SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K/A
Amendment No. 1
ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended February 2, 2002
Commission File Number 1-14565
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 Number)
4300 New Getwell Road
MEMPHIS, TENNESSEE 38118
(Address of Principal Executive Offices)
Registrant's telephone number, including area code (901) 365-8880
Securities Registered Pursuant to Section 12(b) of the Act: None
Securities Registered Pursuant to Section 12(g) of the Act:
Title of Each Class
Class A Common Stock, no par value
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 if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K [X].
As of April 19, 2002, there were 25,405,002 shares outstanding of the
Registrant's Class A no par value voting common stock. Based on the last
reported sale price of $36.95 per share on the NASDAQ Stock Market on April 19,
2002, the aggregate market value of the Registrant's Common Stock held by those
persons deemed by the Registrant to be non-affiliates was $938,714,824.
As of April 19, 2002, there were no shares outstanding of the
Registrant's Class B no par value non-voting common stock.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the 2001 Annual Report to Shareholders for the year ended
February 2, 2002 are incorporated by reference into Part II, Items 5, 6, 7 and
8, and into Part IV, Item 14.
Portions of the Company's Proxy Statement for the 2002 annual
shareholders meeting are incorporated by reference into Part III, Items 11, 12
and 13.
Portions of the Company's Registration Statement on Form S-1 (file no.
33-45637) are incorporated as exhibits into Part IV.
With the exception of those portions that are specifically incorporated
herein by reference, the aforesaid documents are not to be deemed filed as part
of this report.
Explanatory Note
This Amendment No. 1 to the Annual Report on Form 10-K (the "Form 10-K") of
Fred's, Inc.(the "Company") for the fiscal year ended February 02, 2002 is being
filed to amend the list of exhibits filed in Item 14 (Exhibits, Financial
Statement Schedules and Reports on Form 8-K) pursuant to Item 601 of Regulation
S-K under the Securities Exchange Act of 1934, and to include additional
portions of the Company's 2001 Annual Report to Shareholders for the year ended
February 2, 2002 as Exhibit 13.2.
PART IV
Item 14: Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a)(1) Consolidated Financial Statements
The following consolidated financial statements are incorporated herein
by reference from pages 16 through 31 of the 2001 Annual Report to
Shareholders for the year ended February 2, 2002.
Report of Independent Accountants.
Consolidated Statements of Income for the years ended February 2, 2002,
February 3, 2001, and January 29, 2000.
Consolidated Balance Sheets as of February 2, 2002, and February 3,
2001.
Consolidated Statements of Changes in Shareholders' Equity for the
years ended February 2, 2002, February 3, 2001, and January 29, 2000.
Consolidated Statements of Cash Flows for the years ended February 2,
2002, February 3, 2001, and January 29, 2000.
Notes to Consolidated Financial Statements.
(a)(2) Financial Statement Schedules
Report of Independent Accountants on Financial Statement Schedules for
each of the three years for the period ended February 2, 2002.
II Valuation and qualifying accounts
(a)(3) Those exhibits required to be filed as Exhibits to this Annual Report
on Form 10-K pursuant to Item 601 of Regulation S-K are as follows:
2.1 Asset Purchase Agreement between CVS Revco D.S., Inc., Fred's
Stores of Tennessee, Inc., CVS Corporation and Fred's, Inc.,
dated as of October 10, 1997 [incorporated herein by reference
to Exhibit 2.1 to the Company's Current Report on Form 8-K
dated December 1, 1997].
2.2 Letter Agreement between CVS Revco D.S., Inc., Fred's Stores
of Tennessee, Inc., CVS Corporation and Fred's, Inc. dated as
of November 1, 1997 [incorporated herein by reference to
Exhibit 2.2 to the Company's Current Report on Form 8-K dated
December 1, 1997].
3.1 Certificate of Incorporation, as amended [incorporated herein
by reference to Exhibit 3.1 to the Form S-1 as filed with the
Securities and Exchange Commission February 7, 1992 (SEC File
No. 33-45637) (the "Form S-1")].
3.2 By-laws, as amended [incorporated herein by reference to
Exhibit 3.2 to the Form S-1].
3.3 Articles of Amendment to the Charter of Fred's, Inc., dated
September 6, 2001, as filed with the Secretary of the 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.]
