UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
SCHEDULE 14A
(Rule 14a-101)
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant To Section 14(a) of thePROXY STATEMENT PURSUANT TO SECTION 14(A) OF THE SECURITIES
Securities Exchange Act ofEXCHANGE ACT OF 1934
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x | Definitive Proxy Statement |
¨ | Definitive Additional Materials |
¨ | Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12 |
FRED’S, INC.
(Name of Registrant as Specified in Its Charter)
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
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4300 NEW GETWELL ROAD
MEMPHIS, TENNESSEE 38118
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
To be held on Thursday, July 26, 2012Wednesday, June 17, 2015
TO THE SHAREHOLDERS OF FRED’S, INC.:
Notice is hereby given that the Annual Meeting of Shareholders of FRED’S,Fred’s, Inc. (the “Company” or “FRED’S”“Fred’s”) will be held at the Holiday Inn Express, 2192 S. Highway 441, Dublin, Georgia, on Thursday, July 26, 2012,Wednesday, June 17, 2015, at 5:00 p.m., Eastern Daylight Time, for the following purposes:
1. | To elect the |
2. | To ratify the designation of BDO USA, LLP as our independent registered public accounting firm of the Company, as described in the Proxy Statement; |
3. | To |
4. |
To consider and act upon any other matters which properly come before the Annual Meeting or any adjournment of the meeting. |
The accompanying Proxy Statement contains further information with respect to these matters.
Only shareholders of record at the close of business on June 22, 2012,May 1, 2015 will be entitled to vote at the meeting or any adjournment thereof.
WHETHER OR NOT YOU PLAN TO ATTEND THE ANNUAL 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.
Our Proxy Statement, Annual Report to shareholders and proxy card are available onwww.fredsinc.com/shareholders.shareholders.
By order of the Board of Directors,
By order of the Board of Directors, |
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Mark C. Dely |
Secretary |
Charles S. Vail
Secretary
June 27, 2012May 20, 2015
FRED’S, INC.
4300 NEW GETWELL ROAD
MEMPHIS, TENNESSEE 38118
PROXY STATEMENT
For Annual Meeting of Shareholders, July 26, 2012June 17, 2015
The enclosed proxy is solicited by the Board of Directors (the “Board” or “Board of Directors”) of FRED’S,Fred’s, Inc. (the “Company” or “FRED’S”“Fred’s”) to be voted at the Annual Meeting of Shareholders to be held on July 26, 2012,June 17, 2015, at 5:00 p.m., Eastern Daylight Time, at the Holiday Inn Express, 2192 S. Highway 441, Dublin, Georgia, or any adjournment 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 3, 4 and 5 and “AGAINST” Proposal 6.3. 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 June 27, 2012.May 20, 2015.
Voting Securities
Only shareholders of record at the close of business on June 22, 2012,May 1, 2015 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 36,612,20737,155,592 shares of Common Stock. 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 ratification of BDO USA, LLP as our independent registered public accounting firm the 2012 Long-Term Incentive Plan,and the advisory vote on Executiveexecutive compensation and the continuation of the Shareholders Right Plan will be approved if the votes cast favoring the action exceed the votes cast opposing the action. The shareholder proposal will be rejected if the votes cast against the action exceeds the votes cast favoring the action. Abstentions and broker non-votes have no effect on the vote for the election of Directors, the ratification of BDO USA, LLP as the independent registered public accounting firm of FRED’S, the vote for the approval of the 2012 Long Term Incentive Plan,Fred’s or the advisory vote on Executive compensation, the vote for the continuation of the Shareholders Rights Plan and the shareholder proposal.executive compensation.
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Ownership of Common Stock by Directors,
Officers and Certain Beneficial Owners
The following table sets forth the Common Stock beneficial ownership known to the Company as of June 22, 2012,May 1, 2015, by (i) beneficial owners of more than five percent of the outstanding 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’SFred’s as a group.
Shares of Common Stock Beneficially Owned(1) | ||||||||||||
Number of Shares | ||||||||||||
Beneficial Owner | Options(2) | Total(3) | Percent(4) | |||||||||
Heartland Advisors, Inc. (5) | 3,993,195 | 10.9 | ||||||||||
BlackRock, Inc. (6) | 3,304,961 | 9.0 | ||||||||||
Wellington Management Co., LLP (7) | 3,129,036 | 8.5 | ||||||||||
Dimensional Fund Advisors LP (8) | 3,038,968 | 8.3 | ||||||||||
T. Rowe Price Associates, Inc. (9) | 2,019,275 | 5.5 | ||||||||||
The Vanguard Group, Inc. (10) | 1,985,922 | 5.4 | ||||||||||
Michael J. Hayes (11) | 18,720 | 2,219,682 | 6.1 | |||||||||
Bruce A. Efird | 291,966 | 368,031 | 1.0 | |||||||||
John R. Eisenman | 7,250 | 21,544 | * | |||||||||
Roger T. Knox | 7,250 | 24,810 | * | |||||||||
Thomas H. Tashjian | 7,250 | 305,609 | * | |||||||||
B. Mary McNabb | 9,750 | 13,500 | * | |||||||||
Michael T. McMillan | 7,250 | 11,000 | * | |||||||||
Jerry A. Shore | 12,667 | 89,898 | * | |||||||||
Alan Crockett | 4,000 | 20,529 | * | |||||||||
Rick Chambers | 0 | 28,900 | * | |||||||||
Reggie Jacobs | 0 | 27,342 | * | |||||||||
All Directors and Executive Officers | ||||||||||||
As a Group (26 persons) | 402,055 | 3,347,277 | 9.1 | |||||||||
* Less than 1% |
Shares of Common Stock Beneficially Owned (1) | ||||||||||||
Number of Shares | ||||||||||||
Beneficial Owner | Options(2) | Total(3) | Percent(4) | |||||||||
Heartland Advisors, Inc.(5) | — | 4,310,308 | 11.6 | % | ||||||||
Wellington Management Co., LLP(6) | 4,106,083 | 11.0 | % | |||||||||
BlackRock, Inc.(7) | 3,715,294 | 10.0 | % | |||||||||
Dimensional Fund Advisors LP(8) | 3,087,166 | 8.3 | % | |||||||||
The Vanguard Group, Inc.(9) | 2,363,691 | 6.4 | % | |||||||||
National Rural Electric Cooperative Association(10) | 2,231,569 | 6.0 | % | |||||||||
T. Rowe Price Associates, Inc.(11) | — | 2,204,324 | 5.9 | % | ||||||||
Michael J. Hayes(12) | — | 1,637,166 | 4.4 | % | ||||||||
Thomas H. Tashjian | — | 317,611 | * | |||||||||
Jerry A. Shore | 12,500 | 111,224 | * | |||||||||
Michael K. Bloom | — | 59,207 | * | |||||||||
B. Mary McNabb | — | 23,400 | * | |||||||||
Michael T. McMillan | — | 23,000 | * | |||||||||
Steven R. Fitzpatrick | 2,500 | 19,500 | * | |||||||||
Craig L. Barnes | — | 19,345 | * | |||||||||
Mark C. Dely | 6,100 | 17,324 | * | |||||||||
John R. Eisenman | — | 14,500 | * | |||||||||
Sherri L. Tagg | — | 14,096 | * | |||||||||
Rick A. Chambers | — | 6,685 | * | |||||||||
All Directors and Executive Officers | 50,015 | 2,361,856 | 6.3 | % | ||||||||
As a Group (28 persons) |
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 Heartland Advisors, Inc., |
(2) | Represents stock options that are exercisable within sixty (60) days of |
(3) | Includes stock options that are exercisable by beneficial owners within sixty (60) days of |
(4) | Based on outstanding shares of Common Stock as of |
(5) | This information is based on Schedule |
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(6) | This information is based on Schedule |
This information is based on Schedule |
This information is based on Schedule |
This information is based on Schedule |
2
(10) | This information is based on Schedule 13G/A filed on February 17, 2015 by National Rural Electric Cooperative Association which reported that as of December 31, 2014, it had sole power to vote or direct the vote of 2,231,569 shares and sole power to dispose of or direct the disposition of 2,231,569 shares. |
(11) | This information is based on Schedule 13G/A filed on February 12, 2015 by T. Rowe Price Associates, Inc. which reported that as of December 31, 2014, it had sole power to vote or direct the vote of 695,269 shares and sole power to dispose of or direct the disposition of 2,204,324 shares. |
(12) | Includes 126,018 shares owned by Mr. Hayes’ wife and 36,812 shares owned by Memphis Retail Limited Partnership which are attributable to Mr. Hayes and two of his children. |
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PROPOSAL 1 - ELECTION OF DIRECTORS
Eight directors,Seven Directors, constituting the entire Board of Directors, are to be elected at the 2015 Annual Meeting to serve one year or until their successors are elected and qualified. In selecting potential candidates for election to the Board of Directors the Nominating Committee considers the potential nominee’s judgment, integrity, experience, independence, understanding of the Company’s business and industry and other factors as more fully described below. Upon the recommendation of the Nominating Committee, the Board of Directors has nominated each of the following nominees. These nominees all served on the Board of Directors in 2014 and were elected by the shareholders at the 2014 Annual Meeting. The Board of Directors proposesbelieves that the electioncombinations of the following nominees:various qualifications, skills and experiences would contribute to an effective, balanced and well-functioning Board of Directors.
Nominee | Age | Title | ||||
Michael J. Hayes | Director and Chairman of the Board | |||||
John R. Eisenman | Director | |||||
| Director | |||||
| Director | |||||
| Director | |||||
| Director | |||||
| Director, Chief Executive Officer | |||||
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Business Experience, Directorships for the last five years and Reasons for Nomination
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 was the Chief Executive Officer from October 1989 through January 2009 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—President - Corporate Finance and Financial Services. Chairman Hayes’ considerable experience with Fred’s and his years spent on Wall Street position him to serve as Chairman and guide the Board in its critical mission of protecting the shareholders.
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. Mr. Eisenman was selected to serve on our Board because of this retail experience as well as his ability to advise the Board on real estate matters affecting the Company.
Roger T. Knox is President Emeritus of the Memphis Zoo 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 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 former Director of Hancock Fabrics, Inc. Mr. Knox brings to the Board over thirty years of retail experience as well as executive leadership experience.
Thomas H. Tashjian was elected a Director of the Company in March 2001. Mr. Tashjian is a private investor. Prior to 2001, 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. In those roles, Mr. Tashjian dealt with corporate governance and financial matters on a regular basis. Mr. Tashjian’s earlier retail operating experience was in discount retailing at the Ayrway Stores, which were acquired by Target Corporation, and in the restaurant business at Noble Roman’s. He is a graduate of the Director’s Consortium of the Stanford Graduate School of Business and is a member of the Society of Corporate Secretaries and Governance Professionals. Mr. Tashjian was selected to serve on ouris qualified as a member of Fred’s Board of Directors because of his discount retailtwo decades of financial research experience as a noted institutional investment analyst for several major investment banking companies, as well as his standing as a financial expert and corporate governance expert.
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B. Mary McNabb was elected a Director of the Company in April 2005. Most recentlyMs. McNabb is currently the owner and operator of Tai Shan Farms, Inc. Previously, she served as Chief Executive Officer for Kid’s Outlet, California. Kid’s Outlet, California filed for bankruptcy on May 14, 2009. Previously,Prior to that, she served as Executive Vice President and a Director of The Mowbray Group from 2004-2005, a California-based retail consulting firm that specializes in problem-solving, cost reductions, importing, and retail management. She has served as a member of the Board of Directors of C-ME (Cyber Merchants Exchange). Ms. McNabb was formerly Executive Vice President of merchandisingMerchandising and marketingMarketing for Factory 2-U, Vice President of sourcing for S-Q of California, and West Coast Manager/Buyer for One Price Clothing, Inc. Ms. McNabb brings a wealth of retail experience to our Board, with specific experience in the soft lines areas of our business. Ms. McNabb also brings executive leadership experience to the Board.
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Michael T. McMillan was elected a Director of the Company in February 2007. Mr. McMillan currently serves as Senior Director of Franchise Development for Pepsi-Cola North America, a Division of PepsiCo, where he has spent the last 2630 years in various roles including marketing, sales, franchise development, and general management of its bottling operations. Mr. McMillan was chosen to serve on our Board because of his experience in sales and marketing.
Bruce A. Efird was elected a Director of the Company in June 2008. Mr. Efird joined the Company September 22, 2007 as President and became Chief Executive Officer effective February 1, 2009. Prior to joining the Company, Mr. Efird was Executive Vice-President-Merchandising at Meijer, Inc. as well as being responsible for marketing and advertising. Before joining Meijer, Inc. in 2005, Mr. Efird was Executive Vice-President /General Manager for Bruno’s Supermarkets, Inc. in Birmingham, Alabama beginning in 2003. He began his retail career with Food Lion, Inc. in 1984. Mr. Efird brings an entire career in the retail industry, with specific experience in the consumable areas of our business. Mr. Efird also brings executive leadership experience to the Board.
Steven R. Fitzpatrick was elected to the Board of Directors onin May 21, 2012, and will be presented as one of the recommended director nominees at the 2012 Annual Meeting.2012. Steven Fitzpatrick was the President of Accredo Health Group, Inc., Medco’s fast-growing specialty pharmacy organization, a position he held until he retired in JuneJuly 2011. Mr. Fitzpatrick joined Accredo in 2001 as President of its subsidiary, Sunrise Health Management, Inc., and was named President of Accredo Therapeutics, Inc., in February 2002. With the acquisition of Accredo by Medco Health Solutions, Inc., in August 2005, Mr. Fitzpatrick assumed responsibility for both Accredo Therapeutics and Accredo Specialty Care Services (formerly Medco Specialty Solutions). In March 2006, he became Chief Operating Officer of Accredo Health Group and was named President in June 2008. Prior to joining Accredo, Mr. Fitzpatrick held senior management positions with Abbott Laboratories, Block Medical, PharmaThera and Nations Healthcare. Mr. Fitzpatrick has an MBA from Northwestern University and successfully passed the CMA and CPA accounting exams. Mr. Fitzpatrick’s brings extensive experience in the pharmaceutical industry, including specialty pharmacy services, as well as financial and management experience to the Board.
Jerry A. Shore was named Chief Executive Officer in October 2014 and joined the Board of Directors in November 2014. Mr. Shore started with the Company in April 2000 as Executive Vice President and Chief Financial Officer. In January 2014, Chief Operating Officer was added to his responsibilities. Prior to joining the Company, Mr. Shore was employed by Wang’s International, a major importing and wholesale distribution company as Chief Financial Officer from 1989 to 2000, and in various financial management capacities with IPS Corp., and Caterpillar, Inc. from 1975 to 1989. Mr. Shore is a CPA. He brings extensive experience with Fred’s and the retail industry as well as financial and accounting expertise to the Board.
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 FRED’SFred’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’SFred’s has no reason to believe that any nominee will be unable to serve as a director.
AlthoughThe Company expects its directors to attend the Company doesAnnual Meeting, however there is not have a formal policy regarding attendance by members of the Board of Directors at the Annual Meeting, the Company encourages all of its directors to attend.requiring attendance. All directors were present for the 20112014 Annual Meeting of Shareholders.
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 June 22, 2012,May 1, 2015, 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.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’SFred’s Common Stock and written representations furnished to FRED’SFred’s by its officers, directors and principal shareholders, FRED’SFred’s is not aware of the failure of any such reporting person 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 except for the following instances of untimely reporting: Kevin Pitt was promoted to Regional VP on February 24, 2012 and Shannon Strickland sold 296 shares of stock on June 4, 2012.
Board of Directors restricted stock granted on July 1, 2014; leadership grants to Jerry Shore, Mark Dely, Sherri Tagg, Lilia Lauren and Ronald Kay on March 25, 2014, Bernice Bloom on April 14, 2014, William Rampy on April 15, 2014, Mike Holligan on September 15, 2014, Craig Barnes on December 1, 2014, Jerry Shore on December 19, 2014 and Sherri Tagg on December 26, 2014; sales of shares acquired through the employee stock purchase plan by Randy Coughlin on April 8, 2014 and Willie Sands on September 9, 2014.
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Board of Directors
During the last fiscal year, FRED’SFred’s Board of Directors held sevenfourteen meetings. AllOther than Mr. Efird not being present for two Board Meetings, all of the directors attended all of the Board meetings and the prior year'syear’s annual meeting andeither in person or telephonically. As a regular part of the Independentboard meetings, the independent directors also held general meetings.meet separately to discuss different matters on a regular basis. Mr. Hayes is Chairman of the Board of Directors. Non-employee Directors of FRED’S, with the exception of the Chairman of the Board of Directors,Fred’s are paid for their services as such $24,000 per year plus reasonable expenses for meeting attendance, and are granted stock options and/or restricted stock from time to time. For additional information on Director Compensation see “Director Compensation.” John R. Eisenman, Roger T. Knox,Steven R. Fitzpatrick, Thomas H. Tashjian, B. Mary McNabb, and Michael T. McMillan were considered independent as defined in the listing standards of the National Association of Securities Dealers' Automated Quotation SystemNASDAQ Stock Market (“NASDAQ”) as of the end of fiscal 2011.
Communication with the Board of Directors
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The Board of Directors has established a process for shareholders to send communications to the Board. Shareholders may send communications to our Board by sending a letterfacilitate communication with Directors. Communications can be addressed to: Board of Directors, FRED’SFred’s Inc., c/o General Counsel,Mark C. Dely, Secretary, 4300 New Getwell Rd., Memphis, TN 38118. All communication will be reviewed by our Legal Department and appropriate communications will be forwarded to the Board of Directors on a quarterly basis, unless requested by the Board on a more frequent basis. Shareholder communications will be treated confidentially, subject to applicable laws, regulations or legal proceedings, if so marked on the envelope or in the communication.communication but will be reviewed by the Company’s Legal Department.
