SCHEDULE 14A INFORMATION
(Rule 14a-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities Exchange Act of 1934
(Amendment No. ___)
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[ ] Preliminary Proxy Statement
[ ] Confidential, for Use of the Commission Only (as permitted by
Rule 14a-6(e)(2))
[X] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to ss. 240.14a-12
FRED'S, INC.
(Name of Registrant as Specified In Its Charter)
Payment of Filing Fee (Check the Appropriate box):
[X] No fee required
[ ] Fee computed on table below per Exchange Act Rules 14a6(i)(4) and 0-11.
1. Title of each class of securities to which transaction applies:
2. Aggregate number of securities to which transaction applies:
3. Per unit price or other underlying value of transaction
computed pursuant to Exchange Act Rule 0-11 (Set forth the
amount on which the filing fee is calculated and state how it
was determined):
4. Proposed maximum aggregate value of transaction:
5. Total fee paid:
[ ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange
Act Rule 0-11(a)(2) and identify the filing for which the offsetting
fee was paid previously. Identify the previous filing by registration
statement number, or the Form or Schedule and the date of its filing.
1) Amount Previously Paid:
----------
2) Form, Schedule or Registration Statement No:
------------------
3) Filing Party:
--------------------------------------
4) Date Filed:
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FRED'S, INC.
4300 NEW GETWELL ROAD
MEMPHIS, TENNESSEE
--------------------------------------
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
to be held on Wednesday, June 18, 2003
--------------------------------------
TO THE SHAREHOLDERS OF FRED'S, INC.:
Notice is hereby given that the Annual Meeting of Shareholders of Fred's,
Inc. (the "Company" or "Fred's") will be held at the Holiday Inn Express, 2192
S. Highway 441, Dublin, Georgia, on Wednesday, June 18, 2003, at 7:00 P.M.,
Eastern Daylight Time, for the following purposes:
1. To elect the Company's Board of Directors;
2. To ratify the designation of Ernst & Young LLP as independent auditors
of the Company;
The accompanying Proxy Statement contains further information with respect
to these matters.
Only shareholders of record at the close of business on May 2, 2003 will be
entitled to vote at the meeting or any adjournment thereof.
WHETHER OR NOT YOU PLAN TO ATTEND THE MEETING, YOU ARE REQUESTED TO COMPLETE,
DATE, SIGN AND RETURN THE ENCLOSED PROXY IN THE ENCLOSED ENVELOPE. NO POSTAGE IS
REQUIRED FOR MAILING IN THE UNITED STATES.
By order of the Board of Directors,
/s/Charles S. Vail
-----------------------------------
Charles S. Vail
Secretary
May 20, 2003
1
FRED'S, INC.
4300 NEW GETWELL ROAD
MEMPHIS, TENNESSEE 38118
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PROXY STATEMENT
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For Annual Meeting of Shareholders, June 18, 2003
The enclosed proxy is solicited by the Board of Directors (the "Board" or
"Board of Directors") of Fred's, Inc. (the "Company" or "Fred's") to be voted at
the Annual Meeting of Shareholders to be held on June 18, 2003, at 7:00 P.M.,
Eastern Daylight Time, at the Holiday Inn Express, 2192 S. Highway 441, Dublin,
Georgia, or any adjournments thereof (the "Annual Meeting"). At the Annual
Meeting, the presence in person or by proxy of the holders of a majority of the
total number of shares of outstanding Class A common stock ("Common Stock") will
be necessary to constitute a quorum.
The election of each director and the ratification of Ernst & Young LLP as
auditor each require approval by a majority of the votes cast by the holders of
Common Stock present in person or by proxy and entitled to vote on that matter.
All shares represented by properly executed proxies will be voted in
accordance with the instructions indicated thereon unless such proxies
previously have been revoked. If any proxies of holders of Common Stock do not
contain voting instructions, the shares represented by such proxies will be
voted FOR Proposals 1 and 2. The Board of Directors does not know of any
business to be brought before the Annual Meeting, other than as indicated in the
notice, but it is intended that, as to any other such business properly brought
before the meeting, votes may be cast pursuant to the proxies in accordance with
the judgment of the persons acting thereunder.
Any shareholder who executes and delivers a proxy may revoke it at any time
prior to its use upon (a) receipt by the Secretary of the Company of written
notice of such revocation; (b) receipt by the Secretary of the Company of a duly
executed proxy bearing a later date; or (c) appearance by the shareholder at the
meeting (with proper identification) and his request for the return of his proxy
or his request for a ballot.
A copy of this Proxy Statement and the enclosed Proxy Card are first being
sent to shareholders on or about May 20 2003.
Voting Securities
Only shareholders of record at the close of business on May 2, 2003, will
be entitled to vote at the Annual Meeting. As of such date, the Company had
outstanding and entitled to vote at the Annual Meeting 25,744,970 shares of
Common Stock. All references to shares and share prices reflect the stock splits
effected on June 18, 2001 and February 1, 2002. Each share of Common Stock is
entitled to one vote for all matters before the Annual Meeting.
1
Ownership of Common Stock
by Directors,
Officers and Certain Beneficial Owners
The following table sets forth the beneficial ownership known to the
Company of Common Stock as of May 2, 2003, by (i) beneficial owners of more than
five percent of Common Stock, (ii) each director, (iii) each of the persons
named in the Summary Compensation Table, and (iv) all directors and executive
officers of Fred's as a group.