4.1 Specimen Common Stock Certificate [incorporated herein by
reference to Exhibit 4.2 to Pre-Effective Amendment No. 3 to
the Form S-1].
4.2 Preferred Share Purchase Plan [incorporated herein by
reference to the Company's Report on Form 10-Q for the quarter
ended October 31, 1998].
9.1 Baddour, Inc. (Registrant changed its name to "Fred's, Inc."
in 1991) Shareholders Agreement dated as of June 28, 1986
[incorporated herein by reference to Exhibit C, pages C-1
through C-42 to Baddour, Inc.'s Report on Form 8-K dated July
1, 1986]
10.1 Form of Fred's, Inc. Franchise Agreement [incorporated herein
by reference to Exhibit 10.8 to the Form S-1].
10.2 401(k) Plan dated as of May 13, 1991 [incorporated herein by
reference to Exhibit 10.9 to the Form S-1].
10.3 Employee Stock Ownership Plan (ESOP) dated as of January 1,
1987 [incorporated herein by reference to Exhibit 10.10 to the
Form S-1].
10.4* Incentive Stock Option Plan dated as of December 22, 1986
[incorporated herein by reference to Exhibit 10.11 to the Form
S-1].
10.5 Lease Agreement by and between Hogan Motor Leasing, Inc. and
Fred's, Inc. dated February 5, 1992 for the lease of truck
tractors to Fred's, Inc. and the servicing of those vehicles
and other equipment of Fred's, Inc. [incorporated herein by
reference to Exhibit 10.15 to Pre-Effective Amendment No. 1 to
the Form S-1].
10.6 Revolving Loan and Credit Agreement between Fred's, Inc. and
Union Planters National Bank dated as of May 15, 1992
[incorporated herein by reference to the Company's report on
Form 10-Q for the quarter ended May 2, 1992].
10.7* 1993 Long Term Incentive Plan dated as of January 21, 1993
[Incorporated herein by reference to the Company's report on
Form 10-Q for the quarter ended July 31, 1993].
10.8 Modification Agreement between Fred's, Inc. and Union Planters
National Bank dated as of May 31, 1995 (modifies the Revolving
Loan and Credit Agreement included as Exhibit 10.7)
[incorporated herein by reference to the Company's report on
Form 10-Q for the quarter ended July 29, 1995].
10.9 Second Modification Agreement between Fred's, Inc. and Union
Planters National Bank dated as of July 31, 1995 (modifies the
Revolving Loan and Credit Agreement included as Exhibit 10.7)
[incorporated herein by reference to the Company's report on
Form 10-Q for the quarter ended July 29, 1995].
10.10 Seasonal Overline Revolving Credit Agreement between Fred's,
Inc. and Union Planters National Bank dated as of July 23,
1996 [incorporated herein by reference to the Company's report
on Form 10-Q for the quarter ended August 3, 1996].
10.11 Addendum to Leasing Agreement and form of schedules 2 through
6 of Schedule A by and between Hogan Motor Leasing, Inc. and
Fred's, Inc. dated December 19, 1996 (modifies the Lease
Agreement included as Exhibit 10.6) [incorporated herein by
reference to the Company's report on Form 10-K for the year
ended February 1, 1997].
10.12 Third Modification Agreement between Fred's, Inc. and Union
Planters National Bank dated as of February 28, 1997 (modifies
the Revolving Loan and Credit Agreement included as Exhibit
10.7) [incorporated herein by reference to the Company's
report on Form 10-K for the year ended February 1, 1997].
10.13 Term Loan Agreement between Fred's, Inc. and Union Planters
National Bank dated as of May 5, 1998 [incorporated herein by
reference to the Company's Report on Form 10-Q for the quarter
ended May 2, 1998].
10.14 Fourth Modification Agreement between Fred's, Inc. and Union
Planters National Bank dated as of September 1998
[incorporated herein by reference to the Company's Report on
Form 10-Q for the quarter ended August 1, 1998].
10.15 Seasonal Overline Agreement between Fred's, Inc. and Union
Planters National Bank dated as of February 3, 1999
[incorporated herein by reference to the Company's Report on
Form 10-Q for the quarter ended May 1, 1999].
10.16 Seasonal Overline Agreement between Fred's, Inc. and Union
Planters National Bank dated s of May 12, 1999 [incorporated
herein by reference to the Company's Report on From 10-Q for
the quarter ended May 1, 1999].