Leadership Structure
We currently have separate individuals serving as Chairman of the Board and as Chief Executive Officer. We believe that this separation of the positions represents the appropriate structure for us at this time. The Board does not have a policy regarding the separation of the roles of Chief Executive Officer and Chairman of the Board. The Board believes it is in the best interests of the Company and our stockholdersshareholders to be free to make that determination based on the position and direction of the Company and the membership of the Board. Under our current structure both the Chairman and Chief Executive Officer have responsibility for our business strategy and financial performance. Our Chief Executive Officer is responsible for the strategic direction for the Company and the day to day leadership and performance of the Company, while our Chairman provides guidance to the Chief Executive Officer and presides over meetings of the full Board.
Lead Director
In the event that the Chairman of the Board is also a member of management of the Company, pursuant to the Company’s Corporate Governance Guidelines, the Company will elect an independent Director to serve as Lead Director. The role of the Lead Director is:
Currently, because the Company’s Chairman is not a member of management of the Company, the Company does not have a Lead Director.
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Board’s Role in Risk Management
The Board is elected by the shareholders to oversee the long-term health and overall success of the Company. In order to fulfill the Board’s roleresponsibilities, it oversees the proper operation of the business, safeguarding of assets, the maintenance of appropriate financial and internal controls, and the Company’s compliance with applicable laws and regulations. Inherent in risk managementcarrying out these responsibilities is primarily one of oversight and occurs as an integral and continuous part of the Board’s oversight of our business.the various risks that impact the Company. The Board understands that it is impossible to eliminate all risks. Nonetheless, the Board, through its oversight of the Company, undertakes to manage and mitigate risks as appropriate. The primary responsibility for the identification, assessment and management of the various risks that we face belongs with our management team. The entire Board regularly reviews information with management on our business strategy, financial position and operations and considers associated key risks (that can include business, legal, regulatory, compliance, public policy, reputational and other risks).
In addition, the Board executes its oversight role through its Audit Committee and other committees which report regularly to the whole Board on their activities. For our Audit Committee, some areas of specific committee level focus include risk associated with financial reporting, internal control, and related party transactions.transactions and data security. The Compensation Committee reviews risks associated with our executive incentive compensation policies. Our Governance Committee reviews risks in corporate governance structure, business conduct and ethics.
Governance Committee
The BoardCode of Directors believes the Company observes sound corporate governance practices. However, following enactment of the Sarbanes-Oxley Act of 2002 and the adoption of new rules and regulations by the Financial Industry Regulatory Authority (formerly known as the National Association of Securities Dealers, Inc.) and the Securities and Exchange Commission, the Company, like many public companies, has addressed the changing governance environment by reviewing its policies and procedures and, where appropriate, modifying and/or adopting new practices.Conduct
The Company has adopted a code of ethics that applies to all of its directors, officers (including its ChiefNamed Executive Officer, President, Chief Financial Officer, Chief Information Officer, Senior Vice President of Finance, Controller and any person performing similar functions)Officers) and employees. Also, the Company has a vendor code of conduct that applies to its vendors.
The Company’s code of ethics and vendor code of conduct are available on the Company’s website at www.fredsinc.com and can be found under the Investor Relations and Corporate Governance links. The Board of Directors has adopted a written charter for the Governance Committee, which is also available on the Company’s website. The information contained on the website is not incorporated by reference in, or considered part of, this Proxy Statement.
Governance Committee
At the 2012 Annual Meeting, the shareholders requested by way of a majority vote to appoint a Director who has a high level of expertise and experience in corporate governance. The Board of Directors responded by appointing Thomas H. Tashjian to chair the Governance Committee. Mr. Tashjian is a graduate of the Director’s Consortium of the Stanford Graduate School of Business and is a member of the Society of Corporate Secretaries and Governance Professionals. The Board of Directors has determined that Mr. Tashjian has sufficient high level expertise and experience in corporate governance.
In recognition of the continuing importance of sound corporate governance, the Governance Committee has developed corporate governance guidelines that have been adopted by the Board of Directors. The Governance Committee believes these Corporate Governance Guidelines will provide shareholders and Directors with a clear statement of the Company’s expectations and processes utilized by the Board of Directors with respect to corporate governance matters. A copy of the Corporate Governance Guidelines are available on the Company’s website under the investor relations section.
The Governance Committee makes recommendations to the Board of Directors regarding corporate governance matters and practices. The Governance Committee is currently comprised of Michael T. McMillan,Thomas H. Tashjian, Chairman of the Committee Tom H. Tashjian, and B. Mary McNabb allboth of whom meet the independence requirements of NASDAQ listing standards. The Governance Committee ofstandards and the Board of Directors met five times duringindependence criteria set forth in the Company’s latest fiscal year.SEC’s rules. Governance members are paid for their services $6,000 per year for the Chair and $1,500 per year for the other members, plus reasonable expenses for meeting attendance.
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Prior to the vote (at the 2009 annual meeting) of our shareholders with respect to majority voting for the Board of Director elections, but after issuance of the proxy statement describing the vote as binding the Company, the shareholder proponent revised its proposal to be advisory (at the suggestion of the Company) in order to comply with Tennessee law. Our Committee and Board of Directors, recognizing that our Directors are elected for terms of only one year (and not by staggered class terms), have determined to make no changes in director election procedures for this 2012 Annual Shareholders Meeting. The Board of Directors will continue to monitor this subject.
Nominating Committee
The Committee recommends nominees for election to the Board by the shareholders at the annual meeting. The committee is comprised of RogerMichael T. Knox,McMillan, Chairman of the Committee, John R. Eisenman and Tom H. Tashjian, all of whom meet the independence requirements of NASDAQ listing standards. The Nominating Committee met five times with all committee membersstandards and the independence criteria set forth in attendance.the SEC’s rules. Nominating members are paid for their services $6,000 per year for the Chair and $1,500 per year for the other members, plus reasonable expenses for meeting attendance. The Board of Directors has adopted a written charter for the Nominating Committee, which is available Company’s website at www.fredsinc.com.website.
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The Nominating Committee identifies candidates for nomination based upon its criteria for evaluation as described below. 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 Company does not have a formal policy with regard to the consideration of diversity in identifying director nominees, but the Nominating Committee strives to nominate directors withdiverse candidates for service on the Board who have a variety of skills and experience so that theexperience. The Board will havenot discriminate on the necessary expertise to oversee the Company’s business.basis of race, color national origin, sexual orientation, religion, or disability in selecting nominees.
The Nominating Committee has adoptedmeets at least annually and more often as necessary to make nominations to the following policy with regardBoard. The Nominating Committee will consider shareholder nominations to considering a shareholder’s nominee.the Board sent to the Nominating Committee, c/o Mark C. Dely, Corporate Secretary, Fred’s Inc., 4300 New Getwell Road, Memphis, TN 38118. To submit a nomineebe considered for consideration,nomination, a shareholder must provide the Nominating Committee:Committee the following:
proof of the shareholder’s eligibility to submit proposals in accordance with Rule 14a-8(b) of the Securities Exchange Act of 1934, as amended;
a complete description of the candidate’s qualifications, experience, accomplishments and background; and
the candidate’s signed consent to serve on the Board.
In general, the Nominating CommitteeRecommendations by shareholders that are made in accordance with these procedures will evaluate a candidate identified by a shareholderbe evaluated using the same standards as itthe Nominating Committee uses for candidates it identifies. The Nominating Committee has the full discretion not to include a shareholder’s candidate in its recommendation 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 decisions. In addition to considering candidates suggested by the shareholders, the committee considers potential candidates recommended by current directors, Company officers, employees and others and may engage consultants or third-party search firms in identifying and evaluating potential nominees. Before recommending a shareholder’sany candidate, the Nominating Committee may also:
consider whether the shareholder candidate will significantly add to the diverse 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.
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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.
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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 Michael T. McMillan and Steven R. Fitzpatrick, met fivefour times during the last fiscal year. All of the members attended all of the Committee meetings. Each of the members of the Audit Committee is an independent director as defined in the NASDAQ listing standards.standards and meets the independence criteria set forth in the SEC’s rules. Audit Committee members are paid for their services $16,000 per year for the Chair and $4,500 per year for the other members plus reasonable expenses for meeting attendance.
The Audit Committee is responsible for the engagement of the independent registered public accounting firm;firm, considering the range of audit and non-audit fees;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;public, reviewing the Company’s system of internal controls regarding finance, accounting, legal compliance, risk and ethics that management and the Board have established;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 and internal controls over financial reporting 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 is available Company’s website at www.fredsinc.com.website. 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 fiscal 20112014 with management of the Company. BDO USA, LLP, the Company’sCompany��s independent registered public auditing firm, is responsible for performing independent audits of the consolidated financial statements in accordance with generally accepted auditing standards and the effectiveness of the Company’s internal control over financial reporting.reporting in accordance with standards of the Public Company Accounting Oversight Board (“PCAOB”). The Audit Committee also discussed with BDO USA, LLP the matters required to be discussed by Statement on Auditing Standards No. 61, as amended, as adopted by the Public Company Accounting Oversight Board (“PCAOB”)PCAOB in rule 3200T, and other matters required by the Audit Committee’s charter. The Audit Committee has received the written disclosures and the letter from BDO USA, LLP as required by PCAOB Rule 3526 and has discussed with BDO USA, LLP their independence, including consideration of whether the payment to BDO USA, 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 USA, LLP, the Audit Committee has recommended to the Board of Directors that FRED’S, Inc.the Company’s audited financial statements for fiscal 20112014 be included in the 20112014 Annual Report on Form 10-K for filing with the Securities and Exchange Commission, and that BDO USA, LLP be considered for selection as the Company’s independent registered public accounting firm for 2012.2015.
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 USA, 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 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 USA, LLP is in fact independent.
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John R. Eisenman, Audit Committee Chairperson
Roger T. Knox
Thomas H. Tashjian
B. Mary McNabb
Michael T. McMillan
Steven R. Fitzpatrick
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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’SFred’s long-term incentive plan. The Compensation Committee, which is comprised of B. Mary McNabb, Chairperson of the Committee, Roger T. Knox and Michael T. McMillan, and John R. Eisenman, met fivefour times during the last fiscal year. AllEach of the members attended all of the Committee meetings. Each of the members of the Compensation Committee is an independent director as defined in the NASDAQ listing standards and meets the independence criteria set forth in the SEC’s rules. Compensation Committee members are paid for their services, $7,500 per year for the Chair and $1,500 per year for the other members, plus reasonable expenses for meeting attendance. The Board of Directors receives the compensation and grant recommendations of the Committee and may approve, amend or reject the recommendations. The Board of Directors has not adopted a written charter for the Compensation Committee.Committee, which is available at the Company’s website.
Pharmacy Committee
The Pharmacy Committee reviews and provides guidance on the strategy and direction of the Company’s pharmaceutical business. The Pharmacy Committee is comprised of Steven R. Fitzpatrick, Chairperson of the Committee, Thomas J. Tashjian, Jerry Shore, Rick Chambers and Shannon Strickland and met six times during the last fiscal year. Each of the members attended all of the Committee meetings. The non-employee Pharmacy Committee members are paid for their services, $8,000 per year for the Chair and $1,500 per year for the other members, plus reasonable expenses for meeting attendance.
Transactions with Related Persons and the Company'sCompany’s Approval Policy
Atlantic Retail Investors, LLC, which is wholly owned by Michael J. Hayes, a director of the Company, and members of his family, purchased from unrelated parties and owned the land and buildings occupied by thirteen Fred’s stores, until March 2011 when, as described below, a portion of these properties were purchased by the Company. The terms and conditions regarding the leases on these locations were consistent in all material respects with other stores leases of the Company with unrelated landlords.
On March 30, 2011, Fred’s selected and purchased ten of the thirteen properties leased from Atlantic Retail Investors, LLC, one of which has an adjacent parcel and building that is leased to an unrelated party for a total of eleven properties, for $7.5 million in cash and assumed mortgage debt of $3.5 million. The Board of Directors approved these transactions after receiving an evaluation by an independent real estate broker, who concluded that all were acquired at comparable, and favorable, purchase prices to market value and were financially beneficial to Fred’s as the depreciation expense for the newly acquired assets will be less than the future value of the lease payments that would have been due.
In May 2011 after approximately 18 months of negotiation, Atlantic Retail Investors, LLC purchased the land and building of four additional properties that the Company had previously evaluated multiple times and eventually passed for purchase. These stores were subsequently purchased by Atlantic Retail Investors, LLC, from a lender who had foreclosed on the independent landlord/developer at terms and conditions favorable to those earlier evaluated by the Company. Upon closing, Atlantic Retail Investors, LLC informed the Company of the purchase and offered them at substantially the same terms. The terms and conditions regarding the leases on these locations were consistent or better, in all material respects with other stores leases of the Company with unrelated landlords.
In June 2011, Fred’s purchased these four properties together with an adjacent parcel and building at an existing owned location for a total consideration of $2.4 million in cash. No mortgage debt was assumed in this transaction. The Board of Directors approved these transactions based on the financial terms that were more favorable to market value and financially beneficial to Fred’s as a result of the depreciation expense on the newly acquired assets being less than the future value of lease payments that would have been due.
family. As of January 28, 2012,31, 2015, Fred’s is leasing three properties from Atlantic Retail Investors, LLC. These leases were reviewed and approved by the independent Directors of the Company in May 2011based on receiving an independent evaluation from a real estate broker. Mr. Hayes did not take part in that decision. The terms of the leases are consistent with the terms of Fred’s other leased properties. The total rental payments for related party leases were $451.2$310.0 thousand for the year ended January 28, 2012 and $1.3 million31, 2015, $301.0 thousand for the yearsyear ended January 29, 2011February 1, 2014 and January 30, 2010, respectively.
The Board of Directors approved these transactions based on an evaluation by an independent real estate broker, who concluded that all were acquired at better than market value and financially beneficial to Fred’s.$326.1 thousand for the year ended February 2, 2013.
Any future transactions which are required to be described by Item 404(a) of Regulation S-K under the Securities Exchange Act of 1934 will be reviewed and either rejected or approved by the Board of Directors.
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COMPENSATION DISCUSSION AND ANALYSIS
Introduction
This section of the Proxy Statement details the compensation plans for our executive team. In it we describe our compensation philosophy, policies and practices as they relate to our management team and especially to our chief executive officerChief Executive Officer (CEO), chief financial officer (CFO)Chief Financial Officer (CFO and CAO) and the three most highly compensated executive officers (collectively, the “Named Executive Officers”). The Named Executive Officers for 20112014 include: Bruce A. Efird (CEO(who served as CEO & President)President through October 29, 2014), Jerry A. Shore (CFO)(who served as CFO and then CEO beginning on October 30, 2014), AlanSherri L. Tagg (EVP & Chief Accounting Officer (“CAO”)), Michael K. Bloom (Chief Operating Officer & President), Craig L. Barnes (EVP Supply Chain & Global and Domestic Logistics), and Mark C. Crockett (EVPDely (SVP Chief Legal Officer, General Merchandise Manager),Counsel & Secretary). In addition, the Company has also included Rick A. Chambers (EVP Pharmacy Operations) for informational purposes. Mr. Chambers has been one of the Named Executive Officers in the past and Reggie E. Jacobs (EVP Distribution & Corporate Services).the Company anticipates he will be included in the future.
Changes to executive compensation as well as general guidelines for other employees are considered and approved by the Compensation Committee of the Company.
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Summary of Fiscal 20112014
Fiscal 2011The following information contains references to years 2014 and 2013, which represent fiscal years ended January 31, 2015 and February 1, 2014.
2014 was a year of continued momentuminvestment for Fred’s. Despite athe Company. Although the pharmacy department posted another strong script performance in 2014, the year overall was challenging economic climate and generally tough retail conditions, financial objectives were met and exceededas we dealt with problems in many cases. Through the effortsgeneral merchandise side of our dedicated team, we made significant progress during 2011 in rebrandingbusiness and upgrading our stores with the Core 5 Program, improving our in-stock position and merchandise selection and controlling promotional and clearance markdowns, which in turn helped drive increased sales and higher customer traffic. The following are someexpiring pharmacy supply contract. During the last half of the highlights of theseyear, we worked aggressively to clear inventory, close underperforming stores, and improve supply chain strategies. Those efforts resulted in non-recurring charges that were primarily incurred to reduce low-productive inventory and some noteworthy 2011 accomplishments:
Net incomeclose underperforming stores, which totaled $36.6 million pre-tax or $0.60 per share after tax. Overall, for 2014, the Company’s net loss totaled $28.9 million or ($0.79) per diluted share increased to $0.87compared with net income of $26.0 million or $0.71 per diluted share in fiscal 2011 from $0.75 in fiscal 2010, representing a 16% increase.the prior year. Adjusted net loss for 2014 was $7.3 million or ($0.20) per diluted share, which excludes the $36.6 million pre-tax non-operational charges during 2014.
Even with the challenges of 2014, the Company had some notable accomplishments, including:
We achieved gross margin improvement of 10 basis points to 28.7% in 2011 by increased pharmacy rebates, improvements in product sourcing, cost reductions across all product lines and improvements in loss prevention processes leading to reduced shrinkage in our stores.
We continued the successful rollout our Core 5 Program, which is a key strategic initiative designed to highlight key categories within our stores that differentiate us from our competition. In 2011, we remodeled and refurbished 205 stores with an upgraded look featuring the Core 5 Program components, bringing the total stores completed since the rollout in 2010 to 413.
We continued to add new products to our Own Brand line and maintained a penetration rate of 19.0% of total consumables even as the Company experienced a continued shift toward basic and consumable products and a stronger increase in national brand sales.
Comparable storeTotal sales for 2011 increased 0.5% on top offiscal 2014 increasing from $1.970 billion versus $1.939 billion for fiscal 2013, an increase of 2.2% in fiscal 2010.
We increasedThe Company executed a new prime vendor multi-year agreement with pharmacy wholesaler Cardinal Health to serve as Fred’s new primary wholesale supplier for branded and generic pharmaceuticals beginning on October 1, 2014. Under the annual dividendprime vendor agreement, Fred’s and Cardinal Health have established a mutually beneficial strategic alliance designed to $0.20 per share from $0.16 per share the previous year, for an increasesupport Fred’s key initiative of 25%,rapid pharmacy growth, and we repurchased 2,447,823 sharesbuild on a foundation of common stock.
