourth Modification.
2. Notation: Lender and Documentation Agent covenant and agree to
make a notation upon their respective records showing that the
Note and Agreement has been modified as set forth herein.
3. Origination Fee. In consideration of the grant of the Temporary
Overline by Lender, Borrower shall pay an origination fee
("Origination Fee") in an amount equal to ten basis points (10
bp) of the Temporary Overline, equaling the sum of Ten Thousand
and 00/1000 Dollars ($10,000.00).
4. Suspension of "Unused" Fee. For only such time as the Temporary
Term is in effect, the "unused" fee shall be suspended with
respect to the Temporary Overline. The preceding sentence shall
not apply to the original Commitment amount.
5. Continuation of Terms. All of the terms, covenants and conditions
of the Note, as modified by the First Modification, the Second
Modification and Third Modification and the Credit Agreement or
any other document executed in connection therewith, are, to the
extent not inconsistent with the terms herein, hereby
incorporated herein by reference. It is expressly understood and
agreed that the terms, covenants and conditions of all
instruments evidencing or securing the indebtedness evidenced by
the Note shall remain in full force and effect, and shall in no
manner be affected by the execution of this Fourth Modification
except as the same are expressly modified herein. It is further
expressly understood and agreed that the Participation Period of
Documentation Agent, as set forth in that certain Participation
Agreement, by and between the parties, dated as of March 28,
2000, shall be extended and remain in full force and effect, and
shall terminate on July 31, 2006. Furthermore, Borrower presently
covenants, represents and warrants that it is full and current
compliance with all covenants, representations and warranties
contained in the Credit Agreement.
6. Incorporation by Reference. The parties hereby incorporate by
reference the Credit Agreement, First Modification, Second
Modification, Third Modification and Participation Agreement, all
attached hereto as Exhibits "A", "B", "C" and "D", respectively,
as though each agreement was set forth in its entirety.
7. No Discharge. The execution and delivery of this Fourth
Modification does not discharge the obligors, sureties, endorsers
or guarantors of the Note, and all rights of the Lender against
any and all of same are expressly reserved.
8. Successors in Interest. This Fourth Modification shall be binding
upon and inure to the benefit of the parties hereto, their
respective successors and assigns, transferrees and grantees.
9. Governing Law: This Fourth Modification shall be construed in
accordance with the laws of the State of Tennessee and the
parties hereto subject themselves to the jurisdiction of
Tennessee and venue of the Courts of Shelby County, Tennessee for
the resolution of any dispute hereunder.
10. Undefined Terms: All capitalized terms not defined herein shall
have the same definitions as set forth in the Credit Agreement.
[Remainder of page left intentionally blank.]
IN WITNESS WHEREOF, the parties have executed this Fourth Modification Agreement
of the Revolving Loan and Credit Agreement as of the day and year first above
written.
BORROWER:
FRED'S INC., a Tennessee corporation
By: /s/ Jerry A. Shore
-------------------------------
Name: Jerry A. Shore
Title: Executive Vice President and Chief
Financial Officer
LENDER:
UNION PLANTERS BANK NATIONAL ASSOCIATION
By: /s/ James Gummel
------------------------------------
James Gummel
Senior Vice President
DOCUMENTATION AGENT:
SUNTRUST BANK, a Georgia banking corporation
By: /s/ Bryan W. Ford
------------------------------------
Name: Bryan W. Ford
-----------------------------------
Title: Director
-----------------------------------
STATE OF TENNESSEE
COUNTY OF SHELBY
Before me personally appeared, James Gummel, with whom I am personally
acquainted (or proved to me on the basis of satisfactory evidence) and who, upon
oath, acknowledged himself to be a Sr. Vice President of UNION PLANTERS BANK
NATIONAL ASSOCIATION, and that he as such officer being duly authorized so to
do, executed the foregoing instrument for the purpose therein contained by
signing the name of the bank by himself as such officer.
WITNESS MY HAND AND OFFICIAL SEAL, at office this 2nd day of July, 2004.
/s/ Patricia A. Robinson
--------------------------------------
Notary Public
My Commission Expires:
August 28, 2007
- ---------------------
STATE OF TENNESSEE
COUNTY OF SHELBY
Before me personally appeared, Jerry A. Shore, with whom I am personally
acquainted (or proved to me on the basis of satisfactory evidence) and who, upon
oath, acknowledged himself to be the Chief Financial Officer of FRED'S, INC., a
Tennessee corporation, and that he as such officer being duly authorized so to
do, executed the foregoing instrument for the purpose therein contained by
signing the name of the company by himself as such officer.