10.17 Term Loan Agreement between Fred's, Inc. and First American
National Bank dated as of April 23, 1999 [incorporated herein
by reference to the Company's Report on Form 10-Q for the
quarter ended May 1, 1999].
10.18 Seasonal Overline Agreement between Fred's, Inc. and Union
Planters National Bank dated as of August 3, 1999
[incorporated herein by reference to the Company's Report on
Form 10-Q for the quarter ended July 31, 1999].
10.19 Prime Vendor Agreement between Fred's Stores of Tennessee,
Inc. and Bergen Brunswig Drug Company, dated as of November
24, 1999 [incorporated herein by reference to Company's Report
on Form 10-Q for the quarter ended October 31, 1999].
10.20 Addendum to Leasing Agreement and Form of Schedules 7 through
8 of Schedule A, by and between Hogan Motor Leasing, Inc. and
Fred's, Inc dated September 20, 1999 (modifies the Lease
Agreement included as Exhibit 10.6) [incorporated herein by
reference to the Company's report on Form 10-K for the year
ended January 29, 2000].
10.21 Revolving Loan Agreement between Fred's, Inc. and Union
Planters Bank, NA and Suntrust Bank dated April 3, 2000
[incorporated herein by reference to the Company's report on
form 10-K for year ended January 29, 2000].
10.22 Loan modification agreement dated May 26, 2000 (modifies the
Revolving Loan Agreement included as Exhibit 10.23)
[Incorporated herein by reference to the Company's report on
Form 10-K for the year ended January 29, 2000].
10.23 Seasonal Overline Agreement between Fred's, Inc. and Union
Planters National Bank dated as of October 11, 2000
[incorporated herein by reference to the Company's Report on
Form 10-Q for the quarter ended October 28, 2000].
13.1 Annual report to shareholders for the year ended February 2,
2002 (to the extent incorporated herein by reference).
13.2** Management's Discussion and Analysis from the Company's Annual
report to shareholders for the year ended February 2, 2002.
21.1 Subsidiaries of Registrant
23.1 Consent of PricewaterhouseCoopers LLP
* Management Compensatory Plan
** Filed herewithin
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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, on this 24th day of
October, 2002.
FRED'S, INC.
By: /s/ Michael J. Hayes
-------------------------------------
Michael J. Hayes, Chief Executive
Officer
By: /s/ Jerry A. Shore
--------------------------------
Jerry A. Shore, Executive Vice
President and Chief Financial Officer
(Principal Accounting and Financial
Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities indicated on this 24th day of October, 2002.
Signature Title
--------- -----
/s/ Michael J. Hayes Director, Managing Director,
-------------------------- Chief Executive Officer
Michael J. Hayes
/s/ Roger T. Knox Director
--------------------------
Roger T. Knox
/s/ John R. Eisenman Director
--------------------------
John R. Eisenman
/s/ John D. Reier Director
--------------------------
John D. Reier
/s/ Thomas H. Tashjian Director
--------------------------
Thomas H. Tashjian
Exhibit 13.2
FRED'S INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
FISCAL 2001
Selected Financial Data
(dollars in thousands, except per share amounts)
2001 2000(1) 1999 1998(2) 1997
---- ------- ---- ------- ----
Statement of Income Data:
Net sales $910,831 $781,249 $665,777 $600,902 $492,236
Operating income 31,751 25,720 18,943 14,711 15,511
Income before income taxes 30,140 22,494 16,439 13,605 15,660
Provision for income taxes 10,511 7,645 5,737 4,775 5,873
Net income 19,629 14,849 10,702 8,830 9,787
Net income per share:(3)
Basic .83 .66 .48 .40 .45
Diluted .81 .65 .47 .39 .44
Selected Operating Data:
Operating income as a percentage of sales 3.5% 3.3% 2.9% 2.4% 3.2%
Increase in comparable store sales (4) 10.5% 9.2%(5) 5.2% 5.6% 8.3%
Stores open at end of period 353 320 293 283 261
Balance Sheet Data (at period end):
Total assets $284,059 $254,795 $240,222 $220,757 $195,407
Short-term debt (including capital leases) 1,240 2,678 30,736 11,914 214
Long-term debt (including capital leases) 1,320 31,705 11,761 11,821 1,368
Shareholders' equity 218,907 159,687 145,913 136,983 129,359
-----------------
(1) Results for 2000 include 53 weeks.