Our compensation program is designed to motivate and reward outstanding performance that benefits our stockholders.and to drive long-term value creation. We believe that when the Company performs well and achieves its operating goals, that our executive officers should receive rewards that are commensurate with those of our shareholders. Consistent with our philosophy of aligning executive compensation with company performance, in 2014 the Company madedid not make bonus payments other than to a select number of approximately 70% of targetindividuals who were promised minimum bonus amounts when hired, met their the predetermined operating goals, or provided an extraordinary contribution to our executives for fiscal 2011.
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ObjectiveCompensation Objectives
It is the philosophy of FRED’SFred’s that executive compensation beis linked to corporate performance and increases in shareholder value. We have designed our compensation program to align our executives’ compensation with the long-term interests of our shareholders and to attract and retain talent. The following objectives have been adopted by the Committee as guidelines for compensation decisions:
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Provide a competitive total compensation package that enables FRED’SFred’s to attract, motivate and retain a strong leadership team.
Reinforce a high performance culture with integrated programs tied to our short and long term objectives.
Create alignment of interest between executives and shareholders focused on long term value creation.
Role of Compensation Committee
The Compensation Committee is responsible for setting the compensation philosophy of the Company and then evaluating and monitoring adherence to its objectives. In doing so, the compensation philosophy of the Company. It is responsible for balancingCommittee must balance the financial requirements of the Company with the need to attract and retain high caliber individuals for key roles within the Company.
The Compensation Committee reviewed multiple retailersalso reviews the risks and rewards of the Company’s compensation programs. The plans are designed to reward prudent risk-taking over both the short and long term. The Company has put in an effort to develop a peer group. The Compensation Committee was unable to identify enough companies comparable to Fred’s mixplace clawback features for its senior executives in their compensation programs and has also set expectations for long-term stock ownership of its BOD, CEO and President through share ownership guidelines. These features, along with the general merchandise and pharmacy sales, overall sales volume anddesign of the quantity, size and geographical location of our stores. Absent a defined peer group and based on its review of all relevant programs, the Compensation Committee believes that the total compensation program forare meant to ensure appropriate level of risk taking by the Company’s executives of FRED’S is competitive withover the compensation programs provided by other companies with which FRED’S competes.long term.
The Committee believes that our incentive compensation plans are appropriately related to corporate and individual performance, yielding awards that are tied to the annual financial and operational results of FRED’SFred’s and consistent with the returns that are generated on behalf of FRED’SFred’s shareholders. After review by the Compensation Committee and management regarding the policies and practices with respect to risk-taking incentives and risk management, the Company does not believe that potential risks arising from its compensation policies or practices are reasonably likely to have a material adverse effect on the Company.
How We Determine Executive Compensation Philosophy
The Compensation Committee is charged with oversight of the Company’sIn setting executive compensation strategyphilosophy and practices. Thepractice, the Company has engaged independent consulting firms and reviewed benchmarking data of peer companies in the past forretail and pharmacy industries. In collaboration with management, the purpose of evaluating the annual compensation review process. They providedCompensation Committee has set a standardized structure for salary performance reviews, tailored reviews to be more pertinent to the job function and defined and added structure to the review process. These evaluations encompassed interviews with key employees to determine the job responsibilities, skill level requirements and importance of the function within the organization.
Employment Agreements
We have amended employment agreements with Michael J. Hayes (April 30, 2003, amended December 16, 2008) and Bruce A. Efird (September 22, 2007, amended December 22, 2008 and February 16, 2009). The amendments are described below.
Michael J. Hayes. Mr. Hayes retired as Chief Executive Officer effective February 1, 2009. His employment agreement provided that he would receive continued payment of his most recent salary and other Company-provided benefits (including a monthly allowance of $6,000 to defray costs of an office and assistant) for three years from the effective date of his separation from service. During this period Mr. Hayes was not compensated as a member of the Board of Directors. With the exception of his health and dental benefits, which the Company will provide during the lives of Mr. and Mrs. Hayes, Mr. Hayes’ employment agreement expired in February 2012. Mr. Hayes agreed not to compete with Fred’s for a period of six months from the date of his separation from service. Going forward, Mr. Hayes will receive compensation as the Chairman of the Board of Directors in the form of an annual Chairman fee and restricted stock grant that vests on the day after he ceases to be a Board of Director member.
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Bruce A. Efird. Mr. Efird became Chief Executive Officer effective February 1, 2009. His employment agreement automatically extends for successive one year terms unless terminated by either party. The agreement provides that we will pay Mr. Efird an annual base salary of $650,000 annually. Also, Mr. Efird participates in any executive bonus plans of the Company. Should Mr. Efird be separated from service or die, his heirs will receive compensation at the same rate for the balance of the term (not less than 6 months and not more than twelve months salary). All stock options and the 25,000 shares of restricted stock shall accelerate and immediately vest and be payable to the Executive or his heirs.
The Compensation Committee reviews Mr. Efird’s salarydetermines what elements and bonus annually. We may terminate Mr. Efird’s employment with or without cause. Mr. Efird has agreed notamounts are included as part of executive compensation to compete withbalance between short and long term compensation. The Company’s executive compensation program is reviewed annually by the Company for a period of one year following the termination of the employment agreement.Compensation Committee and adjusted as needed.
Perquisites and Other Personal Benefits
Other than the following item, the Company does not provide perquisites or other personal benefits for its executive officers. Mr. Hayes is permitted to use the Company plane for personal use, but did not do so during 2011. The value of past usage was recorded as taxable compensation in the year in which it occurred.
Employee Compensation Components
The Company and the Compensation Committee have implemented compensation programs designed to align our executives’ pay with the achievement of long and short term performance goals that reinforce our business strategy. The Company uses three main components in compensating its executives: base salary, annual cash incentive compensation and stock based incentive compensation. Base salary and cash bonusincentives are geared to reward near term performance, whereas stock awards blend near-term performance with longer-term earnings that result in share price growth.
Additionally, theThe Company believes that these compensation incentive plans and practices, which are based on balanced performance metrics, do not encourage excessive short-term risk taking and do promote disciplined progress towards longer-term Company goals.
The elements of the executive compensation program have remained substantially the same for several years. We believe our programs are effectively designed and working well in alignmentto align with the interests of our shareholders and are instrumental into achieving our business strategy. In determining executive compensation for 2011, the compensation committee considered the overwhelming shareholder support that the “say-on-pay” proposal received at our June 15, 2011 annual meeting of shareholders. As a result, the compensation committee continued to utilize the same elements it has used in previous years and will continue to consider shareholder concerns and feedback in the future. In accordance with the view expressed by our shareholders in an advisory vote at the 2011 Annual Meeting of Shareholders, our Board of Directors currently intendsintend to provide for a “say on pay” vote on an annual basis.basis and will continue to consider shareholder concerns and feedback in the future. In determining executive compensation for 2014, the compensation committee considered the overwhelming shareholder support that the “say-on-pay” proposal received at our June 19, 2013 annual meeting of shareholders. As a result, the Compensation Committee continued to utilize the same elements it has used in previous years, with small changes to encourage a mix of more long-term incentive compensation.
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Base Salary
We pay base salaries to provide a stable fixed amount of cash compensation. Base salaries are determined through analysis of industry data and comparisons with other peer retailing companies trading within our area andcompanies. Salaries are set to recognize individual skills, competencies, experience and organizational impact.impact within a defined job description. 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
The table below reflects the current base salaries of the Named Executive Officers.
Annual | ||||
Base Salary | ||||
Jerry A. Shore, CEO | $ | 575,000 | ||
Michael K. Bloom, COO & President | $ | 500,000 | ||
Rick A. Chambers, EVP Pharmacy Operations | $ | 300,000 | ||
Craig L. Barnes, EVP Supply Chain & Global and Domestic Logistics | $ | 275,000 | ||
Mark C. Dely, SVP Chief Legal Officer, General Counsel & Secretary | $ | 224,994 | ||
Sherri L. Tagg, EVP & CAO | $ | 220,000 |
Annual Merit Increases
All of our employees’ base salaries are reviewed annually for possible merit increases, in base salary were recommendedhowever, an increase is not guaranteed. Any adjustments take into account the individual’s performance, responsibilities and experience, as well as external market practices. Salary increases for Named Executive Officers, other than the CEO, are determined by the Chief Executive Officer in fiscal 2011 forconsultation with their direct supervisor. The Compensation Committee in consultation with the other Named Executives Officers, based on performanceChairman of the Board, reviews and competitive considerations,discusses the Board’s evaluation of the Chief Executive Officer and the Committee considered thosethen makes recommendations in making its determination and recommendation to the Board.non-employee Board Members to consider regarding merit increases of the CEO.
Promotions or Changes in Roles
Base salary may also be increased to recognize a promotion, change in role or additional responsibilities. Promotions, role changes or additional responsibilities do not guarantee a change in compensation. In October of 2014, Jerry Shore was promoted to CEO and Sherri Tagg was promoted to EVP & CAO. Craig Barnes was promoted to General Merchandise Manager in November of 2014 and to EVP – Supply Chain and Global and Domestic Logistics in March of 2015. Base salary was increased for Mr. Shore, Ms. Tagg and Mr. Barnes to recognize their promotions.
Annual Cash and Stock Incentive Compensation (“MIP”)
TheWe pay annual cash and stock incentive compensation to senior executives as part of our Management Incentive Plan (“MIP”) consiststo reward executive performance for the year based on the performance of two components;the Company. The participants only earn payment under the MIP plan if specific pre-established targets and goals are achieved. Generally, forty percent of the bonus payment is contingent upon the Company meeting its pre-tax income corporate goal for the year, while the remaining sixty percent is contingent upon achievement of the employee’s department budget/goals and individual core goals. Of the remaining sixty percent, thirty percent of the bonus payment is contingent on achievement of department goals consisting of meeting either department gross profit, department corporate contribution, department operating profit, or department budget, depending on the department. The remaining thirty percent is contingent upon meeting pre-determined, objective and measured individual goals. Consistent with our pay for performance philosophy, the pharmacy, merchandising and store operations departments must achieve their department goal before they are eligible to receive any bonus on the individual goal component of the MIP. For all other MIP participants, including the CEO and President, in order to be eligible for any payment under the MIP, the Company must meet its threshold pre-tax income goal. The MIP is paid in part stock and part cash compensation. We believe it is important for incentive compensation to include performance-based long-term equity compensation for our senior executives in order to align the interests of these individuals with the interests of our shareholders. We believe that long-term equity compensation is also an important retention tool.
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CEO And President Compensation and Employment Agreements
In October of 2014, the Company promoted Jerry Shore to CEO, and in January of 2015, the Company hired Michael Bloom as President and COO for the Company. Both Mr. Shore and Mr. Bloom entered into employment agreements with the Company that provide for the terms of their compensation (“Agreement” or “Agreements”). These Agreements were included as part of the Company’s 2014 third quarter Form 10-Q dated December 11, 2014 in the case of Mr. Shore and as part of a Form 8-K dated January 14, 2015 for Mr. Bloom. The Company utilized an independent third party consultant to aid in determining the compensation for Mr. Bloom and Mr. Shore.
Base Salary
Under the terms of Mr. Shore’s agreement the Company pays an annual base salary of $575,000. The base salary is to be reviewed annually and may be adjusted upward at the discretion of the Board of Directors. Under the terms of Mr. Bloom’s Agreement, the agreement pays an annual base salary of $500,000. Mr. Bloom’s annual base salary will increase to $550,000 beginning with the Company’s fiscal year 2016, and to $700,000 upon promotion. Thereafter, Mr. Bloom’s base salary is to be reviewed annually and may be adjusted upward at the discretion of the Board of Directors.
Annual Cash Incentive
Under the agreements for both Mr. Shore and Mr. Bloom they are able to participate in the Company’s annual cash bonus componentincentive plan of 75% - 150% of their annual base salary. Eligibility to receive the cash incentive is based upon the achievement of pre-established performance goals agreed upon by the Board of Directors and aCEO (in the case of Mr. Bloom). The cash incentive for Mr. Bloom provides for an annual minimum amount of 50% of annual base, provided certain minimum targets (agreed upon by the CEO and Mr. Bloom) are achieved.
Annual Stock Incentive
Mr. Shore’s agreement provides that he is eligible for an annual stock incentive under the Company’s stock incentive program of up to 80% of his annual base salary payable half in restricted stock component, which includes qualifying performance thresholds over multiple years. Beginningand half in 2012, the componentsoptions to purchase stock of the Company. Mr. Bloom’s agreement provides that he is eligible to receive an annual stock incentive under Company’s stock incentive program in the following amounts: Fiscal Year 2015, $400,000; Fiscal Year 2016, $450,000; and Fiscal Year 2017, $600,000. Thereafter, the incentive amount is equal to 80% of Mr. Bloom’s annual base salary. The amount is payable half in restricted stock of the Company and half in options to purchase stock of the Company. Eligibility to receive the stock incentive is based upon the achievement of pre-established performance goals agreed upon by the Board of Directors and CEO. These goals may be the same or different than the annual cash incentive program.
Mr. Shore also has an opportunity to earn an additional 50% of annual base salary payable in options to purchase stock of the Company for achieving 125% of the mutually agreed upon pre-determined performance goals to qualify for the annual stock incentive. Mr. Bloom has a similar incentive and is eligible to receive an additional amount equal to $250,000 in Fiscal Year 2015; $250,000 in Fiscal Year 2016; $400,000 in Fiscal Year 2017; and 50% of the annual base salary thereafter, payable in options to purchase stock of the Company for achieving 125% of the mutually agreed upon pre-determined performance goals to qualify for the annual stock incentive.
Change in Control
The Agreements for both Mr. Shore and Mr. Bloom provide for compensation in the event of termination for any reason other than cause upon a change in control of the Company within the eighteen-month period following a change in control. This double-trigger change in control states that the Company shall pay either an aggregate amount equal to the annual base salary multiplied by the number of years remaining on the agreement if termination occurs in the first two years of the Agreements, or an aggregate amount equal to the annual base salary if termination occurs after the first two years of the Agreements. In addition, both Mr. Shore and Mr. Bloom are entitled to receive any accrued salary or incentive compensation. Finally, all options provided under the Agreements shall vest and any restrictions on stock provided pursuant to the Agreements shall lapse.
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The Compensation Committee agreed to these change in control benefits in order to ensure that in the event of a transaction that the CEO and President would be adequately aligned with the interests of shareholders in evaluating any such situation. These benefits would only be paid out in the event that either Mr. Shore or Mr. Bloom were terminated in connection with a Change in Control event as defined in the Agreements.
2015 MIP have changedPlan
In 2014, the Compensation Committee undertook a comprehensive review of the Company’s incentive compensation program. The Committee utilized an independent consultant and analyzed industry data to benchmark the Company’s compensation plans. Based on this analysis, the Committee made changes to the incentive compensation program to better align the program with industry compensation levels and increase the amount of employee compensation based on incentive measures instead of guaranteed salary. This reinforces the Company’s philosophy of providing incentive based compensation that drives performance and is closely aligned with the interests of our shareholders. The most significant change was to combine the Company’s RSLP program and MIP programs to provide a total incentive that is awarded as 60% cash incentive and 40% restricted stock incentive for VP, SVP and EVP levels. The incentive programs for the CEO and President are approximately 50% cash and 25% restricted stock and 25% options to purchase shares. The following table illustrates the cash and stock incentive bonus potential under the 2015 MIP expressed as a percentage of salary as recommended by the Compensation Committee and adopted by the Board of Directors:
2015 MIP | ||||||||||||
Total | Cash | Stock | ||||||||||
% | % | % | ||||||||||
CEO | 155 | % | 75 | % | 80 | % | ||||||
COO / President | 155 | % | 75 | % | 80 | % | ||||||
EVP | 70 | % | 42 | % | 28 | % | ||||||
SVP | 55 | % | 33 | % | 22 | % |
In order to achieve the payouts for the MIP program, the participants must achieve established pre-tax income targets. The Compensation Committee decided to change from a tiered EPS structure to a tiered Earnings before Interest and Taxes (“EBIT”) to pre-tax income to account for the increased interest expense the Company will incur related to its recent acquisition of Reeves-Sain Drug Store, Inc. The fiscal 2015 MIP allows for a graduated stock incentive payout based on a tiered pre-tax income structure.
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If the Company achieves one of the escalating stock incentive tiers, one fourth of the grant vests on the first anniversary of the grant date. In each of the subsequent fiscal years, one fourth of the base year grant will vest on the anniversary date. The following table represents the threshold, targetcash and maximum cash bonusstock potential under the 20122015 MIP expressed as a percentage of salaryMIP potential based on EBITpre-tax income levels recommended by the Compensation Committee and adopted by the Board of Directors.
2012 EBIT Goals | ||||||||||||
Threshold $57.2M | Target $59.6M | Maximum $81.2M | ||||||||||
CEO | 25.0 | % | 50 | % | 100 | % | ||||||
CFO | 25.0 | % | 50 | % | 100 | % | ||||||
EVP | 17.5 | % | 35 | % | 70 | % | ||||||
SVP | 12.5 | % | 25 | % | 50 | % |
Pre-tax | ||||||||
Income | Cash | Stock | ||||||
(millions) | % | % | ||||||
$6.4 | 0 | % | 0 | % | ||||
$18.5 | 0 | % | 50 | % | ||||
$24.6 | 0 | % | 75 | % | ||||
$30.6 | 100 | % | 100 | % | ||||
$31.1* |
* | A stretch bonus opportunity exists of 3% for every $500,000 pretax income above this level, up to a maximum of 200% |
Forty percent of the bonus payment is contingent upon the Company meeting its EBITpre-tax corporate goal for the year, while the remaining sixty percent is contingent upon achievement of the employee’s individual and department goals for 2012. Should2015 which are outlined above.
