N
otes
to Consolidated Financial Statements
NOTE 1 — DESCRIPTION OF BUSINESS
AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of business.
The primary
business of Fred's, Inc. and its subsidiaries ("Fred's", “We”, “Our”, “Us” or “Company”)
is the sale of general merchandise through its retail discount stores and full service pharmacies. In addition, the Company sells
general merchandise to its 12 franchisees. As of February 3, 2018, the Company had 584 retail stores, 348 pharmacies, 3 specialty
pharmacy facilities (now classified as Assets Held-for-Sale) and 12 franchised stores located in 15 states mainly in the Southeastern
United States. We are licensed to dispense pharmaceuticals in all 50 states.
Basis of Presentation.
The
Consolidated Financial Statements include the accounts of Fred's, Inc. and its subsidiaries. These financial statements have been
prepared in accordance with U.S. generally accepted accounting principles. All significant intercompany accounts and transactions
are eliminated. Amounts are in thousands unless otherwise noted.
During the fourth quarter of 2017, Fred’s
Board of Directors approved a plan to actively market its specialty pharmacy business. Accordingly, the Company’s specialty
pharmacy business met the criteria for “Assets Held-for-Sale” in accordance with Accounting Standard Codification
(“ASC”) Topic 360 (ASC 360),
Property, Plant and Equipment
as of February 3, 2018. The Specialty Pharmacy assets
and liabilities are reflected as “held for sale” on the consolidated balance sheet in accordance with ASC 360, at
February 3, 2018 and January 28, 2017. In addition, the results of operations for the specialty pharmacy business have been presented
as discontinued operations in accordance with ASC 205-20,
Results of Operations-Discontinued Operations
for all periods
presented (Note 2).
Unless otherwise noted, discussion within
these notes to the consolidated financial statements relates to continuing operations. Refer to Note 2 for additional information
on discontinued operations.
Subsequent Events.
The Company
has evaluated subsequent events through the financial statement issue date.
Based
on this evaluation, we are not aware of any events or transactions requiring recognition in our financial statements. There are
events that require disclosure, see note 16.
Fiscal year.
The Company utilizes
a 52 - 53 week accounting period which ends on the Saturday closest to January 31. Fiscal years 2017, 2016 and 2015,
as used herein, refer to the years ended February 3, 2018, January 28, 2017 and January 30, 2016, respectively. Fiscal year 2017
had 53 weeks, 2016 and 2015 each had 52 weeks.
Use of estimates.
The preparation
of financial statements in accordance with U.S. Generally Accepted Accounting Principles ("U.S. GAAP") requires management
to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reported period.
Actual results could differ from those estimates and such differences could be material to the financial statements.
Cash and cash equivalents.
Cash
on hand and in banks, together with other highly liquid investments which are subject to market fluctuations and having original
maturities of three months or less, are classified as cash and cash equivalents.
Allowance for doubtful accounts
.
The Company is reimbursed for drugs sold by its pharmacies by many different payors including insurance companies, Medicare and
various state Medicaid programs. The Company estimates the allowance for doubtful accounts based on the aging of receivables and
additionally uses payor-specific information to assess collection risk, given its interpretation of the contract terms or applicable
regulations. However, the reimbursement rates are often subject to interpretations that could result in payments that differ from
the Company’s estimates. Additionally, updated regulations and contract negotiations occur frequently, necessitating the
Company’s continual review and assessment of the estimation process. Senior management reviews accounts receivable on a quarterly
basis to determine if any receivables are potentially uncollectible. The Company includes any accounts receivable balances that
are determined to be uncollectible in its overall allowance for doubtful accounts. After all attempts to collect a receivable have
failed, the receivable is written off against the allowance account.
Inventories.
Merchandise inventories
are stated at the lower of cost or market using the retail first-in, first-out method for goods in our stores and the cost first-in,
first-out method for goods in our distribution centers. The retail inventory method is a reverse mark-up, averaging method which
has been widely used in the retail industry for many years. This method calculates a cost-to-retail ratio that is applied to the
retail value of inventory to determine the cost value of inventory and the resulting cost of goods sold and gross margin. The assumption
that the retail inventory method provides for valuation at lower of cost or market and the inherent uncertainties therein are discussed
in the following paragraphs.
In order to assure valuation at the lower
of cost or market, the retail value of our inventory is adjusted on a consistent basis to reflect current market conditions. These
adjustments include increases to the retail value of inventory for initial markups to set the selling price of goods or additional
markups to adjust pricing for inflation and decreases to the retail value of inventory for markdowns associated with promotional,
seasonal or other declines in the market value. Because these adjustments are made on a consistent basis and are based on current
prevailing market conditions, they approximate the carrying value of the inventory at net realizable value (market value). Therefore,
after applying the cost to retail ratio, the cost value of our inventory is stated at the lower of cost or market as is prescribed
by U.S. GAAP.
Because the approximation of net realizable
value (market value) under the retail inventory method is based on estimates such as markups, markdowns and inventory losses (shrink),
there exists an inherent uncertainty in the final determination of inventory cost and gross margin. In order to mitigate that uncertainty,
the Company has a formal review by product class which considers such variables as current market trends, seasonality, weather
patterns and age of merchandise to ensure that markdowns are taken currently, or a markdown reserve is established to cover future
anticipated markdowns. This review also considers current pricing trends and inflation to ensure that markups are taken if necessary.
The estimation of inventory losses (shrink) is a significant element in approximating the carrying value of inventory at net realizable
value, and as such, the following paragraph describes our estimation method as well as the steps we take to mitigate the risk of
this estimate in the determination of the cost value of inventory.
The Company calculates inventory losses
(shrink) based on actual inventory losses occurring as a result of physical inventory counts during each fiscal period and
estimated inventory losses occurring between yearly physical inventory counts. The estimate for shrink occurring in the interim
period between physical counts is calculated on a store-specific basis and is based on history, as well as performance on the most
recent physical count. It is calculated by multiplying each store’s shrink rate, which is based on the previously mentioned
factors, by the interim period’s sales for each store. Additionally, the overall estimate for shrink is adjusted at the corporate
level to a three-year historical average to ensure that the overall shrink estimate is the most accurate approximation of shrink
based on the Company’s overall history of shrink. The three-year historical estimate is calculated by dividing the “book
to physical” inventory adjustments for the trailing 36 months by the related sales for the same period. In order to
reduce the uncertainty inherent in the shrink calculation, the Company first performs the calculation at the lowest practical level
(by store) using the most current performance indicators. This ensures a more reliable number, as opposed to using a higher level
aggregation or percentage method. The second portion of the calculation ensures that the extreme negative or positive performance
of any particular store or group of stores does not skew the overall estimation of shrink. This portion of the calculation removes
additional uncertainty by eliminating short-term peaks and valleys that could otherwise cause the underlying carrying cost of inventory
to fluctuate unnecessarily. The methodology that we have applied in estimating shrink has resulted in variability that is not material
to our financial statements.
Management believes that the Company’s
retail inventory method provides an inventory valuation which reasonably approximates cost and results in valuing inventory at
the lower of cost or market. For pharmacy department inventories, which were approximately $31.6 million, and $35.2 million at
February 3, 2018 and January 28, 2017, respectively, cost was determined using the retail LIFO ("last-in, first-out")
method in which inventory cost is maintained using the retail inventory method, then adjusted by application of the highly inflationary
Producer Price Index published by the U.S. Department of Labor for the cumulative annual periods. The current cost of inventories
exceeded the LIFO cost by approximately $53.9 million at February 3, 2018 and $52.6 million at January 28, 2017. The
LIFO reserve increased by approximately $1.3 million and $5.1 million during 2017 and 2016, respectively.
The Company has historically included an
estimate of inbound freight and certain general and administrative costs in merchandise inventory as prescribed by U.S. GAAP. These
costs include activities surrounding the procurement and storage of merchandise inventory such as merchandise planning and buying,
warehousing, accounting, information technology and human resources, as well as inbound freight. The total amount of procurement
and storage costs and inbound freight included in merchandise inventory at February 3, 2018 is $17.3 million compared to $19.1
million at January 28, 2017.
During 2016, the Company recorded impairment
charges for inventory clearance of product that management identified as low-productive and does not fit our go-forward model.
The Company recorded a below-cost inventory adjustment in accordance with FASB Accounting Standards Codification (“ASC”)
330, "Inventory," of approximately $13.0 million (including $1.6 million, for the accelerated recognition of freight
capitalization expense) in cost of goods sold to value inventory at the lower of cost or market on inventory identified as low-productive.
At the beginning of 2017, there was $9.2 million (including $1.2 million, for the accelerated recognition of freight capitalization
expense) of impairment charges remaining for inventory clearance of product related to 2016 strategic initiatives. In the third
quarter of 2017, the Company recorded additional impairment charges related to the 2016 inventory clearance of product in the amount
of $1.5 million. During 2017 the Company utilized $8.9 million of existing impairment charges (including $1.1 million for the accelerated
recognition of freight capitalization expense), leaving $1.8 million in the reserve related to 2016 strategic initiatives.
During 2017, the Company recorded impairment
charges for inventory clearance of product that management identified as low-productive and does not fit our go-forward model.
The Company recorded a below-cost inventory adjustment in accordance with FASB Accounting Standards Codification (“ASC”)
330, “
Inventory
,” of approximately $16.4 million (including $2.1 million, for the accelerated recognition of
freight capitalization expense) in cost of goods sold to value inventory at the lower of cost or net realizable value on inventory
identified as low-productive. During 2017 the Company utilized $12.1 million of existing impairment charges (including $1.1 million
for the accelerated recognition of freight capitalization expense), leaving $4.3 million in the reserve related to 2017 strategic
initiatives.
The following table illustrates the inventory
impairment charges related to the inventory clearance initiatives discussed in the previous paragraph (in millions):
|
|
Balance at
January 28, 2017
|
|
|
Additions
|
|
|
Utilization
|
|
|
Ending Balance
February 3, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Inventory markdown on low-productive inventory (2016 initiatives)
|
|
$
|
8.0
|
|
|
$
|
1.5
|
|
|
$
|
(7.8
|
)
|
|
$
|
1.7
|
|
Inventory provision for freight capitalization expense (2016 initiatives)
|
|
|
1.2
|
|
|
|
-
|
|
|
|
(1.1
|
)
|
|
|
0.1
|
|
Inventory markdown on low-productive inventory (2017 initiatives)
|
|
|
-
|
|
|
|
14.3
|
|
|
|
(11.0
|
)
|
|
|
3.3
|
|
Inventory provision for freight capitalization expense (2017 initiatives)
|
|
|
-
|
|
|
|
2.1
|
|
|
|
(1.1
|
)
|
|
|
1.0
|
|
Total
|
|
$
|
9.2
|
|
|
$
|
17.9
|
|
|
$
|
(21.0
|
)
|
|
$
|
6.1
|
|
Property and equipment.
Property
and equipment are carried at cost. Depreciation is recorded using the straight-line method over the estimated useful lives of the
assets and presented in depreciation and amortization. Improvements to leased premises are amortized using the straight-line method
over the shorter of the initial term of the lease or the useful life of the improvement. Leasehold improvements added late in the
lease term are amortized over the lesser of the remaining term of the lease (including the upcoming renewal option, if the renewal
is reasonably assured) or the estimated useful life of the improvement. Gains or losses on the sale of assets are recorded at disposal.
The following average estimated useful
lives are generally applied:
|
|
Estimated Useful Lives
|
Building and building improvements
|
|
8 - 31.5 years
|
Furniture, fixtures and equipment
|
|
3 - 10 years
|
Leasehold improvements
|
|
3 - 10 years or term of lease, if shorter
|
Automobiles and vehicles
|
|
3 - 10 years
|
Airplane
|
|
9 years
|
Assets under capital lease are amortized
in accordance with the Company’s normal depreciation policy for owned assets or over the lease term (regardless of renewal
options), if shorter, and the charge to earnings is included in depreciation expense in the Consolidated Financial Statements.
There was no amortization expense on assets under capital lease for 2017.
Leases.
Certain operating leases
include rent increases during the initial lease term. For these leases, the Company recognizes the related rental expense on a
straight-line basis over the term of the lease (which includes the pre-opening period of construction, renovation, fixturing and
merchandise placement) and records the difference between the amounts charged to operations and amounts paid as a rent liability.
Rent expense is recognized on a straight-line basis over the lease term, which includes any rent holiday period.
The Company recognizes contingent rental
expense when the achievement of specified sales targets are considered probable in accordance with FASB ASC 840 “Leases”.
The amount expensed but not paid was $0.5 million and $0.6 million at February 3, 2018 and January 28, 2017, respectively, and
is included in “Accrued expenses and other” in the consolidated balance sheet (See Note 3 - Detail of Certain Balance
Sheet Accounts).
The Company occasionally receives reimbursements
from landlords to be used towards construction of the store the Company intends to lease. The reimbursement is primarily for the
purpose of performing work required to divide a much larger location into smaller segments, one of which the Company will use for
its store. This work could include the addition or demolition of walls, separation of plumbing, utilities, electrical work, entrances
(front and back) and other work as required. Leasehold improvements are recorded at their gross costs including items reimbursed
by landlords. The reimbursements are initially recorded as a deferred credit and then amortized as a reduction of rent expense
over the initial lease term.
Based upon an overall analysis of store
performance and expected trends, we periodically evaluate the need to close underperforming stores. When we determine that an underperforming
store should be closed and a lease obligation still exists, we record the estimated future liability associated with the rental
obligation on the date the store is closed in accordance with FASB ASC 420, “Exit or Disposal Cost Obligations.” Liabilities
are computed based at the point of closure for the present value of any remaining operating lease obligations, net of estimated
sublease income, and at the communication date for severance and other exit costs, as prescribed by FASB ASC 420. The assumptions
in calculating the liability include the timeframe expected to terminate the lease agreement, estimates related to the sublease
of potential closed locations, and estimation of other related exit costs. If the actual timing and the potential termination costs
or realization of sublease income differ from our estimates, the resulting liabilities could vary from recorded amounts. We periodically
review the liability for closed stores and make adjustments when necessary.
Impairment of long-lived assets.
The
Company’s policy is to review the carrying value of all property and equipment as well as purchased intangible assets subject
to amortization for impairment whenever events or changes in circumstances indicate that the carrying value of an asset may not
be recoverable. In accordance with FASB ASC 360, “Impairment or Disposal of Long-Lived Assets,” we review for impairment
all stores open at least 3 years or remodeled more than 2 years ago. Impairment results when the carrying value of the assets exceeds
the undiscounted future cash flows over the life of the lease, or 10 years for owned stores. Our estimate of undiscounted future
cash flows over the lease term is based upon historical operations of the stores and estimates of future store profitability which
encompasses many factors that are subject to management’s judgment and are difficult to predict. If a long-lived asset is
found to be impaired, the amount recognized for impairment is equal to the difference between the carrying value and the asset’s
fair value. The fair value is based on estimated market values for similar assets or other reasonable estimates of fair market
value based upon using a discounted cash flow model.
During fiscal 2016, in association with
the planned closure of stores and pharmacies and the impairment of assets at the corporate headquarters, we recorded charges of
$7.9 million in selling, general and administrative expenses. In the fourth quarter of 2015, the Company recorded an additional
charge of $0.5 million related to five stores that closed in early fiscal 2016.
In the second quarter of 2017, in association
with the planned closure of additional underperforming stores and pharmacies, the Company recorded charges in the amount of $0.8
million in selling, general and administrative expense for the impairment of fixed assets associated with the closing stores and
pharmacies and $1.4 million for the accelerated recognition of amortization of intangible assets associated with the closing pharmacies.