WITNESS MY HAND AND OFFICIAL SEAL, at office this 29th day of June,
2004.
/s/ Merle S. McGruder
---------------------------------------
Notary Public
My Commission Expires:
January 29, 2008
- -----------------------
STATE OF TENNESSEE
COUNTY OF SHELBY
Before me personally appeared, Bryan W. Ford, with whom I am personally
acquainted (or proved to me on the basis of satisfactory evidence) and who, upon
oath, acknowledged himself to be a Director of SUNTRUST BANK, a Georgia banking
corporation, and that he as such officer being duly authorized so to do,
executed the foregoing instrument for the purpose therein contained by signing
the name of the bank by himself as such officer.
WITNESS MY HAND AND OFFICIAL SEAL, at office this 2 day of July, 2004.
/s/ Shermin Cherry
--------------------------------------
Notary Public
My Commission Expires:
October 26, 2004
- -----------------------
EXHIBIT "A"
Credit Agreement
----------------
EXHIBIT "B"
First Modification Agreement
----------------------------
EXHIBIT "C"
Second Modification Agreement
-----------------------------
EXHIBIT "D"
Third Modification Agreement
----------------------------
EXHIBIT "E"
Participation Agreement
-----------------------
Exhibit 10.17
FIFTH MODIFICATION AGREEMENT
OF THE REVOLVING LOAN AND CREDIT AGREEMENT
THIS FIFTH MODIFICATION AGREEMENT OF THE REVOLVING LOAN AND CREDIT
AGREEMENT (hereafter the "Fifth Modification") made and entered into this 19th
day of October, 2004, to be effective as of the 20th day of October, 2004, by
and between UNION PLANTERS BANK NATIONAL ASSOCIATION, a national banking
association with its principal office at 6200 Poplar Avenue, Memphis, Tennessee
("Lender"), SUNTRUST BANK, a Georgia banking corporation with its principal
office at 6410 Poplar Avenue, Suite 320, Memphis, Tennessee (the "Documentation
Agent"), and FRED'S, INC., a Tennessee corporation having its principal offices
at 4300 New Getwell Road, Memphis, Tennessee (the "Borrower").
WHEREAS, Borrower is justly indebted to Lender for Advances made to
Borrower evidenced by that certain Promissory Note dated April 3, 2000 (the
"Note"), in the original principal amount of Forty Million Dollars ($40,000,000)
and that certain Credit Agreement dated March 28, 2000, effective April 3, 2000
(herein the "Credit Agreement"), providing for advances up to a maximum of Forty
Million Dollars ($40,000,000);
WHEREAS, Borrower and Lender entered into a Modification Agreement (the
"First Modification") dated May 26, 2000, providing, among other things, that
the Note, originally payable on demand, would mature and be due and payable on
April 3, 2003;
WHEREAS, Borrower and Lender entered into a second Modification Agreement
(the "Second Modification") dated April 30, 2002, providing, among other things,
that the Note would be due and payable on March 31, 2004;
WHEREAS, Borrower and Lender entered into a third Modification Agreement
(the "Third Modification") dated July 31, 2003, providing, among other things,
that the Note would be due and payable on July 31, 2006;
WHEREAS, Borrower and Lender entered into a fourth Modification Agreement
(the "Fourth Modification") dated June 28, 2004, providing, among other things,
that the Note would be increased to Fifty Million and 00/100 Dollars
($50,000,000.00) until December 15, 2004, at which time it will revert to
$40,000,000.00 until July 31 2006; and
WHEREAS, Borrower and Lender desire to amend the Credit Facility, and to
grant an additional temporary increase in the Commitment, in the amount of Ten
Million and 00/100 Dollars ($10,000,000.00) (in addition to and having the same
maturity as the increase created by the Fourth Modification) (the "Temporary
Overline"), causing the Commitment to temporarily increase from Forty Million
and 00/100 Dollars ($40,000,000.00) to Sixty Million and 00/100 Dollars
($60,000,000.00).
NOW THEREFORE, in consideration of the premises and of other good and
valuable consideration, the adequacy and receipt of which are hereby
acknowledged, the parties hereto agree as follows:
1. Temporary Increase of Commitment: Borrower, Lender and Documentation
Agent each agree that the Commitment shall be temporarily increased by
the amount of the Temporary Overline, effective October 20, 2004, and
that the Temporary Overline shall be immediately due and payable as of
December 15, 2004 (such period of time to be referred to as the
"Temporary Term"). The parties agree that the Temporary Overline shall
be governed by all terms, conditions and covenants currently in place
for the Note and Credit Facility, other than with respect to the
maturity date as set forth in this paragraph 1 of the Fourth
Modification.
