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 15, 2005
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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 15, 2005, at 6:00 p.m.,
Eastern Daylight Time, for the following purposes:
1. To elect the Company's Board of Directors; and
2. To approve the designation of BDO Seidman, LLP as our independent
registered public accounting firm of the Company, as described
in the Proxy Statement
The accompanying Proxy Statement contains further information with respect
to these matters.
Only shareholders of record at the close of business on April 29, 2005 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 20, 2005
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 15, 2005
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 15, 2005, 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previously have been revoked.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 and 2. The Board of Directors does not know of any
business to be brought before the Annual Meeting, other than as indicated in the
notice, but it is intended that, as to any other such business properly brought
before the meeting, votes may be cast pursuant to the proxies in accordance with
the judgment of the persons acting thereunder.
Any shareholder who executes and delivers a proxy may revoke it at any time
prior to its use upon (a) receipt by the Secretary of the Company of written
notice of such revocation; (b) receipt by the Secretary of the Company of a duly
executed proxy bearing a later date; or (c) appearance by the shareholder at the
meeting (with proper identification) and his request for the return of his proxy
or his request for a ballot.
A copy of this Proxy Statement and the enclosed Proxy Card are first being
sent to shareholders on or about May 20, 2005.
Voting Securities
Only shareholders of record at the close of business on April 29, 2005,
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 39,813,381 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 and the designation of BDO Seidman, LLP as our independent
registered public accounting firm 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 and the
designation of BDO Seidman LLP.
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 29, 2005, by (i) beneficial owners of more
than five percent of Common Stock, (ii) each director, (iii) each of the persons
named in the Summary Compensation Table, and (iv) all directors and executive
officers of Fred's as a group.
Shares of Common Stock Beneficially Owned(1)
-------------------------------------------------------------------
Number of Shares
-----------------------------------------
Beneficial Owner Options(3) Total(4) Percent(2)
---------------- --------------- ---------- ----------
FMR Corp. (5) -- 4,540,700 11.4
Janus Capital Management LLC (6) -- 2,930,908 7.4
Franklin Resources, Inc. (7) -- 2,712,918 6.8
Michael J. Hayes (8) 48,250 2,408,254 6.0
John R. Eisenman 16,125 19,639 *
Roger T. Knox 16,125 46,640 *
John D. Reier 22,875 107,178 *
Thomas H. Tashjian 10,502 305,108 *
B. Mary McNabb -- -- *
Gerald E. Thompson -- -- *
Jerry A. Shore 10,200 42,387 *
Reggie E. Jacobs 1,650 11,650 *
Dennis K. Curtis 1,500 21,937 *
All Directors and Executive Officers
as a Group (13 persons) 138,327 3,029,669 7.5
* 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. The address for all except FMR Corp., Janus Capital Management LLC,
and Franklin Resources, Inc. is 4300 New Getwell Rd., Memphis, TN 38118.
The address of FMR Corp. is 1 Federal Street, Boston, MA 02110-2003, Janus
Capital Management LLC is 100 Fillmore Street, Suite 400 Denver, CO
80206-4928, and Franklin Resources, Inc. is 1 Franklin Parkway, San Mateo,
CA 94403-1906.
(2) Based on 40,185,064 shares, which consists of the total outstanding shares
of Common Stock as of April 29, 2005 (39,813,381) and options (371,683)
exercisable within sixty (60) days of April 29, 2005.
(3) Represents stock options that are exercisable within sixty (60) days of
April 29, 2005.
(4) Includes stock options that are exercisable by beneficial owners within
sixty (60) days of April 29, 2005.
(5) This information is based on Amendment 1 to Schedule 13G filed on April 11,
2005 by FMR Corp., which reported that as of March 31, 2005, it had sole
power to vote or direct the vote of 6,300 shares and sole power to dispose
of or direct the disposition of 4,540,700 shares.