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Fiscal 2014 and Prior Year Incentive Compensation
Due to Company performance in 2014, a management incentive plan (MIP) was never approved or implemented. No bonuses were paid other than to select individuals who were promised minimum bonus amounts when hired, met their predetermined operating goals, or provided an extraordinary contribution to the Company fail to achieve its threshold EBIT goal, the entire cash component of thein 2014. In 2012 MIP would be null and void.
The threshold and target tiers of the restricted stock component begin at $59.6 million of EBIT, which represents 20% to 40% of the Senior Executive’s salary. The maximum tier of the restricted stock component is $60.8 million of EBIT, which represents restricted stock bonus compensation for Senior Executives in a range of 25% to 50% of their salary. Should2013, the Company fail to achieve its threshold tier EBIT goal,utilized similar cash incentive plans as the entire grant is null and void. If the Company achieves its threshold tier EBIT goal, one fourth of the grant vests on the first anniversary of the grant date. If the target EBIT is achieved in each of the subsequent fiscal years, one fourth of the base year grant will vest on the anniversary date. The following table illustrates the EBIT thresholds of the multiple year performance requirements of the restricted stock component of the 2012 MIP plan (in millions).
Fiscal Year | Target EBIT | Maximum EBIT | ||||||
2012 | $ | 59.6 | (1) | $ | 60.8 | (2) | ||
2013 | $ | 66.7 | ||||||
2014 | $ | 74.7 | ||||||
2015 | $ | 83.7 |
The fiscal 2011 Management Incentive Plan (MIP)2015 MIP. Those plans allowed for a graduated cash bonus payout based on a tiered Earnings per Share (“EPS”) structure and includes a potential restricted stock award with qualifying performance thresholds over subsequent years.
The following table represents the threshold, target and maximum EPS levels for the cash component of the 2011 MIP expressed as a percentage of salary based on recommendationEBIT levels recommended by the Compensation Committee and adopted by the Board of Directors. The Company failed to achieve its EBIT targets in 2012 and 2013, however, bonuses were paid to several members of the pharmacy department to recognize the strong performance of the department which met the pharmacy operating profit goal in 2012 and 2013. In addition, certain other individuals who met their operating performance goals were paid bonuses based on their performance in 2012 and 2013.
In 2012 and 2013, the Company also had a long-term equity compensation program for our senior executives called the Restricted Stock Leadership Program (“RSLP”). RSLP grants depended on the Company achieving its EBIT goals. The Company did not achieve its EBIT goal in 2012 or 2013 and therefore no RSLP stock grants were made.
2011 EPS Goals | ||||||||||||
Threshold $0.84 | Target $0.86 | Maximum $1.22 | ||||||||||
CEO | 25.0 | % | 50 | % | 100 | % | ||||||
CFO | 25.0 | % | 50 | % | 100 | % | ||||||
EVP | 17.5 | % | 35 | % | 70 | % | ||||||
SVP | 12.5 | % | 25 | % | 50 | % |
Incentive Leadership Grants
In August of 2012, the Compensation Committee recommended that the Board of Directors provide additional restricted stock and option awards to the CEO and CFO to align the interests of our two top executives with those of our shareholders by incentivizing value creation through financial improvement and diversification of the Company in three key areas: (1) improving operating profit margin; (2) driving general merchandising comparable sales growth; (3) achieving diversification through pharmacy growth in the areas of specialty pharmacy, clinical services and patient compliance and adherence. These three areas were identified by the Board of Directors as important to improving the overall performance of the Company. The Board of Directors approved the grant of restricted stock which vests after ten years and has an accelerator for achievement of a 4% operating margin. The Board of Directors also approved the grant of performance based options, 75% of which vest only upon achieving two consecutive years of “real” growth in general merchandising comparable store sales. The remaining 25% vests with the achievement of specific pharmacy goals (namely increasing specialty pharmacy scripts, increasing clinical services, and increasing patient compliance and adherence). The options expire after five years from the date of grant unless the targets are met.
In October of 2013, the Compensation Committee approved the inclusion of the EVP of Pharmacy in the leadership grant program and granted an option to purchase shares which vest only upon the achievement of specific pharmacy goals consistent with those established by the Board of Directors under the grants for the CEO and CFO. The option expires four years from the date of grant unless the targets are met.
To date, none of the targets have been met for these grants.
Compensation for New Hires and Promotions
In order to attract high caliber talent and offer competitive compensation packages, the Company may provide stock options and/or restricted stock to new hires. In addition, individuals who are promoted into an executive or senior executive role may be eligible to receive restricted stock and/or options as part of their compensation for their new role. New hire and promotion grants are made on a case by case basis and are generally effective date as of the employment/promotion date. Certain positions, particularly newly hired, may be provided with a sign-on bonus or guaranteed bonus upon completion of their first year.
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Forty percentIn fiscal 2014, the Company provided new incentive compensation to Jerry Shore, Craig Barnes, Sherri Tagg and Mike Bloom related to the promotions of Mr. Shore, Mr. Barnes and Ms. Tagg and the hire of Mr. Bloom. The Compensation Committee believes this compensation was appropriate to attract and retain top talent and to align the interests of those senior leaders of the bonus payment was contingent uponCompany with the Company meeting its EPS corporate goal for the year, while the remaining sixty percent was contingent upon achievementinterests of the employee’s individualour shareholders. The following grants were made:
On December 10, 2014, Mr. Shore received options to purchase 75,000 shares of common stock. On April 15, 2015, Mr. Shore also received options to purchase 40,000 shares of stock and department goals for 2012. The EPS target for the cash component14,000 shares of the 2011 MIP was $0.86. Excluding the $0.02 impact of the shares repurchased during the fiscal year, the Company’s 2011 EPS was $0.85, which resulted in earning approximately 70% of the cash component of the 2011 MIP.
The thresholdrestricted stock. Options vest ratably and target tiers of the restricted stock component began at $0.86 of EPS, which represents 20% to 40% of the Senior Executive’s salary. The maximum tier of the restricted stock component is $0.88 of EPS, which represents restricted stock bonus compensation for Senior Executives in a range of 25% to 50% of their salary. Since the Company exceeded its target EPS goal, the value of the grant was adjusted accordingly and one fourth of the grant vestedrestrictions lapse ratably on an annual basis beginning on the first anniversary of the date of grant.
Mr. Bloom received 59,207 shares of restricted stock on January 12, 2015. Mr. Bloom will also receive an amount of shares equal to $500,000 divided by the fair market value on the grant date May 3, 2012. If(calculated as the target EPS is achieved in each of the subsequent fiscal years, one fourth of the base year grant will vestclosing price on the anniversary date. The following table illustratesdate of grant) in the EPS thresholdsevent of the multiplehis promotion. Restrictions will lapse ratably over a four year performance requirements of the restricted stock component of the 2011 MIP plan.
Fiscal Year | Target EBIT | Maximum EBIT | ||||||
2011 | $ | 0.86 | (1) | $ | 0.88 | (2) | ||
2012 | $ | 0.99 | ||||||
2013 | $ | 1.14 | ||||||
2014 | $ | 1.31 |
The fiscal 2010 Management Incentive Plan (MIP) allowed for a graduated cash bonus payout based on a tiered Earnings per Share (“EPS”) structure and introduced a potential restricted stock payout with qualifying performance thresholds over subsequent years. The EPS target for the 2010 MIP was $0.72, which the Company exceeded by $0.03. As a result, the Company earned 109% of the cash component of the 2010 MIP.
The threshold and target tiers of the restricted stock component began at $0.72 of EPS, which represented 20% to 40% of the Senior Executive’s salary. The maximum tier of the restricted stock component is $0.74 of EPS, which represents restricted stock bonus compensation for Senior Executives in a range of 25% to 50% of their salary. Since the Company exceeded its target EPS goal, the value of the grant was adjusted accordingly and one fourth of the grant vestedperiod beginning on the first anniversary of the date of grant.
On July 21, 2014, Mr. Barnes received options to purchase 3,500 shares of common stock and 8,500 shares of restricted stock. The options vest ratably over a five year service period. 5,000 shares of restricted stock vest upon achievement of performance metrics, or ten years from the grant date, May 3, 2011. date. 3,500 shares of restricted stock vest ratably over three years. On December 1, 2014, Mr. Barnes received options to purchase 11,500 shares of common stock and 2,500 shares of restricted stock. The options vest ratably over a five year service period. The restricted stock vests upon achievement of performance metrics, or ten years from the grant date.
On December 26, 2014, Ms. Tagg received options to purchase 16,000 shares of common stock and 11,600 shares of restricted stock. The options vest ratably over a five year service period. 5,000 shares of restricted stock vest upon achievement of performance metrics, or ten years from the grant date. 6,600 shares of restricted stock vest ratably over three years.
Benefits and Perquisites
The Company also achievedprovides its 2011 EPS target. Therefore, one fourthfull-time employees, including the Named Executive Officers with health insurance coverage, life insurance and an opportunity to participate in the Fred’s 401(k) plan and Employee Stock Purchase Program. The Fred’s 401(k) plan may include matching contributions by the Company. The Employee Stock Purchase program provides participating employees a discount when purchasing shares of the 2010 grant vested on the second anniversaryCompany’s stock. In addition, perquisites or other personal benefits are provided to some executive officers. These are more fully described as part of the grant date, May 3,Summary of Executive Compensation. Mr. Hayes and Mr. Shore are permitted to use the Company plane for personal use, but did not do so during 2014, 2013, or 2012. IfThe value of usage, if any, would be recorded as taxable compensation in the target EPS is achievedyear in each of the subsequent fiscal years, one fourth of the base year grant will vest on the anniversary date. The following table illustrates the EPS thresholds of the multiple year performance requirements of the restricted stock component of the 2010 MIP plan.
Fiscal Year | Target EPS | Maximum EPS | ||||||
2010 | $ | 0.72 | (1) | $ | 0.74 | (3) | ||
2011 | $ | 0.83 | (2) | |||||
2012 | $ | 0.95 | ||||||
2013 | $ | 1.09 |
The Plan is managed by the Compensation Committee of the Board of Directors. The Board of Directors reserves the right to determine eligibility, performance measurements, final award values, payment timing and terms based upon events of the fiscal year.which it occurred.
The Compensation Committee believes that targeted awards for executive officers of FRED’SFred’s under these plans are consistent with targeted awards of other retailing companies of similar size and complexity to FRED’S.Fred’s. Specified awards were recommended by the Chief Executive Officer for the other Named Executives Officers of FRED’S for fiscal 2010,Fred’s, based upon the Company'sCompany’s performance, and the Committee considered these recommendations in making its determination.
Pay for Performance Analysis
14
2002 Long Term Incentive Plan
Stock Options.This section illustrates the relationship between pay and how the Company measures performance. The Compensation Committee strongly believes that compensation for its CEO and executives be tied to the performance of the Company and long term value creation and has designed it’s compensation plans accordingly. As more fully discussed below, this is accomplished by providing those persons whotying all equity and cash incentive compensation awards to achieving key financial metrics that drive Company performance. The Committee also believes that the CEO and executives’ long-term interests are aligned with shareholders when participating in equity ownership in the Company. By comparing the total cumulative shareholder return over time with our CEO’s compensation, the Committee can assess the relationship between performance and compensation.
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Cumulative Shareholder Return
Despite 2014 being a challenging year, the Company has still provided return on shareholder value over the last three years. The chart below depicts the total cumulative return that a shareholder would have substantial responsibilityreceived at the end of each fiscal year if they had invested $100 in Fred’s stock on February 1, 2012 and reinvested all subsequent dividends.
2013 | 2014 | 2015 | ||||||||||
Investment Value of $100 on February 1, 2012 | $ | 92 | $ | 124 | $ | 120 |
Over the three year period from beginning February 1, 2012 and ending February 1, 2015 total shareholder return was 20%.
Reported versus Realizable Pay
The following chart depicts the total realizable compensation of our CEO as compared to the summary table of compensation. The Compensation Committee believes it is important to provide this information since in some years a significant portion of the reported compensation provided to our CEO is an incentive for future performance and is realizable only if the Company meets or exceeds the applicable specific performance metrics, which are more fully described in the paragraphs below. In 2012, the Company awarded the CEO a Leadership Incentive grant of restricted stock and performance based options, described in the 2012 Incentive Leadership Grants paragraph below, which is meant to incentivize and drive long-term performance and accounts for the managementsignificant difference between the reported and growthrealizable pay in 2012. For 2014, the compensation utilized was for Bruce Efird due to him being employed with the Company for all of FRED’S with an opportunity to increase their ownership of Common Stock, the interests of shareholdersfiscal 2014 and executives will be closely aligned. Therefore, executives and certain other senior level employees are eligible to participate and receive stock options.
Annually, the Incentive Plan participants may receive an option grant which is contingent upon achieving the EPS corporate goal, which gives them the right to purchase shares of Common Stock in the future at a specified price. Options to the executive group are awarded at the first Board meeting after the beginningCEO for most of the fiscal year so as to provide ample timeyear.
2012 | 2013 | 2014 | ||||||||||
Reported Compensation(1) | $ | 2,100,464 | $ | 722,277 | $ | 712,895 | ||||||
Realizable Compensation(2) | $ | 1,418,967 | $ | 853,027 | $ | 1,084,761 |
(1) | Reported compensation is total compensation based on the current reporting rules for the Summary Compensation Table. |
(2) | Realizable compensation is pay actually received by the CEO during the year, including salary, non-equity incentive pay and all other compensation (as included in the Summary Compensation Table) plus the net spread at vesting on all previously granted options and the market value on vesting date of all previously granted restricted stock awards. Realizable pay excludes the value of any new or unvested equity grants. |
Employment Agreements for performance of stated targets and goals. New hire and promotion grants are made as of the effective date of the employment/promotion date. 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.Company’s Prior CEO’s
The Company ties stock option grantshas employment agreements with its former CEO’s Michael Hayes and Bruce Efird that still had outstanding obligations in fiscal 2014. In 2012, the amended employment agreement with Chairman of the Board and former CEO Michael J. Hayes (April 30, 2003, amended December 16, 2008) concluded, other than the continuation of certain health and dental benefits, which the Company will provide during the lives of Mr. and Mrs. Hayes.
The agreement with former CEO Bruce A. Efird was signed September 22, 2007, and amended December 22, 2008, February 16, 2009 and July 30, 2014. Mr. Efird became Chief Executive Officer effective February 1, 2009. On October 17, 2014, Mr. Efird provided notice of his intent not to renew his employment agreement. Therefore, the Company’s performance for the respective fiscal year. After achieving the EPS goal, the stock options then commence vesting on a specified schedule over time. Vesting is intended to not only retain thecontract expired March 31, 2015 at which time Mr. Efird ceased being an employee but provide an incentive to continually improve the profitability of the Company.
Restricted Stock.Restricted stock is granted as a component of some executive employment arrangements as well as special purpose incentives. A special purpose incentive was granted on January 18, 2005 and February 8, 2008, and each has a ten-year restriction period but allows accelerated vesting if the Operating Profit Margin reaches specific goals.
With the expiration of the 2002 Long Term Incentive Plan, the Company is offering its renewal as the 2012 Long Term Incentive Plan within this document as Proposal 3 – 2012 Long Term Incentive Plan.
Other Compensation
Guaranteed bonus. Certain positions, particularly newly hired, may be provided with a guaranteed bonus up to 15% of the employee’s annual compensation upon their first year anniversary.
Director Compensation
Base SalaryThe Company pays its directors an annual retainer and reasonable expenses to compensate them for the time spent working on behalf of the Company. In addition, the Company provides additional compensation in the form of restricted stock to tie Director compensation directly to the long term interests of shareholders. Beginning in 2011, restrictions on stock granted do not lapse and the shares do not vest until after the Director leaves the Board of Directors.
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Annual Retainer
Non-employee Directors of FRED’S,Fred’s are paid an annual cash retainer for their services plus reasonable expenses for meeting attendance. This cash retainer for 2014, for all except the Chairman of the Board of Directors, was $40,000. The Chairman of the Board is paid a retainer of $162,000 for his service to the Board of Directors and also for serving as Chairman of the Board. Also, the non-employee Directors are paid additional fees for their service on the Audit, Compensation, Nominating Pharmacy and Governance committees, which are reflected below in the Director Compensation table. In addition, Directors are provided a $1,500 per day fee for attending special trips/meetings at the request of management. This fee does not apply to any Board or Committee Meetings.
Incentive Compensation
Non-Employee Directors of Fred’s, with the exception of the Chairman of the Board of Directors, are paid for their services as such $24,000 per year plus reasonable expenses for meeting attendance. Also, the non-employee Directors are paidreceive an additional amount for their service on the Audit, Compensation, Nominating and Governance committees.
2002 Long Term Incentive Plan
Previously the Directors were awarded a non qualified stock option grant for 3,000 shares of immediately vested stock with a five year expiration. In fiscal 2010, the directors were awarded a non qualifiedannual grant of 1,250 options that immediately vested. They also received for the first time a grant of 1,2503,500 shares of restricted stock whose restrictions lapse only after two years.the Director ceases being a member of the Board. The Chairman of the Board of Directors receives an annual restricted stock grant of 10,000 shares that vests the day after he ceases to be a Board member. The grant is made each year on the month following the Annual Shareholder Meeting and the election of Directors. In fiscal 2011,2013, the directors received a grant of 2,500 shares of restricted stock whosefor service during fiscal year 2012 and 3,500 shares of restricted stock for service during fiscal year 2013. For both awards during fiscal 2013, restrictions lapse only after the director ceases being a member of the Board.
With There were two grants in 2013 due to the expirationchange in timing of the 2002annual restricted stock grant approved by the Board of Directors. In fiscal 2014, the directors received a grant of 3,500 shares of restricted stock for service during 2014. Restrictions lapse after the director ceases being a member of the Board.
