UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
__________
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): November 27, 2018 (November 20, 2018)
FRED’S, INC.
(Exact Name of Registrant as Specified in Charter)
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Commission File Number 001-14565
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| Tennessee | 62-0634010 | |||
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(State or other Jurisdiction of Incorporation) |
(IRS Employer Identification No.) |
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4300 New Getwell Road, Memphis, Tennessee 38118
(Address of principal executive offices)
(901) 365-8880
Registrant’s telephone number, including area code
Not Applicable
(Former name or former address, if changed since last report)
Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:
| ☐ | Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425) |
| ☐ | Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12) |
| ☐ | Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b)) |
| ☐ | Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c)) |
Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (§230.405 of this chapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (§240.12b-2 of this chapter). ☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financing accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Item 2.01. Completion of Acquisition or Disposition of Assets.
As previously disclosed, on September 7, 2018, Fred’s Stores of Tennessee, Inc., a Delaware corporation (“Seller”) and wholly owned subsidiary of Fred’s, Inc. (the “Company”), entered into an Asset Purchase Agreement (the “Asset Purchase Agreement”) with Walgreen Co., an Illinois corporation (“Buyer”). On October 23, 2018, Seller and Buyer entered into an amendment to the Asset Purchase Agreement (the “Amendment”). Under the Asset Purchase Agreement, as amended by the Amendment (the “Amended Asset Purchase Agreement”), Buyer agreed to purchase from Seller certain prescription files and related data and records, retail pharmaceutical inventory, and certain other assets from 179 of the Company’s retail pharmacy stores (collectively, the “Assets”) for a cash purchase price of approximately $157 million plus an amount equal to the value of the inventory included in the Assets up to an approximately $35 million cap, in each case subject to certain adjustments (the “Transaction”). As of November 20, 2018, the Company had completed the disposition of a “significant amount” of the Company’s assets within the meaning of, and in accordance with, the standards set forth in Item 2.01 of Form 8-K.
As previously disclosed, Seller has been transferring ownership of the Assets to Buyer in a series of ongoing closings, with the initial closing occurring on November 13, 2018 and the final closing expected to occur in the first quarter of calendar year 2019. As of November 20, 2018, Seller has transferred to Buyer Assets from 53 stores and has received cash proceeds of approximately $68.3 million for such Assets, subject to adjustment for the final inventory valuation as described in the Amended Asset Purchase Agreement.
The proceeds received in the Transaction will be used to pay down the Company’s existing indebtedness or for general corporate purposes. The remaining closings of the Transaction are subject to certain customary closing conditions as specified in the Amended Asset Purchase Agreement. Neither the Company nor Seller has any material relationship with Buyer or its subsidiaries out of the ordinary course of business other than in respect of the transactions contemplated by the Amended Asset Purchase Agreement, including the continued disposition of Assets.
This Current Report on Form 8-K is being filed to provide unaudited pro forma financial information for the Company giving effect to the sale of all Assets contemplated to be sold to Buyer pursuant to the Amended Asset Purchase Agreement. Specifically, this pro forma financial information gives effect to the completion of the sale of the Assets pursuant to the terms of the Amended Asset Purchase Agreement, including the sale of the remaining Assets that had not occurred as of November 20, 2018 given that such sales are probable, in accordance with Article 11 of Regulation S-X. Although the Company expects that the sale of the remaining Assets to Buyer will be consummated during the first quarter of calendar year 2019, there can be no assurance that all of the remaining closings will occur, and there can be no assurance that the Company’s actual results would have been as set forth in the pro forma financial statements, and such differences could be material. In accordance with U.S. Securities and Exchange Commission (“SEC”) rules, the Company intends to file additional Current Reports on Form 8-K to disclose the closings of the sale of the remaining Assets pursuant to the Amended Asset Purchase Agreement when the Company completes the subsequent disposition of a significant amount of the Assets pursuant to the applicable legal requirements. However, the Company does not intend to update the pro forma financial statements contained herein unless the Company is required to update such pro forma financial statements by applicable legal requirements.