(6) This information is based on a Schedule 13G filed by Janus Capital
Management, LLC ("Janus"), which reported that as of December 31, 2004, it
had sole power to vote or direct the vote of 2,930,908 shares and sole
power to dispose of or direct the disposition of 2,930,908 shares. Janus
disclaims beneficial ownership of these shares.
(7) This information is based on a Schedule 13G filed on February 11, 2005 by
Franklin Resources, Inc. ("FRI"), which reported that as of December 31,
2004, it was deemed by virtue of Rule 13d-3 of the Securities Exchange Act
of 1934, as amended, to have beneficial ownership of 2,712,918 shares, with
the sole power to vote or direct the vote of 2,007,513 shares, and the sole
power to dispose of or direct the disposition of 2,262,313 shares. Franklin
Advisory Services, Inc., a wholly-owned subsidiary of FRI, has the sole
power to vote or direct the vote of 400,000 shares, and the sole power to
dispose of or direct the disposition of 400,000 shares. Fiduciary Trust
Company International, a wholly-owned subsidiary of FRI, has the sole power
to vote or direct the vote of 50,605 shares, and the sole power to dispose
of or direct the disposition of 50,605 shares.
(8) Includes 165,018 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.
2
PROPOSAL 1 (ELECTION OF DIRECTORS)
Seven 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 and qualified. The Board of Directors proposes the election of the
following nominees:
Nominee Age Title
-------------------------------------------- --- ------------------------------------
Michael J. Hayes............................ 63 Chairman and Chief Executive Officer
John R. Eisenman............................ 63 Director
Roger T. Knox............................... 67 Director
John D. Reier............................... 65 Director and President
Thomas H. Tashjian.......................... 50 Director
B. Mary McNabb.............................. 56 Director
Gerald E. Thompson.......................... 55 Director
Principal Occupation, Business, and Directorships
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 through 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.
B. Mary McNabb was elected a director of the Company in April 2005. Ms.
McNabb became Chief Executive Officer of Garden Ridge Stores, a home-decor chain
with $430 million annual sales, in May 2005. Prior to accepting this position,
she served as an executive vice president and a director of The Mowbray Group, a
California-based retail consulting firm that specializes in problem-solving,
cost reductions, importing, and retail management. She also has served as a
member of the Board of Directors of C-ME (Cyber Merchants Exchange), a public
company, and now as an advisor to the board is involved in the development of
the company's ASAP Trade Show. Ms. McNabb was formerly executive vice president
of merchandising and marketing for Factory 2-U, vice president of sourcing for
S-Q of California, and West Coast manager/buyer for One Price Clothing, Inc.
3
Gerald E. Thompson R.Ph., was elected a director of the Company in April
2005. He retired in July 2004 from Eckerd Corporation, a subsidiary of J.C.
Penney. Joining the company in 1997 as regional vice president, a position he
had held for almost 10 years with Thrift Drug Stores prior to its merger with
Eckerd that year, he was promoted to senior vice president of pharmacy services
in 2000. At different times during his career with Eckerd, Mr. Thompson held
primary operating responsibility for approximately 2,000 stores and, as senior
vice president, he oversaw all of Eckerd's 2,800. Mr. Thompson served in the
industry's trade organization, the National Association of Chain Drug Stores,
where he participated in legislative activities on the federal and state level
and was a member of the Association's Pharmacy and Governmental Affairs
committees.
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
29, 2005, 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.
THE BOARD OF DIRECTORS RECOMMENDS THAT SHAREHOLDERS VOTE "FOR" THE
ELECTION OF THE NOMINEES TO FRED'S BOARD OF DIRECTORS.
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 during fiscal year 2004.
Board of Directors
During the last fiscal year, Fred's Board of Directors held six meetings.
Michael J. Hayes, John R. Eisenman, Roger T. Knox, John D. Reier and Thomas H.
Tashjian attended all of the Board meetings and the prior year annual meeting.