Other Important Compensation Information
Clawback Policy
Beginning with the 2013 MIP, the Board of Directors adopted a clawback policy for any incentive compensation under the MIP. It provides that in the event of an accounting restatement due to material noncompliance of the Company with financial reporting requirements under the U.S. federal securities laws as a result of intentional misconduct, the Board of Directors has the right to recover, from any of its current or former named executive officers who received a cash bonus during the twelve-month period preceding the date on which the Company is required to prepare an accounting restatement, the difference between the amount of any cash bonus paid to the executive officer with respect to the period(s) that such restatement was required, and the amount of the bonus such executive officer would have received had the amount of the bonus been calculated based on the restated financial statements.
Insider Trading Policy
All executive officers are subject to Fred’s insider trading policy, which prohibits the use or sharing of confidential information for trading in the stock of the Company. In addition, all persons subject to Section 16(a) of the Securities Exchange Act of 1934, which includes all Named Executive Officers, may not engage in any transaction involving Fred’s stock (including a purchase or sale, gift, contribution to a trust, stock option grant or exercise, restricted stock grant, stock grant under a deferred compensation plan, intra-plan transfer involving a Fred’s stock fund, Rule 10(b)5-1 plan transaction, pledge or hedge, or any other transfer) without first obtaining pre-clearance of the transaction from the Chief Executive Officer.
Share Ownership Guidelines
The Board of Directors encourages Board members and senior executives to have ownership in the Company. Stock ownership aligns the interests of senior executives with the interests of shareholders and promotes a long-term focus toward management of the Company. In 2013, the Board of Directors adopted the following share ownership guidelines to encourage ownership. For purposes of these guidelines, shares of unrestricted stock, restricted stock and vested incentive or non-qualified stock options with a fair market value above the grant exercise price shall qualify as common stock. In 2014, The Board amended these guidelines to also include the President (previously that role had been a joint role with the CEO).
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CEO, President and CFO
The CEO is expected to acquire and hold during his or her tenure shares of the Company’s common stock equal in value to at least 3 times his or her base salary, the President is expected to acquire and hold during his or her tenure shares of the Company’s commons stock equal in value to at least 2.5 times his or her base salary, and the CFO is expected to acquire and hold during his or her tenure shares of the Company’s common stock equal to at least 2 times his or her base salary. The CEO, President and CFO shall have 5 years from the effective date of implementation of the policy or their initial appointment to the position to meet the target stock ownership guideline, and they are expected to continuously own (i.e., retain) sufficient shares to meet the guideline once attained.
Non-Employee Directors
Non-employee directors are expected to acquire and hold during their tenure as a Board member of the Company shares of the Company’s common stock equal in value to at least 4 times the annual retainer for non-employee directors. Non-employee directors shall have 5 years from the effective date of implementation of the policy or their initial election to the Board to meet the target stock ownership guideline, and they are expected to continuously own (i.e., retain) sufficient shares to meet the guideline once attained.
Company Peer Group
While the Compensation Committee studies other similar companies in its industry to determine the competitiveness and appropriateness of its compensation programs, it has not identified a set peer group. The Compensation Committee recognizes the difficulty in identifying enough companies comparable to Fred’s mix of general merchandise and pharmacy sales, overall sales volume and the quantity, size and geographical location of our stores. The Compensation Committee has engaged a focus group of its customers who mostly identified larger sized national retailers as the Company’s peers rather than small-box and dollar store competitors. Absent a defined peer group and based on its review of all relevant programs, the Compensation Committee believes 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.
2012 Long Term Incentive Plan
All grants of equity incentive are made pursuant to the Company is offering its renewal as theCompany’s 2012 Long Term Incentive Plan within this document as Proposal 3 – 2012(“Incentive Plan”), or a predecessor plan (i.e. 2002 Long Term Incentive Plan). The Incentive Plan provides the Compensation Committee the ability to grant various forms of equity based compensation and create incentive reward programs for employees such as the RSLP and others. The Incentive Plan was approved by shareholders at the 2012 annual meeting. It authorizes awards up to 3,000,000 shares of no par value common stock of the Company. The Compensation Committee has discretion to award stock options, stock appreciation rights, performance units or restricted stock pursuant to the Incentive Plan.
15
Compensation Committee Interlocks and Insider Participation
None of the members of the Compensation Committee has at any time during the past year been one of our officers or employees. Furthermore, no member of the Compensation Committee has any relationship requiring disclosure under Item 404 of Regulation S-K. No executive officer of the Company served during 20112013 as a director or a member of a compensation committee of any entity that had an executive officer serving as a director of the Company or a member of the Compensation Committee.
Compensation Committee Report
The Compensation Committee has reviewed and discussed the above Compensation Discussion and Analysis with management and, based on such review and discussions, the Compensation Committee recommended to the Board that the Compensation Discussion and Analysis be included in this Proxy Statement.
B. Mary McNabb, Compensation Committee Chairperson
Roger T. Knox
Michael T. McMillan
John R. Eisenman
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Summary Compensation Table
The following Summary Compensation Table sets forth the compensation earned by or paid to the Chief Executive Officer, Chief Financial Officer, EVP of Pharmacy Operations and the three other mostlymost highly compensated executive officers, collectively referred to as the Named Executive Officers (“NEOs”) for services rendered to us during the fiscal years indicated.
Name & Principle Position | Year | Salary $ | Bonus $ (1) | Stock Awards $ (2) | Option Awards $ (2) | Non-Equity Incentive Plan Compensation $ (3) | Change in Pension Value and Non-Qualified Deferred Compensation Earnings $ | All Other Compensation $ (4) | Total | |||||||||||||||||||||||
Bruce A. Efird | 2011 | $ | 650,000 | $ | 340,379 | $ | 106,500 | $ | 227,500 | $ | 14,483 | $ | 1,338,862 | |||||||||||||||||||
Chief Executive Officer & President (5) | 2010 | $ | 650,000 | $ | 318,138 | $ | 354,250 | $ | 13,742 | $ | 1,336,130 | |||||||||||||||||||||
2009 | $ | 650,000 | $ | 578,101 | $ | 9,288 | $ | 1,237,389 | ||||||||||||||||||||||||
Jerry A. Shore | 2011 | $ | 308,135 | $ | 157,094 | $ | 53,250 | $ | 108,150 | $ | 6,536 | $ | 633,165 | |||||||||||||||||||
Executive Vice President, | 2010 | $ | 297,596 | $ | 183,532 | $ | 163,500 | $ | 4,002 | $ | 648,630 | |||||||||||||||||||||
Chief Financial Officer & Chief Administarative Officer (6) | 2009 | $ | 275,000 | $ | 2,350 | $ | 277,350 | |||||||||||||||||||||||||
Alan C. Crockett (7) | 2011 | $ | 217,398 | $ | 70,932 | $ | 75,659 | $ | 2,957 | $ | 366,946 | |||||||||||||||||||||
Executive Vice President - | 2010 | $ | 191,731 | $ | 64,175 | $ | 82,023 | $ | 1,654 | $ | 339,583 | |||||||||||||||||||||
General Merchandise Manager | 2009 | $ | 176,106 | $ | 895 | $ | 177,001 | |||||||||||||||||||||||||
Rick A. Chambers | 2011 | $ | 202,916 | $ | 65,623 | $ | 82,494 | $ | 5,645 | $ | 356,678 | |||||||||||||||||||||
Executive Vice President - | 2010 | $ | 196,575 | $ | 83,506 | $ | 75,880 | $ | 4,542 | $ | 360,503 | |||||||||||||||||||||
Pharmacy Operations | 2009 | $ | 189,808 | $ | 1,915 | $ | 191,723 | |||||||||||||||||||||||||
Reggie E. Jacobs (8) | 2011 | $ | 212,364 | $ | 69,629 | $ | 52,676 | $ | 4,179 | $ | 338,848 | |||||||||||||||||||||
Executive Vice President- | 2010 | $ | 197,908 | $ | 83,506 | $ | 80,516 | $ | 2,648 | $ | 364,578 | |||||||||||||||||||||
Distribution & Corporate Services | 2009 | $ | 189,582 | $ | 1,430 | $ | 191,012 |
Name & Principle Position | Year | Salary $(9) | Bonus $(1) | Stock Awards $(2) | Option Awards $(2) | Non-Equity Incentive Plan Compensation $(3) | Change in Pension Value and Non-Qualified Deferred Compensation Earnings $ | All Other Compensation $(4) | Total | |||||||||||||||||||||||||
Bruce A. Efird | 2014 | $ | 700,000 | $ | 12,895 | $ | 712,895 | |||||||||||||||||||||||||||
Chief Executive Officer & President | 2013 | $ | 700,000 | $ | 22,277 | $ | 722,277 | |||||||||||||||||||||||||||
2012 | $ | 696,000 | $ | 395,000 | $ | 965,000 | $ | 44,464 | $ | 2,100,464 | ||||||||||||||||||||||||
Jerry A. Shore | 2014 | $ | 455,773 | $ | 484,500 | $ | 13,879 | $ | 954,152 | |||||||||||||||||||||||||
Chief Executive Officer | 2013 | $ | 372,503 | $ | 10,665 | $ | 383,168 | |||||||||||||||||||||||||||
2012 | $ | 330,949 | $ | 237,000 | $ | 579,000 | $ | 20,542 | $ | 1,167,490 | ||||||||||||||||||||||||
Sherri L. Tagg(5) | 2014 | $ | 172,954 | $ | 22,500 | $ | 247,752 | $ | 70,560 | $ | 659 | $ | 514,425 | |||||||||||||||||||||
Executive Vice President, Chief Accounting Officer | 2013 | $ | 133,350 | $ | 372 | $ | 133,722 | |||||||||||||||||||||||||||
2012 | $ | 138,828 | $ | 2,752 | $ | 998 | $ | 142,578 | ||||||||||||||||||||||||||
Michael K. Bloom(6) | 2014 | $ | 19,231 | $ | 1,000,006 | $ | 1,019,237 | |||||||||||||||||||||||||||
Chief Operating Officer & President | 2013 | |||||||||||||||||||||||||||||||||
2012 | ||||||||||||||||||||||||||||||||||
Craig L. Barnes(7) | 2014 | $ | 133,654 | $ | 176,420 | $ | 63,213 | $ | 1,020 | $ | 374,307 | |||||||||||||||||||||||
Executive Vice President, Supply Chain & Global and Domestic Logistics | 2013 | |||||||||||||||||||||||||||||||||
2012 | ||||||||||||||||||||||||||||||||||
Mark C. Dely(8) | 2014 | $ | 225,859 | $ | 102,714 | $ | 3,177 | $ | 331,750 | |||||||||||||||||||||||||
Chief Legal Officer, General Counsel & Secretary | 2013 | $ | 210,000 | $ | 1,200 | $ | 211,200 | |||||||||||||||||||||||||||
2012 | $ | 14,538 | $ | 25,000 | $ | 68,850 | $ | 68,782 | $ | 177,170 | ||||||||||||||||||||||||
Rick A. Chambers | 2014 | $ | 266,400 | $ | 5,172 | $ | 271,572 | |||||||||||||||||||||||||||
Executive Vice President, Pharmacy Operations | 2013 | $ | 243,346 | $ | 234,750 | $ | 65,268 | $ | 5,350 | $ | 548,715 | |||||||||||||||||||||||
2012 | $ | 219,439 | $ | 9,644 | $ | 229,083 |
(1) |
(2) | The amounts in the columns captioned “Stock Awards” and “Option Awards” reflect the aggregate grant date fair value of the awards according to accounting for share-based payments. For a description of the assumptions used by the Company in valuing these awards for fiscal |
(3) | The amounts in this column reflect cash bonuses earned for the indicated fiscal years performance pursuant to the Management Incentive Plan (MIP). |
(4) | The amounts reported include the following: |
• | Matching contributions to the Fred’s 401(k) plan, which all participating employees receive. |
• | Dividends paid on restricted stock awards that have not vested. |
• | Perquisites, which include personal use of Company car, airline tickets for non-business commuting, repair and maintenance costs on personal car, medical insurance premium and health care reimbursement payments. |
A list of individual compensation amounts in excess of $10,000 referenced in the FRED’S 401(k) plan, which all participating employees receive.All Other Compensation column for2014 is included in the table below.
Dividends paid on restricted stock awards that have not vested.
Name | Dividends | |||
Bruce A. Efird | 10,335 | |||
Jerry A. Shore | 12,788 |
Perquisites, which include personal use of Company car, airline tickets for non-business commuting, repair and maintenance costs on personal car and medical insurance premium payments.
(5) |
(6) | Mr. Bloom was named Chief Operating Officer and President on January 12, 2015. |
(7) | Mr. Barnes was named EVP, Supply Chain and Global and Domestic Logistics on March 17, 2015. Mr. Barnes joined the Company as SVP, General Merchandising Manager effective July 1, |
Mr. |
1720
Grants of Plan-Based Awards
There were no grants of non-equity incentive plan-based awards made by the Company to any of its Named Executive Officers during the fiscal year ended January 31, 2015 other than certain signing and discretionary bonuses identified in the summary compensation table. The following table presents information with respect to the grants of plan-based equity incentive awards made by the Company to each of its Named Executive Officers during the fiscal year ended January 28, 2012.31, 2015.
Name | Grant Date | Award Type | Estimated Future Payouts Under Non-Equity Incentive Plan Awards (1) | Estimated Future Payouts Under Equity Incentive Plan Awards (2) | All Other Stock Awards: Number of Shares of Stock or Units (#) | All Other Option Awards: Number of Securities Underlying Options (#) | Exercise or Base Price of Option Awards ($/Sh) | Grant Date Fair Value of Stock and Option Awards $ (3) | ||||||||||||||||||||||||||||||
Threshold $ | Target $ | Maximum $ | Threshold / Target # | Maximum # | ||||||||||||||||||||||||||||||||||
Bruce A. Efird | 65,000 | 325,000 | 650,000 | 19,847 | 24,809 | (4) | 25,000 | $ | 13.02 | $ | 106,500 | |||||||||||||||||||||||||||
Jerry A. Shore | 30,900 | 154,500 | 309,000 | 9,160 | 11,450 | (5) | 12,500 | $ | 13.02 | $ | 53,250 | |||||||||||||||||||||||||||
Alan C. Crockett | 15,351 | 76,755 | 153,510 | 4,595 | 5,744 | (6) | ||||||||||||||||||||||||||||||||
Rick A. Chambers | 14,619 | 73,096 | 146,192 | 4,251 | 5,314 | (7) | ||||||||||||||||||||||||||||||||
Reggie E. Jacobs | 15,050 | 75,251 | 150,502 | 4,511 | 5,639 | (8) |
2011 EPS Goals | ||||||||||||
Threshold $0.84 | Target $0.86 | Maximum $1.22 | ||||||||||
CEO | 25.0 | % | 50 | % | 100 | % | ||||||
CFO | 25.0 | % | 50 | % | 100 | % | ||||||
EVP | 17.5 | % | 35 | % | 70 | % | ||||||
SVP | 12.5 | % | 25 | % | 50 | % |
Name | Grant Date | Award Type | All Other Stock Awards: Number of Shares of Stock or Units (#) | All Other Option Awards: Number of Securities Underlying Options (#) | Exercise or Base Price of Option Awards ($/Sh) | Grant Date Fair Value of Stock and Option Awards $ (3) | ||||||||||||||||
Jerry A. Shore | 3/25/2014 | Stock Options | 25,000 | $ | 484,500 | |||||||||||||||||
Sherri L. Tagg | 12/26/2014 | Stock Options | 16,000 | $ | 16.68 | $ | 70,560 | |||||||||||||||
3/25/2014 | Restricted Stock | 2,800 | $ | 54,264 | ||||||||||||||||||
12/26/2014 | Restricted Stock | 11,600 | $ | 193,488 | ||||||||||||||||||
Michael K. Bloom | 1/12/2015 | Restricted Stock | 59,207 | $ | 1,000,006 | |||||||||||||||||
Craig L. Barnes | 7/21/2014 | Stock Options | 3,500 | $ | 16.42 | $ | 17,993 | |||||||||||||||
12/1/2014 | Stock Options | 11,500 | $ | 14.74 | $ | 45,220 | ||||||||||||||||
7/21/2014 | Restricted Stock | 3,500 | $ | 57,470 | ||||||||||||||||||
7/21/2014 | Restricted Stock | 5,000 | $ | 82,100 | ||||||||||||||||||
12/1/2014 | Restricted Stock | 2,500 | $ | 36,850 | ||||||||||||||||||
Mark C. Dely | 3/25/2014 | Restricted Stock | 5,300 | $ | 102,714 |
1821
Outstanding Equity Awards at 20112014 Fiscal Year-End
The following table reflects stock option and restricted stock awards granted to the Named Executive Officers under the Company’s 2002 and 2012 Long-Term Incentive PlanPlans that were outstanding as of January 28, 2012.31, 2015.