The foregoing description of the Amended Asset Purchase Agreement and the transactions contemplated thereby is not complete and is subject to, and qualified in its entirety by, the full text of the Asset Purchase Agreement, a copy of which was filed as Exhibit 2.1 to the Company’s Current Report on Form 8-K filed with the SEC on September 10, 2018, which is incorporated herein by reference, and by the Amendment, a copy of which was filed as Exhibit 2.1 to the Company’s Current Report on Form 8-K filed with the SEC on November 14, 2018, and which is incorporated herein by reference.
Item 9.01. Financial Statements and Exhibits.
(b) Pro Forma Financial Information
The following pro forma financial information for the Company with respect to the transaction is filed as Exhibit 99.1 hereto and is incorporated into this item by reference:
| ● | Explanatory Note and Basis of Presentation |
| ● | Unaudited Pro Forma Condensed Consolidated Balance Sheet as of August 4, 2018 |
| ● | Unaudited Pro Forma Condensed Consolidated Statements of Operations for (i) the twenty-six weeks ended August 4, 2018 and (ii) the fiscal years ended (a) February 3, 2018 and (b) January 28, 2017 |
(d) Exhibits.
| 99.1 | Unaudited Pro Forma Financial Statements. |
Forward-Looking Statements
Statements about the expected timing, completion and effects of the Transaction and the other transactions contemplated by the Amended Asset Purchase Agreement and all other statements herein and therein, other than historical facts, constitute forward-looking statements within the meaning of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Readers are cautioned not to place undue reliance on these forward-looking statements and any such forward-looking statements are qualified in their entirety by reference to the following cautionary statements.
All forward-looking statements speak only as of the date hereof and are based on current expectations and involve a number of assumptions, risks and uncertainties that could cause the actual results to differ materially from such forward-looking statements. The Company may not be able to complete the Transaction on the terms described above or other acceptable terms or at all because of a number of factors, including without limitation, (i) the occurrence of any event, change or other circumstances that could give rise to the termination of the Amended Asset Purchase Agreement or (ii) the failure to satisfy the applicable closing conditions set forth in the Amended Asset Purchase Agreement.
Actual results may differ materially from those indicated by such forward-looking statements. In addition, the forward-looking statements represent the Company’s views as of the date on which such statements were made. The Company anticipates that subsequent events and developments may cause its views to change. These forward-looking statements should not be relied upon as representing the Company’s views as of any date subsequent to the date hereof. Additional factors that may affect the business or financial results of the Company are described in the risk factors included in the Company’s public filings with the U.S. Securities and Exchange Commission, including the Company’s Annual Report on Form 10-K for the fiscal year ended February 3, 2018 and the Company’s subsequently filed periodic reports, which factors are incorporated herein by reference. The Company expressly disclaims a duty to provide updates to forward-looking statements, whether as a result of new information, future events or other occurrences, except as required by law.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
| FRED’S, INC. | ||
| Date: November 27, 2018 | By: | /s/ Joseph M. Anto |
| Name: | Joseph M. Anto | |
| Title: | Interim Chief Executive Officer, Executive Vice Present, Chief Financial Officer and Secretary | |
EXHIBIT INDEX
| Number | Exhibit |
| 99.1 | Unaudited Pro Forma Financial Statements. |
Exhibit 99.1
Unaudited Pro Forma Condensed Consolidated Financial Statements
On September 7, 2018, Fred’s Stores of Tennessee, Inc., a Delaware corporation (“Seller”) and wholly owned subsidiary of Fred’s, Inc. (the “Company”), entered into an Asset Purchase Agreement (the “Asset Purchase Agreement”) with Walgreen Co., an Illinois corporation, (“Buyer”). On October 23, 2018, Seller and Buyer entered into an amendment to the Asset Purchase Agreement (“the Amendment”). Under the Asset Purchase Agreement, as amended by the Amendment (the “Amended Asset Purchase Agreement”), Buyer agreed to purchase from Seller certain prescription files and related data and records, retail pharmaceutical inventory, and certain other assets from 179 of the Company’s retail pharmacy stores (collectively, the “Assets”) for a cash purchase price of approximately $157 million (the “Script Purchase Price”) plus an amount equal to the value of the inventory included in the Assets up to an approximately $35 million cap, in each case subject to certain adjustments (the “Transaction”). The Transaction is scheduled to close in a series of ongoing closings, with the initial closing occurring on November 13, 2018 and the final closing expected to occur in the first quarter of calendar year 2019, all as set forth in the Amended Asset Purchase Agreement.