B. Mary McNabb and Gerald E. Thompson were added to the Board of Directors in
April 2005. Mr. Hayes is Chairman of the Board of Directors. Non-employee
Directors of Fred's are paid for their services as such $22,250 per year plus
reasonable expenses for meeting attendance, and are granted stock options from
time to time. John R. Eisenman, Roger T. Knox, Thomas H. Tashjian, B. Mary
McNabb, and Gerald E. Thompson are considered independent as defined in the
listing standards of the National Association of Securities Dealers' Automated
Quotation System ("NASDAQ").
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 38118. 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 a code of ethics that applies to all of its directors,
officers (including its Chief Executive Officer, President, Chief Financial
Officer, Chief Information Officer, Controller and any person performing similar
functions) and employees.
4
Audit Committee
The Audit Committee of the Board of Directors, which is comprised of John
R. Eisenman, Chairman of the Committee, Roger T. Knox, Thomas H. Tashjian, B.
Mary McNabb, and Gerald E. Thompson, met 13 times during the last fiscal year.
Members Eisenman, Knox, and Tashjian attended all of the Committee meetings.
Members McNabb and Thompson were added to the Committee in April 2005. Each of
the members of the Audit Committee is an independent director as defined in the
NASDAQ listing standards. Audit Committee members are paid for their services
$4,000 per year for Mr. Eisenman, Chairman and $2,400 per year for members Knox,
Tashjian, McNabb and Thomson plus reasonable expenses for meeting attendance.
The Audit Committee is responsible for the engagement of the independent
registered public accounting firm; 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 registered public accounting firm is 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 registered
public accounting firm is ultimately accountable to the Audit Committee. The
Board of Directors has adopted a written charter for the Audit Committee, which
was attached as Appendix B to the Company's 2004 Proxy Statement. The Board of
Directors has determined that Mr. Tashjian meets the Commission's definition of
audit committee financial expert.
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 2004 with management of the Company. The Audit Committee also
discussed with BDO Seidman, LLP the matters required to be discussed by
Statement on Auditing Standards ("SAS") No. 61, "Communication with Audit
Committees" as amended, the Sarbanes-Oxley Act of 2002, and other matters
required by the Audit Committee's charter. The Audit Committee has received the
written disclosures and the letter from BDO Seidman, LLP as required by
Independence Standards Board Standard No. 1 "Independence Discussions with Audit
Committees" and has discussed with BDO Seidman, LLP their independence,
including consideration of whether the payment to BDO Seidman, 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 BDO Seidman, LLP, the Audit Committee has recommended to the
Board of Directors that Fred's, Inc. audited financial statements for fiscal
2004 be included in the annual report on Form 10-K for 2004 filing with the
Securities and Exchange Commission, and that BDO Seidman be considered for
selection as the Company's independent registered public accounting firm for
2005.
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 BDO Seidman, 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 BDO Seidman, LLP is in fact
independent.
John R. Eisenman
Roger T. Knox
Thomas H. Tashjian
B. Mary McNabb
Gerald E. Thompson
5
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 shareholders at the
annual meeting and makes recommendations to the Board of Directors regarding
corporate governance matters and practices. The Nominating Committee is
comprised of Thomas H. Tashjian, Chairman of the Committee, John R. Eisenman,
Roger T. Knox, B. Mary McNabb, and Gerald E. Thompson all of whom meet the
independence requirements of NASDAQ listing standards. Members McNabb and
Thompson were added to the Committee in April 2005. Nominating Committee members
are paid for their services $1,500 per year for Mr. Tashjian, and $750 per year
for the other members, plus reasonable expenses for meeting attendance.
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 shareholders;
- business judgment;
- availability and willingness to serve on the Board;
- independence requirements of Nasdaq listing standards;
- potential conflicts of interest with the Company or its shareholders
taken as a whole; and
- accomplishment within the candidate's own field.
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.