Shares of Common
Stock Beneficially Owned(1)
----------------------------------------
Number of Shares Percent(2)
--------------------------- ---------
Beneficial Owner Options(3) Total(4)
---------- ---------
Michael J. Hayes (5) 21,877 1,889,679 7.2
David A. Gardner (6)(7) -- 1,677,893 6.4
EARNEST Partners, LLC (7) -- 1,366,522 5.2
John R. Eisenman 18,125 20,468 *
Roger T. Knox 18,125 32,974 *
John D. Reier 83,438 92,813 *
Thomas H. Tashjian 9,688 201,405 *
John A. Casey 6,875 31,171 *
Charles Brunjes 13,751 13,751 *
Reggie Jacobs 17,062 19,312 *
Jerry A. Shore 16,875 20,625 *
All Directors and Executive
Officers as a Group (10
persons including the
directors named above) 209,566 2,350,492 8.9
* Less than 1%
---------------------
(1) As used in this table, beneficial ownership means the sole or shared power
to vote, or direct the voting of, a security, or the sole or shared power
to dispose, or direct the disposition, of a security. Except as otherwise
indicated, all persons listed above have (i) sole voting power and
investment power with respect to their shares of Common Stock, except to
the extent that authority is shared by spouses under applicable law, and
(ii) record and beneficial ownership with respect to their shares of Common
Stock.
(2) Calculated as the number of shares beneficially owned, divided by
26,333,860 which consists of the total outstanding shares of Common Stock
(25,744,970) and vested options (588,890) within sixty (60) days of May 2,
2003.
(3) Represents stock options that are exercisable within sixty (60) days of May
2, 2003.
(4) Includes stock options that are exercisable within sixty (60) days of May
2, 2003.
(5) Includes 148,571 shares owned by Mr. Hayes' wife and 37,888 shares owned by
Memphis Retail Limited Partnership which are attributable to Mr. Hayes and
two of his children.
(6) Mr. Gardner was an officer and director of the Company until his death on
December 23, 2001. According to the last available public records, Mr.
Gardner's widow is the beneficial owner of these shares and of 169,690
shares that she owns in her own name.
2
(7) The address for all except Mr. Gardner and EARNEST Partners is 4300 New
Getwell Rd., Memphis, TN 38118. The address of the estate of Mr. Gardner is
445 Park Avenue, Suite 1600, New York, New York 10022. The address of
EARNEST Partners is 75 14th Street, Suite 2300, Atlanta, GA 30309.
3
PROPOSAL 1 (ELECTION OF DIRECTORS)
Five directors, constituting the entire Board of Directors, are to be
elected at the Annual Meeting to serve one year or until their successors are
elected. The Board of Directors proposes the election of the following nominees:
Principal Occupation,
Nominee Age Business and Directorships
--------------------------------- --- ------------------------------------
Michael J. Hayes................. 61 Chairman and Chief Executive Officer
John R. Eisenman................. 61 Director
Roger T. Knox.................... 65 Director
John D. Reier.................... 63 Director and President
Thomas H. Tashjian............... 48 Director
Michael J. Hayes was elected a Director of the Company in January 1987 and
was named Chairman of the Board in November 2001. Mr. Hayes has been Chief
Executive Officer since October 1989 and served as a Managing Director of the
Company from 1989 to 2002 when that position was eliminated. He was previously
employed by Oppenheimer & Company, Inc. in various capacities from 1976 to 1985,
including Managing Director and Executive Vice President - Corporate Finance and
Financial Services.
John R. Eisenman is involved in real estate investment and development with
REMAX Island Realty, Inc., located in Hilton Head Island, South Carolina. Mr.
Eisenman has been engaged in commercial and industrial real estate brokerage and
development since 1983. Previously, he founded and served as President of
Sally's, a chain of fast food restaurants, from 1976 to 1983, and prior thereto
held various management positions in manufacturing and in securities brokerage.
Mr. Eisenman has served as a Director since the Company's initial public
offering in March 1992.
Roger T. Knox is President Emeritus of the Memphis Zoological Society and
was its President and Chief Executive Officer from January 1989 thru March 2003.
Mr. Knox was the President and Chief Operating Officer of Goldsmith's Department
Stores, Inc. (a full-line department store in Memphis and Jackson, Tennessee)
from 1983 to 1987 and its Chairman of the Board and Chief Executive Officer from
1987 to 1989. Prior thereto, Mr. Knox was with Foley's Department Stores in
Houston, Texas for 20 years. Mr. Knox has served as a Director since the
Company's initial public offering in March 1992. Additionally, Mr. Knox is a
Director of Hancock Fabrics, Inc.
John D. Reier is President and a Director. Mr. Reier joined the Company in
May 1999 as President and was elected a Director of the Company in August 2001.
Prior to joining the Company, Mr. Reier was President and Chief Executive
Officer of Sunny's Great Outdoors Stores, Inc. from 1997 to 1999, and was
President, Chief Operating Officer, Senior Vice President of Merchandising, and
General Merchandise Manager at Family Dollar Stores, Inc. from 1987 to 1997.
Thomas H. Tashjian was elected a Director of the Company in March 2001. Mr.
Tashjian is a private investor. Previously, he served as a managing director and
consumer group leader at Banc of America Montgomery Securities in San Francisco.
Prior to that, Mr. Tashjian held similar positions at First Manhattan Company,
Seidler Companies, and Prudential Securities. Mr. Tashjian's earlier retail
operating experience was in discount retailing at the Ayrway Stores, which were
acquired by Target, and in the restaurant business at Noble Roman's.
