FRED'S, INC.
4300 NEW GETWELL ROAD
MEMPHIS, TENNESSEE
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NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
to be held on Wednesday, June 16, 2004
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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 16, 2004, at 6:00 p.m.,
Eastern Daylight Time, for the following purposes:
1. To elect the Company's Board of Directors;
2. To approve the designation of Ernst & Young LLP as independent
auditors of the Company, as described in Proxy Statement; and
3. To approve the 2004 Employee Stock Purchase Plan.
The accompanying Proxy Statement contains further information with respect
to these matters.
Only shareholders of record at the close of business on April 30, 2004 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,
Charles S. Vail
Secretary
May 21, 2004
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 16, 2004
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 16, 2004, at 6:00 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.
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previously have been revoked.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, 2 and 3. 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 21, 2004.
Voting Securities
Only shareholders of record at the close of business on April 30, 2004,
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 39,167,627 shares of
Common Stock. All references to shares and share prices reflect the stock split
effected on July 1, 2003. Each share of Common Stock is entitled to one vote for
all matters before the Annual Meeting.
Votes cast by proxy or in person at the Annual Meeting will be tabulated by
the election inspectors appointed for the meeting. A quorum must be present in
order for the Annual Meeting to be held. In order for the quorum requirement to
be satisfied, a majority of the issued and outstanding shares of Common Stock
entitled to vote at the meeting must be present in person or represented by
proxy. The election inspectors will treat abstentions as shares that are present
and entitled to vote for purposes of determining the presence of a quorum. If a
broker indicates on the proxy that it does not have discretionary authority as
to specified shares to vote on a particular matter, those shares will not be
considered as present and entitled to vote with respect to that matter. The
nominees for Director receiving a plurality of the votes cast at the Annual
Meeting in person or by proxy will be elected. The election of the Company's
Board of Directors, the designation of Ernst & Young, LLP as independent
auditors, and the 2004 Employee Stock Purchase Plan will be approved if the
votes cast favoring the action exceed the votes cast opposing the action.
Abstentions and broker non-votes have no effect on the vote for the election of
Directors, the designation of Ernst & Young LLP, or on the vote to approve the
2004 Employee Stock Purchase Plan.
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 April 30, 2004, 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)
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Number of Shares
---------------------------------------
Beneficial Owner Options(3) Total(4) Percent (2)
---------------- ---------- --------- -----------
Michael J. Hayes (5) 7,815 2,595,554 6.5
EARNEST Partners, LLC (6) -- 3,762,973 9.5
John R. Eisenman 27,187 30,701 *
Roger T. Knox 27,187 49,460 *
John D. Reier 130,781 144,843 *
Thomas H. Tashjian 14,532 302,109 *
John A. Casey -- 53,631 *
Charles A. Brunjes 24,376 24,376 *
Jerry A. Shore 21,563 30,937 *
All Directors and Executive Officers
as a Group (11 persons) 288,447 3,311,304 8.3
* 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
39,782,157 which consists of the total outstanding shares of Common Stock
(39,167,627) and options (614,530) exercisable within sixty (60) days of
April 30, 2004.
(3) Represents stock options that are exercisable within sixty (60) days of
April 30, 2004.
(4) Includes stock options that are exercisable within sixty (60) days of April
30, 2004.
(5) Includes 159,018 shares owned by Mr. Hayes' wife and 56,832 shares owned by
Memphis Retail Limited Partnership which are attributable to Mr. Hayes and
two of his children.
(6) The address for all except EARNEST Partners is 4300 New Getwell Rd.,
Memphis, TN 38118. The address of EARNEST Partners is 75 14th Street, Suite
2300, Atlanta, GA 30309.
2
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............................ 62 Chairman and Chief Executive Officer
John R. Eisenman............................ 62 Director
Roger T. Knox............................... 66 Director
John D. Reier............................... 64 Director and President
Thomas H. Tashjian.......................... 49 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
located in Greensboro, North 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 April
30, 2004, 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.
3
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, except as to incentive stock option grants (which were
reported when the option grant was executed, not when granted) and in the
following instances;. Anita G. Ryan did not timely report one transaction on
December 10, 2003. Joseph D. Prowell did not timely report one transaction on
November 24, 2003.
Board of Directors
During the last fiscal year, Fred's Board of Directors held six meetings.
Messrs. Hayes, Eisenman, Knox, Reier and Tashjian attended all of the Board
meetings. All members attended the prior year annual meeting. Mr. Hayes is
Chairman of the Board of Directors. Non-employee Directors of Fred's are paid
for their services as such $20,000 per year plus reasonable expenses, and stock
options from time to time, for meeting attendance. Messrs. Eisenman, Knox and
Tashjian are considered independent as defined in the listing standards of the
National Association of Securities Dealers' Automated Quotation System's listing
standard.
The Board of Directors has a process for shareholders to send
communications to the Board. Shareholders may send communications to our Board
by sending a letter to: Board of Directors, Fred's Inc., c/o General Counsel,
4300 New Getwell Rd., Memphis, TN 37072. All communication will be reviewed by
our Legal Department and forwarded to the Board of Directors on a quarterly
basis, unless requested by the Board on a more frequent basis. Your
communication will be treated confidentially, subject to applicable laws,
regulations or legal proceedings, if so marked on the envelope or in the
communication.
Code of Ethics
The Company has adopted a code of ethics that applies to all of its
directors, officers (including its chief executive officer, chief financial
officer, chief information officer, controller and any person performing similar
functions) and employees. The Company Code of Ethics is attached as Appendix A.
Audit Committee
The Audit Committee of the Board of Directors, which is comprised of
Messrs. Eisenman, Knox and Tashjian, met four 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 standards. Mr. Eisenman
is the Chairman of the Audit Committee. Audit Committee members are paid for
their services $4,000 per year for Mr. Eisenman, Chairman and $2,400 per year
for Messrs. Knox and Tashjian, plus reasonable expenses for meeting attendance.
The Audit Committee is responsible for 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. The Board of Directors has adopted a written
charter for the Audit Committee, a copy of which is attached as Appendix B. The
Board of Directors has determined that Mr. Tashjian meets the Commission's
definition of audit committee financial expert.
4
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 2003 with management of the Company. The Audit Committee also
discussed with Ernst & Young LLP the matters required to be discussed by
Statement on Auditing Standards ("SAS") Nos. 61, 89 and 90 issued by the
Auditing Standards Board of the American Institute of Certified Public
Accountants. SAS Nos. 61, 89 and 90 set forth requirements pertaining to the
independent auditor's communications with the Audit Committee regarding the
conduct of the audit. 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 audit related, tax, and permissible 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
2003 be included in the annual report on Form 10-K for 2003 filing with the
Securities and Exchange Commission, and that Ernst & Young be considered for
selection as the Company's Independent Auditors for 2004.
The members of the Audit Committee are not professionally engaged in the
practice of accounting or auditing and, as such, rely without independent
verification on the information provided to them and on the representations made
by management and Ernst & Young LLP. Accordingly, the Audit Committee's
oversight does not provide an independent basis to determine that management has
maintained appropriate accounting and financial reporting processes or
appropriate internal controls and procedures designed to assure compliance with
the accounting standards and applicable laws and regulations. Furthermore, the
Audit Committee's reviews and discussions referred to above do not assure that
the audit of the Company's financial statements has been carried out in
accordance with generally accepted auditing standards, that the Company's
audited consolidated financial statements are presented in accordance with
generally accepted accounting principles, or that Ernst & Young LLP is in fact
independent.
John R. Eisenman
Roger T. Knox
Thomas H. Tashjian
Nominating Committee
The Nominating and Governance Committee of the Board of Directors (the
"Nominating Committee"), which met one time during the Company's latest fiscal
year, recommends nominees for election to the Board by the stockholders at the
annual meeting and makes recommendations to the Board of Directors regarding
corporate governance matters and practices. The Nominating Committee operates in
accordance with its charter, which is attached as Appendix C. The Nominating
Committee Charter is not currently posted on the Company website. The Nominating
Committee is composed of Messrs. Tashjian, Chairman of the Committee, Eisenman
and Knox, all of whom meet the independence requirements of the Nasdaq listing
standards.
The Nominating Committee identifies candidates for nominees based upon both
its criteria for evaluation and the candidate's previous service on the Board.
Additionally, the Nominating Committee may use the services of a search company
in identifying nominees. Although the Nominating Committee has not determined
specific minimum qualifications for its nominees, it evaluates candidates that
it has identified based upon:
- character, personal and professional ethics, integrity and values;
- executive level business experience and acumen;
- relevant business experience or knowledge (although preference may be
shown for experience in or knowledge of the retail industry, it is not
a prerequisite);
- skills and expertise necessary to make significant contributions to
the Company, its Board and its stockholders;
- business judgment;
- availability and willingness to serve on the Board;
- independence requirements of the Nasdaq listing standards;
- potential conflicts of interest with the Company or its stockholders
taken as a whole; and
- accomplishment within the candidate's own field.
5
The Nominating Committee has adopted a policy with regard to considering a
shareholder's nominee. To submit a nominee for consideration, a shareholder must
provide the Nominating Committee:
- proof of the shareholder's eligibility to submit proposals in
accordance with Rule 14a-8(b) of the Exchange Act of 1934, as amended;
- a complete description of the candidate's qualifications, experience
and background; and
- the candidate's signed consent to serve on the Board.