In the third quarter of 2017, a decision
was made to sell the Company-owned airplane. The Company recorded charges in the amount of $2.6 million in selling, general and
administrative expense to write down the carrying value of the fixed asset to fair value.
In the fourth quarter of 2017, the Company
recorded a charge of $1.1 million in selling, general and administrative expense for the impairment of fixed assets associated
with several underperforming locations based on our review of the carrying value of assets and the undiscounted future cash flows
for these stores. (See Note 13 – Exit and Disposal Activity).
Impairment of goodwill and other intangibles.
Goodwill and intangibles with indefinite lives must be tested for impairment annually or more frequently if events or changes in
circumstances indicate that the related asset might be impaired in accordance with Accounting Standards Codification topic 350,
Intangibles – Goodwill and Other
(“ASC 350”). An impairment of an investment in an unconsolidated affiliate
is recognized when circumstances indicate that a decline in the investment value is other than temporary. An impairment loss should
be recognized only if the carrying amount of the asset/goodwill is not recoverable and exceeds its fair value.
Estimated fair values could change if,
for example, there are changes in the business climate, changes in the competitive environment, adverse legal or regulatory actions
or developments, changes in capital structure, cost of debt, interest rates, capital expenditure levels, operating cash flows or
market capitalization. While we believe we have made reasonable assumptions to calculate the fair value, if future results are
not consistent with our estimates, we could be exposed to future impairment losses that could be material to our results of operations.
The analysis is broken down into two reporting
units: the continuing operations and the discontinued specialty pharmacy (refer to Note 2 for more discussion surrounding discontinued
operations). As of November 1, 2017 the estimated fair value of the business enterprise of the continuing operations was below
the carrying value. As a result of the analysis, management recorded an impairment to goodwill of $87 thousand in the fourth quarter,
the entire balance of goodwill for the continuing operations. The estimated fair value of the business enterprise for the discontinued
specialty pharmacy exceeded the carrying value by approximately 10 percent and as a result did not have any impairment to goodwill.
On February 3, 2018, the Company assessed
the discontinued specialty pharmacy’s goodwill for impairment as a result of the plan to actively market it for sale and
the deterioration in the price of our common stock and the resulting reduced market capitalization. As a result of the interim
impairment test, the Company recognized a goodwill impairment charge of $10.8 million to its discontinued specialty pharmacy business.
The Company determined the fair value of
the reporting units using a weighted combination of the discounted cash flow method and the guideline company method. Determining
the fair value of a reporting unit requires judgment and the use of significant estimates and assumptions. Such estimates and assumptions
include revenue growth rates, operating margins, weighted average costs of capital and future market conditions, among others.
The Company believes the estimates and assumptions used in our impairment assessments are reasonable and based on available market
information, but variations in any of the assumptions could result in a materially different calculations of fair value and determinations
of whether or not an impairment is indicated. Under the discount cash flow method, the Company determined fair value based on estimated
future cash flows of each reporting unit including estimates for capital expenditures, discounted to present value using the risk-adjusted
industry rate, which reflect the overall level of inherent risk of the reporting unit. Cash flow projections are derived from one
year budgeted amounts and five year operating forecasts plus an estimate of later period cash flows, all of which are evaluated
by management. Subsequent period cash flows are developed for each reporting unit using growth rates that management believes are
reasonably likely to occur. Under the guideline company method, the Company determined the estimated fair value of each of our
reporting units by applying valuation multiples of comparable publicly-traded companies to each reporting unit’s projected
revenue and EBITDA to determine the preliminary enterprise value. From that preliminary enterprise value it is further adjusted
by adding cash and cash equivalents and subtracting interest-bearing debt to determine the cash-adjusted equity value. In addition,
the Company estimated a reasonable control premium representing the incremental value that accrues to the majority owner from the
opportunity to dictate the strategic and operational actions of the business.
One key assumption for the measurement
of an impairment is management’s estimate of future cash flows and EBITDA. These estimates are based on the annual budget
for the upcoming year and forecasted amounts for multiple subsequent years. The annual budget process is typically completed near
the annual goodwill impairment testing date, and management uses the most recent information for the annual impairment tests. The
forecast is also subjected to a comprehensive update annually in conjunction with the annual budget process and is revised periodically
to reflect new information and/or revised expectations. The estimates of future cash flows and EBITDA are subjective in nature
and are subject to impacts from the business risks described in “Item 1A. Risk Factors.” Therefore, the actual results
could differ significantly from the amounts used for goodwill impairment testing, and significant changes in fair value estimates
could occur in a given period. Such changes in fair value estimates could result in additional impairments in future periods; however,
management does not believe that any of the goodwill balances in its reporting units as of February 3, 2018 is at significant risk
of impairment other than that $87 thousand impairment discussed above. Therefore, the actual results could differ significantly
from the amounts used for goodwill impairment testing, and significant changes in fair value estimates could occur in a given period,
resulting in additional impairments.
Additionally, during the fourth quarter
2017 the Company recorded a $628 thousand impairment related to the trade name for the specialty pharmacy. Refer to Note 2 for
more discussion on discontinued operations.
Revenue recognition.
The Company
markets goods and services through 584 Company-owned stores, 12 franchised stores and 3 specialty pharmacy-only locations (now
classified as Assets Held-for-Sale) as of February 3, 2018. Net sales includes sales of merchandise from Company-owned stores,
net of returns and exclusive of sales taxes. Sales to franchised stores are recorded when the merchandise is shipped from the Company’s
warehouse. Revenues resulting from layaway sales are recorded upon delivery of the merchandise to the customer.
Revenue from sales of pharmaceutical products
is recognized at the time the prescription is filled. This approximates when a customer picks up the prescription or when the prescription
has been delivered and is recorded net of an allowance for prescriptions that were filled but not picked up by the customer. For
all periods presented, there is no material difference between the revenue recognized at the time the prescription is filled and
that which would be recognized when the customer picks up the prescription. Prescriptions are generally not returnable.
The Company also sells gift cards for which
revenue is recognized at the time of redemption. The Company records a gift card liability on the date the gift card is issued
to the customer. Revenue is recognized and the gift card liability is reduced as the customer redeems the gift card. The Company
will recognize aged liabilities as revenue when the likelihood of the gift card being redeemed is remote. During 2017, we recognized
$0.3 million of gift card revenue, or less than $0.01 per share. During 2016 we recognized $0.2 million of gift revenue, or less
than $0.01 per share, while in 2015 we recognized $0.1 million of gift card revenue, or less than $0.01 per share.
In addition, the Company charges its franchised
stores a fee based on a percentage of their purchases from the Company. These fees represent a reimbursement for use of the Fred's
name and other administrative costs incurred on behalf of the franchised stores. Total franchise income for 2017, 2016 and 2015
was $0.7 million, $1.2 million and $1.5 million, respectively.
Cost of goods sold.
Cost of goods
sold includes the purchase cost of inventory and the freight costs to the Company’s distribution centers. Warehouse and occupancy
costs are not included in cost of goods sold, but are included as a component of selling, general and administrative expenses.
Depreciation and amortization related to warehouse and occupancy costs are included in depreciation and amortization.
Vendor rebates and allowances.
The
Company receives rebates for a variety of merchandising activities, such as volume commitment rebates, relief for temporary and
permanent price reductions, cooperative advertising programs, and for the introduction of new products in our stores. FASB ASC
605-50 “Customer Payments and Incentives” addresses the accounting and income statement classification for consideration
given by a vendor to a retailer in connection with the sale of the vendor’s products or for the promotion of sales of the
vendor’s products. Such consideration received from vendors is reflected as a decrease in prices paid for inventory and recognized
in cost of sales as the related inventory is sold, unless specific criteria are met qualifying the consideration for treatment
as reimbursement of specific, identifiable incremental costs.
Selling, general and administrative
expenses.
The Company includes buying, warehousing, distribution, advertising, depreciation and amortization and occupancy
costs in selling, general and administrative expenses.
Advertising.
In accordance with
FASB ASC 720-35 “Advertising Costs”, the Company charges advertising, including production costs, to selling, general
and administrative expense on the first day of the advertising period. Gross advertising expenses for 2017, 2016 and 2015, were
$24.7 million, $24.6 million and $24.0 million, respectively. Gross advertising expenses were reduced by vendor cooperative
advertising allowances of $2.3 million, $3.6 million and $4.5 million, for 2017, 2016 and 2015, respectively.
Pre-opening costs.
The Company charges
to expense the pre-opening costs of new stores as incurred. These costs are primarily labor to stock the store, rent, pre-opening
advertising, store supplies and other expendable items.
Intangible assets.
Other identifiable
intangible assets primarily represent customer lists associated with acquired pharmacies and are being amortized on a straight-line
basis over seven years. Based on the Company's historical experience, seven years approximates the actual lives of these assets.
Other identifiable intangible assets, net
of accumulated amortization, totaled $54.9 million at February 3, 2018, and $73.0 million at January 28, 2017. Accumulated amortization
at February 3, 2018 and January 28, 2017 totaled $118.0 million and $100.7 million, respectively.
(in millions)
|
|
February 3, 2018
|
|
|
January 28, 2017
|
|
|
Estimated Useful
Lives (years)
|
|
Customer prescription files
|
|
$
|
48,369
|
|
|
$
|
64,505
|
|
|
$
|
7
|
|
Non-compete agreements
|
|
|
5,356
|
|
|
|
6,575
|
|
|
|
3 - 15
|
|
Software
|
|
|
1,048
|
|
|
|
1,845
|
|
|
|
3
|
|
Other
|
|
|
115
|
|
|
|
115
|
|
|
|
-
|
|
|
|
$
|
54,888
|
|
|
$
|
73,040
|
|
|
|
|
|
Amortization expense for 2017, 2016 and
2015, was $17.9 million, $18.0 million and $16.3 million, respectively.
Estimated amortization expense for the
assets recognized as of February 3, 2018, in millions for each of the next 7 years is as follows:
Continuing
(in millions)
|
|
2018
|
|
|
2019
|
|
|
2020
|
|
|
2021
|
|
|
2022
|
|
|
2023
|
|
|
2024
|
|
Estimated amortization expense
|
|
$
|
16.7
|
|
|
$
|
13.9
|
|
|
$
|
11.4
|
|
|
$
|
7.4
|
|
|
$
|
3.7
|
|
|
$
|
1.3
|
|
|
$
|
0.1
|
|
Goodwill
.
The Company records goodwill when the purchase price exceeds the fair value of assets acquired and liabilities assumed. The Company
accounts for goodwill and intangibles under ASC Topic 350, Intangibles – Goodwill and Other, which does not permit amortization,
but requires the Company to test goodwill and other indefinite-lived assets for impairment annually or whenever events or circumstances
indicate that impairment may exist. On a continuing basis, the company no longer has goodwill.
Fair value of financial instruments.
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction
between market participants at the measurement date. The fair value hierarchy prioritizes the inputs to valuation techniques used
to measure fair value. The hierarchy, as defined below, gives the highest priority to unadjusted quoted prices in active markets
for identical assets or liabilities and the lowest priority to unobservable inputs.
|
●
|
Level 1, defined as quoted prices (unadjusted) in active markets for identical assets or liabilities
that the reporting entity can access at the measurement date.
|
|
●
|
Level 2, defined as inputs other than quoted prices included within Level 1 that are observable
for the asset or liability, either directly or indirectly.
|
|
●
|
Level 3, defined as unobservable inputs for the asset or liability, which are based on an entity’s
own assumptions as there is little, if any, observable activity in identical assets or liabilities.
|
At February 3, 2018, the Company did not
have any outstanding derivative instruments. The recorded value of the Company’s financial instruments, which include cash
and cash equivalents, receivables, accounts payable and indebtedness, approximates fair value. The following methods and assumptions
were used to estimate fair value of each class of financial instrument: (1) the carrying amounts of current assets and liabilities
approximate fair value because of the short maturity of those instruments and (2) the fair value of the Company’s indebtedness
is estimated based on the current borrowing rates available to the Company for bank loans with similar terms and average maturities.
Most of our indebtedness is under variable interest rates.
Insurance reserves
. The Company
is largely self-insured for workers compensation, general liability and employee medical insurance. The Company’s liability
for self-insurance is determined based on claims known at the time of determination of the reserve and estimates for future payments
against incurred losses and claims that have been incurred but not reported. Estimates for future claims costs include uncertainty
because of the variability of the factors involved, such as the type of injury or claim, required services by the providers, healing
time, age of claimant, case management costs, location of the claimant, and governmental regulations. These uncertainties or a
deviation in future claims trends from recent historical patterns could result in the Company recording additional expenses or
expense reductions that might be material to the Company’s results of operations. The Company’s worker's compensation
and general liability insurance policy coverages run August 1 through July 31 of each fiscal year. Our employee medical insurance
policy coverage runs from January 1 through December 31. The Company purchases excess insurance coverage for certain of its self-insured
liabilities, or stop loss coverage. The stop loss limits for excessive or catastrophic claims for general liability remained at
$350,000, worker’s compensation remained at $500,000 and employee medical changed to $250,000 effective January 1, 2017.
The Company’s insurance reserve was $11.3 million and $10.9 million on February 3, 2018 and January 28, 2017, respectively.
Changes in the reserve for the year ended February 3, 2018, were attributable to additional reserve requirements of $42.1 million
netted with payments of $41.7 million.
Stock-based compensation.
The Company
uses the fair value recognition provisions of FASB ASC 718, “Compensation – Stock Compensation”, whereby the
Company recognizes share-based payments to employees and directors in the Consolidated Statements of Operations on a straight-line
basis for shares that cliff vest and under the graded vesting attribution method for those shares that have graded vesting.
Effective January 29, 2006, the Company
elected to adopt the alternative transition method provided in FASB ASC 718 for calculating the income tax effects of stock-based
compensation. The alternative transition method includes simplified methods to establish the beginning balance of the additional
paid-in-capital pool (“APIC Pool”) related to the income tax effects of stock based compensation, and for determining
the subsequent impact on the APIC pool and consolidated statements of cash flows of the income tax effects of stock-based compensation
awards that are outstanding upon adoption of FASB ASC 718.
FASB ASC 718 also requires the benefits
of income tax deductions in excess of recognized compensation cost to be reported as a financing cash flow, rather than as an operating
cash flow. The impact of adopting FASB ASC 718 on future results will depend on, among other things, levels of share-based payments
granted in the future, actual forfeiture rates and the timing of option exercises.
Stock-based compensation expense, post
adoption of FASB ASC 718, is based on awards ultimately expected to vest, and therefore has been reduced for estimated forfeitures.
Forfeitures are estimated at the time of grant based on the Company’s historical forfeiture experience and will be revised
in subsequent periods if actual forfeitures differ from those estimates.
The Company adopted the provisions of ASU 2016-09 beginning with its fiscal 2017 first quarter. The ASU
provisions did not have a material impact on the Company’s income tax expense as a result of the valuation allowance position
eliminating the tax effects on the income statement.
Income Taxes
The Company reports
income taxes in accordance with FASB ASC 740, “Income Taxes.” Under FASB ASC 740, the asset and liability method is
used for computing future income tax consequences of events, which have been recognized in the Company’s Consolidated Financial
Statements or income tax returns. Deferred income tax expense or benefit is the net change during the year in the Company’s
deferred income tax assets and liabilities (see Note 6 - Income Taxes).