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 Roger T. Knox, Chairman of the
Committee, John R. Eisenman, Thomas H. Tashjian, B. Mary McNabb, and Gerald E.
Thompson, met five times during the last fiscal year. Members Eisenman, Knox,
Reier and Tashjian attended all of the Committee meetings. Members McNabb and
Thompson were added to the Committee in April 2005. Compensation Committee
members are paid for their services $1,500 per year for Mr. Knox, Chairman and
$750 per year for the other members, 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.
6
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 2004 220,000 -- -- 14,000 8,433 (2)
Chairman and 2003 214,615 80,500 -- -- --
Chief Executive Officer 2002 200,000 -- -- -- 17,651(2)
John D. Reier 2004 250,000 -- 229,050 14,000 --
President 2003 243,269 80,500 -- 60,000 --
2002 217,788 77,000 -- -- --
Jerry A. Shore 2004 157,692 -- 152,700 6,000 --
Executive Vice President 2003 145,962 55,200 -- 27,000 --
Chief Financial Officer - 2002 133,558 52,800 -- -- --
Reggie E. Jacobs 2004 132,000 -- 152,700 4,000
Senior Vice President 2003 122,654 36,800 -- -- --
Distribution 2002 114,240 39,600 -- --
Dennis K. Curtis 2004 128,265 -- 152,700 5,000 801 (2)
Executive Vice President- 2003 119,885 12,062 -- -- 267 (2)
Store Operations 2002 112,846 26,400 -- --
-------------------------
(1) The aggregate restricted stock holdings for the above Named Executives,
using the January 28, 2005 closing price of $15.56 per share, net of any
consideration to be paid, was as follows:
Number Value
------ --------
Michael J. Hayes -- --
John Reier 15,000 $233,400
Jerry A. Shore 15,625 $243,125
Reggie Jacobs 10,000 $155,600
Dennis K. Curtis 10,000 $155,600
All restricted stock holdings pay dividends at the same dividend rate as
the Company's Common Stock. Jerry A. Shore holdings consist of 5,625 shares
issued April 17, 2000 with five year vesting and 10,000 shares issued
January 15, 2005 which vest over 10 years or less based on operating
performance. All other holdings to named executives were issued January 15,
2005 and vest over 10 years or less based on operating performance.
(2) Consists of miscellaneous reimbursements.
7
OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth information on stock option grants pursuant
to the Fred's, Inc. 2002 Long-Term Incentive Plan during the last fiscal year
for each of the Named Executives. The Company has not granted any Stock
Appreciation Rights.
Individual Grants Potential Realizable
---------------------------------------
Value at Assumed
Annual Rates of
Options % of Total Exercise Stock Price
Granted to Options or Base Appreciation for
Employees Granted Price Expiration Option Term (1)
---------------------------
Name (#) in Fiscal Year ($/Sh) Date 5% ($) 10% ($)
----------------- --------- -------------- --------- --------- --------- ----------
Michael J. Hayes 14,000 4.8 14.60 09/2011 83,182 193,839
John D. Reier 14,000 4.8 14.60 09/2011 83,182 193,839
Jerry A. Shore 6,000 2.1 14.60 09/2011 35,650 83,074
Reggie E. Jacobs 4,000 1.4 14.60 09/2011 23,766 55,383
Dennis K. Curtis 5,000 1.7 14.60 09/2011 29,708 69,228
(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 Securities and Exchange 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 January 29, 2005. 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 January 28, 2005 (the last trading
date before the fiscal year-end), which was $15.56 per share.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FY-END OPTION VALUES
Number of Securities
Stock Option Exercises Underlying Unexercised Value of Unexercised
Shares Options In-The-Money Options
Acquired Value At Fiscal Year-end (#) At Fiscal Year-end
on Exercise(#) Realized ($)(1) Exercisable Unexercisable Exercisable Unexercisable
-------------- --------------- ----------- ------------- ----------- -------------
Michael J. Hayes 32,815 400,680 41,250 14,000 132,276 13,440
John D. Reier 119,531 1,560,258 22,875 68,000 54,113 13,440
Jerry A. Shore -- -- 31,763 30,300 244,518 5,760
Reggie E. Jacobs 4,068 65,184 22,088 18,850 130,038 3,840
Dennis K. Curtis 13,125 146,729 1,500 18,500 -- 4,800
---------------------
(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
This Compensation Committee report documents the components of Fred's
executive officer compensation programs and describes the basis on which fiscal
2004 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 2004 for the other Named
Executives, based on performance and competitive considerations, and the
Committee considered those recommendations in making its determination.