2. Notation: Lender and Documentation Agent covenant and agree to make a
notation upon their respective records showing that the Note and
Agreement has been modified as set forth herein.
3. Origination Fee. In consideration of the grant of the Temporary
Overline by Lender, Borrower shall pay an origination fee
("Origination Fee") in an amount equal to twenty basis points (20 bps)
of the Temporary Overline, equaling the sum of Twenty Thousand and
00/1000 Dollars ($20,000.00).
4. Suspension of "Unused" Fee. For only such time as the Temporary Term
is in effect, the "unused" fee shall be suspended with respect to the
Temporary Overline. The preceding sentence shall not apply to the
original Commitment amount.
5. Continuation of Terms. All of the terms, covenants and conditions of
the Note, as modified by the First Modification, the Second
Modification, Third Modification and Fourth Modification and the
Credit Agreement or any other document executed in connection
therewith, are, to the extent not inconsistent with the terms herein,
hereby incorporated herein by reference. It is expressly understood
and agreed that the terms, covenants and conditions of all instruments
evidencing or securing the indebtedness evidenced by the Note shall
remain in full force and effect, and shall in no manner be affected by
the execution of this Fourth Modification except as the same are
expressly modified herein. It is further expressly understood and
agreed that the Participation Period of Documentation Agent, as set
forth in that certain Participation Agreement, by and between the
parties, dated as of March 28, 2000, shall be extended and remain in
full force and effect, and shall terminate on July 31, 2006.
Furthermore, Borrower presently covenants, represents and warrants
that it is full and current compliance with all covenants,
representations and warranties contained in the Credit Agreement.
6. Incorporation by Reference. The parties hereby incorporate by
reference the Credit Agreement, First Modification, Second
Modification, Third Modification, Fourth Modification and
Participation Agreement.
7. No Discharge. The execution and delivery of this Fifth Modification
does not discharge the obligors, sureties, endorsers or guarantors of
the Note, and all rights of the Lender against any and all of same are
expressly reserved.
8. Successors in Interest. This Fifth Modification shall be binding upon
and inure to the benefit of the parties hereto, their respective
successors and assigns, transferees and grantees.
9. Governing Law: This Fifth Modification shall be construed in
accordance with the laws of the State of Tennessee and the parties
hereto subject themselves to the jurisdiction of Tennessee and venue
of the Courts of Shelby County, Tennessee for the resolution of any
dispute hereunder.
10. Undefined Terms: All capitalized terms not defined herein shall have
the same definitions as set forth in the Credit Agreement.
[Remainder of page left intentionally blank.]
IN WITNESS WHEREOF, the parties have executed this Fourth Modification Agreement
of the Revolving Loan and Credit Agreement as of the day and year first above
written.
BORROWER:
FRED'S INC., a Tennessee corporation
By: /s/ Jerry A. Shore
-------------------------------
Name: Jerry A. Shore
-------------------------------
Title: EVP & CFO
------------------------------
LENDER:
UNION PLANTERS BANK NATIONAL ASSOCIATION
By: /s/ James Gummel
---------------------------------
James Gummel
Senior Vice President
DOCUMENTATION AGENT:
SUNTRUST BANK, a Georgia banking corporation
By: /s/ Bryan W. Ford
---------------------------------
Name: Bryan W. Ford
------------------------------
Title Director
------------------------------
STATE OF TENNESSEE
COUNTY OF SHELBY
Before me personally appeared, James Gummel, with whom I
am personally acquainted (or proved to me on the basis of satisfactory evidence)
and who, upon oath, acknowledged himself to be a Sr. Vice President of
UNION PLANTERS BANK NATIONAL ASSOCIATION, and that he as such officer being duly
authorized so to do, executed the foregoing instrument for the purpose therein
contained by signing the name of the bank by himself as such officer.
WITNESS MY HAND AND OFFICIAL SEAL, at office this 19th day of October,
2004.
/s/ Patricia A. Robinson
--------------------------------------
Notary Public
My Commission Expires:
August 28, 2007
- -----------------------
STATE OF TENNESSEE
COUNTY OF SHELBY
Before me personally appeared, Jerry A. Shore, with whom I am personally
acquainted (or proved to me on the basis of satisfactory evidence) and who, upon
oath, acknowledged himself to be the Chief Financial Officer of FRED'S, INC., a
Tennessee corporation, and that he as such officer being duly authorized so to
do, executed the foregoing instrument for the purpose therein contained by
signing the name of the company by himself as such officer.
WITNESS MY HAND AND OFFICIAL SEAL, at office this 19th day of October,
2004.