In June 2006, the Financial Accounting
Standards Board issued FASB Interpretation No. 48 (“FASB ASC 740”), Accounting for Uncertainty in Income Taxes
- an Interpretation of FASB Statement No.109 that is codified in FASB ASC 740. We adopted FASB ASC 740 as of February 4, 2007,
the first day of fiscal 2007. This interpretation clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s
financial statements in accordance with FASB ASC 740 and prescribes a minimum recognition threshold of more-likely-than-not to
be sustained upon examination that a tax position must meet before being recognized in the financial statements. Under FASB ASC
740, the impact of an uncertain income tax position on the income tax return must be recognized at the largest amount that is more-likely-than-not
to be sustained upon audit by the relevant taxing authority. The Company recognizes and measures tax benefits from uncertain tax
positions if it is "more likely than not" that the position is sustainable, based on its technical merits. The tax benefit
of a qualifying position is the largest amount of tax benefit that has a greater than 50 percent likelihood of being realized upon
final settlement with a taxing authority fully knowing all relevant information. Additionally, FASB ASC 740 provides guidance on
de-recognition, measurement, classification, interest and penalties, accounting in interim periods, disclosure and transition (see
Note 6 - Income Taxes).
FASB ASC 740 further requires that interest
and penalties required to be paid on the underpayment of taxes should be accrued on the difference between the amount claimed or
expected to be claimed on the tax return and the tax benefit recognized in the financial statements. The Company includes potential
interest and penalties recognized in accordance with FASB ASC 740 in the financial statements as a component of income tax expense.
Accrued interest and penalties related to our unrecognized tax benefits are recorded in the consolidated balance sheet within “Other
non-current liabilities.”
The Company records valuation allowances
to reduce deferred tax assets when it is more likely than not that a tax benefit will not be realized. Significant judgment is
required in evaluating the need for and magnitude of appropriate valuation allowances against deferred tax assets. The realization
of these assets is dependent on generating future taxable income, as well as successful implementation of various tax planning
strategies. Valuation allowances against the deferred tax assets totaled $59.3 million and $20.3 million on February 3, 2018 and
January 28, 2017, respectively.
Business segments.
The Company is
organized around individual stores. The Company stores have similar economic characteristics, offer pharmaceuticals or general
merchandise consistent with all other locations, and have discrete financial information. Each store therefore represents an operating
segment that is aggregated into one reportable segment.
Comprehensive income.
Comprehensive
income consists of two components, net income and other comprehensive income (loss). Other comprehensive income (loss) refers
to gains and losses that under generally accepted accounting principles are recorded as an element of shareholders’ equity
but are excluded from net income. The Company applies the guidance of FASB ASC 715 “Compensation – Retirement Benefits”
to the accounting and disclosure requirements of accumulated other comprehensive income. See Note 11, Commitments and Contingencies,
in the Notes to Consolidated Financial Statements for further discussion.
Reclassifications.
Certain prior
year amounts have been reclassified to conform to the 2017 presentation.
Recent Accounting Pronouncements.
In
February 2018, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”)
2018-02,
Income Statement – Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated
Other Comprehensive Income.
This ASU provides companies with the option to reclassify tax effects resulting from the Tax Cuts
and Jobs Acts within Accumulated Other Comprehensive Income into Retained Earnings. This ASU is effective for fiscal years beginning
after December 15, 2018, and interim periods within those fiscal years. The company is currently evaluating the effect this ASU
will have on its financial position, results of operations and cash flows.
In January 2017, the FASB issued ASU 2017-04,
Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment.
This ASU is intended to simplify
the accounting for goodwill impairment by removing the requirement to perform a hypothetical purchase price allocation. A goodwill
impairment will now be the amount by which the reporting unit's carrying value exceeds its fair value, not to exceed the carrying
amount of goodwill. All other goodwill impairment guidance will remain largely unchanged. This new standard will be applied prospectively
and is effective for annual or interim goodwill impairment tests in fiscal years beginning after December 15, 2019. Early adoption
is permitted after January 1, 2017. The Company adopted this ASU for its annual goodwill impairment test in the fourth quarter
of fiscal year 2017.
In November
2016, the FASB issued ASU 2016-18,
Statement of Cash Flows (Topic 230): Restricted Cash
. This ASU requires that a statement
of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted
cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash and restricted cash equivalents
should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown
on the statement of cash flows. This ASU is effective for fiscal years beginning after December 15, 2017, and interim periods within
those fiscal years, with early adoption permitted. The Company has adopted this standard and the adoption had no effect on our
statement of cash flows.
In October 2016, the FASB issued ASU 2016-16,
Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other than Inventory
. ASU 2016-16 requires that an
entity recognize the income tax consequences of an intra-entity transfer of assets other than inventory when the transfer occurs.
The guidance must be applied using the modified retrospective basis. The Company does not expect the provisions of ASU 2016-16
to have a material impact on its financial statements. This update will be effective for the Company at the beginning of fiscal
2018.
In
August 2016, the FASB issued ASU 2016-15,
Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash
Payments
. This ASU addresses the classification of certain specific cash flow issues including debt prepayment or extinguishment
costs, settlement of certain debt instruments, contingent consideration payments made after a business combination, proceeds from
the settlement of certain insurance claims and distributions received from equity method investees. This ASU is effective for fiscal
years beginning after December 15, 2017, and interim periods within those fiscal years, with early adoption permitted. An entity
that elects early adoption must adopt all of the amendments in the same period. The Company has adopted this standard and the adoption
had no effect on our statement of cash flows.
In March 2016, the FASB issued ASU 2016-04,
Liabilities – Extinguishments of Liabilities (Subtopic 405-20): Recognition of Breakage for Certain Prepaid Stored-Value
Products
. The amendments in the ASU are designed to provide guidance and eliminate diversity in the accounting for derecognition
of prepaid stored-value product liabilities. Typically, a prepaid stored-value product liability is to be derecognized when it
is probable that a significant reversal of the recognized breakage amount will not subsequently occur. This is when the likelihood
of the product holder exercising its remaining rights becomes remote. This estimate shall be updated at the end of each period.
The amendments in this ASU are effective for the annual reporting periods beginning after December 15, 2017, including the interim
periods within that reporting period. Early adoption is permitted. The Company has adopted this standard and it did not have a
material effect on its financial position, results of operations, or cash flows.
In March 2016, the FASB issued ASU 2016-09,
Compensation – Stock Compensation (Topic 718): Improvement to Employee Share-based Payment Accounting.
ASU 2016-09
simplifies several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification
of awards as either equity or liabilities and classification on the statement of cash flows. Early adoption was permitted. The
Company adopted the provisions of ASU 2016-09 beginning with its fiscal 2017 first quarter. The ASU provisions did not have a material
impact on the Company’s income tax expense as a result of the valuation allowance position eliminating the tax effects on
the income statement.
In February 2016, the FASB issued ASU 2016-02,
Leases (Topic 842)
. The amendments in the ASU are designed to increase transparency and comparability among organizations
by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements.
The amendments in this ASU are effective for the annual reporting periods beginning after December 15, 2018, including the interim
periods within that reporting period. Early adoption is permitted. The Company has identified all leases impacted by this pronouncement.
Currently, the Company is evaluating different software available to maintain all leases in compliance with this pronouncement.
The Company has established a committee to ensure compliance with this standard upon adoption in 2019. The Company does not plan
to early adopt and expects material changes to the financial position created at the inception of compliance with this standard.
The Company will continue to evaluate the impact the guidance will have on the Company’s results of operations and cash flows.
In
August 2015, the FASB issued ASU 2015-14, Revenue from Contracts with Customers (Topic 606), an update to ASU 2014-09. This ASU
amends ASU 2014-09 to defer the effective date by one year for annual reporting periods beginning after December 15, 2017. Subsequently,
the FASB has also issued accounting standards updates which clarify the guidance. This ASU removes inconsistencies, complexities
and allows transparency and comparability of revenue transactions across entities, industries, jurisdictions and capital markets
by providing a single comprehensive principles-based model with additional disclosures regarding uncertainties. The principles-based
revenue recognition model has a five-step analysis of transactions to determine when and how revenue is recognized. The core principle
is that a company should recognize revenue to depict the transfer of promised goods or services to customers in an amount that
reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. Early adoption is
permitted for annual reporting periods beginning after December 15, 2016. In transition, the ASU may be applied retrospectively
to each prior period presented or retrospectively with the cumulative effect recognized as of the date of adoption. The Company
is actively working to comply with this guidance as it relates to gift cards sales, loyalty programs, coupons and discounts and
other areas of the business impacted by the pronouncement. The Company has evaluated the impact that this ASU will have and has
determined that there will be no material impact on the Company’s statement of position, results of operations, or statement
of cash flow. The Company will implement this standard in its first quarter of fiscal year 2018.
Termination of Asset Purchase Agreement
On December 19, 2016, Fred’s and
its wholly-owned subsidiary, AFAE, LLC (“Buyer”), entered into an Asset Purchase Agreement (the “Asset Purchase
Agreement”) with Rite Aid Corporation (“Rite Aid”) and Walgreens Boots Alliance, Inc. (“Walgreens”),
pursuant to which Buyer agreed to purchase 865 stores, certain intellectual property and other tangible assets (collectively, the
“Assets”) and to assume certain liabilities for a cash purchase price of $950 million (the “Rite Aid Transaction”). Pursuant
to Section 8.01(g) of the Asset Purchase Agreement, each of Buyer, Walgreens or Rite Aid was permitted to terminate the Asset Purchase
Agreement upon the termination of that certain Agreement and Plan of Merger, dated as of October 27, 2015, among Walgreens,
Rite Aid and the other parties thereto (as amended, the “Merger Agreement”).
On June 29, 2017, the Merger Agreement
was terminated and, accordingly, the Asset Purchase Agreement was also terminated, effective immediately. In connection with the
termination of the Asset Purchase Agreement, the Company received a termination fee payment of $25 million on June 30, 2017 from
Walgreens.
Note 2 –
Assets
Held-For-Sale and Discontinued Operations
As discussed in Note 1, during the fourth
quarter of 2017, Fred’s Board of Directors approved a plan to actively market its specialty pharmacy business. Accordingly,
the specialty pharmacy business met the criteria for “Assets Held-for-Sale” in accordance with ASC 360 as of February
3, 2018. The Specialty Pharmacy assets and liabilities are reflected as “held for sale” on the consolidated balance
sheets in accordance with ASC 360 at February 3, 2018 and January 28, 2017. In addition, the results of operations for the specialty
pharmacy business have been presented as discontinued operations in accordance with ASC 205-20 for all periods presented.
The results of the specialty pharmacy business
were previously allocated to the Pharmacy segment within the sales mix. The specialty pharmacy recorded a loss from discontinued
operations, net of the tax line item, of $10.9 million for 2017, and income of $1.6 million and $1.6 million for 2016 and 2015,
respectively.
Certain corporate overhead and other costs
previously allocated to the specialty pharmacy for segment reporting purposes did not qualify for classification within discontinued
operations and have been reallocated to continuing operations. In addition, during the fourth quarter a charge of $0.6 million
was recorded as an impairment of the trade name and $10.8 million was recorded as an impairment of the goodwill related to the
specialty pharmacy.
As of May 4, 2018 no sale had been completed
for the specialty pharmacy business and therefore no gain or loss has been recorded.
Summarized Discontinued Operations Financial
Information
The following table provides a reconciliation
of the carrying amounts of major classes of assets and liabilities which are included in assets and liabilities held for sale in
the accompanying consolidated balance sheet for each of the periods presented:
(in thousands)
|
|
2017
|
|
|
2016
|
|
Current assets:
|
|
|
|
|
|
|
|
|
Accounts Receivable, net
|
|
$
|
15,983
|
|
|
$
|
11,613
|
|
Inventories
|
|
|
3,756
|
|
|
|
4,577
|
|
Other non-trade receivables
|
|
|
152
|
|
|
|
1,528
|
|
Prepaid expenses and other current assets
|
|
|
12
|
|
|
|
14
|
|
Total current assets held-for-sale
|
|
$
|
19,903
|
|
|
$
|
17,732
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, less accumulated depreciation and amortization
|
|
$
|
1,036
|
|
|
$
|
634
|
|
Goodwill
|
|
|
30,609
|
|
|
|
41,403
|
|
Intangible assets, net
|
|
|
9,533
|
|
|
|
12,645
|
|
Other noncurrent assets, net
|
|
|
539
|
|
|
|
-
|
|
Total noncurrent assets held-for-sale
|
|
$
|
41,717
|
|
|
$
|
54,682
|
|
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts Payable
|
|
$
|
22,045
|
|
|
$
|
16,682
|
|
Accrued expenses and other
|
|
|
4,527
|
|
|
|
2,182
|
|
Total current liabilities held-for-sale:
|
|
$
|
26,572
|
|
|
$
|
18,864
|
|
|
|
|
|
|
|
|
|
|
Deferred income tax liabilities
|
|
|
-
|
|
|
|
-
|
|
Other noncurrent liabilities
|
|
$
|
48
|
|
|
$
|
167
|
|
Total noncurrent liabilities held-for-sale
|
|
$
|
48
|
|
|
$
|
167
|
|
The following table summarizes the results
of discontinued operations for the years ended February 3, 2018, January 28, 2017, and January 30, 2016:
(in thousands)
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
Revenues
|
|
$
|
275,952
|
|
|
$
|
239,183
|
|
|
$
|
205,551
|
|
Cost of Goods Sold
|
|
|
264,153
|
|
|
|
224,603
|
|
|
|
193,962
|
|
Gross Margin
|
|
|
11,799
|
|
|
|
14,580
|
|
|
|
11,589
|
|
Depreciation and amortization
|
|
|
2,630
|
|
|
|
3,013
|
|
|
|
2,552
|
|
Selling, general and administrative expenses
|
|
|
23,200
|
|
|
|
8,603
|
|
|
|
6,515
|
|
Income (Loss) from discontinued operations before income taxes
|
|
|
(14,031
|
)
|
|
|
2,964
|
|
|
|
2,522
|
|
Income tax expense
|
|
|
(3,113
|
)
|
|
|
1,371
|
|
|
|
949
|
|
Income (loss) from discontinued operations, net of tax
|
|
$
|
(10,918
|
)
|
|
$
|
1,593
|
|
|
$
|
1,573
|
|
NOTE 3 – DETAIL OF CERTAIN BALANCE
SHEET ACCOUNTS
Details of certain balance sheet accounts
as of February 3, 2018 and January 28, 2017 are as follows:
|
|
(in thousands)
|
|
Property and equipment, at cost:
|
|
2017
|
|
|
2016
|
|
Buildings and building improvements
|
|
$
|
119,039
|
|
|
$
|
117,450
|
|
Leasehold improvements
|
|
|
86,402
|
|
|
|
85,965
|
|
Automobiles and vehicles
|
|
|
4,525
|
|
|
|
4,894
|
|
Airplane
|
|
|
-
|
|
|
|
4,697
|
|
Furniture, fixtures and equipment
|
|
|
286,962
|
|
|
|
288,487
|
|
|
|
|
496,928
|
|
|
|
501,493
|
|
Less: Accumulated depreciation and amortization
|
|
|
(390,633
|
)
|
|
|
(381,178
|
)
|
|
|
|
106,295
|
|
|
|
120,315
|
|
Construction in progress
|
|
|
590
|
|
|
|
1,392
|
|
Land
|
|
|
8,581
|
|
|
|
8,581
|
|
Total Property and equipment, at depreciated cost
|
|
$
|
115,466
|
|
|
$
|
130,288
|
|
Depreciation expense totaled $24.7 million,
$26.0 million and $26.9 million for 2017, 2016 and 2015, respectively.