If, for any reason, any of the nominees shall become unavailable for
election, the individuals named in the enclosed proxy may exercise their
discretion to vote for any substitutes chosen by the Fred's Board of Directors,
unless the Board of Directors should decide to reduce the number of directors to
be elected at the Annual Meeting. Fred's has no reason to believe that any
nominee will be unable to serve as a director.
For information concerning the number of shares of Common Stock owned by
each director, and all directors and executive officers as a group as of May 2,
2003, see "Ownership of Common Stock by Directors, Officers and Certain
Beneficial Owners." There are no family relationships between any directors or
executive officers of Fred's.
4
Section 16(a) Beneficial Ownership Reporting Compliance
Based solely upon a review of reports of beneficial ownership of Fred's
Common Stock and written representations furnished to Fred's by its officers,
directors and principal shareholders, Fred's is not aware of any such reporting
person who or which failed to file with the Securities and Exchange Commission
(the "Commission") on a timely basis any required reports of changes in
beneficial ownership.
Audit Committee
The Audit Committee of the Board of Directors, which is comprised of
Messrs. Eisenman, Knox and Tashjian, met eight times during the last fiscal
year, and all Committee members were in attendance. Each of the members of the
Audit Committee is an Independent Director as defined by the National
Association of Securities Dealers' Automated Quotation System's listing
standard. Mr. Eisenman is the Chairman of the Audit Committee. The Board of
Directors has delegated to the Audit Committee responsibility for making
recommendations concerning the engagement of the independent public auditors;
considering the range of audit and non-audit fees; assisting the Board in
fulfilling its oversight responsibilities by reviewing the financial reports and
other financial information provided by the Company to any governmental body or
the public; reviewing the Company's systems of internal controls regarding
finance, accounting, legal compliance and ethics that management and the Board
have established; and reviewing the Company's auditing, accounting, and
financial reporting processes generally. Audit Committee members have the
requisite financial experience to serve on the Audit Committee. The management
of the Company has the primary responsibility for the financial statements and
reporting process. The independent auditors are responsible for conducting and
reporting on the audit of the Company's financial statements in accordance with
generally accepted auditing standards. The Company's independent auditors are
ultimately accountable to the Audit Committee and the Board of Directors. The
Board of Directors has adopted a written charter for the Audit Committee a copy
of which is attached as Appendix A.
Audit Committee Report
In the context of the role of the Audit Committee as outlined above, the
Audit Committee has reviewed and discussed the Company's audited financial
statements for 2002 with management of the Company. It has also discussed with
Ernst & Young LLP those matters required by Statement of Auditing Standards No.
1. The Audit Committee has received the written disclosures and the letter from
Ernst & Young LLP as required by Independence Standards Board Standard No. 1 and
has discussed with Ernst & Young LLP their independence, including consideration
of whether the payment to Ernst & Young LLP of other non-audit fees is
compatible with maintaining their independence. Based upon its review and
discussions with Company management and Ernst & Young LLP, the Audit Committee
has recommended to the Board of Directors that Fred's, Inc. audited financial
statements for fiscal 2002 be included in the annual report on Form 10-K for
2002 filing with the Securities and Exchange Commission, and that Ernst & Young
be selected as the Company's Independent Auditors for 2003.
John R. Eisenman
Roger T. Knox
Thomas H. Tashjian
Compensation Committee
The Compensation Committee reviews and approves the salaries and incentive
compensation of executive officers and recommends the grants of stock-based
incentive compensation under Fred's long-term incentive plan. The Compensation
Committee, which is comprised of Messrs. Eisenman, Knox and Tashjian, met two
times during the last fiscal year, and all Committee members were in attendance.
Mr. Knox is the Chairman of the Compensation Committee. The Board of Directors
receives the grant recommendations of the Committee and may approve, amend or
reject the grant of restricted stock and stock options recommended by the
Committee.
Board of Directors
During the last fiscal year, Fred's Board of Directors held eight meetings.
Messrs. Hayes, Eisenman, Knox, Reier, and Tashjian attended all of the Board
meetings. Mr. Hayes is Chairman of the Board of Directors. Non-employee
Directors of Fred's are paid for their services as such $12,000 per year plus
reasonable expenses, and stock options from time to time, for meeting
attendance. The Board of Directors does not have a nominating committee.
5
Executive Compensation
The following table sets forth the cash compensation paid, as well as
certain other compensation paid or accrued, to Fred's chief executive officer
and to each of the other five most highly compensated executive officers whose
aggregate cash compensation exceeded $100,000 during the indicated fiscal years
(the "Named Executives").