(2) Results for 1998 include the effect of the 1998 adoption of LIFO for
pharmacy inventories.
(3) Adjusted for the 5-for-4 stock split effected on June 18, 2001 and the
3-for-2 stock split effected on February 1, 2002.
(4) A store is first included in the comparable store sales calculation
after the end of the twelfth month following the store's grand opening
month.
(5) The increase in comparable store sales for 2000 is computed on the same
53-week period for 1999.
Management's Discussion and Analysis
Significant Accounting Policies
The preparation of Fred's financial statements requires management to make
estimates and judgments in the reporting of assets, liabilities, revenues,
expenses and related disclosures of contingent assets and liabilities. Our
estimates are based on historical experience and on other assumptions that we
believe applicable under the circumstances, the results of which form the basis
for making judgments about the values of assets and liabilities that are not
readily apparent from other sources. While we believe that the historical
experience and other factors considered provide a meaningful basis for the
accounting policies applied in the consolidated financial statements, the
Company cannot guarantee that the estimates and assumptions will be accurate
under different conditions and/or assumptions. A summary of our critical
accounting policies and related estimates and judgments, can be found in Note 1
to the consolidated financial statements.
Results of Operations
The following Table provides a comparison of Fred's financial results for the
past three years. In this table, categories of income and expense are expressed
as a percentage of sales.
2001 2000 1999
------------------------------------------------------------------------------------------------------
Net sales 100.0% 100.0% 100.0%
Cost of goods sold 72.6 72.5 71.8
------------------------------------
Gross profit 27.4 27.5 28.2
Selling, general and administrative expenses 23.9 24.2 25.3
------------------------------------
Operating income 3.5 3.3 2.9
Interest expense, net 0.2 0.4 0.4
------------------------------------
Income before taxes 3.3 2.9 2.5
Income taxes 1.1 1.0 0.9
------------------------------------
Net income 2.2% 1.9% 1.6%
------------------------------------
Fiscal 2001 Compared to Fiscal 2000
Sales
Net sales increased 16.6% ($129.6 million) in 2001. Approximately $54.0 million
of the increase was attributable to the addition of 33 new or upgraded stores,
and 7 pharmacies during 2001, together with the sales of 31 store locations and
16 pharmacies that were opened or upgraded during 2000 and contributed a full
year of sales in 2001. During 2001, the Company closed 3 pharmacy locations.
Comparable store sales, consisting of sales from stores that have been open for
more than one year, increased 10.5% in 2001.
The Company's front store (non-pharmacy) sales increased approximately 15.5%
over 2000 front store sales. Front store sales growth benefited from the above
mentioned store additions and improvements, and solid sales increases in
categories such as home furnishings, floor coverings, bath, giftware, small
appliances, photo finishing, girl's apparel, missy ready-to-wear, infants and
toddler apparel, beverages, food and snacks.
Fred's pharmacy sales grew to 34.4% of total sales in 2001 from 33% of total
sales in 2000 and continues to rank as the largest sales category within the
Company. The total sales in this department, including the Company's mail order
operation, increased 21.2% over 2000, with third party prescription sales
representing approximately 85% of total pharmacy sales, compared with 83% of
total pharmacy sales in 2000. The Company's pharmacy sales growth continued to
benefit from an ongoing program of purchasing prescription files from
independent pharmacies, the addition of pharmacy departments in existing store
locations, and inflation caused by drug manufacturer increases.
Sales to Fred's 26 franchised locations decreased approximately $.8 million in
2001 and represented 3.7% of the Company's total sales, as compared to 4.0% in
2000. It is anticipated that this category of business will decline as a
percentage of total Company sales since the Company has not added and does not
intend to add any additional franchisees.
Gross Margin
Gross margin as a percentage of sales was 27.4% in 2001 compared to 27.5% in
2000. The decrease in gross margin is a result of margin reduction in the
pharmacy department partially offset by margin improvements in general
merchandise departments.
Selling, General and Administrative Expenses
Selling, general and administrative expenses were 23.9% of net sales in 2001
compared with 24.2% of net sales in 2000. Labor expenses improved in the stores
and pharmacies as a result of the strong sales coupled with store productivity
initiatives. Distribution center labor expense also improved as a percentage of
volume processed. Corporate communications expense improved as a result of
installing new technology that reduced expenses.