|
|
(in thousands)
|
|
|
(in thousands)
|
|
Other non-trade receivables:
|
|
2017
|
|
|
2016
|
|
Vendor receivables
|
|
$
|
22,073
|
|
|
$
|
19,724
|
|
Income tax receivable
|
|
|
1,812
|
|
|
|
4,690
|
|
Franchise stores receivable
|
|
|
1,688
|
|
|
|
1,947
|
|
Insurance claims receivable
|
|
|
-
|
|
|
|
395
|
|
Coupon receivable
|
|
|
375
|
|
|
|
335
|
|
Other
|
|
|
5,552
|
|
|
|
5,335
|
|
Total other non-trade receivable
|
|
$
|
31,500
|
|
|
$
|
32,426
|
|
Prepaid expenses and other current assets:
|
|
2017
|
|
|
2016
|
|
Prepaid rent
|
|
$
|
4,214
|
|
|
$
|
4,419
|
|
Supplies
|
|
|
3,061
|
|
|
|
4,027
|
|
Prepaid insurance
|
|
|
493
|
|
|
|
1,386
|
|
Prepaid advertising
|
|
|
283
|
|
|
|
9
|
|
Other
|
|
|
2,004
|
|
|
|
2,090
|
|
Total prepaid expenses and other current assets
|
|
$
|
10,055
|
|
|
$
|
11,931
|
|
|
|
(in thousands)
|
|
|
(in thousands)
|
|
Accrued expenses and other:
|
|
2017
|
|
|
2016
|
|
Payroll and benefits
|
|
$
|
12,579
|
|
|
$
|
10,913
|
|
Insurance reserves
|
|
|
11,290
|
|
|
|
10,859
|
|
Legal and professional fees
|
|
|
7,048
|
|
|
|
7,016
|
|
Closed Store Reserve
|
|
|
6,338
|
|
|
|
206
|
|
Sales and use tax
|
|
|
5,754
|
|
|
|
4,502
|
|
Network fees
|
|
|
3,304
|
|
|
|
3,080
|
|
Pharmacy credit returns
|
|
|
1,633
|
|
|
|
2,451
|
|
Advertising
|
|
|
795
|
|
|
|
2,396
|
|
Real estate tax
|
|
|
2,567
|
|
|
|
2,376
|
|
Deferred / contingent rent
|
|
|
1,637
|
|
|
|
2,138
|
|
Project costs accrual
|
|
|
2,512
|
|
|
|
1,290
|
|
Franchise stores payable
|
|
|
514
|
|
|
|
1,267
|
|
Information technology
|
|
|
795
|
|
|
|
1,154
|
|
Utilities
|
|
|
1,114
|
|
|
|
1,098
|
|
Personal property tax
|
|
|
1,002
|
|
|
|
1,025
|
|
Warehouse freight and fuel
|
|
|
795
|
|
|
|
651
|
|
Repairs and maintenance
|
|
|
483
|
|
|
|
532
|
|
Giftcard liability
|
|
|
194
|
|
|
|
441
|
|
Lease liability
|
|
|
146
|
|
|
|
204
|
|
Other
|
|
|
7,477
|
|
|
|
8,867
|
|
Total accrued expenses and other
|
|
$
|
67,977
|
|
|
$
|
62,466
|
|
Other noncurrent liabilities:
|
|
2017
|
|
|
2016
|
|
Unearned vendor allowances (see Note 1 - Vendor Rebates and Allowances)
|
|
$
|
25,170
|
|
|
$
|
19,263
|
|
Uncertain tax positions
|
|
|
372
|
|
|
|
371
|
|
Total other noncurrent liabilities
|
|
$
|
25,542
|
|
|
$
|
19,634
|
|
NOTE 4 — INDEBTEDNESS
On January 25, 2013, the Company entered
into a Revolving Loan and Credit Agreement (the "Agreement") with Regions Bank and Bank of America. The Agreement provided
for a $50 million revolving line of credit, and the term of the Agreement extended to January 25, 2016. There were $3.8 million
of borrowings outstanding and $46.2 million available under the Agreement at January 31, 2015. The weighted average interest
rate on borrowings outstanding at January 31, 2015 was 1.8%. The Agreement contained certain restrictive financial covenants, and
at November 1, 2014 and January 31, 2015, the Company was not in compliance with the trailing 12 month covenants for the Fixed
Charge Coverage Ratio, for Consolidated Tangible Net Worth and for positive Net Income.
On April 9, 2015, the Company entered into
a new Revolving Loan and Credit Agreement (the “New Agreement”) with Regions Bank and Bank of America to replace the
Agreement. The proceeds were used to refinance the Agreement and to support acquisitions and the Company’s working
capital needs. The New Agreement provided for a $150.0 million secured revolving line of credit, including a sublimit for letters
of credit and swingline loans. The weighted average interest rate on borrowings outstanding at February 3, 2018 was 3.625%. The
New Agreement, which expires on April 9, 2020, was amended effective January 30, 2017 to increase the loan commitment from $150
million to $225 million. On July 31, 2017 the Company amended the Agreement and related security agreement to: (i) increase the
revolving loan commitment from $225 million to $270 million, (ii) increase the pharmacy scripts advance rate, (iii) revise the
excess availability requirements for certain acquisitions, and (iv) add Bank of America as a co-collateral agent. Draws are limited
to the lesser of the commitment amount or the borrowing base, which is periodically determined by reference to the value of certain
receivables, inventory and scripts, less applicable reserves. The Company may choose to borrow at a spread to either LIBOR or a
Base Rate. For LIBOR loans the spread ranges from 1.75% to 2.25% and for Base Rate loans the spread ranges from 0.75% to 1.25%.
The spread depends on the level of excess availability. Commitment fees on the unused portion of the credit line are 37.5 basis
points. The New Agreement included an up-front credit facility fee which is being amortized over the Agreement term. There
were $153.4 million of borrowings outstanding and $69.7 million available under the New Agreement at February 3, 2018.
On April 10, 2015 the Company acquired
Reeves Sain Drug Store, Inc. (see Note 14 – Business Combinations). A portion of the consideration paid was in the form of
$13 million seller notes. The notes are subject to an earn-out provision which could result in an increase to the face value of
the notes if the acquired business meets certain financial metrics. Payment of principal on the notes shall be made ratably in
three annual installments commencing January 31, 2021. The notes bear interest at a fixed rate of 3.38%.
During the second and third quarter of
fiscal 2007, the Company acquired the land and buildings, occupied by seven Fred's stores which we had previously leased. In consideration
for the seven properties, the Company assumed debt that has fixed interest rates from 6.31% to 7.40%. On March 30, 2011, Fred’s
purchased 10 properties leased from Atlantic Retail Investors, LLC, one of which has an additional parcel that is leased to an
unrelated party, for $7.5 million in cash and assumed mortgage debt of $3.5 million on six of these locations (see Note 7 –
Long-Term Leases) with fixed interest rates from 6.65% to 7.40%. The debt is collateralized by the land and buildings.
Related Party Transactions
On April 10, 2015, the Company completed
the acquisition of Reeves-Sain Drug Store, Inc., a provider of retail and specialty pharmaceutical services (now classified as
Assets Held-for-Sale). As part of the total consideration for the purchase, Fred’s provided notes payable totaling $13.0
million to the sellers of Reeves-Sain Drug Store, Inc. who joined Fred’s as part of the acquisition. The notes payable are
due in three equal installments to be paid on January 31st of 2021, 2022 and 2023 and are subordinate to the Company’s revolving
line of credit. The notes payable have an adjustment mechanism based upon an earn-out provision that could result in an increase
to the face value of the notes if certain financial metrics are achieved. The table below shows the notes payable, along with the
long term debt related to the mortgages discussed above, due for the next five years as of February 3, 2018, which are both related
to continuing operations.
(in thousands)
|
|
2018
|
|
|
2019
|
|
|
2020
|
|
|
2021
|
|
|
2022
|
|
|
Thereafter
|
|
|
Total
|
|
Notes payable
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
4,334
|
|
|
$
|
4,333
|
|
|
$
|
4,333
|
|
|
$
|
-
|
|
|
$
|
13,000
|
|
Mortgage loans on land & buildings
|
|
|
65
|
|
|
|
70
|
|
|
|
75
|
|
|
|
1,369
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,579
|
|
Total
|
|
$
|
65
|
|
|
$
|
70
|
|
|
$
|
75
|
|
|
$
|
1,369
|
|
|
$
|
4,333
|
|
|
$
|
-
|
|
|
$
|
14,579
|
|
The Company financed the construction of
its Dublin, Georgia distribution center with taxable industrial development revenue bonds issued by the City of Dublin and County
of Laurens Development Authority. The Company purchased 100% of the issued bonds and intends to hold them to maturity, effectively
financing the construction with internal cash flow. Because a legal right of offset exists, the Company has offset the investment
in the bonds ($34.6 million) against the related liability and neither is reflected on the consolidated balance sheet.
NOTE 5 — FAIR VALUE MEASUREMENTS
Due to their short-term nature, the Company’s
financial instruments, which include cash and cash equivalents, receivables, accounts payable and indebtedness, are a reasonable
estimate of their fair value as of February 3, 2018 and January 28, 2017. The fair value of the revolving line of credit is consistent
with the carrying amount as repayments are short-term in nature. The fair value of the revolving line of credit and our mortgage
loans are estimated
using Level 2 inputs based on the Company's current
incremental borrowing rate for comparable borrowing arrangements
.
The table below details the fair value
and carrying values for the revolving line of credit and mortgage loans as of the following years:
|
|
February 3, 2018
|
|
|
January 28, 2017
|
|
(dollars in thousands)
|
|
Carrying Value
|
|
|
Fair Value
|
|
|
Carrying Value
|
|
|
Fair Value
|
|
Revolving line of credit
|
|
$
|
153,431
|
|
|
$
|
153,431
|
|
|
$
|
114,331
|
|
|
$
|
114,331
|
|
Mortgage loans on land & buildings
|
|
|
1,579
|
|
|
|
1,684
|
|
|
|
1,639
|
|
|
|
1,881
|
|
Notes payable
|
|
|
13,000
|
|
|
|
12,421
|
|
|
|
13,000
|
|
|
|
12,740
|
|
NOTE 6 — INCOME TAXES
The provision (benefit) for income taxes
consists of the following for the years ended February 3, 2018, January 28, 2017 and January 30, 2016:
(dollars in thousands)
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
Current
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
-
|
|
|
$
|
(3,978
|
)
|
|
$
|
(5,351
|
)
|
State
|
|
|
234
|
|
|
|
774
|
|
|
|
870
|
|
|
|
|
234
|
|
|
|
(3,204
|
)
|
|
|
(4,481
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
705
|
|
|
|
(11,927
|
)
|
|
|
(915
|
)
|
State
|
|
|
302
|
|
|
|
3,277
|
|
|
|
(12
|
)
|
|
|
|
1,007
|
|
|
|
(8,650
|
)
|
|
|
(927
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,241
|
|
|
$
|
(11,854
|
)
|
|
$
|
(5,408
|
)
|
On December 22, 2017, the TCJA was enacted
by the U.S. government. The TCJA contains several key provisions that affected the Company. The enacted provisions impacting the
current financial statements include a permanent reduction of the U.S. corporate income tax rate from 35 to 21 percent, effective
January 1, 2018. As the Company has a February 3, 2018 fiscal year-end, the impact of the lower rate was phased in resulting in
a U.S. statutory federal tax rate of approximately 33.7% for the fiscal year ending February 3, 2018 and a 21% U.S. statutory federal
rate for fiscal years thereafter. Other enacted provisions which may impact the Company beginning in fiscal 2019 include limitations
on the deductibility of executive compensation and changes to the net operating loss carryover rules.
The Securities and Exchange Commission
(SEC) staff issued Staff Accounting Bulletin No. 118 (SAB 118) to address the application of U.S. GAAP in situations where a registrant
does not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete
the accounting for certain income tax effects of the TCJA. To the extent that a company’s accounting for certain income tax
effects of the TCJA is incomplete but it is able to determine a reasonable estimate, it must record a provisional estimate in the
financial statements. If a company cannot determine a provisional estimate to be included in the financial statements, it should
continue to apply ASC 740 on the basis of the provisions of the tax laws that were in effect immediately before the enactment of
the TCJA.
The ultimate impact may differ from provisional
amounts recorded, possibly materially, due to, among other things, additional analysis, changes in interpretations and assumptions
the Company has made, and additional regulatory guidance that may be issued. The accounting is expected to be completed within
one year from the enactment date of the TCJA.
Based on the current analysis, the Company recorded a provisional income tax effect of $0.0 million, after
considering changes to the valuation allowance, in its consolidated financial statements for the fiscal year ended February 3,
2018. The Company was able to determine a reasonable estimate for the re-measurement of the Company’s U.S. federal deferred
tax assets and liabilities at the lower rate (a reduction to net deferred tax assets of approximately $18.8 million offset by an
equal reduction to the valuation allowance). The Company’s analysis of this item is incomplete at this time. The Company
will complete the accounting for this item during the measurement period, which will not exceed beyond one year from the enactment
date.
The income tax effects of temporary differences
that give rise to significant portions of the deferred income tax assets and deferred income tax liabilities as of year-end are
presented below:
(dollars in thousands)
|
|
2017
|
|
|
2016
|
|
Deferred income tax assets:
|
|
|
|
|
|
|
|
|
Accrual for incentive compensation
|
|
$
|
2,782
|
|
|
$
|
5,446
|
|
Allowance for doubtful accounts
|
|
|
653
|
|
|
|
763
|
|
Insurance accruals
|
|
|
1,508
|
|
|
|
2,117
|
|
Other accruals
|
|
|
604
|
|
|
|
1,016
|
|
Net operating loss carryforwards
|
|
|
48,087
|
|
|
|
20,705
|
|
Deferred Revenue
|
|
|
352
|
|
|
|
583
|
|
Federal benefit on state reserves
|
|
|
55
|
|
|
|
91
|
|
WOTC Credit Carryforward
|
|
|
5,295
|
|
|
|
3,896
|
|
Amortization of intangibles
|
|
|
16,925
|
|
|
|
18,448
|
|
Postretirment benefits
|
|
|
159
|
|
|
|
-
|
|
Contribution Carryforward
|
|
|
315
|
|
|
|
424
|
|
Total deferred income tax assets
|
|
|
76,735
|
|
|
|
53,489
|
|
Less: Valuation allowance
|
|
|
59,299
|
|
|
|
22,183
|
|
Deferred income tax assets, net of valuation allowance
|
|
|
17,436
|
|
|
|
31,306
|
|
|
|
|
|
|
|
|
|
|
Deferred income tax liabilities:
|
|
|
|
|
|
|
|
|
Postretirement benefits
|
|
|
-
|
|
|
|
(43
|
)
|
Property, plant and equipment
|
|
|
(5,567
|
)
|
|
|
(12,358
|
)
|
Inventory valuation
|
|
|
(11,173
|
)
|
|
|
(19,557
|
)
|
Prepaid expenses
|
|
|
(588
|
)
|
|
|
(1,322
|
)
|
Total deferred income tax liabilities
|
|
|
(17,328
|
)
|
|
|
(33,280
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred income tax assets/liabilities
|
|
$
|
108
|
|
|
$
|
(1,974
|
)
|
The net operating loss carryforwards are
available to reduce federal and state income taxes in future years. The federal carryforward is approximately $158.0 million and
will expire in 2038. Carryforwards total approximately $323.2 million for state income tax purposes and expire at various
times during the fiscal years 2018 through 2038. Federal income tax credit carryforwards total approximately $5.3 million and begin
to expire in 2036.