On November 14, 2018, the Company filed a Current Report on Form 8-K announcing that, on November 13, 2018, it had completed the initial closing under the Amended Asset Purchase Agreement, resulting in the transfer by Seller of the Assets of nine retail pharmacy stores to Buyer. As of November 20, 2018, Seller has transferred to Buyer Assets from 53 stores and has received cash proceeds of approximately $68.3 for such Assets, subject to adjustment for the final inventory valuation as described in the Amended Asset Purchase Agreement. The subsequent closings of the Transaction remain subject to certain customary closing conditions as specified in the Amended Asset Purchase Agreement.
The parties to the Amended Asset Purchase Agreement have each made customary representations and warranties. The parties have each also made various covenants and agreements, including, among others, the Company’s agreement to conduct its business at the retail pharmacy stores in the ordinary and usual course during the period between the execution of the Amended Asset Purchase Agreement and the closing of the Transaction.
The foregoing description of the Amended Asset Purchase Agreement and the transactions contemplated thereby is not complete and is subject to, and qualified in its entirety by, the full text of the Asset Purchase Agreement, a copy of which was filed as Exhibit 2.1 to the Company’s Current Report on Form 8-K filed with the SEC on September 10, 2018, which is incorporated herein by reference, and by the Amendment, a copy of which was filed as Exhibit 2.1 to the Company’s Current Report on Form 8-K filed with the SEC on November 14, 2018, and which is incorporated herein by reference.
Divestiture of the Assets to be Sold
The Transaction constituted a significant disposition for purposes of Item 2.01 of Form 8-K. As a result, the Company prepared the accompanying unaudited pro forma condensed consolidated financial statements in accordance with Article 11 of Regulation S-X. Based on its magnitude and because the Company is exiting certain markets with respect to its pharmacy business, the Transaction represents a significant strategic shift that will have a material effect on the Company’s operations and financial results. Accordingly, the Assets to be sold in the Transaction met the definition of discontinued operation, as defined by Accounting Standards Codification 210-05 – Discontinued Operations (ASC 205-20), in the quarter ended November 3, 2018 and has not yet been retrospectively applied in the historic financial information.
The following unaudited pro forma condensed consolidated financial statements of the Company include the unaudited pro forma condensed consolidated balance sheet as of August 4, 2018 (the “Unaudited Pro Forma Condensed Consolidated Balance Sheet”), which presents the historical results of operations and financial position of the Company adjusted to reflect the impact of the Transaction, and the unaudited pro forma consolidated statements of operations for the twenty-six week period ended August 4, 2018 and for each of the fiscal years ended February 3, 2018 and January 28, 2017 (the “Unaudited Pro Forma Condensed Consolidated Statements of Operations”). The Unaudited Pro Forma Condensed Consolidated Balance Sheet is presented as if the Transaction had occurred on August 4, 2018. The Unaudited Pro Forma Condensed Consolidated Statements of Operations present the Transaction as if it occurred on January 30, 2016 for the twenty-six week period ended August 4, 2018 and for the fiscal years ended February 3, 2018, and January 28, 2017. The pro forma adjustments are described in the accompanying notes and are based upon information and assumptions available at the time of the filing of this Current Report on Form 8-K.