Operating Income
Operating income increased approximately $6.0 million or 23.5% to $31.8 million
in 2001 from $25.7 million in 2000. Operating income as a percentage of sales
increased to 3.5% in 2001 from 3.3% in 2000, due to the above-mentioned reasons.
Interest Expense, Net
Interest expense for 2001 totaled $1.6 million or .2% of sales compared to net
interest expense of $3.2 million or .4% of sales in 2000. The significant
reduction results from the funds raised from our public offering of 1,585,000
company shares in September 2001(unadjusted for 3-for-2 stock split completed
February 1, 2002), lower interest rates, and improved inventory turnover and
expense control
Income Taxes
The effective income tax rate increased to 34.9% in 2001 from 34.0% in 2000, due
to increased income levels which eliminated the benefit of graduated tax rates.
At February 2, 2002, the Company has certain net operating loss carryforwards
which were acquired in reorganizations and purchase transactions which are
available to reduce income taxes, subject to usage limitations. These
carryforwards total approximately $43.9 million for state income tax purposes,
and expire at various times during the period 2003 through 2023. If certain
substantial changes in the Company's ownership should occur, there would be an
annual limitation on the amount of carryforwards which can be utilized.
Net Income
Net income for 2001 was $19.6 million (or $ .81 per diluted share) or
approximately 32.2% higher than the $14.8 million (or $.65 per diluted share)
reported in 2000.
Fiscal 2000 Compared to Fiscal 1999
Sales
Net sales increased 17.3% ($115 million) in 2000. Approximately $57 million of
the increase was attributable to the addition of 31 new or upgraded stores, and
16 pharmacies during 2000, together with the sales of 20 store locations and 2
pharmacies that were opened or upgraded during 1999 and contributed a full year
of sales in 2000. During 2000, the Company also closed 4 store locations.
Comparable store sales based on a 53-week comparison, consisting of sales from
stores that have been open for more than one year, increased 9.2% in 2000.
The Company's front store (non-pharmacy) sales increased approximately 15% over
1999 front store sales. Front store sales growth benefited from the above
mentioned store additions, and solid performances in categories such as home
furnishings, floor coverings, bath, small appliances, giftware, ladies intimate,
ladies accessories, men's and boy's apparel, ethnic products, beverages, food
and snacks, and tobacco. Lawn and garden sales decreased due to reduced emphasis
of large lawn and garden equipment that carried lower margins and required
additional labor outside the stores.
Fred's pharmacy sales grew to 33% of total sales in 2000 from 31% of total sales
in 1999 and continues to rank as the largest sales category within the Company.
The total sales in this department, including the Company's mail order
operation, increased 25% over 1999, with third party prescription sales
representing approximately 83% of total pharmacy sales, compared with 77% of
total pharmacy sales in 1999. The Company's pharmacy sales growth continued to
benefit from an ongoing program of purchasing prescription files from
independent pharmacies, the addition of pharmacy departments in existing store
locations, and inflation caused by drug manufacturer increases.
Sales to Fred's 26 franchised locations increased approximately $1 million in
2000 and represented 4% of the Company's total sales, as compared to 5% in 1999.
It is anticipated that this category of business will decline as a percentage of
total Company sales since the Company has not added and does not intend to add
any additional franchisees.
Gross Margin
Gross margin as a percentage of sales was 27.5% in 2000 compared to 28.2% in
1999. The decrease in gross margin is primarily attributed to the changes in
sales mix and promotional activities to increase customer traffic.
Selling, General and Administrative Expenses
Selling, general and administrative expenses were 24.2% of net sales in 2000
compared with 25.3% of net sales in 1999. Labor expenses improved in the stores
and pharmacies as a result of the strong sales coupled with store productivity
initiatives. Advertising expense improved as a percentage of sales by reducing
the cost of advertising circulars while maintaining the same number of circulars
issued during the year. Other expenses such as store supplies and distribution
center equipment rental also improved as a result of cost control efforts.
Operating Income
Operating income increased approximately $6.8 million or 35.8% to $25.7 million
in 2000 from $18.9 million in 1999. Operating income as a percentage of sales
increased to 3.3% in 2000 from 2.9% in 1999, due to the above-mentioned reasons.
Interest Expense, Net
Interest expense for 2000 totaled $3.2 million compared to net interest expense
of $2.5 million in 1999.