We maintain a valuation allowance for federal
and state net operating losses and tax credits that we do not expect to utilize prior to their expiration.
During 2017, the valuation allowance increased $37.1 million, and during 2016, the valuation allowance increased $19.6 million.
Based upon the expected reversal of deferred tax liabilities, management believes that it is more likely than not that the results
of operations will generate sufficient taxable income to realize the deferred income tax assets recorded after giving consideration
to the valuation allowance.
A reconciliation of the statutory federal
income tax rate to the effective income tax rate is as follows:
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
Income tax provision at statutory rate
|
|
|
33.7
|
%
|
|
|
35.0
|
%
|
|
|
35.0
|
%
|
State income taxes, net of federal benefit
|
|
|
3.5
|
|
|
|
4.6
|
|
|
|
0.8
|
|
Tax credits, principally jobs
|
|
|
0.6
|
|
|
|
1.0
|
|
|
|
8.6
|
|
Uncertain tax provisions
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Change in valuation allowance
|
|
|
(25.4
|
)
|
|
|
(25.4
|
)
|
|
|
(7.3
|
)
|
TCJA Rate Change
|
|
|
(13.7
|
)
|
|
|
-
|
|
|
|
-
|
|
Other
|
|
|
1.3
|
|
|
|
0.2
|
|
|
|
(0.2
|
)
|
Permanent differences
|
|
|
(0.9
|
)
|
|
|
(0.6
|
)
|
|
|
0.8
|
|
Effective income tax rate
|
|
|
(0.9
|
)%
|
|
|
14.8
|
%
|
|
|
37.7
|
%
|
A reconciliation of the beginning and ending
amount of the unrecognized tax benefits is as follows:
(in millions)
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
Beginning balance
|
|
$
|
0.4
|
|
|
$
|
0.4
|
|
|
$
|
0.4
|
|
Additions for tax positions of prior years
|
|
|
0.5
|
|
|
|
-
|
|
|
|
-
|
|
Additions for current year tax positions
|
|
|
1.4
|
|
|
|
-
|
|
|
|
-
|
|
Ending balance
|
|
$
|
2.3
|
|
|
$
|
0.4
|
|
|
$
|
0.4
|
|
As of February 3, 2018, our liability for
unrecognized tax benefits totaled $2.3 million and is recorded in our Consolidated Balance Sheet within “Other noncurrent
liabilities.” Approximately $0.4 million of such balance, if recognized, would affect our effective tax rate. Examinations
by the state jurisdictions are expected to be completed within the next 12 months which could result in a change to our unrecognized
tax benefits, but we are unable to estimate the amounts.
FASB ASC 740 further requires that interest
and penalties required to be paid by the tax law on the underpayment of taxes should be accrued on the difference between the amount
claimed or expected to be claimed on the tax return and the tax benefit recognized in the financial statements. The Company includes
potential interest and penalties recognized in accordance with FASB ASC 740 in the financial statements as a component of income
tax expense. As of February 3, 2018, accrued interest and penalties related to our unrecognized tax benefits totaled $0.1 million
and $0.1 million, respectively. As of January 28, 2017, accrued interest and penalties related to our unrecognized tax benefits
totaled $0.1 million and $0.1 million, respectively. Both accrued interest and penalties are recorded in the Consolidated
Balance Sheet within “Other noncurrent liabilities.”
The Company files numerous consolidated
and separate company income tax returns in the U.S. federal jurisdiction and in many U.S. state jurisdictions. With few exceptions,
we are subject to U.S. federal, state, and local income tax examinations by tax authorities for years 2013-2016. However, tax authorities
have the ability to review years prior to these to the extent we utilized tax attributes carried forward from those prior years.
NOTE 7 — LONG-TERM LEASES
The Company leases certain of its store
locations under noncancelable operating leases that require monthly rental payments primarily at fixed rates (although a number
of the leases provide for additional rent based upon sales) expiring at various dates through fiscal 2029. None of our operating
leases contain residual value guarantees. 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. Total rent expense under operating leases was $54.9 million, $58.9 million and $58.6 million,
for 2017, 2016 and 2015, respectively. Total contingent rentals included in operating leases above was $0.5 million for 2017, $0.6
million for 2016 and $0.7 million for 2015.
Future minimum rental payments under all
operating leases as of February 3, 2018 are as follows:
(in thousands)
|
|
Operating Leases
|
|
2018
|
|
$
|
40,974
|
|
2019
|
|
|
33,466
|
|
2020
|
|
|
28,255
|
|
2021
|
|
|
23,979
|
|
2022
|
|
|
18,305
|
|
Thereafter
|
|
|
34,036
|
|
Total minimum lease payments
|
|
$
|
179,015
|
|
The gross amount of property and equipment
under capital leases was $5.1 million at both February 3, 2018 and January 28, 2017. Accumulated amortization on property and equipment
under capital leases was $5.1 million at both February 3, 2018 and January 28, 2017. There was no amortization expense on assets
under capital lease for 2017 and 2016.
Related Party Transactions
Atlantic Retail Investors, LLC, which is
partially owned by Michael J. Hayes, a former director and officer of the Company, owns the land and buildings occupied by three
Fred’s stores. Richard H. Sain, former Senior Vice President of Retail Pharmacy Business Development, owns the land and building
occupied by one of Fred’s Xpress Pharmacy locations. The terms and conditions regarding the leases on these locations were
consistent in all material respects with other stores leases of the Company with unrelated landlords. The total rental payments
for related party leases were $375.9 thousand for the year ended February 3, 2018 and $378.4 and $400.0 thousand for the years
ended January 28, 2017 and January 30, 2016, respectively.
NOTE 8 — SHAREHOLDERS’ EQUITY
Purchases of Equity Securities by the Issuer
and Affiliated Purchasers. On August 27, 2007, the Board of Directors approved a plan that authorized stock repurchases of
up to 4.0 million shares of the Company’s common stock, of which 90.0 thousand shares remained at January 28, 2012.
On February 16, 2012, Fred's Board authorized the expansion of the Company's existing stock re-purchase program by increasing the
authorization to repurchase an additional 3.6 million shares. Under the plan, the Company may repurchase its common stock in open
market or privately negotiated transactions at such times and at such prices as determined to be in the Company’s best interest.
These purchases may be commenced or suspended without prior notice depending on then-existing business or market conditions and
other factors.
On December 6, 2017, the Company announced
the amendment of the share repurchase program described above. The amended program will allow for the repurchase of up to 3.8 million
shares of the Company’s outstanding Class A voting common stock (the “common stock”). Under the amended program,
the common stock may be purchased through a combination of a Rule 10b5-1 automatic trading plan and discretionary purchases on
the open market, block trades or in privately negotiated transactions. The amount and timing of any purchases will depend on a
number of factors, including trading price, trading volume and general market conditions. No assurance can be given that any particular
amount of common stock will be repurchased. This repurchase program is valid for up to two years and may be modified, extended
or terminated by the Board at any time. In the Fourth Quarter, the Company repurchased 1.2 million shares, leaving 2.6 million
shares available for repurchase.
|
|
Total Number of
Shares Purchased
|
|
|
Average Price Paid
Per Share
|
|
|
Total Number of
Shares Purchased as
Part of Publicly
Announced Plans or
Program
|
|
|
Authorized Share
Expansion
|
|
|
Maximum Number of
Shares That May Yet
Be Purchased Under
the Plans or Program
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at January 28, 2017
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
3,040,800
|
|
January 29 - February 25, 2017
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
3,040,800
|
|
February 26 - April 1, 2017
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
3,040,800
|
|
April 2, - April 29, 2017
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
3,040,800
|
|
April 30, - May 27, 2017
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
3,040,800
|
|
May 28, - July 1, 2017
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
3,040,800
|
|
July 2, - July 29, 2017
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
3,040,800
|
|
July 30, - August 26, 2017
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
3,040,800
|
|
August 27, - September 30, 2017
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
3,040,800
|
|
October 1, - October 28, 2017
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
3,040,800
|
|
October 29, - November 25, 2017
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
3,040,800
|
|
November 26, - December 30, 2017
|
|
|
620,000
|
|
|
$
|
4.02
|
|
|
|
620,000
|
|
|
|
759,200
|
|
|
|
3,180,000
|
|
December 31, - February 3, 2018
|
|
|
622,000
|
|
|
$
|
4.00
|
|
|
|
622,000
|
|
|
|
|
|
|
|
2,558,000
|
|
Rights Plan. On June 27, 2017, the Board
of Directors of the Company declared a dividend of one right (a “Right”) for each of the Company’s issued and
outstanding shares of Class A Common Stock. The dividend was paid to the shareholders of record at the close of business on July
7, 2017 (the “Record Date”). Each Right entitles the holder, subject to the terms of the Rights Agreement dated as
of June 27, 2017 (the “Original Rights Agreement”) between the Company and American Stock & Trust Company, LLC,
as Rights Agent, to purchase from the Company one one-thousandth of a share of the Company’s Series C Junior Participating
Preferred Stock at a price of $60.00 (the “Exercise Price”), subject to certain adjustments. On September
18, 2017, the Company amended and restated the Original Rights Agreement (the “Amended Rights Agreement”) to (i) decrease
the Exercise Price, (ii) change the circumstances under which the Right may be exercised and (iii) extend the expiration of the
Rights, in each case, as more fully described below.
The purpose of the Amended Rights Agreement
is to protect shareholder value by preserving the Company’s ability to use its net operating losses and certain other tax
assets (“Tax Benefits”) to offset potential future taxable income and reduce federal income tax liability. The Company’s
ability to use its Tax Benefits would be substantially limited if it experiences an “ownership change” as defined in
Section 382 of the Internal Revenue Code of 1986, as amended (the “Code”). A company generally experiences such an
ownership change if the percentage of its stock owned by its “5-percent shareholders,” as defined in Section 382 of
the Code, increases by more than 50 percentage points over a rolling three-year period. The Amended Rights Agreement is intended
to reduce the likelihood of an ownership change under Section 382 of the Code by deterring any person or group from acquiring beneficial
ownership of 4.9% or more of the Company’s outstanding Common Stock.
Pursuant to the Amended Rights Agreement,
the Exercise Price will be $35.00. Further, the Rights will not be exercisable until the earlier to occur of (x) the close
of business on the 10th business day following a public announcement or filing that a person has, or a group of affiliated or associated
persons or persons acting in concert have, become an “Acquiring Person,” which is defined as a person or group of affiliated
or associated persons or persons acting in concert who, at any time after the date of the Amended Rights Agreement, have acquired,
or obtained the right to acquire, beneficial ownership of 4.9% or more of the Company’s outstanding shares of Class A Common
Stock, subject to certain exceptions, and (y) the close of business on the 10th business day (or such other date as may be determined
by action of the Board prior to such time as any person or group of affiliated or associated persons or persons acting in concert
become an Acquiring Person) after the commencement of, or announcement of an intention to commence, a tender offer or exchange
offer the consummation of which would result in any person becoming an Acquiring Person (the earlier of such dates being called
the “Distribution Date”). Any existing shareholder or group that beneficially owns 4.9% or more of the Class A Common
Stock will be grandfathered at its current ownership level, but the Rights will become exercisable if at any time after the announcement
of the Amended Rights Agreement such shareholder or group increases its ownership of the Class A Common Stock by one share or more.
The Rights, which are not exercisable until the Distribution Date, will expire at the earliest to occur
of (w) the close of business on September 18, 2020; (x) the time at which the Rights are redeemed pursuant to the Amended Rights
Agreement; (y) the time at which the Rights are exchanged pursuant to the Amended Rights Agreement; and (z) the time at which
the Rights are terminated upon the closing of any merger or other acquisition transaction involving the Company pursuant to a
merger or other acquisition agreement that has been approved by the Board prior to any person becoming an Acquiring Person.
The above description of the Amended Rights Agreement does not purport to be complete and is qualified in its entirety by the
full text of the Amended Rights Agreement, a copy of which is attached as Exhibit 4.1 to the Company’s Current Report on
Form 8-K filed with the SEC on September 18, 2017.
NOTE 9 – EQUITY INCENTIVE PLANS
Long-Term Incentive Plan.
The Company
has a long-term incentive plan (the "2017 Plan"), which was approved by Fred's stockholders at the 2017 annual shareholders
meeting. The 2017 Plan is substantially similar to the prior plan. The 2017 Plan increased the number of shares of the Company’s
common stock authorized for issuance by 1,900,000 shares, from the 4,000,000 which was available under the prior plan to 5,900,000
shares. The plan expires March 18, 2022, and Section 10 of the 2002 Plan, which provides for supplemental cash payments or loans
to individuals in connection with all or any part of an award under the plan, has been removed and is not part of the 2012 Plan.
Shares available to be granted under the long-term incentive plan were 2,777,382 as of February 3, 2018 (1,037,576 shares as of
January 28, 2017). Options issued under the plans expire five to seven years from the date of grant. Options outstanding at February
3, 2018 expire in fiscal 2018 through fiscal 2024.
The Company grants stock options to key
employees including executive officers, as well as other employees, as prescribed by the Compensation Committee (the “Committee”)
of the Board of Directors. Options, which include non-qualified stock options and incentive stock options, are rights to purchase
a specified number of shares of Fred's common stock at a price fixed by the Committee. Stock options granted have an exercise price
equal to the market price of Fred's common stock on the date of grant. The exercise price for stock options issued under the plan
that qualify as incentive stock options within the meaning of Section 422(b) of the Code shall not be less than 100% of the fair
value as of the date of grant. The option exercise price may be satisfied in cash or by exchanging shares of Fred's common stock
owned by the optionee for at least six months, or a combination of cash and shares. Options have a maximum term of five to eight
years from the date of grant. Options granted under the plan generally become exercisable ratably over four years or ten percent
during each of the first four years on the anniversary date and sixty percent on the fifth anniversary date. The rest vest ratably
over the requisite service period. Stock option expense is recognized using the graded vesting attribution method. The plan also
provides for annual stock grants at the market price of the common stock on the grant date to non-employee directors according
to a non-discretionary formula. The number of shares granted is dependent upon current director compensation levels.
Employee Stock Purchase Plan.
The
2004 Employee Stock Purchase Plan ("ESPP") (the “2004 Plan”), which was approved by Fred's stockholders,
permits eligible employees to purchase shares of our common stock through payroll deductions at the lower of 85% of the fair market
value of the stock at the time of grant or 85% of the market price at the time of exercise. There were 90,225, 59,694, and 57,972
shares issued during fiscal years 2017, 2016, and 2015, respectively. There are 1,410,928 shares approved to be issued under the
2004 Plan and as of February 3, 2018 there were 595,681 shares available. In the fourth quarter, management and the Board of Directors
decided to suspend purchases through the ESPP effective December 31, 2017.