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 2004, based upon the
Company's performance, and the Committee considered these recommendations in
making its determination.
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 deems
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 relevant 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 which 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 with automatic
employment extensions, the latest which expires in May, 2007. The agreement
provides that we will pay Mr. Hayes an annual salary of up to $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 with automatic
employment extensions, the latest which expires in May, 2007. 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.
1/29/00 2/3/01 2/2/02 2/1/03 1/31/04 1/29/05
------- ------ ------ ------ ------- -------
Fred's, Inc. $100 $150 $336 $324 $508 $284
Nasdaq Retail Trade $100 $70 $44 $26 $41 $41
Nasdaq Stock Market (U.S.) $100 $81 $85 $73 $117 $141
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, 2000, and that all dividends were reinvested.
10
PROPOSAL 2 (APPROVE SELECTION OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM)
BDO Seidman, LLP audited the Company's consolidated financial statements
for the year ended January 29, 2005. BDO Seidman, LLP is an independent
registered public accounting firm. The Board of Directors is asking the
shareholders to approve the appointment of BDO Seidman, LLP as such independent
registered public accounting firm for the fiscal year ending January 28, 2006.
Although not required by law, NASDAQ listing standards, or the Company's bylaws,
the Board of Directors is submitting the selection of BDO Seidman, LLP to the
shareholders 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 independent 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 shareholders, including economic considerations.
The Board of Directors will offer a resolution at the Annual Meeting to
ratify this selection. BDO Seidman LLP, which has acted as independent
registered public accounting firm of Fred's since July 30, 2004, 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 BDO SEIDMAN, LLP AS OUR INDEPENDENT REGISTERED PUBLIC ACCOUNTING
FIRM FOR FISCAL YEAR 2005.
Changes in Certifying Independent Registered Public Accounting Firm
On June 11, 2004, Ernst & Young, LLP ("E&Y") submitted to the Company an
engagement letter proposing fiscal 2004 auditing fees which were significantly
higher than anticipated by the Company. Therefore, the Company's Audit Committee
initiated the process of seeking 2004 quotes from other auditors, and instructed
management to attempt to resolve the unanticipated year-end 2003 fee under
dispute with Ernst & Young before making a decision on which auditing firm to
use for fiscal 2004. On July 1, 2004, E&Y notified the Company that it would
resign. The Company's Audit Committee accepted the E&Y resignation on the
foregoing basis.
Each of the audit reports of E&Y on the consolidated financial statements
of the Company for each of the years in which they acted as the Company's
auditors in the two-year period ended January 31, 2004 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 all periods in which E&Y acted as the Company's principal accountant
through July 30, 2004, there were no disagreements with E&Y on any matter of
accounting principles or practices, financial statement disclosure, or auditing
scope or procedures, which disagreements, if not resolved to the satisfaction of
E&Y, would have caused them to make reference to the subject matter of the
disagreement in their reports on the consolidated financial statements for such
years.