The interest expense for 2000 reflects higher average revolver borrowings for
inventory purchases, caused by significantly improved in-stock positions over
1999 and inventory for the new stores opened throughout the year. Higher
interest rates during 2000 were also a factor in the higher expense.
Income Taxes
The effective income tax rate decreased to 34.0% in 2000 from 34.9% in 1999, due
to changes made in the Company's organizational structure during the fourth
quarter of 1998 and the implementation of a federal program to generate
employment related tax credits, which resulted in a reduction in the Company's
liability for taxes.
At February 3, 2001, the Company had certain net operating loss carryforwards
which were acquired in reorganizations and certain purchase transactions and are
available to reduce income taxes, subject to usage limitations. These
carryforwards total approximately $43.8 million for state income tax purposes,
which expire during the period 2002 through 2022. If certain substantial changes
in the Company's ownership should occur, there would be an annual limitation on
the amount of carryforwards which can be utilized.
Net Income
Net income for 2000 was $14.8 million (or $.65 per diluted share) or
approximately 39% higher than the $10.7 million (or $.47 per diluted share)
reported in 1999.
Liquidity and Capital Resources
Fred's primary sources of working capital have traditionally been cash flow from
operations and borrowings under its credit facility. In September 2001 the
Company raised proceeds of $38.2 million from a secondary offering of 1,585,000
Company shares (unadjusted for 3-for-2 stock split completed February 1, 2002).
The Company had working capital of $138.4 million, $110.5 million, and $79.7
million at year-end 2001, 2000 and 1999, respectively. Working capital
fluctuates in relation to profitability, seasonal inventory levels, net of trade
accounts payable, and the level of store openings and closings.
Cash and cash equivalents were $15.9 million at the end of 2001 compared to $2.6
million at year-end 2000. Short-term investment objectives are to maximize
yields while minimizing company risk and maintaining liquidity. Accordingly,
limitations are placed on amounts and types of investments.
In April, 2000, the Company and a bank entered into a new Revolving Loan and
Credit Agreement. The agreement provides the Company with an unsecured revolving
line of credit commitment of up to $40 million and bears interest at 1.5% below
prime rate or a LIBOR-based rate (weighted average interest rate of 5.2% on 2001
outstanding borrowings). The credit capacity is used to accommodate the
Company's continued growth and seasonal inventory needs. Under the most
restrictive covenants of the Agreement, we are required to maintain specific
shareholders' equity and net income levels. We are 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 credit
commitment extends to April 3, 2003. There were no borrowings outstanding under
this agreement at February 2, 2002 and $22.6 million outstanding borrowings at
February 3, 2001. The reduction in borrowings from the prior year results from
cash flow from current operations, continued focus on asset management, and from
the proceeds of the secondary public offering completed during the fiscal year.
In April 1999, the Company entered into a four-year unsecured term loan of $2.3
million to finance the replacement of the Company's mainframe computer system.
The Loan Agreement bears interest at 6.15% per annum and matures on April 15,
2003. At year-end 2001, the outstanding principal balance on the term loan was
approximately $ .7 million compared with $1.3 million at year-end 2000.
In May, 1998, the Company and a bank entered into a Loan Agreement (the "Term
Loan Agreement"). The Term Loan Agreement provided the Company with an unsecured
term loan of $12 million to finance the modernization and automation of the
Company's distribution center and corporate facilities. The Term Loan Agreement
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 Agreement and
the borrowings outstanding under the Agreement at February 3, 2001 totaled $8.8
million.
Off-Balance Sheet Arrangements
The Company has no off-balance sheet financing arrangements.
Contractual Obligations and Commercial Commitments
As discussed in Note 6 of consolidated financial statements, the Company leases
certain of its store locations under noncancelable operating leases expiring at
various dates through 2031. Many of these leases contain renewal options and
require the Company to pay taxes, maintenance, insurance and certain other
operating expenses applicable to the leased properties. In addition, the Company
leases various equipment under noncancelable operating leases and certain
transportation equipment under capital leases. The future minimum rental
payments under all operating and capital leases as of February 2, 2002 are $87.7
million and $2.4 million, respectively.
As discussed in Note 10 of the consolidated financial statements, the Company
had commitments approximating $9.1 million at February 2, 2002 on issued letters
of credit which support purchase orders for merchandise. Additionally, the
Company had outstanding letters of credit aggregating $6.8 million at February
2, 2002 utilized as collateral for their risk management programs.