Option Awards | Stock Awards | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Option Awards | Stock Awards | Number of (#) | Number of Underlying Unexercised Options (#) | Equity Unexercised Unearned | Option Exercise | Option Expiration | Number of Shares or Units of Stock That Units that Have Not Vested | Market Value of Shares or Have Not Vested | Equity Incentive Units or Other rights That Have Not Vested | Equity Incentive of Unearned or Other Rights That | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Name | Number of Securities Underlying Unexercised Options (#) Exercisable | Number of Securities Underlying Unexercised Options (#) Unexercisable | Equity Incentive Plan Awards: Number of Securities Underlying Unexercised Unearned Options (#) | Option Exercise Price ($) | Option Expiration Date | Number of Shares or Units of Stock That Have Not Vested (#) | Market Value of Shares or Units that Have Not Vested ($) | Equity Incentive Plan Awards: Number of Unearned Shares, Units or Other rights That Have Not Vested (#) | Equity Incentive Plan Awards: Market or Payout Value of Unearned Shares, Units or Other Rights That Have Not Vested ($) | Exercisable | Unexercisable | (#) | ($) | Date | (#) | ($) | (#) | ($) | ||||||||||||||||||||||||||||||||||||||||||||||
Bruce A. Efird | 196,041 | 49,011 | $ | 10.61 | 9/22/2014 | (3) | 145,985 | $ | 9.59 | 3/9/2016 | (1) | |||||||||||||||||||||||||||||||||||||||||||||||||||||
58,394 | 87,591 | $ | 9.59 | 3/9/2016 | (6) | 25,000 | $ | 13.02 | 4/21/2016 | (2) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
25,000 | $ | 13.02 | 4/21/2016 | (11) | 250,000 | $ | 13.64 | 8/23/2017 | (3) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
25,000 | $ | 376,750 | (4) | 10,000 | (5) | $ | 166,000 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
10,000 | (5) | $ | 150,700 | 4,962 | (6) | $ | 82,369 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
22,531 | (8) | $ | 339,542 | 1,241 | (7) | $ | 20,601 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
19,847 | (13) | $ | 299,094 | 25,000 | (4) | $ | 415,000 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Jerry A. Shore | 8,500 | $ | 13.25 | 3/21/2013 | (1) | 12,500 | $ | 13.02 | 4/21/2016 | (2) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
12,500 | $ | 13.02 | 4/21/2016 | (11) | 150,000 | $ | 13.64 | 8/23/2017 | (3) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
10,000 | (2) | $ | 150,700 | 25,000 | (8) | $ | 415,000 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
5,000 | (5) | $ | 75,350 | 5,000 | (5) | $ | 83,000 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
9,533 | (9) | $ | 143,662 | 2,290 | (6) | $ | 38,014 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
3,465 | (12) | $ | 52,218 | 573 | (7) | $ | 9,512 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
9,160 | (13) | $ | 138,041 | 15,000 | (4) | $ | 249,000 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Alan C. Crockett | 4,000 | $ | 13.25 | 3/21/2013 | (1) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Sherri L. Tagg | 16,000 | $ | 16.68 | 12/26/2021 | (9) | 360 | (6) | $ | 5,976 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
5,000 | (14) | $ | 75,350 | 45 | (7) | $ | 747 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
3,000 | (5) | $ | 45,210 | 2,800 | (8) | $ | 46,480 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
3,120 | (9) | $ | 47,018 | 5,000 | (10) | $ | 83,000 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
6,600 | (11) | $ | 109,560 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Michael K. Bloom | 59,207 | (12) | $ | 982,836 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Craig L. Barnes | 3,500 | $ | 16.42 | 7/21/2021 | (13) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
11,500 | $ | 14.74 | 12/1/2021 | (14) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
3,500 | (15) | $ | 58,100 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
5,000 | (16) | $ | 83,000 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
2,500 | (17) | $ | 41,500 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Mark C. Dely | 6,100 | 9,151 | $ | 13.77 | 1/2/2020 | (18) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
1,425 | (12) | $ | 21,475 | 5,000 | (19) | $ | 83,000 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
4,595 | (13) | $ | 69,247 | 5,300 | (8) | $ | 87,980 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Rick A. Chambers | 7,800 | $ | 13.25 | 3/21/2013 | (1) | 75,000 | $ | 15.18 | 10/9/2017 | (20) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
10,000 | (2) | $ | 150,700 | 3,000 | (5) | $ | 49,800 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
3,000 | (5) | $ | 45,210 | 1,063 | (6) | $ | 17,646 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
4,732 | (9) | $ | 71,311 | 133 | (7) | $ | 2,208 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
1,182 | (12) | $ | 17,813 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
4,251 | (13) | $ | 64,063 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Reggie E. Jacobs | 5,000 | $ | 13.25 | 3/21/2013 | (1) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
10,000 | (2) | $ | 150,700 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
3,000 | (5) | $ | 45,210 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
4,732 | (9) | $ | 71,311 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
1,182 | (12) | $ | 17,813 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
4,511 | (13) | $ | 67,981 |
(1) | Award was granted on March 9, 2009 and vests 20% on each anniversary of the grant date. The award has since been exercised or canceled. |
(2) | This award was granted on March 21, |
(3) | Award is a performance based |
These awards are performance and/or service based restricted stock granted on |
1922
(5) | These awards are performance and/or service based restricted stock granted on February 8, 2008. The performance criteria were changed May 26, 2008. One third vest upon the Company achieving an operating profit margin of 3.35% or better. Once a 3.35% or better operating profit margin is achieved, the next one third will vest upon the Company achieving an operating profit margin of 3.85% or better. Once the Company has achieved a 3.35% or better and a 3.85% or better operating profit margin, the remaining third will vest upon the Company achieving an operating profit margin of 4.35% or better. To date, none of these performance criteria have been achieved. If the performance measurements are not met, the shares vest on the tenth anniversary of the date of grant. |
(6) |
This award was granted on May 3, |
This award is a true-up of the equity incentive plan for fiscal year 2011. The initial grant on May 3, 2011 was issued at the target amount of 80% of maximum. The maximum was achieved; as such an additional grant was issued on August 3, 2012. This grant has the same performance requirements and vesting schedule as the grant in footnote (6), except the tranche related to fiscal year 2011 performance vested immediately on the grant date. |
(8) | These awards were granted on March 25, 2014. Shares vest ratably over a three year service period. |
(9) | This award was granted on December 26, 2014. The options vest 20% per year on the anniversary of the grant date. The options expire seven years from the grant date. |
(10) | Awards are performance and/or service based restricted stock granted on |
(11) | This award was granted on |
(12) | This award was granted on |
This award was granted on |
(14) | This award was granted on December 1, 2014. The |
(15) | Award granted on July 21, 2014. The |
(17) | Awards are performance and/or service based restricted stock granted on December 1, 2014. One third vest upon the Company achieving an operating profit margin of 3.35% or better. Once a 3.35% or better operating profit margin is achieved, the next one third will vest upon the Company achieving an operating profit margin of 3.85% or better. Once the Company has achieved a 3.35% or better and a 3.85% or better operating profit margin, the remaining third will vest upon the Company achieving an operating profit margin of 4.35% or better. To date, none of these performance criteria have been achieved. If the performance measurements are not met, the shares vest on the tenth anniversary of the date of grant. |
(18) | This award was granted on January 2, 2013. The options vest 20% per year on the anniversary of the grant date. |
(19) | These awards are performance and/or service based restricted stock granted on January 2, 2013. One third vest upon the Company achieving an operating profit margin of 3.35% or better. Once a 3.35% or better operating profit margin is achieved, the next one third will vest upon the Company achieving an operating profit margin of 3.85% or better. Once the Company has achieved a 3.35% or better and a 3.85% or better operating profit margin, the remaining third will vest upon the Company achieving an operating profit margin of 4.35% or better. To date, none of these performance criteria have been achieved. If the performance measurements are not met, the shares vest on the tenth anniversary of the date of grant. |
(20) | Award was granted on October 9, 2013. These are performance based awards for which the vesting is contingent upon completion and achievement of projects and goals established and agreed upon by the option holder and the Pharmacy Committee of the Board. In the event of the completion of an acquisition, merger and/or change of control, 50% of any non-vested options will vest. The options expire four years from the date of grant. |
2023
Option Exercises and Stock Vested
The following table reflects the activityvalue of options exercises and restricted stock that vested,vesting events during the fiscal year ended January 28, 2012, with respect to each of the31, 2015 involving any current Named Executive Officers. There were no options exercised during the fiscal year ended January 28, 2012, therefore the columns pertaining to option awards have been omitted.
Option Awards | Stock Awards | |||||||||||||||||||||||
Number of | Number of | |||||||||||||||||||||||
Shares | Shares | |||||||||||||||||||||||
Acquired on | Value Realized | Acquired on | Value Realized | |||||||||||||||||||||
Stock Awards | Exercise | on Exercise | Vesting | on Vesting | ||||||||||||||||||||
Name | Number of Shares Acquired on Vesting (#) (1) | Value Realized on Vesting ($) (2) | (#) (1) | ($) (2) | (#) | ($) | ||||||||||||||||||
Bruce A. Efird | — | $ | 0 | 80,000 | $ | 351,200 | ||||||||||||||||||
80,000 | $ | 311,200 | ||||||||||||||||||||||
85,052 | $ | 481,394 | ||||||||||||||||||||||
Jerry A. Shore | 3,249 | $ | 44,576 | 10,000 | $ | 176,600 | ||||||||||||||||||
Alan C. Crockett | 1,136 | $ | 15,586 | |||||||||||||||||||||
Sherri L. Tagg | 1,000 | $ | 5,387 | |||||||||||||||||||||
Rick A. Chambers | 1,478 | $ | 20,278 | 10,000 | $ | 176,600 | ||||||||||||||||||
Reggie E. Jacobs | 1,478 | $ | 20,278 |
(1) | Represents |
(2) |
Director Compensation
There are four primary components of compensation to our non-management directors: a cash retainer, committee chair fee, committee member fee and restricted stock. Members of Company management who also serve as members of the Board of Directors are not eligible for compensation for their services in their capacity as a director. The following table sets forth the types and amounts of compensation paid to our directors with the exception of the Chairman of the Board of Directors, as of January 28, 2012:31, 2015:
Annual Retainer | ||||
Chairman of the Board | $ | 162,000 | ||
Standard | $ | 40,000 | ||
Committee Chair Fees | ||||
Audit | $ | 16,000 | ||
Nominating | $ | 6,000 | ||
Governance | $ | 6,000 | ||
Compensation | $ | 7,500 | ||
Pharmacy | $ | 8,000 | ||
Financial Director | $ | 11,500 | ||
Committee Member Fees | ||||
Audit | 4,500 | |||
Nominating | $ | 1,500 | ||
Governance | $ | 1,500 | ||
Compensation | $ | 1,500 | ||
Pharmacy | $ | 1,500 | ||
Annual Restricted Stock Grant(1) | ||||
Chairman of the Board | 10,000 shares | |||
Standard | 3,500 shares |
(1) | ||||
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Restricted stock granted to directors in fiscal 2012 and 2011 cliff vests on the day after the grantee ceases to be a Board of Director member. In the event of termination without cause the restricted shares will cliff vest on the day before such termination. During the fiscal year ended February 1, 2014 Board members received two grants, one for 2,500 shares on February 11, 2013 and another for 3,500 shares on August 26, 2013. Beginning with the August grant, the Board is paid prospectively rather than retrospectively. During the fiscal year ended January 31, 2015 Board members received 3,500 shares on July 1, 2014. |
2124
Non-management directors also receive reimbursement for reasonable out-of-pocket expenses incurred in connection with their Board or committee service.
The following table sets forth the compensation paid to non-management directors during the fiscal year ended January 28, 2012.31, 2015.
Name | Fees earned or Paid in Cash $ | Stock Awards $ (1) | Option Awards $ | Change in Pension Value and Non-Qualified Deferred Compensation Earnings $ | Total | Fees earned or Paid in Cash $ | Stock Awards $(1) | Option Awards $ | Change in Pension Value and Non-Qualified Deferred Compensation Earnings $ | Total | ||||||||||||||||||||||||||||||
Michael J Hayes | $ | 322,594 | $ | 0 | — | — | $ | 322,594 | $ | 162,000 | $ | 153,800 | — | — | $ | 315,800 | ||||||||||||||||||||||||
John R. Eisenman | $ | 41,500 | $ | 34,300 | — | — | $ | 75,800 | $ | 59,000 | $ | 53,830 | — | — | $ | 112,830 | ||||||||||||||||||||||||
Roger T. Knox | $ | 36,000 | $ | 34,300 | — | — | $ | 70,300 | ||||||||||||||||||||||||||||||||
Thomas H. Tashjian | $ | 43,000 | $ | 34,300 | — | — | $ | 77,300 | $ | 70,500 | $ | 53,830 | — | — | $ | 124,330 | ||||||||||||||||||||||||
B. Mary McNabb | $ | 37,500 | $ | 34,300 | — | — | $ | 71,800 | $ | 53,500 | $ | 53,830 | — | — | $ | 107,330 | ||||||||||||||||||||||||
Michael T. McMillan | $ | 36,000 | $ | 34,300 | — | — | $ | 70,300 | $ | 52,000 | $ | 53,830 | — | — | $ | 105,830 | ||||||||||||||||||||||||
Steven R Fitzpatrick | $ | 59,250 | $ | 53,830 | — | — | $ | 113,080 |
(1) | This represents the full grant date fair value |
The following chart sets forth outstanding stock and stock options at fiscal year endyear-end held by non-management directors; all option awards outstanding are vested.
Restricted | Stock | |||||||||||||||
Name | Stock | Stock Options | Stock | Options | ||||||||||||
Michael J Hayes | 0 | 18,720 | 41,804 | — | ||||||||||||
John R. Eisenman | 3,750 | 10,250 | 14,500 | — | ||||||||||||
Roger T. Knox | 3,750 | 10,250 | ||||||||||||||
Thomas H. Tashjian | 3,750 | 10,250 | 14,500 | — | ||||||||||||
B. Mary McNabb | 3,750 | 12,750 | 14,500 | — | ||||||||||||
Michael T. McMillan | 3,750 | 12,750 | 14,500 | — | ||||||||||||
Steven R. Fitzpatrick | 12,000 | 2,500 |
Potential Post Employment Payments or Benefits
This section explains the payments and benefits to which the Named Executive Officers are entitled to in various terminationterminations of employment scenarios. These are hypothetical situations only, as all of our Named Executive Officers are currently employed by the Company. For purposes of this explanation, we have assumed that termination of employment occurred on January 28, 2012,31, 2015, the last day of our 20112014 fiscal year.
The intent of this section is to isolate those payments and benefits for which the amount, vesting or time of payment is altered by a termination of employment. This section does not cover all amounts the Named Executive Officers would receive following termination. Specifically, the Named Executive Officers are entitled to retain their vested stock option awards, and if they meet specified minimum age at the time of termination, the unvested portion of certain stock option awards are not forfeited, and vesting will continue according to the original schedule. The minimum age is 65 and none of the Named Executive Officers has reached the minimum age as of 20112014 fiscal year end.
2225
The following table reflects compensation upon the occurrence of a range of potential separation events for each of the Named Executive Officers, calculated as if the separation event occurred on January 28, 2012.31, 2015. The actual amounts to be paid can only be determined at the time of an actual event.
Involuntary | ||||||||||||||||||||||||||||||||
Change in | (Not for Cause) | |||||||||||||||||||||||||||||||
Control | Termination | Retirement | Death | |||||||||||||||||||||||||||||
Name | Change in Control ($) (1) | Involuntary (Not for Cause) Termination ($) | Retirement ($) (3) | Death ($) | ($) | ($ ) | ($) | ($) | ||||||||||||||||||||||||
Bruce A. Efird | ||||||||||||||||||||||||||||||||
Salary (2) | $ | 433,333 | $ | 433,333 | $ | 433,333 | ||||||||||||||||||||||||||
Stock Options (4) | 1,892,930 | 1,892,930 | 1,944,180 | |||||||||||||||||||||||||||||
Restricted Stock (5) | 376,750 | 376,750 | 376,750 | |||||||||||||||||||||||||||||
Salary(1) | $ | 116,667 | $ | 116,667 | $ | — | $ | — | ||||||||||||||||||||||||
Stock Options(2) | 370,000 | 370,000 | — | 370,000 | ||||||||||||||||||||||||||||
Restricted Stock | — | — | — | — | ||||||||||||||||||||||||||||
Health Benefits | — | — | — | — | ||||||||||||||||||||||||||||
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| |||||||||||||||||||||||||
Totals | $ | 2,703,013 | $ | 2,703,013 | $ | — | $ | 2,754,263 | $ | 486,667 | $ | 486,667 | $ | — | $ | 370,000 | ||||||||||||||||
Jerry A. Shore | ||||||||||||||||||||||||||||||||
Salary(1) | $ | 1,006,250 | $ | 1,006,250 | $ | — | $ | — | ||||||||||||||||||||||||
Stock Options(2) | 444,000 | 444,000 | 444,000 | 444,000 | ||||||||||||||||||||||||||||
Restricted Stock(3) | 794,526 | 794,526 | 794,526 | 794,526 | ||||||||||||||||||||||||||||
Health Benefits(4) | 13,417 | 13,417 | 20,126 | — | ||||||||||||||||||||||||||||
|
|
|
| |||||||||||||||||||||||||||||
Totals | $ | 2,258,193 | $ | 2,258,193 | $ | 1,258,652 | $ | 1,238,526 | ||||||||||||||||||||||||
Sherri L. Tagg | ||||||||||||||||||||||||||||||||
Salary | $ | — | $ | — | $ | — | $ | — | ||||||||||||||||||||||||
Stock Options (4) | 41,095 | |||||||||||||||||||||||||||||||
Stock Options | — | — | — | — | ||||||||||||||||||||||||||||
Restricted Stock | — | — | — | — | ||||||||||||||||||||||||||||
Health Benefits | — | — | — | — | ||||||||||||||||||||||||||||
|
|
|
|
|
|
|
| |||||||||||||||||||||||||
Totals | $ | — | $ | — | $ | — | $ | 41,095 | $ | — | $ | — | $ | — | $ | — | ||||||||||||||||
Alan C. Crockett | ||||||||||||||||||||||||||||||||
Michael K. Bloom | ||||||||||||||||||||||||||||||||
Salary(1) | $ | 1,479,167 | $ | 1,479,167 | $ | — | $ | — | ||||||||||||||||||||||||
Stock Options(2) | — | — | — | — | ||||||||||||||||||||||||||||
Restricted Stock(3) | 982,836 | 982,836 | — | 982,836 | ||||||||||||||||||||||||||||
Health Benefits(4) | 13,417 | 13,417 | — | — | ||||||||||||||||||||||||||||
|
|
|
| |||||||||||||||||||||||||||||
Totals | $ | 2,475,420 | $ | 2,475,420 | $ | — | $ | 982,836 | ||||||||||||||||||||||||
Craig L. Barnes | ||||||||||||||||||||||||||||||||
Salary | $ | — | $ | — | $ | — | $ | — | ||||||||||||||||||||||||
Stock Options (4) | 7,280 | |||||||||||||||||||||||||||||||
Stock Options | — | — | — | — | ||||||||||||||||||||||||||||
Restricted Stock | — | — | — | — | ||||||||||||||||||||||||||||
Health Benefits | — | — | — | — | ||||||||||||||||||||||||||||
|
|
|
| |||||||||||||||||||||||||||||
Totals | $ | — | $ | — | $ | — | $ | — | ||||||||||||||||||||||||
Mark C. Dely | ||||||||||||||||||||||||||||||||
Salary | $ | — | $ | — | $ | — | $ | — | ||||||||||||||||||||||||
Stock Options | — | — | — | — | ||||||||||||||||||||||||||||
Restricted Stock | — | — | — | — | ||||||||||||||||||||||||||||
Health Benefits | — | — | — | — | ||||||||||||||||||||||||||||
|
|
|
|
|
|
|
| |||||||||||||||||||||||||
Totals | $ | — | $ | — | $ | — | $ | 7,280 | $ | — | $ | — | $ | — | $ | — | ||||||||||||||||
Rick A. Chambers | ||||||||||||||||||||||||||||||||
Salary | $ | — | $ | — | $ | — | $ | — | ||||||||||||||||||||||||
Stock Options (4) | 14,196 | |||||||||||||||||||||||||||||||
Stock Options(2) | 53,250 | — | — | — | ||||||||||||||||||||||||||||
Restricted Stock | — | — | — | — | ||||||||||||||||||||||||||||
Health Benefits | — | — | — | — | ||||||||||||||||||||||||||||
|
|
|
|
|
|
|
| |||||||||||||||||||||||||
Totals | $ | — | $ | — | $ | — | $ | 14,196 | $ | 53,250 | $ | — | $ | — | $ | — | ||||||||||||||||
Reggie E. Jacobs | ||||||||||||||||||||||||||||||||
Salary | ||||||||||||||||||||||||||||||||
Stock Options (4) | 9,100 | |||||||||||||||||||||||||||||||
Health Benefits | ||||||||||||||||||||||||||||||||
|
|
|
| |||||||||||||||||||||||||||||
Totals | $ | — | $ | — | $ | — | $ | 9,100 |
(1) |
26
(2) | Stock options granted to Mr. Chambers on October 9, 2013 provide for a portion of the grant to vest in the event of a merger or change in control. Additionally, certain options granted to Mr. Efird on August 24, 2012 provide for a portion of the grant to vest in the event of a merger or change in control |
Under employment agreements with Mr. |
23
PROPOSAL 2 —- APPROVE SELECTION OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
BDO USA, LLP audited the Company’s consolidated financial statements and internal control over financial reporting for the year ended January 28, 2012.31, 2015. BDO USA, LLP is an independent registered public accounting firm. The Board of Directors is asking the shareholders to approve the appointment of BDO USA, LLP as such independent registered public accounting firm for the fiscal year ending January 28, 2012.30, 2016. Although not required by law, NASDAQ listing standards, or the Company’s bylaws, the Board of Directors is submitting the selection of BDO USA, 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 USA, LLP, which has acted as independent registered public accounting firm of FRED’SFred’s since July 30, 2004, is expected to be represented at the Annual Meeting and 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"“FOR” THE APPROVAL
OF THE SELECTION OF BDO USA, LLP AS OUR INDEPENDENT REGISTERED PUBLIC ACCOUNTING
FIRM FOR FISCAL YEAR 2012.2014.