SUMMARY COMPENSATION TABLE
Long-Term
Annual Compensation Compensation
-------------------------- --------------------------
Restricted Option All Other
Name and Salary Bonus Stock Awards Awards Compensation
Principal Position Year ($) (2) ($) ($) (1) (#) ($)
------------------ ----------- ----------- ----------- ----------- ----------- --------------
Michael J. Hayes 2002 200,000 -- -- -- 17,651 (3)
Chairman and 2001 195,710 -- -- 27,500 15,078 (3)
Chief Executive Officer 2000 184,242 -- -- 32,813 --
John D. Reier 2002 217,788 77,000 -- -- --
President 2001 197,860 84,000 -- 11,250 --
2000 190,461 -- -- 32,813 --
Jerry A. Shore (4) 2002 133,558 52,800 -- -- --
Executive Vice President- 2001 130,000 10,000 -- 5,000 --
Chief Financial Officer 2000 105,000 -- 29,750 16,875 --
John A. Casey 2002 119,447 48,400 -- -- --
Executive Vice President- 2001 113,385 52,800 -- 5,000
--
Pharmacy Operations 2000 110,097 -- -- 20,625 --
Charles A. Brunjes (4) 2002 127,067 39,600 -- -- --
Senior Vice President- 2001 118,654 24,000 -- 7,500 --
Store Operations 2000 59,711 -- -- 25,313 --
Reggie E. Jacobs 2002 114,240 39,600 -- -- --
Senior Vice President- 2001 108,654 36,000 -- 7,500 --
Distribution 2000 101,539 -- -- 15,313 --
(1) The aggregate restricted stock holdings for the above named executive
officers, using the February 1, 2003 closing price of $26.86 per share, net
of any consideration to be paid, was as follows:
Number Value
John D. Reier 9,375 $251,813
Jerry A. Shore 3,750 $100,725
John A. Casey -- --
Charles A. Brunjes -- --
Reggie E. Jacobs 1,125 $30,218
No restricted stock awards vest in under three years from the date of
grant. All restricted stock holdings pay dividends at the same dividend
rate as the Company's other common stock.
(2) Fiscal 2000 salaries are based on 53 weeks. Includes Fred's contributions
to defined contribution plans (401(k) and Incentive Plan).
(3) Consists of miscellaneous reimbursements.
(4) Mr. Shore joined the Company on April 17, 2000. Mr. Brunjes joined the
Company on July 24, 2000.
7
OPTION/SAR GRANTS IN LAST FISCAL YEAR
The following table sets forth information on stock option grants pursuant
to the Fred's, Inc. 2002 Long-Term Incentive Plan during the last fiscal year
for each of the Named Executives, all current executive officers as a group, the
non-employee directors as a group and all other recipients as a group. The
Company has not granted any Stock Appreciation Rights ("SARs").
Individual Grants Potential Realizable
------------------------------------------------- Value at Assumed
Annual Rates of
Stock Price
Options/ % of Total Exercise Appreciation for
SARs Options/SARs or Base Option Term (1)
Granted to Granted Price Expiration ------------------------
Employees(#) in Fiscal Year ($/Sh) Date 5% ($) 10%($)
----------------- ------------ --------------- --------- --------- ---------- --------
Michael J. Hayes -- -- -- -- -- --
John D. Reier -- -- -- -- -- --
Jerry A. Shore -- -- -- -- -- --
John A. Casey -- -- -- -- -- --
Charles Brunjes -- -- -- -- -- --
Reggie Jacobs -- -- -- -- -- --
Executive Group
(7 persons) -- -- -- -- -- --
--
Non-Executive
Director Group
(3 persons) 7,500 9.8 34.86 3/11/07 72,222 159,591
Non-Executive
Officer Employee
Group
(96 persons) 68,480 90.2 1,111,487 1,748,150
--------------------------------
(1) The potential gain is calculated from the closing price of Common Stock on
the date of grants until the end of the option period at certain assumed
rates of appreciation set by the Commission. They are not intended to
forecast possible future appreciation in the Common Stock and any actual
gains on exercise of options are dependent on the future performance of the
Common Stock.
The following table shows the stock option exercises by the Named
Executives during the last fiscal year. In addition, this table includes the
number of exercisable and unexercisable stock options held by each of the Named
Executives as of February 1, 2003. The fiscal year-end value of "in-the-money"
stock options is the difference between the exercise price of the option and the
fair market value of the Common Stock (not including options with an exercise
price greater than the fair market value) on February 1, 2003 (the last trading
date before the fiscal year-end), which was $26.86 per share. No SARs have been
granted.
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
AND FY-END OPTION/SAR VALUES
Number of Securities
Stock Option Exercises Underlying Unexercised Value of Unexercised
-------------------------------- Options/SARs In-The-Money Options
Shares At Fiscal Year-end (#) At Fiscal Year-end ($)
Acquired Value ------------------------- ---------------------------------
on Exercise(#) Realized ($)(1) Exercisable Unexercisable Exercisable Unexercisable
-------------- ---------------- ------------ -------------- ------------ --------------
Michael J. Hayes -- -- 10,938 38,438 206,310 435,366
John D. Reier -- -- 72,500 18,438 1,412,097 268,766
Jerry A. Shore -- -- 9,375 12,500 176,813 183,100
John A. Casey 13,750 360,938 -- 11,875 -- 171,313
Charles A. Brunjes 14,062 389,501 8,126 10,625 126,931 147,738
Reggie E. Jacobs 9,344 238,135 11,438 10,624 186,084 147,719
-------------------------
(1) "Value Realized" is the difference between the fair market value of the
underlying shares on the exercise date and the exercise price of the
option.
8
COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
The Compensation Committee of the Board of Directors of Fred's, Inc. (the
"Committee") hereby presents its report on executive compensation. This
Committee report documents the components of Fred's executive officer
compensation programs and describes the basis on which fiscal 2002 compensation
determinations were made by the Committee with respect to the executive officers
of Fred's, including the Named Executives.
Compensation Philosophy and Overall Objectives of Executive Compensation
Programs
It is the philosophy of Fred's that executive compensation be linked to
improvements in corporate performance and increases in shareholder value. The
following objectives have been adopted by the Committee as guidelines for
compensation decisions:
o Provide a competitive total compensation package that enables Fred's
to attract and retain key executives.
o Integrate all pay programs with Fred's annual and long-term business
objectives and strategy, and focus executive behavior on the
fulfillment of those objectives.
o Provide variable compensation opportunities that are linked with the
performance of Fred's and that align executive remuneration with the
interests of shareholders.