The following represents total stock based
compensation expense (a component of selling, general and administrative expenses) recognized in the consolidated financial statements
(in thousands)
:
(in thousands)
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
Continuing Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock option expense
|
|
$
|
649
|
|
|
$
|
796
|
|
|
$
|
248
|
|
Restricted stock expense
|
|
|
3,294
|
|
|
|
6,732
|
|
|
|
1,765
|
|
ESPP expense
|
|
|
676
|
|
|
|
232
|
|
|
|
234
|
|
Subtotal stock-based compensation
|
|
|
4,619
|
|
|
|
7,760
|
|
|
|
2,247
|
|
Other stock based compensation expense
(1)
|
|
|
1,015
|
|
|
|
1,015
|
|
|
|
-
|
|
Total stock-based compensation
|
|
$
|
5,634
|
|
|
$
|
8,775
|
|
|
$
|
2,247
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax benefit on stock-based compensation
|
|
$
|
1,216
|
|
|
$
|
2,331
|
|
|
$
|
590
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discontinued Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock option expense
|
|
$
|
221
|
|
|
$
|
143
|
|
|
$
|
3
|
|
Restricted stock expense
|
|
|
44
|
|
|
|
66
|
|
|
|
12
|
|
ESPP expense
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Total stock-based compensation
|
|
|
265
|
|
|
|
209
|
|
|
|
15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax benefit on stock-based compensation
|
|
$
|
28
|
|
|
$
|
34
|
|
|
$
|
4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stock-based compensation
|
|
$
|
5,899
|
|
|
$
|
8,984
|
|
|
$
|
2,262
|
|
Total income tax benefit on stock-based compensation
|
|
$
|
1,244
|
|
|
$
|
2,365
|
|
|
$
|
594
|
|
1
Stock based compensation expense
earned in fiscal year 2016, grants issued in fiscal year 2017 related to the retirement of the Company's former CEO, Jerry Shore.
Total stock based compensation expense
recorded in Consolidated Statements of Operations for 2016 was $8,984 thousand, while Common Stock balance on Consolidated Balance
Sheet statement as of January 28, 2017 was increased by $7,969 thousand due to grants issued after January 28, 2017. Accrued expenses
balance included $1,015 thousand on the Balance Sheet as of January 28, 2017.
Total stock based compensation expense
recorded in Consolidated Statements of Operations for 2017 was $4,884 thousand, while Common Stock balance on Consolidated Balance
Sheet statement as of February 3, 2018 was increased by $5,899 thousand due to grants issued during fiscal year 2017 year but expensed
in fiscal year 2016.
The Company uses the Modified Black-Scholes
Option Valuation Model (“BSM”) to measure the fair value of stock options granted to employees. The BSM option valuation
model was developed for use in estimating the fair value of traded options, which have no vesting restrictions and are fully transferable.
In addition, option valuation models require the input of highly subjective assumptions including the expected stock volatility
and option life. Because the Company’s employee stock options have characteristics significantly different from those of
traded options, and because changes in the subjective assumptions can materially affect the fair value estimate, in management’s
opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options.
The fair value of each option granted is
estimated on the date of grant using the BSM with the following weighted average assumptions:
Continuing Operations
|
|
|
|
|
|
|
|
|
|
Stock Options
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
Expected volatility
|
|
|
42.3
|
%
|
|
|
33.7
|
%
|
|
|
30.6
|
%
|
Risk-free interest rate
|
|
|
2.1
|
%
|
|
|
1.6
|
%
|
|
|
1.8
|
%
|
Expected option life (in years)
|
|
|
5.84
|
|
|
|
5.84
|
|
|
|
5.84
|
|
Expected dividend yield
|
|
|
1.7
|
%
|
|
|
1.8
|
%
|
|
|
1.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average fair value at grant date
|
|
$
|
3.91
|
|
|
$
|
3.57
|
|
|
$
|
4.32
|
|
Discontinued Operations
|
|
|
|
|
|
|
|
|
|
Stock Options
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
Expected volatility
|
|
|
43.1
|
%
|
|
|
33.4
|
%
|
|
|
30.1
|
%
|
Risk-free interest rate
|
|
|
2.2
|
%
|
|
|
1.6
|
%
|
|
|
2.0
|
%
|
Expected option life (in years)
|
|
|
5.84
|
|
|
|
5.84
|
|
|
|
5.84
|
|
Expected dividend yield
|
|
|
1.9
|
%
|
|
|
1.8
|
%
|
|
|
1.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average fair value at grant date
|
|
$
|
4.89
|
|
|
$
|
3.92
|
|
|
$
|
4.97
|
|
Employee Stock Purchase Plan
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
Expected volatility
|
|
|
80.6
|
%
|
|
|
57.0
|
%
|
|
|
30.9
|
%
|
Risk-free interest rate
|
|
|
1.0
|
%
|
|
|
0.9
|
%
|
|
|
0.3
|
%
|
Expected option life (in years)
|
|
|
0.63
|
|
|
|
0.63
|
|
|
|
0.63
|
|
Expected dividend yield
|
|
|
1.0
|
%
|
|
|
1.0
|
%
|
|
|
1.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average fair value at grant date
|
|
$
|
7.14
|
|
|
$
|
3.88
|
|
|
$
|
4.02
|
|
The following is a summary of the methodology
applied to develop each assumption:
Expected Volatility
— This
is a measure of the amount by which a price has fluctuated or is expected to fluctuate. The Company uses actual historical changes
in the market value of our stock to calculate expected price volatility because management believes that this is the best indicator
of future volatility. The Company calculates weekly market value changes from the date of grant over a past period representative
of the expected life of the options to determine volatility. An increase in the expected volatility will increase compensation
expense.
Risk-free Interest Rate
—
This is the yield of a U.S. Treasury zero-coupon bond issue effective at the grant date with a remaining term equal to the expected
life of the option. An increase in the risk-free interest rate will increase compensation expense.
Expected Lives
— This is the
period of time over which the options granted are expected to remain outstanding and is based on historical experience. Options
granted have a maximum term of seven and one-half years. An increase in the expected life will increase compensation expense.
Dividend Yield
— This is based
on the historical yield for a period equivalent to the expected life of the option. An increase in the dividend yield will decrease
compensation expense.
Stock Options.
The following table
summarizes stock option activity from January 31, 2015 through February 3, 2018:
Continuing Operations
|
|
Options
|
|
|
Weighted-
Average
Exercise
Price
|
|
|
Weighted-
Averaged
Contractual
Life (years)
|
|
|
Aggregate
Intrinsic
Value (000s)
|
|
Outstanding at January 31, 2015
|
|
|
946,553
|
|
|
$
|
13.56
|
|
|
|
3.4
|
|
|
$
|
2,954
|
|
Granted
|
|
|
422,107
|
|
|
|
16.32
|
|
|
|
|
|
|
|
|
|
Forfeited / Cancelled
|
|
|
(328,568
|
)
|
|
|
14.37
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(202,733
|
)
|
|
|
10.48
|
|
|
|
|
|
|
|
|
|
Outstanding at January 30, 2016
|
|
|
837,359
|
|
|
$
|
15.37
|
|
|
|
4.5
|
|
|
$
|
1,371
|
|
Granted
|
|
|
1,107,256
|
|
|
|
12.82
|
|
|
|
|
|
|
|
|
|
Forfeited / Cancelled
|
|
|
(476,434
|
)
|
|
|
15.26
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(14,900
|
)
|
|
|
13.82
|
|
|
|
|
|
|
|
|
|
Outstanding at January 28, 2017
|
|
|
1,453,281
|
|
|
$
|
13.48
|
|
|
|
6.0
|
|
|
$
|
1,947
|
|
Granted
|
|
|
233,312
|
|
|
|
11.00
|
|
|
|
|
|
|
|
|
|
Forfeited / Cancelled
|
|
|
(514,768
|
)
|
|
|
13.16
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Outstanding at February 3, 2018
|
|
|
1,171,825
|
|
|
$
|
13.12
|
|
|
|
5.1
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at February 3, 2018
|
|
|
360,098
|
|
|
$
|
14.43
|
|
|
|
4.1
|
|
|
$
|
-
|
|
Discontiued Operations
|
|
Options
|
|
|
Weighted-
Average
Exercise
Price
|
|
|
Weighted-
Averaged
Contractual
Life (years)
|
|
|
Aggregate
Intrinsic
Value (000s)
|
|
Outstanding at January 31, 2015
|
|
|
-
|
|
|
$
|
-
|
|
|
|
0
|
|
|
$
|
-
|
|
Granted
|
|
|
2,500
|
|
|
|
19.04
|
|
|
|
|
|
|
|
|
|
Forfeited / Cancelled
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Outstanding at January 30, 2016
|
|
|
2,500
|
|
|
$
|
19.04
|
|
|
|
6.5
|
|
|
$
|
-
|
|
Granted
|
|
|
151,875
|
|
|
|
14.11
|
|
|
|
|
|
|
|
|
|
Forfeited / Cancelled
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Outstanding at January 28, 2017
|
|
|
154,375
|
|
|
$
|
14.19
|
|
|
|
6.4
|
|
|
$
|
124
|
|
Granted
|
|
|
25,000
|
|
|
|
13.52
|
|
|
|
|
|
|
|
|
|
Forfeited / Cancelled
|
|
|
(12,000
|
)
|
|
|
12.34
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Outstanding at February 3, 2018
|
|
|
167,375
|
|
|
$
|
14.23
|
|
|
|
5.4
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at February 3, 2018
|
|
|
31,374
|
|
|
$
|
14.27
|
|
|
|
4.9
|
|
|
$
|
-
|
|
The aggregate intrinsic value in the table
above represents the total pre-tax intrinsic value (the excess of Fred's closing stock price on the last trading day of the fiscal
year end and the exercise price of the option multiplied by the number of in-the-money options) that would have been received by
the option holders had all option holders exercised their options on that date. This amount changes based on changes in the market
value of Fred's stock. As of February 3, 2018, total unrecognized stock-based compensation expense net of estimated forfeitures
related to non-vested stock options for continuing operations was approximately $1.7 million, which is expected to be recognized
over a weighted average period of approximately 3.4 years. As of February 3, 2018, total unrecognized stock-based compensation
expense net of estimated forfeitures related to non-vested stock options for discontinued operations was approximately $0.3 million,
which is expected to be recognized over a weighted average period of approximately 3.5 years.
Other information relative to option activity
during 2017, 2016 and 2015 is as follows:
(dollars in thousands)
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
Continuing Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fair value of stock options vested
|
|
$
|
1,185
|
|
|
$
|
361
|
|
|
$
|
318
|
|
Total pretax intrinsic value of stock options exercised
|
|
$
|
-
|
|
|
$
|
85
|
|
|
$
|
1,333
|
|
Discontinued Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fair value of stock options vested
|
|
$
|
121
|
|
|
$
|
3
|
|
|
$
|
-
|
|
Total pretax intrinsic value of stock options exercised
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
The following table summarizes information
about stock options outstanding at February 3, 2018:
|
|
Options Outstanding
|
|
|
Options Exercisable
|
|
Range of Exercise Prices
|
|
Shares
|
|
|
Weighted-
Averaged
Contractual
Life (years)
|
|
|
Weighted-
Average
Exercise
Price
|
|
|
Shares
|
|
|
Weighted-
Average
Exercise
Price
|
|
Continuing Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ 4.57 - $12.55
|
|
|
482,108
|
|
|
|
5.6
|
|
|
$
|
10.28
|
|
|
|
91,991
|
|
|
$
|
10.72
|
|
$12.61 - $14.68
|
|
|
409,451
|
|
|
|
5.1
|
|
|
$
|
14.31
|
|
|
|
95,232
|
|
|
$
|
14.26
|
|
$14.74 - $19.64
|
|
|
280,266
|
|
|
|
4.3
|
|
|
$
|
16.27
|
|
|
|
172,875
|
|
|
$
|
16.50
|
|
|
|
|
1,171,825
|
|
|
|
|
|
|
|
|
|
|
|
360,098
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discontinued Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ 9.99 - $14.66
|
|
|
57,681
|
|
|
|
5.7
|
|
|
$
|
12.19
|
|
|
|
7,736
|
|
|
$
|
10.98
|
|
$14.68 - $15.06
|
|
|
36,303
|
|
|
|
5.1
|
|
|
$
|
14.77
|
|
|
|
8,460
|
|
|
$
|
14.76
|
|
$15.44 - $19.04
|
|
|
73,391
|
|
|
|
5.3
|
|
|
$
|
15.56
|
|
|
|
15,178
|
|
|
$
|
15.68
|
|
|
|
|
167,375
|
|
|
|
|
|
|
|
|
|
|
|
31,374
|
|
|
|
|
|
Restricted Stock.
The Company’s
equity incentive plans also allow for granting of restricted stock having a fixed number of shares at a purchase price that is
set by the Compensation Committee of the Company’s Board of Directors, which purchase price may be set at zero, to certain
executive officers, directors and key employees. The Company calculates compensation expense as the difference between the market
price of the underlying stock on the date of grant and the purchase price if any. Restricted shares granted under the plan have
various vesting types, which include cliff vesting and graded vesting with a requisite service period of three to ten years. Restricted
stock has a maximum term of five to ten years from grant date. Compensation expense is recorded on a straight-line basis for shares
that cliff vest and under the graded vesting attribution method for those that have graded vesting.
The following table summarizes restricted
stock from January 31, 2015 through February 3, 2018:
Continuing Operations
|
|
Shares
|
|
|
Weighted-
Average Grant
Date Fair Value
|
|
Non-vested Restricted Stock at January 31, 2015
|
|
|
557,521
|
|
|
$
|
14.72
|
|
Granted
|
|
|
121,009
|
|
|
|
17.38
|
|
Forfeited / Cancelled
|
|
|
(103,759
|
)
|
|
|
14.13
|
|
Vested
|
|
|
(70,798
|
)
|
|
|
14.07
|
|
Non-vested Restricted Stock at January 30, 2016
|
|
|
503,973
|
|
|
$
|
15.55
|
|
Granted
|
|
|
195,856
|
|
|
|
13.28
|
|
Forfeited / Cancelled
|
|
|
(40,188
|
)
|
|
|
14.35
|
|
Vested
|
|
|
(77,515
|
)
|
|
|
14.65
|
|
Non-vested Restricted Stock at January 28, 2017
|
|
|
582,126
|
|
|
$
|
15.01
|
|
Granted
|
|
|
490,802
|
|
|
|
7.73
|
|
Forfeited / Cancelled
|
|
|
(90,933
|
)
|
|
|
11.96
|
|
Vested
|
|
|
(328,100
|
)
|
|
|
14.64
|
|
Non-vested Restricted Stock at February 3, 2018
|
|
|
653,895
|
|
|
$
|
10.14
|
|
Discontinued Operations
|
|
Shares
|
|
|
Weighted-
Average Grant
Date Fair Value
|
|
Non-vested Restricted Stock at January 31, 2015
|
|
|
-
|
|
|
$
|
-
|
|
Granted
|
|
|
10,000
|
|
|
|
19.07
|
|
Forfeited / Cancelled
|
|
|
-
|
|
|
|
-
|
|
Vested
|
|
|
-
|
|
|
|
-
|
|
Non-vested Restricted Stock at January 30, 2016
|
|
|
10,000
|
|
|
$
|
19.07
|
|
Granted
|
|
|
11,658
|
|
|
|
15.44
|
|
Forfeited / Cancelled
|
|
|
-
|
|
|
|
-
|
|
Vested
|
|
|
-
|
|
|
|
-
|
|
Non-vested Restricted Stock at January 28, 2017
|
|
|
21,658
|
|
|
$
|
17.12
|
|
Granted
|
|
|
2,333
|
|
|
|
14.89
|
|
Forfeited / Cancelled
|
|
|
(10,000
|
)
|
|
|
19.07
|
|
Vested
|
|
|
(2,797
|
)
|
|
|
15.35
|
|
Non-vested Restricted Stock at February 3, 2018
|
|
|
11,194
|
|
|
$
|
15.35
|
|
For continuing operations the aggregate
pre-tax intrinsic value of restricted stock outstanding as of February 3, 2018 is $2.0 million with a weighted average remaining
contractual life of 7.2 years. The unrecognized compensation expense net of estimated forfeitures, related to the outstanding restricted
stock is approximately $2.8 million, which is expected to be recognized over a weighted average period of approximately 3.2
years. The total fair value of restricted stock awards that vested for the year ended February 3, 2018 was $4.4 million. The total
fair value of restricted stock awards that vested for the years ended January 28, 2017 and January 30, 2016 was $1.0 million.