In general, the Nominating Committee will evaluate a candidate identified
by a shareholder using the same standards as it uses for candidates it
identifies. Before recommending a shareholder's candidate, the Nominating
Committee may also:
- consider whether the shareholder candidate will significantly add to
the range of talents, skills and expertise of the Board;
- conduct appropriate verifications of the background of the candidate;
and
- interview the candidate or ask the candidate for additional
information.
The Nominating Committee has full discretion not to include a shareholder's
candidate in its recommendation of nominees to the Board. If the Nominating
Committee does not recommend a shareholder's candidate to the Board, it will not
make public the reason or reasons for its decision.
Thomas H. Tashjian
John R. Eisenman
Roger T. Knox
6
Compensation Committee
The Compensation Committee reviews and approves the salaries and cash
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. Knox, Eisenman, and
Tashjian, met one time during the last fiscal year, and all Committee members
were in attendance. Mr. Knox is the Chairman of the Compensation Committee.
Compensation Committee members are paid for their services $1,500 per year for
Mr. Knox, Chairman and $750 per year for Messrs. Eisenman and Tashjian, plus
reasonable expenses for meeting attendance. 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.
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 four most highly compensated executive officers whose
aggregate cash compensation exceeded $100,000 during the indicated fiscal years
(the "Named Executives").
SUMMARY COMPENSATION TABLE
Long-Term
Annual Compensation Compensation
------------------- ------------
Restricted Option All Other
Name and Salary Bonus Stock Awards Awards Compensation
Principal Position Year ($) ($) ($) (1) (#) ($)
------------------ ---- ------ ----- ------------ ------ ------------
Michael J. Hayes 2003 214,615 80,500 -- -- --
Chairman and 2002 200,000 -- -- -- 17,651 (2)
Chief Executive Officer 2001 195,710 -- -- 41,250 15,078 (2)
John D. Reier 2003 243,269 80,500 -- 60,000 --
President 2002 217,788 77,000 -- -- --
2001 197,860 84,000 -- 16,875 --
Jerry A. Shore 2003 145,962 55,200 -- 27,000 --
Executive Vice President- 2002 133,558 52,800 -- -- --
Chief Financial Officer 2001 130,000 10,000 -- 7,500 --
John A. Casey 2003 131,298 49,484 -- 27,000 1,170 (2)
Executive Vice President- 2002 119,447 48,400 -- -- --
Pharmacy Operations 2001 113,385 52,800 -- 7,500 --
Charles A. Brunjes 2003 138,654 36,800 -- 18,000 714 (2)
Executive Vice President & 2002 127,067 39,600 -- -- --
General Merchandise Manager 2001 118,654 24,000 -- 11,250 --
---------------------------
(1) The aggregate restricted stock holdings for the above Named Executives,
using the February 1, 2004 closing price of $27.99 per share, net of any
consideration to be paid, was as follows:
Number Value
------ --------
John D. Reier 14,062 $393,595
Jerry A. Shore 5,625 $157,444
No restricted stock awards vest in less than three years from the date of
grant. All restricted stock holdings pay dividends at the same dividend
rate as the Company's Common Stock.
(2) Consists of miscellaneous reimbursements.
7
OPTION/SAR GRANTS IN LAST FISCAL YEAR
The following table sets forth information on stock option grants pursuant
to the Fred's, Inc. 2002 Long-Term Incentive Plan during the last fiscal year
for each of the Named Executives, all current executive officers as a group, the
non-employee directors as a group and all other recipients as a group. The
Company has not granted any Stock Appreciation Rights ("SARs").
Individual Grants Potential Realizable
------------------------------------------ Value at Assumed
Annual Rates of
Options/SARs % of Total Exercise Stock Price
Granted to Options/SARs or Base Appreciation for
Employees Granted Price Expiration Option Term (1)
Name (#) in Fiscal Year ($/Sh) Date 5% ($) 10% ($)
------------------ ------------ -------------- -------- ---------- ------- --------
Michael J. Hayes -- -- -- -- -- --
John D. Reier 60,000 10.5 18.26 09/2010 435,053 1,070,582
Jerry A. Shore 27,000 4.7 18.26 09/2010 195,774 481,762
John A. Casey 27,000 4.7 18.26 09/2010 195,774 481,762
Charles Brunjes 18,000 3.1 18.26 09/2010 130,516 321,174
Executive Group
(8 persons) 156,000 27.2 18.26 09/2010 1,140,838 2,801,588
Non-Executive
Director Group
(3 persons) 11,250 2.0 17.67 09/2010 45,326 109,283
Non-Executive Officer
Employee Group
(91 persons) 388,840 67.9 18.26 09/2010 2,879,125 7,040,629
-------------------------
(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, 2004. 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, 2004 (the last trading
date before the fiscal year-end), which was $27.99 per share. No SARs have been
granted.
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
AND FY-END OPTION/SAR VALUES
Number of Securities
Stock Option Exercises Underlying Unexercised Value of Unexercised
Shares Options/SARs In-The-Money Options
Acquired Value At Fiscal Year-end (#) At Fiscal Year-end ($)
on Exercise(#) Realized ($)(1) Exercisable Unexercisable Exercisable Unexercisable
-------------- --------------- ----------- ------------- ----------- -------------
Michael J. Hayes -- -- 32,815 41,250 743,480 645,014
John D. Reier -- -- 130,781 65,625 2,968,325 671,996
Jerry A. Shore 3,749 71,581 21,563 34,500 488,546 380,043
John A. Casey 10,312 178,673 -- 34,500 -- 380,043
Charles A. Brunjes -- -- 24,376 21,750 499,630 233,850
-------------------
(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 2003 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:
- Provide a competitive total compensation package that enables Fred's
to attract and retain key executives.
- 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.
- 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 2003 for the other 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 other Named Executives of Fred's for fiscal 2003, 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.
Roger T. Knox
John R. Eisenman
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. 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. 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.
10
[SEE ATTACHED PDF FILE]
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 29, 1999, 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.
11
PROPOSAL 2 (APPROVE SELECTION OF AUDITORS)
Ernst & Young LLP audited the Company's consolidated financial statements
for the year ended January 31, 2004. Ernst & Young LLP is a registered public
accounting firm. The Board of Directors is asking the shareholders to approve
the appointment of Ernst & Young LLP as such auditors for the fiscal year ending
January 29, 2005. Although not required by law, the NASD's listing standards, or
the Company's bylaws, the Board of Directors is submitting the selection of
Ernst & Young LLP to the stockholders for ratification as a matter of good
corporate practice. Even if the selection is ratified, the Audit Committee in
its discretion may select a different registered public accounting firm at any
time during the year if it determines that such a change would be in the best
interests of the Company and its stockholders, including economic
considerations.
The Board of Directors will offer a resolution at the Annual Meeting to
ratify this selection. Ernst & Young LLP, which has acted as independent
auditors of Fred's since May 2002, 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 APPROVAL OF THE
SELECTION OF ERNST & YOUNG LLP AS INDEPENDENT AUDITORS FOR FISCAL YEAR 2004.
Changes in Certifying Accountant
On May 9, 2002, the Company dismissed PricewaterhouseCoopers LLP
("PricewaterhouseCoopers") as its independent auditor and engaged Ernst & Young
LLP 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 last 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 2003 and fiscal 2002 in connection with various services provided
to us throughout those fiscal years:
Service 2003 Aggregate Fees Billed 2002 Aggregate Fees Billed
------- -------------------------- --------------------------
Audit Fees $ 425,000 $ 180,851
Audit-Related Fees -- --
Tax Fees 244,610 129,613
All Other Fees -- --
12
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.
In fiscal 2003, all audit and permissible non-audit services provided by
our independent auditors were pre-approved by the Audit Committee.
PROPOSAL 3 (APPROVAL OF THE 2004 EMPLOYEE STOCK PURCHASE PLAN)
The stockholders are being asked to approve the adoption of the Fred's,
Inc. 2004 Employee Stock Purchase Plan (the "Employee Stock Purchase Plan"),
under which 1,000,000 shares of Common Stock will be reserved for issuance
initially. The Employee Stock Purchase Plan was adopted by the Board of
Directors on May 15, 2004, and will become effective on July 1, 2004, if
approved by the stockholders at the Annual Meeting.
The Employee Stock Purchase Plan is designed to allow eligible employees to
purchase shares of Common Stock at intervals through accumulated periodic
payroll deductions under the Employee Stock Purchase Plan. The Board of
Directors believes that the Employee Stock Purchase Plan will promote the
interests of Fred's, Inc. by providing eligible employees with the opportunity
to acquire a proprietary interest in the Company through participation in a
payroll deduction based employee stock purchase plan while taking advantage of
the benefits provided by Section 423 of the Internal Revenue Code of 1986, as
amended (the "Internal Revenue Code").
Vote Required
Approval of the Board of Directors' action in adopting the Employee Stock
Purchase Plan requires the affirmative vote of the holders of at least a
majority of the shares of the Company's issued and outstanding capital stock
represented and voting at the Annual Meeting and cast on this Proposal.
Summary Description of the Plan
The following is a summary of the principal features of the Employee Stock
Purchase Plan. The summary, however, does not purport to be a complete
description of all the provisions of the Employee Stock Purchase Plan. The full
text of the Employee Stock Purchase Plan is attached as Appendix D to this proxy
statement. The Board of Directors encourages you to review it for more details
on the Employee Stock Purchase Plan.
Administration
The Employee Stock Purchase Plan will be administered by the Compensation
Committee of the Board. Such committee, as plan administrator, will have full
authority to adopt administrative rules and procedures and to interpret the
provisions of the Employee Stock Purchase Plan.