Compensation Program Components
The Committee reviews Fred's compensation program annually to ensure that
pay levels and incentive opportunities are competitive and reflect the
performance of Fred's. The particular elements of the compensation program for
executive officers are further explained below.
Base Salary - Base pay levels are largely determined through comparisons
with other retailing companies. Actual salaries are based on individual
performance contributions within a salary structure that is established through
job evaluation and job market considerations. Base pay levels for the executive
officers are competitive within the middle of a range that the Committee
considers to be reasonable and necessary. Various increases in base salary were
recommended by the Chief Executive Officer in fiscal 2002 for the Named
Executives, based on performance and competitive considerations, and the
Committee considered and acted in accordance with the recommendation.
Incentive Compensation - Fred's officers are eligible to participate in an
annual incentive compensation plan with awards based primarily on the attainment
of various specified levels of operating profits. The objective of this plan is
to deliver competitive levels of compensation for the attainment of financial
objectives that the Committee believes are primary determinants of earnings
growth. Targeted awards for executive officers of Fred's under this plan are
consistent with targeted awards of other retailing companies of similar size and
complexity to Fred's. Specified awards were recommended by the Chief Executive
Officer for the Named Executives of Fred's for fiscal 2002, based upon the
Company's performance, and the Committee considered and acted in accordance with
the recommendation.
Fred's Stock Option Program - The Committee strongly believes that by
providing those persons who have substantial responsibility for the management
and growth of Fred's with an opportunity to increase their ownership of Common
Stock, the best interests of shareholders and executives will be closely
aligned. Therefore, executives are eligible to receive stock options from time
to time, giving them the right to purchase shares of Common Stock in the future
at a specified price. The number of stock options granted to executive officers
is based on competitive practices, with the value of such options estimated by
using a Black-Scholes pricing model.
Discussion of Compensation for the Chief Executive Officer
The Committee has considered Chief Executive Officer's base salary,
incentive compensation and long-term incentives to be less than or equal to the
total compensation paid to other executives similarly situated, and has deemed
his beneficial ownership of Common Stock to provide adequate linkage between the
interests of Fred's shareholders and Mr. Hayes' personal interests.
9
Summary
After its review of all existing programs, the Committee continues to
believe that the total compensation program for executives of Fred's is
competitive with the compensation programs provided by other companies with
which Fred's competes. The Committee believes that any amounts paid under the
incentive compensation plan will be appropriately related to corporate and
individual performance, yielding awards that are linked to the annual financial
and operational results of Fred's. The Committee also believes that the stock
option program provides opportunities to participants that are consistent with
the returns that are generated on behalf of Fred's shareholders.
John R. Eisenman
Roger T. Knox
Thomas H. Tashjian
Employment Agreements
We have entered into employment agreements with each of Michael J. Hayes
and John D. Reier. Messrs. Hayes' and Reier's employment agreements became
effective as of April 30, 2003.
Michael J. Hayes. Mr. Hayes' employment agreement provides that we will
employ him for a period of two years commencing on May 1, 2003. The agreement
provides that we will pay Mr. Hayes an annual salary of $250,000 and that he
will participate in any bonus plan of the Company. The Compensation Committee
shall annually review his salary and bonus plan. We may terminate Mr. Hayes'
employment with or without cause. However, if we terminate this agreement other
than for cause, he will receive continued payment of his most recent salary, and
other Company-provided benefits, to the end of the term. Each executive is
permitted to terminate his agreement for cause in certain circumstances
following a change in control of the Company. Mr. Hayes has agreed not to
compete with us for a period of six months. In addition, if we terminate Mr.
Hayes' employment without cause, we will provide health and dental benefits for
Mr. and Mrs. Hayes.
John D. Reier. Mr. Reier's employment agreement provides that we will
employ him for a period of two years commencing on May 1, 2003. The agreement
provides that we will pay Mr. Reier an annual salary of $250,000 and that he
will participate in any bonus plan of the Company. The Compensation Committee
shall annually review his salary and bonus plan. We may terminate Mr. Reier's
employment with or without cause. However, if we terminate this agreement other
than for cause, he will receive continued payment of his most recent salary, and
other Company-provided benefits for one year. Each executive is permitted to
terminate his agreement for cause in certain circumstances following a change in
control of the Company. Mr. Reier has agreed not to compete with us for a period
of one year. In addition, if we terminate Mr. Reier's employment without cause,
we will provide health and dental benefits for Mr. and Mrs. Reier for five
years.
11
STOCK PRICE PERFORMANCE GRAPH
See Exhibits 1, 2, 3 and 4
Comparison of Cumulative Total Return
The total cumulative return on investment assumes that $100 was invested in
Fred's, the Nasdaq Retail Trade Stocks Index and the Nasdaq Stock Market (U.S.)
Index on January 30, 1998 and that all dividends were reinvested.
THE BOARD OF DIRECTORS RECOMMENDS THAT SHAREHOLDERS VOTE "FOR"
THE ELECTION OF THE NOMINEES TO FRED'S BOARD OF DIRECTORS.
12
PROPOSAL 2 (RATIFICATION OF SELECTION OF AUDITORS)
The Board of Directors has selected Ernst & Young LLP to be the independent
auditors of Fred's for the year ending January 31, 2004, as recommended by the
Audit Committee. The Board of Directors will offer a resolution at the Annual
Meeting to ratify this selection. Ernst & Young LLP, which acted as independent
auditors of Fred's for the last fiscal year, and is expected to be represented
at the Annual Meeting, will have the opportunity to make a statement, if they
desire to do so, and will be available to respond to appropriate questions.