For discontinued operations the aggregate
pre-tax intrinsic value of restricted stock outstanding as of February 3, 2018 is less than $0.1 million with a weighted average
remaining contractual life of 5.5 years. The unrecognized compensation expense net of estimated forfeitures, related to the outstanding
restricted stock is approximately $0.1 million, which is expected to be recognized over a weighted average period of approximately
3.5 years. The total fair value of restricted stock awards that vested for the year ended February 3, 2018 was less than $0.1 million.
No restricted stock awards vested for the years ending January 28, 2017 and January 30, 2016.
There were no significant modifications
to the Company’s share-based compensation plans during fiscal 2017, 2016 or 2015.
NOTE 10 — NET INCOME PER SHARE
Basic earnings per share excludes dilution
and is computed by dividing income available to common stockholders by the weighted-average number of common shares outstanding
for the period. Diluted earnings per share reflects the potential dilution that could occur if options to issue common stock were
exercised into common stock or resulted in the issuance of common stock that then shared in the earnings of the entity. Restricted
stock is a participating security and is therefore included in the computation of basic earnings per share. However, in fiscal
years 2017, 2016, and 2015, the Company experienced losses and thus such restricted stock was excluded from the calculation of
basic and diluted EPS because inclusion would have been antidilutive.
In fiscal years 2017, 2016, and 2015, the
Company experienced a net loss, requiring the diluted earnings per share calculation to exclude any assumptions of the exercise
of securities, as these would have an antidilutive effect on EPS.
Options to purchase shares of common stock
that were outstanding at the end of the respective fiscal years were not included in the computation of diluted earnings per share
when the options’ exercise prices were greater than the average market price of the common shares. There were 1,339,200 and
918,881 such options outstanding at February 3, 2018 and January 28, 2017, respectively.
NOTE 11 — OTHER COMMITMENTS AND
CONTINGENCIES
Commitments.
The Company had commitments
approximating $0.5 million at February 3, 2018 and $1.1 million at January 28, 2017 on issued letters of credit and open accounts,
which support purchase orders for merchandise. Additionally, the Company had outstanding letters of credit aggregating approximately
$9.3 million at February 3, 2017 and January 28, 2017 utilized as collateral for its risk management programs.
Salary reduction profit sharing plan.
The Company has defined contribution profit sharing plans for the benefit of qualifying employees who have completed three
months of service and attained the age of 21. Participants may elect to make contributions to the plans up to 60% of their compensation
or such lesser amounts based upon limitations established by the Internal Revenue Service. Company contributions are made at the
discretion of the Company’s Board of Directors. Participants are 100% vested in their contributions and earnings thereon.
Contributions by the Company and earnings thereon are fully vested upon completion of six years of service. The Company’s
contributions for 2017, were $0.3 million and for 2016 and 2015 were $0.2 million.
Postretirement benefits.
The Company
provides certain health care benefits to its full-time employees that retire between the ages of 62 and 65 with certain specified
levels of credited service. Health care coverage options for retirees under the plan are the same as those available to active
employees.
Effective February 3, 2007, the Company
began recognizing the funded status of its postretirement benefits plan in accordance with FASB ASC 715, "Compensation Retirement
Benefits." In accordance with FASB ASC 715 the Company is required to display the net over-or–underfunded position of
a defined benefit postretirement plan as an asset or liability, with any unrecognized prior service costs, transition obligations
or actuarial gains/losses reported as a component of accumulated other comprehensive income in shareholders’ equity. The
measurement date for the plan is January 31.
The Company’s change in benefit obligation
based upon an actuarial valuation is as follows:
|
|
For the Years Ended
|
|
(in thousands)
|
|
February 3,
2018
|
|
|
January 28,
2017
|
|
|
January 30,
2016
|
|
Benefit obligation at beginning of year
|
|
$
|
655
|
|
|
$
|
695
|
|
|
$
|
584
|
|
Service cost
|
|
|
36
|
|
|
|
39
|
|
|
|
46
|
|
Interest cost
|
|
|
20
|
|
|
|
21
|
|
|
|
19
|
|
Actuarial loss (gain)
|
|
|
(46
|
)
|
|
|
(54
|
)
|
|
|
92
|
|
Benefits paid
|
|
|
(70
|
)
|
|
|
(46
|
)
|
|
|
(46
|
)
|
Benefit obligation at end of year
|
|
$
|
595
|
|
|
$
|
655
|
|
|
$
|
695
|
|
The Company’s components of net accumulated
other comprehensive income were as follows:
|
|
For the Years Ended
|
|
(in thousands)
|
|
February 3,
2018
|
|
|
January 28,
2017
|
|
|
January 30,
2016
|
|
Accumulated other comprehensive income
|
|
$
|
765
|
|
|
$
|
765
|
|
|
$
|
780
|
|
Deferred tax
|
|
|
(206
|
)
|
|
|
(299
|
)
|
|
|
(305
|
)
|
Accumulated other comprehensive income, net
|
|
$
|
559
|
|
|
$
|
466
|
|
|
$
|
475
|
|
The medical care cost trend used in determining
this obligation is 6.8% at February 3, 2018, decreasing annually throughout the actuarial projection period. The below table illustrates
a one-percentage-point increase or decrease in the healthcare cost trend rate assumed for postretirement benefits:
(in thousands)
|
|
February 3,
2018
|
|
|
January 28,
2017
|
|
|
January 30,
2016
|
|
Effect of health care trend rate
|
|
|
|
|
|
|
|
|
|
|
|
|
1% increase effect on accumulated benefit obligations
|
|
$
|
71
|
|
|
$
|
76
|
|
|
$
|
86
|
|
1% increase effect on periodic cost
|
|
|
11
|
|
|
|
11
|
|
|
|
12
|
|
1% decrease effect on accumulated benefit obligations
|
|
|
(53
|
)
|
|
|
(58
|
)
|
|
|
(69
|
)
|
1% decrease effect on periodic cost
|
|
|
(8
|
)
|
|
|
(9
|
)
|
|
|
(10
|
)
|
The discount rate used in calculating the
obligation was 3.45% in 2017 and 2016.
The annual net postretirement cost is as
follows:
(in thousands)
|
|
February 3,
2018
|
|
|
January 28,
2017
|
|
|
January 30,
2016
|
|
Service cost
|
|
$
|
36
|
|
|
$
|
40
|
|
|
$
|
46
|
|
Interest cost
|
|
|
20
|
|
|
|
21
|
|
|
|
19
|
|
Amortization of prior service cost
|
|
|
(13
|
)
|
|
|
(13
|
)
|
|
|
(13
|
)
|
Amortization of unrecognized prior service costs
|
|
|
(58
|
)
|
|
|
(56
|
)
|
|
|
(51
|
)
|
Net periodic postretirement benefit cost
|
|
$
|
(15
|
)
|
|
$
|
(8
|
)
|
|
$
|
1
|
|
The Company’s policy is to
fund claims as incurred. Information about the expected cash flows for the postretirement medical plan follows:
(in thousands)
|
|
Postretirement
Medical Plan
|
|
Expected Benefit Payments, net of retiree contributions
|
|
|
|
|
2018
|
|
$
|
49
|
|
2019
|
|
|
55
|
|
2020
|
|
|
56
|
|
2021
|
|
|
61
|
|
2022
|
|
|
61
|
|
Next 5 years
|
|
|
262
|
|
Litigation.
On October 15, 2015,
a lawsuit entitled Southern Independent Bank v. Fred’s, Inc. was filed in the U.S. District Court, Middle District of Alabama.
The complaint includes allegations made by the plaintiff on behalf of itself and financial institutions similarly situated (“alleged
class of financial institutions”) that the Company was negligent in failing to use reasonable care in obtaining, retaining,
securing and deleting the personal and financial information of customers who use debit cards issued by the plaintiff and alleged
class of financial institutions to make purchases at Fred’s stores. The complaint also includes allegations that the Company
made negligent misrepresentations that the Company possessed and maintained adequate data security measures and systems that were
sufficient to protect the personal and financial information of shoppers using debit cards issued by the plaintiff and alleged
class of financial institutions. The complaint seeks monetary damages and equitable relief to be proved at trial as well as attorneys’
fees and costs. The Company has denied the allegations and has filed a motion to dismiss all claims. This motion has since been
denied, and the Company filed a motion to reconsider by certifying the question to the Alabama Supreme Court for clarity. However
the Company’s motion was denied, and the Company has now completed discovery and is moving to trial. Future costs or liabilities
related to the incident may have a material adverse effect on the Company. The Company has not made an accrual for future losses
related to these claims at this time as the future losses are not considered probable. The Company has a cyber liability policy
with a $10 million limit and $100,000 deductible.
On July 27, 2016, a lawsuit entitled The
State of Mississippi v. Fred’s Inc., et al was filed in the Chancery Court of Desoto County, Mississippi, Third Judicial
District. The complaint alleges that the Company fraudulently reported their usual and customary prices to Mississippi’s
Division of Medicaid in order to receive higher reimbursements for prescription drugs. The complaint seeks declaratory and monetary
relief for the profits alleged to have been unfairly earned as well as attorney costs. The Company denies these allegations and
believes it acted appropriately in its dealings with the Mississippi Division of Medicaid. The Company successfully filed a Motion
to Transfer to Circuit Court. The State filed and the Mississippi Supreme Court has accepted the State’s Petition for Interlocutory
Appeal, despite the Company filing a Joint Response in opposition to the Petition. Future costs and liabilities related to this
case may have a material adverse effect on the Company; however, the Company has not made an accrual for future losses related
to these claims as future losses are not considered probable and an estimate is unavailable. The Company has multiple insurance
policies which the Company believes will limit its potential exposure.
On September 29, 2016, the Company reported
to the Office of Civil Rights (“OCR”) that an unencrypted laptop containing clinical and demographic data for 9,624
individuals had been stolen from an employee’s vehicle while the vehicle was parked at the employee’s residence. On
January 13, 2017, the OCR opened an investigation into the incident. The Company has fully complied with the investigation and
timely responded to all requests for information from the OCR. The Company has not received any response from the OCR at this time.
Future costs and liabilities related to this case may have a material adverse effect on the Company; however, the Company has not
made an accrual for future losses related to these claims as future losses are not considered probable and an estimate is unavailable.
On March 30, 2017, a lawsuit entitled Tiffany
Taylor, individually and on behalf of others similarly situated, v. Fred’s Inc. and Fred’s Stores of Tennessee, Inc.
was filed in the United Stated District Court for the Northern District of Alabama Southern Division. The complaint alleges that
the Company wrongfully and willfully violated the Fair and Accurate Credit Transactions Act (“FACTA”). On April 11,
2017, a lawsuit entitled Melanie Wallace, Sascha Feliciano, and Heather Tyler, on behalf of themselves and all others similarly
situated, v. Fred’s Stores of Tennessee, Inc. was filed in the Superior Court of Fulton County in the state of Georgia. The
complaint alleges that the Company wrongfully and willfully violated FACTA. On April 13, 2017, a lawsuit entitled Lillie Williams
and Cussetta Journey, on behalf of themselves and all others similarly situated, v. Fred’s Stores of Tennessee, Inc. was
filed in the Superior Court of Fulton County in the state of Georgia. The complaint also alleges that the Company wrongfully and
willfully violated FACTA. The complaints are filed as Class Actions, with the class being open for five (5) years before the date
the complaint was filed. The complaint seeks statutory damages, attorney’s fees, punitive damages, an injunctive order, and
other such relief that the court may deem just and equitable. The Company has filed a Motion to Dismiss the Taylor complaint, and
this Motion has been granted by the Court. The Company filed and the Court granted Motions to Remove and Motions to Transfer the
Williams and Wallace matters to the U.S. District Court for the Northern District of Alabama. Since the Williams and Wallace matters
were removed and transferred to the U.S. District Court for the Northern District of Alabama, the Company has filed a Motion to
Consolidate the Williams and Wallace matters. The Court has yet to rule on the Motion to Consolidate. Plaintiff’s counsel
for each of the Williams and Wallace matters has filed a Motion to Remand the matters. Fred’s has opposed the Motion to Remand,
and the Motion to Remand is still pending. Future costs and liabilities related to this case may have a material adverse effect
on the Company; however, the Company has not made an accrual for future losses related to these claims as future losses are not
considered probable and an estimate is unavailable.
In addition to the matters disclosed above,
the Company is party to several pending legal proceedings and claims arising in the normal course of business. Although the outcomes
of these proceedings and claims against the Company cannot be determined with certainty, management of the Company is of the opinion
that these proceedings and claims should not have a material adverse effect on the Company’s financial statements as a whole.
However, litigation involves an element of uncertainty. Future developments could cause these actions or claims, individually or
in aggregate, to have a material adverse effect on the Company’s financial statements as a whole.
NOTE 12 – SALES MIX
The Company manages its business on the
basis of one reportable segment. See Note 1 – “Description of Business and Summary of Significant Accounting Policies”
for a brief description of the Company’s business. As of February 3, 2018, all of the Company’s operations were located
within the United States. The following data is presented in accordance with FASB ASC 280, “Segment Reporting.”
The Company’s sales mix by major
category during the last 3 years was as follows:
|
|
For the Years Ended
|
|
|
|
February 3,
2018
|
|
|
January 28,
2017
|
|
|
January 30,
2016
|
|
Pharmacy
|
|
|
45.7
|
%
|
|
|
45.0
|
%
|
|
|
44.9
|
%
|
Consumables
|
|
|
29.2
|
%
|
|
|
27.6
|
%
|
|
|
28.4
|
%
|
Household Goods and Softlines
|
|
|
24.3
|
%
|
|
|
26.0
|
%
|
|
|
25.0
|
%
|
Franchise
|
|
|
0.8
|
%
|
|
|
1.4
|
%
|
|
|
1.7
|
%
|
Total Sales Mix
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
NOTE 13 – EXIT AND DISPOSAL ACTIVITY
Fixed Assets
The Company’s policy is to review
the carrying value of all long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying
value of an asset may not be recoverable. We measure impairment losses of fixed assets and leasehold improvements as the amount
by which the carrying amount of a long-lived asset exceeds its fair value as prescribed by FASB ASC 360, "Impairment or Disposal
of Long-Lived Assets." If a long-lived asset is found to be impaired, the amount recognized for impairment is equal to the
difference between the carrying value and the asset’s fair value. The fair value is based on estimated market values for
similar assets or other reasonable estimates of fair market value based upon a discounted cash flow model.
In 2015, the Company recorded an additional
charge of $0.3 million for fixed assets and leasehold improvements related to the 2014 store closures. In 2016, the Company utilized
$0.2 million related to the 2014 store closures, leaving $0.5 million of impairment charges for fixed assets recorded pertaining
to fiscal 2014 store closures. None of the remaining impairment was utilized in 2017, leaving $0.5 million of impairment charges
pertaining to fiscal 2014 store closures as of February 3, 2018.
During fiscal 2016, a decision was made
to close 39 underperforming stores, which included 18 underperforming pharmacies. As a result, the Company recorded charges in
the amount of $2.0 million in selling, general and administrative expense for the impairment of fixed assets associated with the
closing stores and pharmacies and $2.3 million for the accelerated recognition of amortization of intangible assets associated
with the closing pharmacies of which $0.1 million was utilized during 2016. Additional impairment charges of $3.6 million were
for fixed asset impairments related to the corporate headquarters. During the first quarter of 2017, the locations were closed
and the Company utilized the remaining balance of $4.2 million of impairment charges relating to the 2016 planned store closures.