Securities Subject to the Employee Stock Purchase Plan
The number of shares of Common Stock initially reserved for issuance under
the Employee Stock Purchase Plan will be limited to 1,000,000 shares. This share
reserve will increase, if approved by the Board of Directors, over the term of
the Employee Stock Purchase Plan on the first trading day of January each
calendar year, beginning with calendar year 2005, by the lesser of 500,000 or an
amount equal to two percent of the total number of shares of the Common Stock
outstanding on the last trading day in December in the immediately preceding
calendar year.
13
The shares issuable under the Employee Stock Purchase Plan may be made
available from authorized but unissued shares of the Common Stock or from shares
of Common Stock repurchased by the Company, including shares repurchased on the
open market. In the event that any change is made to the outstanding Common
Stock (whether by reason of any recapitalization, stock dividend, stock split,
exchange or combination of shares or other change in corporate structure
effected without the receipt of consideration), appropriate adjustments will be
made. Such adjustments will be designed to preclude any dilution or enlargement
of benefits under the Employee Stock Purchase Plan or the outstanding purchase
rights thereunder.
Offering Periods and Purchase Rights
The Plan will be structured as a series of periods each of which will have
a duration of no more than twenty-seven months ("Offering Period"). Each
Offering Period will include one or more intervals at the end of which Common
Stock will be purchased ("Purchase Interval"). Each individual who is not
currently participating in an Offering Period and who is an eligible employee on
the start date of an Offering Period may enter that Offering Period on its start
date. At the time a participant joins an Offering Period, he or she will be
granted a purchase right to acquire shares of the Common Stock of the Company on
the last day of each Purchase Interval within that Offering Period. All payroll
deductions collected from the participant for each Purchase Interval will be
automatically applied to the purchase of Common Stock at the end of that
Purchase Interval, subject to certain limitations.
Eligibility and Participation
Any individual who is employed on a basis under which he or she is
regularly expected to work for more than twenty hours per week for more than
five months per calendar year will be eligible to participate in the Employee
Stock Purchase Plan. Fred's believes that approximately 6000 employees will be
eligible to participate.
Payroll Deductions and Stock Purchases
Each participant may authorize periodic payroll deductions up to the
maximum percent, determined by the Board of Directors, of his or her base salary
to be applied to the acquisition of Common Stock at the end of a Purchase
Interval.
Purchase Price
The purchase price of the Common Stock acquired on each purchase date will
be equal to eighty-five percent of the lower of (i) the fair market value per
share of the Common Stock on the participant's entry date into the Offering
Period or (ii) the fair market value on the quarterly purchase date. The fair
market value per share of the Common Stock on any particular date under the
Employee Stock Purchase Plan will be deemed to be equal to the closing selling
price per share on such date on Nasdaq. On May 12, 2004, the fair market value
of the Common Stock determined on such basis was $18.19 per share.
Special Limitations
The Employee Stock Purchase Plan imposes certain limitations upon a
participant's rights to acquire Common Stock, including the following
limitations:
- Purchase rights granted to a participant may not permit such
individual to purchase more than $25,000 worth of Common Stock (valued
at the time each purchase right is granted) for each calendar year
those purchase rights are outstanding at any time.
- Purchase rights may not be granted to any individual if such
individual would, immediately after the grant, own or hold outstanding
options or other rights to purchase stock possessing five percent (5%)
or more of the total combined voting power or value of all classes of
the Company's outstanding stock.
14
New Plan Benefits
No purchase rights will be granted and no shares will be issued under the
Employee Stock Purchase Plan unless the Employee Stock Purchase Plan is approved
by our shareholders. The new plan benefits under the Employee Stock Purchase
Plan are not presently determinable.
Federal Tax Consequences
The following discussion of federal income tax consequences is not intended
to provide a complete analysis of all of the potential tax effects of the
Employee Stock Purchase Plan. It is based upon laws, regulations, rulings and
decisions now in effect, all of which are subject to change. No information is
provided with respect to persons who are not citizens or residents of the United
States, or foreign, state or local tax laws, or estate and gift tax
considerations. In addition, the tax consequences to a particular participant
may be affected by matters not discussed below. ACCORDINGLY, WE URGE YOU TO
CONSULT YOUR OWN TAX ADVISOR CONCERNING THE TAX CONSEQUENCES TO YOU OF THE STOCK
INCENTIVE PLAN, INCLUDING THE EFFECTS OF STATE, LOCAL, FOREIGN AND OTHER TAX
LAWS.
The Employee Stock Purchase Plan is intended to be an "employee stock
purchase plan" within the meaning of Section 423 of the Internal Revenue Code.
Under a plan which so qualifies, no taxable income will be recognized by a
participant, and no deductions will be allowable to the Company, upon either the
grant or the exercise of the purchase rights. Taxable income will not be
recognized until there is a sale or other disposition of the shares acquired
under the Employee Stock Purchase Plan or in the event the participant should
die while still owning the purchased shares.
If the participant sells or otherwise disposes of the purchased shares
within two years after his or her entry date into the Offering Period in which
such shares were acquired or within one year after the purchase date on which
those shares were actually acquired, the participant will recognize ordinary
income in the year of sale or disposition equal to the amount by which the fair
market value of the shares on the purchase date exceeded the purchase price paid
for those shares, and the Company will be entitled to an income tax deduction,
for the taxable year in which such disposition occurs, in an amount equal to
such excess.
If the participant sells or disposes of the purchased shares more than two
years after his or her entry date into the Offering Period in which the shares
were acquired and more than one year after the purchase date of those shares,
the participant will recognize ordinary income in the year of sale or
disposition equal to the lesser of (i) the amount by which the fair market value
of the shares on the sale or disposition date exceeded the purchase price paid
for those shares or (ii) fifteen percent of the fair market value of the shares
on the participant's entry date into that Offering Period; and any additional
gain upon the disposition will be taxed as a long-term capital gain. The Company
will not be entitled to an income tax deduction with respect to such
disposition.
The Employee Stock Purchase Plan is not subject to the Employee Retirement
Income Security Act of 1974, as amended and is not qualified under Section 401
of the Internal Revenue Code.
Accounting Treatment
Under current accounting principles applicable to employee stock purchase
plans qualified under Section 423 of the Internal Revenue Code, the issuance of
Common Stock under the Employee Stock Purchase Plan will not result in a
compensation expense chargeable against the Company's reported earnings.
However, the Company must disclose in the Company's financial statements the
impact the purchase rights granted under the Employee Stock Purchase Plan would
have upon the Company's reported earnings were the value of those purchase
rights treated as compensation expense.
THE BOARD OF DIRECTORS RECOMMENDS THAT STOCKHOLDERS VOTE FOR APPROVAL OF
THE PROPOSED ADOPTION OF THE EMPLOYEE STOCK PURCHASE PLAN.
15
Equity Compensation Plans
The only other equity compensation plan currently approved by shareholders
is the 2002 Long Term Incentive Plan. The following is a summary of the status
as of April 20, 2004.
Number of securities
Number of Securities remaining available for
to be issued upon future issuance under
exercise of outstanding Weighted-average-exercise equity compensation
options, warrants and price of outstanding plans (excluding
other rights options, warrants and securities reflected in
Plan Category rights column (a)
------------------------------------ ------------------------ ------------------------- -----------------------
(a) (b) (c)
Equity compensation plans 1,337,328 $13.18 3,010,840
approved by security holders
Equity compensation plans not -- --
approved by security holders
Total 1,337,328 $13.18 3,010,840
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 are authorized by
you to act, and 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 2005 Annual Meeting must be received by the Company no later
than January 21, 2005, 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 6, 2005.
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,
Charles S. Vail
Secretary
May 21, 2004
16
APPENDIX A
FRED'S, INC.
CODE OF BUSINESS CONDUCT AND ETHICS
Introduction
This code of Business Conduct and Ethics covers a wide range of business
practices and procedures. It does not cover every issue that may arise, but it
sets out basic principles to guide all employees of Fred's, Inc. and its
subsidiaries (the "Company'). All of our employees must conduct themselves
accordingly and seek to avoid even the appearance of improper behavior. This
Code should also be provided to and followed by the Company's agents and
representatives, including consultants.
If a law conflicts with a policy in this Code, you must comply with the law;
however, if a local custom or policy conflicts with this Code, you must comply
with the Code. If you have any questions about these conflicts, you should ask
your supervisor how to handle the situation. In addition, the Company's Policy
Book contains information concerning specific applications of this Code.
Those who violate the standards in this Code will be subject to disciplinary
action, if you are in a situation which you believe may violate or lead to
violation of this Code, follow the guidelines described in Section 16 of this
Code.
1. Compliance with Laws, Rules and Regulations
Obeying the law, both in letter and in spirit, is the foundation on which the
Company's ethical standards are built. All employees must respect and obey the
laws, rules and regulations of the cities, states and countries in which we
operate. Although not all employees are expected to know the details of these
laws, it is important to know enough to determine when to seek advice from
supervisors, managers or other appropriate personnel. The Company holds
information and training sessions to promote compliance with laws, rules and
regulations, including insider-trading laws.
2. Conflicts of Interest
A "conflict of interest" exists when a person's private interest interferes in
any way with the interests of the Company. A conflict situation can arise when
an employee, officer or director takes actions or has interests that may make it
difficult to perform his or her Company work objectively and effectively.