THE BOARD OF DIRECTORS RECOMMENDS SHAREHOLDERS VOTE "FOR" THE RATIFICATION
OF THE SELECTION OF ERNST & YOUNG LLP AS INDEPENDENT AUDITORS FOR FISCAL
YEAR 2003.
Changes in Certifying Accountant
On May 9, 2002, the Company dismissed PricewaterhouseCoopers LLP
("PricewaterhouseCoopers") as its independent auditor and engaged Ernst & Young
LLP ("Ernst & Young") as its new independent auditor. The decision to change the
independent audit firm was recommended by the Company's Audit Committee and
approved by the Board of Directors. The audit reports of PricewaterhouseCoopers
on the consolidated financial statements of the Company for the years in the
two-year period ended February 2, 2002 did not contain any adverse opinion or
disclaimer of opinion, nor were they qualified or modified as to uncertainty,
audit scope, or accounting principles. During the two-year period ended February
2, 2002, and the subsequent interim period ended May 9, 2002, there were no
disagreements with PricewaterhouseCoopers on any matter of accounting principles
or practices, financial statement disclosure, or auditing scope or procedures,
which disagreements, if not resolved to PricewaterhouseCoopers' satisfaction,
would have caused them to make reference to the subject matter of the
disagreement in their reports on the consolidated financial statements for such
years. During the past two fiscal years, of their engagement, and through May 9,
2002, PricewaterhouseCoopers has not advised the Company of any reportable
events (as defined in Item 304(a)(1)(v) of Regulation S-K under the Securities
Exchange Act of 1934). PricewaterhouseCoopers was provided a copy of the above
disclosures, as set forth in the Company's Report on Form 8-K dated May 14, 2002
filed with the Securities and Exchange Commission, and was requested to furnish
the Company with a letter addressed to the Commission stating whether it agreed
with the above statement and, if not, stating the respects in which it did not
agree. PricewaterhouseCoopers' letter concurring with the disclosures was filed
as an exhibit to such report.
The Company engaged Ernst & Young as its new independent auditor as of May
9, 2002. During the two year period ended February 2, 2002 and through May 9,
2002, the Company did not consult with Ernst & Young regarding any matters
specified in Items 304(a)(2)(i) or (ii) of Regulation S-K under the Securities
Exchange Act of 1934. Ernst & Young was also provided a copy of the above
disclosures.
Fees Paid to Auditors
The following table sets forth certain fees billed to us by Ernst & Young
LLP in fiscal 2002 and PricewaterhouseCoopers in fiscal 2001 in connection with
various services provided to us throughout those fiscal years:
Service 2002 Aggregate Fees 2001 Aggregate Fees
Billed Billed
------- ------------------- -----------------------
Audit Fees $ 180,851 $ 193,725
Audit-Related Fees -- --
Tax Fees 107,714 70,970
All Other Fees 61,634 98,000
The Audit Committee has the responsibility to pre-approve all audit and
permissible non-audit services provided by our independent auditor. Where
feasible, the Audit Committee considers and, when appropriate, pre-approves such
services at regularly scheduled meetings after disclosure by management as to
the nature of the services to be performed and projected fees. The Committee
also has authorized its Chairman to consider and, when appropriate, pre-approve
audit and non-audit services in situations where pre-approval is necessary prior
to the next regularly scheduled meeting of the Audit Committee. Company
management and the Chairman must report to the Audit Committee at its next
meeting with respect to all services pre-approved by him since the last Audit
Committee meeting.
13
In fiscal 2002, all audit and permissible non-audit services provided by
our independent auditors were pre-approved by the Audit Committee.
OTHER BUSINESS
The Board of Directors knows of no other business which will be presented
at the Annual Meeting. If any other matters properly come before the Annual
Meeting, it is intended that the persons named in the proxy will act in respect
thereof in accordance with their best judgment.
SHAREHOLDER PROPOSALS
Shareholder proposals intended to be included in the proxy statement and
presented at the 2004 Annual Meeting must be received by the Company no later
than January 21, 2004, and the proposals must meet certain eligibility
requirements of the Securities and Exchange Commission. Proposals may be mailed
to Fred's, Inc., to the attention of the Secretary, 4300 New Getwell Road,
Memphis, Tennessee 38118. With regard to shareholder proposals not included in
the Company's proxy statement which a shareholder wishes to be brought before
the annual meeting of shareholders, notice of such a proposal must be received
by the Secretary of the Company by April 5, 2004.
SOLICITATION OF PROXIES AND COST THEREOF
The cost of solicitation of the proxies will be borne by the Company. In
addition to solicitation of the proxies by use of the mails, employees of the
Company, without extra remuneration, may solicit proxies personally or by
telecommunications. The Company will reimburse brokerage firms, nominees,
custodians and fiduciaries for their out-of-pocket expenses for forwarding proxy
materials to beneficial owners and seeking instruction with respect thereto.
SHAREHOLDERS MAY OBTAIN A COPY OF THE COMPANY'S ANNUAL REPORT ON FORM 10-K
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION WITHOUT CHARGE (EXCEPT FOR
EXHIBITS), BY WRITING TO: FRED'S, INC., ATTN: SECRETARY, 4300 NEW GETWELL ROAD,
MEMPHIS, TENNESSEE 38118.
By order of the Board of Directors,
/s/Charles S. Vail
----------------------
Charles S. Vail
Secretary
May 20, 2003
14
APPENDIX A
CHARTER OF AUDIT COMMITTEE
OF
FRED'S, INC.