Fees Paid to Independent Registered Public Accounting Firms
The following table sets forth certain fees billed and to be billed to us by BDO USA, LLP in fiscal 20112014 and 20102013 in connection with various services provided to us throughout those fiscal years:
Service | 2011 Aggregate Fees Billed | 2010 Aggregate Fees Billed | ||||||||
Audit Fees (1) | $ | 839,466 | $ | 846,756 | ||||||
Audit-Related Fees (2) | 61,048 | 79,070 | ||||||||
Tax Fees (3) | — | — | ||||||||
All Other Fees | — | — |
Service | 2014 Aggregate Fees Billed | 2013 Aggregate Fees Billed | ||||||
Audit Fees(1) | $ | 809,632 | $ | 813,819 | ||||
Audit-Related Fees(2) | 52,431 | 37,101 | ||||||
Tax Fees(3) | — | — | ||||||
All Other Fees | — | — |
(1) | 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 planning, 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 being informed 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 2011,2014, all audit and permissible non-audit services provided by our independent registered public accounting firm were pre-approved by the Audit Committee.
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PROPOSAL 3 — 2012 LONG-TERM INCENTIVE PLAN
Summary of 2012 Long-Term Incentive Plan
Is the following summary of the 2012 Plan complete?
No. The following pages summarize the principal features of the Fred’s, Inc. 2012 Long-Term Incentive Plan (the “2012 Plan”), but this summary is not intended to be exhaustive and is qualified in its entirety by reference to the 2012 Plan itself, a copy of which is attached to this proxy statement as Appendix A.
What is the term of the 2012 Plan?
The Company’s 2002 Long-Term Incentive Plan (the “Prior Plan”) expired, by its terms, on March 11, 2012. On March 19, 2012, the Board of Directors approved the proposed 2012 Plan and recommended that it be submitted to shareholders for approval. Thirty seven grantees have received a collective total of 10,484 shares of restricted stock under the 2012 Plan contingent upon approval of said plan by shareholders.
The Company’s long-term success depends upon its ability to attract, retain and encourage dedicated, competent and resourceful key employees. To further these goals, the Company’s Board of Directors adopted and shareholders approved the Prior Plan in 2002.
The purpose of the Company having a long term incentive plan is to direct the attention and efforts of participating employees to the long-term performance of the Company and its subsidiaries, by relating incentive compensation to the achievement of long-term corporate economic objectives. The 2012 Plan is also designed to retain, reward and motivate participating employees by providing an opportunity for investment in the Company and the advantages inherent in stock ownership in the Company. The Company’s Board of Directors believes that the adoption of the 2012 Plan is necessary in order to recruit and retain a pool of skilled and experienced employees.
How does the 2012 Plan differ from the Prior Plan?
The 2012 Plan is substantially identical to the Prior Plan, with the following exceptions:
The 2012 Plan increases the number of shares of the Company’s common stock authorized for issuance by 600,000 shares, from the 2,400,000 which was available under the Prior Plan to 3,000,000 shares; and
The 2012 Plan expiration date would be March 18, 2022; and
Section 10 of the 2002 Plan, which provides for supplemental cash payments or loans to individuals in connection with all or any part of an award under the Plan, has been removed and is not part of the 2012 Plan.
Who administers the 2012 Plan, and who is eligible for awards under the 2012 Plan?
The 2012 Plan is administered by the Compensation Committee of the Company’s Board of Directors (the “Committee”). Officers, other key executives, and Directors of the Company and its subsidiaries who can make substantial contributions to the Company’s long-term profitability and value are eligible to participate (“Participants”) in the 2012 Plan. The approximate number of persons eligible to participate in the 2012 Plan is 400.
The Committee has the exclusive discretion to select the Participants and to determine the type, size, and terms of each award, to modify the terms of awards, to determine when awards will be granted and paid, and to make all other determinations which it deems necessary or desirable in the interpretation and administration of the Plan. The Plan remains in effect until all awards under the Plan either have been satisfied by the issuance of shares of the Company’s common stock or the payment of cash or have expired or otherwise terminated; provided, however, that no awards may be granted more than ten years after the date of the Plan’s approval. Generally, a Participant’s rights and interest under the Plan will not be transferable except by will or by the laws of descent and distribution.
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What are the details of the types of awards authorized under the 2012 Plan?
The Plan provides for the grant of the following types of incentive awards: stock options, stock appreciation rights, restricted stock, and performance units. As of June 22, 2012, the Company has outstanding options or restricted stock granted under the Prior Plan to approximately 356 employees and directors.
Stock Options
Options, which include non-qualified stock options and incentive stock options, are rights to purchase a specified number of shares of the Company’s common stock at a price fixed by the Committee. The exercise price for stock options issued under the Plan that qualify as incentive stock options within the meaning of Section 422(b) of the Code shall not be less than 100% of the fair market value as of the date of grant. The option exercise price may be satisfied in cash or by exchanging shares of the Company’s common stock owned by the optionee, or a combination of cash and shares. If the exercise price is paid by tendering shares of the Company’s common stock, the Committee, in its discretion, may grant the optionee a new stock option for the number of shares used to pay the exercise price. The Committee has broad discretion as to the terms and conditions upon which options granted shall be exercised. Options have a maximum term of ten years from the date of grant. Options granted under the Prior Plan generally have had a five-year term and become exercisable one-third on the first anniversary, one-third on the second anniversary, and one-third on the third anniversary of the date of grant.
Stock Appreciation Rights
Stock Appreciation Rights (“SAR”) are rights to receive cash or shares, or a combination thereof, as the Committee may determine, in an amount equal to the excess of (i) the fair market value of the shares with respect to which the SAR is exercised over (ii) a specified price which must not be less than 100% of the fair market value of the shares at the time the SAR is granted, or, if the SAR is granted in connection with a previously issued stock option, not less than 100% of the fair market value of shares at the time such option is granted.
SARs may be granted in connection with a previously or contemporaneously granted stock option or independently. If a SAR is granted in relation to a stock option, (i) the SAR will be exercisable only at such times and by such persons as the related option is exercisable, and (ii) the grantee’s right to exercise either the related option or the SAR will be canceled to the extent that the other is exercised. No SAR may be exercised earlier than six months or later than ten years after the date of grant. The Committee may provide in the SAR agreement circumstances under which SARs will become immediately exercisable and may, notwithstanding the foregoing restriction on time of exercise, accelerate the exercisability of any SAR at any time.
Restricted Stock
Awards of restricted shares under the 2012 Plan may be made at the discretion of the Committee and consist of shares of stock granted to a participant and subject to a stock restriction agreement. At the time of an award, a Participant may have the benefits of ownership in respect of such shares, including the right to vote such shares and receive dividends thereon and other distributions subject to the restrictions set forth in the 2012 Plan and in the stock restriction agreement. Any shares of the Company’s common stock issued as restricted shares are legended and may not be sold, transferred, or disposed of until such restrictions have elapsed. Upon the expiration, lapse, or removal of restrictions, shares free of restrictive legend will be granted to the grantee. The Committee has broad discretion as to the specific terms and conditions of each award, including applicable rights upon certain terminations of employment.
Performance Units
Performance unit awards entitle grantees to future payments based upon the achievement of pre-established long-term performance objectives. A performance unit agreement will establish with respect to each unit award (i) a performance period of not fewer than two years, (ii) a value for each unit which will not thereafter change, or which may vary thereafter pursuant to criteria specified by the Committee, and (iii) maximum and minimum performance targets to be achieved during the applicable performance period. Under each agreement, the grantee will be entitled to full value of a unit award for achievement of maximum targets and a portion of a unit award for performance exceeding minimum
26
targets but less than maximum targets. The Committee has discretion to determine the Participants to whom performance unit awards are to be made, the times in which such awards are to be made, the size of such awards, and all other conditions of such awards, including any restriction, deferral periods, or performance requirements.
How are withholding taxes on awards handled?
Prior to the issuance or transfer of shares under the 2012 Plan, a Participant must remit to the Company an amount sufficient to satisfy federal, state and local tax withholding requirements. The Committee has the discretion to permit a Participant to satisfy such tax withholding obligations, in whole or in part, by having the Company withhold shares for the value equal to the amount of taxes required by law to be withheld.
What is the effect of a change in control or change in the outstanding Common Stock by reason of a stock dividend or distribution, recapitalization, merger, consolidation, reorganization, split-up, combination, exchange of shares or similar event?
If there occurs a “Change in Control” of the Company, as defined in the 2012 Plan, then any SAR outstanding for at least six months and any stock options awarded and not previously exercisable and vested will become fully exercisable and vested and all restrictions applicable to any restricted stock, performance units or other stock-based awards will lapse.
In the event of any change in the outstanding Common Stock of the Company by reason of a stock dividend or distribution, recapitalization, merger, consolidation, reorganization, split-up, combination, exchange of shares or the like, the Board of Directors, in its discretion, may adjust proportionately the number of shares which may be issued under the 2012 Plan, the number of shares subject to outstanding awards, and the option exercise price of each outstanding option. The Board of Directors may also make such other changes in outstanding options, SARs, performance units and restricted stock awards as it deems equitable in its absolute discretion to prevent dilution or enlargement of the rights of grantees, provided that any fractional shares resulting from such adjustments will be eliminated.
Can the 2012 Plan be amended or terminated?
The Board of Directors may terminate, amend, modify or suspend the 2012 Plan at any time, except that the Board of Directors may not, without the authorization of the holders of a majority of the Company’s outstanding shares, increase the maximum number of shares which may be issued under the 2012 Plan (other than adjustments pursuant to the 2012 Plan), extend the last date on which awards may be granted under the 2012 Plan, extend the date on which the 2012 Plan expires, change the class of persons eligible to receive awards, or change the minimum option price.
The 2012 Plan is not qualified under Section 401(a) of the Internal Revenue Code (the “Code”).
New Plan Benefits
Because the awards to Participants may vary from year to year at the Committee’s discretion and any award of performance units is contingent on attaining the related performance objectives, the amount payable to eligible Participants under the 2012 Plan for any calendar year during which the 2012 Plan is in effect cannot be determined.
What are the federal income tax consequences of each potential award under the 2012 Plan?
The following is a summary of the material anticipated United States federal income tax consequences of the 2012 Plan to the Company and the Participants. The summary is based on current federal income tax law, which is subject to change, and does not address state, local, or foreign tax consequences or considerations.
Stock Options. The grant of a stock option that does not have a readily ascertainable value will not result in taxable income at the time of the grant for either the Company or the Participant. Upon exercising an incentive stock option, the Participant will have no taxable income (except that the alternative minimum tax may apply) and the Company will receive no deduction. Upon exercising a nonqualified stock option, the Participant will recognize ordinary income in the amount by which the fair market value of common stock at the time of exercise exceeds the option exercise price, and the Company will be entitled to a deduction for the same amount. The Participant's income is subject to withholding tax as wages.
27
The tax treatment of the Participant upon a disposition of shares of common stock acquired through the exercise of an option is dependent upon the length of time that the shares have been held and on whether such shares were acquired by exercising an incentive stock option or a nonqualified stock option. If an employee exercises an incentive stock option and holds the shares for at least two years from the date of grant and at least one year after exercise, then any gain or loss realized based on the exercise price of the option will be treated as long-term capital gain or loss. Shares obtained upon exercise of an incentive stock option that are sold without satisfying these holding periods will be treated as shares received from the exercise of a nonqualified stock option. Generally, upon the sale of shares obtained by exercising a nonqualified stock option, the Participant will treat the gain realized on the sale as a capital gain. Generally, there will be no tax consequence to the Company in connection with the disposition of shares of common stock acquired under a stock option, except that the Company may be entitled to a deduction in the case of a disposition of shares acquired upon exercise of an incentive stock option before the applicable holding periods have been satisfied.PROPOSAL 3 - ADVISORY VOTE TO APPROVE EXECUTIVE COMPENSATION
Stock Appreciation Rights. The grant of an SAR will not result in taxable income to the Participant at the time of the award. Upon exercising the SAR, the Participant will recognize ordinary income in the amount by which the fair market value of the common stock or the amount of cash, as the case may be, exceeds the SAR exercise price, if any. The Company will be entitled toseeks a deduction for the same amount. The Participant’s income is subject to withholding tax as wages. Upon a disposition of shares of common stock acquired through the exercise of the SAR, the Participant may recognize capital gain or loss, the character of which is dependent upon the length of time that the shares have been held. Generally, there will be no tax consequences to the Company in connection with the disposition of shares of common stock acquired under a SAR.
Restricted Stock. The federal income tax consequences of awards of restricted stock will depend on the facts and circumstances of each award, and in particular, the nature of the restrictions imposed with respect to the common stock which is the subject of the award. In general, if the common stock is subject to a substantial risk of forfeiture, i.e., limited in terms of transferability, a taxable event occurs only when the risk of forfeiture lapses. At that time, the Participant will recognize ordinary income to the extent of the excess of the fair market value of the common stock on the date the risk ceases over the amount that the Participant paid for the shares, if any, and the Company will be entitled to a deduction in the same amount. Prior to the lapse of restrictions on the restricted stock, any dividends on such shares will be paid currently and will be treated as ordinary compensation income to the Participant, subject to withholding. Subsequent to the determination and satisfaction of the ordinary income tax consequences, any further gain or loss realized on the subsequent disposition of such stock will be a long- or short-term capital gain or loss depending upon the applicable holding period.
Alternatively, within thirty days after transfer of the restricted stock, a Participant may make an election under Section 83(b) of the Code, which would allow the Participant to include in income in the year that the restricted common stock is awarded an amount equal to the fair market value of the restricted stock on the date of such award determined as if the restricted common stock were not subject to restrictions. The Company is then entitled to a compensation-paid deduction in the same amount. The election is required to be written and delivered to the Company within that thirty-day period. The Participant is also required to confirm the election with the filing of the Participant’s federal income tax return for the year in which the award is made. Failure to satisfy either of these requirements may invalidate the intended election. In the event of a valid Section 83(b) election, the Participant will not recognize income at the time that the restrictions actually lapse. In addition, any appreciation or depreciation in the value of the stock and any dividends paid on the stock after a valid Section 83(b) election are not deductible by the Company as compensation paid. For purposes of determining the period of time that the Participant holds the restricted stock, the holding period begins on the award date when a Participant makes a Section 83(b) election. Further, any dividends received after the Section 83(b) election is made will constitute ordinary dividend income to the Participant and will not be deductible by the Company. If the restricted stock subject to the Section 83(b) election is subsequently forfeited, however, the Participant is not entitled to a deduction or tax refund.
Performance Units. A Participant will realize ordinary compensation income upon receipt of a performance unit equaling the amount of cash or the current market value of the common stock received. Wage withholding rules will apply. The Company will be entitled to a deduction at the time of payment in an amount equal to such income. Upon subsequent disposition of any shares of common stock received, any gain or loss will be a long- or short-term gain or loss, depending upon the applicable holding period.