Conflicts of interest may also arise when an employee, officer or director, or
members of his or her family, receives improper personal benefits as a result of
his or her position in the Company. Loans to, or guarantees of obligations of,
employees and their family members may create conflicts of interest.
It is almost always a conflict of interest for a Company employee to work
simultaneously for a competitor, customer or supplier. You are not allowed to
work for a competitor as a consultant or board member. You should avoid any
direct or indirect business connection with our customers, suppliers or
competitors, except on our behalf. Under no circumstances is an employee to deal
directly or indirectly with the Company for personal profit, except with the
prior approval of the Company's CEO given after full disclosure of all the
circumstances.
Conflicts of interest are prohibited as a matter of Company policy, except under
guidelines approved by the Board of Directors. Conflicts of interest may not
always be clear-cut, so if you have a question, you should consult with higher
levels of management or the Company's Legal Department. Any employee, officer or
director who becomes aware of a conflict or potential conflict should bring it
to the attention of the Company's CEO and the Legal Department and consult the
procedures described in section 16 of this Code.
Officers and certain other employees of the Company are required to submit an
annual statement disclosing actual and potential conflicts of interest.
A-1
3. Insider Trading
Employees who have access to confidential information are not permitted to use
or share that information for stock trading purposes or for any other purpose
except the conduct of our business. All non-public information about the Company
is considered confidential information. To use non-public information for
personal financial benefit or to "tip' others who might make an investment
decision on the basis of this information is not only unethical but also
illegal. If you have any questions, please consult the Company's Chief Financial
Officer and/or the Legal Department.
4. Corporate Opportunities
Employees, officers and directors are prohibited from taking for themselves
personally opportunities that are discovered through the use of corporate
property, information or position without the consent of the Board of Directors.
No employee may use corporate property, information, or position for improper
personal gain, and no employee may compete with the Company directly or
indirectly. Employees, officers and directors owe a duty to the Company to
advance its legitimate interests when the opportunity to do so arises.
Without limiting the generality of the foregoing, employees, officers and
directors should avoid speculation or dealing in any kind of service or real or
personal property in a market or during a period that the Company may be
purchasing or dealing in services or property of the same or a similar kind.
5. Competition and Fair Dealing
We seek to outperform our competition fairly and honestly. We seek competitive
advantages through superior performance, never through unethical or illegal
business practices. Stealing proprietary information, possessing trade secret
information that was obtained without the owner's consent, or inducing such
disclosures by past or present employees of other companies is prohibited. Each
employee should endeavor to respect the rights of and deal fairly with the
Company's customers, suppliers, competitors and employees. No employee should
take unfair advantage of anyone through manipulation, concealment, abuse of
privileged information, misrepresentation of material facts, or any other
intentional unfair-dealing practice.
To maintain the Company's valuable reputation, compliance with our quality
processes and safety requirements is essential. In the context of ethics,
quality requires that our products and services be designed and manufactured to
meet our obligations to customers. All inspection and testing documents must be
handled in accordance with all applicable regulations.
The purpose of business entertainment and gifts in a commercial setting is to
create good will and sound working relationships, not to gain unfair advantage
with customers. No gift or entertainment should ever be offered, given, provided
or accepted by any Company employee, family member of an employee or agent
unless it: (1) is not a cash gift, (2) is consistent with customary business
practices, (3) is not excessive in value, (4) cannot be construed as a bribe or
payoff and (5) does not violate any laws or regulations. Please discuss with
your supervisor any gifts or proposed gifts which you are not certain are
appropriate.
6. Employment Relationship
The diversity of the Company's employees is a tremendous asset. We are firmly
committed to providing equal opportunity in all aspects of employment and will
not tolerate any illegal discrimination or harassment or any kind. Examples
include derogatory comments based on racial or ethnic characteristics and
unwelcome sexual advances. Supervisors must be particularly sensitive to the
maintenance of totally professional relations with subordinates. Undue
pressures, no matter how subtle, which result in less than professional
relations must be avoided, Evidence of violation of the letter or spirit of this
policy will result in appropriate disciplinary measures. The Company is entitled
to the full working time and energy of each of its full-time employees.
Accordingly, working in any capacity (including self-employment) in or for any
business activity outside the Company is prohibited, except with the prior
approval of your supervisor given after full disclosure of all the
circumstances. Special attention should be given to avoiding the conduct of any
outside business during Company working hours, on Company premises, or in a
manner that involves fellow employees during their Company working hours, and
the solicitation of fellow employees (particularly subordinates, who could be
especially vulnerable to what might be perceived as pressure from a supervisor)
to participate in or with such business in any way, whether as a customer,
employee, independent contractor, or otherwise.
A-2
7. Health and Safety
The Company strives to provide each employee with a safe and healthful work
environment. Each employee has responsibility for maintaining a safe and healthy
workplace for all employees by following safety and health rules and practices
and reporting accidents, injuries and unsafe equipment, practices or conditions.
Violence and threatening behavior are not permitted. Employees should report to
work in condition to perform their duties, free from the influence of illegal
drugs or alcohol. The use of illegal drugs and/or alcohol in the workplace will
not be tolerated.
8. Record-Keeping
The Company requires honest and accurate recording and reporting of information
in order to be able to make responsible business decisions and to be able to
make full, fair, accurate, timely and understandable disclosure in the reports
and documents the Company files with, or submits to, the Securities and Exchange
Commission and in its other public communications. It is the Company's policy to
make responsible business decisions and to make such disclosure.
All of the Company's books, records, accounts and financial statements must be
maintained in reasonable detail, must appropriately reflect the Company's
transactions and must conform both to applicable legal requirements and to the
Company's system of internal controls. Unrecorded or "off the books" funds or
assets should not be maintained unless permitted by applicable law or
regulation. Many employees regularly use business expense accounts, which must
be documented and recorded accurately. If you are not sure whether a certain
expense is legitimate, ask your supervisor or the controller. Rules and
guidelines are available from the Accounting Department.
Business records and communications often become public, and we should avoid
exaggeration, derogatory remarks, guesswork, or inappropriate characterizations
of people and companies that can be misunderstood. This applies equally to
e-mail, internal memos, and formal reports. Records should always be retained or
destroyed according to the Company's record retention policies. In accordance
with those policies, in the event of litigation or governmental investigation
please consult the Company's Chief Financial Officer.
9. Confidentiality
Employees must maintain the confidentiality of confidential information
entrusted to them by the Company or its suppliers, except when disclosure is
authorized by Senior Management or required by laws or regulations. Confidential
information includes all nonpublic information that might be of use to
competitors, or harmful to the Company or its suppliers, if disclosed. It also
includes information that suppliers have entrusted to us. The obligation to
preserve confidential information continues even after employment ends.
10. Protection and Proper Use of Company Assets
All employees should endeavor to protect the Company's assets and ensure their
efficient use. Theft, carelessness, and waste have a direct impact on the
Company's profitability. Any suspected incident of fraud or theft should be
immediately reported for investigation. Company equipment should not be used for
non-Company business, though incidental personal use may be permitted.
The obligation of employees to protect the Company's assets includes its
proprietary information. Proprietary information includes intellectual property
such as trade secrets, patents, trademarks, and copyrights, as well as business,
marketing and service plans, product and production ideas, equipment, designs,
databases, records, salary information and any unpublished financial data and
reports. Unauthorized use or distribution of this information would violate
Company policy. It could also be illegal and result in civil or even criminal
penalties.
Except for routine ongoing services, all fees to consultants, agents, and
attorneys must be approved in advance by the Company's Senior Management.
Manifestly, such fees must be solely for legitimate company services rendered
and must not be used as a device for making industry political contributions or
other payments not allowed directly.
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11. Political Contributions
Contributions by the Company, directly or indirectly, to or on behalf of
candidates for federal office are not permitted. Other political contributions
are allowed only if permissible under applicable laws, rules and regulations, as
determined by the Company's Chief Financial Officer after consultation with the
Legal Department, and only if approved in writing by the Company's CEO.
12. Payments to Government Personnel
The U.S. Foreign Corrupt Practices Act prohibits giving anything of value,
directly or indirectly, to officials of foreign governments or foreign political
candidates in order to obtain or retain business. It is strictly prohibited to
make illegal payments to government officials of any country. In addition, the
U.S. government has a number of laws and regulations regarding business
gratuities which may be accepted by U.S. government personnel. The promise,
offer or delivery to an official or employee of the U.S. government of a gift,
favor or other gratuity in violation of these rules would not only violate
Company policy but could also be a criminal offense. State and local
governments, as well as foreign governments, may have similar rules. The
Company's Chief Financial Officer can provide guidance to you in this area.
13. Waivers of the Code of Business Conduct and Ethics
Any waiver of this Code for executive officers or directors may be made only by
the Board or a Board committee and will be promptly disclosed as required by
applicable law, rule or regulation, including stock exchange regulation.
14. Reporting any Illegal or Unethical Behavior
Employees are encouraged to talk to supervisors, managers or other appropriate
personnel about observed illegal or unethical behavior and when in doubt about
the best course of action in a particular situation. Violations of this Code
should be reported promptly to a member of Senior Management. It is the policy
of the Company not to allow retaliation for reports of misconduct by others made
in good faith by employees. Employees are expected to cooperate in internal
investigations of misconduct. Additionally, the Company's Senior Management
should always be informed of matters which might appear to risk damage to the
Company's reputation, as well as its financial condition or profitability.