I. Organization:
There shall be a committee of the Board of Directors to be known as the
Audit Committee. The Audit Committee shall be composed of Directors who are
independent of the management of the Corporation and are free of any
relationship that, in the opinion of the Board of Directors, would interfere
with their exercise of independent judgment as a committee member.
II. Statement of Policy:
The Audit Committee shall provide assistance to the corporate Directors in
fulfilling their responsibility to the shareholders, potential shareholders, and
investment community relating the corporate accounting, reporting practices of
the Corporation, and the quality and integrity of the financial reports of the
Corporation. In so doing, it is the responsibility of the Audit Committee to
maintain free and open means of communication between the Directors, the
independent auditors, the internal auditors, and the financial management of the
Corporation.
III. Responsibilities:
In carrying out its responsibilities, the Audit Committee believes its
policies and procedures should remain flexible, in order to best react to
changing conditions and to ensure to the Directors and shareholders that
the corporate accounting and reporting practices of the Corporation are in
accordance with all requirements and are of the highest quality.
In carrying out these responsibilities, the Audit Committee will:
1) Review and recommend to the Directors, the independent auditors to be
selected to the audit and financial statements of the Corporation and its
divisions and subsidiaries.
2) Meet with the independent auditors and financial management of the
Corporation to review the scope of the proposed audit for the current year
and the audit procedures to be utilized, and, at the conclusion thereof,
review such audit, including any comments or recommendations of the
independent auditors.
3) Review with the independent auditors, the Company's internal audit,
and financial controls of the Corporation, and elicit any recommendations
for the improvement of such internal control procedures or particular areas
where new or more detailed controls or procedures are desirable. Particular
emphasis should be given to the adequacy of such internal controls to
expose any payments, transactions, or procedures that might be deemed
illegal or otherwise improper. Further, the Committee periodically should
review Company policy statement to determine their adherence to the coded
of conduct.
4) Receive, prior to each meeting, a summary of findings from completed
internal audits, and a progress report on the proposed internal audit plan,
with explanations for any deviations from the original plan.
5) Review the financial statements contained in the annual report to
shareholders to determine that the independent auditors are satisfied with
the disclosure and content of the financial statement to be presented to
the shareholders. Any changes in accounting principles should be reviewed.
6) Each quarter, provide sufficient opportunity for the internal and
independent auditors to meet with the members of the Audit Committee
without members of management present. Among the items to be discussed in
these are the independent auditors' evaluation of the Corporation's
financial, accounting, and auditing personnel, and the cooperation that the
independent auditors received during the course of the audit.
7) Submit the minutes of all meetings of the audit committee to, or
discuss the matters discussed at each committee meeting with, the Board of
Directors.
15
8) Investigate any matter brought to its attention within the scope of
its duties, with the power to retain outside counsel for this purpose if,
in its judgment, that is appropriate.
FRED'S, INC.
Holiday Inn Express
2192 S. Highway 441
Dublin, Georgia
PROXY FOR THE ANNUAL MEETING OF SHAREHOLDERS - JUNE 18, 2003
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
Charles S. Vail and Jerry A. Shore, or either of them with full power of
substitution, are hereby authorized to represent and vote all the shares of
common stock of the undersigned at the Annual Meeting of the Shareholders of
Fred's, Inc., to be held June 18, 2003, at 7:00 P.M., Eastern Daylight Time, or
any adjournment thereof, with all powers which the undersigned would possess if
personally present, in the following manner:
1. Election of Directors for the term of one year.
[ ] FOR all nominees listed below [ ] WITHHOLD ALL AUTHORITY *
(except as marked to the contrary below) to vote for all nominees listed below
*INSTRUCTION: TO WITHHOLD AUTHORITY TO VOTE FOR ANY INDIVIDUAL NOMINEE, STRIKE
THROUGH THE NOMINEE'S NAME BELOW.
Michael J. Hayes John R. Eisenman Roger T. Knox
John D. Reier Thomas H. Tashjian
2. Ratification of Ernst & Young LLP as independent accountants of the Company.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
3. In their discretion, the Proxies are authorized to vote upon such other
business (none at the time of the solicitation of this Proxy) as may properly
come before the meeting or any adjournment thereof.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" EACH OF THE LISTED PROPOSITIONS.
WHEN PROPERLY EXECUTED, THIS PROXY SHALL BE VOTED AS DIRECTED. IN THE ABSENCE OF
A CONTRARY DIRECTION, IT SHALL BE VOTED FOR THE PROPOSALS AND THE PROXIES MAY
VOTE IN THEIR DISCRETION UPON SUCH OTHER MATTERS AS PROPERLY MAY COME BEFORE THE
MEETING OR ADJOURNMENT THEREOF.
The undersigned acknowledges receipt of Notice of said Annual Meeting and the
accompanying Proxy Statement, and hereby revokes all proxies heretofore given by
the undersigned for said Annual Meeting. THIS PROXY MAY BE REVOKED AT ANY TIME
PRIOR TO VOTING THEREOF.
Dated: , 2003
---------------------
------------------------------------
Signature of Shareholder
------------------------------------
Signature of Shareholder (if held jointly)
Please Date this Proxy and Sign Your
Name or Names Exactly as Shown Hereon.
When signing as an Attorney, Executor,
Administrator, Trustee or Guardian,
Please Sign Your Full Title as Such. If
There Are More than One Trustee, or
Joint Owners, All must Sign. Please
Return the Proxy Card Promptly Using the
Enclosed Envelope.