The unaudited pro forma condensed consolidated financial statements were based on and derived from the Company’s historical consolidated financial statements, adjusted to reflect amounts which were determined to be directly attributable to the Transaction, factually supportable, and with respect to the Unaudited Pro Forma Condensed Consolidated Statements of Operations, expected to have a continuing impact on the Company’s consolidated results. Actual adjustments, however, may differ materially from the information presented.
The information presented in the unaudited pro forma condensed consolidated financial statements is subject to adjustments and is presented for informational purposes only and does not purport to represent what the Company’s results of operations or financial position would actually have been if the Transaction had in fact occurred on the dates discussed above. It also does not project or forecast the Company’s consolidated results of operations or financial position for any future date or period. These unaudited pro forma condensed consolidated financial statements have been developed from, and should be read in conjunction with, the audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K as filed with the Securities and Exchange Commission (the “SEC”) on May 4, 2018 and the Company’s Quarterly Report on Form 10-Q for the thirteen and twenty-six weeks ended August 4, 2018 as filed with SEC on September 18, 2018. Such historical consolidated financial statements were prepared in accordance with United States generally accepted accounting principles. Because the Assets to be sold in the Transaction met the definition of discontinued operations that has not been reflected in the Company's historical consolidated financial statement filings with the SEC, pro forma income statements are provided herein for all historical financial statement periods that would be required in the aforementioned filings with the SEC based on the Company’s current status as a smaller reporting company.
FRED'S INC.
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
(Dollars in thousands, except per share amounts)
(unaudited)
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August 4, 2018
Historical |
Pro Forma
Adjustments |
Pro Forma
August 4, 2018 |
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| ASSETS | ||||||||||||
| Current assets: | ||||||||||||
| Cash and cash equivalents | $ | 5,781 | $ | 192,000 | (a) | $ | 197,781 | |||||
| Inventories | 263,982 | (15,953 | )(b) | 248,029 | ||||||||
| Accounts Receivables, Net | 36,085 | - | 36,085 | |||||||||
| Other non-trade receivables | 29,207 | - | 29,207 | |||||||||
| Prepaid expenses and other current assets | 11,049 | - | 11,049 | |||||||||
| Total current assets | 346,104 | 176,047 | 522,151 | |||||||||
| Property and equipment, less accumulated depreciation and amortization respectively | 107,927 | - | 107,927 | |||||||||
| Intangible assets, net | 46,187 | (17,086 | )(b) | 29,101 | ||||||||
| Other noncurrent assets, net | 1,508 | - | 1,508 | |||||||||
| Total assets | $ | 501,726 | $ | 158,961 | $ | 660,687 | ||||||
| LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||||||||
| Current liabilities: | ||||||||||||
| Accounts payable | $ | 117,933 | $ | - | $ | 117,933 | ||||||
| Current portion of indebtedness | 68 | - | 68 | |||||||||
| Taxes payable | - | - | ||||||||||
| Accrued expenses and other | 71,079 | - | 71,079 | |||||||||
| Total current liabilities | 189,080 | - | 189,080 | |||||||||
| Long-term portion of indebtedness | 162,523 | - | 162,523 | |||||||||
| Other noncurrent liabilities | 21,236 | - | 21,236 | |||||||||
| Total liabilities | 372,839 | - | 372,839 | |||||||||
| Shareholders’ equity: | ||||||||||||
| Preferred stock, nonvoting, no par value | - | - | - | |||||||||
| Preferred stock, Series A junior participating nonvoting, no par value | - | - | - | |||||||||
| Preferred stock, Series B junior participating voting, $100 par value | - | - | - | |||||||||
| Preferred stock, Series C junior participating voting, $60 par value | - | - | - | |||||||||
| Common stock, Class A voting, no par value | - | - | - | |||||||||
| Common stock, Class B nonvoting, no par value | 126,105 | - | 126,105 | |||||||||
| Treasury Stock, at cost | (4,975 | ) | - | (4,975 | ) | |||||||
| Retained earnings | 7,198 | 158,961 | (c) | 166,159 | ||||||||
| Accumulated other comprehensive income | 559 | - | 559 | |||||||||
| Total shareholders’ equity | 128,887 | 158,961 | 287,848 | |||||||||
| Total liabilities and shareholders’ equity | $ | 501,726 | $ | 158,961 | $ | 660,687 | ||||||
FRED'S INC.