15. Annual Statement
Officers and certain other employees of the Company are required to submit an
annual statement disclosing actual and potential conflicts of interest and
including the following affirmation:
"I have examined and understand the Company's Code of Business Conduct and
Ethics (the "Code"). I undertake to report promptly, in accordance with the
Code, any circumstances in the Company's business or operations that may involve
a violation of any applicable law, rule or regulation and any other
circumstances that may involve a violation of the Code. I confirm that I do not
know of any such circumstances not previously reported."
16. Compliance Procedures
We must all work to ensure prompt and consistent action against violations of
this Code. However, in some situations it is difficult to know right from wrong.
Since we cannot anticipate every situation that will arise, it is important that
we have a way to approach a new question or problem. These are the steps to keep
in mind:
- Make sure you have all the facts. In order to reach the right
solutions, we must be as fully informed as possible.
- Ask yourself: What specifically am I being asked to do? Does it seem
unethical or improper? This will enable you to focus on the specific
question you are faced with, and the alternatives you have, Use your
judgment and common sense; if something seems unethical or improper,
it probably is.
- Clarify your responsibility and role. In most situations, there is
shared responsibility. Are your colleagues informed? It may help to
get others involved and discuss the problem.
- Discuss the problem with your supervisor. This is the basic guidance
for all situations. In many cases, your supervisor will be more
knowledgeable about the question, and will appreciate being brought
into the decision-making process. Remember that it is your
supervisor's responsibility to help solve problems.
A-4
- Seek help from Company resources. In the rare case where it may not be
appropriate to discuss an issue with your supervisor, or where you do
not feel comfortable approaching your supervisor with your question,
discuss it with any member of management above the level of your
supervisor, including the Senior Management of the Company. If that
also is not appropriate, call 901-238-2229, the Company's General
Counsel, which will put you in direct contact with the appropriate
people at Company headquarters.
- Submission of confidential information to the Audit Committee. The
Audit Committee is responsible for overseeing the accounting and
financial reporting process of the Company. In order to ensure the
integrity of the Company's financial reports, the Committee welcomes
and encourages employees to report directly to them any practice,
policy or acts that could impair the integrity of the Company's
financial records or reports.
If you have any information that you believe would be beneficial to the
Committee please send communication by sending a letter to Audit
Committee, Fred's Inc., c/o General Counsel, 4300 New Getwell, Memphis,
TN 37072. All communication will be reviewed by our Legal Department
and forwarded to the Audit Committee on a quarterly basis, unless
required by the Committee on a more frequent basis. Your communication
will be treated confidentially, subject to applicable law, regulation
or legal proceedings, if so marked on the envelope or in the
communication.
You may report ethical violations in confidence and without fear of
retaliation. If your situation requires that your identity be kept
secret, your anonymity will be protected. The Company does not permit
retaliation of any kind against employees for good faith reports of
ethical violations.
Always ask first, act later. If you are unsure of what to do in any
situation, seek guidance before you act.
A-5
APPENDIX B
CHARTER OF AUDIT COMMITTEE
OF
FRED'S, INC.
I. Organization:
There shall be an Audit Committee (the "Committee") of the Board of Directors
(the "Directors") of Fred's, Inc. (the "Corporation"). The Committee shall be
composed of at least three directors who meet the independence and experience
requirements of the Nasdaq Stock Market, the Securities Exchange Act of 1934, as
amended (the "Exchange Act") and the rules and regulations of the Securities and
Exchange Commission (the "Commission"). If one member of the Committee is not an
"audit committee financial expert" as defined by the Commission, then that fact
shall be disclosed as required by the Commission.
II. Statement of Policy:
The purpose of the Committee is to oversee the accounting and financial
reporting processes of the Corporation and the audits of the financial
statements of the Corporation. In so doing, it is the responsibility of the
Committee to maintain free and open means of communication between the
Directors, the independent auditors, the internal audit function, and the
management of the Corporation.
III. Responsibilities:
In carrying out its responsibilities, the Committee believes its policies and
procedures should remain flexible, in order to best react to changing conditions
and to ensure that the 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 Committee will:
1) Have the sole authority to appoint, compensate, replace and oversee
the work of the independent auditor, including resolution of
disagreements between management and the independent auditor regarding
financial reporting. The independent auditor shall report directly to
the Committee.
2) Establish procedures for (a) the receipt, retention and treatment of
complaints received by the Corporation regarding accounting, internal
accounting controls or auditing matters, and (b) the confidential,
anonymous submission by employees of concerns regarding questionable
accounting or auditing practices.
3) Pre-approve all audit services and permitted non-audit services
(including the fees and terms thereof) to be performed for the
Corporation by its independent auditor, subject to the de minimis
exceptions for non-audit services described in Section 10A(i)(1)(B) of
the Exchange Act which are approved by the Committee prior to the
completion of the audit, pursuant to the Corporation's Pre-Approval
Policy.
4) Review the financial statements and the Corporation's disclosures in
the "Management's Discussion and Analysis of Financial Condition and
Results of Operations" section contained in the quarterly reports on
Form 10-Q and the annual report on Form 10-K and ensure that the
independent auditor is satisfied with the disclosure and content of
such reports. Review any changes in accounting principles.
5) Review and discuss with management (including the head of the internal
audit function) and the independent auditor:
- the Corporation's disclosure controls and procedures and its
internal controls and procedures for financial reporting,
including the conclusions of the Corporation's chief executive
officer and chief financial officer regarding the effectiveness
of both sets of controls and procedures reached as part of their
certification process for the quarterly reports on Form 10-Q and
the annual report on Form 10-K, and their evaluation process;
- the Corporation's internal controls report and the independent
auditor's attestation of the report; and
- any recommendations for the improvement of such internal control
procedures or particular areas where new or more detailed
controls or procedures are desirable, with particular emphasis on
the adequacy of such internal controls to expose any payments,
transactions, or procedures that might be deemed illegal or
otherwise improper.
B-1
6) Have the authority to retain, to the extent it deems necessary or
appropriate, independent legal, accounting or other advisors. The
Corporation shall provide for appropriate funding, as determined by
the Committee, for payment of compensation to the independent auditor
for the purpose of rendering or issuing an audit report and to any
advisors employed by the Committee, and ordinary administrative
expenses of the Committee that are necessary or appropriate in
carrying out its duties.
7) Pursuant to Independence Standards Board Standard 1:
- ensure that it receives from the independent auditor a formal
written statement delineating all relationships between the
independent auditor and the Corporation;
- actively engage in a dialogue with the independent auditor with
respect to any disclosed relationships or services that may
impact the objectivity and independence of the independent
auditor; and
- take, or recommend that the Directors take, appropriate action to
oversee the independence of the independent auditor.
8) Meet with the independent auditors and 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.
9) Discuss with the independent auditors matters required to be discussed
by Statement on Auditing Standards No. 61 relating to the conduct of
the audit, and in particular any difficulties encountered in the
course of the audit work, any restrictions on the scope of activities
or access to requested information and any significant disagreements
with management.
10) Review and discuss with the independent auditors:
- all critical accounting policies and practices to be used;
- all alternative treatments of financial information within
generally accepted accounting principles ("GAAP") that have been
discussed with management, ramifications of the use of such
alternative disclosures and treatments, and the treatment
preferred by the independent auditor; and
- any material written communications between the independent
auditor and management, such as any management letter or schedule
of unadjusted differences.
11) Review, 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.
12) Periodically review the Corporation's adherence to the code of conduct
and investigate any matter brought to its attention within the scope
of its duties.
13) Each quarter, provide sufficient opportunity for the internal audit
function and the independent auditor to meet with the members of the
Audit Committee without members of management present. Among the items
to be discussed in these meetings 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.
14) Ensure that the lead, concurring, and other audit partners are rotated
off the independent auditor's audit engagement team as necessary to
assure the independence of the independent auditor. Consider rotating
the independent auditor on a regular basis in order to assure
continuing auditor independence.
15) Obtain from the independent auditor assurance that Section 10A(b) of
the Exchange Act has not been implicated.
16) Submit the minutes of all meetings of the audit committee to, or
discuss the matters discussed at each committee meeting with, the
Directors.
17) Prepare the report of the Committee to be included in the
Corporation's annual proxy statement as required by the rules of the
Commission, including disclosures of pre-approval policies and
auditors' fees, and cause this Charter to be included in the proxy
statement periodically.
18) Review and reassess the adequacy of this Charter on an annual basis.
While the Committee has the authority, powers, and responsibilities set forth in
this Charter, it is not the duty of the Committee to plan or conduct audits or
to determine that the Corporation's financial statements and disclosures are
complete and accurate and are in accordance with GAAP and applicable legal,
accounting, and other requirements. These are the responsibilities of the
Corporation's management and the independent auditor.
B-2
APPENDIX C
FRED'S, INC.
NOMINATING AND GOVERNANCE COMMITTEE CHARTER
Purpose
The purpose of the Nominating and Governance Committee is to assist the Board of
Directors (the "Board") of Fred's, Inc. (the "Company") in (1) identifying
individuals qualified to become Board members, consistent with criteria approved
by the Board, and recommending to the Board the director nominees for each
annual meeting of stockholders and the nominees for each Board committee; (2)
developing and recommending to the Board the Corporate Governance Principles
applicable to the Company; and (3) to lead the Board in its annual review of the
Board's performance.
Committee Membership
The Nominating and Governance Committee shall consist of at least three members.
The members of the Committee shall be appointed by and may be replaced by the
Board. The members of the Committee shall meet the independence requirements of
the rules of the Nasdaq Stock Market.