28
FOR THE REASONS STATED ABOVE, THE BOARD OF DIRECTORS BELIEVES THAT THE
CONTINUED USE OF THE 2012 PLAN IS IN THE BEST INTEREST OF THE COMPANY AND THE SHAREHOLDERS.
THE BOARD OF DIRECTORS RECOMMENDS SHAREHOLDERS VOTE “FOR” PROPOSAL 3.
PROPOSAL 4 — ADVISORY VOTE ON EXECUTIVE COMPENSATION
The Dodd-Frank Wall Street Reform and Consumer Protection Act, enacted in July 2010 (“Dodd-Frank”), enables ournon-binding advisory vote from its shareholders to vote to approve on a nonbinding advisory basis, the compensation of our executive officersits Named Executive Officers as discloseddescribed in this proxy statement (commonly referred to as a “say on pay” vote).the “Compensation Discussion and Analysis” section and the “Executive Compensation” section. In accordance with the view expressed by our shareholders in an advisory vote at the 2011 Annual Meeting of Shareholders, our Board of Directors currently intends to provide for a “sayan advisory vote on pay” votecompensation on an annual basis.
As we describe in more detail under the heading “Compensation Discussion and Analysis”, we seek to closely align the interests of our named executive officersNamed Executive Officers with the interests of our shareholders. Our compensation programs are designed to reward our named officersexecutives for the achievement of short-term and long-term operational, financial and individual goals, while at the same time avoiding the encouragement of unnecessary or excessive risk-taking. Our named executive officers’ total compensation is comprised of a mix of base salary, annual cash incentive awards and stock awards geared towards long-term equity incentive. At our 20112014 Annual Meeting of Stockholders,Shareholders, more than 98% of the shares voted (or 88%more than 92% of total shares outstanding) were cast in support of the Company’s executive compensation program.
Highlights of our executive compensation program include:
AAll of our incentive plans are performance based and therefore a large portion of the total potential realizable compensation is variable and is linkedtied to Company performance and measurable goals.
Equity awards that have been granted vest over multiple years which are intended to encourage long-term retention.
Equity awards incentivize management to manage and grow the value of the business over the long-term, serving to align the financial interests of our executive officers with those of our shareholders.
Our Compensation Committee considers the performance, organizational impact, skills and experience when reviewing and determining salary levels of each named executive officer. Base pay levels are competitive within the middle of a range that the Compensation Committee considers reasonable and necessary.
We believe that our executive compensation program is well designed, appropriately aligns the compensation of our executive officers with our performance objectives and our company strategy and incentivizes strong individual performance. WeIn deciding how to vote on this proposal, we encourage our shareholdersyou to read the entire “Compensation Discussion and Analysis” section of this proxy statement for a detailed discussion and analysis of our executive compensation program, including information about the 2011 compensation of our named executive officers.program.
Accordingly, we ask our shareholders to vote on the following resolution:
RESOLVED, that the Company’s shareholders approve, on an advisory basis, the compensation of the named executive officers, as disclosed in the Company’s Proxy Statement for the 20122015 Annual Meeting of StockholdersShareholders including the Compensation Discussion and Analysis, the 20112014 Summary Compensation Table and the other related tables and disclosure.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE “FOR” THE APPROVAL OF THE
COMPENSATION OF OUR NAMED EXECUTIVE OFFICERS, AS DISCLOSED IN THIS PROXY STATEMENT.
2928
PROPOSAL 5 – SHAREHOLDERS RIGHTS PLAN
Summary
In 1998, the Board adopted a Shareholders Rights Plan (the “Rights Plan”) which was then overwhelmingly approved by the shareholders. The Rights Plan granted a dividend of one preferred share purchase right (a “Right”) for each common share outstanding at that date. Each Right represents the right to purchase one-hundredth of a preferred share of stock at a preset price to be exercised when any one individual, firm, corporation or other entity acquires 15% or more of the Company’s common stock. The Rights become dilutive at the time of exercise. The Shareholders Rights Plan was renewed in October 2008 with only date changes from the original Rights Plan and, if unexercised, the Rights will expire in October 2018. A copy of the Rights Plan with Exhibits is attached as Appendix B.
The Rights Plan is a valuable tool for the Company and the shareholders to avoid an unsolicited and/or hostile takeover bid of the Company. Having the Rights Plan in place allows the Board of Directors, should an unsolicited takeover bid be imminent or actual, the opportunity and the time to evaluate the unsolicited bid, to take a proactive approach in reviewing the unsolicited bid, to use rational business judgment to evaluate the unsolicited bid and to have control over the process, rather than allowing the entity or individual who desires to take over the Company the ability to control the process. The Rights Plan allows the Board of Directors, in its business judgment, to find a more suitable acquirer that would better benefit the Company and the shareholders. In addition, the Rights Plan provides the Board of Directors leverage, should the Board of Directors determine that it is in the best interest of the Company and shareholders to commence negotiations with the entity or individual who desires to take over the Company.
The Board of Directors is submitting the Rights Plan to the shareholders for approval at the Annual Meeting. If the votes cast favoring the continued use of the Rights Plan exceed the votes cast opposing the continued use of the Rights Plan, the Rights Plan will remain in place and will expire in October 2018. If the votes cast at the Annual Meeting against the continued use of the Rights Plan exceed the votes cast favoring the continued use of the Rights Plan, then the Board of Directors will cause the Rights Plan to terminate on December 31, 2013.
Following is a summary of the terms of the Rights Agreement. Please note, however, that this description is only a summary, and is not complete, and should be read together with the entire Rights Agreement with Exhibits, which is attached as Appendix B.
The Rights.
The Board authorized the issuance of a Right with respect to each outstanding share of common stock on October 12, 2008. The Rights will initially trade with, and will be inseparable from, the shares of common stock. The Rights are evidenced only by certificates that represent shares of common stock, or in the case of uncertificated shares, the book-entry records representing shares of common stock. New Rights will accompany any new shares of common stock we issue after October 12, 2008 until the Distribution Date described below.
Exercise Price.
Each Right will allow its holder to purchase from the Company one one-hundredth of a share of Series A Junior Participating Preferred Stock (“Preferred Share”) for $100.00, once the Rights become exercisable. This portion of a Preferred Share will give the stockholder approximately the same dividend, voting, and liquidation rights as would one share of common stock. Prior to exercise, the Right does not give its holder any dividend, voting, or liquidation rights.
Exercisability.
The Rights will not be exercisable until:
10 days after the public announcement that a person or group has become an “Acquiring Person” by obtaining beneficial ownership of 15% or more of the Company’s shares of common stock, or, if earlier,
10 business days (or a later date determined by the Board before any person or group becomes an Acquiring Person) after a person or group begins a tender or exchange offer which, if completed, would result in that person or group becoming an Acquiring Person.
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The date when the Rights become exercisable is referred to herein as the “Distribution Date.” Until that date, the common stock certificates, or in the case of uncertificated shares, the book-entry records evidencing shares of common stock, will also evidence the Rights, and any transfer of shares of common stock will constitute a transfer of Rights. After that date, the Rights will separate from the shares of common stock and be evidenced by book-entry credits or by Rights certificates that we will mail to all eligible holders of shares of common stock. Any Rights held by an Acquiring Person are null and void and may not be exercised.
The Board of Directors may reduce the threshold at which a person or group becomes an Acquiring Person from 15% to not less than 10% of the outstanding shares of common stock.
Exceptions to the Definition of “Acquiring Person.”
If the Company repurchases some of its own shares of common stock and this causes a person or group’s holdings to constitute 15% or more of the remaining outstanding shares of common stock, that person or group will not be an Acquiring Person so long as it does not make any further acquisition of the Company’s shares of common stock. Finally, if a person or group acquires 15% or more of the Company’s shares of common stock inadvertently or as a result of third parties exercising contractual rights that exist as of October 10, 2008 (and without acquiring by other means 1% or more of the Company’s shares of common stock since October 10, 2008), and that person or group sells enough common stock to reduce its holdings below 15% of the Company’s common stock as promptly as practicable (which, in the contractual rights case, shall not be longer than 60 days), such person or group will not be an Acquiring Person.
Consequences of a Person or Group Becoming an Acquiring Person.
Flip In. If a person or group becomes an Acquiring Person, all holders of Rights except the Acquiring Person will have the right to receive upon exercise that number of shares of common stock having a market value of two times the exercise price of the right.
Flip Over. If our Company is later acquired in a merger or similar transaction after the Rights Distribution Date, all holders of Rights except the Acquiring Person will have the right to receive upon exercise at the then current exercise price, that number of shares of common stock of the acquiring company which at the time of such transaction will have a market value of two times the exercise price of the Right.
Preferred Share Provisions.
Each one one-hundredth of a Preferred Share, if issued:
Will not be redeemable.
Will entitle holders to minimum preferential quarterly dividend payments of $0.01, but will entitle holders to an aggregate dividend equal to the dividend declared per share of common stock.
Will entitle holders upon liquidation to a minimum preferential liquidation payment of $1 per share, but if greater than $1 per share, an aggregate payment equal to the payment made per share of common stock.
Will have 1 vote.
If shares of our common stock are exchanged via merger, consolidation, or a similar transaction, will entitle holders to a per share payment equal to the payment made on one share of common stock.
The value of one one-hundredth interest in a Preferred Share should approximate the value of one share of common stock.
Expiration.
The Rights will expire on October 12, 2018.
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Redemption.
The Board of Directors may redeem the Rights for $0.01 per Right at any time before any person or group becomes an Acquiring Person. If the Board redeems any Rights, it must redeem all of the Rights. Once the Rights are redeemed, the only right of the holders of Rights will be to receive the redemption price of $0.01 per Right. The redemption price will be adjusted if the Company has a stock split or stock dividends of shares of common stock.
Exchange.
After a person or group becomes an Acquiring Person, but before an Acquiring Person owns 50% or more of our outstanding shares of common stock, the Board of Directors may extinguish the Rights by exchanging one share of common stock or an equivalent security for each Right, other than Rights held by the Acquiring Person.
Anti-Dilution Provisions.
The Board of Directors may adjust the purchase price of the Preferred Shares, the number of Preferred Shares issuable and the number of outstanding Rights to prevent dilution that may occur from a stock dividend, a stock split, a reclassification of the Preferred Shares or shares of common stock. No adjustments to the Exercise Price of less than 1% will be made.
Amendments.
The terms of the Rights Agreement may be amended by the Board of Directors without the consent of the holders of the Rights. However, the Board may not amend the Rights Agreement to lower the threshold at which a person or group becomes an Acquiring Person to below 10% of our outstanding shares of common stock. In addition, the Board may not cause a person or group to become an Acquiring Person by lowering this threshold below the percentage interest that such person or group already owns. After a person or group becomes an Acquiring Person, the Board may not amend the agreement in a way that adversely affects holders of the Rights.
FOR THE REASONS STATED ABOVE, THE BOARD OF DIRECTORS BELIEVES THAT THE CONTINUED USE OF THE RIGHTS PLAN IS IN THE BEST INTEREST OF THE COMPANY AND THE SHAREHOLDERS.
THE BOARD OF DIRECTORS RECOMMENDS SHAREHOLDERS VOTE “FOR” PROPOSAL 5.
PROPOSAL 6 — SHAREHOLDER PROPOSAL REGARDING NOMINATION OF A CORPORATE GOVERNANCE EXPERT TO THE BOARD OF DIRECTORS
The Company has received a shareholder proposal sponsored by Wespath Investment Management, a division of the General Board of Pension and Health Benefits of The United Methodist Church (“Proposing Shareholder”) regarding the nomination of a director with corporate governance expertise. This is the second proposal to be put forth by the Proposing Shareholder in the last three years. The previous proposal would have required the Company to administer standards with offshore vendors that could have dramatically increased the Company’s costs, reduced margins by imposing an expensive monitoring and reporting regimen, lengthened our purchasing cycle, eliminated our ability to make opportunistic purchases of goods as they become available at distressed prices and increased our exposure to litigation. That proposal was overwhelming rejected at the 2010 Annual Meeting. The Company will provide the address and number of shares held by the Proposing Shareholder upon a request for such information sent to the Secretary of the Company. In accordance with Securities and Exchange Commission rules, the text of the shareholder proposal and supporting statement are printed below exactly as they were submitted to the Company. The Company is not responsible for the contents of the proposal or supporting statement. If properly presented, this proposal will be voted on at the 2012 Annual Meeting.
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Director With Corporate Governance Expertise
Fred’s Inc.
RESOLVED, that the shareholders request that, as the terms in office of elected directors expire, at least one candidate shall be selected and recommended for election to the company’s board who:
(i) has a high level of expertise and experience in corporate governance and is widely recognized in the business community as an authority in such field, as reasonably determined by the company’s board, and
(ii) will qualify, subject to limited exceptions in extraordinary circumstances explicitly specified by the board, as an independent director under the standards applicable to the company as a New York Stock Exchange listed company.
Supporting Statement:Sound corporate governance policies and practices are prudent controls that serve to protect shareholder value and corporate competitive positioning. Fred’s nominating committee charter states that, among other qualifications, the company will evaluate candidates based upon “skills and expertise necessary to make significant contributions to the Company, its Board and its shareholders” and “accomplishment within the candidate’s own field.”
Fred’s has received significant criticism from proxy advisory firms regarding its corporate governance policies and practices. An analysis of the board composition shows the company does not have an independent director with corporate governance expertise. Furthermore, the company has not acted upon past shareholder votes pertaining to corporate governance. Fred’s board of directors:
We believe that the company must respond to its corporate governance challenges in an effective and transparent manner in order to restore investor trust in the company and its board of directors.
A director nominee with acknowledged corporate governance experience and who is respected in the business community could perform a valuable and strategic service to the company and its shareholders. Such leadership would enable the company to begin to address the corporate governance challenges inherent in Fred’s governance structure.
END OF SHAREHOLDER PROPOSAL
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT YOU VOTE “AGAINST” THIS PROPOSAL FOR THE REASONS SET FORTH BELOW:
Contrary to the implication of the shareholder proposal above, the Company’s Board of Directors has seriously considered each shareholder proposal presented to the Company and its shareholders over the years. Thus, as to the “majority vote standard” proposal referred to in item #2 above, the Board of Directors determined to make no changes in director election requirements at this time, after careful consideration and in light of the one-year term structure of its director elections (versus staggered class terms). (See page 7 of this Proxy Statement.) According to the 2012 ISS board practices study, fewer than 15% of public companies with the Company’s small market capitalization employ majority voting. The Board of Directors will continue to monitor this subject.
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As to item #3 above, the Company has had a shareholder rights plan since 1998. The terms of the plan adopted in 2008 did nothing more than extend the same terms for another decade. There is no requirement that the plan be submitted to a vote of shareholders. It was the judgment of the Company’s Board of Directors in 2008 that the then financial profile of the Company provided insufficient protection for the Company and its shareholders. However, in this Proxy Statement, because the Company’s Board of Directors has determined that the financial profile of the Company has changed, the Company’s shareholders are being asked whether they wish to continue or to terminate the Plan. (See Proposal 5 on page 30 above.)
The Board of Directors has carefully considered the shareholder proposal above, and believes its committee chairmen, as well as the other Directors, meet the standards of expertise and experience necessary for proper governance of the Company.
The Company has access to corporate governance expertise through both its in-house counsel and outside counsel. In addition, the Company’s current directors have periodic training in corporate governance matters, and, accordingly, are adequately versed in corporate issues, including governance. Indeed, the Company regularly monitors developments in the area of corporate governance. Therefore, the Company does not need to have a corporate governance expert on the Board of Directors in order to have access to corporate governance expertise.
The Board of Directors believes that the Company already has a strong corporate governance process in place that is designed to identify and nominate qualified director candidates who will best serve the interests of the Company and its shareholders. The Nominating Committee, which is comprised solely of independent directors, evaluates and recommends director nominees for election, including nominees proposed by shareholders, based on: character, personal and professional ethics, integrity and values; executive level business experience and acumen; relevant business experience or knowledge; 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 Board of Directors has had great success in nominating strong, highly qualified directors. In addition, the Company includes in this proxy statement information on how shareholders can communicate their views on potential nominees for director, or any other matters of importance to shareholders, including corporate governance, to the Board of Directors. Moreover, the Company does not have a classified or staggered Board of Directors, so each director is elected annually. Annual director elections ensure that the Company’s shareholders are able to communicate their confidence in or concerns over the Company’s performance on a regular basis. The Company’s shareholders also have the ability under the plurality voting standard to withhold votes for directors, which allows shareholders to communicate any concerns they may have about the directors. Thus, we believe that the Company maintains appropriate mechanisms for electing a qualified Board of Directors.
In summary, the Company has access to corporate governance expertise through its in-house and outside counsel, and the Board of Directors receives periodic training in corporate governance matters as well as business related matters.
FOR THE REASONS STATED ABOVE, THE BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE “AGAINST” PROPOSAL 6.
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 recommendations of management and their best judgment.
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SHAREHOLDER PROPOSALS
Shareholder proposals intended to be included in the proxy statement and presented at the 20132015 Annual Meeting must be received by the Company no later than January 23, 201321, 2016 and the proposals must meet certain eligibility requirements of the Securities and Exchange Commission. Proposals may be mailed to FRED’S,Fred’s, Inc., to the attention of the Secretary, 4300 New Getwell Road, Memphis, Tennessee 38118.
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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 mail systems, 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
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FRED’S, INC. Holiday Inn Express 2192 S. Highway 441, Dublin, Georgia PROXY FOR THE ANNUAL MEETING OF SHAREHOLDERS THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
1. Election of Directors for the term of one year.
2. Approval of BDO USA, LLP as independent registered public accounting firm of the Company, as described in the Proxy Statement.
3.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE 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. WHEN PROPERLY EXECUTED, THIS PROXY SHALL BE VOTED AS DIRECTED. IN THE ABSENCE OF A CONTRARY DIRECTION, IT SHALL BE VOTED FOR THE PROPOSALS 1, 2 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.
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. 31 |