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(Dollars in thousands)
(unaudited)
|
Twenty-six weeks
ended August 4, 2018 Historical |
Remove Discontinued
Operations results (d) |
Pro Forma twenty-six
weeks ended August 4, 2018 |
||||||||||
| Net sales | $ | 856,771 | $ | (198,530 | ) | $ | 658,241 | |||||
| Cost of goods sold | 644,699 | (160,747 | ) | 483,952 | ||||||||
| Gross profit | 212,072 | (37,783 | ) | 174,289 | ||||||||
| Depreciation and amortization | 19,842 | (3,456 | ) | 16,386 | ||||||||
| Selling, general and administrative expenses | 231,726 | (37,974 | ) | 193,752 | ||||||||
| Operating loss from continuing operations | (39,496 | ) | 3,647 | (35,849 | ) | |||||||
| Interest expense | 3,708 | - | 3,708 | |||||||||
| Loss from continuing operations before income taxes | (43,204 | ) | 3,647 | (39,557 | ) | |||||||
| Benefit for income taxes | (425 | ) | - | (425 | ) | |||||||
| Loss from continuing operations | $ | (42,779 | ) | $ | 3,647 | $ | (39,132 | ) | ||||
| Net loss income per share - basic | ||||||||||||
| Continuing operations | $ | (1.17 | ) | $ | (1.06 | ) | ||||||
| Total loss per common share - basic | $ | (1.17 | ) | $ | (1.06 | ) | ||||||
| Net loss per share - diluted | ||||||||||||
| Continuing operations | $ | (1.17 | ) | $ | (1.06 | ) | ||||||
| Total loss per common share - diluted | $ | (1.17 | ) | $ | (1.06 | ) | ||||||
| Weighted average shares outstanding | ||||||||||||
| Basic | 36,586 | 36,876 | ||||||||||
| Effect of dilutive stock options | 0 | 0 | ||||||||||
| Diluted | 36,586 | 36,876 | ||||||||||
FRED'S INC.
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(Dollars in thousands)
(unaudited)
|
Fifty-two weeks ended
February 3, 2018 Historical |
Remove Discontinued
Operations results (d) |
Pro Forma fifty-two
weeks ended February 3, 2018 |
||||||||||
| Net sales | $ | 1,805,405 | $ | (409,560 | ) | $ | 1,395,845 | |||||
| Cost of goods sold | 1,346,274 | (314,216 | ) | 1,032,058 | ||||||||
| Gross profit | 459,131 | (95,344 | ) | 363,787 | ||||||||
| Depreciation and amortization | 42,580 | (7,279 | ) | 35,301 | ||||||||
| Selling, general and administrative expenses | 548,280 | (82,789 | ) | 465,491 | ||||||||
| Operating loss from continuing operations | (131,729 | ) | (5,276 | ) | (137,005 | ) | ||||||
| Interest expense | 6,297 | - | 6,297 | |||||||||
| Loss from continuing operations before income taxes | (138,026 | ) | (5,276 | ) | (143,302 | ) | ||||||
| Benefit for income taxes | 1,241 | - | 1,241 | |||||||||
| Loss from continuing operations | $ | (139,267 | ) | $ | (5,276 | ) | $ | (144,543 | ) | |||
| Net loss income per share - basic | ||||||||||||
| Continuing operations | $ | (3.72 | ) | $ | (3.92 | ) | ||||||
| Total loss per common share - basic | $ | (3.72 | ) | $ | (3.92 | ) | ||||||
| Net loss per share - diluted | ||||||||||||
| Continuing operations | $ | (3.72 | ) | $ | (3.92 | ) | ||||||
| Total loss per common share - diluted | $ | (3.72 | ) | $ | (3.92 | ) | ||||||
| Weighted average shares outstanding | ||||||||||||
| Basic | 37,392 | 36,876 | ||||||||||
| Effect of dilutive stock options | 0 | 0 | ||||||||||
| Diluted | 37,392 | 36,876 | ||||||||||
FRED'S INC.