None of the impairment charges relating to the corporate headquarters were utilized as of February 3, 2018.
In the second quarter of 2017, in association
with the planned closure of additional underperforming stores and pharmacies, the Company recorded charges in the amount of $0.8
million in selling, general and administrative expense for the impairment of fixed assets associated with the closing stores and
pharmacies and $1.4 million for the accelerated recognition of amortization of intangible assets associated with the closing pharmacies.
None of these charges were utilized as of February 3, 2018.
In the third quarter of 2017, a decision
was made to sell the Company-owned airplane. The sale was completed in the fourth quarter, and an impairment charge of $2.6 million
recorded in the third quarter related to the sale of this asset was fully utilized in the fourth quarter of 2017.
In the fourth quarter of 2017, the Company
recorded a charge of $1.1 million in selling, general and administrative expense for the impairment of fixed assets associated
with several underperforming locations. None of the impairment charges relating to these assets were utilized as of February 3,
2018.
Inventory
We adjust inventory values on a consistent
basis to reflect current market conditions. In accordance with FASB ASC 330, "Inventories," we write down inventory to
net realizable value in the period in which conditions giving rise to the write-downs are first recognized.
Lease Termination
For lease obligations related to closed
stores, we record the estimated future liability associated with the rental obligation on the cease use date (when the stores were
closed). The lease obligations are established at the cease use date for the present value of any remaining operating lease obligations,
net of estimated sublease income, and at the communication date for severance and other exit costs, as prescribed by FASB ASC 420,
“Exit or Disposal Cost Obligations.” Key assumptions in calculating the liability include the timeframe expected to
terminate lease agreements, estimates related to the sublease potential of closed locations, and estimates of other related exit
costs. If actual timing and potential termination costs or realization of sublease income differ from our estimates, the resulting
liabilities could vary from recorded amounts. These liabilities are reviewed periodically and adjusted when necessary.
During fiscal 2016, the Company increased
the lease liability for stores closed between 2014 and 2016 by $0.5 million and utilized $0.3 million, leaving a liability of $0.2
million. This reserve was utilized during fiscal year 2017 in full.
In the first quarter of 2017, the Company
recorded a lease liability relating to the 39 underperforming store closures in fiscal 2017 of $8.2 million. Additional $0.2 million
reserve was recorded in the fourth quarter of 2017 and $2.1 million of reserve was utilized during the year, leaving $6.3 million
reserve balance as of February 3, 2018.
The following table illustrates the impairment
charges for fixed assets and inventory related to planned closures and inventory strategic initiatives along with the lease liability
related to the planned store closures discussed in the previous paragraphs (in millions):
|
|
Balance at
January 28, 2017
|
|
|
Additions
|
|
|
Utilization
|
|
|
Ending Balance
February 3, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impairment charge for the disposal of fixed assets for 2014 planned closures
|
|
|
0.5
|
|
|
|
-
|
|
|
|
-
|
|
|
|
0.5
|
|
Inventory markdowns for 2016 planned closures
|
|
|
3.0
|
|
|
|
-
|
|
|
|
(3.0
|
)
|
|
|
-
|
|
Inventory provision for freight capitalization expense, 2016 planned closures
|
|
|
1.1
|
|
|
|
-
|
|
|
|
(1.1
|
)
|
|
|
-
|
|
Impairment charge for the disposal of fixed assets for 2016 planned closures
|
|
|
2.0
|
|
|
|
-
|
|
|
|
(2.0
|
)
|
|
|
-
|
|
Impairment charge for the disposal of intangible assets for 2016 planned closures
|
|
|
2.2
|
|
|
|
-
|
|
|
|
(2.2
|
)
|
|
|
-
|
|
Impairment charge for the disposal of fixed assets for corporate office
|
|
|
3.6
|
|
|
|
-
|
|
|
|
-
|
|
|
|
3.6
|
|
Impairment charge for the sale of the Company-owned airplane
|
|
|
-
|
|
|
|
2.6
|
|
|
|
(2.6
|
)
|
|
|
-
|
|
Impairment charge for the disposal of fixed assests for 2017 planned closures
|
|
|
-
|
|
|
|
0.8
|
|
|
|
-
|
|
|
|
0.8
|
|
Impairment charge for the disposal of intangible assests for 2017 planned closures
|
|
|
-
|
|
|
|
1.4
|
|
|
|
-
|
|
|
|
1.4
|
|
Impairment charge for the write down of fixed assets for underperforming stores
|
|
|
-
|
|
|
|
1.1
|
|
|
|
-
|
|
|
|
1.1
|
|
Subtotal
|
|
$
|
12.4
|
|
|
$
|
5.9
|
|
|
$
|
(10.9
|
)
|
|
$
|
7.4
|
|
Lease contract termination liability, 2014-2016 closures
|
|
|
0.2
|
|
|
|
-
|
|
|
|
(0.2
|
)
|
|
|
-
|
|
Lease contract termination liability, 2017 closures
|
|
|
-
|
|
|
|
8.4
|
|
|
|
(2.1
|
)
|
|
|
6.3
|
|
Total
|
|
$
|
12.6
|
|
|
$
|
14.3
|
|
|
$
|
(13.2
|
)
|
|
$
|
13.7
|
|
NOTE 14 – BUSINESS COMBINATIONS
On April 10, 2015, we acquired 100% of
the equity interests in Reeves-Sain Drug Store, Inc., a provider of retail and specialty pharmaceutical services (now classified
as Assets Held-for-Sale). The total consideration for the purchase was approximately $66.0 million, less working capital adjustments
of $10.3 million, which yielded an adjusted purchase consideration of $55.8 million. The Company incurred $0.5 million of transaction
costs in connection with the acquisition. The transaction costs were expensed as incurred and are reflected in selling,
general and administrative expenses in the consolidated statement of operations. The adjusted consideration consisted of $42.8
million in cash at the time of closing and $13.0 million in notes payable in three equal installments on January 31
st
of 2021, 2022 and 2023. The notes payable have an adjustment mechanism based upon an earn-out provision that could result in an
increase to the face value of the notes if certain financial metrics are achieved. No amounts have been reflected in the 2016
or 2017 consolidated financial statements for this provision. If and when the provision is met, the expense will be treated as
compensation expense in that year. Refer to Note 2 – Discontinued Operations for additional discussion surrounding the specialty
pharmacy business.
A summary of the purchase price allocation
for Reeves-Sain Drug Store, Inc. is as follows (dollars in thousands) broken out for continuing operations and discontinued operations:
Total purchase consideration for continuing operations:
|
|
|
|
|
Cash
|
|
$
|
42,757
|
|
Notes payable
|
|
|
13,000
|
|
Total purchase consideration
|
|
$
|
55,757
|
|
Allocation of the purchase price consideration for continuing operations:
Accounts receivables
|
|
$
|
752
|
|
Inventory
|
|
|
741
|
|
Other assets
|
|
|
189
|
|
Goodwill
|
|
|
-
|
|
Identifiable intangible assets
|
|
|
2,320
|
|
Total assets acquired
|
|
$
|
4,002
|
|
|
|
|
|
|
Accounts payable
|
|
|
48
|
|
Other current liabilities
|
|
|
76
|
|
Total liabilities assumed
|
|
$
|
124
|
|
|
|
|
|
|
Net assets acquired
|
|
$
|
3,878
|
|
Allocation of the purchase price consideration for discontinued operations:
Accounts receivables
|
|
$
|
13,722
|
|
Inventory
|
|
|
1,264
|
|
Other assets
|
|
|
118
|
|
Goodwill
|
|
|
41,403
|
|
Identifiable intangible assets
|
|
|
17,916
|
|
Total assets acquired
|
|
$
|
74,423
|
|
|
|
|
|
|
Accounts payable
|
|
|
21,400
|
|
Other current liabilities
|
|
|
1,144
|
|
Total liabilities assumed
|
|
$
|
22,544
|
|
|
|
|
|
|
Net assets acquired
|
|
$
|
51,879
|
|
The following are the identifiable intangible
assets acquired and their respective weighted average useful lives, as determined based on valuations (dollars in thousands) broken
out for continuing operations and discontinued operations:
Continuing Operations
|
|
|
|
|
|
|
|
|
Amount
|
|
|
Weighted
Average Life
(Years)
|
|
Customer prescription files
|
|
$
|
2,320
|
|
|
|
7
|
|
|
|
$
|
2,320
|
|
|
|
|
|
Discontinued Operations
|
|
|
|
|
|
|
|
|
Amount
|
|
|
Weighted
Average Life
(Years)
|
|
Customer prescription files
|
|
$
|
7,156
|
|
|
|
4
|
|
Trade name
|
|
$
|
7,300
|
|
|
|
-
|
|
Referral and relationships
|
|
$
|
1,400
|
|
|
|
2
|
|
Non-compete agreements
|
|
$
|
1,800
|
|
|
|
4
|
|
Business licenses
|
|
$
|
260
|
|
|
|
1
|
|
|
|
$
|
17,916
|
|
|
|
|
|
The following unaudited supplemental pro forma
financial information includes the results of operations of the three Reeves-Sain Drug Store, Inc. locations (now classified as
Assets Held-for-Sale) in 2017, 2016, and 2015 and is presented as if the locations had been consolidated as of the beginning of
the year immediately preceding the date of acquisition. The unaudited supplemental pro forma financial information has been provided
for illustrative purposes only and does not purport to be indicative of the actual results that would have been achieved by the
combined companies for the periods presented or of the results that may be achieved by the combined companies in the future. The
unaudited supplemental pro forma financial information presented below has been prepared by adjusting the historical results of
the Company to include the historical results of the acquisition described above. The 2015 unaudited pro forma historical results
were adjusted (i) to remove one-time acquisition costs of $0.5 million, (ii) to increase amortization expense by $0.6 million resulting
from the incremental intangible assets acquired and (iii) to increase interest expense by $0.2 million as a result of assumed debt
financing for the transaction.
The unaudited pro forma financial information does not include any adjustments to reflect the impact of cost
savings or other synergies that may result from this acquisition. This has been broken out for continuing operations and discontinued
operations.
Continuing Operations
|
|
|
|
|
|
|
|
|
|
(in thousands, except per share data)
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
Revenue
|
|
$
|
1,805,405
|
|
|
$
|
1,886,241
|
|
|
$
|
1,945,152
|
|
Earnings
|
|
|
(139,267
|
)
|
|
|
(68,125
|
)
|
|
|
(8,945
|
)
|
Basic and diluted earnings per share
|
|
$
|
(3.72
|
)
|
|
$
|
(1.84
|
)
|
|
$
|
(0.24
|
)
|
Discontinued Operations
|
|
|
|
|
|
|
|
|
|
(in thousands, except per share data)
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
Revenue
|
|
$
|
275,952
|
|
|
$
|
239,183
|
|
|
$
|
252,902
|
|
Earnings
|
|
|
(10,918
|
)
|
|
|
1,594
|
|
|
|
1,167
|
|
Basic and diluted earnings per share
|
|
$
|
(0.29
|
)
|
|
$
|
0.04
|
|
|
$
|
0.03
|
|
NOTE 15 – QUARTERLY FINANCIAL
DATA (UNAUDITED)
The Company’s unaudited quarterly
financial information for the fiscal years ended February 3, 2018 and January 28, 2017 is reported below:
(in thousands, except per share data)
|
|
First
Quarter
|
|
|
Second
Quarter
|
|
|
Third
Quarter
|
|
|
Fourth
Quarter
|
|
Year ended February 3, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
464,172
|
|
|
$
|
438,527
|
|
|
$
|
425,417
|
|
|
$
|
477,289
|
|
Gross profit
|
|
|
128,566
|
|
|
|
122,747
|
|
|
|
92,687
|
|
|
|
115,131
|
|
Loss from continuing operations
|
|
|
(37,770
|
)
|
|
|
(28,917
|
)
|
|
|
(49,958
|
)
|
|
|
(22,622
|
)
|
Income (loss) from discontinued operations, net of tax
|
|
|
1,309
|
|
|
|
(600
|
)
|
|
|
(1,858
|
)
|
|
|
(9,769
|
)
|
Net loss
|
|
$
|
(36,461
|
)
|
|
$
|
(29,517
|
)
|
|
$
|
(51,816
|
)
|
|
$
|
(32,391
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$
|
(1.02
|
)
|
|
$
|
(0.76
|
)
|
|
$
|
(1.33
|
)
|
|
$
|
(0.62
|
)
|
Discontinued operations
|
|
|
0.04
|
|
|
|
(0.02
|
)
|
|
|
(0.05
|
)
|
|
|
(0.26
|
)
|
Diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$
|
(1.02
|
)
|
|
$
|
(0.76
|
)
|
|
$
|
(1.33
|
)
|
|
$
|
(0.62
|
)
|
Discontinued operations
|
|
|
0.04
|
|
|
|
(0.02
|
)
|
|
|
(0.05
|
)
|
|
|
(0.26
|
)
|
Cash dividends paid per common share
|
|
$
|
0.06
|
|
|
$
|
0.06
|
|
|
$
|
0.06
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended January 28, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
494,689
|
|
|
$
|
471,646
|
|
|
$
|
452,337
|
|
|
$
|
467,569
|
|
Gross profit
|
|
$
|
136,888
|
|
|
$
|
125,837
|
|
|
$
|
107,211
|
|
|
$
|
125,746
|
|
Income (loss) from continuing operations
|
|
|
756
|
|
|
|
(7,069
|
)
|
|
|
(40,092
|
)
|
|
|
(21,721
|
)
|
Income (loss) from discontinued operations, net of tax
|
|
|
500
|
|
|
|
141
|
|
|
|
1,699
|
|
|
|
(745
|
)
|
Net income (loss)
|
|
|
1,256
|
|
|
|
(6,928
|
)
|
|
|
(38,393
|
)
|
|
|
(22,466
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$
|
0.02
|
|
|
$
|
(0.18
|
)
|
|
$
|
(1.10
|
)
|
|
$
|
(0.58
|
)
|
Discontinued operations
|
|
|
0.01
|
|
|
|
-
|
|
|
|
0.05
|
|
|
|
(0.02
|
)
|
Diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$
|
0.02
|
|
|
$
|
(0.18
|
)
|
|
$
|
(1.10
|
)
|
|
$
|
(0.58
|
)
|
Discontinued operations
|
|
|
0.01
|
|
|
|
-
|
|
|
|
0.05
|
|
|
|
(0.02
|
)
|
Cash dividends paid per common share
|
|
$
|
0.06
|
|
|
$
|
0.06
|
|
|
$
|
0.06
|
|
|
$
|
0.06
|
|
NOTE 16 – SUBSEQUENT EVENT
Effective April 24, 2018, Michael K. Bloom
resigned from his position as the Company’s Chief Executive Officer and a director to pursue other opportunities. His resignation
was not a result of any disagreement with the Company or its operations. In connection with his resignation, Mr. Bloom executed
a Separation Agreement and General Release, effective as of April 24, 2018, pursuant to which he will continue to receive his regular
base salary through May 24, 2018, and will receive severance payments totaling $1,166,666.67 and the continuation of benefits in
exchange for a general release of all claims against the Company.
Additionally, on April 27, 2018, each
of Timothy Liebmann, the Company’s Chief Operating Officer – Pharmacy, and Mary Lou Gardner, the Company’s Chief
Merchandising and Marketing Officer, resigned, effective immediately, to pursue other opportunities. In connection with their
resignation, each of Mr. Liebmann and Ms. Gardner will receive severance equal to $800,000 and $663,000, respectively.