Authority and Responsibilities
The Committee shall actively seek individuals qualified to become Board members
for recommendation to the Board, consistent with criteria approved by the Board.
The Committee shall recommend to the Board the director nominees for each annual
meeting of stockholders, and shall recommend to the Board the classes of the
directors.
The Committee shall recommend to the Board the establishment of, and
responsibilities of, various committees of the Board and make recommendations
concerning membership on Board committees and the rotation of committee chairs.
The Committee shall develop and recommend to the Board the Corporate Governance
Principles applicable to the Company, review and reassess the adequacy of the
Corporate Governance Principles, and recommend any proposed changes to the Board
for approval.
The Committee shall receive comments from all directors and report annually to
the Board with an assessment of the Board's performance, to be discussed with
the full Board.
The Committee may form and delegate authority to subcommittees when appropriate.
The Committee shall have the sole authority to retain and terminate any search
firm to be used to identify director candidates and shall have sole authority to
approve the search firm's fees and other retention terms.
The Committee shall make regular reports to the Board.
The Committee shall review and reassess the adequacy of this Charter annually
and recommend any proposed changes to the Board for approval. The Committee
shall annually review its own performance.
C-1
APPENDIX D
FRED'S, INC.
2004 EMPLOYEE STOCK PURCHASE PLAN
Adopted by the Board of Directors May 14, 2004
Approved by Stockholders _____ __, 2004
1. PURPOSE.
(a) The purpose of the Plan is to provide a means by which Employees of the
Company and certain designated Related Corporations may be given an opportunity
to purchase shares of the Common Stock of the Company.
(b) The Company, by means of the Plan, seeks to retain the services of such
Employees, to secure and retain the services of new Employees and to provide
incentives for such persons to exert maximum efforts for the success of the
Company and its Related Corporations.
(c) The Company intends that the Purchase Rights granted under the Plan be
considered options issued under an Employee Stock Purchase Plan.
2. DEFINITIONS.
(a) "Board" means the Board of Directors of the Company.
(b) "Code" means the Internal Revenue Code of 1986, as amended.
(c) "Committee" means a committee appointed by the Board in accordance with
Section 3(c) of the Plan.
(d) "Common Stock" means the common stock of the Company.
(e) "Company" means Fred's, Inc., a Tennessee corporation.
(f) "Corporate Transaction" means the occurrence, in a single transaction
or in a series of related transactions, of any one or more of the events:
(i) a sale, lease, license or other disposition of all or substantially all
of the consolidated assets of the Company;
(ii) a sale or other disposition of at least ninety percent (90%) of the
outstanding securities of the Company;
(iii) a merger, consolidation or similar transaction following which the
Company is not the surviving corporation; or
(iv) a merger, consolidation or similar transaction following which the
Company is the surviving corporation but the shares of Common Stock outstanding
immediately preceding the merger, consolidation or similar transaction are
converted or exchanged by virtue of the merger, consolidation or similar
transaction into other property, whether in the form of securities, cash or
otherwise.
(g) "Director" means a member of the Board.
(h) "Eligible Employee" means an Employee who meets the requirements set
forth in the Offering for eligibility to participate in the Offering, provided
that such Employee also meets the requirements for eligibility to participate
set forth in the Plan.
(i) "Employee" means any person, including Officers and Directors, who is
employed for purposes of Section 423(b)(4) of the Code by the Company or a
Related Corporation. Neither service as a Director nor payment of a director's
fee shall be sufficient to make an individual an Employee of the Company or a
Related Corporation.
D-1
(j) "Employee Stock Purchase Plan" means a plan that grants Purchase Rights
intended to be options issued under an "employee stock purchase plan," as that
term is defined in Section 423(b) of the Code.
(k) "Exchange Act" means the Securities Exchange Act of 1934, as amended.
(l) "Fair Market Value" means the value of a security, as determined in
good faith by the Board. If the security is listed on any established stock
exchange or traded on the Nasdaq National Market or the Nasdaq SmallCap Market,
the Fair Market Value of the security, unless otherwise determined by the Board,
shall be the closing sales price (rounded up where necessary to the nearest
whole cent) for such security (or the closing bid, if no sales were reported) as
quoted on such exchange or market (or the exchange or market with the greatest
volume of trading in the relevant security of the Company) on the Trading Day
prior to the relevant determination date, as reported in The Wall Street Journal
or such other source as the Board deems reliable.
(m) "Offering" means the grant of Purchase Rights to purchase shares of
Common Stock under the Plan to Eligible Employees.
(n) "Offering Date" means a date selected by the Board for an Offering to
commence.
(o) "Officer" means a person who is an officer of the Company within the
meaning of Section 16 of the Exchange Act and the rules and regulations
promulgated thereunder.
(p) "Participant" means an Eligible Employee who holds an outstanding
Purchase Right granted pursuant to the Plan.
(q) "Plan" means this Fred's, Inc. 2004 Employee Stock Purchase Plan.
(r) "Purchase Date" means one or more dates during an Offering established
by the Board on which Purchase Rights granted under the Plan shall be exercised
and as of which purchases of shares of Common Stock shall be carried out in
accordance with such Offering.
(s) "Purchase Period" means a period of time specified within an Offering
beginning on the Offering Date or on the next day following a Purchase Date
within an Offering and ending on a Purchase Date, at the end of which there
shall be purchased shares of Common Stock on behalf of Participants. An Offering
may consist of one or more Purchase Periods.
(t) "Purchase Right" means an option to purchase shares of Common Stock
granted pursuant to the Plan.
(u) "Related Corporation" means any parent corporation or subsidiary
corporation, whether now or hereafter existing, as those terms are defined in
Sections 424(e) and (f), respectively, of the Code.
(v) "Securities Act" means the Securities Act of 1933, as amended.
(w) "Trading Day" means any day the exchange(s) or market(s) on which
shares of Common Stock are listed, whether it be any established stock exchange,
the Nasdaq National Market, the Nasdaq SmallCap Market or otherwise, is open for
trading.
3. ADMINISTRATION.
(a) The Board shall administer the Plan unless and until the Board
delegates administration to a Committee, as provided in Section 3(c). Whether or
not the Board has delegated administration, the Board shall have the final power
to determine all questions of policy and expediency that may arise in the
administration of the Plan.
(b) The Board (or the Committee) shall have the power, subject to, and
within the limitations of, the express provisions of the Plan:
(i) To determine when and how Purchase Rights to purchase shares of Common
Stock shall be granted and the provisions of each Offering of such Purchase
Rights (which need not be identical).
(ii) To designate from time to time which Related Corporations of the
Company shall be eligible to participate in the Plan.
D-2
(iii) To construe and interpret the Plan and Purchase Rights granted under
the Plan, and to establish, amend and revoke rules and regulations for the
administration of the Plan. The Board, in the exercise of this power, may
correct any defect, omission or inconsistency in the Plan, in a manner and to
the extent it shall deem necessary or expedient to make the Plan fully
effective.
(iv) To amend the Plan as provided in Section 15.
(v) Generally, to exercise such powers and to perform such acts as it deems
necessary or expedient to promote the best interests of the Company and its
Related Corporations and to carry out the intent that the Plan be treated as an
Employee Stock Purchase Plan.
(c) The Board may delegate administration of the Plan to a Committee of the
Board composed of one (1) or more members of the Board. If administration is
delegated to a Committee, the Committee shall have, in connection with the
administration of the Plan, the powers theretofore possessed by the Board,
subject, however, to such resolutions, not inconsistent with the provisions of
the Plan, as may be adopted from time to time by the Board. The Board may
abolish the Committee at any time and revest in the Board the administration of
the Plan. If administration is delegated to a Committee, references to the Board
in this Plan and in the Offering document shall thereafter be deemed to be to
the Board or the Committee, as the case may be.
4. SHARES OF COMMON STOCK SUBJECT TO THE PLAN.
(a) Subject to the provisions of Section 14 relating to adjustments upon
changes in stock, the shares of Common Stock that may be sold pursuant to
Purchase Rights granted under the Plan shall not exceed in the aggregate one
million (1,000,000) shares of Common Stock, plus an annual increase to be added
on the first day of each calendar year, commencing on January 1, 2005 and ending
on (and including) January 1, 2014, equal to the least of (i) two percent (2%)
of the shares of Common Stock outstanding on each January 1 (rounded down to the
nearest whole share and calculated on a fully diluted basis, that is assuming
the exercise of all outstanding stock options and warrants to purchase shares of
Common Stock); (ii) five hundred thousand (500,000) shares of Common Stock; or
(iii) such number of shares of Common Stock as determined by the Board, which
number shall be less than each of (i) and (ii). If any Purchase Right granted
under the Plan shall for any reason terminate without having been exercised, the
shares not purchased under such Purchase Right shall again become available for
issuance under the Plan.
(b) The shares of Common Stock subject to the Plan may be unissued shares
or shares that have been bought on the open market at prevailing market prices
or otherwise.
5. GRANT OF PURCHASE RIGHTS; OFFERING.
(a) The Board may from time to time grant or provide for the grant of
Purchase Rights to purchase shares of Common Stock under the Plan to Eligible
Employees in an Offering (consisting of one or more Purchase Periods) on an
Offering Date or Offering Dates selected by the Board. Each Offering shall be in
such form and shall contain such terms and conditions as the Board shall deem
appropriate, which shall comply with the requirement of Section 423(b)(5) of the
Code that all Employees granted Purchase Rights to purchase shares of Common
Stock under the Plan shall have the same rights and privileges. The terms and
conditions of an Offering shall be incorporated by reference into the Plan and
treated as part of the Plan. The provisions of separate Offerings need not be
identical, but each Offering shall include (through incorporation of the
provisions of this Plan by reference in the document comprising the Offering or
otherwise) the period during which the Offering shall be effective, which period
shall not exceed twenty-seven (27) months beginning with the Offering Date, and
the substance of the provisions contained in Sections 6 through 9, inclusive.