EXHIBIT 1
FREDS INC
Cumulative Total Return
------------------------------------------------------------
1/30/98 1/30/99 1/29/00 2/3/01 2/2/02 2/1/03
FRED'S, INC. 100.00 64.20 80.59 119.66 268.70 259.06
NASDAQ STOCK MARKET (U.S.) 100.00 156.49 241.02 164.38 118.93 82.97
NASDAQ RETAIL TRADE 100.00 122.03 97.79 75.20 89.61 72.89
EXHIBIT 2
Begin: 1/30/1998
Period End: 2/1/2003
FREDS INC End: 2/1/2003
Beginning
Transaction Closing No. Of Dividend Dividend Shares Ending Cum. Tot.
Date* Type Price** Shares*** per Share Paid Reinvested Shares Return
----- ----------- ------- --------- --------- ---- ---------- ------ ------
30-Jan-98 Begin 10.867 9.20 9.202 100.00
26-Feb-98 Dividend 13.601 9.20 0.03 0.25 0.018 9.220 125.40
28-May-98 Dividend 12.267 9.22 0.03 0.25 0.020 9.240 113.35
28-Aug-98 Dividend 8.000 9.24 0.03 0.25 0.031 9.271 74.17
27-Nov-98 Dividend 7.434 9.27 0.03 0.25 0.033 9.304 69.16
30-Jan-99 Year End 6.900 9.30 9.304 64.20
4-Mar-99 Dividend 7.467 9.30 0.03 0.25 0.033 9.337 69.72
27-May-99 Dividend 6.600 9.34 0.03 0.25 0.038 9.375 61.88
1-Sep-99 Dividend 7.800 9.38 0.03 0.25 0.032 9.407 73.38
1-Dec-99 Dividend 6.917 9.41 0.03 0.25 0.036 9.443 65.32
29-Jan-00 Year End 8.534 9.44 9.443 80.59
28-Feb-00 Dividend 7.867 9.44 0.03 0.25 0.032 9.475 74.54
30-May-00 Dividend 8.851 9.48 0.03 0.25 0.029 9.504 84.12
30-Aug-00 Dividend 12.801 9.50 0.03 0.25 0.020 9.524 121.91
29-Nov-00 Dividend 10.934 9.52 0.03 0.25 0.023 9.547 104.39
3-Feb-01 Year End 12.534 9.55 9.547 119.66
27-Feb-01 Dividend 12.333 9.55 0.03 0.25 0.021 9.568 118.00
31-May-01 Dividend 15.521 9.57 0.03 0.26 0.016 9.584 148.75
5-Sep-01 Dividend 20.001 9.58 0.03 0.26 0.013 9.597 191.95
5-Dec-01 Dividend 24.728 9.60 0.03 0.26 0.010 9.607 237.57
2-Feb-02 Year End 27.968 9.61 9.607 268.70
27-Feb-02 Dividend 32.430 9.61 0.03 0.29 0.009 9.616 311.85
30-May-02 Dividend 34.600 9.62 0.03 0.29 0.008 9.624 333.01
29-Aug-02 Dividend 33.330 9.62 0.03 0.29 0.009 9.633 321.07
27-Nov-02 Dividend 25.100 9.63 0.03 0.29 0.012 9.645 242.08
1-Feb-03 End 26.861 9.64 9.645 259.06
* Specified ending dates or ex-dividends dates.
** All Closing Prices and Dividends are adjusted for stock splits and stock
dividends.
***'Begin Shares' based on $100 investment.
EXHIBIT 3
Begin: 1/30/1998
Period End: 2/1/2003
NASDAQ STOCK MARKET (U.S.) End: 2/1/2003
Beginning
Transaction Closing No. Of Dividend Dividend Shares Ending Cum. Tot.
Date* Type Price** Shares*** per Share Paid Reinvested Shares Return
----- ---- ------- --------- --------- ---- ---------- ------ ------
30-Jan-98 Begin 537.882 0.19 0.186 100.00
30-Jan-99 Dividend 841.750 0.19 0.186 156.49
29-Jan-00 Dividend 1296.406 0.19 0.186 241.02
3-Feb-01 Dividend 884.147 0.19 0.186 164.38
2-Feb-02 Dividend 639.704 0.19 0.186 118.93
1-Feb-03 Year End 446.268 0.19 0.186 82.97
* Specified ending dates or ex-dividends dates.
** All Closing Prices and Dividends are adjusted for stock splits and stock
dividends.
***'Begin Shares' based on $100 investment.
EXHIBIT 4
Begin: 1/30/1998
Period End: 2/1/2003
NASDAQ RETAIL TRADE End: 2/1/2003
Beginning
Transaction Closing No. Of Dividend Dividend Shares Ending Cum. Tot.
Date* Type Price** Shares*** per Share Paid Reinvested Shares Return
----- ---- ------- --------- --------- ---- ---------- ------ ------
30-Jan-98 Begin 359.786 0.28 0.278 100.00
30-Jan-99 Dividend 439.049 0.28 0.278 122.03
29-Jan-00 Dividend 351.847 0.28 0.278 97.79
3-Feb-01 Dividend 270.559 0.28 0.278 75.20
2-Feb-02 Dividend 322.401 0.28 0.278 89.61
1-Feb-03 Year End 262.256 0.28 0.278 72.89
* Specified ending dates or ex-dividends dates.
** All Closing Prices and Dividends are adjusted for stock splits and stock
dividends.
***'Begin Shares' based on $100 investment.