During the past two fiscal years and through the date of this Report, E&Y
has not advised the Company of any reportable events (as defined in Item
304(a)(1)(v) of Regulation S-K), other than E&Y reported to the Company that, in
conducting its audit of the 2003 financial statements, it noted weaknesses in
certain internal controls. E&Y has not informed the Company that those
weaknesses constitute "material weaknesses" as defined by the American Institute
of Certified Public Accountants. The weaknesses related to (1) the number and
qualifications of corporate accounting personnel, (2) procedures related to
accounting for consideration received from vendors, and (3) the financial
statement closing process. At the direction of its Audit Committee, the Company
had taken steps to address the concerns expressed by E&Y during its work for the
Company. Specifically, the Company has enhanced its internal controls by (i)
hiring additional skilled accounting staff, including a certified public
accountant (who reports directly to the Audit Committee) to oversee internal
controls and the Sarbanes-Oxley Act compliance process and engaging a
third-party accounting firm experienced in Sarbanes-Oxley Act compliance to
assist the Company in achieving timely and complete compliance on a timeline
suggested by E&Y, (ii) focused additional personnel and reviews upon accounting
for consideration received from vendors, and (iii) instituted more testing of
results in the closing process before public reporting of quarterly and fiscal
year end results.
12
On July 30, 2004, the Company engaged BDO Seidman, LLP ("BDO") as its new
certifying accountants. The Company has not consulted with BDO during the two
most recent fiscal years and through July 30, 2004 regarding the application of
accounting principles to a proposed or completed specified transaction or the
type of audit opinion that might be rendered on the Company's consolidated
financial statements, where either a written report was provided or oral advice
was provided that BDO concluded was an important factor considered by the
Company in reaching a decision as to the accounting, auditing or financial
reporting issue or as to any disagreement or reportable event as described in
Item 304(a)(1)(iv) and Item 304(a)(1)(v) of Regulation S-K.
Fees Paid to Independent Registered Public Accounting Firms
The following table sets forth certain fees billed to us by Ernst & Young
LLP in fiscal 2004 and fiscal 2003 and BDO Seidman, LLP in fiscal 2004 in
connection with various services provided to us throughout those fiscal years:
Service 2004 Aggregate Fees Billed 2003 Aggregate Fees Billed
------- -------------------------- --------------------------
Audit Fees (1) $927,036 $425,000
Audit-Related Fees (2) 64,613 --
Tax Fees (3) 48,275 244,610
All Other Fees -- --
(1) 2004 Aggregate Audit Fees Billed include $ 758,172 to BDO Seidman, LLP and
$137,429 to Ernst & Young, LLP. Audit fees include fees and expenses
associated with the annual audit of consolidated financial statements,
reviews of quarterly financial statements, and Sarbanes-Oxley Section 404
attestation services.
(2) Audit related fees include audits of employee benefit plans, statutory
audits of a subsidiary, and consultation on accounting and reporting
matters.
(3) Tax fees represent billings for professional services for tax structuring
and compliance (including federal, state, and local).
The Audit Committee has the responsibility to pre-approve all audit and
permissible non-audit services provided by our independent registered public
accounting firm. 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 2004, all audit and permissible non-audit services provided by
our independent registered public accounting firms were pre-approved by the
Audit Committee.
13
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 2006 Annual Meeting must be received by the Company no later
than January 20, 2006, 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.
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 20, 2005
14
FRED'S, INC.
Holiday Inn Express
2192 S. Highway 441
Dublin, Georgia
PROXY FOR THE ANNUAL MEETING OF SHAREHOLDERS - JUNE 15, 2005
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 15, 2005, 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 B. Mary McNabb
Gerald E. Thompson
2. Approval of BDO Seidman, LLP as independent registered public accounting firm
of the Company, as described in the Proxy Statement.
[ ] 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: , 2005
----------------------
-----------------------------------
Signature of Shareholder
-----------------------------------
Signature of Shareholder (if held jointly)
Please Date this Proxy and Sign Your Name or Names Exactly as Shown Hereon. When
signing as an Attorney, Executor, Administrator, Trustee or Guardian, Please
Sign Your Full Title as Such. If There Are More than One Trustee, or Joint
Owners, All must Sign. Please Return the Proxy Card Promptly Using the Enclosed
Envelope.