(b) If a Participant has more than one Purchase Right outstanding under the
Plan, unless he or she otherwise indicates in agreements or notices delivered
hereunder: (i) each agreement or notice delivered by that Participant shall be
deemed to apply to all of his or her Purchase Rights under the Plan, and (ii) a
Purchase Right with a lower exercise price (or an earlier-granted Purchase
Right, if different Purchase Rights have identical exercise prices) shall be
exercised to the fullest possible extent before a Purchase Right with a higher
exercise price (or a later-granted Purchase Right, if different Purchase Rights
have identical exercise prices) shall be exercised.
D-3
6. ELIGIBILITY.
(a) Purchase Rights may be granted only to Employees of the Company or, as
the Board may designate as provided in Section 3(b), to Employees of a Related
Corporation. Except as provided in Section 6(b), an Employee shall not be
eligible to be granted Purchase Rights under the Plan unless, on the Offering
Date, such Employee has been in the employ of the Company or the Related
Corporation, as the case may be, for such continuous period preceding such
Offering Date as the Board may require, but in no event shall the required
period of continuous employment be greater than two (2) years. In addition, the
Board may provide that no Employee shall be eligible to be granted Purchase
Rights under the Plan unless, on the Offering Date, such Employee's customary
employment with the Company or the Related Corporation is more than twenty (20)
hours per week and more than five (5) months per calendar year.
(b) The Board may provide that each person who, during the course of an
Offering, first becomes an Eligible Employee shall, on a date or dates specified
in the Offering which coincides with the day on which such person becomes an
Eligible Employee or which occurs thereafter, receive a Purchase Right under
that Offering, which Purchase Right shall thereafter be deemed to be a part of
that Offering. Such Purchase Right shall have the same characteristics as any
Purchase Rights originally granted under that Offering, as described herein,
except that:
(i) the date on which such Purchase Right is granted shall be the "Offering
Date" of such Purchase Right for all purposes, including determination of the
exercise price of such Purchase Right;
(ii) the period of the Offering with respect to such Purchase Right shall
begin on its Offering Date and end coincident with the end of such Offering; and
(iii) the Board may provide that if such person first becomes an Eligible
Employee within a specified period of time before the end of the Offering, he or
she shall not receive any Purchase Right under that Offering.
(c) No Employee shall be eligible for the grant of any Purchase Rights
under the Plan if, immediately after any such Purchase Rights are granted, such
Employee owns stock possessing five percent (5%) or more of the total combined
voting power or value of all classes of stock of the Company or of any Related
Corporation. For purposes of this Section 6(c), the rules of Section 424(d) of
the Code shall apply in determining the stock ownership of any Employee, and
stock which such Employee may purchase under all outstanding Purchase Rights and
options shall be treated as stock owned by such Employee.
(d) As specified by Section 423(b)(8) of the Code, an Eligible Employee may
be granted Purchase Rights under the Plan only if such Purchase Rights, together
with any other rights granted under all Employee Stock Purchase Plans of the
Company and any Related Corporations, do not permit such Eligible Employee's
rights to purchase stock of the Company or any Related Corporation to accrue at
a rate which exceeds twenty five thousand dollars ($25,000) of Fair Market Value
of such stock (determined at the time such rights are granted and which, with
respect to the Plan, shall be determined as of their respective Offering Dates)
for each calendar year in which such rights are outstanding at any time.
(e) Officers of the Company and any designated Related Corporation, if they
are otherwise Eligible Employees, shall be eligible to participate in Offerings
under the Plan. Notwithstanding the foregoing, the Board may provide in an
Offering that Employees who are highly compensated Employees within the meaning
of Section 423(b)(4)(D) of the Code shall not be eligible to participate.
7. PURCHASE RIGHTS; PURCHASE PRICE.
(a) On each Offering Date, each Eligible Employee, pursuant to an Offering
made under the Plan, shall be granted a Purchase Right to purchase up to that
number of shares of Common Stock purchasable either with a percentage or with a
maximum dollar amount, as designated by the Board, but in either case not
exceeding fifteen percent (15%), of such Employee's Earnings (as defined by the
Board in each Offering) during the period that begins on the Offering Date (or
such later date as the Board determines for a particular Offering) and ends on
the date stated in the Offering, which date shall be no later than the end of
the Offering.
(b) The Board shall establish one (1) or more Purchase Dates during an
Offering as of which Purchase Rights granted under the Plan and pursuant to that
Offering shall be exercised and purchases of shares of Common Stock shall be
carried out in accordance with such Offering.
D-4
(c) In connection with each Offering made under the Plan, the Board shall
specify a maximum number of shares of Common Stock that may be purchased by any
Participant on any Purchase Date during such Offering. In connection with each
Offering made under the Plan, the Board may specify a maximum aggregate number
of shares of Common Stock that may be purchased by all Participants pursuant to
such Offering. In addition, in connection with each Offering that contains more
than one Purchase Date, the Board may specify a maximum aggregate number of
shares of Common Stock that may be purchased by all Participants on any given
Purchase Date under the Offering. If the aggregate purchase of shares of Common
Stock issuable upon exercise of Purchase Rights granted under the Offering would
exceed any such maximum aggregate number, then, in the absence of any Board
action otherwise, a pro rata allocation of the shares of Common Stock available
shall be made in as nearly a uniform manner as shall be practicable and
equitable.
(d) The purchase price of shares of Common Stock acquired pursuant to
Purchase Rights granted under the Plan shall be not less than the lesser of:
(i) an amount equal to eighty-five percent (85%) of the Fair Market Value
of the shares of Common Stock on the Offering Date; or
(ii) an amount equal to eighty-five percent (85%) of the Fair Market Value
of the shares of Common Stock on the applicable Purchase Date.
8. PARTICIPATION; WITHDRAWAL; TERMINATION.
(a) An Eligible Employee may become a Participant in the Plan pursuant to
an Offering by delivering a participation agreement to the Company within the
time specified in the Offering, in such form as the Company may provide. Each
such agreement shall authorize payroll deductions of up to the maximum
percentage specified by the Board of such Participant's Earnings (as defined in
each Offering) during the Offering. The payroll deductions made for each
Participant shall be credited to a bookkeeping account for such Participant
under the Plan and shall be deposited with the general funds of the Company. To
the extent provided in the Offering, a Participant may reduce (including to
zero) or increase such payroll deductions . To the extent provided in the
Offering, a Participant may begin such payroll deductions after the beginning of
the Offering. A Participant may make additional payments into his or her account
only if specifically provided for in the Offering and only if the Participant
has not already had the maximum permitted amount withheld during the Offering.
(b) At any time during an Offering, a Participant may terminate his or her
payroll deductions under the Plan and withdraw from the Offering by delivering
to the Company a notice of withdrawal in such form as the Company may provide.
Such withdrawal may be elected at any time prior to the end of the Offering,
except as provided in the Offering. Upon such withdrawal from the Offering by a
Participant, the Company shall distribute to such Participant all of his or her
accumulated payroll deductions (reduced to the extent, if any, such deductions
have been used to acquire shares of Common Stock for the Participant) under the
Offering, without interest (unless otherwise specified in the Offering), and
such Participant's interest in that Offering shall be automatically terminated.
A Participant's withdrawal from an Offering shall have no effect upon such
Participant's eligibility to participate in any other Offerings under the Plan,
but such Participant shall be required to deliver a new participation agreement
in order to participate in subsequent Offerings under the Plan.
(c) Purchase Rights granted pursuant to any Offering under the Plan shall
terminate immediately upon a Participant ceasing to be an Employee for any
reason or for no reason (subject to any post-employment participation period
required by law) or other lack of eligibility. The Company shall distribute to
such terminated or otherwise ineligible Employee all of his or her accumulated
payroll deductions (reduced to the extent, if any, such deductions have been
used to acquire shares of Common Stock for the terminated or otherwise
ineligible Employee) under the Offering, without interest (unless otherwise
specified in the Offering).
(d) Purchase Rights granted under the Plan shall not be transferable by a
Participant otherwise than by will or the laws of descent and distribution, or
by a beneficiary designation as provided in Section 13 and, during a
Participant's lifetime, shall be exercisable only by such Participant.
D-5
9. EXERCISE.
(a) On each Purchase Date during an Offering, each Participant's
accumulated payroll deductions and other additional payments specifically
provided for in the Offering (without any increase for interest) shall be
applied to the purchase of shares of Common Stock up to the maximum number of
shares of Common Stock permitted pursuant to the terms of the Plan and the
applicable Offering, at the purchase price specified in the Offering. No
fractional shares shall be issued upon the exercise of Purchase Rights granted
under the Plan unless specifically provided for in the Offering.