Net cash flow provided by operating activities totaled $26.4 million in 2001
compared to $27.1 million in 2000 and cash used in operations of $.8 million in
1999.
In fiscal 2001, cash was primarily used to increase inventories by approximately
$14.3 million during the fiscal year. This increase is primarily attributable to
our adding 33 new stores, upgrading six stores and adding a net of 4 new
pharmacies, as well as supporting the improved comparable store sales. Accounts
payable and accrued liabilities increased by $3.5 million due primarily to
higher inventory purchases. Income taxes payable decreased by approximately $2.4
million as a result of required income tax payments
Year-end 2000 cash was primarily used to increase inventories by approximately $
8.7 million during the fiscal year. Also, accounts receivable increased $4.6
million due to increased pharmacy sales involving third party carriers. Accounts
payable and accrued liabilities increased by $5.1 million due primarily to
higher inventory purchases. Income taxes payable increased as a result of tax
strategies put in place in prior years that had a favorable effect in 2000.
Year-end 1999 inventory levels were impacted by improved in-stock positions and
store and pharmacy growth. Accounts payable were impacted by the accelerated
repayment of $7.5 million.
Capital expenditures in 2001 totaled $17.4 million compared with $15.8 million
in 2000 and $14.0 million in 1999. The 2001 capital expenditures included
approximately $13.5 million of expenditures associated with upgraded, remodeled,
or new stores and pharmacies. Approximately $3.8 million in expenditures related
to technology upgrades, distribution center equipment, freight equipment, and
capital maintenance. The 2000 capital expenditures included approximately $12.2
million of expenditures associated with upgraded, remodeled, or new stores and
pharmacies. Approximately $3.6 million in expenditures related to technology
upgrades, distribution center equipment, freight equipment, and capital
maintenance. The 1999 capital expenditures included approximately $11.7 million
of expenditures associated with upgraded, remodeled, or new stores and
pharmacies. Approximately $2.3 million in expenditures related to technology
upgrades, distribution center equipment, freight equipment, and capital
maintenance. Cash used for investing activities also includes $1.0 million in
2001, $2.8 million in 2000, and $.8 million in 1999 for the acquisition of
customer lists and other pharmacy related items.
The Company believes that sufficient capital resources are available in both the
short-term and long-term through currently available cash, cash generated from
future operations and, if necessary, the ability to obtain additional financing.
Recent Accounting Pronouncements
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 February 2, 2002, the Company has intangible assets, net of accumulated
amortization, of $4.8 million and has recognized amortization expense of
approximately $1.8 million during the year February 2, 2002. The Company will
continue to amortize intangible assets in accordance with its existing policy
and accordingly does not anticipate a material impact on adoption of SFAS No.
142.
In October 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets, effective for years beginning after December 15,
2001. This Statement supersedes SFAS No. 121,Accounting for the Impairment of
Long-Lived Assets to Be Disposed of, but retains the fundamental provision of
SFAS 121 for recognition and measurement of the impairment of long-lived assets
to be held and used and measurement of long-lived assets to be held for sale.
The statement requires that whenever events or changes in circumstances indicate
that a long-lived asset's carrying value may not be recoverable, the asset
should be tested for recoverability. The statement also requires that a
long-lived asset classified as held for sale should be carried at the lower of
its carrying value or fair value, less cost to sell. The Company is evaluating
the potential impact the provisions of SFAS 144 could have on it's financial
statements but does not believe there will be a material effect on the financial
statements upon adoption.
Cautionary Statement Regarding Forward-looking Information
Statements, other than those based on historical facts that the Company expect
or anticipate may occur in the future are forward-looking statements which are
based upon a number of assumptions concerning future conditions that may
ultimately prove to be inaccurate. Actual events and results may materially
differ from anticipated results described in such statements. Our ability to
achieve such results is subject to certain risks and uncertainties, including:
o Economic and weather conditions which affect buying patterns
of our customers;
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; and
o Other factors affecting business beyond our 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 us will be realized or that they will have the
expected effects on our business or operations. Actual results, performance or
achievements can differ materially from results suggested by these
forward-looking statements because of a variety of factors. We undertake no
obligation to update any forward-looking statement to reflect events or
circumstances arising after the date on which it was made.