/s/ Judith A. Jones
---------------------------------------
Notary Public
My Commission Expires:
June 7, 2005
- -----------------------
STATE OF TENNESSEE
COUNTY OF SHELBY
Before me personally appeared, Bryan W. Ford, with whom I am personally
acquainted (or proved to me on the basis of satisfactory evidence) and who, upon
oath, acknowledged himself to be a Director of SUNTRUST BANK, a Georgia banking
corporation, and that he as such officer being duly authorized so to do,
executed the foregoing instrument for the purpose therein contained by signing
the name of the bank by himself as such officer.
WITNESS MY HAND AND OFFICIAL SEAL, at office this 19 day of October,
2004.
/s/ Shermin Cherry
--------------------------------------
Notary Public
My Commission Expires:
October 26, 2004
- -----------------------
EXHIBIT "A"
Credit Agreement
----------------
EXHIBIT "B"
First Modification Agreement
----------------------------
EXHIBIT "C"
Second Modification Agreement
-----------------------------
EXHIBIT "D"
Third Modification Agreement
----------------------------
EXHIBIT "E"
Fourth Modification Agreement
-----------------------------
EXHIBIT "F"
Participation Agreement
------------------------
Exhibit 31.1
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
I, Michael J. Hayes, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Fred's, Inc.;
2. Based on my knowledge, this report does not contain any untrue
statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows
of the registrant as of, and for, the periods presented in this
report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal
control over financial reporting (as defined in Exchange Act Rules
13a-15(f) and 15d-15(f) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designated under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made
known to us by others within those entities, particularly during
the period in which this report is being prepared;
b) Designated such internal control over financial reporting, or
caused such internal control over financial reporting to be
designed under our supervision, to provide reasonable assurance
regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in
accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the registrant's disclosure
controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls
and procedures, as of the end of the period covered by this
report based on such evaluation; and
d) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the
registrant's most recent fiscal quarter that has materially
affected, or is reasonably likely to materially affect, the
registrant's internal control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation of internal control over financial
reporting, to the registrant's auditors and the audit committee of
registrant's board of directors:
b) All significant deficiencies and material weaknesses in the
design or operation of internal control over financial reporting
which are reasonably likely to adversely affect the registrant's
ability to record, process, summarize and report financial
information; and
c) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal control over financial reporting.
Date: December 7, 2004 /s/ Michael J. Hayes
----------------------------------
Michael J. Hayes
Chief Executive Officer
Exhibit 31.2
CERTIFICATION OF CHIEF FINANCIAL OFFICER
I, Jerry A. Shore, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Fred's, Inc.
2. Based on my knowledge, this report does not contain any untrue
statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in report, fairly present in all material
respects the financial condition, results of operations and cash flows
of the registrant as of, and for, the periods presented in this
report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal
control over financial reporting (as defined in Exchange Act Rules
13a-15(f) and 15d-15(f) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designated under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made
known to us by others within those entities, particularly during
the period in which this report is being prepared;
b) Designated such internal control over financial reporting, or
caused such internal control over financial reporting to be
designed under our supervision, to provide reasonable assurance
regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in
accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the registrant's disclosure
controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls
and procedures, as of the end of the period covered by this
report based on such evaluation; and
d) Disclosed in this report any changes in the registrant's internal
control over financial reporting that occurred during the
registrant's most recent fiscal quarter that has materially
affected, or is reasonably likely to materially affect, the
registrant's internal control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation of internal control over financial
reporting, to the registrant's auditors and the audit committee of
registrant's board of directors:
a) All significant deficiencies and material weaknesses in the
design or operation of internal control over financial reporting
which are reasonably likely to adversely affect the registrant's
ability to record, process, summarize and report financial
information; and
b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal control over financial reporting.
Date: December 7, 2004 /s/ Jerry A. Shore
---------------------------------
Jerry A. Shore
Executive Vice President and
Chief Financial Officer
Exhibit 32
CERTIFICATION OF CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER
PURSUANT TO SECTION 18 U.S.C. SECTION 1350
In connection with this quarterly report on Form 10-Q of Fred's, Inc. each of
the undersigned, Michael J. Hayes and Jerry A. Shore, certifies, pursuant to
Section 18 U.S.C. Section 1350, that:
1. The report fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
2. The information contained in this report fairly presents, in all
material respects, the financial condition and results of operations
of Fred's, Inc.
Date: December 7, 2004 /s/ Michael J. Hayes
--------------------------------
Michael J. Hayes
Chief Executive Officer
/s/ Jerry A. Shore
--------------------------------
Jerry A Shore
Executive Vice President and
Chief Financial Officer