(b) If any amount of accumulated payroll deductions remains in a
Participant's account after the purchase of shares of Common Stock and such
remaining amount is less than the amount required to purchase one share of
Common Stock on the final Purchase Date of an Offering, then such remaining
amount shall be held in each such Participant's account for the purchase of
shares of Common Stock under the next Offering under the Plan, unless such
Participant withdraws from such next Offering, as provided in Section 8(b), or
is not eligible to participate in such Offering, as provided in Section 6, in
which case such amount shall be distributed to the Participant after said final
Purchase Date, without interest (unless otherwise specified in the Offering). If
any amount of accumulated payroll deductions remains in a Participant's account
after the purchase of shares of Common Stock and such remaining amount is equal
to the amount required to purchase one (1) or more whole shares of Common Stock
on the final Purchase Date of the Offering, then such remaining amount shall be
distributed in full to the Participant at the end of the Offering without
interest (unless otherwise specified in the Offering).
(c) No Purchase Rights granted under the Plan may be exercised to any
extent unless the shares of Common Stock to be issued upon such exercise under
the Plan are covered by an effective registration statement pursuant to the
Securities Act and the Plan is in material compliance with all applicable
federal, state, foreign and other securities and other laws applicable to the
Plan. If on a Purchase Date during any Offering hereunder the shares of Common
Stock are not so registered or the Plan is not in such compliance, no Purchase
Rights granted under the Plan or any Offering shall be exercised on such
Purchase Date, and the Purchase Date shall be delayed until the shares of Common
Stock are subject to such an effective registration statement and the Plan is in
such compliance, except that the Purchase Date shall not be delayed more than
twelve (12) months and the Purchase Date shall in no event be more than
twenty-seven (27) months from the Offering Date. If, on the Purchase Date under
any Offering hereunder, as delayed to the maximum extent permissible, the shares
of Common Stock are not registered and the Plan is not in such compliance, no
Purchase Rights granted under the Plan or any Offering shall be exercised and
all payroll deductions accumulated during the Offering (reduced to the extent,
if any, such deductions have been used to acquire shares of Common Stock) shall
be distributed to the Participants, without interest (unless otherwise specified
in the Offering).
10. COVENANTS OF THE COMPANY.
(a) During the terms of the Purchase Rights granted under the Plan, the
Company shall ensure that the amount of shares of Common Stock required to
satisfy such Purchase Rights are available.
(b) The Company shall seek to obtain from each federal, state, foreign or
other regulatory commission or agency having jurisdiction over the Plan such
authority as may be required to issue and sell shares of Common Stock upon
exercise of the Purchase Rights granted under the Plan. If, after reasonable
efforts, the Company is unable to obtain from any such regulatory commission or
agency the authority that counsel for the Company deems necessary for the lawful
issuance and sale of shares of Common Stock under the Plan, the Company shall be
relieved from any liability for failure to issue and sell shares of Common Stock
upon exercise of such Purchase Rights unless and until such authority is
obtained.
11. USE OF PROCEEDS FROM SHARES OF COMMON STOCK.
Proceeds from the sale of shares of Common Stock pursuant to Purchase
Rights granted under the Plan shall constitute general funds of the Company.
D-6
12. RIGHTS AS A STOCKHOLDER.
A Participant shall not be deemed to be the holder of, or to have any of
the rights of a holder with respect to, shares of Common Stock subject to
Purchase Rights granted under the Plan unless and until the Participant's shares
of Common Stock acquired upon exercise of Purchase Rights granted under the Plan
are recorded in the books of the Company (or its transfer agent).
13. DESIGNATION OF BENEFICIARY.
(a) A Participant may file a written designation of a beneficiary who is to
receive any shares of Common Stock and/or cash, if any, from the Participant's
account under the Plan in the event of such Participant's death subsequent to
the end of an Offering but prior to delivery to the Participant of such shares
of Common Stock or cash. In addition, a Participant may file a written
designation of a beneficiary who is to receive any cash from the Participant's
account under the Plan in the event of such Participant's death during an
Offering.
(b) The Participant may change such designation of beneficiary at any time
by written notice. In the event of the death of a Participant and in the absence
of a beneficiary validly designated under the Plan who is living at the time of
such Participant's death, the Company shall deliver such shares of Common Stock
and/or cash to the executor or administrator of the estate of the Participant,
or if no such executor or administrator has been appointed (to the knowledge of
the Company), the Company, in its sole discretion, may deliver such shares of
Common Stock and/or cash to the spouse or to any one or more dependents or
relatives of the Participant, or if no spouse, dependent or relative is known to
the Company, then to such other person as the Company may designate.
14. ADJUSTMENTS UPON CHANGES IN SECURITIES; CORPORATE TRANSACTIONS.
(a) If any change is made in the shares of Common Stock, subject to the
Plan, or subject to any Purchase Right, without the receipt of consideration by
the Company (through merger, consolidation, reorganization, recapitalization,
reincorporation, stock dividend, dividend in property other than cash, stock
split, liquidating dividend, combination of shares, exchange of shares, change
in corporate structure or other transaction not involving the receipt of
consideration by the Company), the Plan shall be appropriately adjusted in the
type(s), class(es) and maximum number of shares of Common Stock subject to the
Plan pursuant to Section 4(a), and the outstanding Purchase Rights granted under
the Plan shall be appropriately adjusted in the type(s), class(es), number of
shares and purchase limits of such outstanding Purchase Rights. The Board shall
make such adjustments, and its determination shall be final, binding and
conclusive. (The conversion of any convertible securities of the Company shall
not be treated as a "transaction not involving the receipt of consideration by
the Company.")
(b) In the event of a Corporate Transaction, then: (i) any surviving or
acquiring corporation may continue or assume Purchase Rights outstanding under
the Plan or may substitute similar rights (including a right to acquire the same
consideration paid to stockholders in the Corporate Transaction) for those
outstanding under the Plan, or (ii) if any surviving or acquiring corporation
does not assume such Purchase Rights or does not substitute similar rights for
Purchase Rights outstanding under the Plan, then the Participants' accumulated
payroll deductions (exclusive of any accumulated interest that cannot be applied
toward the purchase of shares of Common Stock under the terms of the Offering)
shall be used to purchase shares of Common Stock immediately prior to the
Corporate Transaction under the ongoing Offering, and the Participants' Purchase
Rights under the ongoing Offering shall terminate immediately after such
purchase.
15. AMENDMENT OF THE PLAN.
(a) The Board at any time, and from time to time, may amend the Plan.
However, except as provided in Section 14 relating to adjustments upon changes
in securities and except as to amendments solely to benefit the administration
of the Plan, to take account of a change in legislation or to obtain or maintain
favorable tax, exchange control or regulatory treatment for Participants or the
Company or any Related Corporation, no amendment shall be effective unless
approved by the stockholders of the Company to the extent stockholder approval
is necessary for the Plan to satisfy the requirements of Section 423 of the
Code, or other applicable laws or regulations.
D-7
(b) It is expressly contemplated that the Board may amend the Plan in any
respect the Board deems necessary or advisable to provide Employees with the
maximum benefits provided or to be provided under the provisions of the Code and
the regulations promulgated thereunder relating to Employee Stock Purchase Plans
and/or to bring the Plan and/or Purchase Rights granted under the Plan into
compliance therewith.
(c) The rights and obligations under any Purchase Rights granted before
amendment of the Plan shall not be impaired by any amendment of the Plan except
(i) with the consent of the person to whom such Purchase Rights were granted,
(ii) as necessary to comply with any laws or governmental regulations, or (iii)
as necessary to ensure that the Plan and/or Purchase Rights granted under the
Plan comply with the requirements of Section 423 of the Code.
16. TERMINATION OR SUSPENSION OF THE PLAN.
(a) The Board in its discretion may suspend or terminate the Plan at any
time. Unless sooner terminated, the Plan shall terminate at the time that all of
the shares of Common Stock reserved for issuance under the Plan, as increased
and/or adjusted from time to time, have been issued under the terms of the Plan.
No Purchase Rights may be granted under the Plan while the Plan is suspended or
after it is terminated.
(b) Any benefits, privileges, entitlements and obligations under any
Purchase Rights granted under the Plan while the Plan is in effect shall not be
impaired by suspension or termination of the Plan except (i) as expressly
provided in the Plan or with the consent of the person to whom such Purchase
Rights were granted, (ii) as necessary to comply with any laws , regulations, or
listing requirements, or (iii) as necessary to ensure that the Plan and/or
Purchase Rights granted under the Plan comply with the requirements of Section
423 of the Code.
17. EFFECTIVE DATE OF PLAN.
The Plan shall become effective as determined by the Board, but no Purchase
Rights granted under the Plan shall be exercised unless and until the Plan has
been approved by the stockholders of the Company within twelve (12) months
before or after the date the Plan is adopted by the Board.
18. MISCELLANEOUS PROVISIONS.
(a) The Plan and Offering do not constitute an employment contract. Nothing
in the Plan or in the Offering shall in any way alter the at will nature of a
Participant's employment or be deemed to create in any way whatsoever any
obligation on the part of any Participant to continue in the employ of the
Company or a Related Corporation, or on the part of the Company or a Related
Corporation to continue the employment of a Participant.
(b) The provisions of the Plan shall be governed by the laws of the State
of Tennessee without resort to that state's conflicts of laws rules.
D-8
FRED'S, INC.
Holiday Inn Express
2192 S. Highway 441
Dublin, Georgia
PROXY FOR THE ANNUAL MEETING OF SHAREHOLDERS - JUNE 16, 2004
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 16, 2004, at 6:00 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. Approval of Ernst & Young LLP as independent auditors of the Company, as
described in the Proxy Statement.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
3. Approval of the 2004 Employee Stock Purchase Plan
[ ] FOR [ ] AGAINST [ ] ABSTAIN
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: , 2004
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Signature of Shareholder
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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.