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(Dollars in thousands)
(unaudited)
|
Fifty-two weeks ended
January 28, 2017 Historical |
Remove Discontinued
Operations results (d) |
Pro Forma fifty-two
weeks ended January 28, 2017 |
||||||||||
| Net sales | $ | 1,886,241 | $ | (412,706 | ) | $ | 1,473,535 | |||||
| Cost of goods sold | 1,390,559 | (321,761 | ) | 1,068,798 | ||||||||
| Gross profit | 495,681 | (90,945 | ) | 404,736 | ||||||||
| Depreciation and amortization | 44,014 | (7,512 | ) | 36,502 | ||||||||
| Selling, general and administrative expenses | 529,328 | (81,472 | ) | 447,856 | ||||||||
| Operating loss from continuing operations | (77,661 | ) | (1,961 | ) | (79,622 | ) | ||||||
| Interest expense | 2,318 | - | 2,318 | |||||||||
| Loss from continuing operations before income taxes | (79,979 | ) | (1,961 | ) | (81,940 | ) | ||||||
| Benefit for income taxes | (11,854 | ) | (757 | ) | (12,611 | ) | ||||||
| Loss from continuing operations | $ | (68,125 | ) | $ | (1,204 | ) | $ | (69,329 | ) | |||
| Net loss income per share - basic | ||||||||||||
| Continuing operations | $ | (1.85 | ) | $ | (1.88 | ) | ||||||
| Total loss per common share - basic | $ | (1.85 | ) | $ | (1.88 | ) | ||||||
| Net loss per share - diluted | ||||||||||||
| Continuing operations | $ | (1.85 | ) | $ | (1.88 | ) | ||||||
| Total loss per common share - diluted | $ | (1.85 | ) | $ | (1.88 | ) | ||||||
| Weighted average shares outstanding | ||||||||||||
| Basic | 36,876 | 36,876 | ||||||||||
| Effect of dilutive stock options | 0 | 0 | ||||||||||
| Diluted | 36,876 | 36,876 | ||||||||||
FRED'S INC.
NOTES TO THE UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
| 1. | Pro Forma Adjustments |
| (a) | Adjustment reflects the expected cumulative cash proceeds as of the final closing date of the Transaction. The final consideration is variable up to approximately $35 million based on the value of inventory at the final closing of the Transaction. For purposes of these pro forma statements the maximum possible consideration has been used, which is the sum of the Script Purchase Price ($157 million assuming no adjustments) plus the approximate $35 million inventory cap. The Company expects to use the proceeds to pay down the Company’s existing indebtedness or for general corporate purposes. |
| (b) | These adjustments reflect the elimination of assets attributable to the Transaction. |
| (c) | This adjustment reflects the estimated gain of approximately $159 million arising from the Transaction net of tax. This estimated gain has not been reflected in the Pro Forma Condensed Consolidated Statement of Operations as it is considered to be nonrecurring in nature. No adjustment has been made to the sale proceeds to give effect to any potential post-closing adjustments under the terms of the Amended Asset Purchase Agreement. |
| (d) | These adjustments reflect the elimination of the historical results of the Company’s 179 retail pharmacy stores. The tax effect of the pro forma adjustments was calculated using the historical statutory rates in effect for the periods presented. Not included in the pro forma results are anticipated savings due to costs that may be reduced or eliminated. |